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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information about us, our convertible notes, our common stock and our financial statements and accompanying notes appearing elsewhere in this prospectus. AKAMAI TECHNOLOGIES, INC. We provide global delivery services for Internet content, streaming media and applications and global Internet traffic management services. Our services improve the speed, quality, availability, reliability and scalability of Web sites. Our services deliver our customers' Internet content, streaming media and applications through a distributed worldwide server network which locates the content and applications geographically closer to users. Using technology and software that is based on our proprietary mathematical formulas, or algorithms, we monitor Internet traffic patterns and deliver our customers' content and applications by the most efficient route available. Our services are easy to implement and do not require our customers or their Web site visitors to modify their hardware or software. Using our FreeFlow service, our customers have been able to more than double the speed at which they deliver content to their users and, in some instances, have been able to improve speeds by ten times or more. Our streaming services offer customers enhanced video and audio quality, scalability and reliability. The ability of a Web site to attract users is in part based on the richness of its content and the usefulness and customization of its applications. Increasingly, Web site owners want to enhance their sites by adding graphics, such as photographs, images and logos, as well as by deploying newer technologies, such as video and audio streaming, animation and software downloads. Web sites are increasingly using application services and features such as profiling, log analysis, transaction processing, customized insertion of advertisements and content transformation to attract users to Web sites. While richer content, application services and features attract more visitors, they also place increasing demands on the Web site to deliver content and applications quickly and reliably. As a result, Web site owners frequently elect to constrain the amount of rich content and applications on their Web sites, thus sacrificing the user experience to maintain acceptable performance levels. To use our content delivery services, customers identify and tag portions of their Web site content and applications that require significant amounts of bandwidth, such as advertising banners, icons, graphics, video and audio streaming, interactive presentations and software downloads. These tagged items are delivered over our distributed server network. When users request these types of content and applications, our technology routes the request to the server that is best able to deliver the content most quickly based on the geographic proximity of all available servers on our network and performance and congestion on the Internet. We currently sell our services primarily through a direct sales force. Our plan is to continue to pursue heavily trafficked Web sites through our direct sales force and to penetrate other markets through our reseller program and other indirect distribution channels. Currently our sales force is actively targeting both domestic and international companies, focusing on Web sites that have the greatest number of visitors, Fortune 100 companies and other companies with large operations worldwide. In addition, we have recently begun to directly market and sell our services through our telesales force to smaller Web sites and businesses. As of September 30, 2000, we had 539 employees in our sales, marketing and distribution organization, of whom 113 are in direct sales. Our technology originated from research that our founders began developing at the Massachusetts Institute of Technology, or MIT, in 1995. In April 1999, we introduced commercially our service for delivery of Internet content. As of September 30, 2000, we have deployed more than 6,000 servers in over 50 countries across more than 335 different telecommunications networks. We currently have over 2,800 customers. Our customers comprise some of the Web's most popular properties. SUMMARY CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> PRO FORMA PERIOD FROM PRO FORMA COMBINED INCEPTION COMBINED NINE MONTHS ENDED NINE MONTHS (AUGUST 20, 1998) YEAR ENDED YEAR ENDED SEPTEMBER 30, ENDED TO DECEMBER 31, DECEMBER 31, DECEMBER 31, -------------------- SEPTEMBER 30, 1998 1999 1999 1999 2000 2000 ----------------- ------------ ------------ -------- --------- -------------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue............................ $ -- $ 3,986 $ 16,555 $ 1,287 $ 52,522 $ 59,208 Total operating expenses........... 900 60,424 1,075,695 29,601 646,150 944,054 Operating loss..................... (900) (56,438) (1,059,140) (28,314) (593,628) (884,846) Net loss........................... (890) (57,559) (1,052,841) (28,325) (582,708) (871,898) Net loss attributable to common stockholders..................... (890) (59,800) (1,052,841) (29,970) (582,708) (871,898) Basic and diluted net loss per share............................ $ (0.06) $ (1.98) $ (25.79) $ (1.47) $ (6.84) $ (9.53) Weighted average common shares outstanding...................... 15,015 30,177 40,822 20,445 85,244 91,498 </TABLE> The unaudited pro forma combined column in the statement of operations data gives effect to our acquisition of Network24 in February 2000 and INTERVU in April 2000 as if each acquisition had been completed on January 1, 1999 and includes in total operating expenses $954 million and $711 million of amortization of intangible assets for the periods ended December 31, 1999 and September 30, 2000, respectively. The unaudited pro forma net loss per share reflects loss from continuing operations and excludes extraordinary loss and dividends on preferred stock. <TABLE> <CAPTION> DECEMBER 31, 1999 SEPTEMBER 30, 2000 ----------------- ------------------ (UNAUDITED) (IN THOUSANDS) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments.......... $269,554 $ 438,743 Working capital............................................ 255,026 419,338 Total assets............................................... 300,815 3,058,326 Obligations under capital leases and equipment loan, net of current portion.......................................... 733 689 Convertible subordinated notes (including the convertible notes covered by this prospectus)........................ -- 300,000 Total stockholders' equity................................. $281,445 $2,702,295 </TABLE> DEFICIENCY OF EARNINGS TO FIXED CHARGES (IN THOUSANDS) We have not recorded earnings for the period from inception (August 20, 1998) to December 31, 1998, for the year ended December 31, 1999 or for the nine months ended September 30, 2000 and therefore are unable to cover fixed charges. Earnings (loss) consists of loss before provision for income taxes and extraordinary items plus fixed charges. Fixed charges consist of interest expense, amortization of deferred financing costs and a portion of rental expense that we believe to be representative of interest. The following table discloses our dollar coverage deficiency. The ratio of earnings to fixed charges is not disclosed since it is a negative number in each year and period. <TABLE> <CAPTION> NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, 1998 1999 2000 ---- ------- ---------------- <S> <C> <C> <C> Ratio of earnings to fixed charges.......................... -- -- -- Coverage deficiency to attain a ratio of 1:1................ $890 $54,169 $582,576 </TABLE> Our principal executive offices are located at 500 Technology Square, Cambridge, Massachusetts 02139, and our telephone number is (617) 250-3000. Our World Wide Web site address is www.akamai.com. The information in our Web site is not incorporated by reference into this prospectus. The Akamai logo, EdgeAdvantage(TM), EdgeScape(SM), EdgeSuite(SM), FirstPoint(SM), FreeFlow(SM), FreeFlow Streaming(SM), the INTERVU logo, Netpodium(SM), SteadyStream(TM), StorageFlow(SM) and Traffic Analyzer(SM) are trademarks or service marks of us or our subsidiaries. All other trademarks or trade names in this prospectus are the property of their respective owners.
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+PROSPECTUS SUMMARY This summary only highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully. Unless we indicate otherwise, information in this prospectus assumes the underwriters will not exercise their over-allotment option. You should refer to the introduction to Summary Historical Combined Financial Information for the meanings of some of the financial terms used in this prospectus. Unless the context requires otherwise, for periods before the corporate reorganization described in this prospectus, Beasley Broadcast Group, we, us, our and similar terms refer to Beasley FM Acquisition Corp. and related companies, and after giving effect to the corporate reorganization, those same terms refer to Beasley Broadcast Group, Inc., its consolidated subsidiaries and the stations we have agreed to acquire in Boston, Miami-Ft. Lauderdale, West Palm Beach and Augusta. Overview We were founded in 1961 and are the 16th largest radio broadcasting company in the United States based on 1998 gross revenues. After giving effect to pending acquisitions in Boston, Miami-Ft. Lauderdale, West Palm Beach and Augusta, we will own and operate 36 stations, 21 FM and 15 AM. Our stations are located in nine large and mid-sized markets in the eastern United States. Twelve of these stations are located in four of the nation s top 12 radio markets: Atlanta, Philadelphia, Boston and Miami-Ft. Lauderdale. Our station groups rank among the first or second largest clusters, based on gross revenues, in five of our nine markets and, collectively, our radio stations reach approximately three million people on a weekly basis. For the twelve months ended September 30, 1999, giving effect to acquisitions and dispositions completed during the period, as well as the pending acquisitions mentioned above and our recent acquisitions in Atlanta, as if those acquisitions had been completed at the beginning of the period, we had net revenues of $94.7 million, broadcast cash flow of $28.8 million and a net loss of $8.1 million. We seek to maximize revenues and broadcast cash flow by acquiring and operating clusters of stations in high-growth large and mid-sized markets located primarily in the eastern United States. We have assembled groups of five or more stations in five of our markets. Our radio stations program a variety of formats, including urban, contemporary hit radio and country, which target the demographic groups in each market that we consider the most attractive to our advertisers. The combination of our market clusters and our advertising, sales and programming expertise has enabled us to achieve strong same station revenue and broadcast cash flow growth. Operating Strategy In order to maximize revenues and broadcast cash flow at our stations, our operating strategy is to: secure and maintain a leadership position in current and future markets by creating clusters of multiple stations; conduct in-depth market research in order to refine our programming and enhance our ratings; establish a strong local brand identity through advertising and promotional initiatives; build a relationship-oriented sales force whose goal is to create a strong local and national sales effort; hire, develop and motivate strong local management teams; and enhance broadcast cash flow margins of underutilized AM stations by selling blocks of programming time to providers of health, ethnic, religious and other specialty programming. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents Acquisition Strategy Since June 1996, we have acquired or agreed to acquire 25 radio stations. Our future acquisition strategy, which will focus on stations located in the 100 largest radio markets, is to: acquire additional radio stations in our current markets to further enhance our market position; acquire existing clusters in new markets or establish a presence in new markets where we believe we can build successful clusters over time; pursue swap opportunities with other radio station owners to build or enhance our market clusters; and selectively acquire large-market AM stations serving attractive demographic groups with specialty programming. Pending Transactions We have entered into agreements to purchase the following radio stations: one AM radio station in Boston for approximately $6 million, subject to an upward adjustment of up to $2 million; two AM radio stations in Miami-Ft. Lauderdale and one AM radio station in West Palm Beach, for a total purchase price of approximately $18 million; and one FM and one AM radio station in Augusta for approximately $800,000. We expect the Boston and Miami-Ft. Lauderdale/ West Palm Beach acquisitions to close in the second quarter of 2000. We are unable to predict when the Augusta acquisitions will close due to pending disputes described in Recently Completed and Pending Radio Broadcasting Transactions. We have entered into a non-binding letter of intent to purchase one FM and five AM stations in various markets in the Northeast, including one AM station in Boston, for a total purchase price of approximately $18 million. We have an additional non-binding letter of intent to purchase one AM station in Atlanta for approximately $1.5 million. Because we have not signed definitive purchase agreements for any of these stations, we have not included them in our portfolio as described in this prospectus. Our Principal Executive Offices Our principal executive offices are located at 3033 Riviera Drive, Suite 200, Naples, Florida 34103, and our telephone number is (941) 263-5000. Amendment No. 4 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents The Offering Class A common stock offered 6,850,000 shares Common stock to be outstanding after the offering 7,252,068 shares of Class A common stock 17,021,373 shares of Class B common stock 24,273,441 shares of common stock Voting rights The Class A common stock and the Class B common stock generally vote together as a single class on all matters submitted to a vote of stockholders. Each share of Class A common stock is entitled to one vote and each share of Class B common stock is entitled to 10 votes. The holders of our Class A common stock, voting as a single class, are entitled to elect two directors. Immediately following this offering, the Class B common stock will represent approximately 95.9% of the combined voting power of our common stock, approximately 95.4% if the underwriters exercise their overallotment option in full. All of our Class B common stock is owned by George G. Beasley, our Chairman and Chief Executive Officer, and members of his immediate family. Conversion and transferability of Class B common stock Shares of Class B common stock are convertible at the option of the holder at any time into shares of Class A common stock on a one-for-one basis. Shares of Class B common stock convert automatically into shares of Class A common stock upon sale or transfer to persons or entities not related to George G. Beasley or members of his immediate family. Proposed Nasdaq National Market symbol BBGI Class A common stock offered and common stock to be outstanding after the offering excludes up to 1,027,500 shares of Class A common stock that may be issued to cover over-allotments of shares. Common stock to be outstanding after the offering is as of the closing date. It excludes grants under our 2000 equity plan of options to purchase 2,500,000 shares of Class A common stock at the initial public offering price. BEASLEY BROADCAST GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 4832 65-0960915 (state or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification No.) 3033 Riviera Drive, Suite 200 Naples, FL 34103 (941) 263-5000 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant s Principal Executive Offices) Table of Contents Summary Historical Combined Financial Information We have derived the summary historical financial information shown below for the years ended December 31, 1996, 1997 and 1998 and the nine months ended September 30, 1998 and 1999 from our audited and unaudited combined financial statements included elsewhere in this prospectus. As you review the information contained in the following table and throughout this prospectus, you should note the following: During the periods presented, we operated as a series of partnerships and subchapter S corporations under the Internal Revenue Code. Accordingly, we were not liable for federal and some state and local corporate income taxes, as we would have been if we had been treated as a subchapter C corporation. During these periods, our stockholders included our taxable income or loss in their federal and applicable state and local income tax returns. The pro forma amounts shown in the table reflect provisions for federal, state and local income taxes, applied to income (loss) before pro forma income taxes, as if we had been taxed as a subchapter C corporation. On the day prior to the date of this prospectus, our subchapter S status will terminate. On the date of this prospectus, we will reorganize all of our entities under a holding company that is a wholly-owned subsidiary of Beasley Broadcast Group, Inc., the newly formed subchapter C corporation that is issuing the Class A common stock offered by this prospectus. For purposes of our historical financial statements, the term pro forma refers to the adjustments necessary to reflect our status as a subchapter C corporation for income tax purposes rather than a series of subchapter S corporations and partnerships, distributions to equity holders for income taxes of entities comprising Beasley Broadcast Group prior to the reorganization, the distribution of untaxed retained income and subsequent recontribution of the same amounts as additional paid-in capital and the fair value adjustment necessary to record the acquisition of minority shareholder interest using the purchase method of accounting. Broadcast cash flow consists of operating income (loss) before corporate general and administrative expenses, depreciation and amortization, equity appreciation rights expenses and impairment loss on long-lived assets. For the periods shown in the following table, broadcast cash flow is unaffected by fees paid under local management and time brokerage agreements of $1,075,000 for the year ended December 31, 1996 and zero for subsequent periods. The fees are included in other non-operating income (expense). Broadcast cash flow margin represents broadcast cash flow as a percentage of net revenues. EBITDA consists of broadcast cash flow minus corporate general and administrative expenses. Pro forma after-tax cash flow consists of pro forma net income (loss) minus net gains on sale of radio stations plus the following: loss on sale of radio stations, depreciation and amortization, equity appreciation rights expenses, impairment loss on long-lived assets and deferred tax provision (or minus deferred income tax benefit). No expense for equity appreciation rights has been recorded for the periods presented. We expect to record equity appreciation rights expenses of approximately $430,000 in the fourth quarter of 1999 and approximately $1.2 million in the first quarter of 2000. The as adjusted balance sheet data as of September 30, 1999 gives effect to: our corporate reorganization and the related reduction of additional paid-in capital by $26,905,000 to establish the net deferred tax liability resulting from the termination of our subchapter S status; the sale of 6,850,000 shares of Class A common stock by us at the initial public offering price of $15.50 per share and the application of the net proceeds as described under Use of Proceeds and Capitalization ; George G. Beasley Chief Executive Officer Beasley Broadcast Group, Inc. 3033 Riviera Drive, Suite 200 Naples, FL 34103 (941) 263-5000 (Address, including zip code, and telephone number, including area code, of agent for service) Table of Contents our recent acquisitions in Atlanta and our pending acquisitions in Boston, Miami-Ft. Lauderdale, West Palm Beach and Augusta for an aggregate purchase price of approximately $34.8 million; and distributions of $3.0 million to equity holders to pay income taxes on income of entities comprising Beasley Broadcast Group for the 1999 tax year. Although broadcast cash flow, EBITDA and pro forma after-tax cash flow are not measures of performance or liquidity calculated in accordance with generally accepted accounting principles, we believe that these measures are useful to an investor in evaluating our performance. These measures are widely used in the broadcast industry to evaluate a radio company s operating performance. However, you should not consider these measures in isolation or as substitutes for operating income, cash flows from operating activities or any other measure for determining our operating performance or liquidity that is calculated in accordance with generally accepted accounting principles. In addition, because broadcast cash flow, EBITDA and pro forma after-tax cash flow are not calculated in accordance with generally accepted accounting principles, they are not necessarily comparable to similarly titled measures employed by other companies. The comparability of the historical financial information reflected below has been significantly affected by acquisitions and dispositions. You should read the summary financial information together with Management s Discussion and Analysis of Financial Condition and Results of Operations and our combined financial statements and the related notes included elsewhere in this prospectus. Copies to: John D. Watson, Jr., Esq. Latham Watkins 1001 Pennsylvania Avenue, N.W., Suite 1300 Washington, DC 20004 (202) 637-2200 Jeremy W. Dickens, Esq. Weil, Gotshal Manges LLP 767 Fifth Avenue New York, New York 10153 (212) 310-8000 Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] (in thousands) Balance Sheet Data: Cash and cash equivalents $ 5,758 $ 2,758 Intangible assets, net 141,086 184,578 Total assets 187,204 231,673 Long-term debt, including current installments 163,155 100,216 Net stockholders equity (deficit) (2,917 ) 82,117 The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Table of Contents
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD CAREFULLY READ THE ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS, BEFORE MAKING AN INVESTMENT DECISION. Bruker Daltonics We are a leading developer and provider of innovative life science tools based on mass spectrometry. Our substantial investment in research and development allows us to design, manufacture and market a broad array of products intended to meet the rapidly growing needs of our diverse customer base. Our customers include pharmaceutical companies, biotechnology companies, agricultural biotechnology companies, molecular diagnostics companies, academic institutions and government agencies. Mass spectrometers are sophisticated devices that provide highly accurate molecular information on a given sample. Our mass spectrometry-based systems often combine automated sample preparation robots, advanced mass spectrometry instrumentation which analyzes the sample, reagent kits containing chemicals and other testing products that are consumed in performing the sample analysis and bioinformatics software which analyzes the data produced by the sample analysis. Our systems offer integrated solutions for applications in multiple existing and emerging markets including (a) the study of genes and their function, or genomics, (b) the separation, identification, characterization and study of proteins and their function, or proteomics, (c) the measurement of products related to the metabolism of substances and disease pathways, or metabolic and biomarker profiling, (d) drug discovery and development, (e) tests for specific molecules or biological pathways referred to as molecular assays and diagnostics, (f) molecular and systems biology and (g) basic medical research. We market our life science systems both through our direct sales force and through strategic distribution arrangements with Agilent Technologies, PerkinElmer, Sequenom, MWG-Biotech and others. We are also a worldwide leader in supplying mass spectrometry-based systems for substance detection and pathogen identification in security and defense applications. Our Products Our life science solutions incorporate instruments that are based on one of four core mass spectrometry technology platforms. Each of these platforms utilizes a different type of mass spectrometry technology, including (a) matrix-assisted laser desorption ionization, or MALDI, time-of-flight mass spectrometry, (b) electrospray ionization, or ESI, time-of-flight mass spectrometry, (c) Fourier transform mass spectrometry and (d) ion trap mass spectrometry. We also employ our mass spectrometry technology in our substance detection and pathogen identification systems. Our Solutions Our product lines integrate sophisticated mass spectrometers with automated preparation and measurement of the samples to be analyzed and, where appropriate, bioinformatics software that uses advanced computing techniques to manage and analyze the data produced by our mass spectrometers. These products address many of the analytical needs of the life science industry across a broad range of applications. Our automated systems allow our customers to generate and evaluate large volumes of accurate, high-quality data on a cost-effective basis. We believe that this enhanced throughput and high-quality data improves our customers' ability to apply bioinformatics to validate lead targets, understand disease pathways and analyze lead compounds. Our customers also use our products in molecular biology and other basic medical research. In addition, our automated, integrated mass spectrometry technology forms the basis of our substance detection and pathogen identification products used in security and defense markets. We believe that our products offer the following advantages to our customers: - high degree of automation; - integrated solutions; - accurate results; - increased productivity; and - cost efficiency. Our Strategy Our strategy is to continue to be a leading provider of mass spectrometry and related systems for use in the life sciences, as well as in substance detection and pathogen identification. Key elements of our strategy include: - provide a broad array of tools for a wide range of applications; - develop new platforms, enhanced products and new applications; - build alliances and pursue acquisitions; - generate recurring revenue; - develop and expand our bioinformation business; and - leverage our intellectual property. Bruker Daltonics was incorporated in Massachusetts in February 1991, as Bruker Federal Systems Corporation. In February 2000, we reincorporated in Delaware as Bruker Daltonics Inc. Our principal executive offices are located at 15 Fortune Drive, Billerica, Massachusetts 01821, and our telephone number is (978) 663-3660. Information about Bruker Daltonics is available at www.daltonics.bruker.com. The information on our website is not incorporated by reference into and does not form a part of this prospectus. Daltonics and the Daltonics logo are trademarks of Bruker Daltonics. All other trademarks, tradenames or copyrights referred to in this prospectus are the property of their respective owners. The Offering <TABLE> <S> <C> Common stock offered by Bruker Daltonics..... 8,000,000 shares Common stock to be outstanding after this offering........................ 53,500,000 shares Use of proceeds.............................. General corporate purposes, including research and development, expansion of sales and marketing capabilities and working capital, including funding potential strategic acquisitions, and repayment of our outstanding bank debt. For more detailed information, see "Use of Proceeds" on page 18. Proposed Nasdaq National Market symbol....... BDAL </TABLE> The number of shares to be outstanding upon completion of this offering is based on 45,500,000 shares outstanding as of August 3, 2000. This number excludes 2,140,000 shares of common stock that will be reserved for issuance under our stock option plan upon completion of this offering, of which 757,250 shares were subject to outstanding options. For a more detailed description of our capitalization, please see "Capitalization" on page 19. See "Risk Factors" and other information included in this Prospectus for a discussion of factors you should consider before investing in the shares of our common stock. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES: - THE UNDERWRITERS HAVE NOT EXERCISED THEIR OPTION TO PURCHASE ADDITIONAL SHARES; AND - THE SEVEN-FOR-ONE COMMON STOCK SPLIT COMPLETED IN FEBRUARY 2000. Summary Financial Data (in thousands, except per share data) <TABLE> <CAPTION> Three Months Year Ended December 31, Ended March 31, ------------------------------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 ----------- ----------- ----------- ----------- ----------- -------- -------- (unaudited) <S> <C> <C> <C> <C> <C> <C> <C> Consolidated/Combined Statements of Operations Data (1): Product revenue............. $ 30,076 $ 43,942 $ 49,247 $ 40,157 $ 60,620 $ 10,879 $ 14,035 Other revenue............... 2,049 2,130 1,878 2,050 4,070 1,019 564 ---------- ---------- ---------- ---------- ---------- -------- -------- Net revenue............... 32,125 46,072 51,125 42,207 64,690 11,898 14,599 Costs and operating expenses: Cost of product revenue... 16,424 20,329 24,538 19,672 31,618 5,497 6,574 Sales and marketing....... 2,806 6,123 7,178 7,435 11,345 2,256 2,564 General and administrative.......... 1,795 1,717 2,120 2,212 3,411 618 1,108 Research and development............. 9,419 8,812 9,166 13,049 15,138 3,088 3,600 Patent litigation costs... -- 1,901 5,525 -- 538 538 303 ---------- ---------- ---------- ---------- ---------- -------- -------- Total costs and operating expenses.. 30,444 38,882 48,527 42,368 62,050 11,997 14,149 ---------- ---------- ---------- ---------- ---------- -------- -------- Operating income (loss) from continuing operations..... 1,681 7,190 2,598 (161) 2,640 (99) 450 Other income (expense)...... 196 2 127 174 130 140 (25) Interest expense, net....... (1,341) (1,032) (743) (901) (907) (267) (103) ---------- ---------- ---------- ---------- ---------- -------- -------- Income (loss) from continuing operations before provision for income taxes.............. 536 6,160 1,982 (888) 1,863 (226) 322 Provision (benefit) for income taxes.............. 9 2,265 1,627 -- 987 (120) 185 ---------- ---------- ---------- ---------- ---------- -------- -------- Income (loss) from continuing operations..... 527 3,895 355 (888) 876 (106) 137 Income from discontinued operations, net of income taxes..................... 372 368 209 383 373 90 37 ---------- ---------- ---------- ---------- ---------- -------- -------- Net income (loss)........... $ 899 $ 4,263 $ 564 $ (505) $ 1,249 $ (16) $ 174 ========== ========== ========== ========== ========== ======== ======== Net income (loss) per share-basic and diluted Income (loss) from continuing operations... $ 0.01 $ 0.08 $ 0.01 $ (0.02) $ 0.02 $ 0.00 $ 0.00 Income from discontinued operations, net of income taxes............ 0.01 0.01 0.00 0.01 0.01 0.00 0.00 ---------- ---------- ---------- ---------- ---------- -------- -------- Net income (loss) per share..................... $ 0.02 $ 0.09 $ 0.01 $ (0.01) $ 0.03 $ 0.00 $ 0.00 ========== ========== ========== ========== ========== ======== ======== Shares used in computing net income (loss) per share-basic and diluted... 45,500 45,500 45,500 45,500 45,500 45,500 45,500 </TABLE> <TABLE> <CAPTION> March 31, 2000 -------------------------- Actual As Adjusted (2) -------- --------------- (unaudited) <S> <C> <C> Consolidated Balance Sheet Data (1): Cash and cash equivalents................................... $ 3,905 $ 80,485 Working capital............................................. 13,335 92,546 Total assets................................................ 71,238 147,818 Total debt.................................................. 14,920 -- Total stockholders' equity.................................. 9,751 101,251 </TABLE> ---------- (1) In December 1998, Bruker Daltonics Inc. acquired Bruker Daltonik GmbH and its subsidiary Bruker Saxonia Analytik GmbH. Since these companies were under common ownership prior to the acquisition, the financial data is shown on a combined basis for all years presented. (2) The adjusted balance sheet data reflects the receipt of the net proceeds from the sale of 8,000,000 shares of common stock by Bruker Daltonics Inc. in this offering at an assumed initial public offering price of $12.50 per share, after underwriting discounts and commissions and estimated offering expenses.
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+PROSPECTUS SUMMARY The following summarizes information in other sections of our prospectus, including our financial statements, the notes to those financial statements and the other financial information appearing elsewhere in this prospectus. You should read the entire prospectus carefully. CAPSTONE TURBINE CORPORATION CAPSTONE We develop, design, assemble and sell Capstone(TM) MicroTurbines. Capstone MicroTurbines are marketable worldwide in the multibillion dollar market for distributed power generation. Capstone MicroTurbines provide power at the site of consumption and to hybrid electric vehicles that combine a primary source battery with an auxiliary power source, such as a microturbine, to enhance performance. We are the first company to sell a proven, commercially available power source using microturbine technology. The Capstone MicroTurbine combines sophisticated design, engineering and technology to produce a reliable and flexible generator of electricity and heat for commercial and industrial applications and is a result of over ten years of research and development. We believe the simple and flexible design of our microturbines will enable our distributors and end users to develop an increasingly broad range of applications to fit their particular power needs. PRODUCTS The Capstone MicroTurbine is a compact, environmentally friendly generator of electricity and heat. Our state-of-the-art microturbines combine patented air-bearing technology, advanced combustion technology and sophisticated power electronics to produce an efficient and reliable electricity and heat production system that requires little on-going maintenance. Our air-bearing technology provides a clean, high-pressure field of air to lubricate the one moving component of the microturbine rather than using traditional petroleum products as in conventional bearings. Our microturbines can operate by remote control and use a broad range of gaseous and liquid fuels, including previously unusable fuels. Our microturbines are easily transportable and designed to allow multiple units to run together to meet an end user's specific electrical and heat requirements. We also have applied our technology to hybrid electric vehicles such as buses, industrial use and other passenger and commercial vehicles. Buses using Capstone MicroTurbines have demonstrated greater range, less maintenance and lower costs than other low emission buses. Our microturbines have been in commercial use in buses since July 1999 and are currently being used in buses operating in U.S. cities such as Los Angeles, Atlanta, Chattanooga, and Tempe and international cities such as Christchurch, New Zealand. We offer two microturbine product families: the 30-kilowatt family, available in 24 configurations, and our 60-kilowatt microturbine family, which we introduced in September 2000, currently available in one configuration. Both the 30-kilowatt and 60-kilowatt units can be used for a variety of power applications. For example, our 30-kilowatt unit provides power sufficient to operate a typical convenience store. A typical fast food restaurant requires approximately 90 kilowatts of power and could be powered by three 30-kilowatt units or a 60-kilowatt unit used in combination with a 30-kilowatt unit. TARGET MARKETS The fundamental need for power, along with the global deregulation of the electric power industry, an increasing need for better power quality and reliability and significant advances in power technology, are creating many new opportunities for Capstone MicroTurbine systems. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED NOVEMBER 16, 2000 <TABLE> <S> <C> <C> [CAPSTONE LOGO] 7,000,000 Shares CAPSTONE TURBINE CORPORATION Common Stock </TABLE> ---------------------- Capstone Turbine Corporation is offering 1,000,000 shares and the selling stockholders identified in this prospectus are offering an additional 6,000,000 shares. Capstone Turbine will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders. The common stock is quoted on the Nasdaq National Market under the symbol "CPST." The last reported sale price of our common stock on the Nasdaq National Market on November 15, 2000 was $34.563 per share. See "Risk Factors" beginning on page 6 to read about factors you should consider before buying shares of the common stock. ---------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------------- <TABLE> <CAPTION> PER SHARE TOTAL --------- ----- <S> <C> <C> Initial Price to public..................................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to Capstone Turbine.............. $ $ Proceeds, before expenses, to selling stockholders.......... $ $ </TABLE> To the extent that the underwriters sell more than 7,000,000 shares of common stock, the underwriters have the option to purchase up to an additional 1,050,000 shares from Capstone Turbine and the selling stockholders at the public offering price, less the underwriting discount. ---------------------- The underwriters expect to deliver the shares against payment in New York, New York on , 2000. GOLDMAN, SACHS & CO. CREDIT SUISSE FIRST BOSTON MERRILL LYNCH & CO. MORGAN STANLEY DEAN WITTER ---------------------- Prospectus dated , 2000. STATIONARY APPLICATIONS We believe the stationary applications for our microturbines are extremely broad, either on a stand-alone basis or connected to the electric utility grid, because of our microturbines' ability to adapt to fuels, load variations, and various climates while operating in an environmentally friendly manner. We have initially targeted markets which we believe will identify and employ our product attributes quickly. As levels of acceptance and volumes increase, we expect to enter larger, more diverse markets. Our initial target markets include: - Resource Recovery Oil and gas production creates fuel byproducts that traditionally have been released or burned into the atmosphere. Capstone MicroTurbines can burn these otherwise wasted gases, including gas with high sulfur content, with minimal emissions and produce on-site electricity for these activities. Our microturbines can also burn gas released from landfills and gas produced from sludge digestion. - Micro-Cogeneration/Combined Heat and Power Using both the heat and electricity from the combustion of fuel improves the overall efficiency of the generation process and can provide a comprehensive solution to a customer's energy needs. Uses for the heat include space heating, air conditioning and heating and cooling water. We have identified the Japanese market as the most receptive for these applications in the near term. - Back-up and Standby Power/Peak Shaving Many commercial and small industrial customers in developed countries could reduce their electricity costs and/or improve their reliability of electric power supply by installing a Capstone MicroTurbine to meet some or all of their needs as a back-up power source. In addition, end users also can use our microturbines to avoid temporary spikes in power prices by producing their own power during periods when power demand and power costs are high, known in the industry as peak shaving. -- Power Quality and Reliability An important and rapidly growing sector within the back-up and standby power/peak shaving market is power quality and reliability. Consumers worldwide, particularly industrial and commercial users, are increasingly using power for digital based processes. These systems are extremely intolerant of disturbances in their power supply. Even momentary disruptions can cause material economic loss. We believe that Capstone MicroTurbines have applications in this market due to their operating flexibility, low emissions and modular form. Our products can provide support for extended outages on a cost effective basis. - Developing Regions Much of the world's population does not have access to electric power. Utilities can install Capstone MicroTurbines at the end of the electric utility grid to avoid building costly power lines. Additionally, our microturbine can be a primary, stand-alone power source which burns a variety of gaseous or liquid fuels. HYBRID ELECTRIC VEHICLES We believe that the hybrid electric vehicle market currently represents a significant opportunity and will expand as governments and consumers demand cost-efficient, reliable and environmentally friendly vehicles, particularly in urban areas. The recent ban on diesel buses imposed by the City of Los Angeles is indicative of this trend. In October 2000, we entered into a joint development <TABLE> <S> <C> [IMAGE] CAPSTONE-ENERGIZED HYBRID ELECTRIC BUS: NEW ZEALAND [IMAGE] WASTEWATER RESOURCE RECOVERY WITH MICRO-COGENERATION: PENNSYLVANIA [IMAGE] NURSING HOME MICRO-COGENERATION: OH [IMAGE] OILFIELD 2-PACK RESOURCE RECOVERY: CANADA [IMAGE] ROOFTOP MICRO-COGENERATION CHILLING: JAPAN [IMAGE] CONVENIENCE STORE PEAK-SHAVING/STANDBY: IL [IMAGE] PUBLIC POOL MICRO-COGENERATION: THE NETHERLANDS </TABLE> agreement with Hyundai Motor Company to demonstrate the feasibility of integrating our microturbine technology into Hyundai sport utility vehicles and buses. OUR STRATEGY Our objective is to remain a leading worldwide developer and supplier of microturbine technology for the stationary power generation and hybrid electric vehicle markets. Key elements of our strategy include the following: - We believe the most effective way to penetrate our target markets is with a business-to-business distribution strategy. We are forging alliances with key distribution partners worldwide. - We shipped the first commercial model of our family of 60-kilowatt microturbine systems in September 2000. We intend to develop microturbine families with power outputs of up to 125+ kilowatts. We also intend to continue our research and development efforts to enhance our current products. - We believe that a policy of actively protecting our patents and other intellectual property is an important component of our strategy to remain the leader in microturbine technology and will provide us a long-term competitive advantage. - We expect our unit production costs and prices to decline substantially as volumes increase. Our strategy is to use low cost materials and to outsource all non-proprietary hardware and electronics to achieve high volume, low cost production targets. We are pursuing a "tier one" supply strategy whereby vendors are responsible for the supply of complete subassemblies made up of parts purchased from other vendors. We will retain manufacturing control over our proprietary air-bearing and combustion components. We will begin to manufacture recuperator cores over the course of the next nine to twelve months. - We intend to minimize our financial and operational risk by maintaining adequate capitalization levels. - We intend to continue to add key personnel to complement our strong management team, which has significant industry expertise. THE OFFERING Shares offered by us.................... 1,000,000 shares Shares offered by the selling stockholders............................ 6,000,000 shares Total................................... 7,000,000 shares Common stock to be outstanding after this offering........................... 75,938,602 shares Use of proceeds......................... Our net proceeds from this offering are estimated to be approximately $32.3 million. We will use the net proceeds for recuperator core manufacturing activities. We will not receive any proceeds from the sale of the common stock by the selling stockholders. See "Use of Proceeds." Nasdaq National Market symbol........... CPST The number of shares of our common stock that will be outstanding after this offering: - includes 74,938,602 shares outstanding as of September 30, 2000; and - excludes up to 9,207,727 shares of common stock either underlying options granted or available for issue under our stock option plans, some of which will be exercised in connection with this offering, and 900,000 shares reserved for issuance under our employee stock purchase plans. Unless otherwise indicated, all information in this prospectus assumes the underwriters option to purchase additional shares in this offering will not be exercised. ------------------------ We were incorporated in California in 1988. We reincorporated in Delaware on June 22, 2000. Our principal executive offices are located at 21211 Nordhoff Street, Chatsworth, California 91311. Our telephone number is (818) 734-5300. Our internet address is www.capstoneturbine.com. This internet address is provided for informational purposes only and is not intended to be useable as a hyperlink. The information at this internet address is not a part of this prospectus. The name Capstone and the Turbine Blade logo are trademarks that belong to us. This prospectus also contains the names of other entities which are the property of their respective owners. SUMMARY FINANCIAL INFORMATION <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, ----------------------------- --------------------------------------------------- SEPTEMBER 30, SEPTEMBER 30, 1995 1996 1997 1998 1999 1999 2000 ------- -------- -------- -------- -------- ------------- ------------- (IN THOUSANDS) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS: Total revenues.................. $ 920 $ 1,462 $ 1,623 $ 84 $ 6,694 $ 1,315 $ 16,029 Cost of goods sold.............. 199 2,179 8,147 5,335 15,629 4,570 20,658 ------- -------- -------- -------- -------- -------- -------- Gross profit (loss)........... 721 (717) (6,524) (5,251) (8,935) (3,255) (4,629) Operating costs and expenses: Research and development...... 4,796 8,599 13,281 19,019 9,151 6,681 8,416 Selling, general and administrative.............. 1,878 3,585 10,946 10,257 11,191 7,818 17,264 ------- -------- -------- -------- -------- -------- -------- Income (loss) from operations.................. (5,953) (12,901) (30,751) (34,527) (29,277) (17,754) (30,309) Net income (loss)........... $(5,957) $(12,595) $(30,553) $(33,073) $(29,530) $(17,863) $(25,067) ======= ======== ======== ======== ======== ======== ======== </TABLE> <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, ----------------------------- ----------------------------------------------------- SEPTEMBER 30, SEPTEMBER 30, 1995 1996 1997 1998 1999 1999 2000 -------- -------- -------- -------- --------- ------------- ------------- (IN THOUSANDS) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS: BALANCE SHEET DATA: Cash and cash equivalents..... $ 525 $ 1,464 $ 44,563 $ 4,943 $ 6,858 $ 4,454 $229,783 Working capital............... 255 1,773 41,431 6,919 6,294 10,140 225,428 Total assets.................. 1,351 6,820 56,989 25,770 36,927 28,397 289,516 Capital lease obligations..... -- 846 1,885 4,449 5,899 5,164 5,963 Long-term debt................ -- -- -- -- -- -- -- Redeemable preferred stock.... 11,242 25,975 99,720 101,624 156,469 125,716 -- Stockholders' (deficiency)/equity......... (11,371) (24,176) (56,057) (91,151) (144,225) (112,543) 264,819 Total liabilities and stockholders' equity........ $ 1,351 $ 6,820 $ 56,989 $ 25,770 $ 36,927 $ 28,397 $289,516 </TABLE>
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+PROSPECTUS SUMMARY This summary does not contain all the information that may be important to you. You should read the entire prospectus before making an investment decision. Kansas City, Missouri is the location of our world headquarters. Our mailing address and telephone number are as follows: Farmland Industries, Inc. P.O. Box 7305 Kansas City, Missouri 64116-0005 816-459-6000 FARMLAND'S BUSINESS Farmland Industries, Inc., founded in 1929 and formally incorporated in Kansas in 1931, is a farm supply cooperative and a processing and marketing cooperative. In this prospectus, "Farmland", "we", "us", or "our" refers to Farmland Industries, Inc. and its subsidiaries, unless the context suggests differently. Farmland operates on a cooperative basis and is primarily owned by its members. Members are entitled to receive patronage refunds distributed by Farmland from the member-sourced portion of its annual net earnings. As of August 31, 1999, Farmland's membership, associate membership and patrons eligible for patronage refunds consisted of approximately 1,400 cooperative associations of farmers and ranchers and 5,700 pork or beef producers or associations of such producers Based on sales, we are one of the largest cooperatives in the United States. In 1999, we had sales of $10.7 billion, including international sales of approximately $3.2 billion. Farmland competes with many companies, including other cooperatives. These competitors are of various sizes and have various levels of vertical integration. We sell to a large number of customers and no single customer is material to our business. Our business is focused on two areas: Agricultural inputs and outputs. AGRICULTURAL INPUTS In this area, we operate as a farm supply cooperative. Our four main farm supply product divisions are as follows: . Plant Foods . Crop Protection . Petroleum . Feed In 1999, our sales of farm supply products were $2.8 billion. Approximately 59% of these farm supply products were manufactured in plants owned or operated by Farmland. Member cooperative associations purchased approximately 68% of the farm supply products we sold in 1999. These cooperatives distribute products primarily to farmers and ranchers who are the end users of the farm supply products we sell. AGRICULTURAL OUTPUTS In this area, we operate as a processing and marketing cooperative. Our agricultural outputs operations are as follows: . The processing and marketing of pork . The raising of hogs for processing . The processing and marketing of beef . The domestic storage and marketing of grain . The international storage and marketing of grain In 1999, our members supplied about 70% of the hogs we processed, 38% of the cattle we processed and 60% of the grain that we marketed domestically. Substantially all of the pork and beef products we sold in 1999 was processed in plants owned by Farmland. THE OFFERING DESCRIPTION OF SECURITIES We are offering $100.0 million of Demand Loan Certificates. We are offering $236.0 million of Subordinated Debenture Bonds for sale or to exchange for certain Farmland subordinated debt securities. The terms and conditions of the debt securities which we are offering for sale or exchange are more fully described in the section "Description of Debt Securities" which begins on page 15. The Subordinated Debenture Bonds are available in several series. Minimum Series Initial Investment Ten-Year, Series A.........................$ 1,000 Ten-Year, Series B ........................$ 100,000 Five-Year, Series C........................$ 1,000 Five-Year, Series D........................$ 100,000 Ten-Year Monthly Income, Series E..........$ 5,000 Ten-Year Monthly Income, Series F..........$ 100,000 Five-Year Monthly Income, Series G.........$ 5,000 Five-Year Monthly Income, Series H.........$ 100,000 MATURITY . Demand Loan Certificates are payable upon demand. . Subordinated Debenture Bonds of Series A and Series B mature 10 years from the date of original issuance. . Subordinated Debenture Bonds of Series C and Series D mature 5 years from the date of original issuance. . Monthly Income Subordinated Debenture Bonds of Series E and Series F mature 10 years from the date of original issuance. . Monthly Income Subordinated Debenture Bonds of Series G and Series H mature 5 years from the date of original issuance. INTEREST RATES The interest rates we pay on the various Debt Securities we are selling can be found under the heading "Determination of Interest Rates" on page 11. Also, you may obtain information about the interest rates we pay by calling Farmland Securities Company, 1-800-821-8000, Extension 6360. INTEREST PAYMENT Interest on the Demand Loan Certificates is payable in one of the following ways at the option of the purchaser. The option is selected by the purchaser at the time of purchase and is irrevocable: a)six months after the Date of Original Issuance, and at the end of each and every six month period thereafter until the Demand Loan Certificate is surrendered for redemption, or b)only at the date of redemption, with interest compounded semi-annually at the effective Certificate Interest Rate. Interest on the Subordinated Debenture Bonds (Series A, Series B, Series C and Series D) is paid semi-annually on January 1 and July 1 or at the holder's election may be left to accumulate semi-annually. Interest on Monthly Income Subordinated Debenture Bonds (Series E, Series F, Series G and Series H) is paid on the first day of each month. PROVISIONS FOR EARLY REDEMPTION BY HOLDERS 1.We will redeem the Ten-Year Series A and Series B and Five-Year Series C and Series D Subordinated Debenture Bonds held by a trustee or custodian in an individual retirement account ("IRA") as necessary to satisfy mandatory withdrawals from the IRA. 2.We will redeem the Ten-Year Series A and Series B, and Five-Year Series C and Series D Subordinated Debenture Bonds upon notice of the death of the holder. 3.We will redeem limited additional amounts of Subordinated Debenture Bonds of Series A, Series B, Series C and Series D before they mature if certain restrictive conditions are satisfied. The limited amount of Subordinated Debenture Bonds that we will redeem before maturity is explained under the caption "Limited Redemption Prior to Maturity of Subordinated Debenture Bonds" beginning on page 38 of this prospectus. A summary of the other limitations on the redemption before maturity of Subordinated Debenture Bonds of Series A, Series B, Series C and Series D follows: . Except when held by a trustee or custodian in an IRA as stated in (1) above, the Ten-Year Subordinated Debenture Bonds (Series A and Series B) must have been held for at least 3 years. . Except when held by a trustee or custodian in an IRA as stated in (1) above, the Five-Year Subordinated Debenture Bonds (Series C and Series D) must have been held for at least 2 years. 4.We will redeem the Ten-Year Monthly Income Subordinated Debenture Bonds (Series E and Series F), and Five-Year Monthly Income Subordinated Debenture Bonds (Series G and Series H) before maturity only after notice of the death of the holder. PROVISIONS FOR EARLY REDEMPTION AT THE OPTION OF FARMLAND Subordinated Debenture Bonds of Ten-Year Series A and Series B, and Five-Year Series C and Series D may be called at the option of Farmland 2 years after the date of issue. Monthly Income Subordinated Debenture Bonds of Ten-Year Series E and Series F and Five-Year Series G and Series H, cannot be called by Farmland. SUBORDINATION The rights of holders of the Subordinated Debenture Bonds to receive payments of principal and interest are subordinated in right of payment to all existing and future holders of Senior Indebtedness. Senior Indebtedness includes Demand Loan Certificates, obligations of Farmland created before the Subordinated Indenture and outstanding to banks or trust companies, insurance companies or pension trust and indebtedness created after the date of the Subordinated Indenture under instruments which state that such indebtedness is Senior Indebtedness. The Subordinated Debenture Bonds are also effectively subordinated to all obligations of Farmland's subsidiaries. UNDERWRITING DISCOUNTS AND COMMISSIONS We will pay Farmland Securities Company a commission not to exceed 4% of the aggregate sales price of the Subordinated Debenture Bonds and Demand Loan Certificates offered. We also pay Farmland Securities Company for all expenses it incurs related to the sale of these securities. However, this additional payment is limited to no more than 3% of the aggregate sales price of the securities being offered. PURPOSE OF THE EXCHANGE OFFER The purpose of the exchange offer is to extend the period of time we utilize funds borrowed from an investor in our Subordinated Debenture Bonds. For additional information regarding the exchange offer, including how to accept an exchange offer, please see "Exchange Offer" on page 13. SELLING PRICE The debt securities, if sold for cash, will be sold for 100% of the face amount. USE OF PROCEEDS Proceeds received from the sale of the debt securities will be used for general corporate purposes, including repayment of long-term debt and the funding of capital expenditures. RISK FACTORS You should consider carefully the following risk factors in addition to the other information contained in this prospectus. SENIOR INDEBTEDNESS HOLDERS WILL BE PAID BEFORE HOLDERS OF SUBORDINATED DEBENTURE BONDS. The Demand Loan Certificates are unsecured and non-subordinated obligations of Farmland and have the same right of payment as all other unsecured and non- subordinated indebtedness of Farmland. The Subordinated Debenture Bonds offered by this Prospectus for sale and for exchange are unsecured obligations of Farmland and are subordinated in right of payment to all existing and future Senior Indebtedness. Senior Indebtedness includes Demand Loan Certificates, obligations of Farmland created before the Subordinated Indenture and outstanding to banks or trust companies, insurance companies or pension trust and indebtedness created after the date of the Subordinated Indenture under instruments which state that such indebtedness is Senior Indebtedness. In addition, the Subordinated Debenture Bonds will be effectively subordinated to all obligations of Farmland's subsidiaries. Any right of Farmland to receive assets from any subsidiary which liquidates or re-capitalizes will be subject to the claims of such subsidiary's creditors. As a result, the right of holders of the Subordinated Debenture Bonds to participate in those assets is also subject to the claims of such subsidiary's creditors. Accordingly, the Subordinated Debenture Bonds will be effectively subordinated to all indebtedness and other liabilities, including trade accounts payable, of our subsidiaries. As of November 30, 1999: 1.Farmland had $646.5 million of Senior Indebtedness outstanding; in addition, Senior Indebtedness includes certain obligations with a present value of approximately $330.3 million for future payments over seven years under long- term leases; 2. Farmland had outstanding $504.6 million aggregate principal amount of subordinated indebtedness; and 3. Certain Farmland subsidiaries had outstanding $224.8 million aggregate principal amount of indebtedness, of which $202.2 million was nonrecourse to Farmland. The indentures under which the debt securities are issued do not contain any provision that would limit the ability of Farmland or any of its affiliates to incur indebtedness of any type or that would provide holders of the debt securities protection in the event of a highly leveraged transaction, restructuring, change in control, merger, sale of substantially all of our assets or similar transaction involving Farmland. In the event of these transactions, we cannot assure you that Farmland or any successor would be able to repay holders of our debt securities either from continuing operations or from proceeds of any such transaction. CREDIT FACILITY RESTRICTIONS COULD AFFECT OUR ABILITY TO REPAY OUR SUBORDINATED DEBT. OUR FAILURE TO COMPLY WITH THESE RESTRICTIONS WOULD RESULT IN A DEFAULT UNDER OUR CREDIT FACILITY. The Credit Facility relating to our Senior Indebtedness contains financial covenants. Violation of these financial covenants or any other breach relating to Senior Indebtedness, including payment defaults, would create a default on our Senior Indebtedness. If default occurs, we will not make payments of principal and interest on the Subordinated Debenture Bonds, as well as our other subordinated debt. Payments may begin again when the breach or violation is resolved. RESTRICTED REDEMPTION RIGHTS OF HOLDERS OF SUBORDINATED DEBENTURE BONDS MAY MAKE THESE BONDS AN UNSUITABLE INVESTMENT FOR YOU. Holders of Subordinated Debenture Bonds may redeem their investments prior to maturity only under restricted conditions. These restricted conditions are more fully described under the caption "Limited Redemption Prior to Maturity of Subordinated Debenture Bonds" starting on page 21 of this prospectus. Depending on your investment objectives, these restricted redemption rights may make these Subordinated Debenture Bonds an unsuitable investment for you. YOU MAY BE UNABLE TO SELL YOUR DEBT SECURITY BECAUSE THERE IS NO TRADING MARKET FOR OUR DEBT SECURITIES. A trading market does not exist for our debt securities. Also, it is highly unlikely that a secondary market for these securities will develop. We do not plan to list any of the debt securities on any securities exchange. THESE SECURITIES ARE OFFERED THROUGH OUR WHOLLY-OWNED SUBSIDIARY, WHICH HAS RECEIVED A PARTIAL EXEMPTION FROM REGULATORY REQUIREMENTS. Farmland Securities Company ("FSC") is our wholly owned subsidiary. FSC's business is limited to the offer and sale of securities issued by us. Because FSC is wholly owned by Farmland, the offering requires a partial exemption from requirements of Rule 2720 of the NASD. This partial exemption requires, among other things, that a minimum of 80 percent of the dollar amount of sales be to a defined group as approved by the NASD. Only persons associated with us or FSC participated in determining the terms, including price, of the securities offered in this prospectus. WE CANNOT ASSURE YOU THAT WE WILL HAVE SUFFICIENT FUNDS AVAILABLE TO PAY INTEREST AND PRINCIPAL. We have not and do not intend to establish special cash reserves, escrow accounts or trusts for payment of principal or interest on the debt securities offered in this prospectus. We have relied on, and plan to continue to rely on, general corporate funds provided through operations, sale of assets and other borrowings to make all principal and interest payments when due. POTENTIAL ENVIRONMENTAL LIABILITIES RELATED TO BOTH CURRENT AND FORMER OPERATIONS MAY ADVERSELY IMPACT OUR FINANCIAL RESULTS. Farmland is subject to various stringent federal, state and local environmental laws and regulations, including those governing the use, storage, discharge and disposal of hazardous materials, which may impose liability for cleanup of environmental contamination. Farmland uses hazardous materials and generates hazardous wastes in the ordinary course of our manufacturing processes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Conditions, Liquidity and Capital Resources - Matters Involving the Environment," which begins on page 55. OUR BUSINESS IS SUBJECT TO UNPREDICTABLE CHANGES IN AGRICULTURAL CONDITIONS. Our financial success depends largely on factors which affect agricultural production and marketing conditions. These factors, which are outside of Farmland's control, often change agricultural conditions in an unpredictable manner. Therefore, we cannot determine the future impact on our operations from changes in these external factors. We expect demand for our products to continue to be volatile as agricultural conditions change. AS A COOPERATIVE, WE HAVE LIMITED ABILITY TO RAISE EQUITY IN THE CAPITAL MARKETS. As a cooperative, we raise equity primarily through the reinvestment of a portion of patronage refunds as stock or capital credits and through retention of net income (retained earnings) generated from transactions with non-members. RECENT EVENTS AGRONOMY VENTURE Farmland, Cenex Harvest States, and Land O'Lakes have announced their intent to form an agronomy marketing joint venture, with the venture beginning operations during early 2000. We anticipate the venture will enable the partners to achieve enhanced economies of scale and to generate critical mass in our marketing and distribution. Farmland will retain the ownership of our manufacturing facilities. INCOME TAX MATTERS In late November, 1999, the United States Tax Court issued an opinion holding that the gains and losses we realized in 1983 and 1984 on the sale of the stock of Terra Resources, Inc. and certain other assets were patronage-sourced, and that we had reported these gains and losses correctly. By ruling in our favor, the Tax Court rejected claims of the Internal Revenue Service that would have resulted in material additional federal income taxes plus accumulated interest. This ruling also means that we do not owe additional state income tax and accumulated interest related to these transactions. The IRS may decide to appeal the Tax Court decision to the United States Court of Appeals for the Eighth Circuit. In the event of an appeal, Farmland's management believes there is a high probability that Farmland would ultimately prevail. DETERMINATION OF INTEREST RATES The Certificate Interest Rate is the interest rate per year for Demand Loan Certificates as determined, from time to time, by Farmland. Each Demand Loan Certificate shall earn interest at the Certificate Interest Rate in effect on the date of issuance of such Demand Loan Certificate for a period of six (6) months only; provided, however, that if during such six (6) month period the Certificate Interest Rate for Demand Loan Certificates is increased to a rate higher than that currently in effect for a Demand Loan Certificate, then each such Demand Loan Certificate will earn interest at the increased rate from the effective date of the increase to the end of such Demand Loan Certificate's then current six (6) month period. Six (6) months from the date of issuance of each Demand Loan Certificate and each six (6) month anniversary date after the issuance date, such Demand Loan Certificate will, if not redeemed, earn interest at the Certificate Interest Rate for Demand Loan Certificates in effect on such anniversary date, but only for a six (6) month period from such anniversary date, subject to the escalation provisions previously set forth. A decrease in the Certificate Interest Rate for Demand Loan Certificates will have no effect on the Certificate Interest Rate of any Demand Loan Certificate issued prior to the decrease unless such decreased rate is in effect on the first day of the next subsequent six (6) month period of such outstanding Demand Loan Certificate. If redeemed by a Farmland member cooperative during a one (1) month period or by any other purchaser during a six (6) month period immediately following the Date of Original Issuance, the Demand Loan Certificates will bear interest from Date of Original Issuance to date of redemption at a rate 2% below the Certificate Interest Rate (the "Demand Rate"). Thus, if the Certificate Interest Rate were 6% per year, the Demand Rate would be 4% per year. The Bond Interest Rate, with respect to any series of Subordinated Debenture Bonds, is the interest rate per year for such Series, as determined by Farmland, from time to time, after giving consideration to the current rates of interest established by various money markets, and Farmland's need for funds. Any change in the Bond Interest Rate will not affect the Bond Interest Rate on any Subordinated Debenture Bonds for which the full purchase price was received prior to the change. On the date of this prospectus, the Certificate Interest Rate on Demand Loan Certificates and the Bond Interest Rate on Subordinated Debenture Bonds is as follows: Minimum Certificate Initial InvestmentInterest Rate Demand Loan Certificates.............$ 1,000 6.50 Bond Subordinated Debenture Bonds: Interest Rates Ten-Year, Series A .................$ 1,000 8.75 Ten-Year, Series B ................$100,000 9.00 Five-Year, Series C ................$ 1,000 8.00 Five-Year, Series D ................$100,000 8.15 Ten-Year Monthly Income, Series E ..$ 5,000 8.75 Ten-Year Monthly Income, Series F ..$100,000 9.00 Five-Year Monthly Income, Series G .$ 5,000 8.00 Five-Year Monthly Income, Series H .$100,000 8.15 Whenever the Certificate Interest Rate or Bond Interest Rate is changed, we will amend this prospectus to specify the interest rate in effect, after the date of the change. Whenever the Certificate Interest Rate or the Bond Interest Rate is changed, Farmland will notify holders of Demand Loan Certificate and Subordinated Debenture Bond of the change. Information concerning the Certificate Interest Rate and Bond Interest Rate can be obtained from the prospectus or from Farmland Securities Company, Post Office Box 7305, Kansas City, Missouri 64116 (telephone 1-800-821-8000, extension 6360). USE OF PROCEEDS The offering is made on a best efforts basis with no established minimum amount of Subordinated Debenture Bonds and Demand Loan Certificates (collectively, the "Offered Debt Securities") that must be sold. No assurance can be provided as to the amount of net proceeds Farmland may receive as a result of this offering. Assuming that all of the Subordinated Debenture Bonds and Demand Loan Certificates offered for cash are sold, net proceeds to Farmland will be approximately $326.0 million after deducting estimated commissions and expenses. To the extent Subordinated Debenture Bonds are exchanged pursuant to the exchange offer, net cash proceeds will be reduced by the face amount of Subordinated Debenture Bonds exchanged, up to $40 million. Any proceeds to Farmland from this offering may be used: . to fund portions of Farmland's capital expenditures and investments in ventures which are estimated to be approximately $221.9 million through the two-year period ending August 31, 2001. See "Business and Properties - Capital Expenditures and Investments in Ventures" beginning on page 37 of this prospectus. . to refinance approximately $42.9 million of subordinated debt with interest rates of 7% to 9.25% which mature at various times prior to August 31, 2001; or . to redeem subordinated debt prior to maturity at owners' requests, as permitted by the respective trust indenture pursuant to which such subordinated debt was issued. See the subcaption "Redemption by Farmland" and "Redemption by the Holder" within the description of each type of Subordinated Debenture Bond, beginning on page 18 of this prospectus. If proceeds from the sale of these securities are less than amounts required for these purposes, additional funds may be obtained from operations, from bank or other borrowings or from other financing arrangements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources", beginning on page 42. PLAN OF DISTRIBUTION The securities offered by this prospectus for cash and for exchange are offered by Farmland Securities Company ("FSC") and may be offered by other broker-dealers selected by Farmland. FSC's commitment is to use its best efforts to solicit orders for the securities being offered. FSC has not made a firm commitment and is not obligated to solicit offers for any specified amount of debt securities. There is no requirement that any minimum amount of securities must be sold. The offering is for an indeterminate period of time not expected to be in excess of two years. FSC, located at 3315 North Oak Trafficway, Kansas City, Missouri, is a wholly-owned subsidiary of Farmland organized for the sole purpose of offering Farmland's Demand Loan Certificates and Subordinated Debenture Bonds for sale to the general public and/or for exchange and to solicit offers which are subject to acceptance by Farmland. FSC is a member of the NASD and the Securities Investor Protection Corporation (SIPC). FSC's involvement in this offering is in compliance with terms of a partial exemption from requirements of Rule 2720 of the NASD because no persons, other than persons associated with Farmland or FSC, participated in determining the price and other terms of the securities offered by this prospectus. Farmland will pay commissions to FSC not to exceed 4% of the aggregate price of the Offered Debt Securities. Farmland will pay all expenses and liabilities incurred by FSC, limited to an amount not to exceed 3% of the aggregate sales price of the Offered Debt Securities. FSC is a registered broker-dealer under the Exchange Act but has only limited authority to engage in the offer and sale of securities issued by Farmland. Farmland will indemnify FSC for certain liabilities under the Securities Act of 1933, as amended (the "Securities Act"). FSC and other brokers-dealers, if any, selected by Farmland have or will agree to deliver a current prospectus relating to the Offered Debt Securities to prospective investors at the time of or prior to any offering of such certificates for sale or for exchange. Farmland may engage other broker-dealers that are qualified to offer and sell Offered Debt Securities in a particular state and that are members of the NASD. Each broker-dealer participating in this offering will be held responsible for complying with all statutes, rules and regulations of all jurisdictions in which each participating broker-dealer offers the Offered Debt Securities for sale. Farmland will pay to other selected broker-dealers, for their services, a sales commission of not more than 4% of the face amount of Subordinated Debenture Bonds sold and not more than 1/2 of 1% of the face amount of Demand Loan Certificates sold. In addition, Farmland may pay to selected broker-dealers an unallocated due diligence and marketing fee of not more than 1/2 of 1% of the face amount of the Subordinated Debt Securities sold. Farmland may indemnify selected broker-dealers for certain liabilities arising out of violations by Farmland of blue sky laws or the Securities Act. Interstate/Johnson Lane Corporation, a member of the NASD, participated as a qualified independent underwriter in the "due diligence" review with respect to the preparation of this Prospectus and received approximately $50,000 for such participation. Interstate/Johnson Lane Corporation will not be participating in the pricing of this issue. EXCHANGE OFFER Farmland is offering: 1) to the owners of its Subordinated Capital Investment Certificates, its Ten-Year Bonds and its Five-Year Bonds the right to exchange such certificates for an equivalent principal amount of any Monthly Income Bond ($5,000 minimum) which, at the time of the exchange, is being offered by this Prospectus. The option to exchange a Subordinated Capital Investment Certificate, Ten-Year Bond or Five-Year Bond into a Monthly Income Bond is not affected by the period of time the Subordinated Capital Investment Certificate, Ten-Year Bond or Five-Year Bond has been held. Farmland will not redeem Monthly Income Bonds prior to maturity except upon death of the owner. 2) to the owners of its Subordinated Capital Investment Certificates which have been held until eligible for redemption prior to maturity at the option of the owner, the right to exchange such certificates for an equivalent principal amount of any Ten-Year Bond or Five-Year Bond which, at the time of the exchange, is being offered by this Prospectus. This option to exchange into Ten-Year Bonds or Five-Year Bonds is affected by the period of time the outstanding certificate has been held. The required holding period is as follows: If, at the time of Then, to be eligible issuance the maturity for exchange, the period of the certificate must have certificate held was: been held for: (In Years) (In Years) 5 2 10 3 15 5 20 5 An exchange will be made effective on the day certificates or bonds eligible for exchange are received at Farmland's office in Kansas City, Missouri,. However, for any certificates received within a fifteen (15) day period preceding the record date of such certificates or bonds, the exchange will made effective as of the first day following such record date. The exchange is irrevocable after the effective date, but is revocable at any time prior to the effective date. Notice of an owner's revocation may be in writing, delivered to the address given below (see "How to Accept Exchange Offer" included in this Prospectus) or by telephone to (816) 459-6360. This exchange offer will expire at 12:00 P.M. Eastern Standard Time on December 31, 2000, unless terminated prior to such date. We will notify holders of certificates or bonds eligible for exchange at least 30 days prior to the effective date of Farmland's termination of this exchange offer. Any interest accrued on a certificate or bond being exchanged will be paid on the day the exchange is made effective. The following discussion is a brief summary of the principal United States Federal income tax consequences under current Federal income tax laws relating to exchanges of certificates or bonds. This summary is the opinion of Robert B. Terry, General Counsel for Farmland, is not intended to be exhaustive and, among other things, does not describe any state, local or foreign income and other tax consequences. Generally, the exchange of certificates or bonds would be considered as taxable exchanges, although it is possible that certain exchanges should be considered as non-taxable exchanges. The basis for determining a taxable gain or loss on a taxable exchange for an owner to take into account as gain or loss is the difference between the fair market value of the security being received and his basis (usually cost) in the security being exchanged. As a practical matter, most owners should have no gain or loss since the certificates and bonds were sold at 100% of face amount and the fair market value of the bonds received in the exchange should be considered 100% of the face amount of the certificates or bonds exchanged. However, since it is possible for a prior owner to have sold his certificate or bond to another person at a cost which is more or less than he had paid for it, a subsequent owner could have a different cost than the original issued cost. Any gain or loss recognized on a taxable exchange generally would be taken into account for purpose of federal income taxes as a gain or loss from the sale or disposition of a capital asset except that, if an owner purchased a certificate or bond at a "market discount" (i.e., at a price less than its face amount), all or a portion of the owner's gain may be treated as ordinary income, rather than capital gain, for federal income tax purposes. Characterization of any capital gain or loss as short-term or long-term will depend on the length of time the certificate or bond had been held by the owner as of the date of the exchange. Owners of these certificates or bonds should seek advice from their tax advisor before accepting the exchange offer. HOW TO ACCEPT EXCHANGE OFFER Registered holders may accept the exchange offer by delivering any of the certificates or bonds which are eligible for exchange (see "Exchange Offer" immediately above), to Farmland Securities Company, P.O. Box 7305, Kansas City, Missouri 64116. The certificates should be assigned to Farmland in the transfer section (on the reverse side of the certificate) and endorsed by all of the persons whose names appear on the face of the certificate. Should any registered owner be incapable of endorsing the certificate, additional documentation may be necessary. Call (816) 459-6360 or write to the above address for specific information. Should registered owners wish to have the new certificate issued to persons other than as shown on the certificate being surrendered in the exchange, the endorsement signatures must be guaranteed by a commercial bank or trust company officer or a NASD member firm representative. The exchange offer must be accompanied by a completed "Order and Receipt for Investment" form supplied by FSC. The U.S. Treasury Form W-9, Backup Withholding Certificate, included on the order form must be completed and signed by the principal owner of the new certificate. HOW TO TRANSFER OWNERSHIP To transfer ownership of the Offered Debt Securities, the certificates should be assigned to the new owner(s) in the transfer section on the reverse side of the certificate and endorsed by all persons named on the face of the certificate. Should any registered owner be incapable of endorsing the certificate, additional documentation may be necessary. Call (816) 459-6360 or write Farmland Industries, Inc., P.O. Box 7305, Kansas City, Mo. 64116, Dept. 79 for specific information. All transfer requests require that endorsement signatures be guaranteed by a commercial bank or trust company officer or an NASD member firm representative. Requests for transfer should be accompanied by a completed transfer form supplied by Farmland. The U.S. Treasury Form W-9 Backup Withholding Certificate included with or on the transfer form must be completed and signed by the new principal owner. The transfer will be made effective on the day certificates to be transferred are received at Farmland's office in Kansas City, Missouri. However, for any certificates received within a fifteen (15) day period preceding the record date of such certificates, the transfer will be made effective as of the first day following such record date. DESCRIPTION OF DEBT SECURITIES Under this prospectus, Farmland is offering the following Offered Debt Securities, namely: Demand Loan Certificates Subordinated Debenture Bonds issuable in series, as follows: Minimum Series Initial Investment Ten-Year, Series A.........................$ 1,000 Ten-Year, Series B ........................$ 100,000 Five-Year, Series C........................$ 1,000 Five-Year, Series D........................$ 100,000 Ten-Year Monthly Income, Series E..........$ 5,000 Ten-Year Monthly Income, Series F..........$ 100,000 Five-Year Monthly Income, Series G.........$ 5,000 Five-Year Monthly Income, Series H.........$ 100,000 The Demand Loan Certificates are called the "Demand Loan Certificates" and the various series of Subordinated Debenture Bonds referred to above are collectively called the "Subordinated Debenture Bonds". The Demand Loan Certificates will rank equally with all other unsecured and unsubordinated debt of Farmland and will be issued under the Senior Indenture. The Demand Loan Certificates are direct obligations of Farmland. As described below, the Senior Indenture permits the issuance of unsubordinated debt in series, of which the Demand Loan Certificates are a series. Each series of Subordinated Debenture Bonds will be subordinate and junior in right of payment to all Senior Indebtedness (as defined below) of Farmland and will be issued under the Subordinated Indenture. As described below, the Subordinated Indenture permits the issuance of subordinated debt in series, of which each series of Subordinated Debenture Bonds offered by this prospectus is a series. The unsubordinated debt issuable under the Senior Indenture and the subordinated debt issuable under the Subordinated Indenture are referred to collectively as the "Debt Securities". Each series of Debt Securities issued pursuant to an Indenture will be issued pursuant to an amendment or supplemental indenture or pursuant to an Officers' Certificate, in each case delivered pursuant to resolutions of the Board of Directors of Farmland and in accordance with the provisions of Section 3.01 of the applicable Indenture. The terms of the Debt Securities include those stated in the applicable Indenture and those made part of the applicable Indenture by reference to the Trust Indenture Act of 1939, as amended (the "TIA"). The Debt Securities are subject to all such terms and the Holders of Debt Securities are referred to the Indentures and the TIA for a statement of such terms. The following summaries of certain provisions of each Indenture, and the Debt Securities and the Offered Debt Securities are not complete and are qualified in their entirety by reference to the provisions of the applicable Indenture, including the definitions of capitalized terms used in this prospectus without definition. Numerical references in parentheses are to sections in the applicable Indenture and unless otherwise indicated capitalized terms have the meanings given them in the Indentures. GENERAL Neither Indenture limits the amount of Debt Securities, debentures, notes or other evidences of indebtedness that may be issued by Farmland or any of its subsidiaries. Furthermore, neither Indenture affords Holders of Debt Securities protection in the event of a highly leveraged transaction, restructuring, change in control, merger or similar transaction involving the Company that may adversely affect Holders of Debt Securities. Each Indenture provides that Debt Securities may be issued from time to time in one or more series. Under each Indenture, Farmland has the authority to establish as to each series: 1)the title of the Debt Securities of the series; 2)any limit upon the aggregate principal amount of the Debt Securities of the series; 3)the date or dates on which the principal of or premium, if any, on the Debt Securities of the series shall be payable or the methods for the determination of principal or premium; 4)the rate or rates at which such Debt Securities will bear interest, if any, or the method or methods of calculating such rate or rates of interest, the date or dates from which such interest shall accrue or the method or methods by which such date or dates shall be determined, the interest payment dates on which any such interest shall be payable, the right, if any, of Farmland to defer or extend an interest payment date, the record date, if any, for the interest payable on any Interest Payment Date, and the basis upon which interest shall be calculated if other than that of a 365-day year; 5)the place or places where such Debt Securities shall be payable or surrendered for registration of transfer or exchange; 6)the period or periods within which, the price or prices at which, and the other terms and conditions upon which, such Debt Securities may be redeemed, in whole or in part, at the option of Farmland; 7)the obligation, if any, of Farmland to redeem or purchase such Debt Securities pursuant to any sinking fund or analogous provisions or upon the happening of a specified event or at the option of a Holder and the period or periods within which, the price or prices at which and the other terms and conditions upon which, such Debt Securities shall be redeemed or purchased, in whole or in part, pursuant to such obligation; 8)the denominations in which such Debt Securities shall be issuable; 9)if other than the entire principal amount of the Debt Security, the portion of the principal amount of Debt Securities of the series which shall be payable upon declaration of acceleration upon an event of default; 10)provisions, if any, granting special rights to the holders of Debt Securities of the series upon the occurrence of specified events; 11)any deletions from, modifications of or additions to the events of default specified in the applicable Indenture or covenants of Farmland specified in the applicable Indenture; 12)the forms of such Debt Securities and interest coupons, if any, of the series; 13)the applicability, if any, to the Debt Securities and interest coupons, if any, of the series of defeasance provisions; 14)if other than Farmland, the identity of the Registrar and any Paying Agent; 15)any restrictions on the registration, transfer or exchange of such Debt Securities; and 16)any other terms of the series including any terms which may be required by or advisable under United States laws or regulations or advisable (as determined by Farmland) in connection with the marketing of Debt Securities of the series. (Section 3.01) Unless otherwise indicated as to a series of Debt Securities, the Debt Securities will be issued only in fully registered form without coupons and Debt Securities denominated in U.S. dollars will be issued in denominations of not less than $1,000. (Section 3.02) Unless otherwise indicated as to a series of Debt Securities, the principal of, and any premium or interest on, any series of Debt Securities will be payable at the principal executive offices of Farmland in Kansas City, Missouri, provided that, at the option of Farmland, payment of interest may be made by check mailed to the address of the Holder entitled thereto as it appears in the related security register or by electronic funds transfer or similar means to an account maintained by the Holder entitled thereto as it appears in the related security register (Sections 3.05, 3.07, 6.02). The office address of Farmland is 3315 North Oak Trafficway, Kansas City, Missouri, 64116-0005). Farmland will issue the Offered Debt Securities on the day (the "Date of Original Issuance") on which it receives (or is deemed to receive) and has accepted payment of the full purchase price. Any payments (other than by electronic funds transfer or similar means) received after noon shall be deemed received by Farmland on the next business day. Electronic funds transfers are effective when funds are received. No Offered Debt Security shall be valid or obligatory for any purpose unless there appears on such Offered Debt Security a certificate of authentication substantially in the form provided for in the applicable Indenture duly executed by the applicable Trustee by manual signature of one of its authorized officers. (Sections 2.02, 3.03) DEMAND LOAN CERTIFICATES INTEREST If purchased and held by a Farmland member cooperative for a one (1) month period or by any other purchaser for a six (6) month period immediately following the Date of Original Issuance of the Demand Loan Certificates, the principal amount of the Demand Loan Certificates will bear interest at the interest rate as determined by Farmland, from time to time (the "Certificate Interest Rate"). Each Demand Loan Certificate will earn interest at the Certificate Interest Rate in effect on the Date of Original Issuance of such Demand Loan Certificate for a period of six (6) months only; provided, however, that if during such six (6) month period the Certificate Interest Rate is increased to a rate higher than that currently in effect for the Demand Loan Certificates, then each such Demand Loan Certificate will earn interest at the increased rate from the effective date of the increase to the end of such Demand Loan Certificate's then current six (6) month period. Commencing six (6) months from the Date of Original Issuance of each Demand Loan Certificate and on each six (6) month anniversary date thereafter, such Demand Loan Certificate will, if not redeemed, earn interest at the Certificate Interest Rate in effect on such anniversary date, but only for a six (6) month period from such anniversary date, subject to the escalation provisions previously set forth. A decrease in the Certificate Interest Rate will have no effect on any Demand Loan Certificate issued prior to the decrease until the first day of the next subsequent six (6) month period of such outstanding Demand Loan Certificate. Holders of Demand Loan Certificates are notified of the effective date of any change of the Certificate Interest Rate which affects the Demand Loan Certificates held. If redeemed by a Farmland member cooperative during a one (1) month period or by any other purchaser during a six (6) month period immediately following the Date of Original Issuance, the Demand Loan Certificates shall bear interest from Date of Original Issuance to date of redemption at a rate 2% below the Certificate Interest Rate (the "Demand Rate"). Thus, if the Certificate Interest Rate is 6% per year, the Demand Rate would be 4% per year. Interest on the principal amount of any Demand Loan Certificates held longer than six (6) months will be computed at the effective Certificate Interest Rate and is payable in one of the following ways at the option of the Holder, made at the time of purchase and irrevocable as to the purchaser: (i) six (6) months after the Date of Original Issuance and at the end of each and every six (6) month period thereafter until the Demand Loan Certificate is surrendered for redemption, or (ii) only at the date of redemption compounded semi-annually at the effective Certificate Interest Rate. Any interest not punctually paid or duly provided for ("Defaulted Interest") on any Demand Loan Certificate will not be payable to the Holder thereof on the applicable payment date but instead may either be paid to the person in whose name such Demand Loan Certificate is registered at the close of business on a special record date for the payment of such Defaulted Interest to be fixed by the Trustee, notice of which shall be given to the Holder of such Demand Loan Certificate not less than ten (10) days prior to such special record date, or may be paid at any time in any other lawful manner, all as more completely provided in the Senior Indenture. (Section 3.07) REDEMPTION The Demand Loan Certificates cannot be called for redemption by Farmland at any time prior to maturity. Farmland will redeem the Demand Loan Certificates at any time upon written request of the Holder. No partial redemptions will be permitted. If the Demand Loan Certificate is surrendered for redemption by a Farmland member cooperative during a one (1) month period or by any other Holder during a six (6) month period immediately following the Date of Original Issuance, interest computed at the applicable Demand Rate from Date of Original Issuance to date of redemption will be paid at the time of redemption of the Demand Loan Certificate. If the Demand Loan Certificate is held for a period longer than six (6) months from Date of Original Issuance, interest from the last previous date on which interest was paid to the date of redemption computed at the applicable Certificate Interest Rate will be paid upon redemption. Any interest held for compounding by Farmland in accordance with an interest option made by the purchaser will be paid upon redemption of the Demand Loan Certificate. SUBORDINATED DEBENTURE BONDS To ensure accuracy, much of the language in this section has been taken directly from the indentures. This language may be legalistic and complex. To help you understand the provisions, we have provided a summary, immediately following this paragraph, of critical characteristics of the subordinated debt securities. The summaries are not meant to be complete. If you have questions regarding the meaning or intent of any section, please contact your selling agent or Farmland Securities Company. Farmland Securities Company may be contacted by calling (816) 459-6360 or writing to: Farmland Securities Company P.O. Box 7305 Kansas City, Missouri 64116 TEN-YEAR, SERIES A AND B MATURITY DATE The maturity date for Subordinated Debenture Bonds, Ten-Year, Series A and Ten- Year, Series B (referred to in this prospectus individually as "Series A Bonds" and "Series B Bonds" and collectively as the "Ten-Year Bonds") is ten (10) years from the Date of Original Issuance. The payment of the principal will be made at maturity upon presentation and surrender of the Subordinated Debenture Bonds, properly endorsed. SERIES A BONDS The Bond Interest Rate for any Series A Bonds issued will be the rate per year stated on the face of the bond. The Series A Bonds will bear interest at the applicable Bond Interest Rate as in effect on the Date of Original Issuance, but any change of the Bond Interest Rate for later issued Series A Bonds will not affect the Bond Interest Rate on any Series A Bond for which the full purchase price was received prior to the change. The Series A Bonds require a minimum initial investment of $1,000. SERIES B BONDS The Bond Interest Rate for any Series B Bonds issued will be the rate per year stated on the face of the bond. The Series B Bonds will bear interest at the applicable Bond Interest Rate as in effect on the Date of Original Issuance. Farmland anticipates that the Bond Interest Rate for Series B Bonds on a particular day may exceed by up to 1/4 of 1% per year the Bond Interest Rate on such day for Series A Bond. Any change of the Bond Interest Rate for later issued Series B Bonds will not affect the Bond Interest Rate on any Series B Bonds for which the full purchase price was received prior to the change. The Series B Bonds require a minimum initial investment of $100,000. INTEREST PAYMENTS Interest is payable on the principal of the Ten-Year Bonds from the Date of Original Issuance at the election of the purchaser, made at the time of purchase, in one of the following ways: 1)semiannually on January 1 and July 1, to Holders of record on the last preceding December 15 and June 15, respectively (or, if originally issued between the record date and the payment date, to the Holder on the Date of Original Issuance); or 2)at maturity or at the date of redemption if redeemed prior to maturity, compounded semiannually, on December 31 and June 30 at the applicable Bond Interest Rate. Any election to receive payment of the interest semiannually is irrevocable. The election to receive payment of the interest at maturity, or at the date of redemption if redeemed prior to maturity, will be terminated upon written request of the Holder, such termination to be effective as of the last previous interest compounding date. Such termination is irrevocable and, at the same time, is an election to receive payment of the interest semiannually thereafter. Any interest attributable to periods starting with the Date of Original Issuance and ending with the effective date of the termination will be paid upon receipt of the written request to terminate the election. Farmland shall have the right at any time by notice to the Holder to terminate any obligation to continue retaining the interest of any Holder. Such termination shall be effective as of the opening of business on the day following the first interest compounding date after such notice is mailed to the Holder, and the Holder will be paid all the interest accrued to the Holder's account on the effective date. Any Defaulted Interest on any Ten-Year Bond will not be payable to the Holder on the applicable record date but instead may either be paid to the person in whose name such Ten-Year Bond is registered at the close of business on a special record date for the payment of such Defaulted Interest to be fixed by the Trustee, notice of which shall be given to the Holder of such Ten-Year Bond not less than ten (10) days prior to such special record date, or may be paid at any time in any other lawful manner, all as more completely provided in the Subordinated Indenture. (Section 3.07) REDEMPTION BY FARMLAND The Ten-Year Bonds may be redeemed, after two (2) years from the Date of Original Issuance, at the option of Farmland at any time prior to maturity, on at least fifteen (15) days written notice, at face value plus accrued interest to the date of redemption. The Subordinated Indenture permits Farmland to select in any manner at its discretion the bonds to be redeemed. (Section 4.01) REDEMPTION BY THE HOLDER Farmland will redeem limited amounts of the Ten-Year, Series A Bonds and Series B Bonds prior to maturity at the option of the Holder as described under the caption "Limited Redemption Prior to Maturity of Subordinated Debenture Bonds" on page 21. FIVE-YEAR, SERIES C AND D MATURITY DATE The maturity date for Subordinated Debenture Bonds, Five-Year, Series C and Five-Year, Series D (referred to in this prospectus individually as "Series C Bonds" and "Series D Bonds" and collectively as the "Five-Year Bonds") is five (5) years from the Date of Original Issuance. The payment of the principal will be made at maturity upon presentation and surrender of the Subordinated Debenture Bonds, properly endorsed. SERIES C BONDS The Bond Interest Rate for any Series C Bonds issued will be the rate per year stated on the face of the bond. The Series C Bonds will bear interest at the applicable Bond Interest Rate as in effect on the Date of Original Issuance, but any change of the Bond Interest Rate for later issued Series C Bonds will not affect the Bond Interest Rate on any Series C Bond for which the full purchase price was received prior to the change. The Series C Bonds require a minimum initial investment of $1,000. SERIES D BONDS The Bond Interest Rate for any Series D Bonds issued will be the rate per year stated on the face of the bond. The Series D Bonds will bear interest at the applicable Bond Interest Rate as in effect on the Date of Original Issuance. Farmland anticipates that the Bond Interest Rate for Series D Bonds on a particular day may exceed by up to 1/4 of 1% per year the Bond Interest Rate on such day for any Series C Bond. Any change of the Bond Interest Rate for later issued Series D Bonds will not affect the Bond Interest Rate on any Series D Bonds for which the full purchase price was received prior to the change. The Series D Bonds require a minimum initial investment of $100,000. INTEREST PAYMENTS Interest is payable on the principal of the Five-Year Bonds from the Date of Original Issuance at the election of the purchaser, made at the time of purchase, in one of the following ways: 1)semiannually on January 1 and July 1, to Holders of record on the last preceding December 15 and June 15, respectively (or, if originally issued between the record date and the payment date, to the Holder on the Date of Original Issuance); or 2)at maturity or at the date of redemption if redeemed prior to maturity, compounded semiannually, on December 31 and June 30 at the applicable Bond Interest Rate. Any election to receive payment of the interest semiannually is irrevocable. The election to receive payment of the interest at maturity, or at the date of redemption if redeemed prior to maturity, will be terminated upon written request of the Holder, such termination to be effective as of the last previous interest compounding date. Such termination is irrevocable and, at the same time, is an election to receive payment of the interest semiannually thereafter. Any interest attributable to periods starting with the Date of Original Issuance and ending with the effective date of the termination will be paid upon receipt of the written request to terminate the election. Farmland shall have the right at any time by notice to the Holder to terminate any obligation to continue retaining the interest of any Holder. Such termination shall be effective as of the opening of business on the day following the first interest compounding date after such notice is mailed to the Holder and the Holder will be paid all the interest accrued to the Holder's account on the effective date. Any Defaulted Interest on any Five-Year Bonds will not be payable to the Holder on the applicable record date but instead may either be paid to the person in whose name such Five-Year Bond is registered at the close of business on a special record date for the payment of such Defaulted Interest to be fixed by the Trustee, notice of which shall be given to the Holder of such Five-Year Bond not less than ten (10) days prior to such special record date, or may be paid at any time in any other lawful manner, all as more completely provided in the Subordinated Indenture. (Section 3.07) REDEMPTION BY FARMLAND The Five-Year Bonds may be redeemed, after two (2) years from the Date of Original Issuance, at the option of Farmland at any time prior to maturity, on at least fifteen (15) days written notice, at face value plus accrued interest to the date of redemption only. The Subordinated Indenture permits Farmland to select in any manner at its discretion the bonds to be redeemed. (Section 4.01) REDEMPTION BY THE HOLDER Farmland will redeem, at face amount plus accrued interest to the date of redemption, limited amounts of the Five-Year Bonds prior to maturity at the option of the Holder as described under the caption "Limited Redemption Prior to Maturity of Subordinated Debenture Bonds". LIMITED REDEMPTION PRIOR TO MATURITY OF SUBORDINATED DEBENTURE BONDS 1. Farmland will redeem each month, on a first come, first serve basis (as evidenced by the time stamped or otherwise recorded as received by Farmland), a limited amount of Ten-Year, Series A Bond, Ten-Year, Series B, Five-Year, Series C Bond and Five-Years, Series D Bond prior to maturity. To be eligible for redemption, a Ten-Year, Series A Bond or Ten-Year, Series B Bond must have been held three (3) years from Date of Original Issuance and a Five-Year, Series C Bond or Five-Year, Series D Bond must have been held two (2) years from Date of Original Issuance. Subject to the carryover discussed below, the aggregate maximum amount that Farmland will redeem of Ten-Year, Series A Bonds, Ten-Year, Series B Bonds, Five- Year, Series C Bonds, Five-Year, Series D Bonds and other subordinated debt that Farmland elects to include in this redemption limit and which, in each case, meets the requirements for redemption prior to maturity, will be the greater of: a) $1,500,000 or, b) 1/2 of 1% of the combined total principal balance outstanding of all such Ten-Year Bonds, Five-Year Bonds and other bonds included in this redemption limit as specified above. If the amount determined pursuant to the above formula in any month (including any carryover from the prior month) exceeds the total amount requested for redemption prior to maturity in that month, such excess is carried over to the next month and added to the amount available for redemption prior to maturity in that month. Any excess, however, will not be carried beyond the end of Farmland's fiscal year. If any series eligible for early redemption under the above provision has a total balance outstanding less than $5,000,000 at the end of any month, then the subordinated debt securities of that series will be redeemed at the request of the Holder without regard to the above dollar limitation. 2. In addition to the amounts made available for redemption prior to maturity as described in (1) above, redemption will be made in the case of death of a Holder of Ten-Year Bonds and Five-Year Bonds upon written request and delivery of satisfactory proof of death and other documentation and in accordance with applicable laws. 3. IRA Redemption In addition to the amounts made available for redemption prior to maturity as described in (1) and (2) above, if Ten-Year Bonds or Five-Year Bonds are held in an Individual Retirement Account (an "IRA") established under Section 408 of the Internal Revenue Code of 1986, as amended (the "IRC"), Farmland will redeem, upon written request, such Ten-Year Bonds and Five- Year Bonds to the extent necessary to satisfy mandatory withdrawals from the IRA which are required by the IRC. Such redemption will be made only upon sufficient proof to Farmland that a mandatory withdrawal from the IRA is required. In general, as presently in effect, the IRC requires mandatory withdrawals from an IRA to commence on April 1 following the calendar year in which the beneficiary reaches the age of seventy and one- half (701/2) years. 4. The foregoing redemption privileges described in this section are subject to the conditions, as provided under the subordination provisions applicable to the Subordinated Debenture Bonds, that Farmland cannot redeem any of the Subordinated Debenture Bonds if, at the time of or immediately after giving effect to such redemption, there shall exist under any indenture or loan or other agreement pursuant to which any Senior Indebtedness is issued any default or any condition, event or act, which with notice or lapse of time, or both, would constitute a default. Redemption prior to maturity will be made upon the surrender of eligible Ten- Year Bonds and Five-Year Bonds properly endorsed and accompanied by written requests for early redemption to Farmland. Redemption prior to maturity will be made at the face value of the bonds plus accrued interest to the date of redemption. Amounts available for redemption prior to maturity are not set aside in a separate fund. TEN-YEAR MONTHLY INCOME, SERIES E AND F MATURITY DATE The maturity date for Subordinated Debenture Bonds, Ten-Year Monthly Income, Series E and Ten-Year Monthly Income, Series F (referred to in this prospectus individually as the "Series E Bonds" and the "Series F Bonds" and collectively as the "Ten-Year Monthly Income Bonds") is ten (10) years from the Date of Original Issuance. The payment of the principal will be made at maturity upon presentation and surrender of the Subordinated Debenture Bonds, properly endorsed. BOND INTEREST RATES The Bond Interest Rate for the Ten-Year Monthly Income Bonds will be determined by Farmland, from time to time. SERIES E BONDS The Bond Interest Rate for any Series E Bonds issued will be the rate per year stated on the face of the bond. The Series E Bonds will bear interest at the applicable Bond Interest Rate as in effect on the Date of Original Issuance, but any change of the Bond Interest Rate for later issued Series E Bonds will not affect the Bond Interest Rate on any Series E Bond for which the full purchase price was received prior to the change. Series E Bonds require an initial minimum investment of $5,000 and subsequent investments require a minimum investment of $1,000. SERIES F BONDS The Bond Interest Rate for any Series F Bonds issued will be the rate per year stated on the face of the bond. The Series F Bonds will bear interest at the applicable Bond Interest Rate as in effect on the Date of Original Issuance. Farmland anticipates that the Bond Interest Rate for Series F Bonds on a particular day may exceed by up to 1/4 of 1% per year the Bond Interest Rate on such day for any Series E Bond. Any change of the Bond Interest Rate for later issued Series F Bonds will not affect the Bond Interest Rate on any Series F Bonds for which the full purchase price was received prior to the change. Series F Bonds require a minimum initial investment of $100,000. INTEREST PAYMENTS Interest on the principal sum is payable monthly on the first day of each month to Holders of record on the last day of the preceding month, commencing on the first day of the month, following the month in which a Ten-Year Monthly Income Bond is issued. Any Defaulted Interest on any Ten-Year Monthly Income Bonds will not be payable to the Holder on the applicable record date but instead may either be paid to the person in whose name such Ten-Year Monthly Income Bond is registered at the close of business on a special record date for the payment of such Defaulted Interest to be fixed by the Trustee, notice of which shall be given to the Holder of such Ten-Year Monthly Income Bond not less than ten (10) days prior to such special record date, or may be paid at any time in any other lawful manner, all as more completely provided in the Subordinated Indenture. (Section 3.07) REDEMPTION BY FARMLAND The Ten-Year Monthly Income Bonds cannot be called for redemption by Farmland any time prior to maturity. REDEMPTION BY THE HOLDER Except as provided in this paragraph, Farmland will not redeem the Ten-Year Monthly Income Bonds prior to maturity upon the request of the Holder. Redemptions will be made in the case of death of a Holder of Ten-Year Monthly Income Bonds, upon written request and delivery of satisfactory proof of death and other documentation and in accordance with applicable laws. Redemptions prior to maturity will be made at the face value of the bonds plus accrued interest to the date of redemption only. Amounts available for redemption prior to maturity are not set aside in a separate fund. (Section 5.01) IRA REDEMPTION The Ten-Year Monthly Income Bonds will not, under any circumstances, be sold to an IRA and an IRA trustee or custodian will not be permitted to be the registered owner of a Ten-Year Monthly Income Bond. Therefore, unlike the Ten- Year Bonds and the Five-Year Bonds, the Ten-Year Monthly Income Bonds do not contain any special redemption rights for the benefit of an IRA or its trustee or custodian. FIVE-YEAR MONTHLY INCOME, SERIES G AND H MATURITY DATE The maturity date for Subordinated Debenture Bonds, Five-Year Monthly Income, Series G and Five-Year Monthly Income, Series H (referred to individually as the "Series G Bonds" and the "Series H Bonds" and collectively as the "Five-Year Monthly Income Bonds") is five (5) years from the Date of Original Issuance. The payment of the principal will be made at maturity upon presentation and surrender of the Subordinated Debenture Bonds, properly endorsed. BOND INTEREST RATES The interest rates for the Five-Year Monthly Income Bonds will be determined by Farmland, from time to time. SERIES G BONDS The Bond Interest Rate for any Series G Bonds issued will be the rate per year stated on the face of the bond. The Series G Bonds will bear interest at the applicable Bond Interest Rate as in effect on the Date of Original Issuance, but any change of the Bond Interest Rate for later issued Series G Bonds will not affect the Bond Interest Rate on any Series G Bond for which the full purchase price was received prior to the change. Series G Bonds require an initial minimum initial investment of $5,000, and subsequent investments require a minimum investment of $1,000. SERIES H BONDS The Bond Interest Rate for any Series H Bonds issued will be the rate per year stated on the face of the bond. The Series H Bonds will bear interest at the applicable Bond Interest Rate as in effect on the Date of Original Issuance. Farmland anticipates that the Bond Interest Rate for Series H Bonds on a particular day may exceed by up to 1/4 of 1% per year the Bond Interest Rate on such day for any Series G Bond. Any change of the Bond Interest Rate for later issued Series H Bonds will not affect the Bond Interest Rate on any Series H Bonds for which the full purchase price was received prior to the change. Series H Bonds require a minimum initial investment of $100,000. INTEREST PAYMENTS Interest on the principal sum is payable monthly on the first day of each month to Holders of record on the last day of the preceding month, commencing on the first day of the month, following the month in which a Five-Year Monthly Income Bond is issued. Any Defaulted Interest on any Five-Year Monthly Income Bonds will not be payable to the Holder on the applicable record date but instead may either be paid to the person in whose name such Five-Year Monthly Income Bond is registered at the close of business on a special record date for the payment of such Defaulted Interest to be fixed by the Trustee, notice of which shall be given to the Holder of such Five-Year Monthly Income Bond not less than ten (10) days prior to such special record date, or may be paid at any time in any other lawful manner, all as more completely provided in the Subordinated Indenture. (Section 3.07) REDEMPTION BY FARMLAND The Five-Year Monthly Income Bonds cannot be called for redemption by Farmland any time prior to maturity. REDEMPTION BY THE HOLDER Except as provided in this paragraph, Farmland will not redeem the Five-Year Monthly Income Bonds prior to maturity upon the request of the Holder. Redemptions will be made in the case of death of a Holder of Five-Year Monthly Income Bonds, upon written request and delivery of satisfactory proof of death and other documentation and in accordance with applicable laws. Redemptions prior to maturity will be made at the face value of the bonds plus accrued interest to the date of redemption only. Amounts available for redemption prior to maturity are not set aside in a separate fund. (Section 5.01) IRA REDEMPTION The Five-Year Monthly Income Bonds will not, under any circumstances, be sold to an IRA and an IRA trustee or custodian will not be permitted to be the registered owner of a Five-Year Monthly Income Bond. Therefore, unlike the Ten- Year Bonds and the Five-Year Bonds, the Five-Year Monthly Income Bonds do not contain any special redemption rights for the benefit of an IRA or its trustee or custodian. SUBORDINATION The payment of the principal of (and premium, if any) and interest on Subordinated Debenture Bonds is, to the extent set forth in the Subordinated Indenture, subordinated in right of payment to the prior payment in full of all Senior Indebtedness, whether currently outstanding or subsequently incurred. "Senior Indebtedness" is defined as: a)the principal of (and premium, if any) and interest on indebtedness of Farmland (other than the indebtedness of Farmland with respect to its Subordinated Capital Investment Certificates issued under indentures dated July 29, 1974, and under an indenture dated November 29, 1976, and under an indenture dated October 24, 1978, and under an indenture dated October 24, 1979, and under an indenture dated November 8, 1984; and with respect to Subordinated Monthly Income Capital Investment Certificates issued under an indenture dated November 8, 1984, and under an indenture dated November 11, 1985; and with respect to its Subordinated Individual Retirement Account Certificates issued under an indenture dated November 8, 1984; and with respect to its Subordinated Debenture Bonds issued under an indenture dated December 4, 1997) for money borrowed from or guaranteed to banks, trust companies, insurance companies, or pension trusts or evidenced by securities issued under the provisions of an indenture or similar instrument between Farmland and a bank or trust company other than indebtedness evidenced by instruments which expressly provide that such indebtedness is not superior in right of payment to the Debt Securities issued under the Subordinated Indenture; b)indebtedness created after the date of the Subordinated Indenture, as to which the instrument creating or evidencing the indebtedness provides that such indebtedness is superior in right of payment to Debt Securities issued under the Subordinated Indenture; and c)the Demand Loan Certificates. By reason of the subordination provisions of the Subordinated Indenture, no payment on account of principal of (or premium, if any) or interest on the Subordinated Debenture Bonds shall be made, and no Subordinated Debenture Bonds shall be purchased, either directly or indirectly, by Farmland or any of its subsidiaries, unless full payment of amounts then due for principal of (and premium, if any) and interest (including interest on overdue principal and interest, to the extent permitted by law) on Senior Indebtedness has been made or duly provided for. In addition, no payment on account of principal of (or premium, if any) or interest on the Subordinated Debenture Bonds shall be made, and no Subordinated Debenture Bonds shall be purchased, either directly or indirectly, by Farmland or any of its subsidiaries, if, at the time of such payment or purchase or immediately after giving effect to such payment or purchase, there shall exist under any Senior Indebtedness or any indenture or agreement pursuant to which any Senior Indebtedness is issued any default or any condition, event or act, which, with notice or lapse of time, or both, would constitute a default. In the event that any Subordinated Debenture Bond is declared due and payable before its stated maturity because of an Event of Default (as herein defined) or upon any other acceleration of payment of the principal of the Subordinated Debenture Bonds because of an Event of Default and upon any payment or distribution of assets of Farmland, whether in cash, property or securities, to creditors upon any dissolution, winding up, total or partial liquidation, reorganization, assignment for the benefit of creditors, or other marshaling of assets, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all principal of (and premium, if any) and interest (including interest on overdue principal and interest) due or to become due upon all Senior Indebtedness shall first be paid in full before the Holders of Subordinated Debenture Bonds, or the Trustee under the Subordinated Indenture, shall be entitled to retain any assets (other than shares of stock of Farmland as reorganized or readjusted or securities of Farmland or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated, at least to the same extent as the Subordinated Debenture Bonds, to the payment of all Senior Indebtedness which at the time may be outstanding, provided that the rights of the owners of the Senior Indebtedness are not altered by such reorganization or readjustment) so paid or distributed in respect of the Subordinated Debenture Bonds (for principal, premium, if any, or interest); and upon any such dissolution, winding up, liquidation, reorganization, assignment or marshaling, any payment or distribution of assets of Farmland, whether in cash, property or securities (other than as set forth above), to which the Holders of Subordinated Debenture Bonds or the Trustee would otherwise be entitled, shall be paid by Farmland or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution, or by the Holders of Subordinated Debenture Bonds or the Trustee under the Subordinated Indenture if received by them or it, directly to the owners of Senior Indebtedness (pro rata to each such owner on the basis of the respective amounts of Senior Indebtedness held by such owner) or their representatives, to the extent necessary to pay all Senior Indebtedness in full, after giving effect to any concurrent payment or distribution to or for the owners of Senior Indebtedness, before any payment or distribution is made to the Holders of Subordinated Debenture Bonds or to the Trustee under the Subordinated Indenture. By reason of such subordination, in the event of Farmland's insolvency, holders of Senior Indebtedness may receive more, ratably, and Holders of Subordinated Debenture Bonds may receive less, ratably, than other creditors of Farmland. The Subordinated Indenture does not limit the amount of Senior Indebtedness that may be issued by Farmland. As of November 30, 1999: 1)Farmland had $646.5 million aggregate principal amount of Senior Indebtedness outstanding. In addition, Senior Indebtedness includes certain obligations with a present value of approximately $330.3 million for future payments over seven years under long-term leases, 2)Farmland had outstanding $504.6 million aggregate principal amount of other subordinated indebtedness and 3)Certain of Farmland's subsidiaries had outstanding $224.8 million aggregate principal amount of indebtedness, of which $202.2 million was nonrecourse to Farmland. See "Risk Factors -- "Holders of Senior Indebtedness will be paid before holders of Subordinated Debenture Bonds", beginning on page 8. EVENTS OF DEFAULT Each Indenture provides that the following shall constitute "Events of Default" with respect to any series of Debt Securities issued (including, as applicable, the Demand Loan Certificates and the Subordinated Debenture Bonds): a)failure to pay principal of (or any installment of the principal of) or any premium on any Debt Securities of that series, after such principal shall have become due and payable; b)failure to pay interest of any Debt Securities of that series for a period of 60 days after such interest shall have become due or payable; c)certain events of bankruptcy, insolvency or reorganization; d)failure to perform any other covenant or agreement contained in the Indenture or in any supplemental indenture or in any Debt Security of that series for a period of 90 days following the mailing by the Trustee to Farmland of a written demand that such failure be cured, such failure not having been cured in the meantime, and e)any other Event of Default established for the series as contemplated by Section 3.01 with respect to Debt Securities of that series (the Offered Debt Securities have no additional Events of Default of the type permitted by this clause (e)). No Event of Default with respect to a particular series of Debt Securities issued under either Indenture necessarily constitutes an Event of Default with respect to any other series of Debt Securities issued under either Indenture. (Section 8.01) Each Indenture provides that if an Event of Default specified therein shall occur and be continuing, either the Trustee or the Holders of at least 50% in aggregate principal amount of the Debt Securities of such series then outstanding may declare the principal amount of the Debt Securities of such series and all interest accrued thereon to be due and payable immediately upon written notice to Farmland. Notwithstanding the above, in the case of an Event of Default arising from certain events of bankruptcy, insolvency or reorganization with respect to Farmland, all Debt Securities will become due and payable without further action or notice. (Section 8.03) The agreements governing certain of Farmland's outstanding indebtedness contain provisions to the effect that certain Events of Default under each Indenture would constitute an event of default under such agreements which, among other things, could cause an acceleration of the indebtedness under the agreements. Each Indenture provides that the Trustee shall within 90 days after the occurrence of a default, not including periods of grace, give the Holders of the affected series notice of all defaults known to it unless such defaults have been cured; provided that, except in the case of default in the payment of principal of or interest on any of the Debt Securities, the Trustee shall be protected in withholding such notice if and so long as the Trustee determines that the withholding of such notice is in the interests of such Holders. (Section 8.02) Each Indenture provides that the Trustee may sue Farmland in the case of default in payment of the principal of any Debt Security when the same shall become due and payable, or in the case of a default in the payment of the interest on any Debt Security for any period of 60 days after such interest shall become due and payable. (Section 8.04) Each Indenture further provides that the right of any Holder to receive payment of the principal of and interest on any Debt Security, or to institute a suit for the enforcement of such payment, may not be impaired without the consent of such Holder, unless, with regard to overdue interest payments, 75% in principal amount of the outstanding Debt Securities of the affected series consent on behalf of the Holders of all the Debt Securities of the affected series to the postponement of such overdue interest payment. (Sections 8.05 and 8.06) Each Indenture also provides that the Holders of not less than a majority in principal amount of the outstanding Debt Securities of each series have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or to consent, on behalf of the Holders of all Debt Securities of such series, to the waiver of any past default and its consequences, except for a default in the payment of principal or interest. (Section 8.06) Each Indenture requires Farmland to file with the Trustee annually an Officers' Certificate as to the absence of certain defaults under the terms of the applicable Indenture. (Section 7.05) CONCERNING THE TRUSTEES UMB Bank, National Association, Kansas City, Missouri, is the Trustee under the Senior Indenture and Commerce Bank of Kansas City, National Association, Kansas City, Missouri, is the Trustee under the Subordinated Indenture. Each Trustee is to perform only the duties as are specifically set forth in the applicable Indenture and in the case of an Event of Default (which has not been cured) to exercise such of the rights and powers vested in it by the applicable Indenture. Each trustee is also required to use the same degree of care and skill in the exercise of rights and powers as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. Each Trustee, before taking any action under the applicable Indenture, may require that satisfactory indemnity be furnished to it by the Holders of the Securities or other persons for the reimbursement of all reasonable costs and expenses to which it may be put and to protect it against all liability which it may incur in or by reason of such action, except liability which is adjudicated to have resulted from its negligence or willful misconduct. CONSOLIDATION OR MERGER OF OR WITH FARMLAND Nothing contained in either Indenture prevents any consolidation or merger of Farmland with or into any other corporation or corporations (whether or not affiliated with Farmland), or successive consolidations or mergers in which Farmland or its successor or successors shall be a party or parties, or prevents any sale or conveyance of the property of Farmland as an entirety or substantially as an entirety to any other corporation (whether or not affiliated with Farmland) authorized to acquire and operate the same; provided, however, that upon any such consolidation, merger, sale or conveyance, the due and punctual payment of the principal of and interest on all the Debt Securities (including the Demand Loan Certificates and the Subordinated Debenture Bonds) and the due and punctual performance and observance of all of the covenants and conditions under each Indenture to be performed or observed by Farmland, shall be expressly assumed, by supplemental indentures satisfactory in form to the Trustees and executed and delivered to the Trustees by the corporation formed by such consolidation, or into which Farmland shall have been merged, or by the corporation which shall have acquired such property. In case of any such consolidation, merger, sale or conveyance and upon any such assumption by the successor corporation, such successor corporation shall succeed to and be substituted for Farmland, as if it had been the signatory to the Indentures. (Sections 13.01, 13.02) MODIFICATION OF THE INDENTURE Each Indenture contains provisions permitting Farmland and the Trustee to enter into one or more supplemental indentures without the consent of the Holders of any of the Debt Securities issued (including, as applicable, the Demand Loan Certificates and the Subordinated Debenture Bonds) in order: a)to evidence the succession of another corporation to Farmland and the assumption by any such successor of the covenants and obligations of Farmland, including the Debt Securities issued and any related interest; b)to add to the covenants of Farmland for the benefit of the Holders of all or any series of Debt Securities issued under the Indenture (and if such covenants are to be for the benefit of less than all series of Debt Securities, stating that such covenants are expressly being included solely for the benefit of such series) or to surrender any right or power conferred upon Farmland; c)to add any additional Events of Default with respect to all or any series of Debt Securities issued under the Indenture; d)to change or eliminate any of the provisions of the Indentures in respect of one or more series of Debt Securities issued under the Indenture, provided that any such change or elimination shall become effective only when there are no Debt Securities outstanding of any series created prior to the execution of such supplemental indenture which is entitled to the benefit of such provision; e)to establish the form or terms of Debt Securities of any series issued under the Indenture; f)to evidence and provide for the acceptance of appointment by a successor Trustee with respect to the issued Debt Securities and to add to or change any of the provisions of the Indenture as shall be necessary to provide for or facilitate the administration of the trusts by more than one Trustee; g)to cure any ambiguity, to correct or supplement any provision in the Indenture which may be inconsistent with any other provision in the Indenture or to make any other provisions with respect to matters or questions arising under the Indenture which shall not be inconsistent with the provisions of such Indenture, provided such action does not adversely affect in any material respect the interests of the Holders of any series issued under the Indenture; h)to modify, eliminate or add to the provisions of the Indenture to such extent as shall be necessary to effect the qualification of the Indenture under the Trust Indenture Act or under any similar federal statute subsequently enacted, and to add to the Indenture such other provisions as may be expressly required under the Trust Indenture Act; or i)to enable the issuance of uncertificated Debt Securities and to permit registration, transfer and exchange of Debt Securities by book-entry. (Section 12.01) Each Indenture also contains provisions permitting Farmland and the respective Trustee, with the consent of the Holders of a majority in aggregate principal amount of the outstanding Debt Securities of each series issued thereunder and affected by such supplemental indenture, to execute supplemental indentures adding any provisions to or changing or eliminating any of the provisions of such Indenture or any supplemental indenture or modifying the rights of the Holders of such series, except that, without the consent of the each Holder so affected, no such supplemental indenture may: a)change the stated maturity of the principal of, or premium, if any, on, or any installment of principal of or premium, if any, or interest on, any such Debt Security, or reduce the principal amount of the Debt Security, or the interest rate or any premium payable upon redemption, or change the manner in which the amount of principal or premium, if any, or interest is determined, or impair the right to institute suit for the enforcement of any such payment on or after the stated maturity (or, in the case of redemption, on or after the redemption date); b)reduce the percentage in principal amount of the outstanding Debt Securities of any series, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of each Indenture or of certain defaults hereunder and their consequences) provided for in such Indenture; c)change any obligation of Farmland to maintain an office or agency in the places at which Debt Securities may be presented for transfer, exchange, redemption and payment, and where notices and demand to or upon Farmland may be served; or d)modify the provisions that set forth the provisions in each Indenture that may not be changed without the consent of the Holder of each Debt Security affected. The Subordinated Indenture also provides that certain provisions with respect to the subordination of outstanding Debt Securities may not be modified in a manner adverse to the Holders without the consent of each Holder of affected outstanding Debt Securities. (Section 12.02) SATISFACTION, DISCHARGE AND DEFEASANCE Each Indenture provides that it ceases to be of further effect with respect to the Debt Securities of, or within, any series (except for certain specified surviving obligations, including: a)certain obligations to register the transfer or exchange of Debt Securities; and b)the rights of Holders of Debt Securities to receive payments of principal and interest upon the stated maturity of the Debt Securities) upon the satisfaction of certain conditions, including that (1) all Debt Securities of such series not previously delivered to the Trustee for cancellation (i) have become due and payable, (ii) will become due and payable at their stated maturity within one year, or (iii) are to be called for redemption within one year and (2) Farmland, has irrevocably deposited or caused to be deposited with the Trustee money in an amount sufficient to pay and discharge the entire indebtedness on such Debt Securities for principal, premium, if any, and interest to the date of such deposit (in the case of Debt Securities which have become due and payable) or to the stated maturity or redemption date, as the case may be. (Section 14.01) Each Indenture also contains defeasance provisions under which, unless otherwise specified with respect to the Debt Securities of any series issued under the Indenture, Farmland, at its option: a)will be discharged from any and all obligations in respect of the Debt Securities of such series (except with regard to certain specified surviving obligations, including (1)certain obligations to register the transfer or exchange of Debt Securities and (2)the rights of Holders of Debt Securities to receive payments of principal and interest upon the stated maturity, or b)will not be subject to certain covenants and Events of Default, in each case, upon the compliance with certain conditions, including the deposit with the relevant Trustee, in trust, of money and/or Government Obligations which through the payment of interest and principal in accordance with their terms will provide money in an amount sufficient to pay the principal of, premium, if any, and each installment of interest on such Debt Securities at the maturity of such payments and any mandatory sinking fund payments applicable to such series on the day on which such payments are due and payable in accordance with the terms of the applicable Indenture and such Debt Securities. Such provisions do not apply to the Demand Loan Certificates and the Subordinated Debenture Bonds. (Sections 14.03, 14.04, 14.05, 14.06) TAX CONSEQUENCE OF INTEREST ELECTION Holders of Demand Loan Certificates and Subordinated Debenture Bonds should be aware that the election to receive interest on the payment date or to have the interest compounded semi-annually and paid at the date of redemption of the related security will not affect the reporting of interest for federal income tax purposes. All interest whether paid on the payment date or left to accumulate and be paid at the date of redemption of the related security will be credited to the Holder's account on the payment or compounding date. All interest credited to the Holder's account will be reported on a Form 1099 INT to the Holder and the Internal Revenue Service ("IRS") as interest income for the calendar year in which such interest is credited to the Holder's account regardless of the Holder's method of accounting for federal income tax purposes. Therefore, a Holder who elects to have interest paid at the date of redemption of the related security would have taxable income for a year and not receive such interest income in cash. However, the Holder could terminate the election to have interest paid at the date of redemption. On the effective date of such termination, the Holder would receive payment of all interest accumulated through the date of termination. BUSINESS AND PROPERTIES GENERAL In terms of revenue, Farmland is one of the largest cooperatives in the United States. In 1999, we had sales of $10.7 billion, including international sales of approximately $3.2 billion. Substantially all of our international sales are invoiced and collected in U.S. Dollars. We conduct business primarily in two operating areas. First, on the input side of the agricultural industry, we operate as a farm supply cooperative. Second on the output side of the agricultural industry, we operate as a processing and marketing cooperative. Our farm supply operations consist of four principal product divisions: plant foods, crop protection, petroleum and feed. Principal products of the plant foods division are nitrogen and phosphate-based fertilizers ("plant foods"). Principal products of the crop protection division include a complete line of insecticides, herbicides and mixed chemicals. Crop protection operations are conducted primarily through our 50% ownership in WILFARM, L.L.C. and Omnium, LLC. Principal products of the petroleum division are refined fuels, propane and by-products of petroleum refining. Petroleum operations are conducted primarily through our equity interest in two ventures. Petroleum refining is managed by Cooperative Refining Association, and petroleum marketing is managed by Country Energy. Principal products of the feed division include swine, dairy, pet, beef, poultry, mineral and specialty feeds, feed ingredients and supplements, animal health products and livestock services. We manufactured approximately 59% of the dollar value of our sales of farm supply products in 1999. Approximately 68% of the farm supply products we sold in 1999 were at wholesale to farm cooperative associations which are members of Farmland, and who, in turn, distribute these products primarily to farmers and ranchers. The output side of our business includes; processing and marketing of pork, raising hogs for processing, processing and marketing of beef, domestic storage and marketing of grain and international storage and marketing of grain. In 1999, approximately 70% of the hogs processed, 38% of the beef cattle processed and 60% of the grain we marketed domestically were supplied to us by our members. Substantially all the pork and beef products we sold in 1999 was processed in plants we own. No material part of the business of any segment of Farmland is dependent on a single customer or a few customers. Financial information about our industry segments is presented in Note 11 of the Notes to Consolidated Financial Statements. The principal businesses of Farmland have been highly seasonal. Historically, the majority of sales of crop production products occur in the spring. Sales in the beef business and in grain marketing historically have been concentrated in the summer and summer is the lowest sales period for the pork and feed businesses. Farmland competes for market share with numerous participants of various sizes and with various levels of vertical integration, product and geographical diversification. In the petroleum industry, competitors include major oil companies, independent refiners, other cooperatives and product brokers. Competitors in the crop production industry include global producers (some of which are cooperatives) of nitrogen- and phosphate-based fertilizers and product importers and brokers. Competitors in the crop protection industry include major chemical companies and product brokers. The feed, grain, pork and beef industries are comprised of a large variety of competitive participants. PLANT FOODS AND CROP PROTECTION MARKETING Farmland's plant foods business includes nitrogen, phosphate and potash based plant nutrients. Sales of the crop production business segment as a percent of consolidated sales was 14% for 1997, 13% for 1998, and 9% for 1999. The crop protection business is conducted primarily through our 50% ownership in WILFARM and Omnium ventures, and includes sales and distribution of a complete line of crop protection products such as insecticides, herbicides and mixed chemicals. Sales of the crop protection business are not included in consolidated sales of Farmland. Competition in the plant foods industry is dominated by price considerations. However, during the spring and fall plant nutrient application seasons, farming activities intensify and delivery service capacity is a significant competitive factor. Farmland maintains a significant capital investment in distribution assets and a seasonal investment in inventory to enhance its manufacturing and distribution operations. We own or lease plant nutrient custom dry blending, liquid mixing, storage and distribution facilities at a large number of locations throughout our trade territory to conform delivery capacity more closely to customer demands for delivery services. Domestic competition, mainly from other regional cooperatives and integrated multinational crop production companies, is intense due to customers' sophisticated buying tendencies and production strategies that focus on costs and service. Also, foreign competition exists from producers of crop production products manufactured in countries with lower cost natural gas supplies (the principal raw material in nitrogen-based fertilizer products). In certain cases, foreign producers of fertilizer for export to the United States may be subsidized by their respective governments. PRODUCTION Farmland manufactures nitrogen-based crop production products. Natural gas is the major raw material used in production of nitrogen-based fertilizer, including synthetic anhydrous ammonia, urea, urea ammonium nitrate ("UAN") and other forms of nitrogen-based fertilizers. Farmland operates seven anhydrous ammonia production plants (three of which are leased under long-term lease arrangements) at six locations in Kansas, Iowa, Nebraska, Oklahoma and Louisiana. Farmland and Mississippi Chemical Company are each 50% owners of a joint venture, Farmland MissChem, Limited ("Farmland MissChem"), which owns an anhydrous ammonia production facility located in The Republic of Trinidad and Tobago. All output from this facility is sold to and distributed by the owners of the venture. Annual production, including Farmland's 50% share of the output of Farmland MissChem, totaled approximately 2.8 million tons for 1997, 3.0 million tons for 1998, and 3.1 million tons for 1999. Five of these synthetic anhydrous ammonia plants have capacity to further process anhydrous ammonia into urea, UAN solutions and other forms of nitrogen fertilizer. Due to unfavorable market conditions, during August, 1999 we temporarily closed production of UAN at our Lawrence, Kansas and Enid, Oklahoma facilities. Production at the Lawrence facility was resumed during December, 1999. Production of our upgraded products approximated 1.6 million tons for 1997, 1.9 million tons for 1998, and 2.1 million tons for 1999. Farmland owns a phosphate chemical plant located in Joplin, Missouri, that produces feed grade phosphate (dicalcium phosphate) and ammonium phosphate, which is combined in varying ratios with muriate of potash to produce different fertilizer grade products. Production of feed grade phosphate approximated 163,000 tons in 1997, 167,000 tons in 1998, and 168,000 tons in 1999. Production of ammonium phosphate approximated 44,000 tons in 1997, 56,000 tons in 1998, and 29,000 tons in 1999. Farmland and Norsk Hydro a.s. are each 50% owners of Farmland Hydro, L.P. ("Hydro"), a joint venture which owns a phosphate fertilizer manufacturing plant at Green Bay, Florida. Hydro's plant produces products such as super phosphoric acid, diammonium phosphate and monoammonium phosphate. Annual phosphate (P205) production was 787,000 tons in 1997, 761,000 tons in 1998, and 752,000 tons in 1999. Farmland provides management and administrative services and Norsk Hydro a.s. provides marketing services to Hydro. Products of this plant are distributed principally to international markets. Farmland is a 50% owner of SF Phosphates Limited Liability Company ("SF Phosphates"), a venture which operates a phosphate mine located in Vernal, Utah, a phosphate chemical plant located in Rock Springs, Wyoming and a 96-mile pipeline connecting the mine to the plant. The plant produces monoammonium phosphate and super phosphoric acid. Annual phosphate (P205) production was 326,000 tons in 1997, 330,000 tons in 1998, and 326,000 tons in 1999. Under the venture agreement, the owners purchase the production of the venture in proportion to their ownership. RAW MATERIALS Natural gas, the largest single component of nitrogen-based fertilizer production, is purchased directly from natural gas producers. Natural gas purchase contracts are generally market sensitive and contract prices change as the market price for natural gas changes. In addition, Farmland has a hedging program which utilizes natural gas futures and options to reduce risks of market price volatility. Natural gas is delivered to Farmland's facilities under pipeline transportation service agreements which have been negotiated with each plant's delivering pipeline. Natural gas delivery to the plants could be curtailed under regulations of the Federal Energy Regulatory Commission if a delivering pipeline's capacity was required to serve priority users such as residences, hospitals and schools. In such cases, production could be curtailed. We have never lost significant production because of curtailments in pipeline transportation, and we do not anticipate having a curtailment in the near future. Adequate supplies of the phosphate rock and sulfur required to operate Hydro's plant are presently available from various suppliers. Hydro owns phosphate rock reserves located in Hardee County, Florida which contain an estimated 80 million tons of phosphate rock. During 1998, Hydro began obtaining various permits and licenses necessary for mining the above properties. This process will take several years to complete and, therefore, Hydro does not anticipate mining any of the phosphate rock reserves within the next year. Based on current recovery methods and the levels of the SF Phosphate plant production in recent years, we estimate that the phosphate rock reserves owned by SF Phosphates are adequate to provide the phosphate rock requirements of the plant for approximately 75 years. PETROLEUM MARKETING The principal products of this business segment are refined fuels, propane and by-products of the petroleum refinery. Other petroleum products include lube oil, grease, and car, truck and tractor tires, batteries and accessories. Sales of petroleum products as a percent of consolidated sales were 15% for 1997, 13% for 1998, and 9% for 1999. Competitive methods in the petroleum industry include service, product quality and price. However, in refined fuel markets, price competition is dominant. Many participants in the industry engage in one or more of the industry's processes (oil production, transportation, refining, wholesale distribution and retailing). Farmland participates in the industry primarily as a mid-continent refiner and as a wholesale distributor of petroleum products. Effective September 1, 1998, Country Energy LLC, a joint venture with Cenex Harvest States, commenced operations. Country Energy LLC provides, on an agency basis, refined fuel, propane and lubricants marketing and distribution services for its owners. PRODUCTION Farmland owns a refinery, with approximately 100,000 barrel per day capacity, at Coffeyville, Kansas. Production at the Coffeyville refinery amounted to approximately 71% of refined fuel sales in 1999. Effective September 1, 1999, we formed an alliance, Cooperative Refining, LLC, with the owners of National Cooperative Refinery Association ("NCRA"). Cooperative Refining performs all activities related to operating NCRA's refinery at McPherson, Kansas and Farmland's refinery at Coffeyville, Kansas. RAW MATERIALS In 1999, Farmland's pipeline/trucking gathering system collected approximately 15% of its crude oil supplies under lease from producers near its refinery. Additional supplies are acquired from diversified sources, including sour crude oil from foreign sources. Crude oil is purchased approximately 45 to 60 days in advance of the time the related refined products are to be marketed. Certain of these advance crude oil purchase transactions, as well as fixed price advance sales contracts of refined products, are hedged utilizing various petroleum futures contracts. During periods of volatile crude oil price changes, or in extremely short crude oil supply conditions, our petroleum operations could be affected to a greater extent than petroleum operations of more vertically integrated competitors with crude oil supplies available from owned producing reserves. In past periods of relatively severe crude oil shortages, various governmental regulations such as price controls and mandatory crude oil allocating programs have been implemented. If a crude oil shortage were to develop, there is no assurance as to what, if any, government action would be taken. FEED Feed products include swine, beef, poultry, dairy, pet, mineral and specialty feeds, feed ingredients and supplements, animal health products and farm and ranch supplies. The primary components of feed products are grain and grain by- products, which are generally available in the region in which we operate. This business segment's sales as a percentage of consolidated sales were approximately 7% in 1997, 6% in 1998 and 5% in 1999. Approximately 47% of the feed segment's sales in 1999 was attributable to products manufactured in our feed mills. Farmland operates feed mixing plants at 20 locations throughout its territory, an animal protein plant in Maquoketa, Iowa, an animal protein plant and a premix plant located in Eagle Grove, Iowa, a premix plant in Marion, Ohio and a pet food plant in Muncie, Kansas. In June of 1998, we acquired six feed mills with an aggregate capacity of 747,000 tons through the acquisition of SF Services, Inc. In 1998 and 1999, feed mills with an aggregate capacity of approximately 415,000 tons were either sold or contributed to ventures. Our partners in these ventures are primarily local cooperatives. PORK PROCESSING Farmland's pork processing and marketing operations are conducted through Farmland Foods, Inc. ("Foods"), a 99%-owned subsidiary, which operates 11 food processing facilities, including leased facilities in Albert Lea, Minnesota and Omaha, Nebraska. Facilities in Denison and Dubuque, Iowa, Monmouth, Illinois and Crete, Nebraska function as pork abattoirs and have additional capabilities for processing pork into bacon, ham and smoked meats. These facilities also process fresh pork into primal cuts for additional processing into fabricated meats which are sold to commercial users and to retail grocery chains, as well as case-ready and label- branded cuts for retail distribution. Meat processing facilities at Springfield, Massachusetts and New Riegel, Ohio produce Italian-style specialty meats and ham products. Plants in Wichita and Topeka, Kansas and Albert Lea, Minnesota process fresh pork into a variety of products including ham, bacon and sausage. Additionally, the Wichita, Kansas facility processes pork, beef and chicken into hot dogs, dry sausage and other luncheon meats. The plant located in Carroll, Iowa is primarily a packaging facility for canned or cook-in-bag products. The facility located in Omaha, Nebraska, prepares primal beef and pork products into case-ready cuts of meat which can be shipped directly to retailers. MARKETING Farmland's pork products marketed include fresh pork, fabricated pork, smoked meats, ham, bacon, fresh sausage, dry sausage, hot dogs and packing house by- products. These products are marketed under a variety of brand names including: Farmland, Farmstead, OhSe, Maple River, Carando, Roegelein, Regal and Marco Polo. Product distribution is through national and regional retail food chains, food service accounts, distributors and through international marketing brokers. Pork marketing is a highly competitive industry with many suppliers of fresh and processed pork products competing for shelf space in retail food stores. Other meat products such as beef, poultry and fish also compete directly with pork products. Competitive methods in this segment include price, product quality, brand and product differentiation and customer service. LIVESTOCK PRODUCTION PRODUCTION AND MARKETING Livestock Production's primary focus is to produce market hogs to be processed by Farmland Foods Inc. We currently have approximately 300 contracts, with producers in 8 states to finish hogs from our own production or from the production of Alliance Farms, an affiliate. The risks associated with the managing of hogs includes disease and genetic changes, as well as the general market price risk for hogs. Livestock Production sells approximately 92% of its inventory to Farmland Foods, which is a 99%-owned subsidiary of Farmland. In 1999, Livestock Production provided approximately 7.5% of Farmland Foods total hog requirements. BEEF PROCESSING Farmland's beef processing and marketing operations are conducted through Farmland National Beef Packing Company, L.P., which at August 31, 1999, was 71.2%-owned by Farmland. The beef processing facilities are located in Liberal, Kansas and Dodge City, Kansas. These facilities function as beef abattoirs and process fresh beef into primal cuts for additional processing into fabricated or boxed beef. The two plants slaughtered an aggregate of 2.1 million cattle in 1997, 2.4 million cattle in 1998, and 2.6 million cattle in 1999. MARKETING Products in our beef processing and marketing operations include fresh and frozen beef, boxed beef and by-products. Product distribution is through national and regional retail and food service customers as well as under the Farmland Black Angus Beef label. In addition, certain beef products are distributed in international markets. Beef marketing is a highly competitive industry with many suppliers of fresh and boxed beef. Other meat products such as pork, poultry and fish also compete directly with beef products. Competitive methods in this industry include price, product quality, brand and product differentiation and customer service. GRAIN MARKETING Farmland conducts domestic grain marketing operations through its North American division and international marketing operations through its eight international grain marketing subsidiaries conducted by a central management group (referred to as "Tradigrain"). NORTH AMERICAN GRAIN MARKETING Farmland markets wheat, corn, soybeans, milo, barley and oats, with wheat and corn constituting the majority of the marketing business. We purchase grain from members and nonmembers located in the Midwestern part of the United States and assume all risks related to selling such grain. Grain is priced in the United States principally through bids based on organized commodity markets. In 1998, Farmland and ConAgra Inc., formed Farmland-Atwood, LLC, a 50%-owned venture. In May 1999, Farmland purchased ConAgra's, interest in the venture. Farmland-Atwood provides risk management services, financial and grain support services and grain brokerage to its customers. Farmland is exposed to price risk as a result of holding grain inventory and because, in the ordinary course of business, Farmland is a party to numerous fixed price sales and fixed price purchase contracts. To reduce the price change risk associated with holding positions in grain, Farmland takes opposite and offsetting positions by entering into grain commodity futures contracts. Generally, such contracts have terms of up to one year. Our strategy is to maintain hedged positions on as close to 100% of our grain positions as is possible. Farmland maintained hedges on its grain positions of approximately 93% during 1997, 93% during 1998, and 95% during 1999. The average market value of grain positions not hedged during the year amounted to less than 1% of our average total assets. While hedging activities reduce the risk of loss from changing market values of grain, such activities also limit the gain potential which otherwise could result from changes in market prices of grain Grain revenues from export sales or sales to domestic customers for export as a percent of total domestic grain sales were approximately 41% in 1997, 43% in 1998, and 37% in 1999. Foreign sales of grain generally are paid in U.S. Dollars. Export-related sales are affected by the level of grain production in foreign countries. Furthermore, export-related sales are subject to international political events and changes in other countries' trade policies which are not within the control of the United States or Farmland. PROPERTY Farmland owns or leases 26 inland elevators and one export elevator in the United States with a total capacity of approximately 178.8 million bushels of grain. INTERNATIONAL GRAIN Farmland's international grain trading subsidiaries (together referred to as "Tradigrain") transact business in all major grains, oilseeds, and sugar. Final consumers are either governmental entities, private companies or other major grain companies throughout the world. Tradigrain's purchases of grain are made on a cash basis and its sales of grain are mostly made against confirmed letters of credit. Furthermore, Tradigrain may take long or short grain positions. These positions are accounted for on a mark-to-market basis and the gain or loss is recognized as a component of net income. RESEARCH Farmland operates a research and development farm for the primary purpose of developing improvements in nutrition, breeding and feeding practices of livestock and pets. We also conduct research at our pork processing facilities directed toward product development and process improvement. Additionally, Farmland formed a five-year research alliance, beginning in 1997, with Kansas State University. Expenditures related to product research and process improvements sponsored by Farmland amounted to $2.1 million, $2.4 million and $2.4 million for 1997, 1998 and 1999, respectively. CAPITAL EXPENDITURES AND INVESTMENTS IN VENTURES In 1999, Farmland made capital expenditures totaling $121.2 million and investments in ventures totaling $23.3 million. Farmland's Board of Directors has authorized expenditures of up to $221.9 million for capital additions and improvements during the years 2000 and 2001. The majority of these expenditures are in the crop production, pork processing and marketing, beef processing and marketing and petroleum businesses and are primarily for plant improvements. From time to time, management may recommend additional capital projects to Farmland's Board of Directors for approval. We intend to fund our capital program with cash from operations, through borrowings or through other capital market transactions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources" beginning on page 42. YEAR 2000 Farmland has not experienced any significant problems related to Year 2000 issues. Also, we do not anticipate encountering significant Year 2000 problems in the future. Farmland's total cost to ensure our software was Year 2000 compliant was approximately $6.5 million. GOVERNMENT REGULATION Farmland's business is conducted within a legal environment created by numerous federal, state and local laws which have been enacted to protect the public's interest by promoting fair trade practices, safety, health and welfare. Farmland believes that its operating procedures conform to the intent of these laws and that we currently are in compliance with all such laws, the violation of which could have a material adverse effect on us. Certain policies may be implemented from time to time by the United States Department of Agriculture, the Department of Energy or other governmental agencies which may impact the demands of farmers and ranchers for our products or which may impact the methods by which certain of our operations are conducted. Such policies may have a significant impact on any or all of Farmland's operating businesses. The Federal Agriculture Improvement and Reform Act ("FAIR") represents the most significant change in government farm programs in more than 60 years. Under FAIR, the former system of variable price-linked deficiency payments to farmers has been replaced by a program of fixed payments which decline over a seven-year period from 1996 to 2002. To compensate for adverse market and weather conditions, additional transfer payments were made by the Federal government during 1998 and 1999. FAIR eliminates federal planting restrictions and acreage controls. Farmland believes that FAIR was intended to accelerate the trend toward greater market orientation and reduced Government influence on the agricultural sector. As a result, we expect the number of acres under cultivation to increase over a long period of time. This increase may favorably impact demand of producers for our plant nutrients and crop protection products and fuels. Whether demand for our products is favorably impacted depends in a large part on whether U.S. agriculture becomes more competitive in world markets as this industry moves toward greater market orientation, the extent which governmental actions expand international trade agreements and whether market access opportunities for U.S. agriculture is increased. The U.S. Congress has in the past considered, and may in the future consider, trade measures which, if passed, could enhance agricultural export potential. Farmland believes "fast-track" (legislation which would authorize the President to submit a trade agreement to Congress with the assurance that it will be voted on within 90 days and not be subject to amendments), normal trading relations with China, and removal of trade sanctions and language to prohibit embargoes could benefit U.S. agricultural interests by opening markets, increasing exports and expanding trade opportunities with countries which import agricultural products. Absent such legislation, our access to international markets may be adversely impacted. Management is not aware of any newly implemented or pending policies, other than as discussed above, having a significant impact or which may have a significant impact on our operations. EMPLOYEE RELATIONS At August 31, 1999, Farmland had approximately 17,700 employees. Approximately 44% of the our employees were represented by unions having national affiliations. Farmland considers its relationship with employees to be generally satisfactory. No labor strikes or work stoppages within the last three fiscal years have had a materially adverse effect on our operating results. Current labor contracts expire on various dates through April 2002. PATRONAGE REFUNDS AND DISTRIBUTION OF ANNUAL EARNINGS Farmland operates on a cooperative basis. In accordance with its bylaws, Farmland determines its annual net earnings from transactions with members ("member-sourced earnings"). For this purpose, annual net earnings means income before income tax determined in accordance with generally accepted accounting principles. The bylaws of Farmland provide that the Board of Directors has complete discretion with respect to the handling and ultimate disposition of any member-sourced losses. The member-sourced earnings (after handling of member- sourced losses) are returned to members as patronage refunds in the form of qualified and/or nonqualified written notices of patronage refund allocation. Each member's portion of the annual patronage refund is determined by the earnings of Farmland attributed to the quantity or value of business transacted by the member with Farmland during the year for which the patronage is paid. A qualified patronage refund must be paid at least 20% in cash. The portion of the qualified patronage refund not paid in cash (the allocated equity portion) is currently paid by Farmland in common shares, associate member common shares or capital credits (depending on the membership status of the recipient). The Board of Directors may determine to pay the allocated equity portion in any other form or forms of equities. The allocated equity portion of the qualified patronage refund is determined annually by the Board of Directors. Farmland is allowed an income tax deduction for the total amount (the cash portion and the allocated equity portion) of its qualified patronage refunds. Nonqualified patronage refunds may be paid entirely in allocated equity; there is no minimum cash requirement. Nonqualified patronage refunds paid by Farmland have been recorded as book credits in the form of common shares, associate member common shares or capital credits (depending on the membership status of the recipient). The Board of Directors may determine to record the nonqualified patronage refund in any other form or forms of nonpreferred equities. Farmland is not allowed an income tax deduction for a nonqualified patronage refund in the year paid. The nonqualified patronage refund is deductible for federal income tax purposes only when such nonqualified written notices of allocation are redeemed for cash or tangible property. For the years ended 1997, 1998 and 1999, patronage refunds authorized by the Board of Directors were: <TABLE> <CAPTION> Cash or Cash Equivalent Portion of Patronage Non-Cash Portion of Total Patronage Refunds Patronage Refunds Refunds (Amounts in Thousands) <S> <C> <C> <C> 1997............... $ 40,228 $ 68,079 $ 108,307 1998............... $ 23,593 $ 35,528 $ 59,121 1999............... $ 6,054 $ 24,215 $ 30,269 </TABLE> Nonmember-sourced income (earnings attributed to transactions with persons not eligible to receive patronage refunds, i.e. nonmembers) and nonpatronage income or loss (income or loss from activities not directly related to the cooperative marketing or purchasing activities of Farmland) are subject to income taxes computed on the same basis as such taxes are computed on the income or loss of other corporations. EQUITY REDEMPTION PLANS The Equity Redemption Plans described below, namely the base capital plan, the estate settlement plan and the special equity redemption plans (together, the "Plans"), may be changed at any time or from time to time at the sole and absolute discretion of the Board of Directors. The Plans are not binding upon the Board of Directors or Farmland, and the Board of Directors reserves the right to redeem, or not redeem, any of Farmland's equities without regard to whether such action or inaction is in accordance with the Plans. Factors which the Board of Directors may consider in determining when and under what circumstances, Farmland may redeem equities include, but are not limited to, the terms of our base capital plan and other equity redemption plans, results of operations, financial position, cash flow, capital requirements, long-term financial planning needs, income and other tax considerations and other relevant considerations. By retaining discretion to determine the amount, timing and ordering of any equity redemptions, the Board of Directors believes that it can continue to assure that the best interests of Farmland and our owners will be protected. BASE CAPITAL PLAN For the purposes of acquiring and maintaining adequate capital to finance Farmland's business, the Board of Directors has established a base capital plan. The base capital plan provides a mechanism for determining Farmland's total capital requirements and each voting member's and associate member's share (referred to as the "Base Capital Requirement"). As part of the Base Capital Plan, the Board of Directors may, in its discretion, provide for redemption of Farmland common shares or associate member common shares held by voting members or associate members whose holdings of common shares or associate member shares exceed the voting members' or associate members' Base Capital Requirement. The base capital plan provides a mechanism under which the cash portion of the patronage refund payable to voting members or associate members will depend upon the degree to which such voting members or associate members meet their Base Capital Requirements. ESTATE SETTLEMENT PLAN The estate settlement plan provides that equity holdings of deceased natural persons (except for equity purchased and held for less than five years) be redeemed at par value. This provision is subject to a limitation of $1.0 million in any one fiscal year without further authorization by the Board of Directors for such year. SPECIAL EQUITY REDEMPTION PLANS From time to time, Farmland has redeemed portions of its outstanding equity under various special equity redemption plans. The special equity redemption plans have been and may be changed at any time or from time to time at the sole and absolute discretion of the Board of Directors. The special equity redemption plans are not binding upon the Board of Directors or Farmland, and the Board of Directors reserves the right to redeem, or not redeem, any equities without regard to whether such action or inaction is in accordance with the special equity redemption plans. The special equity redemption plans are designed to return cash to members or former members of Farmland or Farmland Foods by providing a method for redemption of outstanding equity which may not be subject to redemption through other Plans, such as the base capital plan or the estate settlement plan. The order in which each type of equity is redeemed is determined by the Board of Directors. Presented below are the amounts of equity approved for redemption by the Board of Directors of Farmland and Farmland Foods under the base capital plan, the estate settlement plan and special equity redemption plans for each of the years in the three-year period ended 1999. During the third quarter of 1998, Farmland approved and paid a special equity redemption of approximately $50.0 million. Substantially all other amounts approved for redemptions are paid in cash in the year following approval. <TABLE> <CAPTION> Estate Base Capital Settlement and Plan Redemptions Special Equity Total Plan Redemptions(A) Redemptions (Amounts in Thousands) <S> <c <C> <C> > 1997....... $ 17,228 $ 11,492 $ 28,720 1998....... $ 8,868 $ 50,103 $ 58,971 1999....... $ -0- $ 377 $ 377 </TABLE> (a)Includes redemptions of preferred stock. LEGAL PROCEEDINGS Management believes there is no litigation existing or pending against Farmland or any of its subsidiaries that, based on the amounts involved or the defenses available, would have a material adverse effect on our financial position. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data as of the end of and for each of the years in the five-year period ended August 31, 1999 are derived from the Consolidated Financial Statements of Farmland, which have been audited by KPMG LLP, independent certified public accountants. The following selected consolidated financial data as of the end of and for the three month periods ended November 30, 1998 and 1999 are derived from the unaudited Condensed Consolidated Financial Statements of Farmland (which reflect all adjustments, consisting only of normal recurring adjustments, which in management's opinion are necessary for a fair statement of results for these interim periods). The information set forth below should be read in conjunction with the audited Consolidated Financial Statements and the unaudited Condensed Consolidated Financial Statements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related notes. <TABLE> <CAPTION> Three Months Ended Year Ended August 31 November 30 1995 1996 1997 1998 1999 1998 1999 (Amounts in Thousands) <S> <C> <C> <C> <C> <C> <C> <C> SUMMARY OF OPERATIONS: Net Sales....................$ 7,256,869 $ 9,788,587 $ 9,147,507 $ 8,775,046 $ 10,709,073 $ 2,582,250 $ 2,984,465 Operating Income of Industry Segments(1)<F1>............ 323,254 291,781 295,626 192,874 181,852 33,822 38,160 Interest Expense............. 53,862 62,445 62,335 73,645 90,773 19,929 25,535 Net Income (loss)............ 162,799 126,418 135,423 58,770 13,865 (6,400) (26,542) DISTRIBUTION OF NET INCOME: Patronage Refunds: Allocated Equity...........$ 61,356 $ 60,776 $ 68,079 $ 35,528 $ 24,215 Note 3 Note 3 Cash and Cash Equivalents................ 33,061 32,719 40,228 23,593 6,054 Note 3 Note 3 Earned Surplus and Other Equities................... 68,382 32,923 27,116 (351) (16,404) Note 3 Note 3 RATIO OF EARNINGS TO FIXED CHARGES (2)<F2> 4.0 3.0 3.0 1.6 1.2 Note 2 Note 2 BALANCE SHEETS: Working Capital..............$ 319,513 $ 322,050 $ 242,211 $ 435,482 $ 450,439 $ 450,439 $ 367,849 Property, Plant and Equipment, Net............. 592,145 717,224 783,108 827,149 833,203 833,203 833,548 Total Assets................. 2,185,943 2,568,446 2,645,312 2,874,618 3,257,649 3,257,649 3,170,884 Long-Term Borrowings (excluding current maturities)........ 469,718 616,258 580,665 728,103 808,413 808,413 797,200 Capital Shares and Equities................... 687,287 755,331 821,993 912,696 917,327 Note 3 Note 3 <FN> <F1> 1.Includes segment gross income, segment selling, general, and administrative expenses, and the segment's equity in income (loss) of investees. <F2> 2.The ratios of earnings to fixed charges have been computed by dividing fixed charges into the sum of (a) income (loss) before taxes for the enterprise as a whole, less capitalized interest and with adjustments to appropriately reflect the Company's majority-owned and 20%-to 50%-owned affiliates, and (b) fixed charges. Fixed charges consist of interest on all indebtedness (including amortization of debt issuance expenses) and the component of operating rents determined to be interest, with adjustments as appropriate to reflect the Company's 20%-to 50%-owned affiliates. Income was inadequate to cover fixed charges for the three months ended November 30, 1998 and 1999. The dollar amount of the deficiencies were $11.5 million and $20.8 million, respectively. 3.We make the determination of members' income (and members' loss) only after the end of the fiscal year. Our Board of Directors, in their sole discretion, then determines how member losses are to be handled and the resulting amount of patronage refunds to be paid or losses to be allocated from such member income or loss. Since we determine the amount of members' income and the amount of members' loss only after the end of the fiscal year, and since only after that determination has been made can our Board of Directors determine the handling of members' loss, the resulting amount of patronage refunds to be paid, the portion of such refund to be paid either in cash or Farmland equity (common stock, associate member common stock and capital credits) and since the amount of income appropriated to earned surplus is dependent on the amount of patronage refunds and the handling of members' losses, Farmland makes no provision for patronage refunds in its interim financial statements. Therefore, the amount of net income (loss) for the interim periods presented has been excluded from the Capital Shares and Equities. </FN> </TABLE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Farmland has historically maintained two primary sources for debt capital: a substantially continuous public offering of its subordinated debt and demand loan securities (the "continuous debt program") and bank lines of credit. Farmland's debt securities issued under the continuous debt program generally are offered on a best-efforts basis through our wholly owned broker-dealer subsidiary, Farmland Securities Company and also may be offered by selected unaffiliated broker-dealers. The types of debt securities offered in the continuous debt program include Demand Loan Certificates and Subordinated Debenture Bonds. The total amount of debt securities outstanding and the flow of funds to, or from, Farmland as a result of the continuous debt program are influenced by the rate of interest which we establish for each type or series of debt security offered and by options of Farmland to call for redemption certain of its outstanding debt securities. During the year ended August 31, 1999, the outstanding balance of Demand Loan Certificates decreased by $3.7 million and the outstanding balance of Subordinated Debenture Bonds increased by $101.1 million. During the three months ended November 30, 1999, the outstanding balance of demand certificates decreased by $1.7 million and the outstanding balance of subordinated debt securities decreased $3.0 million. In May 1996, Farmland entered into a five year Syndicated Credit Facility (the "Credit Facility") with various participating banks. The Credit Facility provides a $1.1 billion credit, subject to compliance with financial covenants as set forth in the Credit Facility, consisting of an annually renewable short- term credit of up to $650.0 million and a long-term credit of up to $450.0 million. Farmland pays commitment fees under the Credit Facility equal to 22.5 basis points annually on the unused portion of the short-term credit and 25 basis points annually on the unused portion of the long-term credit. In addition, Farmland must comply with financial covenants regarding working capital, the ratio of certain debts to average cash flow, and the ratio of equity to total capitalization, all as defined in the Credit Facility. The short-term credit provided under the Credit Facility is reviewed and/or renewed annually. The next scheduled review date is in May 2000. The revolving long-term credit provided under the Credit Facility expires in May 2001. At November 30, 1999, the Company had $375.2 million of short-term borrowings under the Credit Facility and $180.0 million of revolving term borrowings. Additionally, $54.2 million of the Credit Facility was utilized to support letters of credit. At November 30, 1999, we had capacity to finance additional current assets of $222.9 million under the short-term credit. Requirements under the Credit Facility limit current availability under the long-term credit to $106.5 million. Farmland maintains other borrowing arrangements with banks and financial institutions. Under such agreements, at November 30, 1999, $28.6 million was borrowed. Farmland National Beef Packing Company, L.P. ("FNBPC") has a five year $130.0 million credit facility which expires March 31, 2003. This facility is provided by various participating banks and all borrowings thereunder are nonrecourse to Farmland or Farmland's other affiliates. At November 30, 1999, FNBPC had borrowings under this facility of $63.4 million and $3.3 million of the facility was utilized to support letters of credit. FNBPC has pledged certain assets to support its borrowings under the facility. Our international grain trading subsidiaries (collectively referred to as "Tradigrain") have borrowing agreements with various international banks which provide financing and letters of credit to support Tradigrain's international grain trading activities. Obligations of Tradigrain under these loan agreements are nonrecourse to Farmland or Farmland's other affiliates. At November 30, 1999, such borrowings totaled $116.8 million. Leveraged leasing has been utilized to finance railcars and a significant portion of our fertilizer production equipment. In December 1997, Farmland entered into a series of agreements which provide for the construction and operation under a long-term lease of facilities adjacent to our petroleum refinery at Coffeyville, Kansas. These facilities are designed to convert petroleum coke by-products into fertilizers. When the facilities are completed in the spring of 2000, Farmland will be obligated to make future minimum lease payments with an approximate present value of $223 million. Alternatively, Farmland has an option to purchase the facilities for a purchase price equal to the facilities' construction costs less any portion of the original construction cost previously paid. In the event Farmland should default on the obligations described above, future lease obligations may be accelerated. If accelerated, obligations due and payable would total approximately $263 million, all of which would be senior to the subordinated debt securities. Upon payment of such amount, we would receive title to the assets. In the opinion of management, these arrangements for capital are adequate for our present operating and capital plans. However, alternative financing arrangements are continuously evaluated. Net cash from operating activities for 1999 decreased $200.1 million compared to 1998, reflecting lower net income and an increase in accounts receivable and inventories, partially offset by an increase in accounts payable. Major uses of cash for 1999 include: $162.5 million used in operations, $121.2 million for capital expenditures, $38.2 million for acquisition of other long-term assets, and $23.6 million for patronage refunds distributed from income of the 1998 fiscal year. Major sources of cash include: $114.9 million from net increase in bank loans and other notes payable, $101.3 million from the net increase of subordinated debt certificates outstanding, $54.1 million of distributions from joint ventures, and $76.1 million from an increase in the balance of checks and drafts outstanding. Operating activities generated $19.7 million of cash during the three months ended November 30, 1999. This cash was generated primarily as a result of decreases in inventories and receivables, partially offset by a decrease in trade payables. Major uses of cash during the three months ended November 30, 1999 include: capital expenditures of $26.3 million; net repayment of bank borrowings of $17.8 million; $6.1 million for patronage refunds distributed from income of the 1999 fiscal year; and $9.5 million for additions to investments and notes receivable. The major source of cash was an increase in the balance of checks and drafts outstanding of $41.8 million. In the normal course of business, Farmland utilizes derivative commodity instruments, primarily related to grain, to limit its exposure to price volatility. These instruments consist mainly of grain contracts traded on organized exchanges and forward purchase and sales contracts in cash markets. The activities which limit the risk of loss also limit the potential for gain which otherwise could result from changes in market prices. Also, in the ordinary course of its international grain trading business, Farmland may take long or short grain positions. Such positions are accounted for on a mark-to- market basis and the gain or loss is recognized currently as a component of net earnings. Farmland operates on a cooperative basis. In accordance with its bylaws, Farmland determines its annual earnings before income tax in accordance with generally accepted accounting principles. Such earnings are then identified to the various patronage refund allocation units (groups of similar products or services) which have been established by the Board of Directors The earnings of each patronage refund allocation unit are then divided into 1) a patronage sourced portion determined on the basis of the quantity or value of business done by such allocation unit with or for its members who are eligible to receive patronage refunds and 2) a non-patronage sourced portion for which amounts are determined on the basis of the quantity or value of business done by such allocation unit with or for persons who are not eligible to receive patronage refunds, plus such net amount of earnings, expense or loss in an allocation unit which are unrelated to the cooperative operations carried on by Farmland for its members. The patronage sourced portion of each patronage refund allocation unit is allocated among the members transacting business with such allocation unit in the ratio that the quantity or value of the business done with or for each such member bears to the quantity or value of the business done with or for all of such members. The Board of Directors reasonably and equitability determines whether allocations within any allocation unit will be on the basis of the quantity or value. The non-patronage sourced portion of annual earnings and earnings unrelated to the cooperative operations carried on by Farmland for its members are transferred to earned surplus after appropriate reduction for income tax. Under Farmland's bylaws, patronage refunds are distributed to members from the member sourced earnings as determined above, unless the earned surplus account after such distribution is lower than 30% of the sum of the prior year-end balance of outstanding common shares, associate member shares, capital credits and patronage refunds for reinvestment. In such cases, the patronage refund is reduced by the lesser of 15% or an amount required to increase the earned surplus account to the required 30%. The amount by which the member sourced income is so reduced is treated as nonmember-sourced income. The member sourced income remaining is distributed to members as patronage refunds. The earned surplus account exceeded the required amount by $101.7 million at August 31, 1997, $80.1 million at August 31, 1998, and $57.3 million at August 31, 1999. The patronage refunds may be paid in the form of qualified or nonqualified written notices of allocation or cash. The nonqualified patronage refund and the allocated equity portion of the qualified patronage refund are sources of funds from operations which are retained for use in the business and which increase our equity base. Common shares and associate member common shares may be redeemed by cash payments from Farmland to holders of these equities who participate in Farmland's base capital plan. Common stock, associate member common stock, capital credits and other equities of Farmland and Farmland Foods may also be redeemed under other equity redemption plans. The base capital plan and other equity redemption plans are described under "Business and Properties - Equity Redemption Plans" beginning on page 39. The Board of Directors of this Association has complete discretion to determine the handling and ultimate disposition of the Association's patronage-sourced net losses (including allocation unit losses) and the form, priority and manner in which such losses or portions thereof are taken into account, retained, and ultimately disposed of or recovered. The Board may retain such losses of the Association and subsequently: . dispose of them by offset against the net earnings of the Association of subsequent years, . apply such losses to prior years' patronage allocation at any time in order to dispose of them by means of offset and cancellation against members' and patrons' equity account balances, or . select and use any other method of disposition of such losses as the Board of Directors, in its sole discretion, from time to time determines. RESULTS OF OPERATIONS FOR YEARS ENDED AUGUST 31, 1997, 1998 AND 1999 Farmland's sales, gross margins and net income depend, to a large extent, on conditions in agriculture and may be volatile due to factors beyond our control, such as weather, crop failures, federal agricultural programs, production efficiencies and U.S. imports and exports. In addition, various federal and state regulations to protect the environment encourage farmers to reduce the use of fertilizers and other chemicals. Global variables which affect supply, demand and price of crude oil, refined fuels, natural gas and other commodities may impact our operations. Historically, changes in the costs of raw materials used in the manufacture of Farmland's finished products have not necessarily resulted in corresponding changes in the prices at which such products have been sold. Management cannot determine the extent to which these factors may impact our future operations. Farmland's cash flow and net income may be volatile as conditions affecting agriculture and markets for our products change. The table below shows the increase (decrease) in sales and income by business segment in each of the years in the three-year period ended 1999, compared with the respective prior year. <TABLE> <CAPTION> Change in Sales 1997 1998 1999 Compared Compared Compared with 1996 with 1997 with 1998 (Amount in Millions) <S> <C> <C> <C> INCREASE (DECREASE) OF BUSINESS SEGMENT SALES: Plant Foods..................................................... $ (73) $ (94) $ (155) Crop Protection................................................. - (11) - Petroleum....................................................... 270 (195) (183) Feed............................................................ 47 (68) 26 Other Operating Units........................................... 8 7 117 Pork Processing and Marketing................................... 283 (145) (130) Livestock Production............................................ - 3 7 Beef Processing and Marketing................................... 55 232 223 North American Grain............................................ (1,221) (133) 116 International Grain............................................. (10) 32 1,913 TOTAL INCREASE (DECREASE) IN BUSINESS SEGMENT SALES............... $ (641) $ (372) $ 1,934 Change in Business Segment Income 1997 1998 1999 Compared Compared Compared with 1996 with 1997 with 1998 (Amount in Millions) <S> <C> <C> <C> INCREASE (DECREASE) OF BUSINESS SEGMENT INCOME OR LOSS: Plant Foods...................................................... $ (19) $ (112) $ (60) Crop Protection.................................................. (1) 2 1 Petroleum........................................................ 32 (35) 18 Feed............................................................. (7) 4 5 Other Operating Units............................................ (3) 6 3 Pork Processing and Marketing.................................... (30) 33 19 Livestock Production............................................. 4 (11) (17) Beef Processing and Marketing.................................... 6 (17) 27 North American Grain............................................. 33 5 8 International Grain.............................................. (6) 21 (3) TOTAL INCREASE (DECREASE) IN BUSINESS SEGMENT INCOME OR LOSS....... $ 9 $ (104) $ 1 <S> <C> <C> <C> CORPORATE EXPENSES AND OTHER: General corporate expenses (increase) decrease................... $ 6 $ (8) $ (26) Interest expense (increase)...................................... - (11) (17) Interest income increase......................................... - - 3 Other income and deductions - net increase (decrease)............ (8) 11 (10) Corporate Equity in net income of investees increase............. 1 3 - Income taxes decrease............................................ 1 32 $ 4 TOTAL INCREASE (DECREASE) IN NET INCOME............................ $ 9 $ (77) $ (45) </TABLE> In computing the change of business segment income or loss, income and expenses not identified to an industry segment and income taxes have been excluded. See Note 11 of the Consolidated Financial Statements. Following is management's discussion of business segment sales, segment income or loss and other factors affecting Farmland's net income during 1997, 1998 and 1999. PLANT FOODS SALES Plant foods unit sales in 1999 were comparable to unit sales in 1998; however, the average unit selling price for nitrogen-based plant foods decreased 16%. As a result, sales decreased $155.3 million, or 13%, in 1999 as compared to 1998. The nitrogen plant foods industry has experienced market price declines due to increased worldwide supplies of nitrogen and decreased demand for plant foods in response to decreased unit prices that producers realize for their grain. These adverse conditions were exacerbated by heavy spring rains throughout Farmland's market area, which restricted the use of fertilizer products. As a result of the above market conditions, Farmland temporarily ceased production of urea ammonia nitrate ("UAN") at our Lawrence, Kansas and Enid, Oklahoma facilities during the fourth quarter of 1999. We expect to commence production at these facilities in the second quarter of 2000 in order to meet expected demand during the 2000 year planting season. In 1998, plant foods unit sales increased 2% compared to 1997. However, unit prices for nitrogen-based plant foods decreased 15% and unit prices for phosphate-based plant foods decreased 7%. As a result, crop production sales decreased $94.4 million, or 7.5%, in 1998 compared with 1997. The decline in nitrogen-based plant foods prices resulted from pressures of rising capacity and inventories in the industry combined with decreased demand from East Asia and China. Plant foods sales decreased $73.5 million, or 5.5%, in 1997 compared with 1996. This decrease was primarily a result of lower unit sales of phosphate and nitrogen plant foods and lower phosphate-based plant foods prices partially offset by higher nitrogen prices. INCOME Income of the plant foods segment decreased from $93.0 million in 1998 to $32.6 million in 1999. This decrease was primarily attributable to lower unit margins on nitrogen plant foods products. Unit margins declined as additional global plant foods production capacity combined with reduced domestic demand continued to decrease selling prices of nitrogen products in 1999. Partially offsetting the decline in gross margin, plant foods realized a $7.7 million gain on the sale of phosphate rock reserves, a $4.1 million gain on futures positions closed as a result of anticipated natural gas purchases which will not occur and $4.3 million from settlement of litigation related to the acquisition of raw materials. During the past year, the nitrogen plant foods industry has experienced market price declines due to increased worldwide supplies of nitrogen and decreased demand for plant foods in response to decreased unit prices that producers have realized for their grains. While no assurances can be given that this trend will not continue, management anticipates a limited price recovery during the spring season. Income of the plant foods segment decreased $112.2 million, or 55%, in 1998 compared with 1997. This decrease was primarily a result of lower nitrogen plant foods unit margins partially offset by higher unit margins for phosphate plant foods. Nitrogen margins decreased primarily due to lower selling prices which declined as a result of additional global plant foods production capacity combined with lower demand in the East Asian market, particularly China. Income of the plant foods segment decreased $19.4 million, or 9%, in 1997 compared with 1996. This decrease was primarily a result of higher natural gas costs which resulted in lower nitrogen plant foods unit margins and by a $2.3 million decrease in our share of net income from crop production ventures. The effect of this decrease was partially offset by higher unit margins related to the distribution of phosphate plant foods. CROP PROTECTION SALES Sales of crop protection products are conducted primarily through two 50%-owned ventures, WILFARM LLC ("WILFARM") and Omnium LLC ("Omnium"), and are not included in consolidated sales. INCOME Income of the crop protection segment primarily consists of Farmland's share of venture income, which increased $0.8 million in 1999 as compared to 1998. The majority of this increase was attributable to a full year effect on WILFARM's margins of its seed business. WILFARM added seed to its product line in 1998. Income of the crop protection segment increased $2.4 million in 1998 from 1997. Farmland's share of WILFARM's income increased $1.4 million, is due to improved operational efficiencies coupled with the expansion of the geographic market area into the mid-South (Arkansas, Alabama, Mississippi and Louisiana). In addition, WILFARM's margins improved due to a favorable shift of its product sales mix. The increase in Omnium, $0.8 million, is a result of improved production volumes and efficiencies compared with 1997. Income for the crop protection segment decreased $1.2 million in 1997 as compared to 1996. The decrease is primarily attributable to WILFARM, which had lower margins combined with increased expenses. PETROLEUM SALES Sales of the petroleum business decreased $182.8 million, or 16%, in 1999 compared to 1998. This decrease resulted in a 12% decrease in unit sales for refined fuels (gasoline, distillates and diesel) and a decrease in the average unit price for refined fuels and propane of 16% and 12%, respectively. The price decline was primarily due to a temporary excess of product supplies in the market relative to demand. In 1998, unit sales of refined fuels increased by 7.5% compared to 1997. However, dollar sales of this business segment decreased by $194.9 million, or 15%, primarily due to a 15% decrease in the average unit price of refined fuels and a 29% decrease in the average unit price of propane. Sales of the petroleum business increased $270.2 million, or 25%, in 1997 compared with 1996. This increase was principally attributable to expansion of capacity at the Coffeyville, KS refinery, which enabled us to increase unit sales of refined fuels. In addition, unit prices for these products were higher than in 1996. INCOME The petroleum business segment had income of $20.5 million in 1999 compared to $2.6 million in 1998. The increase in income is primarily a result of volatile market prices for energy products. In 1998, market prices fell sharply and we reduced our income and the carrying value of inventories by approximately $27.6 million to reflect this market value decline. In 1999, the market value increased. We increased income and the carrying value of petroleum inventories by $27.6 million to reflect this market value increase. In addition, we placed the operations of the Coffeyville refining in a venture which commenced operations on September 1, 1999. In anticipation of the venture's operations, we were able to liquidate certain LIFO inventories and realize a $14.5 million gain. These increases in income were partially offset by strong industry-wide production of refined fuels combined with lower demand for these products, which reduced the spread between crude oil costs and refined product selling prices. The petroleum business segment had income of $2.6 million in 1998 compared with $37.3 million in 1997. This decrease resulted primarily from the $27.6 million adjustment of year-end LIFO inventories to market value as explained above. Petroleum operating income also decreased as finished goods prices declined more than crude oil prices declined, resulting in lower unit margins. Segment income of the petroleum business increased $32.0 million in 1997 compared with 1996. This increase was primarily a result of higher margins coupled with increased unit sales. The higher margins are primarily attributable to an increase in the difference between crude oil prices and finished product prices, the ability of the refinery to process crude oil streams containing a higher proportion of sulfur and to production efficiencies resulting from increased refinery capacity. FEED SALES Sales of the feed business increased $25.8 million in 1999 compared with 1998. This increase resulted primarily from higher unit sales due to geographic expansion partially offset by lower per ton selling prices for livestock feed and feed ingredients. Sales of the feed business decreased $68.3 million in 1998 compared with 1997. The decrease resulted primarily from lower prices. Unit sales were approximately the same volume as in the prior year. Sales of the feed business increased $47.2 million in 1997 compared with 1996. This increase resulted primarily from higher unit prices of feed ingredients combined with a slight increase in volume. INCOME Income of the feed business increased $4.7 million in 1999 compared to 1998. The increase was primarily due to higher unit margins on pet/specialty/equine feeds. Income of the feed business increased $4.0 million in 1998 compared with 1997. The increase was primarily attributable to higher margins per ton in livestock feed, feed ingredients and pet/specialty/equine feeds as well as lower expenses. Income of the feed business decreased $6.7 million in 1997 compared with 1996. This decrease was primarily attributable to declining sales through traditional local cooperative channels and an increase in sales to lower margin commercial accounts. PORK PROCESSING AND MARKETING SALES Sales from the pork processing and marketing business decreased $130.4 million in 1999 compared with 1998. The decrease was attributable to a decrease in unit sales price of approximately 11% partly offset by a 3% increase in the number of hogs processed. The Company's pork processing and marketing business sales decreased $145.2 million in 1998 compared with 1997. The decrease was attributable to a decrease in hog prices partly offset by a 9% increase in the number of hogs processed. The Company's pork processing and marketing business sales increased $283.5 million in 1997 compared with 1996. The increase was largely attributable to increased unit volume primarily resulting from the operations of pork processing plants acquired during the third and fourth quarters of 1996. INCOME Income of the pork processing and marketing segment increased $19.0 million in 1999 compared with 1998. The increase was primarily due to increased gross margins as the decline in live hog prices was greater than the decline in the selling price of fresh pork. This increase in gross margins was partially offset by an increase in promotional, advertising and storage expenses. Income of the Company's pork processing and marketing segment increased $33.0 million in 1998 compared with 1997. The increase was primarily due to increased gross margins in pork processing. Income of the pork processing and marketing segment decreased $29.9 million in 1997 compared with 1996. The decrease was primarily due to increased cost of live hogs and to the increased selling and administrative expenses related to the pork processing business. LIVESTOCK PRODUCTION INCOME The livestock production segment had a loss of $24.8 million in 1999 compared to a loss of $8.2 million in 1998. The increased loss was primarily due to lower live hog prices partially offset by lower selling and administrative expenses. The livestock production segment had a loss of $8.2 million in 1998 compared to income of $3.3 million in 1997. The decrease was primarily due to lower live hog prices. The livestock production segment had income of $3.3 million in 1997 compared with a loss of $0.7 million in 1996. This improvement was primarily due to an increase in live hog prices. BEEF PROCESSING AND MARKETING SALES Sales from beef processing and marketing business increased $223.0 million in 1999 compared with 1998. The increase was attributable to higher unit sales prices. Beef processing and marketing business sales increased $232.1 million in 1998 compared with 1997. The increase was attributable to increases of approximately 15% in the number of cattle processed partly offset by lower wholesale prices for beef. Beef processing and marketing business sales increased $54.9 million in 1997 compared with 1996. This increase was due to the increase of the number of cattle processed and higher wholesale prices for beef. INCOME Income of the beef processing and marketing segment increased $27.5 million in 1999 compared with 1998. The increase was primarily due to increased selling prices, stable cost of raw product, and a decrease in selling and administrative expenses. Income of the beef processing and marketing segment decreased $17.5 million in 1998 compared with 1997. The decrease was primarily due to lower unit margin partially offset by an increase in the number of cattle processed. Income of the beef processing and marketing segment increased $6.4 million in 1997 compared with 1996. The increase was primarily due to increased beef unit sales and increased margin per head of cattle. NORTH AMERICAN GRAIN SALES North American grain sales increased $116.3 million, or 6% in 1999 compared to 1998. This increase is primarily due to an increase in unit sales related to feed grains. In 1998, unit sales increased 4%. However, commodity prices decreased and sales declined from $2.2 billion in 1997 to $2.1 billion in 1998. North American grain sales decreased $1.2 billion in 1997 compared with 1996. This decrease resulted from decreases in both unit sales (primarily due to a reduction in export sales) and unit prices. INCOME North American grain's segment income increased $7.7 million in 1999 compared to 1998. The increase is a result of increased margins and reduced expenses. North American grain income increased $4.9 million in 1998 compared with 1997. This increase resulted primarily from improved margins. The North American grain segment had income of $2.5 million in 1997 compared with a loss of $30.9 million in 1996. This increase in operating income was primarily attributable to higher margins. INTERNATIONAL GRAIN SALES International Grain's sales increased $1.9 billion in 1999 compared to 1998. The primary cause of this increase in sales is the change in Tradigrain's business from grain brokerage operations to buy/sell operations. Due to this change, it is appropriate for Tradigrain to record the full value of the grain sold as revenue ($2.0 billion in 1999) and the related cost of grain acquisition as cost of goods sold ($1.9 billion in 1999), rather than recognizing as revenue only the net margins on grain transactions. For 1997 and 1998, the net margin recognized as revenue totaled $31.2 million and $63.5 million, respectively. The gross value of these transactions for 1997 and 1998 totaled $2.3 billion and $1.7 billion, respectively. INCOME Income of the international grain business decreased $2.7 million in 1999 compared to 1998 primarily as a result of increased administrative expenses. Income of the international grain business increased $21.2 million in 1998 compared to 1997. This increase was primarily attributable to higher margins on wheat, oil, and meal and lower selling, general and administrative expenses. Income of the international grain business decreased $5.8 million in 1997 compared to 1996. In the ordinary course of its international grain trading business, Tradigrain may take long or short positions in grain. In 1997, a late spring freeze in certain wheat producing areas of the United States caused short-term grain market price volatility. The grain market price movement adversely impacted the market value of Tradigrain's grain positions and its operating results for that year. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SGA increased $48.8 million, or 11%, in 1999 compared with 1998. SGA directly associated with business segments increased $22.7 million (primarily related to the pork business and acquisition of SF Services, Inc.) and has been included in the determination of the operating income of business segments. General corporate expenses not identified to business segments increased $26.1 million primarily as a result of the increased cost of management information systems and increased expenses related to geographic expansion. Selling, general and administrative expenses ("SG&A") increased $22.6 million, or 5.5%, in 1998 compared with 1997. SG&A directly associated with business segments increased $15.1 million (primarily related to the grain marketing and meats businesses) and has been included in the determination of the operating income of business segments. General corporate expenses not identified to business segments increased $7.5 million primarily as a result of the increased cost of management information systems and the acquisition of SF Services, Inc. SG&A increased $40.4 million, or 11%, in 1997 compared with 1996. SG&A directly associated with business segments increased $45.8 million (primarily associated with the food processing and marketing segment) and has been included in the determination of the operating income of business segments. General corporate expenses not identified to business segments decreased $5.4 million primarily as a result of lower employee-related costs. OTHER INCOME (DEDUCTIONS) INTEREST EXPENSE Interest expense increased $17.1 million in 1999 compared with 1998, primarily reflecting higher average borrowings. Interest expense increased $11.3 million in 1998 compared with 1997, primarily reflecting higher average borrowings. Interest expense decreased $0.1 million in 1997 compared with 1996, reflecting lower average borrowings offset by a slight increase in the average interest rate. OTHER, NET Other income was $43.3 million in 1999, $30.3 million in 1998, and $22.5 million in 1997. Significant components of the increase in 1999 compared to 1998 include a $7.7 million gain on the sale of phosphate rock reserves, a $4.3 million gain from litigation relating to the purchase of raw materials (natural gas) consumed in producing nitrogen fertilizers, and a $4.1 million gain from closing futures contracts used to hedge anticipated purchases of natural gas which purchases are no longer anticipated due to temporary suspension of production of the Enid, Oklahoma and Lawrence, Kansas UAN facilities, and have been included in the income of the plant foods business segment.. The increase in 1998 compared to 1997 of $7.8 million is principally a gain of $7.2 million on the sale of a 3.8% interest in National Beef Packing Co. L.P. and a $2.2 million gain on the sale of Cooperative Service Company, a wholly owned subsidiary engaged in insurance and auditing services. CAPITAL EXPENDITURES See "Business and Properties - Business - Capital Expenditures and Investments in Ventures" beginning on page 72. RESULTS OF OPERATIONS FOR THREE MONTHS ENDED NOVEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED NOVEMBER 30, 1998 GENERAL In view of the seasonality of Farmland's businesses, it must be emphasized that the results of operations for the periods presented are not necessarily indicative of the results for a full fiscal year. Historically, the majority of farm supply products have been sold in the spring. Sales in the beef and grain marketing businesses historically have been concentrated in the summer. Summer is the lowest sales period for pork products. For the three months ended November 30, 1999, our sales were $3.0 billion compared with sales of $2.6 billion for the same period last year. This increase is primarily due to a $0.2 billion increase in sales of the petroleum segment, a $0.1 billion increase in sales of the beef processing and marketing segments and a $0.1 billion increase in sales of international grain segment. For the three months ended November 30, 1999, Farmland incurred a net loss of $26.5 million compared with a net loss of $6.4 million for the same period last year. The net loss in the three months ended November 30, 1999 compares unfavorably with the prior year primarily because market prices of plant foods continued to decline, which adversely impacted the operating results of Farmland. PLANT FOODS Sales of the plant foods segment decreased $11.8 million for the three months ended November 30, 1999 compared with the same period last year. The decrease results from lower unit selling prices for both nitrogen- and phosphate-based plant foods, partly offset by an increase in unit sales of phosphate-based fertilizers. Plant food market prices have declined due to a relatively high inventory level present in the industry. The plant foods segment had a loss of $19.6 million for the three months ended November 30, 1999 compared with income of $6.1 million the same period last year. This loss results primarily from a continued excess supply of plant foods products, which has caused market prices for both nitrogen- and phosphate-based plant foods to decline. Also, as a result of this situation, we decided to temporarily curtail production at two facilities, which adversely affected our ability to recover certain manufacturing fixed costs. Also contributing to the segment loss were approximately $5.0 million of startup costs related to our gasification plant located in Coffeyville, Kansas. During the past year, the nitrogen plant foods industry has experienced market price declines due to increased worldwide supplies of nitrogen and decreased demand for plant foods in response to decreased unit prices that producers have realized for their grains. While no assurances can be given that this trend will not continue, management anticipates a limited price recovery during the spring season. PETROLEUM Sales of the petroleum segment in the three months ended November 30, 1999 increased $155.8 million compared with the same period last year. This increase was primarily attributable to higher unit prices for refined fuels and distillates combined with a slight increase in unit sales. Income for the petroleum segment decreased $1.6 million for the three months ended November 30, 1999 compared with the prior period. This decline was primarily due to a decrease in the spread between crude oil costs and refined products selling prices. With the formation of the Cooperative Refining venture, a portion of petroleum income is now recognized as equity in income of investees, rather than as gross income. FEED Sales of the feed business increased approximately 5% in the three months ended November 30, 1999 compared with the prior year. This increase is as a result of increased unit sales. Income for the feed segment increased $1.1 million for the three months ended November 30, 1999 compared with the same period last year primarily due to a slight improvement in feed ingredient and formula feed margins. PORK PROCESSING AND MARKETING AND LIVESTOCK PRODUCTION Sales in the pork processing and marketing business segment increased $15.3 million, or approximately 4%, from the same period last year. This increase is primarily attributable to higher unit prices partially offset by lower unit sales. Income in the pork processing and marketing business segment for the three months ended November 30, 1999 decreased $4.0 million compared to the prior period. This decrease is primarily attributable to lower margins which reflect higher live hog prices and to lower unit sales. In addition, the livestock production segment had a loss of $5.2 million for the three months ended November 30, 1999 compared with a loss of $11.7 million in the prior year. This improvement is primarily attributable to improved unit margins due to higher live hog prices. BEEF PROCESSING AND MARKETING Sales of the beef processing and marketing segment increased $108.6 million for the three months ended November 30, 1999 compared with the same period last year. The increase is due to a 6% increase in the number of cattle processed combined with a 13% increase in unit selling prices. Farmland's share of the beef processing and marketing segment's income increased $9.2 million for the three months ended November 30, 1999 compared to the prior period. This increase is primarily attributable to increased beef unit sales and increased margin per head of cattle processed. These increases were partially offset by higher per head labor-related expenses. NORTH AMERICAN GRAIN Sales of the North American grain segment decreased $10.0 million for the three month period ended November 30, 1999 compared with the same period last year primarily as the result of declines in grain prices largely offset by a significant increase in unit sales of wheat. North American grain segment income for the three months ended November 30, 1999 increased $1.3 million compared to the same period last year. This increase is primarily attributable to improved grain margins. During 1999, our Concourse Grain venture was liquidated and certain of Concourse Grain's marketing activities were assumed by North American grain. As a result, during the three months ended November 30, 1999, income related to grain marketing was included as a component of gross income. During the first quarter of last year, this income was included as a component of equity in net income from investees. INTERNATIONAL GRAIN International Grain's sales increased $103.4 million and their income increased $2.2 million for the three month period ended November 30, 1999 compared with the same period last year primarily as a result of increased volume for all major commodities. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative ("SG&A") expenses increased $5.2 million, or 4%, from the same period last year. SG&A expenses directly connected to segments increased approximately $1.5 million and these expenses have been included in the determination of business segment income. SG&A expenses not identified to business segments increased $3.7 million, primarily a result of increased costs of management information services, increased group health plan expenses, and expenses incurred in connection with the proposed merger with Cenex Harvest States. INTEREST EXPENSE Interest expense increased $5.6 million due to both an increase in average borrowings and an increase in average interest rate. TAX BENEFIT The income tax benefit increased $6.7 million due to an increase in Farmland's loss combined with an increase in the effective tax rate. The increase in the effective tax rate is the result of a change in the income that is available for patronage. MATTERS INVOLVING THE ENVIRONMENT Farmland is subject to various stringent federal, state and local environmental laws and regulations, including those governing the use, storage, discharge and disposal of hazardous materials, as we use hazardous substances and generate hazardous wastes in the ordinary course of our manufacturing processes. Liabilities related to remediation of contaminated properties are recognized when the related costs are probable and can be reasonably estimated. Estimates of these costs are based upon currently available facts, existing technology, undiscounted site specific costs and currently enacted laws and regulations. In reporting environmental liabilities, no offset is made for potential recoveries. Such liabilities include estimates of Farmland's share of costs attributable to potentially responsible parties which are insolvent or otherwise unable to pay. All liabilities are monitored and adjusted regularly as new facts or changes in law or technology occur. Farmland wholly or jointly owns or operates 27 grain elevators and 65 manufacturing properties and has potential responsibility for environmental conditions at a number of former manufacturing facilities and at waste disposal facilities operated by third parties. Farmland also has been identified as a potentially responsible party ("PRP") under the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA") at various National Priority List sites and has unresolved liability with respect to the past disposal of hazardous substances at five such sites. CERCLA may impose joint and several liability on certain statutory classes of persons for the costs of investigation and remediation of contaminated properties, regardless of fault or the legality of the original disposal. These persons include the present and former owners or operators of a contaminated property and companies that generated, disposed of, or arranged for the disposal of hazardous substances found at the property. We are investigating or remediating contamination at 31 properties under CERCLA and/or the state and federal hazardous waste management laws. We paid, for environmental investigation and remediation, approximately $4.6 million during 1997, $3.1 million during 1998, and $7.2 million during 1999. Farmland currently is aware of probable obligations for environmental matters at 41 properties. As of November 30, 1999, we had an environmental accrual in our Condensed Consolidated Balance Sheet (unaudited) for probable and reasonably estimated cost for remediation of contaminated property of $12.9 million. We periodically review and, as appropriate, revise our environmental accruals. Based on current information and regulatory requirements, we believe that the accruals established for environmental expenditures are adequate. As of November 30, 1999, Farmland has also recorded, as a receivable, approximately $1.0 million of estimated, probable insurance proceeds related to an environmental issue which has been remediated. Some environmental matters are in preliminary stages and the timing, extent and costs of actions which governmental authorities may require are currently unknown. As a result, certain costs of addressing environmental matters are either not probable or not reasonably estimable and, therefore, have not been accrued. In management's opinion, it is reasonably possible that Farmland may incur $11.8 million of costs in addition to the $12.9 million which has been accrued. Under the Resource Conservation Recovery Act of 1976 (' 'RCRA''), Farmland has three closure and four post-closure plans in place for five locations. Closure and post-closure plans also are in place for three landfills and two injection wells as required by state regulations. Such closure and post-closure costs are estimated to be $5.0 million at November 30, 1999 (and are in addition to the $12.9 million accrual and the $11.8 million discussed in the prior paragraph). These liabilities are accrued when plans for termination of plant operations have been made. Operations are being conducted at these locations and we do not plan to terminate such operations in the foreseeable future. Therefore, these environmental exit costs have not been accrued. There can be no assurance that the environmental matters described above, or environmental matters which may develop in the future, will not have a material adverse effect on our business, financial condition or results of operations. Protection of the environment requires us to incur expenditures for equipment or processes. These expenditures may impact our future net income. However, we do not anticipate that our competitive position will be adversely affected by such expenditures or by laws and regulations enacted to protect the environment. Environmental expenditures are capitalized when such expenditures provide future economic benefits. To improve our environmental compliance and the efficiency of our operations, Farmland made capital expenditures of approximately $8.4 million in 1997, $8.7 million in 1998, and $6.5 million in 1999. Management believes we currently are in substantial compliance with existing environmental rules and regulations. RECENT ACCOUNTING PRONOUNCEMENTS Statements of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued in June 1998 by the FASB and is effective for fiscal periods beginning after June 15, 2000 as a result of SFAS No. 137. Farmland is currently evaluating the impact, if any, that adoption of the provisions of SFAS No. 133 will have on its financial statements. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Farmland is including the following cautionary statement in this prospectus to make applicable and take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statement made by, or on behalf of, Farmland. The factors identified in this cautionary statement are important factors (but not necessarily all important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, Farmland. Where any such forward-looking statement includes a statement of the assumptions or basis underlying such forward-looking statement, we caution that, while we believe such assumptions or basis to be reasonable and makes them in good faith, the assumed facts or basis almost always vary from actual results, and the differences between the assumed facts or basis and actual results can be material, depending upon the circumstances. Where, in any forward-looking statement, Farmland, or its management, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. Such forward looking statements include, without limitation, statements regarding the seasonal effects upon our business, the anticipated expenditures for environmental remediation, Farmland's assessment of future problems related to Year 2000 issues, the continuation of current operating trends through the end of this fiscal year, the ultimate consummation of proposed ventures or alliances, the likelihood of recovery of nitrogen-based plant foods prices, the impact of seasonal demand on the profitability of the crop production business, the consequences of an adverse judgment in certain litigations, the perceived future business benefits related to our agronomy marketing venture, and our ability to fully and timely complete modifications and expansions with respect to certain manufacturing facilities. Discussion containing such forward- looking statements is found in the material set forth under "Risk Factors," "Business and Properties", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Notes to Consolidated Financial Statements", as well as within this prospectus generally. Taking into account the foregoing, the following are identified as important factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, Farmland: 1.Weather patterns (flood, drought, frost, etc.) or crop failure. 2.Federal or state regulations regarding agricultural programs and production efficiencies. 3.Federal or state regulations regarding the amounts of fertilizer and other chemical applications used by farmers. 4.Factors affecting the export of U.S. agricultural produce (including foreign trade and monetary policies, laws and regulations, political and governmental changes, inflation and exchange rates, taxes, operating conditions and world demand). 5.Factors affecting supply, demand and price of crude oil, refined fuels, natural gas and other commodities. 6.Regulatory delays and other unforeseeable obstacles beyond our control that may affect growth strategies through unification, acquisitions and investments in ventures. 7.Competitors in various segments which may be larger than Farmland, offer more varied products or possess greater resources. 8.Technological changes (including "Year 2000" compliance issues) are more difficult or expensive to implement than anticipated. 9.Unusual or unexpected events such as, among other things, litigation settlements, adverse rulings or judgments and environmental remediation costs in excess of amounts accrued. 10.The factors identified in "Risk Factors". QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK SENSITIVITY ANALYSIS Farmland is exposed to various market risks, including commodity price risk, foreign currency risk and interest rate risk. To manage the volatility related to these risks, we enter into various derivative transactions pursuant to our policies in areas such as counterparty exposure and hedging practices. Within limits approved by the Board of Directors, our international grain trading subsidiary, Tradigrain, may take net long or short commodity positions. Otherwise, Farmland does not hold or issue derivative instruments for trading purposes. Commodities to which we have risk exposure include: feedgrains, wheat, oilseeds, sugar, cattle, hogs, natural gas, crude oil and refined fuels. Farmland maintains risk management control systems to monitor its commodity risks and the offsetting hedge positions. The following table presents one measure of market risk exposure using sensitivity analysis. Market risk exposure is defined as the change in the fair value of the derivative commodity instruments assuming a hypothetical change of 10% in market prices of related commodities. Actual changes in market prices of commodities may differ from hypothetical changes. Fair value was determined for derivative commodity contracts using the average quoted market prices for the three near-term contract periods. For derivative commodity instruments, fair value was based on Farmland's net position in derivative commodity instruments by commodity at year-end. The market risk exposure excludes the related commodity holdings and anticipated purchases. The related commodities have a high inverse correlation to price changes of the derivative commodity instruments. Effect of 10% Change in Fair Value As of August 31 (Amounts in Millions) DERIVATIVE COMMODITY CONTRACTS: 1998 1999 Grains: Trading.................... $10.4 $18.9 Other than trading......... $ 6.5 $23.0 Energy, other than trading... $11.2 $11.3 Meats, other than trading.... $ 0.6 $ 3.2 Farmland uses interest rate swaps to hedge a portion of its variable interest rate exposure and uses foreign currency forward contracts to hedge its exposure related to certain foreign currency denominated transactions. Assuming an adverse interest rate movement of 100 basis points, the impact on fair value of interest positions held at August 31, 1998 and 1999 would be $3.1 million and $1.6 million, respectively. Assuming an adverse movement in the foreign currency spot price of 10%, the impact on fair value of currency positions held at August 31, 1998 and 1999 would be $4.1 million and $2.6 million, respectively. Market risk on other than trading transactions is not material to our results of operations or financial position, as we have offsetting physical positions. The market risk of trading positions is unlikely to have a material impact on our financial position, but could have a material impact on our results of operations. Farmland's market exposure to derivative transactions, entered into for the purpose of managing commodity price risk, foreign currency risk and interest rate risk, were not materially changed as of November 30, 1999 compared with our positions as of August 31, 1999. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FARMLAND CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets, August 31, 1999 and November 30, 1999 (unaudited) .........123 Condensed Consolidated Statements of Operations for the three months ended November 30, 1998 and 1999 (unaudited)...........................................62 Condensed Consolidated Statements of Cash Flows for the three months ended November 30, 1998 and 1999 (unaudited)...........................................63 Notes to Condensed Consolidated Financial Statements (unaudited).....................................64 Independent Auditors' Report ...............................73 Consolidated Balance Sheets, August 31, 1998 and 1999 .......................................................74 Consolidated Statements of Operations for each of the years in the three-year period ended August 31, 1999 ...................................................76 Consolidated Statements of Cash Flows for each of the years in the three-year period ended August 31, 1999 ...................................................77 Consolidated Statements of Capital Shares and Equities for each of the years in the three-year period ended August 31, 1999 ...............................79 Notes to Consolidated Financial Statements .................80 FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS <TABLE> <CAPTION> August 31 November 30 1999 1999 (Amounts in Thousands) <S> <C> <C> Accounts receivable - trade............................... $ 794,237 $ 728,582 Inventories (Note 2)...................................... 840,504 764,295 Deferred income taxes..................................... 49,495 49,613 Other current assets...................................... 153,833 158,101 Total Current Assets................................. $ 1,838,069 $ 1,700,591 Investments and Long-Term Receivables (Note 4).............. $ 329,729 $ 383,102 Property, Plant and Equipment: Property, plant and equipment, at cost.................... $ 1,744,252 $ 1,764,148 Less accumulated depreciation and amortization........................................... 911,049 930,600 Net Property, Plant and Equipment......................... $ 833,203 $ 833,548 Other Assets................................................ $ 256,648 $ 253,643 Total Assets................................................ $ 3,257,649 $ 3,170,884 <FN> See accompanying Notes to Condensed Consolidated Financial Statements. </TABLE> FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) LIABILITIES AND EQUITIES <TABLE> <CAPTION> August 31 November 30 1999 1999 (Amounts in Thousands) <S> <C> <C> Current Liabilities: Checks and drafts outstanding................................... $ 76,128 $ 117,977 Short-term notes payable ....................................... 546,180 532,898 Current maturities of long-term debt ........................... 44,771 45,996 Accounts payable - trade........................................ 463,296 396,252 Other current liabilities....................................... 257,255 239,619 Total Current Liabilities................................... $ 1,387,630 $ 1,332,742 Long-Term Liabilities: Long-term borrowings (excluding current maturities)............. $ 808,413 $ 797,200 Other long-term liabilities..................................... 40,212 39,097 Total Long-Term Liabilities................................. $ 848,625 $ 836,297 Deferred Income Taxes............................................... $ 63,058 $ 64,303 Minority Owners' Equity in Subsidiaries............................. $ 41,009 $ 47,179 Net (loss) (Note 1)................................................. $ -0- $ (26,542) Capital Shares and Equities: Preferred Shares, Authorized 8,000,000 Shares, 8% Series A cumulative redeemable preferred shares, stated at redemption value, $50 per share .................................. $ 100,000 $ 100,000 Other Preferred Shares, $25 Par Value ............................ 69 48 Common shares, $25 par value--Authorized 50,000,000 shares.............................................. 508,029 525,703 Earned surplus and other equities............................... 309,229 291,154 Total Capital Shares and Equities........................... $ 917,327 $ 916,905 Contingent Liabilities and Commitments (Note 3) Total Liabilities and Equities...................................... $ 3,257,649 $ 3,170,884 <FN> See accompanying Notes to Condensed Consolidated Financial Statements. </TABLE> FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) <TABLE> <CAPTION> Three Months Ended November 30 November 30 1998 1999 (Amounts in Thousands) <S> <C> <C> Sales......................................................... $ 2,582,250 $ 2,984,465 Cost of sales................................................. 2,469,777 2,860,648 Gross income.................................................. $ 112,473 $ 123,817 Selling, general and administrative expenses.................. $ 118,000 $ 123,171 Other income (deductions): Interest expense, net...................................... $ (17,727) $ (23,732) Other, net................................................. 8,467 (5,424) Total other income (deductions)............................... $ (9,260) $ (29,156) Loss before income taxes, equity in net income of investees an minority owners' interest in net (income) of subsidiaries (Note 4)..................... $ (14,787) $ (28,510) Equity in net income of investees............................. 10,318 1,077 Minority owners' interest in net (income) of subsidiaries............................................ (2,296) (6,131) Loss before income taxes...................................... $ (6,765) $ (33,564) Income tax benefit 365 7,022 Net loss $ (6,400) $ (26,542) <FN> See accompanying Notes to Condensed Consolidated Financial Statements. </TABLE> FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> (UNAUDITED) Three Months Ended November 30 November 30 1998 1999 (Amounts in Thousands) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................................... $ (6,400) $ (26,542) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization.......................................... 30,978 28,038 Equity in net (income) of investees.................................... (9,734) (1,077) Other.................................................................. 985 9,320 Changes in assets and liabilities: Accounts receivable.................................................. (25,597) 65,555 Inventories.......................................................... (224,648) 22,654 Other assets......................................................... (5,713) (765) Accounts payable..................................................... 41,849 (67,044) Other liabilities.................................................... 44,200 (10,437) Net cash provided by (used in) operating activities......................... $ (154,080) $ 19,702 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures........................................................ $ (26,075) $ (26,329) Distributions from joint ventures........................................... 4,798 6,737 Additions to investments and notes receivable............................... (12,427) (9,542) Acquisition of other long-term assets....................................... (9,253) (6,743) Proceeds from disposal of investments and notes receivable.................. 4,834 2,106 Proceeds from sale of fixed assets.......................................... 4,189 3,322 Net cash used in investing activities....................................... $ (33,934) $ (30,449) CASH FLOWS FROM FINANCING ACTIVITIES: Payments of patronage refunds............................................... $ (24,003) $ (6,054) Payments for redemption of equities......................................... (3,422) -0- Payments of dividends....................................................... (2,000) (2,004) Proceeds from bank loans and notes payable.................................. 196,521 915,172 Payments on bank loans and notes payable.................................... (60,316) (933,017) Proceeds from issuance of subordinated debt certificates.................... 10,333 2,751 Payments for redemption of subordinated debt certificates................... (3,780) (5,720) Increase of checks and drafts outstanding................................... 74,498 41,849 Net decrease in demand loan certificates.................................... (7,157) (1,715) Other ...................................................................... 6 (515) Net cash provided by financing activities................................... $ 180,680 $ 10,747 Net decrease in cash and cash equivalents................................... $ (7,334) $ -0- Cash and cash equivalents at beginning of period............................ 7,334 -0- Cash and cash equivalents at end of period.................................. $ -0- $ -0- </TABLE> [FN] See accompanying Notes to Condensed Consolidated Financial Statements. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) INTERIM FINANCIAL STATEMENTS Unless the context suggests differently, (i) "Farmland", "we", "us" and "ours" refers to Farmland Industries, Inc. and its consolidated subsidiaries, (ii) all references to "year" or "years" are to fiscal years ended August 31 and (iii) all references to "members" are to persons eligible to receive patronage refunds from Farmland including voting members, associate members and other patrons with which Farmland has a currently effective patronage refund agreement. In view of the seasonality of Farmland's businesses, it must be emphasized that the results of operations for the periods presented are not necessarily indicative of the results for a full fiscal year. The information included in these unaudited Condensed Consolidated Financial Statements of Farmland reflects all adjustments (consisting only of normal recurring accruals) which, in the opinion of management, are necessary for a fair statement of the results for the interim periods presented. Our sales, margins and net income depend, to a large extent, on conditions in agriculture and may be volatile due to factors beyond our control, such as weather, crop failures, federal agricultural programs, production efficiencies and U.S. imports and exports. In addition, various federal and state regulations intended to protect the environment encourage farmers to reduce the use of fertilizers and other chemicals. Global variables which affect supply, demand and price of crude oil, refined fuels, natural gas, livestock, grain and other commodities may impact Farmland's operations. Historically, changes in the costs of raw materials used in the manufacture of our finished products have not necessarily resulted in corresponding changes in the prices at which we have sold such products. We cannot determine the extent to which these factors may impact our future operations. Our cash flow and net income may be volatile as conditions affecting agriculture and markets for our products change. In accordance with the bylaws of Farmland and its cooperative subsidiaries, we determine annually the members' portion of income or loss before income taxes. From this amount, patronage refunds are distributed or losses are allocated to our members. We make the determination of members' income (and members' loss) only after the end of the fiscal year. Our Board of Directors, in their sole discretion, then determines how member losses are to be handled and the resulting amount of patronage refunds to be paid or losses to be allocated from such member income or loss. Since we determine the amount of members' income and the amount of members' loss only after the end of the fiscal year, and since only after that determination has been made can our Board of Directors determine the handling of members' loss, the resulting amount of patronage refunds to be paid, the portion of such refund to be paid either in cash or Farmland equity (common stock, associate member common stock and capital credits) and since the amount of income appropriated to earned surplus is dependent on the amount of patronage refunds and the handling of members' losses, Farmland makes no provision for patronage refunds in its interim financial statements. Therefore, the amount of net income (loss) for the interim period presented is reflected as a separate item in the accompanying unaudited Condensed Consolidated Balance Sheet as of November 30, 1999. (2) INVENTORIES Major components of inventories are as follows: <TABLE> <CAPTION> August 31 November 30 1999 1999 (Amounts in Thousands) <S> <C> <C> Finished and in-process products.............. $ 719,118 $ 676,507 Materials..................................... 54,387 18,526 Supplies...................................... 66,999 69,262 $ 840,504 $ 764,295 </TABLE> On September 1, 1999, we contributed all of our crude oil and in-process petroleum inventories to Cooperative Refining, LLC in exchange for a 42% interest in the venture. Cooperative Refining operates refineries at Coffeyville, Kansas and McPherson, Kansas on behalf of its partners. This investment is accounted for using the equity method. At November 30, 1999, the carrying value of our remaining petroleum inventories stated under the LIFO method (gasoline and distillates) were $39.3 million, which approximates the replacement cost of these inventories. (3) CONTINGENCIES (A) TAX LITIGATION On November 29, 1999, the United States Tax Court issued an opinion holding that the gains and losses we realized in 1983 and 1984 on the sale of the stock of Terra Resources, Inc. and certain other assets were patronage-sourced, and that we had reported these gains and losses correctly. By ruling in our favor, the Tax Court rejected claims of the Internal Revenue Service that would have resulted in material additional federal income taxes plus accumulated interest. This ruling also means that we do not owe additional state income tax and accumulated interest related to these transactions. The IRS may decide to appeal the Tax Court decision to the United States Court of Appeals for the Eighth Circuit. In the event of an appeal, Farmland's management believes there is a high probability that Farmland would ultimately prevail. (B) ENVIRONMENTAL MATTERS Farmland is aware of probable obligations under state and federal environmental laws at 41 properties. At November 30, 1999, we had an environmental accrual in our Condensed Consolidated Balance Sheet for probable and reasonably estimated costs for remediation of contaminated properties of $12.9 million. We periodically review and, as appropriate, revise our environmental accruals. Based on current information and regulatory requirements, we believe that the accruals established for environmental expenditures are adequate. Farmland has also recorded, as a receivable, approximately $1.0 million of estimated, probable insurance proceeds related to an environmental issue which has been remediated. Some environmental matters are in preliminary stages and the timing, extent and costs of actions which governmental authorities may require are currently unknown. As a result, certain costs of addressing environmental matters are either not probable or not reasonably estimable and, therefore, have not been accrued. In management's opinion, it is reasonably possible that Farmland may incur $11.8 million of costs in addition to the $12.9 million which has been accrued. Under the Resource Conservation Recovery Act of 1976 (' 'RCRA''), Farmland has three closure and four post-closure plans in place for five locations. Closure and post-closure plans also are in place for three landfills and two injection wells as required by state regulations. Such closure and post-closure costs are estimated to be $5.0 million at November 30, 1999 (and are in addition to the $12.9 million accrual and the $11.8 million discussed in the prior paragraphs). These liabilities are accrued when plans for termination of plant operations have been made. Operations are being conducted at these locations and we do not plan to terminate such operations in the foreseeable future. Therefore, these environmental exit costs have not been accrued. (4) SUMMARIZED FINANCIAL INFORMATION OF INVESTEES ACCOUNTED FOR BY THE EQUITY METHOD Summarized financial information of investees accounted for by the equity method for the three months ended November 30, 1998 and November 30, 1999 is as follows: <TABLE> <CAPTION> November 30 November 30 1998 1999 (Amounts in Thousands) <S> <C> <C> Net sales.....................................$ 513,294 $ 740,840 Net income....................................$ 16,905 $ 2,446 Farmland's equity in net income...............$ 10,318 $ 1,077 </TABLE> The Company's investments accounted for by the equity method consist principally of : . 50% equity interests in three manufacturers of plant nutrient products, Farmland Hydro, L.P., SF Phosphates Limited Company and Farmland MissChem, Limited; . a 50% equity interest in a distributor of crop protection products, WILFARM, LLC; . during the three months ended November 30, 1998, a 50% equity interest in a grain marketer, Concourse Grain, LLC; and . during the three months ended November 30, 1999, a 42% equity interest in Cooperative Refining, LLC, which operates two refineries. (5) INDUSTRY SEGMENT INFORMATION <TABLE> <CAPTION> THREE MONTHS ENDED NOVEMBER 30, 1998 (PAGE 1 OF 3) (Amounts in Thousands) CONSOLIDATED SEGMENTS Combined Segments Unallocated Consolidated <S> <C> <C> <C> Sales & transfers $ 2,673,798 $ - $ 2,673,798 Transfers between segments (91,548) - (91,548) Net sales $ 2,582,250 $ - $ 2,582,250 Cost of sales 2,469,777 - 2,469,777 Gross income $ 112,473 $ - $ 112,473 Selling, general and administrative expenses $ 87,656 $ 30,344 $ 118,000 Other income (expense): Interest expense $ - $ (19,929) $ (19,929) Interest income - 2,202 2,202 Other, net 5,945 2,522 8,467 Total other income (expense) $ 5,945 $ (15,205) $ (9,260) Equity in income/(loss) of investees 9,005 1,313 10,318 Minority owners' interest in net (income)/loss of subsidiaries (2,296) - (2,296) Income tax benefit - 365 365 Net income (loss) $ 37,471 $ (43,871) $ (6,400) Total assets $ 2,822,391 $ 254,992 $ 3,077,383 </TABLE> <TABLE> <CAPTION> THREE MONTHS ENDED NOVEMBER 30, 1998 (PAGE 2 OF 3) (Amounts in Thousands) INPUT AND OTHER SEGMENTS Other Total Input Plant Crop Operating and Other Foods Protection Petroleum Feed Units Segments <S> <C> <C> <C> <C> <C> <C> Sales & transfers $ 257,720 $ 62 $ 215,677 $ 157,634 $ 92,287 $ 723,380 Transfers between segments (12,323) - (21) (6,642) (37,992) (56,978) Net sales $ 245,397 $ 62 $ 215,656 $ 150,992 $ 54,295 $ 666,402 Cost of sales 240,320 39 209,700 138,088 44,401 632,548 Gross income $ 5,077 $ 23 $ 5,956 $ 12,904 $ 9,894 $ 33,854 Selling, general and administrative expenses $ 8,497 $ 4 $ 4,813 $ 8,235 $ 9,638 $ 31,187 Other income (expense): Interest expense $ - $ - $ - $ - $ - $ - Interest income - - - - - - Other, net 526 256 2,255 151 1,860 5,048 Total other income (expense) $ 526 $ 256 $ 2,255 $ 151 $ 1,860 $ 5,048 Equity in net income/(loss) of investees 8,965 (1,535) 68 170 78 7,746 Minority owners' interest in net (income)/loss of subsidiaries 54 - - - 253 307 Income tax benefit - - - - - - Net income (loss) $ 6,125 $ (1,260) $ 3,466 $ 4,990 $ 2,447 $ 15,768 Total assets $680,384 $ 20,590 $ 445,635 $ 93,456 $ 191,175 $ 1,431,240 </TABLE> <TABLE> <CAPTION> THREE MONTHS ENDED NOVEMBER 30, 1998 (PAGE 3 OF 3) (Amounts in Thousands) OUTPUT SEGMENTS Pork Beef Grain Total Processing Livestock Processing North Output & Marketing Production & Marketing American International Segments <S> <C> <C> <C> <C> <C> <C> Sales & transfers $ 368,936 $ 13,246 $ 547,715 $ 542,728 $ 477,793 $ 1,950,418 Transfers between segments (1,536) (10,508) (565) (21,961) - (34,570) Net sales $ 367,400 2,738 $ 547,150 $ 520,767 $ 477,793 $ 1,915,848 Cost of sales 306,393 13,534 532,743 512,488 472,071 1,837,229 Gross income $ 61,007 $ (10,796) $ 14,407 $ 8,279 $ 5,722 $ 78,619 Selling, general and administrative expenses $ 41,209 $ 562 $ 4,383 $ 5,228 $ 5,087 $ 56,469 Other income (expense): Interest expense $ - $ - $ - $ - $ - $ - Interest income - - - - - - Other, net (111) (10) 363 180 475 897 Total other income (expense) $ (111) $ (10) $ 363 $ 180 $ 475 $ 897 Equity in net income/(loss) THREE MONTHS ENDED NOVEMBER 30, 1998 (PAGE 3 OF 3) (Amounts in Thousands) of investees - (362) (1,133) 2,754 - 1,259 Minority owners' interest in net (income)/loss of subsidiaries - - (2,603) - - (2,603) Income tax benefit - - - - - - Net income (loss) $ 19,687 $ (11,730) $ 6,651 $ 5,985 $ 1,110 $ 21,703 Total assets $ 336,561 $ 29,813 $ 254,701 $ 446,246 $ 323,830 $ 1,391,151 </TABLE> <TABLE> <CAPTION> THREE MONTHS ENDED NOVEMBER 30, 1999 (PAGE 1 OF 3) (Amounts in Thousands) CONSOLIDATED SEGMENTS Combined Segments Unallocated Consolidated <S> <C> <C> <C> Sales & transfers $ 3,144,262 $ - $ 3,144,262 Transfers between segments (159,797) - (159,797) Net sales $ 2,984,465 $ - $ 2,984,465 Cost of sales 2,860,648 - 2,860,648 Gross income $ 123,817 $ - $ 123,817 Selling, general and administrative expenses 89,146 34,025 123,171 Other income (expense): Interest expense - (25,535) (25,535) Interest income - 1,803 1,803 Other, net (6,951) 1,527 (5,424) Total other income (expense) $ (6,951) $ (22,205) $ (29,156) Equity in income/(loss) of investees 3,489 (2,412) 1,077 Minority owners' interest in net (income)/loss of subsidiaries (6,131) - (6,131) Income tax benefit - 7,022 7,022 Net income (loss) $ 25,078 $ (51,620) $ (26,542) Total assets $ 2,845,805 $ 325,079 $ 3,170,884 </TABLE> <TABLE> <CAPTION> THREE MONTHS ENDED NOVEMBER 30, 1999 (PAGE 2 OF 3) (Amounts in Thousands) INPUT AND OTHER SEGMENTS Other Total Input Plant Crop Operating and Other Foods Protection Petroleum Feed Units Segments <S> <C> <C> <C> <C> <C> <C> Sales & transfers $ 234,570 $ 53 $ 371,470 $ 176,594 $ 106,665 $ 889,352 Transfers between segments (930) - - (17,552) (23,397) (41,879) Net sales $ 233,640 $ 53 $ 371,470 $ 159,042 $ 83,268 $ 847,473 Cost of sales 239,927 33 367,364 145,361 71,782 824,467 Gross income $ (6,287) $ 20 $ 4,106 $ 13,681 $ 11,486 $ 23,006 Selling, general and administrative expenses $ 8,131 $ - $ 4,124 $ 7,980 $ 10,169 $ 30,404 Other income (expense): Interest expense $ - $ - $ - $ - $ - $ - Interest income - - - - - - Other, net (8,858) - (6) 217 1,079 (7,568) Total other income (expense) $ (8,858) $ 0 $ (6) $ 217 $ 1,079 $ (7,568) Equity in net income/(loss) of investees 3,712 (2,610) 1,875 380 63 3,420 Minority owners' interest in net (income)/loss of subsidiaries - - - (196) 16 (180) Income tax benefit - - - - - - Net income (loss) $ (19,564) $ (2,590) $ 1,851 $ 6,102 $ 2,475 $ (11,726) Total assets $ 648,824 $ 17,403 $ 385,085 $ 132,249 $ 107,551 $ 1,291,112 </TABLE> <TABLE> <CAPTION> THREE MONTHS ENDED NOVEMBER 30, 1999 (PAGE 3 OF 3) (Amounts in Thousands) OUTPUT SEGMENTS Pork Beef Grain Total Processing Livestock Processing North Output & Marketing Production & Marketing American International Segments <S> <C> <C> <C> <C> <C> <C> Sales & transfers $ 384,004 $ 23,803 $ 656,233 $ 609,663 $ 581,207 $ 2,254,910 Transfers between segments (1,265) (17,247) (488) (98,918) - (117,918) Net sales $ 382,739 $ 6,556 $ 655,745 $ 510,745 $ 581,207 $ 2,136,992 Cost of sales 327,510 11,012 629,221 497,094 571,344 2,036,181 Gross income $ 55,229 $ (4,456) $ 26,524 $ 13,651 $ 9,863 $ 100,811 Selling, general and administrative expenses $ 40,860 $ 614 $ 5,044 $ 6,622 $ 5,602 $ 58,742 Other income (expense): Interest expense $ - $ - $ - $ - $ - $ - Interest income - - - - - - Other, net 1,320 (52) 215 121 (987) 617 Total other income (expense) $ 1,320 $ (52) $ 215 $ 121 $ (987) $ 617 Equity in net income/(loss) THREE MONTHS ENDED NOVEMBER 30, 1999 (PAGE 3 OF 3) (Amounts in Thousands) of investees 9 (121) 70 111 - 69 Minority owners' interest in net (income)/loss of subsidiaries - - (5,951) - - (5,951) Income tax benefit - - - - - - Net income (loss) $ 15,698 $ (5,243) $ 15,814 $ 7,261 $ 3,274 $ 36,804 Total assets $ 365,042 $ 56,176 $ 304,702 $ 432,866 $ 395,907 $ 1,554,693 </TABLE> INDEPENDENT AUDITORS' REPORT The Board of Directors Farmland Industries, Inc.: We have audited the accompanying consolidated balance sheets of Farmland Industries, Inc. and subsidiaries as of August 31, 1998 and 1999, and the related consolidated statements of operations, cash flows and capital shares and equities for each of the years in the three-year period ended August 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Farmland Industries, Inc. and subsidiaries as of August 31, 1998 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended August 31, 1999, in conformity with generally accepted accounting principles. KPMG LLP Kansas City, Missouri October 15, 1999, except as to Note 6a, which is as of December 6, 1999 FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS <TABLE> <CAPTION> August 31 1998 1999 (Amounts in Thousands) <S> <C> <C> Current Assets: Cash and cash equivalents.......................................... $ 7,334 $ 0 Accounts receivable - trade........................................ 596,415 794,237 Inventories (Note 2)............................................... 725,967 840,504 Deferred income taxes (Note 6)..................................... 61,844 49,495 Other current assets............................................... 145,151 153,833 Total Current Assets.......................................... $ 1,536,711 $ 1,838,069 Investments and Long-Term Receivables (Note 3) $ 298,402 $ 329,729 Property, Plant and Equipment (Notes 4 and 5): Property, plant and equipment, at cost............................. $ 1,680,373 $ 1,744,252 Less accumulated depreciation and amortization..................... 853,224 911,049 Net Property, Plant and Equipment.................................. $ 827,149 $ 833,203 Other Assets......................................................... $ 212,356 $ 256,648 Total Assets......................................................... $ 2,874,618 $ 3,257,649 FN> See accompanying Notes to Consolidated Financial Statements. </FN> </TABLE> FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND EQUITIES <TABLE> <CAPTION> August 31 1998 1999 (Amounts in Thousands) <S> <C> <C> Current Liabilities: Short-term notes payable (Note 5)...................................... $ 408,639 $ 546,180 Current maturities of long-term debt (Note 5).......................... 38,946 44,771 Accounts payable - trade............................................... 330,043 463,296 Other current liabilities.............................................. 323,601 333,383 Total Current Liabilities......................................... $ 1,101,229 $ 1,387,630 Long-term Liabilities: Long-term borrowings (excluding current maturities) (Note 5)........... $ 728,103 $ 808,413 Other long-term liabilities............................................ 31,942 40,212 Total Long-Term Liabilities....................................... $ 760,045 $ 848,625 Deferred Income Taxes (Note 6)........................................... $ 65,177 $ 63,058 Minority Owners' Equity in Subsidiaries (Note 7) $ 35,471 $ 41,009 Capital Shares and Equities (Note 8): Preferred shares, Authorized 8,000,000 shares, 8% Series A cumulative redeemable preferred shares, stated at redemption value, $50 per share, 2,000,000 shares issued and outstanding ............................... $ 100,000 $ 100,000 Other preferred shares, $25 par value, 2,743 shares issued and outstanding (2,838 shares in 1998) .... 71 69 Common shares, $25 par value - Authorized 50,000,000 shares, 20,321,160 shares issued and outstanding (18,072,136 shares in 1998) ........................................... 451,804 508,029 Associate member common shares (nonvoting), $25 par value - Authorized 2,000,000 shares, 1,075,560 shares issued and outstanding (1,140,304 shares in 1998) ............................................ 28,508 26,889 Earned surplus and other equities...................................... 332,313 282,340 Total Capital Shares and Equities................................. $ 912,696 $ 917,327 Contingent Liabilities and Commitments (Notes 5, 6 and 9) Total Liabilities and Equities.............................................$ 2,874,618 $ 3,257,649 <FN> See accompanying Notes to Consolidated Financial Statements. </FN> </TABLE> FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> Year Ended August 31 1997 1998 1999 (Amounts in Thousands) <S> <C> <C> <C> Sales....................................................... $ 9,147,507 $ 8,775,046 $ 10,709,073 Cost of sales............................................... 8,580,826 8,299,505 10,231,081 Gross income................................................ $ 566,681 $ 475,541 $ 477,992 Selling, general and administrative expenses................ $ 409,378 $ 431,999 $ 480,839 Other income (expense): Interest expense......................................... $ (62,335) $ (73,645) $ (90,773) Interest income.......................................... 5,352 5,436 8,337 Other, net (Note 15)..................................... 22,486 30,265 43,322 Total other income (expense)................................ $ (34,497) $ (37,944) $ (39,114) Income (loss) before equity in net income of investees, minority owners interest in net income of subsidiaries and income tax (expense) benefit......................... $ 122,806 $ 5,598 $ (41,961) Equity in net income of investees (Note 3).................. 49,551 56,434 65,510 Minority owners' interest in net income of subsidiaries.......................................... (8,684) (7,005) (17,727) Net income before income taxes (Note 6) 163,673 55,027 5,822 Income tax (expense) benefit (Note 6)....................... (28,250) 3,743 8,043 Net income ................................................. $ 135,423 $ 58,770 $ 13,865 Distribution of net income (Note 8): Patronage refunds: Farm supply patrons.................................. $ 101,262 $ 51,513 $ 20,320 Pork marketing patrons............................... -0- 1,274 4,050 Beef marketing patrons............................... 6,458 3,817 5,420 Grain marketing patrons.............................. 585 2,517 479 Livestock production................................. 2 -0- -0- $ 108,307 $ 59,121 $ 30,269 Earned surplus and other equities........................ 27,116 (351) (16,404) $ 135,423 $ 58,770 $ 13,865 <FN> See accompanying Notes to Consolidated Financial statements. </FN> </TABLE> FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Year Ended August 31 1997 1998 1999 (Amounts in Thousands) <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................... $ 135,423 $ 58,770 $ 13,865 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization............................... 90,351 101,833 109,184 Equity in net income of investees........................... (49,551) (56,434) (65,510) Minority owners' equity in net income of subsidiaries.................................... 8,684 7,005 17,727 (Gain) loss on disposition of investments................... (552) (9,450) 189 Patronage refunds received in equities...................... (1,830) (1,099) (2,143) Proceeds from redemption of patronage equities.............. 5,106 6,546 4,598 Deferred income taxes....................................... (1,469) (641) 10,230 Adjustment of LIFO inventories.............................. -0- 27,593 (27,593) Other....................................................... 1,951 1,029 (4,028) Changes in assets and liabilities (exclusive of assets and liabilities of businesses acquired): Accounts receivable....................................... 27,644 25,398 (181,454) Inventories............................................... (9,343) 17,295 (76,190) Other assets.............................................. 6,249 6,893 (30,592) Accounts payable.......................................... (26,091) (67,286) 105,028 Other liabilities......................................... 35,736 (79,784) (35,791) Net cash provided by (used in) operating activities........... $ 222,308 $ 37,668 $ (162,480) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures.......................................... $ (158,655) $ (108,837) $ (121,184) Distributions from joint ventures............................. 55,238 57,635 54,121 Acquisition of investments and notes receivable............... (46,243) (69,466) (69,811) Acquisition of other long-term assets......................... (25,724) (27,267) (38,240) Proceeds from sale of investments and collection of notes receivable.......................... 24,758 40,884 61,993 Proceeds from sale of fixed assets............................ 6,895 20,632 22,023 Acquisition of businesses, net of cash acquired............... (3,515) (2,766) (5,829) Other......................................................... -0- 2,642 (233) Net cash used in investing activities......................... $ (147,246) $ 86,543) $ (97,160) <FN> See accompanying Notes to Consolidated Financial Statements </FN> </TABLE> FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) <TABLE> <CAPTION> Year Ended August 31 1997 1998 1999 (Amounts in Thousands) <S> <C> <C> <C> CASH FLOWS FROM FINANCING ACTIVITIES: Payments of patronage refunds.............................. $ (32,511) $ (40,449) $ (23,593) Payments for redemption of equities........................ (25,440) (80,243) (9,050) Payments of dividends on preferred shares.................. (4) (4,937) (8,004) Proceeds from bank loans and notes payable................. 337,407 612,634 2,739,865 Payments of bank loans and notes payable................... (416,715) (516,391) (2,624,938) Proceeds from issuance of subordinated debt certificates........................................... 86,132 99,309 121,630 Payments for redemption of subordinated debt certificates...................................... (37,455) (66,000) (20,376) Net increase (decrease) in checks and drafts outstanding................................. 16,299 (47,243) 76,128 Proceeds from issuance of preferred shares................. -0- 100,000 -0- Other increase (decrease).................................. (2,775) (471) 644 Net cash provided by (used in) financing activities........ $ (75,062) $ 56,209 $ 252,306 Net increase (decrease) in cash and cash equivalents....... $ -0- $ 7,334 $ (7,334) Cash and cash equivalents at beginning of year............. -0- -0- 7,334 Cash and cash equivalents at end of year................... $ -0- $ 7,334 $ -0- SUPPLEMENTAL SCHEDULE OF CASH PAID FOR INTEREST AND INCOME TAXES: Interest................................................... $ 57,650 $ 76,087 $ 77,143 Income tax expense (benefit), net of refunds............... $ 13,922 $ 13,446 $ (4,045) SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Equities and minority owners' interest called for redemption......................................... $ 28,579 $ 8,868 $ -0- Transfer of assets in exchange for investment in joint ventures......................................... $ 10,292 $ 4,601 $ 300 Appropriation of current year's net income as patronage refunds...................................... $ 108,307 $ 59,121 $ 30,269 Acquisition of businesses: Fair value of assets acquired.......................... $ -0- $ 168,409 $ 32,883 Goodwill............................................... 2,550 14,819 14,574 Minority owners' investment............................ 965 -0- -0- Equity issuable........................................ -0- (26,323) -0- Cash paid or payable................................... (3,515) (2,766) (7,750) Liabilities assumed........................................ $ -0- $ 154,139 $ 39,707 <FN> See accompanying Notes to Consolidated Financial Statements. </FN> </TABLE> FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITAL SHARES AND EQUITIES <TABLE>< <CAPTION> Years Ended August 31, 1997, 1998 and 1999 Associate Earned Member Surplus and Total Capital Preferred Common Common Other Shares and Shares Shares Shares Equities Equities (Amounts in Thousands) <S> <C> <C> <C> <C> <C> BALANCE AT AUGUST 31, 1996......................... $ 1,264 $ 414,503 $ 15,576 $ 323,988 $ 755,331 Appropriation of current year's net income......... -0- -0- -0- 135,423 135,423 Patronage refund payable in cash transferred to current liabilities........................... -0- -0- -0- (40,228) (40,228) Base capital redemptions transferred to current liabilities........................... -0- (16,783) (444) -0- (17,227) Other equity redemptions transferred to current liabilities........................... (1,189) (6,737) (302) (2,963) (11,191) Prior year patronage refund allocation............. -0- 53,269 5,640 (59,103) (194) Dividends on preferred shares...................... -0- -0- -0- (4) (4) Exchange of common shares, associate member common shares and other equities.......... -0- (2,566) 1,929 637 -0- Issue, redemption and cancellation of equities..... (3) 326 (151) (89) 83 BALANCE AT AUGUST 31, 1997......................... $ 72 $ 442,012 $ 22,248 $ 357,661 $ 821,993 Appropriation of current year's net income......... -0- -0- -0- 58,770 58,770 Patronage refund payable in cash transferred to current liabilities........................... -0- -0- -0- (23,593) (23,593) Base capital redemptions transferred to current liabilities........................... -0- (8,738) (130) -0- (8,868) Prior year patronage refund allocation............. -0- 60,238 7,551 (67,789) -0- Dividends on preferred shares...................... -0- -0- -0- (6,933) (6,933) Exchange of common shares, associate member common shares and other equities.......... -0- (2,058) 123 1,935 -0- Equity issuable for purchase of SF Services, Inc................................. -0- -0- -0- 26,323 26,323 Issue, redemption and cancellation of equities..... 99,999 (39,650) (1,284) (14,061) 45,004 BALANCE AT AUGUST 31, 1998......................... $ 100,071 $ 451,804 $ 28,508 $ 332,313 $ 912,696 Appropriation of current year's net income......... 0 0 0 13,865 13,865 Patronage refund payable in cash transferred to current liabilities .... 0 0 0 (6,054) (6,054) Prior year patronage refund allocation............. 0 32,481 3,046 (35,527) 0 Dividends on preferred stock....................... 0 0 0 (8,004) (8,004) Exchange of common stock, associate member common stock and other equities 0 (1,821) (1,393) 3,214 0 Issue, redemption and cancellation of equities.... (2) 25,565 (3,272) (17,467) 4,824 BALANCE AT AUGUST 31, 1999......................... $ 100,069 $ 508,029 $ 26,889 $ 282,340 $ 917,327 <FN> See accompanying Notes to Consolidated Financial Statements. </FN> </TABLE> FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Farmland Industries, Inc., a Kansas corporation, is organized and operated as a cooperative and its mission is to be a global, consumer-driven, producer-owned, farm-to-table cooperative system. General -- The consolidated financial statements include the accounts of Farmland Industries, Inc. and all of its majority-owned subsidiaries ("Farmland", "we", "us", "our", or the "Company", unless the context requires otherwise). All significant intercompany accounts and transactions have been eliminated. When necessary, the financial statements include amounts based on informed estimates and judgments of management. Our fiscal year ends August 31. Accordingly, all references to "year" or "years" are to fiscal years ended August 31. Cash and Cash Equivalents -- Investments with maturities of less than three months are included as cash and cash equivalents. Investments -- Investments in companies over which Farmland exercises significant influence (20% to 50% voting control) are accounted for by the equity method. Other investments are stated at cost, less any provision for impairment which is other than temporary. Accounts Receivable - Farmland uses the allowance method to account for doubtful accounts and notes. Inventories -- Grain inventories are valued at market adjusted for net unrealized gains or losses on open commodity contracts. Crude oil and refined petroleum products are valued at the lower of last-in, first-out ("LIFO") cost or market. Other inventories are valued at the lower of first-in, first-out ("FIFO") cost or market. Supplies are valued at cost. Property, Plant and Equipment -- Assets, including assets under capital leases, are stated at cost. Depreciation and amortization are computed principally using the straight-line method over the estimated useful lives of the assets and the remaining terms of the capital leases, respectively. Goodwill and Other Intangible Assets -- The excess of cost over the fair market value of assets of businesses purchased is amortized on a straight-line basis over a period of 15 to 25 years. Farmland assesses the recoverability of goodwill and measures impairment, if any, by determining whether the unamortized balance can be recovered over its remaining life through undiscounted future operating cash flows. Goodwill is reflected in the accompanying Consolidated Balance Sheets net of accumulated amortization of $16.4 million and $18.4 million, respectively, at August 31, 1998 and 1999. Other intangible assets, primarily software, are amortized over three to ten years. Sales - Farmland recognizes sales at the time product is shipped. Farmland's international grain trading business ("Tradigrain") has changed from a grain brokerage operation to a buy/sell operation. Accordingly, only the net margins of the international grain business were included in sales during 1997 and 1998. Sales and cost of sales for 1999 include the gross value of the international grain business transactions. Consistent with this change, Tradigrain's 1999 bank borrowings and repayments have been included as cash flows from financing activities. Derivative Commodity Instruments -- Farmland uses derivative commodity instruments, including forward contracts, futures and options contracts, primarily to reduce its exposure to risk of loss from changes in commodity prices. Derivative commodity instruments which are designated as hedges and for which changes in value exhibit high correlation to changes in value of the underlying position are accounted for as hedges. Gains and losses on hedges of inventory are deferred as part of the carrying amount of the related inventories and, upon sale of the inventory, recognized in cost of sales. Gains and losses related to qualifying hedges of firm commitments or anticipated transactions also are deferred and are recognized as an adjustment to the carrying amounts of the commodities when the underlying hedged transaction occurs. When a qualifying hedge is terminated or ceases to meet the specified criteria for use of hedge accounting, any deferred gains or losses through that date continue to be deferred. To the extent an anticipated transaction is no longer likely to occur, related hedges are closed with gains or losses charged to operations. Tradigrain uses derivative commodity instruments to establish positions for trading purposes. Instruments used for this purpose are marked-to-market and all related gains and losses are included in operations. Cash flows from commodity instruments are classified in the same category as cash flows from the hedged commodities in the Consolidated Statements of Cash Flows. Farmland enters into interest rate exchange agreements which involve the exchange of fixed-rate and variable-rate interest payments over the life of the agreements and effectively results in the conversion of specifically identified, variable-rate debt into fixed-rate debt. Differences to be paid or received are accrued as interest and are recognized as an adjustment to interest expense. Gains and losses on termination of interest rate exchange agreements are deferred and recognized over the term of the underlying debt instrument as an adjustment to interest expense. In cases where there is no remaining underlying debt instrument, gains and losses on termination are recognized currently in other income (expense). Environmental Expenditures -- Liabilities related to remediation of contaminated properties are recognized when the related costs are considered probable and can be reasonably estimated. Estimates of these costs are based upon currently available facts, existing technology, undiscounted site specific costs and currently enacted laws and regulations. In reporting environmental liabilities, no offset is made for potential recoveries. All liabilities are monitored and adjusted as new facts or changes in law or technology occur. Environmental expenditures are capitalized when such costs provide future economic benefits. Federal Income Taxes -- Farmland is subject to income taxes on all income not distributed to patrons as qualified patronage refunds. Farmland files consolidated federal and state income tax returns. Reclassifications -- Certain prior year amounts have been reclassified to conform with the current year presentation. (2) INVENTORIES Major components of inventories are as follows: <TABLE> <CAPTION> August 31 1998 1999 (Amounts in Thousands) <S> <C> <C> Finished and in-process products..... $ 605,876 $ 719,118 Materials............................ 62,578 54,387 Supplies............................. 57,513 66,999 $ 725,967 $ 840,504 </TABLE> Income before income taxes for the year ended August 31, 1998 was reduced by $27.6 million to recognize a non-cash charge for the adjustment of crude oil and refined petroleum inventories to market value. In fiscal year 1999, the inventories market value exceeded LIFO cost and the lower of LIFO cost or market adjustment made in 1998 was reversed. The carrying values of crude oil and refined petroleum inventories stated under the lower of LIFO cost or market at August 31, 1998 and 1999, were $112.7 million and $113.2 million, respectively. Replacement cost approximated the carrying values of petroleum inventories at both August 31, 1998 and 1999. During 1999, LIFO inventory quantities were reduced, resulting in a liquidation of LIFO inventory layers. The effect of these layer liquidations was to decrease cost of goods sold and increase income before income taxes by approximately $14.5 million. (3) INVESTMENTS AND LONG-TERM RECEIVABLES Investments and long-term receivables are as follows: <TABLE> <CAPTION> August 31 1998 1999 (Amounts in Thousands) <S> <C> <C> Investments accounted for by the equity method................ $ 196,106 $ 205,047 Investments in and advances to other cooperatives............. 39,112 42,037 National Bank for Cooperatives................................ 16,554 22,362 Other investments and long-term receivables................... 46,630 60,283 $ 298,402 $ 329,729 </TABLE> National Bank for Cooperatives ("CoBank") requires its borrowers to maintain an investment in stock of the bank. The amount of investment required is based on the average amount borrowed from CoBank during the previous five years. At August 31, 1998 and 1999, Farmland's investment in CoBank approximated its requirement. CoBank maintains a statutory lien on the investment held by Farmland in CoBank. Summarized financial information of investees accounted for by the equity method is as follows: <TABLE> <CAPTION> August 31 1998 1999 (Amounts in Thousands) <S> <C> <C> Current Assets................................................ $ 614,845 $ 488,447 Long-Term Assets.............................................. 596,869 707,548 Total Assets.............................................. $ 1,211,714 $ 1,195,995 Current Liabilities........................................... $ 513,293 $ 418,183 Long-Term Liabilities......................................... 308,382 370,882 Total Liabilities......................................... $ 821,675 $ 789,065 Net Assets.................................................... $ 390,039 $ 406,930 </TABLE> <TABLE> <CAPTION> Year Ended August 31 1997 1998 1999 (Amounts in Thousands) <S> <C> <C> <C> Net sales.................................. $ 1,366,038 $ 1,859,159 $ 2,618,163 Net income................................. $ 99,264 $ 115,241 $ 125,826 Farmland's equity in net income............ $ 49,551 $ 56,434 $ 65,510 </TABLE> Farmland's investments accounted for by the equity method consist principally of 50% equity interests in three manufacturers of crop production products, Farmland Hydro, L.P., SF Phosphates Limited Company and Farmland MissChem, Limited and a 50% equity interest in a distributor of crop protection products, WILFARM, LLC. During 1998, Farmland's North American Grain business formed two 50%-owned alliances; Concourse Grain, LLC and Farmland-Atwood, LLC, with ConAgra. Concourse Grain, a marketing alliance, provided both domestic and international customers with multiple classes of wheat. Farmland-Atwood provides risk management services, financial and grain support services and grain brokerage to its customers. On May 24, 1999, the owners of Concourse Grain voted to liquidate the venture. On May 28, 1999, we acquired the remaining 50% interest in Farmland-Atwood. At August 31, 1999, our share of the undistributed earnings of all ventures accounted for by the equity method totaled $63.6 million. (4) PROPERTY, PLANT AND EQUIPMENT A summary of cost for property, plant and equipment is as follows: <TABLE> <CAPTION> August 31 1998 1999 (Amounts in Thousands) <S> <C> <C> Land and improvements..................... $ 57,381 $ 59,072 Buildings................................. 296,163 291,131 Machinery and equipment................... 1,043,831 1,067,838 Automotive equipment...................... 70,676 71,948 Furniture and fixtures.................... 59,859 56,463 Capital leases............................ 54,467 54,461 Leasehold improvements.................... 30,750 38,231 Other..................................... 7,598 5,622 Construction in progress.................. 59,648 99,486 $ 1,680,373 $ 1,744,252 </TABLE> (5) BANK LOANS, SUBORDINATED DEBT CERTIFICATES AND NOTES PAYABLE Bank loans, subordinated debt certificates and notes payable are as follows: <TABLE> <CAPTION> August 31 1998 1999 (Amounts in Thousands) <S> <C> <C> Subordinated capital investment certificates --6% to 9%, maturing 2000 through 2014......................... $ 318,733 $ 404,218 Subordinated monthly income certificates --6.25% to 9.25%, maturing 2000 through 2009................... 87,675 103,314 Syndicated Credit Facility --5.91% to 6.19%, maturing 2001................................ 170,000 180,000 Other bank notes-6.39% to 10.75%, maturing 2000 through 2008..................................... 122,214 94,272 Industrial revenue bonds-3.05% to 6.75%, maturing 2000 through 2021..................................... 25,475 25,500 Promissory notes-5% to 8.5%, maturing 2000 through 2007..................................... 8,927 6,513 Other-3% to 14.92%................................................ 34,025 39,367 $ 767,049 $ 853,184 Less current maturities........................................... 38,946 44,771 $ 728,103 $ 808,413 </TABLE> Farmland has a $1.1 billion Syndicated Credit Facility with a group of domestic and international banks ("the Credit Facility"). The Credit Facility provides revolving short-term credit of up to $650.0 million to finance seasonal operations and inventory, and revolving term credit of up to $450.0 million. At August 31, 1999, Farmland had outstanding $368.5 million of revolving short-term borrowings under the Credit Facility and $180.0 million of revolving term borrowings; additionally, $52.7 million of the Credit Facility was being utilized to support letters of credit issued on our behalf. Farmland pays commitment fees under the Credit Facility of 22.5 basis points annually on the unused portion of the revolving short-term commitment and 25 basis points annually on the unused portion of the revolving term commitment. In addition, we must comply with the Credit Facility's financial covenants regarding working capital, the ratio of certain debt to average cash flow and the ratio of equity to total capitalization, all as defined therein. The short- term provisions of the Credit Facility are reviewed and/or renewed annually. The next review date is in May 2000. The revolving term provisions of the Credit Facility expire in May 2001. During April 1998, Farmland National Beef Packing Company, L.P., a consolidated subsidiary, replaced its existing borrowing arrangements with a new five-year $130.0 million credit facility. This facility, which expires March 31, 2003, is provided by various participating banks and all borrowings thereunder are nonrecourse to Farmland. Farmland National Beef used a portion of this facility to repay in full its borrowings from Farmland. At August 31, 1999, Farmland National Beef had borrowings under this facility of $64.2 million, and $3.3 million of the facility was being utilized to support letters of credit. Farmland National Beef has pledged assets with a carrying value at August 31, 1999, of $241.0 million to support its borrowings under the facility. Farmland maintains other borrowing arrangements with banks and financial institutions. At August 31, 1999, $62.2 million was borrowed under these agreements. Tradigrain has borrowing agreements with various international banks which provide financing and letters of credit to support current international grain trading transactions. At August 31, 1999, these short-term borrowings totaled $108.3 million. Obligations of Tradigrain under these loan agreements are nonrecourse to Farmland or Farmland's other affiliates. Subordinated debt certificates have been issued under several indentures. Certain subordinated capital investment certificates may be redeemed prior to maturity at the option of the owner in accordance with the indenture. Subject to limitations in the indenture, Farmland has options to redeem certain subordinated capital investment certificates in advance of scheduled maturities. Additionally, upon written request we will redeem subordinated capital investment certificates and subordinated monthly income certificates in the case of death of an owner. Outstanding subordinated debt certificates are subordinated to senior indebtedness ($682.2 million at August 31, 1999) and certain additional financings (principally long-term operating leases). See Note 9. At August 31, 1999, under industrial revenue bonds and other agreements, assets with a carrying value of $17.6 million have been pledged. Borrowings from CoBank, under both the Syndicated Credit Facility and short-term notes payable, totaling $215.6 million at August 31, 1999, are partially secured by liens on the equity investment held by Farmland in CoBank. See Note 3. Bank loans, subordinated debt certificates and notes payable mature during future fiscal years ending August 31 in the following amounts: (Amounts in Thousands) 2001................. $ 231,864 2002................. 55,677 2003................. 64,544 2004................. 59,470 2005 and after....... 396,858 $ 808,413 At August 31, 1998 and 1999, we had demand loan certificates and short-term bank debt outstanding of $408.6 million (weighted average interest rate of 6.06%) and $546.2 million (weighted average interest rate of 6.45%), respectively. During 1997, 1998 and 1999, Farmland capitalized interest of $4.0 million, $3.9 million and $0.3 million, respectively. (6) INCOME TAXES A. TERRA RESOURCES, INC. In late November, 1999, the United States Tax Court issued an opinion holding that the gains and losses we realized in 1983 and 1984 on the sale of the stock of Terra Resources, Inc. and certain other assets were patronage-sourced, and that we had reported these gains and losses correctly. By ruling in our favor, the Tax Court rejected claims of the Internal Revenue Service that would have resulted in material additional federal income taxes plus accumulated interest. This ruling also means that we do not owe additional state income tax and accumulated interest related to these transactions. The IRS may decide to appeal the Tax Court decision to the United States Court of Appeals for the Eighth Circuit. In the event of an appeal, Farmland's management believes there is a high probability that Farmland would ultimately prevail. b. OTHER INCOME TAX MATTERS Income (loss) before income taxes include the following components: <TABLE> <CAPTION> Year Ended August 31 1997 1998 1999 (Amounts in Thousands) <S> <C> <C> <C> Foreign.................................. $ 9,709 $ 30,269 $ 27,381 Domestic................................. 153,964 24,758 (21,559) Total.................................... $ 163,673 $ 55,027 $ 5,822 </TABLE> Income tax expense (benefit) is comprised of the following: <TABLE> <CAPTION> Year Ended August 31 1997 1998 1999 (Amounts in Thousands) <S> <C> <C> <C> Federal: Current.................................. $ 24,940 $ (5,610) $ (23,440) Deferred................................. (1,129) (512) 12,119 $ 23,811 $ (6,122) $ (11,321) State: Current................................. $ 4,418 $ (981) $ (4,135) Deferred................................ (199) (90) 2,138 $ 4,219 $ (1,071) $ (1,997) Foreign: Current................................. $ 361 $ 2,967 $ 1,362 Deferred................................ (141) 483 3,913 $ 220 $ 3,450 $ 5,275 Total income tax expense (benefit)......... $ 28,250 $ (3,743) $ (8,043) </TABLE> Income tax expense (benefit) differs from the "expected" income tax expense (benefit) using a statutory rate of 35% as follows: <TABLE> <CAPTION> Year Ended August 31 1997 1998 1999 <S> <C> <C> <C> Computed "expected" income tax expense on income before income taxes ..................... 35.0 % 35.0 % 35.0 % Increase (reduction) in income tax expense attributable to: Patronage refunds ....................... (22.9) (37.6) (181.7) State income tax expense, net of federal income tax effect.............. 1.2 3.3 2.4 Other, net .............................. 4.0 (7.5) 6.2 Income tax expense (benefit)............... 17.3 % (6.8) % (138.1) % </TABLE> The tax effect of temporary differences that give rise to significant portions of deferred tax liabilities and deferred tax assets at August 31, 1998 and 1999 are as follows: <TABLE> <CAPTION> August 31 1998 1999 (Amounts in Thousands) <S> <C> <C> Deferred tax liabilities: Property, plant and equipment, principally due to differences in depreciation......................... $ 75,808 $ 90,321 Prepaid pension cost ....................... 16,388 16,114 Income from foreign subsidiaries ........... 11,187 16,776 Basis differences in pass-through ventures................................ 4,677 6,446 Other ...................................... 6,169 7,701 Total deferred tax liabilities.......... $ 114,229 $ 137,358 Deferred tax assets: Safe harbor leases ......................... $ 3,802 $ 3,435 Accrued expenses ........................... 61,700 55,241 Benefit of nonqualified written notices......................... 33,761 39,542 Alternative minimum tax credit ............. 5,829 15,389 Accounts receivable, principally due to allowance for doubtful accounts......... 3,024 6,359 Other ...................................... 2,780 3,829 Total deferred tax assets............... $ 110,896 $ 123,795 Net deferred tax liability ................. $ 3,333 $ 13,563 </TABLE> At August 31, 1999, Farmland has nonmember-sourced loss carryforwards, expiring in 2019, amounting to $36.6 million, available to offset future nonmember- sourced income. Farmland also has alternative minimum tax credit carryovers amounting to $15.4 million available to reduce future federal income taxes payable. At August 31, 1999, Farmland has member-sourced loss carryforwards, expiring from 2010 through 2019, amounting to $24.1 million available to offset future member-sourced income. No deferred tax asset has been established for these carryforwards since member-sourced losses offset future patronage refunds. (7) MINORITY OWNERS' EQUITY IN SUBSIDIARIES A summary of the equity of subsidiaries owned by others is as follows: <TABLE> <CAPTION>. August 31 1998 1999 (Amounts in Thousands) <S> <C> <C> Farmland National Beef Packing Company, L.P................$ 30,084 $ 36,414 Farmland Foods, Inc........................................ 4,061 3,723 Other subsidiaries......................................... 1,326 872 $ 35,471 $ 41,009 </TABLE> (8) PREFERRED STOCK, EARNED SURPLUS AND OTHER EQUITIES A summary of preferred stock is as follows: <TABLE> <CAPTION> August 31 1998 1999 (Amounts in Thousands) <S> <C> <C> Preferred shares - Authorized 8,000,000 shares: 8%, Series A cumulative redeemable preferred shares, stated at redemption value, $50 per share, 2,000,000 shares issued and outstanding .... $ 100,000 $ 100,000 5-1/2% and 6%, $25 par value - 2,743 shares issued and outstanding (2,838 shares in 1998)......................... 71 69 $ 100,071 $ 100,069 </TABLE> Dividends on the Series A preferred shares accumulate whether or not: Farmland has earnings; funds are legally available for the payment; or such dividends are declared. These preferred shares are redeemable, beginning on December 15, 2022, at our sole discretion. No redemption is allowed prior to that time. Series A preferred shares each have a liquidation preference of $50 per share, plus an amount equal to accumulated and unpaid dividends, if any, thereon. The preferred shares are not entitled to vote. A summary of earned surplus and other equities is as follows: <TABLE> <CAPTION> August 31 1998 1999 (Amounts in Thousands) <S> <C> <C> Earned surplus............................................ $ 249,108 $ 226,476 Patronage refund payable in equities...................... 35,528 24,215 Capital credits........................................... 19,694 26,453 Equity issuable for the purchase of SF Services, Inc...... 26,323 0 Additional paid-in surplus................................ 1,596 5,102 Other..................................................... 64 94 $ 332,313 $ 282,340 </TABLE> Patronage refunds payable in equities represent the portion of patronage refunds payable from current year earnings, in the form of common shares, associate member common shares and capital credits. In July 1998, Farmland acquired all of the common stock of SF Services, Inc. in exchange for $26.3 million in Farmland equity, $2.8 million in cash and warrants which, when exercisable, may be exchanged for $21.7 million in Farmland equity. The right to exercise the warrants is contingent on achieving a specified volume of purchases over seven years. As of August 31, 1999, no warrants had been converted to Farmland equity. SF Services operated as a regional farm supply cooperative, serving local cooperative members in Arkansas, Mississippi, Louisiana and Alabama. Capital credits are issued: 1) for payment of patronage refunds to patrons who do not satisfy requirements for membership or associate membership and 2) upon conversion of common stock or associate member common stock held by persons who no longer meet qualifications for membership or associate membership in Farmland. (9) CONTINGENT LIABILITIES AND COMMITMENTS Farmland leases various equipment and real properties under long-term operating leases. For 1997, 1998 and 1999, rental expense totaled $53.9 million, $64.3 million, and $66.3 million, respectively. Rental expense is reduced for sublease income, primarily rental income received on leased railroad cars and ammonia trailers ($5.4 million in 1997, $1.1 million in 1998 and $1.0 million in 1999). The lease agreements have various remaining terms ranging from one year to fourteen years. Some agreements are renewable, at our option, for additional periods. The minimum required payments for these agreements during the fiscal years ending August 31 are as follows: (Amounts in Thousands) 2000........................... $ 63,769 2001........................... 56,393 2002........................... 46,382 2003........................... 21,179 2004........................... 17,132 2005 and after................. 61,816 $266,671 Commitments for capital expenditures and investments in joint ventures aggregated $32.8 million at August 31, 1999. Farmland has been designated by the Environmental Protection Agency as a potentially responsible party ("PRP") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), at various National Priority List ("NPL") sites. In addition, we are aware of possible obligations associated with environmental matters at other sites, including sites where no claim or assessment has been made. Our accrued liability for probable and reasonably estimable obligations for resolution of environmental matters at NPL and other sites was $14.4 million and $13.3 million at August 31, 1998 and 1999, respectively. The ultimate costs of resolving certain environmental matters are not quantifiable because many such matters are in preliminary stages and the timing and extent of actions which governmental authorities may ultimately require are unknown. It is possible that the costs of such resolution may be greater than the liabilities which, in the opinion of management, are probable and reasonably estimable at August 31, 1999. In the opinion of management, it is reasonably possible for such costs to approximate an additional $9.7 million. In the ordinary course of conducting international grain trading, Tradigrain, as of August 31, 1999, was contingently liable in the amount of $92.0 million of performance and bid bonds, guarantees and letters of credit. In December 1997, Farmland entered into a series of agreements which provide for the construction and operation under a long-term lease of facilities adjacent to our petroleum refinery at Coffeyville, Kansas. These facilities are designed to convert petroleum coke by-products into fertilizers. When the facilities are completed (presently scheduled during the second quarter of fiscal 2000), Farmland will be obligated to make future minimum lease payments which, at that time, will have an approximate present value of $223 million. Alternatively, Farmland has an option to purchase the facilities. Our subordinated debt securities are subordinated in right of payment to payments related to the Coffeyville facility and to $72.8 million of certain lease obligations. Farmland is involved in various lawsuits arising in the normal course of business. In the opinion of management, except for the tax litigation relating to Terra as explained in Note 6, the ultimate resolution of these litigation issues is not expected to have a material adverse effect on our Consolidated Financial Statements. (10) EMPLOYEE BENEFIT PLANS The Farmland Industries, Inc. Employee Retirement Plan (the "Plan") is a defined benefit plan in which employees whose customary employment is at the rate of at least 15 hours per week may participate. Participation in the Plan is optional prior to age 34, but mandatory thereafter. Benefits payable under the Plan are based on years of service and the employee's average compensation during the highest four of the employee's last ten years of employment. The assets of the Plan are maintained in a trust fund. The majority of the Plan's assets are invested in common stocks, corporate bonds, United States Government bonds, short-term investment funds, private REITS and venture capital funds. Our funding strategy is to make the maximum annual contribution to the Plan's trust fund that can be deducted for federal income tax purposes. Farmland charges pension costs as accrued based on the actuarial valuation of the plan. Farmland adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" for the year ended August 31, 1999. Prior year disclosures have been conformed to this standard. Components of the Company's pension cost are as follows: <TABLE> <CAPTION> Year Ended August 31 1997 1998 1999 (Amounts in Thousands) <S> <C> <C> <C> Service cost....................................................... $ 11,333 $ 12,013 $ 15,126 Interest cost...................................................... 19,816 21,403 23,405 Expected return on Plan assets..................................... (25,771) (28,192) (34,621) Curtailment gain................................................... (3,582) 0 0 Net amortization................................................... 207 207 207 Pension expense.................................................... $ 2,003 $ 5,431 $ 4,117 </TABLE> The following table sets forth the Plan's funded status and amounts recognized as assets in our Consolidated Balance Sheets at August 31, 1998 and 1999. Such prepaid pension cost is based on the Plan's funded status as of May 31, 1998 and 1999. <TABLE> <CAPTION> AUGUST 31 1998 1999 (Amounts in Thousands) <S> <C> <C> CHANGE IN PROJECTED BENEFIT OBLIGATION: Projected Benefit Obligation, beginning of year $ 264,523 $ 342,548 Service Cost 12,013 15,126 Employee Contributions 5,186 5,961 Interest Cost 21,403 23,405 Actuarial (Gain) Loss 48,647 (30,293) Benefits Paid (9,224) (11,760) Projected Benefit Obligation, end of year $ 342,548 $ 344,987 CHANGE IN FAIR VALUE OF PLAN ASSETS: Plan Assets at Fair Value, beginning of year 331,822 385,112 Return on Plan Assets 56,047 13,052 Company Contributions 1,281 427 Employee Contributions 5,186 5,961 Benefits Paid (9,224) (11,760) Plan Assets at Fair Value, end of year $ 385,112 $ 392,792 FUNDED STATUS AND PREPAID PENSION COST: Funded Status of the Plan, end of year $ 42,564 $ 47,805 Unrecognized Prior Service cost 414 207 Unrecognized Net (Gain)/Loss 5,387 (3,337) Prepaid Pension Cost, end of year $ 48,365 $ 44,675 </TABLE> The following rates were used when calculating service cost, interest cost, expected return on plan assets, the projected benefit obligation and the Plan's funded status. <TABLE> <CAPTION> Year Ended August 31 ...................... 1997 1998 1999 <S> <C> <C> <C> Discount rate......................... 8.0% 7.25% 7.5% Rate of increase in future compensation levels............................... 4.5% 4.5% 4.9% Expected long-term rate of return on pla assets............................... 8.5% 9.0% 9.0% </TABLE> (11) INDUSTRY SEGMENT INFORMATION Farmland adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" for the year ended August 31, 1999. This statement requires companies to report certain information about operating segments in their financial statements and establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance. Comparative information for prior years presented has been restated to conform to the requirements of SFAS 131. Farmland conducts business primarily in two operating areas: agricultural inputs and outputs. On the input side of the agricultural industry, we operate as a farm supply cooperative. On the output side of the agricultural industry, we operate as a processing and marketing cooperative. Our farm supply operations consist of four segments: petroleum, plant foods, crop protection and feed. Principal products of the petroleum division are refined fuels, propane, jet fuels and by-products of petroleum refining. Principal products of the plant foods division are nitrogen-based and phosphate- based plant foods. Principal products of the crop protection business are, through the Company's ownership in the WILFARM, LLC and Omnium L.L.C. joint ventures, a complete line of insecticides, herbicides and mixed chemicals. Principal products of the feed division include swine, dairy, pet, beef, poultry, mineral and specialty feeds; feed ingredients and supplements, animal health products and livestock services. On the output side, Farmland's operations consist of five segments: hog production, the processing and marketing of pork, the processing and marketing of beef, the origination, storage and marketing of grain domestically, and the origination, storage and marketing of grain internationally. Other operations primarily includes: financial, management, printing and transportation services. The operating income (loss) of each industry segment includes the revenue generated on transactions involving products within that industry segment less identifiable expenses. Corporate assets include cash, investments in other cooperatives, and certain other assets. Following is a summary of industry segment information as of and for the years ended August 31, 1997, 1998 and 1999: <TABLE> <CAPTION> 1997 (PAGE 1 OF 3) (Amounts in Thousands) CONSOLIDATED SEGMENTS Combined Segments Unallocated Consolidated <S> <C> <C> <C> Sales and transfers $ 9,425,548 $ - $ 9,425,548 Transfers between segments (278,041) - (278,041) Net sales $ 9,147,507 $ - $ 9,147,507 Cost of sales 8,580,826 - 8,580,826 Gross income $ 566,681 $ - $ 566,681 Selling, general and administrative expenses $ 320,549 $ 88,829 $ 409,378 Other income (expense): Interest expense $ - $ (62,335) $ (62,335) Interest income - 5,352 5,352 Other, net 10,211 12,275 22,486 Total other income (expense) $ 10,211 $ (44,708) $ (34,497) Equity in net income of investees 49,494 57 49,551 Minority owners' interest in net (income)/loss of subsidiaries (8,933) 249 (8,684) Income tax (expense) - (28,250) (28,250) Net income (loss) $ 296,904 $ (161,481) $ 135,423 Investment in and advances to investees $ 168,977 $ 9,017 $ 177,994 Total assets $ 2,394,678 $ 250,634 $ 2,645,312 Depreciation and amortization expense $ 80,969 $ 9,382 $ 90,351 Capital expenditures $ 145,229 $ 16,941 $ 162,170 </TABLE> <TABLE> <CAPTION> 1997 (PAGE 2 OF 3) (Amounts in Thousands) INPUT AND OTHER SEGMENTS Other Total Input Plant Crop Operating and Other Foods Protection Petroleum Feed Units Segments <S> <C> <C> <C> <C> <C> <C> Sales & transfers $ 1,267,684 $ 11,634 $ 1,336,940 $ 636,134 $ 153,919 $ 3,406,311 Transfers between segments (15,752) - (5,153) (18,134) (24,166) (63,205) Net sales $ 1,251,932 $ 11,634 $ 1,331,787 $ 618,000 $ 129,753 $ 3,343,106 Cost of sales 1,064,147 10,635 1,272,617 579,006 104,911 3,031,316 Gross income $ 187,785 $ 999 $ 59,170 $ 38,994 $ 24,842 $ 311,790 Selling, general and administrative expenses $ 27,612 $ 1,137 $ 22,904 $ 32,351 $ 36,405 $ 120,409 Other income (expense): Interest expense $ - $ - $ - $ - $ - $ - Interest income - - - - - - Other, net 1,381 (65) 903 (416) 3,612 5,415 Total other income (expense) $ 1,381 $ (65) $ 903 $ (416) $ 3,612 $ 5,415 Equity in net income of investees 43,269 4,986 163 399 237 49,054 Minority owners' interest in net (income)/loss of subsidiaries 382 - - - 992 1,374 Income tax (expense) - - - - - - Net income (loss) $ 205,205 $ 4,783 $ 37,332 $ 6,626 $ (6,722) $ 247,224 Investment in and advances to investees $ 148,634 $ 9,914 $ 706 $ 3,185 $ 3,281 $ 165,720 Total assets $ 591,638 $ 20,482 $ 449,754 $ 110,721 $ 67,942 $ 1,240,537 Depreciation and amortization expense $ 15,898 $ 785 $ 13,901 $ 4,959 $ 7,695 $ 43,238 Capital expenditures $ 71,488 $ 102 $ 22,403 $ 3,035 $ 9,906 $ 106,934 </TABLE> <TABLE> <CAPTION> 1997 (PAGE 3 OF 3) (Amounts in Thousands) OUTPUT SEGMENTS Pork Beef Grain Total Processing Livestock Processing North Output & Marketing Production & Marketing American International Segments <S> <C> <C> <C> <C> <C> <C> Sales & transfers $ 1,655,893 $ 61,318 $ 1,903,413 $ 2,367,447 $ 31,166 $ 6,019,237 Transfers between segments - (54,523) - (160,313) - (214,836) Net sales $ 1,655,893 $ 6,795 $ 1,903,413 $ 2,207,134 $ 31,166 $ 5,804,401 Cost of sales 1,516,055 3,050 1,840,497 2,189,908 - 5,549,510 Gross income $ 139,838 $ 3,745 $ 62,916 $ 17,226 $ 31,166 $ 254,891 Selling, general and administrative expenses $ 144,625 $ 1,497 $ 13,474 $ 17,556 $ 22,988 $ 200,140 Other income (expense): Interest expense $ - $ - $ - $ - $ - $ - Interest income - - - - - - Other, net 676 747 2,281 2,718 (1,626) 4,796 Total other income (expense) $ 676 $ 747 $ 2,281 $ 2,718 $ (1,626) $ 4,796 Equity in net income 1997 (PAGE 3 OF 3) (Amounts in Thousands) of investees - 287 - 153 - 440 Minority owners' interest in net (income)/loss of subsidiaries - - (10,307) - - (10,307) Income tax (expense) - - - - - - Net income (loss) $ (4,111) $ 3,282 $ 41,416 $ 2,541 $ 6,552 $ 49,680 Investment in and advances to investees $ 18 $ 2,618 $ - $ 621 $ - $ 3,257 Total assets $ 354,224 $ 29,818 $ 277,008 $ 263,403 $ 229,688 $ 1,154,141 Depreciation and amortization expense $ 19,673 $ 1,772 $ 11,222 $ 3,039 $ 1,935 $ 37,641 Capital expenditures $ 16,475 $ 3,439 $ 15,735 $ 1,696 $ 950 $ 38,295 </TABLE> <TABLE> <CAPTION> 1998 (PAGE 1 OF 3) (Amounts in Thousands) CONSOLIDATED SEGMENTS Combined Segments Unallocated Consolidated <S> <C> <C> <C> Sales & transfers $ 8,985,984 $ - $ 8,985,984 Transfers between segments (210,938) - (210,938) Net sales $ 8,775,046 $ - $ 8,775,046 Cost of sales 8,299,505 - 8,299,505 Gross income $ 475,541 $ - $ 475,541 Selling, general and administrative expenses $ 335,677 $ 96,322 $ 431,999 Other income (expense): Interest expense $ - $ (73,645) $ (73,645) Interest income - 5,463 5,436 Other, net 6,806 23,459 30,265 Total other income (expense) $ 6,806 $ (44,750) $ (37,944) Equity in income/(loss) of investees 53,010 3,424 56,434 Minority owners' interest in net (income)/loss of subsidiaries (7,202) 197 (7,005) Income tax benefit - 3,743 3,743 Net income (loss) $ 192,478 $ (133,708) $ 58,770 Investment in and advances to investees $ 183,614 $ 12,492 $ 196,106 Total assets $ 2,579,039 $ 295,579 $ 2,874,618 Depreciation and amortization expense $ 86,218 $ 15,615 $ 101,833 Capital expenditures $ 150,579 $ 3,650 $ 154,229 </TABLE> <TABLE> <CAPTION> 1998 (PAGE 2 OF 3) (Amounts in Thousands) INPUT AND OTHER SEGMENTS Other Total Input Plant Crop Operating and Other Foods Protection Petroleum Feed Units Segments <S> <C> <C> <C> <C> <C> <C> Sales & transfers $ 1,161,940 $ 299 $ 1,141,090 $ 570,622 $ 163,761 $ 3,037,712 Transfers between segments (4,396) - (4,162) (20,890) (27,304) (56,752) Net sales $ 1,157,544 $ 299 $ 1,136,928 $ 549,732 $ 136,457 $ 2,980,960 Cost of sales 1,081,397 243 1,114,081 509,418 103,869 2,809,008 Gross income $ 76,147 $ 56 $ 22,847 $ 40,314 $ 32,588 $ 171,952 Selling, general and administrative expenses $ 28,188 $ 31 $ 22,485 $ 31,132 $ 37,449 $ 119,285 Other income (expense): Interest expense $ - $ - $ - $ - $ - $ - Interest income - - - - - - Other, net 1,978 (9) 1,938 272 2,997 7,176 Total other income (expense) $ 1,978 $ (9) $ 1,938 $ 272 $ 2,997 $ 7,176 Equity in net income/(loss) of investees 42,768 7,199 260 1,123 566 51,916 Minority owners' interest in net (income)/loss of subsidiaries 281 - - - 687 968 Income tax benefit - - - - - - Net income (loss) $ 92,986 $ 7,215 $ 2,560 $ 10,577 $ (611) $ 112,727 Investment in and advances to investees $ 140,212 $ 13,264 $ 1,087 $ 7,308 $ 4,862 $ 166,733 Total assets $ 631,887 $ 23,027 $ 433,117 $ 98,555 $ 222,099 $ 1,408,685 Depreciation and amortization expense $ 22,215 $ 57 $ 14,609 $ 4,500 $ 6,529 $ 47,910 Capital expenditures $ 25,761 $ 311 $ 26,172 $ 5,627 $ 47,866 $ 105,737 </TABLE> <TABLE> <CAPTION> 1998 (PAGE 3 OF 3) (Amounts in Thousands) OUTPUT SEGMENTS Pork Beef Grain Total Processing Livestock Processing North Output & Marketing Production & Marketing American International Segments <S> <C> <C> <C> <C> <C> <C> Sales & transfers $ 1,510,677 $ 63,371 $ 2,135,476 $ 2,175,261 $ 63,487 $ 5,948,272 Transfers between segments - (53,184) - (101,002) - (154,186) Net sales $ 1,510,677 $ 10,187 $ 2,135,476 $ 2,074,259 $ 63,487 $ 5,794,086 Cost of sales 1,339,263 17,323 2,081,585 2,052,326 - 5,490,497 Gross income $ 171,414 $ (7,136) $ 53,891 $ 21,933 $ 63,487 $ 303,589 Selling, general and administrative expenses $ 144,804 $ 2,172 $ 15,292 $ 19,375 $ 34,749 $ 216,392 Other income (expense): Interest expense $ - $ - $ - $ - $ - $ - Interest income - - - - - - Other, net 2,230 660 (4,934) 2,655 (981) (370) Total other income (expense) $ 2,230 $ 660 $ (4,934) $ 2,655 $ (981) $ (370) Equity in net income/(loss) of investees - 477 (1,569) 2,186 - 1,094 Minority owners' interest in net (income)/loss of subsidiaries - - (8,170) - - (8,170) Income tax benefit - - - - - - Net income (loss) $ 28,840 $ (8,171) $ 23,926 $ 7,399 $ 27,757 $ 79,751 Investment in and advances to investees $ - $ 3,496 $ - $ 13,385 $ - $ 16,881 Total assets $ 330,999 $ 33,343 $ 273,503 $ 297,050 $ 235,459 $ 1,170,354 Depreciation and amortization expense $ 19,386 $ 1,231 $ 12,608 $ 3,065 $ 2,018 $ 38,308 Capital expenditures $ 19,166 $ 3,068 $ 18,680 $ 3,601 $ 327 $ 44,842 </TABLE> <TABLE> <CAPTION> 1999 (PAGE 1 OF 3) (Amounts in Thousands) CONSOLIDATED SEGMENTS Combined Segments Unallocated Consolidated <S> <C> <C> <C> Sales & transfers $ 11,038,775 $ - $ 11,038,775 Transfers between segments (329,702) - (329,702) Net sales $ 10,709,073 $ - $ 10,709,073 Cost of sales 10,231,081 - 10,231,081 Gross income $ 477,992 $ - $ 477,992 Selling, general and administrative expenses 358,412 122,427 480,839 Other income (expense): Interest expense - (90,773) (90,773) Interest income - 8,337 8,337 Other, net 29,971 13,351 43,322 Total other income (expense) $ 29,971 $ (69,085) $ (39,114) Equity in income/(loss) of investees 62,272 3,238 65,510 Minority owners' interest in net (income)/loss of subsidiaries (18,010) 283 (17,727) Income tax benefit - 8,043 8,043 Net income (loss) $ 193,813 $ (179,948) $ 13,865 Investment in and advances to investees $ 193,143 $ 11,904 $ 205,047 Total assets $ 2,855,640 $ 402,009 $ 3,257,649 Depreciation and amortization expense $ 93,284 $ 15,900 $ 109,184 Capital expenditures $ 114,986 $ 6,198 $ 121,184 </TABLE> <TABLE> <CAPTION> 1999 (PAGE 2 OF 3) (Amounts in Thousands) INPUT AND OTHER SEGMENTS Other Total Input Plant Crop Operating and Other Foods Protection Petroleum Feed Units Segments <S> <C> <C> <C> <C> <C> <C> Sales & transfers $ 1,009,019 $ 247 $ 954,220 $ 599,208 $ 284,756 $ 2,847,450 Transfers between segments (6,735) - (48) (23,661) (30,837) (61,281) Net sales $ 1,002,284 $ 247 $ 954,172 $ 575,547 $ 253,919 $ 2,786,169 Cost of sales 1,004,267 174 918,186 530,246 216,879 2,669,752 Gross income $ (1,983) $ 73 $ 35,986 $ 45,301 $ 37,040 $ 116,417 Selling, general and administrative expenses $ 30,085 $ 4 $ 20,553 $ 30,774 $ 42,527 $ 123,943 Other income (expense): Interest expense $ - $ - $ - $ - $ - $ - Interest income - - - - - - Other, net 18,166 242 2,726 355 7,465 28,954 Total other income (expense) $ 18,166 $ 242 $ 2,726 $ 355 $ 7,465 $ 28,954 Equity in net income/(loss) of investees 46,374 7,682 2,366 906 229 57,557 Minority owners' interest in net (income)/loss of subsidiaries 167 - - (504) 498 161 Income tax benefit - - - - - - Net income (loss) $ 32,639 $ 7,993 $ 20,525 $ 15,284 $ 2,705 $ 79,146 Investment in and advances to investees $ 146,501 $ 16,310 $ 4,383 $ 7,771 $ 6,658 $ 181,623 Total assets $ 651,650 $ 26,287 $ 491,018 $ 121,380 $ 99,101 $ 1,389,436 Depreciation and amortization expense $ 23,432 $ 66 $ 16,039 $ 4,844 $ 9,662 $ 54,043 Capital expenditures $ 6,683 $ 6 $ 26,841 $ 4,970 $ 11,758 $ 50,258 </TABLE> <TABLE> <CAPTION> 1999 (PAGE 3 OF 3) (Amounts in Thousands) OUTPUT SEGMENTS Pork Beef Grain Total Processing Livestock Processing North Output & Marketing Production & Marketing American International Segments <S> <C> <C> <C> <C> <C> <C> Sales & transfers $ 1,380,297 $ 64,156 $ 2,358,500 $ 2,411,788 $ 1,976,584 $ 8,191,325 Transfers between segments - (47,237) - (221,184) - (268,421) Net sales $ 1,380,297 $ 16,919 $ 2,358,500 $ 2,190,604 $ 1,976,584 $ 7,922,904 Cost of sales 1,175,938 38,332 2,273,251 2,159,466 1,914,342 7,561,329 Gross income $ 204,359 $ (21,413) $ 85,249 $ 31,138 $ 62,242 $ 361,575 Selling, general and administrative expenses $ 157,419 $ 3,061 $ 17,750 $ 20,415 $ 35,824 $ 234,469 Other income (expense): Interest expense $ - $ - $ - $ - $ - $ - Interest income - - - - - - Other, net 899 1 914 580 (1,377) 1,017 Total other income (expense) $ 899 $ 1 $ 914 $ 580 $ (1,377) $ 1,017 Equity in net income/(loss) 1999 (PAGE 3 OF 3) (Amounts in Thousands) of investees 15 (336) 1,191 3,845 - 4,715 Minority owners' interest in net (income)/loss of subsidiaries - (4) (18,167) - - (18,171) Income tax benefit - - - - - - Net income (loss) $ 47,854 $ (24,813) $ 51,437 $ 15,148 $ 25,041 $ 114,667 Investment in and advances to investees $ 266 $ 5,890 $ - $ 5,364 $ - $ 11,520 Total assets $ 344,979 $ 41,614 $ 296,039 $ 470,301 $ 313,271 $ 1,466,204 Depreciation and amortization expense $ 19,576 $ 829 $ 13,497 $ 4,588 $ 751 $ 39,241 Capital expenditures $ 18,169 $ 4,929 $ 21,027 $ 11,891 $ 8,712 $ 64,728 </TABLE> Substantially all of Farmland's long-lived assets are located in the United States. Sales by country, determined by customer location, were as follows: <TABLE> <CAPTION> Year Ended August 31 1997 1998 1999 (Amounts in Thousands) <S> <C> <C> <C> United States........................ $ 7,784,212 $ 7,474,758 $ 7,520,565 Mexico............................... 441,384 472,955 570,959 Japan................................ 158,694 157,022 220,763 Other................................ 763,217 670,311 2,396,786 Total................................ $ 9,147,507 $ 8,775,046 $ 10,709,073 </TABLE> (12) SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK Farmland extends credit to its customers on terms generally no more favorable than standard terms of sale for the industries it serves. A substantial portion of our receivables are concentrated in the agricultural industry. Collection of these receivables may be dependent upon economic returns from farm crop and livestock production. A significant amount of trade receivables are with customers located in foreign countries. Although Farmland does not currently foresee a credit risk associated with these receivables, repayment is dependent upon the financial stability of those countries' national economies. Farmland has counterparty performance risk on forward contracts we have entered into with producers and local cooperatives. In the past, Farmland has not had significant problems with non-performance on these contracts and we do not anticipate having significant non-performance problems in the future. However, the risk of non- performance always exists and such risk may change as the agricultural economy changes. Our credit risks are continually reviewed and management believes that adequate provisions have been made for doubtful accounts. Farmland enters into interest rate swap agreements, natural gas/financial swap agreements, and foreign currency exchanges with financial institutions. We continually monitor our positions with, and the credit quality of, the financial institutions which are counterparties to our financial instruments and we do not anticipate non-performance by counterparties. Farmland maintains investments in and advances to cooperatives, cooperative banks and joint ventures from which it purchases products or services. A substantial portion of the business of these investees is dependent upon the agribusiness economic sector. See Note 3. (13)DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Estimates of fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could affect the estimates. Except for our investments in other cooperatives, the fair market value of all financial instruments held by Farmland approximates the carrying value of these instruments. Investments in the equities of other cooperatives which have been purchased are carried at cost and equities received as patronage refunds are carried at par value, less provisions for other than temporary impairment. Management believes it is not practicable to estimate the fair value of these equities because there is no established market for these equities and estimated future cash flows, which are largely dependent on the future equity redemption policy of each cooperative, are not determinable. At August 31, 1998 and 1999, the carrying value of our investments in other cooperatives' equities totaled $43.7 million and $53.4 million, respectively. For all other financial instrument assets, the fair value has been estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. The estimated fair value of the fixed rate financial instrument liabilities was calculated using a discount rate equal to the interest rate on financial instruments with similar maturities currently offered for sale by Farmland. The estimated fair value of our variable rate financial instruments approximates the carrying value. (14) RELATED PARTY TRANSACTIONS Farmland has a 50% interest in two manufacturers of phosphate products and a manufacturer of nitrogen products, Farmland Hydro, L.P., SF Phosphates Limited Company and Farmland MissChem Limited, a 50% interest in a distributor of crop protection products, WILFARM, LLC, a 50% interest in a manufacturer and distributor of crop protection products, Omnium, LLC and a 50% interest in OneSystem Group, LLC, which is an information technology service. During 1997, 1998 and 1999, Farmland purchased $131.9 million, $231.5 million and $224.1 million, respectively, of products and services from these ventures. Farmland had accounts payable of $5.9 million and $14.6 million due to these ventures at August 31, 1998 and 1999, respectively, and a note payable due to a venture of $17.1 million and $12.6 million at August 31, 1998 and 1999, respectively. Accounts receivable owed to us at August 31, 1998 and 1999 totaled $22.3 million and $6.2 million, respectively. Notes receivable due from these ventures totaled $35.0 million and $35.4 million at August 31, 1998 and 1999, respectively. (15) OTHER INCOME During 1999, Farmland realized $10.3 million of gain resulting from the favorable settlement of various lawsuits involving natural gas pricing, crude oil supply, and environmental recoveries. Farmland also sold its investment in its Florida phosphate reserves resulting in a gain of approximately $7.7 million before income taxes. In connection with the temporary shutdown of the Lawrence fertilizer production facility, Farmland realized a $4.1 million gain on futures positions closed as a result of anticipated natural gas purchases which will not occur. During 1998, we sold: (1) an approximate 3.8% interest in Farmland National Beef, resulting in a gain before income taxes of $7.2 million; and (2) all of our interest in Cooperative Services Company, formerly a wholly-owned subsidiary, resulting in a gain before income taxes of $2.2 million. (16) SUBSEQUENT EVENTS During September, the Boards of Directors of Farmland and Cenex Harvest States separately approved the terms of a unification. Both cooperatives have scheduled a November 23, 1999, member vote regarding the unification. If members approve, the unification is scheduled to occur March 1, 2000. The unified entity will be named United Country Brands. During September, 1999, Land O'Lakes, Inc., Farmland and Cenex Harvest States announced their intent to form a marketing venture which will distribute crop production and crop protection products. The venture anticipates beginning operations early in calendar year 2000. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. DIRECTORS AND EXECUTIVE OFFICERS OF FARMLAND <TABLE> <CAPTION> The directors of Farmland are as follows: Total Years Expiration ofof Service Age as of Positions Present Term as Board August 31, Held With as Member 1999 Farmland Director Name Business Experience During Last Five Years <S> <C> <C> <C> <C> <C> Albert J. Shivley 56 Chairman of the 2001 15 General Manager--American Pride Co-op Board Association, Brighton, Colorado, a local cooperative association of farmers and ranchers. Jody Bezner 58 Vice Chairman 2000 8 Producer--Texline, Texas. Mr. Bezner and Vice serves as President of Dalhart Consumers President Fuel Association, Inc., Board of Directors, Dalhart, Texas, a local cooperative association of farmers and ranchers. Lyman Adams, Jr. 48 2001 7 General Manager--Cooperative Grain and Supply, Hillsboro, Kansas, a local cooperative association of farmers and ranchers. Ronald J. Amundson 55 2000 11 General Manager--Central Iowa Cooperative, Jewell, Iowa, a local cooperative association of farmers and ranchers. Baxter Ankerstjerne 63 2002 9 Producer--Peterson, Iowa. From 1988 to 1997, Mr. Ankerstjerne served as Chairman of the Board of Directors of Farmers Cooperative Association, Marathon, Iowa. Steven Erdman 49 2001 7 Producer--Bayard, Nebraska. Mr. Erdman serves as Secretary, Panhandle Co-op, Scottsbluff, Nebraska, a local cooperative association of farmers and ranchers. Harry Fehrenbacher 51 2002 3 Producer--Newton, Illinois. Mr. Fehrenbacher serves as President of the Board of Directors of Effingham Equity, Effingham, Illinois, a local cooperative association of farmers and ranchers. Martie Floyd 51 2000 2 Producer--Johnson, Kansas. Mr. Floyd serves as Secretary of the Board of Directors of Johnson Cooperative Grain Co, Inc., Johnson, Kansas, a local cooperative association of farmers and ranchers. Don Gales 37 2002 * General Manager--South Dakota Wheat Growers, Aberdeen South Dakota a local cooperative association of farmers and ranchers. Warren Gerdes 51 2001 6 General Manager--Farmers Cooperative Elevator Company, Buffalo Lake, Minnesota, a local cooperative association of farmers and ranchers. Thomas H. Gist 64 2002 1 Producer--Marianna, Ark. Mr. Gist serves as Secretary of the Board of Directors of Tri-County Farmers Association of Brinkley, Ark., a local cooperative association of farmers and ranchers. Ben Griffith 50 2001 10 General Manager--Central Cooperatives, Inc., Pleasant Hill, Missouri, a local cooperative association of farmers and ranchers. Gail D. Hall 57 2000 11 Retired--Mr. Hall is the former General Manager of the Lexington Cooperative Oil Company, Lexington, Nebraska, a local cooperative association of farmers and ranchers. Barry Jensen 54 2002 9 Producer--White River, South Dakota. Mr. Jensen serves as a Director of Dakota Pride Cooperative, Winner, South Dakota, a local cooperative association of farmers and ranchers. Ron Jurgens 61 2001 4 General Manager-Agri Co-op, Holdrege, Nebraska, a local cooperative association of farmers and ranchers. William F. Kuhlman 50 2002 3 Producer--Oakley, Kansas. Mr. Kuhlman serves on the Boards of Directors of Kansas Retail Venture Group. Formerly, he was President and CEO of Cooperative Agricultural Services, Inc., Oakley, Kansas and General Manager of Menlo- Rexford Cooperative, local cooperative associations of farmers and ranchers. Greg Pfenning 50 2000 7 Producer--Hobart, Oklahoma. Mr. Pfenning formerly served as a Director of The Farmers Cooperative Association, Hobart Oklahoma, a local cooperative association of farmers and ranchers. Monte Romohr 46 2002 9 Producer--Gresham, Nebraska Mr. Romohr serves as a Director of Farmers Co-op Business Association, Shelby, Nebraska, a local cooperative association of farmers and ranchers. Joe Royster 47 2002 6 General Manager--Dacoma Farmers Cooperative, Inc., Dacoma, Oklahoma, a local cooperative association of farmers and ranchers. E. Kent Stamper 53 2002 3 Producer--Plainville, Kansas. Mr. Stamper serves as Director and Vice President of the Board of Directors of Midland Marketing Coop, Hays, Kansas, a local cooperative association of farmers and ranchers. He is a member of the Director Development Committee of the Kansas Cooperative Council. Eli F. Vaughn 50 2000 2 General Manager--Farmers Cooperative Company, Afton, Iowa, a local cooperative association of farmers and ranchers. Frank Wilson 51 2001 4 General Manager-Elkhart Farmers Co-op Association, Elkhart, Texas, a local cooperative association of farmers and ranchers. * Elected to the Board of Directors December 9, 1999 </TABLE> Directors are elected for a term of three years by the shareholders of Farmland at its annual meeting. The expiration dates for such three-year terms are sequenced so that about one-third of the Board of Directors is elected each year. The executive committee consists of Ronald Amundson, Lyman Adams, Jody Bezner, Monte Romohr, Albert Shivley and H. D. Cleberg. With the exception of H. D. Cleberg, President and Chief Executive Officer, members of the executive committee serve as chairmen of standing committees of the Board of Directors as follows: Ron Jurgens, corporate responsibility committee; Ben Griffith, audit committee; Jody Bezner, compensation committee; Monte Romohr, finance committee; and Albert Shivley, governance committee. The executive officers of Farmland are as follows: <TABLE> <CAPTION> Age as of August 31, Name 1999 Principal Occupation and Other Positions <S> <C> <C> H. D. Cleberg 60 President and Chief Executive Officer--Mr. Cleberg has been with Farmland since 1968. He was appointed to his present position effective April 1991. Prior to April 1991 Mr. Cleberg held senior leadership positions in Farmland's input and output businesses and in corporate areas responsible for transportation and logistics, sales, marketing and research. R. W. Honse 56 Executive Vice President and Chief Operating Officer--Mr. Honse has been with Farmland since 1973. He was appointed to his present position in February 1999. From September 1995 to February 1999, he served as Executive Vice President and Chief Operating Officer, Ag Input Businesses. From January 1992 to September 1995, he served as Executive Vice President, Agricultural Inputs Operations. J. F. Berardi 56 Executive Vice President and President Grain and Grain Processing--Mr. Berardi joined Farmland in March 1992 as Executive Vice President and Chief Financial Officer and served in that position until July 1996. From July 1996 until September 1999, he served as Executive Vice President, President Grain and Grain Processing. T. M. Campbell 49 Executive Vice President and Chief Financial Officer--Mr. Campbell joined Farmland in August 1992, serving as Vice President and Treasurer. He was appointed to his present position in August 1996. G. E. Evans 55 Executive Vice President and Chief Operating Officer, Refrigerated Foods and Livestock Production Group--Mr. Evans resigned from Farmland effective January, 2000. Mr. Evans had served as Executive Vice President and Chief Operating Officer, Refrigerated Foods and Livestock Production Group since July 1997. He held the same position in the Meat and Livestock Businesses from September 1995 until July 1997. From January 1992 to September 1995 he served as Senior Vice President, Agricultural Production Marketing/Processing. B. L. Sanders 58 Senior Vice President and Corporate Secretary--Dr. Sanders had been with Farmland since 1968. He was appointed to his present position in September 1991. From April 1990 to September 1991 he served as Vice President, Strategic Planning and Development. S. A. Riemann 48 Executive Vice President and President, Crop Production Group--Mr. Riemann joined Farmland in March 1974. He was appointed to his present position in May 1999. K. G. Nunn 42 Vice President and Chief Information Officer Farmland Industries; President and Chief Executive Officer OneSystem Group, LLC--Mr. Nunn joined Farmland in 1990. He was appointed to his present position in 1995. He has served as President and CEO of OneSystem Group, LLC since its formation in 1997. R. B. Terry 43 Vice President and General Counsel--Mr. Terry has been with Farmland since September 1989. He was appointed to his present position in 1993. </TABLE> EXECUTIVE COMPENSATION The following table sets forth the annual compensation awarded to, earned by, or paid to the Chief Executive Officer and Farmland's next four most highly compensated executive officers for services rendered to Farmland in all capacities during 1997, 1998 and 1999. <TABLE> <CAPTION> Compensation Under Employee Long-Term Year Variable Management Ending Annual Compensation Compensation Plan Name and Principal Position August 31 Salary Plan <S> <C> <C> <C> <C> H. D. Cleberg, 1997 $ 540,292 $ 469,954 $ 514,999 President and 1998 $ 578,878 $ 213,564 $ 400,436 Chief Executive Officer 1999 $ 623,814 $ -0- $ -0- R. W. Honse, 1997 $ 322,125 $ 245,352 $ 257,499 Executive Vice President and 1998 $ 347,328 $ 110,144 $ 200,218 Chief Operating Officer 1999 $ 426,224 $ -0- $ -0- G. E. Evans, 1997 $ 317,568 $ 245,352 $ 257,499 Executive Vice President and 1998 $ 333,456 $ 110,144 $ 200,218 Chief Operating Officer 1999 $ 348,456 $ -0- $ -0- Refrigerated Foods and Livestock Production Group J. F. Berardi, 1997 $ 286,814 $ 245,352 $ 243,194 Executive Vice President and 1998 $ 326,016 $ 110,144 $ 200,218 Chief Operating Officer, 1999 $ 340,680 $ -0- $ -0- Grain and Grain Group S. A. Riemann 1997 $ 231,240 $ 165,044 $ 171,666 Executive Vice President and 1998 $ 246,264 $ 61,781 $ 133,479 President, Crop Production Group 1999 $ 261,314 $ -0- $ -0- <FN> An Annual Employee Variable Compensation Plan, a Management Long-Term Incentive Plan and an Executive Deferred Compensation Plan have been established by Farmland to meet competitive salary programs and to provide a method of compensation which is based on Farmland's performance. </TABLE> Under the Annual Employee Variable Compensation Plan, all regular salaried employees' total compensation is based on a combination of base and variable pay. Variable compensation is dependent upon the employee's position, the performance of Farmland for the fiscal year and/or the selected performance criteria of the operating unit where the individual is employed. Variable compensation is awarded only in years that Farmland achieves a threshold performance level and is subject to approval each year by the Board of Directors. We intend for our total compensation (base plus variable) to be competitive, recognizing that in the event Farmland fails to achieve a predetermined threshold level of performance, the base pay alone will place the employees well under market rates. This system of compensation allows us to keep our fixed cost base salaries lower. Under the Management Long-Term Incentive Plan, selected management employees are paid cash incentive amounts determined by a formula which takes into account the position held and Farmland's aggregate income over periods specified in the plan. Periods covered by the Management Long-Term Incentive Plan are: 1998 through 2000 ("2000 Plan"), 1999 through 2001 ("2001 Plan") and 2000 through 2002 ("2002 Plan"). For each plan, if the aggregate income is less than the Threshold or if the sum of the cash returned to members as patronage refunds, redemptions under the base capital plan, estate settlement plans and special allocated equity redemptions is less than the amount specified in the respective Plan, subject to the following paragraph, no payment will occur with respect to such Plan. The Board of Directors may, in its sole discretion, amend or discontinue, adjust or cancel any award otherwise payable under the Management Long-Term Incentive Plan, should Farmland incur a loss in the final year of any plan. In addition, the Board of Directors may impact the payout amount of a plan by approving for inclusion or exclusion in the calculation of plan income the gains or losses from nonrecurring transactions during a plan period. Subject to the preceding paragraph, if aggregate income equals or exceeds the Threshold and the cash returned to members equals or exceeds the specified amounts, then .83% of aggregate income of the three year plan period is made available to pay incentive awards. Of the amount made available to pay incentives, Messrs. Cleberg, Honse, Evans, Berardi and Riemann will receive at least the following percentages: <TABLE> <CAPTION> 2000 Plan 2001 Plan 2002 Plan <S> <C> <C> <C> H. D. Cleberg 11.2% 11.2% 11.2% R. W. Honse 7.2% 7.9% 8.4% G. E. Evans 5.6% 5.6% 5.6% J. F. Berardi 5.6% 5.6% 5.6% S. A. Riemann 3.7% 3.7% 3.7% The percentages above may be adjusted if a significant change in the officer's responsibilities occurs during a plan period. In general, a participant must be an active employee of Farmland at the end of a Plan in order to receive payment of the award. </TABLE> Under the 2000 Plan, the 2001 Plan and the 2002 Plan, certain management employees, including those executives set forth below, may be eligible for future awards, contingent on satisfying the terms and conditions of the Plan as set forth above. <TABLE> <CAPTION> Estimated Future Payouts Under Non-Stock (A) (B) (C) Price Based Plans Number of Shares, Performance or Other Units or Other Period Until Maturation (D) (E) (F) Name Rights (1) or Payout Threshold Target (2) Maximum (2) (Amounts in Thousands) <S> <C> <C> <C> <C> <C> H. D. Cleberg 1998 - 2000 $ 463 1999 - 2001 460 2000 - 2002 376 R. W. Honse 1998 - 2000 $ 296 1999 - 2001 326 2000 - 2002 282 G. E. Evans 1998 - 2000 $ 232 1999 - 2001 230 2000 - 2002 188 J. F. Berardi 1998 - 2000 $ 232 1999 - 2001 230 2000 - 2002 188 S. A. Riemann 1998 - 2000 $ 153 1999 - 2001 152 2000 - 2002 124 <FN> (1) Rights in the incentive pool are expressed as a minimum percentage of the total pool. (2) The Plan does not specify a target or maximum payment. Payouts are only made when income over the three year plan period reaches the threshold amount, and then the amount available for payment is a fixed percentage of total income. </FN>< /TABLE> Our Executive Deferred Compensation Plan permits executive employees to defer part of their base salary and/or part or all of their compensation under the Employee Variable Compensation Plan and Long-Term Management Incentive Plan. The amount to be deferred and the period for deferral is specified by an election made semi-annually. Payments of deferred amounts shall begin at the earlier of the end of the specified deferral period, retirement, disability or death. The employee's deferred account balance is credited annually with interest at the highest rate of interest paid by Farmland on any Subordinated Debenture Bond sold during the year. Payment of an employee's account balance shall, at the employee's election, be a lump sum or in ten annual installments. Amounts deferred pursuant to the plan for the accounts of the named individuals during the years 1997, 1998 and 1999 are included in the cash compensation table. Farmland established the Farmland Industries, Inc. Employee Retirement Plan (the "Retirement Plan") in 1986. Generally, employees whose customary employment is at the rate of at least 15 hours per week may participate in the Retirement Plan. Participation in the Retirement Plan is optional prior to age 34, but mandatory thereafter. Approximately 7,945 active and 9,300 inactive employees were participants in the Retirement Plan on August 31, 1999. The Retirement Plan is funded by employer and employee contributions to provide lifetime retirement income at normal retirement age 62, or a reduced income beginning as early as age 55. The Retirement Plan also contains provisions for death and disability benefits. The Retirement Plan has been determined qualified under the Internal Revenue Code. The Retirement Plan is administered by a committee appointed by the Board of Directors and all funds are held by a bank trustee in accordance with the terms of the trust agreement. Farmland's funding strategy is to make the maximum annual contributions to the Retirement Plan's trust fund that can be deducted for federal income tax purposes. Farmland made contributions to the Retirement Plan of $12.2 million for 1997, $-0- million for 1998, and $ 1.7 million for 1999. Payments to participants in the Retirement Plan are based upon length of participation and compensation reported for the four highest of the last ten years of employment. Compensation for this purpose includes base salary and compensation earned under the Annual Employee Variable Compensation Plan discussed above. However, at the present time, the maximum compensation per participant which may be covered by a qualified pension plan is limited to $160,000 annually and the maximum retirement benefit which may be paid by such plan is limited to $130,000 annually by the Internal Revenue Code ("IRC"). We have established a Supplemental Executive Retirement Plan ("SERP"). The SERP is intended to restore 100% of the employer provided retirement benefit of executive participants in the Retirement Plan whose retirement benefit is reduced because of the limitation of the IRC on the amount of annual salary which can be included in the computation of retirement income or the amount of annual retirement benefit which may be paid by a qualified retirement plan. The following table sets forth, for compensation levels up to $160,000, the estimated annual benefits payable at age 62 for members of the Retirement Plan. These benefits are not reduced to take into account Social Security payments. The following table also sets forth, for compensation levels exceeding $160,000, an estimate of the combined annual benefits payable under the Retirement Plan and SERP. </TABLE> <TABLE> <CAPTION> Final Averag Years of Service Wage 15 20 25 30 35 <s <C> <C> <C> <C> <C> 100,000 $ 26,250 $ 35,000 $ 43,750 $ 52,500 $ 61,250 125,000 32,813 43,750 54,688 65,625 76,563 150,000 39,375 52,500 65,625 78,750 91,875 200,000 50,728 67,638 84,547 101,456 118,366 250,000 61,884 82,513 103,141 123,769 144,397 300,000 73,041 97,388 121,734 146,081 170,428 350,000 84,197 112,263 140,328 168,394 196,459 400,000 95,353 127,138 158,922 190,706 222,491 450,000 106,509 142,013 177,516 213,019 248,522 500,000 117,666 156,888 196,109 235,331 274,553 600,000 139,978 186,638 233,297 279,956 326,616 700,000 162,291 216,388 270,484 324,581 378,678 800,000 184,603 246,138 307,672 369,206 430,741 900,000 206,916 275,888 344,859 413,831 482,803 1,000,000 229,228 305,638 382,047 458,456 534,866 1,100,000 251,541 335,388 419,234 503,081 586,928 1,200,000 273,853 365,138 456,422 547,706 638,991 1,300,000 296,166 394,888 493,609 592,331 691,053 1,400,000 318,478 424,638 530,797 636,956 691,053 1,500,000 340,791 454,388 567,984 681,581 795,178 </TABLE> The following table sets forth the credited years of service for certain of Farmland's executive officers at August 31, 1999. Name Years of Creditable Service H. D. Cleberg 34 R. W. Honse 25 G. E. Evans 25 J. F. Berardi 7 S. A. Riemann 23 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The following persons served as members of the compensation committee during 1999: Messrs. Jody Bezner, Tom Gist, Harry Fehrenbacher, Barry Jensen and Joe Royster. Except for Mr. Bezner, who has served as Vice Chairman and Vice President of the Board of Farmland from December 1997 to the current date, none of the above is either currently or formerly an officer or employee of Farmland or any of its subsidiaries. No executive officer of Farmland: . served as a member of a compensation committee (or other board committee performing equivalent functions or, in the absence of such committee, the entire board of directors) of another entity that had an executive officer who also served on the compensation committee of Farmland, . served as a director of another entity that had an executive officer who also served on the compensation committee of Farmland, or . served as a member of a compensation committee (or other board committee performing equivalent functions or, in the absence of such committee, the entire board of directors) of another entity that had an executive officer who also served as a director of Farmland. COMPENSATION OF DIRECTORS We pay annual retainers of $30,000 to the Chairman; $25,000 to each member of the Executive Committee, other than the Chairman and President; and $20,000 to all other directors. In addition, directors' compensation includes payment of three hundred dollars ($300.00) per day of Farmland business (including, for example, board and committee meetings and other similar activities), plus reimbursement of necessary expenses incurred in connection with their official duties. EQUITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Farmland's equity consists of preferred shares, common shares, associate member common shares and capital credits. Only the common shares have voting rights. At August 31, 1999, no person was known by Farmland to be the beneficial owner of more than five percent of Farmland's common shares. At August 31, 1999, the directors and executive officers of Farmland, neither individually nor as a group, beneficially owned in excess of one percent of any class of Farmland's equity. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Farmland transacts business in the ordinary course with its directors and with its local cooperative members with which the directors are associated on terms no more favorable than those available to its other members. LEGAL MATTERS Robert B. Terry, Vice President and General Counsel of Farmland, has given an opinion upon the legality of the Offered Debt Securities. EXPERTS The Consolidated Financial Statements of Farmland as of August 31, 1998 and 1999 and for each of the years in the three-year period ended August 31, 1999 included in this prospectus, have been included in this prospectus in reliance upon the report of KPMG LLP, independent certified public accountants, appearing on page 166 of this prospectus and upon the authority of such firm as experts in accounting and auditing. QUALIFIED INDEPENDENT UNDERWRITER Interstate/Johnson Lane Corporation, a member of the NASD, has participated as a qualified independent underwriter in the "due diligence" review with respect to the preparation of this prospectus. See "Plan of Distribution", beginning on page 21, regarding the exception from pricing by the qualified independent underwriter. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The expenses (excluding commissions) to be incurred in connection with the issuance and distribution of the securities to be offered are estimated as follows and will be borne by the Company: Estimated Item Expense Federal and state registration fees $ 90,000 .................................. State taxes and fees.............. 7,000 Printing and engraving............ 161,000 Accounting and legal.............. 20,000 Trustee fee....................... 32,000 Advertising and administration.... 1,328,000 $1,638,000 ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 6002(b) of Chapter 17 of the Kansas Statutes (1987), permits the following provision to be included in the articles of incorporation of the Company: a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders, policyholders or members for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (A) for any breach of the director's duty of loyalty to the corporation or its stockholders, policyholders or members, (B) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (C) under the provision of K.S.A. 17-6424 and amendments thereto or (D) for any transaction from which the director derived an improper personal benefit. No such provision shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective. All references in this subsection to a director shall be deemed also to refer to a member of the governing body of a corporation which is not authorized to issue capital stock. Section 6002(c) provides that "It shall not be necessary to set forth in the articles of incorporation any of the powers conferred on corporations by this act." Article VII of the Articles of Incorporation of Farmland reads as follows: ARTICLE VII - INDEMNIFICATION Section 1. Indemnification. The Association may agree to the terms and conditions upon which any director, officer, employee or agent accepts his office or position and in its bylaws, by contract or in any other manner may agree to indemnify and protect any director, officer, employee or agent of the Association, or any person who serves at the request of the Association as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, to the fullest extent permitted by the laws of the State of Kansas. Section 2. Limitation of Liability. Without limiting the generality of the foregoing provisions of this ARTICLE VII, to the fullest extent permitted or authorized by the laws of the State of Kansas, including, without limitation, the provisions of subsection (b)(8) of Kan. Stat. Ann. Sec. 17-6002 (1981) as now in effect and as it may from time to time hereafter be amended, no person who is currently or shall hereinafter become a director of the Association shall have personal liability to the Association for monetary damages for breach of fiduciary duty as a director for any act or omission occurring subsequent to the date this provision becomes effective. If the Kansas General Corporation Code is amended after approval of this provision by the shareholders of the Association, to authorize corporate action further limiting or eliminating the personal liability of directors, then the liability of a director of the Association shall be limited or eliminated to the fullest extent permitted by the Kansas General Corporation Code, as so amended. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In December 1997, Farmland sold 2 million shares of 8% Series A Cumulative Redeemable Preferred Shares (the "Preferred Shares") at $50 per Preferred Share with an aggregate liquidation preference of $100 million ($50 liquidation preference per share). The Preferred Shares were issued in a transaction which, pursuant to Section 4(2) of the Securities Act of 1933, as amended, was exempt from the registration requirements of the Securities Act and applicable state securities laws. All Preferred Shares were sold in a private transaction to Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Initial Purchaser"), a qualified institutional investor. All Preferred Shares were sold for $100 million in cash, less a $3 million commission. The Preferred Shares do not have any stated maturity, are not subject to any sinking fund or mandatory redemption provisions and are not convertible into any other securities of Farmland. The Securities Act registration statement for the Preferred Shares was declared effective in May 1998 and was assigned the SEC file number No. 333-49373. Farmland estimates that it incurred approximately $65,000 of expenses to register the Preferred Shares, resulting in net proceeds from the issuance of the Preferred Shares of approximately $96.9 million. Such proceeds were used to redeem approximately $47.6 million of principal and accumulated interest on certain subordinated debt securities; the remaining proceeds were used to redeem capital shares and equity. Of the proceeds paid to redeem capital shares held by producers or member cooperatives, approximately $2.5 million was paid to member cooperatives with which members of Farmland's Board of Directors are affiliated, through either employment as General Manager or through service as a Director on the cooperative's Board of Directors. Farmland did not sell any unregistered subordinated debt securities during the three years ended August 31, 1999. ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS The following exhibits are filed as a part of this Form S-1 Registration Statement. Certain of these exhibits are incorporated by reference. Items marked with an asterisk (*) are filed with this registration statement. Exhibit No. Description of Exhibits ARTICLES OF INCORPORATION AND BYLAWS: 1. Underwriting Agreement between Farmland Industries, Inc. and Farmland Securities Company, dated December 6, 1989. (Incorporated by Reference - Form S-1 No. 33-56821 filed December 12, 1994) 1.A Amendment, dated December 5, 1994, to the agreement, dated December 6, 1989 between Farmland Industries, Inc. and Farmland Securities Company. (Incorporated by Reference - Form S-1 No. 33-56821, filed December 12, 1994) 3.(i)A Articles of Incorporation and Bylaws of Farmland Industries, Inc. effective December 10, 1998. (Incorporated by Reference - Form S-1/A, filed December 16, 1998) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES**: 4.(i)A Form of Trust Indenture with UMB Bank, National Association, providing for issuance of unsubordinated debt securities, including form of Demand Loan Certificates. (Incorporated by Reference - Form S-1, No. 33-40759, effective December 31, 1997) 4.(i)B Form of Trust Indenture with Commerce Bank, National Association, providing for issuance of Subordinated Debenture Bonds, including forms of Ten-Year Bond, Series A, Ten-Year Bond, Series B, Five-Year Bond, Series C, Five-Year Bond, Series D, Ten-Year Monthly Income Bond, Series E, Ten-Year Monthly Income Bond, Series F, Five-Year Monthly Income Bond, Series G and Five-Year Monthly Income Bond, Series H. (Incorporated by Reference - Form S-1, No. 33-40759, effective December 31, 1997) 4.(i)C Certificate of Designation for a Series of Preferred Shares Designated as 8% Series A Cumulative Redeemable Preferred Shares, dated December 19, 1997. (Incorporated by Reference - Form S-2, filed April 3, 1998) 4(.ii)A Syndicated Credit Facility between Farmland Industries, Inc. and various banks dated May 15, 1996, (Incorporated by Reference - Form 10- Q filed July 15, 1996) * 5 Opinion of Robert B. Terry, Vice President and General Counsel of Farmland Industries, Inc. re Legality MATERIAL CONTRACTS: MANAGEMENT REMUNERATIVE PLANS: 10.(iii)A Employee Variable Compensation Plan (September 1, 1999 - August 31, 2000) (Incorporated by Reference - Form 10K, filed, November 19, 1999) 10.(iii)B Farmland Industries, Inc. Management Long-Term Incentive Plan (Incorporated by Reference - Form 10-K, filed November 7, 1997) 10.(iii)B(1) Exhibit F to the Management Long-Term Incentive Plan (Fiscal years 1998 through 2000) (Incorporated by Reference - Form 10-K, filed November 7, 1997) 10.(iii)B(2) Exhibit G to the Management Long-Term Incentive Plan (Fiscal years 1999 through 2001) (Incorporated by Reference - Form 10-K, filed November 20, 1998) 10.(iii)B(3) Exhibit H to the Management Long-Term Incentive Plan (Fiscal years 2000 through 2002) (Incorporated by Reference - Form 10-K, filed November 19, 1999) 10.(iii)C Farmland Industries, Inc. Supplemental Executive Retirement Plan (As Amended and Restated Effective September 1, 1999) (Incorporated by Reference - Form 10-K, filed November 19, 1999) 10.(iii)C(1) Appendix A to the Supplemental Executive Retirement Plan (Incorporated by Reference - Form 10-K, filed November 27, 1996) 10.(iii)D Farmland Industries, Inc. Executive Deferred Compensation Plan (As Amended and Restated Effective November 1, 1996) (Incorporated by Reference - Form 10-K, filed November 27, 1996) * 12 Computation of Ratios 21 Subsidiaries of the Registrant (Incorporated by Reference - Form 10-K, filed November 19, 1999) * 23.A Independent Auditors' Consent * 23.B Consent of Qualified Independent Underwriter * 23.C Consent of Robert B. Terry, Vice President and General Counsel of Farmland Industries, Inc. (Included in Exhibit 5) * 24 Power of Attorney * 25.A Statement of Eligibility of Trustee and Qualification of UMB Bank, National Association, as Trustee, Form T-1 * 25.B Statement of Eligibility of Trustee and Qualification of Commerce Bank, National Association, as Trustee, Form T-1 * Filed with this registration statement. ** Long-term debt instruments pursuant to which the debt issuable thereunder does not exceed 10% of Farmland's total assets have not been filed. At the Commission's request, we agree to furnish a copy of such instruments or agreements. (B) FINANCIAL STATEMENT SCHEDULES All schedules are omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or related notes included herein. ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes: (a) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) (Section 230.424(b)) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (b) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (d) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, FARMLAND INDUSTRIES, INC. HAS DULY CAUSED THIS REGISTRATION STATEMENT ON FORM S-1 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF KANSAS CITY, STATE OF MISSOURI ON JANUARY 19, 2000. FARMLAND INDUSTRIES, INC. BY /s/ TERRY M. CAMPBELL Terry M. Campbell Executive Vice President and Chief Financial Officer BY /s/ ROBERT B. TERRY Robert B. Terry Vice President and General Counsel Signature Title Date * Chairman of Board, January 19, 2000 Albert J. Shivley Director * Vice Chairman of Board January 19, 2000 Jody Bezner Vice President and Director * Director January 19, 2000 Lyman L. Adams, Jr. * Director January 19, 2000 Ronald J. Amundson * Director January 19, 2000 Baxter Ankerstjerne * Director January 19, 2000 Steven Erdman * Director January 19, 2000 Harry Fehrenbacher Director January 19, 2000 Don Gales * Director January 19, 2000 Martie Floyd * Director January 19, 2000 Warren Gerdes * Director January 19, 2000 Thomas H. Gist * Director January 19, 2000 Ben Griffith * Director January 19, 2000 Gail D. Hall * Director January 19, 2000 Barry Jensen * Director January 19, 2000 Ron Jurgens * Director January 19, 2000 William F. Kuhlman * Director January 19, 2000 Greg Pfenning * Director January 19, 2000 Monte Romohr * Director January 19, 2000 Joe Royster * Director January 19, 2000 E. Kent Stamper * Director January 19, 2000 Eli F. Vaughn * Director January 19, 2000 Frank Wilson /s/ H.D. CLEBERG President, January 19, 2000 H. D. Cleberg Chief Executive Officer /s/ TERRY M. CAMPBELL Executive Vice President January 19, 2000 Terry M. Campbell and Chief Financial Officer (Principal Financial Officer) /s/ MERL DANIEL Vice President and January 19, 2000 Merl Daniel Controller (Principal Accounting Officer) *BY /s/ TERRY M. CAMPBELL Terry M. Campbell Attorney-In-Fact </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-99 <SEQUENCE>2 <DESCRIPTION>EXHIBIT INDEX <TEXT> EXHIBIT 99 EXHIBIT INDEX Exhibit No. Description of Exhibits ARTICLES OF INCORPORATION AND BYLAWS: 1. Underwriting Agreement between Farmland Industries, Inc. and Farmland Securities Company, dated December 6, 1989. (Incorporated by Reference - Form S-1 No. 33-56821 filed December 12, 1994) 1.A Amendment, dated December 5, 1994, to the agreement, dated December 6, 1989 between Farmland Industries, Inc. and Farmland Securities Company. (Incorporated by Reference - Form S-1 No. 33-56821, filed December 12, 1994) 3.(i)A Articles of Incorporation and Bylaws of Farmland Industries, Inc. effective December 10, 1998. (Incorporated by Reference - Form S-1/A, filed December 16, 1998) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES**: 4.(i)A Form of Trust Indenture with UMB Bank, National Association, providing for issuance of unsubordinated debt securities, including form of Demand Loan Certificates. (Incorporated by Reference - Form S-1, No. 33-40759, effective December 31, 1997) 4.(i)B Form of Trust Indenture with Commerce Bank, National Association, providing for issuance of Subordinated Debenture Bonds, including forms of Ten-Year Bond, Series A, Ten-Year Bond, Series B, Five-Year Bond, Series C, Five-Year Bond, Series D, Ten-Year Monthly Income Bond, Series E, Ten-Year Monthly Income Bond, Series F, Five-Year Monthly Income Bond, Series G and Five-Year Monthly Income Bond, Series H. (Incorporated by Reference - Form S-1, No. 33-40759, effective December 31, 1997) 4.(i)C Certificate of Designation for a Series of Preferred Shares Designated as 8% Series A Cumulative Redeemable Preferred Shares, dated December 19, 1997. (Incorporated by Reference - Form S-2, filed April 3, 1998) 4(.ii)A Syndicated Credit Facility between Farmland Industries, Inc. and various banks dated May 15, 1996, (Incorporated by Reference - Form 10-Q filed July 15, 1996) * 5 Opinion of Robert B. Terry, Vice President and General Counsel of Farmland Industries, Inc. re Legality MATERIAL CONTRACTS: MANAGEMENT REMUNERATIVE PLANS: 10.(iii)A Employee Variable Compensation Plan (September 1, 1999 - August 31, 2000) (Incorporated by Reference - Form 10K, filed, November 19, 1999) 10.(iii)B Farmland Industries, Inc. Management Long-Term Incentive Plan (Incorporated by Reference - Form 10-K, filed November 7, 1997) 10.(iii)B(1) Exhibit F to the Management Long-Term Incentive Plan (Fiscal years 1998 through 2000) (Incorporated by Reference - Form 10-K, filed November 7, 1997) 10.(iii)B(2) Exhibit G to the Management Long-Term Incentive Plan (Fiscal years 1999 through 2001) (Incorporated by Reference - Form 10-K, filed November 20, 1998) 10.(iii)B(3) Exhibit H to the Management Long-Term Incentive Plan (Fiscal years 2000 through 2002) (Incorporated by Reference - Form 10-K, filed November 19, 1999) 10.(iii)C Farmland Industries, Inc. Supplemental Executive Retirement Plan (As Amended and Restated Effective September 1, 1999) (Incorporated by Reference - Form 10-K, filed November 19, 1999) 10.(iii)C(1) Appendix A to the Supplemental Executive Retirement Plan (Incorporated by Reference - Form 10-K, filed November 27, 1996) 10.(iii)D Farmland Industries, Inc. Executive Deferred Compensation Plan (As Amended and Restated Effective November 1, 1996) (Incorporated by Reference - Form 10-K, filed November 27, 1996) * 12 Computation of Ratios 21 Subsidiaries of the Registrant (Incorporated by Reference - Form 10-K, filed November 19, 1999) * 23.A Independent Auditors' Consent * 23.B Consent of Qualified Independent Underwriter * 23.C Consent of Robert B. Terry, Vice President and General Counsel of Farmland Industries, Inc. (Included in Exhibit 5) * 24 Power of Attorney * 25.A Statement of Eligibility of Trustee and Qualification of UMB Bank, National Association, as Trustee, Form T-1 * 25.B Statement of Eligibility of Trustee and Qualification of Commerce Bank, National Association, as Trustee, Form T-1 * Filed with this registration statement. ** Long-term debt instruments pursuant to which the debt issuable thereunder does not exceed 10% of Farmland's total assets have not been filed. At the Commission's request, we agree to furnish a copy of such instruments or agreements. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-12 <SEQUENCE>3 <DESCRIPTION>COMPUTATION OF RATIOS <TEXT> EXHIBIT 12 FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES <TABLE> <CAPTION> Year Ended August 31 1995 1996 1997 1998 1999 (Amounts in Thousands) <S> <C> <C> <C> <C> <C> Earnings: Pretax Income......................... $ 197,641 $ 155,754 $ 163,672 $ 55,025 $ 5,822 Minority Interest in Income of Consolidated Subsidiary 9,793 7,604 10,586 8,346 $ 17,727 Equity Interest in Loss (Income) of Investees (A).................. (623) 574 (868) (56,531) (65,510) Distributions from Investees (A)..................... -0- -0- 5 57,620 59,715 Total Fixed Charges (excluding interest capitalized)............. 68,271 76,658 79,247 94,960 113,611 Total Earnings............................. $ 275,082 $ 240,369 $ 250,740 $ 158,079 $ 131,365 Fixed Charges: Interest (including amounts capitalized and amortization of debt issuance costs).............. $ 55,497 $ 65,361 $ 68,099 $ 79,421 $ 93,686 Estimated Interest Component of Rentals........................ 13,494 12,926 15,127 19,483 19,925 Total Fixed Charges........................ $ 68,991 $ 78,287 $ 83,226 98,904 113,611 Ratio of Earnings to Fixed Charges......... 4.0 3.0 3.0 1.6 1.2 </TABLE> (A) Through 1997, equity interest and distributions shown represent less-than- 50%-owned Investees. Beginning with 1998, equity interest and distributions shown represent 50%-owned and less-than-50%-owned Investees. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-23.A <SEQUENCE>4 <DESCRIPTION>INDEPENDENT AUDITOR'S CONSENT <TEXT> EXHIBIT 23.A INDEPENDENT AUDITORS' CONSENT The Board of Directors Farmland Industries, Inc.: We consent to the use of our report included herein and to the references to our firm under the headings "Selected Consolidated Financial Data", and "Experts" in the Prospectus. KPMG PEAT MARWICK LLP Kansas City, Missouri January 19, 2000 1 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-24 <SEQUENCE>5 <DESCRIPTION>POWER OF ATTORNEY <TEXT> EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose name appears below constitutes and appoints Robert B. Terry and Terry M. Campbell, and each of them, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, as well as any related registration statement (or amendments thereto) filed pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This Power of Attorney may be executed in multiple counterparts, each of which shall be deemed an original, but which taken together shall constitute one instrument. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICTED. <TABLE> <CAPTION> Signature Title Date <S> <C> <C> Chairman of Board December 9, 1999 Albert J. Shivley and Director Vice Chairman of Board December 9, 1999 Jody Bezner and Director Director December 9, 1999 Lyman L. Adams, Jr. Director December 9, 1999 Ronald J. Amundson Director December 9, 1999 Baxter Ankerstjerne Director December 9, 1999 Richard L. Detten Director December 9, 1999 Steven Erdman Director December 9, 1999 Harry Fehrenbacher Director December 9, 1999 Martie Floyd Director December 9, 1999 Warren Gerdes Director December 9, 1999 Thomas H. Gist Director December 9, 1999 Ben Griffith Director December 9, 1999 Gail D. Hall Director December 9, 1999 Barry Jensen Director December 9, 1999 Ron Jurgens Director December 9, 1999 William F. Kuhlman Director December 9, 1999 Greg Pfenning Director December 9, 1999 Monte Romohr Director December 9, 1999 Joe Royster Director December 9, 1999 E. Kent Stamper Director December 9, 1999 Eli F. Vaughn Director December 9, 1999 Frank Wilson </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-5 <SEQUENCE>6 <DESCRIPTION>CONSENT OF GENERAL COUNSEL <TEXT> EXHIBIT 5 Farmland Industries, Inc. 3315 North Oak Trafficway Kansas City, Missouri 64116 Gentlemen: I am acting as the General Counsel for Farmland Industries, Inc., a Kansas corporation (the "Company"), in connection with the Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the contemplated issuance by the Company from time to time of Demand Loan Certificates and Subordinated Debenture Bonds of the Company, which with respect to Demand Loan Certificates may be issued pursuant to an Indenture entered into between the Company and UMB Bank, National Association, and with respect to Subordinated Debenture Bonds may be issued under an Indenture entered into between the Company and Commerce Bank, National Association, as trustee. Said Demand Loan Certificates and Subordinated Debenture Bonds, when issued and sold in accordance with this Registration Statement presently to be filed with the Securities and Exchange Commission, Washington, D.C., and registered in accordance with the laws of the States in which the Demand Loan Certificates and Subordinated Debenture Bonds are and will be sold, will constitute valid and binding obligations according to their tenor and effect. Capitalized terms used herein have the meanings set forth in the Registration Statement, unless otherwise defined herein. I have examined the originals, or certified, conformed or reproduction copies of all records, agreements, instruments and documents as I have deemed relevant or necessary as the basis for the opinions hereinafter expressed. In all such examinations, I have assumed the genuineness of all signatures on original or certified copies and the conformity to original or certified copies of all copies submitted to me as conformed or reproduction copies. As to various questions of fact relevant to such opinions, I have relied upon, and assumed the accuracy of, certificates and statements and other information of public officials, officers or representatives of the Company and others. Based upon the foregoing, and subject to the limitations set forth herein, I hereby confirm the opinions attributed to me in the Registration Statement. I hereby consent to the filing of this opinion as an exhibit to the Registration Statement (including any Amendment thereto) and to the references to me under the captions "Legal Matters" in the Prospectus and "Legal Matters" in any Prospectus Supplement forming a part of the Registration Statement. In giving these consents, I do not hereby admit that I am in the category of persons whose consent is required under Section 7 of the Securities Act. Very truly yours, /s/ ROBERT B. TERRY Robert B. Terry January 19, 2000 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-23.B <SEQUENCE>7 <DESCRIPTION>CONSENT OF SPECIAL TAX COUNSEL <TEXT> EXHIBIT 23.B CONSENT OF QUALIFIED INDEPENDENT UNDERWRITER Farmland Industries, Inc.: We consent to the references to our firm under the caption "Qualified Independent Underwriter" in the Prospectus. James H. Glen, Jr. INTERSTATE/JOHNSON LANE January 11, 2000 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-25.A <SEQUENCE>8 <DESCRIPTION>STATEMENT OF ELIGIBILITY OF TRUSTEE FORM T-1 <TEXT> Exhibit 25.A SECURITIES AND EXCHANGE COMMISSION{PRIVATE } Washington, D.C. 20549 FORM T-1 STATEMENT OF ELIGIBILITY AND QUALIFICATION UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE UMB BANK, NATIONAL ASSOCIATION (Exact name of trustee as specified in its charter) 44-0201230 (I.R.S. Employer Identification No.) 928 Grand Avenue, Kansas City, Missouri...............64106 (Address of principal executive offices) (Zip Code) FARMLAND INDUSTRIES, INC. (Exact name of obligor as specified in its charter) KANSAS 42-0209330 (State or other jurisdiction (I.R.S. employer of incorporation or organization) identification No.) 3315 North Oak Trafficway Post Office Box 7305 Kansas City, Missouri 64116 (Address of principal executive offices) (Zip Code) DEMAND LOAN CERTIFICATES Dated: November 20, 1981 (Title of the indenture securities) Item 1.General Information (a) Name and address of each examining or supervising authority to which the Trustee is subject is as follows: The Comptroller of the Currency Mid-Western District 2345 Grand Avenue, Suite 700 Kansas City, Missouri 64108 Federal Reserve Bank of Kansas City Federal Reserve P.O. Station Kansas City, Missouri 64198 Supervising Examiner Federal Deposit Insurance Corporation 720 Olive Street, Suite 2909 St. Louis, Missouri 63101 (b) The Trustee is authorized to exercise corporate trust powers. Item 2. Affiliations with obligor and underwriters. The Obligor is not affiliated with the Trustee. No person, who is not an affiliate of the Obligor, has served as an underwriter for the Obligor. Item 3. Voting securities of the Trustee. The following information as to each class of voting securities of the Trustee is furnished as December 1999: Column A Column B Title of Amount Class Outstanding -------- ------------ Common 660,000 Item 4. Trusteeships under other indentures. The Trustee is not a trustee under another indenture under which any other securities, or certificates of interest or participation in other securities, of the Obligor are outstanding. Item 5. Interlocking directorates and similar relationships with the obligor or underwriters. Neither the Trustee nor any of its directors or officers is a director, officer, partner, employee, appointee, or representative of the Obligor. No person, who is not an affiliate of the Obligor, has served as an underwriter for the Obligor. Item 6. Voting securities of the trustee owned by the obligor or its officials. No voting securities of the Trustee are owned beneficially by the Obligor or its directors and executive officers as of December 8, 1999. Item 7. Voting securities of the trustee owned by underwriters or their officials. Not applicable Item 8. Securities of the obligor owned or held by the trustee. No securities of Obligor are owned beneficially or held as collateral security for obligations in default by the Trustee as of. December 8, 1999. Item 9. Securities of the underwriters owned or held by the trustee. Not applicable Item 10. Ownership or holdings by the trustee of voting securities of certain affiliates or security holders of the obligor. The Trustee neither owns beneficially nor holds as collateral security for obligations in default any voting securities of a person who, to the knowledge of the Trustee, (1) owns 10 percent or more of the voting securities of the Obligor, or (2) is an affiliate, other than a subsidiary of Obligor, as December 8, 1999. Item 11. Ownership or holdings by the trustee of any securities of a person owning 50 percent or more of the voting securities of the obligor. The Trustee neither owns beneficially nor holds as collateral security for obligations in default any securities of a person who, to the knowledge of the Trustee, owns 50 percent or more of the voting shares of the Obligor as of December 8, 1999. Item 12. Indebtedness of the Obligor to the Trustee. None Item 13. Defaults of the Obligor. There has been no default with respect to the securities under this Indenture. Item 14. Affiliations with the Underwriters. Not Applicable Item 15. Foreign Trustee. Not Applicable Item 16. List of exhibits. Listed below are all exhibits filed as a part of this statement of eligibility and qualification. Exhibit No. Exhibit 1. Articles of Association of the Trustee, as now in effect. 2. Certificate of Authority from the Comptroller of the Currency evidencing a change of the corporate title of the Association. Incorporated by Reference - In the Statement of Eligibility and Qualification of United Missouri Bank, National Association, as Trustee, Form T-1 #22-21530, Filed on FORM SE dated December 19, 1991. 3. Certificate from the Comptroller of the Currency evidencing authority to exercise corporate trust powers and a letter evidencing a change of the corporate title of the Association. Incorporated by Reference - In the Statement of Eligibility and Qualification of United Missouri Bank, National Association, as Trustee, Form T-1 #22-21530, Filed on FORM SE dated December 19, 1991. 4. Bylaws, as amended, of the Trustee. 5. N/A 6. Consent of the Trustee required by Section 321 (b) of the Act. 7. Report of Condition of the Trustee as of September 30, 1999. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee, UMB Bank, National Association, a national bank organized and existing under the laws of the United States of America, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the city of Kansas City, and State of Missouri, on the 8th day of December, 1999. UMB BANK, NATIONAL ASSOCIATION BY: Frank C. Bramwell, Senior Vice President Frank C. Bramwell, Senior Vice President T-1 Exhibit 6 Consent of Trustee Pursuant to Section 321(B) of the Trust Indenture Act of 1939, UMB Bank, National Association, a national bank organized under the laws of the United States, hereby consents that reports of examinations by the Comptroller of the Currency, of the Federal Deposit Insurance Corporation, and any other federal, state, territorial or district authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. UMB BANK, NATIONAL ASSOCIATION By: Frank C. Bramwell, Senior Vice President Frank C. Bramwell, Senior Vice President Date: December 8, 1999 UMB BANK, NATIONAL ASSOCIATION RESTATED ARTICLES OF ASSOCIATION FIRST: The title of this Association shall be "UMB Bank, National Association" (amended as of October 1, 1994). SECOND: The main office shall be in the City of Kansas City, County of Jackson, State of Missouri. The general business of this Association, and its operations of discount and deposit, shall be conducted at its main office. THIRD: The Board of Directors of this Association shall consist of not less than five nor more than twenty-five shareholders, the exact number of Directors within such minimum and maximum limits to be fixed and determined from time to time by resolution of a majority of the full Board of Directors or by resolution of the shareholders at any annual or special meeting thereof. Unless otherwise provided by the laws of the United States, any vacancy in the Board of Directors for any reason, including an increase in the number thereof, may be filled by action of the Board of Directors. FOURTH: The regular annual meeting of the shareholders for the election of directors and the transaction of whatever other business which may be brought before said meeting shall be held at the main office, or at such other place as the Board of Directors may designate, on the day of each year specified therefor in the By-Laws of the Association, but if no election be held on that day it may be held on any subsequent day according to the provisions of law. FIFTH: The amount of authorized capital stock of this Association shall be Sixteen Million Five Hundred Thousand Dollars ($16,500,000), divided into 660,000 shares of common stock of the par value of Twenty-Five Dollars ($25) each; but said capital stock may be increased or decreased from time to time in accordance with the provisions of the laws of the United States. If the capital stock is increased by the sale of additional shares thereof, each shareholder shall be entitled to subscribe for such additional shares in proportion to the number of shares of said capital stock owned by him at the time the increase is authorized by the shareholders, unless another time subsequent to the date of the shareholders' meeting is specified in a resolution adopted by the shareholders at the time the increase is authorized. The Board of Directors shall have the power to prescribe a reasonable period of time within which the pre-emptive rights to subscribe to the new shares of capital stock must be exercised. If the capital stock is increased by a stock dividend, each shareholder shall be entitled to his proportion of the amount of such increase in accordance with the number of shares of capital stock owned by him at the time the increase is authorized by the shareholders, unless another time subsequent to the date of the shareholders' meeting is specified in a resolution adopted by the shareholders at the time the increase is authorized. SIXTH: The Board of Directors shall appoint one of its members to be President of this Association. The Board of Directors may appoint one of its members to be Chairman of the Board, who shall perform such duties as the Board of Directors may designate. The Board of Directors shall have the power to appoint one or more Vice Presidents and to appoint a Cashier and such other officers and employees as may be required to transact the business of the Association. The Board of Directors shall have the power to define the duties of the officers and employees of the Association; to fix the salaries to be paid to them; to dismiss them; to require bonds from them and to fix the penalty thereof; to regulate the manner in which any increase in the capital of the Association shall be made; to manage and administer the business and affairs of the Association; to make all By-Laws that it may be lawful for them to make; and generally to do and perform all acts that it may be legal for the Board of Directors to do and perform. The Board of Directors, without the approval of the shareholders, but subject to the approval of the Comptroller of the Currency, shall have the power to change the location of the main office of the Association to any other place within the limits of Kansas City, Missouri and to establish or change the location of any branch or branches to any other location permitted under applicable law. SEVENTH: The corporate existence of this Association shall continue until terminated in accordance with the laws of the United States. EIGHTH: The Board of Directors of this Association, or any three or more shareholders owning, in the aggregate, not less than ten percentum (10%) of the stock of this Association, may call a special meeting of the shareholders at any time; provided, however, that unless otherwise provided by law, not less than ten (10) days prior to the date fixed for any such meeting, a notice of the time, place and purpose of the meeting shall be given by first class mail, postage prepaid, to all shareholders of record at their respective addresses as shown upon the books of the Association. Subject to the provisions of the laws of the United States, these Articles of Association may be amended at any meeting of the shareholders, for which adequate notice has been given, by the affirmative vote of the owners of two-thirds of the stock of this Association, voting in person or by proxy. NINTH: Any person, his heirs, executors, or administrators, may be indemnified or reimbursed by the Association for reasonable expenses actually incurred in connection with any action, suit, or proceeding, civil or criminal, to which he or they shall be made a party by reason of his being or having been a director, officer, or employee of the Association or any firm, corporation, or organization which he served in any capacity at the request of the Association; provided, however, that no person shall be so indemnified or reimbursed in relation to any matter in such action, suit, or proceeding as to which he shall finally be adjudged to have been guilty of or liable for gross negligence or willful misconduct or criminal acts in the performance of his duties to the Association; and, provided further, that no person shall be so indemnified or reimbursed in relation to any matter in such action, suit, or proceeding which has been made the subject of a compromise settlement except with the approval of a court of competent jurisdiction, or the holders of record of a majority of the outstanding shares of the Association, or the Board of Directors, acting by vote of directors not parties to the same or substantially the same action, suit, or proceeding, constituting a majority of the whole number of the directors. The foregoing right of indemnification or reimbursement shall not be exclusive of other rights to which such person, his heirs, executors, or administrators, may be entitled as a matter of law. T-1 Exhibit 2 Certificate, dated January 10th, 1934, of the Office of Comptroller of the Currency authorizing the City National Bank and Trust Company of Kansas City to Commence the business of Banking. C E R T I F I C A T E For and on behalf of UMB Bank, National Association, a national banking association organized under the laws of the United States of America (formerly named The City National Bank and Trust Company of Kansas City and the United Missouri Bank of Kansas City, National Association and United Missouri Bank, National Association), the undersigned, R. William Bloemker, Assistant Secretary of said Association, hereby certifies that attached hereto are the following: 1) A true and correct copy of the certificate of the Comptroller of the Currency, dated December 19, 1972, evidencing a change in corporate title from The City National Bank and Trust Company of Kansas City to United Missouri Bank of Kansas City, National Association; 2) A true and correct copy of the letter of authorization from the Comptroller of the Currency, dated April 9, 1991, authorizing the Association to adopt the name United Missouri Bank, National Association; and 3) Certified Resolution evidencing recordation of change of the name of the Association to UMB Bank, National Association. Certified under the corporate seal of said Association this 8th day of December, 1999. /s/ R. William Bloemker Assistant Secretary Certificate, dated December 19, 1972, of the Comptroller of the Currency evidencing change in corporate title from the City National Bank and Trust Company of Kansas City to United Missouri Bank of Kansas City, National Association. Letter, dated April 9, 1991, from the Comptroller of the currency, authorizing the Association to adopt the name United Missouri Bank, National Association. CERTIFIED RESOLUTION I hereby certify that the following is an excerpt from a letter dated October 3, 1994 from the Office of the Comptroller of the Currency (OCC) confirming the Bank's change of name: The OCC has recorded that as of October 1, 1994, the title of United Missouri Bank, National Association, Charter No. 13936, was changed to "UMB Bank, National Association." /s/ R. William Bloemker Assistant Secretary [SEAL] T-l Exhibit 3 C E R T I F I C A T E For and on behalf of UMB Bank, National Association, a national banking association under the laws of the United States of America, the undersigned, R. William Bloemker, Assistant Secretary of said Association, hereby certifies that the attached document is a true and correct copy of the certificate issued by the Comptroller of the Currency of the United States evidencing its authority to exercise fiduciary powers under the statutes of the United States. Certified under the corporate seal of said Association this 8th day of December, 1999. /s/ R. William Bleomker Assistant Secretary Certificate, dated December 31, 1972, of the Comptroller of the Currency evidencing the authority of the Association to exercise fiduciary powers under the statutes of the United States. T-l Exhibit No. 4 TO WHOM IT MAY CONCERN The attached ByLaws are the ByLaws for the UMB Bank, National Association and are current as of this date. /s/ R. William Bloemker Assistant Secretary December 8, 1999 [SEAL] UMB BANK, NATIONAL ASSOCIATION BY-LAWS ARTICLE I Meetings of Shareholders Section 1.1 - Where Held. All meetings of shareholders of this Association shall be held at its main banking house in Kansas City, Jackson County, Missouri, or at such other place as the Board of Directors may from time to time designate. Section 1.2 - Annual Meeting. The annual meeting of shareholders shall be held at 11 o'clock in the forenoon, or at such other time as shall be stated in the notice thereof, on the third Wednesday of January in each year or, if that day be a legal holiday, on the next succeeding banking day, for the purpose of electing a Board of Directors and transacting such other business as may properly come before the meeting. Section 1.3 - Special Meetings. Except as otherwise provided by law, special meetings of shareholders may be called for any purpose, at any time, by the Board of Directors or by any three or more shareholders owning, in the aggregate, not less than ten percent (10%) of the outstanding stock in the Association. Section 1.4 - Notice of Meetings. Written notice of the time, place, and purpose of any meeting of shareholders shall be given to each shareholder (a) by delivering a copy thereof in person to the shareholder, or (b) by depositing a copy thereof in the U.S. mails, postage prepaid, addressed to the shareholder at his address appearing on the books of the Association, in either case at least ten (10) days prior to the date fixed for the meeting. Section 1.5 - Quorum. A majority of the outstanding capital stock, represented in person or by proxy, shall constitute a quorum for the transaction of business at any meeting or shareholders, unless otherwise provided by law. A majority of the votes cast shall decide every question or matter submitted to the shareholders at any meeting, unless otherwise provided by law or by the Articles of Association. Section 1.6 - Adjournment. Any meeting of shareholders may, by majority vote of the shares represented at such meeting, in person or by proxy, though less than a quorum, be adjourned from day to day or from time to time, not exceeding, in the case of elections of directors, sixty (60) days from such adjournment, without further notice, until a quorum shall attend or the business thereof shall be completed. At any such adjourned meeting, any business may be transacted which might have been transacted at the meeting as originally called. Section 1.7 - Voting. Each shareholder shall be entitled to one (1) vote on each share of stock held, except that in the election of directors each shareholder shall have the right to cast as many votes, in the aggregate, as shall equal the number of shares owned by him, multiplied by the number of directors to be elected, and said votes may be cast for one director or distributed among two (2) or more candidates. Voting may be in person or by proxy, but no officer or employee of this Association shall act as proxy. Authority to vote by proxy shall be by written instrument, dated and filed with the records of the meeting, and shall be valid only for one meeting, to be specified therein, and any adjournments of such meeting. ARTICLE II Directors Section 2.1 - Number and Qualifications. The Board of Directors (hereinafter sometimes referred to as the "Board") shall consist of not less than five (5) nor more than twenty-five (25) shareholders, the exact number, within such limits, to be fixed and determined from time to time by resolution of a majority of the full Board of Directors or by resolution of the shareholders at any meeting thereof; provided, however, that a majority of the full Board of Directors shall not increase the number of directors to a number which: (a) exceeds by more than two (2) the number of directors last elected by shareholders where such number was fifteen (15) or less; or (b) exceeds by more than four (4) the number of directors last elected by shareholders where such number was sixteen (16) or more. No person who has attained the age of seventy (70) shall be eligible for election to the Board of Directors unless such person is actively engaged in business at the time of his election, but any person not so disqualified at the time of his election as a director shall be entitled to serve until the end of his term. All directors shall hold office for one (1) year and until their successors are elected and qualified. Section 2.2 - Advisory Directors. The Board of Directors may appoint Advisory Directors, chosen from former directors of the Association or such other persons as the Board shall select. The Advisory Directors shall meet with the Board at all regular and special meetings of the Board and may participate in such meetings but shall have no vote. They shall perform such other advisory functions and shall render such services as may from time to time be directed by the Board. Section 2.3 - Powers. The Board shall manage and administer the business and affairs of the Association. Except as expressly limited by law, all corporate powers of the Association shall be vested in and may be exercised by said Board. It may not delegate responsibility for its duties to others, but may assign the authority and responsibility for various functions to such directors, committees and officers or other employees as it shall see fit. Section 2.4 - Vacancies. In case of vacancy occurring on the Board through death, resignation, disqualification, disability or any other cause, such vacancy may be filled at any regular or special meeting of the Board by vote of a majority of the surviving or remaining directors then in office. Any director elected to fill a vacancy shall hold office for the unexpired term of the director whose place was vacated and until the election and qualification of his successor. Section 2.5 - Organization Meeting. Following the annual meeting of shareholders, the Corporate Secretary shall notify the directors elect of their election and of the time and place of the next regular meeting of the Board, at which the new Board will be organized and the members of the Board will take the oath required by law, after which the Board will appoint committees and the executive officers of the Association, and transact such other business as may properly come before the meeting; provided, however, that if the organization meeting of the Board shall be held immediately following the annual meeting of shareholders, no notice thereof shall be required except an announcement thereof at the meeting of directors. Section 2.6 - Regular Meetings. The regular meetings of the Board of Directors shall be held, without notice except as provided for the organization meeting, on the third Wednesday of each month at the main banking house in Kansas City, Jackson County, Missouri. When any regular meeting of the Board falls upon a holiday, the meeting shall be held on the next banking day, unless the Board shall designate some other day. A regular monthly meeting of the Board may, by action of the Board at its preceding meeting, be postponed to a later day in the same month. Section 2.7 - Special Meetings. Special meetings of the Board may be called by the Corporate Secretary on direction of the President or of the Chairman of the Board, or at the request of three (3) or more directors. Each member of the Board shall be given notice, by telegram, letter, or in person, stating the time, place and purpose of such meeting. Section 2.8 - Quorum. Except when otherwise provided by law, a majority of the directors shall constitute a quorum for the transaction of business at any meeting, but a lesser number may adjourn any meeting, from time to time, and the meeting may be held, as adjourned, without further notice. Section 2.9 - Voting. A majority of the directors present and voting at any meeting of the Board shall decide each matter considered. A director may not vote by proxy. Section 2.10 - Compensation of Directors. The compensation to be paid the directors of the Association for their services shall be determined from time to time by the Board. ARTICLE III Committees Appointed by the Board Section 3.1 - Standing Committees. The standing committees of this Association shall be the Management Committee, Executive Committee, the Officers' Salary Committee, the Discount Committee, the Bond Investment Committee, the Trust Policy Committee, the Bank Examining Committee and the Trust Auditing Committee. The members of the standing committees shall be appointed annually by the Board of Directors at its organization meeting, or, on notice, at any subsequent meeting of the Board, to serve until their respective successors shall have been appointed. The President and the Chairman of the Board shall be, ex officio, members of all standing committees except the Bank Examining Committee and the Trust Auditing Committee. Each standing committee shall keep minutes of its meetings, showing the action taken on all matters considered. A report of all action so taken shall be made to the Board, and a copy of such minutes shall be available for examination by members of the Board. Section 3.2 - Management Committee. The Management Committee shall consist of such executive officers of the Association as shall be designated by the Board. One of the members of the Committee shall be designated by the Board as Chairman. The Committee may adopt policies (not inconsistent with policies and delegations of authority prescribed by these By-Laws or by the Board) with respect to the executive and administrative functions of the Association, and in general, it shall coordinate the performance of such functions in and among the various departments of the Association, assisting and advising the executive officers or department heads upon matters referred to it by such officers or department heads. The Committee shall make reports and recommendations to the Board upon such policies or other matters as it deems advisable or as may be referred to it by the Board, and shall have such other powers and duties as may be delegated or assigned to it by the Board from time to time. The secretary of the Committee may be designated by the Board, or, in default thereof, by the Committee, and may but need not be a member thereof. Section 3.3 - Executive Committee. The Executive Committee shall consist of such executive officers of the Association as shall be designated by the Board. One of the members of the Committee shall be designated by the Board as Chairman. The Committee shall carry out such responsibilities and duties as the Management Committee shall delegate to it, from time to time. Section 3.4 - Officers' Salary Committee. The Officers' Salary Committee shall consist of such directors and officers of the Association as may be designated by the Board. It shall study and consider the compensation to be paid to officers of the Association and shall make recommendations to the Board with respect thereto and with respect to such other matters as may be referred to it by the Board. Section 3.5 - Discount Committee. The Discount Committee shall consist of such directors and officers as shall be designated by the Board of Directors. It shall have the power to discount and purchase bills, notes and other evidences of debt; to buy and sell bills of exchange; to examine and approve loans and discounts; and to exercise authority regarding loans and discounts held by the Association. At each regular meeting of the Board, the Board shall approve or disapprove the report filed with it by the Discount Committee and record its actions in the minutes of its meeting. The powers and authority conferred upon the Discount Committee by this Section may, with the approval of the Board of Directors, be assigned or delegated by it, to officers of the Association, subject to such limits and controls as the Committee may deem advisable. Section 3.6 - Bond Investment Committee. The Bond Investment Committee shall consist of such directors and officers as shall be designated by the Board of Directors. It shall have power to buy and sell bonds, to examine and approve the purchase and sale of bonds, and to exercise authority regarding bonds held by the Association. At each regular meeting of the Board, the Board shall approve or disapprove the report filed with it by the Bond Investment Committee and record its action in the minutes of its meeting. Section 3.7 - Trust Policy Committee. The Trust Policy Committee shall consist of such directors and officers of the Association as shall be designated by the Board of Directors. Such committee shall have and exercise such of the Bank's fiduciary powers as may be assigned to it by the Board, with power to further assign, subject to its control, the exercise of such powers to other committees, officers and employees. The action of the Trust Policy Committee shall, at all times, be subject to control by the Board. Section 3.8 - Bank Examining Committee. The Bank Examining Committee shall consist of such directors of the Association as shall be designated by the Board, none of whom shall be an active officer of the Association. It shall make suitable examinations at least once during each period of twelve (12) months of the affairs of the Association or cause a suitable audit to be made by auditors responsible only to the Board of Directors. The result of such examinations shall be reported in writing, to the Board at the next regular meeting thereafter and shall state whether the Association is in a sound and solvent condition, whether adequate internal controls and procedures are being aintained, and shall recommend to the Board such changes as the Committee shall deem advisable. The Bank Examining Committee, with the approval of the Board of Directors, may employ a qualified firm of certified public accountants to make an examination and audit of the Association. If such a procedure is followed, the annual examination of directors, will be deemed sufficient to comply with the requirements of this section of the By-Laws. Section 3.9 - Trust Auditing Committee. The Trust Auditing Committee shall consist of such directors of the Association as shall be designated by the Board, none of whom shall be an active officer of the Association. At least once during each calendar year, and within fifteen (15) months of the last such audit, the Trust Auditing Committee shall make suitable audits of the Trust Departments or cause suitable audit to be made by auditors responsible only to the Board of Directors, and t such time shall ascertain whether the Departments have been administered in accordance with law, the Regulations of the Comptroller and sound fiduciary practices. As an alternative, in lieu of such periodic audits, the Board may elect to adopt an adequate continuous audit system. Section 3.10 - Other Committees. The Board may appoint, from time to time, from its own members or from officers of the Association, or both, other committees of one or more persons for such purposes and with such powers as the Board may determine. Section 3.11 - Compensation of Committee Members. The Board shall determine the compensation to be paid to each member of any committee appointed by it for services on such committee, but no such compensation shall be paid to any committee member who shall at the time be receiving a salary from the Association as an officer thereof. ARTICLE IV Officers and Employees Section 4.1 - Chairman of the Board. The Board of Directors shall appoint one of its members (who may, but need not, be President of the Association) as Chairman of the Board. He shall preside at all meeting of the Board of Directors and shall have general executive powers and such further powers and duties as from time to time may be conferred upon, or assigned to, him by the Board of Directors. He shall be, ex officio, a member of all standing committees except the Bank Examining Committee and the Trust Auditing Committee. Section 4.2 - President. The Board of Directors shall appoint one of its members to be the President of this Association. The President shall be the chief executive officer of the Association, except as the Board of Directors may otherwise provide, and shall have and may exercise any and all other powers and duties pertaining to such office. He shall also have and may exercise such further powers and duties as from time to time may be conferred upon, or assigned to, him by the Board of Directors. He shall be, ex officio, a member of all standing committees except the Bank Examining Committee and the Trust Auditing Committee. Section 4.3 - Chairman of the Executive Committee. The Board of Directors may appoint a Chairman of the Executive Committee, who shall have general executive powers and shall have and may exercise such further powers and duties as from time to time may be conferred upon, or assigned to, him by the Board of Directors. Section 4.4 - Vice Presidents. The Board of Directors shall appoint one or more Vice Presidents. Each Vice President shall have such powers and duties as may be assigned to him by the Board and may be given such descriptive or functional titles as the Board may designate. Section 4.5 - Trust Officers. The Board of Directors shall appoint one or more Trust Officers. Each Trust Officer shall have such powers and duties as may be assigned to him by the Board of Directors in accordance with the provisions of Article V. The Trust Officers may be given such descriptive or functional titles as the Board may designate. Section 4.6 - Corporate Secretary. The Board of Directors shall appoint a Corporate Secretary. The Corporate Secretary shall be responsible for the minutes book of the Association, in which he shall maintain and preserve the organization papers of the Association, the Articles of Association, the By-Laws, minutes of regular and special meetings of the shareholders and of the Board of Directors, and reports by officers and committees of the Association to the shareholders and to the Board of Directors. He shall attend all meetings of the shareholders and of the Board of Directors and shall act as the clerk of such meetings and shall prepare and sign the minutes of such meetings. He shall have custody of the corporate seal of the Association and of the stock transfer books, except as given to the Comptroller's Department or the Corporate Trust Department to act as transfer agent and registrar of the Association's capital stock, and of such other documents and records as the Board of Directors shall entrust to him. The Secretary shall give such notice of meetings of the shareholders and of the Board of Directors as is required by law, the Articles of the Association and the By-Laws. In addition, he shall perform such other duties as may be assigned to him from time to time by the Board of Directors. The Assistant Secretaries shall render the Corporate Secretary such assistance as he shall require in the performance of his office. During his absence or inability to act, the Assistant Secretaries shall be vested with the powers and perform the duties of the Corporate Secretary. Section 4.7 - Cashier. The Board of Directors may appoint a Cashier. He shall have such powers and shall perform such duties as may be assigned to him by resolution of the Board of Directors. Section 4.8 - Comptroller. The Board of Directors shall appoint a Comptroller. The Comptroller shall institute and maintain the accounting policies and practices established by the Board of Directors. He shall maintain, or cause to be maintained, adequate records of all transactions of the Association. He shall be responsible for the preparation of reports and returns to taxing and regulatory authorities, and at meetings of the Board of Directors shall furnish true and correct statements of condition and statements of operations of the Association and such further information and data, and analyses thereof, as the Board of Directors may require. He shall have custody of the Association's insurance policies. In addition, the Comptroller shall perform such other duties as may be assigned to him, from time to time by the Board of Directors. The Assistant Comptroller(s) shall render the Comptroller such assistance as he shall require in the performance of the duties of his office and, during his absence or inability to act, the Assistant Comptroller(s), in the order designated by the Board of Directors, shall be vested with the powers and perform the duties of the Comptroller. Section 4.9 - Auditor. The Board of Directors shall appoint an Auditor of the Association. He shall see that adequate audits of the Association are currently and regularly made and that adequate audit systems and controls are established and maintained. He shall examine each department and activity of the Association and may inquire into transactions affecting the Association involving any officer or employee thereof. The Board, however, may, in lieu of appointing an Auditor, assign the duties thereof to the Auditor of the parent company of the Association. Section 4.10 - Other Officers. The Board of Directors may appoint one or more Assistant Vice Presidents, one or more Assistan Trust Officers, one or more Assistant Secretaries, one or more Assistant Cashiers, and such other officers and Attorneys-In-Fact as from time to time may appear to the Board of Directors to be required or desirable to transact the business of the Association. The power to appoint such assistant or the additional officers may be delegated to the Chairman of the Board or the President, or to such other executive officer or officers as the Board may designate, but the power to appoint any officer of the Audit Department or any Assistant Secretary may not be so delegated. Any officer and Attorney-In-Fact appointed as herein provided shall exercise such powers and perform such duties as pertain to his office or as may be conferred upon or assigned to him by the Board of Directors of by the officer authorized to make such appointment. Section 4.11 - Tenure of Office. The Chairman of the Board and the President shall hold office for the current year for which Board of Directors of which they are members was elected, unless either of them shall resign, become disqualified or be removed, and any vacancy occurring in either of such offices shall be filled promptly by the Board of Directors. All other officers of the Association shall serve at the pleasure of the Board of Directors. Section 4.12 - Compensation of Officers. The compensation of the officers of the Association shall be fixed and may be altered, from time to time, by the Board of Directors or, in the case of officers appointed by another officer, as authorized by Section 4.10 of this Article, by the officer or officers making such appointment, subject to the supervisory control of, and in accordance with the policies established by, the Board. Section 4.13 - Combining Offices. The Board of Directors, in its discretion, may combine two or more offices and direct that they be filled by the same individual, except that (a) the office of Corporate Secretary shall not be combined with that of the Chairman of the Board or of the President and (b) the office of Auditor shall not be combined with any other office. Section 4.14 - Succession. During the absence of the Chairman of the Board, or such other officer designated as Chief Executive Officer, all of the duties pertaining to his office under these By-Laws and the resolutions of the Board of Directors shall, subject to the supervisory control of the Board, devolve upon, and be performed by, the officers, successively, who are next in the order of authority as established by the Board of Directors from time to time, or, in the absence of an order of authority so established, in the order of Chairman of the Board, President and Chairman of the Executive Committee as may be applicable in the particular case. Section 4.15 - Clerks and Agents. Any one of the Chairman of the Board, President or Chairman of the Executive Committee, or any officer of the Association authorized by them, may appoint and dismiss all or any clerks, agents and employees and prescribe their duties and the conditions of their employment, and from time to time fix their compensation. Section 4.16 - Requiring Bond. The Board of Directors shall require such officers and employees of the Association as it shall designate to give bond, of suitable amount, with security to be approved by the Board, conditioned for the honest and faithful discharge by each such officer or employee of his respective duties. In the discretion of the Board, such bonds may be in blanket form and the premiums may be paid by the Association. The amount of such bonds, form of coverage, and the company acting as surety therefor, shall be reviewed by the Board of Directors each year. ARTICLE V Administration of Trust Powers Section 5.1 - Trust Department. Organization. There shall be one or more departments of the Association which shall perform the fiduciary responsibilities of the Association. Section 5.2 - Management of Department. The Board of Directors shall be responsible for the management and administration of the Trust Department or Departments, but is may assign or delegate such of its powers and authority to the Trust Policy Committee and to such other committees and officers of the Association as it may deem advisable. Section 5.3 - Department Heads. The Board of Directors shall designate one of the Trust Officers as the chief executive of each Trust Department. His duties shall be to manage, supervise and direct all activities of such Department, subject to such supervision as may be vested in the Trust Policy and other committees. He shall do, or cause to be done, all things necessary or proper in carrying on the business of such Department in accordance with provisions of law, applicable regulations and policies established by authority of the Board. He shall act pursuant to opinions of counsel where such opinion is deemed necessary. He shall be responsible for all assets and documents held by the Association in connection with fiduciary matters, in such Department, except as otherwise provided in this Article V. Section 5.4 - Custody of Securities. The Board of Directors shall designate two or more officers or employees of the Association to have joint custody of the investments of each trust account administered by the Trust Department or Departments. Section 5.5 - Trust Department Files. There shall be maintained in each Trust Department files containing all fiduciary records necessary to assure that it fiduciary responsibilities have been properly undertaken and discharged. Section 5.6 - Trust Investments. Funds held in a fiduciary capacity shall be invested in accordance with the instrument establishing the fiduciary relationship and governing law. Where such instrument does not specify the character and class of investments to be made and does not vest in the Association a discretion in the matter, funds held pursuant to such instrument shall be invested in investments in which corporate fiduciaries may invest under the laws of the State of Missouri and the decisions of its courts. ARTICLE VI Stock and Stock Certificates Section 6.1 - Transfers. Shares of the capital stock of the Association shall be transferable only on the books of the Association, and a transfer book shall be kept in which all transfers of stock shall be recorded. Section 6.2 - Stock Certificates. Certificates of stock shall bear the signatures of (i) the Chairman of the Board, the President or any Vice President, and (ii) the Secretary, Cashier, any Assistant Secretary, or any other officer appointed by the Board of Directors for that purpose; and the seal of the Association shall be impressed, engraved, or printed thereon. Such signatures may be manual or engraved, printed or otherwise impressed by facsimile process; but if both of the required signatures are by facsimile then such certificates shall be manually countersigned by the person or persons thereunto authorized by the Board of Directors. Certificates bearing the facsimile signature of an authorized officer may be validly issued even though the person so named shall have ceased to hold such office at the time of issuance. Each certificate shall recite on its face that the stock represented thereby is transferable only upon the books of the Association upon the surrender of such certificate properly endorsed. Section 6.3 - Closing Transfer Books or Fixing Record Date. The Board of Directors shall have power to close the transfer books of the Association for a period not exceeding thirty (30) days preceding the date of any meeting of shareholders, or the date of payment of any dividend, or the date of allotment of rights, or the date when any change or conversion of exchange of shares shall go into effect; provided, however, that in lieu of closing the said transfer books, the Board of Directors may fix, in advance, a date, not exceeding thirty (30) days preceding the date of any such event, as record date for the determination of the shareholders entitled to notice of, and to vote at, any such meeting (and any adjournment thereof), or entitled to receive payment of any such dividend or allotment of such rights, or to exercise rights in respect of any such change, conversion or exchange of shares, and in such case, only such shareholders as shall be shareholders of record at the close of business on the date of closing the transfer books or on the record date so fixed shall be entitled to notice of, and to vote at, such meeting (and any adjournment thereof), or to receive payment of such dividend or allotment of such rights, or to exercise such rights, as the case may be. ARTICLE VII Corporate Seal Section 7.1 - Authority to Affix. The President, the Corporate Secretary, the Cashier, and any Assistant Secretary or other officer designated by the Board of Directors, shall have authority to affix the corporate seal on any document requiring such seal, and to attest the same. The seal shall be substantially in the following form: ARTICLE VIII Miscellaneous Provisions Section 8.1 - Fiscal Year. The fiscal year of the Association shall be the calendar year. Section 8.2 - Execution of Instruments. All agreements, indentures, mortgages, deeds, conveyances, transfers, certificates, declarations, receipts, discharges, releases, satisfactions, settlements, petitions, schedules, accounts, affidavits, bonds, undertakings, proxies and other instruments or documents may be signed, executed, acknowledged, verified, delivered or accepted on behalf of the Association by the Chairman of the Board, the President, any Vice President, or the Cashier; and, if in connection with the exercise of fiduciary owers of the Association, by any of said officers or by any authorized officer of the Trust Department or Departments. Any such instruments may also be executed, acknowledged, verified, delivered, or accepted on behalf of the Association in such other manner and by such other officers as the Board of Directors may from time to time direct. The provisions of this Section are supplementary to any other provisions of these By-Laws. Section 8.3 - Banking Hours. The Association shall be open for business on such days and during such hours as may be prescribed by resolution of the Board of Directors. Unless and until the Directors shall prescribe other and different banking hours, this Association's main office shall be open for business from 9:30 o'clock a.m. to 2:00 o'clock p.m. of each day, except Fridays when the hours shall be from 9:30 o'clock a.m. to 6:00 o'clock p.m., and except that the Association shall be closed on Saturdays and Sundays, and, with the approval of the Board on days recognized by the laws of the State of Missouri as public holiday. ARTICLE IX By-Laws Section 9.1. - Inspection. A copy of the By-Laws, with all amendments thereto, shall at all times be kept in a convenient place at the main office of the Association and shall be open for inspection to all shareholders during banking hours. Section 9.2 - Amendments. The By-Laws may be amended, altered or repealed by vote of a majority of the entire Board of Directors at any meeting of the Board, provided that ten (10) days' written notice of the proposed change has been given to each Director. No amendment may be made unless the By-Laws, as amended, is consistent with the requirements of the laws of the United States and with the provisions of the Articles of the Association. A certified copy of all amendments to the By-Laws shall be forwarded to the Comptroller of the Currency immediately after adoption. 10-1-94 T-l Exhibit 6 Consent of Trustee Pursuant to Section 32l(b) of the Trust Indenture Act of l939, UMB Bank, National Association, a national bank organized under the laws of the United States, hereby consents that reports of examinations by the Comptroller of the Currency, of the Federal Deposit Insurance Corporation, and any other federal, state, territorial or district authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. UMB BANK, NATIONAL ASSOCIATION BY: Frank C. Bramwell, Senior Vice President Frank C. Bramwell, Senior Vice President Date: December 8, 1999 T-1 Exhibit 7 Legal Title of Bank: UMB BANK, N.A. Call Date: 6/30/97 ST-BK: 29-2668 FFIEC 032 Address: P. O. Box 419226 Page RC-1 City, State Zip: KANSAS CITY, MO 64141-6226 FDIC Certificate No.: /1/3/6/0/1 Consolidated Report of Condition for Insured Commercial and State-Chartered Savings Bank for September 30, 1998 All schedules are to be reported in thousands of dollars. Unless otherwise indicated, report the amount outstanding as of the last business day of the quarter. Schedule RC--Balance Sheet <TABLE> <CAPTION> Dollar Amounts in Thousands RCON Bil Mil Thou <S> <C> <C> <C> 1. Cash and balance due from depository institutions: a. Noninterest-bearing balances and currency and coin 0081 572,869 b.Interest-bearing balances <F2> 0071 2,234 2. Securities ///////////////// a. Held-to-maturity securities (from Schedule RC-B, column A 1754 598,406 b. Available-for-sale securities (from Schedule RC-B, column D 1773 1,740,866 3. Federal funds sold and securities purchased under agreements to resell: 1350 201,874 4. Loans and lease financing receivables: ///////////////// a. Loans and leases, net of unearned income (from Schedule RC-C) RCON 2122	1,449,605 ///////////////// b. LESS: Allowance for loan and lease losses . . . . . . . . . . RCON 3123 17,722 ///////////////// c. LESS: Allocated transfer risk reserve . . . . . . . . . . . . RCON 3128 0 ///////////////// d. Loans and leases, net of unearned income, ///////////////// allowance, and reserve (item 4.a minus 4.b and 4.c) 2125 2,151,301 5. Trading assets (from Schedule RC-D) 3545 72,923 6. Premises and fixed assets (including capitalized leases) 2145 197,162 7. Other real estate owned (from Schedule RC-M) 2150 363 8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M) 2130 0 9. Customers' liability to this bank on acceptances outstanding 2155 9,345 10. Intangible assets (from Schedule RC-M) 2143 24,963 11. Other assets (from Schedule RC-F) 2160 141,829 12. Total Assets (sum of items 1 through 11) 2170 5,714,135 LIABILITIES 13. Deposits ///////////////// a. In domestic offices (sum of totals of columns A and C from Schedule RC-E) 2200 4,118,147 (1) Noninterest-bearing <F1> . . . . . . . . . . RCON 6631 740,423 ///////////////// (2) Interest-bearing . . . . . . . . . . . . . RCON 6636 2,308,028 ///////////////// b. In foreign offices, Edge and Agreement subsidiaries, and IBFs ///////////////// (1) Non-interest-bearing ///////////////// (2) Interest-bearing ///////////////// 14. Federal Funds purchased and securities sold under agreements to repurchase: ///////////////// a. Federal funds purchased 2800 830,196 15. a. Demand notes issued to the U. S. Treasury 2840 1,106 b. Trading liabilities (from Schedule RC-D) 3548 48 16. Other borrowed money: ///////////////// a. With original maturity of one year or less 2332 150,000 b. With original maturity of more than one year 2333 0 17. Mortgage indebtedness and obligations under capitalized leases 2910 0 18. Bank's liability on acceptances executed and outstanding 2920 9,345 19. Subordinated notes and debentures 3200 0 20. Other liabilities (from Schedule RC-G) 2930 136,554 21. Total liabilities (sum of items 13 through 20) 2948 5,245,396 ///////////////// 22. Limited-life preferred stock and related surplus 3282 0 EQUITY CAPITAL ///////////////// 23. Perpetual preferred stock and related surplus 3838 0 24. Common stock 3230 16,500 25. Surplus (exclude all surplus related to preferred stock) 3839 124,322 26. a. Undivided profits and capital reserves 3632 331,805 b. Net unrealized holding gains (losses) on available-for-sale securities 8434 (3,888) 27. Cumulative foreign currency translation adjustments ///////////////// 28. Total equity capital (sum of items 23 through 27) 3210 468,739 29. Total liabilities, limited-life preferred stock, and equity capital ///////////////// (sum of items 21, 22 and 28) 3300 5,714,135 <F1> Includes cash items in process of collection and unposted debits. <F2> Includes time certificates of deposit not held for trading. </F> </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-25.B <SEQUENCE>9 <DESCRIPTION>STATEMENT OF ELIGIBILITY OF TRUSTEE FORM T-1 <TEXT> Exhibit 25B FORM T - 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) COMMERCE BANK, NATIONAL ASSOCIATION (exact name of trustee as specified in its charter) NATIONAL BANKING ASSOCIATION (State of incorporation if not a national bank) 44-0206815 (I.R.S. employer identification No.) 1000 WALNUT STREET, KANSAS CITY, MISSOURI (Address of principal executive offices) 64106 (Zip Code) William E. Ekey 922 Walnut Street, Kansas City, MO 64106 (816) 234-2102 (Name, Address and telephone number of agent for service) Farmland Industries, Inc. (Exact name of obligator as specified in its charter) Kansas (State or other jurisdiction of incorporation or organization) 44-0209330 (I.R.S. Employer Identification No.) 3315 North Oak Trafficway, Kansas City, Missouri (Address of principal executive offices) 64116 (Zip Code) Subordinated Debt Securities (Title of the indenture securities) ITEM 1. GENERAL INFORMATION. Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. Comptroller of the Currency, Washington, D.C. Federal Reserve Bank of Kansas City, Kansas City, Missouri Federal Deposit Insurance Corporation Washington, D.C. (b) Whether it is authorized to exercise corporation trust powers. Yes. As authorized by the Comptroller of the Currency, effective June 30, 1972. Previously organized as a trust company under the Laws of the State of Missouri. ITEM 2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS. If the obligor or any underwriter for the obligor is an affiliate of the trustee, describe each such affiliation. NONE ITEM 3. VOTING SECURITIES OF THE TRUSTEE. Furnish the following information as to each class of voting securities of the trustee: As of November 30, 1999 ___________________________________________________________________________ COL. A. COL. B. Title of class Amount Outstanding Capital Stock - par $20 900,000 Shares ITEM 4. TRUSTEESHIPS UNDER OTHER INDENTURES. If the trustee is a trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the obligor are outstanding, furnish the following information: (a) Title of the securities outstanding under each such other indenture. FARMLAND INDUSTRIES, INC. (F.K.A. Consumers Cooperative Association) Subordinated Capital Investment Certificates (under Indenture dated July 29, 1974) 9%, due 15 years from date of issue(18th Indenture) and Subordinated Capital Investment Certificates (under Indenture dated November 29, 1976) 9-1/2%, due 20 years from date of issue (21st Indenture) and Subordinated Capital Investment Certificates (under Indenture dated October 24, 1978, as amended by Supplemental Indenture dated December 21, 1978) 9-1/2%, due 20 years from date of issue (23rd Indenture) and Subordinated Capital Investment Certificates (under Indenture dated October 24, 1979) 10-1/2%, due 25 years from date of issue (26th Indenture) and Subordinated Capital Investment Certificates (under Indenture dated November 8, 1984) due 5 years from date of issue (34th Indenture) and Subordinated Capital Investment Certificates (under Indenture dated November 8, 1984) due 10 years from date of issue (35th Indenture) and Subordinated Capital Investment Certificates (under Indenture dated November 8, 1984) due 20 years from date of issue (36th Indenture) and Subordinated Monthly Income Capital Investment Certificates (under Indenture dated November 8, 1984) due 10 years from date of issue (37th Indenture) and Subordinated Individual Retirement Account Certificates (under Indenture dated November 8, 1984) due 10 years from date of issue (38th Indenture) and Subordinated Monthly Income Capital Investment Certificates (under Indenture dated November 11, 1985) due 5 years from date of issue (39th Indenture) and Subordinated Debenture Bonds, Series A-H (under subordinated Indenture dated as of December 4, 1997) (41st Indenture) (b) A brief statement of the facts relied upon as a basis for the claim that no conflicting interest within the meaning of Section 310 (b) (1) of the Act arises as a result of the trusteeship under any such other indenture, including a statement as to how the securities will rank with the securities issued under such other indenture. The securities issued, or to be issued, under the indentures named herein are wholly unsecured and rank equally with each other without priority. [The remainder of this page was intentionally left blank.] ITEM 5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH OBLIGOR OR UNDERWRITERS. If the trustee or any of the directors or executive officers of he trustee is a director, officer, partner, employee, appointee, or representative of the obligor or of any underwriter for the obligor, identify each such person having any such connection and state the nature of each such connection. H. D. Cleberg, President and CEO of Farmland Industries, Inc. is a director of Commerce Bank of Kansas City, N.A. ITEM 6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR ITS OFFICIALS. Furnish the following information as to the voting securities of the trustee owned beneficially by the obligor and each director, partner and executive officer of the obligor. As of November 30, 1999 ___________________________________________________________________________ COL. A. COL. B. COL. C. COL. D. Amount Percentage of voting Name of Title of owned securities represented by owner class beneficially amount given in Col. C. NONE ITEM 7. VOTING SECURITIES OWNED BY UNDERWRITERS OR THEIR OFFICIALS. Furnish the following information as to the voting securities of the trustee owned beneficially by each underwriter for the obligor and each director, partner, and executive officer or each underwriter. As of November 30, 1999 ___________________________________________________________________________ COL. A. COL. B. COL. C. COL. D. Amount Percentage of voting Name of Title of Owned securities represented owner class beneficially by amount given in Col. C. NONE ITEM 8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE. Furnish the following information as to the securities of the obligor owned beneficially or held as collateral security for obligations in default by the trustee. As of November 30, 1999 ___________________________________________________________________________ COL. A. COL. B. COL. C. COL. D. Whether the Amount owned Percent of securities are beneficially or held as class represented Title of voting or non- collateral security for by amount given class voting securities obligations in default in Col. C. NONE ITEM 9. SECURITIES OF UNDERWRITERS OWNED OR HELD BY THE TRUSTEE. If the trustee owns beneficially or holds collateral security for obligations in default any securities of an underwriter for the obligor, furnish the following information as to each class of securities of such underwriter any of which are so owned or held by the trustee. As of November 30, 1999 __________________________________________________________________________ COL. A. COL. B. COL. C. COL. D. Amount owned beneficially Percent of Name of issuer or held as collateral class represented and Amount security for obligations by amount given title of class outstanding in default by trustee in Col. C. NONE ITEM 10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES OF CERTAIN AFFILIATES OR SECURITY HOLDERS OF THE OBLIGOR. If the trustee owns beneficially or holds as collateral security for obligations in default voting securities of a person who, to the knowledge of the trustee (1) owns 10 percent or more of the voting securities or the obligor or (2) is an affiliate, other than a subsidiary or the obligor, furnish the following information as to the voting securities of such person. As of November 30, 1999 ___________________________________________________________________________ COL. A. COL. B. COL. C. COL. D. Amount owned beneficially Percent of Name of issuer or held as collateral class represented and Amount security for obligations by amount given title of class outstanding in default by trustee in Col. C. NONE ITEM 11. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF ANY SECURITIES OF A PERSON OWNING 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR. If the trustee owns beneficially or holds as collateral security for obligations in default any securities of a person who, to the knowledge of the trustee, owns 50 percent or more of the voting securities of the obligor, furnish the following information as to each class of securities of such person any of which are so owned or held by the trustee. As of November 30, 1999 ___________________________________________________________________________ COL. A. COL. B. COL. C. COL. D. Amount owned beneficially Percent of Name of issuer or held as collateral class represented and Amount security for obligations by amount given title of class outstanding in default by trustee in Col. C. NONE ITEM 12. INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE Except as noted in the instructions, if the obligor is indebted to the trustee, furnish the following information: __________________________________________________________________________ COL. A. COL. B. COL. C Nature of Indebtedness Amount Outstanding Date Due Equipment Lease $ 34,352 7/1/01 Unsecured Line of Credit 1,215,592 12/29/99 Unsecured Line of Credit 2,625,000 12/09/99 Unsecured Line of Credit 1,400,000 12/06/99 Unsecured Line of Credit 1,519,432 1/04/00 ITEM 13. DEFAULTS BY THE OBLIGOR (a) State whether there is or has been a default with respect to the securities under this indenture. Explain the nature of any such default There is not currently, nor has there been a default with respect to the securities under the indentures. (b) If the trustee is a trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the obligor are outstanding, or is trustee for more than one outstanding series of securities under the indenture, state whether thee has been a default under any such indenture or series, identify the indenture or series affected, and explain the nature of any such default. There has been no default under any of the securities for which the Trustee is a Trustee under any other indenture. ITEM 14. AFFILIATIONS WITH THE UNDERWRITERS If any underwriter is an affiliate of the trustee, describe each such affiliation. No underwriter is an affiliate of the trustee. ITEM 15. FOREIGN TRUSTEE Identify the order or rule pursuant to which the foreign trustee is authorized to act as sole trustee under indentures qualified or to be qualified under the Act. Not applicable. ITEM 16. LIST OF EXHIBITS: 1. A copy of the articles of association of the trustee as now in effect. 2. A copy of the certificate of authority of the trustee to commence business, if not contained in the articles of association. 3. A copy of the authorization of the trustee to exercise corporate trust powers. 4. A copy of the existing By-Laws of the trustee or instruments corresponding thereto. 5. A copy of each indenture referred to in Item 4 hereof. 6. The consents of the trustee required by Section 321(b) of the Act. 7. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of the supervising examining authority. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee, Commerce Bank, National Association, a banking association organized and existing under the laws of the United States, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Kansas City, and State of Missouri, on the 13th day of December, 1999 COMMERCE BANK, NATIONAL ASSOCIATION By /s/William E. Ekey William E. Ekey Vice-President EXHIBIT 1 COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN EFFECT ARTICLES OF ASSOCIATION FIRST. The title of this Association shall be Commerce Bank, National Association. SECOND. The main office of the Association shall be in the City of Kansas City, County of Jackson, State of Missouri. The general business of the Association shall be conducted at its main office and its branches. THIRD. The Board of Directors of this Association shall consist of not less than five nor more than twenty-five shareholders, the exact number of Directors within such minimum and maximum limits to be fixed and determined from time to time by resolution of a majority of the full Board of Directors or by resolution of the shareholders at any annual or special meeting thereof. Unless otherwise provided by the laws of the United States, any vacancy in the Board of Directors for any reason, including an increase in the number thereof, may be filled by action of the Board of Directors. FOURTH. The annual meeting of the shareholders for the election of Directors and the transaction of whatever other business may be brought before said meeting shall be held at the main office or such other place as the Board of Directors may designate, Board of Directors may designate, on the day of each year specified therefor in the By-Laws, but if no election is held on that day, it may be held on any subsequent day according to the provisions of law; and all elections shall be held according to such lawful regulations as may be prescribed by the Board of Directors. Nominations for election to the Board of Directors may be made by the Board of Directors or by any shareholder of any outstanding class of capital stock of the bank entitled to vote for election of directors. FIFTH. The authorized amount of capital stock of this Association shall be 100,000 shares of common stock of the par value of one hundred dollars ($100.00) each; but said capital stock may be increased or decreased from time to time, in accordance with the provisions of the laws of the United States. No holder of shares of the capital stock of any class of the corporation shall have any preemptive or preferential right of subscription to any shares of any class of stock of the corporation, whether now or hereafter authorized, or to any obligations convertible into stock of the corporation, issued or sold, nor any right of subscription to any thereof other than such, if any, as the Board of Directors, in its discretion, may from time to time determine and at such price as the Board of Directors may from time to time fix. The Association, at any time and from time to time, may authorize and issue debt obligations, whether or not subordinated, without the approval of the shareholders. SIXTH. The Board of Directors shall appoint one of its members President of this Association, who shall be Chairman of the Board, unless the Board appoints another director to be the Chairman. The Board of Directors shall have the power to appoint one or more Vice Presidents; and to appoint a Cashier and such other officers and employees as may be required to transact the business of this Association. The Board of Directors shall have the power to define the duties of the officers and employees of the Association; to fix the salaries to be paid to them; to dismiss them; to require bonds from them and to fix the penalty thereof; to regulate the manner in which any increase of the capital of the Association shall be made; to manage and administer the business and affairs of the Association; to make all By-Laws that it may be lawful for them to make; and generally to do and perform all acts that it may be legal for a Board of Directors to do and perform. SEVENTH. The Board of Directors shall have the power to change the location of the main office to any other place within the limits of Kansas City, Missouri, without the approval of the shareholders, and shall have the power to establish or change the location of any branch or branches of the Association to any other location without the approval of the shareholders but subject to the approval of the Comptroller of the Currency. EIGHTH. The corporate existence of this Association shall continue until terminated in accordance with the laws of the United States. NINTH. The Board of Directors of this Association, or any shareholder owning, in the aggregate, not less than 25 per cent of the stock of this Association, may call a special meeting of shareholders at any time. Unless otherwise provided by the laws of the United States, a notice of the time, place, and purpose of every annual and special meeting of the shareholders shall be given by first-class mail, postage prepaid, mailed at least ten days prior to the date of such meeting to each shareholder of record at his address as shown upon the books of this Association. TENTH. This Association shall, to the fullest extent permissible under The General and Business Corporation Law of Missouri, (a) indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, other than an action by or in the right of the corporation, by reason of the fact that such person is or was a director, officer or employee of this Association, or is or was serving at the request of this Association as a director, officer or employee of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Association, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful, and (b) indemnify any person who was or is a party or is threatened to be made a party to any threatened pending or completed action or suit by or in the right of the Association to procure a judgment in its favor by reason of the fact that such person is or was a director, officer or employee of the Association or is or was serving at the request of the Association as a director, officer or employee of another corporation against expenses and amounts paid in settlement actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Association, and indemnification shall be made in the event of negligence or misconduct in the performance of duties to the corporation only to the extent that the court in which the action or suit was brought determines upon application that the person is fairly and reasonably entitled to indemnity for such expenses; provided, however, that no such indemnification shall be available to any person against expenses or civil money penalties arising from final orders in an administrative proceeding or action instituted by an appropriate bank regulatory agency assessing such civil money penalties or requiring affirmative action by an individual or individuals in the form of payments to this Association; and, provided further, that all advances to an officer, director or employee to indemnify such party against expenses incurred in an action instituted by the Comptroller of the Currency shall be made subject to reimbursement if a final order is entered assessing civil money penalties or requiring payments to be made to this Association and before any advances are made the Board of Directors of this Association in good faith has determined in writing that all the following conditions are met: 1. The officer, director or employee has a substantial likelihood of prevailing on the merits; 2. In the event the officer, director or employee does not prevail, he or she will have the financial capability to reimburse this Association; and 3. Payment of expenses by this Association will not adversely affect the Association's safety and soundness; and provided further, the Association may purchase insurance covering the liability of its directors, officers, or employees, and pay the premiums therefor, to the extent authorized under The General and Business Corporation Law of Missouri, except that any such insurance shall exclude insurance coverage for a formal order assessing civil money penalties against a bank director or employee. ELEVENTH. These Articles of Association may be amended at any regular or special meeting of the shareholders by the affirmative vote of the holders of a majority of the stock of this Association, unless the vote of the holders of a greater amount of stock is required by law, and in that case by the vote of the holders of such greater amount. SECTION 10 This Agreement shall be ratified and confirmed by the affirmative vote of shareholders of each of the merging banks owning at least two-thirds of its capital stock outstanding at a meeting to be held on the call of the directors; and the Merger shall become effective at the time specified in a merger approval to be issued by the Comptroller of the Currency of the United States. EXHIBIT 2 COPY OF THE CHARTER EXHIBIT 3 COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE TRUST POWERS EXHIBIT 4 COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE OR INSTRUMENTS CORRESPONDING THERETO COMMERCE BANK, N.A., Kansas City, Missouri By-Laws as amended thru November 30, 1999 BY-LAWS OF COMMERCE BANK, NATIONAL ASSOCIATION KANSAS CITY, MISSOURI By-Laws as amended January 9, 1998 COMMERCE BANK, NATIONAL ASSOCIATION KANSAS CITY, MISSOURI ARTICLE I STOCKHOLDERS' MEETING ARTICLE I STOCKHOLDERS' MEETING SECTION 1.1 STOCKHOLDERS' ANNUAL MEETINGSECTION 1.1 STOCKHOLDERS' ANNUAL MEETING. The annual meeting of the stockholders of this Association for the election of directors and the transaction of other business shall be held at the offices of the Association in Kansas City, Missouri, on the third Tuesday of February in each year, and shall be convened by the Chairman of the Board or the President at the hour of ten o'clock A.M., or in lieu thereof the stockholders may elect such directors and transact such other business by executing a written document evidencing their unanimous consent thereto and causing such written document to be filed in the official records of this Association by the Secretary. SECTION 1.2 SPECIAL MEETINGS OF STOCKHOLDERSSECTION 1.2 SPECIAL MEETINGS OF STOCKHOLDERS. Special meetings of the stockholders may be called by the Chairman of the Board or the President at any time, and shall be called whenever so directed by resolution of the Board of Directors, or whenever stockholders holding a majority of the capital stock issued and outstanding, request either of them in writing so to do. SECTION 1.3 NOTICESECTION 1.3 NOTICE. Notice of each annual and each special meeting of stockholders shall be given by the Secretary as required by law; provided, that notice of any meeting of stockholders may be waived by any stockholder executing a written waiver of notice either before, during or after such meeting. The execution of a document evidencing the unanimous consent of all stockholders shall constitute the waiver of any notice required for the taking of such action. SECTION 1.4 VOTESSECTION 1.4 VOTES. Each share of stock shall entitle its owner to one vote, and in case of election for Directors, each stockholder shall have the right to cast as many votes in the aggregate as shall equal the number of shares held by such stockholder, multiplied by the number of directors to be elected, and may cast the whole number of votes, in person or by proxy, for one candidate or distribute them among two or more. SECTION 1.5 PROXIESECTION 1.5 PROXIES. Stockholders may vote at any meeting of the stockholders by proxies duly authorized in writing; provided, however, that each proxy shall be valid only for the specific meeting of stockholders specified therein and at any adjournments of such meeting, and, provided further, that no officer or employee of this Association shall act as proxy. Proxies shall be dated and shall be filed with the records of the meeting. ARTICLE II DIRECTORSARTICLE II DIRECTORS SECTION 2.1 BOARD OF DIRECTORSSECTION 2.1 BOARD OF DIRECTORS. The affairs of this Association shall be controlled and managed by a Board of Directors (hereinafter referred to as the "Board") consisting of not less than five nor more than twenty-five shareholders, the exact number within such minimum and maximum limits to be fixed and determined from time to time by resolution of a majority of the full Board or by resolution of the shareholders at any meeting thereof; provided, however, that a majority of the full Board may not increase the number of directors to a number which: (i) exceeds by more than two the number of directors last elected by shareholders where such number was fifteen or less; and (ii) exceeds by more than four the number of directors last elected by shareholders where such number was sixteen or more, but in no event shall the number of directors exceed twenty-five. In addition the Board may appoint, from time to time, one or more Advisory Directors to serve in advisory capacities only without the power of final decision in matters concerning the business of this Association; and the Board delegates to the Chairman, Vice Chairman or President the power and authority to appoint, from time to time, one or more Advisory Directors to serve in advisory capacities in the various market regions of this Association and to establish compensation for such Advisory Directors. Advisory Directors shall be subject to the same requirements relating to retirement as other directors. Advisory Directors may also serve in an advisory capacity on any committee; provided, that an Advisory Director may not fill any committee position which, according to these By-Laws, must be filled by a regular member of the Board. SECTION 2.2 RETIREMENT OF DIRECTORSSECTION 2.2 RETIREMENT OF DIRECTORS. No person shall be elected a director of this Association who shall have attained the age of 70 years, and each person serving as a director of this Association upon attaining the age of 70 years shall be deemed to have submitted his resignation as a director of this Association with such resignation to become effective on the day such director attains the age of 70 years. Notwithstanding the foregoing, a director who is also an officer of this Association shall retire from the Board on the date he shall resign, retire or otherwise terminate his services as an officer of this Association. The election or re-election by mistake or otherwise of a director in violation of the aforesaid policy shall not, ipso facto, void such election or re-election or nullify any actions such person might take as a director. SECTION 2.3 BOARD MEETINGSSECTION 2.3 BOARD MEETINGS. Regular meetings of the Board shall be held at the office of the Association in Kansas City, Missouri, or such other place as the Board shall determine, either within or without the State of Missouri at the hour of 9:00 in the morning, on the second Monday of each month, if not a legal holiday, and if the same be a legal holiday, then on the first day following which is not a legal holiday. No notice shall be required for any such regular monthly meetings of the Board, and any and all business may be transacted thereat. Meetings of the Board or any Committee of the Board may be conducted in a manner such that members of the Board may participate by means of conference video or similar communications equipment whereby all persons participating in the meeting can see and hear each other, and participation in this manner shall constitute presence in person at the meeting. At the first regular meeting of the Board following a stockholders meeting at which directors are elected, the Board shall first proceed with the organization of the new Board and shall elect and appoint such officers as these By-Laws or the Board may prescribe. SECTION 2.4 SPECIAL BOARD MEETINGSSECTION 2.4 SPECIAL BOARD MEETINGS. Special meetings of the Board may be held at any time on the call of the Chairman of the Board, the Chairman of the Executive Committee, if one be elected, or the President, or any three (3) directors. SECTION 2.5 NOTICE OF BOARD MEETINGSSECTION 2.5 NOTICE OF BOARD MEETINGS. While no notice shall be required for any regular meeting of the Board, nevertheless, the Secretary, for the information of the directors, shall mail to each director a written or printed notice specifying the time and place of such meeting, addressed to him at his last known business address (postage prepaid), not less than twenty-four (24) hours before the hour fixed for the meeting. Except in the case of special meetings called by reason of emergency, as hereinafter provided, notice of the time and place of special meetings shall be given by the Secretary, in writing, delivered to, or by telephone message communicated to, or by prepaid telegram deposited in the telegraph office at Kansas City, Missouri, addressed to each director not less than twenty-four (24) hours before the hour fixed for the meeting. Such notices and communications may be addressed to or communicated to such director at his last known place of business or residence, and shall be sufficient if delivered to, addressed to, or communicated to, such place of business or residence. If in the opinion of the Chairman of the Board, or the President, and of three directors, the matters to be presented at such special meeting are so urgent in their character as to constitute an emergency requiring a shorter notice, and they shall so certify in writing, notice of such meeting may be given in the same manner as hereinbefore provided, but shall be sufficient if given at least one (l) hour before the hour fixed for the meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. SECTION 2.6 QUORUM. A majority of the directors shall constitute a quorum at any meeting, except when otherwise provided by law, but a lesser number may adjourn any meeting from time to time and the meeting may be held, as adjourned, without further notice. SECTION 2.7 VACANCIES. When any vacancy occurs among the directors the remaining members of the Board, in accordance with the laws of the United States, may appoint a director to fill such vacancy at any regular meeting of the Board or at a special meeting called for that purpose. SECTION 2.8 COMPENSATION OF DIRECTORS. The compensation of Directors and Advisory Directors of this Association for services shall be established by the Board; provided that no such compensation shall be paid to any director who shall at the time be receiving a salary from the Association, the parent of the Association or any other subsidiary of the parent, as an officer thereof, without express order from the Board. ARTICLE III COMMITTEES SECTION 3.1 EXECUTIVE COMMITTEE. The Executive Committee shall consist of five (5) directors, of whom the Chairman of the Board, the Chairman of the Executive Committee, if one be so elected, and the President shall be members and such other members of the Board as may be appointed, from time to time, by the Chairman of the Board with the approval of the Board. The Executive Committee shall have, and exercise, all the powers of the Board during the intervals between meetings of the Board, including the power to control the conduct of the Association's business, and full power to appoint committees and prescribe their duties, and to direct the actions of all officers, agents and employees of the Association. The Executive Committee shall meet at the office of the Association on such days and at such hour as meetings of such Committee may be called, from time to time, by any three members thereof, or by the Chairman of the Executive Committee, the Chairman of the Board, or the President. Notices of meetings shall be given in the same manner as is provided for in the case of special emergency meetings of the Board. Three (3) members of the Executive Committee shall constitute a quorum for the transaction of business. Unless otherwise indicated in the notice thereof, any and all business may be transacted at any meeting of the Committee. Minutes of the meetings of the Executive Committee shall be recorded in chronological order in the same Minute Book of the Association in which the minutes of the meetings of the stockholders and of the Board are recorded, and shall be approved at the next succeeding meeting of the Board as the report of that committee to the Board, together with any special report that said Committee may wish to make to the Board not contained in said minutes. SECTION 3.2 OTHER COMMITTEES. From time to time the Board may create such other committees, consisting of such persons, as the Board may determine to be necessary or desirable and may fix the powers and duties of any such committee. SECTION 3.3 COMPENSATION OF COMMITTEE MEMBERS. The compensation of committee members for service shall be established by the Board for each meeting attended; provided, that no such compensation shall be paid to any committee member who shall at the time be receiving a salary from the Association, the parent of the Association or any other subsidiary of the parent, as an officer thereof, without express order from the Board. ARTICLE IV OFFICERS SECTION 4.1 EXECUTIVE OFFICERS. The executive officers of this Association shall be the Chairman of the Board, the Vice Chairman of the Board, if one or more is so elected, the Chairman of the Executive Committee, if one be so elected, the President, the Executive Vice Presidents and the Secretary. Any person may hold two or more offices except the offices of President and Secretary. SECTION 4.2 CHAIRMAN OF THE BOARD. The Board shall elect one of its members to be Chairman of the Board. He shall preside at all meetings of the Board and shall supervise the establishment of policies adopted or approved by the Board. He shall have general executive powers, including, by way of illustration, the power to fix remuneration of officers, agents and employees; to employ and dismiss any officer, agent or employee; and to assign officers, agents and employees to duties in the various areas of the Association, as well as the specific powers conferred by these By-Laws and shall also have and may exercise such further powers and duties as may from time to time be conferred upon, or assigned to him by the Board. SECTION 4.3 VICE CHAIRMAN OF THE BOARD. The Board may elect one or more of its members to the office of Vice Chairman of the Board. In the absence of the Chairman, any Vice Chairman may preside at any meeting of the Board. The Vice Chairman of the Board shall assist the Chairman of the Board in establishing policies adopted or approved by the Board. A Vice Chairman of the Board shall have such general executive powers as may be assigned by the Chairman as well as specific powers conferred by these By-Laws, and shall also have and may exercise such further powers and duties as may from time to time be conferred upon or assigned to him by the Board SECTION 4.4 CHAIRMAN OF THE EXECUTIVE COMMITTEE. The Board may elect one of its members to the office of Chairman of the Executive Committee, and such officer shall preside over all meetings of the Executive Committee. In the absence of the Chairman or any Vice Chairman of the Board, the Chairman of the Executive Committee shall preside at any meeting of the Board. The Chairman of the Executive Committee shall have such general executive powers as may be assigned by the Chairman as well as specific powers conferred upon or assigned to him by the Board. SECTION 4.5 PRESIDENT. The Board shall elect one of its members to be President of the Association. In the absence of the Chairman, any Vice Chairman, or Chairman of the Executive Committee, the President shall preside at any meeting of the Board. The President shall have such general executive powers as may be assigned by the Chairman, and shall have and may exercise any and all other powers and duties pertaining by law, regulation, or practice, to the office of President, or imposed by these By-Laws, and shall also have and may exercise such further powers and duties as may from time to time be conferred upon or assigned to him by the Board. SECTION 4.6 VICE PRESIDENT. The Board shall elect one or more Vice Presidents and may classify one or more of such Vice Presidents so elected as Executive Vice President, Senior Vice President or otherwise as the Board may deem appropriate. The office of Executive Vice President shall be deemed executive offices of the Association and the persons holding such office shall be authorized to participate in the major policy making functions of the Asso- ciation and shall additionally have such powers and duties as imposed by the By-Laws or assigned or conferred from time to time by the Board, the Chairman of the Board, a Vice Chairman or the President. Each Executive Vice President shall have and may exercise any and all powers and duties pertaining to the office of Executive Vice President as imposed by these By-Laws and shall also have and may exercise such further powers and duties as may from time to time be conferred upon or assigned to him by the Board, the Chairman of the Board, a Vice Chairman or the President. SECTION 4.7 SECRETARY. The Board shall elect a Secretary (who may also be designated as Cashier) who shall be the Secretary of the Board and of the Association. He shall attend the meetings of stockholders, the Board, and the Executive Committee and keep minutes of said meetings and shall have custody of the corporate records of the Association. He shall have custody of the seal of the Association and shall have authority to affix the same to any instrument executed on behalf of the Association and also to attest the same. He shall also attend to the giving of all notices required by these By-Laws to be given and shall have and may exercise any and all other powers and duties pertaining by law, regulation or practice or imposed by these By-Laws or as may be assigned to him, from time to time, by the Board. The Board may elect one or more Assistant Secretaries, from time to time, as may appear to be Board to be required or desirable to transact the business of the Association. SECTION 4.8 GENERAL COUNSEL. The Board shall elect a General Counsel who shall have charge of the legal business of the Association and shall appear or provide for proper appearances for the Association in suits and proceedings to which it is a party. He shall advise the Board, Executive Committee, Chairman of the Board, President and other officers of the Association concerning the affairs of the Association when by them requested. He shall also have such other powers and duties as may be imposed by these By-Laws. SECTION 4.9 CONTROLLER. The Board shall elect a Controller who shall receive and take care of all monies, securities and evidences of indebtedness belonging to the Association, keep full and complete accounts of receipts and disbursements, and make reports thereof to the Executive Committee and the Board as often as may be requested. He shall, under the direction of the Chairman of the Board, a Vice Chairman, or the President, perform such other duties pertinent to his office as they may require. SECTION 4.10 OTHER OFFICERS. The Board may also elect, from time to time, one or more individuals as "Officers" or "Corporate Officers" of this Association and with respect to such Officers or Corporate Officers, the Board may permit the additional use of community, market, group or division title by such Officers or Corporate Officers. All such titles above the level of vice president shall be approved by the Board. All titles of vice president and below shall be conferred according to procedures adopted by the Director of Human Resources. Such title designation shall not be deemed as conferring any additional responsibility or authority on any such individual beyond that approved in these By-Laws or by resolution of the Board. SECTION 4.11 BONDS. All officers shall be bonded with such security and approved in such manner as the Board or the Executive Committee may from time to time direct. SECTION 4.12 TENURE OF OFFICE. The officers of this Association shall be elected by the Board annually at the annual meeting of the Board and such officers as shall be elected to such offices shall continue in office for one year and until their successors shall be elected, unless such officer shall resign, become disqualified, or be removed. Persons may be elected officers or be promoted to a different office at any meeting of the Board; provided, that such person so elected shall continue in office only until the next annual meeting of the Board at which all officers are to be elected or re-elected, unless any such person shall resign, become disqualified, or be removed. The Board shall have the power to remove any officer at any time and, in addition, may designate by resolution, officers who shall have the authority to dismiss any officer, agent or employee. ARTICLE V POWERS AND DUTIES OF OFFICERS SECTION 5.1 REPRESENTATION. The Chairman of the Board, any Vice Chairman, the President, the General Counsel, and such other officer or officers of the Association as may be empowered so to do by the Board, or any one of them, shall have power to act for, appear in behalf of, and represent this Association before all Departments and Courts of the United States of America, and any State, Territory or Possession thereof, and to execute general or special powers of attorney for litigation in favor of lawyers, solicitors, agents, or any other legal representatives, granting to them such powers and authorization, whether ordinary or extraordinary, and with or without limitation, which any such officer may deem advisable, including the power to settle in or out of court, or to submit to arbitrators or other adjustment, any question in which this Association may be interested; and to employ counsel and direct the taking of any legal action in reference to any of the foregoing, or any other matter or thing touching the interest of the Association. SECTION 5.2 REAL ESTATE CONVEYANCES. All transfers and conveyances of real estate, including releases of mortgages, deeds of trust and other real estate interests held, or purportedly held, by the Association, may without any further order of the Board be executed and delivered by the Chairman of the Board, any Vice Chairman, the President, or any Executive Vice President and such other Officers of the Association as the Board, by resolution, may appoint, sealed with the corporate seal of the Association and, if required, attested by the Secretary or one of the Assistant Secretaries of the Association. SECTION 5.3 VOTING OF SECURITIES. Unless otherwise ordered by the Board or the Executive Committee, the Chairman of the Board, any Vice Chairman, the President, any Executive Vice President, or such other Officers of this full power and authority in behalf of the Association to attend, and to act and to vote at any meeting of the stockholders of any corporation in which the Association may hold stock, in its own capacity or in any fiduciary capacity, and in connection with such meeting each of said officers shall possess and may exercise in behalf of the Association any and all rights and powers incident to the ownership of such stock, including the power to sign proxies therefor; provided, that any proxy granted with respect to stock held in a fiduciary capacity shall be limited to a single meeting and shall either be limited to voting for trustees or directors or shall direct how such proxy holder shall vote. SECTION 5.4 FORECLOSURE OF COLLATERAL. The Chairman of the Board, any Vice Chairman, the President, and any Executive Vice President, and such other Officers of this Association as the Board, by resolution, shall appoint, shall each have power and authority for and on behalf of this Association to request, order or direct the foreclosure of any mortgage, deed of trust or other security agreement in favor of the Association held or owned by the Association (or held by this Association in trust) securing a loan or loans or other obligations and to exercise any or all of the options and powers inuring to this Association under the provisions of such mortgages, deeds of trust or security agreements or under the terms of the note or notes thereby secured, including the power and authority to appoint and designate a successor trustee or trustees as substitutes for the trustee or trustees named in any such mortgage or deed of trust. SECTION 5.5 REFUSAL TO SERVE AS TRUSTEE. The Chairman of the Board, any Vice Chairman, the President, and any Executive Vice President, or such Officers as the Board, by resolution, shall appoint, shall each have power and authority to act for the Association in refusing or declining to act as trustee under any mortgage or deed of trust securing a loan on real or personal property in which this Association is named or designated as trustee, and/or to resign as such trustee, and to make, execute and deliver in the name of, and for and in behalf of the Association, appropriate instruments, in writing, evidencing such refusal or declination to so act or such resignation. SECTION 5.6 AUTHENTICATION OF SECURITIES. The Chairman of the Board, any Vice Chairman, the President, any Executive Vice President, or such Officers as the Board, by resolution shall approve, shall each have authority to countersign or authenticate bonds or certificates on behalf of this Association as Trustee, and to sign, in behalf of this Association as Trustee, authentications or certifications of this Association as Trustee under any mortgage, deed of trust or other agreement securing an issue of bonds, debentures, notes or other obligations of any corporation, association or individual, or as registrar or transfer agent, and also certificates of deposit for stock, bonds, debentures, notes or other obligations, interim certificates and trust certificates. The Chairman of the Board, any Vice Chairman, the President, any Executive Vice President, and such Officers as the Board, by resolution, shall appoint, or the Secretary and any Assistant Secretary shall each have authority to countersign or authenticate bonds or certificates on behalf of this Association where this Association is the direct purchaser of the issue and to execute any closing documents required for the purchase of such bonds. SECTION 5.7 TRUST DIVISION. The Chairman of the Board shall assign an Officer who shall have and may exercise, subject to the control of the Chairman, a Vice Chairman or the President, general supervision over the Trust Division. Such Officer together with such other Officers designated by the Board and assigned to the Trust Division and each of them, may represent the Association in any of the business of said division. All securities and funds held by the Association in a fiduciary capacity and the accounts of each trust or other fiduciary relationship shall be held separate and apart from those of every other and entirely separate and apart from the assets of the Association, and such securities shall be subject to the joint control of two Officers or, if designated by the Officer having general supervision of the Trust Division, employees of the Trust Division. SECTION 5.8 TRUSTS. The Chairman of the Board, any Vice Chairman, the President, any Executive Vice President, the Officer having general supervision of the Trust Division, or such other Officers as the Board may designate within the Trust Division shall each have authority, for and on behalf of this Association, to accept or reject any and all trusts or other fiduciary duties or responsibilities which may be offered to this Association, and in connection therewith to execute, on behalf of this Association, all trust agreements or other appropriate instruments and the Secretary, or any Assistant Secretary of this Association, is authorized to affix the seal of this Association to any such trust agreement or other instrument which has been duly signed by any such officer. SECTION 5.9 SUBSTITUTION OF ATTORNEY-IN-FACT. Whenever this Association has been, or may be appointed Attorney-in-Fact, with power of substitution in and about the transfer of shares of capital stock, bonds or other instruments commonly referred to as securities of any corporation or other entity, the Chairman of the Board, any Vice Chairman, the President, or any Executive Vice President or such other Officers as the Board shall, by resolution, designate, may substitute, by a proper written instrument, an attorney-in-fact to act in the place and stead of this Association in and about such transfer. SECTION 5.10 PURCHASE OR TRANSFER OF SECURITIES. The Chairman of the Board, any Vice Chairman, the President, and any Executive Vice President, the Controller or such other Officers as the Board shall, by resolution, designate, shall each have authority for and in behalf of the Association, and in its name, to sell, assign and transfer, or to purchase or otherwise acquire, directly or through a cash account of this Association established or maintained with a brokerage firm selected by such person, any and all shares of the capital stock, bonds, or other instruments commonly referred to as securities, and notes, mortgages and deeds of trust issued by any corporation or other entity and held or to be held by this Association in its own capacity or in any fiduciary capacity; and the Chairman of the Board, any Vice Chairman or the President may designate, in writing, from time to time, such other officers or employees as shall be authorized to exercise the powers granted by this Section. SECTION 5.11 BANKING RELATIONSHIPS. The Chairman of the Board, any Vice Chairman and the President shall each have authority for and in behalf of the Association to designate from time to time institutions with which this Association may maintain checking or other depository accounts, safekeeping accounts, clearing accounts or such other form of account as may be deemed necessary or appropriate for the conduct of the Association's business, whether any such account shall be in the name of this Association or in the name of this Association in any custodial or fiduciary capacity, and to designate from time to time such individuals, who may be officers or employees of this Association, as shall be authorized to effect transactions with respect thereto, and with respect to any and all accounts or transactions with the Federal Reserve Bank , including, without limitation, the signing of checks, drafts or other orders with respect to any depository account to effect the deposit or withdrawal of funds, securities, instruments or other documents held in or subject to any such account, including delivery instructions with respect to any safekeeping, clearing or other form of account, and any such transactions as may be effected by a designated individual shall include authority to effect transfers of funds, securities, instruments or other documents subject to any such account by wire or telephone instruction. ARTICLE VI STOCK SECTION 6.1 STOCK CERTIFICATES--TRANSFERRED. The capital stock of this Association shall be represented by certificates signed by the Chairman of the Board, any Vice Chairman, the President, or any Executive Vice President, and attested by the Secretary or an Assistant Secretary, with the corporate seal affixed, and shall be transferable only on the books of the Association, in person or by attorney duly authorized according to law; and when stock is transferred, the certificate therefor shall be returned to the Association and canceled, and new certificate issued. SECTION 6.2 STOCKHOLDERS RECOGNIZED. Until stock shall be transferred, as provided in Section 6.l, no person shall be recognized by this Association as the owner of said stock, except the person to whom the same was issued, and in whose name the same stands on the books of the Association, except as provided by law in case of executor, administrator, guardian or trustee. SECTION 6.3 RECORD DATE. With respect to each meeting of stockholders, each declaration and payment of a dividend or distribution, or each declaration and grant of allotment of rights, the Board may fix a date preceding the date on which such event affecting the rights of any stockholder shall occur as a record date for the determination of the stockholders entitled to notice of and to vote at any such meeting or entitled to receive payment of any such dividend or to any such allotment of rights or to exercise the rights in respect of any change, conversion or exchange of capital stock, and in such case such stockholders and only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to notice of and to vote at such meeting or to receive payment of such dividend or to receive such allotment of rights or to exercise such rights, as the case may be, notwithstanding any transfer of any stock on the books of the Association after any such record date fixed as aforesaid. Any such date as may be fixed by the Board as the record date shall not precede the date of any meeting of stockholders, the date for the payment of any dividend or the date for allotment of rights or the date when any change, conversion or exchange of capital stock shall go into effect by more than fifty days. If the Board shall not have set a record date for the determination of its stockholders entitled to participate in the event for which a record date be established, the date on which notice of the meeting is mailed or the date such dividend is declared or other right announced shall be the record date for such determination of stockholders so entitled to participate. ARTICLE VII MISCELLANEOUS SECTION 7.1 FISCAL YEAR. The fiscal year of this Association shall end on the 31st day of December in each year, and at the close of each fiscal year it shall be the duty of the Board to cause a complete and accurate statement of the financial condition of the Association to be made forthwith from the books thereof, a copy of which shall be submitted to the stockholders at the annual meeting. SECTION 7.2 SEAL. The Association shall have a corporate seal which shall have inscribed around the upper circumference thereof "Commerce Bank" and around the lower circumference thereof "National Association" and elsewhere thereon shall bear the word "Seal". SECTION 7.3 BUSINESS HOURS. The main office and all other facilities of the Association shall be open for the transaction of business on such days and during such hours as the Board or the Executive Committee may in its discretion determine. The Board of Directors, or the Executive Committee, however, may in its discretion change said hours and days, or close the office entirely, whenever the interests of the Association will be best served thereby, or circumstances shall render the same proper. SECTION 7.4 AMENDMENTS. The Board shall have the power to make, alter, amend, or repeal the By-Laws of this Association from time to time. Exhibit 5 COPIES OF INDENTURE Exhibit 5 Page 1 COPIES OF INDENTURE Copies of the Indentures referred to in Item 4 hereof have heretofore been filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Securities Exchange Act of 1934 as Exhibits to the Registration Settlements of the Farmland Industries, Inc. (formerly Consumers Cooperative Association). The copies of Indentures listed in this Exhibit 5 hereof are hereby incorporated by reference to the Exhibits to the Registration Statements which are listed as items (a) through (k) as follows: (a) Trust Indenture dated July 29, 1974, as amended January 29, 1982 (Form S-1, No. 2-51757 effective October 22, 1974) 9%, 15-Year Subordinated Capital Investment Certificates (b) Trust Indenture dated November 29, 1976, as amended January 29, 1982. (Form S-1, No. 2-55767 effective January 10, 1977). 9-1/2%, 20-Year Subordinated Capital Investment Certificates (c) Trust Indenture dated October 24, 1978, as amended December 21, 1978. (Form S-1, No. 2-63106) 9-1/2% 20-Year Subordinated Capital Investment Certificates (d) Trust Indenture dated October 24, 1979, as amended January 29, 1982. (Form S-1, No. 2-66090 effective January 3, 1980). 10-1/2%, 25-Year Subordinated Capital Investment Certificates (e) Trust Indenture dated November 8, 1984. (Form S-1, No. 2-94400 effective December 31, 1984). 5-Year Subordinated Capital Investment Certificates (f) Trust Indenture dated November 8, 1984. (Form S-1, No. 2-94400 effective December 31, 1984). 10-Year Subordinated Capital Investment Certificates (g) Trust Indenture dated November 8, 1984. (Form S-1, No. 2-94400 effective December 31, 1984). 20-Year Subordinated Capital Investment Certificates (h) Trust Indenture dated November 8, 1984 (Form S-1, No. 2-9440 effective December 31, 1984) 10-Year Subordinated Monthly Income Capital Investment Certificates (i) Trust Indenture dated November 8, 1984 (Forms S1, No. 2-94400 effective December 31, 1984) 10-year IRA Certificates (j) Trust Indenture dated November 11, 1985 (Form S-1, No. 33-1970, effective December 3, 1985) 5-Year Subordinated Monthly Income Capital Investment Certificates (k) Subordinated Indenture dated as of December 4, 1997 (Form S-1, No. 333-40759, effective December 15, 1997) Exhibit 6 CONSENTS OF THE TRUSTEE REQUIRED BY SECTION 321(B) OF THE ACT Exhibit 6 CONSENT OF THE TRUSTEE Pursuant to Section 321(b) of the Trust Indenture Act, Commerce Bank, National Association, hereby consents to the release of reports of examinations by Federal, State, Territorial or District authorities to the Securities and Exchange Commission upon request therefor. Dated this 13th day of December, 1999. COMMERCE BANK, NATIONAL ASSOCIATION, Trustee By: /s/ William E. Ekey William E. Ekey, Vice-President EXHIBIT 7 COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED PURSUANT TO LAW OR THE REQUIREMENTS OF THE SUPERVISING EXAMINING AUTHORITY <TABLE> <CAPTION> <S> <C> <C> <C> COMMERCE BANK N.A. (KANSAS CITY) STATEMENT OF CONDITION SEPTEMBER 30, 1999 ASSETS Loans, less allowance for loan losses of 102,110,000 $ 6,286,990,000 Investment Securities: US Government and Federal Agency obligations $843,202,000 Obligation of states and political subdivisions 33,990,000 Other securities 995,896,000 1,873,088,000 Federal funds sold and securities purchased under agreements to resell 167,836,000 Trading account securities 21,720,000 Net earning assets $8,349,634,000 Cash and due from banks 530,610,000 Land, buildings and equipment 172,129,000 Customers' acceptance liability 2,405,000 Other assets 218,683,000 Total Assets $9,273,461,000 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand $1,440,886,000 Savings and interest bearing demand 4,463,879,000 Time 1,915,535,000 $7,820,300,000 Federal funds purchased and securities sold under 591,937,000 agreements to repurchase Accrued expenses and other liabilities 149,106,000 Acceptances outstanding 2,405,000 Total Liabilities $8,563,748,000 Stockholders' equity: Capital stock 10,000,000 Capital surplus 539,013,000 Undivided profits 160,700,000 Total Stockholder's equity 709,713,000 Total liabilities and stockholders' equity $9,273,461,000 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----
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+PROSPECTUS SUMMARY This summary does not include all of the information that may be important to you. You should read the following summary together with the more detailed information, including our financial statements and related notes, appearing elsewhere in this prospectus. Unless otherwise indicated, all information in this prospectus assumes the underwriters will not exercise their over-allotment option. On November 16, 1999, we changed our name to CollegeLink.com Incorporated from Cytation.com Incorporated and changed our state of incorporation to Delaware from New York. COLLEGELINK.COM INCORPORATED OUR COMPANY We provide college bound students and their families with a range of solutions to the challenges of the college admission process, from college selection to submission of college, financial aid, and scholarship applications. We have recently entered into an agreement to acquire a related business, Student Success, Inc., and a letter of intent to acquire another related business, Online Scouting Network, Inc. We have developed an Internet hub with a college application, financial aid and scholarship service. We expect that a large number of applications will be submitted by computer within the next several years because of increasing student computer literacy and the significant financial and administrative benefits to colleges and universities of receiving applications electronically. In addition, through the Making College Count(R) and Making High School Count(TM) programs, we help prepare students for success in college. We also continuously obtain demographic and other information which can be used by students, their families, colleges and other service providers to assist in the college admissions process and enhance the entire college experience. Due to the volume of college bound students who visit our Internet hub, we are developing an attractive e-commerce location for students and their families. CollegeLink.com. Through CollegeLink.com, and its relationships with more than 900 colleges and universities, we are a leading provider of computer-based college applications and admissions services to college bound students and their families. Student Success. Student Success is a leading provider of onsite high school and college preparatory programs for students and their families under its Making College Count(R) and Making High School Count(TM) trademarks. Through this channel, we intend to continue to expand our presence and awareness of our services with high school students. Student Success presented its seminars to more than 215,000 students at about 900 high schools and junior colleges nationwide last year. These programs were sponsored by eight major consumer products companies. Online Scouting Network. Online Scouting Network is a leading provider of online recruiting services offering student athletes greater visibility to more than 3,000 college and university professionals. To date, approximately 25,000 high school students from over 500 high schools nationwide have registered with Online Scouting Network. OUR RELATIONSHIPS We have entered into agreements and developed relationships with more than 900 colleges and universities to accept applications in their respective formats through CollegeLink(R). A complete list of these colleges and universities is included in this prospectus. We have an agreement with PNC Bank, N.A., one of the largest student loan providers in the United States, to provide certain financial products and services to college bound students and their families through our CollegeLink.com Internet hub. PNC Investment Corp., an affiliate of PNC Bank, has made a $4,000,000 investment in our company. - -------------------------------------------------------------------------------- [INSIDE SPREAD] [A two page spread containing the names of colleges and universities listed alphabetically.] - -------------------------------------------------------------------------------- We have an agreement with The College Board(R) to be the exclusive provider of electronic college applications through The College Board's ExPAN(R) guidance software. The College Board(R) is a membership organization of colleges and secondary schools and is the provider of the SAT(R) and the AP(R) Exams. We also have co-marketing relationships with Student Advantage, Inc. and FastWeb.com L.L.C. and are negotiating similar relationships with other Web-based businesses including The FamilyEducation Company. We are continually seeking appropriate relationships to expand our service and product offerings. OUR MARKET There are about 13.8 million high school students in the United States. According to the National Center for Education Statistics, this number will increase to more than 15.5 million over the next five years. Each year about 3.2 million students enter colleges and universities for the first time. Of these about 2.2 million apply as first time freshman to undergraduate colleges and universities. The remaining students apply to continuing education programs of various sorts. Each year about 3.2 million applicants submit more than seven million applications for undergraduate admission to nearly 3,400 U.S. colleges and universities. About 50% of these students apply for some form of financial aid. According to the Department of Education, it is expected that the total number of college bound students will continue to increase each year for the foreseeable future. Based on industry statistics, we believe colleges spend about $3 billion annually to recruit and enroll students. OUR STRATEGY Our strategy is to build upon the thousands of relationships we have developed with high school guidance counselors and college admissions professionals through one-on-one marketing efforts. We plan to build our brand, reach increasing numbers of high school and college students, and drive traffic to our Internet hub. Our objectives are to: Expand our market leadership position. We intend to leverage our relationships with more than 2,500 high schools and more than 900 colleges and universities to establish new affiliations, attract additional students to our website, and create a premier Internet hub for college bound students. We plan to continue to add high schools, colleges and universities through on campus direct sales calls by sales personnel, corporate sponsorships, direct mailings, targeted periodical advertising, online and broadcast advertising, partnerships and various promotional campaigns. Expand existing brand awareness. We intend to build upon our established brands and our relationships with PNC Bank, N.A., The College Board(R), Student Advantage, Inc., FastWeb.com L.L.C. and others to establish CollegeLink.com as a leading Internet hub and e-commerce site. Capitalize on our strong high school presence. Last year, The College Board(R) distributed our CollegeLink(R) software with its ExPAN(R) guidance software to about 2,000 high schools nationwide. Last school year, Making College Count(R) presented at about 900 high schools and junior colleges and Online Scouting Network registered athletes from over 500 high schools. We intend to grow our presence in the high school market through expansion of these programs. Develop strategic web partnerships. We have initiated a web partnership program to co-brand our products and services on targeted high school and college-related high traffic websites and add content to our Internet hub. Overcome resistance to online applications. We believe many college bound students and their families perceive that colleges and universities prefer applications that are submitted on the institution's specific format. CollegeLink(R) software is the only program currently available that permits students applying to more than one college to enter general information only once and still deliver to each - -------------------------------------------------------------------------------- institution an application in that institution's own format. We believe this feature gives us a significant competitive advantage and we intend to promote it to increase use of our services. Our executive offices are located at 55 Hammarlund Way, Middletown, Rhode Island 02842 and our telephone number is (401) 845-8800. Our website is located at http://www.collegelink.com. Information contained on our website is not part of this prospectus. THE OFFERING Common stock offered by CollegeLink......................... 2,200,000 shares Common stock to be outstanding after the offering(1)..................... 12,126,239 shares Use of proceeds..................... We intend to use our net proceeds for the acquisitions of Student Success and Online Scouting Network, general corporate purposes, including working capital, expansion of our sales and marketing programs and in acquisitions of and investments in complementary businesses. See "Use of Proceeds." Over-the-Counter Electronic Bulletin Board Symbol........................ CLNK (Prior to November 26, 1999, our common stock traded on the Over-the-Counter Electronic Bulletin Board under the symbol "CYTA.") Proposed American Stock Exchange symbol(2)........................... APS - --------------- (1) The number of shares of common stock to be outstanding after the offering excludes (a) 330,000 shares of the underwriters' over-allotment option, (b) 220,000 shares of common stock reserved for issuance upon exercise of the representatives' warrants, (c) options outstanding at January 19, 2000, to purchase 1,886,185 shares of common stock, and 1,980,065 shares reserved for future grants under our option plans at January 19, 2000, (d) 1,140,000 shares of common stock issuable upon conversion of 1,140,000 shares of Series A Convertible Preferred Stock outstanding at January 19, 2000, (e) 550,369 shares of common stock issuable upon conversion of 279,771 shares of Series B Convertible Preferred Stock outstanding at January 19, 2000 (assuming the maximum number of shares of common stock issuable upon such conversion), (f) 1,000,000 shares of common stock issuable upon conversion of 1,000,000 shares of Series C Convertible Preferred Stock outstanding at January 19, 2000, and (g) warrants to purchase 940,283 shares of common stock outstanding at January 19, 2000. (2) Our shares of common stock have been accepted for quotation on the American Stock Exchange under the symbol "APS." SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table summarizes our financial data. The data presented in this table is derived from the "Selected Financial Data" and the financial statements and related notes which are included elsewhere in this prospectus. You should read those sections for a further explanation of the financial data summarized here. The pro forma financial data presented in the table gives effect to the proposed issuance of common stock to the stockholders of Student Success and Online Scouting Network, and assuming a $4.00 per share price in this offering. The pro forma as adjusted financial data also gives effect to this offering. <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED JUNE 30, SEPTEMBER 30, 1999 ------------------------------- ---------------------- PRO FORMA ACQUISITIONS PRO FORMA 1998 1999 1999 ACTUAL ACQUISITIONS ------ ------- ------------ ------- ------------ <S> <C> <C> <C> <C> <C> INCOME STATEMENT Revenues.................................. $1,243 $ 562 $ 1,840 $ 266 $ 678 Expenses.................................. 1,873 3,106 7,962 1,627 2,412 ------ ------- ------- ------- ------- Net Loss.................................. $ (630) $(2,586) $(6,123) $(1,361) (1,734) ====== ======= ======= ======= ======= Weighted Average Primary Shares........... 3,499 6,531 8,540 9,495 11,196 ====== ======= ======= ======= ======= Net Loss Per Share........................ $(0.18) $ (0.40) $ (0.72) $ (0.14) $ (0.15) ====== ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> AT JUNE 30, SEPTEMBER 30, 1999 ------------------------------ ------------------------------------ PRO FORMA ACQUISITIONS PRO FORMA PRO FORMA 1998 1999 1999 ACTUAL ACQUISITIONS AS ADJUSTED ------ ------ ------------ ------- ------------ ----------- <S> <C> <C> <C> <C> <C> <C> BALANCE SHEET Current Assets............................ $ 131 $1,557 $ 2,249 $ 4,639 $ 1,988 Total Assets.............................. 358 1,807 21,619 13,181 21,297 Stockholders' Equity (Deficit)............ (69) 1,377 19,232 12,202 19,051 Shares Outstanding........................ 3,482 9,152 11,053 9,846 11,196 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000311046_opticare_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000311046_opticare_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights certain information contained elsewhere in this prospectus. To understand this offering fully, you should read the entire prospectus carefully, including the risk factors and our consolidated financial statements. OPTICARE HEALTH SYSTEMS, INC. Our Business. We are an integrated eye care services company focused on providing laser vision correction, managed care and professional eye care services. We currently own, operate and develop laser vision correction and ambulatory surgery centers and provide systems, including Internet-based software solutions, to eye care professionals. We also provide managed eye care services to health plans and operate integrated eye health centers and retail optical stores. While we believe that all of our businesses have solid same-store growth prospects, we expect our laser correction and professional services division as well as our managed care business to have the potential for significant near-term and long-term growth. In order to focus our resources accordingly, we have recently reorganized our operations, creating three operating divisions versus only two previously. These three divisions are: o Laser Correction and Professional Services. We develop laser vision correction centers and provide marketing, systems, software and other services to eye care professionals. o Managed Care Services. We contract with managed care plans to manage the eye health portion of their benefits. o Other Integrated Services. We own and operate fully integrated eye health centers, retail optical stores and a buying group program. To realize the growth potential in these businesses: o We intend to expand our laser vision correction services at our existing owned and operated laser vision correction and ambulatory surgery centers. o We have developed a program called the OptiCare Laser Advantage (Trade Mark) to participate in the rapid growth of laser vision correction. In this arrangement, we intend to enter into laser vision correction development agreements with ophthalmology practices that already perform laser vision correction surgery at a third-party laser site, but which desire to open their own laser center. o We will emphasize our professional services offerings, in which we sell a broad range of management services and eye care systems and software to eye health professionals. o We intend to aggressively promote and grow our Managed Care Services division by leveraging our large customer base and favorable market trends. o We intend to further leverage and link our service offerings across the spectrum of eye care. We believe that having multiple businesses within the eye care services marketplace provides us with numerous advantages. Our History. Our present form is the result of two mergers completed on August 13, 1999 among Saratoga Resources, Inc., a Delaware corporation, OptiCare Eye Health Centers, Inc., and PrimeVision Health, Inc. At the time of the mergers, PrimeVision Health and OptiCare Eye Health Centers was each an integrated vision services company. Saratoga, the surviving parent of the mergers, was renamed "OptiCare Health Systems, Inc." at the time the mergers were closed. For accounting purposes, PrimeVision Health was deemed the acquirer of Saratoga and OptiCare. Throughout this prospectus: o when we use the words "we," "our," "us" or "company" for periods prior to August 13, 1999, we are referring to PrimeVision Health or to OptiCare Eye Health Centers, or to both of them on a combined pro forma basis as the context requires, and not to Saratoga; o when we use the word "Saratoga", we are referring to Saratoga Resources, Inc., a Delaware corporation, and its oil business for periods prior to August 13, 1999. Our executive offices are located at 87 Grandview Avenue, Waterbury, Connecticut 06708, and our telephone number is 203-596-2236. THE OFFERING Common Stock Offered........ Up to 4,000,000 shares Common Stock Outstanding after the Offering.......... 12,972,128 shares, assuming we sell all 4,000,000 shares we are offering. Use of Proceeds............. We intend to use our net proceeds from this offering to reduce the outstanding balance of our term loan under our credit facility, to repay indebtedness under subordinated notes, and to expand our laser correction and professional services division, and general corporate purposes; prior to applying the net proceeds to expand, we will temporarily reduce the outstanding balance of our revolving debt under our credit facility. See "Use of Proceeds." American Stock Exchange Symbol............. "OPT" Risk Factors................ You should carefully consider the information set forth in "Risk Factors" and all other information set forth in this prospectus before investing in our common stock. Dividend Policy............. We intend to retain our earnings for working capital and do not anticipate paying cash dividends in the foreseeable future. See "Dividend Policy." Unless otherwise indicated, references to numbers and percentages of shares of common stock are based upon 8,972,128 shares of our common stock outstanding on January 14, 2000. This number excludes 1,316,778 shares of common stock issuable upon the exercise of stock options under our Performance Stock Program. For more information about our Performance Stock Program, see "Performance Stock Program." SUMMARY HISTORICAL CONSOLIDATED AND PRO FORMA COMBINED FINANCIAL DATA The following summary historical consolidated financial data has been derived from PrimeVision Health's audited consolidated financial statements for the years ended December 31, 1998, 1997, 1996 and 1995, and the unaudited consolidated financial statements as of and for the nine month periods ended September 30, 1999 and 1998. Prior to 1995, PrimeVision Health did not exist. Our present form is the result of the mergers completed on August 13, 1999 among Saratoga, PrimeVision Health and OptiCare Eye Health Centers. For accounting purposes, PrimeVision Health is treated as the accounting acquirer and, therefore, the predecessor business for historical financial statement reporting purposes. For more detailed financial data, see "Selected Consolidated Historical and Pro Forma Combined Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements which begin on page F-1. The pro forma combined financial data has been derived from the unaudited pro forma financial data appearing elsewhere in this prospectus. The pro forma statement of operations data gives effect to each of the following transactions as if each had occurred at the beginning of the respective period: o the reverse acquisition by PrimeVision Health of Saratoga; o the acquisition by PrimeVision Health of OptiCare Eye Health Centers under the purchase method of accounting; and o the issuance and sale of our common stock in this offering at an offering price of $3.50 per share, which is the closing price of our common stock on the American Stock Exchange on January 14, 2000, and the application of the net proceeds therefrom as described in "Use of Proceeds." The as adjusted combined balance sheet data gives effect to the issuance and sale of our common stock in this offering at an offering price of $3.50 per share, which is the closing price of our common stock on the American Stock Exchange on January 14, 2000, and the application of the net proceeds therefrom as if each of these transactions had occurred on September 30, 1999. The information set forth below should be read in conjunction with our consolidated financial statements and unaudited pro forma combined financial statements and notes thereto, and the "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The financial information presented below for the nine-month periods ended September 30, 1999 and 1998 reflects all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of our consolidated results of operations and financial position for such periods. The information shown for the nine-month periods is not necessarily indicative of the results that may be expected for the full year. <TABLE> <CAPTION> FOR THE NINE MONTHS ENDED SEPTEMBER 30, (UNAUDITED) FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- ------------------------------------------------------- PRO FORMA HISTORICAL PRO FORMA HISTORICAL ----------- ---------------------- ----------- ------------------------------------------- 1999 1999(1) 1998 1998 1998 1997 1996 1995 ----------- ----------- ---------- ----------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Total net revenues ............... $96,398 $62,895 $ 50,164 $103,982 $ 64,612 $ 58,346 $52,157 $38,523 Income (loss) from continuing operations ...................... (403) 212 (1,285) (1,538) (3,239) (2,034) (767) (391) Weighted average shares outstanding(3) .................. 12,862 3,415 2,241 12,862 2,256 1,856 693 -- Income (loss) from continuing operations per share(2) ......... $ (0.03) $ (0.11) $ (0.84) $ (0.12) $ (2.54) $ (1.10) $ (1.11) $ -- </TABLE> - ---------- (1) On August 13, 1999, OptiCare Eye Health Centers was acquired in a transaction accounted for as a purchase. Accordingly, the results of operations for OptiCare Eye Health Centers are included in the historical results of operations since September 1, 1999, the deemed effective date of the acquisition for accounting purposes. (2) Income (loss) from continuing operations per share for the historical 1999 and 1998 periods are calculated after giving effect to preferred stock dividends. (3) The weighted average common shares outstanding have been adjusted to reflect the conversion associated with the reverse merger with Saratoga. <TABLE> <CAPTION> AS OF SEPTEMBER 30, 1999 --------------------------- AS ADJUSTED HISTORICAL ------------- ----------- <S> <C> <C> Balance Sheet Data: Total current assets ........................... $25,395 $25,395 Total assets ................................... 68,308 68,444 Total current liabilities ...................... 25,327 25,327 Total debt (including current portion) ......... 27,782 41,382 Total stockholders' equity ..................... 17,800 4,336 </TABLE>
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+PROSPECTUS SUMMARY The following summary highlights information that we present more fully elsewhere in this prospectus. You should read this entire prospectus, including "Risk Factors" and the consolidated financial statements and related notes, before deciding to invest in our Class B common stock. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of factors described under "Risk Factors" and elsewhere in this prospectus. McDATA Corporation We are a leading provider of high performance enterprise switches and related software for connecting servers and storage systems in a storage area network, or SAN, based on our historic market share in this segment. We sell our products through industry leading original equipment manufacturers, such as EMC Corporation, resellers, such as International Business Machines Corporation, and systems integrators. We invoice the value of sales at shipment and generally have on-going service arrangements with these customers or the ultimate end-users of our products. We combine years of experience in designing, developing and manufacturing high performance switching technologies with a knowledge of business critical applications, service and support to solve complex business problems at the core of a business enterprise's data infrastructure. Our products enable business enterprises to cost effectively deploy a comprehensive, highly available and centrally managed storage network to support growing storage capacity requirements. During the past decade, the volume and value of data created throughout business enterprises has increased dramatically. As a result, the demand for data storage capacity has exploded as enterprises increasingly need to access, process and manipulate data that is critical to their businesses. International Data Corporation, an independent information technology research firm referred to as IDC, estimates that multi-user disk storage grew from more than 7,000 terabytes in 1993 to more than 185,000 terabytes in 1999, and will reach more than 1.9 million terabytes in 2003. One terabyte is one trillion bytes. The growing dependence on data for fundamental business processes has also greatly increased the performance required of servers and storage systems. The inability of traditional server-to-storage connections to provide the needed performance enhancements has caused significant performance limitations. To address the limitations of traditional server-to-storage connections, fibre channel technology was introduced in the early 1990's as a means to facilitate high performance storage connectivity, accelerating the development of SANs. SANs enable fast, efficient and reliable transfer of data across multiple servers and storage devices to improve the management of data within an enterprise. However, to date, business enterprises have often deployed SANs only within particular areas of their organization, as opposed to on an enterprise-wide basis. This localized deployment requires that each SAN be administered and managed locally, which hinders access to and sharing of information on a centrally-managed enterprise-wide basis. Our solutions include hardware and software products, methodologies and education that enable businesses to scale their operations globally through a comprehensive, manageable, flexible data infrastructure that is optimized for rapid application deployment and responsiveness to customer needs. The advantages of our solutions include the following: - Scalability -- Dynamic Growth. Our solutions are designed to enable business enterprises to consolidate, add or reconfigure servers and storage assets within an enterprise-wide network of data storage and switching devices. The architecture of our products is designed to permit businesses to expand their computing and storage resource needs without causing business interruption or a decline in overall storage system performance. MCDATA The Enterprise Storage Networking Company MCDATA ED-5000 DIRECTOR -------------- The Backbone of the Enterprise SAN [GRAPHIC] [The graphic depicts images and lines representing an enterprise-wide network of services, storage facilities, workgroups and McDATA products.] MCDATA ES-1000 SWITCH MCDATA EFC MANAGER ----------------------- ------------------------- Enables Enterprise-wide Manage the Enterprise SAN Data Centralization From a Central Location MCDATA's ENTERPRISE STORAGE NETWORKING SOLUTION ----------------------------------------------- - Connectivity -- Interoperability. We are at the forefront of providing products that interoperate with the majority of popular servers and storage devices. Our products are designed to protect customers' investments in their information infrastructures. - Availability -- Information Anywhere, Anytime. Our products are designed to provide maximum availability by using fault-tolerant technology incorporating spare, or "redundant," components in the architecture of the products. These products offer internally redundant capabilities that enable customers to run their businesses on a 24x7 basis with 99.999%, or "five-nines," operational availability. - Manageability -- Comprehensive Control for Low Total Cost of Ownership. Our enterprise-wide switching and network management software solutions are designed to enable customers to manage their entire SAN fabric from a central point. Product features simplify the overall administration, service and support of the infrastructure, permitting more efficient use of personnel and increased data availability. - Performance -- High Price to Performance Value. We have designed the technology for our products to provide customers with more data transmission ports per switch. This results in a lower price per port than similarly sized products with fewer ports that must be networked together in order to provide the same number of available ports. ------------------------ We are a Delaware corporation with our principal executive offices at 310 Interlocken Parkway, Broomfield, Colorado 80021, and our telephone number is (303) 460-9200. We maintain a Web site at www.mcdata.com. We do not, however, intend for our Web site to be part of this prospectus. In this prospectus, "McDATA," "we," "us" and "our" each refers to McDATA Corporation and its subsidiaries, and not to the underwriters or EMC. "EMC" refers to EMC Corporation and its subsidiaries, excluding McDATA. McDATA and McDATA's logo are trademarks of McDATA Corporation. All other brand names, logos, copyrights and trademarks appearing in this prospectus are the property of their respective owners. OUR RELATIONSHIP WITH EMC We are currently an indirect, majority-owned subsidiary of EMC Corporation. Since October 1, 1997, EMC, through its direct, wholly-owned subsidiary, McDATA Holdings Corporation, has owned 100% of our Class A common stock. Each share of our Class A common stock entitles its holder to one vote per share, while each share of our Class B common stock entitles its holder to one-tenth (1/10) of one vote per share. The Class A common stock indirectly held by EMC will represent, immediately following this offering, approximately 97% of the combined voting power of both classes of our voting stock on a fully diluted basis. Since October 1, 1997, we have operated substantially as a separate company from McDATA Holdings Corporation and EMC under the direction of our board of directors, a majority of whom are unaffiliated with EMC. EMC currently plans to liquidate McDATA Holdings Corporation and distribute all of the shares of our Class A common stock to the holders of EMC's common stock on a pro rata basis approximately six to twelve months after the date of this offering. However, EMC is not obligated to complete this distribution, and this distribution may not occur by the anticipated time or at all. EMC will, in its sole discretion, determine whether to complete the distribution, and the timing, structure and all other terms of its distribution of our Class A common stock that it owns. EMC's distribution depends on, among other things, it receiving a private letter ruling from the Internal Revenue Service that its distribution of shares of our Class A common stock to its stockholders will be tax-free to EMC and its stockholders. EMC acquired McDATA in December 1995. In October 1997, EMC reorganized McDATA to separate our fibre channel business from EMC. As part of this reorganization, we became a company focused on designing, developing, manufacturing and selling fibre channel switching devices for connecting servers and storage systems in a SAN or other information infrastructure. We continue to provide, under a services agreement with McDATA Holdings Corporation, manufacturing and distribution management services for proprietary mainframe protocol, or ESCON(TM), switching solutions manufactured for and sold to IBM. In addition to this services agreement, in 1997 we entered into other agreements with EMC relating to our business and our relationship with EMC. In connection with the offering described in this prospectus, we have entered into additional agreements with EMC relating to the offering and the distribution by EMC of our Class A common stock to its stockholders and to our relationship with EMC after the completion of the offering. These agreements provide for, among other things, various interim and ongoing relationships with EMC. We have also entered into an OEM Purchase and License Agreement with EMC that governs EMC's purchases of our products. Each of the agreements between us and EMC is described more fully in the section of this prospectus titled "Arrangements between McDATA and EMC." The terms of these agreements, which were negotiated in the context of a parent-subsidiary relationship, may be less favorable to us than if they had been negotiated with unaffiliated third parties. See "Risk Factors -- Risks Related to our Relationship with EMC." THE OFFERING Class B common stock offered....................... 12,500,000 shares Common stock to be outstanding after this offering: Class A common stock........ 81,000,000 shares Class B common stock........ 25,452,226 shares Total......................... 106,452,226 shares Underwriters' over-allotment option........................ 1,875,000 shares Use of proceeds............... We intend to use the net proceeds for general corporate purposes, including repayment of $1.9 million of outstanding indebtedness to McDATA Holdings Corporation, a wholly-owned subsidiary of EMC, capital expenditures and working capital. Voting Rights: Class A common stock........ One (1) vote per share Class B common stock........ One-tenth ( 1/10) of one vote per share Other common stock provisions.................... The holders of our Class A common stock and Class B common stock generally have identical rights, except for the different voting rights described above. Proposed Nasdaq National Market trading symbol for the Class B common stock........ MCDT ------------------------ Unless otherwise indicated, all information contained in this prospectus: - assumes no exercise of the underwriters' option to purchase up to 1,875,000 additional shares of our Class B common stock to cover over-allotments; and - reflects a 2-for-1 split of our Class A and Class B common stock effected prior to the offering. The number of shares of our Class B common stock to be outstanding immediately after the offering: - is based upon 12,952,226 shares of our Class B common stock outstanding as of June 30, 2000; and - does not take into account 12,839,624 shares of our Class B common stock issuable upon the exercise of options outstanding as of June 30, 2000, at a weighted average exercise price of $3.26 per share. ------------------------ SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------------------------- ------------------ 1995(1) 1996(1) 1997(1) 1998 1999 1999 2000 ------- ------- ------- ------- ------- ------- -------- <S> <C> <C> <C> <C> <C> <C> <C> Consolidated statements of operations data: Product revenue................ $11,851 $ 5,370 $ 4,035 $ 5,242 $29,466 $ 9,558 $ 26,475 Product revenue -- Parent...... -- 526 1,336 5,632 48,111 13,264 68,794 Service revenue -- Parent...... 22,438 26,304 27,652 25,674 17,686 11,368 8,326 ------- ------- ------- ------- ------- ------- -------- Total revenue.................. $34,289 $32,200 $33,023 $36,548 $95,263 $34,190 $103,595 Gross profit................... 24,382 24,196 21,753 23,443 44,983 17,885 53,331 ------- ------- ------- ------- ------- ------- -------- Income (loss) from operations................... 4,427 8,931 (1,230) (8,565) (930) (1,846) 16,238 ------- ------- ------- ------- ------- ------- -------- Net income (loss).............. $ 2,805 $ 5,770 $ (574) $(5,118) $(1,616) $(2,047) $ 9,555 ======= ======= ======= ======= ======= ======= ======== Pro Forma Earnings per Share(2): --------------------------- Basic net income (loss) per share........................ $ 0.03 $ 0.06 $ (0.01) $ (0.06) $ (0.02) $ (0.02) $ 0.10 ======= ======= ======= ======= ======= ======= ======== Shares used in computing basic net income (loss) per share........................ 91,000 91,000 91,000 91,000 91,638 91,017 93,398 Diluted net income (loss) per share........................ $ 0.03 $ 0.06 $ (0.01) $ (0.06) $ (0.02) $ (0.02) $ 0.10 ======= ======= ======= ======= ======= ======= ======== Shares used in computing diluted net income (loss) per share........................ 91,000 91,000 91,000 91,000 91,638 91,017 100,550 PRO FORMA INCOME DATA: Pro forma net income (loss)(3).................... $(1,518) $ 9,582 ======= ======== Pro forma net income (loss) per share(3)..................... $ (0.02) $ 0.10 ======= ======== Shares used in computing pro forma net income (loss) per share(3)..................... 91,719 93,479 Pro forma diluted net income (loss) per share(3).......... $ (0.02) $ 0.10 ======= ======== Shares used in computing pro forma diluted net income (loss) per share(3).......... 91,719 100,631 </TABLE> <TABLE> <CAPTION> JUNE 30, 2000 ------------------------- ACTUAL AS ADJUSTED(4) ------- -------------- <S> <C> <C> Consolidated balance sheet data: Cash and cash equivalents................................... $ 6,259 $296,251 Working capital............................................. 27,558 319,480 Total assets................................................ 73,984 363,976 Short-term debt -- Parent................................... 1,900 -- Long-term portion of capital lease obligations.............. 1,719 1,719 Total stockholders' equity.................................. 44,230 336,122 </TABLE> ------------------------- (1) In October 1997, EMC reorganized McDATA to separate our fibre channel devices business from EMC. As part of this reorganization, we became a company focused on designing, developing, manufacturing and selling fibre channel switching devices. As a result, the historical financial information for the three years ended December 31, 1997 has been adjusted to reflect the impact of the reorganization as if it occurred at the beginning of 1995. (2) Per share computations for 1995, 1996 and 1997 have been calculated using the actual number of shares issued on October 1, 1997 because the capital structure for prior periods was not indicative of the current structure. Per share computations for 1995, 1996 and 1997 are, therefore, pro forma per share data. (3) Pro forma per share computations have been calculated assuming that a portion of the proceeds from this offering were used to repay the $1.9 million in short term debt -- Parent on January 1, 1999 for the year ended December 31, 1999 and on January 1, 2000 for the six month period ended June 30, 2000. The pro forma net income (loss) is adjusted to add back the interest expense incurred related to the debt during the respective periods. The pro forma shares used to compute the pro forma net income (loss) per share, on both a basic and diluted basis, were adjusted to reflect the number of shares issued pursuant to this offering to repay the short term debt -- Parent. (4) The as adjusted balance sheet reflects this offering at an assumed initial offering price of $25.00 per share of Class B common stock, the mid-price of the filing range, after deducting an assumed underwriting discount and estimated offering expenses payable by us and the repayment of the short-term debt -- Parent.
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+PROSPECTUS SUMMARY [JOHN HANCOCK LOGO APPEARS HERE] AN INTRODUCTION We are a financial services company with a strong record of profitable growth. John Hancock is one of the nation's leading financial services companies, providing a broad array of insurance and investment products and services to retail and institutional customers. By diversifying from traditional life insurance products to include investment-oriented savings products demanded by consumer and institutional markets, we have generated strong revenue and earnings growth. Our net income grew at a compound annual rate of 21.3% from $207.2 million in 1994 to $448.5 million in 1998. Net income of $409.1 million for the nine months ended September 30, 1999 declined 7.8% over net income [GRAPHIC] of $443.6 million for the nine months ended September 30, 1998 primarily due to non-recurring demutualization expenses, charges in connection with our court approved settlement relating to a class action lawsuit and an increase in the mutual company surplus tax. Our 1998 return on equity ("ROE") was 10.3%, calculated as net income divided by average equity excluding net unrealized investment gains and losses. We also evaluate our overall performance and base management's incentives on segment income. Total segment income differs from net income because it excludes items which management believes are not indicative of overall operating trends, including the effects of net realized investment gains and losses and unusual or non-recurring events and transactions. Total segment income grew at a compound annual rate of 15.0%, from $286.6 million in 1994 to $500.8 million in 1998. Total segment income of $473.3 million for the nine months ended September 30, 1999 grew 30.9% over total segment income of $361.7 million for the nine months ended September 30, 1998. Our 1998 total segment return on equity was 11.5%. The accompanying chart demonstrates our strong ROE as a result of our strategy of diversified products and distribution. In addition to product diversification, we have strategically expanded distribution channels to capture a broader share of the consumer market. Today's multi-distribution network includes associated sales personnel, broker/dealers, direct brokerage, financial planners, banks, direct marketing and e-commerce. With our broad product diversity and distribution reach linked to the valuable John Hancock name, we believe we are positioned to continue our growth in revenue and profitability. Our brand is a key competitive asset. The John Hancock brand is one of the most well recognized names in the financial services industry. We have used distinctive advertising strategies to expand our brand recognition both as a quality provider of insurance and as an expert in investment management. The very strong claims paying ratings we hold from each of the four major rating agencies further strengthen the John Hancock brand. We believe a strong brand and recognized financial strength are competitive advantages, and thus they continue to be key elements of our corporate strategy. We operate in five segments. We operate and report results in two retail and two institutional segments, as well as in a Corporate and Other Segment, as illustrated below. [JOHN HANCOCK LOGO APPEARS HERE] [CHART APPEARS HERE] Our retail products and distribution channels are diversified. We recognize that different consumer groups have different financial planning needs and preferences. Our retail strategy of diversifying products and distribution, which has been in place for more than five years, is designed to meet these changing consumer needs. Demand for our variable life insurance and other asset gathering products has accelerated significantly. Today, sales of variable life insurance account for nearly 68% of our total life insurance sales. Sales of variable annuities represented more than 70% of our total annuity sales in 1998. Although sales of variable annuities have decreased relative to fixed annuities through the first nine months of 1999, our total annuity sales have remained at the same level as the first nine months of 1998. From 1996 through 1998, total long-term care insurance premium increased at a compound annual rate of 25% reaching $291.2 million. For the nine months ended September 30, 1999, long-term care premiums increased 21.9% to $259.5 million. We have recently announced our agreement to purchase Fortis, Inc.'s individual long-term care business. This acquisition will reinforce our leadership position and increase our individual long-term care business by about 50% in this rapidly growing market. Given our expertise in product design, we most recently developed an innovative new product that combines the benefits of variable annuities and long-term care protection. In 1998, net deposits and reinvestments of our mutual funds were $3.1 billion, and total mutual fund assets under management were $34.9 billion. In 1999, we, like many mutual fund companies, experienced net redemptions. For the first nine months of 1999, there were net redemptions of $2.1 billion attributable primarily to our financial industries and regional bank funds, the performance of which reflected weakness in these sectors. We have taken steps to restore growth in assets under management, including the development of new fund offerings and refocusing our sales organization on regional distributors. In terms of distribution, we have been diversifying our channels to address the consumers' preferences for selecting financial services and products through a variety of sources. In addition to about 3,000 associated sales personnel, we sell through financial planners, broker/dealers, banks and direct channels including e-commerce. Over the past three and three quarter years, an average of 43% of our total annuity sales, nearly 86% of our mutual fund sales and 38% of our life insurance sales were made through alternative channels. With respect to life insurance sales, alternative channels include the M Financial Group, a national producer group of firms operating exclusively in the upper end of the wealth transfer and executive benefit markets. In addition to diversification of distribution, we are also making fundamental changes in our career agency system to improve productivity, reduce fixed costs and enhance service. As a key component of this strategy, in early 1999 we created a distribution subsidiary, Signator Financial Network ("Signator"), which will provide tailored financial planning tools and marketing support to further enable our current agents, as well as new, top- producing experienced agents, to sell products of multiple companies. Signator will also be making significant investments in agent training, expanded licensing and enhanced service and product support. Our institutional businesses are backed by a strong track record. Our institutional segments offer investment products and services to retirement plans and institutional investors including 60 of the largest 100 U.S. corporate pension plans. Major products of our Guaranteed and Structured Financial Products Segment include a variety of GICs, funding agreements and other investment products. The Investment Management Segment offers investments in a variety of asset classes, including fixed maturity securities, equities, natural resources, collateralized bond obligations and mezzanine financings. We distribute institutional products through dedicated sales professionals, independent marketing specialists, consultants and investment banks. We have built our institutional asset management businesses on the foundation of our core investment expertise, including our global investment expertise. In addition to managing $47.5 billion of general account investments, we also managed advisory assets of $39.7 billion and separate account assets of $26.0 billion which back our variable product lines. We continue to work to enhance our collaborative approach across all retail and institutional product segments to streamline the development of new asset management products and services. OUR STRATEGY FOR THE FUTURE Our strategy is focused on continued growth in revenue and profitability and on providing greater returns to our shareholders. Demutualization will support this strategy because, by converting from a mutual to a stockholder-owned company, we will have access to capital for acquisitions, which will, among other things, facilitate lowering unit costs and broadening distribution. As a stock company, we will also be better able to attract and retain talented staff. Our major strategic initiatives are: . Support and extend the John Hancock brand We will continue to commit the financial and creative resources necessary to ensure our brand leadership. . Meet changing customer needs through additional product choice To meet the needs of increasingly sophisticated consumers, we will provide a comprehensive portfolio of competitive, innovative products and provide superior service for all of our retail and institutional product lines and distribution channels. . Expand distribution channel options for our customers Expansion of our multi-distribution network will continue to be a key to our success. We will, where appropriate, continue to own distribution. Our new Investors Partner Life subsidiary is an innovative vehicle to provide life insurance through broker/dealers. In 1999, we acquired Essex Corporation, one of the nation's leading distributors of annuities through banks. Our recently announced agreement to purchase Fortis, Inc.'s individual long-term care business will provide access to an established national network of long-term care insurance brokers. . Provide customized and superior distribution channel service We will continue our customized approach to supporting and servicing our distributors. We will also expand our presence in the on-line area via delivery to portals, consumer web sites and Internet partnerships. . Expand in key international markets We recognize the increasingly global nature of the financial services business and intend to build on our presence in Canada and selected Asian markets, including China. . Build on our investment management strength We will build on our asset management capabilities, strong asset/liability management and financial engineering skills to expand both product offerings and fee-based asset management businesses. . Become more efficient We recognize the imperative to be an efficient provider of products, distribution and services. We have already taken significant steps to reduce costs and to further that aim we are assessing all major initiatives and have engaged outside consulting services to identify major savings opportunities. . Continue to invest in technology We expect to make significant investments in technology over the next several years to improve operational efficiency and enhance service. These initiatives include automated underwriting, digital signature processes, on-line shopping and electronic servicing. We intend to expand our capabilities as an efficient provider and servicing agent of multiple products to multiple channels. THE REORGANIZATION On August 31, 1999, the board of directors of John Hancock Mutual Life Insurance Company unanimously adopted the Plan of Reorganization, under which John Hancock Mutual Life Insurance Company would convert from a mutual life insurance company to a stock life insurance company and become a wholly-owned subsidiary of John Hancock Financial Services, Inc. Our reorganization is governed by the Massachusetts insurance law. The Massachusetts Commissioner of Insurance held a hearing on the Plan of Reorganization on November 17 and 18, 1999. At a special meeting of the policyholders of John Hancock Mutual Life Insurance Company held on November 30, 1999, the policyholders voted to approve the Plan of Reorganization. On December 9, 1999, the Massachusetts Commissioner of Insurance issued an order approving the Plan of Reorganization. The appeal period with respect to this order is described below. The unsatisfied conditions to the effectiveness of the Plan of Reorganization are the completion of this offering, the contribution of substantially all of the net proceeds of the offering to John Hancock Life Insurance Company, and the delivery to us by outside counsel of a legal opinion as to the tax consequences of the reorganization. The reorganization will become effective on the date of the closing of the offering. See "The Reorganization" and "Use of Proceeds." Under the Plan of Reorganization, policyholders' membership interests in John Hancock Mutual Life Insurance Company will be extinguished and in exchange eligible policyholders of John Hancock Mutual Life Insurance Company will receive shares of our common stock, policy credits or cash. See "The Reorganization--Payment of Consideration to Eligible Policyholders." Under the Plan of Reorganization, as of the effective date of the reorganization, John Hancock Life Insurance Company will be obligated to establish and operate a closed block for the benefit of the policies included therein. The policies included in the closed block are individual or joint traditional whole life insurance policies currently paying or expected to pay policy dividends and individual term life insurance policies which are in force on the effective date of the reorganization. The purpose of the closed block is to protect the policy dividend expectations of these policies after the reorganization. Unless the Massachusetts Commissioner of Insurance and, in certain circumstances, the New York Superintendent of Insurance, consent to an earlier termination, the closed block will continue in effect until the date none of the policies included in the closed block is in force. On the effective date of the reorganization, John Hancock Life Insurance Company will allocate assets to the closed block that are expected to produce cash flows which, together with anticipated revenues (principally premiums and investment income) from the policies included in the closed block, are expected to be sufficient to support those policies. The total cash flows are intended to be sufficient to provide for payment of policy benefits, taxes and direct asset acquisition and disposition costs, and for continuation of policy dividend scales payable in 1999, so long as the experience underlying such dividend scales continues. See "The Reorganization--Establishment and Operation of the Closed Block." THE OFFERING Common stock offered........ 102,000,000 shares. Common stock outstanding after the offering......... 331,700,000 shares. Use of proceeds............. We expect the net proceeds of the offering to be approximately $1,649 million. All of the net proceeds (including any proceeds received pursuant to exercise of the underwriters' over-allotment option) other than the portion to be retained by John Hancock Financial Services, Inc., as described below, will be contributed to John Hancock Life Insurance Company and will, subject to a limited exception, be used to make cash payments to, and establish reserves with respect to policy credits for, eligible policyholders and to pay expenses related to the reorganization. We expect that the amount of net proceeds to be retained by John Hancock Financial Services, Inc. will be $150 million. We intend to use these net proceeds for general corporate purposes and to pay a dividend to our stockholders in the year following the effective date of the reorganization. However, provisions of our Plan of Reorganization may serve to reduce the amount retained to an amount less than $150 million, unless specific approval is received from the Massachusetts Commissioner of Insurance. If this amount is reduced, John Hancock Financial Services, Inc. may require additional funds, to be obtained through dividends from John Hancock Life Insurance Company or borrowings, in order to pay our first year stockholder dividend, if declared. Dividend policy............. Subject to our financial condition and declaration by our board of directors, we currently intend to pay regular annual cash dividends on our common stock. We currently intend to declare an initial annual cash dividend of $.30 per share in the fourth quarter of 2000. See "Stockholder Dividend Policy." Proposed New York Stock Exchange symbol............ JHF Unless we specifically state otherwise, the information in this prospectus does not take into account the sale of up to 15,300,000 shares of our common stock which the underwriters have the option to purchase from us to cover over- allotments. SUMMARY HISTORICAL FINANCIAL DATA The following table sets forth certain summary historical consolidated financial data. The summary income statement data for each of the three years ended December 31, 1998 and balance sheet data as of December 31, 1998 and 1997 have been derived from our audited consolidated financial statements and notes thereto included elsewhere in this prospectus (the "Consolidated Financial Statements"). The following summary income statement data for the years ended December 31, 1995 and 1994 and balance sheet data as of December 31, 1996, 1995, and 1994 have been derived from our audited consolidated financial statements not included herein. The summary income statement data for the nine months ended September 30, 1999 and 1998 and balance sheet data as of September 30, 1999 have been derived from our unaudited interim consolidated financial statements included in this prospectus. The summary balance sheet data as of September 30, 1998 has been derived from our unaudited interim consolidated financial statements not included herein. All unaudited interim consolidated financial data presented in the tables below reflect all adjustments (consisting of normal, recurring accruals) necessary for a fair presentation of our consolidated financial position and results of operations for such periods. The results of operations for the nine months ended September 30, 1999 are not necessarily indicative of the results to be expected for the full year. The following summary historical consolidated financial data has been prepared in accordance with generally accepted accounting principles ("GAAP"), except that the statutory data presented below has been prepared in accordance with applicable statutory accounting practices and was taken from our annual statements filed with insurance regulatory authorities. The following is a summary, and in order to fully understand our consolidated financial data, you should also read "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our Consolidated Financial Statements and the notes thereto included elsewhere in this prospectus. In particular, those other sections of this prospectus contain information about the adoption of GAAP accounting standards and transactions affecting comparability of results of operations between periods that is not included in this summary. <TABLE> <CAPTION> For the Nine Months Ended September 30, For the Year Ended December 31, ------------------ --------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- -------- -------- (in millions) <S> <C> <C> <C> <C> <C> <C> <C> Income Statement Data: Revenues Premiums................ $2,033.3 $1,647.7 $2,197.9 $2,473.6 $2,922.5 $2,657.1 $2,473.6 Universal life and investment-type product charges................ 509.4 441.3 597.0 512.0 466.3 414.0 379.7 Net investment income... 2,581.0 2,441.5 3,330.7 3,190.7 3,223.1 3,099.4 2,910.7 Net realized investment gains (losses), net of related amortization of deferred policy acquisition costs and amounts credited to participating pension contractholders (1).... 178.0 64.9 106.4 157.0 110.7 52.3 (79.4) Investment management revenues, commissions and other fees......... 504.6 487.9 659.7 554.7 751.3 660.0 588.7 Other revenue........... 11.8 2.6 10.3 58.3 230.9 248.3 194.7 -------- -------- -------- -------- -------- -------- -------- Total revenues......... 5,818.1 5,085.9 6,902.0 6,946.3 7,704.8 7,131.1 6,468.0 Benefits and expenses Benefits to policyholders, excluding amounts related to net realized investment gains credited to participating pension contractholders (2).... 3,600.4 2,944.1 4,152.0 4,303.1 4,676.7 4,226.5 3,925.2 Other operating costs and expenses........... 997.1 955.9 1,383.0 1,283.7 1,694.1 1,568.3 1,536.9 Amortization of deferred policy acquisition costs, excluding amounts related to net realized investment gains (3).............. 145.0 200.3 249.7 312.0 230.9 229.1 219.7 Dividends to policyholders.......... 361.0 348.4 473.2 457.8 435.1 496.5 416.6 -------- -------- -------- -------- -------- -------- -------- Total benefits and expenses.............. 5,103.5 4,448.7 6,257.9 6,356.6 7,036.8 6,520.4 6,098.4 -------- -------- -------- -------- -------- -------- -------- Income before income taxes, extraordinary item and cumulative effect of accounting change................. 714.6 637.2 644.1 589.7 668.0 610.7 369.6 Income taxes............ 239.2 188.8 183.9 106.4 247.5 261.2 142.2 -------- -------- -------- -------- -------- -------- -------- Income before extraordinary item and cumulative effect of accounting change...... 475.4 448.4 460.2 483.3 420.5 349.5 227.4 Extraordinary item-- demutualization expenses, net of tax... (56.6) (4.8) (11.7) -- -- -- -- Cumulative effect of accounting change...... (9.7) -- -- -- -- -- (20.2) -------- -------- -------- -------- -------- -------- -------- Net income............. $ 409.1 $ 443.6 $ 448.5 $ 483.3 $ 420.5 $ 349.5 $ 207.2 ======== ======== ======== ======== ======== ======== ======== </TABLE> <TABLE> <CAPTION> As of or for the Nine Months Ended September 30, As of or for the Year Ended December 31, ------------------- ------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- --------- --------- (in millions) <S> <C> <C> <C> <C> <C> <C> <C> Balance Sheet Data: General account assets.. $54,157.6 $52,011.2 $52,000.1 $49,906.4 $48,420.6 $47,485.7 $43,778.2 Separate accounts assets................. 26,048.5 22,690.8 24,966.6 21,511.1 18,082.1 15,835.2 12,909.8 Total assets............ 80,206.1 74,702.0 76,966.7 71,417.5 66,502.7 63,320.9 56,688.0 General account liabilities............ 48,485.8 46,443.2 46,442.2 44,693.0 43.291.2 42,795.9 40,249.9 Long-term debt.......... 536.8 647.5 602.7 543.3 1,037.0 934.3 605.4 Separate accounts liabilities............ 26,048.5 22,690.8 24,966.6 21,511.1 18,082.1 15,835.2 12,909.8 Total liabilities....... 75,071.1 69,781.5 72,011.5 66,747.4 62,410.3 59,565.4 53,765.1 Policyholders' equity... 5,135.0 4,920.5 4,955.2 4,670.1 4,092.4 3,755.5 2,922.9 Statutory Data: Capital and surplus (4).................... $ 3,811.7 $ 3,413.3 $ 3,388.7 $ 3,157.8 $ 2,856.1 $ 2,533.5 $ 2,330.0 Asset valuation reserve ("AVR")................ 1,198.0 1,280.1 1,316.9 1,191.0 1,088.4 1,035.6 852.8 --------- --------- --------- --------- --------- --------- --------- Capital and surplus plus AVR.................... $ 5,009.7 $ 4,693.4 $ 4,705.6 $ 4,348.8 $ 3,944.5 $ 3,569.1 $ 3,182.8 ========= ========= ========= ========= ========= ========= ========= Statutory net income.... $ 483.6 $ 353.4 $ 627.3 $ 414.0 $ 313.8 $ 340.8 $ 182.6 </TABLE> We evaluate segment performance and base management's incentives on segment after-tax operating income, which excludes the effect of net realized investment gains and losses and unusual or non-recurring events and transactions. Segment after-tax operating income is determined by adjusting GAAP net income for net realized investment gains and losses, extraordinary items, and certain other items which we believe are not indicative of overall operating trends. While these items may be significant components in understanding and assessing our consolidated financial performance, we believe that the presentation of segment after-tax operating income enhances the understanding of our results of operations by highlighting net income attributable to the normal, recurring operations of the business. However, segment after-tax operating income and total segment income are not a substitute for net income determined in accordance with GAAP. <TABLE> <CAPTION> For the Nine Months Ended For the Year Ended September 30, December 31, -------------- ------------------------ 1999 1998 1998 1997 1996 ------ ------ ------- ------- ------ (in millions) <S> <C> <C> <C> <C> <C> Segment Data: (5) Segment after-tax operating income: Protection Segment................. $137.3 $133.8 $ 172.3 $ 158.1 $197.3 Asset Gathering Segment............ 97.5 87.9 111.1 93.3 55.7 ------ ------ ------- ------- ------ Total Retail..................... 234.8 221.7 283.4 251.4 253.0 Guaranteed and Structured Financial Products Segment.................. 165.8 101.8 145.7 139.9 155.4 Investment Management Segment...... 27.6 6.4 15.4 17.2 21.6 ------ ------ ------- ------- ------ Total Institutional.............. 193.4 108.2 161.1 157.1 177.0 Corporate and Other Segment........ 45.1 31.8 56.3 39.4 20.2 ------ ------ ------- ------- ------ Total segment income................. 473.3 361.7 500.8 447.9 450.2 After-tax adjustments: Realized investment gains, net (6)............................... 118.0 75.1 93.9 104.9 80.6 Class action lawsuit............... (91.1) -- (150.0) (112.5) (90.0) Restructuring charges.............. (7.5) -- -- -- -- Benefit from pension participating contract modification............. -- -- -- 7.7 -- Surplus tax........................ (17.3) 11.6 15.5 35.3 (20.3) ------ ------ ------- ------- ------ Total after-tax adjustments...... 2.1 86.7 (40.6) 35.4 (29.7) ------ ------ ------- ------- ------ GAAP Reported: Income before extraordinary item and cumulative effect of accounting change................. 475.4 448.4 460.2 483.3 420.5 Extraordinary item-demutualization expenses, net of tax.............. (56.6) (4.8) (11.7) -- -- Cumulative effect of accounting change............................ (9.7) -- -- -- -- ------ ------ ------- ------- ------ Net income......................... $409.1 $443.6 $ 448.5 $ 483.3 $420.5 ====== ====== ======= ======= ====== </TABLE> - -------- (1) Net realized investment gains have been reduced by: (1) amortization of deferred policy acquisition costs to the extent that such amortization results from realized gains and losses and (2) the portion of realized gains and losses credited to participating pension contractholder accounts. We believe presenting realized investment gains and losses in this format provides information useful in evaluating our operating performance. This presentation may not be comparable to presentations made by other insurers. See note 6 for related amounts. (2) Benefits to policyholders excludes amounts related to net realized investment gains credited to participating pension contractholders of $33.7 million and $9.6 million for the nine months ended September 30, 1999 and 1998, respectively, and $79.1 million, $29.3 million, $22.3 million, $1.3 million, and $(1.8) million for the years ended 1998, 1997, 1996, 1995, and 1994, respectively. (3) Amortization of deferred policy acquisition costs excludes amounts related to net realized investment gains of $60.0 million and $30.5 million for the nine months ended September 30, 1999 and 1998, respectively, and $41.2 million, $31.2 million, $17.6 million, $24.7 million, and $2.9 million for the years ended 1998, 1997, 1996, 1995, and 1994, respectively. (4) In accordance with accounting practices prescribed or permitted by the Massachusetts Division of Insurance, statutory capital and surplus includes $450.0 million in total principal amount of our surplus notes outstanding. (5) Our GAAP reported net income was significantly affected by net realized investment gains and losses and unusual or non-recurring events and transactions presented above as after-tax adjustments. A description of these adjustments follows. In all periods, net realized investment gains and losses, except for gains and losses from mortgage securitizations and investments backing our multi-manager funding agreements, have been excluded from segment after-tax operating income due to their volatility between periods and because such data are often excluded by analysts and investors when evaluating the overall financial performance of insurers. The volatility between periods can be impacted by fluctuations in the market, as well as by changes in the volume of activity which can be influenced by us and our investment decisions. Realized investment gains and losses from mortgage securitizations and investments backing our multi-manager funding agreements were not excluded from segment after-tax operating income because we view the related gains and losses as an integral part of the core business of those operations. See note 6 for related amounts. We have been subject to the surplus tax imposed on mutual life insurance companies which disallows a portion of a mutual life insurance company's policyholder dividends as a deduction from taxable income. As a stock company, we will no longer be subject to surplus tax and have excluded the surplus tax from segment after-tax operating income in all periods. During 1997, we entered into a court approved settlement relating to a class action lawsuit involving individual life insurance policies sold from 1979 through 1996, as specified elsewhere in this prospectus. In entering into the settlement, we specifically denied any wrongdoing. The reserve held in connection with the settlement to provide for relief to class members and for legal and administrative costs associated with the settlement amounted to $522.5 million, $436.6 million and $308.8 million at September 30, 1999, December 31, 1998 and December 31, 1997, respectively. Given the uncertainties associated with estimating the reserve, it is reasonably possible that the final cost of the settlement could differ materially from the amount previously provided. During the first nine months of 1999, we recorded $7.5 million in after-tax restructuring charges in accordance with our plans to reduce the cost structure of our mutual fund operations and career agency distribution system. These charges primarily included accruals for severance and related benefits. The restructuring liability at September 30, 1999 was $11.2 million and is expected to be paid by March 2002. During 1997, a participating pension reinsurance contractholder requested the distribution of a portion of contract funds. At the time of the request, the contract stated that these funds were to be paid out over a specified number of years. However, we distributed a portion of the contractholder's funds in exchange for the right to retain the tax credits that resulted from the distribution. The contractual amendment resulted in the recognition of a $7.7 million after-tax gain. (6) Net realized investment gains have been reduced by: (1) amortization of deferred policy acquisition costs to the extent that such amortization results from realized gains and losses and (2) the portion of realized gains and losses credited to participating pension contractholder accounts. We believe presenting realized investment gains and losses in this format provides information useful in evaluating our operating performance. This presentation may not be comparable to presentations made by other insurers. Summarized below is a reconciliation of (a) net realized investment gains per the consolidated financial statements for the nine months ended September 30, 1999 and 1998 and for the years ended 1998, 1997, 1996, 1995, and 1994, and (b) the adjustment made for net realized investment gains to calculate segment after-tax operating income for the nine months ended September 30, 1999 and 1998 and for the years ended 1998, 1997, and 1996. <TABLE> <CAPTION> For the Nine Months Ended September 30, For the Year Ended December 31, -------------- -------------------------------------- 1999 1998 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ ------ ------ (in millions) <S> <C> <C> <C> <C> <C> <C> <C> Net realized investment gains (losses)......... $271.7 $105.0 $226.7 $217.5 $150.6 $ 78.3 $(78.3) Less amortization of deferred policy acquisition costs related to net realized investments gains...... (60.0) (30.5) (41.2) (31.2) (17.6) (24.7) (2.9) Less amounts credited to participating pension contractholder accounts............... (33.7) (9.6) (79.1) (29.3) (22.3) (1.3) 1.8 ------ ------ ------ ------ ------ ------ ------ Net realized investment gains (losses), net of related amortization of deferred policy acquisition costs and amounts credited to participating pension contractholders--per consolidated financial statements............. 178.0 64.9 106.4 157.0 110.7 $ 52.3 $(79.4) ====== ====== Less realized investment gains (losses) attributable to mortgage securitizations and investments backing multi-manager funding agreements............. (17.4) (49.2) (42.1) (4.6) -- ------ ------ ------ ------ ------ Realized investment gains (losses), net-- pre-tax adjustment made to calculate segment operating income....... 195.4 114.1 148.5 161.6 110.7 Less income tax effect.. (77.4) (39.0) (54.6) (56.7) (30.1) ------ ------ ------ ------ ------ Realized investment gains (losses), net-- after-tax adjustment made to calculate segment operating income................. $118.0 $ 75.1 $ 93.9 $104.9 $ 80.6 ====== ====== ====== ====== ====== </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000736338_gerimed_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000736338_gerimed_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. Before investing in the common stock, you should read the entire prospectus carefully, including the "Risk Factors" section and the financial statements and the notes to those statements. Any references to "we," "us," "our" or similar words or phrases refer to GeriMed of America, Inc. and its subsidiaries. We are not affiliated with GeriMed, Inc., a Kentucky corporation that purchases and distributes pharmaceuticals for the long term care industry. GENERAL We are a health care delivery and medical management organization specializing in providing health care services to patients eligible to participate in the federal Medicare program who are 65 years of age and older. Our primary business focus is on providing comprehensive health care services for Medicare beneficiaries under global risk contracts with health maintenance organizations. Global risk contracts obligate us to provide comprehensive medical services to health maintenance organization patients on a percent of total premium basis. The foundation of our health care delivery model is the MedWise Primary Care Center, a primary care medical center that uses a physician-led team and our proprietary care management software to provide comprehensive primary care services for older adults. The MedWise Primary Care Center's interdisciplinary team concept works to provide earlier, less costly intervention in medical and psycho-social problems, with a goal of improving the quality of care and patient satisfaction and decreasing utilization of inappropriate and costly health care services. A key component of our health care delivery model is our proprietary care management software. This software is a tool used by our MedWise Primary Care Center interdisciplinary teams and administrative staff to manage the care of their patients throughout the entire healthcare continuum. In addition, we are in the development stages of a physician support module for integration into our software, which we are currently beta testing for use as an electronic medical record. If such testing is positive, we will investigate potential commercialization of such software. However, we currently cannot predict the commercial viability of such software, nor our ability to fund such commercialization. Our clients include HMOs and hospitals. HMOs contract with us to provide comprehensive health care services to their members under their health plans. We currently provide most of our services under Medicare health care plans, but approximately 7% of our service revenues in 1999 were attributable to non-Medicare health care plan enrollment. We arrange for the delivery of these services for a fixed per member monthly fee, typically referred to as a capitated fee arrangement. Primary care physician services are provided THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND WILL BE AMENDED AND COMPLETED. A REGISTRATION STATEMENT RELATING TO THE COMMON STOCK HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED MARCH 31, 2000 GERIMED OF AMERICA, INC. 7,759,335 Shares Of Common Stock -------------------- GeriMed of America, Inc. and its shareholders are offering up to 7,759,335 shares of common stock, including: o Up to 1,060,000 shares that we may offer to our employees directly through our stock option plan o Up to 3,545,000 shares that our officers and directors may offer through the internal market o Up to 3,154,335 shares that our other shareholders may offer through the internal market This offering of common stock is designed to allow trading of the common stock among our employees, directors, and other current shareholders up to four times each year on the internal market. No exchange will list the common stock. For more details on how the internal market will function, see "Internal Market Information" beginning on page 12. All of the shares being offered for sale by this prospectus will be sold through the internal market at the price set by the Board of Directors from time to time. Effective for the second quarter of 2000, the price for the common stock is $2.50 per share. ----------- INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4. ----------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ----------- Prospectus dated , 2000 TABLE OF CONTENTS <TABLE> <S> <C> PROSPECTUS SUMMARY................................................................................................1 RISK FACTORS......................................................................................................4 SECURITIES OFFERED BY THIS PROSPECTUS............................................................................12 INTERNAL MARKET INFORMATION......................................................................................12 USE OF PROCEEDS..................................................................................................18 DIVIDEND POLICY..................................................................................................18 DILUTION.........................................................................................................19 SELECTED FINANCIAL DATA..........................................................................................20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................21 BUSINESS.........................................................................................................27 STOCK OPTION PLAN................................................................................................37 MANAGEMENT.......................................................................................................44 CERTAIN TRANSACTIONS.............................................................................................49 PRINCIPAL SHAREHOLDERS...........................................................................................50 SECURITIES OFFERED BY THE CURRENT SHAREHOLDERS...................................................................53 DESCRIPTION OF CAPITAL STOCK.....................................................................................55 SHARES ELIGIBLE FOR FUTURE SALE..................................................................................63 LEGAL MATTERS....................................................................................................63 EXPERTS..........................................................................................................63 WHERE YOU CAN FIND MORE INFORMATION..............................................................................63 INDEX TO FINANCIAL STATEMENTS...................................................................................F-1 </TABLE> through physicians employed by or under contract with us. For services, other than primary care services, we generally arrange for these services by contracting with hospitals and other providers under a variety of fee arrangements. As of March 1, 2000, we were under contract to provide comprehensive health care services to approximately 17,150 HMO patients in Florida and Colorado, of which approximately 14,600 are Medicare HMO patients. Historically, hospitals have contracted with us for the development and management of primary care outpatient clinics primarily for patients who are 65 years of age or older. In connection with such clinics, we have also licensed our care management software. Our hospital clients typically pay a one-time fixed development fee and monthly fixed management and licensing fees for our services and the use of our software. We are currently phasing out of the business of managing hospital clinics to focus on providing medical services to managed care organizations through our own centers. We currently manage six hospital clinics. EXPANSION AND LIQUIDITY OF COMMON STOCK OWNERSHIP Historically, our shareholder agreements have restricted ownership and transfer of our common stock. To expand the ownership of our common stock, the Board of Directors decided to establish a new ownership program as a replacement for the shareholders' agreements. The main goals of the new program are: o Establishing an internal market to enable shareholders to buy and sell common stock; and o Expanding the opportunity for common stock ownership to include all of our employees and directors. OPERATION OF THE INTERNAL MARKET Through the internal market, any eligible shareholder may offer shares of common stock for sale to eligible buyers up to four times each year on predetermined trade dates. Shares will be bought and sold through the internal market at a price determined by the Board of Directors that is intended to represent fair value. The stock price is determined by the Board of Directors based upon our results of operations and total revenue, as well as a subjective analysis of market factors the Board of Directors considers relevant. We may purchase and the broker administering the internal market may purchase or sell shares of common stock on the internal market on any trade date to balance the supply and demand for common stock between sellers and buyers, but neither we nor the broker will be obligated to do so. CORPORATE INFORMATION We were incorporated in Colorado in 1993. Our executive offices are at 333 West Hampden Avenue, Suite 200, Englewood, Colorado 80110. Our telephone number is (303) 781-6430; and our website is www.gerimed.com. Information contained on our website is not part of this prospectus.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000750199_epl-oil_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000750199_epl-oil_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read this entire prospectus carefully, including "Risk Factors" and our financial statements and the notes to those financial statements included elsewhere in this prospectus. We have provided definitions for some of the oil and natural gas terms used in this prospectus in the "Glossary of Oil and Natural Gas Terms" included in this prospectus. Unless otherwise indicated, the information contained in this prospectus assumes that the underwriters do not exercise their over-allotment options. ABOUT ENERGY PARTNERS, LTD. We are an independent oil and natural gas exploration and production company concentrated in the shallow to moderate depth waters of the central region of the Gulf of Mexico Shelf. This region contains over 500 oil and natural gas fields, 25 of which have individually produced over 250 million barrels of oil equivalent. Most of our properties are located in the Terrebonne Trough area of this region. We have focused on this area because it provides us with favorable economic and geologic conditions, including multiple reservoir formations, regional economies of scale, extensive infrastructure and comprehensive geologic databases. We believe that the large, established fields in this region offer a balanced and ample inventory of existing and prospective exploitation and development opportunities, as well as the long-term potential for reserve additions and production increases from deeper geologic formations. We were incorporated in January 1998 by Richard A. Bachmann, our chairman, president and chief executive officer. Mr. Bachmann, the former president and chief operating officer of The Louisiana Land and Exploration Company, assembled a team of geoscientists and management professionals with considerable region-specific geological, geophysical, technical and operational experience to form the foundation of our company. The industry relationships of Mr. Bachmann and the rest of our team provide us with access to the operators of the Gulf of Mexico Shelf fields that we target for redevelopment. Our 12-member management team has an average of 25 years of energy industry experience, many with large energy companies. Our management and employees collectively will own or have rights to acquire approximately 24.1% of our common stock after this offering. In November 1999, Evercore Capital Partners L.P., a New York-based private investment firm, invested $60.0 million in our company and will own approximately 34.8% of our outstanding shares of common stock after this offering. We have grown our company through a combination of multi-year, multi-well drill-to-earn programs and strategic acquisitions. Under our drill-to-earn programs, we use our personnel and capital to identify and pursue additional drilling opportunities on properties previously developed by our drill-to-earn partners and recover our investment through sharing revenue from the new production we establish. After successful drilling of wells, we earn an interest in the reserves we find and develop. We generally operate the properties during the drilling phase of these programs and seek to reduce costs and improve reservoir recovery efficiencies through our geophysical, technical and operational expertise. Early this year, we acquired Ocean Energy, Inc.'s interest in the East Bay field and, in a series of transactions, increased our interest in the South Timbalier 26 field. Our proved reserves at January 1, 2000, including our acquisition of the East Bay field and our increased interest in the South Timbalier 26 field, were 35.5 Mmboe (28.0 Mmbls of oil and 44.6 Bcf of natural gas, or 79% oil) and our pre-tax PV-10 (present value of future cash flows, assuming a discount rate of 10% per annum) was $258.5 million, based on a reserve report prepared by Netherland, Sewell & Associates, Inc. Our standardized measure of discounted future net cash flows, which deducts the present value of estimated income taxes from the pre-tax PV-10 amount, totaled $201.7 million. For the month ended June 30, 2000, our net daily oil production averaged approximately 9,200 Bbls and our net daily natural gas production averaged approximately 11,850 Mcf, or a total of 11,200 Boe per day. Our pro forma EBITDAX (earnings before interest, taxes, depreciation, depletion and amortization and exploration expenditures) was $47.4 million for the year ended December 31, 1999 and $34.6 million for the six months ended June 30, 2000. Our pro forma net income was $8.2 million for the year ended December 31, 1999 and $15.8 million for the six months ended June 30, 2000. EXPLANATORY NOTE This registration statement contains two forms of prospectus: one to be used in connection with an underwritten offering of our common stock in the United States and Canada, and one to be used in a concurrent international offering of our common stock. The U.S. prospectus for the offering in the United States and Canada follows immediately after this explanatory note. After the U.S. prospectus are the alternate pages for the international prospectus. Copies of the complete U.S. prospectus and international prospectus in the exact forms in which they are to be used after effectiveness will be filed with the Securities and Exchange Commission pursuant to Rule 424(b) under the Securities Act. OUR STRATEGY Our goal is to generate an attractive return on capital employed by opportunistically entering into drill-to-earn programs or complementary acquisitions in our core operating areas. We plan to achieve this goal by: - Maintaining our Gulf of Mexico focus. We focus on the large, established fields in the central Gulf of Mexico Shelf area because we believe that this region's extensive infrastructure and favorable geologic conditions will allow us to achieve attractive returns on our investments. - Capitalizing on our geoscience expertise. Our geologists and geophysicists internally generate and evaluate prospects in their current area of focus and in connection with our new business initiatives. Our drill-to-earn programs give our technical teams access to our partners' technical databases to identify and implement successful and profitable development, exploitation and exploration activities. - Continuing to operate our properties. We seek to retain operatorship following an acquisition or in connection with drill-to-earn programs. As of June 30, 2000, we operated properties which comprised approximately 88% of our production. - Expanding our asset base through additional drill-to-earn programs and strategic acquisitions. We plan to identify new drill-to-earn and acquisition opportunities by targeting both oil and natural gas properties that have high cumulative production with low levels of current production, significant identified proven reserves with potential for large reserve additions, existing infrastructure and multiple productive reservoir targets. - Maximizing profitability through outsourcing non-geoscience activities. We seek to enhance our operating capability and achieve operating cost savings through strategic alliances with oilfield service companies and by outsourcing the majority of our accounting and administrative functions. Risks related to our strategy. Prospective investors should carefully consider the matters set forth under the caption "Risk Factors," as well as the other information set forth in this prospectus, including that our future operating results are difficult to forecast because we have a limited operating history, the 3-D seismic data and other technologies we use cannot eliminate exploration risk, our relatively small number of properties increases our exposure to production problems, reserve estimate inaccuracies materially affect the quantities and net present value of our reserves, our Gulf of Mexico focus subjects us to higher reserve replacement needs, and the oil and natural gas business involves many operating and financial risks. One or more of these matters could negatively impact our ability to implement successfully our business strategy. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED OCTOBER 24, 2000 P R O S P E C T U S 5,750,000 SHARES [ENERGY PARTNERS, LTD. LOGO] ENERGY PARTNERS, LTD. COMMON STOCK ---------------------- This is our initial public offering. We are selling all of the shares. The U.S. underwriters are offering 4,600,000 shares in the U.S. and Canada and the international managers are offering 1,150,000 shares outside the U.S. and Canada. We expect the public offering price to be between $17 and $19 per share. Currently, no public market exists for the shares. After pricing of the offering, we expect that the shares will trade on the New York Stock Exchange under the symbol "EPL." INVESTING IN OUR COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 10 OF THIS PROSPECTUS. ---------------------- <TABLE> <CAPTION> PER SHARE TOTAL --------- ----- <S> <C> <C> Public offering price...................................... $ $ Underwriting discount...................................... $ $ Proceeds, before expenses, to Energy Partners, Ltd......... $ $ </TABLE> The U.S. underwriters may also purchase up to an additional 690,000 shares at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. The international managers may similarly purchase up to an additional 172,500 shares from us. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The shares will be ready for delivery on or about , 2000. ---------------------- MERRILL LYNCH & CO. UBS WARBURG LLC CREDIT SUISSE FIRST BOSTON HOWARD WEIL A DIVISION OF LEGG MASON WOOD WALKER, INC. ---------------------- The date of this prospectus is , 2000. OUR PRINCIPAL OIL AND NATURAL GAS PROPERTIES Currently, we have three specific project areas: East Bay; Greater Bay Marchand; and Main Pass 122/133. South Timbalier 26, Bay Marchand and South Timbalier 22, 23 and 27 collectively comprise what is known as the Greater Bay Marchand area. The blocks are contiguous and together cover most of the large Bay Marchand area located in state and federal waters offshore Louisiana. East Bay has produced 880 Mmboe and the Greater Bay Marchand area has produced over 1,069 Mmboe. East Bay and the Greater Bay Marchand area are two of the ten largest fields in the central Gulf of Mexico Shelf, based on cumulative production. The following table and accompanying narrative summarize our interests in these properties, our significant transactions since our inception and our rationale for each transaction. We discuss each property in more detail under "Business and Properties -- Our Principal Oil and Natural Gas Properties." <TABLE> <CAPTION> AS OF JANUARY 1, 2000 JUNE 2000 -------------------------------- AVERAGE DAILY PROVED RESERVES PRE-TAX NET PRODUCTION WORKING ---------------- PV-10 -------------- PROJECT AREA INTEREST MBOE % OIL (IN MILLIONS) BOE % OIL ------------ --------- ------- ------ ------------- ------ ----- <S> <C> <C> <C> <C> <C> <C> East Bay................................... 96.1% 27,405 83% $183.5 8,150 85% Greater Bay Marchand Area: South Timbalier 26....................... 50.0 5,483 67 54.2 1,670 81 Bay Marchand............................. 12.5-45.0 1,411 83 11.0 785 80 South Timbalier 22, 23 and 27............ 12.5 383 67 1.8 115 72 ------ ------ ------ Total Greater Bay Marchand Area........ 7,277 70 67.0 2,570 80 Main Pass 122/133.......................... 51.4-75.0 792 27 8.0 480 58 ------ ------ ------ Total............................. 35,474 79 $258.5 11,200 82 ====== ====== ====== </TABLE> We acquired the East Bay field from Ocean Energy, Inc. effective January 1, 2000. Three oil and natural gas fields, South Pass 24, 27 and 39, comprise the East Bay field. This property met all of our investment criteria and also provided us with a significant source of stable production from a large number of wells. During the first half of 1998, we negotiated the purchase of a 100% working interest in the South Timbalier 26 field from Shell Offshore, Inc. We brought in Unocal Corporation as our partner in the transaction and, in June 1998, we completed the purchase. We acquired a 20% working interest in and operatorship of the field and Unocal acquired the remaining 80% working interest. Unocal subsequently elected to dispose of its interest in the field, and effective January 1, 2000, we acquired Unocal's 80% interest in the field. We subsequently sold 50% of our working interest in the field to Vastar Resources, Inc. We retained operatorship of the field. Our interests in the Bay Marchand field originated from two drill-to-earn programs with Chevron USA Inc. The first program covered the federal outer continental shelf portion of the field and commenced in August 1998. In May 2000, we entered into the second drill-to-earn program, covering the portion of the field located in Louisiana state waters. We purchased our initial interest in South Timbalier 22, 23 and 27 in October 1999. In September 2000, we acquired an additional 14.6% working interest from Texaco Exploration and Production Inc. effective January 1, 2000. Our reserves and production associated with this interest are not included in the table above or other reserve and production information in this prospectus. Our drill-to-earn program with Chevron covering Main Pass 122/133 generated our first set of drilling opportunities. Our success with these wells provided us with the operating history and track record to negotiate additional drill-to-earn programs and acquisitions. We have completed this drill-to-earn program and do not plan any additional capital investments for Main Pass 122/133. We have identified a substantial inventory of development, exploitation and exploration projects which we are pursuing in East Bay and the Greater Bay Marchand area. We believe this inventory provides us with significant opportunities to increase our reserves and production. The following table summarizes well projects and the estimated capital expenditures we currently plan to undertake through December 31, 2002. <TABLE> <CAPTION> ESTIMATED CAPITAL IDENTIFIED EXPENDITURES PROJECT AREA PROJECTS (IN MILLIONS) ------------ ---------- ------------- <S> <C> <C> East Bay.................................................... 172 $102.0 Greater Bay Marchand Area................................... 81 73.5 --- ------ Total............................................. 253 $175.5 === ====== </TABLE> OUR EXECUTIVE OFFICES Our principal executive offices are located at 201 St. Charles Avenue, Suite 3400, New Orleans, Louisiana 70170. Our telephone number is (504) 569-1875. Our Internet address on the World Wide Web is www.eplweb.com. Information on our web site does not constitute part of this prospectus. THE OFFERING Common stock offered by Energy Partners: U.S. offering.................. 4,600,000 shares International offering......... 1,150,000 shares Total.................. 5,750,000 shares Shares outstanding after the offering......................... 27,057,489 shares Use of proceeds.................. We estimate that our net proceeds from this offering without exercise of the over-allotment options will be approximately $95.1 million. We intend to use these net proceeds: - to repay indebtedness; - to redeem preferred stock; and - for general corporate purposes. Please read "Use of Proceeds" for more details regarding the allocation among the listed uses. Risk factors..................... Please read "Risk Factors" and other information included in this prospectus for a discussion of factors you should consider carefully before deciding to invest in shares of our common stock. Proposed New York Stock Exchange symbol........................... "EPL" The number of shares outstanding after the offering excludes 433,000 shares issuable on exercise of outstanding stock options at a weighted average exercise price of $9.88 per share and 208,295 shares which are issuable under our benefit plans and other rights to acquire shares. Please read "Capitalization" for more information regarding our capitalization immediately following this offering. SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The summary historical financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with our financial statements and the notes to those financial statements included elsewhere in this prospectus. The statement of operations data for the period January 29, 1998 (inception) to December 31, 1998 and for the year ended December 31, 1999 and the balance sheet data as of December 31, 1998 and 1999 were derived from our audited financial statements included in this prospectus. The summary pro forma and historical financial data as of June 30, 2000 and for the six-month periods ended June 30, 1999 and 2000 were derived from our unaudited consolidated financial statements, which in our opinion include all adjustments (which consist only of normal recurring adjustments) necessary for a fair presentation of our financial condition and results of operations for such interim periods. The pro forma financial data set forth below does not purport to represent what our financial condition or results of operations actually would have been if the acquisitions that are given pro forma effect in fact occurred on the assumed dates or to project our financial condition or results of operations for any future period or date. <TABLE> <CAPTION> JANUARY 29, 1998 PRO FORMA SIX MONTHS ENDED JUNE 30, (INCEPTION) TO YEAR ENDED YEAR ENDED ---------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, PRO FORMA 1998 1999 1999(1) 1999 2000 2000(1) -------------- ------------ ------------ -------- ----------- --------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Revenue..................................... $ 1,966 $ 9,509 $78,719 $ 3,780 $ 30,356 $56,401 -------- -------- ------- -------- -------- ------- Costs and Expenses: Lease operating........................... 359 1,640 27,283 623 7,992 15,869 Exploration expenditures and dry hole costs................................... -- 1,570 1,570 -- 824 824 Depreciation, depletion and amortization............................ 1,303 4,525 23,300 1,936 8,286 12,531 General and administrative................ 615 2,609 4,077 1,098 5,577 5,944 -------- -------- ------- -------- -------- ------- Total costs and expenses.............. 2,277 10,344 56,230 3,657 22,679 35,168 -------- -------- ------- -------- -------- ------- Income (loss) from operations............... (311) (835) 22,489 123 7,677 21,233 -------- -------- ------- -------- -------- ------- Interest income............................. 49 312 312 85 328 328 Interest expense............................ (802) (2,947) (9,877) (1,301) (3,057) (4,790) Gain on sale of oil and gas assets.......... -- -- -- -- 7,781 7,781 -------- -------- ------- -------- -------- ------- Income (loss) before income taxes........... (1,064) (3,470) 12,924 (1,093) 12,729 24,552 Income taxes................................ 359 1,185 (4,716) 374 (4,474) (8,730) -------- -------- ------- -------- -------- ------- Net income (loss)........................... $ (705) $ (2,285) $ 8,208 $ (719) $ 8,255 $15,822 ======== ======== ======= ======== ======== ======= Net income (loss) available to common stockholders(2)........................... $ (705) $ (3,121) $ 7,372 $ (719) $ 4,023 $11,589 ======== ======== ======= ======== ======== ======= Basic income (loss) per common share........ $ (0.09) $ (0.22) $ 0.52 $ (0.05) $ 0.47 $ 1.36 ======== ======== ======= ======== ======== ======= Diluted income (loss) per common share...... $ (0.09) $ (0.22) $ 0.35 $ (0.05) $ 0.46 $ 0.89 ======== ======== ======= ======== ======== ======= Weighted average shares: Basic(3).................................. 7,427 14,247 14,247 15,060 8,495 8,495 ======== ======== ======= ======== ======== ======= Diluted(4)................................ 7,427 14,247 23,498 15,060 17,824 17,824 ======== ======== ======= ======== ======== ======= Other Financial Data and Selected Ratios: EBITDAX(5).................................. $ 992 $ 5,260 $47,359 $ 2,059 $ 16,787 $34,588 EBITDAX margin(6)........................... 50% 55% 60% 54% 55% 61% Cash flows provided by (used in): Operating activities...................... $ 8,044 $ (4,594) -- $ 5,165 $ 7,114 -- Investing activities...................... (27,081) (19,233) -- (10,001) (84,844) -- Financing activities...................... 19,689 45,457 -- 7,861 62,112 -- Capital and exploration expenditures........ $ 27,081 $ 19,233 -- $ 10,001 $121,454 -- </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, ------------------------- AS OF DECEMBER 31, PRO FORMA ------------------ AS ADJUSTED 1998 1999 2000 2000(7) ------- ------- ----------- ----------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS) <S> <C> <C> <C> <C> Balance Sheet Data: Total assets.............................................. $40,015 $69,276 $163,841 $180,745 Long-term debt, excluding current maturities.............. 20,000 10,150 60,000 -- Redeemable preferred stock................................ -- 56,475 60,663 -- Stockholders' equity...................................... (694) (3,815) 717 153,285 </TABLE> footnotes on the following page --------------- (1) Gives effect to the acquisitions and the disposition completed by us in 2000, each as if consummated on January 1, 1999. (2) Net income (loss) available to common stockholders is computed by subtracting preferred stock dividends and accretion of issuance costs for the year ended December 31, 1999 of $836,342 and for the six months ended June 30, 2000 of $4,232,583. (3) Basic weighted average shares excludes 3,304,830 shares from the date placed in escrow, November 17, 1999. (4) Diluted weighted average shares includes the conversion of Class A and B preferred stock. (5) EBITDAX is defined as earnings before interest, taxes, depreciation, depletion and amortization and exploration expenditures and is presented because it is a widely accepted financial indication of an exploration and production company's ability to service and incur debt. EBITDAX is not a calculation based on generally accepted accounting principles and should not be considered as an alternative to earnings (loss) as an indicator of the company's operating performance or to cash flows as a measure of liquidity. EBITDAX measures presented in this prospectus may not be comparable to other similarly titled measures reported by other companies. In evaluating EBITDAX, investors should consider, among other things, the amount by which EBITDAX exceeds interest costs, how EBITDAX compares to principal repayments on debt and how EBITDAX compares to capital expenditures for each period. (6) Represents EBITDAX divided by revenue. (7) As adjusted to give effect to the offering (at an assumed offering price of $18.00 per share) and the application of the net offering proceeds described in more detail under "Use of Proceeds." ADDITIONAL PRO FORMA DATA The net income (loss) data presented in the following table adjusts our historical net income (loss) and our pro forma income giving effect to: - the conversion of all outstanding shares of our preferred stock into common stock as if the conversion had occurred on January 1, 1999; - the release of 2,545,500 shares of common stock from escrow with an expense of approximately $45.5 million as if the shares vested on January 1, 1999; and - the use of a portion of the estimated net proceeds of this offering to pay all outstanding indebtedness and the reduction of related interest expense all as if the transaction had occurred on January 1, 1999. Proceeds used to repay debt were $75 million and required the issuance of 4,166,667 shares of common stock. Interest expense was reduced by $2,947,354 in 1999 and $3,056,860 for the six months ended June 30, 2000. <TABLE> <CAPTION> YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1999 JUNE 30, 2000 -------------------------- -------------------------- PRO FORMA PRO FORMA PRO FORMA AS ADJUSTED(1) PRO FORMA AS ADJUSTED(1) --------- -------------- --------- -------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> Pro forma income (loss).................... $(44,837) $(27,415) $11,312 $20,612 ======== ======== ======= ======= Pro forma basic and diluted income (loss) per common share......................... $ (1.64) (1.00) $ 0.46 $ 0.84 ======== ======== ======= ======= Pro forma weighted average number of common shares outstanding--basic and diluted.... 27,391 27,391 24,537 24,537 ======== ======== ======= ======= </TABLE> --------------- (1) Adjusts the pro forma net income (loss) to also give effect to the acquisitions and the disposition completed by us in 2000, each as if consummated on January 1, 1999. Pro forma interest expense was reduced on a pro forma basis by $9,877,000 in 1999 and $4,790,000 for the six months ended June 30, 2000. SUMMARY RESERVE AND OPERATING DATA The following table presents summary information regarding our estimated net proved oil and natural gas reserves as of December 31, 1998 and 1999 and January 1, 2000 and our historical and pro forma operating data for the years ended December 31, 1998 and 1999 and the six months ended June 30, 1999 and 2000. All calculations of estimated net proved reserves have been made in accordance with the rules and regulations of the SEC, and, except as otherwise indicated, give no effect to federal or state income taxes otherwise attributable to estimated future net revenues for the sale of oil and natural gas. The January 1, 2000 estimates of proved reserves are based on a reserve report prepared by Netherland, Sewell, our independent petroleum engineering consultants. Appendix A to this prospectus contains a letter prepared by Netherland, Sewell summarizing the reserve report. For additional information regarding our reserves, please read "Business and Properties -- Oil and Natural Gas Reserves" and note 11 of the notes to our financial statements. RESERVE DATA <TABLE> <CAPTION> AS OF DECEMBER 31, AS OF ------------------- JANUARY 1, 1998 1999 2000(4) -------- -------- ---------- <S> <C> <C> <C> Total estimated net proved reserves: Oil (Mbbls)............................................... 2,861 3,824 28,040 Natural gas (Mmcf)........................................ 12,534 12,752 44,603 Total (Mboe)...................................... 4,950 5,949 35,474 Net proved developed reserves: Oil (Mbbls)............................................... 2,467 2,715 24,991 Natural gas (Mmcf)........................................ 10,859 7,631 32,476 Total (Mboe)...................................... 4,277 3,987 30,404 Estimated future net revenues before income taxes (in thousands)................................................ $41,051 $76,999 $326,416 Present value of estimated future net revenues before income taxes (in thousands)(1)(2)................................ $27,533 $54,819 $258,525 Standardized measure of discounted future net cash flows (in thousands)(3)............................................. $24,889 $47,177 $201,725 </TABLE> table continued and footnotes on the following page OPERATING DATA <TABLE> <CAPTION> PRO FORMA JANUARY 29, 1998 PRO FORMA SIX MONTHS SIX MONTHS (INCEPTION) TO YEAR ENDED YEAR ENDED ENDED JUNE 30, ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, ---------------- JUNE 30, 1998 1999 1999(6) 1999 2000 2000(6) ---------------- --------------- ------------ ------ ------- ------------ <S> <C> <C> <C> <C> <C> <C> Net production: Oil (Mbbls).............. 96 384 3,817 187 965 1,770 Natural gas (Mmcf)....... 238 831 7,430 325 1,479 2,880 Total (Mboe).......... 136 523 5,055 241 1,212 2,250 Net sales data (in thousands): Oil...................... $1,268 $6,678 $64,095 $2,613 $24,803 $47,091 Natural gas.............. 524 1,806 14,365 601 5,206 9,241 ------ ------ ------- ------ ------- ------- Total................. $1,792 $8,484 $78,460 $3,214 $30,009 $56,332 ====== ====== ======= ====== ======= ======= Average sales prices: Oil (per Bbl)............ $13.21 $17.39 $ 16.79 $13.97 $ 25.70 $ 26.61 Natural gas (per Mcf).... 2.20 2.17 1.93 1.85 3.52 3.21 Total (per Boe)....... 13.18 16.22 15.52 13.34 24.76 25.04 Average (per Boe): Lease operating expense............... $ 2.64 $ 3.14 $ 5.40 $ 2.59 $ 6.60 $ 7.05 General and administrative expense............... 4.52 4.99 0.81 4.56 4.60 2.64 Depreciation, depletion and amortization expense............... 9.58 8.65 4.74 8.03 6.84 5.57 EBITDAX(5)............... 7.29 10.06 9.37 8.54 13.85 15.37 </TABLE> --------------- (1) The present value of estimated future net revenues attributable to our reserves was prepared using constant prices, as of the calculation date, discounted at 10% per year on a pre-tax basis. (2) The December 31, 1999 amount was calculated using a period end average realized oil price of $24.64 per barrel and a period end average realized gas price of $2.42 per Mcf. (3) The standardized measure of discounted future net cash flows represents the present value of future cash flows after income tax discounted at 10%. (4) Includes reserves for East Bay and the additional interest acquired in South Timbalier 26. (5) EBITDAX is defined as earnings before interest, taxes, depreciation, depletion and amortization and exploration expenditures and is presented because it is a widely accepted financial indication of an exploration and production company's ability to service and incur debt. EBITDAX is not a calculation based on generally accepted accounting principles and should not be considered as an alternative to earnings (loss) as an indicator of the company's operating performance or to cash flows as a measure of liquidity. EBITDAX measures presented in this prospectus may not be comparable to other similarly titled measures reported by other companies. In evaluating EBITDAX, investors should consider, among other things, the amount by which EBITDAX exceeds interest costs, how EBITDAX compares to principal repayments on debt and how EBITDAX compares to capital expenditures for each period. (6) The pro forma production amounts were obtained by aggregating the production for the properties we acquired with our historical production. The pro forma sales, expense and EBITDAX information per Boe was derived by dividing the respective amounts from the unaudited pro forma financial statements appearing elsewhere in this prospectus by the pro forma production.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000758938_qualstar_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000758938_qualstar_prospectus_summary.txt
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+PROSPECTUS SUMMARY To fully understand this offering and its consequences to you, you should read the following summary together with the more detailed information and financial statements and notes thereto appearing elsewhere in this prospectus. Qualstar Corporation We design, develop, manufacture and sell automated magnetic tape libraries used to store, retrieve and manage electronic data primarily in network computing environments. Tape libraries consist of cartridge tape drives, storage arrays of tape cartridges and robotics to move the tape cartridges from their storage locations to the tape drives under software control. Our tape libraries provide storage solutions for organizations requiring backup, recovery and archival storage of critical electronic information. Our tape libraries are compatible with commonly used network operating systems, including UNIX, Windows NT, NetWare and Linux, and a wide range of storage management software. We offer tape libraries for multiple tape drive technologies, including those using Advanced Intelligent Tape, DLT, and quarter inch cartridge tape drives and media. We recently announced tape libraries for the Linear Tape Open, Ultrium tape drives and media. The amount of electronic data and information has been growing due to the emergence of new applications such as image processing, e-commerce, Internet information and email, video and motion picture image storage and other multimedia applications. Storing, managing and protecting this data is increasingly important to the success and operations of many organizations. Consequently, the data storage industry is growing in response to this increase in data. Tape libraries are an important part of a data storage solution and are less expensive on a cost per-megabyte basis than any other data storage method. The growth in data and the need for complex storage solutions have spurred the evolution of new storage and data management technologies. These new technologies include: . Fibre Channel, an interface technology which allows users to share storage information with other storage devices and servers over longer distances with data transfer speeds at least 10 times faster than the most common interface technology in use today. In November 1999, we invested $1.1 million for an approximately 1% interest in Chaparral Network Storage, Inc. We purchase products from Chaparral that we incorporate into our tape libraries to provide Fibre Channel connectivity; . Storage Area Networks, a networking architecture which allows data to move efficiently and reliably between multiple storage devices and servers; . Advanced storage management software, which has increased the ability of businesses to store, retrieve and manage important data, which in turn allows businesses to operate more efficiently; and . Internet-based storage backup, which allows individuals and enterprises to outsource their storage of data on a cost-efficient basis through services provided by Internet-based storage backup companies. We have designed and developed our products to work with these emerging technologies. We have focused our business primarily on supporting value added resellers and original equipment manufacturers as the most effective and profitable distribution channels for our tape libraries. Value added resellers develop and install storage solutions for enterprises that face complex storage needs but lack the in-house capability to design and implement their own solution. Value added resellers integrate our tape libraries with the products of other manufacturers and sell the combined products to their customers. Original equipment manufacturers combine our tape libraries with their own products and generally resell our products under their own brand names. We custom configure our library products based on our customer's requirements, with a standard delivery time of one to three working days. We support our value added resellers with a wide array of marketing programs and offer all of our customers around-the-clock technical support. Our six senior operations executives have worked in the computer and data storage industries for an average of more than 30 years each. We believe that our experience provides us the ability to bring new products to market in response to changing market conditions and new opportunities as they arise. From July 1, 1996 through March 31, 2000, our revenues have grown at a compound annual growth rate of 35.8% and our net income has grown at a compound annual growth rate of 85.3%. We believe that we are well-positioned to become a key provider of automated tape libraries to the storage solutions market. To achieve our goals, we intend to focus on the following key strategies: . Offer libraries for multiple tape drive technologies in order to target the specific preferences of our value added reseller and original equipment manufacturer customers; . Focus distribution on the value added reseller channel, which we believe is the most effective market channel for our products; . Maintain and strengthen our original equipment manufacturer relationships, which allow us to reach end users not served by our value added reseller customers; . Develop libraries for new tape technologies as they come to market; and . Increase our rate of innovation in order to exploit emerging technologies and product opportunities. Corporate Information We were incorporated in California in August 1984. Our executive offices are located at 6709 Independence Avenue, Canoga Park, CA 91303. Our telephone number is (818) 592-0061. Our website address is www.qualstar.com. Information contained in our website does not constitute part of this prospectus. "Qualstar(R)," "Inventory Sentry(TM)" and our logo are trademarks of Qualstar. This prospectus also contains product names, trade names and trademarks that belong to other companies. The Offering <TABLE> <C> <C> <S> Common stock offered................................ 2,500,000 shares Common stock to be outstanding after this offering.. 12,123,155 shares Use of proceeds..................................... We intend to use the net proceeds from this offering for leasehold improvements, sales and marketing activities, research and development, capital expenditures, working capital and other general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol....................... QBAK </TABLE> The number of shares of common stock outstanding after this offering is based on shares outstanding as of April 30, 2000, and excludes: . 1,152,900 shares of common stock reserved for issuance under our stock incentive plans, of which options to purchase 326,700 shares were outstanding as of April 30, 2000, at a weighted average exercise price of $1.44 per share. Unless otherwise indicated, all information in this prospectus: . has been adjusted to give effect to a 2.7-for-1 stock split that became effective on March 29, 2000; . reflects the automatic conversion of all outstanding shares of our preferred stock into a total of 2,378,160 shares of common stock upon the closing of this offering; . assumes no exercise of the underwriters' over-allotment option; and . assumes no exercise of outstanding options to purchase shares of our common stock after April 30, 2000. Summary Financial Data (in thousands, except per share amounts) <TABLE> <CAPTION> Nine Months Ended Years Ended June 30, March 31, -------------------------------------- ----------------- 1995 1996 1997 1998 1999 1999 2000 ------ ------- ------- ------- ------- -------- -------- (unaudited) <S> <C> <C> <C> <C> <C> <C> <C> Statements of Income Data: Net revenues............ $8,432 $10,974 $15,333 $19,155 $29,698 $ 20,643 $ 34,896 Gross profit............ 2,934 3,834 4,565 6,263 10,640 7,624 12,940 Income from operations.. 37 793 1,451 3,030 6,507 4,671 8,973 Net income applicable to common shareholders.... 82 526 848 1,786 3,986 2,829 5,490 Earnings per share: Basic................. $ 0.01 $ 0.08 $ 0.13 $ 0.28 $ 0.60 $ 0.43 $ 0.79 Diluted............... $ 0.01 $ 0.06 $ 0.09 $ 0.19 $ 0.42 $ 0.30 $ 0.57 Shares used to compute earnings per share: Basic................. 6,221 6,288 6,332 6,404 6,629 6,627 6,928 Diluted............... 9,231 9,196 9,065 9,290 9,467 9,370 9,625 Pro forma earnings per share: Basic................. $ 0.44 $ 0.59 Diluted............... $ 0.42 $ 0.57 Shares used to compute pro forma earnings per share: Basic................. 9,008 9,306 Diluted............... 9,467 9,625 </TABLE> The pro forma basic and diluted net income per share data presented above gives effect to the conversion of our preferred stock into a total of 2,378,160 shares of common stock upon the closing of this offering from the beginning of the periods presented. The as adjusted column contained in the balance sheet data summarized below gives effect to our receipt of the net proceeds from this offering assuming an initial public offering price of $8.00 per share, which are estimated to be $17.5 million, as described under "Use of Proceeds." <TABLE> <CAPTION> March 31, 2000 ------------------- Actual As Adjusted ------- ----------- (unaudited) <S> <C> <C> Balance Sheet Data: Cash and cash equivalents................................... $ 2,094 $19,594 Working capital............................................. 15,830 33,330 Total assets................................................ 20,082 37,582 Total debt.................................................. -- -- Shareholders' equity........................................ 17,323 34,823 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000786998_matrixone_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000786998_matrixone_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, especially "Risk Factors" beginning on page 8. Our Business We are a provider of Internet business collaboration software. Our eMatrix suite of products serves as an Internet platform facilitating collaboration among different departments and geographic locations of global organizations. Our software is also designed to serve as a backbone for an enterprise to collaborate through the Internet with its customers, suppliers and other business partners. Our eMatrix line of products integrates different business processes and facilitates the exchange of information and ideas such as conceptual planning and design of new products, design for manufacturability, new product introduction and a variety of other key business activities. Additionally, we provide a full line of services, including implementation, training, maintenance and customer support, designed to ensure that our customers successfully utilize our eMatrix products. The emergence of a global economy and the rapid growth of the Internet are requiring organizations to rapidly respond to a constantly changing business environment. Today, companies need timely, greater and tighter integration and collaboration among their engineering, manufacturing, sales and marketing and customer support departments to efficiently bring feature-rich products and services to market at competitive prices. Organizations may be hindered in their abilities to interact and exchange information both internally and externally due to disparate business processes, differing information technology systems, language barriers, the lack of a reliable and secure environment, network constraints and the prospect of long implementation times for new software solutions. Our eMatrix suite of software products is designed to address these issues. Our products provide companies with an Internet platform enabling flexible, real-time collaboration within their organizations and with their customers, suppliers and other business partners. Our product features allow our customers to dynamically model, continuously re-evaluate, change and optimize their business processes and content with minimal programming. Customers are also able to define business processes in multiple languages or dialects and to minimize the problems of misinterpretation or misunderstanding. In addition, we offer our customers off-the-shelf integrations to a wide variety of software products, which allow our customers to leverage their existing technology infrastructures and continue to use other best-of-breed applications and point solutions. Our open-standards Internet architecture enables our customers to exchange large volumes of different types of data, information, ideas and knowledge regardless of their information technology infrastructures, systems or software. Our eMatrix products also contain security features designed to protect the confidentiality and integrity of the data, information and ideas being exchanged. Although implementation times for our products vary with the scope of the project, our customers are able to implement specific applications in as little as two weeks, which allows our customers to rapidly realize the benefits of our software. Our installed customer base represents a wide variety of industries, including aerospace/ defense, automotive, communications, high technology, machinery and medical equipment. Over 300 companies in more than 40 countries worldwide use our eMatrix product suite, including Celestica, Honda, Honeywell, John Deere, Scania, Siemens and 3Com. For more information about our customers please see "Business--Customers and Case Studies" beginning on page 48. For the six months ended January 1, 2000, we achieved revenues of $30.0 million and reported an operating loss of $3.5 million and for the year ended July 3, 1999, we had revenues of $41.3 million and an operating loss of $7.7 million. Our Strategy We seek to be the world's leading provider of Internet business collaboration software. To accomplish this goal, we intend to: . extend our technology leadership by accelerating research and development investments; . expand our business-to-business collaboration capabilities by continuing to enhance the scope of the features and functionality of our eMatrix product line; . develop business process and industry-focused applications which capture and automate particular business processes; . broaden our business alliances with systems integrators and distributors and with enterprise, Internet and application software companies; . leverage our customer base to sell additional products and services, to access our customers' suppliers, customers and other business partners, and to further penetrate our customers' industries; and . expand our global presence to increase our ability to provide our customers with high-quality service in any of their locations. Our History We incorporated in Delaware under the name Adra Systems, Inc. in July 1983. We commercially shipped the first version of our business collaboration software in November 1993 and released our first Internet business collaboration software product in March 1997. In October 1997, we changed our name to MatrixOne, Inc., and in May 1998, we sold our legacy design and manufacturing software business, Adra Systems, to focus on our Internet suite of products. We released the current version of our business collaboration suite of products, eMatrix, in June 1999. Our principal executive offices are located at Two Executive Drive, Chelmsford, Massachusetts 01824, and our telephone number is (978) 322-2000. Our Internet address is www.matrixone.com. The information contained on our website is not incorporated by reference in this prospectus. MatrixOne(R) is a registered trademark, and eMatrix, eMatrix Advantage, Adaplet, eMatrix Integrations, Matrix Global Advantage, Matrix Systems Administrator, Matrix Business Administrator, MatrixWeb User, Matrix Application Development Kit ADK, CSM and Customer Success Model are trademarks, of MatrixOne. All other trademarks or trade names referenced in this prospectus are the property of their respective owners. The Offering <TABLE> <C> <S> Shares offered by MatrixOne.................. 5,000,000 shares Shares to be outstanding after the offering.. 38,158,245 shares Proposed Nasdaq National Market symbol....... MONE Use of proceeds.............................. For general corporate purposes, including working capital and possible acquisitions. </TABLE> The shares of common stock to be outstanding after the offering exclude: . 12,828,270 shares issuable upon the exercise of outstanding stock options as of January 1, 2000 at a weighted average exercise price of $0.80; . 168,750 shares issuable upon the exercise of an outstanding warrant as of January 1, 2000 at an exercise price of $0.44 per share; and . 200,000 shares issuable upon the exercise of an outstanding warrant as of February 1, 2000 at an exercise price equal to 125% of the initial public offering price. Unless otherwise specifically stated, information throughout this prospectus assumes: . no exercise of the underwriters' over-allotment option; . the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 26,762,779 shares of common stock immediately prior to the closing of the offering; . the effectiveness of a three-for-one stock split of the common stock immediately prior to the date of this prospectus; . the effectiveness of our Second Amended and Restated Certificate of Incorporation which reflects 100,000,000 shares of authorized common stock and authorizes 5,000,000 shares of undesignated preferred stock and the adoption of our Amended and Restated By-laws as of the closing of the offering; and . the sale of 450,000 shares of common stock to GE Capital Equity Investments, Inc. based on an assumed initial public offering price of $21.00 per share. The shares will be sold at the initial public offering price less underwriters' discounts and commissions in a concurrent private placement. For additional information, please see "Business-- Customers and Case Studies" beginning on page 48 and "Description of Capital Stock--Concurrent Private Placement" on page 69. Summary Consolidated Financial Data The following table summarizes our consolidated statements of operations data. In May 1998, we sold our legacy design and manufacturing software business, Adra Systems, to focus on our Internet-enabled suite of software products. The financial results of this divested business are reflected in our consolidated financial statements as discontinued operations. Shares used in computing pro forma basic and diluted net income (loss) per share give effect to the conversion of all outstanding shares of our convertible preferred stock into shares of common stock, as if the conversion had occurred on the original date of issuance. <TABLE> <CAPTION> Year Ended Six Months Ended ---------------------------------------------- --------------------- July 1, June 29, June 28, June 27, July 3, January 2, January 1, 1995 1996 1997 1998 1999 1999 2000 ------- -------- -------- -------- ------- ---------- ---------- (in thousands, except per share data) <S> <C> <C> <C> <C> <C> <C> <C> Consolidated Statements of Operations Data: Total revenues.......... $ 1,885 $ 6,130 $12,275 $ 21,179 $41,346 $17,731 $30,048 Gross profit............ 521 3,608 8,469 13,351 23,556 10,133 16,924 Total operating expenses............... 4,692 10,243 12,873 26,203 31,504 14,479 20,562 Net loss from continuing operations............. (4,171) (6,635) (3,669) (10,876) (7,704) (4,146) (3,498) Net income (loss) from discontinued operations............. 3,816 (319) 1,777 8,684 -- -- -- Net loss................ $ (355) $(6,954) $(1,892) $ (2,192) $(7,704) $(4,146) $(3,498) Basic and diluted net income (loss) per share: Continuing operations... $ (1.19) $ (1.84) $ (0.98) $ (2.88) $ (1.74) $ (1.03) $ (0.63) Discontinued operations............. 1.09 (0.09) 0.47 2.30 -- -- -- ------- ------- ------- -------- ------- ------- ------- Net loss................ $ (0.10) $ (1.93) $ (0.51) $ (0.58) $ (1.74) $ (1.03) $ (0.63) ======= ======= ======= ======== ======= ======= ======= Shares used in computation............ 3,516 3,606 3,729 3,777 4,428 4,026 5,535 ======= ======= ======= ======== ======= ======= ======= Pro forma basic and diluted net income (loss) per share: Continuing operations... $ (0.22) $ (0.35) $ (0.19) $ (0.43) $ (0.28) $ (0.15) $ (0.11) Discontinued operations............. 0.20 (0.02) 0.09 0.34 -- -- -- ------- ------- ------- -------- ------- ------- ------- Net loss................ $ (0.02) $ (0.37) $ (0.10) $ (0.09) $ (0.28) $ (0.15) $ (0.11) ======= ======= ======= ======== ======= ======= ======= Shares used in computation............ 18,785 18,874 18,998 25,050 27,970 27,413 32,298 ======= ======= ======= ======== ======= ======= ======= </TABLE> The following table presents a summary of our balance sheet as of January 1, 2000: . on an actual basis; . on a pro forma basis after giving effect to the conversion of our outstanding convertible preferred stock into 26,762,779 shares of common stock immediately prior to the closing of the offering and the filing of our Second Amended and Restated Certificate of Incorporation as of the closing of the offering which reflects 100,000,000 shares of authorized common stock and authorizes 5,000,000 shares of undesignated preferred stock; and . on a pro forma as adjusted basis to reflect the sale of 5,000,000 shares of common stock at an assumed initial public offering price of $21.00 per share after deducting the estimated underwriters' discounts and commissions and estimated offering expenses, and the sale of 450,000 shares of common stock in a concurrent private placement at an assumed initial public offering price of $21.00 per share less an amount equal to underwriters' discounts and commissions. <TABLE> <CAPTION> As of January 1, 2000 ------------------------------ Pro Forma Actual Pro Forma As Adjusted ------- --------- ----------- (in thousands) <S> <C> <C> <C> Consolidated Balance Sheet Data: Cash and equivalents............................. $ 6,850 $ 6,850 $111,664 Working capital.................................. 5,261 5,261 110,075 Total assets of continuing operations............ 30,956 30,956 135,770 Redeemable convertible preferred stock........... 17,015 -- -- Total stockholders' equity (deficit)............. (7,947) 9,068 113,882 </TABLE>
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information and consolidated financial statements and notes thereto appearing elsewhere in this prospectus before making an investment decision. Unless we indicate otherwise, all information in this prospectus assumes no exercise of the over-allotment option granted to the underwriters. References to fiscal 1996 and fiscal 1997 refer to the twelve month periods ended June 30, 1996 and June 30, 1997, respectively. In February 1998, we changed our fiscal year end from June 30 to January 31. References to the transition period refer to the seven month period beginning July 1, 1997 and ended January 31, 1998, which precedes the start of the new fiscal year and bridges the gap between our previous and new fiscal year ends. References to fiscal 1999, fiscal 2000 and fiscal 2001 refer to the twelve month periods ended January 31, 1999, 2000 and 2001, respectively. This prospectus contains forward-looking statements regarding our performance, strategy, plans, objectives, expectations, beliefs and intentions. The actual outcome of the events described in these forward-looking statements could differ materially. This prospectus, and especially the sections entitled "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," contain discussions of some of the factors and risks that could contribute to those differences. SOUND ADVICE OVERVIEW Sound Advice is a specialty retailer of high-end audio and video entertainment products and systems and mobile electronics. We provide our customers knowledgeable advice concerning product selection and system integration in conjunction with products incorporating the latest technology. We operate 28 stores in the State of Florida, the fourth largest state with the fastest growing population in the United States. We distinguish ourselves from most large retailers of consumer electronics by: - focusing on high-end audio, video, television and mobile electronics product categories produced by manufacturers whose premium products are not readily available in the general consumer marketplace; - offering the most innovative and technologically advanced products currently available; - featuring audition rooms, home theaters and demonstration areas in our stores to allow our customers to experience our products and systems; - enabling our customers to integrate these products into multi-room, multi-functional residential entertainment systems; - supporting our customers through every stage of product and system selection, purchase, installation, service and, in some cases, upgrades; - ensuring that our sales associates are well trained, highly knowledgeable and able to add value to our customers' experience; and - facilitating the design, installation and repair process through our at-home service support team. We currently operate 24 full-size stores, most of which are between 15,000 and 17,000 square feet. We offer over 2,100 products from approximately 150 high-end manufacturers. These products include home and car audio systems, large screen projection and conventional televisions, video products, mobile electronics, car security systems, home entertainment furniture and related customized services and accessories. Our full-size stores contain audition and demonstration areas in which customers are encouraged to experience and compare our products. We also operate four Bang & Olufsen stores, which are smaller, specialty boutiques featuring Bang & Olufsen products. Our Bang & Olufsen stores are typically 1,500 square feet. We plan to open our first Electronic Interiors concept store in October 2000 in Palm Beach. Our concept stores will be entirely demonstration oriented, built to simulate a residential environment showcasing some of our integrated entertainment systems. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. SOUND ADVICE AND THE UNDERWRITERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION SEPTEMBER 14, 2000 2,150,000 SHARES (WE GIVE SOUND ADVICE LOGO) COMMON STOCK This is a public offering of 2,150,000 shares of common stock of Sound Advice, Inc. Sound Advice is a full service specialty retailer of upscale entertainment and consumer electronic products. Sound Advice is selling 1,800,000 shares in this offering, and the selling shareholders identified in this prospectus are selling 350,000 shares in this offering. Some of the selling shareholders have also granted the underwriters the right to purchase up to 322,500 additional shares to cover any over-allotments. Sound Advice's common stock is quoted on the Nasdaq National Market under the symbol "SUND." On September 12, 2000, the last reported sale price of the common stock was $9.31 per share. INVESTING IN OUR COMMON STOCK INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 7. <TABLE> <CAPTION> PER SHARE TOTAL --------- ----------- <S> <C> <C> Offering price.............................................. $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to Sound Advice.................. $ $ Proceeds, before expenses, to the selling shareholders...... $ $ </TABLE> The representatives of the underwriters will also receive warrants to purchase 200,000 shares of our common stock at an exercise price per share equal to 120% of the offering price per share set forth above. --------------------- Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. FAHNESTOCK & CO. INC. RYAN, BECK & CO. , 2000 In fiscal 2000, our sales increased to $177,349,000, a 16.6% increase from the prior year. Comparable store sales in fiscal 2000 increased 13.1%. Average net sales were $7,161,000 per full-size store and $2,053,000 per Bang & Olufsen store. Our gross margin improved slightly to 35.1% from the prior fiscal year, while our income from operations increased to $6,782,000, a 103.2% increase from the prior year. Inventory turned 3.7 times in fiscal 2000. During the first six months of fiscal 2001, our sales were $84,491,000, a 6.7% increase over the first six months of fiscal 2000. Comparable store sales increased 6.0%. Our gross margin increased to 35.5% of sales compared to 34.8% in the first six months of fiscal 2000, while our income from operations increased to $3,102,000, a 41.8% increase over the first six months of fiscal 2000. THE CONSUMER ELECTRONICS INDUSTRY The consumer electronics industry is defined to include audio, video, mobile electronics, communications, information technology, multimedia and accessory products, as well as related services. According to the Consumer Electronics Association, total sales of consumer electronics in the United States were estimated to be $80 billion in 1999, a 5% increase from $76 billion in 1998, and are projected to increase to $84 billion in 2000. Growth in the consumer electronics market has historically been driven by the introduction of new products based on technological innovations. For example, the proliferation of video cassette recorders and compact disc players helped to accelerate growth in the 1980s. We believe that a new generation of technology offers the prospect of increased industry sales with the introduction of digital delivery systems such as high definition televisions (HDTV), digital audio players such as MP3 players, digital versatile discs players (DVD) and direct broadcast satellite systems. The Consumer Electronics Association estimates that digital video products will average 35% annual growth from 1999 to 2002. We believe that specialty retailers with sales personnel capable of understanding and communicating the benefits of technologically advanced products to consumers are well positioned to capture the anticipated increased sales. GROWTH STRATEGY We have become the largest specialty consumer electronics retailer in Florida by delivering to consumers a total system solution for home entertainment and mobile electronics. Our solution integrates outstanding product selection, concept design, professional installation and after-market service and support. We intend to grow our business through the following strategies: Increase Same Store Sales We expect to increase our same store sales by continuing to focus on products incorporating the latest technology, since higher sales prices are typically associated with these products. For example, we believe that by offering an increasing number of digitally based products as they become available to the market, we can benefit from the higher prices at which these products are sold. In addition, we intend to increase our same store sales by expanding the capabilities that can be incorporated into our integrated systems. We recently began offering lighting and security systems as additional features to our integrated solutions. Open New Stores We opened two new full-size stores, one in Tallahassee and one in North Palm Beach, in November 1998 and four mall based Bang & Olufsen stores in February and December 1998, June 1999 and March 2000. We expect to continue to explore the opening of new stores in geographic areas within our existing Florida distribution network and advertising radius in order to realize efficiencies and cost benefits as a result of our clustering of stores. Our current plans are to open two new Bang & Olufsen stores in the next 18 months, one of which will be located adjacent to our first Electronic Interiors location, which we expect to open in October 2000. The Electronic Interiors stores will allow customers to experience our products and the integration of our systems in aesthetically pleasing environments. We expect to open approximately eight additional Electronic Interiors stores during the next two years. [INSIDE COVER] [PICTURE OF SOUND ADVICE STORE] [PICTURE OF BANG & OLUFSEN STORE] [PICTURES OF PRODUCTS] Upgrade and Relocate Existing Stores We continually improve our existing stores by upgrading and rotating product displays and remodeling the stores' interiors. At times, we may choose to relocate our stores in connection with the need for expansion. In November 1999, we relocated and upgraded our Tampa-Dale Mabry location from a 7,400 square foot facility to a 15,000 square foot facility. In Fall 2000, we plan to relocate one of our Miami stores, which is currently housed in a 11,000 square foot facility, to a 15,700 square foot facility located in Miami. We also plan to relocate our Altamonte Springs store in Spring 2001 from a 10,800 square foot facility to a 15,000 square foot facility located in Altamonte Springs. We believe these relocations will improve store visibility and increase customer traffic for these stores. Pursue Acquisitions We believe that we may gain significant benefits through strategic acquisitions of local and regional specialty retailers. Due to the fragmentation of the retail consumer electronics market, many opportunities exist for the acquisition of high-end stores. We have identified geographic markets with favorable demographics and intend to pursue acquisitions of local and regional stores with brand name recognition as a platform for expansion into those markets. We have executed a letter of intent and are engaged in the process of negotiating a definitive agreement for the acquisition of the assets of Showcase Home Entertainment of the Southwest, LLC, a privately held retailer of upscale home entertainment products and custom design services with stores located in Scottsdale and Chandler, Arizona. * * * Sound Advice is a Florida corporation incorporated on March 12, 1974. In this prospectus, the terms "Sound Advice," "we," "us" and "our" mean Sound Advice, Inc. and our subsidiaries, unless otherwise required by the context. WHERE TO CONTACT US Our principal executive offices are located at 1901 Tigertail Boulevard, Dania Beach, Florida 33004 and our telephone number is (954) 922-4434. Our Web site is www.wegivesoundadvice.com. The information on our Web site is not part of this prospectus. THIS OFFERING Shares offered by Sound Advice...... 1,800,000 shares Shares offered by the selling shareholders........................ 350,000 shares Shares to be outstanding after this offering............................ 5,588,394 shares Use of proceeds..................... We intend to use the net proceeds from this offering to pursue potential acquisitions, retire some of our indebtedness, open new stores, upgrade and relocate some existing stores and for general corporate purposes. Nasdaq National Market symbol....... SUND The number of shares to be outstanding after this offering does not include 838,500 shares reserved for issuance upon exercise of outstanding options and warrants and 200,000 shares issuable upon the exercise of the warrants to be issued to the representatives of the underwriters. SUMMARY FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND STORE DATA) The following table contains our summary consolidated financial and operating information. Information for the fiscal years ended June 30, 1996 and 1997, the seven month transition period ended January 31, 1998 and the fiscal years ended January 31, 1999 and 2000 have been derived from our consolidated financial statements, which have been audited by KPMG LLP, our independent certified public accountants. Information for the seven months ended January 31, 1997, the twelve months ended January 31, 1998 and the six months ended July 31, 1999 and 2000 have been derived from our consolidated financial statements and are unaudited. The information presented below under the caption "Store Data," "Selected Consolidated Operating Data" and "Balance Sheet Data" is unaudited. The results of operations for the six months ended July 31, 2000 are not necessarily indicative of the results to be expected for the full year. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements and the Notes thereto included elsewhere in this prospectus. <TABLE> <CAPTION> SEVEN SEVEN MONTH TWELVE FISCAL YEARS ENDED MONTHS TRANSITION MONTHS FISCAL YEARS ENDED JUNE 30, ENDED PERIOD ENDED ENDED JANUARY 31, ---------------------- JANUARY 31, JANUARY 31, JANUARY 31, ------------------- 1996 1997 1997 1998 1998 1999 2000 -------- ----------- ------------ ------------ ----------- -------- -------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA(1): Net sales......................... $165,384 $152,316 $98,558 $95,205 $148,963 $152,124 $177,349 Cost of goods sold................ 116,174 102,298 67,005 64,234 99,527 98,893 115,057 -------- -------- ------- ------- -------- -------- -------- Gross profit.................... 49,210 50,018 31,553 30,971 49,436 53,231 62,292 Selling, general and administrative expenses......... 52,393 49,045 29,827 29,903 49,122 49,893 55,510 -------- -------- ------- ------- -------- -------- -------- Income (loss) from operations..... (3,183) 973 1,726 1,068 314 3,338 6,782 Other income (expense): Interest expense................ (1,526) (1,556) (891) (897) (1,562) (1,417) (1,367) Other income (expense).......... (4) 101 31 48 120 96 (107) -------- -------- ------- ------- -------- -------- -------- Income (loss) before income taxes (benefit)....................... (4,713) (482) 866 219 (1,128) 2,017 5,308 Income taxes (benefit)............ (486) 389 475 1,175 1,089 1,310 (1,218) -------- -------- ------- ------- -------- -------- -------- Net income (loss)............... $ (4,227) $ (871) $ 391 $ (956) $ (2,217) $ 707 $ 6,526 ======== ======== ======= ======= ======== ======== ======== Common and common equivalent per share amounts: Basic earnings (loss) per share(2)...................... $ (1.13) $ (.23) $ .10 $ (.26) $ (.59) $ .19 $ 1.74 Diluted earnings (loss) per share(2)...................... $ (1.13) $ (.23) $ .10 $ (.26) $ (.59) $ .18 $ 1.55 Weighted average number of shares outstanding -- basic............ 3,729 3,729 3,729 3,729 3,729 3,730 3,746 Weighted average number of shares outstanding -- diluted.......... 3,729 3,729 3,729 3,729 3,729 3,965 4,223 STORE DATA: Number of stores open at end of period: Full-size stores................ 21 21 22 24 24 Bang & Olufsen stores........... -- -- -- 2 3 Weighted average net sales per store(3): Full-size stores................ $ 7,875 $ 7,253 $ 7,038 $ 6,669 $ 7,161 Bang & Olufsen Stores........... -- -- -- 1,770 2,053 <CAPTION> SIX MONTHS ENDED JULY 31, --------------------- 1999 2000 ------- ----------- (UNAUDITED) <S> <C> <C> STATEMENT OF OPERATIONS DATA(1): Net sales......................... $79,151 $84,491 Cost of goods sold................ 51,599 54,508 ------- ------- Gross profit.................... 27,552 29,983 Selling, general and administrative expenses......... 25,364 26,881 ------- ------- Income (loss) from operations..... 2,188 3,102 Other income (expense): Interest expense................ (706) (902) Other income (expense).......... 20 38 ------- ------- Income (loss) before income taxes (benefit)....................... 1,502 2,238 Income taxes (benefit)............ -- 873 ------- ------- Net income (loss)............... $ 1,502 $ 1,365 ======= ======= Common and common equivalent per share amounts: Basic earnings (loss) per share(2)...................... $ .40 $ .36 Diluted earnings (loss) per share(2)...................... $ .36 $ .32 Weighted average number of shares outstanding -- basic............ 3,734 3,771 Weighted average number of shares outstanding -- diluted.......... 4,121 4,316 STORE DATA: Number of stores open at end of period: Full-size stores................ 24 24 Bang & Olufsen stores........... 3 4 Weighted average net sales per store(3): Full-size stores................ $ 3,212 $ 3,400 Bang & Olufsen Stores........... 886 751 </TABLE> <TABLE> <CAPTION> FISCAL YEAR ENDED SIX MONTHS ENDED JANUARY 31, JULY 31, -------------------- ------------------------ 1999 2000 1999 2000 ------- ------- ------- ----------- <S> <C> <C> <C> <C> SELECTED CONSOLIDATED OPERATING DATA: Gross profit margin....................................... 35.0% 35.1% 34.8% 35.5% Operating income margin................................... 2.2% 3.8% 2.8% 3.7% Store contribution to profit and corporate expenses(4).... $22,087 $28,616 $12,484 $14,401 Comparable store sales increase (decrease)(5)............. (3.2)% 13.1% 13.0% 6.0% </TABLE> <TABLE> <CAPTION> JANUARY 31, 2000 JULY 31, 2000 -------------------- ------------------------ AS ACTUAL ACTUAL ADJUSTED(6) ------ ------- ----------- <S> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital........................................... $13,020 $13,917 $26,690 Total assets.............................................. 60,932 59,092 64,089 Revolving line of credit.................................. 7,310 9,776 -- Total debt, excluding revolving line of credit and cash overdraft............................................... 5,679 5,642 5,642 Shareholders' equity...................................... 22,692 24,127 38,901 </TABLE> --------------- (1) We eliminated personal computers from our product mix in January 1996. (2) In December 1997, we adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share" which establishes new guidelines for the calculations of earnings per share. Basic earnings per share have been computed by dividing net income by the weighted average number of shares outstanding during the year. Diluted earnings per share have been computed using the exercise of stock options, and their related income tax effects, if any. Earnings per share for all periods have been restated to reflect the adoption of this statement. (3) Weighted average net sales per store represents the net sales of our full-size and Bang & Olufsen stores for the period divided by the number of full-size and Bang & Olufsen stores open during the period, weighted to account for stores open for only a portion of the period. (4) Refers to gross profit after deducting selling expenses including labor, advertising, store level operations and pre-opening expenses. Store contribution is presented to provide additional information about us and is commonly used as a performance measurement by retail companies. Store contribution should not be considered in isolation or as a substitute for operating income, cash flow from operating activities and other income or cash flow data prepared in accordance with generally accepted accounting principles, or as a measure of our profitability or liquidity. Our calculation of store contribution may not be comparable to similarly titled items reported by other companies. (5) Refers to the percentage change in sales for stores open for at least one year. (6) Adjusted to reflect the application of the estimated net proceeds of the sale of 1,800,000 shares of common stock offered by us at an assumed public offering price of $9.31 (the closing price on September 12, 2000), after deducting the estimated underwriting discount and offering expenses payable by us.
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL INFORMATION AND RELATED NOTES, BEFORE INVESTING IN OUR COMMON STOCK. THE TERMS "WE," "US," "OUR," "OUR COMPANY" AND "RMS" AS USED IN THIS PROSPECTUS REFER TO RMS NETWORKS, INC. AND ITS SUBSIDIARIES AS A COMBINED ENTITY, EXCEPT WHERE THE CONTEXT REQUIRES OTHERWISE. RMS NETWORKS, INC. OUR BUSINESS We are a premier provider of point-of-purchase advertising and information distributed by broadband satellite networks. Through our relationships with retailers, we provide advertisers with a platform to direct advertising at targeted consumers. Retailers use our broadband networks to enhance their in- store environments with entertaining and informative audio-visual programming that is designed to increase the duration of shopping visits and result in increased sales. Our programming consists of broadcast-quality, full motion video and high quality sound delivered through strategically placed monitors in retail locations. By delivering programming at the point of purchase, we enable advertisers and retailers to efficiently engage customers where the most important purchase decisions are made. Our networks were installed at more than 2,300 locations in 49 states in the United States as of February 29, 2000, an increase from 37 locations in 20 states at March 31, 1999. We estimate that our networks currently reach an average of approximately 750,000 consumers each day. We offer retailers fully-installed turnkey systems consisting of video monitors, audio components, digital video servers, satellite receivers and proprietary software that receive and transmit our programming. Our technology allows programming and advertising to be customized to the specific needs of a retailer based on location, customer preferences, product availability, current events and other retailer needs. Broadband satellite technology, integrated with our proprietary software, enables us to add, delete or rotate programming segments in real-time via satellite and to verify network statistics necessary to monitor advertising on our networks. We have entered into a service agreement with Spacenet Inc., a U.S. subsidiary of Gilat Satellite Networks Ltd., in which Spacenet has agreed to provide satellite service for our broadband networks and to install, maintain and finance a significant portion of our equipment. Our technology, combined with our relationships with retailers such as Advance Auto Parts and The Sports Authority, enables us to offer what we believe is one of the most effective advertising mediums currently available at the point of purchase. Studies show that advertising and product demonstrations at the point of purchase can significantly influence which products a consumer buys. Our networks are designed to encourage consumers to remain in retail stores longer, make return visits and increase their product purchases. By providing audio-visual programming targeted to clearly defined demographic groups, we believe that we offer advertisers an efficient and cost-effective advertising medium. We can also reinforce advertisers' and retailers' relationships with consumers through additional channels such as the Internet and e-mail. We develop tailored Internet strategies for retailers by designing and maintaining websites with content that largely parallels the presentation on our video networks. Each network's website can be specifically designed to integrate in-store video segments and product advertisements with related news, product promotions and additional web content. We produce our network programming using video segments that we create ourselves or that we obtain from various programming suppliers, including CNN, E! Entertainment, Fox, Time Warner and Ziff Davis. We design our programming to provide relevant and entertaining information tailored to the demographic audience of specific retailers. We update our programming on a daily or weekly basis in order to keep it fresh and topical. Programming represents approximately 60% of the airtime on our networks, with the remaining 40% reserved for advertising. We typically target retail industries with high consumer traffic, multiple retail outlets, a concentrated base of advertisers and a large number of stock keeping units, or SKUs. Our strategy is to install our broadband networks in both national and regional chains as well as in independent stores. To date, we have created networks in the following industries: - PHARMACIES. We launched the PharmaSee Network in July 1999 and, as of February 29, 2000, we provided this network to more than 740 independent pharmacies with an average audience we estimate to be 110,000 consumers each day. Programming on the network is also available on our related website, WWW.PHARMASEE.COM. We have entered into an exclusive licensing agreement to make the PharmaSee Network available to members of the National Community Pharmacists Association, or NCPA, the largest association of independent pharmacists in the United States. In addition, we have entered into an agreement to launch a custom version of the PharmaSee Network at five pharmacies run by Albertson's, Inc., which operates more than 2,600 pharmacies nationwide. We have agreed with Albertson's to work towards a definitive agreement to install and transmit the network in all of the Albertson's family of drug stores, including its Sav-On, Osco, Albertson's and Acme locations. There are more than 40,000 pharmacies and drug stores in the United States. - AUTO PARTS. We launched the Advance Auto Parts Network in April 1999 and provide this network to stores operated by Advance Auto Parts, the second largest auto parts retailer in the United States with more than 1,600 stores in 37 states. As of February 29, 2000, this network supported more than 1,550 Advance Auto Parts stores with an estimated average audience of 620,000 consumers each day. - SPORTING GOODS. We launched our sporting goods network in January 2000 and have entered into an agreement with The Sports Authority, a leading U.S. sporting goods retailer, to expand the network to all of The Sports Authority's nearly 200 stores nationwide. The network is currently provided at three Sports Authority locations. There are more than 15,000 sporting goods stores in the United States. - BEER, WINE AND SPIRITS. BEVision, our network for beer, wine and spirits retailers, is currently under contract to be installed at more than 280 independent beer, wine and spirits stores. We have also entered into an agreement to provide BEVision at five stores operated by ABC Liquors, Inc., which has an option to expand the network to all of its 150 stores after a two-month trial period. We began the production of programming for this network in January 2000. We expect to begin installing equipment for this network and to launch a related website, WWW.BEVISION.NET, during the second quarter of 2000. We also have an arrangement with the National Association of Beverage Retailers in which the association has agreed to actively promote our services to all of its members. There are more than 25,000 beer, wine and spirits stores in the United States. Our networks' digital broadband platform can be adapted to support a variety of complementary services. For example, retailers use our networks to deliver training and product information to in-store employees and the networks can be adapted for company-wide corporate communications or live events. Our networks are also capable of supporting two-way broadband communications and future commercial data transmission services, including the transmission of retail inventory and credit card data. MARKET OPPORTUNITY Our strategy is to obtain an increasing percentage of companies' advertising budgets. Approximately $255 billion was spent on U.S. advertising in 1998 and U.S. advertising sales are expected to reach approximately $365 billion in 2003, according to Veronis Suhler. The advertising industry is diverse and includes television, newspapers, magazines, radio, specialty media, the Internet, billboards, direct mail and telephone directories. Advertisers are increasingly seeking to diversify their advertising. According to Veronis Suhler, spending on specialty media was $105.7 billion in 1998 and is estimated to reach $149.3 billion in 2003. Specialty media consists of consumer promotion, business to business promotion, direct mail and sponsorships. Consumer promotion includes point-of-purchase materials and retail displays, premiums, promotional licensing, product sampling and in-store marketing. Veronis Suhler estimates that consumer promotion spending totaled $25.3 billion in 1998 and will reach approximately $31.8 billion in 2003. Our broadband satellite networks offer advertisers and retailers a unique, technologically advanced advertising solution which we believe is one of the most effective advertising mediums available in retail locations. COMPETITIVE STRENGTHS We provide the following key benefits to advertisers: - access to consumers at the point of purchase; - ability to access large numbers of consumers and to target specific audience demographics; - a cost-effective advertising medium; - integrated advertising across video and Internet media; - technologically advanced, full motion, broadcast-quality advertising; and - customized and timely advertising. We provide the following key benefits to retailers: - a fully-installed turnkey system; - an enhanced shopping environment; - branded networks for specific retailers; - longer lengths of stay by consumers and an opportunity to enhance sales; - an ability to promote private label brands and influence brand and product selection; and - in-store employee training and product education. BUSINESS STRATEGY Our goal is to provide the leading point-of-purchase advertising medium available to advertisers. Key elements of our business strategy include: - capturing significant revenue and profits through our point-of-purchase advertising medium; - utilizing our broadband technological capabilities to deliver effective advertising solutions, including timely inventory management; - expanding current networks and developing new networks in order to extend the reach of our advertisers; and - pursuing ancillary revenue sources, including Internet access and credit card processing, utilizing our broadband platform. THE OFFERING <TABLE> <S> <C> Common stock offered by us.................. shares Common stock to be outstanding after this offering.................................. shares(1) Use of proceeds............................. We intend to use the proceeds of this offering for working capital and general corporate purposes, including the development of new networks, the purchase of network equipment and capital expenditures. See "Use of Proceeds." Proposed Nasdaq National Market symbol...... RMSN </TABLE> - ------------------------ (1) The number of shares of common stock to be outstanding after this offering is estimated based on the number of shares outstanding as of February 29, 2000. This number excludes: - shares subject to outstanding options at a weighted average exercise price of $ per share; - shares available for future issuance under our employee stock option plans; - shares that may be issued if the underwriters exercise their over-allotment option in full; and - shares subject to options that will be granted upon completion of this offering to the placement agent for our second 1999 private placement. SUMMARY FINANCIAL INFORMATION We present below our summary historical financial data. We derived the historical consolidated balance sheet data as of December 31, 1999 and the historical consolidated statement of operations data for each of the three years ended December 31, 1999 from our audited consolidated financial statements, which are included elsewhere in this prospectus. The statement of operations data for the period from May 29, 1996 (inception) to December 31, 1996 is derived from our audited financial statements which are not included in this prospectus. <TABLE> <CAPTION> MAY 29, 1996 (INCEPTION) TO FISCAL YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------------ 1996 1997 1998 1999 -------------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue..................................... $ -- $ -- $ 717 $ 2,182 Operating expenses: Cost of revenue........................... -- -- 554 1,422 Selling, general and administrative expenses................................ 18 93 470 2,377 Development expenses...................... 161 686 218 638 Loss on impairment of fixed assets........ -- -- -- 262 ---------- ---------- ---------- ---------- Loss from operations.................... (179) (779) (525) (2,517) Other income (expense): Interest income........................... -- 11 2 29 Interest expense.......................... (11) (118) (158) (68) ---------- ---------- ---------- ---------- Loss before income taxes................ (190) (886) (681) (2,556) Income taxes................................ -- -- -- -- ---------- ---------- ---------- ---------- Net loss................................ $ (190) $ (886) $ (681) $ (2,556) ========== ========== ========== ========== NET LOSS PER COMMON SHARE: Basic and diluted......................... $ (0.18) $ (0.13) $ (0.39) ========== ========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic and diluted......................... 5,019,521 5,229,219 6,577,840 ========== ========== ========== OTHER DATA: EBITDA(1)................................... $ (179) $ (773) $ (510) $ (2,402) Net cash provided by (used in): Operating activities...................... (120) (557) (340) (1,749) Investing activities...................... -- (47) (29) (610) Financing activities...................... 144 882 127 10,887 Capital expenditures........................ -- (47) (29) (520) </TABLE> (CONTINUED ON THE FOLLOWING PAGE) <TABLE> <CAPTION> DECEMBER 31, 1999 --------------------------- HISTORICAL AS ADJUSTED(2) ---------- -------------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................. $8,588 $ Working capital........................................... 7,986 Total assets.............................................. 9,809 Total debt................................................ -- -- Total stockholders' equity................................ 8,735 </TABLE> - ------------------------ (1) EBITDA represents, for any period, loss from operations plus depreciation and amortization. EBITDA is presented because it is a widely accepted financial indicator of a company's operating results and cash flows and management believes that presentation of EBITDA is helpful to investors. However, EBITDA should not be considered as an alternative to net loss as a measure of our operating results or to cash flows as a measure of liquidity. In addition, although the EBITDA measure of performance is not recognized under generally accepted accounting principles, it is widely used as a general measure of a company's operating performance because it assists in comparing performance on a relatively consistent basis across companies without regard to depreciation and amortization, which can vary significantly depending on accounting methods or non-operating factors such as historical cost bases. Because EBITDA is not calculated identically by all companies, the presentation herein may not be comparable to other similarly titled measures of other companies. (2) The as adjusted data gives effect to receipt of the net proceeds from the sale of shares of common stock offered by us in this offering at the assumed public offering price of $ per share, the mid-point of the range on the cover page of this prospectus, after deducting the estimated underwriting discount and estimated offering expenses payable by our company.
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+PROSPECTUS SUMMARY In this section, we have provided you with an overview of some of the more important information in this prospectus. However, we caution you that this information is not complete. You should read all of the information in this prospectus before purchasing any common stock. Unless the context otherwise requires, we use the terms "we," "our," "us" and the "Company" to mean Able Telcom Holding Corp. and its subsidiaries, including the subsidiaries we acquired in the acquisition of the network construction and transportation systems business of WorldCom, Inc. on July 2, 1998. We use the term "Able" when we refer to Able Telcom Holding Corp. and its subsidiaries prior to this acquisition. We sometimes use the term "MFSNT" to refer to MFS Network Technologies and its subsidiaries before we acquired them and to refer to our subsidiaries that now own the assets and liabilities that we acquired from WorldCom, Inc. THE COMPANY We develop, build and maintain communications systems for companies and government authorities. We have five main organizational groups. Each group is comprised of subsidiaries of the Company with each group having local executive management functioning in a decentralized operating environment. We completed operational restructuring of our subsidiaries during fiscal 1999. As a result, we now have fourteen subsidiaries, eleven of which are wholly owned. We own at least 80% of each of the remaining three subsidiaries. The services provided by each group are as follows: <TABLE> <CAPTION> Organizational Group Service Provided -------------------- ---------------- <S> <C> Network Service .................. Design, development, engineering, installation, construction, operation and maintenance services for telecommunications systems. Network Development .............. Own, operate and maintain local and regional telecommunication networks. Transportation Services .......... Design, development, integration, installation, construction, project management, maintenance and operation of automated toll collection systems. Construction ..................... Design, development, installation, construction, maintenance and operation of electronic traffic management and control systems, and road signage and telcom infrastructure construction. Communications Development ....... Design, installation and maintenance services to foreign telephone companies in South America. </TABLE> In conjunction with our reorganization, much of our executive management has changed. We have replaced several senior executives and Group Presidents and have added other senior people to our executive staff. As reflected above, we reorganized our subsidiaries into five main operating groups. Additionally, as part of our ongoing efforts to strategically align the profitable portions of our business, we took the following steps during the fiscal year ended October 31, 1999 to discontinue the operations of, merge, and/or manage unprofitable subsidiaries: - We assigned control of certain of our previously independent operating subsidiaries (Patton Management Corp. and Able Telecommunications & Power) to the Construction Group. - We merged several of our previously independent operating subsidiaries into Construction Group subsidiaries. - As a result of significant turnover and a deterioration of underlying contracts, we discontinued the operations of two subsidiaries, which together used cash flows from operations of approximately $7.4 million and $3.8 million during the fiscal years ended October 31, 1998 and 1999. The Company was originally incorporated in 1987 as a Colorado corporation under the name "Delta Venture Fund, Inc." We adopted our current name in 1989 and became a Florida corporation in 1991. Our principal executive offices are located at 1000 Holcomb Woods Parkway, Suite 440, Roswell, Georgia 30076 and our telephone number is (770) 993-1570. This information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED AUGUST ___, 2000 PROSPECTUS 16,271,507 SHARES OF COMMON STOCK, PAR VALUE $.001 ABLE TELCOM HOLDING CORP. This is a public offering of common stock of Able Telcom Holding Corp. We are registering 16,271,507 shares of common stock for sale by selling shareholders (the "Selling Shareholders"), as follows: - 2,000,000 shares of common stock that WorldCom, Inc. may receive upon the exercise in full of an option granted to it by us on April 24, 1998. - 600,000 shares of common stock, which is the maximum number of shares of common stock that WorldCom may receive upon the exercise of certain stock appreciation rights ("SARs") granted by us on September 9, 1998. - 409,505 shares of common stock that certain holders of warrants may receive upon the exercise of all of these warrants. We issued these warrants in connection with the sale of our 12% Senior Subordinated Notes originally due January 6, 2005. - 2,932,991 shares of common stock issued or issuable upon the conversion or redemption of securities held by former holders of our Series B Preferred Stock. - 570,000 shares of common stock, representing the total amount of common stock that holders of certain warrants may receive upon the exercise of all of their warrants. We issued these warrants at various times in connection with the sale and conversion and exchange of the Series B Preferred Stock. Because the exercise price of and number of shares issuable pursuant to these warrants is subject to adjustment under certain circumstances, this amount does not necessarily represent the actual total number of shares of common stock that these holders may receive if they exercise all of their warrants. - 3,750,000 shares of common stock issuable upon the conversion of our Series C Convertible Preferred Stock. This amount represents the number of shares of common stock that would be issued upon the conversion of all outstanding Series C Preferred Stock at a conversion price of $4.00 per share. - 997,500 shares of common stock, representing 105% of the total amount of common stock that holders of certain warrants may receive upon the exercise of all of their warrants. We issued these warrants in connection with the sale and amendment of the terms of the Series C Preferred Stock. Because the exercise price of and number of shares issuable pursuant to these warrants is subject to adjustment under certain circumstances, this amount does not necessarily represent the actual total number of shares of common stock that these holders may receive if they exercise all of their warrants. - 5,011,511 shares of common stock to be issued to Sirit Technologies, Inc. in settlement of a lawsuit between us and Sirit. We will not be selling any of the shares of common stock that we register in this prospectus. No underwriters will be used to sell the shares. We will not receive any proceeds from the sale of these shares. However, we may receive cash upon the exercise of the options and warrants described above. Our common stock is traded on the Nasdaq National Market under the symbol "ABTE." We intend to list the common stock that we are registering in this prospectus on the Nasdaq National Market, but this application has not yet been approved. On August 29, 2000, the last reported sales price of the common stock was $2.88 per share. MATERIAL DEVELOPMENTS BRACKNELL MERGER. On August 24, 2000, we announced that we had entered into an agreement to merge with Bracknell Corporation of Toronto in a stock-for-stock transaction with a conversion rate of 0.6 shares of Bracknell's common stock for each share of our common stock. The completion of this merger is conditioned upon a number of items, including the receipt of regulatory and shareholder approval, the receipt by Bracknell of appropriate financing and the absence of a material adverse change as to us. Bracknell is a leading provider of value-added facilities and structure services to businesses across North America, servicing customers in the technology, telecommunications, industrial and commercial sectors. If the merger is consummated, we will become a wholly owned subsidiary of Bracknell and our stock will no longer be publicly traded. However, our shareholders will receive shares of Bracknell's common stock, which is traded on the Toronto Stock Exchange. There can be no assurance that the merger with Bracknell will be consummated. In connection with our signing the merger agreement with Bracknell, and to comply with terms of our settlement with Sirit which is described below, we entered into a new Master Services Agreement with WorldCom which extends the term of that agreement and provides for a minimum purchase of $55 million of our services by WorldCom each year. WorldCom also agreed to vote in favor of the merger with Bracknell when it is proposed to our shareholders. Further, WorldCom converted $37,000,000 of our indebtedness to WorldCom for advances under the Master Services Agreement into our Series D Preferred Stock. The Series D Preferred Stock is convertible into our common stock at a price of $10.01 per share. For a description of the terms of our Series D Preferred Stock see the discussion under the heading "Description of Securities -- Preferred Stock -- Series D Convertible Preferred Stock." Further, WorldCom agreed to extend the term of our $4.5 million note payable to WorldCom to a seven-year, 8% interest rate note. As extended, this note will mature on July 12, 2007. SHAREHOLDERS' MEETING. We are submitting a number of proposals related to the securities covered by this prospectus for approval at an annual meeting of our shareholders currently scheduled to be held in late September or early October of this year. In addition to other matters to be considered at this annual meeting, we are submitting the following proposals to our shareholders: - to approve grants of stock options to officers and directors outside of our 1995 Stock Option Plan; - to approve issuing up to 2,600,000 shares of our common stock to WorldCom if it exercises options and stock appreciation rights obtained from us when we acquired the network, construction and transportation systems business from WorldCom; - to approve issuing shares of our common stock in connection with conversion, redemption and exercise of securities issued to finance our acquisition of the network construction and transportation business from WorldCom; - to approve issuing shares of our common stock to holders of our Series C Preferred Stock and warrants upon conversion or exercise of those securities; and - to approve issuing shares of our common stock in connection with a litigation settlement with Sirit Technologies, Inc. These proposals are being submitted for approval because they include actions for which shareholder approval is required under rules applicable to companies listed on the Nasdaq National Market System, such as us. Under Nasdaq rules, certain transactions require us to obtain the approval of holders of a majority of our shares casting votes if we plan to issue new shares of common stock that represent 20% or more of the shares of common stock that are outstanding at the time we agree to issue the common stock. The Nasdaq rules apply to the following stock issuances relevant to the proposals being submitted to our shareholders: - common stock to be issued to acquire another company; - common stock to be issued at a price below the greater of book value or market value of the common stock immediately prior to the issuance; and - common stock to be issued to officers and directors under an arrangement that does not include other employees, even if less than 20% of the outstanding common stock. For purposes of disclosure in this prospectus, we have assumed that the shareholders will approve each of the proposals described above. For a discussion of risks related to the shareholders failure to approve such proposals, see the discussion under the heading "Risk Factors." We also intend to submit a proposal at our annual meeting to approve a change in our name to "The Adesta Group, Inc." We will not reflect this proposed change in this prospectus unless and until our name is actually changed. The Selling Shareholders may offer their shares of common stock in public or private transactions, on or off the Nasdaq National Market, at prevailing market prices, or at privately negotiated prices. An investment in our common stock involves a high amount of risk. Before you invest in our common stock, we strongly recommend that you carefully consider all of the risks and information contained in this prospectus, including the information contained in the "Risk Factors" section that begins on page 6. Our principal executive offices are located at 1000 Holcomb Woods Parkway, Suite 440, Roswell, Georgia 30076, and our telephone number is (770) 993-1570. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PROSPECTUS DATED , 2000 No dealer, salesperson or other person is authorized to provide any oral or written information about us or this offering that is not included in this prospectus. THE SIRIT SETTLEMENT. In May 1998, Sirit Technologies, Inc. filed a lawsuit against us and Thomas M. Davidson, a former member of our Board of Directors. Sirit sued for tortious interference, fraudulent inducement, negligent misrepresentation and breach of contract in connection with our acquisition of the network construction and transportation systems business of WorldCom. In May 2000, the jury awarded Sirit compensatory damages against us in the amount of $1.2 million and punitive damages in the amount of $30.0 million. Additionally, the Court assessed punitive damages against Mr. Davidson. In July 2000, we and Sirit, among others, entered into a settlement agreement which resulted in the court's entry of a consent judgment vacating the $31.2 million judgment. As part of the Sirit settlement, we agreed to issue Sirit and its affiliates, subject to using our best efforts to obtain shareholder approval at our annual shareholder meeting, the following securities: - 4,074,597 shares of our common stock, and - an additional 936,914 shares of common stock at such time as holders of the Series C Convertible Preferred Stock have converted their shares of Series C Convertible Preferred Stock into common stock. This amount assumes that the Series C Convertible Preferred Stock has a $15.0 million face value and is converted at a conversion price of $4.00 per share. The resale by Sirit of the common stock issued or issuable to it is covered by this prospectus. GOING CONCERN We incurred losses applicable to common stock of $57.5 million during the six months ended April 30, 2000, and losses applicable to common stock of $36.8 million during the fiscal year ended October 31, 1999. These net losses, our default under our Secured Credit Facility and our contractual obligations are placing a significant strain on our financial resources that raise substantial doubt about our ability to continue as a going concern. See "Risk Factors," "Management's Discussion and Analysis" and the consolidated financial statements and footnotes included in this prospectus. Our ability to continue as a going concern is dependent upon our ability to: - generate sufficient cash flow to meet our obligations on a timely basis; - obtain additional financing when we need it; and - achieve and maintain profitability. We have strategically realigned portions of our business, converted some of our debt to common stock and discontinued unprofitable cash-intensive operations to correct our financial difficulties. We also are reallocating resources to meet contractual commitments and seeking other sources of capital, whether with existing lenders or investors or new strategic investors. However, we cannot assure you that the realignment or reallocation of resources will be successful or that we will be able to secure additional capital on acceptable terms or at all.
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+PROSPECTUS SUMMARY This summary highlights only selected information contained elsewhere in this prospectus. Before investing in our common stock, you should read the entire prospectus carefully, including the "Risk Factors" section and the financial statements and the notes to those statements. ROCKFORD We design, manufacture and distribute high-performance audio systems for the car and professional audio markets. Our car audio products are sold primarily in the $6.3 billion worldwide car audio aftermarket to consumers who want to improve their existing car audio systems. We market our car audio products under our Rockford Fosgate and Lightning Audio brand names, selling products that include digital and analog amplifiers, speakers, source units, CD and MP3 changers and accessories. Based on 1999 dollar sales, we rank first in U.S. market share for car audio amplifiers and third for car speakers. Under our Hafler brand, we market amplifiers and speakers in the professional audio market and plan to introduce Hafler home theater products later this year. We believe our ability to deliver innovative and technologically advanced products appeals to our consumers' desires for distinctive, leading-edge products and powerful, high-quality sound. We continue to develop new products to capitalize on improvements in digital technology that have increased demand for high-performance audio products. Our Rockford Fosgate, Lightning Audio and Hafler products have won numerous consumer and industry awards. Car Audio For over 20 years, Rockford Fosgate has been the brand of choice among our core consumers, 16-24 year old males. Many of these consumers devote a significant portion of their time and disposable income to their car audio systems. We believe our core consumers perceive Rockford Fosgate as the "coolest" car audio brand and we target our message to them using aggressive grass-roots marketing. As a result of our consumers' loyalty, we believe Rockford Fosgate has generated loyalty among the retailers who use our brand, products and distinctive marketing programs as a "pull" brand to attract these consumers. In June 1999, as part of our growth strategy to develop additional brands, we acquired Lightning Audio, a manufacturer and distributor of car audio accessories. In January 2000, at the Consumer Electronics Show, we introduced a line of high-performance amplifiers and subwoofers under the Lightning Audio brand name that are more moderately priced than our Rockford Fosgate products. Our newly introduced Lightning Audio amplifier won an EIA/CES Innovation Award at the Consumer Electronics Show. We currently sell our car audio products in the U.S. through approximately 2300 independent retail stores, including specialty dealers, audio/video retailers, national consumer electronics retailers and catalog merchants. Internationally, we sell our car audio products in over 60 countries through independent distributors and sales representatives. We believe the Rockford Fosgate brand is as widely-recognized internationally as it is in the U.S. Historically, specialty dealers dominated the retail distribution of car audio aftermarket products. However, over the last several years, as a result of changing consumer buying patterns, audio/video and national consumer electronics retailers have become the fastest growing distribution channels for car audio aftermarket products, increasing their combined market share from 35% in 1987 to 48% in 1999. To capitalize on these changing industry dynamics, in early 1999 we began distributing our products through Best Buy, a national consumer electronics retailer, in all of its more than 350 stores. Professional Audio and Home Theater Our Hafler professional audio products are used in recording studios, movie theaters, concert facilities, stadiums, traveling bands and broadcast studios. Our amplifiers are designed for use in recording studios. We believe our ability to meet the needs of this demanding niche positions us well for expansion into other segments of the professional audio market. Additionally, we are developing a full line of home theater products, including a preamp/surround processor, multi-channel amplifiers and speakers for introduction in 2000. We believe our home theater products will benefit from the reputation of our Hafler brand in the professional audio market. Our Growth Strategy Our goal is to design, produce and distribute the best engineered and most recognized and respected brands of high-performance audio products in the world. Each element of our strategy is intended to enhance and reinforce the global brand images of Rockford Fosgate, Lightning Audio and Hafler among consumers and retailers. Key elements of our growth strategy are to: - Continue to introduce new and technologically innovative products; - Acquire and develop additional audio brands, taking advantage of our technology and distribution strengths; - Broaden our distribution by entering new distribution channels and increasing our penetration of our existing distribution channels; - Capitalize on our worldwide brand recognition to increase sales in international markets; and - Expand our professional audio business and enter the home theater market. As a result of our strong brands and growth strategy, we believe we can grow our business significantly and become a much larger participant in the worldwide car and professional audio markets. ------------------------ Our principal executive offices are located at 546 South Rockford Drive, Tempe, Arizona 85281, and our telephone number is (480) 967-3565. Our corporate Web site is located at www.rockfordcorp.com. INFORMATION CONTAINED ON OUR WEB SITES DOES NOT CONSTITUTE A PART OF THIS PROSPECTUS. THE OFFERING Except as otherwise indicated, all information in this prospectus reflects a 4.3-for-1 split of the common stock effected on August 2, 1999, and assumes no exercise of the underwriters' over-allotment option. Common stock offered by Rockford.......... 2,500,000 shares Common stock offered by selling shareholders.............................. 850,000 shares Common stock to be outstanding after the offering and common stock underlying outstanding options, warrants and convertible securities.................. 9,793,627 shares Use of proceeds........................... For repayment of debt, working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol.... ROFO OWNERSHIP AFTER THE OFFERING The following table shows ownership of our outstanding shares, and shares underlying our outstanding options, warrants and convertible securities even if they are not exercisable immediately after the offering: <TABLE> <CAPTION> OPTIONS, WARRANTS OUTSTANDING AND CONVERTIBLE SHARES SECURITIES TOTAL ----------- ----------------- --------- <S> <C> <C> <C> Officers, directors and employees............. 3,470,883 2,199,043 5,669,926 Other existing shareholders................... 624,110 149,591 773,701 New shareholders.............................. 3,350,000 0 3,350,000 --------- --------- --------- Total....................................... 7,444,993 2,348,634 9,793,627 ========= ========= ========= </TABLE> After this offering, we will have 7,444,993 shares outstanding, including: - 4,753,146 shares outstanding on December 31, 1999; - 67,488 shares issued after December 31, 1999, upon exercise of outstanding warrants; - 2,500,000 shares issued in this offering; and - 124,359 shares we will issue to shareholders who currently own $277,417 of our 8.5% convertible subordinated debentures or warrants and who will convert them into shares in order to sell the shares in this offering. In addition, after this offering we will have 2,348,634 shares reserved for issuance to holders of outstanding options, warrants and convertible securities, including: - 1,998,131 shares of common stock that we will issue if the holders choose to exercise outstanding options and warrants, with a weighted average exercise price of $3.34 per share; - 286,003 shares of common stock that we will issue if the holders of our 8.5% convertible subordinated debentures exercise their conversion rights, with a conversion price of $2.44 per share; and - 64,500 shares of common stock that we will issue if the holders choose to exercise outstanding options, with an exercise price of the price per share of this offering. We also will have reserved 272,485 shares of common stock for future issuance of options under our 1994 and 1997 stock option plans and 361,200 shares of common stock for future issuance under our 1999 employee stock purchase plan. SUMMARY CONSOLIDATED FINANCIAL DATA You should read the following summary consolidated financial data together with our financial statements and related notes and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. Set forth below are summary consolidated statements of operations data for the years ended December 31, 1997, 1998 and 1999. Also set forth below is summary consolidated balance sheet data as at December 31, 1999, on an actual, pro forma and pro forma as adjusted basis. The pro forma data gives effect to (1) the conversion of $277,417 of our 8.5% convertible subordinated debentures into 113,609 shares of common stock to occur concurrently with this offering, (2) the issuance of 10,750 shares upon exercise of warrants to occur concurrently with this offering and (3) the issuance of 67,488 shares after December 31, 1999 upon exercise of outstanding warrants. The pro forma as adjusted data gives effect to the sale by us of 2,500,000 shares in this offering at an assumed initial public offering price of $12.00 per share, our receipt of the estimated proceeds of that sale after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and the application of the net proceeds. See "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000850083_authoriszo_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000850083_authoriszo_prospectus_summary.txt
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+PROSPECTUS SUMMARY BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS BEFORE DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK. OUR BUSINESS We provide a patent-pending security solution which secures corporate Web-related information while enabling businesses to provide secure access to their corporate Website and applications and to conduct secure communications over computer networks and the Internet. Our product suite and processes enable a corporation to provide secure access to the information on its Web server to its customers, suppliers, employees and public visitors from the Internet, according to their pre-determined security profile. We believe our solution to be innovatively different from other security solutions available today. Our solution provides security by securing a customer's Website, corporate information assets and contents off-line, making this information completely inaccessible, except through the customer's Web server. This process eliminates any direct contact between the person requesting information and the corporate information assets. The benefit of our product suite is that it has been designed to provide an added dimension of security to existing security products, such as: - firewalls; - virtual private networks; - encryptions; - security tokens; - smart cards; and - biometrics. Our customer investments in these other security technologies can be preserved and combined with our product suite. Our executive offices are located at 1 Justin Road, Natick, Massachusetts 01760-5565. Our telephone number is (508) 650-3916 and our Website address is http://www.authoriszor.com. The information contained on our Website is not incorporated by reference into this prospectus. THE OFFERING This prospectus relates to 2,827,273 shares of common stock that may be offered and sold from time to time by selling stockholders. We will not receive any of the proceeds from the sale of shares of common stock by the selling stockholders. The selling stockholders purchased the shares offered by this prospectus from us in offerings exempt from the registration requirements of U.S. federal securities laws. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The following selected consolidated financial data are derived from the financial statements of the Company, which have been audited by Grant Thornton, independent chartered accountants. The selected consolidated statement of operations for the nine month periods ended March 31, 2000 and 1999 are unaudited but, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the information included therein. The financial data for the Company should be read in conjunction with the Consolidated Financial Statements and Notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere in this Prospectus. The results for the nine month period ended March 31, 2000 are not necessarily indicative of results that may be expected for the full year. <TABLE> <CAPTION> JANUARY 15, 1997 (DATE OF INCEPTION) YEAR ENDED NINE MONTHS ENDED TO JUNE 30, MARCH 31, JUNE 30, ------------------------- ------------------------- 1997 1998 1999 1999 2000 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> Statement of operations data: Net sales................. $ 3,290 $ -- $ 33,711 $ 32,682 $ 121,186 Operating loss............ (5,283) (23,821) (49,631) (27,504) (4,682,127) Other income, net......... -- -- -- -- 73,263 Net loss.................. (5,283) (23,821) (49,631) (27,504) (4,608,864) Loss per common share-- basic and diluted....... (0.00) (0.00) (0.00) (0.00) (0.32) Weighted average shares outstanding--basic and diluted................. 13,765,808 13,765,808 13,765,808 13,765,808 14,462,226 </TABLE> <TABLE> <CAPTION> JUNE 30, ------------------------------ MARCH 31, 1997 1998 1999 2000 -------- -------- -------- ----------- (UNAUDITED) <S> <C> <C> <C> <C> Balance sheet data: Current assets.......................... $ 4,855 $ 1,049 $ 3,196 $27,863,341 Current liabilities..................... 10,815 34,730 100,670 604,469 Total assets............................ 5,473 5,224 24,790 32,755,668 Stockholders' equity (deficit).......... (5,342) (29,506) (75,880) 32,151,199 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000851697_autolend_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000851697_autolend_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read this Prospectus carefully before making any investment decision regarding our common stock and pay particular attention to the information under "Risk Factors" and in the financial statements and related notes elsewhere in this Prospectus. In addition, you should consult your own advisors to understand fully the consequences of an investment in our shares. . The Company AutoLend Group, Inc., is a company headquartered in Albuquerque, New Mexico. We are currently winding down our existing businesses. We operate through our subsidiaries, which are: . AutoLend Corporation, which maintains a residual portfolio of installment contract receivables. At September 30, 1999, this portfolio consisted of 12 active sub-prime consumer used-car loan contracts purchased from used- car dealers valued at $30,000. In addition to the active portion of the portfolio, we also have a substantial inactive portion, which consists of loans that have been more than six months in arrears and have been written off. These inactive loans presently provide us an irregular net cash flow of approximately $14,000 per month. We ceased purchasing car loans in December 1995. . American Life Resources Group, Inc., and LB NM, Inc., which maintain residual portfolios of unmatured life insurance policies having a combined face value of $0.4 million and a net book value of $55,000, and which consisted of 6 policies as of September 30, 1999. These policies were purchased from persons with life-threatening illnesses, a business generically referred to as viatical settlements. We ceased purchasing these policies in September 1994. Since the sale in September 1996 of another subsidiary which provided short-term "floor" financing to used-car dealers, our activities have been concentrated on resolving our bankruptcy; developing or acquiring a new business activity, primarily in the gaming industry (which is now a division of ours doing business under the name of Kachina Gaming); resolving certain obligations and litigation associated with former operations; collecting amounts due from the outstanding used-car loans; and collecting proceeds from the life insurance policies. See "BUSINESS." . Proposed New Business: PROVIDING GAMING SERVICES TO FRATERNAL ORGANIZATIONS IN NEW MEXICO . Economic Assumptions for Providing Gaming Services to Fraternal --------------------------------------------------------------- Organizations in New Mexico --------------------------- Our plan of reorganization involves developing a new business that consists primarily of providing, installing and servicing gaming devices and gaming machines for certain non-profit organizations in New Mexico, as made possible by the relatively recent passage of new state laws and regulations. According to the state's leading newspaper, the Albuquerque Journal, there are approximately 200 local veteran and fraternal clubs within the state which are potentially licensable under the new state gaming laws. These clubs, under present state law and after becoming licensed, may install up to 15 slot machines each on their premises. Many of these clubs have indicated a preference that a distributor organization obtain, provide, install, and service these machines on their behalf (as opposed to purchasing or leasing such machines directly from a machine manufacturer). We anticipate that while, on average, these fraternals will not install the maximum number of machines allowed by law, a total of approximately 1,300 machines will likely be installed throughout the state under present regulations. [This total assumes that some fraternal clubs will economically support 15 machines, and some fraternals will support only 1 or 2 machines, and some fraternals will decide not to have gaming at all, and, overall, there will be an average of 6 or 7 machines per club across the state. This average is our internal estimate, based upon management's knowledge of the local market, and is not supported by any verifiable sources.] Average sustained revenues which may be generated by these gaming machines are unknown at this time, but we estimate these revenues to eventually range between $40 and $150 per machine per day of operation. [This range is based upon a report issued by Bear Stearns (a major investment banking firm), as well as anecdotal reports.] This would imply potential total statewide fraternal gaming gross revenues (i.e., the total market which we plan to obtain a portion thereof) of between $16 million and $60 million per year. At present, the state takes 25 percent off the top of this "net win" according to a February 1999 publication issued by the New Mexico Gaming Control Board. This publication also reports that the distributor portion of these gross gaming revenues is presently limited to a maximum of 40 percent of the after-tax net win, plus possible additional fees for other affiliated services (which can be up to about 10 percent, but cannot be a strict percentage relationship). At this point and, to the best of our knowledge (based on our negotiations and discussions with many fraternal organizations) most fraternal contracts with distributors (including our own) have tended to be at or near this maximum, which yields an equivalent of about 37 percent of the net win. [The 37% is calculated as follows: A) If 100 is the total net win, then 75 is the after- tax portion of the net win. B) The distributor's share can be a maximum of 40% of this after-tax portion plus an additional amount for extra services, which may approximate another 10% of the after-tax portion, for a total maximum distributor share of approximately 50% of the after-tax portion. C) 50% of 75 is about 37.] This implies total net revenues available to all distributors statewide under the present laws of between $6 million and $22 million per year. At this relatively early point in the development of legalized fraternal gaming in New Mexico, only 19 fraternal clubs have become licensed thus far according to the New Mexico Gaming Control Board (the first of which started gaming in July of this year), and as of late November 1999, state-wide only 8 fraternal clubs have actually started gaming. There are currently 6 potential providers of gaming services which have been licensed by the New Mexico Gaming Control Board. During the last year, we have been actively pursuing relationships with many fraternal organizations. This effort has resulted in our obtaining 13 signed agreements to provide services to these organizations contingent upon their and our ability to obtain licensing from the state, among other things. As of this date, 3 of these fraternal organizations have obtained a license. No individual potential customer is anticipated to represent more than 10 percent of our revenue from this activity. It is our belief that if our licensing process is not significantly further delayed, we will be able to capture a significant share of the total statewide distributor net revenues. [Based on management's review of competitor capabilities and management's relationships with fraternal organizations across the state, we believe that such a market share may be possible; however, this is impossible to predict with any certainty at the time.] It is our belief that gaming in New Mexico will be expanded in future years. Thus, establishing our position early would provide a significant advantage for us to capitalize on any such expansion, through legislated increases to the numbers of machines per club, and/or the addition of table games, and possibly the expansion of the types of organizations eventually allowed to have such gaming. Finally, if we are successful in participating in the development of the New Mexico gaming market, we would look at any similar possibilities that may develop in other geographic areas. . Background ---------- We have been considering various prospects to develop a new business suitable for our situation. The realities of new business development are almost always difficult. Our particular realities impose significant constraints that make this undertaking even more difficult. These constraints include: . the need to acquire or develop the business without paying substantial cash or taking on significant debt; . the handicap of not having actively traded stock to use to procure such a business; . the requirement that, after launch, the business will not need a significant capital investment to "ramp-up"; and . the need for the new business to produce a positive cash flow almost immediately. In 1997, the New Mexico Legislature passed the "Gaming Control Act," and on approximately July 2, 1999, the first legalized gaming in a non-profit fraternal organization began in New Mexico. We propose to provide, supply, and service gaming devices as described in the Gaming Control Act, and the business would be regulated by the New Mexico Gaming Control Board as described in the Gaming Control Act. We have commenced efforts in this arena, doing business as Kachina Gaming, which has been organized as a Division of AutoLend Group, Inc. In connection with these efforts, we have hired a Vice President of Gaming Development and Marketing. We believe we can obtain the proper licenses, gaming machines, and contracts with non-profit organizations to make this business viable and to allow us to meet our obligations. In this regard, we have made application to the New Mexico Gaming Control Board for licensure as a distributor. Additionally, we have signed a number of contingent agreements with fraternal organizations, whereby we would supply gaming machines to licensed operators. The agreements are contingent upon certain matters, such as our and our fraternal organizations ability to obtain the appropriate state licensing as well as the actual approval of the respective agreements by the Gaming Control Board. We are also holding discussions with several licensed gaming machine manufacturers with respect to obtaining such machines. In as much as no distributors have yet developed any financial history for such licensed operations in New Mexico, and no fraternals have yet established records of average "net drops" under regulated gaming in New Mexico, potential operating results are unknown, and thus we cannot be assured of success in this venture. Material terms of most of our anticipated contracts would generally include the following: . contract would become effective after both parties become licensed and the contract itself is approved by the New Mexico Gaming Control Board; . we provide the slot machines, software, and related equipment to the fraternal organization (however, all this equipment remains our property); . we provide a range of additional services, which includes on-going service to the machines on short notice, and can include "house bank" loans, facility enhancement loans, assistance with the licensing process, training, assistance with required state reporting, optimizing the mix of machines, and/or other services which may be needed; . a four-year term, with automatic one-year renewals if not cancelled in writing by either party at least sixty days before the end of the term; . the number of slot machines to be installed (both initially and at any time during the term) is at our discretion; . no fixed monthly or per-machine payments required of the fraternal; our primary payment is a percentage of the net win (after the state gaming tax of 25 percent); additionally, we will collect other (lessor) fees for other services provided; . we have exclusive rights to gaming equipment on premises during the term; . the fraternal organization provides acceptable insurance and indemnification; . a one-time unilateral cancellation capability for us at the end of the first six-months of operation; . assignability to the extent permitted by licensing and gaming regulations. We are obligated to pursue the gaming business (as hereinbefore described) under the plan of reorganization approved by the Bankruptcy Court. If this business does not meet our expectation and does not significantly add to our operation, once we are no longer under the constraints of the Bankruptcy Court, we may need to seek other business opportunities which would be compatible to our operations. . Present Status -------------- Costs to commence the gaming business currently consist of salaries, marketing, and travel. Additional costs, including lease payments, will be incurred upon servicing our contracts, which will occur after we and the fraternal organizations have obtained required gaming licenses. The New Mexico Gaming Control Board is currently processing our application for licensure as a distributor. In connection with this review, we have received correspondence from them indicating that the process has been significantly lengthened due to the yet unconcluded SEC investigation (see "Legal Proceedings"). We are unable to predict with certainty at this time how much longer the review may take. . Background; Recent History . Change In Management -------------------- In September 1996, new management, led by Nunzio P. DeSantis, our current Chairman of the Board, President, and Chief Executive Officer, took over our management and direction. This was the result of a Stipulation of Settlement approved by a Chancery Court arising from litigation brought by Mr. DeSantis and other stockholders in Delaware. The losses that forced us into bankruptcy were caused primarily by the business our former management initiated and operated, i.e., purchasing and maintaining a portfolio of sub-prime car loan contracts. New management significantly reduced our overhead expenses, including reducing our number of employees and moving our headquarters from Miami Beach, Florida, to Albuquerque, New Mexico. It also took other actions to improve our financial condition, including an exchange offer of our old common and preferred stock for our outstanding debentures, purchasing some of those debentures at a discount in the open market, and resolving the expensive lease of the Miami Beach office space. . Voluntary Bankruptcy -------------------- On September 23, 1997, we filed for reorganization under Chapter 11 of the Code in the Bankruptcy Court. Under Chapter 11, certain claims against us in existence before the petition for relief was filed were stayed while we continued our business operations as "debtor-in-possession." The losses that forced us into bankruptcy were caused primarily by a business our former management initiated and operated, i.e., purchasing and maintaining a portfolio of sub-prime car loan contracts, resulting in our inability to make scheduled principal payments and accrued interest on our debentures. Our Disclosure Statement was approved by the Bankruptcy Court in September 1998 and, together with our plan of reorganization, was mailed to our creditors and other interest holders in October 1998. They approved the plan of reorganization, and a Confirmation Hearing was held on February 3, 1999. The Bankruptcy Court confirmed the plan of reorganization, and it became effective on March 5, 1999. On January 13, 2000, the Bankruptcy Court entered its final decree thereby closing our Chapter 11 case. . Plan of Reorganization ---------------------- The material features of our plan of reorganization have provided for the cancellation of all of our $7.2 million principal of convertible subordinated debentures and $2.3 million accrued interest thereon, and all of our equity securities, effective as of March 5, 1999. The class of unsecured creditors has now received 100 percent of its allowed claims. The holders of our debentures will receive approximately 1.0 million shares of our common stock, $3.0 million in cash, and non-interest bearing, uncollateralized notes aggregating $0.6 million payable in five annual payments. As of December 17, 1999, approximately $2.8 million of the $3.0 million in cash had already been disbursed, and the remainder has been set aside as restricted cash. The holders of our canceled securities have the right to purchase new shares of common stock during certain periods beginning on the date of this Prospectus. If the holders of canceled securities purchase all available new common stock, the following shares and potential equity capital will result: <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------------------------- Class of Maximum number of Offering Price Per Unit Potential Equity Canceled Securities Shares of Capital New Common Stock - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Common stock 6,079,530 (1) $1.00 $ 6,079,530 - -------------------------------------------------------------------------------------------------------------------------------- Preferred stock 5,780,000 (1) $1.00 $ 5,780,000 - -------------------------------------------------------------------------------------------------------------------------------- Warrants 2,663,500 (2) $4.00 $10,654,000 - -------------------------------------------------------------------------------------------------------------------------------- Options 3,660,000 (2) $4.00 $14,640,000 - -------------------------------------------------------------------------------------------------------------------------------- </TABLE> (1) Right to purchase will expire on March 17, 2000 (2) Right to purchase will expire on March 4, 2000 We expect that only a portion of these shares will be purchased by existing equity holders, resulting in total common stock outstanding between 1.5 million and 9 million shares; this would result in a total net equity (before the impact of any interim operating results) of up to $8.1 million. See "SUMMARY - The Offering." . Termination of Option to Purchase ITB Shares -------------------------------------------- In January 1999, we settled litigation (which settlement was approved by the Bankruptcy Court) that involved an option we had purchased pursuant to a related loan transaction. The option was for the potential acquisition of up to an approximately 25 percent ownership equity in International Thoroughbred Breeders, Inc. ("ITB"). In consideration for this option we paid $0.2 million in cash and issued a contingent promissory note payable. We acquired this option in 1997 from NPD, Inc. ("NPD"), which is majority-owned by Nunzio DeSantis, our Chairman of the Board (who was also Chairman of NPD). Also covered in the settlement were transactions related to the option purchase, wherein we had loaned $3.0 million to NPD, and had deposited $2.0 million in an escrow account. On January 29, 1999, in connection with the settlement, we received $4,446,771 in cash from third parties (including ITB), and the option was cancelled, as were the contingent note payable to NPD and the loan receivable from NPD. Our receipt of these funds represents the return of the escrow deposit (plus interest) and repayment to us of $2.3 million against our $3.0 million (principal) loan to NPD (which loan had accrued interest outstanding of $0.5 million). The option itself, which we held for approximately a year, was then expensed for $0.2 million. In total, we recognized a loss associated with these events of approximately $1.4 million for the fiscal year ended March 31, 1999. This loss was later partially offset by a $0.5 million gain from the settlement of a related adversary litigation. See "Business - Termination of Option to Purchase ITB Shares," and "Legal Proceedings." . The Offering We are offering shares of our new common stock to holders of our old common and preferred stock and Class A and Class B warrants, options, and debentures, all of which were canceled on March 5, 1999, under the plan of reorganization. Specifically, the offering includes the following shares: - -------------------------------------------------------------------------------- Total Maximum Available Shares of Canceled Securities New Common Stock - ------------------------------------------------------------------------------- Common stock 6,079,530 - ------------------------------------------------------------------------------- Preferred stock 5,780,000 - ------------------------------------------------------------------------------- Warrants 2,663,500 - ------------------------------------------------------------------------------- Options 3,660,000 - ------------------------------------------------------------------------------- Debentures 1,040,000 - ------------------------------------------------------------------------------- Total 19,223,030 - ------------------------------------------------------------------------------- However, we estimate that no more than 9 million of these shares will actually be issued as a result of the offering. Any shares of new common stock not issued in these transactions will remain authorized and unissued and will be available to be issued in other transactions in the future as approved by our Board of Directors. . Holders of Old Common and Preferred Stock ----------------------------------------- Pursuant to our plan of reorganization, during the 60 days following the date of this Prospectus, holders of old: Common stock have the right to purchase up to one share of our new common stock for each share of old common stock they own, for $1.00 per new share of common stock; and Preferred stock have the right to purchase up to 100 shares of our new common stock for each share of old preferred stock they own, for $1.00 per new share of common stock. For the next 30 days thereafter, each holder of our new common stock will have the right to purchase a pro rata portion of the aggregate number of shares of our new common stock not purchased by the holders of old common and preferred stock during the initial (60-day) offering period, for $1.00 per share. In addition, each holder of new common stock has the option during this period to purchase any amount of any remaining shares of our new common stock not otherwise purchased by our holders of new common stock on a pro rata basis at $1.00 per share. See "PROSPECTUS SUMMARY - The Offering." . Holders of Class A and Class B Warrants --------------------------------------- For one year after March 5, 1999, holders of our Class A and Class B warrants may purchase up to the same number of shares of our new common stock that they could have purchased of our old common stock pursuant to the old warrants for $4.00 per share of new common stock. . Holders of Options ------------------ For one year after March 5, 1999, holders of options to purchase shares of our old common stock may purchase the same number of shares of our new common stock that they could have purchased of our old common stock pursuant to their old options for $4.00 per share of new common stock. . Terms ----- For holders of old common and preferred stock, the cost for shares of new common stock purchased during the initial 60-day offering period is payable in cash or certified funds, and those holders may pay either entirely up front, or over one year with quarterly payments in increments of 25 percent of the purchase price, and certificates representing the new common stock will be issued as they are paid for in full. Payment, either in full or the first quarterly payment, is due with the subscription agreement and must be made by 60 days after the date of this Prospectus. Holders of new common stock who exercise their rights under our plan of reorganization to purchase additional shares of new common stock during the second (30-day) offering period must pay in full upon exercise. Holders of old warrants and options will pay us only if they exercise their warrants and options during the next year (ending March 4, 2000); upon their exercise, payment is due in full. Certificates representing the number of shares of new common stock will be issued upon payment by holders of old common and preferred stock and warrants and options upon our receipt of payment for shares of new common stock. . Holders of Debentures --------------------- Debenture holders will receive 1,040,000 shares of new common stock, plus cash payments of $3,043,250 and notes payable in the amount of $624,000 (undiscounted) in exchange for a total of $7,225,000 in principal value of debenture debt and $2,375,689 in accrued interest. As of December 17, 1999, approximately $2.8 million in cash has already been disbursed, and the remainder has been set aside as restricted cash. If purchases of new common stock at $1.00 per share (by holders of old common stock and preferred stock) and at $4.00 per share (by warrant and option holders) bring in less than $1.1 million in new capital, then the former debenture holders will own a majority of our Company. . Summary Financial Information Our summary financial data is given below for the six months ended September 30, 1999 and 1998 (unaudited), and the fiscal years ended March 31, 1999, 1998, and 1997 (audited). The unaudited financial data for the interim periods reflect, in the opinion of our management, all adjustments necessary to present fairly the data for those periods. The results of operations for the interim periods do not necessarily indicate operating results for the entire year. Fresh-start reporting has been reflected in the financial statements as of March 31, 1999, thus certain material aspects of these financial statements are not comparable to such statements of any prior period, since the statements as of March 31, 1999 are those of a reorganized entity. A "black line" has been drawn between the Registrant's financial statements and those of the Predecessor Company. This data should be read with our financial statements and the related notes elsewhere herein. <TABLE> <CAPTION> Registrant | Predecessor Six months -------------- |------------------------------------------ ended September 30: Twenty-six |Eleven months and Years ended March 31: ---------------------- days ended | five days ended ----------------------- Registrant Predecessor March 31, 1999 | March 5, 1999 1998 1997 1999 1998 -------------- |----------------- ---------- ---------- --------- |----------- <S> <C> |<C> <C> <C> <C> | <C> Total net revenues $ 9 |$ 356 $ 597 $ 2,075 $ 121| $ 373 | | Operation earnings/(loss), including | | loan loss provisions $ (31)|$ (967) $ (1,469) $ (7,402) $ (528)| $ (174) Recovery/(write-off) of assets and | | (accrual of expenses) related to the | | consumer loan and viatical businesses - | 536 (132) (2,109) -| 491 Net interest income/(expense) 21 | (208) (571) (1,816) 67| (152) Non-cash debenture conversion charge - | - (6,261) - -| - Loss on settlement ITB/NPD - | (1,368) - - -| - Gain on adversary settlement | 451| Cancellation of Florida tax claim | 163| Miscellaneous other income/(expense), net 37 | (146) (38) (461) (16)| 41 -------------- |---------------- ---------- ---------- ----------| -------- | | Pretax results of operations $ 27 |$ (2,153) $ (8,471) $ (11,788) $ 137| $ 206 Tax offset to loss/(taxes) - | - - 86 -| - Net gain on early extinguishment of debt - | - 3,172 - -| - Net gain as result of - | 5,342 - - -| - reorganization-Debentures | | Bankruptcy reorganization expense (151)| (341) (212) - (131)| (244) Discontinued operations - | - - 167 -| - -------------- |---------------- ---------- ---------- ----------| ---------- | | | | Net loss income/(loss) $ (124)|$ 2,848 $ (5,511) $ (11,535) $ 6| $ (38) ============== |================ ========== ========== ==========| ========= | | | | | | Per Share Data: | | - --------------- | | Net loss income/(loss) $ (0.12)|$ 0.47 $ (0.91) $ (2.49) $ -| $ (0.01) ============== |================ ========== ========== ==========| ========= | | Weighted average number of common and | | common equivalent shares outstanding - | 6,079,530 6,039,391 4,634,530 -| 6,079,530 ============== |================ ========== ========== ==========| ========= Weighted average number of common and | | common equivalent shares issuable 1,040,000 | - - - 1,040,000| - ============== |================ ========== ========== ==========| ========= Balance Sheet Data: | | - ------------------- | | Total Assets $ 5,197 |$ 6,888 $ 7,640 $ 16,276 $ 1,808| $ 8,623 Total Liabilities 4,629 | 6,196 11,078 28,128 1,233| 11,709 Total Stockholders' Equity 568 | 692 (3,438) (11,852) 575| (3,086) </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000851720_security_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000851720_security_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information about our company, but does not contain all the information that you should consider before investing in the common stock or the warrants. You should read the entire prospectus carefully. Security Associates International, Inc., which was founded by 30 independent alarm dealers and three members of our senior management, is the largest wholesale alarm monitoring company in the United States. We have grown rapidly in recent years, principally through the acquisition of central monitoring station businesses. Over the last two years our company experienced an approximate 76% net increase in the number of systems monitored. As of March 23, 2000 we provided security alarm monitoring to over 400,000 residential and business consumers whose alarm systems were installed and are serviced by members of our dealer network. We market our monitoring services to independent alarm dealers and, as a result, do not compete directly with most of the large, integrated alarm companies. Independent alarm dealers are those who generally have less than 10,000 customers. We do not sell or install alarm systems, and are committed to not compete with the independent alarm dealer community. Our dealers represent a national group with a strong local presence. We believe we can serve as a vehicle to aggregate these dealers into a nationwide marketing, installation and servicing network. We own and operate ten central monitoring stations which are strategically located to provide services to most of the major geographic regions of the country, including: the Southeast, Midwest, North Central, Mountain, Northwest, West and Southwest regions. We also provide education and training in the areas of marketing, finance and new products and services to alarm dealers through one-on-one contact, periodic regional seminars and our annual convention. We believe that the recruitment, training and motivation of dealers are key factors in the success and growth of our company. The electronic monitoring of alarm systems is characterized by high fixed costs and incrementally lower variable costs, often referred to as economies of scale. Since most independent alarm dealers are small, they outsource or subcontract, the monitoring of their customer's alarm systems and focus on the sale, installation and service aspects of their business. Despite the fact that they subcontract the monitoring services, dealers retain the bulk of the monitoring fees. Dealers, therefore, view monitoring as an important part of their business and frequently look to their central monitoring company for support and additional services. Industry statistics suggest that substantial benefits, in the form of lower burglary rates, accrue to consumers who protect their premises with electronically monitored security systems. Approximately 15% of residences in the United States have monitored alarm systems. The security alarm industry has grown at a 6.7% average annual rate over the past three years, and we expect that rate to continue in the foreseeable future. The industry has a relatively small number of large, well-capitalized and integrated participants, but remains dominated by many thousands of independent alarm dealers. We are the largest wholesale monitoring company in the United States and all of our central stations are Underwriters Laboratories (UL) listed. There are approximately 250 UL listed and approximately 1,500 to 2,000 non-UL central stations in the United States, although most are small, locally owned companies. We anticipate that the alarm industry will gradually converge with other industries and small central station owners will be increasingly pressured to provide additional products and services to help dealers grow and compete. We believe this is a significant factor creating the opportunity for us to acquire and possibly consolidate these small central stations. There are approximately 27 million residential and commercial electronically monitored alarm systems in <TABLE> <CAPTION> CALCULATION OF REGISTRATION FEE PROPOSED PROPOSED MAXIMUM MAXIMUM TITLE OF EACH OFFERING AGGREGATE AMOUNT OF CLASS OF SECURITIES AMOUNT TO BE PRICE PER OFFERING REGISTRATION TO BE REGISTERED REGISTERED (2) SHARE (1) PRICE (1) FEE - ----------------- -------------- --------- --------- --- <S> <C> <C> <C> <C> Common Stock, $0.001 par value 3,918,600 shares (3) $ 3.50 $13,715,100 $3,621(4)(5) </TABLE> (1) Estimated solely for purposes of computing the registration fee pursuant to Rule 457 under the Securities Act of 1933 on the basis of the average of the high and low prices reported in the consolidated reporting system on March 23, 2000. (2) Does not include 2,778,088 shares (including shares registered for resale by certain selling stockholders) and 2,000,000 warrants were registered pursuant to a Registration Statement on Form S-1, Registration No. 333-31775, declared effective on October 20, 1997. 1,000,000 shares were registered for resale pursuant to a Registration Statement on Form S-1, Registration No. 33-49897, declared effective on April 22, 1998, with the consent of the Registrant, by certain selling stockholders who may wish to sell such shares under circumstances requiring or making desirable the use of the prospectus contained herein. The 2,778,088 shares registered included 2,000,000 shares that may be issued upon the exercise of the warrants. (3) 3,918,600 shares that are being registered for resale, with the consent of the Registrant, by certain selling stockholders who may wish to sell such shares under circumstances requiring or making desirable the use of the prospectus contained herein. (4) The Registrant previously paid a fee of $7,079 in connection with the registration of the shares and warrants referred to in footnote No. 2 above. (5) Pursuant to Rule 429 under the Securities Act of 1933, as amended, the prospectus filed as part of this Registration Statement relates to the securities registered hereby and also relates to 2,778,088 shares of the Registrant's common stock (including shares registered for resale by certain selling stockholders) and 2,000,000 Warrants to purchase such common stock under our Registration Statement on Form S-1 (File No. 333-31775) and 1,000,000 shares of the Registrant's common stock which were registered for resale by certain selling stockholders under our Registration Statement on Form S-1 (File No. 33-49897). THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ the United States, of which approximately half are represented by independent alarm dealers. Our senior management and marketing personnel have extensive relationships with independent alarm dealers, which have been cultivated over a combined 100 years of experience in the security industry, serving or working with independent alarm dealers. We have the largest dealer network in the United States, with over 3,000 dealers who install and service approximately 600,000 residential and commercial security systems in nearly every major community in the United States. Approximately 2,500 of those dealers purchase all or a portion of their monitoring services from our regional monitoring stations and have regular contact with us. Additionally, many of these dealers participate in one or more of our educational or training programs. We believe that our focused strategy of wholesale monitoring for independent alarm dealers has advantages over an integrated sales, installation, service and monitoring strategy. Our revenue base grows with the overall growth in the industry, particularly with the growth of new sales and installations by independent alarm dealers. We believe that independent alarm dealers as a group enjoy better customer retention and relationships than the large, integrated national companies by virtue of their local ownership and emphasis on quality service. Additionally, independent alarm dealers install a large percentage of "custom" alarm systems which we believe enjoy better retention rates than "low cost" or "no money down" systems. As a result, as their customer base grows, we anticipate an inherent growth in our wholesale monitoring business. Historically, this growth has been accommodated with only modest, incremental capital expenditures to increase capacity. We believe independent alarm dealers will continue to be a dominant force in the alarm industry and we will continue to invest in and provide programs specifically designed to assist our dealers in achieving profitable growth. We will continue to pursue our existing business strategy of aligning ourselves closely with independent alarm dealers, as we believe this will provide greater long-term value to customers, our dealers and our stockholders. The key elements of our strategy to sustain and accelerate the growth in our wholesale monitoring business and dealer network are as follows: Alarm Dealer Network and Stock Incentive Plans. We believe that alarm dealers are more productive, provide more revenue to us and remain associated with us longer, if they are equity owners in our company. For this reason we offer dealers common stock based incentive plans that allow them to become owners of our company in return for agreeing to monitor their alarm systems in one of our central stations. Central Monitoring Stations. We will continue to pursue acquisitions of central monitoring station businesses in order to complete a nationwide network of strategically located regional monitoring stations. We believe that regional wholesale monitoring services are more attractive to independent alarm dealers and are consistent with the "local" marketing and service most independent alarm dealers provide to their customers. We will continue, where appropriate, to consolidate our monitoring businesses within the framework of our regional operating structure. We expect that our acquisition and consolidation strategy will significantly increase our operating margins, while maintaining the quality of service our dealers and their customers expect. Our dealer network has the technical capability to provide existing and potential customers with a wide range of low-voltage products and services that are security, communications, information, entertainment or recurring revenue related. In fact, many of them already do provide some of these services. We also believe that a nationwide network of secure, redundant central monitoring facilities with substantial communication capability and capacity can facilitate and support many additional products and services. As a result, we anticipate that the combination of the collective customer base, market share, installation, service and sales capability of our dealer THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION DATED MARCH 27, 2000 PROSPECTUS 7,696,688 SHARES AND WARRANTS TO PURCHASE 2,000,000 SHARES 0F [SECURITY ASSOCIATES LOGO] SECURITY ASSOCIATES INTERNATIONAL, INC. COMMON STOCK Security Associates International, Inc. is offering 2,000,000 shares of its common stock and warrants to purchase up to 2,000,000 of those shares. The shares and warrants will not be issued for cash, but rather will be issued: - On a continuing basis to independent security alarm dealers as an inducement for them to enter into agreements to use the alarm monitoring services we offer. See "Business - Dealer Partner Program" and "Business -Dealer Financing Programs - The ValueBuilder Program." - As all or part of the price we pay in purchasing other businesses. The warrants have an exercise price of $6.00 per share of common stock purchased. We will not receive any cash from the initial issuance of shares or warrants. We will receive $6.00 for each share of common stock purchased on exercise of the warrants. The selling stockholders identified in this prospectus may also sell up to 5,696,688 shares of common stock. If any of the selling stockholders elect to sell their shares they may do so from time to time privately at prices individually negotiated with the purchasers, or publicly in transactions on the American Stock Exchange. Selling stockholders may pledge common stock to Bear Stearns Securities Corp. or to another broker as collateral for margin loans. In the event of a default by such a selling stockholder, Bear Stearns or such other broker may offer and sell the pledged shares in the manner described above. Additionally, the common stock may be sold from time to time by pledgees, donees, transferees or other successors in interest, including but not limited to Bear Stearns. Our common stock is traded on the American Stock Exchange under the symbol "SAI." On March 23, 2000, the last reported sale price of the common stock was $3.50. network, and the technical and operational capabilities of our nationwide network of electronic monitoring stations, will provide numerous opportunities to profitably grow and diversify the recurring revenue of our dealers and our company. We believe we are uniquely positioned to respond to these challenges and opportunities. Our Executive Offices are located at 2101 South Arlington Heights Road, Suite 100, Arlington Heights, Illinois 60005. Our telephone number is (847) 956-8650.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000857914_talarian_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000857914_talarian_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary contains basic information about our business and this offering. It may not contain all of the information that is important to you. You should read the entire prospectus, including "Risk Factors" and the financial statements and related notes, before making an investment decision. Except as otherwise indicated, all information in this prospectus assumes the conversion of all outstanding shares of preferred stock into common stock, no exercise of the underwriters' over-allotment option and our reincorporation from California to Delaware. TALARIAN CORPORATION We develop and market infrastructure software that enables businesses to exchange information reliably and securely in real time, both internally and with their partners, suppliers and customers. Our products allow software applications to communicate across local or wide area networks, including private networks and the Internet. Our flagship software product, SmartSockets, provides businesses with a robust and easy-to-use method of distributing relevant, time-critical information that continues to operate efficiently, or "scale," with networks as they grow. We also offer professional services that assist our customers in systems planning, architecture and design, custom development and systems integration for the rapid deployment of our products. Our products are designed for and implemented in demanding, mission-critical environments with high volumes of users and data. Our products have been deployed by over 300 companies in a variety of markets such as financial services, networking, satellite communications, securities and energy exchanges, telecommunications and transportation. Our end-user customers include Credit Suisse First Boston, D.E. Shaw, Lockheed Martin, MCI WorldCom, Micron Technology, Raytheon Systems and SIAC (the New York Stock Exchange). We have also entered into agreements with Aspect Telecommunications, BMC Software, Micromuse, Nortel Networks, Novell and Platinum Technology (now part of Computer Associates) that allow them to embed our infrastructure software in their product offerings. These customers and independent software vendors have accounted for more than 40% of our total revenue since October 1, 1997. We were incorporated in 1988 and originally offered software products used primarily in connection with mission-critical command and control operations in industries such as satellite communications. In 1997, leveraging our existing technology, we refocused our business strategy to provide infrastructure software for applications relying heavily upon the use of real-time communications over distributed systems. Our SmartSockets infrastructure software facilitates selective information delivery through the use of high-performance publish-subscribe technology. This technology enables messages, or "packets" of data, to be delivered automatically to interested applications, or subscribers, rather than requiring users to request information on a case by case basis. Our products use both Transmission Control Protocol/Internet Protocol, or TCP/IP, the standard Internet protocol for one-to-one communication, or unicast, and multicast protocols for one-to-many communication. Multicast allows information requested by multiple applications to be sent only once, rather than as multiple separate messages to each application. As a result, multicast can provide information simultaneously to multiple applications and use the existing capacity, or bandwidth, of the network more efficiently. We also offer implementations of multicast protocols that contain enhanced error recovery mechanisms, known as "reliable multicast," for mission-critical environments, and delivery services for the implementation of these protocols. We believe that our products meet the needs of the market by providing our customers with the following benefits: - One of the highest performing infrastructure software products available, capable of delivering over 20,000 200-byte messages per second; - High scalability in terms of transaction volumes, number of users, and geographic location of users and applications, enabling businesses to add new clients, servers and applications easily without having to rewrite software; - Easy to use and quickly deployable without extensive use of system integrators, reducing the overall cost of ownership for the customer; - Efficient and cost-effective use of available network bandwidth due to our publish-subscribe and multicast technologies; - The reliability and fault tolerance required by very demanding environments such as e-commerce sites, financial exchanges and large-scale transportation systems; and - Automatic delivery of information only to those applications, known as subscribers, that have previously expressed an interest in receiving that information when it becomes available. Our objective is to be the leading provider of infrastructure software that enables businesses to communicate and collaborate in real-time within and between organizations. The key elements of our strategy include: - Strengthening our technology position by investing substantial resources in research and development, making strategic acquisitions and participating in the development of industry standards relevant to our business; - Proliferating our technology by strengthening our strategic relationships with Nortel Networks and Novell and developing new relationships with other key industry players; - Expanding our presence in key existing vertical target markets such as financial services and telecommunications, and establishing a similar presence in other key markets, both domestically and internationally; - Investing in research and development to provide our products with the enhanced capabilities required for the Internet infrastructure market and focusing additional sales and marketing resources on that market; - Expanding our distribution channels by creating re-seller relationships with major systems and business-to-business integration companies, professional services organizations and enterprise application integration vendors; and - Increasing investment in our marketing infrastructure to promote market awareness of our company and our products. RISKS RELATED TO OUR BUSINESS Our operating history with our current business strategy is limited. We incurred net losses of $3.5 million for the fiscal year ended September 30, 1999 and $5.7 million for the six months ended March 31, 2000. As of March 31, 2000, we had an accumulated deficit of approximately $24.8 million. We expect to continue to incur significant product development, sales and marketing, and administrative expenses over the next several years as we continue to expand our business. We operate in a highly competitive market characterized by rapid technological change. Our future success is subject to risks and uncertainties. The market for real-time infrastructure products is in an early stage of development and these products, including our SmartSockets software, may not achieve market acceptance. In addition, several of our competitors have broader product offerings than ours and many have significantly greater resources than we do. ------------------------- We incorporated in Maryland in November 1988, reincorporated in California in May 1991 and reincorporated in Delaware in July 2000. Our principal executive offices are located at 333 Distel Circle, Los Altos, California 94022, and our telephone number is (650) 965-8050. Our Internet address is talarian.com. The information on our Web site is not a part of this prospectus. SmartSockets(R) is our registered trademark, and Talarian(TM), the Talarian logo, RMTP-II(TM), PGM(TM), RTmonitor(TM), MQadmin(TM), MQexpress(TM), GlobalCast(TM) and WhiteBarn(TM) are our trademarks. All other trademarks or trade names appearing elsewhere in this prospectus are the property of their respective owners. RECENT DEVELOPMENTS The following are our unaudited results for the three months ended June 30, 2000, although we have not finalized our financial statements for this period. For the three months ended June 30, 2000, our total revenue was $4.4 million. This total revenue was comprised of $2.7 million of license revenue, $781,000 of maintenance revenue and $940,000 of professional services revenue, including $395,000 of professional services revenue from customers obtained through our acquisition of WhiteBarn on March 13, 2000. For the three months ended June 30, 2000, our gross profit was $3.2 million and our net loss was $5.0 million. This loss included amortization of deferred stock compensation of $3.5 million and amortization of goodwill and intangible assets of $607,000. THE OFFERING Common stock offered by Talarian...... 4,000,000 shares Common stock to be outstanding after this offering......................... 18,855,053 shares Use of proceeds....................... We estimate that we will receive net proceeds from this offering of $46.8 million, or $54.1 million if the underwriters exercise their over-allotment option in full. We expect to use the net proceeds for general corporate purposes, including sales and marketing expenses, research and development expenses, capital expenditures and, if appropriate opportunities arise, acquiring, or investing in, businesses, products or technologies or establishing joint ventures. See "Use of Proceeds." Nasdaq National Market symbol......... TALR The number of shares of our common stock that will be outstanding after this offering is based on the number outstanding on March 31, 2000 and assumes the conversion of our outstanding shares of preferred stock into 8,810,882 shares of common stock upon the closing of this offering; The number of shares of our common stock that will be outstanding after this offering excludes: - 2,122,387 shares subject to options outstanding at March 31, 2000 at a weighted average exercise price of $1.92 per share; - 131,502 shares subject to warrants outstanding at March 31, 2000 at a weighted average exercise price of $0.72 per share; - 1,051,773 additional shares available at March 31, 2000 for issuance under our 1998 Equity Incentive Plan; and - 3,300,000 shares currently reserved for future issuance under our 2000 Equity Incentive Plan and 2000 Employee Stock Purchase Plan. From April 1, 2000 through July 15, 2000, we have granted options to purchase 476,500 shares with a weighted average exercise price of $6.22 and options and warrants to purchase 17,018 shares have been exercised for aggregate proceeds of $13,664. SUMMARY CONSOLIDATED FINANCIAL DATA The following tables summarize our consolidated financial data and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes included elsewhere in this prospectus. The unaudited pro forma information in the consolidated statement of operations data gives effect to our acquisition of substantially all the assets of GlobalCast Communications, Inc. in September 1999 and our acquisition of WhiteBarn, Inc. in March 2000, as if the acquisitions had occurred on October 1, 1998, but does not assume the conversion of the shares of our outstanding preferred stock into common stock upon the closing of this offering. <TABLE> <CAPTION> YEAR ENDED SEPTEMBER 30, -------------------------------------------- 1995 1996 1997 1998 1999 ------ ------ ------ ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue: Licenses........................ $2,821 $3,560 $4,209 $ 5,100 $ 5,912 Maintenance..................... 780 1,255 1,426 1,873 2,488 Professional services........... 503 733 807 540 640 ------ ------ ------ ------- ------- Total revenue................. 4,104 5,548 6,442 7,513 9,040 Gross profit...................... 3,515 5,148 5,230 6,448 7,872 Income (loss) from operations..... (185) 48 (889) (1,718) (3,522) Net income (loss)................. $ (181) $ 118 $ (894) $(1,728) $(3,539) Basic and diluted net loss per share attributable to common stockholders.................... $(0.28) $(0.18) $(0.57) $ (0.80) $ (1.30) Basic and diluted common shares used in computation............. 2,073 2,139 2,434 2,781 3,099 <CAPTION> PRO FORMA --------------------------- SIX MONTHS ENDED SIX MONTHS MARCH 31, YEAR ENDED ENDED ------------------------- SEPTEMBER 30, MARCH 31, 1999 2000 1999 2000 ----------- ----------- ------------- ----------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue: Licenses........................ $ 2,939 $ 4,080 $ 5,912 $ 4,080 Maintenance..................... 1,085 1,469 2,488 1,469 Professional services........... 163 879 2,233 1,571 ------- ------- ------- ------- Total revenue................. 4,187 6,428 10,633 7,120 Gross profit...................... 3,675 5,322 7,766 5,347 Income (loss) from operations..... (1,244) (5,702) (9,146) (6,866) Net income (loss)................. $(1,229) $(5,672) $(9,517) $(6,805) Basic and diluted net loss per share attributable to common stockholders.................... $ (0.50) $ (2.88) $ (2.51) $ (2.91) Basic and diluted common shares used in computation............. 2,941 4,089 3,985 4,437 </TABLE> The pro forma column of the consolidated balance sheet data reflects the conversion of our outstanding preferred stock into 8,810,882 shares of common stock upon the closing of this offering, the related cancellation of accrued preferred dividends and the repayment of all bank borrowings and other debt after March 31, 2000. The pro forma as adjusted column of the consolidated balance sheet data reflects the sale of 4,000,000 shares of our common stock at an assumed initial public offering price of $13.00 per share, after deducting the estimated underwriting discount and offering expenses payable by us. <TABLE> <CAPTION> MARCH 31, 2000 ------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (IN THOUSANDS) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $ 10,120 $ 8,982 $55,792 Working capital............................................. 8,019 8,019 54,829 Total assets................................................ 22,113 20,975 67,785 Debt, less current portion.................................. -- -- -- Redeemable convertible preferred stock...................... 24,672 -- -- Stockholders' equity (deficit).............................. (10,783) 13,889 60,699 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000859074_isky-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000859074_isky-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE INFORMATION UNDER "RISK FACTORS" BEGINNING ON PAGE 4 AND THE FINANCIAL STATEMENTS BEGINNING ON PAGE F-1, BEFORE MAKING AN INVESTMENT DECISION. OUR BUSINESS iSKY provides a complete customer service solution to both electronic businesses and traditional companies seeking to enhance their customers' interaction with them over the internet and through traditional communication methods, before, during and after a purchase. Our services use interactive one-to-one communications through a variety of media including text conversation over the internet, e-mail, voice conversations over the internet, telephone and facsimile, enhanced by personalized data collection and management that occurs during the interaction, to find, win, keep and enhance profitable customer relationships. In addition, we are able to collect valuable customer data which provides insights into buying behavior, responses to different sales channels, the effectiveness of promotions and trends in customer service issues. Our services enable our clients to provide high quality customer care and to establish long-term relationships with customers that are critical to the ability of internet-based and traditional businesses to maintain their competitive positions. Both internet-based and traditional businesses often lack the expertise, resources and infrastructure necessary to provide top quality customer support and as a result may look for a solution from a third party to fulfill this need. OUR COMPETITIVE ADVANTAGES We believe our competitive advantages include: - Integrated customer loyalty management solution. - Unique data management and web-based reporting capabilities. - Flexible infrastructure that can easily be modified to handle larger volumes of transactions. - Diverse and long-term client relationships. - Experienced management team. OUR GROWTH STRATEGY The key elements of our growth strategy include the following: - Rapidly expand and enhance existing client relationships. - Expand client base in key vertical markets. - Promote the iSKY brand. - Pursue acquisitions and strategic partnerships. - Expand our presence abroad. OUR HISTORY iSKY was incorporated in Maryland as Original Research Corporation on May 8, 1984, changed its name to Sky Alland Research, Inc. on May 5, 1989, and changed its name to iSKY on February 4, 2000. We began offering, on a test basis, our integrated internet-based services in September 1999. We have experienced operating losses and net losses for the past two years and rely on financing to support our operating and capital requirements. Our principal executive offices are located at 6740 Alexander Bell Drive, Suite 300, Columbia, Maryland 21046. Our telephone number is (410) 312-1515. Our website is located at www.isky.com. Information contained in this website does not constitute part of this prospectus and is not incorporated into this prospectus by reference. THE OFFERING <TABLE> <S> <C> Common stock offered by us.................................. 4,000,000 shares Common stock to be outstanding after the offering........... 17,334,754 shares Use of proceeds............................................. General corporate purposes, working capital needs and payment of debt and accrued preferred stock dividends. Proposed Nasdaq National Market Symbol...................... "ISKY" </TABLE> ------------------------ UNLESS OTHERWISE NOTED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THE UNDERWRITERS DO NOT EXERCISE THEIR OPTION TO PURCHASE AN ADDITIONAL 600,000 SHARES OF COMMON STOCK FROM US TO COVER OVER-ALLOTMENTS. THE NUMBER OF OUTSTANDING SHARES USED IN THIS PROSPECTUS IS 13,334,754 AND EXCLUDES 2,361,120 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF OUTSTANDING OPTIONS AND 4,824,360 SHARES OF COMMON STOCK AVAILABLE FOR THE FUTURE GRANT OF STOCK OPTIONS UNDER OUR STOCK OPTION PLANS. SUMMARY FINANCIAL INFORMATION The following table presents summary financial data for iSKY. This data should be read in conjunction with the financial statements and related notes included elsewhere in this prospectus and with "Management's Discussion and Analysis of Financial Condition and Results of Operations." The pro forma balance sheet data reflects the net proceeds from the sale of 1,260,775 shares of convertible preferred stock in a private offering after deducting related offering expenses. The pro forma as adjusted column reflects the net proceeds from the sale of 4,000,000 shares of common stock offered by us after deducting the estimated underwriting discounts and related offering expenses, automatic conversion of all outstanding shares of preferred stock into common stock and repayment of the line of credit upon the closing of this offering. The number of interactions line represents completed inbound and outbound telephone calls and facsimiles, e-mails and internet chat sessions. Our historical financial information may not necessarily reflect our results of operations or financial position in the future. The shares used to compute supplemental pro forma unaudited basic and diluted net income (loss) per share includes 371,743 shares, representing the number of shares whose proceeds would be necessary to cover the $2,886,556 for payment of accrued, unpaid dividends and to cover the $645,000 payment of outstanding debt upon consummation of the anticipated initial public offering at the assumed initial public offering price of $9.50 per share. Interest expense incurred during 1999 related to this debt was $56,584. <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, --------------------------------- 1997 1998 1999 --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues.................................................... $18,709 $19,733 $23,840 Income (loss) from operations............................... 448 (1,120) (2,274) Net income (loss)........................................... 159 (1,550) (2,432) Preferred stock dividend requirements....................... (788) (682) (1,349) Net income (loss) applicable to common stockholders......... (629) (2,232) (3,781) ======= ======= ======= Basic and diluted net income (loss) per share applicable to common stockholders....................................... $ (0.38) $ (1.32) $ (2.15) ======= ======= ======= Shares used to compute basic and diluted net income (loss) per share applicable to common stockholders............... 1,652 1,685 1,758 ======= ======= ======= Pro forma unaudited basic and diluted net income (loss) per share..................................................... $ (0.23) Shares used to compute pro forma unaudited basic and diluted net income (loss) per share............................... 10,362 Supplemental pro forma unaudited basic and diluted net income (loss) per share................................... $ (0.23) Shares used to compute supplemental pro forma unaudited basic and diluted net income (loss) per share............. 10,733 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 1,612 $29,912 $60,415 Working capital............................................. 1,882 30,182 61,331 Total assets................................................ 14,646 42,946 73,449 Long-term obligations, net of current portion............... 586 586 586 Convertible redeemable preferred stock...................... 1,421 1,421 -- Stockholders' equity........................................ 6,917 35,217 66,365 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000865753_burst-com_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000865753_burst-com_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all the information you should consider before buying shares in this offering. You should read the entire prospectus carefully, including the risk factors and consolidated financial statements and related notes appearing elsewhere in this prospectus. The prospectus contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of the factors described under "Risk Factors" and elsewhere in this prospectus. See "Cautionary Note on Forward-Looking Statements." Our Company We are an independent provider of client/server network software for the delivery of video and audio information over networks. Our principal executive offices are located in San Francisco, California and we have seven additional sales offices in several domestic metropolitan areas. Our software manages the delivery of video and audio content over various networks, including the Internet and corporate intranets, optimizing network efficiency and quality of service. Our Burstware(R) suite of software products enables companies to transmit video and audio files at Faster-Than-Real-Time(TM) speed, which is accomplished by utilizing available bandwidth capacity to send more video or audio data to users than the players are demanding. This data is stored on the users' machine for playing on demand, thus isolating the user from noise and other network interference. The result is high quality, full-motion video and CD-quality audio to the end-user. Burstware(R) utilizes several components of our international patent portfolio, including the Faster-Than-Real-Time(TM) delivery method. As network bandwidth, data storage, processing power and compression technologies have become increasingly available, the demand for high-quality video and audio over the Internet, intranet and extranet has expanded rapidly. According to Paul Kagan Associates, in 1999, the number of households with high-speed access was estimated to be 1.9 million with service revenue of $574.0 million; by 2002, these figures are expected to reach 12.0 million and $3.6 billion, respectively. As businesses have begun to recognize the cost, inconvenience and inefficiency of business communication tools such as audio and videoconferencing, online business-to-business, business-to-consumer and business-to-employee communications have become commonplace. Frost & Sullivan, a leading market research firm, reported that video server market revenue for 1999 was expected to reach $722.7 million, growing to $2.1 billion by 2002. As current real-time streaming technology expands rapidly online, content delivery becomes increasingly susceptible to network congestion and disruption causing interruption or degradation of the client's multimedia experience. Additionally, the number of real-time connections that can be maintained simultaneously by the server is limited by processing power as well as bandwidth availability. This, along with the fact that a server tends to devote disproportionate resources to the client with the most available bandwidth, also reduces the quality as well as the availability of the audio-visual content. As a result of these limitations, and including the fact that most streaming technology involves proprietary encoding schemes and limited platform acceptance, widespread dissemination of high-quality streaming content has yet to occur within either the business-to-business or business-to-consumer market. Escalating demand for audio-visual content as well as quality enhancement in its delivery has created a need for a software solution capable of eliminating network disruptions and utilizing client bandwidth efficiently. Our Java-based Burstware(R) architecture delivers consistent, high-quality multimedia content with open standard flexibility through optimization of network resources and superior isolation from network disturbances. In a Burst-Enabled(TM) network, the server sends multiplexed "bursts" of content into the network at rates faster than real-time consumption, providing a local reserve in the event that data across the network slows or ceases. During all phases of content delivery, Burstware(R) provides continuous monitoring of consumption rates, multiple end-user needs and changes in network conditions. With a need-based delivery model and the ability to service the same number of real-time streaming clients using fewer network resources, our Burstware(R) Network Simulator has shown improvements of up to 60% in network efficiency, or throughput, when compared to real-time streaming. Page 1 <PAGE> Burstware(R) intelligence allows for multiple end-user applications as well. With the capacity to deliver data in a clear, efficient and cost-effective manner, Burstware(R) enables powerful business-to-business, business-to-consumer and business-to-employee communication. Burstware(R) also gives producers, aggregators and developers the ability to reach new markets with virtually unlimited access to vast libraries of content. Finally, Burstware(R)'s network delivery mechanism is ideally suited for numerous industries including news, entertainment, retail and advertising as well as local, state and federal governments and agencies. Our principal executive offices are located at 500 Sansome Street, Suite 503, San Francisco, California, 95111, and our telephone number is (415) 391-4455. In this prospectus, the terms "Burst.com," "we," "us," and "our" refer to Burst.com and our subsidiaries Timeshift-TV, Inc. and Explore Technology, Inc. unless the context otherwise requires. <TABLE> <CAPTION>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000866751_bpi_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000866751_bpi_prospectus_summary.txt
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+PROSPECTUS SUMMARY This section provides a brief overview of the most significant terms of the rights offering and answers in summary form some questions you may have about us and this rights offering. The information in this section is not complete and may not contain all of the information that you should consider before exercising your rights. You should read the entire prospectus carefully, including the "Risk Factors" section. QUESTIONS AND ANSWERS ABOUT OUR COMPANY WHAT IS BPI PACKAGING TECHNOLOGIES, INC.? We convert commercially available high molecular weight, high density polyethylene resins into thin film. This film is either sold directly into industrial or packaging applications or converted in-house into carryout bags of "T-shirt sack" design for supermarkets, convenience stores and other retail markets. All of our plastic products are manufactured using advanced, high quality extrusion, printing and bag making equipment in our facility in North Dighton, Massachusetts. Plastic resin is heated and blown into a thin film on blown film extrusion lines. The film is cooled, wound on large rolls, printed with customer information using water-based inks and shipped to customers. However, if the film is to be used to manufacture bags, it is slit-sealed into bags, reviewed by quality control inspectors, boxed and shipped to customers. Our manufacturing equipment consists of blown film extrusion lines, printing presses, bag making machines and film slitting operations. WHERE ARE WE LOCATED? Our corporate offices are located at 455 Somerset Avenue, North Dighton, Massachusetts 02764. Our telephone number is (508) 824-8636. WHAT ARE RECENT DEVELOPMENTS? In July 1997, we sold 2,100,902 shares of common stock at a price of $1.00 per share in a best-efforts private placement offering with total net proceeds of $2,100,902. Shares of common stock were sold in a single offering under Regulation D and Regulation S of the Securities Act. Under Regulation D, we sold 850,902 shares of common stock only to accredited investors as defined in Regulation D. Under Regulation S, we sold 1,250,000 shares of common stock outside the United States to non-U.S investors. In October 1997, we sold 1,796,000 shares of common stock at a price of $1.05 per share in a best-efforts private placement offering with total net proceeds of $1,885,800. Shares of common stock were sold in a single offering under Regulation D and Regulation S of the Securities Act. Under Regulation D, we sold 400,000 shares of common stock only to accredited investors as defined in Regulation D. Under Regulation S, we sold 1,396,000 shares of common stock outside the United States to non-U.S. investors. In December 1997, we sold 1,094,223 shares each of common stock and warrants in a private placement offering of restricted securities with total net proceeds of $1,004,800. The price per share for 88,889 of the shares was $1.125 per share and the remaining shares were sold at $0.90 per share. Warrants exercisable for a minimum of 10,000 shares at $1.08 per share were sold in this offering. Under Regulation D, we sold 222,223 shares each of common stock and warrants only to accredited investors as defined in Regulation D. Under Regulation S, we sold 872,000 shares each of common stock and warrants outside the United States to non-U.S. investors. In June 1998, we completed an offering of private placement units. Each unit consisted of 100,000 shares of common stock and a three-year warrant to purchase 100,000 shares of common stock at $1.25 per share. However, if we announce the receipt of a contract for the purchase of goods or services resulting in revenues of $5,000,000 or more, then the purchase price will be reduced to $1.05 per share for 15 days after the announcement. The offering price was $90,000 per unit and the net proceeds from the offering were $1,485,000. Under Regulation D, we sold 1,050,000 shares of common stock only to accredited investors as defined in Regulation D. Under Regulation S, we sold 600,000 shares of common stock outside the United States to non-U.S. investors. In each of the above four offerings: - the issuances of the securities were deemed to be exempt from registration under Section 4(2) and Regulation D of the Securities Act as transactions by an issuer not involving any public offering; - the sale proceeds were used as part of our working capital; - we promised to use our best efforts to file with the SEC a registration statement on Form S-1 or S-3 relating to the shares in each offering; and - the securities sold under Regulation D were registered under the Securities Act on October 28, 1999. On June 27, 1998, we stopped funding the operations of our two wholly-owned subsidiaries, RC America, Inc. and Market Media, Inc. RC America purchased surplus inventory from manufacturers of consumer products and markets and sold the products to mass merchandise retailers and other retail chains. Market Media sold and marketed in-store advertising and promotion programs. At the same time, we also ended the employment of Ronald V. Caulfield, the Chief Executive Officer and President of RC America. On July 2, 1998, the employment of Dennis Caulfield, our former Chief Executive Officer, was terminated. On August 13, 1998, the NASDAQ Listing Qualifications Panel of the NASDAQ Stock Market delisted our securities from NASDAQ NMS principally due to our failure to maintain compliance with the minimum bid price and net tangible assets requirements, effective as of close of business on August 13, 1998. Shortly thereafter, we formally requested that the NASDAQ Listing and Hearing Review Council review the August 13, 1998 decision. On December 22, 1998, NASDAQ Listing and Review Council affirmed the decision of the NASDAQ Listing Qualifications Panel to delist our common stock from the NASDAQ NMS. As of the date of this prospectus, we have not appealed the NASDAQ decision to the SEC. Since August 14, 1998, our common stock has been traded on the NASDAQ Over-the-Counter Bulletin Board under the symbol "BPIE." Throughout the remainder of 1998, our management at the time attempted to obtain additional financing to fund our ongoing losses from operations. During this time period, we were unable to service our then existing capital and operating leases and numerous of our creditors had perfected their judgments against us and several of such creditors were attempting to perfect their security interests in a manner which would have forced us to cease our operations. In early January 1999, we commenced negotiations with DGJ for the financing which would allow us to address these capital needs. We were introduced to DGJ by Global Financial Services, Inc., a company unaffiliated with us and DGJ, which we engaged to help us in our efforts to find equity or debt financing in order to continue to fund the ongoing costs of our operations. On January 27, 1999, we entered into a Securities Purchase Agreement with DGJ, under which we issued and sold to DGJ: 1. a Promissory Note in the principal amount of $3,200,000; 2. a Common Stock Purchase Warrant to purchase up to 80,000,000 shares of common stock, at an exercise price of $0.04 per share, exercisable until January 27, 2009; and 3. 1,629,930 shares of our Series C Preferred Stock for $100. In connection with this financing, DGJ required certain members of our management, C. Jill Beresford, James F. Koehlinger, Hanspeter Schulz, Richard H. Nurse and Ivan J. Hughes, to invest $300,000, in the aggregate, in our warrants. As of January 5, 2000, 6,563,000 of the 7,500,000 issued warrant shares were converted into common stock. On January 27, 1999, we entered into a factoring agreement with Franklin Capital Corporation, an entity affiliated with Gary Edidin, one of our Directors and a member of DGJ, whereby we, with full recourse, assigned and sold to Franklin our entire interest in all of our present and future accounts and similar rights and instruments arising from our sales of goods, then existing or created thereafter. We paid Franklin a factoring fee in an amount equal to 2% of the gross amount of such receivables, however, the minimum commission for any receivable was $5.00. Under this factoring agreement, Franklin was able to advance to us up to 85% of the purchase price of our receivables as they were created, subject to a maximum advance at any time outstanding of $2,000,000. Interest was charged for the number of days that advances of the purchase price of the receivables were made to us prior to the date they were paid and the number of days that the advances from Franklin's account remained outstanding at the prime rate plus 2% per annum, except that interest was in no event less than 8% per annum. We retired this factoring agreement on August 19, 1999 when we entered into the relationships with LaSalle Business Credit, Inc. and DGJ. We also issued a demand revolving note to Franklin in the principal sum of $1,000,000 at an interest rate of 5% above the prime rate, however, the interest charged could not be less than a minimal annual fixed rate of 12 3/4%. This note was secured by a security agreement between us and Franklin which granted Franklin a continuing security interest in our present and future accounts, inventory, equipment and other property. Pursuant to the terms of this agreement, the amount eligible to be advanced to us under this revolving note was limited to the lesser of $1,000,000 or the sum of 50% of eligible inventory and 50% of our eligible raw materials. We retired our obligations under this note on August 19, 1999. The members of DGJ are Gary R. Edidin, Lawrence A. Sherman, Deere Park Capital Management, Inc. and BPI Hilco, L.L.C. Three of our Directors, Gary R. Edidin, Allen S. Gerrard and Theodore L. Koenig, are affiliated with DGJ and a fourth Director, Bruce M. Fleisher, was appointed to our Board by DGJ. Messrs. Edidin and Sherman are also stockholders of Franklin, however, our obligations to Franklin were satisfied in full at the time of the August 1999 financing, described below. We also refinanced our equipment, capital and operating leases in January 1999 when we entered into an equipment lease with DGJ. The new lease carries no debt reduction obligation and is treated as long-term debt. The combined monthly payments under the retired leases were reduced from approximately $305,000 per month to $102,000 per month under the new equipment lease with DGJ. The term of the lease is ten years and its monthly payments of $102,000 represent interest only. Also in January 1999, we entered into agreements with most of our unsecured creditors that provided for a discounted payment in February 1999 or permitted us to pay the entire balance without interest over a three-year period. On August 19, 1999, we entered into a series of transactions with LaSalle Business Credit, Inc. and DGJ to refinance our existing indebtedness. Our loan agreement with LaSalle provides us with a $4,000,000 revolving line of credit. This credit facility is secured by a first priority security interest in our accounts receivable, inventory and certain other assets. DGJ is the lessor of substantially all the equipment that we use, under a capital lease, and holds a first priority security interest in our equipment. LaSalle received a second priority security interest in our equipment. Certain of the proceeds of this credit facility were used to retire existing indebtedness we owed to Franklin Capital Corporation, including the factoring agreement and revolving note described above, while the remaining proceeds were used to retire some of our other indebtedness and for working capital purposes. This credit facility bears interest at a fluctuating rate equal to 1.5% per annum above the prime rate of LaSalle in effect from time to time and matures in three years. We were introduced to LaSalle by one of our Directors, Theodore L. Koenig, a principal of Monroe Investments, Inc., which is a member of Hilco BPI, L.L.C., which is a member of DGJ. As of January 5, 2000, the balance outstanding under this agreement is $3,442,435. In addition, we and DGJ amended and restated the promissory note in the original principal amount of $3,200,000, described above, because we were unable to fulfill the financial obligations under the terms of the loan and lease documents with DGJ. To cure the defaults, we restated the note to include, in addition to the original principal and interest accrued thereunder at 6%, all amounts outstanding under: (i) an equipment loan made by DGJ to us as of March 1, 1999 in the original principal amount of $218,665; (ii) a series of advances made to us by Franklin Capital Corporation during the second quarter of 1999 (which totaled approximately $900,000, and were reduced to approximately $660,000 after application of proceeds of the credit facility), rights to repayment of which were subsequently assigned by Franklin to us; (iii) delinquent payments under the DGJ lease of approximately $570,000; and (iv) interest on the foregoing. The resulting balance of $4,773,585 was restated as the principal amount of a new amended promissory note. The amended promissory note is in the original principal amount of $4,773,585 and is payable as follows: $3,200,000 of principal is due and payable on February 1, 2004, or earlier by acceleration, as described in the Securities Purchase Agreement between us and DGJ, or otherwise, and $1,573,585 is due and payable pursuant to the terms of an intercreditor agreement between DGJ and LaSalle. The amended promissory note bears interest at a rate of 10% per annum, and is secured by all of our assets, subordinated to LaSalle except as to equipment. During the third quarter of 1999, DGJ made additional advances to us totaling $252,000. These loans bear interest at the rate of 10% per annum with interest payable monthly and the principal is due and payable on the same date as the maturity date of the amended promissory note discussed in the prior paragraph. At our annual meeting of stockholders on August 24, 1999, our stockholders approved the increase in our authorized number of shares of common stock from 60,000,000 to 150,000,000 shares.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000874689_integrated_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000874689_integrated_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary is not complete and may not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus, including the financial data and related notes, carefully before making an investment decision. This prospectus contains forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in "Risk Factors" and elsewhere in this prospectus. Unless otherwise stated, the information contained in this prospectus: (1) assumes no exercise of the underwriters' over-allotment option and (2) reflects the reclassification of all of our classes of common stock into a single class of common stock and the 1.6942-for-1 stock split of that single class, which will occur immediately prior to the effectiveness of the registration statement of which this prospectus forms a part. Integrated Circuit Systems, Inc. We are a worldwide leader in the design, development and marketing of silicon timing devices for a number of high-growth application segments. Our silicon timing devices are used in a variety of consumer and business electronics such as personal computers, or PCs, digital cameras, set-top boxes, PC peripherals and DVD players. Our products are also increasingly being used in various communications applications including routers, switches, fiber optics, cable modems and ADSL equipment. Silicon timing devices are integrated circuits that emit timing signals or pulses required to sequence and synchronize electronic operations to ensure that information is interpreted at the right time and speed. All digital devices require a timing signal and those with any degree of complexity require silicon timing devices to time and synchronize their various operations. Growth in our markets is being driven by the rapid pace of infrastructure development for the Internet, the increasing complexity of our customers' end products, and the transition from traditional analog devices to digital technologies. Internet infrastructure expansion is now largely broadband based, requiring higher operating frequencies and more complex digital equipment. This advancement has driven the continued proliferation of technologically complex consumer and business electronic devices that help optimize the Internet experience. In addition, the transition from traditional analog devices to digital devices has led to increasing consumer adoption of digital technologies such as HDTV or DVD players. Our silicon timing devices are well suited to these developments as they operate in analog and digital environments (i.e., mixed-signal) and can manage multiple frequencies, have high programmability and generally require less power than traditional timing products such as crystal oscillators, which are predominantly quartz based timing devices that resonate at a single frequency. We have developed a reputation for engineering excellence and innovative technology in silicon timing design. We pioneered the silicon timing market in 1988, introducing silicon timing devices for video and graphics applications. Since then, we have consistently led the industry with several technical designs, including delivering the first silicon timing device for the PC motherboard in 1990. Our ongoing focus on product innovation has led to the introduction of approximately 424 new products into the marketplace over the past three fiscal years. We are the leading supplier of silicon timing devices to several markets, including PCs and digital set-top boxes, and we are continuing to design and introduce new products for communications equipment companies such as Motorola, Lucent, Nortel, Cisco Systems, Fujitsu and Alcatel. Over 40% of our current design opportunities are for communications equipment companies. A design opportunity reflects a request from a customer or potential customer for a silicon timing design. In the first six months of fiscal 2000, we converted over 80% of our design opportunities into design wins, which could lead to future production orders. We have developed long-standing and valuable relationships with the majority of leading original equipment manufacturers, or OEMs, of consumer and business electronics and communications equipment. We work closely with these OEMs to develop unique and often proprietary timing, sequencing and synchronization solutions and are closely integrated into their product design and development process. Our top OEM customers include such companies as Asustek, Hughes Networks, Compaq, Dell, IBM, Echostar, Intel, E-Machines, General Instruments and Hewlett Packard. In the PC market, our research and development efforts are aligned with Intel's product and technology road map. Intel made a $13.5 million investment in our company in December 1999. For the 1999 calendar year, we had revenues of approximately $150 million, and over the past three calendar years, we have grown our core revenues at over 25% per year. With continued focus on our core silicon timing devices, our gross profit has grown from $63.5 million, or a 46.3% gross margin, for the 1997 calendar year to $88.2 million, or a 58.8% gross margin, for the 1999 calendar year. Industry Overview As silicon timing devices are critical to the functioning of end-user consumer and business electronics as well as certain communications equipment, we expect the market for our products to experience significant growth. In 1999, the total available market for timing devices, which includes both silicon timing solutions and crystal oscillators, was approximately $2.8 billion. We expect this market to grow 18% per year to over $3.8 billion by 2001. Silicon timing devices represent approximately $378 million, or 14% of the overall timing market, but we expect it to grow to over $850 million, or 23% of this market, by 2001, a growth rate of approximately 50% per year. The accelerated growth for silicon timing devices reflects not only the underlying growth in our end markets, but also the conversion of crystal oscillators to silicon timing devices in our customers' increasingly complex digital products. Business Strategy Our business strategy is to focus on our core silicon timing business and continue to provide customized and high performance products to our expanding and diversified customer base. We have a proprietary development process that allows for the timely customization of our products to a specific application and our fabless operating model allows us to focus on new product development and customer relationships. Our specific strategies include: . Identify and target new market opportunities where there are strong growth prospects and where we can leverage our core silicon timing technologies. . Dominate these new markets by developing multiple application-specific products to meet the needs of our customers and create a leading market position. . Maintain design leadership in core silicon timing technologies through our extensive design library, patents on core technologies and significant investments in research and development. . Expand into new timing markets through select acquisitions of technology and recruitment of personnel that complement our existing expertise. Results for the Three Months Ended April 1, 2000 For the three months ended April 1, 2000, our consolidated revenue was $41.6 million, a 19% increase from the corresponding quarter last year. Our core revenues increased 34% as compared to the same period in the prior year. Sales growth for our silicon timing products reflected an increase in market share, particularly in the PC industry, as well as increased shipments to the communications industry and for digital set-top box applications. Gross margin during the quarter increased to 61% from 58% during the same quarter a year ago, reflecting reduced material costs and a favorable product mix for the quarter. Traditionally, this quarter is our weakest quarter, particularly for PC-related sales. The Recapitalization Through a recapitalization effected in May 1999, Bain Capital, Inc. and its affiliates, an affiliate of The Bear Stearns Companies Inc., or Bear Stearns, and our senior management team acquired securities that represented approximately 98% of our outstanding voting power at such time. We refer to this transaction in this prospectus as the recapitalization. Our senior management team, together with many of our other employees, own common stock and options that together will represent approximately 18% of our common stock on a fully diluted basis following this offering. Such equity ownership represents a significant economic commitment to, and participation in, our continued success.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000874786_varsity_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000874786_varsity_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights some of the information provided elsewhere in this prospectus. The summary is not complete and may not provide all information you should consider before deciding whether or not to exercise the rights. You should read the entire prospectus carefully. Portions of this prospectus, such as the Risk Factors section starting on page 12, are not summarized below. Riddell also encourages you to review the financial statements and other information provided in the reports and other documents it files under the Securities Exchange Act of 1934, as described in the "Where You Can Find More Information" section in this prospectus at page 92. The Rights Offering Securities offered Rights to purchase 1,000,000 shares of our common stock. Further, to those individuals and entities who exercise rights, we will issue warrants which, upon exercise, will represent in the aggregate, _____ (____%) percent of Riddell's ownership in an existing subsidiary or a new subsidiary that we may establish in the future to conduct substantially all of our Internet operations. Concurrent offering Concurrently with the rights offering, we are offering 250,000 shares of newly-issued shares of stock. Shares of common stock outstanding 9,317,957 outstanding on March 1, 2000. prior to this offering Shares of common stock outstanding 10,567,957. Unless expressly stated after this offering (assuming to the contrary, the share information completion of this rights offering in this prospectus excludes: in full and the sale of 250,000 shares in the concurrent offering under a separate prospectus) o 2,496,025 shares issuable upon exercise of options granted pursuant to Riddell's 1991 Stock Option Plan and 1997 Stock Option Plan as of March 1, 2000. o 1,395,011 shares of common stock issuable upon conversion at $5.3763 per share (subject to certain adjustments) of Riddell's 4.1% Convertible Subordinated Note due 2004. o The shares issued upon exercise of the underwriter's over-allotment option in the concurrent offering. Record date December 27, 1999 Expiration date and time The rights expire at 5:00 p.m., New York City time, on _________ __, 2000, unless properly exercised before that time and date. Rights To each record holder of common stock on December 27,1999 Riddell is granting 0.10795 of a right for each share of common stock held on such date. To exercise the right, you must deliver one full right for each share of common stock you would like to purchase. Subscription price We currently anticipate that the subscription price for each full right will be approximately $3.00 per share, payable in cash. Payment by personal check must clear payment on or before the expiration date, which may require five or more business days from the date that we receive your personal check. As a result, we recommend that stockholders pay the subscription price by certified or cashier's check drawn on a U.S. bank, U.S. postal money order or wire transfer of funds. The subscription price will be approved by those members of our Board of Directors that are not members of the standby group. Transferability of rights The rights are transferable, but we do not anticipate that a formal market will be made in the rights or that they will be listed for trading on any exchange; although an informal market may develop. The rights are issued in the form of subscription certificates which accompany this prospectus sent to the record holders. Fractional shares We will not issue fractional shares. If your rights would allow you to purchase a fractional share, you may exercise your rights only by rounding down to and paying for the nearest whole share, or paying for any lesser number of whole shares. No revocation Once you submit the form of subscription certificate to exercise any rights, you are not allowed to revoke, or change the exercise or request a refund of monies paid. Common Stock Purchase Warrant If the right is exercised, the exercising holder will receive, for no additional cash, a common stock purchase warrant that will entitle the exercising holder to purchase shares in an existing subsidiary or a new subsidiary that we may establish in the future to conduct substantially all of our Internet operations. These warrants will not be exercisable until the later of (A) one year after the effective date of this rights offering, and (B) the effective date of an initial public offering of such an Internet subsidiary, which presently does not exist, and which initial public offering must occur on or before December 31, 2002. If we effect an initial public offering of our Internet subsidiary after the one year anniversary of the effective date of this rights offering, and before December 31, 2002, you will have six months after the closing of that initial public offering to exercise your common stock purchase warrant. If we effect an initial public offering of the Internet subsidiary prior to the one year anniversary of this rights offering, these warrants will not become exercisable until the one year anniversary of the effective date of this rights offering, but you will have six months commencing on the one year anniversary of this rights offering to exercise your common stock purchase warrant. If we do not establish the Internet subsidiary before December 31, 2002, or establish the Internet subsidiary but do not effect an initial public offering for such subsidiary before December 31, 2002, the common stock purchase warrant will never become exercisable and will automatically expire. These warrants have an exercise price of $0.01 per share and are non-transferrable except in the event of the death of the holder. Reasons for the rights offering To finance our Internet business and for additional working capital. No board or committee recommendation Our Board of Directors will not make any recommendation to stockholders regarding the exercise of rights under this offering. Stockholders who do exercise rights risk investment loss on new money invested. We can not assure you that the subscription price will be below the market price for the common stock, or that anyone purchasing shares at the subscription price will be able to sell those shares in the future at a higher price. See "Risk Factors --Risks relating to the rights offering." Standby purchase commitment It is currently anticipated that a group to consist of some of Riddell's officers and directors and certain others with whom we are currently in discussions regarding joining this group will standby and agree to exercise all of the rights granted to those members of this standby group who are officers and/or directors of the Company on the record date. In addition, this standby group will be contractually bound to purchase up to $____________ of the shares offered under the rights offering that are not purchased by stockholders who are not a part of this standby group. The rights granted to this standby group represent ____% of all of the rights being issued to stockholders. Conditions to the rights offering The obligations of the standby group to complete its purchase of shares under the proposed standby agreement are subject to certain conditions described under "Rights Offering -- Conditions relating to the rights offering." If the standby agreement with the standby group is not consummated in accordance with its terms for any reason, or if the other conditions are not satisfied or waived, we may terminate the rights offering and the concurrent offering in their entirety. If the rights offering is terminated, we will refund without interest to those persons who subscribed for shares in the rights offering all payments received from those subscribers. Subscription agent American Stock Transfer & Trust Company Solicitation agent H.C. Wainwright & Co., Inc. Procedure for exercising rights To exercise rights, you must complete the subscription certificate and deliver it to American Stock Transfer & Trust Company with full payment under the subscription privilege. American Stock Transfer & Trust Company must receive the proper forms and payments in good funds on or before the expiration date. You may deliver the documents and payments by mail or commercial courier. If regular mail is used for this purpose, we recommend using insured, registered mail. You may use an alternative, the "Notice of Guaranteed Delivery", if you are unable to deliver the subscription certificate before the expiration date, subject to the requirements of this procedure described under "The Rights Offering--Special procedure under "Notice of Guaranteed Delivery" form. Payment adjustments If you send a payment that is insufficient to purchase the number of shares requested, or if the number of shares requested is not specified in the forms, the payment received will be applied to exercise the subscription privilege to the extent of the payment. If the payment exceeds the subscription price for the full exercise of the subscription privilege, the excess will be refunded to you as soon as it is practicable. You will not receive interest on any payments received under the rights offering. Nominee accounts If you wish to purchase shares in this offering and your shares are held by a securities broker, bank, trust company or other nominee, you should promptly contact your record holder(s) and request that they exercise rights on your behalf. You may also contact the nominee and request that the nominee send a separate subscription certificate to you. If you are a record holder who wishes an institution such as a broker or bank to exercise your rights for you, you should contact that institution promptly to arrange the method of exercise. If you are a nominee who desires subscription certificates re-issued in smaller denominations, you must act promptly under special procedures described under "The Rights Offering--How to transfer rights." You are responsible for the payment of any fees that brokers or other persons holding your shares may charge. You are not responsible for any fees payable to the Subscription Agent or the solicitation agent. Exercise by foreign and certain other American Stock Transfer & Trust Company stockholders will hold subscription certificates for stockholders having addresses outside the United States. In order to exercise rights, holders with addresses outside the United States must notify American Stock Transfer & Trust Company and timely follow other procedures on or before the expiration date of the rights. U.S. income tax consequences For United States federal income tax purposes, we believe that a stockholder will not recognize taxable income as a result of the distribution of the rights. Upon exercise of the rights, we believe that receipt of the common stock purchase warrants will be treated as a distribution of property and taxable as a dividend to the stockholders to the extent the fair value of the common stock purchase warrant on the date of receipt exceeds the subscription price allocated to the warrants. See "The Rights Offering - Federal Income Tax Consequences" and "Certain Federal Income Tax Consequences". Each stockholder should, and is urged to, consult their own tax adviser concerning the tax consequences of this offering under the holder's own tax situation. This prospectus does not summarize tax consequences arising under state tax laws, non-U.S. tax laws, or any tax laws relating to special tax circumstances or particular types of taxpayers. Stock certificates We will deliver stock certificates representing common stock purchased by the exercise of rights as soon as practicable after the expiration date of the rights. Warrant certificates We will deliver warrant certificates representing the common stock purchase warrants granted to you upon the exercise of your rights as soon as practicable after the expiration date of the rights. Amendment, extension and termination We may amend or extend the rights offering. We reserve the right to withdraw the rights offering at any time prior to the expiration date for any reason, in which event all funds received in the rights offering will be returned without interest to those persons who subscribed for shares in the rights offering. Riddell Our Business Riddell is a leading marketer and manufacturer of branded products and services to the extracurricular activities portion of the educational market. We believe that the extracurricular activities market encompasses approximately 30 million young men and women in the United States who participate in team sports and other organized activities outside the classroom. We estimate that this market generates approximately $5 billion in sales annually, including approximately $2 billion in athletic equipment and uniforms for team sports and various products and services for cheerleaders and dancers. Under our many brands, the best known of which are Riddell(R) and Varsity Spirit(R), which we own, and Umbro(R), which we license, we are: o a leading provider of equipment and clothing for team sports; o the only national reconditioner of football protective and other athletic equipment; o the largest designer, marketer and supplier of innovative cheerleader and dance team uniforms and accessories; o the biggest operator of cheerleading and dance team training camps and clinics; o a leading organizer of special events for extracurricular activities; o a nationwide provider of soccer apparel, equipment and footwear for team play; and o a supplier of sports collectible products sold through retailers in the U.S. and internationally. We believe that more than 50% of all high school and collegiate football players either wear our football helmets or use other branded football equipment made by us. We also have a longstanding agreement with the NFL for the promotion of our Riddell brand. Over 80% of the NFL players choose to wear our helmets. We believe that our Varsity Spirit brand cheerleading uniforms are worn by approximately 40% of all high school and 75% of all collegiate cheerleaders. In 1999, our cheerleading camps were attended by more than 215,000 students, and, in 1999, more than 25,000 people traveled to the Walt Disney Resort in Orlando, Florida to participate in and view our various cheerleading and dance competitions. In the fourth quarter of 1998, we became the exclusive U.S. licensee for Umbro branded soccer apparel, footwear and equipment for the team channel of distribution. Umbro is one of the leading soccer brands worldwide. Our strategy Our strategy is to increase our current market share and broaden the recognition of our brands in the extracurricular market. We intend to implement this strategy by: o continuing to focus on opportunities to add new products within the array of products and services offered through our traditional team sports and school spirit business; o develop special events, competitions and championships to create new relationships with participants in extracurricular activities that we are currently not serving effectively, such as youth baseball; o expand the size of our sales force; and o implement our Internet operations. Our opportunities for growth Over the past few years we have positioned ourselves for growth in four areas: o Football, baseball and softball game uniforms to high school and collegiate teams o Football, baseball and softball game uniforms and equipment to recreational youth leagues o Apparel, equipment and footwear to the team soccer market o New Internet operations Our advantages We believe that we have three principal advantages that will support our growth opportunities: o Our direct, proprietary sales force has approximately 320 people who are responsible for developing and maintaining relationships among 40,000 junior and senior high schools, colleges and numerous recreational organizations throughout the United States. Our sales force will be particularly important in connection with sales of athletic clothing and equipment to high schools, colleges and recreational youth leagues. We believe that we have the only national sales force in the U.S. serving the extracurricular market. o Our efficient manufacturing and sourcing capabilities support our direct sales effort and enable us to produce and deliver competitively priced, high quality customized products faster than our competitors. o Our relationship marketing, which we began 25 years ago, is a year-round, integrated marketing approach that creates a strong bond between us and our customers. In the case of cheerleading it includes conducting training camps, clinics and conventions, producing various nationally-televised and regional championships and performance events and selling cheerleading uniforms and accessories. Our relationship marketing is designed so that each of our products and services reinforce one another, as well as strengthen overall brand awareness. We believe that our new Internet operations are a logical extension of, and will effectively reinforce, our relationship marketing strategy. Our Internet operations Our Internet business, which will be funded, in part, by the proceeds of this offering, has a community and a commerce orientation. We started our Internet operations in the fourth quarter of 1999 with our first two web sites: a community web site with e-commerce elements for cheerleaders, www.varsity.com, and an e-commerce web site for sports collectibles, www.riddell.com. To date, we have received approximately $100,000 in revenues from our Internet business. o Community: We will be developing web sites for identifiable, highly-focused communities in the extracurricular activities market. We believe that the community members in this market, such as cheerleaders, football players and other participants in extracurricular activities, often define their lives through their participation in these activities. As a result, we believe that these community members will become frequent visitors to our web sites. Our community web sites will provide these users with meaningful, timely, activity-specific content. o Commerce: On our community sites, we anticipate that users will be able to purchase our products and purchase the products of other marketers who will want to sell to our community members. We will offer products that will appeal to the members of our focused community sites as well as products that will appeal to members of different communities. We believe as we create web sites for these discrete, highly-focused communities, that our combined group of users will represent a large, sought after audience for third-party advertisers and marketers. We believe that many of these community members, such as cheerleaders and others, are often the leaders and trend setters in their communities. We also believe that our web site for sports collectibles will be attractive to a broad range of sports fans. We believe that the Internet will help us expand our traditional business, increase our brand recognition and give rise to new revenue streams. o Direct link to our customers: We believe that the content and community-building aspects of each community web site will enhance our existing relationships and help us build new relationships with coaches and participants in various extracurricular activities. The Internet will also provide us with another way to rapidly disseminate new product information and promote our camps, clinics, competitions and performance events. o Market penetration: We believe that the Internet will be particularly effective with respect to the sale of game uniforms and equipment to recreational youth leagues, a large and highly-fragmented market. o Expand into new businesses: In addition to new revenue streams from alliances with other companies and the sale of advertising, we believe that the Internet will ultimately provide us with a cost-effective vehicle to begin marketing beyond our traditional extracurricular groups, such as cheerleaders and team sports, to non-athletic extracurricular activities, such as musical organizations, drama clubs and dance studios. o Broaden distribution of sports collectibles: We believe that the web site dedicated to our retail products will overcome the geographical constraints and inventory limitations of retail stores, which preclude our ability to offer collectibles of every team in every city. The Internet will also enable us to offer customized products that cannot readily be sold through traditional commercial channels. We are a Delaware corporation with our principal offices located at 50 East 42nd Street, Suite 1808, New York, NY 10017. Our phone number is (212) 808-5400. Our current web sites are www.varsity.com and www.riddell.com. The information contained on our web sites is not intended to be a part of this prospectus. Summary Financial Data The selected financial information set forth below is derived from the more detailed financial data and related notes thereto included elsewhere in this prospectus. This information shall be read in conjunction with such financial data. <TABLE> <CAPTION> (In thousands, except per share amounts) ----------------------------------------------- Year Ended December 31, ----------------------------------------------- 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Statements of Operations Data: Net revenues $208,597 $186,600 $138,273 Gross profit 84,835 73,059 57,598 Interest expense 15,379 14,656 11,879 Net (loss) (599) (7,139) (559) Net (loss) per share, basic and diluted (0.06) (0.78) (0.07) December 31, ------------ 1999 1998 1997 ---- ---- ---- Balance Sheet Data: Working capital $49,908 $37,963 $37,599 Total assets 194,336 186,211 181,761 Long-term debt, less current portion 136,097 126,900 122,500 Stockholders' equity 24,865 25,451 32,125 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000876188_cardiac_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000876188_cardiac_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..552029a67199a655fe859151710e5e850de4ec7d
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS, BEFORE MAKING AN INVESTMENT DECISION. OUR COMPANY We have developed proprietary tachyarrhythmia detection and discrimination software, RHYTHMx ECD-TM-,to be incorporated into devices that are attached prophylactically to patients determined to be at risk of sudden cardiac arrest. RHYTHMx ECD enables these devices, such as external defibrillator monitors and patient monitoring systems, to provide patients suffering sudden cardiac arrest with potentially lifesaving defibrillation therapy in as little as 10 seconds without human intervention. We intend to license RHYTHMx ECD to third parties. We also have designed, are developing, and intend to market non-invasive automatic external cardiac defibrillation or "AECD-Registered Trademark-" devices that use RHYTHMx ECD as well as our other proprietary technology. We believe our proprietary technology will help to create a new standard of care by significantly increasing the rate at which patients survive sudden cardiac arrests. Our first device, the Powerheart, is the only FDA cleared non-invasive external cardioverter defibrillator device that provides fully automatic detection and treatment of ventricular tachyarrhythmias for in-hospital patients. In December 1998, we entered into a five-year exclusive distribution and licensing agreement with Medtronic Physio-Control, a subsidiary of Medtronic, Inc. Medtronic Physio-Control will market the Powerheart in the U.S., Canada, and selected European countries, and also has been licensed to integrate RHYTHMx ECD into Medtronic's LIFEPAK-Registered Trademark- line of in-hospital external defibrillators. We also have signed distribution agreements covering 27 other international markets giving us representation in 39 countries. In addition to the Powerheart, we are developing two other products based on our proprietary technology: - a fully automatic defibrillator module that is designed to be embedded and integrated into existing, third party patient monitoring systems which typically are located in most acute care areas within hospitals; and - an automatic, portable, "public-access" external defibrillator for use by early responders and non-medical personnel. Our strategy is to rapidly build a large installed base of products using our proprietary technology through strategic alliances with established industry leaders and by marketing through country-specific, independent international distributors. We hope to generate revenue from licensing RHYTHMx ECD, from selling devices that use our proprietary technology, and from recurring sales of our single-use, disposable defibrillator pads. Both the Powerheart and the automatic defibrillator module utilize these disposable defibrillator pads which, for sanitary, safety, and performance reasons, must be changed once every 24 hours. Our disposable defibrillator pads feature our proprietary "smart chip" technology, designed to assure that only our pads will be used with defibrillator and monitoring devices utilizing our proprietary technology. ABOUT US We were incorporated in the State of Delaware in May 1991. Our principal executive offices are located at 16931 Millikan Avenue, Irvine, California 92606. Our phone number is 949-587-0357. Our website address is cardiacscience.com. The information in our website is not a part of this prospectus. AECD, POWERHEART and MDF are our U.S. registered trademarks. AECD, AECD ELECTRODES, and POWERHEART are our registered trademarks in Great Britain, France, Japan, and China. Other service marks, trademarks, and trade names referred to in this prospectus are the property of their respective owners. THE OFFERING <TABLE> <S> <C> Common Stock offered by the selling stockholders ........ 8,791,630 shares Common Stock outstanding prior to the offering........... 12,313,127 shares Common Stock outstanding after the offering ............. 12,313,127 shares OTC Bulletin Board Symbol................................ DFIB </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000878722_westbury_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000878722_westbury_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..1d47bb7b96351f7e35d6a3dc6e8f7ada5847a5aa
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+PROSPECTUS SUMMARY This summary highlights certain information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider before investing in our common stock. You should read the entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk Factors" and the financial statements and notes thereto, before deciding to invest in shares of our common stock. WESTBURY METALS GROUP We are a rapidly growing provider of integrated fabrication, reclamation, refining, processing, and financial and risk management services to small and medium sized consumers of precious metals and intermediate industrial products. Our primary focus is on the manufacture and sale of base and precious metal products to industrial users. We also reclaim precious and specialty metals from scrap and industrial residue from industrial scrap and provide industrial commodity management services to industrial users. Management has built the company through a series of strategic acquisitions of small to medium-sized metals companies and through internal growth. Our revenues have grown from approximately $1.5 million for the fiscal year ended June 30, 1997 to approximately $34.5 million for the fiscal year ended June 30, 1999 and from approximately $14.6 million for the six months ended December 31, 1998 to approximately $36.5 million for the six months ended December 31, 1999. We provide a broad range of processing, refining and financial services in connection with reclamation of precious and specialty metals from primary and secondary sources. We reclaim gold, silver, platinum and palladium from scrap and residues from the electronics, jewelry, petroleum, dental, chemical, automotive, mining and aerospace industries. After controlled weighing, sampling and assaying to determine values and to settle with the customer, we either purchase the reclaimed metal or return it to the customer. Through our 98% owned Peruvian subsidiary, Alloy Trading S.A., we import metals for our own use, as well as for direct sales to third parties. Through our subsidiaries, we operate in three inter-related areas of the precious metals business: - Industrial Products - We manufacture and sell customized, value-added precious and base metal products principally to the North American metal finishing and plating industry. - Metal Processing - We reclaim precious and specialty metals materials through processing and refining services, including platinum group metals from used automotive catalytic converters. - Industrial Commodities Management - We buy, sell and finance metal for our own account and for our customers and offer hedging and risk management services, including spot fixing market pricing and forward contracts, to our customers. We believe that we are one of only a few companies that offers a full range of precious metal related services to small and medium-sized customers. We offer services to our customers throughout the entire operating cycle - from fabrication through recycling back to fabrication, together with hedging and risk management services. We believe that our ability to address our customers' needs throughout their precious metal usage cycle distinguishes us from most of our competitors and positions us to expand sales to our existing customers. We were incorporated in New York in August 1990 under the name Rosecap, Inc. Westbury Metals Group, Inc. and our subsidiaries were formed through a reverse merger of Westbury Acquisition Corporation and Westbury Alloys, Inc. on March 31, 1998. On June 18, 1998, we changed our name to Westbury Metals Group, Inc. Our principal executive offices are located at 750 Shames Drive, Westbury, New York 11590, and our telephone number is (516) 997-8333. PROSPECTUS WESTBURY METALS GROUP, INC. 4,960,373 SHARES OF COMMON STOCK This prospectus relates to the public offering of up to 4,960,373 shares of our common stock held by the stockholders named in this prospectus and the person(s) to whom the stockholders may transfer their shares, including shares of common stock to be acquired upon exercise of warrants. The selling stockholders and any broker-dealer who may participate in sales of the shares may use this prospectus. See "Plan of Distribution." The prices at which such stockholders may sell the shares will be determined by the prevailing market price for the shares or in negotiated transactions. We will not receive proceeds from the sale of the shares. We will bear substantially all expenses of registration of the shares, and the selling stockholders will pay any underwriting fees, discounts or commissions, and transfer taxes. Our common stock is traded on the Nasdaq Bulletin Board under the symbol "WMET." On May 9, 2000, the average of the bid and ask sale prices for the common stock as reported on the Nasdaq Bulletin Board was $ 2.59375 per share. -------------------- INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4. -------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -------------------- The date of this Prospectus is May 12, 2000 -------------------- THE OFFERING <TABLE> <S> <C> Common stock offered by selling stockholders: Common stock ............................... 3,187,780 shares ========= Common stock issuable upon the exercise of warrants...................... 1,772,593 shares ========= Common Stock outstanding...................... 5,270,028 shares* Use of proceeds............................... We will not receive any proceeds from this offering. All proceeds will be received by the selling stockholders. We will receive the net proceeds from the exercise, if any, of warrants. Nasdaq OTC Bulletin Board symbol.............. "WMET" </TABLE> - ------------------------- * Based on the shares of common stock outstanding as of March 31, 2000. Excludes: - - 1,269,818 shares of common stock issuable upon exercise of warrants held by selling stockholders at an exercise price of $4.00 per share; - - 502,775 shares of common stock issuable upon exercise of warrants held by selling stockholders at an exercise price of $2.25 per share; - - 93,273 shares of common stock issuable upon exercise of warrants held by Alliance Capital Investment Corp. at an exercise price of $9.00 per share; and - - an aggregate of 750,000 shares of common stock reserved for issuance under our stock option plan of which 389,000 shares are subject to outstanding options, at a weighted average exercise price of $2.02 per share. TABLE OF CONTENTS Page ---- PROSPECTUS SUMMARY.......................................................1 RISK FACTORS.............................................................4 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........................8 USE OF PROCEEDS..........................................................9 MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS..............9 SELECTED CONSOLIDATED FINANCIAL DATA....................................10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................11 BUSINESS................................................................17 MANAGEMENT..............................................................22 CERTAIN TRANSACTIONS....................................................26 PRINCIPAL STOCKHOLDERS..................................................28 THE SELLING STOCKHOLDERS................................................29 PLAN OF DISTRIBUTION....................................................34 DESCRIPTION OF CAPITAL STOCK............................................36 LEGAL MATTERS...........................................................37 EXPERTS.................................................................37 WHERE YOU CAN FIND INFORMATION..........................................37 You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. The selling stockholders are offering to sell, and seeking offers to buy, shares of Westbury Metals Group common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the shares. SUMMARY FINANCIAL DATA (in thousands, except per share data and shares outstanding) <TABLE> <CAPTION> SIX MONTHS ENDED FISCAL YEAR ENDED JUNE 30, DECEMBER 31, -------------------------- ---------------------- 1995(1) 1996(1) 1997 1998 1999 1998 1999 ---- ---- ---- ---- ---- ---- ---- CONSOLIDATED STATEMENT OF OPERATIONS DATA: <S> <C> <C> <C> <C> <C> <C> <C> Total revenue.............................. $ - $ - $1,541 $ 3,300 $ 34,470 $ 14,594 $ 36,475 Total cost of sales........................ - - 704 2,143 31,422 13,269 34,575 ------ ------- ------ ---------- ---------- --------- ---------- Gross profit............................... - - 837 1,157 3,048 1,325 1,900 Total operating expenses................... 6 6 874 1,472 2,900 1,248 2,062 ------ ------- ------ ---------- ---------- --------- ---------- (Loss) earnings from operations............ (6) (6) (37) (315) 148 77 (162) Net (loss) income ......................... $ (6) $ (6) $ (103) $ (424) $ (185) $ 59 $ (568) ------ ------ ------ ---------- ---------- --------- ---------- Net (loss) income per share-basic and diluted............ $(0.10) $(0.10) $(0.05) $ (0.20) $ (0.06) $ 0.02 $ (0.17) ====== ====== ====== ========== ========== ========== ========== Weighted average number of shares outstanding-basic and diluted.......... 62,500 62,500 1,937,500 2,173,139 3,197,586 3,197,312 3,415,885 ====== ====== ========= ========== ========== ========== ========== </TABLE> - ----------------------- (1) Reflects financial data for Rosecap, Inc., predecessor to Westbury Metals Group, Inc. <TABLE> <CAPTION> AS OF JUNE 30, 1999 AS OF DECEMBER 31, 1999 ------------------- ----------------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents.......................................... $1,242 $1,365 Total current assets............................................... $5,305 $7,408 Total assets....................................................... $9,157 $11,280 Current liabilities................................................ $5,300 $3,376 Long-term debt..................................................... $1,342 $2,680 Total stockholders' equity......................................... $2,515 $5,224 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000897265_entrade_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000897265_entrade_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..bf9a27301a9f01644f9095b37c4b369533b1f428
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0000897265_entrade_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY Entrade Inc. We own all of the outstanding shares of entrade.com, our Nationwide Auction Systems entities and Artra Group. We also currently own an approximately 14.65% equity interest in asseTrade.com, computed on a fully diluted basis, or 17.47% of the outstanding voting common stock, a 61% equity interest in printeralliance.com and a 15% equity interest in Pricecontainer.com. We operate as an Internet business-to-business electronic commerce, or "e- commerce," service provider. entrade.com combines its internal transaction technologies with business-to-business commercial applications to provide clients with marketing, procurement, inventory and supply-chain management functions for use in a multiple-site or industry community on-line environment. Clients use entrade.com's software and services for the management, purchase and sale of the clients' products and services including inventory, equipment and other assets. We have also created and are managing industry-specific websites for marketing, sales and procurement of products and services. We refer to this kind of website as a "vertical portal," which is a website dedicated to a specific industry for use by companies in that particular industry to buy and sell products and services. Under this business model, entrade.com generates commissions based upon these transactions and license fees for its software. entrade.com is directing its initial marketing efforts to utilities through utiliparts.com and to the heavy equipment industry through asseTrade.com. Artra became a wholly owned subsidiary of ours pursuant to a merger in September 1999, at which time the shareholders of Artra became the holders of approximately 83% of our outstanding shares of common stock. In recent years through November 20, 1998, Artra had operated as a manufacturer of packaging products principally serving the food industry. Artra currently has no active business operations. In October 1999, we acquired two entities that operate as Nationwide Auction Systems. Nationwide, which has operated for over 20 years, is one of the nation's largest volume public auction firms in the disposition of municipality, law enforcement, corporate and utility company surplus property. In addition to vehicles and equipment, Nationwide conducts real property and jewelry auctions. Nationwide conducts the auctions at its facilities or at off-site locations. Nationwide has six auction facilities located in California, Missouri, Delaware, New Mexico and Georgia. The address of our headquarters is 500 Central Avenue, Northfield, Illinois 60093, and our telephone number is (847) 441-6650. EXPERTS ................................................................90 WHERE YOU CAN FIND MORE INFORMATION......................................90 INDEX TO FINANCIAL STATEMENTS...........................................F-1 ORBIT System(R) is a registered trademark of entrade.com Inc. and Nationwide Auction Systems(R) and a related design are registered service marks of Asset Liquidation Group, Inc., each of which is a wholly owned subsidiary of Entrade. MARS System(TM) is a trademark of entrade.com Inc. The Offering Securities offered Up to 5,629,584 shares of common stock. Price per share Prevailing market prices for the common stock. See "Plan of Distribution" and "Selling Shareholders."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000904977_transtexas_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000904977_transtexas_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..238973a739ba9f8b45c01678b7f96aaf1bfcf62a
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+++ b/parsed_sections/prospectus_summary/2000/CIK0000904977_transtexas_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary highlights selected information from this prospectus and may not contain all of the information that is important to you. This prospectus includes specific terms of the securities as well as information regarding our business and detailed financial data. We encourage you to read this prospectus carefully, including the "Risk Factors" and the financial statements included herein. References in this prospectus to "us," "our" and "we" refer to TransTexas Gas Corporation and its predecessors and subsidiaries unless the context requires otherwise. "TEC" refers to TransAmerican Energy Corporation, our former parent, and "TARC" refers to TransAmerican Refining Corporation, another subsidiary of TEC. For purposes of this prospectus when we describe information on a pro forma basis, unless otherwise indicated, we are giving effect to our bankruptcy plan of reorganization described further down on this page. THE COMPANY We were organized in May 1993 as a Delaware corporation. Our principal executive office is located at 1300 North Sam Houston Parkway East, Suite 310, Houston, Texas 77032, and our telephone number at that address is (281) 987-8600. We are engaged in the exploration for and development and production of natural gas and condensate, primarily in South Texas and along the Upper Gulf Coast. Our business strategy is to use our experience in drilling and operating wells in South Texas to find, develop and produce reserves at a low cost. Our long-term goal is to convert unproven acreage to proved reserves by drilling in under-exploited areas. In order to meet these long-term goals, our strategy is to drill wells in areas of the Upper Texas Gulf Coast where 3-D seismic data indicates productive potential and to drill development wells in our proven producing areas such as the Eagle Bay field and Wharton County. During the year ended January 31, 2000, our drilling program was restricted by reduced capital available from operations and by our debtor-in-possession financing. As of February 1, 2000, we had net proved reserves, as estimated by Netherland, Sewell & Associates, Inc., an independent firm of petroleum engineers, of 118 billion cubic feet equivalent ("Bcfe"). As of January 31, 2000, we owned approximately 333,400 gross (210,000 net) acres of mineral interests. Our average net daily natural gas production for the year ended January 31, 2000 was approximately 77 million cubic feet per day ("MMcfd"), for a total net production of 27.8 billion cubic feet ("Bcf") of natural gas. Our average net daily condensate and oil production for the year ended January 31, 2000 was approximately 5,005 barrels of oil per day ("Bpd"), for a total net production of 1.8 million barrels of condensate and oil. Our average net daily production of natural gas liquids ("NGLs") for the year ended January 31, 2000 was approximately 120,519 gallons per day, for a total net production of 44 million gallons of natural gas liquids. REORGANIZATION OF THE COMPANY PURSUANT TO OUR BANKRUPTCY FILING On April 19, 1999, we filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. On April 20, 1999, our then parent company, TEC, and TARC also filed voluntary petitions for relief under Chapter 11. On May 20, 1999, the bankruptcy cases were transferred to the Southern District of Texas, Corpus Christi Division. Our Second Amended, Modified and Restated Plan of Reorganization dated January 25, 2000 was confirmed by the bankruptcy court on February 7, 2000. The effective date of our bankruptcy plan was March 17, 2000. Under our bankruptcy plan, we executed several transactions, most of which were dated as of March 15, 2000. Among other things, we: o filed an amended and restated certificate of incorporation (as amended through the date of this prospectus, our "certificate of incorporation"); o canceled all of our old common stock, our $450 million intercompany loan payable to TEC, and all of our 13 3/4% Senior Subordinated Notes; o issued 1,002,751 shares of class A common stock and 247,500 shares of class B common stock; o issued 625,000 warrants; o filed a certificate of designation relating to 328,667,820 shares of senior preferred stock, and issued 222,455,320 of those shares; o filed a certificate of designation relating to 37,469,711 shares of junior preferred stock, and issued 20,716,080 of those shares; o entered into an Indenture relating to, and issued, $200 million of notes; o entered into a $52.5 million oil and gas credit facility; o entered into a $15 million accounts receivable credit facility; and o sold a production payment with a primary sum outstanding as of March 15, 2000 of $35 million. We describe these transactions more fully in the section "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" located at page 37 of this prospectus. As a result of the effectiveness of our bankruptcy plan, we adopted "fresh-start" reporting as of January 31, 2000, and a new entity was created for the purposes of our financial reporting (sometimes referred to as the "Successor"). Information prior to January 31, 2000 is that of the predecessor entity. Pursuant to fresh-start reporting, we estimated our reorganization value as of January 31, 2000, which value was allocated to identified assets based on the assets' relative fair values. Liabilities surviving our bankruptcy plan were valued at the present value of amounts to be paid. We adjusted the present value of our liabilities to reflect an assumed interest rate of 15% for the period from February 1, 2000 to the effective date of our bankruptcy plan. The accretion of the discount was recorded as interest expense, which totalled $4.8 million for the six months ended July 31, 2000. RECENT EVENTS AND TRANSACTIONS On the effective date of our bankruptcy plan, we entered into an Oil and Gas Revolving Credit and Term Loan Agreement with GMAC Commercial Credit LLC, or GMACC, as a lender and as the agent for other lenders, under which we were provided certain loans to implement our bankruptcy plan and ongoing operations. The oil and gas credit facility consists of a term loan in the principal amount of $22.5 million and a revolving credit facility in a maximum amount of $30 million (all of which we borrowed on the effective date of our bankruptcy plan). The term loan bears interest at a rate of 14% per annum and the revolving loan bears interest at a rate of 13 1/2% per annum. Interest on the term loan and the revolving loan is payable monthly in arrears. The principal amount of the term loan is due in 20 quarterly installments of $56,250 each, with the balance due March 14, 2005. The principal amount of the revolving loan is due on March 14, 2005; however, we may, and in certain circumstances must, make prepayments of the revolving loan. If we make prepayments of the revolving loan and we demonstrate sufficient collateral value to satisfy certain requirements of the oil and gas credit facility provisions, we may be entitled to reborrow money under the revolving loan. The oil and gas credit facility is secured by substantially all of our assets. The security interest in our accounts receivable and inventory that secures the oil and gas credit facility is subordinated to the security interest of GMACC under the accounts receivable facility (described in the second paragraph following this paragraph). The repayment of the oil and gas credit facility is guaranteed by our subsidiaries, Galveston Bay Processing Corporation and Galveston Bay Pipeline Company. On the effective date of our bankruptcy plan, we entered into an Indenture with Firstar Bank, N.A., as Trustee, pursuant to which we issued the notes. Our subsidiaries Galveston Bay Processing Corporation and Galveston Bay Pipeline Company also entered into the indenture as guarantors of our obligations under the Indenture and the notes. Interest on the notes is due semi-annually on March 15 and September 15, beginning September 15, 2000. The stated maturity date of the notes is March 15, 2005. The Indenture contains certain covenants that restrict our ability to incur indebtedness, engage in transactions with our affiliates and related parties, dispose of assets or engage in sale/leaseback transactions, issue dividends on common stock, redeem our preferred stock, change our line of business, consolidate or merge with or into another entity or convey, transfer or lease all or substantially all of our assets, and suffer a change of control. The notes are secured by substantially all of our assets other than our accounts receivable and inventory. However, the security interest in favor of the Trustee (for the benefit of the holders of the notes) and securing repayment of the notes is subordinated to the security interest in favor of the agent under the oil and gas credit facility described in the immediately preceding paragraph. On the effective date of our bankruptcy plan, we entered into a Third Amended and Restated Accounts Receivable Management and Security Agreement with GMACC. This accounts receivable facility is a revolving credit facility secured by our accounts receivable and inventory. The maximum loan amount under this facility is $15 million, against which we may from time to time borrow, repay and reborrow, subject to the terms and conditions of the accounts receivable facility. As of July 31, 2000, $12.2 million was outstanding under this facility and there was availability to borrow an additional $1.2 million. Money borrowed under the accounts receivable facility bears interest at a rate per annum equal to the higher of (i) the prime commercial lending rate of The Bank of New York plus 1/2 of 1%, and (ii) the federal funds rate plus 1 1/2%, payable monthly in arrears. The outstanding principal balance under the accounts receivable facility will be due on March 14, 2005. In March 2000, we entered into a production payment agreement with certain parties unrelated to us whereby the third parties, or counterparties, advanced us money to finance drilling (a "primary sum") in exchange for the right to receive a portion of the proceeds resulting from the production of certain wells owned and/or operated by us ("production payments"). The production payment agreement requires us to pay the counterparties the primary sum plus an amount equivalent to a 15% interest rate on the unpaid portion of the primary sum. As of July 31, 2000 and September 15, 2000, the primary sum outstanding under the production payment agreement was $30.9 million and $32.4 million, respectively. We have the right to sell further production payments to the counterparties in return for additional sums up to a maximum aggregate primary sum of $52 million. The provisions of the oil and gas credit facility place certain restrictions on the amount of the aggregate primary sum that may be outstanding under the production payment agreement. SUMMARY OF THE OFFERING <TABLE> <S> <C> <C> Securities Offered by Selling Security Holders: $200,000,000 aggregate principal amount of notes 328,667,820 shares of senior preferred stock 37,469,711 shares of junior preferred stock 515,625 warrants 62,963,376 shares of class A common stock 247,500 shares of class B common stock </TABLE> Use of Proceeds: We will use the proceeds, if any, received upon exercise of the warrants for general corporate purposes. We will not receive any proceeds from the sale of any other of the securities. Registration Rights: We entered into various registration rights agreements with or for the benefit of each of the selling security holders relating to the notes, the senior preferred stock, the junior preferred stock and the class A common stock. Under the terms of these various registration rights agreements, we have agreed to register the securities under a registration statement filed with the SEC and, among other things, do the following: o keep the registration statement effective for five years (or a shorter time if all of the securities covered thereby have been sold pursuant to the registration statement); o cause the registration statement to be kept sufficiently accurate to comply with the requirements of the Securities Act of 1933 and the rules and regulations of the SEC; o give written notice to the holders of any of the securities covered thereby of any amendment to the registration statement; o give written notice to the holders of any of the securities covered thereby of a suspension of the effectiveness of the registration statement or any event that we believe could lead to such a suspension; o make reasonable efforts to have the registration statement made effective as soon as possible after any suspension of its effectiveness; and o provide each holder of any security covered by the registration statement with as many copies of this prospectus (and any amendments or supplements hereto) that are reasonably requested. SUMMARY OF THE SECURITIES The following descriptions of the securities offered by this prospectus are summaries only and are not complete. You should also carefully read the descriptions of the securities set forth in the section entitled "Description of the Securities" beginning on page 59 of this prospectus. NOTES The 15% Senior Secured Notes due 2005 covered by this prospectus are referred to in this prospectus as the "notes." Interest: We will pay you interest on the notes in cash at a rate of 15% per annum, paid twice a year on March 15 and September 15. Maturity: March 15, 2005. Optional Redemption: Before March 15, 2005, at our option, we can buy back all or a portion of the notes, in cash, at the redemption prices (expressed as a percentage of the outstanding principal amount) set forth below, together with accrued and unpaid interest, if any, to the redemption date: <TABLE> <CAPTION> IF REDEEMED DURING THE REDEMPTION 12-MONTH PERIOD BEGINNING PRICE --------------------------------- ---------- <S> <C> March 15, 2000 115% March 15, 2001 112% March 15, 2002 109% March 15, 2003 106% March 15, 2004 103% </TABLE> Guaranty: Our material subsidiaries, whether existing now or created in the future, are required to unconditionally guarantee our payment of the notes. If we cannot make payments on the notes when due, our guarantor subsidiaries must make them instead. Galveston Bay Processing Corporation and Galveston Bay Pipeline Company, each a wholly owned subsidiary of ours, are currently the guarantor subsidiaries of the notes. Our Obligation to Purchase the notes: If control of our Board of Directors changes in certain respects, we must offer to purchase your notes at 101% of the unpaid principal amount, plus accrued interest. Security: Our repayment of the notes is secured by substantially all of our assets other than our accounts receivable and inventory; however, this collateral for repayment of the notes is subject to a prior lien securing the payment of our oil and gas credit facility. Therefore, in the event that we default on both the notes and our oil and gas credit facility, our pledged assets will be used to pay our obligations under our oil and gas credit facility before they are used to pay our obligations to you under the notes. Ranking: The notes rank senior to all of our junior debt, but rank equally with our other senior debt, if any. Therefore, if we default, your right to payment under the notes will be shared, on a dollar for dollar basis, by any other person who holds any of our other senior debt, even if the other senior debt is incurred in the future. Currently the notes are our only outstanding senior indebtedness other than the following: o our oil and gas credit facility; o our accounts receivable facility; and o a promissory note in favor of Jefferies Analytical Trading Group, Inc. in the principal amount of $6,676,288, due March 17, 2003. Restrictive Covenants: We issued the notes under an Indenture with Firstar Bank, N.A. The Indenture, among other things, restricts our ability and the ability of our subsidiaries to: o borrow money; o pay dividends on common stock or preferred stock or make other asset transfers; o transact business with affiliates and related parties; o sell stock in subsidiaries; o engage in any new line of business; o further impair the security interests in any collateral for the notes; o use assets as security in other transactions; and o sell certain assets or merge with or into other companies. For additional information concerning the notes, see "Description of the Securities -- The Notes" beginning at page 59 of this prospectus. SENIOR PREFERRED STOCK The shares of Series A Senior Preferred Stock covered by this prospectus are referred to in this prospectus as the "senior preferred stock." Dividends: As a holder of shares of senior preferred stock, you have the right to receive quarterly cash dividends at the rate of $0.10 per share of senior preferred stock per annum, except that during the first two years after March 15, 2000, in lieu of paying cash dividends, we have the option to pay you dividends in kind (i.e., in additional shares of senior preferred stock with an aggregate liquidation preference equal to the amount of the dividend to be paid) at a rate of $0.20 per share per annum. After March 15, 2002, we will pay you dividends only in cash at the rate of $0.0775 per share per annum. We cannot pay you dividends if we do not have sufficient surplus (or, in certain cases, sufficient net profits) to legally make such dividend payments. Par Value: $0.001 per share. Liquidation Preference: $1.00 per share, plus an amount equal to accrued and unpaid dividends. Mandatory Redemption: We are required to redeem your shares of senior preferred stock on March 15, 2006 at 100% of the liquidation preference per share. Optional Redemption: We may redeem your shares of senior preferred stock at any time at an initial price equal to $0.88 per share plus all accrued but unpaid dividends, increasing by $0.005 per share per month to a maximum of 100% of the liquidation preference per share. However, we are not permitted to redeem the senior preferred stock prior to the time the notes have been retired. Mandatory Conversion: If either (i) more than 75 million shares of the senior preferred stock are outstanding after March 15, 2006 or (ii) any two dividend payments have not been paid on the senior preferred stock, then, on a pro rata basis, one-half of the outstanding shares of the senior preferred stock will automatically convert into shares of our common stock on the basis of 0.3461 shares of class A common stock for each $1.00 of liquidation preference of the shares of senior preferred stock converted. The conversion ratio is subject to adjustment pursuant to customary anti-dilution provisions. The remaining shares of senior preferred stock will remain outstanding. Voting Rights: Holders of senior preferred stock have the right, voting separately as a class, to elect four (4) of the five (5) directors to our Board of Directors; provided, that if we have not paid dividends with respect to the payments due commencing March 15, 2002, such holders will have the right, voting separately as a class, to elect all five (5) directors to our Board of Directors. Holders of senior preferred stock have one vote per share, voting together with the class A common stock, the junior preferred stock and any other series or classes of our stock entitled to vote with the class A common stock, on all matters on which the holders of the class A common stock are entitled to vote generally. Voting rights of the senior preferred stock may not be changed without the consent of the holders of 75% of the shares of senior preferred stock, voting as a class. Ranking: The senior preferred stock ranks senior to all of our other capital stock with respect to the payment of dividends and amounts upon our liquidation, dissolution or winding up, unless additional preferred stock is issued that ranks senior or equal to the senior preferred stock in these respects. We are not entitled to issue any such senior or equal ranking stock without the approval of the holders of a majority of the senior preferred stock. Restrictive Covenants: The certificate of designation governing the senior preferred stock contains restrictive covenants that, among other things, restrict our ability and the ability of our subsidiaries to: o borrow money; o pay dividends on capital stock or make other asset transfers; o transact business with affiliates and related parties; o sell stock in subsidiaries; o engage in any new line of business; o use assets as security in other transactions; and o sell certain assets or merge with or into other companies. Additional Issuances: We may not issue additional shares of senior preferred stock other than shares that we issue to pay dividends in kind. For additional information concerning the senior preferred stock, see the section entitled "Description of the Securities -- The Senior Preferred Stock" beginning at page 87 of this prospectus. JUNIOR PREFERRED STOCK The shares of Series A Junior Preferred Stock covered by this prospectus are referred to in this prospectus as the shares of "junior preferred stock." The senior preferred stock and the junior preferred stock, when referred to collectively, are sometimes referred to as the "preferred stock." Dividends: As a holder of shares of junior preferred stock, you have the right to receive quarterly dividends at the rate of $0.10 per share per annum through March 15, 2006, and at a rate of $0.20 per share per annum thereafter. We will pay you dividends only in additional shares of junior preferred stock through March 15, 2006. Beginning June 15, 2006, we will pay you dividends both (i) in cash at the rate of $0.10 per share per annum and (ii) in additional shares of junior preferred stock at the rate of $0.10 per share per annum. We cannot pay you dividends if we do not have sufficient surplus (or, in certain cases, sufficient net profits) to legally make such dividend payments. Par Value: $0.001 per share. Liquidation Preference: $1.00 per share, plus an amount equal to accrued and unpaid dividends. Mandatory Redemption: We are required to redeem your shares of junior preferred stock on March 15, 2010 at 100% of the liquidation preference per share. Optional Redemption: We may redeem your shares of junior preferred stock, in whole or in part, at our option for cash in an amount equal to 100% of the liquidation preference per share at any time after the notes and the senior preferred stock have been retired and all accrued and unpaid dividends on the junior preferred stock have been paid in full. Mandatory Conversion: If either (i) more than 75 million shares of the senior preferred stock are outstanding after March 15, 2006 or (ii) any two dividend payments have not been paid on the senior preferred stock, then all of the outstanding shares of the junior preferred stock will automatically convert into shares of our common stock on the basis of 0.1168 shares of class A common stock for each $1.00 of liquidation preference of the junior preferred stock. The conversion ratio is subject to adjustment pursuant to customary anti-dilution provisions. Voting Rights: Holders of junior preferred stock have one vote per share, voting together with holders of the class A common stock, the senior preferred stock and any other series or classes of our stock entitled to vote with the class A common stock, on all matters on which holders of the class A common stock are entitled to vote. If no shares of the senior preferred stock are outstanding, holders of the shares of junior preferred stock will have the right, voting separately as a class, to elect two directors to our Board of Directors. Voting rights of the junior preferred stock may not be changed without the consent of the holders of 75% of the shares of the junior preferred stock, voting as a class. Ranking: The junior preferred stock ranks junior to the senior preferred stock and to all of our hereafter issued preferred stock that is expressly stated to be senior to the junior preferred stock, and senior to our common stock and to all of our hereafter issued preferred stock, if any, that is expressly stated to be junior to the junior preferred stock with respect to the payment of dividends and amounts upon our liquidation, dissolution or winding up. Restrictive Covenants: The certificate of designation governing the junior preferred stock contains restrictive covenants that, among other things, restrict our ability and the ability of our subsidiaries to: o borrow money; o pay dividends on common stock or the preferred stock or make other asset transfers; o transact business with affiliates and related parties; o sell stock in subsidiaries; o engage in any new line of business; o use assets as security in other transactions; and o sell certain assets or merge with or into other companies. These covenants will become effective when all of the notes (and any refinancings thereof) have been repaid and all of the senior preferred stock has been redeemed. Additional Issuances: We may not issue additional shares of junior preferred stock other than shares that we issue to pay dividends in kind. For additional information concerning the junior preferred stock, see the section entitled "Description of the Securities -- The Junior Preferred Stock" beginning at page 90 of this prospectus. WARRANTS We have issued a total of 625,000 Class A Common Stock Purchase Warrants, of which 515,625 are covered by this prospectus. The Class A Common Stock Purchase Warrants are referred to in this prospectus as the "warrants." The shares of class A common stock issuable upon exercise of the warrants are referred to as the "warrant shares." Warrants Issued: 625,000 warrants. The shares of our class A common stock to be issued upon exercise of the warrants and our other outstanding warrants will represent approximately 33% of our common stock on a fully-diluted basis (after giving effect to the exercise of all of our outstanding warrants and the conversion of the class B common stock but before any conversion of the senior preferred stock or the junior preferred stock). Exercise: Each warrant is immediately exercisable to purchase one share of class A common stock at the exercise price. Expiration Date: June 30, 2002. Exercise Price: $120 per share. Anti-Dilution Provisions: We issued the warrants pursuant to a Warrant Agreement with ChaseMellon Shareholder Services, L.L.C., as warrant agent. The warrant agreement contains customary anti-dilution provisions. However, the anti-dilution provisions will not provide for any adjustments relating to shares that we issue upon the exercise of warrants covered by the warrant agreement or upon conversion, if any, of the senior preferred stock or the junior preferred stock. For additional information concerning the warrants, see "Description of the Securities -- The Warrants" beginning at page 94 of this prospectus. CLASS A COMMON STOCK The shares of class A common stock covered by this prospectus are sometimes referred to in this prospectus as the "common stock." Par Value: $0.01 per share. Voting Rights: Subject to the rights of the preferred stock and the class B common stock to elect certain directors, holders of shares of class A common stock are entitled to one vote per share on any matter submitted to a vote of stockholders, including the election of directors to fill vacancies which are not otherwise designated to be filled by the holders of the preferred stock or class B common stock. Cumulative voting is prohibited. The holders of the class B common stock will have the right, voting separately as a class, to elect one of our directors during periods in which the holders of the senior preferred stock are not entitled to elect all five of our directors. Rights Regarding Dividends and Liquidation: Shares of class A common stock are not redeemable, do not have any conversion rights and are not subject to any obligation of ours to repurchase the class A common stock. As a holder of class A common stock, you have no preemptive rights to maintain your percentage ownership of us in future offerings or sales of stock by us. We do not pay a dividend on the common stock and may not do so as long as the preferred stock is outstanding. Upon liquidation, dissolution or winding-up of our affairs, you will be entitled to participate equally and ratably, in proportion to the number of shares you hold, in our net assets available for distribution to holders of class A common stock. The shares of class A common stock currently outstanding are validly issued, fully paid and nonassessable. CLASS B COMMON STOCK The shares of class B common stock offered by this prospectus will automatically convert, on a share for share basis, into shares of class A common stock upon their transfer to any person other than John R. Stanley, his affiliates and members of his family or upon the termination, for certain reasons, of John R. Stanley as our chief executive officer and as one of our directors. Par Value: $0.01 per share. Voting Rights: Subject to the rights of the preferred stock to elect certain directors, the holders of class B common stock will have the right, voting separately as a class, to elect one director of the Company and to one vote per share on any other matter submitted to a vote of stockholders, including the election of directors to fill vacancies which are not otherwise designated to be filled by the holders of the preferred stock. Cumulative voting is prohibited. Rights Regarding Dividends and Liquidation: Shares of class B common stock are not redeemable, do not have any conversion rights (other than the automatic conversion into class A common stock in the instances described above) and are not subject to any obligation of the Company to repurchase the class B common stock. As a holder of class B common stock, you have no preemptive rights to maintain your percentage ownership of us in future offerings or sales of stock by us. We do not pay a dividend on the class B common stock and may not do so as long as the preferred stock is outstanding. Upon liquidation, dissolution or winding-up of our affairs, you will be entitled to participate equally and ratably, in proportion to the number of shares you hold, in our net assets available for distribution to holders of class B common stock. The shares of class B common stock currently outstanding are validly issued, fully paid and nonassessable. SUMMARY BALANCE SHEET DATA The following table presents our summary balance sheet data as of July 31, 2000. The summary balance sheet data should be read in conjunction with our historical financial statements included herein. <TABLE> <CAPTION> JULY 31, 2000 ---------------- (IN THOUSANDS OF DOLLARS) <S> <C> Working capital............... $ 3,362 Net property and equipment.... $335,718 Total assets.................. $388,136 Total debt.................... $313,824 Stockholders' deficit......... $ 13,436 </TABLE>
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+PROSPECTUS SUMMARY THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD CAREFULLY READ THE ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED IN THE PROSPECTUS, BEFORE MAKING AN INVESTMENT DECISION. DYAX CORP. We are a biopharmaceutical company that has developed and patented a method, known as phage display, that we are using to identify a broad range of compounds with potential for the treatment and diagnosis of diseases. We are also using this method to identify compounds that could be used in purifying and manufacturing biopharmaceuticals and other chemicals. We believe that we and others can use our phage display technology to rapidly and cost-effectively determine the potential medical uses of newly discovered proteins and genes and subsequently discover biopharmaceutical product candidates. Given the quantity of genetic information made available by the recent mapping of most of the human genome, we believe that the advantages of our technology over other technologies should increase in importance. We believe that phage display can have the greatest potential impact on our business through our discovery of proprietary biopharmaceuticals. We also develop, manufacture and sell chromatography separations systems and products that are used in laboratories and pharmaceutical manufacturing to separate molecules in liquid mixtures. These systems are used during the discovery, development and manufacture of biological and pharmaceutical products. We are a leading developer, manufacturer and supplier of chromatography separations systems that use disposable cartridges to separate and thereby purify pharmaceuticals being produced for research and clinical development. Using our phage display technology, we are also developing novel separations products to purify biopharmaceuticals. PHAGE DISPLAY In the late 1980s, Dyax scientists invented phage display, a novel method to display individually up to tens of billions of peptides and proteins, including human antibodies and enzymes, on the surface of a small bacterial virus called a phage. Using phage display, we can produce and search through large collections, or libraries, of peptides and proteins to identify rapidly those compounds that bind tightly to a specific molecular target. Our scientists, collaborators and licensees use phage display to improve the speed and cost effectiveness of drug discovery and optimization. Our core patent position in this technology has enabled us to license our patents to an extensive and increasing number of companies that use phage display. We believe that with our intellectual property position, our diverse types of libraries and our substantial experience in applying phage display technology, we are an attractive partner for companies seeking collaborative arrangements in the application of this technology. BUSINESS STRATEGY We plan to maximize the value of our phage display technology by pursuing our internal product discovery and development programs and our collaborative arrangements and by broadly licensing our phage display technology. The principal elements of our business strategy are to: - discover and develop proprietary biopharmaceuticals; - leverage our technology through collaborative arrangements and licensing of our phage display patents and libraries; - develop and market innovative separations products, including separations products developed using phage display; - develop novel products in other areas using phage display, including molecules for imaging disease conditions in humans, and industrial enzymes, which are enzymes used to accelerate chemical reactions in industrial processes; and - continue to extend our intellectual property and technology through internal and external initiatives. We plan to continue to invest substantially in programs using our phage display technology to develop biopharmaceutical and other products. We have accumulated losses since inception as we have invested in our businesses. For us to be profitable, we must fully develop and commercialize biopharmaceuticals, establish additional collaborative arrangements and achieve greater market penetration for our separations products with new and existing separations products. OUR PRODUCTS, PROGRAMS AND INITIATIVES BIOPHARMACEUTICAL PRODUCT DEVELOPMENT PROGRAMS We have used our phage display technology to: - discover two potential biopharmaceuticals, EPI-HNE4, which we refer to as Reltran-TM-, and DX-88, that are in Phase I human clinical trials for some inflammatory diseases; and - identify two proteins, including one human monoclonal antibody, with potential applications for treating some cancers. EPI-HNE4/Reltran-TM- is a potential biopharmaceutical for the treatment of cystic fibrosis, chronic obstructive pulmonary disease, asthma and acute respiratory distress syndrome. Our collaborator, Debiopharm S.A., a Swiss pharmaceutical development company, is currently conducting a Phase I clinical trial of this compound, which will determine the safety of this compound in healthy human subjects. We have retained the right to develop the drug ourselves outside of Europe. DX-88 is a potential therapeutic for the treatment of an hereditary condition involving abnormal swelling of body tissue, as well as for complications of cardiopulmonary bypass surgery and rheumatoid arthritis. We have entered into a collaboration with Genzyme Corporation to develop DX-88, which is now in a Phase I clinical trial. COLLABORATION AND LICENSE ARRANGEMENTS We are currently engaged in collaborative arrangements with biotechnology and pharmaceutical companies for the discovery and/or development of potential pharmaceutical, separations and diagnostic products. We currently have 10 of these arrangements, and have completed work under several others, that generally provide us with research funding, license fees, milestone payments and royalties. We have also licensed our phage display patents to enable the broad application of this technology in the fields of therapeutics and laboratory, or IN VITRO, diagnostics. We have licensed our phage display patents to over 40 companies and institutions on a non-exclusive basis. Under these licenses, we generally obtain revenues from license fees, milestone payments and royalties on sales of products developed using phage display. We recently entered into two broad license and collaboration agreements with Amgen Inc. and Human Genome Sciences, Inc.: - In February 2000, we entered into a license technology transfer and technology services agreement with Amgen Inc. under which we are developing a new phage library for Amgen. Amgen has broad rights to develop and commercialize biopharmaceuticals using our phage display technology. - In March 2000, we entered into a collaboration and license agreement with Human Genome Sciences, Inc. Under this agreement, we and HGSI will use our phage display technology and compound libraries to identify and optimize product candidates that bind to molecular targets selected by HGSI, and also to develop new technologies for screening and purifying molecular targets. SEPARATIONS PRODUCTS AND PRODUCT DEVELOPMENT PROGRAMS Our customers use our separations systems in processes that range from drug discovery to full commercial production. We market our separations products under our Biotage trade name. In 1999, we had over $12 million in Biotage product revenues. We are also developing potential separations products that will use unique binding compounds identified through phage display to provide improved purification for discovery, development and manufacture of biopharmaceuticals. We refer to these potential products as affinity separations products because they are based on the tight binding quality, also known as high affinity, that we can select using phage display technology. DIAGNOSTIC IMAGING AND INDUSTRIAL ENZYME PRODUCT DEVELOPMENT PROGRAMS We have discovery and preclinical programs for diagnostic imaging products that are used in humans, or IN VIVO, and for discovery programs for novel industrial enzymes. We are using our phage display technology to develop compounds as IN VIVO imaging agents for diagnosis and monitoring of cardiovascular and inflammatory diseases and some cancers. We are also using our phage display technology to develop methods for engineering novel industrial enzymes for use in the field of pharmaceutical production. TECHNOLOGY EXPANSION INITIATIVES We continue to develop technology internally and acquire technology rights that are complementary to or expand our existing technology. As an example of these initiatives, in July 1999 we acquired Target Quest B.V., which increased our ability to discover human antibodies using our phage display technology. THE OFFERING The number of shares outstanding after the offering is based on shares outstanding as of July 25, 2000 and excludes 2,740,730 shares reserved for issuance under our stock plans, of which options to purchase 2,320,516 shares are outstanding at a weighted average exercise price of $2.05 per share. This number also excludes 27,022 shares issuable upon exercise of outstanding warrants at an exercise price of $3.97 per share. This number assumes no exercise of the underwriters' over-allotment option. If the over-allotment option is exercised in full, we will issue and sell an additional 600,000 shares. Unless otherwise indicated, all information in this prospectus reflects the filing of an amended and restated certificate of incorporation with the Secretary of State of the State of Delaware prior to the closing of this offering. <TABLE> <S> <C> COMMON STOCK OFFERED BY DYAX.................... 4,000,000 shares COMMON STOCK TO BE OUTSTANDING AFTER THE 18,102,711 shares OFFERING...................................... USE OF PROCEEDS................................. We expect to use the net proceeds to fund: - research and development; - possible acquisitions of technology and complementary businesses; and - working capital, capital expenditures and other general corporate purposes. Please read "Use of Proceeds." PROPOSED NASDAQ NATIONAL MARKET SYMBOL.......... "DYAX" </TABLE> All information in this prospectus assumes the issuance and sale of common stock in the offering at an assumed initial public offering price of $14.00 per share, the mid-point of the range of the initial public offering prices set forth on the cover page of this prospectus. ------------------------ We have filed for trademark protection for the Dyax mark and the Dyax logo. We have a United States registration on the Kiloprep mark. We have also registered the Kiloprep mark in Japan, Germany and the United Kingdom. In addition, we consider "Biotage" as a trade name and consider Parallex, ProPrep, BioFLASH and Reltran to be trademarks. All other trademarks or service marks appearing in this prospectus are the property of their respective holders. ------------------------ We incorporated in Delaware in 1989 under the name Biotage, Inc. and merged with Protein Engineering Corporation in August 1995. Our principal executive offices are located at One Kendall Square, Building 600, Cambridge, Massachusetts 02139, and our telephone number is (617) 225-2500. SUMMARY CONSOLIDATED FINANCIAL DATA We have derived the consolidated statement of operations data for the years ended December 31, 1997, 1998, and 1999 from our audited financial statements included elsewhere in this prospectus. We have derived the summary consolidated financial data as of June 30, 2000 and for the six months ended June 30, 1999 and June 30, 2000 from our unaudited financial statements included elsewhere in this prospectus. The pro forma net loss per share reflects the number of shares outstanding as of December 31, 1999 and June 30, 2000, after giving effect to the conversion of all of the outstanding shares of preferred stock into common stock and the acceleration of vesting with respect to some shares of restricted common stock. The pro forma as adjusted balance sheet data reflect that conversion and also reflect the sale of 4,000,000 shares of common stock in this offering at an assumed initial offering price of $14.00 per share after deducting underwriting discounts and estimated offering expenses. You should read the selected financial information below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and notes related to those financial statements included elsewhere in this prospectus. <TABLE> <CAPTION> ---------------------------------------------------------------- <S> <C> <C> <C> <C> <C> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------- ------------------------ IN THOUSANDS, EXCEPT SHARE DATA 1997 1998 1999 1999 2000 ---------- ---------- ----------- ---------- ----------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Product sales................................. $ 7,138 $ 9,641 $ 12,596 $ 5,246 $ 6,686 Product development and license fee revenues.................................... 2,192 4,490 4,237 1,728 3,577 ---------- ---------- ----------- ---------- ----------- Total revenues............................ 9,330 14,131 16,833 6,974 10,263 ---------- ---------- ----------- ---------- ----------- Operating expenses: Cost of products sold......................... 2,931 4,164 5,515 2,311 3,071 Research and development...................... 5,625 6,778 10,618 4,653 6,992 Selling, general and administrative........... 6,787 10,061 14,069 6,113 8,365 Stock-based compensation...................... 75 681 939 470 878 ---------- ---------- ----------- ---------- ----------- Total operating expenses.................. 15,418 21,684 31,141 13,547 19,306 ---------- ---------- ----------- ---------- ----------- Loss from operations............................ (6,088) (7,553) (14,308) (6,573) (9,043) Interest income (expenses), net................. 265 401 856 418 318 Investment income............................... -- -- 265 -- -- ---------- ---------- ----------- ---------- ----------- Net loss........................................ $ (5,823) $ (7,152) $ (13,187) $ (6,155) $ (8,725) ---------- ---------- ----------- ---------- ----------- Net loss per common share, basic and diluted.... $ (3.95) $ (4.22) $ (6.81) $ (3.53) $ (3.74) Shares used in computing basic and diluted net loss per share--................................... 1,473,474 1,694,782 1,936,907 1,743,759 2,333,493 Unaudited pro forma basic and diluted net loss per share..................................... $ (.97) $ (.62) Shares used in computing unaudited, pro forma basic and diluted net loss per share.......... 13,604,750 14,006,038 </TABLE> <TABLE> <CAPTION> ------------------- <S> <C> <C> AS OF JUNE 30, 2000 ------------------- PRO FORMA AS IN THOUSANDS ACTUAL ADJUSTED -------- -------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $16,156 $ 67,156 Working capital............................................. 12,713 63,713 Total assets................................................ 30,053 81,053 Long-term debt and capital lease obligations, less current portion................................................... 1,929 1,929 Accumulated (deficit)....................................... (60,380) (60,380) Total stockholders' equity.................................. 11,835 62,835 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000908797_coho_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000908797_coho_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained in this prospectus. This summary does not contain all of the important information that you should consider before exercising the rights and investing in our new common stock. You should read the entire prospectus carefully, including the section called "Risk Factors" and the financial data and related notes, before making an investment decision. The terms "Coho," "our," "us" and "we" as used in this prospectus refer to Coho Energy, Inc. and its consolidated subsidiaries, unless we indicate otherwise or the context otherwise requires. Additional definitions related to oil and gas terms are located in the section of this prospectus called "Glossary." COHO ENERGY, INC. We are an independent energy company engaged, through our wholly owned subsidiaries, in the development and production of, and exploration for, crude oil and natural gas. Our operations are concentrated principally in the U.S. Gulf Coast and Mid-Continent regions, including Mississippi, Oklahoma and Texas. At December 31, 1999, our total proved reserves were 113.9 MMBOE, of which approximately 94% were comprised of crude oil and approximately 69% were proved developed. The present value of estimated future net cash flows, before income taxes, of proved crude oil and natural gas reserves, discounted at an assumed rate of 10%, was $790.2 million. We also have substantial exploitation reserve growth opportunities, including recompletions, drilling and waterflood projects. Additionally, we have exploration and exploitation reserve growth opportunities associated with our 3-D seismic databases in Mississippi and Oklahoma within the geographical confines of our existing fields. Of the 21 major producing properties in which operations are conducted, we operate 17 and own an average working interest of approximately 77% in these operated properties. Our significant control of operations and geographic focus have resulted in substantial operating economies of scale that have enabled us to maintain a low cost structure. Our strategy is to maximize production and increase reserves through - relatively low-risk activities such as development and delineation drilling, multi-zone completions, recompletions, enhancement of production facilities and secondary recovery projects; - use of 3-D seismic and other technologies to identify exploration projects and to identify reserves; - acquisition of controlling interests in underdeveloped crude oil and natural gas properties; and - significant control of operations. Our executive offices are located at 14785 Preston Road, Suite 860, Dallas, Texas 75240, and our telephone number is (972) 774-8300. RECENT DEVELOPMENTS On November 30, 1999, we filed our plan of reorganization with the United States Bankruptcy Court for the Northern District of Texas. At a hearing on February 4, 2000, the bankruptcy court approved our disclosure statement with respect to the plan of reorganization. In that hearing, the bankruptcy court also scheduled a confirmation hearing to consider the plan of reorganization for March 15, 2000. On February 14, 2000, we and the Official Committee of Unsecured Creditors jointly filed the Debtors' and Creditors Committee's First Amended and Restated Chapter 11 Plan of Reorganization to reflect the matters contained in the approved disclosure statement. On February 15, 2000, we filed the approved disclosure statement with the bankruptcy court and on February 14, 2000, we began mailing it to holders of claims and equity interests for voting on our plan of reorganization. Subsequently, we obtained approval of our plan of reorganization. On March 20, 2000, the bankruptcy court entered a confirmation order confirming our plan of reorganization, as amended and restated, and on March 31, 2000, our plan of reorganization became effective and was consummated.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000909353_lsc-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000909353_lsc-inc_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..0310646b784110cd85548d675cf225e7a699db07
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+PROSPECTUS SUMMARY Following is a summary of the more detailed information and the financial statements and notes contained elsewhere in this prospectus. We encourage you to read the entire prospectus carefully, including the section titled "Risk Factors" and the financial statements and the notes to those financial statements. Our Business We develop, license and support data storage software. Our software products provide data storage management for computer systems ranging in size from single servers to large, complex networks. Our software products meet the demands of organizations requiring uninterrupted access to information 24 hours per day, seven days per week. Our products allow organizations to efficiently and reliably create, store, access, manage, analyze and move data across local and remote computer networks and over a new type of computing environment, called a storage area network or SAN, which we believe will emerge as a preferred data storage method. We have over 600 licenses of our software in 33 countries with more than 250 customers. Our six largest commercial customers, based on software license revenues in 1999, were Abbey National Insurance, Audi, Bristol-Myers Squibb, Hallmark, Volkswagen AG and Xerox Corporation. We currently offer six primary software products and have additional products under development. Our core product, Storage and Archive Manager File System or SAM-FS, is our main revenue generator. Revenue attributable to SAM-FS accounted for 71.8%, 84.4% and 73.2% of our total revenue for 1997, 1998 and 1999, respectively. Industry Background Until recently, organizations required data storage software only for high performance computing applications generating enormous quantities of data, such as military or oil and gas exploration applications. In recent years, however, the emergence of lower cost, powerful workstations, high speed computer networks and the Internet has led to broader demand for data storage management. Today, diverse organizations such as hospitals, printing companies, automotive manufacturers and retailers generate their own massive amounts of data demanding high performance computer networks. In turn, these organizations now require sophisticated data storage software to more effectively utilize their increasing amounts of data. International Data Corporation, an independent technology research firm, estimates that the overall market for data protection and management software is growing from $3.5 billion in 1998 to $6.7 billion in 2003. Our Market Positioning and Strategy We believe that our data storage software meets and exceeds the increasing demands of today's organizations to handle large volumes of data because we have designed our products to provide: scalability, or the ability of our products to efficiently manage customers' storage systems as their hardware components and data storage management needs increase; protection against data loss and file system corruption; SAN capability, or the ability of multiple computer servers to share the same data on a common group of storage devices; rapid data recovery in the event of computer system failure; consistent and uninterrupted access to data; access to data over commonly used computer networks, the Internet and SANs; compatibility with leading computer applications and ease of use; the ability for customers' data storage hardware to perform at essentially full rated speeds; and flexible automated management. Our data storage software products operate only on the Sun Microsystems Solaris operating system. Sun is the leading provider of UNIX operating environments. We market our software directly to original equipment manufacturers, or OEMs, and to end users through resellers, value added resellers, hardware distributors, application software vendors and system integrators. Our objective is to emerge as a market leader among providers of data storage software. Our plans for meeting this goal are to: introduce new products through our development efforts; build brand awareness and product recognition; retain more OEMs and distribution partners in an effort to license our products for new applications and into new markets; and pursue strategic product or technology acquisitions. Our History and Structure We were originally incorporated in Texas in 1985 as a consulting company. In 1993, we reincorporated in Minnesota and began focusing exclusively on data storage software in 1997. Our principal executive offices are located at 1270 Eagan Industrial Road, Suite 160, Eagan, Minnesota 55121-1231, and our telephone number is (651) 554-1500. We own or have rights to trademarks that we use in connection with the sale of our products. This prospectus also makes reference to trademarks and trade names of other companies. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 The Offering Common stock offered 3,000,000 shares Common stock to be outstanding after the offering 7,540,834 shares Use of proceeds Although we have no firm plans for how to use the net proceeds of this offering, we anticipate using the net proceeds for expansion of sales and marketing, development of new data management storage software products and working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol LSCI The table above and, unless otherwise specified, other references in this prospectus to our outstanding common stock, are based on the number of shares outstanding as of March 31, 2000, assume that the underwriters' over-allotment option will not be exercised and exclude: 1,000,000 shares of common stock reserved for issuance under our 1992 stock option plan, under which options to acquire 782,600 shares are outstanding at a weighted average exercise price of $2.88 per share, options to acquire 166,000 shares are outstanding at an exercise price equal to the initial public offering price in this offering and options to acquire 51,400 shares are available for future issuance; 1,000,000 shares of common stock reserved for issuance under our 2000 stock incentive plan, under which no awards have been granted; 850,000 shares of common stock reserved for issuance under stock options and an agreement to grant stock options at a weighted average exercise price of $3.59 per share; 200,000 shares of common stock reserved for issuance under our employee stock purchase plan, which will commence after completion of this offering; 357,562 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $3.29 per share; up to 300,000 shares of common stock issuable upon exercise of warrants to be issued to the underwriters; and 40,000 shares of common stock an individual claims to hold but which we do not treat as outstanding because we believe the individual is required to forfeit these shares. AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Total operating expenses 1,621 2,240 2,914 2,900 4,007 722 1,082 Operating income (loss) (1,369 ) (1,070 ) (1,329 ) 121 889 324 450 Interest income (expense), net 16 57 (129 ) (343 ) (86 ) (28 ) (1)Includes non-cash stock compensation expense of $489,195 and $49,231 for the year ended December 31, 1999 and for the three months ended March 31, 2000, respectively. (2)The as adjusted amounts reflect the receipt and application of the net proceeds from the sale of 3,000,000 shares of our common stock at an assumed initial public offering price of $8.00, after deducting the underwriting discounts and estimated offering expenses payable by us. Total operating expenses 1,621 2,240 2,914 2,900 4,007 722 1,082 Operating income (loss) (1,369 ) (1,070 ) (1,329 ) 121 889 324 450 Interest income (expense), net 16 57 (129 ) (343 ) (86 ) (28 ) LSC, INCORPORATED (Exact name of registrant as specified in its charter) Minnesota 7372 75-1977026 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 1270 Eagan Industrial Road, Suite 160 Eagan, Minnesota 55121-1231 (651) 554-1500 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) J. B. (Brad) Balogh President and Chief Executive Officer LSC, Incorporated 1270 Eagan Industrial Road, Suite 160 Eagan, Minnesota 55121-1231 (651) 554-1500 (Name, address, including zip code, and telephone number, including area code, of agent for service)
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000909987_purina_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000909987_purina_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..fd38ccf7e8430255aa3c7c87aaef4a07aad3c7a2
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and our consolidated financial statements and related notes appearing elsewhere in this prospectus. OUR BUSINESS We are a market leader in the United States in developing, manufacturing, and marketing differentiated animal nutrition products and programs for dairy cattle, beef cattle, hogs, and horses. We also develop, manufacture and sell poultry feeds as well as specialty feeds for rabbits, zoo animals, laboratory animals, birds, fish and pets. In the United States our products are generally marketed under the widely recognized brand names Purina(R) and Chow(R), and the "Checkerboard" Nine Square Logo(R) and other trademarks pursuant to an exclusive, perpetual, royalty-free license from Ralston Purina Company, except with regard to dog and cat food, which is marketed domestically under the PMI Nutrition brand name. Our products are sold as complete feeds or concentrated nutritional additives which are mixed with our customer's base ingredients. Our product lines range from economy feeds to high-performance, value-added products, and are sold in complete rations or as concentrated nutritional additives to be mixed with grains. We maintain a total of over 36,000 active feed formulas, which encompass a wide range of animal species. Although products are the principal point of differentiation, we develop and sell our products as part of nutrition and management programs that address all critical areas in the production of meat, milk and eggs. Our nutrition programs include information and services regarding the care of the animals and their facilities, as well as nutritional, genetic and breeding counseling. We distribute our products through two primary distribution channels: through dealers and directly to end-users. During 1999, approximately 60% of our sales were made through our dealer network and 40% of sales were made directly to animal producers. Although sales volume through our dealer network has always been substantially higher than our direct sales volume, direct sales to customers have accounted for an increasing proportion of our sales volume over the past 10 years. Our basic feed manufacturing process consists of grinding various grains and protein sources into a meal form that is then mixed with various nutritional additives. The resulting products are sold in a variety of forms, including meal, pellets, blocks and liquids. Our feed formulas are based upon the nutrient content as determined through proprietary scientific research. When the price of certain raw ingredients increases, we can generally adjust our feed formulas by substituting lower-cost, alternative ingredients to produce feeds with comparable nutritional value. By using our least-cost product formulation system, we can determine optimal formulations that meet our nutritional standards and maintain product quality. We currently operate 48 feed manufacturing plants located in 25 states. Our total feed manufacturing capacity is approximately 6.4 million tons per year based on a three shift per day, five-day week, and individual plant capacity ranges from 60,000 tons to 275,000 tons per year. We have invested in highly sophisticated computerized systems for mixing, pelleting, micro-ingredient blending and packing. In addition, we have developed and implemented a sophisticated software program for feed formulation that incorporates the nutritional value of substitute ingredients. Our research efforts are focused on the development of proprietary product forms and process technologies designed to support new product development and increase manufacturing efficiency while lowering processing costs. At our research center in Gray Summit, Missouri, we conduct extensive animal research to develop value-added products and programs designed to optimize the genetic performance potential of animals. Each species of animal is closely studied from birth to maturity to enable scientists to understand the complex nutritional needs and genetic capabilities at each stage in its life cycle. By understanding the metabolic process of each species, our scientists have identified which nutrients are required by an animal at various stages in its development to maximize its genetic potential. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND NEITHER WE NOR THE SELLING STOCKHOLDERS ARE SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED OCTOBER 11, 2000 UP TO 2,356,168 SHARES PURINA MILLS, INC. LOGO COMMON STOCK ------------------------ We have prepared this prospectus to allow GSCP Recovery, Inc. and its transferees as selling stockholders to sell up to 2,356,168 shares of our common stock. GSCP Recovery acquired the common stock from us by operation of our plan of reorganization under the Bankruptcy Code, which became effective on June 29, 2000. Our common stock currently trades under the symbol "PMIL" on the Nasdaq National Market System. On October 9, 2000, the last reported sale price of our common stock on Nasdaq was $9.56 per share. ------------------------ See "Risk Factors" beginning on page 4 to read about factors you should consider before buying shares of our common stock. ------------------------ The selling stockholders directly, through agents designated from time to time, or through dealers or underwriters also to be designated, may sell the common stock from time to time on terms to be determined at the time of sale. To the extent required, the specific shares to be sold, names of the selling stockholders, purchase price, public offering price, the names of any such agent, dealer or underwriter, amount of expenses of the offering and any applicable commission or discount with respect to a particular offer will be set forth in an accompanying prospectus supplement. The selling stockholders reserve the sole right to accept and, together with its agents from time to time, to reject in whole or in part any proposed purchase of shares of common stock to be made directly or through agents. The aggregate proceeds to the selling stockholders from the shares of common stock will be the purchase price of the shares of common stock sold less the aggregate agents' commissions and the underwriters' discounts, if any. We will receive no proceeds from this offering, but will pay the expenses of this offering. The selling stockholders and any broker-dealers, agents or underwriters that participate with them in the distribution of the shares of common stock may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, and any commissions received by them and any profit on the resale of the shares of common stock purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ Prospectus dated , 2000. We are a Delaware corporation and our principal executive offices are located at 1401 South Hanley Road, St. Louis, Missouri 63144. Our telephone number is (314) 768-4100. OUR HISTORY Purina Mills and its predecessors have been in the animal nutrition business since 1894. Over the past 100 years, we have built and maintained our industry leadership by consistently providing high-quality, innovative products and dedicated customer service. In March 1998 we and our subsidiaries were acquired in a leveraged acquisition by Koch Agriculture Company, a subsidiary of Koch Industries, Inc. Subsequent to the acquisition, we had substantial indebtedness. Because of the highly leveraged nature of the acquisition, a significant portion of our cash flow from operations was thereafter dedicated to the payment of principal and interest on our indebtedness, reducing the funds available for our operations. Ultimately, our substantial degree of leverage limited our ability to adjust to depressed conditions in the agricultural markets we serve and resulted in our decision to seek bankruptcy protection. In October 1999, after defaulting on our debt obligations, we and our subsidiaries filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. Our plan of reorganization was confirmed by the bankruptcy court in April 2000. The plan became effective and we emerged from bankruptcy on June 29, 2000. The plan provided for, among other things: - cancellation of Koch Agriculture's equity interest in us; - issuance of 10,000,000 shares of our common stock, par value $0.01 per share, of which 9,910,000 shares will be distributed to holders of general unsecured claims under the plan, which includes holders of all of our $350 million in prepetition subordinated debt; - repayment of all of our $278 million prepetition secured debt through a $103 million cash payment and $175 million in borrowings under a new, post-bankruptcy term loan; and - a new $50 million revolving credit facility. Affiliates of GSCP Recovery, Inc. owned approximately 32.1% of our prepetition subordinated debt and, by operation of our plan of reorganization, GSCP Recovery became our largest stockholder, owning approximately 28.6% of our common stock as of August 25, 2000. THE OFFERING Common stock offered by Purina Mills....... None Common stock offered by selling stockholders............................... Up to 2,356,168 shares Common stock outstanding prior to this offering................................... 8,230,332 shares Use of proceeds............................ Purina Mills will not receive any proceeds from this offering Nasdaq National Market symbol.............. "PMIL" ------------------------ The above information is based upon the number of shares outstanding as of August 25, 2000. This information excludes 912,858 shares of common stock issuable upon the exercise of outstanding options at a weighted average exercise price of $21.97 per share and 87,142 shares of common stock reserved for future issuance under our equity incentive plan.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000914573_tessera_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000914573_tessera_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..12ef10e3290769732d37bc6a8bbb5d303545d103
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+++ b/parsed_sections/prospectus_summary/2000/CIK0000914573_tessera_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including "Risk Factors" and our financial statements before making an investment decision. TESSERA, INC. We provide intellectual property for chip scale packaging to meet the accelerating demand for performance and miniaturization in wireless communications, Internet access, computing and consumer electronics. Our intellectual property, which includes 116 issued patents and 169 pending patents in the United States as of September 30, 2000, enables the semiconductor industry to overcome fundamental issues in performance, reliability and size. The high growth markets for electronic products demand continued innovation in semiconductor technology. Advancements in semiconductor design and manufacturing have enabled the number of transistors on a chip to double every 18 months, resulting in improvements in semiconductor performance and size. Packaging technology has failed to keep pace with these improvements, and has become a limiting factor in the continued advancement of electronic products. To address the need for advanced packaging technology, we have developed a solution that combines our intellectual property with our design and manufacturing expertise to enable our customers to successfully adopt and implement our technology. Our patented chip scale packaging technology is designed to offer the following key benefits: - Reduced Size. By reducing the size of the package to almost the size of the chip itself, our proprietary technology enables the semiconductor to occupy a smaller area on the circuit board, allowing for increased system miniaturization and functionality. - Higher Performance. Our technology enables higher system level performance by allowing shorter electrical paths throughout the system, resulting in a more rapid transfer of data, voice and multimedia information. - Increased Reliability. Our patented technology compensates for the differing rates of thermal expansion and contraction between the chip and the circuit board preventing the failure of connections between the chip and board. Our objective is to establish our chip scale packaging technology as the industry standard by providing the most advanced intellectual property and services. We have licensed our patented technology to over 35 companies, including leading semiconductor manufacturers, assemblers and material and equipment suppliers. We have received royalties on more than 350 million semiconductors packaged using our technology. Our customers include ChipPAC, EEMS, Intel, IPAC, LG Electronics, OSE, Samsung and Toshiba. Each of these named customers accounted for more than $250,000 of our revenues for the nine months ended September 30, 2000. Our technology is incorporated in electronic products, including wireless handsets, or mobile phones, personal digital assistants, personal computers, servers and game consoles, from Casio, Compaq, Dell, Ericsson, Hewlett-Packard, IBM, Motorola, Nokia, Samsung and Sony. We were incorporated in Delaware in May 1990. Our principal executive offices are located at 3099 Orchard Drive, San Jose, CA 95134. Our telephone number is (408) 894-0700. The information in this prospectus is not complete and may be changed. We may not sell any of these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED OCTOBER 20, 2000 PROSPECTUS SHARES [LOGO] COMMON STOCK This is an initial public offering of common stock by Tessera, Inc. Tessera is selling 7,500,000 shares of common stock. The estimated offering price will be between $10 and $12 per share. ------------------ No public market currently exists for our common stock. We have applied for listing of our common stock on the Nasdaq National Market under the symbol "TSRA." ------------------ <TABLE> <CAPTION> PER SHARE TOTAL ---------- -------- <S> <C> <C> Initial public offering price............................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds to Tessera, before expenses........................ $ $ </TABLE> Tessera has granted the underwriters an option for a period of 30 days to purchase up to 1,125,000 additional shares of our common stock. ------------------ INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 4. ------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. CHASE H&Q UBS WARBURG LLC NEEDHAM & COMPANY, INC. WIT SOUNDVIEW , 2000 THE OFFERING Common stock offered by Tessera........... 7,500,000 shares Common stock to be outstanding after this offering.................................. 39,056,774 shares Use of proceeds........................... Working capital and general corporate purposes. Proposed Nasdaq National Market Symbol.... TSRA ------------------ The common stock outstanding after the offering is based on the number of shares outstanding as of September 30, 2000, and does not include: - 6,918,042 shares of common stock issuable upon the exercise of outstanding stock options as of September 30, 2000; - 1,076,934 shares of common stock issuable upon the exercise of outstanding warrants as of September 30, 2000; - 1,475,469 shares of common stock available for issuance under our 1999 Stock Plan following this offering; and - 200,000 additional shares of common stock available for issuance under our 2000 Employee Stock Purchase Plan following this offering. ------------------------ Unless otherwise noted, all share information in this prospectus: - reflects the conversion of all outstanding shares of our convertible preferred stock into 25,544,290 shares of common stock, immediately prior to the closing of this offering; - gives effect to a two-for-three reverse stock split of our common stock and preferred stock effective as of September 1, 2000; and - assumes no exercise of the underwriter's over-allotment option. ------------------ We operate on a 52-53 week fiscal year which ends on the Sunday nearest to December 31. Our 52 week fiscal years consist of four equal quarters of 13 weeks each, and our 53 week fiscal years consist of three 13 week quarters and one 14 week quarter. The financial results for our 53 week fiscal years and our 14 week fiscal quarters will not be exactly comparable to our 52 week fiscal years and our 13 week fiscal quarters. For presentation purposes, all fiscal periods presented or discussed in this prospectus have been presented as ending on the last day of the nearest calendar month. For example, our 1999 fiscal year ended on January 2, 2000, but we present our 1999 fiscal year as ending December 31, 1999. [INSIDE FRONT COVER] [DESCRIPTION OF ARTWORK] [Left side art: (Tessera logo) "Providing the Chip-to-System Interface" Artwork will illustrate the chip-to-system interface by showing a photo illustration of a semiconductor, integrating into a chip scale package using our technology, integrating onto a circuit board, and finally inside a cell phone. There will be a cut out illustration on the phone showing the chip scale package inside.] [Right side art: The following body copy will be on the right side of the inside cover, with illustrations depicting each major point of copy: "Establishing Standards for Chip Scale Packaging. Our objective is to establish our technology as the industry standard by providing the most advanced, cost-effective chip scale packaging solution with the intellectual property and services demanded by industry leaders in our target markets." "Targeting High Growth Markets. We target high growth applications that we believe represent the greatest immediate need for our technology, including wireless communications, high performance computing and high bandwidth networking. These applications demand ever-increasing functionality and performance and continued miniaturization." "Serving Leading Customers. Our technology has been adopted by the semiconductor industry including more than 35 industry leading semiconductor assemblers, manufacturers and equipment and material providers, such as Intel, Samsung, Toshiba and Amkor." "Providing Fundamental Technology. We are a leading provider of proprietary chip scale packaging technology that addresses fundamental issues in performance, reliability and size. Our intellectual property portfolio includes 116 issued patents and 169 pending patent applications in the United States for chip scale packaging."] ["Gatefold. The gatefold will be an illustration with photography showing a chip scale package using our technology in the center of the page, with the words "High Performance", "Small Size", and "High Reliability" around the package. The rest of the page will list our target markets and include photographs and illustrations of the products that incorporate our technology." The text and illustrations will include: Top of page text: "Tessera . . . providing intellectual property for chip scale packaging to meet the demand for smaller and faster electronic products." High Bandwidth Networking Devices -- photo of a server with an illustrated cut-out showing a chip scale package using our technology inside the server. Game Consoles -- photo of a game console with an illustrated cut-out showing a chip scale package using our technology inside the game console. Wireless Phones and Portable Devices -- photo of a wireless phone and a personal digital assistant with cut-out in each device showing a chip scale package using our technology inside. Internet Access -- photo of a personal computer with a cut-out showing a chip scale package using our technology inside the personal computer.] SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table summarizes the consolidated financial data for our business. You should read this information together with the financial statements and the notes to those statements appearing elsewhere in this prospectus. <TABLE> <CAPTION> NINE MONTHS YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30, ----------------------------- ---------------------- 1997 1998 1999 1999 2000 ------- -------- -------- ----------- -------- (UNAUDITED) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues: License.......................... $ 3,730 $ 4,594 $ 2,925 $ 2,525 $ 2,740 Royalty.......................... 26 630 1,475 642 2,699 Engineering services and other... 1,175 1,435 2,019 2,381 2,858 ------- -------- -------- ------- -------- Total revenues................. 4,931 6,659 6,419 5,548 8,297 Gross profit (loss)................... 911 (69) (189) 1,027 3,523 Net loss from continuing operations... (9,140) (12,550) (13,960) (8,762) (21,821) Net loss.............................. $(9,545) $(13,890) $(17,777) $(9,800) $(21,534) ======= ======== ======== ======= ======== Net loss from continuing operations per common share, basic and diluted(1).......................... $ (2.65) $ (2.66) $ (2.96) $ (1.78) $ (5.88) Net loss per common share, basic and diluted(1).......................... $ (2.77) $ (2.94) $ (3.77) $ (1.99) $ (5.83) Shares used in computing basic and diluted net loss per common share... 3,452 4,724 4,713 4,913 5,328 Pro forma as adjusted net loss per common share, basic and diluted (unaudited)......................... $ (0.69) $ (1.03) Shares used in computing pro forma as adjusted net loss per common share, basic and diluted (unaudited)....... 25,760 30,281 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 2000 -------------------------- PRO FORMA ACTUAL AS ADJUSTED(2) -------- -------------- (UNAUDITED) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 570 $ 75,570 Working capital............................................. 23,232 98,232 Total assets................................................ 36,667 111,667 Long-term obligations, less current portion................. 456 456 Mandatorily redeemable cumulative convertible preferred stock..................................................... 96,155 0 Total stockholders' equity (deficit)........................ $(68,591) $102,564 </TABLE> ------------------------- (1) Net loss attributable to common stockholders for the period ended September 30, 2000, was reduced by a cumulative preferred stock dividend and a deemed preferred stock dividend of $7.7 million and $1.9 million, respectively. See note 1 of the notes to the financial statements for an explanation of the determination of net loss per common share. (2) The pro forma as adjusted numbers reflect the automatic conversion of all shares of mandatorily redeemable cumulative convertible preferred stock into common stock upon the closing of this offer and the receipt of the net proceeds from the sale of shares of common stock offered hereby at an assumed initial public offering price of $11 per share, after deducting the estimated underwriting discount and estimated offering expenses payable by us.
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+PROSPECTUS SUMMARY This summary highlights information that we present more fully in the rest of this prospectus. This summary does not contain all the information you should consider before buying shares in this offering. You should read the entire prospectus carefully, including the "Risk Factors" section and the financial statements and the notes to those statements. EDEN BIOSCIENCE CORPORATION We are a plant technology company focused on developing, manufacturing and marketing innovative natural products for agriculture. We have a fundamentally new, patented and proprietary technology that we believe will significantly improve plant protection and crop production worldwide. We believe our technology and our initial product, Messenger, allow us to offer superior alternatives to existing plant protection and crop yield enhancement products in terms of both performance and safety and, importantly, to avoid the substantial public resistance to many chemical pesticides and genetically modified plants. We are aware of no other product or technology currently being marketed, under development or described in scientific literature that generates the comprehensive set of beneficial results that Messenger produces on such a wide array of crops. Our Core Harpin Technology Our core harpin and harpin-related technology is based on an understanding of innate complex plant defense and growth systems and the discovery of how these systems are activated in nature. In recent years, researchers have begun to recognize the critical role these natural systems play in determining plant health, growth and survival, but there has been no effective means to reliably activate these mechanisms without toxic effects to the plant. Through the discovery of a new class of nontoxic, naturally occurring proteins called harpins, we have been able to activate these previously inaccessible plant mechanisms. Harpin proteins trigger a plant's natural defense systems to protect against disease and pests, and simultaneously activate plant growth systems, leading to increased biomass, photosynthesis, nutrient uptake and root development and, ultimately, to greater crop yield and quality. We own or have obtained exclusive worldwide rights to patents and patent applications that cover our core harpin and harpin-related technology. Messenger -- Our Initial Product Commercial sales of Messenger began in August 2000. Based on our harpin technology, Messenger can be used for both plant protection and yield enhancement on a wide variety of crops. Messenger is a water-soluble, granular powder that is topically applied either independently or in conjunction with traditional chemical pesticides. Once applied, Messenger degrades rapidly and leaves no detectable residue. In field trials on over 40 crops, Messenger has generally reduced, or even eliminated, the need for traditional chemical pesticides. In addition, Messenger has been shown to be effective in simultaneously: - improving crop yields generally by 10% to 20%; - protecting against a broad array of viral, fungal and bacterial diseases, including some diseases for which there is currently no effective treatment; - reducing damage caused by a variety of pests; and - enhancing plant growth and crop quality. Unlike traditional chemical pesticides, Messenger and other products we are developing have no direct killing effect on pests and pathogens. Instead, Messenger activates the plant's own defense and growth systems. Furthermore, unlike genetically modified plants, Messenger delivers the advantages of TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Prospectus Summary.......................................... 3 Risk Factors................................................ 8 Use of Proceeds............................................. 17 Dividend Policy............................................. 17 Special Note Regarding Forward-Looking Statements........... 17 Capitalization.............................................. 18 Dilution.................................................... 19 Selected Financial Data..................................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 21 Business.................................................... 25 Management.................................................. 39 Certain Relationships and Related Party Transactions........ 49 Principal Shareholders...................................... 51 Description of Capital Stock................................ 53 Shares Eligible for Future Sale............................. 56 Underwriting................................................ 58 Legal Matters............................................... 61 Experts..................................................... 62 Where You Can Find More Information......................... 62 Index to Financial Statements............................... F-1 </TABLE> ---------------------- You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date. EDEN(R), EDEN Bioscience(R) and Messenger(R) are registered trademarks of EDEN. modern biotechnology without altering the plant's DNA. Messenger offers several other key advantages over existing plant protection and yield enhancement alternatives, including: - improved food safety; - reduced risk of environmental damage; - improved worker safety; and - reduced likelihood of pest resistance. Messenger received conditional EPA approval for full commercial use in April 2000. The EPA approval requires that we submit the results of four additional studies relating to the safety of the product by April 19, 2001. We have completed three of the required studies and believe they meet the EPA's requirements, and we are in the process of completing the remaining required study. If we are unable to meet the conditions imposed by the EPA within the time frames specified by the EPA, the agency could revoke our registration or impose use restrictions that are not currently applicable to Messenger, such as restrictions on frequency or method of application. Business Strategy The increasing scarcity of agricultural resources and growing global demand for food, together with concerns regarding the use of traditional chemical pesticides and genetically modified plants, are forcing growers to look at new alternatives to traditional plant protection and yield enhancement methods. Annual crop losses from pests are estimated to be $300 billion worldwide. To mitigate these losses, growers worldwide spent approximately $30 billion for agricultural chemicals in 1999. Our strategy is to be a leading provider of innovative plant protection and yield enhancement solutions to growers throughout the world. We are focusing on the following key initiatives: - commercialize Messenger and future products based on our proprietary technology; - promote the benefits of Messenger and our harpin and harpin-related technologies; - continue to develop Messenger product extensions and new products that utilize natural plant defense and growth systems; - control and protect our technology; and - maintain control over product manufacturing. Our near-term focus is the commercialization of Messenger for use on a variety of crops. We are currently concentrating our efforts in the United States on high-value crops, such as citrus, tomatoes, peppers, cucumbers, strawberries and other horticultural and specialty crops, from which we expect growers will derive the greatest economic benefit from Messenger. In 1999, over 121 million acres of horticultural and specialty crops were harvested worldwide, including approximately 17 million acres of tomatoes, peppers, cucumbers and strawberries and approximately 18 million acres of citrus. We plan to take advantage of the Messenger brand developed in the use on these high-value crops to penetrate traditional field crop markets, including cotton, wheat, rice, corn and soybean. In 1999, approximately 2.0 billion acres of row crops were harvested worldwide, with corn, wheat, cotton and rice accounting for approximately 1.3 billion acres. We will continue to expand our sales and field development specialist force to educate industry leaders on the benefits of Messenger and maintain close relationships with large commercial growers and independent agricultural product distributors. We also intend to continue to conduct domestic and international field trials and aggressively pursue international regulatory approvals to establish Messenger as a leading plant protection and yield enhancement product in the global marketplace. Prior to August 2000, we had derived all of our revenues from research grants and from providing consulting services. Since 1997 we have not sought, and do not intend to seek in the future, additional research grants, and since January 2000 we no longer provide any consulting services. For the immediately foreseeable future, we will be dependent on the successful development and commercialization of Messenger. To be successful, we must achieve broad market acceptance for Messenger and differentiate it from products that genetically modify plants, which have been subject to public concerns and negative public attitudes, particularly in Europe. Research and Development We will continue to focus significant resources on discovering and developing new products based on our harpin and harpin-related technology platform. These efforts will include Messenger product line extensions, such as crop, disease and pest specific products. In addition, we have identified and are currently performing efficacy studies on new harpin proteins that are significantly more potent and may be effective against other classes of disease or induce additional growth pathways. We believe that many of the additional products and technologies currently under development will lead to significant business opportunities in the future. THE OFFERING Common stock offered by EDEN........... 5,800,000 shares Common stock to be outstanding after the offering........................... 22,732,707 shares Use of proceeds........................ We estimate that our net proceeds from this offering, assuming no exercise of the underwriters' over- allotment option, will be approximately $69.0 million. We intend to use a portion of the net proceeds of this offering to expand and enhance our manufacturing and research and development facilities, and the remainder for working capital and general corporate purposes, including expansion of our sales and marketing capabilities for the commercialization of Messenger and for research and development activities. Risk factors........................... See "Risk Factors" and other information included in this prospectus for a discussion of factors that you should carefully consider before deciding to invest in shares of the common stock. Nasdaq National Market symbol.......... EDEN The number of shares of common stock to be outstanding after this offering is based on shares outstanding as of August 31, 2000 and excludes: - 2,468,000 shares of common stock issuable under our 1995 combined incentive and non-qualified stock option plan upon the exercise of stock options outstanding as of August 31, 2000, at a weighted average exercise price of $6.93 per share, and 326,334 shares of common stock reserved for issuance under such plan; - 331,953 shares of common stock issuable upon the exercise of warrants outstanding as of August 31, 2000, at a weighted average exercise price of $1.64 per share; - 230,769 shares of common stock, assuming an initial public offering price of $13.00 per share, issuable upon the exercise of currently outstanding warrants associated with our two existing credit facilities, at an exercise price equal to the public offering price of shares sold in this offering; and - 1,500,000 shares of common stock reserved for issuance under our 2000 stock incentive plan and 500,000 shares of common stock reserved for issuance under our 2000 employee stock purchase plan. In addition, except as otherwise noted, all information in this prospectus is based on the following assumptions: - the conversion of all outstanding shares of preferred stock into an aggregate of 13,794,104 shares of common stock upon the effectiveness of our registration statement; and - no exercise of the underwriters' over-allotment option. We were incorporated in the state of Washington in 1994. Our executive offices are located at 11816 North Creek Parkway North, Bothell, Washington 98011-8205, and our telephone number is (425) 806-7300. Our Web site is located at http://www.edenbio.com. Any information that is included on or linked to our Web site is not a part of this prospectus. SUMMARY FINANCIAL DATA The following tables set forth our summary financial data. When you read this summary financial data, it is important that you also read our financial statements and related notes included elsewhere in this prospectus, as well as the section of this prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ----------------------------------------------- ----------------- 1995 1996 1997 1998 1999 1999 2000 ------- ------- ------- ------- ------- ------- ------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenues: Consulting services..................... $ 132 $ 178 $ 176 $ 121 $ 115 $ 43 $ -- Research grants......................... 110 42 7 -- -- -- -- ------- ------- ------- ------- ------- ------- ------- Total revenues................... 242 220 183 121 115 43 -- ------- ------- ------- ------- ------- ------- ------- Operating expenses: Research and development................ 990 1,643 2,865 5,322 7,555 3,713 5,116 General and administrative.............. 269 396 577 1,708 2,209 1,010 1,911 ------- ------- ------- ------- ------- ------- ------- Total operating expenses......... 1,259 2,039 3,442 7,030 9,764 4,723 7,027 ------- ------- ------- ------- ------- ------- ------- Loss from operations............. (1,017) (1,819) (3,259) (6,909) (9,649) (4,680) (7,027) ------- ------- ------- ------- ------- ------- ------- Interest and dividend income.............. 20 99 172 135 435 248 279 Interest expense.......................... (3) (27) (116) (162) (181) (93) (74) ------- ------- ------- ------- ------- ------- ------- Net loss.................................. $(1,000) $(1,747) $(3,203) $(6,936) $(9,395) $(4,525) $(6,822) ======= ======= ======= ======= ======= ======= ======= Historical basic and diluted net loss per share................................... $ (0.57) $ (1.04) $ (1.90) $ (3.93) $ (5.23) $ (2.48) $ (2.38) ======= ======= ======= ======= ======= ======= ======= Weighted average shares outstanding used in computation of historical basic and diluted net loss per share.............. 1,742 1,681 1,681 1,765 1,902 1,823 2,863 ======= ======= ======= ======= ======= ======= ======= Pro forma basic and diluted net loss per share................................... $ (0.67) $ (0.41) ======= ======= Weighted average shares outstanding used in computation of pro forma basic and diluted net loss per share.............. 14,820 16,657 ======= ======= </TABLE> <TABLE> <CAPTION> JUNE 30, 2000 ---------------------- PRO FORMA ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 6,609 $ 75,648 Working capital............................................. 3,833 72,872 Total assets................................................ 11,601 80,640 Capital lease obligations, net of current portion........... 393 393 Deficit accumulated during development stage................ (29,797) (29,797) Total shareholders' equity.................................. 8,093 77,132 </TABLE> The table above presents balance sheet data as of June 30, 2000: - on an actual basis; and - on a pro forma as adjusted basis to reflect the sale of 5,800,000 shares of common stock offered by this prospectus at an assumed initial public offering price of $13.00 per share (the midpoint of the expected price range) and the receipt by EDEN of the estimated net proceeds after deducting estimated underwriting discounts and commissions and estimated offering expenses.
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+PROSPECTUS SUMMARY This summary highlights information contained in other parts of this prospectus. Because it is a summary, it does not contain all of the information that you should consider before investing in the shares. You should read the entire prospectus carefully. ISTA PHARMACEUTICALS OVERVIEW We discover and develop new remedies for diseases and conditions of the eye. Our product development efforts involve mixtures, or formulations, of a natural enzyme called hyaluronidase. We target serious conditions of the eye such as vitreous hemorrhage, diabetic retinopathy, corneal opacification and keratoconus. Each of these conditions affects a significant number of patients and has limited treatment options. We currently have no products available for sale and have incurred losses since inception. We expect to continue to incur operating losses for the foreseeable future as we increase our research and development, preclinical and clinical testing activities, and seek regulatory approval for our product candidates. STRATEGY Our objective is to build a leading biopharmaceutical company that discovers, develops and commercializes new and superior drug products for treatment of serious diseases and conditions of the eye. We intend to accomplish this through the following strategic initiatives: - targeting diseases and conditions representing large underserved markets for which there are currently no approved drug treatments - focusing on bringing our lead product candidate, Vitrase, to market as quickly as possible and establishing its broad acceptance for treatment of serious conditions of the eye - continuing to discover and develop new, safe and effective applications for hyaluronidase - forming strategic collaborations with pharmaceutical companies or others to accelerate commercialization of our products, as appropriate - seeking to acquire or in-license complementary products and technologies OUR PRODUCTS IN DEVELOPMENT Our products are currently in various stages of clinical trials. Phase I, II and III clinical trials are three successively more difficult and larger studies that test the safety and effectiveness of an experimental drug. Vitrase We are developing Vitrase, a proprietary formulation of hyaluronidase, for treatment of severe vitreous hemorrhage, a sight threatening condition, and diabetic retinopathy, the leading cause of adult blindness in the United States. Vitrase is currently in two Phase III clinical trials for treatment of severe vitreous hemorrhage. We are also conducting a pilot Phase IIa clinical trial of Vitrase in Mexico for treatment of diabetic retinopathy. Vitreous hemorrhage. A vitreous hemorrhage occurs when retinal blood vessels rupture and bleed into the vitreous humor, the clear, gel-like substance that fills the back of the eye between the lens and the retina. The blood from the hemorrhage can obscure vision and prevent ophthalmologists from seeing into the eye to diagnose or treat the cause of the hemorrhage. The only current treatment options are a "watchful waiting" period, during which the attending physician provides no medical treatment in the hope that the hemorrhage will clear on its own, and an invasive surgical procedure to remove the blood filled vitreous humor from the eye. Vitrase, when injected into the vitreous humor, causes the vitreous humor to liquefy and promotes clearance of vitreous hemorrhage. Based on market research we commissioned in February 1999, we believe that approximately one million cases of vitreous hemorrhage occur each year in the United States, Europe and Japan and that approximately half of these cases are candidates for treatment using Vitrase. Diabetic retinopathy. Diabetes can result in abnormal changes to blood vessels in the eye, a condition known as diabetic retinopathy. Diabetic retinopathy is a progressive disease consisting of two stages. We are developing Vitrase for treatment for nonproliferative diabetic retinopathy, the first stage of the disease, for which there is currently no effective treatment. Vitrase, when injected into the vitreous humor, causes the vitreous humor to liquefy and separate from the retina, thereby limiting growth of abnormal blood vessels in the back of the eye. We believe that Vitrase may be effective for treating diabetic retinopathy at the nonproliferative stage. Approximately four to six million people in the United States with diabetes have some form of diabetic retinopathy, the majority of whom are in the nonproliferative stage of the disease. Keratase We are currently conducting a Phase IIb trial of Keratase, a proprietary formulation of hyaluronidase, for the treatment of corneal opacification. Corneal opacification occurs when the cornea, which is normally transparent, becomes scarred, cloudy or opaque, diminishing the amount of light entering the eye. The only current treatment for corneal opacification is a corneal transplant. Risks associated with a corneal transplant include loss of vision, rejection and creation of astigmatism. We believe that there are approximately three million people in the United States, Western Europe and Japan that have a form of vision impairment due to corneal opacification. We believe physicians can use Keratase to treat corneal opacification with benefits equivalent to those of corneal transplants but without the associated risks of rejection and astigmatism. Keraform We are developing Keraform, our proprietary system for the treatment of keratoconus, a degenerative corneal disease that impairs vision. Keratoconus is a progressive thinning of the cornea and the development of an irregular, cone- like protrusion of the cornea, which typically occurs in both eyes. We believe that there are approximately 400,000 people in the United States, Western Europe and Japan who currently have keratoconus. COLLABORATION WITH ALLERGAN In March 2000, we entered into agreements with subsidiaries of Allergan, Inc. for the marketing, sale and distribution of Vitrase in the United States and all international markets, except Mexico until April 2004 and Japan. Allergan is a leading provider of eye care and specialty pharmaceutical products throughout the world. Allergan has agreed to pay us a royalty on any sales of Vitrase outside the United States and will split any profits on sales of Vitrase in the United States on a 50/50 basis. Pursuant to our agreements, Allergan made an equity investment of $10.0 million in us and may pay us aggregate future milestone payments of up to $35.0 million. GENERAL INFORMATION Since our inception, we have financed our operational losses primarily through private sales of our preferred stock. We incorporated in California in February 1992 as Advanced Corneal Systems, Inc. In March 2000, we changed our name to ISTA Pharmaceuticals, Inc. and we reincorporated in Delaware in August 2000. Our corporate headquarters and principal research laboratories are located at 15279 Alton Parkway, Building 100, Irvine, California 92618, and our telephone number is (949) 788-6000. Vitrase, Keratase, Keraform, ISTA, ISTA Pharmaceuticals and the ISTA logo are our trademarks. We also use trademarks of other companies in this prospectus. THE OFFERING Common stock offered...................... 4,500,000 shares Common stock to be outstanding after the offering.................................. 15,926,759 shares Use of proceeds........................... To fund clinical trials and preclinical research, with a particular focus on Vitrase, to finance the possible acquisition of complementary technologies, products or businesses, and for general corporate purposes. Proposed Nasdaq National Market symbol.... ISTA We based the number of shares of common stock to be outstanding after the offering in the table above on the number of shares outstanding as of June 30, 2000 and have excluded 2,416,933 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2000, at a weighted average exercise price of $0.62 per share. Unless otherwise stated, all information contained in this prospectus assumes: - no exercise of the over-allotment option granted to the underwriters - the conversion of all outstanding shares of our preferred stock into shares of common stock - the cashless exercise, prior to the offering, of 1,153,877 warrants to purchase 808,569 shares of our common stock SUMMARY FINANCIAL INFORMATION (in thousands, except per share data) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------- ------------------------ 1997 1998 1999 1999 2000 ------- --------- ----------- --------- ----------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Costs and expenses: Research and development.......... $ 4,969 $ 7,523 $ 11,062 $ 1,930 $ 3,023 General and administrative........ 1,949 2,147 3,240 449 1,500 ------- ------- -------- ------- -------- Total costs and expenses............ 6,918 9,670 14,302 2,379 4,523 ------- ------- -------- ------- -------- Loss from operations................ (6,918) (9,670) (14,302) (2,379) (4,523) Interest income (expense), net...... 166 46 18 13 (32) ------- ------- -------- ------- -------- Net loss............................ (6,752) (9,624) (14,284) (2,366) (4,555) Deemed dividend to preferred stockholders...................... -- -- -- -- (19,245) ------- ------- -------- ------- -------- Net loss attributable to common stockholders...................... $(6,752) $(9,624) $(14,284) $(2,366) $(23,800) ======= ======= ======== ======= ======== Net loss per common share, basic and diluted........................... $ (5.28) $ (7.17) $ (9.50) $ (1.62) $ (13.10) ======= ======= ======== ======= ======== Shares used in computing net loss per common share, basic and diluted........................... 1,279 1,342 1,503 1,457 1,817 Pro forma net loss per common share, basic and diluted................. $ (1.95) $ (2.76) ======== ======== Shares used in computing pro forma net loss per common share, basic and diluted....................... 7,333 8,636 </TABLE> <TABLE> <CAPTION> MARCH 31, 2000 ---------------------- PRO FORMA ACTUAL AS ADJUSTED ------- ----------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $10,620 $68,020 Working capital............................................. 5,388 62,788 Total assets................................................ 13,357 70,757 Total stockholders' equity.................................. 7,088 64,488 </TABLE> We calculated net loss per common share, basic and diluted, and shares used in computing net loss per common share, basic and diluted, by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. We calculated the pro forma net loss per common share, basic and diluted, and the shares used in computing pro forma net loss per common share, basic and diluted, assuming (i) the conversion of all outstanding shares of preferred stock into common stock as if the shares had converted immediately upon issuance and (ii) the cashless exercise prior to the offering of 1,153,877 warrants to purchase 808,569 shares of our common stock as though the exercise had occurred January 1, 1999. The pro forma as adjusted balance sheet data above also give effect to the sale of 4,500,000 shares in this offering at an assumed initial public offering price of $14.00 per share, less the underwriting discount and other offering expenses. The statement of operations data for the year ended December 31, 1999 and the three months ended March 31, 2000 would not be materially affected on a pro forma basis had the acquisition of Visionex Pte. Ltd. on March 8, 2000 occurred on January 1, 1999. The pro forma net loss per common share would have been $1.46 and $2.28 for the year ended December 31, 1999 and the three months ended March 31, 2000, respectively.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000933955_amedia_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000933955_amedia_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights certain information contained elsewhere in this prospectus. You should read the entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk Factors." Except as otherwise noted, the information in this prospectus does not give effect to the conversion of outstanding convertible securities or to the exercise of outstanding options and warrants. Unless otherwise noted, references in this prospectus to "TTR," "we," "our" and "us" refer to TTR Technologies, Inc., a Delaware corporation, and our wholly owned subsidiary, TTR Technologies, Ltd., an Israeli company. We design and develop anti-piracy software technologies that provide copy protection for electronic content distributed on optical media and over the Internet. Our proprietary anti-piracy technology, MusicGuard(TM), is a unique hardware-based technology designed to prevent the unauthorized copying of audio content distributed on CDs. Our copy protection technologies are designed to be transparent to the legitimate end-user. As of November 24, 1999, we entered into an agreement with Macrovision Corporation to jointly design and develop and market a copy protection product designed to thwart the illegal copying of audio content on CDs, DVDs and other optical media. The new product will be based primarily upon our MusicGuard technology as well as related Macrovision technology and will be jointly owned by us and Macrovision. We expect that the immediate application of the technology we are developing with Macrovision will be of interest for the music distribution business and recording studios whose products are customarily distributed on CDs. We granted to Macrovision an exclusive world-wide royalty bearing license to design, develop and market the copy protection technology which we are jointly developing. Our immediate goal is to establish the proposed audio content protection technology which we and Macrovision are developing as the leading product in the target market of audio content copy protection for the high-volume recording industry. Additionally, we are actively developing other technologies and looking to acquire technologies which are synergistic with our current business and will enable us to leverage our knowledge base and skill. We were organized in July 1994. We have an Israeli subsidiary, organized in December 1994, through which we conduct research and development. Our principal executive offices are located at 2 HaNager Street, Kfar Saba, Israel, telephone 011-972-9-766-2393. We also have a mailing address at 67 Wall Street, Suite 2411, New York, New York 10005 and can be reached by telephone in New York at 212-323-8284. Our Web site is www.ttrtech.com. Information contained on our Web site is not, and should not be deemed to be, a part of this prospectus. The Offering <TABLE> <S> <C> Securities offered..................10,468,505 shares of common stock. (1) Shares outstanding..................15,967,890 shares of common stock. (2) Use of proceeds.....................We will not receive any proceeds from the sale of common stock by the selling stockholders. We may, however, receive proceeds from the sale of certain of the warrants held by certain of the selling stockholders. </TABLE> - ---------- (1) Includes (i) 7,552,493 shares of common stock held by certain selling stockholders, and (ii) 2,916,012 shares of common stock issuable upon exercise of certain warrants and options held by certain selling stockholders. (2) Does not include (a) up to an aggregate of 1,166,400 shares of our common stock issuable upon exercise of options granted under our 1996 Stock Option Plan, (b) any of the shares described in clause (ii) in footnote (1) above, or (c) 95,000 shares issuable upon exercise of certain outstanding options and warrants that are not held by the selling stockholders. We are registering the shares offered hereby in order to satisfy various obligations to the selling stockholders to register their resale of our common stock. See "Plan of Distribution."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000934473_genvec-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000934473_genvec-inc_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..883991b90e1bc1413e65cf7aff4ee521c9c4ec7b
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY. GENVEC, INC. We develop gene-based products that produce medically beneficial proteins at the site of disease. We believe that this approach minimizes the overall toxicity that can occur when large doses of a protein are introduced directly into the body. Our current areas of focus are diseases of the heart and blood vessels, cancer and diseases of the eye. Our lead product candidate, BIOBYPASS angiogen, is currently in Phase II clinical trials. Our product candidates are made up of genes and vehicles, commonly called vectors, that deliver those genes into cells at the site of the disease. Our technology focuses on the use and improvement of vectors. We believe that our technology allows us to rapidly and cost effectively test the potential benefit of genes. It also generally allows us to advance our product candidates into clinical testing in less time than traditional drug discovery methods. OUR PRODUCT CANDIDATES We are using our technology to convert knowledge about genes and gene function into products with a medical benefit for patients. We currently have four product development programs: - BIOBYPASS angiogen, our lead product candidate, produces vascular endothelial growth factor, or VEGF, in diseased tissues. VEGF is a protein that stimulates the formation of new blood vessels and improves blood flow. We deliver BIOBYPASS angiogen locally to the site of disease. We believe local production of VEGF minimizes the toxicity associated with delivery of large doses of this protein directly into the body. In collaboration with Warner-Lambert, we have initiated Phase II clinical trials for the treatment of two major disease indications--coronary artery disease, or insufficient blood flow in the vessels of the heart, and peripheral vascular disease, or insufficient blood flow in the body's extremities, particularly the legs. - We are developing TNFerade to treat cancer in combination with radiation therapy. Our product candidate produces a protein called tumor necrosis factor-alpha, or TNFa, in the tumor to cause a reduction in tumor size while minimizing overall toxicity to the body. We have designed TNFerade so that the maximum TNFa production takes place with traditional radiation treatment. We have completed preclinical testing of TNFerade and are beginning Phase I clinical trials. - We are developing product candidates to treat two diseases of the eye, macular degeneration and diabetic retinopathy. Excessive growth of blood vessels in the eye is the primary contributor to the loss of vision in these diseases. Our product candidates cause the production in the eye of the protein called pigment epithelium-derived factor, or PEDF. This protein inhibits new blood vessel formation. These product candidates are undergoing preclinical testing. - We are developing GENSTENT to prevent the narrowing of blood vessels resulting from damage caused by some medical procedures used to treat coronary artery disease and peripheral vascular disease. Our product candidate causes the local production of nitric oxide at the site of blood vessel injury to promote healing and to prevent the narrowing of damaged blood vessels. GENSTENT is undergoing preclinical testing. OUR DRUG DISCOVERY AND DEVELOPMENT TECHNOLOGY Our core technology is based on the use of modified adenoviruses. Adenoviruses are naturally occurring viruses that cause ailments such as the common cold. We use modified adenoviruses, commonly called adenovectors, to deliver genes to cells. To create our product candidates, we incorporate into our adenovectors genes that provide the blueprint for the production of desired proteins. We deliver our product candidates directly to the site of disease using devices such as catheters and syringes to localize the production of medically beneficial, or therapeutic, proteins. We have developed proprietary techniques to enhance the delivery of genes for the production of proteins at the site of disease. Our technology enables us to design product candidates that bind to essentially all cells or only to selected cell types. Our technology also allows us to control the level and length of time of therapeutic protein production. STRATEGIC ALLIANCES We establish collaborations with pharmaceutical companies and other organizations to enhance our ability to discover, evaluate, develop and commercialize multiple product opportunities. OUR COLLABORATION WITH THE WARNER-LAMBERT COMPANY We have a collaboration agreement with Warner-Lambert to research, develop and commercialize gene-based products, including BIOBYPASS angiogen, for the treatment of coronary artery disease and peripheral vascular disease. Warner-Lambert has the primary responsibility for clinical development, regulatory approval, manufacturing and commercialization of products that we develop under this collaboration. Under the terms of the collaboration, we may receive more than $100 million, excluding royalties, in research and development funding, milestone payments, equity purchases and license fees. As of September 30, 2000, Warner-Lambert had paid us $53.7 million under this collaboration. CORPORATE INFORMATION We were incorporated in Delaware in December 1992. Our corporate headquarters is located at 65 West Watkins Mill Road, Gaithersburg, Maryland 20878, and our telephone number is (240) 632-0740. Our corporate website is located at www.genvec.com. We do not intend for information found on our website to be part of this prospectus. We own or have rights to various copyrights, trademarks and trade names used in our business. BIOBYPASS-Registered Trademark- is a registered trademark of GenVec, and the term angiogen is used to refer to an angiogenic agent. "GenVec," the GenVec logo, GENSTENT-TM- biologic, AdFAST-TM- system, AdACE-TM- system, AdLIBRARY-TM- system, UTV-TM- technology and DART-TM- vectors are some of our trademarks. Other copyrights, trademarks and trade names referred to in this prospectus are the property of their respective owners. THE OFFERING <TABLE> <S> <C> COMMON STOCK OFFERED................................ 4,000,000 shares COMMON STOCK TO BE OUTSTANDING AFTER THIS 17,826,268 shares OFFERING.......................................... USE OF PROCEEDS..................................... We expect to use the net proceeds to fund: - research and development activities; - clinical trials, capital expenditures and working capital; and - other corporate purposes, including possible acquisitions. Please read "Use of Proceeds." PROPOSED NASDAQ NATIONAL MARKET SYMBOL.............. "GNVC" </TABLE> The information in the above table: - reflects 1,935,350 shares of common stock outstanding as of September 30, 2000; - reflects the conversion of all our outstanding convertible preferred stock into 11,543,092 shares of common stock upon the closing of this offering; and - assumes the sale of 347,826 shares of our common stock to Warner-Lambert in a private transaction concurrent with the closing of this offering at a price of $14.375 per share reflecting a purchase price equal to 125% of the initial public offering price. The number of outstanding shares of common stock does not include: - 3,506,017 shares of common stock issuable on the exercise of stock options outstanding as of September 30, 2000 at a weighted average exercise price of $2.88 per share; - 582,317 shares of common stock issuable upon exercise of warrants outstanding as of September 30, 2000 at a weighted average exercise price of $9.02 per share; or - 1,056,712 additional shares of common stock that we could issue under our stock option and stock purchase plans. Unless otherwise indicated, information in this prospectus assumes the following: - the reclassification of each share of common stock into one and one-half shares of our common stock and a corresponding adjustment to the conversion ratio for the convertible preferred stock before the closing of this offering; - the filing of our amended and restated certificate of incorporation and the adoption of amended and restated bylaws before the closing of this offering; - no exercise of the underwriters' over-allotment option; and - an initial public offering price of $11.50 per share, the midpoint of the range shown on the cover of this prospectus. SUMMARY FINANCIAL DATA The following table summarizes our statements of operations data for the years ended December 31, 1995, 1996, 1997, 1998 and 1999 and the nine-month periods ended September 30, 1999 and 2000 and our balance sheet data as of September 30, 2000. The pro forma net loss per share data reflects the conversion of our outstanding convertible preferred stock upon the closing of this offering. The summary balance sheet data as of September 30, 2000 are presented: - on an actual basis; - on a pro forma basis to reflect that conversion of all of our outstanding preferred stock at September 30, 2000 into a total of 11,543,092 shares of common stock upon completion of this offering; and - on a pro forma basis as adjusted to reflect the sale of 4,000,000 shares of common stock in this offering at an assumed initial public offering price of $11.50 per share, the sale of 347,826 shares of common stock in the direct offering to Warner-Lambert in a private transaction concurrent with the closing of this offering at an assumed price of $14.375 per share, and our receipt of the net proceeds after deducting underwriting discounts and estimated offering expenses. <TABLE> <CAPTION> ---------------------------------------------------------------------- NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------------------------- ----------------- 1995 1996 1997 1998 1999 1999 2000 ------- ------- ------- ------- ------- ------- ------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> IN THOUSANDS, EXCEPT PER SHARE DATA STATEMENTS OF OPERATIONS DATA: Revenues: Ongoing research and development support......................... $ 1,005 $ 698 $ 3,188 $ 6,750 $14,075 $10,628 $ 7,109 Contract, license and milestone payments........................ -- -- 2,500 3,000 2,875 2,156 4,231 ------- ------- ------- ------- ------- ------- ------- Total revenues.................. 1,005 698 5,688 9,750 16,950 12,784 11,340 ------- ------- ------- ------- ------- ------- ------- Operating expenses: Research and development.......... 6,460 5,896 8,085 10,592 14,018 10,645 10,639 General and administrative........ 2,266 3,915 4,031 5,903 5,428 3,969 5,731 Purchase of in-process technology...................... 592 -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- Total operating expenses........ 9,318 9,811 12,116 16,495 19,446 14,614 16,370 ------- ------- ------- ------- ------- ------- ------- Loss from operations................ (8,313) (9,113) (6,428) (6,745) (2,496) (1,830) (5,030) Other income, net................... 413 496 263 398 577 436 373 ------- ------- ------- ------- ------- ------- ------- Net loss............................ $(7,900) $(8,617) $(6,165) $(6,347) $(1,919) $(1,394) $(4,657) ======= ======= ======= ======= ======= ======= ======= Basic and diluted net loss per share............................. $ (9.39) $ (7.16) $ (4.30) $ (4.10) $ (1.22) $ (0.89) $ (2.52) ======= ======= ======= ======= ======= ======= ======= Shares used in computing basic and diluted net loss per share........ 841 1,203 1,435 1,549 1,576 1,569 1,851 Pro forma basic and diluted net loss per share......................... $ (0.15) $ (0.35) ======= ======= Shares used in computing pro forma basic and diluted net loss per share............................. 12,708 13,394 </TABLE> <TABLE> <CAPTION> ---------------------------------- AS OF SEPTEMBER 30, 2000 ---------------------------------- (UNAUDITED) PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- <S> <C> <C> <C> IN THOUSANDS BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $ 7,444 $ 7,444 $ 54,024 Working capital............................................. 4,640 4,640 51,220 Total assets................................................ 20,878 20,878 67,458 Long-term obligations, less current portion................. 6,567 6,567 6,567 Convertible preferred stock................................. 8 -- -- Common stock................................................ 2 14 18 Additional paid-in capital.................................. 61,088 61,084 107,660 Accumulated deficit......................................... (47,554) (47,554) (47,554) Deferred compensation....................................... (5,414) (5,414) (5,414) Total stockholders' equity.................................. 8,126 8,126 54,706 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000940298_manufactur_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000940298_manufactur_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..5b8b3bc4776216ceb102419a29b4a1cc86e23b60
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS IMPORTANT INFORMATION REGARDING OUR BUSINESS AND THIS OFFERING. BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY "RISK FACTORS" BEGINNING ON PAGE 6 AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES, BEFORE DECIDING TO INVEST IN OUR COMMON STOCK. EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. MANUFACTURERS' SERVICES LIMITED Overview We are a leading global provider of advanced electronics design, manufacturing and related services. We provide these services to original equipment manufacturers primarily in the voice and data communications, computer and related peripherals, medical equipment and industrial and consumer electronics industries. The services that we provide are commonly referred to as electronics manufacturing services. We provide original equipment manufacturers, or OEMs, with a comprehensive range of services, including: - product design and new product introduction services; - materials procurement and management; - assembly and manufacturing; - testing services; - order fulfillment and distribution; and - after-market support. We assist our customers in the design and product introduction phases of development to reduce the time it takes to bring their products to market and optimize their design for high volume manufacturing. We obtain competitive component pricing and greater sourcing flexibility for our customers through our material and inventory management expertise and our global information systems. We utilize sophisticated assembly and manufacturing techniques in order to provide the complex functionality and small product size that is required by OEMs. We subject our manufactured products to a comprehensive set of tests for quality, functionality and reliability, including, in some instances, product-specific tests that we design for our customers. Additionally, we assist our customers in packaging and distributing the final products directly into their distribution channels and to their end users. We also provide a wide range of after-market support services such as repair, refurbishment, exchange, system upgrades and spare part manufacturing. By providing these services, we allow our customers to focus on their core competencies, and we enhance their competitiveness by reducing the cost of their products and shortening the time from product conception to product introduction in the marketplace. We have established a network of manufacturing facilities in the world's major electronics markets--North America, Europe and Asia--to serve the increasing outsourcing needs of both multinational and regional OEMs. We have strategically located our manufacturing facilities near our customers and their end-markets, which benefits our customers by reducing the time required to get their products to market and by increasing their flexibility to respond to changing market conditions. We believe that the combination of our services and our global manufacturing network has enabled us to become integral to our customers' product development and manufacturing strategies. We target leading OEMs in rapidly growing industries. We seek to establish long-term, integrated relationships with OEMs that have chosen outsourcing as a core manufacturing strategy. Due to our focus on rapidly growing industries, our prospects are influenced by recent trends, such as the buildout of the communications and Internet infrastructure, the proliferation of personal computing devices and other technological trends. Our most significant customers based on sales in the first fiscal quarter of 2000 include industry leaders such as: <TABLE> <S> <C> 3Com Corporation Iomega Corporation ADC Telecommunications, Inc. LM Ericsson Telefon AB Gilat Satellite Networks Ltd. LSI Logic Corporation Hewlett-Packard Company Palm, Inc. International Business Machines Rockwell International Corporation Corporation </TABLE> We also serve selected emerging companies in order to establish an early outsourcing relationship that will provide us with attractive growth opportunities as the products of these emerging companies gain market acceptance. OEMs, which once pursued fully integrated business strategies, have begun outsourcing their new product design, materials procurement and management, assembly and manufacturing, order fulfillment and distribution and after-market support functions. As a result of this increasing trend by OEMs to outsource these functions, the electronics manufacturing services industry has experienced significant growth over the past several years. We have capitalized on this industry growth through a combination of strategic acquisitions and internal expansion. Our total net sales have increased from $183.2 million in 1995, our first full year of operations, to $920.7 million in 1999, a compound annual growth rate of approximately 50%. While we experienced net losses of approximately $9.7 million, $17.3 million and $6.2 million in 1996, 1997 and 1998, respectively, we reported net income of approximately $2.0 million in 1999. Technology Forecasters projects that electronics manufacturing services industry revenues will grow annually at 20% from 1998 through 2003, reaching $149 billion in 2003. Technology Forecasters also projects that the twelve electronics manufacturing services providers with revenues of greater than $500 million in 1998 will have an annual growth rate of 30% over the 1998 to 2003 period. We believe that we are well positioned to benefit from this forecasted growth. Our Business Strategy Our objective is to be the premier provider of value-added electronics design, manufacturing and related services to leading OEMs in rapidly growing industries. Our strategy to achieve this objective includes the following key elements: - establish and maintain long-term relationships with leading OEMs in rapidly growing industries; - expand our global presence; - expand our integrated design, manufacturing and related services; - continually reduce our customers' overall product costs; - reduce our customers' time-to-global market and time-to-global volume; and - actively pursue strategic acquisitions. An important element of our business strategy has been to acquire existing OEM manufacturing facilities, retain their business and employees, integrate the acquired operations and introduce new customers into the acquired facilities. As an increasing number of OEMs are divesting their manufacturing operations, we intend to selectively pursue acquisitions of OEM divestitures and other strategic opportunities. In 1995, we established a significant presence in North America, Europe and Asia by acquiring facilities from AT&T, IBM and Omnitron, a spin-off of LM Ericsson. We also acquired two Asian contract manufacturers, Connett Technologies and Topas Electronics. More recently, in 1998 we assumed operation of an IBM facility in Charlotte, North Carolina. In 1999, we acquired an existing manufacturing facility in Salt Lake City, Utah, from 3Com. The Salt Lake City facility manufactures handheld computing devices, known as Palm computing devices, and modems and network interface cards. In connection with this acquisition, we entered into a two-year supply agreement with Palm, a subsidiary of 3Com, to produce Palm computing devices and a two-year supply agreement with 3Com to produce modems and network interface cards. Additionally in 1999, we considerably enhanced our North American product design services with the acquisition of two electronics design firms, Electronic System Packaging and Ronlin Design. Our History We are organized as a Delaware corporation. In January 1995, investment entities affiliated with Donaldson, Lufkin & Jenrette, Inc. acquired substantially all of our outstanding common stock, and after this offering they will own approximately 57.5% of our common stock. Our principal executive office is located at 300 Baker Avenue, Suite 106, Concord, Massachusetts 01742 and our telephone number is (978) 287-5630. We maintain a website on the Internet at WWW.MSL.COM. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider that information as part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered by us................ 11,000,000 shares Common stock outstanding after this offering........................... 30,947,770 shares Use of proceeds........................... We plan to use the net proceeds from this offering to retire all of our outstanding senior preferred stock and to repay a portion of our indebtedness. See "Use of Proceeds." New York Stock Exchange symbol............ MSV </TABLE> The number of shares of our common stock to be outstanding after this offering is based on the number of shares outstanding as of April 2, 2000, the last day of our first fiscal quarter. It excludes: - 2,521,703 shares of common stock reserved for issuance upon the exercise of outstanding options granted under our stock option plans, of which 889,929 were exercisable at a weighted average exercise price equal to $12.12 per share; - 2,264,207 additional shares of common stock available for future grants under our stock option plans; and - 1,288,550 shares of common stock issuable upon the exercise of outstanding warrants at a weighted average exercise price equal to $4.72 per share. SUMMARY CONSOLIDATED FINANCIAL DATA The following table summarizes the consolidated financial data for our business. You should read this information together with our "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and notes included elsewhere in this prospectus. <TABLE> <CAPTION> First Fiscal Year Ended December 31, Quarter(a) ---------------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 (Unaudited) (In thousands, except per share data) <S> <C> <C> <C> <C> <C> <C> <C> Consolidated Statement of Operations Data: Net sales...................... $183,164 $474,288 $562,666 $837,993 $920,722 $206,964 $332,820 Gross profit................... 16,499 38,133 35,879 45,259 55,233 11,085 16,315 Operating income (loss)........ 5,210 3,880 (4,252) 8,695 16,411 3,157 (6,387) Income (loss) applicable to common stock before extraordinary loss........... 1,217 (9,726) (17,278) (4,039) 1,201 103 (12,954) Income (loss) per share applicable to common stock before extraordinary loss: Basic...................... $ 0.19 $ (0.74) $ (1.07) $ (0.21) $ 0.06 $ 0.01 $ (0.66) Diluted.................... $ 0.19 $ (0.74) $ (1.07) $ (0.21) $ 0.06 $ 0.01 $ (0.66) Weighted average number of shares outstanding: Basic...................... 6,430 13,159 16,172 18,746 19,384 19,053 19,673 Diluted.................... 6,430 13,159 16,172 18,746 19,608 19,208 19,673 </TABLE> <TABLE> <CAPTION> April 2, 2000 ------------------------- Actual As Adjusted(b) (In thousands) <S> <C> <C> Consolidated Balance Sheet Data: Cash and cash equivalents................................... $ 11,736 $ 11,736 Working capital............................................. 102,944 103,444 Total assets................................................ 451,236 449,696 Current portion of long-term debt and capital lease obligations............................................... 7,500 7,000 Long-term debt and capital lease obligations................ 142,215 37,575 Senior preferred stock...................................... 39,595 -- Total stockholders' equity.................................. 39,197 182,392 </TABLE> -------------------------- (a) The financial data for the first fiscal quarter of 1999 and 2000 is as of and for the three-month periods ended April 4, 1999 and April 2, 2000, respectively. (b) As adjusted gives effect to this offering, assuming net proceeds of $162.1 million. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000945980_host_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000945980_host_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..e77d235bd76e7d042befcf0e1453415ff6f80bb6
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+PROSPECTUS SUMMARY This summary highlights selected information from this prospectus and does not contain all of the information that may be important to you. For a more complete description of this offering, you should read this entire prospectus as well as the additional documents we refer to under the heading "Where To Find Additional Information." OUR COMPANY Our principal business is the acquisition of high quality, limited service and full service hotels throughout the United States, which are affiliated with national or regional hotel chains. As of May 31, 2000, our hotel portfolio included 11 hotels, located in 8 states and consisting of approximately 850 rooms. All of our hotels are leased and operated by third party lessees or operators under lease agreements or operating agreements. We were initially structured to operate as a real estate investment trust ("REIT"), but we do not qualify for and have not elected REIT status under the Internal Revenue Code. MANAGEMENT AND PRINCIPAL OFFICES There are five (5) persons on our Board of Directors. C.E. Patterson is our Chief Executive Officer and Robert E. Dixon is the Chairman of our Board of Directors. Our principal executive offices are located at 1640 School Street, Suite 100, Moraga, California 94556. Our telephone number is (925) 631-7929. Although our Board of Directors is directly responsible for managing our affairs and for setting the policies which guide us, our day-to-day operations are performed by MacKenzie Patterson, Inc., a contractual external advisor under the supervision of our Board of Directors. The duties of our advisor include, among other things, investigating, evaluating and recommending real estate investment and sales opportunities, and locating financing and refinancing sources. Our advisor also serves as a consultant in connection with our business plan and investment policy decisions made by our Board of Directors. SECURITIES TO BE OFFERED This prospectus relates to the offering of up to $50,000,000 of an indeterminate amount of our shares of Common Stock and up to $50,000,000 of an indeterminate amount of our shares of Preferred Stock. USE OF PROCEEDS Unless we advise you differently in a prospectus supplement, we will use the net proceeds from the sale of any securities under this prospectus for general corporate purposes. These general purposes may include repayment of indebtedness and existing obligations, making improvements or renovations to our hotel properties and the acquisition of additional hotel properties. SUMMARY FINANCIAL AND OTHER DATA We are providing the following summary financial information to aid you in your analysis of the financial aspects of an investment in Host Funding. The table sets forth summary historical financial data for Host Funding for the years ended December 31, 1999, 1998 and 1997. We believe that this presentation is informative to the reader. <TABLE> <CAPTION> YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 ------------------ ------------------ ------------------ <S> <C> <C> <C> OPERATING RESULTS: --------------------------------------------- GROSS REVENUES............................... $ 3,879,333 $ 3,926,042 $ 3,837,350 LOSS BEFORE INCOME TAXES..................... $(1,972,726) $ (904,316) $(1,025,514) NET LOSS..................................... $(1,972,726) $ (904,316) $(1,025,514) BASIC AND DILUTED NET LOSS PER COMMON SHARE...................................... $ (1.22) $ (0.58) $ (0.68) TOTAL ASSETS................................. $30,570,050 $32,449,658 $31,996,180 PREFERRED STOCK.............................. $ 1,500,000 -0 - -0 - SHAREHOLDERS' EQUITY......................... $ 2,789,580 $ 3,587,500 $ 4,279,337 </TABLE>
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+PROSPECTUS SUMMARY This summary highlights selected information from this prospectus, but does not contain all information that may be important to you. We encourage you to read this prospectus in its entirety before making an investment decision. CMS Oil and Gas Company is currently a wholly-owned subsidiary of CMS Enterprises Company, which in turn is a wholly-owned subsidiary of CMS Energy Corporation. Unless the context otherwise requires, references to (1) "CMS Oil and Gas," "we," "us" or "our" refers to CMS Oil and Gas Company and its subsidiaries; (2) "CMS Enterprises" refers to CMS Enterprises Company; and (3) "CMS Energy" refers to CMS Energy Corporation and its subsidiaries, other than CMS Oil and Gas. Unless otherwise indicated, this prospectus assumes that the underwriters' over- allotment option is not exercised. The September 30, 2000 estimated reserve data included throughout this prospectus are based on the report of Ryder Scott Company, L.P., independent petroleum engineers. We have provided definitions for some of the oil and natural gas industry terms used in this prospectus in "Glossary of Oil and Natural Gas Terms" beginning on page 101. ABOUT CMS OIL AND GAS COMPANY CMS Oil and Gas Company is an independent energy company engaged in oil and natural gas acquisition, exploration and development activities principally in Africa, the U.S. and South America. Formed in 1967, we have grown our operations through acquisition and exploration and are currently one of the larger U.S. based independent oil and natural gas companies. Our strategy is to increase reserves, production, cash flow and earnings by committing our resources to regions with significant growth prospects and properties that allow us to leverage our extensive operating and technical expertise. On a pro forma basis, excluding our Michigan and Ecuador properties which we recently sold, we have grown our production and estimated proved reserves at annualized rates of 12.4% and 25.4%, respectively, from January 1, 1995 through September 30, 2000. We have achieved these impressive growth rates by employing a lower-risk, disciplined international and domestic acquisition, exploration and development strategy. Internationally, we have been active in Africa and South America for over a decade and currently have concessions which have significant production, reserves and, we believe, reserve growth potential. We are actively exploiting our properties in Equatorial Guinea, Colombia, Venezuela and the Republic of Congo (Brazzaville). Domestically, we have built an attractive reserve base and acreage holdings located principally in the Powder River Basin of Wyoming and Montana and the Permian Basin of West Texas. We are actively exploring and developing these domestic properties which have increasing production and, we believe, significant reserve growth potential. We expect to spend approximately $166.0 million in 2001 to further develop our existing reserves and to pursue attractive exploration opportunities. We believe that our regional operating philosophy, acreage and reserve positions and management expertise provide us with significant opportunities for growth. As of September 30, 2000, we had estimated proved reserves of 212.0 million barrels of oil equivalent, or MMBoe, with a net present value (before taxes) of $1,164.7 million. Of these reserves, 92% were classified as proved developed. We operate properties accounting for approximately 91% of these estimated proved reserves, allowing us to better manage expenses, capital allocation and the timing of exploration and development activities. On a pro forma basis, excluding our recently sold Michigan and Ecuador properties and after giving effect to the acquisition in October 1999 of an additional interest in the Bioko Permit offshore Equatorial Guinea, we produced 7.1 MMBoe in 1999 and 6.3 MMBoe for the nine months ended September 30, 2000. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED NOVEMBER 22, 2000 SHARES [LOGO] CMS OIL AND GAS COMPANY COMMON STOCK ------------------ We are selling shares of common stock and the selling shareholder, CMS Enterprises Company, our parent company, is selling shares of common stock. We will not receive any of the proceeds from the shares of common stock sold by the selling shareholder. The underwriters have an option to purchase a maximum of additional shares from us and/or the selling shareholder to cover over-allotments of shares. Prior to this offering, there has been no public market for our common stock. The initial public offering price of the common stock is expected to be between $ and $ per share. We will apply to list our common stock on The New York Stock Exchange under the symbol "CGS." Concurrently with this offering, we plan to issue $200,000,000 aggregate principal amount of our senior subordinated notes in either the public or private markets. Neither offering is contingent upon the other. Following this offering, CMS Enterprises Company and CMS Energy Corporation, its parent company, will continue to beneficially own approximately % of our common stock and will be able to determine, or have significant influence over, the outcome of all corporate actions requiring shareholder approval. INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 9. <TABLE> <CAPTION> UNDERWRITING PROCEEDS TO PROCEEDS TO PRICE TO DISCOUNTS AND CMS OIL SELLING PUBLIC COMMISSIONS AND GAS SHAREHOLDER -------- ------------- ----------- ----------- <S> <C> <C> <C> <C> Per Share................................. $ $ $ $ Total..................................... $ $ $ $ </TABLE> Delivery of our shares of common stock will be made on or about , 2001. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. CREDIT SUISSE FIRST BOSTON The date of this prospectus is , 2001. ------------------------ TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> PROSPECTUS SUMMARY.................... 1 RISK FACTORS.......................... 9 SPECIAL NOTE REGARDING FORWARD- LOOKING STATEMENTS.................. 21 USE OF PROCEEDS....................... 22 DIVIDEND POLICY....................... 22 DILUTION.............................. 23 CAPITALIZATION........................ 24 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA...................... 25 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA...................... 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 33 BUSINESS AND PROPERTIES............... 48 MANAGEMENT............................ 73 OWNERSHIP OF CAPITAL STOCK............ 81 RELATIONSHIP AND CERTAIN TRANSACTIONS WITH CMS ENERGY AND AFFILIATES...... 82 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> DESCRIPTION OF CAPITAL STOCK.......... 90 SHARES ELIGIBLE FOR FUTURE SALE....... 92 UNDERWRITING.......................... 94 NOTICE TO CANADIAN RESIDENTS.......... 96 MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF OUR COMMON STOCK.................... 97 LEGAL MATTERS......................... 99 EXPERTS............................... 99 INDEPENDENT PETROLEUM ENGINEERS....... 99 WHERE YOU CAN FIND MORE INFORMATION... 100 GLOSSARY OF OIL AND NATURAL GAS TERMS............................... 101 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.......................... F-1 REPORT OF INDEPENDENT PETROLEUM ENGINEERS........................... A-1 </TABLE> ------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT, AS THIS DOCUMENT MAY BE AMENDED OR SUPPLEMENTED AFTER THAT DATE IN THE EVENT OF ANY SUBSEQUENT MATERIAL CHANGES DURING THE PROSPECTUS DELIVERY PERIOD SPECIFIED BELOW. DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 2001 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. The following table summarizes by region our estimated proved reserves as of September 30, 2000 and our average daily net production during the three months ended September 30, 2000: <TABLE> <CAPTION> AVERAGE DAILY NET PRODUCTION ESTIMATED PROVED RESERVES DURING THE THREE MONTHS ENDED AS OF SEPTEMBER 30, 2000 SEPTEMBER 30, 2000 ---------------------------------------------- ------------------------------------------ % OF % OF OIL AND NATURAL TOTAL PROVED OIL AND NATURAL TOTAL CONDENSATE GAS TOTAL RESERVES CONDENSATE GAS TOTAL PRODUCTION (MMBBLS)(1) (BCF) (MMBOE) (MMBOE) (MBBLS)(1) (MMCF) (MBOE) (MBOE) ----------- ------- ------- ------------ ---------- ------- ------ ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> INTERNATIONAL: Africa: Equatorial Guinea...... 50.8 587.1 148.6 70.1% 4.3 4.8 5.1 19.8% Congo.................. 14.7 -- 14.7 6.9 5.7 -- 5.7 22.2 Tunisia................ 3.2 36.0 9.2 4.3 1.0 8.5 2.4 9.3 South America: Venezuela.............. 12.5 6.4 13.6 6.4 5.4 2.9 5.9 23.0 Colombia............... 4.3 -- 4.3 2.0 1.7 -- 1.7 6.6 ---- ----- ----- ----- ---- ---- ---- ----- Total International.... 85.5 629.5 190.4 89.8 18.1 16.2 20.8 80.9 DOMESTIC: Powder River Basin...... -- 33.8 5.6 2.6 -- 4.2 0.7 2.7 West Texas.............. 5.3 48.3 13.5 6.4 0.8 9.2 2.4 9.4 Louisiana............... 0.3 10.8 2.1 1.0 0.1 9.5 1.7 6.6 Other Domestic.......... 0.3 1.4 0.4 0.2 0.1 0.3 0.1 0.4 ---- ----- ----- ----- ---- ---- ---- ----- Total Domestic....... 5.9 94.3 21.6 10.2 1.0 23.2 4.9 19.1 ---- ----- ----- ----- ---- ---- ---- ----- Total.............. 91.4 723.8 212.0 100.0% 19.1 39.4 25.7 100.0% ==== ===== ===== ===== ==== ==== ==== ===== </TABLE> --------------- (1) For purposes of this table, oil and condensate reserves includes 12.2 million barrels, or MMBbls, of international natural gas liquids, or NGLs, and oil and condensate production includes 0.9 thousand barrels, or MBbls, of international NGLs. OUR STRATEGY Our strategy is to increase reserves, production, cash flow and earnings by committing our resources to regions with significant growth potential and properties that allow us to leverage our extensive operating experience and focused technical expertise. We intend to achieve an attractive return on capital while seeking to diversify our geologic, geographic and political risks. We intend to implement our strategy as follows: FOCUS ON PROPERTIES WITH SIGNIFICANT GROWTH POTENTIAL. We focus on known hydrocarbon provinces with significant growth potential. Internationally, we hold properties which we believe have significant growth potential in West Africa, Colombia and Venezuela. Domestically, our activities are concentrated in the high-growth areas of the Powder River Basin in Wyoming and Montana and the Permian Basin in West Texas. TARGET SPECIFIC REGIONS AND LARGE ACREAGE POSITIONS. We believe that ownership of significant working interests in large acreage positions in targeted regions allows us to achieve economies of scale in the utilization of our geologic, engineering, exploration and production expertise. We own at least a 50% working interest in substantially all of our properties. The concentration of our operations permits us to manage a larger asset base with fewer staff, enabling us to add production at relatively low incremental cost. Moreover, we believe that the collective expertise we acquire as we explore and develop hydrocarbon systems containing multiple prospects should improve our drilling success rates while reducing our finding costs and diminishing our overall drilling and operating risk profile. MANAGE COST STRUCTURE, CAPITAL ALLOCATION AND RISK PROFILE BY SERVING AS OPERATOR. We have operations in seven countries on three continents, and we operate all but one of our major projects. Our operated properties accounted for approximately 91% of our estimated proved reserves as of September 30, 2000. As operator, we can better manage production performance and more effectively control costs, the allocation of capital and the timing of exploration and development of our properties. [Maps illustrating the location of international and domestic oil and gas properties] EXPAND OUR POSITION IN DOMESTIC NATURAL GAS. We hold 273,813 net acres in the Powder River Basin, which makes us one of the larger holders of coal bed methane acreage in this basin. By year-end 2000, we will have participated in the drilling of 500 wells in this basin. For the three months ended September 30, 2000, our aggregate net production from this basin averaged 4.2 million cubic feet, or MMcf, per day of natural gas. We expect this production to increase as we plan to participate in the drilling of approximately another 510 wells in 2001 and 700 wells in 2002. In the Permian Basin of West Texas, as of September 30, 2000 we held 44,750 net undeveloped acres and we have options on an additional 43,400 net undeveloped acres. Since June 1999 we have spudded 43 wells, of which 34 were producing, eight were in the process of being drilled or completed and one was a salt water disposal well. For the three months ended September 30, 2000 our aggregate net production from the Permian Basin averaged 9.2 MMcf per day of natural gas. We will continue to seek natural gas exploration, development and acquisition opportunities in these and other gas-prone areas of North America, including western Canada, in order to attain a more balanced portfolio and capitalize on the strength of the domestic gas market. LEVERAGE MANAGEMENT AND TECHNICAL EXPERTISE AND EXPERIENCE. We employ seasoned managers and technical personnel who have many years' experience operating in our targeted geographic regions. We have 38 professionals dedicated to our West Africa properties with over 246 cumulative years of area-specific management and technical experience and 26 professionals dedicated to our South American properties with over 140 cumulative years of area-specific management and technical experience. Furthermore, at least in part due to our former Antrim Shale operations in Michigan and other domestic operations, our Powder River Basin and West Texas operations employ dedicated personnel with over 55 cumulative years of domestic experience in the exploitation of tight gas sands and unconventional reservoirs. We believe that our seasoned managers and technical personnel have contributed to a significant reduction in our per-foot drilling costs over the past five years. ACQUISITIONS AND DISPOSITIONS OF PROPERTIES We continually reevaluate our portfolio of property holdings in order to maintain a disciplined adherence to our business strategy. As a result, we have sought to make acquisitions of reserves which complement our business objectives and to divest properties that dilute those objectives. Acquisition of Additional Working Interest in Equatorial Guinea In October 1999, we purchased an additional 11.5% working interest in the Bioko Permit in Equatorial Guinea for approximately $53.3 million in cash, increasing our working interest in this property from 42.5% to 54.0%. Acquisition of Methanol Production Facility We have agreed to purchase, prior to the completion of this offering, a 50% interest in Atlantic Methanol Capital Company, which owns an indirect 90% interest in a 2,500 metric ton per day methanol production facility currently in the late stages of construction on Bioko Island in Equatorial Guinea. We will purchase this interest from CMS Gas Transmission Company, a subsidiary of CMS Enterprises, by issuance of a note in the principal amount of approximately $137.0 million, which will be repaid with a portion of the aggregate proceeds from this offering and our concurrent offering of senior subordinated notes. Atlantic Methanol Capital has issued $125.0 million of limited recourse indebtedness, which is secured by, among other things, a pledge of 60% of the interest we expect to acquire. We believe that ownership of an interest in this methanol facility will allow us to further enhance the value of our natural gas reserves in Equatorial Guinea. Prior to our agreement to acquire this facility, our return on this natural gas was limited by the $0.25 per MMBtu selling price under a 20-year contract to sell up to 126,500 MMBtu per day of natural gas to the facility. Given that natural gas is typically the largest cost component in the production of methanol, we believe this gas sales contract will position this facility to be one of the lowest cost methanol producers in world markets. Recent Dispositions of Non-Strategic Assets In the first half of 2000, we sold our Michigan and Ecuador properties for aggregate cash consideration of approximately $258.7 million. We sold these properties because they had lower growth potential than our other properties, our working interest was relatively small and, with respect to Ecuador, we did not serve as operator. OUR RELATIONSHIP WITH CMS ENERGY Pending completion of this offering, we are an indirect wholly-owned subsidiary of CMS Energy Corporation. CMS Enterprises Company owns all of our outstanding stock, and CMS Energy owns all of the outstanding common stock of CMS Enterprises. CMS Energy is a major international energy company with electric and natural gas utility operations; independent power production; natural gas pipelines, gathering, processing and storage; energy marketing, services and trading; and, through us, oil and natural gas exploration and development. After completion of this offering, CMS Energy will continue to own indirectly approximately %, or approximately % if the underwriters exercise their over-allotment option in full, of the outstanding shares of our common stock. OUR EXECUTIVE OFFICES Our principal executive offices are located at 1021 Main Street, Suite 2800, Houston, Texas, 77002, and our telephone number is (713) 651-1700. THE OFFERING Common stock offered by us.......... shares Common stock offered by CMS Enterprises......................... shares Common stock to be outstanding after this offering(1).................... shares Common stock to be held by CMS Enterprises after this offering..... shares Use of proceeds..................... We intend to use the net proceeds to us from this offering, together with the net proceeds from our concurrent offering of $200.0 million aggregate principal amount of our senior subordinated notes, for repayment of debt under our bank credit facility and repayment of intercompany notes payable to CMS Energy. In the aggregate, CMS Energy will generate funds of approximately $ million from these transactions. Any remaining proceeds will be used for general corporate purposes. Proposed New York Stock Exchange symbol.............................. "CGS" --------------- (1) Excludes (a) shares of common stock issuable upon exercise of options we expect to grant to our executive officers in connection with this offering at an exercise price equal to the initial public offering price and (b) restricted shares of common stock we expect to issue to our outside directors in connection with this offering. SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The following table presents our summary historical and pro forma consolidated financial data as of the dates and for the periods shown. The data presented in these tables are derived from "Selected Historical Consolidated Financial Data," "Unaudited Pro Forma Consolidated Financial Data" and our historical consolidated financial statements and related notes included elsewhere in this prospectus. You should read those sections for a further explanation of the data summarized here. The pro forma income statement and other data for the year ended December 31, 1999 and for the nine months ended September 30, 2000 give effect to the transactions noted below as if these transactions had been completed on January 1 of the relevant period: - our acquisition in October 1999 of an additional 11.5% interest in the Bioko Permit offshore Equatorial Guinea and the disposition of our properties in Michigan and Ecuador in March 2000 and June 2000, respectively; and - the application of the estimated net proceeds to us of $140.3 million from shares sold by us in this offering and of $194.0 million from our concurrent offering of $200.0 million aggregate principal amount of our senior subordinated notes with an assumed annual interest rate of 9.5%. The pro forma balance sheet data give effect to the transactions noted below as if these transactions had been completed on September 30, 2000: - our proposed distribution of a $39.0 million note payable to our parent, CMS Enterprises; and - our pending acquisition of an indirect 45% interest in a methanol production plant for a note in the principal amount of approximately $137.0 million. The pro forma as adjusted balance sheet data give effect to these two transactions, as well as our sale of shares of common stock in this offering and our concurrent offering of $200.0 million aggregate principal amount of our senior subordinated notes and the application of the estimated net proceeds to us from these offerings of $140.3 million and $194.0 million, respectively, as if these transactions had been completed on September 30, 2000. The pro forma financial data are not necessarily indicative of the financial position or results of operations that would have been achieved if the pro forma transactions had occurred on the dates indicated or the financial position or results of operations that will be achieved in the future. The consolidated financial position and results of operations as of and for the nine months ended September 30, 2000 are not necessarily indicative of the financial position or results of operations that may be achieved as of and for the full year ending December 31, 2000. <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, -------------------------------------------- --------------------------------------- PRO FORMA PRO FORMA 1997 1998 1999 1999 1999 2000 2000 -------- -------- -------- ----------- ----------- ----------- ----------- (UNAUDITED) ------- (UNAUDITED) ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Operating Revenues: Oil and condensate..................... $ 91,364 $ 66,821 $ 82,560 $ 64,097 $ 58,858 $ 76,311 $ 66,772 Natural gas............................ 56,369 56,103 54,664 17,498 39,590 35,684 26,009 Other operating........................ 8,472 4,395 5,538 4,455 2,828 6,506 6,076 -------- -------- -------- -------- -------- -------- -------- Total operating revenues(1)...... 156,205 127,319 142,762 86,050 101,276 118,501 98,857 Operating Expenses: Depreciation, depletion and amortization......................... 48,129 38,067 43,786 21,740 31,812 28,505 22,126 Operating and maintenance.............. 44,169 44,322 51,985 35,762 37,685 40,882 34,566 Exploration costs...................... 27,747 18,976 9,456 7,914 6,142 6,160 5,822 General and administrative............. 16,517 14,250 16,819 16,294 11,056 14,775 14,945 Production taxes and other............. 5,470 5,315 4,029 571 2,484 3,289 2,169 -------- -------- -------- -------- -------- -------- -------- Total operating expenses......... 142,032 120,930 126,075 82,281 89,179 93,611 79,628 -------- -------- -------- -------- -------- -------- -------- </TABLE> <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, -------------------------------------------- --------------------------------------- PRO FORMA PRO FORMA 1997 1998 1999 1999 1999 2000 2000 -------- -------- -------- ----------- ----------- ----------- ----------- (UNAUDITED) ------- (UNAUDITED) ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> Pretax operating income.................. 14,173 6,389 16,687 3,769 12,097 24,890 19,229 Other income (expense)................... 13,146 1,233 712 (1,632) 879 32,842 (2,120) Interest expense, net of capitalized interest............................... 15,723 16,069 13,606 19,600 10,004 11,369 14,700 -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes........ 11,596 (8,447) 3,793 (17,463) 2,972 46,363 2,409 Total income tax provision (benefit)..... (6,982) (13,881) (14,082) (8,458) (9,854) (2,516) (1,853) -------- -------- -------- -------- -------- -------- -------- Net income............................... $ 18,578 $ 5,434 $ 17,875 $ (9,005) $ 12,826 $ 48,879 $ 4,262 ======== ======== ======== ======== ======== ======== ======== Net income per common share.............. $ $ $ $ $ $ $ ======== ======== ======== ======== ======== ======== ======== Average common shares outstanding........ OTHER DATA: EBITDAX(2)............................... $ 90,049 $ 63,432 $ 69,929 $ 33,423 $ 50,051 $ 59,555 $ 47,177 Capital expenditures(3).................. 120,774 142,196 153,253 142,743 55,321 85,503 83,843 </TABLE> <TABLE> <CAPTION> AS OF SEPTEMBER 30, 2000 ------------------------------------ PRO FORMA HISTORICAL PRO FORMA AS ADJUSTED ---------- --------- ----------- ------- (UNAUDITED) ------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Working capital(4).......................................... $ 71,309 $(104,691) $102,388 Investment and other assets................................. 10,026 147,026 153,026 Property, plant and equipment, net.......................... 421,735 421,735 421,735 Total assets................................................ 693,045 830,045 867,124 Long-term debt, including current portion................... 130,514 130,514 203,343 Stockholder's equity........................................ 403,969 364,969 505,219 </TABLE> --------------- (1) Total operating revenues include the effect of settlement of various hedging transactions to which we have been a party. Excluding the impact of these hedging transactions, total operating revenues for the years ended December 31, 1997, 1998 and 1999 and pro forma 1999 would have been $175.4 million, $124.4 million, $163.8 million and $109.5 million, respectively. Excluding the impact of hedging transactions, total operating revenues for the nine months ended September 30, 1999 and 2000 and pro forma 2000 would have been $108.5 million, $162.3 million and $131.3 million, respectively. For a discussion of our recent hedging activities and the expected adoption of new policies applicable to our hedging, we refer you to "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Hedging Transactions" and "Business and Properties -- Hedging Objectives," respectively. (2) EBITDAX is earnings before interest, income taxes, depreciation, depletion and amortization, other income (expense), extraordinary item and exploration costs. EBITDAX is presented to provide additional information about our ability to meet our future requirements for debt service, capital expenditures and working capital. EBITDAX should not be considered as an alternative to net income as an indicator of operating performance or as an alternative to cash flows as a measure of liquidity. (3) Costs incurred for exploration, development and acquisition activities, including such of those costs as are expensed under the successful efforts method of accounting. (4) Excludes current maturities of long-term debt. SUMMARY OIL AND NATURAL GAS RESERVE DATA The following table summarizes our estimated proved oil and natural gas reserves as of the dates indicated. The reserve estimates as of September 30, 2000 have been prepared by Ryder Scott Company, L.P., our independent petroleum engineers. The reserve estimates as of January 1, 1998, 1999 and 2000 have been prepared based on reports prepared by Ryder Scott Company and/or Lee Keeling and Associates, Inc., independent petroleum engineers, and adjusted by us to exclude our reserves in Michigan and Ecuador, which we sold in March 2000 and June 2000, respectively. For additional information relating to our oil and natural gas reserves, you should read the risk factor relating to our reserves under "Risk Factors," "Business and Properties -- Reserves" and "Supplemental Information -- Oil and Gas Producing Activities" in the notes to our consolidated financial statements included elsewhere in this prospectus. Attached to this prospectus as Appendix A is a letter from Ryder Scott Company relating to its report on our estimated proved reserves as of September 30, 2000. <TABLE> <CAPTION> AS OF JANUARY 1, ------------------------- AS OF 1998(1) 1999(1) 2000 SEPTEMBER 30, 2000 ------- ------- ----- ------------------ <S> <C> <C> <C> <C> ESTIMATED PROVED RESERVES: Oil and condensate (MMBbls)(2)............. 83.9 78.3 91.6 91.4 Natural gas (Bcf).......................... 107.8 468.5 616.8 723.8 Total (MMBoe).............................. 101.9 156.4 194.4 212.0 </TABLE> --------------- (1) Includes additional interest in the Bioko Permit offshore Equatorial Guinea, which we acquired in October 1999. (2) Includes NGLs. The following table summarizes the net present value of future cash flows and the standardized measure of discounted future net cash flows attributable to our estimated proved reserves as of September 30, 2000, discounted at 10% per annum. The net present value of future cash flows has been prepared by Ryder Scott Company using the September 30, 2000 prices of $5.13 per million British thermal units, or MMBtu, of natural gas at the Henry Hub Index and $30.83 per barrel of oil at the Cushing spot market, except where we have fixed and determinable prices or service fees provided by contracts. The standardized measure of discounted future net cash flows has been prepared by us using the net present value information prepared by Ryder Scott. <TABLE> <CAPTION> AS OF SEPTEMBER 30, 2000 ------------------ <S> <C> Net present value(millions)(1).............................. $1,164.7 Standardized measure of discounted future net cash flows (millions)(2)............................................. $ 894.9 </TABLE> --------------- (1) Net present value represents the net present value of future cash flows on a pre-tax basis calculated in accordance with SEC guidelines. Net present value is sometimes also known as PV 10. (2) The standardized measure of discounted future net cash flows represents the net present value of future cash flows attributable to our reserves after income tax, calculated in accordance with the provisions of Statement of Financial Accounting Standards No. 69. For further details concerning this calculation, see "Business and Properties -- Reserves."
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+PROSPECTUS SUMMARY This summary provides an overview of the key aspects of the offering. Because this is a summary, it may not contain all of the information that is important to you. You should read the entire prospectus carefully, including the "Risk Factors" section and the financial statements and related notes. OUR BUSINESS We develop, manufacture and market solar power cells, panels and systems that provide reliable and environmentally clean electric power throughout the world. Solar power products convert the sun's energy into electricity. Our sales are composed of primarily solar panels. After three years of research and development and three years of refining our solar power technologies in our pilot manufacturing facility, we are preparing to begin large-scale manufacturing of our solar power products in our new manufacturing facility by early 2001. We believe the proprietary and patented solar power technologies that we have developed and are currently developing will give us significant cost and product design advantages. We intend to become a leading producer of high-quality solar power products by reducing manufacturing costs, developing innovative solar power products and pursuing strategic relationships, such as our distribution and marketing relationship with Kawasaki Heavy Industries, Ltd. of Japan. OUR MARKET OPPORTUNITY The electric power industry is one of the world's largest industries, with 1998 annual revenues of approximately $900 billion. Furthermore, electricity accounts for a growing share of overall energy use. According to The Huber Mills Digital Power Report, electricity accounted for 25% of domestic energy use 25 years ago and 37% in 1999, and is projected to account for more than 50% of domestic energy use early in this century. A principal driver of this growth is increasing reliance on electricity-dependent advanced technologies, such as in the Internet and telecommunications industries. We believe that deregulation and technological innovations are creating significant opportunities for new entrants and technologies within the electric power industry, just as these changes have created similar opportunities in other regulated industries such as telecommunications, banking and transportation. We believe that distributed generation is one of the most promising areas for growth in the global electric power industry. Distributed generation is defined as point-of-use electricity generation that either supplements or bypasses the electric utility grid, and employs technologies such as solar power, microturbines and fuel cells. Distributed generation is expected to provide greater portability, reliability, power quality and user control. We believe capacity constraints, increased demand for power reliability and quality, and new environmental initiatives will drive the demand for distributed generation. The solar power market has experienced significant growth over the past 20 years. Solar power applications that are not connected to the existing utility grid, also referred to as off-grid applications, provide remote power for rural electrification in developing countries, remote homes in developed countries, water pumping, transportation signals, telecommunications and other uses. Solar power applications that are connected to the existing utility grid, also referred to as on-grid applications, are used to supplement power generated by electric utilities, typically on residential and commercial buildings. PV Energy Systems, a leading independent market research firm, estimates that on-grid shipments represented 31% of the total solar power market in 1999 and have grown at a compound annual growth rate of approximately 47% from 1990 to 1999, while off-grid shipments, representing 69% of the 1999 solar power market, have grown approximately 13% per year since 1990. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED WITHOUT NOTICE. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. Prospectus (Not Complete) Issued October 31, 2000 3,000,000 SHARES [EVERGREEN LOGO] EVERGREEN SOLAR, INC. COMMON STOCK ------------------------------ Evergreen Solar, Inc. is offering shares of common stock in a firmly underwritten offering. This is our initial public offering, and no public market currently exists for our shares. We anticipate that the initial public offering price for our shares will be between $13.00 and $15.00 per share. After the offering, the market price for our shares may be outside of this range. ------------------------------ We have applied to have our common stock quoted on the Nasdaq National Market under the symbol "ESLR." ------------------------------ INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6. ------------------------------ <TABLE> <CAPTION> Per Share Total --------- ----- <S> <C> <C> Offering Price.............................................. $ $ Discounts and Commissions to Underwriters................... $ $ Offering Proceeds to Evergreen Solar........................ $ $ </TABLE> Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Evergreen Solar, Inc. has granted the underwriters the right to purchase up to an additional 450,000 shares of common stock to cover any over-allotments. The underwriters can exercise this right at any time within thirty days after the offering. Banc of America Securities LLC expects to deliver the shares of common stock to investors on , 2000. BANC OF AMERICA SECURITIES LLC CIBC WORLD MARKETS FAC/EQUITIES ------------------------------ , 2000 OUR TECHNOLOGY SOLUTION We believe the principal challenge to the widespread adoption of solar power is reducing manufacturing costs without impairing product reliability. We believe that our proprietary and patented technologies will enable us to meet this challenge due to the following advantages: - Efficient material use. Unlike conventional crystalline silicon technologies, our proprietary and patented String Ribbon technology avoids the slicing of solid blocks of silicon. Our technology currently uses approximately half the silicon required by today's market-leading technologies, which reduces manufacturing costs. We believe we can reduce this amount to one-fifth over the next few years. - Simplified and continuous processing. We are developing continuous manufacturing processes that require fewer and simpler steps, which we believe will reduce manufacturing costs. - Reduced manufacturing capital costs. We believe our manufacturing technologies require significantly lower capital investment than most existing technologies, enabling us to more easily and quickly scale our manufacturing capacity to our needs with less capital risk. - Improved product design and performance. We believe the advanced solar panels we are developing will be thinner, easier to ship and install, longer lasting and more attractive. OUR ALLIANCE WITH KAWASAKI In December 1999, we formed a five-year strategic distribution and marketing relationship with Kawasaki for the Japanese market. According to PV Energy Systems, a leading solar power market research firm, Japan is currently the largest solar power market in the world and in 1998 accounted for 26% of worldwide solar power shipments. We have agreed to sell our solar power products in Japan exclusively through Kawasaki, and Kawasaki has agreed that we will be Kawasaki's exclusive supplier of the types of solar power products we produce for the Japanese market. We are also collaborating with Kawasaki on technical training, and have agreed to explore the possibility of joint manufacturing in Japan in the future. In addition, Kawasaki made a $5 million equity investment in our company. We believe strategic relationships such as our alliance with Kawasaki will enable us to more easily and cost-effectively enter new geographic markets, attract new customers and develop innovative solar power products. OUR STRATEGY Our principal objective is to become a leading producer of high-quality solar power products, primarily for the on-grid market and the off-grid rural electrification market. We plan to achieve this objective by aggressively pursuing the following strategies: - Expanding our manufacturing capacity by relocating to our new 56,250 square foot manufacturing facility by early 2001. - Reducing manufacturing costs without compromising product quality by capitalizing on our proprietary and patented technologies in String Ribbon wafer manufacturing, innovative solar cell fabrication and advanced solar panel designs. - Developing innovative solar power products that will be longer lasting, more attractive, and easier to deliver and install by building on our technological advantages in solar power product design and performance. - Pursuing strategic relationships to leverage the marketing, manufacturing and distribution capabilities of larger companies and to explore opportunities for additional solar power product development. - Penetrating international markets through local manufacturing of solar wafers, cells and panels using our modular manufacturing technology to achieve economies of scale at smaller capacities than conventional solar power technologies. [Captions and graphics appearing on gatefold:] [Heading that reads "EVERGREEN SOLAR SERVING TODAY'S ELECTRIC POWER APPLICATIONS" beside the Evergreen Solar logo] [Underneath heading appear six photographs: a photograph of solar panels on a rooftop over the caption "Kawasaki Heavy Industries rooftop installation, Chiba, Japan.", a photograph of the EverSun AC Module over the caption "EverSun AC Module providing supplemental home power.", a photograph of a solar panel over the caption "Single panel powering military instrumentation that requires high reliability.", a photograph of solar panels on a rooftop over the caption "Roof-mounted panels installed at a private lakeside retreat.", a photograph of solar panels over the caption "Water pumping system for a business in Tanzania.", and a photograph of a single pole-mounted solar power system over the caption "Backup power system at a day care center in Arizona."] [Captions and graphics appearing in inside front cover] [Heading that reads "EVERGREEN SOLAR'S PROPRIETARY TECHNOLOGY - DESIGNED TO IMPROVE EACH PHASE IN THE MANUFACTURING CYCLE" beside the Evergreen Solar logo] [Photograph of String Ribbon furnaces over the caption "STRING RIBBON FURNACES- Evergreen Solar's proprietary and patented String Ribbon technology uses a continuous silicon growth process to avoid the conventional slicing of silicon blocks. Furnaces in which ribbons of silicon are being produced are shown above."] [Photograph of wrap-around solar cells over the caption "WRAP-AROUND CELLS - UNDER DEVELOPMENT - Evergreen Solar's proprietary and patented solar cells, called wrap-around solar cells, are being designed to place all electrical connections on the back of the solar cell to simplify the process of assembling numerous solar cells into solar panels."] [Photograph of solar panels over the caption "POLYMER PANELS - UNDER DEVELOPMENT - Evergreen Solar's innovative frameless solar panels, including roofing tiles, are being designed to be thinner, lighter, easier to ship and install, longer lasting and more attractive."] OUR HISTORY Evergreen Solar, Inc. was incorporated in Delaware in August 1994. Our corporate offices are located at 211 Second Avenue, Waltham, Massachusetts, and our telephone number is (781) 890-7117. Our web site address is www.evergreensolar.com. Information contained in our web site does not constitute a part of this prospectus. Our registered trademarks include "Evergreen Solar" and the Evergreen Solar logo. Our trademarks include "EverSun" and "String Ribbon." Other trademarks and tradenames in this prospectus are the property of their respective owners. THE OFFERING Common stock offered................ 3,000,000 shares Common stock outstanding after this offering............................ 11,057,705 shares Use of proceeds..................... We intend to use the net proceeds of this offering to expand our manufacturing operations and distribution network, finance research and development activities, fund operating losses, and provide working capital for general corporate purposes. We may also use a portion of the net proceeds to expand our business through strategic alliances and acquisitions. Proposed Nasdaq National Market symbol.............................. "ESLR" The number of shares of common stock outstanding after this offering: - includes the conversion of all of our outstanding convertible preferred stock into an aggregate of 7,248,240 shares of common stock upon the closing of the offering; - excludes 617,696 shares issuable upon the exercise of all outstanding stock options under our 1994 Stock Option Plan as of June 30, 2000 with a weighted average exercise price of $1.42 per share, 151,603 of which were exercisable as of June 30, 2000; - excludes 636,027 shares issuable upon the exercise of all warrants outstanding as of June 30, 2000 with an exercise price of $4.33 per share; and - excludes 65,553 shares issuable upon the exercise of all options granted under our 1994 Stock Option Plan between July 1, 2000 and September 30, 2000 with a weighted average exercise price of $6.45 per share, 15,687 of which were exercisable as of September 30, 2000; and 127,019 shares issuable upon the exercise of options to be granted under our 1994 Stock Option Plan immediately prior to this offering with an exercise price equal to the public offering price per share. ------------------------ Unless otherwise specifically stated, information throughout this prospectus assumes: - no exercise of the underwriters' over-allotment option; - the conversion of all of our outstanding convertible preferred stock into an aggregate of 7,248,240 shares of common stock upon the closing of the offering; - the effectiveness of our third amended and restated certificate of incorporation, which reflects 30,000,000 shares of authorized common stock and authorizes 1,000,000 shares of undesignated preferred stock, and the adoption of our amended and restated by-laws, in each case effective as of the closing of the offering; and - a 1-for-2.165 reverse stock split to be effected immediately prior to the consummation of this offering. SUMMARY FINANCIAL DATA The following tables set forth summary financial data for our company. You should read this information together with the financial statements and notes to those statements appearing elsewhere in this prospectus. The pro forma data and pro forma as adjusted data give effect to the conversion of all of our outstanding convertible preferred stock into 7,248,240 shares of our common stock upon the closing of this offering. The pro forma as adjusted data also reflect the sale of 3,000,000 shares of common stock by us in this offering at an assumed initial public offering price of $14.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------- ----------------- 1997 1998 1999 1999 2000 ------- ------- ------- ------- ------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Product revenues............................... $ 153 $ 163 $ 189 $ 81 $ 97 Research revenues.............................. 556 1,395 2,113 1,070 1,008 ------- ------- ------- ------- ------- Total revenues............................ 709 1,558 2,302 1,151 1,105 Operating expenses: Cost of product revenues..................... 1,007 955 991 447 970 Research and development expenses............ 2,051 2,373 3,085 1,334 1,682 Selling, general and administrative expenses.................................. 809 917 1,303 581 733 Stock-based compensation expense............. -- -- 18 -- 110 ------- ------- ------- ------- ------- Total operating expenses.................. 3,867 4,245 5,397 2,362 3,495 ------- ------- ------- ------- ------- Operating income (loss)........................ (3,158) (2,687) (3,095) (1,211) (2,390) Net interest income............................ 102 165 163 98 515 ------- ------- ------- ------- ------- Net income (loss).............................. (3,056) (2,522) (2,932) (1,113) (1,875) ------- ------- ------- ------- ------- Accretion of redeemable convertible preferred stock........................................ (537) (953) (1,231) (610) (1,256) ------- ------- ------- ------- ------- Net income (loss) attributable to common stockholders................................. $(3,593) $(3,475) $(4,163) $(1,723) $(3,131) ======= ======= ======= ======= ======= Net income (loss) per common share (basic and diluted)..................................... $ (4.47) $ (4.33) $ (5.18) $ (2.15) $ (3.88) ======= ======= ======= ======= ======= Shares used in computing basic and diluted net income (loss) per common share............... 803 803 803 803 807 </TABLE> <TABLE> <CAPTION> JUNE 30, 2000 ------------------------------------------ PRO FORMA AS ACTUAL PRO FORMA ADJUSTED -------- -------------- ------------ (UNAUDITED) (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short-term investments...... $ 16,143 $16,143 $54,153 Working capital........................................ 16,416 16,416 54,426 Total assets........................................... 19,522 19,522 57,532 Total long-term debt................................... -- -- -- Total redeemable convertible preferred stock........... 35,766 -- -- Total stockholders' equity (deficit)................... (16,423) 19,343 57,353 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0000948599_hob_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0000948599_hob_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is intended to highlight information found in greater detail elsewhere in this prospectus. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk Factors." As used in this prospectus, the terms "HOB Entertainment," "we," "us," and "our" refer to HOB Entertainment, Inc. HOB Entertainment, Inc. Our Business We are a leading live music entertainment company with a network of premier clubs and concert venues, a strong brand name and an integrated Internet and digital strategy. We own, operate or exclusively book 27 live music venues including: . seven widely known House of Blues(R) clubs and . 20 premier amphitheatre, theatre and arena concert venues. We believe that we are the second largest operator of amphitheatre, theatre and arena concert venues, and the second largest promoter of live concerts in the United States. We believe that we are also the largest promoter of live concerts in Canada through a joint venture we operate. The live concert performances that we promote and distribute reflect a diverse array of music genres, including pop, rock, hard rock, Latin, hip hop, rap, blues, R&B, jazz, soul, funk, swing, country & western, gospel and contemporary, and appeal to an equally diverse demographic base. We promote more than 3,500 live music performances annually and are able to attract high-quality talent by offering a state-of-the-art live performance environment, venues of varying types and sizes and unique multimedia promotional opportunities for artists. We are uniquely positioned to capitalize on the live performances we present at our venues by digitally capturing a wide array of audio and visual live music content and distributing it through a variety of media, including our web site, www.hob.com, other forms of digital media, television and radio. We began distributing live music entertainment over the Internet in 1995. We believe we were the first to offer both free and pay-per-view streaming of live music entertainment on the Internet. We believe that we are well-positioned to be a leader in the distribution of high-quality live music entertainment through the Internet and other digital media because of our fully integrated operations and the strength of our widely recognized House of Blues brand name. We believe that consumers and artists identify our House of Blues brand with a high-quality live music experience and we seek to continually reinforce our brand as "The Home of Live Music" SM and "The Home of Live Music on the Internet." SM Our Unique Business Model We believe that there is a large, unmet demand for live music entertainment worldwide. We believe that the live music entertainment business has historically fulfilled only a limited portion of consumer demand because of inherent constraints of time, geography, availability and cost of live music performances. We believe there are numerous economically and demographically advantageous markets which are under-served by existing live music venues. Additionally, we believe that the high costs of producing, marketing and distributing a single live music event have limited the selection of live music content currently available to consumers. We believe that the continued development of new digital distribution media will result in significant opportunities to efficiently and effectively meet consumer demand for live music entertainment. Our business provides consumers with the opportunity to experience high- quality live music both at our premier clubs and concert venues and through the Internet and other forms of digital and traditional media. Key components of our unique business model include: . our wide array of concert venue types and sizes; . our widely recognized and powerful House of Blues brand name; . our talent buyers' and promoters' strong relationships with both emerging and established artists, their representatives and record labels; . our direct access to high-quality live music content created at our clubs and concert venues; . our technical expertise and unique ability to digitally capture, repurpose and distribute live music content at little incremental cost, thus creating new, innovative, revenue-generating products; . our "first-mover" advantage and experience in creating an online source for high-quality live music, which enables us to cultivate hob.com as "The Home of Live Music on the Internet;" and . our strategic relationships with leading music content, Internet, digital distribution and technology companies. Our Strategy Our objective is to be the leading source for high-quality, diverse live music entertainment through a powerful multimedia distribution platform. Our key strategies to fulfill this objective include: . Positioning our House of Blues brand as the source for the highest- quality live music entertainment across a variety of music genres. We believe that House of Blues is one of the most widely recognized consumer brands for live music in North America. We intend to continue to develop House of Blues as an internationally recognized brand synonymous with high-quality live music entertainment. . Expanding and capitalizing on long-term relationships with artists, their representatives and record labels to maximize our access to high- quality live music content. We intend to nurture our strong industry relationships and enhance artists' attraction to our state-of-the-art live concert facilities and multimedia promotional opportunities in order to expand our access to a wide array of high-quality live music content. . Growing our position as a leading live music venue operator and promoter. We intend to develop additional House of Blues clubs and larger capacity concert venues in targeted markets. We also intend to continue to expand our promotions businesses to further increase our access to artists and our penetration of important geographical markets. . Leveraging the opportunities created by our fully integrated operations to become the leading multimedia producer and distributor of live music entertainment products. We intend to capitalize on our position as a leading live music venue operator and promoter, as well as our multimedia capabilities, to continue booking and showcasing high-quality artists. We intend to continue to use our existing, cost-effective production infrastructure to digitally capture and distribute high- quality live music content which will generate new sources of revenue for ourselves, artists, their representatives and record labels. . Continuing to pursue strategic alliances and relationships to enhance our access to live music entertainment content and expand our distribution network. We intend to continue to enter into strategic relationships with leading content providers in order to gain greater access to live music content. Furthermore, we intend to continue to enter into strategic relationships with leading telecommunications companies, Internet service providers, online portals and other music- related web site operators in order to enhance our Internet and other digital distribution capabilities, generate new Internet traffic for our hob.com web site and broaden our interaction with web users. Corporate Information We were incorporated in Texas in June 1992 under the name House of Blues, Inc. and reincorporated in Delaware in December 1992 under the same name. On June 18, 1993, House of Blues, Inc. changed its name to HOB Entertainment, Inc. Our executive offices are located at 6255 Sunset Boulevard, 16th Floor, Hollywood, California 90028, our telephone number is (323) 769-4600 and our fax number is (323) 769-4601. We maintain a web site at www.hob.com. Information contained on our web site does not constitute a part of this prospectus. The Offering <TABLE> <C> <S> Common stock offered.......................... shares Common stock outstanding after this offering.. shares Use of proceeds............................... We intend to use the net proceeds of this offering . to redeem outstanding shares of our 12% senior redeemable preferred stock and our 10% senior convertible preferred stock; . to repay a portion of our outstanding indebtedness under our senior credit facility; and . for working capital and other general corporate purposes. Proposed Nasdaq National Market symbol........ HOBE </TABLE> ---------------- The shares of common stock outstanding after this offering is based on the shares of common stock outstanding at , 2000 and includes the conversion of outstanding shares of our convertible preferred stock into shares of common stock upon the closing of this offering. The number of shares of common stock outstanding after this offering excludes the following: . shares of common stock issuable upon exercise of outstanding warrants to purchase common stock with a weighted average exercise price of $ per share; . shares of common stock issuable upon exercise of outstanding stock options under our 1993 Amended and Restated Stock Option Plan with a weighted average exercise price of $ per share, of which are immediately exercisable as of , 2000; and . shares of common stock issuable upon exercise of stock options granted outside our employee plans with a weighted average exercise price of $ per share. Please see "Management--Employee Benefit Plans" and "Description of Capital Stock" for more information. Conventions Which Apply to this Prospectus Unless we indicate otherwise, all information in this prospectus reflects the following: . the completion of a one-for- reverse stock split that will occur upon the closing of this offering; . the conversion of outstanding shares of our convertible preferred stock into shares of common stock upon the closing of this offering; and . no exercise of the underwriters' over-allotment option to purchase up to additional shares of common stock. References in this prospectus to the offering refer to the initial public offering of our common stock being made by this prospectus. Summary Historical and Pro Forma Consolidated Financial Data The following table sets forth summary historical and pro forma consolidated financial data about us. On September 10, 1999, we acquired Universal Concerts, Inc., which we renamed House of Blues Concerts, Inc., and its affiliates that comprised the Universal Concerts business from Universal Studios, Inc. and its Canadian affiliate, both subsidiaries of The Seagram Company Ltd. The pro forma consolidated statement of operations data gives effect to our acquisition of Universal Concerts, Inc. and its affiliates as if we completed the acquisition on December 29, 1997. You should read this information together with our historical and pro forma financial statements and the notes to those statements appearing elsewhere in this prospectus and the information under "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> Years Ended Six Months Ended -------------------------------------- ----------------------------------- December 29, December 28, December 27, December 27, June 27, December 26, 1996 1997 1998 1998 1999 1999(a) ------------ ------------ ------------ ------------ -------- ------------ (unaudited) (unaudited) (in thousands, except per share data) <S> <C> <C> <C> <C> <C> <C> Consolidated Statement of Operations Data: Historical Revenues................ $ 36,108 $ 69,548 $ 87,783 $ 45,074 $ 52,003 $107,263 Operating loss.......... (27,085) (18,184) (7,394) (3,904) (4,910) (4,888) Net loss................ (26,814) (18,890) (8,526)(b) (4,340) (8,945) (6,880) Basic and diluted loss per share.............. (8.20) (6.66) (3.89)(c) (2.12) (3.57) (4.55) Pro Forma(d) Revenues.......................................... $203,872 $125,793 $120,499 $163,426 Operating loss.................................... (10,131) (515) (11,129) (1,851) Net income (loss)................................. (13,272) 315 (18,790) (2,219) Basic and diluted loss per share.................. (9.63) (2.08) (8.99) (3.99) </TABLE> <TABLE> <CAPTION> As of December 26, 1999 ------------------------- Pro Forma Actual(a) As Adjusted(e) --------- -------------- (unaudited) (in thousands) <S> <C> <C> Consolidated Balance Sheet Data: Cash and cash equivalents............................ $ 35,993 $ Working capital...................................... 4,412 Total assets......................................... 323,274 Total long-term debt, including current portion...... 72,570 Total preferred stock................................ 287,986 Total stockholders' equity (deficit)................. (102,029) </TABLE> <TABLE> <CAPTION> Years Ended Six Months Ended -------------------------------------- ----------------------------------- December 29, December 28, December 27, December 27, June 27, December 26, 1996 1997 1998 1998 1999 1999(a) ------------ ------------ ------------ ------------ -------- ------------ (unaudited) (unaudited) (in thousands) <S> <C> <C> <C> <C> <C> <C> Other Operating Data: EBITDA(f)............... $ (24,649) $ (10,789) $ (1,989) $ (1,083) $ (1,345) $ 1,044 Operating cash flow..... (13,813) (18,009) (10,452) (4,410) 920 (3,215) Investing cash flow..... (35,336) (14,422) (4,340) (2,318) (5,713) (162,132) Financing cash flow..... 31,708 22,910 18,373 9,122 2,567 199,914 Pro Forma EBITDA(d)(f).. 9,128 11,764 (3,521) 8,988 </TABLE> - ------- Notes: (a) Includes results of Universal Concerts after the September 10, 1999 acquisition date. (b) Net loss is from continuing operations before cumulative effect of change in accounting principle. (c) Basic and diluted loss per share is before cumulative effect of change in accounting principle. (d) This note provides supplemental pro forma segment data consistent with the historical segment data provided in Note 16 to our historical financial statements and the pro forma segment data provided in the notes to the pro forma consolidated statements of operations. <TABLE> <CAPTION> Year Ended Six Months Ended ------------ ----------------------------------- December 27, December 27, June 27, December 26, 1998 1998 1999 1999 ------------ ------------ -------- ------------ (in thousands) <S> <C> <C> <C> <C> Attributed revenues(g) Clubs.................. $ 83,679 $ 41,879 $ 51,712 $ 57,374 Concerts............... 178,105 122,840 87,580 144,556 Digital................ 274 159 141 302 Other.................. 3,830 3,036 150 82 -------- -------- -------- -------- Total attributed revenues .............. 265,888 167,914 139,583 202,314 Less attributed revenues from managed unconsolidated joint ventures.............. (62,016) (42,121) (19,084) (38,888) -------- -------- -------- -------- Total revenues as reported............... 203,872 125,793 120,499 163,426 Operating income (loss) Clubs.................. (3,805) (2,319) (1,072) (975) Concerts............... (2,737) 3,389 (6,219) 5,327 Digital................ (3,390) (1,752) (3,023) (4,824) Other.................. (199) 167 (815) (1,379) -------- -------- -------- -------- Total operating loss.... (10,131) (515) (11,129) (1,851) EBITDA(f) Clubs.................. 1,136 171 2,261 1,643 Concerts............... 11,117 12,847 (2,176) 13,227 Digital................ (3,218) (1,644) (2,863) (4,599) Other.................. 93 390 (743) (1,283) -------- -------- -------- -------- Total EBITDA............ 9,128 11,764 (3,521) 8,988 </TABLE> (e) Reflects the impacts of issuances of warrants and preferred stock consummated subsequent to December 26, 1999, the conversion of shares of our convertible preferred stock into shares of our common stock and this offering. (f) We define EBITDA as operating income plus depreciation and amortization, plus venue pre-opening costs, plus our attributed share of the EBITDA from joint ventures which we manage and account for under the equity method. You should not consider EBITDA in isolation or as a substitute for operating income, net income, net cash provided by operating activities or any other measure for determining our operating performance or liquidity that is calculated in accordance with GAAP. EBITDA, as we calculate it, may not be comparable to calculations of similarly titled measures presented by other companies. (g) We define attributed revenue as total consolidated revenues plus our share of the revenues from joint ventures which we manage and account for under the equity method.
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+PROSPECTUS SUMMARY You should read the following summary together with the entire prospectus, including the more detailed information in our consolidated financial statements and related notes appearing elsewhere in this prospectus. You should carefully consider, among other things, the matters discussed in "Risk Factors." Transmeta develops and sells software-based microprocessors and develops additional hardware and software technologies for Mobile Internet Computers, which are portable computing and communication devices designed to provide an Internet experience comparable to that traditionally provided by a desktop personal computer, or PC. Our Crusoe family of microprocessors is targeted at the notebook and Internet appliance segments of the Mobile Internet Computer market, and we provide Crusoe microprocessors to suit both existing and emerging products within these market segments. We believe that our microprocessors are also well suited for other developing markets requiring low power consumption, including a variety of home electronic devices connected to the Internet. As people are becoming increasingly mobile, they are dependent on use of the Internet from remote locations to conduct their business and personal lives. In addition, the emergence of high-speed wired and wireless Internet access is enabling a new generation of notebook and Internet appliance products that offer significant improvements in portability and provide users with a full-featured Internet experience. International Data Corporation, or IDC, forecasts that the market for notebook computers will grow to 35 million units in 2003, while the market for Internet appliances and similar devices that access the Internet will grow to more than 75 million units in the same time frame. Rather than using the traditional method of designing microprocessors primarily with hardware, we have developed a novel approach that incorporates a substantial portion of microprocessor functionality into our software. We believe that our approach to designing microprocessors allows us to provide the first microprocessor solution that simultaneously satisfies a wide range of user requirements for Mobile Internet Computers, including compatibility with PC software, long battery life and performance comparable to a desktop PC. The primary components of our Crusoe microprocessors are as follows: CODE MORPHING SOFTWARE. Our Code Morphing software provides a compatibility bridge between PC software and our own proprietary instruction set, using a translation process that is indiscernible to the end user. In addition, Code Morphing software continuously learns about and re-optimizes software applications a user is running to improve power usage and performance. VERY LONG INSTRUCTION WORD (VLIW) PROCESSOR HARDWARE. Our VLIW processor hardware provides for parallel processing of instructions to achieve high performance. Because we use Code Morphing software to perform much of the functionality typically found in hardware, our microprocessors use a relatively simple hardware design that is optimized for low power consumption in addition to speed. We are focused on extending our leadership in software-based microprocessor technologies and expanding the number of products and end markets that use Crusoe microprocessors. We have assembled a team of engineers with comprehensive systems expertise to help manufacturers quickly resolve any system design issues and achieve rapid time-to-market for next generation products built with our Crusoe microprocessors. In addition, we have established, and intend to continue to establish, relationships with computer manufacturers to design and develop next generation Mobile Internet Computers. We introduced our first Crusoe microprocessors in January 2000 and recognized our first product revenue from these products in the first half of 2000. Through June 30, 2000, we had manufactured only limited quantities of our products. In September 2000, we began volume shipments. As of September 30, 2000, we had shipped products in volume only to Sony Electronics and Fujitsu Ltd. Sony Electronics has announced that it will use our Crusoe microprocessor in its new VAIO PictureBook C1VN notebook computer. Fujitsu has announced that it will use our Crusoe microprocessor in its new FM Biblo Loox T and FM Biblo Loox S notebook computers. Hitachi has announced three notebook computers and an Internet appliance incorporating Crusoe. Gateway has announced that it will use Crusoe in Internet appliances still under development with America Online. NEC has announced that it will use our Crusoe microprocessor in its new LaVie MX notebook computer. We have a history of substantial losses, and at September 30, 2000, we had an accumulated deficit of approximately $147.5 million. THE OFFERING Common stock offered by Transmeta..... 13,000,000 shares Common stock to be outstanding after this offering......................... 127,752,858 shares Use of proceeds....................... We intend to use the net proceeds from this offering to increase working capital and for other general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol......... TMTA The number of shares of our common stock to be outstanding immediately after this offering is based on the number of shares outstanding on September 30, 2000 and assumes the conversion of our outstanding shares of preferred stock into 73,174,342 shares of common stock and the conversion of a convertible promissory note into 1,200,000 shares of common stock upon the closing of this offering. The number of shares of our common stock that will be outstanding immediately after this offering excludes: - 14,775,142 shares of common stock issuable upon exercise of options outstanding at September 30, 2000 with a weighted average exercise price of $3.68 per share; - 2,066,432 shares of common stock issuable upon exercise of warrants outstanding at September 30, 2000 with a weighted average exercise price of $1.15 per share; and - 10,007,414 additional shares available for issuance under our stock purchase and option plans. We were incorporated in California in March 1995 and reincorporated in Delaware in October 2000. Our principal executive offices are located at 3940 Freedom Circle, Santa Clara, California 95054, and our telephone number at that address is (408) 919-3000. Transmeta()(TM), the Transmeta logo, Crusoe()(TM), the Crusoe logo, Code Morphing()(TM) and LongRun()(TM) are trademarks of Transmeta Corporation in the United States and other countries. All other trademarks or trade names appearing in this prospectus are the property of their respective owners. SUMMARY CONSOLIDATED FINANCIAL DATA The following tables provide summary consolidated financial data and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes appearing elsewhere in this prospectus. The pro forma information in the tables below reflects the conversion of our outstanding shares of preferred stock into 73,174,342 shares of common stock and the conversion of a convertible promissory note into 1,200,000 shares of common stock upon the closing of this offering. The pro forma as adjusted column of consolidated balance sheet data also reflects the sale of 13,000,000 shares of common stock offered by us at an assumed initial public offering price of $17.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The financial data as of September 30, 2000 and for the nine months ended September 30, 1999 and 2000, and the pro forma data, are derived from financial statements that are unaudited. <TABLE> <CAPTION> PERIOD FROM MARCH 3, 1995 (DATE OF NINE MONTHS INCORPORATION) ENDED THROUGH YEAR ENDED DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ----------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 -------------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Product revenue............................. $ 250 $ -- $ -- $ 326 $ 76 $ 76 $ 3,817 License revenue............................. -- -- 1,400 28,000 5,000 5,000 -- Total revenue............................. 250 -- 1,400 28,326 5,076 5,076 3,817 Gross profit................................ 250 -- 1,400 28,255 5,058 5,058 1,512 Total operating expenses.................... 1,295 7,640 17,412 36,083 46,151 32,517 76,670 Operating loss.............................. (1,045) (7,640) (16,012) (7,828) (41,093) (27,459) (75,158) Net loss.................................... (1,009) (7,471) (16,187) (10,090) (41,089) (27,990) (71,464) Net loss per share -- basic and diluted..... $ (.05) $ (.37) $ (.79) $ (.44) $ (1.51) $ (1.05) $ (2.26) Weighted average shares outstanding -- basic and diluted............................... 20,000 20,000 20,576 23,074 27,236 26,707 31,652 Pro forma net loss per share -- basic and diluted (unaudited)....................... $ (.52) $ (.71) Pro forma weighted average shares outstanding -- basic and diluted (unaudited)............................... 79,564 100,030 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 2000 ------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (IN THOUSANDS) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 64,076 $ 64,076 $268,106 Working capital............................................. 75,171 75,171 279,201 Total assets................................................ 149,426 149,426 353,456 Long-term obligations, net of current portion............... 26,192 25,770 25,770 Total stockholders' equity.................................. 94,652 95,074 299,104 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001002119_illuminet_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001002119_illuminet_prospectus_summary.txt
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+SUMMARY This summary highlights some of the information in this prospectus and summarizes the material terms of this offering. It is not complete and may not contain all of the information that you should consider before deciding to purchase our common stock. You should read the entire prospectus carefully, including the "Risk Factors" and the financial statements and the notes to those statements. Unless otherwise noted, this prospectus (1) reflects the retroactive restatement of our accounts to reflect our transaction with National Telemanagement Corporation ("NTC"), which was accounted for as a pooling of interests, and (2) assumes the underwriters do not exercise their over-allotment option. ILLUMINET OUR COMPANY We operate the largest unaffiliated Signaling System 7 ("SS7") network in the United States and are a leading provider of complementary intelligent network and SS7 services to telecommunications carriers. Connection to our network gives carriers access to the system of signaling networks of nearly the entire U.S. public-switched telecommunications infrastructure through a single source. Our SS7 network also provides us with an established platform from which we can provide other value-added services. SS7 is the industry standard used by almost every switched telephone network operator in the United States and Canada to identify available network routes and designate the circuits to be used for each individual telephone call. SS7 networks also provide access to intelligent network services, such as caller identification, calling card validation and other specialized database access functions, all of which are performed in the seconds it takes to complete a call. SS7 networks are specialized packet-switched data networks that provide these control functions and services in parallel with separate voice networks. We have been a provider of telecommunications database services since 1981 and of critical SS7 network services since 1990. In 1999, we generated revenues of $116.7 million, operating income of $21.8 million and net income of $13.6 million. NETWORKS & SERVICES Through our networks, we provide: - SS7 connectivity, switching and transport; - intelligent network services, including local number portability and support for roaming between wireless carriers and various specialized database services; and - prepaid wireless account management and access to wireless roaming for unregistered wireless users. We also provide: - clearinghouse services to facilitate payment among telecommunications carriers; and - network usage software applications. Our SS7 network is composed of specialized SS7 switches, sophisticated computers and databases strategically located across the country. These elements interconnect our customers and the largest U.S. telecommunications carriers through leased lines. Our SS7 network serves over 700 network services customers, including incumbent local exchange carriers, competitive local exchange carriers, long distance companies, wireless telecommunications providers and Internet service providers. OUR COMPETITIVE STRENGTHS Our competitive strengths include: - SINGLE SOURCE ACCESS TO SS7 NETWORK AND INTELLIGENT NETWORK SERVICES. We provide our customers connectivity to the signaling networks of nearly the entire U.S. public-switched telecommunications infrastructure and an array of network-enabled services through a single source. We believe most of our customers choose not to build in-house SS7 networks due to the significant capital and technical expertise required to install and manage necessary SS7 connections with the largest U.S. telecommunications carriers. - ESTABLISHED CUSTOMER RELATIONSHIPS BASED ON INDEPENDENCE AND NEUTRALITY. As the largest non-carrier affiliated SS7 network provider, we have fostered business relationships with AT&T, MCI WorldCom, Sprint, all of the regional Bell operating companies, many major competitive local exchange carriers and a significant number of wireless operators, independent telephone companies and interexchange carriers. We believe that our independence and neutrality significantly enhance our attractiveness as a provider of outsourced SS7 services. In addition, our established relationships provide us with the opportunity to sell additional services to a broad base of customers. - PROVEN BUSINESS MODEL WITH STABLE AND RECURRING REVENUE STREAMS. Our networks provide us with a profitable base of recurring service revenue. We believe this recurring revenue stream gives us greater clarity as to our projected financial performance and future capital needs and significantly enhances our planning processes. We also believe that the costs incurred by a carrier in moving to a competitor's SS7 network are relatively high, further strengthening the stability of our revenue base. - ABILITY TO LEVERAGE OUR EXISTING SS7 NETWORK PLATFORM TO OFFER NEW AND INNOVATIVE SERVICES. Our SS7 network design is advanced and flexible, which enables us to rapidly add services to our existing offerings with limited service disruptions or additional costs. We have added and expect to continue to add new services which we believe will complement the services we currently provide to existing customers, and therefore increase revenues per customer, as well as help us add new customers. - ABILITY TO LEVERAGE OUR PLANNED OSS MEDIATION PLATFORM TO PROVIDE ADDITIONAL SERVICES. We believe our planned OSS mediation platform, which will use our SS7 network and established interfaces with multiple carriers to facilitate communication among their back office or operational support systems ("OSS"), will enable us to provide additional services to existing customers and to attract new customers. Because of the complexity of establishing intercarrier interfaces, we believe there is a growing need for outsourced OSS mediation and that we are well equipped to provide these services. - POSITIONED TO BE THE SS7 SERVICE PROVIDER OF CHOICE TO INTERNET PROTOCOL-BASED CARRIERS. As one of the largest providers of outsourced SS7 and intelligent network services in the United States, we are strategically positioned to provide those services to emerging Internet protocol-based carriers who must access existing public-switched telecommunications networks to serve their rapidly growing customer bases. OUR GROWTH STRATEGY Our growth strategy consists of the following key elements: - BROADEN OUR CUSTOMER BASE BY TARGETING EMERGING CARRIERS. We intend to continue to aggressively grow our customer base by targeting new telecommunications carriers as they enter the market. These carriers include competitive local exchange carriers, integrated communications providers, wireless carriers and Internet service providers. - PROVIDE NEW SERVICES TO HELP DIFFERENTIATE OUR CUSTOMERS FROM THEIR COMPETITORS. We intend to continue to deliver new and enhanced services and applications that will enable our customers to broaden their service offerings and thus improve their market position. - GENERATE ADDITIONAL REVENUE THROUGH OUR SS7 NETWORK USAGE MEASUREMENT CAPABILITIES. We believe that the traffic and usage data we capture from our network SS7 can be used to enhance the billing and network management capabilities of our customers. We are developing services that will enable our customers to use this information to more efficiently operate their networks and develop targeted marketing plans. - BECOME THE PREFERRED PROVIDER OF SS7-BASED SERVICES TO EMERGING INTERNET PROTOCOL-BASED CARRIERS. We believe that providing carrier-class intelligent network capabilities is one of the biggest challenges facing emerging Internet protocol-based carriers. We have worked with hardware providers, including Cisco and Lucent, to certify new SS7-related equipment for emerging Internet protocol-based carriers. We intend to pursue additional opportunities to provide intelligent network capabilities using emerging Internet protocol-based technologies. - DEVELOP AND MARKET OSS MEDIATION SERVICES. We are developing an OSS mediation service to meet the growing demand for interface between carriers to execute complex transactions. We intend to initially focus on existing customers before expanding to new customers. We believe that our mediation service will be more attractive to carriers than the alternative of developing their own interfaces with other carriers. - STRENGTHEN OUR MARKET PRESENCE THROUGH SELECT ACQUISITIONS. We will actively seek to acquire companies that possess complementary service offerings. Companies that have developed signaling-based services or services that can be improved or delivered more economically through the use of our SS7 network can provide us incremental revenues and net income. OUR INDUSTRY Key industry trends that are expanding our business opportunities include: - DEREGULATION. Deregulation has opened telecommunications markets to many new service providers, many of which use our SS7 services. In addition, deregulation has opened specific service opportunities to competition, such as the provision of toll-free number database services, line information database services and local number portability. - GROWING NEED FOR VALUE ADDED SERVICES. Increased competition in the telecommunications industry is forcing carriers to differentiate themselves by providing advanced, value-added services, such as personal toll-free numbers, caller identification and real time billing validation. Providing many of these services requires SS7 connectivity and simultaneous database access through an SS7 network. Most U.S. independent local exchange carriers and a significant number of competitive local exchange carriers use us to provide these types of services. - GROWING NEED FOR INTER-CARRIER MEDIATION SERVICES. Competitive local exchange carriers must establish interfaces with several other carriers to provide services to their customers. Establishing an interface with another carrier can be difficult and time consuming. We believe that because these interfaces are not standardized a significant burden is put on competitive local exchange carriers to establish these interfaces. As a result, we believe that there is a growing need for mediation services to assist in the establishment of these interfaces. RECENT DEVELOPMENTS On June 30, 2000, we acquired NTC through a merger of NTC with one of our subsidiaries. NTC is a developer and provider of advanced applications for the wireless communications industry, including prepaid wireless account management and services for wireless users that do not have service contracts, who we refer to as "unregistered users." We offer unregistered users the ability to roam on wireless carriers' networks, a service we refer to as "unregistered wireless roaming service." NTC's account management and services enable wireless network providers to offer a wide variety of features intended to control costs and manage usage, including roaming management, multiple rate plans, call blocking, account history and calling pattern monitoring. NTC's services also allow wireless providers to instantly calculate a customer's account balance, while providing for automatic debiting and replenishment of customer accounts. For the year ended December 31, 1999, NTC reported net revenues of $16.1 million and net income of $630,000. Between December 31, 1998 and December 31, 1999, NTC's net revenues increased 56%, and for the quarters ended March 31, 1999 and March 31, 2000, its net revenues increased 52%. In connection with the merger, we issued 1,888,944 shares of common stock and options to purchase up to 80,297 shares of common stock to NTC stockholders and employees. The transaction has been accounted for as a pooling of interests, and accordingly, our accounts have been retroactively restated to reflect the merger. THE OFFERING Common stock offered by: Illuminet................... 400,000 shares Selling stockholders........ 3,792,262 shares Total.................. 4,192,262 shares Common stock to be outstanding after this offering(1)........... 32,150,480 shares Over-allotment option............ 628,839 shares Use of proceeds.................. We intend to use the net proceeds we receive: - to fund potential acquisitions; - to develop new and improved services; - to maintain and expand our network; and - for general corporate purposes. We cannot specify with certainty all of the particular uses for the net proceeds. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders. See "Use of Proceeds." Dividend policy.................. We have never declared or paid any dividends on our common stock. We do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our board of directors. Nasdaq National Market Symbol.... ILUM ------------------------ (1) Includes shares issued in our transaction with NTC, as shown under "Capitalization." The number of shares of our common stock that will be outstanding after the offering does not take into account 3,298,904 shares of our common stock issuable upon exercise of outstanding options, which have a weighted average exercise price of $4.25 a share, as of March 31, 2000. SUMMARY SUPPLEMENTAL CONSOLIDATED FINANCIAL AND OTHER DATA We derived the following summary supplemental consolidated financial data for the years ended December 31, 1997, 1998 and 1999 from our consolidated supplemental financial statements, which have been audited by Ernst & Young LLP, independent auditors. We derived the summary supplemental consolidated financial data as of and for the three months ended March 31, 1999 and 2000 from our unaudited supplemental consolidated financial statements, which, in our opinion, reflect all adjustments (consisting of only normal and recurring accruals) necessary to present fairly our financial position and results of operations for those periods. Other financial data and other data are unaudited. Interim results do not necessarily indicate the results that you may expect for any other interim period or for the full year. You should read this summary information in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our supplemental consolidated financial statements and the notes to those financial statements that are included in the back of this prospectus. You should read the following information with the data in the table on the next page: - Our summary supplemental consolidated financial and other data provided below is derived from the supplemental consolidated financial statements included in this prospectus, which reflects our transaction with NTC, which was accounted for as a pooling of interests. Our supplemental financial statements will become our historical financial statements after the financial statements covering the date of our transaction with NTC are issued. - The 1997 income tax benefit reflects the benefits of net operating loss carryforwards of $2.4 million. In addition, the 1997 income tax benefit includes a benefit of $0.9 million attributable to the reversal of substantially all of the remaining previously recorded deferred tax valuation allowance due to improved operating results. - Earnings per share-basic is based on net income available to common stockholders divided by the weighted average number of common shares outstanding. Earnings per share-diluted includes the dilutive effect of outstanding convertible securities, warrants, debentures and common stock options. - Long-term obligations, less current portion includes: (1) obligations under capital leases, less current portion, and (2) long-term debt, less current portion. - Capital expenditures includes purchases and capital leases of property and equipment. - Customers is the number of entities that received a bill from us during the relevant period, including, in some cases, subsidiaries of consolidated groups and individual locations of a single company. - Signaling points represents the number of connections to our SS7 network. These points may be either individual switches or connections to other companies' signaling transfer points with networks attached to them. - The pro forma supplemental balance sheet data as of March 31, 2000 reflects the impact of the conversion of convertible redeemable preferred stock into common stock in connection with our transaction with NTC. - The pro forma as adjusted supplemental balance sheet data as of March 31, 2000 reflects the receipt of our estimated net proceeds from this offering. <TABLE> <CAPTION> THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, --------------------------------------- ------------------------- 1997 1998 1999 1999 2000 ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA) <S> <C> <C> <C> <C> <C> SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME DATA: Revenues: Network services.............. $ 52,829 $ 70,577 $ 109,317 $ 23,315 $ 32,944 Clearinghouse services........ 6,723 6,232 5,851 1,539 1,315 Network usage software applications............... 3,468 5,406 1,532 231 270 ----------- ----------- ----------- ----------- ----------- Total revenues............. 63,020 82,215 116,700 25,085 34,529 Expenses: Carrier costs................. 17,893 25,506 28,004 6,945 6,512 Operating..................... 18,857 23,288 36,623 7,539 9,164 Selling, general and administrative............. 10,382 12,882 16,656 3,702 4,888 Depreciation and amortization............... 7,622 10,131 13,610 2,751 3,643 ----------- ----------- ----------- ----------- ----------- Total expenses............. 54,754 71,807 94,893 20,937 24,207 ----------- ----------- ----------- ----------- ----------- Operating income................ 8,266 10,408 21,807 4,148 10,322 Interest and other income, net........................... 501 767 2,020 278 1,800 Interest expense................ (1,770) (1,966) (2,060) (484) (371) ----------- ----------- ----------- ----------- ----------- Income before income taxes...... 6,997 9,209 21,767 3,942 11,751 Income tax provision (benefit)..................... (676) 3,826 8,132 1,492 4,468 ----------- ----------- ----------- ----------- ----------- Net income...................... $ 7,673 $ 5,383 $ 13,635 $ 2,450 $ 7,283 =========== =========== =========== =========== =========== SUPPLEMENTAL PER SHARE DATA: Earnings per share -- basic..... $ .33 $ .22 $ .52 $ .10 $ .23 Earnings per share -- diluted... $ .30 $ .19 $ .45 $ .08 $ .21 Weighted average common shares -- basic............... 23,073,310 23,027,833 24,630,095 22,716,671 31,114,235 Weighted average common shares -- diluted............. 27,477,934 27,798,781 29,246,941 27,841,831 33,512,649 SUPPLEMENTAL OTHER FINANCIAL DATA: Capital expenditures............ $ 12,639 $ 19,678 $ 17,346 $ 2,626 $ 2,780 SUPPLEMENTAL OTHER DATA: Customers....................... 417 544 735 584 766 Signaling points................ 533 686 765 706 770 </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, 2000 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- <S> <C> <C> <C> SUPPLEMENTAL CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents, and securities available for sale... $107,870 $107,870 $123,900 Property and equipment, net................................. 50,381 50,381 50,381 Total assets................................................ 200,638 200,638 216,668 Long-term obligations, less current portion................. 14,163 14,163 14,163 Convertible Redeemable Preferred Stock...................... 4,273 -- -- Stockholders' equity........................................ $142,883 $147,156 $163,186 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001003265_eloquent_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001003265_eloquent_prospectus_summary.txt
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+SUMMARY The items in the following summary are described in more detail later in this prospectus. This summary provides an overview of selected information and does not contain all the information you should consider. Therefore, you should also read the more detailed information contained in this prospectus, including the financial statements and related notes. ELOQUENT Eloquent provides rich media solutions for business-to-business communications. "Rich media" is the combination of video, audio, sophisticated graphics and text into a synchronized, interactive, navigable and searchable format. We have developed a unique and proprietary combination of software and services that we use together, in what we call a "solutions platform," to create and deliver rich media presentations, or "events," on behalf of our customers. These events can be delivered over Web-based channels or CD-ROMs to be viewed by end users on their personal computers. "Web-based channels" includes the World Wide Web, internal computer networks known as "intranets," and computer networks known as "extranets" that provide access to customers and business partners but not to the public. Our customers, which are primarily large companies, use our solutions to communicate time-sensitive, business-critical information to target audiences in an effective, consistent and cost-efficient manner. Customers use our events for product launch briefings to sales teams, strategic and corporate alignment presentations to employees, sales pitches to potential customers, employee training seminars, business partner education programs and complex customer support activities. Since our inception in March 1995, we have produced over 700 rich media events consisting of over 3,500 hours of content for more than 150 customers. Business-to-business communications involve the dissemination of corporate information to audiences both inside and outside an organization, including employees, customers and business partners. The ability to communicate effectively with these audiences represents an important competitive advantage for companies under increasing pressure to operate more efficiently and to better serve the needs of their customers. Companies disseminate information to their target audiences through a variety of means and a number of different technologies that, although useful, do not always provide the most efficient and robust means of delivering communications. The emergence of the Web as a global communications medium has enabled companies to gather information, communicate and conduct business electronically over Web-based channels. Furthermore, the development of streaming media technologies and the proliferation of multimedia-capable computers has enabled the delivery of continuous "streams" of video and audio content, including our rich media events. Most streaming media applications, however, have been focused on entertainment applications and do not provide for synchronization of multiple media or sophisticated search and navigation capabilities. Additionally, a number of technical challenges have limited the adoption of streaming media technology for business-to-business communications. We believe our customers recognize the benefits of outsourcing the production and delivery of rich media events to Eloquent because we have specialized rich media expertise, the ability to deliver a complete set of products and services, and the ability to achieve economies of scale in producing rich media events. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Our platform includes all of the software and services our customers need to deliver rich media business-to-business communications to their target audiences. We have developed what we believe to be the most effective, comprehensive and robust platform available for producing and delivering rich media events for business-to-business communications that are: - easier to produce and deliver -- we have the capability to produce rich media events for our clients in a turnkey fashion. By "turnkey" we mean that we do substantially all of the work to produce an event ourselves from start to finish, rather than providing our customers with tools with which to produce an event themselves. In addition, by delivering rich media events through the Web, intranets, extranets and CD-ROMs, we enable our customers to reach their entire target audience easily. - more effective -- our rich media events provide users with business-critical information in an interactive, searchable and navigable format that we believe makes our events more engaging than other forms of business-to-business communication, enhancing comprehension and retention of the information. - faster -- we enable our customers to disseminate critical information rapidly due to our unique and efficient production process and Web-based channel and CD-ROM delivery. Using our proprietary scheduling software and production expertise, we can produce a typical four- to five-hour rich media event in nine business days, compared to months for alternative solutions. - less expensive -- our solutions eliminate many of the costs associated with traditional business presentations, including airline, hotel and other travel expenses for event participants, facilities costs and the opportunity costs associated with diverting employees from their work schedules. We believe that these benefits can result in a number of strategic and competitive advantages for our customers, including accelerating the commercial launch of new products, increasing employee productivity, strengthening important business relationships and enhancing sales and marketing efforts. Our objective is to enhance our leadership position in rich media solutions for business-to-business communications. Key elements of our strategy include: - further penetration of our existing customer base of large corporate accounts; - expansion into additional industries; - identification of new applications for our solutions; - expansion and enhancement of our existing set of customer solutions by broadening the functionality of our platform and adding value-added services; and - expansion into international markets. OFFICE LOCATION Our principal executive offices are located at 2000 Alameda de las Pulgas, Suite 100, San Mateo, California 94403 and our telephone number is (650) 294-6500. Our primary Web site is located at www.eloquent.com. Information contained on our Web site is not part of this prospectus. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE OFFERING Common stock offered...................... 4,500,000 shares Common stock and common stock warrants outstanding after the offering............ 16,917,267 shares Offering price............................ $ per share Use of proceeds........................... We will receive net proceeds from this offering of approximately $ million. We intend to use approximately $23.0 million of these net proceeds for the repayment of debt. We intend to use $7.5 million to $9.0 million of the remaining net proceeds to increase the size of our sales and marketing organizations, and $1.5 million to $2.0 million to expand research and development efforts in order to enhance the functionality of our solutions platform. We anticipate using the remaining net proceeds for working capital and for general corporate purposes, including international expansion. See "Use of Proceeds" on page 17 for a more detailed description of our plans to use the net proceeds of this offering. Proposed Nasdaq National Market symbol.... ELOQ The common stock and common stock warrants outstanding after the offering set forth above are based on the total number of shares of common stock outstanding on December 31, 1999 and shares issuable upon exercise of warrants outstanding on that date. These warrants are exercisable for 1,685,387 shares of common stock. Of these warrants, warrants to purchase 14,450 shares will expire upon the closing of this offering if not exercised by that time. The number of shares and warrants set forth above excludes: - 3,327,342 shares of common stock issuable upon exercise of stock options outstanding as of December 31, 1999; and - 2,162,849 shares of common stock reserved for issuance pursuant to future grants of stock options made under our equity incentive plans and our stock purchase plan. Unless otherwise specifically stated, information contained in this prospectus: - does not take into account the exercise of the underwriters' over-allotment option to purchase up to 675,000 shares of our common stock; and - gives effect to the conversion of all of our outstanding preferred stock into common stock upon the closing of this offering. "Eloquent" and the Eloquent logo are trademarks of Eloquent, Inc. that are registered in the United States and other jurisdictions. All other trademarks or service marks appearing in this prospectus are trademarks or service marks of the respective companies that use them. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUMMARY FINANCIAL DATA <TABLE> <CAPTION> INCEPTION (MARCH 29, 1995) THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, ----------------------------------------- 1995 1996 1997 1998 1999 ----------------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Content production services................... $ 55 $ 944 $ 3,519 $ 6,750 $ 8,412 Software licenses and maintenance................................... -- -- 406 993 2,959 Professional services......................... -- -- -- -- 1,121 -------- -------- -------- -------- -------- Total revenues......................... 55 944 3,925 7,743 12,492 -------- -------- -------- -------- -------- Cost of revenues: Content production services................... -- 405 3,717 5,730 5,021 Software licenses and maintenance............. -- -- 50 445 646 Professional services......................... -- -- -- -- 1,496 -------- -------- -------- -------- -------- Total cost of revenues................. -- 405 3,767 6,175 7,163 -------- -------- -------- -------- -------- Gross margin.................................. 55 539 158 1,568 5,329 -------- -------- -------- -------- -------- Operating expenses: Sales and marketing........................... 81 846 3,785 6,812 8,856 Research and development...................... 86 659 845 1,510 1,959 General and administrative.................... 208 597 1,876 2,211 3,499 Stock-based compensation...................... -- -- -- 992 5,756 -------- -------- -------- -------- -------- Total operating expenses............... 375 2,102 6,506 11,525 20,070 -------- -------- -------- -------- -------- Loss from operations................. (320) (1,563) (6,348) (9,957) (14,741) Interest expense and other charges.............. 1 (21) (100) (259) (2,175) Interest income and other income................ -- 49 79 208 301 -------- -------- -------- -------- -------- Net loss........................................ $ (319) $ (1,535) $ (6,369) $(10,008) $(16,615) ======== ======== ======== ======== ======== Net loss per share, basic and diluted........... $ (1.33) $ (1.97) $ (4.59) $ (4.74) $ (5.47) ======== ======== ======== ======== ======== Weighted average shares, basic and diluted...... 240 781 1,388 2,111 3,036 ======== ======== ======== ======== ======== Pro forma net loss per share, basic and diluted....................................... $ (1.63) ======== Pro forma weighted average shares, basic and diluted....................................... 10,195 ======== </TABLE> The following table summarizes our balance sheet as of December 31, 1999: - on an actual basis; and - on a pro forma basis to reflect the sale of 4,500,000 shares of common stock offered hereby at an assumed initial offering price of $13.00 per share, after deducting estimated underwriting discounts, commissions and offering expenses, the application of $20.0 million of the net proceeds from the offering to repay our subordinated notes and the application of $3.0 million of the net proceeds from the offering to repay borrowings under our existing line of credit. <TABLE> <CAPTION> DECEMBER 31, 1999 ---------------------- ACTUAL PRO FORMA ------- ----------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $17,174 $47,301 Working capital............................................. 12,706 45,833 Total assets................................................ 25,265 53,724 Long-term obligations and subordinated notes................ 9,254 777 Total stockholders' equity.................................. 7,688 47,626 </TABLE> Long-term obligations and subordinated notes presented above in the "Actual" column are net of $11.5 million of unamortized debt discount. Total stockholders' equity presented above in the "Pro Forma" column reflects a loss on extinguishment of debt of $8.0 million. For more detail on the accounting treatment of our subordinated notes and their repayment, see "Management's Discussion and Analysis of Financial Condition and Results of Operations"
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001003439_diva_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001003439_diva_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information about us, the sale of our common stock in this offering, and our financial statements and notes to those financial statements that appear elsewhere in this prospectus. Our Business We are a leading provider of interactive, on-demand television products and services. We are the only company currently commercially deploying an end-to- end video-on-demand service in North America. We have also recently introduced an interactive program guide as a stand-alone product. Both our video-on-demand service and interactive program guide operate on industry-standard digital set- top boxes and operating systems and provide flexible and cost-effective interactive television solutions for cable and other broadband network operators, which we refer to as network operators. We are also enhancing our core technology to support new services including on-demand timeshifted television, interactive targeted advertising and television-based e-commerce. We have recently deployed the newest version of our video-on-demand services at three Insight Communications cable systems, one MediaOne cable system and one Charter Communications cable system. Our interactive program guide has recently been deployed on a limited basis at two cable operators' systems. We are currently developing a video-on-demand capability for NTL, the largest cable network operator in the United Kingdom, under an agreement we entered into in September 1999. In May 2000, in a separate transaction NTL entered into an agreement to make a $6.0 million strategic investment in our company. In May 2000, we entered into an agreement with Charter Communications to launch our video-on-demand service as part of its core digital cable package in a number of its cable systems. The agreement covers Charter's Los Angeles and Atlanta area systems, and provides incentives for Charter to deploy our service in other markets. Under the agreement, Charter will purchase our video-on- demand hardware, license our video-on-demand and navigation software, and obtain the full range of our video-on-demand support services, including content acquisition and management. We continue to pursue discussions with major cable operators in the United States as well as internationally for deployment and expansion of our services at selected sites. We entered into development arrangements with OpenTV Corp. in March and April 2000 to integrate our video-on-demand system and our interactive program guide into OpenTV's interactive television software platform. In connection with these arrangements, OpenTV made a $5.0 million investment in our company. We also entered into a development agreement with Liberate Technologies in May 2000 to integrate our video-on-demand system into Liberate's interactive television software platform. In a separate transaction, also in May 2000, Liberate made a $4.0 million investment in our company. Our Opportunity The market opportunity for interactive, on-demand television products and services is being driven by demand from cable operators for new services to increase their share of home entertainment industry revenues. According to Veronis, Suhler & Associates, television-based home entertainment revenues were $57 billion in 1999 and are expected to reach $76 billion in 2003. In 1999, approximately $18.7 billion of this market was comprised of videotape rentals and sales and approximately $1.9 billion was comprised of pay-per-view. We believe that video-on-demand offers consumers compelling advantages over video store rentals. We also believe interactive, on-demand television services will allow cable television operators to offer consumers more programming choices and differentiate their product offerings from those of direct broadcast satellite operators. In addition, we believe these services will further drive penetration of the cable operators' new digital cable program package. In order to provide these services, cable operators are deploying digital set-top boxes and upgrading their networks. According to Paul Kagan Associates, by the end of 2000, cable operators will deploy 10 million digital set-top boxes and upgrade 75% of their networks to two-way-capable hybrid fiber coaxial plant. The rollout of this digital infrastructure coupled with significant reductions in the cost of technology has made the wide-scale deployment of video-on-demand, interactive program guides and other interactive services a compelling economic opportunity for cable television operators. DIVA Benefits As the first video-on-demand provider to be commercially deployed with several cable operators, we believe that we are well-positioned to capture significant market share for video-on-demand and other interactive, on-demand products and services. We believe that the benefits of our interactive, on- demand television products and services include: Compelling On-Demand Entertainment. Our video-on-demand services offer subscribers immediate access to hundreds of viewing choices including feature films, library titles, children's programming, special interest videos and other programming content. This service combines pause, fast forward and rewind control with high-quality digital picture and sound at prices comparable to home video rentals without inconvenient trips to the video store, late return fees and tape rewind charges. Our interactive program guide, which combines programming information and full motion video, serves as an easy-to-use television portal to help consumers navigate the myriad of channels and services offered by digital cable. Significant Revenue Opportunity. We believe our interactive, on-demand television products and services provide a platform that enables cable operators to increase customer penetration for their digital tier and generate significant incremental revenue from the ordering of on-demand movies and other programming. We also believe our interactive program guide provides operators with additional revenue opportunities from promotions and advertising. Comprehensive and Flexible Solution. Our products and services have been field-proven and, accordingly, reduce both the time-to-market and the operational challenges associated with implementing interactive television services. We offer our core suite of software and hardware products, including sophisticated back office support, as an end-to-end solution or as individual components. Our architecture is designed to scale to support thousands of titles, serve the full range of cable systems and integrate our products and services with major digital broadcast platforms, including Motorola (formerly General Instrument) and Scientific-Atlanta in the United States and PACE in Europe. Our Strategy Our objective is to be the leading provider of interactive, on-demand television products and services for cable and other broadband network operators. Our strategy includes the following key elements: . leverage our first mover advantage; . aggressively expand our customer base; . pursue commercial opportunities for our interactive program guide; . enhance and expand our products and services; . pursue industry relationships; . adapt our technology and services for other broadband networks; and . penetrate global markets. Other Information We are an early stage company with limited commercial operating history. We have generated revenues of $1.5 million and have incurred net losses of approximately $292.3 million since our inception through December 31, 1999. Our principal executive offices are located at 800 Saginaw Drive, Redwood City, California 94063, and our telephone number is (650) 779-3000. We were incorporated in Delaware in June 1995. We maintain a Web site at www.divatv.com. Information contained on our Web site does not constitute part of this prospectus. Our logo and certain titles and logos of our products mentioned in this prospectus are our service marks or trademarks. Each trademark, trade name or service mark of any other company appearing in this prospectus belongs to its holder. The Offering <TABLE> <C> <S> Common stock offered................................ shares Common stock to be outstanding after this offering.. shares Proposed Nasdaq National Market symbol.............. DVTV Use of proceeds..................................... For general corporate purposes, including working capital and to fund operating losses and capital expenditures. </TABLE> ---------------- Unless we specifically state otherwise, whenever we present the number of shares of our common stock outstanding, this number is based on shares outstanding as of December 31, 1999, assuming the cash exercise of warrants to purchase 2,398,794 shares of common stock and preferred stock and the conversion of all outstanding preferred stock into common stock upon the closing of this offering, and excludes: . an aggregate of 1,666,667 shares of our common stock issuable upon the conversion of preferred stock issued to OpenTV, NTL and Liberate subsequent to December 31, 1999; . 8,608,935 shares of our common stock and preferred stock issuable upon the exercise of outstanding options at a weighted average exercise price of $2.56 per share; . 4,876,800 shares of our common stock and preferred stock issuable upon exercise of outstanding warrants (which will not expire on the effective date of this offering) at a weighted average exercise price of $0.18 per share; . 1,336,942 shares of our common stock issuable upon exercise of warrants at an exercise price of $0.005 per share to be issued on May 15, 2000 to the holders of warrants issued in connection with our debt financing in May 1996; . shares of our common stock available for future issuance as of December 31, 1999 under our existing and proposed stock plans; and . up to shares of common stock that the underwriters have the option to purchase to cover over-allotments. Between January 1, 2000 and March 31, 2000, our board of directors granted options to purchase an additional 277,430 shares of common stock at a weighted average exercise price of $3.35 per share under our 1995 Stock Plan. SUMMARY CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> Six Months Ended Year Ended June 30, December ----------------------------------- ---------------- 1996 1997 1998 1999 1998 1999 ------- ------- ------- -------- ------- ------- (unaudited) (in thousands, except per share data) <S> <C> <C> <C> <C> <C> <C> Consolidated Statement of Operations Data: Revenue................ $ -- $ -- $ 82 $ 293 $ 120 $ 1,115 Operating expenses..... 11,300 24,647 46,224 82,235 33,379 34,282 Acquired in-process research and development(1)........ -- 4,061 24,321 -- -- -- ------- ------- ------- -------- ------- ------- Operating loss......... 11,300 28,708 70,463 81,942 33,259 33,167 Equity in (income) loss of investee........... (357) 2,080 1,631 -- -- -- Interest (income)...... (65) (410) (5,632) (8,645) (4,991) (3,099) Interest expense....... 395 3,590 13,730 33,967 16,408 18,817 ------- ------- ------- -------- ------- ------- Net loss before extraordinary item.... 11,273 33,968 80,192 107,264 44,676 48,885 Extraordinary loss on early extinguishment of debt(2)............ -- -- 10,676 -- -- -- ------- ------- ------- -------- ------- ------- Net loss............... 11,273 33,968 90,868 107,264 44,676 48,885 Accretion of redeemable warrants.............. -- 91 763 969 522 304 ------- ------- ------- -------- ------- ------- Net loss attributed to common stockholders... $11,273 $34,059 $91,631 $108,233 $45,198 $49,189 ======= ======= ======= ======== ======= ======= Basic and diluted net loss per share: Loss before extraordinary item.... $ 1.03 $ 2.22 $ 4.92 $ 6.31 $ 2.65 $ 2.79 Extraordinary loss- early extinguishment of debt(2)............ -- -- 0.65 -- -- -- ------- ------- ------- -------- ------- ------- Net loss per share..... $ 1.03 $ 2.22 $ 5.57 $ 6.31 $ 2.65 $ 2.79 ======= ======= ======= ======== ======= ======= Shares used in per share computation..... 10,895 15,316 16,447 17,147 17,063 17,600 ======= ======= ======= ======== ======= ======= </TABLE> <TABLE> <CAPTION> December 31, 1999 ------------------------- Pro Forma Actual As Adjusted (3) -------- --------------- (unaudited) (in thousands) <S> <C> <C> Consolidated Balance Sheet Data: Cash, cash equivalents and investments............... $ 52,907 Short-term investments............................... 57,262 Total current assets................................. 113,591 Total assets......................................... 133,331 Total current liabilities............................ 5,009 Long-term debt....................................... 294,564 Total stockholders' deficit.......................... (168,653) </TABLE> - ------- (1) In connection with the acquisition of Norstar Multimedia, Inc. in July 1996 and Sarnoff Real Time Corporation in April 1998, we wrote off acquired in- process research and development of $4.1 million and $24.3 million, respectively, as one-time charges to operations for the fiscal years ended June 30, 1997 and 1998, respectively. (2) In February 1998, we received $250.0 million in gross proceeds from an offering of 463,000 units consisting of warrants to purchase common stock and senior discount notes with an aggregate principal amount at maturity of $463.0 million. In connection with this unit offering, we retired all of our subordinated discount notes issued in a previous offering resulting in an extraordinary loss of approximately $10.7 million ($0.65 per share), for the fiscal year ended June 30, 1998. (3) Reflects the exercise of warrants to purchase 186,000 shares of our common stock, the exercise of warrants to purchase 2,212,794 shares of our preferred stock and the conversion of these 2,212,794 shares and an additional 22,239,605 shares of preferred stock into an equivalent number of shares of our common stock upon the closing of this offering, the sale of $15.0 million of preferred stock in April and May 2000 which will convert into 1,666,667 shares of common stock upon the closing of this offering and the sale of shares of our common stock at an assumed initial public offering price of $ per share, and the application of the net proceeds from such sale.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001005002_connected_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001005002_connected_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should carefully read the entire prospectus, including "Risk Factors" and the financial statements before making an investment decision. We are a leading provider of application services and licensed software applications that support personal computers, or PCs, over the Internet and corporate intranets. With our eSupport solution, users can solve their PC problems themselves online, virtually anywhere, 24 hours a day. Our solution automates diagnosis and self-repair, supports upgrades, and restores data and applications lost due to such problems as virus damage, lost or stolen PCs, and hard drive crashes. We believe that our solution is applicable worldwide to companies of all sizes in all industries. We have developed critical technologies that we believe enable our solution to efficiently support the demands of the largest enterprises as well as millions of small companies and individual users. International Data Corporation, an independent market research firm, estimates worldwide PC purchases will increase from 112 million in 1998 to 190 million in 2003. Advances in PC hard drive capacity, distributed software applications, and trends toward remote usage of laptops have created environments in which the majority of information and applications resides on personal computers. While businesses have invested in storage management systems to provide high availability for their servers and mainframes, they have been unable to provide similar availability for PCs. In attempting to support large and growing deployments of PCs, information technology, or IT, staffs are faced with many unique challenges: - the sheer volume, complexity, and diversity of applications and data; - uncooperative, non-technical user communities; - frequent application changes, amended files, and hardware upgrades; - frequently lost or damaged systems in uncontrolled environments; and - increasing remote PC usage. We believe most attempts to provide PC application and data availability have failed due to the high costs and inefficacy of manually-intensive support processes. The Internet provides a new vehicle for automating the PC support process. This provision of online PC support, known as eSupport, is estimated by International Data Corporation to reach a $14 billion market opportunity in 2003. We use the Internet and our proprietary technologies to overcome the challenges of PC support. Using the power of the Internet, our eSupport solution automatically captures and centrally stores a PC's profile, including data, applications, and settings, without user involvement. Through a combination of proprietary data reduction techniques, hierarchical storage management methods and computationally efficient software design, we can support millions of individual users, or the largest enterprise. We plan to leverage these core technologies to provide a broader range of eSupport capabilities as well as support additional networked devices. Our worldwide sales strategy is to focus direct sales efforts on larger enterprises while expanding our partnerships with application service providers, Internet service providers, PC manufacturers, and IT service outsourcers to address small and medium size businesses. Along with our strategic partners, we currently provide eSupport application services to approximately 12,000 PCs, and our eSupport solution is currently licensed by over 50 customers for over 85,000 PCs. Some of our customers include Ariba, Inc., General Electric Company, GTE Internetworking, Hewlett-Packard, Honeywell, Koch, and Visa. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED APRIL 19, 2000 [CONNECTED FPO LOGO] - -------------------------------------------------------------------------------- SHARES COMMON STOCK - -------------------------------------------------------------------------------- This is the initial public offering of Connected Corporation and we are offering shares of our common stock. We have applied to list our common stock on The Nasdaq National Market under the symbol "CNTD." The stockholders listed on page 61 under the caption "Certain Transactions -- Preemptive Rights" have the right to purchase up to a total of shares in our offering. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 4. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS CONNECTED <S> <C> <C> <C> Per share $ $ $ Total $ $ $ </TABLE> We have granted the underwriters the right to purchase up to additional shares to cover over-allotments. DEUTSCHE BANC ALEX. BROWN BEAR, STEARNS & CO. INC. WIT SOUNDVIEW THE DATE OF THIS PROSPECTUS IS , 2000. THE OFFERING <TABLE> <S> <C> Common stock offered by Connected................. shares Common stock to be outstanding after this shares offering........................................ Use of proceeds................................... General corporate purposes, including working capital. See "Use of Proceeds." Proposed Nasdaq National Market Symbol............ CNTD </TABLE> The number of shares to be outstanding upon completion of this offering is based on shares outstanding as of March 31, 2000. This number assumes the conversion into common stock of all of our preferred stock outstanding on that date and certain warrants upon the closing of this offering, and excludes: - 8,278,617 shares of common stock issuable upon exercise of stock options and warrants outstanding at March 31, 2000, at a weighted average exercise price of $1.02 per share; - 500,000 shares of common stock reserved for issuance pursuant to our employee stock purchase plan; and - 3,496,141 shares of common stock reserved for issuance pursuant to stock options not yet granted under all of our stock option plans. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------------- ----------------- 1995(1) 1996 1997 1998 1999 1999 2000 ------- ------- ------- ------- ------- ------- ------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: License..................... $ -- $ 13 $ 112 $ 1,166 $ 3,157 $ 329 $ 1,833 Subscription................ -- 9 210 975 2,586 543 915 Other....................... -- 10 230 899 196 117 36 ------- ------- ------- ------- ------- ------- ------- Total revenues....... -- 32 552 3,040 5,939 989 2,784 Gross profit.................. -- -- -- 2,438 5,011 795 2,337 Loss from operations.......... (128) (3,330) (4,550) (2,878) (4,458) (868) (2,974) Net loss...................... (126) (3,231) (4,381) (2,794) (4,910) (892) (2,722) Net loss available to common stockholders................ (126) (3,231) (4,381) (2,794) (6,140) (892) (2,722) Net loss per share -- basic and diluted................. $ -- $ (4.43) $ (1.51) $ (0.77) $ (1.31) $ (0.21) $ (0.51) Weighted average common shares outstanding -- basic and diluted..................... -- 729 2,909 3,634 4,679 4,329 5,369 Pro forma net loss per share -- basic and diluted..................... $ (0.36) $ (0.11) Pro forma weighted average common shares outstanding -- basic and diluted..................... 16,920 25,582 </TABLE> - ------------------------- (1) Data presented for the period from our inception, October 31, 1995, through December 31, 1995. [Graphics appearing on inside front cover: Diagram of two arrows which follow tip to tail to create a circle with the text "IT Staff Overload" at the center and the following text positioned on the arrows around the circumference of the circle: "PC Deployment," "Virus Damage," "Lost Data," "Software Upgrades,"Application Corruption," "Lost or Stolen PCs," "Company Access to Data," "Hardware Upgrades," "System Failures," "Drive Crashes," and "PC Retirement." The diagram is entitled "Problems of the PC eSupport Lifecycle." Positioned around the outside of the diagram are pictures of four different types of computing devices. Our logo appears in the lower right-hand corner.] <TABLE> <CAPTION> MARCH 31, 2000 -------------------------------------------- PRO FORMA AS ACTUAL PRO FORMA ADJUSTED ------------ ------------ ------------ (UNAUDITED) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents.............................. $18,346 $18,346 $ Current assets......................................... 21,191 21,191 Total assets........................................... 22,853 22,853 Current liabilities.................................... 4,253 4,253 Redeemable convertible preferred stock................. 23,582 -- Total stockholders' equity............................. (4,982) 18,600 </TABLE> The pro forma information in the tables above gives effect to the conversion into common stock of all outstanding shares of preferred stock and of certain warrants upon the closing of this offering. The pro forma as adjusted balance sheet data as of March 31, 2000 also gives effect to the sale of shares of common stock that we are offering under this prospectus, assuming an initial public offering price of $ per share and after deducting underwriting discounts and commissions and estimated offering expenses. We are a Delaware corporation. We were formed in October 1995. We have incurred net losses since we were formed. For the year ended December 31, 1999, we recognized total revenue of approximately $5.9 million and incurred a net loss of approximately $4.9 million. For the quarter ended March 31, 2000, we recognized total revenue of approximately $2.8 million and incurred a net loss of approximately $2.7 million. We have not yet achieved profitability, and as of March 31, 2000, we have accumulated losses of approximately $18.2 million. Our principal offices are located at 24 Prime Parkway, Natick, Massachusetts 01760 and our telephone number is (508) 652-7300. Our website is located at www.connected.com. The information contained on our website does not constitute part of this prospectus. The names "Connected," "SendOnce," "eWare," "Connected TLM," "Delta Block," "eConnect," "Powered by Connected," "Transparent, Effortless and Certain," and our logo are names and service marks that belong to us. We claim rights in other names and marks. This prospectus also contains the trademarks and trade names of other entities which are the property of their respective owners. ------------------------- Except where we note otherwise, all information in this prospectus: - assumes the completion of a 3-for-1 split effected prior to the completion of this offering; - assumes the over-allotment option granted by us to the underwriters has not been exercised; and - assumes the conversion of all shares of our outstanding convertible preferred stock and of certain warrants into 20,212,665 shares of common stock occurs immediately prior to completion of this offering. [Graphics appearing on gatefold following inside front cover: Diagram entitled "Connected eSupport Solution." The diagram is divided into three vertical segments. The left most segment appears under the caption "License Software Application" and contains six pictures of the users of an intranet-based eSupport Solution with the following overlaid on these pictures: "LAN PCs," "Mobile Users," and "Remote Offices." At the bottom of this segment is a picture of a data center with the text "Corporate Data Center" overlaid on the picture. These pictures are arranged around two arrows which form a rectangle with the word "Intranet" centered in the middle. The center segment contains the following text stacked vertically: Self Healing, PC Upgrade, Virus Repair, Data Recovery, Secure Corporate Storage and Help Desk. The right most segment appears under the caption "Application Services" and contains four pictures of the users of an internet-based eSupport Solution with the following text overlaid on these pictures: "Consumers," "Large Enterprises," "Small and Medium Size Businesses." These pictures are arranged around two arrows which form a circle with the word "Internet" centered in the middle. At the bottom of this segment is a picture of a data center with the text "ASP" overlaid on the picture.]
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001006614_onyx_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001006614_onyx_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information from this prospectus and may not contain all the information that may be important to you. You should read the entire prospectus, including the financial data and related notes, before making an investment decision. Unless we state otherwise, the terms "Onyx,""our,"and "we" refer to Onyx Acceptance Corporation and its subsidiaries, and the term "notes" refers to the ___% Subordinated Notes due _____ 2006 we are offering pursuant to this prospectus. Certain industry terms that we use are defined in the Glossary which begins on page 74. ONYX We are a specialized consumer finance company engaged principally in the business of providing indirect automobile financing to franchised new car dealerships and select used car dealerships throughout the United States. We primarily purchase motor vehicle contracts from such dealerships. We focus our efforts on acquiring motor vehicle contracts that are secured by late model used motor vehicles and, to a lesser extent, new motor vehicles, that were entered into with purchasers whom we believe have favorable credit profiles. We generate revenues primarily through the purchase, warehousing, securitization and ongoing servicing of motor vehicle contracts. Since we started purchasing, originating and servicing motor vehicle contracts in February 1994, we have purchased or originated more than $3.8 billion in motor vehicle contracts from approximately 7,600 dealers, and we have expanded our operations from a single office in Orange County, California to major markets throughout the United States.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001008554_humboldt_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001008554_humboldt_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..766e4913f66c3271aa840767773c1d851c720125
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001008554_humboldt_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information and the financial statements appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. Except as otherwise specifically noted herein, all of the information in this Prospectus assumes that the merger with Global Bancorp will have taken place. HUMBOLDT BANCORP Humboldt Bancorp is a California corporation that owns two banks and part of a leasing company. One of our banks is Humboldt Bank, a California community bank headquartered in Eureka, California, with nine branch offices located in Humboldt, Trinity and Mendocino, California counties. Our other bank is Capitol Valley Bank, which opened for business on March 3, 1999, as a California community bank with one main branch in Roseville, California. We also own 50% of Bancorp Financial Services, Inc., located in Sacramento, California. Bancorp Financial Services makes consumer automobile loans and commercial equipment leases of less than $100,000 to small businesses. We have entered into a merger agreement with Global Bancorp. Global Bancorp is a California bank holding company that owns Capitol Thrift & Loan Association, a California industrial loan company. Capitol Thrift has 10 branches located throughout California. Global Bancorp's main office is 1424 Second Street, Napa, California 94559. Under the merger agreement, Capitol Thrift will become our wholly-owned subsidiary. The acquisition is subject to several conditions, including approval of the merger by the shareholders of Global Bancorp, regulatory approval, and completion of this public offering. While it is expected that approval of the shareholders of Global Bancorp will have been obtained prior to completion of this offering, bank regulatory approval may not yet have been received. This offering is not contingent upon the merger with Capitol Thrift. See "Risk Factors." Over the past 10 years, we have grown through branch acquisitions and the opening of a new community bank. Some of the highlights of our growth and expansion include opening a new branch in 1991, branch purchases in 1993, 1995, 1997 and 1999, and the formation of Bancorp Financial Services in 1997. Assuming the merger of Global Bancorp is completed, as of September 30, 1999, we will have pro forma assets of $537.1 million. Based on our unaudited, consolidated financials, our net income for the year ended December 31, 1999, was $4.6 million, and our total assets as of December 31, 1999, were $424.0 million. Based on Global Bancorp's unaudited, consolidated financials, Global Bancorp's net income for the year ended December 31, 1999, was $1.3 million, and Global Bancorp's total assets as of December 31, 1999, was $116.6 million. Our main office is located at 701 Fifth Street, Eureka, California 95501, and our telephone number is (707) 445-3233. BUSINESS STRATEGY Our business strategy is to: - Develop a banking presence primarily in high-growth areas of Northern California through the acquisition of strongly performing, well-regarded community banks; - Operate acquired banks as separate subsidiaries to retain their boards of directors and the goodwill of the communities they serve; - Consolidate operations of acquired banks which serve overlapping market areas; - Form community banks in areas of Northern California that may have lost their independent community banks through consolidation, merger, acquisition and regulatory action; - Cross-sell services from and within our constituent banks; - Continue to acquire branch offices, per historical precedent, to complement general growth and strategic objectives, and provide additional sources of deposits; - Improve our efficiency ratio by combining functions such as financial administration, data processing, insurance, employee benefits and contracts for services; - Increase higher yielding earning assets through prudent but aggressive management of our constituent banks' loan-to-deposit ratio; - Continue to develop non-interest income sources such as Merchant Bankcard activities, which over the past five years has developed into an area of financial and strategic importance for us; - Develop and expand the activities and associated business lines through Bancorp Financial Services; and - Take advantage of the combined size and diversity of our constituent banks to access capital at lower costs. We believe that banking customers value doing business with locally managed institutions that can provide full-service commercial banking relationships, understand customers' financial needs, and have the flexibility to customize products and services to meet those needs. We also believe that banks are better able to build successful customer relationships by affiliating with a holding company that provides cost effective administrative support services while promoting bank autonomy and individualized service. THE OFFERING Common stock outstanding prior to the offering................................ 5,253,704 shares(1) Common stock offered by Humboldt Bancorp Minimum............................... 320,000 shares Maximum............................... 640,000 shares Common Stock to be outstanding after this Offering Minimum............................... 5,573,704 shares Maximum............................... 5,893,704 shares Use of proceeds................. To acquire and capitalize Capitol Thrift, as well as pay expenses associated with the offering. If our acquisition of Capitol Thrift is not consummated, to pay off debt of $1.3 million, and for working capital and other general corporate purposes. For a more detailed discussion of how we expect to use these proceeds, please refer to "Use of Proceeds" on page 13. - ------------------------- (1) Based on the number of shares outstanding as of February 7, 2000. This number does not include options to purchase 954,786 shares of common stock and warrants to purchase 99,000 shares of common stock.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001008949_ford_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001008949_ford_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fc2bcccd9e85b425db00061c63699a4ded1927bd
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001008949_ford_prospectus_summary.txt
@@ -0,0 +1,20557 @@
+prospectus is expected to be made pursuant to
+Rule 434, check the following
+box. [ ]
+
+CALCULATION OF REGISTRATION FEE
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ Proposed Maximum
+ 
+ Proposed Maximum
+ 
+ Amount of
+
+ Title of Securities
+ 
+ Amount Being
+ 
+ Offering Price
+ 
+ Aggregate Offering
+ 
+ Registration
+
+ Being Registered
+ 
+ Registered
+ 
+ Per Unit(1)
+ 
+ Price(1)
+ 
+ Fee
+
+ 
+
+ 
+
+ 
+ Class A Asset Backed Notes
+ 
+ 
+ $2,629,722,000
+ 
+ 
+ 
+ 100%
+ 
+ 
+ $2,629,722,000
+ 
+ 
+ 
+ $694,320
+ 
+
+ 
+
+ 
+ Class B Asset Backed Notes
+ 
+ 
+ $97,397,000
+ 
+ 
+ 
+ 100%
+ 
+ 
+ $97,397,000
+ 
+ 
+ 
+ $25,608
+ 
+
+ 
+
+ 
+ TOTAL
+ 
+ 
+ $2,727,119,000
+ 
+ 
+ 
+ 
+ 
+ $2,727,119,000
+ 
+ 
+ 
+ $719,928
+ *
+
+ 
+
+ 
+
+(1) Estimated solely for the purpose of calculating the
+registration fee.
+
+ * All of which was previously paid.
+
+Table of Contents
+
+$2,727,119,000
+
+Ford Credit Auto Owner Trust 2000-F,
+
+Issuer
+
+ 
+ 
+ 
+
+ 
+ Ford Credit Auto
+
+ Receivables Two L.P.,
+
+ Seller
+ 
+ 
+ Ford Motor Credit
+
+ Company,
+
+ Servicer
+
+ 
+ 
+
+ 
+ 
+ The trust will issue the following securities:
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ Targeted
+ 
+ Final
+
+ 
+ 
+ Principal
+ 
+ 
+ 
+ Scheduled
+ 
+ Scheduled
+
+ 
+ 
+ Amount
+ 
+ Interest Rate
+ 
+ Distribution Date
+ 
+ Distribution Date
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Class A-1 Notes
+ 
+ $
+ 906,000,000
+ 
+ 
+ three-month LIBOR
+plus 0.06%(1)
+ 
+ 
+ October 15, 2002
+ 
+ 
+ 
+ August 15, 2003
+ 
+
+ 
+ Class A-2 Notes
+ 
+ $
+ 701,000,000
+ 
+ 
+ 
+ 6.56%
+ 
+ 
+ 
+ April 15, 2003
+ 
+ 
+ 
+ May 15, 2004
+ 
+
+ 
+ Class A-3 Notes
+ 
+ $
+ 520,000,000
+ 
+ 
+ 
+ 6.58%
+ 
+ 
+ 
+ October 15, 2003
+ 
+ 
+ 
+ November 15, 2004
+ 
+
+ 
+ Class A-4 Notes
+ 
+ $
+ 343,000,000
+ 
+ 
+ three-month LIBOR
+plus 0.10%(1)
+ 
+ 
+ April 15, 2004
+ 
+ 
+ 
+ May 15, 2005
+ 
+
+ 
+ Class A-5 Notes
+ 
+ $
+ 159,722,000
+ 
+ 
+ three-month LIBOR
+plus 0.12%(1)
+ 
+ 
+ October 15, 2004
+ 
+ 
+ 
+ October 15, 2005
+ 
+
+ 
+ Variable Pay Term Notes(2)
+ 
+ 
+ (3)
+ 
+ 
+ 
+ (4)
+ 
+ 
+ 
+ N/A
+ 
+ 
+ 
+ N/A
+ 
+
+ 
+ Class B Notes
+ 
+ $
+ 97,397,000
+ 
+ 
+ 
+ 7.00%
+ 
+ 
+ 
+ N/A
+ 
+ 
+ 
+ March 15, 2006
+ 
+
+ 
+ Class C Certificates(2)(5)
+ 
+ $
+ 55,656,000
+ 
+ 
+ 
+ 7.24%
+ 
+ 
+ 
+ N/A
+ 
+ 
+ 
+ July 15, 2006
+ 
+
+ 
+ Class D Certificates(2)(5)
+ 
+ $
+ 55,656,000
+ 
+ 
+ 
+ 9.00%
+ 
+ 
+ 
+ N/A
+ 
+ 
+ 
+ April 15, 2008
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ (1) 
+ 
+ For the first quarterly interest period, LIBOR for
+ the floating rate Class A Notes will be calculated based on
+ the linear interpolation between two-month LIBOR and three-month
+ LIBOR.
+
+ 
+ (2) 
+ 
+ The Variable Pay Term Notes, the Class C
+ Certificates and the Class D Certificates are not being
+ registered and are not being offered hereby.
+
+ 
+ (3) 
+ 
+ Variable Pay Term Notes may be issued, provided
+ conditions specified herein are satisfied, on the targeted
+ scheduled distribution date for each subclass of Class A
+ Notes in a principal amount equal to the amount required to pay
+ such subclass of Class A Notes in full. To the extent that a
+ subclass of Class A Notes is not paid in full on its
+ targeted scheduled distribution date, Variable Pay Term Notes may
+ be issued, provided conditions specified herein are satisfied,
+ on any monthly distribution date thereafter in a principal amount
+ equal to the amount required to pay that subclass in full.
+ 
+
+ 
+ (4) 
+ 
+ The interest rate of each Variable Pay Term Note
+ will be equal to one-month LIBOR plus a spread that will be
+ determined on the date of issuance, which spread shall not exceed
+ 1.50%.
+
+ 
+ (5) 
+ 
+ The Class C Certificates and the Class D
+ Certificates will initially be retained by the seller.
+
+ 
+ 
+
+ 
+ 
+ The trust expects to pay the outstanding principal
+ on each subclass of Class A Notes on its targeted scheduled
+ distribution date subject to the provisions described in this
+ prospectus. No principal will be paid during the revolving period
+ ending on the targeted scheduled distribution date for the
+ Class A-1 Notes unless the revolving period terminates early
+ as a result of an early amortization event. Principal payments
+ on the Class B Notes will be paid after the Class A
+ Notes and the Variable Pay Term Notes have been paid in full.
+ 
+
+ 
+
+ 
+ 
+ Except as provided below, the trust will pay
+ interest on the Class A-1 Notes, the Class A-4 Notes
+ and the Class A-5 Notes quarterly on the 15th day of each
+ January, April, July and October (or if the 15th day is not a
+ business day, the next business day). The first quarterly payment
+ date will be January 16, 2001. However, (a) if the
+ trust fails to pay the Class A-1 Notes, the Class A-4
+ Notes or the Class A-5 Notes in full on their respective
+ targeted scheduled distribution dates, the trust will pay
+ interest to that subclass on the 15th day of each month (or if
+ the 15th day is not a business day, the next business day) and
+ (b) if an early amortization event occurs, the trust will
+ pay interest to the Class A-1 Notes, Class A-4 Notes
+ and Class A-5 Notes on the 15th day of each month (or if the
+ 15th day is not a business day, the next business day).
+
+ 
+
+ 
+ 
+ The trust will pay interest on the Class A-2
+ Notes, the Class A-3 Notes, the Variable Pay Term Notes, the
+ Class B Notes, the Class C Certificates and the
+ Class D Certificates on the 15th day of each month (or if
+ the 15th day is not a business day, the next business day). The
+ first monthly payment date will be November 15, 2000.
+
+The underwriters are offering the following notes by this
+prospectus:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Initial Public
+ 
+ Underwriting
+ 
+ Proceeds to the
+
+ 
+ 
+ Offering Price(1)
+ 
+ Discount
+ 
+ Seller(1)(2)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Per Class A-1 Note
+ 
+ 
+ 100.000000%
+ 
+ 
+ 
+ 0.2100%
+ 
+ 
+ 
+ 99.790000%
+ 
+
+ 
+ Per Class A-2 Note
+ 
+ 
+ 99.998817%
+ 
+ 
+ 
+ 0.2300%
+ 
+ 
+ 
+ 99.768817%
+ 
+
+ 
+ Per Class A-3 Note
+ 
+ 
+ 99.992135%
+ 
+ 
+ 
+ 0.2500%
+ 
+ 
+ 
+ 99.742135%
+ 
+
+ 
+ Per Class A-4 Note
+ 
+ 
+ 100.000000%
+ 
+ 
+ 
+ 0.2500%
+ 
+ 
+ 
+ 99.750000%
+ 
+
+ 
+ Per Class A-5 Note
+ 
+ 
+ 100.000000%
+ 
+ 
+ 
+ 0.2500%
+ 
+ 
+ 
+ 99.750000%
+ 
+
+ 
+ Per Class B Note
+ 
+ 
+ 99.981967%
+ 
+ 
+ 
+ 0.3500%
+ 
+ 
+ 
+ 99.631967%
+ 
+
+ 
+ Total
+ 
+ $
+ 2,727,052,245.57
+ 
+ 
+ $
+ 6,412,594.50
+ 
+ 
+ $
+ 2,720,639,651.07
+ 
+
+ 
+ 
+
+ (1) 
+ 
+ The price of the offered notes will also include
+ interest accrued, if any, from October 26, 2000.
+
+ 
+
+ (2) 
+ 
+ Before deducting expenses payable by the seller
+ estimated to be $1,219,928.
+
+Application has been made to list the
+Class A Notes and Class B Notes on the Luxembourg Stock
+ Exchange. There can be no assurance that such listing will be
+obtained.
+
+Neither the Securities and Exchange Commission
+nor any state securities commission has approved or disapproved
+of these securities or passed upon the adequacy or accuracy of
+this prospectus. Any representation to the contrary is a criminal
+ offense.
+
+Deutsche Banc Alex. Brown
+
+ 
+ 
+
+ 
+ 
+ Goldman, Sachs Co.
+
+ 
+ 
+
+ 
+ 
+ J.P. Morgan Co.
+
+ 
+ 
+
+ 
+ 
+ Merrill Lynch Co.
+
+ 
+ 
+
+ 
+ 
+ Salomon Smith Barney
+
+The date of this prospectus is October 18, 2000.
+
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Before you purchase any of these securities, be
+ sure you understand the structure and the risks. See especially
+ the risk factors beginning on page 25 of this prospectus.
+ 
+ 
+
+ 
+
+ 
+ 
+ These securities are asset backed securities
+ issued by a trust. The securities are not obligations of Ford
+ Motor Company, Ford Motor Credit Company, the servicer, the
+ seller or any of their affiliates.
+ 
+
+Table of Contents
+
+This prospectus has been prepared by the trust solely for use
+in connection with the offering of the Class A Notes and the
+ Class B Notes. The trust has taken reasonable care to
+ensure that facts stated in this prospectus are true and accurate
+ in all material respects and that there have not been omitted
+material facts the omission of which would make misleading any
+statements of fact or opinion contained herein. The trust accepts
+ responsibility accordingly.
+
+The delivery of this prospectus at any time does not imply
+that the information contained herein is correct at any time
+subsequent to its date.
+
+2
+
+TABLE OF CONTENTS
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+WHERE TO FIND INFORMATION IN THIS DOCUMENT
+
+SUMMARY OF TERMS OF THE SECURITIES
+
+STRUCTURAL SUMMARY
+
+RISK FACTORS
+
+THE TRUST
+
+Limited Purpose and Limited Assets
+
+Capitalization of the Trust
+
+The Owner Trustee and the Delaware Trustee
+
+THE SELLER AND THE GENERAL PARTNER
+
+FORD MOTOR CREDIT COMPANY
+
+PRIMUS
+
+THE RECEIVABLES POOL
+
+General Information Concerning the Receivables
+
+Criteria Applicable to Selection of the Initial Receivables
+
+Characteristics of the Initial Receivables
+
+Criteria Applicable to Selection of Additional Receivables
+
+Delinquencies, Repossessions and Net Losses of Ford Credit s Portfolios
+
+HOW YOU CAN COMPUTE YOUR PORTION OF THE AMOUNT OUTSTANDING ON THE NOTES
+
+MATURITY AND PREPAYMENT CONSIDERATIONS
+
+DESCRIPTION OF THE NOTES
+
+Form of Registration
+
+The Revolving Period
+
+Payments of Interest on Class A Notes and Variable Pay Term Notes
+
+Payments of Principal of Class A Notes and Variable Pay Term Notes
+
+Variable Pay Term Notes
+
+Interest Rate Swaps
+
+Payments of Interest on Class B Notes
+
+Payments of Principal of Class B Notes
+
+Events of Default
+
+Optional Redemption
+
+Amendments
+
+The Certificates
+
+DISTRIBUTIONS ON THE SECURITIES
+
+Distributions
+
+Priority of Payments May Change Upon an Event of Default Under the Indenture
+
+Application of Funds to Maintain Overcollateralization
+
+Accumulation Account
+
+VPTN Proceeds Account
+
+Class A Quarterly Interest Funding Account
+
+Reserve Account
+
+Reports to Securityholders
+
+Certain Covenants of the Trust Under the Indenture
+
+The Indenture Trustee
+
+SALE AND SERVICING OF RECEIVABLES
+
+Sale and Assignment of Receivables
+
+Accounts Established by the Servicer
+
+Servicing of Receivables
+
+Other Provisions of the Receivables Transfer and Servicing Agreements
+
+The Administration Agreement
+
+Governing Law
+
+CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
+
+Security Interests in Vehicles
+
+Repossession
+
+Notice of Sale; Cure Rights
+
+Deficiency Judgments and Excess Proceeds
+
+Consumer Protection Laws
+
+Other Limitations
+
+Transfers of Vehicles
+
+FEDERAL INCOME TAX MATTERS
+
+Scope of the Tax Opinions
+
+Tax Characterization of the Trust
+
+Tax Consequences to Holders of the Class A Notes and Class B Notes
+
+Treatment of the Class A Notes and Class B Notes as Indebtedness.
+
+Certain U.S. Federal Income Tax Documentation Requirements
+
+STATE TAX MATTERS
+
+Michigan Tax Consequences
+
+Michigan Tax Consequences With Respect to the Class A Notes and Class B Notes
+
+ERISA CONSIDERATIONS
+
+Special Considerations Applicable to Insurance Company General Accounts
+
+UNDERWRITING
+
+Settlement
+
+LISTING AND GENERAL INFORMATION
+
+LEGAL OPINIONS
+
+GLOSSARY OF TERMS FOR THE PROSPECTUS
+
+SIGNATURES
+
+EXHIBIT INDEX
+
+Amendment No. 1 to Form S-1
+
+Underwriting Agreement
+
+Form of Indenture
+
+Form of Trust Agreement
+
+Opinion of H.D. Smith, Esq.
+
+Opinion of Skadden, Arps, Slate, Meagher & Flom
+
+Opinion of H.D. Smith, Esq.
+
+Form of Internet Rate Swap Agreement
+
+Powers of Attorney
+
+T-1 Statement of Eligibility
+
+Form of Sale & Servicing Agreement
+
+Form of Administration Agreement
+
+Form of Purchase Agreement
+
+Form of Appendix A
+
+TABLE OF CONTENTS
+
+ 
+ 
+ 
+ 
+
+ 
+ Where to Find Information in This Document
+ 
+ 
+ 5
+
+ 
+ Summary of Terms of the Securities
+ 
+ 
+ 6
+
+ 
+ Structural Summary
+ 
+ 
+ 12
+
+ 
+ Risk Factors
+ 
+ 
+ 25
+
+ 
+ The Trust
+ 
+ 
+ 41
+
+ 
+ 
+ Limited Purpose and Limited Assets
+ 
+ 
+ 41
+
+ 
+ 
+ Capitalization of the Trust
+ 
+ 
+ 41
+
+ 
+ 
+ The Owner Trustee and the Delaware Trustee
+ 
+ 
+ 42
+
+ 
+ The Seller and the General Partner
+ 
+ 
+ 42
+
+ 
+ Ford Motor Credit Company
+ 
+ 
+ 42
+
+ 
+ Primus
+ 
+ 
+ 43
+
+ 
+ The Receivables Pool
+ 
+ 
+ 43
+
+ 
+ 
+ General Information Concerning the Receivables
+ 
+ 
+ 44
+
+ 
+ 
+ Criteria Applicable to Selection of the Initial Receivables
+ 
+ 
+ 46
+
+ 
+ 
+ Characteristics of the Initial Receivables
+ 
+ 
+ 46
+
+ 
+ 
+ Criteria Applicable to Selection of Additional Receivables
+ 
+ 
+ 49
+
+ 
+ 
+ Delinquencies, Repossessions and Net Losses of Ford Credit s
+ Portfolios
+ 
+ 
+ 50
+
+ 
+ How You Can Compute Your Portion of the Amount Outstanding on
+ the
+
+ Notes
+ 
+ 
+ 51
+
+ 
+ Maturity and Prepayment Considerations
+ 
+ 
+ 52
+
+ 
+ Description of the Notes
+ 
+ 
+ 53
+
+ 
+ 
+ Form of Registration
+ 
+ 
+ 54
+
+ 
+ 
+ The Revolving Period
+ 
+ 
+ 57
+
+ 
+ 
+ Payments of Interest on Class A Notes and Variable Pay Term
+ Notes
+ 
+ 
+ 58
+
+ 
+ 
+ Payments of Principal of Class A Notes and Variable Pay Term
+ Notes
+ 
+ 
+ 61
+
+ 
+ 
+ Variable Pay Term Notes
+ 
+ 
+ 63
+
+ 
+ 
+ Interest Rate Swaps
+ 
+ 
+ 64
+
+ 
+ 
+ Payments of Interest on Class B Notes
+ 
+ 
+ 69
+
+ 
+ 
+ Payments of Principal of Class B Notes
+ 
+ 
+ 70
+
+ 
+ 
+ Events of Default
+ 
+ 
+ 71
+
+ 
+ 
+ Optional Redemption
+ 
+ 
+ 74
+
+ 
+ 
+ Amendments
+ 
+ 
+ 74
+
+ 
+ 
+ The Certificates
+ 
+ 
+ 76
+
+ 
+ Distributions on the Securities
+ 
+ 
+ 76
+
+ 
+ 
+ Distributions
+ 
+ 
+ 77
+
+ 
+ 
+ Priority of Payments May Change Upon an Event of Default Under
+ the Indenture
+ 
+ 
+ 83
+
+ 
+ 
+ Application of Funds to Maintain Overcollateralization
+ 
+ 
+ 85
+
+ 
+ 
+ Accumulation Account
+ 
+ 
+ 87
+
+ 
+ 
+ VPTN Proceeds Account
+ 
+ 
+ 87
+
+ 
+ 
+ Class A Quarterly Interest Funding Account
+ 
+ 
+ 88
+
+ 
+ 
+ Reserve Account
+ 
+ 
+ 88
+
+ 
+ 
+ Reports to Securityholders
+ 
+ 
+ 90
+
+ 
+ 
+ Certain Covenants of the Trust Under the Indenture
+ 
+ 
+ 91
+
+ 
+ 
+ The Indenture Trustee
+ 
+ 
+ 92
+
+ 
+ Sale and Servicing of Receivables
+ 
+ 
+ 92
+
+ 
+ 
+ Sale and Assignment of Receivables
+ 
+ 
+ 92
+
+ 
+ 
+ Accounts Established by the Servicer
+ 
+ 
+ 93
+
+ 
+ 
+ Servicing of Receivables
+ 
+ 
+ 94
+
+ 
+ 
+ Other Provisions of the Receivables Transfer and Servicing
+ Agreements
+ 
+ 
+ 98
+
+ 
+ 
+ The Administration Agreement
+ 
+ 
+ 99
+
+ 
+ 
+ Governing Law
+ 
+ 
+ 99
+
+ 
+ Certain Legal Aspects of the Receivables
+ 
+ 
+ 99
+
+ 
+ 
+ Security Interests in Vehicles
+ 
+ 
+ 99
+
+ 
+ 
+ Repossession
+ 
+ 
+ 101
+
+ 
+ 
+ Notice of Sale; Cure Rights
+ 
+ 
+ 101
+
+ 
+ 
+ Deficiency Judgments and Excess Proceeds
+ 
+ 
+ 102
+
+ 
+ 
+ Consumer Protection Laws
+ 
+ 
+ 102
+
+ 
+ 
+ Other Limitations
+ 
+ 
+ 103
+
+ 
+ 
+ Transfers of Vehicles
+ 
+ 
+ 103
+
+ 
+ Federal Income Tax Matters
+ 
+ 
+ 103
+
+ 
+ 
+ Scope of the Tax Opinions
+ 
+ 
+ 104
+
+ 
+ 
+ Tax Characterization of the Trust
+ 
+ 
+ 105
+
+ 
+ 
+ Tax Consequences to Holders of the Class A Notes and
+ Class B Notes
+ 
+ 
+ 105
+
+ 
+ 
+ Certain U.S. Federal Income Tax Documentation Requirements
+ 
+ 
+ 110
+
+ 
+ State Tax Matters
+ 
+ 
+ 111
+
+ 
+ 
+ Michigan Tax Consequences
+ 
+ 
+ 112
+
+ 
+ 
+ Michigan Tax Consequences With Respect to the Class A Notes
+ and Class B Notes
+ 
+ 
+ 112
+
+3
+
+Table of Contents
+
+ 
+ 
+ 
+ 
+
+ 
+ ERISA Considerations
+ 
+ 
+ 112
+
+ 
+ 
+ Special Considerations Applicable to Insurance Company General
+ Accounts
+ 
+ 
+ 113
+
+ 
+ Underwriting
+ 
+ 
+ 114
+
+ 
+ 
+ Settlement
+ 
+ 
+ 116
+
+ 
+ Listing and General Information
+ 
+ 
+ 116
+
+ 
+ Legal Opinions
+ 
+ 
+ 117
+
+ 
+ Glossary of Terms For the Prospectus
+ 
+ 
+ 118
+
+4
+
+Table of Contents
+
+WHERE TO FIND INFORMATION IN THIS DOCUMENT
+
+This prospectus provides information about the trust, Ford Credit
+ Auto Owner Trust 2000-F, including terms and conditions
+that apply to the notes and certificates to be issued by the
+trust. The specific terms of the trust are contained herein. You
+should rely only on information on the securities provided
+herein. We have not authorized anyone to provide you with
+different information. We do not claim the accuracy of the
+information herein as of any date other than the date stated on
+the cover page. We are not offering the securities in any states
+where it is not permitted.
+
+We have included cross-references to captions in these materials
+where you can find further related discussions. We have started
+with several introductory sections describing the trust and terms
+ in abbreviated form, followed by a more complete description of
+the terms. The introductory sections are:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Summary of Terms of the Securities provides
+ important information concerning the amounts and the payment
+ terms of each class of securities
+
+ 
+
+ 
+ 
+ 
+ Structural Summary gives a brief introduction
+ to the key structural features of the trust
+
+ 
+
+ 
+ 
+ 
+ Risk Factors describes briefly some of the
+ risks to investors of a purchase of the securities
+
+Cross references are contained in the introductory sections which
+ will direct you elsewhere in this prospectus to more detailed
+descriptions of a particular topic. You can also find references
+to key topics in the Table of Contents on the two
+preceding pages.
+
+All references to U.S.$ , $ ,
+ U.S. dollars and dollars 
+are to United States dollars.
+
+Capitalized terms are defined in a glossary beginning on page
+118.
+
+5
+
+Table of Contents
+
+SUMMARY OF TERMS OF THE SECURITIES
+
+ 
+The following summary is a short description of the main terms
+ of the offering of the securities. For that reason, this summary
+ does not contain all of the information that may be important to
+ you. To fully understand the terms of the offering of the
+securities, you will need to read this prospectus in its
+entirety.
+
+Issuer
+
+Ford Credit Auto Owner Trust 2000-F, a Delaware business trust,
+will purchase from the seller motor vehicle retail installment
+sale contracts which constitute the receivables (1) on the
+closing date, with proceeds from the issuance and sale of the
+securities and (2) on each monthly distribution date during
+the revolving period, from amounts otherwise allocable to
+payments of principal on the securities. The seller purchased or
+will purchase the receivables from Ford Motor Credit Company,
+which acquired or will acquire the receivables directly from
+dealers, or indirectly through PRIMUS. Ford Credit will service
+the receivables. The trust will rely upon collections on the
+receivables and the funds on deposit in certain accounts to make
+payments on the securities. The trust will be solely liable for
+the payment of the securities.
+
+Offered Securities
+
+The following securities are being offered by this prospectus:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Aggregate
+ 
+ 
+
+ 
+ 
+ Principal
+ 
+ 
+
+ Class
+ 
+ Amount
+ 
+ Interest Rate
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ A-1 Notes
+ 
+ $
+ 906,000,000
+ 
+ 
+ 
+ three-month
+
+ LIBOR + 0.06%
+
+ 
+ A-2 Notes
+ 
+ $
+ 701,000,000
+ 
+ 
+ 
+ 6.56%
+
+ 
+ A-3 Notes
+ 
+ $
+ 520,000,000
+ 
+ 
+ 
+ 6.58%
+
+ 
+ A-4 Notes
+ 
+ $
+ 343,000,000
+ 
+ 
+ 
+ three-month
+
+ LIBOR + 0.10%
+
+ 
+ A-5 Notes
+ 
+ $
+ 159,722,000
+ 
+ 
+ 
+ three-month
+
+ LIBOR + 0.12%
+
+ 
+ B Notes
+ 
+ $
+ 97,397,000
+ 
+ 
+ 
+ 7.00%
+
+LIBOR for the first interest period will be equal to the linear
+interpolation between two-month LIBOR and three-month LIBOR.
+
+Notwithstanding the above, LIBOR for purposes of determining the
+interest rate of the Class A-1 Notes, the Class A-4
+Notes and the Class A-5 Notes will be one-month LIBOR
+(a) if the trust fails to pay that subclass in full on its
+targeted scheduled distribution date or (b) following the
+occurrence of an early amortization event or an acceleration of
+the notes due to an event of default.
+
+Other Securities
+
+On the closing date, the trust is also issuing Class C
+Certificates in an aggregate principal amount of $55,656,000 and
+Class D Certificates in an aggregate principal amount of
+$55,656,000. The trust expects to issue Variable Pay Term Notes,
+which are described below, on the targeted scheduled distribution
+ date for each subclass of the Class A Notes. If issued, the
+ proceeds from the sale of Variable Pay Term Notes will be
+applied to principal payments on the subclass or subclasses of
+Class A Notes targeted for payment on that date. The
+Class C Certificates and Class D Certificates will
+initially be retained by the seller. The Class C
+Certificates, the Class D Certificates and the Variable Pay
+Term Notes are not being offered by this prospectus.
+
+The Class A-1 Notes, the Class A-4 Notes and the
+Class A-5 Notes are collectively referred to as the 
+ floating rate Class A Notes herein and the
+Class A-2 Notes and the Class A-3 Notes are
+collectively referred to as the fixed rate Class A
+Notes . The Class A Notes, the Class B Notes
+and the Variable Pay Term Notes are collectively referred to as
+the notes and the Class C Certificates
+and the Class D Certificates are collectively referred to as
+ the certificates . The notes and the
+certificates are together referred to as the 
+ securities .
+
+The Seller
+
+Ford Credit Auto Receivables Two L.P., a Delaware limited
+partnership.
+
+6
+
+Table of Contents
+
+The Servicer
+
+Ford Motor Credit Company, a Delaware corporation.
+
+Trustees
+
+ 
+
+ 
+ 
+ 
+
+ 
+ Notes
+ 
+ 
+ The indenture trustee for the notes will be The Chase
+ Manhattan Bank, a New York corporation.
+
+ 
+
+ 
+ Certificates
+ 
+ 
+ The trustees for the certificates will be The Bank of New York,
+ a New York banking corporation, as owner trustee, and The Bank of
+ New York (Delaware), a Delaware banking corporation, as Delaware
+ trustee.
+
+Important Dates
+
+Closing Date
+
+The trust expects to issue the Class A Notes, the
+Class B Notes, the Class C Certificates and the
+Class D Certificates on October 26, 2000.
+
+Monthly Distribution Dates
+
+The monthly distribution dates for those classes and subclass of
+securities which are payable monthly will be the 15th day of each
+ month (or, if the 15th day is not a business day, on the next
+business day). The first scheduled monthly distribution date will
+ be November 15, 2000.
+
+Quarterly Payment Dates
+
+The quarterly payment dates for those subclasses of the floating
+rate Class A Notes which are payable quarterly will be the
+15th day of each January, April, July and October (or, if the
+15th day is not a business day, on the next business day). The
+first scheduled quarterly payment date will be January 16,
+2001.
+
+Interest and Principal Payment Dates for the Floating Rate
+Class A Notes
+
+ 
+ 
+
+ 
+ 
+ Except as provided below, the trust will pay interest on the
+ floating rate Class A Notes on quarterly payment dates. No
+ principal will be paid on the floating rate Class A Notes
+ during the revolving period. After the revolving period, the
+ trust expects to pay the principal of each subclass of the
+ floating rate Class A Notes in full on its targeted
+ scheduled distribution date.
+
+ 
+
+ 
+ 
+ If the trust is unable to pay the principal of a subclass of the
+ floating rate Class A Notes in full on its targeted
+ scheduled distribution date, the frequency of payments for that
+ subclass will change and the trust will pay interest and, after
+ all other Class A Notes with a lower numerical designation
+ have been paid in full, principal on such subclass on monthly
+ distribution dates.
+
+ 
+
+ 
+ 
+ In addition, if an early amortization event occurs, the frequency
+ of payments will change for all subclasses of the floating rate
+ Class A Notes and the trust will pay interest on each
+ subclass of the floating rate Class A Notes on monthly
+ distribution dates and will pay principal of each subclass on
+ monthly distribution dates after all other subclasses of
+ Class A Notes with a lower numerical designation have been
+ paid in full.
+
+Interest and Principal Payment Dates for the Fixed Rate
+Class A Notes
+
+ 
+ 
+
+ 
+ 
+ The trust will pay interest on the fixed rate Class A Notes
+ on monthly distribution dates. No principal will be paid on the
+ fixed rate Class A Notes during the revolving period. After
+ the revolving period, the trust expects to pay the principal of
+ each subclass of the fixed rate Class A Notes in full on its
+ targeted scheduled distribution date. If the trust is unable to
+ pay the principal of a subclass of the fixed rate Class A
+ Notes in full on its targeted scheduled distribution date, the
+ trust will pay principal of such subclass on subsequent monthly
+ distribution dates after all other subclasses of Class A
+ Notes with a lower numerical designation have been paid in full.
+
+7
+
+Table of Contents
+
+Interest and Principal Payment Dates for the Class B
+Notes
+
+The trust will pay interest and, after the revolving period and
+after all of the Class A Notes and Variable Pay Term Notes
+have been paid in full, principal on the Class B Notes on
+monthly distribution dates.
+
+Record Dates
+
+On each monthly distribution date or quarterly payment date, as
+applicable, the trust will pay interest and principal, as
+applicable, to the holders of the securities as of the related
+record date. The record date for the notes will be the day
+immediately preceding the monthly distribution date or quarterly
+payment date, as applicable.
+
+Targeted Scheduled Distribution Dates
+
+The targeted scheduled distribution date for each subclass of
+Class A Notes is listed on the cover page of this
+prospectus. The trust expects that no payments of principal will
+be made on any subclass of Class A Notes until its targeted
+scheduled distribution date, and that each subclass of
+Class A Notes will be paid in full on its targeted scheduled
+ distribution date from the proceeds of issuance and sale of
+Variable Pay Term Notes and other funds available. Failure to pay
+ a subclass of Class A Notes in full on its targeted
+scheduled distribution date will not constitute an event of
+default under the indenture.
+
+Final Scheduled Distribution Dates
+
+The final scheduled distribution date for each class and subclass
+ of notes and certificates is the date listed on the cover page
+of this prospectus. It is expected that all notes and
+certificates will be paid in full on or before their respective
+final scheduled distribution dates. Failure to pay any class or
+subclass of notes in full on or before its final scheduled
+distribution date will constitute an event of default under the
+indenture.
+
+Interest Rates
+
+Floating Rate Class A Notes
+
+ 
+ 
+
+ 
+ 
+ Except as provided below, the trust will pay interest on the
+ floating rate Class A Notes quarterly at interest rates
+ equal to three-month LIBOR plus the spread specified on the cover
+ page of this prospectus, provided that LIBOR for the initial
+ interest period will be equal to the linear interpolation of
+ two-month LIBOR and three-month LIBOR.
+
+ 
+
+ 
+ 
+ Beginning on the monthly distribution date following the
+ occurrence of an early amortization event or an acceleration of
+ the notes due to an event of default (unless the early
+ amortization event or acceleration occurs within two London
+ banking days prior to a monthly distribution date, in which case
+ beginning on the next following monthly distribution date), the
+ LIBOR reference for the floating rate Class A Notes will
+ change and the floating rate Class A Notes will accrue
+ interest at a rate equal to one-month LIBOR plus the spread
+ specified on the cover page of this prospectus.
+
+ 
+
+ 
+ 
+ If a subclass of the floating rate Class A Notes is not paid
+ in full on its targeted scheduled distribution date, the LIBOR
+ reference for that subclass will change and such subclass will
+ accrue interest at a rate equal to one-month LIBOR plus the
+ spread specified on the cover page of this prospectus, beginning
+ with that targeted scheduled distribution date, until the monthly
+ distribution date on which that subclass is paid in full.
+
+ 
+
+ 
+ 
+ The floating rate Class A Notes will accrue interest on an
+ actual/360 basis quarterly from and including an
+ interest payment date to but excluding the next interest payment
+ date. This means that, if there are no outstanding shortfalls in
+ the payment of interest, the interest due on the floating rate
+ Class A Notes on each interest payment date will be the
+ product of:
+
+ 
+ 
+ 
+
+ 
+ 1. 
+ 
+ the outstanding principal balance;
+
+ 
+
+ 
+ 2. 
+ 
+ the interest rate (equal to the linear interpolation of two-month
+ LIBOR and three-month LIBOR for the initial
+
+8
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ interest period and equal to three-month LIBOR or one-month LIBOR
+ thereafter, as the case may be, plus the spread specified on the
+ cover page of this prospectus); and
+
+ 
+ 
+ 
+
+ 
+ 3. 
+ 
+ the actual number of days elapsed since the previous interest
+ payment date (or in the case of the first interest payment date,
+ since the closing date) divided by 360.
+
+Fixed Rate Class A Notes and Class B Notes
+
+ 
+ 
+
+ 
+ 
+ The fixed rate Class A Notes and the Class B Notes will
+ accrue interest on a 30/360 basis from and including
+ the 15th day of the month to but excluding the 15th day of the
+ next month. This means that, if there are no outstanding
+ shortfalls in the payment of interest, the interest due on each
+ monthly distribution date will be the product of:
+
+ 
+ 
+ 
+
+ 
+ 1. 
+ 
+ the outstanding principal balance;
+
+ 
+
+ 
+ 2. 
+ 
+ the interest rate; and
+
+ 
+
+ 
+ 3. 
+ 
+ 30 (or in the case of the first distribution date, 19) divided by
+ 360.
+
+Variable Pay Term Notes
+
+ 
+ 
+
+ 
+ 
+ The interest rates on the Variable Pay Term Notes to be issued on
+ targeted scheduled distribution dates, or on other monthly
+ distribution dates, will be equal to one-month LIBOR plus a
+ spread determined at the time of issuance, which spread will not
+ exceed 1.50%.
+
+ 
+
+ 
+ 
+ The Variable Pay Term Notes will accrue interest on an
+ actual/360 basis from and including a monthly
+ distribution date to, but excluding, the next monthly
+ distribution date. This means that, if there are no outstanding
+ shortfalls in the payment of interest, the interest due on the
+ Variable Pay Term Notes on each monthly distribution date will be
+ the product of:
+
+ 
+ 
+ 
+
+ 
+ 1. 
+ 
+ the outstanding principal balance;
+
+ 
+
+ 
+ 2. 
+ 
+ the interest rate; and
+
+ 
+
+ 
+ 3. 
+ 
+ the actual number of days elapsed since the previous interest
+ payment date (or, in the case of the first monthly distribution
+ date following the issuance of a Variable Pay Term Note, since
+ its issuance date) divided by 360.
+
+For a more detailed description of the payment of interest,
+you should refer to Description of the Notes 
+Payments of Interest on Class A Notes and Variable Pay Term
+Notes, Payments of Interest on
+Class B Notes and The
+Certificates and Distributions on the
+Securities Distributions .
+
+No Principal Payments During the Revolving Period
+
+No principal payments will be made on the notes or the
+certificates during the revolving period. The revolving period
+will end on (and will not include) the targeted scheduled
+distribution date for the Class A-1 Notes unless the
+revolving period terminates earlier due to the occurrence of an
+early amortization event. During the revolving period, funds
+otherwise available to pay principal on the securities will be
+used on each monthly distribution date to purchase additional
+receivables from the seller.
+
+For further discussion of the revolving period, see
+ Description of the Notes The Revolving
+Period .
+
+Early Amortization Event
+
+Upon the occurrence of an early amortization event, the revolving
+ period will terminate and (1) interest will be paid monthly
+ to the floating rate Class A Notes instead of quarterly,
+(2) principal will be paid monthly to each subclass of
+Class A Notes sequentially, so that no principal payments
+will be made on any subclass of Class A Notes until all
+subclasses of Class A Notes with a lower numerical
+designation have been paid in full and (3) no Variable Pay
+Term Notes will be issued. After each subclass of Class A
+Notes has been paid in full, the trust will pay principal
+sequentially to the Class B Notes, Class C Certificates
+ and Class D Certificates until each such class is paid in
+full.
+
+9
+
+Table of Contents
+
+Sequential Principal Payments After the Revolving Period
+
+The amortization period will commence upon the termination of the
+ revolving period. During the amortization period, the trust
+expects to issue a Variable Pay Term Note on each targeted
+scheduled distribution date in an amount sufficient to pay the
+related subclass of Class A Notes in full. If Variable Pay
+Term Notes are issued, the trust will pay principal sequentially
+to the Variable Pay Term Notes beginning with the earliest
+issued.
+
+On each monthly distribution date on which any subclass of
+Class A Notes is outstanding that has reached or passed its
+targeted scheduled distribution date (unless such monthly
+distribution date is a targeted scheduled distribution date upon
+which the trust will issue Variable Pay Term Notes), the trust
+will pay principal on such subclass and on the Variable Pay Term
+Notes pro rata based on the aggregate principal amounts of
+ all Class A Notes and Variable Pay Term Notes outstanding.
+
+After each subclass of Class A Notes and each Variable Pay
+Term Note has been paid in full, the trust will pay principal
+sequentially to the Class B Notes, Class C Certificates
+ and Class D Certificates until each such class is paid in
+full.
+
+For a more detailed description of the payment of principal,
+you should refer to Description of the Notes 
+Payments of Principal of Class A Notes and Variable Pay Term
+ Notes and to Distributions on the
+Securities Distributions Priority in
+Which the Trust Makes Principal Payments on the Notes and
+Certificates .
+
+Optional Redemption
+
+The servicer has the option to purchase the receivables on any
+monthly distribution date on which the aggregate principal
+balance of the receivables is 10% or less of the aggregate
+principal balance of the receivables as of the last day of the
+revolving period. The price will be equal to the outstanding
+principal balance of the notes and certificates plus accrued and
+unpaid interest thereon. The trust will apply such payment to the
+ redemption of the securities in full.
+
+It is expected that at the time this redemption option becomes
+available to the servicer only the certificates, the Class B
+ Notes and either Variable Pay Term Notes or the Class A-5
+Notes will be outstanding.
+
+For further discussion of optional redemption, you should
+refer to Description of the Notes Optional
+Redemption. 
+
+Ratings
+
+It is a condition to the issuance of the securities on the
+closing date that:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the Class A Notes be rated in the highest long-term rating
+ category by at least two nationally recognized rating agencies;
+ and
+
+ 
+
+ 
+ 
+ 
+ the Class B Notes be rated A or its equivalent
+ by at least two nationally recognized rating agencies.
+
+It is a condition to the issuance of any Variable Pay Term Note
+that such Variable Pay Term Note be rated AAA and
+ Aaa at issuance by S P and Moody s,
+respectively.
+
+A rating is not a recommendation to purchase, hold or sell the
+Class A Notes or Class B Notes inasmuch as such rating
+does not comment as to market price or suitability for a
+particular investor. The ratings of the Class A Notes and
+Class B Notes address the likelihood of the payment of
+principal and interest on such securities according to their
+terms. A rating agency rating the Class A Notes or Class B
+Notes may lower or withdraw its rating in the future, in its
+discretion.
+
+10
+
+Table of Contents
+
+Minimum Denominations of the Class A Notes and
+Class B Notes
+
+$1,000 and integral multiples thereof
+
+Registration, Clearance and Settlement of the Class A
+Notes and Class B Notes
+
+DTC/ Clearstream/ Euroclear
+
+Tax Status
+
+Opinions of Counsel
+
+Skadden, Arps, Slate, Meagher Flom LLP will deliver its
+opinion that for federal income tax purposes:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the Class A Notes will be characterized as debt;
+
+ 
+
+ 
+ 
+ 
+ the Class B Notes should be treated as debt, although the
+ issue is not free from doubt; and
+
+ 
+
+ 
+ 
+ 
+ the trust will not be characterized as an association (or a
+ publicly traded partnership) taxable as a corporation.
+
+Hurley D. Smith, Esq., Secretary and Corporate Counsel of Ford
+Credit, will deliver his opinion to the same effect with respect
+to Michigan income and single business tax purposes.
+
+Investor Representations
+
+If you purchase the Class A Notes or Class B Notes, you
+ agree by your purchase that you will treat such notes as
+indebtedness.
+
+ERISA Considerations
+
+The Class A Notes and Class B Notes are generally
+eligible for purchase by employee benefit plans, subject to the
+considerations discussed under ERISA
+Considerations .
+
+Investor Information Mailing Address, Telephone
+Number and Principal Executive Offices
+
+The mailing address of Ford Credit Auto Receivables Two L.P. is
+One American Road, Dearborn, Michigan 48126, attention of the
+Secretary. The servicer s telephone number is
+(313) 322-3000 and the facsimile number is
+(313) 594-7742.
+
+CUSIP, ISIN Numbers and Common Codes
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ Common
+
+ 
+ 
+ CUSIP
+ 
+ ISIN
+ 
+ Code
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Class A-1 Notes:
+ 
+ 
+ 34527RER0
+ 
+ 
+ 
+ US34527RER03
+ 
+ 
+ 
+ 11944302
+ 
+
+ 
+ Class A-2 Notes:
+ 
+ 
+ 34527RES8
+ 
+ 
+ 
+ US34527RES85
+ 
+ 
+ 
+ 11949398
+ 
+
+ 
+ Class A-3 Notes:
+ 
+ 
+ 34527RET6
+ 
+ 
+ 
+ US34527RET68
+ 
+ 
+ 
+ 11949428
+ 
+
+ 
+ Class A-4 Notes:
+ 
+ 
+ 34527REU3
+ 
+ 
+ 
+ US34527REU32
+ 
+ 
+ 
+ 11949606
+ 
+
+ 
+ Class A-5 Notes:
+ 
+ 
+ 34527REV1
+ 
+ 
+ 
+ US34527REV15
+ 
+ 
+ 
+ 11949673
+ 
+
+ 
+ Class B Notes:
+ 
+ 
+ 34527REW9
+ 
+ 
+ 
+ US34527REW97
+ 
+ 
+ 
+ 11954022
+ 
+
+Listing and Trading
+
+Application has been made to list the Class A Notes and the
+Class B Notes on the Luxembourg Stock Exchange, but there is
+ no assurance that the listing will be obtained. See
+ Listing and General Information . There is
+currently no market for any of the notes and there can be no
+assurance that such a market will develop. See Risk
+Factors The Absence of a Secondary Market Could Limit
+ Your Ability to Resell Your Notes .
+
+11
+
+Table of Contents
+
+STRUCTURAL SUMMARY
+
+ 
+This summary briefly describes certain major structural
+components of the trust. To fully understand the terms of the
+trust, you will need to read this prospectus in its entirety.
+
+Transfer of Receivables and Application
+
+of Proceeds
+
+On the closing date, Ford Credit Auto Receivables Two L.P., the
+seller, will purchase certain eligible motor vehicle retail
+installment sale contracts originated by Ford Credit and PRIMUS
+with an aggregate principal balance of $2,999,599,993.73 as of
+the opening of business on October 1, 2000, which constitute
+ the initial receivables, and will immediately sell the initial
+receivables to Ford Credit Auto Owner Trust 2000-F.
+
+The following chart represents the application of proceeds from
+investors and the transfer of the initial receivables sold on the
+ closing date.
+
+[FORD MOTOR CREDIT COMPANY FLOW CHART DESCRIBING APPLICATION OF
+PROCEEDS FROM INVESTORS AND THE TRANSFER OF RECEIVABLES SOLD BY
+FORD MOTOR CREDIT COMPANY]
+
+On each monthly distribution date during the revolving period,
+the seller will purchase from Ford Credit additional receivables
+meeting the eligibility criteria and sell them to the trust. The
+initial receivables and the additional receivables are referred
+to herein as the receivables. 
+
+Property of the Trust
+
+The property of the trust will include the following:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the receivables and the collections on the receivables;
+
+ 
+
+ 
+ 
+ 
+ security interests in the vehicles financed by the receivables;
+
+ 
+
+ 
+ 
+ 
+ bank accounts;
+
+ 
+
+ 
+ 
+ 
+ rights to proceeds under insurance policies that cover the
+ obligors under the receivables or the vehicles financed by the
+ receivables;
+
+ 
+
+ 
+ 
+ 
+ remedies for breaches of representations and warranties made by
+ the dealers that originated the receivables;
+
+ 
+
+ 
+ 
+ 
+ other rights under documents relating to the receivables; and
+
+ 
+
+ 
+ 
+ 
+ rights under the interest rate swaps.
+
+Composition of the Initial Receivables
+
+The composition of the initial receivables as of October 1,
+2000 is as follows:
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ Aggregate Principal Balance
+ 
+ 
+ $2,999,599,993.73
+
+ 
+ 
+ 
+ 
+ Number of Receivables
+ 
+ 
+ 205,646
+
+ 
+ 
+ 
+ 
+ Average Principal Balance
+ 
+ 
+ $14,586.23
+
+ 
+ 
+ 
+ 
+ (Range)
+ 
+ 
+ $259.51 to
+
+ $49,974.57
+
+ 
+ 
+ 
+ 
+ Average Original Amount Financed
+ 
+ 
+ $17,196.50
+
+ 
+ 
+ 
+ 
+ (Range)
+ 
+ 
+ $812.43 to
+
+ $74,484.40
+
+ 
+ 
+ 
+ 
+ Weighted Average
+
+ APR
+ 
+ 
+ 8.28%
+
+ 
+ 
+ 
+ 
+ (Range)(1)
+ 
+ 
+ 1.80% to
+
+ 20.00%
+
+ 
+ 
+ 
+ 
+ Weighted Average Original Term
+ 
+ 
+ 55.3 months
+
+ 
+ 
+ 
+ 
+ (Range)
+ 
+ 
+ 6 months to
+
+ 60 months
+
+ 
+ 
+ 
+ 
+ Weighted Average Remaining Term
+ 
+ 
+ 47.1 months
+
+ 
+ 
+ 
+ 
+ (Range)
+ 
+ 
+ 2 months to
+
+ 58 months
+
+ 
+ 
+ 
+ 
+ Scheduled Weighted Average Life (2)
+ 
+ 
+ 2.12 years
+
+ 
+ 
+
+ (1) 
+ 
+ Includes receivables with APRs below the interest
+ rates on the securities.
+
+ (2) 
+ 
+ From October 1, 2000, assuming
+ (1) payments on all receivables are due on the first day of
+ the month, (2) all payments on the receivables are paid when
+ due, commencing one month from October 1, 2000 and (3) no
+ prepayments on the receivables are made.
+
+12
+
+Table of Contents
+
+Servicer of the Receivables
+
+Ford Credit will be the servicer of the receivables. The trust
+will pay the servicer a servicing fee on each monthly
+distribution date equal to 1/12 of 1.00% of the principal
+balance of the receivables at the beginning of the related
+collection period. In addition to the servicing fee, the trust
+will also pay the servicer a supplemental servicing fee equal to
+any late, prepayment, and other administrative fees and expenses
+collected during the related collection period and any
+reinvestment earnings on any payments received on the
+receivables, except for investment earnings on amounts deposited
+into the accumulation account, the Class A quarterly
+interest funding account and the reserve account. The
+supplemental servicing fee will be retained by the servicer, and
+will not be a part of the funds available for distribution under
+the indenture.
+
+Issuance of Variable Pay Term Notes
+
+ 
+ 
+
+ 
+ 
+ On the targeted scheduled distribution date for each subclass of
+ the Class A Notes, the trust will issue and sell Variable
+ Pay Term Notes to the extent needed to repay the related subclass
+ of Class A Notes if all of the conditions to issuance are
+ met and one or more purchasers agree to purchase such Variable
+ Pay Term Notes.
+
+ 
+
+ 
+ 
+ Ford Credit, as the administrator of the trust, will use
+ reasonable efforts to locate purchasers for the Variable Pay Term
+ Notes if all the conditions to issuance have been met.
+
+ 
+
+ 
+ 
+ If Variable Pay Term Notes cannot be issued on the targeted
+ scheduled distribution date of any subclass of Class A Notes
+ in an aggregate amount sufficient to repay such subclass of
+ Class A Notes in full, Ford Credit, as administrator, will
+ use reasonable efforts to locate purchasers for Variable Pay Term
+ Notes to be issued on a future monthly distribution date. If
+ purchasers are located and if all the conditions to issuance have
+ been met, the trust will issue the Variable Pay Term Notes.
+
+ 
+
+ 
+ 
+ Variable Pay Term Notes will only be issued if the proceeds of
+ their issuance and sale, taken together with the other amounts
+ allocable to principal on the Class A Notes on such issuance
+ date, are sufficient to repay sequentially in their entirety one
+ or more subclasses of Class A Notes which have reached or
+ passed their targeted scheduled distribution dates.
+
+ 
+
+ 
+ 
+ FCAR Owner Trust, a commercial paper conduit administered by Ford
+ Credit, may purchase any Variable Pay Term Note issued by the
+ trust; however, none of FCAR Owner Trust, Ford Credit or any
+ other person is obligated to purchase any Variable Pay Term Note.
+
+ 
+
+ 
+ 
+ The conditions to the issuance of the Variable Pay Term Notes
+ will include, among other things, that:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ there be in effect a separate interest rate swap for each
+ subclass of floating rate Class A Notes with a notional
+ amount equal to the outstanding principal balance of such
+ subclass and an interest rate swap with a notional amount equal
+ to the aggregate principal balance of all of the Variable Pay
+ Term Notes outstanding after giving effect to such issuance;
+
+ 
+
+ 
+ 
+ 
+ the interest rate on each Variable Pay Term Note not exceed
+ one-month LIBOR plus 1.50%;
+
+ 
+
+ 
+ 
+ 
+ the Variable Pay Term Notes be issued at par;
+
+ 
+
+ 
+ 
+ 
+ the aggregate proceeds of the Variable Pay Term Notes issued on
+ such monthly distribution date will be sufficient (when taken
+ together with other amounts allocable to the payment of principal
+ on the Class A Notes on such monthly distribution date) to
+ repay in full in sequential order one or more subclasses of
+ Class A Notes that have reached or passed their targeted
+ scheduled distribution dates;
+
+13
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ no event of default or event of servicing termination shall have
+ occurred and be continuing; and
+
+ 
+
+ 
+ 
+ 
+ the Variable Pay Term Notes be rated AAA and
+ Aaa at issuance by S P and Moody s,
+ respectively.
+
+For further discussion of the Variable Pay Term Notes, see
+ Description of the Notes Payments of Interest
+on Class A Notes and Variable Pay Term Notes, 
+ Payments of Principal of Class A Notes and
+ Variable Pay Term Notes and Variable Pay
+ Term Notes .
+
+Interest Rate Swaps
+
+Floating Rate Class A Note Interest Rate Swaps
+
+ 
+ 
+
+ 
+ 
+ On the closing date, the trust will enter into an interest rate
+ swap to hedge the floating interest rate on each subclass of the
+ floating rate Class A Notes with Deutsche Bank AG, New
+ York Branch as the swap counterparty. Each floating rate
+ Class A Note interest rate swap will have an initial
+ notional amount equal to the aggregate principal amount of the
+ applicable subclass of floating rate Class A Notes on the
+ closing date. The notional amount of each floating rate
+ Class A Note interest rate swap will decrease by the amount
+ of any principal payments on the applicable subclass.
+
+ 
+
+ 
+ 
+ In general, under each interest rate swap agreement for the
+ floating rate Class A Notes, on each quarterly payment
+ date, the trust will be obligated to pay the swap counterparty a
+ fixed rate payment on the notional amount of the floating rate
+ Class A Note interest rate swap and the swap counterparty
+ will be obligated to pay a floating rate payment based on the
+ coupon rate of the applicable subclass of Class A Notes to
+ the trust on the same notional amount.
+
+ 
+
+ 
+ 
+ If interest on a subclass of the floating rate Class A Notes
+ becomes payable on monthly distribution dates due to an early
+ amortization event, an event of default resulting in an
+ acceleration of the notes or the failure to pay such subclass in
+ full on its targeted scheduled distribution date, then the LIBOR
+ reference for the related floating rate Class A Note
+ interest rate swap will convert to one-month LIBOR and the net
+ swap amounts due and payable under such floating rate
+ Class A Note interest rate swap will be exchanged on monthly
+ distribution dates.
+
+Variable Pay Term Notes Interest Rate Swap
+
+ 
+ 
+
+ 
+ 
+ The trust will also enter into an interest rate swap with
+ Deutsche Bank AG, New York Branch as the swap counterparty
+ on the closing date to hedge the floating interest rate on the
+ Variable Pay Term Notes the trust expects to issue, which swap
+ will have a notional amount at all times equal to the aggregate
+ principal balance of all outstanding Variable Pay Term Notes.
+
+ 
+
+ 
+ 
+ Under the interest rate swap agreement for the Variable Pay Term
+ Notes, on each monthly distribution date, the trust will be
+ obligated to pay the swap counterparty fixed rate monthly
+ payments on the notional amount of the swap and the swap
+ counterparty will be obligated to pay a floating rate payment
+ equal to one-month LIBOR to the trust on the same notional
+ amount.
+
+Terms of the Interest Rate Swap Agreements
+
+ 
+ 
+
+ 
+ 
+ Payments on each of the interest rate swaps will be exchanged on
+ a net basis. The net amount owed by the trust to a swap
+ counterparty on a monthly distribution date or quarterly payment
+ date with respect to an interest rate swap, if any, is a 
+ net swap payment, and the net amount owed by the
+ swap counterparty to the trust, if any, is a net swap
+ receipt, in each case excluding any swap termination
+ payments.
+
+ 
+
+ 
+ 
+ The obligations of the trust under the interest rate swap
+ agreements are secured under the indenture. Net swap payments
+ rank higher in priority than interest payments on the securities,
+ and swap termination payments are pari passu with interest on
+ the Class A Notes and Variable Pay Term Notes and senior to
+ other payments on the securities. The obligations of the swap
+ counterparties will be
+
+14
+
+Table of Contents
+
+ 
+ 
+
+ 
+ 
+ unsecured except under the circumstances described below.
+
+ 
+ 
+
+ 
+ 
+ In the event that a swap counterparty s long-term senior
+ unsecured debt ceases to be rated at the levels required to
+ maintain the then-current ratings assigned to the Class A
+ Notes and Variable Pay Term Notes by S P, Moody s and
+ Fitch, the trust will be entitled to terminate the related
+ interest rate swaps unless the swap counterparty posts collateral
+ to secure its obligations under the interest rate swap
+ agreements, assigns the interest rate swap to an eligible
+ substitute swap counterparty acceptable to the trust or
+ establishes other arrangements satisfactory to maintain the
+ ratings assigned to the Class A Notes and Variable Pay Term
+ Notes.
+
+ 
+
+ 
+ 
+ A termination event or an event of default on any interest rate
+ swap will result in a termination event or event of default,
+ respectively, on each of the other interest rate swaps that the
+ trust has entered into with that swap counterparty.
+
+For further discussion of the interest rate swaps, see
+ Description of the Notes Interest Rate
+Swaps .
+
+The Revolving Period
+
+ 
+ 
+
+ 
+ 
+ The revolving period is scheduled to last until the targeted
+ scheduled distribution date of the Class A-1 Notes. During
+ the revolving period, after payment of any unreimbursed advances
+ by the servicer for payments due from obligors but not received,
+ the servicing fee, net swap payments, interest on the notes and
+ certificates, amounts required to be deposited into the
+ Class A quarterly interest funding account and any swap
+ termination payments, amounts otherwise allocable to principal
+ payments on the securities will be used to purchase additional
+ receivables on each monthly distribution date until the targeted
+ level of overcollateralization is reached and to the extent
+ sufficient additional receivables are available from the seller.
+ Any amounts collected from the receivables that remain after such
+ payments have been made and the targeted level of
+ overcollateralization has been reached shall be released to the
+ seller. Consequently, during the revolving period no principal
+ will be payable on the notes and certificates.
+
+ 
+
+ 
+ 
+ Upon the occurrence of an early amortization event, the revolving
+ period will be terminated early and the trust will be prohibited
+ from purchasing any additional receivables. Generally, an early
+ amortization event will occur upon the occurrence of any of the
+ following: (1) the three-month rolling average delinquency
+ ratio with respect to the receivables exceeds 2.25%, (2) the
+ three-month rolling average realized loss ratio with respect to
+ the receivables exceeds 2.50%, (3) the amount on deposit in
+ the reserve account is less than 75% of the specified reserve
+ balance for three consecutive months, (4) the amount in the
+ accumulation account exceeds 1.0% of the outstanding principal
+ balance of the receivables, (5) an event of servicing
+ termination, (6) an event of default under the indenture or
+ (7) an event of default or a termination event under one or
+ more of the interest rate swaps where an election is made to
+ terminate the related interest rate swap agreements and there is
+ a failure to enter into a replacement interest rate swap or
+ interest rate swaps with a substitute swap counterparty within
+ 30 days after the date of such termination.
+
+ 
+
+ 
+ 
+ Upon termination of the revolving period, the amortization period
+ will begin and amounts received by the trust allocable to
+ principal will be applied to the payment of principal of the
+ notes and certificates as further described herein.
+
+ 
+
+ 
+ 
+ During the revolving period, each pool of additional receivables
+ purchased on a monthly distribution date will be required to meet
+ certain eligibility criteria with respect to the minimum
+ weighted average APR, the maximum weighted average remaining term
+ to maturity, the percentage of receivables financing new
+ vehicles and the percentage of receivables purchased by PRIMUS,
+ unless the rating agencies confirm that the purchase of a pool of
+ additional receivables
+
+15
+
+Table of Contents
+
+ 
+ 
+
+ 
+ 
+ that does not meet those criteria will not result in a reduction,
+ suspension or withdrawal of their then-current ratings on the
+ notes. The trust will purchase the additional receivables at a
+ price of 94.63% of their principal balance, which is the same
+ discount at which the trust will purchase the initial receivables
+ on the closing date.
+
+Accumulation Account
+
+ 
+ 
+
+ 
+ 
+ During the revolving period, the servicer will use collections
+ and other funds received during each collection period that are
+ otherwise allocable to the payment of principal on the securities
+ to purchase additional receivables on behalf of the trust on
+ each monthly distribution date until the targeted level of
+ overcollateralization is reached. As long as the targeted level
+ of overcollateralization is maintained, funds which are not
+ needed to pay any unreimbursed advances made by the servicer for
+ payments due from obligors but not received, the servicing fee,
+ the accrual of interest on the interest rate swaps, amounts
+ required to be deposited into the Class A quarterly interest
+ funding account, any swap termination payments or interest on
+ the notes and certificates shall be released to the seller. To
+ the extent that amounts allocated for the purchase of additional
+ receivables are not so used on any monthly distribution date,
+ they will be deposited in the accumulation account and applied on
+ subsequent monthly distribution dates during the revolving
+ period to purchase additional receivables. During the revolving
+ period, an amount up to 1.0% of the principal balance of the
+ receivables (calculated as if all amounts deposited into the
+ accumulation account had been invested in receivables and not
+ including any reinvestment income) may be held in the
+ accumulation account without triggering an early amortization
+ event.
+
+ 
+
+ 
+ 
+ During the amortization period, if all Variable Pay Term Notes
+ are or have been paid in full and Class A Notes are
+ outstanding but none of the outstanding Class A Notes have
+ reached their targeted scheduled distribution dates, amounts
+ allocable to payment of principal will be deposited in the
+ accumulation account.
+
+ 
+
+ 
+ 
+ No funds will be deposited in the accumulation account
+ (1) on any monthly distribution date after the notes have
+ been accelerated following the occurrence of an event of default,
+ unless the event of default has been cured or waived, or after
+ the occurrence of an early amortization event, (2) on any
+ monthly distribution date on or after the date on which the
+ Class A Notes and Variable Pay Term Notes have been paid in
+ full, (3) on any monthly distribution date on which any
+ Variable Pay Term Notes are outstanding until such Variable Pay
+ Term Notes are paid in full or (4) on any monthly
+ distribution date on which principal is payable on any subclass
+ or subclasses of Class A Notes until such subclass or
+ subclasses are paid in full.
+
+ 
+
+ 
+ 
+ Amounts, if any, on deposit in the accumulation account during
+ the amortization period generally will be distributed on the next
+ targeted scheduled distribution date to pay principal of the
+ related subclass of Class A Notes.
+
+ 
+
+ 
+ 
+ Amounts on deposit in the accumulation account will be invested
+ in permitted investments.
+
+Class A Quarterly Interest Funding Account
+
+ 
+ 
+
+ 
+ 
+ On each monthly distribution date (including quarterly payment
+ dates), the fixed rate amounts that accrue on the floating rate
+ Class A Note interest rate swaps for the floating rate
+ Class A Notes that pay interest quarterly will be deposited
+ into the Class A quarterly interest funding account. Amounts
+ that accumulate in the Class A quarterly interest funding
+ account will be used to pay the net swap payments on the floating
+ rate Class A Notes that pay interest quarterly, and the net
+ swap receipts from such floating rate Class A Note interest
+ rate swaps will be deposited into the Class A quarterly
+ interest funding account.
+
+ 
+
+ 
+ 
+ On quarterly payment dates, after giving effect to all deposits
+ and withdrawals on that date, amounts in the Class A
+ quarterly
+
+16
+
+Table of Contents
+
+ 
+ 
+
+ 
+ 
+ interest funding account will be used to make interest payments
+ on the floating rate Class A Notes that are paid interest
+ quarterly.
+
+ 
+
+ 
+ 
+ Amounts on deposit in the Class A quarterly interest funding
+ account will be invested in permitted investments.
+
+Priority of Distributions
+
+From collections on the receivables during the prior monthly
+collection period, amounts withdrawn from the reserve account and
+ payahead account, any advances made by the servicer for payments
+ due from obligors but not received, any net swap receipts on the
+ Variable Pay Term Notes interest rate swaps and on any floating
+rate Class A Note interest rate swaps that are payable on
+monthly distribution dates and any swap termination payments paid
+ by the swap counterparties, unless certain events of default
+have occurred which will result in a change in the priority of
+distributions as further described herein, the trust will pay the
+ following amounts on each monthly distribution date (including
+any quarterly payment date) in the following order of priority,
+after reimbursement of any advances made in prior months by the
+servicer for payments due from obligors but not received:
+
+ 
+ 
+ 
+
+ 
+ (1)
+ 
+ Servicing Fee the servicing fee payable to the
+ servicer;
+
+ 
+
+ 
+ (2) 
+ 
+ Net Swap Payments on a pro rata basis, based on the
+ amounts payable or to be deposited, (a) to the applicable
+ swap counterparty, any net swap payments payable on the Variable
+ Pay Term Notes interest rate swap, (b) to the Class A
+ quarterly interest funding account, the amount of any net swap
+ payments accrued to such monthly distribution date on the
+ floating rate Class A Note interest rate swaps payable on
+ quarterly payment dates to the extent that such amount exceeds
+ the total amount on deposit in the Class A quarterly
+ interest funding account immediately prior to such monthly
+ distribution date, and (c) to the applicable swap
+ counterparty, any net swap payments payable on the floating rate
+ Class A Note interest rate swaps payable on monthly
+ distribution dates.
+
+ 
+
+ 
+ (3)
+ 
+ Class A Note and Variable Pay Term Note Interest and Swap
+ Termination Payments :
+
+ 
+ 
+ 
+
+ 
+ (A) 
+ 
+ with respect to the floating rate Class A Notes which
+ receive payments on quarterly payment dates, to the Class A
+ quarterly interest funding account an amount (together with the
+ amounts deposited in accordance with clause 2(b) above, the
+ Class A quarterly interest funding account deposit
+ amount ), equal to (x) on each monthly distribution
+ date that is not a quarterly payment date, the aggregate amount
+ of interest accrued on the notional amount of each floating rate
+ Class A Note interest rate swap at the fixed rate applicable
+ to each such floating rate Class A Note interest rate swap
+ minus the amount deposited under clause (2)(b), above, and
+ (y) on each quarterly payment date, the excess of the amount
+ needed to pay interest due on the floating rate Class A
+ Notes which receive payments on quarterly payment dates over the
+ aggregate amount on deposit in the Class A quarterly
+ interest funding account after giving effect to all net swap
+ payments and net swap receipts on the interest rate swaps
+ relating to the Class A Notes that are payable quarterly on
+ such quarterly payment date;
+
+17
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ (B) 
+ 
+ to the holders of the floating rate Class A Notes which
+ receive payments on monthly distribution dates and to the holders
+ of the fixed rate Class A Notes, interest due on such
+ subclasses of Class A Notes;
+
+ 
+
+ 
+ (C) 
+ 
+ to the holders of the Variable Pay Term Notes, interest due on
+ the Variable Pay Term Notes; and
+
+ 
+
+ 
+ (D) 
+ 
+ to the swap counterparties, the amount of any swap termination
+ payments;
+
+provided, that if amounts available for distributions are
+insufficient to make the deposits and payments described in
+clauses (A), (B), (C), and (D) above in full, then such
+amounts will be allocated pro rata based on (I) with
+respect to the deposits made to the Class A quarterly
+interest funding account, the principal balances of the
+subclasses of floating rate Class A Notes that receive
+payments on quarterly payment dates, (II) with respect to
+interest payments on the subclasses of floating rate Class A
+ Notes that receive interest on monthly distribution dates and
+with respect to the fixed rate Class A Notes, the principal
+balances of such subclasses of Class A Notes,
+(III) with respect to interest payments on the Variable Pay
+Term Notes, the principal balances of the Variable Pay Term
+Notes, and (IV) with respect to any swap termination
+payments, the amount of any such payments; and provided,
+further, that if any amounts are remaining after such
+allocations are made, such amounts will be allocated to the
+Class A quarterly interest funding account, the holders of
+the Class A Notes which receive payments on monthly
+distribution dates, the holders of the Variable Pay Term Notes
+and the swap counterparties pro rata based on the amounts
+described above in clauses (A), (B), (C) and (D),
+respectively, that have not been deposited or paid, as
+applicable, after giving effect to the prior allocations;
+
+ 
+ 
+ 
+
+ 
+ (4)
+ 
+ First Priority Principal Distribution Amount 
+ to the principal distribution account, an amount, if any, equal
+ to the excess of (x) the aggregate principal balance of the
+ Class A Notes and Variable Pay Term Notes less any amounts
+ on deposit in the accumulation account over (y) the
+ aggregate principal balance of the receivables less the yield
+ supplement overcollateralization amount;
+
+ 
+
+ 
+ (5)
+ 
+ Class B Note Interest interest due on the
+ Class B Notes to the holders of the Class B Notes;
+
+ 
+
+ 
+ (6)
+ 
+ Second Priority Principal Distribution Amount 
+ to the principal distribution account, an amount, if any, equal
+ to the excess of (x) the aggregate principal balance of the
+ Class A Notes, Variable Pay Term Notes and Class B
+ Notes less any amounts on deposit in the accumulation account
+ over (y) the aggregate principal balance of the receivables
+ less the yield supplement overcollateralization amount. This
+ amount will be reduced by any amount deposited in the principal
+ distribution account in accordance with clause (4) above;
+
+ 
+
+ 
+ (7)
+ 
+ Class C Certificate Interest interest due
+ on the Class C Certificates to the holders of the
+ Class C Certificates;
+
+ 
+
+ 
+ (8)
+ 
+ Class D Certificate Interest interest due
+ on the Class D Certificates to the holders of the
+ Class D Certificates;
+
+ 
+
+ 
+ (9) 
+ 
+ Reserve Account Deposit to the reserve
+ account, the amount, if any, necessary to reinstate the specified
+ reserve balance (calculated after giving effect to all amounts,
+ including amounts pursuant to clause (10) below, deposited
+ to the principal distribution account and then transferred to the
+ accumulation account on such date);
+
+18
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ (10) 
+ 
+ Regular Principal Distribution Amount to the
+ principal distribution account, an amount equal to the excess of
+ (x) the sum of the aggregate principal balances of the notes
+ and certificates less any amounts on deposit in the accumulation
+ account over (y) the aggregate principal balance of the
+ receivables less the sum of (A) the specified
+ overcollateralization amount, and (B) the yield supplement
+ overcollateralization amount. This amount will be reduced by any
+ amount deposited in the principal distribution account in
+ accordance with clauses (4) and (6) above; and
+
+ 
+
+ 
+ (11) 
+ 
+ any amounts remaining after the above distributions shall be paid
+ to the seller.
+
+Allocation of Amounts in the Class A Quarterly Interest
+Funding Account
+
+On each quarterly payment date, after giving effect to amounts
+deposited into the Class A quarterly interest funding
+account and to all net swap payments withdrawn therefrom on such
+quarterly payment date, interest shall be paid to the holders of
+the floating rate Class A Notes that receive payments on
+quarterly payment dates from amounts remaining on deposit in the
+Class A quarterly interest funding account, provided, that
+if amounts available for distribution are insufficient to pay
+such interest in full, then such amounts will be allocated pro
+ rata based on the amounts of interest due on the floating
+rate Class A Notes that receive interest payments on
+quarterly payment dates. Any amounts remaining in the
+Class A quarterly interest funding account after such
+payments are made will be deposited into the collection account
+and applied in accordance with the priorities set forth under 
+ Distributions on the Securities 
+Distributions Priority of Payments. 
+
+Following an early amortization event, amounts allocable to each
+subclass of the floating rate Class A Notes that receives
+interest payments on quarterly payment dates will be withdrawn
+from the Class A quarterly interest funding account and paid
+ to the holders of each such subclass, generally on the next
+monthly distribution date, after giving effect to any amounts
+deposited into the Class A quarterly interest funding
+account (including any net swap receipts) and any net swap
+payments withdrawn therefrom on such monthly distribution date,
+whether or not such monthly distribution date is a quarterly
+payment date.
+
+For a more detailed description of the priority of
+distributions and the allocation of funds on each monthly
+distribution date, you should refer to Distributions on the
+ Securities Distributions .
+
+Priority in Which Principal Payments Are Made on the Notes and
+ Certificates
+
+During the amortization period, on each monthly distribution
+date, from amounts on deposit in the principal distribution
+account, the VPTN proceeds account, and the accumulation account,
+ the indenture trustee will make payments to the holders of the
+notes and certificates in the following order of priority:
+
+ 
+ 
+ 
+
+ 
+ (1) 
+ 
+ to the Class A Notes and Variable Pay Term Notes as follows:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ if the monthly distribution date is a targeted scheduled
+ distribution date upon which the trust is able to issue and does
+ issue Variable Pay Term Notes, then
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ first, from amounts on deposit in the principal
+ distribution account, to the Variable Pay Term Notes, if any,
+ (excluding any Variable Pay Term Notes issued on such targeted
+ scheduled distribution date) until paid in full and then to such
+ subclass or subclasses of Class A Notes which have reached
+ or passed their targeted scheduled distribution dates;
+
+19
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ second, from amounts, if any, in the accumulation account
+ to such subclass of Class A Notes that has reached its
+ targeted scheduled distribution date until paid in full;
+
+ 
+
+ 
+ 
+ 
+ third, from amounts on deposit in the VPTN proceeds
+ account, to such subclass or subclasses of Class A Notes
+ that have reached or passed their targeted scheduled distribution
+ dates until paid in full; and
+
+ 
+
+ 
+ 
+ 
+ fourth, any remaining amounts on deposit in the principal
+ distribution account will be deposited to the accumulation
+ account if any Class A Notes are outstanding that have not
+ reached or passed their targeted scheduled distribution dates;
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ if the monthly distribution date (1) is a targeted scheduled
+ distribution date upon which the trust is unable to issue
+ Variable Pay Term Notes, or (2) is not a targeted scheduled
+ distribution date but upon such monthly distribution date a
+ subclass or subclasses of Class A Notes are outstanding that
+ have reached or passed their targeted scheduled distribution
+ dates (and if no early amortization event has occurred), then
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ first, from amounts on deposit in the principal
+ distribution account, to the Class A Notes and any Variable
+ Pay Term Notes, pro rata, on the basis of the total
+ principal amount of Class A Notes outstanding and the total
+ principal amount of Variable Pay Term Notes outstanding, with
+ payments allocable to the Class A Notes applied to the
+ subclass or subclasses of Class A Notes that have reached or
+ passed their targeted scheduled distribution dates until such
+ subclass or subclasses are paid in full;
+
+ 
+
+ 
+ 
+ 
+ second, from amounts, if any, in the accumulation account
+ to such subclass or subclasses of Class A Notes that have
+ reached their targeted scheduled distribution dates until paid in
+ full;
+
+ 
+
+ 
+ 
+ 
+ third, from amounts on deposit in the VPTN proceeds
+ account, to such subclass or subclasses of Class A Notes
+ that have reached or passed their targeted scheduled distribution
+ dates until paid in full; and
+
+ 
+
+ 
+ 
+ 
+ fourth, from any remaining amounts on deposit in the
+ principal distribution account, to the Variable Pay Term Notes
+ until paid in full and then any remaining amounts will be
+ deposited to the accumulation account if any Class A Notes
+ are outstanding;
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ if such monthly distribution date is not a targeted scheduled
+ distribution date and the trust has paid in full each subclass of
+ Class A Notes which has reached or passed its targeted
+ scheduled distribution date, then
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ first, from amounts on deposit in the principal
+ distribution account, to the Variable Pay Term Notes, if any,
+ until paid in full; and
+
+ 
+
+ 
+ 
+ 
+ second, any remaining amounts will be deposited to the
+ accumulation account if any Class A Notes are outstanding;
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ if an early amortization event has occurred, to the Class A
+ Notes until they are paid in full;
+
+20
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ (2) 
+ 
+ to the Class B Notes until they are paid in full;
+
+ 
+
+ 
+ (3) 
+ 
+ to the Class C Certificates until they are paid in full;
+
+ 
+
+ 
+ (4) 
+ 
+ to the Class D Certificates until they are paid in full; and
+
+ 
+
+ 
+ (5) 
+ 
+ to the seller, any funds remaining.
+
+All of the subclasses of Class A Notes will be paid
+sequentially, so that no principal payments will be paid on any
+subclass of Class A Notes until all subclasses of
+Class A Notes with a lower numerical designation have been
+paid in full. If, at any time, more than one Variable Pay Term
+Note is outstanding, principal will be paid to the Variable Pay
+Term Notes sequentially, with the earliest issued Variable Pay
+Term Note being paid in full before principal is paid to any
+later issued Variable Pay Term Note.
+
+For a more detailed description of the distributions and the
+allocation of funds on each monthly distribution date, you should
+ refer to Distributions on the Securities 
+Distributions .
+
+Change of Priority of Distributions Upon Certain Events of
+Default and Insolvency Events
+
+Following the occurrence of one of the events of default listed
+below:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ a default in the payment of principal on a class or subclass of
+ notes that has resulted in an acceleration of the notes;
+
+ 
+
+ 
+ 
+ 
+ a default for five days or more in the payment of interest on the
+ controlling class of notes that has resulted in an acceleration
+ of the notes; or
+
+ 
+
+ 
+ 
+ 
+ certain events of bankruptcy, insolvency, receivership or
+ liquidation of the trust or its property which has resulted in an
+ acceleration of the notes;
+
+the trust will make no distributions of principal or interest on
+the Class B Notes until payment in full of principal and
+interest on the Class A Notes and the Variable Pay Term
+Notes and any net swap payments and swap termination payments
+owed by the trust to the swap counterparties and no distributions
+ of principal or interest on the certificates until payment in
+full of principal and interest on the Class B Notes.
+
+Following the occurrence of any other event of default which has
+resulted in an acceleration of the notes, no change will be made
+in the priority of payment of interest on the notes on each
+monthly distribution date until a liquidation, if any, of the
+property of the trust. However, the trust will pay the notes in
+full and any net swap payments and swap termination payments owed
+ by the trust to the swap counterparties before paying any
+principal or interest on the certificates.
+
+For a more detailed description of events of default and
+rights of investors in such circumstances, you should refer to
+ Description of the Notes Events of
+Default .
+
+Credit Enhancement
+
+Credit enhancement for the notes will be provided by
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the reserve account;
+
+ 
+
+ 
+ 
+ 
+ overcollateralization; and
+
+ 
+
+ 
+ 
+ 
+ the subordinated class or subclasses of notes and the
+ subordination of the certificates.
+
+Reserve Account
+
+ 
+ 
+
+ 
+ 
+ On the closing date, the seller will deposit $14,997,999.97 into
+ the reserve account. On each monthly distribution date, the trust
+ will deposit into the reserve account, to the extent necessary
+ to reinstate the required balance of the reserve account, any
+ collections on the receivables remaining after the first eight
+ items listed in Priority of Distributions 
+ above are satisfied.
+
+ 
+
+ 
+ 
+ The balance required to be on deposit in the reserve account will
+ be the lesser of (a) $14,997,999.97 and (b) the
+ outstanding principal balance of the notes and certificates.
+
+21
+
+Table of Contents
+
+ 
+ 
+
+ 
+ 
+ In addition, if amounts are on deposit in the accumulation
+ account, the balance required to be on deposit in the reserve
+ account will be increased to compensate for any negative
+ carry that may occur if the average interest rates on the
+ permitted investments in the accumulation account are lower than
+ the weighted average interest rate of the outstanding securities.
+ The increased amount placed on deposit will be withdrawn and
+ applied with collections to the extent that the corresponding
+ funds are withdrawn from the accumulation account and applied to
+ the purchase of additional receivables during the revolving
+ period or paid to the holders of the Class A notes in
+ respect of principal during the amortization period.
+
+ 
+
+ 
+ 
+ To the extent that funds are not sufficient on any monthly
+ distribution date to pay the servicing fee, the net swap
+ payments, any swap termination payments, interest payments on all
+ classes of notes and certificates payable on such monthly
+ distribution date and any first priority or second priority
+ principal distribution amounts, and to make the required deposit
+ into the Class A quarterly interest funding account, the
+ indenture trustee will withdraw funds from the reserve account
+ for those purposes.
+
+ 
+
+ 
+ 
+ On and after the final scheduled distribution date for any class
+ or subclass of securities, if such class or subclass has not been
+ paid in full, amounts on deposit in the reserve account will be
+ withdrawn to repay such class or subclass in full.
+
+ 
+
+ 
+ 
+ Amounts on deposit in the reserve account will not be used to pay
+ principal on any subclass of Class A Notes on its targeted
+ scheduled distribution date solely for the purpose of paying such
+ subclass on that targeted scheduled distribution date.
+
+ 
+
+ 
+ 
+ On any monthly distribution date, after the trust pays the
+ servicing fee, the net swap payments, any swap termination
+ payments, interest payments on all classes of notes and
+ certificates payable on such monthly distribution date and all
+ principal distribution amounts, and makes the required deposit
+ into the Class A quarterly interest funding account, amounts
+ in excess of the required reserve balance will be released to
+ the seller.
+
+For a further discussion of the reserve account, refer to
+ Distributions on the Securities Reserve
+Account .
+
+Overcollateralization
+
+The overcollateralization amount represents the amount by which
+the principal balance of the receivables exceeds the principal
+balance of the notes and certificates.
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Initially, the principal balance of the receivables will exceed
+ the principal balance of the notes and certificates by 5.37% of
+ the receivables balance.
+
+ 
+
+ 
+ 
+ 
+ Because both interest and principal collected on the receivables
+ will be used to purchase additional receivables during the
+ revolving period, it is expected that the overcollateralization
+ amount will increase and the targeted level of
+ overcollateralization will be reached during the revolving
+ period. Once the targeted level of overcollateralization has been
+ reached, collections remaining on any monthly distribution date
+ after the first 10 items listed under Priority of
+ Distributions above will be released to the seller.
+
+The targeted level for the overcollateralization amount is
+structured as a dynamic formula to absorb anticipated losses on
+the receivables and to compensate for the low interest rates of
+some of the receivables. The targeted level for the
+overcollateralization amount on each monthly distribution date
+will be the sum of:
+
+ 
+ 
+
+ (X) 
+ 
+ the excess of:
+
+ 
+ 
+
+ (1)
+ 
+ the lesser of:
+
+ 
+ 
+
+ (a)
+ 
+ the greatest of:
+
+ 
+ 
+
+ (A)
+ 
+ $14,997,999.97
+
+ 
+
+ (B)
+ 
+ 1.00% of the outstanding principal balance of the receivables,
+
+ and
+
+22
+
+Table of Contents
+
+ 
+ 
+
+ (C)
+ 
+ the aggregate principal balance of the receivables that are
+ delinquent 91 days or more and have not yet been liquidated,
+ and
+
+ 
+ 
+
+ (b)
+ 
+ the outstanding principal balance of the notes and certificates,
+
+over
+
+ 
+ 
+
+ (2)
+ 
+ the balance required to be on deposit in the reserve account
+
+and
+
+ 
+ 
+
+ (Y) 
+ 
+ the yield supplement overcollateralization amount for the
+ applicable monthly distribution date.
+
+ 
+ 
+
+ 
+ 
+ The yield supplement overcollateralization amount is designed to
+ compensate for receivables with interest rates below 12%.
+
+ 
+
+ 
+ 
+ For the initial receivables purchased on the closing date, the
+ yield supplement overcollateralization amounts for each monthly
+ distribution date will be calculated as the aggregate of the
+ excess, if any, for each receivable, of the present value on such
+ monthly distribution date of all future scheduled payments
+ discounted at the receivable s APR over the present value on
+ such monthly distribution date of all such payments discounted
+ at a rate of 12%, assuming no prepayments, defaults or
+ delinquencies.
+
+ 
+
+ 
+ 
+ For the additional receivables that are purchased during the
+ revolving period, the yield supplement overcollateralization
+ amount will be determined as of the applicable subsequent cut-off
+ date. The yield supplement overcollateralization amount for the
+ pool of additional receivables will be determined by applying a
+ YSOA factor calculated for each future monthly
+ distribution date which is equal to the ratio of (1) the
+ yield supplement overcollateralization amount for the initial
+ receivables with respect to each monthly distribution date to
+ (2) the aggregate principal balance of the initial
+ receivables as of the initial cut-off date. The yield supplement
+ overcollateralization amount will then be recalculated upon each
+ purchase of additional receivables by (1) multiplying the
+ YSOA factors (beginning with the closing date YSOA factor) by the
+ principal balance of the additional receivables as of the
+ applicable subsequent cut-off date and (2) adding the
+ results to the yield supplement overcollateralization amounts
+ (beginning with the monthly distribution date on which the
+ additional receivables are purchased).
+
+ 
+
+ 
+ 
+ Although the eligibility criteria for the additional receivables
+ require that the pool of additional receivables purchased on each
+ monthly distribution date have a weighted average coupon of not
+ less than 7.53% and a weighted average remaining term to maturity
+ of not greater than 49.1 months, the exact characteristics
+ of the additional receivables will not be taken into account in
+ determining the yield supplement overcollateralization amount for
+ the additional receivables. For this reason, there is no
+ assurance that the additions to the yield supplement
+ overcollateralization amount with respect to the additional
+ receivables added during the revolving period will provide the
+ same level of overcollateralization as provided for the initial
+ receivables, or will be sufficient to compensate for receivables
+ with low APRs.
+
+ 
+
+ 
+ 
+ You can find the yield supplement overcollateralization amounts
+ and the YSOA factors listed in the glossary at the end of this
+ prospectus under the definition of Yield Supplement
+ Overcollateralization Amount and YSOA Factor 
+ .
+
+For a more detailed description of the application of funds
+and the calculation of the overcollateralization amount, you
+should refer to Distributions on the Securities 
+ Distributions Priority of Payments . For a more
+ detailed description of the risks associated with low APR
+receivables and the calculation of the yield supplement
+overcollateralization amount, see Risk Factors 
+You May Suffer Losses Due to Receivables with Low APRs. 
+
+Subordination of Principal and Interest
+
+As long as any Class A Notes, Variable Pay Term Notes or
+interest rate swaps remain
+
+23
+
+Table of Contents
+
+outstanding, (1) payments of interest on the Class B
+Notes will be subordinated to payments of interest on the
+Class A Notes and Variable Pay Term Notes, to the deposit of
+ the Class A quarterly interest funding account deposit
+amount into the Class A quarterly interest funding account,
+to payments (including termination payments) due to the swap
+counterparties under the interest rate swaps and, in certain
+circumstances, to payments of principal on the Class A Notes
+ and Variable Pay Term Notes and (2) payments of principal
+on the Class B Notes will be subordinated to payments of
+interest and principal on the Class A Notes and Variable Pay
+ Term Notes, to the deposit of the Class A quarterly
+interest funding account deposit amount into the Class A
+quarterly interest funding account and to payments (including
+termination payments) due to the swap counterparties under the
+interest rate swaps.
+
+As long as the Class A Notes, Variable Pay Term Notes, any
+of the interest rate swaps or the Class B Notes remain
+outstanding, (1) payments of interest on the certificates
+will be subordinated to payments of interest on the notes, to the
+ deposit of the Class A quarterly interest funding account
+deposit amount into the Class A quarterly interest funding
+account and to payments (including termination payments) due to
+the swap counterparties under the interest rate swaps and, in
+certain circumstances, to payments of principal on the notes and
+(2) payments of principal on the certificates will be
+subordinated to payments of interest and principal on the notes,
+to the deposit of the Class A quarterly interest funding
+account deposit amount into the Class A quarterly interest
+funding account and to payments (including termination payments)
+due to the swap counterparties under the interest rate swaps.
+
+For further discussion on the subordination of the
+Class B Notes and the certificates, refer to
+ Distributions on the Securities 
+Distributions .
+
+Governing Law
+
+The notes, the indenture, the purchase agreement, the sale and
+servicing agreement, the administration agreement and the
+interest rate swap agreements will be governed by, and construed
+in accordance with, the laws of the State of New York. The trust
+agreement and the certificates will be governed by, and construed
+ in accordance with, the laws of the State of Delaware.
+
+24
+
+Table of Contents
+
+RISK FACTORS
+
+ 
+You should consider the following risk factors in deciding
+whether to purchase any of the notes.
+
+ 
+
+ 
+ 
+ 
+
+ 
+ The Absence of a Secondary Market Could Limit Your Ability to
+ Resell Your Notes
+ 
+ 
+ The absence of a secondary market for the notes could limit your
+ ability to resell them. This means that if in the future you want
+ to sell any of your notes before they mature, you may be unable
+ to find a buyer or, if you find a buyer, the selling price may be
+ less than it would have been if a market existed for the notes.
+ There currently is no secondary market for the notes. The
+ underwriters expect to make a market for the notes but will not
+ be obligated to do so. There is no assurance that a secondary
+ market for the notes will develop. If a secondary market for the
+ notes does develop, it might end at any time or it might not be
+ sufficiently liquid to enable you to resell any of your notes.
+
+ 
+
+ 
+ You May Experience Losses Due to Limited Assets of the Trust
+ 
+ 
+ 
+ The only source of funds for payments on the notes will be the
+ assets of the trust. You will suffer a loss on your notes if the
+ assets of the trust are insufficient to pay the principal amount
+ of your notes in full. The securities are obligations solely of
+ the trust and will not be insured or guaranteed by Ford Credit,
+ including in its capacity as servicer or originator of the
+ receivables, or by the indenture trustee, the owner trustee or
+ any other person or entity. Consequently, you must rely for
+ payment of your securities upon payments on the receivables and
+ under the interest rate swaps, and, to the extent available,
+ funds on deposit in the reserve account.
+
+ 
+
+ 
+
+ 
+ 
+ The amount required to be on deposit in the reserve account will
+ be limited in amount. After the amounts in the reserve account
+ are depleted, the trust will depend solely on collections on the
+ receivables to make payments on your securities.
+
+ 
+
+ 
+
+ 
+ 
+ The balance required to be on deposit in the reserve account will
+ decrease as the outstanding balance of the receivables
+ decreases. The balance on deposit in the reserve account will
+ decrease as amounts are paid out to cover shortfalls in
+ distributions of principal and interest on the securities.
+
+ 
+
+ 
+
+ 
+ 
+ The indenture authorizes the indenture trustee to sell the
+ receivables following an acceleration of the maturity dates of
+ the notes, subject to the conditions set forth in the indenture.
+ However, the amount received by the indenture trustee upon
+ selling the receivables may be less than the aggregate principal
+ amount of the outstanding notes. In such a circumstance, the
+ principal amount of the notes may not be paid in full.
+
+25
+
+Table of Contents
+
+ 
+
+ 
+ 
+ 
+
+ 
+ You May Experience Reinvestment Risk Because of Prepayments
+ and May Suffer Opportunity Costs Because Targeted Scheduled
+ Distribution Dates Are Not Assured
+ 
+ 
+ The trust expects that each subclass of Class A Notes will
+ be paid in full on its targeted scheduled distribution date
+ through the issuance and sale of Variable Pay Term Notes.
+ Following the revolving period, so long as none of the
+ outstanding subclasses of Class A Notes have reached or
+ passed their targeted scheduled distribution dates, payments
+ allocable to principal, including prepayments from any
+ receivables, will be applied to any outstanding Variable Pay Term
+ Notes, or if none are outstanding, deposited to the accumulation
+ account as long as any other Class A Notes are outstanding.
+ As a result, the Class A Notes will generally not be
+ subject to prepayment risk. It is possible, however, that a
+ subclass or subclasses of the Class A Notes could receive
+ their principal payments either sooner or later than their
+ targeted scheduled distribution dates.
+
+ 
+
+ 
+
+ 
+ 
+ If an early amortization event occurs, the revolving period will
+ end earlier than scheduled, no Variable Pay Term Notes will be
+ issued, no deposits will be held in the accumulation account, and
+ amounts available to make principal payments will be applied
+ each month to pay each subclass of Class A Notes
+ sequentially so that no principal payments will be paid on any
+ subclass of Class A Notes until all subclasses of
+ Class A Notes with a lower numerical designation have been
+ paid in full. In such event, the rate of principal payments on
+ the Class A Notes will depend on the amount of payments,
+ prepayments and defaults occurring on the receivables.
+
+ 
+
+ 
+
+ 
+ 
+ If any subclass of Class A Notes is not paid in full on its
+ targeted scheduled distribution date (either because the trust
+ failed to satisfy the required conditions for issuance of
+ Variable Pay Term Notes or was unable to sell Variable Pay Term
+ Notes in the required amount), amounts on deposit in the
+ principal distribution account will be applied to such subclass
+ or subclasses of Class A Notes and any outstanding Variable
+ Pay Term Notes pro rata on that targeted scheduled
+ distribution date and each monthly distribution date thereafter
+ until such subclass or subclasses of Class A Notes are paid
+ in full (either by application of collections to such
+ Class A Notes or because Variable Pay Term Notes are
+ subsequently issued). If this occurs, investors in that subclass
+ or in those subclasses of Class A Notes will receive
+ repayment of principal later than their respective targeted
+ scheduled distribution date and may lose the opportunity to
+ reinvest the principal at rates that may be more favorable than
+ the rate of return that any such subclass of Class A Notes
+ is providing.
+
+ 
+
+ 
+
+ 
+ 
+ The Class B Notes do not have targeted scheduled
+ distribution dates, and the timing of principal payments on the
+
+26
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ Class B Notes will vary according to the level of payments,
+ prepayments, repurchases of the receivables by the seller or the
+ servicer and defaults within the pool of receivables. It is
+ expected that holders of Class B Notes will receive
+ principal distributions prior to their final scheduled
+ distribution date. Such investors may not be able to reinvest
+ such principal at rates equal to or greater than the rates they
+ will earn on the Class B Notes.
+
+ 
+
+ 
+
+ 
+ 
+ As a general matter, the receivables included in the trust may be
+ prepaid, in full or in part, voluntarily or as a result of
+ defaults, theft of or damage to the related vehicles or other
+ reasons. Ford Credit will be required to repurchase a receivable
+ from the seller, and the seller will be required to repurchase a
+ receivable from the trust, if Ford Credit breached its
+ representations and warranties with respect to the receivable in
+ the purchase agreement with the seller. Ford Credit, in its
+ capacity as servicer, will be required to purchase a receivable
+ from the trust if it breaches its servicing obligations with
+ respect to the receivable and the receivable is materially and
+ adversely affected by the breach. The servicer also will be
+ entitled to purchase all remaining receivables from the trust
+ once the aggregate principal balance of the receivables is 10% or
+ less of the aggregate principal balance of the receivables as of
+ the last day of the revolving period.
+
+ 
+
+ 
+
+ 
+ 
+ The rate of prepayments on the receivables may be influenced by a
+ variety of economic, social and other factors in addition to
+ those described in the preceding paragraph.
+
+ 
+
+ 
+
+ 
+ 
+ Ford Credit does not generally maintain records of the historical
+ prepayment experience of its portfolio of receivables. No
+ prediction can be made as to the actual prepayment rates which
+ will be experienced on the receivables. You will bear all
+ reinvestment risk resulting from prepayments on the receivables
+ and any corresponding acceleration of payments on the securities.
+
+ 
+
+ 
+
+ 
+ 
+ The final payment of the Class A Notes and the Class B
+ Notes is expected to occur prior to their final scheduled
+ distribution dates because of the considerations set forth above.
+ If sufficient funds are not available to pay any class or
+ subclass of notes in full on its final scheduled distribution
+ date, an event of default will occur and final payment of such
+ class or subclass of notes may occur later than such date or may
+ not occur at all.
+
+ 
+
+ 
+
+ 
+ 
+ For more information regarding the timing of repayments of the
+ notes, see Maturity and Prepayment Considerations .
+ 
+
+27
+
+Table of Contents
+
+ 
+
+ 
+ 
+ 
+
+ 
+ Amounts in the Reserve Account Are Limited and May Not Be
+ Sufficient to Cover Losses on the Notes
+ 
+ 
+ Amounts on deposit in the reserve account from time to time are
+ available to:
+
+ 
+
+ 
+
+ 
+ 
+ enhance the likelihood that you will receive the
+ interest due on each monthly distribution date or quarterly
+ payment date and principal on the final scheduled distribution
+ date for your notes; and
+
+ 
+
+ 
+
+ 
+ 
+ decrease the likelihood that you will experience
+ losses on your notes.
+
+ 
+
+ 
+
+ 
+ 
+ However, the amounts on deposit in the reserve account are
+ limited to the specified reserve balance. If the amount required
+ to be withdrawn from the reserve account to cover shortfalls in
+ funds on deposit in the collection account exceeds the amount on
+ deposit in the reserve account, a temporary shortfall in the
+ amounts distributed to the holders of the notes could result. In
+ addition, depletion of the reserve account ultimately could
+ result in losses on your notes.
+
+ 
+
+ 
+ Amounts in the Reserve Account May Not Be Liquid
+ 
+ 
+ Funds in the reserve account may be invested in permitted
+ investments that will not mature prior to the next monthly
+ distribution date if each rating agency confirms that doing so
+ will not affect the ratings on the notes. These investments will
+ not be sold to cover any shortfalls that occur on a monthly
+ distribution date. This could delay payments to you because these
+ funds would not be available on a particular monthly
+ distribution date.
+
+ 
+
+ 
+ You May Suffer Losses Due to Receivables with Low APRs
+ 
+ 
+ The receivables include receivables which have APRs that are
+ lower than the interest rates on the notes or certificates.
+ Interest paid on the higher coupon receivables compensates for
+ the lower coupon receivables to the extent such interest is paid
+ by the trust as principal on the notes or certificates and
+ additional overcollateralization is created. Excessive
+ prepayments on the higher coupon receivables may adversely impact
+ your notes by reducing such interest payments available.
+
+ 
+
+ 
+
+ 
+ 
+ The targeted level of overcollateralization takes into account
+ the mix of initial receivables by APR and potential changes in
+ that mix through prepayments and purchases of additional
+ receivables by including the yield supplement
+ overcollateralization amounts. However, there is no assurance
+ that the targeted level of overcollateralization will be achieved
+ or will be sufficient to pay all notes in full.
+
+ 
+
+ 
+
+ 
+ 
+ The yield supplement overcollateralization amounts are designed
+ to cause the cash flow from the receivables to be greater than
+ the amount needed to pay principal and interest
+
+28
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ on the securities and provide credit enhancement. The yield
+ supplement overcollateralization amounts will be determined:
+
+ 
+
+ 
+
+ 
+ 
+ on the closing date for the initial receivables
+ sold on the closing date; and
+
+ 
+
+ 
+
+ 
+ 
+ on each monthly distribution date during the
+ revolving period, for the additional receivables sold to the
+ trust.
+
+ 
+
+ 
+
+ 
+ Changing Characteristics of the Receivables Pool During the
+ Revolving Period Could Result in Faster or Slower Repayments or
+ Losses on Your Notes
+ 
+ 
+ During the revolving period, the amounts that would otherwise be
+ used to repay the principal of the securities will be used to
+ purchase additional receivables from the seller. In addition,
+ initial receivables and additional receivables will pay, prepay
+ and default during the revolving period. For these reasons, the
+ characteristics of the receivables pool will change after the
+ closing date, and could be substantially different at the end of
+ the revolving period from the characteristics of the initial
+ receivables pool. These differences could result in faster or
+ slower repayments or greater losses on your notes.
+
+ 
+
+ 
+
+ 
+ 
+ Although each pool of additional receivables purchased on a
+ monthly distribution date is required to have a minimum weighted
+ average coupon and a maximum weighted average remaining term to
+ maturity, the exact characteristics of the additional receivables
+ will not be taken into account in determining the yield
+ supplement overcollateralization amount. The weighted average APR
+ criterion for the additional receivables will not ensure that
+ the aggregate principal amount of receivables with any specific
+ APR or range of APRs in any pool of additional receivables will
+ be proportional to the principal amount of the receivables with
+ that APR or range of APRs in the pool of initial receivables
+ (including the receivables with APRs less than 12%, for which the
+ yield supplement overcollateralization amount is designed to
+ compensate).
+
+ 
+
+ 
+
+ 
+ 
+ To the extent the characteristics of the additional pools of
+ receivables differ from those of the initial pool of receivables
+ at closing, the amounts applied to the additional pools of
+ receivables to compensate for yield may be less than actually
+ needed and may be less than the amount of credit enhancement
+ provided by the yield supplement overcollateralization amount for
+ the initial receivables on the closing date. For example, if
+ pools of additional receivables have greater proportions of
+ receivables with lower-than-average APRs and longer-than-average
+ terms to maturity than the initial pool of receivables purchased
+ on the closing date, the yield supplement overcollateralization
+ amount may be less than is actually needed. Accordingly, this
+ would
+
+29
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ increase the risk that you may incur delays in payment or losses
+ on your notes.
+
+ 
+
+ 
+ The Class B Notes Are Subject to Greater Risk Because the
+ Class B Notes Are Subordinate to the Class A Notes and
+ Variable Pay Term Notes
+ 
+ 
+ The Class B Notes bear greater risk of delays in payment and
+ losses than the Class A Notes and the Variable Pay Term
+ Notes because payments of interest and principal on the
+ Class B Notes are subordinated, to the extent described
+ below, to payments of interest and principal on the Class A
+ Notes and the Variable Pay Term Notes, to the deposit of the
+ Class A quarterly interest funding account deposit amount
+ into the Class A quarterly interest funding account, and to
+ payments (including termination payments) due to the swap
+ counterparties under the interest rate swaps.
+
+ 
+
+ 
+
+ 
+ 
+ Interest payments on the Class B Notes on each monthly
+ distribution date will be subordinated to unreimbursed servicer
+ advances and advances by the servicer, of the proceeds from the
+ issuance and sale of a Variable Pay Term Note, servicing fees due
+ to the servicer, net swap payments and termination payments
+ payable to the swap counterparty, interest payments on the
+ Class A Notes and the Variable Pay Term Notes, the deposit
+ of the Class A quarterly interest funding account deposit
+ amount into the Class A quarterly interest funding account,
+ and an allocation of principal payments to the Class A Notes
+ and the Variable Pay Term Notes to the extent that the sum of
+ the principal balances of the Class A Notes and the Variable
+ Pay Term Notes exceeds the sum of the receivables balance and
+ amounts in the accumulation account (exclusive of investment
+ earnings), less the yield supplement overcollateralization
+ amount.
+
+ 
+
+ 
+
+ 
+ 
+ Principal payments on the Class B Notes will be fully
+ subordinated to principal payments on the Class A Notes and
+ the Variable Pay Term Notes. No principal will be paid on the
+ Class B Notes until interest and principal of the
+ Class A Notes and the Variable Pay Term Notes have been paid
+ in full.
+
+ 
+
+ 
+
+ 
+ 
+ For a more detailed description of principal payment
+ distributions, see Distributions on the
+ Securities Distributions Priority of
+ Payments . You should note that the payment sequence
+ changes, however, following certain events of default.
+
+ 
+
+ 
+
+ 
+ The Revolving Period May End if Ford Credit is Unable to
+ Originate Additional Receivables
+ 
+ 
+ During the revolving period, no principal will be paid to the
+ noteholders or certificateholders. Instead, on each monthly
+ distribution date during the revolving period, the trust will
+ generally apply amounts allocable to principal payments on the
+ notes and certificates to purchase additional receivables.
+
+30
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ Such amounts that are not applied to purchase additional
+ receivables will be deposited to the accumulation account. If,
+ however, additional receivables meeting the eligibility criteria
+ are not available for sale to the trust such that the
+ unreinvested principal amounts deposited into the accumulation
+ account during the revolving period exceed 1.00% of the aggregate
+ principal balance of the receivables pool (calculated as if all
+ amounts had been reinvested in receivables), then an early
+ amortization event will occur. If an early amortization event
+ occurs, the revolving period will terminate and the amortization
+ period will commence. Ford Credit does not, as of the date of
+ this offering, expect that any shortage in availability will
+ arise during the revolving period, and has agreed to sell to the
+ trust a sufficient amount of additional receivables. However, if
+ Ford Credit is unable to originate additional receivables as
+ expected and the revolving period terminates early, then you will
+ receive payments of principal on your notes earlier than
+ expected. In addition, if the revolving period terminates early,
+ no Variable Pay Term Notes will be issued and payments on the
+ Class A Notes will be made on monthly distribution dates
+ (with principal paid sequentially) rather than on targeted
+ scheduled distribution dates.
+
+ 
+
+ 
+
+ 
+ Failure to Sell Variable Pay Term Notes Will Result in
+ Class A Notes Not Being Paid in Full on Their Targeted
+ Scheduled Distribution Dates
+ 
+ 
+ The trust s ability to pay the full principal amount of any
+ subclass of Class A Notes on its targeted scheduled
+ distribution date will depend on whether the trust is able to
+ sell Variable Pay Term Notes on that targeted scheduled
+ distribution date in the amount necessary, together with other
+ funds available, to pay such subclass of Class A Notes in
+ full. To the extent Variable Pay Term Notes are not issued and
+ sold by the trust on a targeted scheduled distribution date, it
+ is highly unlikely that holders of any Class A Notes
+ targeted for payment on that date will be paid in full on such
+ date.
+
+ 
+
+ 
+
+ 
+ 
+ The trust will not be able to issue Variable Pay Term Notes
+ unless all of the conditions to issuance are met and one or more
+ purchasers agree to purchase the Variable Pay Term Notes. The
+ conditions to issuance include restrictions that the spread over
+ one-month LIBOR on the Variable Pay Term Notes not exceed 1.50%
+ and that such notes be issued in amounts sufficient to repay one
+ or more subclasses of Class A Notes, each in full.
+
+ 
+
+ 
+
+ 
+ 
+ Although the administrator, Ford Credit, has agreed to use
+ reasonable efforts to find purchasers on each targeted scheduled
+ distribution date, and in the event that Variable Pay Term Notes
+ are not issued on any targeted scheduled distribution date, to
+ continue to use reasonable efforts to find
+
+31
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ purchasers on each monthly distribution date thereafter, no
+ person or entity is obligated to purchase a Variable Pay Term
+ Note or any interest therein.
+
+ 
+
+ 
+
+ 
+ 
+ Although FCAR Owner Trust, a commercial paper conduit
+ administered by Ford Credit, is permitted to purchase Variable
+ Pay Term Notes, FCAR Owner Trust has limited purchasing capacity,
+ and there is no guarantee that sufficient capacity will be
+ available to purchase any Variable Pay Term Note. Even if FCAR
+ Owner Trust has sufficient capacity to purchase a Variable Pay
+ Term Note, it is not obligated to make any such purchase, and
+ Ford Credit as administrator of FCAR Owner Trust may determine
+ that it is not in the best interests of FCAR Owner Trust to
+ purchase a Variable Pay Term Note.
+
+ 
+
+ 
+
+ 
+ 
+ Accordingly, there is no assurance that any Variable Pay Term
+ Notes will be issued and sold or that the proceeds from sale of
+ Variable Pay Term Notes will be sufficient to pay a subclass of
+ Class A Notes in full on its targeted scheduled distribution
+ date or on any monthly distribution date thereafter.
+
+ 
+
+ 
+
+ 
+ 
+ Although interest will continue to accrue on all outstanding
+ subclasses of Class A Notes at their respective interest
+ rates, if Variable Pay Term Notes are not issued and sold on any
+ targeted scheduled distribution date, it is extremely unlikely
+ that the holders of the related subclass of Class A Notes
+ will receive the full principal payment on the targeted scheduled
+ distribution date. In that event, holders of such subclass of
+ Class A Notes may lose the opportunity to reinvest such
+ amounts at more favorable rates until the principal payments are
+ received after the applicable targeted scheduled distribution
+ date.
+
+ 
+
+ 
+ The Issuance of the Variable Pay Term Notes May Reduce the
+ Amount of Funds Available for Distribution to Other Notes and the
+ Certificates
+ 
+ 
+ The Variable Pay Term Notes will bear interest at floating rates
+ with spreads to LIBOR which will be determined at the time of
+ issuance. Although such spreads cannot exceed 1.50% and an
+ interest rate swap with a notional amount equal to the aggregate
+ principal balance of the outstanding Variable Pay Term Notes must
+ be in effect, the issuance of Variable Pay Term Note at all-in
+ rates (after giving effect to the fixed rates payable by the
+ trust and the floating rate payable to the trust under the
+ Variable Pay Term Notes interest rate swap) higher than the
+ interest rates of the related subclasses of Class A Notes
+ which are being repaid will increase the amount of interest
+ payable by the trust. Since interest payments on the Variable Pay
+ Term Notes are paid pro rata with interest payments on
+ the Class A Notes and any swap termination payments and are
+ senior to payments of interest and principal on the Class B
+ Notes and the certificates, the
+
+32
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ issuance of such Variable Pay Term Notes would reduce the amount
+ of funds available for distribution to the other notes and
+ certificates. This could result in a delay in or loss of payments
+ on your notes or the certificates or in a reduction of their
+ ratings.
+
+ 
+
+ 
+ Risks Associated with the Interest Rate Swaps
+ 
+ 
+ The trust will enter into interest rate swaps because the
+ receivables owned by the trust bear interest at a fixed rate
+ while the floating rate Class A Notes and the Variable Pay
+ Term Notes will bear interest at floating rates based on LIBOR.
+ The trust will use payments made by the swap counterparties to
+ help make interest payments on the notes and the certificates.
+
+ 
+
+ 
+
+ 
+ 
+ During those periods in which the floating LIBOR-based rates
+ payable by the swap counterparties are substantially greater than
+ the fixed rates payable by the trust, the trust will be more
+ dependent on receiving payments from the swap counterparties in
+ order to make interest payments on the notes and the certificates
+ without using amounts that would otherwise be paid as principal
+ on the notes and certificates. If the swap counterparties fail to
+ pay the net amount due, you may experience delays and/or
+ reductions in the interest and principal payments on your notes.
+
+ 
+
+ 
+
+ 
+ 
+ On the other hand, during those periods in which the floating
+ rates payable by the swap counterparties are less than the fixed
+ rates payable by the trust, the trust will be obligated to make
+ payments to the swap counterparties. The swap counterparties will
+ have a claim on the assets of the trust for the net amount due,
+ if any, to the swap counterparties under the interest rate swaps.
+ The swap counterparties claim for payments other than
+ termination payments will be higher in priority than payments on
+ the notes and the certificates, and their claim for termination
+ payments will be pari passu with interest on the
+ Class A Notes and the Variable Pay Term Notes. If there is a
+ shortage of funds available on any monthly distribution date,
+ you may experience delays and/or reductions in the interest and
+ principal payments on your notes.
+
+ 
+
+ 
+
+ 
+ 
+ On each monthly distribution date, the trust will deposit into
+ the Class A quarterly interest funding account the amount of
+ the accrued fixed rate payments on the floating rate
+ Class A Note interest rate swaps that relate to the floating
+ rate Class A Notes that receive payments on quarterly
+ payment dates. If the swap counterparties are required to make
+ net payments on such floating rate Class A Note interest
+ rate swaps on any quarterly payment date and fail to make such
+ payments, the amount on deposit in the Class A quarterly
+ interest funding account will be insufficient to pay the interest
+ due on such Class A Notes on such quarterly payment date.
+ In that event, collections on the receivables and other amounts
+ deposited into the collection account on such quarterly payment
+ date will be applied to cover such shortfall,
+
+33
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ and any amounts so applied will be shared on a pro rata
+ basis with holders of the subclasses of Class A Notes that
+ receive monthly payments on monthly distribution dates, with the
+ holders of the Variable Pay Term Notes to the extent of interest
+ due on such notes and with swap counterparties with respect to
+ any swap termination payments that are due. As a result, you may
+ experience delays and/or reductions in the interest and principal
+ payments on your notes.
+
+ 
+
+ 
+
+ 
+ 
+ The interest rate swaps generally may not be terminated except
+ upon failure of either party to make payments when due,
+ insolvency of either party, illegality, or due to failure of the
+ swap counterparty to post collateral, assign the swap to an
+ eligible counterparty or take other remedial action if the swap
+ counterparty s debt ratings drop below the levels required
+ by S P, Moody s and Fitch to maintain the then-current
+ ratings of the Class A Notes and Variable Pay Term Notes.
+ Depending on the reason for the termination, a termination
+ payment may be due to the trust or to the swap counterparty. The
+ amount of any such termination payment will be based on the
+ market value of the interest rate swap unless the swap
+ counterparty is the defaulting party or the party causing the
+ termination event to occur and the trust enters into a
+ replacement interest rate swap, in which case the amount of the
+ termination payment will generally be determined by reference to
+ the losses incurred by the trust. Any such termination payment
+ could, if market interest rates and other conditions have changed
+ materially, be substantial. Any such payment due to a swap
+ counterparty would be made by the trust out of funds that would
+ otherwise be available to make payments on the notes and the
+ certificates and deposits into the Class A quarterly
+ interest funding account. Any swap termination payments would be
+ paid from available funds pari passu with payments of
+ interest on the Class A Notes and the Variable Pay Term
+ Notes and with the deposit of the Class A quarterly interest
+ funding account deposit amount into the Class A quarterly
+ interest funding account.
+
+ 
+
+ 
+
+ 
+ 
+ If a swap counterparty fails to make a termination payment owed
+ to the trust, the trust may not be able to enter into a
+ replacement interest rate swap and to the extent the interest
+ rates on the floating rate Class A Notes and the Variable
+ Pay Term Notes have exceeded the fixed rate the trust had been
+ required to pay the swap counterparty under the related interest
+ rate swap, the amount available to pay principal of and interest
+ on the notes and certificates will be reduced. In addition, the
+ amount of any swap termination payment payable by a swap
+ counterparty may not be sufficient to make any initial payments
+ required to be made by the trust to a replacement swap
+ counterparty in order to enter into a replacement interest rate
+ swap on similar economic terms.
+
+ 
+
+ 
+
+ 
+ 
+ If an interest rate swap is terminated and no replacement is
+ entered into, you may experience delays and/or reductions in
+
+34
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ the interest and principal payments on your notes. In addition,
+ if an interest rate swap is terminated and no replacement
+ interest rate swap is entered into, no more Variable Pay Term
+ Notes may be issued and, as a result, it is highly unlikely that
+ holders of any subclasses of Class A Notes outstanding at
+ that time will be paid on their targeted scheduled distribution
+ dates.
+
+ 
+
+ 
+ Geographic Concentration May Result in More Risk to You
+ 
+ 
+ As of October 1, 2000, Ford Credit s records indicate
+ that the highest state concentrations of obligors of the initial
+ receivables based on the billing addresses of the obligors were
+ recorded as being in the following states (receivables of
+ obligors in Alabama and Pennsylvania are not included in the
+ receivables pool for administrative reasons):
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Percentage of
+
+ 
+ 
+ Aggregate
+
+ 
+ 
+ Principal
+
+ 
+ 
+ Balance
+
+ 
+ 
+ 
+
+ 
+ Texas
+ 
+ 
+ 11.97
+ %
+
+ 
+ California
+ 
+ 
+ 10.91
+ %
+
+ 
+ Florida
+ 
+ 
+ 8.69
+ %
+
+ 
+ Illinois
+ 
+ 
+ 5.01
+ %
+
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ No other state, by billing addresses, constituted more than 5% of
+ the balance of the initial receivables pool as of
+ October 1, 2000. Because of payments on the receivables and
+ the purchase of additional receivables during the revolving
+ period, concentrations of obligors in the pool after
+ October 1, 2000 may be substantially different from the
+ concentrations that exist as of the closing date. Economic
+ conditions or other factors affecting states with high
+ concentrations of obligors could adversely affect the
+ delinquency, credit loss or repossession experience of the pool
+ of receivables.
+
+ 
+
+ 
+ Delays in Collecting Payments Could Occur If Ford Credit
+ Ceases to Be the Servicer
+ 
+ 
+ If Ford Credit were to cease acting as servicer, the processing
+ of payments on the receivables and information relating to
+ collections could be delayed, which in turn could delay payments
+ to securityholders. Ford Credit can be removed as servicer if it
+ defaults on its servicing obligations as described in 
+ Sale and Servicing of the Receivables Servicing
+ of Receivables Events of Servicing Termination 
+ herein.
+
+ 
+
+ 
+ You May Suffer Losses on Your Securities Because the Servicer
+ Will Hold Collections and Commingle Them with its Own Funds
+ 
+ 
+ Ford Credit, as servicer, will generally be permitted to hold
+ with its own funds (1) collections it receives from
+ obligors on the receivables and (2) the repurchase price
+ amounts for receivables required to be repurchased from the trust
+ until
+
+35
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ the next monthly distribution date. During this time, the
+ servicer may invest collections and repurchase price amounts at
+ its own risk and for its own benefit and need not segregate them
+ from its own funds. If the servicer is unable to pay these
+ amounts to the trust on the monthly distribution date, you might
+ incur a loss on your securities.
+
+ 
+
+ 
+ The Controlling Class Controls Removal of the Servicer
+ Upon 
+
+ a Default on its 
+
+ Servicing Obligations
+ 
+ 
+ The indenture trustee or the holders of a majority of the
+ outstanding balance of the controlling class of notes (which will
+ be the combined Class A Notes and Variable Pay Term Notes
+ for so long as any Class A Notes and Variable Pay Term Notes
+ are outstanding) or, if no notes are outstanding, the owner
+ trustee or a majority of the certificate balance of the
+ controlling class of certificates, can remove the servicer if the
+ servicer:
+
+ 
+
+ 
+
+ 
+ 
+ does not deliver to the indenture trustee the
+ available funds for application to a required payment after a
+ grace period after notice or discovery;
+
+ 
+
+ 
+
+ 
+ 
+ defaults on a servicing obligation which
+ materially and adversely affects the trust after a grace period
+ after notice; or
+
+ 
+
+ 
+
+ 
+ 
+ becomes the subject of certain insolvency
+ proceedings.
+
+ 
+
+ 
+
+ 
+ 
+ The holders of a majority of the note balance of the controlling
+ class of notes (or, if no notes are outstanding, a majority of
+ the certificate balance of the controlling class of certificates)
+ may also waive a default by the servicer. The holders of any
+ subordinate class of securities do not have any rights to
+ participate in such determinations for so long as any of the more
+ senior classes are outstanding, and the subordinate classes of
+ securities may be adversely affected by determinations made by
+ the more senior classes. See Sale and Servicing of
+ Receivables Servicing of Receivables 
+ Rights Upon Event of Servicing Termination and
+ Waiver of Past Events of Servicing
+ Termination .
+
+ 
+
+ 
+ Interest of Other Persons in the Receivables Could Reduce the
+ Funds Available to Make Payments on the Securities
+ 
+ 
+ Financing statements under the Uniform Commercial Code will be
+ filed reflecting the sale of the receivables by Ford Credit to
+ the seller and the subsequent sale by the seller to the trust.
+ Ford Credit s accounting records and computer systems will
+ also be marked to reflect a sale of the receivables to the trust.
+ However, by obtaining physical possession of a receivable,
+ another person could acquire an interest in that receivable that
+ is superior to the trust s interest because the servicer
+ will not segregate or mark the receivables as belonging to the
+ trust. If another person acquires an interest in a receivable
+ that is superior to the trust s interest in the receivable,
+ the collections on that
+
+36
+
+Table of Contents
+
+ 
+ 
+
+ 
+ 
+ receivable will not be available to make payment on the
+ securities.
+
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ Another person could acquire an interest in a vehicle financed by
+ a receivable that is superior to the trust s interest
+ because the servicer will not amend the certificate of title or
+ ownership to identify the trust as the new secured party. If
+ another person acquires an interest in a vehicle that is superior
+ to the trust s interest in that vehicle, the proceeds from
+ the sale of the vehicle will not be available to make payments on
+ the securities.
+
+ 
+
+ 
+
+ 
+ 
+ The trust s security interest in the receivables or the
+ financed vehicles could be impaired for one or more of the
+ following reasons:
+
+ 
+
+ 
+
+ 
+ 
+ Ford Credit or PRIMUS has failed to perfect its
+ security interest in a receivable;
+
+ 
+
+ 
+
+ 
+ 
+ Ford Credit or PRIMUS has failed to perfect its
+ security interest in a financed vehicle;
+
+ 
+
+ 
+
+ 
+ 
+ the trust may not have a security interest in the
+ financed vehicles in all states because the certificates of title
+ to the financed vehicles will not be amended to reflect
+ assignment to the trust;
+
+ 
+
+ 
+
+ 
+ 
+ holders of some types of liens, such as tax liens
+ or mechanic s liens, may have priority over the trust s
+ security interest;
+
+ 
+
+ 
+
+ 
+ 
+ the trust may lose its security interest in
+ vehicles confiscated by the government; and
+
+ 
+
+ 
+
+ 
+ 
+ the trust could lose its priority to a person who
+ obtains physical possession of a receivable without knowledge of
+ the assignment of the receivable to the trust.
+
+ 
+
+ 
+
+ 
+ 
+ Neither the seller nor the servicer will be required to
+ repurchase a receivable if the security interest in a related
+ vehicle or the receivable becomes impaired after the receivable
+ is sold to the trust.
+
+ 
+
+ 
+ Bankruptcy of Ford Credit Could Result in Delays in Payment or
+ Losses on the Securities
+ 
+ 
+ If Ford Credit becomes subject to bankruptcy proceedings, you
+ could experience losses or delays in payments on your securities.
+ Ford Credit will sell the receivables to the seller, and the
+ seller will in turn transfer the receivables to the trust.
+ However, if Ford Credit becomes subject to a bankruptcy
+ proceeding, a court in the bankruptcy proceeding could conclude
+ that Ford Credit effectively still owns the receivables by
+ concluding that the sale to the seller was not a true
+ sale or that the seller should be consolidated with Ford
+ Credit for bankruptcy purposes. If a court were to reach this
+ conclusion, you could experience losses or delays in payments on
+ your securities due to, among other things:
+
+ 
+
+ 
+
+ 
+ 
+ the automatic stay provision of the U.S.
+ Bankruptcy Code which prevents secured creditors from exercising
+ remedies
+
+37
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ against a debtor in bankruptcy without permission from the court
+ and other provisions that permit substitution of collateral in
+ certain circumstances;
+
+ 
+
+ 
+
+ 
+ 
+ certain tax or other government liens on Ford
+ Credit s property that arose prior to the transfer of the
+ receivables to the trust having a claim on collections that are
+ senior to payments on your securities; and
+
+ 
+
+ 
+
+ 
+ 
+ the trust not having a perfected security interest
+ in (1) one or more of the vehicles securing the receivables
+ or (2) any collections held by Ford Credit at the time that
+ Ford Credit becomes the subject of a bankruptcy proceeding.
+
+ 
+
+ 
+
+ 
+ 
+ The seller will take steps in structuring the transactions to
+ minimize the risk that a court would consolidate the seller with
+ Ford Credit for bankruptcy purposes or conclude that the sale of
+ the receivables to the seller was not a true sale. 
+
+ 
+
+ 
+
+ 
+ 
+ In a 1993 case, the U.S. Court of Appeals for the Tenth
+ Circuit concluded that accounts transferred by a seller to a
+ buyer should be included in the bankruptcy estate of the seller
+ even if the transfer was a true sale. The reasoning appears to be
+ inconsistent with other cases and of expert commentators to the
+ Uniform Commercial Code, including comments made after the 1993
+ decision, and we are not aware of any subsequent cases that have
+ been similarly decided. However, if Ford Credit enters a
+ bankruptcy proceeding and the court in the bankruptcy proceeding
+ applies the reasoning of the court in that case, you could
+ experience losses or delays in payments on your securities.
+
+ 
+
+ 
+ An Event of Default May Cause Prepayments, Potential Losses
+ and Change of Priority of Payment of Principal
+ 
+ 
+ An event of default under the indenture may result in payments on
+ the notes being accelerated. As a result:
+
+ 
+
+ 
+
+ 
+ 
+ you may suffer losses on your notes if the assets
+ of the trust are insufficient to pay the amounts owed on the
+ notes;
+
+ 
+
+ 
+
+ 
+ 
+ payments on your notes may be delayed until more
+ senior classes or subclasses of notes are repaid; and
+
+ 
+
+ 
+
+ 
+ 
+ your notes may be repaid earlier than as
+ scheduled, which may require you to reinvest your principal at a
+ lower rate of return.
+
+ 
+
+ 
+ Interest Payable on Class B Notes and Certificates May Be
+ Delayed upon Certain Events of Default
+ 
+ 
+ The priority of interest and principal payments will change
+ following:
+
+ 
+
+ 
+
+ 
+ 
+ an event of default under the indenture relating
+ to the payment of interest on the controlling class of notes or
+ to the payment of principal on any note that has resulted in an
+ acceleration of the notes; or
+
+38
+
+Table of Contents
+
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ an event of default under the indenture relating
+ to certain events of bankruptcy, insolvency, receivership or
+ liquidation of the trust or its property that has resulted in an
+ acceleration of the notes.
+
+ 
+
+ 
+
+ 
+ 
+ In such an event, the trust will not make any distributions of
+ principal or interest on the Class B Notes or the
+ certificates until payment in full of principal and interest on
+ the Class A Notes and the Variable Pay Term Notes. This may
+ result in a delay or default in paying interest on the
+ Class B Notes.
+
+ 
+
+ 
+ Indenture Trustee May Sell Receivables upon an Event of
+ Default Which Could Result in Losses To You
+ 
+ 
+ If the maturity dates of the notes are accelerated following an
+ event of default under the indenture, the indenture trustee,
+ under certain circumstances, may sell the receivables and prepay
+ the notes, and after the notes are paid in full, redeem the
+ certificates. Upon a sale of the receivables following an event
+ of default no amounts will be distributed to the holders of the
+ Class B Notes until the interest and principal due on the
+ Class A Notes and the Variable Pay Term Notes have been paid
+ in full and all amounts (including any termination payments)
+ payable by the trust under the interest rate swaps have been paid
+ in full.
+
+ 
+
+ 
+
+ 
+ 
+ So long as the Class A Notes and the Variable Pay Term Notes
+ are the controlling class of notes, the holders of the
+ Class B Notes will not have any right to vote on waivers of
+ an event of default or to direct the indenture trustee to
+ accelerate the notes following an event of default and will have
+ the right to vote on the sale of the receivables following an
+ event of default and acceleration in only limited circumstances.
+
+ 
+
+ 
+
+ 
+ 
+ In the event the indenture trustee sells the receivables under
+ adverse market conditions, proceeds from the sale of the
+ receivables may not be sufficient to repay all of the notes. In
+ certain circumstances, this could result in losses to the holders
+ of the notes.
+
+ 
+
+ 
+
+ 
+ 
+ See Description of the Notes Events of
+ Default .
+
+ 
+
+ 
+ Holders of the Class B Notes Have Limited Control over
+ Actions of the Trust and Conflicts Between Classes of Notes May
+ Occur
+ 
+ 
+ Because the trust has pledged the property of the trust to the
+ indenture trustee to secure payment on the notes, the indenture
+ trustee may, and at the direction of the specified percentage of
+ the controlling class of notes (which will be the Class A
+ Notes and Variable Pay Term Notes for so long as any Class A
+ Notes or Variable Pay Term Notes are outstanding) will, take one
+ or more of the other actions specified in the indenture relating
+ to the property of the trust, including a sale of the
+ receivables. Furthermore, the holders
+
+39
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ of a majority of the Class A Notes and Variable Pay Term
+ Notes, or the indenture trustee acting on behalf of the holders
+ of Class A Notes and Variable Pay Term Notes, under certain
+ circumstances, have the right to waive events of servicing
+ termination or to terminate the servicer as the servicer of the
+ receivables without consideration of the effect such waiver or
+ termination would have on the holders of Class B Notes,
+ Class C Certificates or Class D Certificates. The
+ holders of Class B Notes will have only limited rights to
+ direct remedies under the indenture and will not have the ability
+ to waive events of servicing termination or to remove the
+ servicer until the Class A Notes and Variable Pay Term Notes
+ have been paid in full.
+
+ 
+
+ 
+
+ 
+ 
+ See Description of the Notes Events of
+ Default and Sale and Servicing of
+ Receivables Servicing of Receivables 
+ Rights Upon Event of Servicing Termination and 
+ Waiver of Past Events of Servicing Termination .
+
+ 
+
+ 
+ You Will Bear the Risk of Any Withholding Taxes
+ 
+ 
+ Although no withholding tax is imposed on payments of interest on
+ the notes or certificates currently, there can be no assurance
+ that the law will not change. In the event that any withholding
+ tax is imposed on payments of interest, you will not be entitled
+ to receive grossed-up amounts to compensate for such withholding
+ tax.
+
+40
+
+Table of Contents
+
+THE TRUST
+
+Limited Purpose and Limited Assets
+
+ 
+Ford Credit Auto Owner Trust 2000-F is a business trust formed
+under the laws of the State of Delaware by a trust agreement to
+be dated as of October 1, 2000 among Ford Credit Auto
+Receivables Two L.P., the owner trustee and the Delaware trustee.
+ The trust will not engage in any activity other than:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ acquiring, holding and managing the assets of the trust,
+ including the receivables, and the proceeds of those assets;
+
+ 
+
+ 
+ 
+ 
+ issuing the notes and the certificates;
+
+ 
+
+ 
+ 
+ 
+ making payments on the notes and the certificates;
+
+ 
+
+ 
+ 
+ 
+ entering into the Interest Rate Swaps; and
+
+ 
+
+ 
+ 
+ 
+ engaging in other activities that are necessary, suitable or
+ convenient to accomplish any of the other purposes listed above
+ or are in any way connected with those activities.
+
+ 
+The trust will be capitalized by the issuance of the notes and
+certificates. The Class C and the Class D Certificates
+initially will be retained by the seller and thereafter may be
+sold to third party investors. The proceeds from the sale of the
+Class A Notes, the Class B Notes and the certificates
+on the Closing Date will be used by the seller (1) to
+purchase the initial receivables from Ford Credit under a
+purchase agreement to be dated as of October 1, 2000 between
+ Ford Credit and the seller, and (2) to fund the initial
+deposit to the Reserve Account. The proceeds from the issuance of
+ any Variable Pay Term Notes will be used to make principal
+payments on the Subclass or Subclasses of Class A Notes that
+ have reached or passed their Targeted Scheduled Distribution
+Dates.
+
+ 
+The assets of the trust are limited to the receivables, including
+ the proceeds from the repossession and sale of the financed
+vehicles which secure defaulted receivables, its rights under the
+ Interest Rate Swaps, the Reserve Account and the proceeds of the
+ issuance and sale of any Variable Pay Term Notes. Various
+factors, such as the trust not having perfected security
+interests in the financed vehicles securing the receivables in
+all states, may affect the servicer s ability to repossess
+and sell the collateral securing the receivables, and thus may
+reduce the proceeds which the trust can distribute to the holders
+ of the notes and certificates. See Distributions on the
+ Securities Distributions and 
+Reserve Account, Risk Factors Amounts in
+the Reserve Account Are Limited and May Not Be Sufficient to
+Cover Losses on the Notes and Certain Legal Aspects
+of the Receivables .
+
+Capitalization of the Trust
+
+ 
+The following table illustrates the capitalization of the trust
+as of the Closing Date:
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Class A-1 Notes
+ 
+ $
+ 906,000,000
+ 
+
+ 
+ Class A-2 Notes
+ 
+ 
+ 701,000,000
+ 
+
+ 
+ Class A-3 Notes
+ 
+ 
+ 520,000,000
+ 
+
+ 
+ Class A-4 Notes
+ 
+ 
+ 343,000,000
+ 
+
+ 
+ Class A-5 Notes
+ 
+ 
+ 159,722,000
+ 
+
+ 
+ Class B Notes
+ 
+ 
+ 97,397,000
+ 
+
+ 
+ Class C Certificates
+ 
+ 
+ 55,656,000
+ 
+
+ 
+ Class D Certificates
+ 
+ 
+ 55,656,000
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Total
+ 
+ $
+ 2,838,431,000
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+41
+
+Table of Contents
+
+The Owner Trustee and the Delaware Trustee
+
+ 
+The Bank of New York is the owner trustee under the trust
+agreement. The Bank of New York is a New York banking corporation
+ and its principal offices are located at One Wall Street, New
+York, New York.
+
+ 
+The Bank of New York (Delaware) is the Delaware trustee under the
+ trust agreement. The Bank of New York (Delaware) is a Delaware
+banking corporation and its principal offices are located at
+White Clay Center, Route 273, Newark, Delaware. The seller
+and its affiliates may maintain normal commercial banking
+relations with the owner trustee, the Delaware trustee, their
+parents and their affiliates.
+
+ 
+The trustees liability in connection with the issuance and
+sale of the related securities is limited solely to the express
+obligations of the trustees set forth in the trust agreement.
+Either trustee may resign at any time, in which event the
+administrator, or its successor, will be obligated to appoint a
+successor trustee. The administrator may also remove either
+trustee if:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ such trustee ceases to be eligible to continue as trustee under
+ the related trust agreement; or
+
+ 
+
+ 
+ 
+ 
+ such trustee becomes insolvent.
+
+ 
+In either of these circumstances, the administrator must appoint
+a successor trustee. If a trustee resigns or is removed, the
+resignation or removal and appointment of a successor trustee
+will not become effective until the successor trustee accepts its
+ appointment.
+
+THE SELLER AND THE GENERAL PARTNER
+
+ 
+The seller was organized as a Delaware limited partnership in
+February 1996. The General Partner of the seller is Ford Credit
+Auto Receivables Two, Inc., a Delaware corporation and a wholly
+owned, limited-purpose subsidiary of Ford Credit. The limited
+partnership interests in the seller are owned by Ford Credit. The
+ seller was organized for limited purposes, which include
+purchasing receivables from Ford Credit and transferring such
+receivables to third parties and any activities incidental to and
+ necessary or convenient for the accomplishment of such purposes.
+ The principal executive offices of the seller are located at One
+ American Road, Dearborn, Michigan 48126. The telephone
+number of such offices is (313) 322-3000. The General
+Partner is located at One American Road, Dearborn, Michigan
+48126.
+
+FORD MOTOR CREDIT COMPANY
+
+ 
+Ford Credit was incorporated in Delaware in 1959 and is a wholly
+owned indirect subsidiary of Ford Motor Company.
+
+ 
+Ford Credit and its subsidiaries provide wholesale financing and
+capital loans to Ford dealers and associated non-Ford dealers
+throughout the world, most of which are privately owned and
+financed, and purchase retail installment sale contracts and
+retail leases from them. Ford Credit also makes loans to vehicle
+leasing companies, the majority of which are affiliated with such
+ dealerships. In addition, Ford Credit provides these financing
+services in the United States, Europe, Canada and Australia to
+non-Ford dealers. A substantial majority of all new vehicles
+financed by Ford Credit are manufactured by Ford Motor Company.
+In the United States, Ford Credit (exclusive of PRIMUS) purchases
+ automotive retail contracts from about 7,100 Ford dealers and
+associated non-Ford dealers through approximately 140 automotive
+financing branches.
+
+ 
+Ford Credit and PRIMUS also provide retail financing for used
+vehicles built by Ford Motor Company and other manufacturers. In
+addition to vehicle financing, Ford Credit makes loans to
+affiliates of Ford Motor Company and finances certain receivables
+ of Ford Motor Company and
+
+42
+
+Table of Contents
+
+its subsidiaries. Ford Credit also conducts insurance operations
+through the American Road Insurance Company and its subsidiaries
+in the United States and Canada. American Road s business
+consists of extended service plan contracts for new and used
+vehicles manufactured by affiliated and nonaffiliated companies,
+primarily originating from Ford dealers, physical damage
+insurance covering vehicles and equipment financed at wholesale
+by Ford Credit, and the reinsurance of credit life and credit
+disability insurance for retail purchasers of vehicles and
+equipment. The mailing address of Ford Credit s executive
+offices is One American Road, Dearborn, Michigan 48126. The
+telephone number of such offices is (313) 322-3000.
+
+PRIMUS
+
+ 
+Primus Automotive Financial Services, Inc., a New York
+corporation, was formed in October 1991 and is the successor
+ corporation to Marine Midland Automotive Financial Corporation,
+which was purchased by Ford Credit in 1990. Approximately 1,800
+Ford Credit employees conduct PRIMUS s operations in the
+United States through 29 branch offices and its headquarters
+located in suburban Nashville, Tennessee.
+
+ 
+Commencing in 1991, and until August 1999, PRIMUS conducted
+its business as a wholly owned subsidiary of Ford Credit. Until
+August 1999, PRIMUS assigned receivables it generated,
+together with the related financing documents, security interests
+ in the related vehicles and any other property securing the
+receivables, to Ford Credit immediately after being acquired by
+PRIMUS. Commencing in August 1999, PRIMUS Automotive
+Financial Services, Inc. ceased its business operations, and Ford
+ Credit began conducting the business using the d/b/a Primus
+Financial Services.
+
+ 
+PRIMUS offers a full array of automotive financing products,
+including indirect retail and lease programs, wholesale lines of
+credit, mortgages, capital loans and revolving lines of credit,
+all designed for non-Ford dealers and their retail customers.
+These non-Ford dealers include those selling vehicles
+manufactured by DaimlerChrysler, General Motors, Honda, Jaguar,
+Mazda, Nissan, Saturn, Subaru, Suzuki, Toyota and Volkswagen. In
+addition to offering financing under the PRIMUS name, PRIMUS
+offers private-label financial services to Subaru of America,
+Inc., Jaguar Cars, Inc., Mazda North American Operations,
+American Suzuki Motor Company and Kia Motors America, Inc. PRIMUS
+ also is the source of choice for The Hertz Corporation and Aston
+ Martin. In addition, PRIMUS purchases receivables from other
+finance sources.
+
+ 
+The retail installment sale contracts purchased by PRIMUS are
+usually purchased without recourse to the dealer or the seller,
+subject to exceptions for certain breaches of representations and
+ warranties and delivery to PRIMUS of a valid, enforceable and
+correctly issued lien on the related vehicle. PRIMUS services the
+ receivables it originates in accordance with substantially the
+same servicing guidelines and criteria as Ford Credit.
+
+THE RECEIVABLES POOL
+
+ 
+The trust will own a pool of receivables consisting of motor
+vehicle retail installment sale contracts secured by security
+interests in the motor vehicles financed by those contracts. The
+Receivables Pool will initially consist of the receivables which
+the seller transfers to the trust on the Closing Date. During the
+ Revolving Period, the seller will transfer Additional
+Receivables to the trust on each Monthly Distribution Date. The
+initial receivables will include payments on the initial
+receivables that are made on or after the Initial Cut-off Date.
+The Additional Receivables purchased during the Revolving Period
+will include payments on the Additional Receivables that are made
+ on or after the applicable Subsequent Cut-off Date.
+
+43
+
+Table of Contents
+
+General Information Concerning the Receivables
+
+ 
+Origination of the Receivables. The receivables
+consist of retail installment sale contracts secured by new and
+used automobiles and light trucks. The receivables have been or
+will be purchased by Ford Credit or by PRIMUS in the ordinary
+course of business. A dealer is paid a purchase price for each
+receivable generally equal to the principal balance of the
+receivable. A portion of the obligor s finance charge
+usually is paid or credited to the dealer. Generally, no more
+than 100% of the negotiated purchase price of a vehicle, plus
+related amounts such as taxes and insurance is financed, which
+amount generally is less than or equal to the MSRP of a new
+vehicle or published prices for used vehicles. New vehicles
+generally can be purchased at a discount from MSRP.
+
+ 
+Underwriting of the Receivables. Ford Credit and
+PRIMUS utilize common underwriting standards and credit
+evaluation criteria which emphasize the obligor s ability to
+ pay and creditworthiness, as well as the asset value of the
+vehicle being financed. Each applicant for a contract completes a
+ credit application with the dealer. Each application is screened
+ for acceptability and a credit investigation is conducted to
+determine the creditworthiness of the applicant. The credit
+investigation is conducted through the use of a credit bureau
+review of each application together with an internal review and
+verification process. Statistically-based retail credit risk
+rating guidelines are used to determine the creditworthiness of
+applicants.
+
+ 
+These guidelines are used as internal measuring devices to
+indicate the degree of risk associated with offered contracts and
+ are not the sole method used to decide whether to extend credit.
+ The final credit decision also reflects other factors such as
+the relationship with the dealer and the judgment of the credit
+analyst. Within each branch, purchase approval authority
+guidelines are established based upon the amount financed, the
+percent of the total purchase price advanced and credit scores.
+The retail rate pricing strategy is based on a principle of
+offering the dealer or seller a minimum rate that reflects the
+level of risk associated with the customer s credit
+evaluation. The dealer establishes the retail rate with the
+obligor. Each obligor is required on each related receivable to
+obtain or agree to obtain physical damage insurance.
+
+ 
+Once an offered contract has been approved, the dealer submits
+the contract and the credit application to be checked by Ford
+Credit for accuracy and regulatory compliance. The dealer is
+required to perfect the security interest of Ford Credit in the
+vehicles.
+
+ 
+Types of Receivables. The receivables owned may
+consist of either Simple Interest Receivables or Actuarial
+Receivables.
+
+ 
+A. Simple Interest Receivables. If an obligor
+ on a Simple Interest Receivable pays a fixed monthly installment
+ before its scheduled due date the portion of the payment
+allocable to interest for the period since the preceding payment
+was made will be less than it would have been had the payment
+been made as scheduled and the portion of the payment applied to
+reduce the unpaid principal balance will be correspondingly
+greater. Conversely, if an obligor pays a fixed monthly
+installment after its scheduled due date, the portion of the
+payment allocable to interest for the period since the preceding
+payment was made will be greater than it would have been had the
+payment been made as scheduled and the portion of the payment
+applied to reduce the unpaid principal balance will be
+correspondingly less. In either case, the obligor pays a fixed
+monthly installment until the final scheduled payment date, at
+which time the amount of the final installment is increased or
+decreased as necessary to repay the then outstanding principal
+balance. If a Simple Interest Receivable is prepaid, the obligor
+is required to pay interest only to the date of prepayment. The
+servicer, however, is required to make a non-reimbursable advance
+ to the trust of interest which would have accrued to the next
+scheduled due date of the receivable.
+
+ 
+B. Actuarial Receivables. Because interest
+and principal are not computed separately on Actuarial
+Receivables, obligors under Actuarial Receivables will be
+entitled to rebates of unearned
+
+44
+
+Table of Contents
+
+finance charges if they prepay or if their obligations are
+accelerated. If an Actuarial Receivable is prepaid in full, with
+minor variations based upon state law, Actuarial Receivables
+require that any rebate be calculated on the basis of a constant
+interest rate.
+
+ 
+Subvention of Interest Rates. Subvention programs
+are marketing tools of vehicle manufacturers under which the
+manufacturer will offer a reduced financing rate to retail
+customers as an incentive to purchase an automobile or light
+truck. Subvention programs, if any, require the manufacturer to
+pay an amount to compensate Ford Credit or PRIMUS for offering
+the incentive interest rate financing. The subvention
+compensation payments will not be property of the trust. However,
+ the maintenance of the Yield Supplement Overcollateralization
+Amount, as further described under Distributions on the
+Securities Application of Funds to Maintain
+Overcollateralization herein, is intended to offset any
+ subvention of the receivables.
+
+ 
+Servicing and Collections. Ford Credit and PRIMUS
+separately service their respective accounts, but utilize common
+servicing practices and procedures. Ford Credit and PRIMUS
+service over 4.7 million retail accounts. On June 15, 1999, Ford
+Credit announced that it intended to restructure its servicing
+operations and move them into seven regional service centers in
+the U.S. Currently, five of the service centers are fully
+operational. The remaining two service centers are expected to be
+ fully operational by April 2001. Servicing personnel do not
+ know if a receivable that they are servicing has been sold to a
+third party.
+
+ 
+Obligors are instructed to send their monthly payments to one of
+several lock-box centers. Most of the receivables are paid
+without any additional servicing. Accounts are rated by behavior
+evaluation and collection assignments are initiated after
+specified periods of delinquency. These assignments are placed in
+ high, medium and low categories respectively for collection
+follow-up.
+
+ 
+A customer collection representative will attempt to contact a
+delinquent obligor to determine the reason for a delinquency and
+identify the obligor s plans to resolve the delinquency. If
+the obligor cannot make the past due payments, extensions and
+rewrites are the primary options used to adjust a delinquent
+account. A rewrite is a refinancing of the obligor s
+outstanding balance with a different contract term, while an
+extension defers remaining payments for one or more months. A fee
+ or additional interest, as appropriate, is usually collected on
+extensions and rewrites to cover the costs associated with
+revised terms. Periodic management reports which include
+information such as delinquencies, extensions and rewrites and
+operating audits are the primary methods used to maintain control
+ over the use of collection actions. For a more detailed
+discussion of the servicing procedures of the servicer, see
+ Sale and Servicing of Receivables Servicing of
+Receivables .
+
+ 
+Repossession and Write-off Policies of the Servicer. 
+Reasonable efforts will be made to collect on delinquent
+accounts and keep obligors accounts current. Repossession
+is considered as a last resort when:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the obligor has demonstrated the inability or intention not to
+ pay;
+
+ 
+
+ 
+ 
+ 
+ the security interest in the vehicle is impaired; and/or
+
+ 
+
+ 
+ 
+ 
+ the customer has not complied with specific contract provisions.
+
+ 
+Upon repossession or voluntary surrender of a vehicle, a
+condition report is prepared. A repossessed vehicle is sold at an
+ auction and the proceeds are applied to the outstanding balance
+of the receivable. Ford s Vehicle Remarketing Department
+manages the disposal of repossessed vehicles and seeks to obtain
+the highest net price for the vehicle, comprised of gross auction
+ proceeds less auction fees and costs for reconditioning and
+transportation.
+
+ 
+All collection activities for accounts that have been written off
+ by Ford Credit are consolidated and performed by Ford Credit at
+its collection operations in Mesa, Arizona. These collection
+efforts have recovered an average of 20% of the remaining
+balances (after application of repossession proceeds). The
+collection activities for accounts written off by PRIMUS have
+
+45
+
+Table of Contents
+
+been performed by PRIMUS employees and by outside collection
+agencies, but were recently consolidated and are now performed by
+ Ford Credit. Collection activities are continued until an
+account is paid or settled in full, or is deemed to be legally
+uncollectible due to bankruptcy of the obligor, the death of the
+obligor without a collectible estate or the expiration of the
+statute of limitations.
+
+Criteria Applicable to Selection of the Initial Receivables
+
+ 
+Ford Credit purchased 88.09% of the initial receivables sold to
+the trust on the Closing Date (by principal balance) in the
+ordinary course of its business in accordance with Ford
+Credit s underwriting standards. PRIMUS purchased 11.91% of
+the initial receivables sold to the trust on the Closing Date (by
+ principal balance) in the ordinary course of its business in
+accordance with PRIMUS s underwriting standards which are
+substantially identical to Ford Credit s underwriting
+standards. Prior to PRIMUS becoming a part of Ford Credit, PRIMUS
+ sold all receivables it purchased to Ford Credit immediately
+after their purchase.
+
+ 
+The initial receivables were selected from Ford Credit s and
+ PRIMUS s portfolio for inclusion in the Receivables Pool by
+ several criteria. These criteria include the requirement that
+each receivable:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ is secured by a new or used vehicle;
+
+ 
+
+ 
+ 
+ 
+ was originated in the U.S.;
+
+ 
+
+ 
+ 
+ 
+ provides for level monthly payments (except for the last payment,
+ which may be minimally different from the level payments) that
+ fully amortize the amount financed over its original term to
+ maturity;
+
+ 
+
+ 
+ 
+ 
+ is an Actuarial Receivable or a Simple Interest Receivable;
+
+ 
+
+ 
+ 
+ 
+ bears interest at an APR of not less than 1.80% and not greater
+ than 20.00%;
+
+ 
+
+ 
+ 
+ 
+ has an original term not greater than 60 months;
+
+ 
+
+ 
+ 
+ 
+ is not more than 30 days past due as of the Initial Cut-off
+ Date and has never been extended; and
+
+ 
+
+ 
+ 
+ 
+ was originated on or after October 1, 1998.
+
+ 
+
+ 
+The initial receivables were selected at random from Ford
+Credit s and PRIMUS s portfolio of retail installment
+sale contracts for new and used vehicles, in each case meeting
+the criteria described above. No selection procedures believed to
+ be adverse to the holders of the notes or certificates were
+utilized in selecting the initial receivables. No initial
+receivable has a scheduled maturity later than July 29,
+2005.
+
+ 
+With respect to the expected prepayment experience of the
+Receivables Pool, Ford Credit believes that the actual rate of
+prepayments will result in a substantially shorter weighted
+average life than the scheduled weighted average life and
+estimates that the actual weighted average life of its portfolio
+of U.S. retail installment contracts for new and used vehicles
+ranges between 60% and 70% of their scheduled weighted average
+life. See Maturity and Prepayment Considerations .
+
+Characteristics of the Initial Receivables
+
+ 
+The following tables describe the characteristics of the initial
+receivables, as of the Initial Cut-off Date, that are sold to the
+ trust on the Closing Date. It is important to understand that
+the composition of the Receivables Pool will change as
+receivables pay, prepay and default and as Additional Receivables
+ are sold to the trust on each Monthly Distribution Date during
+the Revolving Period. Investors should understand that the
+characteristics of the Receivables Pool at
+
+46
+
+Table of Contents
+
+the end of the Revolving Period could be substantially different
+from the characteristics as of the Initial Cut-off Date.
+
+ 
+The geographic distribution and distribution by APR of the
+Receivables Pool as of the Initial Cut-off Date are set forth in
+the following tables. The geographic distribution and
+distribution by APR of the Receivables Pool will change as
+Additional Receivables are added to the trust.
+
+Geographic Distribution of the Receivables Pool as of the
+Initial Cut-off Date
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Percentage of
+
+ 
+ 
+ Aggregate Principal
+
+ State(1)
+ 
+ Balance(2)
+
+ 
+ 
+ 
+
+ 
+ Alabama(3)
+ 
+ 
+ 0.00
+ %
+
+ 
+ Alaska
+ 
+ 
+ 0.22
+ %
+
+ 
+ Arizona
+ 
+ 
+ 1.65
+ %
+
+ 
+ Arkansas
+ 
+ 
+ 1.41
+ %
+
+ 
+ California
+ 
+ 
+ 10.91
+ %
+
+ 
+ Colorado
+ 
+ 
+ 1.56
+ %
+
+ 
+ Connecticut
+ 
+ 
+ 1.35
+ %
+
+ 
+ Delaware
+ 
+ 
+ 0.15
+ %
+
+ 
+ District of Columbia
+ 
+ 
+ 0.10
+ %
+
+ 
+ Florida
+ 
+ 
+ 8.69
+ %
+
+ 
+ Georgia
+ 
+ 
+ 4.49
+ %
+
+ 
+ Hawaii
+ 
+ 
+ 0.24
+ %
+
+ 
+ Idaho
+ 
+ 
+ 0.22
+ %
+
+ 
+ Illinois
+ 
+ 
+ 5.01
+ %
+
+ 
+ Indiana
+ 
+ 
+ 1.88
+ %
+
+ 
+ Iowa
+ 
+ 
+ 0.84
+ %
+
+ 
+ Kansas
+ 
+ 
+ 1.16
+ %
+
+ 
+ Kentucky
+ 
+ 
+ 0.95
+ %
+
+ 
+ Louisiana
+ 
+ 
+ 1.79
+ %
+
+ 
+ Maine
+ 
+ 
+ 0.40
+ %
+
+ 
+ Maryland
+ 
+ 
+ 2.37
+ %
+
+ 
+ Massachusetts
+ 
+ 
+ 2.45
+ %
+
+ 
+ Michigan
+ 
+ 
+ 3.80
+ %
+
+ 
+ Minnesota
+ 
+ 
+ 1.52
+ %
+
+ 
+ Mississippi
+ 
+ 
+ 1.08
+ %
+
+ 
+ Missouri
+ 
+ 
+ 3.17
+ %
+
+ 
+ Montana
+ 
+ 
+ 0.17
+ %
+
+ 
+ Nebraska
+ 
+ 
+ 0.47
+ %
+
+ 
+ Nevada
+ 
+ 
+ 0.72
+ %
+
+ 
+ New Hampshire
+ 
+ 
+ 0.64
+ %
+
+ 
+ New Jersey
+ 
+ 
+ 2.51
+ %
+
+ 
+ New Mexico
+ 
+ 
+ 0.64
+ %
+
+ 
+ New York
+ 
+ 
+ 3.54
+ %
+
+ 
+ North Carolina
+ 
+ 
+ 4.25
+ %
+
+ 
+ North Dakota
+ 
+ 
+ 0.11
+ %
+
+ 
+ Ohio
+ 
+ 
+ 2.98
+ %
+
+ 
+ Oklahoma
+ 
+ 
+ 1.45
+ %
+
+ 
+ Oregon
+ 
+ 
+ 1.14
+ %
+
+ 
+ Pennsylvania(3)
+ 
+ 
+ 0.00
+ %
+
+ 
+ Rhode Island
+ 
+ 
+ 0.27
+ %
+
+ 
+ South Carolina
+ 
+ 
+ 1.61
+ %
+
+ 
+ South Dakota
+ 
+ 
+ 0.18
+ %
+
+ 
+ Tennessee
+ 
+ 
+ 2.40
+ %
+
+ 
+ Texas
+ 
+ 
+ 11.97
+ %
+
+ 
+ Utah
+ 
+ 
+ 0.41
+ %
+
+ 
+ Vermont
+ 
+ 
+ 0.30
+ %
+
+ 
+ Virginia
+ 
+ 
+ 2.85
+ %
+
+ 
+ Washington
+ 
+ 
+ 1.91
+ %
+
+ 
+ West Virginia
+ 
+ 
+ 0.45
+ %
+
+ 
+ Wisconsin
+ 
+ 
+ 1.48
+ %
+
+ 
+ Wyoming
+ 
+ 
+ 0.14
+ %
+
+ 
+ 
+
+ (1) 
+ 
+ Based on the billing addresses of the obligors on the receivables
+ as of the Initial Cut-off Date.
+
+ 
+
+ (2) 
+ 
+ May not add to 100% due to rounding.
+
+ 
+
+ (3) 
+ 
+ Alabama and Pennsylvania excluded for administrative reasons.
+
+47
+
+Table of Contents
+
+Distribution by APR of the Receivables Pool
+
+as of the Initial Cut-off Date
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ Percentage of
+
+ 
+ 
+ 
+ 
+ 
+ 
+ Aggregate
+
+ 
+ 
+ Number of
+ 
+ Aggregate
+ 
+ Principal
+
+ APR Range
+ 
+ Receivables
+ 
+ Principal Balance
+ 
+ Balance(1)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 1.80 to 1.99%
+ 
+ 
+ 2,889
+ 
+ 
+ $
+ 35,444,524.08
+ 
+ 
+ 
+ 1.18
+ %
+
+ 
+ 2.00 to 2.49
+ 
+ 
+ 5
+ 
+ 
+ 
+ 55,225.37
+ 
+ 
+ 
+ 0.00
+ %
+
+ 
+ 2.50 to 2.99
+ 
+ 
+ 15,452
+ 
+ 
+ 
+ 232,817,589.50
+ 
+ 
+ 
+ 7.76
+ %
+
+ 
+ 3.00 to 3.49
+ 
+ 
+ 0
+ 
+ 
+ 
+ 0.00
+ 
+ 
+ 
+ 0.00
+ %
+
+ 
+ 3.50 to 3.99
+ 
+ 
+ 14,635
+ 
+ 
+ 
+ 213,125,731.66
+ 
+ 
+ 
+ 7.11
+ %
+
+ 
+ 4.00 to 4.49
+ 
+ 
+ 1
+ 
+ 
+ 
+ 11,778.22
+ 
+ 
+ 
+ 0.00
+ %
+
+ 
+ 4.50 to 4.99
+ 
+ 
+ 26,688
+ 
+ 
+ 
+ 425,057,033.67
+ 
+ 
+ 
+ 14.17
+ %
+
+ 
+ 5.00 to 5.49
+ 
+ 
+ 5
+ 
+ 
+ 
+ 88,285.12
+ 
+ 
+ 
+ 0.00
+ %
+
+ 
+ 5.50 to 5.99
+ 
+ 
+ 20,748
+ 
+ 
+ 
+ 367,672,950.21
+ 
+ 
+ 
+ 12.26
+ %
+
+ 
+ 6.00 to 6.49
+ 
+ 
+ 73
+ 
+ 
+ 
+ 1,087,975.46
+ 
+ 
+ 
+ 0.04
+ %
+
+ 
+ 6.50 to 6.99
+ 
+ 
+ 11,576
+ 
+ 
+ 
+ 201,025,640.22
+ 
+ 
+ 
+ 6.70
+ %
+
+ 
+ 7.00 to 7.49
+ 
+ 
+ 1,682
+ 
+ 
+ 
+ 23,280,841.63
+ 
+ 
+ 
+ 0.78
+ %
+
+ 
+ 7.50 to 7.99
+ 
+ 
+ 11,816
+ 
+ 
+ 
+ 194,684,425.05
+ 
+ 
+ 
+ 6.49
+ %
+
+ 
+ 8.00 to 8.49
+ 
+ 
+ 4,229
+ 
+ 
+ 
+ 56,427,666.56
+ 
+ 
+ 
+ 1.88
+ %
+
+ 
+ 8.50 to 8.99
+ 
+ 
+ 8,515
+ 
+ 
+ 
+ 115,537,034.99
+ 
+ 
+ 
+ 3.85
+ %
+
+ 
+ 9.00 to 9.49
+ 
+ 
+ 4,800
+ 
+ 
+ 
+ 65,309,664.00
+ 
+ 
+ 
+ 2.18
+ %
+
+ 
+ 9.50 to 9.99
+ 
+ 
+ 13,778
+ 
+ 
+ 
+ 204,848,432.35
+ 
+ 
+ 
+ 6.83
+ %
+
+ 
+ 10.00 to 10.49
+ 
+ 
+ 3,867
+ 
+ 
+ 
+ 52,786,216.41
+ 
+ 
+ 
+ 1.76
+ %
+
+ 
+ 10.50 to 10.99
+ 
+ 
+ 7,730
+ 
+ 
+ 
+ 106,388,365.68
+ 
+ 
+ 
+ 3.55
+ %
+
+ 
+ 11.00 to 11.49
+ 
+ 
+ 2,952
+ 
+ 
+ 
+ 39,644,001.51
+ 
+ 
+ 
+ 1.32
+ %
+
+ 
+ 11.50 to 11.99
+ 
+ 
+ 7,665
+ 
+ 
+ 
+ 108,507,986.62
+ 
+ 
+ 
+ 3.62
+ %
+
+ 
+ 12.00 to 12.49
+ 
+ 
+ 2,881
+ 
+ 
+ 
+ 36,213,835.87
+ 
+ 
+ 
+ 1.21
+ %
+
+ 
+ 12.50 to 12.99
+ 
+ 
+ 6,738
+ 
+ 
+ 
+ 88,068,217.09
+ 
+ 
+ 
+ 2.94
+ %
+
+ 
+ 13.00 to 13.49
+ 
+ 
+ 2,500
+ 
+ 
+ 
+ 31,237,115.56
+ 
+ 
+ 
+ 1.04
+ %
+
+ 
+ 13.50 to 13.99
+ 
+ 
+ 5,295
+ 
+ 
+ 
+ 66,111,975.75
+ 
+ 
+ 
+ 2.20
+ %
+
+ 
+ 14.00 to 14.49
+ 
+ 
+ 2,372
+ 
+ 
+ 
+ 29,048,934.24
+ 
+ 
+ 
+ 0.97
+ %
+
+ 
+ 14.50 to 14.99
+ 
+ 
+ 4,553
+ 
+ 
+ 
+ 55,103,001.26
+ 
+ 
+ 
+ 1.84
+ %
+
+ 
+ 15.00 to 15.49
+ 
+ 
+ 2,096
+ 
+ 
+ 
+ 24,876,927.54
+ 
+ 
+ 
+ 0.83
+ %
+
+ 
+ 15.50 to 15.99
+ 
+ 
+ 3,338
+ 
+ 
+ 
+ 39,310,330.61
+ 
+ 
+ 
+ 1.31
+ %
+
+ 
+ 16.00 to 16.49
+ 
+ 
+ 1,457
+ 
+ 
+ 
+ 16,424,681.20
+ 
+ 
+ 
+ 0.55
+ %
+
+ 
+ 16.50 to 16.99
+ 
+ 
+ 2,989
+ 
+ 
+ 
+ 33,534,613.98
+ 
+ 
+ 
+ 1.12
+ %
+
+ 
+ 17.00 to 17.49
+ 
+ 
+ 1,639
+ 
+ 
+ 
+ 18,856,651.71
+ 
+ 
+ 
+ 0.63
+ %
+
+ 
+ 17.50 to 17.99
+ 
+ 
+ 2,435
+ 
+ 
+ 
+ 27,399,332.60
+ 
+ 
+ 
+ 0.91
+ %
+
+ 
+ 18.00 to 18.49
+ 
+ 
+ 2,860
+ 
+ 
+ 
+ 33,706,736.88
+ 
+ 
+ 
+ 1.12
+ %
+
+ 
+ 18.50 to 18.99
+ 
+ 
+ 1,962
+ 
+ 
+ 
+ 21,410,443.01
+ 
+ 
+ 
+ 0.71
+ %
+
+ 
+ 19.00 to 19.49
+ 
+ 
+ 1,162
+ 
+ 
+ 
+ 11,566,112.19
+ 
+ 
+ 
+ 0.39
+ %
+
+ 
+ 19.50 to 19.99
+ 
+ 
+ 1,840
+ 
+ 
+ 
+ 18,840,330.37
+ 
+ 
+ 
+ 0.63
+ %
+
+ 
+ 20.00
+ 
+ 
+ 423
+ 
+ 
+ 
+ 4,089,385.56
+ 
+ 
+ 
+ 0.14
+ %
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Totals
+ 
+ 
+ 205,646
+ 
+ 
+ $
+ 2,999,599,993.73
+ 
+ 
+ 
+ 100.00
+ %
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ (1) 
+ 
+ May not add to 100.00% due to rounding.
+
+48
+
+Table of Contents
+
+Certain Other Characteristics of the Receivables as of the
+Initial Cut-off Date
+
+ 
+The initial receivables have the characteristics indicated below.
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Percentage
+
+ 
+ 
+ by Aggregate
+
+ Characteristic
+ 
+ Principal Balance
+
+ 
+ 
+ 
+
+ 
+ Purchased by Ford Credit
+ 
+ 
+ 88.09%
+ 
+
+ 
+ Purchased by PRIMUS
+ 
+ 
+ 11.91%
+ 
+
+ 
+ Simple Interest Receivables
+ 
+ 
+ 99.98%
+ 
+
+ 
+ Actuarial Receivables
+ 
+ 
+ 00.02%
+ 
+
+ 
+ Vehicles financed at new vehicle rates by principal balance
+ 
+ 
+ 70.00%
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Percentage
+
+ 
+ 
+ by Aggregate
+
+ 
+ 
+ Number of
+
+ 
+ 
+ Receivables
+
+ 
+ 
+ 
+
+ 
+ Number of vehicles financed at new vehicle rates
+ 
+ 
+ 63.04%
+ 
+
+Criteria Applicable to Selection of Additional Receivables
+
+ 
+The Additional Receivables purchased during the Revolving Period
+will be selected from Ford Credit s and PRIMUS s
+portfolio for inclusion in the Receivables Pool by several
+criteria. These criteria include the requirement that each
+Additional Receivable:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ is secured by a new or used vehicle;
+
+ 
+
+ 
+ 
+ 
+ was originated in the U.S.;
+
+ 
+
+ 
+ 
+ 
+ provides for level monthly payments (except for the last payment,
+ which may be minimally different from the level payments) that
+ fully amortize the amount financed over its original term to
+ maturity;
+
+ 
+
+ 
+ 
+ 
+ is an Actuarial Receivable or a Simple Interest Receivable;
+
+ 
+
+ 
+ 
+ 
+ bears interest at an APR of not less than 1.80% and not greater
+ than 20.00%;
+
+ 
+
+ 
+ 
+ 
+ has an original term not greater than 60 months;
+
+ 
+
+ 
+ 
+ 
+ is not more than 30 days past due as of the applicable
+ Subsequent Cut-off Date and has never been extended;
+
+ 
+
+ 
+ 
+ 
+ was originated no more than 24 months prior to the
+ applicable Subsequent Cut-off Date;
+
+ 
+
+ 
+ 
+ 
+ has a final maturity date no later than 6 months prior to
+ the Final Scheduled Distribution Date of the Class D
+ Certificates; and
+
+ 
+
+ 
+ 
+ 
+ has a remaining term to maturity not exceeding 60 months as
+ of the applicable Subsequent Cut-off Date.
+
+ 
+In addition, the aggregate Additional Receivables sold to the
+trust on any Monthly Distribution Date must comply with the
+following:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the weighted average APR of the Additional Receivables added on
+ such Monthly Distribution Date is not less than 7.53%;
+
+49
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the weighted average remaining term range of the Additional
+ Receivables added on such Monthly Distribution Date is not
+ greater than 49.1 months;
+
+ 
+
+ 
+ 
+ 
+ the percentage of Additional Receivables added on such Monthly
+ Distribution Date with respect to vehicles financed at new
+ vehicle rates by principal balance is equal to or greater than
+ 69.00% of the aggregate principal balance of the Additional
+ Receivables acquired by the trust on such Monthly Distribution
+ Date; and
+
+ 
+
+ 
+ 
+ 
+ the percentage of Additional Receivables added on such Monthly
+ Distribution Date purchased by Ford Credit (but not by PRIMUS) by
+ principal balance is greater than or equal to 87.59% of the
+ aggregate principal balance of the Additional Receivables
+ acquired by the trust on such Monthly Distribution Date.
+
+ 
+The Additional Receivables will be selected from Ford
+Credit s and PRIMUS s portfolio of retail installment
+sale contracts for new and used vehicles, in each case meeting
+the criteria described above. It is intended that no selection
+procedures adverse to the noteholders or the certificateholders
+will be utilized in selecting the Additional Receivables.
+
+Delinquencies, Repossessions and Net Losses of Ford
+Credit s Portfolios
+
+ 
+Set forth below is certain information concerning Ford
+Credit s experience with its portfolios of U.S. retail
+installment sale contracts for new and used automobiles and light
+ trucks (including previously sold contracts which Ford Credit
+continues to service). There is no assurance that the
+delinquency, repossession or loss experience of the initial
+receivables or any Additional Receivables will be comparable to
+Ford Credit s experience shown in the following tables. Ford
+ Credit expects that credit losses will temporarily increase as a
+ result of the restructuring of its servicing operations as
+discussed above.
+
+Delinquency Experience(1)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Six Months Ended
+ 
+ 
+
+ 
+ 
+ June 30,
+ 
+ Year Ended December 31,
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 2000
+ 
+ 1999
+ 
+ 1999
+ 
+ 1998
+ 
+ 1997
+ 
+ 1996
+ 
+ 1995
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Average Number of Contracts Outstanding During the Period
+ 
+ 
+ 5,632,361
+ 
+ 
+ 
+ 4,833,211
+ 
+ 
+ 
+ 5,053,474
+ 
+ 
+ 
+ 4,359,281
+ 
+ 
+ 
+ 4,000,754
+ 
+ 
+ 
+ 3,917,263
+ 
+ 
+ 
+ 3,655,309
+ 
+
+ 
+ Average Daily Delinquencies as a Percent of Average Contracts
+ Outstanding
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 31-60 Days(2)
+ 
+ 
+ 2.38%
+ 
+ 
+ 
+ 2.41%
+ 
+ 
+ 
+ 2.38%
+ 
+ 
+ 
+ 2.53%
+ 
+ 
+ 
+ 2.80%
+ 
+ 
+ 
+ 2.49%
+ 
+ 
+ 
+ 2.17%
+ 
+
+ 
+ 
+ 61-90 Days(2)
+ 
+ 
+ 0.32%
+ 
+ 
+ 
+ 0.30%
+ 
+ 
+ 
+ 0.32%
+ 
+ 
+ 
+ 0.32%
+ 
+ 
+ 
+ 0.32%
+ 
+ 
+ 
+ 0.28%
+ 
+ 
+ 
+ 0.23%
+ 
+
+ 
+ 
+ Over 90 Days(3)
+ 
+ 
+ 0.15%
+ 
+ 
+ 
+ 0.13%
+ 
+ 
+ 
+ 0.14%
+ 
+ 
+ 
+ 0.14%
+ 
+ 
+ 
+ 0.14%
+ 
+ 
+ 
+ 0.09%
+ 
+ 
+ 
+ 0.05%
+ 
+
+ 
+ 
+
+ (1) 
+ 
+ The information in the table includes U.S. retail
+ installment sale contracts for new and used automobiles and light
+ trucks and includes previously sold contracts which Ford Credit
+ continues to service.
+
+ 
+
+ (2) 
+ 
+ Delinquencies represent the daily average number
+ of contracts delinquent.
+
+ 
+
+ (3) 
+ 
+ Delinquencies represent the average monthly
+ end-of-period number of contracts delinquent.
+
+50
+
+Table of Contents
+
+Credit Loss and Repossession Experience(1)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Six Months Ended
+ 
+ 
+
+ 
+ 
+ June 30,
+ 
+ Year Ended December 31,
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 2000
+ 
+ 1999
+ 
+ 1999
+ 
+ 1998
+ 
+ 1997
+ 
+ 1996
+ 
+ 1995
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Average Portfolio Outstanding During the Period (Millions) Gross
+ 
+ $
+ 76,736
+ 
+ 
+ $
+ 63,019
+ 
+ 
+ $
+ 66,928
+ 
+ 
+ $
+ 54,106
+ 
+ 
+ $
+ 46,020
+ 
+ 
+ $
+ 43,760
+ 
+ 
+ $
+ 38,028
+ 
+
+ 
+ 
+ Net
+ 
+ $
+ 67,873
+ 
+ 
+ $
+ 55,671
+ 
+ 
+ $
+ 59,242
+ 
+ 
+ $
+ 47,075
+ 
+ 
+ $
+ 39,288
+ 
+ 
+ $
+ 36,862
+ 
+ 
+ $
+ 32,134
+ 
+
+ 
+ Repossessions as a Percent of Average Number of Contracts
+ Outstanding
+ 
+ 
+ 2.08%
+ 
+ 
+ 
+ 2.26%
+ 
+ 
+ 
+ 2.25%
+ 
+ 
+ 
+ 2.65%
+ 
+ 
+ 
+ 3.08%
+ 
+ 
+ 
+ 3.07%
+ 
+ 
+ 
+ 2.37%
+ 
+
+ 
+ 
+ Net Losses as a Percent of Gross Liquidations(2)
+ 
+ 
+ 1.74%
+ 
+ 
+ 
+ 1.83%
+ 
+ 
+ 
+ 1.91%
+ 
+ 
+ 
+ 2.27%
+ 
+ 
+ 
+ 2.61%
+ 
+ 
+ 
+ 2.31%
+ 
+ 
+ 
+ 1.45%
+ 
+
+ 
+ 
+ Net Losses as a Percent of Average Gross Portfolio Outstanding(2)
+ 
+ 
+ 0.86%
+ 
+ 
+ 
+ 0.92%
+ 
+ 
+ 
+ 0.95%
+ 
+ 
+ 
+ 1.16%
+ 
+ 
+ 
+ 1.44%
+ 
+ 
+ 
+ 1.31%
+ 
+ 
+ 
+ 0.83%
+ 
+
+ 
+ 
+ Net Losses as a Percent of Average Net Portfolio Outstanding(2)
+ 
+ 
+ 0.97%
+ 
+ 
+ 
+ 1.05%
+ 
+ 
+ 
+ 1.07%
+ 
+ 
+ 
+ 1.34%
+ 
+ 
+ 
+ 1.69%
+ 
+ 
+ 
+ 1.56%
+ 
+ 
+ 
+ 0.98%
+ 
+
+ 
+ 
+
+ (1) 
+ 
+ All gross amounts and percentages are based on the
+ gross amount scheduled to be paid on each contract including
+ unearned finance and other charges. All net amounts and
+ percentages are based on the net amount scheduled to be paid on
+ each contract excluding unearned finance and other charges. The
+ information in the table includes U.S. retail installment sale
+ contracts for new and used automobiles and light trucks and
+ includes previously sold contracts which Ford Credit continues to
+ service.
+
+ 
+
+ (2) 
+ 
+ Net Losses are equal to the aggregate
+ balance of all contracts which are determined to be uncollectible
+ in the period less any recoveries on contracts charged-off in
+ the period or any prior periods. Net Losses include expenses
+ associated with outside collection agencies but exclude other
+ expenses associated with collection, repossession, and
+ disposition of the vehicle. These other expenses are not material
+ to the data presented.
+
+HOW YOU CAN COMPUTE YOUR PORTION OF THE AMOUNT
+
+OUTSTANDING ON THE NOTES
+
+ 
+The servicer will provide in each report which it delivers to you
+ a factor which you can use to compute your portion of the
+principal amount outstanding on the notes.
+
+ 
+How the Servicer Computes the Factor For Your Notes.
+ The servicer will compute a factor for each Subclass of the
+Class A Notes and for the Class B Notes. The factor
+will be a seven-digit decimal which the servicer will compute
+prior to each distribution with respect to such class or Subclass
+ of notes indicating the remaining outstanding principal amount
+of each Subclass of the Class A Notes and of the
+Class B Notes, as of the applicable Monthly Distribution
+Date. The servicer will compute the factor after giving effect to
+ payments to be made on such Monthly Distribution Date, as a
+fraction of the initial outstanding principal amount of each
+Subclass of the Class A Notes and of the Class B Notes.
+
+ 
+Your Portion of the Outstanding Amount of the Notes.
+ For each note you own, your portion is the product of:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the original denomination of your note; and
+
+ 
+
+ 
+ 
+ 
+ the factor relating to the applicable Subclass of Class A
+ Notes or the Class B Notes computed by the servicer in the
+ manner described above.
+
+ 
+The Factors Described Above Will Decline as the Trust Makes
+ Payments on the Notes. Each of the factors described
+above will initially be 1.0000000. They will then decline to
+reflect reductions in the outstanding principal amount of the
+applicable class or Subclass of notes.
+
+ 
+Following the Revolving Period, these amounts will generally be
+reduced by, in the case of the Class A Notes, application of
+ the proceeds of the issuance and sale of Variable Pay Term Notes
+ and, in the case of the Class B Notes, as a result of
+scheduled payments, prepayments, repurchases of the receivables
+by the seller or the servicer and liquidations of the
+receivables.
+
+51
+
+Table of Contents
+
+MATURITY AND PREPAYMENT CONSIDERATIONS
+
+ 
+The weighted average life of the Class A Notes will be
+dependent on whether an Early Amortization Event occurs and
+whether the trust is able to issue Variable Pay Term Notes on
+each Targeted Scheduled Distribution Date or on a subsequent
+Monthly Distribution Date in a sufficient amount to pay the
+related Subclass of Class A Notes in full. The weighted
+average life of the Class B Notes (and the Class A
+Notes if the trust is not able to issue and sell Variable Pay
+Term Notes) will generally be influenced by the rate at which the
+ principal balances of the related receivables are paid, which
+payment may be in the form of scheduled amortization or
+prepayments.
+
+ 
+Prepayments for these purposes include the following
+circumstances:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Prepayments in full All of the receivables are
+ prepayable at any time without penalty to the obligor.
+
+ 
+
+ 
+ 
+ 
+ Repurchases of the receivables by the seller The
+ seller may be required to repurchase a receivable from the trust
+ if certain breaches of representations and warranties occur and
+ the receivable is materially and adversely affected by the
+ breach.
+
+ 
+
+ 
+ 
+ 
+ Repurchases of the receivables by the servicer The
+ servicer may be obligated to purchase a receivable from the trust
+ if certain breaches of covenants occur or if the servicer
+ extends or modifies the terms of a receivable beyond the April
+ 2008 Monthly Distribution Date.
+
+ 
+
+ 
+ 
+ 
+ Partial prepayments, including those related to rebates of
+ extended warranty contract costs and insurance premiums.
+
+ 
+
+ 
+ 
+ 
+ Liquidations of the receivables due to default.
+
+ 
+
+ 
+ 
+ 
+ Receipts of proceeds from physical damage, credit life and
+ disability insurance policies.
+
+ 
+
+ 
+ 
+ 
+ Receivables repurchased by the seller or the servicer for
+ administrative reasons.
+
+ 
+In light of the above considerations, there can be no assurance
+as to the amount of principal payments to be made on the
+Class A Notes or Class B Notes on each Monthly
+Distribution Date, since such amount will depend, in part, on the
+ amount of principal collected on the receivables during the
+applicable Collection Period. Any reinvestment risks resulting
+from a faster or slower incidence of prepayment of receivables
+will be borne by the holders of the Class A Notes to the
+extent such holders are entitled to monthly payments of
+principal, and by the holders of the Variable Pay Term Notes and
+the Class B Notes. Such reinvestment risks include the risk
+that interest rates may be lower at the time such holders receive
+ payments from the trust than interest rates would otherwise have
+ been had such prepayments not been made or had such prepayments
+been made at a different time.
+
+ 
+Holders of notes should consider:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ in the case of notes purchased at a discount, the risk that a
+ slower than anticipated rate of principal payments on the
+ receivables could result in an actual yield that is less than the
+ anticipated yield; and
+
+ 
+
+ 
+ 
+ 
+ in the case of notes purchased at a premium, the risk that a
+ faster than anticipated rate of principal payments on the
+ receivables could result in an actual yield that is less than the
+ anticipated yield.
+
+ 
+For further discussion of the effect of prepayments of
+receivables on principal payments on the Class A Notes and
+the Class B Notes, see Risk Factors You
+May Experience Reinvestment Risk Because of Prepayments and May
+Suffer Opportunity Costs Because Targeted Scheduled Distribution
+Dates Are Not Assured .
+
+52
+
+Table of Contents
+
+ 
+If an Early Amortization Event occurs, the Revolving Period will
+end, no Additional Receivables will be purchased and no Variable
+Pay Term Notes will be issued and sold. Thus, on the Monthly
+Distribution Date following the occurrence of an Early
+Amortization Event, amounts deposited to the Principal
+Distribution Account will be applied to make principal payments
+on the Class A Notes sequentially, beginning with the
+Class A-1 Notes.
+
+ 
+No principal payments will be made at any time, including upon
+the occurrence and during the continuation of an Event of Default
+ under the indenture:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ of the Class A-2 Notes until the Class A-1 Notes have
+ been paid in full;
+
+ 
+
+ 
+ 
+ 
+ of the Class A-3 Notes until the Class A-2 Notes have
+ been paid in full;
+
+ 
+
+ 
+ 
+ 
+ of the Class A-4 Notes until the Class A-3 Notes have
+ been paid in full;
+
+ 
+
+ 
+ 
+ 
+ of the Class A-5 Notes until the Class A-4 Notes have
+ been paid in full; or
+
+ 
+
+ 
+ 
+ 
+ of the Class B Notes until the Class A-5 Notes and
+ Variable Pay Term Notes have been paid in full.
+
+ 
+No distributions of principal of the certificates will be made
+until all the notes have been paid in full.
+
+ 
+As the rate of payment of principal may depend on the rate of
+payment (including prepayments) of the principal balance of the
+receivables, final distribution in respect of the notes could
+occur significantly earlier than the respective Final Scheduled
+Distribution Dates.
+
+See Description of the Notes Payments of
+Principal of Class A Notes and Variable Pay Term Notes 
+ and Payments of Principal of Class B
+Notes .
+
+ 
+The Notes May Not Be Repaid on their Final Scheduled
+Distribution Dates. It is expected that final
+distribution on the notes will occur on or prior to their
+respective Final Scheduled Distribution Dates. Failure to make
+final payment of the notes on or prior to the respective Final
+Scheduled Distribution Dates would constitute an Event of Default
+ under the indenture. See Description of the
+Notes Events of Default . However, no
+assurance can be given that sufficient funds will be available to
+ pay the notes in full on or prior to their respective Final
+Scheduled Distribution Dates. If sufficient funds are not
+available, final distribution on the notes could occur later than
+ such dates.
+
+DESCRIPTION OF THE NOTES
+
+ 
+The trust will issue the notes under an indenture to be dated as
+of October 1, 2000 (the indenture ),
+between the trust and The Chase Manhattan Bank, as indenture
+trustee (the indenture trustee ). A copy of the
+ indenture will be available at the corporate offices of the
+indenture trustee and the Luxembourg Paying Agent. The following
+summary describes certain terms of the notes and the indenture.
+The summary is not a complete description of all the provisions
+of the notes and the indenture. We refer you to those provisions.
+
+ 
+The trust will issue on the Closing Date $906,000,000 aggregate
+principal amount of Class A-1 Floating Rate Asset Backed
+Notes (the Class A-1 Notes ), $701,000,000
+ aggregate principal amount of Class A-2 6.56% Asset Backed
+Notes (the Class A-2 Notes ), $520,000,000
+ aggregate principal amount of Class A-3 6.58% Asset Backed
+Notes (the Class A-3 Notes ), $343,000,000
+ aggregate principal amount of Class A-4 Floating Rate Asset
+ Backed Notes (the Class A-4 Notes ),
+$159,722,000 aggregate principal amount of Class A-5
+Floating Rate Asset Backed Notes (the Class A-5
+Notes and together with the Class A-1 Notes, the
+Class A-2 Notes, the Class A-3 Notes and the
+Class A-4 Notes, the Class A Notes )
+and $97,397,000 aggregate principal amount of Class B 7.00%
+Asset Backed Notes (the Class B Notes )
+pursuant to the indenture. The trust also will issue on the
+Closing Date $55,656,000 aggregate
+
+53
+
+Table of Contents
+
+principal balance of Class C 7.24% Asset Backed Certificates
+ (the Class C Certificates ) and
+$55,656,000 aggregate principal balance of Class D 9.00%
+Asset Backed Certificates (the Class D
+Certificates and, together with the Class C
+Certificates, the certificates ). As provided
+herein, the trust may also issue, from time to time, Variable Pay
+ Term Notes (the Variable Pay Term Notes and,
+together with the Class A Notes and the Class B Notes,
+the notes ) pursuant to the indenture. The
+notes and the certificates are sometimes referred to herein as
+the securities. The Variable Pay Term Notes,
+the Class C Certificates and the Class D Certificates
+are not being offered hereby. The trust has not issued any debt
+prior to the Closing Date and will not issue any debt other than
+the securities described in this prospectus.
+
+ 
+A copy of the form of indenture has been filed as an exhibit to
+the Registration Statement filed with the Securities and Exchange
+ Commission (the Commission ). The following
+summary describes certain terms of the notes and the indenture.
+The summary does not purport to be complete and is subject to,
+and is qualified in its entirety by reference to, all the
+provisions of the notes and the indenture.
+
+Form of Registration
+
+ 
+The Class A Notes and Class B Notes will be available
+in book-entry form only through the facilities of The Depository
+Trust Company and through Clearstream and Euroclear, and
+investors will not be entitled to receive physical delivery of
+Definitive Notes except in limited circumstances. The
+Class A Notes and the Class B Notes are not issuable in
+ bearer form. The Class A Notes and Class B Notes will
+be available in minimum denominations of $1,000 and in integral
+multiples thereof. Under the indenture, the indenture trustee
+will be appointed as the registrar (in such capacity, the 
+ Registrar ) and transfer agent for the notes (in
+such capacity, together with each additional transfer agent for
+the notes appointed pursuant to the indenture, each a 
+ Transfer Agent ) and will provide for the
+registration of notes and the registration of transfers of notes
+in the register maintained by it.
+
+ 
+Book Entry Procedures. Upon the issuance of the
+Class A Notes and Class B Notes (collectively, the 
+ Global Notes ), DTC or its custodian will credit,
+on its internal system, the respective stated initial principal
+balance of the individual beneficial interests represented by
+such Global Notes to the accounts of persons who have accounts
+with DTC. Such accounts initially will be designated by or on
+behalf of the underwriters. Ownership of beneficial interests in
+Global Notes will be limited to persons who have accounts with
+DTC ( participants ) or persons who hold
+interests through participants. Ownership of beneficial interests
+ in a Global Note will be shown on, and the transfer of that
+ownership will be effected only through, records maintained by
+DTC or its nominee (with respect to interests of participants)
+and the records of participants (with respect to interests of
+persons other than participants).
+
+ 
+The registered owner of the relevant Global Note will be the only
+ person entitled to receive payments in respect of such notes
+represented by such Global Note, and the trust will be discharged
+ by payment to, or to the order of, the registered owner of such
+Global Note in respect of each amount so paid. No person other
+than the registered owner of the relevant Global Note shall have
+any claim against the trust in respect of any payment due on that
+ Global Note. Account holders or participants in Euroclear and
+Clearstream shall have no rights under the indenture with respect
+ to such Global Notes held on their behalf by the Registrar as
+custodian for DTC, and DTC may be treated by the trust, the
+indenture trustee and any agent of the trust or the indenture
+trustee as the holder of such Global Notes for all purposes
+whatsoever.
+
+ 
+Payments of the principal of and interest on the Global Notes
+will be made to DTC or its nominee, as the registered owner
+thereof. Neither the trust, the indenture trustee, the Registrar
+nor any paying agent will have any responsibility or liability
+for any aspect of the records relating to, or payments made on
+account of, beneficial ownership interests in the Global Notes or
+ for any notice permitted or required to be given to holders of
+notes or any consent given or actions
+
+54
+
+Table of Contents
+
+taken by DTC or its nominee as holder of the Global Notes. The
+trust expects that DTC or its nominee, upon receipt of any
+payment of principal or interest in respect of a Global Note
+representing any notes held by it or its nominee, will
+immediately credit participants accounts with payments in
+amounts proportionate to their respective interests in the
+principal balance of such Global Notes as shown on the records of
+ DTC or its nominee. The trust also expects that payments by
+participants to owners of interests in such Global Note held
+through such participants will be governed by standing
+instructions and customary practices, as is now the case with
+securities held for the accounts of customers registered in the
+names of nominees for such customers. Such payments will be the
+responsibility of such participants.
+
+ 
+Transfers between participants will be effected in the ordinary
+way in accordance with DTC rules and will be settled in same-day
+funds. The laws of some jurisdictions require that certain
+persons take physical delivery of securities in physical form.
+Consequently, the ability to transfer beneficial interests in
+Global Notes to these persons may be limited. Because DTC can
+only act on behalf of participants, who in turn act on behalf of
+indirect participants and certain banks, the ability of a person
+having a beneficial interest in Global Notes to pledge the
+interest to persons or entities that do not participate in the
+DTC system, or otherwise take actions in respect of such
+interest, may be affected by the lack of a physical note of the
+interest. Transfers between account holders in Euroclear and
+Clearstream will be effected in the ordinary way in accordance
+with their respective rules and operating procedures.
+
+ 
+Subject to compliance with the transfer restrictions applicable
+to the Global Notes described above, cross-market transfers
+between DTC participants not holding for Euroclear or
+Clearstream, on the one hand, and, direct or indirect Euroclear
+or Clearstream account holders, on the other, will be effected in
+ DTC in accordance with DTC rules on behalf of Euroclear or
+Clearstream, as the case may be, by its respective depositary;
+however, these cross-market transactions will require delivery of
+ instructions to Euroclear or Clearstream, as the case may be, by
+ the counterparty in the system in accordance with its rules and
+procedures and within its established deadlines (Brussels time).
+Euroclear or Clearstream, as the case may be, will, if the
+transaction meets its settlement requirements, deliver
+instructions to its respective depositary to take action to
+effect final settlement on its behalf by delivering or receiving
+interests in a Global Note in DTC, and making or receiving
+payment in accordance with normal procedures for a same-day funds
+ settlement applicable to DTC. Clearstream and Euroclear account
+holders may not deliver instructions directly to the depositaries
+ for Clearstream or Euroclear.
+
+ 
+Because of time zone differences, the securities account of a
+Euroclear participant or Clearstream customer purchasing an
+interest in a Global Note from another DTC participant will be
+credited during the securities settlement processing day (which
+must be a business day for Euroclear or Clearstream, as the case
+may be) immediately following the DTC settlement date and the
+credit of any transactions in interests in a Global Note settled
+during the processing day will be reported to the relevant
+Euroclear or Clearstream participant or customer on that day.
+Cash received in Euroclear or Clearstream participant or customer
+ accounts as a result of sales of interests in a Global Note by
+or through a Euroclear or Clearstream participant or customer to
+a DTC participant will be received on the DTC settlement date but
+ will be available in the relevant Euroclear or Clearstream cash
+account only as of the Business Day following settlement in DTC.
+
+ 
+DTC has advised the trust that it will take any action permitted
+to be taken by a holder of the Global Notes (including the
+presentation of the applicable notes for exchange as described
+below) only at the direction of one or more participants to whose
+ account with DTC interests in a Global Note are credited and
+only in respect of that portion of the aggregate principal
+balance of such notes as to which the participant or participants
+ has or have given direction.
+
+ 
+The giving of notices and other communications by DTC to
+participants, by participants to persons who hold accounts with
+them and by such persons to holders of beneficial interests in a
+
+55
+
+Table of Contents
+
+Global Note will be governed by arrangements between them,
+subject to any statutory or regulatory requirements as may exist
+from time to time.
+
+ 
+DTC has advised the trust as follows: DTC is a limited purpose
+trust company organized under the laws of the State of New York,
+a member of the Federal Reserve System, a clearing
+corporation within the meaning of the Uniform
+Commercial Code and a Clearing Agency 
+registered pursuant to the provisions of Section 17A of the
+Exchange Act. DTC was created to hold securities for its
+participants and facilitate the clearance and settlement of
+securities transactions between participants through electronic
+book-entry changes in accounts of its participants, thereby
+eliminating the need for physical movement of certificates.
+Participants include securities brokers and dealers, banks, trust
+ companies and clearing corporations and may include certain
+other organizations. Indirect access to the DTC system is
+available to others such as banks, brokers, dealers and trust
+companies that clear through or maintain a custodial relationship
+ with a participant, either directly or indirectly (
+ indirect participants ).
+
+ 
+Although DTC, Clearstream and Euroclear have agreed to the
+foregoing procedures in order to facilitate transfers of
+interests in the notes among participants or customers of DTC,
+Clearstream and Euroclear, they are under no obligation to
+perform or continue to perform these procedures, and the
+procedures may be discontinued at any time. Neither the trust nor
+ the indenture trustee will have any responsibility for the
+performance by DTC, Clearstream, Euroclear or their respective
+participants, customers or indirect participants of their
+respective obligations under the rules and procedures governing
+their operations.
+
+ 
+Payment of Funds. Except as described below, all
+payments will be made to the persons in whose names the
+Class A Notes and Class B Notes are registered at the
+close of business on the applicable Record Date. As to each
+holder of a Class A Note or Class B Note, such
+distributions will be made by the indenture trustee on behalf of
+the trust by wire transfer in immediately available funds to the
+account specified by such holder at a bank or other entity having
+ appropriate facilities therefor, if such holder shall have
+provided the indenture trustee with wiring instructions not later
+ than five Business Days prior to the related Monthly
+Distribution Date, or otherwise by check mailed to such holder.
+All payments made on a class of Class A Notes or
+Class B Notes will be allocated pro rata among the
+outstanding notes of such class based on their respective
+percentage interests in such class. Cede Co. 
+ will be the registered holder of the Global Notes until
+Definitive Notes are issued in respect thereof. The final
+distribution on any Class A Note or Class B Note will
+be made only upon presentation and surrender of such note at the
+location that will be specified in a notice of the pendency of
+such final distribution.
+
+ 
+Definitive Notes. Except in the limited
+circumstances described in the next sentence, owners of
+beneficial interests in the Global Notes will not be entitled to
+have Global Notes registered in their names, will not receive or
+be entitled to receive a physical note and will not be considered
+ holders of notes under the indenture. If
+(i) DTC notifies the trust that it is unwilling or unable to
+ continue as depositary for the Global Notes or DTC, Euroclear or
+ Clearstream ceases to be a Clearing Agency 
+registered under the Exchange Act, and a successor depositary or
+clearing agency is not appointed by the indenture trustee within
+90 days after receiving such notice, (ii) the
+administrator advises the indenture trustee that it elects to
+terminate the book-entry system or (iii) a majority of a
+class of notes advise the indenture trustee after the occurrence
+of an Event of Default or an Event of Servicing Termination that
+continuation with the book-entry system is no longer in their
+bests interests, the trust will direct the Registrar to issue or
+cause to be issued securities in the form of Definitive Notes in
+exchange for the applicable Global Notes to the beneficial owners
+ of such Global Notes in the manner set forth in the indenture.
+
+ 
+If Definitive Notes are issued, interest payments and any
+principal payments on the Definitive Notes will be made by wire
+transfer or by check mailed to the address of the holder as it
+appears on the Record Date on the register maintained by the
+Registrar, and no presentation
+
+56
+
+Table of Contents
+
+of the holder s Definitive Notes will be required for such
+holder to receive payment. The final payment on any Definitive
+Note, however, will be made only upon presentation and surrender
+of such Definitive Note at the office or agency specified in the
+notice of final distribution to noteholders, or at the corporate
+trust office of the Principal Paying Agent or any other paying
+agent appointed by the trust, on or after the Monthly
+Distribution Date or Quarterly Payment Date specified in such
+notice, so long as the presentation is made on a day that is a
+business day in the place of presentation. Banque Internationale
+ Luxembourg S.A., 69, route d Esch, L-2953 Luxembourg
+has been appointed as a paying agent in Luxembourg for such
+purpose (the Luxembourg Paying Agent ).
+
+ 
+In addition, upon maturity or payment of the final distribution
+thereon, such Definitive Notes may be presented for payment at
+the office of the Principal Paying Agent or the office of the
+Luxembourg Paying Agent up to two years after such maturity or
+final distribution. Thereafter, the indenture trustee may take
+appropriate steps to contact the remaining holders of the
+Class A Notes and Class B Notes regarding the surrender
+ of their notes, and the cost thereof will be paid out of the
+funds held by the indenture trustee for the benefit of such
+holders. If a new Luxembourg Paying Agent is appointed, a notice
+thereof will be published in a newspaper of general circulation
+in Luxembourg (an Authorized Newspaper ). It is
+ expected that such publication would be made in the 
+Luxemburger Wort.
+
+ 
+The Luxembourg Paying Agent also will act as a Transfer Agent
+with respect to the related Definitive Notes. At the option of
+the holder of a Class A Note or Class B Note, any
+Definitive Note may be transferred or exchanged for one or more
+other Class A Notes or Class B Notes of the same class
+in any denominations of like aggregate principal amount, subject
+to the minimum denomination requirements, upon surrender of the
+note to be transferred or exchanged at the office of the
+Registrar or the office of the Luxembourg Paying Agent. In
+exchange for any Definitive Notes properly presented for
+transfer, the Registrar will, within five Business Days of such
+request if made at the corporate trust office of the Registrar,
+or within ten Business Days if made at the office of the
+Luxembourg Paying Agent, authenticate and deliver at the
+corporate trust office of the Registrar or the office of the
+Luxembourg Paying Agent, as the case may be, one or more
+Definitive Notes in the amount being transferred and in such
+denominations as may be requested. Delivery may be made to the
+transferee by first-class mail at the risk of the transferee to
+such address as the transferee may request. The presentation for
+transfer of any Definitive Note will not be made unless made at
+the corporate trust office of the Registrar or the office of the
+Luxembourg Paying Agent by the registered holder in person, or by
+ a duly authorized attorney-in-fact. No service charge will be
+imposed for any registration of transfer or exchange of a
+Definitive Note, but the Registrar may require payment of a sum
+sufficient to cover any tax or other governmental charge imposed
+in connection therewith or the expenses of delivery by other than
+ regular mail (if any).
+
+The Revolving Period
+
+ 
+During the Revolving Period, holders of the notes and
+certificates will receive payments of interest only. On each
+Monthly Distribution Date during the Revolving Period, after
+payment of the Servicing Fee, the Net Swap Payments, any
+termination payments relating to the Interest Rate Swaps,
+interest payable on the notes and certificates and any deposits
+to the Class A Quarterly Interest Funding Account, the trust
+ will apply remaining funds available for distribution in an
+amount equal to the Principal Distribution Amount, together with
+any amounts on deposit in the Accumulation Account, to purchase
+from the seller Additional Receivables meeting the eligibility
+requirements described herein on each Monthly Distribution Date.
+Any portion of the Principal Distribution Amount which is not
+used to purchase Additional Receivables on a Monthly Distribution
+ Date during the Revolving Period will be deposited to the
+Accumulation Account. As long as the targeted level of
+overcollateralization is maintained, collections remaining on any
+
+57
+
+Table of Contents
+
+Monthly Distribution Date after the first 10 items listed under
+ Distributions on the Securities 
+Distributions Priority of Payments will be
+released to the seller.
+
+ 
+Each pool of Additional Receivables purchased on each Monthly
+Distribution Date during the Revolving Period will be purchased
+at the same discount from the outstanding balance thereof
+(94.63%) at which the trust purchased the initial pool of
+receivables on the Closing Date.
+
+ 
+The Revolving Period terminates on the Amortization Date and as
+of the Amortization Date the trust will be prohibited from
+purchasing Additional Receivables. During the Amortization
+Period, holders of the notes and certificates will be entitled to
+ receive payments of principal in accordance with the priorities
+set forth in Distributions on the Securities 
+ Distributions Priority in which the Trust Makes
+Principal Payments on the Notes and Certificates below.
+ The Amortization Date will occur upon the earlier of
+(1) the Scheduled Amortization Date and (2) the date on
+ which an Early Amortization Event occurs. An Early
+Amortization Event will occur upon any of the
+following:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the Three-Month Rolling Average Delinquency Ratio exceeds 2.25%;
+
+ 
+
+ 
+ 
+ 
+ the Three-Month Rolling Average Realized Loss Ratio exceeds
+ 2.50%;
+
+ 
+
+ 
+ 
+ 
+ the amount on deposit in the Reserve Account shall be less than
+ 75% of the Specified Reserve Balance for three consecutive
+ months;
+
+ 
+
+ 
+ 
+ 
+ after application of funds to the seller in consideration of
+ Additional Receivables on any Monthly Distribution Date during
+ the Revolving Period, the amount of unreinvested principal
+ collections deposited to the Accumulation Account exceeds 1.00%
+ of the aggregate principal balance of the receivables (with such
+ principal balance being calculated as though all amounts
+ deposited into the Accumulation Account had been invested in
+ receivables and not including any reinvestment income);
+
+ 
+
+ 
+ 
+ 
+ the occurrence of an Event of Servicing Termination;
+
+ 
+
+ 
+ 
+ 
+ the occurrence of an Event of Default; and
+
+ 
+
+ 
+ 
+ 
+ an event of default or a termination event under one or more of
+ the Interest Rate Swaps in which an election is made to terminate
+ the related Interest Rate Swap and a failure to enter into a
+ replacement Interest Rate Swap or Interest Rate Swaps on
+ substantially similar terms with a replacement swap counterparty
+ within 30 days after the date of such termination.
+
+The occurrence of an Early Amortization Event is not an Event of
+Default.
+
+Payments of Interest on Class A Notes and Variable Pay
+Term Notes
+
+ 
+General. The Interest Rate, the
+ Targeted Scheduled Distribution Date and the
+ Final Scheduled Distribution Date for each
+Subclass of the Class A Notes are set forth on the cover
+page hereof. The Class A-1 Notes, the Class A-4 Notes and
+the Class A-5 Notes will bear interest at floating rates
+based on three-month LIBOR (except that LIBOR for the initial
+interest period will be based on the linear interpolation of
+two-month LIBOR and three-month LIBOR) or, in certain
+circumstances as described below, based on one-month LIBOR, and
+are referred to as the Floating Rate Class A
+Notes . The Class A-2 Notes and the Class A-3
+Notes will bear interest at fixed rates and are referred to as
+ Fixed Rate Class A Notes. The Variable
+Pay Term Notes that are issued will bear interest at a floating
+rate equal to one-month LIBOR plus a spread determined at the
+time of issuance not to exceed 1.50%.
+
+ 
+Calculation Agent for Floating Rate Class A Notes and
+Variable Pay Term Notes. The Chase Manhattan Bank will be
+ appointed as the initial Calculation Agent. The Calculation
+Agent will determine LIBOR and the interest rates for the
+Floating Rate Class A Notes and the Variable Pay Term Notes
+on each LIBOR Determination Date (in each case, at a rate per
+annum rounded,
+
+58
+
+Table of Contents
+
+if necessary, to the nearest 1/100,000 of 1% (.0000001), with
+five one-millionths of a percentage point rounded upward). As
+soon as possible after 11:00 a.m. (London time) on each
+LIBOR Determination Date, but in no event later than
+11:00 a.m. (London time) on the Business Day immediately
+following each LIBOR Determination Date, the Calculation Agent
+will cause the interest rates for the next Interest Period and
+the amount of interest for such Interest Period payable in
+respect of each $100,000 principal amount of each Subclass of the
+ Floating Rate Class A Notes (the Floating Rate
+Class A Note Interest Amounts ) and each Variable
+Pay Term Note (the Variable Pay Term Note Interest
+Amounts ) (in each case, rounded to the nearest cent,
+with half a cent being rounded upward) on the related Quarterly
+Payment Date or Monthly Distribution Date, as applicable, to be
+communicated to the indenture trustee, DTC, Euroclear,
+Clearstream, any paying agent and, if required, the Luxembourg
+Stock Exchange.
+
+ 
+As required by the rules of the Luxembourg Stock Exchange, such
+information shall be published by the Calculation Agent in an
+Authorized Newspaper as soon as possible after its determination.
+ If required, such publication is expected to be made in the 
+Luxemburger Wort. The determination of the interest rates for
+ the Floating Rate Class A Notes and the Variable Pay Term
+Notes, the Floating Rate Class A Note Interest Amounts and
+the Variable Pay Term Note Interest Amounts by the Calculation
+Agent shall (in the absence of manifest error) be final and
+binding upon all parties.
+
+ 
+The Calculation Agent will also specify to the indenture trustee
+the quotations upon which the interest rates for the Floating
+Rate Class A Notes and Variable Pay Term Note are based, and
+ in any event the Calculation Agent shall notify the indenture
+trustee before 5:00 p.m. (London time) on each LIBOR
+Determination Date that either: (1) it has determined or is
+in the process of determining the Floating Rate Class A Note
+ Interest Rates, the Variable Pay Term Note Interest Rates, the
+Floating Rate Class A Note Interest Amounts and the Variable
+ Pay Term Note Interest Amounts or (2) it has not determined
+ and is not in the process of determining such rates and amounts,
+ together with its reasons therefor.
+
+ 
+The Calculation Agent may be removed by the indenture trustee at
+any time. If the Calculation Agent is unable or unwilling to act
+as such or is removed by the indenture trustee, or if the
+Calculation Agent fails to determine the Floating Rate
+Class A Note interest rates, the Variable Pay Term Note
+interest rate, the Floating Rate Class A Note Interest
+Amounts or the Variable Pay Term Note Interest Amounts for any
+Interest Period, the indenture trustee will promptly appoint as a
+ replacement Calculation Agent a leading bank which is engaged in
+ transactions in Eurodollar deposits in the international
+Eurodollar market and which does not control or is not controlled
+ by or under common control with the seller or its affiliates.
+The Calculation Agent may not resign its duties without a
+successor having been duly appointed.
+
+ 
+Interest on the Floating Rate Class A Notes.
+Interest on each Subclass of the Floating Rate Class A Notes
+ will accrue at the applicable interest rate set forth on the
+cover page hereof and, except as described below, will be payable
+ to the holders of each Subclass of the Floating Rate
+Class A Notes on the fifteenth day of each January, April,
+July and October (or, if such day is not a Business Day, the next
+ Business Day) (each, a Quarterly Payment Date 
+). Except as described below, interest on each Subclass of
+Class A Notes will accrue during each Quarterly Interest
+Period on the outstanding principal balance as of the preceding
+Quarterly Payment Date or, until the first Quarterly Payment
+Date, as of the Closing Date, in each case until such Subclass is
+ paid in full.
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ If any Subclass of the Floating Rate Class A Notes is not
+ paid in full on its Targeted Scheduled Distribution Date, then on
+ such Targeted Scheduled Distribution Date, interest on such
+ Subclass will begin to accrue during each Monthly Interest Period
+ and be paid on each Monthly Distribution Date thereafter at an
+ interest rate equal to one-month LIBOR plus the spread indicated
+ on the cover page of this prospectus. Monthly
+ Distribution
+
+59
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Date means the fifteenth day of each month or the
+ next Business Day thereafter if the 15th day is not a Business
+ Day.
+
+ 
+
+ 
+ 
+ 
+ If an Early Amortization Event occurs or if the notes are
+ accelerated due to an Event of Default, then on the Monthly
+ Distribution Date following the Early Amortization Event or
+ acceleration of the notes (unless the Early Amortization Event or
+ acceleration of the notes occurs within two London banking days
+ prior to a Monthly Distribution Date, in which case beginning on
+ the next following Monthly Distribution Date), interest on each
+ Subclass of Floating Rate Class A Notes will accrue during
+ each Monthly Interest Period and, in the case of an Early
+ Amortization Event, will be paid on each Monthly Distribution
+ Date thereafter at an interest rate equal to one-month LIBOR plus
+ the spread indicated on the cover page of this prospectus.
+
+ 
+Deposits to the Class A Quarterly Interest Funding
+Account. On each Monthly Distribution Date (including any
+ Quarterly Payment Date), the trust will deposit an amount into
+the Class A Quarterly Interest Funding Account equal to the
+Accrued Fixed Rate Payments on the Quarterly Pay Floating Rate
+Class A Note Interest Rate Swaps. On each Quarterly Payment
+Date, the trust will also make any Net Swap Payments from, and
+deposit any Net Swap Receipts into, the Class A Quarterly
+Interest Funding Account that relate to the Quarterly Pay
+Floating Rate Class A Note Interest Rate Swaps. After giving
+ effect to such deposits and withdrawals on Quarterly Payment
+Dates, funds accumulated in the Class A Quarterly Interest
+Funding Account will be paid as quarterly interest payments to
+the holders of the Floating Rate Class A Notes that receive
+interest payments on Quarterly Payment Dates. For further
+information on the Class A Quarterly Interest Funding
+Account and the Interest Rate Swaps, see
+ Interest Rate Swaps below.
+
+ 
+If any of the Quarterly Pay Floating Rate Class A Note
+Interest Rate Swaps have been terminated, and no replacement swap
+ has been entered into, the Class A Quarterly Interest
+Funding Account Deposit Amount will change, and the amount
+deposited into the Class A Quarterly Interest Funding
+Account on each Monthly Payment Date with respect to such swap
+and the related Subclass will be equal to the amount of interest
+accrued on such Subclass since the preceding Monthly Payment
+Date.
+
+ 
+Interest on the Fixed Rate Class A Notes.
+Interest on the Fixed Rate Class A Notes will accrue for
+each Interest Period at the rate specified on the cover page of
+this prospectus on the outstanding principal balance as of the
+preceding Monthly Distribution Date, or with respect to the first
+ Monthly Distribution Date, as of the Closing Date until such
+Fixed Rate Class A Notes are paid in full. Interest on the
+Fixed Rate Class A Notes will be calculated on the basis of
+a 360-day year consisting of twelve 30-day months.
+
+ 
+Interest on the Variable Pay Term Notes. Interest
+on the Variable Pay Term Notes will accrue during each Interest
+Period at the interest rate determined at the time of issuance,
+and will be payable monthly on each Monthly Distribution Date
+based on their principal balances as of the preceding Monthly
+Distribution Date, or with respect to the first Monthly
+Distribution Date following the date of issuance, from the date
+of issuance. Interest on the Variable Pay Term Notes will be
+calculated on the basis of the actual number of days elapsed
+during the applicable Interest Period and a 360-day year.
+
+ 
+Priority of Interest Payments on the Class A Notes and
+ Variable Pay Term Notes. The trust will make interest
+payments on the Monthly Pay Class A Notes and on the
+Variable Pay Term Notes along with any termination payments on
+the Interest Rate Swaps and any deposits into the Class A
+Quarterly Interest Funding Account on each Monthly Distribution
+Date from the collections on the receivables deposited into the
+Collection Account during the preceding Collection Period, from
+the Reserve Account and the Payahead Account, from Servicer
+Collections Advances, from Net Swap Receipts from the Variable
+Pay Term Notes Interest Rate Swap and from any Monthly Pay
+Floating Rate Interest Rate Swaps and from any swap termination
+payments paid by the swap counterparties after payment to the
+servicer of any
+
+60
+
+Table of Contents
+
+unreimbursed Servicer Collections Advances and after the payment
+of the Servicing Fee and Net Swap Payments.
+
+ 
+Interest on the Monthly Pay Class A Notes and the
+Variable Pay Term Notes, Deposits to the Class A Quarterly
+Interest Funding Account and any Swap Termination Payments will
+be paid Pro Rata if the Trust Does Not Have Enough Funds
+Available to Pay all such Amounts. If, on any Monthly
+Distribution Date, the amounts available (1) to make the
+deposit of the Class A Quarterly Interest Funding Account
+Deposit Amount into the Class A Quarterly Interest Funding
+Account, (2) to pay interest payments on the Variable Pay
+Term Notes and any Monthly Pay Class A Notes, and
+(3) to pay termination payments under the Interest Rate
+Swaps are insufficient to make the full amount of such payments
+or deposits, amounts will be allocated to such payments or
+deposits pro rata:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ first, based on the principal amounts of the Quarterly Pay
+ Class A Notes, the Monthly Pay Class A Notes and the
+ Variable Pay Term Notes and the amount of any swap termination
+ payments, respectively; and
+
+ 
+
+ 
+ 
+ 
+ second, to the extent any Class A Quarterly Interest Funding
+ Account Deposit Amount, accrued interest on the Monthly Pay
+ Class A Notes and Variable Pay Term Notes or swap
+ termination payments remain unpaid after such allocation is made,
+ ratably based on the amounts of such deposit or payment.
+
+ 
+Interest payments on the Monthly Pay Class A Notes and
+Variable Pay Term Notes, the deposit of the Class A
+Quarterly Interest Funding Account Deposit Amount into the
+Class A Quarterly Interest Funding Account and swap
+termination payments are senior to interest payments on the
+Class B Notes and on the certificates, and no interest on
+the Class B Notes or on the certificates will be paid on any
+ Monthly Distribution Date until interest due the Class A
+Notes and the Variable Pay Term Notes and any payments due and
+payable to the swap counterparties on such Monthly Distribution
+Date have been paid in full and the Class A Quarterly
+Interest Funding Account Deposit Amount has been made into the
+Class A Quarterly Interest Funding Account.
+
+ 
+Event of Default. If the full amount of interest
+due on the Class A Notes or the Variable Pay Term Notes is
+not paid by the fifth day following the related Monthly
+Distribution Date, an Event of Default under the Indenture will
+occur. For a further discussion on Events of Default under the
+ Indenture and payments thereunder, see Events
+of Default below.
+
+Payments of Principal of Class A Notes and Variable Pay
+Term Notes
+
+ 
+During the Revolving Period, amounts allocable to principal
+payments on the notes and certificates will be applied to
+purchase Additional Receivables. No payments of principal on the
+Class A Notes will be made during the Revolving Period. In
+addition, no Variable Pay Term Notes will be issued during the
+Revolving Period. Upon the occurrence of an Early Amortization
+Event, the Revolving Period will terminate and the Class A
+Notes will be entitled to receive monthly payments of principal
+in accordance with the priorities set forth herein. For
+further discussion of the application of principal during the
+Revolving Period and the Amortization Period, see
+ The Revolving Period above.
+
+ 
+General. Payments of principal of the Class A
+Notes and Variable Pay Term Notes will be senior to payments of
+principal of the Class B Notes and certificates. Payments
+allocable to principal on the Class A Notes and the Variable
+ Pay Term Notes will be made pursuant to the priority of payments
+ described herein. No principal payments will be made on a
+Subclass of Class A Notes at any time, including upon the
+occurrence and during the continuation of an Event of Default
+under the indenture, until all Subclasses of Class A Notes
+having a lower numerical designation have been paid in full.
+
+61
+
+Table of Contents
+
+ 
+On each Monthly Distribution Date during the Amortization Period,
+ the trust will make principal payments on the Variable Pay Term
+Notes from amounts on deposit in the Principal Distribution
+Account allocable to the Variable Pay Term Notes. On each Monthly
+ Distribution Date which is a Targeted Scheduled Distribution
+Date or on which a Subclass of Class A Notes which has
+reached or passed its Targeted Scheduled Distribution Date is
+still outstanding, the trust will make principal payments on such
+ Subclass of Class A Notes from any proceeds of issuance and
+ sale of Variable Pay Term Notes, any amounts on deposit in the
+Accumulation Account and any amounts on deposit in the Principal
+Distribution Account allocable to such Subclass of Class A
+Notes. If the trust issues Variable Pay Term Notes on a Targeted
+Scheduled Distribution Date, the trust will apply amounts on
+deposit in the Principal Distribution Account on such date as
+principal payments first to the outstanding Variable Pay Term
+Notes until such notes are paid in full and then to the Subclass
+or Subclasses of Class A Notes that have reached or passed
+their Targeted Scheduled Distribution Dates and, thereafter, the
+trust will make principal payments on such Subclass or Subclasses
+ of Class A Notes from amounts on deposit in the
+Accumulation Account and VPTN Proceeds Account. On each Monthly
+Distribution Date (other than a Monthly Distribution Date which
+is also a Targeted Scheduled Distribution Date upon which the
+trust issues Variable Pay Term Notes) upon which principal is
+payable on the Class A Notes, the trust will make principal
+payments on the Class A Notes along with principal payments
+on any Variable Pay Term Notes pro rata (based on the
+principal balances of all the outstanding Class A Notes and
+all the outstanding Variable Pay Term Notes) from amounts on
+deposit in the Principal Distribution Account. If, on any Monthly
+ Distribution Date, none of the outstanding Subclasses of
+Class A Notes have reached or passed their Targeted
+Scheduled Distribution Dates and no Variable Pay Term Notes are
+outstanding, amounts otherwise allocable to principal payments on
+ that Monthly Distribution Date will be deposited into the
+Accumulation Account. For further discussion of the
+application of principal, see Distributions on the
+Securities Distributions Priority in
+Which the Trust Makes Principal Payments on the Notes and
+Certificates and Events of Default 
+below.
+
+ 
+Funds in the Reserve Account will not be used to make any
+payments of principal on a Targeted Scheduled Distribution Date
+solely for the purpose of paying the principal payment of a
+Class A Note on its Targeted Scheduled Distribution Date. No
+ payments of principal will be made on the Class B Notes or
+on the certificates until the Class A Notes and Variable Pay
+ Term Notes are paid in full.
+
+ 
+Failure to Pay Principal in Full on the Targeted Scheduled
+Distribution Dates. If any Subclass or Subclasses of
+Class A Notes are not paid in full on their Targeted
+Scheduled Distribution Date (as described under 
+ Variable Pay Term Notes below), on
+each Monthly Distribution Date thereafter (other than a Monthly
+Distribution Date which is also a Targeted Scheduled Distribution
+ Date upon which the trust issues Variable Pay Term Notes), until
+ the date such Subclass or Subclasses of Class A Notes are
+paid in full, amounts on deposit in the Principal Distribution
+Account will be allocated between the Class A Notes and the
+Variable Pay Term Notes pro rata, on the basis of the
+total principal amount of all Class A Notes outstanding and
+the total principal amount of all Variable Pay Term Notes
+outstanding, and the portion allocated to the Class A Notes
+will be applied to such Subclass or Subclasses. If on any Monthly
+ Distribution Date thereafter such Subclass or Subclasses of
+Class A Notes have not been paid in full and the trust is
+able to issue Variable Pay Term Notes, such Variable Pay Term
+Notes will be issued in an aggregate amount sufficient to pay,
+each in its entirety, one or more of the Subclasses of
+Class A Notes that has reached or passed its Targeted
+Scheduled Distribution Date. If each such Subclass of
+Class A Notes is paid in full on such Monthly Distribution
+Date, on each Monthly Distribution Date thereafter, until the
+next Targeted Scheduled Distribution Date, amounts available to
+make principal payments will be applied to make payments of
+principal on the outstanding Variable Pay Term Notes.
+
+62
+
+Table of Contents
+
+ 
+Payments on the Class A Notes will be made sequentially,
+such that no principal payments will be made on any Subclass of
+Class A Notes until all Subclasses of Class A Notes
+with a lower numerical designation have been paid in full.
+Principal payments to be made on the Variable Pay Term Notes will
+ be applied to the Variable Pay Term Notes in the order in which
+they were issued, such that the earliest issued Variable Pay Term
+ Notes will be paid in full before any principal payments are
+made on any later issued Variable Pay Term Notes.
+
+ 
+It is unlikely that there will be sufficient funds to pay a
+Subclass of Class A Notes on its Targeted Scheduled
+Distribution Date if the trust is not able to issue Variable Pay
+Term Notes on that Targeted Scheduled Distribution Date. See
+ Variable Pay Term Notes below.
+
+ 
+Final Scheduled Distribution Dates. The outstanding
+ principal balance of each Subclass of Class A Notes and
+each Variable Pay Term Note will be due and payable in full on
+its Final Scheduled Distribution Date in an amount equal to 100%
+of the principal balance outstanding on such date. The actual
+date on which the trust pays the outstanding principal balance of
+ any Subclass of Class A Notes in full may be earlier or later
+than the applicable Final Scheduled Distribution Date based on a
+variety of factors, including those described under 
+ Maturity and Prepayment Considerations , the
+ability of the trust to issue Variable Pay Term Notes and whether
+ the trust effects an Optional Redemption. See Risk
+Factors Changing Characteristics of the Receivables
+Pool During the Revolving Period Could Result in Faster or Slower
+ Repayments or Losses on Your Notes , An
+Event of Default May Cause Prepayments, Potential Losses and
+Change of Priority of Payment of Principal ,
+ Distributions on the Securities Priority of
+Payments May Change Upon an Event of Default Under the
+Indenture and Optional Redemption 
+. Although failure to pay the full principal amount of a
+Subclass of Class A Notes on the applicable Final Scheduled
+Distribution Date will be an Event of Default, failure to pay a
+Subclass of Class A Notes on its Targeted Scheduled
+Distribution Date will not result in an Event of Default.
+
+Variable Pay Term Notes
+
+ 
+The Variable Pay Term Notes are not being offered by this
+prospectus. All Variable Pay Term Notes will be privately placed
+and will bear interest at one-month LIBOR plus a spread
+determined at the time of issuance which shall not exceed 1.50%.
+No Variable Pay Term Note will be issued during the Revolving
+Period, after the occurrence of an Early Amortization Event or
+after an Event of Default.
+
+ 
+The trust will issue Variable Pay Term Notes on each Targeted
+Scheduled Distribution Date and use the proceeds to make payments
+ of principal on one or more of the Subclasses of Class A
+Notes that have been targeted for payment on or before that date
+provided that one or more purchasers of the Variable Pay Term
+Notes can be located and the conditions specified in the
+paragraph below are satisfied. If the trust is unable to issue
+Variable Pay Term Notes on any Targeted Scheduled Distribution
+Date, the trust will issue Variable Pay Term Notes on the first
+Monthly Distribution Date thereafter on which Ford Credit as
+administrator has located purchasers and the conditions to
+issuance are met. Each issuance of the Variable Pay Term Notes
+will have an aggregate principal amount not exceeding the
+difference between (1) the outstanding principal balance of
+the Subclass or Subclasses of the Class A Notes that have
+reached or passed their Targeted Scheduled Distribution Dates and
+ (2) the amounts (exclusive of investment earnings) that
+remain on deposit in the Accumulation Account and Principal
+Distribution Account, if any, that are allocable to such Subclass
+ or Subclasses of Class A Notes.
+
+ 
+The conditions that must be satisfied for the issuance of
+Variable Pay Term Notes are:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the aggregate amount of the proceeds of the issuance and sale of
+ the Variable Pay Term Notes on such Monthly Distribution Date
+ (including any related Servicer Liquidity Advances) will be
+ sufficient, when taken together with amounts on deposit in the
+ Principal Distribution Account that are allocable to principal
+ payments on the Class A Notes and
+
+63
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the amounts on deposit in the Accumulation Account, to repay,
+ each in its entirety, one or more of the Subclasses of
+ Class A Notes that have reached or passed their Targeted
+ Scheduled Distribution Dates;
+
+ 
+
+ 
+ 
+ 
+ the Variable Pay Term Notes must be rated AAA and
+ Aaa by S P and Moody s, respectively;
+
+ 
+
+ 
+ 
+ 
+ the interest rate swap agreements must be in full force and
+ effect with respective notional amounts equal to (1) with
+ respect to each of the Floating Rate Class A Note Interest
+ Rate Swaps, the aggregate principal amount of the related
+ Subclass of Floating Rate Class A Notes and (2) with
+ respect to the Variable Pay Term Notes Interest Rate Swap, the
+ aggregate principal balance of the Variable Pay Term Notes to be
+ issued and all other outstanding Variable Pay Term Notes;
+
+ 
+
+ 
+ 
+ 
+ no Early Amortization Event shall have occurred;
+
+ 
+
+ 
+ 
+ 
+ no Event of Servicing Termination shall have occurred and be
+ continuing;
+
+ 
+
+ 
+ 
+ 
+ no Event of Default under the indenture shall have occurred and
+ be continuing;
+
+ 
+
+ 
+ 
+ 
+ the purchase price of the Variable Pay Term Notes must be equal
+ to par; and
+
+ 
+
+ 
+ 
+ 
+ the interest rates on the Variable Pay Term Notes must be equal
+ to one-month LIBOR plus a spread not greater than 1.50%.
+
+ 
+Ford Credit, as administrator, has agreed to use reasonable
+efforts to locate purchasers for the Variable Pay Term Notes if
+the above conditions are met. If the conditions are met and one
+or more purchasers have agreed to purchase the Variable Pay Term
+Notes, the trust will issue the Variable Pay Term Notes on the
+Targeted Scheduled Distribution Date. No person or entity,
+however, is obligated to purchase any Variable Pay Term Notes or
+any interest therein. As a result, there can be no assurance that
+ any Variable Pay Term Notes will be sold on any Targeted
+Scheduled Distribution Date or that the proceeds from any sale of
+ any such Variable Pay Term Notes will be sufficient to pay a
+Subclass of Class A Notes in full on its Targeted Scheduled
+Distribution Date or on any Monthly Distribution Date thereafter.
+ See Risk Factors Failure to Sell Variable
+Pay Term Notes Will Result in Class A Notes Not Being Paid
+in Full on Their Targeted Scheduled Distribution Dates .
+
+ 
+If, on any Monthly Distribution Date on which the trust is
+permitted to issue Variable Pay Term Notes, the seller has a
+binding agreement with a purchaser for the purchase of a Variable
+ Pay Term Note but the servicer determines that the proceeds from
+ that sale will not be received in time to make the intended
+principal payment on the Class A Notes on that Monthly
+Distribution Date, the servicer may, in its sole discretion, make
+ a liquidity advance (a Servicer Liquidity Advance 
+) to the trust in an amount equal to such proceeds if it
+determines, in its sole discretion, that it has received
+reasonable assurances from the purchaser of the Variable Pay Term
+ Note to the effect that the full amount of the proceeds will be
+delivered to the trust within two Business Days of that Monthly
+Distribution Date. Servicer Liquidity Advances will be deposited
+into the VPTN Proceeds Account. If the servicer makes a Servicer
+Liquidity Advance, it will be reimbursed for such amount upon
+receipt by the trust of the purchase price of the Variable Pay
+Term Note, and will be deemed to be the holder of the Variable
+Pay Term Note and will be entitled to all payments allocable to
+the Variable Pay Term Note, including interest, until the
+purchase price for the interest in the Variable Pay Term Note is
+received from the purchaser and paid to the servicer. See
+ Distributions on the Securities 
+Distributions .
+
+Interest Rate Swaps
+
+ 
+Generally. On the Closing Date, the trust will
+enter into interest rate swaps to hedge the floating interest
+rate on the Floating Rate Class A Notes with Deutsche Bank
+AG, acting through its New York Branch as the swap counterparty.
+A separate interest rate swap (each, a Floating Rate
+Class A Note Interest Rate Swap ) will be entered
+into with respect to each Subclass of the Floating Rate
+Class A Notes and will remain in effect so long as any
+portion of the related
+
+64
+
+Table of Contents
+
+Subclass remains outstanding. Each Floating Rate Class A
+Note Interest Rate Swap will have an initial notional amount
+equal to the principal balance of the applicable Subclass of
+Floating Rate Class A Notes on the Closing Date. The
+notional amount on each Floating Rate Class A Note Interest
+Rate Swap will decrease by the amount of any principal payments
+on the applicable Subclass. In addition, on the Closing Date, the
+ trust will enter into an interest rate swap (the 
+ Variable Pay Term Notes Interest Rate Swap and,
+together with the Floating Rate Class A Note Interest Rate
+Swap, the Interest Rate Swaps ) with Deutsche
+Bank AG, acting through its New York Branch, as swap
+counterparty, to hedge the floating rate interest that will
+accrue on the Variable Pay Term Notes. The trust will not be
+permitted to issue Variable Pay Term Notes unless all the
+Floating Rate Class A Note Interest Rate Swaps and the
+Variable Pay Term Notes Interest Rate Swap are in effect.
+
+ 
+The information in the next subsection has been provided by
+the swap counterparty for use in this prospectus. Except for the
+next paragraph, the swap counterparty has not prepared and does
+not accept responsibility for this prospectus. No representation
+is made by the servicer, the seller or any of their affiliates as
+ to the accuracy or completeness of such information.
+
+ 
+Deutsche Bank AG, acting through its New York Branch, as
+swap counterparty
+
+ 
+Deutsche Bank AG, acting through its New York Branch.
+Deutsche Bank AG New York Branch (the Branch ), a
+branch of Deutsche Bank Aktiengesellschaft ( Deutsche Bank
+AG ), was established in 1978 and is licensed by the New
+York Superintendent of Banks. Its office is currently located at
+31 West 52nd Street, New York, NY 10019. The Branch is
+examined by the New York State Banking Department and is subject
+to the banking laws and regulations applicable to a foreign bank
+that operates a New York branch. The Branch is also examined by
+the Federal Reserve Bank of New York.
+
+ 
+Deutsche Bank AG and the Deutsche Bank Group. Pursuant to
+the law on the Regional Scope of Credit Institutions, Deutsche
+Bank, the predecessor to Deutsche Bank Aktiengesellschaft
+( Deutsche Bank AG ), founded in 1870, was split into
+three regional banks in 1952. The present day Deutsche Bank AG
+originated from the merger of Norddeutsche Bank
+Aktiengesellschaft, Hamburg, Deutsche Bank Aktiengesellschaft
+West, D sseldorf and S ddeutsche Bank
+Aktiengesellschaft, Munich. The merger and the name were entered
+in the Commercial Register of the District Court, Frankfurt am
+Main, on 2 May 1957. Deutsche Bank AG is a banking company
+with limited liability incorporated under the laws of Germany
+under registration number HRB 30 000. Deutsche Bank AG
+has its registered office at Taunusanlage 12, D-60325
+Frankfurt am Main.
+
+ 
+Deutsche Bank AG is the parent company of a group consisting of
+banks, capital market companies, fund management companies,
+mortgage banks and a property finance company, installment
+financing and leasing companies, insurance companies, research
+and consultancy companies and other domestic and foreign
+companies (the Deutsche Bank Group 1).
+Deutsche Bank Group has over 2,200 branches and offices engaged
+in banking business and other financial business worldwide.
+
+ 
+The objectives of Deutsche Bank AG, as laid down in its Articles
+of Association, are the transaction of banking business of every
+kind, the provision of financial and other services and the
+promotion of international economic relations. Deutsche Bank AG
+may realize these objectives itself or through subsidiaries and
+affiliated companies. To the extent permitted by law, Deutsche
+Bank AG is entitled to transact all business and to take all
+steps which appear likely to
+
+ 
+ 
+
+ 1 
+ 
+ There are non-consolidated subsidiaries of Deutsche Bank AG whose
+ assets amounted to roughly 0.2% of the aggregate balance sheet
+ total as at December 1999. Owing to their minor importance for
+ the assets and income situation of Deutsche Bank Group, these
+ companies are not included in the consolidated statement of
+ accounts.
+
+65
+
+Table of Contents
+
+promote its objectives, in particular to acquire and dispose of
+real estate, to establish branches at home and abroad, to
+acquire, administer and dispose of interests in other
+enterprises, and to conclude enterprise agreements.
+
+ 
+As of 30 June, 2000, the subscribed share capital of
+Deutsche Bank AG amounted to E1,572,716,856.20 consisting of
+614,342,520 shares of no par value. The shares are fully paid up
+and in registered form. The shares are listed for trading and
+official quotation on all the German Stock Exchanges. They are
+also listed on the Stock Exchanges in Amsterdam, Antwerp,
+Brussels, London, Luxembourg, Paris, Tokyo, Vienna and the Swiss
+Stock Exchange.
+
+ 
+The long-term senior debt of Deutsche Bank AG has been assigned a
+ rating of AA by S P, Aa3 (outlook: positive) by Moody s
+ and AA by Fitch. The short-term senior debt of Deutsche Bank AG
+has been assigned a rating of A-1+ by S P, P-1 by
+Moody s and F1+ by Fitch. A credit rating may be subject to
+revision, suspension or withdrawal at any time by the rating
+organization.
+
+ 
+As of 30 June, 2000, based on International Accounting
+Standards, Deutsche Bank Group had total assets of E925.6
+billion, total loans and advances to customers of E388.7 billion,
+ amounts owed to other depositors of E338.2 billion, liabilities
+evidenced by paper of E168.2 billion and capital and reserves of
+E26.3 billion. International Accounting Standards may not conform
+ to generally accepted accounting principles applied by United
+States banks.
+
+ 
+Deutsche Bank AG will provide without charge to each person to
+whom this prospectus is delivered, upon the written or oral
+request of such person a copy of the most recent Annual Report of
+ Deutsche Bank AG, which contains the consolidated statements of
+Deutsche Bank AG and the most recent Interim Report of Deutsche
+Bank showing unaudited figures. The Interim Reports of Deutsche
+Bank which are made available are for purposes of information
+only. Written requests should be directed to: Deutsche Bank AG
+New York Branch, 31 West 52nd Street, New York, NY 10019,
+Attention: Management.
+
+ 
+Litigation or Arbitration Proceedings Relating to Deutsche
+Bank AG. No court or arbitration proceedings which could have
+ a significant effect on the financial condition of Deutsche Bank
+ AG, or had such an effect in the last two years, have been
+pending, and Deutsche Bank AG is not aware, to the best of its
+knowledge, of any such proceedings now pending or threatened.
+
+ 
+Since June of 1998, several purported class and individual
+actions have been filed with various U.S. Courts against Deutsche
+ Bank AG and other banks with regard to events that occurred
+during the period of the Third Reich , between 1933
+and 1945. The plaintiffs seek the release of accounting records,
+the creation of an endowment (trust), restitution, disgorgement
+of profits, and compensatory and punitive damages in an amount to
+ be determined at trial. Deutsche Bank AG believes that the
+actions filed are not permissible class actions, that the claims
+are without merit, and that they will not have a material adverse
+ effect on the financial condition of Deutsche Bank AG presented
+in this prospectus.
+
+66
+
+Table of Contents
+
+ 
+Terms of the Interest Rate Swaps
+
+ 
+Quarterly Pay Floating Rate Class A Note Interest Rate
+Swaps. Except as described below under 
+ Monthly Pay Floating Rate Class A Note
+Interest Rate Swaps, under each Floating Rate
+Class A Note Interest Rate Swap, on a net basis on each
+Quarterly Payment Date, (1) the trust will be obligated to
+pay to the swap counterparty interest accrued during the
+Quarterly Interest Period preceding such Quarterly Payment Date
+at the Fixed Class A Interest Rate Swap Rates described
+below and (2) the swap counterparty will be obligated to pay
+ to the trust the amount of interest accrued during the Quarterly
+ Interest Period preceding such Quarterly Payment Date at an
+interest rate equal to three-month LIBOR plus the spread on the
+related Subclass of the Floating Rate Class A Notes, in each
+ case on a notional amount equal to the outstanding balance of
+the related Subclass of the Floating Rate Class A Notes.
+
+ 
+The interest rates applicable to the fixed payments to be made by
+ the trust on the Quarterly Pay Floating Rate Class A Note
+Interest Rate Swaps on Quarterly Payment Dates (the 
+ Fixed Class A Interest Rate Swap Rates ) are
+as set forth in the table below.
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Fixed Class A
+
+ 
+ 
+ Interest Rate
+
+ Swap
+ 
+ Swap Rate
+
+ 
+ 
+ 
+
+ 
+ Class A-1 Note Interest Rate Swap
+ 
+ 
+ 6.5925%
+ 
+
+ 
+ Class A-4 Note Interest Rate Swap
+ 
+ 
+ 6.6505%
+ 
+
+ 
+ Class A-5 Note Interest Rate Swap
+ 
+ 
+ 6.6885%
+ 
+
+ 
+On each Monthly Distribution Date, the indenture trustee will
+deposit, in accordance with the priorities described under 
+ Distributions on the Securities 
+Distributions Priority of Payments, the sum
+ of the Accrued Fixed Rate Payments on each of the Quarterly Pay
+Floating Rate Class A Note Interest Rate Swaps. With respect
+ to any Monthly Distribution Date, the Accrued Fixed
+Rate Payments will be equal to the total amount accrued
+ at the applicable Fixed Class A Interest Rate Swap Rate on
+the notional amount of each Quarterly Pay Floating Rate
+Class A Note Interest Rate Swap since the previous Monthly
+Distribution Date. The amount of the Accrued Fixed Rate Payments
+will be calculated as described below under 
+ Calculation of Interest Accrued on the Interest
+ Rate Swaps. 
+
+ 
+Monthly Pay Floating Rate Class A Note Interest Rate
+Swaps. In the event that any Subclass of Floating Rate
+Class A Notes is not paid in full on its Targeted Scheduled
+Distribution Date and provided an Early Amortization Event or an
+Event of Default resulting in acceleration of the notes has not
+occurred prior to such Targeted Scheduled Distribution Date, the
+frequency of payments, the Fixed Class A Interest Rate Swap
+Rate and the Index Maturity on the related Floating Rate
+Class A Note Interest Rate Swap will change, and the
+floating rates payable by the swap counterparties will no longer
+include the applicable spread. On any Targeted Scheduled
+Distribution Date on which the related Subclass of Floating Rate
+Class A Notes is not paid in full (1) the trust will be
+ obligated to pay to the swap counterparty the interest accrued
+during the period beginning on the last Quarterly Payment Date
+and ending on such Targeted Scheduled Distribution Date at a
+fixed rate equal to the applicable Fixed Class A Interest
+Rate Swap Rate and (2) the swap counterparty will be
+obligated to pay to the trust the amount of interest accrued
+during the period beginning on the last Quarterly Payment Date
+and ending on such Targeted Scheduled Distribution Date at an
+interest rate equal to three-month LIBOR plus the spread on the
+related Subclass of Floating Rate Class A Notes, in each
+case on a notional amount equal to the outstanding balance of the
+ applicable Subclass of Floating Rate Class A Notes. On each
+ Monthly Distribution Date thereafter until the related Subclass
+of Class A Notes is paid in full, (1) the trust will be
+ obligated to pay to the swap counterparty the interest accrued
+during the preceding Monthly Interest Period at a fixed rate of
+6.5925% and (2) the swap counterparty will be obligated to
+pay to the trust the amount of interest accrued during the
+preceding Monthly Interest Period at an interest rate equal to
+one-month LIBOR, in each case on
+
+67
+
+Table of Contents
+
+a notional amount equal to the outstanding balance of the
+applicable Subclass of Floating Rate Class A Notes.
+
+ 
+In addition, if an Early Amortization Event occurs or an Event of
+ Default that results in an acceleration of the notes occurs, the
+ amount and frequency of payments and the Index Maturity of the
+related Floating Rate Class A Note Interest Rate Swap will
+change for each Subclass of Quarterly Pay Class A Notes. On
+the Monthly Distribution Date relating to the LIBOR Determination
+ Date immediately following the date on which an Early
+Amortization Event or an acceleration of the notes occurs, under
+each affected Floating Rate Class A Note Interest Rate Swap,
+ (1) the trust will be obligated to pay to the swap
+counterparty the interest accrued during the period beginning on
+the last Quarterly Payment Date and ending on such Monthly
+Distribution Date at the applicable Fixed Class A Interest
+Rate Swap Rate and (2) the swap counterparty will be
+obligated to pay to the trust the amount of interest accrued
+during the period beginning on the last Quarterly Payment Date
+and ending on such Targeted Scheduled Distribution Date at an
+interest rate equal to three-month LIBOR plus the spread
+applicable to such Subclass of Floating Rate Class A Notes,
+in each case on a notional amount equal to the outstanding
+balance of the applicable Subclass of Floating Rate Class A
+Notes. On each Monthly Distribution Date thereafter until such
+Subclass of Floating Rate Class A Notes is paid in full,
+(1) the trust will be obligated to pay to the swap
+counterparty the interest accrued during the preceding Monthly
+Interest Period at the respective Fixed Class A Interest
+Rate Swap Rates on the related Floating Rate Class A Note
+Interest Rate Swap and (2) the swap counterparty will be
+obligated to pay to the trust the amount of interest accrued
+during the preceding Monthly Interest Period at an interest rate
+equal to one-month LIBOR plus the spread applicable to such
+Subclass of Floating Rate Class A Notes, in each case on a
+notional amount equal to the outstanding balance of the
+applicable Subclass of Floating Rate Class A Notes.
+
+ 
+Variable Pay Term Notes Interest Rate Swap. Under
+the Variable Pay Term Notes Interest Rate Swap, on each Monthly
+Distribution Date, the trust will be obligated to pay to the swap
+ counterparty a fixed rate of 6.5925% and the swap counterparty
+will be obligated to pay to the trust one-month LIBOR on the
+notional amount applicable on such Monthly Distribution Date. The
+ notional amount of the Variable Pay Term Notes Interest Rate
+Swap will be equal to zero on the Closing Date, and will increase
+ by the principal amount of any Variable Pay Term Notes that are
+issued and will decrease by the amount of any principal payments
+made on the Variable Pay Term Notes. For further discussion of
+ conditions to issuance of the Variable Pay Term Notes, see
+ Variable Pay Term Notes above.
+
+ 
+Calculation of Interest Accrued on the Interest Rate Swaps.
+ The amounts of the payments due on, or accrued as of,
+any Monthly Distribution Date will be calculated for each of the
+Interest Rate Swaps as described below.
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ With respect to the fixed payments payable by the trust, interest
+ will accrue on the applicable notional amount on a
+ 30/360 basis from and including the 15th day of the
+ previous month to but excluding the 15th day of the current month
+ or, in the case of the first Monthly Distribution Date, the
+ period from and including the Closing Date to but excluding
+ November 15, 2000. This means that the fixed rate interest
+ accrued each month on each of the Interest Rate Swaps will be
+ equal to the product of (1) the notional amount,
+ (2) the fixed rate applicable to such payment and
+ (3) 30 days (or 19 days, in the case of the
+ accrual of interest from the Closing Date to the first Monthly
+ Distribution Date) divided by 360.
+
+ 
+
+ 
+ 
+ 
+ With respect to the floating rate payments payable by the swap
+ counterparty, interest will accrue on the applicable notional
+ amount on an actual/360 basis from the previous
+ Monthly Distribution Date or Quarterly Payment Date, as
+ applicable, to the current
+
+68
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Monthly Distribution Date or Quarterly Payment Date, as
+ applicable. This means that the interest payable by the swap
+ counterparty on each of the Interest Rate Swaps will be equal to
+ the product of (1) the notional amount, (2) the
+ floating interest rate applicable to such payment and
+ (3) the actual number of days during the related Monthly
+ Interest Period or Quarterly Interest Period, as applicable,
+ divided by 360.
+
+ 
+Termination of Interest Rate Swaps; Termination Payment.
+The obligations of the trust under the Interest Rate
+Swaps are secured under the indenture. The obligations of the
+swap counterparty under the Interest Rate Swaps are unsecured.
+However, in the event a swap counterparty s long-term senior
+ unsecured debt ceases to be rated at the level required by the
+Rating Agencies to maintain the then-current ratings on the
+Class A Notes and Variable Pay Term Notes, such swap
+counterparty will be obligated, within 30 calendar days of the
+date on which the swap counterparty s ratings fall below the
+ required ratings or are withdrawn or suspended, either to
+(a) post collateral, (b) arrange for a substitute swap
+counterparty acceptable to the trust to assume the rights and
+obligations of the swap counterparty under its respective
+Interest Rate Swaps, or (c) establish other arrangements
+necessary, if any, to secure its obligations under its respective
+ Interest Rate Swaps, in any case so that the Rating Agencies
+confirm the ratings of the Class A Notes and Variable Pay
+Term Notes that were in effect immediately prior to the change in
+ the rating of the swap counterparty. If the swap counterparty
+fails to take such action, the trust may elect to terminate the
+Interest Rate Swap.
+
+ 
+Upon the occurrence of any event of default specified in an
+Interest Rate Swap, the non-defaulting party may elect to
+terminate the Interest Rate Swap. These events include failure to
+ make payments due under such Interest Rate Swap and the
+occurrence of certain bankruptcy and insolvency events.
+
+ 
+An Interest Rate Swap may also be terminated upon the occurrence
+of a termination event other than an event of default. These
+termination events include (1) illegality, (2) an
+acceleration of the notes resulting from a payment default under
+the indenture, (3) an acceleration of the notes following a
+covenant default under the indenture and the consent by the
+Controlling Class of notes to a sale by the indenture trustee for
+ the trust s assets or (4) the making of an amendment
+to the Receivables Transfer and Servicing Agreements or to the
+indenture that affects the Interest Rate Swap without the consent
+ of the swap counterparty, which consent will not be unreasonably
+ withheld.
+
+ 
+In the event an Interest Rate Swap is terminated due to a an
+event of default or a termination event, a termination payment
+may be due (1) to the swap counterparty by the trust out of
+funds pari passu with payments of interest on the
+Class A Notes and the Variable Pay Term Notes or (2) to
+ the trust by the swap counterparty. The amount of any such
+termination payment may be based on market quotations of the cost
+ of entering into a similar swap transaction or such other method
+ as may be required under the Interest Rate Swap, in each case in
+ accordance with the procedures set forth in the Interest Rate
+Swap agreement. Any such termination payment could, if market
+interest rates or other conditions have changed materially, be
+substantial.
+
+For further discussion of termination payments under the
+Interest Rate Swaps see Risk Factors Risks
+Associated with the Interest Rate Swaps .
+
+Payments of Interest on Class B Notes
+
+ 
+Calculation of Interest. Interest on the
+Class B Notes will accrue for each Monthly Interest Period
+at 7.00% per annum on the outstanding principal balance as of the
+ preceding Monthly Distribution Date, or with respect to the
+first Monthly Distribution Date, as of the Closing Date until
+such Class B Notes are paid in full. Interest on the
+Class B Notes will be calculated on the basis of a 360-day
+year consisting of twelve 30-day months. For so long as the
+Class A Notes and Variable Pay Term Notes are the
+Controlling Class of notes, interest distributions due the
+
+69
+
+Table of Contents
+
+Class B Notes for any Monthly Distribution Date but not
+distributed on such Monthly Distribution Date will be due on the
+next Monthly Distribution Date plus interest on such amount at
+the rate of interest on the Class B Notes (to the extent
+lawful). If the amount available for interest payments on the
+Class B Notes is less than the amount of interest payable on
+ the Class B Notes on any Monthly Distribution Date, each of
+ the holders of the Class B Notes will receive their ratable
+ share (based upon the total amount of interest due to such
+holders of the Class B Notes) of the aggregate amount
+available to be distributed in respect of interest on the
+Class B Notes.
+
+ 
+Interest Paid on the Class B Notes is Subordinate to
+Interest Paid on the Class A Notes and Variable Pay Term
+Notes and to the Class A Quarterly Interest Funding Account
+Deposit Amount. Generally, interest on the Class B
+Notes will not be paid on any Monthly Distribution Date until any
+ unreimbursed Servicer Collections Advances, the Servicing Fee,
+the Net Swap Payments, any swap termination payments, interest
+due on the Class A Notes and the Variable Pay Term Notes and
+ the Class A Quarterly Interest Funding Account Deposit
+Amount have been paid in full. The payment of interest on the
+Class B Notes will be further subordinated if on any Monthly
+ Distribution Date the sum of the Pool Balance and any amounts in
+ the Accumulation Account (exclusive of investment earnings from
+Permitted Investments) reduced by the Yield Supplement
+Overcollateralization Amount is less than the aggregate
+outstanding principal balance of the Class A Notes and
+Variable Pay Term Notes. In such case, interest on the
+Class B Notes will not be paid until any unreimbursed
+Servicer Collections Advances, the Servicing Fee, the Net Swap
+Payments, any swap termination payments, interest on the
+Class A Notes and Variable Pay Term Notes, the Class A
+Quarterly Interest Funding Account Deposit Amount and the First
+Priority Principal Distribution Amount have been paid in full. In
+ addition, as further described under Distributions on
+the Securities Distributions Priority of
+Payments May Change Upon an Event of Default Under the
+Indenture herein, interest on the Class B Notes
+may become further subordinated upon the occurrence of certain
+Events of Default. For further discussion on the payment of
+interest on the Class B Notes, see Risk
+Factors The Class B Notes Are Subject to Greater
+ Risk Because the Class B Notes are Subordinate to the
+Class A Notes and Variable Pay Term Notes . 
+Generally, interest on the certificates will not be paid until
+the interest due on the Class A Notes and the Class B
+Notes has been paid in full.
+
+ 
+Event of Default. If the Class B Notes are the
+ Controlling Class of Notes, failure to pay the full interest due
+ on the Class B Notes on any Monthly Distribution Date will
+constitute an Event of Default under the indenture after a
+five-day grace period. For further discussion of Events of
+Default under the indenture, see Events of
+Default below.
+
+Payments of Principal of Class B Notes
+
+ 
+Payments of principal on the Class B Notes will not be made
+during the Revolving Period and will be made only during the
+Amortization Period after all the Class A Notes and Variable
+ Pay Term Notes have been paid in full. Upon the occurrence of an
+ Early Amortization Event, the Revolving Period will terminate
+and the Class B Notes will be entitled to receive monthly
+payments of principal in accordance with the priorities set forth
+ herein. For further discussion of the application of principal
+during the Revolving Period and the Amortization Period, see 
+ The Revolving Period above and
+ Distributions on the Securities 
+Distributions. 
+
+ 
+General. Payments of principal of the Class B
+Notes are subordinate to payments of principal of the
+Class A Notes and Variable Pay Term Notes, and senior to
+distributions of principal payments on the certificates.
+
+ 
+Holders of the Class B Notes will be entitled to receive
+principal payments on each Monthly Distribution Date commencing
+with the Monthly Distribution Date on which the Class A
+Notes and Variable Pay Term Notes have been paid in full. The
+trust will make principal payments on the Class B Notes from
+ amounts transferred to the Principal Distribution Account from
+the Collection
+
+70
+
+Table of Contents
+
+Account, if any, including amounts that have been withdrawn from
+the Reserve Account and the Payahead Account and from amounts in
+the Accumulation Account to the extent funds are available after
+payment in full of the Class A Notes and Variable Pay Term
+Notes. Holders of Class B Notes may be entitled to receive
+limited payments of principal prior to the distribution of
+interest on the Class C Certificates if the sum of the Pool
+Balance and the amounts in the Accumulation Account (exclusive of
+ investment earnings from Permitted Investments) reduced by the
+Yield Supplement Overcollateralization Amount is less than the
+aggregate outstanding principal balance of the Variable Pay Term
+Notes and the Class B Notes. In addition, interest on the
+certificates may become further subordinated upon the occurrence
+of an Event of Default under certain circumstances. No principal
+will be paid on the certificates until the Class B Notes
+have been paid in full.
+
+ 
+Final Scheduled Distribution Date. The outstanding
+principal balance of the Class B Notes will be due and
+payable in full on the applicable Final Scheduled Distribution
+Date. The actual date on which the trust pays the outstanding
+principal balance of the Class B Notes may be earlier or
+later than the applicable Final Scheduled Distribution Date,
+based on a variety of factors, including those described under
+ Maturity and Prepayment Considerations .
+
+Events of Default
+
+ 
+Events of Default. An Event of
+Default shall constitute the occurrence of any of the
+following events:
+
+ 
+ 
+ 
+
+ 
+ (1) 
+ 
+ a default for five days or more in the payment of any interest on
+ notes of the Controlling Class of notes;
+
+ 
+
+ 
+ (2) 
+ 
+ a default in the payment of the principal of or any installment
+ of the principal of any note on its Final Scheduled Distribution
+ Date;
+
+ 
+
+ 
+ (3) 
+ 
+ a default in the observance or performance of any material
+ covenant or agreement of the trust other than those dealt with
+ specifically elsewhere as an Event of Default and the
+ continuation of any such default for a period of 60 days after
+ notice thereof is given to the trust by the indenture trustee or
+ to the trust and the indenture trustee by the holders of at least
+ 25% in principal amount of the Controlling Class of notes;
+
+ 
+
+ 
+ (4) 
+ 
+ any representation or warranty made by the trust having been
+ incorrect in any material respect as of the time made, and such
+ breach not having been cured within 30 days after notice
+ thereof is given to the trust by the indenture trustee or to the
+ trust and the indenture trustee by the holders of at least 25% in
+ principal amount of the Controlling Class of notes; or
+
+ 
+
+ 
+ (5) 
+ 
+ certain events of bankruptcy, insolvency, receivership or
+ liquidation of the trust or its property.
+
+ 
+Rights Upon Event of Default. If an Event of
+Default should occur and be continuing with respect to the notes,
+ the indenture trustee or holders of a majority in principal
+amount of the Controlling Class of notes may declare the
+principal of such notes to be immediately due and payable, except
+ that such acceleration shall occur automatically in the case of
+clause (5) of the definition of Event of Default 
+ above. Such declaration may be rescinded by the holders of a
+majority in principal amount of the Controlling Class of notes
+then outstanding if both of the following occur:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the trust has paid or deposited with the indenture trustee enough
+ money to pay (1) all payments of principal of and interest
+ on all notes and all other amounts that would then be due if the
+ Event of Default causing the acceleration of maturity had not
+ occurred and (2) all sums paid or advanced by the indenture
+ trustee and the reasonable
+
+71
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ compensation, expenses, disbursements and advances of the
+ indenture trustee and its agents and counsel; and
+
+ 
+
+ 
+ 
+ 
+ all Events of Default, other than the nonpayment of the principal
+ of the notes that has become due solely by the acceleration,
+ have been cured or waived.
+
+ 
+Any such rescission could be treated, for federal income tax
+purposes, as a constructive exchange of such notes by the related
+ noteholders for deemed new notes upon which gain or loss would
+be recognized.
+
+ 
+If an Event of Default has occurred with respect to the notes,
+the indenture trustee may institute proceedings to collect
+amounts due or foreclose on trust property, exercise remedies as
+a secured party or sell the related receivables. Upon the
+occurrence of an Event of Default relating to the payment of
+principal of or a default for five days or more in the payment of
+ interest of any note resulting in acceleration of the notes, the
+ indenture trustee may sell the related receivables without
+obtaining the consent of the securityholders or may elect to have
+ the trust maintain possession of such receivables and apply
+collections as received. However, the indenture trustee is
+prohibited from selling the related receivables following any
+other Event of Default, unless (i) the holders of 100% of
+the Controlling Class of notes consent to such sale (excluding
+notes held by the seller, the servicer or their affiliates),
+(ii) the proceeds of such sale are sufficient to pay in full
+ the principal of and the accrued interest on the outstanding
+notes at the date of such sale, or (iii) the indenture
+trustee determines that the proceeds of the receivables would not
+ be sufficient on an ongoing basis to make all payments on the
+notes as such payments would have become due if such obligations
+had not been declared due and payable, and the indenture trustee
+obtains the consent of the holders of 66 2/3% of the
+aggregate outstanding amount of the Controlling Class of notes.
+For further discussion of the sale of receivables by the
+indenture trustee upon an Event of Default, see Risk
+Factors Indenture Trustee May Sell Receivables upon
+an Event of Default Which Could Result in Losses to You .
+
+ 
+In addition, if the Event of Default relates to a default by the
+trust in observing or performing any material covenant or
+agreement or breach of representation or warranty by the trust
+(other than an Event of Default relating to non-payment of
+interest or principal, insolvency or any other event which is
+otherwise specifically dealt with by the indenture), the
+indenture trustee is prohibited from selling the receivables
+unless the holders of all outstanding notes and certificates
+consent to such sale or the proceeds of such sale are sufficient
+to pay in full the principal of and the accrued interest on the
+outstanding notes and certificates.
+
+ 
+In the event of a sale of the receivables by the indenture
+trustee following an Event of Default, the noteholders and
+certificateholders will receive notice and an opportunity to
+submit a bid in the sale of the receivables.
+
+ 
+If the notes are accelerated at any time due to an Event of
+Default, no Variable Pay Term Notes will be issued after the date
+ of such acceleration and all Quarterly Pay Class A Notes
+will convert to Monthly Pay Class A Notes as described under
+ Payments of Interest on Class A Notes
+and Variable Pay Term Notes Interest on the Floating
+Rate Class A Notes. 
+
+ 
+If the notes are accelerated due to a default in the payment of
+principal, a default in the payment of interest on any class of
+notes for five days or more, or certain events of bankruptcy,
+insolvency, receivership or liquidation of the trust or its
+property, the trust will change the priority of distributions and
+ will make no distributions of principal or interest on the
+Class B Notes until payment in full of principal and
+interest on the Class A Notes and the Variable Pay Term
+Notes, no distributions of principal or interest on the
+Class C Certificates until payment in full of principal and
+interest on the Class B Notes and no distributions of
+principal or interest on the Class D Certificates until
+payment in full of principal and interest on the Class C
+Certificates. Following the occurrence of any other Event of
+Default which results in an acceleration of the notes, no change
+will be made in the priority of distributions until a
+liquidation, if any, of the property of the
+
+72
+
+Table of Contents
+
+trust, provided, however, the trust will pay the notes in full
+before paying any principal or interest on the certificates.
+
+ 
+Under the Trust Indenture Act of 1939, the indenture trustee may
+be deemed to have a conflict of interest and be required to
+resign as trustee for the Class A Notes, the Variable Pay
+Term Notes or the Class B Notes if a default occurs under
+the indenture. In these circumstances, the indenture will provide
+ for a successor trustee to be appointed for one or more of the
+Class A Notes, Variable Pay Term Notes and Class B
+Notes in order that there be separate trustees for each of the
+Class A Notes, Variable Pay Term Notes and Class B
+Notes. In general, so long as any amounts remain unpaid with
+respect to the Class A Notes and Variable Pay Term Notes:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ only the indenture trustee for the Controlling Class of notes
+ will have the right to exercise remedies under the indenture; and
+
+ 
+
+ 
+ 
+ 
+ only the holders of the Controlling Class of notes will have the
+ right to direct or consent to any action to be taken, including
+ sale of the receivables.
+
+ 
+In any case, holders of the Class B Notes will be entitled
+to their respective shares of any proceeds of enforcement,
+subject to the subordination of the Class B Notes to the
+Class A Notes and Variable Pay Term Notes as described
+herein. When the Class A Notes and Variable Pay Term Notes
+are repaid in full, all rights to exercise remedies under the
+indenture will transfer to the trustee for the Class B
+Notes.
+
+ 
+If the indenture trustee relating to any class of notes resigns,
+its resignation will become effective only after a successor
+indenture trustee for that class of notes is appointed and the
+successor accepts the appointment.
+
+ 
+Subject to the provisions of the indenture relating to the duties
+ of the indenture trustee, if an Event of Default under the
+indenture occurs and is continuing with respect to notes, the
+indenture trustee will be under no obligation to exercise any of
+the rights or powers under the indenture at the request or
+direction of any of the holders of the notes, if the indenture
+trustee reasonably believes it will not be adequately indemnified
+ against the costs, expenses and liabilities which might be
+incurred by it in complying with such request. Subject to the
+provisions for indemnification and certain limitations contained
+in the indenture, the holders of a majority in principal amount
+of the Controlling Class of notes will have the right to direct
+the time, method and place of conducting any proceeding or any
+remedy available to the indenture trustee, and the holders of a
+majority in principal amount of the Controlling Class of notes
+may, in certain cases, waive any default with respect thereto,
+except a default in the payment of principal or interest or a
+default in respect of a covenant or provision of the indenture
+that cannot be modified without the waiver or consent of the
+holders of all of the outstanding notes of the trust. Any such
+waiver could be treated, for federal income tax purposes, as a
+constructive exchange of such notes by the related noteholders
+for deemed new notes upon which gain or loss would be recognized.
+
+ 
+No holder of a note will have the right to institute any
+proceeding with respect to the indenture, unless: (i) such
+holder previously has given to the indenture trustee written
+notice of a continuing Event of Default; (ii) the holders of
+ not less than 25% in principal amount of the Controlling Class
+of notes have made written request to the indenture trustee to
+institute such proceeding in its own name as indenture trustee;
+(iii) such holder or holders have offered the indenture
+trustee reasonable indemnity; (iv) the indenture trustee has
+ for 60 days after such notice, request and offer of
+indemnity failed to institute such proceeding; and (v) no
+direction inconsistent with such written request has been given
+to the indenture trustee during such 60-day period by the holders
+ of a majority in principal amount of the Controlling Class of
+notes.
+
+ 
+The indenture trustee and the noteholders, by accepting the
+notes, will covenant that they will not at any time institute
+against the trust any bankruptcy, reorganization or other
+proceeding under any federal or state bankruptcy or similar law.
+
+73
+
+Table of Contents
+
+ 
+Neither the indenture trustee nor the owner trustee in its
+individual capacity, nor any holder of a certificate representing
+ an ownership interest in the trust nor any of their respective
+owners, beneficiaries, agents, officers, directors, employees,
+affiliates, successors or assigns will be personally liable for
+the payment of the principal of or interest on the notes or for
+the obligations of the trust contained in the indenture.
+
+Optional Redemption
+
+ 
+General. All outstanding notes will be redeemed in
+whole, but not in part, on any Monthly Distribution Date on which
+ the servicer exercises its option to purchase the receivables.
+The servicer may purchase the receivables when the Pool Balance
+has declined to 10% or less of the aggregate principal balance of
+ the receivables as of the last day of the Revolving Period. The
+redemption price for the notes outstanding will be equal
+to 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the unpaid principal amount of such notes plus accrued and unpaid
+ interest at the rate of interest on those notes; plus
+
+ 
+
+ 
+ 
+ 
+ interest on any past due interest at the rate of interest on
+ those notes (to the extent permitted by law).
+
+ 
+Redemption Procedures. Notice of an optional
+redemption will be given by first-class mail, postage prepaid,
+mailed not less than 15 Business Days prior to the
+applicable optional redemption date, to each holder of
+outstanding notes at such holder s address in the register
+maintained by the Registrar under the indenture. The trust
+expects that each of Euroclear, Clearstream and DTC, upon receipt
+ of any notice of optional redemption, will provide prompt notice
+ of such optional redemption to its participants or customers who
+ own an interest in a book-entry note representing any notes to
+be redeemed in accordance with its customary procedures. The
+trust expects that any such participants or customers in
+Euroclear, Clearstream or DTC will provide prompt notice of such
+optional redemption to owners of an interest in a book-entry note
+ representing any notes to be redeemed through such participants
+or customers in accordance with the customary procedures of such
+participants or customers. For so long as any of the Class A
+ Notes or Class B Notes are listed on the Luxembourg Stock
+Exchange, notification of the redemption price, outstanding
+principal balances of the notes to be redeemed and the redemption
+ date will be given to the Luxembourg Stock Exchange.
+
+ 
+In the event Definitive Notes are issued and called for
+redemption, the Definitive Notes must be surrendered at the
+office of any paying agent appointed for the notes under the
+indenture in order to receive the redemption price.
+
+ 
+Such redemption of securities is referred to as an 
+ Optional Redemption. If and for so long as any
+notes to be redeemed are listed on the Luxembourg Stock Exchange
+and the rules of such stock exchange should so require, the
+indenture trustee will arrange for a notice of the redemption,
+the redemption price and the optional redemption date to be
+published in an Authorized Newspaper as soon as possible. Such
+publication, if required, is expected to be made in the 
+Luxemburger Wort.
+
+Amendments
+
+ 
+The trust, together with the indenture trustee, may, without the
+consent of the noteholders or certificateholders but with prior
+notice to the Rating Agencies, execute a supplemental indenture
+for the purpose of:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ further protecting the indenture trustee s interest in the
+ property subject to the lien of the related indenture;
+
+ 
+
+ 
+ 
+ 
+ evidencing any successor to the trust and the assumption of the
+ obligations of the trust by such successor;
+
+74
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ adding to the covenants of the trust made for the benefit of the
+ noteholders;
+
+ 
+
+ 
+ 
+ 
+ surrendering any right or power conferred to the trust under the
+ related indenture;
+
+ 
+
+ 
+ 
+ 
+ conveying or pledging any property to the related indenture
+ trustee;
+
+ 
+
+ 
+ 
+ 
+ curing any ambiguity, correcting or supplementing any provision
+ of the related indenture or making the terms of the related
+ indenture consistent, so long as such action does not materially
+ adversely affect the noteholders;
+
+ 
+
+ 
+ 
+ 
+ evidencing a successor indenture trustee or changing any
+ provision necessary to facilitate administration of the trust;
+ and
+
+ 
+
+ 
+ 
+ 
+ qualifying the related indenture under any federal statute.
+
+The trust and the indenture trustee may also enter into
+supplemental indentures, without obtaining the consent of the
+noteholders or certificateholders but with prior notice to the
+Rating Agencies, for the purpose of, among other things, adding
+any provisions to or changing in any manner or eliminating any of
+ the provisions of the related indenture or modifying in any
+manner the rights of such noteholders (except with respect to the
+ matters listed in the next paragraph which require the approval
+of the noteholders) provided that:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ such action will not, as evidenced by an opinion of counsel,
+ materially adversely affect the interest of any noteholder;
+
+ 
+
+ 
+ 
+ 
+ such action will not, as confirmed by the Rating Agencies rating
+ the notes of the related trust, cause the then current rating
+ assigned to any class or Subclass of notes to be withdrawn or
+ reduced; and
+
+ 
+
+ 
+ 
+ 
+ an opinion of counsel is delivered stating that certain adverse
+ tax consequences will not result from such action.
+
+The trust, together with the indenture trustee, may with prior
+notice to the Rating Agencies and the consent of holders of a
+majority of the Note Balance of the Controlling Class enter into
+an indenture or indenture supplement for the purpose of adding
+provisions to, or changing or modifying the rights of
+noteholders, provided that (1) such actions will not, as
+confirmed by the Rating Agencies rating the notes of the related
+trust, cause the then current rating assigned to any class or
+Subclass of notes to be withdrawn or reduced, and (2) an
+opinion of counsel is delivered stating that certain adverse tax
+consequences will not result from such action. Notwithstanding
+the foregoing, however, without the consent of the holder of each
+ such outstanding note affected thereby (in addition to the
+satisfaction of each of the conditions set forth in the preceding
+ paragraph), no supplemental indenture will:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ change the due date of any installment of principal of or
+ interest on any such note or reduce the principal amount thereof,
+ the interest rate thereon or the redemption price with respect
+ thereto, change the application of the proceeds of a sale of the
+ trust property to payment of principal and interest on the notes
+ or change any place of payment where, or the coin or currency in
+ which, any such note or any interest thereon is payable;
+
+ 
+
+ 
+ 
+ 
+ impair the right to institute suit for the enforcement of certain
+ provisions of the related indenture regarding payment;
+
+ 
+
+ 
+ 
+ 
+ reduce the percentage of the Note Balance of the Controlling
+ Class or of the notes, the consent of the holders of which is
+ required for any such supplemental indenture or the consent of
+ the holders of which is required for any waiver of compliance
+ with certain provisions of the related indenture or of certain
+ defaults or events of default thereunder and their consequences
+ as provided for in such indenture;
+
+75
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ modify or alter the provisions of the related indenture regarding
+ the voting of notes held by the applicable trust, any other
+ obligor on such notes, the seller or an affiliate of any of them;
+
+ 
+
+ 
+ 
+ 
+ reduce the percentage of the Note Balance of the Controlling
+ Class, the consent of the holders of which is required to direct
+ the related indenture trustee to sell or liquidate the
+ receivables after an Event of Default if the proceeds of such
+ sale would be insufficient to pay the principal amount and
+ accrued but unpaid interest on the outstanding notes and
+ certificates of such trust;
+
+ 
+
+ 
+ 
+ 
+ decrease the percentage of the Note Balance of the Controlling
+ Class or of the notes required to amend the sections of the
+ related indenture which specify the applicable percentage of
+ aggregate principal amount of the notes of such trust necessary
+ to amend such indenture, any of the Receivables Transfer and
+ Servicing Agreements or certain other relevant documents;
+
+ 
+
+ 
+ 
+ 
+ affect the calculation of the amount of interest or principal
+ payable on any note on any Monthly Distribution Date or Quarterly
+ Payment Date, as applicable (including the calculation of any of
+ the individual components of such calculation);
+
+ 
+
+ 
+ 
+ 
+ affect the rights of the noteholders to the benefit of any
+ provisions for the mandatory redemption of the notes provided in
+ the related indenture; or
+
+ 
+
+ 
+ 
+ 
+ permit the creation of any lien ranking prior to or on a parity
+ with the lien of the related indenture with respect to any of the
+ collateral for such notes or, except as otherwise permitted or
+ contemplated in such indenture, terminate the lien of such
+ indenture on any such collateral or deprive the holder of any
+ such note of the security afforded by the lien of such indenture.
+
+The Certificates
+
+ 
+The certificates will be issued pursuant to the terms of the
+trust agreement, a copy of which has been filed as an exhibit to
+the Registration Statement. Neither the Class C Certificates
+ nor the Class D Certificates are offered hereby. A copy of
+the trust agreement will be filed with the Securities and
+Exchange Commission following the issuance of the securities.
+Interest on the Class C Certificates will accrue for each
+Monthly Interest Period at 7.24% per annum on the Certificate
+Balance as of the preceding Monthly Distribution Date, or with
+respect to the first Monthly Distribution Date, as of the Closing
+ Date until such certificates are paid in full. Interest on the
+Class D Certificates will accrue for each Monthly Interest
+Period at 9.00% per annum on the Certificate Balance as of the
+preceding Monthly Distribution Date, or with respect to the first
+ Monthly Distribution Date, as of the Closing Date until such
+certificates are paid in full. Interest on the certificates will
+be calculated on the basis of a 360-day year consisting of twelve
+ 30-day months. Until the certificates are paid in full, interest
+ distributions due the certificates for any Monthly Distribution
+Date but not distributed on such Monthly Distribution Date will
+be due on the next Monthly Distribution Date increased by an
+amount equal to interest on such amount at the rate of interest
+on the certificates (to the extent lawful).
+
+DISTRIBUTIONS ON THE SECURITIES
+
+ 
+We have summarized below some of the important terms of the
+Receivables Transfer and Servicing Agreements with respect to the
+ distribution of funds on the securities. We have filed forms of
+the Receivables Transfer and Servicing Agreements as exhibits to
+the Registration Statement. We will file copies of the actual
+Receivables Transfer and Servicing Agreements with the Commission
+ after we issue the Class A Notes, the Class B Notes
+and the certificates. This summary is not a complete description
+of all of the provisions of the Receivables Transfer and
+Servicing Agreements. It is subject to all of the provisions of
+the Receivables Transfer and
+
+76
+
+Table of Contents
+
+Servicing Agreements. You can find more information about the
+transfer of the receivables from the seller to the trust on the
+Closing Date under the sale and servicing agreement under 
+ Sale and Servicing of Receivables Sale and
+Assignment of Receivables .
+
+Distributions
+
+ 
+Deposits to the Collection Account and Determination of
+Available Collections. On or before each Monthly
+Distribution Date, the servicer will cause all collections on the
+ receivables (other than amounts constituting the Supplemental
+Servicing Fee), Actuarial Advances, Simple Interest Advances, Net
+ Swap Receipts from the Monthly Pay Floating Rate Class A Note
+Interest Rate Swaps and the Variable Pay Term Notes Interest Rate
+ Swap, any swap termination payments paid by the swap
+counterparties, earnings on Permitted Investments in the
+Accumulation Account and other amounts constituting the Available
+ Funds to be deposited into the Collection Account. On or before
+each Monthly Distribution Date, the servicer will instruct the
+indenture trustee to make the following deposits to the
+Collection Account on such Monthly Distribution Date:
+
+ 
+ 
+ 
+
+ 
+ (1) 
+ 
+ the amount, if any, to be withdrawn from the Reserve Account and
+ deposited in the Collection Account for payment of the Servicing
+ Fee, any Net Swap Payments from the Monthly Pay Floating Rate
+ Class A Note Interest Rate Swaps and the Variable Pay Term
+ Notes Interest Rate Swap, any swap termination payments, any
+ shortfalls in interest payments, any shortfalls in the
+ Class A Quarterly Interest Funding Account Deposit Amount,
+ any First Priority Principal Distribution Amount or Second
+ Priority Principal Distribution Amount, and any shortfalls in
+ principal amounts on Final Scheduled Distribution Dates, as
+ described below;
+
+ 
+
+ 
+ (2) 
+ 
+ the Reserve Account Excess Amount, if any, to be withdrawn from
+ the Reserve Account and deposited in the Collection Account;
+
+ 
+
+ 
+ (3) 
+ 
+ the amount, if any, to be withdrawn from the Payahead Account and
+ deposited in the Collection Account representing current
+ payments for the related Collection Period; and
+
+ 
+
+ 
+ (4) 
+ 
+ on any Monthly Distribution Date that is a Quarterly Payment
+ Date, the excess of the amount on deposit in the Class A
+ Quarterly Interest Funding Account (after giving effect to any
+ deposits to such account on such Monthly Distribution Date and
+ any Net Swap Receipts and Net Swap Payments on the Quarterly Pay
+ Floating Rate Class A Note Interest Rate Swaps) over the
+ amount to be withdrawn from such account on such Monthly
+ Distribution Date in accordance with How the
+ Trust Distributes Amounts on Deposit in the Class A
+ Quarterly Interest Funding Account, below.
+
+ 
+The amount, if any, to be withdrawn from the Reserve Account and
+deposited in the Collection Account as specified in clause
+(1) above, will be an amount equal to the lesser of:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the amount, if any, by which (a) the Total Required Payment
+ exceeds (b) the Available Funds for such Monthly
+ Distribution Date; and
+
+ 
+
+ 
+ 
+ 
+ the amount of cash or other immediately available funds in the
+ Reserve Account on such Monthly Distribution Date (after giving
+ effect to any withdrawals from the Reserve Account relating to
+ the Reserve Account Excess Amount for that Monthly Distribution
+ Date).
+
+77
+
+Table of Contents
+
+ 
+If such Monthly Distribution Date is the Final Scheduled
+Distribution Date for any class or Subclass of notes or
+certificates, the servicer will instruct the indenture trustee to
+ withdraw from the Reserve Account and deposit in the Collection
+Account an amount equal to the lesser of:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the excess, if any, of (1) the amount required to pay such
+ class or Subclass of notes or certificates in full (and all other
+ payments required to be made by the trust that are senior in
+ priority to such payment) over (2) the sum of the Available
+ Funds plus the amount, if any, withdrawn from the Reserve Account
+ for the amount of the Total Required Payment which exceeds the
+ Available Funds for such Monthly Distribution Date; and
+
+ 
+
+ 
+ 
+ 
+ the amount of cash or other immediately available funds in the
+ Reserve Account on such Monthly Distribution Date (after giving
+ effect to any withdrawals from the Reserve Account relating to
+ the Reserve Account Excess Amount and the amount by which the
+ Total Required Payment exceeds the Available Funds for such
+ Monthly Distribution Date).
+
+ 
+Priority of Payments. On each Monthly Distribution
+Date, provided no Event of Default has occurred and is
+continuing, the servicer will allocate amounts on deposit in the
+Collection Account and will instruct the indenture trustee to
+make the following deposits and distributions, to the extent of
+funds then on deposit in the Collection Account relating to the
+Collection Period preceding such Monthly Distribution Date
+(including the Net Swap Receipts from the Monthly Pay Floating
+Rate Class A Note Interest Rate Swaps and Variable Pay Term
+Notes Interest Rate Swap and any swap termination payments to be
+made by the swap counterparties (to the extent that such
+termination payments are not applied by the trust to enter into a
+ replacement interest rate swap), any Servicer Collections
+Advances made by the servicer and funds, if any, deposited into
+the Collection Account from the Reserve Account and the Payahead
+Account), in the following order of priority after payment to the
+ servicer for reimbursement of any Servicer Collections Advances:
+
+ 
+ 
+ 
+
+ 
+ (1) 
+ 
+ to the servicer, the Servicing Fee and all unpaid Servicing Fees
+ from prior Collection Periods;
+
+ 
+
+ 
+ (2) 
+ 
+ with the same priority and ratably in accordance with the
+ respective payments or deposits (A) to the applicable swap
+ counterparty, any Net Swap Payments payable by the trust on the
+ Variable Pay Term Notes Interest Rate Swap, (B) to the
+ Class A Quarterly Interest Funding Account, the excess, if
+ any, of (I) if positive, (x) the total amount of the Accrued
+ Fixed Rate Payments on the Quarterly Pay Floating Rate
+ Class A Note Interest Rate Swaps minus (y) the aggregate
+ amount accrued from the preceding Monthly Distribution Date on
+ the respective notional amounts of the Quarterly Pay Floating
+ Rate Class A Note Interest Rate Swaps, in each case at an
+ interest rate equal to three-month LIBOR (or, in the case of the
+ first Quarterly Interest Period, the interpolated rate) plus the
+ spread on the related Subclass of Floating Rate Class A
+ Notes over (II) the total amount on deposit in the
+ Class A Quarterly Interest Funding Account immediately prior
+ to such Monthly Distribution Date, and (C) to the
+ applicable swap counterparties, any Net Swap Payments payable by
+ the trust on the Monthly Pay Floating Rate Class A Note
+ Interest Rate Swaps, if any;
+
+ 
+
+ 
+ (3) 
+ 
+ with the same priority and ratably in accordance with the
+ principal balance of the Quarterly Pay Class A Notes, the
+ Monthly Pay Class A Notes, the Variable Pay Term Notes and
+ the amount of any swap termination payments due and payable by
+ the trust to the swap counterparties:
+
+ 
+ 
+ 
+
+ 
+ (i) 
+ 
+ to the indenture trustee for deposit into the Class A
+ Quarterly Interest Funding Account an amount (together with the
+ amounts deposited under clause (2)(B),
+
+78
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ above, the Class A Quarterly Interest Funding
+ Account Deposit Amount ) equal to the sum of:
+
+ 
+ 
+ 
+
+ 
+ (a) 
+ 
+ on each Monthly Distribution Date that is not a Quarterly Payment
+ Date, the aggregate of the Accrued Fixed Rate Payments on each
+ of the Quarterly Pay Floating Rate Class A Note Interest
+ Rate Swaps minus the amount deposited under clause (2)(B) above;
+ and
+
+ 
+
+ 
+ (b) 
+ 
+ on each Quarterly Payment Date, an amount equal to the excess of
+ (I) the aggregate amount of interest due on such Quarterly
+ Payment Date on the Quarterly Pay Class A Notes, plus any
+ shortfall in the amount of interest payable to the holders of the
+ Quarterly Pay Class A Notes on prior Quarterly Payment
+ Dates that has not been paid plus interest at the applicable
+ Subclass Interest Rates on any shortfall to the extent permitted
+ by law over (II) the amount on deposit in the Class A
+ Quarterly Interest Funding Account on such Quarterly Payment
+ Date, in each case after giving effect to all other deposits to
+ be made under this clause (3) and the deposit of any Net
+ Swap Receipts, and the withdrawal of any Net Swap Payments, in
+ each case with respect to the Quarterly Pay Floating Rate
+ Class A Note Interest Rate Swaps;
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ (provided, that on each Monthly Distribution Date, if one or more
+ of the Quarterly Pay Floating Rate Class A Note Interest
+ Rate Swaps have been terminated and no replacement Quarterly Pay
+ Floating Rate Class A Note Interest Rate Swaps have been
+ entered into, then the portion of the Class A Quarterly
+ Interest Funding Account Deposit Amount deposited into the
+ Class A Quarterly Interest Funding Account on such Monthly
+ Distribution Date with respect to the related Subclasses of
+ Quarterly Pay Class A Notes will be equal to the amount of
+ interest accrued on those Subclasses from the preceding Monthly
+ Distribution Date at three-month LIBOR plus the applicable
+ spread)
+
+ 
+
+ 
+ (ii) 
+ 
+ to the indenture trustee for the holders of the Monthly Pay
+ Class A Notes an amount equal to the sum of:
+
+ 
+ 
+ 
+
+ 
+ (a) 
+ 
+ the aggregate amount of interest accrued during the related
+ Monthly Interest Period on the Monthly Pay Class A Notes on
+ the principal outstanding as of the previous Monthly Distribution
+ Date after giving effect to all payments of principal to the
+ holders of such Subclasses of Class A Notes on the preceding
+ Monthly Distribution Date; and
+
+ 
+
+ 
+ (b) 
+ 
+ any shortfall in the amount of interest payable to the holders of
+ the Monthly Pay Class A Notes on prior Monthly Distribution
+ Dates that has not been paid, plus interest at the applicable
+ Subclass Interest Rate on any shortfall to the extent permitted
+ by law;
+
+ 
+ 
+ 
+
+ 
+ (iii) 
+ 
+ to the indenture trustee for the holders of the Variable Pay Term
+ Notes an amount equal to the sum of:
+
+ 
+ 
+ 
+
+ 
+ (a) 
+ 
+ the aggregate amount of interest accrued for the related Interest
+ Period on all outstanding Variable Pay Term Notes on the
+ principal outstanding as of the previous Monthly Distribution
+ Date after giving effect to all payments of principal to the
+ holders of the Variable Pay Term Notes on the preceding Monthly
+ Distribution Date; and
+
+ 
+
+ 
+ (b) 
+ 
+ any shortfall in the amount of interest payable to the holders of
+ the Variable Pay Term Notes on prior Monthly Distribution Dates
+ which has not been
+
+79
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ paid, plus interest at the applicable Variable Pay Term Note
+ Interest Rates on any such shortfall to the extent permitted by
+ law; and
+
+ 
+ 
+ 
+
+ 
+ (iv) 
+ 
+ to the swap counterparties, the amount of any swap termination
+ payments due and payable to them,
+
+ 
+
+ 
+ 
+ 
+ and any amounts remaining after such allocations are made, to be
+ allocated to the Class A Quarterly Interest Funding Account,
+ the holders of the Variable Pay Term Notes, the holders of the
+ Monthly Pay Class A Notes and the swap counterparties pro
+ rata based on the amounts described above in
+ clauses (i), (ii), (iii) and (iv), respectively, that would
+ not be deposited or paid, as applicable, after giving effect to
+ such allocations;
+
+ 
+ 
+ 
+
+ 
+ (4) 
+ 
+ to the Principal Distribution Account, the First Priority
+ Principal Distribution Amount, if any;
+
+ 
+
+ 
+ (5) 
+ 
+ to the indenture trustee for the holders of the Class B
+ Notes:
+
+ 
+ 
+ 
+
+ 
+ (a) 
+ 
+ the aggregate amount of interest accrued for the related Interest
+ Period on each of the Class B Notes on the principal
+ outstanding as of the previous Monthly Distribution Date after
+ giving effect to all payments of principal to the holders of the
+ Class B Notes on the preceding Monthly Distribution Date;
+ and
+
+ 
+
+ 
+ (b) 
+ 
+ any shortfall in the amount of interest payable to the holders of
+ the Class B Notes on prior Monthly Distribution Dates which
+ remains unpaid, plus interest on any such shortfall at the
+ Class B Note Interest Rate to the extent permitted by law;
+
+ 
+ 
+ 
+
+ 
+ (6) 
+ 
+ to the Principal Distribution Account, the Second Priority
+ Principal Distribution Amount, if any;
+
+ 
+
+ 
+ (7) 
+ 
+ to the Certificate Interest Distribution Account for the holders
+ of the Class C Certificates:
+
+ 
+ 
+ 
+
+ 
+ (a) 
+ 
+ the aggregate amount of interest accrued for the related Interest
+ Period on each of the Class C Certificates on the principal
+ outstanding as of the previous Monthly Distribution Date after
+ giving effect to all payments of principal to the holders of the
+ Class C Certificates on the preceding Monthly Distribution
+ Date; and
+
+ 
+
+ 
+ (b) 
+ 
+ any shortfall in the amount of interest payable to the holders of
+ the Class C Certificates on prior Monthly Distribution
+ Dates which remains unpaid, plus interest at the Class C
+ Certificate Interest Rate on any such shortfall to the extent
+ permitted by law;
+
+ 
+ 
+ 
+
+ 
+ (8) 
+ 
+ to the Certificate Interest Distribution Account for the holders
+ of the Class D Certificates:
+
+ 
+ 
+ 
+
+ 
+ (a) 
+ 
+ the aggregate amount of interest accrued for the related Interest
+ Period on the Certificate Balance of the Class D
+ Certificates as of the previous Monthly Distribution Date after
+ giving effect to all payments of principal to the holders of the
+ Class D Certificates on the preceding Monthly Distribution
+ Date; and
+
+ 
+
+ 
+ (b) 
+ 
+ any shortfall in the amount of interest payable to the holders of
+ the Class D Certificates on prior Monthly Distribution
+ Dates which remains unpaid, plus interest at the Class D
+ Certificate Interest Rate on any such shortfall to the extent
+ permitted by law;
+
+ 
+ 
+ 
+
+ 
+ (9) 
+ 
+ to the Reserve Account, the amount required to reinstate the
+ amount in the Reserve Account up to the Specified Reserve Balance
+ (calculated after giving effect to all amounts, including
+ amounts pursuant to clause (10) below, deposited to the
+ Principal Distribution Account and then transferred to the
+ Accumulation Account on such date);
+
+80
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ (10) 
+ 
+ to the Principal Distribution Account, the Regular Principal
+ Distribution Amount; and
+
+ 
+
+ 
+ (11) 
+ 
+ to the seller, any funds remaining on deposit in the Collection
+ Account with respect to the Collection Period preceding such
+ Monthly Distribution Date.
+
+ 
+How the Trust Distributes Amounts on Deposit in the
+Class A Quarterly Interest Funding Account. On each
+Quarterly Payment Date (or, on any Monthly Distribution Date that
+ is not a Quarterly Payment Date, if an Early Amortization Event
+or an acceleration of the notes due to an Event of Default has
+occurred on or prior to the LIBOR Determination Date relating to
+such Monthly Distribution Date), after giving effect to the
+deposits and withdrawals with respect to the Quarterly Pay
+Floating Rate Class A Note Interest Rate Swaps and the
+deposits made pursuant to clause (3) under 
+ Priority of Payments above, the trust
+ will apply amounts on deposit in the Class A Quarterly
+Interest Funding Account as follows:
+
+ 
+ 
+ 
+
+ 
+ (1) 
+ 
+ to pay to the holders of each Subclass of Quarterly Pay Class A
+ Notes their pro rata share of the amounts on deposit in
+ the Class A Quarterly Interest Funding Account according to the
+ amount of interest due to each Subclass to the extent necessary
+ to pay the full amount of interest due and payable on each such
+ Subclass; and
+
+ 
+
+ 
+ (2) 
+ 
+ to deposit any amounts remaining (which will generally be equal
+ to the amount of earnings on Permitted Investments in the
+ account) into the Collection Account to be applied on such
+ Monthly Distribution Date in accordance with the priorities set
+ forth above under Priority of Payments 
+ .
+
+ 
+Priority in Which the Trust Makes Principal Payments on the
+ Notes and Certificates. On each Monthly Distribution
+Date during the Amortization Period, the servicer shall instruct
+the indenture trustee to withdraw the funds on deposit in the
+VPTN Proceeds Account (after repayment of any unpaid Servicer
+Liquidity Advances to the servicer) and the Principal
+Distribution Account and, if such Monthly Distribution Date is a
+Targeted Scheduled Distribution Date, any funds on deposit in the
+ Accumulation Account and make distributions and payments from
+those accounts as described below and in the following order of
+priority:
+
+ 
+ 
+ 
+
+ 
+ (1) 
+ 
+ FIRST, to the holders of the Class A Notes and
+ Variable Pay Term Notes in reduction of principal until the
+ principal amounts of the outstanding Class A Notes and
+ Variable Pay Term Notes have been paid in full, in accordance
+ with the following:
+
+ 
+ 
+ 
+
+ 
+ (A) 
+ 
+ On each Targeted Scheduled Distribution Date for a Subclass of
+ Class A Notes upon which the trust is able to issue and does
+ issue Variable Pay Term Notes,
+
+ 
+ 
+ 
+
+ 
+ (i) 
+ 
+ first, from amounts on deposit in the Principal Distribution
+ Account to the holders of the outstanding Variable Pay Term
+ Notes, if any, until all outstanding Variable Pay Term Notes are
+ paid in full, and then any remaining amounts to the holders of
+ such Subclass or Subclasses of Class A Notes that have
+ reached or passed their Targeted Scheduled Distribution Dates
+ until paid in full;
+
+ 
+ 
+ 
+
+ 
+ (ii) 
+ 
+ second, from amounts, if any, on deposit in the Accumulation
+ Account to the holders of such Subclass of Class A Notes
+ which has reached its Targeted Scheduled Distribution Date until
+ paid in full;
+
+ 
+ 
+ 
+
+ 
+ (iii) 
+ 
+ third, from amounts on deposit in the VPTN Proceeds Account to
+ the holders of such Subclass or Subclasses of Class A Notes
+ that have reached or passed their Targeted Scheduled Distribution
+ Dates until paid in full; and
+
+ 
+ 
+ 
+
+ 
+ (iv) 
+ 
+ fourth, from any remaining amounts on deposit in the Principal
+ Distribution Account to the holders of the Variable Pay Term
+ Notes until paid in full, and then any remaining amounts will be
+ deposited to the Accumulation Account if
+
+81
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ any Subclasses of Class A Notes are outstanding which have
+ not reached or passed their Targeted Scheduled Distribution
+ Dates;
+
+ 
+ 
+ 
+
+ 
+ (B) 
+ 
+ On each Targeted Scheduled Distribution Date for a Subclass of
+ Class A Notes upon which the trust is unable to issue
+ Variable Pay Term Notes or on any other Monthly Distribution Date
+ which is not a Targeted Scheduled Distribution Date upon which a
+ Subclass or Subclasses of Class A Notes which have reached
+ or passed their Targeted Scheduled Distribution Dates remain
+ outstanding (and no Early Amortization Event has occurred),
+
+ 
+ 
+ 
+
+ 
+ (i) 
+ 
+ first,
+
+ 
+ 
+ 
+
+ 
+ (a) 
+ 
+ from amounts on deposit in the Principal Distribution Account to
+ the holders of the outstanding Variable Pay Term Notes, if any,
+ the Variable Pay Term Note Percentage of such amounts until all
+ outstanding Variable Pay Term Notes are paid in full; and
+
+ 
+
+ 
+ (b) 
+ 
+ from amounts on deposit in the Principal Distribution Account to
+ the holders of all of the outstanding Subclasses of Class A
+ Notes which have reached or passed their Targeted Scheduled
+ Distribution Dates, the Class A Percentage of all amounts on
+ deposit in the Principal Distribution Account until the
+ principal amount of all of such outstanding Subclasses of
+ Class A Notes has been paid in full;
+
+ 
+ 
+ 
+
+ 
+ (ii) 
+ 
+ second, from amounts, if any, on deposit in the Accumulation
+ Account to the holders of such Subclass of Class A Notes
+ which has reached its Targeted Scheduled Distribution Date until
+ paid in full;
+
+ 
+ 
+ 
+
+ 
+ (iii) 
+ 
+ third, from amounts on deposit in the VPTN Proceeds Account to
+ the holders of such Subclass or Subclasses of Class A Notes
+ that have reached or passed their Targeted Scheduled Distribution
+ Dates until paid in full; and
+
+ 
+ 
+ 
+
+ 
+ (iv) 
+ 
+ fourth, from any remaining amounts on deposit in the Principal
+ Distribution Account to the holders of the Variable Pay Term
+ Notes until paid in full, and then any remaining amounts will be
+ deposited to the Accumulation Account if any Subclasses of
+ Class A Notes are outstanding which have not reached or
+ passed their Targeted Scheduled Distribution Dates;
+
+ 
+ 
+ 
+
+ 
+ (C) 
+ 
+ On each Monthly Distribution Date that is not a Targeted
+ Scheduled Distribution Date for a Subclass of Class A Notes
+ and as of which the trust has paid in full each Subclass of
+ Class A Notes which has reached or passed its Targeted
+ Scheduled Distribution Date (and no Early Amortization Event has
+ occurred),
+
+ 
+ 
+ 
+
+ 
+ (i) 
+ 
+ first, from amounts on deposit in the Principal Distribution
+ Account, to the holders of the outstanding Variable Pay Term
+ Notes, if any, until all outstanding Variable Pay Term Notes have
+ been paid in full; and
+
+ 
+ 
+ 
+
+ 
+ (ii) 
+ 
+ second, if any Class A Notes remain outstanding, the
+ remainder, if any, to the Accumulation Account; and
+
+ 
+ 
+ 
+
+ 
+ (D) 
+ 
+ On each Monthly Distribution Date following an Early Amortization
+ Event, to the holders of all of the outstanding Subclasses of
+ Class A Notes until the principal amount of all such
+ outstanding Subclasses of Class A Notes have been paid in
+ full, in the following order of priority:
+
+ 
+ 
+ 
+
+ 
+ (i) 
+ 
+ to the Class A-1 Notes until paid in full;
+
+ 
+
+ 
+ (ii) 
+ 
+ to the Class A-2 Notes until paid in full;
+
+ 
+
+ 
+ (iii) 
+ 
+ to the Class A-3 Notes until paid in full;
+
+82
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ (iv) 
+ 
+ to the Class A-4 Notes until paid in full; and
+
+ 
+
+ 
+ (v) 
+ 
+ to the Class A-5 Notes until paid in full;
+
+ 
+ 
+ 
+
+ 
+ (2) 
+ 
+ SECOND, to the holders of the Class B Notes until the
+ principal amount of the outstanding Class B Notes has been
+ paid in full;
+
+ 
+
+ 
+ (3) 
+ 
+ THIRD, to the Certificate Principal Distribution Account,
+ until the Certificate Balance of the Class C Certificates
+ has been paid in full;
+
+ 
+
+ 
+ (4) 
+ 
+ FOURTH, to the Certificate Principal Distribution Account,
+ until the Certificate Balance of the Class D Certificates
+ has been paid in full; and
+
+ 
+
+ 
+ (5) 
+ 
+ FIFTH, to the seller, any funds remaining on deposit in
+ the Principal Distribution Account;
+
+provided, in each case, that in the event there are not
+sufficient funds to pay the principal amount of all notes or
+certificates within a Subclass or Class having the same priority,
+ principal payments shall be made to each holder within such
+Subclass or Class on a pro rata basis, and provided,
+further, that all of the Subclasses of Class A Notes
+will be paid sequentially, so that no principal payments will be
+made on any Subclass of Class A Notes until all Subclasses
+of Class A Notes with a lower numerical designation have
+been paid in full and that if at any time more than one Variable
+Pay Term Note is outstanding, principal will be paid to the
+Variable Pay Term Notes sequentially, with the earliest issued
+Variable Pay Term Note being paid in full before any principal is
+ paid to any Variable Pay Term Note with a later issuance date.
+
+Priority of Payments May Change Upon an Event of Default Under
+ the Indenture
+
+ 
+Upon the occurrence and continuation of any Event of Default
+described under Description of the Notes 
+Events of Default, the indenture trustee or the holders
+ of a majority of the Controlling Class of notes may accelerate
+the maturity of the notes. Acceleration of the notes will result
+in a change in the priority of payments, which will depend upon
+the type of default, as described below.
+
+ 
+Defaults in Payment of Interest and Principal Resulting in
+Acceleration and Certain Insolvency Events. Following the
+ occurrence and during the continuation of an Event of Default
+relating to:
+
+ 
+ 
+
+ 
+ 
+ (a) a default in the payment of principal on any note which
+ has resulted in acceleration of the notes;
+
+ 
+
+ 
+ 
+ (b) a default for five days or more in the payment of
+ interest on the Controlling Class of notes which has resulted in
+ acceleration of the notes; or
+
+ 
+
+ 
+ 
+ (c) an Insolvency Event or dissolution with respect to the
+ trust which has resulted in an acceleration of the notes;
+
+the priority of payments changes and the holders of the
+Class A Notes and the Variable Pay Term Notes must be paid
+in full and all Net Swap Payments and swap termination payments
+due to the swap counterparties paid in full before any
+distributions of interest or principal may be made on the
+Class B Notes and the certificates; the holders of the
+Class B Notes must be paid in full before any distributions
+of interest or principal may be made on the certificates; and the
+ holders of the Class C Certificates must be paid in full
+before any distributions of interest or principal may be made on
+the Class D Certificates. In such an Event of Default, the
+Class A Notes and the Variable Pay Term Notes will be paid
+principal pro rata.
+
+ 
+Other Defaults Resulting in Acceleration. Following
+ the occurrence of any other Event of Default which has resulted
+in an acceleration of the notes, the trust will continue to pay
+interest and principal on the Class A Notes, the Variable
+Pay Term Notes and the Class B Notes on each
+
+83
+
+Table of Contents
+
+Monthly Distribution Date in the manner set forth in 
+ Priority of Payments, above, until a
+liquidation, if any, of the receivables.
+
+ 
+Certificates Subordinated Upon Any Event of Default
+Resulting in Acceleration. Following the occurrence of
+any Event of Default which has resulted in an acceleration of the
+ notes, the priority of payments changes and the holders of the
+notes will be entitled to be paid in full before any
+distributions of principal or interest may be made on the
+certificates. See Interest and Principal
+Paid in Order of Seniority of Classes Upon a Sale of Collateral
+Following an Event of Default below.
+
+ 
+Interest and Principal Paid in Order of Seniority of
+Classes Upon a Sale of Collateral Following an Event of Default.
+Following an Event of Default that has resulted in
+acceleration of the notes, the indenture trustee may elect to
+liquidate the receivables and the other property of the trust,
+subject to the requirements set forth under Description
+of the Notes Events of Default Rights
+upon Event of Default. Irrespective of the type of
+Event of Default, upon such a liquidation of receivables (1)
+interest payments allocable to the Class A Notes and
+Variable Pay Term Notes and swap termination payments will
+continue to be paid pro rata based on the principal amount
+ of the Class A Notes and Variable Pay Term Notes and the
+amount of the swap termination payments but principal payments
+will be paid to the Class A Notes and Variable Pay Term
+Notes pro rata, (2) no amounts will be distributed to
+ the holders of the Class B Notes until all interest and
+principal due on the Class A Notes and the Variable Pay Term
+ Notes and payments due to the swap counterparties have been paid
+ in full, (3) no amounts will be distributed to the holders
+of the Class C Certificates or Class D Certificates
+until all interest and principal due on the Class B Notes
+has been paid in full and (4) no amounts will be distributed
+ to the holders of the Class D Certificates until all
+interest and principal due on the Class C Certificates has
+been paid in full.
+
+ 
+Servicer will Provide Information to Indenture Trustee.
+On or before the Business Day preceding each Monthly
+Distribution Date, the servicer will provide the indenture
+trustee with the information specified in the sale and servicing
+agreement with respect to the preceding Collection Period
+including:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the amount of aggregate collections on the receivables;
+
+ 
+
+ 
+ 
+ 
+ the aggregate amount of Liquidated Receivables;
+
+ 
+
+ 
+ 
+ 
+ the aggregate Servicer Collections Advances to be made by the
+ servicer;
+
+ 
+
+ 
+ 
+ 
+ the amount of Servicer Liquidity Advances, if any; and
+
+ 
+
+ 
+ 
+ 
+ the aggregate Purchase Amount of receivables to be repurchased by
+ the seller or to be purchased by the servicer.
+
+ 
+Required Principal Distributions Made as a Result of Notes
+Reaching Their Final Scheduled Distribution Dates May Delay
+Interest and Principal on Subordinate Classes of Notes. 
+The principal balances of the notes and certificates are
+generally expected to be repaid prior to their applicable Final
+Scheduled Distribution Date. However, if the principal amount of
+any Subclass of Class A Notes or the Class B Notes is
+not fully repaid on or prior to its Final Scheduled Distribution
+Date, any remaining principal balance of that Subclass or class,
+as the case may be, will be immediately due on that date, and
+will be payable before any payments of principal or interest are
+made to any other Subclass or class of securities subordinate to
+such Subclass or Class. Any such failure to pay the principal
+balance of any Subclass of Class A Notes on its Final
+Scheduled Distribution Date or to pay the principal balance of
+the Variable Pay Term Notes in full on their Final Scheduled
+Distribution Date will result in a delay of interest and
+principal payments on the Class B Notes and the
+certificates. Any such failure to pay the principal balance of
+the Class B Notes on their Final Scheduled Distribution Date
+ will result in a delay of interest and principal payments on the
+ certificates.
+
+84
+
+Table of Contents
+
+ 
+A substantial amount payable on a Final Scheduled Distribution
+Date would generally occur as a result of slower-than-expected
+payments on the receivables, including:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ a larger-than-expected number of late payments on the Simple
+ Interest Receivables; or
+
+ 
+
+ 
+ 
+ 
+ slower-than-expected prepayments on the receivables.
+
+ 
+Higher-Priority Principal Payments Made as a Result of
+Losses or Prepayments May Delay Interest Payments on Class B
+ Notes or Certificates. The trust will pay principal on
+the Class A Notes, the Variable Pay Term Notes and the
+Class B Notes prior to the payment of interest on the
+certificates (and, in some cases, will pay principal on the
+Class A Notes and the Variable Pay Term Notes prior to the
+payment of interest on the Class B Notes and the
+certificates) where the sum of the Pool Balance and the amount on
+ deposit in the Accumulation Account (exclusive of investment
+earnings from Permitted Investments) has decreased to a level
+which is less than the sum of the aggregate outstanding principal
+ balance of the notes (or, in some cases, the aggregate
+outstanding principal balance of the Class A Notes and the
+Variable Pay Term Notes) and the Yield Supplement
+Overcollateralization Amount.
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ To the extent that the sum of the Pool Balance and the amount on
+ deposit in the Accumulation Account (exclusive of investment
+ earnings from Permitted Investments) has decreased to a level
+ which is less than the sum of the aggregate outstanding principal
+ balance on the Class A Notes, Variable Pay Term Notes and
+ Class B Notes and the Yield Supplement Overcollateralization
+ Amount, a Second Priority Principal Distribution Amount will be
+ payable prior to the payment of interest on the Class C
+ Certificates and Class D Certificates.
+
+ 
+
+ 
+ 
+ 
+ To the extent that the sum of the Pool Balance and the amount on
+ deposit in the Accumulation Account (exclusive of investment
+ earnings from Permitted Investments) has decreased to a level
+ which is less than the sum of the aggregate outstanding principal
+ balance of the Class A Notes and Variable Pay Term Notes
+ and the Yield Supplement Overcollateralization Amounts, a First
+ Priority Principal Distribution Amount will be payable prior to
+ the payment of interest on the Class B Notes, the
+ Class C Certificates and the Class D Certificates.
+
+ 
+Because of the prioritization of the above amounts, the
+occurrence of any of the following events may result in
+insufficient funds for the trust to make payments of interest on
+subordinate classes of notes or certificates on a timely basis:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ substantial losses suffered by the trust as a result of defaults
+ which are not covered by sufficient Liquidation Proceeds
+ allocable to principal and which exceed the Specified
+ Overcollateralization Amount; or
+
+ 
+
+ 
+ 
+ 
+ delayed collections on the receivables resulting from either:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ a larger-than-expected number of late payments on the Simple
+ Interest Receivables; or
+
+ 
+
+ 
+ 
+ 
+ slower-than-expected prepayments on the receivables.
+
+Application of Funds to Maintain Overcollateralization
+
+ 
+On the Closing Date the principal balance of the receivables will
+ exceed the principal balance of the notes and certificates by
+5.37% of the receivables balance, which is less than the targeted
+ level of overcollateralization. The targeted level of
+overcollateralization will be equal to the sum of the Specified
+Overcollateralization Amount and the Yield Supplement
+Overcollateralization Amount. The Additional Receivables will be
+purchased by the trust with amounts that would otherwise be paid
+as principal to holders of the notes and certificates to the
+extent that receivables are available from the seller. For a
+further discussion of the purchase of Additional Receivables
+during the Revolving Period, see Description of the
+Notes The Revolving Period . It is expected
+that the targeted level of overcollateralization will be achieved
+ during the Revolving Period, although there can be no
+assurances. As long as the targeted level of
+
+85
+
+Table of Contents
+
+overcollateralization has been reached during the Revolving
+Period, amounts deposited into the Collection Account on any
+Monthly Distribution Date and remaining after the payment of the
+Servicing Fees, Net Swap Payments, any swap termination payments,
+ interest payable on the notes and certificates and the
+Class A Quarterly Interest Funding Account Deposit Amount
+will be paid to the seller.
+
+ 
+During the Amortization Period, the targeted level of
+overcollateralization will be maintained by the requirement to
+pay principal on the securities in an amount equal to the
+Principal Distribution Amount on each Monthly Distribution Date.
+If overcollateralization is below the targeted level, additional
+funds will be applied to payments of principal on the securities.
+ This will result in the principal on the securities paying down
+at a faster rate than principal on the receivables and, thereby,
+re-establishing the targeted level of overcollateralization.
+Under most circumstances, the amount of principal paid on the
+securities will be equal to the Regular Principal Distribution
+Amount. The Regular Principal Distribution Amount is the decline
+in the Pool Balance plus the required overcollateralization. The
+Regular Principal Distribution Amount will vary depending on the
+deficiency of overcollateralization the greater the
+deficiency, the greater the Regular Principal Distribution Amount
+ will be. In periods where there are substantial prepayments,
+late payments on Simple Interest Receivables or Realized Losses,
+(1) a Second Priority Principal Distribution Amount may be
+payable to the extent that the aggregate outstanding principal
+balance of the notes exceeds the remaining Pool Balance minus the
+ Yield Supplement Overcollateralization Amount or (2) a
+First Priority Principal Distribution Amount may be payable to
+the extent the aggregate outstanding principal balance of the
+Class A Notes and Variable Pay Term Notes exceeds the
+remaining Pool Balance minus the Yield Supplement
+Overcollateralization Amount. In each case, principal will be
+paid on the notes or, in the case of a First Priority Principal
+Distribution Amount, the Class A Notes and the Variable Pay
+Term Notes, prior to the payment of interest on the other
+securities in order to attempt to re-establish targeted levels of
+ overcollateralization.
+
+ 
+The amount of overcollateralization calculated to compensate for
+receivables with interest rates below 12% is represented by the
+Yield Supplement Overcollateralization Amount. The Yield
+Supplement Overcollateralization Amount will be calculated on the
+ Closing Date for the initial receivables sold to the trust on
+the Closing Date. On each Monthly Distribution Date during the
+Revolving Period, the Yield Supplement Overcollateralization
+Amount will be increased as described below to reflect the
+Additional Receivables to be sold to the trust on that Monthly
+Distribution Date.
+
+ 
+The portion of the Yield Supplement Overcollateralization Amount
+for the initial receivables sold to the trust on the Closing Date
+ will be calculated as the sum of the amount for each initial
+receivable equal to the excess, if any, of (1) the scheduled
+ payments due on such receivable for each future Collection
+Period discounted to present value as of the end of the preceding
+ Collection Period at the APR of such receivable, over
+(2) the scheduled payments due on the receivable for each
+future Collection Period discounted to present value as of the
+end of the preceding Collection Period at 12%. The Yield
+Supplement Overcollateralization Amounts for the initial
+receivables are calculated with the assumption that future
+scheduled payments on the receivables will be made on their
+scheduled due dates without any delays, defaults or prepayments.
+
+ 
+The Yield Supplement Overcollateralization Amount will be
+increased upon the purchase of each pool of Additional
+Receivables. The amount of each such increase will be calculated
+based on the YSOA Factor determined on the Closing Date for each
+month after the Initial Cut-off Date. The YSOA Factor for each
+future Monthly Distribution Date will be calculated by dividing
+(1) the Yield Supplement Overcollateralization Amount
+relating to such Monthly Distribution Date by (2) the
+aggregate principal balance of the receivables as of the Initial
+Cut-off Date. The Yield Supplement Overcollateralization Amount
+for each Monthly Distribution Date will then be
+
+86
+
+Table of Contents
+
+recalculated upon each purchase of Additional Receivables by
+(1) multiplying (A) the YSOA Factors corresponding
+ to the number of months that have elapsed since the Subsequent
+Cut-off Date for that pool of Additional Receivables by
+(B) the aggregate principal balance of the Additional
+Receivables as of the applicable Subsequent Cut-off Date and
+(2) adding the results to the applicable Yield Supplement
+Overcollateralization Amounts (beginning with the Yield
+Supplement Overcollateralization Amount applicable to the Monthly
+ Distribution Date on which such Additional Receivables were
+purchased).
+
+Accumulation Account
+
+ 
+Deposits During the Revolving Period. Under the
+Receivables Transfer and Servicing Agreements, the servicer will
+establish the Accumulation Account with the indenture trustee. On
+ each Monthly Distribution Date during the Revolving Period, the
+indenture trustee will pay to the seller amounts on deposit in
+the Principal Distribution Account in consideration for
+Additional Receivables sold to the trust by the seller on such
+Monthly Distribution Date. If the amounts of eligible Additional
+Receivables that are available for sale to the trust are
+insufficient for the reinvestment of amounts allocable to
+principal, any unreinvested principal amounts shall be deposited
+to the Accumulation Account and shall be invested in Permitted
+Investments until the next Monthly Distribution Date, on which
+date such amounts may be withdrawn and applied to purchase
+Additional Receivables. Up to 1.00% of the aggregate balance of
+the pool of receivables (calculated as though all amounts were
+reinvested and excluding any investment earnings) can be held in
+the Accumulation Account during the Revolving Period without
+triggering an Early Amortization Event.
+
+ 
+Deposits During the Amortization Period. If, on any
+ Monthly Distribution Date during the Amortization Period, there
+are Class A Notes outstanding, no Variable Pay Term Notes
+outstanding, no Subclass of Class A Notes has reached or
+passed its Targeted Scheduled Distribution Date and has not been
+paid in full, and no Early Amortization Event has occurred,
+amounts that would otherwise be allocable to principal payments
+on the notes and certificates will instead be deposited into the
+Accumulation Account. No funds will be deposited in the
+Accumulation Account (1) on any Monthly Distribution Date
+after the notes have been accelerated following the occurrence of
+ an Event of Default, unless the event of default has been cured
+or waived, or after the occurrence of an Early Amortization
+Event, (2) on any Monthly Distribution Date on or after the
+date on which the Class A Notes and Variable Pay Term Notes
+have been paid in full, (3) on any Monthly Distribution Date
+ on which any Variable Pay Term Note is outstanding until such
+Variable Pay Term Note is paid in full or (4) on any Monthly
+ Distribution Date on which principal is payable on any Subclass
+or Subclasses of Class A Notes. The Accumulation Account
+will be an Eligible Deposit Account and amounts on deposit in the
+ Accumulation Account will be invested in Permitted Investments.
+
+ 
+As further described in Reserve Account 
+ below, if a deposit is made into the Accumulation Account, the
+required balance of the Reserve Account will be increased to
+compensate in part for any negative carry between the
+ interest earned on the Permitted Investments and the interest
+payable on the notes and certificates and the Servicing Fee.
+
+VPTN Proceeds Account
+
+ 
+The indenture trustee will establish the VPTN Proceeds Account
+for the benefit of the holders of the Class A Notes. On each
+ date of issuance of a Variable Pay Term Note, the indenture
+trustee will instruct the purchasers of Variable Pay Term Notes
+to deposit the purchase price in the VPTN Proceeds Account on or
+before the corresponding Monthly Distribution Date. Any Servicer
+Liquidity Advances shall also be deposited into the VPTN Proceeds
+ Account. Amounts on deposit in the VPTN Proceeds Account shall
+be applied to the payment of principal on the related Subclass or
+ Subclasses of Class A Notes sequentially according to their
+ lowest numerical designation until all Class A Notes are
+paid in full.
+
+87
+
+Table of Contents
+
+Class A Quarterly Interest Funding Account
+
+ 
+The indenture trustee will establish the Class A Quarterly
+Interest Funding Account for the benefit of the holders of the
+Class A Notes. On each Monthly Distribution Date until the
+Class A Notes are paid in full, the indenture trustee will
+deposit the Class A Quarterly Interest Funding Account
+Deposit Amount into the Class A Quarterly Interest Funding
+Account to the extent that funds are available.
+
+ 
+Amounts on deposit in the Class A Quarterly Interest Funding
+ Account will be invested in Permitted Investments with maturity
+dates no later than the next Monthly Distribution Date.
+
+ 
+On each Quarterly Payment Date, the indenture trustee will apply
+the funds on deposit in the Class A Quarterly Interest
+Funding Account after giving effect to the deposits and
+withdrawals with respect to the Quarterly Pay Floating Rate
+Class A Note Interest Rate Swaps and the deposits made
+pursuant to clause (3) under Priority of
+Payments as follows:
+
+ 
+ 
+ 
+
+ 
+ (1) 
+ 
+ to pay to the holders of each Subclass of Quarterly Pay
+ Class A Notes their pro rata share of the amounts on
+ deposit in the Class A Quarterly Interest Funding Account
+ according to the amount of interest due to each Subclass to the
+ extent necessary to pay the full amount of interest due and
+ payable on each such Subclass; and
+
+ 
+
+ 
+ (2) 
+ 
+ to deposit any amounts remaining (which will generally be equal
+ to the amount of earnings on Permitted Investments in the
+ account) into the Collection Account to be applied on such
+ Monthly Distribution Date in accordance with the priorities set
+ forth above under Priority of Payments .
+
+Reserve Account
+
+ 
+Under the Receivables Transfer and Servicing Agreements, the
+seller will establish the Reserve Account with the indenture
+trustee. The Reserve Account will be held in the name of the
+indenture trustee for the benefit of the holders of the notes and
+ certificates. To the extent that amounts on deposit in the
+Reserve Account are depleted, the holders of the notes and
+certificates will have no recourse to the assets of the seller or
+ servicer as a source of payment.
+
+ 
+Deposits to the Reserve Account. The Reserve
+Account will be funded by an initial deposit by the seller on the
+ Closing Date in the amount of $14,997,999.97, which equals 0.50%
+ of the initial Pool Balance (the Reserve Initial
+Deposit ). On each Monthly Distribution Date, the
+indenture trustee will withdraw funds from the Collection Account
+ to the extent available after payment of the Total Required
+Payment to the extent necessary to increase the balance in the
+Reserve Account to the Specified Reserve Balance. See
+ Distributions Priority of Payments 
+ above.
+
+ 
+In addition, if a deposit is to be made into the Accumulation
+Account on any Monthly Distribution Date or was made on any prior
+ Monthly Distribution Date, the Specified Reserve Balance will be
+ increased to compensate in part for any negative carry between
+the interest rates payable on the notes and certificates (and the
+ servicing fee) and the interest rate payable on Permitted
+Investments in the Accumulation Account in an amount equal to the
+ product of (i) the amount remaining on deposit in the
+Accumulation Amount after giving effect to any withdrawals or
+deposits on such Monthly Distribution Date, (ii) the
+weighted average interest rate of the securities (after giving
+effect to all principal payments on such Monthly Distribution
+Date) minus one-month LIBOR (determined as of the second London
+banking day prior to such Monthly Distribution Date) less 2.50%,
+and (iii) a fraction, which (x) if such Monthly
+Distribution Date occurs during the Revolving Period, the
+numerator of which is one and the denominator of which is 12, and
+ (y) if such Monthly Distribution Date occurs during the
+Amortization Period, the numerator of which is the number of
+Monthly Distribution Dates after such Monthly Distribution Date
+through and including the next Monthly Distribution Date that is
+a Targeted Scheduled Distribution Date for any Subclass of
+Class A Notes and the denominator of which is 12.
+
+88
+
+Table of Contents
+
+ 
+There is no assurance that these increases in the Specified
+Reserve Balance will be sufficient to compensate for any negative
+ carry or that there will be sufficient funds to deposit to the
+Reserve Account in the amount of such increase.
+
+ 
+Withdrawals from the Reserve Account. On each
+Monthly Distribution Date, the indenture trustee will withdraw
+from amounts on deposit in the Reserve Account, the Reserve
+Account Excess Amount, if any, and the amount of any shortfall
+between the Total Required Payment and Available Funds on such
+Monthly Distribution Date. The indenture trustee will withdraw
+from amounts on deposit in the Reserve Account on the Final
+Scheduled Distribution Date of any Class or Subclass of notes or
+certificates amounts necessary to pay in full such Class or
+Subclass of securities after giving effect to the Available Funds
+ and any amount withdrawn to pay a shortfall in the Total
+Required Payment as described in the preceding sentence. At no
+time, however, will amounts on deposit in the Reserve Account be
+available to pay principal of the Class A Notes on a
+Targeted Scheduled Distribution Date except to the extent of
+amounts withdrawn in respect of the portion of the Total Required
+ Payment consisting of a First Priority Principal Distribution
+Amount or a Second Priority Principal Distribution Amount. See
+ Distributions Deposits to the
+Collection Account and Determination of Available
+Collections above.
+
+ 
+In addition, the indenture trustee will withdraw amounts from the
+ Reserve Account on any Monthly Distribution Date to the extent
+that such amounts, together with the Available Funds for such
+Monthly Distribution Date and any amounts on deposit in the
+Class A Quarterly Interest Funding Account, would be
+sufficient to pay the sum of the Servicing Fee, all Net Swap
+Payments relating to the Variable Pay Term Notes Interest Rate
+Swap and the Monthly Pay Floating Rate Class A Note Interest
+ Rate Swaps, any swap termination payments, principal and
+interest on all outstanding notes and certificates and to deposit
+ the Class A Quarterly Interest Funding Account Deposit
+Amount into the Class A Quarterly Interest Funding Account.
+
+ 
+If the amounts on deposit in the Reserve Account on any Monthly
+Distribution Date, after giving effect to all other deposits,
+including the deposit described under clause (10) under 
+ Distributions Priority of
+Payments above, and withdrawals therefrom on such
+Monthly Distribution Date, is greater than the Specified Reserve
+Balance for such Monthly Distribution Date, the servicer will
+instruct the indenture trustee to distribute the Reserve Account
+Excess Amount to the seller. Upon any such distribution to the
+seller, neither the holders of the notes nor the holders of the
+certificates will have any rights in, or claim to, such amounts.
+
+ 
+Investments. Amounts on deposit in the Reserve
+Account will be invested by the indenture trustee at the
+direction of the seller in Permitted Investments and investment
+earnings (net of losses and investment expenses) therefrom will
+be deposited into the Reserve Account. Permitted Investments are
+generally limited to obligations or securities that mature on or
+before the next Monthly Distribution Date. However, to the extent
+ each Rating Agency rating the notes or certificates confirms
+that such actions will not adversely affect its ratings of the
+notes or certificates, funds in the Reserve Account may be
+invested in Permitted Investments that will not mature prior to
+the next Monthly Distribution Date and Permitted Investments will
+ not be sold to meet any shortfalls.
+
+ 
+Funds in the Reserve Account Will be Limited. 
+Amounts on deposit in the Reserve Account from time to time are
+available to:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ enhance the likelihood that you will receive the amounts due on
+ your notes; and
+
+ 
+
+ 
+ 
+ 
+ decrease the likelihood that you will experience losses on your
+ notes.
+
+ 
+However, the amounts on deposit in the Reserve Account are
+limited to the Specified Reserve Balance. If the amount required
+to be withdrawn from the Reserve Account to cover shortfalls in
+funds on deposit in the Collection Account exceeds the amount on
+deposit in the Reserve Account, a temporary shortfall in the
+amounts distributed to the holders of the notes could result. In
+addition, depletion of the Reserve Account ultimately could
+result in losses on your notes.
+
+89
+
+Table of Contents
+
+ 
+After making distributions which are ranked senior in priority,
+the trust will deposit amounts to the Reserve Account in order to
+ maintain the Specified Reserve Balance.
+
+ 
+After the payment in full, or the provision for such payment, of
+all accrued and unpaid interest on the notes and certificates and
+ the outstanding principal amount of the notes and certificates,
+any funds remaining on deposit in the Reserve Account, subject to
+ certain limitations, will be paid to the seller.
+
+Reports to Securityholders
+
+ 
+On or prior to each Monthly Distribution Date, the servicer or
+administrator will provide a statement (i) to the indenture
+trustee to be delivered to the noteholders, (ii) to the
+Luxembourg Paying Agent to be made available to the noteholders
+and (iii) to the owner trustee to be delivered to the
+certificateholders. Each statement will include (to the extent
+applicable) the following information for the related Monthly
+Distribution Date:
+
+ 
+ 
+ 
+
+ 
+ (1)
+ 
+ the amount allocable to interest for each class or Subclass of
+ notes and certificates, the amount allocable to each Subclass of
+ the Quarterly Pay Class A Notes to be deposited into the
+ Class A Quarterly Interest Funding Account and the amount to
+ be paid to each Subclass of Floating Rate Class A Notes
+ from amounts on deposit in the Class A Quarterly Interest
+ Funding Account;
+
+ 
+
+ 
+ (2)
+ 
+ (a) during the Revolving Period, the amount deposited to the
+ Principal Distribution Account, the amount applied from the
+ Principal Distribution Account to purchase Additional
+ Receivables, the amount applied from the Accumulation Account to
+ purchase Additional Receivables, and the aggregate principal
+ balance of the Additional Receivables and (b) during the
+ Amortization Period, the amount allocable to principal for each
+ class of notes and certificates, including the Class A
+ Percentage and Variable Pay Term Note Percentage thereof;
+
+ 
+
+ 
+ (3)
+ 
+ the amount of any withdrawals from the Reserve Account
+ (separately stated by purpose) and the Accumulation Account;
+
+ 
+
+ 
+ (4)
+ 
+ the Pool Balance as of the close of business on the last day of
+ the preceding Collection Period;
+
+ 
+
+ 
+ (5)
+ 
+ the Yield Supplement Overcollateralization Amount for such
+ Monthly Distribution Date;
+
+ 
+
+ 
+ (6)
+ 
+ the aggregate outstanding principal amount for each class of
+ notes and certificates and any related factors needed to compute
+ the principal amount outstanding of the notes or certificates,
+ each after giving effect to all payments reported under clauses
+ (1) and (2) above on such date;
+
+ 
+
+ 
+ (7)
+ 
+ the amount of the Servicing Fee and any unpaid Servicing Fee for
+ the related Collection Period;
+
+ 
+
+ 
+ (8)
+ 
+ the amount of the aggregate Realized Losses, if any, for the
+ related Collection Period;
+
+ 
+
+ 
+ (9)
+ 
+ previously due and unpaid interest payments (plus interest
+ accrued on such unpaid interest), if any, on the notes and the
+ certificates;
+
+ 
+ 
+ 
+
+ 
+ (10) 
+ 
+ previously due and unpaid principal payments (plus interest
+ accrued on such unpaid principal), if any, on the notes and the
+ certificates;
+
+ 
+
+ 
+ (11) 
+ 
+ the aggregate Purchase Amounts for receivables, if any, that were
+ repurchased in the related Collection Period;
+
+ 
+
+ 
+ (12) 
+ 
+ the balance of the Reserve Account on such date, after giving
+ effect to changes therein on such date;
+
+90
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ (13) 
+ 
+ the Specified Overcollateralization Amount on such date, before
+ and after giving effect to changes therein on such date;
+
+ 
+
+ 
+ (14) 
+ 
+ the amount of Servicer Collections Advances on such date;
+
+ 
+
+ 
+ (15) 
+ 
+ for the first Monthly Distribution Date that is on or immediately
+ following the end of the Revolving Period, the amount remaining
+ in the Principal Distribution Account that has not been used to
+ fund the purchase of Additional Receivables;
+
+ 
+
+ 
+ (16) 
+ 
+ for any Targeted Scheduled Distribution Date, and any other
+ Monthly Distribution Date which occurs after a Targeted Scheduled
+ Distribution Date on which the related Subclass of Class A
+ Notes has not been paid in full, the aggregate principal amount
+ of any Variable Pay Term Notes to be issued on such date;
+
+ 
+
+ 
+ (17) 
+ 
+ the amount, if any, to be deposited in the Accumulation Account
+ and the balance of the Accumulation Account on such date, after
+ giving effect to changes therein on such date;
+
+ 
+
+ 
+ (18) 
+ 
+ whether an Early Amortization Event has occurred;
+
+ 
+
+ 
+ (19) 
+ 
+ if such Monthly Distribution Date is a Targeted Scheduled
+ Distribution Date, whether the related Subclass of Class A
+ Notes will be paid in full; and
+
+ 
+
+ 
+ (20) 
+ 
+ if such Monthly Distribution Date occurs after a Targeted
+ Scheduled Distribution Date on which the related Subclass of
+ Class A Notes has not been paid in full, whether such
+ Subclass remains outstanding.
+
+ 
+Each amount set forth under clauses (1), (7), (9) and (10)
+and, during the Amortization Period, subclause (b) of
+clause (2), with respect to the notes or the certificates
+will be expressed as a dollar amount per $1,000 of the initial
+principal amount of such notes or the initial Certificate Balance
+ of such certificates, as applicable.
+
+ 
+Reports and notices to the holders of the notes will be given by
+first-class mail, postage prepaid, to the registered holders of
+such notes or certificates at their address appearing in the note
+ register and will be available at the office of the Luxembourg
+Paying Agent. In addition, for so long as the Class A Notes
+or the Class B Notes are outstanding and listed on the
+Luxembourg Stock Exchange and as the rules of the exchange
+require, notices to the holders of such notes will be given by
+publication in a newspaper of general circulation in Luxembourg.
+Such publication notice, if required, is expected to be made in
+the Luxemburger Wort.
+
+ 
+Within the prescribed period of time for federal income tax
+reporting purposes after the end of each calendar year during the
+ term of the trust, the owner trustee will mail to each person
+who at any time during such calendar year has been a
+securityholder with respect to the trust and received any payment
+ thereon a statement containing certain information for the
+purposes of such securityholder s preparation of federal
+income tax returns. See Federal Income Tax
+Matters .
+
+Certain Covenants of the Trust Under the Indenture
+
+ 
+Restrictions on Consolidation or Merger of Trust.
+To protect the assets of the trust and the interests of the
+noteholders, the indenture will generally prohibit the
+consolidation or merger of the trust with another entity. The
+trust will only be allowed to consolidate or merge if all of the
+following has occurred: (i) the surviving entity is
+organized under U.S. laws, (ii) the entity expressly assumes
+ the trust s obligation under the indenture, (iii) no
+Event of Default (or with notice or lapse of time or both would
+become) will occur and be continue as a result of the
+consolidation or merger, (iv) the rating of the notes and
+the certificates will not be reduced or withdrawn by the Rating
+Agencies as a result of the consolidation or merger, (v) the
+ trust has received an opinion of counsel stating that such
+consolidation or merger will have no material
+
+91
+
+Table of Contents
+
+adverse tax consequence to the trust or any holder of notes or
+certificates, (vi) actions to maintain the lien and security
+ interest created by the indenture have been taken, and
+(vii) the trust has received an opinion of counsel and
+officer s certificate stating that the consolidation or
+merger satisfies all requirements under the indenture.
+
+ 
+Negative Covenants. The trust will make certain
+negative covenants that are intended to protect the assets and
+interests of the noteholders. The trust will covenant, among
+other things, not to (i) dispose of its assets, except as
+expressly permitted, (ii) take a credit or deduction on the
+amounts payable on the notes (other than amounts withheld for tax
+ or state law purposes) or assert a claim against the holders of
+the notes for payment of taxes, (iii) dissolve or liquidate
+the trust, (iv) subordinate or impair the lien created under
+ the indenture, (v) allow the indenture to become invalid
+(vi) release the obligations created under the indenture,
+except as expressly permitted, or (vii) allow the creation
+of any lien or other encumbrance which would burden the assets or
+ proceeds of the trust, except as may be allowed under the
+indenture.
+
+ 
+The trust will not incur, assume or guarantee any indebtedness
+other than indebtedness incurred under the related notes and
+indenture, the related certificates and as a result of any
+Servicer Collections Advances or Servicer Liquidity Advances made
+ to it by the servicer or otherwise in accordance with the
+transaction documents.
+
+The Indenture Trustee
+
+ 
+The Chase Manhattan Bank, a New York corporation, will be the
+indenture trustee under the indenture. The principal trust
+offices of The Chase Manhattan Bank are located at 450 West
+33rd Street, New York, New York 10001.
+
+ 
+The indenture trustee may resign at any time, in which event the
+trust will be obligated to appoint a successor indenture trustee.
+ The trust will remove the indenture trustee if the indenture
+trustee ceases to be eligible under the indenture or if the
+indenture trustee becomes insolvent. In such circumstances, the
+trust will be obligated to appoint a successor indenture trustee
+for the notes of the trust. In addition, a majority of the
+Controlling Class of notes may remove the indenture trustee
+without cause and may appoint a successor indenture trustee. Any
+resignation or removal of the indenture trustee and appointment
+of a successor indenture trustee for the notes of the trust does
+not become effective until acceptance of the appointment by the
+successor indenture trustee.
+
+SALE AND SERVICING OF RECEIVABLES
+
+Sale and Assignment of Receivables
+
+ 
+Sale and Assignment of Receivables. Before the
+trust issues the securities, Ford Credit will sell and assign to
+the seller under the purchase agreement, without recourse, its
+entire interest in the receivables, including its security
+interests in the related financed vehicles in exchange for the
+net proceeds received by the seller from the sale of the notes
+and the certificates. When the trust issues the securities, the
+seller will sell and assign to the trust under the Receivables
+Transfer and Servicing Agreements, without recourse, the
+seller s entire interest in the receivables, including its
+security interests in the related financed vehicles, in exchange
+for the notes and certificates issued by the trust. Each such
+receivable will be identified in a schedule to the Receivables
+Transfer and Servicing Agreements. The indenture trustee will not
+ independently verify the existence and eligibility of any
+receivables. The indenture trustee will, concurrently with the
+sale and assignment, execute and deliver the notes and the owner
+trustee will execute and deliver the certificates to the seller
+in exchange for the receivables. Additional Receivables will be
+sold by Ford Credit to the seller and by the seller to the trust
+on Monthly Distribution Dates during the Revolving Period.
+
+92
+
+Table of Contents
+
+ 
+Representations and Warranties. In the purchase
+agreement, Ford Credit will represent and warrant to the seller,
+and in the Receivables Transfer and Servicing Agreements the
+seller will represent and warrant to the trust, among other
+things, that at the Closing Date and on the date of each transfer
+ of Additional Receivables:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the information provided about the related receivables is correct
+ in all material respects;
+
+ 
+
+ 
+ 
+ 
+ the obligor on each related receivable had obtained or agreed to
+ obtain physical damage insurance in accordance with Ford
+ Credit s normal requirements;
+
+ 
+
+ 
+ 
+ 
+ the related receivables are free and clear of all security
+ interests, liens, charges, and encumbrances (such representation
+ and warranty will be made to the best of its knowledge with
+ respect to mechanic s liens and the like relating to each
+ financed vehicle) and no setoffs, defenses, or counterclaims
+ against it have been asserted or threatened;
+
+ 
+
+ 
+ 
+ 
+ each of the related receivables is or will be secured by a first
+ priority perfected security interest in the financed vehicle in
+ favor of Ford Credit or PRIMUS; and
+
+ 
+
+ 
+ 
+ 
+ each related receivable, at the time it was originated, complied,
+ and at the date of issuance of the notes and certificates and at
+ each transfer date of each Additional Receivable complies in all
+ material respects with applicable federal and state laws,
+ including consumer credit, truth in lending, equal credit
+ opportunity, and disclosure laws.
+
+ 
+If there is a breach of representation or warranty then the
+seller is obligated to repurchase the related receivable. As of
+the last day of the second (or, if the seller elects, the first)
+Collection Period following the discovery by or notice to the
+seller of a breach of any representation or warranty of the
+seller which materially and adversely affects the interests of
+the trust in any receivable, the seller, unless the breach has
+been cured, will purchase such receivable from the trust. Ford
+Credit will then be required to purchase such receivable from the
+ seller, at a price equal to the Purchase Amount. The purchase
+obligation will constitute the sole remedy available to the
+noteholders, certificateholders and the indenture trustee in
+respect of the trust for any such uncured breach.
+
+Accounts Established by the Servicer
+
+ 
+Accounts of the Trust. In general, the servicer
+will be permitted to retain collections on the receivables until
+the Business Day preceding any Monthly Distribution Date.
+However, the servicer will be required to remit collections
+received with respect to the receivables not later than the
+second Business Day after receipt to the Collection Account
+(1) if there is an Event of Servicing Termination,
+(2) if Ford Credit is no longer the servicer or (3) if
+Ford Credit s short-term rating is no longer rated P-1 by
+Moody s, A-1 by S P or F-1 by Fitch. The following
+accounts will be established:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the servicer will establish the Collection Account with the
+ indenture trustee in the name of the indenture trustee on behalf
+ of the holders of the notes and certificates and the swap
+ counterparty;
+
+ 
+
+ 
+ 
+ 
+ the servicer will establish the Principal Distribution Account in
+ the name of the indenture trustee within the Collection Account
+ on behalf of the holders of the notes and certificates and the
+ swap counterparty;
+
+ 
+
+ 
+ 
+ 
+ the servicer will establish the Certificate Interest Distribution
+ Account in the name of the owner trustee;
+
+ 
+
+ 
+ 
+ 
+ the servicer will establish the Certificate Principal
+ Distribution Account in the name of the owner trustee;
+
+ 
+
+ 
+ 
+ 
+ the servicer will establish the VPTN Proceeds Account with the
+ indenture trustee in the name of the indenture trustee on behalf
+ of the holders of the Class A Notes;
+
+93
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the servicer will establish the Class A Quarterly Interest
+ Funding Account with the indenture trustee in the name of the
+ indenture trustee on behalf of the holders of the Class A
+ Notes;
+
+ 
+
+ 
+ 
+ 
+ the servicer will establish the Accumulation Account in the name
+ of the indenture trustee on behalf of the holders of the notes
+ and certificates; and
+
+ 
+
+ 
+ 
+ 
+ the servicer will establish and will maintain the Reserve Account
+ in the name of the indenture trustee on behalf of the holders of
+ the notes and certificates and the swap counterparty.
+
+ 
+The trust will pledge the Collection Account, the Principal
+Distribution Account, the Accumulation Account and the Reserve
+Account to the indenture trustee for the benefit of the holders
+of the notes and the swap counterparties. The VPTN Proceeds
+Account and the Class A Quarterly Interest Funding Account
+will be pledged by the trust to the indenture trustee for the
+benefit of the holders of the Class A Notes.
+
+ 
+Payahead Account. The servicer also will establish
+and will maintain with the indenture trustee the Payahead
+Account. Amounts credited to the Payahead Account are held for
+the benefit of obligors who have made a payment before its due
+date and are applied on the due date. The Payahead Account will
+not be included in the property of the trust.
+
+Servicing of Receivables
+
+ 
+General. Under the Receivables Transfer and
+Servicing Agreements, the servicer will service and administer
+the receivables held by the trust and, as custodian on behalf of
+the trust, will maintain possession as the trustee s agent
+of the retail installment sale contracts and any other documents
+relating to such receivables. To assure uniform quality in
+servicing both the receivables and the servicer s own
+portfolio of receivables, as well as to facilitate servicing and
+save administrative costs, the installment sale contracts and
+other documents relating thereto will not be physically
+segregated from other similar documents that are in the
+servicer s possession or otherwise stamped or marked to
+reflect the transfer to the trust so long as Ford Credit is
+servicing the related receivables. However, Uniform Commercial
+Code financing statements reflecting the sale and assignment of
+the receivables by Ford Credit to the seller and by the seller to
+ the trust, will be filed, and the servicer s accounting
+records and computer systems will be marked to reflect such sale
+and assignment. Because the receivables will remain in the
+servicer s possession and will not be stamped or otherwise
+marked to reflect the assignment to the trust if a subsequent
+purchaser were to obtain physical possession of such receivables
+without knowledge of the assignment, the trust s interest in
+ the receivables could be defeated. See Certain Legal
+Aspects of the Receivables Security Interests in
+Vehicles. 
+
+ 
+Servicing Procedures of the Servicer. Ford Credit
+will act as servicer and make reasonable efforts to collect all
+payments due with respect to the receivables held by the trust
+and will use the same collection procedures that it follows with
+respect to automotive retail installment sale contracts that it
+continues to own, in a manner consistent with the Receivables
+Transfer and Servicing Agreements.
+
+ 
+Consistent with its normal procedures, the servicer may, in its
+discretion, arrange with the obligor on a receivable to defer or
+modify the payment schedule. Some of such arrangements may
+require the servicer to purchase the receivable while others may
+result in the servicer making Servicer Collections Advances with
+respect to the receivable. The servicer may be obligated to
+purchase or make Servicer Collections Advances with respect to
+any receivable if, among other things, it extends the date for
+final payment by the obligor of such receivable beyond six months
+ past the last day of the Collection Period preceding the latest
+date that a receivable matures, changes the APR or the total
+amount or number of scheduled payments of such receivable or
+fails to maintain a perfected security interest in the related
+financed vehicle. If
+
+94
+
+Table of Contents
+
+the servicer determines that eventual payment in full of a
+receivable is unlikely, the servicer will follow its normal
+practices and procedures to realize upon the receivable,
+including the repossession and disposition of the financed
+vehicle securing the receivable at a public or private sale, or
+the taking of any other action permitted by applicable law. Ford
+Credit may from time to time take additional security securing
+payment of any receivable held by the trust.
+
+ 
+Collections May Be Retained by the Servicer During the
+Collection Period; Certain Applications of Collections. 
+So long as Ford Credit is the servicer and provided that
+(1) there exists no Event of Servicing Termination and
+(2) each other condition to making monthly deposits as may
+be required by the Receivables Transfer and Servicing Agreements
+is satisfied, the servicer may retain all payments on the
+receivables received from obligors and all proceeds of the
+receivables collected during a Collection Period until the
+Business Day preceding the applicable Monthly Distribution Date.
+However, if such conditions are not met, the servicer will be
+required to deposit such amounts into the related collection
+account not later than the second Business Day after receipt. The
+ servicer or the seller, as the case may be, will remit the
+aggregate Purchase Amount of any receivables to be purchased from
+ the trust to the Collection Account on or prior to the Business
+Day preceding the applicable Monthly Distribution Date. Pending
+deposit into the Collection Account, collections may be employed
+by the servicer at its own risk and for its own benefit and will
+not be segregated from its own funds. For further discussion
+of servicer retention of collections, see Risk
+Factors You May Suffer Losses on Your Securities
+Because the Servicer Will Hold Collections and Commingle Them
+with its Own Funds .
+
+ 
+Collections on a receivable made during a Collection Period which
+ are not late fees, prepayment charges, or certain other similar
+fees or charges shall be applied first to any outstanding
+Servicer Collections Advances made by the servicer with respect
+to such receivable and then to the scheduled payment. To the
+extent that collections on an Actuarial Receivable during a
+Collection Period exceed the outstanding Actuarial Advances and
+the scheduled payment on such Actuarial Receivable, the
+collections shall be applied to prepay the Actuarial Receivable
+in full. If the collections are insufficient to prepay the
+Actuarial Receivable in full, they generally shall be treated as
+Payaheads until such later Collection Period as such Payaheads
+may be transferred to the Collection Account and applied either
+to the scheduled payment or to prepay the Actuarial Receivable in
+ full.
+
+ 
+Servicer May Make Advances. To the extent the
+collections on an Actuarial Receivable for a Collection Period
+are less than the scheduled payment, the amount of Payaheads made
+ on such Actuarial Receivable not previously applied, if any,
+with respect to such Actuarial Receivable shall be applied by the
+ servicer to the extent of the shortfall. To the extent of any
+remaining shortfall, the servicer may make an Actuarial Advance.
+The servicer will be obligated to make an Actuarial Advance in
+respect of an Actuarial Receivable only to the extent that the
+servicer, in its sole discretion, expects to recoup the Actuarial
+ Advance from the related obligor, the Purchase Amount or
+Liquidation Proceeds. The servicer will deposit Actuarial
+Advances in the Collection Account on or prior to the Business
+Day preceding the applicable Monthly Distribution Date. The
+servicer will be entitled to recoup its Actuarial Advances from
+subsequent payments by or on behalf of the obligor, collections
+of Liquidation Proceeds and payment of any related Purchase
+Amount; or, upon the determination that reimbursement from the
+preceding sources is unlikely, will be entitled to recoup its
+Actuarial Advances from collections from other receivables.
+
+ 
+On or before each applicable Monthly Distribution Date, the
+servicer shall deposit into the Collection Account an amount
+equal to the Simple Interest Advance. If the Simple Interest
+Advance is a negative number, an amount equal to such amount
+shall be paid to the servicer in reimbursement of outstanding
+Simple Interest Advances. In addition, in the event that a Simple
+ Interest Receivable becomes a Liquidated Receivable, the amount
+of accrued and unpaid interest thereon (but not including
+interest for the then current Collection Period) shall be
+withdrawn from the Collection Account and paid to the servicer in
+ reimbursement of outstanding Simple
+
+95
+
+Table of Contents
+
+Interest Advances. No advances of principal will be made with
+respect to Simple Interest Receivables.
+
+ 
+In the event that an obligor shall prepay a receivable in full,
+if the related contract did not require such obligor to pay a
+full month s interest for the month of prepayment, at the
+APR, the servicer will advance the amount of such interest. The
+servicer will not be entitled to recoup any such advance. The
+servicer may instruct the indenture trustee to withdraw such
+Servicer Collections Advances instead from the reserve account
+provided that the servicer within two Business Days replaces in
+the reserve account any funds so used.
+
+ 
+Compensation Payable to the Servicer. The servicer
+is entitled to receive the Servicing Fee on each Monthly
+Distribution Date. The Servicing Fee, together with any portion
+of the Servicing Fee that remains unpaid from prior Monthly
+Distribution Dates, will be payable on each Monthly Distribution
+Date. The Servicing Fee will be paid only to the extent of the
+funds on deposit in the Collection Account with respect to the
+Collection Period preceding such Monthly Distribution Date,
+including funds, if any, deposited into the Collection Account
+from the Reserve Account and the Payahead Account. The servicer
+also is entitled to receive the Supplemental Servicing Fee.
+
+ 
+The Servicing Fee and the Supplemental Servicing Fee are intended
+ to compensate the servicer for performing the functions of a
+third party servicer of the receivables as an agent for their
+beneficial owner, including collecting and posting all payments,
+responding to inquiries of obligors on the receivables,
+investigating delinquencies, sending payment coupons to obligors,
+ reporting federal income tax information to obligors, paying
+costs of collections, and policing the collateral. The fees will
+also compensate the servicer for administering the Receivables
+Pool, including making advances, accounting for collections,
+furnishing monthly and annual statements to the owner trustee and
+ indenture trustee with respect to distributions, and generating
+federal income tax information for the trust. The fees also will
+reimburse the servicer for certain taxes, the fees of the owner
+trustee, Delaware trustee and indenture trustee, accounting fees,
+ outside auditor fees, data processing costs, and other costs
+incurred in connection with administering the receivables.
+
+ 
+Servicer Allowed to Make Net Deposits. As an
+administrative convenience and for so long as certain conditions
+are satisfied (see Collections May Be Retained by
+ the Servicer During the Collection Period; Certain Applications
+of Collections above), the servicer will be permitted
+to make the deposit of collections, aggregate Servicer
+Collections Advances and Purchase Amounts for the trust for or
+with respect to the related Collection Period, net of
+distributions to the servicer as reimbursement of Servicer
+Collections Advances or payment of fees to the servicer with
+respect to such Collection Period. Similarly, the servicer may
+cause to be made a single, net transfer from the collection
+account to any related payahead account, or vice versa.
+The servicer, however, will account to the indenture trustee, the
+ noteholders and the certificateholders as if all deposits,
+distributions, and transfers were made individually.
+
+ 
+Evidence as to Compliance of the Servicer. The
+Receivables Transfer and Servicing Agreements will provide that a
+ firm of independent certified public accountants will furnish to
+ the indenture trustee annually a statement as to compliance by
+the servicer during the preceding twelve months (or, in the case
+of the first such statement, from the Closing Date) with certain
+standards relating to the servicing of the receivables, the
+servicer s accounting records and computer files with
+respect thereto and certain other matters.
+
+ 
+The Receivables Transfer and Servicing Agreements will also
+provide for delivery to the indenture trustee substantially
+simultaneously with the delivery of such accountants 
+statement referred to above, of a certificate signed by an
+officer of the servicer stating that the servicer has fulfilled
+its obligations under the Receivables Transfer and Servicing
+Agreements throughout the preceding twelve months (or, in the
+case of the first such certificate, from the Closing Date) or, if
+ there has been a default in the fulfillment of any such
+obligation, describing each such default. The servicer has agreed
+ to give the owner trustee and indenture trustee notice of
+certain Events
+
+96
+
+Table of Contents
+
+of Servicing Termination under the Receivables Transfer and
+Servicing Agreements. Copies of such statements and certificates
+may be obtained by securityholders by a request in writing
+addressed to the indenture trustee.
+
+ 
+Certain Other Matters Regarding the Servicer. The
+Receivables Transfer and Servicing Agreements will provide that
+Ford Credit may not resign from its obligations and duties as
+servicer thereunder, except upon a determination that Ford
+Credit s performance of such duties is no longer permissible
+ under applicable law. No such resignation will become effective
+until a successor servicer has assumed Ford Credit s
+servicing obligations and duties under the Receivables Transfer
+and Servicing Agreements.
+
+ 
+The Receivables Transfer and Servicing Agreements will further
+provide that neither the servicer nor any of its directors,
+officers, employees and agents will be under any liability to the
+ trust, the noteholders or the certificateholders for taking any
+action or for refraining from taking any action under the
+Receivables Transfer and Servicing Agreements or for errors in
+judgment; except that neither the servicer nor any such person
+will be protected against any liability that would otherwise be
+imposed by reason of willful misfeasance, bad faith or negligence
+ in the performance of the servicer s duties thereunder or
+by reason of reckless disregard of its obligations and duties
+thereunder. In addition, the Receivables Transfer and Servicing
+Agreements will provide that the servicer is under no obligation
+to appear in, prosecute or defend any legal action that is not
+incidental to the servicer s servicing responsibilities
+under the Receivables Transfer and Servicing Agreements and that,
+ in its opinion, may cause it to incur any expense or liability.
+The servicer may, however, undertake any reasonable action that
+it may deem necessary or desirable in respect of the Receivables
+Transfer and Servicing Agreements, the rights and duties of the
+parties thereto, and the interests of the securityholders
+thereunder. In such event, the legal expenses and costs of such
+action and any liability resulting therefrom will be expenses,
+costs, and liabilities of the servicer, and the servicer will not
+ be entitled to be reimbursement.
+
+ 
+Under the circumstances specified in the Receivables Transfer and
+ Servicing Agreements, any entity into which the servicer may be
+merged or consolidated, or any entity resulting from any merger
+or consolidation to which the servicer is a party, or any entity
+succeeding to the business of the servicer or, with respect to
+its obligations as servicer, any corporation 50% or more of the
+voting stock of which is owned, directly or indirectly, by Ford
+Motor Company, which corporation or other entity in each of the
+foregoing cases assumes the obligations of the servicer, will be
+the successor of the servicer under the Receivables Transfer and
+Servicing Agreements. For as long as Ford Credit is the servicer,
+ it may at any time subcontract some or substantially all of its
+duties as servicer under the Receivables Transfer and Servicing
+Agreements to any corporation more than 50% of the voting stock
+of which is owned, directly or indirectly, by Ford Motor Company
+and the servicer may at any time perform certain specific duties
+as servicer through other subcontractors.
+
+ 
+Events of Servicing Termination. Events of
+ Servicing Termination under the Receivables Transfer
+and Servicing Agreements will consist of:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ any failure by the servicer or the seller, as the case may be, to
+ deliver to the indenture trustee for distribution to the
+ securityholders or for deposit in the Trust Accounts, the
+ Certificate Interest Distribution Account or the Certificate
+ Principal Distribution Account, any required payment, which
+ failure continues unremedied for three Business Days after
+ written notice from the indenture trustee is received by the
+ servicer or the seller, as the case may be, or after discovery by
+ an officer of the servicer or the seller, as the case may be;
+
+ 
+
+ 
+ 
+ 
+ any failure by the servicer or the seller, as the case may be,
+ duly to observe or perform in any material respect any other
+ covenant or agreement in the Receivables Transfer and Servicing
+ Agreements, which failure materially and adversely affects the
+ rights of the
+
+97
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ noteholders or the certificateholders and which continues
+ unremedied for 90 days after the giving of written notice of
+ such failure (A) to the servicer or the seller, as the case
+ may be, by the indenture trustee or (B) to the servicer,
+ the seller and the indenture trustee by holders of notes or
+ certificates, as applicable, of not less than 25% in principal
+ amount of the Controlling Class of notes (or, if no notes are
+ outstanding, 25% by Certificate Balance of the Controlling Class
+ of certificates);
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ certain events of bankruptcy, insolvency or similar proceedings
+ or the winding up or liquidation of the seller s or
+ servicer s affairs which have continued unstayed and in
+ effect for a period of sixty (60) consecutive days; and
+
+ 
+
+ 
+ 
+ 
+ the consent by the servicer or seller to the appointment of a
+ conservator or receiver in any insolvency or similar proceedings,
+ or the servicer shall admit in writing its inability to pay its
+ debts generally as they become due, file a petition for
+ insolvency or reorganization, make an assignment for the benefits
+ of its creditors, or voluntarily suspend payment of its
+ obligations or become insolvent;
+
+ 
+Rights Upon Event of Servicing Termination. If an
+Event of Servicing Termination occurs, the indenture trustee or
+holders of not less than a majority of the principal amount of
+the Controlling Class of notes (or, if no notes are outstanding,
+the owner trustee or a majority of the Certificate Balance of the
+ Controlling Class of certificates) may remove the servicer
+without the consent of any of the other securityholders,
+whereupon a successor servicer appointed by the indenture trustee
+ will succeed to all the responsibilities, duties and liabilities
+ of the servicer under the Receivables Transfer and Servicing
+Agreements and will be entitled to similar compensation
+arrangements. For further discussion of the rights of
+noteholders and certificateholders upon an Event of Servicing
+Termination, see Risk Factors the Controlling
+Class Controls Removal of the Servicer upon a Default on its
+Servicing Obligations .
+
+ 
+If, however, a bankruptcy trustee or similar official has been
+appointed for the servicer, and no Event of Servicing Termination
+ other than such appointment has occurred, such bankruptcy
+trustee or official may have the power to prevent the indenture
+trustee, the noteholders or the certificateholders from effecting
+ a transfer of servicing. In the event that the indenture trustee
+ is legally unable to act as servicer, it may appoint, or
+petition a court of competent jurisdiction for the appointment
+of, a successor with a net worth of at least $100,000,000 and
+whose regular business includes the servicing of motor vehicle
+receivables. The indenture trustee may make such arrangements for
+ compensation to be paid, which in no event may be greater than
+the servicing compensation to the servicer under the Receivables
+Transfer and Servicing Agreements.
+
+ 
+Waiver of Past Events of Servicing Termination. If
+an Event of Servicing Termination occurs, a majority of the
+principal amount of the Controlling Class of notes (or, if no
+notes are outstanding, a majority of the Certificate Balance of
+the Controlling Class of certificates), subject to the exceptions
+ provided in the Receivables Transfer and Servicing Agreements,
+may waive any Event of Servicing Termination except for a failure
+ to make any required deposits to or payments from any account,
+without the consent of any of the other securityholders. The
+certificateholders will not have the right to determine whether
+any Event of Servicing Termination should be waived until the
+notes have been paid in full.
+
+Other Provisions of the Receivables Transfer and Servicing
+Agreements
+
+ 
+Termination of Agreements. The obligations of the
+servicer, the seller, the owner trustee and the indenture trustee
+ under the Receivables Transfer and Servicing Agreements will
+terminate upon the earlier of (1) the maturity or other
+liquidation of the last related receivable and the disposition of
+ any amounts received upon liquidation of any such remaining
+receivables, (2) the payment to noteholders and
+certificateholders of the trust of all amounts required to be
+
+98
+
+Table of Contents
+
+paid to them under the Receivables Transfer and Servicing
+Agreements and (3) an Optional Redemption.
+
+ 
+Amendment of Agreements. The parties to each of the
+ Receivables Transfer and Servicing Agreements may amend such
+agreements without the consent of the noteholders and
+certificateholders, to add any provisions to or change or
+eliminate any of the provisions of the Receivables Transfer and
+Servicing Agreements or modify the rights of the noteholders or
+certificateholders; provided that such action will not, in the
+opinion of counsel satisfactory to the indenture trustee,
+materially and adversely affect the interest of any the holder of
+ notes or certificates. The Receivables Transfer and Servicing
+Agreements may also be amended by the seller, the servicer or the
+ indenture trustee with the consent of the holders of notes of
+the trust evidencing not less than a majority in principal amount
+ of each class of notes, voting separately, and the holders of
+the certificates evidencing not less than a majority of the
+Certificate Balance of such certificates then outstanding, to add
+ any provisions to or change or eliminate any of the provisions
+of such Receivables Transfer and Servicing Agreements or modify
+the rights of the noteholders or certificateholders; provided,
+however, that no such amendment may (1) increase or reduce
+in any manner the amount of, or accelerate or delay the timing
+of, collections of payments on the receivables or distributions
+that are required to be made for the benefit of the noteholders
+or certificateholders or change any interest rates on the notes
+and certificates or the amount required to be on deposit in the
+reserve account, if any, or (2) reduce the percentage of the
+ notes or certificates of the trust which are required to consent
+ to any such amendment, without the consent of the holders of all
+ the outstanding notes and certificates of the trust and provided
+ that an opinion of counsel as to certain tax matters is
+delivered if required.
+
+The Administration Agreement
+
+ 
+Covenants of the Owner Trustee Relating to the Bankruptcy
+of the Trust. The trust agreement will provide that the
+owner trustee does not have the power to commence a voluntary
+proceeding in bankruptcy with respect to the trust without the
+unanimous prior approval of all certificateholders (excluding the
+ seller, the servicer or their affiliates) of the trust and the
+delivery to the owner trustee by each such holder of certificates
+ (excluding the seller, the servicer or their affiliates) of a
+certificate certifying that such holder of certificates
+reasonably believes that the trust is insolvent.
+
+ 
+Administration Agreement. Ford Credit, will be the
+administrator of the trust and will agree, to the extent provided
+ in an administration agreement, to provide the notices and
+certain reports and to perform other administrative obligations
+required by the indenture. The administrator will be entitled to
+a periodic administration fee which will be paid by the seller as
+ compensation for the performance of the administrator s
+obligations under the administration agreement and as
+reimbursement for its expenses related thereto.
+
+Governing Law
+
+ 
+The notes, the indenture, the purchase agreement, the sale and
+servicing agreement, the administration agreement and the
+interest rate swap agreements will be governed by, and construed
+in accordance with, the laws of the State of New York. The trust
+agreement and the certificates and will be governed by, and
+construed in accordance with, the laws of the State of Delaware.
+
+CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
+
+Security Interests in Vehicles
+
+ 
+In all states in which the receivables have been originated,
+retail installment sale contracts such as the receivables
+evidence the credit sale of automobiles and light trucks by
+dealers to
+
+99
+
+Table of Contents
+
+obligors; the contracts also constitute personal property
+security agreements and include grants of security interests in
+the vehicles under the Uniform Commercial Code. Perfection of
+security interests in the vehicles is generally governed by the
+motor vehicle registration laws of the state in which the vehicle
+ is located. In most states in which the receivables have been
+originated, a security interest in a vehicle is perfected by
+notation of the secured party s lien on the vehicle s
+certificate of title. Each receivable prohibits the sale or
+transfer of the financed vehicle without the consent of Ford
+Credit or PRIMUS, as the case may be.
+
+ 
+Under the purchase agreement, Ford Credit will assign its
+security interests in the financed vehicles securing the related
+receivables to the seller. Under the Receivables Transfer and
+Servicing Agreements, the seller will assign its security
+interests in the financed vehicles securing the related
+receivables to the trust. However, because of the administrative
+burden and expense, the servicer, the seller and the trust will
+not amend any certificate of title to identify the trust as the
+new secured party on the certificates of title relating to the
+financed vehicles. Also, the servicer will continue to hold any
+certificates of title relating to the financed vehicles in its
+possession as custodian for the trust under the Receivables
+Transfer and Servicing Agreements. For further discussion of
+the sale of receivables, see Sale and Servicing of
+Receivables Sale and Assignment of Receivables .
+
+ 
+In most states, assignments such as those under the purchase
+agreement and the Receivables Transfer and Servicing Agreements
+together with a perfected security interest in the chattel paper
+are an effective conveyance of a security interest in the
+vehicles subject to the chattel paper without amendment of any
+lien noted on a vehicle s certificate of title, and the
+assignee succeeds thereby to the assignor s rights as
+secured party. In the absence of fraud or forgery by the vehicle
+owner or the servicer or administrative error by state or local
+agencies, the notation of Ford Credit s or PRIMUS s
+lien on the certificates of title will be sufficient to protect
+the trust against the rights of subsequent purchasers of a
+financed vehicle or subsequent lenders who take a security
+interest in a financed vehicle. If there are any financed
+vehicles as to which Ford Credit or PRIMUS failed to obtain a
+perfected security interest, its security interest would be
+subordinate to, among others, subsequent purchasers of the
+financed vehicles and holders of perfected security interests.
+Such a failure would constitute a breach of Ford Credit s
+warranties under the purchase agreement and of the seller s
+warranties under the Receivables Transfer and Servicing
+Agreements and would create an obligation of Ford Credit under
+the purchase agreement and of the seller under the Receivables
+Transfer and Servicing Agreements to purchase the related
+receivable if such breach shall materially adversely affect the
+interest of the trust in such receivable and if such failure or
+breach shall not have been cured by the last day of the second
+(or, if the seller elects, the first) month following the
+discovery by or notice to the seller of such breach. By not
+identifying the trust as the secured party on the certificate of
+title, the trust s interest in the chattel paper may not
+have the benefit of the security interest in the financed vehicle
+ in all states or such security interest could be defeated
+through fraud or negligence. The seller will assign its rights
+under the purchase agreement to the trust. If the trust does not
+have a perfected security interest in a financed vehicle, its
+ability to realize on such financed vehicle in the event of a
+default would be adversely affected.
+
+ 
+Under the laws of most states, the perfected security interest in
+ a vehicle would continue for four months after a vehicle is
+moved to a state other than the state in which it is initially
+registered and thereafter until the vehicle owner re-registers
+the vehicle in the new state. A majority of states generally
+require surrender of a certificate of title to re-register a
+vehicle; accordingly, a secured party must surrender possession
+if it holds the certificate of title to the vehicle, or, in the
+case of vehicles registered in states providing for the notation
+of a lien on the certificate of title but not possession by the
+secured party, the secured party would receive notice of
+surrender if the security interest is noted on the certificate of
+ title. Thus, the secured party would have the opportunity to
+re-perfect its security interest in the vehicle in the state of
+relocation. In states that do not require a certificate of title
+for registration of a motor vehicle,
+
+100
+
+Table of Contents
+
+re-registration could defeat perfection. In the ordinary course
+of servicing receivables, Ford Credit and PRIMUS take steps to
+effect re-perfection upon receipt of notice of re-registration or
+ information from the obligor as to relocation. Similarly, when
+an obligor sells a vehicle, Ford Credit or PRIMUS must surrender
+possession of the certificate of title or will receive notice as
+a result of its lien noted thereon and accordingly will have an
+opportunity to require satisfaction of the related receivable
+before release of the lien. Under the Receivables Transfer and
+Servicing Agreements, the servicer will be obligated to take
+appropriate steps, at the servicer s expense, to maintain
+perfection of security interests in the financed vehicles.
+
+ 
+Under the laws of most states, liens for repairs performed on a
+motor vehicle and liens for certain unpaid taxes take priority
+over even a perfected security interest in a financed vehicle.
+The Internal Revenue Code of 1986, as amended, also grants
+priority to certain federal tax liens over the lien of a secured
+party. Federal law and the laws of certain states permit the
+confiscation of motor vehicles under certain circumstances if
+used in unlawful activities, which may result in the loss of a
+secured party s perfected security interest in the
+confiscated motor vehicle. Ford Credit will represent to the
+seller and the seller will represent to the trust that each
+security interest in a financed vehicle is or will be prior to
+all other present liens (other than tax liens and liens that
+arise by operation of law) upon and security interests in such
+financed vehicle. However, liens for repairs or taxes, or the
+confiscation of a financed vehicle, could arise or occur at any
+time during the term of a receivable. No notice will be given to
+the indenture trustee, noteholders or certificateholders in the
+event such a lien arises or confiscation occurs. Neither the
+seller nor the servicer will have any obligation to repurchase a
+receivable as to which any of the aforementioned occurrences
+result in the trust losing the priority of its security interest
+or its security interest in such financed vehicle after the
+Closing Date with respect to a receivable.
+
+Repossession
+
+ 
+In the event of default by vehicle purchasers, the holder of the
+retail installment sale contract has all the remedies of a
+secured party under the Uniform Commercial Code, except where
+specifically limited by other state laws. The Uniform Commercial
+Code remedies of a secured party include the right to
+repossession by self-help means, unless such means would
+constitute a breach of the peace. Unless a vehicle is voluntarily
+ surrendered, self-help repossession is the method employed by
+Ford Credit and PRIMUS in the majority of instances in which a
+default occurs and is accomplished simply by retaking possession
+of the financed vehicle. In cases where the obligor objects or
+raises a defense to repossession, or if otherwise required by
+applicable state law, a court order must be obtained from the
+appropriate state court, and the vehicle must then be repossessed
+ in accordance with that order.
+
+Notice of Sale; Cure Rights
+
+ 
+In the event of default by the obligor, some jurisdictions
+require that the obligor be notified of the default and be given
+a time period within which the obligor may cure the default prior
+ to repossession. Generally, this right to cure may be exercised
+on a limited number of occasions.
+
+ 
+The Uniform Commercial Code and other state laws require the
+secured party to provide the obligor with reasonable notice of
+the date, time, and place of any public sale and/or the date
+after which any private sale of the collateral may be held. The
+obligor has the right to redeem the collateral prior to actual
+sale by paying the secured party the unpaid principal balance of
+the obligation plus reasonable expenses for repossessing,
+holding, and preparing the collateral for disposition and
+arranging for this sale, plus, in some jurisdictions, reasonable
+attorneys fees. In some states, a reinstatement right is
+permitted by payment of delinquent installments. Repossessed
+vehicles are generally disposed of by Ford s Vehicle
+Marketing Department at auction.
+
+101
+
+Table of Contents
+
+Deficiency Judgments and Excess Proceeds
+
+ 
+The proceeds of resale of the repossessed vehicles generally will
+ be applied to the expenses of resale and repossession and then
+to the satisfaction of the indebtedness of the obligor on the
+receivable. While some states impose prohibitions or limitations
+on deficiency judgments if the net proceeds from resale do not
+cover the full amount of the indebtedness, a deficiency judgment
+can be sought in those states that do not prohibit or limit such
+judgments. However, the deficiency judgment would be a personal
+judgment against the obligor for the shortfall, and a defaulting
+obligor can be expected to have very little capital or sources of
+ income available following repossession. Therefore, in many
+cases, it may not be useful to seek a deficiency judgment or, if
+one is obtained, it may be settled at a significant discount.
+
+ 
+Occasionally, after resale of a vehicle and payment of all
+expenses and indebtedness, there is a surplus of funds. In that
+case, the Uniform Commercial Code requires the lender to remit
+the surplus to any holder of any lien with respect to the vehicle
+ or if no such lienholder exists or there are remaining funds,
+the Uniform Commercial Code requires the lender to remit the
+surplus to the former obligor.
+
+Consumer Protection Laws
+
+ 
+Numerous federal and state consumer protection laws and related
+regulations impose substantial requirements upon lenders and
+servicers involved in consumer finance. These laws include the
+Truth-in-Lending Act, the Equal Credit Opportunity Act, the
+Federal Trade Commission Act, the Fair Credit Reporting Act, the
+Fair Debt Collection Practices Act, the Magnuson-Moss Warranty
+Act, the Federal Reserve Board s Regulations B and Z,
+state adaptations of the National Consumer Credit Protection Act
+and of the Uniform Consumer Credit Code, and state motor vehicle
+retail installment sales acts, retail installment sales acts, and
+ other similar laws. Also, state laws impose finance charge
+ceilings and other restrictions on consumer transactions and
+require contract disclosures in addition to those required under
+federal law. The requirements impose specific statutory
+liabilities upon creditors who fail to comply with their
+provisions. In some cases, this liability could affect an
+assignee s ability to enforce consumer finance contracts
+such as the receivables.
+
+ 
+The so-called holder-in-due-course rule of the Federal Trade
+Commission, also known as the FTC rule, the provisions of which
+are generally duplicated by the Uniform Consumer Credit Code,
+other state statutes, or the common law in certain states, has
+the effect of subjecting a seller (and certain related lenders
+and their assignees) in a consumer credit transaction and any
+assignee of the seller to all claims and defenses which the
+obligor in the transaction could assert against the seller of the
+ goods. Liability under the FTC rule is limited to the amounts
+paid by the obligor under the contract, and the holder of the
+contract may also be unable to collect any balance remaining due
+thereunder from the obligor.
+
+ 
+Most of the receivables will be subject to the requirements of
+the FTC rule. Accordingly, the trust, as holder of the related
+receivables, will be subject to any claims or defenses that the
+purchaser of the financed vehicle may assert against the seller
+of the financed vehicle. Such claims are limited to a maximum
+liability equal to the amounts paid by the obligor on the
+receivable. Under most state motor vehicle dealer licensing laws,
+ sellers of motor vehicles are required to be licensed to sell
+motor vehicles at retail sale. Furthermore, Federal Odometer
+Regulations promulgated under the Motor Vehicle Information and
+Cost Savings Act require that all sellers of new and used
+vehicles furnish a written statement signed by the seller
+certifying the accuracy of the odometer reading. If a seller is
+not properly licensed or if an Odometer Disclosure Statement was
+not provided to the purchaser of the related financed vehicle,
+the obligor may be able to assert a defense against the seller of
+ the vehicle. If an obligor were successful in asserting any such
+ claim or defense, such claim or defense would constitute a
+breach of Ford Credit s and the seller s
+representations and warranties under the purchase
+
+102
+
+Table of Contents
+
+agreement and the Receivables Transfer and Servicing Agreements
+and would create an obligation of Ford Credit and the seller to
+repurchase the receivable unless the breach is cured. For
+further discussion of Ford Credit s and the seller s
+representations and warranties, see Sale and Servicing of
+Receivables Sale and Assignment of
+Receivables Representations and Warranties .
+
+ 
+Courts have imposed general equitable principles on secured
+parties pursuing repossession of collateral or litigation
+involving deficiency balances. These equitable principles may
+have the effect of relieving an obligor from some or all of the
+legal consequences of a default.
+
+ 
+In several cases, obligors have asserted that the self-help
+remedies of secured parties under the Uniform Commercial Code and
+ related laws violate the due process protections provided under
+the 14th Amendment to the Constitution of the United States.
+Courts have generally upheld the notice provisions of the Uniform
+ Commercial Code and related laws as reasonable or have found
+that the repossession and resale by the creditor do not involve
+sufficient state action to afford constitutional protection to
+consumers.
+
+ 
+Ford Credit and the seller will warrant under the purchase
+agreement and the Receivables Transfer and Servicing Agreements
+that each receivable complies with all requirements of law in all
+ material respects. Accordingly, if an obligor has a claim
+against the trust for violation of any law and such claim
+materially and adversely affects the trust s interest in a
+receivable, such violation would constitute a breach of warranty
+under the purchase agreement and the Receivables Transfer and
+Servicing Agreements and would create an obligation of Ford
+Credit and the seller to repurchase the receivable unless the
+breach is cured. For further discussion of Ford Credit s
+and the seller s representations and warranties, see
+ Sale and Servicing of Receivables Sale and
+Assignment of Receivables Representations and
+Warranties .
+
+Other Limitations
+
+ 
+In addition to the laws limiting or prohibiting deficiency
+judgments, numerous other statutory provisions, including federal
+ bankruptcy laws and related state laws, may interfere with or
+affect the ability of a lender to realize upon collateral or
+enforce a deficiency judgment. For example, in a Chapter 13
+proceeding under the federal bankruptcy law, a court may prevent
+a lender from repossessing a motor vehicle, and, as part of the
+rehabilitation plan, reduce the amount of the secured
+indebtedness to the market value of the motor vehicle at the time
+ of bankruptcy (as determined by the court), leaving the party
+providing financing as a general unsecured creditor for the
+remainder of the indebtedness. A bankruptcy court may also reduce
+ the monthly payments due under a contract or change the rate of
+interest and time of repayment of the indebtedness.
+
+Transfers of Vehicles
+
+ 
+The terms of the receivables prohibit the sale or transfer of the
+ vehicle securing a receivable without consent and permit
+acceleration of the maturity of the receivable upon a sale or
+transfer without consent except where prohibited by law. The
+servicer does not intend to consent to any sale or transfer and
+intends to require prepayment of the receivable. The servicer may
+ enter into a transfer of equity agreement with the secondary
+purchaser for the purpose of effecting the transfer of the
+financed vehicle.
+
+FEDERAL INCOME TAX MATTERS
+
+ 
+The following is a general summary of certain federal income tax
+consequences of the purchase, ownership and disposition of the
+Class A Notes and Class B Notes. Unless otherwise
+indicated, this summary deals only with the consequences to the
+holders of such notes that are
+
+103
+
+Table of Contents
+
+U.S. persons, as defined below, who acquired their notes at their
+ original issue price in the original issuance of those notes and
+ who hold these notes as capital assets.
+
+ 
+The summary does not purport to deal with federal income tax
+consequences applicable to all categories of holders of the
+Class A Notes and Class B Notes, some of which may be
+subject to special rules. For example, it does not discuss the
+tax treatment of noteholders that are:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ insurance companies;
+
+ 
+
+ 
+ 
+ 
+ regulated investment companies;
+
+ 
+
+ 
+ 
+ 
+ dealers in securities or currencies;
+
+ 
+
+ 
+ 
+ 
+ tax exempt entities;
+
+ 
+
+ 
+ 
+ 
+ persons holding notes as apart of a hedging, integrated
+ conversion, or constructive sale transaction or a straddle; or
+
+ 
+
+ 
+ 
+ 
+ persons whose functional currency is not the U.S. Dollar.
+
+ 
+Moreover, there are no cases or Internal Revenue Service rulings
+on similar transactions involving both debt instruments and
+equity interests issued by a trust. As a result, the IRS may
+disagree with all or a part of the discussion below. Prospective
+investors are urged to consult their own tax advisors in
+determining the federal, state, local, foreign and any other tax
+consequences to them of the purchase, ownership and disposition
+of the Class A Notes and the Class B Notes.
+
+ 
+The following summary is based upon current provisions of the
+Code, the Treasury regulations under the Code and judicial or
+ruling authority, all of which are subject to change, which
+change may be retroactive. Special Tax Counsel will provide to
+the trust an opinion regarding certain federal income tax matters
+ discussed below. An opinion of Special Tax Counsel, however, is
+not binding on the IRS or the courts. We have not sought, nor
+will we seek, a ruling on any of the issues discussed below.
+
+ 
+For purposes of this discussion, the term U.S. person means a
+beneficial owner of a Class A Note or Class B Note who
+is:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ a citizen or resident of the United States;
+
+ 
+
+ 
+ 
+ 
+ a corporation or partnership created or organized in the United
+ States or under the laws of the United States or any political
+ subdivision of the United States;
+
+ 
+
+ 
+ 
+ 
+ an estate the income of which is subject to United States federal
+ income taxation regardless of its source; or
+
+ 
+
+ 
+ 
+ 
+ a trust that is subject to the supervision of a court within the
+ United States and the control of a United States person as
+ described in section 7701(a)(30) of the Code or that has a valid
+ election in effect under applicable U.S. Treasury regulations to
+ be treated as a United States person.
+
+ 
+For purposes of this discussion, the term non-U.S. person means a
+ beneficial owner of a Class A Note or Class B Note who
+ is not a U.S. person, as defined in the Code.
+
+Scope of the Tax Opinions
+
+ 
+Upon issuance of the notes and certificates, Special Tax Counsel
+will deliver its opinion that, under current law and subject to
+the discussion below, the trust will not be classified as an
+association (or publicly traded partnership) taxable as a
+corporation for federal income tax purposes. Special Tax Counsel
+will advise the trust that the Class A Notes will be
+classified as debt for federal income tax purposes. While there
+is no authority directly addressing analogous situations and the
+issue is not free from doubt, Special Tax Counsel will advise the
+ trust that the
+
+104
+
+Table of Contents
+
+Class B Notes should be classified as debt for federal
+income tax purposes. Class B noteholders are advised that
+the opinion of Special Tax Counsel is not binding on the IRS. In
+the event that the Class B Notes were treated as equity
+interests in the trust, the consequences described under the
+heading Tax Consequences to Holders of the
+Class A Notes and Class B Notes Possible
+Alternative Treatments of the Class A Notes and Class B
+ Notes below would apply to the Class B
+noteholders. In particular, in such a case, income to certain
+tax-exempt entities would be unrelated business taxable
+income. Class B noteholders are strongly urged to review
+the disclosure under the headings Tax
+Consequences to Holders of the Class A Notes and
+Class B Notes Possible Alternative Treatments of
+ the Class A Notes and Class B Notes below,
+and to consult their tax advisors regarding the treatment, for
+federal income tax purposes, of the Class B Notes.
+
+ 
+In addition, Special Tax Counsel has prepared or reviewed the
+statements as they relate to federal income tax matters under the
+ headings Summary of Terms of the Securities 
+ Tax Status and Federal Income Tax
+Matters in this prospectus and is of the opinion that
+such statements are correct in all material respects. Such
+statements are intended as an explanatory discussion of the
+possible effects of the classification of the trust as a
+partnership for federal income tax purposes on investors
+generally and of related tax matters affecting investors
+generally, but do not purport to furnish information in the level
+ of detail or with the attention to the investor s specific
+tax circumstances that would be provided by an investor s
+own tax advisor. Accordingly, each investor is advised to consult
+ its own tax advisors with regard to the tax consequences to it
+of investing in the Class A Notes and Class B Notes.
+
+Tax Characterization of the Trust
+
+ 
+Special Tax Counsel will deliver its opinion that the trust will
+not be classified as an association (or publicly traded
+partnership) taxable as a corporation for federal income tax
+purposes. This opinion will be based on the assumption that the
+terms of the trust agreement and related documents will be
+complied with, and on counsel s conclusions that:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the trust is not an entity that is per se classified as an
+ association taxable as a corporation; and
+
+ 
+
+ 
+ 
+ 
+ either the nature of the income of the trust will exempt it from
+ the provisions of the Code requiring some publicly traded
+ partnerships to be taxed as corporations or the trust will
+ otherwise qualify for an exemption from the rules governing
+ publicly traded partnerships.
+
+ 
+However, as discussed above, this opinion will not be binding on
+the IRS. Special Tax Counsel cannot give any assurances that this
+ characterization will prevail. If the trust were taxable as a
+corporation for federal income tax purposes, the trust would be
+subject to corporate income tax on its taxable income. The
+trust s taxable income would include all of its income on
+the receivables, possibly reduced by its interest expense on the
+notes. Any such corporate income tax could materially reduce the
+amount of cash available to make payments on the notes and
+distributions on the certificates. The certificateholders and,
+possibly, the Class B noteholders could be liable for any
+such tax that is unpaid by the trust.
+
+Tax Consequences to Holders of the Class A Notes and
+Class B Notes
+
+ 
+
+ Treatment of the Class A
+ Notes and Class B Notes as Indebtedness. The
+holders of the Class A Notes and Class B Notes will be
+deemed to agree, by their purchase of the Class A Notes and
+Class B Notes, to treat the notes as debt for federal income
+ tax purposes. The discussion below assumes that this
+characterization of the Class A Notes and Class B Notes
+ is correct.
+
+ 
+Original Issue Discount. Unless a Class A Note
+ or a Class B Note is a Short-Term Note, it will be treated
+as issued with original issue discount if the excess of such
+note s stated
+
+105
+
+Table of Contents
+
+redemption price at maturity over the issue price equals or
+ exceeds a de minimis amount equal to 1/4 of
+1 percent of the note s stated redemption price at
+maturity multiplied by the number of complete years (based on the
+ anticipated weighted average life of a note) to its maturity.
+
+ 
+In general, OID, if any, will equal the difference between the
+stated redemption price at maturity of a Class A Note or
+Class B Note and its issue price. A holder of a Class A
+ Note or a Class B Note must include such OID in gross
+income as ordinary interest income as it accrues under a method
+taking into account an economic accrual of the discount. In
+general, a holder of a Class A Note or a Class B Note
+with OID must include the OID in its income before the holder
+receives the cash representing that income. The amount of OID on
+a Class A Note or a Class B Note will be considered to
+be zero if it is less than a de minimis amount determined
+as described above.
+
+ 
+However, the amount of any de minimis OID must be included
+ in income as principal payments are received on a Class A
+Note or a Class B Note, in the proportion that each such
+payment bears to the original principal amount of the
+Class A Note or Class B Note. The issue price of a
+Class A Note or a Class B Note will generally be the
+initial offering price at which a substantial amount of the
+Class A Notes and Class B Notes are sold. The trust
+intends to treat the issue price as including, in addition, the
+amount paid by the holders of Class A Notes and Class B
+ Notes for accrued interest, if any, that relates to a period
+prior to the Closing Date. Under the Treasury regulations
+governing OID, the stated redemption price at maturity is the sum
+ of all payments on the Class A Note or Class B Note
+other than any qualified stated interest payments.
+Qualified stated interest is defined as any one of a series of
+payments equal to the product of the outstanding principal amount
+ of the Class A Note or Class B Note and a single fixed rate
+ or certain variable rates of interest that is unconditionally
+payable at least annually.
+
+ 
+The holder of a Class A Note or a Class B Note issued
+with OID must include in gross income, for all days during its
+taxable year on which it holds such Class A Note or
+Class B Note, the sum of the daily portions of
+such OID. Such daily portions are computed by allocating to each
+day during a taxable year a pro rata portion of the OID
+that accrued during the relevant accrual period(s). Because it is
+ expected that the Class A Notes will be paid on their
+Targeted Scheduled Distribution Date, the trust will take the
+position that the Class A Notes are not installment
+obligations or obligations that can be accelerated as
+result of prepayments on the receivables. Accordingly, OID on
+each Subclass of Class A Notes, if any, will be accrued
+assuming that the Targeted Scheduled Distribution Date of each
+such Subclass is the sole principal payment date for such
+Subclass. Such OID will generally equal, for any accrual period,
+the product of the yield to maturity (based on monthly
+compounding) for such class and the adjusted issue
+price thereof.
+
+ 
+In the case of an obligation which is prepayable by the borrower,
+ such as the Class B Notes, OID is computed by taking into
+account the Prepayment Assumption. The Prepayment Assumption that
+ will be used in determining the rate of accrual of OID, premium
+and market discount, if any, is 1.5% ABS. The amount of OID that
+will accrue during an accrual period (generally the period
+between interest payments or compounding dates) is the excess, if
+ any, of the sum of:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the present value of all payments remaining to be made on the
+ Class B Note as of the close of the accrual period; and
+
+ 
+
+ 
+ 
+ 
+ the payments during the accrual period of amounts included in the
+ stated redemption price of the Class B Note; over
+
+ 
+
+ 
+ 
+ 
+ the adjusted issue price of the Class B Note at
+ the beginning of the accrual period.
+
+ 
+An accrual period is the period over which OID
+ accrues, and may be of any length, provided that each accrual
+period is no longer than one year and each scheduled payment of
+interest or principal occurs on either the last day or the first
+day of an accrual period. The trust
+
+106
+
+Table of Contents
+
+intends to report OID on the basis of an accrual period that
+corresponds to the interval between Monthly Distribution Dates.
+The adjusted issue price of a Class A Note or a Class B
+ Note is the sum of its issue price plus prior accruals of OID,
+reduced by the total payments made with respect to such
+Class A Note or Class B Note in all prior periods,
+other than qualified stated interest payments. The present value
+of the remaining payments is determined on the basis of the
+following three factors:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the original yield to maturity of the Class B Note
+ (determined on the basis of compounding at the end of each
+ accrual period and properly adjusted for the length of the
+ accrual period);
+
+ 
+
+ 
+ 
+ 
+ events which have occurred before the end of the accrual period;
+ and
+
+ 
+
+ 
+ 
+ 
+ the assumption that the remaining payments will be made in
+ accordance with the original Prepayment Assumption.
+
+ 
+The effect of this method is to increase the portions of OID
+required to be included in income by a holder of a Class B
+Note to take into account prepayments on the receivables at a
+rate that exceeds the Prepayment Assumption, and to decrease (but
+ not below zero for any period) the portions of OID required to
+be included in income by a holder of a Class B Note to take
+into account prepayments with respect to the receivables at a
+rate that is slower than the Prepayment Assumption. Although OID
+will be reported to holders of Class B Notes based on the
+Prepayment Assumption, no representation is made to holders of
+Class B Notes that the receivables will be prepaid at that
+rate or at any other rate.
+
+ 
+A holder of a Class A Note or a Class B Note that
+acquires such note for an amount that exceeds its stated
+redemption price will not include any OID in gross income. A
+subsequent holder of a Class A Note or a Class B Note
+which acquires such note for an amount that is less than its
+stated redemption price will be required to include OID in gross
+income, but such a holder who purchases such note for an amount
+that exceeds its adjusted issue price will be entitled (as will
+an initial holder who pays more than a Class A Note or a
+Class B Note s issue price) to reduce the amount of OID
+ included in income in each period by the amount of OID
+multiplied by a fraction, the numerator of which is the excess
+of:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the purchaser s adjusted basis in the Class A Note or
+ Class B Note immediately after purchase thereof; over
+
+ 
+
+ 
+ 
+ 
+ the adjusted issue price of the Class A Note or Class B
+ Note,
+
+ 
+and the denominator of which is the excess of:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ all amounts remaining to be paid on the Class A Note or
+ Class B Note after the purchase date, other than qualified
+ stated interest; over
+
+ 
+
+ 
+ 
+ 
+ the adjusted issue price of the Class A Note or Class B
+ Note.
+
+ 
+Total Accrual Election. As an alternative to
+separately accruing stated interest, OID, de minimis OID,
+market discount, de minimis market discount, unstated
+interest, premium, and acquisition premium, a holder of a
+Class A Note or a Class B Note (other than a Short-Term
+ Note, as described below) may elect to include all income that
+accrues on such note using the constant yield method. If a holder
+ of a Class A Note or a Class B Note makes this
+election, income on such note will be calculated as though:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the issue price of the Class A Note or Class B Note
+ were equal to the holder s adjusted basis in such note
+ immediately after its acquisition by the holder of such note;
+
+ 
+
+ 
+ 
+ 
+ the Class A Note or Class B Note were issued on the
+ holder s acquisition date; and
+
+107
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ none of the interest payments on the Class A Note or
+ Class B Note were qualified stated interest. 
+
+ 
+A holder of a Class A Note or a Class B Note may make
+such an election for such note that has premium or market
+discount, respectively, only if the holder makes, or has
+previously made, an election to amortize bond premium or to
+include market discount in income currently. See
+ Market Discount and
+ Amortizable Bond Premium below.
+
+ 
+Market Discount. The Class A Notes and
+Class B Notes, whether or not issued with OID, will be
+subject to the market discount rules of
+Section 1276 of the Code. In general, these rules provide
+that if a Note Owner acquires a Class A Note or a
+Class B Note at a market discount (that is, a discount from
+its stated redemption price at maturity or, if the Class A
+Notes and Class B Notes were issued with OID, its original
+issue price plus any accrued OID that exceeds a de minimis
+amount specified in the Code) and thereafter:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ recognizes gain upon a disposition; or
+
+ 
+
+ 
+ 
+ 
+ receives payments of principal,
+
+then, the lesser of such gain or principal payment or the accrued
+ market discount will be taxed as ordinary interest income.
+
+ 
+Generally, the accrued market discount will be the total market
+discount on the Class A Note or Class B Note multiplied
+ by a fraction, the numerator of which is:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the number of days the Note Owner held the Class A Note or
+ Class B Note
+
+ 
+and the denominator of which is:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the number of days from the date the Note Owner acquired the
+ Class A Note or Class B Note until its maturity date.
+
+ 
+The Note Owner may elect, however, to determine accrued market
+discount under the constant yield method.
+
+ 
+Limitations imposed by the Code which are intended to match
+deductions with the taxation of income may defer deductions for
+interest on indebtedness incurred or continued, or short-sale
+expenses incurred, to purchase or carry a Class A Note or a
+Class B Note with accrued market discount. A Note Owner may
+elect to include market discount in gross income as it accrues
+and, if the Note Owner makes such an election, is exempt from
+this rule. Any such election will apply to all debt instruments
+acquired by the taxpayer on or after the first day of the first
+taxable year to which such election applies. The adjusted basis
+of a Class A Note or a Class B Note subject to such
+election will be increased to reflect market discount included in
+ gross income, thereby reducing any gain or increasing any loss
+on a sale or taxable disposition.
+
+ 
+Amortizable Bond Premium. In general, if a Note
+Owner purchases a Class A Note or a Class B Note at a
+premium (that is, an amount in excess of the amount payable upon
+the maturity thereof), such Note Owner will be considered to have
+ purchased such note with amortizable bond premium 
+equal to the amount of such excess. Such Note Owner may elect to
+amortize such bond premium as an offset to interest income and
+not as a separate deduction item as it accrues under a constant
+yield method over the remaining term of the Class A Note or
+Class B Note. Such Note Owner s tax basis in the
+Class A Note or Class B Note will be reduced by the
+amount of the amortized bond premium. Any such election shall
+apply to all debt instruments (other than instruments the
+interest on which is excludible from gross income) held by the
+Note Owner at the beginning of the first taxable year for which
+the election applies or thereafter acquired and is irrevocable
+without the consent of the IRS. Bond premium on a Class A
+Note or a Class B Note held by a Note Owner who does not
+elect to amortize the premium will remain a part of such Note
+Owner s tax basis in such note and will decrease the
+
+108
+
+Table of Contents
+
+gain or increase the loss otherwise recognized on the disposition
+ of the Class A Note or Class B Note.
+
+ 
+Short-Term Notes. Under the Code, special rules
+apply to Short-Term Notes. Such Short-Term Notes are treated as
+issued with acquisition discount which is calculated
+and included in income under principles similar to those
+governing OID except that acquisition discount is equal to the
+excess of all payments of principal and interest on the
+Short-Term Notes over their issue price. In general, an
+individual or other cash basis holder of a short-term obligation
+is not required to accrue acquisition discount for federal income
+ tax purposes unless it elects to do so. Accrual basis holders
+and certain other holders, including banks, regulated investment
+companies, dealers in securities and cash basis holders who so
+elect, are required to accrue acquisition discount on Short-Term
+Notes on either a straight-line basis or under a constant yield
+method (based on daily compounding), at the election of the
+holder. In the case of a holder not required and not electing to
+include acquisition discount in income currently, any gain
+realized on the sale or retirement of the Short-Term Notes will
+be ordinary income to the extent of the acquisition discount
+accrued on a straight-line basis (unless an election is made to
+accrue the acquisition discount under the constant yield method)
+through the date of sale or retirement. Holders who are not
+required and do not elect to accrue acquisition discount on
+Short-Term Notes will be required to defer deductions for
+interest on borrowings allocable to short-term obligations in an
+amount not exceeding the deferred income until the deferred
+income is realized.
+
+ 
+Sale or Other Disposition. If a holder of
+Class A Notes and Class B Notes sells a Class A Note or
+ a Class B Note, the holder will recognize gain or loss in
+an amount equal to the difference between:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the amount realized on the sale, and
+
+ 
+
+ 
+ 
+ 
+ the holder s adjusted tax basis in the Class A Note or
+ Class B Note.
+
+ 
+The adjusted tax basis of a Class A Note or a Class B
+Note to a particular holder generally will equal the
+holder s cost for such note, increased by any market
+discount, acquisition discount, OID and gain previously included
+by such holder in income with respect to such note and decreased
+by any bond premium previously amortized and principal payments
+previously received by such holder with respect to such note.
+
+ 
+Any such gain or loss and any gain or loss realized upon
+prepayment of a Class A Note or a Class B Note (other
+than unamortized OID, whether or not accrued) will be capital
+gain or loss if the holder held such note as a capital asset,
+except for gain representing accrued interest, accrued market
+discount or OID that has not previously accrued, in each case to
+the extent not previously included in income. A holder of a
+Class A Note or a Class B Note may generally only use
+capital losses incurred on sale or disposition of a note to
+offset the holder s capital gains.
+
+ 
+Non-U.S. Persons. In general, a non-U.S. person
+will not be subject to United States federal income tax on
+interest (including OID) on a beneficial interest in a
+Class A Note or a Class B Note unless:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the non-U.S. person actually or constructively owns
+ 10 percent or more of the total combined voting power of all
+ classes of stock of the seller (or affiliate of the seller)
+ entitled to vote (or of a profits or capital interest of the
+ trust);
+
+ 
+
+ 
+ 
+ 
+ the non-U.S. person is a controlled foreign corporation that is
+ related to the seller (or the trust) through stock ownership,
+
+ 
+
+ 
+ 
+ 
+ the non-U.S. person is a bank receiving interest described in
+ Code Section 881(c)(3)(A);
+
+ 
+
+ 
+ 
+ 
+ such interest is contingent interest described in Code
+ Section 871(h)(4);
+
+109
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the non-U.S. person (who is a holder of a Class A Note or a
+ Class B Note) bears certain relationships to any holder of a
+ certificate.
+
+ 
+To qualify for the exemption from taxation, the non-U.S. person
+must comply with applicable certification requirements.
+
+ 
+Any capital gain realized on the sale, redemption, retirement or
+other taxable disposition of a Class A Note or a
+Class B Note by a non-U.S. person will be exempt from United
+ States federal income tax and withholding tax, provided that:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ such gain is not effectively connected with the conduct of a
+ trade or business in the United States by the non-U.S. person;
+ and
+
+ 
+
+ 
+ 
+ 
+ in the case of an individual non-U.S. person, the non-U.S. person
+ is not present in the United States for 183 days or more in
+ the taxable year.
+
+ 
+Backup Withholding. Each holder of a Class A
+Note or a Class B Note (other than an exempt holder such as
+a corporation, tax-exempt organization, qualified pension and
+profit-sharing trust, individual retirement account or
+nonresident alien who provides certification as to status as a
+nonresident) will be required to provide, under penalties of
+perjury, a certificate containing the holder s name,
+address, correct taxpayer identification number and a statement
+that the holder is not subject to backup withholding. Should a
+nonexempt holder of a Class A Note or a Class B Note
+fail to provide the required certification, the trust will be
+required to withhold 31 percent of the amount otherwise
+payable to the holder, and remit the withheld amount to the IRS
+as a credit against the holder s federal income tax
+liability.
+
+ 
+Possible Alternative Treatments of the Class A Notes
+and Class B Notes. If the IRS successfully asserted
+that one or more of the Class A Notes and Class B Notes
+ did not represent debt for federal income tax purposes, the
+Class A Notes and Class B Notes might be treated as equity
+interests in the trust. If so treated, the trust might be treated
+ as a publicly traded partnership that would not be taxable as a
+corporation because it would meet certain qualifying income
+tests. Nonetheless, treatment of the Class A Notes and
+Class B Notes as equity interests in such a publicly traded
+partnership could have adverse tax consequences to certain
+holders. For example, income to certain tax-exempt entities
+(including pension funds) would be unrelated business
+taxable income, income to holders of Class A Notes and
+ Class B Notes that are non-U.S. persons generally would be
+subject to U.S. federal tax and U.S. federal tax return filing
+and withholding requirements, individual holders might be subject
+ to certain limitations on their ability to deduct their share of
+ trust expenses, and taxpayers such as regulated investment
+companies and real estate investment trusts could be adversely
+affected.
+
+Certain U.S. Federal Income Tax Documentation Requirements
+
+ 
+A beneficial owner of Class A Notes and Class B Notes
+holding securities through Clearstream (formerly known as
+Cedelbank) or Euroclear (or through DTC if the holder has an
+address outside the U.S.) will be subject to the 30% U.S.
+withholding tax that generally applies to payments of interest
+(including original issue discount) on registered debt issued by
+U.S. Persons, unless (i) each clearing system, bank or other
+financial institution that holds customers securities in
+the ordinary course of its trade or business in the chain of
+intermediaries between such beneficial owner and the U.S. entity
+required to withhold tax complies with applicable certification
+requirements and (ii) such beneficial owner takes one of the
+ following steps to obtain an exemption or reduced tax rate:
+
+ 
+Treasury regulations provide that as of January 1, 1999, in
+order to qualify for reduced rates of withholding, non-U.S.
+Persons are obliged to file a new unified Form W-8 that has
+replaced the former versions of Form 1001 (Ownership,
+Exemption or Reduced Rate Certificate), Form W-8
+(Certificate of Foreign Status), and Form 4224 (Exemption
+from Withholding of Tax on Income Effectively Connected with the
+Conduct of a Trade or Business in the United States).
+
+110
+
+Table of Contents
+
+Therefore, pursuant to those regulations, all beneficial owners
+of Class A Notes and Class B Notes who have a valid
+former version of Form W-8, Form 1001, or
+Form 4224, as the case may be, on file with the appropriate
+party (as described above) must file a new unified Form W-8
+with such party before the earlier of (i) the expiration of
+the Form W-8, Form 1001, or Form 4224 currently on
+ file, (ii) a change in circumstances that makes any of the
+information on the currently filed former version of
+Form W-8, Form 1001, or Form 4224 incorrect, or
+(iii) December 31, 2000. Beneficial owners who are
+non-U.S. persons who do not currently have a valid former version
+ of Form W-8, Form 1001, or Form 4224, as the case
+ may be, on file, must file the new unified Form W-8 in
+order to obtain an exemption or reduced tax rate on any of the
+bases addressed by the former versions of Form W-8,
+Form 1001, or Form 4224.
+
+ 
+Exemption for non-U.S. Persons (Former Form W-8). 
+Beneficial owners of Class A Notes and Class B
+Notes that are non-U.S. persons can obtain a complete exemption
+from the withholding tax if they currently have a signed and
+valid former version of the Form W-8 on file with the
+appropriate party (as described above). If the information shown
+on Form W-8 changes, a new unified Form W-8 must be
+filed within 30 days of such change.
+
+ 
+Exemption for non-U.S. Persons with effectively connected
+income (Former Form 4224). A non-U.S. person,
+including a non-U.S. corporation or bank with a U.S. branch, for
+which the interest income is effectively connected with its
+conduct of a trade or business in the United States, can obtain
+an exemption from the withholding tax if it has a valid former
+version of Form 4224 on file with the appropriate party (as
+discussed above).
+
+ 
+Exemption or reduced rate for non-U.S. Persons resident in
+treaty countries (Former Form 1001). Non-U.S.
+persons that are beneficial owners of Class A Notes and
+Class B Notes residing in a country that has a tax treaty
+with the United States can obtain an exemption or reduced tax
+rate (depending on the treaty terms) if they have a valid current
+ version of the Form 1001 on file with the correct party (as
+ discussed above). If the treaty provides only for a reduced
+rate, withholding tax will be imposed at that rate unless the
+filer alternatively has a valid current version of Form W-8
+on file with the appropriate party (as described above).
+
+ 
+Exemption for U.S. Persons (Former Form W-9). 
+U.S. persons can obtain a complete exemption from the withholding
+ tax by filing Form W-9 (Payer s Request for Taxpayer
+Identification Number and Certification).
+
+ 
+Exemption for all non-U.S. Persons with no valid current
+version of Form W-8, Form 1001, or Form 4224 on file
+(Form W-8). Beneficial owners who are non-U.S.
+persons who do not currently have a valid former version of
+Form W-8, Form 1001, or Form 4224, as the case may
+ be, on file, must file the new unified Form W-8 in order to
+ obtain an exemption or reduced tax rate on any of the bases
+addressed by the former versions of Form W-8,
+Form 1001, or Form 4224.
+
+ 
+U.S. Federal Income Tax Reporting Procedure. The
+beneficial owner of a Class A Note or a Class B Note
+files by submitting the new unified Form W-8 to the person
+through whom it holds (the clearing agency, in the case of
+persons holding directly on the books of the clearing agency).
+The new unified Form W-8 is effective for three calendar years.
+
+ 
+This summary does not deal with all aspects of U.S. federal
+income tax withholding that may be relevant to non-U.S. persons
+who are holders of the Class A Notes and Class B Notes.
+ Investors are advised to consult their own tax advisors for
+specific tax advice concerning their holding and disposing of the
+ Class A Notes and Class B Notes.
+
+STATE TAX MATTERS
+
+ 
+Because of the variation in each state s and locality s
+ tax laws, it is impossible to predict the tax classification of
+the trust or the tax consequences to the trust or to holders of
+Class A Notes
+
+111
+
+Table of Contents
+
+and Class B Notes in all of the state and local taxing
+jurisdictions in which they may be subject to tax. Holders of the
+ Class A Notes and Class B Notes are urged to consult
+their own tax advisors with respect to state and local taxation
+of the trust and state and local tax consequences of the
+purchase, ownership and disposition of the Class A Notes and
+ Class B Notes.
+
+Michigan Tax Consequences
+
+ 
+The State of Michigan imposes a state individual income tax and a
+ Single Business Tax which is based partially upon the net income
+ of corporations, partnerships and other entities doing business
+in the State of Michigan. This discussion is based upon present
+provisions of Michigan statutes and the regulations promulgated
+thereunder, and applicable judicial or ruling authority, all of
+which are subject to change, which change may be retroactive. No
+ruling on any of the issues discussed below will be sought from
+the Michigan Department of Treasury.
+
+Michigan Tax Consequences With Respect to the Class A
+Notes and Class B Notes
+
+ 
+Michigan Tax Counsel will deliver his opinion that, assuming the
+Class A Notes and Class B Notes will be treated as debt
+ for federal income tax purposes, the Class A Notes and
+Class B Notes will be treated as debt for Michigan income
+tax and Single Business Tax purposes. Accordingly, holders of
+Class A Notes and Class B Notes not otherwise subject
+to taxation in Michigan should not become subject to taxation in
+Michigan solely because of a holder s ownership of
+Class A Notes and Class B Notes. However, a holder of
+Class A Notes and Class B Notes already subject to
+Michigan s income tax or Single Business Tax could be
+required to pay additional Michigan tax as a result of the
+holder s ownership or disposition of Class A Notes and
+Class B Notes. However, in the event that the Class B
+Notes were treated as equity interests in the trust, adverse tax
+consequences may occur for certain holders. For example, a
+Class B noteholder that is a nonresident of Michigan may be
+subject to Michigan income tax on income received from the
+Class B Notes.
+
+ 
+Michigan Tax Counsel will deliver an opinion that if the
+arrangement created by the trust agreement is treated as a
+partnership (not taxable as a corporation) for federal income tax
+ purposes, the same treatment should also apply for Michigan tax
+purposes. In such case, the partnership should have no Michigan
+Single Business Tax liability (which could otherwise result in
+reduced funds available for distribution).
+
+ 
+THE FEDERAL AND STATE TAX DISCUSSIONS SET FORTH ABOVE ARE
+INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE
+DEPENDING UPON A HOLDER S PARTICULAR TAX SITUATION.
+PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX ADVISORS WITH
+RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE,
+OWNERSHIP AND DISPOSITION OF CLASS A NOTES AND CLASS B NOTES,
+INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND
+OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR
+OTHER TAX LAWS.
+
+ERISA CONSIDERATIONS
+
+ 
+The notes may, in general, be purchased by or on behalf of
+Benefit Plan Investors. Although no assurance can be given in
+this regard, the notes should be treated as debt and
+not as equity interests for purposes of the Plan
+Assets Regulation because the notes:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ are expected to be treated as indebtedness under local law and
+ will, in the opinion of Special Tax Counsel, be treated as debt,
+ rather than equity, for federal tax purposes (see
+ Federal Income Tax Matters ); and
+
+ 
+
+ 
+ 
+ 
+ should not be deemed to have any substantial equity
+ features. 
+
+112
+
+Table of Contents
+
+ 
+However, the acquisition and holding of the notes by or on behalf
+ of a Benefit Plan Investor could be considered to give rise to a
+ prohibited transaction under ERISA and Section 4975 of the
+Code if the trust, the owner trustee, the indenture trustee, any
+holder of a certificate or any of their respective affiliates, is
+ or becomes a party in interest or a
+ disqualified person (as defined in ERISA and the
+Code, respectively) with respect to such Benefit Plan Investor.
+In such case, certain exemptions from the prohibited transaction
+rules could be applicable to such acquisition and holding by a
+Benefit Plan Investor depending on the type and circumstances of
+the Benefit Plan Investor fiduciary making the decision to
+acquire a note.
+
+Special Considerations Applicable to Insurance Company General
+ Accounts
+
+ 
+Based on the reasoning of the United States Supreme Court in 
+John Hancock Life Ins. Co. v. Harris Trust and Sav. Bank, 114
+ S. Ct. 517 (1993), an insurance company s general account
+may be deemed to include assets of the Plans investing in the
+general account (e.g., through the purchase of an annuity
+contract), and the insurance company might be treated as a
+Party-in-Interest with respect to a Plan by virtue of such
+investment. Any purchaser that is an insurance company using the
+assets of an insurance company general account should note that
+the Small Business Job Protection Act of 1996 added new
+Section 401(c) of ERISA relating to the status of the assets
+ of insurance company general accounts under ERISA and
+Section 4975 of the Code. Pursuant to Section 401(c),
+the Department of Labor issued final regulations effective
+January 5, 2000 (the General Account
+Regulations ) with respect to insurance policies issued on
+or before December 31, 1998 that are supported by an
+insurer s general account. As a result of these regulations,
+ assets of an insurance company general account will not be
+treated as plan assets for purposes of the fiduciary
+responsibility provisions of ERISA and Section 4975 of the
+Code to the extent such assets relate to contracts issued to
+employee benefit plans on or before December 31, 1998 and
+the insurer satisfies various conditions. Section 401(c)
+also provides that, except in the case of avoidance of the
+General Account Regulation and actions brought by the Secretary
+of Labor relating to certain breaches of fiduciary duties that
+also constitute breaches of state or federal criminal law, until
+the date that is 18 months after the General Account
+Regulations become final, no liability under the fiduciary
+responsibility and prohibited transaction provisions of ERISA and
+ Section 4975 of the Code may result on the basis of a claim
+ that the assets of the general account of an insurance company
+constitute the plan assets of any such plan. The plan
+ asset status of insurance company separate accounts is
+unaffected by new Section 401(c) of ERISA, and separate
+account assets continue to be treated as the plan assets of any
+such plan invested in a separate account.
+
+113
+
+Table of Contents
+
+UNDERWRITING
+
+ 
+Subject to the terms and conditions set forth in the underwriting
+ agreement, the seller has agreed to cause the trust to sell to
+each of the underwriters named below, and each of those
+underwriters has severally agreed to purchase, the initial
+principal amount of Class A-1 Notes, Class A-2 Notes,
+Class A-3 Notes, Class A-4 Notes and Class A-5
+Notes set forth opposite its name below:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Principal
+ 
+ Principal
+ 
+ Principal
+ 
+ Principal
+ 
+ Principal
+
+ 
+ 
+ Amount of
+ 
+ Amount of
+ 
+ Amount of
+ 
+ Amount of
+ 
+ Amount of
+
+ Class A Note
+ 
+ Class A-1
+ 
+ Class A-2
+ 
+ Class A-3
+ 
+ Class A-4
+ 
+ Class A-5
+
+ Underwriters
+ 
+ Notes
+ 
+ Notes
+ 
+ Notes
+ 
+ Notes
+ 
+ Notes
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Deutsche Bank Securities Inc. 
+ 
+ $
+ 181,200,000
+ 
+ 
+ $
+ 140,200,000
+ 
+ 
+ $
+ 104,000,000
+ 
+ 
+ $
+ 68,600,000
+ 
+ 
+ $
+ 31,944,400
+ 
+
+ 
+ Goldman, Sachs Co. 
+ 
+ $
+ 181,200,000
+ 
+ 
+ $
+ 140,200,000
+ 
+ 
+ $
+ 104,000,000
+ 
+ 
+ $
+ 68,600,000
+ 
+ 
+ $
+ 31,944,400
+ 
+
+ 
+ J.P. Morgan Securities Inc. 
+ 
+ $
+ 181,200,000
+ 
+ 
+ $
+ 140,200,000
+ 
+ 
+ $
+ 104,000,000
+ 
+ 
+ $
+ 68,600,000
+ 
+ 
+ $
+ 31,944,400
+ 
+
+ 
+ Merrill Lynch, Pierce, Fenner Smith
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Incorporated
+ 
+ $
+ 181,200,000
+ 
+ 
+ $
+ 140,200,000
+ 
+ 
+ $
+ 104,000,000
+ 
+ 
+ $
+ 68,600,000
+ 
+ 
+ $
+ 31,944,400
+ 
+
+ 
+ Salomon Smith Barney Inc. 
+ 
+ $
+ 181,200,000
+ 
+ 
+ $
+ 140,200,000
+ 
+ 
+ $
+ 104,000,000
+ 
+ 
+ $
+ 68,600,000
+ 
+ 
+ $
+ 31,944,400
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Total
+ 
+ $
+ 906,000,000
+ 
+ 
+ $
+ 701,000,000
+ 
+ 
+ $
+ 520,000,000
+ 
+ 
+ $
+ 343,000,000
+ 
+ 
+ $
+ 159,722,000
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+The seller has been advised by the underwriters of the
+Class A Notes that they propose initially to offer the
+Class A Notes to the public at the prices set forth herein.
+After the initial public offering of the Class A Notes, the
+public offering prices may change.
+
+ 
+Subject to the terms and conditions set forth in the underwriting
+ agreement, the seller has agreed to cause the trust to sell to
+the underwriter named below, and such underwriter has agreed to
+purchase, the initial principal amount of the Class B Notes
+set forth below opposite its name.
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Principal
+
+ 
+ 
+ Amount of
+
+ 
+ 
+ Class B
+
+ Class B Note Underwriter
+ 
+ Notes
+
+ 
+ 
+ 
+
+ 
+ Deutsche Bank Securities Inc. 
+ 
+ $
+ 97,397,000
+ 
+
+ 
+The seller has been advised by the underwriter of the
+Class B Notes that it proposes initially to offer the
+Class B Notes to the public at the price set forth herein.
+After the initial public offering of the Class B Notes, the
+public offering price may change.
+
+ 
+The underwriting discounts and commissions, the selling
+concessions that the underwriters of the notes and the
+certificates may allow to certain dealers, and the discounts that
+ such dealers
+
+114
+
+Table of Contents
+
+may reallow to certain other dealers, expressed as a percentage
+of the principal amount of each Class of notes and as an
+aggregate dollar amount, shall be as follows:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Underwriting
+ 
+ Net
+ 
+ Selling
+ 
+ 
+
+ 
+ 
+ Discount and
+ 
+ Proceeds
+ 
+ Concessions
+ 
+ Reallowance
+
+ 
+ 
+ Commissions
+ 
+ to the Seller
+ 
+ not to exceed
+ 
+ not to exceed
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Class A-1 Notes
+ 
+ 
+ 0.2100%
+ 
+ 
+ 
+ 99.790000%
+ 
+ 
+ 
+ 0.1300
+ %
+ 
+ 
+ 0.075
+ %
+
+ 
+ Class A-2 Notes
+ 
+ 
+ 0.2300%
+ 
+ 
+ 
+ 99.768817%
+ 
+ 
+ 
+ 0.1400
+ %
+ 
+ 
+ 0.100
+ %
+
+ 
+ Class A-3 Notes
+ 
+ 
+ 0.2500%
+ 
+ 
+ 
+ 99.742135%
+ 
+ 
+ 
+ 0.1500
+ %
+ 
+ 
+ 0.100
+ %
+
+ 
+ Class A-4 Notes
+ 
+ 
+ 0.2500%
+ 
+ 
+ 
+ 99.750000%
+ 
+ 
+ 
+ 0.1500
+ %
+ 
+ 
+ 0.100
+ %
+
+ 
+ Class A-5 Notes
+ 
+ 
+ 0.2500%
+ 
+ 
+ 
+ 99.750000%
+ 
+ 
+ 
+ 0.1500
+ %
+ 
+ 
+ 0.100
+ %
+
+ 
+ Class B Notes
+ 
+ 
+ 0.3500%
+ 
+ 
+ 
+ 99.631967%
+ 
+ 
+ 
+ 0.2100
+ %
+ 
+ 
+ 0.125
+ %
+
+ 
+ 
+ Total for the Class A Notes and Class B Notes
+ 
+ $
+ 6,412,594.50
+ 
+ 
+ $
+ 2,720,639,651.07
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ The price to the public and the proceeds to the issuer will also
+ include interest accrued on the offered securities, if any, from
+ October 26, 2000.
+
+ 
+
+ 
+ 
+ 
+ Some of the proceeds to the issuer will be used to reimburse
+ expenses payable by the seller estimated to be U.S.$1,219,928.
+
+ 
+Until the distribution of the Class A Notes and the
+Class B Notes is completed, rules of the Commission may
+limit the ability of the underwriters and certain selling group
+members to bid for and purchase the Class A Notes and the
+Class B Notes. As an exception to these rules, the
+underwriters are permitted to engage in certain transactions that
+ stabilize the price of the Class A Notes and the
+Class B Notes. Such transactions consist of bids or
+purchases for the purpose of pegging, fixing or maintaining the
+price of the Class A Notes and the Class B Notes.
+
+ 
+If the underwriters create a short position in the Class A
+Notes or Class B Notes in connection with this offering (
+i.e., they sell more Class A Notes or Class B Notes
+ than are set forth on the cover page hereof), the underwriters
+may reduce that short position by purchasing the Class A
+Notes or the Class B Notes, as the case may be, in the open
+market.
+
+ 
+The underwriters may also impose a penalty bid on certain
+underwriters and selling group members. This means that if the
+underwriters purchase the Class A Notes or Class B
+Notes in the open market to reduce the underwriters short
+position or to stabilize the price of such Class A Notes or
+Class B Notes, they may reclaim the amount of the selling
+concession from any underwriter or selling group member who sold
+those Class A Notes or Class B Notes, as the case may
+be, as part of the offering.
+
+ 
+In general, purchases of a security for the purpose of
+stabilization or to reduce a short position could cause the price
+ of the security to be higher than it might be in the absence of
+such purchases. The imposition of a penalty bid might also have
+an effect on the price of a security to the extent that it were
+to discourage resales of the security.
+
+ 
+Neither the seller nor any of the underwriters makes any
+representation or prediction as to the direction or magnitude of
+any effect that the transactions described above may have on the
+price of the Class A Notes or Class B Notes. In
+addition, neither the seller nor any of the underwriters makes
+any representation that the underwriters will engage in such
+transactions or that such transactions, once commenced, will not
+be discontinued without notice.
+
+ 
+The Class A Notes and the Class B Notes are new issues
+of securities and there currently is no secondary market for such
+ securities. The underwriters for the notes expect to make a
+market in such securities but will not be obligated to do so.
+There is no assurance that a secondary market for the notes or
+certificates will develop. If a secondary market for the notes
+
+115
+
+Table of Contents
+
+and certificates does develop, it might end at any time or it
+might not be sufficiently liquid to enable you to resell any of
+your notes or certificates.
+
+ 
+The indenture trustee may, from time to time, invest the funds in
+ the Collection Account, the Accumulation Account and the Reserve
+ Account in investments acquired from or issued by the
+underwriters.
+
+ 
+In the ordinary course of business, the underwriters and their
+affiliates have engaged and may engage in investment banking and
+commercial banking transactions with the servicer and its
+affiliates.
+
+ 
+The seller and Ford Credit have agreed to indemnify the
+underwriters against certain liabilities, including civil
+liabilities under the Securities Act of 1933, as amended, or to
+contribute to payments which the underwriters may be required to
+make in respect thereof.
+
+ 
+The closings of the sale of each Class of the notes on the
+Closing Date are conditioned on the closing of the sale of each
+other Class of notes and on the issuance of certificates.
+
+ 
+Upon receipt of a request by an investor who has received an
+electronic prospectus from an underwriter or a request by such
+investor s representative within the period during which
+there is an obligation to deliver a prospectus, the seller or the
+ underwriter will promptly deliver, or cause to be delivered,
+without charge, a paper copy of the prospectus.
+
+Settlement
+
+ 
+All payments in respect of the Offered Securities shall be made
+in United States dollars in same-day funds.
+
+LISTING AND GENERAL INFORMATION
+
+ 
+ 
+ 
+
+ 
+ 1. 
+ 
+ Application has been made to list the Class A-1 Notes,
+ Class A-2 Notes, Class A-3 Notes, Class A-4
+ Notes, Class A-5 Notes and Class B Notes (collectively,
+ the Luxembourg Listed Notes ) on the
+ Luxembourg Stock Exchange. Banque International Luxembourg
+ S.A. has been appointed as the Listing Agent. There can be no
+ assurance that such listing will be obtained. Prior to the
+ listing, a legal notice relating to the issue of the Luxembourg
+ Listed Notes and the trust agreement under which the trust will
+ be created will be deposited with the Chief Registrar of the
+ District of Luxembourg ( Greffier en Chef du Tribunal
+ d Arrondissement de et Luxembourg ), where
+ copies thereof may be obtained, free of charge, upon request.
+
+ 
+
+ 
+ 2. 
+ 
+ So long as the Luxembourg Listed Notes are listed on the
+ Luxembourg Stock Exchange and as the rules of the Luxembourg
+ Stock Exchange require, the trust will maintain a paying agent
+ and a transfer agent in Luxembourg. Banque Internationale 
+ Luxembourg S.A. will initially act as such paying agent and
+ transfer agent in Luxembourg (together with any subsequent paying
+ agent, the Luxembourg Paying Agent ).
+
+ 
+
+ 
+ 3. 
+ 
+ If issued, Definitive Notes may be presented for payment at the
+ principal corporate offices of any paying agent up to two years
+ after such maturity or final distribution. Thereafter, the
+ indenture trustee may take appropriate steps to contact the
+ remaining holders of the notes regarding the surrender of their
+ notes, and the cost thereof will be paid out of the funds held by
+ the indenture trustee for the benefit of such holders.
+
+ 
+
+ 
+ 4. 
+ 
+ Copies of the Receivables Transfer and Servicing Agreements, the
+ Interest Rate Swaps, the indenture for the notes, the trust
+ agreement for the certificates and the monthly statements
+ described in Distributions on the Securities 
+ Reports to Securityholders in this prospectus will be
+ available for inspection so long as the Luxembourg Listed Notes
+ are outstanding at the office of the Listing Agent in the City of
+ Luxembourg.
+
+116
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ 5. 
+ 
+ The trust represents that there has been no material adverse
+ change in its financial position since its date of creation.
+
+ 
+
+ 
+ 6. 
+ 
+ The trust is not involved in any litigation or arbitration
+ proceedings relating to claims on amounts which are material in
+ the context of the issue of the Luxembourg Listed Notes, nor, so
+ far as the trust is aware, is any such litigation or arbitration
+ involving it pending or threatened.
+
+ 
+
+ 
+ 7. 
+ 
+ The establishment of the trust and the sale of the receivables
+ was authorized by the Board of Directors of the general partner
+ of the seller by resolutions passed on September 1, 1998.
+
+ 
+
+ 
+ 8. 
+ 
+ The Class A Notes and Class B Notes represented by the
+ global certificates are expected to be accepted for clearance
+ through Clearstream Banking Luxembourg S.A. and Euroclear:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ ISIN
+ 
+ Common Codes
+ 
+ CUSIP
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Class A-1 Notes
+ 
+ 
+ US34527RER03
+ 
+ 
+ 
+ 11944302
+ 
+ 
+ 
+ 34527RER0
+ 
+
+ 
+ Class A-2 Notes
+ 
+ 
+ US34527RES85
+ 
+ 
+ 
+ 11949398
+ 
+ 
+ 
+ 34527RES8
+ 
+
+ 
+ Class A-3 Notes
+ 
+ 
+ US34527RET68
+ 
+ 
+ 
+ 11949428
+ 
+ 
+ 
+ 34527RET6
+ 
+
+ 
+ Class A-4 Notes
+ 
+ 
+ US34527REU32
+ 
+ 
+ 
+ 11949606
+ 
+ 
+ 
+ 34527REU3
+ 
+
+ 
+ Class A-5 Notes
+ 
+ 
+ US34527REV15
+ 
+ 
+ 
+ 11949673
+ 
+ 
+ 
+ 34527REV1
+ 
+
+ 
+ Class B Notes
+ 
+ 
+ US34527REW97
+ 
+ 
+ 
+ 11954022
+ 
+ 
+ 
+ 34527REW9
+ 
+
+ 
+ ISIN: International Securities Identification Number
+
+ 
+ 
+ 
+
+ 
+ 9. 
+ 
+ Except as disclosed herein, as at the date of this prospectus the
+ trust has no outstanding loan capital, borrowings, indebtedness
+ or contingent liabilities, nor has the trust created any
+ mortgages, charges or guarantees.
+
+ 
+ 
+ 
+
+ 
+ 10. 
+ 
+ Amounts paid by the trust in respect of principal of and interest
+ on the Luxembourg Listed Notes and unclaimed by the holder
+ entitled to the same for two years following the date on which
+ such interest and principal was paid will be deemed forfeited and
+ revert to the seller. Claims against the trust and seller for
+ the payment of any such interest and principal will be proscribed
+ unless made within such two-year period.
+
+LEGAL OPINIONS
+
+ 
+Certain legal and state tax matters relating to the Class A
+Notes and Class B Notes will be passed upon for the seller
+and the servicer by Hurley D. Smith, Esq., Secretary and
+Corporate Counsel of the servicer. Certain legal matters relating
+ to the Class A Notes and Class B Notes will be passed
+upon for the underwriters and certain federal income tax and
+other matters will be passed upon for the seller by Skadden,
+Arps, Slate, Meagher Flom LLP. Mr. Smith is a
+full-time employee of Ford Credit and owns and holds options to
+purchase shares of Common Stock of Ford Motor Company. Skadden,
+Arps, Slate, Meagher Flom LLP have from time to time
+represented Ford Motor Company, Ford Credit and their affiliates
+in connection with other transactions.
+
+117
+
+Table of Contents
+
+GLOSSARY OF TERMS FOR THE PROSPECTUS
+
+ 
+ Accrued Fixed Rate Payments has the meaning
+set forth on page 67.
+
+ 
+ Accumulation Account means the account which
+the servicer will establish in the name of the indenture trustee
+into which the trust will deposit (1) the Principal
+Distribution Amount on any Monthly Distribution Date during the
+Amortization Period if no Variable Pay Term Notes are outstanding
+ and Class A Notes remain outstanding, but no Class A
+Notes are outstanding for which the Targeted Scheduled
+Distribution Date has occurred, the notes have not been
+accelerated following an Event of Default and no Early
+Amortization Event has occurred and (2) the Principal
+Distribution Amount on any Monthly Distribution Date during the
+Revolving Period, to the extent not reinvested in Additional
+Receivables.
+
+ 
+ Actuarial Advance means an advance on an
+Actuarial Receivable made by the servicer, in its sole
+discretion, for a deficiency in a scheduled payment as of the
+last day of a Collection Period.
+
+ 
+ Actuarial Receivable means a receivable that
+provides for amortization of the loan over a series of fixed
+level payment monthly installments where each monthly
+installment, including the monthly installment representing the
+final payment on the receivable, consists of an amount of
+interest equal to 1/12 of the loan APR multiplied by the
+unpaid principal balance of the loan, and an amount of principal
+equal to the remainder of the monthly installment.
+
+ 
+ Additional Receivable means an additional
+receivable purchased by the trust from the seller on a Monthly
+Distribution Date during the Revolving Period that meets the
+eligibility criteria described on page 49.
+
+ 
+ administrator means, Ford Credit, in its
+capacity as administrator of the trust under an administration
+agreement.
+
+ 
+ Amortization Date means the earlier of
+(i) the Scheduled Amortization Date and (ii) the date
+on which an Early Amortization Event occurs.
+
+ 
+ Amortization Period means the period starting
+on the Amortization Date and ending on the date that all classes
+of notes and certificates have been paid in full.
+
+ 
+ APR means, with respect to a receivable, its
+annual percentage rate and with respect to the Receivables Pool,
+the weighted average annual percentage rate of all of the
+receivables in that pool.
+
+ 
+ Authorized Newspaper means a newspaper of
+general circulation in Luxembourg, expected to be the 
+Luxemburger Wort.
+
+ 
+ Available Collections for a Monthly
+Distribution Date will be the sum of the following amounts with
+respect to the Collection Period preceding that Monthly
+Distribution Date (subject to the exclusions set forth below such
+ amounts):
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ all scheduled payments and all prepayments in full collected with
+ respect to Actuarial Receivables (including amounts withdrawn
+ from the Payahead Account but excluding amounts deposited into
+ the Payahead Account) and all payments collected with respect to
+ Simple Interest Receivables;
+
+ 
+
+ 
+ 
+ 
+ all Liquidation Proceeds and all recoveries in respect of
+ Liquidated Receivables which were written off in prior Collection
+ Periods;
+
+ 
+
+ 
+ 
+ 
+ all Servicer Collections Advances made by the servicer of
+ principal due on the Actuarial Receivables;
+
+ 
+
+ 
+ 
+ 
+ all Servicer Collections Advances made by the servicer of
+ interest due on the receivables;
+
+118
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ all Servicer Collections Advances, if any, of interest made by
+ the servicer in respect of receivables which were prepaid in
+ full;
+
+ 
+
+ 
+ 
+ 
+ the Purchase Amount of each receivable that was repurchased by
+ the seller or purchased by the servicer under an obligation which
+ arose during the related Collection Period;
+
+ 
+
+ 
+ 
+ 
+ any investment earnings (net of any investment losses) from
+ amounts in the Accumulation Account which have been invested in
+ Permitted Investments;
+
+ 
+
+ 
+ 
+ 
+ on any Quarterly Payment Date, the excess, if any, of the amount
+ on deposit in the Class A Quarterly Interest Funding Account
+ over the aggregate amount of interest due on the Quarterly Pay
+ Class A Notes (after giving effect to all deposits to such
+ account on such Quarterly Payment Date and the payment of the Net
+ Swap Payments on the Quarterly Pay Floating Rate Class A
+ Note Interest Rate Swaps on such date); and
+
+ 
+
+ 
+ 
+ 
+ partial prepayments of any refunded item included in the
+ principal balance of a receivable, such as extended warranty
+ protection plan costs, or physical damage, credit life,
+ disability insurance premiums, or any partial prepayment which
+ causes a reduction in the obligor s periodic payment to an
+ amount below the scheduled payment as of the Initial Cut-off Date
+ or any Subsequent Cut-off Date.
+
+ 
+The Available Collections on any Monthly Distribution Date
+ will exclude the following:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ amounts received on any receivable to the extent that the
+ servicer has previously made an unreimbursed Servicer Collections
+ Advance with respect to such receivable;
+
+ 
+
+ 
+ 
+ 
+ amounts received on any of the receivables to the extent that the
+ servicer has previously made an unreimbursed Servicer
+ Collections Advance on a receivable which is not recoverable from
+ collections on the particular receivable;
+
+ 
+
+ 
+ 
+ 
+ Liquidation Proceeds with respect to a particular Actuarial
+ Receivable to the extent of any unreimbursed Actuarial Advances
+ made with respect to that Actuarial Receivable;
+
+ 
+
+ 
+ 
+ 
+ all payments and proceeds (including Liquidation Proceeds) of any
+ receivables the Purchase Amount of which has been included in
+ the Available Funds in a prior Collection Period;
+
+ 
+
+ 
+ 
+ 
+ Liquidation Proceeds with respect to a Simple Interest Receivable
+ attributable to accrued and unpaid interest thereon (but not
+ including interest for the then current Collection Period) but
+ only to the extent of any unreimbursed Simple Interest Advances;
+
+ 
+
+ 
+ 
+ 
+ amounts constituting the Supplemental Servicing Fee;
+
+ 
+
+ 
+ 
+ 
+ amounts on deposit in the Accumulation Account (exclusive of
+ investment earnings from amounts in the Accumulation Account
+ which have been invested in Permitted Investments);
+
+ 
+
+ 
+ 
+ 
+ amounts on deposit in the Class A Quarterly Interest Funding
+ Account (except to the extent of, on any Quarterly Payment Date,
+ amounts that are not required to pay the amount of interest due
+ on the Quarterly Pay Class A Notes, after giving effect to
+ all deposits to such account on such Quarterly Payment Date and
+ the payment of the Net Swap Payments on the Quarterly Pay
+ Floating Rate Class A Note Interest Rate Swaps on such
+ date); and
+
+ 
+
+ 
+ 
+ 
+ proceeds from the issuance and sale of any Variable Pay Term
+ Notes.
+
+ 
+Although amounts in the Accumulation Account are not part of the
+Available Collections, amounts will be withdrawn from the
+Accumulation Account and applied during the Revolving Period to
+purchase Additional Receivables as described under 
+ Description of the Notes The Revolving
+Period and during the Amortization Period to pay
+principal on the notes and
+
+119
+
+Table of Contents
+
+certificates as described under Distributions on the
+Securities Distributions Priority in
+Which the Trust Makes Principal Payments on the Notes and
+Certificates. 
+
+ 
+ Available Funds for a Monthly Distribution
+Date shall be the sum of:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the Available Collections,
+
+ 
+
+ 
+ 
+ 
+ the Reserve Account Excess Amount,
+
+ 
+
+ 
+ 
+ 
+ the Net Swap Receipts on the Monthly Pay Floating Rate
+ Class A Note Interest Rate Swaps and the Variable Pay Term
+ Notes Interest Rate Swap, and
+
+ 
+
+ 
+ 
+ 
+ any swap termination payments paid by the swap counterparty to
+ the extent that such amounts are not used to enter into a
+ replacement interest rate swap.
+
+ 
+ Benefit Plan Investor means any:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ employee benefit plans (as defined in
+ Section 3(3) of ERISA) including without limitation
+ governmental plans, foreign pension plans and church plans;
+
+ 
+
+ 
+ 
+ 
+ plans described in Section 4975(e)(1) of the
+ Code, including individual retirement accounts and Keogh plans;
+ or
+
+ 
+
+ 
+ 
+ 
+ entities whose underlying assets include plan assets by reason of
+ a plan s investment in such entity, including without
+ limitation, as applicable, an insurance company general account.
+
+ 
+ Business Day is a day other than a Saturday, a
+ Sunday or a day on which banking institutions or trust companies
+ in The City of New York or the State of Delaware are authorized
+by law, regulation or executive order to be closed.
+
+ 
+ Calculation Agent means the calculation agent
+appointed to calculate interest rates on the Floating Rate
+Class A Notes and Variable Pay Term Notes. The Chase
+Manhattan Bank will be appointed as the initial Calculation
+Agent.
+
+ 
+ Certificate Balance means:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ with respect to the Class C Certificates, initially,
+ $55,656,000 and, thereafter, means the initial Certificate
+ Balance of the Class C Certificates, reduced by all amounts
+ allocable to principal previously distributed to the holders of
+ the Class C Certificates; and
+
+ 
+
+ 
+ 
+ 
+ with respect to the Class D Certificates, initially,
+ $55,656,000 and, thereafter, means the initial Certificate
+ Balance of the Class D Certificates, reduced by all amounts
+ allocable to principal previously distributed to holders of the
+ Class D Certificates.
+
+ 
+ certificates means the Class C
+Certificates and the Class D Certificates.
+
+ 
+ Certificate Interest Distribution Account 
+means the interest payment account which the owner trustee will
+create for the benefit of the holders of the certificates.
+
+ 
+ Certificate Principal Distribution Account 
+means the principal payment account which the owner trustee will
+create for the benefit of the holders of the certificates.
+
+ 
+ Class A Percentage means, for a Monthly
+Distribution Date, the percentage equal to a fraction, the
+numerator of which is the outstanding principal balance of the
+Class A Notes and the denominator of which is the sum of the
+ outstanding principal balance of the Class A Notes plus the
+ outstanding principal balance of the Variable Pay Term Notes, in
+ each case at the close of business on the immediately preceding
+Monthly Distribution Date (or, in the case of the first Monthly
+Distribution Date, the Closing Date).
+
+ 
+ Class A Quarterly Interest Funding Account 
+ is an account which the indenture trustee will establish
+into which amounts allocable to the Quarterly Pay Floating Rate
+Class A Note
+
+120
+
+Table of Contents
+
+Interest Rate Swaps (other than swap termination payments) and
+interest payments on the Quarterly Pay Class A Notes will be
+ deposited.
+
+ 
+ Class A Quarterly Interest Funding Account Deposit
+Amount has the meaning set forth on page 78.
+
+ 
+ Class B Note Interest Rate means interest
+ rate set forth on the cover page of this prospectus with respect
+ to the Class B Notes.
+
+ 
+ Clearance System means each of Clearstream and
+ Euroclear.
+
+ 
+ Clearstream means Clearstream Banking
+Luxembourg S.A., formerly known as Cedelbank.
+
+ 
+ Closing Date means October 26, 2000.
+
+ 
+ Code means the Internal Revenue Code of 1986,
+as amended.
+
+ 
+ Collection Account means an account, held in
+the name of the indenture trustee, into which the servicer is
+required to deposit collections on the receivables.
+
+ 
+ Collection Period means, with respect to the
+first Monthly Distribution Date, the calendar month ending on
+October 31, 2000, and with respect to each subsequent
+Monthly Distribution Date, the calendar month preceding the
+calendar month in which a Monthly Distribution Date occurs.
+
+ 
+ Controlling Class shall mean the outstanding
+Class A Notes and the outstanding Variable Pay Term Notes as
+ long as any Class A Notes or Variable Pay Term Notes are
+outstanding, and thereafter the Class B Notes as long as any
+ Class B Notes are outstanding, and thereafter the
+Class C Certificates as long as any Class C
+Certificates are outstanding, in all cases excluding notes held
+by FCAR Owner Trust (a commercial paper conduit administered by
+Ford Credit), the seller and the servicer or their affiliates.
+
+ 
+ Corporate Trust Office with respect to the
+initial Registrar, is 450 West 33rd Street, New York, New York
+10001; and with respect to the Luxembourg Paying Agent,
+Luxembourg S.A.69, Route d Esch, L-2953 Luxembourg.
+
+ 
+ Definitive Notes means with respect to the
+Class A Notes and Class B Notes, such notes issued in
+fully registered, certificated form to noteholders or their
+respective nominees, rather than to DTC or its nominee.
+
+ 
+ Delaware trustee means The Bank of New York
+(Delaware), a Delaware banking corporation as Delaware trustee
+under the trust agreement.
+
+ 
+ DOL means the United States Department of
+Labor.
+
+ 
+ DTC means The Depository Trust Company and any
+ successor depository selected by the trust.
+
+ 
+ Early Amortization Event has the meaning set
+forth on page 58.
+
+ 
+ Eligible Deposit Account means either:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ a segregated account with an Eligible Institution; or
+
+ 
+
+ 
+ 
+ 
+ a segregated trust account with the corporate trust department of
+ a depository institution organized under the laws of the U.S. or
+ any one of the states thereof or the District of Columbia (or
+ any domestic branch of a foreign bank), having corporate trust
+ powers and acting as trustee for funds deposited in such account,
+ so long as any of the securities of such depository institution
+ have a credit rating from each Rating Agency in one of its
+ generic rating categories which signifies investment grade.
+
+121
+
+Table of Contents
+
+ 
+ Eligible Institution means, with respect to
+securities of the trust:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the corporate trust department of the indenture trustee, the
+ owner trustee or the Delaware trustee, as applicable; or
+
+ 
+
+ 
+ 
+ 
+ a depository institution organized under the laws of the U.S. or
+ any one of the states thereof or the District of Columbia (or any
+ domestic branch of a foreign bank), (1) which has either
+ (A) a long-term unsecured debt rating acceptable to the
+ Rating Agencies or (B) a short-term unsecured debt rating or
+ certificate of deposit rating acceptable to the Rating Agencies
+ and (2) whose deposits are insured by the FDIC.
+
+ 
+ Eligible Purchaser means with respect to a
+purchaser of Variable Pay Term Notes, either FCAR Owner Trust (a
+commercial paper conduit administered by Ford Credit) or any
+other purchaser satisfactory to the Rating Agencies.
+
+ 
+ ERISA means the Employee Retirement Income
+Security Act of 1974, as amended.
+
+ 
+ Euroclear means a professional depository
+operated by the Brussels, Belgium office of Morgan Guaranty Trust
+ Company of New York under contract with Euroclear Clearance
+System, S.C., a Belgian cooperative corporation.
+
+ 
+ Event of Default has the meaning set forth on
+page 71.
+
+ 
+ Event of Servicing Termination has the meaning
+ set forth on page 97.
+
+ 
+ Exchange Act means the U.S. Securities
+Exchange Act of 1934, as amended.
+
+ 
+ FCAR Owner Trust means FCAR Owner Trust, a
+commercial paper conduit administered by Ford Credit.
+
+ 
+ Final Scheduled Distribution Date for each
+class of notes and certificates means the respective dates set
+forth on the cover page hereof or, if such date is not a Business
+ Day, the next succeeding Business Day.
+
+ 
+ First Priority Principal Distribution Amount 
+means, with respect to any Monthly Distribution Date, an amount
+not less than zero equal to:
+
+ 
+(SN AA) (PB YSOA)
+
+ 
+Where:
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ SN
+ 
+ 
+ =
+ 
+ 
+ the aggregate of the outstanding principal balances of the
+ Class A Notes and Variable Pay Term Notes as of the
+ preceding Monthly Distribution Date, after giving effect to any
+ principal payments made on the Class A Notes or Variable Pay
+ Term Notes on such preceding Monthly Distribution Date;
+
+ 
+
+ 
+ AA
+ 
+ 
+ =
+ 
+ 
+ the amount (exclusive of investment earnings) in the Accumulation
+ Account as of the preceding Monthly Distribution Date;
+
+ 
+
+ 
+ PB
+ 
+ 
+ =
+ 
+ 
+ the Pool Balance as of such Monthly Distribution Date; and
+
+ 
+
+ 
+ YSOA
+ 
+ 
+ =
+ 
+ 
+ the Yield Supplement Overcollateralization Amount with respect to
+ such Monthly Distribution Date.
+
+ 
+Provided, however that:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the First Priority Principal Distribution Amount on or after the
+ Class A-1 Final Scheduled Distribution Date shall not be
+ less than the amount that is necessary to reduce the outstanding
+ principal amount of the Class A-1 Notes to zero;
+
+ 
+
+ 
+ 
+ 
+ the First Priority Principal Distribution Amount on or after the
+ Class A-2 Final Scheduled Distribution Date shall not be
+ less than the amount that is necessary to reduce the outstanding
+ principal amount of the Class A-2 Notes to zero;
+
+122
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the First Priority Principal Distribution Amount on or after the
+ Class A-3 Final Scheduled Distribution Date shall not be
+ less than the amount that is necessary to reduce the outstanding
+ principal amount of the Class A-3 Notes to zero;
+
+ 
+
+ 
+ 
+ 
+ the First Priority Principal Distribution Amount on or after the
+ Class A-4 Final Scheduled Distribution Date shall not be
+ less than the amount that is necessary to reduce the outstanding
+ principal amount of the Class A-4 Notes to zero;
+
+ 
+
+ 
+ 
+ 
+ the First Priority Principal Distribution Amount on or after the
+ Class A-5 Final Scheduled Distribution Date shall not be
+ less than the amount that is necessary to reduce the outstanding
+ principal amount of the Class A-5 Notes to zero; and
+
+ 
+
+ 
+ 
+ 
+ the First Priority Principal Distribution Amount on or after the
+ Final Scheduled Distribution Date of the Variable Pay Term Notes
+ shall not be less than the amount that is necessary to reduce the
+ outstanding principal amount of all Variable Pay Term Notes to
+ zero.
+
+ 
+ Fitch means Fitch, Inc.
+
+ 
+ Fixed Class A Interest Rate Swap Rates 
+has the meaning set forth on page 67.
+
+ 
+ Fixed Rate Class A Notes means the
+Class A-2 Notes and the Class A-3 Notes.
+
+ 
+ Floating Rate Class A Note Interest Amounts 
+ means, for any Monthly Distribution Date or Quarterly
+Payment Date, the amount of interest due or accrued on each
+Subclass of Floating Rate Class A Notes.
+
+ 
+ Floating Rate Class A Note Interest Rate Swap 
+ has the meaning set forth on page 65.
+
+ 
+ Floating Rate Class A Notes means the
+Class A-1 Notes, the Class A-4 Notes and the
+Class A-5 Notes.
+
+ 
+ Ford Credit means Ford Motor Credit Company.
+
+ 
+ General Account Regulations has the meaning
+set forth on page 113.
+
+ 
+ General Partner means Ford Credit Auto
+Receivables Two, Inc., a Delaware corporation and a wholly owned,
+ limited-purpose subsidiary of Ford Credit and the general
+partner of the seller.
+
+ 
+ Global Notes has the meaning set forth on
+page 54.
+
+ 
+ indenture trustee means The Chase Manhattan
+Bank, a New York corporation, as indenture trustee, under
+the indenture.
+
+ 
+ Index Maturity means:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ with respect to the Variable Pay Term Notes, one month;
+
+ 
+
+ 
+ 
+ 
+ with respect to a Subclass of Floating Rate Class A Notes,
+ three months, unless such Subclass of Floating Rate Class A
+ Notes is not paid in full on its Targeted Scheduled Distribution
+ Date or unless an Early Amortization Event or an acceleration of
+ the notes due to an Event of Default has occurred, in which case
+ the Index Maturity applicable to the first Interest Period
+ following such Targeted Scheduled Distribution Date, Early
+ Amortization Event or acceleration of the notes and for each
+ Interest Period thereafter shall mean one month; and
+
+ 
+
+ 
+ 
+ 
+ with respect to the calculation of any increases in the Specified
+ Reserve Balance that result from deposits that are made to the
+ Accumulation Account on any Monthly Distribution Date, one month;
+
+123
+
+Table of Contents
+
+provided, that with respect to the first Quarterly Interest
+Period, LIBOR with respect to the Quarterly Pay Class A
+Notes and the Quarterly Pay Floating Rate Class A Note
+Interest Rate Swaps will be equal to the linear interpolation
+between LIBOR as determined by reference to an Index Maturity of
+two months and LIBOR as determined by reference to an Index
+Maturity of three months with respect to the number of days
+in the first Quarterly Interest Period.
+
+ 
+ indirect participants has the meaning set
+forth on page 56.
+
+ 
+ Initial Cut-off Date means the date as of
+which the seller will transfer the initial receivables to the
+trust, which is October 1, 2000.
+
+ 
+ Insolvency Event means, with respect to any
+entity, any of the following events or actions: certain events of
+ insolvency, readjustment of debt, marshalling of assets and
+liabilities or similar proceedings with respect to such entity
+and certain actions by such entity indicating its insolvency,
+reorganization pursuant to bankruptcy proceedings or inability to
+ pay its obligations.
+
+ 
+ Interest Period means,
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ for any Subclass of Class A Notes, the Monthly Interest
+ Period or the Quarterly Interest Period, to the extent applicable
+ to that Subclass;
+
+ 
+
+ 
+ 
+ 
+ for the Class B Notes, the Variable Pay Term Notes, the
+ Certificates, the Monthly Pay Floating Rate Class A Note
+ Interest Rate Swaps, the Variable Pay Term Notes Interest Rate
+ Swaps and the calculation of any increases in the Specified
+ Reserve Balance that result from deposits that are made to the
+ Accumulation Account on any Monthly Distribution Date, the
+ Monthly Interest Period; and
+
+ 
+
+ 
+ 
+ 
+ for the Quarterly Pay Floating Rate Class A Note Interest
+ Rate Swaps, the Quarterly Interest Period.
+
+ 
+ Interest Rate means, (i) with respect to
+any Subclass of the Class A Notes, any Class B Notes,
+any Class C Certificates or any Class D Certificates,
+the rates set forth on the cover page hereof, and (ii) with
+respect to any Variable Pay Term Note, LIBOR plus the
+corresponding spread determined at the time of issuance.
+
+ 
+ Interest Rate Swaps has the meaning set forth
+on page 65.
+
+ 
+ Interest Reset Date means the first day of the
+ applicable Interest Period.
+
+ 
+ IRS means the Internal Revenue Service.
+
+ 
+ LIBOR means the London Interbank Offered Rate
+for U.S. dollar deposits for each Interest Period as determined
+by the Calculation Agent for any LIBOR Security as follows:
+
+ 
+ 
+ 
+
+ 
+ (1) 
+ 
+ On each LIBOR Determination Date, the Calculation Agent for such
+ LIBOR Security will obtain the rate for deposits in U.S. dollars
+ for the period of the Index Maturity, which appears on Telerate
+ Page 3750 (as defined in the International Swaps and
+ Derivatives Association, Inc. 1991 Interest Rate and Currency
+ Exchange Definitions) or such page as may replace Telerate
+ Page 3750, as of 11:00 a.m. (London time) on the
+ related LIBOR Determination Date.
+
+ 
+
+ 
+ (2) 
+ 
+ If the Calculation Agent determines that Telerate Page 3750
+ or such page as may replace Telerate Page 3750 is not available
+ on such LIBOR Determination Date, the Calculation Agent for such
+ LIBOR Security will request the principal London offices of each
+ of four major banks in the London interbank market selected by
+ such Calculation Agent to provide such Calculation Agent with its
+ offered quotations for deposits in U.S. dollars for a period of
+ the Index Maturity, commencing on such Interest Reset Date, to
+ prime banks in the London interbank market at approximately
+ 11:00 a.m., London time, on such LIBOR Determination Date
+ and in a principal amount equal to
+
+124
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ an amount of not less than $1,000,000 that is representative of a
+ single transaction in such market at such time. If at least two
+ such quotations are provided, LIBOR for such Interest Period will
+ be the arithmetic mean of such quotations. If fewer than two
+ such quotations are provided, LIBOR for such Interest Period will
+ be the arithmetic mean of rates quoted by three major banks in
+ The City of New York selected by the Calculation Agent for such
+ LIBOR Security at approximately 11:00 a.m., New York City
+ time, on such LIBOR Determination Date for loans in U.S. dollars
+ to leading European banks, for the period of the specified Index
+ Maturity, commencing on such Interest Reset Date, and in a
+ principal amount equal to an amount of not less than $1,000,000
+ that is representative of a single transaction in such market at
+ such time; provided, however, that if the banks selected as
+ aforesaid by such Calculation Agent are not quoting rates as
+ mentioned in this sentence, LIBOR for such Interest Period will
+ be the same as LIBOR for the immediately preceding Interest
+ Period.
+
+ 
+ LIBOR Determination Date means the second
+London banking day prior to the Interest Reset Date for the
+related Interest Period or, with respect to the calculation of
+any increases in the Specified Reserve Balance that result from
+deposits that are made to the Accumulation Account on any Monthly
+ Distribution Date, the second London banking day prior to such
+Monthly Distribution Date.
+
+ 
+ LIBOR Security means the Floating Rate
+Class A Notes and the Variable Pay Term Notes.
+
+ 
+ Liquidated Receivables means a receivable
+which:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ by its terms, is in default; and
+
+ 
+
+ 
+ 
+ 
+ as to which the servicer has determined, in accordance with its
+ customary servicing procedures, that eventual payment in full is
+ unlikely or has repossessed and disposed of the related financed
+ vehicle.
+
+ 
+ Liquidation Proceeds means all proceeds of a
+Liquidated Receivable, net of expenses incurred by the servicer
+in connection with such liquidation and any amounts required by
+law to be remitted to the obligor on such Liquidated Receivable
+in accordance with the servicer s customary servicing
+procedures.
+
+ 
+ Listing Agent means Banque Internationale
+ Luxembourg S.A.
+
+ 
+ London banking day means any day other than a
+Saturday, Sunday or any other day on which banks in London are
+required or authorized to be closed.
+
+ 
+ Luxembourg Listed Notes has the meaning set
+forth on page 116.
+
+ 
+ Luxembourg Paying Agent means the paying agent
+ and transfer agent in Luxembourg for any Luxembourg Listed Notes
+ issued as a Definitive Note, including any subsequent paying
+agent and transfer agent, and shall initially be Banque
+Internationale Luxembourg S.A., 69, route d Esch 11,
+L-2953 Luxembourg.
+
+ 
+ Michigan Tax Counsel means Hurley D. Smith,
+Esq., Secretary and Corporate Counsel of the servicer.
+
+ 
+ Monthly Distribution Date means the date on
+which the trust will make payments on the Monthly Pay
+Class A Notes, the Class B Notes, the Variable Pay Term
+ Notes and the certificates, and will make deposits into the
+Class A Quarterly Interest Funding Account, which will be
+the fifteenth day of each month or, if any such day is not a
+Business Day, on the next Business Day, commencing
+November 15, 2000.
+
+125
+
+Table of Contents
+
+ 
+ Monthly Interest Period means:
+
+ 
+ 
+
+ 
+ 
+ with respect to the Floating Rate Class A Notes, the accrual
+ of LIBOR-based interest on the Interest Rate Swaps and with
+ respect to LIBOR in the calculation of any increases in the
+ Specified Reserve Balance that result from deposits that are made
+ to the Accumulation Account on any Monthly Distribution Date
+ during the Revolving Period,
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ in the case of the first Monthly Distribution Date, the period
+ from and including the Closing Date to but excluding the first
+ Monthly Distribution Date;
+
+ 
+
+ 
+ 
+ 
+ for any other Monthly Distribution Date, the period from and
+ including the previous Monthly Distribution Date to but excluding
+ such Monthly Distribution Date;
+
+ 
+ 
+
+ 
+ 
+ with respect to the Fixed Rate Class A Notes, the
+ Class B Notes, the Class C Certificates, the
+ Class D Certificates and the accrual of fixed rate interest
+ on the Interest Rate Swaps,
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ in the case of the first Monthly Distribution Date, the period
+ from and including the Closing Date to but excluding the first
+ Monthly Distribution Date; and
+
+ 
+
+ 
+ 
+ 
+ for any other Monthly Distribution Date, the period from and
+ including the 15th day of the previous month to but excluding the
+ 15th day of the month of such Monthly Distribution Date.
+
+ 
+ Monthly Pay Class A Notes means, on any
+Monthly Distribution Date:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the Fixed Rate Class A Notes;
+
+ 
+
+ 
+ 
+ 
+ the Subclass or Subclasses of Floating Rate Class A Notes
+ that have passed their Targeted Scheduled Distribution Dates and,
+ as a result, are payable with respect to interest and principal
+ on each Monthly Distribution Date; and
+
+ 
+
+ 
+ 
+ 
+ if an Early Amortization Event or an acceleration of the notes
+ due to an Event of Default has occurred on or prior to the LIBOR
+ Determination Date relating to such Monthly Distribution Date,
+ all Subclasses of Floating Rate Class A Notes.
+
+ 
+ Monthly Pay Floating Rate Class A Note Interest
+Rate Swap means, on any Monthly Distribution Date, a
+Floating Rate Class A Note Interest Rate Swap for which the
+related Class A Notes are Monthly Pay Class A Notes.
+
+ 
+ Moody s means Moody s Investors
+Service, Inc.
+
+ 
+ MSRP means with respect to a motor vehicle,
+the manufacturer s suggested retail price.
+
+ 
+ Net Swap Payment means, with respect to any
+Monthly Distribution Date, the net amount payable by the trust to
+ any swap counterparty on such Monthly Distribution Date.
+
+ 
+ Net Swap Receipt means, with respect to any
+Monthly Distribution Date, the net amount owed by any swap
+counterparty to the trust on such Monthly Distribution Date.
+
+ 
+ Note Balance means, with respect to each class
+ of notes and as the context so requires, (1) with respect
+to all notes of such class, an amount equal to, initially, the
+initial Note Balance of such class of notes and, thereafter, an
+amount equal to the initial Note Balance of such class of notes,
+reduced by all amounts distributed to noteholders of such class
+of notes and allocable to principal or (2) with respect to
+any note of such class, an amount equal to, initially, the
+initial denomination of such note and, thereafter, an amount
+equal to such initial denomination, reduced by all amounts
+distributed in respect of such note and allocable to principal.
+
+ 
+ Note Owner means a person acquiring a
+beneficial ownership interest in notes (other than the Variable
+Pay Term Notes).
+
+126
+
+Table of Contents
+
+ 
+ notes means the Class A Notes, the
+Variable Pay Term Notes and the Class B Notes, collectively.
+
+ 
+ OID means original issue discount.
+
+ 
+ OID Regulations means the Treasury regulations
+ governing OID.
+
+ 
+ Optional Redemption has the meaning set forth
+on page 74.
+
+ 
+ owner trustee means The Bank of New York, a
+New York banking corporation.
+
+ 
+ participants has the meaning set forth on page
+ 54.
+
+ 
+ Payahead Account is an account which the
+servicer will establish in the name of the indenture trustee into
+ which it will deposit Payaheads.
+
+ 
+ Payaheads means early payments by or on behalf
+ of obligors on Actuarial Receivables which do not constitute
+scheduled payments, full prepayments, or certain partial
+prepayments that result in a reduction of the obligor s
+periodic payment below the scheduled payment as of the Initial
+Cut-off Date or any Subsequent Cut-off Date.
+
+ 
+ Permitted Investments means:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ direct obligations of, and obligations fully guaranteed as to
+ timely payment by, the United States of America or its agencies;
+
+ 
+
+ 
+ 
+ 
+ demand deposits, time deposits, certificates of deposit or
+ bankers acceptances of certain depository institutions or
+ trust companies having the highest rating from the applicable
+ Rating Agency rating the notes or certificates;
+
+ 
+
+ 
+ 
+ 
+ commercial paper having, at the time of such investment, a rating
+ in the highest rating category from the applicable Rating Agency
+ rating the notes or certificates;
+
+ 
+
+ 
+ 
+ 
+ investments in money market funds having the highest rating from
+ the applicable Rating Agency rating the notes or certificates;
+
+ 
+
+ 
+ 
+ 
+ repurchase obligations with respect to any security that is a
+ direct obligation of, or fully guaranteed by, the United States
+ of America or its agencies, in either case entered into with a
+ depository institution or trust company having the highest rating
+ from the applicable Rating Agency rating the notes or
+ certificates; and
+
+ 
+
+ 
+ 
+ 
+ any other investment (which may include motor vehicle retail
+ installment sale contracts) acceptable to the applicable Rating
+ Agencies.
+
+Permitted Investments are generally limited to obligations or
+securities which mature on or before the next Monthly
+Distribution Date.
+
+ 
+ Plan means any of the following
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ employee benefit plans (as defined in Section 3(3) of
+ ERISA),
+
+ 
+
+ 
+ 
+ 
+ plans described in Section 4975(e)(1) of the Code, including
+ individual retirement accounts or Keogh plans, and
+
+ 
+
+ 
+ 
+ 
+ any entities whose underlying assets include plan assets by
+ reason of a plan s investment in such entities.
+
+ 
+ Plan Assets Regulation means a regulation, 29
+C.F.R. Section 2510.3-101, issued by the DOL.
+
+ 
+ Pool Balance means for any Monthly
+Distribution Date, the aggregate principal balance of the
+receivables at the end of the preceding Collection Period (or in
+the case of the first Collection Period, as of the Initial
+Cut-off Date) plus the aggregate principal balance of any
+
+127
+
+Table of Contents
+
+Additional Receivables purchased during the month of such Monthly
+ Distribution Date as of their related Subsequent Cut-off Date,
+after giving effect to all payments (other than Payaheads)
+received from obligors, Liquidation Proceeds, Servicer
+Collections Advances and Purchase Amounts to be remitted by the
+servicer or the seller, as the case may be, for such Collection
+Period and all Realized Losses during such Collection Period.
+
+ 
+ Prepayment Assumption means the anticipated
+rate of prepayments assumed in pricing a debt instrument.
+
+ 
+ PRIMUS means:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ until August 1999, PRIMUS Automotive Financial Services,
+ Inc., a wholly owned subsidiary of Ford Credit conducting its
+ business as a corporate entity separate from Ford Credit; and
+
+ 
+
+ 
+ 
+ 
+ beginning in August 1999, Primus Financial Services, a d/b/a
+ of Ford Credit, conducting its business as a division of Ford
+ Credit.
+
+ 
+ Principal Distribution Account means, so long
+as any of the notes are outstanding, the administrative
+subaccount within the Collection Account created by the servicer
+entitled the Principal Distribution Account into
+which the Principal Distribution Amount shall be deposited and
+after the principal of all the notes has been paid in full, the
+Certificate Principal Distribution Account.
+
+ 
+ Principal Distribution Amount means the First
+Priority Principal Distribution Amount, the Second Priority
+Principal Distribution Amount and the Regular Principal
+Distribution Amount.
+
+ 
+ Principal Paying Agent means The Chase
+Manhattan Bank and any successor principal paying agent selected
+by the trust.
+
+ 
+ Purchase Amount means a price at which the
+seller or the servicer must purchase a receivable, equal to the
+amount required to be paid by the related obligor to prepay such
+receivable (including one month s interest thereon, in the
+month of payment, at the APR), after giving effect to the receipt
+ of any monies collected (from whatever source) on such
+receivable.
+
+ 
+ Quarterly Interest Period means, with respect
+to the Floating Rate Class A Notes which are Quarterly Pay
+Class A Notes and the accrual of LIBOR-based interest on the
+ Quarterly Pay Floating Rate Class A Note Interest Rate
+Swaps,
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ in the case of the first Quarterly Payment Date, the period from
+ and including the Closing Date to but excluding the first
+ Quarterly Payment Date; and
+
+ 
+
+ 
+ 
+ 
+ for any other Quarterly Payment Date, the three-month period from
+ and including the previous Quarterly Payment Date to but
+ excluding such Quarterly Payment Date.
+
+ 
+ Quarterly Pay Class A Notes means, on any
+ Monthly Distribution Date, all Subclasses of Class A Notes
+that have not become Monthly Pay Class A Notes.
+
+ 
+ Quarterly Pay Floating Rate Class A Note Interest
+Rate Swaps means, on any Monthly Distribution Date, the
+ Floating Rate Class A Note Interest Rate Swaps that have
+not become Monthly Pay Floating Rate Class A Note Interest
+Rate Swaps.
+
+ 
+ Quarterly Payment Date has the meaning set
+forth on page 59.
+
+ 
+ Rating Agencies means Fitch, S P and
+Moody s.
+
+ 
+ Realized Losses means the excess of the
+principal balance of any Liquidated Receivable over Liquidation
+Proceeds of such Liquidated Receivable to the extent allocable to
+ principal.
+
+128
+
+Table of Contents
+
+ 
+ receivables means collectively the initial
+receivables purchased by the trust on the Closing Date and the
+additional receivables purchased by the trust on each Monthly
+Distribution Date during the Revolving Period.
+
+ 
+ Receivables Pool means the pool of receivables
+ owned by the trust, consisting of motor vehicle retail
+installment sale contracts secured by security interests in the
+motor vehicles financed by those contracts.
+
+ 
+ Receivables Transfer and Servicing Agreements 
+means collectively the purchase agreement under which Ford Credit
+ will sell receivables to the seller, the sale and servicing
+agreement under which the trust will purchase receivables from
+the seller and the servicer will agree to service such
+receivables, the trust agreement under which the trust will be
+created and certificates will be issued and the administration
+agreement under which Ford Credit will undertake certain
+administrative duties.
+
+ 
+ Record Date with respect to any Monthly
+Distribution Date or Quarterly Payment Date means:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ with respect to the Quarterly Pay Class A Notes, the day
+ immediately preceding the Quarterly Payment Date;
+
+ 
+
+ 
+ 
+ 
+ with respect to the Class B Notes, the Variable Pay Term
+ Notes and any Monthly Pay Class A Notes, the day immediately
+ preceding the Monthly Distribution Date; and
+
+ 
+
+ 
+ 
+ 
+ with respect to the certificates, the last day of the month
+ preceding the Monthly Distribution Date.
+
+ 
+ Registrar has the meaning set forth on
+page 54.
+
+ 
+ Regular Principal Distribution Amount means,
+with respect to any Monthly Distribution Date, an amount not less
+ than zero equal to:
+
+ 
+ 
+
+ 
+ 
+ (OS AA (PB [SOA +
+ YSOA])) (FPDA + SPDA)
+
+ 
+ 
+ 
+ 
+ 
+
+ Where:
+ 
+ 
+ 
+ 
+
+ 
+ OS
+ 
+ 
+ =
+ 
+ 
+ the sum of the aggregate outstanding principal amount of all the
+ notes and the certificates as of the preceding Monthly
+ Distribution Date (after giving effect to any principal payments
+ to be made on the securities on such preceding Distribution Date)
+ or the Closing Date, as the case may be;
+
+ 
+ AA
+ 
+ 
+ =
+ 
+ 
+ the amount (exclusive of investment earnings) in the Accumulation
+ Account as of the preceding Monthly Distribution Date after
+ giving effect to all principal payments on such preceding Monthly
+ Distribution Date;
+
+ 
+ PB
+ 
+ 
+ =
+ 
+ 
+ the Pool Balance as of such Monthly Distribution Date;
+
+ 
+ SOA
+ 
+ 
+ =
+ 
+ 
+ the Specified Overcollateralization Amount with respect to such
+ Monthly Distribution Date;
+
+ 
+ YSOA
+ 
+ 
+ =
+ 
+ 
+ the Yield Supplement Overcollateralization Amount;
+
+ 
+ FPDA
+ 
+ 
+ =
+ 
+ 
+ the First Priority Principal Distribution Amount, if any, with
+ respect to such Monthly Distribution Date; and
+
+ 
+ SPDA
+ 
+ 
+ =
+ 
+ 
+ the Second Priority Principal Distribution Amount, if any, with
+ respect to such Monthly Distribution Date.
+
+ 
+provided, however, that the Regular Principal
+Distribution Amount:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ shall not exceed the sum of the aggregate outstanding principal
+ balance of all the notes and the aggregate Certificate Balance of
+ all the certificates on such Monthly Distribution
+
+129
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Date, after giving effect to any principal payments made on the
+ securities on such Monthly Distribution Date in respect of the
+ First Priority Principal Distribution Amount, if any, and the
+ Second Priority Principal Distribution Amount, if any;
+
+ 
+
+ 
+ 
+ 
+ on or after the Final Scheduled Distribution Date relating to the
+ Class C Certificates shall not be less than the amount that
+ is necessary to reduce the outstanding principal amount of the
+ Class C Certificates to zero; and
+
+ 
+
+ 
+ 
+ 
+ on or after the Final Scheduled Distribution Date relating to the
+ Class D Certificates shall not be less than the amount that
+ is necessary to reduce the Certificate Balance of the Class D
+ Certificates to zero.
+
+ 
+ Reserve Account means the account which the
+seller will establish in the name of the indenture trustee into
+which the seller will deposit the Reserve Initial Deposit and
+into or from which the indenture trustee will make the other
+deposits and withdrawals specified herein.
+
+ 
+ Reserve Account Excess Amount , with respect to
+ any Monthly Distribution Date, means an amount equal to the
+excess, if any, of:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the amount of cash or other immediately available funds in the
+ Reserve Account on that Monthly Distribution Date, prior to
+ giving effect to any withdrawals from the Reserve Account
+ relating to that Monthly Distribution Date, over
+
+ 
+
+ 
+ 
+ 
+ the Specified Reserve Balance with respect to that Monthly
+ Distribution Date.
+
+ 
+ Reserve Initial Deposit has the meaning set
+forth on page 88.
+
+ 
+ Revolving Period means the period beginning on
+ the Closing Date and ending on the earlier to occur of
+(1) the Scheduled Amortization Date and (2) the date on
+ which an Early Amortization Event occurs.
+
+ 
+ S P means Standard Poor s
+Ratings Services, a division of The McGraw-Hill Companies, Inc.
+
+ 
+ Scheduled Amortization Date means the Targeted
+ Scheduled Distribution Date for the Class A-1 Notes.
+
+ 
+ Second Priority Principal Distribution Amount 
+means, with respect to any Monthly Distribution Date, an amount
+not less than zero equal to:
+
+ 
+(N AA (PB YSOA)) 
+FPDA
+
+ 
+Where:
+
+ 
+ 
+ 
+
+ 
+ N =
+ 
+ the aggregate outstanding principal amount of the Class A
+ Notes and Class B Notes as of the preceding Monthly
+ Distribution Date (after giving effect to any principal payments
+ made on the notes on such preceding Monthly Distribution Date);
+
+ 
+
+ 
+ AA =
+ 
+ the amount (exclusive of investment earnings) in the Accumulation
+ Account as of the preceding Monthly Distribution Date;
+
+ 
+
+ 
+ PB =
+ 
+ the Pool Balance as of such Monthly Distribution Date;
+
+ 
+
+ 
+ YSOA =
+ 
+ the Yield Supplement Overcollateralization Amount; and
+
+ 
+
+ 
+ FPDA =
+ 
+ the First Priority Principal Distribution Amount, if any, with
+ respect to such Monthly Distribution Date.
+
+ 
+ 
+
+ 
+ 
+ provided, however, that:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the Second Priority Principal Distribution Amount shall not
+ exceed the sum of the aggregate outstanding principal balance of
+ all the notes and the aggregate
+
+130
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Certificate Balance of all the certificates on such Monthly
+ Distribution Date (after giving effect to any principal payments
+ to be made on the securities on such Monthly Distribution Date in
+ respect of the First Priority Principal Distribution Amount, if
+ any); and
+
+ 
+
+ 
+ 
+ 
+ the Second Priority Principal Distribution Amount on or after the
+ Final Scheduled Distribution Date relating to the Class B
+ Notes shall not be less than the amount that is necessary to
+ reduce the outstanding principal amount of the Class B Notes
+ to zero.
+
+ 
+ securities mean the notes and certificates.
+
+ 
+ Securities Act means the Securities Act of
+1933, as amended.
+
+ 
+ seller means Ford Credit Auto Receivables Two
+L.P., a Delaware limited partnership.
+
+ 
+ servicer means Ford Credit, a Delaware
+corporation and a wholly owned indirect subsidiary of Ford Motor
+Company.
+
+ 
+ Servicer Collections Advances means,
+collectively, Actuarial Advances and Simple Interest Advances.
+
+ 
+ Servicing Fee means a fee payable to the
+servicer on each Monthly Distribution Date for servicing the
+receivables which is equal to the product of 1/12 of 1.00%
+ and the Pool Balance as of such Monthly Distribution Date.
+
+ 
+ Servicer Liquidity Advance has the meaning set
+ forth on page 64.
+
+ 
+ Short-Term Notes means notes that have a
+maturity of one year or less from their date of original
+issuance.
+
+ 
+ Simple Interest Advance means an amount that
+the servicer shall deposit into the related collection account,
+in its sole discretion, equal to the amount of interest that
+would have been due on the related Simple Interest Receivables at
+ their respective APRs for the related Collection Period
+(assuming that such Simple Interest Receivables are paid on their
+ respective due dates) minus the amount of interest actually
+received on such Simple Interest Receivables during the related
+Collection Period.
+
+ 
+ Simple Interest Receivables are receivables
+that provide for the amortization of the amount financed under
+each receivable over a series of fixed level payment monthly
+installments. However, unlike the monthly installment under an
+Actuarial Receivable, each monthly installment consists of an
+amount of interest which is calculated on the basis of the
+outstanding principal balance of the receivable multiplied by the
+ stated APR and further multiplied by the period elapsed (as a
+fraction of a calendar year) since the preceding payment of
+interest was made. As payments are received under a Simple
+Interest Receivable, the amount received is applied first to
+interest accrued to the date of payment and the balance is
+applied to reduce the unpaid principal balance.
+
+ 
+ Special Tax Counsel means Skadden, Arps,
+Slate, Meagher Flom LLP.
+
+ 
+ Specified Credit Enhancement Amount means,
+with respect to any Monthly Distribution Date, the greatest of:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ $14,997,999.97;
+
+ 
+
+ 
+ 
+ 
+ 1.00% of the Pool Balance as of such Monthly Distribution Date;
+ or
+
+ 
+
+ 
+ 
+ 
+ the aggregate principal balance of the receivables that are
+ delinquent 91 days or more and were not Liquidated
+ Receivables at the end of the Collection Period preceding such
+ Monthly Distribution Date;
+
+131
+
+Table of Contents
+
+ 
+ 
+
+ 
+ 
+ provided, however, that the Specified Credit Enhancement
+ Amount with respect to any Monthly Distribution Date shall not
+ exceed the sum of the aggregate outstanding principal amount of
+ all the notes and the aggregate Certificate Balance of all the
+ certificates as of the preceding Monthly Distribution Date (after
+ giving effect to any principal payments made on the securities
+ on such preceding Monthly Distribution Date).
+
+ 
+ Specified Overcollateralization Amount means,
+with respect to any Monthly Distribution Date, the excess, if
+any, of:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the Specified Credit Enhancement Amount with respect to such
+ Monthly Distribution Date, over
+
+ 
+
+ 
+ 
+ 
+ the Specified Reserve Balance with respect to such Monthly
+ Distribution Date.
+
+ 
+ Specified Reserve Balance means the lesser of:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ $14,997,999.97; and
+
+ 
+
+ 
+ 
+ 
+ the sum of the aggregate outstanding principal amount of all the
+ notes and the certificates as of the preceding Monthly
+ Distribution Date, after giving effect to any principal payments
+ made on the securities on such Monthly Distribution Date,
+
+ 
+ 
+
+ 
+ 
+ plus, in each case, if amounts remain on deposit in the
+ Accumulation Account after giving effect to all deposits and
+ withdrawals on such Monthly Distribution Date, an additional
+ amount equal to the product of (i) the amount remaining on
+ deposit in the Accumulation Account and (ii) the weighted
+ average interest rate of the securities (after giving effect to
+ all principal payments on such Monthly Distribution Date) minus
+ one-month LIBOR (determined as of the second London banking day
+ prior to such Monthly Distribution Date) less 2.50%, and
+ (iii) a fraction, which (x) if such Monthly
+ Distribution Date occurs during the Revolving Period, the
+ numerator of which is one and the denominator of which is 12 and
+ (y) if such Monthly Distribution Date occurs during the
+ Amortization Period, the numerator of which is the number of
+ Monthly Distribution Dates after such Monthly Distribution Date
+ through and including the next Monthly Distribution Date that is
+ a Targeted Scheduled Distribution Date for any Subclass of
+ Class A Notes and the denominator of which is 12.
+
+ 
+ Subclass means any subclass of Class A
+Notes, including the Class A-1 Notes, the Class A-2
+Notes, the Class A-3 Notes, the Class A-4 Notes and the
+ Class A-5 Notes.
+
+ 
+ Subclass Interest Rate means, on any Monthly
+Distribution Date for any Subclass of Class A Notes, the
+interest rate set forth on the cover of this prospectus; 
+provided, that for any Monthly Pay Class A Notes, the
+Subclass Interest Rate will be equal to one-month LIBOR
+plus the spread set forth on the cover of this prospectus.
+
+ 
+ Subsequent Cut-off Date means, with respect to
+ any Additional Receivable, the first day of the calendar month
+in which such Additional Receivable is purchased by the trust.
+
+ 
+ Supplemental Servicing Fee means, for each
+Collection Period, the amount of any late, prepayment, and other
+administrative fees and expenses collected during that Collection
+ Period, plus any interest earned during the Collection Period on
+ amounts on deposit in the Collection Account and the Payahead
+Account during the Collection Period.
+
+ 
+ swap counterparty means a swap counterparty
+under a Floating Rate Class A Note Interest Rate Swap or the
+Variable Pay Term Notes Interest Rate Swap.
+
+ 
+ Targeted Scheduled Distribution Date for each
+Subclass of Class A Notes has the meaning set forth on the
+cover page hereof or, if such date is not a Business Day, the
+next succeeding Business Day.
+
+ 
+ Three-Month Rolling Average Delinquency Ratio 
+shall mean, for any Monthly Distribution Date, a rolling three
+month average (or, in the case of the first Monthly Distribution
+Date
+
+132
+
+Table of Contents
+
+following the Closing Date, the rolling one month average, or in
+the case of the second Monthly Distribution Date following the
+Closing Date, the rolling two month average) of the ratio,
+expressed as a percentage, of (a) the aggregate principal
+balance of the receivables over 60 days delinquent
+(excluding any Liquidated Receivables) during the related
+Collection Period to (b) the average of the aggregate
+outstanding principal balance of the receivables as of the end of
+ the related Collection Period; provided, that for purposes of
+determining the date on which an Early Amortization Event has
+occurred, the Three-Month Rolling Average Delinquency Ratio will
+be deemed to have been determined as of the end of the related
+Collection Period.
+
+ 
+ Three-Month Rolling Average Realized Loss Ratio 
+means, for any Monthly Distribution Date, a rolling three
+month average (or, in the case of the first Monthly Distribution
+Date following the Closing Date, the rolling one month average,
+or in the case of the second Monthly Distribution Date following
+the Closing Date, the rolling two month average) of the ratio,
+expressed as a percentage, of (a) the aggregate of the Realized
+Losses incurred during the related Collection Period to
+(b) the aggregate outstanding principal balance of the
+receivables as of the first day of the related Collection Period;
+ provided, that for purposes of determining the date on which an
+Early Amortization Event has occurred, the Three-Month Rolling
+Average Realized Loss Ratio will be deemed to have been
+determined as of the end of the related Collection Period.
+
+ 
+ Total Required Payment means, on any Monthly
+Distribution Date, the sum of:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the Servicing Fee and all unpaid Servicing Fees from prior
+ Collection Periods;
+
+ 
+
+ 
+ 
+ 
+ all interest payable on the Monthly Pay Class A Notes and
+ Variable Pay Term Notes, including any accrued interest and
+ interest on accrued interest;
+
+ 
+
+ 
+ 
+ 
+ the Class A Quarterly Interest Funding Account Deposit
+ Amount;
+
+ 
+
+ 
+ 
+ 
+ the First Priority Principal Distribution Amount, if any;
+
+ 
+
+ 
+ 
+ 
+ any Net Swap Payments with respect to the Variable Pay Term Notes
+ Interest Rate Swap and the Monthly Pay Floating Rate
+ Class A Note Interest Rate Swaps and any swap termination
+ payments due and payable to swap counterparties;
+
+ 
+
+ 
+ 
+ 
+ all interest payable on the Class B Notes, including any
+ accrued interest and interest on accrued interest;
+
+ 
+
+ 
+ 
+ 
+ the Second Priority Principal Distribution Amount, if any;
+
+ 
+
+ 
+ 
+ 
+ all interest payable on the Class C Certificates, including
+ any accrued interest and interest on accrued interest; and
+
+ 
+
+ 
+ 
+ 
+ all interest payable on the Class D Certificates, including
+ any accrued interest and interest on accrued interest,
+
+ 
+ 
+
+ 
+ 
+ provided, however, that following the occurrence and
+ during the continuation of an Event of Default which has resulted
+ in an acceleration of the notes, on any Monthly Distribution
+ Date until the Monthly Distribution Date on which the outstanding
+ principal amount of all the notes has been paid in full, the 
+ Total Required Payment shall mean the sum of:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the Servicing Fee and all unpaid Servicing Fees from prior
+ Collection Periods;
+
+ 
+
+ 
+ 
+ 
+ all interest payable on the Monthly Pay Class A Notes and
+ Variable Pay Term Notes, including any accrued interest thereon;
+
+ 
+
+ 
+ 
+ 
+ the Class A Quarterly Interest Funding Account Deposit
+ Amount;
+
+ 
+
+ 
+ 
+ 
+ any Net Swap Payments with respect to the Variable Pay Term Notes
+ Interest Rate Swap and the Monthly Pay Floating Rate
+ Class A Note Interest Rate Swaps and any swap termination
+ payments;
+
+133
+
+Table of Contents
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ all interest payable on the Class B Notes, including any
+ accrued interest thereon;
+
+ 
+
+ 
+ 
+ 
+ all interest payable on the Class C Certificates, including
+ any accrued interest thereon; and
+
+ 
+
+ 
+ 
+ 
+ the amount necessary to reduce the outstanding principal amount
+ of all the notes to zero.
+
+ 
+ Transfer Agent has the meaning set forth on
+page 54.
+
+ 
+ Treasury regulations means the regulations
+promulgated by the United States Treasury Department under the
+United States Internal Revenue Code of 1986.
+
+ 
+ Trust Accounts means the Collection Account,
+the Reserve Account, the Accumulation Account, the VPTN Proceeds
+Account, the Class A Quarterly Interest Funding Account and
+the Principal Distribution Account.
+
+ 
+ U.S. person means (i) a citizen or
+resident of the United States, (ii) a corporation or
+partnership organized in or under the laws of the United States
+or any political subdivision thereof, (iii) an estate the
+income of which is includible in gross income for United States
+tax purposes, regardless of its source or (iv) a trust if a
+U.S. court is able to exercise primary supervision over the
+administration of such trust and one or more U.S. persons have
+the authority to control all substantial decisions of such trust.
+
+ 
+ Variable Pay Term Note Interest Amounts has
+the meaning set forth on page 59.
+
+ 
+ Variable Pay Term Notes Interest Rate Swap has
+ the meaning set forth on page 65.
+
+ 
+ Variable Pay Term Note Percentage means, for
+any Monthly Distribution Date, 100% minus the Class A
+Percentage for that Monthly Distribution Date.
+
+ 
+ VPTN Proceeds Account is an account which the
+indenture trustee will establish into which the proceeds of
+issuance of the Variable Pay Term Notes and any Servicer
+Liquidity Advances will be deposited for application thereafter
+to the payment of principal of one or more Subclasses of
+Class A Notes.
+
+ 
+ Yield Supplement Overcollateralization Amount 
+means, with respect to the receivables and any Collection Period
+or Monthly Distribution Date, the amount specified below with
+respect to such Collection Period or Monthly Distribution Date as
+ those amounts may be increased upon the purchase of Additional
+Receivables in the manner described below:
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Yield Supplement
+
+ 
+ 
+ Overcollateralization
+
+ 
+ 
+ Amount for the
+
+ 
+ 
+ initial Pool of
+
+ 
+ 
+ Receivables on the
+
+ Monthly Distribution Date
+ 
+ Closing Date
+
+ 
+ 
+ 
+
+ 
+ Closing Date
+ 
+ $
+ 216,824,370.04
+ 
+
+ 
+ November 2000
+ 
+ 
+ 208,232,015.48
+ 
+
+ 
+ December 2000
+ 
+ 
+ 199,792,246.68
+ 
+
+ 
+ January 2001
+ 
+ 
+ 191,507,595.42
+ 
+
+ 
+ February 2001
+ 
+ 
+ 183,380,458.76
+ 
+
+ 
+ March 2001
+ 
+ 
+ 175,413,239.97
+ 
+
+ 
+ April 2001
+ 
+ 
+ 167,608,454.64
+ 
+
+ 
+ May 2001
+ 
+ 
+ 159,968,525.04
+ 
+
+ 
+ June 2001
+ 
+ 
+ 152,495,945.68
+ 
+
+ 
+ July 2001
+ 
+ 
+ 145,193,204.80
+ 
+
+ 
+ August 2001
+ 
+ 
+ 138,062,832.23
+ 
+
+ 
+ September 2001
+ 
+ 
+ 131,107,370.18
+ 
+
+ 
+ October 2001
+ 
+ $
+ 124,329,463.70
+ 
+
+ 
+ November 2001
+ 
+ 
+ 117,731,833.56
+ 
+
+ 
+ December 2001
+ 
+ 
+ 111,317,190.45
+ 
+
+ 
+ January 2002
+ 
+ 
+ 105,087,271.58
+ 
+
+ 
+ February 2002
+ 
+ 
+ 99,043,095.21
+ 
+
+ 
+ March 2002
+ 
+ 
+ 93,185,789.98
+ 
+
+ 
+ April 2002
+ 
+ 
+ 87,516,757.34
+ 
+
+ 
+ May 2002
+ 
+ 
+ 82,037,339.83
+ 
+
+ 
+ June 2002
+ 
+ 
+ 76,748,491.40
+ 
+
+ 
+ July 2002
+ 
+ 
+ 71,651,192.82
+ 
+
+ 
+ August 2002
+ 
+ 
+ 66,746,831.08
+ 
+
+ 
+ September 2002
+ 
+ 
+ 62,036,913.25
+ 
+
+134
+
+Table of Contents
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Yield Supplement
+
+ 
+ 
+ Overcollateralization
+
+ 
+ 
+ Amount for the
+
+ 
+ 
+ initial Pool of
+
+ 
+ 
+ Receivables on the
+
+ Monthly Distribution Date
+ 
+ Closing Date
+
+ 
+ 
+ 
+
+ 
+ October 2002
+ 
+ $
+ 57,523,585.09
+ 
+
+ 
+ November 2002
+ 
+ 
+ 53,209,013.72
+ 
+
+ 
+ December 2002
+ 
+ 
+ 49,095,041.52
+ 
+
+ 
+ January 2003
+ 
+ 
+ 45,181,610.36
+ 
+
+ 
+ February 2003
+ 
+ 
+ 41,467,205.90
+ 
+
+ 
+ March 2003
+ 
+ 
+ 37,949,333.37
+ 
+
+ 
+ April 2003
+ 
+ 
+ 34,625,235.00
+ 
+
+ 
+ May 2003
+ 
+ 
+ 31,491,578.06
+ 
+
+ 
+ June 2003
+ 
+ 
+ 28,542,224.28
+ 
+
+ 
+ July 2003
+ 
+ 
+ 25,769,581.15
+ 
+
+ 
+ August 2003
+ 
+ 
+ 23,166,520.66
+ 
+
+ 
+ September 2003
+ 
+ 
+ 20,723,384.86
+ 
+
+ 
+ October 2003
+ 
+ 
+ 18,438,472.56
+ 
+
+ 
+ November 2003
+ 
+ 
+ 16,309,631.03
+ 
+
+ 
+ December 2003
+ 
+ 
+ 14,334,665.49
+ 
+
+ 
+ January 2004
+ 
+ 
+ 12,511,024.92
+ 
+
+ 
+ February 2004
+ 
+ 
+ 10,835,955.52
+ 
+
+ 
+ March 2004
+ 
+ $
+ 9,307,014.82
+ 
+
+ 
+ April 2004
+ 
+ 
+ 7,921,419.28
+ 
+
+ 
+ May 2004
+ 
+ 
+ 6,675,006.69
+ 
+
+ 
+ June 2004
+ 
+ 
+ 5,561,606.79
+ 
+
+ 
+ July 2004
+ 
+ 
+ 4,574,710.43
+ 
+
+ 
+ August 2004
+ 
+ 
+ 3,707,773.07
+ 
+
+ 
+ September 2004
+ 
+ 
+ 2,950,504.04
+ 
+
+ 
+ October 2004
+ 
+ 
+ 2,296,495.37
+ 
+
+ 
+ November 2004
+ 
+ 
+ 1,738,774.93
+ 
+
+ 
+ December 2004
+ 
+ 
+ 1,270,214.20
+ 
+
+ 
+ January 2005
+ 
+ 
+ 885,792.40
+ 
+
+ 
+ February 2005
+ 
+ 
+ 579,937.49
+ 
+
+ 
+ March 2005
+ 
+ 
+ 347,258.83
+ 
+
+ 
+ April 2005
+ 
+ 
+ 181,864.46
+ 
+
+ 
+ May 2005
+ 
+ 
+ 76,819.20
+ 
+
+ 
+ June 2005
+ 
+ 
+ 20,702.98
+ 
+
+ 
+ July 2005
+ 
+ 
+ 138.05
+ 
+
+ 
+The portion of the Yield Supplement Overcollateralization
+Amount for the initial pool of Receivables sold to the trust
+on the Closing Date has been calculated for each Monthly
+Distribution Date as the sum of the amount for each receivable
+equal to the excess, if any, of:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ the scheduled payments due on such receivable for each future
+ Collection Period discounted to present value as of the end of
+ the preceding Collection Period at the APR of such receivable;
+ over
+
+ 
+
+ 
+ 
+ 
+ the scheduled payments due on the receivable for each future
+ Collection Period discounted to present value as of the end of
+ the preceding Collection Period at 12%.
+
+The Yield Supplement Overcollateralization Amount provided in the
+ table above will be increased on each Monthly Distribution Date
+with respect to all pools of Additional Receivables that have
+been purchased on or prior to that Monthly Distribution Date by:
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ multiplying the aggregate principal balance of the Additional
+ Receivables in each pool as of its Subsequent Cut-off Date by
+
+ 
+
+ 
+ 
+ 
+ the YSOA Factor that corresponds to the number of months that
+ have passed since such pool s Subsequent Cut-off Date.
+
+135
+
+Table of Contents
+
+ 
+ YSOA Factor means, with respect to
+(1) any pool of Additional Receivables and (2) the
+Monthly Distribution Date on which that pool of Additional
+Receivables is purchased by the trust and each Monthly
+Distribution Date thereafter, the factor specified in the table
+below.
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Number of Months
+ 
+ 
+
+ Since Purchase
+ 
+ 
+
+ of the Pool of
+ 
+ 
+
+ Additional Receivables
+ 
+ YSOA Factor
+
+ 
+ 
+ 
+
+ 
+ 0
+ 
+ 
+ 
+ 0.072284428088
+ 
+
+ 
+ 1
+ 
+ 
+ 
+ 0.069419927962
+ 
+
+ 
+ 2
+ 
+ 
+ 
+ 0.066606296539
+ 
+
+ 
+ 3
+ 
+ 
+ 
+ 0.063844377857
+ 
+
+ 
+ 4
+ 
+ 
+ 
+ 0.061134971044
+ 
+
+ 
+ 5
+ 
+ 
+ 
+ 0.058478877296
+ 
+
+ 
+ 6
+ 
+ 
+ 
+ 0.055876935255
+ 
+
+ 
+ 7
+ 
+ 
+ 
+ 0.053329952452
+ 
+
+ 
+ 8
+ 
+ 
+ 
+ 0.050838760501
+ 
+
+ 
+ 9
+ 
+ 
+ 
+ 0.048404188926
+ 
+
+ 
+ 10
+ 
+ 
+ 
+ 0.046027081117
+ 
+
+ 
+ 11
+ 
+ 
+ 
+ 0.043708284589
+ 
+
+ 
+ 12
+ 
+ 
+ 
+ 0.041448681144
+ 
+
+ 
+ 13
+ 
+ 
+ 
+ 0.039249177826
+ 
+
+ 
+ 14
+ 
+ 
+ 
+ 0.037110678318
+ 
+
+ 
+ 15
+ 
+ 
+ 
+ 0.035033761768
+ 
+
+ 
+ 16
+ 
+ 
+ 
+ 0.033018767641
+ 
+
+ 
+ 17
+ 
+ 
+ 
+ 0.031066072201
+ 
+
+ 
+ 18
+ 
+ 
+ 
+ 0.029176142660
+ 
+
+ 
+ 19
+ 
+ 
+ 
+ 0.027349426591
+ 
+
+ 
+ 20
+ 
+ 
+ 
+ 0.025586242019
+ 
+
+ 
+ 21
+ 
+ 
+ 
+ 0.023886915912
+ 
+
+ 
+ 22
+ 
+ 
+ 
+ 0.022251910661
+ 
+
+ 
+ 23
+ 
+ 
+ 
+ 0.020681728690
+ 
+
+ 
+ 24
+ 
+ 
+ 
+ 0.019177085348
+ 
+
+ 
+ 25
+ 
+ 
+ 
+ 0.017738703104
+ 
+
+ 
+ 26
+ 
+ 
+ 
+ 0.016367196167
+ 
+
+ 
+ 27
+ 
+ 
+ 
+ 0.015062545158
+ 
+
+ 
+ 28
+ 
+ 
+ 
+ 0.013824245228
+ 
+
+ 
+ 29
+ 
+ 
+ 
+ 0.012651464678
+ 
+
+ 
+ 30
+ 
+ 
+ 
+ 0.011543284129
+ 
+
+ 
+ 31
+ 
+ 
+ 
+ 0.010498592521
+ 
+
+ 
+ 32
+ 
+ 
+ 
+ 0.009515343492
+ 
+
+ 
+ 33
+ 
+ 
+ 
+ 0.008591005869
+ 
+
+ 
+ 34
+ 
+ 
+ 
+ 0.007723203330
+ 
+
+ 
+ 35
+ 
+ 
+ 
+ 0.006908716130
+ 
+
+ 
+ 36
+ 
+ 
+ 
+ 0.006146977130
+ 
+
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+ 0.000006901914
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+ 
+ 57
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+ 
+ 0.000000046023
+ 
+
+136
+
+Table of Contents
+
+PRINCIPAL OFFICE OF THE TRUST
+
+Ford Credit Auto Owner Trust 2000-F
+
+c/o The Bank of New York
+
+101 Barclay Street
+
+New York, New York 10286
+
+United States
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Owner Trustee The Bank of New York 101 Barclay Street New
+ York, New York 10286 United States
+ 
+ 
+ Delaware Trustee The Bank of New York (Delaware) White
+ Clay Center, Route 273 Newark, Delaware 19711 United States
+ 
+ 
+ Indenture Trustee The Chase Manhattan Bank 450 West 33rd
+ Street New York, New York 10001 United States
+
+AGENTS
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Principal Paying Agent The Chase Manhattan Bank 450 West
+ 33rd Street New York, New York 10001 United States
+ 
+ 
+ 
+ 
+ Luxembourg Paying Agent and Listing Agent Banque
+ International Luxembourg S.A. 69, Route d Esch,
+ L-2953 Luxembourg
+
+LEGAL ADVISORS
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ To the Seller, the General Partner and the Servicer 
+ Hurley D. Smith, Esq. Ford Motor Credit Company One American
+ Road, Dearborn, Michigan 48126 United States
+ 
+ 
+ 
+ 
+ To the Underwriters Skadden, Arps, Slate, Meagher
+ Flom LLP Four Times Square New York, New York 10036-6522
+ United States
+
+ 
+
+Table of Contents
+
+ You should rely only on the information contained in or
+incorporated by reference into this Prospectus. We have not
+authorized anyone to give you different information. We do not
+claim the accuracy of the information in this Prospectus as of
+any date other than the date stated on the cover page. We are not
+ offering the Securities in any states where it is not permitted.
+
+ Ford Credit Auto
+
+Receivables Two L.P.
+
+Seller
+
+Ford Motor Credit Company
+
+Servicer
+
+Dealer Prospectus Delivery Obligation.
+Until January 16, 2001 all dealers
+ that effect transactions in these Securities, whether or not
+participating in the offering, may be required to deliver a
+prospectus. This is in addition to the dealers obligation
+to deliver a prospectus when acting as underwriters and with
+respect to their unsold allotments or subscriptions.
+
+ Ford Credit
+
+Auto Owner Trust
+
+2000-F
+
+$906,000,000 Class A-1
+
+Floating Rate Asset Backed Notes
+
+$701,000,000 Class A-2
+
+6.56% Asset Backed Notes
+
+$520,000,000 Class A-3
+
+6.58% Asset Backed Notes
+
+$343,000,000 Class A-4
+
+Floating Rate Asset Backed Notes
+
+$159,722,000 Class A-5
+
+Floating Rate Asset Backed Notes
+
+$97,397,000 Class B
+
+7.00% Asset Backed Notes
+
+PROSPECTUS
+
+Deutsche Banc Alex. Brown
+
+Goldman, Sachs Co.
+
+J.P. Morgan Co.
+
+Merrill Lynch Co.
+
+Salomon Smith Barney
+
+Table of Contents
+
+PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
+
+Item 14. Other Expenses of Issuance and
+Distribution.
+
+ 
+The following table sets forth the estimated expenses in
+connection with the offering described in this Registration
+Statement.
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Securities and Exchange Commission
+ 
+ $
+ 719,928
+ 
+
+ 
+ Rating agency fee
+ 
+ 
+ 50,000
+ 
+
+ 
+ Printing
+ 
+ 
+ 200,000
+ 
+
+ 
+ Legal fees and expenses
+ 
+ 
+ 50,000
+ 
+
+ 
+ Accountants fees
+ 
+ 
+ 50,000
+ 
+
+ 
+ Fees and expenses of Indenture Trustee
+ 
+ 
+ 25,000
+ 
+
+ 
+ Fees and expenses of Owner Trustee
+ 
+ 
+ 25,000
+ 
+
+ 
+ Miscellaneous expenses
+ 
+ 
+ 100,000
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Total
+ 
+ $
+ 1,219,928
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+Item 15. Indemnification of Directors and
+Officers
+
+ 
+Section 17-108 of the Delaware Revised Uniform Limited
+Partnership Act provides as follows:
+
+Section 17-108. Indemnification.
+
+ 
+Subject to such standards and restrictions, if any, as are set
+forth in its partnership agreement, a limited partnership may,
+and shall have the power to, indemnify and hold harmless any
+partner or other person from and against any and all claims and
+demands whatsoever.
+
+ 
+Section 4.2 of the Agreement of Limited Partnership of Ford
+Credit Auto Receivables Two L.P. provides as follows:
+
+ 
+Section 4.2. Exculpation and Indemnification.
+
+ 
+(a) Neither the General Partner nor any director, officer,
+partner, agent or legal representative of the General Partner or
+the Partnership, nor any of their Affiliates or the respective
+directors, officers, partners, stockholders, agents or legal
+representatives of any of their Affiliates (collectively, the
+ Indemnified Parties ) shall have any liability
+(whether direct or indirect, in contract, tort or otherwise) to
+any Partner (or its Affiliates) for any losses, claims, damages,
+liabilities or expenses, including, without limitation,
+judgments, interest on such judgments, fines, charges, costs,
+amounts paid in settlement, expenses and attorneys fees
+incurred in investigating, preparing or defending any action,
+claim, suit, inquiry, proceeding, investigation or any appeal
+taken from the foregoing by or before any court or governmental,
+administrative or other regulatory agency, body or commission,
+whether pending or merely threatened, whether or not any
+Indemnified Party is or may be a party thereto, including
+interest on any of the foregoing (collectively,
+ Damages ), arising out of, or in connection with, the
+management or conduct of the business and affairs of the
+Partnership, except for any such Damages to the extent that they
+are found by a court of competent jurisdiction to have resulted
+from the gross negligence or willful misconduct of the
+Indemnified Parties or willful violations of the express
+provisions hereof by the indemnified Parties. The Indemnified
+Parties may consult with counsel and accountants with respect to
+the affairs of the Partnership and shall be fully protected and
+justified, to the extent allowed by law, in acting, or failing to
+ act, if such action or failure to act is in accordance with the
+advice or opinion of such counsel or accountants.
+
+ 
+(b) The Partnership will, to the extent permitted by law,
+indemnify and hold harmless any and all of the Indemnified
+Parties for any and all Damages arising out of or in connection
+with the management or conduct of the business and affairs of the
+ Partnership or their activities with respect thereto, except to
+the extent that any such Damages are found by a court of
+competent jurisdiction to have resulted from the gross negligence
+ or willful misconduct of the person seeking
+
+II-1
+
+Table of Contents
+
+indemnification (or willful violation of the express provisions
+hereof). No Indemnified Party may satisfy any right of indemnity
+or reimbursement granted in this Section 4.3(b) or to which
+it may otherwise be entitled except out of the assets of the
+Partnership, and no Partner shall be personally liable with
+respect to any such claim for indemnity or reimbursement.
+
+ 
+Section 145 of the General Corporation Law of Delaware
+provides as follows:
+
+145. Indemnification of officers, directors, employees
+and agents; insurance
+
+ 
+(a) A corporation may indemnify any person who was or is a
+party or is threatened to be made a party to any threatened,
+pending or completed action, suit or proceeding, whether civil,
+criminal, administrative or investigative (other than an action
+by or in the right of the corporation) by reason of the fact that
+ he is or was a director, officer, employee or agent of the
+corporation, or is or was serving at the request of the
+corporation as a director, officer, employee or agent of another
+corporation, partnership, joint venture, trust or other
+enterprise, against expenses (including attorneys fees),
+judgments, fines and amounts paid in settlement actually and
+reasonably incurred by him in connection with such action, suit
+or proceeding if he acted in good faith and in a manner he
+reasonably believed to be in or not opposed to the best interests
+ of the corporation, and, with respect to any criminal action or
+proceeding, had no reasonable cause to believe his conduct was
+unlawful. The termination of any action, suit or proceeding by
+judgment, order, settlement, conviction, or upon a plea of nolo
+contendere or its equivalent, shall not, of itself, create a
+presumption that the person did not act in good faith and in a
+manner which he reasonably believed to be in or not opposed to
+the best interests of the corporation, and, with respect to any
+criminal action or proceeding, had reasonable cause to believe
+that his conduct was unlawful.
+
+ 
+(b) A corporation may indemnify any person who was or is a
+party or is threatened to be made a party to any threatened,
+pending or completed action or suit by or in the right of the
+corporation to procure a judgment in its favor by reason of the
+fact that he is or was a director, officer, employee or agent of
+the corporation, or is or was serving at the request of the
+corporation as a director, officer, employee or agent of another
+corporation, partnership, joint venture, trust or other
+enterprise against expenses (including attorneys fees)
+actually and reasonably incurred by him in connection with the
+defense or settlement of such action or suit if he acted in good
+faith and in a manner he reasonably believed to be in or not
+opposed to the best interests of the corporation and except that
+no indemnification shall be made in respect of any claim, issue
+or matter as to which such person shall have been adjudged to be
+liable to the corporation unless and only to the extent that the
+Court of Chancery or the court in which such action or suit was
+brought shall determine upon application that, despite the
+adjudication of liability but in view of all the circumstances of
+ the case, such person is fairly and reasonably entitled to
+indemnity for such expenses which the Court of Chancery or such
+other court shall deem proper.
+
+ 
+(c) To the extent that a present or former director or
+officer of a corporation has been successful on the merits or
+otherwise in defense of any action, suit or proceeding referred
+to in subsections (a) and (b) of this section, or in
+defense of any claim, issue or matter therein, such person shall
+be indemnified against expenses (including attorneys fees)
+actually and reasonably incurred by such person in connection
+therewith.
+
+ 
+(d) Any indemnification under subsections (a) and
+(b) of this section (unless ordered by a court) shall be
+made by the corporation only as authorized in the specific case
+upon a determination that indemnification of the present or
+former director, officer, employee or agent is proper in the
+circumstances because he has met the applicable standard of
+conduct set forth in subsections (a) and (b) of this
+section. Such determination shall be made, with respect to a
+person who is a director or officer at the time of such
+determination, (1) by a majority vote of the directors who
+are not parties to such action, suit or proceeding, even though
+less than a quorum, or (2) by a committee of such directors
+designated by majority vote of such directors, even though less
+than a quorum, or (3) if there are no such directors, or if
+such directors so direct, by independent legal counsel in a
+written opinion, or (4) by the stockholders.
+
+II-2
+
+Table of Contents
+
+ 
+(e) Expenses (including attorneys fees) incurred by
+an officer or director in defending a civil, criminal,
+administrative or investigative action, suit or proceeding may be
+ paid by the corporation in advance of the final disposition of
+such action, suit or proceeding upon receipt of an undertaking by
+ or on behalf of such director or officer to repay such amount if
+ it shall ultimately be determined that such person is not
+entitled to be indemnified by the corporation as authorized in
+this section. Such expenses (including attorneys fees)
+incurred by former directors and officers or other employees and
+agents may be so paid upon such terms and conditions, if any, as
+the corporation deems appropriate.
+
+ 
+(f) The indemnification and advancement of expenses
+provided by, or granted pursuant to, the other subsections of
+this section shall not be deemed exclusive of any other rights to
+ which those seeking indemnification or advancement of expenses
+may be entitled under any bylaw, agreement, vote of stockholders
+or disinterested directors or otherwise, both as to action in
+such person s official capacity and as to action in another
+capacity while holding such office.
+
+ 
+(g) A corporation shall have power to purchase and maintain
+ insurance on behalf of any person who is or was a director,
+officer, employee or agent of the corporation, or is or was
+serving at the request of the corporation as a director, officer,
+ employee or agent of another corporation, partnership, joint
+venture, trust or other enterprise against any liability asserted
+ against such person and incurred by such person in any such
+capacity, or arising out of such person s status as such,
+whether or not the corporation would have the power to indemnify
+such person against such liability under this section.
+
+ 
+(h) For purposes of this section, references to the
+corporation shall include, in addition to the resulting
+corporation, any constituent corporation (including any
+constituent of a constituent) absorbed in a consolidation or
+merger which, if its separate existence had continued, would have
+ had power and authority to indemnify its directors, officers,
+and employees or agents, so that any person who is or was a
+director, officer, employee or agent of such constituent
+corporation, or is or was serving at the request of such
+constituent corporation as a director, officer, employee or agent
+ of another corporation, partnership, joint venture, trust or
+other enterprise, shall stand in the same position under this
+section with respect to the resulting or surviving corporation as
+ such person would have with respect to such constituent
+corporation if its separate existence had continued.
+
+ 
+(i) For purposes of this section, references to other
+ enterprises shall include employee benefit plans;
+references to fines shall include any excise taxes
+assessed on a person with respect to any employee benefit plan;
+and references to serving at the request of the
+corporation shall include any service as a director,
+officer, employee, or agent of the corporation which imposes
+duties on, or involves services by, such director, officer,
+employee, or agent with respect to an employee benefit plan, its
+participants or beneficiaries; and a person who acted in good
+faith and in a manner such person reasonably believed to be in
+the interest of the participants and beneficiaries of an employee
+ benefit plan shall be deemed to have acted in a manner not
+ opposed to the best interests of the corporation as
+referred to in this section.
+
+ 
+(j) The indemnification and advancement of expenses
+provided by, or granted pursuant to, this section shall, unless
+otherwise provided when authorized or ratified, continue as to a
+person who has ceased to be a director, officer, employee or
+agent and shall inure to the benefit of the heirs, executors and
+administrators of such a person.
+
+ 
+(k) The Court of Chancery is hereby vested with exclusive
+jurisdiction to hear and determine all actions for advancement of
+ expenses or indemnification brought under this section or under
+any bylaw, agreement, vote of stockholders or disinterested
+directors, or otherwise. The Court of Chancery may summarily
+determine a corporation s obligation to advance expenses
+(including attorneys fees).
+
+II-3
+
+Table of Contents
+
+ 
+Article Five of the Certificate of Incorporation of Ford
+Credit Auto Receivables Two, Inc. provides as follows:
+
+ 
+(a) A director of the corporation shall not be personally
+liable to the corporation or its stockholders for monetary
+damages for breach of fiduciary duty as a director, except for
+liability
+
+ 
+(i) for any breach of the director s duty of loyalty
+to the corporation or its stockholders,
+
+ 
+(ii) for acts or omissions not in good faith or which
+involve intentional misconduct or a knowing violation of law,
+
+ 
+(iii) under Section 174 of the Delaware General
+Corporation Law or
+
+ 
+(iv) for any transaction from which the director derived an
+ improper personal benefit.
+
+ 
+If the Delaware General Corporation Law is amended after approval
+ by the stockholders of this Article FIFTH to authorize
+corporate action further eliminating or limiting the personal
+liability of directors, then the liability of a director of the
+corporation shall be eliminated or limited to the fullest extent
+permitted by the Delaware General Corporation Law, as so amended.
+
+ 
+(b) Any repeal or modification of paragraph (a) of
+this Article FIFTH by the stockholders of the corporation
+shall not adversely affect any right or protection of a director
+of the corporation existing at the time of such repeal or
+modification.
+
+ 
+(c)(i) Each person who was or is made a party or is
+threatened to be made a party to or is involved in any action,
+suit or proceeding, whether civil, criminal, administrative,
+investigative or otherwise (hereinafter a
+ proceeding ), by reason of the fact that he or she, or
+ a person of whom he or she is the legal representative, is or
+was a director, officer or employee of the corporation or is or
+was serving at the request of the corporation as a director,
+officer or employee of another corporation or of a partnership,
+joint venture, trust or other enterprise, including service with
+respect to employee benefit plans, whether the basis of such
+proceeding is alleged action in an official capacity as a
+director, officer or employee or in any other capacity while
+serving as a director, officer or employee, shall be indemnified
+and held harmless by the corporation to the fullest extent
+authorized by the Delaware General Corporation Law, as the same
+exists or may hereafter be amended (but, in the case of any such
+amendment, only to the extent that such amendment permits the
+corporation to provide broader indemnification rights than said
+law permitted the corporation to provide prior to such
+amendment), against all expense, liability and loss (including
+penalties, fines, judgments, attorneys fees, amounts paid
+or to he paid in settlement and excise taxes imposed on
+fiduciaries with respect to (i) employee benefit plans,
+(ii) charitable organizations or (iii) similar matters)
+ reasonably incurred or suffered by such person in connection
+therewith and such indemnification shall continue as to a person
+who has ceased to be a director, officer or employee and shall
+inure to the benefit of his or her heirs, executors and
+administrators; provided, however, that the corporation shall
+indemnify any such person seeking indemnification in connection
+with a proceeding (or part thereof) initiated by such person
+(other than pursuant to subparagraph (c)(ii) of this
+Article FIFTH) only if such proceeding (or part thereof) was
+ authorized by the Board of Directors of the corporation. The
+right to indemnification conferred in this
+subparagraph (c)(i) of Article FIFTH shall be a
+contract right and shall include the right to be paid by the
+corporation the expenses incurred in defending any such
+proceeding in advance of its final disposition; provided,
+however, that, if the Delaware General Corporation Law so
+requires, the payment of such expenses incurred by a director or
+officer in his or her capacity as a director or officer (and not
+in any other capacity in which service was or is rendered by such
+ person while a director or officer, including, without
+limitation, service to an employee benefit plan) in advance of
+the final disposition of a proceeding shall be made only upon
+delivery to the corporation of an undertaking, by or on behalf of
+ such director or officer, to repay all amounts so advanced if it
+ shall ultimately be determined that such director or officer is
+not entitled to be indemnified under this
+subparagraph (c)(i) of Article FIFTH or otherwise.
+
+II-4
+
+Table of Contents
+
+ 
+(ii) If a claim which the corporation is obligated to pay
+under subparagraph (c)(i) of this Article FIFTH is not
+paid in full by the corporation within 60 days after a
+written claim has been received by the corporation, the claimant
+may at any time thereafter bring suit against the corporation to
+recover the unpaid amount of the claim and, if successful in
+whole or in part, the claimant shall be entitled to be paid also
+the expense of prosecuting such claim. It shall be a defense to
+any such action (other than an action brought to enforce a claim
+for expenses incurred in defending any proceeding in advance of
+its final disposition where the required undertaking, if any is
+required, has been tendered to the corporation) that the claimant
+ has not met the standards of conduct which make it permissible
+under the Delaware General Corporation Law for the corporation to
+ indemnify the claimant for the amount claimed, but the burden of
+ proving such defense shall be on the corporation. Neither the
+failure of the corporation (including its Board of Directors,
+independent legal counsel or its stockholders) to have made a
+determination prior to the commencement of such action that
+indemnification of the claimant is proper in the circumstances
+because he or she has met the applicable standard of conduct set
+forth in the Delaware General Corporation Law, nor an actual
+determination by the corporation (including its Board of
+Directors, independent legal counsel or its stockholders) that
+the claimant has not met such applicable standard of conduct,
+shall be a defense to the action or create a presumption that the
+ Claimant has not met the applicable standard of conduct.
+
+ 
+(iii) The provisions of this paragraph (c) of
+Article FIFTH shall cover claims, actions, suits and
+proceedings, civil or criminal, whether now pending or hereafter
+commenced, and shall be retroactive to cover acts or omissions or
+ alleged acts or omissions which heretofore have taken place. If
+any part of this paragraph (c) of Article FIFTH should
+be found to be invalid or ineffective in any proceeding, the
+validity and effect of the remaining provisions shall not be
+affected.
+
+ 
+(iv) The right to indemnification and the payment of
+expenses incurred in defending a proceeding in advance of its
+final disposition conferred in this paragraph (c) of
+Article FIFTH shall not be exclusive of any other right
+which any person may have or hereafter acquire under any statute,
+ provision of the Certificate of Incorporation, By-Law,
+agreement, vote of stockholders or disinterested directors or
+otherwise.
+
+ 
+(v) The corporation may maintain insurance, at its expense,
+ to protect itself and any director, officer, employee or agent
+of the corporation or another corporation, partnership, joint
+venture, trust or other enterprise against any such expense,
+liability or loss, whether or not the corporation would have the
+power to indemnify such person against such expense, liability or
+ loss under the Delaware General Corporation Law.
+
+ 
+(vi) The corporation may, to the extent authorized from
+time to time by the Board of Directors, grant rights to
+indemnification, and rights to be paid by the corporation the
+expenses incurred in defending any proceeding in advance of its
+final disposition, to any agent of the corporation to the fullest
+ extent of the provisions of this paragraph (c) of
+Article FIFTH with respect to the indemnification and
+advancement of expenses of director, officers and employees of
+the corporation.
+
+ 
+Similar indemnification provisions in Section 5 of
+Article NINTH of the Certificate of Incorporation of both
+Ford Motor Company and Ford Motor Credit Company are applicable
+to directors, officers and employees of Ford Credit Auto
+Receivables Two, Inc. who serve as such at the request of Ford
+Motor Company or Ford Motor Credit Company.
+
+ 
+Ford Credit Auto Receivables Two, Inc. is insured for liabilities
+ it may incur pursuant to Article FIFTH of its Certificate
+of Incorporation relating to the indemnification of its
+directors, officers and employees. In addition, directors,
+officers and certain key employees are insured against certain
+losses which may arise out of their employment and which are not
+recoverable under the indemnification provisions of Ford Credit
+Auto Receivables Two, Inc. s Certificate of Incorporation.
+The premium for both insurance coverages is paid by Ford Motor
+Company.
+
+II-5
+
+Table of Contents
+
+Item 16. Exhibits and Financial Statements.
+
+ 
+(A) Exhibits:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 1.
+ 1
+ 
+ 
+ 
+ 
+ 
+ Form of Underwriting Agreement for the Notes.
+
+ 
+ 3.
+ 1
+ 
+ 
+ 
+ 
+ 
+ Certificate of Limited Partnership of the Seller. Filed as
+ Exhibit 3.1 to Registration Statement No. 333-01245 and
+ incorporated herein by reference.
+
+ 
+ 3.
+ 2
+ 
+ 
+ 
+ 
+ 
+ Limited Partnership Agreement between the General Partner and
+ Ford Credit. Filed as Exhibit 3.2 to Registration Statement
+ No. 333-01245 and incorporated herein by reference.
+
+ 
+ 3.
+ 3
+ 
+ 
+ 
+ 
+ 
+ Certificate of Incorporation of the General Partner. Filed as
+ Exhibit 3.3 to Registration Statement No. 333-01245 and
+ incorporated herein by reference.
+
+ 
+ 3.
+ 4
+ 
+ 
+ 
+ 
+ 
+ By-Laws of the General Partner. Filed as Exhibit 3.4 to
+ Registration Statement No. 333-01245 and incorporated herein
+ by reference.
+
+ 
+ 4.
+ 1
+ 
+ 
+ 
+ 
+ 
+ Form of Indenture between the Trust and the Indenture Trustee
+ (including forms of Notes).
+
+ 
+ 4.
+ 2
+ 
+ 
+ 
+ 
+ 
+ Form of Amended and Restated Trust Agreement between the Seller
+ and the Owner Trustee (including forms of Certificates).
+
+ 
+ 5.
+ 1
+ 
+ 
+ 
+ 
+ 
+ Opinion of H.D. Smith, Esq., Secretary and Corporate Counsel
+ of Ford Credit Auto Receivables Two, Inc. with respect to
+ legality.
+
+ 
+ 8.
+ 1
+ 
+ 
+ 
+ 
+ 
+ Opinion of Skadden, Arps, Slate, Meagher Flom LLP with
+ respect to federal income tax matters.
+
+ 
+ 8.
+ 2
+ 
+ 
+ 
+ 
+ 
+ Opinion of H.D. Smith, Esq., Secretary and Corporate Counsel
+ of the Servicer with respect to tax matters under Michigan law.
+
+ 
+ 10.
+ 1
+ 
+ 
+ 
+ 
+ 
+ Form of Interest Rate Swap Agreements between the trust and the
+ swap counterparty.
+
+ 
+ 23.
+ 1
+ 
+ 
+ 
+ 
+ 
+ Consent of H.D. Smith Esq., Secretary and Corporate Counsel
+ of Ford Credit Auto Receivables Two, Inc. (included as part of
+ Exhibit 5.1).
+
+ 
+ 23.
+ 2
+ 
+ 
+ 
+ 
+ 
+ Consent of Skadden, Arps, Slate, Meagher Flom LLP
+ (included as part of Exhibit 8.1).
+
+ 
+ 23.
+ 3
+ 
+ 
+ 
+ 
+ 
+ Consent of H.D. Smith, Esq., Secretary and Corporate Counsel
+ of the Servicer (included as part of Exhibit 8.2).
+
+ 
+ 24.
+ 1
+ 
+ 
+ 
+ 
+ 
+ Powers of Attorney.
+
+ 
+ 25.
+ 1
+ 
+ 
+ 
+ 
+ 
+ T-1 Statement of Eligibility under the Trust Indenture Act of
+ 1939 of The Chase Manhattan Bank.
+
+ 
+ 99.
+ 1
+ 
+ 
+ 
+ 
+ 
+ Form of Sale and Servicing Agreement among the Seller, the
+ Servicer and the Trust.
+
+ 
+ 99.
+ 2
+ 
+ 
+ 
+ 
+ 
+ Form of Administration Agreement among the Trust, the
+ Administrator and the Indenture Trustee.
+
+ 
+ 99.
+ 3
+ 
+ 
+ 
+ 
+ 
+ Form of Purchase Agreement between Ford Credit and the Seller.
+
+ 
+ 99.
+ 4
+ 
+ 
+ 
+ 
+ 
+ Form of Appendix A Defined Terms.
+
+II-6
+
+Table of Contents
+
+Item 17. Undertakings.
+
+ 
+The undersigned registrant hereby undertakes:
+
+ 
+(a) To file, during any period in which offers or sales are
+ being made, a post-effective amendment to this registration
+statement; (i) to include any prospectus required by
+Section 10(a)(3) of the Securities Act of 1933; (ii) to
+ reflect herein any facts or events arising after the effective
+date of the registration statement (or the most recent
+post-effective amendment thereof) which, individually or in the
+aggregate, represent a fundamental change in the information set
+forth in the registration statement; (iii) to include any
+material information with respect to the plan of distribution not
+ previously disclosed in the registration statement or any
+material change to such information in the registration
+statement; provided, however, that (a)(i) and (a)(ii) will not
+apply if the information required to be included in a
+post-effective amendment thereby is contained in periodic reports
+ filed with or furnished to the Commission, pursuant to
+Section 13 or Section 15(d) of the Securities Exchange
+Act of 1934 that are incorporated by reference in this
+registration statement.
+
+ 
+(b) That, for the purpose of determining any liability
+under the Securities Act of 1933, each such post-effective
+amendment shall be deemed to be a new registration statement
+relating to the securities offered therein, and the offering of
+such securities at that time shall be deemed to be the initial
+bona fide offering thereof.
+
+ 
+(c) To remove from registration by means of a
+post-effective amendment any of the securities being registered
+which remain unsold at the termination of the offering.
+
+ 
+(d) That, for purposes of determining any liability under
+the Securities Act of 1933, each filing of the registrant s
+annual report pursuant to Section 13(a) or 15(d) of the
+Securities Exchange Act of 1934 (and, where applicable, each
+filing of an employee benefit plan s annual report pursuant
+to Section 15(d) of the Securities Exchange Act of 1934)
+that is incorporated by reference in the registration statement
+shall be deemed to be a new registration statement relating to
+the securities offered therein, and the offering of such
+securities at that time shall be deemed to be the initial bona
+fide offering thereof.
+
+ 
+(e) To provide to the underwriters at the closing specified
+ in the underwriting agreements certificates in such
+denominations and registered in such names as required by the
+underwriters to permit prompt delivery to each purchaser.
+
+ 
+(f) That insofar as indemnification for liabilities arising
+ under the Securities Act of 1933 may be permitted to directors,
+officers and controlling persons of the registrant pursuant to
+the provisions described under Item 15 above, or otherwise,
+the registrant has been advised that in the opinion of the
+Securities and Exchange Commission such indemnification is
+against public policy as expressed in the Act and is, therefore,
+unenforceable. In the event that a claim for indemnification
+against such liabilities (other than the payment by the
+registrant of expenses incurred or paid by a director, officer or
+ controlling person of the registrant in the successful defense
+of any action, suit or proceeding) is asserted by such director,
+officer or controlling person in connection with the securities
+being registered, the registrant will, unless in the opinion of
+its counsel the matter has been settled by controlling precedent,
+ submit to a court of appropriate jurisdiction the question
+whether such indemnification by it is against public policy as
+expressed in the Act and will be governed by the final
+adjudication of such issue.
+
+ 
+(g) That, for purposes of determining any liability under
+the Securities Act of 1933, the information omitted from the form
+ of prospectus filed as part of this Registration Statement in
+reliance upon Rule 430A and contained in a form of
+prospectus filed by the registrant pursuant to
+Rule 424(b)(1) or (4) or 497(h) under the Securities
+Act of 1933 shall be deemed to be part of this Registration
+Statement as of the time it was declared effective.
+
+II-7
+
+Table of Contents
+
+ 
+(h) That, for the purpose of determining any liability
+under the Securities Act of 1933, each post-effective amendment
+that contains a form of prospectus shall be deemed to be a new
+registration statement relating to the securities offered
+therein, and the offering of such securities at that time shall
+be deemed to be the initial bona fide offering thereof.
+
+II-8
+
+Table of Contents
+
+SIGNATURES
+
+ 
+Pursuant to the requirements of the Securities Act of 1933, the
+Registrant certifies that it has reasonable grounds to believe
+that it meets all of the requirements for filing on
+Form S-1, and has duly caused this
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001009618_paradigm4_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001009618_paradigm4_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ff3ab0f447b3c08b39cfea9235100d40cb801c40
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001009618_paradigm4_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY Because this is only a summary, it does not contain all of the information that may be important to you. You should read the entire prospectus, including "Risk Factors" and the financial statements and the notes to the financial statements, before deciding whether to invest in our common stock. Unless otherwise indicated, the presentation of financial information in this prospectus relates only to our continuing operations and assumes the discontinuation of certain business operations as described in footnote 1 to our consolidated financial statements appearing elsewhere in this prospectus. PARADIGM4, INC. We provide our customers with a broad range of solutions that enable them to access and exchange information on a wireless basis. Our services link our customers' mobile workforce and remote locations to our customers' and third-party data bases. Our solutions use the sophisticated capabilities of our proprietary platform, the Paradigm4 Wireless DataNet, as well as our extensive industry experience, to facilitate the exchange of information on a timely, reliable, secure and cost-effective basis. The Paradigm4 Wireless DataNet increases productivity for our customers by providing employees in the field reliable, wireless access to information and applications. We also offer advanced interoperability, enabling a more extensive network that allows wireless data users to move smoothly between the coverage areas of different wireless carriers. Our wireless data solutions are carrier-neutral and operate on a broad array of end-user devices. We also develop customized applications for specific industries, and provide our customers with more general applications such as wireless e-mail, calendar and contact information. We are able to host, manage and monitor these applications on our network. Our engineering teams have extensive experience engineering and implementing complex wireless data solutions. The market for wireless data solutions is expected to grow rapidly. The convergence of wireless communications and the Internet has created new demand for data connections that free users from their desktop personal computers. DataQuest, a market research firm, estimates that the number of wireless data subscribers worldwide will grow from approximately 14 million at the end of 1998 to approximately 103 million at the end of 2003. However, wireless data solutions remain complex due to incompatible devices and networks, slow data speeds and uncertain security. We offer a comprehensive solution to our customers' wireless data needs. We research, analyze, design, develop and implement industry-specific wireless data applications. For example, we maintain a leading market position in the public safety sector, an early adopter of wireless data services. Our wireless data applications enable law enforcement officers to access state and federal law enforcement databases using wireless devices in the field. We have identified specific industry segments that would benefit from access to wireless data, such as the insurance, healthcare, financial services, legal and public utility industries. We have recently begun to devote significant marketing and development resources to target these industries. In addition to industry-specific applications, we provide wireless data applications that appeal to a broad range of industries. We have a strategic relationship with Wireless Knowledge Inc., a joint venture of Microsoft Corporation and Qualcomm, Inc., to develop and market Wireless Knowledge's Workstyle Server products and services. Workstyle Server facilitates real-time wireless access to the e-mail, calendar and contact-information features of Microsoft Exchange using Internet-enabled devices, such as smartphones. We are currently the exclusive reseller of Workstyle Server to the government sector in North America and a non-exclusive reseller to all other North American sectors. Under our arrangement with Wireless Knowledge, we act as exclusive managed-service provider of Workstyle Server, which includes support, monitoring and management services for Workstyle Server users. Information for wireless mobile users needs to be exchanged differently from information exchanged on a wireline basis, due primarily to incompatible standards and data transmission capacity constraints. Our Paradigm4 Wireless DataNet platform links wireless mobile users using hand-held devices to their enterprise databases and applications through numerous wireless carriers. We provide security for customer THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED APRIL 19, 2000 Shares [PARADIGM4 LOGO] Common Stock ------------------ Prior to this offering, there has been no public market for our common stock. All of the shares are being sold by us. The initial public offering price of the common stock is expected to be between $ and $ per share. We intend to apply to list our common stock on The Nasdaq Stock Market's National Market under the symbol "PFOR". The underwriters have an option to purchase a maximum of additional shares to cover over-allotments of shares. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" STARTING ON PAGE 6. <TABLE> <CAPTION> UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS PARADIGM4 ---------------------- ---------------------- ---------------------- <S> <C> <C> <C> Per Share............................................ $ $ $ Total................................................ $ $ $ </TABLE> Delivery of the shares of common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON DONALDSON, LUFKIN & JENRETTE CHASE H&Q The date of this prospectus is , 2000. data using authentication and encryption. Our patented enterprise messaging system middleware translates content between various protocols and operating systems such as DOS, Windows CE and UNIX, and is compatible with the following wireless networks: CDPD, Mobitex, DataRadio, ARDIS and Bell South Wireless Data. Our middleware also compresses data and removes unnecessary information to optimize data transport. The Paradigm4 Wireless DataNet architecture is configured for interconnection among the wireless carriers and networks to create an extensive network that allows wireless data users to move smoothly between the coverage areas of different wireless carriers. We intend to become the leading provider of wireless data services to commercial and other enterprises. We intend to achieve our objectives through the following strategies: - continue to broaden the scope of our services; - maintain market leadership in the public safety sector; - expand to new markets; - seek additional connections to carriers; - increase our market penetration and brand recognition through enhanced sales and marketing efforts; and - expand technologies and capabilities through strategic acquisitions and alliances. We were incorporated in Delaware on December 18, 1995 and commenced commercial operations in January 1996. Our principal executive offices are located at 100 Wells Street, Hartford, Connecticut 06103. Our telephone number at that location is (860) 249-2211. ------------------ TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> PROSPECTUS SUMMARY...................... 1 RISK FACTORS............................ 5 FORWARD-LOOKING STATEMENTS.............. 15 USE OF PROCEEDS......................... 16 DIVIDEND POLICY......................... 16 CAPITALIZATION.......................... 17 DILUTION................................ 18 SELECTED CONSOLIDATED FINANCIAL DATA.... 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................ 21 BUSINESS................................ 28 MANAGEMENT.............................. 39 CERTAIN TRANSACTIONS.................... 47 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> PRINCIPAL STOCKHOLDERS.................. 52 DESCRIPTION OF CAPITAL STOCK............ 54 SHARES ELIGIBLE FOR FUTURE SALE......... 57 UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS............. 59 UNDERWRITING............................ 62 NOTICE TO CANADIAN RESIDENTS............ 65 LEGAL MATTERS........................... 66 EXPERTS................................. 66 CHANGE OF AUDITORS...................... 66 WHERE YOU CAN FIND ADDITIONAL INFORMATION........................... 66 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................ F-1 </TABLE> ------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. ------------------ WE ARE PURSUING TRADEMARK AND/OR SERVICE MARK REGISTRATIONS FOR, AMONG OTHERS, THE MARKS "PARADIGM4," "PARADIGM4 WIRELESS DATANET," "SMARTPARTNER" AND THE PARADIGM4 LOGO WITH THE TAG LINE "IMAGINATION GONE WIRELESS." OTHER TRADEMARKS AND SERVICE MARKS APPEARING IN THIS PROSPECTUS ARE THE PROPERTY OF THEIR RESPECTIVE HOLDERS. ------------------ DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. THE OFFERING Common stock offered by us.......... shares Common stock to be outstanding after this offering....................... shares Use of proceeds..................... We intend to use the net proceeds from this offering to develop and expand our service offerings, expand our sales and engineering staff, expand our network operations center, increase our sales and marketing activities and for working capital and other general corporate purposes. We may also use a portion of the net proceeds for acquisitions, strategic alliances or joint ventures. Proposed Nasdaq National Market symbol.............................. "PFOR" The outstanding share information is based on our shares outstanding as of March 31, 2000. This information excludes: - 6,206,953 shares of common stock issuable upon the exercise of stock options outstanding under our employee stock option plans with a weighted average exercise price of $3.37 per share; and - 2,908,912 shares of common stock issuable upon the exercise of warrants with a weighted average exercise price of $2.52 per share. Except as otherwise indicated, information in this prospectus assumes: - the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 28,416,485 shares of common stock upon the closing of this offering; and - no exercise of the underwriters' over-allotment option. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE DATA) The following table sets forth certain summary consolidated financial data for Paradigm4. In 1999, we decided to hold for sale a software development contract with the City of New York. Accordingly, we have reported the net income or loss on this contract under the line item discontinued operations of contract held for sale. We have not allocated any research and development, selling and marketing, depreciation and amortization or interest expense to calculate discontinued operations of contract held for sale. See note 1 to our consolidated financial statements. You should read this information together with our consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus and the information under "Consolidated Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------ 1997 1998 1999 --------- --------- ---------- <S> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues(1): Services revenues...................................... $ 6,693 $ 948 $ 6,296 Hardware and third party software sales................ 4,935 2,711 3,735 --------- --------- ---------- Total revenues...................................... 11,628 3,659 10,031 Gross profit (loss)...................................... 5,508 (7,534) (5,115) Loss from continuing operations.......................... (4,869) (22,067) (21,957) Discontinued operations of contract held for sale........ (23) 1,041 (475) Net loss................................................. $ (4,892) $ (21,026) $ (22,432) ========= ========= ========== Basic and diluted (loss) earnings per common share: Continuing operations............................... $ (1.89) $ (8.42) $ (8.03) Discontinued operations............................. (0.01) 0.40 (0.17) --------- --------- ---------- Net loss............................................ $ (1.90) $ (8.02) $ (8.20) ========= ========= ========== Weighted average shares outstanding...................... 2,568,826 2,619,424 2,733,995 ========= ========= ========== Pro forma net loss per share............................. $ (0.72) ========== Shares used in computing pro forma net loss per share.... 31,150,480 ========== </TABLE> - --------------- (1) Our 1998 and 1999 revenues were significantly affected by changes in our estimates of costs required to complete certain contracts subsequent to recognizing revenues based on the percentage-of-completion accounting method. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001010116_applied_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001010116_applied_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d4796f9792e9673db9fc0dde1d25b2b317c34e7e
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001010116_applied_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering, especially the risks of investing in our common stock discussed under the caption "Risk Factors" and our consolidated financial statements and related notes appearing elsewhere in this prospectus. APPLIED SCIENCE FICTION We innovate, develop and license proprietary imaging technologies that optimize, enhance and enable the digitization of photographic images for traditional photo processing applications as well as for desktop, professional and Internet publishing applications. Our two principal technologies are: . Digital Film Processing, or DFP, which permits the direct digitization of exposed but undeveloped 35mm and Advanced Photosystem film; and . ICE/3/ (pronounced "ICE cubed") technologies, which are embedded in scanners and have the power to eliminate surface defects, restore faded color values and enhance the granular clarity of scanned color photographic images. We have developed a product prototype of our DFP subsystem, which includes a highly specialized digital image capture engine that we anticipate will be incorporated within DFP systems which we expect will be introduced by our original equipment manufacturer, or OEM, customers. When commercially introduced, DFP systems will process exposed but undeveloped standard 35mm and Advanced Photosystem film directly into a digital form without a wet chemical development process, and will thus serve as a substitute means for processing such film. We believe that DFP systems will enable our customers to compete more effectively in the market for image output, including Internet storage, archiving, transmission and printing of digital images and offer a number of advantages over traditional film processing systems, including: . end-user convenience and flexibility in processing traditional film into digital form; . fewer over- and under-exposures in processed images; . no use or discharge of hazardous liquid chemicals in the film- development process; . no need for plumbing or specialized handling of hazardous chemicals, enabling DFP systems to be deployed at diverse locations; and . scalability of use, including the possible introduction of multiple DFP engine central processing units and PC-compatible versions for small office/home office use. ICE/3/ consists of the following three technologies that improve and enhance the digitized quality of existing color photographs, slides and negatives, which we refer to simply as "photographic images": . Digital Image Correction and Enhancement, or Digital ICE, which eliminates scratches, dust, fingerprints and other surface defects in scanned color photographic images; . Digital Reconstruction of Color, or Digital ROC, which corrects color fading in aging photographic images and restores the color values in a digitized image to their original condition; and . Digital Grain Equalization and Management, or Digital GEM, which minimizes the distracting visual pattern seen in photographic images caused by excess silver grains in the original developed image. Our objectives are to establish DFP subsystems as a premier means for processing exposed but undeveloped 35mm and Advanced Photosystem film and to establish ICE/3/ technologies as premier technologies for enhancing the digitization of existing color images. To achieve these objectives, we plan to: . leverage our current relationships with global market leaders, such as Gretag, Hewlett-Packard, Kodak, Konica, Minolta, Nikon and Noritsu, and expand our customer base; . continue to enhance our technology position through research and development and the patenting of our core technologies; . expand end-user awareness of our company and its technologies through brand identity; . diversify sources of recurring revenue, including ICE/3/ royalties and sales of the developing agent consumable that will be used in DFP subsystems; and . pursue strategic alliances in the evolving imaging industry. We expect that a significant portion of our future growth will depend on the success of our DFP technology and products. We are in the process of further developing our DFP technology for commercial application. We have, to date, recognized contract revenues relating to the development of our DFP technology, but we do not expect to derive revenue from sales of DFP subsystems and related products prior to the first half of 2002. We have generated most of our revenue to date from our Digital ICE technology. As of December 31, 1999, we had an accumulated deficit of $25.0 million, including net losses of approximately $16.3 million in 1999, and we expect to continue to incur significant losses for at least the next 24 months. Our ability to reduce these losses will depend in large part on our ability to generate significant additional revenues. Our technologies are largely unproven and we may not achieve profitability. ---------------- Unless otherwise indicated, all information in this prospectus gives effect to the conversion of all outstanding shares of our preferred stock into shares of common stock effective upon the closing of the offering and a 1.309-for-1 stock split of our common stock effected pursuant to a stock dividend that will be declared and paid prior to the closing of this offering and assumes no exercise of the underwriters' over-allotment option. Our principal executive offices are located at 8920 Business Park Drive, Austin, Texas 78759. Our telephone number is (512) 651-6200. ---------------- THE OFFERING <TABLE> <C> <S> Common stock offered......................... 5,769,229 shares Common stock to be outstanding after this offering.................................... 34,470,666 shares Use of proceeds.............................. We intend to use the net proceeds for research and development, sales and marketing activities, purchases of capital equipment and leasehold improvements and general corporate purposes. Proposed Nasdaq National Market symbol....... ASFX </TABLE> The above information is based on shares outstanding as of December 31, 1999. It excludes (1) 354,002 shares of common stock issuable upon exercise of options outstanding as of December 31, 1999 with a weighted average exercise price of $.64 per share, (2) 634,426 additional shares of common stock reserved under our option plan as of December 31, 1999, (3) 1,647,146 shares of common stock, on an as-converted basis, that are subject to outstanding warrants as of December 31, 1999 with a weighted average exercise price of $.52 per share, and (4) 769,230 shares of common stock issued to IBM at a price valued at the mid- point of the pricing range to be set forth in the circulated preliminary prospectus used to market this offering subject to adjustment if the initial public offering price is lower than that price. SUMMARY CONSOLIDATED FINANCIAL DATA The following table summarizes our financial data. For a more detailed explanation of our financial condition and operating results, you should read "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes to those statements included in this prospectus. Unaudited pro forma basic and diluted net loss per share have been calculated assuming the conversion of all outstanding shares of our preferred stock into common stock as if the shares had converted immediately upon their issuance. <TABLE> <CAPTION> Year Ended December 31, -------------------------- 1997 1998 1999 ------- ------- -------- (in thousands, except per share data) <S> <C> <C> <C> Consolidated Statements of Operations Data: Revenues........................................... $ 628 $ 502 $ 3,973 Loss from operations............................... (1,130) (7,538) (16,642) Net loss........................................... (990) (7,510) (16,256) Basic and diluted net loss per share............... $ (.14) $ (.77) $ (1.33) Shares used in computing basic and diluted net loss per share......................................... 7,017 9,719 12,244 Pro forma basic and diluted net loss per share..... $ (.69) Shares used in computing pro forma basic and diluted net loss per share.................................... 23,718 </TABLE> The following table contains a summary of our balance sheet: . on an actual basis at December 31, 1999; . on a pro forma basis at December 31, 1999 to reflect the conversion of all outstanding shares of our preferred stock into an aggregate of 11,474,705 shares of common stock; and . on a pro forma as adjusted basis at December 31, 1999 to reflect our sale of 5,769,229 shares of common stock in this offering at an assumed initial public offering price of $13.00 per share and the application of the net proceeds received from this offering. <TABLE> <CAPTION> As of December 31, 1999 ------------------------ Pro As Actual Forma Adjusted ------- ------- -------- (in thousands) <S> <C> <C> <C> Consolidated Balance Sheet Data: Cash, cash equivalents and short- and long-term investments.......................................... $18,735 $18,735 $86,985 Working capital....................................... 7,434 7,434 75,684 Total assets.......................................... 23,656 23,656 91,906 Notes payable to bank, less current portion........... 6,436 6,436 6,436 Total stockholders' equity............................ 11,730 11,730 79,980 </TABLE>
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001013705_security_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001013705_security_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..87bd8297f3467a80f632f046629876afc0aa1ba2
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001013705_security_prospectus_summary.txt
@@ -0,0 +1 @@
+SUMMARY The following summary is qualified in its entirety by the detailed information and Consolidated Financial Statements contained elsewhere in this prospectus. You as a prospective investor should carefully consider the information presented in this prospectus, particularly the matters set forth under "Risk Factors" beginning on page 6. SECURITY CAPITAL U.S. REALTY We are a research-driven, growth-orientated real estate company focused on taking significant strategic investment positions in value-added real estate operating companies based in the United States. For a description of our strategic investment positions, please read "Business--SC-U.S. Realty's Operating Strategy--Strategic Investment Positions" and for a more detailed description of our operating strategy, including how our operating strategy adds value to real estate operating companies, you should read "Business--SC-U.S. Realty's Operating Strategy". Our primary capital deployment objective is to take a pro-active ownership role in businesses that we believe can potentially generate above-average rates of return. We believe there are significant value creation opportunities in the multi-trillion dollar U.S. real estate industry, as investors shift from traditional, direct, private forms of ownership to indirect ownership through real estate investment trusts or REITs whose securities are traded on major stock exchanges. As of 31 December 1999 our strategic investments had a combined market capitalisation of approximately $8.4 billion. Our offices are located at 25b, boulevard Royal, L-2449 Luxembourg, and our telephone number in Luxembourg is 011 (352) (4637561). Unless otherwise indicated or the context in this prospectus otherwise requires, the terms "we", "us", "our", or "SC-U.S. Realty" mean or refer to Security Capital U.S. Realty and its subsidiaries.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001014222_synchronic_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001014222_synchronic_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..985d1f23dbb93c543bdd84e57fd24416c8db5b2f
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001014222_synchronic_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information in this prospectus, including risk factors, regarding our company and the common stock being sold in this offering. THE COMPANY We develop and market software products that enable businesses to collaborate over the internet throughout the development of complex electronic products such as semiconductors and microelectronics. Our products manage, coordinate and track the exchange of information among geographically dispersed employees, suppliers, consultants, customers, business partners and other participants who comprise the electronic product development supply chain. Among other things, our products: - permit secure, real-time communication and controlled sharing of computer files and other design information among supply chain members; - immediately and automatically notify supply chain members of design changes and track these changes throughout the product development process; and - enable participants to store, catalogue and retrieve existing design elements, such as circuits, for reuse in the development of new products. We believe that the enhanced collaboration resulting from the use of our products enables companies to develop feature-rich, complex electronic products at lower cost and in less time. Since October 1997, when we shipped our first product, we have licensed our products to approximately 60 companies worldwide, including eight of the ten largest semiconductor companies. The growth of the new digital economy has been fueled in large part by the rapid development of new complex electronic products, which are essential to an increasing number of end-user products ranging from computers and mobile phones to personal digital assistants and pagers. According to the Semiconductor Industry Association, the semiconductor market alone was $140.8 billion in 1999. Competition among suppliers of electronic products has become more intense and has expanded globally. In order to compete successfully, the suppliers must develop complex, high quality, feature-rich products at a lower cost and more quickly than their competitors. The competitive environment and the increasing complexity of electronic products have compelled companies to shift from traditional in-house product development processes to the outsourcing of specialized design tasks. In addition, companies increasingly reuse existing design elements in the development of new products in order to shorten product development cycles. Despite their value, outsourcing and design reuse have created growing challenges, including the need to promote and manage supply chain collaboration, manage numerous and rapid design changes and coordinate the reuse of design elements. We have designed our products to address these new challenges by making it possible for businesses to implement internet-based solutions that enhance collaboration among product development supply chain members regardless of their corporate affiliation or geographic location. Our products are designed to effectively manage, track and communicate the large volumes of simultaneous and interactive changes which occur to design information during the development process. In addition, our products enable companies to establish design reuse practices by cataloguing existing design elements and publishing these design elements on the internet for WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE PERMITTED BY US FEDERAL SECURITIES LAW TO OFFER THESE SECURITIES USING THIS PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR LEGAL. SUBJECT TO COMPLETION, DATED MAY 9, 2000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTUS , 2000 [SYNCHRONICITY LOGO] 3,500,000 SHARES OF COMMON STOCK - -------------------------------------------------------------------------------- SYNCHRONICITY SOFTWARE, INC.: -- We develop and market software products that enable businesses to collaborate over the internet throughout the development of complex electronic products such as semiconductors and microelectronics. -- Synchronicity Software, Inc. 201 Forest Street Marlboro, Massachusetts 01752 (508) 485-4122 PROPOSED SYMBOL AND MARKET: -- SNCY/Nasdaq National Market THE OFFERING: -- We are offering 3,500,000 shares of our common stock. -- The underwriters have an option to purchase up to 525,000 additional shares from Synchronicity to cover over-allotments. -- This is the initial public offering of our common stock. -- We anticipate that the initial public offering price will be between $9.00 and $11.00 per share. -- Closing: , 2000 <TABLE> <CAPTION> - ------------------------------------------------------------------------------------ PER SHARE TOTAL - ------------------------------------------------------------------------------------ <S> <C> <C> Public offering price: $ $ Underwriting fees: Proceeds to Synchronicity: - ------------------------------------------------------------------------------------ </TABLE> THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5. - -------------------------------------------------------------------------------- Neither the SEC nor any state securities commission has determined whether this prospectus is truthful or complete. Nor have they made, nor will they make, any determination as to whether anyone should buy these securities. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- DONALDSON, LUFKIN & JENRETTE ROBERTSON STEPHENS DAIN RAUSCHER WESSELS DLJdirect INC. internal or external use. Our products also integrate with and complement existing software tools and preserve our customers' existing investments in computer systems and software programs. We intend to be the leading provider of solutions that enable company-wide and business-to-business collaboration within complex product development supply chains. Key elements of our growth strategy include enhancing the functionality of supply chain collaboration, leveraging our installed customer base and increasing the proliferation of our products. We also aim to expand our strategic relationships, pursue additional market opportunities and expand our worldwide presence. While our software is currently used in the development of electronic products, we believe that it may be equally useful in the development of other complex products. [SYNCHRONICITY LOGO] TABLE OF CONTENTS <TABLE> <CAPTION> PAGE <S> <C> Prospectus Summary................ 1 Risk Factors...................... 5 Special Note Regarding Forward- Looking Statements; Market Data............................ 18 Use of Proceeds................... 19 Dividend Policy................... 19 Corporate Information............. 19 Capitalization.................... 20 Dilution.......................... 21 Selected Financial Data........... 22 Management's Discussion and Analysis of Financial Condition and Results of Operations....... 23 </TABLE> <TABLE> <CAPTION> PAGE <S> <C> Business.......................... 34 Management........................ 49 Certain Relationships and Related Transactions.................... 59 Principal Stockholders............ 60 Description of Capital Stock...... 62 Shares Eligible for Future Sale... 65 Underwriting...................... 67 Legal Matters..................... 69 Experts........................... 69 Where You Can Find More Information..................... 70 Index to Financial Statements..... F-1 </TABLE> THE OFFERING Common stock offered.......... 3,500,000 shares Common stock to be outstanding after the offering.......... 14,607,757 shares Use of proceeds............... We intend to use the net proceeds for working capital and other general corporate purposes. These uses may include product development and expansion of our operations and sales and marketing capabilities. See "Use of Proceeds." Proposed Nasdaq National Market symbol............... SNCY The number of shares of common stock to be outstanding after the offering is based on the number of shares outstanding on April 30, 2000. This number does not include: - 1,382,500 shares of common stock issuable upon the exercise of stock options outstanding on April 30, 2000 with a weighted average exercise price of $1.80 per share; - 150,000 shares of common stock issuable upon the exercise of a warrant outstanding on April 30, 2000 with an exercise price of $4.30 per share; or - an aggregate of 668,385 shares reserved as of April 30, 2000 for future stock option grants and purchases under our equity compensation plans. Except as otherwise noted, all information in this prospectus: - reflects the automatic conversion of all of our outstanding shares of convertible preferred stock into an aggregate of 7,021,002 shares of common stock upon completion of the offering; - reflects the effectiveness upon completion of the offering of our second amended and restated certificate of incorporation, which sets the authorized number of shares of common stock at 90,000,000 and sets the authorized number of shares of preferred stock at 5,000,000; and - assumes no exercise of the underwriters' over-allotment option. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) Set forth below are summary statements of operations data for the years ended December 31, 1997, 1998 and 1999 and the three months ended March 31, 1999 and 2000 and summary balance sheet data as of March 31, 2000: -- on an actual basis; -- with respect to the statement of operations data, pro forma basic and diluted net loss per share have been calculated assuming the conversion of all outstanding shares of our convertible preferred stock into shares of common stock, as if the shares had converted immediately upon issuance; and -- with respect to the balance sheet data, on a pro forma as adjusted basis to give effect to the conversion of our convertible preferred stock upon the consummation of this offering, our sale of 3,500,000 shares of common stock in this offering at an assumed initial public offering price of $10.00 per share, after deducting the estimated underwriting discounts and commissions and offering expenses payable by us, and the receipt of the net proceeds from this offering. This information should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this prospectus. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and may not contain all of the information that investors should consider before investing in our common stock. Investors should read the entire prospectus carefully. DIGITAL COMMERCE CORPORATION We are a leading provider of business-to-government e-commerce solutions for the procurement of products and services. Our solutions enable government entities at the federal, state and local levels to locate vendors, compare prices, negotiate transaction terms, and execute and track purchases. We provide government entities and buyers with a simple, cost-effective and reliable method of implementing business-to-government e-commerce. Our solutions also enable vendors to access multiple government buyers efficiently, automate the transaction process and comply with government-specific purchasing requirements. By leveraging the capabilities of the Internet to address the special characteristics of government purchasing, we seek to streamline procurement and lower the costs of transactions for the government and its vendors. We currently serve more than 13,000 registered users at the federal level, including buyers in the U.S. Departments of Defense, Treasury, Justice and Health and Human Services. In addition, our solutions are used at the state and local levels by the State of Connecticut and the Fairfax County, Virginia School Board. As of March 31, 2000, we had 260 vendors listing more than 2.6 million different products and services on our federal e-marketplace, and we had agreements with an additional 420 vendors to list their products and services. Nationally recognized vendors using our solutions include CompUSA, Office Depot, Polaroid and Xerox. OUR MARKET According to the Department of Commerce, federal executive departments and agencies and state and local governments together purchased approximately $400 billion of goods and services in 1999. As in the private sector, government procurement has historically been paper-based and subject to considerable inefficiency. In addition, we believe that the government procurement process has special characteristics that include: - a high degree of fragmentation, with more than 60 federal entities and over 300,000 vendors involved in procurement at the federal level; - multiple methods of procurement; - entity-specific forms and requirements; - extensive record keeping; and - special policy objectives, including consideration for small and disadvantaged businesses. The U.S. government has adopted several initiatives to promote e-commerce, including amending the Office of Federal Procurement Policy Act to mandate that federal government buyers use e-commerce for procurement to the maximum extent practicable and cost-effective. We believe that these initiatives and the special characteristics of the procurement process make government procurement particularly well-suited for our products. OUR PRODUCTS FEDERAL - FedCenter.com. FedCenter is a web-based marketplace linking federal government buyers and vendors for purchases of products and services. FedCenter is free to government buyers and is a cost-effective way to comply with the Congressional mandate to use e-commerce. Vendors use FedCenter to list their products and services in a customized FedCenter web site, or FedSite, linked to the FedCenter marketplace. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. DIGITAL COMMERCE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION , 2000. [DCC LOGO] - -------------------------------------------------------------------------------- SHARES COMMON STOCK - -------------------------------------------------------------------------------- This is the initial public offering of Digital Commerce Corporation. We are offering shares of our common stock at a price between $ and $ per share. Prior to this offering, there has been no public market for our common stock. We anticipate our common stock will be approved for quotation on the Nasdaq National Market under the symbol "DCCN." SEE "RISK FACTORS" BEGINNING ON PAGE TO READ ABOUT FACTORS YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> PER SHARE TOTAL <S> <C> <C> Initial public offering price $ $ Underwriting discount $ $ Proceeds, before expenses, to Digital Commerce $ $ </TABLE> If the underwriters sell more than shares of common stock, the underwriters have the option to purchase up to an additional shares from us at the initial public offering price less the underwriting discount. The underwriters expect to deliver the shares to purchasers on , 2000. DEUTSCHE BANC ALEX. BROWN ROBERTSON STEPHENS BEAR, STEARNS & CO. INC. PROSPECTUS DATED , 2000. - MarketLink. MarketLink is a software product that enables vendors to identify and respond to requests for quotes and requests for proposals from government entities. STATE AND LOCAL - OrderLink. OrderLink is a web-based purchasing solution that enables state and local government buyers to transact with vendors through pre-negotiated contracts. - StateGovCenter.com. StateGovCenter is a web-based solution that enables state and local government buyers to purchase products and services through pre-negotiated contracts or in the open market through vendors' price schedules. OUR STRATEGY We seek to become the leading provider of e-commerce solutions to government entities by implementing the following key strategies: - increasing usage by federal government buyers; - penetrating state and local markets; - expanding our base of vendors; - enhancing the functionality and services of our solutions; and - pursuing strategic alliances. RECENT DEVELOPMENTS Sale of Series D Preferred Stock. In March 2000, we sold 8,709,902 shares of our Series D redeemable convertible preferred stock for $50.8 million to a group of investors, including Weston Presidio Capital, Highland Capital Partners and SAP Investments. The proceeds are being used to fund working capital. At the closing of this offering, all of our outstanding series of preferred stock will automatically convert into 16,724,131 shares of our common stock. Spin-Off of PowerTrust.com, Inc. In 2000, we spun off PowerTrust.com, our wholly-owned subsidiary, to our then existing security holders. PowerTrust.com was formed to assist residential consumers in deregulated energy markets in accessing alternative sources of natural gas. We determined that PowerTrust.com was not part of our long-term strategic plan. Our financial information in this prospectus excludes the assets, liabilities and operations of PowerTrust.com. ------------------------ Our principal executive offices are located at 575 Herndon Parkway, Herndon, Virginia 20170. Our telephone number is (703) 456-6500, and our Internet web sites are www.digitalcommerce.com, www.fedcenter.com, www.stategovcenter.com, orderlink.dmx.com and www.mygovclub.com. The information on our web sites is not a part of this prospectus. THE OFFERING Shares offered by Digital Commerce......... shares Common stock to be outstanding after this offering................................... shares(1) Estimated net proceeds to Digital Commerce................................... Use of proceeds............................ For general corporate purposes, principally additional sales and marketing expenses, investing in our technology and working capital. Proposed Nasdaq National Market symbol..... DCCN Risk Factors............................... See "Risk Factors" for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock. - ------------ (1) The number of shares of our common stock that will be outstanding after this offering is based on 7,749,598 shares of common stock outstanding as of March 31, 2000 and gives effect to the conversion of all of our outstanding preferred stock into a total of 16,724,131 shares of common stock upon the closing of this offering. It excludes: - shares of common stock issuable upon exercise of stock options outstanding as of , 2000 at a weighted average exercise price of $ per share; - shares of common stock available for future grant under our stock option plans as of , 2000; and - 884,920 shares of common stock issuable upon exercise of warrants outstanding as of March 31, 2000 that are currently exercisable at an exercise price of $12.00 per share. Except as otherwise noted, all information in this prospectus assumes no exercise of the underwriter's overallotment option. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The following table sets forth our consolidated statement of operations data for the periods presented. We acquired the business of Datamatix in August 1999. The unaudited pro forma consolidated statement of operations data gives effect to the acquisition of Datamatix as if it occurred on January 1, 1999. <TABLE> <CAPTION> THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, --------------------------------------------- --------------------- PRO FORMA 1997 1998 1999 1999 1999 2000 ------- --------- --------- ----------- --------- --------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues.......................... $ 518 $ 1,375 $ 1,437 $ 2,731 $ 241 $ 1,599 Gross profit (loss)............... (462) 133 467 1,443 18 969 Loss from operations.............. (5,717) (11,386) (14,738) (15,164) (2,490) (9,189) Net loss.......................... (6,192) (8,597) (16,093) (16,545) (2,676) (9,490) Net loss per share -- basic and diluted......................... (11.86) (5.87) (3.31) (3.26) (0.61) (1.23) Weighted average shares outstanding -- basic and diluted......................... 522,247 1,464,255 4,867,685 5,086,253 4,380,737 7,720,303 </TABLE> The following table sets forth a summary of our consolidated balance sheet data at March 31, 2000: - on an actual basis; and - on an as adjusted basis to reflect the conversion of our outstanding preferred stock into 16,724,131 shares of common stock upon the closing of this offering and the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting underwriting discounts and commissions and our estimated offering expenses of $ million. <TABLE> <CAPTION> MARCH 31, 2000 ------------------------- AS ACTUAL ADJUSTED ----------- ----------- (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $41,455 Working capital............................................. 32,801 Total assets................................................ 48,104 Total indebtedness.......................................... 1,665 Redeemable convertible preferred stock...................... 47,762 Total stockholders' deficit................................. (10,752) </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001014672_caliper_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001014672_caliper_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all the information you should consider before buying shares in the offering. You should read the entire prospectus carefully. CALIPER We are a leader in lab-on-a-chip technologies, which enable experiments that ordinarily require laboratories full of equipment and people to be conducted on a chip small enough to fit in the palm of a child's hand. Each chip contains a network of microscopic channels through which fluids and chemicals are manipulated in order to perform experiments. We believe our LabChip systems have the potential to revolutionize experimentation in a wide range of industries by enabling individuals and organizations to perform laboratory experiments at a speed, cost and scale previously unattainable. We believe that we are the first company to sell and deliver lab-on-a-chip products to customers. During 1999, we introduced our first two LabChip systems: - Personal Laboratory System. In collaboration with Hewlett-Packard, we launched the Agilent 2100 Bioanalyzer system, our first personal laboratory system for use by individual laboratory researchers. Hewlett-Packard transferred our collaboration to its subsidiary, Agilent Technologies. - High Throughput System. High throughput systems rapidly conduct experiments using different chemicals in each experiment. Under our technology access program, we have sold and delivered initial versions of our high throughput systems for drug screening to Amgen, Hoffmann-La Roche, Eli Lilly and Millennium Pharmaceuticals. We develop, manufacture and sell our proprietary LabChip systems to pharmaceutical and other companies. The pharmaceutical, agriculture, clinical diagnostics and chemical industries rely on laboratory experimentation to obtain important information that can be used to discover and develop new products. These companies, however, still rely on manual, multi-step experiments that use tools such as test tubes, beakers and large pieces of equipment that utilize decades-old technology. These tools and processes are expensive and labor-intensive, rendering them inadequate to handle these companies' accelerating needs for greater research and development productivity. We believe that our LabChip systems represent a revolutionary advance in laboratory experimentation. Our LabChip systems have the potential to expand the capabilities and improve the productivity of individual researchers and, on an institutional level, enable pharmaceutical companies to perform the massive scale experimentation they need to advance the drug discovery process. As a result, our LabChip technology has the potential to reduce the time it takes to discover and commercialize new drugs. Our LabChip systems miniaturize, integrate and automate experimentation to an unprecedented degree. Because we have great flexibility in channel design and can exert split-second computer control over fluid flow, we have the ability to create chips for a multitude of experiments, or applications. We believe the key benefits of our LabChip systems are: - High Speed. Our LabChip systems accelerate experiments as much as 10-fold or more, depending on the application. - Reduced Reagent and Labor Cost. Our LabChip systems use only a small fraction of the normal amount of expensive reagents, as little as 1/100,000th in some cases, and also reduce labor involved in each experiment. - Expanded Individual Researcher Capability. Because our LabChip systems can collapse a multi-step, complex experiment into one step, individual researchers can perform experiments previously outside their areas of expertise. - Improved Data Accuracy. Our LabChip systems generally produce more accurate and consistent data by reducing human error and the variability caused by the use of multiple instruments. - Improved Enterprise-Wide Productivity. We believe our LabChip systems can improve data quality to the point where researchers can rely on data generated outside their laboratory or organization, thereby improving enterprise-wide productivity. Our objective is to be the leading lab-on-a-chip company. Key elements of our strategy to achieve this objective are as follows: - Focus on the pharmaceutical industry first - Rapidly build our installed customer base - Leverage our installed customer base by expanding the menu of chip applications - Generate recurring revenue from high-value chips - Build a substantial intellectual property estate - Maintain leadership in chip technology and manufacturing - Opportunistically penetrate new industries LabChip is a registered trademark of Caliper. We have applied for registration of the following trademarks: Caliper, the Caliper logo, the LabChip logo, LibraryCard and Sipper. This prospectus also includes trademarks of companies other than Caliper. Caliper was incorporated in Delaware on July 26, 1995. Our principal offices and manufacturing facilities are located at 605 Fairchild Drive, Mountain View, California 94043-2234, and our telephone number is (650) 623-0700. Our website is located at http://www.calipertech.com. Information contained on our website or links contained on our website is not a part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered by selling stockholders............ 2,300,000 shares Common stock outstanding................................ 23,537,704 shares Use of proceeds......................................... We will not receive any proceeds from the sale of common stock by the selling stockholders Nasdaq National Market symbol........................... CALP </TABLE> The number of shares outstanding is based on the number of shares outstanding on August 31, 2000 and excludes: - 3,025,530 shares that may be issued upon exercise of options outstanding as of August 31, 2000 at a weighted average exercise price of $17.30 per share - 2,012,107 additional shares that we could issue under our stock option plans - 383,461 shares that we could issue under our employee stock purchase plan - 38,460 shares that may be issued upon exercise of warrants outstanding as of August 31, 2000 at a weighted average exercise price of $1.22 per share ASSUMPTIONS USED IN THIS PROSPECTUS We entered into a collaboration agreement with Hewlett-Packard in May 1998 under which Hewlett-Packard agreed to manufacture, market and distribute some of our products, as we further describe in this prospectus. In November 1999, Hewlett-Packard transferred our collaboration to its subsidiary, Agilent Technologies. Where we refer to Agilent in this prospectus, we are referring to Hewlett-Packard prior to the transfer of this collaboration and Agilent following the transfer of this collaboration. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> PERIOD FROM INCEPTION (JULY 26, 1995) SIX MONTHS ENDED THROUGH YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, -------------------------------------- ------------------ 1995 1996 1997 1998 1999 1999 2000 --------------- ------- ------- ------- -------- ------- -------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenue................... $ -- $ 132 $ 2,266 $ 8,155 $ 12,087 $ 5,445 $ 8,069 Costs and expenses........ 534 4,952 9,678 12,516 27,612 10,590 21,975 Operating loss............ (534) (4,820) (7,412) (4,361) (15,525) (5,145) (13,906) Loss before change in accounting principle.... (536) (4,710) (6,281) (2,975) (14,373) (4,556) (11,248) Cumulative effect of a change in accounting principle............... -- -- -- -- -- -- (2,294) Net loss.................. (536) (4,710) (6,281) (2,975) (14,373) (4,556) (13,542) Accretion on redeemable convertible preferred stock................... -- (262) (1,470) (2,174) (2,328) (1,214) -- Net loss attributable to common stockholders..... $ (536) $(4,972) $(7,751) $(5,149) $(16,701) $(5,770) $(13,542) Net loss per common share, basic and diluted....... $(1.71) $ (3.90) $ (4.38) $ (2.39) $ (4.56) $ (2.21) $ (0.65) Shares used in computing net loss per common share, basic and diluted................. 313 1,274 1,768 2,157 3,663 20,933 Pro forma net loss per share, basic and diluted................. $ (0.92) $ (0.65) Shares used in computing pro forma net loss per share, basic and diluted................. 15,578 20,933 </TABLE> <TABLE> <CAPTION> JUNE 30, 2000 --------------------- ACTUAL PRO FORMA -------- --------- (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and marketable securities............ $ 90,079 $194,459 Working capital............................................. 61,655 166,035 Total assets................................................ 100,820 205,200 Long-term obligations, less current portion................. 4,722 4,722 Total stockholders' equity.................................. 88,002 192,382 </TABLE> Accretion on redeemable convertible preferred stock ceased upon conversion of all of the outstanding preferred stock to common stock at the closing of our initial public offering in December 1999. See Note 1 of notes to our financial statements for an explanation of the determination of the number of shares used in computing per share data. See Note 1 of notes to our financial statements for an explanation of the cumulative effect of a change in accounting principle related to revenue recognition. The pro forma balance sheet data reflects the receipt and application of the net proceeds from the 2,300,000 shares of common stock sold by us to the selling stockholders at a purchase price of $48.00 per share after deducting commissions and estimated expenses.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001018035_juno_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001018035_juno_prospectus_summary.txt
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+PROSPECTUS SUMMARY BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO, BEFORE DECIDING TO INVEST IN OUR COMMON STOCK. OUR COMPANY Juno Online Services, Inc. is a leading provider of Internet-related services to millions of computer users throughout the United States. We provide several levels of service, ranging from basic dial-up Internet access--which is provided to the end user for free--to high-speed broadband Internet access, which is currently being tested in selected markets. Unlike almost all other Internet access providers, we offer both free basic and billable premium services, and we believe we are unique in having converted hundreds of thousands of individuals from free to paying customers. Our strategy of offering several different service levels and our easy-to-use, intuitive software are designed to attract a broad spectrum of users, including those who are just now beginning to explore the Internet. Our services are provided nationwide through more than 2,300 local telephone numbers, which we lease from several providers. These phone numbers can be reached by the vast majority of the U.S. population without having to place a long distance telephone call. Our revenues are derived primarily from the subscription fees we charge for the use of our premium services, from the sale of advertising, and from various types of electronic commerce. We have been a pioneer in providing free Internet services since April 1996, when we launched our basic service, which was the first on the Internet to provide free e-mail. In July 1998, we introduced our first premium services, which offered features ranging from enhanced e-mail services to full access to the World Wide Web, and for which we charged subscription fees. In December 1999, we announced a major expansion of our services: - Our BASIC SERVICE now provides full Internet access for free. - JUNO WEB provides competitively priced premium Internet access, supplementing the features of the basic service with free live technical support and customer service, priority access to Juno's network, several hundred additional local access numbers, and the elimination of a prominent advertising and navigation banner that is displayed to our basic service users at all times while they are connected to the Web. - JUNO EXPRESS is a broadband service that provides all the features of Juno Web at speeds up to 15 times faster than an ordinary dial-up Internet connection. We are now conducting a pilot test of Juno Express in selected markets and plan to expand into additional markets over the coming year. Our services have been very popular, with more than 8.1 million Juno accounts created since the launch of our basic service in 1996. During the month of December 1999, an average of 820,000 user accounts dialed into our service on any given day, with a total of 2.3 million user accounts connecting during the month of December, and 2.9 million user accounts connecting during the three-month period ended December 31, 1999. As of December 31, 1999, we had approximately 550,000 Juno Web subscribers, the majority of whom began as users of our basic service. We initially marketed Juno Web only to our own basic service subscribers. Following our initial public offering on May 25, 1999, however, we began marketing Juno Web beyond the existing Juno user base through an external marketing campaign. We plan to significantly expand our marketing activities in 2000 in order to increase the subscriber base of our billable premium services and, in particular, our expanded free basic service. In operating our expanded basic service, we plan to capitalize on the size of our existing user base, advantages we believe our technology confers on our cost structure, and our established advertising sales and electronic commerce activities. Our technology has been designed to maximize hours of consumer contact and potential advertising revenues while minimizing the number of hours each user actually spends connected by telephone to our central computers or to the Web, a key component of our costs. We believe our subscribers spend significantly less time connected to the Internet each month than those of our largest competitors, in part because of technology we have developed that enables subscribers to read and write e-mail offline rather than while connected. Importantly, this technology allows us to continue displaying highly targetable interactive advertisements throughout this offline time. As of December 31, 1999, approximately 300 firms had advertised on the Juno services. In addition, we derive revenues from conducting electronic commerce both independently and with strategic marketing partners. We have entered into a number of major strategic marketing alliances, including several that involve multi-million-dollar guaranteed minimum payments to Juno. These alliances include multi-year relationships with Qwest, The Hartford, and WingspanBank.com. Our advertising and strategic marketing activities benefit from our ability to target advertising to selected segments of the Juno subscriber base on the basis of a wide variety of information obtained from a detailed electronic questionnaire that must be completed in order to sign up for Juno's basic service. In addition to our advertising and strategic marketing relationships, we derive revenue from relationships with providers of Web-based content and functionality. All Juno users begin each Web session on our portal site, WWW.JUNO.COM, which contains tools, information, and product offers supplied by a wide range of strategic partners. Companies with whom we have formed this sort of strategic relationship include HotJobs.com, Lycos, Mail.com, News Corporation, and more than 50 online merchants that participate in the shopping channel on our portal site, including eBay and 1-800-FLOWERS. We plan to significantly increase both the number of such alliances and the associated revenues as our Web-enabled subscriber base grows. MARKET OPPORTUNITY The Internet is becoming an increasingly significant global medium for communications, advertising, and commerce. International Data Corporation estimates that more than 80 million individuals in the U.S. used the Internet in 1999, and projects that this figure will reach 177 million by 2003. IDC also projects that consumer-targeted dial-up Internet service provider revenues in the U.S. will grow from $7.4 billion in 1999 to $11.1 billion in 2003. In addition, Jupiter Communications has projected that online advertising expenditures in the U.S. will grow from an estimated $3.2 billion in 1999 to $11.5 billion in 2003. IDC projects that consumer electronic commerce revenues in the U.S. will grow from $12.8 billion in 1998 to $83.5 billion in 2003. OUR STRATEGY We seek to strengthen our position as a leading provider of consumer Internet-related services. In particular, we plan to: - Rapidly expand our subscriber base - Migrate subscribers to higher levels of service - Leverage and expand our strategic marketing alliances and advertising sales - Enhance our services to provide an increasingly personalized, integrated and engaging Internet experience - Embrace new technologies while maintaining technology independence THE OFFERING The following information excludes 4,212,368 shares of common stock issuable upon the exercise of stock options outstanding as of January 31, 2000, with a weighted average exercise price of $8.42 per share, and 1,272,844 additional shares that may be issued under our stock option plan. <TABLE> <S> <C> Common Stock Offered by Juno................. 3,320,000 shares Common Stock Outstanding After this Offering........................ 38,339,351 shares Use of Proceeds.............................. We intend to use the net proceeds of this offering for subscriber acquisition, advertising, brand marketing, continued investment in the development of our Internet services, enhancements of our network infrastructure and other general corporate purposes. We may also use a portion of the proceeds for acquisitions, strategic alliances, or joint ventures. See "Use of Proceeds." Nasdaq National Market Symbol................ "JWEB" </TABLE> ------------------------ "Juno Web", "Juno Express" and "Juno Gold" are trademarks, and "Juno" and Juno Online Services, Inc.'s logo are registered trademarks, of Juno Online Services, Inc. Each trademark, trade name or service mark of any other company appearing in this prospectus belongs to its holder. Juno Online Services, Inc. was incorporated in Delaware on July 2, 1996 and is the successor by merger to Juno Online Services, L.P., which was formed on June 30, 1995 as a Delaware limited partnership. Our principal executive offices are located at 1540 Broadway, New York, New York 10036. Our telephone number at that location is (212) 597-9000. INFORMATION CONTAINED ON OUR WEB SITES DOES NOT CONSTITUTE PART OF THIS PROSPECTUS. References in this prospectus to "Juno," "we," "our," and "us" refer to Juno Online Services, Inc., a Delaware corporation, and its predecessor prior to the merger, Juno Online Services, L.P., a Delaware limited partnership. ------------------------ UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS: - REFLECTS THE STATUTORY MERGER OF JUNO ONLINE SERVICES, L.P. WITH AND INTO JUNO ONLINE SERVICES, INC. ON MARCH 1, 1999; - REFLECTS THE 1-FOR-4.5 REVERSE STOCK SPLIT OF EACH CLASS OF OUR CAPITAL STOCK EFFECTED IN CONNECTION WITH OUR MAY 1999 INITIAL PUBLIC OFFERING; AND - ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA The following table sets forth summary consolidated financial and operating data for Juno. You should read this information together with the consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus. See "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> PERIOD FROM INCEPTION (JUNE 30, 1995) TO YEAR ENDED DECEMBER 31, DECEMBER 31, ----------------------------------------------------- 1995 1996 1997 1998 1999 ------------ ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Billable services............................ $ -- $ 6 $ 1,371 $ 6,645 $ 34,545 Advertising and transaction fees............. -- 127 1,875 6,454 12,662 Direct product sales......................... -- 3 5,845 8,595 4,794 ------------ ----------- ----------- ----------- ----------- Total revenues............................. -- 136 9,091 21,694 52,001 ------------ ----------- ----------- ----------- ----------- Cost of revenues: Billable services............................ -- -- 1,053 5,606 24,950 Advertising and transaction fees............. -- 278 1,659 3,725 4,675 Direct product sales......................... -- 3 5,796 7,627 4,176 ------------ ----------- ----------- ----------- ----------- Total cost of revenues..................... -- 281 8,508 16,958 33,801 ------------ ----------- ----------- ----------- ----------- Operating expenses: Operations, free service..................... -- 5,803 11,075 9,383 6,698 Subscriber acquisition....................... 592 6,993 3,140 5,334 47,651 Sales and marketing.......................... 389 4,276 12,593 11,584 11,556 Product development.......................... 2,577 3,741 4,860 7,345 7,232 General and administrative................... 275 2,172 2,897 2,760 4,615 ------------ ----------- ----------- ----------- ----------- Total operating expenses................... 3,833 22,985 34,565 36,406 77,752 ------------ ----------- ----------- ----------- ----------- Loss from operations....................... (3,833) (23,130) (33,982) (31,670) (59,552) Interest income, net........................... -- 128 243 44 3,718 ------------ ----------- ----------- ----------- ----------- Net loss................................... $ (3,833) $ (23,002) $ (33,739) $ (31,626) $ (55,834) ============ =========== =========== =========== =========== Pro forma basic and diluted net loss per share (1).......................................... $ (1.85) $ (1.84) =========== =========== Weighted average shares outstanding used in pro forma basic and diluted per share calculation (1).......................................... 17,091 30,339 =========== =========== </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ------------------------- ACTUAL AS ADJUSTED(2) -------- -------------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................. $ 91,497 $175,261 Working capital........................................... 67,571 151,335 Total assets.............................................. 119,088 202,852 Total indebtedness, including current maturities.......... 2,878 2,878 Total stockholders' equity................................ 71,648 155,412 </TABLE> - ------------------------------ (1) Gives pro forma effect to the following: - treatment of Class A limited partnership units as common stock for all periods presented; and - conversion of Series B redeemable convertible preferred stock for the period following the March 1999 statutory merger. See the consolidated financial statements and the notes to these statements appearing elsewhere in this prospectus for the determination of the number of shares used in computing pro forma basic and diluted loss per share. (2) As adjusted to reflect the sale of 3,320,000 shares of common stock offered by Juno hereby at an assumed offering price of $26.88 per share after deducting the underwriting discount and estimated offering expenses payable by Juno. See "Use of Proceeds" and "Capitalization."
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+PROSPECTUS SUMMARY The following summary highlights information we present more fully elsewhere in this prospectus. Except as we indicate otherwise, all of the information in this prospectus: - reflects a 1.6-for-1 forward stock split of our outstanding common stock that we will effect at the effective time of this offering; - reflects the automatic conversion of all outstanding shares of our preferred stock into 12,326,173 shares of common stock immediately prior to the closing of this offering; and - assumes the underwriters do not exercise their over-allotment option. INTROGEN THERAPEUTICS, INC. We are a leading developer of gene therapy products for the treatment of cancer. We are capitalizing on the significant advances in the understanding of the human genome and the role that genetic function plays in the development of cancer. Our drug discovery and development programs have resulted in innovative approaches in which physicians use genes to treat cancer by directly addressing the genetic abnormalities associated with the disease. Our lead product candidate, INGN 201, combines the p53 gene, one of the most potent members of a group of naturally occurring genes, the tumor suppressor genes, that act to protect cells from becoming cancerous, with a gene delivery system that we have developed and extensively tested. The gene delivery system, or vector, uses a modified adenovirus, a common cold virus, to deliver genes like p53 to cancer cells. The critical importance of the p53 gene in controlling tumor growth indicates that INGN 201 is applicable to multiple cancers. We have commenced the first of our planned pivotal Phase III clinical trials of INGN 201 in head and neck cancer. Pivotal Phase III trials are typically the final phase required for United States Food and Drug Administration, or FDA, approval. We are also conducting a Phase II clinical trial in non-small cell lung cancer, a category that includes approximately 80% of the various kinds of lung cancer. Phase II trials are efficacy studies. We are also conducting several Phase I clinical trials, or safety studies, for additional cancer types, or indications. To date, doctors at clinical sites have treated over 400 patients with a total of over 3,000 doses of INGN 201, establishing a large safety database. We are developing INGN 201 and other p53 products as part of our collaboration agreement with Aventis Pharma. The cancer therapies we are developing, which are based on restoring normal cellular function through gene therapy, may offer safer and more effective treatments than are currently available. Cancer, the second leading cause of death in the United States, is primarily a genetic disease. Research has shown that tumor suppressor genes, which regulate cancer cell growth, are mutated or defective in cancer cells. In gene therapy for cancer, tumor suppressor genes are used to produce proteins that cause cancer cell death without affecting normal cells. This distinguishes gene therapy from conventional cancer treatments such as radiation and chemotherapy that cannot discriminate well between normal cells and cancer cells and therefore are often toxic at effective doses. We and Aventis have conducted a Phase II study with INGN 201 in 112 patients with head and neck cancer that is either recurrent, in that it grows back or recurs following initial treatment, or refractory, in that it recurs following two or more kinds of treatment, at 18 clinical centers in the United States and Europe. A preliminary analysis of the data from this study showed that INGN 201, which investigators administered locally, shrank tumors or stopped their growth in 25% of the treated patients. The analysis also showed that approximately 60% of individual tumors that the investigators injected with INGN 201 shrank or stopped growing, providing further evidence of activity using local administration. Tumors with non-mutated, or normal, p53 genes and those with mutant, or abnormal, p53 genes responded to treatment with INGN 201. The patients in the study tolerated the treatment well, without the significant side effects common in conventional cancer treatments. Based on these results, in June 2000 we initiated our first randomized, controlled pivotal Phase III study which we designed to demonstrate the efficacy of INGN 201 for treatment of patients with head and neck cancer who have failed conventional treatments. Physicians will treat patients in this study regardless of whether their tumors have mutant p53 genes. We have also designed a second pivotal Phase III study which combines INGN 201 with standard chemotherapy, which we plan to commence in 2000. We believe that the design of these studies will allow us to establish the effectiveness of INGN 201, administered both alone and in combination with standard chemotherapy treatments. In addition to our INGN 201 development program, we have identified and are developing additional gene therapy product candidates, including the genes mda-7, PTEN and CCAM, which we believe may be effective in treating certain cancers. Through our development experience with INGN 201, we have created an efficient process to evaluate new drug candidates and advance them from preclinical studies to human trials. In addition, we have developed a variety of technologies, which we refer to as enabling technologies, for administering gene therapy products to patients and for enhancing the effects of these products. We also have specialized manufacturing expertise and a manufacturing facility to support our continued product development and commercialization efforts. Our objective is to be the leader in the development of gene therapy products for the treatment of cancer and other diseases which, like cancer, result from cellular dysfunction and uncontrolled cell growth. To accomplish this objective, our strategy is to: - develop and commercialize INGN 201 for multiple cancer types, or indications; - develop our portfolio of gene therapy drug products; - expand our delivery system technologies; - leverage our manufacturing capabilities to produce additional gene therapy drug products; - establish targeted sales and marketing capabilities; and - expand our market focus to non-cancer indications. Our principal executive offices are located at 301 Congress Avenue, Suite 1850, Austin, Texas 78701, and our telephone number is (512) 708-9310. Our corporate web site is located at www.introgen.com. Statements and information contained on our web site are not part of this prospectus. We were incorporated in Delaware on June 17, 1993. "Introgen" and the Introgen logo are trademarks of Introgen Therapeutics, Inc. All other trademarks and service marks appearing in this prospectus are trademarks or service marks of the respective companies that use them. THE OFFERING Common stock we are offering............ 4,000,000 shares Common stock to be outstanding after this offering........................... 20,460,353 shares Underwriters' over-allotment option..... 600,000 shares Use of proceeds......................... We expect to use the net proceeds from this offering to conduct research and development, including clinical trials, advance our process development and manufacturing capabilities, initiate product marketing and commercialization programs, and for general corporate purposes, including working capital. See "Use of Proceeds." Proposed Nasdaq National Market symbol.................................. INGN The number of shares of common stock to be outstanding after the offering is based on 16,460,353 shares of common stock outstanding as of June 30, 2000. It does not include: - 2,597,155 shares of common stock subject to stock options outstanding as of June 30, 2000, with a weighted average exercise price of $0.54 per share; and - 163,600 shares of common stock subject to warrants outstanding as of June 30, 2000, with a weighted average exercise price of $4.96 per share. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The following table contains a summary of our statement of operations data. The pro forma net loss per share data below gives effect to the pro forma basis of presentation described in Note 2 to our consolidated financial statements, including the conversion of each outstanding share of preferred stock into 1.92 shares of common stock upon the closing of this offering. <TABLE> <CAPTION> YEAR ENDED JUNE 30, ---------------------------------------------------------- 1996 1997 1998 1999 2000 --------- --------- --------- --------- ---------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue from collaborations................................. $ 10,449 $ 12,052 $ 8,606 $ 6,714 $ 6,204 --------- --------- --------- --------- ---------- Revenue from product sales to affiliate..................... -- -- 2,505 1,475 2,184 Cost of product sales....................................... -- -- 1,729 994 1,476 --------- --------- --------- --------- ---------- Gross margin on product sales............................. -- -- 776 481 708 Operating costs and expenses................................ 11,992 15,589 12,186 10,516 14,776 --------- --------- --------- --------- ---------- Loss from operations........................................ (1,543) (3,537) (2,804) (3,321) (7,864) Interest income, net........................................ 211 421 789 675 140 --------- --------- --------- --------- ---------- Net loss.................................................... $ (1,332) $ (3,116) $ (2,015) $ (2,646) $ (7,724) ========= ========= ========= ========= ========== Basic and diluted net loss per share........................ $ (0.34) $ (0.80) $ (0.51) $ (0.66) $ (1.89) ========= ========= ========= ========= ========== Shares used in computing basic and diluted net loss per share..................................................... 3,909,376 3,909,376 3,922,768 4,005,893 4,095,623 ========= ========= ========= ========= ========== Pro forma basic and diluted net loss per share.............. $ (0.47) ========== Shares used in computing pro forma basic and diluted net loss per share............................................ 16,421,796 ========== </TABLE> The following table contains a summary of our consolidated balance sheet at June 30, 2000: - on an actual basis; and - on a pro forma as adjusted basis to reflect the conversion of all outstanding shares of preferred stock into 12,326,173 shares of common stock effective upon the closing of this offering and the receipt of the estimated net proceeds for the sale of the shares of common stock that we are offering, at an assumed initial public offering price per share of $8.00, after deducting the estimated underwriting discount and the estimated offering expenses. <TABLE> <CAPTION> JUNE 30, 2000 ----------------------- PRO FORMA ACTUAL AS ADJUSTED -------- ----------- <S> <C> <C> BALANCE SHEET DATA: Cash and investments........................................ $ 11,765 $ 40,425 Working capital............................................. 10,263 38,923 Total assets................................................ 24,855 53,515 Long-term obligations, net of current portion............... 8,021 8,021 Accumulated deficit......................................... (18,744) (18,744) Total stockholders' equity.................................. 13,592 42,252 </TABLE>
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+Prospectus Summary.................... 1 Summary Financial Information......... 2 Risk Factors.......................... 3 Issuance of Shares to Selling Shareholders........................ 11 Use of Proceeds....................... 11 Price Range of common stock........... 12 Dividend Policy....................... 13 Selected Financial Data............... 14 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 15 Business.............................. 22 Management............................ 29 Principal and Selling Stockholders.... 37 Description of Capital Stock.......... 40 Plan of Distribution.................. 55 Legal Matters......................... 56 Experts............................... 56 Available Information................. 56 Index to Financial Statements......... F-1 </TABLE> HOMECOM COMMUNICATIONS, INC. 2,645,000 SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF SHARES OF HOMECOM'S SERIES E CONVERTIBLE PREFERRED STOCK AND UPON THE EXERCISE OF WARRANTS --------------------- PROSPECTUS --------------------- August 28, 2000 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- <PAGE> PART II ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION <TABLE> <S> <C> Securities and Exchange Commission registration fee......... $ 567.35 Nasdaq SmallCap Market additional listing fee............... 26,450.00 Accountants' fees and expenses.............................. 10,000.00 Legal fees and expenses..................................... 15,000.00 Blue Sky fees and expenses.................................. 5,000.00 Transfer Agent's fees and expenses.......................... 500.00 Printing and engraving expenses............................. 500.00 Miscellaneous............................................... 1,000.00 ---------- Total expenses........................................ $59,017.35 ========== </TABLE> ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Delaware General Corporation Law (the "DGCL") permits a corporation to eliminate or limit the personal liability of a director to the corporation or its stockholders for monetary damages for breach of duty of care or other duty as a director, provided that no provision shall eliminate or limit the liability of a director: (A) for an appropriation, in violation of his duties, of any business opportunity of the corporation; (B) for acts or omissions which involve intentional misconduct or a knowing violation of law; (C) for unlawful corporate distributions; or (D) for any transaction from which the director received an improper personal benefit. This provision pertains only to breaches of duty by directors in their capacity as directors (and not in any other corporate capacity, such as officers) and limits liability only for breaches of fiduciary duties under Delaware corporate law (and not for violation of other laws, such as the federal securities laws). Our Restated Certificate of Incorporation (the "Restated Certificate") exonerates our directors from monetary liability to the extent permitted by this statutory provision. Our Restated Certificate of Incorporation and Restated Bylaws (the "Restated Bylaws") also provide that we shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including any action by or in the right of HomeCom), by reason of the fact that such person is or was a director or officer of HomeCom, or is or was serving at the request of HomeCom as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including reasonable attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of HomeCom (and with respect to any criminal action or proceeding, if such person had no reasonable cause to believe such person's conduct was unlawful), to the maximum extent permitted by, and in the manner provided by, the DGCL. Notwithstanding any provisions of our Restated Certificate of Incorporation and Restated Bylaws to the contrary, the DGCL provides that we shall not indemnify a director or officer for any liability incurred in a proceeding in which the director is adjudged liable to HomeCom or is subjected to injunctive relief in favor of HomeCom: (1) for any appropriation, in violation of his duties, of any business opportunity of HomeCom; (2) for acts or omissions which involve intentional misconduct or a knowing violation of law; (3) for unlawful corporate distributions; or (4) for any transaction from which the director or officer received an improper personal benefit. II-1 <PAGE> ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The following list describes sales by the Registrant of securities in the past three years which were not registered under the Securities Act. 1. In September 1997, the Registrant issued and sold 5% convertible debentures (the "Debentures") to four private investors for an aggregate purchase price of $1,700,000. The Debentures were issued pursuant to the terms of a 5% Convertible Debenture Purchase Agreement dated effective as of September 19, 1997 (the "Debenture Agreement"). All of the 5% Convertible Debentures have been converted into an aggregate of 961,460 shares of our common stock. In connection with the issuance of the Debentures, the Registrant granted to an entity designated by the investors aggregate warrants to acquire 400,000 shares of common stock, with warrants to acquire 200,000 of such shares exercisable at a price of $4.00 per share and warrants to acquire the remaining 200,000 of such shares exercisable at a price of $6.00 per share. If not earlier exercised, these warrants expire on October 27, 2000. 2. In December 1997, the Registrant issued 20,000 shares of its Series A Convertible preferred stock (the "Series A preferred stock") to private investors (the "Series A Preferred Holders") for an aggregate purchase price of $2,000,000. Net proceeds to the Registrant were approximately $1.8 million. All of the Series A preferred stock has been converted into an aggregate of 711,456 shares of our common stock. In connection with the issuance and sale of the Series A preferred stock, the Registrant granted warrants to the Series A Preferred Holders to acquire an aggregate of 75,000 shares of common stock, with warrants to purchase 62,500 shares of common stock having an exercise price per share equal to $14.50625 and warrants to purchase 12,500 shares of common stock having an exercise price per share equal to $15.825. The Registrant also granted 50,000 warrants to a placement agent, the Malachi Group, at an exercise price of $15.825 per share. These warrants to purchase an aggregate 125,000 shares of common stock (the "Series A preferred stock Warrants") will expire on December 31, 2000 and are eligible to be exercised at any time on or after June 23, 1998. 3. On April 16, 1998, we acquired all of the outstanding capital stock of The Insurance Resource Center, Inc. ("IRC") for 351,391 shares of our common stock. Pursuant to the Agreement and Plan of Reorganization, we filed a registration statement for 175,696 of such shares on June 12, 1998. 4. In March 1999, the Registrant issued 125 shares of its Series B convertible preferred stock (the "Series B Preferred Stock") to private investors (the "Series B Preferred Holders") for an aggregate purchase price of $2,500,000. Net proceeds to the Registrant were approximately $2.3 million. In connection with the issuance and sale of the Series B Preferred Stock, the Registrant granted warrants to the Series B Preferred Holders to acquire an aggregate of 225,000 shares of common stock having an exercise price per share equal to $5.70. The Registrant also granted 25,000 warrants to a placement agent, J.P. Turner & Company, L.L.C., at an exercise price of $5.70 per share. These warrants to purchase an aggregate of 250,000 shares of common stock will expire on March 24, 2004. 5. In March 1999, we acquired all of the outstanding shares of the First Institutional Marketing companies for 1,252,174 shares of common stock. In connection with that acquisition, we filed a registration statement covering the resale of one-half of those shares. 6. In April 1999, we acquired all the outstanding shares of Ganymede Corporation for total consideration of 185,342 shares of common stock and $100,000 cash. In connection with that acquisition, we filed a registration statement covering the resale of one-half of those shares. 7. In July 1999, the Registrant issued 175 shares of its series C convertible preferred stock (the "Series C Preferred Stock") to a private investor for an aggregate purchase price of $3,500,000. Net proceeds to the Registrant were approximately $3.3 million. In connection with the issuance and sale of II-2 <PAGE> the Series C Preferred Stock, the Registrant issued to the investor warrants to acquire an aggregate of 59,574 shares of common stock having an exercise price per share equal to $7.34. These warrants will expire on July 27, 2004. The Registrant also issued warrants to acquire an aggregate of 77,000 shares of common stock having an exercise price per share equal to $5.813 to the Delphi Group in satisfaction of their claim that they were entitled to compensation in connection with the issuance of the Series C Preferred Stock. These warrants will expire on July 30, 2004. 8. In September 1999, the Registrant issued 75 shares of its series D convertible preferred stock (the "Series D Preferred Stock") to a private investor for an aggregate purchase price of $1,500,000. Net proceeds to the Registrant were approximately $1.4 million. In connection with the issuance and sale of the Series D Preferred Stock, the Registrant issued to the investor warrants to acquire an aggregate of 25,000 shares of common stock having an exercise price per share equal to $7.34. These warrants will expire on September 27, 2004. 9. In April 2000, the Registrant issued 106.35 shares of its series E convertible preferred stock (the "Series E Preferred Stock") to a private investor for an aggregate purchase price of $2,000,000. Net proceeds to the Registrant were approximately $1.9 million. In connection with the issuance and sale of the Series E Preferred Stock, the Registrant issued to the investor warrants to acquire an aggregate of 66,667 shares of common stock having an exercise price per share equal to $3.35. These warrants will expire on April 14, 2005. The sales and issuance of shares listed above were exempt from registration under the Securities Act by virtue of Sections 4(2) and 3(b) thereof and in reliance on Rule 501 and Regulation D promulgated thereunder. The recipients of the above-described securities represented their intention to acquire the securities for investment only and not with a view to distribution thereof. Appropriate restrictive legends were affixed to stock certificates and warrants issued in such transactions. ITEM 16. EXHIBITS <TABLE> <CAPTION> EXHIBIT DESCRIPTION --------------------- ------------------------------------------------------------ <C> <S> 1.1 -- Form of Underwriting Agreement.* 3.1 -- Restated Certificate of Incorporation of the Registrant.* 3.2 -- Restated Bylaws of the Registrant.* 3.3 -- Certificate of Designation of Series A Convertible Preferred Stock.*** 3.4 -- Certificate of Designation of Series B Convertible Preferred Stock.** 3.5 -- Certificate of Designation of Series C Convertible Preferred Stock #### 3.6 -- Certificate of Designation of Series D Convertible Preferred Stock #### 3.7 -- Amended Certificate of Designations, Preferences and Rights of Series E Convertible Preferred Stock of HomeCom Communications, Inc. dated as of April 14, 2000 ##### 4.1 -- See Exhibits 3.1 and 3.2 for provisions of the Restated Certificate of Incorporation and Bylaws of the Registrant defining rights of the holders of common stock of the Registrant.* 4.2 -- Specimen Stock Certificate.* 4.3 -- Form of Warrant.* 5.1 -- Opinion of Sims Moss Kline & Davis LLP, Counsel to the Registrant, as to the legality of the shares being registered (previously filed). 10.1 -- HomeCom Communications, Inc. Stock Option Plan and form of Stock Option Certificate.* </TABLE> II-3 <PAGE> <TABLE> <CAPTION> EXHIBIT DESCRIPTION --------------------- ------------------------------------------------------------ <C> <S> 10.2 -- HomeCom Communications, Inc. Non-Employee Directors Stock Option Plan and form of Stock Option Certificate.* 10.3 -- Employment Agreement between the Registrant and Harvey W. Sax, dated January 1, 1996.* 10.4 -- Form of Employment Agreement entered into between the Registrant and each of its executive officers except Harvey W. Sax.* 10.5 -- Lease Agreement between Property Georgia OBJLW One Corporation and the Registrant dated January 22, 1996.* 10.6 -- Lease and Services Agreement between Alliance Greensboro, L.P. and the Registrant, dated June 25, 1996.* 10.7 -- Business Alliance Program Agreement between Oracle Corporation and the Registrant, dated May 30, 1996, together with the Sublicense Addendum, Application Specific Sublicense Addendum, Full Use and Deployment Sublicense Addendum and License Transfer Policy, each dated May 30, 1996.* 10.8 -- Network Enrollment Agreement between Apple Computer, Inc. and the Registrant, effective May 1996.* 10.9 -- Member Level Agreement between Microsoft Corporation and the Registrant, effective May 1996.* 10.10 -- Master Agreement for internet Services and Products between BBN Planet Corporation and the Registrant, dated February 1, 1996.* 10.11 -- Authorized Business Partners Agreement between BBN Planet Corporation and the Registrant, dated May 14, 1996.* 10.12 -- Stock Purchase Agreement between the Registrant and the stockholders of HomeCom Internet Security Services, Inc., dated August 31, 1996.* 10.13 -- Form of Promissory Notes issued by the Registrant and held by Mark Germain.* 10.14 -- Form of Promissory Notes issued by the Registrant and held by Esther Blech and the Edward A. Blech Trust.* 10.15 -- Marketing Associate Solution Alliance Agreement dated February 6, 1997 between the Registrant and Unisys Corporation.* 10.16 -- Marketing Associate Agreement dated February 6, 1997 between the Registrant and Unisys Corporation.** 10.17 -- Letter agreement dated January 16, 1997 between the Registrant, David A. Blech, Esther Blech and the Edward A. Blech Trust.* 10.18 -- HomeCom Communications, Inc. Employee Stock Purchase Plan.* 10.19 -- 5% Convertible Debenture Purchase Agreement dated effective September 19, 1997 between the Registrant, Euro Factors International, Inc., Beauchamp Finance, FTS Worldwide Corporation and COLBO.*** 10.20 -- Form of 5% Convertible Debenture issued by the Registrant and held by Euro Factors International, Inc., Beauchamp Finance, FTS Worldwide Corporation and COLBO.*** </TABLE> II-4 <PAGE> <TABLE> <CAPTION> EXHIBIT DESCRIPTION --------------------- ------------------------------------------------------------ <C> <S> 10.21 -- Registration Rights Agreement dated effective September 19, 1997 between the Registrant, Euro Factors International, Inc., Beauchamp Finance, FTS Worldwide Corporation and COLBO.*** 10.22 -- Letter agreement dated September 23, 1997 between the Registrant, Euro Factors International, Inc., Beauchamp Finance, FTS Worldwide Corporation and COLBO.*** 10.23 -- Letter agreement dated September 27, 1997 between the Registrant, Euro Factors International, Inc., Beauchamp Finance, FTS Worldwide Corporation and COLBO.*** 10.24 -- Form of Warrant to purchase 200,000 shares of common stock at an exercise price of $4.00 per share issued by the Registrant to First Granite Securities, Inc.*** 10.25 -- Form of Warrant to purchase 200,000 shares of common stock at an exercise price of $6.00 per share issued by the Registrant to First Granite Securities, Inc.*** 10.26 -- Form of Securities Purchase Agreement between the Registrant, Sovereign Partners, L.P. and Dominion Capital Fund, LTD. dated as of December 23, 1997.*** 10.27 -- Form of Registration Rights Agreement between the Registrant, Sovereign Partners, L.P. and Dominion Capital Fund, LTD. dated as of December 23, 1997.*** 10.28 -- Form of Warrant to purchase 18,750 shares of common stock issued by the Registrant to Sovereign Partners, L.P.*** 10.29 -- Form of Warrant to purchase 56,250 shares of common stock issued by the Registrant to Dominion Capital Fund, LTD.*** 10.30 -- Common Stock Purchase Agreement dated January 23, 1998 by and among InsureRate, Inc., the Registrant, Jerome R. Corsi and Hamilton Dorsey Alston Company.*** 10.31 -- Escrow Agreement dated as of January 23, 1998 by and among InsureRate, Inc., Hamilton Dorsey Alston Company, the Registrant, Jerome R. Corsi and SunTrust Bank, Atlanta.*** 10.32 -- Shareholders Agreement dated January 23, 1998 by and among Hamilton Dorsey Alston Company, the Registrant and InsureRate, Inc.*** 10.33 -- Web Development and Hosting Services Agreement dated January 23, 1998, by and among InsureRate, Inc. and Hamilton Dorsey Alston Company.*** 10.34 -- Form of Warrant to purchase 25,000 shares of common stock for an aggregate purchase price of $92,500 by the Registrant to Hamilton Dorsey Alston Company.*** 10.35 -- Loan Agreement dated January 23, 1998 by and between InsureRate, Inc. and the Registrant.*** 10.36 -- Form of Master Note issued by the Registrant to InsureRate, Inc.*** 10.37 -- Form of Warrant to purchase 50,000 shares of common stock issued by the Registrant to The Malachi Group, Inc.+ 10.38 -- Letter Agreement, dated April 8, 1998 by and among HomeCom, Eurofactors International Inc., Blauchamp France, FTS Worldwide Corporation and COLBO.**** 10.39 -- Letter Agreement, dated April 8, 1998 by and between First Granite Securities, Inc. and HomeCom.**** 10.40 -- Letter Agreement, dated April 17, 1998 by and among Sovereign Partners, L.P., Dominion Capital Fund and HomeCom.**** </TABLE> II-5 <PAGE> <TABLE> <CAPTION> EXHIBIT DESCRIPTION --------------------- ------------------------------------------------------------ <C> <S> 10.41 -- Agreement and Plan of Reorganization by and among The Insurance Resource Center, Inc., Tim Strong, James Higham, Cameron M. Harris & HomeCom and HomeCom, dated as of April 15, 1998.*** 10.42 -- Employment Agreement by and between HomeCom and Tim Higham, dated as of April 16, 1998.*** 10.44 -- Asset Purchase Agreement by and between HomeCom and Sage Networks Acquisition Corp. dated as of June 10, 1998. # 10.45 -- Escrow Agreement by and between HomeCom and Sage Networks Acquisition Corp. dated as of June 10, 1998. # 10.46 -- Transitional Services Agreement by and between HomeCom and Sage Networks Acquisition Corp. dated as of June 10, 1998. # 10.47 -- Co-Location Agreement by and between HomeCom and Sage Networks, Inc. dated as of June 10, 1998. # 10.48 -- Agreement and Plan of Merger by and among HomeCom Communications, Inc, FIMI Securities Acquisitions Corp., Inc., ATF Acquisition Corp., Inc. and Daniel A. Delity, James Wm. Ellsworth, and David B. Frank dated as of November 6, 1998, together with exhibits. ## 10.50 -- Securities Purchase Agreement dated as of March 25, 1999 by and among HomeCom Communications, Inc. and CPR (USA), Inc., Liberty View Funds, L.P., and Liberty View Fund, L.L.C.++ 10.51 -- Registration Rights Agreement dated as of March 25, 1999 by and among HomeCom Communications, Inc. and CPR (USA), Inc., Liberty View Funds, L.P., and Liberty View Fund, L.L.C.++ 10.52 -- Transfer Agent Instructions dated as of March 25, 1999.++ 10.53 -- Transfer Agent Legal Opinion dated as of March 25, 1999.++ 10.54 -- Placement Agency Agreement dated as of March 25, 1999 by and between HomeCom Communications, Inc. and J.P. Turner & Company, L.L.C.++ 10.55 -- Stock Purchase Agreement by and among HomeCom Communications, Inc. and Richard L. Chu, Joseph G. Rickard, John R. Winans, Mario D'Agostino, Karen Moore, and John Kokinis, dated as of April 23, 1999.+++ 10.56 -- Employment Agreement Between Ganymede Corporation and Richard L. Chu, dated as of April 23, 1999.+++ 10.57 -- Employment Agreement between Ganymede Corporation and John Winans, dated as of April 23, 1999.+++ 10.58 -- Employment Agreement between Ganymede Corporation and Joseph G. Rickard, dated as of April 23, 1999.+++ 10.59 -- Escrow Agreement by and among HomeCom Communications, Inc. and Richard L. Chu, Joseph G. Rickard, John R. Winans, Mario D'Agostino, Karen Moore, and John Kokinis, dated as of April 23, 1999.+++ 10.60 -- Pledge and Security Agreement by and between HomeCom Communications, Inc. and Richard L. Chu, Joseph G. Rickard, John R. Winans, Mario D'Agostino, Karen Moore, and John Kokinis, dated as of April 23, 1999.+++ </TABLE> II-6 <PAGE> <TABLE> <CAPTION> EXHIBIT DESCRIPTION --------------------- ------------------------------------------------------------ <C> <S> 10.61 -- Warrant Agreement, dated as of March 25, 1999, by and among CPR (USA), Inc. and HomeCom Communications, Inc.++++ 10.62 -- Warrant Agreement, dated as of March 25, 1999, by and among Liberty View Fund, L.L.C. and HomeCom Communications, Inc.++++ 10.63 -- Warrant Agreement, dated as of March 25, 1999, by and among Liberty View, Funds, L.P. and HomeCom Communications, Inc.++++ 10.64 -- Warrant Agreement, dated as of March 25, 1999, by and among J.P. Turner & Company, L.L.C and HomeCom Communications, Inc.++++ 10.65 -- Securities Purchase Agreement dated as of July 23, 1999 by and among HomeCom Communications, Inc. and MacNab LLC #### 10.66 -- Registration Rights Agreement dated as of July 23, 1999 by and among HomeCom Communications, Inc. and MacNab LLC #### 10.67 -- Transfer Agent Instructions dated as of September 28, 1999 #### 10.68 -- Transfer Agent Legal Opinion dated as of July 23, 1999 #### 10.69 -- Placement Agency Agreement dated as of July 23, 1999 by and between HomeCom Communications, Inc. and Greenfield Capital Partners #### 10.70 -- Warrant Agreement, dated as of July 23, 1999, by and between HomeCom Communications, Inc. and MacNab LLC 10.71 -- Securities Purchase Agreement dated as of September 27, 1999 by and among HomeCom Communications, Inc. and Jackson LLC #### 10.72 -- Registration Rights Agreement dated as of September 27, 1999 by and among HomeCom Communications, Inc. and Jackson LLC #### 10.73 -- Transfer Agent Instructions dated as of September 28, 1999 #### 10.74 -- Transfer Agent Legal Opinion dated as of September 28, 1999 #### 10.75 -- Placement Agency Agreement dated as of September 27, 1999 by and between HomeCom Communications, Inc. and Greenfield Capital Partners #### 10.76 -- Warrant Agreement, dated as of September 27, 1999, by and between HomeCom Communications, Inc. and Jackson LLC #### 10.77 -- Asset Purchase Agreement, dated October 1, 1999, by and between HomeCom Communications, Inc. and Infrastructure Defense, Inc.+++++ 10.78 -- Bill of Sale and Assignment, dated October 1, 1999, by and between HomeCom Communications, Inc. and Infrastructure Defense, Inc.+++++ 10.79 -- Non-solicitation and Non-compete Agreement, Dated October 1, 1999, by and between HomeCom Communications, Inc. and Infrastructure Defense, Inc.+++++ 10.80 -- Registration Rights Agreement, October 1, 1999, by and between HomeCom Communications, Inc. and Infrastructure Defense, Inc.+++++ 10.81 -- Form of Opinion of Purchaser's Counsel.+++++ 10.82 -- Form of Opinion of Seller's Counsel.+++++ </TABLE> II-7 <PAGE> <TABLE> <CAPTION> EXHIBIT DESCRIPTION --------------------- ------------------------------------------------------------ <C> <S> 10.83 -- Referral and Service Agreement, dated October 1, 1999, by and between HomeCom Communications, Inc. and Infrastructure Defense, Inc.+++++ 10.84 -- Value Added Distributor Agreement, dated October 1, 1999 by and between HomeCom Communications, Inc. and Infrastructure Defense, Inc.+++++ 10.85 -- Resignation Letter of Krishan Puri, dated November 1, 1999.++++++ 10.86 -- Securities Purchase Agreement dated as of April 14, 2000, by and among HomeCom Communications, Inc. and McNab LLC ##### 10.87 -- Registration Rights Agreement dated as of April 14, 2000, by and among HomeCom Communications, Inc. and McNab LLC ##### 10.88 -- Transfer Agent Instructions dated as of April 14, 2000 ##### 10.89 -- Transfer Agent Legal Opinion dated as of April 14, 2000 ##### 10.90 -- Warrant Agreement, dated as of April 14, 2000, by and among MacNab LLC and HomeCom Communications, Inc. 21.1 -- List of Subsidiaries.*** 23.1 -- Consent of PricewaterhouseCoopers LLP 23.2 -- Consent of Andrew Shebay & Company, PLLC 23.3 -- Consent of Andrew Shebay & Company, PLLC 23.4 -- Consent of Ostrow Reisin Berk & Abrams, Ltd. 23.5 -- Consent of Sims Moss Kline & Davis LLP (included in Exhibit 5.1) (previously filed). 24.1 -- Powers of Attorney (previously filed). 27.1 -- Financial Data Schedule (for SEC use only). ### </TABLE> ------------------------ <TABLE> <C> <S> * Incorporated herein by reference to exhibit of the same number in the Form S-1 Registration Statement of the Registrant (Registration No. 333-12219). ** Incorporated herein by reference to exhibit of the same number in the Form 10-K of the Registrant filed with the Commission on March 31, 1998. *** Incorporated herein by reference to exhibit of the same number in the Form S-1 Registration Statement of the Registrant (Registration No. 333-42599). **** Incorporated herein by reference to exhibit of the same number in Form 8-K of the Registrant filed with the Commission on April 28, 1998. # Incorporated herein by reference to exhibit of the same number in Form 8-K of the Registrant filed with the Commission on June 25, 1998. ## Incorporated herein by reference to exhibit of the same number in Form 8-K of the Registrant filed with the Commission on November 18, 1998. ### Incorporated herein by reference to exhibit of the same number in Form 10-Q of the Registrant filed with the Commission on August 14, 2000. </TABLE> II-8 <PAGE> <TABLE> <C> <S> #### Incorporated herein by reference to exhibit of the same number in Form S-1 Registration Statement of the Registrant (Registration No. 333-88491). ##### Incorporated herein by reference to exhibit of the same number in Form S-3 Registration Statement of the Registrant (Registration No. 333-38326). + Incorporated herein by reference to exhibit of the same number in Form S-1 Registration Statement of the Registrant (Registration No. 333-45383). ++ Incorporated herein by reference to exhibit of the same number in Form 10-K of the Registrant filed with the Commission on March 31, 1999. +++ Incorporated herein by reference to exhibit of the same number in Form 8-K of the Registrant filed with the Commission on May 10, 1999. ++++ Incorporated herein by reference to Registration Statement on Form S-3 of the Registrant (Registration No. 333-79761) +++++ Incorporated herein by reference to exhibit of the same number on Form 8-K of the Registrant filed with the Commission on October 18, 1999. ++++++ Incorporated herein by reference to exhibit of the same number on Form 8-K of the Registrant filed with the Commission on November 5, 1999. </TABLE> ITEM 17. UNDERTAKINGS (a) The Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of this Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this Registration Statement. Notwithstanding the foregoing, any increase or decrease in the volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement or any material change to such information in this Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "1993 Act") may be permitted to directors, officers and controlling persons of the Registrant II-9 <PAGE> pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue. (c) The Registrant hereby undertakes that: (1) For purposes of determining any liability under the 1933 Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of the Registration Statement as of the time it was declared effective. (2) For purposes of determining any liability under the 1933 Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-10 <PAGE> SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Atlanta, State of Georgia on the 28th day of August, 2000. <TABLE> <S> <C> <C> HOMECOM COMMUNICATIONS, INC. By: /s/ HARVEY W. SAX ----------------------------------------- Harvey W. Sax PRESIDENT AND CHIEF EXECUTIVE OFFICER </TABLE> Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. <TABLE> <CAPTION> SIGNATURE TITLE DATE --------- ----- ---- <C> <S> <C> /s/ HARVEY W. SAX President and Chief ------------------------------------------- Executive Officer (Principal August 28, 2000 Harvey W. Sax Executive Officer) /s/ HARVEY W. SAX Chief Technical Officer and ------------------------------------------- Director August 28, 2000 Harvey W. Sax /s/ HARVEY W. SAX Director As Attorney-In-Fact ------------------------------------------- August 28, 2000 Roger Nebel /s/ HARVEY W. SAX Director As Attorney-In-Fact ------------------------------------------- August 28, 2000 James Wm. Ellsworth /s/ HARVEY W. SAX Director As Attorney-In-Fact ------------------------------------------- August 28, 2000 Daniel A. Delity /s/ HARVEY W. SAX Director As Attorney-In-Fact ------------------------------------------- August 28, 2000 Claude A. Thomas /s/ TIMOTHY ROBINSON Executive Vice President and ------------------------------------------- Chief Financial Officer August 28, 2000 Timothy R. Robinson </TABLE> II-11 </TEXT> </DOCUMENT>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001022225_oplink_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001022225_oplink_prospectus_summary.txt
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+SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION IN THIS PROSPECTUS, INCLUDING RISK FACTORS, REGARDING OPLINK AND THE COMMON STOCK BEING SOLD IN THIS OFFERING. OPLINK COMMUNICATIONS, INC. We design, manufacture and market fiber optic components and integrated optical modules that increase the performance of optical networks. We sell our products worldwide to communications equipment suppliers. Our top customers by revenue for the quarter ended June 30, 2000 were, listed alphabetically: ADVA International, Cisco Systems, Corning Incorporated, JDS Uniphase Corporation, Lucent Technologies, LuxN and Sycamore Networks. Our broad line of products enables the following applications within a fiber optic network: - WAVELENGTH EXPANSION--uses dense wavelength division multiplexing, or DWDM, to transmit large amounts of data through multiple wavelengths of light. - OPTICAL AMPLIFICATION--amplifies optical signals without the need to enhance the signals electronically. - WAVELENGTH PERFORMANCE MONITORING AND PROTECTION--controls the direction of light signals by monitoring wavelength performance within an optical network. - OPTICAL SWITCHING--redirects light signals without requiring the signal to be converted into an electrical one. These applications address the unique requirements of all segments within communications networks including: ultra-long haul, for cross-country connections; long haul, for long distance connections between cities; metropolitan, for connections within urban areas; and access, for connections to individual businesses and homes. We work closely with our customers early in their product development cycles to design components and integrated optical modules that meet their particular requirements. We combine our design expertise with our manufacturing capabilities in the United States and China to produce high performance products in large volumes. Data traffic has increased rapidly over the past several years, driving the demand for greater capacity, or bandwidth, on existing communications networks. Limitations of these networks and recent breakthroughs in optical component technology have led to the widespread deployment of fiber optic technology, which is able to transport large amounts of data. These breakthroughs include new technologies that expand the bandwidth of existing optical fiber networks and that provide intelligence, or the ability to monitor and manage optical signals. Fiber optic components and integrated optical modules are the core elements of optical systems that provide these capabilities within a network. We believe that manufacturers that are able to provide a broad line of sophisticated and customized components and modules in large volume will be in a strong position to grow their revenues in the fiber optic market. Our objective is to become a leading supplier of advanced components and integrated optical modules for the fiber optic communications industry. Key elements of our strategy include: - expanding our manufacturing capacity in both the United States and China as well as enhancing our manufacturing capabilities through automation; - building new and expanding existing customer relationships to increase market penetration by focusing on custom design and quality; - expanding and enhancing our existing line of optical components and integrated optical modules for all segments of the optical network; - continuing to develop optical products with features that allow service providers to manage their optical networks effectively; - continuing to attract talented personnel; and - pursuing strategic acquisitions of businesses and technologies. THE OFFERING <TABLE> <S> <C> Common stock offered.................................... 13,700,000 shares Common stock offered in a concurrent private placement............................................. 3,485,234 shares Common stock to be outstanding after the offering and the private placement................................. 153,949,656 shares Use of proceeds......................................... For expansion of manufacturing facilities, marketing and distribution activities, research and development activities, working capital and other general corporate purposes and acquisitions. See "Use of Proceeds." Nasdaq National Market symbol........................... OPLK </TABLE> CONCURRENT PRIVATE PLACEMENT In August 2000, we issued a convertible promissory note to Cisco Systems in the principal amount of $50 million. The note accrues interest at a rate of 8% per annum. Upon the closing of this offering, the outstanding principal amount and all accrued interest on the note will automatically convert into shares of our common stock at a conversion price per share equal to 85% of the public offering price. Assuming a public offering price of $17.00 and a closing date of September 30, 2000, the note would convert into 3,485,234 shares of common stock. The common stock outstanding after this offering is based on shares outstanding as of July 31, 2000 and includes 3,485,234 shares to be issued to Cisco Systems upon conversion of the convertible promissory note, but excludes: - 22,363,744 shares issuable upon exercise of outstanding options as of July 31, 2000 with a weighted average exercise price of $1.1139; - 3,255,178 shares reserved for future issuance under our 1995 and 1998 stock option plans as of July 31, 2000; and - 348,904 shares of common stock issuable upon exercise of outstanding warrants as of July 31, 2000 with a weighted average exercise price of $0.1720. Unless otherwise indicated, the information in this prospectus: - assumes no exercise of the underwriters' over-allotment option; - reflects, except in the consolidated financial statements and notes thereto, the conversion of all outstanding shares of our convertible preferred stock into shares of common stock upon completion of this offering; and - reflects a 2-for-1 stock split of our common stock and preferred stock effected in September 2000. SUMMARY CONSOLIDATED FINANCIAL DATA (in thousands, except share and per share data) <TABLE> <CAPTION> FISCAL YEAR ENDED JUNE 30, ----------------------------------------------------------------- 1996 1997 1998 1999 2000 ---------- ---------- ---------- ----------- ------------ <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues................................................... $ 10 $ 426 $ 2,493 $ 9,094 $ 39,048 Gross profit (loss)........................................ 7 (451) (471) 1,869 5,704 Loss from operations....................................... (436) (1,406) (2,136) (3,417) (25,591) Net loss................................................... (426) (1,397) (2,148) (3,474) (24,902) Net loss per share: Basic and diluted...................... $ (4.67) $ (2.37) $ (3.18) Weighted average shares: Basic and diluted................. 459,616 1,463,342 7,839,650 Pro forma net loss per share............................... $ (0.24) Pro forma weighted average shares.......................... 104,537,892 </TABLE> <TABLE> <CAPTION> JUNE 30, 2000 --------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ----------- ----------- ----------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $26,665 $ 76,665 $291,537 Working capital............................................. 30,618 80,618 295,490 Total assets................................................ 95,932 145,932 360,804 Long term liabilities....................................... 4,225 54,225 4,225 Convertible preferred stock................................. 58,373 -- -- Total stockholder's equity.................................. 10,825 69,198 325,246 </TABLE> - Pro forma balance sheet data gives effect to the conversion of all outstanding shares of our preferred stock into shares of our common stock upon the closing of this offering and the receipt of $50.0 million from Cisco Systems pursuant to a convertible note payable. - Pro forma as adjusted balance sheet data gives effect to our sale of 13,700,000 shares of common stock in this offering at an assumed initial public offering price of $17.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses and the conversion of the principal and accrued interest on the note payable to Cisco Systems into shares of our common stock at a conversion price equal to 85% of the initial public offering price. Assuming a public offering price of $17.00 and a closing date of September 30, 2000, the note would convert into 3,485,234 shares of common stock. Pro forma as adjusted stockholders' equity reflects the recording of selling and marketing expenses of $8.8 million, representing the fair value of the discount feature of the note payable and accrued interest of $362,000 on the note payable. CORPORATE INFORMATION We were incorporated in California in September 1995 and reincorporated in Delaware in September 2000. Our principal executive offices are located at 3469 North First Street, San Jose, California 95134-1803, and our telephone number at that address is (408) 433-0606. Our website is located on the world wide web at "oplink.com." Information contained in our website is not part of this prospectus.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001022509_tumbleweed_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001022509_tumbleweed_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..6f283aea00519c82a88bc9a7a5ce36a6a6186533
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING OUR COMPANY AND THE SECURITIES BEING SOLD IN THIS OFFERING, TOGETHER WITH THE CONSOLIDATED FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. Tumbleweed Communications Corp. is a leading provider of advanced messaging solutions for business communications. Our products and services enable businesses to extend existing networks and applications, creating secure online channels for interactive, business-critical communication. Tumbleweed Integrated Messaging Exchange, or Tumbleweed IME, is a platform and set of applications for creating secure communications channels between a business and its customers, partners and suppliers. Tumbleweed Messaging Management System, or Tumbleweed MMS, is a comprehensive solution that extends internal e-mail systems to the Internet through centralized management, policy enforcement, filtering and archiving. Used together, Tumbleweed IME and Tumbleweed MMS automatically apply security policies and redirect sensitive e-mail for secure, trackable delivery. E-mail has quickly claimed its place as one of the most ubiquitous and utilized forms of business communications. International Data Corporation estimates that the number of electronic mailboxes will grow from approximately 315 million as of July 1999 to over 757 million by 2005. International Data Corporation further estimates that the number of e-mail messages sent worldwide will grow from 5.3 billion per day in 1999 to more than 26 billion per day by 2005. But many companies have not yet expanded their use of e-mail beyond internal communication or casual Internet correspondence. Proprietary groupware e-mail solutions are widely used by businesses within an enterprise, but their security and management features do not extend beyond the corporate network. Standard Internet e-mail systems have much broader reach, but lack the security, tracking and archiving functionality required to conduct transactions and deliver sensitive information online. Our technology allows our customers to expand and exploit the power of e-mail, and to fully integrate their existing business processes with the Internet. Our solution enables enterprises to strengthen business relationships by proactively interacting with customers via personalized deliveries, alerts, updates and promotional information, all delivered through a secure communication channel that requires no proprietary desktop software regardless of which e-mail system the customer uses. In addition, we enable enterprises to define and enforce Internet communication policies, by automatically filtering and monitoring messaging traffic, and protecting internal networks from intrusion or misuse. We sell our solution to enterprise customers and service providers such as American Express, Chase Manhattan Bank, Datek Online, the European Union's Joint Research Council, the Food and Drug Administration, Mitsui & Co., Northern Trust, Pitney Bowes, TD Waterhouse, Travelers Property Casualty, UPS and the United States Postal Service. Our solution offers customers the following benefits: - Comprehensive technology; - Multi-level security; - Easy, universal access; - Highly-personalized and customized communication; - Centralized policy enforcement and traffic management; and - A design that accommodates growth. Our objective is to be the leading provider of secure online communication services. Key elements of our strategy include: - Establish our products as the leading infrastructure and management solutions for online business communication; - Increase recurring transaction-based revenue; - Cultivate a channel of key service providers; - Establish Tumbleweed IME as the international standard for secure online communication; - Expand into accounts after first securing business-critical applications; and - Provide comprehensive professional services. RECENT DEVELOPMENT On June 28, 2000, we entered into a merger agreement providing for the acquisition of Interface Systems, Inc. Pursuant to the merger agreement, each outstanding share of Interface common stock will be converted into the right to receive 0.264 of a share of our common stock upon the closing of the merger, and we will assume all outstanding options and warrants of Interface. As of June 28, 2000, there were outstanding 4,719,675 shares of Interface common stock as well as options and warrants to purchase an additional 886,018 shares of Interface common stock. The transaction, if completed, will be treated as a purchase for accounting purposes. Accordingly, as of June 30, 2000, we expected to expense up to $2.0 million of acquired in-process research and development, and to record unearned compensation and goodwill and other intangibles of approximately $66.1 million to be amortized over periods ranging from one to three years. In this prospectus, we present pro forma financial statements based on a number of assumptions and adjustments to historical financial information, including adjustments for the divestiture of Interface businesses other than L2i. The pro forma condensed combined financial information does not purport to represent what the consolidated results of operations or financial condition of Tumbleweed would actually have been if the Interface acquisition had in fact occurred on such dates or the future consolidated results of operations or financial condition of Tumbleweed. Our expectation with respect to these amounts, adjustments and periods are preliminary and therefore subject to substantial subsequent adjustments. The acquisition is not expected to close until after the closing of this offering. The acquisition is subject to customary closing conditions, including approval by the shareholders of Interface. As a result, the acquisition may not close, and investors should not rely on the consummation of the acquisition in purchasing the shares offered hereby. The transaction will result in significant one-time charges, whether completed or not, and, if completed, will substantially increase our operating expenses in future periods. Interface's L2i products and services simplify the process of transforming and using data found in legacy computer systems into electronic content that is easy to distribute and use online. The L2i products adapt legacy print streams and other data types to the Internet and intelligently convert them into formats such as Portable Document Format, HyperText Markup Language or eXtensible Markup Language for use online. The combination of L2i with Tumbleweed IME would give our customers a comprehensive, end-to-end solution for electronic statement presentment. We have announced our intention to divest Interface businesses other than L2i. These businesses comprised a substantial majority of the historical operating results of Interface, as more fully described in the pro forma financial statements included elsewhere in this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered by Tumbleweed...................... 1,500,000 shares Common stock offered by the selling stockholders........ 1,500,000 shares Common Stock outstanding after the offering............. 27,770,104 shares Use of proceeds......................................... We expect to use the net proceeds of this offering for working capital and other general corporate purposes. In addition, we may use a portion of the net proceeds to acquire complementary products, technologies or businesses. Nasdaq National Market symbol........................... TMWD Dividend policy......................................... We intend to retain all future earnings to fund the development and growth of our business. Therefore, we do not anticipate paying cash dividends on our common stock in the foreseeable future. </TABLE> The common stock to be outstanding after the offering is based on shares outstanding as of June 30, 2000. The shares outstanding exclude: - 6,579,034 shares of common stock issuable as of June 30, 2000 upon the exercise of outstanding stock options issued under our stock incentive plans at a weighted average exercise price of $24.16 per share; - 418,137 shares of common stock reserved for future issuance as of June 30, 2000 under our stock incentive plans; - 436,689 shares of common stock reserved for issuance under our employee stock purchase plan; - 540,000 shares of common stock issuable as of June 30, 2000 upon the exercise of outstanding warrants at a weighted average exercise price of $27.04 per share; - 1,245,994 shares of our common stock to be issued in connection with the closing of our pending acquisition of Interface based on shares outstanding as of June 28, 2000; - 233,909 shares of our common stock issuable, after giving effect to the exchange ratio in the acquisition, upon the exercise of outstanding stock options, rights and warrants that we have agreed to assume upon the closing of our pending acquisition of Interface based on shares outstanding as of June 28, 2000; and - up to 314,231 shares of our common stock to be reserved for future issuance, after giving effect to the exchange ratio in the acquisition, under stock incentive plans we have agreed to assume upon closing of our pending acquisition of Interface, subject to approval by the Interface board of directors and shareholder of an increase in shares reserved under Interface's stock incentive plans. ------------------------ EXCEPT AS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS DOES NOT GIVE EFFECT TO OUR PROPOSED ACQUISITION OF INTERFACE AND ASSUMES THAT THE UNDERWRITERS DO NOT EXERCISE THE OPTION GRANTED BY A SELLING STOCKHOLDER TO PURCHASE ADDITIONAL SHARES OF COMMON STOCK IN THIS OFFERING. SUMMARY CONSOLIDATED FINANCIAL DATA The following financial data, other than the pro forma data, includes the financial data of Tumbleweed, after giving effect to the acquisition of Worldtalk, and excludes the financial data of Interface. Our pro forma consolidated statement of operations data gives effect to our pending acquisition of Interface (assuming the divestiture of the Interface businesses other than L2i) as if it occurred at the beginning of the pro forma period presented. The completion of this offering is not contingent on consummation of the acquisition, which is not expected to close until after the completion of this offering and is subject to customary closing conditions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Recent Operating Results" for a discussion of the operating results of Tumbleweed and Interface for the period ended June 30, 2000. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, -------------------------------------------- --------------------------------------- 1999 2000 ---------------------- ------------------------- 1997 1998 ACTUAL PRO FORMA 1999 ACTUAL PRO FORMA -------- -------- -------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue from continuing product lines........ $ 4,476 $ 10,575 $ 15,284 $ 18,636 $ 3,269 $ 6,610 $ 7,931 Total revenue.......... 12,056 15,463 16,756 20,108 3,907 6,610 7,931 Gross profit........... 7,946 11,213 11,853 14,685 3,003 4,362 5,402 Operating expenses(1).......... 19,897 23,456 37,900 71,411 6,090 23,552 34,785 Operating loss......... (11,951) (12,243) (26,047) (56,726) (3,087) (19,190) (29,383) Net loss............... (11,461) (11,720) (24,222) (54,899) (2,931) (18,622) (28,803) Net loss per share--basic and diluted.............. (1.90) (1.79) (1.65) (3.45) (0.43) (0.73) (1.07) Shares used in calculating basic and diluted loss per share................ 6,023 6,549 14,650 15,896 6,889 25,588 26,834 </TABLE> The pro forma balance sheet data gives effect to the pending acquisition of Interface (assuming the divestiture of the Interface businesses other than L2i) as if it had occurred on March 31, 2000. The actual, as adjusted balance sheet data excludes the pro forma data but gives effect to the sale of shares of common stock in this offering at an assumed public offering price of $59.63 per share, less estimated underwriting discounts and commissions and estimated offering expenses. <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, 2000 ------------------------------------------- ACTUAL ACTUAL PRO FORMA AS ADJUSTED(2) ----------- ----------- --------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................. $46,447 $ 47,276 $129,302 Total assets.............................................. 62,576 131,428 145,431 Long-term debt, excluding current installments............ 858 904 858 Total stockholders' equity................................ 45,883 113,316 128,738 </TABLE> ------------------------ (1) Includes stock compensation expense of $288,000, $715,000, $3.5 million, $336,000 and $1.1 million for the years ended December 31, 1997, 1998 and 1999 and the three months ended March 31, 1999 and 2000, respectively. (2) Our Pro Forma Consolidated Balance Sheet Data as of March 31, 2000, as adjusted, is as follows: Cash and cash equivalents of $130.1 million; Total assets of $214.3 million; Long-term debt of $904,000; and, Total stockholders' equity of $196.2 million. CONTACT INFORMATION Our principal executive offices are located at 700 Saginaw Drive, Redwood City, California 94063, and our telephone number is (650) 216-2000. Our web site is www.tumbleweed.com. The information on our web site does not constitute part of this document. ------------------------ TUMBLEWEED-REGISTERED TRADEMARK-, WORLDSECURE-REGISTERED TRADEMARK- AND WORLDTALK-REGISTERED TRADEMARK- ARE REGISTERED TRADEMARKS AND INTEGRATED MESSAGING EXCHANGE-TM-, IME-TM-, MESSAGING MANAGEMENT SYSTEM (MMS)-TM-, WORLDSECURE/MAIL-TM-, SECURE INBOX-TM-, SECURE ENVELOPE-TM-, TUMBLEWEED IME PLATFORM-TM-, TUMBLEWEED IME APPLICATIONS-TM-, IME STATEMENTS-TM-, IME DEVELOPER-TM-, IME MESSENGER-TM-, IME PERSONALIZE-TM-, AND IME ALERT-TM- ARE TRADEMARKS OF TUMBLEWEED COMMUNICATIONS CORP. L2I-TM- IS A REGISTERED TRADEMARK OF INTERFACE SYSTEMS, INC.
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+PROSPECTUS SUMMARY OUR BUSINESS We provide Web-based courses and services designed to meet the training needs of businesses, organizations and home office users worldwide. We deliver our courses over our clients' internal computer networks and over the Internet. Our extensive online catalog of over 400 courses covers information technology, desktop computing and professional and practical skills. Our course technology enables users to learn in an interactive, flexible and cost-effective manner anytime, anywhere. Our courses are designed to provide users with knowledge necessary to compete in today's dynamic business environment. We license our courses through direct and indirect sales channels, enabling us to effectively reach the large user market we believe exists for Web-based training: DIRECT SALES. Our internal sales force targets businesses and other large organizations that we believe generate over $50 million in annual revenues or require an efficient means of training a large number of employees. We currently license our courses and provide services to over 700 direct sales clients. INDIRECT SALES. We distribute our courses indirectly to businesses, organizations and individuals through Internet service providers and other marketing partners: INTERNET SERVICE PROVIDERS--Internet service providers offer their subscribers direct access to the Internet. We currently have agreements with more than 1,300 Internet service providers who offer our courses to over 7.4 million subscribers, including over 900,000 businesses. OTHER MARKETING PARTNERS--We currently have marketing alliances with over 125 businesses and other organizations whose current operations support and facilitate the sale of our Web-based training courses. These marketing partners include technology companies that combine our courses with their products and non-business organizations with members who need our Web- based courses and services. OUR MARKET OPPORTUNITY In today's rapidly changing and competitive business environment, business leaders recognize that a significant source of competitive advantage is the depth and breadth of knowledge of their employees. In order to gain a competitive advantage, businesses are investing increasing amounts in employee training. The United States Department of Education estimates that in 1997 businesses spent more than $55 billion on training programs in the United States. Historically, the majority of this training has been in the form of instructor-led training. This traditional method of training is costly, slow and inflexible. Web-based training offers a more efficient and effective means for providing training. International Data Corporation ("IDC") estimates that the U.S. corporate market for training and education presented over the Internet will increase from $550 million in 1998 to approximately $11.4 billion by 2003, an 83% compound annual growth rate. With the rapid adoption of the Internet, we believe the advantages of online training can now be marketed to both large and small businesses, as well as to home office users, in a cost-efficient manner. OUR COMPETITIVE STRENGTHS We believe we possess the following key competitive strengths: BREADTH, DEPTH AND COST-EFFECTIVENESS OF COURSE OFFERINGS. We offer more than 400 courses in a broad range of topics, over 80% of which address information technology, desktop computing and certification training. In most subjects, we offer a number of courses from introductory to advanced. For a fixed license fee, clients can subscribe to our entire catalog of online courses, a smaller group of related courses or individual courses. MULTIPLE DISTRIBUTION CHANNELS. We derive the vast majority of our revenues from the direct sale of our courses to large organizations. At the end of 1997, we launched our indirect distribution channels to take advantage of the significant opportunity that we believe exists in the small business and home office user markets worldwide. PROPRIETARY COURSE DEVELOPMENT PROCESS. We use a proprietary course development process that enables us to produce new courses rapidly while maintaining high-quality course design and content. UNIQUE THIRD-PARTY CONTENT SOURCING. We use third-party content to provide a wide variety of topics in a timely and cost-effective manner without the expense of maintaining a large research staff. EFFICIENT AND FLEXIBLE TECHNOLOGY. We present all of our courses through standard Web browsers, which are common software applications that allow users to access and interact with Websites. This eliminates the need for our clients to download our content and provides users with direct, immediate access to our courses. ON-GOING REFERENCE RESOURCE. Our powerful index features allow users to reference any topic in any licensed course or any group of licensed courses quickly and easily. OUR FOCUSED GROWTH STRATEGY Our goal is to be the leading global provider of high-quality business-to-business Web-based training courses and services. The principal elements of our growth strategy are to: - continue to license our courses and services to large organizations; - expand sales to small businesses and home office users through our indirect marketing channels in the U.S. and abroad; - broaden course offerings in new and existing topics and categories and accelerate course development; - further enhance our technological infrastructure; - increase brand awareness in our target business markets; and - seek possible strategic acquisitions of or investments in complementary businesses, products, services or technologies. RECENT EVENTS In January 2000, we sold 1,167 shares of series C convertible preferred stock for an aggregate purchase price of $1,500,000 and a warrant to purchase 49,348 of our common shares at $7.60 per share to River Cities Capital Fund II Limited Partnership. In March 2000, we changed our name from "DPEC, Inc." to "MindLeaders.com, Inc." THE OFFERING <TABLE> <S> <C> Common shares offered by MindLeaders.com..... 3,100,000 shares Common shares to be outstanding after this 11,384,615 shares offering................................... To expand our business and pay our debt. For a more detailed description of how we intend to use the proceeds of this offering, see "Use of Proceeds" on page 14. Use of proceeds.............................. Proposed Nasdaq National Market symbol....... "MDLR" </TABLE> The common shares to be outstanding after this offering do not include shares issuable on exercise of outstanding stock options. For information on the number of common shares reserved for stock options, see "Management--2000 Incentive Stock Plan" on page 42. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES: - A 169-FOR-1 SPLIT OF OUR COMMON SHARES ON OR BEFORE COMPLETION OF THIS OFFERING; - THE AUTOMATIC CONVERSION OF OUR OUTSTANDING PREFERRED SHARES INTO COMMON SHARES UPON CLOSING OF THIS OFFERING; AND - NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY. SUMMARY FINANCIAL DATA The following table summarizes the financial data of our business. From August 1, 1996 through September 15, 1998, we elected S-Corporation status and, accordingly, federal income taxes were the responsibility of the individual shareholders. The pro forma information for 1997 and 1998 has been computed as if we had been subject to corporate income taxes for all periods presented based on the tax laws in effect during the period. The pro forma income tax provision (benefit) has been offset by a valuation allowance of $535,000 for the year ended December 31, 1998. Prior to August 1, 1996 we were, and since September 15, 1998 we have been, taxed as a C-Corporation. The pro forma as adjusted basic and diluted net loss per share for the year ended December 31, 1999 gives effect to the assumed conversion of our convertible preferred shares into common shares upon the closing of this offering and the repayment of related party debt and term note at the beginning of the period from a portion of the offering proceeds. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31 ------------------------------------ 1997 1998 1999 ---------- ---------- ---------- (IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA) <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Courseware fees.................................... $ 5,615 $ 7,074 $ 11,307 Third-party courseware fees........................ 1,783 651 83 Other revenue...................................... 706 447 26 ---------- ---------- ---------- Total revenue...................................... 8,104 8,172 11,416 Gross profit....................................... 7,035 7,402 10,614 Net loss........................................... (266) (1,698) (4,873) Convertible redeemable preferred stock dividends... -- -- (20) Intrinsic value of beneficial conversion feature of preferred stock.................................. -- -- (2,960) ---------- ---------- ---------- Net loss available to common shareholders.......... $ (266) $ (1,698) $ (7,853) ========== ========== ========== Basic and diluted net loss per common share........ $ (0.05) $ (0.30) $ (1.38) ========== ========== ========== Weighted average shares used in per share calculation...................................... 5,363,553 5,630,235 5,701,553 ========== ========== ========== Pro forma net loss before taxes.................... $ (266) $ (1,698) Pro forma benefit for income taxes................. (116) (153) ---------- ---------- Pro forma net loss................................. $ (150) $ (1,545) ========== ========== Basic and diluted pro forma net loss per common share:........................................... $ (.03) $ (.27) ========== ========== Basic and diluted weighted average shares used in per share calculation............................ 5,363,553 5,630,235 5,701,553 ========== ========== ========== Basic and diluted pro forma as adjusted net loss per common share:................................ $ (1.11) ---------- Weighted average shares used in pro forma as adjusted per share calculation................... 7,168,438 ---------- </TABLE> The following table provides a summary of our balance sheet as of December 31, 1999. The pro forma column reflects the sale of 1,167 shares of series C convertible preferred stock for $1.5 million and the sale of 3.1 million common shares in this offering at an assumed initial offering price of $13.00 per share, the mid-point of the estimated offering range, and after deducting the underwriting discount and estimated offering expenses payable by us and gives effect to the conversion of all outstanding preferred shares into common shares upon the closing of this offering. For additional information on this offering and our capitalization after the offering, see "Use of Proceeds"
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001022974_dgi_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001022974_dgi_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before deciding to invest in our common stock. We urge you to read this entire prospectus carefully, including the "Risk Factors" section and our consolidated financial statements and the notes to those statements. deCODE OUR COMPANY deCODE is developing gene and drug target discovery, database and information technology products and services for the healthcare industry using human genetics. We develop and apply modern information technology to discover new knowledge about health and disease through data-mining, which is the exploration and comparison of data from various sources. We believe that certain unique qualities of the Icelandic population, together with our advanced bioinformatics and research facility, should place deCODE at a competitive advantage to perform genetic and medical research to identify disease genes and drug and diagnostic targets. As the international effort to discover the sequence of human genetic material, known as the human genome, progresses, we believe that the principal task will be to transform raw genetic data into knowledge about human health and disease and then into tangible products and services. We believe that deCODE is well-positioned to place the human genome sequence in a meaningful context through which we and our partners can generate value. deCODE was founded in 1996 and its operations, as well as its approximately 300 employees, are based in Iceland. In 1998, we entered into a significant research collaboration and cross-license agreement with F.Hoffmann-La Roche, or Roche, under which we may receive a total of more than $200 million in research funding and milestone payments. To date our accomplishments include: - the identification of eight locations for disease-causing genes; - the identification of twelve specific candidate disease genes; - the achievement of four milestones in our research collaboration agreement with Roche; - the completion of a highly efficient genotyping facility; - the development of automated software for data capture, analysis and interpretation; and - near completion of a computerized genealogy database covering the Icelandic population. We believe that discovery of healthcare knowledge requires bringing together three key types of data: information from the healthcare system, information about relationships among individuals covered by this system and associated molecular genetics data. We believe that operating in Iceland accomplishes this by allowing us to benefit from the following four important characteristics of the Icelandic nation in our medical and genetic research: - genealogical records dating back in some cases to the settlement of the country in the ninth century; - relative genetic homogeneity with a population descended from a small number of settlers; - a centralized healthcare system since 1915; and - a well-educated population. We believe that bringing these four factors together greatly enhances our research and development efforts in generating future products and services for the healthcare industry. deCODE is pursuing its access to public and proprietary data through three avenues of commercialization: - discovery services, with a focus on gene and drug target discovery; TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Prospectus Summary.................... 3 Risk Factors.......................... 8 Special Note Regarding Forward-Looking Statements.......................... 23 Use of Proceeds....................... 24 Dividend Policy....................... 25 Capitalization........................ 26 Dilution.............................. 27 Exchange Rates........................ 28 Selected Consolidated Financial Data................................ 29 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 30 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> Business.............................. 36 Management............................ 59 Certain Transactions.................. 65 Principal Stockholders................ 66 Description of Securities............. 68 Tax Considerations.................... 71 Shares Eligible for Future Sale....... 77 Underwriters.......................... 79 Legal Matters......................... 81 Experts............................... 82 Where You Can Find More Information... 82 EASDAQ Information.................... 82 Index to Consolidated Financial Statements.......................... F-1 </TABLE> ------------------------ ABOUT THIS PROSPECTUS UNTIL , 2000, ALL DEALERS THAT BUY, SELL OR TRADE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - database services, with a focus on the construction and commercialization of the Icelandic Health Sector Database, which contains non-personally identifiable data from Icelandic healthcare records, and the deCODE Combined Data Processing system, to cross-reference data from the Icelandic Health Sector Database with genealogical and genotypic data; and - healthcare informatics, which is the computerized analysis of healthcare data, with a focus on bioinformatics, which is the computerized analysis of biological information, decision-support tools and privacy products. We believe that the deCODE Combined Data Processing system will permit users to build more complete models of the interplay of genes, the environment and disease than are currently available. OUR STRATEGY Our strategy is to use our population-based approach to the study of genes and their function, known as genomics, to transform genomic data and healthcare data into products and services. The key elements of our strategy are as follows: - Gene and Drug Target Discovery. deCODE plans to pursue gene and drug target discovery and the characterization of genes that contribute to the causes of common diseases. In addition, we will study the functions and effects of genes and the interactions of the proteins they produce to define molecular pathways, which may contain drug targets. - Database Subscription and Consulting Services. deCODE expects to develop and operate the deCODE Combined Data Processing system, which is intended to cross-reference non-personally identifiable healthcare information on the Icelandic population in the Icelandic Health Sector Database with genealogy data and genetic data obtained through consent. In addition, we are developing new mathematical methods to extract further knowledge from the deCODE Combined Data Processing system. Services we plan to offer to future subscribers to the deCODE Combined Data Processing system will include gene discovery and drug target validation, pharmacogenomics, disease management and health management. - Pharmacogenomics Partnerships. In collaboration with pharmaceutical companies, we intend to apply the analysis and identification of genes involved in responses to drugs, a field known as pharmacogenomics, to understand differences in drug response among individuals. We believe that genomics will permit scientists and physicians to identify the genetic differences that cause different people to respond differently to the same drugs and that, as a result, it will be possible to individualize the selection of drugs for patients. - Sale and Marketing of Healthcare Informatics Products. We plan to exploit market opportunities for software tools that we develop during the design and construction of the Icelandic Health Sector Database and deCODE Combined Data Processing system and in our disease gene discovery efforts. The software tools that we have already developed include GeneMiner, DecodeGT, an encryption system, and a comprehensive sample database. We expect to offer healthcare informatics services, such as decision-support software and privacy solutions. - Formation of Collaborations. We intend to seek corporate collaborations or joint ventures with pharmaceutical and biotechnology companies to provide research alliances, product development and commercialization for our gene and drug target discovery programs. deCODE was incorporated in Delaware in 1996. Our principal office is located at Lynghals 1, Reykjavik, Iceland, our telephone number is +354-570-1900 and our address on the world wide web is www.decode.com. ------------------------ In this prospectus, references to us refer to us and our wholly-owned subsidiary Islensk erfethagreining ehf., an Icelandic company. deCODE genetics(TM), the deCODE genetics logo, DecodeGT(TM), Allegro(TM), and GeneMiner(TM) are trademarks of deCODE genetics, Inc. GeneChip(R) is a registered trademark of Affymetrix Inc. Other trade names and trademarks appearing in this prospectus are the property of their respective holders. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. You should assume that the information contained in this prospectus is accurate only as of the date of this prospectus, unless such information is stated to be given as of another date. Our business, financial condition, results of operations and prospects may have changed since any such date. THE OFFERING Common stock that we are offering................. 8,000,000 shares Friends and family offering................... 500,000 shares are to be set aside by the underwriters to be offered to a number of our directors, officers, employees, friends and family who have expressed an interest in subscribing for shares in the offering. These shares are included in the number of shares set forth under "Common stock that we are offering." Common stock to be outstanding immediately after this offering...... 41,390,343 shares Use of Proceeds............ We estimate that our net proceeds from this offering will be approximately $119.0 million, based on an initial public offering price of $16 per share (the midpoint of the price range set forth on the front cover page of this prospectus). We plan to use the net proceeds from this offering for the development and operation of the deCODE Combined Data Processing system, to fund our research and discovery programs, for capital expenditures and for working capital and general corporate purposes. See "Use of Proceeds." Dividend Policy............ We intend to retain earnings, if any, for use in our business and do not anticipate paying dividends on our common stock in the foreseeable future. See "Dividend Policy." Quotations................. We have applied to have our common stock listed on the Nasdaq National Market, and we have applied for admission to listing on the European Association of Securities Dealers Automated Quotation, or EASDAQ, in each instance under the symbol "DCGN." --------------- Unless we specifically state otherwise, the information in this prospectus does not take into account our issuance of up to 1,200,000 shares of our common stock which the underwriters have the option to purchase solely to cover over-allotments. If the underwriters exercise their over-allotment option in full, 42,590,343 shares of our common stock will be outstanding after the offering. The number of shares of our common stock to be outstanding immediately after this offering includes 23,737,081 shares of our common stock that we will issue upon the automatic conversion of all our outstanding shares of preferred stock upon the closing of this offering. See "Description of Securities -- Preferred Stock." The number of shares of our common stock to be outstanding immediately after this offering does not take into account 2,070,000 shares of our common stock that we reserved for issuance upon exercise of outstanding options and warrants or 1,478,500 shares of our common stock issuable under our 1996 Equity Incentive Plan. For a description of the options, see "Description of Securities -- Stock Options" and "Certain Transactions." For a description of the warrants, see "Description of Securities -- Warrants and Other Rights to Purchase." SUMMARY CONSOLIDATED FINANCIAL DATA The following table presents consolidated summary financial data for deCODE. We have derived the data presented in this table from "Selected Consolidated Financial Data" and the consolidated financial statements and the notes to those statements which we have included elsewhere in this prospectus. You should read those sections for a further explanation of the financial data summarized here. You should also read "Management's Discussion and Analysis of Financial Condition and Results of Operations," which describes a number of factors that have affected our financial results. <TABLE> <CAPTION> INCEPTION (AUGUST 23, THREE MONTHS ENDED 1996) TO YEAR ENDED DECEMBER 31, MARCH 31, DECEMBER 31, ----------------------------------------- --------------------------- 1996 1997 1998 1999 1999 2000 ------------ ----------- ------------ ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue...................... $ 0 $ 0 $ 12,705,000 $ 16,591,485 $ 4,507,489 $ 4,618,386 Operating Expenses Research and development... 737,764 6,080,096 19,282,364 33,213,557 6,805,146 9,234,368 General and administrative........... 454,873 1,967,684 4,893,202 8,220,758 2,208,749 2,946,337 ----------- ----------- ------------ ------------ ------------ ------------ Total operating expenses..... 1,192,637 8,047,780 24,175,566 41,434,315 9,013,895 12,180,705 Operating loss............... (1,192,637) (8,047,780) (11,470,566) (24,842,830) (4,506,406) (7,562,319) Equity in net earnings (loss) of affiliate............... 0 0 0 (486,366) (278,780) 0 Interest income and other, net........................ 40,005 (8,461) 562,336 1,540,749 97,514 664,180 Taxes........................ 0 0 0 0 0 0 ----------- ----------- ------------ ------------ ------------ ------------ Net loss..................... (1,152,632) (8,056,241) (10,908,230) (23,788,447) (4,687,672) (6,898,139) Accrued dividends and amortized discount on preferred stock............ (181,852) (620,385) (2,571,523) (7,542,787) (862,260) (2,379,378) Premium on repurchase of preferred stock............ 0 0 0 (30,887,044) 0 0 ----------- ----------- ------------ ------------ ------------ ------------ Net loss available to common stockholders............... $(1,334,484) $(8,676,626) $(13,479,753) $(62,218,278) $ (5,549,932) $ (9,277,517) =========== =========== ============ ============ ============ ============ Basic and diluted net loss per share.................. $ (1.10) $ (3.85) $ (3.06) $ (9.65) $ (0.97) $ (1.25) Shares used in computing basic and diluted net loss per share(1)............... 1,213,925 2,254,413 4,400,576 6,446,055 5,749,963 7,419,439 Unaudited pro forma basic and diluted net loss per share...................... $ (0.86) $ (0.23) Shares used in computing unaudited pro forma basic and diluted net loss per share(1)................... 27,559,365 30,392,795 </TABLE> The following table presents a summary of our balance sheet at March 31, 2000: on an actual basis; on a pro forma basis after giving effect to the issuance of 23,031,525 shares of our common stock upon the automatic conversion upon the closing of this offering of our Series A preferred stock, Series B preferred stock and Series C preferred stock into shares of common stock; and on a pro forma basis as adjusted to give effect to the issuance of 23,031,525 shares of our common stock upon that automatic conversion and the sale of 8,000,000 shares of common stock pursuant to this offering. We have based this information on an initial public offering price of $16 per share, the midpoint of the price range set forth on the front cover page of this prospectus, less the estimated underwriters discounts and commissions. <TABLE> <CAPTION> AS OF MARCH 31, 2000 ------------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------------ ----------- ------------ (UNAUDITED) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 40,707,864 $40,707,864 $159,747,864 Total assets................................................ 60,771,808 60,771,808 179,811,808 Total long-term liabilities................................. 5,043,482 5,043,482 5,043,482 Redeemable, convertible preferred stock..................... 124,030,726 0 0 Total stockholders' equity (deficit)........................ (79,866,924) 44,163,802 163,203,802 </TABLE> --------------- (1) See Note B of Notes to Consolidated Financial Statements for an explanation of the determination of the shares used in computing basic and diluted net loss per share and unaudited pro forma basic and diluted net loss per share.
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+PROSPECTUS SUMMARY You should not make an investment decision based only on summary information. We therefore urge you to read carefully all of this prospectus. US Unwired General We currently provide wireless personal communications services, commonly referred to as PCS, in parts of Louisiana and Texas. We are a network partner of Sprint PCS, the personal communications services group of Sprint Corporation. Sprint PCS, directly and through affiliates like us, provides wireless services in more than 4,000 cities and communities across the country. We have the exclusive right to provide digital PCS services under the Sprint(R) and Sprint PCS(R) brand names in a service area comprising approximately 9.7 million residents in the Gulf States region. Our service area has the largest population and the most subscribers of any network partner of Sprint PCS. We currently provide Sprint PCS service in eleven markets: Alexandria, Houma-Thibodaux, Lake Charles, Monroe and Shreveport, Louisiana and Beaumont- Port Arthur, Longview-Marshall, Lufkin-Nacogdoches, Texarkana and Tyler, Texas and Montgomery, Alabama. Our network currently covers approximately 2.4 million residents out of approximately 3.6 million total residents in those markets. We expect to cover a total of approximately 6.1 million residents by December 2000 and 6.4 million residents by March 2001, at which point we expect to have covered approximately 66% of the resident population in our service area. The number of people in our service area does not represent the number of Sprint PCS subscribers that we expect to have in our service area. At March 31, 2000, we were providing PCS services to approximately 66,000 subscribers in our service area. In addition, we were providing cellular and paging service to approximately 81,000 subscribers in southwest Louisiana at March 31, 2000. For the twelve month period ended March 31, 2000, we had revenues of approximately $68.0 million and a net loss from continuing operations of approximately $30.4 million, and our operations used approximately $18.5 million more cash than they generated. Our service area covers 41 markets in eastern Texas, southern Oklahoma, southern Arkansas, significant portions of Louisiana, Alabama and Mississippi, the Florida panhandle and southern Tennessee. Our service area is contiguous with Sprint PCS's launched markets of Houston, Dallas, Little Rock, New Orleans, Birmingham, Tallahassee and Memphis. We are constructing a 100% digital, 100% wireless PCS network that we expect to complete by March 2001. We estimate that Sprint PCS paid over $100 million to acquire the PCS licenses in our service area and to clear the licensed markets for microwave radio frequency service. Benefits of Our Affiliation with Sprint PCS Our exclusive relationship with Sprint PCS allows us to take advantage of the strength and reputation of Sprint PCS's national brand. We believe the benefits of this relationship include: Marketing. We market our products and services under the nationally recognized Sprint PCS(R) brand. We benefit from Sprint PCS's national advertising campaigns and subscriber programs and its relationships with major national retailers. National Network. Subscribers in our service area can immediately access Sprint PCS's growing network in over 4,000 cities and communities across the United States. Handset and Equipment Availability and Pricing. We have access to network and subscriber equipment under Sprint PCS's vendor contracts that provide for volume discounts. Exclusive Traveling Partner. We are the exclusive provider of traveling services for all non-US Unwired Sprint PCS customers in our service area and benefit from the increased traffic created by other Sprint PCS customers who travel in our service area. Technology. Sprint PCS's extensive research and development effort produces ongoing benefits through both new technological products as well as enhanced service features. As provided under our agreements with Sprint PCS, we receive from Sprint PCS 92% of collected revenues from subscribers based in our service area and Sprint PCS retains the remaining 8%. We also receive other revenue, including Sprint PCS traveling revenues, calculated as a per minute charge paid to us by Sprint PCS for each minute that Sprint PCS subscribers based outside our service area use our portion of the Sprint PCS network, and 100% of revenues from handset sales. Our Competitive Strengths In addition to the advantages provided by our strategic affiliation with Sprint PCS, we have the following competitive strengths: . extensive territorial reach. . existing corporate infrastructure. . significant number of owned licenses. . 40 MHz of bandwidth in many of our markets. . high-quality customer care. Adequate Funding to Complete Our Network We funded the initial phase of our PCS network buildout with a portion of the proceeds from the sale of our non-Louisiana cellular assets in 1998. As of the date of this prospectus, we have raised $264 million from the sale of $55 million of our convertible preferred stock and the issuance in a private placement of $209 million of our senior subordinated discount notes. We also have a $130 million senior credit facility under which, as of the date of this prospectus, no funds have been drawn. Management expects that these funds, together with the proceeds of this offering, will be sufficient to complete the buildout of our PCS network, fund start up losses and maintain adequate working capital. The Offering <TABLE> <S> <C> Class A common stock offered...... 8,000,000 shares Class A and Class B common stock to be outstanding after this offering....................... 79,009,235 shares Use of proceeds................... For accelerating the construction of our PCS network and for other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol......................... "UNWR" </TABLE> The number of shares of our common stock to be outstanding after this offering includes: . 2,559,601 shares of our class A common stock outstanding as of the date of this prospectus. . 68,449,634 shares of our class B common stock outstanding as of the date of this prospectus. . 8,000,000 shares of our class A common stock to be sold in this offering. The number of shares of our common stock to be outstanding after this offering excludes: . 6,817,518 shares of our class A common stock issuable upon exercise of options that will have been granted as of the date of this offering under our 1999 Equity Incentive Plan at an average exercise price of $4.81 per share. . 5,442,402 shares of our class A common stock reserved as of the date of this offering for issuance under our 1999 Equity Incentive Plan. Generally, the information in this prospectus: . assumes that the underwriters do not exercise any of their over- allotment option. . gives effect to the conversion of our preferred stock. . gives effect to a 5.3304 for 1 stock split that was approved by our stockholders on April 11, 2000. We describe our capitalization on page 16. --------------- SUMMARY FINANCIAL INFORMATION The table below shows summary consolidated financial information for 1998 and 1999 and for the three months ended March 31, 1999 and 2000. You should read this information with our consolidated financial statements and the related notes and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," all of which are included in this prospectus. <TABLE> <CAPTION> Year Ended Three Months Ended December 31, March 31, ------------------ --------------------- 1998(/1/) 1999 1999 2000 --------- -------- -------- ----------- (unaudited) (Dollars in thousands except for per share data and other data) <S> <C> <C> <C> <C> Statement of Operations Data(/2/): Revenues........................... $71,711 $ 58,632 $ 12,929 $ 22,291 Cost of services and merchandise sold............................ 29,363 31,591 6,347 13,513 Other operating expenses........... 37,873 52,299 9,863 23,007 ------- -------- -------- -------- Operating income (loss)............ $ 4,475 $(25,258) $ (3,281) $(14,229) ======= ======== ======== ======== Income (loss) from continuing operations...................... $28,796 $(17,634) $ (1,392) $(14,203) ======= ======== ======== ======== Basic and Diluted Per Share Data: Income (loss) from continuing operations...................... $ 0.48 $ (0.29) $ (0.02) $ (0.32) ======= ======== ======== ======== Other Data: Number of PCS subscribers(/3/)..... 14,611 46,838 23,606 66,753 Number of PCS markets launched(/4/)................... 5 10 5 11 Total residents in launched markets (millions)(/4/)................. 1.8 3.1 1.8 3.6 <CAPTION> As of March 31, 2000 --------------------- Actual As Adjusted -------- ----------- (unaudited) <S> <C> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents............................. $ 16,053 $119,413 Marketable securities................................. 109,010 109,010 Property and equipment, net........................... 138,599 138,599 Total assets(/5/)..................................... 332,278 430,275 Long term debt, including current maturities(/5/)..... 233,417 231,824 Equity................................................ 15,996 171,689 </TABLE> - -------------------- (1) In July 1998, in anticipation of the Sprint PCS buildout, US Unwired sold all of its cellular assets related to its Mississippi, Alabama and Kansas markets, along with its majority ownership interest in Mississippi 34 Cellular Corporation, for $161.5 million. This transaction resulted in a gain of approximately $57.4 million which is included in income (loss) from continuing operations. (2) Includes results of operations for Unwired Telecom, our cellular and paging operating subsidiary, which for the year ended December 31, 1999 generated $46.2 million of revenues and $5.7 million of operating income and for the year ended December 31, 1998 generated $67.7 million of revenues and $4.0 million of operating income. Presents LEC Unwired as a discontinued operation. LEC Unwired began operations in 1998 and is presented on the equity method for the year ended December 31, 1998. (3) Reflects PCS subscribers for LA Unwired and Texas Unwired and does not include our proportionate share of PCS subscribers in our Meretel partnership, which were 1,538 at December 31, 1998, 5,045 at December 31, 1999 and 5,839 at March 31, 2000. (4) Does not include the launched markets in our Meretel partnership or our proportional ownership of the residents in those markets, which were approximately 163,000 residents at December 31, 1998 and at December 31, 1999 and approximately 229,000 residents at March 31, 2000. (5) The as adjusted column reflects the sale of certain PCS licenses and the payoff of the related debt as if these events occurred as of March 31, 2000. ***** We are located at One Lakeshore Drive, Suite 1900, Lake Charles, Louisiana 70629. Our phone number is (800) 673-2200, and our website is www.usunwired.com.
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+Prospectus Summary The following summary does not contain all the information that may be important to you. You should read the entire prospectus before making an investment decision. UBS AG UBS AG is a global, integrated investment services firm and the leading bank in Switzerland. UBS's business is managed through three main business groups and its Corporate Center. The business groups are: UBS Switzerland, UBS Warburg and UBS Asset Management. UBS's clients include international corporations, small- and medium-sized businesses in Switzerland, governments and other public bodies, financial institutions, market participants and individuals. UBS AG's ordinary shares are listed on the New York Stock Exchange under the symbol "UBS.N," on the Zurich Stock Exchange under the symbol "UBSNZn.S" and on the Tokyo Stock Exchange under the symbol "UBS.T." On 3 November 2000, UBS acquired Paine Webber Group Inc., one of the largest full-service securities firms in the United States. UBS purchased all outstanding shares of PaineWebber stock for a combination of cash and stock representing a total purchase price of $11.8 billion (based on the UBS share price on 3 November 2000). The principal executive offices of UBS AG are located at Bahnhofstrasse 45, Zurich, Switzerland and Aeschenvorstadt 1, Basel, Switzerland. Its telephone numbers are 011-41-1-234-11-11 and 011-41-61-288-20-20. UBS AMERICAS UBS Americas Inc. is the successor by merger to Paine Webber Group Inc. Paine Webber Group Inc. was the holding company for the PaineWebber group of companies. UBS Americas is a direct, wholly owned subsidiary of UBS AG, and continues to act as the holding company for the U.S. onshore private banking operations of UBS. UBS Americas' principal executive offices are located at 677 Washington Boulevard, Stamford, Connecticut 06901, and its telephone number is 203-719-3000. SHAREHOLDERS' LETTER 28 NOVEMBER 2000 A PERSONAL NOTE FROM THE CHAIRMAN AS YOU MIGHT BE AWARE, I HAVE DECIDED TO STEP DOWN FROM MY FUNCTION AS CHAIRMAN OF THE BOARD OF DIRECTORS AFTER THE ANNUAL GENERAL MEETING IN APRIL 2001. I CONSIDER THIS TO BE THE RIGHT MOMENT. WE HAVE SUCCESSFULLY COMPLETED THE MERGER BETWEEN UNION BANK OF SWITZERLAND AND SWISS BANK CORPORATION. THE BUSINESS GROUPS AND THEIR RESPECTIVE RESPONSIBILITIES HAVE BEEN REDESIGNED. WE RECENTLY COMPLETED THE MERGER OF PAINEWEBBER INTO OUR GROUP. UBS IS IN GOOD FINANCIAL HEALTH. THE BOARD OF DIRECTORS WILL SUBMIT THE ELECTION OF MARCEL OSPEL, CURRENTLY GROUP CHIEF EXECUTIVE OFFICER, FOR YOUR APPROVAL AT THE AGM OF 26 APRIL 2001, AND WILL THEN APPOINT HIM AS CHAIRMAN. LUQMAN ARNOLD, CURRENTLY GROUP CHIEF FINANCIAL OFFICER, HAS BEEN ELECTED TO BECOME THE NEW PRESIDENT OF THE GROUP EXECUTIVE BOARD, ADDING THIS NEW ROLE TO HIS RESPONSIBILITY FOR THE GROUP'S FINANCE AND RISK FUNCTIONS. A NEW TOP-MANAGEMENT TEAM IS READY, AND I AM RELAXED AND CONFIDENT ABOUT HANDING OVER FULL RESPONSIBILITY TO THE YOUNGER GENERATION. PLEASE JOIN ME AND THE BOARD OF DIRECTORS IN WISHING MARCEL OSPEL AND LUQMAN ARNOLD SUCCESS AND LUCK IN THEIR NEW FUNCTIONS. ALEX KRAUER SENIOR MANAGEMENT SUCCESSION PLANS On 11 October, we announced plans for changes in the senior management of UBS which will take effect after the Annual General Meeting in April next year. Details are in the note which you will find opposite. At the Annual General Meeting in April you will also be asked to approve the election of three other new members of the Board of Directors. The British, Dutch and American candidates will help accurately reflect at Board level UBS's international culture and global reach. The three candidates are: Sir Peter Davis, CEO of J. Sainsbury plc; Johannes Antonie de Gier, former Chairman and CEO of Warburg Dillon Read; and Lawrence Allen Weinbach, Chairman and CEO of Unisys Corporation. UBS AG /s/ Alex Krauer Alex Krauer Chairman of the Board of Directors OUTLOOK We are pleased to have been able to report strong results so far this year and to have maintained this performance through the recent more mixed market conditions. The fourth quarter is normally the quietest part of the year in most of our businesses, and we expect this year to be no exception. In addition, we expect a one-off impact from PaineWebber integration and restructuring costs. Nevertheless, we are confident that we can complete 2000 in robust form and that we are excellently positioned for further success in 2001. The history of our bank has been one of forging new partnerships and learning from the cultures and skills of new colleagues. As an organization we are naturally excited about change and the PaineWebber merger makes next year one of our most eagerly anticipated. /s/ Marcel Ospel Marcel Ospel Group Chief Executive Officer Prospectus Summary The following summary does not contain all the information that may be important to you. You should read the entire prospectus before making an investment decision. UBS AG UBS AG is a global, integrated investment services firm and the leading bank in Switzerland. UBS's business is managed through three main business groups and its Corporate Center. The business groups are: UBS Switzerland, UBS Warburg and UBS Asset Management. UBS's clients include international corporations, small- and medium-sized businesses in Switzerland, governments and other public bodies, financial institutions, market participants and individuals. UBS AG's ordinary shares are listed on the New York Stock Exchange under the symbol "UBS.N," on the Zurich Stock Exchange under the symbol "USBNZn.S" and on the Tokyo Stock Exchange under the symbol "UBS.T." On 3 November 2000, UBS acquired Paine Webber Group Inc., one of the largest full-service securities and commodities firms in the United States. UBS purchased all outstanding shares of PaineWebber stock for a combination of cash and stock representing a total purchase price of $11.8 billion (based on the UBS share price on 3 November 2000). The principal executive offices of UBS AG are located at Bahnhofstrasse 45, Zurich, Switzerland and Aeschenvorstadt 1, Basel, Switzerland. Its telephone numbers are 011-41-1-234-11-11 and 011-41-61-288-20-20. UBS AMERICAS UBS Americas Inc. is the successor by merger to Paine Webber Group Inc. Paine Webber Group Inc. was the holding company for the PaineWebber group of companies. USB Americas is a direct, wholly owned subsidiary of UBS AG. THE TRUSTS Each trust is a business trust formed under the Delaware Business Trust Act under a declaration of trust among the trustees of that trust and UBS Americas. Each trust's primary governing document is its declaration of trust, which was completely amended and restated on the date its preferred trust securities were initially issued. The amended and restated declaration of trust of each trust is called the trust's "declaration." Each declaration is qualified under the Trust Indenture Act of 1939. The rights of the Holders of the trust securities, including economic rights, rights to information and voting rights, are as set forth in the applicable declaration, the Business Trust Act and the Trust Indenture Act. UBS Americas holds all the issued and outstanding common trust securities of each trust. Each trust exists solely for the purpose of: - issuing its trust securities for cash, - investing the proceeds in an equivalent amount of junior subordinated debentures, and - engaging in such other activities as are necessary, convenient or incidental to these activities. PROSPECTUS Prospectus dated 27 December 2000 -------------------------------------------------------------------------------- [UBS AG LOGO] UBS Americas Inc. Certain Debt Securities FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED IN THIS PROSPECTUS, BY UBS AG -------------------------------------------------------------------------------- This prospectus relates to outstanding debt securities of UBS Americas Inc. UBS Americas Inc. is the successor by merger to Paine Webber Group Inc. Before the merger, Paine Webber Group Inc. issued the following debt securities, of which the indicated aggregate principal amounts are outstanding: - $150,000,000 of 9 1/4% Notes Due 2001 - $100,000,000 of 7 7/8% Notes Due 2003 - $200,000,000 of 6 1/2% Notes Due 2005 - $100,000,000 of 6 3/4% Notes Due 2006 - $200,000,000 of 7 5/8% Notes Due 2014 - $125,000,000 of 8 7/8% Notes Due 2005 - $125,000,000 of 8 1/4% Notes Due 2002 - $150,000,000 of 7 5/8% Notes Due 2008 - $250,000,000 of 6.55% Notes Due 2008 - $340,000,000 of 6.45% Notes Due 2003 - $525,000,000 of 6 3/8% Notes Due 2004 - $275,000,000 of 7 5/8% Notes Due 2009 - $175,000,000 of 7 3/4% Subordinated Notes Due 2002 - Varying principal amounts and maturities of Medium-Term Senior Notes, Series C - Varying principal amounts and maturities of Medium-Term Subordinated Notes, Series D As a result of the merger of Paine Webber Group Inc. into UBS Americas Inc., UBS Americas is now the issuer of all the debt securities listed above. UBS Americas is a wholly owned subsidiary of UBS AG. Following the merger of UBS Americas and Paine Webber Group, UBS AG issued its guarantee of the payment obligations of UBS Americas under all the debt securities issued above. Under this guarantee, UBS AG has fully and unconditionally guaranteed all the obligations of UBS Americas under these securities. However, the obligations of UBS AG under its guarantee of the subordinated debt securities listed above are subordinated as well, as described in this prospectus. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The debt securities are not deposit liabilities of UBS AG and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency of the United States, Switzerland or any other jurisdiction. This prospectus is to be used by UBS AG and its affiliates, including UBS Warburg LLC and PaineWebber Incorporated, in connection with offers and sales of the debt securities when UBS AG and its affiliates engage in market-making transactions. These transactions may be executed at negotiated prices that are related to market prices at the time of purchase or sale, or at other prices. UBS AG and its affiliates may act as principal or agent in these transactions. No new debt securities are being offered. UBS WARBURG LLC PAINEWEBBER INCORPORATED THE OFFERING This prospectus relates to the outstanding debt securities of UBS Americas and the related guarantees of UBS. The specific terms of each debt security are described under "Description of the Debt Securities" below in this prospectus. The Debt Securities........... This prospectus relates to the following outstanding debt securities of UBS Americas: $150,000,000 of 9 1/4% Notes Due 2001 $100,000,000 of 7 7/8% Notes Due 2003 $200,000,000 of 6 1/2% Notes Due 2005 $100,000,000 of 6 3/4% Notes Due 2006 $200,000,000 of 7 5/8% Notes Due 2014 $125,000,000 of 8 7/8% Notes Due 2005 $125,000,000 of 8 1/4% Notes Due 2002 $150,000,000 of 7 5/8% Notes Due 2008 $250,000,000 of 6.55% Notes Due 2008 $340,000,000 of 6.45% Notes Due 2003 $525,000,000 of 6 3/8% Notes Due 2004 $275,000,000 of 7 5/8% Notes Due 2009 $175,000,000 of 7 3/4% Subordinated Notes Due 2002 Varying principal amounts and maturities of Medium-Term Senior Notes, Series C Varying principal amounts and maturities of Medium-Term Subordinated Notes, Series D. Issuer........................ UBS Americas Inc. Guarantor..................... UBS AG. Terms of the Debt Securities.................... As stated in the applicable description below. Market for the Debt Securities.................... UBS Warburg LLC and PaineWebber Incorporated currently make a market in the debt securities. However, they are not required to do so, and they can stop doing so at any time without notice. As a result, there is no assurance as to the liquidity of any market for the debt securities. Use of Proceeds............... All of the sales of debt securities under this prospectus will be market-making transactions -- that is, transactions in which UBS AG, UBS Warburg LLC, PaineWebber Incorporated, or one of UBS AG's other affiliates, resells securities that the seller, or one of its affiliates, has previously bought from another party. UBS Americas will not receive any of the proceeds from these resales of the debt securities. In general, we expect that the entity that resells any particular debt securities will retain the proceeds of its market-making resales and will not pay the proceeds to UBS Americas or, if the resales are not made by UBS AG, to UBS AG. GROUP REVIEW 28 NOVEMBER 2000 GROUP REVIEW [RoE 1 ANNUALIZED BAR CHART] [BASIC ADJUSTED EPS 2,3 (CHF) BAR CHART] [COST/INCOME RATIO 2 BAR CHART] [NET NEW MONEY, PRIVATE BANKING AND PRIVATE CLIENTS (CHF bn) BAR GRAPH] 1 Annualized, before goodwill amortization and adjusted for significant financial events. 2 Before goodwill amortization and adjusted for significant financial events. 3 1999 share figures are restated for the two-for-one share split, effective 8 May 2000. UBS GROUP PERFORMANCE AGAINST TARGETS <TABLE> <CAPTION> For the period 9M2000 6M2000 9M1999 1 -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> RoE (%, ANNUALIZED) as reported 26.9 29.5 23.0 before goodwill amortization and adjusted for significant financial events 3, 4 29.1 31.9 18.8 -------------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> For the quarter ended 30.9.00 30.6.00 30.9.99 1 -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> BASIC EPS (CHF) 2 as reported 5.15 5.24 3.07 before goodwill amortization and adjusted for significant financial events 3, 4 5.46 5.97 3.22 -------------------------------------------------------------------------------------------------------------------- COST / INCOME RATIO (%) as reported 69.5 72.8 72.3 before goodwill amortization and adjusted for significant financial events 3, 4 68.0 69.2 71.4 -------------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> ASSETS UNDER MANAGEMENT NET NEW MONEY 5 CHF billion 30.9.00 30.6.00 % change 3Q00 --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> UBS GROUP 1,746 1,711 2 --------------------------------------------------------------------------------------------- UBS SWITZERLAND Private and Corporate Clients 440 439 0 1 Private Banking 707 683 4 1 --------------------------------------------------------------------------------------------- UBS ASSET MANAGEMENT Institutional Asset Management 6 528 525 1 (9) Investment Funds / GAM 227 225 1 0 --------------------------------------------------------------------------------------------- UBS Warburg Private Clients 44 37 19 8 ============================================================================================= </TABLE> 1 The 1999 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Basis of Accounting). 2 1999 share figures are restated for the two-for-one share split, effective 8 May 2000. 3 The amortization of goodwill and other purchased intangible assets are excluded from the calculation. 4 Significant financial events are excluded from the calculation. 5 Excludes interest and dividend income. 6 Includes non-institutional assets also reported in the Investment Funds / GAM business unit. GROUP TARGETS UBS focuses on four key performance targets, designed to ensure that we deliver continually improving returns to our shareholders. Our performance against these targets has continued to be very good this quarter. Adjusted for significant financial events, our annualized pre-goodwill return on equity for the first nine months of 2000 is 29.1%, once again well above our target range of 15-20%. Pre-goodwill earnings per share grew 70% over third quarter 1999, adjusted for one-off gains, clearly beating our double-digit growth target. The cost/income ratio is also well below that of third quarter 1999 and slightly lower than second quarter 2000. Net new money in both the private banking units was positive this quarter, although the volatility in the quarter-on-quarter net new money trend in the Private Clients business unit reflects its relatively early stage of business development. SIGNIFICANT FINANCIAL EVENTS There were no significant financial events in third quarter 2000. Second quarter 2000 included an additional and final provision of CHF 200 million before tax in respect of the US Global Settlement regarding World War II related claims. Third quarter 1999 included a capital gain of CHF 26 million before tax relating to our residual holding in Long Term Capital Management. RESULTS SUMMARY Excellent third quarter results, with net profit after taxes and minority interests of CHF 2,075 million, demonstrate continued strong profitability. Group net profit after tax and minority interests has now been above CHF 2 billion for a third straight quarter and is up 73% compared to third quarter 1999, on an adjusted basis. THE OFFERING The Securities................ 7,000,000 8.30% Preferred Trust Securities of PWG Capital Trust I. 7,000,000 8.08% Preferred Trust Securities of PWG Capital Trust II. The terms of each series of preferred trust securities correspond to the terms of the junior subordinated debentures held by the relevant trust. Each trust's ability to make distributions and other payments on its preferred trust securities is solely dependent upon UBS Americas' making payments on the junior subordinated debentures held by the trust as and when required. Liquidation Amount............ The liquidation amount of the 8.30% Preferred Trust Securities of PWG Capital Trust I is $25 per security. The liquidation amount of the 8.08% Preferred Trust Securities of PWG Capital Trust II is $25 per security. Offering Price................ Negotiated prices that are related to market prices at the time of purchase or sale, or at other prices. Distributions................. Holders of the 8.30% Preferred Trust Securities of PWG Capital Trust I will be entitled to receive cumulative cash distributions at an annual rate of 8.30% of the stated liquidation amount of $25 per preferred trust security. These distributions are payable monthly, in arrears, on the first day of each month. Holders of the 8.08% Preferred Trust Securities of PWG Capital Trust II will be entitled to receive cumulative cash distributions at an annual rate of 8.08% of the stated liquidation amount of $25 per preferred trust security. These distributions are payable monthly, in arrears, on the first day of each month. Extension Periods............. UBS Americas has the right to defer payments of interest on either series of the junior subordinated debentures for a period of not more than five years. No interest will be due and payable on the junior subordinated debentures during an extension period and, as a result, distributions on the trust securities will also be deferred. At the end of the extension period, UBS Americas will be required to pay all accrued interest on the affected series of junior subordinated debentures, together with interest on that accrued interest at the rate applicable to those junior subordinated debentures to the extent permitted by applicable law, compounded monthly. UBS Americas has the right to select an extension period as many times as it wishes during the life of the junior subordinated debentures. There could be multiple extension periods of varying lengths throughout the term of either series of junior subordinated debentures. TABLE OF CONTENTS -------------------------------------------------------------------------------- <TABLE> <S> <C> Prospectus Summary.................... 3 Use of Proceeds....................... 7 Cautionary Note Regarding Forward- Looking Information................. 8 Capitalization of UBS................. 9 Recent Developments................... 10 UBS................................... 11 UBS Americas.......................... 128 Unaudited Pro Forma Condensed Consolidated Financial Information......................... 129 Description of the Debt Securities.... 155 The Guarantees........................ 181 Foreign Currency Risks................ 184 Certain United States Federal Income Tax Considerations.................. 187 Tax Considerations Under the Laws of Switzerland......................... 193 ERISA Matters......................... 194 Plan of Distribution.................. 195 Validity of the Securities............ 196 Experts............................... 196 Limitations on Enforcement of U.S. Laws Against UBS AG, Its Management and Others.......................... 196 Where You Can Find More Information... 197 Presentation of Financial Information......................... 197 Financial Statements of UBS........... F-i Third Quarter Report 2000............. A-1 </TABLE> Plan of Distribution.......... This prospectus relates to market-making transactions in the debt securities by UBS AG and its affiliates. The affiliates that may engage in these transactions include, but are not limited to, UBS AG itself, UBS Warburg LLC and PaineWebber Incorporated. These transactions may be executed at negotiated prices that are related to prevailing market prices at the time of sale, or at other prices. UBS AG and its affiliates may act as principal or agent in these transactions. No new securities are offered. GROUP REVIEW 28 NOVEMBER 2000 SIGNIFICANT FINANCIAL EVENTS <TABLE> <CAPTION> Quarter ended Year-to-date ----------------------------------------- ------------------------- <S> <C> <C> <C> <C> <C> CHF million 30.9.00 30.6.00 30.9.99 30.9.00 30.9.99 ----------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME AS REPORTED 8,545 9,200 6,534 27,102 21,636 Julius Baer registered shares divestment 110 International Global Trade Finance divestment 200 Swiss Life/Rentenanstalt divestment 1,490 LTCM gain 26 26 ADJUSTED OPERATING INCOME 8,545 9,200 6,508 27,102 19,810 ----------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES AS REPORTED 5,842 6,548 4,921 18,839 14,992 US Global Settlement provision 200 200 ADJUSTED OPERATING EXPENSES 5,842 6,348 4,921 18,639 14,992 ----------------------------------------------------------------------------------------------------------------------------------- ADJUSTED OPERATING PROFIT BEFORE TAX AND MINORITY INTERESTS 2,703 2,852 1,587 8,463 4,818 =================================================================================================================================== Tax expense 621 591 374 1,878 1,525 Tax effect of significant financial events 45 (3) 45 (348) Minority interests (7) (9) (14) (42) (35) ----------------------------------------------------------------------------------------------------------------------------------- ADJUSTED NET PROFIT 2,075 2,207 1,202 6,498 3,606 =================================================================================================================================== </TABLE> Year-to-date adjusted net profit after tax of CHF 6,498 million represents an increase of 80% over the first nine months of 1999, and already exceeds the adjusted 1999 full-year results by 39%. Net interest income before credit loss expense increased 30% over third quarter 1999 to CHF 1,831 million. Higher interest rates increased the cost of medium and long term debt, but also helped to increase net income from lending to clients and banks. Trading-related net interest income was up 24% over third quarter 1999. Net fee and commission income was CHF 3,865 million in third quarter 2000, an increase of 26% over third quarter 1999. Brokerage fees reflected higher levels of client activity in UBS Switzerland and busier markets, rising 36% from the same period last year. Underwriting fees were up 65% thanks to another strong performance in equity underwriting, and Corporate finance fees also increased 71%, with strong results worldwide. Portfolio and other management and advisory fees increased CHF 81 million compared to second quarter 2000, chiefly as a result of the performance of the new O'Connor business, and were up nearly 50% from the same quarter last year, due to O'Connor and the acquisition of GAM in fourth quarter 1999. The 34% increase in Investment fund fees since third quarter 1999 reflects the addition of GAM, increased fund assets and a greater proportion of client money invested in higher margin equity funds. Net trading income was CHF 2,368 million in third quarter 2000, 13% up on the same quarter last year, as a result of increased global market activity and the strong client-driven performance of UBS Warburg. Equity trading revenues are well ahead of this time last year, but when combined with dividend income fell in comparison to second quarter 2000, reflecting the usual seasonal reduction in market activity and trading opportunities experienced during the summer holiday season. The increase of CHF 100 million in Other income compared to third quarter 1999, is primarily due to the inclusion of income from Klinik Hirslanden, which was not consolidated in the income statement at that time. Total operating expenses increased 19% over third quarter last year to CHF 5,842 million. This is largely due to increased performance-related compensation as revenues continue to exceed levels in 1999. Personnel expenses were down 11% from last quarter, in line with slower revenues, but were 24% higher than in third quarter 1999. General and administrative expenses increased only 8% over third quarter 1999, to CHF 1,503 million, mainly due to currency movements and the impact of the consolidation of Klinik Hirslanden. The underlying figure was roughly static relative to third quarter last year, reflecting our continued efforts to control non-revenue driven costs. Depreciation and amortization increased 12% to CHF 476 million compared to third quarter 1999, with increases in goodwill amortization due to the acquisitions of Allegis and GAM. UBS Group incurred a tax expense of CHF 621 million for third quarter 2000, an effective tax rate of 23%. See "Risk Factors--Option to Extend Interest Payment Period," "--Tax Impact of Extension," "Description of Securities--Description of the Junior Subordinated Debentures--General" and "--Description of the Junior Subordinated Debentures--Option to Extend Interest Payment Period." Ranking....................... The preferred trust securities and the common trust securities of each trust rank equally with each other and have equivalent terms. However, - If an event of default (as defined below) under the declaration of trust of the issuing trust occurs and continues, the Holders of the preferred trust securities of that trust will have a priority over the Holders of the common trust securities of that trust with respect to payments on those preferred trust securities. - Holders of the common securities of each trust have the exclusive right (subject to the terms of the trust's declaration of trust) to appoint, replace or remove trustees for the issuing trust and to increase or decrease the number of trustees. Redemption.................... The preferred trust securities of each trust will be redeemed when the junior subordinated debentures of that trust mature or are redeemed. The junior subordinated debentures held by PWG Capital Trust I will mature on 1 December 2036. UBS Americas may redeem the junior subordinated debentures held by PWG Capital Trust I, either as a whole or in part, at any time after 30 November 2001. The junior subordinated debentures held by PWG Capital Trust II will mature on 1 March 2037. UBS Americas may redeem the junior subordinated debentures held by PWG Capital Trust II, either as a whole or in part, at any time after 28 February 2002. In addition, UBS Americas can redeem the junior subordinated debentures of either trust at any time if a "Tax Event," as described below, occurs. If UBS Americas redeems any junior subordinated debentures, the trust that holds those junior subordinated debentures must redeem a corresponding amount of its trust securities. The redemption price will be equal to the liquidation amount of the trust security plus any accrued and unpaid distributions to the date fixed for redemption. See "Description of Securities--Description of the Preferred Trust Securities--Redemption of Trust Securities." Distribution of Junior Subordinated Debentures..... If a trust is dissolved, the junior subordinated debentures held by that trust will be distributed to the holders of that trust's trust securities, pro rata. UBS Americas Inc. will have RATIO OF EARNINGS TO FIXED CHARGES The following table sets forth UBS AG's ratio of earnings to fixed charges, for the periods indicated. <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED 31 DECEMBER 30 JUNE 1997 1998 1999 1999 2000 CHF in millions, except ratios ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> INTERNATIONAL ACCOUNTING STANDARDS ("IAS")(1) RATIO OF EARNINGS TO FIXED CHARGES(2).............. 0.95 1.11 1.25 1.36 1.28 US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP")(1) RATIO OF EARNINGS TO FIXED CHARGES(3).............. x 0.80 1.14 x 1.16 </TABLE> ------------ (1) The ratio is provided using both IAS and US GAAP values, as the ratio is materially different between the two accounting standards. No US GAAP information is provided for 31 December 1997 and 30 June 1999 as a US GAAP reconciliation was not required for those periods. (2) The deficiency in the coverage of fixed charges by earnings before fixed charges on an IAS basis at 31 December 1997 of CHF 851 million is due to restructuring charges of CHF 7,000 million under IAS charged in that period. Without that charge, the ratio would have been 1.36. (3) The deficiency in the coverage of fixed charges by earnings before fixed charges at 31 December 1998 of CHF 5,319 million is due to restructuring charges of CHF 3,982 million under US GAAP, as well as 1,706 million of pre-tax losses from significant financial events charged for that period. See "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Introduction." Without those charges the ratio would have been 1.01. GROUP REVIEW 28 NOVEMBER 2000 RESTRUCTURING PROVISION USED <TABLE> <CAPTION> Quarter ended ------------------- CHF million Personnel IT Premises Other 30.9.00 30.6.00 ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> UBS Switzerland 38 7 0 0 45 54 Private and Corporate Clients 37 5 0 0 42 52 Private Banking 1 2 0 0 3 2 UBS Asset Management 5 0 0 0 5 1 UBS Warburg 0 0 0 0 0 0 Corporate Center 2 0 29 0 31 18 ------------------------------------------------------------------------------------------------------------------------ GROUP TOTAL 45 7 29 0 81 73 ======================================================================================================================== ------------------------------------------------------------------------------------------------------------------------ Initial restructuring provision in 1997 7,000 Additional provision in 1999 300 Used in 1998 4,027 Used in 1999 1,844 Used in 2000 272 ------------------------------------------------------------------------------------------------------------------------ Total used through 30.9.2000 6,143 ------------------------------------------------------------------------------------------------------------------------ RESTRUCTURING PROVISION REMAINING AT 30.9.2000 1,157 ======================================================================================================================== </TABLE> UBS/SBC MERGER RESTRUCTURING PROVISION Of the CHF 7,300 million restructuring provision relating to the 1998 merger between Union Bank of Switzerland and Swiss Bank Corporation, CHF 81 million was used in third quarter 2000, leaving CHF 1,157 million still to be used. As in the second quarter, the main use of the provision this quarter related to severance costs in Private and Corporate Clients and vacancy-related premises costs in Corporate Center. UBS expects that the provision will be completely utilized by the end of 2001. The sale of Solothurner Bank to Baloise Insurance in August this year represents the completion of UBS's compliance with the sale of business conditions set by the Swiss Competition Commission as a result of the merger. The sale was completed on 19 October 2000, and will be reflected in fourth quarter results. CREDIT RISK During third quarter 2000, UBS realized a write-back of credit loss expenses of CHF 142 million, compared to a write-back of CHF 208 million in the second quarter 2000. This is the result of a continued improvement in the quality of our Swiss loan portfolio and is in sharp contrast to the CHF 275 million of credit loss expenses recorded in third quarter 1999. In accordance with the trend in the previous quarter, the unprecedentedly strong rebound of the Swiss economy, combined with UBS's disciplined credit underwriting standards, enabled additional recoveries of previously established loan loss provisions in the Swiss portfolio, which by far exceeded new requirements. On the other hand, this positive scenario was partially offset by the need for additional loan loss provisions in UBS Warburg's portfolio, in line with trends in the international credit markets. The significant reduction in the international loan portfolio achieved during the past two years, coupled with the active use of credit derivatives and reluctance to engage in balance sheet-led earnings growth, positions UBS well for the less positive credit conditions expected outside Switzerland, notably in the US. In particular, in line with its commitment to risk diversification, UBS's loan exposure to the telecom sector is relatively small compared to many of our peers, representing less than 2% of gross loans outstanding at 30 September 2000. The vast majority of our telecom loan book is rated investment grade. The further improvement in UBS's credit risk portfolio is also evident in the reduction of non-performing loans by CHF 956 million, or 8%, during the quarter. UBS's loan portfolio increased by CHF 11.4 billion over the quarter, to CHF 282.4 billion. The increase of CHF 17.5 billion in the UBS Warburg portfolio, principally as a result of zero risk-weighted money market and Group treasury positions held by UBS Warburg, was partially offset by a decrease of CHF 5.3 billion in UBS Switzerland, where the write-off and repayment of impaired positions exceeded new business. The reduction in non-performing loans combined with the increase in size of the overall portfolio means that the non-performing loans to total loans ratio fell to the right to liquidate each trust if there is a "Special Event," as described below, as a result of a change in law or a change in legal interpretation. However, if the Special Event is a Tax Event, UBS Americas may have the right to redeem the junior subordinated debentures, which would result in the redemption of the trust securities as described above. If the junior subordinated debentures are distributed to the Holders of the preferred trust securities, UBS Americas will use its best efforts to have the junior subordinated debentures listed on the New York Stock Exchange, or on whatever exchange that then lists the preferred trust securities. See "Description of Securities--Description of the Preferred Trust Securities--Special Event Redemption or Distribution" and "--Description of the Junior Subordinated Debentures."
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+Prospectus Summary The following summary does not contain all the information that may be important to you. You should read the entire prospectus before making an investment decision. UBS AG UBS AG is a global, integrated investment services firm and the leading bank in Switzerland. UBS's business is managed through three main business groups and its Corporate Center. The business groups are: UBS Switzerland, UBS Warburg and UBS Asset Management. UBS's clients include international corporations, small- and medium-sized businesses in Switzerland, governments and other public bodies, financial institutions, market participants and individuals. UBS AG's ordinary shares are listed on the New York Stock Exchange under the symbol "UBS.N," on the Zurich Stock Exchange under the symbol "UBSNZn.S" and on the Tokyo Stock Exchange under the symbol "UBS.T." On 3 November 2000, UBS acquired Paine Webber Group Inc., one of the largest full-service securities firms in the United States. UBS purchased all outstanding shares of PaineWebber stock for a combination of cash and stock representing a total purchase price of $11.8 billion (based on the UBS share price on 3 November 2000). The principal executive offices of UBS AG are located at Bahnhofstrasse 45, Zurich, Switzerland and Aeschenvorstadt 1, Basel, Switzerland. Its telephone numbers are 011-41-1-234-11-11 and 011-41-61-288-20-20. UBS AMERICAS UBS Americas Inc. is the successor by merger to Paine Webber Group Inc. Paine Webber Group Inc. was the holding company for the PaineWebber group of companies. UBS Americas is a direct, wholly owned subsidiary of UBS AG, and continues to act as the holding company for the U.S. onshore private banking operations of UBS. UBS Americas' principal executive offices are located at 677 Washington Boulevard, Stamford, Connecticut 06901, and its telephone number is 203-719-3000. SHAREHOLDERS' LETTER 28 NOVEMBER 2000 A PERSONAL NOTE FROM THE CHAIRMAN AS YOU MIGHT BE AWARE, I HAVE DECIDED TO STEP DOWN FROM MY FUNCTION AS CHAIRMAN OF THE BOARD OF DIRECTORS AFTER THE ANNUAL GENERAL MEETING IN APRIL 2001. I CONSIDER THIS TO BE THE RIGHT MOMENT. WE HAVE SUCCESSFULLY COMPLETED THE MERGER BETWEEN UNION BANK OF SWITZERLAND AND SWISS BANK CORPORATION. THE BUSINESS GROUPS AND THEIR RESPECTIVE RESPONSIBILITIES HAVE BEEN REDESIGNED. WE RECENTLY COMPLETED THE MERGER OF PAINEWEBBER INTO OUR GROUP. UBS IS IN GOOD FINANCIAL HEALTH. THE BOARD OF DIRECTORS WILL SUBMIT THE ELECTION OF MARCEL OSPEL, CURRENTLY GROUP CHIEF EXECUTIVE OFFICER, FOR YOUR APPROVAL AT THE AGM OF 26 APRIL 2001, AND WILL THEN APPOINT HIM AS CHAIRMAN. LUQMAN ARNOLD, CURRENTLY GROUP CHIEF FINANCIAL OFFICER, HAS BEEN ELECTED TO BECOME THE NEW PRESIDENT OF THE GROUP EXECUTIVE BOARD, ADDING THIS NEW ROLE TO HIS RESPONSIBILITY FOR THE GROUP'S FINANCE AND RISK FUNCTIONS. A NEW TOP-MANAGEMENT TEAM IS READY, AND I AM RELAXED AND CONFIDENT ABOUT HANDING OVER FULL RESPONSIBILITY TO THE YOUNGER GENERATION. PLEASE JOIN ME AND THE BOARD OF DIRECTORS IN WISHING MARCEL OSPEL AND LUQMAN ARNOLD SUCCESS AND LUCK IN THEIR NEW FUNCTIONS. ALEX KRAUER SENIOR MANAGEMENT SUCCESSION PLANS On 11 October, we announced plans for changes in the senior management of UBS which will take effect after the Annual General Meeting in April next year. Details are in the note which you will find opposite. At the Annual General Meeting in April you will also be asked to approve the election of three other new members of the Board of Directors. The British, Dutch and American candidates will help accurately reflect at Board level UBS's international culture and global reach. The three candidates are: Sir Peter Davis, CEO of J. Sainsbury plc; Johannes Antonie de Gier, former Chairman and CEO of Warburg Dillon Read; and Lawrence Allen Weinbach, Chairman and CEO of Unisys Corporation. UBS AG /s/ Alex Krauer Alex Krauer Chairman of the Board of Directors OUTLOOK We are pleased to have been able to report strong results so far this year and to have maintained this performance through the recent more mixed market conditions. The fourth quarter is normally the quietest part of the year in most of our businesses, and we expect this year to be no exception. In addition, we expect a one-off impact from PaineWebber integration and restructuring costs. Nevertheless, we are confident that we can complete 2000 in robust form and that we are excellently positioned for further success in 2001. The history of our bank has been one of forging new partnerships and learning from the cultures and skills of new colleagues. As an organization we are naturally excited about change and the PaineWebber merger makes next year one of our most eagerly anticipated. /s/ Marcel Ospel Marcel Ospel Group Chief Executive Officer Prospectus Summary The following summary does not contain all the information that may be important to you. You should read the entire prospectus before making an investment decision. UBS AG UBS AG is a global, integrated investment services firm and the leading bank in Switzerland. UBS's business is managed through three main business groups and its Corporate Center. The business groups are: UBS Switzerland, UBS Warburg and UBS Asset Management. UBS's clients include international corporations, small- and medium-sized businesses in Switzerland, governments and other public bodies, financial institutions, market participants and individuals. UBS AG's ordinary shares are listed on the New York Stock Exchange under the symbol "UBS.N," on the Zurich Stock Exchange under the symbol "USBNZn.S" and on the Tokyo Stock Exchange under the symbol "UBS.T." On 3 November 2000, UBS acquired Paine Webber Group Inc., one of the largest full-service securities and commodities firms in the United States. UBS purchased all outstanding shares of PaineWebber stock for a combination of cash and stock representing a total purchase price of $11.8 billion (based on the UBS share price on 3 November 2000). The principal executive offices of UBS AG are located at Bahnhofstrasse 45, Zurich, Switzerland and Aeschenvorstadt 1, Basel, Switzerland. Its telephone numbers are 011-41-1-234-11-11 and 011-41-61-288-20-20. UBS AMERICAS UBS Americas Inc. is the successor by merger to Paine Webber Group Inc. Paine Webber Group Inc. was the holding company for the PaineWebber group of companies. USB Americas is a direct, wholly owned subsidiary of UBS AG. THE TRUSTS Each trust is a business trust formed under the Delaware Business Trust Act under a declaration of trust among the trustees of that trust and UBS Americas. Each trust's primary governing document is its declaration of trust, which was completely amended and restated on the date its preferred trust securities were initially issued. The amended and restated declaration of trust of each trust is called the trust's "declaration." Each declaration is qualified under the Trust Indenture Act of 1939. The rights of the Holders of the trust securities, including economic rights, rights to information and voting rights, are as set forth in the applicable declaration, the Business Trust Act and the Trust Indenture Act. UBS Americas holds all the issued and outstanding common trust securities of each trust. Each trust exists solely for the purpose of: - issuing its trust securities for cash, - investing the proceeds in an equivalent amount of junior subordinated debentures, and - engaging in such other activities as are necessary, convenient or incidental to these activities. PROSPECTUS Prospectus dated 27 December 2000 -------------------------------------------------------------------------------- [UBS AG LOGO] UBS Americas Inc. Certain Debt Securities FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED IN THIS PROSPECTUS, BY UBS AG -------------------------------------------------------------------------------- This prospectus relates to outstanding debt securities of UBS Americas Inc. UBS Americas Inc. is the successor by merger to Paine Webber Group Inc. Before the merger, Paine Webber Group Inc. issued the following debt securities, of which the indicated aggregate principal amounts are outstanding: - $150,000,000 of 9 1/4% Notes Due 2001 - $100,000,000 of 7 7/8% Notes Due 2003 - $200,000,000 of 6 1/2% Notes Due 2005 - $100,000,000 of 6 3/4% Notes Due 2006 - $200,000,000 of 7 5/8% Notes Due 2014 - $125,000,000 of 8 7/8% Notes Due 2005 - $125,000,000 of 8 1/4% Notes Due 2002 - $150,000,000 of 7 5/8% Notes Due 2008 - $250,000,000 of 6.55% Notes Due 2008 - $340,000,000 of 6.45% Notes Due 2003 - $525,000,000 of 6 3/8% Notes Due 2004 - $275,000,000 of 7 5/8% Notes Due 2009 - $175,000,000 of 7 3/4% Subordinated Notes Due 2002 - Varying principal amounts and maturities of Medium-Term Senior Notes, Series C - Varying principal amounts and maturities of Medium-Term Subordinated Notes, Series D As a result of the merger of Paine Webber Group Inc. into UBS Americas Inc., UBS Americas is now the issuer of all the debt securities listed above. UBS Americas is a wholly owned subsidiary of UBS AG. Following the merger of UBS Americas and Paine Webber Group, UBS AG issued its guarantee of the payment obligations of UBS Americas under all the debt securities issued above. Under this guarantee, UBS AG has fully and unconditionally guaranteed all the obligations of UBS Americas under these securities. However, the obligations of UBS AG under its guarantee of the subordinated debt securities listed above are subordinated as well, as described in this prospectus. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The debt securities are not deposit liabilities of UBS AG and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency of the United States, Switzerland or any other jurisdiction. This prospectus is to be used by UBS AG and its affiliates, including UBS Warburg LLC and PaineWebber Incorporated, in connection with offers and sales of the debt securities when UBS AG and its affiliates engage in market-making transactions. These transactions may be executed at negotiated prices that are related to market prices at the time of purchase or sale, or at other prices. UBS AG and its affiliates may act as principal or agent in these transactions. No new debt securities are being offered. UBS WARBURG LLC PAINEWEBBER INCORPORATED THE OFFERING This prospectus relates to the outstanding debt securities of UBS Americas and the related guarantees of UBS. The specific terms of each debt security are described under "Description of the Debt Securities" below in this prospectus. The Debt Securities........... This prospectus relates to the following outstanding debt securities of UBS Americas: $150,000,000 of 9 1/4% Notes Due 2001 $100,000,000 of 7 7/8% Notes Due 2003 $200,000,000 of 6 1/2% Notes Due 2005 $100,000,000 of 6 3/4% Notes Due 2006 $200,000,000 of 7 5/8% Notes Due 2014 $125,000,000 of 8 7/8% Notes Due 2005 $125,000,000 of 8 1/4% Notes Due 2002 $150,000,000 of 7 5/8% Notes Due 2008 $250,000,000 of 6.55% Notes Due 2008 $340,000,000 of 6.45% Notes Due 2003 $525,000,000 of 6 3/8% Notes Due 2004 $275,000,000 of 7 5/8% Notes Due 2009 $175,000,000 of 7 3/4% Subordinated Notes Due 2002 Varying principal amounts and maturities of Medium-Term Senior Notes, Series C Varying principal amounts and maturities of Medium-Term Subordinated Notes, Series D. Issuer........................ UBS Americas Inc. Guarantor..................... UBS AG. Terms of the Debt Securities.................... As stated in the applicable description below. Market for the Debt Securities.................... UBS Warburg LLC and PaineWebber Incorporated currently make a market in the debt securities. However, they are not required to do so, and they can stop doing so at any time without notice. As a result, there is no assurance as to the liquidity of any market for the debt securities. Use of Proceeds............... All of the sales of debt securities under this prospectus will be market-making transactions -- that is, transactions in which UBS AG, UBS Warburg LLC, PaineWebber Incorporated, or one of UBS AG's other affiliates, resells securities that the seller, or one of its affiliates, has previously bought from another party. UBS Americas will not receive any of the proceeds from these resales of the debt securities. In general, we expect that the entity that resells any particular debt securities will retain the proceeds of its market-making resales and will not pay the proceeds to UBS Americas or, if the resales are not made by UBS AG, to UBS AG. GROUP REVIEW 28 NOVEMBER 2000 GROUP REVIEW [RoE 1 ANNUALIZED BAR CHART] [BASIC ADJUSTED EPS 2,3 (CHF) BAR CHART] [COST/INCOME RATIO 2 BAR CHART] [NET NEW MONEY, PRIVATE BANKING AND PRIVATE CLIENTS (CHF bn) BAR GRAPH] 1 Annualized, before goodwill amortization and adjusted for significant financial events. 2 Before goodwill amortization and adjusted for significant financial events. 3 1999 share figures are restated for the two-for-one share split, effective 8 May 2000. UBS GROUP PERFORMANCE AGAINST TARGETS <TABLE> <CAPTION> For the period 9M2000 6M2000 9M1999 1 -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> RoE (%, ANNUALIZED) as reported 26.9 29.5 23.0 before goodwill amortization and adjusted for significant financial events 3, 4 29.1 31.9 18.8 -------------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> For the quarter ended 30.9.00 30.6.00 30.9.99 1 -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> BASIC EPS (CHF) 2 as reported 5.15 5.24 3.07 before goodwill amortization and adjusted for significant financial events 3, 4 5.46 5.97 3.22 -------------------------------------------------------------------------------------------------------------------- COST / INCOME RATIO (%) as reported 69.5 72.8 72.3 before goodwill amortization and adjusted for significant financial events 3, 4 68.0 69.2 71.4 -------------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> ASSETS UNDER MANAGEMENT NET NEW MONEY 5 CHF billion 30.9.00 30.6.00 % change 3Q00 --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> UBS GROUP 1,746 1,711 2 --------------------------------------------------------------------------------------------- UBS SWITZERLAND Private and Corporate Clients 440 439 0 1 Private Banking 707 683 4 1 --------------------------------------------------------------------------------------------- UBS ASSET MANAGEMENT Institutional Asset Management 6 528 525 1 (9) Investment Funds / GAM 227 225 1 0 --------------------------------------------------------------------------------------------- UBS Warburg Private Clients 44 37 19 8 ============================================================================================= </TABLE> 1 The 1999 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Basis of Accounting). 2 1999 share figures are restated for the two-for-one share split, effective 8 May 2000. 3 The amortization of goodwill and other purchased intangible assets are excluded from the calculation. 4 Significant financial events are excluded from the calculation. 5 Excludes interest and dividend income. 6 Includes non-institutional assets also reported in the Investment Funds / GAM business unit. GROUP TARGETS UBS focuses on four key performance targets, designed to ensure that we deliver continually improving returns to our shareholders. Our performance against these targets has continued to be very good this quarter. Adjusted for significant financial events, our annualized pre-goodwill return on equity for the first nine months of 2000 is 29.1%, once again well above our target range of 15-20%. Pre-goodwill earnings per share grew 70% over third quarter 1999, adjusted for one-off gains, clearly beating our double-digit growth target. The cost/income ratio is also well below that of third quarter 1999 and slightly lower than second quarter 2000. Net new money in both the private banking units was positive this quarter, although the volatility in the quarter-on-quarter net new money trend in the Private Clients business unit reflects its relatively early stage of business development. SIGNIFICANT FINANCIAL EVENTS There were no significant financial events in third quarter 2000. Second quarter 2000 included an additional and final provision of CHF 200 million before tax in respect of the US Global Settlement regarding World War II related claims. Third quarter 1999 included a capital gain of CHF 26 million before tax relating to our residual holding in Long Term Capital Management. RESULTS SUMMARY Excellent third quarter results, with net profit after taxes and minority interests of CHF 2,075 million, demonstrate continued strong profitability. Group net profit after tax and minority interests has now been above CHF 2 billion for a third straight quarter and is up 73% compared to third quarter 1999, on an adjusted basis. THE OFFERING The Securities................ 7,000,000 8.30% Preferred Trust Securities of PWG Capital Trust I. 7,000,000 8.08% Preferred Trust Securities of PWG Capital Trust II. The terms of each series of preferred trust securities correspond to the terms of the junior subordinated debentures held by the relevant trust. Each trust's ability to make distributions and other payments on its preferred trust securities is solely dependent upon UBS Americas' making payments on the junior subordinated debentures held by the trust as and when required. Liquidation Amount............ The liquidation amount of the 8.30% Preferred Trust Securities of PWG Capital Trust I is $25 per security. The liquidation amount of the 8.08% Preferred Trust Securities of PWG Capital Trust II is $25 per security. Offering Price................ Negotiated prices that are related to market prices at the time of purchase or sale, or at other prices. Distributions................. Holders of the 8.30% Preferred Trust Securities of PWG Capital Trust I will be entitled to receive cumulative cash distributions at an annual rate of 8.30% of the stated liquidation amount of $25 per preferred trust security. These distributions are payable monthly, in arrears, on the first day of each month. Holders of the 8.08% Preferred Trust Securities of PWG Capital Trust II will be entitled to receive cumulative cash distributions at an annual rate of 8.08% of the stated liquidation amount of $25 per preferred trust security. These distributions are payable monthly, in arrears, on the first day of each month. Extension Periods............. UBS Americas has the right to defer payments of interest on either series of the junior subordinated debentures for a period of not more than five years. No interest will be due and payable on the junior subordinated debentures during an extension period and, as a result, distributions on the trust securities will also be deferred. At the end of the extension period, UBS Americas will be required to pay all accrued interest on the affected series of junior subordinated debentures, together with interest on that accrued interest at the rate applicable to those junior subordinated debentures to the extent permitted by applicable law, compounded monthly. UBS Americas has the right to select an extension period as many times as it wishes during the life of the junior subordinated debentures. There could be multiple extension periods of varying lengths throughout the term of either series of junior subordinated debentures. TABLE OF CONTENTS -------------------------------------------------------------------------------- <TABLE> <S> <C> Prospectus Summary.................... 3 Use of Proceeds....................... 7 Cautionary Note Regarding Forward- Looking Information................. 8 Capitalization of UBS................. 9 Recent Developments................... 10 UBS................................... 11 UBS Americas.......................... 128 Unaudited Pro Forma Condensed Consolidated Financial Information......................... 129 Description of the Debt Securities.... 155 The Guarantees........................ 181 Foreign Currency Risks................ 184 Certain United States Federal Income Tax Considerations.................. 187 Tax Considerations Under the Laws of Switzerland......................... 193 ERISA Matters......................... 194 Plan of Distribution.................. 195 Validity of the Securities............ 196 Experts............................... 196 Limitations on Enforcement of U.S. Laws Against UBS AG, Its Management and Others.......................... 196 Where You Can Find More Information... 197 Presentation of Financial Information......................... 197 Financial Statements of UBS........... F-i Third Quarter Report 2000............. A-1 </TABLE> Plan of Distribution.......... This prospectus relates to market-making transactions in the debt securities by UBS AG and its affiliates. The affiliates that may engage in these transactions include, but are not limited to, UBS AG itself, UBS Warburg LLC and PaineWebber Incorporated. These transactions may be executed at negotiated prices that are related to prevailing market prices at the time of sale, or at other prices. UBS AG and its affiliates may act as principal or agent in these transactions. No new securities are offered. GROUP REVIEW 28 NOVEMBER 2000 SIGNIFICANT FINANCIAL EVENTS <TABLE> <CAPTION> Quarter ended Year-to-date ----------------------------------------- ------------------------- <S> <C> <C> <C> <C> <C> CHF million 30.9.00 30.6.00 30.9.99 30.9.00 30.9.99 ----------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME AS REPORTED 8,545 9,200 6,534 27,102 21,636 Julius Baer registered shares divestment 110 International Global Trade Finance divestment 200 Swiss Life/Rentenanstalt divestment 1,490 LTCM gain 26 26 ADJUSTED OPERATING INCOME 8,545 9,200 6,508 27,102 19,810 ----------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES AS REPORTED 5,842 6,548 4,921 18,839 14,992 US Global Settlement provision 200 200 ADJUSTED OPERATING EXPENSES 5,842 6,348 4,921 18,639 14,992 ----------------------------------------------------------------------------------------------------------------------------------- ADJUSTED OPERATING PROFIT BEFORE TAX AND MINORITY INTERESTS 2,703 2,852 1,587 8,463 4,818 =================================================================================================================================== Tax expense 621 591 374 1,878 1,525 Tax effect of significant financial events 45 (3) 45 (348) Minority interests (7) (9) (14) (42) (35) ----------------------------------------------------------------------------------------------------------------------------------- ADJUSTED NET PROFIT 2,075 2,207 1,202 6,498 3,606 =================================================================================================================================== </TABLE> Year-to-date adjusted net profit after tax of CHF 6,498 million represents an increase of 80% over the first nine months of 1999, and already exceeds the adjusted 1999 full-year results by 39%. Net interest income before credit loss expense increased 30% over third quarter 1999 to CHF 1,831 million. Higher interest rates increased the cost of medium and long term debt, but also helped to increase net income from lending to clients and banks. Trading-related net interest income was up 24% over third quarter 1999. Net fee and commission income was CHF 3,865 million in third quarter 2000, an increase of 26% over third quarter 1999. Brokerage fees reflected higher levels of client activity in UBS Switzerland and busier markets, rising 36% from the same period last year. Underwriting fees were up 65% thanks to another strong performance in equity underwriting, and Corporate finance fees also increased 71%, with strong results worldwide. Portfolio and other management and advisory fees increased CHF 81 million compared to second quarter 2000, chiefly as a result of the performance of the new O'Connor business, and were up nearly 50% from the same quarter last year, due to O'Connor and the acquisition of GAM in fourth quarter 1999. The 34% increase in Investment fund fees since third quarter 1999 reflects the addition of GAM, increased fund assets and a greater proportion of client money invested in higher margin equity funds. Net trading income was CHF 2,368 million in third quarter 2000, 13% up on the same quarter last year, as a result of increased global market activity and the strong client-driven performance of UBS Warburg. Equity trading revenues are well ahead of this time last year, but when combined with dividend income fell in comparison to second quarter 2000, reflecting the usual seasonal reduction in market activity and trading opportunities experienced during the summer holiday season. The increase of CHF 100 million in Other income compared to third quarter 1999, is primarily due to the inclusion of income from Klinik Hirslanden, which was not consolidated in the income statement at that time. Total operating expenses increased 19% over third quarter last year to CHF 5,842 million. This is largely due to increased performance-related compensation as revenues continue to exceed levels in 1999. Personnel expenses were down 11% from last quarter, in line with slower revenues, but were 24% higher than in third quarter 1999. General and administrative expenses increased only 8% over third quarter 1999, to CHF 1,503 million, mainly due to currency movements and the impact of the consolidation of Klinik Hirslanden. The underlying figure was roughly static relative to third quarter last year, reflecting our continued efforts to control non-revenue driven costs. Depreciation and amortization increased 12% to CHF 476 million compared to third quarter 1999, with increases in goodwill amortization due to the acquisitions of Allegis and GAM. UBS Group incurred a tax expense of CHF 621 million for third quarter 2000, an effective tax rate of 23%. See "Risk Factors--Option to Extend Interest Payment Period," "--Tax Impact of Extension," "Description of Securities--Description of the Junior Subordinated Debentures--General" and "--Description of the Junior Subordinated Debentures--Option to Extend Interest Payment Period." Ranking....................... The preferred trust securities and the common trust securities of each trust rank equally with each other and have equivalent terms. However, - If an event of default (as defined below) under the declaration of trust of the issuing trust occurs and continues, the Holders of the preferred trust securities of that trust will have a priority over the Holders of the common trust securities of that trust with respect to payments on those preferred trust securities. - Holders of the common securities of each trust have the exclusive right (subject to the terms of the trust's declaration of trust) to appoint, replace or remove trustees for the issuing trust and to increase or decrease the number of trustees. Redemption.................... The preferred trust securities of each trust will be redeemed when the junior subordinated debentures of that trust mature or are redeemed. The junior subordinated debentures held by PWG Capital Trust I will mature on 1 December 2036. UBS Americas may redeem the junior subordinated debentures held by PWG Capital Trust I, either as a whole or in part, at any time after 30 November 2001. The junior subordinated debentures held by PWG Capital Trust II will mature on 1 March 2037. UBS Americas may redeem the junior subordinated debentures held by PWG Capital Trust II, either as a whole or in part, at any time after 28 February 2002. In addition, UBS Americas can redeem the junior subordinated debentures of either trust at any time if a "Tax Event," as described below, occurs. If UBS Americas redeems any junior subordinated debentures, the trust that holds those junior subordinated debentures must redeem a corresponding amount of its trust securities. The redemption price will be equal to the liquidation amount of the trust security plus any accrued and unpaid distributions to the date fixed for redemption. See "Description of Securities--Description of the Preferred Trust Securities--Redemption of Trust Securities." Distribution of Junior Subordinated Debentures..... If a trust is dissolved, the junior subordinated debentures held by that trust will be distributed to the holders of that trust's trust securities, pro rata. UBS Americas Inc. will have RATIO OF EARNINGS TO FIXED CHARGES The following table sets forth UBS AG's ratio of earnings to fixed charges, for the periods indicated. <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED 31 DECEMBER 30 JUNE 1997 1998 1999 1999 2000 CHF in millions, except ratios ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> INTERNATIONAL ACCOUNTING STANDARDS ("IAS")(1) RATIO OF EARNINGS TO FIXED CHARGES(2).............. 0.95 1.11 1.25 1.36 1.28 US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP")(1) RATIO OF EARNINGS TO FIXED CHARGES(3).............. x 0.80 1.14 x 1.16 </TABLE> ------------ (1) The ratio is provided using both IAS and US GAAP values, as the ratio is materially different between the two accounting standards. No US GAAP information is provided for 31 December 1997 and 30 June 1999 as a US GAAP reconciliation was not required for those periods. (2) The deficiency in the coverage of fixed charges by earnings before fixed charges on an IAS basis at 31 December 1997 of CHF 851 million is due to restructuring charges of CHF 7,000 million under IAS charged in that period. Without that charge, the ratio would have been 1.36. (3) The deficiency in the coverage of fixed charges by earnings before fixed charges at 31 December 1998 of CHF 5,319 million is due to restructuring charges of CHF 3,982 million under US GAAP, as well as 1,706 million of pre-tax losses from significant financial events charged for that period. See "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Introduction." Without those charges the ratio would have been 1.01. GROUP REVIEW 28 NOVEMBER 2000 RESTRUCTURING PROVISION USED <TABLE> <CAPTION> Quarter ended ------------------- CHF million Personnel IT Premises Other 30.9.00 30.6.00 ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> UBS Switzerland 38 7 0 0 45 54 Private and Corporate Clients 37 5 0 0 42 52 Private Banking 1 2 0 0 3 2 UBS Asset Management 5 0 0 0 5 1 UBS Warburg 0 0 0 0 0 0 Corporate Center 2 0 29 0 31 18 ------------------------------------------------------------------------------------------------------------------------ GROUP TOTAL 45 7 29 0 81 73 ======================================================================================================================== ------------------------------------------------------------------------------------------------------------------------ Initial restructuring provision in 1997 7,000 Additional provision in 1999 300 Used in 1998 4,027 Used in 1999 1,844 Used in 2000 272 ------------------------------------------------------------------------------------------------------------------------ Total used through 30.9.2000 6,143 ------------------------------------------------------------------------------------------------------------------------ RESTRUCTURING PROVISION REMAINING AT 30.9.2000 1,157 ======================================================================================================================== </TABLE> UBS/SBC MERGER RESTRUCTURING PROVISION Of the CHF 7,300 million restructuring provision relating to the 1998 merger between Union Bank of Switzerland and Swiss Bank Corporation, CHF 81 million was used in third quarter 2000, leaving CHF 1,157 million still to be used. As in the second quarter, the main use of the provision this quarter related to severance costs in Private and Corporate Clients and vacancy-related premises costs in Corporate Center. UBS expects that the provision will be completely utilized by the end of 2001. The sale of Solothurner Bank to Baloise Insurance in August this year represents the completion of UBS's compliance with the sale of business conditions set by the Swiss Competition Commission as a result of the merger. The sale was completed on 19 October 2000, and will be reflected in fourth quarter results. CREDIT RISK During third quarter 2000, UBS realized a write-back of credit loss expenses of CHF 142 million, compared to a write-back of CHF 208 million in the second quarter 2000. This is the result of a continued improvement in the quality of our Swiss loan portfolio and is in sharp contrast to the CHF 275 million of credit loss expenses recorded in third quarter 1999. In accordance with the trend in the previous quarter, the unprecedentedly strong rebound of the Swiss economy, combined with UBS's disciplined credit underwriting standards, enabled additional recoveries of previously established loan loss provisions in the Swiss portfolio, which by far exceeded new requirements. On the other hand, this positive scenario was partially offset by the need for additional loan loss provisions in UBS Warburg's portfolio, in line with trends in the international credit markets. The significant reduction in the international loan portfolio achieved during the past two years, coupled with the active use of credit derivatives and reluctance to engage in balance sheet-led earnings growth, positions UBS well for the less positive credit conditions expected outside Switzerland, notably in the US. In particular, in line with its commitment to risk diversification, UBS's loan exposure to the telecom sector is relatively small compared to many of our peers, representing less than 2% of gross loans outstanding at 30 September 2000. The vast majority of our telecom loan book is rated investment grade. The further improvement in UBS's credit risk portfolio is also evident in the reduction of non-performing loans by CHF 956 million, or 8%, during the quarter. UBS's loan portfolio increased by CHF 11.4 billion over the quarter, to CHF 282.4 billion. The increase of CHF 17.5 billion in the UBS Warburg portfolio, principally as a result of zero risk-weighted money market and Group treasury positions held by UBS Warburg, was partially offset by a decrease of CHF 5.3 billion in UBS Switzerland, where the write-off and repayment of impaired positions exceeded new business. The reduction in non-performing loans combined with the increase in size of the overall portfolio means that the non-performing loans to total loans ratio fell to the right to liquidate each trust if there is a "Special Event," as described below, as a result of a change in law or a change in legal interpretation. However, if the Special Event is a Tax Event, UBS Americas may have the right to redeem the junior subordinated debentures, which would result in the redemption of the trust securities as described above. If the junior subordinated debentures are distributed to the Holders of the preferred trust securities, UBS Americas will use its best efforts to have the junior subordinated debentures listed on the New York Stock Exchange, or on whatever exchange that then lists the preferred trust securities. See "Description of Securities--Description of the Preferred Trust Securities--Special Event Redemption or Distribution" and "--Description of the Junior Subordinated Debentures."
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+PROSPECTUS SUMMARY The following highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully. We are principally engaged in the operation of two Internet health care sites: HealthGrades.com and ProviderWeb.net. HealthGrades.com provides ratings and other information on health care providers and facilities. ProviderWeb.net is a subscription-based website that provides tools and resources for physician practice administrators and managers. HealthGrades.com is a comprehensive health care information website that provides ratings and other profile information regarding a variety of providers and facilities in the United States. This information is provided through several "report card" sections that rate hospitals, health plans, nursing homes and home health agencies on a scale from one to five stars. The ratings are based upon the application of proprietary algorithms or other statistical analysis to data that we obtain from several sources. Our HealthGrades.com website also provides information on physicians in numerous specialties, including detailed profiles, as well as the ability to refine a physician search based on criteria including practice experience, board certification and absence of sanctions. In addition, we provide detailed data on hospices, including the ability to refine searches based on the nature of core and non-core services provided. We also furnish detailed profiles for providers and facilities such as dentists, assisted living residences and mammography facilities. Our goal is to provide comprehensive, objective health care ratings and profiles to assist consumers in making the most informed decisions regarding their health and that of their families. We seek to obtain revenue from our HealthGrades.com website by licensing our content to other websites, licensing our data and trademark rights to highly rated hospitals, nursing homes and health plans, licensing our health plan information to payors and employers and selling advertising space on our website. ProviderWeb.net is a subscription-based service that provides financial and administrative tools, articles and resources covering a broad range of matters relating to practice administration, including, among other areas, financial, human resources, compliance and patient satisfaction. We believe that these tools and resources cover a wide array of needs of a typical physician practice. We market subscriptions to practice administrators and others involved in the financial and operational performance of physician practices. We seek to obtain revenue from our ProviderWeb.net website through subscription fees, advertising and promotional activities and revenue sharing arrangements with other health-related websites that can be accessed from our website. Our revenues to date from ProviderWeb.net have not been material. Due to the intent of management to focus its efforts on continuing the development of the HealthGrades.com website, we are currently exploring strategic alternatives for ProviderWeb.net. We also provide limited physician practice management services to four musculoskeletal practices under management services agreements that have terms expiring through September 2002. Our principal executive offices are located at 44 Union Boulevard, Suite 600, Lakewood, Colorado, 80228 and our telephone number is (303) 716-0041. Our website is www.HealthGrades.com. This URL is intended to be an inactive textual reference only. THE INFORMATION IN OUR WEBSITE IS NOT PART OF THIS PROSPECTUS. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. SUMMARY FINANCIAL DATA <TABLE> <CAPTION> YEAR ENDED YEAR ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, JUNE 30, 1998 1999 1999 2000 ---------------- --------------- -------------- ------------ (unaudited) <S> <C> <C> <C> <C> Revenue: Physician practice management revenue $ 79,181,302 $ 31,178,171 $21,749,704 $ 3,567,811 Internet revenue -- 407,577 136,792 1,262,567 Other -- -- 459,366 2,719 ---------------- --------------- -------------- ------------ 79,181,302 31,585,748 22,345,862 4,833,097 ------------ --------------- -------------- ------------ Costs and expenses: Physician practice management costs and expenses: Clinic expenses 55,188,411 15,234,416 14,442,454 -- Impairment loss on service agreements 94,582,227 -- -- -- Impairment loss on intangible assets and other long-lived assets 3,316,651 -- -- -- Litigation and other costs 3,564,392 5,309,168 3,363,260 571,835 Internet costs and expenses: Production, content and product development -- 1,217,917 264,544 1,205,592 Sales and marketing -- 1,853,191 119,244 1,246,653 General and administrative 14,468,537 10,570,223 6,002,984 4,062,413 ---------------- --------------- -------------- ------------ Total costs and expenses 171,120,218 34,184,915 24,192,486 7,086,493 ---------------- --------------- -------------- ------------ (Loss) income from operations (91,938,916) (2,599,167) (1,846,624) (2,253,396) Other: Gain (loss) on sale of assets and other -- -- 3,531,758 (194,779) Gain on sale of assets, practice disputes, and amendment and restatement of service agreements -- 2,766,284 -- -- Gain on sale of equity investment 1,240,078 127,974 -- -- Gain on sale of subsidiary -- 221,258 221,258 -- Interest income 187,450 312,447 160,496 259,356 Interest expense (3,741,089) (2,489,427) (1,886,986) (375,793) ---------------- --------------- -------------- ------------ (Loss) income before income taxes (94,252,477) (1,660,631) 179,902 (2,564,612) Income tax benefit 32,466,391 2,625,561 1,696,347 -- ---------------- --------------- -------------- ------------ Net (loss) income $ (61,786,086) $ 964,930 $ 1,876,249 $ (2,564,612) ================ =============== ============== ============ Net (loss) income per common share (basic) $ ( 3.39) $ 0.07 $ 0.12 $ (0.15) ================ =============== ============== ============ Weighted average number of common shares used in computation (basic) 18,237,827 14,202,748 16,031,953 17,512,743 ================ =============== ============== ============ Net income (loss) per common share (diluted) $ (3.39) $ 0.07 $ 0.11 $ (0.15) ================ =============== ============== ============ Weighted average number of common shares and common share equivalents used in computation (diluted) 18,237,827 14,817,732 16,383,102 17,512,743 ================ =============== ============== ============ </TABLE> Balance Sheet Data <TABLE> <CAPTION> DECEMBER 31, 1998 DECEMBER 31, 1999 JUNE 30, 2000 ----------------- ----------------- -------------- (unaudited) <S> <C> <C> <C> Working capital (deficit) $(21,457,105) $ 1,383,945 $ 8,147,381 Total assets 70,179,278 20,392,968 11,952,612 Total long-term debt 680,152 8,803,283 1,316,065 Total short-term debt 53,514,615 7,702,005 663,149 </TABLE> The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED AUGUST 31, 2000 12,465,000 Shares HealthGrades.com, Inc. Common Stock ---------------------------------------- The shares offered hereby (the "Shares") consist of up to 12,465,000 shares of our common stock, including up to 3,300,000 shares underlying warrants. The Shares may be offered from time to time by the selling stockholders identified in this prospectus. We will not receive any part of the proceeds from the sale of the Shares. We will bear all expenses relating to registration of the Shares. The selling stockholders have not advised us of any specific plans for the distribution of the Shares covered by this prospectus, but it is anticipated that the Shares will be sold from time to time in negotiated transactions and in transactions (which may include short sales and block transactions) on Nasdaq at the market price then prevailing, although sales may also be made as described in this prospectus under "Plan of Distribution." The selling stockholders and the broker-dealers through whom sale of the Shares may be made may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), and commissions or discounts paid to broker-dealers in connection with such sales and other compensation may be regarded as underwriters' compensation. See "Plan of Distribution." THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001028065_orapharma_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001028065_orapharma_prospectus_summary.txt
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+SUMMARY This summary highlights information contained elsewhere in this prospectus. We have included this information in the summary because we believe this information is highly important in making a decision to invest in our common stock. You should read this summary together with the more detailed information regarding our company and the common stock being sold in this offering appearing elsewhere in this prospectus, including our financial statements and related notes, for a more complete understanding of our business and the offering. OraPharma Introduction OraPharma is developing pharmaceutical products for the treatment of oral diseases and disorders. We completed two Phase 3 clinical trials in October 1999 for our first product candidate, Minocycline Periodontal Therapeutic System. We conducted these trials on 747 patients to establish drug safety and efficacy in treating adult periodontitis, a chronic infection caused by plaque buildup on teeth and the leading cause of adult tooth loss. Based on our clinical trial results, we submitted a New Drug Application, or NDA, to the Food and Drug Administration, or FDA, on February 17, 2000. We developed MPTS to be used together with the current standard of care, scaling and root planing, which is a mechanical procedure involving the removal of bacteria- containing plaque. We are directing our other research and development programs at further establishing a presence in oral care pharmaceuticals and expanding the use of our core technology, which is our manufacturing process and method for administering the drug. Periodontitis has no known cure and is thought to be linked to other serious systemic health problems such as cardiovascular disease, diabetes and low infant birth weight. Published reports citing the American Dental Association state that approximately 50 million Americans have periodontal disease and only 7.5 million Americans are currently receiving treatment. Industry sources indicate that more than $6.0 billion is spent annually on products and services to treat this condition. Pharmaceuticals for the treatment of periodontitis comprise a rapidly emerging segment of the overall oral health care market. In addition, we believe a broader market opportunity exists for the treatment of other oral health care diseases and disorders with large, unmet medical needs. Examples include oral mucositis, a condition that is a consequence of cancer therapy and involves the formation of painful ulcers in the mouth and esophagus, and various oral conditions requiring regeneration of bone and tissue. Our first product candidate, MPTS, uses our core technology--a patented system that both allows precise drug placement at the desired site and enables drug-release over several days or weeks--and a specially designed dispenser to place the antibiotic minocycline at the site of periodontal infection. We licensed MPTS and our core technology from American Cyanamid, which is now a part of American Home Products, or AHP. We have developed MPTS to enhance the effect of the standard treatment for periodontitis, scaling and root planing. We believe MPTS offers significant advantages over existing pharmaceutical treatments, particularly speed and convenience of administration. In addition, our approach to deliver the drug precisely at the infection site results in high drug concentration for an extended time period, with, we believe, reduced risk of drug resistance. Finally, the oral care professional administers MPTS chair-side, ensuring patient compliance. In the U.S., we intend to create a sales and marketing force of 50 to 75 persons and to begin hiring and training activities in late 2000. Assuming we obtain FDA approval, we will target approximately 3,700 periodontists, and approximately 25,000 general dentists whom we believe frequently perform scaling and root planing procedures. In international markets, we intend to enter into strategic relationships to market and sell MPTS rather than establish our own sales force. We licensed patents and related methods in December 1998 for two additional product programs that are currently in preclinical studies. Preclinical studies are safety investigations that are conducted prior to drug testing in humans. The first, initially developed at Brigham and Women's Hospital, is for the treatment of oral mucositis. This is a condition that occurs in more than 40% of patients receiving standard chemotherapy and virtually all patients who receive head and neck radiation therapy, according to an article published in January 1995, Principles and Practice of Oncology. The second, initially developed at Children's Hospital of Boston, is for the regeneration of bone and soft-tissue to aid in the support of dental implants and dentures. We also formed collaborations with both organizations to support ongoing development of these technologies. In addition, we have begun two research programs with the University of North Carolina--Chapel Hill, that focus on treating traumatic tooth injury and periodontitis. Both programs are at an early development stage, where we are screening possible compounds for potential use as a drug therapy. We aim to become a leader in oral care pharmaceuticals, including agents that target both dental and non-dental pathologies of the oral cavity. Our business strategy is based on leveraging our scientific and medical staff's expertise in drug development, drug delivery and management of clinical trials; building our own sales and marketing team for the commercialization of MPTS and other oral healthcare product candidates in the U.S.; and forming strategic relationships to complete early stages of research and conduct manufacturing and distribution activities. Additional Information We were formed in August 1996. Our principal executive offices are located at 732 Louis Drive, Warminster, Pennsylvania 18974, and our telephone number is 215-956-2200. We have applied for a federally registered trademark for "OraPharma." This prospectus also includes trademarks and tradenames of other parties. Recent Developments On February 17, 2000 we submitted an NDA to the FDA for MPTS for the treatment of periodontitis. The Offering <TABLE> <S> <C> Common stock offered by OraPharma...... 4,000,000 shares Common stock to be outstanding after this offering........................ 12,596,735 shares Use of proceeds........................ For further development of, obtaining FDA approval for, and commercialization of MPTS; payments under licensing, sponsored research and consulting agreements; general corporate and working capital purposes; ongoing research and development; and obtaining new product candidates or technology. Proposed Nasdaq National Market symbol............................... OPHM </TABLE> The number of shares outstanding after this offering excludes, as of December 31, 1999: . 1,250,000 shares of common stock available for issuance under our 1999 equity compensation plan; . 586,472 shares of common stock issuable upon exercise of outstanding stock options under our 1996 stock option plan at a weighted average exercise price of $0.35 per share; . warrants to purchase 31,249 shares of series A preferred stock, which will either be exercised prior to the completion of this offering or become exercisable for 31,249 shares of common stock upon the completion of this offering at an exercise price of $2.00 per share; . warrants to purchase 27,500 shares of common stock at an exercise price of $3.64 per share; . warrants to purchase 110,617 shares of common stock at an exercise price of $12.92 per share issued in connection with the sale of series D preferred stock; and . warrants to purchase 41,152 shares of common stock at an exercise price of $4.86 per share. -------------------- Generally, the information in this prospectus, unless otherwise noted: . assumes that the over-allotment option is not exercised; . reflects the automatic conversion, on a one-for-one basis, of all outstanding shares of series A, B, C and D preferred stock into an aggregate of 7,557,100 shares of common stock at the closing of this offering; and . reflects a one-for-two reverse stock split that was completed on February 3, 2000. Summary Financial Data The following table presents summary financial information for OraPharma. The pro forma balance sheet data gives effect to the conversion of all of our outstanding shares of preferred stock. The pro forma as adjusted balance sheet data reflects the sale by OraPharma of 4,000,000 shares of common stock in the offering at an assumed offering price of $16.00 per share. The summary financial data for the period from inception (August 1, 1996) through December 31, 1996, the years ended December 31, 1997, 1998 and 1999, and the period from inception through December 31, 1999 are derived from the audited financial statements. You should read this data together with the financial statements and related notes included in this prospectus. <TABLE> <CAPTION> Period from Period from Inception Inception (August 1, (August 1, 1996) Year Ended 1996) Through December 31, Through December 31, -------------------------------------- December 31, 1996 1997 1998 1999 1999 ------------ ----------- ----------- ------------ ------------ <S> <C> <C> <C> <C> <C> Statement of Operations Data: Operating expenses: Research and development.......... $ 26,294 $ 1,706,393 $ 7,589,000 $ 9,693,413 $ 19,015,100 General and administrative....... 408,295 939,469 1,604,579 2,189,577 5,141,920 --------- ----------- ----------- ------------ ------------ Operating loss........ (434,589) (2,645,862) (9,193,579) (11,882,990) (24,157,020) Net interest income (expense)............. (641) 504,123 424,488 636,957 1,564,927 --------- ----------- ----------- ------------ ------------ Net loss................ (435,230) (2,141,739) (8,769,091) (11,246,033) (22,592,093) Non-cash preferred stock charge................ -- -- -- 1,729,651 1,729,651 --------- ----------- ----------- ------------ ------------ Net loss to common stockholders.......... $(435,230) $(2,141,739) $(8,769,091) $(12,975,684) $(24,321,744) ========= =========== =========== ============ ============ Basic and diluted net loss per share........ $ (5.05) $ (13.72) $ (16.74) =========== =========== ============ Shares used in computing net loss per share.... 424,054 639,339 775,116 =========== =========== ============ Pro forma basic and diluted net loss per share................. $ (1.67) ============ Shares used in computing pro forma basic and diluted net loss per share................. 7,792,759 ============ </TABLE> <TABLE> <CAPTION> December 31, 1999 ---------------------------------------- Pro Forma Actual Pro Forma As Adjusted ------------ ------------ ------------ <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents........... $ 13,073,803 $ 13,073,803 $ 71,893,803 Total assets........................ 14,711,739 14,711,739 73,531,739 Long-term debt...................... 288,043 288,043 288,043 Redeemable convertible preferred stock............................. 32,974,359 -- -- Deficit accumulated during the development stage................. (22,592,093) (22,592,093) (22,592,093) Total stockholders' equity (deficit)......................... (20,616,829) 12,357,530 71,177,530 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001028442_sequoia_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001028442_sequoia_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding us and our common stock being sold in this offering and our consolidated financial statements and the financial statements of Radian Systems, Inc. and the related notes appearing elsewhere in this prospectus. Overview Sequoia Software Corporation provides XML-based Internet software for creating interactive portals. Portals, popularized by companies like Yahoo and Excite , provide users with the ability to search for, find and view information located in different systems, over a computer network or on the Internet. Interactive portals add an additional dimension, enabling users to add, edit and update data back to the original information source. Enterprises are deploying interactive portals to address a variety of market opportunities. Businesses need to manage the increasing amounts of information flowing into and out of the enterprise in order to improve employee efficiency. By better leveraging these information assets, businesses are enhancing how employees, customers, suppliers and partners access and interact with those information resources to generate new business opportunities and increase productivity. Additionally, businesses are deploying interactive portals to exploit new market opportunities for web-based commerce initiatives. New web-based marketplaces and information services are utilizing portal software to deploy their sites more rapidly and cost-effectively, and to enhance the overall user experience. Our products address the growing demand for this new breed of information solutions. Our flagship product is the Sequoia XML Portal Server, or XPS. We believe that XPS is the first interactive portal software product that uses XML as its core technology. XML, an approved Internet standard, is a technology that is being utilized to facilitate more efficient commerce-based activities over the Internet. XML is a standard that enables meaning or context to be coded into information. Because XML is an Internet standard, we believe it is rapidly emerging as a key enabling technology for Internet software. XPS utilizes XML s contextual capability to integrate, extract and intelligently aggregate data and content from disparate sources such as customer databases, groupware products, business intelligence solutions, financial and sales applications, as well as the Internet. Information is channeled to users based upon each user s individualized needs. Once XPS aggregates information, it leverages our patent pending XML-based technologies to provide users with a variety of features and benefits. These features and benefits include context-based searching, security, personalization of presentation for each individual user and data interactivity. These capabilities meet a growing need among businesses for standards-based Internet software that can tap into today s vast enterprise and Internet information reservoirs in order to bring information and people together. The Sequoia Solution With XPS, an enterprise can integrate multiple sources of information into a unified, personalized interface for deploying portals that serve employees, suppliers, customers and 5457 Twin Knolls Road Columbia, MD 21045 (410) 715-0206 (Address of Principal Executive Offices) Table of Contents partners. We believe our comprehensive, integrated, interactive solution provides our clients with the following benefits: Streamlined Business Processes; Improved Decision-Making; Enhanced Revenue Opportunities; Ability to Leverage Existing Technology; and Scalable, or Readily Expandable, XML-based Architecture. We believe these aspects of XPS improve productivity, reduce costs, encourage growth, and create a more cost-effective solution for our customers. The Sequoia Strategy Our goal is to be the market leader for XML-based, Internet software for creating interactive portals. Our solution consists of XML-based portal software and services that enable businesses to create, deploy and manage interactive portals. The key elements of our business strategy are to: Maintain and Extend Leadership in XML-based Interactive Portal Software Market; Expand Product Offerings; Further Develop Indirect Distribution Channels; Extend Our Strategic Relationships; and Leverage Radian Systems Customer Base to Enhance Sales of XPS. Richard C. Faint, Jr. Chief Executive Officer Sequoia Software Corporation 5457 Twin Knolls Road Columbia, MD 21045 (410) 715-0206 (Name, address, including zip code and telephone number, including area code of agent for service) Unless otherwise indicated, all information in this prospectus assumes that: the over-allotment option granted to the underwriters by us is not exercised; the conversion of all shares of our outstanding series A, series B, series C, and series D redeemable convertible preferred stock into common stock occurs immediately upon completion of this offering; and a one-for-four split and a three-for-two split of our capital stock has been effected. Copies to: Edwin M. Martin, Jr., Esquire Piper Marbury Rudnick Wolfe LLP 1200 19th Street, NW Washington, DC 20036 (202) 861-3900 Michael P. Rogan, Esquire Skadden, Arps, Slate, Meagher Flom LLP 1440 New York Avenue, NW Washington, DC 20005 (202) 371-7000 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] (1) Prior to February 1996, we operated as a limited liability company and therefore we have not presented share and per share data for the year ended December 31, 1995. CALCULATION OF REGISTRATION FEE (in thousands) Balance Sheet Data: Cash and cash equivalents $ 4,286 $ 36,940 Working capital 6,422 39,076 Total assets 19,603 53,257 Long-term debt, excluding current portion 485 485 Redeemable convertible preferred stock 143,619 Total common stockholders equity (deficit) (130,502 ) 46,771 We have not presented our redeemable convertible preferred stock as part of our stockholders equity because it is mandatorily redeemable after November 2004. All of these shares will automatically convert into common stock upon consummation of this offering. Sequoia and the Sequoia logo as displayed on the cover of this prospectus are our trademarks. Trademark registration applications are pending for Sequoia XML Portal Server and Xdex. All other trade names, trademarks and service marks used in this prospectus are the property of their respective owners. Principal Offices Our principal executive offices are located at 5457 Twin Knolls Road, Columbia, Maryland 21045 and our telephone number is (410) 715-0206. Our Web site address is www.sequoiasoftware.com. We do not intend for the information on our Web site to constitute part of this prospectus. Richard C. Faint, Jr., Chief Executive Officer and Chairman of the Board 18,750 1.68% $ 0.35 3/5/09 162,250 268,376 431,194 Richard C. Faint, Jr., Chief Executive Officer and Chairman of the Board 93,750 8.41% $ 1.86 7 11/23/09 668,750 1,199,380 2,013,470 Mark A. Wesker, President and Chief Operating Officer 75,000 6.73% $ 1.86 7 11/23/09 535,000 959,504 1,610,776 Marc E. Rubin, Chief Accounting Officer 18,750 1.68% $ 0.35 3/5/09 162,250 268,376 431,194 Anil Sethi, Chief Technology Officer 56,250 5.04% $ 1.86 7 11/23/09 401,250 719,628 1,208,082 Kenneth E. Tighe, Executive Vice President, Sales 56,250 5.04% $ 1.86 Table of Contents
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001029129_quality_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001029129_quality_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the Risk Factors section. Our Company We are a provider of health insurance claim reimbursements and health insurance benefits administration software. We are marketing what we believe to be the only currently available Internet-based business-to-business software capable of promptly adjudicating and approving for payment the majority of healthcare claims. We are adding an Internet-based product because of the numerous potential benefits associated with the Internet including ease of access, speed of data transfer and reduced costs. Our Internet-based product will provide access to our software that we have marketed to the healthcare industry since 1995. We also act as an outsourced application service provider, or ASP, and provide other services to support our software. As an application service provider, we manage and support at our facilities the computer systems and networks needed by our customers to operate our claims and benefits administration software. Healthcare claims and benefit services include managing the interaction between: payors insurance companies, managed care organizations, government agencies, self-insured employers, third-party administrators, providers who maintain financial responsibility for healthcare claims and other enterprises that implement healthplans and pay the majority of healthcare expenses; providers physicians, dentists, medical and dental practice groups, laboratories, hospitals and other organizations that deliver medical care; and patients individuals who receive medical and dental care. Our products and services manage the interaction between payors, providers and patients by automating significant portions of the claims and benefit process such as the analysis of a specific patient s healthcare plan and related coverage to determine patient eligibility for healthcare benefits, the calculation of the payor s and patient s responsibility for the claim and, for certain customers, the authorization of referrals to other providers. Traditionally, our customers have been payors and providers who maintain financial responsibility for the care they deliver. As of April 17, 2000, we had 30 customers collectively representing 3.3 million patient lives. We currently license our software for fees based on the number of lives covered by the healthplans administered by our customers and expect to continue to license software to customers who choose not to use our Internet-based products. We also receive fees for services related to installing and modifying our software. To date, we have received 90% of our revenues from licensing fees for our products and 10% of our revenues from the provision of support services in our capacity as an application service provider. Our Internet-based product will generate fees on a per transaction basis. In 1999, approximately 56% of our revenues were derived from four of our 27 customers. In November 1999, we began marketing our products to companies involved in Internet-based healthcare commerce. Currently, we have joint marketing and distribution arrangements with Healtheon/ WebMD Corporation, Synertech Health System Solutions, Inc. and the Trizetto Group, Inc. To date, we have not obtained revenue from these contracts or from our Internet-based product. Approximately 4.7 billion healthcare claims were processed in the United States in 1999, of which approximately 85% of hospital claims and 43% of physician claims were submitted through electronic data interchange, with the balance submitted in paper form. Providers typically submit these claims through a clearinghouse or third-party intermediary. After the initial sorting and processing, the clearinghouse then sends claims to the appropriate payor for completion of the adjudication process. This sequential process averages 42 days, at an industry average cost of approximately $21 per claim. The length of time and cost Loss from operations (430 ) (583 ) (671 ) (1,119 ) (872 ) (202 ) Other (expense) income: Interest expense (22 ) (33 ) (20 ) (6 ) (7 ) (15 ) Interest income 0 12 30 24 12 5 Other 3 5 (9 ) (33 ) 5 AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents per claim increases significantly if any information submitted by the provider is incorrect, incomplete or inconsistent with the policies of the payor. Historically, most healthcare information technology vendors have not been able to offer products that adjudicate and approve for payment healthcare claims in a timely, cost effective and efficient manner. We believe our rules-based adjudication software meets this need by automating the analysis of the numerous rules that comprise an individual s specific benefit coverage that determine everything from a patient s co-payment and deductible obligations to whether or not a medial procedure or drug is covered by the plan. Our products and services streamline the claims adjudication and payment approval process by automatically determining the correct amount that should be paid to a provider for most claims. We believe most claims processed using our Internet product can be adjudicated on a same-day basis, as opposed to days or even weeks using many current systems, at a cost we estimate will average from $2 to $5. Our Internet product enables the effective receipt and distribution of claims data and payment authorization which we believe will ultimately result in administrative savings for both payors and providers. Currently we have no customers using our Internet-based product. Our Risks An investment in our common stock has significant risk. For example we: had an accumulated deficit of $7.6 million at December 31, 1999; had net losses for 1999, 1998 and 1997 of approximately $2.4 million, $2.9 million, and $1.1 million, respectively; anticipate incurring substantial operating losses and negative operating cash flow in the foreseeable future; and operate in a highly competitive market. Our Opportunity We believe that the ability to reduce the time in which providers receive a meaningful financial benefit is critical to increasing the rate at which they will adopt our Internet-based administration products. A key benefit of our Internet-based adjudication product is that it affords those providers who also function as payors because they maintain financial responsibilities for healthcare costs improved certainty of payment through rapid claims adjudication, which we believe enables these providers to better use traditional financing sources to enhance their cash flow. In addition, we believe our products and services will reduce erroneous claims appeals and the duplication of claims, thereby immediately reducing payors administration costs. We believe that these near-term financial benefits will increase the rate of adoption of our Internet-based administration products by providers and payors. Our products and services effectively and efficiently manage communication, interaction and information between the provider and the payor. By applying our proprietary, rules-based software, our products and services reduce human data entry and minimize less efficient electronic data interchange, mail, fax, phone and e-mail communications. This automation significantly increases the speed and accuracy of claims processing and settlement and provides our customers with the following benefits: significant cost savings; increased accuracy and efficiency; accelerated financial certainty; rapid claims processing; adaptable and flexible product delivery; improved data management and reporting capability; Loss from operations (503 ) (801 ) Other (expense) income: Interest expense (23 ) (36 ) Interest income 1 0 Other 4 QUALITY CARE SOLUTIONS, INC. (Exact name of registrant as specified in its charter) Nevada 7374 86-0690975 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 5030 East Sunrise Drive Phoenix, Arizona 85044 (480) 940-6432 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Table of Contents system and data security; and aid in government compliance. Our Products and Services The core of our products and services is the QMACS/ aQDEN software which offers fully automated claims adjudication capabilities together with other administration functions for the medical and dental industries. These adjudication capabilities include financial management reporting, member administration, provider administration, benefit plan administration and employer and policy administration. We are marketing a new product, aQHealth, to enable us to deliver QMACS/aQDEN through the Internet to providers, thereby increasing payors accessibility to providers and rendering the claims adjudication process even more efficient. Additionally, we have developed an application service provider capability, aQServ, which provides payors with the benefits of our QMACS/aQDEN software on an outsourced basis where we manage and support at our facilities the computer systems and networks needed by our customers to operate our products. Our Internet-based product provides the same capabilities through the Internet, making them accessible from providers offices without purchasing or installing our software. In providing these services, we individually integrate the specific rules of our customers healthplans into our software enabling our software to automate the analysis of various healthplans and related claims and benefits administration. We also provide implementation services, including the programming and entry of specific benefit plan rules, for all of our products and services. Upon completion of this offering, our executive officers and directors, together with their affiliates Dominion Fund IV, L.P., Paradise Canyon Ventures, LLC and Aztore Holdings, Inc., will beneficially own, in the aggregate, approximately 52% of our outstanding common stock. These stockholders will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors and significant corporate transactions such as mergers, acquisitions and other business combinations. Our executive offices are located at 5030 East Sunrise Drive, Phoenix, Arizona 85284, and our telephone number is (480) 940-6432. Our World Wide Web address is www.qmacs.com. Information on our Web site is not part of this prospectus. We were incorporated on August 19, 1991 as an Arizona corporation and reincorporated as a Nevada corporation on July 14, 1997. Income (loss) from operations 87 (1,029 ) (1,058 ) (2,803 ) (2,379 ) Other income (expense), net Total other expense Gregory S. Anderson Quality Care Solutions, Inc. 5030 East Sunrise Drive Phoenix, Arizona 85044 (480) 940-6432 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents The Offering Common stock offered 5,000,000 Common stock outstanding after the offering 20,176,681 Use of proceeds To fund increases in our sales and marketing capabilities; to fund product development programs; for working capital; for payment of approximately $2.1 million of preferred stock cumulative dividends; to fund potential acquisitions, if any; and for general corporate purposes. Nasdaq National Market symbol QCSI All information in this prospectus reflects a four for three (4:3) reverse stock split to be effected prior to the closing of this offering. Unless we specifically state otherwise, the information in this prospectus does not take into account the issuance of up to 750,000 shares of common stock which the underwriters have the option to purchase solely to cover over-allotments. If the underwriters exercise their over-allotment option in full, 20,926,681 shares of common stock will be outstanding after the offering. The number of shares of common stock to be outstanding immediately after the offering is based upon shares outstanding as of December 31, 1999, and does not take into account 2,350,188 shares of common stock issuable upon exercise of options outstanding at a weighted average exercise price of $0.78 per share, and 860,932 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $1.42 per share. A warrant for the purchase of 499,723 shares of common stock at exercise prices ranging from $2.00 to $8.00 per share is contingently issuable based upon future performance. Copies To: Frank M. Placenti, Esq. Chad A. Freed, Esq. Bryan Cave LLP Two North Central Avenue, Suite 2200 Phoenix, Arizona 85004-4496 (602) 364-7000 (602) 364-7070 (Fax) Philip J. Boeckman, Esq. Cravath, Swaine Moore Worldwide Plaza 825 Eighth Avenue New York, New York 10019 (212) 474-1000 (212) 474-3700 (Fax) (in thousands) Balance Sheet Data: Cash and cash equivalents $ 297 $ 354 $ 55,154 Working capital (deficiency) (143 ) (82 ) 54,718 Total assets 2,444 2,501 57,301 Long-term obligations, net of current portion 1,043 451 451 Preferred stock 7,340 Stockholders equity (deficit) (7,305 ) 688 55,488 The pro forma balance sheet data reflects the automatic conversion into common stock of all outstanding convertible preferred stock and of a convertible note payable. The pro forma as adjusted balance sheet data represents the pro forma totals adjusted to reflect this offering. Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, as amended, check the following box and list the securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, as amended, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, as amended, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] Table of Contents
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001031951_copper_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001031951_copper_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read this summary together with the more detailed information and financial statements and notes appearing elsewhere in this prospectus. You should carefully consider, among other things, the matters set forth in "Risk Factors." THE COMPANY Copper Mountain is a leading supplier of high-speed digital subscriber line, or DSL, based communications products. Our solutions enable telecommunications service providers to provide high-speed, cost-effective connectivity over the existing copper wire telephone infrastructure to the business, multi-tenant unit and residential markets. We believe there is significant demand for high-speed data access services, especially among business users who have found current solutions to be inadequate or too expensive. The emergence of electronic commerce, business usage of web-based communications, remote access for teleworkers, applications hosting and other services have generated enormous traffic for the existing communications infrastructure. While there are a number of alternatives to deliver high-bandwidth connectivity, we believe that none has the cost, performance and coverage advantages of using the existing copper wire telephone infrastructure. DSL is a technology that was developed to enable telecommunications service providers to exploit this existing infrastructure to provide guaranteed, dedicated bandwidth at a low cost to virtually all businesses and homes in the United States. Telecommunications service providers are seeking vendors that have effectively incorporated DSL into communications equipment solutions enabling them to offer cost-effective, full-coverage, high-bandwidth data access services. Our flexible, scalable solution consists of the following products: CopperEdge DSL access concentrators, CopperRocket DSL customer premise equipment, and CopperView network management tools. Our products offer the following benefits: . Support for Business Applications. Our products enable telecommunications service providers to deliver business services such as high-speed Internet access, corporate networking, teleworking and packet-based voice solutions. . Full Coverage DSL. Our symmetric DSL and ISDN DSL-based products allow our telecommunications service provider customers the flexibility and range to reach their targeted customers. . Multi-Vendor Customer Premise Equipment Interoperability. We have partnered with third-party DSL customer premise equipment manufacturers through our CopperCompatible program to develop a broad line of modems, routers and other innovative customer premise equipment that is compatible with our CopperEdge DSL access concentrators. . Trouble Free Operations. Our products are designed to reduce installation and support requirements for our customers while allowing large scale central-office based deployment of DSL solutions with a zero-installation "plug and play" DSL customer premise equipment that eliminates complex configuration issues for the end user. . Support for Multiple Services. Our platform is a highly-scalable and cost-effective platform that addresses the strong demand for Internet access services. In addition, the CopperEdge products maximize return on investment through support of value added Frame Relay, VPN and voice services. Unlike most DSL access multiplexer platforms, the Copper Edge solution delivers advanced packet processing, class of service using weighted fair queuing, and subscriber aggregation to support multiple simultaneous services. Our objective is to be the leading supplier of DSL solutions to telecommunications service providers. We will focus on expanding our presence in the business and multi-tenant building markets. In addition, we will address the emerging opportunities developing in the residential market as telecommunications service providers seek to offer 1. <PAGE> DSL services to residential subscribers seeking high-speed access. As this trend toward broad deployment of DSL Services evolves, we anticipate significant opportunities for us to deploy new offerings, such as our recently introduced G. Lite Line Card, that leverages both our technology and our relationships with service providers. Finally, we are working to drive interoperability of DSL technology to facilitate faster and broader market acceptance. We sell our products primarily through a direct sales force and selected original equipment manufacturers and distributors to telecommunications service providers. As of December 31, 1999, we have sold over 4,600 CopperEdge DSL access concentrators. We have also formed strategic relationships with Lucent Technologies Inc. and 3Com Corporation to allow us to expand our distribution and market presence. In addition, to facilitate faster and broader market acceptance of our solutions, we have promoted a "CopperCompatible" program through which we offer licenses of our DSL customer premise equipment technology to other manufacturers of customer premise equipment. On February 29, 2000 we completed our acquisition of OnPREM Networks Corporation, which we refer to in this prospectus as OnPREM. OnPREM is a developer of highly integrated DSL solutions for the small and medium building multi-tenant unit, or MTU, market whose products compliment our existing MTU product, the CopperEdge 150, or CE150. We believe that our acquisition of OnPREM will enable us to provide enhanced services to our customers. We were incorporated in California in 1996 and reincorporated in Delaware in 1999. Our principal executive offices are located at 2470 Embarcadero Way, Palo Alto, California 94303, and our telephone number is (650) 687-3300. THE OFFERING <TABLE> <S> <C> Common stock offered by Copper Mountain................ 0 shares Common stock offered by the selling stockholders....... 1,142,293 shares Common stock to be outstanding after the offering...... 49,819,362 shares Use of proceeds........................................ We will not receive any proceeds from the sale of common stock by the selling stockholders Proposed Nasdaq National Market symbol................. CMTN </TABLE> The foregoing information is based upon shares outstanding as of February 29, 2000. - ---------- Except as otherwise indicated, all information in this prospectus has been adjusted to reflect the 100% stock dividend that was distributed to our stockholders on December 10, 1999, also referred to herein as a 2-for-1 stock split. 2. <PAGE> SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The summary statement of operations data for the years ended December 31, 1999, 1998, 1997, for the period March 11, 1996 (inception) to December 31, 1996, the summary pro forma unaudited statement of operations data for the year ended December 31, 1999, the summary unaudited statement of operations data for the three months ended March 31, 2000 and 1999, the summary unaudited balance sheet data at March 31, 2000, the summary balance sheet data at December 31, 1999 and the summary pro forma unaudited balance sheet data at December 31, 1999 set forth below, is qualified in its entirety by reference to, and should be read in conjunction with, the financial statements included elsewhere in this prospectus. The unaudited pro forma financial information reflects the acquisition of OnPREM as if such acquisition had been completed as of January 1, 1999 and is derived from the unaudited pro forma combined condensed financial statements and the notes thereto, which are included elsewhere in this prospectus. The unaudited pro forma financial information is intended for informational purposes only and is not necessarily indicative of the future financial position or results of operations of the consolidated company, or of the financial position or results of operations of the company that would have actually occurred had the acquisition been effected as of the dates indicated above. <TABLE> <CAPTION> MARCH 11, 1996 (INCEPTION) YEAR ENDED DECEMBER 31 THROUGH --------------------------------------------- DECEMBER 31 1999 ----------- ------------------- 1996 1997 1998 ACTUAL PRO FORMA ---- ---- ---- ------ --------- (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenue ........................................ $ -- $ 211 $ 21,821 $ 112,723 $ 112,723 Gross profit (loss) ................................ -- (1,506) 9,421 59,721 59,721 Income (loss) from operations ...................... (2,225) (11,187) (10,524) 16,611 (8,022) Net income (loss) .................................. (2,181) (11,016) (10,331) 12,217 (11,282) Basic net income (loss) per share .................. $ (5.84) $ (7.81) $ (3.87) $ .39 Diluted net income (loss) per share ................ $ (5.84) $ (7.81) $ (3.87) $ .23 Pro forma basic and diluted net loss per share ..... $ (.35) Shares used in basic per share calculations ........ 374 1,410 2,666 31,289 Shares used in diluted per share calculations ...... 374 1,410 2,666 52,282 Shares used in pro forma basic and diluted per share calculations ...................................... 32,559 THREE MONTHS ENDED MARCH 31 ------------------ 1999 2000 ---- ---- (UNAUDITED) <S> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenue ........................................ $ 13,217 $ 60,824 Gross profit ....................................... 6,833 32,722 Income (loss) from operations ...................... (1,135) 8,440 Net income (loss) .................................. (1,036) 13,673 Basic net income (loss) per share .................. $ (.23) $ .28 Diluted net income (loss) per share ................ $ (.23) $ .24 Shares used in basic per share calculations ........ 4,417 48,593 Shares used in diluted per share calculations ...... 4,417 57,550 </TABLE> <TABLE> <CAPTION> AT MARCH 31, AT DECEMBER 31, 1999 ------------ -------------------- 2000 ACTUAL PRO FORMA ------------ -------- --------- <S> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short-term investments $ 141,289 $117,169 $118,947 Working capital ................................. 145,906 132,187 131,636 Total assets .................................... 269,057 165,775 233,750 Long-term debt and capital lease obligation, .... 3,977 4,044 4,044 less current portion Total stockholders' equity ...................... 230,023 143,321 208,957 </TABLE> 3. <PAGE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001034072_deltagen_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001034072_deltagen_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD CONSIDER BEFORE BUYING SHARES IN THIS OFFERING. THEREFORE, YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE RISKS OF PURCHASING OUR COMMON STOCK DISCUSSED UNDER THE "RISK FACTORS" SECTION AND OUR FINANCIAL STATEMENTS AND THE RELATED NOTES. DELTAGEN We have developed technology to convert raw genetic data into mammalian gene function information to help pharmaceutical and biotechnology companies expedite the drug discovery process. Our technology enables us to select genes believed to be relevant to disease and delete, or knockout, these genes in mice, which allows us to gather information about the role of these genes in disease. We then use an extensive analysis program to assess the function and potential pharmaceutical relevance of these genes. Our technology allows us to generate targeted gene knockouts in mice on a large scale and at a fast rate. To promote more efficient use of our data, we have developed DeltaBase, a proprietary, searchable database that will provide immediate access to gene function information contained in the database and potential targets for drug discovery. OUR OPPORTUNITY Pharmaceutical and biotechnology companies are continually challenged to develop and market increased numbers of drugs. Recent advances have led to the identification of approximately 140,000 genes of which 3,000 to 10,000 are believed to have potential as drug targets. This is a significant increase over the approximate 500 targets that are currently the primary focus of drug development. Seeking to capitalize upon the opportunity to discover new drug targets, pharmaceutical, biotechnology and genomics companies are rapidly pursuing genomics-based drug discovery programs to identify genes that represent commercially viable drug targets. We believe traditional target discovery methods are likely to be insufficient to evaluate such a large number of genes as potential drug targets. Consequently, we believe pharmaceutical and biotechnology companies would benefit from a more rapid and high-volume approach for the selection of genes that represent valid drug targets. OUR APPROACH We have developed a fully integrated system to validate drug targets. Our approach moves rapidly from gene identification to the determination of gene function in a mammalian organism. Additionally, we pursue patents to protect the intellectual property rights that we generate relating to gene function. To commercialize our technology, we have developed the following programs: DELTABASE is our proprietary database that we designed to provide subscribers with immediate access to target validation information on genes that we have selected for their relevance to the drug discovery process. This searchable database will enable our subscribers to make decisions regarding the selection of drug targets and pursue those targets they consider to have the highest degree of commercial relevance. In addition, subscribers to DeltaBase will have the right to access our intellectual property on gene function. By providing earlier access to extensive mammalian gene function information, we believe that we can improve the efficiency of the drug discovery process by allowing subscribers to make earlier decisions regarding drug target viability. We recently launched our DeltaBase product with Glaxo Wellcome as our initial subscriber. DELTASELECT is our target validation program that we provide to potential DeltaBase subscribers. Under this program, our customers select genes for entry into our target validation system and receive the resulting gene function information utilizing the same information technology platform employed in DeltaBase. We also intend to use DeltaSelect to advance potential new database product offerings with our customers. Currently, our DeltaSelect customers are Merck & Co., Pfizer, Inc., Roche Biosciences, Schering-Plough Research Institute and Glaxo Wellcome. DELTA-GT is our program that simultaneously identifies and determines the function of proteins that are secreted in a mammalian organism. Examples of secreted proteins that have already allowed other companies to develop successful drugs include insulin, human growth hormone, and erythropoeitin, or EPO. We believe that our Delta-GT technology represents a system for developing potential drug candidates. We are currently not seeking to commercialize any drug candidates through our Delta-GT program. OUR STRATEGY Our goal is to be the leading provider of data on the function, role and disease relevance of mammalian genes. The key elements of our strategy to achieve this goal include: - becoming the most comprehensive source of information on mammalian gene function and target validation by expanding our proprietary technologies and developing systems to increase the scale, scope and depth of our database content; - focusing on the commercial needs of our customers by delivering valuable information and facilitating real-time access and searching of DeltaBase; - continuing to pursue intellectual property rights for what we believe to be our commercially relevant inventions, products and methods and offering our customers access to our intellectual property portfolio; - pursuing early stage development of targets found through our Delta-GT program; and - acquiring technologies to meet the target validation needs of our customers. As we are a development stage company with a limited operating history and an unproven business strategy, there can be no assurance that we will succeed in achieving our goal. Moreover, we face serious competition from others attempting to determine gene function and cannot assure you that our technology and product offerings will be commercially viable. -------------- We were incorporated in Delaware in January 1997 under the name Deltagen, Inc. Our principal executive offices and primary research facilities are located at 1003 Hamilton Avenue, Menlo Park, California 94025, and our telephone number is (650) 752-0200. THE OFFERING <TABLE> <S> <C> Common stock offered................................. 7,000,000 shares Common stock reserved................................ 700,000 shares of the common stock included in this offering have been reserved for sale to our directors, officers and employees, as well as to clients, vendors and individuals associated with us. Common stock outstanding after this offering......... 28,804,437 shares Use of proceeds...................................... For expansion of product and technology development, growth of our sales and marketing organization, investment in intellectual property protection, working capital and general corporate purposes. Nasdaq National Market symbol........................ "DGEN" </TABLE> Unless otherwise indicated, all information in this prospectus: - assumes an 8-for-7 forward split of our capital stock prior to the completion of this offering; - assumes no exercise of the underwriters' option to purchase up to 1,050,000 additional shares of common stock to cover over-allotments; and - reflects the conversion of each of the 18,137,486 outstanding shares of our preferred stock into 18,137,486 shares of our common stock automatically upon the closing of this offering. The number of shares of common stock to be outstanding immediately after the offering: - is based upon 21,804,437 shares outstanding as of March 31, 2000; - does not take into account 1,266,230 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2000, at a weighted average exercise price of $0.67 per share, 222,256 shares of common stock issuable upon exercise of options granted on May 26, 2000, at a weighted average exercise price of $7.88 and 621,313 shares of common stock issuable upon exercise of options granted on July 7, 2000, at a weighted exercise price of $12.60; - does not take into account 43,101 shares of Series B preferred stock, convertible into common stock upon the closing of this offering and issuable upon the exercise of warrants outstanding as of March 31, 2000, at an exercise price of $1.53 per share; - does not take into account 457,143 shares of Series C preferred stock, convertible into common stock upon the closing of this offering and issuable upon the exercise of a warrant outstanding as of July 31, 2000, at an exercise price of $3.13; and - does not take into account 13,931 unissued shares authorized for future awards under our 1998 Stock Incentive Plan, 5,485,714 unissued shares authorized for future awards under our 2000 Stock Incentive Plan and 1,142,857 unissued shares authorized for future issuance under our Employee Stock Purchase Plan. -------------- Deltagen-Registered Trademark- is our company's registered trademark. DeltaBase-TM-, DeltaSelect-TM-, Delta-GT-TM- and DeltaXpress-TM- are our common law trademarks. This prospectus also contains brand names, logos, service marks and trademarks of other companies. SUMMARY FINANCIAL DATA <TABLE> <CAPTION> PERIOD FROM JANUARY 28, 1997 (DATE OF INCEPTION) YEARS ENDED THREE MONTHS TO DECEMBER 31, ENDED MARCH 31, DECEMBER 31, ------------------- ------------------- 1997 1998 1999 1999 2000 ------------------- -------- -------- -------- -------- (UNAUDITED) <S> <C> <C> <C> <C> <C> (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Contract revenue............................... $ -- $ 381 $ 1,240 221 286 ------- ------- -------- ------- -------- Operating expenses: Research and development..................... 879 3,360 12,144 2,236 5,627 General and administrative................... 416 638 2,932 248 2,045 ------- ------- -------- ------- -------- Total operating expenses................... 1,295 3,998 15,076 2,484 7,672 ------- ------- -------- ------- -------- Loss from operations........................... (1,295) (3,617) (13,836) (2,263) (7,386) Interest income (expense), net................. 40 265 (11) 68 91 ------- ------- -------- ------- -------- Net loss....................................... (1,255) (3,352) (13,847) (2,195) (7,295) Deemed dividend related to beneficial conversion of preferred stock................ -- -- -- -- (22,360) ------- ------- -------- ------- -------- Net loss attributable to common stockholders... $(1,255) $(3,352) $(13,847) $(2,195) $(29,655) ======= ======= ======== ======= ======== Net loss per common share, basic and diluted... $ -- $ (8.00) $ (12.82) $ (2.44) $ (18.56) ======= ======= ======== ======= ======== Shares used in computing net loss per common share, basic and diluted (unaudited)...................... -- 419 1,080 898 1,598 ======= ======= ======== ======= ======== Pro forma net loss per share, basic and diluted...................................... $ (1.15) $ (1.64) ======== ======== Shares used in computing pro forma net loss per share, basic and diluted (unaudited)......... 12,018 18,136 ======== ======== </TABLE> Pro forma basic and diluted net income per share have been calculated assuming the conversion of all outstanding shares of convertible preferred stock as of March 31, 2000 into 18,137,486 shares of common stock as if the stock had been converted immediately upon its issuance. <TABLE> <CAPTION> MARCH 31, 2000 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (IN THOUSANDS) (UNAUDITED) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 17,961 $17,961 $107,901 Working capital............................................. 12,732 12,732 102,672 Total assets................................................ 25,075 25,075 115,015 Capital lease obligations, less current portion............. 14 14 14 Loans payable, less current portion......................... 2,051 2,051 2,051 Redeemable convertible preferred stock...................... 36,807 -- -- Total stockholders' equity (deficit)........................ (19,327) 17,480 107,420 </TABLE> The pro forma balance sheet reflects the automatic conversion of 18,137,486 outstanding shares of convertible preferred stock as of March 31, 2000 into 18,137,486 shares of common stock. The pro forma as adjusted balance sheet reflects this automatic conversion and the sale of 7,000,000 shares of common stock offered at an assumed initial public offering price of $14.00 after deducting estimated underwriting discounts, commissions and offering expenses.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001034397_versata_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001034397_versata_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information found in greater detail elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk Factors" and the consolidated financial statements, before you decide to buy our common stock. OUR COMPANY Our comprehensive suite of software and services enables our customers to rapidly deploy e-business software applications that can be modified quickly to meet constantly changing business requirements. The migration of the commercial marketplace to the Internet and the movement of corporate communication and information management to intranets has resulted in a new operating model known as e-business. Our E-Business Automation System utilizes a unique business rules automation technology that redefines how companies create, deploy and modify the critical e-business software applications used to transact their online business. We believe our solution enables our customers to achieve a substantial time-to-market and business flexibility advantage compared to companies using traditional Web-based software application development tools. As of December 31, 1999, we had licensed our product to approximately 500 customers worldwide for use in a wide range of business-to-business, business-to-employee and business-to-consumer software applications. More than 35 customers have purchased our products and services for over $100,000, including Canadian Pacific Ships, El Paso Energy, Hilton Hotels, IBM, IM Group, Interim Services and ITT Fluid Technology. We have entered into a strategic marketing and development relationship with IBM to provide a single product offering that integrates our software with IBM's WebSphere(TM) Application Server Advanced Edition. This integrated product will be offered under both of our respective brand names. To complement our direct sales efforts, we have developed relationships with a variety of indirect sales channels and partnerships, and we plan to continue to develop more of these relationships in the future. With our solution, companies can: - rapidly create, deploy and maintain e-business software applications required to execute or modify their e-business strategy, even with few or no skilled Java programmers; - rapidly change the business rules required to implement critical shifts in their strategy, achieving a time-to-market and business flexibility advantage over traditional programming methods; - create and deploy e-business software applications that are compatible with various programming languages and that are readily integrated into legacy computing environments; and - utilize our comprehensive suite of professional services to automate e-business software applications without regard for internal staffing constraints. We intend to establish our solution as the foundation for the next generation of business-to-business Web-based software applications. To achieve this objective, our key growth strategies are to: - define the new paradigm for e-business automation and establish our E-Business Automation System as the industry standard; The information contained in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED MARCH 2, 2000 PROSPECTUS [VERSATA LOGO] 3,850,000 Shares Common Stock - -------------------------------------------------------------------------------- This is an initial public offering of shares of common stock of Versata, Inc. We are offering 3,850,000 shares in this offering. No public market currently exists for our common stock. We anticipate that the initial public offering price will be between $19.00 and $21.00 per share. We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol "VATA." - -------------------------------------------------------------------------------- INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 5. - -------------------------------------------------------------------------------- <TABLE> <CAPTION> PER SHARE TOTAL <S> <C> <C> Public offering price $ $ Underwriting discounts and commissions $ $ Proceeds to us $ $ </TABLE> The underwriters have an option to purchase 577,500 additional shares of common stock from us at the initial public offering price, less underwriting discounts and commissions, to cover any over-allotments of shares at any time until 30 days after the date of this prospectus. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- THOMAS WEISEL PARTNERS LLC DAIN RAUSCHER WESSELS SG COWEN DLJDIRECT INC. The date of this prospectus is , 2000 - enhance our position as a technology leader by increasing the functionality, performance, ease of use and scalability of our E-Business Automation System; - expand our sales efforts by adding more direct sales teams in North America, Europe and the Pacific Rim; - continue to complement our direct sales efforts with multiple indirect channels to provide additional marketing and sales support for our products and accelerate the successful deployment of e-business software applications using our solution; - establish additional marketing and technology relationships with leading vendors to increase our visibility in the marketplace and broaden the functionality of our solution; and - increase the size of our service and support organization to further expand our professional services capabilities and to provide high quality customer support. For the year ended December 31, 1999, our total revenue was $12.6 million compared to $4.0 million in the year ended December 31, 1998 and $1.4 million in the year ended December 31, 1997. Our net loss for the year ended December 31, 1999 was $21.8 million compared to $8.1 million in the year ended December 31, 1998 and $9.8 million in the year ended December 31, 1997. Our accumulated deficit was $53.4 million as of December 31, 1999. Versata, Inc., through its predecessors Vision Software Tools, Inc. and Image Innovation Solutions, Inc., was incorporated in California on August 27, 1991. We reincorporated in Delaware in February 2000. In September 1996, we began development of our first Web-based software product, which we began shipping commercially in September 1997. We plan to reincorporate in Delaware prior to the commencement of this offering. Our principal executive offices are located at 2101 Webster Street, Oakland, California 94612 and our telephone number is (510) 238-4100. Our Web site can be found at www.versata.com. Information contained in our Web site does not constitute a part of this prospectus. The inside front cover contains a brief description of the Versata E-Business Automation System and a graphic showing several classes of e-business software applications that can be deployed with the E-Business Automation System. THE OFFERING Common stock offered by us.......... 3,850,000 shares Common stock outstanding after this offering............................ 37,968,804 shares Use of proceeds..................... For general corporate purposes, including working capital, technology and product development and sales and marketing. See "Use of Proceeds" for more information regarding our planned use of the proceeds from this offering. Proposed Nasdaq National Market symbol............................ VATA The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of December 31, 1999. It also reflects the automatic conversion into common stock upon completion of this offering of (i) all series of preferred stock outstanding as of December 31, 1999 and (ii) 341,784 shares of Series F preferred stock issued in January 2000. In addition to the shares of common stock to be outstanding after this offering, there are: - 7,945,760 shares that could be issued upon the exercise of options outstanding as of February 29, 2000 at a weighted average exercise price of $4.16 per share; - 970,803 shares reserved for issuance under our option plans at February 29, 2000; - 537,982 shares that could be issued upon the exercise of warrants outstanding as of December 31, 1999 at a weighted average exercise price of $0.43 and 216,745 shares issuable upon conversion of preferred stock issuable upon the exercise of warrants outstanding as of December 31, 1999 at a weighted average exercise price of $3.41; and - 500,000 shares that could be issued to employees who elect to buy stock in the future under our employee stock purchase plan. Except as otherwise specified in this prospectus, all information in this prospectus: - assumes no exercise of the underwriters' over-allotment option; and - reflects our reincorporation into Delaware in February 2000. TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Prospectus Summary................... 1 Risk Factors......................... 5 Cautionary Note on Forward-Looking Statements......................... 17 Trademarks........................... 17 Use of Proceeds...................... 18 Dividend Policy...................... 18 Capitalization....................... 19 Dilution............................. 21 Selected Financial Data.............. 22 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 23 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> Business............................. 34 Management........................... 51 Related Party Transactions........... 63 Principal Stockholders............... 71 Description of Securities............ 75 Shares Eligible for Future Sale...... 79 Underwriting......................... 82 Legal Matters........................ 85 Experts.............................. 85 Where You Can Find Additional Information........................ 85 Index to Consolidated Financial Statements......................... F-1 </TABLE> ------------------------- You should rely only on the information contained in this document or to that which we have referred you. We have not authorized anyone to provide you with information that is different. This document may be used only where it is legal to sell these securities. The information in this prospectus is accurate only on the date of this document. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) You should read the following summary financial data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the accompanying consolidated financial statements and related notes which are included in this prospectus. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------------- 1997 1998 1999 ---------- ---------- ----------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenue.................................. $ 1,406 $ 3,950 $ 12,582 Gross profit................................... 95 1,468 5,962 Loss from operations........................... (10,012) (7,883) (21,496) Net loss....................................... (9,844) (8,134) (21,800) Net loss attributable to common stockholders... $ (9,844) $ (8,134) $ (32,600) Net loss per share attributable to common stockholders: Basic and diluted............................ $ (5.72) $ (3.99) $ (9.18) Weighted average shares outstanding.......... 1,720,649 2,038,393 3,552,409 Unaudited pro forma net loss per share: Basic and diluted............................ $ (0.87) Weighted average shares outstanding.......... 24,923,904 </TABLE> The unaudited pro forma net loss information gives effect to the conversion into common stock of all series of preferred stock outstanding as of December 31, 1999. <TABLE> <CAPTION> DECEMBER 31, 1999 --------------------------------- PRO PRO FORMA ACTUAL FORMA AS ADJUSTED ------- ------- ----------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................... $20,655 $22,155 $ 92,075 Working capital......................................... 16,215 17,715 87,635 Total assets............................................ 33,660 36,210 106,130 Total long-term liabilities............................. 320 320 320 Stockholders' equity.................................... 19,418 21,968 91,888 </TABLE> The pro forma information reflects the net proceeds of $1.5 million from the sale of 269,784 shares of Series F preferred stock on January 19, 2000 and the issuance of 72,000 shares of Series F preferred stock valued at $1.1 million in connection with a business acquisition on January 20, 2000. The pro forma as adjusted information also gives effect to: - the automatic conversion of all outstanding series of preferred stock into common stock upon completion of this offering; and - the receipt of the estimated net proceeds of $69.9 million from the sale of 3,850,000 shares of common stock in this offering at an assumed public offering price of $20.00 per share after deducting underwriting discounts and commissions and offering expenses. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001034460_concours_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001034460_concours_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. Because this is only a summary, it may not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including the "Risk Factors" section and our consolidated financial statements and the notes to those statements, before deciding to invest in our common stock. OUR COMPANY We deliver management and strategy consulting, research and executive education services which enable our clients to improve their performance and competitiveness. Currently we focus our services on advising Global 1000 and mid-size corporations in developing and deploying eBusiness strategies. We believe an eBusiness is a business that combines technology and human resource strategies to adapt and thrive in the new economy where business is being transformed by the capabilities of the Internet and other information technologies. We designed our operating model to enable us to rapidly evolve our services to anticipate and meet the needs of our clients in fast-changing markets. We currently provide consulting services in the following areas: - eBusiness and business strategy; - eBusiness solution implementation planning and management; - information technology strategy, implementation planning and management; and - custom executive education. Our operating model is based on four core capabilities: - Re.sults(R) research -- an ongoing series of 90-day research projects to discover and develop innovative management techniques, including current and future best practices; - Subscription-based multi-client programs -- a set of advisory conferences that bring together senior executives of clients who annually subscribe to a program and that provides these senior executives with new ideas and guidance on the pressing business issues and challenges they face; - Mindshare marketing -- an ongoing series of briefing materials on contemporary management issues that we distribute to over 15,000 senior executives as a means of gaining their attention, or "mindshare;" and - A dedicated salesforce of experienced sales professionals who develop new client relationships and maintain relationships with existing clients. We use these four capabilities to help us: - build long-term relationships with senior business and technology executives; - generate a flow of new ideas and consulting techniques; and - develop new consulting engagements and other business opportunities. All of our multi-client programs and a portion of our Re.sults research projects are subscription-based, which provides us with a recurring revenue stream. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED AUGUST 10, 2000 PROSPECTUS [THE CONCOURS GROUP, INC. LOGO] 2,500,000 SHARES THE CONCOURS GROUP, INC. COMMON STOCK $ PER SHARE ------------------ This is an initial public offering of common stock. We currently expect the initial public offering price to be between $15.00 and $17.00 per share. Our common stock has been approved for quotation on the Nasdaq National Market under the symbol "CCGP". ------------------ INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 7. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------ <TABLE> <CAPTION> PER SHARE TOTAL --------- -------- <S> <C> <C> Public Offering Price $ $ Underwriting Discount $ $ Proceeds to Concours (before expenses) $ $ </TABLE> The underwriters named in this prospectus may purchase up to 375,000 additional shares of common stock from us to cover any over-allotments. The underwriters expect to deliver the shares to purchasers on or about , 2000. ------------------ SALOMON SMITH BARNEY U.S. BANCORP PIPER JAFFRAY WILLIAM BLAIR & COMPANY , 2000 We have grown rapidly since our founding in January 1997. Our revenue has increased from $8.8 million in 1997 to $26.1 million in 1999, a compound annual growth rate of approximately 72%. From January 1997 through June 30, 2000, we lost approximately $17.5 million, and we anticipate a net loss at least through 2000. Based upon total revenue during 1999, our top ten clients in North America were: - Arrow Electronics, Inc.; - Ashland Inc.; - Borg-Warner Automotive, Inc.; - Cargill, Incorporated; - CarrAmerica Realty Corporation; - International Paper Company; - Novartis AG; - Schneider Electric SA; - A. Schulman Inc.; and - The United Illuminating Company. Of these ten clients, eight used all three of our consulting, research and multi-client services during 1999. For each of the last two years, over 75% of our multi-client and research clients renewed their subscriptions for at least one program. OUR MARKET OPPORTUNITY We believe there are significant opportunities for management and strategy consulting firms that can provide comprehensive, advanced eBusiness strategies and solutions in time frames that enable clients to meet the demands of their rapidly changing industries. Although many Internet professional service firms are beginning to offer strategy services, we seek to differentiate ourselves by providing a combination of critical capabilities that together help clients improve their performance and competitiveness in the new Internet-based economy. These capabilities are: - eBusiness and business strategy; - human resource and organizational expertise; - research-based advanced solutions; and - industry-leading ideas. In 1999, International Data Corporation estimated that spending on Internet consulting services will grow from $425 million in 1998 to $4.4 billion in 2003, a compound annual growth rate of approximately 60%. OUR SOLUTION We focus first and foremost on clients' business outcomes and critical business objectives, and then create solutions tailored to meet those objectives. Below are the key components of how we deliver client solutions: - Advanced solutions. We focus on providing clients with advanced solutions that combine the latest technological capabilities, business and human resource practices and innovative operating models. We constantly evolve our advanced solutions, many of which stem from our Re.sults research projects, so that we continually update our services. - Comprehensive solutions. We believe there is more to eBusiness than simply installing Web sites and other information systems, and that it takes more than technology to effect significant business improvement. We create comprehensive solutions to assist clients in transforming their organizations into eBusinesses. - Senior professionals. We have assembled a group of highly skilled consulting professionals from established firms who average over twelve years of relevant industry experience. Our professionals have expertise in numerous industries and business processes. - Speed of execution. Our methods are designed to share insights immediately and provide measurable value quickly. We typically structure projects to be completed within 15 to 90 days. [BACK OF FRONT COVER] WE HELP COMPANIES CHANGE THEIR FUTURE. [CONCOURS LOGO] OUR STRATEGY We are committed to creating an industry-leading, multinational management and strategy consulting, research and executive education firm that is at the leading edge of business practices and adjusts rapidly to the future needs of a growing client base. To achieve our goal, we are pursuing the following growth initiatives: - continue to develop and expand our services to anticipate and meet our clients' changing needs; - continue geographic expansion; - continue to attract and retain highly qualified professionals; - reformat and redistribute our Re.sults research; and - grow our multi-client programs and the amount of consulting services provided to multi-client participants. OUR OFFICES We were incorporated in Delaware in January 1997. Our principal executive offices are located at 3 Kingwood Place, 800 Rockmead Drive, Kingwood, Texas 77339 and our telephone number at that location is (281) 359-3464. THE OFFERING Common stock offered....... 2,500,000 shares Common stock outstanding after this offering........ 11,727,388 shares Use of proceeds............ Working capital, capital expenditures, expansion of our international operations, potential acquisitions of, or investments in, complementary businesses and other general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol..................... CCGP The number of shares of common stock outstanding after this offering as indicated above is based on 5,870,604 shares outstanding as of June 30, 2000, plus 3,356,784 shares of common stock to be issued and outstanding upon the automatic conversion of all of our outstanding convertible preferred stock upon the consummation of this offering. This number excludes: - 3,491,850 shares of common stock issuable upon the exercise of stock options outstanding as of June 30, 2000; and - 50,000 shares of common stock issuable upon the exercise of warrants outstanding as of June 30, 2000. As of June 30, 2000, options to purchase 606,750 shares of common stock were exercisable at a weighted average exercise price of $3.15 per share. All outstanding stock options had a weighted average exercise price of $6.37 per share. See "Management -- Our Stock Option Plans" and note 8 to our consolidated financial statements included elsewhere in this prospectus. All warrants outstanding as of June 30, 2000 had an exercise price of $5.00 per share. See "Description of Capital Stock." Unless otherwise indicated, all information contained in this prospectus assumes no exercise of the 30-day option granted to the underwriters to purchase up to 375,000 additional shares of our common stock to cover over-allotments, if any. RECENT ACQUISITION On February 29, 2000, we purchased all of the outstanding shares of capital stock of Cepro AB, a Swedish management consulting firm, from Cepro's stockholders in exchange for a total of 1,221,000 shares of our common stock valued at an estimated $12,210,000. Cepro provides consulting services for businesses throughout Sweden in areas such as strategic planning, financial analysis, e-commerce, marketing, information management, and executive and organizational development. Each employee of Cepro entered into an employment agreement as part of the acquisition. See "Related Transactions and Recent Acquisition" for a more detailed description of our acquisition of Cepro. Unless otherwise indicated, the description of our business and operating data provided for any date or period prior to March 1, 2000 in this prospectus does not include the business or operating data of Cepro. SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The summary historical financial data below for 1997, 1998 and 1999 is derived from our audited financial statements. The summary historical financial data below as of June 30, 2000 and for the six month periods ended June 30, 1999 and 2000, is derived from our unaudited financial statements prepared on a basis consistent with our audited financial statements and the notes to those statements. Operating results for the first six months of 2000 include results of operations of Cepro since February 29, 2000. The summary unaudited pro forma financial data below is derived from the pro forma financial statements included elsewhere in this prospectus. The financial data is qualified in its entirety by, and should be read in conjunction with, "Unaudited Pro Forma Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of Concours and Cepro and the notes to those statements included elsewhere in this prospectus. Both the unaudited pro forma statement of operations and balance sheet are adjusted for the conversion of all of our outstanding convertible preferred stock into 3,356,784 shares of common stock upon consummation of this offering. In addition, the pro forma statement of operations is adjusted for the effects of the following transactions that took place during February 2000: - the issuance of 805,425 shares of common stock upon conversion of $4.0 million of convertible debt held by Infologix (BVI) Limited, our largest stockholder, and the sale to them of 750,000 shares of common stock for $6.0 million, - the repayment of our $1.0 million bank line of credit, - the sale of 1,546,784 shares of Series B convertible redeemable preferred stock for $15.0 million to Thayer Equity Investors IV, L.P. and Thayer CGI Partners LLC, and - the acquisition of Cepro for 1,221,000 shares of our common stock, as if the transactions had occurred on January 1, 1999. The pro forma statement of operations data includes adjustments that are based upon available information and various assumptions and estimates that we believe are reasonable. You should not rely on this summary information to indicate the consolidated operating results we might have obtained had these events actually occurred. Also, you should not rely on this summary information to indicate the operating results we may achieve in the future. <TABLE> <CAPTION> PERIOD FROM INCEPTION, (JANUARY 22, 1997) YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, THROUGH ---------------------------------- --------------------------------------- DECEMBER 31, PRO FORMA PRO FORMA 1997 1998 1999 1999 1999 2000 2000 -------------------- --------- --------- ---------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenue.............. $ 8,812 $ 15,951 $ 26,080 $ 32,876 $ 11,544 $ 24,045 $ 25,300 Costs and expenses of services................. 5,775 12,996 19,732 25,248 9,382 14,970 15,588 ------- --------- --------- ---------- ---------- ---------- ---------- Gross margin............... 3,037 2,955 6,348 7,628 2,162 9,075 9,712 Other costs and expenses(1).............. 4,059 8,694 13,271 17,598(2) 6,404 10,394 11,343(2) ------- --------- --------- ---------- ---------- ---------- ---------- Operating loss............. $(1,022) $ (5,739) $ (6,923) $ (9,970) $ (4,242) $ (1,319) $ (1,631) ======= ========= ========= ========== ========== ========== ========== Net loss attributable to common stockholders...... $ (974) $ (5,665) $ (7,177) $ (10,309) $ (4,293) $ (3,763) $ (1,627) ======= ========= ========= ========== ========== ========== ========== Net loss per share attributable to common stockholders, basic and diluted.................. $ (0.43) $ (1.73) $ (2.32) $ (1.15) $ (1.39) $ (0.74) $ (0.18) ======= ========= ========= ========== ========== ========== ========== Shares used in computing basic and diluted net loss per share attributable to common stockholders............. 2,270,630 3,279,447 3,088,248 8,986,457 3,085,219 5,065,273 9,006,629 </TABLE> <TABLE> <CAPTION> DECEMBER 31, JUNE 30, -------------------------- ------------------------------------------ PRO FORMA PRO FORMA AS ADJUSTED 1997 1998 1999 2000 2000 2000(3) ------ ------- ------- ----------- ----------- -------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents...................... $1,485 $ 1,056 $ 705 $14,289 $14,289 $49,179 Working capital................................ 76 (2,033) (5,134) 13,465 13,465 48,355 Total assets................................... 4,058 5,804 8,848 39,874 39,874 74,764 Long-term debt, net of current portion......... -- -- 4,000 -- -- -- Total stockholders' equity (deficit)........... 364 (1,372) (8,187) 10,062 27,375 62,265 </TABLE> ------------------ (1) Includes costs and expenses for sales and marketing, general and administrative and stock-based compensation for all applicable personnel. (2) Includes $3.1 million for 1999 and $1.5 million for 2000 of amortization of intangibles related to the acquisition of Cepro and $0.2 million for 1999 and $0.7 million for 2000 of amortization of stock-based compensation. (3) Adjusted to reflect the sale of 2,500,000 shares of common stock in this offering at an assumed offering price of $16.00 per share and after deducting estimated underwriting discounts and offering expenses payable by us and the application of our net proceeds from the offering. See "Capitalization."
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+PROSPECTUS SUMMARY
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+PROSPECTUS SUMMARY THIS SUMMARY CONTAINS BASIC INFORMATION ABOUT US AND THIS OFFERING. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE SECTION ENTITLED "RISK FACTORS" AND OUR FINANCIAL STATEMENTS AND THE ACCOMPANYING NOTES BEFORE MAKING AN INVESTMENT DECISION ABOUT OUR COMMON STOCK. VISTA MEDICAL TECHNOLOGIES, INC. We develop, manufacture and market products that provide information to doctors performing minimally invasive general surgical, heart, head, neck and spine and other selected microsurgical procedures. Our products combine a head-mounted display with video cameras to provide surgeons with critical visual information during these microsurgical procedures. Our product lines include the ORPC Visualization and Information System for general surgery and other complex endoscopic procedures, the Series 8000 Advanced Visualization and Information System, for use in heart surgery and the StereoSite System, for use in microscopic and endoscopic procedures in head, neck and spine surgery. In general terms, endoscopic surgery involves a telescopic viewing device which is inserted into an incision in the body and which allows the surgeon to better view the internal part of the body being repaired. The development and subsequent widespread adoption of minimally invasive surgical procedures have revolutionized many surgical fields, including general surgery, orthopedics, gynecology and urology. Minimally invasive surgical procedures are performed through strategically placed ports or mini-incisions as opposed to using large incisions to gain surgical access. These procedures are designed to be as safe and effective as conventional surgery. The goal in using a minimally invasive procedure is to substantially reduce trauma, and pain and suffering, speed recovery, shorten the length of hospital stays and decrease many of the costs associated with patient care. However, while minimally invasive techniques have become the standard of care in certain high volume general surgical procedures, such as gall bladder removal, the adoption rate has been considerably slower for more complex procedures. We believe that the development of the various technologies required to drive renewed growth in general surgery is now being undertaken by several companies and that our advanced visualization and information technology will contribute to increasing adoption by providing the surgeon with enhanced depth perception to facilitate the performance of complicated, physically intricate tasks during complex minimally invasive procedures. An example of such a procedure, and the first in general surgery to be specifically targeted by us, is laparoscopic gastric bypass, a surgical treatment for weight control, in which we believe our 3-D visualization uniquely enhances procedure performance. The application of minimally invasive techniques to heart surgery is regarded as a potentially revolutionary development in modern surgery. Minimally invasive heart bypass and heart valve replacement or repair procedures avoid the trauma caused by cracking open the patient's chest and promise to significantly decrease pain and trauma and shorten recovery times. The use of these techniques, however, requires the surgeon to perform technically challenging procedures, including working on tiny delicate structures, such as a one millimeter heart vessel, with highly restricted access through small incisions. Heart surgeons use our systems to gain a clear and accurate view of the portions of the heart being repaired, without having to open the patient's chest to gain visual access to the heart. We believe that our visualization and information products also have application in other surgical areas, including general surgery, gynecology, urology and head, neck and spine. Our products can provide the surgeon with enhanced depth perception when performing complicated, physically intricate tasks, combined with the ability to view additional information in a voice-controlled, picture-in-picture format, to facilitate real-time decision making during surgery. Our products are based on the following principles which we believe are essential in advancing minimally invasive technologies: - Three-dimensional view of the anatomy, - High resolution images, managed electronically by the surgeon, - Improved surgical access through miniaturization technology, - Optimized ergonomics for the surgeon, to enhance performance, and, - Integration of images and information. Our business strategy is to become the leading developer and marketer of advanced visualization and information systems for complex minimally invasive procedures in general surgery, heart, head, neck and spine surgery and other selected microsurgical procedures. Key elements of our strategy include: - Develop applications for our technology which are specific to each surgical or medical specialty which we target; - Identify specific high-value procedures to facilitate our entry into the general surgery market; - Establish advanced visualization technologies as standard practice in minimally invasive heart surgery; - Promote our visualization solution for use in all types of heart surgery; - Increase the surgeon's real-time access to critical data; - Develop original equipment manufacturer customers with volume sales potential for endoscopic cameras; and - Enter into strategic relationships which ensure distribution or complement our technology resources. To assist in implementing the clinical portions of our strategy, we have established three clinical advisory boards made up of leading surgeons, focused on heart surgery, head, neck and spine microsurgery and general surgery and other specialties. Members of the advisory boards consult with us exclusively in the field of visualization. The advisory boards are intended to act as a clinical reference for us and to provide access to surgical evaluation and training sites for our visualization products. We were incorporated in the State of California as a wholly-owned subsidiary of Kaiser Aerospace in July 1993, became an independent entity in July 1995 when several venture capital funds became investors, and reincorporated in the State of Delaware in November 1996. Our principal executive offices are located at 5451 Avenida Encinas, Suite A, Carlsbad, California 92008, and our telephone number is (760) 603-9120. THE OFFERING <TABLE> <S> <C> Common stock offered by Vista Medical............ 7,000,000 shares Shares to be outstanding after the offering...... 20,795,525 shares Use of proceeds.................................. Working capital, funding the launch of our visualization product line for general surgery, general corporate purposes and for general product development. Nasdaq SmallCap Market symbol.................... VMTI </TABLE> The number of shares of our common stock to be outstanding after this offering is based on the number of shares outstanding as of December 31, 1999 and does not include 1,999,993 shares of common stock issuable upon exercise of options outstanding as of December 31, 1999 at a weighted average exercise price of $1.79 per share under our stock option plans and 74,264 shares of common stock issuable upon the exercise of warrants granted to Silicon Valley Bank and EGS Securities Corp. at an average exercise price of $5.05 per share. SUMMARY FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ---------------------------------------------------------- 1995 1996 1997 1998 1999 ------- ---------- --------- ---------- ----------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Sales.............................. $ 1,719 $ 2,244 $ 4,141 $ 6,572 $ 5,516 Cost and expenses: Cost of sales................... 1,272 2,253 4,559 6,119 7,521 Research and development........ 1,904 3,880 6,875 5,480 3,229 Sales and marketing............. 834 2,057 5,011 5,953 2,890 General and administrative 1,034 3,103 5,499 5,039 2,178 Restructuring expense........... -- -- -- 940 690 ------- ---------- --------- ---------- ----------- Total costs and expenses...... 5,044 11,293 21,944 23,531 16,508 ------- ---------- --------- ---------- ----------- Loss from operations............... (3,325) (9,049) (17,803) (16,959) (10,992) License income..................... -- 1,493 -- -- -- Interest income.................... 51 117 926 900 218 Other gains (losses)............... -- -- -- (662) 51 ------- ---------- --------- ---------- ----------- Net loss........................... $(3,274) $ (7,439) $ (16,877) $ (16,720) $ (10,723) ------- ---------- --------- ---------- ----------- ------- ---------- --------- ---------- ----------- Basic and diluted loss per share... $(88.49) $ (37.01) $ (2.51) $ (1.26) $ (0.79) Shares used in computing basic and diluted loss per share.......... 37,000 201,000 6,731,000 13,312,366 13,594,328 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 --------------------------- AS ACTUAL ADJUSTED ----------- ------------ (UNAUDITED) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments.......................... $ 1,658 $ 8,443 Working capital............................................................ 2,972 9,757 Total assets............................................................... 7,367 14,152 Total debt................................................................. -- -- Accumulated deficit........................................................ (57,941) (57,941) Total stockholders' equity................................................. 4,584 11,369 </TABLE> The "as adjusted" column above gives effect to the sale of 7,000,000 shares of common stock offered by us in this offering at an assumed offering price of $1.00 per share, and the application of the net proceeds therefrom, after deducting offering expenses payable by us. For a description of how we intend to use the proceeds of this offering, see "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001036960_fairchild_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001036960_fairchild_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary may not contain all of the information that may be important to you. You should read the entire prospectus, including the financial data and related notes, before making an investment decision. We have changed our fiscal year-end from the last Sunday in May to the last Sunday in December. Our first full fiscal year following this change will be the year ending December 31, 2000. We refer to the seven-month transition period ending December 26, 1999 as stub year 1999. This prospectus includes financial information for our fiscal years ended May 1997, 1998 and 1999 and for the six-month period ended November 28, 1999. The power device business, which we purchased on April 13, 1999 from Samsung Electronics Co., Ltd., reported on a calendar year basis. See "Glossary" for a description of other terms. FAIRCHILD INTERNATIONAL Fairchild International is the second-largest independent semiconductor company, based on pro forma Fiscal 1999 revenues, focused solely on multi-market products. Multi-market products are building block components that can be used in a wide range of applications and are found in virtually all electronic devices. While other semiconductor companies may generate greater revenues from the sale of multi-market products, these companies derive more of their revenues from the sale of other products than from multi-market products. We design, develop and market analog, discrete, logic and non-volatile memory semiconductors. Analog semiconductors are used to amplify electric signals and control power, light, color and sound functions in electronic devices. Discrete semiconductors perform basic signal amplification and switching functions. Logic semiconductors utilize ones and zeros, the basic digital language, to provide decision making functions in electronic circuits, such as turning an electronic switch on or off. Non-volatile memory semiconductors are used to retain data after an electrical device has been turned off. We supply customers in a diverse range of end markets, including the computer, industrial, telecommunications, consumer electronics and automotive industries. We are particularly strong in providing discrete and analog power management products, which address the growing requirement for portability and long battery life for computing and communication devices. Our business strategy is designed to maintain our multi-market product leadership and to focus on value-added products for our customers that leverage our strengths. Those strengths include developing and manufacturing devices for managing power in electrical devices and converting physical data such as color, light and sound into a digital format usable by electronic devices. Additionally, we believe that we are competitive in our development of technologies which allow for faster switching of voltages and technologies to allow circuit boards and peripherals to communicate with one another and in the design of ultra-small packages. We believe that we are well positioned for growth as a result of the new products that we are developing, the devices we have recently introduced, our strength in analog and discrete products and the increasing semiconductor content of electronic products. We have wafer fabrication plants in Maine, Utah and South Korea, and assembly facilities in Malaysia and the Philippines. Worldwide semiconductor market revenues were approximately $125.6 billion during 1998 according to the reports of Worldwide Semiconductor Trade Statistics published by the Semiconductor Industry Association. Since 1990, global semiconductor market revenues have expanded at a compounded annual growth rate of approximately 12.0%. We operate primarily in the approximately $55.3 billion segment of the semiconductor market relating to products that move and shape electrical signals and which includes analog, discrete and logic products. We believe that the markets we operate in provide us with attractive growth opportunities. Revenues for analog and discrete markets are expected to grow from 1998 to 2001 at compounded annual growth rates of 15.7% and 9.9%, respectively, according to the Semiconductor Industry Association. Additionally, we focus on low-voltage CMOS (Complementary Metal Oxide Semiconductor) fabrication, one of the fastest growing THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED JANUARY 19, 2000 [FAIRCHILD SEMICONDUCTOR LOGO] 23,500,000 Shares FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. Class A Common Stock ------------------ We are selling 6,140,880 shares and the selling stockholders named under "Principal and Selling Stockholders" are selling 17,359,120 shares of our Class A Common Stock. We will not receive any of the proceeds from shares of our Class A Common Stock sold by the selling stockholders. We have granted the underwriters an option to purchase a maximum of 1,410,000 additional shares and one of the selling stockholders has granted the underwriters an option to purchase a maximum of 2,115,000 additional shares to cover over-allotments of shares, if any. Our Class A Common Stock is listed on The New York Stock Exchange under the symbol "FCS." The last reported sale price of our Class A Common Stock on January 3, 2000 was $27.625 per share. INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" STARTING ON PAGE 9. <TABLE> <CAPTION> UNDERWRITING PROCEEDS TO PROCEEDS TO PRICE TO DISCOUNTS AND FAIRCHILD SELLING PUBLIC COMMISSIONS INTERNATIONAL STOCKHOLDERS -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Per Share............................................ $ $ $ $ Total................................................ $ $ $ $ </TABLE> Delivery of the shares of Class A Common Stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON SALOMON SMITH BARNEY DEUTSCHE BANC ALEX. BROWN MERRILL LYNCH & CO. ROBERTSON STEPHENS The date of this prospectus is , 2000. segments of the logic industry. CMOS is one of the most common integrated circuit fabrication technologies. The low voltage segment of CMOS in which we compete is expected by Insight/Onsite to grow over the next five years at a compounded annual growth rate of 13% in terms of revenues. We do not produce microcontrollers, microprocessors or the complex system-on-a-chip semiconductors. We also do not produce semiconductors that do not retain data after an electric device has been turned off, which we refer to as volatile memory semiconductors. COMPANY STRENGTHS We believe our core strengths are the following: BREADTH OF PRODUCT PORTFOLIO. We provide our customers with one of the largest product offerings in the industry for analog, discrete, logic and non-volatile memory devices. Our analog device portfolio comprises over 2,300 products, including offerings in 92 of the top 100 best-selling analog product types by volume. Our discrete device portfolio comprises over 4,000 products and we believe it is one of the most comprehensive power device portfolios in the industry. We develop products for a wide range of market applications, reducing our dependence on any single product, application or market. In addition, we believe that our ability to provide our customers with multiple products meets a growing need among our end users for a single source of supply. LEADERSHIP IN POWER SOLUTIONS. We believe there is an increasing demand for a combination of sophisticated computing and communication capabilities, frequently in the form of portable devices. We are a leader in providing solutions for managing the power required to operate such devices. Our combined analog and discrete offering provides a complete solution for power management: Analog: We provide specific solutions for power conversion, temperature sensing, management functions, battery chargers and motor controls. Power Discrete: We provide comprehensive solutions for managing power from the original power source to end products such as computers, cellular phones and network devices. HIGH QUALITY CUSTOMER SERVICE. Our customers recognize us for our high quality of service. They require a reliable source of supply, often in high volumes and with short lead times, demand quick responses to technical questions and seek support in designing new applications which use our products. Because we are an independent company focused solely on multi-market products, all of our service and support efforts are tailored to meet these customer needs. As a result of our efforts, we have received numerous customer and industry awards, including supplier awards from Compaq Computer Corp., Siemens AG and Acer Inc. and the European Mid-Size Vendor of the Year award from Dataquest. HISTORY OF PRODUCT INNOVATION. Our success in introducing new products has been an important source of our growth and profitability. We have been a significant innovator in the multi-market segment of the semiconductor industry with several leading edge technologies and industry firsts, including our introduction of many new power management solutions over the past three decades which set new standards for speed and efficiency. Since June 1997, we have designed and introduced over 500 new products. DIVERSE AND BLUE-CHIP CUSTOMER BASE. Our diverse customer base, which spans a wide spectrum of end user markets, enables us to avoid some of the volatility that may be encountered in specific semiconductor markets. We serve more than 50,000 customers worldwide, with no single customer, other than National Semiconductor and Samsung Electronics, providing more than 5% of our pro forma Fiscal 1999 total revenue. Customers in our end user markets include industry leaders such as Compaq, Ericsson, Lucent, Nortel Networks, Samsung Electronics and Siemens. EXPERIENCED MANAGEMENT. Our senior management team consists of seven individuals who have on average approximately 25 years of experience in the semiconductor industry. Our chief executive officer, Kirk P. Pond, has over 30 years of experience in the industry and has held senior management positions at Texas Instruments and National Semiconductor. At National Semiconductor, Mr. Pond was executive vice president and chief operating officer prior to his current position at Fairchild International. ------------------ We are a holding company with no significant assets other than the stock of our subsidiary, Fairchild Semiconductor Corporation, all of which is pledged to secure debt obligations issued by Fairchild Semiconductor Corporation and guaranteed by us. Our principal executive offices are located at 333 Western Avenue, Mail Stop 01-00, South Portland, Maine 04106, and our telephone number is (207) 775-8100. THE OFFERING Class A Common Stock offered (1)........................... 6,140,880 shares by us 17,359,120 shares by the selling stockholders Common stock to be outstanding after this offering(2)...... 66,436,224 shares of Class A Common Stock 28,396,000 shares of Class B Common Stock -------------------------------------------- Total....................... 94,832,224 shares of common stock -------------------------------------------- -------------------------------------------- Voting rights................. Holders of Class A Common Stock are entitled to one vote per share on all matters submitted to a vote of the stockholders. Our Restated Certificate of Incorporation provides for cumulative voting in elections of directors. Holders of Class B Common Stock have no voting rights. Other rights.................. Except as to voting and conversion rights, each class of common stock has the same rights. Shares of each class of common stock are convertible on a one-to-one basis into shares of the other class of common stock at the option of the holder. Use of proceeds............... We will not receive any of the proceeds from the sale of shares by the selling stockholders. We intend to use the net proceeds from the sale of shares by us to undertake the first phase of a multi-year capital investment program. This investment will be made to increase production capacity in support of power management and interface products. NYSE symbol................... FCS - ------------------------- (1) Excludes 1,410,000 shares of Class A Common Stock that the underwriters may purchase from us and 2,115,000 shares of Class A Common Stock that the underwriters may purchase from one of the selling stockholders to cover over-allotments of shares, if any. (2) Based on shares outstanding at November 28, 1999 and excluding 6,968,695 shares of Class A Common Stock reserved for issuance upon exercise of outstanding stock options after November 28, 1999. SUMMARY HISTORICAL, PRO FORMA AND SUPPLEMENTAL DATA In the tables below, we present unaudited pro forma financial data for informational purposes only. Since the information in the tables is a summary, you should read the following tables in conjunction with other information contained under the caption "Unaudited Pro Forma Combined Condensed Financial Statements and Unaudited Supplemental Data," and with the financial statements and related notes and the other financial information contained elsewhere in this prospectus. We present below summary historical, pro forma and supplemental data of Fairchild International and the power device business. We derived the historical balance sheet data as of November 28, 1999 and the historical statement of operations data for the six months ended November 29, 1998 and November 28, 1999 from the unaudited condensed consolidated financial statements included elsewhere in this prospectus. We derived the historical statement of operations data for the years ended May 25, 1997, May 31, 1998 and May 30, 1999 from Fairchild International's audited consolidated financial statements and related notes, which are included elsewhere in this prospectus. In our opinion, the unaudited financial data include all adjustments (consisting of normal recurring adjustments) that we consider necessary for a fair presentation of the data. The Fairchild International unaudited pro forma statement of operations data presented below are based upon unaudited pro forma financial statements for the year ended May 30, 1999 for Fairchild International after giving effect to the acquisition of the power device business, our initial public offering consummated on August 9, 1999, and the application of the proceeds from our initial public offering, as if they had occurred on June 1, 1998. We have not presented unaudited pro forma statement of operations data for the six months ended November 28, 1999 because the operating results of the power device business are included in the historical financial statements for the entire period, and because this offering has no pro forma effect on income (loss) applicable to common stockholders. The unaudited balance sheet data, as adjusted for this offering, are based on assumptions that we believe accurately represent the effect of this offering and the application of the proceeds of this offering as described in "Use of Proceeds" as if they had occurred on November 28, 1999. We derived the historical financial data of the power device business for the years ended December 31, 1996, 1997 and 1998 from the power device business' audited financial statements and related notes, which are included elsewhere in this prospectus. We derived the historical financial data of the power device business for the twelve months ended March 31, 1999 from the power device business' unaudited financial statements and related notes, which are not included in this prospectus. The unaudited pro forma data of the power device business presented below are based upon unaudited financial statements for the twelve months ended March 31, 1999 for the power device business and are adjusted to give pro forma effect to the contracts we entered into with Samsung Electronics in connection with the acquisition of the power device business, and to eliminate the historical expenses related to the liabilities that we did not assume, and the related income tax effect of all pro forma adjustments. The financial statements of the power device business for the three years ended December 31, 1998 and the twelve months ended March 31, 1999 have been translated from South Korean Won into U.S. Dollars, and are presented in accordance with U.S. GAAP as described in "Selected Historical Financial Data of the Power Device Business." FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. <TABLE> <CAPTION> FISCAL YEAR ENDED MAY 30, 1999 SIX MONTHS FISCAL YEAR ENDED MAY ---------------------- ENDED NOVEMBER ---------------------- PRO FORMA ------------------- 1997 1998 HISTORICAL (1)(2) 1998 1999 -------- -------- ---------- --------- -------- -------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA:(3) Revenue: Analog......................................... $ -- $ 32.0 $ 95.8 $ 228.9 $ 34.6 $ 151.3 Discrete....................................... 164.5 187.3 222.8 428.9 84.5 277.6 Logic.......................................... 285.3 303.0 267.6 267.6 128.7 156.7 Memory(4)...................................... 138.0 113.5 67.9 67.9 39.3 33.9 Contract manufacturing services................ 104.2 153.4 81.0 118.6 32.1 61.8 ------- ------- ------- -------- -------- -------- Total revenue.................................... $ 692.0 $ 789.2 $ 735.1 $1,111.9 $ 319.2 $ 681.3 ======= ======= ======= ======== ======== ======== Gross profit(4).................................. $ 152.5 $ 230.5 $ 152.3 $ 279.5 $ 66.0 $ 208.8 Research and development......................... 18.9 35.7 39.3 52.4 18.3 29.7 Selling, general and administrative(5)........... 96.4 92.0 105.1 161.5 46.2 109.7 Litigation settlement expense(6)................. -- -- -- 58.0 -- -- Restructuring, impairments and other charges(7)..................................... 5.3 15.5 55.3 55.3 4.5 -- ------- ------- ------- -------- -------- -------- Operating income (loss)........................ 31.9 87.3 (47.4) (47.7) (3.0) 69.4 Interest expense, net(8)......................... 11.2 54.5 71.8 79.9 29.6 50.8 Other expense (income), net...................... 1.4 -- -- (0.1) -- -- Provision (benefit) for income taxes............. 3.8 10.7 (5.1) (5.1) (6.5) 4.1 ------- ------- ------- -------- -------- -------- Income (loss) before cumulative effect of change in accounting principle(9)............ $ 15.5 $ 22.1 $(114.1) $ (122.4) $ (26.1) $ 14.5 ======= ======= ======= ======== ======== ======== Net income (loss) applicable to common stock- holders before cumulative effect of change in accounting principle.................................... $ 13.4 $(123.9) $ (122.4) $ (30.8) $ 12.5 ======= ======= ======== ======== ======== EARNINGS PER COMMON SHARE(10): Basic..................................................... $ 0.21 $ (1.97) $ (1.39) $ (0.49) $ 0.16 Diluted................................................... $ 0.20 $ (1.97) $ (1.39) $ (0.49) $ 0.15 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (IN MILLIONS): Basic..................................................... 62.8 62.9 88.1 62.9 78.7 Diluted................................................... 65.0 62.9 88.1 62.9 82.0 OTHER FINANCIAL DATA:(1) Amortization of intangibles(11).................. $ -- $ 1.4 $ 8.4 $ 33.5 $ 1.6 $ 16.9 Depreciation and other amortization.............. 77.1 83.2 95.3 117.6 45.8 54.1 Capital expenditures............................. 47.1 78.0 46.2 52.5 19.4 53.8 </TABLE> <TABLE> <CAPTION> AS OF NOVEMBER 28, 1999 ------------------------------- AS ADJUSTED HISTORICAL FOR THIS OFFERING ---------- ----------------- (DOLLARS IN MILLIONS) <S> <C> <C> BALANCE SHEET DATA (AT PERIOD END): Cash and cash equivalents................................... $ 123.6 $ 284.6 Accounts receivable, net.................................... 145.9 145.9 Inventories................................................. 162.4 162.4 Total assets................................................ 1,115.2 1,276.2 Long-term debt, including current portion................... 718.6 718.6 Total stockholders' equity.................................. 205.4 366.4 </TABLE> POWER DEVICE BUSINESS <TABLE> <CAPTION> YEAR ENDED TWELVE MONTHS ENDED DECEMBER 31, MARCH 31, 1999 -------------------------- -------------------------- 1996 1997 1998 HISTORICAL PRO FORMA(12) ------ ------ ------ ---------- ------------- (DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue......................................... $471.8 $478.1 $386.5 $406.7 $451.0 Gross profit.................................... $ 56.5 $131.0 $137.3 $129.0 $153.4 Research and development........................ 18.6 19.2 15.2 14.8 14.8 Selling, general and administrative............. 29.0 34.3 33.8 36.1 36.5 Litigation settlement expense(6)................ -- -- 58.0 58.0 58.0 ------ ------ ------ ------ ------ Operating income................................ $ 8.9 $ 77.5 $ 30.3 $ 20.1 $ 44.1 ====== ====== ====== ====== ====== OTHER FINANCIAL DATA: Capital expenditures............................ 118.1 10.9 8.6 7.1 7.1 </TABLE> - ------------------------- (1) The pro forma combined financial data includes the pro forma results of operations for the power device business for the twelve months ended March 31, 1999. The pro forma combined financial data excludes the actual results of our Power Device Products Group for the period from April 14, 1999 to May 30, 1999. For the period from April 14, 1999 to May 30, 1999, amortization of intangibles, depreciation and amortization and capital expenditures for our Power Device Products Group were $5.0 million, $2.1 million and $0.8 million, respectively. See "Unaudited Pro Forma Combined Condensed Financial Statement and Unaudited Supplemental Data." (2) Pro forma combined financial data is provided to adjust for the effect of Fairchild International's initial public offering, consummated on August 9, 1999. See "Unaudited Pro Forma Combined Condensed Financial Statement and Unaudited Supplemental Data." (3) For the fiscal year ended May 1997, statement of operations data includes the direct expense of the Fairchild Semiconductor business of National Semiconductor and allocated expenses from National Semiconductor. Such amounts may not be comparable to data for Fiscal 1998 or to the historical and pro forma data for Fiscal 1999. (4) Revenues and gross profit in Fiscal 1999 were negatively impacted by $5.5 million and $15.4 million, respectively, due to one-time write-offs for additional sales and inventory reserves as a result of our Memory division restructuring. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of Fairchild International -- Restructuring." (5) For the six months ended November 1999, selling, general and administrative expenses include $8.3 million for a one-time write-off of receivables from the management investors to pay their federal and state individual income tax liabilities resulting from the lapse of risks of forfeiture with respect to their stock ownership. Such receivables were cancelled as a result of our initial public offering. This write-off includes amounts to discharge the individual tax liabilities associated with the cancellation. (6) Represents a one-time charge for settlement by Samsung Electronics of a patent infringement lawsuit attributable to the power device business. The associated liability was retained by Samsung Electronics. (7) In Fiscal 1997, restructuring, impairments and other charges consisted of severance and other costs related to lay-offs that occurred in the first quarter of Fiscal 1997. In Fiscal 1998, such charges consisted of in-process research and development associated with the acquisition of the Raytheon Semiconductor business. In Fiscal 1999, such charges consisted of $34.0 million of in-process research and development associated with the acquisition of the power device business and $21.3 million related to various restructuring actions. For the six months ended November 1998, such charges consisted of severance and other costs associated with a workforce reduction. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of Fairchild International -- Restructuring." (8) For the six months ended November 1999, interest expense includes $7.2 million for the write-off of unamortized debt issuance costs associated with debt repaid and $0.3 million for a prepayment premium on a 12.5% Subordinated Note Due 2008 repaid as a result of Fairchild International's initial public offering consummated on August 9, 1999. (9) Excludes a charge for the cumulative effect of change in accounting principle of $1.5 million, net of a related tax benefit of $0.8 million, in Fiscal 1998. (10) Earnings per common share is calculated using net income (loss) applicable to common stockholders and excludes the effect of a $1.5 million cumulative effect of change in accounting principle in Fiscal 1998, which amount would reduce both basic and diluted earnings per common share by $0.02. (11) Amortization of intangibles primarily represents the amortization of identifiable acquisition-related intangible assets. (12) Pro forma data for the twelve months ended March 31, 1999 has been presented to be consistent with the pro forma data for Fiscal 1999 presented for Fairchild International. See "Unaudited Pro Forma Combined Condensed Financial Statement and Unaudited Supplemental Data."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001037054_context_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001037054_context_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary may not contain all of the information that is important to you. You should read the entire prospectus, including the financial statements and related notes, before making an investment decision. CONTEXT INTEGRATION Overview Context Integration is a leading Internet professional services firm. Our integrated offering of strategy, creative design, technology architecture, solutions construction and applications management services allows us to rapidly deliver innovative and robust web-based business-to-business, or B2B, solutions. The skills required to build these complex B2B solutions are beyond those necessary for merely designing web sites or building business-to-consumer, or B2C, e-commerce capabilities. B2B solutions typically involve large numbers of transactions and users, and must be secure, reliable and scaleable. They must also be integrated with the existing systems infrastructure of a client and its customers and business partners. As a result, companies are increasingly turning to outside Internet professional services providers like Context for assistance. As of February 29, 2000, we employed over 330 people who serve clients from our regional offices in the metropolitan areas of Boston, New York, Houston, Dallas, Denver, San Francisco, Los Angeles and central New Jersey. Our clients include large enterprises such as Merrill Lynch, BMG Entertainment, and Merck- Medco, as well as innovative B2B start-ups such as GoCargo.com, PaperExchange.com and OnlineAsset.com. Market Opportunity Companies are increasingly using the Internet and B2B e-commerce solutions to streamline their internal and external processes and strengthen their relationships with suppliers and customers in order to gain a competitive advantage. The demand for these solutions has been growing rapidly. International Data Corporation, or IDC, estimates that the worldwide market for Internet services will grow from $7.8 billion in 1998 to $78.5 billion in 2003, representing a compound annual growth rate of approximately 59%. In addition, Forrester Research, Inc. estimates that revenue from B2B e-commerce will grow from $406 million in 2000 to $2.7 trillion by 2004, representing a compound annual growth rate of approximately 61%. Competitive Strengths We believe that the combination of the following factors differentiates us from other firms in our industry and enables us to deliver B2B solutions that provide a sustainable competitive advantage to our clients: . Deep technology skills. Since 1992, we have been innovators in applying leading-edge technologies to businesses, and have developed expertise in the advanced technologies used for building and integrating B2B solutions. We partner selectively with some of the Internet industry's leading technology vendors, including BroadVision and Art Technology Group, and we employ highly experienced technologists who work in small, high-performance teams. . Early focus on robust B2B solutions. Our early experience was in building strategic systems using distributed, client-server architectures for several leading banks. These systems were typically transaction intensive, globally distributed, available 24 hours per day, seven days per week, or 24x7, highly secure and scaleable, and required extensive integration with multiple existing systems. Today's B2B solutions share many of these same demanding technical requirements, and we are now focused primarily on this B2B market. . Rapid project delivery model. We work with our clients to achieve their business objectives in the shortest possible time. Our projects are typically completed in four to five months and in some cases less. We do most of our work on a fixed-price, fixed-time basis, sharing risk with our clients. THE OFFERING <TABLE> <C> <S> Common stock offered................................ shares Common stock to be outstanding after this offering.. shares Over-allotment option............................... shares Use of proceeds..................................... For general corporate purposes, including working capital. Dividend policy..................................... We do not intend to pay dividends on our common stock. We currently intend to retain our future earnings, if any, for use in the operation and expansion of our business, and do not anticipate declaring or paying cash dividends on our common stock in the foreseeable future. In addition, our existing bank line of credit prohibits the payment of dividends. Proposed Nasdaq National Market symbol.............. CTXT </TABLE> The number of shares of common stock to be outstanding after this offering is based on 22,393,178 shares outstanding as of January 31, 2000. This number excludes 5,541,660 shares of common stock issuable upon exercise of outstanding options on January 31, 2000 at a weighted average exercise price of $1.07. See "Management--Stock Plans" and note 9 of notes to our audited financial statements. SUMMARY FINANCIAL DATA These summary financial data have been derived from our audited and unaudited historical financial statements and the audited financial statements of Underline, Inc. You should read the information set forth below in conjunction with the financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The 1999 pro forma statements of operations data give effect to our acquisition of Underline, Inc. as if the acquisition had occurred on January 1, 1999. The balance sheet data as of December 31, 1999 is presented: . on an actual basis; . on a pro forma basis to give effect to our acquisition of Underline, Inc. as if it had occurred on December 31, 1999; and . on a pro forma basis as adjusted to give effect to the above pro forma adjustments, as well as the conversion of all outstanding shares of preferred stock into 10,724,702 shares of common stock upon the closing of this offering and the sale of shares of common stock in this offering, at an assumed initial public offering price of $ per share after deducting estimated underwriting discounts and estimated offering expenses. <TABLE> <CAPTION> Year Ended December 31, ---------------------------------------------------- 1999 1995 1996 1997 1998 1999 Pro Forma ------ ------ ------- ------- ------- --------- (unaudited) (in thousands, except per share data) <S> <C> <C> <C> <C> <C> <C> Statements of Operations Data: Revenue................. $3,243 $7,311 $15,608 $19,786 $27,077 $28,803 Operating expenses: Professional services............. 1,935 4,071 9,220 12,688 15,258 16,216 Sales and marketing... 170 767 1,959 3,034 4,631 4,681 General and administrative....... 1,164 2,329 5,452 9,927 13,419 14,149 Stock-based compensation......... -- -- 386 181 587 1,985 Amortization of goodwill ............ -- -- 644 -- -- 1,641 ------ ------ ------- ------- ------- ------- Total operating expenses........... 3,269 7,167 17,661 25,830 33,895 38,672 ------ ------ ------- ------- ------- ------- (Loss) income from operations............. (26) 144 (2,053) (6,044) (6,818) (9,869) Interest (expense) income, net............ -- (50) 63 (11) (33) (49) Income tax (expense) benefit................ (7) (95) 94 -- -- (10) ------ ------ ------- ------- ------- ------- Net loss................ $ (33) $ (1) $(1,896) $(6,055) $(6,851) $(9,928) ====== ====== ======= ======= ======= ======= Basic and diluted net loss per share......... $(0.01) $ -- $ (0.28) $ (0.65) $ (0.70) $ (0.87) ====== ====== ======= ======= ======= ======= Basic and diluted weighted average common shares outstanding..... 2,402 2,435 6,795 9,245 9,767 11,371 Unaudited pro forma basic and diluted net loss per share assuming conversion of preferred stock ................. $ (0.38) $ (0.50) ======= ======= Unaudited pro forma weighted average number of basic and diluted shares outstanding assuming conversion of preferred stock ....... 18,134 19,738 </TABLE> <TABLE> <CAPTION> As of December 31, 1999 ----------------------------- Pro Forma Actual Pro Forma As Adjusted ------- --------- ----------- (in thousands) <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents......................... $ 8,697 $ 8,610 $ Working capital................................... 11,747 11,253 Total assets...................................... 21,690 30,369 Total stockholders' equity........................ 14,192 21,648 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001037165_oratec_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001037165_oratec_prospectus_summary.txt
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+SUMMARY OF THE PROSPECTUS This summary highlights information contained elsewhere in this prospectus. You should read this entire prospectus carefully, including the "Risk Factors" section and the financial statements and the notes to those statements. ORATEC Interventions, Inc. ORATEC Interventions develops and markets innovative medical devices that use controlled thermal energy to treat spine and joint disorders. We currently market two minimally invasive systems, the SpineCATH IntraDiscal ElectroThermal Therapy, or IDET, system and the ElectroThermal Arthroscopy System. Our proprietary systems use heat to modify, cut or remove damaged or stretched soft tissue. We market our products to orthopedic surgeons, neurosurgeons and pain management specialists. Our SpineCATH IDET system offers a minimally invasive outpatient alternative to patients suffering from chronic low back pain caused by degenerative disc disease. The IDET system enables physicians to navigate to the location of damaged tissue within a spinal disc using a self-guiding single use catheter. Physicians can then apply heat directly to the disc wall, causing the tissue to contract and thicken. We believe that the application of heat desensitizes nerve fibers and over time results in a stiffening of the disc wall. Treatment with the IDET system is indicated for degenerative disc disease, including contained herniations, which are small bulges in the disc wall. IDET is not recommended for the treatment of completely ruptured discs. Following the IDET procedure, many patients have experienced significant pain reduction and improved overall quality of life, and have reduced or eliminated pain medication. The procedure does not require general anesthesia or extended hospitalization and does not subject the patient to the post-operative complications often associated with spine surgery. The IDET system was formally launched in October 1998, and we estimate that, as of December 31, 1999, over 640 physicians had performed the IDET procedure on approximately 11,000 patients. Back pain costs the U.S. economy over $50 billion annually and represents the second most common reason for doctor visits. Conditions related to back pain account for more hospitalizations annually than any other orthopedic condition. It is estimated that, at any given time, five million individuals in the U.S. suffer from low back pain. The vast majority of these cases are resolved within three months using non-operative therapies ranging from physical therapy to spinal injections. However, many of these individuals fail to improve with non-operative therapies, suffer from degenerative disc disease and yet do not have the level of disc degeneration necessary to warrant a spinal fusion. We believe these individuals are candidates for our IDET procedure. In addition to our spine products, we offer a proprietary ElectroThermal Arthroscopy System, which treats joint disorders through the application of controlled heat by modifying, cutting or removing soft tissue. The system provides a minimally invasive outpatient treatment option for patients who suffer from joint disorders caused by loose or stretched ligaments and whose most viable option is often open surgery. In addition, we believe our system can improve on existing arthroscopic procedures through tissue modification in combination with tissue anchoring, cutting and removal, or ablation. The ElectroThermal Arthroscopy System was launched in March 1997. In November 1999, we introduced the new Vulcan ElectroThermal Arthroscopy System (EAS) which combines the benefits of rapid tissue cutting and ablation capabilities with the ability to modify tissue using our temperature control technology. We estimate that, as of December 31, 1999, over 1,500 physicians had used our arthroscopy products in approximately 100,000 procedures. Approximately 2.2 million arthroscopic procedures were performed in the U.S. in 1998. However, many joint injuries and disorders are still treated using open surgery because, for many of these conditions, arthroscopic techniques are not available, not effective or are difficult to perform. Our products expand arthroscopic treatment options for surgeons treating joint disorders. We have a separate sales and marketing team for each of the spine and arthroscopy markets in order to address the different physician groups in these growing areas. Our sales organizations include direct sales employees complemented by select sales agencies. We have entered into an exclusive distribution agreement with DePuy AcroMed, a division of Johnson & Johnson, for the international marketing and sales of our spine products. The marketing platform for both spine and arthroscopy is built on scientific and clinical data and extensive physician training programs. The products we currently market have either received the necessary 510(k) pre-market clearance from the FDA or are exempt from this requirement. As of December 31, 1999 we had 12 issued patents, four notices of allowance and 45 U.S. and foreign patent applications pending. The Offering <TABLE> <S> <C> Common stock offered by ORATEC....... 4,000,000 shares Common stock to be outstanding after the offering........................ 20,491,149 shares Use of proceeds...................... Expanded sales and marketing activities, future product development, repayment of debt and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market sym- bol................................. "OTEC" </TABLE> The share data in the table above is based on shares outstanding as of December 31, 1999 and excludes: (a) 3,374,037 shares that were subject to outstanding options at a weighted average exercise price of $3.26 as of December 31, 1999; (b) 212,908 shares that were issuable upon exercise of outstanding warrants at a weighted average exercise price of $3.29 per share as of December 31, 1999; and (c) an aggregate of 1,618,700 shares that were available for future issuance under our 1999 stock plan, our 1999 directors' plan and our 1999 employee stock purchase plan as of December 31, 1999. Summary Financial Data (in thousands, except per share data) <TABLE> <CAPTION> Years Ended December 31, ------------------------- 1997 1998 1999 ------ -------- ------- <S> <C> <C> <C> Statement of Operations Data: Sales............................................. $2,600 $ 11,129 $31,365 Gross profit...................................... 859 4,563 18,335 Total operating expenses.......................... 7,857 15,748 27,293 Net loss.......................................... (6,832) (11,342) (9,669) Net loss per common share, basic and diluted...... $(1.75) $ (2.83) $ (2.30) Shares used in computing net loss per common share, basic and diluted......................... 3,912 4,006 4,201 Pro forma net loss per share, basic and diluted (unaudited)...................................... $ (0.59) Shares used in computing pro forma net loss per share, basic and diluted (unaudited)............. 16,276 </TABLE> <TABLE> <CAPTION> December 31, 1999 --------------------- Actual As Adjusted -------- ----------- (unaudited) <S> <C> <C> Balance Sheet Data: Cash, cash equivalents and short term investments...... $ 8,874 $60,154 Total assets........................................... 23,841 75,121 Long term obligations, net of current portion.......... 4,348 4,348 Redeemable convertible preferred stock................. 35,816 -- Common stock, additional paid-in capital, deferred stock compensation, receivable from stockholder and accumulated deficit................................... (29,385) 57,711 </TABLE> The as adjusted numbers in the table above reflect receipt of the net proceeds from the sale of shares of common stock offered by us at an assumed offering price of $14.00 per share, after deducting the estimated underwriting discount and commissions and estimated offering expenses payable by us. See also "Use of Proceeds," "Capitalization" and "Underwriting." Except as otherwise indicated, all information in this prospectus is based on the following assumptions: (a) the conversion of each outstanding share of redeemable preferred stock into one share of common stock upon the completion of this offering, (b) no exercise of the underwriters' overallotment option and (c) the filing of our amended and restated certificate of incorporation immediately following the closing of the offering.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001039198_arrowpoint_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001039198_arrowpoint_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following is a summary of some important information about ArrowPoint and this offering. It may not contain all of the information that is important to you. You should read this summary together with the more detailed information and our financial statements and the notes to those statements appearing elsewhere in this prospectus. ARROWPOINT We provide intelligent Web switches that enable our customers to deploy a global Web network architecture to optimize e-commerce transactions and the delivery of Web content. Our products, which are specifically designed for the Web, are intended to enhance the performance, scalability, availability, reliability and security of our customers' Web sites. Using patented technology, our switches intelligently route requests for Web content or transactions to the network server that is best able to handle the request at that moment based on information about: - - the requesting party; - - the content or transaction requested; and - - the structure and changing conditions of the customer's Web network. In recent years there has been dramatic growth in both the number of people using the Internet and the amount of e-commerce taking place over the Web. To attract and retain Internet users, companies are continually increasing the amount and the sophistication of the information and services offered on their Web sites. This has resulted in significantly more complex Web sites, typically consisting of a variety of different types of servers connected by traditional networking devices such as switches and routers. While the increasing importance of the Internet to the businesses of many companies makes it critical for those companies to effectively manage their Web site traffic and provide visitors with a positive experience, the increasing complexity of their Web networks is making it more difficult to do so. We believe many companies are seeking to develop a Web network architecture that improves the ability to conduct e-commerce on their Web sites, intelligently directs Web traffic and enables these companies to offer new and enhanced Web services. Our intelligent Web switches enable our customers to deploy a Web network architecture that: - - facilitates e-commerce transactions; - - enables companies to give preferred or differing treatment to specific users or specific types of content requests; - - directs Web requests to the network server best able to handle those requests based on information about the requesting party, the Web content or transaction requested and the customer's Web network; - - identifies hot content, such as a breaking news story, and automatically triggers the copying of that content to dynamically add capacity to handle the requests for that content; - - intelligently redirects requests for content or applications unavailable due to a Web site failure to another Web site or server which has the requested information; - - protects against attempts by computer hackers to disable servers or keep servers busy performing useless tasks without significantly impairing performance; - - addresses a range of customer needs, from those of smaller Web sites to the high-performance demands of large, complex Web hosting operations; and - - tracks detailed statistics about the performance of the network, servers, applications and content. Our objective is to be the leading provider of intelligent Web switches that enable the deployment of a global Web network architecture to optimize e-commerce transactions and the delivery of Web content. To achieve this objective, we are pursuing the following strategies: - - targeting leading Web hosting and application service providers and e-commerce companies; - - aggressively expanding our direct sales force and increasing the size and productivity of our indirect sales channels; - - maintaining our technological leadership; - - pursuing strategic alliances with key customers, Web hosting and application service providers; and - - continuing to deliver superior service and support to our customers. Our customers include Web hosting and application service providers, e-commerce companies, Internet service providers and other enterprises deploying applications on the Web. Our Web switches enable our customers to solve many e-commerce problems and to offer new and enhanced Web services. As of December 31, 1999, over 100 companies have deployed our switches in their Web networks. Our customers include EMC, Exodus Communications, Global Crossing, NaviSite and Road Runner. ArrowPoint Communications, Inc. was incorporated in Delaware in April 1997. Our principal executive offices are located at 50 Nagog Park, Acton, Massachusetts 01720. Our telephone number is (978) 206-3000. Our World Wide Web site is located at www.arrowpoint.com. The information on our Web site should not be considered part of this prospectus. THE OFFERING Shares offered by ArrowPoint.................... 5,000,000 shares Shares outstanding after the offering.................... 34,218,364 shares Proposed Nasdaq National Market symbol................. "ARPT" Use of proceeds............... For general corporate purposes, including funding expansion of product development and sales and marketing activities and working capital. See "Use of Proceeds". The number of shares of common stock to be outstanding after the offering is based on the number of shares outstanding on February 29, 2000. This number does not include 5,790,998 shares of common stock issuable upon the exercise of stock options outstanding on February 29, 2000 with a weighted average exercise price of $5.40 per share. This number also does not include an aggregate of 10,694,334 additional shares reserved for future issuance under ArrowPoint's stock option and purchase plans as of February 29, 2000. Except as otherwise specified in this prospectus, all information in this prospectus: - gives effect to the automatic conversion of all outstanding shares of our preferred stock into 21,003,996 shares of our common stock, or two shares of common stock for each outstanding share of preferred stock, which will occur upon the closing of this offering; - gives effect to the two-for-one split of our common stock in February 2000; and - assumes that the underwriters do not exercise the over-allotment option that we have granted to them to purchase additional shares in the offering. See "Underwriting". SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) You should read this summary information with the discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and notes to those statements included elsewhere in this prospectus. <TABLE> <CAPTION> PERIOD FROM INCEPTION YEAR ENDED (APRIL 14, 1997) TO DECEMBER 31, DECEMBER 31, ------------------- 1997 1998 1999 ------------------- ---- ---- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue............................................. $ -- $201 $12,377 Cost of revenue..................................... -- 150 5,110 ------- ------- -------- Gross profit........................................ -- 51 7,267 Total operating expenses............................ 2,996 9,900 20,390 ------- ------- -------- Net loss............................................ (2,856) (9,447) (12,606) Net loss per share: Basic and diluted................................. $(11.36) $(6.26) $(3.99) ======= ======= ======== Pro forma basic and diluted....................... $(0.57) ======== Shares used in computing net loss per share: Basic and diluted................................. 251 1,509 3,157 Pro forma basic and diluted....................... 22,277 </TABLE> The following table presents a summary of our balance sheet as of December 31, 1999: - on an actual basis, - on a pro forma basis to reflect the sale in January 2000 of 657,263 shares of Series E preferred stock at $21.14 per share, a charge to accumulated deficit of $6.6 million related to the fair value of the beneficial conversion feature of the Series E preferred stock, and the conversion of all outstanding shares of our preferred stock into 21,003,996 shares of our common stock, and - on a pro forma basis as adjusted to reflect our sale of 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $31.00 per share, after deducting the estimated underwriting discount and offering expenses. <TABLE> <CAPTION> DECEMBER 31, 1999 ----------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------ --------- ----------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................ $10,731 $24,586 $167,811 Working capital.......................................... 10,350 24,206 167,431 Total assets............................................. 23,206 37,061 180,286 Long-term liabilities.................................... -- -- -- Redeemable preferred stock............................... 34,534 -- -- Total stockholders' equity (deficit)..................... (19,858) 28,531 171,756 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001039242_bluestone_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001039242_bluestone_prospectus_summary.txt
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. GENERALLY, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE OVER-ALLOTMENT OPTION GRANTED TO THE UNDERWRITERS BY CERTAIN SELLING STOCKHOLDERS IS NOT EXERCISED. BLUESTONE We are a leading provider of software for enterprise interaction management, which enables businesses to extend information over the World Wide Web in a controlled manner and to support high volumes of users and interactions. Our flagship product, Sapphire/Web, is a framework for JAVA Web application servers and is currently in Release 6. A Web application server is a software product that allows broad access to stored corporate information and applications to a variety of users, including customers, suppliers and employees, via the Web. We believe that our JAVA Web application server is the leading solution of its kind based on the breadth of its functionality. We believe that ours is the only product to adequately address the four defining elements of enterprise interaction management--development, deployment, integration and management--and therefore provides the most complete overall solution to our customers. In January 1999, we released Bluestone XML Suite, which represents a new generation of specialized Web application server focused on commerce via the Internet. In December 1999, we released Bluestone Total-e-Business, an e-business platform that provides the infrastructure, integration, content management, personalization and e-commerce components that companies utilize to conduct their businesses on the Internet. OUR INDUSTRY Businesses are rapidly adopting technology that allows their existing computer systems to operate and be accessed over the Web. To date, most businesses have simply provided marketing material on their Web sites and have not been able to take full advantage of the interactive potential of the Internet. The existing information technology infrastructure of most companies cannot reliably and securely handle a high volume of interactions across the Internet. Therefore, most companies are unable to utilize, integrate or deploy their existing information technology assets for Internet commerce or use over the Web. Deploying Web application servers allows real time, interactive access to complex information through the Web that is otherwise only available internally in an organization through its own applications and existing corporate databases. This enables a much broader and diverse audience to utilize and interact with a business' core systems and information. Uses of this capability include: - broad dissemination and more effective use of management information for decision support; - employee self-service applications that improve internal efficiencies; - customer relationship management activities that enhance service levels; - supply chain functions that increase coordination among trading partners; and - Internet commerce initiatives that create entirely new revenue streams and business models. Demand for these capabilities has resulted in significant growth in the market for Web application servers. In an August 1998 report, Forrester Research estimated that the market for application server software would be approximately $700 million in 1999 and grow to approximately $1.8 billion by 2001, representing a compounded annual growth rate of approximately 60%. Another independent technology research organization, Ovum, estimated in a June 1999 report that the market for application server technologies, which Ovum defines in a manner that more closely resembles our addressable market, will grow to $17 billion by 2004. As this market develops, businesses are recognizing that a broader set of facilities, beyond simple deployment alone, are required to capture the substantial benefits that Internet computing and Internet commerce can provide. OUR SOLUTION We provide a comprehensive framework that enables businesses to deploy information across the Internet to employees, customers, suppliers and partners. Our solution furnishes businesses with the ability to Web-enable their existing systems, develop new Web-based applications, integrate their applications and enable Internet commerce. Our deployment solution is 100% Pure JAVA, a programming language developed by Sun Microsystems that operates in virtually all computing environments. We believe our solution is the only one available that allows organizations to develop, deploy, integrate and manage enterprise-scale, mission-critical applications. In particular, our solution offers the following facilities: - a robust development environment and toolset that is open and highly adaptable and has many features that increase the speed and reduce the cost of systems development; - open, high-performance deployment that enables implementation of systems with high reliability, security and flexibility and supports very high volumes of interactions; - extensive integration capabilities that facilitate the integration of a business' overall computing environment; and - comprehensive management features that provide the necessary means to monitor, administer and report on a business' entire Web infrastructure. OUR GROWTH STRATEGY Our goal is to maintain and extend our position as a leading provider of Web application server technology, enterprise application integration and Internet commerce solutions. Our key growth strategies are to: - maintain and extend technological leadership; - expand product offerings; - continue to focus on enterprise-scale solutions; - increase marketing and direct sales efforts; - further develop indirect channels, partners and alliances; and - make strategic acquisitions of complementary businesses and technologies. OUR CUSTOMERS Our solutions are applicable to a wide variety of industries and are used by many of the world's leading businesses, including: - three of the top five FORTUNE 500 companies in the electronics industry; - five of the top ten FORTUNE 500 companies in the computer equipment industry; - four of the top five FORTUNE 500 companies in the aerospace industry; - seven out of the top ten FORTUNE 500 companies in the telecommunications industry; - three of the top four FORTUNE 500 companies in the entertainment industry; and - five of the top ten FORTUNE 500 companies in the pharmaceuticals industry. We market our products and services through our direct sales force and a network of value added resellers, independent software vendors and systems integrators. Since 1996, we have sold our Sapphire/ Web software products to over 500 customers. Our customers include ARI, Avnet, Deutsche Bank, Expression Engines, Inc., Food.com, gazoontite.com, Hewlett-Packard, Houghton Mifflin Company, Sanchez Computer Associates, Spinrocket.com, Inc. and Strategic Weather Services. We were originally incorporated in 1989. Our executive offices are located at 300 Stevens Drive, Philadelphia, Pennsylvania 19113. Our telephone number is (610) 915-5000. Information contained on our Web site at www.bluestone.com does not constitute a part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered by Bluestone............ 1,750,000 shares Common stock offered by the selling 1,750,000 shares stockholders............................... Total offering............................... 3,500,000 shares Common stock outstanding after this 20,262,359 shares offering................................... Use of proceeds.............................. Product development, sales and marketing, potential acquisitions and working capital Nasdaq National Market symbol................ "BLSW" </TABLE> Common stock outstanding after this offering is based on the number of shares outstanding as of December 31, 1999 and includes an additional 277,842 shares of common stock offered by certain selling stockholders which were issuable upon the exercise of stock options outstanding on such date. It excludes: - 2,384,645 shares of common stock issuable upon exercise of other options and warrants at a weighted average exercise price of $11.92 per share. - 369,356 shares reserved for future grants under our stock option and directors' compensation plans. - 3,459,672 additional shares reserved for issuance under our stock option plan as approved on January 31, 2000. SUMMARY FINANCIAL INFORMATION The following table sets forth certain of our historical, pro forma and adjusted financial data. The pro forma net loss per share amount presented below reflects the outstanding preferred stock during the period presented on an as converted basis. The adjusted balance sheet data presented below gives effect to the receipt of the estimated net proceeds of $161.1 million from the sale of shares of common stock offered by us at an assumed offering price of $97.00 per share, after deducting $8.6 million for estimated underwriting discounts and commissions and our estimated offering expenses and our receipt of $2.3 million of proceeds from the exercise of 277,842 stock options by certain selling stockholders. In April 1997, we spun off our consulting division to our then sole stockholder. The consulting division spin-off has been reported as a discontinued operation. In April 1998, we decided to focus on internally developed software products and curtail the licensing and services related to third party products. No material license revenues from third party products were recognized after March 31, 1998. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------- 1997 1998 1999 --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Software license fees..................................... $ 2,337 $ 3,391 $ 11,654 Services.................................................. 2,179 3,620 3,993 Third party products and related services................. 5,225 1,107 -- ------- -------- -------- Total revenues........................................ 9,741 8,118 15,647 Cost of revenues: Software license fees..................................... 202 259 401 Services.................................................. 2,516 4,433 4,792 Third party products and related services................. 2,798 643 -- ------- -------- -------- Total cost of revenues................................ 5,516 5,335 5,193 ------- -------- -------- Gross profit................................................ 4,225 2,783 10,454 Operating expenses: Sales and marketing....................................... 5,131 9,551 15,936 Product development....................................... 1,295 2,474 4,537 General and administrative................................ 1,616 2,316 4,412 Amortization of stock-based compensation.................. -- -- 282 ------- -------- -------- Total operating expenses.............................. 8,042 14,341 25,167 ------- -------- -------- Loss from operations........................................ (3,817) (11,558) (14,713) Interest expense, net....................................... (80) (47) (405) ------- -------- -------- Loss from continuing operations............................. (3,896) (11,605) (15,118) Income from discontinued operations......................... 99 -- -- ------- -------- -------- Net loss.................................................... (3,798) (11,605) (15,118) Accretion of preferred stock redemption value............... (240) (846) (1,636) ------- -------- -------- Net loss available to common stockholders................... $(4,038) $(12,451) $(16,754) ======= ======== ======== Basic and diluted net income (loss) per share: Continuing operations..................................... $ (1.39) $ (4.12) $ (2.18) Discontinued operations................................... 0.04 -- -- Accretion of preferred stock redemption value............. (0.09) (0.30) (0.24) ------- -------- -------- $ (1.44) $ (4.42) $ (2.42) ======= ======== ======== Shares used in computing basic and diluted net income (loss) per share................................................. 2,813 2,814 6,928 Pro forma basic and diluted net loss per share from continuing operations..................................... $ (1.13) ======== Shares used in computing pro forma basic and diluted net loss per share............................................ 13,429 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ------------------------------------------ ACTUAL ADJUSTED -------- ------------------------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $66,160 $229,579 Working capital............................................. 63,545 226,964 Total assets................................................ 74,140 237,559 Long-term obligations, net of current portion............... 439 439 Total stockholders' equity.................................. 65,964 229,383 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001039446_jmxi-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001039446_jmxi-inc_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..de3ffe944ac2fc59e88efee94701bceba3659792
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The information below is only a summary of more detailed information included in other sections of this prospectus. The other information is important, so please read this entire prospectus carefully. MEDIA METRIX OUR BUSINESS We are a leading provider of Internet and Digital Media measurement products and services. We measure usage of the entire digital landscape, including its largest segments: the World Wide Web, proprietary online services like America Online, software, instant messaging applications and other digital applications. In January 1996, we released the first World Wide Web Audience Measurement report. Today, we offer a range of Internet audience, e-commerce, advertising, and technology measurement services to leading Internet advertisers, advertising agencies, media companies, technology companies and financial institutions. Our products and services enable the continued growth and development of the Internet by providing third-party measurement data that our customers rely on to make critical business decisions. Our data are used to buy, sell and plan advertising, support marketing and commerce initiatives, assess partnerships and distribution strategies and analyze competitors. We collect Internet audience data by measuring Internet usage from representative samples, or panels, of personal computer users with our proprietary tracking technology. We maintain large panels of randomly selected individuals, reporting Internet usage at home and at work. Panelists are randomly recruited to participate in the Media Metrix sample. They are required to fill out a detailed questionnaire to provide background demographic information at the individual and household level. Panelists download and install our tracking software onto their PCs. The tracking software tracks all PC usage at the individual user level. The tracking software follows the panelists, page-by-page, minute-by-minute, click-by-click, as they use their PCs. We collect these usage data from the panelists' personal computers and transmit them to our data collection center for processing. The data are used to construct several databases, and they provide the foundation for our products and services. As a result of our acquisition of AdRelevance in October 1999, we offer Internet advertising measurement products and services. AdRelevance specializes in the automated retrieval and analysis of online advertising. Using intelligent agent technology, the AdRelevance system scours the Internet, retrieving advertisements. Upon retrieval, ads are analyzed, classified and added to the AdRelevance database, providing advertisers, agencies and publishers with marketing intelligence, including when, how and how much their competitors are marketing and advertising on the Internet. AdRelevance operates as a wholly owned subsidiary of Media Metrix. OUR HISTORY Our business was originally conducted as a division within The NPD Group, Inc., a leading marketing research firm. In March 1996, NPD formed PC Meter, a Delaware limited partnership, to conduct our business. In March 1997, we reorganized into a Delaware corporation and began using the trade name Media Metrix in our business. In November 1998, we merged with RelevantKnowledge, Inc., our leading competitor. In May 1999, we completed an initial public offering of our common stock. In October 1999, we acquired AdRelevance. NPD, our largest stockholder, owns approximately 21% of our common stock. Although our revenues have continued to grow, we have a history of operating losses and negative cash flow. In ================================================================================ DATED APRIL 26, 2000 868,756 SHARES OF COMMON STOCK OF MEDIA METRIX, INC. - -------------------------------------------------------------------------------- This prospectus relates to the public offering, which is not being underwritten, of 868,756 shares of our common stock by some of our current stockholders. The prices at which the selling stockholders may sell the shares will be determined by the prevailing market price for the shares or in negotiated transactions. We will not receive any of the proceeds from the sale of the shares. Our common stock is traded on the Nasdaq National Market under the symbol "MMXI." On April 25, 2000, the last reported sale price for the common stock was $35.50 per share. THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 4. April 26, 2000 - -------------------------------------------------------------------------------- NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS DETERMINED WHETHER THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. NOR HAVE THEY MADE, NOR WILL THEY MAKE, ANY DETERMINATION AS TO WHETHER ANYONE SHOULD BUY THESE SECURITIES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- addition, the market for Internet audience measurement services is new and rapidly evolving, and we expect competition in this market to intensify in the future. Our principal executive offices are located at 250 Park Avenue South, 7th Floor, New York, New York 10003, and our telephone number is (212) 515-8700. Media Metrix(R), PC Meter, RelevantKnowledge, e-Trends, The Power of Relevant Knowledge, MyMetrix, AdRelevance and the Media Metrix logo are our trademarks. Any other trademark, trade name or service mark of any other company appearing in this prospectus belongs to its holder. THE OFFERING This prospectus relates to the sale of shares of our common stock by the selling stockholders listed in "Selling Stockholders." The selling stockholders may sell the common stock offered in this prospectus in one or more transactions on the Nasdaq National Market or in negotiated transactions. These transactions may include: - negotiated transactions; - the writing of options; or - a combination of these methods of sale. These transactions may occur: - at fixed prices that may be changed; - at market prices prevailing at the time of sale; - at prices related to such prevailing market prices; or - at negotiated prices. The selling stockholders may sell common stock to or through broker-dealers, including broker-dealers who may act as underwriters. These broker-dealers may receive compensation in the form of discounts, concessions or commissions from the selling stockholders. This compensation may exceed customary commissions. The selling stockholders may also: - sell common stock pursuant to Rule 144 promulgated under the Securities Act of 1933; or - pledge common stock as collateral for margin accounts, and this common stock could be resold pursuant to the terms of these accounts. The selling stockholders and any participating brokers and dealers may be deemed to be "underwriters," as defined in the Securities Act. See "Plan of Distribution." We will receive none of the proceeds from the sale of the common stock by the selling stockholders. We have agreed to bear all expenses, other than selling commissions and fees, in connection with the registration and sale of the common stock being offered by the selling stockholders. See "Plan of Distribution." RECENT DEVELOPMENTS On April 17, 2000, we reported revenues of $10.2 million for the three months ended March 31, 2000, a 35% increase compared to revenues of $7.6 million for the three months ended December 31, 1999 and a 221% increase compared to revenues of $3.2 million for the three months ended March 31, 1999. Net loss applicable to common stockholders was $8.1 million, or $0.41 per share, for the three months ended March 31, 2000, compared to $14.3 million, or $0.75 per share, for the three months ended December 31, 1999, and $2.5 million, or $0.19 per share, for the three months ended March 31, 1999. TABLE OF CONTENTS <TABLE> <CAPTION> Page <S> <C> PROSPECTUS SUMMARY .................................................................. 1 RISK FACTORS ........................................................................ 4 USE OF PROCEEDS ..................................................................... 17 PRICE RANGE OF COMMON STOCK ......................................................... 17 DIVIDEND POLICY ..................................................................... 17 CAPITALIZATION ...................................................................... 18 SELECTED FINANCIAL DATA ............................................................. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................ 20 BUSINESS ............................................................................ 29 MANAGEMENT .......................................................................... 40 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ...................................... 47 PRINCIPAL STOCKHOLDERS AND MANAGEMENT ............................................... 51 SELLING STOCKHOLDERS ................................................................ 53 DESCRIPTION OF CAPITAL STOCK ........................................................ 55 SHARES ELIGIBLE FOR FUTURE SALE ..................................................... 58 PLAN OF DISTRIBUTION ................................................................ 60 LEGAL MATTERS ....................................................................... 61 EXPERTS ............................................................................. 61 WHERE YOU CAN FIND ADDITIONAL INFORMATION ........................................... 61 </TABLE> SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table summarizes the statement of operations data for our business and our predecessor businesses. The pro forma data give effect to our acquisition of AdRelevance as if it took place on January 1, 1999. For a more detailed explanation of these financial data, see "Selected Financial Data" and our financial statements located elsewhere in this prospectus. <TABLE> <CAPTION> Period from Inception Pro Forma through Year Ended December 31, Year-Ended December 31, -------------------------------------------------------- December 31, 1995 1996 1997 1998 1999 1999 <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues $ - $ 1,033 $ 3,188 $ 6,331 $ 20,500 $ 20,503 Cost of revenues 140 1,744 3,463 4,121 10,291 10,291 -------- -------- -------- -------- -------- -------- Gross profit (loss) (140) (711) (275) 2,210 10,209 10,212 Operating Expenses: Research and development 86 588 866 1,382 5,044 5,862 Sales and marketing 45 929 2,022 2,888 9,117 9,341 General and administrative 101 1,148 1,516 2,715 6,756 7,644 Amortization of deferred compensation and other stock-based compensation - - - 369 1,060 1,981 Amortization of intangibles - - - 479 7,312 20,894 Acquired in-process research and development - - - 1,600 6,800 6,800 -------- -------- -------- -------- -------- -------- Total operating expenses 232 2,665 4,404 9,433 36,089 52,522 -------- -------- -------- -------- -------- -------- Loss from operations (372) (3,376) (4,679) (7,223) (25,880) (42,310) Minority interests - - - - 1,689 1,689 Interest and other income, net - - 95 65 2,283 2,279 -------- -------- -------- -------- -------- -------- Net loss (372) (3,376) (4,584) (7,158) (21,908) (38,342) Preferred stock dividends - - (290) (314) (109) (109) Net loss applicable to common stockholders $ (372) $ (3,376) $ (4,874) $ (7,472) $(22,017) $(38,451) ======== ======== ======== ======== ======== ======== Basic and diluted net loss per common share applicable to common stockholders $ (0.06) $ (0.52) $ (0.75) $ (0.98) $ (1.34) $ (2.27) ======== ======== ======== ======== ======== ======== Shares used in the calculation of basic and diluted net loss per share applicable to common stockholders 6,523 6,523 6,523 7,619 16,445 16,973 </TABLE> <TABLE> <CAPTION> At December 31, -------------------------------------------------------------------- BALANCE SHEET DATA: 1996 1997 1998 1999 <S> <C> <C> <C> <C> Cash, cash equivalents and marketable securities $ 583 $ 1,869 $ 8,012 $112,241 Working capital (deficit) (2,478) (47) 1,057 102,806 Total assets 1,213 2,787 16,060 178,844 Due to NPD 2,782 1,284 4,706 444 Preferred stocks - 8,366 4,680 - Total stockholders' equity (deficit) (2,478) (8,274) 2,622 162,789 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001040853_pharsight_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001040853_pharsight_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE BUYING SHARES IN THIS OFFERING. WE URGE YOU TO READ THE ENTIRE PROSPECTUS CAREFULLY. PHARSIGHT CORPORATION We develop and market integrated products and services that help pharmaceutical and biotechnology companies improve the drug development process. Our solution combines proprietary computer-based simulation, statistical and data analysis tools with strategic decision making and the sciences of pharmacology, drug and disease modeling, human genetics and biostatistics, a branch of statistics applied to biological phenomena, and consists of: - SCIENTIFIC AND DECISION SERVICES. Our multidisciplinary research teams collaborate with customers to design more efficient drug development programs by applying a more rigorous and integrated scientific approach than is currently used. - COMPUTER-BASED DEVELOPMENT APPLICATIONS AND SERVICES. Customers use our software applications, including drug and disease modeling and clinical trial simulation and related services, to improve their drug development process. - INFORMATION PRODUCTS. We are developing medical databases and software products for the analysis of these databases, to enable our customers to obtain objective and quantitative answers to important questions in trial and program decision-making. We have an integrated solution to address the critical steps in designing clinical trials and drug development programs. Our solution is designed to help our customers use a more rigorous scientific and statistical process to identify earlier those drug candidates that will not be successful and to enhance the likelihood that the remaining candidates will successfully complete clinical trials. We believe our solution helps reduce the time, cost and risk of drug development and may improve the marketing and use of pharmaceutical products. Pharmaceutical and biotechnology companies have invested substantial resources in new technologies, such as high throughput screening and combinatorial chemistry, to accelerate the drug discovery process. While new technologies have been developed to expand the number of new drug candidates and accelerate the speed with which they can be evaluated, and to better and more rapidly capture and organize data for submission to regulatory agencies, the clinical development process continues to be lengthy and unpredictable. In fact, the FDA reports that clinical development prior to regulatory submission takes five years on average, and that 80% of drugs that enter human clinical trials ultimately fail to receive regulatory approval. Twelve of the world's 20 largest pharmaceutical companies have begun to apply our computer-assisted drug development solution, and our computer-based development applications are currently used on more than 1,800 researcher desktops. Our top five customers by revenue to us in the fiscal year ended March 31, 2000 were, listed in alphabetical order, AstraZeneca PLC, Glaxo Wellcome Inc., Johnson & Johnson, SmithKline Beecham Pharmaceuticals and Warner-Lambert Company. Our strategy is to help pharmaceutical and biotechnology companies accelerate clinical development and to assist large healthcare organizations in the adoption and use of pharmaceutical products. We were incorporated in California in April 1995, and we reincorporated in Delaware in June 2000. Our executive offices are located at 800 West El Camino Real, Suite 200, Mountain View, CA 94040, and our telephone number is (650) 314-3800. Our website address is on the world wide web at "pharsight.com." We do not incorporate the information on our website into this prospectus, and you should not consider it part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered............. 3,750,000 shares Common stock to be outstanding after the offering............. 18,491,939 shares Use of proceeds.................. Approximately $6.1 million to the holders of our series C preferred stock and the remainder for research and development of new and existing products and services, and working capital and other general corporate purposes, including potential acquisition of products, technologies or businesses. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Proposed Nasdaq National Market symbol......................... PHST Risk factors..................... See "Risk Factors," beginning on page 4, for a discussion of factors you should consider carefully before deciding to buy our common stock. </TABLE> The number of shares outstanding after this offering is based on shares outstanding as of March 31, 2000, assuming the conversion of our preferred stock into common stock, and excludes 2,132,250 shares issuable upon exercise of outstanding stock options and warrants at a weighted average exercise price of $1.11 per share. ASSUMPTIONS WHICH APPLY TO THIS PROSPECTUS Unless otherwise indicated, all share amounts and financial information presented in this prospectus assume the underwriters' over-allotment option is not exercised and give effect to: - conversion of our convertible preferred stock into our common stock, which will occur automatically upon completion of this offering; - our reincorporation from a California corporation to a Delaware corporation, which occurred in June 2000; and - the filing of our restated certificate of incorporation, which will occur immediately following the completion of this offering. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The tables below summarize our financial data set forth in more detail in the financial statements at the end of this prospectus. The financial data below are based on the following assumptions: - The pro forma basic and diluted net loss per share includes shares of common stock issued on the conversion of our outstanding preferred stock on a one-for-one basis into common stock. - The as adjusted balance sheet data reflect the conversion of all outstanding shares of preferred stock into common stock, the sale by us of 3,750,000 shares of common stock offered by this prospectus at an assumed initial public offering price of $13.00 per share after deducting the estimated underwriting discounts and commissions and offering expenses payable by us, and the payment of approximately $6.1 million to the holders of our series C preferred stock. <TABLE> <CAPTION> YEARS ENDED MARCH 31, ------------------------------ 1998 1999 2000 <S> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenues.................................................. $ 736 $ 3,891 $ 8,859 Operating expenses........................................ 5,333 13,818 19,031 Loss from operations...................................... (4,597) (9,927) (10,172) Net loss applicable to common shareholders................ (5,517) (10,850) (11,228) Basic and diluted net loss per common share............... $ (4.19) $ (4.48) $ (3.48) Shares used in computing basic and diluted net loss per common share............................................ 1,318 2,424 3,225 Pro forma basic and diluted net loss per common share..... $ (0.88) Shares used in computing pro forma basic and diluted net loss per common share................................... 12,712 </TABLE> <TABLE> <CAPTION> MARCH 31, 2000 ---------------------- ACTUAL AS ADJUSTED <S> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short-term investments......... $16,482 $54,361 Working capital........................................... 12,837 50,716 Total assets.............................................. 21,320 59,199 Long-term obligations, net of current portion............. 708 708 Redeemable convertible preferred stock.................... 18,582 -- Total stockholders' equity (deficit)...................... (4,525) 51,936 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001041403_corillian_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001041403_corillian_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN OUR FORWARD-LOOKING STATEMENTS FOR REASONS SUCH AS THOSE SET FORTH UNDER "RISK FACTORS." CORILLIAN We are a provider of solutions that enable banks, brokers, financial portals and other financial service providers to rapidly deploy Internet-based financial services. Our solutions allow consumers to conduct financial transactions, view personal and market financial information, pay bills and access other financial services on the Internet. The Internet is being used increasingly to deliver Internet-based financial services that provide consumers significant benefits, such as twenty-four hour, real-time access to information, a convenient means to pay bills and personal finance management tools. These benefits have made Internet-based financial services popular among consumers, and personal finance content is one of the most popular content categories on the Internet. International Data Corporation estimates that the number of users banking on the Internet will expand from 8.1 million in 1998 to 39.8 million in 2003, and that the number of banks offering Internet-based financial services will increase from 1,150 in 1998 to 15,845 in 2003. Our Voyager eFinance Suite is a software platform combined with a set of applications for Internet banking, electronic bill presentment and payment, targeted marketing and online customer relationship management. Voyager integrates into our customers' existing database applications and systems and enables them to monitor transactions across all systems in real time. Our current Voyager customers include Citibank, Quicken.com, SunTrust Bank and Wachovia Bank. Our recently introduced OneSource service aggregates financial information from numerous banks, brokerages and other financial service providers and delivers this content to our subscribers. By subscribing to OneSource, financial institutions and financial portals can offer their customers a service that quickly consolidates all of their customers' financial information in one comprehensive location. As a result, a subscriber's customer can see financial information from all of his or her accounts in one place. Microsoft, through the MSN financial portal, MoneyCentral, is our initial OneSource subscriber. Our software, which scales to accommodate millions of users, and our professional and content services enable our customers to deploy new or enhanced Internet-based financial services in today's competitive environment. In addition, our software is designed to allow new applications to be quickly added to our platform or other software platforms. Our objective is to be the leading provider of Internet solutions to both traditional and emerging Internet financial service providers. We intend to increase our market share and continue to introduce new products and solutions. For example, we recently made our solutions accessible to wireless devices and intend to expand our product offerings to include additional retail functions, such as brokerage transactions. We intend to leverage the strategic partnerships we have established with such companies as Intuit, Microsoft, Parkers' Edge and Yahoo! to establish Voyager and OneSource as the solutions of choice for Internet finance. We were incorporated in Oregon in 1997. Our principal office is located at 3855 SW 153(rd) Drive, Beaverton, Oregon 97006, and our telephone number is (503) 627-0729. Our World Wide Web site is located at HTTP://WWW.CORILLIAN.COM. Information on our website does not constitute part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered by us................ 4,000,000 shares Common stock offered in the private placement............................... 1,909,091 shares Common stock to be outstanding after the offering................................ 29,525,594 shares Use of proceeds........................... Working capital and general corporate purposes. See "Use of Proceeds" on page 15. Proposed Nasdaq National Market symbol.... CORI </TABLE> - ------------------------ The share amounts in this table are based on shares outstanding as of December 31, 1999. This table excludes: - 3,619,224 shares of common stock issuable upon the exercise of stock options outstanding under our 1997 stock option plan; - 4,000,000 additional shares of common stock available for issuance under our 2000 stock incentive compensation plan; - 333,333 shares of common stock available for issuance under our 2000 employee stock purchase plan; and - 250,000 shares of common stock issuable upon the exercise of the warrant issued in the private placement that will occur concurrently with this offering. ------------------------ EXCEPT AS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS DOES NOT GIVE EFFECT TO THE EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND GIVES EFFECT TO: - A 2-FOR-3 REVERSE STOCK SPLIT BEFORE THE COMPLETION OF THIS OFFERING; - THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED STOCK INTO COMMON STOCK UPON THE CLOSING OF THIS OFFERING; AND - THE FILING OF OUR AMENDED AND RESTATED ARTICLES OF INCORPORATION. CORILLIAN, VOYAGER, ONESOURCE and the Corillian logo are our trademarks. Other trademarks or service marks appearing in this prospectus are trademarks or service marks of the companies that use them. SUMMARY FINANCIAL DATA The pro forma as adjusted balance sheet data below give effect to the sale of the shares of common stock offered by us in the offering at an estimated initial public offering price of $11.00 per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, the sale of 1,909,091 shares of our common stock in the private placement that will occur concurrently with the closing of this offering at an estimated per share price of $11.00, after deducting the estimated placement agent compensation payable by us, and the sale of the warrant to be issued in the private placement that will occur concurrently with the closing of this offering, after deducting the estimated placement agent compensation payable by us. The pro forma balance sheet data below also give effect to the conversion of 14,723,223 shares of redeemable convertible preferred stock into 14,723,223 shares of common stock and the conversion of 1,639,730 shares of convertible preferred stock into 1,639,730 shares of common stock. See Note 2 of the Notes to Financial Statements for an explanation of the method used to calculate basic and diluted net loss per share. <TABLE> <CAPTION> PERIOD FROM YEAR ENDED APRIL 9, 1997 DECEMBER 31, (DATE OF INCEPTION) ------------------- TO DECEMBER 31, 1997 1998 1999 --------------------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenues........................................... $ 399 $ 3,393 $ 7,736 Gross profit....................................... 81 1,499 1,085 Total operating expenses........................... 1,504 3,426 11,478 Loss from operations............................... (1,423) (1,927) (10,393) Net loss........................................... (1,396) (1,831) (9,994) Basic and diluted net loss per share............... $ (0.38) $ (0.24) $ (1.37) Shares used in computing basic and diluted net loss per share............................... 3,771 7,427 7,399 Pro forma basic and diluted net loss per share..... $ (0.62) Shares used in computing pro forma basic and diluted net loss per share....................... 16,292 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 --------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- -------------- ----------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................. $ 8,502 $ 8,502 $ 70,439 Investments........................................... 10,357 10,357 10,357 Working capital....................................... 16,976 16,976 78,913 Total assets.......................................... 25,902 25,902 87,839 Capital lease obligations, less current portion....... 177 177 177 Redeemable convertible preferred stock................ 31,501 -- -- Total shareholders' (deficit) equity.................. (11,706) 19,795 81,732 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001041672_heller_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001041672_heller_prospectus_summary.txt
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+SUMMARY The following is only a summary of the terms of the notes. It does not contain all the information that may be important to you. You should read this entire prospectus. In addition, you may wish to read the documents governing the sale of the contracts, the formation of the trust and the issuance of notes. Those documents have been filed as exhibits to the registration statement of which this prospectus is a part. There are material risks associated with an investment in the notes. See "RISK FACTORS" on page 11 for a discussion of factors you should consider before making an investment in the notes. <TABLE> <S> <C> The Trust................................. Heller Equipment Asset Receivables Trust 2000-1. The trust's principal offices will be in care of Wilmington Trust Company, as owner trustee, at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890, telephone number (302) 651-1000. The Originators........................... Heller Financial, Inc. and Heller Financial Leasing, Inc. The Trust Depositor....................... Heller Funding Corporation. The trust depositor is a wholly owned, limited purpose subsidiary of Heller Financial, Inc. The trust depositor's principal executive offices are located at 500 West Monroe Street, Chicago, Illinois 60661, telephone (312) 441-7246. The Servicer.............................. Heller Financial, Inc., with Heller Financial Leasing, Inc. acting as a sub-servicer. The Indenture Trustee..................... Norwest Bank Minnesota, National Association The Trust's Assets A. The Contracts....................... The trust's assets will primarily consist of the contracts. The contracts consist of: - conditional sale agreements - leases - secured promissory notes - installment payment agreements - financing agreements Most of the contracts are end-user contracts. End-user contracts relate to the financing by end-users of equipment or software and related support and consulting services. The obligors on the end-user contracts are the actual end-users. The other contracts are limited recourse loans to equipment manufacturers, dealers or distributors or to computer software distributors, all of which are secured by one or more end-user contracts. We refer to these other contracts as vendor loans. The contracts have been originated or purchased by Heller Financial, Inc., Heller Financial Leasing, Inc. or vendors of equipment or software. If a vendor originated a contract, the vendor assigned the contract to Heller Financial, Inc. or Heller Financial Leasing, Inc. Heller Financial, Inc. and Heller Financial Leasing, Inc. have sold the contracts to the trust </TABLE> <TABLE> <CAPTION> PAGE -------- <S> <C> Representations and Warranties; Definition of Eligible Contract... 91 Remedies for Breaches of Representations and Warranties; Definition of Ineligible Contract.......................... 94 Concentration Amounts; Definition of Excess Contract................... 94 Material Modifications to Contracts......................... 95 Definition of Defaulted Contracts... 96 Substitute Contracts................ 96 Indemnification..................... 97 Servicing Standard and Servicer Advances.......................... 97 Servicer Resignation................ 97 </TABLE> <TABLE> <CAPTION> PAGE -------- <S> <C> Servicer Default.................... 98 Evidence as to Compliance........... 99 Amendments.......................... 100 The Owner Trustee................... 100 Federal Income Tax Consequences....... 102 ERISA Considerations.................. 108 Plan of Distribution.................. 110 Rating of the Notes................... 112 Legal Matters......................... 112 Experts............................... 112 Index of Terms........................ 115 </TABLE> ------------------------ IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS Within the period during which there is an obligation to deliver a prospectus, the underwriters will, at your request, promptly deliver to you, or cause to be delivered to you, without charge, a paper copy of this prospectus. No dealer, salesman or other person is authorized to give any information or to make any representation not contained in this prospectus. If anyone makes such a representation to you, you should not rely on it. This prospectus does not constitute an offer to sell or a solicitation of any offer to buy any security other than the notes offered by this prospectus, nor does it constitute an offer to sell or a solicitation of any offer to buy any of the notes to any person in any jurisdiction in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such an offer or solicitation to such person. <TABLE> <S> <C> depositor. On or about , 2000, the trust depositor will transfer the contracts and security interests in the related equipment to the trust. The contracts have been selected based on criteria specified in the sale and servicing agreement. Frequently, information about the contracts is expressed in terms of the discounted contract balance. The discounted contract balance of a contract is the present value of scheduled payments to be paid on the contract calculated at a discount rate of [ ]%. For a more specific description of how the discounted contract balance is calculated see "DISCOUNTED CONTRACT BALANCE". Where noted in this prospectus, we used a statistical discount rate of [ ]% to calculate the discounted contract balances of the contracts. The statistical discount rate is based on an average of the estimated interest rates of the notes weighted by the estimated initial average life and initial principal amounts of the notes. None of the obligors on the contracts are located outside of the United States and its territories. No more than [ ]% (calculated using the statistical discount rate) of the aggregate discounted contract balance of the contracts relates to obligors located in the same state. All of the contracts are commercial contracts and, as of the date of this prospectus, no contract has any delinquent scheduled payments. We consider a scheduled payment to be delinquent if: - it is more than 60 days delinquent; and - the delinquent amount is more than the greater of the following: (A) $10 or (B) 10% of the scheduled payment. See "THE SALE AND SERVICING AGREEMENT--REPRESENTATIONS AND WARRANTIES; DEFINITION OF ELIGIBLE CONTRACT" and "THE CONTRACTS POOL". As of , 2000, the contracts had the following characteristics calculated using the statistical discount rate: </TABLE> <TABLE> <S> <C> Number of contracts...................... Aggregate discounted contract balance.... $ Average discounted contract balance of a contract............................... $ Weighted average original term to maturity............................... months Range.................................... months Weighted average remaining term to maturity............................... months Range.................................... months </TABLE> <TABLE> <S> <C> Changes in characteristics of the contracts between , 2000 and the closing date will not affect more than 5.00% of the aggregate discounted contract balance of the contracts. </TABLE> <TABLE> <S> <C> For further information regarding the contracts, see "THE CONTRACTS POOL" and "THE CONTRACTS," as well as "THE SALE AND SECURITY AGREEMENT--REPRESENTATIONS AND WARRANTIES; DEFINITION OF ELIGIBLE CONTRACT" and "--CONCENTRATION AMOUNTS; DEFINITION OF EXCESS CONTRACT". We may replace a contract that is part of the trust's assets with a substitute contract: - if we subsequently determine that a contract was not eligible to be sold to the trust at the time of its sale to the trust; - if we did not remove and replace that contract, the obligor or equipment concentrations of contracts would exceed the limits described in "THE SALE AND SERVICING AGREEMENT--CONCENTRATION AMOUNTS; DEFINITION OF EXCESS CONTRACTS;" or - if the contract is prepaid. See "THE SALE AND SERVICING AGREEMENT--SUBSTITUTE CONTRACTS". The substitute contracts will have been originated under the same credit criteria and policies as the contracts they replace. B. Reserve Fund........................ On the closing date of the transfer of the contracts to the trust, the trust depositor will establish a reserve fund in the name of the indenture trustee. The reserve fund provides you with limited protection in the event collections from obligors on the contracts are insufficient to make payments on the notes. We cannot assure you, however, that this protection will be adequate to prevent shortfalls in amounts available to make payment on the notes. The initial balance of the reserve fund will be equal to [ ]% of the initial aggregate discounted contract balance of the contracts, approximately $[ ]. If, on any payment date, the amounts available for distribution exceed the amounts needed to pay amounts owed to the servicer and to pay interest and principal on the notes, the excess will be deposited into the reserve fund. However, the amount deposited in the reserve fund shall not exceed the amount needed to increase the reserve fund balance to an amount equal to [ ]% of the aggregate outstanding principal amount of the notes as of the last day of the immediately preceding completed collection period. Investment earnings on amounts held in the reserve fund will be available for distribution to you. If on any payment date, collections on the contracts are less than the amount needed to pay interest on the notes, the indenture trustee will withdraw funds from the reserve fund to pay the interest. Additionally, if collections on the contracts are sufficient to pay interest but not principal on the notes, we will withdraw any amounts in excess of [ ]% of the aggregate outstanding principal amount of the notes. The conditions under which we will withdraw amounts from the reserve fund are more specifically described in the </TABLE> <TABLE> <S> <C> "DESCRIPTION OF THE NOTES AND INDENTURE--ALLOCATIONS" and "--RESERVE FUND". Securities Not Offered by this Prospectus.............................. We will also issue $ aggregate principal amount of Class D % Receivable-Backed Notes, Series 2000-1, $ aggregate principal amount of Class E % Receivable-Backed Notes, Series 2000-1 and a certificate with a $ certificate balance, none of which are offered by this prospectus. Terms of the Notes........................ The basic terms of the notes will be as described below. See "DESCRIPTION OF THE NOTES AND INDENTURE". We will pay principal and interest due on the notes using: - collections of payments due under the contracts held by the trust; - earnings on amounts held in the collection account; - late charges relating to a contract if the late charges were included in the contract's terms as of the date the contract was purchased by the trust; - amounts earned on funds held in the reserve fund; - amounts received upon the prepayment or purchase of contracts or liquidation of the contracts and disposition of the related equipment upon defaults under the contracts; - amounts received from vendor recourse, if any; and - amounts in the reserve fund more specifically described in "DESCRIPTION OF NOTES AND INDENTURE--RESERVE FUND". See "AMOUNTS AVAILABLE FOR PAYMENTS ON THE NOTES". Amounts representing the residual value of the leased equipment will not be available to pay principal or interest due on the notes. You may purchase the offered notes in minimum denominations of $1,000, and in integral multiples of $1,000 in excess of the minimum denominations. We will offer the offered notes only in book-entry form. A. Events of Default................... Events of default with respect to the notes include: - failure to pay accrued interest on any payment date, - failure to pay outstanding principal on a maturity date, - breach of representations and warranties with respect to the contracts which are materially incorrect and which have a material adverse effect on the noteholders and - the occurrence of insolvency events with respect to the originators, the trust depositor, the trust or the servicer. See "DESCRIPTION OF THE NOTES AND INDENTURE--EVENTS OF DEFAULT". B. Interest............................ On a payment date, we will first repay any outstanding servicer advances. Second, we will pay the servicer's monthly </TABLE> <TABLE> <S> <C> servicing fee, but only if the servicer is not Heller Financial, Inc. or one of its affiliates. Third, we will pay interest on the notes at the rates specified on the cover of this prospectus in the following order: </TABLE> <TABLE> SECURITIES RECEIVING INTEREST PAYMENT CLASS OF NOTES PRIOR TO SPECIFIED CLASS --------------------- ---------------------------------------- <C> <S> A-1, A-2, A-3, A-4 None B Class A-1 Notes, Class A-2 Notes, Class A-3 Notes, Class A-4 Notes C Class A-1 Notes, Class A-2 Notes, Class A-3 Notes, Class A-4 Notes, Class B Notes D Class A-1 Notes, Class A-2 Notes, Class A-3 Notes, Class A-4 Notes, Class B Notes, Class C Notes E Class A-1 Notes, Class A-2 Notes, Class A-3 Notes, Class A-4 Notes, Class B Notes, Class C Notes, Class D Notes </TABLE> <TABLE> <S> <C> See "DESCRIPTION OF THE NOTES AND INDENTURE--ALLOCATIONS". We will calculate interest on the Class A-1 Notes on the basis of actual days elapsed over a year of 360 days. We will calculate interest on all other notes on the basis of a year of 360 days consisting of twelve 30 day months. C. Principal............................. On a payment date, after we pay interest on the notes, we will pay principal on the notes in the following order: </TABLE> <TABLE> SECURITIES RECEIVING PRINCIPAL PAYMENT CLASS OF NOTES PRIOR TO SPECIFIED CLASS --------------------- ---------------------------------------- <C> <S> A-1 None A-2 Class A-1 Notes Class B Notes, Class C Notes, Class D Notes and Class E Notes will receive principal payments prior to Class A-2 Notes on any payment date on which the outstanding principal amount of the Class A-1 Notes is greater than $0 A-3 Class A-1 Notes, Class A-2 Notes Class B Notes, Class C Notes, Class D Notes and Class E Notes will receive principal payments prior to Class A-3 Notes on any payment date on which the outstanding principal amount of the Class A-2 Notes is greater than $0 </TABLE> <TABLE> SECURITIES RECEIVING PRINCIPAL PAYMENT CLASS OF NOTES PRIOR TO SPECIFIED CLASS --------------------- ---------------------------------------- <C> <S> A-4 Class A-1 Notes, Class A-2 Notes, Class A-3 Notes Class B Notes, Class C Notes, Class D Notes and Class E Notes will receive principal payments prior to Class A-4 Notes on any payment date on which the outstanding principal amount of the Class A-3 Notes is greater than $0 B Class A-1 Notes Class A-2 Notes will receive principal payments prior to the Class B Notes after the outstanding principal amount of the Class A-1 Notes is reduced to $0 Class A-3 Notes will receive principal payments prior to the Class B Notes after the outstanding principal amount of the Class A-1 Notes and Class A-2 Notes is reduced to $0 Class A-4 Notes will receive principal payments prior to the Class B Notes after the outstanding principal amount of the Class A-1 Notes, Class A-2 Notes and Class A-3 Notes is reduced to $0 C Class A-1 Notes, Class B Notes Class A-2 Notes will receive principal payments prior to the Class C Notes after the outstanding principal amount of the Class A-1 Notes is reduced to $0 Class A-3 Notes will receive principal payments prior to the Class C Notes after the outstanding principal amount of the Class A-1 Notes and Class A-2 Notes is reduced to $0 Class A-4 Notes will receive principal payments prior to the Class C Notes after the outstanding principal amount of the Class A-1 Notes, Class A-2 Notes and Class A-3 Notes is reduced to $0 </TABLE> <TABLE> SECURITIES RECEIVING PRINCIPAL PAYMENT CLASS OF NOTES PRIOR TO SPECIFIED CLASS --------------------- ---------------------------------------- <C> <S> D Class A-1 Notes, Class B Notes, Class C Notes Class A-2 Notes will receive principal payments prior to the Class D Notes after the outstanding principal amount of the Class A-1 Notes is reduced to $0 Class A-3 Notes will receive principal payments prior to the Class D Notes after the outstanding principal amount of the Class A-1 Notes and Class A-2 Notes is reduced to $0 Class A-4 Notes will receive principal payments prior to the Class D Notes after the outstanding principal amount of the Class A-1 Notes, Class A-2 Notes and Class A-3 Notes is reduced to $0 E Class A-1 Notes, Class B Notes, Class C Notes, Class D Notes Class A-2 Notes will receive principal payments prior to the Class E Notes after the outstanding principal amount of the Class A-1 Notes is reduced to $0 Class A-3 Notes will receive principal payments prior to the Class E Notes after the outstanding principal amount of the Class A-1 Notes and Class A-2 Notes is reduced to $0 Class A-4 Notes will receive principal payments prior to the Class E Notes after the outstanding principal amount of the Class A-1 Notes, Class A-2 Notes and Class A-3 Notes is reduced to $0 </TABLE> <TABLE> <S> <C> See "DESCRIPTION OF THE NOTES AND INDENTURE--ALLOCATIONS". For the purposes of principal allocation described below, the Class A-1 Notes, Class A-2 Notes, Class A-3 Notes and Class A-4 Notes are considered as one class of notes and are referred to as Class A Notes. The amount of principal paid on any class of notes will be the amount necessary to reduce the outstanding principal of that class of notes to the greater of: (1) a specified percentage of the aggregate discounted contract balance of the contracts as of the last day of the most recent full collection period or (2) an amount which is intended to maintain a credit enhancement equal to a specified dollar amount of credit enhancement provided by the classes of notes </TABLE> <TABLE> <S> <C> subordinate to such class and the certificate after taking into account cumulative losses on the contracts. The percentage used in clause (1) is the ratio of the initial principal amount of such class of notes to the initial aggregate discounted contract balance of the contracts. Following an event of default, we will not make principal payments in the order described above. Instead, we will pay principal on the notes in the following order: - outstanding principal of Class A-1 Notes - Class A-2 Notes, Class A-3 Notes and Class A-4 Notes (pro rata) - outstanding principal of Class B Notes - outstanding principal of Class C Notes - outstanding principal of Class D Notes - outstanding principal of Class E Notes See "DESCRIPTION OF THE NOTES AND INDENTURE--ALLOCATIONS" and "--EVENTS OF DEFAULT". D. Payment Dates....................... You will receive distributions of interest and principal on the [ ] day of each month, or if that day is not a business day, the next business day. E. Stated Maturity Date................ The notes will mature on the date shown on the cover of this prospectus, except that if the day is not a business day, then the stated maturity date will be the next business day. F. Optional Redemption................. If the aggregate discounted contract balance of the contracts at the time is less than 10% of the initial aggregate discounted contract balance of the contracts as of , 2000, the trust depositor may redeem any outstanding notes. If the trust depositor does redeem any outstanding notes, the redemption price will be equal to the unpaid principal amount of the notes plus accrued and unpaid interest through the date of redemption. Servicing; Servicing Fee.................. The servicer will be responsible for servicing, managing and administering the contracts and related interests, and enforcing and making collections on the contracts. Additionally, the servicer and the sub-servicer have in some cases delegated servicing and collection functions on some contracts to the vendor who originated those contracts. In such instances, the servicer retains the right to determine or veto some servicing decisions and/or to replace or take over servicing and collection functions from the vendor. Although Heller Financial, Inc. may delegate its servicing duties, it remains liable for the performance or non-performance of those duties. See "THE SALE AND SERVICING AGREEMENT--SERVICING STANDARD AND SERVICER ADVANCES". </TABLE> <TABLE> <S> <C> The servicer will be entitled to receive a monthly fee equal to the product of: (1) one-twelfth of 0.40% and (2) the aggregate discounted contract balance of the contracts in the trust as of the second day of the immediately preceding calendar month. The fee is payable out of amounts we receive on the contracts. The servicer will pay any servicing fees to be paid to any sub-servicers (including vendor sub-servicers) from the servicer's monthly servicing fee. The servicing fee is paid after making payments of interest and principal on the notes as long as Heller Financial, Inc. or any affiliate is the servicer. See "DESCRIPTION OF THE NOTES AND INDENTURE--SERVICING COMPENSATION AND EXPENSES" and "THE SALE AND SERVICING AGREEMENT". Federal Income Tax Consequences........... In the opinion of Winston & Strawn, federal tax counsel to the trust depositor, for federal income tax purposes, the notes offered by this prospectus will be characterized as debt, and the trust will not be characterized as an association or a publicly traded partnership taxable as a corporation. You, by accepting a note, agree to treat the note as indebtedness. See "FEDERAL INCOME TAX CONSEQUENCES". ERISA Considerations...................... Subject to the considerations discussed under "ERISA CONSIDERATIONS", the notes will be eligible for purchase by some employee benefit plans. Any benefit plan fiduciary considering purchase of the notes should, however, consult with its counsel regarding the consequences of its purchase under ERISA and the Internal Revenue Code. See "ERISA CONSIDERATIONS". Rating.................................... We will not issue the notes unless they receive ratings from the following rating agencies as set forth below: </TABLE> <TABLE> <CAPTION> CLASS OF NOTE ------------- <S> <C> <C> A-1.................. A-2.................. A-3.................. A-4.................. B.................... C.................... </TABLE> <TABLE> <S> <C> A rating is not a recommendation to purchase, hold or sell notes since a rating does not comment on market price or suitability for a particular investor. See "RATING OF THE NOTES".
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index 0000000000000000000000000000000000000000..890e1902588ec555be9ed0b76f9a0d1787e0d283
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001042098_internet_prospectus_summary.txt
@@ -0,0 +1,213 @@
+PROSPECTUS SUMMARY
+
+ 
+
+ This
+ summary highlights some of the information in this prospectus. To understand
+ this offering fully, you should read this entire prospectus carefully,
+ including the risk factors and our financial statements.
+
+ 
+
+ Our Company
+
+ 
+
+ 
+
+ 
+
+ We are an
+ Internet service provider for approximately 30,000 residential and
+ commercial end users in small- to medium-sized communities in the western
+ United States. We currently operate in nineteen communities located in
+ California, Colorado, Idaho, Oregon and Washington. Our objective is to
+ become a dominant Internet communications provider in communities with
+ populations under 500,000. Based on our four years of operating experience
+ in these smaller markets, we believe that a committed local presence in a
+ community will assist in establishing a strong customer base, providing us
+ with an advantage over our larger competitors.
+
+ 
+
+ We
+ provide Internet services including:
+
+ 
+
+ 
+ 
+ 
+ dial-up and broadband Internet access
+
+ 
+
+ 
+ 
+ 
+ local web hosting, advertising and storage of high-quality streaming
+ media
+
+ 
+
+ 
+ 
+ 
+ systems integration and network design services
+
+ 
+
+ Our
+ dial-up and broadband Internet access provides our subscribers with access
+ to the Internet via phone line, cable wire or wireless cable. Our web
+ hosting services provide local businesses with an electronic address where
+ the web page of that business is located. We provide local information, such
+ as local events, announcements, news and weather, and sell advertising on
+ these web pages. We also provide our customers with video and audio
+ programming, called streaming media, which we store on our local computer
+ files. Our systems integration and network design services are aimed at
+ providing local businesses with consulting and design advice for improving
+ computer systems and computer networks.
+
+ 
+
+ It is
+ widely recognized that the evolution of the Internet industry will have
+ enormous implications for the way individuals communicate, work, learn, and
+ entertain themselves. In 1998, there were 95.4 million Internet users in the
+ U.S. This number is expected to increase to 350 million by the year 2003. As
+ a result, we expect the demand for our services to increase in the
+ future.
+
+ 
+
+ We
+ believe Internet users want fast, reliable Internet access at a reasonable
+ cost. In response, we offer a high-speed Internet access under the brand
+ name PeRKInet . Unlike other competing high-speed Internet access
+ technologies, which require substantial capital improvements, the PeRKInet
+ solution uses existing cable TV and telephone technologies to offer
+ customers the ability to connect to the Internet more than four times faster
+ than conventional 56Kbps modems. However, we currently provide the PeRKInet
+ service only to a limited number of subscribers in five of the
+ nineteen communities in which we operate and have encountered difficulty in
+ our efforts to create revenue sharing partnerships with cable systems
+ serving additional target markets.
+
+ 
+
+ We
+ incorporated in California on September 19, 1995. Our principal office is
+ located at 1611 South Catalina Avenue, Suite 320, Redondo Beach, California
+ 90277 and our telephone number is (310) 543-4937. Our web site is located at
+ www.ivn.net. The information on our website is not incorporated by reference
+ into this prospectus.
+
+ 
+
+ Our Strategy
+
+ 
+
+ The key
+ elements of our strategy for becoming a leading Internet service provider
+ include the following:
+
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ Acquire or form
+ relationships with existing Internet service providers in small- to
+ medium-sized communities in the western United States
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ Become a dominant provider
+ of Internet services in these markets
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ Launch our PeRKInet 
+ broadband Internet service in these markets
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ Develop strategic
+ relationships to take advantage of other business
+ opportunities
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ The Offering
+
+ 
+
+ Common stock offered..
+
+ 
+ 
+ 
+ 1,000,000 shares
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ Common stock outstanding prior to this offering, as of January 28,
+ 2000..
+
+ 
+ 
+ 
+ 7,678,970 shares
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001043561_improvenet_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001043561_improvenet_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0ef5516740df949011040e714a46fb96c23f4365
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001043561_improvenet_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD CONSIDER BEFORE BUYING SHARES IN THIS OFFERING. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY. IMPROVENET, INC. We provide home improvement information and services on the Internet. Through our ImproveNet.com and ImproveNetPro.com Web sites, matching services and targeted advertising, we are creating a national marketplace for home improvement products and services in which homeowners, service providers and suppliers of home improvement products and related services benefit from an organized and efficient online flow of information and communication. We generate quality job leads for architects, designers and contractors, or service providers, from highly interested homeowners within their geographic area using our proprietary matching service. In 1999, we received approximately 106,500 job submissions, of which we matched approximately 37,500 or 35.2% with service providers who were interested in bidding on the job. Our service providers won approximately 3,350 jobs or 8.9% of all matched jobs and 3.1% of all jobs submitted. We have designed our services to deliver a satisfying home improvement experience to homeowners and to assist them through the four phases of the home improvement process: - DREAM AND DESIGN--We provide homeowners free online information and design tools such as our design gallery and product showcase as well as a personal project folder that allows homeowners to store all ideas and information about their projects on our Web site. - PLAN AND BUDGET--Our Web site provides interactive tools, such as our kitchen visualization tool, that allow homeowners to plan their projects or our kitchen estimator, that allow homeowners to calculate the expected cost of their projects based on parameters such as physical dimensions, styles and estimated costs for service providers within a given zip code. - HIRE AND BUILD--Our proprietary matching process allows us to match service providers who have passed our screening process with pre-qualified job leads submitted by homeowners. We provide participating homeowners free access, both online and offline, to one of our project advisors, who assists them through the entire process. - FIX AND MAINTAIN--Our online and offline information, services and support personnel empower homeowners to continuously maintain and improve their homes, from idea creation to project completion. The home improvement industry is fragmented. Based upon a compilation of industry sources, we believe there are up to 900,000 service providers in the United States. Further, according to the United States Census Bureau, as of September 30, 1999 there were 70.5 million owner-occupied homes out of a total of 120 million housing units. Our strategy is to become America's home improvement resource on the Internet. The key elements of our strategy are: - deliver a satisfying home improvement experience to homeowners, service providers and suppliers; - increase the number of jobs submitted to us and the percentage of those jobs won by service providers in our network; - expand our commercial contracts with suppliers of home improvement products and services and related home services; and - continue to build the ImproveNet brand. We generate revenues from our three constituents: - service providers pay us lead fees and win fees for our matching service that are included in service revenues; - suppliers of home improvement products and services as well as other advertisers pay us advertising fees for the purchase of advertising space on our Web sites that are included in advertising revenues; and - homeowners pay us fees for our premium home improvement services that are included in service revenues and that to date have not been significant. In 1999, service revenues represented approximately 55% of total revenues and advertising revenues represented the remainder. We have entered into multi-year commercial contracts with the following providers of home improvement products and services and related home services: Cendant, DuPont, General Electric Appliances, Microsoft and Owens Corning. From inception through December 31, 1999, we had aggregate net losses of approximately $42.0 million, and we anticipate incurring losses in the foreseeable future. Following this offering, our existing stockholders will own approximately 85.6% of our stock and therefore will have control over the election of directors and all other matters submitted to stockholders for approval. We were incorporated in California in January 1996 as Netelligence, Inc., changed our name to ImproveNet, Inc. in May 1996 and reincorporated in Delaware in September 1998. Our principal executive offices are located at 720 Bay Road, Suite 200, Redwood City, California 94063-2469. Our telephone number is (650) 701-8000. Our consumer Internet address is WWW.IMPROVENET.COM and our professional Internet address is WWW.IMPROVENETPRO.COM. The information found on our Web sites is not part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered........................... 2,300,000 shares Common stock to be outstanding after the offering..................................... 16,019,310 shares Use of proceeds................................ For operating activities, including expansion of our sales and marketing programs and field support organization, capital expenditures and other general corporate purposes. Proposed Nasdaq National Market symbol......... IMPV </TABLE> The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of December 31, 1999, and excludes: - 1,858,067 shares subject to options outstanding as of December 31, 1999, at a weighted average exercise price of $3.72 per share; - 1,787,172 shares subject to warrants outstanding as of December 31, 1999, at a weighted average exercise price of $6.67 per share; - 1,179,356 additional shares that are available for issuance under our stock option plans; - 300,000 shares that we could issue under our employee stock purchase plan; and - 48,592 shares to be issued in connection with the acquisition of The J.L. Price Corporation. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------------------------- 1996 1997 1998 1999 -------- -------- -------- -------- <S> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues.............................................. $ 2 $ 60 $ 258 $ 2,065 Loss from operations........................................ (360) (1,239) (4,199) (36,768) Net loss attributable to common stockholders................ (359) (1,328) (4,832) (36,490) Basic and diluted net loss per common share................. $(0.73) $ (1.08) $ (3.49) $ (23.85) Shares used in calculating basic and diluted net loss per common share.............................................. 493 1,228 1,383 1,530 Pro forma basic and diluted net loss per common share (unaudited)............................................... $ (4.40) Shares used in calculating pro forma basic and diluted net loss per common share (unaudited)......................... 8,234 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- ----------- ----------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $45,291 $45,291 $75,976 Working capital............................................. 39,891 39,891 70,576 Total assets................................................ 51,542 51,542 82,227 Total stockholders' equity.................................. 43,862 43,862 74,547 </TABLE> See Note 2 of the notes to our consolidated financial statements for an explanation of the determination of the number of shares used in computing per share data. The pro forma information gives effect to the conversion of all outstanding shares of preferred stock into common stock upon the closing of this offering. The pro forma as adjusted information is adjusted to give effect to the sale of 2,300,000 shares of common stock in this offering at an assumed initial public offering price of $15.00 per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001043604_juniper_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001043604_juniper_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..00d556cd6024861b455053fb776690b20bc78a17
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001043604_juniper_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary may not contain all of the information that may be important to you. You should read the entire prospectus as well as the information regarding us, including our consolidated financial statements and the accompanying notes, appearing elsewhere in this prospectus. All information in this prospectus assumes the underwriters' overallotment option with respect to the convertible notes offering is not exercised unless otherwise stated. ABOUT JUNIPER NETWORKS We are a leading provider of Internet infrastructure solutions that enable Internet service providers and other telecommunications service providers to meet the demands resulting from the rapid growth of the Internet. We deliver next generation Internet backbone routers that are specifically designed, or purpose-built, for service provider networks and offer our customers increased reliability, performance, scalability, interoperability and flexibility, and reduced complexity and cost compared to current alternatives. Our flagship product is the M40 Internet backbone router and we recently introduced the M20, an Internet backbone router purpose-built for emerging service providers. Our Internet backbone routers combine the features of our JUNOS Internet Software, high performance ASIC-based (application specific integrated circuit) packet forwarding technology and Internet optimized architecture into a purpose-built solution for service providers. Unlike conventional routers, which were originally developed for enterprise applications and are increasingly inadequate for service provider use in public networks, our Internet backbone routers are specifically designed to accommodate the size and scope of the Internet. We sell our Internet backbone routers primarily through a direct sales force in the United States and through value added resellers internationally. Our M40 Internet backbone router is currently used by several of the world's leading service providers, such as UUNet, an MCI WorldCom Company, Cable & Wireless USA, AT&T/IBM Global Services, Frontier GlobalCenter Inc. and Verio Inc. We believe that the Internet will continue to grow at significant rates and will evolve into the next generation public network, superseding and expanding upon many of the functions provided by the traditional telephone network. This trend will drive the need for new Internet infrastructure equipment that can deliver the high levels of reliability and scalability needed in a public network. We believe we have developed the first commercially available Internet backbone routing platform specifically designed and built to meet these requirements. Ryan Hankin Kent, an industry research firm, estimated in 1999 that the market for Internet backbone routers was $169 million in 1998 and is expected to increase to approximately $5.5 billion in 2003. Our objective is to become the primary supplier of high performance Internet backbone infrastructure equipment. The following are key elements of our strategy: - leverage our early lead as supplier of purpose-built Internet infrastructure equipment; - work closely with our key customers; - increase our penetration in major service providers; - leverage our early successes to rapidly penetrate new customers; - expand our sales and distribution network; - maintain and extend our technology leadership; and - enable new IP-based services. Our principal executive offices are located at 385 Ravendale Drive, Mountain View, California 94043, and our telephone number is (650) 526-8000. Juniper Networks is a registered trademark and the Juniper Networks logo, M40, M20 and JUNOS are trademarks of Juniper Networks. Each trademark, trade name or service mark of any other company appearing in this prospectus belongs to its holder. Information contained on our website, www.juniper.net, does not constitute part of this prospectus. We were incorporated in the State of California in February 1996, and we reincorporated in the State of Delaware in March 1998. THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION. DATED MARCH 2, 2000. $850,000,000 [LOGO] % Convertible Subordinated Notes due March 15, 2007 ------------------------ We are offering $850,000,000 of % Convertible Subordinated Notes due March 15, 2007. You may convert your convertible notes into our common stock at any time prior to maturity or their prior redemption or repurchase by us. The convertible notes will mature on March 15, 2007. The conversion rate is shares per each $1,000 principal amount of convertible notes, subject to adjustment. This is equivalent to a conversion price of approximately $ per share. Our common stock is quoted on the Nasdaq National Market under the symbol "JNPR". On February 29, 2000, the last reported bid price for the common stock was $277.00 per share. We will pay interest on the convertible notes on March 15 and September 15 of each year. The first interest payment will be made on September 15, 2000. The convertible notes are subordinated in right of payment to all of our senior debt. The convertible notes will be issued only in denominations of $1,000 and integral multiples of $1,000. On or after the third business day after March 15, 2003, we have the option to redeem the convertible notes at the redemption prices set forth in this prospectus. You have the option to require us to repurchase any convertible notes held by you if there is a change in control, under the circumstances and at the price described in this prospectus. See "Risk Factors" beginning on page 6 of this prospectus to read about important factors you should consider before buying the convertible notes. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ <TABLE> <CAPTION> Per Note Total -------- ------------ <S> <C> <C> Initial public offering price............................... % $ Underwriting discount....................................... % $ Proceeds, before expenses, to Juniper Networks.............. % $ </TABLE> The initial public offering price set forth above does not include accrued interest, if any. Interest on the convertible notes will accrue from , 2000 and must be paid by the purchaser if the convertible notes are delivered after , 2000. To the extent that the underwriters sell more than $850,000,000 principal amount of convertible notes, the underwriters have the option to purchase up to an additional $127,500,000 principal amount of convertible notes from us at the initial public offering price less the underwriting discount. ------------------------ The underwriters expect to deliver the convertible notes in book-entry form only through the facilities of The Depository Trust Company against payment in New York, New York on , 2000. GOLDMAN, SACHS & CO. CREDIT SUISSE FIRST BOSTON ROBERTSON STEPHENS DAIN RAUSCHER WESSELS SG COWEN WARBURG DILLON READ LLC ------------------------ Prospectus dated , 2000. THE OFFERING Securities offered......... $850,000,000 aggregate principal amount of % Convertible Subordinated Notes due March 15, 2007. We also have granted the underwriters an over-allotment option to purchase up to an additional $127,500,000 aggregate principal amount of convertible notes. Offering price............. 100% of the principal amount of the convertible notes, plus accrued interest, if any, from , 2000. Interest................... We will pay interest on the convertible notes semi-annually on March 15 and September 15 of each year, commencing September 15, 2000. Conversion................. You may convert your convertible notes into shares of our common stock at a conversion rate of shares of common stock per $1,000 principal amount of convertible notes. This is equivalent to a conversion price of approximately $ per share. The conversion rate may be subject to adjustment. The convertible notes will be convertible at any time before the close of business on the maturity date, unless we have previously redeemed or repurchased the convertible notes. You may convert your convertible notes called for redemption or submitted for repurchase up to and including the business day immediately preceding the date fixed for redemption or repurchase, as the case may be. Subordination.............. The convertible notes are subordinated to our senior debt, as that term is defined in "Description of the Convertible Notes -- Subordination". The convertible notes are also effectively subordinated in right of payment to all indebtedness and other liabilities of our subsidiaries. As of December 31, 1999, we did not have any outstanding senior debt. The indenture under which the convertible notes will be issued will not restrict the incurrence of senior debt or other indebtedness by us. Global note; book-entry system..................... We will issue the convertible notes only in fully registered form without interest coupons and in minimum denominations of $1,000. The convertible notes will be evidenced only by one or more global notes in fully registered form and without coupons deposited with the trustee for the convertible notes, as custodian for DTC. Your interest in the global notes will be shown on, and transfers of your interest can only be made through, records maintained by DTC and its participants and indirect participants. Optional redemption by Juniper.................... On or after the third business day after March 15, 2003, we have the right at any time to redeem some or all of your convertible notes at the redemption prices set forth in this prospectus plus accrued and unpaid interest. Repurchase at the option of holders upon a change in control.................... If we experience a change in control, as that term is defined in "Description of Convertible Notes -- Repurchase at Option of Holders Upon a Change in Control", you will have the right, subject to conditions and restrictions, to require us to repurchase some or all of your convertible notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest to the repurchase date. The repurchase price is payable in cash or, at our choice depending on the circumstances, in shares of our common stock, valued at 95% of the average closing sales prices of the common stock for the five trading days preceding and including the third trading day prior to the repurchase date. Use of proceeds............ We anticipate using the net proceeds from this offering for working capital and other general corporate purposes. Should the opportunity arise, we may also use a portion of the net proceeds to fund acquisitions of or investments in complementary businesses, partnerships, minority investments, products or technologies. Events of default.......... Events of default include: - we fail to pay principal of or any premium on any convertible note when due, whether or not the payment is prohibited by the subordination provisions of the indenture; - we fail to pay any interest on any convertible note when due and that default continues for 30 days, whether or not the payment is prohibited by the subordination provisions of the indenture; - we fail to provide the notice that we are required to give in the event of a change in control, whether or not the notice is prohibited by the subordination provisions of the indenture; - we fail to perform any other covenant in the indenture and that failure continues for 60 days after written notice to us by the trustee or the holders of at least 25% in aggregate principal amount of outstanding convertible notes; - we or any of our significant subsidiaries fail to pay when due at final maturity thereof, either at its maturity or upon acceleration, any indebtedness under any bonds, debentures, convertible notes or other evidences of indebtedness for money borrowed, or any guarantee thereof, in excess of $25,000,000 if the indebtedness is not discharged, or the acceleration is not annulled, within 30 days after written notice to us by the trustee or the holders of at least 25% in aggregate principal amount of the outstanding convertible notes; and - events of bankruptcy, insolvency or reorganization with respect to us or any of our significant subsidiaries specified in the indenture. Listing of convertible notes...................... The convertible notes will not be listed on any securities exchange or quoted on the Nasdaq National Market. The underwriters have advised us that they currently intend to make a market in the convertible notes. However, the underwriters are not obligated to do so, and any such market making may be discontinued at any time at the sole discretion of the underwriters without notice. Our common stock is traded on the Nasdaq National Market under the symbol "JNPR". Governing law.............. The indenture and the convertible notes will be governed by the laws of the State of New York, without regard to conflicts of laws principles. Risk factors............... You should read the "Risk Factors" section, beginning on page 6, as well as the other cautionary statements, risks and uncertainties described in this prospectus, so that you understand the risks associated with an investment in the convertible notes. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, -------------------------------- 1999 1998 1997 -------- -------- -------- <S> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenues.......................................... $102,606 $ 3,807 $ -- Cost of revenues...................................... 45,272 4,416 -- -------- -------- -------- Gross profit (loss)................................... 57,334 (609) -- Operating expenses: Research and development............................ 41,502 23,987 9,406 Sales and marketing................................. 20,931 4,216 1,149 General and administrative.......................... 5,235 2,223 1,043 Amortization of goodwill and purchased intangibles and deferred stock compensation.................. 4,286 1,235 -- -------- -------- -------- Total operating expenses......................... 71,954 31,661 11,598 -------- -------- -------- Operating loss........................................ (14,620) (32,270) (11,598) Interest income, net.................................. 8,011 1,301 1,235 -------- -------- -------- Loss before income taxes.............................. (6,609) (30,969) (10,363) Provision for income taxes............................ 2,425 2 -- -------- -------- -------- Net loss.............................................. $ (9,034) $(30,971) $(10,363) ======== ======== ======== Basic and diluted net loss per share(1)............... $ (0.10) $ (0.80) $ (0.40) ======== ======== ======== Shares used in computing basic and diluted net loss per share(1)........................................ 94,661 38,871 25,773 ======== ======== ======== Pro forma basic and diluted net loss per share (unaudited)(1)...................................... $ (0.07) $ (0.28) ======== ======== Shares used in computing pro forma basic and diluted net loss per share (unaudited)(1)................... 131,480 111,210 ======== ======== OTHER DATA: Ratio of earnings to fixed charges(2)................. -- -- -- </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ------------------------------ ACTUAL AS ADJUSTED(3) ------------ -------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $345,958 1,173,708 Working capital............................................. 322,170 1,149,920 Long-term investments....................................... 97,201 97,201 Total assets................................................ 513,378 1,363,378 Total long-term debt........................................ -- 850,000 Stockholders' equity........................................ 457,715 457,715 </TABLE> - --------------- (1) See note 1 of the notes to consolidated financial statements for an explanation of the determination of the shares used to compute net loss per share. All share and per share amounts have been adjusted to reflect the three-for-one split of our common stock paid to stockholders of record on December 31, 1999. (2) The pre-tax loss from continuing operations for the years ended December 31, 1999, 1998 and 1997 are not sufficient to cover fixed charges by a total of approximately $6.6 million in 1999, $31.0 million in 1998 and $10.4 million in 1997. As a result, the ratio of earnings to fixed charges has not been computed for any of these years. (3) Reflects net proceeds of approximately $827.8 million from the sale of the convertible notes, assuming an offering price of 100% of the principal amount, and after deducting underwriters' discounts and commissions and estimated offering expenses.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001043892_cypress_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001043892_cypress_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..575a32256e408f307dcd3125d173204cadaa4aa8
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001043892_cypress_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary provides an overview of selected information and does not contain all the information you should consider. Therefore, you should also read the more detailed information set out in this prospectus and the financial statements. Our Company We provide a full range of communications services to small and medium-sized businesses located in multi-tenant office buildings in major metropolitan markets throughout the United States. We offer local and long distance voice services, digital telephone systems, high speed, always-on Internet access, business television, voicemail, e-mail, web site hosting and other enhanced communications services. We differentiate ourselves from other communications companies by providing a single-source solution with a high degree of customer service and responsiveness. Our services are delivered over state-of-the-art fiber-optic, digital and broadband, or high capacity, networks that we design, construct, own and operate inside large and medium-sized office buildings. We gain access to these buildings by executing long-term license agreements with property owners and building managers. As of December 31, 1999, we were operating our networks in 116 buildings representing approximately 30 million rentable square feet in 12 major metropolitan areas. Overall, we have long-term license agreements with building owners and property managers giving us the right to install and operate our networks in more than 730 buildings representing more than 229 million rentable square feet in 50 major metropolitan areas. We have not been profitable over the course of our limited operating history and we expect continued net losses for the foreseeable future as we deploy our in-building networks. For the nine months ended September 30, 1999, we experienced an $8.2 million net loss as compared to a $2.5 million net loss in the nine months ended September 30, 1998. Our Solution We believe that it is difficult for small and medium-sized businesses to evaluate the many communications providers and services available to them and to secure affordable access to the advanced communications services they require. To meet these needs, we provide our customers with a high-quality, affordable single-source solution designed to address all of their various communications requirements. . A comprehensive solution from a single source. We effectively function as our customers' communications manager and provide the convenience of "one stop shopping." . A reliable, feature-rich communications package with performance levels and pricing that have traditionally been available only to large corporations. Our solution includes high speed, always-on Internet access, state-of-the-art, multi-function telephone equipment and reliable performance supported by our multiple carriers, backup network components and emergency power supplies. . Rapid installation and service expansion with minimal capital outlay by customers. We deliver our comprehensive package of services to a new customer within a few days of receiving an order and can often provide same day service for existing customers requesting new services. Additionally, because we provide telephone equipment to most of our customers and can upgrade this equipment as needed, our customers avoid significant capital outlays and substantially mitigate the risks of encountering communications capacity constraints. . On-site or near-site customer service and support. Each of our customers is assigned a dedicated, experienced account team available on a 24x7 basis to address customer inquiries. Our Strategy . Provide a broad and growing range of communications services under long- term customer contracts. . Provide superior customer service through dedicated account teams. . Control the critical "last few feet" between our customers and out-of- building networks to position us as "gatekeeper" to our in-building customers. . Leverage our experience and first mover advantage to rapidly secure additional licenses with building owners. . Deploy cost effective, flexible networks by committing capital only after entering into long-term license agreements and by using a combination of transmission technologies provided by multiple vendors. . Opportunistically pursue strategic acquisitions and relationships to expand our customer base and geographic presence. The Offering <TABLE> <S> <C> Common stock offered.............. 10,000,000 shares Common stock to be outstanding after the offering............... 45,856,415 shares Use of proceeds................... We intend to use approximately $100.0 million of the net proceeds for the construction of additional in-building networks and the purchase of communications equipment, approximately $10.0 million for implementation and modification of information systems and the remainder for working capital and general corporate purposes. Proposed Nasdaq National Market Symbol........................... CYCO </TABLE> The number of shares of common stock that will be outstanding after this offering is based on the 2,759,806 shares outstanding as of December 31, 1999, plus: . 10,000,000 shares of common stock to be sold by us in this offering; . 32,815,359 shares of common stock to be issued at the completion of this offering upon the conversion of all of our outstanding convertible preferred stock; and . 281,250 shares of common stock to be issued in connection with our agreed-upon investment in SiteConnect, a Seattle-based provider of communications services. The number of shares of common stock to be outstanding after this offering excludes: . 1,500,000 shares of common stock issuable pursuant to the over-allotment option; . 5,820,975 shares of common stock issuable upon the exercise of outstanding options at a weighted average exercise price of $1.60 as of December 31, 1999; . 5,756,125 shares of common stock reserved for issuance in connection with future grants under our stock option plan; . 900,000 shares of common stock reserved for issuance under our employee stock purchase plan; and . up to 11,163,990 shares of common stock issuable upon the exercise of warrants with an exercise price of $4.22 per share. We issued these warrants to several real estate owners and operators in connection with their execution of master license agreements giving us the right to install and operate our networks in their buildings. The exact number of shares of common stock underlying the warrants, which is based on the gross leasable area of the buildings set forth in the master license agreements, will not be determined until the completion of due diligence and the finalization of the building schedules, which is expected to occur shortly. The warrants are exercisable for a period of ten years, but cannot be exercised until six months following completion of this offering. All information in this prospectus regarding shares of common stock and per share amounts has been retroactively adjusted to reflect the 4.5-for-1 stock split which occurred on February 8, 2000. ---------------- The address of our principal executive offices is Fifteen Piedmont Center, Suite 710, Atlanta, Georgia 30305 and our telephone number is (404) 869-2500. Our website address is www.cypresscom.net. The information on our website is not a part of this prospectus. Summary Financial and Other Data You should read the following summary financial and other data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes, all of which appear elsewhere in this prospectus. The following summary statement of operations data for the years ended December 31, 1997 and 1998 and the balance sheet data as of December 31, 1998 have been derived from our audited financial statements. The summary statement of operations data for the nine months ended September 30, 1998 and 1999 and the summary balance sheet data as of September 30, 1999 are derived from our unaudited financial statements. Operating results for the nine months ended September 30, 1999 are not necessarily indicative of the results that may be expected for the entire year. <TABLE> <CAPTION> Nine Months Ended Year Ended Year Ended September 30, December 31, December 31, ------------------------ 1997 1998 1998 1999 ------------ ------------ ----------- ----------- (unaudited) <S> <C> <C> <C> <C> Statement of Operations Data: Revenues................... $ 709,402 $ 2,417,816 $ 1,428,497 $ 5,227,727 Operating expenses: Cost of services......... 603,114 1,539,846 944,760 3,248,377 Sales and marketing...... 448,916 1,470,107 1,075,039 2,466,844 General and administrative.......... 900,595 2,436,221 1,597,974 5,604,135 Amortization of deferred compensation............ 0 117,593 16,878 636,792 Depreciation and amortization............ 196,415 576,659 351,453 1,413,906 ----------- ----------- ----------- ----------- Total operating expenses.............. 2,149,040 6,140,426 3,986,104 13,370,054 ----------- ----------- ----------- ----------- Operating loss........... (1,439,638) (3,722,610) (2,557,607) (8,142,327) Interest income, net..... 113,922 232,279 66,911 168,120 ----------- ----------- ----------- ----------- Loss before income taxes................... (1,325,716) (3,490,331) (2,490,696) (7,974,207) Income tax benefit....... 0 0 0 0 ----------- ----------- ----------- ----------- Net loss ................ $(1,325,716) $(3,490,331) $(2,490,696) $(7,974,207) =========== =========== =========== =========== Net loss per share of common stock: Basic and diluted........ $ (.50) $ (1.32) $ (0.94) $ (3.02) =========== =========== =========== =========== Weighted average shares of common stock outstanding: Basic and diluted........ 2,636,906 2,636,906 2,636,906 2,636,906 =========== =========== =========== =========== </TABLE> The pro forma balance sheet information below reflects the sale since September 30, 1999 of 4,161,974 shares of our series C preferred stock for total proceeds of approximately $79.1 million and the issuance of 281,250 shares of our common stock to occur in connection with our agreed-upon investment in SiteConnect. The pro forma as adjusted balance sheet information reflects the above adjustments, as well as receipt of the estimated net proceeds of $137.1 million from this offering, assuming an initial public offering price of $15.00 per share, and the conversion upon the completion of this offering of all convertible preferred stock into common stock. <TABLE> <CAPTION> As of December 31, 1998 As of September 30,1999 ------------ --------------------------------------- (unaudited) Pro Forma Actual Actual Pro Forma As Adjusted ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents............ $11,057,696 $ 3,378 $ 79,200,701 $216,300,701 Property and equipment, net.................... 6,291,413 11,645,639 11,645,639 11,645,639 Total assets............ 19,407,105 14,281,941 97,698,014 234,798,014 Total liabilities....... 2,404,191 4,557,668 4,557,668 4,557,668 Convertible redeemable preferred stock........ 21,317,263 21,376,037 100,453,537 -- Stockholders' (deficit) equity................. (4,314,349) (11,651,764) 25,717,247 241,897,384 </TABLE> As used in the table below, EBITDA consists of net loss excluding net interest, income taxes and depreciation and amortization. EBITDA excludes depreciation and amortization expenses of $196,415, $694,252, $368,331, and $2,050,698 for the year ended December 31, 1997, the year ended December 31, 1998, and the nine months ended September 30, 1998 and 1999, respectively. We expect that depreciation and amortization will increase considerably as we enter into additional property license agreements and deploy additional in- building networks. We believe that because EBITDA is a measure of financial performance it is useful to investors and analysts as an indicator of a company's ability to fund its operations and to service or incur debt. However, EBITDA is not a measure calculated under generally accepted accounting principles. Other companies may calculate EBITDA or other similarly titled measures differently from us; consequently, our calculation of EBITDA may not be comparable to other companies' calculations of EBITDA or other similarly titled measures. EBITDA is not an alternative to operating income as an indicator of our operating performance or an alternative to cash flows from operating activities as a measure of liquidity, and investors should consider these measures as well. We do not expect to generate positive EBITDA in the near term. <TABLE> <CAPTION> Cypress ---------------------------------------------------- Year Ended Nine Months Ended December Year Ended September 30, 31, December 31, ------------------------- 1997 1998 1998 1999 ----------- ------------ ----------- ------------ (unaudited) <S> <C> <C> <C> <C> Other Operating Data: Net cash used in operating activities... $ (891,519) $ (2,914,905) $(1,971,373) $ (5,775,126) Net cash used in investing activities... (2,013,953) (4,991,641) (1,691,993) (5,172,675) Net cash provided by (used in) financing activities............. 6,128,811 15,293,177 15,535,276 (106,517) EBITDA.................. (1,243,223) (3,028,358) (2,189,276) (6,091,629) Capital expenditures.... (1,190,723) (2,887,243) (1,691,993) (5,392,075) Markets served.......... 2 4 2 9 Buildings served........ 19 39 24 96 Rentable square feet in buildings served....... 3.6 million 11.0 million 5.5 million 23.5 million </TABLE>
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+SUMMARY Because this is a summary, it does not contain all of the information that may be important to you. You should read this entire prospectus and its exhibits before you decide to invest. MORGAN STANLEY DEAN WITTER SPECTRUM SERIES The Spectrum Series consists of six continuously offered limited partnerships. Two of those partnerships, Spectrum Currency and Spectrum Commodity, are discussed in this prospectus. The other four partnerships, Spectrum Select, Spectrum Technical, Spectrum Strategic, and Spectrum Global Balanced, are discussed in a separate prospectus. If you are considering an investment in any of those four other partnerships, you should read the prospectus relating to those partnerships. Each partnership was organized in the State of Delaware: <TABLE> <CAPTION> PARTNERSHIPS DATE ORGANIZED - ------------ -------------------- <S> <C> Spectrum Currency October 20, 1999 Spectrum Commodity (formerly, Morgan Stanley Tangible Asset Fund L.P.) July 31, 1997 </TABLE> The offices of each partnership are located at Two World Trade Center, 62nd Floor, New York, New York 10048, telephone (212) 392-8899. Each partnership provides the opportunity to invest in futures contracts managed by an experienced, professional trading advisor. Since each partnership's assets are traded by different trading advisors, each employing a different trading program, you should review the specific information relating to each partnership and its trading advisors to better understand how a partnership may fit into your overall investment plan. If you decide to invest in more than one partnership, you may allocate your investment among any one or more of the partnerships and, after an initial six month holding period, you may shift your investment among one or more of the Spectrum Series partnerships, including Spectrum Select, Spectrum Technical, Spectrum Strategic, and Spectrum Global Balanced. A futures contract is an agreement to buy or sell a fixed amount of a commodity or other underlying product, instrument or index at a predetermined price at a specified time in the future. In order to secure its obligation to make or take delivery under a futures contract, the trader must deposit funds, referred to as margin, with the commodity broker through which it trades. An option on a futures contract gives the buyer of the option, in exchange for a one-time payment known as premium, the right, but not the obligation, to buy or sell a futures contract at a specified price within a specified period of time. The seller of an option on a futures contract receives the premium payment and has the obligation to buy or sell the futures contract at the specified price within the specified period of time. Futures contracts and options on futures contracts are traded on U.S. and foreign exchanges. A forward contract is an agreement directly between two parties to buy or sell a fixed amount of an underlying product at an agreed price at an agreed date in the future. Forward contracts are not traded on exchanges, but rather are traded in the dealer markets. A partnership may take long positions in futures, forwards and options contracts in which the partnership is obligated to take delivery of the underlying commodity, product, instrument or index. A partnership also may take short positions in those contracts in which the partnership has an obligation to deliver the underlying commodity, product, instrument or index. Futures, forwards and options contracts are traded in a number of commodities, products, instruments, and indices, including foreign currencies, financial instruments, precious and industrial metals, energy products, agricultural commodities, stock indices and "soft" commodities like cotton and cocoa. For additional information on the futures, options, and forwards markets, see "Statement of Additional Information" beginning on page 85. The investment objective of each partnership is to achieve capital appreciation and to provide investors with the opportunity to diversify a portfolio of traditional investments consisting of stocks and TABLE OF CONTENTS PART ONE DISCLOSURE DOCUMENT <TABLE> <CAPTION> PAGE -------- <S> <C> Summary................................... 1 Risk Factors.............................. 9 Trading and Performance Risks........... 9 The partnerships' trading is speculative and volatile............ 9 Each partnership's trading is highly leveraged........................... 9 Options trading can be more volatile than futures trading................ 9 You should not rely on the past performance of a partnership in deciding to purchase units.......... 9 Spectrum Currency does not have an operating history................... 9 Spectrum Currency is a new fund and will be subject to special risks during its start-up period.......... 9 Spectrum Commodity is subject to greater risk of loss during periods of low inflation.................... 10 Market illiquidity may cause less favorable trade prices.............. 10 Trading on foreign exchanges presents greater risks to each partnership than trading on U.S. exchanges...... 10 The unregulated nature of the forwards markets creates counterparty risks that do not exist in futures trading on exchanges........................ 10 The partnerships are subject to speculative position limits......... 11 The partnerships could lose assets and have their trading disrupted if a commodity broker or others become bankrupt............................ 11 Euro conversion limits Spectrum Currency's ability to trade individual currencies and could result in trading losses............ 11 Partnerships and Offering Risks......... 11 Each partnership incurs substantial charges............................. 11 Incentive fees may be paid by a partnership even though the partnership sustains trading losses.............................. 11 Restricted investment liquidity in the units............................... 12 </TABLE> <TABLE> <CAPTION> PAGE -------- <S> <C> Conflicts of interest in each partnership's structure............. 12 An investment in units may not diversify an overall portfolio...... 12 No assurance that units of Spectrum Currency will be sold............... 12 Trading Advisor Risks................... 12 Reliance on the trading advisors to trade successfully.................. 12 Market factors may adversely influence the trading programs................ 12 Possible consequences of using multiple trading advisors for Spectrum Currency................... 12 Spectrum Commodity is a single-advisor fund and lacks the diversity of a multi-advisor fund.................. 12 Increasing the assets managed by a trading advisor may adversely affect performance......................... 13 Limited partners will not be aware of changes to trading programs......... 13 Limited term of management agreements may limit access to a trading advisor............................. 13 Taxation Risks.......................... 13 Even though the partnerships do not intend to make distributions, you will be liable for taxes on your share of any trading profits and any other income of the partnerships in which you have invested............. 13 The partnerships' tax returns could be audited............................. 13 Conflicts of Interest..................... 13 Fiduciary Responsibility and Liability.... 15 Description of Charges.................... 17 Use of Proceeds........................... 20 The Spectrum Series....................... 22 Selected Financial Data................... 28 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 29 Quantitative and Qualitative Disclosures About Market Risk....................... 32 The General Partner....................... 35 The Trading Advisors...................... 40 Exchange Right............................ 65 </TABLE> bonds. While each partnership has the same over-all investment objective, each trading advisor and its trading programs trades differently. Each partnership has distinct trading advisors and trading programs. You should review and compare the specifics of each partnership, its terms, and its trading advisors before selecting one or more partnerships in which to invest. If you are also considering an investment in the other four Spectrum Series partnerships, Spectrum Select, Spectrum Technical, Spectrum Strategic, and Spectrum Global Balanced, you should review the prospectus relating to those partnerships and make similar comparisons. MORGAN STANLEY DEAN WITTER SPECTRUM CURRENCY L.P. This new partnership will allocate its assets between two trading advisors: John W. Henry & Company, Inc. and Sunrise Capital Partners, LLC. The trading advisors employ proprietary trading programs that seek to identify favorable price relationships between and among various global currency markets through the analysis of technical market information. The trading advisors collectively trade world currencies primarily in the forward dealer markets, but also in the futures and options markets. MORGAN STANLEY DEAN WITTER SPECTRUM COMMODITY L.P. (FORMERLY, MORGAN STANLEY TANGIBLE ASSET FUND L.P.) This partnership currently allocates its assets to a single trading advisor, Morgan Stanley Dean Witter Commodities Management Inc. The trading advisor employs a proprietary trading approach that seeks to identify increasing price trends through the disciplined analysis of technical market information. The trading advisor trades futures and may trade forwards in a portfolio of agricultural commodities, precious and base metals, soft commodities and energy products. WHO MAY SUBSCRIBE INVESTMENT CONSIDERATIONS You should purchase units in a partnership only if you understand the risks involved in the investment and only if your financial condition permits you to bear those risks, including the risk of losing all or substantially all of your investment in the partnership. You should invest in the units only with the risk capital portion of your investment portfolio. MINIMUM INVESTMENT If you are a new investor in the Spectrum Series of partnerships, you must invest at least $5,000, unless you are investing through an IRA, in which case your minimum investment is $2,000. You may allocate your investment among any one or more of the partnerships in the Spectrum Series, including Spectrum Select, Spectrum Technical, Spectrum Strategic, and Spectrum Global Balanced, which are discussed in a separate prospectus, but you must invest at least $1,000 in a partnership. Once you become an investor in any Spectrum Series partnership, you may increase that investment with an additional contribution of at least $500. If you are an investor in another limited partnership for which Demeter Management Corporation serves as the general partner and commodity pool operator, you may redeem your interest in that other partnership and use the proceeds to invest in any one or more of the Spectrum Series of partnerships. The general partner may, in its sole discretion, reject any subscription in whole or in part. FINANCIAL SUITABILITY Unless otherwise specified in the subscription agreement under "State Suitability Requirements," you must have either: a net worth of at least $75,000, exclusive of home, furnishings, and automobiles; or both a net worth of at least $30,000, exclusive of home, furnishings, and automobiles, and an annual income of at least $30,000. You should be aware, however, that certain States impose more restrictive suitability and/ <TABLE> <CAPTION> PAGE -------- <S> <C> Redemptions............................... 66 The Commodity Brokers..................... 68 Litigation................................ 69 The Limited Partnership Agreements........ 69 Plan of Distribution...................... 73 Subscription Procedure.................... 75 Purchases by Employee Benefit Plans-- ERISA Considerations.................... 77 Material Federal Income Tax Considerations.......................... 78 State and Local Income Tax Aspects........ 84 Legal Matters............................. 84 Experts................................... 84 Where You Can Find More Information....... 84 PART TWO STATEMENT OF ADDITIONAL INFORMATION The Futures, Options, and Forwards Markets................................. 85 Potential Advantages...................... 89 Supplemental Performance Information............................. 98 Glossary of Terms......................... 106 Financial Statements...................... F-1 Exhibit A - Form of Amended and Restated Limited Partnership Agreements.......................... A-1 Exhibit B - Specimen Form of Subscription and Exchange Agreement and Power of Attorney............... B-1 Exhibit C - Subscription Agreement Update Form......................... C-1 </TABLE> or higher minimum investment requirements. Before you invest you will be required to represent and warrant that you meet the applicable State minimum financial suitability standard set forth in the subscription agreement, which may also require a greater minimum investment. LIMITED REVOCATION RIGHT After you subscribe for units in any Spectrum Series partnership, you will have limited rights to revoke your subscription. You may only revoke a subscription and receive a full refund of the subscription amount, plus any accrued interest, within five business days after execution of the subscription agreement or no later than 3:00 P.M., New York City time, on the date of the applicable monthly closing, whichever comes first, by delivering written notice to your Morgan Stanley Dean Witter financial advisor. THE OFFERING OF UNITS SPECTRUM CURRENCY'S INITIAL OFFERING 12,000,000 Units of Spectrum Currency are being offered for sale at $10 per unit at its initial closing, which is currently scheduled to be held as of April 30, 2000. The period from the date of this prospectus through September 30, 2000 is the initial offering period for Spectrum Currency. The initial offering period, however, may be extended to November 30, 2000 in the sole discretion of the general partner. The general partner must receive and accept subscriptions for at least 600,000 units during the initial offering period in order for Spectrum Currency to commence trading operations. If investors do not subscribe for at least 600,000 units of Spectrum Currency during the initial offering period, the offering will terminate and each subscriber's customer account will be credited for the full subscription amount, with interest. THE SPECTRUM SERIES CONTINUOUS OFFERING Spectrum Commodity is continuously offering, and Spectrum Currency, once it has held its initial closing, will continuously offer, units of limited partnership interest for sale at monthly closings held as of the last day of each month. You can purchase units at a price equal to 100% of a partnership's month-end net asset value. The general partner calculates each partnership's net asset value per unit on a monthly basis by dividing the partnership's month-end net assets by the number of its month-end outstanding units. A partnership's net assets is its assets minus its liabilities. ESCROW TERMS During Spectrum Currency's initial offering period and during each partnership's continuous offering, your subscription will be transferred to, and held in escrow by, The Chase Manhattan Bank, New York, New York. Subscription funds held in escrow will be invested in the escrow agent's money market account and will earn interest at the rate then paid by the bank on that money market account. If the general partner accepts your subscription, the escrow agent will pay the subscription amount to the appropriate partnerships and pay any interest earned on those funds to Dean Witter. In turn, Dean Witter will credit your customer account with the interest. If the general partner rejects a subscription, your account will be credited in an amount equal to the rejected subscription amount, together with any interest earned on those funds while held in escrow. SUMMARY OF RISK FACTORS YOU SHOULD CONSIDER - These are speculative securities. - You could lose all or substantially all of your investment in the partnerships. - Past performance is not necessarily indicative of future results. - Each partnership's futures, forwards and options trading is speculative and trading performance is expected to be volatile. - Each partnership's trading is highly leveraged, which accentuates the trading profit or loss on a trade. - You may not redeem your units until you have been an investor for at least six months. - If you redeem units within 24 months after they are purchased, you will pay a redemption charge except in defined circumstances. - Units will not be listed on an exchange and no other secondary market will exist for the units. - Each partnership pays substantial charges and fees and must earn substantial trading profits in order to pay these expenses. - Profits earned by a partnership will be taxable to an investor even though the general partner does not intend to make any distributions. MAJOR CONFLICTS OF INTEREST - Because the general partner, Dean Witter, Morgan Stanley, Morgan Stanley International, and Morgan Stanley Dean Witter Commodities Management are affiliates of each other, the fees payable to those parties and the other terms relating to the operation of the partnerships and the sale of units were not negotiated by an independent party. - Because your Morgan Stanley Dean Witter financial advisor receives a portion of the brokerage fees paid by the partnerships, your financial advisor has a conflict of interest in advising you in the purchase or redemption of units. - The trading advisors, commodity brokers and general partner may trade futures, forwards and options for their own accounts and, thus, they may compete with a partnership for positions. Also, the other commodity pools managed by the general partner and the trading advisors compete with the partnerships for positions. These conflicts can result in less favorable prices on the partnerships' transactions. THE GENERAL PARTNER The general partner of each partnership is Demeter Management Corporation, a Delaware corporation. The general partner is or has been the general partner of 35 commodity pools and currently operates 25 other commodity pools. As of December 31, 1999, the general partner managed $1.4 billion of client assets. The general partner's main business office is located at Two World Trade Center, 62nd Floor, New York, New York 10048, telephone (212) 392-8899. THE COMMODITY BROKERS The commodity brokers for the partnerships are responsible for assuring that the partnerships' trades are properly processed and recorded or "cleared" by the clearinghouse affiliated with the exchange on which the trade took place, and for holding the partnerships' funds deposited with the commodity brokers as margin for the trades. Dean Witter is the non-clearing commodity broker for each partnership. As non-clearing broker, Dean Witter holds each partnership's funds and provides margin funds to the clearing brokers for the partnership's futures, forwards and options positions. Carr Futures Inc. serves as the clearing commodity broker for Spectrum Currency. The clearing commodity broker for Spectrum Commodity is Morgan Stanley & Co. Incorporated, except that all trades for Spectrum Commodity on the London Metal Exchange are cleared by Morgan Stanley & Co. International Limited. The clearing commodity broker is responsible for processing and clearing the futures and options transactions placed by a trading advisor for the account of a partnership. Carr Futures also acts as the dealer on each foreign currency forward contract for the partnerships. ORGANIZATIONAL CHART Following is an organizational chart for each partnership, showing the relationships among the various parties involved with this offering. With the exception of Carr Futures, JWH, and Sunrise, all parties are affiliates of Morgan Stanley Dean Witter & Co. [CHART] - --------- * Demeter presently serves as general partner for 25 other commodity pools. Dean Witter acts as the non-clearing commodity broker for all of the pools, and Carr Futures acts as the clearing commodity broker for all of the pools except Spectrum Commodity. Morgan Stanley acts as the clearing commodity broker for Spectrum Commodity, and Morgan Stanley International serves as the clearing commodity broker for that pool's trades that take place on the London Metal Exchange. Dean Witter has also served as selling agent for all but one of the pools managed by Demeter. All of the pools, including the partnerships, are managed and traded independently of one another. FEES TO BE PAID BY THE PARTNERSHIPS The partnerships pay the following monthly fees: <TABLE> <CAPTION> MANAGEMENT FEE BROKERAGE FEE (ANNUAL RATE) INCENTIVE FEE(1) (ANNUAL RATE) -------------- ---------------- ------------- <S> <C> <C> <C> % % % Spectrum Currency 3 or 4(2) 15 4.60 Spectrum Commodity 2.5 20 4.60 </TABLE> - --------- (1) Spectrum Currency pays its trading advisors a monthly incentive fee, and Spectrum Commodity pays its trading advisor an annual incentive fee. (2) JWH-Registered Trademark- receives a monthly management fee at a 4% annual rate. Sunrise receives a monthly management fee at a 3% annual rate. The management fee payable to each trading advisor and the brokerage fee payable to Dean Witter are based on a percentage of net assets and will be paid monthly regardless of a partnership's performance. The partnerships pay each trading advisor an incentive fee only if trading profits are earned on the portion of net assets managed by the trading advisor. You should understand that because Spectrum Currency has two trading advisors, it may pay one of its trading advisors an incentive fee even though the partnership as a whole is not profitable. Neither you nor the partnerships will pay any selling commissions, or organizational, initial, or continuing offering expenses in connection with the offering of units by the partnerships. Dean Witter will pay all costs incurred in connection with the organization of Spectrum Currency and its initial offering of units. Dean Witter will also pay all costs incurred in connection with the continuing offering of units of each partnership, and will pay the ordinary administrative expenses of each partnership. Each partnership will pay any extraordinary expenses it may incur. BREAK EVEN ANALYSIS Following is a table that sets forth the fees and expenses that you would incur on an initial investment of $5,000 in each partnership and the amount that your investment must earn, after taking into account estimated interest income, in order to break even after one year and more than two years. The fees and expenses applicable to each partnership are described above. <TABLE> <CAPTION> SPECTRUM SPECTRUM CURRENCY COMMODITY -------- --------- <S> <C> <C> $ $ Management Fee.............................................. 175.00 125.00 Brokerage Fee............................................... 230.00 230.00 Less: Interest Income (1)................................... (188.00) (188.00) Incentive Fee (2)........................................... -- -- Redemption Charge (3)....................................... 102.04 102.04 Amount of trading profits a partnership must earn for you to recoup your initial investment at the end of one year after paying a redemption charge.......................... 319.04 269.04 Trading profits as percentage of net assets that a partnership must earn for you to recoup your initial investment at the end of one year after paying a redemption charge......................................... 6.38% 5.38% Amount of trading profits a partnership must earn each year for you to recoup your initial investment after two years with no redemption charge................................. 217.00 167.00 Trading profits as percentage of net assets that a partnership must earn each year for you to recoup your initial investment after two years with no redemption charge.................................................... 4.34% 3.34% </TABLE> - --------- (1) The partnerships do not directly invest in interest-bearing instruments. Instead, each partnership is paid interest by Dean Witter at the blended rate Dean Witter earns on its U.S. Treasury bill investments with all customer segregated funds, as if 80% of the partnership's average daily net assets for the month were invested at that rate. The rate used in the calculations was estimated based upon current rates of approximately 4.70%. (2) Incentive fees are paid to a trading advisor only on trading profits on the assets of the partnership managed by that trading advisor. Trading profits are determined after deducting all partnership expenses attributable to the partnership assets managed by the trading advisor, other than any extraordinary expenses, and do not include interest income. Therefore, incentive fees will be zero at the partnership's breakeven point on the assets managed by the trading advisor. Further, there do not need to be trading profits to cover the redemption charge because the interest earned by the partnership during the year will exceed the redemption charge to the investor. Note, however, that because one trading advisor to a partnership could be profitable and earn an incentive fee while the other trading advisors are unprofitable such that the partnership has an overall trading loss, it is possible for a partnership to pay an incentive fee at a time when it has incurred overall losses. (3) Units redeemed at the end of one year from the date of purchase are generally subject to a 2% redemption charge; after two years there are no redemption charges. REDEMPTION CHARGES INCURRED BY YOU You will pay a redemption charge of 2% of the net asset value of the units redeemed if you redeem within the first twelve months after the units were purchased, and 1% if you redeem units within the thirteenth through twenty-fourth months after the units were purchased. Units are not subject to a redemption charge after you have owned them for more than 24 months. You will not incur a redemption charge if you redeem units during the first 24 months after they were issued in the following circumstances: - If you purchase at least $500,000 of units. - If you redeem units immediately following notice of an increase in brokerage, management or incentive fees. - If you redeem units in connection with an exchange for units in another Spectrum Series partnership. - If you acquire units with the proceeds from the redemption of interests in a non-Spectrum Series partnership for which Demeter serves as the general partner, you will not be subject to a redemption charge on those units when they are redeemed. - If you previously redeemed units and paid a redemption charge or held those units for at least 24 months, you will not have to pay a redemption charge on subsequently purchased units provided they are purchased within 12 months of the redemption of the old units and the purchase price of the new units does not exceed the net proceeds received from the prior redemption. REDEMPTIONS Once you have been an investor in any Spectrum Series partnership, including Spectrum Select, Spectrum Technical, Spectrum Strategic, and Spectrum Global Balanced, for more than six months, you are permitted to redeem any part of your investment, even if subsequent purchases have been held for less than six months. However, you will pay a redemption charge of 2% of the net asset value redeemed if your redeemed units were purchased within 12 months of the date of redemption, and 1% if purchased within 13 to 24 months of the date of redemption. You will not be subject to a redemption charge after you have owned your units for more than 24 months. Unless you are redeeming your entire interest in a partnership, redemptions may only be made in whole units, with a minimum of 50 units required for each redemption. EXCHANGE RIGHT You may redeem units in any partnership after you have been an investor for six months and use the proceeds to purchase units in one or more of the other partnerships in the Spectrum Series, including Spectrum Select, Spectrum Technical, Spectrum Strategic, and Spectrum Global Balanced, at a price equal to 100% of the net asset value per unit, without incurring any redemption or other charge on the transaction. DISTRIBUTIONS The General Partner currently does not intend to make any distribution of partnership profits. TAX CONSIDERATIONS Even though the general partner currently does not intend to make distributions, your allocable share of the trading profits and other income of the partnerships in which you invest will be taxable to you. The trading activities of each partnership, in general, generate capital gains and loss and ordinary income. 40% of any trading profits on U.S. exchange-traded contracts are taxed as short-term capital gains at your ordinary income tax rate, while 60% of such gains are taxed at your long-term capital gains tax rate. We expect that each partnership's trading gains from other contracts will be primarily short-term capital gains. This tax treatment applies regardless of how long you hold your units. You may deduct losses on units against capital gains income. You may deduct losses in excess of capital gains against ordinary income only to the extent of $3,000 per year. Consequently, you could pay tax on a partnership's interest income even though you have lost money on your units.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001044818_new-cache_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001044818_new-cache_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..968d1817b87f745be214755c17c9b58b403c879a
--- /dev/null
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@@ -0,0 +1 @@
+SUMMARY The following summary highlights certain information about this offering that is important to you. However, it does not contain all the information regarding this offering. As such, we encourage you to read this prospectus in its entirety. About Abraxas We are an independent energy company engaged primarily in the acquisition, exploitation, development and production of crude oil and natural gas. Our principal areas of operation are South Texas, West Texas and Canada. Our principal means of growth is through the acquisition and subsequent exploitation and development of producing crude oil and natural gas properties and related assets. Our principal United States offices are located at 500 North Loop 1604 East, Suite 100, San Antonio, Texas 78232 and the telephone number is (210) 490-4788. Our principal Canadian offices are located at 300 5th Avenue SW, #1200, Calgary, Alberta, Canada T2P 3C4 and the telephone number is (403) 262-1949. Summary of the Offering Two of our security holders are offering to sell up to $5.0 million principal amount of the second lien notes, 163,354 shares of Abraxas common stock and 163,354 contingent value rights that may result in the issuance of up to 268,210 shares of Abraxas common stock. We will not receive any proceeds from the sale of the second lien notes, common stock or contingent value rights. You should read the discussions under the headings "Description of the Second Lien Notes" and "Description of Capital Stock" for further information regarding the second lien notes, common stock and contingent value rights. Summary of the Second Lien Notes Amount Offered................... 11 1/2% Senior Secured Notes due 2004, Series A, with principal amount of up to $5.0 million. Issuers.......................... Abraxas Petroleum Corporation and Canadian Abraxas Petroleum Limited. Maturity Date.................... November 1, 2004. Interest Rate and Payment Dates.. Annual rate - 11 1/2%. Payment frequency - every six months on May 1 and November 1. First payment -- May 1, 2000. Guarantees....................... Each guarantor is Abraxas' wholly-owned subsidiary. If the issuers cannot make payments on the second lien notes when they are due, the guarantors must make them instead. Ranking.......................... The second lien notes and the guarantees constitute senior debts. They rank equally with all of the issuers' and each guarantor's current and future indebtedness. They are, however, effectively subordinated to the first lien notes and related guarantees to the extent the value of the collateral securing the second lien notes and related guarantees and the first lien notes and related guarantees is insufficient to pay both the second lien notes and the first lien notes. Collateral....................... The second lien notes are secured by a second lien or charge on substantially all of our proved crude oil and natural gas properties and natural gas processing plants and the shares of Grey Wolf common stock owned by us. Holders of the second lien notes may not foreclose on the collateral for 180 days after an event of default under the second lien notes. Optional Redemption.............. On or after December 1, 2000, the issuers may redeem some or all of the second lien notes at any time at the redemption prices listed in the section "Description of the Second Lien Notes" under the heading "Optional Redemption." Before December 1, 2000, the issuers may redeem up to 50% of the second lien notes with the proceeds of certain public offerings of equity in Abraxas or asset sales at the prices listed in the section "Description of the Second Lien Notes" under the heading "Optional Redemption." Mandatory Offer to Repurchase..... If the issuers sell certain assets or experience specific kinds of changes of control, the issuers must offer to repurchase the second lien notes, subject to certain limitations in the case of assets sales, at the prices listed in the section "Description of the Second Lien Notes." Basic Covenants of the Indenture.. The issuers issued the second lien notes under an indenture with Firstar Bank, National Association. The indenture, among other things, restricts the issuers' ability and the ability of their subsidiaries to: o borrow money or issue preferred stock; o pay dividends on stock or purchase stock; o pay dividends or make other asset transfers; o transact business with affiliates; o sell stock in subsidiaries; o engage in any new line of business; o impair the security interest in any collateral for the new notes; o use assets as security in other transactions; and o sell certain assets or merge with or into other companies. The Common Stock Abraxas is currently authorized to issue a total of 50,000,000 shares of common stock, par value $.01 per share, and 1,000,000 shares of preferred stock, par value $.01 per share. The Board of Directors of Abraxas has, however, made a proposal in Abraxas' proxy statement for its annual meeting of stockholders to increase the number of authorized shares of common stock to 200,000,000. The Board has made this proposal so that Abraxas will have adequate shares of common stock available for issuance to the holders of the contingent value rights if such issuance becomes necessary and for general corporate purposes. The holders of the common stock will vote on this proposal at the 2000 annual meeting of stockholders currently scheduled to be held on May 26, 2000. As of April 24, 2000, there were 22,747,118 shares of Abraxas common stock outstanding and no shares of preferred stock outstanding. The Contingent Value Rights Abraxas has issued contingent value rights or CVRs the terms of which provide that the holders thereof could receive up to a total of 104,365,326 shares of Abraxas common stock. Subsequent to the issuance of the CVRs, Abraxas' common stock traded at a price per share of $2.01 or higher for 30 days during the 45-day trading period beginning on February 8, 2000, and ending on April 10, 2000. As a result, under the terms of the CVRs, the maximum number of shares which holders of the CVRs could be entitled to receive has been reduced to 26,400,000 shares of Abraxas common stock. In addition, in the event Abraxas common stock trades at a price per share higher than $2.01 for 30 days during any future 45-day trading period, the number of shares issuable under the CVRs would decrease correspondingly to a number below 26,400,000. On December 21, 2000, or at the election of Abraxas, on May 21, 2001, Abraxas may be required to issue additional shares of common stock to the holders of the contingent value rights. The actual number of shares issued will depend on the market price of Abraxas common stock. The CVRs will terminate if the market price of Abraxas common stock exceeds certain target prices for a period of 30 trading days during any 45 consecutive trading day period prior to the expiration date. The target price on any given date will equal $5.03 plus daily interest at an annual rate of 11.5%. On December 21, 2000, the target price will be $5.68 and on May 21, 2001, the target price will be $5.97. Summary Historical and Pro Forma Financial Information The following table presents our summary historical consolidated financial data as of and for the three years ended December 31, 1999, and as of and for the three months ended March 31, 1999 and 2000 and our pro forma financial data as of and for the year ended December 31, 1999, and the three months ended March 31, 2000, which have been derived from our consolidated financial statements and unaudited historical and pro forma financial data. It is important that you read the information in this table along with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Selected Historical Financial Data," our Consolidated Financial Statements and the notes thereto and the unaudited Pro Forma Financial Information and the notes thereto included elsewhere in this prospectus. <TABLE> <CAPTION> Year Ended December 31, 1999 Three Months Ended March 31, ----------------------------------------------- ------------------------------ Pro Pro Forma Forma 1997 1998 1999 1999 (1) 1999 2000 2000 (2) ---------------------------------------------- ------------------------------- Consolidated Statement of Operations Data: (dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> Total operating revenue (3)......... $70,931 $60,084 $66,770 $ 66,770 $ 15,970 $ 16,717 $ 16,717 Operating expense (4)............... 16,429 18,612 18,562 18,562 4,897 4,817 4,817 Depreciation, depletion and amortization expense............... 30,581 31,226 34,811 34,811 9,146 8,948 8,948 Proved property impairment.......... 4,600 61,224 19,100 19,100 -- -- -- General and administrative expense.. 4,171 5,522 5,269 5,866 1,323 1,439 1,552 Interest expense, net of interest income............................. 24,300 30,043 36,149 29,463 8,683 7,713 7,713 Amortization of deferred financing fee................................ 1,260 1,571 1,915 2,286 345 507 507 Income (loss) from continuing operations before extraordinary items.............................. $ (6,485) $(83,960) $(36,680) $ (30,962) $ (8,238) $ 26,840 $ 26,727 Preferred stock dividends........... 183 -- -- -- -- -- -- --------- --------- --------- ---------- ---------- --------- --------- Net income (loss) applicable to common stock....................... $ (6,668) $(83,960) $(36,680) $(30,962) $ (6,294) $ 27,156 $ 27,043 Net income (loss) per common share: Basic............................. $ (1.11) $ (13.26) $ (5.41) $ (1.35) $ (.99) $ 1.20 $ 1.20 Diluted........................... $ (1.11) $ (13.26) $ (5.41) $ (1.35) $ (.99) $ .52 $ .51 Other Data: Capital expenditures (including acquisitions)...... ............... $ 87,764 $ 57,861 $128,708 $128,708 $ 99,422 $ 11,840 $ 11,840 Ratio of earnings to fixed charges (5) -- -- -- -- -- -- -- </TABLE> March 31, 2000 -------------------------- (dollars in thousands) (unaudited) Consolidated Balance Sheet Data: Total assets................................ $ 355,186 Total debt (6) ............................. $ 275,384 Stockholders' equity (deficit) (7) ......... $ 15,806 - ---------- (1) Reflects the sale of the first lien notes, the exchange offer and the reversal of an overhead reimbursement received from Abraxas Wamsutter, L.P. associated with the Samson transaction as if they occurred on January 1, 2000. (2) Reflects the reversal of an overhead reimbursement received from Abraxas Wamsutter, L.P. associated with the Samson transaction as if it occurred on January 1, 2000. (3) Consists of crude oil and natural gas production sales, revenue from rig operations and processing facilities, and other miscellaneous revenue. (4) Consists of lease operating expenses, production taxes, rig operating expenses and processing costs. (5) Earnings consist of income (loss) from continuing operations before income taxes plus fixed charges. Fixed charges consist of interest expense, amortization of deferred financing fees and premium on the old notes. Our earnings were inadequate to cover fixed charges in 1997, 1998, 1999, March 31, 1999, and Pro Forma March 31, 2000, by $10.0 million, $88.1 million, $49.0 million, $11.6 million, $9.3 million and $7.3 million, respectively. (6) Consists of long-term debt, including the premium on the old notes and capital lease obligations. (7) Consists of 22,747,118 issued and outstanding shares of Abraxas common stock.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001045597_i3-mobile_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001045597_i3-mobile_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3eaed39b024ef10386ccf37479590da777902c09
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001045597_i3-mobile_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights selected information from this prospectus and may not contain all the information that is important to you. To learn about this offering and our business, you should carefully read the entire prospectus, including the risk factors and our financial statements and related notes. Unless otherwise indicated, we present information in this prospectus assuming: - the conversion of all outstanding shares of preferred stock into an aggregate of 11,316,765 shares of common stock upon the closing of this offering; - our common stock will be sold at $15.00 per share, which is the mid-point of the range shown on the cover of this prospectus; and - the underwriters have not exercised their over-allotment option to purchase additional shares of common stock. OUR BUSINESS We provide timely personalized information to users of wireless devices such as mobile phones, pagers and personal digital assistants to address their media content and electronic commerce needs. We currently deliver information content in a variety of categories, including finance, news, weather, sports, entertainment, traffic and travel, from over 50 content sources. We have also begun to offer additional products and services, including advertising sales, wireless electronic commerce, e-mail and personal information management applications. We believe that our technical knowledge, business relationships and experience will enable us to capitalize on the growth of the wireless data medium. We provide our products and services primarily through our distribution relationships with wireless network operators. We currently provide personalized wireless information services developed for, and provided under agreements with, more than 15 wireless network operators, collectively representing approximately 48 million wireless phone subscribers at September 30, 1999, or more than 55% of the North American market of wireless phone users. We have also developed wireless message delivery systems for four Internet media networks and corporate enterprises. At December 31, 1999, we had over 450,000 users of our products and services, of which approximately 100,000 were paying subscribers and 350,000 were complimentary users. OUR HISTORY OF OPERATING LOSSES We incurred net losses of approximately $1.3 million for the year ended December 31, 1996, approximately $2.4 million for the year ended December 31, 1997, approximately $2.9 million for the year ended December 31, 1998 and approximately $10.3 million for the year ended December 31, 1999, resulting in an accumulated deficit of approximately $45.0 million at December 31, 1999, of which $26.6 million represents non-cash charges related to dividends on and redemptions of our preferred stock in 1999. We expect to continue to operate at a significant net loss and have negative operating cash flows as we incur costs related to product development, sales and marketing and administrative expenses. THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED APRIL 4, 2000 [I3 MOBILE, INC. LOGO] - -------------------------------------------------------------------------------- i3 MOBILE, INC. 5,100,000 SHARES COMMON STOCK - -------------------------------------------------------------------------------- This is the initial public offering of i3 Mobile, Inc. We are offering 5,100,000 shares of our common stock. We anticipate that the initial public offering price will be between $14.00 and $16.00 per share. Our common stock has been approved for listing on the Nasdaq National Market under the symbol "IIIM." INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 7. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO PUBLIC AND COMMISSIONS I3 MOBILE, INC. <S> <C> <C> <C> Per Share $ $ $ Total $ $ $ </TABLE> We have granted the underwriters the right to purchase up to an additional 765,000 shares to cover any over-allotments. DEUTSCHE BANC ALEX. BROWN CHASE H&Q CREDIT SUISSE FIRST BOSTON The date of this prospectus is , 2000 PRODUCTS AND SERVICES We market our products and services using the established distribution channels of our distributors and the combined brand names of our distributors and our own brand name. Our products and services are offered on both a complimentary and subscription basis. Our complimentary service allows users to select from a limited number of content categories, such as sports, weather or finance, to receive a daily message at no cost to the user. Our subscription service allows users to select from a larger number of content categories to receive multiple personalized messages throughout the day for a fee. We have proprietary technology and systems that have been designed to provide a network and device independent platform for the creation and delivery of our products and services. In addition, we offer wireless network operators a package of services, including personal profiling, content aggregation, content parsing, application development, message delivery, billing and customer service, for the delivery of customized content and information through their networks. We also offer any one or more of these services to Internet media networks and corporate enterprises.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001045647_idealab_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001045647_idealab_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..7b1dc6bd753d01fec35d3834ade4c71f168e26b0
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING US AND THE COMMON STOCK BEING SOLD IN THIS OFFERING, AND WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS PROSPECTUS: (1) DOES NOT TAKE INTO ACCOUNT THE POSSIBLE ISSUANCE OF UP TO __________ ADDITIONAL SHARES OF OUR COMMON STOCK UPON THE EXERCISE OF THE UNDERWRITERS' RIGHT TO PURCHASE SUCH SHARES; (2) REFLECTS THE AUTOMATIC CONVERSION OF ALL 23,686,010 SHARES OF OUR PREFERRED STOCK OUTSTANDING AS OF JANUARY 31, 2000 INTO 236,860,100 SHARES OF COMMON STOCK UPON THE CLOSING OF THIS OFFERING; (3) REFLECTS OUR REINCORPORATION IN NEVADA PRIOR TO THE CLOSING OF THIS OFFERING; AND (4) REFLECTS THE AMENDMENT OF OUR CHARTER TO PROVIDE FOR THE AUTHORIZATION OF 10,000,000,000 SHARES OF COMMON STOCK AND 100,000,000 SHARES OF PREFERRED STOCK EFFECTIVE UPON CLOSING OF THIS OFFERING. IDEALAB! idealab! is a new form of enterprise that creates, builds and operates businesses that use the power of real-time interactive communications, including the Internet, telephony, cable and wireless, to satisfy unmet market needs. Most of our companies are based on ideas we generate internally, although from time to time we may consider ideas brought to us by other entrepreneurs or acquire interests in existing Internet companies that are strategically important to our network. Each business in our integrated, collaborative network is established as a separate company rather than as a division of idealab!. We believe that the resulting balance of decentralization and centralization enables each business to retain the adaptability and entrepreneurialism of a small company while benefiting from the economies of scale, information sharing and other synergies associated with inclusion in our network. Moreover, we believe that our companies are able to compete more effectively and grow more rapidly than many of their stand-alone competitors because we enable the entrepreneurs managing our businesses to concentrate primarily on the rapid execution of their business plans. The idealab! business method consists of idea generation, selection and analysis, company building and operational support, and strategic guidance and direction. Our experience in creating, building and operating Internet businesses enables us to quickly and efficiently bring innovative new companies to market and to build our existing companies into market leaders. o IDEA GENERATION, SELECTION AND ANALYSIS. We create network companies by continually generating ideas for innovative business models. We measure each idea against several criteria, including whether it addresses an unmet market need, its potential to benefit the idealab! network and its ability to generate increasing efficiencies as the business grows. Before creating or acquiring a company, we perform thorough qualitative and quantitative analyses, create prototypes and conduct extensive consumer testing. o COMPANY BUILDING AND OPERATIONAL SUPPORT. We provide our companies with operational assistance from our various in-house departments and third party service providers, access to our business relationships both inside and outside the idealab! network and financial support. We initially house most of our companies at our open-plan facilities, which are designed to foster a collaborative process and a sharing of best practices among the companies in these locations. Our managing directors, entrepreneurs-in-residence and operational vice presidents provide strategic guidance as well as assistance in sales, marketing and brand management, executive recruiting, web development and information technology, and legal, finance, accounting and human resources to our network companies. o STRATEGIC GUIDANCE AND DIRECTION. We actively develop the business models, strategies, operations and management teams of all our companies throughout their lifecycles to ensure that each company benefits fully from our collective experiences. Our senior executives serve on the boards of directors of our network companies and participate in consultation and informal communications that allow us to take an active, hands-on role in the ongoing oversight and strategic management of our companies. Our operating methods are designed to promote commercial relationships among our network companies, which we believe enhance the value of our overall network. Our objective is to increase the value of our network by continually creating new business ideas and acquiring existing businesses in markets involving real-time interactive communications that complement our existing companies. We believe that we can enhance stockholder value by engaging in business through an integrated network of companies in which we own significant stakes over the long term. We intend to continue establishing additional facilities around the world where we can match our best ideas with talented people to create new companies. In each new location we intend to duplicate the organization of our functional teams to promote the consistent execution of the idealab! method. We have grown rapidly since our inception in 1996. The idealab! network currently includes the following seven public and 28 private companies: PUBLIC COMPANIES Centra Software NetZero eMachines Ticketmaster Online - CitySearch eToys Tickets.com GoTo.com PRIVATE COMPANIES CarsDirect.com jobs.com Cooking.com MyHome.com dotTV OpenSales.com EntryPoint PayMyBills.com eve.com PeopleLink eLease PETsMART.com eVoice Sameday.com FirstLook.com scan.com FreeMusic Scout HomePage.com shopMarket ice.com Swap.com iExchange.com Utility.com Intranets.com WeddingChannel.com Jackpot.com z.com We currently have 198 employees. In addition to our headquarters in Pasadena, California, we maintain offices in the Silicon Valley, New York, Boston and London. THE OFFERING <TABLE> <S> <C> Common stock offered................................. shares Common stock to be outstanding shares after the offering................................. Use of proceeds...................................... To create, build and operate, acquire, or increase our interests in interactive communications businesses, and for general corporate purposes. Proposed Nasdaq National Market symbol............... ILAB </TABLE> The table above is based on shares outstanding as of January 31, 2000. The number of shares of common stock to be outstanding after the offering excludes: o 200,013,550 shares of common stock subject to outstanding options with a weighted-average exercise price of $1.22 per share as of January 31, 2000; o 64,085,700 shares of common stock available for issuance under our stock option plans as of January 31, 2000; o 21,850,350 shares underlying options granted between February 1, 2000 and March 15, 2000 at a weighted-average exercise price of $1.94; o 2,220,081 shares of common stock issued between February 1, 2000 and March 31, 2000; and o 14,880,750 shares of common stock issuable upon the conversion of Series D preferred stock issued between February 1, 2000 and March 31, 2000. The table above includes 107,575,000 shares of common stock subject to a right of repurchase by us. ------------------ WE INTEND TO REINCORPORATE IN NEVADA AND CHANGE OUR CORPORATE NAME TO "IDEALAB!" CONCURRENTLY WITH THIS OFFERING. WE WERE INCORPORATED IN CALIFORNIA IN MARCH 1996 UNDER THE NAME BILL GROSS' IDEALAB!. THE TERMS "IDEALAB!", "OUR" AND "WE", AS USED IN THIS PROSPECTUS, REFER TO IDEALAB! AND ITS WHOLLY-OWNED SUBSIDIARY, IDEALAB! HOLDINGS, L.L.C., A DELAWARE LIMITED LIABILITY COMPANY, EXCEPT WHERE IT IS CLEAR THAT THE TERM REFERS ONLY TO IDEALAB!. WE REFER TO THE INTERNET COMPANIES THAT WE HAVE CREATED OR INVESTED IN AND THAT PARTICIPATE IN OUR COLLABORATIVE NETWORK AS "OUR COMPANIES" OR "OUR NETWORK COMPANIES". WE DO NOT ACT AS AN AGENT OR LEGAL REPRESENTATIVE FOR ANY OF THESE COMPANIES AND WE DO NOT HAVE THE POWER OR AUTHORITY TO LEGALLY BIND ANY OF THESE COMPANIES. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) The following summary historical and pro forma consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited consolidated financial statements and notes thereto included elsewhere in this prospectus. The Pro Forma column included in the Consolidated Statement of Operations Data for the year ended January 31, 2000, reflects the effects of certain fiscal 2000 acquisitions and dispositions as if they had occurred on February 1, 1999. The Pro Forma per share data assumes the conversion of all series of our outstanding convertible preferred stock on February 1, 1999 or original issue date if later. See Note 5 of Notes to our Consolidated Financial Statements and Unaudited Pro Forma Condensed Combined Financial Information included elsewhere in this prospectus. The Pro Forma column included in the Consolidated Balance Sheet Data as of January 31, 2000 reflects the automatic conversion of all shares of our convertible preferred stock into 236,860,100 shares of common stock upon completion of this offering. The Pro Forma, As Adjusted column reflects the sale of shares of common stock that we are offering after deducting underwriting discounts and commissions and estimated offering expenses. See "Use of Proceeds" and "Capitalization." <TABLE> <CAPTION> MARCH 14, 1996 YEAR ENDED JANUARY 31, (INCEPTION) TO --------------------------------------------------- JANUARY 31, 1998 1999 2000 2000 1997 ACTUAL ACTUAL ACTUAL PRO FORMA --------------- ---------- ---------- ------------ ------------- (UNAUDITED) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues.................................. $ -- $ 154 $ 805 $ 21,158 $ 134,303 Operating expenses, excluding stock-based compensation............................ 2,275 11,330 8,387 153,194 277,316 Stock-based compensation.................. 135 233 3,910 109,150 109,299 --------------- ---------- ---------- ------------ ------------- Operating income (loss)................... (2,410) (11,409) (11,492) (241,186) (252,312) --------------- ---------- ---------- ------------ ------------- Other income (expense), net............... 71 74 7,628 322,311 320,287 Income (loss) before income taxes, minority interest and equity in the income (loss) of affiliates............. (2,339) (11,335) (3,864) 81,125 67,975 Income tax benefit (expense).............. (3) 3,528 2,358 (86,245) (73,214) Minority interest......................... 116 1,022 572 95,537 138,334 Equity in the income (loss) of affiliates, net of tax.................. (144) (271) 51 28,067 (23,337) --------------- ---------- ---------- ------------ ------------- Net income (loss)......................... (2,370) (7,056) (883) 118,484 109,758 Deduction for beneficial conversion feature................................. -- -- -- (9,724) (9,724) Repurchase of convertible preferred stock. -- -- -- (3,777) (3,777) --------------- ---------- ---------- ------------ ------------- Net income (loss) applicable to common shareholders..................... $ (2,370) $ (7,056) $ (883) $ 104,983 $ 96,257 =============== ========== ========== ============ ============= Net income (loss) per share applicable to common shareholders--diluted............. $ (0.01) $ (0.02) $ -- $ 0.15 -- Shares used to calculate net income (loss) per share applicable to common shareholdres--diluted.................... 322,232 334,760 352,083 695,312 -- Pro Forma net income (loss) per share applicable to common shareholders-diluted -- -- -- -- $ 0.14 Pro Forma shares used to calculate net income (loss) per share applicable to common shareholders--diluted.................... -- -- -- -- 697,839 </TABLE> <TABLE> <CAPTION> AS OF JANUARY 31, 2000 --------------------------------------------------- PRO FORMA, ACTUAL PRO FORMA AS ADJUSTED ---------------- ---------------- --------------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 601,474 $ 601,474 $ Working capital............................................. 562,024 562,024 Total assets................................................ 1,674,383 1,674,383 Convertible preferred stock ................................ 892,782 -- -- Total shareholders' equity.................................. 337,784 1,230,566 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001045926_requisite_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001045926_requisite_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..940b1d4c1314525a94460fef653ed10c0de4a163
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+PROSPECTUS SUMMARY You should read this summary together with the more detailed information regarding our company and the common stock being sold in this offering and our consolidated financial statements and notes to the consolidated financial statements appearing elsewhere in this prospectus. In this prospectus, "we," "us" and "our" refer to Requisite Technology, Inc. and our wholly-owned subsidiaries Antaeus Systems, Inc. and Requisite Technology, Ltd. We are a leading provider of end-to-end electronic content creation and management products and services that enable business-to-business electronic commerce, or B2B e-commerce. Our solutions allow for the creation of electronic catalogs of goods and services offered for sale over the Internet and corporate networks. These catalogs can be created from a variety of paper and electronic sources. We also provide tools for the management of electronic content as well as search technology that allows buyers to find products and services more efficiently. We believe that manageable and findable product and service information is essential for the success of buyers, suppliers and Internet-based electronic marketplaces, or e-marketplaces, in global B2B e-commerce. We have established strategic partnerships with seven leading enterprise software vendors, or ESVs, including SAP AG and Oracle Corporation, each of which integrates our software into their B2B e-commerce procurement solutions. As of August 25, 2000, we have sold our content management and finding solutions to 65 customers. The Internet has become an important global commerce medium. According to International Data Corporation, the number of commercial users employing the Internet worldwide in the normal course of their operations is expected to grow from 82 million at the end of 1999 to 250 million in 2003. GartnerGroup projects that total B2B e-commerce sales will increase worldwide from $403 billion at the end of 2000 to $7.3 trillion in 2004. This growth in B2B Internet usage is being driven in part by the increasingly competitive global business environment, which is causing businesses to seek new ways to reduce costs and make business processes more efficient. According to AMR Research, between October 1998 and March 2000, over 600 e-marketplaces began operations in industries ranging from aerospace to oil and gas. Many types of production and non-production goods and services can be purchased through these e-marketplaces, ranging from basic office supplies, such as pens and pencils, to automobile parts to multi-million dollar items such as turbine engines. The success of most B2B procurement systems and e-marketplaces depends in part on aggregating varied information about products or services from multiple suppliers. A unified electronic catalog must be created in which information can be easily found by people in many different organizations who may have different buying systems, habits and computer skill levels. We believe that one of the fundamental problems limiting widespread B2B e-commerce is the difficulty of organizing product and service content from multiple suppliers and presenting that information consistently and in a manner that is readily accessible to end users. Our objective is to become the leading provider of content creation and management products and services to enable and facilitate global B2B e-commerce. Our strategy includes propagating our Requisite Unifying Structure, or RUS, platform as the standard for organizing electronic product and service information and managing electronic content. We believe that integrating our technology into our strategic partners' solutions will further drive the adoption of RUS as a standard for companies transacting business on the Internet. We believe this strategy will facilitate the sale or license of our electronic catalog management and finding solutions. By offering an end-to-end solution for the creation, management and finding of electronic content, we offer buyers, suppliers and e-marketplaces a critical part of the infrastructure they need to conduct e-commerce. Buyers, suppliers, e-marketplaces and B2B e-commerce solution providers each derive benefits from our solutions. For buyers, our content creation and management solutions make electronic procurement applications more effective by allowing users to easily find comprehensive information on the products they want to buy. Our solutions enable suppliers to rapidly launch global e-commerce initiatives, respond to customer demand for electronic content for their procurement programs and become effective participants in e-marketplaces, without having to make a substantial investment in personnel and systems. Our solutions enable e-marketplaces to rapidly create and launch their services. Our solutions allow B2B e-commerce solution providers to offer seamless electronic procurement offerings to their customers by combining our electronic catalog products with their procurement applications. By facilitating the rapid deployment of effective electronic procurement solutions with superior finding and content management capabilities, we can improve the competitive positions of buyers, suppliers, e-marketplaces and of our strategic partners. THE OFFERING Common stock offered.......... shares Common stock to be outstanding after this offering........... shares Use of proceeds............... For general corporate purposes, including working capital and capital expenditures. We also may use a portion of the net proceeds to acquire or invest in complementary companies, products or technologies. See "Use of Proceeds." Proposed Nasdaq National Market symbol................. RQST The information contained in this prospectus is based on the number of shares outstanding as of August 25, 2000, and excludes: -- 37,419 shares of common stock issuable directly or indirectly upon exercise of outstanding warrants as of August 25, 2000, at a weighted average exercise price of $1.43 per share; -- 7,950,000 shares of common stock reserved for issuance under our stock option plans, of which 3,432,821 shares at a weighted average exercise price of $2.38 per share were subject to outstanding options as of August 25, 2000; and -- 2,000,000 shares of common stock reserved for issuance under our employee stock purchase plan. In addition, except as otherwise noted, all information in this prospectus assumes: -- the conversion of all outstanding preferred stock into 17,265,196 shares of common stock upon the completion of this offering; -- a three-for-two stock split of all of our outstanding common stock and preferred stock effective as of , 2000; and -- the underwriters' over-allotment option is not exercised. We were incorporated in Delaware on November 1, 1993. Our principal executive offices are located at 10355 Westmoor Drive, Suite 205, Westminster, Colorado 80021, and our telephone number is (303) 474-2200. Our website address is www.requisite.com. This is a textual reference only. We do not incorporate the information on our website into this prospectus, and you should not consider it part of this prospectus. Requisite Technology(R) is registered as a trademark in the United States. We also have filed trademark applications in the United States for BugsEye(TM) and eLeader(TM). In addition, we have filed applications to register the Requisite Technology and BugsEye trademarks in one or more foreign countries. These trademark applications are subject to review by the applicable governmental authorities, may be opposed by private parties and may not be issued. The prospectus contains other trademarks, service marks and trade names owned by other companies. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The pro forma basic and diluted share calculations below reflect the conversion upon the closing of this offering of all outstanding shares of preferred stock into 17,265,196 shares of common stock as if the conversion occurred at the date of original issuance. <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------- ----------------- 1997 1998 1999 1999 2000 ------- ------- -------- ------- ------- (UNAUDITED) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue...................................... $ 217 $ 1,387 $ 7,299 $ 2,558 $14,186 Operating expenses........................... 5,346 7,520 19,465 5,938 23,194 Loss from operations......................... (5,129) (6,133) (12,166) (3,380) (9,008) Net loss..................................... (5,028) (5,909) (11,691) (3,306) (8,695) Net loss per share, basic and diluted........ $ (1.98) $ (2.06) $ (3.01) $ (.97) $ (1.70) Weighted averaged common shares outstanding, basic and diluted.......................... 2,543 2,873 3,882 3,398 5,103 Pro forma (unaudited): Net loss per share, basic and diluted...... $ (.66) $ (.21) $ (.39) Weighted average common shares outstanding, basic and diluted....................... 17,831 16,029 22,169 </TABLE> The following table presents summary consolidated balance sheet data as of June 30, 2000. The pro forma column reflects the automatic conversion of all shares of our outstanding preferred stock into common stock upon completion of this offering. The pro forma as adjusted column further reflects our receipt of the estimated net proceeds from our sale of the shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. <TABLE> <CAPTION> AS OF JUNE 30, 2000 --------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- (UNAUDITED) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $19,247 $19,247 $ Working capital............................................. 8,951 8,951 Total assets................................................ 32,576 32,576 Total liabilities........................................... 16,194 16,194 Total stockholders' equity.................................. 16,382 16,382 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001046442_next_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001046442_next_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary contains basic information about us and the offering. Because it is a summary, it does not contain all the information that you should consider before investing. You should read the entire prospectus carefully, including the risk factors and our financial statements and the related notes to those statements included in this prospectus. Except as otherwise required by the context, references in this prospectus to "we," "our," "us" and "NGN" refer to Next Generation Network, Inc. A Designated Market Area, known as a DMA, is a measure of market size in the U.S. based on population as reported by the Nielsen Rating Service and is a standard market measure used in the media industry. Unless otherwise indicated, all information in this prospectus reflects the exercise of all outstanding warrants for an aggregate of 1,442,159 shares of common stock and assumes no exercise of the underwriters option to purchase additional shares of common stock. OUR COMPANY We are the leader in the emerging digital out-of-home advertising industry. We are currently implementing a rapid build-out of the world's largest network of digital video advertising displays, which we call E*billboards. E*billboards are high resolution digital monitors, located in high traffic, frequently-visited places, that offer sequences of advertising and up-to-date programming such as news, weather, financial data, sports, trivia and community service announcements. All of our E*billboards are connected to a central hub in Minneapolis which enables us to manage and transmit our advertising and programming on a continuous basis. As of December 31, 1999, we have installed E*billboards in 5,031 sites and secured long-term site rights for an additional 5,000 sites that are pending installation. Our E*billboards are currently seen by an audience of more than 39 million people each week in 17 major U.S. markets, including eight of the ten largest markets in the country. Our strategy is to increase our leadership position by continuing to amass a significant E*billboard footprint both nationally and internationally. We intend to accomplish this by targeting major operators who control multiple sites in high traffic venues such as elevators, fast food restaurants, transit hubs, movie theatres, pharmacies, gas stations, ATM kiosks, convenience stores and lobby shops where customers wait in line. We have established agreements with site operators such as 7-Eleven, Inc. (5,327 sites), Cumberland Farms (934 sites) and the New Jersey Transit Authority (203 sites). Consistent with our global expansion strategy, in January 2000, we formed an alliance with Otis Elevator Company. Currently, Otis has agreements to maintain more than 1.2 million elevators worldwide. Initially, Otis will focus its E*billboard marketing efforts on the largest media markets such as London, New York, Paris and Sydney. As we expand our network of E*billboards, we believe that we will increase our ability to attract a broad range of advertisers. We were founded to capitalize on the dramatic impact digital technology is expected to have on the out-of-home advertising industry. To date, we have raised more than $96 million, including a $30 million equity investment made by a subsidiary of Otis' parent, United Technologies Corporation, in January 2000. We have used the proceeds of these financings to develop our proprietary technology delivery platform, establish our sales and marketing organization and begin installation of our network of E*billboards. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED , 2000. Shares [LOGO] NEXT GENERATION NETWORK, INC. Common Stock ------------ Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $ and $ per share. We will apply to list our common stock on The Nasdaq Stock Market's National Market under the symbol " ". The underwriters have an option to purchase a maximum of additional shares to cover over-allotments. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" STARTING ON PAGE 8. <TABLE> <CAPTION> UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS PUBLIC COMMISSIONS TO NGN ------ ----------- ------ <S> <C> <C> <C> Per Share $ $ $ Total $ $ $ </TABLE> Delivery of the shares of common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON BANC OF AMERICA SECURITIES LLC CIBC WORLD MARKETS FRIEDMAN BILLINGS RAMSEY The date of this prospectus is , 2000. COMPETITIVE ADVANTAGES Digital technology is ushering in an era of dramatic change for the media industry by providing advertisers with new forums and formats through which they can connect with and impact their target audiences. The strengths of outdoor advertising include its ability to build product awareness and reach large audiences at a relatively low cost. We believe that our digital technology enhances these strengths by increasing the targetibility, flexibility and overall effectiveness of out-of-home advertising. Our ability to capture an increasing share of the total advertising market is enhanced by the following competitive advantages. Large and expanding footprint. We currently hold long-term site rights for more than 10,000 sites, including 5,031 that have already been installed, representing a potential weekly audience of approximately 79 million. Unlike traditional billboards, we are not constrained by real estate zoning or other site restrictions. As a result, we believe that there are significant opportunities to place our E*billboards in a significant number of high traffic venues throughout our target markets, including convenience stores, fast food restaurants, transit hubs and gas stations. Furthermore, we are able to reach highly appealing, upscale demographic locations where traditional billboards have been restricted. Ability to precisely target audiences. E*billboards are individually addressable and programmable and are profiled based on specific characteristics of their audience, including age, gender, race and income. As a result, our network offers advertisers the ability to target specific demographics on a site by site basis. This allows us to appeal to both local advertisers targeting a small geographic area within a major city, as well as national advertisers targeting a wide range of demographic groups. Proprietary network technology. Built upon Internet-enabled networking and database technologies, our network of E*billboards is managed using proprietary software that we developed expressly for an out-of-home advertising application. Our technology and operating platform have the ability to support a global network for selling, creating, distributing and tracking digital advertisements and content. In addition, whereas traditional outdoor advertising takes days or weeks to update, our technology reduces the lead times for advertising or programming changes to hours or minutes. Our clients are able, therefore, to target specific parts of the day and feed in advertising updates at any time, which provides them with the ability to improve the timeliness of their message at little incremental cost. High impact appeal. Our technology allows us to deliver high resolution, full video advertisements and programming content. The effectiveness of E*billboards is enhanced by positioning them in prominent locations where people are waiting or standing in line and by offering relevant and interesting programming. E*billboards typically impact viewers at locations where they generally have limited exposure to other media. As a result, E*billboards have demonstrated a high level of impact and recall rates with little or no competition from other media. Significant benefits to site operators. E*billboards have been well-received by site operators due to the economic and other benefits that they provide. The E*billboard installation process is quick and simple and typically requires no investment by the site operator. Typically, E*billboard site agreements provide site operators with a small percentage of advertising revenues generated by that site in return for a five to ten year commitment. In addition, E*billboards improve the shopping experience for retail outlet customers by providing a source of entertainment and information. Often, we provide site operators with the ability to promote their own products and services on the E*billboards within their establishments. Highly scalable technology platform. We designed our technology and infrastructure platform to support a rapid build-out of our network. Due to the relatively fixed cost nature of our operating platform, our cost structure allows for economies of scale and significant margin expansion as our revenues increase in line with a larger installed base of sites. OUR PORTFOLIO OF E*BILLBOARD SITES As of December 31, 1999, we operated our E*billboards in seventeen major markets as follows: <TABLE> <CAPTION> DMA MARKET NO. OF ESTIMATED RANK MARKET(1) POPULATION SITES WEEKLY VIEWERS - ---- ---------------- ---------- ----- -------------- <S> <C> <C> <C> <C> 1 New York 14,643,600 1,317 10,400,000 2 Los Angeles 11,522,935 578 4,600,000 3 Chicago 6,543,815 172 1,400,000 4 Philadelphia 5,511,985 307 2,400,000 5 San Francisco 4,952,195 245 1,900,000 6 Boston 4,529,755 241 1,900,000 7 Dallas 3,818,990 306 2,400,000 8 Washington, DC 4,012,095 519 4,000,000 14 Tampa 2,804,345 165 1,300,000 16 Miami 2,888,755 117 900,000 20 Sacramento 2,508,585 64 500,000 22 Orlando 2,107,275 257 2,000,000 24 Baltimore 2,034,360 204 1,600,000 26 San Diego 2,081,930 157 1,200,000 40 Norfolk 1,308,230 237 1,900,000 44 West Palm Beach 1,175,090 67 500,000 81 Ft. Myers 746,188 54 400,000 Developmental 24 Markets(2) ---------- ----- ---------- TOTALS 73,190,128 5,031 39,300,000 </TABLE> (1) In contiguous markets, such as Washington, D.C. and Baltimore, San Francisco and Sacramento, Miami and West Palm Beach and Tampa and Ft. Myers, we have a single sales office that supports both markets. (2) Developmental markets consist of markets in which we have installed 10 or less E*billboards. OUR STRATEGY In 1998, the U.S. out-of-home advertising industry generated more than $19 billion of revenue. We intend to capture an increasing share of this market by offering advertisers a new out-of-home digital distribution channel that can more precisely target and effectively impact their intended audience than traditional media. We are using the following strategies to rapidly expand our network and consolidate our leadership position in the developing digital out-of-home advertising industry. Rapidly expand our network footprint. Our strategy is to rapidly expand our network worldwide. In addition to installing our current backlog of 5,000 secured but uninstalled sites, we will continue to broaden our presence throughout the U.S. by securing and installing additional sites within the most important advertising markets. We position our E*billboards in multiple locations and in various types of venues in order to increase the likelihood that viewers will encounter E*billboards several times each day. We have identified several categories of high traffic, frequently visited venues that have a high level of advertising appeal. We intend to attract significant site operators within each of these venues: - elevators - fast food restaurants - movie theatres - pharmacies - gas stations - ATM kiosks - convenience stores - transit hubs - lobby shops Our domestic geographic expansion is initially focused on the ten largest U.S. markets, with the intention of having a significant presence in the 25 largest U.S. markets by 2002. We also intend to expand internationally by developing networks either directly or through alliances with local partners. Local partners will be chosen primarily for their ability to secure quality real estate sites or source advertising on a national, regional and local level within their particular area. For example, our alliance with Otis provides us with potential access to more than 1.2 million elevators in major markets throughout the world. Focus on local and national advertisers. Traditionally, the area of strength for out-of-home advertising has been local advertising. We will continue to develop local sales forces to work closely with advertisers as we expand into each new market. We believe that once we have established an extensive network of sites, we will also become more attractive to large national advertisers seeking to reach a significant portion of the population. Furthermore, we also intend to target national advertisers by organizing our sales force initiatives around key product advertising categories and their respective agencies. Leverage our proprietary technology. We seek to continually improve our proprietary technology to further enhance our operating efficiency and the functionality and usability of our product. For example, we are developing software that will allow our advertisers to manage their advertising program for E*billboards in-house over the Internet. In a Web-based and interactive environment, advertisers will be able to review advertising slots available on a site by site basis, develop national, regional or local advertising programs, generate automatic quotes and submit orders. Continually improve programming. As our footprint expands, we intend to develop our programming content production capabilities to maintain and enhance the local relevancy and appeal of our digital programming. Our programming focuses on national, regional and local topics of interest such as news, sports, weather and entertainment. Because we gather and distribute our programming digitally, we are not required to maintain editorial staff in all regions in which we have a presence. Instead, we have a centralized editorial team that receives content from various sources, repackages that content and transmits it to any location on our network. We may establish additional relationships with new local or national programming content providers as we expand. CORPORATE INFORMATION We were incorporated under the laws of the State of Delaware in 1990. Our corporate headquarters are located at 11010 Prairie Lakes Drive, Suite 300, Minneapolis, Minnesota 55344-3854, and our telephone number is (612) 944-7944. ----------------------------- THE OFFERING Common stock offered ............. shares Common stock to be outstanding after the offering(1) ............ shares Use of proceeds .................. We will use the net proceeds from this offering to fund capital expenditures of at least $30 million, related to the purchase and installation of our E*billboards, over the next two years, as well as for working capital and general corporate purposes. Listing .......................... We will apply to list our common stock on The Nasdaq National Market, subject to official notice of issuance, under the symbol " ". - ------------ (1) Assumes the exercise of all outstanding warrants, representing 1,442,159 shares, and excludes 2,240,000 shares of common stock reserved for issuance under our stock option plans, pursuant to which options to purchase 1,705,810 shares of common stock have been granted. SUMMARY FINANCIAL INFORMATION The following table sets forth our summary historical and pro forma financial information for the periods ended and as of the dates indicated. We derived the summary historical financial information below as of and for each of the fiscal years from our audited financial statements. You should read the following financial information along with the information contained throughout this prospectus, including "Management's Discussion and Analysis of Financial Position and Results of Operations" and the financial statements and related notes that are included in this prospectus. The pro forma adjustments to the information for the year ended, and as of, December 31, 1999 are for the sale of 3,025,017 shares of our common stock for consideration of $30 million to a wholly owned subsidiary of United Technologies Corporation, the issuance of 2,715,699 shares of common stock upon the conversion of preferred stock and the purchase of $18.1 million aggregate face amount of our 12% senior secured PIK notes after that date. Statement of operations and other data pro forma amounts are as if the transactions occurred on January 1, 1999 and balance sheet data pro forma amounts are as if the transactions occurred on December 31, 1999. <TABLE> <CAPTION> Historical Pro Forma Fiscal Year Ended December 31, Fiscal Year Ended 1997 1998 1999 December 31, 1999 ------------ ------------ ------------ ----------------- (in dollars except share, per share and operating data) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS: Net revenues ....................... $ 1,827,121 $ 2,589,690 $ 5,501,269 $ 5,501,269 Operating expenses: Network operating expenses ......... 2,256,387 4,140,918 6,936,130 6,936,130 Cost of network equipment sales(1) .................... 60,893 9,996 1,526 1,526 Selling expenses ................... 1,757,523 6,062,770 8,980,846 8,980,846 General and administrative expenses(2) ................. 1,850,775 3,643,005 5,448,175 5,448,175 Corporate overhead(3) .............. 1,408,366 2,093,299 3,618,305 3,618,305 Depreciation and amortization(4) ... 713,892 1,371,959 2,764,005 2,764,005 ------------ ------------ ------------ ------------ Total operating expenses ......... 8,047,836 17,321,947 27,748,987 27,748,987 ------------ ------------ ------------ ------------ Operating loss ..................... (6,220,715) (14,732,257) (22,247,718) (22,247,718) Interest expense, net .............. 167,769 4,930,720 7,680,354 5,085,460 Other expense(5) ................... -- -- 67,175 67,175 ------------ ------------ ------------ ------------ Net loss before preferred stock dividends .................. (6,388,484) (19,662,977) (29,995,247) (27,400,353) Preferred stock dividends .......... 1,630,836 2,515,590 2,871,619 133,650 ------------ ------------ ------------ ------------ Net loss ........................... $ (8,019,320) $(22,178,567) $(32,866,866) $(27,534,003) ============ ============ ============ ============ Earnings (loss) per share: Basic and diluted(6) ............... $ (3.01) $ (8.33) $ (12.34) $ (3.28) Weighted average common shares Outstanding: Basic and diluted(6) ............... 2,662,680 2,662,680 2,662,680 8,403,396 OTHER DATA: Billboard Cash Flows(7) ............ (4,098,457) (11,266,999) (15,865,408) (15,865,408) EBITDA(7) .......................... (5,506,823) (13,360,298) (19,483,713) (19,483,713) Capital expenditures ............... 1,278,775 7,899,479 5,733,059 5,733,059 Number of markets(8) ............... 9 17 17 17 Number of sites .................... 1,769 3,630 5,031 5,031 Weekly audience(9) ................. 39,679,497 39,679,497 </TABLE> <TABLE> <S> <C> <C> <C> <C> Cash flows from: Operating activities ............. $ (4,652,255) $(10,491,372) $(18,416,882) $(18,416,882) Investing activities ............... (1,388,291) (7,832,727) (5,868,456) (5,868,456) Financing activities .............. 5,008,493 40,245,170 (21,440) 26,845,346 BALANCE SHEET DATA (at period end): Cash and cash equivalents .......... 24,710,213 403,435 27,476,026 Total assets ....................... 38,453,371 17,715,969 44,124,560 Total long-term debt (including current maturities) .............. 42,136,586 49,580,598 32,915,598(10) Mandatory redeemable preferred stock ............................ 16,772,830 19,396,949 -- Total shareholders' equity (deficit) (26,391,499) (59,054,883) 3,261,852 </TABLE> - ---------- (1) Includes the costs of hardware and the costs to install the equipment sold to third-parties. Prior to 1997 these sales were a part of our business of selling E*billboards to local media companies with which we had license and network operating agreements. In 1997, we reacquired all the equipment and terminated these agreements with local media companies. After 1997, we sold small amounts of equipment to various purchasers. In the future we do not expect equipment sales to be significant. (2) Includes rent and compensation and related benefits for personnel involved in corporate development, field operations, network operations, marketing, creative services, management information systems and accounting. (3) Includes compensation and related benefits for senior management and administrative personnel, legal, accounting and other professional fees, travel, insurance and telecommunications. (4) Includes $543,000, $1.1 million and $2.2 million of depreciation and amortization of capital costs associated with the installation of E*billboards for 1997, 1998 and 1999, respectively. The remainder represents depreciation and amortization on other assets. (5) Represents the loss on our investment in Next Generation Network International, LLC, which was formed for the purpose of researching the development of markets for E*billboards in several countries outside the U.S. We own 50% of NGN International and one of our directors controls the remaining 50% . (6) Excludes the effect of all outstanding warrants for an aggregate of 1,411,159 and 31,000 shares of common stock exercisable immediately at per share prices of $.01 and $7.143, respectively. (7) Billboard cash flow consists of operating loss before depreciation, amortization, and corporate overhead. EBITDA consists of operating loss before depreciation and amortization. Although billboard cash flow and EBITDA are not measures of performance or liquidity calculated in accordance with generally accepted accounting principles, we believe that these measures are useful to any investor in evaluating the company because these measures are widely used in the out-of-home advertising industry as a measure of a company's performance. Nevertheless, billboard cash flow and EBITDA should not be considered in isolation from or as a substitute for net income or loss, cash flows from operations and other statement of operations or statement of cash flows prepared in accordance with generally accepted accounting principles, or as a measure of profitability or liquidity. Moreover, because billboard cash flow and EBITDA are not measures calculated in accordance with generally accepted accounting principles, these performance measures are not necessarily comparable to similarly titled measures employed by other companies. Billboard cash flow for 1997 is not directly comparable with billboard cash flows presented for 1998 and 1999 because some of our revenues in 1997 were from network equipment sales and network operating fees and royalties. (8) Excludes developmental markets in which there are 10 or less E*billboard sites. (9) Equals the number of sites multiplied by 7,887, which is the average weekly traffic per site as estimated by Audits & Surveys. (10) Based upon the actual amount of senior secured notes repurchased on February 25, 2000, the date of the transaction. The pro forma adjustment includes accrued interest and additional senior secured notes issued as an interest payment after December 31, 1999.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001046501_buca-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001046501_buca-inc_prospectus_summary.txt
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+SUMMARY The items in the following summary are described in more detail later in this prospectus. This summary provides an overview of selected information and does not contain all the information you should consider. Therefore, you should also read the more detailed information set out in this prospectus, including the financial statements. Business of BUCA BUCA, Inc. owns and operates 40 full service, dinner-only restaurants under the name BUCA di BEPPO. Our restaurants offer high quality, immigrant Southern Italian cuisine served family-style in large portions in a fun and energetic atmosphere that parodies the decor and ambiance of post-War Italian/American restaurants. Our food is based on authentic family recipes enjoyed for generations in the villages of Southern Italy and then adapted to American ingredients. Our menu features dishes such as the BUCA di BEPPO 1893 salad, chicken cacciatore, spaghetti with half-pound meat balls, eggplant parmigiana, ravioli al pomodoro, veal marsala, garlic mashed potatoes, pizza arrabiatta and tiramisu. These dishes, often seasoned with garlic and served with vine-ripened tomatoes, communicate the pure, powerful flavors of the immigrant Southern Italian kitchen. Our oversized portions, served family-style on large platters, are designed to overwhelm guests with an abundance of high quality food. In family-style serving, each item is shared by the entire table, which encourages guests to interact and enjoy the meal together. We believe that the generous portions, combined with an average check per guest in fiscal 1999 of approximately $20.00, including beverages, offer our guests exceptional value. BUCA di BEPPO restaurants irreverently exaggerate the cliches of post-War Italian/American restaurants found in Italian neighborhoods of large U.S. cities. We design each of our restaurants to be a fun, high-energy destination. Each BUCA di BEPPO restaurant in a market is unique, which reinforces our image as a collection of neighborhood restaurants. Restaurant interiors are covered with hundreds of vintage photos and icons of Italian heritage, and feature lively music from classic artists such as Frank Sinatra and Dean Martin. Restaurant exteriors feature flashing bare bulb signage, statuary and humorous neon signs. Our food, decor and family-style servings all promote a fun, celebratory and socially interactive dining experience that emulates a traditional Italian/American evening meal. Our innovative concept has attracted national attention as evidenced by 17 "best of" designations in a variety of readers' polls across the U.S., a 1999 write-up in Gourmet Magazine, a 1998 "Hot Concepts!" award from Nation's Restaurant News, and numerous awards in our local markets. We believe that our restaurants provide superior unit level economics. For fiscal 1999, our restaurants with at least two full years of operating history generated average restaurant sales of approximately $3.2 million and average cash flow of approximately $785,000, or 24.5% of restaurant sales. We believe that our Paisano Partners program, in which our restaurant general managers, known as Paisano Partners, purchase stock and receive a significant portion of their annual cash compensation based on restaurant cash flow, motivates Paisanos to achieve significantly greater operating efficiencies and contributes to our superior unit level economics. We are pursuing a rapid but disciplined expansion strategy. Our objective is to become the dominant family-style, immigrant Southern Italian restaurant in each of our markets. We intend to continue our expansion throughout the United States. We plan to open 17 restaurants in fiscal 2000, of which six have already opened, nine are under construction and the remaining two have signed leases. By the end of fiscal 2000, we plan to have 51 restaurants open in 29 markets. To continue our expansion, we will need to select appropriate restaurant sites, effectively manage development risks, recruit qualified personnel and raise additional capital as necessary. Office Location We were incorporated on December 2, 1994 as a Minnesota corporation. Our principal executive offices are located at 1300 Nicollet Mall, Minneapolis, Minnesota 55403 and our telephone number is (612) 288-2382. Our website is www.BUCAdiBeppo.com The information on our website is not intended to be part of this prospectus, and you should not rely on any of the information provided there in making your decision to invest in our common stock. The Offering Common stock offered: <TABLE> <S> <C> By BUCA, Inc........................... 3,000,000 shares By selling shareholders................ 33,699 shares Total.............................. 3,033,699 shares Common stock outstanding after the offering.... 13,891.437 shares Offering price................................. $ per share Use of proceeds................................ To fund restaurant development, repay existing bank debt and for general corporate purposes. Nasdaq National Market symbol.................. BUCA </TABLE> The number of shares to be outstanding after the offering excludes: . 1,296,498 shares of common stock issuable upon exercise of options outstanding as of the date of this prospectus at a weighted average exercise price of $8.13 per share, . 69,441 shares of common stock issuable upon conversion of convertible subordinated debt outstanding as of the date of this prospectus and . 511,018 additional shares of common stock reserved for issuance under our employee stock plans. The number of shares to be outstanding after the offering includes 13,699 shares to be issued in connection with this offering upon the exercise of options by selling shareholders. Except as otherwise noted, all information in this prospectus assumes: . no exercise of the underwriters' over-allotment option and . no exercise of outstanding options to purchase shares of common stock or the conversion of the outstanding convertible subordinated debt into shares of common stock. Summary Consolidated Financial Data (in thousands, except per share and operating data) The as adjusted information below gives effect as of December 26, 1999 to our receipt of the estimated net proceeds of $41,908,000 from the sale of 3,000,000 shares of common stock offered by us, our receipt of $97,000 upon exercise of 13,699 outstanding options by selling shareholders in connection with this offering. <TABLE> <CAPTION> Fiscal Year Ended -------------------------------------- December 28, December 27, December 26, 1997 1998 1999 ------------ ------------ ------------ <S> <C> <C> <C> Consolidated Statements of Operations Data: Restaurant sales....................... $19,030 $38,483 $71,528 Operating (loss) income................ (2,399) (1,893) 1,492 Net (loss) income...................... (3,319) (2,946) 1,424 Net (loss) income applicable to common stock................................. (5,305) (5,135) 680 Net (loss) income per common share-- basic................................. $ (2.13) $ (2.04) $ 0.08 Net (loss) income per common share-- diluted............................... $ (2.13) $ (2.04) $ 0.08 Weighted average common shares outstanding--basic.................... 2,490 2,512 8,111 Weighted average common shares outstanding--diluted.................. 2,490 2,512 8,655 Operating Data: Comparable restaurant sales increase(/1/)......................... 8.9% 13.3% 9.6% Average weekly restaurant sales........ $47,579 $52,727 $54,229 Restaurants open at end of period...... 11 19 34 </TABLE> <TABLE> <CAPTION> December 26, 1999 ---------------- As Actual Adjusted ------- -------- <S> <C> <C> Consolidated Balance Sheet Data: Cash and cash equivalents..................................... $ 1,726 $ 43,731 Total assets.................................................. 75,945 117,950 Total debt, including current portion......................... 1,738 1,738 Common shareholders' equity................................... 61,709 103,714 </TABLE> - --------------- (/1/)The calculation of comparable restaurant sales increase includes restaurants open for 12 full calendar months, as adjusted to provide comparable 52-week fiscal years.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001047262_exe_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001047262_exe_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS SOME INFORMATION FROM THIS PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD CAREFULLY READ THE ENTIRE PROSPECTUS, INCLUDING THE RISK FACTORS AND THE FINANCIAL STATEMENTS. IN THIS PROSPECTUS, UNLESS THE CONTEXT INDICATES OTHERWISE, "EXE TECHNOLOGIES, INC.," "WE," "US" AND "OUR" REFER TO EXE TECHNOLOGIES, INC., A DELAWARE CORPORATION. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS: - ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION; AND - GIVES EFFECT TO THE CONVERSION INTO COMMON STOCK, ON A ONE-FOR-ONE BASIS, OF ALL OUR ISSUED AND OUTSTANDING SERIES A, SERIES B, SERIES C AND SERIES D PREFERRED STOCK AND OUR CLASS B COMMON STOCK. OUR BUSINESS We are a leading provider of fulfillment, warehousing and distribution software for e-commerce and traditional distribution channels. e-Commerce fulfillment, or e-fulfillment, is the process of picking, configuring, packing and shipping products ordered by customers over the Internet. Our software allows companies to use the Internet and traditional communication methods to efficiently manage and control the flow of inventory throughout the supply chain. Companies use our software to reduce distribution costs and increase customer loyalty and satisfaction. We provide global service and support for our software from established facilities in North America, Europe, the Middle East, Asia and Australia. We sell our software through a direct sales force of 86 employees worldwide and through strategic alliances with complementary software vendors and consulting organizations, including Cap Gemini, i2 Technologies, IBM Global Services, Microsoft, Oracle and PricewaterhouseCoopers. We target companies in industries characterized by large product selections, high transaction volumes and increasing demands for customer-specific order processing, including traditional retailers, newly-created e-tailers, manufacturers and outsourced e-commerce and third-party logistics providers. A representative sample of our largest customers in these industries includes barnesandnoble.com, ConAgra, Consolidated Freightways (Redwood Systems), Ford, Fritz Companies, GroceryWorks.com, K-Mart, Safeway and Safeway(.com). Together, these customers accounted for approximately 15.3% of our total revenue, with no single customer accounting for more than 5% of our revenue in 1999. Revenue from our e-fulfillment, or eFS, and predecessor 4000 warehouse management system products, which includes versions 2.0 and 3.0 and their successors, was $14.9 million for the three-month period ended March 31, 2000, an 85.1% increase over the same period in 1999, accounting for 58.6% of our total revenue of $25.5 million for the three-month period ended March 31, 2000. In the three-month period ended March 31, 2000, our operating loss was $2.4 million and our net loss was $2.9 million. Revenue from our e-fulfillment software and predecessor 4000 warehouse management system products was $41.2 million for 1999, a 109.2% increase over 1998, accounting for 42.6% of our total revenue. In 1999, our operating loss was $24.1 million, and our net loss was $26.1 million. THE OPPORTUNITY The rapid emergence of the Internet as a medium for commerce has shifted the focus of logistics systems from warehouse management and distribution to e-fulfillment. Many traditional retailers, who have historically relied on warehouse management systems to replenish retail stores, are becoming e-commerce retailers with the ability to transact directly with customers worldwide. Many traditional manufacturers, who have historically relied on distributors and retailers to transact with customers, are now selling directly to the end-customer. In addition, many e-commerce companies are relying on third parties to satisfy their fulfillment needs. We believe that traditional warehouse management and distribution software has been designed to store and distribute bulk products and is not flexible enough for these companies as they implement their Internet strategies. We believe that these companies must invest in and rapidly deploy e-fulfillment systems to respond to the specific needs of customers on a worldwide basis. OUR SOLUTION Our software manages the fulfillment of orders initiated through both e-commerce and traditional sales channels and provides the following benefits to our customers: - REDUCED TIME TO ENTER NEW MARKETS. We believe our software provides all of the functionality necessary for e-fulfillment in a single, packaged solution and reduces the time it takes for companies to launch or enhance e-commerce initiatives. - CUSTOMER-SPECIFIC FULFILLMENT. Our software allows companies to treat each transaction individually by automating and coordinating complex customer-specific fulfillment, assembly, product configuration and marketing campaigns. - FLEXIBILITY AND RELIABILITY. Our software can be deployed using most major computer systems and has been proven reliable in high volume businesses that distribute through retail stores or sell directly to customers. - VISIBILITY. Our software provides suppliers and customers an immediate view of order status and fulfillment activities. - GLOBAL CAPABILITY. Our software, which currently operates in 35 countries and 15 different languages, can be installed and supported around the world. - ADAPTABILITY FOR COMPLEX BUSINESS MODELS. Our software is designed to handle logistics situations where it is necessary to assemble, distribute and bill for products owned by multiple companies. OUR STRATEGY Our goal is to be the leading provider of e-fulfillment, warehousing and distribution software. We plan to: - Take advantage of our experience and established market position; - Use our international infrastructure to gain global market share; - Expand our strategic alliances; - Enhance our e-commerce solutions; - Capture the growing opportunity created by electronic marketplaces; and - Exploit the growing trend to outsource business processes and computer services. RECENT DEVELOPMENTS Revenue from our eFS and predecessor 4000 warehouse management system products was approximately $17.2 million for the three-month period ended June 30, 2000, a 101.3% increase over the same period in 1999, and accounted for 61.4% of our total revenue of approximately $28.1 million for the three-month period ended June 30, 2000. THE OFFERING <TABLE> <S> <C> Common stock offered...................... 7,250,000 shares Common stock to be outstanding after this offering................................ 41,227,463 shares Use of proceeds........................... We intend to use the net proceeds from this offering to repay indebtedness and for research and development, working capital and other general corporate purposes, including potential future acquisitions. Proposed Nasdaq National Market symbol.... EXEE </TABLE> The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of March 31, 2000. This number does not include: - an aggregate of 4,999,558 shares of common stock issuable upon exercise of options outstanding as of March 31, 2000 at a weighted average exercise price of $4.50 per share, of which 1,514,841 are fully vested at a weighted average exercise price of $3.45 per share; - an aggregate of 1,085,000 shares of common stock issuable upon the exercise of warrants outstanding as of March 31, 2000 at a weighted average exercise price of $4.16 per share, of which 755,000 are fully vested at a weighted average exercise price of $4.23 per share; - an additional 3,455,243 shares of common stock reserved as of March 31, 2000 for issuance under our equity-based compensation plans; and - 1,087,500 shares subject to the underwriters' over-allotment option. In addition, subsequent to March 31, 2000 we granted additional options to executive officers and employees to acquire approximately 1,500,000 shares of common stock at exercise prices ranging from $7.50 per share to the price per share in this offering.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001047499_nexprise_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001047499_nexprise_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..64589fe6496a8d4ba2098cfa938e37fd3589d5ae
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding us and our common stock being sold in this offering and our consolidated financial statements and related notes appearing elsewhere in this prospectus. We are a leading builder and operator of vertical business-to-business e- commerce marketplace companies. Our platform of enabling technologies and operating capabilities allows us to rapidly enter new markets while realizing economies of scale. Our solutions benefit suppliers by permitting them to lower sales and marketing costs as well as to improve inventory management and product delivery. Customers enjoy a significantly enhanced purchasing system that provides access to a broad range of basic and specialized products, increased flexibility and a reduction in the cost of the procurement process. We created Ventro in February 2000 to expand the scope of our marketplace companies by leveraging the assets and experience that we gained in building and operating Chemdex, our marketplace for life sciences research products. In addition to Chemdex, we currently operate or are developing three additional Ventro marketplaces: Promedix, for the specialty medical products market, Broadlane, for the high-volume, hospital and medical supplies market, and Industria Solutions, for the fluid processing market. We provide a secure, Internet-based solution that enables us to buy products from suppliers and resell them to customers while streamlining business processes, increasing productivity and reducing costs through the supply chain. Our platform employs a robust database architecture, advanced search engines and transaction software that enable users to easily identify, locate and purchase the products they need. We have entered into agreements with leading companies in each of the Ventro marketplaces, including VWR Scientific Products, Tenet Healthcare and DuPont. With our strategic relationships with Ariba, Commerce One, Concur Technologies and IBM, we offer customers and suppliers the ability to directly connect their enterprise software to our marketplace. We believe this extensive system integration provides a key competitive advantage for Ventro companies, as customers and suppliers can directly link their front and back offices to the Ventro marketplace and increase the automation of their procurement and order fulfilment processes. We also provide professional and implementation services to enable market participants to take full advantage of our operating capabilities. Our strategy is to build and operate leading vertical business-to-business e-commerce marketplace companies by: . Leveraging Our Platform. We will use our technology architecture, operating capabilities and marketplace experience, as well as our strategic relationships, to enter new vertical markets rapidly. . Being the Market Leader in the Most Attractive Markets. We will target large, fragmented markets where we believe the aggregation enabled by our marketplace solution will provide significant value to customers and suppliers. . Scaling Operations Rapidly. We plan to pursue markets where we can join with industry leaders or make acquisitions to build our expertise and enhance our position to rapidly achieve scale and reinforce our first- mover advantage. . Expanding Internationally. The international scope of the Internet, the global reach of many of our customers and suppliers and the worldwide demand for the products in the markets we serve provides us with an opportunity to grow our marketplaces internationally. THE OFFERING <TABLE> <C> <S> Common stock offered: Shares offered by us.............................. 1,370,000 shares Shares offered by the selling stockholders........ 455,000 shares Total....................................... 1,825,000 shares Common stock to be outstanding after the offering.. 46,003,563 shares Over-allotment option.............................. 273,750 shares Use of proceeds.................................... We anticipate using the net proceeds from this offering for working capital and general corporate purposes. See "Use of Proceeds." Dividend policy.................................... We do not anticipate paying cash dividends. Nasdaq National Market symbol...................... VNTR Concurrent offering................................ We are offering for sale through another prospectus convertible subordinated notes with an aggregate principal amount of $300,000,000, excluding the over-allotment option. </TABLE> The 46,003,563 shares of our common stock to be outstanding immediately after the offering is based on 44,633,563 shares outstanding at February 10, 2000. This number does not include: . the issuance of 12,500 shares of common stock related to the exercise of options granted under our 1999 Directors' Stock Plan subsequent to December 31, 1999 and prior to February 10, 2000; . the repurchase of 28,386 shares of common stock subsequent to December 31, 1999 and prior to February 10, 2000; . 5,277,952 shares of our common stock subject to options outstanding as of February 10, 2000 with a weighted averaged exercise price of $29.16 per share; . 197,178 shares of common stock issuable upon the exercise of warrants outstanding as of February 10, 2000 with a weighted average exercise price of $4.94 per share; . 5,549,685 shares of our common stock subject to options reserved for future issuance under our stock plans at February 10, 2000; and . the shares of common stock issuable upon conversion of the $300,000,000 of principal amount of convertible subordinated notes that we are offering for sale through another prospectus. Except as otherwise noted, all information in this prospectus assumes no exercise of the underwriters' overallotment option. Chemdex was incorporated in Delaware in September 1997 and in February 2000 changed its name to Ventro Corporation. Our principal executive offices are located at 1500 Plymouth Street, Mountain View, California 94043, and our telephone is (650) 567-8900. We maintain a world wide website at www.Ventro.com. The information in our website is not incorporated by reference into this prospectus. Ventro, Ventro's logo, Ventro.com, Chemdex, the Chemdex Marketplace, Promedix and the Promedix Marketplace are some of our trademarks. Each other trademark, trade name or service mark of any other company appearing in this prospectus is the property of its holder. SUMMARY CONSOLIDATED FINANCIAL DATA The following historical consolidated statements of operations data and consolidated balance sheet data are derived from our audited financial statements. The unaudited pro forma consolidated statement of operations data are derived from the Unaudited Pro Forma Combined Condensed Financial Information and reflects our acquisitions of Promedix and SpecialtyMD as if those acquisitions occurred on January 1, 1999. <TABLE> <CAPTION> Historical ----------------------------------- Period From September 4, 1997 Year Ended Pro Forma (Inception) December 31, Year Ended Through ----------------- December 31, December 31, 1997 1998 1999 1999 ----------------- ------- -------- ------------ (in thousands, except per share data) <S> <C> <C> <C> <C> Consolidated Statements of Operations Data: Net revenues................ $ -- $ 29 $ 30,840 $ 30,871 Operating loss.............. (404) (8,796) (51,568) (222,501) Loss from continuing operations................. (404) (8,488) (48,573) (219,827) Basic and diluted loss from continuing operations per share...................... $(.24) $ (4.79) $ (3.17) $ (10.96) Weighted average common shares outstanding--basic and diluted................ 1,704 1,772 15,322 20,050 </TABLE> The actual column in the following table presents our historical actual consolidated balance sheet data and is derived from our audited financial statements. The pro forma column reflects the acquisitions of Promedix and SpecialtyMD as if those acquisitions had occurred on December 31, 1999 and the issuance of an aggregate of 11,870,800 shares of common stock subsequent to December 31, 1999. The unaudited pro forma consolidated balance sheet data are derived from the Unaudited Pro Forma Combined Condensed Financial Information. The pro forma as adjusted column further reflects (1) our sale of 1,370,000 shares of our common stock by us in this offering at an assumed public offering price of $162.00 per share and (2) our sale of $300.0 million principal amount of convertible subordinated notes in a concurrent offering through another prospectus, in each case, after deducting estimated underwriting discounts and commissions and estimated offering expenses. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001047643_worldpages_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001047643_worldpages_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..e5dc0a0c2c834086dd3cb0a72c5a2616d40005e7
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider before investing in WorldPages. You should read this entire prospectus carefully. WORLDPAGES Beginning with its initial public offering in February 1998, WorldPages was a yellow pages publisher and a telecommuications service provider operating a local exchange carrier providing integrated telecommunications services. In April 1999, as a result of its inability to adequately fund its telecommunications operations, WorldPages determined to change its business strategy to focus on its profitable yellow pages advertising segment and to extend it into internet directory services. WorldPages pursued this new strategy by selling its telecommunications operations in November 1999 and acquiring YPtel, Web YP and Big Stuff in February 2000. This February acquisition increased WorldPages' yellow pages publishing business as well as expanded its operations to include providing internet directory services. WorldPages is one of the largest independent yellow pages publishers in the United States. It publishes and distributes approximately 6.6 million yellow page directories annually in 41 markets in Texas, Oklahoma, California, Washington, Oregon, Utah and Arizona. WorldPages also designs and produces websites for yellow and white page publishers and operates a website designed to bring buyers and sellers together. WorldPages headquarters are located at 390 South Woods Mill Road, Suite 260, St. Louis, Missouri. Its telephone number is (314) 205-8668. SHARES OF WORLDPAGES COMMON STOCK TO BE SOLD BY SELLING STOCKHOLDERS. The selling stockholders individually identified under the caption Selling Stockholders' offer for sale a total of 23,851,281 shares of common stock of WorldPages. The selling stockholders obtained or will obtain the shares they are selling pursuant to the exchange or conversion of securities, redemption or exchange of indebtedness, or exercise of warrants or options in connection with the acquisition by WorldPages of YPtel, Web YP and Big Stuff in February 2000. THE OFFERING <TABLE> <S> <C> Shares offered by selling 23,851,281(1) stockholders: Total shares outstanding after the 44,237,541(2) offering: Use of Proceeds: WorldPages will not receive any of the proceeds from the sale of shares of WorldPages common stock by the selling stockholders. </TABLE> - ------------------------ (1) Of these shares, approximately 2,766,500 are issuable upon the exchange of Class A Special Shares of ACG Exchange Company, a wholly owned subsidiary of WorldPages, for WorldPages common stock on a one-for-one basis. An additional 351,286 shares are issuable on the exercise of options or warrants issued to former directors, officers, and certain employees of YPtel and to two current and one former non-employee directors of WorldPages. These securities must be converted into WorldPages common stock before stock may be sold. (2) Included in these shares are the 23,851,281 to be sold by the Selling Stockholders.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001050025_brightstar_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001050025_brightstar_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8d386e8c6cda5871994ee8954a2de8fc86be33eb
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information and our consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus. OUR COMPANY We are an e-business solutions and application service provider to Global 2000 companies and public sector organizations. Our rapidly deployed solutions for e-commerce, supply chain management, customer relationship management, enterprise resource planning, corporate portal and application outsourcing help companies transform themselves into successful e-businesses and achieve a competitive advantage by delivering superior service to their customers while improving operational efficiencies. We have approximately 180 employees in offices throughout the United States. Our e-commerce practice leverages our extensive experience in implementing enterprise applications to help companies develop, rapidly deploy, and support business-to-business and business-to-consumer commerce sites, as well as traditional Internet information publishing sites, that are tightly integrated with existing information systems. Our partnerships with BroadVision, Microsoft and other technology companies, combined with our expertise in enterprise application integration, Web site design and Internet information security issues enable us to put in place comprehensive e-commerce solutions tailored to the specific needs of our clients. RECENT DEVELOPMENTS On June 20, 2000, we announced that revenue and earnings for the second quarter and the remainder of the calendar year would be lower than expected and that we are realigning our operations to improve operating margins by reducing expenses associated with underutilized office space and personnel. As a result of our realignment of operations, we recorded a restructuring charge of $2.5 million in the second quarter ending June 30, 2000. Of the total charge, approximately $1.0 million was reserved for ongoing lease obligations for facilities that were closed and $0.5 million was recorded to write-down related fixed assets. The remainder of the restructuring charge relates to the severance of approximately 90 employees, or 15% of our workforce. We attributed the lower than expected revenues to the continued decline in the enterprise resource planning market and slower-than-expected adoption of our remaining service offerings. There can be no assurance that our actions will improve profit margins, or that our business focus will result in sustained or improved revenue and earnings levels. On September 8, 2000, we entered into an asset purchase agreement with Integrated Control Systems, Inc., a Delaware corporation, and Integrated Controls, Inc., a Louisiana corporation and our wholly-owned subsidiary ("ICON"). Pursuant to the asset purchase agreement, we sold to Integrated Control Systems substantially all of the assets, except for accounts receivable, and transferred certain liabilities of ICON's business of systems integration for the energy industry, which ICON ran through its controls division. The aggregate purchase price was $2.1 million subject to certain adjustments. The Company recorded a third quarter charge of $1.0 million as a result of the sale. THE INFORMATION CONTAINED IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED DECEMBER 18, 2000 PRELIMINARY PROSPECTUS BRIGHTSTAR INFORMATION TECHNOLOGY GROUP, INC. 3,085,853 SHARES COMMON STOCK ---------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" ON PAGE 2 OF THIS PROSPECTUS FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ---------- The selling stockholders identified in this prospectus are offering up to 3,085,853 of our common stock. Our common stock is quoted on the Nasdaq National Market under the symbol of "BTSR." On September 15, 2000, the last sale price of our common stock on the Nasdaq National Market was $3.00 per share. We will not receive any of the proceeds from the sale of shares by the selling stockholders, and we are not offering any shares for sale under this prospectus. See "Selling Stockholders" and "Plan of Distribution" for a description of sales of the shares by the selling stockholders. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this prospectus is _____________, 2000 Michael Ober resigned as our Chief Executive Officer effective October 2, 2000. Joseph A. Wagda, a director of BrightStar since April 2000, became interim Chief Executive Officer effective October 2, 2000. Donald W. Rowley resigned as our Chief Financial Officer effective November 30, 2000. David L. Christeson, Controller, since April 1999, became Vice President of Finance and Administration effective December 1, 2000. On October 19, 2000, we agreed in principle to a settlement with the prior owners of Cogent Technologies, LLC ("Cogent") relating to claims by them for (1) the unpaid balance of the purchase price for our purchase of the business of Cogent from them in June 1999; and (2) breach of employment agreements with us. Pursuant to the proposed settlement, in exchange for a mutual release from the agreement by which we acquired Cogent and employment agreements, they will receive 1,000,000 shares of our common stock, up to $75,000 in legal fee reimbursement and monthly compensation due under the terms of their employment agreements until June 30, 2001. On December 13, 2000, we completed the sale of our Australian subsidiary, BrightStar Information Technology Group Ltd., for A$10.0 million (US $5.5 million). Of the total purchase price, A$2.5 million (US $1.4 million was paid upon closing, with the remainder due upon completion of a contingent earnout for the twelve month period ended December 31, 2001. We will record a loss of US $1.1 million related to the fourth quarter sale. Our revenue and earnings for the fourth quarter of this year and the first quarter of 2001 will be lower than expected. We are continuing to realign our operations to improve operating margins by reducing expenses associated with underutilized office space and personnel. OUR OFFICES Our principal executive offices are located at 4900 Hopyard Road, Suite 200, Pleasanton, California 94588. THE OFFERING Common stock offered by the selling stockholders................... 3,085,853 shares Common stock to be outstanding after the offering(1).................. 11,545,057 shares Use of proceeds........................ We will not receive any proceeds from sales of common stock by the selling stockholders. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001050250_triton_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001050250_triton_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..d9c57a6ffb03fbbfc0844f5ec3df3eeaa5bd8119
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully. TRITON NETWORK SYSTEMS, INC. We provide high-speed, or broadband, wireless equipment that enables communications service providers to deliver fast, cost-effective voice, video and data services to their business customers. Our products, which we call Invisible Fiber, combine the high transmission speeds and reliability of fiber optic networks with the flexibility, low cost and rapid deployment of wireless technologies. Our customers include Internet service providers offering high speed Internet access for businesses as well as companies providing voice and data communications services in competition with the incumbent carriers. We design our products for deployment in a ring within a service area. This ring configuration, which we call a consecutive point network, enables communications traffic to flow around the network in either direction, reducing service interruptions caused by interference with the wireless connection between any two units. We currently offer two product lines: our product line for Internet service providers, which we call our Invisible Fiber Internet product line, and our product line for communications service providers, which we call our Invisible Fiber SONET product line. Our Invisible Fiber SONET product line uses SONET, or Synchronous Optical Networks, a standard for transmission of high volume communications in fiber optic networks. Our Invisible Fiber products and consecutive point network configuration provide service providers several advantages including: - High Speed Network Services. Our initial Invisible Fiber Internet products transmit data at 100 million binary digits, or bits, per second, or 100 Mbps, and our Invisible Fiber SONET products transmit data at 155 Mbps. - High Reliability and Availability of Service. We design our products to match the reliability achieved by fiber optic networks, including 99.999% availability and error rates of under 1 per trillion bits transmitted. This level of performance meets the stringent requirements of service providers and is referred to as carrier class reliability. - Rapid Deployment and Potential for Rapid Return on Investment. Our Invisible Fiber units easily connect with network equipment and can be installed in hours, enabling service providers to begin generating revenues rapidly. - High Density Deployment. Our proprietary technologies minimize radio interference and enable service providers to install more Invisible Fiber units in a service area than would be possible with conventional broadband wireless technologies. This allows a service provider to generate more revenues by maximizing the number of subscribers that may be served in the area covered by the service provider's licensed radio frequency. - Highly Flexible. Our Invisible Fiber units enable service providers to configure, expand and relocate their networks rapidly to meet changing subscriber demands and to match capital outlays with subscriber growth. We entered into three-year supply agreements with Advanced Radio Telecom and CenturyTel in December 1999, and CAVU in April 2000. We are currently engaged in field trials with other prospective customers. Advanced Radio Telecom and CAVU are purchasing our products to provide broadband Internet services to businesses, and CenturyTel is purchasing our products to provide telephony, Internet and data services to businesses. COMPANY INFORMATION We were incorporated in Delaware in March 1997. Since then, we have incurred significant losses in each period and year of our operation. At March 31, 2000, we had an accumulated deficit of approximately $62.5 million. We recognized our first revenues of approximately $3.5 million in the three-month period ended March 31, 2000. We expect to continue to incur substantial losses for the foreseeable future. Our principal executive offices are located at 8529 South Park Circle, Orlando, Florida 32819 and our telephone number is (407) 903-0900. Information contained on our web site is not a part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered....................... 5,500,000 shares Common stock to be outstanding after this offering................................. 33,830,932 shares Use of proceeds............................ For general corporate purposes Proposed Nasdaq National Market symbol..... TNSI </TABLE> The number of shares to be outstanding after this offering is based on 28,330,932 shares outstanding as of March 31, 2000, and excludes: - 2,092,437 shares of common stock issuable upon exercise of options outstanding as of March 31, 2000, at a weighted average exercise price of $9.70 per share; - 1,455,587 shares of common stock available for issuance at March 31, 2000, under our 1997 Stock Plan; - 211,250 shares of common stock issuable upon exercise of warrants outstanding as of March 31, 2000 at a weighted average exercise price of $1.00 per share; - the cashless exercise of outstanding warrants to purchase 126,250 shares of common stock at an exercise price of $1.00 per share, resulting in a net issuance of 117,232 shares of common stock; - 28,571 shares of common stock at an assumed exercise price of $12.60 per share, based on an initial offering price of our common stock of $14.00 per share, issuable upon exercise of a warrant issued to the lender under our new capital equipment financing line; - 250,000 shares of common stock available for issuance under our 2000 Employee Stock Purchase Plan immediately following the offering. Except as otherwise indicated, all information in this prospectus assumes: - the conversion of all shares of preferred stock into 21,556,469 shares of common stock upon completion of this offering; - the effectiveness of our amended and restated certificate of incorporation; - no exercise of the underwriters' over-allotment option; and - a one-for-two reverse stock split which became effective on July 10, 2000. SUMMARY CONSOLIDATED FINANCIAL DATA (in thousands, except share and per share data) <TABLE> <CAPTION> PERIOD FROM MARCH 5, 1997 THREE MONTHS ENDED (INCEPTION) THROUGH YEAR ENDED DECEMBER 31, MARCH 31, DECEMBER 31, ----------------------- ----------------------- 1997 1998 1999 1999 2000 ------------------- ---------- ---------- ---------- ---------- (UNAUDITED) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues................... $ -- $ -- $ -- $ -- $ 3,497 Loss from operations....... (2,558) (18,105) (32,766) (8,111) (11,354) Net loss................... $ (2,475) $ (17,224) $ (31,854) $ (7,889) $ (10,935) ========== ========== ========== ========== ========== Net loss per share -- basic and diluted.............. $ (1.01) $ (5.07) $ (6.67) $ (1.84) $ (2.02) ========== ========== ========== ========== ========== Shares used in per share calculations -- basic and diluted.................. 2,456,995 3,395,300 4,776,567 4,295,326 5,407,418 ========== ========== ========== ========== ========== Pro forma net loss per share: Net loss per share -- basic and diluted............... $ (1.64) $ (0.45) ========== ========== Shares used in per share calculations -- basic and diluted........... 19,400,204 24,213,887 ========== ========== </TABLE> <TABLE> <CAPTION> MARCH 31, 2000 ------------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ----------- --------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents.......................... $ 31,340 $ 31,340 $ 101,217 Working capital.................................... 32,055 32,055 101,932 Intangible assets.................................. 36,180 36,180 36,180 Total assets....................................... 94,816 94,816 164,694,036 Convertible preferred stock........................ 43 -- -- Total stockholders' equity......................... 79,686 79,686 149,563,636 </TABLE> See note 7 of notes to consolidated financial statements for an explanation of the determination of the number of shares used in computing net loss per share data. The pro forma consolidated balance sheet data reflect the conversion into common stock of all outstanding convertible preferred stock upon the closing of this offering. The pro forma as adjusted data reflect our receipt of the net proceeds from the sale of the 5,500,000 shares of common stock offered by us at an initial public offering price of $14.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001050776_virage_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001050776_virage_prospectus_summary.txt
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+SUMMARY The following summary contains information about our company and the offering that we believe is important. You should read the entire prospectus, including the financial statements and the notes to those financial statements, for a complete understanding of our business and the offering. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of the factors described under the heading "Risk Factors" and elsewhere in this prospectus. OUR COMPANY Virage Logic provides semiconductor intellectual property, or SIP, for the memory elements of complex electronic systems contained on a single silicon chip. Our SIP consists of (1) designs for the memory elements of these systems, which are referred to as embedded memories, (2) software systems called compilers that allow the designers of these systems to configure embedded memories into different shapes and sizes on a single silicon chip and (3) software tools that can be used to build memory compilers. We also provide custom memory design services. The electronic systems that incorporate our semiconductor intellectual property are commonly referred to as systems-on-a-chip because they incorporate all of the components of an entire electronic system, such as the microprocessor, communications, logic and memory elements, on a single silicon chip rather than as separate elements of a circuit board. Systems-on-a-chip are critical components of communications equipment and many electronic devices, including cellular and digital phones, pagers, digital cameras, DVD players, switches and modems. We license our SIP and offer our custom design services to semiconductor companies that design and develop the systems-on-a-chip used in these types of products. The growth of the Internet and the development of high-speed communications infrastructure are creating demand for communications equipment and electronic devices that can utilize the increased available bandwidth. The designers of these products use systems-on-a-chip to decrease the size and enhance the performance of these products. According to Integrated Circuit Engineering, an independent market research firm, the system-on-a-chip (SOC) market is expected to grow from $2.9 billion in 1999 to $17.5 billion by 2004. These types of products increasingly require larger amounts of high-performance and highly customizable memories that utilize extremely small amounts of power in order to deliver the processing speed necessary to take advantage of increased bandwidth. The designers of these products are facing increased market pressure to rapidly introduce new products, which shortens the time available for research and development. To meet these challenges, semiconductor companies are increasingly relying on external sources of pre-designed, production-tested elements from third-party SIP suppliers, such as Virage Logic. We do not manufacture systems-on-a-chip ourselves. Rather, we license our SIP to semiconductor companies for them to incorporate as the memory element design component of their overall system-on-a-chip designs. Our customers can be divided into two principal categories: companies that do not have facilities to manufacture their own silicon chips, which are referred to as fabless semiconductor companies, and companies that manufacture the silicon chips for their own products internally, which are referred to as integrated device manufacturers. Our fabless semiconductor company customers include ATI Technologies, Broadcom, Level One, Lockheed Martin, Macronix, MMC Networks, PMC-Sierra, TranSwitch and Vitesse. Our integrated device manufacturer customers include AMD, Conexant, Fijitsu, Hitachi, Hyundai, IBM, Matsushita, National Semiconductor, OKI, Phillips and Toshiba. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED JULY 31, 2000 PROSPECTUS 3,750,000 SHARES [VIRAGE LOGIC LOGO] COMMON STOCK -------------------------------------------------------------------------------- This is our initial public offering of shares of common stock. We are offering 3,750,000 shares. No public market currently exists for our shares. We propose to list the shares on the Nasdaq National Market under the symbol "VIRL." We expect the public offering price to be between $11.00 and $13.00 per share. INVESTING IN OUR SHARES INVOLVES RISKS. "RISK FACTORS" BEGIN ON PAGE 6. <TABLE> <CAPTION> PER SHARE TOTAL --------- ---------- <S> <C> <C> Public Offering Price....................................... $ $ Underwriting Discount....................................... $ $ Proceeds to Virage Logic.................................... $ $ </TABLE> We have granted the underwriters a 30-day option to purchase up to 562,500 additional shares of common stock on the same terms and conditions as set forth above solely to cover over-allotment, if any. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Lehman Brothers expects to deliver the shares on or about , 2000. -------------------------------------------------------------------------------- LEHMAN BROTHERS ROBERTSON STEPHENS SG COWEN FIDELITY CAPITAL MARKETS a division of National Financial Services Corporation , 2000. We offer our customers: - memory design expertise; - a broad product line of memory types and compilers; - memories that have been production tested; - significant advantages in getting their system designs into production quickly; - high-density, high-performance memories with ultra-low power consumption; and - software development tools that allow our memories to be easily integrated with other elements of our customers' system-on-a-chip designs. Our objective is to be the leading supplier of semiconductor intellectual property for the memory elements of systems-on-a-chip. Key elements of our strategy include: - utilizing and developing endorsements of our embedded memories by leading third-party semiconductor manufacturers; - becoming a strategic supplier to fabless semiconductor companies; - increasing our base of integrated device manufacturer customers; - continuing to innovate our existing technologies for advanced manufacturing processes; - expanding our research and development efforts; and - expanding our distribution channels. RECENT DEVELOPMENTS Our revenues for the three months ended June 30, 2000 were $5.1 million compared to our revenues of $2.5 million for the same period of the previous year. The primary reasons for this increase were the first sales from the introduction of our 0.15 micron memory compilers and increased sales of compilers for 0.18 micron memories. CORPORATE INFORMATION Virage Logic Corporation was incorporated in California on November 27, 1995. We reincorporated in Delaware on July 25, 2000. Our principal executive offices are located at 46501 Landing Parkway, Fremont, California 94538. Our telephone number is (510) 360-8000. Our website address is www.viragelogic.com. Information on our website and websites linked to it is not intended to be a part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered.................................. 3,750,000 shares Common stock to be outstanding after this offering.... 18,837,627 shares(1) Use of proceeds....................................... Research and development, sales and marketing and general corporate purposes, including possible acquisitions. Proposed Nasdaq National Market symbol................ VIRL </TABLE> ------------------------- (1) Includes 403,226 shares to be sold to Crosslink Capital, Inc. or its affiliates, assuming a public offering price of $12.00 per share. Simultaneously with this offering, we anticipate selling a total of 403,226 shares of common stock in a private placement to one of our stockholders, Crosslink Capital, Inc., or its affiliates, at a price of [INSIDE FRONT COVER] Virage Logic Logo Text: Virage Logic provides semiconductor companies with memory designs for systems contained on a silicon chip Color Artwork: Artistic representation of a silicon embedded memory die $11.16 per share (based on an assumed public offering price of $12.00 per share). See "Description of Capital Stock -- Simultaneous Private Placement." The number of shares of common stock to be outstanding after this offering is based on shares outstanding on March 31, 2000, as adjusted for a 1-for-2 reverse stock, split which we completed on July 25, 2000 and excludes the following: - 562,500 shares of common stock that may be issued upon the exercise of the underwriters' option to purchase additional shares in this offering; - 1,559,500 shares of common stock that may be issued upon the exercise of outstanding options granted under our 1997 Equity Incentive Plan; - 239,515 additional shares of common stock available for future grant under our 1997 Equity Incentive Plan; - 60,000 shares of common stock that may be issued upon the exercise of three outstanding warrants; and - 200,000 shares of common stock available for future purchase under our 2000 Employee Stock Purchase Plan. During April 2000, we increased the number of shares of common stock available for issuance under our 1997 Equity Incentive Plan by 1.5 million shares. Since April 1, 2000, we have granted options to purchase 887,000 additional shares of common stock under this plan. In addition, we granted a warrant to purchase 50,000 shares of common stock to an industry partner and its affiliates as part of a license agreement. Unless we indicate otherwise, all information in this prospectus assumes: - the automatic conversion of our Series A, Series B and Series C preferred stock into common stock at the closing of this offering; - the 1-for-2 reverse stock split completed on July 25, 2000; - the sale by us of 403,226 shares of our common stock at an assumed price of $11.16 per share to Crosslink Capital, Inc., or its affiliates, in a private placement simultaneous with the closing of this offering; and - that the underwriters do not exercise their option to purchase additional shares in this offering. ------------------------- TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Summary............................... 1 Risk Factors.......................... 6 Forward-Looking Statements............ 14 Use of Proceeds....................... 15 Dividend Policy....................... 15 Capitalization........................ 16 Dilution.............................. 18 Selected Consolidated Financial Data................................ 20 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 23 Business.............................. 32 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> Management............................ 41 Related Party Transactions............ 51 Principal Stockholders................ 53 Description of Capital Stock.......... 55 Shares Eligible for Future Sale....... 58 Underwriting.......................... 59 Legal Matters......................... 61 Experts............................... 61 Where You Can Find Additional Information......................... 62 Index to Consolidated Financial Statements.......................... F-1 </TABLE> ------------------------- THROUGH AND INCLUDING , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS THAT BUY, SELL OR TRADE IN OUR SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OF SUBSCRIPTIONS. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The consolidated balance sheet data at March 31, 2000 and the consolidated statement of operations data for the years ended September 30, 1997, 1998, 1999 and the six months ended March 31, 2000 are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The consolidated statement of operations data for the period from November 27, 1995 (inception) to September 30, 1996 and the six months ended March 31, 1999 are unaudited. This historical financial information may not be an accurate indicator of our future performance. The Company has restated its financial statements as of and for the periods ended September 30, 1999 and March 31, 2000. See note 12 of the notes to the consolidated financial statements. <TABLE> <CAPTION> PERIOD FROM NOVEMBER 27, 1995 (INCEPTION) SIX MONTHS ENDED TO YEAR ENDED SEPTEMBER 30, MARCH 31, SEPTEMBER 30, ------------------------------ --------------------- 1996 1997 1998 1999 1999 2000 ------------- ------ ------ ---------- ------- ---------- (RESTATED) (RESTATED) <S> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues...................... $ 324 $ 369 $1,970 $ 9,589 $ 3,474 $ 8,806 Gross profit.................. 238 161 1,117 7,027 2,395 6,526 Stock-based compensation...... -- -- -- 701 -- 2,235 Net income (loss)............. 6 (373) (851) (186) 218 (2,148) Deemed dividend on Series C redeemable convertible preferred stock............. -- -- -- -- -- (10,104) ----- ------ ------ ------- ------- -------- Net income (loss) applicable to common stockholders...... $ 6 $ (373) $ (851) $ (186) $ 218 $(12,252) ===== ====== ====== ======= ======= ======== Net income (loss) per share applicable to common stockholders: Basic....................... $0.06 $(0.85) $(0.19) $ (0.04) $ 0.04 $ (2.22) Diluted..................... $0.02 $(0.85) $(0.19) $ (0.04) $ 0.02 $ (2.22) Shares used in computing net income (loss) per share applicable to common stockholders: Basic....................... 94 438 4,379 5,301 5,067 5,526 Diluted..................... 376 438 4,379 5,301 10,254 5,526 Pro forma net loss per share applicable to common stockholders: Basic....................... $ (0.02) $ (0.96) Diluted..................... $ (0.02) $ (0.96) Shares used in computing pro forma net loss per share applicable to common stockholders: Basic....................... 9,770 12,722 Diluted..................... 9,770 12,722 </TABLE> <TABLE> <CAPTION> MARCH 31, 2000 ------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................. $ 7,925 $ 7,925 $ 53,025 Working capital........................................... 9,903 9,903 55,003 Total assets.............................................. 19,720 19,720 64,820 Long-term debt obligations, less current portion.......... 382 382 382 Series C redeemable convertible preferred stock........... -- -- 10,104 Accumulated deficit....................................... (13,657) (13,657) (13,657) Total stockholders' equity................................ 4,393 14,497 59,597 -------- -------- -------- </TABLE> Pro forma net loss per share applicable to common stockholders and shares used in computing pro forma net loss per share applicable to common stockholders are calculated as if all of our outstanding shares of Series A, Series B and Series C preferred stock were converted into shares of our common stock on the date of their issuance. See footnote 1 of the notes to our consolidated financial statements. The "Pro Forma" amounts in the Consolidated Balance Sheet Data reflect the conversion of our outstanding shares of Series A, Series B and Series C preferred stock into 7,196,276 shares of common stock upon the completion of this offering. The "Pro Forma As Adjusted" amounts in the Consolidated Balance Sheet Data reflect the conversion of all preferred stock, our receipt of net proceeds of $4.5 million from our sale of 403,226 shares of common stock to Crosslink Capital, Inc., or its affiliates, at an assumed price of $11.16 per share in a private placement simultaneous with the closing of this offering, and our receipt of net proceeds of $40.6 million from the issuance and sale in this offering of 3,750,000 shares of common stock at an assumed initial public offering price of $12.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses. See "Use of Proceeds,"
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001050808_vitria_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001050808_vitria_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all the information you should consider before buying shares in the offering. You should read the entire prospectus carefully. Vitria Technology, Inc. Our Business We are a leading provider of eBusiness infrastructure software. eBusiness refers to the use of the Internet to conduct business with customers and partners. Our product, BusinessWare, provides the infrastructure that enables incompatible information technology systems to exchange information over corporate networks and the Internet. BusinessWare enables this exchange to take place automatically, without human intervention. This eliminates manual entry of information into multiple IT systems, and eliminates the need to manually exchange information with customers and business partners using phone, facsimile or mail. We have designed BusinessWare to give our customers complete control and visibility of their business operations across an "extended enterprise" that includes their customers and partners. BusinessWare allows our customers to improve the efficiency of their business operations, reduce time to market for new products and services, develop closer relationships with their customers and partners, and rapidly respond to changing business conditions. To date, we have licensed BusinessWare to over 70 companies, including American Century, CableVision, Covad, Deutsche Bank, Duke Energy, FedEx, Fujitsu PC, Inacom, Level 3, NorthPoint Communications, Rhythms NetConnections, 3Com, Verio and Weblink Wireless. In 1999, sales of the BusinessWare product accounted for approximately 69% of our total revenues. Our Market Opportunity eBusiness is fundamentally changing the speed and nature of business. To compete in this new environment, companies must be able to communicate instantly with customers and partners over the Internet, using a clearly defined set of business processes that can be continuously analyzed and rapidly changed. This is what we refer to as "real-time eBusiness." Companies that engage in real-time eBusiness can bring new products and services to market faster, form new partnerships more easily, and respond to changing business conditions more rapidly. To conduct business at this accelerated pace, we believe that companies must address four key requirements: (1) Business Process Automation. Business processes describe, step-by-step, how a company conducts its business operations across their extended enterprise. For example, a company may define its order fulfillment process as follows: receive an order, allocate inventory, request product shipment from a distribution partner, and bill the customer. These business processes define how information should flow across internal IT systems and across the Internet to the IT systems of customers and partners. In many companies today, this information flow is not automated. (2) Internet-Based Communications. As companies extend their business processes to directly include their customers and partners, they need a way to communicate business information over the Internet in a secure and reliable fashion. In the prior example, the interactions between the company, its distribution partners and the customer could take place over the Internet. These exchanges of information would take place through the exchange of electronic messages over the Internet. (3) Application Integration. To automate business processes, companies must exchange information between IT systems. For example, the fulfillment of customer orders might require that a company's order management, shipping and billing systems exchange data to ensure that the order is correctly received, requested products are shipped, and the customer is appropriately billed. As a result, companies need a way to automatically access information in one system and translate it into standard formats so that it can be shared with and understood by other systems. (4) Real-Time Analysis. Business managers need to continuously monitor and analyze automated business processes to identify and respond to problems as they occur. Analysis software typically requires information to be accumulated in the database before it can be analyzed. The resulting delay reduces a company's ability to respond to a problem in a timely manner. Real-time analysis allows information to be analyzed as soon as it is captured. In the prior example, the company can monitor and analyze orders from customers and adjust inventories on a continuous basis, rather than waiting until the end of the day to extract the information from the database. We do not believe that other competitors adequately address all four of these requirements. For example, enterprise application integration vendors focus on integrating IT systems. Messaging software vendors focus on inter- application communications. We believe that no approach adequately addresses process automation or real-time analysis, and that there is a significant market opportunity for infrastructure software that addresses all four requirements for real-time eBusiness. Our Solution BusinessWare addresses the four eBusiness requirements in a single comprehensive software product. Business users can use BusinessWare to create visual diagrams of their business processes, called "process models," using a graphical user interface. This eliminates the need for expensive custom programming. BusinessWare then uses these process models to automatically coordinate the flow of information across a company's internal IT systems and across the Internet to the systems of its customers and partners. Once BusinessWare has automated a business process, it selectively gathers and analyzes key performance statistics and allows business managers to identify and respond to business problems the moment they occur. BusinessWare provides the following key benefits to customers: . Provides Complete Control and Visibility of Business Operations Across the Extended Enterprise. Companies can increase the efficiency of their operations and lower operating costs by automating and analyzing the performance of their business processes in real-time. . Reduces Time to Market. Business users can quickly automate new processes that accelerate the delivery of new products and services. . Enables Rapid Response to Change. Business users can revise and continuously refine processes by changing process models. . Enables Tighter Relationships with Customers and Partners. Companies can quickly establish sophisticated and highly automated relationships with partners or customers that support shared business processes. Our Strategy We intend to establish BusinessWare as the leading infrastructure software product for eBusiness. As part of this strategy, we have developed strong working relationships with leading system integrators, including Andersen Consulting, Deloitte Consulting and Electronic Data Systems, or EDS. These system integrators help our customers install and deploy our product and in many cases these integrators have existing relationships with our targeted customers. In addition, we are working to develop market-focused eBusiness solutions that are built on BusinessWare and targeted to the needs of specific industries. These solutions include pre-defined, customizable process models that reflect the business processes of the target industry. Our first industry- specific product was made available to customers in December 1999. As of December 31, 1999, we had an accumulated deficit of $24.3 million. Other Information We were incorporated in California in October 1994 and reincorporated in Delaware in July 1999. Our principal executive offices are located at 945 Stewart Drive, Sunnyvale, California 94086, and our telephone number is (408) 212-2700. Our Internet address is www.vitria.com. The information on our website is not incorporated by reference into this prospectus. The Offering <TABLE> <S> <C> Common stock offered by Vitria.............. 1,500,000 shares Common stock offered by selling stockholders............................... 3,500,000 shares Common stock to be outstanding after this offering................................... 63,250,992 shares Use of proceeds ............................ General corporate purposes, including expansion of our sales and marketing capabilities, product development, and other working capital requirements. We will not receive any proceeds from the shares sold by selling stockholders. See "Use of Proceeds." Nasdaq National Market symbol .............. VITR </TABLE> The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of December 31, 1999, and excludes: . 7,276,014 shares subject to options outstanding as of December 31, 1999, at a weighted average exercise price of $6.74 per share; . 9,106,248 additional shares that we could issue under our stock option plans; and . 3,000,000 shares that we could issue under our employee stock purchase plan. Summary Financial Information (in thousands, except per share data) <TABLE> <CAPTION> Year Ended December 31, --------------------------- 1997 1998 1999 -------- ------- -------- <S> <C> <C> <C> Statement of Operations Data: Revenues: License......................................... $ 955 $ 5,198 $ 21,790 Service......................................... 1,425 1,633 8,539 Government grant................................ 1,255 796 1,212 -------- ------- -------- Total revenues................................. 3,635 7,627 31,541 Cost of revenues.................................. 1,611 2,905 7,722 -------- ------- -------- Gross profit...................................... 2,024 4,722 23,819 Loss from operations.............................. (655) (9,875) (15,442) Net loss.......................................... (580) (9,569) (14,106) ======== ======= ======== Basic and diluted net loss per share available to common stockholders.............................. $ (0.03) $ (0.40) $ (0.42) Basic and diluted weighted average shares used in the computation of net loss per share available to common stockholders........................... 19,830 24,006 37,874 </TABLE> <TABLE> <CAPTION> December 31, 1999 ------------------- Actual As Adjusted ------- ----------- <S> <C> <C> Balance Sheet Data: Cash and cash equivalents................................... $52,218 $214,013 Working capital............................................. 54,237 216,032 Total assets................................................ 86,494 248,289 Deferred revenue............................................ 15,627 15,627 Stockholders' equity........................................ 59,450 221,245 </TABLE> - -------- See Note 1 of Notes to Consolidated Financial Statements for an explanation of the determination of the number of shares used in computing per share data. The as adjusted balance sheet data gives effect to the net proceeds from the sale of the 1,500,000 shares of common stock offered by Vitria in this offering at an assumed offering price of $113.75 per share after deducting the underwriting discounts and commissions and estimated offering expenses. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001051736_corechange_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001051736_corechange_prospectus_summary.txt
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY WITH THE MORE DETAILED INFORMATION IN THIS PROSPECTUS ABOUT CORECHANGE AND THE COMMON STOCK BEING SOLD IN THIS OFFERING, INCLUDING RISK FACTORS AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES. CORECHANGE We develop, market and support software that provides enterprises with a framework to manage access to business information and applications using the internet and wireless internet technology. Our access framework software, Coreport, enables enterprises to provide their employees, customers, suppliers and business partners with an internet-based interface to access and manipulate the information they require to conduct business electronically, known as e-business. In addition, Coreport's wireless capabilities allow users to access relevant information and conduct e-business from web-enabled cellular phones and personal digital assistants, in addition to personal computers. Coreport's functionality provides enterprises with the following business benefits: - Provides relevant, personalized business information and applications; - Facilitates mobile e-business; - Enables more informed and timely business decisions; - Promotes rapid implementation of enterprises' e-business strategies; and - Enhances e-business relationships. Coreport's role-based administration enables enterprises to define categories of users and to provide these users with access to information and applications based on the users' business needs and roles. Our software provides users with a single sign-on to access relevant business information and applications. Coreport is designed to easily scale to large numbers of users and integrates with many types and sources of information. Today, enterprises are increasingly using the internet to share business information and create new business opportunities. Advances in wireless communications and the increasing use of web-enabled wireless devices are creating new ways to use the internet to access information and conduct business. Orum estimates that the market for mobile electronic commerce will grow to over $200 billion by 2005. ARC Group estimates that by 2005 over 1.0 billion people will access the internet using wireless devices compared to 650 million people using personal computers. In today's e-business environment, access to the right information at the right time is a significant competitive advantage. Although the internet and wireless communications are making information more readily available, the proliferation of business applications and other sources of information is making it difficult for enterprises to aggregate and provide efficient access to all relevant information. As enterprises increasingly adopt e-business strategies, we believe that they will require a solution to efficiently and effectively provide their employees, customers, suppliers and business partners with access to information and applications specific to their business needs. Our objective is to be the leading provider of access framework software. Key elements of our strategy include pursuing wireless opportunities, targeting Global 2000 enterprises and increasing the use of our software by our customers. We also intend to continue to expand our distribution channels, develop additional strategic relationships and expand our international presence. We license our Coreport software to 41 domestic and international customers in a variety of industries, including ABN AMRO, Braathens Airways, Children's Hospital of Philadelphia and Philips Electronics. THE OFFERING <TABLE> <S> <C> Common stock offered....................................... 4,500,000 shares Common stock to be outstanding after this offering......... 15,778,366 shares Use of proceeds............................................ Working capital and other general corporate purposes, including the expansion of sales and marketing as well as research and development activities Proposed Nasdaq National Market symbol..................... CRCH </TABLE> The common stock outstanding after the offering is based on the number of shares outstanding as of June 30, 2000, and does not include: - 1,488,541 shares issuable upon exercise of outstanding options with a weighted average exercise price of $3.26 per share; - 1,919,360 additional shares available for issuance and grant under our stock incentive plans; and - 120,191 shares issuable upon exercise of an outstanding warrant to purchase shares at an exercise price of $4.99 per share. Unless otherwise indicated, all information in this prospectus: - assumes that the underwriters will not exercise their over-allotment option; and - gives effect to the conversion of all outstanding shares of preferred stock into 6,881,389 shares of common stock upon the completion of this offering. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following summary statement of operations data should be read with "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements, including the related notes, included elsewhere in this prospectus. Pro forma basic and diluted net loss per common share has been calculated assuming the conversion of all outstanding shares of convertible preferred stock into shares of common stock, as if the shares had converted immediately upon issuance. <TABLE> <CAPTION> SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------ ------------------- 1997 1998 1999 1999 2000 <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Software licenses.......................... $ 1,054 $ 1,004 $ 926 $ 677 $ 2,143 Services................................... 1,864 4,657 4,340 2,329 1,259 ------- ------- ------- ------- -------- Total revenues........................... 2,918 5,661 5,266 3,006 3,402 Gross profit................................. 1,312 1,915 2,141 1,357 2,277 Operating loss............................... (8,780) (7,659) (4,787) (1,619) (5,783) Net loss..................................... (8,975) (7,429) (4,782) (1,598) (5,591) Pro forma basic and diluted net loss per common share............................... $ (0.62) $ (0.95) Shares used in computing pro forma basic and diluted net loss per common share.......... 7,589 10,250 </TABLE> The balance sheet data are presented on an actual basis and on a pro forma as adjusted basis to give effect to the conversion of all outstanding shares of our convertible preferred stock into shares of common stock that will occur upon the closing of this offering and also to reflect the sale of 4,500,000 shares of our common stock in this offering at an assumed initial public offering price of $9.00 per share after deducting underwriting discounts and estimated offering expenses. <TABLE> <CAPTION> AS OF JUNE 30, 2000 ---------------------- PRO FORMA ACTUAL AS ADJUSTED <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................. $ 10,349 $47,323 Working capital........................................... 9,640 46,614 Total assets.............................................. 13,192 49,657 Redeemable convertible preferred stock.................... 33,102 -- Total stockholders' equity (deficit)...................... (22,318) 47,249 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001051743_onesoft_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001051743_onesoft_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. Our Business We develop and provide Internet commerce application software and services that enable our clients to rapidly build, grow, and extend their online businesses. The core of our solution is OneCommerce, our application software built on the eXtensible Markup Language standard, or XML. We designed OneCommerce for scalable operation on the Microsoft operating platform. OneCommerce enables enterprises to intelligently and dynamically interact with their customers and trading partners over the Internet to exchange information, provide services, and complete business-to-business and business-to-consumer transactions. We primarily deliver OneCommerce on an outsourced basis, which shortens our clients' time-to-market and minimizes their need to make substantial investments to develop and maintain their own Internet commerce, or e-commerce, Web sites. In order to succeed in the Internet commerce marketplace, both traditional companies and Internet-only businesses are investing heavily in Internet commerce solutions. We believe that our market opportunity derives from the need for a solution that: . provides comprehensive functionality across key business processes; . supports XML, an emerging standard for Internet commerce; . rapidly adapts to changing business and technology requirements; and . is designed for delivery on an outsourced basis. We believe that our solution, comprised of OneCommerce and a broad array of services, responds to these needs. OneCommerce manages Web site content, provides personalized visitor experiences, processes orders, delivers customer support, and integrates with internal and external business applications. We believe we have developed the only XML-based Internet commerce application software. We have designed our solution to be offered by us and our partners on an outsourced basis. Widely-respected companies involved with Internet commerce such as Microsoft and MarchFirst (formerly known as USWeb/CKS) have endorsed OneCommerce as one of the industry's top few solutions for large-scale Internet commerce. Our clients include Alloy Online, ePhones, Espanol.com, Maytag, Phillips Publishing, SmartCruiser.com, The Mark Group, and WeightWatchers.com. Our objective is to provide the application software that supports a leading share of commerce conducted over the Internet. We intend to do this by expanding our range of application services to include additional software functionality and value-added services. We also intend to contribute to and leverage the emerging technology standards upon which we have built OneCommerce. Further, we plan to expand our distribution channels to include a broad range of application service providers, systems integrators, and other professional services companies. The Offering <TABLE> <CAPTION> Common stock offered by OneSoft...................... 4,500,000 shares <C> <S> Common stock to be outstanding after this offering.. 20,966,148 shares Use of proceeds..................................... General corporate purposes, including working capital. See "Use of Proceeds." Proposed Nasdaq National Market symbol.............. ONSF </TABLE> The number of shares of our common stock that will be outstanding after this offering is based on the number of shares outstanding on February 29, 2000 and assumes no exercise of the underwriters' over-allotment option, and the conversion into common stock of all of our preferred stock outstanding on that date. It also assumes the filing of our amended and restated certificate of incorporation immediately following the closing of this offering. It excludes 4,000,325 shares issuable upon exercise of subject options at a weighted- average exercise price of $4.97 per share and 60,651 warrants at an exercise price of $6.59 per share and additional shares available for issuance under our stock plans as of February 29, 2000. Summary Consolidated Financial Data (in thousands, except per share data) <TABLE> <CAPTION> Year Ended December 31, ----------------------------------------------- 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> Consolidated Statement of Operations Data: Revenues: Application services........ $ -- $ 240 $ 171 $ 561 $ 2,023 Professional services....... -- 1,834 1,834 995 6,928 -------- -------- -------- -------- -------- Total revenues............ -- 2,074 2,005 1,556 8,951 Gross profit................. -- 616 605 495 1,554 (Loss) income from operations.................. (8) 48 (614) (3,764) (26,708) Net (loss) income............ (8) 49 (601) (3,590) (26,370) Net (loss) income attributable to common shareholders................ (8) 49 (601) (3,608) (29,431) Basic and diluted net loss per share................... $ (0.00) $ 0.02 $ (0.10) $ (0.60) $ (4.85) Weighted average common shares-basic and diluted.... 3,000 3,000 5,832 5,969 6,066 Pro forma basic and diluted net loss per share.......... $ (1.87) Pro forma weighted average common shares-basic and diluted..................... 14,123 </TABLE> <TABLE> <CAPTION> December 31, 1999 ------------------------------ Pro Forma Actual Pro Forma As Adjusted ------- --------- ----------- <S> <C> <C> <C> Consolidated Balance Sheet Data: Cash, cash equivalents and short-term investments .................................. $16,361 $16,361 $69,466 Working capital................................ 11,598 11,598 64,703 Total assets................................... 28,399 28,399 81,504 Long term debt and capital lease obligations... 63 63 63 Redeemable preferred stock..................... 48,747 -- -- Stockholders' (deficit) equity ................ (30,736) 18,011 71,116 </TABLE> The unaudited pro forma balance sheet data above reflects the conversion of all classes of preferred stock into common stock as of December 31, 1999. See Note 11 of Notes to Consolidated Financial Statements. The unaudited pro forma as adjusted balance sheet data above reflects the receipt of the net proceeds from the sale of the 4,500,000 shares of common stock in this offering at an assumed initial public offering price of $13.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses. In this prospectus, "OneSoft", "we", "us", and "our" refer to OneSoft Corporation. Our executive offices are located at 1505 Farm Credit Drive, McLean, Virginia 22102. Our telephone number is (703) 821-9190. Our Web site is located at http://www.onesoft.com. Information contained on our Web site is not a part of this prospectus. "OneSoft," "OneCommerce," our logo and other trademarks and service marks of OneSoft Corporation mentioned in this prospectus are the property of OneSoft Corporation. All other trademarks or trade names referred to in this prospectus are the property of their respective owners. ---------------- Unless otherwise indicated, all information in this prospectus assumes: . that the underwriters have not exercised their option to purchase additional shares; . conversion of all shares of preferred stock into shares of common stock upon completion of this offering; and . the filing of an amended and restated certificate of incorporation upon completion of this offering.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001052246_repeater_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001052246_repeater_prospectus_summary.txt
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+SUMMARY The items in the following summary are described in more detail later in this prospectus. This summary provides an overview of selected information and does not contain all the information you should consider. Therefore, you should also read the more detailed information and the consolidated financial statements contained in this prospectus. REPEATER TECHNOLOGIES, INC. We develop, market and sell wireless network equipment primarily to providers of code division multiple access or CDMA-based wireless services. CDMA is a rapidly growing wireless communications standard for the digital transmission of voice and data. We provide cost-effective, high quality coverage systems utilizing CDMA technology. These systems can be used in suburban and rural areas, urban areas and inside office buildings and other coverage-limited structures. Our products have been deployed with over 40 CDMA wireless service providers in ten countries. Our products are based on our Network Repeater technology that works in conjunction with base stations to expand the coverage area of a wireless network. A base station is a key component of a wireless network used to receive and transmit voice and data signals over radio frequencies. Our Network Repeater receives, amplifies and re-transmits voice and data signals between mobile handsets and base stations and provides a wireless connection to the telecommunications network. Our RepeaterHybrid Network solutions incorporate our family of Network Repeaters, antenna systems, network management systems and network design services to provide outdoor wireless service coverage. These products are used in conjunction with third-party base stations to increase coverage at significantly reduced cost by reducing the number of required base stations, related communication links and other wireless network equipment. We have deployed 20 RepeaterHybrid Networks with 12 service providers. Our Distributed Antenna System provides in-building coverage using copper cable and small antennas. Our OfficeCell distributed antenna system, currently under development, will provide in-building coverage utilizing fiber-optic cable to link distributed antennas for increased flexibility and broader coverage. These systems can be used in a wide range of indoor areas, including office buildings, shopping malls, sports arenas and tunnels. Our in-building products offer low cost, ease of installation and remote monitoring via our proprietary network management system. We have deployed our copper cable Distributed Antenna System with 16 service providers in six countries. Our goal is to be the leader in the development and deployment of CDMA-compatible wireless network equipment. To achieve this goal, our strategy is to: - Continue to expand our installed base of Network Repeaters; - Expand our in-building capabilities; - Establish a market leadership position in the next generation of wireless networks for high-speed data access commonly referred to in the wireless communications industry as third generation or "3G"; - Focus on network design and customer support; and - Pursue strategic acquisitions. We have incurred losses since our inception and we expect to continue to incur losses at least through our fiscal year ending March 2001. OFFICE LOCATION We are incorporated in Delaware. Our principal executive offices are located at 1150 Morse Avenue, Sunnyvale, California 94089 and our telephone number is (408) 747-1900. Information contained on our web site does not constitute part of this prospectus. -------------------------------------------------------------------------------- THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE SECURITIES AND EXCHANGE COMMISSION DECLARES OUR REGISTRATION STATEMENT EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED AUGUST 4, 2000 4,750,000 SHARES REPEATER TECHNOLOGIES, INC. COMMON STOCK $ PER SHARE -------------------------------------------------------------------------------- -- Repeater Technologies, Inc. is offering 4,750,000 shares. -- We anticipate that the initial public offering price will be between $8.00 and $10.00 per share. -- This is our initial public offering and no public market currently exists for our shares. -- Proposed trading symbol: Nasdaq National Market -- RPTR. --------------------------------------------- THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 4. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- <TABLE> <CAPTION> PER SHARE TOTAL -------------- -------------- <S> <C> <C> Public offering price....................................... $ $ Underwriting discount....................................... $ $ Proceeds to Repeater Technologies, Inc. .................... $ $ </TABLE> -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- The underwriters have a 30-day option to purchase up to 712,500 additional shares of common stock from us to cover over-allotments, if any. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OF ANYONE'S INVESTMENT IN THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. U.S. BANCORP PIPER JAFFRAY BANC OF AMERICA SECURITIES LLC THE DATE OF THIS PROSPECTUS IS , 2000. [REPEATER TECHNOLOGIES LOGO] -------------------------------------------------------------------------------- THE OFFERING Common stock offered.................. 4,750,000 shares Common stock outstanding after the offering.............................. 22,616,740 shares Offering price........................ $ per share Use of proceeds....................... We intend to use the net proceeds from this offering primarily for general corporate purposes, including working capital, research and development, sales and marketing, network design services, capital expenditures and potential acquisitions. Proposed Nasdaq National Market symbol................................ RPTR --------------------------------------------- Unless otherwise indicated, all information contained in this prospectus, including the outstanding share information above, is based on 3,320,400 shares of common stock outstanding as of June 30, 2000 and: - assumes filing of our amended and restated certificate of incorporation which will become effective upon the closing of this offering; - assumes conversion of all outstanding shares of preferred stock into 10,116,319 shares of common stock upon the closing of this offering; - assumes conversion of outstanding Series DD convertible subordinated debentures into 2,727,263 shares of common stock upon the closing of this offering; - includes the issuance of $5.1 million of Series EE convertible subordinated debentures on July 11, 2000 and the conversion of such debentures into 637,500 shares of common stock upon the closing of this offering; - assumes the exercise of outstanding warrants for 1,065,258 shares of common stock at a weighted average exercise price of $2.05 per share, which will expire if not exercised by 5:00 p.m. upon the closing of this offering; - excludes 3,964,096 shares of common stock issuable upon the exercise of outstanding options having a weighted average exercise price of $4.08 per share; - excludes 250,395 shares of common stock issuable upon the exercise of outstanding warrants, including 127,500 shares issuable upon the exercise of warrants issued on July 11, 2000, having a weighted average exercise price of $6.55 per share; - assumes no exercise of the underwriters' option to purchase up to 712,500 additional shares of common stock to cover over-allotments; and - assumes an initial public offering price of $9.00 per share, the midpoint of the initial public offering price range. -------------------------------------------------------------------------------- [Inside Front Cover Graphics] Inside Front Cover Graphic An artist's rendition of a populated geographic area with an overlay of a RepeaterHybrid Network. Text Title: "RepeaterHybrid(TM) Network" On the perimeter of the map are four small pictures of products and services that the company provides. Picture 1 Graphic: Picture of RepeaterStar antenna Picture 1 Text: RepeaterStar(TM) Donor Antenna Picture 2 Graphic: A service man installing a NetworkRepeater on a pole. Picture 2 Text: NetworkRepeater(TM) Picture 3 Graphic: A Computer Terminal with radio frequency prediction plots on the screen and the wall. Picture 3 Text: RepeaterCAD(TM) network design and application services Picture 4 Graphic: Picture of RepeaterNet (Computer rack) Picture 4 Text: RepeaterNet(TM) network management system Inside Back Cover: Map of the World with symbols placed on the map where we have deployed repeaters. (The map has no political boundaries and the symbols have no identity to operator or countries). Text Title: "Repeater Technologies has deployed network repeaters with over 40 wireless service providers on 5 continents". Bottom of page Graphic: Picture of NetworkRepeater with cellular telephone. Bottom of the page Text: Company Logo with Design and Company Name. -------------------------------------------------------------------------------- SUMMARY CONSOLIDATED FINANCIAL DATA (in thousands, except per share data) The following table summarizes the financial data for our business during the periods indicated. You should read this information together with our consolidated financial statements, the notes to those statements beginning on page F-1 of this prospectus, and the information under "Selected Consolidated Financial Data," "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> YEARS ENDED --------------------------------------------------------- MARCH 31, MARCH 31, MARCH 27, MARCH 26, MARCH 31, 1996 1997 1998 1999 2000 --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenues................................. $ 10,302 $10,581 $ 7,770 $ 9,612 $ 16,953 Gross profit (loss).......................... 732 1,226 (1,037) 729 4,808 Loss from operations......................... (5,808) (5,937) (12,707) (10,270) (13,498) Net loss..................................... (5,816) (5,973) (12,628) (10,570) (15,040) Net loss per common share -- basic and diluted.................................... $(153.05) $ (3.16) $ (5.31) $ (4.47) $ (6.00) ======== ======= ======== ======== ======== Shares used in net loss per common share calculation -- basic and diluted........... 38 1,893 2,376 2,367 2,508 ======== ======= ======== ======== ======== Pro forma net loss per common share -- basic and diluted (unaudited).................... $ (0.98) ======== Shares used in pro forma net loss per common share calculation -- basic and diluted (unaudited)................................ 15,352 ======== </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, 2000 --------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- -------------- ----------- (IN THOUSANDS) (UNAUDITED) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 4,823 $12,104 $49,810 Working capital............................................. 4,641 11,922 49,628 Total assets................................................ 16,217 23,498 61,204 Long-term obligations....................................... 3,585 3,585 3,585 Convertible subordinated debentures......................... 15,000 -- -- Total stockholders' equity (deficit)........................ (11,604) 10,677 48,383 </TABLE> --------------------------------------------- Pro forma gives effect to the automatic conversion of all of our outstanding shares of preferred stock into 10,116,319 shares of our common stock, all of our convertible debentures into 3,364,763 shares of our common stock and the exercise of outstanding warrants exercisable for 1,069,349 shares of our common stock, which will expire if not exercised by 5:00 p.m. on the date of the closing of this offering. Pro forma as adjusted gives effect to this offering assuming an initial public offering price of $9.00 per share and the automatic conversion of all of our outstanding shares of preferred stock into 10,116,319 shares of our common stock, all of our convertible debentures into 3,364,763 shares of our common stock and the exercise of outstanding warrants exercisable for 1,069,349 shares of our common stock, which will expire if not exercised by 5:00 p.m. on the date of the closing of this offering. -------------------------------------------------------------------------------- TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Summary..................................................... 1 Risk Factors................................................ 4 Special Note Regarding Forward-Looking Statements........... 12 Use of Proceeds............................................. 13 Dividend Policy............................................. 13 Capitalization.............................................. 14 Dilution.................................................... 16 Selected Consolidated Financial Data........................ 18 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 19 Business.................................................... 29 Management.................................................. 41 Principal Stockholders...................................... 51 Certain Transactions........................................ 54 Description of Capital Stock................................ 58 Shares Eligible for Future Sale............................. 62 United States Federal Income Tax Consequences to Non-U.S. Persons................................................... 64 Underwriting................................................ 67 Legal Matters............................................... 69 Experts..................................................... 69 Change in Independent Accountants........................... 70 Where You Can Find More Information......................... 70 Index to Consolidated Financial Statements.................. F-1 </TABLE> ---------------------------------------------
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001052547_vicuron_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001052547_vicuron_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk Factors." Our principal executive offices are located at 34790 Ardentech Ct., Fremont, California 94555. Our telephone number is (510) 739-3000. Our web site is http://www.versicor.com. We do not intend that the information found on our web site be a part of this prospectus. Please note that references to "partners" or "collaborative partners" do not necessarily imply any equity ownership in us by such entities. OUR BUSINESS Versicor is a biopharmaceutical company focused on the marketing, development and discovery of pharmaceutical products for the treatment of bacterial and fungal infections. We intend to focus on antiinfective products that have competitive advantages over existing products, such as greater potency, improved effectiveness against resistant strains and reduced toxicity. Because the development process for antiinfectives is relatively efficient and well-defined, we believe the costs and time required to bring new products to market can be significantly less than other disease categories. We have a distinct, two-fold approach to product development and marketing. Our primary strategy is to focus on the development of proprietary products, concentrating on injectable antibiotic and antifungal products for the hospital market. We expect to market these products to hospitals in North America through our own direct sales force, which we believe can be established with a targeted and cost-effective sales and marketing infrastructure. Our product candidates target disease indications that represent substantial markets where there is significant demand for new therapies. Our secondary strategy is to collaborate with major pharmaceutical companies to develop orally administered antibiotic and antifungal products. Orally administered products require substantial development expenditures and extensive sales and marketing infrastructures to reach their full market potential. Through these collaborations, we intend to exploit our technology platform to discover and supply lead compounds while our partners conduct pre-clinical, clinical development, marketing and sales activities to transform the compounds into pharmaceutical products. We expect to receive research funding, milestone payments and equity investments from our collaborative partners, as well as royalty fees if products are commercialized. PROPRIETARY PRODUCTS Our lead product candidate, V-Echinocandin, is an antifungal intended for the intravenous treatment of serious fungal infections that are systemic, meaning that they involve the whole body. V-Echinocandin has potent fungicidal activity, a broad spectrum of activity against CANDIDA (including fluconazole-resistant strains) and ASPERGILLUS, low potential for developing resistance and a novel mechanism of action. We believe V-Echinocandin will have competitive advantages over existing therapies because it combines potent fungus killing, or fungicidal, activity with a good safety profile. V-Echinocandin is currently in Phase II clinical trials, where it has shown significant activity and has been well tolerated. We plan to initiate a Phase III trial in the first quarter of 2001. Our second product candidate, V-Glycopeptide, is a second-generation antibiotic belonging to the same class as Vancomycin and is intended for the treatment of serious systemic infections, particularly STAPHYLOCOCCI. V-Glycopeptide has potent bactericidal effect. In comparison to Vancomycin, V-Glycopeptide has more potent activity, enhanced potency against methicillin-resistant STAPHYLOCOCCUS strains and appears to be suitable for once-a-day administration. V-Glycopeptide is currently in Phase I safety and tolerance studies in the United Kingdom and we expect to begin additional studies in the United States during the second half of 2000. PARTNERED PRODUCT PROGRAMS Our first partnered product program is a collaboration with Pharmacia & Upjohn aimed at identifying second and third generation oxazolidinones. Oxazolidinones promise to be the first new major chemical class of antibacterial products to enter the market in over 20 years. They are active against a broad range of bacteria, including multidrug resistant STAPHYLOCOCCI, STREPTOCOCCI and ENTEROCOCCI. We have identified several structurally novel second generation oxazolidinone candidates that have a broader spectrum of activity (including the key respiratory pathogen H. INFLUENZAE), improved potency against multidrug resistant bacteria, and good activity in preclinical IN VIVO studies when administered orally. Our second partnered product program is a collaboration with Novartis Pharma AG to develop deformylase inhibitors. Deformylase is an essential enzyme present in bacteria but absent in human cells, and thus represents a good target for the discovery of inhibitors that can serve as broad spectrum antibacterial agents. We have identified several lead molecules that are active against multidrug resistant strains, as well as important respiratory pathogens such as S. PNEUMONIAE, H. INFLUENZAE and M. CATARRHALIS; and have demonstrated activity in IN VIVO preclinical studies when administered orally. OUR MARKET OPPORTUNITY We believe the antiinfective market presents a highly attractive opportunity for three major reasons: - LARGE MARKET. The market for antibiotics and antifungals represents the third largest worldwide pharmaceutical drug market, with 1998 sales of nearly $24 billion. The hospital antiinfective market, where we will target our proprietary products, totaled $6.5 billion worldwide in 1998. - GROWING NEED FOR NEW DRUGS. The number of patients with impaired immune systems has been increasing dramatically due to the aging of the population, growing use of therapies such as chemotherapy and organ transplantation, and the prevalence of AIDS. These patients are particularly susceptible to serious infection because their immune systems are impaired, a condition referred to as immunosuppression. In addition, the increasing resistance of infectious agents has led to an increased number of serious infections in patients who are not immunosuppressed. As a result, there is a strong demand for new drugs that are more potent, more effective against resistant strains and that cause fewer side effects than existing therapies. - EFFICIENT AND WELL-DEFINED DRUG DEVELOPMENT PROCESS. IN VITRO and early IN VIVO testing of antiinfective drugs has been shown to be more predictive of clinical results than other therapeutic categories. Moreover, antiinfectives that successfully complete Phase I clinical testing are more likely to be efficacious and to receive regulatory approval. As a result, the costs and time required to develop antiinfectives are greatly reduced in comparison to other major therapeutic categories. OUR STRATEGY Our objective is to be a leader in the marketing and development of pharmaceutical products for the treatment of bacterial and fungal infections in the hospital setting. To accomplish our objective, we are pursuing the following strategies: - in-license compounds and products with demonstrated potential; - exploit our internal discovery platform to expand our product portfolio; - obtain lead compounds through BIOCOR, our external leads partnership with Biosearch Italia; - acquire businesses that can accelerate our development; and - target our sales force on the North American hospital market. THE OFFERING <TABLE> <S> <C> Common stock offered by us................... 4,600,000 shares Common stock to be outstanding after the offering................................... 22,039,468 shares Use of proceeds.............................. To fund our operations, including clinical development of existing product candidates, acquisition of and development related to new product candidates, commercialization of product candidates, and for other working capital and general corporate purposes. See "Use of Proceeds." Risk Factors................................. An investment in our common stock involves significant risks. See "Risk Factors." Proposed Nasdaq National Market symbol....... VERS </TABLE> Except as otherwise indicated, the information in this prospectus reflects the following assumptions: - all outstanding shares of our preferred stock automatically convert into 16,677,138 shares of our common stock upon the closing of this offering; - the underwriters do not exercise the over-allotment option granted by us to purchase additional shares in the offering; - the filing of our amended and restated certificate of incorporation immediately following the closing of this offering; and - a 5-for-4 stock split to be completed prior to the closing of this offering. The number of shares of common stock outstanding after the offering is based on shares outstanding as of March 31, 2000. See "Capitalization." This information excludes shares of capital stock we are obligated to issue upon exercise of options and warrants outstanding. As of March 31, 2000, these shares consisted of: - 1,995,217 shares of common stock issuable upon the exercise of options at a weighted average exercise price of $0.43 per share; - 521,646 additional shares of common stock made available for future issuance under our 1995 and 1997 Equity Incentive Plans; - 45,000 shares of common stock issuable upon the exercise of warrants at an exercise price of $4.45 per share; - 168,125 shares of Series C preferred stock issuable upon the exercise of warrants at an exercise price of $4.00 per share; and - 226,236 shares of Series F preferred stock issuable upon the exercise of warrants at an exercise price of $4.72 per share. The warrants for Series C and Series F preferred stock described above will be exercisable for common stock upon completion of this offering. SUMMARY FINANCIAL AND OPERATING DATA The pro forma net loss per share and shares used in computing pro forma net loss per share are calculated as if all of our convertible preferred stock was converted into shares of our common stock on the date of their issuance. See footnote 1 of notes to financial statements. The net loss available to common stockholders for the year ended December 31, 1999 includes $35,112,612 of deemed dividends related to a beneficial conversion feature associated with preferred stock issued during 1999. See footnote 8 of notes to financial statements. The pro forma balance sheet data below reflects the conversion of each outstanding share of preferred stock into one share of common stock upon the closing of this offering. The pro forma as adjusted balance sheet data below reflects the conversion of each outstanding share of preferred stock into one share of common stock upon the closing of this offering and the issuance and sale of 4,600,000 shares of our common stock in this offering at an assumed price to the public of $12.00 per share, after deducting the underwriting discounts and commissions and estimated offering expenses, and our receipt of the net proceeds from that sale. <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, --------------------------------- ---------------------- 1997 1998 1999 1999 2000 -------- -------- ----------- -------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues............................. $ -- $ -- $ 4,275 $ -- $ 1,258 -------- -------- ----------- -------- ----------- Operating expenses: Research and development........... 5,403 11,429 25,472 2,209 3,637 General and administrative......... 807 1,386 2,586 268 1,648 -------- -------- ----------- -------- ----------- Total operating expenses........... 6,210 12,815 28,058 2,477 5,285 -------- -------- ----------- -------- ----------- Loss from operations............... (6,210) (12,815) (23,783) (2,477) (4,027) Net interest (expense) income...... (74) 230 (5,421) (21) 469 Other.............................. -- -- (14) -- -- -------- -------- ----------- -------- ----------- Net loss............................. (6,284) (12,585) (29,218) (2,498) (3,558) Preferred stock deemed dividends and accretion to redemption value...... (422) (2,527) (38,176) (1,281) (1,435) -------- -------- ----------- -------- ----------- Net loss available to common stockholders....................... $ (6,706) $(15,112) $ (67,394) $ (3,779) $ (4,993) ======== ======== =========== ======== =========== Net loss per share, basic and diluted............................ $ (24.31) $ (47.11) $ (127.28) $ (8.72) $ (7.09) ======== ======== =========== ======== =========== Shares used in computing net loss per share, basic and diluted........... 275,834 320,800 529,513 433,384 704,789 ======== ======== =========== ======== =========== Pro forma net loss per share, basic and diluted........................ $ (2.75) $ (0.20) =========== =========== Shares used in computing pro forma net loss per share, basic and diluted............................ 10,613,276 17,381,926 =========== =========== </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, 2000 ----------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED --------- --------- ----------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................. $ 34,003 $ 34,003 $ 84,243 Total assets.............................................. 44,575 44,575 94,815 Term loan payable, less current portion................... 4,095 4,095 4,095 Convertible and redeemable preferred stock................ 85,278 -- -- Accumulated deficit....................................... (59,231) (59,231) (59,231) Total stockholders' equity (deficit)...................... (51,447) 33,831 84,071 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001052667_chiles_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001052667_chiles_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS, BUT DOES NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY. UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS REFLECTS OUR CONVERSION FROM A LIMITED LIABILITY COMPANY INTO A CORPORATION UPON THE COMPLETION OF THIS OFFERING AND ASSUMES THAT THE UNDERWRITERS WILL NOT EXERCISE THEIR OVER-ALLOTMENT OPTION. EXCEPT AS OTHERWISE INDICATED, SHARE AND OTHER INFORMATION IN THIS PROSPECTUS DOES NOT REFLECT THE ISSUANCE OF SHARES IN CONNECTION WITH OUR CONTEMPLATED TONALA TRANSACTIONS UNDER AN AGREEMENT EXECUTED ON JULY 20, 2000. ALL INFORMATION RELATED TO THE SHARES TO BE ISSUED AND OUTSTANDING FOLLOWING THIS OFFERING, AS WELL AS SHARES ISSUABLE UPON THE EXERCISE OF OUTSTANDING OPTIONS, IS BASED ON, AMONG OTHER THINGS, THE ASSUMED INITIAL PUBLIC OFFERING PRICE OF $18.13 PER SHARE. IN THIS PROSPECTUS, "CHILES OFFSHORE," "OUR COMPANY," "WE," AND "OUR" REFER TO CHILES OFFSHORE INC. OR CHILES OFFSHORE LLC, AS APPLICABLE, AND ITS WHOLLY OWNED SUBSIDIARIES. CHILES OFFSHORE INC. We operate three of the seven existing ultra-premium jackup drilling rigs, all of which currently operate in the U.S. Gulf of Mexico. We own two of these rigs and operate the third under a bareboat charter. We have entered into an agreement to acquire, through a series of transactions, all of the shares of capital stock of a newly formed entity that will own the rig that we currently charter, as described in greater detail below under "--TONALA Agreement." Jackup drilling rigs are mobile offshore drilling platforms equipped with legs that are lowered to the ocean floor to support the drilling platform while drilling. Ultra-premium jackup drilling rigs are differentiated from other jackup drilling rigs primarily by their greater water depth capabilities, an ability to extend the drilling system over larger fixed offshore platforms and more powerful mud pumps that allow them to drill wells faster and more reliably than other rigs. Construction of the three rigs we currently operate was completed in the last 16 months, making them significantly newer than the remaining four rigs in their class. A fourth ultra-premium jackup rig is currently being built for us in Singapore. This rig will have additional enhancements as compared to our existing rigs and is expected to be delivered to us during the second quarter of 2002. We also intend to exercise an option to construct a fifth rig that will be similar in design to the fourth rig. We intend to continue to focus on the ultra-premium jackup niche of the offshore drilling industry. This niche is positioned between traditional jackup rigs and much more costly harsh environment jackup rigs constructed primarily for operations in the North Sea and off the eastern coast of Canada. The key elements of our strategy are to: - Own and operate ultra-premium jackup rigs that allow us to charge higher daily rates, or "dayrates," by generating significant savings for our customers on the overall cost of drilling a well by completing wells faster, more safely and more efficiently than more traditional jackup rigs and by drilling wells that less technologically advanced rigs are unable to drill; - Increase the size of our ultra-premium jackup rig fleet to satisfy growing demand for this class of drilling unit; - Focus initially on the natural gas-rich Gulf of Mexico, which is a major source for the growing natural gas market in the United States; - Target sophisticated oil and gas operators that we believe are willing to pay higher dayrates for our rigs, which can satisfy our customers' more demanding productivity, environmental and safety requirements; and - Employ, retain and motivate experienced senior management and operating personnel to maximize the performance of our ultra-premium jackup rig fleet. TONALA AGREEMENT On July 20, 2000, we entered into an agreement with Perforadora Central, S.A. de C.V., its parent corporation and that parent's stockholders to acquire, through a series of transactions, all of the shares of capital stock of a newly formed entity that will own the TONALA, the rig that we currently operate under a bareboat charter with Perforadora Central. Under the terms of the agreement, the stockholders will receive 2,679,723 shares of our common stock. Following the completion of this offering and the issuance of those shares, we would have 17,896,965 shares issued and outstanding, of which Perforadora Central would hold approximately 15%. As a result of the contemplated transactions, we will also assume approximately $64.6 million aggregate principal amount of debt incurred by Perforadora Central to construct the rig. That debt is guaranteed by the U.S. Maritime Administration and bears interest at the rate of 5.6% per year until its maturity in 2010. Because this debt bears interest at a rate that is below current market rates, we will record the debt at a discount if the transactions are completed and we assume that debt. Based on discussions with the U.S. Maritime Administration, we anticipate that the U.S. Maritime Administration will consent to the transaction and permit us to assume that debt; however, we cannot assure you that we will receive the necessary consent from the U.S. Maritime Administration or that we will not be required to agree to additional terms or provide additional collateral in support of that debt. In the event the U.S. Maritime Administration does not approve the transaction and we choose to proceed with the transaction, we would have to refinance that debt under a new $120 million bank facility, which will replace our existing $40 million bank facility. We have obtained commitments from banks to provide the new facility and are currently negotiating a definitive credit agreement. We expect to complete the TONALA transactions this year; however, the transactions are conditioned upon the occurrence of a number of events, including the approval of the U.S. Maritime Administration, the consummation of this offering and the receipt of customary consents and approvals by Perforadora Central and its affiliates with respect to the transactions. ------------------------ Our principal executive offices are located at 11200 Richmond Avenue, Suite 490, Houston, Texas 77082. Our telephone number at this location is (713) 339-3777. THE OFFERING <TABLE> <S> <C> Common stock we are offering................. 6,500,000 shares Common stock to be outstanding after this offering................................... 15,217,241 shares Use of proceeds.............................. We intend to use the estimated $109 million of net proceeds from this offering as follows: - approximately $95 million to purchase and retire all of our currently outstanding senior notes; and - approximately $14 million to fund a portion of the cost to further expand our fleet. Proposed American Stock Exchange symbol...... "COD" </TABLE> The number of shares of our common stock to be outstanding after this offering is based on the number of shares that would be outstanding following our conversion from a limited liability company to a corporation and excludes: - 2,679,723 shares issuable upon consummation of the TONALA transactions to the stockholders of the newly formed entity that will own the TONALA; - 975,000 shares that the underwriters have an option to purchase to cover over-allotments; and - 511,227 shares issuable upon exercise of outstanding stock options and 430,098 shares available for future issuance under our stock option plan. SUMMARY HISTORICAL FINANCIAL AND OTHER DATA (IN THOUSANDS) Chiles Offshore LLC was formed in August 1997 for the purpose of managing the construction of, owning and operating a fleet of ultra-premium jackup drilling rigs. In 1997, we commissioned the construction of two ultra-premium jackup drilling rigs, the CHILES COLUMBUS and the CHILES MAGELLAN. We took delivery of the CHILES COLUMBUS in May 1999 and the CHILES MAGELLAN in October 1999. Both rigs are currently operating in the U.S. Gulf of Mexico. In November 1999, we entered into a bareboat charter agreement for the third rig, the TONALA, which is also a new ultra-premium jackup rig. Under the bareboat charter, we are responsible for all crewing, insurance, and other operating expenses, as well as the charter payment to the vessel owner. The charter operations commenced in April 2000 and the initial charter term is 18 months. We have entered into an agreement to acquire, through a series of transactions, all of the shares of capital stock of a newly formed entity that will own the TONALA as described in greater detail above under "--TONALA Agreement." The following summary financial data are derived from the financial statements of Chiles Offshore LLC as of and for the periods presented. The summary financial data for the six-month periods ended June 30, 2000 and 1999 are derived from financial statements that are unaudited but include all adjustments, consisting of normal recurring adjustments, that we consider necessary for a fair presentation of the financial position and results of operations of Chiles Offshore LLC for these periods. The results for the six months ended June 30, 2000 are not necessarily indicative of the results to be achieved for the full year. The summary financial data below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements, including the notes to those financial statements, included elsewhere in this prospectus. <TABLE> <CAPTION> FOR THE PERIOD FROM INCEPTION (AUGUST 5, 1997) YEAR ENDED SIX MONTHS ENDED TO DECEMBER 31, DECEMBER 31, JUNE 30, ----------------- ------------------- ------------------- 1997 1998 1999 1999 2000 ----------------- -------- -------- -------- -------- (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues....................................... $ -- $ -- $ 7,651 $ 528 $ 22,655 Rig operating expenses......................... -- -- 4,432 403 7,594 Charter expenses............................... -- -- -- -- 1,461 General and administrative expenses............ 376 767 1,326 444 1,346 Depreciation................................... 6 56 2,478 222 3,523 Operating income (loss)...................... (382) (823) (585) (541) 8,730 Interest expense, net of capitalized interest..................................... -- 2,387 3,764 375 5,790 Interest income................................ 73 3,383 874 723 152 Extraordinary loss on extinguishment of debt... -- -- 489 -- -- Net income (loss)............................ (309) 173 (3,963) (193) 3,093 OTHER FINANCIAL DATA: Cash flows provided by (used in): Operating activities......................... $ 3,571 $ 925 $ 1,930 $ 2,383 $ (945) Investing activities......................... (5,215) (76,552) (82,138) (63,734) (16,120) Financing activities......................... 33,985 105,500 21,947 -- 17,790 EBITDA (1)..................................... (376) (767) 1,893 (319) 12,254 BALANCE SHEET DATA: Working capital................................ $28,401 $ 9,677 $ (3,731) $ (5,959) $ 4,574 Property and equipment, net.................... 35,020 111,725 191,697 175,237 204,294 Total assets................................... 67,398 178,433 203,246 182,209 223,855 Total debt..................................... -- 110,000 117,000 110,000 102,000 Members' equity................................ 63,422 63,595 74,578 63,402 110,461 </TABLE> ------------------------------ (1) EBITDA consists of income prior to interest income, interest expense, income taxes, depreciation, amortization and extraordinary items. However, we have not been subject to U.S. corporate income taxes because as a limited liability company, we are treated as a partnership for tax purposes, and such taxes are liabilities of the individual equity members. EBITDA is not intended to represent cash flows from operations, as defined by GAAP, and should not be considered as an alternative to net income as an indicator of our operating performance or to cash flows from operations as a measure of liquidity. EBITDA is one basis on which we assess and will assess our financial performance.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001053182_internatio_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001053182_internatio_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS," THE FINANCIAL DATA AND RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION. OUR BUSINESS We design, develop and market high performance integrated circuits for the computing, communications, and consumer electronics markets. Our product portfolio includes integrated circuit timing devices and EMI reduction and high performance logic integrated circuits. We believe our gate-array-based architecture, proprietary input/output structures and extensive mixed-signal cell library enable us to deliver flexible, high performance solutions to our customers faster than many of our competitors, which in turn assists our customers in achieving their time-to-market objectives. Our design methodology gives us fast design and prototype cycle times and enables rapid product introductions. We sell our products to leading systems manufacturers in the computing, communications and consumer electronics markets. Our customers include Apple, Canon, Cisco, Dell, Fujitsu Siemens, Hewlett-Packard, IBM, NEC, Panasonic, Pioneer, Sharp, Samsung, Sanyo, Sony and Xerox. We believe that we have developed a compelling product portfolio, as evidenced by our significant design wins with industry leaders, such as Compaq and Cisco, which has resulted in the integration of our products into some of Compaq's personal computers and Cisco's leading-edge routers. In addition, our timing devices are designed into the Intel reference mobile motherboard. We have also successfully penetrated the digital camera, DVD and minidisc player markets with recent design wins at Sanyo, Sony and Kenwood. OUR OPPORTUNITY There exists a growing demand for fast, high-bandwidth electronic systems characterized by ever-improving performance, flexibility, reliability and functionality, as well as decreasing size, cost and power consumption. This demand has resulted in both the development of new, and the enhancement of existing, electronic systems, such as digital cameras, DVD players, game consoles, internet appliances, network routers and switches, notebook computers and set-top boxes. The components of these electronic systems, which include microprocessors, memory, logic, and timing devices, must continue to increase in performance in order to enable the continued development of higher performance systems. Advances in the development of a particular type of integrated circuit timing device, known as a clock, are particularly critical as they generate the timing signals necessary for communication among the components within systems as well as between systems. Other integrated circuits that are becoming increasingly important in complex, high-speed systems such as computer servers, workstations and networking systems, where data transfers at optimum speeds are essential, include zero delay buffers and high performance, low power logic. High performance electronics systems often emit elevated levels of electromagnetic interference, or EMI. Because EMI is regulated by the Federal Communications Commission, systems manufacturers are seeking solutions to reduce levels of EMI. In order to meet the demand for higher performance systems in the computing, communications and consumer electronics markets, systems manufacturers require high performance integrated circuits with programmable features that allow the manufacturers to rapidly design and test systems, assisting them in meeting their time-to-market and cost objectives. OUR SOLUTION To address these needs, we have developed a portfolio of product families consisting of clocks, zero delay buffers and EMI reduction and high performance logic integrated circuits for the computing, communications and consumer electronics markets. Our products are based upon a flexible platform with which we are able to quickly build new products to meet our customers' requirements. We focus our product development efforts on applications in areas where we have identified a market opportunity and a large customer need. We currently offer more than 100 products, of which more than 50% have been introduced during the last 12 months. The key elements of our solution are: - UNIQUE AND FLEXIBLE DESIGN SOLUTION. Our design methodology and product design architectures have been optimized to enable rapid new product introductions and to provide flexibility during the development process while minimizing costs. - HIGH PERFORMANCE PRODUCTS. We design and manufacture our products to meet or exceed manufacturers' highest standards and specifications as evidenced by the integration of our products into the systems of industry leaders, such as Cisco, Compaq, Dell and Sony. - BROAD FEATURE SET. We offer products with unique programmability features and integration levels to address a broad range of system requirements and functionality. - CUSTOMER RESPONSIVENESS. We believe our unique fast time-to-market design capability enables us to respond to customer requests more rapidly than our competition. OUR STRATEGY Our objective is to be a leading supplier of clocks, zero delay buffers and EMI reduction and high performance logic integrated circuits to the computing, communications and consumer markets. Key elements of our strategy include: - further increase our market share through the continued penetration of existing customers and the expansion of our sales, marketing and applications support organization to acquire new customers; - leveraging our core competencies in timing and EMI solutions across the high growth communications and consumer products markets; - extending our leadership in the EMI market to maintain our position as the EMI solution provider of choice; - further penetration of industry leaders in an effort to influence the purchasing decisions of additional customers within those industries; and - continuing to expand our product offerings as end-product performance requirements and process technologies evolve. CORPORATE INFORMATION International Microcircuits, Inc. was incorporated in California in November 1972 and reincorporated in Delaware in 2000. Our principal executive offices are located at 525 Los Coches Street, Milpitas, California 95035, our telephone number is (408) 263-6300, and our website is located at www.imicorp.com. Information on our website is not a part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered by us........................... shares Common stock offered by the selling stockholders....................................... shares Common stock to be outstanding after this offering... shares Use of proceeds...................................... To repay outstanding indebtedness and redeem our Series A redeemable preferred stock and for general corporate purposes, principally working capital and capital expenditures. See "Use of Proceeds." We will not receive any of the proceeds from the sale of shares by the selling stockholders. Proposed Nasdaq National Market symbol............... IIMI </TABLE> The number of shares that will be outstanding after the offering is based on the number of shares outstanding as of June 30, 2000 and excludes: - 1,793,748 shares of common stock issuable upon exercise of options outstanding as of June 30, 2000 under our 1995 and 1997 stock option plans, with a weighted average exercise price of $0.54 per share, and 3,691,000 shares reserved for future grants under our option plans; and - 200,000 shares of common stock reserved for issuance under our 2000 employee stock purchase plan. ------------------------------------------------ Unless specifically stated, the information in this prospectus: - reflects the automatic conversion of all outstanding shares of our mandatorily redeemable convertible preferred stock into an aggregate of 10,662,057 shares of our common stock and 3,159,128 shares of our Series A redeemable preferred stock and the redemption of all such shares of Series A redeemable preferred stock for $12.4 million upon the closing of this offering; - reflects a three-for-two stock split that was effected in February 1998, a three-for-two stock split that was effected in February 2000 and a three-for-two stock split to be effected in September 2000; - does not take into account the possible sale of additional shares of common stock to the underwriters to cover over-allotments; - assumes the reincorporation of our company in Delaware prior to the completion of this offering; and - reflects the creation of a new class of preferred stock and an increase in the number of authorized shares of common stock to 100,000,000 shares upon the closing of this offering. Dial-a-dB, Dial-a-Drive, Dial-a-Frequency, Dial-a-Skew and IMI are trademarks of International Microcircuits, Inc. This prospectus contains product names, trade names and trademarks of International Microcircuits, Inc. and other organizations. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) You should read the following summary financial information with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the notes thereto included elsewhere in this prospectus. <TABLE> <CAPTION> THREE MONTHS ENDED FISCAL YEAR ENDED MARCH 31, JUNE 30, ---------------------------------------------------- ------------------- 1996 1997 1998 1999 2000 1999 2000 -------- -------- -------- -------- -------- -------- -------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenue.......................... $35,694 $27,857 $34,165 $38,998 $44,326 $10,516 $11,507 Gross profit(1)...................... 13,204 10,350 14,239 15,995 20,273 4,507 5,565 Operating income (loss).............. 2,832 1,305 (934) 2,813 4,074 1,027 855 Net income (loss).................... 1,197 1,029 (2,197) 987 1,774 425 217 Net income (loss) per share(2): Basic.............................. $ 0.07 $ 0.06 $ (0.17) $ 0.33 $ 0.47 $ 0.13 $ 0.05 Diluted............................ $ 0.07 $ 0.06 $ (0.17) $ 0.01 $ 0.06 $ 0.01 $ 0.00 Weighted average shares(2): Basic.............................. 17,213 17,213 13,008 2,735 3,602 3,028 3,982 Diluted............................ 17,213 17,213 13,008 14,642 15,908 16,176 16,052 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 2000 -------------------------- ACTUAL AS ADJUSTED(3) --------- -------------- (UNAUDITED) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................. $ 4,670 Working capital........................................... 6,455 Total assets.............................................. 17,817 Long-term debt, including current portion................. 5,700 Mandatorily redeemable securities......................... 15,821 Total stockholders' equity (deficit)...................... (14,389) </TABLE> ------------------------ (1) Gross profit excludes stock-based compensation expense of $73,000 for the year ended March 31, 2000 and $60,000 for the three months ended June 30, 2000, which is combined with other stock-based compensation and included in operating income. (2) See Note 1 of Notes to our consolidated financial statements for a description of the computation of the number of shares and net income (loss) per share. (3) Adjusted to reflect the sale by us of shares of common stock in this offering, at an assumed initial public offering price of $ per share after deducting the estimated underwriting discount and offering expenses, and to give effect to the conversion of all outstanding shares of our mandatorily redeemable convertible preferred stock into common stock and Series A redeemable preferred stock, the redemption of all such shares of Series A redeemable preferred stock, and the application of the net proceeds of the offering. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001053384_genomic_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001053384_genomic_prospectus_summary.txt
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+Prospectus summary This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, especially the risks of investing in our callable common stock discussed under Risk factors. Our principal executive offices are located at 4355 Varsity Drive, Suite E, Ann Arbor, MI 48108. Our telephone number is (734) 975-4800. Our Website is www.genomicsolutions.com. The information found on our Website is not a part of this prospectus. OUR BUSINESS We design, develop, manufacture, market and sell instruments, software, consumables and services used to determine the activity level of genes and to isolate, identify and characterize proteins. Unlike many other gene and protein research instrumentation companies, we offer products and systems with demonstrated market acceptance. Our products and systems enable researchers to perform complex, high volume experiments at a lower cost and in less time than traditional techniques. As a result, our products and systems facilitate more rapid and less expensive drug discovery. Since 1997, we have sold our systems and instrumentation to more than 100 pharmaceutical and biotechnology companies, government agencies, universities and private research institutions, including Parke-Davis, Merck, diaDexus, Biogen, RIKEN Genome Science Center (Japan) and Ludwig Institute for Cancer Research. We currently maintain facilities and employ direct sales forces in the United States, the United Kingdom and Japan. We intend to expand our customer base in other markets through our recent marketing, sales and distribution alliance with PerkinElmer, a leading provider of analytical instrumentation and high volume processing tools for drug discovery with distribution capabilities in over 100 countries. OUR MARKET OPPORTUNITY Pharmaceutical and biotechnology companies have realized the potential of genomics and proteomics to improve the productivity of the drug discovery process. Genomics is the large scale study of genes and proteomics is the large scale study of proteins. Genomic researchers use biochips to conduct gene expression analysis, the process of determining how gene function varies under different conditions and in response to different stimuli. Biochips consist of thousands of genes printed on glass slides. Genes contain DNA, the information necessary to create proteins. Proteins are the molecules that carry out a cell s biological functions. Humans may produce one million or more distinct proteins. Most diseases, including diabetes and Alzheimer s, result from abnormalities in the presence, expression or performance of proteins within cells. Consequently, pharmaceutical and biotechnology companies are acquiring biochip and proteomic technologies to decipher the role genes and proteins play in disease processes, which can facilitate more efficient drug discovery and development. We believe that most currently available biochip and proteomic technologies suffer from the following limitations: - poor quality results due to lack of integration; - low productivity due to lack of automation; - limited flexibility, preventing researchers from tailoring experiments; and - high fees for licensing or gaining access to technology. Table of Contents OUR SOLUTION We provide biochip and proteomic systems to capitalize on the rapidly growing drug discovery industry. We believe that our systems offer the following advantages over other available products: - High Quality Results. Our integrated and automated systems reduce data variability associated with manual and incompatible instruments produced by multiple vendors. By providing walk-away, high volume processing capabilities, our systems reduce the risk of human error and sample contamination. - Increased Productivity. Our systems use advanced robotics and sophisticated software to automate both gene expression and protein analysis. Our automated systems allow users to complete large scale, statistically meaningful experiments in significantly less time than with manual processes and stand-alone instruments. - Enhanced Flexibility. Our systems allow customers to design their experiments to meet their research objectives. We enable researchers to rapidly and independently design, produce and analyze custom biochips incorporating previous experimental results. Our automated proteomic systems allow researchers to work with a broader range of proteins than is practical with manual methods. - Lower Cost. Each of our automated systems is designed to produce results in less time and at lower costs than alternative approaches. We do not charge royalties, access fees or license fees for the use of our systems. OUR STRATEGY We intend to strengthen our global position in the biochip and proteomic markets. Key elements of our strategy include: - Expanding our sales efforts to capitalize on the rapidly growing markets for our products; - Enhancing our product offering through internal development and acquisitions; - Promoting consumables and services that optimize performance of our systems while generating a steady stream of high margin, recurring revenue; and - Using our expertise in biochip and proteomic technologies to combine and correlate data obtained through genomic and proteomic research to understand better the biochemical pathways involved in producing, regulating and modifying genes and proteins. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001053676_sielox-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001053676_sielox-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information and FairMarket's financial statements and the notes to those statements appearing elsewhere in this prospectus. FAIRMARKET, INC. FairMarket provides outsourced, networked online auction services for companies that desire to develop or enhance their Internet marketplaces. Our primary service offering consists of the development, hosting and maintenance of private-label online auction sites for business merchants, Internet portal sites and other companies that have a presence on the web. We host these auction sites on our central operating system, which gives us the ability to aggregate listings of goods and services available for sale on each of our customers' auction sites and make those listings available for display and sale on auction sites of other FairMarket customers. We refer to this network of customer auction sites as the FairMarket Network. For example, a computer listed for auction by a merchant like CompUSA appears not only on CompUSA's auction site but also on other community auction sites in the FairMarket Network. Similarly, listings posted by a seller on a community auction site in the FairMarket Network automatically appear on other FairMarket Network community auction sites. Our primary sources of revenue are service fees and network fees. Service fees include one-time auction site set-up fees and monthly fees for hosting and maintaining customers' auction sites and providing customer support services. Network fees include success fees charged to sellers upon a completed sale, listing fees and merchandising fees, which are fees charged for the prominent display of a particular seller or listing. Today, over 90 businesses and several top Internet portal sites are members of the FairMarket Network. A representative list of our customers appears on page 40. Our goal is to become a leading provider of outsourced, networked e-commerce services. Key elements of our strategy include: - expanding the number of customers for whom we host e-commerce applications; - increasing traffic and transactions across the FairMarket Network of customer sites; - continuing to provide new e-commerce service offerings; - expanding into additional international markets; and - applying our expertise to further penetrate the business-to-business market. We are a Delaware corporation. We were formed in February 1997 and therefore have a limited operating history in the highly competitive market for e-commerce services. We have incurred net losses since we were formed. For the year ended December 31, 1999, we recognized total revenue of approximately $2.1 million and incurred a net loss of approximately $16.5 million. We have not yet achieved profitability and as of December 31, 1999, we had an accumulated deficit of approximately $18.5 million. In addition, we have received a report from our independent accountants containing an explanatory paragraph stating that our historical losses, negative cash flows from operations and net capital deficiency as of December 31, 1999 raise substantial doubt about our ability to continue as a going concern. Our executive offices are located at 500 Unicorn Park Drive, Woburn, Massachusetts 01801 and our telephone number is (781) 376-5600. Our web site is located at www.fairmarket.com. The information contained on our web site does not constitute part of this prospectus. The names FairMarket, FairMarket Network, AuctionPlace, AutoMarkdown, Quick Win and our logo are names and service marks that belong to us. We claim rights in other names and marks. This prospectus also contains the trademarks and trade names of other entities which are the property of their respective owners. THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED MARCH 10, 2000 [fairmarket LOGO] - -------------------------------------------------------------------------------- 5,000,000 Shares Common Stock - -------------------------------------------------------------------------------- This is the initial public offering of FairMarket, Inc. We are offering 5,000,000 shares of our common stock. Prior to this offering, there has been no public market for FairMarket's common stock. We currently estimate that the initial public offering price per share will be between $13.00 and $15.00. We have applied for quotation of the common stock on the Nasdaq National Market under the symbol "FAIM." SEE "RISK FACTORS" BEGINNING ON PAGE 4 TO READ ABOUT FACTORS YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> PER SHARE TOTAL <S> <C> <C> Initial public offering price $ $ Underwriting discount $ $ Proceeds, before expenses, to FairMarket $ $ </TABLE> If the underwriters sell more than 5,000,000 shares of common stock, the underwriters have the option to purchase up to an additional 750,000 shares from FairMarket at the initial public offering price less the underwriting discount. The underwriters expect to deliver the shares to purchasers on , 2000. DEUTSCHE BANC ALEX. BROWN ROBERTSON STEPHENS U.S. BANCORP PIPER JAFFRAY PROSPECTUS DATED , 2000. THE OFFERING Shares offered by FairMarket....... 5,000,000 shares Common stock to be outstanding after this offering.............. 26,556,111 shares(1) Estimated net proceeds to FairMarket....................... $63,800,000 Use of proceeds.................... For general corporate purposes, including working capital, hiring personnel, capital expenditures, expansion of sales and marketing activities and development of technology. Proposed Nasdaq National Market symbol........................... FAIM Risk factors....................... See "Risk Factors" for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock. - ------------------------- (1) The number of shares of our common stock that will be outstanding after this offering is based on 5,243,226 shares of common stock and 16,312,885 shares of convertible preferred stock (which will convert into a total of 16,312,885 shares of common stock at the closing of this offering) outstanding as of December 31, 1999. It excludes: - any shares of common stock to be issued upon exercise of the overallotment option granted to the underwriters; - 3,711,249 shares of common stock issuable upon exercise of employee stock options outstanding as of December 31, 1999; - 188,487 shares of common stock available for future grant under our employee stock option plans as of December 31, 1999; - 5,225,000 shares of common stock issuable upon exercise of warrants outstanding as of December 31, 1999 that are currently exercisable; and - 595,000 shares of common stock issuable upon exercise of a performance warrant outstanding as of December 31, 1999 that is not currently exercisable. Inside Front Cover Graphics Text: Who we are. FairMarket SM provides outsourced, networked online auction services for companies that desire to develop or enhance their Internet marketplaces. [Logo of FairMarket] Text: What we do. We develop, host and maintain private-label online auction sites for business merchants, Internet portal sites and other companies that have a presence on the web. We host these auction sites on our central operating system, which gives us the ability to aggregate listings of goods and services available for sale on each of our customers' auction sites and make those listings available for display and sale on auction sites of other FairMarket customers. We refer to this network of customer auction sites as the FairMarket Network. Gatefold Graphics Text: The customers depicted on this page are representative of our customers based on contribution to revenue. No single customer has accounted for more than 10% of our revenue in 1999 or 2000. [Logo of FairMarket in the center of the page. The FairMarket logo is surrounded by the logos of our clients: Lycos, Alloy Online, msn, CBS SportsLine, Vh1.com, citysearch.com. Zones@auction, Xoom.com, Quokkasports, Outpost.com, New Line Cinema, CompUSA, autobytel.com, Excite and boston.com. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The tables below present summary financial data of FairMarket which should be read together with our financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" presented elsewhere in this prospectus. The following table sets forth our statement of operations data for the periods presented. The unaudited pro forma information in the following table gives effect, as of December 31, 1999, to the issuance of 16,312,885 shares of common stock upon the conversion of all of our outstanding preferred stock into common stock immediately prior to the closing of this offering. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ---------------------------- 1997(1) 1998 1999 ------- ------- -------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue..................................................... $ 3 $ 4 $ 2,121 Operating expenses: Cost of revenue, exclusive of $83 reported below as equity related charges......................................... -- -- 1,051 Sales and marketing, exclusive of $4,734 reported below as equity related charges.................................. 232 675 3,341 Advertising expense....................................... 47 8 4,782 Development and engineering, exclusive of $330 reported below as equity related charges......................... 94 314 1,960 General and administrative, exclusive of $175 reported below as equity related charges......................... 234 426 2,690 Equity related charges.................................... -- -- 5,322 ------ ------- -------- Total operating expenses................................ 607 1,423 19,146 ------ ------- -------- Loss from operations........................................ (604) (1,419) (17,025) Interest income, net........................................ 3 31 516 ------ ------- -------- Net loss.................................................... $ (601) $(1,388) $(16,509) ====== ======= ======== Basic and diluted net loss per share........................ $(0.15) $ (0.30) $ (3.30) ====== ======= ======== Shares used in computing basic and diluted net loss per share..................................................... 4,073 4,571 5,010 Unaudited pro forma basic and diluted net loss per share.... $ (1.07) ======== Shares used in computing pro forma basic and diluted net loss per share............................................ 15,449 </TABLE> - ------------------------- (1) Period from February 20, 1997 (date of inception) to December 31, 1997. The following table sets forth a summary of our balance sheet at December 31, 1999: - on an actual basis; - on a pro forma basis giving effect to: (1) the issuance of 16,312,885 shares of common stock upon the conversion of all of our outstanding preferred stock into common stock immediately prior to the closing of this offering; (2) the expiration of a put option on 2,500,000 shares of our Series D Convertible Preferred Stock (which will convert into 2,500,000 shares of common stock) upon the closing of this offering; and (3) the receipt of $5.0 million from Excite, Inc. due upon the closing of this offering. See Note 6 to the financial statements included elsewhere in the prospectus; and - on a pro forma as adjusted basis to reflect the preceding pro forma adjustments and the sale of 5,000,000 shares of common stock in this offering, assuming an initial public offering price of $14.00 per share and after deducting underwriting discounts and commissions and our estimated offering expenses of $6.2 million. <TABLE> <CAPTION> DECEMBER 31, 1999 ------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- ----------- ----------- (UNAUDITED) <S> <C> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and marketable securities............ $13,079 $18,079 $81,879 Working capital............................................. 12,304 17,304 81,104 Total assets................................................ 20,071 25,071 88,871 Total stockholders' equity.................................. (1,118) 21,382 85,182 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001054131_turnstone_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001054131_turnstone_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, especially "Risk Factors" beginning on page 5. Unless otherwise indicated, this prospectus assumes that the underwriters do not exercise their option to purchase additional shares in this offering. In addition, except as otherwise indicated, all information in this prospectus reflects a two-for-one split of our common stock paid on August 23, 2000 in the form of a stock dividend to stockholders of record on August 9, 2000. TURNSTONE SYSTEMS, INC. We are a leading provider of products that enable local exchange carriers to rapidly deploy and efficiently maintain digital subscriber line, or DSL, services. Our products enable the automation and remote control of installation, qualification and maintenance of copper telephone lines. The Copper CrossConnect CX100, our first and only volume product, enables local exchange carriers to rapidly and efficiently deploy high speed digital services on existing copper telephone lines. The CX100 is currently being installed in telephone company central offices by communications service providers to speed their deployment of DSL services. We began shipping our CX100 in the first quarter of 1999, and, as of August 21, 2000, we had shipped more than 10,000 CX100s. We sell our CX100 through our direct sales force and through an original equipment manufacturer relationship with Lucent Technologies, who has chosen to sell the CX100 as a co-branded system. Our customers include leading voice and data competitive local exchange carriers located in the United States and internationally, including Covad Communications, Digital Broadband Communications, First:telecom plc, Lucent, Mpower Communications (formerly MGC Communications), Network Access Solutions, Northpoint Communications, Qwest Communications International Inc. (formerly U.S. West), Rhythms NetConnections and Riodata GmbH. A competitive local exchange carrier is a company that, following the U.S. Telecommunications Act of 1996 or similar legislation in other countries, is authorized to compete in a local communications services market. In contrast, an incumbent local exchange carrier is a communications company that held an exclusive license to offer local telephone services prior to the U.S. Telecommunications Act of 1996 or similar legislation in other countries. OUR INDUSTRY We believe that Internet content and the number of users accessing the Internet will continue to grow rapidly. As more users access more content, the ability to connect to the Internet at high speeds is becoming increasingly important for users. DSL networks provide high-speed access services over existing telephone lines. These copper telephone lines, commonly referred to as the local loop, were installed as part of analog telephone networks developed and deployed over the past 100 years to carry voice traffic, and frequently require qualification and preparation to support DSL deployment. To date, DSL deployment and maintenance have been difficult, expensive and labor intensive. We believe widespread deployment of competitive DSL services requires a shift from labor-intensive processes to new infrastructure equipment providing for the automation and remote management of line installation, qualification and maintenance. OUR SOLUTION AND STRATEGY We believe that our CX100 and CrossWorks software represent the first commercially available solution specifically designed for the automation and remote control of installation, qualification and maintenance of copper telephone lines for DSL service. With our solution in place, local exchange carriers can rapidly and efficiently deploy DSL services. THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION. DATED SEPTEMBER 12, 2000. 4,000,000 Shares <TABLE> <S> <C> <C> [TURNSTONE SYSTEMS, INC. LOGO] TURNSTONE SYSTEMS, INC. </TABLE> Common Stock ------------------------- Turnstone Systems, Inc. is offering 3,500,000 of the shares to be sold in the offering. The selling stockholders identified in this prospectus are offering an additional 500,000 shares. Turnstone Systems will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders. The common stock is quoted on the Nasdaq National Market under the symbol "TSTN". The last reported sale price of the common stock on September 8, 2000 was $51 7/8 per share. See "Risk Factors" beginning on page 5 to read about factors you should consider before buying shares of the common stock. ------------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------- <TABLE> <CAPTION> Per Share Total --------- ----------- <S> <C> <C> Initial price to public..................................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to Turnstone Systems............. $ $ Proceeds, before expenses, to the selling stockholders...... $ $ </TABLE> To the extent the underwriters sell more than 4,000,000 shares of common stock, the underwriters have the option to purchase up to an additional 600,000 shares from certain of the selling stockholders at the initial price to public less the underwriting discount. ------------------------- The underwriters expect to deliver the shares in New York, New York on September , 2000. GOLDMAN, SACHS & CO. DAIN RAUSCHER WESSELS DEUTSCHE BANC ALEX. BROWN ROBERTSON STEPHENS U.S. BANCORP PIPER JAFFRAY ------------------------- Prospectus dated September , 2000. The benefits of our solution include: - RAPID AND EFFICIENT DSL DEPLOYMENT. Our CX100 enables carriers to remotely identify and qualify any copper telephone line in their network, without the need for on-site labor. - IMPROVED NETWORK RELIABILITY. The CX100 improves network reliability and availability and allows service to be restored rapidly in the event of failure in DSL equipment, enabling local exchange carriers to offer guaranteed levels of service. - AUTOMATED OPERATIONS. Our CrossWorks software operates in conjunction with the CX100 to automate the collection, analysis and archiving of information regarding subscribers, line quality, test histories and other information. - COMPATIBLE WITH ALL SERVICES AND PLATFORMS AND IN LINE SHARING ARRANGEMENTS. The CX100 is designed to be compatible with all types of services delivered on copper telephone lines and all types of DSL access multiplexers. A DSL access multiplexer is a network device, usually located at a telephone company's central office, that receives signals from multiple DSL connections and puts the signals on a larger, high-speed transmission line. A single CX100 may be deployed with multiple DSL access multiplexers from a variety of vendors. The CX100 can provide optional integrated signal splitting functionality and operate in a line sharing arrangement where incumbent local exchange carriers and competitive local exchange carriers share the existing subscriber line. The following are key elements of our strategy: - increase our penetration of competitive local exchange carriers and incumbent local exchange carriers in the United States and internationally and penetrate new markets as they emerge; - enhance product offerings to provide better value to existing and new customers; - leverage relationships with original equipment manufacturers and complementary vendors; and - outsource manufacturing of our products to lower manufacturing costs and enhance flexibility. RECENT DEVELOPMENTS PARAGON ACQUISITION On August 8, 2000, we completed the acquisition of Paragon Solutions Limited, a privately-held New Zealand company. Paragon is an engineering design services company that specializes in the design of telecommunications services products. In connection with this acquisition and in exchange for all outstanding ordinary shares of Paragon, the former shareholders of Paragon received $5.0 million in cash on the closing date. On the first anniversary of the closing date, they are entitled to receive an additional $2.5 million and a further $2.5 million if certain conditions are met. As a result of the acquisition, Paragon became a wholly-owned subsidiary of Turnstone Systems. CORPORATE INFORMATION We were incorporated in Delaware in January 1998. Our principal executive offices are located at 2220 Central Expressway, Santa Clara, California 95050, and our telephone number is (408) 907-1400. We have registered Turnstone Systems, the Turnstone Systems logo and Copper CrossConnect CX100 as trademarks. Each trademark, trade name or service mark of any other company appearing in this prospectus belongs to its holder. THE OFFERING Shares offered by Turnstone Systems... 3,500,000 shares Shares offered by the selling stockholders.......................... 500,000 shares Shares to be outstanding after the offering.............................. 64,309,452 shares Use of proceeds....................... For general corporate purposes, including working capital and capital expenditures and potential acquisitions of, or investments in, complementary businesses, technologies and products. Nasdaq National Market symbol......... "TSTN" The total number of shares outstanding after the offering is based on information as of June 30, 2000. It excludes as of June 30, 2000: - 6,546,634 shares of common stock issuable upon exercise of options outstanding under our 1998 stock plan at a weighted average exercise price of $2.36 per share, assuming certain of the selling stockholders have acquired the 57,500 shares offered by them pursuant to exercises of options outstanding under our 1998 stock plan concurrently with the closing of this offering; - 3,082,000 shares of common stock issuable upon exercise of options outstanding under our 2000 stock plan at a weighted average exercise price of $53.38 per share; - 7,494,000 shares available for future issuance under our 2000 stock plan; - 1,000,000 shares available for issuance under our 2000 employee stock purchase plan. It also excludes as of August 31, 2000: - 1,901,200 shares of common stock underlying options that we have committed to issue under our 2000 nonstatutory stock plan; and - 2,098,800 shares available for issuance under our 2000 nonstatutory stock plan. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> PERIOD FROM JANUARY 2, 1998 SIX MONTHS ENDED (INCEPTION) TO YEAR ENDED JUNE 30, DECEMBER 31, DECEMBER 31, ------------------ 1998 1999 1999 2000 --------------- ------------ ------- ------- (UNAUDITED) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenues............................. $ -- $27,196 $ 5,671 $64,160 Gross profit............................. -- 14,837 2,585 38,328 Operating income (loss).................. (4,941) 51 (2,379) 20,555 Net income (loss)........................ (4,749) (232) (2,296) 13,637 Basic net earnings (loss) per share of common stock(1)........................ $ (1.99) $ (0.03) $ (0.34) $ 0.31 Diluted net earnings (loss) per share of common stock(1)........................ $ (1.99) $ (0.03) $ (0.34) $ 0.21 Weighted-average shares of common stock outstanding used in computing basic net earnings (loss) per share of common stock(1)............................... 2,390 8,474 6,800 44,108 Weighted-average shares of common stock outstanding used in computing diluted net earnings (loss) per share of common stock(1)............................... 2,390 8,474 6,800 64,234 </TABLE> ------------------------- (1) See Note 2 of the Notes to Financial Statements for an explanation of the determination of the shares used to compute net earnings (loss) per share of common stock. The "As Adjusted" balance sheet data below reflect the application of the estimated net proceeds from the sale of our common stock at an assumed initial price to public of $51 7/8 per share, after deducting an assumed underwriting discount and estimated offering expenses. <TABLE> <CAPTION> JUNE 30, 2000 ----------------------- ACTUAL AS ADJUSTED -------- ----------- (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 55,254 $226,738 Working capital............................................. 115,860 287,344 Total assets................................................ 144,879 316,363 Long-term obligations under capital leases, net of current portion................................................... 125 125 Stockholders' equity........................................ 121,802 293,286 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001054298_ask_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001054298_ask_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE DISCUSSION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISK AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. THE COMPANY Ask Jeeves has developed and deployed an online personal service infrastructure to provide real-time access to information, products and services. Our online personal service infrastructure allows companies to create an intuitive interaction with their customers. We accomplish this by connecting Web users to answers through easy-to-use services that include automated search, natural language question answering, intelligent advisor technology and live help. We believe that by providing users with a more intuitive, relevant and flexible way to access information online, companies will be able to maximize the returns on their Web-based strategies through better customer targeting and acquisition, increased conversion and retention rates, lowered support costs and access to customer data. Key elements of our strategy are to extend our reach in corporate markets, introduce new technologies and services, provide customer insight, increase awareness of the Ask Jeeves brand, expand our syndication business and expand our international presence. Our online personal service infrastructure is built on proprietary technology combined with human intelligence to create an interaction centered on understanding users' specific needs and interests and connecting them to the most relevant information, products and services. We introduced Jeeves Answers, our natural language question answering service, on Ask Jeeves at Ask.com in 1997 to provide Web users with a more satisfying and productive experience and to help companies better target and acquire customers. In 1998, we launched a customized service to develop and implement Jeeves Answers on corporate Web sites to help companies better acquire, convert and retain customers. In 1999, we expanded our suite of services to include Jeeves Advisor and Jeeves Live which permit our corporate customers to offer a decision advisory process and real-time interaction with a live representative. In February 2000, we added Jeeves Search, a popularity-based automated search technology that uses the collective queries and Web site selections of users to deliver relevant results across the Internet or on a corporate Web site. Our services are built on a flexible, scalable architecture with an information gathering system that collects users' questions and selections across Ask Jeeves-enabled Web sites. We store and analyze the information we collect to improve the performance of our services and to deliver user insight to our corporate customers. We deliver our online personal service infrastructure through our Web Properties and Syndication Group and our Corporate Services Group. Our Web Properties and Syndication Group delivers potential customers to companies' Web sites through a combination of advertising, sponsorships, listing and shopping services available on Ask.com and DirectHit.com. We have recently added a syndication service, whereby we syndicate our services to generate traffic to our Web sites. This service also includes our existing licensing arrangements with portals, such as AltaVista and Netscape. Currently, we reach millions of Web users through our Web Properties and Syndication Group, enabling companies to reach a broad set of potential customers. Our Corporate Services Group develops and maintains customized automated search, natural language question answering, intelligent advisor and live help services on corporate Web sites. We believe our corporate services help companies convert shoppers to buyers, reduce support costs, gain consumer insight and improve customer retention. The Corporate Services Group provides these services on an outsourced basis with little involvement from our corporate customers' technical personnel. Through syndication, we are able to license our technology and our knowledge base to portals, Web sites and media companies so that they can provide their users with an easier and more intuitive way to find the information, products and services such users need. Syndication allows us to expand the reach of our interactive network and increase revenues without expending large amounts of resources. In November 1999, we acquired Net Effect Systems, Inc., a provider of a live help service that enables real-time, text-based communication between a company and its online customers. In February 2000, we acquired Direct Hit Technologies, Inc., a leading provider of technology that aggregates and organizes online content to enable users to quickly find relevant and accurate information, products and services. We believe that the addition of online live help technology and popularity-based search technology to our natural language question answering technology will increase the likelihood that users will find more relevant answers and will do so more efficiently. In the fourth quarter of 1999 we created Ask Jeeves International, Inc., a wholly-owned subsidiary, to make our interactive network accessible worldwide. Central to these efforts is customizing our interactive network for both language and cultural differences. We were incorporated in California in June 1996 and reincorporated in Delaware in June 1999. Our principal executive offices are located at 5858 Horton Street, Suite 350, Emeryvillle, California 94608, and our telephone number is (510) 985-7400. Our World Wide Web site address is www.Ask.com. The information in the Web site is not incorporated by reference into this prospectus. THE OFFERING <TABLE> <S> <C> Common Stock offered by selling stockholders............................... 4,207,893 shares Common Stock offered by us................... 0 Common Stock to be outstanding after the offering................................... 35,623,335 shares (1) Use of Proceeds.............................. We will not receive any proceeds from the sale of common stock by the selling stockholders. Nasdaq National Market symbol................ ASKJ Risk Factors................................. You should read the "Risk Factors" section, beginning on page 6, as well as the other cautionary statements, risks and uncertainties described in this prospectus so that you understand the risks associated with an investment in the common stock. Concurrent common stock offering............. Concurrently with this common stock offering and by separate prospectuses, the selling stockholders and additional selling stockholders are selling additional shares. Upon completion of the offerings, certain selling stockholders will have sold their entire beneficial ownership of our common stock. </TABLE> ------------------------ (1) Excludes (a) 6,704,673 shares of common stock issuable upon the exercise of options outstanding as of May 15, 2000, with a weighted average exercise price of $27.12 per share, (b) approximately 320,760 shares of common stock subject to outstanding options with a weighted average exercise price of $9.0105 per share assumed as part of the Direct Hit acquisition, (c) an aggregate of 3,665,779 shares of common stock reserved for future issuance under our stock option plans, (d) an aggregate of 286,850 shares of common stock reserved for future issuance under our 1999 Employee Stock Purchase Plan, and (e) 11,250 shares of common stock issuable upon the exercise of warrants outstanding as of March 31, 2000, with a weighted average exercise price of $14.00 per share. Includes 4,751,878 shares of common stock issued in connection with our acquisition of Direct Hit in February 2000 and 1,715,000 shares issued in connection with our public offering effective March 13, 2000. SUMMARY CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> PERIOD FROM JUNE 13, 1996 (INCEPTION) THREE MONTHS ENDED THROUGH YEAR ENDED DECEMBER 31, MARCH 31, DECEMBER 31, -------------------------------------- --------------------------- 1996 1997 1998 1999 1999 2000 -------------- --------- ----------- ------------ ------------ ------------ (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues........................... $ -- $ 22,603 $ 800,398 $ 22,026,796 $ 1,503,266 $ 17,757,131 Gross profit (loss)...................... -- 22,603 (598,994) 7,942,866 (372,390) 9,815,278 Operating loss........................... (107,797) (730,174) (6,966,362) (54,906,702) (6,052,096) (47,722,741) Net loss................................. (107,797) (724,639) (6,806,359) (52,929,226) $ (5,899,446) $(47,198,612) Basic and diluted net loss per share..... $ (.08) $ (.21) $ (.74) $ (2.64) $ (0.33) $ (1.48) ========= ========= =========== ============ ============ ============ Weighted average shares outstanding used in computing basic and diluted net loss per share.............................. 1,295,342 3,394,397 9,162,624 20,046,959 17,798,002 31,932,408 ========= ========= =========== ============ ============ ============ </TABLE> <TABLE> <CAPTION> AS OF ------------------------------------- DECEMBER 31, 1999 MARCH 31, 2000 ------------------- --------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents and short-term investments........ $ 51,530,227 152,274,111 Working capital............................................. 35,756,807 128,585,815 Total assets................................................ 76,164,089 654,808,229 Capital lease obligations, less current portion............. 2,350,760 1,966,247 Total stockholders' equity.................................. 41,851,363 604,620,990 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001054721_bsquare_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001054721_bsquare_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary highlights information that we present more fully elsewhere in this prospectus. You should read this entire prospectus carefully. BSQUARE CORPORATION We provide a broad range of products and services that facilitate the integration of Microsoft Windows operating systems into a variety of devices we call intelligent computing devices (ICDs), enhance the functionality of those devices, and accelerate their deployment into the marketplace. Original equipment manufacturers, semiconductor vendors, software developers, value added resellers, internet service providers and network service providers rely on our products and services to help bring customized intelligent computing devices and intelligent computing device applications to market in a timely fashion. We have been providing Windows CE-based software services since before the commercial release of Windows CE in September 1996, and therefore we believe that we offer a greater breadth and depth of Windows CE expertise than any of our current competitors. In addition, in late 1999, we began offering Windows NT Embedded integration services, thus expanding the breadth of our service offerings, and in January 2000, our acquisition of BlueWater Systems broadened our product line for developers of ICDs based on additional Windows operating systems including Windows 98, Windows 2000, Windows NT and Windows NT Embedded. Our acquisition of Mainbrace Corporation in May 2000 enables us to provide standard manufacturable designs of popular intelligent computing devices such as Webpads, Web-phones, Pocket PCs, E-books and portable data tablets, which together with our other products and services offer customers a broad range of solutions to rapidly bring products to market. Intelligent computing devices are an emerging class of products with sophisticated processing power that are designed for specific computing and communications applications. Examples of intelligent computing devices include television "set-top boxes," which sit on top of television sets and provide users with advanced cable TV services, sophisticated video gaming features and Internet access; handheld and palm-size PCs; gaming systems; handheld industrial data collectors; consumer "Internet appliances" such as kiosk terminals and navigational devices in cars and trucks; and Windows-based terminals, Webpads, E-books and Pocket PCs used both in the workplace and at home. Compared to traditional computers, intelligent computing devices are often less expensive and more adaptable in terms of their size, weight and shape, while still providing sophisticated computing and communications capabilities, including Internet connectivity. Increasingly, intelligent computing devices are able to connect directly to the Internet, either through wired or wireless telecommunications systems. As businesses and consumers increasingly use the Internet to transact business and access information and as demand for smaller and more mobile devices grows, original equipment manufacturers are developing new intelligent computing devices to better meet the needs of end users. Because of space constraints and other design and resource limitations inherent in the intelligent computing device environment, original equipment manufacturers require a computer operating system that is both scaleable and highly customizable, with lower system requirements than traditional PC operating systems. There are several different operating systems that can be used in intelligent computing devices. Windows CE, a versatile and highly adaptable operating system modeled after Microsoft Windows, is gaining market acceptance among original equipment manufacturers as an operating system that meets these requirements. As increased use of the Internet by consumers and businesses helps fuel the growth of the intelligent computing device market, we believe that the market for Windows CE will in turn benefit. In addition, the Windows NT Embedded operating system is used for "computerizing" larger, more complex devices with a need for real time functionality. Examples of devices for which Windows NT Embedded is SUBJECT TO COMPLETION, DATED SEPTEMBER 14, 2000 635,486 SHARES BSQUARE CORPORATION COMMON STOCK This prospectus relates to the public offering, which is not being underwritten, of 635,486 shares of our common stock which are held by some of our current shareholders. The prices at which such shareholders may sell the shares will be determined by the prevailing market price for the shares or in negotiated transactions. We will not receive any of the proceeds from the sale of the shares. Our common stock is quoted on the Nasdaq National Market under the symbol "BSQR." On September 5, 2000, the average of the high and low price for the common stock was $17.56. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE THE SECTION ENTITLED "RISK FACTORS" ON PAGE 5 OF THIS PROSPECTUS FOR CERTAIN RISKS AND UNCERTAINTIES THAT YOU SHOULD CONSIDER. ------------------------- Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. ------------------------- This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the securities covered by this prospectus, nor does it constitute an offer to or solicitation of any person in any jurisdiction in which such offer or solicitation may not lawfully be made. The date of this prospectus is September , 2000. designed include Windows-based terminals, office machine equipment such as printers, and telecommunications equipment such as routers and switching equipment. We develop products and provide services that facilitate the development of Windows CE-based intelligent computing devices. We generate revenue in four distinct ways. First, we provide software code-writing and related engineering services to Microsoft and semiconductor vendors to adapt Windows CE software to different microprocessors and to enhance Windows CE's user-specific features and functions. Second, we offer a comprehensive set of software products and services that help enable original equipment manufacturers to cost-effectively integrate Windows CE, NT Embedded and other Windows operating systems into their intelligent computing devices. These offerings include original equipment manufacturer adaptation kits, software development products, test programs and Microsoft Windows CE licensing, along with engineering and quality assurance services and training. Our service and product offerings are designed to ensure that Windows works properly with the original equipment manufacturer's computer boards, which are the internal hardware constituting the core of their intelligent computing devices. We also offer software engineering services for the integration of Window NT Embedded into ICDs, and for other Windows-based operating systems we offer the BlueWater Systems software development products. Third, we license a wide range of Windows-based software applications to original equipment manufacturers, value added resellers, Internet service providers, network service providers and intelligent computing device consumers to provide additional functions to Windows-based intelligent computing devices, such as printing and faxing capabilities, voice-over IP, remote device management and wireless wide area least cost routing. Fourth, we license standard manufacturing design of intelligent computing devices such as Webpads, Web-phones, Pocket PCs, E-books and portable data tablets and bundle our products and integration services for our customers. We intend to become a primary provider of products and services for facilitating the rapid and cost-efficient development of intelligent computing devices. Generally, an operating system provided by vendors in its original form will not be readily compatible with the increasingly wide variety of semiconductors and intelligent computing devices that are becoming available and, therefore, will need to be adapted in order to function. We refer to this process as "integration." The key elements of our strategy include building on our expertise as a provider of Windows-based integration services, expanding our strategic relationships with hardware and software vendors, maintaining and expanding our relationship with Microsoft, developing additional software applications, providing a comprehensive solution capability for rapid development and deployment of intelligent computing devices and expanding our international presence. We were incorporated in the State of Washington in July 1994. Our principal executive offices are located at 3150 139th Avenue S.E., Suite 500, Bellevue, Washington 98005, and our telephone number is (425) 519-5900. Our World Wide Web address is www.bsquare.com. Information on our website does not constitute a part of this prospectus. THE OFFERING Common stock offered by selling shareholders................................ 635,486 shares Common stock to be outstanding after this offering.................................... 34,298,445 shares Use of proceeds............................. We will not receive any of the proceeds from the sale of the shares. Nasdaq National Market Symbol............... BSQR Please see "Capitalization" on page 15 for a more complete discussion regarding the outstanding shares of common stock, options to purchase common stock and other related matters. SUMMARY CONSOLIDATED FINANCIAL DATA The following summary consolidated financial data should be read in conjunction with our consolidated financial statements and related notes, as well as the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," found elsewhere in this prospectus. Additionally, on January 5, 2000 we acquired BlueWater Systems, Inc. in a transaction accounted for as a pooling of interests. All of our financial data presented in the consolidated financial statements and results of operations have been restated to include the historical financial information of BlueWater Systems, Inc. as if it had always been a part of BSQUARE. <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------------- ------------------ 1995 1996 1997 1998 1999 1999 2000 ----------- ----------- ------- ------- ------- ------- ------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue............................ $ 1,840 $ 5,026 $15,914 $25,937 $41,406 $19,261 $28,992 Gross profit....................... 1,033 3,546 10,099 14,574 21,897 10,382 15,222 Income (loss) from operations...... 815 2,002 4,815 3,140 1,873 1,450 (1,665) Net income (loss).................. $ 816 $ 2,005 $ 4,003 $ 2,300 $ 1,695 $ 871 $(1,480) ======= ======= ======= ======= ======= ======= ======= Basic earnings (loss) per share.... $ 0.04 $ 0.09 $ 0.18 $ 0.12 $ 0.08 $ 0.04 $ (0.05) ======= ======= ======= ======= ======= ======= ======= Shares used in computation of basic earnings (loss) per share........ 21,261 22,367 21,661 18,633 21,430 18,467 32,821 ======= ======= ======= ======= ======= ======= ======= Diluted earnings (loss) per share............................ $ 0.04 $ 0.09 $ 0.18 $ 0.08 $ 0.06 $ 0.03 $ (0.05) ======= ======= ======= ======= ======= ======= ======= Shares used in computation of diluted earnings (loss) per share............................ 21,261 22,367 22,042 27,736 30,800 28,945 32,821 ======= ======= ======= ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> JUNE 30, 2000 ------------- (UNAUDITED) <S> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments......... $ 79,773 Working capital........................................... 73,048 Total assets.............................................. 113,742 Shareholders' equity...................................... 99,478 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001054992_formus_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001054992_formus_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summarizes information in other sections of our prospectus, including our consolidated financial statements and the notes to those statements. This summary does not contain all of the information that you should consider before investing in our Class A common stock. You should read the entire prospectus carefully, especially the risks of investing in the shares discussed under "Risk Factors." References to "we," "our" and "us" mean Formus Communications, Inc. and our subsidiaries and affiliates. Certain currency amounts listed in this prospectus have been converted into U.S. dollars at the applicable exchange rate in effect on March 31, 2000. References to common stock mean our Class A common stock and our Class B common stock unless otherwise indicated. FORMUS COMMUNICATIONS We provide broadband Internet and data communications services to business customers in selected European markets. We also provide virtual private networks and are developing a broad range of other value-added services for our customers. We currently deliver broadband services over our fixed wireless networks using point-to-multipoint and point-to-point technologies. We also plan to deliver our services using digital subscriber line technology, known as DSL, to both business and residential customers. We believe that substantial opportunities exist to provide these and other broadband services throughout Europe where incumbent providers have not met market demand. Our wireless networks use radio spectrum, which is regulated by government agencies and licensed to service providers. We have been awarded spectrum licenses in Germany, Poland, Finland, Norway, Spain and Switzerland and expect to be awarded a license in Ireland. We also have trial licenses in France, Hungary, Belgium and Ireland that allow us to provide services on a non-commercial basis prior to conclusion of the licensing processes in those countries. We have spectrum license applications pending in six European countries and have begun the application process in four other European countries that have initiated their licensing procedures. In addition to our spectrum licenses, we hold nationwide telecommunications licenses that allow us to provide voice and data transmission services over landline networks in Austria and Germany. We are launching DSL services in Germany, Denmark and Finland, where access to the incumbents' local network is available. In light of recent European Union (EU) published communications, we expect regulators to increase access to incumbent telecommunication providers' local networks, which will facilitate our expansion of DSL offerings in other European countries. The growth of the Internet, e-commerce and bandwidth-intensive applications has dramatically increased demand for broadband telecommunications connections. International Data Corporation predicts that Internet access revenues will grow 27.1% annually in Western Europe, from $5.0 billion in 1999 to $13.0 billion in 2003. Until recently, Europe's telecommunications markets have been dominated by government-owned telephone monopolies that generally have not provided broadband access at competitive rates, if at all. OUR PRODUCTS AND SERVICES We offer bundled and stand-alone communications services that can be tailored to our customers' needs. Our products and services include: - high-speed always-on and dial-up Internet access; - high-capacity data transport via local area and wide area networks; - virtual private networks; - e-mail services; - Internet domain name registration; and - national, regional and international long distance voice services. To date, we have commenced commercial operations in Germany and Poland. In Germany, we are currently offering bundled Internet access and switched long-distance voice services and hold spectrum WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE PERMITTED BY US FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING THIS PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR LEGAL. SUBJECT TO COMPLETION -- MAY 5, 2000. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTUS - ------------, 2000 [FORMUS LOGO] SHARES OF CLASS A COMMON STOCK - -------------------------------------------------------------------------------- FORMUS COMMUNICATIONS: - We provide broadband Internet and data communications services to business customers in selected European markets. - 720 South Colorado Blvd. Suite 600 North Denver, Colorado 80246 (303) 504-3200 PROPOSED SYMBOL AND MARKETS: - FMUS - Nasdaq National Market - We also intend to list on a European exchange THE OFFERING: - - We are offering shares of our Class A common stock. - - The underwriters have an option to purchase an additional shares from us to cover over-allotments. - - This is our initial public offering, and no public market currently exists for our Class A common stock. - - We anticipate that the initial public offering price of the shares will be between $ and $ per share. - - Closing: , 2000 <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------ Per Share Total ------------------------------------------------------------------------------------------------ <S> <C> <C> Public offering price: $ $ Underwriting fees: Proceeds to Formus: ------------------------------------------------------------------------------------------------ </TABLE> This investment involves risks. See "Risk Factors" beginning on page 5. - -------------------------------------------------------------------------------- NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS DETERMINED WHETHER THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. NOR HAVE THEY MADE, NOR WILL THEY MAKE, ANY DETERMINATION AS TO WHETHER ANYONE SHOULD BUY THESE SECURITIES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- DONALDSON, LUFKIN & JENRETTE SALOMON SMITH BARNEY --------------------- CREDIT SUISSE FIRST BOSTON DLJDIRECT INC. licenses in areas that represent approximately 45% of the country's population. We hold spectrum licenses for the ten largest cities in Poland and currently have 117 business customers in Warsaw to whom we provide a mix of broadband Internet access, leased capacity over wireless links and virtual private networks. As of April 20, 2000, we have agreements to service an additional 121 businesses. CEL Polska, which we currently co-manage and have agreed to acquire, subject to government approval, holds a license that allows it to establish specific point-to-point wireless broadband connections upon the filing of requisite documentation. CEL Polska uses this license to provide leased capacity on high frequency broadband connections to transport data for seven telecommunications providers. In France, Hungary and Belgium, we are using trial licenses to offer private voice services, computer networking, broadband Internet access and Internet-based voice services on a non-commercial basis over wireless networks. We have a pending offer to purchase the right to use capacity on Global Crossing's pan-European and trans-Atlantic fiber optic network, which will enhance the quality and reliability of our broadband services and lower our operating costs. This network will provide us with 155 Mbps (megabits per second) of capacity between Dublin and eight European countries and 620 Mbps of redundant capacity in a trans-Atlantic ring. We expect to offer services in Denmark, Finland, Ireland, Norway and Switzerland in 2000 and in Spain in 2001. In addition, we have a 12.6% interest in VeloCom Inc., which provides competitive voice services in Brazil and broadband services in Argentina over wireless networks. OUR BUSINESS STRATEGY We intend to capitalize on the increasing demand among business customers for Internet access and broadband telecommunications services to grow our revenues. To meet this objective, we will focus on the following strategies: - rapidly and cost-effectively deploy our wireless and DSL networks; - aggressively expand the base of customers connected to our broadband networks; - serve as the single-source provider of broadband Internet, communications and information services to our customers; - retain experienced local management teams; - obtain additional spectrum and telecommunications licenses; - develop strategic relationships with industry leaders and local partners; and - pursue strategic acquisitions to broaden our service offerings. OUR HISTORY We were incorporated in October 1996, and have incurred significant losses to date as we have focused on forming strategic partnerships, acquiring telecommunications licenses and building out our networks. We commenced commercial operations in Poland in May 1999 and in Germany in July 1999 and have generated approximately $2.3 million in revenues from operations through December 31, 1999. From the date of our inception through December 31, 1999, we incurred cumulative net losses of approximately $60.0 million, and we expect to continue to incur losses for the foreseeable future. We funded losses through the sale of approximately $203.1 million of equity securities through March 31, 2000. Additionally, in May 2000, we issued or agreed to issue a total of $175.0 million of senior preferred stock and agreed to issue $45.0 million of senior secured notes. OUR PRINCIPAL EXECUTIVE OFFICES Formus Communications, Inc. 720 S. Colorado Boulevard, Suite 600 North Denver, Colorado 80246 Telephone: (303) 504-3200 [MAP OF EUROPE WITH ICONS DEPICTING THE TYPES OF SERVICES (PHONE SERVICE, DSL, FIXED WIRELESS ACCESS (FWA), FWA TEST AND POINT-TO-POINT) OFFERED OR TO BE OFFERED BY THE COMPANY IN THE RESPECTIVE COUNTRIES WHERE THE COMPANY AND ITS AFFILIATES HAVE LICENSES. INSET MAP SHOWING LOCATION OF PROPOSED EUROPEAN BACKBONE NETWORK.] THE OFFERING Class A common stock offered.................... shares Common stock to be outstanding after this offering: Class A common stock...................... shares Class B common stock...................... ____________ shares Total............ shares Our Class A common stock and Class B common stock are identical, except that our Class B common stock has no voting rights. Use of Proceeds............ We plan to use the net proceeds from this offering: - to redeem our senior secured notes; - to fund capital expenditures and operating losses associated with our rollout of telecommunications services; - to acquire additional telecommunications licenses; - for continued business development activities; - for business acquisitions; and - for general corporate purposes. Nasdaq National Market Symbol..................... FMUS European Exchange Symbol... To be determined Risk Factors............... You should review the "Risk Factors" section for a discussion of certain factors about us, the industry in which we operate and this offering that you should consider before buying our Class A common stock. The number of shares of our Class A common stock to be outstanding after this offering excludes 4,805,294 shares of common stock issuable upon the exercise of outstanding options, 1,772,492 shares reserved for future grants under our equity incentive plan and 1,550,000 shares to be issued upon the exercise of outstanding warrants. Generally, the information in this prospectus: - assumes there is no exercise of the underwriters' over-allotment option; - gives effect to the conversion of all outstanding shares of preferred stock into shares of common stock; and - gives effect to the conversion of all shares of preferred stock underlying outstanding warrants into shares of common stock. [Diagram illustrating fixed wireless radio technology, including a central network operations facility and the fibre connections to the Internet; microwave point to point and point to multipoint links; rooftop and tower hub stations; and, dedicated and multipoint channels for three types of customers.] SUMMARY CONDENSED CONSOLIDATED BALANCE SHEET DATA You should read this summary condensed consolidated balance sheet data together with our audited consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this prospectus. The following condensed consolidated balance sheet data as of December 31, 1998 and 1999 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The unaudited as adjusted column shows actual data, as adjusted to give effect to the issuance of our senior preferred stock and senior secured notes that has occurred or is scheduled to occur prior to the closing of this offering. The unaudited as further adjusted column shows actual data as adjusted for our issuance of the senior preferred stock and senior secured notes and as further adjusted to give effect to the sale of shares of our Class A common stock offered by us at an assumed initial public offering price of $ per share, the midpoint of the offering range, less underwriting fees and estimated offering expenses. <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 AS OF ----------------------------------- DECEMBER 31, AS FURTHER 1998 ACTUAL AS ADJUSTED ADJUSTED ------------ -------- ----------- ---------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> <C> <C> Cash, cash equivalents and short-term investments...................................... $22,887 $ 77,091 $293,716 $478,716 Restricted short-term investment................... -- 19,008 19,008 19,008 Telecommunications licenses, net................... 12,176 150,705 150,705 150,705 Investment in affiliate............................ -- 31,725 31,725 31,725 Goodwill, net...................................... -- 81,776 81,776 81,776 Total assets....................................... 54,146 403,174 621,574 804,799 Senior secured notes............................... -- -- 45,000 -- Long-term deferred tax liability(1)................ -- 70,769 70,769 70,769 Total liabilities.................................. 4,154 102,752 147,752 102,752 Minority interests in our subsidiaries............. 10,564 2,560 2,560 2,560 Preferred stock and total stockholders' (deficit) equity........................................... $39,428 $297,862 $471,262 $699,487 </TABLE> - --------------- (1) This long-term deferred tax liability results from the use of purchase accounting in connection with the acquisition of the remaining interest in our German operations as discussed in Note 13 to our consolidated financial statements. Our statement of operations data included later in this prospectus shows our history of losses from operations since our inception. [Map of Europe identifying the Formus markets, by country and city, and offered services.]
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001056386_internap_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001056386_internap_prospectus_summary.txt
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING OUR COMPANY AND THE COMMON STOCK BEING SOLD IN THIS OFFERING, RISKS AFFECTING OUR COMPANY AND OUR FINANCIAL STATEMENTS AND THE NOTES TO OUR FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. INTERNAP NETWORK SERVICES CORPORATION InterNAP is a leading provider of fast, reliable and centrally managed Internet connectivity services targeted at businesses seeking to maximize the performance of mission-critical Internet-based applications. Customers connected to one of our Private-Network Access Points, or P-NAP facilities, which are our patented network routing infrastructures coupled with our proprietary ASsimilator routing technology, have their data optimally routed to and from destinations on the Internet in a manner that minimizes data loss, resulting in better performance. We offer our high performance Internet connectivity services at dedicated line speeds of 1.5 Megabits per second, or Mbps, to 155 Mbps to customers desiring higher transmission speeds, lower instances of data loss and greater quality of service than they could receive from conventional Internet connectivity providers. As of December 31, 1999, we provided consistent high performance Internet connectivity services to 247 customers, including Akamai Technologies, Amazon.com, Beyond.com, Bizrate.com, Datek Online, Fidelity Investments, Go2Net, MindSpring, The Nasdaq Stock Market, Network Associates, The Street.com, Travelocity, Warner Bros. Online, Waterhouse Securities and WebTV. THE OPPORTUNITY The Internet is rapidly becoming a critically important medium for communications and commerce. However, businesses are unable to benefit from the full potential of the Internet due, in part, to slow and unreliable data transfers. This results primarily from the way Internet backbone networks exchange data, current routing technologies and the Internet's architecture, which was not designed to support today's large volumes of traffic. To compound this problem, Internet traffic is expected to grow rapidly. In addition, widespread adoption of applications that rely on network quality require consistent, high speed data transfer. We believe the future of Internet connectivity services will be driven by providers that, through high performance Internet routing services, enable businesses to successfully execute their mission-critical Internet-based applications over the public network infrastructures. OUR SOLUTION We provide high performance Internet connectivity services through the deployment of P-NAP facilities. Our P-NAP facilities maintain high speed, dedicated connections to major global Internet backbone networks, such as AT&T, Cable & Wireless USA, Global Crossing, GTE Internetworking, ICG Communications, Intermedia, PSINet, Qwest Communications International, Sprint, UUNET and Verio. Our technology platform optimally routes our customers' data through these multiple backbone networks, generally bypassing Internet traffic congestion and reducing data loss that frequently occurs at Internet data exchange points known as public network access points and private peering points. As of January 20, 2000, we operated 13 P-NAP facilities which are located in the Atlanta, Boston, Chicago, Dallas, Denver, Los Angeles, Miami, New York, Philadelphia, San Jose, Seattle and Washington, D.C. metropolitan areas. We expect to have a total of 24 P-NAP facilities operational by the end of 2000. Our services provide the following key advantages: - HIGH PERFORMANCE CONNECTIVITY. We route our customers' traffic over the Internet in a way that we believe provides consistently greater speed and superior end-to-end control, predictability and reliability, than services offered by conventional Internet connectivity providers. - HIGHLY RELIABLE NETWORK ARCHITECTURE. P-NAP facilities are designed with a highly redundant network infrastructure, such that any of the Internet backbones connected to a P-NAP facility can be used to instantly reroute customers' data in the event of a backbone provider network outage. - SUPERIOR ROUTE OPTIMIZATION AND MANAGEMENT. Our proprietary routing technology and network management system provide us with data to manage and monitor network traffic and to offer economic settlements to backbone providers for the transfer of our customers' data. - SCALABILITY AND FLEXIBILITY. We manage each P-NAP facility independently and make connection upgrades locally as required with each backbone provider. This allows us to more readily scale our capacity as traffic levels increase, without the need to make uniform upgrades throughout our system of P-NAP facilities. - SUPERIOR CUSTOMER SERVICE AND SUPPORT. Our customers receive the benefit of our proprietary network monitoring and reporting tools and a single point of contact with our highly skilled engineers for support inquiries, network troubleshooting and diagnosis 24 hours a day, seven days a week. OUR STRATEGY Our objective is to be the leading provider of high performance Internet connectivity services that enable businesses to run mission-critical Internet-based applications over the public Internet and to establish and maintain the standard of quality for Internet connectivity services. To achieve this objective we intend to: - Enhance our core technologies to continue to provide the highest performance Internet connectivity services. - Expand our suite of service offerings to drive additional demand for our connectivity and satisfy our customers' needs. - Continue to provide superior customer service and support. - Expand our geographic coverage in key markets. - Continue to build our brand awareness. - Continue to target strategic markets. - Maintain backbone provider neutrality. RECENT DEVELOPMENTS EQUANT RELATIONSHIP. In December 1999, we entered into an agreement with Equant to assist us in our international expansion. Equant will help support the international deployment of our P-NAP facilities in exchange for the right to provide our high performance connectivity services for customers connected to its network. PREFERRED CO-LOCATION PROGRAM. In January 2000, we entered into agreements with leading co-location providers to offer our customers a high quality co-location solution. Under this program we will provide our customers with the ability to co-locate their equipment at various data centers throughout the country while still maintaining access to our high performance connectivity services. AVENTAIL RELATIONSHIP. In February 2000, we invested $6.0 million in Aventail Corporation. We also entered into a joint marketing agreement with Aventail that grants us certain limited exclusive rights to sell Aventail's managed extranet service and grants Aventail rights to sell our services. THE OFFERING <TABLE> <S> <C> Common stock offered by: InterNAP.................................... 3,000,000 shares Selling shareholders........................ 4,500,000 shares Total..................................... 7,500,000 shares Common stock to be outstanding after the offering...................................... 135,981,682 shares Use of proceeds................................. For working capital and general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol................... INAP </TABLE> The foregoing information is based on the number of shares of common stock outstanding as of February 29, 2000. This information does not include, as of February 29, 1999: - 16,160,981 shares subject to options with a weighted average exercise price of $9.65 per share; - 8,185,391 shares that could be issued under our stock plans; and - 1,688,912 shares subject to outstanding warrants with a weighted average exercise price of $5.79 per share. SUMMARY FINANCIAL DATA <TABLE> <CAPTION> PERIOD FROM INCEPTION (MAY 1, 1996) TO YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------ 1996 1997 1998 1999 -------------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues............................................. $ 44 $ 1,045 $ 1,957 $ 12,520 Total operating costs and expenses................... 961 2,455 8,907 64,751 Loss from operations................................. (917) (1,410) (6,950) (52,231) Net loss............................................. (959) (1,609) (6,973) (49,917) Basic and diluted net loss per share................. $(.14) $ (.24) $ (1.04) $ (1.31) Pro forma basic and diluted net loss per share....... $ (.15) $ (.46) Weighted average shares used in computing pro forma basic and diluted net loss per share............... 45,466 108,391 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ------------------------ ACTUAL AS ADJUSTED ---------- ----------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short term investments........... $205,352 $336,037 Total assets................................................ 245,546 376,231 Notes payable and capital lease obligations, less current portion................................................... 14,378 14,378 Total shareholders' equity.................................. 210,500 341,185 </TABLE> The as adjusted column reflects our sale of 3,000,000 shares of common stock at an assumed public offering price of $46.00 per share and the application of the estimated net proceeds of $130.7 million. We will not receive any of the proceeds from the sale of shares by the selling shareholders.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001056794_avanex_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001056794_avanex_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering and our consolidated financial statements and notes appearing elsewhere in this prospectus. Avanex designs, manufactures and markets fiber optic-based products, known as photonic processors, which are designed to increase the performance of optical networks. Our photonic processors offer communications service providers and optical systems manufacturers greater levels of performance and miniaturization, reduced complexity and increased cost-effectiveness as compared to current alternatives. We believe photonic processors will enable the next-generation, all-optical network, which is necessary to support the increasing demand for capacity, or bandwidth. The proliferation of the Internet and the increase in activities such as electronic commerce, the transmission of large data files, Internet-based businesses and telecommuting, have caused a significant increase in the volume of traffic across the communications infrastructure. According to Ryan, Hankin & Kent, a leading market research and consulting firm, Internet traffic will increase from 350,000 terabytes, or trillions of bytes, per month, at the end of 1999 to over 15 million terabytes per month in 2003. This market research suggests that, at the end of 1999, the volume of Internet data traffic will have surpassed the volume of voice traffic. In an effort to increase network capacity and performance, the transport layer, or medium over which the data traffic is transmitted, is currently being upgraded from electrical to optical transmission by many common carriers, including MCI, AT&T and Sprint. Despite the advances that have occurred in the existing communications infrastructure, there are still many challenges to deploying a next-generation, optical network, including: - the need to prevent an optical signal from degrading, a phenomenon known as attenuation, by converting it into an electrical signal and back into an optical signal at frequent intervals across a network; - the need to compensate for chromatic dispersion, a negative effect caused by different wavelengths of light traveling down the optical fiber at different velocities and reaching their destination at different times; - the need to carry increased amounts of data in each wavelength of light; - the high cost of the optical products needed for an optical network; and - the difficulty in deploying large pieces of optical equipment. Our PowerFilter and PowerMux products are designed to overcome the technological challenges, such as chromatic dispersion and attenuation, and the cost and deployment challenges inherent in optical networks. Our products are designed to enable the transmission of more data in a wavelength of light, at higher speeds and across greater distances in a network, than currently available optical technologies. Our customers can also optimize the utilization of limited network space because we miniaturize our products and combine multiple components in a single package. We design our products to work within existing network deployments, as well as in future optical networks. We believe our photonic processors enable communications service providers and optical systems manufacturers to maximize the capacity of optical networks to facilitate next generation services and applications, such as virtual private networking and business-to-business electronic commerce. Our objective is to be the leading provider of innovative, fiber optic-based solutions that enable our customers to deploy and optimize fiber optic networks. In order to achieve this objective, our strategy is to leverage our technology leadership and expertise to develop new products and expand customer relationships. We also intend to expand our manufacturing facilities, automate our manufacturing processes and extend awareness of our brand. Our marketing strategy is based on a push-pull approach. With our push approach, we target optical systems manufacturers that can buy our products and then resell them as part of their optical solutions. Using our pull approach, we target communications service providers that can create demand for our products by directly purchasing, or requiring that their systems incorporate, our products. We believe this approach will drive demand for our products and help enable the transition to the next-generation, all-optical network. THE OFFERING Common stock offered........................ 6,000,000 shares Common stock to be outstanding after this offering.................................... 62,529,320 shares Use of proceeds............................. We intend to use the net proceeds for general corporate purposes, including capital expenditures and working capital. See "Use of Proceeds." Proposed Nasdaq National Market symbol...... AVNX The above information is based on the number of shares of common stock outstanding as of December 31, 1999 and assumes the exercise of warrants to purchase 337,500 shares of common stock at an exercise price of $4.00 per share prior to the completion of this offering, the subsequent conversion of all of our outstanding preferred stock as of December 31, 1999 into an aggregate of 35,019,134 shares of common stock upon the completion of this offering and the sale of 769,230 shares of common stock to two corporate investors at a price of $13.00 per share for an aggregate of $9,999,990 in a private placement that will close contemporaneously with this offering. It excludes 3,401,427 shares of common stock issuable upon exercise of outstanding options with a weighted-average exercise price of $1.40 per share, 29,347 shares of common stock issuable upon exercise of an outstanding warrant with an exercise price of $3.83 per share, 1,245,117 shares of common stock reserved for future awards under our stock plans as of December 31, 1999 and an additional 7,500,000 shares reserved for future awards under our stock plans subsequent to December 31, 1999. It also excludes 525,000 shares of stock to be reserved for issuance under our Employee Stock Purchase Plan and 300,000 shares of stock to be reserved for issuance under our 1999 Director Option Plan. Both of these plans will become effective upon the completion of this offering. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED OCTOBER 24, 1997 ---------------------------- (INCEPTION) TO YEAR ENDED DECEMBER 31, DECEMBER 31, JUNE 30, 1998 JUNE 30, 1999 1998 1999 ---------------- ------------- ------------- ------------ (UNAUDITED) <S> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenue................................ $ -- $ 510 $ -- $ 10,916 Gross profit (loss)........................ -- (21) -- 2,722 Stock compensation expense................. 362 3,464 673 15,697 Total operating expenses................... 1,133 9,229 2,609 22,490 Loss from operations....................... (1,133) (9,250) (2,609) (19,768) Net loss................................... (1,137) (9,221) (2,607) (19,794) Net loss attributable to common stockholders............................. (1,137) (9,221) (2,607) (39,845) Pro forma basic and diluted net loss per common share (unaudited)................. $ (.39) $ (1.02) Weighted average shares used in computing pro forma basic and diluted net loss per common share (unaudited)................. 23,628 39,110 </TABLE> The following table presents our summary consolidated balance sheet data as of December 31, 1999. The pro forma as adjusted information reflects: - the assumed exercise of warrants to purchase 337,500 shares of common stock at an exercise price of $4.00 per share prior to this offering and the subsequent conversion of all of our outstanding preferred stock as of December 31, 1999 into an aggregate of 35,019,134 shares of common stock upon completion of this offering; - our sale of 6,000,000 shares of our common stock in this offering, at an assumed initial public offering price of $29.00 per share, after deducting estimated underwriting discounts and commissions and our estimated offering expenses; and - the sale of 769,230 shares of common stock to two corporate investors at a price of $13.00 per share for an aggregate of $9,999,990 in a private placement that will close contemporaneously with this offering. <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ------------------------ PRO FORMA ACTUAL AS ADJUSTED ------- ----------- (UNAUDITED) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $14,379 $185,524 Working capital............................................. 14,313 185,458 Total assets................................................ 28,152 199,297 Long-term obligations, excluding current portion............ 1,320 1,320 Redeemable convertible preferred stock...................... 30,408 -- Total other stockholders' equity (deficit).................. (10,498) 191,055 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001056923_datalink_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001056923_datalink_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information found elsewhere in the prospectus. Since this is only a summary, it does not contain all of the information that may be important to you. Before deciding whether to invest in our common stock, you should read the entire prospectus carefully, including the financial statements and related notes.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001057083_pc-tel-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001057083_pc-tel-inc_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..11ce9b8de31d5a05f197ee07b4caa7f93a189551
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. You should read the entire prospectus carefully before making an investment decision. This prospectus contains forward looking statements, which involve risks and uncertainties. PCTEL's actual results could differ materially from those anticipated in these forward looking statements as a result of the factors described under "Risk Factors" and elsewhere in this prospectus. PCTEL We are a leading developer and supplier of cost-effective, software-based connectivity solutions for data transmission in a wide range of communications environments. Our solutions enable high speed internet access and other communications applications through emerging digital subscriber line, wireless and other broadband networks as well as existing analog networks. Broadband networks enhance voice and data capabilities beyond that which is offered by the existing analog networks. Connectivity solutions refer to any method for connecting one circuit, network or computer to another. We have developed a proprietary software architecture that is easily upgradeable, minimizing the risk of technological obsolescence and enables widespread internet access and other communications applications through PCs and alternative internet access devices. We are one of the pioneers in developing host signal processing technology, a proprietary set of algorithms that enables cost-effective, software-based digital signal processing solutions. Host signal processing technology and the software architecture on which it is based utilize the computational and processing resources of a host central processor rather than requiring additional special-purpose hardware. Based on our own research and testing, the reduction of hardware components in our host signal processing architecture can reduce space requirements by up to 50% and power requirements by up to 70% compared to conventional hardware-based solutions. We believe our 1999 soft modem shipments represented 85% of the worldwide soft modem market based on projections from Cahners In-Stat Group. Various original equipment manufacturers, including Acer, Compaq, Dell, emachines, Fujitsu and Sharp, have integrated our soft modems into their products. In recent years, dramatic increases in business and consumer demand for multimedia information, entertainment and voice and data communication have resulted in a corresponding increase in demand for high speed remote access. The accelerated growth of content-rich applications, which demand high bandwidth, has changed the nature of information networks. High-speed connectivity is now a commonplace requirement for business, government, academic and home environments. These market trends have resulted in a significant increase in the demand for connectivity devices. International Data Corporation estimates that by 2003, the number of internet connectivity devices in use will grow to over 722 million. Our host signal processing architecture, which involves running software on a host computer rather than using dedicated processing hardware, allows us to quickly and cost-effectively capitalize on this rapid growth in demand for connectivity devices. We believe that we can use our intellectual property portfolio to readily adapt to the speed and design requirements of emerging connectivity technologies. For example, we have developed LiteSpeed, a host signal processing architecture solution, in response to growing market acceptance of G.Lite, a digital subscriber line technology that enables downstream data transmission speeds of up to 1.5 Mbps and upstream data transmission speeds of up to 512 Kbps over existing copper telephone lines. Downstream transmission refers to the transmission of data from the central office to the customer premise, and upstream transmission of data refers to the reverse. By providing connectivity solutions that can be easily adapted to new standards and protocols, we simplify purchasing decisions and accelerate deployment times for original equipment manufacturers. We are also developing a G.DMT standard version of asymmetric digital subscriber line customer premise equipment which will allow for full-rate data transmission. Full-rate solutions can accommodate eight megabits per second downstream and one megabit per second upstream. In February 2000, we acquired Voyager Technologies, a pioneer of short-range wireless technology. We believe Voyager Technologies provides us with the core wireless technology and the resources to allow us to accelerate our penetration into emerging growth markets for wireless data networking, high speed internet access through cellular handsets, shared broadband internet access through home networks (commonly referred to as residential gateway solutions) and cordless handsets. Our principal executive offices are located at 1331 California Circle, Milpitas, California 95035. Our telephone number is (408) 965-2100. The Offering <TABLE> <C> <S> Common stock offered by PCTEL..................... 800,000 shares Common stock offered by the selling stockholders.. 2,600,000 shares Common stock outstanding after this offering...... 17,360,335 shares Use of proceeds................................... For general corporate purposes, including working capital, and for potential investments in and acquisitions of complementary products, technologies or businesses. </TABLE> The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of December 31, 1999 and does not include the following: . 4,494,578 shares of common stock that will be issued upon the exercise of outstanding stock options under our 1995 stock plan and 1997 stock plan, which includes 49,056 shares of common stock underlying options granted in connection with the acquisition of Voyager Technologies on February 24, 2000, . 201,063 shares of common stock that will be issued upon the exercise of outstanding warrants, and . 267,687 shares of common stock issued in connection with the acquisition of Voyager Technologies on February 24, 2000. ---------------- Please also note that, except where otherwise indicated: . the information in this prospectus relating to our outstanding shares of common stock or options or warrants to purchase our common stock is based upon information as of December 31, 1999, . the information in this prospectus assumes no exercise of the underwriters' over-allotment option, and . in this prospectus, "PCTEL," "we," "us" and "our" refer to PCTEL, Inc. and its subsidiaries. Summary Consolidated Financial Information You should read the following summary consolidated financial information together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus. The following tables present our summary consolidated statement of operations data for fiscal years 1995 through 1999 and our summary balance sheet data as of December 31, 1999. Summary balance sheet data is presented on an actual basis and pro forma as adjusted to reflect the sale of 800,000 shares of common stock offered by us in this offering at an assumed price of $62.00 per share and after deducting the estimated underwriting discounts and offering expenses and giving effect to the application of the net proceeds. Pro forma basic and diluted earnings per share below excludes non-cash charges for amortization of deferred compensation related to stock option grants. For the year ended December 31, 1999 pro forma basic and diluted earnings per share also excludes non-cash charges related to amortization of goodwill and an extraordinary loss of $1.6 million related to the early extinguishment of debt. <TABLE> <CAPTION> Year Ended December 31, -------------------------------------- 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------ (in thousands, except per share data) <S> <C> <C> <C> <C> <C> Statement of Operations Data: Revenues.............................. $76,293 $33,004 $24,009 $16,573 $ 191 Gross profit.......................... 36,865 19,126 11,085 7,391 85 Income (loss) from operations......... 9,776 228 2,957 3,882 (1,127) Net income (loss)..................... 5,422 495 2,301 3,004 (1,093) Basic earnings per share.............. $ 1.03 $ 0.21 $ 1.13 $ 4.79 $ -- Diluted earnings per share............ $ 0.37 $ 0.04 $ 0.20 $ 0.29 $ -- Pro forma basic earnings per share.... $ 1.72 $ 0.22 $ 1.13 $ 4.84 $ -- Pro forma diluted earnings per share.. $ 0.62 $ 0.04 $ 0.20 $ 0.30 $ -- Shares used in computing basic earnings per share................... 5,287 2,355 2,032 627 -- Shares used in computing diluted earnings per share................... 14,666 12,325 11,645 10,280 -- </TABLE> <TABLE> <CAPTION> December 31, 1999 ------------------- Pro Forma Actual as Adjusted ------- ----------- (in thousands) <S> <C> <C> Balance Sheet Data: Cash, cash equivalents and short-term investments........... $98,290 $144,610 Total assets................................................ 130,605 176,925 Total stockholders' equity.................................. 104,278 150,598 </TABLE> ---------------- See Note 2 of Notes to the Consolidated Financial Statements for an explanation of the shares used in computing basic earnings per share and diluted earnings per share in the above table.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001057234_universal_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001057234_universal_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..1b791646baf377fef080cd5023b2e8b4fbd3cb7e
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including our financial data and related notes. The terms "Universal," "our company" and "we," when used in this prospectus, refer to Universal Compression Holdings, Inc. and its subsidiaries, including Universal Compression, Inc., as a combined entity, except where it is made clear that such term means only the parent company, and includes its predecessors, including Tidewater Compression Service, Inc. Unless we indicate otherwise, the information contained in this prospectus (other than in the historical financial statements) assumes that the underwriters' over-allotment option is not exercised and reflects the conversion of all of our non-voting common stock into common stock on a 1-for-1 basis, a 7.4248-for-1 common stock split and the conversion of all of our outstanding preferred stock at a post-split ratio of one share of preferred stock into 2.3256 shares of common stock, in each case concurrently with this offering. OUR COMPANY OVERVIEW We are a leading natural gas compression services company, providing a full range of rental, sales, operations, maintenance and fabrication services and products to the natural gas industry. These services and products are essential to the production, transportation and processing of natural gas by producers, gatherers and pipeline companies. We acquired our business in 1998 through the acquisition of Tidewater Compression Service, Inc., which has been in the gas compression services business since 1954. Today, we own one of the largest gas compressor fleets in the United States and have a growing presence in key international markets. Since 1998, we have increased our capital investments in our business and, as a result, have experienced significant growth. The horsepower of our fleet has increased 29%, from 492,417 as of March 31, 1998 to 633,398 as of March 31, 2000, with our average capacity per unit increasing from 179 horsepower to 240 horsepower. Our revenues have increased 25%, from $108.8 million for the fiscal year ended March 31, 1998 to $136.4 million for the fiscal year ended March 31, 2000. For the fiscal year ended March 31, 2000, approximately $98.3 million of our revenues was derived from our compression rental services, with the remaining approximately $38.1 million being derived from fabrication and other compression activities. We distinguish ourselves by providing comprehensive, high quality natural gas compression services to over 650 customers that are involved in natural gas production, transportation and processing -- from the wellhead through the gathering system and through the pipeline. Due to our low cost, centralized operating structure, we are able to offer these high quality services to our customers at competitive prices while maintaining high margins. By outsourcing their compression needs, we believe our customers generally are able to increase their revenues by producing a higher volume of natural gas through decreased compressor downtime. In addition, outsourcing allows our customers to reduce their operating and maintenance costs and capital investments and meet their changing compression needs more efficiently. Our full service orientation enhances customer loyalty, enables us to attract new customers and allows us to grow our business with our existing customers. We operate in every significant natural gas producing region in the United States through our 30 compression sales and service locations. We have a highly standardized compressor fleet, with approximately 481,000 horsepower operating under contract in 23 states as of March 31, 2000. Our revenues from domestic compression rental services were $83.6 million for the fiscal year ended March 31, 2000. We believe that our size and broad scope result in economies of scale since the addition of incremental compressors in a region does not require us to proportionately increase our investment in field personnel and administrative support. EXPLANATORY NOTE This registration statement contains two forms of prospectus: one to be used in connection with an underwritten offering in the United States and Canada, and one to be used in a concurrent international offering, of common stock, par value $0.01 per share, of Universal Compression Holdings, Inc. The U.S. prospectus for the offering in the United States and Canada follows immediately after this explanatory note. After the U.S. prospectus are the alternate pages for the international prospectus. A copy of the complete U.S. prospectus and international prospectus in the exact forms in which they are to be used after effectiveness will be filed with the Securities and Exchange Commission pursuant to Rule 424(b) under the Securities Act. Since 1993, we have expanded our presence in select international markets, including Argentina, Colombia, Venezuela and Australia. As of March 31, 2000, we had 50 units aggregating approximately 52,000 horsepower operating under contract in these markets. In addition, in March 2000, we were awarded significant compression service projects in Mexico and Argentina which will increase the amount of horsepower we operate internationally by at least 25% within the next year. We are also pursuing opportunities in other strategic international areas, including other South American countries and Southeast Asia. Our revenues from international operations have increased by 116% in the last year, from $6.8 million for the fiscal year ended March 31, 1999 to $14.7 million for the fiscal year ended March 31, 2000. We believe that the capital raised in this offering and the financing and operating lease arrangements which we will enter into concurrently with this offering will allow us to continue to expand our compressor fleet and take advantage of the significant growth and consolidation opportunities in our industry, both domestically and internationally. INDUSTRY CONDITIONS At the end of 1998, there was approximately 14.8 million horsepower of field compression equipment in the United States, of which approximately 4.1 million horsepower was outsourced. From 1993 to 1998, the compression rental industry grew at a rate of approximately 15.4% per year in the United States in terms of horsepower, with the percentage of outsourced horsepower increasing from 13% to 28%. Our industry also has recently begun to grow rapidly internationally. The demand for compression services is linked to natural gas consumption rather than exploration activities. As a result, our financial performance historically has been less affected by the short-term market cycles and volatile commodity prices of oil and natural gas than companies operating in other sectors of the energy industry. Demand for compression services has increased over time, even during periods of volatile natural gas prices. We believe the natural gas compression services industry continues to have significant growth potential due to the following factors: - natural gas consumption is increasing in the United States at an average rate of 2.0% to 2.5% per year and internationally at an average rate of 3.0% to 4.0% per year, - the aging of producing natural gas fields in the United States will require more compression to continue producing the same volume of natural gas, - natural gas producers are increasingly outsourcing gas compression requirements to reduce overall cost of compression, improve run-time performance, reduce capital requirements and better meet changing compression needs, - the production of natural gas in international markets will continue to grow as a result of increasing demand for energy, the desire to replace oil with natural gas as a fuel source in local markets to allow the exportation of more oil, the recognition of natural gas as the clean air fuel of choice and environmental laws curtailing the prior practice of flaring gas and - continued development of pipeline infrastructure, particularly in South America, and privatization of state-owned energy producers internationally, leading to increased outsourcing of compression. We believe that we are well positioned to participate in a disproportionately high share of the future growth in this industry as we are one of the few compression service providers with sufficient fleet size and geographic scope to meet the full service needs of customers worldwide. OUR GROWTH STRATEGY Our growth strategy is to continue to focus on meeting the evolving needs and demands of our customers by providing consistent, superior services and dependable, high quality products. We believe that this approach strengthens our relationships with our existing customers, helps us attract new customers and THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED MAY 22, 2000 PROSPECTUS 7,000,000 SHARES [UNIVERSAL COMPRESSION LOGO] COMMON STOCK ---------------------- This is Universal Compression Holdings, Inc.'s initial public offering. Universal is selling all of the shares. The U.S. underwriters are offering 5,600,000 shares in the U.S. and Canada and the international managers are offering 1,400,000 shares outside the U.S. and Canada. We expect the public offering price to be between $21.00 and $23.00 per share. Currently, no public market exists for the shares. Our common stock has been approved for listing on the New York Stock Exchange under the trading symbol "UCO," subject to official notice of issuance. INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 7 OF THIS PROSPECTUS. ---------------------- <TABLE> <CAPTION> PER SHARE TOTAL --------- ----- <S> <C> <C> Public offering price....................................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to Universal Compression Holdings, Inc. ..................... $ $ </TABLE> The U.S. underwriters may also purchase up to an additional 840,000 shares from Universal at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. The international managers may similarly purchase up to an additional 210,000 shares from Universal. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The shares will be ready for delivery on or about , 2000. ---------------------- MERRILL LYNCH & CO. SALOMON SMITH BARNEY DEUTSCHE BANC ALEX. BROWN FIRST UNION SECURITIES, INC. WASSERSTEIN PERELLA SECURITIES, INC. ---------------------- The date of this prospectus is , 2000. diversifies our revenue base, resulting in increased market share, revenues and earnings. The key elements of our strategy are described below: - FOCUSING ON PROVIDING A COMPLETE RANGE OF HIGH QUALITY SERVICES. We will continue to provide a complete range of high quality compression services to meet the changing compression needs of our customers. To accomplish this, we will continue to expand, upgrade and reconfigure our rental fleet, work closely with our customers to find strategic solutions and provide our operations and maintenance personnel with extensive training. - CONTINUING A CENTRALIZED, STANDARDIZED APPROACH TO OUR BUSINESS. Our centralized structure and automated inventory system enable us to respond quickly and efficiently to our customers' compression requirements, which can be identified early by our field sales and service personnel. In addition, we have standardized our fleet, enabling us to develop expertise in operating and maintaining our compressors, provide our customers with consistent, high quality service, optimize our inventory and reduce our costs. - EXPANDING OUR OPERATIONS IN SELECT INTERNATIONAL MARKETS. We plan to capitalize on the growing international compression market by expanding our existing presence in Argentina, Colombia, Venezuela and Australia and offering our services in other key markets, including Southeast Asia, Mexico and other South American countries. We believe that our experience in these markets and our strong reputation for the engineering and fabrication of high specification gas and air compressors positions us to expand our business internationally. - EXPANDING OUR RENTAL FLEET AND CUSTOMER BASE THROUGH THE PURCHASE AND LEASEBACK OF COMPRESSORS. We are providing an increasing number of customers the opportunity to sell their existing compression equipment to us in purchase and leaseback transactions. These transactions enable a customer to outsource its compression operations and reallocate capital to its core business activities while typically enjoying improved operational performance. Through purchase and leaseback transactions, we are able to expand our rental fleet while promoting our operations and maintenance services to new customers and strengthening our relationships with existing customers. - PURSUING INDUSTRY CONSOLIDATION OPPORTUNITIES. Since 1993, we have completed six acquisitions. We intend to continue to pursue acquisitions of complementary businesses to expand our fleet and our customer base. We believe that continuing industry consolidation will present us with opportunities to acquire attractive compression service companies and assets in the future. Our principal executive offices are located at 4440 Brittmoore Road, Houston, Texas 77041 and our telephone number at that address is (713) 335-7000. Our website is located at www.universalcompression.com. Information contained on our website is not a part of this prospectus. THE OFFERING Common stock offered by Universal: U.S. offering.................. 5,600,000 shares International offering......... 1,400,000 shares Total.................. 7,000,000 shares Shares outstanding after the offering......................... 12,983,584 shares Use of proceeds.................. We estimate that our net proceeds from this offering without exercise of the over-allotment option will be approximately $142.9 million. We intend to use these net proceeds and the net proceeds of our concurrent operating lease facility: - to repay all outstanding indebtedness under our existing credit facility and international debt arrangements and redeem our 11 3/8% senior discount notes and - for general corporate purposes, which may include the repurchase of some of our 9 7/8% senior discount notes. Risk factors..................... See "Risk Factors" and other information included in this prospectus for a discussion of factors you should consider carefully before deciding to invest in shares of our common stock. NYSE symbol...................... "UCO." The number of shares outstanding after the offering includes 287,723 shares issued on April 28, 2000 in connection with our acquisition of Spectrum Rotary Compression Inc. This number excludes 1,912,421 shares reserved for issuance under our stock option plan, of which options to purchase 612,399 shares at a weighted average exercise price of $14.91 per share have been issued as of April 28, 2000. In connection with this offering, we have authorized the grant of options to purchase an aggregate of 250,600 shares at an exercise price equal to the initial public offering price. The number of shares outstanding after the offering assumes that the underwriters' over-allotment option is not exercised. If the over-allotment option is exercised in full, we will issue and sell an additional 1,050,000 shares. Map of the United States depicting the 23 states in which Universal operates and the location of its 30 field and sales offices, including its corporate headquarters. Underneath the map is a listing of the five countries outside the United States in which Universal operates (Argentina, Australia, Colombia, Mexico and Venezuela). SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OPERATING DATA The following tables present summary historical and pro forma consolidated financial and operating data for Universal and for Tidewater Compression Service, Inc., the predecessor of Universal that was acquired on February 20, 1998, for the periods and dates indicated. The pro forma financial and operating data for Universal are derived from the consolidated pro forma financial data included elsewhere in this prospectus. The pro forma income statement and other financial and operating data give effect to the offering and the concurrent operating lease facility as though each occurred on April 1, 1999. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The pro forma balance sheet data give effect to the offering and the concurrent operating lease facility as though each occurred on March 31, 2000. The summary pro forma financial and operating data for the year ended March 31, 1998 were derived from the pro forma consolidated financial statements, give effect to the acquisition of Tidewater Compression as if it had occurred on April 1, 1997 and have been prepared under the purchase method of accounting. Under this method of accounting, based on an allocation of the purchase price of Universal, its identifiable assets and liabilities have been adjusted to their estimated fair values. The pro forma income statement and other financial and operating data presented below are not necessarily indicative of the financial results that would have occurred had the offering and the concurrent operating lease facility occurred on April 1, 1999, or indicative of our financial position had the offering and lease facility occurred on March 31, 2000, and should not be viewed as indicative of operations or financial position in future periods. See "Selected Historical Consolidated Financial and Operating Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information regarding the historical, the pro forma consolidated and the other financial and operating data. Two pictures depicting natural gas compressors used in field production. <TABLE> <CAPTION> TIDEWATER COMPRESSION (PREDECESSOR COMPANY) UNIVERSAL ---------------------------------- -------------------------------------- PERIOD FROM PERIOD FROM APRIL 1, DECEMBER 12, YEARS ENDED 1997 1997 PRO FORMA MARCH 31, THROUGH THROUGH YEAR ENDED YEAR ENDED ------------------- FEBRUARY 20, MARCH 31, MARCH 31, MARCH 31, 1996 1997 1998 1998 1998 1999 -------- -------- ------------ ------------ ---------- ---------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Revenues........................... $110,464 $113,886 $ 95,686 $ 13,119 $ 108,805 $129,498 Gross margin(1).................... 51,685 48,332 47,752 6,891 58,443 61,887 Selling, general and administrative expenses......................... 10,508 11,004 8,669 1,305 13,037 16,863 Depreciation and amortization...... 26,997 26,163 23,310 1,560 19,307 19,314 Operating income(2)................ 14,180 11,165 15,773 4,026 26,099 25,710 Operating lease facility expense... -- -- -- -- -- -- Interest expense................... 3,706 -- -- 3,203 32,474 29,313 Income tax expense (benefit)....... 3,745 4,724 6,271 409 (1,888) (1,031) Net income (loss).................. 5,972 7,842 10,759 430 (3,214) (2,361) OTHER FINANCIAL DATA: EBITDA(3).......................... $ 40,420 $ 38,729 $ 40,340 $ 5,930 $ 49,742 $ 48,435 Capital expenditures: Expansion........................ $ (2,423) $(12,464) $(11,902) $ (1,820) $ (13,722) $(63,408) Maintenance...................... (3,971) (4,056) (5,698) (218) (9,716) (7,626) Other............................ 5,124 7,684 3,803 (351,107) (347,304) 8,038 Cash flows from (used in): Operating activities............. $ 50,810 $ 41,923 $ 33,491 $ (1,005) $ 22,076 $ 22,793 Investing activities............. (1,270) (8,836) (13,797) (353,145) (370,742) (62,996) Financing activities............. 49,506 (33,121) (17,870) 356,532 352,872 40,748 OTHER DATA: Total number of rental units (end of period)....................... 2,787 2,764 2,780 2,749 2,749 2,701 Aggregate horsepower (end of period).......................... 473,282 473,973 495,653 492,417 492,417 544,600 Average horsepower per unit (end of period).......................... 170 171 178 179 179 202 Average horsepower utilization(4)................... 73.9% 77.4% 81.8% 83.9% 82.0% 80.3% <CAPTION> UNIVERSAL --------------------------- PRO FORMA AS ADJUSTED(6) YEAR ENDED YEAR ENDED MARCH 31, MARCH 31, 2000 2000 ---------- -------------- (DOLLARS IN THOUSANDS) <S> <C> <C> INCOME STATEMENT DATA: Revenues........................... $136,449 $136,449 Gross margin(1).................... 68,961 68,961 Selling, general and administrative expenses......................... 16,797 13,597 Depreciation and amortization...... 26,006 22,447 Operating income(2)................ 26,158 32,916 Operating lease facility expense... -- 5,702 Interest expense................... 34,327 18,600 Income tax expense (benefit)....... (1,994) 4,384 Net income (loss).................. (5,982) 4,424 OTHER FINANCIAL DATA: EBITDA(3).......................... $ 55,557 $ 55,557 Capital expenditures: Expansion........................ $(49,871) $(49,871) Maintenance...................... (9,920) (9,920) Other............................ (1,312) (1,312) Cash flows from (used in): Operating activities............. $ 47,144 $ 51,955 Investing activities............. (61,103) (56,482) Financing activities............. 12,435 3,003 OTHER DATA: Total number of rental units (end of period)....................... 2,645 2,645 Aggregate horsepower (end of period).......................... 633,398 633,398 Average horsepower per unit (end of period).......................... 240 240 Average horsepower utilization(4)................... 80.7% 80.7% </TABLE> <TABLE> <CAPTION> MARCH 31, 2000 ---------------------------- ACTUAL AS ADJUSTED(6) ----------- -------------- (DOLLARS IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Working capital........................................... $ 7,209 $ 10,015 Total assets.............................................. 469,942 416,020 Total debt(5)............................................. 377,485 186,939 Stockholders' equity...................................... 74,677 211,301 </TABLE> - --------------- (1) Gross margin is defined as total revenue less (i) rental expense, (ii) cost of sales (exclusive of depreciation and amortization), (iii) gain on asset sales and (iv) interest income. (2) Operating income is defined as income before income taxes less gain on asset sales and interest income plus interest expense and operating lease facility expense. (3) EBITDA is defined as net income plus income taxes, interest expense, leasing expense, management fees, depreciation and amortization. EBITDA represents a measure upon which management assesses financial performance, and certain covenants in our borrowing arrangements will be tied to similar measures. EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered an alternative to operating income or net income as an indicator of our operating performance or to net cash provided by operating activities as a measure of our liquidity. Additionally, the EBITDA computation used herein may not be comparable to other similarly titled measures of other companies. (4) Reflects an average horsepower utilization over each period based upon our total average fleet horsepower. (5) Includes capital lease obligations. (6) As adjusted to reflect the application of the net proceeds to us from this offering and our concurrent operating lease facility.
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING US AND OUR COMMON STOCK BEING SOLD IN THE OFFERING AND OUR FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE SPECIFICALLY STATED, INFORMATION IN THIS PROSPECTUS GIVES PRO FORMA EFFECT TO: - THE CONVERSION OF ALL OUTSTANDING SHARES OF OUR PREFERRED STOCK INTO SHARES OF COMMON STOCK, WHICH WILL OCCUR AUTOMATICALLY UPON COMPLETION OF THE OFFERING; AND - THE ADDITIONAL $50.0 MILLION INVESTMENT IN OUR COMPANY BY AN AFFILIATE OF KOHLBERG KRAVIS ROBERTS & CO. IN APRIL 2000. IN ADDITION, UNLESS OTHERWISE SPECIFICALLY STATED, INFORMATION IN THIS PROSPECTUS ASSUMES THE UNDERWRITERS DO NOT EXERCISE THEIR OPTION TO PURCHASE ADDITIONAL SHARES IN THE OFFERING. OUR COMPANY We are a rapidly growing integrated communications provider. We seek to become the leading provider of telecommunications services for small and mid-sized businesses in each of the cities we serve. We offer state-of-the-art telecommunications services to our customers, who today are located throughout Missouri, Kansas, Texas and Oklahoma. These voice and data service offerings include local and long distance telephone service, Internet access, web hosting, integrated voice and data transmission over broadband lines and customer premises equipment sales and services. We offer these services to our customers through a combination of leased and owned network facilities. We are currently deploying collocations and transmission equipment throughout our markets to deliver digital subscriber line service, which will support dedicated high-speed Internet access and eventually voice services. We expect to have over 130 collocations operational by the end of this year. Our revenue for the year ended December 31, 1999 was $60.5 million, a 132% increase over 1998 and was $23.8 million for the quarter ended March 31, 2000, a 124% increase over the equivalent period in 1999. We have increased our local access lines in service to over 168,000 and now serve over 29,000 business customers, making us one of the largest integrated communications providers in the territory served by Southwestern Bell. We intend to continue to grow our customer base rapidly. We currently serve 23 markets that have populations ranging in size from 95,000 to 4.5 million. We average 7,000 lines in each of those markets. We intend to offer our services in an additional 35 markets before the end of 2001. We expect to commence service in the regions served by Ameritech and BellSouth in 2001. We have developed systems and network capabilities and have an experienced sales force and customer service team that position us to rapidly penetrate new markets and serve a growing number of customers. We believe that our success to date is largely attributable to our customer-focused philosophy and our aggressive marketing strategy. We have developed a capital-efficient network platform to deliver voice services to our customers. In most of our markets, we lease substantially all of the network elements from the incumbent telephone company and use our advanced back-office systems to combine these elements into integrated Birch-branded voice services. This network delivery method, which we call the unbundled network element platform, or UNE-P, has allowed us to offer voice services to customers located virtually anywhere in our markets and achieve high gross margins and superior returns on incremental capital invested. UNE-P allows us to minimize current capital expenditures and maintain design flexibility for the next generation of telecommunications technology. We currently operate 29 data switches and a high-speed network interconnecting these switches to carry data traffic across our region. We intend to be one of the first carriers in our markets to deliver broadband facilities directly to our small and mid-sized business customers. By implementing digital subscriber line technology to transmit both data and voice traffic over a single line, we expect to significantly reduce the per-line costs of providing and leasing telephone lines. These savings should allow us to offer a more attractive package of data and voice services to our customers and improve our gross margins. We are beta-testing technologies provided by third-party vendors that we expect will allow us to provide voice services over digital subscriber lines. We offer our customers simplified packages of voice and high-speed data services designed for small and mid-sized businesses, which are conveniently billed on a single invoice. In each of our markets, we deploy a locally based sales force that consults with our customers to assist them in selecting an appropriate service package that will meet their needs. Our 196-person direct sales force is supported by aggressive multi-media advertising campaigns designed to enhance awareness of the Birch name. We believe that our customer-oriented approach to small and mid-sized businesses provides us with an advantage over incumbent telephone companies, who are not focused on these customers. OUR STRATEGY We believe that our business is poised for rapid expansion and that our experienced management team is well prepared to execute our focused business strategy. The key elements of our strategy include: - FOCUSING ON SMALL AND MID-SIZED BUSINESS CUSTOMERS; - PROVIDING COMPLETE SERVICE PACKAGES THAT ARE TAILORED TO OUR CUSTOMERS; - CREATING A STRONG BRAND PRESENCE; - DEPLOYING A DIRECT SALES FORCE IN EACH OF OUR MARKETS; - INVESTING IN INDUSTRY-LEADING, SCALABLE BACK OFFICE SYSTEMS; - MAINTAINING MAXIMUM NETWORK FLEXIBILITY; - EXPANDING OUR GEOGRAPHIC REACH; AND - GROWING THROUGH ACQUISITIONS. RECENT EVENTS In August 1999, an affiliate of KKR purchased $60.0 million of our preferred stock and, in April 2000, invested an additional $50.0 million in our company. KKR's investment will be converted into common stock at the closing of the offering. KKR is our largest stockholder and KKR's investment represents a 51.2% equity interest as of June 23, 2000. Upon closing of the offering, KKR will beneficially own approximately % of our outstanding common stock. In December 1999, we obtained a $75.0 million senior credit facility, which was increased to $125.0 million in February 2000. This credit facility provides for a $25.0 million reducing revolver and $100.0 million in multi-draw term loans. The revolver is available for general corporate purposes of our subsidiaries, and the term loans are to be used to finance telecommunications equipment, inventory, network assets and back office systems. ------------------------ PRINCIPAL OFFICES We were incorporated in Delaware on December 23, 1996, and our principal executive offices are located at 2020 Baltimore Avenue, Kansas City, Missouri 64108. Our telephone number is (816) 300-3000. Our website address is www.birch.com. Information on our website does not constitute part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered......................... shares Over-allotment option........................ shares Common stock to be outstanding after the offering, not including the over-allotment option..................................... shares Use of proceeds.............................. We estimate that our net proceeds from the offering will be approximately $184.0 million, based on an assumed initial public offering price of $ per share, or $211.9 million if the underwriters exercise their over-allotment option. We plan to use the net proceeds from the offering to fund capital expenditures and operating losses and for general corporate purposes, including possible future investments, acquisitions or strategic alliances. Proposed Nasdaq National Market symbol....... BRCH </TABLE> The calculation of the number of shares outstanding after the offering is based on: - the number of shares outstanding on June 23, 2000, which reflects the 1.795-for-1 split of our common stock that occurred on April 6, 2000; and - conversion of our preferred stock into 74,147,135 shares of common stock, which will occur automatically upon completion of the offering. This total does not reflect: - shares that may be issued upon the exercise of outstanding options and warrants; or - shares that are reserved for future issuance pursuant to our employee and director stock plans. SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA The following table summarizes the consolidated financial and operating data of our business for the periods presented. Our statement of operations data and other financial data for the years ended December 31, 1997, 1998 and 1999, as well as the statement of operations data and other financial data for the predecessor company for the year ended December 31, 1997 have been derived from, and is qualified by reference to, our consolidated financial statements included elsewhere in this prospectus, which Ernst & Young LLP, our independent auditors, have audited. Our statement of operations data and other financial data for the three months ended March 31, 1999 and 2000 and our balance sheet data as of March 31, 2000 have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. The per share data presented below give effect to the 1.795-for-1 split of our common stock, which occurred on April 6, 2000. The pro forma balance sheet data presented below give effect to the conversion of all outstanding shares of our preferred stock into common stock, which will occur upon completion of the offering, and give effect to the additional $50.0 million investment in our company by an affiliate of KKR, as if these events had occurred on March 31, 2000. The pro forma as adjusted balance sheet data presented below give effect to the pro forma items listed above and reflect the sale of shares of common stock in the offering at an assumed public offering price of $ per share as if these events had occurred on March 31, 2000. The pro forma net loss per share calculations give effect to all of the pro forma items listed above, as if they had occurred on January 1, 1999. You should read the information set forth below in conjunction with "Selected Consolidated Financial and Operating Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and their related notes included elsewhere in this prospectus. EBITDA consists of earnings before interest, income taxes, depreciation and amortization. EBITDA is provided because it is a measure of financial performance commonly used in the telecommunications industry. EBITDA is used by management and some investors as an indicator of a company's historical ability to service debt. Management believes that an increase in EBITDA is an indicator of improved ability to service existing debt, to sustain potential future increases in debt and to satisfy capital requirements. We have presented EBITDA to enhance your understanding of our operating results. You should not construe it as an alternative to operating income, as an indicator of our operating performance nor as an alternative to cash flows from operating activities as a measure of liquidity determined in accordance with generally accepted accounting principles, or GAAP. We may calculate EBITDA differently from other companies. For further information, see our consolidated financial statements and the related notes elsewhere in this prospectus. The predecessor company is Valu-Line Companies, Inc., which merged with us in February 1998. Prior to February 1998, Birch had no revenues and was a development stage company. We acquired Boulevard Phone Company, Telesource Communications, Inc. and TFSnet, Inc. in 1998 and American Local Telecommunications, LLC and Capital Communications Corporation in 1999. The statement of operations data, other financial data and operating data in the table include the operations of these companies beginning on the dates they were acquired. These acquisitions affect the comparability of the financial data for the periods presented. <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, --------------------------------------------------------------- ------------------- THE PREDECESSOR BIRCH BIRCH ------------------------------ ------------------------------ ------------------- 1995 1996 1997 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- -------- -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue........................... $12,226 $13,217 $16,801 $ -- $ 26,087 $ 60,538 $ 10,636 $ 23,808 Gross margin...................... 3,942 4,468 4,959 -- 7,201 14,180 2,711 6,472 Income (loss) from operations..... 233 596 551 (1,803) (10,876) (49,693) (7,128) (19,191) Net income (loss)................. 94 289 268 (1,789) (16,208) (61,804) (9,936) (23,343) Net loss applicable to common stock........................... (1,789) (17,933) (65,646) (10,437) (25,768) Shares used in per share calculation..................... 2,217 6,837 8,896 9,072 8,415 Net loss per common share--basic and diluted..................... $ (0.81) $ (2.62) $ (7.38) $ (1.15) $ (3.06) Shares used in pro forma per share calculation (unaudited)......... Pro forma net loss per common share--basic and diluted (unaudited)..................... $ $ OTHER FINANCIAL DATA: Cash flows from operating activities...................... $ (267) $ 834 $ 488 $(1,551) $(10,643) $(53,225) $ (5,722) $(20,821) Cash flows from investing activities...................... (230) (513) (243) (128) (67,093) (31,796) (11,836) (14,496) Cash flows from financing activities...................... 259 (257) (145) 1,889 117,271 50,329 (974) 38,342 EBITDA............................ 422 907 892 (1,776) (8,568) (38,865) (5,585) (14,731) Capital expenditures.............. 230 513 243 128 21,550 41,360 6,957 14,008 OPERATING DATA: Local customers served at end of period.......................... -- 14,735 38,487 17,352 46,033 Access lines in service at end of period.......................... -- 39,323 112,518 50,425 146,241 Circuit switches in service at end of period....................... -- 1 4 1 4 Data switches in service at end of period.......................... -- 1 19 1 26 Employees at end of period........ 14 345 935 506 1,130 </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, 2000 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 8,078 $ 55,528 $239,528 Pledged securities.......................................... 23,740 23,740 23,740 Property and equipment...................................... 84,151 84,151 84,151 Total assets................................................ 166,096 206,848 390,848 Long-term debt and capital lease obligations................ 165,756 165,756 165,756 Redeemable preferred stock.................................. 65,800 -- -- Total stockholders' equity (deficit)........................ (91,718) (14,834) 198,834 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001057758_tw_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001057758_tw_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding the Company, the Class A Common Stock being sold in this offering and our financial statements and the notes to these financial statements appearing elsewhere in this prospectus. We have summarized the history and structure of our company under "Background of the Company." For simplicity, we use the terms "we" and the "Company" throughout this prospectus to refer to the business that is owned and conducted by the corporation that became Time Warner Telecom Inc. shortly prior to the initial public offering of the Class A Common Stock, and that was owned and conducted by its predecessors prior to that time. We use the term "selling stockholder" throughout this prospectus to refer to MediaOne Group, Inc. Other important terms are defined in "Background of the Company." In addition, to assist you in understanding certain terms relating to the telephony business that we explain and use in the body of this prospectus, we have also included a glossary at the back of this prospectus. THE COMPANY The Company is a leading fiber facilities-based integrated communications provider offering local business "last mile" broadband connections for data, high-speed internet access, local voice and long distance services. It offers a wide range of business telephony services, primarily to medium- and large-sized telecommunications-intensive business end-users, long distance carriers, internet service providers, wireless communications companies and governmental entities. These business telephony services include dedicated transmission, local switched, long distance, data and video transmission services and high- speed dedicated internet access. The Company offers its services in 21 metropolitan markets and expects to initiate service in three additional markets during 2000. In addition, the Company expects to commence construction in an additional 8 to 12 markets during 2000 and 2001. As of December 31, 1999, the Company had deployed digital telephony switches in 19 of its 21 service areas. As of that date, the Company's network spanned 8,872 route miles, contained 332,263 fiber miles and offered service to 5,566 buildings. The Company believes that the Telecommunications Act of 1996 (the "1996 Act") and certain state regulatory initiatives provide increased opportunities in the telecommunications marketplace by opening all local markets to competition and requiring existing local telephone companies, which are often referred to as incumbent local exchange carriers, to provide increased direct interconnection. Business Strategy The key elements of the Company's business strategy are discussed in detail under "Business--Business Strategy," which we urge you to read carefully because we believe it is important to understanding our business. The following is a summary of the Company's business strategy. Leverage Existing Fiber Optic Networks. The Company has designed and built local and regional fiber networks to serve geographic locations where management believes there are large numbers of potential customers. These highly concentrated networks have not yet been fully exploited and provide the capacity to serve a substantially larger base of customers with a larger array of products. Enter New Geographic Areas. The Company is in the process of constructing three additional networks in Los Angeles/Orange County, California, Dayton, Ohio, and Fayetteville, North Carolina during 2000, for a total of 24 markets. Also, the Company has recently announced a more accelerated geographic expansion plan that presently calls for commencing construction in an additional 8 to 12 metropolitan statistical areas during 2000 and 2001. The Company will also evaluate other expansion opportunities. Expand Switched Services. The Company provides a broad range of switched services in 20 of its 21 service areas. The Company has rapidly installed switches in its markets and expects to derive a growing portion of its revenue from switched services. In addition, the Company is currently evaluating how to best integrate new "softswitch" technology into its infrastructure, which would allow voice over Internet Protocol and other applications. Expand Data Services. The Company will continue to deliver high-speed traditional transport services through its fiber optic networks and will also focus on the delivery of next generation data networking and converged network services. Target Business Customers. The Company has historically targeted telecommunications-intensive medium- and large-sized business customers who require the high quality networks that we operate. In order to achieve further economies of scale and network utilization, the Company is targeting smaller business customers in buildings the Company already serves where the Company can offer a package of network services that may not otherwise be available to them. Interconnect Service Areas. The Company is in the process of interconnecting its 21 existing service areas within regional clusters with owned or licensed fiber optic facilities. This is expected to increase the Company's revenue potential and increase margins by addressing customers' regional long distance voice, data and video requirements. Utilize Strategic Relationships with Time Warner Cable. The Company has benefited from and continues to leverage its relationships with Time Warner Cable, one of the largest multiple system cable operators in the U.S., by licensing and sharing the cost of fiber optic facilities. The Company has agreements with Time Warner Cable that allow the Company access to rights-of- way, easements, poles, ducts and conduits. The Company may also benefit from positive awareness of the "Time Warner" name, which it licenses from Time Warner Inc. Continue Disciplined Expenditure Program. The Company increases operating efficiencies by pursuing a capital expenditure program that focuses on projects that meet stringent financial criteria. The Company evaluates every capital expenditure on the basis of whether or not it meets several minimum requirements, including minimum recurring revenue, cash flow margin and rate of return. THE OFFERING Class A Common Stock offered by the selling stockholder (1)..... 9,000,000 shares. Class A Common Stock offered by the selling stockholder in the over-allotment option(1)... 500,000 shares. Common Stock to be outstanding after the offering and the over-allotment option........... 33,368,601 shares of Class A Common Stock. 71,726,500 shares of Class B Common Stock. Relative rights of Common The Company's Class A Common Stock and Class Stock........................... B Common Stock are identical in all respects, except that: (a) holders of Class A Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to 10 votes per share on all matters submitted to a vote of stockholders; (b) certain matters require the approval of 100% of the outstanding Class B Common Stock, voting separately as a class; and (c) certain other matters require the approval of a majority of the outstanding Class A Common Stock, voting separately as a class. Each share of Class B Common Stock is convertible into one share of Class A Common Stock. Use of proceeds................. We will not receive any proceeds from the shares sold by the selling stockholder. Nasdaq National Market symbol... "TWTC" The number of shares of Common Stock to be outstanding after this offering is based on the number of shares outstanding as of February 29, 2000, and excludes: . 7,865,203 shares underlying options outstanding as of February 29, 2000, at a weighted average exercise price of $19.26 per share; . 514,554 shares available for future grants under our option plan; and . 750,000 shares available for issuance under our employee stock purchase plan. - -------- (1) In connection with the offering, MediaOne Group, Inc. will convert 8,987,785 shares of Class B Common Stock (9,487,785 shares if the over- allotment option is fully exercised) into an equal number of shares of Class A Common Stock. MediaOne will retain up to 5,789,842 shares of Class B Common Stock. See "Risk Factors--Each of the Class B Stockholders has veto rights over certain actions; the selling stockholder will retain those rights as long as it retains Class B Common Stock." BACKGROUND OF THE COMPANY The Company began its business by providing telephony services through cable television systems owned by its Former Parent Companies. On July 14, 1998, Time Warner Telecom LLC ("TWT LLC") was formed to acquire the assets and liabilities of the Company's business and to conduct the offering on July 21, 1998 of $400 million principal amount 9 3/4% Senior Notes due July 2008. On May 10, 1999, in preparation for the Company's initial public offering, TWT LLC was reconstituted as a Delaware corporation under the name Time Warner Telecom Inc. by merging into a newly formed Delaware corporation. As part of the merger, the outstanding Class A limited liability company interests were converted into Class A Common Stock and the outstanding Class B limited liability company interests were converted into Class B Common Stock of the newly formed corporation. On May 14, 1999, in conjunction with the reconstitution, the Company completed an initial public offering of 20,700,000 shares of Class A Common Stock at a price of $14 per share. See "Background of the Company,"
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. You should carefully read the entire prospectus before making an investment decision. OUR BUSINESS We design, manufacture and market a broad range of devices, components and subsystems that are used throughout wireless and broadband infrastructure equipment and related test equipment applications. We sell products that operate over the full range of frequencies commonly used in wireless communications transmission, including radio frequencies, microwave frequencies and millimeter wave frequencies. We refer to this range of frequencies as RF. Our customers use our products to control, condition and enhance RF signals for use in their wireless and broadband infrastructure equipment. Worldwide demand for voice, data and video services has required communications service providers to offer their customers greater connectivity, mobility and bandwidth. The rapid growth in the wireless communications industry has led to substantial investments in infrastructure equipment to support the build-out of communications networks. We sell our products to the original equipment manufacturers, or OEMs, of these networks and related test equipment OEMs, as well as to RF subsystems manufacturers. We also focus our sales efforts on OEMs using RF products in emerging communications infrastructure applications such as broadband access and fiber optic networking. We believe that the following factors place us in a strong competitive position within the growing market for wireless communications infrastructure equipment: - our broad product offering and benefits of scale in a highly fragmented industry; - our strong design and manufacturing capabilities, particularly at high frequencies and high power levels; - our expertise in the integration of devices and components into subsystems; and - our ability to rapidly and cost-effectively respond to the design and production requirements of our globally oriented OEM customers. We are a technology based, market driven organization, and we place significant value on developing our customer relationships and responding to our customers' needs. Our largest customers for the six months ended June 30, 2000 were Agilent Technologies, Flextronics International, Forem / Allen Telecom, LM Ericsson, Lucent Technologies and Motorola. We market our products worldwide through a direct sales force of approximately 45 personnel based at our five operating units and at the parent company. Our sales force works closely with a global network of over 90 independent sales representative firms to better cover and respond to our customers. Our direct sales force routinely integrates engineering and product line support from our operating units to address specific customer requirements and provide custom-engineered design solutions. We also employ a select number of independent distributors to market our higher volume products. We seek to become the leading independent supplier of RF devices, components and subsystems to OEM customers serving the wireless communications, broadband access and fiber optic networking infrastructure markets. We intend to achieve this objective by implementing the following key elements of our strategy: - expanding our technological expertise in and continuing our focus on RF devices, components and subsystems for wireless communications; - developing and enhancing customer relationships, particularly with major wireless infrastructure OEMs; - focusing on growth opportunities in emerging communications technologies and markets; - growing through strategic acquisitions; and - expanding our international presence. Since our acquisition of Inmet Corporation in June 1994, we have completed the following four strategic acquisitions: - Weinschel Corporation which we acquired on November 30, 1995; - KDI/Triangle Corporation which we acquired on July 23, 1996; - Metelics Corporation which we acquired on March 16, 1998; and - DML Microwave Limited which we acquired on July 30, 1999. Through these acquisitions, we have assembled a company with a strong heritage in the RF industry that dates back to the industry's formative years. KDI and Weinschel were established in the 1950s and DML, Inmet and Metelics were established in the 1970s. Our heritage contributes to our strong reputation and the brand recognition of our operating units. We believe that our heritage, combined with our technical expertise, breadth of products and benefits of scale, positions MCE favorably in the fragmented RF devices, components and subsystems industry. ------------------------- We were incorporated in the State of Michigan in October 1995 to be the parent of Inmet and other acquired businesses. Our principal executive office are located at 310 Dino Drive, Ann Arbor, Michigan 48103. Our telephone number is (734) 426-1230. Our web site is located at www.mcecompanies.com. The information contained on our web site does not constitute a part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered by MCE Companies..... 5,500,000 shares Common stock to be outstanding after the offering................................ 26,600,480 shares Use of proceeds........................... To repay indebtedness, to redeem preferred stock and for working capital and other general corporate purposes, including acquisitions. See "Use of Proceeds" for more detailed information. Proposed Nasdaq National Market symbol.... MCEI </TABLE> The number of shares of common stock to be outstanding upon completion of this offering is based on the number of shares outstanding as of September 30, 2000, but excludes: - 1,104,700 shares of common stock issuable upon the exercise of an outstanding stock option granted pursuant to our 1996 stock option plan at an exercise price of approximately $0.65 per share; - 3,777,200 shares of common stock issuable upon the exercise of warrants at an exercise price of $0.0001 per share; - 3,800,000 shares of common stock issuable upon exercise of outstanding stock options granted pursuant to our 2000 stock incentive plan at an exercise price equal to the initial public offering price; and - 2,800,000 shares of common stock reserved for future option grants and restricted stock awards under our 2000 stock incentive plan. As of September 30, 2000, 4,000 shares of redeemable preferred stock were outstanding. We will use a portion of the proceeds of this offering to redeem all of these shares of redeemable preferred stock. ------------------------------ DML is a registered trademark of DML, INMET is a registered trademark of Inmet Corporation, METELICS MC and design are registered trademarks of Metelics Corporation, WEINSCHEL is a registered trademark of Weinschel Corporation, KDI and KDI/TRIANGLE are trademarks of KDI/Triangle Corporation, SMARTSTEP is a trademark of Weinschel and the MCE logo and MCE are trademarks of MCE Companies, Inc. All other trademarks or trade names referred to in this prospectus are the property of their respective owners. ------------------------ Unless otherwise indicated, all information in this prospectus assumes: - that the underwriters have not exercised their option to purchase 825,000 additional shares; - the filing of restated articles of incorporation, increasing our authorized common stock to 100,000,000 shares and increasing our authorized undesignated preferred stock to 10,000,000 shares, effective prior to the date of this prospectus; and - the 99-for-one stock dividend of the common stock, pursuant to which 99 shares of common stock are distributed for each share of common stock outstanding, effective prior to the consummation of this offering. SUMMARY CONSOLIDATED FINANCIAL DATA (in thousands, except per share data) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------------------------- --------------------- CONSOLIDATED STATEMENT OF 1995 1996 1997 1998 1999 1999 2000 OPERATIONS DATA: ------- -------- -------- -------- -------- ------- ----------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> Net sales....................... $ 5,282 $ 35,332 $ 65,418 $ 61,764 $ 64,647 $29,579 $46,141 Gross profit.................... 2,874 13,060 26,197 25,224 23,790 12,850 19,525 Write-off of acquired in-process research and development...... -- -- -- 6,000 -- -- -- Income (loss) from operations... 1,017 3,423 9,896 (1,171) 728 2,146 5,432 Redeemable warrant expense...... -- -- 6,242 -- 250 126 1,912 Net income (loss)............... 373 1,195 (955) (4,457) (1,891) 271 (130) Net income (loss) available to common shareholders........... 373 960 (1,500) (5,020) (2,474) (18) (429) Income (loss) per common share: Basic......................... $ 0.03 $ 0.05 $ (0.08) $ (0.24) $ (0.12) $ (0.00) $ (0.02) Diluted....................... $ 0.03 $ 0.05 $ (0.08) $ (0.24) $ (0.12) $ (0.00) $ (0.02) Shares used in per share calculations: Basic......................... 12,446 18,950 19,301 20,644 20,946 20,922 21,032 Diluted....................... 12,446 20,581 19,301 20,644 20,946 20,922 21,032 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 2000 --------------------- AS OF DECEMBER 31, PRO FORMA --------------------------------------------------- AS CONSOLIDATED BALANCE SHEET 1995 1996 1997 1998 1999 ACTUAL ADJUSTED(1) DATA: ------- -------- -------- -------- -------- ------- ----------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> Cash and cash equivalents....... $ 580 $ 911 $ 149 $ 129 $ 177 $ 192 $ 20,956 Working capital(2).............. 3,562 10,883 6,464 8,095 10,772 10,241 35,545 Total assets.................... 13,843 36,782 34,438 59,460 69,981 78,798 102,908 Long term debt(3)............... 8,651 17,522 5,817 28,304 36,663 36,601 2,716 Redeemable and convertible warrants and preferred stock......................... -- 4,242 10,709 10,952 13,435 15,486 -- Warrants........................ -- -- -- -- -- -- 18,091 Total shareholders' equity...... 3,215 4,883 3,416 3,319 1,114 754 74,235 </TABLE> <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------------------------- --------------------- 1995 1996 1997 1998 1999 1999 2000 OTHER DATA: ------- -------- -------- -------- -------- ------- ----------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> Cash flows from operating activities.................... $ 639 $ 634 $ 10,869 $ 1,323 $ 1,221 $ 1,128 $ 1,191 Cash flows from investing activities.................... (6,413) (11,579) 341 (23,460) (11,202) (1,365) (1,158) Cash flows from financing activities.................... 6,174 11,277 (11,972) 22,117 10,029 283 (10) Adjusted EBITDA(4).............. 1,584 5,132 12,444 8,145 7,970 4,286 8,077 </TABLE> ------------ (1) The as adjusted balance sheet data as of June 30, 2000 gives effect to: - the issuance and sale of the 5,500,000 shares of common stock offered by us at an assumed initial public offering price of $12.00 per share after deducting the estimated underwriting discounts and commissions and estimated offering expenses; - the repayment of all of our debt, excluding a $2.7 million note; - the redemption of our redeemable preferred stock; - the amendment to our redeemable warrants to eliminate the holders' put and cash conversion rights and the warrants' resulting reclassification as warrants within shareholders' equity and the charge of $6.3 million to the accumulated deficit for the increase in the fair value of the redeemable warrants; - the amendment to our convertible warrants to eliminate the holders' cash conversion rights and the warrants' resulting reclassification as warrants within shareholders' equity; - the net increase in shareholders' equity of $3.6 million related to the tax benefit of the $12.5 million charge resulting from the option outstanding under the 1996 stock option plan becoming exercisable in connection with the closing of this offering; and - the decrease to shareholders' equity for the loss on extinguishment of debt of $2.0 million and the accretion of the redeemable preferred stock of $288,000. (2) The calculation of working capital as of December 31, 1996 includes the reclassification of our revolving line of credit, in the amount of $7.2 million, from a current liability to long term debt for purposes of consistency with the other periods presented. (3) Long term debt includes the current portion thereon and also includes borrowings outstanding under our revolving line of credit. (4) In addition to income from operations, net income and cash flows, we use Adjusted EBITDA to evaluate our operating performance. Adjusted EBITDA is calculated as follows: <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------------- ---------------- 1995 1996 1997 1998 1999 1999 2000 ------ ------ ------- ------- ------- ------ ------ <S> <C> <C> <C> <C> <C> <C> <C> Net income (loss)........................... $ 373 $1,195 $ (955) $(4,457) $(1,891) $ 271 $ (130) Interest expense and other.................. 451 1,458 1,440 2,025 3,203 1,249 2,343 Income tax expense (benefit)................ 193 770 3,435 823 (834) 500 1,307 Depreciation................................ 124 996 1,399 1,688 2,017 944 1,215 Amortization................................ 443 713 883 2,066 2,530 1,196 1,430 Redeemable warrant expense.................. -- -- 6,242 -- 250 126 1,912 Restructuring and impairment charges and inventory write-off....................... -- -- -- -- 2,695 -- -- Write-off of acquired in-process research and development........................... -- -- -- 6,000 -- -- -- ------ ------ ------- ------- ------- ------ ------ Adjusted EBITDA............................. $1,584 $5,132 $12,444 $ 8,145 $ 7,970 $4,286 $8,077 ====== ====== ======= ======= ======= ====== ====== </TABLE> This measure is calculated differently by other companies and, therefore, it may not be comparable to other similarly titled measures presented by other companies. We have presented Adjusted EBITDA because we use it to evaluate our operating performance and because investors commonly use it to analyze a company's operating performance. You should not consider Adjusted EBITDA to be a substitute for income from operations, net income, cash flows or other measures of financial performance prepared in accordance with generally accepted accounting principles.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001058177_landacorp_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001058177_landacorp_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in the common stock. You should read the entire prospectus carefully, including "Risk Factors" and our financial statements before making an investment decision. In this prospectus, unless the context indicates otherwise, "Landacorp," "we," "us" and "our" refer to Landacorp, Inc. LANDACORP We offer business-to-business Internet-based and other electronic medical management solutions to healthcare payers and providers that are designed to control the cost and improve the quality of healthcare delivery. The term medical management solution refers to our applications that automate and streamline administrative and business processes, minimize inefficient paper-, fax-and phone-based communications, and facilitate interaction among various healthcare participants. Our solutions enable our clients to deliver consistent and appropriate medical care utilizing their chosen clinical guidelines and business process rules. We currently offer two products to healthcare payers: maxMC and e-maxMC, our new Internet-based medical management solution. As of December 31, 1999, five payers who claim to have a combined membership of six million participants were using maxMC. We have successfully tested e-maxMC internally and recently began offering the solution to payers. We expect to complete testing of e-maxMC with one of our payer customers in early 2000. We believe that the lack of functionality offered by existing Internet-based medical management products provides a significant market opportunity for e-maxMC. e-maxMC will add medical management functions to payers' Web sites in order to attract repeat visits by their members. We refer to Internet-based functions that generate repeat visits as sticky applications. Maxsys II is our medical management solution for healthcare providers. As of December 31, 1999, approximately 175 hospitals were using Maxsys II or its predecessor, Maxsys I. Although we no longer market Maxsys I, we continue to support it as a service to our customers and pursuant to ongoing contractual obligations. The Internet is emerging as a powerful tool for connecting healthcare participants, enhancing the efficiency of business processes, clinical decision-making and case and disease management, and minimizing expenditures on unauthorized or inappropriate care. Of the $1.1 trillion spent on healthcare in the U.S. annually, an estimated $250 billion relates to unnecessary care, redundant tests and procedures and excessive administrative costs. We believe the healthcare industry has failed to realize much of the potential offered by the Internet, as existing Internet-based products have merely linked healthcare participants without providing the medical management functions needed to make their interactions more efficient. Our solutions enable our clients to complement existing information systems, as well as other Internet-based products, with a rich set of medical management functions, including: - functions that assist with coordination of medical care by putting to use clinical guidelines chosen by our customers in order to match payers' business rules with providers' and members' requests for care; - case and disease management tools that assist with the determination of appropriate levels of care, perform short- and long-term care planning and minimize unnecessary procedures; and - tools for maintaining and reviewing physicians' credentials and other biographical information, such as continuing medical education credits, medical board certifications and records of disciplinary and other adverse actions. Our solutions are flexible and secure, and we can deploy them across a broad range of computing environments. The solutions are also scalable, which means customers can use them on a small scale for a limited number of users or on a large scale for multiple users without affecting product performance. As a result, our customers may tailor our solutions to suit their specific administrative and business processes, clinical guidelines, existing information systems and business models. Our objective is to be the leading provider of Internet-based and other electronic medical management solutions for healthcare payers and providers. Key components of our strategy include: - aggressively marketing our new Internet-based medical management solution, e-maxMC; - achieving greater market penetration; - developing and offering application service provider services for medium to small health plans and hospitals; - continuing to add functionality to our electronic medical management solutions; and - pursuing strategic partnerships and acquisitions. The address of our principal executive offices is 4151 Ashford Dunwoody Road, Suite 505, Atlanta, Georgia, 30319. Our telephone number is (404) 531-9956. We incorporated on April 27, 1982 as Landa Management Systems Corporation, a California corporation. We reincorporated as Landacorp, Inc., a Delaware corporation, on December 3, 1999. Our fiscal year ends December 31. THE OFFERING COMMON STOCK OFFERED BY US.............. 3,500,000 shares COMMON STOCK TO BE OUTSTANDING AFTER THE OFFERING................................ 13,213,184 shares USE OF PROCEEDS......................... Working capital and general corporate purposes, including: - development and implementation of new applications; - enhancing our sales and marketing organization; and - the purchase of assets from High Technology Solutions, Inc., and other possible strategic partnerships and acquisitions. PROPOSED NASDAQ NATIONAL MARKET SYMBOL.................................. LCOR ------------------------- This number does not include 911,115 shares of common stock subject to outstanding options at December 31, 1999 with a weighted average exercise price of $1.44 per share. Please see "Capitalization" for a more complete discussion regarding our common stock and options to purchase our common stock and other related matters. ------------------------- Unless otherwise noted, all information in this prospectus: - assumes the conversion of all outstanding preferred stock into common stock on a one-for-one basis; - assumes the cashless exercise of outstanding warrants to purchase 350,000 shares of common stock at an exercise price of $1.20 per share, resulting in a net issuance of 303,333 shares of common stock assuming an initial public offering price of $9.00 per share; - assumes no exercise by the underwriters of their option to purchase additional shares of common stock to cover over-allotments, if any. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) You should read the following summary financial data in conjunction with our financial statements and their related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this prospectus. We derived the following statement of operations data for the years ended December 31, 1996, 1997 and 1998 and for the nine month period ended September 30, 1999, and the balance sheet data at September 30, 1999, from the audited financial statements included at the end of this prospectus. We derived the following statement of operations data for the nine month period ended September 30, 1998 from the unaudited financial statements included at the end of this prospectus. In the pro forma as adjusted balance sheet data presented below we have given effect to the receipt of the estimated net proceeds from this offering at an assumed initial public offering price of $9.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses, the cashless exercise of warrants to purchase 350,000 shares of common stock at a price of $1.20 per share, resulting in a net issuance of 303,333 shares of common stock assuming an initial public offering price of $9.00 per share, and the conversion of all outstanding shares of our preferred stock into common stock on a one-for-one basis. <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------- --------------------- 1996 1997 1998 1998 1999 ------- ------- ------- ----------- ------- (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues............................... $ 1,939 $ 4,038 $ 6,217 $4,648 $ 7,067 Loss from operations......................... (1,697) (803) (1,985) (401) (1,524) Net loss..................................... (1,897) (1,011) (1,910) (352) (1,452) Net loss per share: Basic and diluted......................... $ (1.74) $ (0.91) $ (1.84) $(0.34) $ (1.15) Weighted average shares................... 1,088 1,108 1,041 1,045 1,259 Pro forma net loss per share:(1) Basic and diluted (unaudited)............. $ (0.27) $ (0.17) Weighted average shares (unaudited)....... 7,061 8,362 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1999 --------------------- PRO FORMA ACTUAL AS ADJUSTED ------ ----------- (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................. $2,094 $30,393 Working capital........................................... 157 28,456 Total assets.............................................. 5,317 33,616 Stockholders' equity...................................... 967 29,266 </TABLE> - ------------------------- (1) See Note 2 of Notes to Financial Statements for a discussion of the computation of pro forma basic and diluted net loss per share and weighted average shares outstanding.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001058444_savvis-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001058444_savvis-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY The information below is only a summary of more detailed information included in other sections of this prospectus. This summary may not contain all the information that is important to you or that you should consider before buying shares in the offering. The other information is important, so please read this entire prospectus carefully. The terms "SAVVIS," "we," "us" and "our" as used in this prospectus refer to SAVVIS Communications Corporation, a Delaware corporation, formerly SAVVIS Holdings Corporation, and its subsidiaries, except where by the context it is clear that such terms mean only SAVVIS Communications Corporation. Unless otherwise indicated, all information in this prospectus assumes the underwriters do not exercise their over-allotment option and reflects the 72,000-for-1 stock split of our outstanding common stock on July 22, 1999. SAVVIS is a subsidiary of Bridge Information Systems, Inc., or Bridge, which owns approximately 69% of SAVVIS' outstanding common stock. SAVVIS OUR BUSINESS We are a rapidly growing provider of high quality, high performance global data networking and Internet-related services to medium and large businesses, multinational corporations and Internet service providers. We currently offer the following services: o MANAGED DATA NETWORKING SERVICES that provide secure, high quality data communication links over our network to connect a customer's geographically dispersed offices, known as intranets, or to connect with its customers and suppliers, known as extranets. o HIGH BANDWIDTH INTERNET ACCESS SERVICES including dedicated access and digital subscriber line, commonly known as DSL, services and Internet security services which connect our customers to the Internet at high speeds. o COLOCATION SERVICES that allow our customers to locate their mission-critical content and networking hardware in our data centers which provide a highly secure, fault tolerant environment. Simultaneously with the closing of this offering, we will acquire the Internet protocol network assets of Bridge and the employees of Bridge who have operated that network. This transfer will significantly expand our managed data networking services, which we began offering in September 1999. Upon the transfer of the Bridge network to us and pursuant to a network services agreement between Bridge and us, Bridge will pay us for the use of the SAVVIS ProActiveSM Network to deliver Bridge's content and applications to over 4,500 financial institutions, including 75 of the top 100 banks in the world and 45 of the top 50 brokerage firms in the United States. Following the network transfer, these entities will remain customers of Bridge. We currently provide Internet access services directly to approximately 850 customers. THE SAVVIS PROACTIVESM NETWORK The SAVVIS ProActiveSM Network was created through the combination, in September 1999, of the Bridge network, which was constructed to meet the exacting requirements of the financial services industry worldwide, and the SAVVIS network, which was constructed to provide high quality Internet access in the United States. Both of these networks have been operational since 1996 and we refer to the combined network as the "SAVVIS ProActiveSM Network." The SAVVIS ProActiveSM Network interconnects over 6,000 buildings in 83 of the world's major commercial cities in 43 countries. Our network architecture is based on the following technologies: o asynchronous transfer mode, commonly known as ATM, which supports the transmission of all kinds of content and allows data to be prioritized; o frame relay, which is a shared network technology commonly used in communications networks; and o Internet protocol, a communications protocol that is a core element of the Internet and is used on computers, but that cannot currently reliably deliver real-time data, unless operated over an ATM network, such as the SAVVIS ProActiveSM Network. Additionally, our 83 city global system connects to eight private Internet access points, which we call PrivateNAPsSM, where our network connects to a number of Internet service providers, including Sprint Corporation, Cable & Wireless plc and UUNET, an MCI Worldcom company. These PrivateNAPsSM, which will be expanded to 12 by March 2000, use our proprietary routing policies to reduce data loss and enhance performance by avoiding the congested public access points on the Internet. We measure the performance of our access services using data loss and transmission delay, commonly known as latency, measurements. The high performance of our Internet access services has been verified by our analysis of data collected by Keynote Systems, Inc., an independent research firm, which showed that we had the second best mean download time in 1999. RELATIONSHIP WITH BRIDGE In April 1999, we were acquired by Bridge. Bridge is a global provider of high quality, real-time and historical financial information, including coverage of equities, fixed income, foreign exchange and commodities, which it delivered to an estimated 235,000 trading terminals around the globe as of December 31, 1999. On September 10, 1999, Bridge sold in a private placement approximately 25% of its equity ownership in SAVVIS to existing stockholders of Bridge. Bridge currently owns approximately 69% of our outstanding common stock and, after completion of this offering, will own approximately 56% of our outstanding common stock. Investment partnerships sponsored by Welsh, Carson, Anderson & Stowe, or Welsh Carson, a sponsor of private equity funds with extensive experience in the communications and information services industries, currently owns approximately 38% of Bridge's outstanding voting stock and approximately 11% of our outstanding common stock and, after completion of this offering, will own approximately 10% of our outstanding common stock. Over the last four years, Bridge constructed a sophisticated network based on Internet protocol and ATM technologies to service some of the largest financial institutions and institutional investors in the world. These financial market participants rely on information received continuously from Bridge to make trading and investment decisions throughout the business day. Bridge must deliver this information instantaneously and reliably. Accordingly, Bridge built a highly redundant, fault tolerant network to deliver high volume, real-time financial data and news around the globe. Since January 1996, Bridge has converted a substantial portion of its customers from less technologically advanced protocols to its Internet protocol network. As of December 31, 1999, of Bridge's estimated 235,000 terminals, an estimated 135,000 terminals were connected to the SAVVIS ProActiveSM Network. Bridge has advised us that it intends to convert the remaining 100,000 terminals on its other networks to the SAVVIS ProActiveSM Network over the next three years. As Bridge converts terminals, we expect it to order additional connections from us under the network services agreement. As of December 31, 1999, Bridge's proprietary network monitoring and customer support systems managed over 10,000 routers and over 11,000 servers. Additionally, Bridge has a highly experienced group of network engineers, technical support representatives and customer call center personnel to support its services and has agreed to make their services available to us. Acquisition of Bridge's Network Assets and Ongoing Relationship with Bridge. Simultaneously with the closing of this offering, we will acquire Bridge's Internet protocol network assets and the employees of Bridge who operate them, and we will enter into a network services agreement with Bridge that commits Bridge to purchase a minimum of approximately $105 million, $132 million and $145 million of network services from us in 2000, 2001 and 2002, respectively. Thereafter, Bridge will be required to purchase at least 80% of their network requirements from us, declining to 60% in 2006 through the end of the agreement in 2010. We will incur losses from the operation of the network under the network services agreement, and had the network services agreement been in effect in 1999, Bridge would have represented approximately 83% of our 1999 revenues. We have instituted a lead referral program for Bridge's approximately 500 sales representatives worldwide to generate sales leads for us. We will also enter into a number of other agreements with Bridge under which Bridge will transfer a number of highly skilled people to us and we will purchase various support services from it. Preferential Distribution. We will also pay to Bridge a $58 million preferential distribution with a portion of the proceeds of this offering. BUSINESS STRATEGY Our objective is to tap the rapidly growing market for reliable, high speed data communications and Internet services. Key elements of our strategy to achieve this objective include: o providing a single source for managed data network services and high quality Internet services; o capitalizing on Bridge's relationships to penetrate its customer base; o targeting potential customers in buildings already connected to our network; o expanding our network and PrivateNAPSM infrastructure; o growing domestic and international distribution channels; o providing enabling infrastructure for e-commerce services; and o developing and marketing new services. COMPETITIVE STRENGTHS Our target customers are businesses that are intensive users of data communications and require high quality service for their global data networking and Internet needs. We believe our competitive strengths in servicing these customers include: o large number of sophisticated users already connected to our network; o network engineered for real-time performance; o global network presence; o single source service offering; and o world-class service through proprietary systems. WE HAVE INCURRED SIGNIFICANT LOSSES AND NEGATIVE CASH FLOW IN THE PAST AND EXPECT TO INCUR SIGNIFICANT LOSSES AND NEGATIVE CASH FLOW AT LEAST THROUGH 2002. We incurred losses of approximately $2.2 million, $14.0 million and $20.0 million in 1996, 1997 and 1998 and had negative cash flow from operating activities of $1.3 million, $10.5 million and $20.6 million in these years. We also had losses of $8.1 million and negative cash flow from operating activities of $6.2 million for the period from January 1, 1999 to April 6, 1999 and losses of approximately $22.6 million, and negative cash flows from operating activities of approximately $9.9 million, from April 7, 1999 to September 30, 1999. We expect to incur significant net losses and negative cash flow from operating activities at least through 2002. As of September 30, 1999, our accumulated deficit was approximately $22.6 million, which reflects our losses only since Bridge acquired our company on April 7, 1999. OTHER RISK FACTORS You should consider carefully the following risk factors, the information contained in "Risk Factors" and the other information in this prospectus before deciding to invest in our common stock: o a significant portion of our revenues is expected to come from Bridge, and the loss of Bridge as a customer or reduced demand from Bridge would materially affect our business; o if Bridge is unable to meet its financial commitments to us, we will be materially adversely affected; o our limited operating history, and the fact that we only recently began offering data networking and colocation services, makes it difficult for you to evaluate our performance; and o our historical financial information will not be comparable to our future financial performance. Our principal executive office is located at 12007 Sunrise Valley Drive, Reston, Virginia 20191, and our telephone number is (703) 453-7500. THE OFFERING Common stock offered by us........ 14,875,000 shares Common stock offered by the selling stockholder........... 2,125,000 shares Total.......................... 17,000,000 shares Shares outstanding after this offering.................... 92,610,933 shares Over-allotment option............. 2,550,000 shares Use of proceeds.................. We will receive net proceeds from this offering of approximately $326 million, assuming a per share price of $23.50. We intend to use these net proceeds to pay the $63 million cash portion of the purchase price for the Bridge network assets, for capital expenditures relating to our network expansion, and for other general corporate purposes. In addition, a portion of the net proceeds of this offering will be used to pay a $58 million preferential distribution to Bridge and repay approximately $4 million of indebtedness owed to Bridge. We will not receive any proceeds from the sale of shares by the selling stockholder. Dividend policy.................. We do not intend to pay dividends on our common stock for the foreseeable future. We plan to retain any earnings for use in the operation of our business and to fund future growth. Nasdaq National Market Symbol........................... "SVVS" This information is based on our shares outstanding on January 25, 2000. This information excludes 3,518,419 shares of common stock underlying options granted under our stock option plans outstanding as of December 31, 1999 at an exercise price of $.50 per share. SUMMARY CONSOLIDATED FINANCIAL DATA We derived the summary historical consolidated financial data presented below as of and for each of the three years ended December 31, 1996, 1997 and 1998 from our audited consolidated financial statements. We derived the summary historical consolidated financial data presented below for the nine months ended September 30, 1998, the period from January 1, 1999 to April 6, 1999 and the period from April 7, 1999 to September 30, 1999 and as of September 30, 1999 from our unaudited consolidated financial statements. We prepared the unaudited financial statements on substantially the same basis as our audited financial statements and, in our opinion, the unaudited financial statements include all adjustments necessary for a fair presentation of the results of operations for those periods. Historical results are not necessarily indicative of the results to be expected in the future, and results of interim periods are not necessarily indicative of results for the entire year. You should read the information set forth below together with the discussion under "Unaudited Pro Forma Consolidated Financial Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the notes to those financial statements that are in the back of this prospectus. On April 7, 1999, Bridge acquired all our equity securities and accounted for this acquisition as a purchase transaction. Since the purchase transaction resulted in our company becoming a wholly owned subsidiary of Bridge, SEC rules required us to establish a new basis of accounting for the purchased assets and liabilities. The accounting for the purchase transaction has been "pushed down" to the financial statements of SAVVIS. Therefore, the purchase price has been allocated to the underlying assets purchased and liabilities assumed based on the estimated fair market values of these assets and liabilities on the acquisition date. As a result of the application of fair value accounting, intangibles, goodwill, other liabilities and stockholders' equity were increased in the SAVVIS unaudited consolidated balance sheet. The SAVVIS unaudited historical consolidated balance sheet data as of September 30, 1999 and unaudited consolidated statement of operations data for the period from April 7, 1999 through September 30, 1999 give effect to our acquisition by Bridge and are labeled "Successor." The SAVVIS unaudited historical financial data for the periods prior to the acquisition are labeled "Predecessor." On September 10, 1999, Bridge sold in a private placement approximately 25% of its equity ownership in SAVVIS to existing stockholders of Bridge, including Welsh Carson which purchased from Bridge a 12% interest in SAVVIS at that time. Pro forma data for the year ended December 31, 1998 and the nine months ended September 30, 1999 give effect to, as if they had occurred at the beginning of 1998 for the statement of operations data and at September 30, 1999 for the balance sheet data, the acquisition of our company by Bridge, our purchase of the network assets from Bridge for $88 million, including the incurrence of capital lease obligations to Bridge of $25 million, the payment of a $58 million preferential distribution to Bridge and the sale in this offering of the shares required to generate the $125 million of cash to be paid to Bridge in respect of these items. For more detailed information on the pro forma financial data, see "Unaudited Pro Forma Consolidated Financial Statements." We calculate EBITDA as earnings (loss) before depreciation and amortization, interest income and expense and income tax expense (benefit). We have included information concerning EBITDA because our management believes that in our industry such information is a relevant measurement of a company's financial performance and liquidity. EBITDA is not determined in accordance with generally accepted accounting principles, is not indicative of cash used by operating activities and should not be considered in isolation or as an alternative to, or more meaningful than, measures of operating performance determined in accordance with generally accepted accounting principles. Additionally, EBITDA as used in this prospectus may not be comparable to similarly titled measures of other companies, as other companies may not calculate it in a similar manner. <TABLE> <CAPTION> PREDECESSOR -------------------------------------------- HISTORICAL PRO FORMA -------------------------------------------- -------------- YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, -------------------------------------------- -------------- 1996 1997* 1998* 1998* -------------- -------------- -------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues ..................... $ 290 $ 2,758 $ 13,674 $ 13,674 Direct costs and operating expenses: Data communications and operations ............. 1,044 11,072 20,889 20,889 Selling, general and administrative ............. 1,204 5,130 12,245 12,245 Depreciation and amortization ............... 153 631 2,288 45,876 Impairment of assets ........ -- -- -- -- ------------ ------------ ------------ ------------ Total direct costs and operating expenses.......... 2,401 16,833 35,422 79,010 ------------ ------------ ------------ ------------ Loss from operations ......... (2,111) (14,075) (21,748) (65,336) Interest expense, net ........ (60) (482) (100) (1,739) ------------ ------------ ------------ ------------ Net loss before minority interest and extraordinary item .......... (2,171) (14,557) (21,848) $ (67,075) ============ Minority interest in losses, net of accretion ............ -- 547 (147) Extraordinary gain on debt extinguishment, net of tax .................. -- -- 1,954 ------------ ------------ ------------ Net loss ..................... $ (2,171) $ (14,010) $ (20,091) ============ ============ ============ Basic and diluted net loss per common share ............ $ (.06) $ (.38) $ (.39) $ (.87) ============ ============ ============ ============ Weighted average shares outstanding ................. 35,396,287 36,904,108 58,567,482 77,309,840 ============ ============ ============ ============ OTHER FINANCIAL DATA: EBITDA ....................... $ (1,958) $ (12,897) $ (17,653) Capital expenditures ......... 884 697 1,688 Cash used in operating activities .................. (1,293) (10,502) (20,560) Cash used in investing activities .................. (884) (697) (2,438) Cash provided by financing activities ........ 2,740 12,024 24,121 <CAPTION> PREDECESSOR SUCCESSOR ------------------------------ --------------- HISTORICAL ------------------------------ HISTORICAL PRO FORMA NINE MONTHS PERIOD FROM PERIOD FROM NINE MONTHS ENDED JANUARY 1 TO APRIL 7 TO ENDED SEPTEMBER 30, APRIL 6, SEPTEMBER 30, SEPTEMBER 30, --------------- -------------- --------------- -------------- 1998* 1999* 1999 1999 --------------- -------------- --------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues ..................... $ 8,914 $ 5,440 $ 12,192 $ 17,632 Direct costs and operating expenses: Data communications and operations ............. 14,609 6,429 13,095 19,524 Selling, general and administrative ............. 7,353 4,751 11,142 15,893 Depreciation and amortization ............... 1,556 817 9,747 30,185 Impairment of assets ........ -- 1,383 -- 1,383 ------------ ------------ ------------ ------------ Total direct costs and operating expenses.......... 23,518 13,380 33,984 66,985 ------------ ------------ ------------ ------------ Loss from operations ......... (14,604) (7,940) (21,792) (49,353) Interest expense, net ........ (138) (135) (782) (1,682) ------------ ------------ ------------ ------------ Net loss before minority interest and extraordinary item .......... (14,742) (8,075) (22,574) $ (51,035) ============ Minority interest in losses, net of accretion ............ (147) -- -- Extraordinary gain on debt extinguishment, net of tax .................. 1,954 -- -- ------------ ------------ ------------ Net loss ..................... $ (12,935) $ (8,075) $ (22,574) ============ ============ ============ Basic and diluted net loss per common share ............ $ (.26) $ (.14) $ (.31) $ (.66) ============ ============ ============ ============ Weighted average shares outstanding ................. 56,735,597 66,018,388 72,000,000 77,309,840 ============ ============ ============ ============ OTHER FINANCIAL DATA: EBITDA ....................... $ (11,241) $ (7,123) $ (12,045) Capital expenditures ......... 1,308 275 855 Cash used in operating activities .................. (15,530) (6,185) (9,945) Cash used in investing activities .................. (2,058) (275) (855) Cash provided by financing activities ........ 24,445 4,533 12,189 </TABLE> <TABLE> <CAPTION> PREDECESSOR SUCCESSOR PRO FORMA ---------------------------------- --------------------- -------------- HISTORICAL HISTORICAL ---------------------------------- --------------------- AS OF AS OF DECEMBER 31, ---------------------------------- AS OF SEPTEMBER 30, SEPTEMBER 30, 1996 1997* 1998* 1999 1999 -------- ------------ ------------ --------------------- -------------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents .................... $573 $ 1,398 $ 2,521 $ 1,983 $203,541 Goodwill and intangibles, net ................ -- -- 1,406 30,322 30,322 Total assets ................................. 1,888 4,313 11,663 41,422 330,980 Debt and capital lease obligations ........... 1,126 8,814 2,759 23,237 44,456 Redeemable stock, net of discount and deferred financing costs ............................. 500 5,261 36,186 -- -- Stockholders' equity (deficit) ............... (693) (14,903) (33,197) 9,172 277,511 </TABLE> * As discussed in Note 14 to our Consolidated Financial Statements, 1997, 1998 and predecessor 1999 amounts have been restated.
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+(1) Reflects a car allowance and automobile insurance premiums in the amount of $12,724 and our matching contributions made to Mr. Garvey s 401(k) account in the amount of $1,127. (2) Reflects our matching contributions made to the named executive s 401(k) account. Option Grants in Last Fiscal Year The following table sets forth information regarding stock options granted in 1999 to the named executive officers listed in the Summary Compensation Table above. Neither Mr. Garvey nor Ms. Bates was granted any options or stock appreciation rights in 1999. The values set forth in the last two columns of the table represent the gain that Mr. Wirthlin would realize assuming that (1) he exercises all of the options granted at the end of their respective terms and (2) the value of a share of our common stock increases annually by a rate of 5% and 10% during the term of the option. These assumed growth rates are prescribed by the rules of the Securities and Exchange Commission. By including these values in this prospectus, we do not intend to forecast the possible appreciation of our common stock or to establish a present value of these options. Mr. Wirthlin may not necessarily achieve the gain amounts reflected in the table. There was no public market for our common stock as of December 31, 1999. Accordingly, the fair market value per share of our common stock on December 31, 1999 was determined by our board of directors. The board based its determination on the valuations of comparable public companies at the time, the prices paid for shares of our preferred stock by institutional investors, which prices were reached through arms-length negotiations, and the advice of investment firms. Individual Grants Potential realized Table of Contents Advanced e-Business Expertise. We provide our clients with the most current e-business technologies through our unique internal knowledge sharing process that we call our Centers of Excellence. Through these Centers of Excellence, our senior technology specialists identify, assess, and deploy new technologies throughout our organization. Our Centers of Excellence program ensures the timely integration of new technologies into our service delivery capabilities, enabling our consultants to transfer these technologies across multiple client engagements. Industry-Specific Expertise. We seek to deliver superior solutions for our clients by combining our leading edge Internet technology expertise with an in-depth business knowledge of the industries in which our clients compete. By understanding our clients businesses, our consultants effectively act as a liaison between the client and our technology implementation team, reducing the time and personnel commitment otherwise required by a client to convey and translate their unique business concerns. Rapid Implementation Solutions. Using our proprietary service delivery methodology, which we call Dimensions, we are able to rapidly provide comprehensive solutions that incorporate our knowledge of the most current leading edge technologies and leverage our extensive expertise in specific vertical markets. Our Dimensions methodology is a framework involving six distinct steps through which we conceive, explore, design, create, support, and evolve our clients transition to a web-based environment. This framework facilitates the delivery of clearly conceptualized, enhanced, and implemented solutions with the speed-to-market demanded in today s rapidly changing e-business environment. Our Strategy Our objective is to become an integral component of our clients business success by providing high quality digital solutions. By providing the technologically advanced, customer-specific, and rapidly implemented services demanded in today s dynamic e-business environment, we seek to build upon our position as a comprehensive provider of Internet professional services. Key elements of our business strategy include: create and expand long-term client relationships; continue to provide leading edge technology expertise; expand geographic presence; strengthen and create key alliances; attract and retain professionals by maintaining our innovative culture; and promote and expand brand recognition. Our Clients Our current clients include many leading and emerging companies in the financial services, health care, local government, manufacturing, and retail industries. Over the past year, we have performed services for clients such as American Express (which accounted for 35% of our 1999 revenues), CSK Auto, CommercialWare, DentalTown.com, EMC, Employee Solutions, Frederick s of Hollywood, goracing.com, Intel, PCS Health Systems, and visitalk.com. Our Offices Our executive offices are located at 1560 West Fountainhead Parkway, Tempe, Arizona 85282, and our telephone number is (480) 317-8000. Within the past year, we have commenced operations in Atlanta, Boston, Denver, Las Vegas, and Los Angeles and opened a solutions development center in Bangalore, India. Our Web site can be located at www.iisweb.com. Information contained on our Web site should not be considered a part of this prospectus. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Except as otherwise indicated, all information in this prospectus assumes: no exercise of the underwriters over-allotment option; and the automatic conversion of all outstanding shares of our Series A, B, and C preferred stock into an aggregate of 4,538,170 shares of common stock. Except as otherwise indicated, the total number of shares to be outstanding after this offering excludes: 2,503,593 shares of common stock issuable upon the exercise of stock options outstanding at February 21, 2000 at a weighted average exercise price of $2.16 per share; 1,991,082 shares of common stock reserved for future grants under our stock option plan; 400,000 shares of common stock reserved for future issuances under our employee stock purchase plan; and 117,000 shares of common stock issuable upon the exercise of outstanding warrants at an exercise price of $2.00 per share. Computed expected income tax expense (benefit) $ (412 ) (478 ) Nondeductible permanent differences 8 23 State income taxes, net of federal benefit (3 ) (132 ) Nontaxable S corporation loss 422 Difference in rates due to conversion from S corporation to C corporation status (94 ) Change in valuation allowance 664 Other Amendment No. 2 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Balance Sheet Data: Cash and cash equivalents $ 863 $ 20,274 $ 74,888 Working capital 662 20,073 74,687 Total assets 12,118 31,529 86,143 Long-term debt and capital lease obligations, less current installments 1,825 1,825 1,825 Convertible preferred stock 4,882 24,293 Total stockholders equity (deficiency) $ (704 ) $ (704 ) $ 78,203 2000 $ 222 2001 231 2002 231 2003 197 2004 Deferred expense (benefit): Federal 14 (18 ) State Integrated Information Systems, Inc. (Exact name of registrant as specified in its charter) Delaware (State of incorporation) 7379 (Primary Standard Industrial Classification Code Number) 86-0624332 (I.R.S. Employer Identification No.) 1560 W. Fountainhead Parkway Tempe, Arizona 85282 (480) 317-8000 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Table of Contents
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+PROSPECTUS SUMMARY This summary may not contain all the information that may be important to you. You should read the following summary together with the more detailed information appearing elsewhere in this prospectus, including "Risk Factors" and our consolidated financial statements and the notes thereto, before making an investment decision. The terms "WAM!NET," "our company," "we," "us" and "our" as used in this prospectus refer to WAM!NET Inc., a Minnesota corporation, its subsidiaries and its predecessors as a combined entity, except where it is made clear that we are only referring to the parent company, WAM!NET Inc. WAM!NET OVERVIEW We are a leading global provider of business-to-business electronic services to the media industry. We enable entertainment, advertising, publishing, printing and related media businesses worldwide to collaborate on-line within their workflow chains. These businesses experience inefficiencies associated with incompatible systems and largely manual processes involving both analog and digital data. Our services and network infrastructure address this problem by providing businesses a common electronic workflow platform to seamlessly integrate their production processes and accelerate the adoption of digital workflow collaboration. Our e-services include: (1) managed data transport, (2) media application hosting, (3) managed data storage, (4) computer animation rendering and (5) Internet-based services. We offer our services under simple monthly service fee and pay-per-use pricing plans, which require no up-front capital investment by our customers. We enable businesses to achieve measurable operating efficiencies, productivity gains and cost savings. We own and operate a private, Internet Protocol or IP based global network, hosting and storage infrastructure that we have integrated with the public Internet. Customers can access our services and infrastructure through the Internet or through a dial-up or dedicated connection to our network. This provides our customers with the global access of the Internet and the reliability, security, accountability and predictability of a managed private infrastructure. By design, our network is not dependent on a single technology, protocol or telephony solution, allowing us to quickly take advantage of new network, access and storage technologies to enhance our services or reduce costs. Our services are tailored to meet the specialized needs of businesses involved in the creation, exchange, distribution and storage of media, such as magazines, newspapers, marketing materials, brand advertisements, television and radio broadcast programming and films. As the number of influential, industry-leading firms that rely on our services and applications grows, the value of our network to current and prospective customers increases. We believe media businesses that gain the most cost savings by digitally integrating their workflow chains will become the strongest proponents of our workflow platform. Many of our customers actively encourage their workflow partners to purchase our services and, in some cases, pay the fees incurred by their partners. As of December 31, 1999, we had over 1,900 customer points-of-presence consisting of dedicated network access devices and local bandwidth connectivity. In addition, we had over 6,800 users of our Internet and dial-up services globally. Our customers include: Time Inc., Sony Corporation, R.R. Donnelley & Sons Company, J. Walter Thompson, Inc., Ford Motor Company, Young & Rubicam, Inc., and Callaway Golf Company. MARKET OPPORTUNITY The emergence of business-to-business e-commerce over the Internet and private networks is changing the way companies are conducting business. According to Forrester Research, Inc., a leading independent research firm, more than $1.3 trillion in business-to-business e-commerce will be transacted in 2003. We believe as companies in the media industry increase the amount of business they conduct over the Internet, these businesses will increase their digital collaboration and require on-line integrated workflow chains. This workflow evolution, combined with the success of Information Technology or IT outsourcing, is increasing demand for industry-specific, standardized e-commerce platforms through which The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED MARCH , 2000 PROSPECTUS ,000,000 SHARES [WAM!NET LOGO] COMMON STOCK ---------------------- This is WAM!NET Inc.'s initial public offering of shares of common stock. All of the ,000,000 shares of common stock are being offered by WAM!NET. We expect the public offering price to be between $ and $ per share. Currently, no public market exists for the shares. After pricing of this offering, we expect that the shares will trade on the Nasdaq National Market under the symbol "WMNT." INVESTING IN OUR COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 6 OF THIS PROSPECTUS. ---------------------- <TABLE> <CAPTION> PER SHARE TOTAL --------- ----- <S> <C> <C> Public offering price....................................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to WAM!NET....................... $ $ </TABLE> The underwriters may also purchase up to an additional shares at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The shares will be ready for delivery on or about , 2000. ---------------------- MERRILL LYNCH & CO. GOLDMAN, SACHS & CO. ---------------------- ROBERT W. BAIRD & CO. ---------------------- THE DATE OF THIS PROSPECTUS IS , 2000 workflow partners can access a full range of e-services and seamlessly integrate their media production processes. The need for a standardized e-commerce platform is heightened by the fact that businesses involved in media design and production are increasingly using computers, software applications and other electronic systems in all aspects of the media production process. The demand for digital media in Web-based e-commerce and the increasing use of digital tools to create media will continue to fuel growth in data traffic. GISTICS Incorporated, a leading media research firm, estimated that in North America alone businesses would spend nearly $20 billion in 1999 on physical and digital media logistics and transportation, including the transportation of media to workflow partners using traditional physical processes such as overland or air couriers, including Federal Express, DHL Worldwide Express and United Parcel Service. We believe that five trends will continue to drive our market opportunity: - Rapid growth in the creation of digital media and expenditures for digital media production; - Expanding use of digital media in workflow collaboration and e-commerce; - Growing demand for accessible, integrated and on-line media storage and hosting solutions; - Emerging need by the media industry for standardized, integrated and cost-effective e-commerce solutions; and - Continuing positive impact of the Internet on our market. BUSINESS STRATEGY Our objective is to become the leading global provider of business-to-business e-services that enable businesses to collaborate on-line with their workflow chains. We intend to implement the following strategies to achieve this objective: - Capitalize on our first-to-market advantage with our existing influential customer base to attract new customers worldwide and increase utilization of our services; - Provide a complete range of e-services that enable our customers to accelerate their adoption of digital workflow; - Enter into strategic relationships to expand distribution channels, integrate emerging technologies, develop new hosted applications and services and reduce costs; - Integrate public and private IP infrastructures to meet the global needs of our customers most effectively; and - Apply our business model to other vertical markets worldwide. STRATEGIC RELATIONSHIPS We develop strategic relationships that enable us to further penetrate our market by enhancing our sales, marketing and distribution efforts and that permit us to expand and improve our infrastructure and services by providing us with access to new technologies. Our present strategic partners include SGI (formerly Silicon Graphics, Inc.), Winstar Communications, Inc., Sumitomo Corporation and MCI WorldCom, Inc. We have also entered into joint marketing and distribution agreements with Sony Corporation, Heidelberger Druckmaschinen AG (Heidelberg) and Minnesota Mining & Manufacturing Company (3M). Our strategic partners invested approximately $220 million in us during the past year, which includes an $85 million equity investment by Winstar. Our strategic relationship with Winstar involves a revenue guarantee, a reseller and agency agreement and a commitment to provide us with increased bandwith capacity through wireless local loop and backbone network facilities. THE OFFERING Common stock offered by us.... shares Common stock to be outstanding after this offering........... shares(1) Over-allotment option......... shares Use of proceeds............... We intend to use the proceeds of this offering for working capital, to repay bank debt, for the expansion of our network, hosting and storage infrastructure, and for possible acquisitions. Proposed Nasdaq National Market symbol................. "WMNT" - --------------- (1) Based on 9,494,797 shares outstanding as of March 14, 2000, plus 1,937,984 shares to be issued upon mandatory conversion of our Class G convertible preferred stock at the time of the closing of this offering. Excludes the following shares of common stock: - 24,795,521 shares issuable upon exercise of outstanding stock options; - 33,042,840 shares issuable upon exercise of warrants; - 5,000,000 shares issuable upon conversion of convertible debt (exclusive of shares issuable upon conversion of accrued interest at fair market value per share on the date of conversion); and - shares issuable upon conversion of our Class B, Class C, Class D, Class E and Class F convertible preferred stock, including accumulated but undeclared in-kind dividends. The number of shares of common stock to be outstanding after this offering also excludes 19,049,796 shares of common stock issuable under warrants held by MCI WorldCom that will terminate unexercised upon repayment of our $25 million revolving credit facility with a portion of the net proceeds from this offering. See "Use of Proceeds." SUMMARY CONSOLIDATED FINANCIAL DATA The following tables present our summary consolidated financial data, which should be read together with our consolidated financial statements and related notes appearing elsewhere in this prospectus, and with "Management's Discussion and Analysis of Financial Condition and Results of Operations." The pro forma balance sheet data gives effect to the sale of shares of Class E, Class F and Class G convertible preferred stock to SGI, Winstar, Sumitomo and certain other investors pursuant to private placements that closed in February and March 2000, and the application of a portion of the proceeds from the sale of these securities to repay our line of credit with Foothill Capital. The pro forma as adjusted balance sheet data gives effect to the sale of such convertible preferred stock, the repayment of the line of credit with Foothill Capital, the sale of the common stock in this offering for assumed net proceeds of $ million, and the mandatory conversion of the Class G convertible preferred stock upon completion of this offering. See "Use of Proceeds" and "Capitalization." <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ----------------------------------------------------------------- 1995(1) 1996 1997 1998 1999 ------------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues Net service revenue....... $ 180 $ 279 $ 1,555 $ 6,799 $ 17,319 Software and hardware sales.................. -- -- -- 10,791 7,476 ---------- ---------- ---------- ---------- ---------- Total revenues.............. 180 279 1,555 17,590 24,795 Loss from operations........ (1,257) (6,757) (29,482) (102,391) (105,623) Net loss applicable to common stock.............. $ (1,277) $ (7,596) $ (33,706) $ (121,948) $ (145,117) ========== ========== ========== ========== ========== Net loss applicable per common share.............. $ (.24) $ (1.18) $ (5.19) $ (13.87) $ (15.58)(2) Weighted average number of common shares outstanding............... 5,263,535 6,445,785 6,496,345 8,793,961 9,315,900(2) FINANCIAL DATA: Net cash flows provided by (used in): Operating activities...... $ (747) $ (6,218) $ (23,917) $ (55,878) $ (65,670) Investing activities...... (657) (5,244) (15,599) (71,304) (25,942) Financing activities...... 2,732 24,578 25,346 132,817 113,497 EBITDA(3)................. (1,226) (6,310) (26,814) (84,684) (69,473) </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ---------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED --------- ------------ ----------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................... $ 27,180 $ 96,768 $ Total assets............................................ 435,255 554,843 Total debt(4)........................................... 547,612 545,475 Shareholders' equity (deficit).......................... (147,885) (26,160) </TABLE> - --------------- (1) We were organized in September 1994 and commenced operations in March 1995. (2) If the shares of Class B, Class C and Class D convertible preferred stock been converted as of their date of issuance in 1999, the net loss per share, on a pro forma basis, would have been $(8.38). Giving effect to the pro forma conversion, the weighted average shares outstanding used in the net loss per share calculation would have been 16,584,807. The Class B, Class C and Class D convertible preferred stock will mandatorily convert into common stock upon completion of an underwritten public offering with an initial offering price of at least $12.13, $12.52 and $12.52 per share, respectively. (3) EBITDA represents earnings (loss) from operations before taking into consideration net interest expense, income tax expense, depreciation expense and amortization expense. We have included information concerning EBITDA as it is used by some investors as a measure of a company's ability to service its debt. EBITDA should not be considered as an alternative to net income or any other measure of performance or liquidity as determined in accordance with generally accepted accounting principles or as an indicator of our overall financial performance. In addition, EBITDA as we have presented it may not be comparable to other similarly-titled measures of other companies. (4) Total debt includes long-term debt, current portion of long-term debt, obligations under capitalized leases and redeemable preferred stock.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001060824_cosine_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001060824_cosine_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary highlights information we present more fully elsewhere in this prospectus. This summary does not contain all of the information you should consider before buying shares in the offering. You should read the entire prospectus carefully. COSINE COMMUNICATIONS, INC. We develop, market and sell a communications platform designed to enable network service providers to rapidly deliver computer applications and communications services from within their networks. Our communications platform is a combination of hardware and software that uses IP, or internet protocol, and consists of three independent elements: - IPSX 9000 processing switch; - InVision service management system for network management; and - InGage customer network management software. Our IP service delivery platform is designed to allow simultaneous delivery of applications and services to thousands of subscribers. It addresses cost, management complexity and scalability issues of existing systems by moving the implementation of network services from the customers' premises to the service provider's facilities. Our products are designed to offer customers potential benefits such as: - fewer pieces of equipment; - a centralized platform that allows automated delivery of services, customer activation of services, centralized billing and fewer service calls; - enhanced reliability and ease of expansion; - network management software that can be accessed securely through the internet; and - an architecture that supports network standards and permits the implementation of third-party applications. Our objective is to become the leading supplier of network systems designed to enable the delivery of applications and services from within a service provider's network. We began shipping the IPSX 9000 and InVision in the first quarter of 2000, and we have made InGage generally available in the third quarter of 2000. Our customers potentially include traditional local, regional, national and international communications carriers, IP carriers and internet service providers, or ISPs. We have entered into contracts with Qwest Communications Corporation, AduroNet Ltd., BroadBand Office, Inc., Nissho Electronics Corporation, Internet Initiative Japan Inc., Telia TeleCom, Telenordia AB, and American MetroComm Corporation. Qwest, AduroNet and Broadband Office have received warrants to purchase CoSine stock, Nissho Electronics and Internet Initiative Japan are investors in CoSine, and American MetroComm will receive a warrant to purchase CoSine stock if it receives financing for the purchase of the products it has ordered. We ceased being a development stage company when we began shipping products and recognizing revenue during the first quarter of 2000. We have recognized substantially all of our revenue during the first six months of 2000 from sales to two customers. We anticipate that our IP service delivery platform, which is our only product line, and related software applications will constitute the majority of our future revenue. We had an accumulated deficit of $104.2 million as of June 30, 2000 and expect to continue to incur substantial operating losses in the future. At June 30, 2000, we had $88.8 million in cash and short-term investments. Our principal executive offices are located at 3200 Bridge Parkway, Redwood City, California 94065 and our telephone number is (650) 637-4777. We do not intend for information contained on our website, www.cosinecom.com, to constitute part of this prospectus. We were incorporated in the State of California in April 1997. We reincorporated in the State of Delaware in August 2000. THE OFFERING Shares offered............. 10,000,000 shares Shares to be outstanding after this offering........ 100,127,953 shares Nasdaq National Market symbol................... COSN Use of proceeds............ For general corporate purposes, including working capital and capital expenditures, and potential acquisitions of complementary products, technologies or businesses. Except as otherwise indicated, the total number of shares to be outstanding after this offering includes: - 20,406,737 shares of common stock outstanding at June 30, 2000; - 69,721,216 shares of common stock issuable upon: - the assumed exercise of 2,372,601 warrants that are automatically exercisable before or upon the closing of this offering; - the automatic conversion upon the closing of this offering of preferred stock outstanding at June 30, 2000 into 67,348,615 shares of common stock; and - 10,000,000 shares offered in this offering. The number of shares to be outstanding after this offering excludes: - 9,860,629 shares of common stock issuable upon exercise of stock options outstanding at June 30, 2000, with a weighted average exercise price of $4.18 per share; - an additional 4,748,587 shares of common stock reserved for future issuance under our 1997 stock plan at June 30, 2000, including the options for 2,668,305 shares of common stock issuable upon exercise of stock options granted after June 30, 2000, with a weighted average exercise price of $10.61 per share; - an additional 5,400,000 shares of common stock reserved for future issuance under our 2000 stock plan, director option plan and employee stock purchase plan; and - 895,915 shares of common stock issuable upon exercise of warrants outstanding at June 30, 2000, at a weighted average exercise price of $2.60 per share, which are not automatically exercisable before or upon the closing of this offering. Except as otherwise indicated, information in this prospectus: - reflects a 4-for-1 stock split of our common stock in May 1998; - reflects the issuance of 69,721,216 shares of common stock upon the exercise of warrants that are automatically exercisable before or upon the closing of this offering and the conversion of all of our outstanding shares of preferred stock into shares of common stock upon the closing of this offering; - reflects our reincorporation in Delaware in August 2000; and - assumes no exercise of the underwriters' option to purchase additional shares in the offering. SUMMARY CONSOLIDATED FINANCIAL INFORMATION The following tables present our summary consolidated financial data. The data presented in these tables are from "Selected Consolidated Financial Data" and our historical consolidated financial statements and notes to those financial statements included elsewhere in this prospectus. You should read those sections for a further explanation of the financial data summarized here. Pro forma basic and diluted net loss per share have been calculated assuming the exercise of warrants that are automatically exercisable before or upon the closing of this offering and the conversion of all outstanding preferred stock into common stock. <TABLE> <CAPTION> PERIOD FROM YEAR ENDED SIX MONTHS ENDED INCEPTION DECEMBER 31, JUNE 30, (APRIL 14, 1997) TO ------------------ ------------------- DECEMBER 31, 1997 1998 1999 1999 2000 ------------------- ------- -------- -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue........................... $ -- $ -- $ -- $ -- $ 11,321 Non-cash charges related to equity issuances............. -- -- -- -- 3,699 ------ ------- -------- -------- -------- Revenue, net of non-cash charges related to equity issuances..... -- -- -- -- 7,622 Cost of sales: Cost of goods sold.............. -- -- -- -- 6,332 Non-cash charges related to equity issuances............. -- -- -- -- 943 -------- -------- Gross profit (loss)............... -- -- -- -- 347 -------- -------- Loss from operations.............. (134) (9,078) (38,393) (15,138) (58,311) Net loss.......................... (131) (9,293) (37,721) (15,098) (57,036) Deemed dividend to series D preferred stockholders.......... -- -- -- -- (2,500) Net loss allocable to common stockholders.................... (131) (9,293) (37,721) (15,098) (59,536) Basic and diluted net loss per common share.................... (0.25) (4.53) (7.49) (3.63) (7.19) Shares used in computing basic and diluted net loss per common share........................... 522 2,051 5,034 4,156 8,286 Pro forma basic and diluted net loss per common share (unaudited)..................... $ (0.75) $ (0.83) Shares used in computing pro forma basic and diluted net loss per common share (unaudited)........ 50,575 71,922 </TABLE> <TABLE> <CAPTION> JUNE 30, 2000 ---------------------------------- PRO FORMA AS ACTUAL PRO FORMA ADJUSTED ------- --------- ------------ (UNAUDITED) (IN THOUSANDS) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents, and short-term investments....... 88,823 88,823 281,123 Working capital.......................................... 100,115 100,115 292,415 Total assets............................................. 147,812 147,812 340,112 Long-term obligations, less current portion.............. 11,712 11,712 11,712 Redeemable convertible preferred stock................... 174,682 -- -- Total stockholders' equity (net capital deficiency)...... (66,893) 107,789 300,089 </TABLE> The pro forma consolidated balance sheet data includes: - the assumed exercise of warrants that are automatically exercisable before or upon the closing of this offering; and - the conversion into common stock upon the closing of this offering of our preferred stock outstanding at June 30, 2000. The pro forma as adjusted consolidated balance sheet data includes: - the assumed exercise of warrants that are automatically exercisable before or upon the closing of this offering; - the conversion into common stock upon the closing of this offering of our preferred stock outstanding at June 30, 2000; and - the sale of our common stock in this offering at an assumed initial public offering price of $21.00, after deducting an assumed underwriting discount and estimated offering expenses payable by us.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001061261_jawz-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001061261_jawz-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary is not a substitute for the more detailed information, financial statements and the notes to the financial statements appearing elsewhere in this prospectus. This prospectus contains forward looking statements that involve risks and uncertainties. JAWS' actual results could differ materially from the results anticipated in these forward looking statements as a result of the factors set forth under "Risk Factors" and elsewhere in this prospectus. COMPANY SUMMARY JAWS is a provider of information security consulting services and software solutions, a developer of proprietary information security encryption software, a provider of financial information security technology solutions to retailers and large financial organizations in North America and a provider of internet based data storage management services. JAWS consulting services and the software solutions developed by JAWS are designed to minimize the threats to clients' information and communications. JAWS information security consulting services, software solutions and proprietary encryption software are provided through all of its wholly-owned subsidiaries. JAWS financial information technology security solutions services include services in the area of payment systems, including point of sale, automated banking machine and electronic funds transfer, switch implementation, point of sale application and device integration, network architecture and design, system integration and project management. JAWS Secure Network Storage, a division of JAWS, provides data storage management. On July 7, 2000, JAWS changed its state of incorporation from Nevada to Delaware, which was effected upon obtaining requisite stockholder approval and approval by JAWS' board of directors, by merging JAWS Technologies, Inc., a Nevada corporation, with and into JAWS Technologies, Inc., a new Delaware corporation and formerly a wholly-owned subsidiary of JAWS Technologies, Inc., a Nevada corporation. Upon consummation of the reincorporation in the State of Delaware, JAWS Technologies, Inc., a Nevada corporation, ceased to exist and JAWS Technologies, Inc., a Delaware corporation, continues to operate the business of JAWS under its current name JAWS Technologies, Inc. JAWS was originally incorporated in the State of Nevada on January 27, 1997 under the name "e-biz" solutions, inc. On February 10, 1998, "e-biz" solutions, inc. entered into an agreement to purchase all of the outstanding shares of common stock of JAWS Technologies Inc., an Alberta corporation, incorporated on September 18, 1997, in exchange for 1,500,000 shares of the restricted common stock of "e-biz" solutions, inc. and options to purchase 400,000 shares of restricted common stock at $0.50 per share. On March 27, 1998, "e-biz" solutions, inc. changed its name to JAWS Technologies, Inc. Our executive offices are located at Paracorp Incorporated, 208, 318 Carson Street, Carson City, Nevada 89701 and our head office is located at 400, 630-8th Avenue S.W., Calgary, Alberta T2P 1G6. Our website is located at www.jawstech.com. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where such offer or sale is not permitted. PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED JULY 13, 2000 14,061,343 JAWS TECHNOLOGIES, INC. Common Stock ------------ Of the shares of common stock covered by this prospectus, (i) 4,959,960 shares are owned by the stockholders (other than Strong River Investments, Inc. and Bay Harbor Investments, Inc.) listed in the section of this prospectus called "Selling Stockholders" or are issuable on exercise of warrants owned by such selling stockholders, and (ii) 2,936,630 shares are owned by, or are issuable upon the exercise of warrants owned by, Strong River Investments, Inc. and Bay Harbor Investments, Inc., two of the selling stockholders listed in the "Selling Stockholders" section of this prospectus (includes an aggregate of (a) 800,000 shares issued by the Company on June 22, 2000, (b) 400,000 shares which will be issued promptly upon effectiveness of the registration statement of which this prospectus is a part, (c) 240,000 shares of our common stock issuable upon the exercise of warrants, and (d) an additional 1,496,630 shares of our common stock which may be issued upon the exercise of warrants. The selling stockholders may sell any or all of their shares from time to time. See "Plan of Distribution." In addition, we have prepared this prospectus in connection with our prior acquisition of Offsite Data Systems Ltd. ("Offsite") to allow the former shareholders and warrantholders of Offsite to acquire up to 6,164,753 shares of our common stock upon their exchange of exchangeable shares of our subsidiary, JAWS Acquisition Corp. an Alberta corporation ("JAC"), that have been or may be issued to such shareholders in connection with the Offsite acquisition. See "Business - Recent Acquisitions - Offsite Data Systems Ltd." We will not receive any of the proceeds of sales by the selling stockholders, or upon the issuance of any shares of our common stock to the holders of JAC exchangeable shares. However, we received proceeds of CDN $337,209 from the exercise of 843,023 warrants at $0.40 per warrant, and JAWS issued 297,081 JAC exchangeable shares, which are exchangeable for shares of JAWS' common stock on a 1-for-1 basis. We have agreed to bear all expenses related to this offering, other than any underwriting discounts and commissions and any transfer taxes on the shares of common stock that the selling stockholders are offering. Our common stock is included for quotation on the Nasdaq National Market System under the symbol "JAWZ". INVESTING IN THIS COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------ THE DATE OF THIS PROSPECTUS IS JULY 13, 2000. SUMMARY SELECTED FINANCIAL DATA (in thousands, except per share data) The following sets forth summary selected financial information of the Company on a historical basis for each of the periods and dates indicated and on a pro forma basis as of and for the three-month period ended March 31, 2000. The following information should be read in conjunction with the financial statements and notes thereto of the Company. The unaudited selected consolidated pro forma financial information for the period ended March 31, 2000 is presented as if the acquisitions of Offsite and Nucleus, and the consummation of our private placement financing of approximately $2.5 million completed on February 23, 2000 (and the application of the net proceeds therefrom) had all occurred as of January 1, 2000 for the income statement accounts and March 31, 2000 for the balance sheet accounts. The unaudited selected consolidated pro forma financial information as at and for the year ended December 31, 1999 is presented as if the foregoing events, and the acquisition of Pace, had occurred as of January 1, 1999, for the income statement accounts and as of December 31, 1999, for the balance sheet accounts. The pro forma financial information is unaudited and is not necessarily indicative of what the financial position and results of operations of the Company would have been as of the dates and for the periods indicated, nor does it purport to represent or project the financial position or results of operations for future periods. The information set forth in the table should be read in conjunction with the financial statements and notes thereto, the pro forma information and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" included elsewhere in this prospectus. THE COMPANY (PRO FORMA) AND (HISTORICAL) <TABLE> <CAPTION> Three Months Ended March 31, ---------------------------- Pro Forma (Unaudited) Historical (Unaudited) --------------------- ---------------------- 2000 2000 1999 ---- ---- ---- <S> <C> <C> <C> Results of operations --------------------- Revenue 1,087 652 3 Net loss for the period 4,711 (4,020) (1,202) Net loss for the period per share of common stock (0.16) (0.14) (0.11) Financial position ------------------ Total assets 30,594 28,876 507 Long-term debt 139 139 674 Stockholders equity (deficiency) 27,467 26,467 (1,276) </TABLE> THE COMPANY (PRO FORMA) AND (HISTORICAL) <TABLE> <CAPTION> Year Ended December 31, ----------------------- Pro Forma (Unaudited) Historical (Audited) --------------------- -------------------- 1999 1999 1998 1997 ---- ---- ---- ---- <S> <C> <C> <C> <C> Results of operations --------------------- Revenue 4,929 592 29 -- Net loss for the period (14,226) (7,168) (3,076) (137) Net loss for the period per share of common stock (0.70) (0.50) (0.42) (0.03) Financial position ------------------ Total assets 32,537 12,606 273 10 Long-term debt 68 68 147 -- Stockholders equity (deficiency) 30,208 11,162 (574) (101) </TABLE> SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Some of the forward-looking statements can be identified by the use of forward-looking words such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates" or "anticipates" or the negative of those words or other comparable terminology. Forward-looking statements involve risks and uncertainties. A number of important factors could cause actual results to differ materially from those in the forward-looking statements. These factors include the inability to successfully develop and commercialize products, the Company's limited operating history and continuing operating losses, recent and potential development strategic alliances, the Company's liquidity and capital resources, systems failures, technological changes, volatility of securities markets, government regulations, and economic conditions and competition in the geographic and the business areas where we conduct our operations. For a discussion of the factors that could cause actual results to differ from projected results, please see the discussion under "Risk Factors" contained in this prospectus and in other information contained in our publicly available SEC filings and press releases. CURRENCY REFERENCES Financial information herein is expressed in the United States dollars ("US$," "$" or "dollars"), unless stated in Canadian dollars ("Cdn$"). As of June 26, 2000, the exchange rate was US $1.00 equal Cdn $1.4823.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001061377_allscripts_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001061377_allscripts_prospectus_summary.txt
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+PROSPECTUS SUMMARY This is a summary and does not contain all the information that may be important to you. You should read the more detailed information included in this prospectus. All information in this prospectus gives effect to a one-for- six reverse split of our common stock effected on June 28, 1999. Except as otherwise noted, the information contained in this prospectus assumes that the underwriters will not exercise the over-allotment option, and no other person will exercise any other outstanding option or warrant. Allscripts, Inc. We provide physicians with Internet and client/server medication management solutions designed to improve the quality and cost effectiveness of pharmaceutical healthcare. Our technology-based approach focuses on the point of care, where prescriptions and many other healthcare transactions originate, and creates an electronic dialogue between physicians and other participants in the healthcare delivery process, including patients, pharmacies, managed care organizations and pharmaceutical manufacturers. We believe physicians find our solutions attractive because incorporating these solutions into their office work flow can increase efficiency and profitability, reduce medication errors and improve the quality of patient care. We also believe that, in addition to medication management, there are other aspects of the physician's daily work flow that can be effectively addressed through technology-focused solutions. We intend to enhance our current offerings by integrating new products and services that address these needs. The traditional process for prescribing and delivering medications is inefficient, unnecessarily costly and error-prone. Our Internet and in-office comprehensive solutions are designed to improve and streamline every step of the pharmaceutical healthcare process in a way that can benefit each participant. Our medication management solutions enable physicians to improve their prescribing at the point of care by providing them with information about potential adverse drug interactions, patient drug history and managed care guidelines. This ready access to information during the prescribing process reduces the time physicians spend clarifying and changing prescriptions, enables them to better manage financial risk and can reduce medication errors. Our products also enable physicians to increase practice revenue by dispensing their most commonly prescribed medications to their patients at the point of care. In addition, our solutions make it possible for patients to have their prescriptions electronically routed to the pharmacy of their choice or to benefit from the convenience, immediacy and confidentiality of receiving their medications in the physician's office. Our solutions also benefit managed care organizations by promoting higher physician compliance with their pharmacy guidelines, while pharmacies benefit from improved communication with physicians, which enhances efficiency and reduces the likelihood of errors. We also believe that our medication management solutions as well as the new products and services that we intend to offer in the future will benefit additional participants in the healthcare delivery process. We currently offer products in four categories: point-of-care medication management, Internet products and services, including e-detailing, information products and prepackaged medications. Our TouchScript software enables electronic prescribing, routing of prescription information and capturing of prescription data at the point of care. Our other e-commerce products and services offer physicians and their patients medication-related education and information services. We also sell prepackaged medications to physicians for dispensing to their patients. We believe that our experience in the pharmaceutical healthcare delivery process gives us a competitive advantage. Through our business relationships with thousands of physicians, we have developed an understanding of their office work flow and business practices. Versions of TouchScript are currently installed and used in over 400 physician practice sites, and we have facilitated relationships between many of the country's largest managed care payers and our physician customers under which our customers can obtain reimbursement for prescription medications dispensed in their offices. In addition, our experience in providing medication management solutions has given us a thorough understanding of the complex and dynamic healthcare regulatory environment. Finally, we believe that our management team, which is experienced in managing rapidly growing public companies that use technology to change business processes, further enhances our competitive advantage. Corporate Information Allscripts was incorporated in Illinois in 1986 and was reincorporated in Delaware in 1999. Our executive offices are at 2401 Commerce Drive, Libertyville, Illinois 60048. Our telephone number is (847) 680-3515; our Internet e-mail address is info@allscripts.com; and our Web site is www.Allscripts.com. Information contained on our Web site is not part of this prospectus. TouchScript(R) and MedSmart(R) are registered trademarks of Allscripts, Inc. Allscripts(TM), 3Touch Prescribing(TM), Physician's Interactive(TM), ScriptGuard(TM), Personal Prescriber(TM), e-detailing(TM) and Intelligent Reminder(TM) are trademarks of Allscripts, Inc. All other trademarks, brand marks, trade names and registered marks used in this prospectus are trademarks, brand marks, trade names or registered marks of their respective owners. The Offering <TABLE> <S> <C> Shares offered by Allscripts............. 1,092,000 Shares offered by the selling stockholders... 1,308,000 Shares to be outstanding after the offering (1).................... 25,843,995 Nasdaq National Market symbol................. MDRX Use of proceeds......... Working capital and other general corporate purposes. See "Use of Proceeds." </TABLE> - ------- (1) Based on shares outstanding as of February 29, 2000. It excludes shares that may be issued pursuant to a contingent obligation to a strategic partner and also excludes an aggregate as of February 18, 2000 of up to 2,971,636 shares comprised of: . 57,133 shares issuable upon the exercise of outstanding warrants at a weighted average exercise price of $1.76 per share; . 2,706,560 shares issuable upon the exercise of outstanding stock options with a weighted average exercise price of $11.40 per share; and . 207,943 shares available for future grant under our Amended and Restated 1993 Stock Incentive Plan. See "Shares Eligible for Future Sale" and "Business--Strategic Relationships--IMS Health Strategic Alliance." Summary Consolidated Financial Data (In thousands, except per share data) The following table summarizes our financial data and should be read together with our consolidated financial statements, including the related notes, and the other financial information in this prospectus. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> Year Ended December 31, -------------------------------------------- 1995 1996 1997 1998 1999 ------- ------- ------- ------- -------- <S> <C> <C> <C> <C> <C> Statements of Operations Data: Revenue.......................... $33,310 $33,462 $30,593 $23,682 $ 27,586 Gross profit..................... 9,168 10,072 9,476 6,362 5,677 Loss from continuing operations.. (5,752) (4,430) (8,991) (7,694) (15,433) Gain from sale of discontinued operations...................... -- -- -- -- 3,547 Net loss......................... (4,363) (2,941) (10,799) (7,514) (11,244) Net loss attributable to common stockholders.................... (5,286) (3,864) (11,722) (9,929) (13,442) Basic and diluted net loss from continuing operations per share........................... $ (3.84) $ (1.87) $ (3.35) $ (1.66) $ (1.20) Weighted average shares used in computing per share calculation..................... 1,737 2,854 2,956 6,076 14,718 Pro forma basic and diluted net loss from continuing operations per share (1)................... $ (0.88) $ (0.94) Shares used in computing pro forma basic and diluted net loss from continuing operations per share (1)....................... 9,073 16,426 Other Operating Data: Traditional revenue (2).......... $33,310 $33,462 $30,593 $22,338 $ 17,892 E-commerce revenue (3)........... -- -- -- 1,344 9,694 ------- ------- ------- ------- -------- Revenue.......................... $33,310 $33,462 $30,593 $23,682 $ 27,586 ======= ======= ======= ======= ======== </TABLE> - ------- (1) Pro forma basic and diluted net loss from continuing operations per share information reflects the impact of the conversion of all shares of convertible preferred stock into common stock upon the closing of our initial public offering as well as the issuance of 19,958 shares of common stock upon the closing of our initial public offering pursuant to a contingent payment obligation on basic and diluted net loss per share as of the beginning of the year, or date of issuance, if later, using the if- converted method. In addition, the unaudited pro forma net loss per share information excludes accretion and accrued dividends on redeemable preferred shares as redemption of these shares, which occurred upon the closing of our initial public offering, is assumed to have occurred as of the beginning of the year or, if later, the date of issuance. (2) Traditional revenue includes all non-e-commerce revenue and is derived from the sale through non-Internet channels of prescription medications and other medical products to physicians who do not use our software. (3) E-commerce revenue is derived primarily from the sale of prescription medications over the Internet to physicians who use our software or who order products from us primarily over the Internet. E-commerce revenue also includes revenue from software license fees, computer hardware sales and leases, and related services. <TABLE> <CAPTION> December 31, 1999 ------------------------------- Pro Pro Forma Actual Forma(1) As Adjusted(2) ------- -------- -------------- <S> <C> <C> <C> Balance Sheet Data: Cash, cash equivalents and marketable securities................................... $55,610 $65,610 $136,577 Working capital............................... 58,856 68,856 139,823 Total assets.................................. 74,014 84,014 154,981 Long-term debt................................ 59 59 59 Total stockholders' equity.................... 67,364 77,364 148,331 </TABLE> - ------- (1) The consolidated pro forma balance sheet data at December 31, 1999 shows our balance sheet data as if we had completed our sale to a strategic partner of 214,794 shares of common stock for $10,000,000 on December 31, 1999. (2) The consolidated pro forma as adjusted balance sheet data at December 31, 1999 shows our pro forma balance sheet, giving effect to the sale of 1,092,000 shares at an assumed initial price to the public of $69.00 per share, after deducting the underwriting discount and estimated offering expenses payable by us.
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+PROSPECTUS SUMMARY This summary highlights selected information from this prospectus and may not contain all of the information that you should consider before deciding to purchase our Series B common stock. For a more complete understanding of FirstWorld and the shares of Series B common stock offered by this prospectus, you should read the entire prospectus, including the risk factors and our consolidated financial statements and accompanying notes. The Company We are a rapidly growing network-based provider of Internet, data and communications services. Our service offerings include high-speed Internet access, such as dedicated access and digital subscriber line, or DSL; dial-up Internet access; web hosting and design; data center services, including co- location, access, application hosting, and monitoring services; e-commerce solutions; and web integration and consulting services. To complement our data services, we also provide telephony services in selected markets. Our strategy is to offer our customers a single source solution to meet a broad range of their increasingly complex Internet, data and communications needs. We primarily market our services, using a consultative sales approach, to small- and medium-sized businesses, and also selectively to larger businesses, wholesale customers and consumers. We currently offer our services in the San Francisco, Los Angeles, San Diego, Portland, Denver, Houston, Salt Lake City, Dallas and Chicago metropolitan markets and are expanding our service offering in each of these markets. We also plan to enter the Seattle market in 2000. We currently operate data centers in Glendale, San Diego, Santa Clara, Irvine and Denver, and plan to open six additional centers in 2000, which will bring our total data center space to over 290,000 square feet. We reported 1999 revenue of $54.5 million and ended the year with approximately 2,300 DSL lines, 1,300 dedicated access lines, 55,100 dial-up Internet accounts, 10,600 web hosting accounts, 325 web integration customers and 1,200 telephony accounts. We deliver our services over a communications network that utilizes advanced packet-switching technology and the communications protocol known as Internet Protocol, or IP, that enables us to provide cost-effective services to our customers. Our network combines equipment housed in our own facilities and equipment interconnected to the incumbent local exchange carrier's central office with redundant, high-speed connectivity to the Internet. We seek to establish these interconnections in areas with a high density of small- and medium-sized businesses. In addition, we have rights to use certain routes in a nationwide, long-haul, fiber-optic network currently under construction by Enron. In October 1998, Sheldon S. Ohringer joined FirstWorld as President and Chief Executive Officer and the leader of a new management team. Mr. Ohringer was formerly the President of ICG Telecom Group, Inc., the principal operating subsidiary of ICG Communications, Inc. Since that time we have expanded our management team significantly, adding a number of experienced data and communications executives. Our equity sponsors include Texas Pacfic Group and entities controlled by Donald L. Sturm. Texas Pacific Group, founded in 1993, is a private investment partnership with offices in Ft. Worth, San Francisco, Washington, D.C. and London. Mr. Sturm is a private equity investor and the former Vice Chairman of Peter Kiewit Sons' Inc. Mr. Sturm, who participated in the decision by Peter Kiewit Sons' to invest in MFS Communications and who owns a significant interest in Level 3 Communications, controls entities which have invested approximately $55.0 million in FirstWorld. On December 2, 1999, we entered into an equity investment agreement with an entity controlled by Mr. Sturm under which we can require this entity to purchase up to 6,666,667 shares of Series B common stock. On February 10, 2000 this entity purchased 3,333,333 of our Series B common stock pursuant to the automatic trigger provisions of this agreement for an aggregate purchase price of $25.0 million. On March 3, 2000 Texas Pacific Group purchased from Enron for $129.1 million 8,236,083 shares of our common stock and warrants to purchase 5,236,083 shares of Series B common stock. Concurrently with this offering, we are selling an aggregate amount of $91.5 million of our Series B common stock to Texas Pacific Group, SAIC Venture Capital Corporation, Microsoft Corporation and Lucent Technologies Inc., as more fully discussed below. Report of Independent Accountants on Financial Statement Schedule To The Board of Directors and Stockholders of FirstWorld Communications, Inc.: Our audits of the consolidated financial statements referred to in our report dated February 11, 2000 appearing in the Registration Statement on Form S-1 (333-93357) of FirstWorld Communications, Inc. also included an audit of the financial statement schedule included in such Form S-1. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICEWATERHOUSECOOPERS LLP Denver, Colorado February 11, 2000 The FirstWorld Opportunity Data communications is the fastest growing segment of the communications industry. Forrester Research, Inc. projects that the total market for Internet access and hosting will grow from $3.7 billion in 1998 to approximately $56.6 billion by 2003. The Internet's rapid growth as an essential communications medium has created a substantial market opportunity for companies such as ours that provide Internet, data and communications services. We believe this market opportunity is due to the convergence of a number of factors, including the following: . Growing Demand for Single Source Internet and Data Solutions. Most companies, particularly small- and medium-sized businesses, lack the expertise, capital or personnel required to install, maintain and monitor their own web infrastructure. These companies are increasingly demanding a single source solution for their Internet, data and communications requirements and are finding it more cost-effective to outsource these services. . Growth of Small- and Medium-Sized Business Internet Market. Data communications, particularly through the Internet, have made it possible for smaller companies to compete more effectively with larger competitors. Demand for data communications services from small- and medium-sized businesses is growing, however, these businesses have traditionally been underserved by the larger communications providers. . Increasing Demand for High-Speed Internet Access. The growth in bandwidth-intensive applications, and the increasing number of remote office workers is increasing the demand for high-speed Internet connections. . Emergence of Third Party Co-location Services. Internet infrastructure and applications platforms are complex and sensitive to environmental factors, leading many businesses to rely on third parties to house, monitor and maintain the equipment that supports their web sites, e- commerce platforms and other business-critical applications. Third party co-location services also allow them the flexibility to rapidly add additional servers as their businesses grow. Our Strategy We intend to capitalize on the market opportunity outlined above and the key elements of our strategy include: . Providing single source Internet and data services to meet our customers' needs; . Focusing on small- and medium-sized business customers; . Employing a consultative sales approach and superior customer care; . Deploying flexible, cost-effective networks and expanding our market footprint; and . Pursuing a focused acquisition strategy to increase the breadth of our product offerings, accelerate our penetration into new markets and grow our customer base. Recent Agreements Relating to Investments in our Common Stock. We have recently entered into agreements to sell to the following investors, in private placements concurrent with this offering, an aggregate of $91.5 million of our Series B common stock at a price per share equal to the public offering price net of the underwriting discount in this offering. <TABLE> <CAPTION> Amount Investor Invested -------- ------------- (in millions) <S> <C> Texas Pacific Group.......................................... $50.0 SAIC Venture Capital Corporation............................. 19.5 Microsoft Corporation........................................ 12.0 Lucent Technologies Inc...................................... 10.0 ----- $91.5 ===== </TABLE> Microsoft's investment includes an additional warrant to purchase shares of our common stock. In a separate transaction, Texas Pacific Group recently purchased from Enron 8,236,083 shares of our common stock, together with warrants to purchase an additional 5,236,083 shares of our Series B common stock, for an aggregate purchase price of $129.1 million, resulting in an aggregate proposed investment by Texas Pacific Group in our company of $179.1 million, $50.0 million of which will be proceeds to FirstWorld. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Developments." Our principal executive offices are located at 8390 E. Crescent Parkway, Suite 300, Greenwood Village, Colorado 80111, and our telephone number is (303) 874-8010. Our World Wide Web address is www.firstworld.com. The information on our web site is not incorporated by reference into this prospectus. THE OFFERING <TABLE> <S> <C> Series B common stock offered in the: United States offering..................... 8,500,000 shares International offering..................... 1,500,000 shares ---------- 10,000,000 shares Series B common stock offered in the concurrent private placements (assuming a public offering price of $16.00)............ 6,149,194 shares ---------- Total.................................... 16,149,194 shares ========== Common stock to be outstanding after this offering and the concurrent private placements: Series A common stock...................... 5,101,831 shares Series B common stock...................... 44,506,285 shares ---------- Total.................................... 49,608,116 shares ========== Over-allotment option........................ 1,500,000 shares of Series B common stock Voting rights: Series A common stock...................... Ten votes per share Series B common stock...................... One vote per share Use of proceeds.............................. We will receive net proceeds from the public offering of approximately $148.2 million assuming an offering price of $16.00 per share and $91.5 million from the private placements. We intend to use the net proceeds to expand our sales and marketing efforts, fund our operating losses, hire additional personnel, fund potential acquisitions, fund our capital expenditures and product development, provide working capital and for general corporate purposes. See "Use of Proceeds." Dividend policy.............................. We have not paid any dividends on our common stock and do not intend to pay dividends on our common stock in the foreseeable future. We plan to retain any earnings for use in the operation of our business and to fund future growth. See "Dividend Policy." We have not generated net income and do not expect to do so for at least the next several years. Nasdaq National Market symbol................ FWIS </TABLE> The foregoing information is based on 32,658,922 shares of Series A and Series B common stock outstanding as of March 3, 2000, includes 800,000 shares of Series B common stock to be issued immediately prior to and contingent upon the closing of this offering pursuant to a warrant of which we have received notice of exercise, and excludes: . 8,421,629 shares of Series B common stock (including stock appreciation rights that are anticipated to be converted into stock options to purchase 1,137,012 shares of Series B common stock) issuable upon the exercise of outstanding stock options as of March 3, 2000 at exercise prices ranging from $.25 to $10.75 per share, with a weighted average exercise price of $6.72 per share; . Any exercise of our remaining rights and obligations under an agreement with an entity controlled by Mr. Sturm that allows us to sell up to an additional 3,333,334 shares of Series B common stock at a price of $7.50 per share; . 23,778,435 shares of Series B common stock issuable upon the exercise of outstanding warrants at exercise prices ranging from $.01 to $6.00 per share, with a weighted average exercise price of $2.48 per share; . 2,275,705 shares of Series B common stock reserved for issuance under our stock plans; and . 604,839 shares of Series B common stock issuable upon exercise of a warrant to be issued to Microsoft in connection with the concurrent private placement to Microsoft, assuming a public offering price of $16.00. See "Management's Discussion and Analysis - Recent Developments." In connection with our grants of options during the first quarter of 2000 and stock appreciation rights outstanding as of December 31, 1999 and granted during the first quarter of 2000, we may be required to record material non- cash compensation charges beginning in the first fiscal quarter of 2000 resulting from the difference between the exercise price of these options and stock appreciation rights and the public offering price in this offering. Such charges will be amortized over the vesting periods of such options and stock appreciation rights, typically four years.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001061669_eoexchange_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001061669_eoexchange_prospectus_summary.txt
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+SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus, including "Risk Factors" and the consolidated financial statements and related notes, carefully before making an investment decision. EoExchange EoExchange enables business-to-business websites by providing an outsourced industry-specific search, monitor and notification infrastructure. Our services enable our customers to build traffic, improve customer loyalty and increase revenues through new commerce opportunities. We combine our proprietary technologies with our in-house industry expertise to find and deliver relevant business information to professionals via the Internet. By providing our outsourced services to a wide range of industry-specific websites, we are establishing a network of business-to business websites that enable us to offer advertising and commerce opportunities targeted at business professionals. Our search, monitor and notification solution benefits business professionals such as managers, engineers and researchers by focusing their Internet searches only on highly relevant websites within their industries. In contrast, general business-to-consumer search engines typically conduct less targeted searches that generate results often lacking the relevance and thoroughness required for efficient business use. We earn revenues from multiple sources including fees for service deployment, monthly subscriptions, and network advertising and sponsorships. We also derive revenues from the sale, service and customization of our search, monitor and notification solution, and we expect to earn commissions from commerce sales initiated on web pages hosted by us. In May 1999, we launched our first industry-specific search solution, or EoCenter, for application in the high-technology industry. Customers of this EoCenter include Red Herring Communications, CMP Media and EarthWeb. We have launched additional EoCenters in the finance, healthcare and insurance industries, and are rapidly developing new EoCenters for a range of industries such as chemicals, metals, construction and telecommunications. As of March 31, 2000, our services are deployed on more than 50 websites and we have contracted for approximately 150 additional website deployments. We also have strategic relationships with Office.com and VerticalNet that extend our ability to develop our EoCenter services across multiple new industries. Market Opportunity Gartner Group estimates that business-to-business electronic commerce will generate $2.7 trillion in revenues by 2004. As a result, a large number of industry-specific, business-to-business websites are emerging to link buyers and sellers in those industries. By 2001, Gartner Group estimates that there will be 100,000 such websites. As the overall number of industry-focused websites increases, it will become more difficult for these websites to differentiate themselves and for business users to quickly and efficiently access the most relevant information available on these websites. We believe that search and navigation solutions currently available inadequately serve the needs of business professionals because they search across the entire Internet and often return information that is either largely irrelevant or incomplete. We further believe that the optimal solution for business-to-business vertical websites is an outsourced search, monitor and notification infrastructure that delivers only relevant, industry-specific content. Our Services We provide businesses with search and navigation services through our EoCenter research engine and with monitor and notification services through our EoMonitor personalized tracking service. In addition, our EoExchange network enables advertisers and merchants to target business professionals within specific industries. EoCenter. Our EoCenter research engine allows business professionals to search the Internet efficiently by targeting their searches on information that is most relevant to a specific industry. For example, a search performed on our EoCenter for the high-technology industry will only search relevant industry sources, such as the websites of hardware and software vendors, trade and business press and technology organizations. Our EoCenter service retains the branding, look and feel of our customer's website; however, EoCenter pages are actually hosted by us on a separate website. This allows our customers to deliver our value-added services as a natural extension of their websites. EoMonitor. Our EoMonitor personalized tracking service notifies business professionals when selected topics of interest are addressed or changed on web pages or sites that they selected to be monitored. For example, an EoMonitor user can monitor the websites of a competitor, supplier or customer and can receive notification of changes or additions to these sites. Changes are clearly marked and can be delivered to an e-mail account or published to the Internet. EoExchange Network. Our EoExchange network is the aggregation of industry destinations created by providing our EoCenter and EoMonitor services to a broad range of business-to-business vertical websites. We believe that our EoExchange network represents a focused advertising, sponsorship and commerce platform that reaches the leading websites in a particular industry. We believe that our EoExchange network is valuable to marketers because it enables them to deliver highly targeted advertisements to business professionals within an industry. Our Strategy Our objective is to be the leading provider of outsourced search, monitor and notification infrastructure for business-to-business vertical websites. Key elements of our strategy include: . building a network of business professionals by partnering with the leading business-to-business websites; . extending our leadership in our existing core business-to-business markets; . penetrating a wide range of additional business-to-business vertical markets with our EoCenter and EoMonitor services; . leveraging our network of business professionals to create a highly targeted advertising, sponsorship and commerce platform; . maximizing advertising, sponsorship and commerce revenue opportunities with existing customers by targeting business professionals; and . maintaining and strengthening our technology leadership through internal development and acquisition of complementary technologies. Our Corporate Information We were incorporated in California in October 1996 under the name Aeneid Corporation and reincorporated as EoExchange, Inc., a Delaware corporation, in March 2000. Our principal executive offices are located at 282 2nd Street, Suite 400, San Francisco, California 94105, and our telephone number is (415) 538-8555. Our corporate website is located at www.eoexchange.com. Information contained on our corporate website, our other websites or any other website referenced elsewhere in this prospectus is not part of this prospectus. The Offering <TABLE> <C> <S> Common stock offered by EoExchange................. shares Common stock to be outstanding after the offering.. shares Use of proceeds.................................... (1) To expand into new vertical website markets, (2) to significantly increase our sales efforts, (3) for marketing and branding and (4) for working capital and other general corporate purposes, including possible strategic acquisitions and investments. See "Use of Proceeds." Proposed Nasdaq National Market symbol............. EOEX </TABLE> The shares of common stock to be outstanding after the offering are based on the number of shares outstanding as of , 2000 and exclude: . 1,474,162 shares of common stock reserved for issuance under our 1996 stock option plan, all of which are subject to outstanding options; . 4,028,005 shares of common stock reserved for issuance under our 1999 stock plan, of which 2,989,285 shares are subject to outstanding options; and . shares of common stock reserved for issuance under our employee stock purchase plan. ---------------- Except as otherwise indicated, all of the information in this prospectus: . reflects the automatic conversion of each outstanding share of preferred stock into one share of common stock immediately prior to the closing of this offering; and . assumes no exercise of the underwriters' over-allotment option. Summary Consolidated Financial Data You should read the summary financial data with our consolidated financial statements and the related notes included elsewhere in this prospectus and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Selected Consolidated Financial Data." Please see note 2 of the notes to our "Consolidated Financial Statements" for an explanation of the determination of weighted average shares used in computing per share data. Pro forma statement of operations data reflects the acquisition of InGenius Technologies, Inc. as if it had occurred as of January 1, 1999. <TABLE> <CAPTION> Three Month Pro Forma Period Ended Years Ended December 31, Year Ended March 31, -------------------------- December 31, ----------------- 1997 1998 1999 1999 1999 2000 ------- ------- -------- ------------ ------- -------- (In thousands, except per share data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Revenues................ $ -- $ 49 $ 496 $ 620 $ 25 $ 1,007 Cost of revenues........ -- 306 1,599 1,732 188 521 ------- ------- -------- -------- ------- -------- Gross profit (loss)..... -- (257) (1,103) (1,112) (163) 486 Operating expenses...... 1,149 3,613 10,409 11,588 1,096 6,230 ------- ------- -------- -------- ------- -------- Loss from operations.... (1,149) (3,870) (11,512) (12,700) (1,259) (5,744) Interest income (expense), net......... (32) 19 162 5 5 343 ------- ------- -------- -------- ------- -------- Net loss................ (1,181) (3,851) (11,350) (12,695) (1,254) (5,401) ------- ------- -------- -------- ------- -------- Imputed dividends and accretion attributable to preferred stock..... -- -- (21,770) (21,770) (3,364) (6,507) ------- ------- -------- -------- ------- -------- Net loss attributable to common stockholders.... $(1,181) $(3,851) $(33,120) $(34,465) $(4,618) $(11,908) ======= ======= ======== ======== ======= ======== Net loss per share: Basic and diluted..... $ (0.28) $ (0.62) $ (4.27) $ (4.45) $ (0.61) $ (1.38) ======= ======= ======== ======== ======= ======== Weighted average shares--basic and diluted.............. 4,214 6,188 7,749 7,749 7,552 8,642 ======= ======= ======== ======== ======= ======== </TABLE> The following balance sheet data is provided on an actual basis, on a pro forma basis and on a pro forma as adjusted basis. The pro forma column reflects the conversion of all of our outstanding preferred stock. The pro forma as adjusted column assumes, in addition, the sale of shares of our common stock at an initial public offering price of $ per share after deducting the estimated underwriting discounts and commissions and estimated offering expenses. <TABLE> <CAPTION> March 31, 2000 ------------------------------- Pro Forma Actual Pro Forma As Adjusted -------- --------- ----------- (In thousands) <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents...................... $ 24,161 $24,161 Working capital................................ 23,405 23,405 Total assets................................... 31,174 31,174 Long-term obligations, less current portion.... 10 10 Preferred stock................................ 71,695 -- Total stockholders' equity (deficit)........... (43,229) 28,466 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001061895_itxc-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001061895_itxc-corp_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information about us. It may not contain all of the information that you find important. You should carefully read this entire document, including the "Risk Factors" section beginning on page 6 and the consolidated financial statements and their related notes beginning on page F-1. Unless otherwise indicated, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option. Our Company We are a leading global provider of high quality Internet-based voice and fax services. Our network and proprietary software allow our customers to capitalize on the convergence of the traditional telephone network with both private and public data networks, such as the Internet. ITXC.net, our actively managed network that is overlaid on the public Internet, delivers high quality voice communications over the Internet and other data networks. As part of ITXC.net, we have established ITXC facilities in the U.S. and have arrangements with affiliates outside of the U.S. to place and complete telephone calls on our network. We believe that ITXC.net provides our customers with the cost savings of data networks and the global reach of the Internet and provides us with a platform for delivering additional value-added services. We intend to continue to rapidly deploy ITXC.net on a global basis by taking advantage of the growth of the Internet. In April 1998, we introduced our WWeXchange(R) service, our first application using ITXC.net. This service provides international call completion over the Internet to our carrier and communications service provider customers and enables them to offer their own customers phone-to-phone global voice services. We have achieved significant growth in the use of our network since we began offering this service. That growth has continued since our initial public offering. The number of minutes of traffic over ITXC.net increased from 42.5 million during the quarter ended September 30, 1999, to 72.0 million during the quarter ended December 31, 1999. We believe that this growth demonstrates that our proprietary technology and techniques, which we refer to as BestValue RoutingSM, are effective in enhancing the quality of voice and fax services delivered over the Internet. We actively manage ITXC.net with BestValue Routing to avoid congestion and select optimal routes. We have developed a reliable network by using the Internet for transport and our affiliates' local infrastructure for completing calls. We have used our early entrant status to deploy what we believe to be the broadest global network for Internet telephony. We believe that the scale of our network provides us with a significant advantage in increasing market share and introducing new services. In addition to our facilities in the U.S., our affiliates place and complete calls on our network in 112 international cities and operate 185 ITXC.net points of presence. Our affiliates and customers include Bell Atlantic, China Telecom, COLT Telecom, GTS, Interoute, Korea Telecom, Pacific Gateway Exchange and the Ameritech division of SBC. On a typical day, we originate traffic from over 30 countries and deliver it to more than 180 countries. In addition, we are developing products and services that we believe will strengthen our relationships with our customers and enable us to provide them with enhanced services. For example, in April 1999, we introduced a new proprietary device called a SNARCTM. This device allows our customers to access our network directly from their premises, which eliminates the costs of special traditional telephone connections dedicated to connecting with our network hubs and improves the economics of our services to them. In September 1999, we introduced our Borderless800SM service, which offers non-U.S. carrier affiliates no cost access to toll-free telephone numbers in the U.S. In December 1999, we commenced our first service offering as a voice application service provider. Our webtalkNOW! SM service allows Internet portals, Internet service providers and web sites to offer web-to-phone calling to their customers. We believe that data networks offer superior functionality to traditional telephone networks and that the Internet, when actively managed, will usually be the network of choice for both existing and enhanced voice and fax services. We believe that our early entrant status, our global network of affiliates and our experience in providing high quality voice communications over ITXC.net since April 1998 position us to take advantage of the convergence of these services and data networks including the Internet. Our Strategy Our goal is to be the leading provider of Internet-based voice and fax services. In order to achieve this goal we intend to: . Exploit our early entrant status and worldwide network . Rapidly expand ITXC.net by adding additional affiliates worldwide . Capitalize on the cost advantages of the Internet . Expand our role as a voice application service provider . Establish ITXC.net as the standard for quality in our industry . Provide our customers and affiliates with direct access to ITXC.net . Continue to provide leadership in the development of industry standards . Deliver additional Internet voice services over ITXC.net Recent Developments We have significantly expanded the global reach of ITXC.net since we completed our initial public offering, from 110 ITXC.net points of presence in 71 international cities in September 1999 to 185 ITXC.net points of presence in 112 international cities on January 31, 2000. We experienced substantial growth in revenue and minutes of traffic over ITXC.net during the quarter ended December 31, 1999. During this period, we generated revenue of $11.1 million and a loss from operations of $7.1 million as compared to revenue of $6.5 million and a loss from operations of $6.3 million for the quarter ended September 30, 1999. The number of minutes of traffic over ITXC.net increased from 42.5 million during the quarter ended September 30, 1999 to 72.0 million during the quarter ended December 31, 1999. In December 1999, we commenced our first service offering as a voice application service provider. Our webtalkNOW! service enables us to provide Internet portals, Internet service providers and web sites with an outsourced voice solution, including dialing software and global call completion over ITXC.net, thereby enabling these customers to offer their end-users real-time web-to-phone calling. We believe that our webtalkNOW! service capitalizes on the global reach and quality of ITXC.net as a platform for enhanced Internet- based voice services. Since September 1999, we have been providing our customers with global access to toll-free U.S. telephone numbers, which we call our Borderless800 service. This allows our customers to provide their non-U.S. subscribers no- charge or low charge access, over ITXC.net, to toll-free telephone numbers in the U.S. from telephones and fax machines around the world. In December 1999, we began installing ITXC-owned equipment called CRANS(TM) on selected affiliates' premises to connect them directly to the Internet for the purpose of terminating calls originated over ITXC.net. We generally use CRANS to rapidly add incumbent national carriers as affiliates and extend ITXC.net to their premises. Part of our expansion of the global reach of ITXC.net was due to our acquisition in November 1999 of contractual rights and software from OzEmail Interline Pty Limited, a wholly-owned Australian subsidiary of MCI WorldCom. As a result of the acquisition of those assets, we were able to add certain of OzEmail's call termination and origination affiliates to ITXC.net. In January 2000, we added Thomas J. Shoemaker to our management team as Executive Vice President of Business Development. Prior to joining us, Mr. Shoemaker had been President and Chief Executive Officer of Electric Schoolhouse, an Internet education company, and, prior to that, the Vice President responsible for AT&T's WorldNet Service. Mr. Shoemaker will be responsible for the development of our new Internet voice and fax services as well as opportunities to grow ITXC through the acquisition of existing businesses and complementary technologies. Principal Executive Offices Our principal executive offices are located at 600 College Road East, Princeton, New Jersey 08540, and our telephone number is (609) 419-1500. The Offering <TABLE> <C> <S> Common stock offered by ITXC.................. 2,000,000 shares Common stock offered by selling stockholders.. 2,000,000 shares (1) Common stock outstanding after the offering... 38,155,886 shares (1)(2) Use of proceeds............................... We intend to use the net proceeds to purchase gateways, SNARCs, CRANS, software and other equipment used to expand the scope of our network and the nature of the services we provide, to increase our global sales and marketing presence, to develop, license or acquire software for our Internet voice service offerings, to fund the acquisition of complementary businesses and technologies, to support the continued development of any acquired businesses and for general corporate purposes. We cannot specify with certainty all of the particular uses for the net proceeds we will have upon completion of the offering. See "Use of Proceeds." Nasdaq National Market symbol................. "ITXC" </TABLE> (1) Includes 179,690 shares underlying options held by selling stockholders which are expected to be exercised in connection with this offering. (2) Based on share information as of January 31, 2000. See "Risk Factors" for information about additional shares which may be issued in the future, including those currently reserved for issuance. Summary Consolidated Financial Data The following summary financial data for the period from our July 21, 1997 date of inception to December 31, 1997 and for the years ended December 31, 1998 and 1999 are derived from our audited consolidated financial statements. You should read the information that we have presented below in conjunction with our consolidated financial statements, related notes and other financial information included elsewhere in this prospectus. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Use of Proceeds" and "Capitalization." <TABLE> <CAPTION> Period from July 21, 1997 (date of inception) Year ended to December 31, December 31, --------------------------- 1997 1998 1999 --------------------------------- ------------- (in thousands, except per share data) <S> <C> <C> <C> Statement of Operations Data: Revenue................. $ 59 $ 1,891 $ 25,411 Total costs and expenses............... 706 9,189 46,365 Net loss................ (646) (7,207) (19,665) Basic and diluted net loss per share applicable to common stockholders........... (0.09) (0.88) (1.29) Weighted average shares used in computation of basic and diluted net loss per share applicable to common stockholders........... 7,005 8,185 15,886 Pro forma basic and diluted net loss per share.................. (0.45) (0.69) Weighted average shares used in computation of pro forma basic and diluted net loss per share.................. 16,155 28,526 </TABLE> <TABLE> <CAPTION> As of December 31, 1999 ------------------- Actual As Adjusted ------- ----------- (in thousands) <S> <C> <C> Balance Sheet Data: Cash, cash equivalents and marketable securities............ $74,396 $241,773 Total assets................................................ 99,862 267,239 Long-term obligations, including current portion............ 5,493 5,493 Working capital............................................. 65,810 233,187 Total stockholders' equity.................................. 80,366 247,744 </TABLE> - -------- When we completed our initial public offering on October 1, 1999, all of our outstanding preferred stock converted into common stock. The pro forma line items in the operating statement data presented above give effect to that conversion as if that conversion had occurred at the dates of issuance. The as adjusted column in the balance sheet data presented above reflects the sale of the 2,000,000 shares of common stock to be sold by us in this offering at an assumed public offering price of $88.19 per share, after deducting the estimated underwriting discounts and offering expenses payable by us. The following summary financial and operating data for our most recent four quarters have been derived in part from our unaudited consolidated financial statements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Financial Information."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001062019_watchguard_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001062019_watchguard_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information that we present more fully in the rest of this prospectus. This summary does not contain all the information you should consider before buying shares in this offering. You should read the entire prospectus carefully. WatchGuard Technologies, Inc. WatchGuard is a leading provider of Internet security solutions designed to protect enterprises or telecommuters using the Internet for electronic commerce and communications. Our core market is small- to medium-sized enterprises, or SMEs, those businesses, governmental entities and educational institutions with fewer than 1,000 employees. We have recently expanded our marketing focus, however, to include larger enterprises as well as small offices and home offices, or SOHOs, and telecommuters, particularly those using broadband Internet connections. Our innovative subscription-based LiveSecurity solution enables enterprises to keep their security systems current with minimal effort through our broadcast over the Internet of threat responses, software updates, information alerts, expert editorials, support flashes and virus alerts. LiveSecurity is made possible through an updatable security appliance that executes software sent from a remote management system that receives our LiveSecurity broadcasts. Our LiveSecurity solution is a fully integrated, comprehensive, easy-to-install package. Our solution for SMEs and larger enterprises features a firewall, encryption, virtual private networking, user authentication, web surfing control and our LiveSecurity broadcast service. In January 2000, we announced the introduction of our security solutions for SOHOs and telecommuters, which we expect to begin shipping in the first quarter of 2000. Our solutions for SOHOs and telecommuters will feature a firewall, virtual private networking, Internet protocol sharing and our LiveSecurity broadcast service. We provide enterprises a security management choice through our two product offerings, the LiveSecurity System and LiveSecurity for MSS, or managed security service. Our LiveSecurity System enables enterprises to manage their own Internet security with an easy-to-configure solution that provides point- and-click security management. The LiveSecurity System allows enterprises to rapidly distribute security protection from a desktop personal computer to all security appliances on their corporate network, while retaining centralized control and administration. Alternatively, SMEs, larger enterprises and, in the near future, SOHOs and telecommuters, can outsource their security management to Internet service providers, or ISPs, that have implemented our LiveSecurity for MSS. Through LiveSecurity for MSS, enterprises can sign up with an ISP to centrally configure, monitor and update their network security. For the ISP, our technology greatly improves the economics of managed security services through a scalable delivery platform that enables the ISP to remotely configure and manage thousands of customer sites quickly, easily and economically. We initially incorporated in Washington in 1996 and reincorporated in Delaware in 1997. References to "we," "our," "us" and "WatchGuard" in this prospectus refer to WatchGuard Technologies, Inc. and its predecessor. Our executive offices are located at 316 Occidental Avenue South, Suite 200, Seattle, Washington 98104, and our telephone number is (206) 521-8340. Our web site is located at http://www.watchguard.com. Any information that is included on or linked to our web site is not a part of this prospectus. We own or have rights to various trademarks and trade names used in our business. These include WatchGuard(R), Firebox(TM) and LiveSecurity(TM). This prospectus also includes trademarks, service marks and trade names of other companies, which remain the property of their owners. The Offering <TABLE> <S> <C> Common stock offered by WatchGuard......... 1,700,000 shares Common stock offered by the selling 1,500,000 shares stockholders.............................. Common stock to be outstanding after this offering.................................. 21,336,752 shares Use of proceeds............................ For working capital, corporate facilities relocation or expansion, possible repayment of indebtedness and other general corporate purposes, as well as the possible acquisition of or investment in complementary businesses or technologies Nasdaq National Market symbol.............. WGRD </TABLE> The number of shares of outstanding common stock is based on shares outstanding as of December 31, 1999, and excludes . 524,999 shares available for grant under our stock option plan as of December 31, 1999; . 6,502,680 shares of common stock issuable upon exercise of options outstanding under our stock option plan as of December 31, 1999, at a weighted average exercise price of $4.60 per share, of which options to purchase 2,359,707 shares were exercisable and of which options to purchase 125,000 shares will be exercised by a selling stockholder in connection with this offering; . 225,000 shares of common stock issuable upon exercise of warrants outstanding as of December 31, 1999, at a weighted average exercise price of $0.92 per share, all of which were exercisable; and . 600,000 shares of common stock available for issuance under our employee stock purchase plan as of December 31, 1999. Except where stated otherwise, the information we present in this prospectus assumes (1) no exercise by the underwriters of their over-allotment option, (2) a public offering price of $51.31 per share, which is based on the average of the high and low trading prices of our common stock on February 14, 2000, as reported on The Nasdaq National Market, and (3) the exercise by a selling stockholder of an option to purchase 125,000 shares, all of which will be sold in this offering at an exercise price of $0.13 per share. You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may be used only where it is legal to sell these securities. The information in this document may be accurate only on the date of this document. Summary Financial Data <TABLE> <CAPTION> Period From February 14, 1996 Year Ended (Inception) December 31, to December 31, ------------------------- 1996 1997 1998 1999 ----------------- ------- ------- ------- (In thousands, except per share data) <S> <C> <C> <C> <C> Statement of Operations Data: Total revenues .................. $ 331 $ 5,098 $11,379 $20,619 Operating loss .................. (462) (4,396) (9,000) (16,173) Net loss ........................ (468) (4,334) (9,119) (16,018) Basic and diluted net loss per share .......................... N/A $(17.17) $(11.34) $ (1.80) Shares used in calculation of basic and diluted net loss per share .......................... N/A 252 804 8,903 Pro forma basic and diluted net loss per share (unaudited)...... $ (0.96) Shares used in calculation of pro forma basic and diluted net loss per share (unaudited)........... 16,664 </TABLE> See note 7 of Notes to Financial Statements for information concerning the calculation of pro forma basic and diluted net loss per share. <TABLE> <CAPTION> December 31, 1999 ------------------- Actual As Adjusted ------- ----------- (In thousands) <S> <C> <C> Balance Sheet Data: Cash, cash equivalents and marketable securities........... $26,401 $107,914 Working capital............................................ 24,395 106,291 Total assets............................................... 41,311 122,824 Long-term debt, less current portion....................... -- -- Total stockholders' equity................................. 32,245 114,141 </TABLE> The preceding table summarizes . actual balance sheet data; and . balance sheet data as adjusted to give effect to the sale by WatchGuard of 1,700,000 shares of common stock offered through this prospectus at an assumed public offering price of $51.31 per share, after deducting underwriting discounts and commissions and estimated offering expenses, the assumed exercise of 125,000 stock options by a selling shareholder at an exercise price of $0.13 per share, and WatchGuard's repayment of notes payable in the amount of $383,000.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001063527_august_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001063527_august_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read this prospectus carefully. All references to "we," "us," "our," "August" or "the company" in this prospectus mean August Technology Corporation. This prospectus contains forward-looking-statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking-statements as a result of a variety of factors, including those set forth under "Risk Factors" and elsewhere in this prospectus. August Technology Corporation We design, manufacture, market and service automated visual inspection equipment for the detection of micro defects, which are defects generally larger than 0.5 microns, in semiconductor devices. Our fully automated inspection systems provide semiconductor manufacturers real-time information that they use to improve their processes and ultimately their profitability. We have sold micro defect inspection systems worldwide to many major semiconductor manufacturing companies. Our customers supply semiconductor devices used in a wide range of high-growth electronic products such as cellular phones, fiber-optic switches, personal digital assistants, cable modems, network switches and personal computers. As the life cycles of these products decrease, the time needed for semiconductor manufacturers to reach optimal production yields for their new semiconductor devices has become more critical. In addition, the increasing complexity of semiconductor devices further adds to the difficulty of quickly achieving optimal production yields. As a result of these pressures, semiconductor manufacturers need more useful and timely data about their processes to increase their yield and productivity. Using our expertise in machine vision technology and proprietary inspection software, our NSX series of products automatically identifies micro defects on our customers' semiconductor devices during the manufacturing process. Our systems enable early identification of faulty devices at multiple process steps, allowing semiconductor manufacturers to take corrective action before large quantities of defective devices are produced. This solution offers significant advantages over previous inspection methods which typically involved sampling performed at the end of the manufacturing process by large numbers of people using microscopes. Specifically, we help improve our customers' productivity and yield by providing: fast, automated micro defect inspection; rapid data collection and reporting; scalable, modular inspection solutions; expert application development resources; and worldwide customer service and support. Our objective is to be the leading supplier of automated micro defect inspection systems. We plan to build upon our expertise in machine vision technology and proprietary software development to further capitalize on the accelerating demand for our products. Key elements of our strategy are to: extend our technological leadership; expand our product development relationships with customers; capitalize on our applications solutions expertise; expand our global sales and service network; leverage our broad and comprehensive customer base; and accelerate growth through strategic acquisitions. Our principal executive offices are at 4900 West 78th Street, Bloomington, Minnesota, 55435, and our telephone number is (952) 820-0080. We were incorporated under the laws of Minnesota in 1992. Our web site address is www.augusttech.com. The information on our web site is not part of this prospectus. PRE-EFFECTIVE AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT Under the Securities Act of 1933 Balance Sheet Data: Cash and cash equivalents $ $ 33,704 Working capital 1,691 37,386 Total assets 8,245 41,949 Total debt 1,991 Total shareholders' equity 2,921 38,616 August Technology Corporation (Exact name of registrant as specified in its charter) Minnesota 3827 41-1729485 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code) (I.R.S. Employer Identification Number) August Technology Corporation 4900 West 78th Street Bloomington, Minnesota 55435 (952) 820-0080 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Jeff O'Dell, Chief Executive Officer August Technology Corporation 4900 West 78th Street Bloomington, Minnesota 55435 (952) 820-0080 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Thomas R. King, Esq. Douglas P. Long, Esq. Robert K. Ranum, Esq. Richard G. Erstad, Esq. Fredrikson & Byron, P.A. Faegre & Benson LLP 900 Second Avenue South, Suite 1100 90 South Seventh Street Minneapolis, Minnesota 55402 Minneapolis, Minnesota 55402 (612) 347-7000 (612) 336-3000 (612) 347-7077 fax (612) 336-3026 fax
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001064445_personify_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001064445_personify_prospectus_summary.txt
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+Prospectus Summary....................................................... 1 Risk Factors............................................................. 5 Use of Proceeds.......................................................... 12 Dividend Policy.......................................................... 12 Special Note Regarding Forward-Looking Statements........................ 12 Capitalization........................................................... 13 Dilution................................................................. 14 Selected Consolidated Financial Data..................................... 15 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................... 17 Business................................................................. 24 Management............................................................... 35 Related Party Transactions............................................... 44 Principal Stockholders................................................... 50 Description of Capital Stock............................................. 53 Shares Eligible for Future Sale.......................................... 55 United States Tax Consequences to Non-U.S. Holders....................... 56 Underwriting............................................................. 59 Legal Matters............................................................ 63 Experts.................................................................. 63 Where You Can Find More Information...................................... 63 Index to Financial Statements............................................ F-1 </TABLE> --------------------- Personify(R) is a trademark of Personify, Inc., which may be registered in certain jurisdictions. Essentials(TM), Accelerators(TM) and Accelerator Framework(TM), Beacons(TM), Connectors(TM), Proactive(TM), Design for Measurability and DFMSM, Web ETL(TM), Behavioral OLAP(TM), Proactive Profile Exchange(TM) and CentralSM are claimed as trademarks and service marks of Personify. Other service marks, trademarks and trade names referred to in this prospectus are the property of their respective owners. SUMMARY Because this is only a summary, it does not contain all the information that may be important to you. You should read the entire prospectus, especially "Risk Factors" and the consolidated financial statements and notes, before deciding to invest in our common stock. Personify, Inc. We provide e-business software that enables companies to measure, analyze and optimize customer-focused profitability metrics. We believe the insight that companies gain from using our software will enable them to accelerate growth and profitability at every stage of their e-business evolution. Many early e-businesses emphasized rapid acquisition of prospective customers while deferring profitability. E-businesses that spent heavily on attracting visitors to their websites are facing the resulting problem of converting those prospects into paying customers and retaining enough customers to sustain a profitable business. To achieve and grow profitable customer relationships, many e-businesses are seeking to exploit an advantage unique to the internet: e-businesses collect significantly more behavioral data about prospects' and customers' interests and tendencies than do traditional businesses. However, the volume and complexity of this data make it difficult to process with traditional software approaches. As a result, e-businesses are seeking software to help them refine raw internet data into profiles of prospects and customers which can be analyzed for business insight and used to target personalized offerings. Our solution allows e-businesses to measure, analyze and optimize metrics such as the percentage of prospects that become customers, the return on investment for advertising spending and the rate at which shoppers fail to purchase items they initially place in their online shopping carts. Benefits of our solution include: . E-centric behavioral profiling. Our products are designed and built for the internet, which we call being e-centric, enabling them to create behavioral profiles from large volumes of complex e-business data. . Predictive modeling. Our proprietary multidimensional modeling algorithms can discover previously hidden segments within an e- business' audience, such as which prospects and customers will likely contribute a disproportionate share of revenue. . Value at every stage. We believe our solution enables a company to accelerate growth and profitability at each stage of its e-business evolution. At the entry stage, our products provide an e-business with the means to better measure, analyze and optimize customer acquisition. At the emerging stage, our products provide an e-business with tools to improve sales by determining the effectiveness of its website content, promotions and design. At the established stage, our products provide an e-business with means to better merchandise its products and services. At the experienced stage, our products help an e-business maximize the lifetime value of its customer relationships. . Measurable results. We enable our customers to measure the benefits of our solution, generally including increased prospect-to-customer conversion rates, reduced abandonment of online shopping carts and increased repeat sales. We sell our products through a direct sales force based in San Francisco, with satellite offices throughout the United States. In addition, our products are marketed and referred to customers through our relationships with services and technology companies. We have strategic alliances with Deloitte Consulting, Ernst & Young and marchFIRST, among others. Each of these three companies has agreed to commit resources to promote, sell and deploy our products. Our customers consist of large, traditional businesses such as Volvo and REI and prominent internet-based companies such as Living.com and Petopia.com. Our objective is to become the leading provider of software that enables companies to rapidly accelerate growth and profitability of their e-business. Key elements of our strategy to achieve this goal include: . extending technology and product leadership; . leveraging our installed customer base to gain new customers; . expanding strategic relationships; . extending our products' compatibility with other providers' complementary products; and . facilitating rapid development and deployment of our solutions. We were incorporated in California in March 1996 as Affinicast Corp. We changed our name to Personify Incorporated in January 1998, and we expect to reincorporate in Delaware in June 2000 as Personify, Inc. Our principal executive offices are located at 425 Battery Street, Suite 450B, San Francisco, California 94111, and our telephone number at that address is (415) 782-2050. Our website is located at www.personify.com. Information contained on our website is not a part of this prospectus. The Offering <TABLE> <C> <S> Common stock to be offered by Personify..... shares Common stock outstanding after the offering................................... shares Use of proceeds............................. We plan to use the proceeds of the offering for general corporate purposes, including sales and marketing and product development, and for other working capital purposes. </TABLE> The share amounts in this table are based on shares outstanding as of March 31, 2000. This table excludes: . 7,199,673 shares of common stock reserved for issuance under our 2000 equity incentive plan, of which options to purchase 4,285,692 shares were outstanding as of March 31, 2000 at a per share weighted average exercise price of $3.20; . 1,000,000 shares available for issuance under our 2000 employee stock purchase plan; . 199,524 shares of convertible preferred stock issuable upon the exercise of outstanding warrants as of March 31, 2000 at a weighted average exercise price of $0.614 per share; and . 246,913 shares of common stock issuable upon the exercise of outstanding warrants as of March 31, 2000 at a weighted average exercise price of $8.16 per share. Except as otherwise indicated, information in this prospectus is based on the following assumptions: . our reincorporation in Delaware; . the automatic conversion of shares of our preferred stock into shares of our common stock prior to the closing of this offering; . no exercise of the underwriters' over-allotment option; and . the filing of our amended and restated certificate of incorporation upon completion of this offering. Summary Consolidated Financial Information (in thousands, except per share data) <TABLE> <CAPTION> Three Months Year Ended December 31, Ended March 31, ------------------------- ----------------- 1997 1998 1999 1999 2000 ------- ------- ------- ------- -------- (unaudited) <S> <C> <C> <C> <C> <C> Consolidated Statements of Operations Data: Net revenues: License revenues............... $ 10 $ 24 $ 639 $ 65 $ 645 Service revenues............... 5 166 704 37 568 ------- ------- ------- ------- -------- Total net revenues.............. 15 190 1,343 102 1,213 Cost of revenues................ 2 107 1,961 139 1,370 ------- ------- ------- ------- -------- Gross profit (loss)........... 13 83 (618) (37) (157) ------- ------- ------- ------- -------- Operating expenses: Research and development....... 506 1,081 2,549 471 947 Sales and marketing............ 270 1,277 4,336 667 2,857 General and administrative..... 134 468 1,024 192 1,652 Stock-based compensation....... -- -- 690 3 8,030 Amortization of intangible assets....................... -- -- 350 -- 350 ------- ------- ------- ------- -------- Total operating expenses........ 910 2,826 8,949 1,333 13,836 ------- ------- ------- ------- -------- Operating loss................ (897) (2,743) (9,567) (1,370) (13,993) Interest and other income (expense), net................ (65) 96 240 19 147 ------- ------- ------- ------- -------- Net loss........................ (962) (2,647) (9,327) (1,351) (13,846) Dividend accretion on preferred stock......................... (88) (125) (125) (31) (31) ------- ------- ------- ------- -------- Net loss attributable to common stockholders.................. $(1,050) $(2,772) $(9,452) $(1,382) $(13,877) ======= ======= ======= ======= ======== Net loss per share attributable to common stockholders, basic and diluted................... $ (0.72) $ (2.14) $ (5.47) $( 1.10) $ (3.91) ======= ======= ======= ======= ======== Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted....................... 1,457 1,298 1,728 1,260 3,549 ======= ======= ======= ======= ======== </TABLE> See Note 2 of the notes to our consolidated financial statements for an explanation of how we determined the number of shares used in computing per share data. <TABLE> <CAPTION> March 31, 2000 ----------------------------- Pro Pro Forma Actual Forma As Adjusted -------- ------- ----------- (unaudited) <S> <C> <C> <C> Consolidated Balance Sheet Data: Cash and cash equivalents....................... $ 9,919 $ 9,919 $ Total assets.................................... 21,157 21,157 Long-term debt and capital lease obligations, less current portion.......................... 45 45 Mandatorily redeemable preferred stock and warrants...................................... 28,011 -- Total stockholders' equity (deficit)............ (13,791) 14,220 </TABLE> The preceding balance sheet data is shown on a pro forma basis to give effect to the conversion of our preferred stock into common stock prior to the closing of this offering and on a pro forma, as adjusted basis to reflect the proceeds of our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting the underwriting discounts and commissions and estimated offering expenses.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001065663_objectspac_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001065663_objectspac_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION THAT WE BELIEVE IS ESPECIALLY IMPORTANT CONCERNING OUR BUSINESS AND THIS OFFERING OF COMMON STOCK. IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO YOUR INVESTMENT DECISION. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS AND RELATED NOTES, BEFORE DECIDING TO INVEST IN OUR COMMON STOCK. OUR BUSINESS OVERVIEW We are a leading provider of business-to-business integration, or B2Bi, software products and professional services that enable organizations to easily and rapidly integrate business applications within and across organizations over the Internet. Our software products allow organizations to link their business processes to share services, conduct transactions and exchange information in real-time with customers, suppliers and other trading partners. Our professional services, which comprise the majority of our revenue, assist our customers in all phases of the B2Bi process, from concept development to design to implementation. By simplifying and automating business-to-business, or B2B, processes and information flows, our solution enables organizations to realize significant benefits from integrating customers, suppliers and other trading partners within a new Internet-based community. These benefits include both enhanced revenue opportunities, such as enabling organizations to introduce products to market more quickly and to provide new services to their customers, and increased operating efficiencies, such as efficiently managing inventories, automating manual processes and improving forecasting capabilities. We have designed our solution to be rapidly deployed, permitting our customers to reduce the time necessary to execute new Internet-based B2B strategies. Our solution does not require customers to modify existing applications or to adopt a common integration technology, saving valuable implementation time. Because our solution's integration capabilities easily extend existing applications to a wide range of users without costly reprogramming, organizations can realize greater returns on their prior information technology investments. PRODUCTS Our OpenBusiness product line is comprised of our: - OPENBUSINESS INFRASTRUCTURE PLATFORM that provides an essential foundation for integrating an organization's incompatible business applications, allowing them to be easily extended to their external B2B partners. Our Infrastructure Platform was introduced in October 1997. - OPENBUSINESS GATEWAY that builds upon the functionality of the Infrastructure Platform by extending an organization's internally integrated applications to their B2B partners over the Internet. Alternatively, the Gateway may also be used with a customer's existing infrastructure, such as application servers or databases, or with a customer's existing applications. Our Gateway was introduced in March 2000. - OPENBUSINESS PORTAL that builds on the integration and access capabilities of the Infrastructure Platform and Gateway, allowing organizations to rapidly create a website to catalog business applications they choose to make available to their community of B2B partners. Our Portal was introduced in March 2000. BUSINESS STRATEGY Our goal is to be the leading provider of B2Bi software products and professional services that enable organizations to develop and implement new Internet-based B2B models. To achieve this objective, we intend to extend our product and technological leadership, sell additional products and services to our installed customer base, expand our sales and distribution channels, benefit from network effects as our customers' B2B partners adopt our products and capitalize on our professional services capabilities. SALES AND MARKETING We market our products and professional services globally primarily through our direct sales force. Our direct sales force is complemented by the selling and support efforts of our value-added resellers and system integrators. As of July 31, 2000, we had licensed our OpenBusiness products or provided professional services to over 300 customers, including Caterpillar, General Motors, Intel, Merrill Lynch, Nokia, Sprint and Unisys. THE OFFERING <TABLE> <S> <C> Common stock offered......................... 7,500,000 Shares Common stock to be outstanding after this offering................................... 37,876,530 Shares Use of proceeds.............................. We plan to use the net proceeds from this offering for working capital and other general corporate purposes and for the repayment of approximately $3.0 million of indebtedness. Proposed Nasdaq National Market symbol....... OBSP </TABLE> ABOUT THIS PROSPECTUS Unless otherwise indicated, all information contained in this prospectus: - assumes no exercise of the underwriters' option to purchase an over-allotment of up to 1,125,000 additional shares; - gives effect to a 100% stock dividend completed in January 2000 and a 40% stock dividend completed in March 2000; and - gives effect to the conversion of each outstanding share of preferred stock into 2.8 shares of common stock upon the closing of this offering. The number of shares of our common stock to be outstanding after this offering includes: - 21,208,963 shares of our common stock outstanding as of August 8, 2000; and - 9,167,567 shares of our common stock to be issued upon the conversion of all shares of our preferred stock upon the closing of this offering. The number of shares of our common stock to be outstanding after this offering excludes: - 5,737,683 shares issuable upon exercise of options outstanding as of August 8, 2000 with a weighted-average exercise price of $4.02; - 4,163,663 shares available for future issuance under our stock option plans as of August 8, 2000; and - 434,795 shares plus that number of shares equal to $2.5 million divided by the offering price of the common stock in this offering, issuable upon the exercise of warrants outstanding as of August 8, 2000. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) When reading this summary financial data, please refer to "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited financial statements and accompanying notes for additional information. The pro forma information in the table below gives effect to the automatic: - conversion of all outstanding shares of our preferred stock into shares of common stock, as if the shares had converted immediately upon issuance; and - elimination of redemption rights on 1,144,433 shares of our common stock. <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net Revenue: License............................. $ 588 $ 1,097 $ 1,547 $ 908 $ 5,250 $ 1,231 $ 5,548 Service............................. 3,972 8,757 10,070 10,897 14,896 6,438 10,533 ------- ------- ------- ------- ------- ------- ------- Total net revenue................. 4,560 9,854 11,617 11,805 20,146 7,669 16,081 Gross profit.......................... 1,908 4,557 3,841 3,670 8,774 2,750 8,513 Operating loss from continuing operations.......................... (755) (1,578) (3,789) (4,661) (6,262) (3,857) (4,026) Net income (loss)..................... 179 5 (2,292) (4,362) (4,153) (3,997) (1,948) Basic and diluted net income (loss) per common share.................... $ 0.01 $ -- $ (0.12) $ (0.23) $ (0.49) $ (0.34) $ (0.23) Weighted average number of common shares outstanding.................. 16,800 17,611 19,624 19,632 19,640 19,635 19,912 Pro forma basic and diluted net loss per common share.................... $ (0.14) $ (0.06) Shares used in computing pro forma net loss per common share............... 30,076 30,224 </TABLE> In accordance with generally accepted accounting principles, net income (loss) per common share does not reflect the conversion of all outstanding shares of our preferred stock into shares of common stock or the elimination of redemption rights on shares of our common stock, both of which will occur upon the closing of this offering. The pro forma column of the table below gives effect to the automatic: - conversion of all outstanding shares of our preferred stock into shares of common stock upon the closing of this offering; and - elimination of redemption rights on 1,144,433 shares of our common stock upon the closing of this offering. The pro forma as adjusted information in the table below gives effect to: - our sale of 7,500,000 shares of common stock in this offering at an assumed initial public offering price of $10.00 per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us; and - our repayment of approximately $3.0 million of outstanding indebtedness from the net proceeds of this offering. <TABLE> <CAPTION> AS OF JUNE 30, 2000 ------------------------------------ PRO FORMA PRO FORMA ACTUAL (UNAUDITED) AS ADJUSTED <S> <C> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and marketable securities.......... $ 8,340 $ 8,340 $73,940 Working capital........................................... 5,696 5,696 73,546 Total assets.............................................. 18,863 18,863 84,463 Long-term obligations, net of current portion............. 1,004 1,004 254 Mandatorily redeemable convertible preferred stock, common stock and warrants...................................... 22,699 -- -- Stockholders' equity (deficit)............................ (15,692) 7,007 75,607 </TABLE>
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+PROSPECTUS SUMMARY THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" ON PAGE 5 AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO THOSE FINANCIAL STATEMENTS ON PAGE F-1, BEFORE MAKING AN INVESTMENT DECISION. ELITRA PHARMACEUTICALS INC. We are a leader in antimicrobial functional genomics. We use proprietary technologies and molecular biology tools to identify the essential genes that enable bacteria and fungi to grow and survive. We intend to discover, develop and commercialize novel antibiotic and antifungal drugs that inhibit the products of these essential genes. Our antimicrobial drugs will be designed to treat common and life-threatening infections and to address the growing problem of drug resistance in the $29 billion antimicrobial market. We have developed an automated high throughput approach to discovering new antimicrobials, which we refer to as ultra-rapid gene-to-lead generation. Using our ultra-rapid technologies, we have identified over 800 essential drug targets in seven species of clinically relevant bacteria in the past 18 months. By comparison, all known antibiotics prescribed today inhibit fewer than 25 different essential drug targets. We have established a proprietary bioinformatics database, which allows us to rapidly prioritize and select optimal drug targets for our drug discovery programs. In addition, we can prepare our drug targets for high throughput screening to identify potential new drugs within two to three weeks, while traditional methods generally require six to nine months. We believe that the speed, specificity and sensitivity of our gene-to-lead approach, combined with our bioinformatics database, will enable us to discover new classes of antimicrobial drugs. Over the last decade, major worldwide research efforts have focused on determining the exact sequence of DNA from diverse organisms. However, additional knowledge of a gene's role in an organism must be determined in order to identify which genes would be suitable as targets for drug discovery and development. Although there have been general advances in the areas of genomic information, molecular biology tools and new screening technologies, these advances have produced few new antimicrobial drugs. We believe that our approach of developing new drugs working against novel targets will best address the current crisis of drug resistant bacteria and fungi. BENEFITS OF OUR ULTRA-RAPID GENE-TO-LEAD APPROACH - ULTRA-RAPID GENE DISCOVERY Conventional antimicrobial gene discovery techniques require the evaluation of one gene at a time. Our functional genomics technology allows us to simultaneously evaluate the essentiality of thousands of genes, comprising the entire genome of an organism. Our automated process provides the capacity to identify over 100 essential drug targets in a single month. - OPTIMAL DRUG TARGETS Using our proprietary bioinformatics database of essential drug targets, we prioritize targets for our drug discovery programs. Targets are selected where the resultant drug candidates are likely to have specific characteristics, such as activity against a range of organisms or a specific pathogen, inhibition of a particular biological activity and minimal human toxicity. - RAPID GENE TO SCREEN Using traditional techniques it can take six to nine months to develop an assay to begin screening for a compound that inhibits the drug target. In addition, many targets are either too complex or have an unknown biochemical function which makes assay development difficult or even impossible. In contrast, because we use the same molecular biology tools used to discover essential genes, we can convert our essential drug targets into assays for high throughput screening within two to three weeks. Our assays are conducted directly in the pathogen of interest and can be used to screen essential drug targets even when the biochemical function of the protein is unknown. - HIGHLY SENSITIVE ASSAYS Our assay technology makes bacteria and fungi cells extremely sensitive to compounds that inhibit a specific essential drug target. This approach enables us to discover drug candidates that might not be detected using traditional screening methodologies. The high degree of sensitivity and specificity of our assays allows us to screen both new and historic collections of chemical libraries to generate new drug candidates. - HIGH THROUGHPUT SCREENING We have established in-house high throughput screening capabilities that we use to screen selected essential drug targets against our diverse chemical library of approximately 170,000 compounds. Currently, we have the capacity to screen approximately 25,000 compounds per day. We intend to increase our chemical library to approximately 500,000 compounds and our screening capacity to approximately 150,000 compounds per day. OUR TECHNOLOGY We use a proprietary shotgun antisense technology as a functional genomics research tool to identify essential genes. Antisense molecules are short strands of DNA or RNA that can be used to stop the production of specific proteins. By stopping the production of a protein, we can determine if the associated gene is essential to the growth and survival of an organism. We use the same molecular biology tools for both identifying essential drug targets and screening for new drug candidates. We are developing our bioinformatics database to help select optimal essential drug targets for our drug discovery programs. We are building that database by adding our proprietary essential gene information to the source code for the PathoSeq-TM- Database, that we have acquired by purchase or license from Incyte Genomics, Inc. PathoSeq is an extensive database of public and proprietary microbial sequence data, software and analysis tools. We believe this comprehensive bioinformatics database represents a major advance in our essential drug target selection and validation capabilities. To date, we have applied our technologies to a variety of clinically important bacteria and fungi. These include pathogens associated with both common community and hospital-acquired infections, including those exhibiting a high frequency of resistance to current antibiotics. Examples of these types of pathogens include STAPHYLOCOCCUS AUREUS, PSEUDOMONAS AERUGINOSA and ASPERGILLUS FUMIGATUS. We plan to develop and commercialize antimicrobial drugs both on our own and in collaboration with corporate partners. In May 2000, we entered into a corporate collaboration with LG Chemical Ltd. to discover, develop and commercialize antimicrobial products based on a specific number of our drug targets. Under the collaboration, we retain exclusive marketing rights in North America. Our principal executive offices are located at 3510 Dunhill Street, San Diego, CA 92121 and our telephone number is (858) 410-3030. We were incorporated in California on July 18, 1997 and reincorporated in Delaware on June 1, 1998. THE OFFERING <TABLE> <S> <C> Common stock we are offering................. shares Common stock to be outstanding after the offering................................... shares Use of proceeds.............................. We intend to use the net proceeds of this offering and a concurrent private placement for research and development activities, access to complementary technologies, acquisition of compound and natural products libraries, patent prosecution and other capital investments, as well as working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol....... ELIT </TABLE> ------------------------ The number of shares of our common stock to be outstanding immediately after this offering is based on the number of shares outstanding on August 15, 2000 and includes shares of our common stock to be sold to Incyte in a concurrent private placement. This number excludes: - 1,323,766 shares of our common stock issuable upon the exercise of stock options outstanding under our stock option plan with a weighted average exercise price of $0.08 per share; - 93,656 shares of our common stock issuable upon the exercise of warrants outstanding with a weighted average exercise price of $1.44 per share; - 4,733,623 shares of our common stock available for future issuance under our 1998 Equity Incentive Plan, as amended; - 500,000 shares of our common stock available for future issuance under our Non-Employee Directors' Stock Option Plan; and - 500,000 shares of our common stock available for future issuance under our Employee Stock Purchase Plan. ------------------------ UNLESS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO REFLECT A -FOR- REVERSE STOCK SPLIT WHICH WILL BE EFFECTED PRIOR TO THE CONSUMMATION OF THIS OFFERING AND ASSUMES: - THE CONVERSION OF ALL OUTSTANDING SHARES OF OUR PREFERRED STOCK INTO 35,181,246 SHARES OF COMMON STOCK UPON THE CLOSING OF THIS OFFERING; AND - NO EXERCISE BY THE UNDERWRITERS OF THE OVER-ALLOTMENT OPTION. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The following summary financial data is derived from our financial statements. You should read this information together with the financial statements and the notes to those statements appearing elsewhere in this prospectus and the information under "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." See note 1 to our financial statements for an explanation of the determination of the number of shares used in computing per share data. <TABLE> <CAPTION> PERIOD FROM JULY 18, 1997 YEAR ENDED SIX MONTHS ENDED (INCEPTION) TO DECEMBER 31, JUNE 30, DECEMBER 31, --------------------- ----------------------- 1997 1998 1999 1999 2000 --------------- -------- ---------- ---------- ---------- (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenue................................ $ -- $ -- $ -- $ -- $ 287 Total operating expenses..................... (40) (1,750) (6,052) (2,020) (5,990) Loss from operations......................... (40) (1,750) (6,052) (2,020) (5,703) Net loss..................................... (41) (1,749) (5,786) (2,042) (5,523) Net loss attributable to common stockholders............................... $ (41) $(1,749) $ (6,170) $ (2,042) $ (5,907) ======= ======= ========== ========== ========== Basic and diluted net loss per share......... $ (0.11) $ (2.55) $ (4.52) $ (1.71) $ (2.93) ======= ======= ========== ========== ========== Shares used in computing basic and diluted net loss per share......................... 379,000 685,000 1,366,000 1,193,000 2,014,000 Pro forma basic and diluted net loss per share...................................... $ (0.34) $ (0.21) ========== ========== Shares used in computing pro forma basic and diluted net loss per share................. 18,356,000 28,496,000 </TABLE> The following table contains a summary of our consolidated balance sheet at June 30, 2000: - on an actual basis; - on a pro forma basis to reflect the conversion of all outstanding shares of preferred stock into 35,181,246 shares of common stock effective upon the closing of this offering, including 6,722,327 shares of Series E preferred stock issued in August 2000; and - on a pro forma, as adjusted basis, to reflect the sale of shares of common stock offered hereby at an assumed initial public offering price per share of $ after deducting estimated underwriting discounts, commissions and offering expenses, and the concurrent sale and issuance of shares of common stock to Incyte at the initial public offering price. <TABLE> <CAPTION> AS OF JUNE 30, 2000 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (UNAUDITED) <S> <C> <C> <C> SELECTED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $ 11,269 $ 33,116 $ Working capital............................................. 9,285 31,133 Total assets................................................ 22,917 44,764 Long-term obligations, less current portion................. 2,548 2,548 Redeemable convertible preferred stock...................... 16,768 -- Accumulated deficit......................................... (13,867) (13,867) Total stockholders' equity.................................. 342 38,958 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001066657_morgan_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001066657_morgan_prospectus_summary.txt
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+SUMMARY Because this is a summary, it does not contain all of the information that may be important to you. You should read the entire prospectus and its exhibits carefully before you decide to invest. MORGAN STANLEY DEAN WITTER CHARTER SERIES The Morgan Stanley Dean Witter Charter Series consists of three continuously offered limited partnerships, each organized in the State of Delaware on July 15, 1998: Morgan Stanley Dean Witter Charter Graham L.P. Morgan Stanley Dean Witter Charter Millburn L.P. Morgan Stanley Dean Witter Charter Welton L.P. The offices of each partnership are located at Two World Trade Center, 62nd Floor, New York, New York 10048, telephone (212) 392-8899. Each partnership provides the opportunity to invest in futures contracts managed by an experienced, professional trading advisor. Since each partnership's assets are traded by different trading advisors, each employing a different trading program, you should review the specific information relating to each partnership and its trading advisor to better understand how a partnership may fit into your overall investment plan. If you decide to invest in more than one partnership, you may allocate your investment among any one or more of the partnerships and, after an initial six-month holding period, you may shift your investment among one or more of the other Charter Series partnerships. A futures contract is an agreement to buy or sell a fixed amount of a commodity or other underlying product, instrument or index at a predetermined price at a specified time in the future. In order to secure its obligation to make or take delivery under a futures contract, the trader must deposit funds, referred to as margin, with the commodity broker through which it trades. An option on a futures contract gives the buyer of the option, in exchange for a one-time payment known as premium, the right, but not the obligation, to buy or sell a futures contract at a specified price within a specified period of time. The seller of an option on a futures contract receives the premium payment and has the obligation to buy or sell the futures contract at the specified price within the specified period of time. Futures contracts and options on futures contracts are traded on U.S. and foreign exchanges. A forward contract is an agreement directly between two parties to buy or sell a fixed amount of an underlying product at an agreed price at an agreed date in the future. Forward contracts are not traded on exchanges, but rather are traded in the dealer markets. A partnership may take long positions in futures, forwards, and options contracts in which the partnership is obligated to take delivery of the underlying commodity, product, instrument, or index. A partnership also may take short positions in those contracts in which the partnership has an obligation to deliver the underlying commodity, product, instrument, or index. Futures, forwards and options contracts are traded in a number of commodities, products, instruments, and indices, including foreign currencies, financial instruments, precious and industrial metals, energy products, agricultural commodities, stock indices, and soft commodities like cotton and cocoa. For additional information on the futures, options, and forwards markets, see "Statement of Additional Information" beginning on page * . The investment objective of each partnership is to achieve capital appreciation and to provide investors with the opportunity to diversify a portfolio of traditional investments consisting of stocks and bonds. While the partnerships have the same over-all investment objective, and the trading advisors may trade in the same futures, forwards, and options contracts, each trading advisor and its trading programs trades differently. Each partnership has a different trading advisor and trading program. You should review and compare the specifics of each partnership, its terms, and its trading advisor before selecting one or more partnerships in which to invest. MORGAN STANLEY DEAN WITTER CHARTER GRAHAM L.P. This partnership's assets are traded by Graham Capital Management, L.P. pursuant to its Global Diversified Program at 1.5 times the leverage it normally applies for the program. The Global Diversified Program utilizes computerized trading models to participate in the potential profit opportunities of approximately 80 markets. The computer models on a daily basis analyze the recent price action, the relative strength, and the risk characteristics of each market and compare statistically the quantitative results of this data to years of historical data on each market. The program will normally have weightings of approximately 25% in futures contracts based on short-term and long-term global interest rates, 27% in currencies, 17% in stock index futures, 16% in agricultural futures, 8% in metal futures, and 7% in energy futures. The actual weighting and leverage used in each market will change over time due to liquidity, price action, and risk considerations. MORGAN STANLEY DEAN WITTER CHARTER MILLBURN L.P. This partnership's assets are traded by Millburn Ridgefield Corporation pursuant to its Diversified Portfolio at standard leverage. The objective of Millburn's trading method is to participate in major sustained price moves in the markets traded. Millburn will make trading decisions pursuant to its trading method which includes technical trend analysis and certain non-trend-following technical systems, as well as the application of money management principles. The Diversified Portfolio trades approximately 50 markets and will normally have weightings of approximately 47% in currencies, 18% in interest rate, 8% in softs and agricultural futures, 9% in stock index futures, 11% in energy futures, and 7% in metal futures. The actual weightings and leverage used in each market may change over time. MORGAN STANLEY DEAN WITTER CHARTER WELTON L.P. This partnership's assets are traded by Welton Investment Corporation pursuant to its Diversified Portfolio at standard leverage. The Diversified Portfolio employs multiple trading strategies, consisting primarily of proprietary mathematical systems, in an attempt to profitably participate in a variety of market conditions. The Diversified Portfolio trades in over 75 global futures, forwards, and options markets and will normally have weightings of approximately 28% in global interest rate futures, 23% in currencies, 21% in stock index futures, 10% in agricultural futures, 10% in metal futures, and 8% in energy futures. The actual weightings and leverage used in each market may change over time. WHO MAY SUBSCRIBE INVESTMENT CONSIDERATIONS You should purchase units in a partnership only if you understand the risks involved in the investment and only if your financial condition permits you to bear those risks, including the risk of losing all or substantially all of your investment in the partnership. You should invest in the units only with the risk capital portion of your investment portfolio. MINIMUM INVESTMENT If you are a new investor in the Charter Series of partnerships, you must invest at least $20,000. You may allocate your investment among any one or more of the partnerships in the Charter Series, but you must invest at least $5,000 in a partnership. Once you become an investor in any Charter Series partnership you may increase that investment with an additional contribution of at least $1,000. If you are an investor in another limited partnership for which Demeter Management Corporation serves as the general partner, you may redeem your interest in that other partnership and use the proceeds to invest in any one or more of the Charter Series of partnerships. The $20,000 minimum subscription will be satisfied if the proceeds from the redemption would have equaled at least $20,000 as of the last day of the month immediately preceding the monthly closing at which the units are purchased, irrespective of whether the actual proceeds from the redemption are less than $20,000 when the units are redeemed. The general partner may, in its sole discretion, reject any subscription in whole or in part. FINANCIAL SUITABILITY Unless otherwise specified in the subscription agreement under "State Suitability Requirements," you must have either: a net worth of at least $150,000, exclusive of home, furnishings, and automobiles; or both a net worth of at least $45,000, exclusive of home, furnishings, and automobiles, and an annual income of at least $45,000. You should be aware, however, that certain states impose more restrictive suitability and/or higher minimum investment requirements. Before you invest you will be required to represent and warrant that you meet the applicable state minimum financial suitability standard set forth in the subscription agreement, which may also require a greater minimum investment. LIMITED REVOCATION RIGHT After you subscribe for units in any Charter Series partnership, you will have limited rights to revoke your subscription. You may only revoke a subscription and receive a full refund of the subscription amount, plus any accrued interest, within five business days after execution of the subscription agreement or no later than 3:00 P.M., New York City time, on the date of the applicable monthly closing, whichever comes first, by delivering written notice to your Morgan Stanley Dean Witter financial advisor. THE OFFERING OF UNITS THE CHARTER SERIES CONTINUOUS OFFERING Each partnership is continuously offering units of limited partnership interest for sale at monthly closings held as of the last day of each month. You can purchase units at a price equal to 100% of a partnership's month-end net asset value. The general partner calculates each partnership's month-end net asset value per unit on a monthly basis by dividing the partnership's month-end net assets by the number of its month-end outstanding units. A partnership's net assets is its assets minus its liabilities. ESCROW TERMS During each partnership's continuous offering, your subscription will be transferred to, and held in escrow by, The Chase Manhattan Bank, New York, New York. Subscription funds held in escrow will be invested in the escrow agent's money market account and will earn interest at the rate then paid by the bank on that money market account. If the general partner accepts your subscription, the escrow agent will pay the subscription amount to the appropriate partnerships and pay any interest earned on those funds to Dean Witter. In turn, Dean Witter will credit your customer account with the interest. If the general partner rejects a subscription, your account will be credited in an amount equal to the rejected subscription amount, together with any interest earned on those funds while held in escrow. SUMMARY OF RISK FACTORS YOU SHOULD CONSIDER * These are speculative securities. * You could lose all or substantially all of your investment in the partnerships. * Past performance is not necessarily indicative of future results. * Each partnership's futures, forwards, and options trading is speculative and trading performance has been, and is expected to be, volatile. * Each partnership's trading is highly leveraged, which accentuates the trading profit or loss on a trade. * You may not redeem your units until you have been an investor for at least six months. * If you redeem units within 24 months after they are purchased, you will pay a redemption charge except in defined circumstances. * Units will not be listed on an exchange and no other secondary market will exist for the units. * Each partnership pays substantial charges and fees and must earn substantial trading profits in order to pay these expenses. * Profits earned by a partnership will be taxable to an investor even though the general partner does not intend to make any distributions. MAJOR CONFLICTS OF INTEREST * Because the general partner and Dean Witter are affiliates of each other, the fees payable to Dean Witter and the other terms relating to the operation of the partnerships and the sale of units were not negotiated by an independent party. * Because your Morgan Stanley Dean Witter financial advisor receives a portion of the brokerage fees paid by the partnerships, your financial advisor has a conflict of interest in advising you in the purchase or redemption of units. * The trading advisors, commodity brokers and general partner may trade futures, forwards and options for their own accounts and, thus, they may compete with a partnership for positions. Also, the other commodity pools managed by the general partner and the trading advisors compete with the partnerships for positions. These conflicts can result in less favorable prices on the partnerships' transactions. THE GENERAL PARTNER The general partner of each partnership is Demeter Management Corporation, a Delaware corporation. The general partner is or has been the general partner of 35 commodity pools and currently operates 26 other commodity pools. As of January 31, 2000, the general partner managed $1.4 billion of client assets. The general partner's main business office is located at Two World Trade Center, 62nd Floor, New York, New York 10048, telephone (212) 392-8899. THE COMMODITY BROKERS The commodity brokers for the partnerships are responsible for assuring that the partnerships' trades are properly processed and recorded or "cleared" by the clearinghouse affiliated with the exchange on which the trade took place, and for holding the partnerships' funds deposited with the commodity brokers as margin for the trades. Dean Witter is the non-clearing commodity broker for each partnership. As non-clearing commodity broker, Dean Witter holds each partnership's funds and provides margin funds to the clearing commodity broker for the partnership's futures, forwards, and options positions. Carr Futures Inc. serves as the clearing commodity broker for each partnership. The clearing commodity broker is responsible for processing and clearing the futures and options transactions placed by the trading advisor for the account of a partnership. Carr Futures also acts as the dealer on each foreign currency forward contract for the partnerships. ORGANIZATIONAL CHART Following is an organizational chart for each partnership, showing the relationships among the various parties involved with this offering. With the exception of Carr Futures and all of the trading advisors, all parties are affiliates of Morgan Stanley Dean Witter & Co. <TABLE> <S> <C> <C> <C> Morgan Stanley Dean Witter & Co. wholly-owned wholly-owned Dean Witter Demeter general 23 other commodity partnership pools* interest Selling Agreement SELLING AGENT AND NON-CLEARING COMMODITY BROKER GENERAL PARTNER general partnership Customer Agreement interest Management Agreements Charter Graham Charter Millburn Charter Welton Customer Agreement Customer Agreement Management Agreements F/X Agreement Trading Advisor Carr Futures CLEARING COMMODITY BROKER </TABLE> - ------------------ *Demeter presently serves as general partner for 26 other commodity pools. Dean Witter acts as the non-clearing commodity broker for all of the pools and Carr Futures acts as clearing commodity broker for all of the pools except one. Dean Witter has also served as selling agent for all but one of the pools managed by Demeter. All of the pools, including the partnerships, are managed and traded independently of one another. FEES TO BE PAID BY THE PARTNERSHIPS The partnerships pay the following monthly fees: <TABLE> <CAPTION> MANAGEMENT FEE BROKERAGE FEE (ANNUAL RATE) INCENTIVE FEE (ANNUAL RATE) -------------- -------------- ------------- % % % <S> <C> <C> <C> Charter Graham.................. 2.00 20.00 7.00 Charter Millburn................ 2.00 20.00 7.00 Charter Welton.................. 2.00 20.00 7.00 </TABLE> The management fee payable to each trading advisor and the brokerage fee payable to Dean Witter are based on a percentage of net assets and will be paid monthly regardless of a partnership's performance. Each partnership pays its trading advisor an incentive fee only if trading profits are earned on the net assets managed by the trading advisor. Trading profits represent the amount by which profits from futures, forwards, and options trading exceed losses, after brokerage, management and incentive fees have been paid. Neither you nor the partnerships will pay any selling commissions or continuing offering expenses in connection with the offering of units by the partnerships. Dean Witter will pay all costs incurred in connection with the continuing offering of units of each partnership and will pay the ordinary administrative expenses of each partnership. Each partnership will pay any extraordinary expenses it may incur. BREAK EVEN ANALYSIS Following is a table that sets forth the fees and expenses that you would incur on an initial investment of $20,000 in a partnership and the amount that your investment must earn, after taking into account estimated interest income, in order to break even after one year and more than two years. The fees and expenses applicable to each partnership are described above. <TABLE> <CAPTION> $20,000 INVESTMENT ------------------ <S> <C> Management Fee.................................................... 400 Brokerage Fee..................................................... 1,400 Less: Interest Income (1)......................................... (1,000) Incentive Fee (2)................................................. -- Redemption Charge (3)............................................. 408 Amount of trading profits a partnership must earn for you to recoup your initial investment at the end of one year after paying a redemption charge...................................... 1,208 Trading profits as a percentage of net assets that a partnership must earn for you to recoup your initial investment at the end of one year after paying a redemption charge.................... 6.04% Amount of trading profits a partnership must earn each year for you to recoup your initial investment after two years with no redemption charge............................................... 800 Trading profits as a percentage of net assets that a partnership must earn each year for you to recoup your initial investment after two years with no redemption charge....................... 4.00% </TABLE> - ------------------ (1) The partnerships receive interest at the rate earned by Dean Witter on its U.S. Treasury bill investments with customer segregated funds as if 100% of each partnership's average daily net assets for the month were held and invested at that rate. In addition, Dean Witter will credit each partnership with 100% of the interest income Dean Witter receives from Carr Futures with respect to such partnership's assets deposited as margin with Carr Futures. For purposes of the break-even calculation, it was estimated that approximately 80% of a partnership's average daily funds maintained in trading accounts will be on deposit with Dean Witter and earn interest income at a rate of approximately 5.15%, and that approximately 20% of a partnership's average daily funds maintained in trading accounts will be on deposit with Carr Futures and generate interest income at a rate of approximately 4.40%. An interest rate of 5.15% was derived by using an average of the blended rate for the five most recent weekly auction rates for three-month U.S. Treasury bills and adjusting for the historical rate that Dean Witter earned in excess of such amount. The combined rate used for this break-even analysis is estimated to be approximately 5.00%. (2) Incentive fees are paid to a trading advisor only on trading profits earned. Trading profits are determined after deducting all partnership expenses, other than any extraordinary expenses, and do not include interest income. Therefore, incentive fees will be zero at the partnership's break even point on the assets managed by the trading advisor. Further, there do not need to be trading profits to cover the redemption charge because the interest earned by the partnership during the year will exceed the redemption charge to the investor. (3) Units redeemed at the end of one year from the date of purchase are generally subject to a 2% redemption charge; after two years there are no redemption charges. REDEMPTION CHARGES INCURRED BY YOU You will pay a redemption charge of 2% of the net asset value of the units redeemed if you redeem within the first twelve months after the units were purchased, and 1% if you redeem units within the thirteenth through twenty-fourth months after the units were purchased. Units are not subject to a redemption charge after you have owned them for more than 24 months. You will not incur a redemption charge if you redeem units during the first 24 months after they were issued in the following circumstances: * If you purchase at least $500,000 of units. * If you redeem units immediately following notice of an increase in brokerage, management or incentive fees. * If you redeem units in connection with an exchange for units in another Charter Series partnership. * If you acquire units with the proceeds from the redemption of interests in a non-Charter Series partnership for which Demeter serves as the general partner, you will not be subject to a redemption charge on those units when they are redeemed. * If you previously redeemed units and paid a redemption charge or held those units for at least 24 months, you will not have to pay a redemption charge on subsequently purchased units provided they are purchased within 12 months of the redemption of the old units and the purchase price of the new units does not exceed the net proceeds received from the prior redemption. REDEMPTIONS Once you have been an investor in any Charter Series partnership for more than six months, you are permitted to redeem any part of your investment, even if subsequent purchases have been held for less than six months. However, you will pay a redemption charge of 2% of the net asset value redeemed if your redeemed units were purchased within 12 months of the date of redemption, and 1% if purchased within 13 to 24 months of the date of redemption. You will not be subject to a redemption charge after you have owned your units for more than 24 months. Unless you are redeeming your entire interest in a partnership, redemptions may only be made in whole units, with a minimum of 100 units required for each redemption. EXCHANGE RIGHT You may redeem units in any partnership after you have been an investor for six months and use the proceeds to purchase units in one or more of the other partnerships in the Charter Series, at a price equal to 100% of the net asset value per unit, without incurring any redemption or other charge on the transaction. DISTRIBUTIONS The General Partner currently does not intend to make any distribution of partnership profits. TAX CONSIDERATIONS Even though the general partner currently does not intend to make distributions, your allocable share of the trading profits and other income of the partnerships in which you invest will be taxable to you. The trading activities of each partnership, in general, generate capital gains and loss and ordinary income. 40% of any trading profits on U.S. exchange-traded contracts are taxed as short-term capital gains at your ordinary income tax rate, while 60% of such gains are taxed at your long-term capital gains tax rate. We expect that each partnership's trading gains from other contracts will be primarily short-term capital gains. This tax treatment applies regardless of how long you hold your units. You may deduct losses on units against capital gains income. You may deduct losses in excess of capital gains against ordinary income only to the extent of $3,000 per year. Consequently, you could pay tax on a partnership's interest income even though you have lost money on your units.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001066978_power_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001066978_power_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this Prospectus. This summary does not contain all of the information you should consider before investing in our Common Stock. You should read the entire Prospectus carefully, including "Risk Factors" and our consolidated financial statements and notes to those consolidated financial statements before making an investment decision. Power Technology, Inc. (the "Company"), a Nevada corporation, was incorporated on June 3, 1996. However, the Company did not conduct any significant operations until March 1998 when it acquired all of the issued and outstanding capital stock and assets of PowerTek Technology Corporation, Inc. (formerly called Power Technology, Inc.) which is presently a wholly-owned subsidiary of the Company. The Company changed its corporate name from "Zepplin Production Corp." to Power Technology, Inc. during March 1998 to reflect the change in the purposes and nature of its business. The Company is a research and development company. It is presently engaged in research and development activities regarding (i) batteries for the automotive and electric car industries, (2) electronic sensors, (3) pipeline connection technology, and (4) agricultural grain drying equipment. The business objective of the Company has been to create and commercialize new products and to license its technologies to unaffiliated companies to manufacture and market its products. As of the date of the Prospectus, the Company has not completed its development activities regarding any of its products, and has no licensing or manufacturing agreements to commercialize its products. <TABLE> <CAPTION> The Offering <S> <C> Common Stock outstanding prior to the offering 18,509,305 shares (1) Shares being offered for resale to the public by Selling Stockholders 32,459,999 Common Stock to be outstanding after this offering (2) 50,969,304 shares Price per share to the public Market price at time of resale Total proceeds raised by offering None to the Company; however, we will receive the proceeds from the previous sale of shares that are to be issued to the Selling Stockholders. We may receive up to $13,225,000 from the sale of shares to the Selling Stockholders, including the conversion of outstanding convertible notes, and we may receive additional amounts of up to $3,598,397 from the sale of shares issuable upon the exercise of warrants and options issued to the Selling Stockholders. Use of proceeds from the sale of the shares to the Selling Stockholders We plan to use the proceeds from the sale of the shares to the Selling Stockholders for working capital and general corporate purposes. Over-the-Counter Market Symbol PWTC </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001067465_jones_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001067465_jones_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS (I) ASSUMES THAT THE UNDERWRITERS WILL NOT EXERCISE THEIR OVER-ALLOTMENT OPTION, (II) ASSUMES THAT ALL OF THE OUTSTANDING SHARES OF OUR SERIES A CONVERTIBLE PREFERRED STOCK WILL BE CONVERTED INTO SHARES OF OUR CLASS A COMMON STOCK CONCURRENT WITH COMPLETION OF THIS OFFERING AND (III) REFLECTS THE EFFECTS OF THE 5-FOR-4 STOCK SPLIT OF OUR CLASS A COMMON STOCK AND CLASS B COMMON STOCK, WHICH OCCURRED JANUARY 28, 2000. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS, WHICH INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. JONES INTERNATIONAL NETWORKS, LTD. OVERVIEW We own and operate a leading network radio programming business and two cable television networks and are developing a complementary Internet business. Through our traditional media businesses, we create, develop and produce network radio and cable programming that is distributed to more than 2,450 radio stations and 1,750 cable systems, respectively, throughout the United States. We provide advertisers with the ability to reach approximately 60 million weekly radio listeners and 42 million cable viewing households on a full- or part-time basis. We currently operate multiple web sites that extend our traditional media content and personalities to the Internet and allow us to capitalize on Internet advertising and e-commerce opportunities. As a complement to our programming businesses, we own and operate a leading network advertising sales business that provides advertisers with an efficient means to reach national radio and cable television audiences as well as Internet users. We also provide satellite services to facilitate the distribution of our programming and that of other companies. We expect the demand for radio and cable television programming content to increase dramatically during the next several years, primarily as a result of technological advances such as audio and video streaming over the Internet, satellite radio and digital cable television. The growing popularity of the Internet creates a need for additional programming content that will attract viewers to web sites for extended time periods. In this expanding distribution environment, we believe that there will be strong demand for branded programming content that can be channeled across multiple media outlets. We believe that we are well-positioned to benefit from this increased demand for content. Our portfolio of businesses includes the following: - PROGRAMMING CONTENT RADIO. We produce or license over 2,000 hours of original radio programming weekly. This programming is comprised of twelve 24-hour formats and 19 syndicated programs. Our radio programming covers a wide variety of genres, such as country, adult contemporary, talk and Hispanic. It features well-known syndicated programs such as The Crook & Chase Country Countdown, Delilah and The Dennis Prager Show. CABLE TELEVISION. We own and operate two cable television networks, Great American Country (GAC) and the Product Information Network (PIN). GAC is a 24-hour country music video network reaching nearly 12 million cable households. PIN, a joint venture with Cox Communications, Inc., airs long-form paid programming produced by advertisers and infomercial providers. PIN reaches more than 30 million households on a full- or part-time basis. INTERNET. We have developed multiple web sites that complement our radio and cable programming content and are developing additional sites. To extend GAC and our country radio programming content to the Internet, we developed CountryStars.com, a portal catering to the "country" lifestyle. RadioDelilah.com and DennisPrager.com are examples of our web sites that extend our personality-driven radio programs to the Internet. Our web sites provide valuable cross-promotion and e-commerce opportunities. - PROGRAMMING SUPPORT SERVICES ADVERTISING SALES SERVICES. We currently represent more than 90 network radio programs or services, including over 60 programs produced by third parties that are distributed to approximately 6,000 radio stations. In addition, we sell network advertising for our two cable networks. We have recently begun to provide advertising sales services to our web sites and to web sites owned by third parties. In February 2000, we entered into an agreement to provide advertising sales services for Matchmaker.com, an online dating service. In addition, we have an exclusive long-term agreement to provide advertising sales services to Sirius Satellite Radio, one of only two licensed satellite radio providers in the United States. Sirius is expected to launch its service in the fourth quarter of 2000 with approximately 100 channels of digital radio service, up to 50 of which will carry commercials. SATELLITE SERVICES. We provide satellite delivery and production support services for GAC, PIN and cable channels operated by other companies. We own two satellite transponders and an uplink facility. Ownership of these assets allows us to control the distribution of our radio and cable programming. It also provides us with a cost-effective platform for launching new radio and cable networks. We generate additional revenues from leasing excess satellite capacity and providing related support services to other cable programmers. We believe that our ability to develop and distribute programming content across multiple forms of media allows us to capitalize on significant operating synergies arising from our radio, cable television and Internet programming businesses and to generate strong revenue and cash flow growth. For the year ended December 31, 1999, we generated $64.4 million of revenue, $12.0 million of EBITDA and $2.0 million of operating income, representing an increase of 68.5%, 178.8% and 216.0%, respectively, as compared to the year ended December 31, 1998. Assuming that the acquisition that we completed in 1999 had been completed on January 1, 1999, our revenue, EBITDA and operating income for the year ended December 31, 1999 would have been $69.1 million, $13.4 million and $0.9 million, respectively. COMPETITIVE STRENGTHS We believe we have the following competitive strengths: EFFICIENT MEANS FOR ADVERTISERS TO REACH TARGETED AUDIENCES. Through our varied programming formats, multiple distribution channels and experienced sales organization, we can aggregate a large, national audience according to specific demographics, providing advertisers with an efficient, cost-effective means to reach desired audiences across multiple media platforms. EXCLUSIVE, PERSONALITY-DRIVEN PROGRAMMING. We have an established history of identifying and attracting successful on-air personalities and developing radio and cable television programs that generate a significant and loyal audience. Our exclusive programming includes such widely recognized shows as Delilah, The Crook & Chase Country Countdown and Neon Nights. VALUE CREATION THROUGH CROSS-PROMOTION AND BRANDING. We cross-promote and brand our programming content in an effort to encourage our audience to seek out and access our content across multiple platforms. Our cross-promotion strategy utilizes traditional commericials, as well as in-program and on-air promotions by our popular personalities. For example, our CountryStars.com web site is promoted on GAC, our three 24-hour country radio formats and through our four syndicated country radio programs. ESTABLISHED NATIONAL ADVERTISING SALES ORGANIZATION. We have a 16 person sales force with offices in New York, Los Angeles, Chicago, Detroit, Dallas and Denver and intend to open an office in Nashville in the first half of 2000. With an average of 16 years of advertising sales experience, our sales force has established long-term relationships with many national advertisers and advertising agencies. As a result, we are well-positioned to assist national advertisers in developing complementary advertising programs spanning all three of our media platforms. ABILITY TO LEVERAGE EXISTING INFRASTRUCTURE TO DEVELOP NEW REVENUE OPPORTUNITIES. We have made a substantial investment in our advertising sales, affiliate sales, content development and satellite distribution capabilities. We intend to leverage these resources to develop new program offerings for radio, cable television and the Internet at a low incremental cost. In addition, we have an extensive library of audio and video content for distribution across multiple platforms, including the Internet, in a cost-effective manner. EXPERIENCED MANAGEMENT TEAM. Our Chairman, Glenn R. Jones, a prominent leader in the cable television industry, was the founder, Chairman and Chief Executive Officer of Jones Intercable, Inc., a top ten multiple system cable operator. In addition to Mr. Jones, we have assembled a senior management team with extensive experience in all areas of our business. With an average of over 20 years of relevant industry experience for our top five executives, we enjoy long-term relationships with advertisers, advertising agencies, cable and radio affiliates, the music recording industry and independent producers of network programming. OPERATING STRATEGY Our operating strategy is designed to take advantage of the increasing demand for programming content while leveraging our core competencies. This strategy includes the following: - develop high quality, personality-driven programming; - increase programming distribution; - increase advertising sales revenues; - enhance revenue growth by capitalizing on Internet revenue opportunities; - develop new cable programming networks; - leverage cross-media platform synergies; and - recruit and retain experienced management. An important part of our business strategy is to pursue acquisitions and ventures that enhance our existing businesses or provide entry to new related businesses. Our recent acquisitions of Broadcast Programming in August 1999 and MediaAmerica in July 1998 demonstrate this strategy. Broadcast Programming, which we acquired for $20.9 million, owns and distributes two high-growth syndicated radio programs, Delilah and Neon Nights, and provides a wide spectrum of programming and programming consulting services to approximately 800 radio stations. MediaAmerica, which we acquired for $26.7 million in cash and $8.1 million of Class A Common Stock, operates a network radio advertising sales business and owns several syndicated radio programs. This acquisition became the basis for our in-house advertising sales services business. BACKGROUND We are a Colorado corporation incorporated in 1998 and are the successor to certain affiliated entities that previously conducted our businesses. We are a holding company. Our operations are conducted through a number of subsidiaries, including Jones Radio Networks and Broadcast Programming (radio programming), Great American Country and Product Information Network Venture (cable television programming), MediaAmerica (advertising sales services) and Jones Direct (Internet operations). Our principal shareholder is Jones International, Ltd., which owns a number of subsidiaries with which we have business dealings. From the inception of Jones Intercable, Inc. until April 1999, Jones International owned a controlling interest in Jones Intercable. Our corporate offices are located at 9697 East Mineral Avenue, Englewood, Colorado 80112. Our telephone number is (303) 792-3111. THE OFFERING <TABLE> <S> <C> Class A Common Stock offered................. 4,900,000 shares Common Stock to be outstanding after this offering................................... 12,692,426 shares of Class A Common Stock(1) 2,231,400 shares of Class B Common Stock(2) Voting rights................................ Holders of Class A Common Stock are entitled to one vote per share and are entitled to elect 25% of our directors. Holders of Class B Common Stock are entitled to ten votes per share and are entitled to elect 75% of our directors. Use of proceeds.............................. We intend to use the net proceeds from the offering to repay debt, for working capital and for general corporate purposes. General corporate purposes include acquisitions, cable programming distribution payments to cable operators for carrying GAC, and developing our Internet businesses, which we expect will include Internet programming content and advertising sales services. Nasdaq Symbol................................ JINI </TABLE> - ---------- (1) This number includes 2,397,500 shares issuable upon conversion of our Series A Convertible Preferred Stock into shares of Class A Common Stock upon completion of this offering. This number excludes (i) 529,375 shares of Class A Common Stock issuable upon exercise of outstanding options under our stock option plan, (ii) 218,000 shares of Class A Common Stock that will be issuable upon exercise of options that become effective as of the closing of this offering, (iii) approximately 24,516 shares of Class A Common Stock issuable upon exercise of immediately exercisable non-qualified stock options to be issued to management upon closing of this offering at an exercise price equal to 25% of the price of Class A Common Stock in this offering, and (iv) 978,109 shares of Class A Common Stock available for issuance under our stock option plan. Also excludes an estimated approximately 60,000 shares of Class A Common Stock that we expect to issue in connection with acquisitions. (2) Class B Common Stock to be outstanding after this offering is based on shares outstanding as of February 1, 2000. Each share of Class B Common Stock is convertible at any time, at the option of the holder, into one share of Class A Common Stock. SELECTED CONSOLIDATED FINANCIAL INFORMATION The following tables summarize certain financial and operating data for our business. This information should be read along with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and notes to those statements included elsewhere in this prospectus. The historical statements of operations and balance sheet data as of and for each of the years in the three-year period ended December 31, 1999, have been derived from our consolidated financial data. This data has been audited by Arthur Andersen LLP, independent auditors. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------ 1997 1998 1999 ---------- ---------- ---------- (IN THOUSANDS EXCEPT SHARE, PER SHARE AND RADIO STATION AFFILIATE DATA) <S> <C> <C> <C> STATEMENT OF OPERATIONS: Revenues.................................................. $ 29,112 $ 38,212 $ 64,366 Operating expenses: Operations.............................................. 17,049 27,181 43,617 Selling and marketing................................... 3,491 5,412 6,438 General and administrative.............................. 1,151 1,116 1,491 Depreciation and amortization........................... 5,168 6,266 10,775 ---------- ---------- ---------- Total operating expenses.............................. 26,859 39,975 62,321 ---------- ---------- ---------- Operating income (loss)................................... 2,253 (1,763) 2,045 ---------- ---------- ---------- Interest expense, net..................................... 5,569 8,195 11,729 Other expense............................................. 616 1,228 (32) Income tax provision (benefit)............................ (1,342) 49 (470) Minority interest......................................... 903 215 881 ---------- ---------- ---------- Net loss.................................................. $ (3,493) $ (11,450) $ (10,063) ========== ========== ========== Net loss per common share: Basic................................................... $ (0.64) $ (1.71) $ (1.32) Fully diluted........................................... $ (0.64) $ (1.71) $ (1.32) Weighted average shares outstanding: Basic................................................... 5,500,560 6,715,805 7,617,926 Fully diluted........................................... 5,500,560 6,702,010 7,601,868 OTHER DATA: EBITDA(a)................................................. $ 6,599 $ 4,290 $ 11,960 Capital expenditures...................................... 1,367 2,258 850 Cable programming distribution payments(b)................ -- 3,064 6,354 Net cash provided by (used in): Operating activities.................................... 7,589 (7,065) 2,398 Investing activities.................................... (1,156) (35,021) (32,633) Financing activities.................................... (2,720) 59,023 22,851 AUDIENCE DATA (at end of period): Radio station affiliates(c)............................... 1,484 2,146 2,485 Radio Station AQH (24-hour formats)(d).................... 2,296 2,369 1,986 Radio Station AQH (syndicated)(d)......................... 1,048 6,090 12,401 Great American Country subscribers(e)..................... 1,550 7,131 11,971 Product Information Network subscribers(e)................ 11,497 20,634 30,094 Product Information Network FTRE's(f)..................... 7,036 8,647 12,934 BALANCE SHEET DATA (at end of period): Cash and cash equivalents(g).............................. $ 3,717 $ 10,654 $ 13,271 Working capital (deficit)................................. (9,331) 16,047 13,246 Total assets.............................................. 41,358 110,894 128,462 Total long-term debt(h)................................... 45,312 100,000 100,000 Shareholders' equity (deficit)............................ (18,206) (11,333) 2,702 </TABLE> - ------------- (a) EBITDA is unaudited and represents operating income (loss) plus depreciation and amortization minus the EBITDA attributable to the minority interest in the PIN Venture, a consolidated 55.3%-owned subsidiary. Management acknowledges that EBITDA is not a measure of performance or liquidity calculated in accordance with generally accepted accounting principles. However, EBITDA is a measure widely used by analysts and investors in the media industry to determine a company's operating performance and ability to service and incur debt. EBITDA should not be considered in isolation or as a substitute for net income (loss), cash flows from operating activities or other consolidated income or cash flow statement data prepared in accordance with generally accepted accounting principles or as a measure of profitability or liquidity. (b) Cable programming distribution payments made by GAC to multiple system cable television operators for carrying GAC programming. These payments are reflected as intangible assets on the balance sheet and are amortized over the period during which any portion of such payment is refundable (usually 5 to 10 years). (c) Represents the number of non-duplicating radio station affiliates receiving our programs at the end of the periods indicated. (d) AQH represents the average audience estimated to have listened, for a minimum of five minutes during any quarter hour, to a radio station broadcasting our advertising. For the 24-hour formats, the period used to determine AQH is Monday through Friday, 6am to 7pm. The period used to determine AQH for syndicated programs is the time during which the commercials associated with the programs or services are broadcast. These AQH estimates are derived from data provided by Marketron (a third party processor) that is based on Arbitron copyrighted and proprietary audience estimates. They are not estimates produced by Arbitron. Radio advertising is generally sold on the basis of the listening audience as quantified by AQH. Beginning in the period ended December 31, 1998, we have excluded the AQH related to non-recurring specials. AQH (24-hour formats) has been restated for periods prior to 1998 to reflect our creation in 1998 of a second selling network resulting from the division of our then-existing network. This division more accurately reflects our audience to radio advertisers. The effect of this restatement is to make periods prior to 1998 comparable to 1998 and later periods. (e) Represents the total number of subscribers at the end of the periods indicated. (f) FTREs represent the number of full-time revenue equivalent subscribers receiving PIN at the end of the periods indicated. FTRE weights part-time subscribers based on the number of hours carried, the daypart carried and the revenue associated therewith. (g) Excludes restricted cash of $10.0 million at December 31, 1998. (h) Includes current and non-current maturities of long-term debt and capital lease obligations.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001067588_aclara_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001067588_aclara_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and our common stock being sold in this offering and our financial statements and the notes to our financial statements appearing elsewhere in this prospectus before making an investment decision. You should also carefully consider the information discussed in "Risk Factors." ACLARA BIOSCIENCES We are a developer of microfluidics, or lab-on-a-chip, technology with access to the wide range of technology and intellectual property required to broadly address the markets for genomics, or RNA and DNA analysis, and pharmaceutical drug screening. We use microfluidics, the movement of small volumes of fluids through microscopic channels to perform various laboratory measurements on a chip the size of a credit card. We believe we have obtained broad access to the genomics market by combining our technology with the intellectual property and market position of our strategic collaborators, in particular, PE Biosystems. We are developing multiple products to address both the genomics and pharmaceutical drug screening markets based on our proprietary microfluidics technology that allow researchers to rapidly perform large numbers of chemical and biological measurements in a miniaturized, automated format. In collaboration with our strategic partners, we are developing analytical instruments that will utilize our LabCard chip products. We believe that these LabCard systems will provide improved efficiency and enhanced accuracy for a wide range of laboratory analyses, at a lower cost per measurement than current analytical systems. We intend to commercially introduce our initial product, the Oasis LabCard chip, in late 2000. We have formed strategic partnerships to commercialize our products with PE Biosystems and Packard BioScience, leading providers of analytical systems for genomics and pharmaceutical drug screening. We are combining our proprietary microfluidics technology with their broad platform of technologies, including reagents, analysis methods, instrumentation and software. We also plan to use the marketing, sales and distribution strengths of our current and future partners to successfully commercialize our products. OUR TECHNOLOGY AND PRODUCTS Our microfluidic chip technology enables us to move various fluids and materials, using electric fields, through networks of interconnected channels, each the width of a human hair. We design these networks in a grid or array format, enabling researchers to perform multiple measurements in parallel on our LabCard chips. Our microfluidic approach enables the rapid and accurate measurement, dispensing and mixing of reagent volumes many times smaller than what researchers commonly use today. In this manner, we can precisely manipulate a variety of fluids, including those that contain whole cells, cell fragments or magnetizable particles, using computerized controls with no moving parts or valves. We are currently developing multiple products for the genomics and pharmaceutical drug screening markets. We believe that our products will offer researchers several key benefits: - Greater Flexibility in Chip Design and Use. We produce most of our chips using advanced plastic materials and proprietary manufacturing processes. We believe that our single-use plastic chips offer substantial advantages over glass chips, including the avoidance of carryover contamination from one measurement to the next, and lower manufacturing costs. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. Subject to Completion, Dated March 17, 2000 LOGO - -------------------------------------------------------------------------------- 9,000,000 SHARES COMMON STOCK - -------------------------------------------------------------------------------- This is the initial public offering of ACLARA BioSciences, Inc., and we are offering 9,000,000 shares of our common stock. We anticipate the initial public offering price will be between $16.00 and $18.00 per share. We have applied to list our common stock on the Nasdaq National Market under the symbol "ACLA." INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> UNDERWRITING PUBLIC OFFERING DISCOUNTS AND PROCEEDS TO PRICE COMMISSIONS ACLARA <S> <C> <C> <C> Per Share $ $ $ Total $ $ $ </TABLE> We have granted the underwriters the right to purchase up to 1,350,000 additional shares to cover any over-allotments. Joint Book-Running Managers DEUTSCHE BANC ALEX. BROWN WARBURG DILLON READ LLC U.S. BANCORP PIPER JAFFRAY THE DATE OF THIS PROSPECTUS IS , 2000 - Higher Throughput and Avoidance of Cross Contamination. Throughput is the number of samples that can be processed in a given amount of time. We have designed chips that contain arrays of microfluidic networks, where each network enables analysis of a different sample. This approach increases throughput and avoids cross contamination of different reactions on the same chip. - Greater Information Content. Our LabCard chips and proprietary reagents allow researchers to obtain more information from each measurement than is currently possible with standard methods. - Faster Analysis. Our LabCard chips allow researchers to perform most measurements faster than with conventional instrument systems. For example, we can determine the sequence of a DNA strand in less than 20 minutes on our LabCard chips. A similar experiment often requires over two hours on currently available systems. - Increased Efficiency and Higher Data Quality. Our LabCard chips decrease the amount of manual labor required and reduce the potential for variability and error. - Reduced Reagent Cost. Our chips perform measurements on very small volumes of material, enabling significant reductions in the amounts of sample and reagents required for a test. OUR STRATEGY Our objective is to be the leading provider of microfluidic chips to large, fast-growing segments of the genomics and pharmaceutical drug screening markets where the information sought is of high value to customers. Key elements of our strategy include: - Partnering With Industry Leaders for Instrument Development, Manufacturing and Commercialization. We intend to use the instrumentation, software, chemistry expertise and distribution strengths of our partners, such as PE Biosystems, to accelerate the development and commercialization of our products. - Leveraging Our Intellectual Property With That of Our Partners. Our broad patent portfolio includes over 80 patents and patent applications. We also benefit from the intellectual property portfolio of our strategic partners, enabling us to broadly address the genomics and pharmaceutical drug screening markets. - Generating Recurring, High Margin Revenue. We expect that most LabCard systems sold will generate recurring revenue from sales of single-use disposable LabCard chips. We are developing proprietary manufacturing processes for the cost-effective production of these plastic LabCard chips. - Enhancing the Value of LabCard Systems With Proprietary Reagents. We intend to integrate proprietary reagents developed by us and our strategic partners to significantly enhance the flexibility and utility of our LabCard systems. [INSIDE FRONT COVER] [Photograph of ACLARA microfluidic array chip, held in human hand] APPLICATIONS <TABLE> <CAPTION> Genomics Drug Discovery -------- -------------- <S> <C> - DNA Sequencing - Ultra/high throughput screening - Gene Expression analysis - Assay development - Genotyping/SNP analysis - Secondary screening </TABLE> Future ------ - Industrial process control and sensing systems - Clinical diagnostics ____________________________________________________________________________ [INSIDE FOLDOUT PANEL #1] DNA Sequencing <TABLE> <S><C> - ------------------------- ------------------------- [IMAGE] [IMAGE] - ------------------------- ------------------------- ACLARA Image of DNA Sequencing LabCard Chip Experimental Data Using ACLARA LabCard Chips (700 bases in 20 minutes) </TABLE> ____________________________________________________________________________ [INSIDE FOLDOUT PANEL #2] EXPRESSION PROFILING USING MICROFLUIDIC ARRAY CHIPS ACROSS LARGE SAMPLE SETS <TABLE> <S><C> [IMAGE] CONVENTIONAL ONE SAMPLE -----> DNA MICROARRAY -----> MULTIPLE GENES/SNPs FROM ONE SAMPLE [IMAGE] MANY SAMPLES -----> ACLARA -----> MULTIPLE GENES/SNPs MICROFLUIDIC PER SAMPLE ARRAY CHIP </TABLE> (Two schematics comparing ACLARA microfluidic array chip to DNA microarray chip) ____________________________________________________________________________ OUR HISTORY We were formed by a spin-off transaction from Soane Technologies, Inc., which was incorporated in 1991 and subsequently changed its name to 2C Optics, Inc. We were incorporated in Delaware in 1995 under the name Soane BioSciences, Inc. and changed our name to ACLARA BioSciences, Inc. in 1998. Our principal executive offices are located at 1288 Pear Avenue, Mountain View, California 94043, and our telephone number is (650) 210-1200. Our website is located at www.aclara.com. Information contained in our website is not a part of this prospectus. LabCard, ACLARA, Oasis and eTAGs are trademarks of ACLARA BioSciences, Inc. All other trademarks used in this prospectus are the property of their respective owners. THE OFFERING Common stock offered by ACLARA..... 9,000,000 shares Common stock to be outstanding after this offering................ 31,172,995 shares Use of proceeds.................... For research and development activities, for financing possible acquisitions and investments in technology as well as for working capital and other general corporate purposes. Proposed Nasdaq National Market symbol............................. ACLA The number of shares of common stock to be outstanding after this offering is based on 22,172,995 shares outstanding on December 31, 1999. This number assumes the conversion into common stock of all of our preferred stock outstanding on that date and excludes: - 5,014,004 shares of common stock reserved for issuance under our stock plans as of December 31, 1999, of which options to purchase 2,891,064 shares were outstanding as of December 31, 1999 at a weighted average exercise price of $0.44 per share; - 538,472 shares of common stock that may be issued upon exercise of warrants outstanding as of December 31, 1999 at a weighted average exercise price of $1.32 per share, including 154,557 shares of common stock issuable upon exercise of Series D warrants; - an additional 1,290,000 shares of common stock reserved for issuance under our Amended and Restated 1997 Stock Plan, approved by the board in February 2000; - 450,000 shares of common stock reserved for issuance under our employee stock purchase plan, approved by the board in February 2000, to be effective upon the closing of this offering; and - 1,547,271 shares of common stock issued upon the exercise of options between January 1, 2000 and February 11, 2000. ------------------------ Unless otherwise indicated, information in this prospectus assumes the following: - the conversion of each outstanding share of our convertible preferred stock into one share of our common stock immediately prior to the closing of this offering; - a 3-for-2 stock split effected on March 14, 2000; - the underwriters have not exercised their option to purchase additional shares. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> PERIOD FROM INCEPTION (MAY 5, 1995) THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, -------------------------------------- 1995 1996 1997 1998 1999 ------------- ------- ------- ------- -------- <S> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Total revenue................................ $ 393 $ 1,324 $ 2,649 $ 1,353 $ 2,936 Operating expenses........................... 879 2,302 4,649 6,745 11,253 -------- ------- ------- ------- -------- Loss from operations......................... (486) (978) (2,000) (5,392) (8,317) Interest income (expense), net............... 31 22 2 (130) 160 -------- ------- ------- ------- -------- Net loss..................................... $ (455) $ (956) $(1,998) $(5,522) $ (8,157) ======== ======= ======= ======= ======== Net loss attributable to common stockholders............................... $ (468) $(1,157) $(2,299) $(6,011) $(18,446) ======== ======= ======= ======= ======== Net loss per common share, basic and diluted.................................... $(234.00) $(21.83) $ (4.02) $ (5.03) $ (11.85) ======== ======= ======= ======= ======== Shares used in computing net loss per common share, basic and diluted................... 2 53 572 1,195 1,556 ======== ======= ======= ======= ======== Pro forma net loss per share, basic and diluted (unaudited)........................ $ (0.64) ======== Shares used in computing pro forma net loss per share, basic and diluted (unaudited)... 20,546 ======== </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 -------------------------------------- PRO FORMA ACTUAL AS ADJUSTED AS ADJUSTED -------- ----------- ----------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents and marketable securities......... $ 13,729 $ 13,729 $ 155,379 Working capital............................................. 12,056 12,056 153,706 Total assets................................................ 20,574 20,574 162,224 Capital lease obligations, less current portion............. 284 284 284 Loans payable, less current portion......................... 3,087 3,087 3,087 Mandatorily redeemable convertible preferred stock.......... 40,973 -- -- Total stockholders' equity (deficit)........................ (26,492) 14,481 156,131 </TABLE> The as adjusted balance sheet data above reflects the conversion of each outstanding share of convertible preferred stock into one share of common stock upon the closing of this offering. The pro forma as adjusted amounts above give effect to the sale of the 9,000,000 shares of common stock in this offering at an assumed initial offering price of $17.00 per share, after deducting underwriting discounts and commissions and offering expenses.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001068397_integrity_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001068397_integrity_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including "Risk Factors" and the financial statements, before making an investment decision. INTEGRITY SOFTWARE We are a Dublin-based software company that develops, markets, implements and supports web-enabled, enterprise-wide software applications for smaller to mid-sized organizations in the distribution and contracting industries. Our products enable organizations to optimize the efficiency of internal and external information flow by integrating business-to-business modules with mission-critical, enterprise-wide software applications. These applications include core accounting functions as well as key, industry-specific functionality. The modular design of our products enables us to provide customers with cost-effective, tailored solutions that can be easily implemented and integrated with existing business systems. We conduct our operations primarily in the United Kingdom, Ireland and South Africa, where we currently have approximately 3,800 customers under contract using software applications. According to Forrester Research, an independent market research firm, global license revenues from packaged enterprise-wide applications are expected to grow from $14 billion in 1998 to over $41 billion by 2003, representing a compound annual growth rate of 24%. The non-U.S. portion of this market is projected to grow even faster from $6 billion to over $20 billion during this same period, representing a compound annual growth rate of 27%. However, the market for enterprise-wide software applications for smaller to mid-sized organizations has historically been under-served because vendors have targeted large organizations with expensive, large-scale packages. We believe that this market will generate a significant portion of the growth for enterprise-wide software applications due to smaller to mid-sized organizations' unique requirements. These organizations generally do not have the information technology resources to purchase, implement and support large-scale, enterprise-wide systems. We believe that our products, Vision and Legerdemain for the distribution industry, and Evolution and Foundation for the contracting industry, offer greater functionality, faster implementation and integration and lower cost of ownership solutions for customers in our targeted markets. Our primary business objective is to be the leading provider of web-enabled, enterprise-wide software applications to our target markets. To achieve our objective, we intend to pursue the following strategies: - focus our research and development on next-generation web-enabled, mission-critical software products - accelerate growth and achieve economies of scale through strategic acquisitions - leverage our legacy customer base by selling our new products to them - expand our value added reseller, or VAR, channel - further penetrate targeted markets - enhance our service and support functions We have four integrated business areas: business-to-business, or B2B, enterprise-wide software, general accounting and technical services, or GATS, and computer finance services, or CFS. We support our four business areas with cross-company resources in sales and marketing, research and development, training and support. Our research and development investment is focused on creating web-enabled, enterprise-wide, mission-critical applications to address the requirements of customers across all of our business areas. We are incorporated in Delaware. Our principal executive offices are located at Camden Lock, South Dock Road, Dublin 4, Ireland, and our telephone number is 011-353-1-665-2002. Our corporate web site is www.integrity-us.com. Information on our web site is not part of this prospectus. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED , 2000 PROSPECTUS 3,000,000 SHARES LOGO COMMON STOCK ------------------------ We are offering 3,000,000 shares of our common stock for sale. A limited number of shares of our common stock currently is traded over the counter. On , 2000, the bid price of our common stock on the Pink Sheets of the National Quotation Bureau, LLC was $ per share. We have filed an application to qualify our common stock for quotation on the Nasdaq National Market under the symbol "INTY." ------------------------ INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4 OF THIS PROSPECTUS. ------------------------ <TABLE> <CAPTION> - ------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------- PER SHARE TOTAL - ------------------------------------------------------------------------------------- <S> <C> <C> Public Price................................................ $ $ Underwriting Discount....................................... $ $ Proceeds, before expenses, to Integrity Software............ $ $ - ------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------- </TABLE> We and a group of selling stockholders have granted the underwriters an option for a period of 30 days to purchase additional shares of common stock at the offering price, less the underwriting discount, solely to cover over-allotments. We will not receive any of the proceeds from the sale of shares by selling stockholders. Of the shares subject to the over-allotment option, 210,000 will be sold by the selling stockholders and 240,000 will be sold by Integrity Software. The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. It is illegal for any person to tell you otherwise. ------------------------ NEEDHAM & COMPANY, INC. A.G. EDWARDS & SONS, INC. The date of this prospectus is , 2000 prospectus is accurate only as of the date on the front of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date. Until , 2000 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. THE OFFERING Except as otherwise indicated, all information in this prospectus reflects a 2-for-5 reverse stock split of our common stock on March 20, 2000 and assumes no exercise of the underwriters' over-allotment option. Common stock offered by Integrity... 3,000,000 shares Common stock to be outstanding after this offering....................... 16,957,808 shares Use of proceeds..................... We intend to use the net proceeds of this offering to finance research and development activities, as well as potential future acquisitions. We will use the balance of the net proceeds for general corporate and working capital purposes. Listing............................. Our common stock is currently traded over the counter and quoted in the Pink Sheets. We have applied to have our common stock quoted on the Nasdaq National Market effective upon completion of this offering. Proposed Nasdaq National Market symbol.............................. INTY Unless otherwise indicated, all information in this prospectus, including the outstanding share information above, is based on the number of shares outstanding as of March 22, 2000 and: - excludes 1,650,000 shares of common stock reserved for issuance under our stock option plan - excludes currently exercisable options to purchase 40,000 shares of common stock - assumes no issuance of 240,000 shares by us pursuant to the over-allotment option granted to the underwriters TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Prospectus Summary.......................................... 1 Risk Factors................................................ 4 Forward-Looking Statements.................................. 12 Use of Proceeds............................................. 13 Dividend Policy............................................. 13 Capitalization.............................................. 14 Price Range of Common Stock................................. 15 Dilution.................................................... 16 Selected Consolidated Financial Data........................ 17 Exchange Rates.............................................. 19 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 20 Business.................................................... 30 Management.................................................. 40 Principal and Selling Stockholders.......................... 45 Related Party Transactions.................................. 46 Description of Capital Stock................................ 47 Shares Eligible for Future Resale........................... 49 Underwriting................................................ 50 Where You Can Find Additional Information................... 52 Legal Matters............................................... 52 Experts..................................................... 52 Enforcement of Civil Liabilities............................ 52 Index to Financial Statements............................... F-1 </TABLE> ------------------------ All amounts listed in this prospectus are stated in U.S. dollars, unless otherwise noted. In this prospectus, references to "Pounds," "Pounds Sterling" or "L" are to British pounds, references to "IRL" or "Irish Pounds" are to Irish pounds and references to "U.S. dollars" or "$" are to United States dollars. Any discrepancy between the amounts listed and their totals in the tables included in this prospectus are due to rounding. References in this prospectus to "we," "our," "us," "our company," "Integrity" and "Integrity Software" are to Integrity Software, Inc. On March 13, 2000, we changed our name to Integrity Software, Inc., from Integrity Holdings, Ltd. and reincorporated from Nevada to Delaware. Accordingly, references to Integrity Software, Inc. for periods prior to March 13, 2000, or where the context otherwise requires, are to Integrity Holdings, Ltd. ------------------------ In this prospectus, we rely on and refer to information regarding the enterprise-wide software market that has been prepared by independent industry research firms, including Forrester Research, or compiled from market research reports and other publicly available information. Although we believe this information is reliable, we cannot guarantee the accuracy and completeness of the information and we have not independently verified it. We have not, and the underwriters have not, authorized any person to provide you with information not contained in this prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. This prospectus is not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information contained in this SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) You should read our summary consolidated financial data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes included elsewhere in this prospectus. Our consolidated financial statements for the years ended December 31, 1997, 1998 and 1999 have been audited by BDO International, independent accountants, and our financial statements for the years ended December 31, 1998 and 1999 have been restated to reflect our December 7, 1999 merger with Jyris Limited, which has been accounted for as a pooling of interests. Our consolidated financial statements for the years ended December 31, 1997, 1998 and 1999 have been prepared and presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The financial statements for the years ended December 31, 1995 and 1996 (not included herein) are the statements of the Wyse Group plc, which is considered to be our predecessor for accounting purposes, and have been prepared and presented in accordance with generally accepted accounting principles in the United Kingdom. These financial statements have not been reconciled to U.S. GAAP; however, in the opinion of our management, there is no material difference in these presentations. The pro forma financial data summarizes our Unaudited Pro Forma Condensed Consolidated Financial Information included elsewhere in this prospectus, which includes the results of operations of each of the companies acquired in 1999 (including companies acquired by Jyris) as if all companies had been acquired on January 1, 1999. The as adjusted balance sheet data gives effect to the sale of 3,000,000 shares of common stock in this offering at an assumed offering price of $ per share and the application of the net proceeds therefrom, after deducting underwriting commissions and discounts and estimated offering expenses payable by us. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ---------------------------------------------------------- PRO FORMA 1995 1996 1997 1998 1999 1999 ------ ------ ------ ------- ------- ----------- CONSOLIDATED STA(UNAUDITED)PERATIONS DATA: <S> <C> <C> <C> <C> <C> <C> Total revenues....................... $4,755 $2,726 $2,002 $10,403 $49,158 $59,695 Gross profit......................... 446 597 445 3,173 24,026 31,688 Amortization of goodwill............. -- -- -- 59 1,857 2,366 Income (loss) from operations........ 113 114 64 757 (2,771) (3,176) Net income (loss).................... $ 71 $ 73 $ 45 $ 640 $(2,387) $(2,881) ====== ====== ====== ======= ======= ======= Basic earnings (loss) per common share............................. $ 3.55 $ 3.65 $ 0.19 $ 0.32 $ (0.21) $ (0.25) ====== ====== ====== ======= ======= ======= Diluted earnings (loss) per share.... $ 3.55 $ 3.65 $ 0.19 $ 0.20 $ (0.21) $ (0.25) ====== ====== ====== ======= ======= ======= Weighted average shares outstanding: Basic........................... 20 20 238 2,027 11,510 11,570 Diluted......................... 20 20 238 3,142 11,510 11,570 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ---------------------- ACTUAL AS ADJUSTED -------- ----------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................. $ 1,965 $ Working capital........................................... (12,556) Total assets.............................................. 38,303 Long-term debt, (excluding current maturities)............ 450 Total stockholders' equity................................ 9,250 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001068796_maxygen_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001068796_maxygen_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding us, the sale of our common stock in this offering, and our financial statements and notes to those financial statements that appear elsewhere in this prospectus. Our Business Overview We believe that we are the leader in the emerging field of directed molecular evolution, the process by which genes are modified for specific commercial uses. Our proprietary directed molecular evolution technologies, known as MolecularBreeding(TM) technologies, mimic the natural process of evolution and bring together advances in molecular biology and classical breeding, while capitalizing on the large amount of genetic information generated by government, academic and commercial laboratories. Unlike conventional technologies, MolecularBreeding directed molecular evolution technologies are efficient, in part because they require minimal understanding of complex underlying biological systems. We have designed our technologies to rapidly develop new genes for commercial applications, where such genes would be difficult or impossible to develop through other processes. We believe our MolecularBreeding directed molecular evolution technologies are commercially applicable to a broad range of industries. We are currently conducting research on more than 40 product candidates for the chemical, agricultural and pharmaceutical industries, enabling us to potentially generate short-term as well as long-term revenues. We have established collaborations with Novo Nordisk, DuPont/Pioneer Hi- Bred, AstraZeneca, DSM and Rio Tinto, all leaders in their respective markets, as well as with United States government agencies. Our commercial collaborators and U.S. government agencies have committed funding of over $102 million. While we will continue to establish strategic collaborations with leading companies and pursue additional grants from U.S. government agencies, we will also invest our own funds in certain areas. To that end, we have retained significant product commercialization rights to future applications of our technologies. Our Target Markets Our technologies address a number of multi-billion dollar industries. Our target markets include chemicals, agriculture, protein pharmaceuticals, and preventative and therapeutic vaccines. Within these markets, we are focusing our efforts on specific high-value opportunities. In chemicals, we are developing new processes using enzymes as catalysts that could increase yields and decrease manufacturing costs for multiple product classes, such as vitamins, pharmaceuticals, paints and plastics. In addition, we believe that processes using enzymes as catalysts may have utility for generating new useful materials such as fibers for industrial and consumer product applications. In agriculture, we are applying our technologies to potentially increase crop yield and qualities, including enhanced nutritional value in human food and animal feed. In pharmaceuticals and vaccines, we are focusing our efforts on developing products for a number of indications, including multiple forms of cancer, infectious diseases such as HIV and hepatitis, and diseases in which the body generates an improper immune response, such as rheumatoid arthritis and multiple sclerosis. Our Technologies Our MolecularBreeding directed molecular evolution technologies consist of two components: DNAShuffling(TM) recombination technologies and MaxyScan(TM) screening systems. DNAShuffling is the process of recombining single genes or gene families to generate a library of new modified genes. MaxyScan is a series of specialized screening systems that efficiently and rapidly select those gene products and enzymes best suited for specific commercial purposes. We have an extensive patent portfolio, including 16 issued U.S. patents, of which six are owned by us and 10 have been licensed to us by others. Furthermore, we have over 55 families of patent applications relating to our MolecularBreeding directed molecular evolution technologies, the application of our technologies to diverse industries and specific proteins improved by our technologies. Our Accomplishments We have attracted a multi-disciplinary team comprised of leading experts in the field of directed molecular evolution. We have consistently been able to generate significant enhancements in many different genes that have relevance to multiple commercial applications. We have demonstrated improvements in 13 product candidates and have an additional 32 product candidates in earlier stages of development. For example, we have increased the anti-viral activity of a protein and developed new modified enzymes which have the potential to streamline chemical and pharmaceutical manufacturing processes. In addition, we have significantly improved the performance of multiple commercially relevant properties of the industrial enzyme subtilisin, one of the most studied and extensively modified commercial enzymes. Subtilisin, which is widely used in laundry detergents, had annual sales of $500 million in 1998. We believe that this example demonstrates the ability of our MolecularBreeding directed molecular evolution technologies to achieve significant improvements beyond the limits of other approaches in biotechnology. To date, we have established strategic alliances with Novo Nordisk in the area of industrial enzymes, DuPont/Pioneer Hi-Bred and AstraZeneca in agriculture, DSM in antibiotic manufacturing and Rio Tinto in chemical processing. Since 1997, our collaborators have committed funding of over $75 million, assuming we perform research for the full term of the existing collaborations. Of this amount, we have received approximately $33 million, including $15 million in equity investments. In addition, we could receive over $145 million in milestone payments based on the accomplishment of specific performance criteria, as well as royalties on product sales. We have received six grants from the U.S. National Institute of Standards and Technology- Advanced Technology Program and the Defense Advanced Research Projects Agency with total committed grant funding of over $27 million, of which we have expended approximately $7 million. These grants are primarily for the development of vaccines and the advancement of our MolecularBreeding directed molecular evolution technologies. Our Strategy Our strategy has four major components: . We will continue to develop our core MolecularBreeding directed molecular evolution technologies to extend our proprietary technology leadership by investing significantly in research and development programs. We will acquire and license technologies from third parties that complement our capabilities. . We will continue to establish strategic collaborations with leading companies in targeted industries and will pursue additional grants from U.S. government agencies. We have retained, and intend to retain, significant rights to develop and market certain applications of products arising from our strategic collaborations. . We plan to develop multiple products in the chemicals, agriculture and pharmaceutical industries to generate revenues in the short-, medium- and long-term. We expect to receive a diversified royalty stream from the sale of commercial products and processes that may be developed and commercialized by our existing collaborators as well as revenues from any products that result from our grant-funded programs and self-funded programs. . We plan to retain rights to use our technologies in multiple applications. We will invest our own funds in selected areas and product opportunities with the aim of capturing a high percentage of profits on product sales. Our History We began operations in 1997 to commercialize technologies originally conceived by Dr. Willem P.C. Stemmer while at Affymax Research Institute, a subsidiary of Glaxo Wellcome plc. We now have over 145 employees and occupy our own facilities and executive offices, totaling 47,880 square feet, located at 515 Galveston Drive, Redwood City, California 94063. Our telephone number is (650) 298-5300. We were incorporated under the laws of Delaware on May 7, 1996. Maxygen(TM), MaxyScan(TM), MolecularBreeding(TM), DNAShuffling(TM), and the Maxygen logo are some of our trademarks. Other service marks, trademarks and trade names referred to in this prospectus are the property of their respective owners. The Offering <TABLE> <S> <C> Shares offered by Maxygen.................... 1,500,000 shares Shares to be outstanding after this offering.................................... 32,269,644 shares Nasdaq National Market symbol................ MAXY Use of proceeds.............................. For research and development activities, for capital expenditures, to finance possible acquisitions and investments in technology, and for working capital and other general corporate purposes. </TABLE> --------------- The above information is based on shares outstanding as of February 15, 2000. This information excludes 2,111,602 shares of common stock issuable upon the exercise of options outstanding as of February 15, 2000 at a weighted average exercise price of $5.74 per share and 1,943,385 shares of common stock reserved for future issuance under our benefit plans. Summary Financial Data See Note 1 of Notes to Financial Statements for an explanation of the method used to determine the number of shares used in computing per share data below. See Note 8 to Financial Statements for information concerning the deemed dividend upon issuance of convertible preferred stock in August 1999. <TABLE> <CAPTION> Year Ended December 31, -------------------------- 1997 1998 1999 ------- ------- -------- (in thousands, except per share data) <S> <C> <C> <C> Statement of Operations Data: Collaborative research and development revenue.... $ 341 $ 1,077 $ 8,895 Grant revenue..................................... -- 1,646 5,122 ------- ------- -------- Total revenues.................................... 341 2,723 14,017 Operating expenses: Research and development........................ 3,074 7,858 19,250 General and administrative...................... 1,461 3,920 7,498 ------- ------- -------- Total operating expenses.......................... 4,535 11,778 26,748 ------- ------- -------- Loss from operations.............................. (4,194) (9,055) (12,731) Net interest income............................... 161 229 1,413 ------- ------- -------- Net loss.......................................... (4,033) (8,826) (11,318) Deemed dividend upon issuance of convertible preferred stock.................................. -- -- (2,200) ------- ------- -------- Net loss attributable to common stockholders...... $(4,033) $(8,826) $(13,518) Basic and diluted net loss per share.............. $ (0.82) $ (1.31) $ (1.53) ======= ======= ======== Shares used in computing basic and diluted net loss per share................................... 4,917 6,748 8,854 Pro forma basic and diluted net loss per share.... $ (0.75) $ (0.74) ======= ======== Shares used in computing pro forma basic and diluted net loss per share....................... 11,762 18,249 </TABLE> In the "as adjusted" column below, we have adjusted the actual balance sheet data to give effect to receipt of the net proceeds from the sale in this offering of 1,500,000 shares of common stock at an assumed public offering price of $162.50 per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses. <TABLE> <CAPTION> December 31, 1999 ------------------ As Actual Adjusted -------- -------- (in thousands) <S> <C> <C> Balance Sheet Data: Cash and cash equivalents................................... $136,343 $366,187 Working capital............................................. 132,510 362,354 Total assets................................................ 145,578 375,422 Non-current portion of equipment financing.................. 1,644 1,644 Accumulated deficit......................................... (24,177) (24,177) Total stockholders' equity.................................. 133,716 363,560 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001069433_affinity_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001069433_affinity_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS AND THE NOTES TO THE FINANCIAL STATEMENTS, BEFORE MAKING AN INVESTMENT DECISION. ABOUT AFFINITY Affinity International Travel Systems, Inc. was incorporated in Nevada in 1977 under the name Medanco, Inc. From 1977 through 1997, Medanco had no revenues and limited operations. In 1997, Medanco changed its name to Pay Dirt, Inc., which had no operations until it completed the acquisition of SunStyle International Holidays, Inc. in July 1998, at which point it changed its name to Affinity International Travel Systems, Inc. Since 1998, we have been operating primarily through our wholly-owned subsidiary, SunStyle International Holidays, Inc. Through SunStyle, we are engaged in the business of marketing, selling and distributing a variety of wholesale and retail travel related products and services. Specifically, we market, sell and distribute vacation packages, tours, cruises, domestic and international airline tickets, car rentals and accommodation products and services to travel agencies and consumers. During the fiscal year ended June 30, 1999, we had consolidated revenues of $2.3 million, of which approximately $69,000 were derived from Internet sales. In December 1999 we sold Prestige Travel Services, II, which accounted for approximately 29.0% of our revenues during the six months ended December 31, 1999. During the fiscal year ended June 30, 1999, we incurred net losses of $5.6 million. In order to fund our operations and continue the implementation of our Internet business strategy, we anticipate the need to raise at least $6.0 million in additional capital during the calendar year 2000. We will need to raise a portion of that capital immediately to fund negative cash flow from operations and fund capital expenditures related to the implementation of our Internet business strategy. Our wholesale revenue consists principally of the sales activities of SunStyle, which functions primarily as a tour operator. SunStyle contracts with airline, hotel and auto suppliers for wholesale purchases and then sells vacation packages to both travel agents and directly to consumers. In 1998 and 1999, we acquired several retail travel agencies to provide a channel of distribution for wholesale products. We also generate revenue from our retail travel services, which consists primarily of commissions earned from travel service suppliers, such as airlines, car rental companies, resorts and hotels, for facilitating travel arrangements for these suppliers' retail customers. OUR BUSINESS STRATEGY We have recently shifted the focus of our business strategy from conventional sales of travel services and products to online sales of travel services and products. We plan to offer wholesale and retail vacation packages through our web sites and other linked internet web sites. A key component of our Internet business strategy is to focus our resources in two segments: the business to consumer and business to business travel arena. We intend to concentrate our resources on the business to business online travel arena, where our objective is to sell to other travel providers leisure travel products that traditionally have had higher margins than airline ticket sales, including, among others, vacation packages, tours and cruises. We also intend to continue to sell our leisure travel products directly to consumers. We intend to fulfill demand for our travel products, in both the business to business and business to consumer online travel arenas, by aggregating our inventory of packaged leisure travel products and using the Internet as the delivery platform. We believe our Internet business strategy is different from current online travel distribution organizations which derive the majority of their revenue from airline tickets sales, the least profitable but highest volume product in the travel services industry. In order to implement our business strategies, we have undertaken the following strategic initiatives: - DEVELOPMENT AND ACQUISITION OF TECHNOLOGIES. We have developed and acquired technologies and software relating to processing on-line queries, vacation packaging, booking transactions, and making travel reservations, all of which are currently available to travel agents and consumers. Our software systems include TOURSCAPE, TOURWISE, BOOKIT! and AND BOOKIT! PRO. Each of these software systems is designed to assist us in developing and packaging customized travel plans and reservations. We license these non-proprietary technologies and software systems on a non-exclusive basis. Some of our competitors also use these software systems. - SPECIALIZED KNOWLEDGE AND EXPERTISE IN DESTINATION MARKETS. We have primarily focused our marketing and selling efforts on the following destinations: Caribbean, Hawaii, Florida and Mexico. We believe our knowledge of these markets provides us with the expertise necessary to provide high-quality service to our clients. - STRATEGIC RELATIONSHIPS WITH SUPPLIERS. We have negotiated arrangements with major hotels and resorts, airlines, cruise and auto rental companies, which allow us to offer competitive pricing and give us access to a broader inventory base than suppliers who lack these relationships. We believe that these arrangements give us a competitive advantage over suppliers and other travel agencies who lack these relationships because our experience has shown that travel providers are increasingly utilizing specialized distributors, such as Affinity, as a preferred source of distribution. These arrangements, however, are not exclusive and our competitors may obtain similar arrangements. We believe that our current infrastructure should enable us to take advantage of the projected growth in online travel. Forrester Research reports that online travel sales are projected to increase from $2.8 billion in 1999 to $29.5 billion by 2003. We plan to implement our Internet business strategy through the development and implementation of our FarAway.com web site, which will utilize our existing hardware and software infrastructure, strategic partnerships and existing vendor contracts. This web site will be designed to attract a base of potential customers in the United States, Europe, Asia and Latin America, and to convert these potential customers into leisure travel buyers. We plan to implement our strategy as follows: - SALE OF SPECIALIZED LEISURE TRAVEL PACKAGES. We plan to have specialized vacation package inventory available to consumers, which can be accessed by our web site through the use of our online software and tools that will help facilitate complex and specialized leisure travel purchases. We expect that our established vendor relationships will enable us to provide specialized packages at rates that customers will find attractive. - CUSTOMER SERVICE. Our customer service will be available to customers to provide both on and offline assistance to ensure that the customer is receiving the service that a customer would generally receive through the use of an 800 number or a conventional travel agent. We believe that because users of our site will have access to our travel specialists through real time chat, Internet telephony, 800 telephone service, and, in the future, Internet based video communication, customers will begin to feel more comfortable making online travel purchases. - STRATEGIC PARTNERSHIPS AND ALLIANCES. In addition to traditional types of online partnerships, such as those for content and advertising, we intend to pursue online strategic partnerships and alliances with other e-commerce companies. These relationships would allow us to create a link from the online vendor's site to our site. The online vendor would receive a commission for any sales generated on our site as a result of the link. We believe that relationships with other e-commerce companies should generate traffic to our web site, increase the number of our customers and generate revenue. - STRATEGIC ACQUISITIONS. We plan to seek strategic acquisitions within the leisure travel industry. We believe the leisure travel industry is highly fragmented, and includes numerous small, specialized distributors. We believe growth opportunities are available through acquisitions. We also believe that we will be able to broaden our offering of specialized travel services, increase our level of customer service, and improve our Internet and technology infrastructure through strategic acquisitions. - CREATE FARAWAY.COM REFERRAL PROGRAM. We plan to seek referral relationships with other online vendors to increase our online traffic and sales. - TARGET EUROPEAN AND LATIN AMERICAN GEOGRAPHIC MARKETS. With the rapid growth in the number of Internet users, especially in Europe and Latin America, we plan to expand our target market beyond the United States, to include more countries in Europe and Latin America. In anticipation of expanding our international operations, we have opened an office in the United Kingdom which is currently being connected to our TOURSCAPE software system located in Florida. We anticipate that our online booking engines and our primary web site, WWW.FARAWAY.COM, will be developed and operational within the next three months. We believe that we will need to raise $3 million of additional capital during the next three months to complete the development of our booking engines and our primary web site. We plan to raise this additional capital through additional equity or debt financings. Our principal executive offices are located at 100 Second Avenue South, Suite 1100S, St. Petersburg, Florida 33701-4301, and our telephone number is (727) 896-1513. Our web sites are located at WWW.AFFINITYINTERNATIONAL.COM, WWW.SUNSTYLE.COM, WWW.FARAWAY.COM, WWW.AFFINITYRENTACAR.COM and WWW.CRUISEAFFINITY.COM. THE OFFERING <TABLE> <S> <C> Common stock offered by the selling stockholders.... 20,353,094 shares Use of proceeds .................................... We will not receive any proceeds from the sale of common stock by the selling stockholders. Over-the-Counter Symbol............................. AFFT </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> Statement of Operations Data: Year ended June 30,(1) Nine Months ended March 31,(1) --------------------------------------------------------- ------------------------------------------ 1997 1998 1999 1999(3) 1999 2000 2000(3) ---- ---- ---- ------- ---- ---- -------- (Pro Forma) (Unaudited) (Unaudited) (Pro Forma) <S> <C> <C> <C> <C> <C> <C> <C> Net sales $ 665,143 $ 1,328,577 $ 2,324,943 $ 1,698,862 $ 1,366,493 $ 2,749,729 $ 2,159,953 Cost of sales 541,751 769,667 1,585,807 1,439,686 937,836 1,802,520 1,628,410 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Gross profit 123,392 558,910 739,136 259,176 428,657 947,209 531,543 Operating expenses 436,981 1,702,818 3,469,797 2,932,374 1,398,111 4,672,180 4,121,926 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Operating loss (313,589) (1,143,908) (2,730,661) (2,673,198) (969,454) (3,724,971) (3,590,383) Interest income (expense), net (785) (40,721) (2,872,795) (2,872,795) (475,391) (493,372) (493,372) Gain on sale of subsidiary - - - - - 75,000 - Financing charges - - - - (222,000) (10,431,000) (10,431,000) Other income (expense), net (3,451) 16,128 13,374 13,374 1,984 (68,750) (68,750) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net loss $(317,825) $(1,168,501) $(5,590,082) $(5,532,619) $(1,664,861) $(14,643,093) $(14,583,505) ============ =========== =========== =========== =========== ============ ============ Net loss per common share: Basic and diluted $(.11) $(.27) $(.89) $(.88) $(.29) $(1.06) $(1.16) Weighted average common shares outstanding: Basic and diluted (3) 2,848,718 4,249,506 6,290,174 6,290,174 5,812,076 13,756,542 12,558,492 </TABLE> <TABLE> <CAPTION> Nine months ended Balance Sheet Data: Year ended June 30,(1) March 31,(1) -------------------------------------- ------------------------ 1997 1998 1999 1999 2000 ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Cash and cash equivalents $326,452 $64,061 $1,119,796 $51,091 $578,131 Working capital 193,468 (595,550) (294,631) (997,287) (1,587,086) Total assets 547,086 395,165 3,664,923 2,464,342 2,609,467 Long-term debt, less current maturities 9,063 - - - - Capital lease obligation, less current portion - 38,334 22,924 48,919 14,295 Convertible debentures 150,000 - 25,000 - - Total liabilities 361,933 834,250 1,992,531 1,549,359 2,725,647 Stockholders' equity (deficit) 185,153 (439,085) (3,940,608) (4,698,017) (5,729,180) </TABLE> FOOTNOTES --------------- (1) On July 31, 1998, Affinity acquired SunStyle in a transaction accounted for as a purchase of Affinity by SunStyle (a reverse acquisition in which SunStyle is considered the acquirer for accounting purposes). Therefore, the historical financial statements herein are those of SunStyle. See Note 1 to the Consolidated Financial Statements for the three years ended June 30, 1999. In December 1999, we disposed of Prestige Travel Services, Inc. (acquired on January 1, 1999) by selling all of its outstanding common stock to its original stockholders. Prestige accounted for $626,000 and $590,000 of our revenues for the year ended June 30, 1999 and the nine months ended March 31, 2000, respectively. Our revenues in future periods will be substantially less than shown in our Consolidated Financial Statements for the year ended June 30, 1999 and the nine months ended March 31, 2000 if we are unable to replace the revenues we previously received from Prestige's operations. (2) The weighted average common shares outstanding for the year ended June 30, 1997, have been adjusted to reflect additional shares issued to the then sole stockholder and a stock split which occurred during the year ended June 30, 1997. (3) The unaudited pro forma combined statement of operations for the year ended June 30, 1999 and the nine months ended March 31, 2000 give effect to the sale of the subsidiary, Prestige Travel Services, II by reversing the subsidiary's purchase on January 1, 1999 and eliminating its effects on operations from January 1 to December 31, 1999. (See Pro Forma Financial Data).
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+Table of Contents You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Until , 2000 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. Table of Contents MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors including, but not limited to, those discussed in Risk Factors and elsewhere in this prospectus. Overview We are a leading online retailer of new college textbooks and we provide marketing services to other businesses interested in reaching the nation s 15 million college students. We were incorporated in December 1997 and began offering books for sale on our Web site on August 10, 1998. For the period from inception through August 9, 1998, our primary activities consisted of: developing our business model; establishing, negotiating and consummating a relationship with our supplier, Baker Taylor; initial planning and development of our Web site; developing our information systems infrastructure; developing our marketing plans; and establishing finance and administrative functions. Since the launch of our Web site, we have continued these activities and have also focused on increasing sales, expanding our product and service offerings, improving the efficiency of our order and fulfillment process, recruiting and training employees, developing our booklist operations, enhancing finance and administrative functions, and increasing customer service operations, and the depth of our management team to help implement our growth strategy. We began to generate sales once we launched our Web site in August 1998, at which time we posted the booklists for five schools. For the Spring 2000 semester, we increased the booklists we posted to over 240,000 courses at over 380 different targeted colleges and universities and we launched partnership programs with 25 different partner institutions. To date, our revenues have consisted primarily of sales of new textbooks. Net sales consist of sales of books and charges to customers for outbound shipping and are net of allowances for returns, promotional discounts and coupons. Revenues from sales of textbooks are recognized at the time products are shipped to customers. We have also generated revenues through the sale of general interest books, banner advertisements and marketing service agreements, as well as co-marketing programs, pursuant to which we have arrangements to sell textbooks through other Web sites. Revenues from the sales of Internet advertisements are recognized net of commissions paid. Revenues from our marketing programs are recognized over the period in which the services are delivered, provided that no significant performance obligations remain and the collection of the related receivable is probable. During the fourth quarter of fiscal 1999, we began generating revenues from co-marketing programs for which we used our student representative network to market to students on behalf of other businesses. We have incurred substantial losses and negative cash flows from operations in every fiscal period since our inception. For the year ended December 31, 1998, we incurred a loss from operations of approximately $2.7 million and negative cash flows from operations of $1.2 million. For the nine months ended September 30, 1999, we incurred a loss from operations of approximately $19.3 million and negative cash flows from operations of $10.2 million. As of December 31, 1998 and September 30, 1999, we had accumulated deficits of approximately $2.7 million and $21.8 million, respectively. We expect operating losses and negative cash flows to continue for the foreseeable future. We anticipate our net losses will TABLE OF CONTENTS Page In the quarter ended December 31, 1999, the Company granted 904,820 options at a weighted average exercise price of $9.70, resulting in additional deferred compensation of approximately $2.7 million. The deferred compensation will be amortized over the four year vesting period of the options. Our fiscal year runs from January 1 through December 31. We did not execute any transactions from December 16, 1997 (inception) through December 31, 1997. We commenced offering books for sale on our Web site in August 1998, and, accordingly, the calendar year ended December 31, 1998 only includes a period of five months during which we generated net sales. Similarly, we generated net sales for two months during the nine months ended September 30, 1998 as compared to all nine months during the period ended September 30, 1999. Nine Months Ended September 30, 1999 Compared with Nine Months Ended September 30, 1998 Net Sales Net sales increased to $8.9 million for the nine months ended September 30, 1999 from $96,000 for the nine months ended September 30, 1998, as a result of the significant growth in orders primarily from our expanding customer base as well as the commencement of our partnership program. Operating Expenses Cost of Product Related Party (Baker Taylor). Cost of product related party consists of the cost of products sold to customers. Cost of product related party increased to $7.7 million for the nine months ended September 30, 1999 from $79,000 for the nine months ended September 30, 1998. This increase was primarily attributable to our increased sales volume. We expect that cost of product related party will continue to increase as we expand our customer base and partnership program. Table of Contents Cost of Shipping Related Party (Baker Taylor). Cost of shipping related party consists of outbound shipping. Cost of shipping increased to $723,000 for the nine months ended September 30, 1999 from $7,000 in the nine months ended September 30, 1998. This increase was primarily attributable to our increased sales volume. Also for the nine months ended September 30, 1999, cost of shipping related party exceeded shipping revenue by $182,000 or 33.6%. As part of our business strategy, we charge a flat rate for shipping, which is less than our actual costs. We believe that this strategy is responsive to the competitive nature of our business and is positively perceived by our customer base. We expect that cost of shipping related party will continue to exceed shipping revenue and will increase as we expand our customer base. As discussed further in Related Party Transactions Transactions with Baker Taylor, effective October 1, 1999 we have amended the documents governing our relationship with Baker Taylor. The amendment provides for assignment of separate values to the separate services provided by Baker Taylor: supply of books, shipping and other services, including Web site content and customer database management. Such assignment is based on the relative fair value of each element as determined by Baker Taylor. Effective with the amendment of our agreement with Baker Taylor on October 1, 1999, we have included in cost of product related party in our statement of operations the cost of purchased books from Baker Taylor, we will include in shipping related party the cost of shipping charges from Baker Taylor and we will include in marketing and sales related party the cost of other services charged from Baker Taylor. On a prospective basis, these agreements will serve to reduce Cost of Product Related Party (Baker Taylor) as a percentage of revenue and increase Marketing and Sales Related Party (Baker Taylor) as a percentage of revenue. Equity Transactions Related Party (Baker Taylor). Equity transactions related party consists of the fair value of warrants and the amortization of the excess of the fair value over the cost of common stock issued to Baker Taylor. During 1998, we issued a warrant to purchase 107,143 shares of our common stock at an exercise price of $2.33 per share in July; a warrant to purchase up to 50,000 shares of our common stock at an exercise price of $0.20 per share in October; and a warrant to purchase up to 53,571 shares of our common stock at an exercise price of $2.33 per share in December. Additional warrants to purchase up to 5,950 and 62,500 shares of our common stock at an exercise price of $2.33 and $0.22 per share respectively were issued to Baker Taylor in 1999. We estimated the fair value of the warrants on the date of grant using an established option pricing model (see note 3 to the accompanying consolidated financial statements). On July 10, 1998, we sold 535,714 shares of our common stock to Baker Taylor at par value. We subsequently determined that the fair value of the common stock was in excess of the exercise price and sales price. Fair value per share was derived by reference to the preferred stock value since inception see note 3 to the accompanying consolidated financial statements. We expensed the excess of the fair value of the common stock over its cost, which was approximately $643,000, in July 1998. In connection with all of the Baker Taylor equity transactions, we recorded an aggregate expense of $169,000 for the nine months ended September 30, 1999, a decrease from the $708,000 we recorded for such transactions for the nine months ended September 30, 1998. Marketing and Sales. Marketing and sales expense consists primarily of advertising and promotional expenditures and payroll and related expenses for personnel engaged in marketing, including the expenses associated with the continued development of our nationwide network of student representatives. Marketing and sales expense increased to $13.4 million for the nine months ended September 30, 1999 from $142,000 for the nine months ended September 30, 1998. Advertising expense increased to $8.3 million in the nine months ended September 30, 1999 from $100,700 for the nine months ended September 30, 1998. This increase was primarily attributable to the expansion of our online and offline advertising, increased personnel and related expenses and the continued expansion of our network of student representatives and our partnership program. We expect that marketing and sales expense will continue to increase in absolute dollars as we expand our network of student representatives and incur additional advertising and promotional expenses to build our sales base. Marketing and sales expense will also increase as a result of Table of Contents the amendment of our agreements with Baker Taylor, which will result in the classification of services such as Web site content and customer database management as marketing and sales expense. Product Development. Product development expense consists of payroll and related expenses for development and systems personnel and consultants. Product development expense increased to $2.5 million for the nine months ended September 30, 1999 from $262,000 for the nine months ended September 30, 1998. This increase was primarily attributable to increased staffing and other costs related to feature and functionality enhancements to our Web site. We expect that product development expenses will continue to increase as we add additional features and functionality to our Web site. General and Administrative. General and administrative expense consists of payroll and related expenses for executive and administrative personnel, facilities expenses, professional services expenses, travel and other general corporate expenses. General and administrative expense increased to approximately $3.7 million for the nine months ended September 30, 1999 from $230,000 for the nine months ended September 30, 1998. This increase was primarily attributable to the hiring of additional personnel and increased professional services expenses. We expect that general and administrative expenses will increase as we continue to build our back-office infrastructure. Other Income (Expense) Other income or expense consists of interest income on our cash and cash equivalents and investments, interest expense attributable to our convertible notes payable and other income or expense items. Other income was $156,000 for the nine months ended September 30, 1999 compared to other income of $6,000 for the nine months ended September 30, 1998. This increase was primarily attributable to interest income on higher average cash and cash equivalent balances during the nine months ended September 30, 1999. Income Taxes As of December 31, 1998 and September 30, 1999, we had net operating loss carryforwards for federal income tax purposes of $1.7 million and $18.7 million, respectively, which expire beginning in 2018. We have provided a full valuation allowance on the resulting deferred tax asset because of uncertainty regarding its realizability. Changes in the ownership of our common stock, as defined in the Internal Revenue Code of 1986, as amended, may restrict the utilization of such carryforwards. See note 10 to our consolidated financial statements. Year Ended December 31, 1998 Net sales were $132,000 for the year ended December 31, 1998 primarily as a result of the growth in orders from our expanding customer base. Cost of product related party was $115,000 and cost of shipping related party was $10,000 as a result of our increased sales volume. Equity transactions related party of $798,000 relates to expense recognized in connection with warrants and common stock issued to Baker Taylor as described above. Marketing and sales expense was $589,000 as a result of our online and offline advertising as well as personnel and related expenses. Product development expense was $696,000 as a result of staffing and other costs related to feature and functionality enhancements to our web site. General and administrative expense was $617,000 as a result of the hiring of personnel and professional services expenses. Seasonality We have experienced significant seasonality in our results of operations. Due to the college calendar and the seasonal nature of the textbook industry, our peak selling periods are currently August/September and January/February, when college students return to school and new semesters begin. Part of our strategy includes offering additional products and services through our Web site. While these products and services may not have the same seasonal selling periods as textbook sales, purchases of these products and services may occur primarily with customer purchases of textbooks. In addition, the net sales generated Table of Contents Add Booklist Schools. We intend to increase our customer base by expanding the number of schools for which we post the prescribed reading lists for classes, or booklists. Extend the Breadth and Depth of Our Offerings. We intend to capitalize on our brand recognition, college marketing experience and extensive customer base to offer additional products and services geared to students needs and interests, such as entertainment products, apparel and school supplies. We currently offer general interest books, we launched our job and career center in January 2000, and we will soon begin to award scholarships and offer free e-mail services targeted toward college students. Capitalize on Our Growing Customer Database. We intend to capitalize on our growing customer database to provide targeted product, service and promotional offerings by us as well as other businesses. Add Partnership Schools. We intend to expand our partnership program, through which we act as the exclusive new textbook supplier for traditional four-year and community colleges, private high schools that require students to purchase their textbooks, distance learning programs and continuing and professional education programs. Table of Contents from these products and services may be significantly less than those generated from our sales of textbooks. As a result, we may continue to experience fluctuations in quarterly operating results. Liquidity and Capital Resources Since inception, we have financed our operations primarily through private sales of our convertible preferred stock. On August 6, 1998 and December 3, 1998, we issued an aggregate of 2,071,420 shares of Series A preferred stock at a purchase price of $0.70 per share, resulting in gross proceeds of approximately $1.5 million. On February 25, 1999, we issued 6,933,806 shares of Series B preferred stock at a purchase price of $1.44 per share, resulting in gross proceeds of approximately $10.0 million. On August 27, 1999 and September 21, 1999, we issued an aggregate of 8,928,571 shares of Series C preferred stock at a purchase price of $3.36 per share, resulting in gross proceeds of approximately $30.0 million. Upon the closing of this offering, shares of our Series A, B and C preferred stock will be converted into 8,966,879 shares of our common stock. In April 1999, we entered into an agreement with Campus Pipeline, Inc. under which a warrant to purchase 25,000 shares of our common stock with an exercise price of $6.00 per share was issued and will be exercisable upon the achievement of contractual revenues of $30.0 million on or before December 31, 2000, with an additional warrant for 50,000 shares with an exercise price of $6.00 per share which will be exercisable if contractual revenues equal or exceed $80.0 million on or before July 31, 2001. Since the exercisability of these warrants is based on the achievement of uncertain future revenue targets, we have not recorded any expense for these warrants. These warrants could result in a significant charge to operating results in the future as described under Risk Factors We will be required to record significant expense because of targets set forth in our agreements with third parties. In December 1999, we granted AOL a warrant to purchase 493,246 shares of our common stock, which does not include the additional warrant to purchase 1,125 shares which we granted to AOL when we entered into definitive agreements with Imperial Bank and the additional warrant to purchase 34,367 shares which we granted to AOL when we entered into the product promotion agreement with Sallie Mae, with an exercise price equal to the initial public offering price in this offering. Of the aggregate of 528,738 shares subject to purchase under these warrants, 176,245 are immediately exercisable and the remaining 352,493 shares will vest over the next three years based on ICQ s performance under our interactive marketing agreement. This warrant will result in charges to operating results in the future as described under Risk Factors We will be required to record significant expense because of targets set forth in our agreements with third parties. In February 2000, we granted Sallie Mae, Inc. warrants to purchase up to 616,863 shares of our common stock, with an exercise price equal to the initial public offering price in this offering. Of these shares, warrants to purchase 352,493 are immediately exercisable and the warrants to purchase the remaining 264,370 shares will vest over the next two years based on Sallie Mae s performance under our product promotion agreement. This warrant will result in charges to operating results in the future as described under Risk Factors We will be required to record significant expense because of targets set forth in our agreements with third parties. In August 1999, we loaned $62,000 to each of our founders, Eric J. Kuhn and Timothy J. Levy, to each purchase 207,077 shares of our common stock. The notes bear interest at a floating rate equal to the then current applicable federal rate, which was 5.41% for October 1999, and are due August 1, 2001. As of September 30, 1999, we had $28.6 million of cash and cash equivalents. As of that date, our principal commitments consisted of obligations outstanding under operating leases, accounts payable and accrued liabilities. Although we have no material commitments for capital expenditures, we anticipate a substantial increase in our capital expenditures and lease commitments consistent with anticipated growth in operations, infrastructure and personnel. Table of Contents Net cash used in operating activities was $10.2 million for the nine months ended September 30, 1999, and $221,000 for the nine months ended September 30, 1998, consisting primarily of net losses adjusted for changes in accounts receivable, accounts payable and accrued expenses. Net cash used in investing activities was $1.2 million for the nine months ended September 30, 1999, and $27,000 for the nine months ended September 30, 1998, consisting primarily of purchases of computer equipment, fixtures and furniture, as well as an investment in United States government debt securities and related proceeds for the nine month period ended September 30, 1998. Net cash provided by financing activities was $38.5 million for the nine months ended September 30, 1999, and $1.3 million for the nine months ended September 30, 1998. Net cash provided by financing activities during the nine months ended September 30, 1999 consisted primarily of net proceeds of $38.5 million from the issuance of preferred stock. On January 19, 2000 we entered into a revolving credit facility with Imperial Bank in an aggregate amount of $7.5 million with a sublimit of $3.0 million for purchases of property, equipment and software. The maturity date for advances for working capital would be December 31, 2000 and the maturity date for property, equipment and software advances would be October 18, 2002. Interest on outstanding balances would accrue at Imperial s prime rate (8.5% at December 31, 1999) plus 1.0% until the closing of this offering, and afterwards at Imperial s prime rate. All amounts outstanding, which could be up to $7.5 million, would be secured by a pledge of all of our assets. Under the terms of the credit facility, as amended, we must maintain a tangible net worth of $15 million and we must maintain a ratio of our current assets to our current liabilities of 1.5 to 1. We will also issue a warrant to Imperial to purchase 37,500 shares of our common stock at an exercise price of $10.00 per share. If we do not close this offering by February 29, 2000, we would be obligated to issue warrants to purchase additional shares of our common stock each month in an amount equal to an aggregate exercise price of $150,000 divided by the lesser of $10.00 per share or the price of a private equity offering in the event we were to undertake such an offering. We began borrowing under the revolving credit facility during February 2000, and we anticipate repaying all of the borrowings with a portion of the net proceeds of this offering. As of February 10, 2000, there was $1.5 million outstanding. We expect that operating losses and negative cash flows will continue for the foreseeable future and anticipate that losses will increase significantly from current levels because of additional costs and expenses related to brand development, marketing and other promotional activities, continued expansion of booklist operations, continued development of our Web site and information technology infrastructure expansion of product offerings and development of relationships with other businesses. We could reduce some of these costs if working capital decreased significantly. Our failure to generate sufficient revenues, raise additional capital or, if necessary, reduce discretionary spending could harm our results of operations and financial condition. We currently anticipate that the net proceeds of this offering, together with our available funds including amounts we expect to be available under the revolving credit agreement, will be sufficient to meet our anticipated needs for working capital and capital expenditures through the next 12 months. We may need to raise additional funds prior to the expiration of such period if, for example, we pursue new business, technology or intellectual property acquisitions or experience net losses that exceed our current expectations. Any required additional financing may be unavailable on terms favorable to us, or at all. If we raise additional funds by issuing equity securities, you may experience significant dilution of your ownership interest and such securities may have rights senior to those of the holders of our common stock. There can be no assurance that this capital will be available in amounts or on terms acceptable to us, if at all. Quantitative and Qualitative Disclosures About Market Risk Substantially all of our cash equivalents are at fixed interest rates, and therefore the fair value of these instruments is affected by changes in market interest rates. However, as of September 30, 1999, all of our cash equivalents mature within three months. As of September 30, 1999, we believe the reported amounts Table of Contents will vest over the two year term of the agreement depending on the number of customer transactions and partnership school referrals Sallie Mae delivers during that period. Table of Contents of cash equivalents to be reasonable approximations of their fair values. As a result, we believe that the market risk arising from our holdings of financial instruments is minimal. Year 2000 Compliance Many currently installed computer systems and software products are coded to accept or recognize only two-digit entries in the date code field. These systems and software products need to accept four-digit entries to distinguish 21st century dates from 20th century dates. As a result, computer systems and software used by many companies and governmental agencies needed to be upgraded to comply with such year 2000 requirements or risked system failure or miscalculations causing disruptions of normal business activities. State of Readiness. We made an assessment of the year 2000 readiness of our information technology, or IT, systems, including the hardware and software that enable us to provide and deliver our products and services. Our year 2000 readiness plan consists of: quality assurance testing of our internally developed proprietary software; contacting third-party vendors and licensors of material software and services that are both directly and indirectly related to the delivery of our products and services; assessing our repair and replacement requirements; and creating contingency plans in the event of year 2000 failures. We performed a year 2000 simulation on our software during the fourth quarter of 1999 to test system readiness. Our simulation uncovered two non-critical issues, both of which were subsequently corrected and re-tested. We have been informed by the majority of our material software component vendors and by our Internet service provider that the products we use are currently year 2000 compliant. We are in the process of following up with the remaining vendors to receive similar confirmations. We purchased all of our software and hardware within the past two years, and therefore we generally do not have legacy systems that have been identified to have year 2000 issues. We have applied all known vendor patches for relevant software of which we have been notified to comply with vendor defined year 2000 standards. We are currently assessing our non-IT systems, such as telephone, heating, ventilating and air conditioning and electronic entry systems, and are seeking assurance of year 2000 compliance from the providers of material non-IT systems. Until testing is complete and we receive responses from these vendors and providers, we will not be able to completely evaluate whether our IT systems or non-IT systems will need to be revised or replaced. As of February 3, 2000, we had not experienced any problems associated with year 2000 issues with any of our IT or non-IT systems, and we do not believe that any year 2000 problems will arise in the future. Costs. To date we have not incurred any material incremental costs in identifying or evaluating year 2000 compliance issues. We have established a year 2000 budget of approximately $200,000 for external costs for consultants and purchases of hardware and software associated with the project. We have assigned several employees to work on the project as necessary, but have not tracked the cost of these employees. Risks. We are not currently aware of any year 2000 compliance problems relating to our technology or our IT or non-IT systems that would have a material adverse effect on our business, results of operations or financial condition. However, we may discover year 2000 compliance problems in our technology that will require substantial revisions. In addition, we may need to revise or replace third party software, hardware or services incorporated into our material IT and non-IT systems, all of which could be time consuming and expensive. If we fail to fix our technology or fail to fix or replace third-party software, hardware or services on a timely basis, the result could be lost revenues, increased operating costs, the loss of customers and other business interruptions, any of which could have a material adverse effect on our Our Address Our principal executive offices are located at 2020 K Street N.W., 6th Floor, Washington, D.C. 20006 and our telephone number is (202) 667-3400. Our Web site is located at www.varsitybooks.com. We do not intend the information contained on our Web site to be incorporated into this prospectus. Table of Contents business, results of operations and financial condition. Moreover, the failure to adequately address year 2000 compliance issues in our technology and our IT and non-IT systems could result in claims of mismanagement, misrepresentation or breach of contract and related litigation, which could be costly and time consuming to defend. In addition, we cannot be assured that governmental agencies, utility companies, Internet access companies, third-party service providers such as Baker Taylor, and others outside our control will be year 2000 compliant. We rely on several products listed in Baker Taylor s year 2000 disclosures on the Baker Taylor Web site. As indicated in its disclosures, Baker Taylor has not identified any year 2000 issues with those products. However, Baker Taylor is contacting many of its significant suppliers and shippers to determine Baker Taylor s vulnerability if their suppliers and shippers fail to remedy their own potential year 2000 problems. Baker Taylor s key suppliers and shippers may face year 2000 problems, and if not effectively remedied, they could disrupt Baker Taylor s operations. Moreover, while we would seek to use other suppliers if Baker Taylor s or its third party vendors services were disrupted because of year 2000 problems, we may not be able to identify suitable substitutes on a basis that would avoid disruptions to our operations. We believe that the most reasonably likely worst case scenario would involve a failure of these third party service providers to be compliant for an extended period of time in which case we would need to find alternate providers, if any were available, or our operations would be disrupted. The failure by such entities to be year 2000 compliant could result in a systemic failure beyond our control, such as a prolonged Internet, telecommunications or electrical failure, which could also prevent us from delivering our products and services to our customers, decrease the use of the Internet or prevent users from accessing the Web sites of companies with whom we have entered into business alliances, which could have a material adverse effect on our business, results of operations and financial condition. Contingency Plan. As discussed above, we are engaged in an ongoing year 2000 assessment and developed contingency plans in case of year 2000 disruptions. We took into account the results of our year 2000 simulation testing and the responses received from third party vendors and service providers in determining the nature and extent of our contingency plans. Recent Accounting Pronouncements In January 1999, we adopted Statement of Position No. 98-1, or SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which provides guidance on accounting for the cost of computer software developed or obtained for internal use. SOP 98-1 was effective for fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 did not have a material impact on our consolidated financial statements. In January 1999, we adopted Statement of Position No. 98-5, or SOP 98-5, Reporting on the Costs of Start-Up Activities. This standard requires companies to expense the costs of start-up activities and organization costs as incurred. In general, SOP 98-5 is effective for fiscal years beginning after December 15, 1998. Our adoption of SOP 98-5 did not have a material impact on our consolidated financial statements. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income. SFAS No. 133 is effective for our fiscal year ending December 31, 2001. We do not expect that the adoption of SFAS No. 133 will have a material impact on our consolidated financial statements. Table of Contents BUSINESS General We are a leading online retailer of new college textbooks and we provide marketing services to other businesses interested in reaching the college market. According to Student Monitor L.L.C., a nationally syndicated market research company, we were the Web site most visited, most heard-of, and most often visited by college students in the fall of 1999. Our brand is built on saving students time and money while providing a high level of customer service. Our student representative network enables us to customize our marketing to the particular dynamics of each campus and reach students on a peer-to-peer basis. We plan to increase the number of products and services we offer and to provide a marketing channel for other businesses. Industry Background According to statistics published by the National Center for Educational Statistics, the college student market is large and growing. Student Monitor reports show that as of spring 1999, there were approximately 15 million full-time and part-time undergraduate and graduate students at more than 3,600 colleges and universities in the United States. The National Center for Educational Statistics predicts that college enrollment will increase to approximately 16 million students by 2008. According to Student Monitor, college students spent over $105 billion in 1998 on goods and services, excluding tuition, room and board. The college market is unique both in the diverse interests and the particular needs of college students, who represent a broad cross-section of socio-economic and cultural backgrounds. These students have a wide variety of curricular and extracurricular interests, and their purchasing patterns are similarly varied. Nonetheless, students have common needs. For instance, most students must buy expensive school-related goods and services, such as textbooks and school supplies. In fact, textbooks are most students single largest school-related expenditure after tuition and room and board, with most students spending an average of $440 each year on textbooks according to Student Monitor. Based on statistics published by the National Association of College Stores, new textbook sales were approximately $5 billion in 1998. Purchasing new textbooks through traditional retailers tends to be expensive and inconvenient. The new textbook market is presently dominated by campus bookstores, with most schools either operating their own bookstore or contracting these services to a third party. With few bookstores on or near each campus, most campus bookstores face little competition and thus do not have an incentive to address the inefficiencies of the traditional new textbook market. Campus bookstores typically have significant overhead, in part because they bear the cost of warehousing the wide variety of titles needed each semester. In addition, campus bookstores have little purchasing power because they are required to purchase relatively small quantities of many different titles to satisfy the needs of their students. These factors limit their ability to offer reduced prices to their customers. The majority of campus bookstores are operated by educational institutions as an ancillary service. For smaller schools, running a bookstore typically means a diversion of necessary resources with little, if any, financial return. Regardless of the size of the school, campus bookstores are crowded at the beginning of each semester, forcing students to endure long lines and frequent out-of-stock inventory problems. Online commerce provides a new opportunity to better serve and more efficiently reach the college student market. College students are active users of the Internet and are increasingly purchasing goods and services online. According to Student Monitor, during the Spring 1999 semester, 95% of college students used the Internet, spending an average of seven hours a week online. Approximately 57% of these students accessed the Internet one or more times daily and, during a one year period ending in the spring of 1999, approximately 26% of these students made online purchases, up from a cumulative total of 10% through December 31, 1997. Online commerce complements students lifestyles, generally providing them the convenience of twenty-four hour shopping and a lower cost alternative for their purchases. Table of Contents College students spending power, as exhibited by the $105 billion they spent in 1998 on items such as entertainment, music and apparel, coupled with the belief that students are still forming their brand loyalties, make college students an attractive market to businesses and advertisers. We believe few businesses have succeeded in offering students a unified marketplace to meet their varied needs in a convenient and cost-effective manner. Students are geographically dispersed and frequently change their addresses, which makes them difficult to target with traditional direct marketing. While national and regional media campaigns build brand recognition, they are not a cost-effective method of targeting college students. Although students do watch television and read newspapers and magazines, we believe they tend to be more influenced by the opinions and actions of their peers than by traditional media advertising. We believe an opportunity exists to better serve and market to college students, particularly given the inefficiencies of the traditional textbook industry and the inherent difficulties in reaching these students. Students have many demands on their time and typically have a limited budget. We believe there is a significant market opportunity for an online store that offers students an enhanced shopping experience by providing textbooks and other student-oriented goods and services with a focus on cost savings, convenience and customer service. We also believe an opportunity exists to more effectively target college students by creating a defined, peer-to-peer marketing channel to overcome the inherent difficulties in reaching this market. The VarsityBooks.com Solution As a leading online retailer of college textbooks, we are becoming a trusted online marketplace for students. We selected textbooks as our initial product offering because they are an expensive purchase that students are required to make each semester. By addressing inefficiencies in the textbook market and providing increased convenience and low prices to students, we are building our brand and attracting college students to our Web site. We have also established a platform for marketing goods and services to college students. Our solution is comprised of: Network of Student Representatives. As of January 17, 2000, we had a network of over 2,000 student representatives on the campuses of over 500 colleges, universities and graduate schools. As enrolled students at their respective schools, our representatives provide us feedback on their peers needs and lifestyles, allowing us to customize our marketing approach to the particular dynamics of each campus. Student representatives reach our potential customers wherever students gather in classrooms, student organizations, dormitories and fraternities and sororities. We believe using our student representative network, combined with our marketing campaigns, more effectively builds brand awareness and drives more traffic to our Web site than a traditional national or regional marketing campaign would alone. Convenience and Availability. Through our easy-to-use Web site, a customer can search our database of over 350,000 different titles twenty-four hours a day, seven days a week. Our customers can avoid the overcrowding and long lines characteristic of peak season shopping at campus bookstores. To date, we have sold books to students at over 2,600 colleges and universities. To provide maximum convenience, in the Spring 2000 semester we posted booklists for over 240,000 courses from over 380 colleges and universities. These booklists enable students to view the prescribed reading list for their courses and then order the appropriate books directly from us. We plan to provide this convenience to an increasing number of students each year by regularly seeking and posting booklists for additional schools. If we have not posted a specific school s booklist, our customers can still search for the books they need by author, title, keyword, publisher or ISBN number (a unique industry identification number). Our information on textbook availability is updated regularly throughout the day, giving our customers accurate information and assuring availability prior to ordering. Cost Savings and Customer Service. We provide students with a reliable, cost-saving alternative to the traditional campus shopping experience. We significantly reduce the overhead associated with Table of Contents Summary Consolidated Financial Data Below is our summary historical consolidated financial data. We derived the consolidated statement of operations and consolidated balance sheet data from our audited and unaudited consolidated financial statements. You should read this summary data together with Management s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the related notes appearing elsewhere in this prospectus. The as adjusted balance sheet data gives effect to: The conversion of all our outstanding Series A, Series B and Series C preferred stock into 8,966,879 shares of common stock upon consummation of this offering; and The receipt and application of the net proceeds from the sale of 4,000,000 shares of common stock by us in the offering, assuming an initial public offering price of $10.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses. Nine Months Ended September 30, Year Ended Table of Contents textbook sales because we do not maintain individual stores and we outsource our ordering, inventory, warehousing and fulfillment needs through our relationship with Baker Taylor, a leading distributor of books, videos and music products. We pass these savings on to our customers by offering discounted prices. In addition to providing new textbooks at reduced prices, we are committed to providing top quality customer service. Our customer service center is available by telephone and e-mail twenty-four hours a day, seven days a week, and we increase our service center staffing during our peak periods to ensure a timely response to our customers questions. In addition, we provide tracking numbers to our customers, which enable them to follow the delivery process of their orders on our Web site. Marketing Channel to College Students. We use the combination of our advertising and our student representatives to drive traffic to our Web site, enabling us to aggregate the fragmented student market. As our customers conduct transactions on our Web site, we collect their contact information as well as data on their majors and schools. We also retain their transactional histories. Using this database of student demographics, together with our student representative network and our experience selling to college students, we can market on a peer-to-peer basis and target specific groups of students. In addition to serving our own marketing needs, we have begun to make our student representatives and our Web site available to other businesses to reach this large, demographically attractive, yet fragmented, market. Partnership Program. We provide an opportunity for schools to maximize their limited resources and offer increased convenience and reduced prices to their students by outsourcing new textbook sales to us. We believe that for many schools, including traditional four-year colleges as well as community colleges, private high schools and distance learning programs, the expense and inconvenience of maintaining a bookstore exceeds the schools financial return. In addition to maximizing their limited resources, we offer our partnership schools a percentage of the revenue generated by their students on our Web site. Strategy Our goal is to become the leading online college retailer and the most effective marketing channel to college students. Our success in selling textbooks online has allowed us to compile our customers demographics and build a growing customer base that will enable us to sell additional goods and services directly to the student market. Our network of student representatives allows us to market directly to students, both on our own behalf and on behalf of advertisers and other businesses. In pursuing our goal, we use the following strategies: Aggressively Build Our Brand. We intend to establish VarsityBooks.com as the leading college-oriented brand through a variety of marketing and promotional techniques, including the use of our student representative network and a comprehensive national media campaign featuring radio, print, e-mail and online advertisements. We continue to differentiate ourselves based on the reliability, quality and cost-efficiency of our products and services. In addition to focusing on college students, we intend to extend our reach to high school students, primarily through expanding our partnership program, and graduate students, as well as continue to aggressively market to professors, teaching assistants, dorm resident assistants and parents who influence our ultimate target audience, college students. Leverage and Grow Our Network of Student Representatives. We believe that our network of student representatives is a significant competitive advantage. We intend to use our carefully selected, trained and growing network of student representatives to expand awareness of our current product offerings, to introduce our new products and services and to provide marketing services for other businesses. We believe that our campus presence allows us to customize our marketing strategy and that our peer-to-peer marketing, together with our traditional marketing campaign, enables us to reach college students more effectively than a traditional marketing campaign alone. We intend to continue to devote substantial efforts to building a talented student representative base and to attracting recognized student leaders to our team. Table of Contents Add Booklist Schools. We intend to increase our nationwide presence by expanding the number of schools for which we post booklists. We believe that the added convenience of purchasing textbooks through the use of booklists increases our sales at booklist schools and our customer base. By increasing our customer base we believe we increase our ability to successfully introduce our new product and service offerings. Extend the Breadth and Depth of Our Offerings. We intend to capitalize on our brand recognition, college marketing experience and extensive customer base to offer additional products and services. In January 2000, we launched our job and career center and will soon begin to award scholarships and offer free e-mail services targeted toward college students. Among the products we are considering offering are music and entertainment products, apparel and school supplies and equipment. In addition, we plan, among other things, to increase our payment options, develop a loyalty program and begin offering services geared to students needs and interests, such as online entertainment ticketing, travel and financial services. Capitalize on Our Growing Customer Database. We intend to capitalize on our growing customer database to provide targeted product, service and promotional offerings, both by us and other businesses. We plan to use our customer information and transactional histories to assist us in planning our product and service line expansions. As we broaden our product and service offerings, we will learn more about our customers and will be in a position to become an infomediary, serving both students and the companies that seek to reach them. We believe that by tailoring the marketing of our products and services, we will increase sales through our Web site. Add Partnership Schools. We intend to expand our partnership program to further extend our reach into traditional four-year and community colleges, private high schools that require students to purchase their textbooks, distance learning programs and continuing and professional education programs. We work closely with all participating schools in our partnership program, providing them with dedicated customer service and support. Through these relationships, we are endorsed as the exclusive new textbook retailer at our partnership schools. As a result, we gain direct access to their students, enabling us to build brand awareness and market our other products and services. The VarsityBooks.com Experience Our Web site, www.varsitybooks.com, offers several benefits to students including convenience, ease of use and depth of product selection. Key aspects of our Web site include: Finding Books. When logging on to our Web site, visitors are presented with several shopping options, including: Searching by School. Students can use our customized map to locate their school. Once they find their school, if they attend one of over 380 colleges or universities for which we post booklists, they can link from a list of departments to a list of classes organized by professor and to the specific booklists for the particular courses they are taking. Alternatively, students can search directly by professor or course name. Our customers have the option of placing all the textbooks for a particular class in their shopping cart with a single click or selecting only those titles that interest them. Searching for Books. If we have not posted a specific school s booklist, our customers can still easily search for the books they need by author, title, keyword, publisher or ISBN number. Our Web site offers additional book verification for many selections, including pictures of jacket art, editor s name, volume number, table of contents and other identifying characteristics. Browsing. Visitors to our Web site may browse our available selections of over 1,500 subject matter categories, such as business and finance, dance and theatre, social sciences and humanities, natural sciences and classic literature. In addition, visitors can also browse pages specifically dedicated to law, business and medical school textbooks, study aids and student travel materials. Table of Contents Ordering and Delivery. When our customers are ready to place an order, they can proceed through our shopping cart function directly to our checkout page. We presently accept American Express, Discover, Mastercard and Visa as payment for our products, and we plan to expand the payment options we accept. At our partnership schools, we also accept personal checks and debit student accounts. During the ordering process, we ask our customers for basic information about themselves, which we maintain in our customer database. Once a customer places an order, he or she immediately receives an e-mail that includes a unique order number and confirms that the order has been received and processed. We do not accept orders for out- of-stock items. However, through our BookPager option, students can request that we notify them by e-mail for up to 21 days if the desired book becomes available. After the order is shipped, the customer receives a second e-mail that includes a UPS tracking number and a link to a page on our Web site where they can follow their order through the delivery process. We use UPS Second Day Air to take advantage of UPS s guaranteed delivery and to ensure our customers will receive their orders within three business days. For faster delivery, our customers may choose to pay for UPS overnight service. Customer Service. We are committed to delivering superior customer service. Our customers can easily access our customer service center at any time during their visits to our Web site. The customer service page of our Web site offers answers to frequently asked questions and enables our customers to ask their own questions through e-mail. We also have a toll-free number that is staffed twenty-four hours a day, seven days a week. We increase our service center staffing during our peak periods to ensure a fast response time to our customers queries. We also maintain separate toll-free numbers dedicated to our partnership schools. Membership. Anyone who visits our Web site can open a free membership account with VarsityBooks.com by providing basic school-related and other information including shipping and billing addresses. Members can store the products they are considering in their shopping cart until they are ready to make a purchase. Each time they sign on, they have the opportunity to review their shopping cart and determine which items they want to buy. We store their shipping and billing addresses to facilitate easy ordering every time they return to our Web site. We also allow them to view their past purchases and print receipts for their own records. We provide our members with regular newsletters and marketing material via e-mail. Find a Job. The find a job section of our site enables a search for full-time and part-time jobs as well as internships. In addition, we provide job interview tips and industry and company information. Also, we offer relocation tools to assist job seekers in evaluating opportunities. Marketing Our goal is to be the leading online college retailer and most effective marketing channel to college students. As such, we believe it is critical that college students are exposed to our Web site, www.varsitybooks.com. Our marketing strategy is designed to increase awareness of the VarsityBooks.com brand name, increase customer traffic to our Web site, build strong brand loyalty, acquire more customers, maximize repeat customers and develop incremental revenue opportunities. We advertise our Web site through our student representatives and through a comprehensive national media plan featuring radio, print, e-mail and online banner advertisements. In addition to targeting college students, we market to professors, teaching assistants, dorm resident assistants and parents to have them encourage students to visit our Web site. The marketing channels we have developed are as follows: Student Representatives. To penetrate the difficult-to-reach college student market, we have created a network of student representatives, employing over 2,000 as of January 17, 2000. A portion of our full time staff is dedicated to selecting, training, managing and monitoring our growing network of student representatives. We actively scout college campuses to determine names of student leaders on campus. We then recruit and rigorously screen these students for our lead student representative positions. We conduct regular training sessions for our lead representatives, during which we teach them about our company, marketing techniques and how to select a student representative team. Our lead student Table of Contents representatives are responsible for hiring and managing a campus team consisting of up to fifteen student representatives. We provide each lead student representative with a comprehensive marketing kit that they use to market directly to classrooms, student organizations and dormitories, depending on what they consider to be the best method for their campus. We pay our representatives an hourly wage and offer sales-based commissions. We also grant stock options to our lead representatives. Off-line Advertising and Public Relations. We combine the active marketing of our student representatives with a comprehensive media campaign to emphasize our brand and ensure our reach is broad enough to raise awareness among key student influencers such as parents. We engage in a coordinated program of print advertising in college, specialized and general circulation newspapers and magazines as well as a radio advertising campaign in targeted markets. We increase our marketing in the period before classes start and through the prime book buying season. As a result of our own public relations activities, as well as unsolicited invitations, we have been featured in a variety of television shows, newspaper and magazine articles and radio programs including CNN, The New York Times , The Wall Street Journal and National Public Radio. Online Advertising. We place advertisements on other high-profile and high-traffic college-oriented Web sites. These advertisements usually take the form of banners that encourage readers to click through directly to www.varsitybooks.com. In addition, we obtain lists of e-mail addresses of college students who have consented to receive relevant information and send e-mails to these students directing them to our Web site. Awareness Program. We market to college students before the beginning of each school year through awareness programs which target incoming students. We send our student representative teams to freshman orientations, and advertise on the radio at major student summer destinations to reach students on the way back to school. Affiliate Programs. We offer student organizations, such as fraternities, sororities and other clubs, a fundraising opportunity through our affiliate program. Organizations can work with us to market our brand by creating links from their Web site to ours and through direct marketing. We track the customers who reach our Web site through affiliate lines and we pay our affiliates a sales-based commission. Alliances and Relationships We have arrangements with a number of college-oriented Web sites and other organizations to provide a link to www.varsitybooks.com. We believe this enhances our marketing efforts and allows us to capitalize on the recognition of other noncompeting Web sites: AOL s ICQ. We entered into a three-year interactive marketing agreement with AOL s ICQ pursuant to which we are the exclusive college-targeted commerce partner on the ICQ instant messaging service as well as its Web site, www.icq.com . We will act as the exclusive third-party targeted advertiser and a marketer of the ICQ service and ICQ.com on U.S. college campuses. Our exclusivity provisions expire on December 31, 2000, and the agreement itself is scheduled to expire on December 22, 2002 unless earlier terminated because of breach, insolvency, or change of control affecting us. Sallie Mae. We entered into both a marketing services agreement and a product promotion agreement with Sallie Mae, Inc., an educational loan delivery organization. Pursuant to the marketing services agreement, Sallie Mae will pay us $2.0 million over the two year term. In exchange, we will customize a marketing plan for Sallie Mae to reach the college market. In addition, we entered into a product promotion agreement with Sallie Mae under which we will pay Sallie Mae referral fees based on a percentage of any revenue generated by its customers during the term of the arrangement. Sallie Mae will promote our products to its customers. Sallie Mae will also actively promote our partnership program to the schools to which it sells and promotes its products. In addition, Sallie Mae will maintain links on its Web site to our Web site and we will be the exclusive textbook retailer on the Sallie Mae site. In exchange, we granted Sallie Mae a (in thousands, except share and per share data) Statement of Operations Data Net sales $ 132 $ 96 $ 8,866 Operating expenses 2,825 1,428 28,179 Loss from operations (2,693 ) (1,332 ) (19,313 ) Other income (expense), net 4 6 156 Net loss (2,689 ) (1,326 ) (19,157 ) Preferred stock dividends 682 Net loss applicable to common stockholders (2,689 ) (1,326 ) (19,839 ) Net loss per share: Basic and diluted $ (1.53 ) $ (0.80 ) $ (9.40 ) Table of Contents warrant to purchase up to 616,863 shares of common stock, which represents 3.5% of our aggregate common stock outstanding and reserved for issuance immediately prior to the completion of this offering, at a price equal to the initial public offering price in this offering. Of these shares, 352,493 are currently vested and the remaining 264,370 shares will vest over the two year term of the agreement depending on the number of customer transactions and partnership school referrals Sallie Mae delivers during that period. Both of these agreements will expire on February 1, 2002 unless earlier terminated because of breach, insolvency, or change of control affecting us. edu.com. We are currently the only online retailer of textbooks for edu.com, a Web site that offers discounts on hardware, software and other products exclusively to students. edu.com verifies that its customers are enrolled at a higher education institution before selling any products. Once students are members of edu.com, they can initiate a textbook search by author, title, ISBN number or keyword directly on the edu.com Web site. Once a search is initiated, the student is linked to a VarsityBooks.com page to continue the shopping and ordering process. The written agreement we have entered into with edu.com is scheduled to expire on August 20, 2000 unless both parties agree to its renewal. The agreement provides that edu.com will receive a percentage of the revenue generated from the co-branded edu.com/VarsityBooks.com Web site. Book Tech. We have a partnership with Book Tech, Inc., a custom publisher of digitally printed and copywritten material. Under the agreement, Book Tech provides co-branded course packets, which we offer on our Web site. The written agreement we have entered into with Book Tech is scheduled to expire on June 30, 2000, but will extend automatically for one-year terms unless either party elects not to renew. The agreement provides that Book Tech will receive a percentage of revenue from our sales of books that originated from Book Tech s Web site. Kaplan Educational Centers. We have a relationship with Kaplan Educational Centers, under which Kaplan allows us to distribute flyers and market our services in their learning centers. Kaplan is an educational and career service company. We do not have a written agreement with Kaplan Educational Centers. JobDirect.com. We have a relationship with JobDirect.com that enables students who visit our Web site to search for part-time and full-time jobs and internships. JobDirect.com is an online database for employers to target, search and find prospective job candidates from the college market. Our agreement with JobDirect.com terminates December 31, 2000, but is subject to cancellation with 60 days written notice. As we add other product and service offerings, we plan to enter into similar arrangements to support our growth. Partnership Program As of January 17, 2000, we were the exclusive new textbook supplier for 25 institutions. At these institutions, which include smaller, traditional four-year colleges, private high schools, distance learning programs and continuing and professional education programs, we work directly with our partners to market our services to their students. By partnering with private high schools, we reach students early, enabling us to extend our brand and establish a customer relationship with students prior to their attending college. Distance learning programs, in particular, represent a growing market that the traditional campus bookstore cannot efficiently serve. According to International Data Corporation, over 50% of college students have indicated an interest in distance learning. As a result, IDC estimates that over 84% of higher education institutions will offer distance learning programs and that the number of students taking such courses will increase by more than 30% per year before 2002. Our exclusive relationships generally are for a period of up to four years and automatically renew on a year-to-year basis. For each school that has an intranet, we create and maintain a virtual bookstore directly on their site. When students click on the school s virtual bookstore, they link directly to a co-branded Web site. Our partner schools receive a share of the revenues their students generate. By taking Table of Contents advantage of the convenience and cost-savings of this program, our partner schools provide a valuable service to their students. Fulfillment We fulfill all of our textbook orders through Baker Taylor, a leading distributor of books, videos and music products with whom we have a series of written agreements, each of which are scheduled to expire on October 1, 2002 with automatic renewal for one year unless either party elects in writing not to renew. The agreements are terminable upon up to 30 days notice by either party in the event of a default. Under these agreements with Baker Taylor, we agree to provide Baker Taylor with our written demand forecasts for each upcoming semester and we agree to use Baker Taylor as our principal supplier of textbooks and drop-ship and fulfillment services. We pay fees and expenses related to the services Baker Taylor provides and we purchase products from Baker Taylor at a discount to the suggested price. In return, Baker Taylor agrees not to provide drop-ship services to any online textbook retailer serving students at colleges and universities or distance learning programs located in the United States that require students to purchase textbooks, unless the retailer was an existing customer of Baker Taylor on or prior to June 10, 1998, the date we initially contracted with Baker Taylor. Our agreements with Baker Taylor provide us access to and use of an electronic set of data elements from Baker Taylor s title file database which contains bibliographic records. In addition, under these agreements, Baker Taylor provides us with promotional, customer service, and database management services. As a result of the data access our agreements provide, information on availability of book titles is automatically updated on our Web site on an hourly basis from 8:00 a.m. to 10:00 p.m. eastern standard time based on a direct feed from Baker Taylor, ensuring our customers receive accurate in-stock inventory information. Orders placed on our Web site are automatically transmitted to Baker Taylor within twenty minutes of their receipt. At the Baker Taylor warehouse currently used for fulfillment, the order is processed, packaged in a VarsityBooks.com branded box and shipped directly to our customers via UPS so that it arrives within three business days of the placement of the order. We extend a convenient return policy to our customers under which returns are shipped directly to Baker Taylor to expedite processing. Providing Baker Taylor with our demand forecasts for each semester helps to ensure they maintain an adequate and relevant inventory to meet the demands of our customers. Technology We use an array of site management, search, customer interaction, transaction-processing and fulfillment services and systems using a combination of proprietary technologies and commercially available, licensed technologies. Our strategy is to license commercially available technology whenever possible rather than seek internally developed solutions. Our technology environment is designed to provide: a satisfying customer experience; consistent system availability and good performance; high security for all transactions, particularly, our customers commerce transactions; scalability for continued growth; and the collection, maintenance and security of valuable information. We currently use a Microsoft Windows NT operating system platform and multiple Compaq application servers that house our Web server and search engine applications. These servers are able to handle applications including accepting and validating customer orders, handling multiple shipment methods and accepting, authorizing and charging customer credit cards. In addition, our system maintains ongoing automated e-mail communications with customers throughout the ordering process. These systems entirely automate many routine communications, facilitate management of customer e-mail inquiries and Table of Contents allow customers to, on a self-service basis, check order status and order history, change their personal information and check subscriptions to personal notification services. We manage user requests and other traffic using load balancing devices that work across the entire complement of our hardware. This strategy of balancing traffic allows all customers and site users to enjoy favorable response times and other performance measures, regardless of traffic fluctuations. Although we own and maintain our hardware and software systems, Frontier/ Global Center, located in Herndon, Virginia, hosts our two separate server environments and acts as our Internet service provider and we lease the space in which our hardware system resides from Frontier/ Global Center. A group of in-house systems administrators and network engineers and Frontier/ Global personnel monitor and operate our Web site, network operations and transaction-processing systems. Our agreement with Frontier/ Global Center currently provides for service to be provided on an annual basis, subject to renewal. We pay for the space in which our hardware system resides and our Internet access based on our usage, on a monthly basis. We may terminate this agreement on any annual renewal date without penalty. We use the Microsoft suite of tools for our development environment, including Site Server Commerce, InterDev and SQL SVR for the database engine. Additionally, we have separate database servers that capture and retain transaction logs of all activity that occurs on the site. These log databases can, among other things, trace a transaction from its inception to its completion. Our separate recording database generates and delivers reports and interfaces for our marketing, operations and financial systems. We employ SSL data encryption technology to protect credit card data while it is passed from the customer through the site during a purchase transaction. This prevents outside parties from intercepting the customer s credit card data during transaction processing. Competition Both the e-commerce market and online textbook business are highly competitive. Since the introduction of e-commerce to the Internet, the number of e-commerce Web sites competing for customers attention has increased rapidly, and the market for online textbook sales is relatively new, intensely competitive and rapidly changing. We expect future competition to intensify given the relative ease with which new Web sites can be developed. We currently or potentially compete, directly and indirectly, for customers, advertisers and sponsors with the following categories of companies: traditional new textbook retailers, such as campus bookstores; traditional used college textbook retailers, some of which have or are expected to begin online selling; Internet-based textbook retailers such as bigwords.com, ecampus.com (affiliated with Wallace s Bookstores, Inc.), efollett.com (affiliated with The Follett Corporation) and textbooks.com (affiliated with Barnes Noble College Bookstores, Inc.); Internet-based general booksellers such as Amazon.com, barnesandnoble.com and Borders.com; general purpose consumer online services such as America Online and Microsoft Network, each of which provides access to student-related content and services; vendors of college student information, merchandise, products and services distributed through other means, including retail stores, direct mail and schools; and Web sites targeted to students generally or to students of a particular school, such as Web sites developed by College Club, CommonPlaces and Student.Net Publishing. Part of our strategy is to offer additional products and services. For many of these products and services, there are already other traditional and online retailers offering these products. Pro forma basic and diluted $ (1.27 ) $ (2.99 ) Table of Contents We believe that the principal competitive factors in attracting and retaining student customers are: convenience; discount pricing; selection of available products; customer service; quality of content and navigability tools; brand recognition; and reliability and speed of fulfillment. Our success will depend heavily upon our ability to provide a compelling and satisfying shopping experience and advertising environment, as well as our continued ability to attract and retain experienced personnel. Intellectual Property We regard our copyrights, service marks, trademarks, trade dress, trade secrets, proprietary technology and similar intellectual property as critical to our success. We rely on trademark and copyright law, trade secret protection and confidentiality and license agreements with our employees, customers, independent contractors, sponsors and others to protect our proprietary rights. We have applied to register VarsityBooks.com as a trademark with the United States Patent and Trademark Office. We received an anticipatory refusal to our application for registration on December 15, 1998 because of a prior-filed application to register VARSITY BOOK for personal computers, peripheral equipment and various hardware items. We filed a response to this anticipatory refusal on June 15, 1999. The examining attorney at the United States Patent and Trademark Office will review that response and decide whether to withdraw the anticipatory refusal, in which case our application would proceed, or to continue it, in which case our application would be suspended until the prior-filed application matures into a registration or is abandoned. We may be required to obtain licenses from others to refine, develop, market and deliver new products and services. There can be no assurance that we will be able to obtain any such license on commercially reasonable terms or at all, or that rights granted pursuant to any licenses will be valid and enforceable. Domain names are the user s Internet address. Domain names have been the subject of significant trademark litigation in the United States. Domain names derive value from the individual s ability to remember such names, therefore there can be no assurance that our domain name will not lose its value if, for example, users begin to rely on mechanisms other than domain names to access online resources. The current system for registering, allocating and managing domain names has been the subject of litigation and of proposed regulatory reform. There can be no assurance that our domain name will not lose its value, or that we will not have to obtain an entirely new domain name in addition to or in lieu of our current domain name, if such litigation or reform effort results in a restructuring of the current domain name system. Government Regulation Internet Regulation in General. There are an increasing number of laws and regulations pertaining to the Internet. In addition, a number of legislative and regulatory proposals are under consideration by federal, state, local and foreign governments and agencies. Laws or regulations may be adopted relating to issues such as to liability for information retrieved from or transmitted over the Internet, online content regulation, user privacy, taxation and quality of products and services. Moreover, it may take years to determine whether and how existing laws such as those governing intellectual property ownership and infringement, privacy, libel, copyright, trade mark, trade secret, obscenity, personal privacy, taxation and the regulation of the sale of other specified goods and services apply to the Internet. The requirement that Table of Contents we comply with any new legislation or regulation, or any unanticipated application or interpretation of existing laws, may decrease the growth in the use of the Internet, which could in turn decrease the demand for our Internet-based services, increase our cost of doing business or otherwise materially harm our business. Privacy Concerns. Federal, state and foreign governments have enacted or may enact laws or consider regulations regarding the collection and use of personal identifying information obtained from individuals when accessing Web sites, with particular emphasis on access by minors. Such regulations may include requirements that companies establish procedures to: give adequate notice to consumers regarding information collection and disclosure practices; provide consumers with the ability to have personal identifying information deleted from a company s data; provide consumers with access to their personal information and with the ability to rectify inaccurate information; clearly identify affiliations or a lack thereof with third parties that may collect information or sponsor activities on a company s Web site; obtain express parental consent prior to collecting and using personal identifying information obtained from children; and the Federal Children s Online Privacy Act. Such regulation may also include enforcement and redress provisions. While we have implemented programs designed to enhance the protection of the privacy of our users, including children, there can be no assurance that such programs will conform with applicable laws or regulations. Moreover, even in the absence of such regulations, the Federal Trade Commission has begun investigations into the privacy practices of companies that collect information on the Internet. One such investigation has resulted in a consent decree pursuant to which an Internet company agreed to establish programs to implement the privacy safeguards described above. We may become subject to such an investigation, or the FTC s regulatory and enforcement efforts may adversely affect the ability to collect demographic and personal information from users, which could have an adverse effect on the our ability to provide highly targeted opportunities for advertisers and e-commerce marketers. Any such developments could harm our business. It is also possible that cookies may become subject to laws limiting or prohibiting their use. The term cookies refers to information keyed to a specific server, file pathway or directory location that is stored on a user s hard drive, possibly without the user s knowledge, and which is used to track demographic information and to target advertising. Some of the currently available Internet browsers allow users to modify their browser settings to remove cookies or prevent cookies from being stored on their hard drives. In addition, a number of Internet commentators, advocates and governmental bodies in the United States and other countries have urged the passage of laws limiting or abolishing the use of cookies. Limitations on or elimination of the use of cookies could limit the effectiveness of our targeting of advertisements, which could harm our ability to generate advertising revenue. We currently obtain and retain personal information about our Web site users with their consent. We have a stringent privacy policy covering this information. However, if third persons were able to penetrate our network security and gain access to, or otherwise misappropriate, our users personal information, we could be subject to liability. Such liability could include claims for misuses of personal information, such as for unauthorized marketing purposes or unauthorized use of credit cards. These claims could result in litigation, our involvement in which, regardless of the outcome, could require us to expend significant financial resources. Data Protection. Legislation pending in Congress, if passed, would afford broader rights to owners of databases of information, such as stock quotes and sports scores. Such protection already exists in the European Union. If enacted, this legislation could result in an increase in the price of services that provide data to Web sites. In addition, such legislation could create potential liability for unauthorized use of such data. Shares used in computation of basic and diluted loss per share 1,755,536 1,660,714 2,111,621 Table of Contents Internet Taxation. A number of legislative proposals have been made at the federal, state and local level, and by foreign governments, that would impose additional taxes on the sale of goods and services over the Internet and some states have taken measures to tax Internet-related activities. Although Congress recently placed a three-year moratorium, due to expire in October 2001, on state and local taxes on Internet access or on discriminatory taxes on e-commerce, existing state or local laws were expressly excepted from this moratorium. Further, once this moratorium is lifted, some type of federal or state taxes may be imposed upon Internet commerce. Such legislation or other attempts at regulating commerce over the Internet may substantially impair the growth of commerce on the Internet and, as a result, adversely affect our opportunity to derive financial benefit from such activities. Jurisdiction. Due to the global reach of the Internet, it is possible that, although our transmissions over the Internet originate primarily in the Commonwealth of Virginia, the governments of other states and foreign countries might attempt to regulate Internet activity and our transmissions or take action against us for violations of their laws. Employees As of January 17, 2000, we had approximately 200 full-time employees and over 2,000 student representatives, including over 600 lead student representatives. Each semester our lead student representatives recruit up to 15 representatives each to work on their campus teams. We also hire temporary employees, particularly at the beginning of each school semester, and contract service providers as necessary. As we continue to grow and introduce additional products and services, we expect to hire additional employees, particularly in sales and marketing, online product development and booklist operations. None of our employees is represented by a labor union or is the subject of a collective bargaining agreement. We believe that relations with our employees are good. Facilities Our headquarters are at 2020 K Street, N.W. in Washington, D.C. At this headquarters site, we presently lease an aggregate of approximately 34,000 square feet. Our current lease for this facility expires in February 2003. We believe this space will be sufficient for our needs for approximately twelve months. Legal Proceedings On October 29, 1999, the National Association of College Stores, or N.A.C.S., sued us in the United States District Court for the District of Columbia. In their complaint, N.A.C.S. alleged that we use false and misleading advertisements in our efforts to sell textbooks. Specifically, the complaint alleges that we falsely advertise discounts of 40% on textbooks on our Web site. The complaint also alleges that there is no suggested retail price for textbooks from which to calculate discounts. N.A.C.S. claims that, in making the alleged false and misleading statements, we are implying that N.A.C.S. member stores overcharge students for their textbooks. The complaint requests that we be prevented from claiming in any advertising or promotional material, packaging or the like, or representing in any way, that we offer discounts or percentages off of textbooks, unless we clearly and prominently identify the true basis for the claimed discount, the source of the comparative price we use to determine the discounts we offer and the true percentage of textbooks offered at the stated discounted price. In addition, N.A.C.S. seeks to have us retract all prior claims through prominent statements on our Web site. The complaint does not seek monetary damages, other than attorneys fees. We believe these claims to be completely without merit. Our Web site and our advertising truthfully state that we offer college textbooks at up to 40% off suggested price. We also believe that the industry data we use to determine the suggested price from which we calculate discounts is appropriate. We have filed a motion to dismiss these claims and are awaiting a ruling on our motion. (In thousands) 1999 $ 185 2000 205 2001 Eric J. Kuhn 29 Co-founder, Chief Executive Officer, President and Chairman of the Board Timothy J. Levy 29 Co-founder, Executive Vice President, Development and Director Richard Hozik 48 Senior Vice President and Chief Financial Officer Maryann Bastnagel 42 Senior Vice President and Chief Information Officer Debra Graham 34 Vice President of Marketing Andrew E. Green 30 Vice President, Operations and Business Development Jonathan Kaplan 35 Vice President, Communications and Strategic Planning Helen Kim 32 Vice President of Marketing Bruce McNamer 37 Vice President, Business Development Jonathan N. Grayer(2) 34 Director Allen L. Morgan(1)(2) 46 Director Andrew J. Oleszczuk(1) 43 Director Gene Riechers(1)(2) 44 Director James S. Ulsamer (1) Member of the compensation and stock option committee. (2) Member of the audit committee. Eric J. Kuhn co-founded VarsityBooks.com and has served as our Chief Executive Officer and Chairman of the Board since our inception. He has also served as our President since June 1999. From August 1997 to April 1998, Mr. Kuhn practiced law at Greenberg Traurig Hoffman Lippoff Rosen and Quentel P.A. in Miami, Florida, and from September 1996 to July 1997, practiced law at Kaye, Scholer, Fierman, Hays Handler L.L.P. in New York, New York. Mr. Kuhn serves on the board of directors of the Electronic Commerce Forum, a public/private organization representing the interests of the emerging electronic commerce industry. Mr. Kuhn received a B.A. with honors from Haverford College in 1993 and a J.D. with honors from The George Washington University Law School in 1996. Timothy J. Levy co-founded VarsityBooks.com and has served as a Director since our inception. He has served as our Executive Vice President, Development since June 1999. From December 1997 to June 1999, Mr. Levy served as our President. From September 1997 to April 1998, Mr. Levy practiced law at Arent Fox Kintner Plotkin Kahn, P.L.L.C. in Washington, D.C. From August 1996 to August 1997, Mr. Levy served as a judicial clerk for the Hon. William A. Dreier, Presiding Judge, Appellate Division of New Jersey. Mr. Levy serves on the board of directors of the Electronic Commerce Forum, a public/private organization representing the interests of the emerging electronic commerce industry. Mr. Levy received a B.A. from Columbia University in 1992 and a J.D. with honors from The George Washington University Law School in 1996. Richard Hozik has served as our Senior Vice President and Chief Financial Officer since June 1999. From November 1995 through May 1999, Mr. Hozik served as Senior Vice President and Chief Financial Officer of LCC International, Inc., a publicly-traded radio frequency engineering and wireless telecommunications consulting company. From October 1992 through October 1995, Mr. Hozik served as Senior Vice President and Chief Financial Officer of the J.E. Robert Companies, a privately held real Table of Contents estate investment and management company. Mr. Hozik is a Certified Public Accountant and received a B.S. in Accounting from the University of Maryland in 1973. Maryann Bastnagel has served as our Senior Vice President and Chief Information Officer since May 1999. From June 1997 to May 1999, Ms. Bastnagel served as the Senior Vice President of Travel Services International, Inc., a distributor of specialized leisure travel services. From February 1989 to June 1997, Ms. Bastnagel served as the Vice President of Business Technology Strategy of Marriott International. Ms. Bastnagel received a B.A. and a B.S. from the University of Maryland at College Park in 1979 and 1985, respectively. She also received an M.S. from Johns Hopkins University in 1989. Debra Graham has served as a Vice President of Marketing since November 1998. From 1995 to 1998, Ms. Graham was at Dean Company where, as a Manager, she focused on retail and high-tech marketing. From 1993 to 1995, Ms. Graham worked in brand management at Procter Gamble. Ms. Graham received an A.B. from Harvard and Radcliffe Colleges in 1988 and a M.B.A. from Harvard Business School in 1993. Andrew E. Green has served as our Vice President of Operations and Business Development since October 1998. From September 1996 to October 1998, Mr. Green practiced law in the Cyberlaw and Communications groups at Wiley, Rein Fielding in Washington, D.C. Mr. Green received a B.A. from the University of California, Berkeley in 1991 and a J.D. with honors from The George Washington University Law School in 1996. Jonathan Kaplan has served as our Vice President of Communications and Strategic Planning since October 1999. From 1994 to 1999, Mr. Kaplan worked in the Clinton Administration, most recently in the White House as Special Assistant to the President for Economic Policy and Chief of Staff of the National Economic Council. From 1992 to 1994, Mr. Kaplan practiced law at Covington Burling in Washington, D.C. where he specialized in general litigation matters. Mr. Kaplan received an A.B. (with honors) from Harvard College in 1986 and a J.D. from the Boston University School of Law in 1992. Helen Kim has served as a Vice President of Marketing since May 1999. From 1997 to May 1999, Ms. Kim was with SRI Consulting, a subsidiary of Stanford Research Institute. From 1995 to 1997, Ms. Kim served as the Director of Marketing and Corporate Development for Rally s Inc. Ms. Kim received a B.A. from the University of Virginia in 1989 and an M.B.A. from Darden Business School at the University of Virginia in 1994. Bruce McNamer has served as our Vice President of Business Development since February 2000. From 1998 to 1999, Mr. McNamer served as a White House Fellow at the National Economic Council. From 1996 to 1998 Mr. McNamer was with McKinsey Company. From 1985 through 1988, Mr. McNamer worked for Morgan Stanley Company. Mr. McNamer received an A.B. (with honors) from Harvard College in 1985, a J.D. from Stanford Law School in 1996, and an M.B.A. from the Stanford University Graduate School of Business, also in 1996. Jonathan N. Grayer has served as a Director since April 1999. Since July 1994, Mr. Grayer has served as the President and Chief Executive Officer of Kaplan Educational Centers, a provider of educational and career services. Mr. Grayer received an A.B., with honors, from Harvard College in 1986 and an M.B.A. from Harvard Business School in 1990. Allen L. Morgan has served as a Director since February 1999. Since January 1999, Mr. Morgan has been a General Partner of the Mayfield Fund, a venture capital fund. From May 1997 to December 1998, Mr. Morgan was a partner in the corporate department of Latham Watkins in Menlo Park, California. From November 1982 to May 1997, Mr. Morgan was a partner in the corporate department of Wilson, Sonsini, Goodrich Rosati in Menlo Park, California. He received an A.B. from Dartmouth College in 1976, a B.A. and M.A. from Oxford University in 1978 and 1983, respectively, and a J.D. from the University of Virginia in 1981. Andrew J. Oleszczuk has served as a Director since September 1999. Since August 1998, Mr. Oleszczuk has been the President of Tribune Ventures, a division of Tribune Company. From Shares used in computation of pro forma basic and diluted loss per share 2,125,397 6,411,494 Table of Contents November 1993 to July 1998, Mr. Oleszczuk served as Vice President of Development at Tribune Company. Mr. Oleszczuk received a B.A. from Northwestern University in 1978 and an M.B.A. from the Wharton Graduate School of Business in 1980. Gene Riechers has served as a Director since February 1999. Since 1996, Mr. Riechers has served as the Managing Director of FBR Technology Venture Partners L.P., a venture capital fund. From December 1995 to December 1996, Mr. Riechers served as the Chief Financial Officer of CyberCash, Inc., an Internet payment systems company. From September 1993 to December 1995, he served as Chief Financial Officer and Vice President, Business Development of Online Resources Communications Corp. Mr. Riechers also serves as a director of LifeMinders.com, Inc. and webMethods, Inc. Mr. Riechers received a B.S. from Pennsylvania State University in 1977 and an M.B.A. from Loyola College in 1984. James S. Ulsamer has served as a Director since July 1998. Mr. Ulsamer has served as President of Baker Taylor Retail, a division of Baker Taylor Corporation, a distributor of books, music and videos, since July 1999 and as Executive Vice President of Baker Taylor since June 1994. From June 1994 to July 1999, he also served as President of Baker Taylor Books. Mr. Ulsamer earned a B.A. in Economics from Rutgers University in 1972. Board of Directors Our board of directors is divided into three classes, designated as Class I, Class II and Class III. Members of each class hold office for staggered three-year terms. At each annual meeting of our stockholders commencing in 2000, the successors to the directors whose terms expire at that meeting will be elected to serve until the third annual meeting after their election or until their successors have been elected and qualified. Messrs. Oleszczuk and Ulsamer are Class I directors whose terms expire at the 2000 annual meeting of the stockholders. Messrs. Grayer, Levy and Morgan are Class II directors whose terms expire at the 2001 annual meeting of the stockholders. Messrs. Kuhn and Riechers are Class III directors whose terms expire at the 2002 annual meeting of stockholders. With respect to each class, a director s term will be subject to the election and qualification of their successors, or their earlier death, resignation or removal. This classification of our board of directors, when taken in conjunction with other provisions of our amended and restated certificate of incorporation, may delay or prevent a change in control of our company. Board Committees Our board of directors has established an audit committee and a compensation and stock option committee. The audit committee reviews, acts on and reports to the board of directors with respect to various auditing and accounting matters, including the recommendation of our independent auditors, the scope of the annual audits, fees to be paid to the independent auditors, the performance of our independent auditors and our accounting practices. The audit committee consists of Messrs. Grayer, Morgan and Riechers. The compensation and stock option committee determines the salaries and benefits for our employees, consultants, directors and other individuals compensated by our company. In addition, the compensation and stock option committee administers our stock option plan. The compensation and stock option committee consists of Messrs. Morgan, Oleszczuk and Riechers. Director Compensation Except for reimbursement for reasonable travel expenses relating to attendance at board meetings and the granting of stock options, directors are not compensated for their services as directors. Our directors are eligible to participate in our stock option plan. As of December 31, 1999, we had granted to Mr. Kuhn an option to purchase 138,052 shares at an exercise price of $0.30 per share and an option to purchase 453,383 shares which includes options to purchase 107,913 shares we granted on February 3, 2000 pursuant to the AOL, Imperial and Sallie Mae transactions at an exercise price of $10.00 per share. On Eric J. Kuhn $ 52,000 $ Chief Executive Officer Option Grants During Fiscal 1998 Mr. Kuhn was not granted any options or stock appreciation rights in 1998. In August 1999, we granted Mr. Kuhn an option to purchase 138,052 shares of our common stock at an exercise price of $0.30 per share. In December 1999, we granted Mr. Kuhn an option to purchase 453,383 shares of our common stock, which includes options to purchase 107,913 shares granted on February 3, 2000 in conjunction with the warrants we issued to AOL, Imperial and Sallie Mae, at an exercise price of $10.00 per share. Both options vest ratably each month from the date of grant for four years. Option Exercises and Fiscal Year-End Option Values Mr. Kuhn did not exercise any options to purchase securities during 1998 and did not hold any such options as of December 31, 1998. Agreements Regarding Employment We have entered into agreements with Mr. Kuhn and Mr. Levy. Compensation. The compensation of Mr. Kuhn and Mr. Levy is determined by the board of directors provided that, according to their respective agreements, Mr. Kuhn will receive a salary of not less than $160,000 per year and Mr. Levy will receive a salary of not less than $150,000 per year. Effective August 1, 1999 the board of directors has determined that Mr. Kuhn will receive an annual salary of $160,000 and Mr. Levy will receive an annual salary of $150,000. In addition, Mr. Kuhn and Mr. Levy are eligible for cash performance bonuses of up to 25% of their base salary. Stock Option Grants. The board of directors may grant stock options to Mr. Kuhn and Mr. Levy. Termination of Agreements. Mr. Kuhn s and Mr. Levy s agreements may be terminated with or without cause by either Mr. Kuhn, Mr. Levy or us. If we terminate the agreement of either Mr. Kuhn or Mr. Levy with cause, or if either resigns without good reason, he is only entitled to his base salary through the date of termination. If we terminate the agreement of either Mr. Kuhn or Mr. Levy without cause or if either Mr. Kuhn or Mr. Levy resign for good reason, he is entitled to his base salary through the date of termination, together with his pro-rata bonus. In lieu of any further salary or bonus payments to Mr. Kuhn or Mr. Levy, we will pay an amount equal to twelve months salary, payable in twelve equal installments after termination of his employment. If there is a change in control of the Company, and if at anytime thereafter the employment of Mr. Kuhn or Mr. Levy is terminated without cause, or if Mr. Kuhn or As of September 30, 1999 Table of Contents Mr. Levy terminate his employment with good reason, we will pay his base salary through the date of termination at the rate in effect at the time, together with pro-rata bonus. In lieu of any further salary or bonus payments to Mr. Kuhn or Mr. Levy, we will pay a severance payment in an amount equal to 150% of their base salary in effect as of termination. Noncompetition and Confidentiality. Neither Mr. Kuhn nor Mr. Levy may compete with us during the term of his employment and neither may solicit our employees for a period of twelve months immediately following the termination of his relationship with us for any reason, whether with or without cause. Confidentiality and Assignment of Inventions. Mr. Kuhn and Mr. Levy are also bound by confidential information and invention assignment agreements that prohibit them from, among other things, disseminating or using confidential information about our business or clients in any way that would be adverse to us. Mr. Kuhn and Mr. Levy have agreed to assign to VarsityBooks.com all inventions which they may develop during their respective terms of employment. Stock Option Plan We have adopted our 1998 Stock Option Plan. The plan provides for grants of incentive stock options and nonqualified stock options to our employees, consultants, advisors and directors. The plan authorizes the issuance of an aggregate of up to 4,000,000 shares of common stock. As of December 31, 1999, we had options to purchase 1,851,982 shares of common stock outstanding under the plan. We adopted the plan to promote our best interests. We believe that encouraging stock ownership enables us to attract, retain and incent employees, directors, consultants and advisors. In addition, we want to reward those employees, directors, consultants and advisors who contribute to our success. The board of directors, or a committee appointed by the board, has the authority to determine the terms of the options, including the exercise price of the options, the number of shares subject to each option, the terms upon which the option may be exercised and the form of consideration payable on such exercise. The exercise price must be at least 100% of fair market value for incentive stock options. Incentive stock options granted to any holder of 10% or more of the combined voting power of all classes of our stock must have an exercise price of not less than 110% of fair market value. An option granted pursuant to our stock option plan must be exercised within ten (10) years from the effective date of grant. The board of directors may amend or terminate the plan at any time except that such amendment or termination may not adversely affect or alter any right or obligation with respect to any outstanding option, except to allow the outstanding option to qualify as an incentive stock option. Employee Stock Purchase Plan The Employee Stock Purchase Plan will become effective upon the completion of this offering. A total of 500,000 shares of common stock are available for issuance under the plan. The number of shares of common stock available for issuance under the plan will be increased on the first day of each of our fiscal years during the term of the plan by the lesser of 300,000 shares or 2% of our issued and outstanding common stock as of the last day of the preceding year. The plan will be administered by a committee appointed by the board of directors. Employees are eligible to participate if they are customarily employed by us for at least 20 hours per week and more than five months in any fiscal year. The plan permits an eligible employee to purchase our common stock at a discount through accumulated payroll deductions of up to 15% of his or her compensation. The plan, which is intended to qualify under Section 423 of the IRS Code, will be implemented by a series of overlapping offering periods of 24 months duration, with new offering periods, other than the first offering period, commencing on or about January 1, April 1, and July 1 and October 1 of each year. Each offering period will consist of eight consecutive purchase periods of approximately three months duration, Actual As Adjusted Table of Contents and at the end of each three month period, an automatic purchase will be made for participants. The initial offering period is expected to commence on the date of this offering and end on December 31, 2001; the initial purchase period is expected to begin on the date of this offering and end on March 31, 2000. Participants generally may not purchase more than 1,000 shares on any purchase date or stock having a value measured at the beginning of the offering period greater than $25,000 in any calendar year. Individuals who are eligible employees as of the first business day of each offering period may enter the plan as of that offering period. Once enrolled in the plan, a participant will continue to participate in the plan for future offering periods, until the participant ceases to be an eligible employee, withdraws from the plan or discontinues his or her contributions. The purchase price per share will be 85% of the lower of (1) the fair market value of our common stock on the purchase date and (2) the fair market value of a share of our common stock on the last trading day before the offering date, or, in the case of the first offering period under the plan, the price at which one share of our common stock is offered to the public in our initial public offering. The board may at any time amend, modify or terminate the plan. The plan will terminate no later than December 17, 2009. Eric J. Kuhn Chief Executive Officer 35,714 Timothy J. Levy Executive Vice President, Development 35,714 Jason M. Kuhn and Susan B. Kuhn Brother and sister-in-law of Mr. Kuhn 17,857 Karen L. Kuhn Mother of Mr. Kuhn 35,714 Trust for the Benefit of Eric J., Jordan D. and Jason M. Kuhn Mr. Kuhn and the brothers of Mr. Kuhn 71,428 Deborah R. Levy Sister of Mr. Levy 14,285 Jeffrey C. Levy Brother of Mr. Levy 17,857 Linda R. Levy Mother of Mr. Levy 35,714 Paul G. Levy Father of Mr. Levy 21,428 In connection with this private placement, we entered into an investors rights agreement and a right of first refusal and co-sale agreement with investors in our Series A preferred stock. The investors rights agreement granted the holders of the Series A preferred stock the right to nominate a director to our board and rights to receive information about our financial performance and obligated us to meet operational covenants. The nominee of the Series A preferred stock resigned from our board in September 1999. The right of first refusal and co-sale agreement granted the investors in the Series A preferred stock the ability to purchase any shares of common stock proposed to be sold by Mr. Kuhn or Mr. Levy and, if they were not all purchased by the investors, for the nonpurchasing investors to sell their shares, on a pro rata basis, to the third party purchaser with those proposed to be sold by Mr. Kuhn or Mr. Levy. The holders of the Series A preferred stock have registration rights applicable to the common stock issuable upon conversion of the Series A preferred stock. Other than the registration rights, all other rights under these agreements terminate upon the closing of this offering. None of the rights may be exercised in connection with this offering. The sales to our directors, executive officers and holders of 5% or more of our common stock, as well as any other rights granted to them, were on the same terms as those agreed to by third parties on an arm s-length basis. Series B Private Placement On February 25, 1999, we sold an aggregate of 6,933,806 shares of our Series B preferred stock at a price of $1.44 per share. Immediately prior to the consummation of this offering, shares of Series B preferred stock will convert into an aggregate of 3,466,897 shares of common stock. The purchasers of Eric J. Kuhn Chief Executive Officer 29,750 Richard Hozik Chief Financial Officer 29,762 Allen L. Morgan Director 14,881 Roger A. Kuhn and Karen L. Kuhn Parents of Eric Kuhn 37,203 Jason M. Kuhn Brother of Eric Kuhn 7,441 Linda R. Levy Mother of Tim Levy 7,441 Paul G. Levy Father of Tim Levy 7,441 Tribune Ventures, a division of Tribune Company 2,976,191 Carlyle Venture Partners 2,232,143 Mayfield Fund 1,681,551 FBR Technology Venture Partners L.P. 595,239 Table of Contents In connection with this private placement, we entered into a second amended and restated investors rights agreement and a second amended and restated right of first refusal and co-sale agreement with investors in our Series A preferred stock, Series B preferred stock and Series C preferred stock. The amendments granted the holders of the Series C preferred stock the same rights enjoyed by the holders of the Series A and Series B preferred stock. In accordance with those agreements, Mr. Oleszczuk, a designee of the holders of the Series C preferred stock, has been elected to our board. In addition, the holders of the Series C preferred stock have registration rights applicable to the common stock issuable upon conversion of the Series C preferred stock. Other than the registration rights, all other rights under these agreements terminate upon the closing of this offering. None of the rights may be exercised in connection with this offering. The sales to our directors, executive officers and holders of 5% or more of our common stock, as well as any other rights granted to them, were on the same terms as those agreed by third parties on an arm s-length basis. AOL/ICQ and Sallie Mae Transactions In connection with the AOL/ICQ transaction, we entered into a third amended and restated investors rights agreement. The amendment granted AOL the right to require us to register their shares for sale or participate in subsequent registrations of our common stock, if the warrants become exercisable and are exercised. In connection with the Sallie Mae warrants, we entered into a fourth amended and restated investors rights agreement. The amendment granted Sallie Mae the right to require us to register their shares for sale or participate in subsequent registrations of our common stock, if the warrants become exercisable and are exercised. In addition, AOL and Sallie Mae will have registration rights applicable to the shares of common stock issuable upon exercise of their warrants. Other than the registration rights, all other rights under this agreement terminate upon the closing of this offering. None of the rights may be exercised in connection with this offering. The terms of these amendments are no more favorable than those that would have been agreed upon by third parties on an arm s length basis. Transactions with Baker Taylor On July 10, 1998, we entered into an Equity Investment and Operating Agreement, and other related agreements, with Baker Taylor, Inc., our principal supplier of textbooks, fulfillment, shipping and handling services and a supplier of promotional, customer service and data base management services. In consideration for Baker Taylor s fulfillment and drop-ship services and assistance in developing our product and customer base, we sold Baker Taylor 535,714 shares of our common stock at par value and granted a warrant to purchase an additional 107,143 shares of our common stock at a weighted average exercise price of $2.33 per share. In accordance with this agreement, James S. Ulsamer was elected to our board. In October 1998, we issued to Baker Taylor a warrant to purchase 50,000 shares of our common stock at an exercise price of $0.20. In December 1998, we issued a warrant to purchase 53,571 shares of our common stock at an exercise price of $2.33 in conjunction with a bridge loan from Baker Taylor in the amount of $500,000. In February 1999, we issued a warrant to Baker Taylor to purchase 5,950 shares of our common stock at an exercise price of $2.33 per share in conjunction with the December 1998 bridge loan. In February 1999, we issued to Baker Taylor a warrant to purchase 62,500 shares of our common stock at an exercise price of $0.22 per share. In addition, we converted a bridge loan note in the amount of $500,000 issued in December 1998 into 173,611 shares of our Series B preferred stock. Table of Contents In August 1999, Baker Taylor transferred its ownership interest in VarsityBooks.com to B T ENTERPRISES, L.L.C., a limited liability company owned by some of the stockholders of Baker Taylor. Effective October 1, 1999, we entered into a new Operating Agreement with Baker Taylor and amended the other agreements governing our operating relationship. Baker Taylor has agreed for a period of 18 months not to provide direct to consumer fulfillment services for any online textbook retailer serving students at colleges and universities, distance learning programs and high schools located in the United States that require students to purchase their textbooks, with the exception of any retailers who were existing customers of Baker Taylor as of July 10, 1998, the date we initially contracted with Baker Taylor. In return, we have agreed to use Baker Taylor as our principal supplier. The exclusivity is automatically extended each semester to remain at 18 months as long as we agree with Baker Taylor on the amount of inventory they need to acquire for the upcoming semester. The agreement provides that Baker Taylor would provide its services initially for three years, subject to automatic annual extensions after the initial period. We believe the terms of our agreements with Baker Taylor were on terms no more favorable than those that would have been agreed upon by third parties on an arm s-length basis. Indebtedness of Management On August 24, 1999, we sold to each of Mr. Kuhn and Mr. Levy 207,077 shares of our common stock at a purchase price of $0.30 per share. Each of Mr. Kuhn and Mr. Levy paid for these shares with a full recourse promissory note. The notes bear interest at a floating rate equal to the current applicable federal rate, which was 5.41% for October 1999, and are due August 1, 2001. The shares purchased by Mr. Kuhn and Mr. Levy are subject to forfeiture based on conditions relating to their continued employment. These conditions lapse with respect to 82,831 shares each on August 1, 2000 and with respect to 124,246 shares each on August 1, 2001. The terms of the sale of the shares of common stock to Mr. Kuhn and Mr. Levy and the terms of the promissory notes executed by Mr. Kuhn and Mr. Levy were negotiated on our behalf by the board of directors, excluding Mr. Kuhn and Mr. Levy. We believe the terms of these transactions with Mr. Kuhn and Mr. Levy were fair to us, but we are not certain if these transactions were on terms no more favorable than those that would have been agreed upon by third parties on an arm s length basis. Transactions with Promoters Mr. Kuhn and Mr. Levy, each a director or an executive officer, were involved in our founding and organization and each may be deemed a promoter for purposes of the federal securities laws. At our inception, we issued 750,000 shares of common stock to each of Mr. Kuhn and Mr. Levy and received a nominal amount of capital for their initial capitalization. When issued, all 750,000 of the shares purchased by each of Mr. Kuhn and Mr. Levy were subject to forfeiture based on conditions relating to their continued employment. As of December 31, 1999, an aggregate of 694,445 shares remain subject to repurchase by us. These conditions lapse with respect to 13,889 shares for each of Mr. Kuhn and Mr. Levy on the first day of each month until July 1, 2001, at which point our repurchase right expires as to any remaining shares. We believe the terms of these transactions with Mr. Kuhn and Mr. Levy were on terms no more favorable than those that would have been agreed upon by third parties on an arm s length basis. * Represents less than 1% of the outstanding shares of common stock. (1) Includes 1,992,489 shares held by Mayfield IX, 104,868 shares held by Mayfield Associates Fund IV and 245,537 shares held by the Varsity Books Trust, a revocable trust. Mayfield IX Management LLC is the general partner of Mayfield IX and Mayfield Associates Fund IV both of which are Delaware limited partnerships. Mr. Morgan, one of our directors, is a nonmanaging member on Table of Contents Mayfield IX Management LLC. He has no management authority with respect to Mayfield IX Management and disclaims beneficial ownership of our shares held directly by Mayfield IX Management, Mayfield IX, and Mayfield Association Fund IV except to the extent of any pecuniary interest therein. Mayfield Fund, L.P. s address is 2800 Sand Hill Road, Menlo Park, California 94025 (2) The Carlyle Group includes 745,483 shares held by Carlyle Venture Partners, L.P., 155,625 shares held by C/ S Venture Investors, L.P., 116,092 shares held by Carlyle Venture Coinvestment L.L.C. and 98,870 shares held by Carlyle U.S. Venture Partners, L.P., as well as 712,836 shares currently outstanding and 279,164 shares issuable upon exercise of outstanding warrants, all of which are exercisable within the next 60 days at a weighted average exercise price of $1.48 per share held by B T ENTERPRISES, L.L.C., a limited liability company. TC Group, L.L.C., an affiliate of The Carlyle Group, is the manager of B T ENTERPRISES, L.L.C. and has sole control over the voting and disposition of the shares held by B T ENTERPRISES, L.L.C. TC Group, L.L.C. disclaims beneficial ownership of any of the shares held by B T ENTERPRISES, L.L.C. TCG Ventures, Ltd, an affiliate of The Carlyle Group, is the general partner of both Carlyle Venture Partners, L.P. and C/S Venture Investors, L.P. TCG Ventures, L.L.C., an affiliate of The Carlyle Group, is the general partner of both Carlyle Venture Coinvestment L.L.C. and Carlyle U.S. Venture Partners, L.P. The Carlyle Group s address is 1001 Pennsylvania Avenue, N.W., Suite 220 South, Washington, D.C. 20004. (3) Tribune Ventures is a division of Tribune Company and is located at 435 North Michigan Avenue, Chicago, Illinois 60611 (4) Includes 999,616 shares currently outstanding and 39,750 shares subject to options exercisable within the next 60 days. (5) The address for FBR Technology Venture Partners L.P. is Potomac Tower, 1001 19th Street North, Arlington, Virginia 22209. (6) Includes 984,741 shares currently outstanding. (7) Includes 14,881 shares currently outstanding. None of the options held by Mr. Hozik are exercisable within the next 60 days. (8) None of the options held by Ms. Bastnagel are exercisable within the next 60 days. (9) Includes 1,992,489 shares held by Mayfield IX, 104,868 shares held by Mayfield Associates Fund IV, 245,537 shares held by the Varsity Book Trust and 7,440 shares held directly by Mr. Morgan. Except for those shares held by Mr. Morgan, Mr. Morgan disclaims beneficial ownership of all other shares except to the extent of any pecuniary interest therein. (10) Includes 1,488,095 shares beneficially owned by Tribune Ventures, a division of Tribune Company. Mr. Oleszczuk is President of Tribune Ventures, and, as such may be deemed to have voting and investment power over such shares. Mr. Oleszczuk disclaims beneficial ownership of these shares. (11) Includes 992,063 shares beneficially owned by FBR Technology Venture Partners L.P. Mr. Riechers is a partner of FBR Technology Venture Partners L.P. and, as such, may be deemed to have voting and investment power over such shares. Mr. Riechers disclaims beneficial ownership of these shares except to the extent of any pecuniary interest therein. Table of Contents DESCRIPTION OF CAPITAL STOCK The following summary information is qualified in its entirety by the provisions of our amended and restated certificate of incorporation and bylaws, copies of which have been filed as exhibits to the registration statement of which this prospectus is a part. Our authorized capital stock consists of 60,000,000 shares of common stock, $0.0001 par value, and 20,000,000 shares of preferred stock, $0.0001 par value, after giving effect to the filing of our amended and restated certificate of incorporation to delete references to Series A, Series B and Series C preferred stock, which will occur upon conversion of such preferred stock into common stock immediately prior to the closing of this offering, and the subsequent authorization of shares of undesignated preferred stock, as described below. Common Stock As of December 31, 1999, there were 60,000,000 shares of common stock authorized, of which 11,610,158 were outstanding, after giving effect to the conversion of our outstanding preferred stock into common stock. These shares were held of record by 70 stockholders. Following this offering, there will be 15,610,158 shares of common stock outstanding, after giving effect to the sale of the shares of common stock to the public offered hereby and the conversion of our outstanding preferred stock into common stock. In addition, as of December 31, 1999, there were outstanding stock options for the purchase of an aggregate of 1,851,982 shares of common stock, approximately 119,000 of which were exercisable within the next 60 days, and warrants for the purchase of an aggregate of 1,638,451 shares of common stock, 946,588 of which were exercisable within the next 60 days, assuming completion of this offering and the issuance of the Imperial and Sallie Mae warrants. Subject to preferences that may be applicable to any preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available at times and in amounts as the board of directors may determine from time to time. The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Upon our liquidation, dissolution or winding up, the holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. The common stock has no preemptive or conversion rights and is not subject to redemption. All outstanding shares of common stock are fully paid and nonassessable, and the shares of common stock to be issued upon completion of this offering will be fully paid and nonassessable. Preferred Stock Our amended and restated certificate of incorporation authorizes 20,000,000 shares of preferred stock. Our board of directors has the authority to issue the preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions of each series, such as dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the right to increase or decrease the number of shares of any series, without further vote or action by the stockholders. Our board of directors may issue preferred stock with voting or conversion rights that may have the effect of delaying, deferring or preventing a change in control of VarsityBooks.com and could adversely affect the market price of the common stock and the voting and other rights of the holders of common stock. We currently have no plans to issue any preferred stock. Warrants Upon completion of this offering, AOL will hold warrants to purchase 528,738 shares of common stock, at an exercise price equal to the initial public offering price in this offering. Of these shares, 176,245 will be immediately exercisable and the remaining 352,493 will vest based upon ICQ s performance under the interactive marketing agreement. In lieu of paying the exercise price in cash, AOL may elect to surrender a portion of the shares of common stock underlying the warrant, using the difference between the per share exercise price of the warrant and the current per share fair market value of the underlying Table of Contents common stock to purchase the remaining shares of common stock. The exercise price of the warrant is subject to adjustment downward in the event we issue shares of common stock at a price below the then current fair market value of the common stock. This warrant expires on December 22, 2006. In addition, B T ENTERPRISES, L.L.C. will hold warrants to purchase 279,164 shares of common stock at a weighted average exercise price of $1.48 per share all of which are currently exercisable. In lieu of paying the exercise price in cash, B T ENTERPRISES, L.L.C. may elect to surrender a portion of the shares of common stock underlying the warrants, using the difference between the per share exercise price of the warrant and the current per share fair market value of the underlying common stock to purchase the remaining shares of common stock. These warrants expire on dates ranging from October 2, 2003 to February 23, 2004. In addition, Palmer Private Equity, Thompson and Jane Rogers, Paul Bagley, Donald Jackson, L. Wayne Harber, W. Duke DeGrassi, Mario Giannini, Leslie Brun, Jim Fried, Andy Cahill, John McKey and Mesirow Financial Inc., as custodian for Mary H. Jochim, hold warrants to purchase an aggregate of 101,186 shares of common stock at an exercise price of $2.33 per share. In lieu of paying the exercise price in cash, these holders may elect to surrender a portion of the shares of common stock underlying the warrants, using the difference between the per share exercise price of the warrant and the current per share fair market value of the common stock to purchase the remaining shares of common stock. All of these warrants are presently exercisable. These warrants expire on dates ranging from December 8, 2003 to February 1, 2004. In addition, Campus Pipeline, Inc. has warrants to purchase 75,000 shares of common stock at an exercise price of $6.00 per share. In lieu of paying the exercise price in cash, Campus Pipeline may elect to surrender a portion of the shares of common stock underlying the warrants, using the difference between the per share exercise price of the warrant and the current fair market value of the common stock to purchase the remaining shares of common stock. These warrants expire on dates ranging from December 31, 2000 to July 31, 2001. These warrants are exercisable upon the occurrence of events relating to traffic generated from our distribution agreement with Campus Pipeline. As of December 31, 1999 none of these warrants were exercisable. In addition, Imperial Bank has presently exercisable warrants to purchase 37,500 shares of common stock at an exercise price of $10.00 per share. If we do not close this offering by February 29, 2000, we would be obligated to issue warrants to purchase additional shares of our common stock each month in an amount equal to an aggregate exercise price of $150,000 divided by the lesser of $10.00 per share or the price of a private equity offering in the event we were to undertake such an offering. These warrants expire on January 19, 2005. In addition, Sallie Mae has warrants to purchase 616,863 shares of our common stock, of which 352,493 shares are immediately exercisable and the remaining 264,370 shares will vest over the next two years based on Sallie Mae s performance under the product promotion agreement. These warrants will expire on February 3, 2007. Registration Rights Convertible Preferred and Common Stock. The 17,933,797 shares of convertible preferred stock outstanding will be automatically converted into 8,966,879 shares of common stock in connection with this offering. Pursuant to the terms of our third amended and restated investors rights agreement, all of the holders of our convertible preferred stock outstanding prior to this offering and Baker Taylor, Eric J. Kuhn and Timothy J. Levy, who hold 11,416,747 shares of outstanding common stock, and AOL, which will hold a warrant to purchase 528,738 shares of common stock, which includes an additional warrant to purchase 1,125 shares of common stock which we granted to AOL when we entered into definitive agreements with Imperial Bank and an additional warrant to purchase 34,367 shares of common stock which we granted when we entered into the product promotion agreement with Sallie Mae are entitled to specified registration rights with respect to the registration of its shares of common stock under the Securities Act of 1933 (the Securities Act ). If we propose to register shares of our common stock under Table of Contents the Securities Act, these holders are entitled to notice of the registration and are entitled to include their shares of common stock in the registration at our expense. If the registration is underwritten, the managing underwriters have the right to limit the number of shares included in the registration. Subject to various conditions and limitations, these holders may require us, at our expense but on not more than ten occasions, to file a registration statement under the Securities Act with respect to their shares of common stock. These rights to require registration may not be exercised until 180 days after the date of this prospectus. Subject to various conditions and limitations, these holders may also require us, at our expense, to register their shares of common stock on Form S-3 when we become eligible to use that form. These rights expire five years from the date of this prospectus. We are not required to act on any demand registration: (a) in any jurisdiction in which we would be required to execute a general consent to service of process unless we are already subject to service in that jurisdiction; (b) prior to 90 days following the closing date of our initial public offering; (c) if we deliver 30 days notice to the holders stating that we intend to file a registration statement for our initial public offering within 90 days; or (d) after we have effected the two demand registrations for any particular series of former-holders of preferred shares granted rights under the agreement. In addition, once in any 12 month period, we may delay a registration for 90 days if we provide our holders with a certificate, signed by our president, stating that in the good faith judgment of the board of directors it would be detrimental to us or our shareholders for a registration statement to be filed in the near future. We anticipate granting similar rights to Sallie Mae once we enter into the product promotion agreement for that transaction. With the exception of demand registration rights, we anticipate granting similar rights to Imperial Bank once we enter into definitive agreements for that transaction. Warrant Holders. Pursuant to the terms of its warrants, Campus Pipeline is also entitled to registration rights designated in its registration rights agreement with respect to the registration of its shares of common stock under the Securities Act. If we propose to register shares of the common stock under the Securities Act, other than this offering, holders are entitled to notice of the registration and are entitled to include their shares of common stock in the registration at our expense. If the registration is underwritten, the managing underwriters have the right to limit the number of shares included in the registration. Subject to certain conditions and limitations, holders may require us, at our expense but on not more than one occasion, to file a registration statement under the Securities Act with respect to their shares of common stock. These rights expire five years from the date of this prospectus. Anti-Takeover Effects of Certain Provisions Of Delaware Law and Our Certificate of Incorporation and Bylaws Section 203 of the General Corporation Law We are subject to Section 203 of the General Corporation Law of the State of Delaware, or DGCL, which, subject to various exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder. This restriction applies unless: prior to the date the stockholder became an interested stockholder, the board of directors approves either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by (1) persons who are directors and also officers and (2) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or Table of Contents on or subsequent to the date the stockholder became an interested stockholder the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines business combination to include: any merger or consolidation involving the corporation and the interested stockholder; any sale, lease, exchange, mortgage, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder, subject to various exceptions; any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or person who owns 15% or more of the outstanding voting stock of the corporation, and (i) any entity or person controlling, controlled by or under common control with the entity or person, (ii) any relative or spouse of the person or (iii) any entity in which the entity or person owns 20% or more of any class of voting stock or any trust or estate in which the person has a 20% beneficial ownership interest or for which the person serves in a fiduciary capacity. Additional Anti-Takeover Provisions In addition, some provisions of our amended and restated certificate of incorporation and bylaws may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in its best interest, including those attempts that might result in a premium over-the-market price for the shares held by our stockholders. These provisions include: Board of Directors. Our board is divided into three classes of directors serving staggered three-year terms. Our certificate of incorporation authorizes our board to fill vacant directorships or increase the size of the board. This may deter a stockholder from removing incumbent directors and simultaneously gaining control of the board by filling the vacancies created by such removal with its own nominees. Stockholder Action; Special Meeting of Stockholders. Our certificate of incorporation provides that stockholders may take action only at a duly called annual or special meeting of stockholders and may not take action by written consent. Our certificate of incorporation further provides that special meetings of our stockholders may be called only by the chairman of the board, by a committee of the board or a majority of the board, and in no event may the stockholders call a special meeting. Advance Notice Requirements for Stockholder Proposals and Director Nominations. Our bylaws provide that stockholders seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual meeting of stockholders, must provide timely written notice. To be timely, a stockholder s notice must be delivered to or mailed and received at our principal executive offices not less than 120 days prior to the first anniversary of the date of our notice of annual meeting provided with respect to the previous year s annual meeting of stockholders. However, if no annual meeting of stockholders was held in the previous year or the date of the annual meeting of stockholders has been changed to be more than 30 calendar days from the time contemplated at the time of the previous year s proxy statement, then a proposal shall be received no later than the close of business on the 10th day following the date on which notice of the date of the meeting was mailed or a public announcement was made, whichever occurs first. The bylaws also include a similar requirement for making Table of Contents nominations at special meetings and specify certain requirements as to the form and content of a stockholder s notice. These provisions may preclude stockholders from bringing matters before an annual meeting of stockholders or from making nominations for directors at an annual or special meeting of stockholders. Authorized But Unissued Shares. The authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval, subject to limitations imposed by the DGCL and the Nasdaq National Market. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock and preferred stock could render more difficult or discourage an attempt to obtain control of VarsityBooks.com by means of a proxy contest, tender offer, merger or otherwise. The DGCL provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation s certificate of incorporation or bylaws, unless a corporation s certificate of incorporation or bylaws, as the case may be, requires a greater percentage. We have provisions in our certificate and bylaws which require a super-majority vote of the stockholders to amend, revise or repeal the anti-takeover provisions described above. Limitation of Liability and Indemnification Matters Our certificate of incorporation provides that, except to the extent prohibited by the DGCL, our directors shall not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duty as a director. Under the DGCL, the directors have a fiduciary duty to us that is not eliminated by this provision of the certificate of incorporation and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available. In addition, each director will continue to be subject to liability under the DGCL for breach of the director s duty of loyalty to us for acts or omissions which are found by a court of competent jurisdiction not to be in good faith or that involve intentional misconduct, or knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are prohibited by the DGCL. This provision also does not affect the directors responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. Section 145 of the DGCL empowers a corporation to indemnify its directors and officers and to purchase insurance with respect to liability arising out of their capacity or status as directors and officers, provided that this provision shall not eliminate or limit the liability of a director: for any breach of the director s duty of loyalty to the corporation or its stockholders, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, arising under Section 174 of the DGCL, or for any transaction from which the director derived an improper personal benefit. The DGCL provides further that the indemnification permitted thereunder shall not be deemed exclusive of any other rights to which the directors and officers may be entitled under a corporation s bylaws, any agreement, a vote of stockholders or otherwise. Our certificate of incorporation eliminates the personal liability of directors to the fullest extent permitted by the DGCL and provides that we may fully indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that such person is or was an employee, director or officer of VarsityBooks.com or is or was serving at our request as an employee, director or officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding. Table of Contents We have entered into agreements to indemnify our directors and officers, in addition to the indemnification provided for in our bylaws. We believe that these provisions and agreements are necessary to attract and retain qualified directors and officers. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions, regardless of whether the DGCL would permit indemnification. At present, there is no pending litigation or proceeding involving any director, officer or employee as to which indemnification will be required or permitted under our certificate of incorporation. We are not aware of any threatened litigation or proceeding that may result in a claim for such indemnification. Transfer Agent And Registrar Upon the closing of this offering, the transfer agent and registrar for the common stock will be American Stock Transfer and Trust. Listing Our common stock has been approved for quotation on the Nasdaq National Market under the symbol VSTY. Table of Contents SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock. Future sales of substantial amounts of our common stock in the public market could adversely affect market prices prevailing from time to time. Because only a limited number of shares will be available for sale shortly after this offering due to existing contractual and legal restrictions on resale as we describe below, sales of substantial amounts of our common stock in the public market after the restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. Upon completion of this offering we will have 15,610,158 shares of common stock outstanding, assuming no exercise of the underwriters over-allotment option or of options and warrants to purchase 2,800,578 shares of common stock that are outstanding as of December 31, 1999. Of the outstanding shares, the shares sold in this offering will be freely transferable, without restriction or registration under the Securities Act, except for any shares purchased by one of our existing affiliates, as that term is defined in Rule 144 under the Securities Act. The remaining 11,535,158 shares of common stock outstanding as of December 31, 1999 are restricted securities within the meaning of Rule 144. Holders of restricted shares may sell those shares in the public market only if the sale is registered or if the shares qualify for an exemption from registration under Rules 144 or 701 under the Securities Act. As a result of the contractual restrictions described below and the provisions of Rules 144 and 701, additional shares will be available for sale in the public market as follows: Beginning 90 days after the date of this prospectus, approximately 394,994 additional shares will be eligible for sale, subject to volume, manner-of-sale and other limitations under Rule 144. Beginning 180 days after the date of this prospectus, approximately 6,503,706 additional shares will be eligible for sale, all of which will be subject to volume, manner-of-sale and other limitations under Rule 144. The remaining 4,636,458 shares will become eligible for sale under Rule 144 upon the expiration of various one-year holding periods. Lock-Up Agreements. All of our officers and directors, stockholders owning 1% or more of our outstanding stock prior to this offering and other stockholders, who will together hold 11,175,520 shares of our common stock and 1,261,444 shares subject to then exercisable options or warrants to purchase common stock after this offering, have signed lock-up agreements with our underwriters under which they agreed during the period ending 180 days after the date of this prospectus, not to offer to sell, contract to sell or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock or any options, warrants to purchase any shares of common stock, or any securities convertible into or exchangeable for shares of common stock owned as of the date of this prospectus or thereafter acquired directly by such holders or with respect to which they have the power of disposition, other than shares acquired on the open market, without the prior written consent of FleetBoston Robertson Stephens Inc. Notwithstanding earlier eligibility for sale under the provisions of Rules 144 and 701, shares subject to lock-up agreements will not be salable until these agreements expire or are released by FleetBoston Robertson Stephens Inc. There are no existing agreements between the representatives of the underwriters and any of our stockholders providing consent to the sale of shares prior to the expiration of the lock-up period. Rule 144. In general, under Rule 144 as currently in effect, beginning 90 days after this offering, a person, or persons whose shares are aggregated, who owns shares that were purchased from us, or any of our affiliates, at least one year previously, is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of our then-outstanding shares of common stock, which will equal approximately 156,102 shares immediately after this offering, or the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to manner-of-sale provisions, notice requirements and the availability Table of Contents of current public information about us. Any person, or persons whose shares are aggregated, who is not deemed to have been one of our affiliates at any time during the three months preceding a sale, and who owns shares that are restricted securities under Rule 144 that were purchased from us, or any affiliate, at least two years previously, would be entitled to sell the shares under Rule 144(k) without regard to the volume limitations, manner-of-sale provisions, public information requirements or notice requirements. Rule 701. Our employees, directors, officers, consultants or advisers who purchased common stock from us prior to the date we become subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, under written compensatory benefit plans or written contracts relating to the compensation of these persons may rely on Rule 701 with respect to the resale of that stock. Rule 701 also will apply to stock options we grant before we become subject to the reporting requirements of the Exchange Act, along with the shares acquired upon exercise of the options, including exercises after the date of this prospectus. Shares of common stock we issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, may be resold by persons other than affiliates, beginning 90 days after the date of this prospectus, subject only to the manner-of-sale provision of Rule 144, and by affiliates, beginning 90 days after the date of this prospectus, subject to all provisions of Rule 144 except its one-year minimum holding period. Registration Rights. Upon completion of this offering, the holders of approximately 11,416,747 shares of outstanding common stock, or their transferees, will be entitled to various rights with respect to the registration of these shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration, except for shares purchased by affiliates. Stock Plans. Promptly after this offering, we intend to file a registration statement under the Securities Act covering 4,000,000 shares of common stock issued or reserved for issuance under our Stock Option Plan and a second registration statement covering 500,000 shares of common stock reserved for issuance under our Employee Stock Purchase Plan. We expect these registration statements to become effective as soon as practicable after the effective date of this offering. As of December 31, 1999, options to purchase 1,851,982 shares of our common stock were issued and outstanding. All of these shares will be eligible for sale in the public market from time to time, subject to vesting provisions, Rule 144 volume limitations and holding period requirements applicable to our affiliates and the expiration of lock-up agreements. The representatives have advised us that the underwriters propose to offer the shares of common stock to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers at such price less a concession not in excess of $ per share, of which $ per share may be reallowed to other dealers. After the initial public offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives. No such reduction shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. Prior to this offering, there has been no public market for the common stock. Consequently, the public offering price for the common stock offered by this prospectus will be determined through negotiations among us and the representatives of the underwriters. Among the factors to be considered in such negotiations will be prevailing market conditions, our financial information, market valuations of other companies that we and the representatives of the underwriters believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant. The underwriters have advised us that they do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered. Over-Allotment Option We have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to 611,250 additional shares of common stock to cover over-allotments, if any, at the public offering price less the underwriting discount set forth on the cover page of this prospectus. If the underwriters exercise their over-allotment option to purchase any of the additional 611,250 shares of common stock, the underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof as the number of shares to be purchased by each of them bears to the total number of shares of common stock offered in this offering. If purchased, these additional shares will be sold by the underwriters on the same terms as those on which the shares offered hereby are being sold. We will be obligated, pursuant to the over-allotment option, to sell shares to the underwriters to the extent the over-allotment option is exercised. The underwriters may exercise the over-allotment option only to cover over-allotments made in connection with the sale of the shares of common stock offered in this offering. The representatives have advised us that the underwriters propose to offer the shares of common stock to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers at such price less a concession not in excess of $ per share, of which $ per share may be reallowed to other dealers. After the initial public offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives. No such reduction shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. Prior to this offering, there has been no public market for the common stock. Consequently, the public offering price for the common stock offered by this prospectus will be determined through negotiations among us and the representatives of the underwriters. Among the factors to be considered in such negotiations will be prevailing market conditions, our financial information, market valuations of other companies that we and the representatives of the underwriters believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant. The underwriters have advised us that they do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered. Over-Allotment Option We have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to 611,250 additional shares of common stock to cover over-allotments, if any, at the public offering price less the underwriting discount set forth on the cover page of this prospectus. If the underwriters exercise their over-allotment option to purchase any of the additional 611,250 shares of common stock, the underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof as the number of shares to be purchased by each of them bears to the total number of shares of common stock offered in this offering. If purchased, these additional shares will be sold by the underwriters on the same terms as those on which the shares offered hereby are being sold. We will be obligated, pursuant to the over-allotment option, to sell shares to the underwriters to the extent the over-allotment option is exercised. The underwriters may exercise the over-allotment option only to cover over-allotments made in connection with the sale of the shares of common stock offered in this offering. Public offering price $ $ $ Underwriting Discounts and Commissions payable by VarsityBooks.com Underwriting Discounts and Commissions payable by the selling stockholders We estimate that the expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $1,480,650. Thomas Weisel Partners LLC, one of the representatives of the underwriters, was organized and registered as a broker-dealer in December 1998. Since December 1998, Thomas Weisel Partners has been named as a lead or co-manager on 107 filed public offerings of equity securities, of which 79 have been completed, and has acted as a syndicate member in an additional 54 public offerings of equity securities. Thomas Weisel Partners does not have any material relationship with us or any of our officers, directors or controlling persons, except with respect to its contractual relationship with us pursuant to the underwriting agreement entered into in connection with this offering. FBR Technology Venture Partners L.P., an affiliate of Friedman, Billings, Ramsey Co., Inc., owns 1,388,889 shares of Series B preferred stock and 595,239 shares of Series C preferred stock. Directed Share Program The underwriters have reserved up to five percent of the common stock to be issued by us and offered for sale in this offering, at the initial public offering price, to directors, officers, employees, business associates and persons otherwise connected to us. The number of shares of common stock available for sale to the general public will be reduced to the extent these individuals purchase reserved shares. Any reserved shares which are not purchased will be offered by the underwriters to the general public on the same basis as the other shares offered in this offering. Internet Distribution DLJdirect Inc. will make allocations of securities distributed by it in this offering through the use of the Internet. Approximately two to three weeks prior to the scheduled offering date, DLJdirect will post on its Web site (www.dljdirect.com) a brief description of the offering which contains only the information permitted under Rule 134. At that time, DLJdirect will also send an e-mail to all DLJ direct account holders with $100,000 or more in assets in their accounts advising them of the offering. These account holders will have access to the preliminary prospectus by links on the DLJdirect Web site. DLJdirect will allocate the shares it has underwritten based on its subjective judgment of what is in the best interest of the issuer, considering the following criteria with respect to the account holders expressing an interest in the offering: asset level of the account, trading history of the account, tenure of the account at DLJdirect and post-offering activity in previous offerings. fbr.com, a division of FBR Investment Services, Inc., which is an affiliate of Friedman, Billings, Ramsey Co., Inc., will also be facilitating Internet distribution for this offering. Friedman, Billings, Ramsey Co., Inc. has agreed to allocate a limited number of shares to fbr.com for sale to its online brokerage account holders. An electronic prospectus is available on the Web site maintained by fbr.com. Other than the prospectus in electronic format, the information on the DLJdirect and fbr.com Web sites relating to this offering is not a part of this prospectus and should not be relied upon by prospective investors. Table of Contents Indemnity The underwriting agreement contains covenants of indemnity among the underwriters, us and the selling stockholders against certain civil liabilities, including liabilities under the Securities Act, and liabilities arising from breaches of representations and warranties contained in the underwriting agreement. Lock-Up Agreements Each director, officer and stockholder owning more than 1% of the outstanding common stock and some other stockholders, who will together hold 11,175,520 shares of our common stock and 1,261,444 shares subject to then exercisable options or warrants to purchase common stock after this offering, including each selling stockholder, has agreed, during the period ending 180 days after the date of this prospectus, subject to specified exceptions, not to offer to sell, contract to sell or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock or any options, warrants to purchase any shares of common stock, or any securities convertible into or exchangeable for shares of common stock owned as of the date of this prospectus or thereafter acquired directly by those holders or with respect to which they have the power of disposition, other than: (a) shares acquired on the open market; (b) as a bona fide gift, provided the recipient(s) agree to be bound by the lock-up agreement; (c) as a distribution to partners or shareholders, provided the recipient(s) agree to be bound by the lock-up agreement; or (d) with the prior written consent of FleetBoston Robertson Stephens Inc. However, FleetBoston Robertson Stephens Inc. may, in its sole discretion and at any time or from time to time, without notice, release all or any portion of the securities subject to lock-up agreements. There are no existing agreements between the representatives of the underwriters and any of our stockholders providing consent to the sale of shares prior to the expiration of the lock-up period. In addition, we have agreed that during the lock-up period we will not, without the prior written consent of FleetBoston Robertson Stephens Inc., subject to specified exceptions, consent to the disposition of any shares held by stockholders subject to lock-up agreements prior to the expiration of the lock-up period, or issue, sell, contract to sell, or otherwise dispose of, any shares of common stock, any options to purchase any shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock other than our sale of shares in this offering, and the issuance of common stock upon the exercise of outstanding options and the issuance of options under existing stock option and incentive plans, provided that those options do not vest prior to the expiration of the lock-up period. Listing Our common stock has been approved for quotation on the Nasdaq National Market under the symbol VSTY. Stabilization The representatives have advised us that, pursuant to Regulation M under the Securities Act, some persons participating in the offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of the shares of common stock at a level above that which might otherwise prevail in the open market. A stabilizing bid is a bid for or the purchase of common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A syndicate covering transaction is the bid for or the purchase of the common stock on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with this offering. A penalty bid is an arrangement permitting the representatives to reclaim the selling concession otherwise accruing to an underwriter or syndicate member in connection with this offering if the common stock originally sold by such underwriter or syndicate member is purchased by the representatives in a syndicate covering transaction and has therefore not been effectively placed by such underwriter or syndicate member. The representatives have advised us that such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. Table of Contents LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Shaw Pittman, a law partnership including professional corporations, located in McLean, Virginia. Jack L. Lewis, whose professional corporation is a member of Shaw Pittman, serves as our secretary. Hale and Dorr LLP, located in Washington, D.C. will serve as legal counsel to the underwriters in this offering. EXPERTS The financial statements as of and for the year ended December 31, 1998, included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. Changes and Disagreements with Accountants on Accounting and Financial Disclosure Our board of directors appointed PricewaterhouseCoopers LLP as our independent accountants on October 8, 1999 to replace KPMG LLP. We dismissed KPMG on September 22, 1999 as a result of a disagreement in accounting principle. The dismissal of KPMG was recommended and approved by our audit committee and approved by our board of directors. KPMG did not issue a report on our financial statements for any period as a result of the disagreement in accounting principle. The disagreement arose regarding the classification in our statement of operations of certain amounts paid to Baker Taylor. Under an operating agreement with Baker Taylor, which is a related party, we purchase books, pay to Baker Taylor shipping and handling costs representing incremental charges for drop shipping services and receive from Baker Taylor certain fulfillment services. We had proposed to classify, based on discussions with Baker Taylor and industry practice, the value of such fulfillment services as marketing and sales expenses in our statement of operations in recognition of the value of those services provided by Baker Taylor. We believe that the full value of such services is not separately invoiced to us by Baker Taylor but is included in part by Baker Taylor in the cost of books purchased by us. KPMG disagreed with our proposed approach. KPMG believes that the invoiced amount for books purchased from Baker Taylor should be included in the cost of products. KPMG has informed us that they believe, based on their discussions with Baker Taylor, that the pricing of books sold to us, based on an agreed upon discount from list price, is consistent with Baker Taylor s pricing for other similar customers. KPMG has also informed us that a prospective change to the distribution agreement between us and Baker Taylor to recharacterize the elements of the cost of purchased books that did not change the substance of the agreement with Baker Taylor should not be a basis for reclassification of costs in our statement of operations. We disagree with the use of the word recharacterize as the marketing and sales expenses were not recharacterized. Marketing and sales services were identified as services to be performed by Baker Taylor in the agreements. The disagreement was discussed with the audit committee and with the full board of directors. The matter related to the disagreement affects the measurement of our gross profit. Under our proposal, we would have reported higher gross profit and higher marketing and sales expenses. Under the approach required by KPMG, we would have reported lower gross profit and lower marketing and sales expenses. The disagreement did not affect net sales, loss from operations, net loss, net loss available to common stockholders or related per share amounts or any line item in our balance sheets, statements of stockholders equity or cash flows or related notes to the consolidated financial statements. We have subsequently accepted the position of KPMG with respect to the inclusion of the value of fulfillment costs as a component of cost of products for the year ended December 31, 1998 and the nine month periods ended September 30, 1998 and 1999. In addition, subsequent to September 22, 1999 we decided to present in our statement of operations cost of products, shipping expenses and marketing and sales expenses as separate components of operating expenses and to omit the disclosure of gross margin. As discussed further in Related Party Transactions Transactions with Baker Taylor, effective October 1, 1999 we have amended the documents governing our relationship with Baker Taylor. The amendment provides for assignment of separate values to the separate fulfillment services provided by Baker Taylor: supply of books, shipping services and other services, including Web site content, Table of Contents customer database management and placement of promotional literature in packages to be sent to customers. Such assignment is based on the relative fair value of each element as determined by Baker Taylor. Effective with the amendment of our agreement with Baker Taylor on October 1, 1999, we will include in cost of products related party in our statement of operations the cost of purchased books from Baker Taylor, we will include in shipping related party the cost of shipping charges from Baker Taylor and we will include in marketing and sales related party the cost of other services charged from Baker Taylor. Prior to our appointment and engagement of PricewaterhouseCoopers, we had not consulted with PricewaterhouseCoopers regarding the type of audit opinion that might be rendered on our financial statements. We discussed with PricewaterhouseCoopers all transactions reflected in our financial statements that we deemed significant, including the disagreement which led to the dismissal of KPMG. We described the relationship of Baker Taylor, the terms of the original operating agreement and the terms of the amended operating agreement with PricewaterhouseCoopers including specifically the assignment of separate values for the separate services provided by Baker Taylor to supply Web site content, customer database management and placement of promotional literature in packages sent to customers, those values being based upon the relative fair value of each element as determined by Baker Taylor. PricewaterhouseCoopers did not take exception to our position to include those costs in marketing and sales related party in the statement of operations for the period after October 1, 1999, subject to its being able to obtain sufficient and objective evidence of the allocation of Baker Taylor s billing to the various products and services they provided. PricewaterhouseCoopers also did not take exception to the historical treatment of those costs as a part of the cost of product related party up to the date of the amended agreements with Baker Taylor. We authorized KPMG to respond fully to the inquiries of PricewaterhouseCoopers concerning the subject matter of the disagreement. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a Registration Statement on Form S-1, including exhibits, schedules and amendments, under the Securities Act with respect to the shares of common stock to be sold in this offering. This prospectus does not contain all the information set forth in the Registration Statement. For further information with respect to us and the shares of common stock to be sold in the offering, reference is made to the Registration Statement. Statements contained in this prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract, agreement or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. You may read and copy all or any portion of the Registration Statement or any other information we file at the Securities and Exchange Commission s public reference room at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following regional offices of the Commission: Seven World Trade Center, Room 1400, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of these documents, upon payment of a duplicating fee, by writing to the Securities and Exchange Commission. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Our Securities and Exchange Commission filings, including the Registration Statement, are also available to you on the Commission s Web site (http://www.sec.gov). As a result of this offering, we will become subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, will file periodic reports, proxy statements and other information with the Securities and Exchange Commission. We intend to furnish our stockholders with annual reports containing audited financial statements and with quarterly reports for the first three quarters of each year containing unaudited interim consolidated financial information. Actual As Adjusted (in thousands) Stockholders Equity Preferred stock, $0.0001 par value, issuable in series: no shares authorized, issued and outstanding actual; 20,000,000 shares authorized, no shares issued and outstanding, as adjusted $ $ Series A convertible preferred stock, $.0001 par value: 2,071,420 shares authorized, issued and outstanding, actual; no shares authorized, issued and outstanding, as adjusted Series B convertible preferred stock, $.0001 par value: 6,933,806 shares authorized, issued and outstanding, actual; no shares authorized, issued and outstanding, as adjusted 1 Series C convertible preferred stock, $.0001 par value: 9,755,633 shares authorized, 8,928,571 shares issued and outstanding, actual; no shares authorized, issued and outstanding, as adjusted 1 Common stock, $.0001 par value: 27,932,927 shares authorized, 2,539,604 shares issued and outstanding, actual; 60,000,000 shares authorized, 15,506,483 shares issued and outstanding, as adjusted 2 Additional paid-in capital 50,509 86,228 Notes receivable from stockholders (124 ) (124 ) Deferred compensation (6,478 ) (6,478 ) Accumulated deficit (21,846 ) (21,846 ) Total stockholders equity 22,063 57,782 Total capitalization $ 22,063 $ 57,782 Table of Contents DILUTION Our net tangible book value as of September 30, 1999 was $22.1 million, or $1.92 per share, as adjusted to give effect to the assumed automatic conversion of all of the outstanding shares of convertible preferred stock into 8,966,879 shares of our common stock upon consummation of this offering. Net tangible book value per share represents the amount of our total tangible assets (total assets less intangible assets) less total liabilities divided by 11,506,483 shares of common stock outstanding. Dilution per share to new investors represents the difference between the amount per share paid by purchasers of our common stock in this offering and the net tangible book value per share of common stock immediately after completion of this offering. After giving effect to the sale of 4,000,000 shares of common stock by us in this offering at an assumed initial public offering price of $10.00 per share and the receipt and application of the net proceeds, after deduction of estimated underwriting discounts and commissions and the payment of the estimated offering expenses, our net tangible book value as of September 30, 1999, would have been $57.8 million, or $3.73 per share. This represents an immediate dilution in net tangible book value of $6.27 per share to purchasers of common stock in this offering and an immediate increase in net tangible book value of $1.81 per share to existing stockholders, as illustrated in the following table: Assumed initial public offering price per share $ 10.00 Net tangible book value per share as of September 30, 1999 $ 1.92 Increase per share attributable to new investors 1.81 Net tangible book value per share after this offering 3.73 Dilution per share to new investors $ 6.27 The following table summarizes on an as adjusted basis as of September 30, 1999, the number of shares of common stock purchased from us, the total consideration paid or to be paid, and the average price per share paid or to be paid to us by existing stockholders and by new investors at an assumed initial public offering price of $10.00 per share: Shares Purchased Total Consideration Average Price Number Percent Amount Percent Per Share Existing stockholders 11,506,483 74.2% $ 41,334,000 50.8% $ 3.59 New investors 4,000,000 25.8 40,000,000 49.2 $ 10.00 132 Total net sales 132 Total net sales 132 Total 15,506,483 100.0% $ 81,334,000 100.0% 1,202 9.67 $ 1.11 Fixed assets, net $ Net deferred tax assets 25 Table of Contents SELECTED CONSOLIDATED FINANCIAL DATA The consolidated statement of operations data for the year ended December 31, 1998 and the nine months ended September 30, 1999 and the consolidated balance sheet data as of December 31, 1998 and September 30, 1999 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of operations data for the nine months ended September 30, 1998 are derived from our unaudited consolidated financial statements for such period which are included elsewhere in this prospectus. We have prepared this unaudited information on the same basis as the audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for such periods. When you read this selected financial data, it is important that you also read the historical consolidated financial statements and related notes included in this prospectus, as well as Management s Discussion and Analysis of Financial Condition and Results of Operations. Historical results are not necessarily indicative of future results, and results for any interim period are not necessarily indicative of results for a full year. Nine Months Ended September 30, Balance at December 31, 1998 2,071,420 2,035,714 2,798 Issuance of common stock 89,736 20 Issuance of series B convertible preferred stock 5,996,306 1 8,552 Conversion of convertible notes to series B preferred stock 937,500 1,160 Issuance of series C convertible preferred stock 8,928,571 1 29,899 Issuance of warrants: Related party 169 Convertible debt 31 Deferred compensation 7,756 Loans to stockholders 414,154 Issuance of common stock for note receivable $ $ $ Total operating expenses 2,825 1,428 28,179 Fixed assets, net 100 1,122 Other assets Net loss applicable to common stockholders $ (2,689 ) $ (1,326 ) $ (19,839 ) Operating expenses: Cost of product related party 115 79 7,710 Cost of shipping related party 10 7 723 Equity transactions related party 798 708 169 Marketing and sales: Non-cash compensation $ 53 $ 8 $ 538 Other marketing and sales 536 589 134 Operating expenses: Cost of product related party 115 79 7,710 Cost of shipping related party 10 7 723 Equity transactions related party 798 708 169 Marketing and sales: Non-cash compensation $ 53 $ 8 $ 538 Other marketing and sales 536 589 134 Operating expenses: Cost of product related party 115 79 7,710 Cost of shipping related party 10 7 723 Equity transactions related party 798 708 169 Marketing and sales: Non-cash compensation $ 53 $ 8 $ 538 Other marketing and sales 536 589 134 Net loss per share: Basic and diluted $ (1.53 ) $ (0.80 ) $ (9.40 ) Pro forma basic and diluted loss $ (1.27 ) $ (2.99 ) Shares used in computation of basic and diluted loss per share 1,755,536 1,660,714 2,111,621 Shares used in computation of pro forma basic and diluted loss per share 2,125,397 6,411,494 As of As of December 31, 1998 September 30, 1999 Loss from operations (2,693 ) (1,332 ) (19,313 ) Other income (expense), net 4 6 Loss from operations (2,693 ) (1,332 ) (19,313 ) Other income (expense), net 4 6 Total other income 4 6 Table of Contents increase significantly from current levels because we expect to incur additional costs and expenses related to brand development, marketing and other promotional activities, continued expansion of our booklist operations, continued development of our Web site and information technology infrastructure, expansion of our product offerings and development of relationships with other businesses. We granted options to purchase 179,490 shares for the period ended December 31, 1998 and options to purchase 1,201,963 shares for the nine months ended September 30, 1999 that have been deemed to be compensatory. As a result, we recorded deferred compensation of $354,000 during the year ended December 31, 1998 and $4.2 million during the nine months ended September 30, 1999. Additionally, effective August 1, 1999, we sold 207,077 shares of our common stock at a price of $0.30 per share to each of Mr. Kuhn and Mr. Levy. The shares vest at a rate of 40% upon the completion of one year of service and the remaining 60% vest at the end of the second year. Also, effective August 24, 1999, Mr. Kuhn was granted an option to purchase 138,052 shares of our common stock at an exercise price of approximately $0.30 per share. The option vests in equal monthly installments over each of the next 48 months assuming Mr. Kuhn remains employed by us. We have deemed that the fair value of the underlying stock for both the sale of common stock and option grants is in excess of the related sales or exercise price. As a result, we recorded deferred compensation of $3.5 million during August 1999 for these transactions, resulting in total deferred compensation for the nine month period ended September 30, 1999 of $7.7 million. Amortization of deferred compensation was $1.5 million for the nine months ended September 30, 1999 and is included in non-cash compensation in the accompanying consolidated statements of operations as a component of the marketing and sales, product development and general and administrative line items, as appropriate. Non-cash compensation is being charged to operations over the vesting period of the underlying shares and options. The deferred compensation is being amortized as follows: (in thousands) $ 8,110 Table of Contents The following table sets forth the results of our operations for the year ended December 31, 1998 and the nine months ended September 30, 1998 and 1999: Nine Months Ended September 30, Total operating expenses 2,825 1,428 28,179 Net loss applicable to common stockholders $ (2,689 ) $ (1,326 ) $ (19,839 ) Table of Contents MANAGEMENT Executive Officers, Directors and Key Employees The following table presents information about each of our executive officers, directors and key employees. Name Age Position Year ended December 31, 1998 $ 146 Year ended December 31, 1999 2,523 Year ended December 31, 2000 3,139 Year ended December 31, 2001 1,474 Year ended December 31, 2002 604 Year ended December 31, 2003 Table of Contents December 15, 1999, Mr. Grayer exercised an option to purchase 90,000 shares of stock subject to repurchase by us in the event Mr. Grayer no longer serves on our board. Compensation Committee Interlocks and Insider Participation No interlocking relationship exists between our board of directors or compensation committee and the board of directors or compensation committee of any other company, nor have any such interlocking relationships existed in the past. Executive Compensation The following table sets forth information concerning all compensation we paid our Chief Executive Officer during the year ended December 31, 1998. We did not pay any executive over $100,000 in 1998. Summary Compensation Table Annual Compensation All Other Name and Principal Position Salary Bonus Compensation General and administrative: Non-cash compensation 24 17 876 Other general and administrative 593 617 213 General and administrative: Non-cash compensation 24 17 876 Other general and administrative 593 617 213 General and administrative: Non-cash compensation 24 17 876 Other general and administrative 593 617 213 Table of Contents RELATED PARTY TRANSACTIONS Series A Private Placement On August 6, 1998 and on December 3, 1998, we sold an aggregate of 2,071,420 shares of Series A preferred stock at a price of $0.70 per share. Immediately prior to the consummation of this offering, shares of Series A preferred stock will convert into an aggregate of 1,035,706 shares of common stock. The purchasers of Series A preferred stock included the following directors, executive officers, holders of 5% or more of our common stock on a fully converted basis and immediate family members of such persons: Number of Shares Name Relationship Purchased Table of Contents Series B preferred stock included the following directors, executive officers, holders of 5% or more of our common stock on a fully converted basis and immediate family members of such persons: Number of Shares Name Relationship Purchased Eric J. Kuhn Chief Executive Officer 19,615 Timothy J. Levy Executive Vice President, Development 19,615 Jason M. Kuhn and Susan B. Kuhn Brother and sister-in-law of Mr. Kuhn 8,681 Karen L. Kuhn Mother of Mr. Kuhn 19,615 Jeffrey C. Levy Brother of Mr. Levy 17,361 Linda R. Levy Mother of Mr. Levy 17,361 Paul G. Levy Father of Mr. Levy 6,944 Mayfield Fund 3,004,239 Baker Taylor, Inc. (subsequently transferred to B T ENTERPRISES, L.L.C.) 354,244 FBR Technology Venture Partners L.P. 1,388,889 In connection with this private placement, we entered into an amended and restated investors rights agreement and an amended and restated right of first refusal and co-sale agreement with investors in our Series B preferred stock and Series A preferred stock. The amendments granted the holders of the Series B preferred stock the same rights enjoyed by the holders of the Series A preferred stock. In accordance with those agreements, Mr. Riechers, a designee of FBR Technology Venture Partners L.P., and Mr. Morgan, a designee of Mayfield Fund, have been elected to our board. In addition, the holders of the Series B preferred stock have registration rights applicable to the common stock issuable upon conversion of the Series B preferred stock. Other than the registration rights, all other rights under these agreements terminate upon the closing of this offering. None of the rights may be exercised in connection with the offering. The sales to our directors, executive officers and holders of 5% or more of our common stock, as well as any other rights granted to them, were on the same terms as those agreed by third parties on an arm s-length basis. Series C Private Placement Between August 27, 1999 and September 21, 1999, we sold an aggregate of 8,928,571 shares of our Series C preferred stock at a price of $3.36 per share. Immediately prior to the consummation of this offering, shares of Series C preferred stock will convert into an aggregate of 4,464,276 shares of common stock immediately prior to completion of this offering. The purchasers of Series C preferred stock included the following directors, executive officers, holders of 5% or more of our common stock on a fully converted basis and immediate family members of such persons: Number of Shares Name Relationship Purchased Table of Contents PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth information regarding beneficial ownership of our common stock as of December 31, 1999, by: each person, or group of affiliated persons, who we know beneficially owns more than five percent in the aggregate of the outstanding shares of our common stock; each of our executive officers named in the Summary Compensation Table; each selling stockholder; each of our directors; and all directors and executive officers as a group. Under the rules of the Securities and Exchange Commission, beneficial ownership includes voting or investment power with respect to securities and includes the shares issuable under stock options or warrants that are exercisable within 60 days of December 31, 1999. Shares issuable under stock options or warrants are deemed outstanding for computing the percentage of the person holding options but are not outstanding for computing the percentage of any other person. The number of shares of common stock outstanding after this offering includes shares of common stock being offered for sale by us in this offering. The percentage of beneficial ownership for the following table is based upon 11,610,158 shares of common stock outstanding as of December 31, 1999 (after giving effect to the conversion of all of our outstanding preferred stock to common stock), and 15,610,158 shares of common stock outstanding after the completion of this offering. Unless otherwise indicated, the address for each listed stockholder is: c/o VarsityBooks.com Inc., 2020 K Street, N.W., 6th floor, Washington, D.C. 20006. To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting power and investment power with respect to all shares of common stock. Shares of Shares of Common Stock Common Stock to be Beneficially Owned Beneficially Owned Before the Offering Number of After The Offering Shares Being Name of Beneficial Owner Number Percentage Offered Number Percentage Mayfield Fund(1) 2,342,894 20.2 % 2,342,894 15.0 % The Carlyle Group(2) 2,108,070 17.7 2,108,070 13.3 Tribune Ventures(3) 1,488,095 12.8 1,488,095 9.5 Eric J. Kuhn(4) 1,039,366 8.9 37,500 1,001,866 6.4 FBR Technology Venture Partners L.P.(5) 992,063 8.5 992,063 6.4 Timothy J. Levy(6) 984,741 8.5 37,500 947,241 6.1 Richard Hozik(7) 14,881 * 14,881 * Maryann Bastnagel(8) * * Allen L. Morgan(9) 2,350,334 20.2 2,350,334 15.1 Andrew J. Oleszczuk(10) 1,488,095 12.8 1,488,095 9.5 Gene Riechers(11) 992,063 8.5 992,063 6.4 Jonathan N. Grayer 90,000 * 90,000 * James S. Ulsamer Directors and executive officers as a group (8 persons) 6,959,480 59.7 75,000 6,884,480 44.0 Product development: Non-cash compensation 69 60 72 Other product development 627 696 202 Product development: Non-cash compensation 69 60 72 Other product development 627 696 202 Product development: Non-cash compensation 69 60 72 Other product development 627 696 202 Table of Contents UNDERWRITING The underwriters named below, acting through their representatives, FleetBoston Robertson Stephens Inc., Thomas Weisel Partners LLC, Friedman, Billings, Ramsey Co., Inc. and DLJdirect Inc. have severally agreed with us and the selling stockholders, subject to the terms and conditions of the underwriting agreement, to purchase from us and the selling stockholders the number of shares of common stock set forth opposite their respective names below. The underwriters are committed to purchase and pay for all shares if any are purchased. Number of Underwriter Shares FleetBoston Robertson Stephens Inc. Thomas Weisel Partners LLC Friedman, Billings, Ramsey Co., Inc. DLJdirect Inc. (In thousands) Deferred tax assets: Net operating loss carryforwards/other carryovers $ 753 $ 7,536 Financing and start-up costs 257 231 Accrued expenses Total 4,075,000 Table of Contents The following table summarizes the compensation to be paid by VarsityBooks.com and the selling stockholders to the underwriters: Total Without With Per Share Over-allotment Over-allotment Table of Contents VARSITYBOOKS.COM INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Table of Contents VARSITYBOOKS.COM INC. Consolidated Statements of Operations (In thousands, except share and per share data) Nine Months Ended September 30, Total operating expenses 2,825 1,428 28,179 Loss from operations (2,693 ) (1,332 ) (19,313 ) Other income (expense): Interest income 16 6 223 Interest expense (12 ) (67 ) Net loss applicable to common stockholders $ (2,689 ) $ (1,326 ) $ (19,839 ) Net loss per share (basic and diluted): Net loss $ (1.53 ) $ (0.80 ) $ (9.08 ) Preferred stock dividends (0.32 ) Net loss applicable to common stockholders $ (1.53 ) $ (0.80 ) $ (9.40 ) Pro forma (unaudited) $ (1.27 ) $ (2.99 ) Shares used in computation of basic and diluted loss per share 1,755,536 1,660,714 2,111,621 Shares used in computation of pro forma basic and diluted loss per share (unaudited) 2,125,397 6,411,494 Table of Contents VARSITYBOOKS.COM INC. Consolidated Balance Sheets (In thousands, except share and per share data) December 31, 1998 September 30, 1999 Total current assets 1,646 30,211 Total assets $ 1,746 $ 31,465 Total current liabilities 1,845 9,402 Commitments and contingencies Stockholders equity: Series A convertible preferred stock: $.0001 par value, 2,071,420 shares authorized, issued and outstanding (liquidation preference of $1,450 at December 31, 1998 and September 30, 1999) Series B convertible preferred stock: $.0001 par value, 6,933,806 shares authorized, issued and outstanding at September 30, 1999 (liquidation preference of $10,457 at September 30, 1999) 1 Series C convertible preferred stock: $.0001 par value, 9,755,633 shares authorized; 8,928,571 shares issued and outstanding at September 30, 1999 (liquidation preference of $30,210 at September 30, 1999) 1 Common stock, $.0001 par value, 9,100,000 and 27,932,927 shares authorized, 2,035,714 and 2,539,604 shares issued and outstanding at December 31, 1998 and September 30, 1999, respectively Additional paid-in capital 2,798 50,509 Notes receivable from stockholders (124 ) Deferred compensation (208 ) (6,478 ) Accumulated deficit (2,689 ) (21,846 ) Balance at December 31, 1997 $ $ $ $ $ Issuance of common stock 2,035,714 642 Issuance of series A convertible preferred stock 2,071,420 1,433 Issuance of warrants: Related party 155 Convertible debt ($79 from issuance to related party) 214 Deferred compensation Total stockholders (deficit) equity (99 ) 22,063 Total liabilities and stockholders equity $ 1,746 $ 31,465 Table of Contents VARSITYBOOKS.COM INC. Consolidated Statements of Stockholders (Deficit) Equity Year ended December 31, 1998 and Nine months ended September 30, 1999 (In thousands, except share data) Series A Series B Series C Convertible Convertible Convertible Preferred Stock Preferred Stock Preferred Stock Common Stock Additional Paid-in Shares Amount Shares Amount Shares Amount Shares Amount Capital [Additional columns below] [Continued from above table, first column(s) repeated] Notes Receivable from Deferred Accumulated Stockholders Compensation Deficit Total Balance at December 31, 1997 $ $ $ $ Issuance of common stock 642 Issuance of series A convertible preferred stock 1,433 Issuance of warrants: Related party 155 Convertible debt ($79 from issuance to related party) 214 Deferred compensation (208 ) 146 Net loss (2,689 ) (2,689 ) LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities: Accounts payable (including $28 and $189 with related party at December 31, 1998 and September 30, 1999, respectively) $ 656 $ 1,901 Accrued marketing expenses 5,317 Other accrued expenses and other current liabilities 17 1,273 Taxes payable 8 504 Accrued employee compensation and benefits 16 Balance at December 31, 1998 (208 ) (2,689 ) (99 ) Issuance of common stock 20 Issuance of series B convertible preferred stock 8,553 Conversion of convertible notes to series B preferred stock 1,160 Issuance of series C convertible preferred stock 29,900 Issuance of warrants: Related party 169 Convertible debt 31 Deferred compensation (6,270 ) 1,486 Loans to stockholders (124 ) Net loss (19,157 ) (19,157 ) Balance at September 30, 1999 $ (124 ) $ (6,478 ) $ (21,846 ) $ 22,063 Table of Contents VARSITYBOOKS.COM INC. Consolidated Statements of Cash Flows (In thousands) Nine Months Ended September 30, (unaudited) Operating activities: Net loss $ (2,689 ) $ (1,326 ) $ (19,157 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 6 145 Non-cash compensation 146 85 1,486 Amortization of discount on convertible notes payable 12 12 Equity transactions with related party and interest expense related to warrants issued 798 708 201 Changes in operating assets and liabilities: Accounts receivable, net (1 ) (2 ) (881 ) Prepaid expenses and other (164 ) (536 ) Accounts payable 656 273 1,245 Accrued marketing expenses 5,317 Other accrued expenses and other current liabilities 17 29 1,256 Taxes payable 8 6 496 Accrued employee compensation and benefits 16 6 391 Other non-current assets (132 ) Net cash used in operating activities (1,195 ) (221 ) (10,157 ) Net cash used in investing activities (105 ) (27 ) (1,167 ) Net cash provided by financing activities 2,781 1,260 38,473 $ Net increase in cash and cash equivalents 1,481 1,012 27,149 Cash and cash equivalents at beginning of period 1,481 Cash and cash equivalents at end of period $ 1,481 $ 1,012 $ 28,630 Supplemental disclosure of cashflow information: Cash paid for income taxes and interest $ $ $ Supplemental schedule of noncash investing and financing activities: Conversion of convertible notes payable to series B preferred stock $ $ $ 1,160 Table of Contents VARSITYBOOKS.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Table of Contents VARSITYBOOKS.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Table of Contents VARSITYBOOKS.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Table of Contents VARSITYBOOKS.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Table of Contents VARSITYBOOKS.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Table of Contents VARSITYBOOKS.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. Fixed Assets Fixed assets, at cost, consist of the following: December 31, 1998 September 30, 1999 Depreciation and amortization expense was approximately $6,000 for the year ended December 31, 1998 and $145,000 for the nine months ended September 30, 1999. 5. Convertible Notes Payable On December 8, 1998, the Company issued unsecured convertible notes due June 8, 2000 totaling $1.35 million and warrants to purchase 144,642 shares of the Company s common stock under the terms of a Note and Warrant Purchase Agreement. Of these amounts, $500,000 of the convertible notes and 53,571 warrants were issued to a related party see note 3. Approximately $214,100 of the proceeds from the notes was allocated to the purchase price of the warrants based on the relative fair values of the notes and the warrants. The warrants have an exercise price of approximately $2.33 per share, are exercisable at any time after issuance and expire on December 9, 2003 (see note 7). Debt discount of approximately $214,000 was recorded as a result of the transaction. Total convertible debt was $1.15 million, including $12,000 as a result of the amortization of discount, at December 31, 1998. Both the Company and the holders of the notes had the right to convert the notes plus accrued interest thereon, at the rate of 8% per annum, into Series B preferred stock upon the consummation of a new round of preferred stock financing equal to or greater than $3.0 million, at a price no greater than $2.865 per share. In February 1999, the notes (total of $1.16 million) were converted into 937,500 shares of Series B preferred stock in conjunction with the Company s Series B preferred stock financing (see note 7) at the same price as the Series B preferred stock of $1.44 per share. 6. Commitments and Contingencies Leases The Company leases office space in Washington, D.C. under a noncancelable operating lease. The lease includes a provision for annual rent escalation of 3.0% and requires the Company to pay for a portion of executory costs such as taxes and insurance. The lease expires February 28, 2003. The Company also leases certain office furniture. Future minimum lease payments excluding executory costs, are as follows: Year ending December 31, Amount Table of Contents VARSITYBOOKS.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Table of Contents VARSITYBOOKS.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Table of Contents VARSITYBOOKS.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Table of Contents VARSITYBOOKS.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Table of Contents VARSITYBOOKS.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. Stock-Based Compensation On October 2, 1998, the Company adopted the 1998 Stock Plan, under which incentive stock options, non-qualified stock options or stock rights, or any combination thereof may be granted to the Company s employees. The board of directors, or a Committee appointed by the board, administers the Plan and determines the individuals to whom options will be granted, number of options granted, the exercise price and vesting schedule. Options are exercisable at prices established at the date of grant and have a term of ten years. Each optionee has a vested interest in 25% of the option shares upon the completion of one year of service. The remaining balance vests in equal successive monthly installments of 1/36 upon the completion of each of the next 36 months of service. Vested options held at the date of termination may be exercised within three months. The board of directors may terminate the Plan at anytime. Stock option activity was as follows: Weighted Number of Average Stock Exercise Exercise Options Price Price (In thousands) Outstanding, December 31, 1997 Granted 179 $0.20 $0.30 $ 0.21 Exercised Cancelled Outstanding, December 31, 1998 179 $ 0.21 Granted 1,206 $0.30 $6.04 $ 1.12 Exercised (20 ) $0.20-$0.30 $ 0.20 Cancelled (163 ) $0.20 $0.30 $ 0.30 Outstanding, September 30, 1999 1,202 $ 1.11 The Company has reserved for an additional 893,007 shares of its common stock for future option grants. The following table summarizes information about options at September 30, 1999. Options Outstanding Options Exercisable Range of Weighted Avg. Exercise Number Remaining Weighted Avg. Number Weighted Avg. Price Outstanding Contractual Life Exercise Price Outstanding Exercise Price Table of Contents VARSITYBOOKS.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) nine months ended September 30, 1998 and 1999, respectively, and is included in non-cash compensation in the accompanying consolidated statements of operations. Effective August 1, 1999, the Company sold 207,077 shares of its common stock to its Chief Executive Officer in exchange for a $62,123 promissory note and 207,077 shares of its common stock to its Executive Vice President, Development in exchange for a $62,123 promissory note. The notes bear interest at the Applicable Federal Rate (5.43% for August 1999) and are due August 1, 2001. The shares vest at a rate of 40% upon the completion of one year of service with the remaining 60% vesting at the end of the second year. Under the terms of the agreement, none of the shares vest if either is terminated for cause or voluntarily resigns. The shares, however, fully vest prior to the completion of two years of service if (i) either is terminated without cause or (ii) upon certain conditions if a change of control occurs. Also, effective August 24, 1999, the Company s Chief Executive Officer was granted an option to purchase 138,052 shares of the Company s common stock at an exercise price of $0.30 per share. This option vests in equal monthly installments over each of the next 48 months of service. The Company has established that the fair value of the underlying stock for both the sale of common stock and grant of options is in excess of the exercise price. As a result, the Company recorded deferred compensation of $3.5 million during August 1999. Amortization of deferred compensation was $347,130 for the nine months ended September 30, 1999 and is included in non-cash compensation in the accompanying consolidated statement of operations. Non-cash compensation is being charged to operations over the vesting period of the underlying shares and options. SFAS No. 123, Accounting for Stock-Based Compensation, encourages adoption of a fair value-based method for valuing the cost of stock-based compensation. However, it allows companies to continue to use the intrinsic value method for options granted to employees and disclose pro forma net loss and loss per share. Had compensation cost for the Company s stock-based compensation plans been determined consistent with SFAS No. 123, the Company s net loss and loss per share would have been as follows: Nine Months Year Ended Ended December 31, 1998 September 30, 1999 Table of Contents VARSITYBOOKS.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Per Share Per Share Net Loss Shares Amount Net Loss Shares Amount (In thousands, except per share and share data) Net loss $ (2,689 ) $ (19,157 ) Less: preferred stock dividends (682 ) Table of Contents VARSITYBOOKS.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) At December 31, 1998 and September 30, 1999, the Company had net operating loss carryforwards of approximately $1.7 million and $18.7 million, respectively, related to federal and state jurisdictions. These net operating loss carryforwards will begin to expire at various times beginning 2018. For federal and state tax purposes, a portion of the Company s net operating loss may be subject to certain limitations on annual utilization in case of changes in ownership, as defined by federal and state tax laws. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company s deferred tax assets and liabilities are as follows: December 31, 1998 September 30, 1999 Total deferred tax assets 1,010 8,036 Valuation allowance (985 ) (7,936 ) Deferred tax liabilities: Depreciation and amortization (25 ) (100 ) Net deferred tax assets $ $ Table of Contents VARSITYBOOKS.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Table of Contents VARSITYBOOKS.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share and per share data) Statement of Operations Data Net sales: Product $ 122 $ 89 $ 8,325 Shipping 10 7 (in thousands) Net sales: Product $ 122 $ 89 $ 8,325 Shipping 10 7 (unaudited) Net sales: Product $ 122 $ 89 $ 8,325 Shipping 10 7 credit facility, as amended, the Company must maintain a tangible net worth of $15.0 million and the Company must F-21.1 Table of Contents VARSITYBOOKS.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Table of Contents [VARSITYBOOKS.COM LOGO] Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell securities, and we are not soliciting offers to buy these securities, in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED FEBRUARY 14, 2000 [VARSITYBOOKS.COM LOGO] 4,075,000 Shares Common Stock VarsityBooks.com is offering 4,000,000 shares of its common stock and the selling stockholders are selling an additional 75,000 shares. This is our initial public offering and no public market currently exists for our shares. We have applied to have the shares we are offering approved for quotation on the Nasdaq National Market under the symbol VSTY. We anticipate that the initial public offering price will be $10.00 per share. Investing in our common stock involves risks. See Risk Factors beginning on page 9. Per Share Total Public Offering Price $ $ Underwriting Discounts and Commissions $ $ Proceeds to VarsityBooks.com $ $ Proceeds to Selling Stockholders $ $ The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. VarsityBooks.com has granted the underwriters a 30-day option to purchase up to an additional 611,250 shares of common stock to cover over-allotments. FleetBoston Robertson Stephens International Limited expects to deliver the shares of common stock to purchasers on , 2000. Table of Contents UNDERWRITING The underwriters named below, acting through their representatives, FleetBoston Robertson Stephens Inc., Thomas Weisel Partners LLC, Friedman, Billings, Ramsey Co., Inc. and DLJdirect Inc. have severally agreed with us and the selling stockholders, subject to the terms and conditions of the underwriting agreement, to purchase from us and the selling stockholders the number of shares of common stock set forth opposite their respective names below. The underwriters are committed to purchase and pay for all shares if any are purchased. Number of U.S. Underwriters Shares FleetBoston Robertson Stephens Inc. Thomas Weisel Partners LLC Friedman, Billings, Ramsey Co., Inc. DLJdirect Inc. International Underwriters FleetBoston Robertson Stephens International Limited Thomas Weisel Partners LLC Friedman, Billings, Ramsey International Ltd. DLJdirect Inc. Total 4,075,000 Table of Contents PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. Other Expenses of Issuance and Distribution The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by us in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee. SEC registration fee $20,850 NASD filing fee 8,000 Nasdaq National Market listing fee 95,000 Printing and engraving costs 600,000 Legal fees and expenses 450,000 Accounting fees and expenses 220,000 Blue Sky fees and expenses 11,800 Transfer Agent and Registrar fees 15,000 Miscellaneous expenses 60,000 Total $1,480,650 ITEM 14. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law permits a corporation to include in its charter documents, and in agreements between the corporation and its directors and officers, provisions expanding the scope of indemnification beyond that specifically provided by the current law. Article 7 of the registrant s Amended and Restated Certificate of Incorporation provides for the indemnification of directors to the fullest extent permissible under Delaware law. A director of the Corporation will not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived any improper personal benefit. If the General Corporation Law of the State of Delaware is amended to authorize corporate action further eliminating or limiting the personal liability of directors then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware as so amended. In addition, to the maximum extent permitted by Delaware law in effect from time to time, the Corporation will indemnify and pay, or reimburse reasonable expenses in advance of final disposition of a proceeding, to (a) any individual who is a current or former director or officer of the Corporation or (b) any individual who, while a director or officer of the Corporation and at the request of the Corporation, serves or has served as a director, officer, partner or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or any other enterprise from and against any claim or liability to which such person may become subject or which such person may incur by reason of his status as a present or former director or officer of the Corporation. To the maximum extent permitted by Delaware law in effect from time to time, the Corporation will, with the approval of the board of directors, provide such indemnification and advancement of expenses to a person who served a predecessor of the Corporation in any of the capacities described in (a) or (b) above and to any employee or agent of the Corporation or a predecessor of the Corporation. Article 6 of the registrant s Amended and Restated Bylaws provides for the indemnification of officers, directors and third parties acting on behalf of the registrant to the fullest extent permissible under II-1 Table of Contents Delaware law, except that the Registrant will indemnify such party in connection with a proceeding (or part thereof) initiated by that party only if the proceeding (or part thereof) was authorized by the Registrant s board of directors. The indemnification provided under the Bylaws includes the right to be paid by the Registrant the expenses in advance of any proceeding for which indemnification may be had in advance of its final disposition, provided that the payment of such expenses in advance of any proceeding for which indemnification may be had in advance of its final disposition may be made only upon delivery to the Registrant of an undertaking by or on behalf of the indemnified party to repay all amounts so advanced if it shall ultimately be determined that such party is not entitled to be indemnified. If a claim for indemnification is not paid by the Registrant within sixty days after a written claim has been received by the Registrant, the claimant may at any time thereafter bring suit against the Registrant to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant will also be paid the expense of prosecuting such suit. In addition, the Bylaws grant the Registrant the authority to purchase and maintain insurance on behalf of any person who is a director, officer, employee or agent of the Registrant or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Registrant would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware. The Registrant has entered into Indemnification Agreements with each of its directors and executive officers to indemnify them in the amount and under the circumstances described above. The Underwriting Agreement provides that the Company and Selling stockholders are obligated, under specified circumstances, to indemnify the Underwriters. In addition, the Underwriting Agreement provides that the Underwriters are obligated, under specified circumstances, to indemnify directors, officers and controlling persons of the Registrant against specified liabilities. ITEM 15. Recent Sales of Unregistered Securities The following information on sale of the Registrant s stock does not reflect its reverse stock split, except as noted. Within the last three years, the Registrant has issued and sold the following unregistered securities: 1. On June 23, 1998, the Registrant issued and sold to each of its founders, Eric J. Kuhn and Timothy J. Levy, 1,500,000 shares of common stock for an aggregate purchase price of $150 each in conjunction with a restricted stock agreement entered into between the Registrant and each of its founders. This transaction was exempt from registration under rule 506 of Regulation D. 2. On July 10, 1998, the Registrant issued and sold to an accredited investor, Baker Taylor, Inc., 1,071,428 shares of common stock for an aggregate purchase price of $107.14 in conjunction with an agreement entered into with the investor. This transaction was exempt from registration under rule 506 of Regulation D. 3. On July 10, 1998, the Registrant issued to an accredited investor, Baker Taylor, Inc., a warrant to purchase 214,286 shares of common stock at an exercise price of $1.1666 per share in conjunction with a service agreement entered into between the Registrant and the investor. This transaction was exempt from registration under rule 506 of Regulation D. 4. On August 6, 1998, the Registrant issued and sold to 19 accredited investors (including StonePine VarsityBooks.com LLC, Pinnacle Bancorp, Inc., Kuhn Irrevocable Trust dated July 30, 1998, Sandor Engel, Esq., Trustee, Michael J. Kuhn, Timothy J. Levy, Eric Jonathan Kuhn, Karen Kuhn, Linda R. Levy, Paul G. Levy, Jason and Susan Kuhn, JTWRS, Jeffrey C. Levy and Deborah R. Levy) an aggregate of 1,785,707 shares of its Series A Convertible Preferred Stock for $0.70 per share, for an aggregate purchase price of $1,249,994.90. This transaction was exempt from registration under rule 506 of Regulation D. 5. On October 2, 1998, the Registrant issued to an accredited investor, Baker Taylor, Inc., a warrant to purchase 100,000 shares of common stock at an exercise price of $0.10 per share in II-2 Table of Contents conjunction with a service agreement entered into between the Registrant and the investor. This transaction was exempt from registration under rule 506 of Regulation D. 6. On November 4, 1998, the Registrant granted to a director an option to purchase 30,893 shares of common stock at an exercise price of $0.10 per share. This transaction was exempt from registration under rule 701. 7. On November 4, 1998, the Registrant granted to 10 employees options to purchase an aggregate of 313,088 shares of common stock at an exercise price of $0.10 per share. This transaction was exempt from registration under rule 701. 8. On December 3, 1998, the Registrant issued and sold to 5 accredited investors (including Andrew Green, WS Investment Company 98B and SDJ Capital, Inc.) an aggregate of 285,713 shares of its Series A Convertible Preferred Stock for $0.70 per share, for an aggregate purchase price of $199,999.10. This transaction was exempt from registration under rule 506 of Regulation D. 9. On December 8, 1998, the Registrant issued to five accredited investors (Baker Taylor, Inc., StonePine VarsityBooks.com LLC, Pinnacle Bancorp, Inc., John McKey and Mesirow Financial Inc., Custodian FBO: Mary H. Jochim IRA A/C 88473435) warrants to purchase an aggregate of 289,285 shares of common stock at an exercise price of $1.1666 per share and 8% convertible promissory notes in the aggregate principal amount of $1,350,000 in conjunction with bridge loans to the Registrant. This transaction was exempt from registration under rule 506 of Regulation D. 10. On December 28, 1998, the Registrant granted to an employee an option to purchase 10,000 shares of common stock at an exercise price of $0.10 per share. This transaction was exempt from registration under rule 701. 11. On January 12, 1999, the Registrant granted to an employee an option to purchase 10,000 shares of common stock at an exercise price of $0.10 per share. This transaction was exempt from registration under rule 701. 12. On January 25, 1999, the Registrant granted to an employee an option to purchase 2,000 shares of common stock at an exercise price of $0.10 per share. This transaction was exempt from registration under rule 701. 13. On February 16, 1999, the Registrant granted to an employee an option to purchase 5,000 shares of common stock at an exercise price of $0.10 per share. This transaction was exempt from registration under rule 701. 14. On February 24, 1999, the Registrant issued to five accredited investors (Baker Taylor, Inc., StonePine VarsityBooks.com LLC, Pinnacle Bancorp, Inc., John McKey and Mesirow Financial Inc., Custodian FBO: Mary H. Jochim IRA A/C 88473435) warrants to purchase an aggregate of 32,130 shares of common stock at an exercise price of $1.1666 per share pursuant to the 8% convertible promissory notes issued to these investors in conjunction with bridge loans to the Registrant. This transaction was exempt from registration under rule 506 of Regulation D. 15. On February 24, 1999, the Registrant issued to an accredited investor, Baker Taylor, Inc., a warrant to purchase 125,000 shares of common stock at an exercise price of $0.11 per share in conjunction with an agreement entered into between the Registrant and the investor. This transaction was exempt from registration under rule 506 of Regulation D. 16. On February 25, 1999, the Registrant issued and sold to 20 accredited investors (including FBR Technology Venture Partners I, L.P., Pinnacle Bancorp, Inc., StonePine VarsityBooks.com LLC, StonePine VarsityBooks.com II, LLC, Baker Taylor, Inc., John McKey, Jr. and Candace McKey, Mesirow Financial, Custodian FBO: Mary H. Jochim IRA, Mayfield IX, Mayfield Associates Fund IV, Robert Haft, Karen Kuhn, Jason and Susan Kuhn, Eric J. Kuhn, SDJ Capital, Inc., Jeffrey C. Levy, Linda R. Levy, Timothy J. Levy and Paul Levy) an aggregate of 6,933,806 shares of its Series B Convertible Preferred Stock for $1.44 per share, for an aggregate purchase price of $9,984,680.64. This transaction was exempt from registration under rule 506 of Regulation D. II-3 Table of Contents 17. On March 24, 1999, the Registrant granted to a consultant an option to purchase 20,000 shares of common stock at an exercise price of $0.15 per share. This transaction was exempt from registration under rule 701. 18. On March 24, 1999, the Registrant granted to an employee an option to purchase 125,000 shares of common stock at an exercise price of $0.10 per share. This transaction was exempt from registration under rule 701. 19. On March 24, 1999, Registrant granted to four employees options to purchase an aggregate of 100,000 shares of common stock at an exercise price of $0.15 per share. This transaction was exempt from registration under rule 701. 20. On April 27, 1999, the Registrant granted to a director an option to purchase 157,632 shares of common stock at an exercise price of $0.15 per share. This transaction was exempt from registration under rule 701. 21. On April 27, 1999, Registrant granted to two employees options to purchase an aggregate of 55,000 shares of common stock at an exercise price of $0.15 per share. This transaction was exempt from registration under rule 701. 22. On May 12, 1999, the Registrant granted to 6 employees options to purchase an aggregate of 421,772 shares of common stock at an exercise price of $0.15 per share. This transaction was exempt from registration under rule 701. 23. On May 28, 1999, the Registrant issued and sold to an employee 138,857 shares of common stock at an exercise price of $0.15 per share. This transaction was exempt from registration under rule 701. 24. On June 18, 1999, the Registrant granted to 21 employees options to purchase an aggregate of 542,410 shares of common stock at an exercise price of $0.15 per share. This transaction was exempt from registration under rule 701. 25. On July 23, 1999, the Registrant granted to employees (lead student representatives) options to purchase 32,000 shares of common stock at an exercise price of $0.15 per share. This transaction was exempt from registration under rule 701. 26. On July 23, 1999, Registrant granted to 14 employees options to purchase an aggregate of 129,500 shares of common stock at an exercise price of $0.15 per share. This transaction was exempt from registration under rule 701. 27. On August 4, 1999, the Registrant issued to an accredited investor, Campus Pipeline, Inc., a contingent warrant to purchase 50,000 shares of common stock at an exercise price of $3.00 per share in conjunction with a provider agreement entered into between the Registrant and the investor. This transaction was exempt from registration under rule 506 of Regulation D. 28. On August 4, 1999, the Registrant issued to an accredited investor, Campus Pipeline, Inc., a contingent warrant to purchase 100,000 shares of common stock at an exercise price of $3.00 per share in conjunction with a provider agreement entered into between the Registrant and the investor. This transaction was exempt from registration under rule 506 of Regulation D. 29. On August 8, 1999, the Registrant issued and sold to an employee 2,000 shares of common stock for an aggregate purchase price of $200.00 pursuant to an exercise of an option grant. This transaction was exempt from registration under rule 701. 30. On August 24, 1999, the Registrant granted to 18 employees options to purchase an aggregate of 107,000 shares of common stock at an exercise price of $0.15 per share. This transaction was exempt from registration under rule 701. 31. On August 24, 1999, the Registrant issued and sold to each of its founders, Eric J. Kuhn and Timothy J. Levy, 414,154 shares of its common stock for $0.15 per share, for an aggregate purchase price of $124,246.20. The consideration was paid by a promissory note and the shares are subject to re-purchase by the Company. This transaction was exempt from registration under rule 701. II-4 Table of Contents 32. On August 24, 1999, the Registrant granted to its Chief Executive Officer, Eric J. Kuhn, an option to purchase 276,103 shares of common stock at an exercise price of $0.15 per share. This transaction was exempt from registration under rule 701. 33. On August 24, 1999, the Registrant granted to two directors an option to purchase an aggregate of 72,368 shares of common stock at an exercise price of $0.15 per share. This transaction was exempt from registration under rule 701. 34. On August 27, 1999, the Registrant issued and sold to 9 accredited investors (Tribune Company, Mayfield IX, Mayfield Associates Fund IV, Varsity Book Trust, Affiliated E-Commerce Investments, LLC, FBR Technology Venture Partners I, L.P., Southeastern Technology Fund, L.P., Robert Haft and Allen Morgan) an aggregate of 6,220,245 shares of its Series C Convertible Preferred Stock for $3.36 per share, for an aggregate purchase price of $20,900,023. This transaction was exempt from registration under rule 506 of Regulation D. 35. On September 3, 1999, the Registrant issued and sold to 20 accredited investors (including Carlyle Venture Partners, L.P., C/S Venture Investors, L.P., Carlyle U.S. Venture Partners, L.P., Carlyle Venture Coinvestment L.L.C., Roger A. Kuhn and Karen Kuhn, JTWROS, Jason Kuhn, Paul Levy, Linda R. Levy, Eric J. Kuhn, and Roger T. Staubach) an aggregate of 2,708,326 shares of its Series C Convertible Preferred Stock for $3.36 per share, for an aggregate purchase price of $9,099,975.30. This transaction was exempt from registration under rule 506 of Regulation D. 36. On September 16, 1999, the Registrant issued and sold to an employee 7,723 shares of common stock for an aggregate purchase price of $772.30 pursuant to an exercise of an option grant. This transaction was exempt from registration under rule 701. 37. On September 17, 1999, the Registrant granted to 27 employees options to purchase an aggregate of 363,500 shares of common stock at an exercise price of $3.02 per share. This transaction was exempt from registration under rule 701. 38. On September 17, 1999, Registrant issued and sold to an employee 30,893 shares of common stock for an aggregate purchase price of $3,089.30 pursuant to an exercise of an option grant. This transaction was exempt from registration under rule 701. 39. On October 6, 1999, the Registrant issued and sold to an employee 18,100 shares of common stock for an aggregate purchase price of $2,102 pursuant to an exercise of an option grant. This transaction was exempt from registration under rule 701. 40. On October 22, 1999, Registrant granted to 10 employees options to purchase an aggregate of 147,000 shares of common stock at an exercise price of $4.00 per share. This transaction was exempt from registration under rule 701. 41. On November 1, 1999, the Registrant issued and sold to an employee 5,111 shares of common stock for an aggregate purchase price of $4,161.10 pursuant to an exercise of an option grant. This transaction was exempt from registration under rule 701. 42. On November 4, 1999, the Registrant issued and sold to an employee 1,250 shares of common stock for an aggregate purchase price of $125.00 pursuant to an exercise of an option grant. This transaction was exempt from registration under rule 701. 43. On November 11, 1999, the Registrant issued and sold to an employee 425 shares of common stock for an aggregate purchase price of $346.18 pursuant to an exercise of an option grant. This transaction was exempt from registration under rule 701. 44. On November 19, 1999, the Registrant granted to 24 employees options to purchase an aggregate of 123,500 shares of common stock at an exercise price of $4.00 per share. This transaction was exempt from registration under rule 701. 45. On November 19, 1999, the Registrant issued and sold to an employee 1,287 shares of common stock for an aggregate purchase price of $128.70 pursuant to an exercise of an option grant. This transaction was exempt from registration under rule 701. II-5 Table of Contents 46. On December 9, 1999, the Registrant issued and sold to an employee 425 shares of common stock for an aggregate purchase price of $346.18 pursuant to an exercise of an option grant. This transaction was exempt from registration under rule 701. 47. On December 13, 1999, Registrant issued and sold to an employee 104 shares of common stock for an aggregate purchase price of $10.40 pursuant to an exercise of an option grant. This transaction was exempt from registration under rule 701. 48. On December 14, 1999, Registrant issued and sold to an employee 643 shares of common stock for an aggregate purchase price of $64.30 pursuant to an exercise of an option grant. This transaction was exempt from registration under rule 701. 49. On December 15, 1999, Registrant issued and sold to a director 180,000 shares of common stock for an aggregate purchase price of $27,000 pursuant to an exercise of an option grant. This transaction was exempt from registration under rule 701. 50. On December 17, 1999, Registrant granted to 104 employees options to purchase an aggregate of 826,900 shares of common stock at an exercise price of $5.00 per share. This transaction was exempt from registration under rule 701. 51. On December 17, 1999, Registrant granted to its Chief Executive Officer, Eric J. Kuhn, an option to purchase 690,940 shares of common stock at an exercise price of $5.00 per share. This transaction was exempt from registration under rule 701. 52. On December 17, 1999, Registrant granted to 213 of its lead student representatives options to purchase an aggregate of 21,300 shares at an exercise price of $5.00 per share. This transaction was exempt from registration under rule 701. 53. On December 23, 1999, Registrant issued to America Online, Inc. a contingent warrant to purchase 463,246 shares of common stock at an exercise price equal to the initial public offering price in conjunction with a marketing agreement entered into between the Registrant and America Online. This transaction was exempt from registration under rule 506 of Regulation D. The amount of shares in this item is shown after giving effect to the reverse stock split. 54. On January 19, Registrant issued to Imperial Bank, a warrant to purchase 37,500 shares of common stock at an exercise price equal to the initial public offering price in conjunction with a credit agreement entered into between the Registrant and Imperial Bank. This transaction was exempt from registration under rule 506 of Regulation D. The amount of shares in this item is shown after giving effect to the reverse stock split. 55. On January 31, Registrant granted 52 employees and 414 student representatives options to purchase an aggregate of 696,300 shares at an exercise price of $5.00 per share. This transaction was exempt from registration under rule 701. 56. On February 3, Registrant issued to Sallie Mae, Inc., contingent warrants to purchase up to an aggregate of 616,863 shares of common stock at an exercise price equal to the initial public offering price in conjunction with a product promotion agreement entered into between the Registrant and Sallie Mae. This transaction was exempt from registration under rule 506 of Regulation D. The amount of shares in this item is shown after giving effect to the reverse stock split. 57. On February 3, Registrant granted to its Chief Executive Officer, Eric J. Kuhn, an option to purchase 215,826 shares of common stock at an exercise price of $5.00 per share. This transaction was exempt from registration under rule 701. The sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or, with respect to issuances to employees, directors and consultants, rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under such rule 701. The recipients of securities in each of these transactions represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate II-6 Table of Contents legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationship with the Registrant, to information about the Registrant. ITEM 16. Exhibits and Financial Statement Schedules a) Exhibits. Exhibit No. Description 1.1** Form of Underwriting Agreement. 3.1** Amended and Restated Certificate of Incorporation of the registrant, as amended to date. 3.2** Form of Amended and Restated Certificate of Incorporation of the registrant, to be effective after the closing of the offering made pursuant to this registration statement. 3.3** Bylaws of the registrant, as amended to date. 3.4** Form of Amended and Restated Bylaws of the registrant, to be effective after the closing of the offering made pursuant to this registration statement. 4.1** Specimen Certificate of the registrant s common stock. 4.2** Fourth Amended and Restated Investor Rights Agreement. 4.3** Registration Rights Agreement with Campus Pipeline dated as of April 27, 1999. 5.1** Opinion of Shaw Pittman, counsel to the registrant. 10.1** Form of Indemnification Agreement entered into between the registrant and its directors and executive officers. 10.2** 1998 Stock Option Plan. 10.3** Amended and Restated Operating Agreement by and between Baker Taylor, Inc. and VarsityBooks.com Inc. dated as of October 1, 1999. 10.4** Amended and Restated Database License Agreement by and between Baker Taylor, Inc. and VarsityBooks.com Inc. dated as of October 1, 1999. 10.5** Amended and Restated Drop Ship Agreement by and between Baker Taylor, Inc. and VarsityBooks.com Inc. dated as of October 1, 1999. 10.6** Promotional and Customer Service Agreement by and between Baker Taylor, Inc. and VarsityBooks.com Inc. dated as of October 1, 1999. 10.7** Agreement for Eric J. Kuhn. 10.8** Agreement for Timothy J. Levy. 10.9** Sublease by and between Student Loan Marketing Association and VarsityBooks.com Inc. dated as of January 19, 1999. 10.10** Sublease by and between AT T Corp. and VarsityBooks.com Inc. dated as of September 7, 1999. 10.11** Employee Stock Purchase Plan. 10.12 Interactive Marketing Agreement by and between ICQ, Inc. and the Registrant dated as of December 22, 1999. 10.13 ** Credit Agreement by and between VarsityBooks.com Inc. and Imperial Bank, dated as of January 19, 2000 10.14 ** Marketing Services Agreement by and between VarsityBooks.com Inc. and Sallie Mae, Inc., dated as of February 3, 2000 10.15 ** Product Promotion Agreement by and between VarsityBooks.com Inc. and Sallie Mae, Inc., dated as of February 3, 2000 11.1** Computation of Earnings Per Common Share. II-7 Table of Contents Exhibit No. Description 16.1** Letter from KPMG LLP in accordance with Item 304(a) of Regulation S-K. 21.1** List of Subsidiaries. 23.1 Consent of PricewaterhouseCoopers LLP. 23.3** Consent of Shaw Pittman, counsel to the registrant (included in Exhibit 5.1). 24.1** Power of Attorney. 27.1** Financial Data Schedule. 27.2** Financial Data Schedule. * To be filed by amendment. ** Previously filed. confidential treatment sought b) Financial Statement Schedule Financial Statement Schedules are not listed because the information required to be set forth therein is not applicable or is shown in the financial statement or notes thereto. ITEM 17. Undertakings The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification by the Registrant for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this registration statement, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-8 Table of Contents SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 9 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Washington, D.C., on the 14th day of February 2000. VARSITYBOOKS.COM INC. By: /s/ TIMOTHY J. LEVY Name: Timothy J. Levy Title: Executive Vice President, Development Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 9 to Registration Statement has been signed by the following persons in the capacities and on the dates indicated below. Signature Title Date /s/ ERIC J. KUHN* Eric J. Kuhn Chairman of the Board of Directors, Chief Executive Officer and President (Principal Executive Officer) February 14, 2000 /s/ TIMOTHY J. LEVY Timothy J. Levy Executive Vice President, Development and Director February 14, 2000 /s/ RICHARD HOZIK* Richard Hozik Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) February 14, 2000 /s/ JONATHAN N. GRAYER* Jonathan N. Grayer Director February 14, 2000 /s/ ALLEN L. MORGAN* Allen L. Morgan Director February 14, 2000 /s/ ANDREW J. OLESZCZUK* Andrew J. Oleszczuk Director February 14, 2000 /s/ GENE RIECHERS* Gene Riechers Director February 14, 2000 /s/ JAMES S. ULSAMER* James S. Ulsamer Director February 14, 2000 * Timothy J. Levy, by signing his name hereto, does hereby sign this Amendment No. 9 to Registration Statement on behalf of each of the directors and officers of the Registrant after whose typed names asterisks appear pursuant to powers of attorney duly executed by such directors and officers and filed herewith with the Securities and Exchange Commission as exhibits to this Amendment No. 9 to Registration Statement. By: /s/ TIMOTHY J. LEVY Timothy J. Levy Attorney-in-fact II-9 Net loss (2,689 ) (1,326 ) (19,157 ) Preferred stock dividends Net loss (2,689 ) (1,326 ) (19,157 ) Preferred stock dividends Net loss (2,689 ) (1,326 ) (19,157 ) Preferred stock dividends Investing activities: Additions to fixed assets (106 ) (28 ) (1,167 ) Purchase of investment securities (697 ) (697 ) Proceeds from sale of investment securities 698 ASSETS Current assets: Cash and cash equivalents $ 1,481 $ 28,630 Accounts receivable, net of allowance for doubtful accounts of $-0- at December 31, 1998 and September 30, 1999 1 881 Prepaid expenses and other 164 earnings per share data. Under SFAS No. 128 the Company is required to present basic and diluted earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that shared in the earnings of the Company. The reconciliation of the basic and diluted earnings per share computations for the year ended December 31, 1998 and the nine months ended September 30, 1999, is as follows: Nine Months Ended December 31, 1998 1998 Table of Contents CAPITALIZATION The following table sets forth the capitalization of VarsityBooks.com as of September 30, 1999 on an actual basis and an as adjusted basis. The as adjusted capitalization gives effect to: the filing of our amended and restated certificate of incorporation; and the conversion of all of our outstanding shares of Series A, Series B and Series C preferred stock into 8,966,879 shares of common stock upon consummation of the offering and our sale of 4,000,000 shares of common stock in the offering and receipt and application of the estimated net proceeds from the offering, at an assumed initial public offering price of $10.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses. This information should be read in conjunction with our financial statements and the related notes appearing elsewhere in this prospectus. This table excludes the following shares as of September 30, 1999: 1,201,963 shares of common stock issuable upon the exercise of stock options outstanding under our employee stock option plan at a weighted average exercise price of $1.11 per share and 893,007 additional shares of common stock reserved for issuance under our stock option plan, and 455,350 shares of common stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $2.41 per share. From September 30, 1999 through December 31, 1999, we: granted options to purchase an aggregate of 904,820 shares of common stock at a weighted average exercise price of $9.70 per share; reserved 1,905,030 additional shares of common stock for issuance under our stock option plan, leaving 2,024,036 additional shares reserved for issuance under our stock option plan as of December 31, 1999; issued a warrant to purchase 493,246 shares of common stock at the initial public offering price to AOL, which represents the aggregate number of shares that may be purchased by AOL pursuant to the warrant issued to AOL in December 1999 but does not include the additional warrant to purchase 1,125 shares of common stock we granted to AOL when we entered into definitive agreements with Imperial Bank and the additional warrant to purchase 34,367 shares of common stock we granted to AOL when we entered into the product promotion agreement with Sallie Mae; and reserved 500,000 shares of common stock for future issuances under our employee stock purchase plan. As of September 30, Year Ended December 31, 1998 1998 Year Ended December 31, 1998 1998 Year Ended December 31, 1998 1998 December 31, 1998 1998 Robertson Stephens Thomas Weisel Partners LLC Friedman Billings Ramsey DLJdirect Inc. The date of this Prospectus is , Robertson Stephens International Thomas Weisel Partners LLC Friedman Billings Ramsey International DLJdirect Inc. The date of this Prospectus is , VARSITYBOOKS.COM INC. (Exact Name of Registrant as Specified in its Charter) Delaware Summary 4
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+Prospectus Summary You should read the following summary together with the more detailed informa- tion and our financial statements and notes appearing elsewhere in this pro- spectus before you decide to purchase our common stock. Except as otherwise indicated, the share information in this prospectus assumes that the underwriters do not exercise the option granted by us to purchase ad- ditional shares in this offering to cover over-allotments and assumes, upon consummation of this offering, the redemption or conversion of all of our pre- ferred stock and the exercise of warrants to purchase common stock that will expire if not exercised prior to the consummation of this offering. Total Sports Inc. Total Sports is an event-centered, online sports media company. We provide sports fans and enthusiasts with live, or real-time, simulcasts of events in eight collegiate and professional sports, game summaries, in-depth statistical analysis, breaking news and the opportunity to purchase sports-related merchan- dise. We believe we are differentiated from our competitors by our live-event focus and our business architecture, which consists of our combination of pro- prietary technology and people who cover live events and provide other sports content. Our business architecture enables us to provide statistically de- tailed, real-time coverage and continually update and customize content. We gather sports-related information and rapidly distribute it via the Internet. Our contractual relationships with the NCAA through Host Communications, Major League Baseball and Sports Illustrated provide us the majority of our content. Our contractual relationship with NBC Sports, a Total Sports stockholder, pro- vides us with the majority of our promotion on television. Our objective is to become the leading global online sports media company with a focus on live event coverage. We derive our revenues from three primary sources: . Digital publishing, or selling sponsorships and advertisements, licensing sports information to our customers and providing Web site development serv- ices; . Print publishing, or selling sports-related books; and . E-commerce, or selling sports equipment, apparel and memorabilia over the Internet. In 1999, digital publishing revenues accounted for 62.9% of our revenues, print publishing revenues accounted for 21.3% of our revenues and e-commerce revenues accounted for 15.8% of our revenues. Users access our content in a number of ways, including: . through our two main navigation sites, www.totalsports.net and www.totalsports.com, which help users find our specific site covering the sport, league or team in which they are interested; . through our five sports networks, which consist of groups of our individual sites, organized by sport, league, school or team, and linked together for easy navigation; . directly through one of our over 100 individual Web sites for sports, leagues, schools or teams; or . through the over 250 Web sites of our distribution customers to whom we dis- tribute sports content. Each of our five sports networks provides users with live event coverage, his- torical databases, expert analysis and breaking news for a particular sport: . Total College Sports Network; . Total Baseball Network; . Total Golf Network; . Total Motor Racing Network; and . Total Sportfishing Network. We believe our network approach provides users with an alternative that makes it easier to navigate, find and use relevant sports-related content, statistics and applications on the Internet. In addition, our event-centered approach al- lows for targeted merchandising that takes advantage of specific sporting events. Our business architecture allows us to rapidly collect sports content from a wide variety of sources, convert the content into one master format, and then customize and distribute that content quickly and efficiently on our Total Sports networks and to our distribution customers. We provide online, live- event sports programming through our proprietary simulcast technology, TotalCast, which integrates interactive graphical, textual and statistical analysis and information into a real-time graphical and textual depiction. In 1999, we provided live coverage of over 4,000 sporting events using our TotalCast and other simulcast technologies. We believe Total Sports offers benefits to users, customers, sponsors, adver- tisers and merchants. For example: . Our graphical and textual presentation of live sporting events allows our users to experience interactive play-by-play, real-time coverage over the Internet while simultaneously receiving extensive and authoritative statis- tical analysis and information. . We supply our customers, who include online news and entertainment compa- nies, broadcasters, leagues, athletic conferences and teams, with real-time, event-centered sports coverage, attractive e-commerce and advertising oppor- tunities, and outsourced sports content while maintaining their brand integ- rity. . We provide our sponsors, advertisers and merchants with a large and demo- graphically attractive user base and targeted sales channels. The growth of the online sports market presents an attractive alternative for advertisers and merchants to reach sports enthusiasts. The total number of Web users world-wide will increase from approximately 196 million in 1999 to 502 million by 2003, according to International Data Corporation. We believe, based on our market research conducted in 1999, that sports-related Web sites are the third most visited category on the Internet, and over 75% of all Internet users have visited sports-related sites, averaging approximately 1.7 visits a day. The popularity of sports has created significant opportunities to generate rev- enue from advertising, live event sponsorship and sports-related commerce. While the online sports market is new and rapidly evolving, we believe that traditional media sports-related revenues indicate the opportunities available online in the future. For example, based on research conducted by Sports Mar- keting magazine, our management estimates that in 1998, between $12.2 billion and $14.2 billion was invested globally in sports through the sponsorship of events, federations, teams, individuals and stadiums. In the United States, spectator sporting events, the sale of sporting goods and the sale of sports publications generated approximately $130 billion of revenue in 1995, according to the Georgia Institute of Technology. Additionally, approximately $4.8 bil- lion was spent in 1998 on sports-related television advertising, according to Paul Kagan & Associates. Factors to Consider Before Investing See "Risk Factors" starting on page 5 to read about factors you should consider before you buy shares of our common stock. These factors include the following: - We have a history of significant losses, having lost over $35.8 million since inception; - We expect losses for the foreseeable future; - We operate in a highly competitive market; and - After this offering, our executive officers and directors will be able to control the election of directors and other stockholder votes because they will beneficially own or control, collectively, approximately 56.80% of our outstanding stock. The Offering <TABLE> <S> <C> Common Stock Offered......................... 4,166,667 shares Common Stock Outstanding after the Offering.. 16,869,385 shares Over-Allotment Option........................ 625,000 shares Use of Proceeds.............................. We intend to use the net proceeds we receive from this offering for expansion of our marketing efforts and technology infrastructure, strategic acquisitions and general corporate purposes, including working capital. Proposed Nasdaq National Market Symbol "TSPT" </TABLE> The outstanding share information set forth above is based on the number of shares of our common stock outstanding on December 31, 1999 and includes a to- tal of 4,635,100 shares of common stock which will be issued upon the consumma- tion of this offering as a result of the conversion of all outstanding shares of our Series B preferred stock, Series C preferred stock, Series C1 preferred stock, Series D preferred stock and Series E preferred stock, and the assumed cashless exercise of outstanding warrants to purchase 102,716 shares of common stock that will expire if not exercised prior to the consummation of this of- fering, resulting in the issuance of 46,504 shares. The outstanding share in- formation also includes shares of common stock issuable to holders of Series D preferred stock and to NBC Sports upon consummation of this offering if the per share offering price is less than $33.18 with respect to holders of our Series D preferred stock and $32.11 with respect to our common stock issued to NBC Sports. Based upon a per share offering price of $12.00 (the midpoint of the range shown on the cover page of this prospectus), we would issue an additional 3,778,641 shares of common stock to holders of Series D preferred stock and an additional 1,359,810 shares of common stock to NBC Sports. See "Business--Stra- tegic Relationships" and "Certain Relationships and Related Transactions" for a description of our relationship with NBC Sports, including the provisions re- quiring the additional issuance of these shares. At the time of the consumma- tion of this offering, we will redeem all of our outstanding shares of Series A preferred stock. The outstanding share information set forth above excludes: . 468,773 shares of common stock issuable upon the exercise of stock options outstanding under our 1997 stock plan as of December 31, 1999 with a weight- ed-average exercise price of $9.37 per share; . an additional 702,838 shares reserved for issuance under our 1997 stock plan; . 1,826,947 shares of common stock issuable upon exercise of outstanding war- rants (including warrants for Series B preferred stock and Series D1 pre- ferred stock that will convert into warrants to purchase our common stock upon consummation of this offering) as of December 31, 1999, with a weight- ed-average exercise price of $11.18 per share, that are not required to be exercised in connection with and will not expire upon the consummation of this offering; and . 15,067 shares of common stock issuable upon the exercise of outstanding war- rants with an exercise price greater than $12.00 per share (the midpoint of the range shown on the cover page of this prospectus) that will expire if not exercised prior to the consummation of this offering. -------------- We were incorporated in North Carolina in February 1997 and reincorporated in Delaware in June 1998. Our principal executive office is located at 234 Fay- etteville Street, Raleigh, North Carolina 27601, and our telephone number at that location is (919) 573-8020. Our primary Web sites are located at www.totalsports.com and www.totalsports.net. Information on our Web sites is not part of this prospectus. Summary Financial Data The following tables present summary historical financial data that should be read together with "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the financial statements and other financial data presented elsewhere in this prospectus. The adjusted pro forma amounts shown below reflect the June 4, 1999 acquisition of Long Distance Technologies, Inc., d/b/a Motortrax as if the acquisition oc- curred on January 1, 1999. The adjusted pro forma loss per common share and weighted-average shares data and the pro forma as adjusted balance sheet data shown below reflect, upon completion of this offering, the redemption of all of our outstanding Series A preferred stock, the conversion into common stock of all of our outstanding Series B preferred stock, Series C preferred stock, Se- ries C1 preferred stock, Series D preferred stock and Series E preferred stock, the assumed cashless exercise of warrants to purchase 102,716 shares of common stock that will expire if not exercised prior to the consummation of this of- fering, the issuance of additional shares of our common stock based upon an as- sumed initial per share offering price of $12.00 (the midpoint of the range shown on the cover page of this prospectus) to holders of our Series D pre- ferred stock and to NBC Sports, and the sale of 4,166,667 shares of common stock at an assumed initial public offering price of $12.00 (the midpoint of the range shown on the cover page of this prospectus) after deducting estimated underwriting discounts and offering expenses. <TABLE> <CAPTION> -------------------------------------------------- Adjusted February 20, Years Ended Pro Forma 1997 to December 31, Year Ended December 31, ---------------------- December 31, 1997 1998 1999 1999 ------------ ---------- ---------- ------------ Dollars in thousands, except per share data <S> <C> <C> <C> <C> Statement of Operations Data: Revenues: Digital publishing........... $ 738 $ 2,083 $ 5,397 $ 5,444 Print publishing............. 257 1,315 1,831 1,831 E-commerce................... 14 435 1,356 1,356 ---------- ---------- ---------- ----------- Total revenues............... 1,009 3,833 8,584 8,631 Cost of Revenues: Digital publishing........... 1,395 3,567 8,605 8,779 Print publishing............. 411 2,375 3,334 3,334 E-commerce................... 1 332 1,192 1,191 ---------- ---------- ---------- ----------- Total cost of revenues....... 1,807 6,274 13,131 13,304 ---------- ---------- ---------- ----------- Gross loss.................... (798) (2,441) (4,547) (4,673) Operating Expenses: Product development.......... 1,467 2,672 4,171 4,191 Sales and marketing.......... 600 2,744 5,389 5,433 General and administrative... 846 2,599 4,951 5,110 Amortization................. 32 185 1,520 3,622 ---------- ---------- ---------- ----------- Total operating expenses..... 2,945 8,200 16,031 18,356 Operating loss................ (3,743) (10,641) (20,578) (23,029) Other income (expense), net.......................... 43 (523) (359) (358) ---------- ---------- ---------- ----------- Net loss...................... $ (3,700) $ (11,164) $ (20,937) $ (23,387) ---------- ---------- ---------- ----------- Dividends on Series A preferred stock.............. (144) (197) (194) -- Dividends on Series D preferred stock from beneficial conversion feature...................... -- -- -- (29,402) Redemption of Series A preferred stock.............. -- -- -- 1,536 ---------- ---------- ---------- ----------- Net loss applicable to common stockholders.......... $ (3,844) $ (11,361) $ (21,131) $ (51,253) ========== ========== ========== =========== Historical basic income (loss) per common share...... $(3.17) $(7.28) $ (11.88) -- Historical weighted-average common shares outstanding.... 1,214,419 1,560,903 1,778,670 -- Adjusted pro forma basic income (loss) per common share........................ -- -- -- $ (3.04) Adjusted pro forma weighted- average common shares outstanding.................. -- -- -- 16,869,385 </TABLE> <TABLE> <CAPTION> ------------------------------------- As of As of December 31, December 31, 1999 ---------------- ------------------- Pro Forma 1997 1998 Actual As Adjusted ------- ------- ------- ----------- <S> <C> <C> <C> <C> Balance Sheet Data (at period end): Working capital (deficit)............ $(2,763) $(3,726) $14,686 $59,786 Property and equipment, net.......... 742 1,307 3,438 3,438 Total assets......................... 2,638 5,697 28,794 73,894 Line of credit, notes payable and capital lease obligations........... 2,414 3,623 963 963 Redeemable Series A preferred stock.. 1,145 1,343 1,537 -- Stockholders' equity (deficit)....... (2,090) (2,000) 20,251 66,887 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001070380_saba_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001070380_saba_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read this summary together with the entire prospectus, including the more detailed information in our consolidated financial statements and accompanying notes appearing elsewhere in this prospectus. Unless otherwise indicated, all information contained in this prospectus assumes (1) the conversion of each outstanding share of preferred stock into one share of our common stock, (2) an amendment to our Certificate of Incorporation authorizing 5,000,000 shares of preferred stock and 200,000,000 shares of common stock and (3) no exercise of the underwriters' over-allotment option. SABA We are a provider of software and services that enable businesses and governments to create and deploy global networks over the Internet that connect people to learning. Our Internet-based software platform and related services enable organizations to procure and deliver learning and systematically close knowledge and competency gaps across their base of employees, customers, partners and suppliers, known as the "extended enterprise." In addition, we offer learning providers an Internet-based global marketing and distribution channel. We recently launched the Saba Learning Exchange, an Internet-based business-to-business learning marketplace. The Saba Learning Exchange is designed to enable businesses, governments and learning providers to buy and sell learning offerings, such as on-line and off-line courses and related materials, as well as collaborate within learning communities. As of December 31, 1999, our software was licensed for use by over two million people and more than 20,000 third-party learning offerings were accessible on Saba learning networks. Our significant customers include 3Com, Agilent, Anheuser-Busch, Cisco Systems, Continental Airlines, DaimlerChrysler, Ford, General Electric, Hyundai, Lucent Technologies, Procter & Gamble and Qwest Communications. Our learning offerings are available from over 50 third-party learning providers, including DigitalThink, ExecuTrain, IBM Catapult, International Air Transport Association, NETg, PROVANT, SkillSoft and the Sun-Netscape Alliance. To remain competitive in today's rapidly changing business environment, organizations must continually strive to improve the knowledge and competencies of their extended enterprises. A more knowledgeable and competent extended enterprise leads to improved performance through, among other things, increased productivity, reduced time and expense associated with bringing new products and services to market, and improved customer satisfaction and loyalty. Because of these benefits, many organizations make significant learning investments. However, they are unable to realize the full potential of these investments because traditional learning management solutions typically fail to address the full spectrum of an organization's learning management needs. Additionally, learning providers have faced significant limitations on their ability to develop, market, sell, distribute and improve their content offerings. The rapid adoption of the Internet has created an opportunity to solve many of the shortcomings of the business learning market. The Internet has the potential to significantly improve the procurement, deployment and management of learning offerings. However, existing offerings did not take full advantage of the Internet and usually were not designed to serve as an integrated solution capable of improving the manner in which learning is managed across the extended enterprise. As a result, we believe there is a significant opportunity for a software and services solution that is designed to leverage the benefits of the Internet to create learning networks to meet the needs of businesses, their employees, customers, partners and suppliers, as well as the needs of third-party learning providers. Our integrated software platform consists of the Saba Learning Network and Saba Learning Provider Network software applications, as well as Saba Learning Exchange. Saba Learning Network is an Internet-based software application that allows enterprises to assess the learning needs of individuals and organizations, select and purchase on-line and off-line learning materials and programs, track individual learners' progress, and manage enterprise-wide learning initiatives. Saba Learning Provider Network is an Internet-based software application that enables learning providers to develop, market, sell and distribute on-line and off-line learning materials to organizations worldwide. Saba Learning Exchange is a business-to-business learning marketplace that is designed to serve as a single point of access for the highly fragmented learning market. We also provide a full range of strategic consulting, business process reengineering, and technical implementation and support services for our customers. We have generated most of our revenues to date from license fees for our Saba Learning Network and Saba Learning Provider Network software products and related services, including implementation, consulting, support and education services. We intend to pursue transaction-based revenues, as well as other forms of revenues, from our recently introduced Saba Learning Exchange. We intend to increase the number of learners and providers using our Internet-based platform in order to create the leading global exchange that connects people to learning. Key elements of our strategy include: - Increasing the number of our Global 2000 and government customers; - Extending penetration within our existing customer base and their affiliates; - Increasing the number of learning offerings in our network; - Expanding Saba Learning Exchange; - Expanding our international presence; and - Developing new uses and markets for the Saba platform. We were incorporated in Delaware in April 1997. Our headquarters are located at 2400 Bridge Parkway, Redwood Shores, California 94065, and our telephone number at this location is (650) 696-3840. We maintain a World Wide Web site at www.saba.com. The reference to this World Wide Web site address does not constitute incorporation by reference of the information contained therein. Saba, the Saba logo, Saba Software, saba.com, Saba Learning Exchange, the phrase "Connecting People to Learning", the phrase "Connect People to Learning", Saba Learning Network Solution, Saba Learning Network, Saba Learning Provider Network, Saba Learning e-Store and the marks relating to other Saba products and services referenced are our trademarks and service marks. All other trademarks appearing in this prospectus are the property of their respective owners. THE OFFERING Common stock offered.................... 4,000,000 shares Common stock offered in the concurrent private placement to an entity affiliated with Singapore Telecommunications.................... 409,165 shares(1) Common stock to be outstanding after the offering and the concurrent private placement............................. 42,905,772 shares Use of proceeds from the offering and the concurrent private placement........ For general corporate purposes, including working capital and capital expenditures. See "Use of Proceeds". Proposed Nasdaq National Market symbol.................................. "SABA" The number of shares of our common stock to be outstanding after the offering and the concurrent private placement is based on 38,496,607 shares outstanding as of March 31, 2000 and excludes: - 7,481,891 shares of our common stock subject to outstanding options and warrants as of March 31, 2000; and - 8,679,163 additional shares of our common stock available for future grant or purchase under our stock plans as of March 31, 2000. - --------------- (1) Determined based on an assumed initial public offering price of $13.00 per share. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> PERIOD FROM APRIL 16, 1997 SIX MONTHS ENDED (INCEPTION) NOVEMBER 30, THROUGH YEAR ENDED ------------------- MAY 31, 1998 MAY 31, 1999 1998 1999 --------------- ------------- -------- -------- (UNAUDITED) <S> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues................................ $ 40 $ 1,939 $ 483 $ 5,204 Gross profit (loss)..................... (32) 675 195 2,476 Total operating expenses................ 1,531 11,572 2,807 20,309 Loss from operations.................... (1,563) (10,897) (2,612) (17,833) Net loss................................ (1,571) (10,852) (2,601) (17,677) Basic and diluted net loss per share(1).............................. (0.17) (0.84) (0.20) (1.26) Shares used in computing basic and diluted net loss per share(1)......... 9,439 12,987 12,896 13,996 Pro forma basic and diluted net loss per share (unaudited)..................... $ (0.52) $ (0.62) Shares used in computing pro forma basic and diluted net loss per share (unaudited)........................... 20,881 28,557 </TABLE> <TABLE> <CAPTION> NOVEMBER 30, 1999 ------------------------ AS ACTUAL ADJUSTED(2) -------- ------------- (UNAUDITED) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $29,390 $81,750 Working capital............................................. 23,955 76,315 Total assets................................................ 40,188 92,548 Long-term obligations, less current portion................. 2,615 2,615 Total stockholders' equity.................................. 24,961 77,321 </TABLE> - --------------- (1) See note 2 of notes to our consolidated financial statements for an explanation of the determination of the number of shares used in computing per share amounts. (2) The as adjusted consolidated balance sheet data gives effect to the sale of our shares of common stock in this offering and in the concurrent private placement, assuming an initial public offering price of $13.00 per share, and after deducting the estimated underwriting discounts and commissions and the estimated offering expenses. See "Capitalization".
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001073091_freerealti_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001073091_freerealti_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights some of the information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk Factors" and the financial statements and notes to those statements appearing elsewhere in this prospectus. OUR COMPANY We are a Web-centric financial media and investment services company, empowering independent investors with real-time actionable insight, including market data, research and tools, to make knowledgeable investing decisions. We provide investment information services to a wide range of individual and institutional investors, with an emphasis on an audience that we refer to as Sophisticated Online Home and Office investors, which include independent investors, smaller institutional investors, and investment professionals such as executives, managers, and brokers and their clients. In excess of 1.3 million investors have registered for our online services, including www.FreeRealtime.com, www.RedChip.com, and the Red Chip Review and related research services. We estimate that by publishing and distributing investment information we reach our investor audience several million times every month and, during the month of September 2000, our investor audience viewed in excess of 140 million pages of investment information on our various services. We produce and distribute a broad range of investment information services, with a focus on "real-time actionable insight" by offering free, real-time stock quotes and value-added content, including news, market commentary, company research, and analytical tools such as charting and portfolio stock tracking. We publish value-added content from a number of allied content partners as well as from our own proprietary research group, the Red Chip Review. In proprietary content our strategy is to provide value discovery and insight for our investors with in-depth coverage on sectors and companies that are largely overlooked by traditional Wall Street investment banks. Our award-winning Red Chip Review, including our professional staff of approximately 30 analysts, editors and reporters, concentrate on "discovering tomorrow's blue chips today" with independent research on over 300 companies, financial analysis and commentary created every trading day, and investment profiles on over 5000 publicly traded companies. We deliver our information services across an integrated platform of various media including Websites, e-mail, print publications, investor conferences, webcasts, teleconferences and certain broadcast media, and we characterize ourselves as "web-centric" because we strive to have the best practices and capabilities of the Web - such as real timeliness, interactivity and customer targeting - influence the quality and delivery of our information over these media. Our investment information services are offered on a "tiered" basis with a substantial amount of free content, centered around our FreeRealtime.com Web site, and certain premium research and tools available on a pay or subscription basis. Our free services are supported through the sale of advertising to media advertisers, corporate advertisers, and sponsors and partners. We believe we have a demographically attractive audience for our advertisers because, based on customer survey and research, our investor audience has income, wealth, education and consumption attributes above those of the average U.S. consumer. We also offer subscription services from both allied service providers as well as services that we own and operate, including our BullSession web site, a subscription service of "streaming" real-time stock quotes and dynamically updating stock portfolios, and the Red Chip Review research service. Our various subscription services have prices ranging from $99 to $25,000 per year. While our service strategy remains focused on being a leading "independent knowledge source for investors," in response to requests from our investor audience we are developing "one click" away securities trading and transaction services, which will be offered through allied partners and affiliates. We have formed and own majority interest in www.DigitalOffering.com and have recently received regulatory approval to operate as a registered broker/dealer, which will allow DigitalOffering to realize commissions from securities transactions and to participate in fee sharing arrangements associated with transactions conducted through third party allies. Currently, as many of our information services are offered free of charge to our registered users, the sale of advertising represents our major source of revenue; however, if we develop towards our "long term operating model," then subscription and services sales and transaction fees and commissions are expected to represent the majority of our sales. -------------------------------------------------------------------------------- The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted. -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED , 2000 PROSPECTUS 4,317,867 SHARES [FREEREALTIME.COM LOGO] COMMON STOCK ------------------------- The selling stockholders, identified in this prospectus are selling 4,317,867 shares of common stock. We are not selling any shares of our common stock under this prospectus and we will not receive any of the proceeds from the shares of common stock sold by the selling stockholders. The selling stockholders may sell the shares of common stock described in this prospectus in a number of ways and at varying prices. We provide more information about how the selling stockholders may sell their shares in the section entitled "Plan of Distribution" on page 46. Our common stock is currently quoted on the OTC Bulletin Board under the trading symbol "FRTI." On November 13, 2000 the last reported sale price of our common stock on the OTC Bulletin Board was $2.25 per share. ------------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 4 TO READ ABOUT FACTORS YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK. ------------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. , 2000 In recent years, there has been substantial growth in the ownership of securities, as well as a related increase in securities trading volumes. For every securities transaction, investors typically engage in multiple information transactions, including price quotes, research, financial news and portfolio review and tracking and, therefore, the growth in ownership and associated trading activity has created substantial demand by investors for more market data, investment research, news and commentary. The development of the Web as both a robust communications medium and an efficient commerce marketplace is also rapidly changing the markets for securities transactions and investment information services. Consequently, individual investors -- with easy access to Web-based information previously available generally only to investment professionals and to faster, cheaper and more convenient online trading -- have been taking greater control of their investments. Increasingly, this growing group of self-directed investors is seeking timely, independent and insightful market data, investment research and financial news and commentary that can help them make knowledgeable investing decisions. On August 18, 2000, we acquired RedChip.com, Inc., a Delaware corporation. RedChip is an independent research firm with an online vertical portal, www.redchip.com, which provides proprietary research and targeted information on emerging growth companies with a strategy of "discovering tomorrow's blue chips today." In conjunction with a recent significant purchase by Jefferies & Co., Inc. of our common stock, we have entered into a non-binding letter of intent with Jefferies regarding a wide-ranging strategic alliance to provide online financial transaction services and to jointly market investment information services. The proposed alliance includes the contribution by Jefferies of certain technology resources, including licenses for existing trading systems and programming and development resources for co-developed trading and execution products and services, in exchange for shares of our common stock, which shares may be valued at prices equal to or higher than the offering price described herein. Our executive offices are located at 3333 Michelson Drive, Suite 430, Irvine, CA 92612. Our telephone number is (949) 833-2959 and our Web site is www.FreeRealtime.com. Information contained on our Website does not constitute any part of this prospectus.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001073104_medibuy_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001073104_medibuy_prospectus_summary.txt
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+PROSPECTUS SUMMARY Before making an investment decision, you should read the following summary together with the more detailed information regarding us and our common stock and our financial statements and the notes to our financial statements appearing elsewhere in this prospectus. You should also carefully consider the information discussed in "Risk Factors". MEDIBUY.COM, INC. medibuy.com operates a leading business-to-business Internet marketplace for the purchase and sale of medical and non-medical products and services used by the healthcare industry worldwide. Through our Web site at www.medibuy.com, we offer an online marketplace which enables buyers and sellers to reduce many of the inefficiencies of the traditional healthcare supply chain. We provide buyers and sellers with a flexible and secure exchange to conduct daily commerce and access the latest information relating to products, services, pricing and market trends. We capture valuable transaction information which our customers can access through a variety of reporting and analytical tools. To accelerate adoption of our marketplace solution, we have established strategic relationships with a number of companies, including: - PREMIER. Premier Purchasing Partners, L.P., an affiliate of Premier, Inc., is one of the largest group purchasing organizations in the United States. Group purchasing organizations aggregate the purchasing volume of their member hospitals in order to negotiate contracts with favorable pricing and terms with sellers of medical and non-medical products and services. We will be the exclusive e-commerce marketplace that Premier will offer to its 1,800 member hospitals. - HEALTHEON/WEBMD. We will create and cooperatively market a co-branded online marketplace for Healtheon/WebMD's physician members. - DRUGSTORE.COM. We will create and cooperatively market a co-branded online marketplace with drugstore.com for home healthcare providers. - ALLIANZ CAPITAL PARTNERS. Allianz will assist us with the expansion of our marketplace in Europe. We estimate that the market for new medical products, supplies and equipment used by healthcare providers is $83 billion in the United States and $150 billion worldwide. These estimates do not include services or non-medical or used products, supplies and equipment purchased by healthcare providers, which we believe will contribute significantly to our market opportunity. In the United States, there are over 22,000 medical supplies manufacturers and distributors selling products to approximately 6,000 hospitals and hundreds of thousands of other healthcare providers. In addition, there are non-medical manufacturers and distributors that sell their products to healthcare providers and various organizations that market services such as maintenance, nursing care, home care and medical billing to these providers. The traditional process of buying and selling products and services used by the healthcare industry is time consuming and inefficient and does not adequately address the needs of buyers and sellers. A 1996 study published by a consortium of healthcare providers and suppliers known as the Efficient Healthcare Consumer Response found that $11 billion is spent annually in the United States on avoidable costs associated with healthcare supply chain inefficiencies. These inefficiencies result from a number of factors, including the large number of geographically dispersed buyers and sellers, the multi-facility nature of many healthcare providers, and the heavy reliance on telephones, faxes, catalogs and electronic data interchange, or EDI. To address these inefficiencies and to better serve buyers and sellers, we have created an online marketplace that spans the breadth of purchasing activities. Our eCatalog service provides buyers with access to the latest market pricing as well as a customer's own contracted product pricing, transaction activity reporting and current product availability information, and provides sellers with cost-effective access to new customers and markets. Our eRFP service automates the time-consuming, paper-based processes of distributing a request-for-proposal to appropriate sellers and coordinating responses from the seller community. Through our eAuction service, we offer auction capabilities enabling users to buy and sell new and used medical equipment. Our eSpecials service allows the seller community to actively promote and sell products and offer discounted prices directly to the buyer. All of our e-commerce services are powered by our proprietary electronic catalog technologies, which enable online transactions with multiple parties. Our online marketplace provides substantial benefits to participating buyers and sellers by reducing order processing and tracking costs and improving the utilization of data relating to products, services, transactions, and market trends. In addition, our online marketplace benefits buyers by providing access to a global seller community and by streamlining the purchasing process. Our online marketplace also benefits sellers by providing access to a worldwide buyer community, reducing sales and marketing costs, and improving inventory and rebate management. Our primary ongoing revenue model will be to derive transaction fees from the sale of products and services through our electronic marketplace. For the year ended December 31, 1999, our revenue was derived both from e-commerce transaction fees and fees from e-commerce software development and other services that enable e-commerce transactions. It is difficult to evaluate our business and our future prospects because we have only recently introduced our services, and the market for an online marketplace for the purchase and sale of medical and non-medical products and services is new and unproven. We have experienced a history of significant losses with a net loss of $1.4 million through December 31, 1998 and a net loss attributable to common stockholders of $45.9 million for the year ended December 31, 1999. As of December 31, 1999, we had an accumulated deficit of $47.3 million. We expect to continue to incur losses for the foreseeable future. As of December 31, 1999, we had total revenue since inception of $170,000. Our objective is to become the preferred marketplace for products and services used by the healthcare industry. To achieve this objective, we intend to pursue a strategy that involves the following key components: - - Accelerate the adoption and use of our marketplace by members of group purchasing organizations and unaffiliated buyers and sellers - - Maintain our neutrality with respect to group purchasing organizations, buyers and sellers who participate in our marketplace - - Maintain our commitment to technological leadership - - Continue to build brand recognition - - Expand our service offerings - - Continue to excel in customer service - - Expand internationally ACQUISITION OF PREMIER HEALTH EXCHANGE LLC In March 2000, we entered into an agreement to acquire Premier Health Exchange LLC, the e-commerce provider of Premier Purchasing Partners, L.P., one of the largest group purchasing organizations in the U.S., representing 1,800 member hospitals. Premier Purchasing Partners is an affiliate of Premier, Inc., a national strategic business alliance representing hospitals and health systems. Premier Purchasing Partners negotiates pricing and terms with sellers of medical and non-medical products and services on behalf of its members. In 1999, Premier reported that membership purchases under its contracted purchasing agreements with approximately 400 sellers totaled $10.6 billion. Virtually none of the purchases by Premier members were conducted through an online marketplace in 1999. We cannot assure you that any significant portion of these purchases will be made through our online marketplace in the future. As a result of this acquisition, we will be the exclusive e-commerce marketplace that Premier will offer to its members for a scheduled six-year term. Under an e-commerce outsourcing agreement, we will receive payments of $159 million over the six-year exclusivity period. The agreement also provides for the additional payment of transaction-based fees to us and to Premier for e-commerce transactions with Premier's members through our online marketplace. Prior to the acquisition, Premier Health Exchange's primary activities have been the development of technology for an electronic catalog which provides data that enhances the operation of group purchasing organizations and their members. THE OFFERING <TABLE> <S> <C> Common stock offered......................... 13,000,000 shares Common stock to be outstanding after this offering................................... 114,404,743 shares Proposed Nasdaq National Market symbol....... "MBUY" Use of proceeds.............................. We intend to use the net proceeds from the offering for increased sales and marketing efforts, enhancement and continued development of our Internet services, accelerating integration with our customers' systems, potential acquisitions of complementary products, services, technologies and businesses and for other working capital and general corporate purposes. </TABLE> The number of shares of common stock to be outstanding after the offering is based upon the pro forma number of shares outstanding as of March 1, 2000. Unless otherwise stated, information on our common stock outstanding is as of March 1, 2000 and assumes: - - a 2.5 for 1 split of our common stock that will take effect prior to the effective date of this offering - - no exercise of the underwriters' option to purchase additional shares in this offering - - the completion of our acquisition of Premier Health Exchange and our issuance of 50,000,000 shares of common stock in the transaction - - no exercise of options or warrants to acquire our common stock As of March 1, 2000, there were 18,696,400 shares authorized for issuance on exercise of options under our stock option plans, under which 11,111,995 options were outstanding. Additionally, there were 1,235,338 options outstanding that were issued outside of the plans. The weighted average exercise price of the total 12,347,333 options outstanding was $3.02 per share. We have issued or made commitments to issue warrants to purchase an aggregate of 1,174,960 shares of our common stock at an average exercise price of $0.05 per share. In addition, upon our acquisition of Premier Health Exchange, we will issue warrants to acquire 11,162,901 shares of our common stock at an exercise price of $0.01 per share and options to acquire 3,125,701 shares of our common stock at an exercise price of $5.35 per share. ------------------------- CORPORATE INFORMATION We were incorporated in the State of Delaware on August 18, 1998 under the name HS.com, Inc. In January 1999, we changed our name to medibuy.com, Inc. Our executive offices are located at 10120 Pacific Heights Boulevard, San Diego, California 92121. Our telephone number is (858) 587-7200. Our address on the World Wide Web is http://www.medibuy.com. Information contained at our Web site is not part of this prospectus. TRADEMARKS medibuy.com(TM), medibuy(TM), eRFP(TM), eAuction(TM), eCatalog(TM), eCertified(TM), InstaCat(TM), ePort(TM), cowhorn.com(TM), eSource(TM) and eSpecials(TM) are trademarks of medibuy.com. This prospectus also refers to trade names and trademarks of other organizations. SUMMARY CONSOLIDATED FINANCIAL DATA The following consolidated financial information should be read together with the "Selected Consolidated Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. <TABLE> <CAPTION> PERIOD FROM AUGUST 18, 1998 (INCEPTION) YEAR THROUGH ENDED DECEMBER 31, DECEMBER 31, 1998 1999 --------------- ------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues................................................ $ -- $ 170 Loss from operations.................................... (1,454) (40,193) Net loss................................................ (1,452) (39,721) Net loss attributable to common stockholders............ (1,452) (45,879) Net loss per share attributable to common stockholders, basic and diluted..................................... $ (0.16) $ (4.01) Shares used in per share computations, basic and diluted............................................... 8,987,269 11,445,535 Pro forma net loss per share attributable to common stockholders, basic and diluted....................... $ (1.37) Shares used in pro forma per share computations, basic and diluted........................................... 28,902,712 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ------------------------------------- PRO FORMA AS ACTUAL PRO FORMA ADJUSTED -------- ------------ --------- (IN THOUSANDS) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents........................... $63,780 $117,832 $249,372 Working capital..................................... 57,855 106,657 238,197 Total assets........................................ 84,682 821,546 953,086 Stockholders' equity................................ 76,238 807,852 939,392 </TABLE> See our consolidated financial statements and accompanying notes for a description of the computation of the net loss per share, pro forma net loss per share and the number of shares used in the per share calculations in consolidated statement of operations data above. Pro forma net loss per share reflects the conversion of our outstanding preferred stock into common stock, retroactive to the date of issuance. The pro forma balance sheet data listed above reflects: - - the sale of 1,480,149 shares of Series E preferred stock in January 2000 for net proceeds totaling $30,402,000 - - the issuance of 50,000,000 shares of common stock, 3,125,701 options to purchase common stock and 11,162,901 warrants to purchase common stock with an estimated aggregate fair value of $701,212,000 in connection with our acquisition of Premier Health Exchange - - the subsequent conversion of all of our outstanding preferred stock into common stock immediately prior to this offering The pro forma as adjusted consolidated balance sheet data listed above also reflects the sale of 13,000,000 shares of our common stock in this offering at an assumed initial public offering price of $11.00 per share after deducting an assumed underwriting discount and estimated offering expenses. See "Use of Proceeds" and "Capitalization" for a discussion about how we intend to use the proceeds from this offering and about our capitalization. Immediately prior to this offering, each share of our Series A and Series B preferred stock will convert into 25 shares of common stock and each share of our Series C, Series D and Series E preferred stock will convert into two and one-half shares of common stock.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001073508_student_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001073508_student_prospectus_summary.txt
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+SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including "Risk Factors" and the financial statements and the related notes. STUDENT ADVANTAGE OUR BUSINESS.................. Student Advantage is dedicated to serving the needs of college students through our leading membership program and our network of web sites, including studentadvantage.com, UWIRE.com and FANSonly.com. With our national fee-based membership program, we have created a community of over 1,300,000 student members. Our members receive a variety of services and benefits, including ongoing discounts on products and services offered by national and local vendors. We seek to enhance our brand online and provide additional services to our members, businesses and colleges with the objective of becoming the leading online network of web sites for college students. We believe that Student Advantage appeals to students, businesses and schools because we provide a combination of the following benefits: - For students, a valuable program that offers ongoing discounts, as well as online content, community and e-commerce targeted at their particular needs, - For businesses, targeted online and offline access to an attractive demographic group through a trusted brand, and - For schools, a resource for their students and an opportunity for cost savings and increased revenue. Our position at the intersection of these three groups has enabled us to create a powerful vehicle for advertising and commerce directed at the student market. We generated total revenue of $4.8 million in 1997, $19.4 million in 1998 and $27.6 million in 1999, and incurred a net loss of $6.8 million in 1997, $10.5 million in 1998 and $19.6 million in 1999. OUR PRODUCTS AND SERVICES..... Membership in Student Advantage provides students with discounts on products and services offered by over 50 national sponsors, including Amtrak(R), Foot Locker, Greyhound, Staples, Tower Records, textbooks.com and Barnes & Noble College Bookstores, and over 15,000 participating locations in 125 local markets. Student members also receive SAM, Student Advantage Magazine. A key component of our strategy is to make our studentadvantage.com web site the centerpiece of our membership program. We currently offer content and services to all students through studentadvantage.com, including our proprietary U-WIRE news feed; community through online bulletin boards and articles offering advice on student life; and e-commerce through sponsors including Staples, Greyhound, 1-800-FLOWERS.com and textbooks.com. In order to receive discounts on the products offered through our web site, students must join our membership program. PROSPECTUS [STUDENT LOGO] STUDENT ADVANTAGE, INC. 1,219,447 SHARES COMMON STOCK Student Advantage previously issued 2,438,875 shares of common stock to the former stockholders of University Netcasting, Inc. in connection with our acquisition of that company. This prospectus relates to resales of 1,219,447 of those shares. We will not receive any of the proceeds from the sale of the shares. We have agreed to pay certain expenses in connection with the registration of the shares and to indemnify the selling stockholders against certain liabilities. The selling stockholders will pay all underwriting discounts and selling commissions, if any, in connection with the sale of the shares. The selling stockholders, or their pledgees, donees, transferees or other successors in interest, may offer the shares through public or private transactions at prevailing market prices, at prices related to prevailing market prices or at privately negotiated prices. Our common stock is traded on the Nasdaq National Market ("Nasdaq") under the symbol "STAD." On March 28, 2000, the closing sale price of the common stock on Nasdaq was $14.50 per share. ------------------------------ INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4. ------------------------------ THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------------ The date of this Prospectus is March 30, 2000. We believe that our primary role as a provider of information and services to students, along with the web-savvy nature of our student membership base, makes the internet ideally suited for our business. We also provide tailored marketing services for businesses seeking to market their products to college students. Through our membership program and network of web sites, we provide businesses a platform through which they can reach a large, demographically attractive market. These businesses benefit from targeted and continued access to the student market, as well as our expertise in designing and implementing effective marketing programs to reach college students. OUR MARKET.................... College students represent an attractive market opportunity for businesses because of their significant purchasing power and their tendency to retain brand loyalties after graduation. According to Student Monitor LLC, a market research company, total discretionary spending by college students in the 1997-1998 academic year exceeded $105 billion. In the United States, there are over 15 million full-time and part-time undergraduate and graduate students at more than 3,500 university and college campuses. This population is expected to grow as there are currently 40 million children and young adults from ages 10 to 19. OUR STRATEGY.................. Our objective is to be the leading online and offline resource for college students. The key elements of our strategy include the following: - Strengthen our online destination for students, - Continue to build the Student Advantage brand, - Aggressively grow our membership, - Enhance relationships with students, businesses and schools, and - Continue to pursue strategic acquisitions and alliances. ------------------------------ Student Advantage's principal executive offices are located at 280 Summer Street, Boston, Massachusetts 02210 and our telephone number at that location is (617) 912-2000. Our principal web site is located at www.studentadvantage.com. Information contained on any of our web sites is not part of this prospectus. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) Set forth below are summary consolidated statements of operations data for the years ended December 31, 1995, 1996, 1997, 1998 and 1999, and summary balance sheet data as of December 31, 1999. This information should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this prospectus. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." All amounts for all periods presented have been restated to reflect the acquisition of University Netcasting, Inc. in June 1999, which was accounted for as a pooling of interests. Effective June 18, 1999, University Netcasting, Inc.'s fiscal year end was changed from March 31 to December 31 to conform to Student Advantage's fiscal year end. University Netcasting, Inc.'s results of operations for the years ended March 31, 1996, 1997, 1998 and 1999 have been included in Student Advantage's results of operations for the years ended December 31, 1995, 1996, 1997 and 1998, respectively. University Netcasting's results of operations for the twelve months ended December 31, 1999 have been included in Student Advantage's results of operations for the twelve months ended December 31, 1999. Accordingly, University Netcasting's results of operations for the three months ended March 31, 1999 have been included in Student Advantage's results of operations for both of the years ended December 31, 1998 and 1999. Total revenue and net loss for University Netcasting for the three months ended March 31, 1999 were $682,000 and $1.6 million, respectively. This net loss amount has been reported as an adjustment to the consolidated accumulated deficit. Shares used in computing pro forma basic and diluted net loss per share include the conversion of all outstanding shares of our convertible preferred stock into shares of common stock which occurred upon the closing of the initial public offering on June 23, 1999 as if converted on the later of January 1, 1998 or the date of issue. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1995 1996 1997 1998 1999 ----------- ------- ------- -------- -------- (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA Total revenue............................................... $ 769 $ 1,838 $ 4,815 $ 19,360 $ 27,644 Total costs and expenses.................................... 2,982 4,480 11,566 30,017 48,557 Net loss.................................................... (2,216) (2,638) (6,828) (10,536) (19,555) Basic and diluted net loss per share........................ $ (0.16) $ (0.18) $ (0.41) $ (0.59) $ (0.71) Shares used in computing basic and diluted net loss per share..................................................... 14,184 14,384 16,588 17,710 27,410 Unaudited pro forma basic and diluted net loss per share.... $ (0.46) $ (0.63) Shares used in computing unaudited pro forma basic and diluted net loss per share................................ 22,772 31,226 </TABLE> <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------------------------- 1995 1996 1997 1998 1999 ----------- ------ ------- -------- ------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA Cash and cash equivalents................................... $ 47 $ 702 $ 5,806 $ 6,140 $15,370 Marketable securities....................................... -- -- -- -- 20,546 Working capital (deficit)................................... (928) (114) (1,670) (2,355) 24,139 Total assets................................................ 338 1,118 7,217 11,704 60,796 Deferred revenue............................................ 183 276 5,970 7,064 9,576 Redeemable convertible preferred stock...................... -- 54 111 10,196 -- Stockholders' equity (deficit).............................. (1,065) (70) (1,024) (10,548) 41,694 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001073715_jato_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001073715_jato_prospectus_summary.txt
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+SUMMARY THIS SUMMARY HIGHLIGHTS CERTAIN INFORMATION REGARDING OUR BUSINESS AND IS QUALIFIED BY THE MORE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. WE ARE A START UP COMPANY WITH A HISTORY OF SIGNIFICANT LOSSES, A LARGE ACCUMULATED DEFICIT AND AN EXPECTATION OF CONTINUED SIGNIFICANT LOSSES. YOU SHOULD CAREFULLY READ AND CONSIDER THIS ENTIRE PROSPECTUS, INCLUDING THE "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND ALL RELATED NOTES BEFORE MAKING AN INVESTMENT DECISION. JATO COMMUNICATIONS CORP. OVERVIEW We provide our customers broadband data communications services including high speed Internet access, e-commerce, wide and local area networking and associated applications and services. Our services are tailored to meet the growing data communications needs of small- and medium-sized businesses in our targeted markets. We are developing a nationwide network platform based principally on digital subscriber line, or DSL, technology. DSL is a data transmission technology enabling high-speed access through an existing copper connection located between the network service provider and the end user. We have designed our network to accomodate a variety of local access technologies in addition to DSL. We intend to offer our services primarily through a direct sales force comprised of account managers, telesales personnel and specialized account groups. As more fully described in "Business--Strategic Alliances," we have entered into strategic arrangements with Qwest Communications Corporation, Global Crossing Bandwidth, Inc., Lucent Technologies and Microsoft Corporation in order to rapidly deploy our network and achieve our sales and operating goals. We have targeted 50 smaller metropolitan areas nationwide which we believe present attractive business opportunities and are currently underserved by existing data communications providers. We estimate these secondary markets contain, in aggregate, approximately 2.8 million businesses and 145 cities. We expect to offer services in 40 of our targeted secondary markets by the end of 2000 and expect to offer services in all 50 of our targeted secondary markets by the middle of 2001. As of March 24, 2000, we offered service in eleven markets encompassing 176 central offices and have equipment installed in an additional 122 incumbent carrier central offices which comprise an incremental eight markets. As of March 24, 2000, we had approximately 1,345 lines in service and we were under contract to supply over 2,200 additional lines to our customers. STRATEGY Our strategy for expanding our services to small- and medium-sized businesses in our target markets nationwide is to: - Exploit our early-mover advantage, - Acquire customers through direct marketing and other sales channels, - Offer a wide variety of Internet based applications and services, and - Retain customers through superior customer care and support. THE OFFERING <TABLE> <S> <C> Common stock offered by Jato.............. 8,925,000 Shares Common stock outstanding after this offering................................ 53,574,327 Shares(1) Use of proceeds........................... We estimate that our net proceeds from this offering and the concurrent placement to Qwest will be approximately $117.0 million. We intend to use approximately $64.1 million of these net proceeds to fund capital expenditures and operating losses related to the continued deployment of our network, an additional $30.0 million to expand sales and marketing activities and the remaining $22.9 million for working capital and other general corporate purposes. Dividend policy........................... We currently intend to retain any future earnings to fund the growth and development of our business. Therefore, we do not currently anticipate paying cash dividends. Nasdaq National Market Symbol............. JATO </TABLE> - ------------------------ (1) Based on the number of shares outstanding on March 24, 2000. Includes 9,628,010 outstanding shares of common stock, 34,842,746 shares of common stock to be issued upon conversion of our preferred stock, and the 178,571 shares of common stock to be issued to Qwest at an assumed initial public offering price of $14.00 per share upon the closing of a private placement concurrent with this offering. Excludes 7,583,180 shares of common stock issuable upon the exercise of stock options outstanding as of March 24, 2000, with a weighted average exercise price of $3.31 per share, 315,489 of which were exercisable, 7,035 shares of common stock issuable upon the exercise of outstanding warrants at an exercise price of $2.13 per share and the 297,619 shares of common stock issuable to Qwest pursuant to a warrant with an aggregate exercise price of $5.0 million and a per share exercise price equal to 120% of the initial public offering price per share in this offering. Unless we indicate otherwise, all information in this prospectus pertaining to the purchase price per share for the shares to be sold to Qwest in the concurrent placement assumes an initial public offering price of $14.00 per share and an exercise price per share for the warrant to be issued to Qwest in the concurrent placement of $16.80, representing 120% of the assumed initial public offering price of $14.00 per share. Throughout this prospectus, Qwest refers to Qwest or to U.S. TeleSource, Inc., its wholly owned subsidiary, as applicable. See "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001074090_800-com_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001074090_800-com_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..18fc44a19dab96b1cb94c4960c9183c5afde0a01
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+SUMMARY You should read this summary together with the more detailed information in this prospectus, including "Risk Factors" and our financial statements and notes to those statements, regarding our company and the common stock being sold in this offering. 800.COM We are a leading online specialty retailer of consumer electronics and related products. We offer a value-added shopping experience for consumer electronics that we believe is superior to our competitors. As an authorized retailer for over 60 of the most widely-recognized consumer electronics brands, we feature a broad selection of consumer electronics, including televisions, DVD players, VCRs, home stereo equipment, digital cameras, portable stereos, personal CD players, MP3 players, car audio, telephones, other communications products and accessories. We offer our products in combination with detailed product specifications and decision support tools, extensive information and content, knowledgeable consultation and support, and superior customer service. We recorded net sales of $23.7 million for the nine months ended December 31, 1999, with $13.5 million of the total being recorded in the fourth calendar quarter. THE MARKET FOR CONSUMER ELECTRONICS Size, Growth and Market Characteristics. The consumer electronics industry is attractive because it offers the following advantages: - LARGE MARKET OPPORTUNITY. Based on our analysis of data reported by the Consumer Electronics Association, we estimate that total U.S. retail sales of consumer electronics, excluding personal computers, will exceed $75 billion in calendar year 2000, representing more than 5% growth over 1999. - STRONG GROWTH POTENTIAL. We believe that the emergence of new digital technologies such as DVD, MP3, high definition television (HDTV) and digital satellite systems (DSS) will continue to fuel strong industry growth. - PREDICTABLE PRICES AND ATTRACTIVE PRODUCT MARGINS. Authorized retailers have traditionally sold higher-quality consumer electronics, other than personal computers, at attractive product margins. Manufacturers have facilitated these margins by providing predictable pricing, advertising allowances and suggested minimum advertised price (MAP) policies. Barriers to Entry. Despite the attractive nature of the consumer electronics market, new entrants may have difficulty sourcing product for the following reasons: - LACK OF LARGE DISTRIBUTORS. Unlike industries that rely on large, third-party distributors, higher-quality consumer electronics are primarily distributed directly from the manufacturer to the retailer. Reliable and consistent access to product, therefore, depends upon a retailer's ability to source directly from the manufacturer. - NEED FOR MANUFACTURER AUTHORIZATION. Manufacturer authorizations are critical to consumer electronics retailers because manufacturers permit the majority of their products to be sold only through authorized channels. The difficult process of obtaining manufacturer authorization may, in some cases, take in excess of two years. Once granted, these authorizations can be easily revoked. - LIMITED ACCESS TO HIGHER-QUALITY PRODUCTS. We believe higher-quality consumer electronics generally yield higher product margins. Manufacturers generally authorize only those retailers that have the skills to properly position their products and provide pre- and post-sales support at levels proportional to the complexity of specific products. Unlike specialty retailers who may have access to the full breadth of a manufacturer's product line, many mass-market retailers are authorized to carry only lower-margin commodity products. INSIDE BACK COVER There are five items describing 800.COM's value-added service for online consumer electronic purchasing. Each item consists of a graphic, a title and a text description. The graphics are on the left. Each title is directly to the right of its graphic with the text directly below the title. The first graphic is a bell. The title is "Service." The text is "We help people who want electronics to make an informed and satisfying purchase. We help them before and after the purchase. We're there seven days a week. Anyone can call to our call center or get online live support from our experts. We know how it feels not to be understood. We're consumers too." The second graphic is three stereo speakers. The title is "Selection." The text is "We have many brands, like Sony, Pioneer, Kenwood, Aiwa, JVC and Philips, so people can compare. If someone doesn't like the equipment they just got, it can easily be returned. Because the only thing you should feel remorseful about, is blasting you neighbors everytime you turn that new stereo system on." The third graphic is an opened book. The title is "Resources." The text is "Clicking 800.COM can hook people up not only with our experts, but with other shoppers as well. We also provide charts, articles, reviews - basically everything you need to make an informed decision. Because there are many occasions when you want to be alone. But buying electronics is not one of them." The fourth graphic is a paper shopping bag with the 800.COM logo on it. The title is "Convenience." The text is "At 800.COM people find everything they need in one place. And they don't have to worry about carrying and getting the new equipment to their house. Our Red Carpet Delivery not only brings the big stuff into your home, we also unpack it, and even take the boxes away to recycle. Bad news for chiropractors." The fifth graphic is the 800.COM logo with the slogan "Electronics. And More." below it. The title is "800.COM." The text is "We are a leading online specialty retailer of consumer electronics and related products." BACK COVER There is a graphic centered on the page consisting of the 800.COM logo with the slogan "Electronics. And More." below it. Challenges Facing Consumers. We believe consumers are frustrated by the often stressful and time-consuming consumer electronics buying experience for reasons that include: - COMPLEX BUYING PROCESS. The rapid rate of new product introductions and technological change creates a complex, multi-step consumer electronics buying process that often requires significant research, education and product comparisons. - POOR BUYING EXPERIENCE. We believe that the traditional retail channel for consumer electronics fails to satisfy consumer desire for selection, product information, expert advice and superior customer service. Challenges Facing Manufacturers. Despite their best efforts, the traditional consumer electronics retail channel presents significant limitations for manufacturers, including: - INSUFFICIENT BRAND PROTECTION. Unsatisfactory customer service, departures from MAP policies and sales into unauthorized channels jeopardize the position and perception of valuable manufacturer brands. - INADEQUATE BRAND PROMOTION. Manufacturers feel under-served when retailers do not effectively communicate their marketing messages or properly position their products. Given the limitations of the traditional consumer electronics retail channel, we believe that the opportunity exists to create a more compelling solution. THE 800.COM SOLUTION Our online store brings together all of the elements necessary for a consumer to make an informed and satisfying consumer electronics purchase. We address the limitations of the traditional consumer electronics retail channel for consumers and manufacturers by leveraging the Internet and its unique characteristics. Our solution incorporates the following: - VALUE-ADDED SHOPPING SERVICES. As an online consumer electronics specialty retailer, we add value to the shopping experience by providing detailed product specifications and decision support tools, extensive information and content, and knowledgeable consultation and support. - BROAD SELECTION OF AUTHORIZED PRODUCTS. We are authorized to sell merchandise from over 60 nationally-recognized brands, including, most recently, Sony and Pioneer. We offer our products without the shelf-space limitations, store-layout constraints and floor-model expenses faced by traditional retailers. - CONTROL OF FULFILLMENT AND DISTRIBUTION. Our control of fulfillment and distribution operations in-house improves our ability to gain manufacturer authorizations, carry a customized assortment of products, reduce shipping and handling costs and shorten delivery times, all of which contribute to high customer satisfaction and better service. - COMMITMENT TO FULL-SERVICE RETAILING. We emphasize customer service during all phases of the customer's online shopping experience. Our service representatives include experienced consultants with a broad knowledge of consumer electronics. THE 800.COM GROWTH STRATEGY Our goal is to be the world's leading online specialty retailer of consumer electronics. We intend to achieve this goal by aggressively building our brand, promoting repeat purchases, maintaining and expanding our authorized dealer status, enhancing the online shopping experience and continuing our focus as a value-added retailer. THE OFFERING COMMON STOCK OFFERED BY 800.COM....... shares COMMON STOCK TO BE OUTSTANDING AFTER THIS OFFERING......................... shares USE OF PROCEEDS....................... For marketing and advertising expenses, working capital expenditures and other general corporate purposes. See "Use of Proceeds." PROPOSED NASDAQ NATIONAL MARKET SYMBOL................................ EHDC Common stock to be outstanding after this offering is based on shares outstanding as of December 31, 1999. Except as otherwise noted, it does not include: - 2,107,804 shares issuable upon exercise of outstanding options as of December 31, 1999; - 70,518 shares available for future grant or issuance under our stock option plans as of December 31, 1999; and - 1,978,435 shares issuable upon exercise of warrants outstanding as of December 31, 1999, 1,761,768 of which will expire if not exercised prior to the completion of this offering. Except as otherwise noted, all information in this prospectus: - reflects the conversion of all outstanding shares of preferred stock into shares of common stock upon completion of this offering; and - does not take into account the possible issuance of additional shares of common stock to the underwriters pursuant to their right to purchase additional shares to cover over-allotments. CORPORATE INFORMATION 800.COM's principal executive offices are located at 1516 NW Thurman, Portland, Oregon 97209, and our telephone number at that address is (503) 944-3600. Our Web site is located at www.800.com. Information contained in our Web site is not part of this prospectus. In this prospectus, the "Company," "800.COM," "we," "us" and "our" refer to 800.COM, Inc., an Oregon corporation. SUMMARY FINANCIAL DATA The statement of operations data for the year ended March 31, 1999, are derived from our audited financial statements appearing elsewhere in this prospectus. The statements of operations data for the three-month and nine-month periods ended December 31, 1998 and 1999, and the balance sheet data as of December 31, 1999, are derived from unaudited interim financial statements appearing elsewhere in this prospectus. The summary financial data should be read in conjunction with our financial statements and the related notes included elsewhere in this prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, YEAR ENDED -------------------- ------------------- MARCH 31, 1999 1998 1999 1998 1999 ----------------- -------- -------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA Net sales....................... $ 3,024 $ 1,188 $ 13,468 $ 1,336 $ 23,698 Gross profit.................... (126) 3 995 20 (33) Total operating expenses........ 11,348 3,865 23,317 4,864 35,135 Loss from operations............ (11,473) (3,862) (22,322) (4,845) (35,168) Net loss........................ (12,047) (3,921) (22,259) (4,965) (35,727) Net loss applicable to common shareholders.................. (12,506) (4,380) (22,263) (5,424) (35,737) Net loss per share, basic and diluted....................... $ (6.57) $ (4.08) $ (7.77) $ (4.36) $ (13.07) Shares used to compute basic and diluted net loss per share.... 1,903 1,073 2,866 1,244 2,735 Pro forma net loss per share, basic and diluted............. $ (2.82) $ (0.97) $ (1.98) Shares used to compute pro forma basic and diluted net loss per share......................... 4,431 23,059 18,033 </TABLE> The following table presents summary balance sheet data as of December 31, 1999; pro forma to reflect the conversion of all outstanding shares of preferred stock into shares of common stock upon completion of this offering, and the cash exercise of vested warrants for 1,541,768 shares of common stock, which are forfeited if not exercised prior to the completion of this offering; and pro forma as adjusted for the sale of shares of our common stock in this offering at an initial public offering price of $ per share and the application of the net proceeds after deducting underwriting discounts and commissions and estimated offering expenses. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001074767_ivillage_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001074767_ivillage_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information and iVillage's consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus. IVILLAGE INC. OUR BUSINESS iVillage Inc., The Women's Network, is the leading online destination targeted at women and one of the most demographically focused communities on the Internet. As an online media company, we provide advertisers and merchants with targeted access to women using the Internet. Jupiter Communications projects that women will make up 49.0% of the online population by December 1999. We believe that women are attractive to advertisers and merchants because it is reported that women account for 70% of all retail sales in the United States. Our page views have grown to a monthly average of 137 million for the quarter ended December 31, 1999, and we estimate our unique visitors have grown to 8.1 million for the month of December 1999. Page views are the total number of complete pages retrieved and viewed by visitors to our network. A unique visitor or person is an individual visitor to our network. iVillage.com offers effective solutions and support for busy women who are actively managing careers, families, relationships, and finances. Our network is designed to provide support for problem solving that goes beyond information and content. It encompasses a tightly integrated mix of information, life stage experts, active peer interaction, workshops, and the opportunity to research and buy products. Membership in iVillage.com is free and provides access to features such as email, personal homepages, instant messaging, and our other community tools. Our network of sites consists of 16 content specific channels and several shopping areas. The channels cover the topics of deepest interest to women, such as family, health, work, money, food, computers, relationships, shopping, travel, pets and astrology. We facilitate network use across channels by providing common features, positioning and functionality within each channel and across the network, resulting in a consistent and strongly branded environment. As of August 31, 1999, our membership and our core audience was approximately 81% female. As of August 31, 1999, we contacted our members through approximately 10.7 million weekly newsletters and provided our members with over 1,000 chats, 1,700 message boards and 1,600 volunteer community leaders. We believe this strong community has contributed to increased user loyalty and time spent on iVillage.com. We believe our CPMs are significantly above the industry average and the average for other women's Web sites. CPMs are advertising rates measured on a cost per thousand impressions basis. The combination of the following attributes creates a powerful environment for advertising and commerce and contributes to the appeal of iVillage.com to advertisers and merchants: o a large, growing user base with a highly attractive demographic profile; o a high degree of member involvement allowing our advertisers to reach women when they are actively seeking communication and focused on a goal; o an interactive sponsorship model that integrates advertising and commerce into the content of Web pages; and o a single consistent brand. Currently, we generate commerce revenues through iBaby, an online retailer of baby gifts and products, iMaternity, an online retailer of maternity clothing and Astrology.Net, an online provider of electronic horoscope reports. Commerce revenue represented 23% of total revenue for the three months ended September 30, 1999. In addition to being a leader in the women's category, our allHealth channel is one of the leading health sites on the Internet. Women in the United States make an estimated 80% of health care decisions and nearly 60% of health care purchases, according to Jupiter Communications. To further strengthen allHealth's reach and breadth, on June 30, 1999 we acquired Online Psychological Services, Inc. This site provides comprehensive resources and interactive tools focusing on mental health issues. We have also entered into a $15.0 million sponsorship agreement with PlanetRx.com, Inc. to be our exclusive online retailer for prescriptions, over-the-counter medications and vitamins. In addition, PlanetRx.com has paid us $7.5 million to license selected content and community tools. To broaden the relationship with PlanetRx.com, we have made a $7.5 million equity investment in PlanetRx.com. To solidify our leading position in the parenting category, on August 20, 1999, we acquired Lamaze Publishing Company, Inc., a multimedia provider of education information to expectant and new mothers. We currently estimate that Lamaze Publishing reaches more than 75% of all women giving birth in the United States through its magazines, videos and the Newborn Channel, its satellite television network broadcasting in over 800 hospitals in the United States. Through iVillage, women can now get prenatal, birthing and parenting information tools and products as well as the support of a community. We plan to utilize this multimedia platform to: o further strengthen the iVillage brand; o drive visitors to our network; o increase our advertising revenue; and o expand our commerce business through iBaby, iMaternity and other retailers. OUR STRATEGY Our objective is to strengthen our position as the leading online destination targeted at women by: o building strong brand recognition; o aggressively growing membership and usage; o enhancing and expanding our network; o continuing to pursue strategic acquisitions and alliances; o increasing sponsor and advertising revenues; and o generating e-commerce revenues. OUR OFFICES Our executive offices are located at 212 Fifth Avenue, New York, New York 10010. Our telephone number at that location is (212) 206-3100 and our Internet address is www.ivillage.com. OUR TRADEMARKS iVillage(R); the iVillage logo(R); Parent Soup(R); iVillage.com; The Women's Network; The double oval design; Click!; Community Challenges; Community Challenge; Solutions For Your Life; Family Point; Never Say Diet; allHealth; allHealth.com; PlusBoutique; Keyboard Yoga; Parentsplace; and Parentsplace.com are marks of iVillage, Inc. iBaby(R) and iMaternity are marks of iBaby, Inc. KnowledgeWeb(R); Astrology.Net(R); Astrozine(R); Kelli Fox and the Kelli Fox Likeness are marks of KnowledgeWeb, Inc. Online Psych is a mark of Online Psychological Services, Inc. Newborn Channel and NewBorn Channel and Design are marks of Lamaze Publishing. Lamaze(R) and Lamaze.com are marks of Lamaze International, Inc., exclusively licensed to Lamaze Publishing for use in connection with consumer publications and other communications, which include print, audio, visual and other consumer oriented media, that are commercial in nature. All other trademarks and service marks in this prospectus are the property of their respective owners. The information on our Web sites is not a part of this prospectus.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001075056_vastera_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001075056_vastera_prospectus_summary.txt
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING OUR COMPANY AND THE COMMON STOCK BEING SOLD IN THIS OFFERING INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. Our Business We are a leading provider of web-based software products and services that facilitate international buying and selling of goods by streamlining and optimizing global trade processes. We call these products and services our solutions. Global trade involves the shipment of goods between countries and the management of information and business processes required to complete shipments. Global trade is regulated by dynamic, country-specific rules and involves a complex network of trade participants, namely exporters, forwarders, carriers, brokers, importers, banks and customs and regulatory agencies. The core of our solutions is our global trade content, which is our extensive on-line library of country-specific rules and regulations that are needed to automate global trade processes. Our web-based software applications utilize this content to improve coordination and collaboration between the network of trade participants required to complete international transactions. Our clients can subscribe to or license our software products, use our transaction-based hosted service through our Internet portal, TradePrism.com, or engage us to provide complete managed services for part or all of their global trade operations. The Internet is enabling companies and individuals to expand their reach for buying and selling goods around the world. While many companies have deployed the technologies to streamline and automate business practices for their domestic operations, many companies continue to inefficiently execute international trade transactions due to paper-based business practices, a lack of coordination among international trade participants and constantly changing trade regulations. These inefficiencies are evidenced by a lack of information and excess inventory in international supply chains, inaccurate duty payments resulting in overpayments or fines or engaging in illegal trade. Most large companies maintain large and costly internal departments solely to handle issues related to international trade. Companies that cannot justify this cost often miss new opportunities entirely. Forrester Research estimates that over 46% of Internet-based orders into the U.S. from international clients go unfilled because companies lack the procedures to fill them. We provide comprehensive trade content covering countries that accounted for approximately $4.1 trillion of global trade in 1999. We serve an international client base of over 200 companies, including Dell, Ford, Lucent, Microsoft, the New Zealand Dairy Board, Nike, Nortel and Sony. Our clients currently utilize our solutions to ship to over 120 countries worldwide. We also provide integrated solutions for specific industry segments, or vertical industries, which are currently used by Internet trading exchanges such as CatalogCity.com, Fasturn.com, RightFreight.com and SupplierMarket.com. Recent Developments On July 14, 2000, we entered into an agreement to acquire Ford Motor Company's global customs unit in exchange for 8,000,000 shares of our common stock. Under the terms of our agreement, Ford merged its global customs unit, consisting of personnel and technology used by Ford to manage its worldwide trade, into our managed services operations. Under an agreement with Ford, we will manage Ford's global trade operations including supporting Ford's import/export customs operations, administering contracts between Ford and third party brokers and freight forwarders, minimizing duties and customs fees for a minimum term of four years and a maximum term of 10 years. As consideration for our software products and services offerings, Ford has agreed to pay us based on certain minimum transaction thresholds as well as a gain-sharing fee equal to a specified percentage of the cost savings experienced by Ford under our agreement. We will initially provide our product and service offerings to Ford in the United States. Under our agreement, after successful implementation of our services in the United States, we will commence providing our services to Ford divisions and subsidiaries in other geographic regions around the world in a phased approach. For a complete description of the Ford transaction, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Certain Transactions--Transaction with Ford Motor Company." The Offering <TABLE> <S> <C> Common stock offered......................... 6,000,000 shares Common stock to be outstanding after this offering.............................. 34,457,508 shares Use of proceeds.............................. For general corporate purposes, principally working capital, and possible acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol....... VAST </TABLE> The number of shares of our common stock that will be outstanding after this offering is based on the number of shares outstanding as of June 30, 2000 and assumes no exercise of the underwriters' over-allotment option, the conversion into common stock of all of our convertible preferred stock outstanding on that date and the issuance of 8,000,000 shares of common stock to Ford on August 29, 2000 in connection with our acquisition of Ford's global customs unit. It excludes 17,833,028 shares of common stock available for issuance pursuant to our employee stock option plans, of which 6,504,552 shares are subject to outstanding options at a weighted average exercise price of $3.56 as of June 30, 2000, and 1,100,000 shares of common stock available for issuance pursuant to our employee stock purchase plan. It also excludes 640,459 shares of common stock issuable upon the exercise of warrants outstanding after this offering, at a weighted average exercise price of $5.48. Our revenues for 1999 were $19.1 million, and for the six months ended June 30, 2000, our revenues were $13.4 million. Our net loss for 1999 was $10.5 million, and for the six months ended June 30, 2000, our net loss was $15.7 million. Our accumulated deficit as of June 30, 2000 was $82.8 million. Summary Consolidated Financial Data (in thousands, except per share data) <TABLE> <CAPTION> Six Months Ended Year Ended December 31, June 30, ---------------------------------------------------- ------------------------- 1995 1996 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- ----------- ----------- (unaudited) (unaudited) <S> <C> <C> <C> <C> <C> <C> <C> Consolidated Statement of Operations Data: Revenues: Subscription/transaction revenues.................... $ 635 $ 1,222 $ 2,200 $ 4,088 $ 7,261 $ 2,945 $ 5,629 Services revenues............ 402 917 1,545 4,778 11,869 6,190 7,806 ------ ------- ------- ------- -------- ------- -------- Total revenues........... 1,037 2,139 3,745 8,866 19,130 9,135 13,435 Loss from operations........... (758) (3,079) (9,209) (8,099) (10,660) (2,738) (15,815) Net loss....................... $ (783) $(3,086) $(9,307) $(8,256) $(10,479) $(2,615) $(15,743) ====== ======= ======= ======= ======== ======= ======== Per share information: Pro forma basic and diluted net loss per share......... $ (.64) $ (.82) -------- -------- Pro forma weighted average common shares outstanding................ 16,277 19,260 -------- -------- </TABLE> <TABLE> <CAPTION> June 30, 2000 --------------------------------------- Pro Forma Actual Pro Forma As Adjusted ----------- ----------- ----------- (unaudited) (unaudited) (unaudited) <S> <C> <C> <C> Consolidated Balance Sheet Data: Cash and cash equivalents................................. $ 374 $ 374 $ 64,334 Short-term investments.................................... 8,669 8,669 8,669 Working capital........................................... 4,752 83,952 147,912 Total assets.............................................. 28,599 108,549 172,509 Long-term debt............................................ 3,408 3,408 3,408 Redeemable convertible preferred stock.................... 80,224 -- -- Total stockholders' equity (deficit)...................... (74,043) 85,381 149,341 </TABLE> The pro forma balance sheet data gives effect to the automatic conversion of all outstanding shares of convertible preferred stock into 13,824,817 shares of common stock upon the consummation of the offering and both the issuance of 8,000,000 shares of common stock and the acquisition of an estimated $80.0 million of net assets from Ford in connection with our acquisition of Ford's global customs unit completed on August 29, 2000. The pro forma as adjusted balance sheet data also gives effect to the sale of 6,000,000 shares of common stock at an assumed initial public offering price of $12.00 per share, less the estimated underwriting discounts and commissions and estimated offering expenses. We were incorporated in Virginia in November 1991 under the name Export Software International, Inc. We reincorporated in Delaware in July 1996 and we changed our name to Vastera, Inc. in June 1997. Our principal executive offices are located at 45025 Aviation Drive, Suite 200, Dulles, Virginia 20166, and our telephone number is (703) 661-9006. Our web site is WWW.VASTERA.COM. Information contained on our web site does not constitute a part of this prospectus. Vastera is a registered U.S. trademark of Vastera, Inc. Global Trade Management, Global Trade Value Chain, TradeSphere, TradeValue, TradeVantage, TradePrism, Global eContent, TradeAxiom, Opening the World to eBusiness, Global Passport, SmarteCommerce, SmarteContent, SmarteMethods and SmarteWare are trademarks of Vastera, Inc. that are the subject of pending federal trademark registration applications. The Vastera logo is also a trademark of Vastera, Inc. All other brand names and trademarks appearing in this prospectus are the property of their respective holders. ------------------------ EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS IS BASED ON THE FOLLOWING ASSUMPTIONS: - THE UNDERWRITERS DO NOT EXERCISE THEIR OVER-ALLOTMENT OPTION; - THE CONVERSION OF OUR OUTSTANDING SHARES OF CONVERTIBLE PREFERRED STOCK INTO AN AGGREGATE 13,824,817 SHARES OF COMMON STOCK UPON THE CLOSING OF THIS OFFERING; AND - THE COMPLETION OF A 3-FOR-2 STOCK SPLIT TO BE EFFECTED UPON THE CLOSING OF THIS OFFERING.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001076016_broadbase_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001076016_broadbase_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..7338606846dc7c8949cefd8b5fc3d1bf3c68985d
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of the factors set forth under "Risk Factors" and elsewhere in this prospectus. OUR BUSINESS Broadbase develops and markets software that integrates and analyzes customer information from Internet and traditional business channels, enabling businesses to improve their customer acquisition, retention and profitability. Our software integrates information from numerous points of customer interaction, or touch points, by pulling information from multiple data sources and transforming it into a standard format that can be analyzed. Our software then analyzes this reformatted information to provide a comprehensive understanding of the customer lifecycle from initial identification through acquisition and retention. Our products then allow businesses to translate this analysis into specific actions such as targeting profitable customers, personalizing customer interactions and identifying opportunities to sell complementary or higher-end products and services. In addition, with our recent acquisition of Rubric, Inc., we now offer Rubric's eMA (eMarketing Automation) application, which enables businesses to act on this analysis through automated marketing campaigns over the Internet and traditional channels. By integrating, analyzing and acting on valuable customer information, our products enable businesses to build long-lasting and profitable customer relationships. The Internet is emerging as an important channel for businesses to interact with their customers. As a result, traditional "bricks and mortar" companies are adapting many of their business activities to the Internet. In addition, a new class of Internet-only companies is rapidly emerging. Together, these companies represent a new category of enterprise called the e-business. The rise of the Internet as a new business channel has led to a dramatic increase in the number of ways that businesses interact with their customers. Today, these include not only traditional storefronts, catalogs and call centers, but also websites, e-mail marketing campaigns and online customer service. The Internet has also created a highly competitive environment for businesses, where customers can easily switch among alternative product and service offerings. To maintain customer loyalty in this environment, e-businesses need to develop a complete understanding of individual customers to maximize the effectiveness of every customer interaction. Broadbase software addresses this need. Our software consists of a suite of applications that are built on Foundation, our software platform that provides a wide range of analytic capabilities. Our software integrates information that has traditionally been isolated in separate systems designed to support specific types of customer interactions, such as customer service and Internet-based sales. It provides decision-makers in sales, marketing, customer service and e-commerce business functions with a more comprehensive view of the customer. Each application provides these decision-makers with analysis of customer information that is specifically designed for their particular business function. Our solutions can generally be deployed in less than 30 days, allowing our customers to quickly capture revenue opportunities and achieve rapid return on investment. To date, over 150 end user customers have licensed our products from us and our distributors and resellers. Traditional "bricks and mortar" customers include Aon Service Corporation, Boeing, Canon Computer, Chevron, HealthSystem Minnesota, Hewlett-Packard, Honda, Inprise, Polaris Service, Telia AB and Xerox. Internet-only customers include BizBuyer.com, CMP Media, InsWeb, Onvia.com and Pets.com. Each of the foregoing end user customers has licensed products and purchased services totaling at least $300,000. THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. UNDERWRITERS MAY NOT CONFIRM SALES OF THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. Subject to completion. Dated February 11, 2000. 3,000,000 Shares BROADBASE SOFTWARE, INC. [BROADBASE LOGO] Common Stock ------------------------- Broadbase is offering 1,500,000 of the shares to be sold in the offering. The selling stockholders identified in this prospectus are offering an additional 1,500,000 shares. Broadbase will not receive any of the proceeds from the sale of shares being sold by the selling stockholders. The common stock is quoted on the Nasdaq National Market under the symbol "BBSW". The last reported sale price of the common stock on February 10, 2000 was $106.00 per share. See "Risk Factors" beginning on page 5 to read about factors you should consider before buying shares of the common stock. ------------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------- <TABLE> <CAPTION> Per Share Total --------- ------- <S> <C> <C> Initial price to public..................................... $ $ Underwriting discounts...................................... $ $ Proceeds, before expenses, to Broadbase..................... $ $ Proceeds, before expenses, to the selling stockholders...... $ $ </TABLE> To the extent that the underwriters sell more than 3,000,000 shares of common stock, the underwriters have the option to purchase up to an additional 450,000 shares from Broadbase at the initial price to public less the underwriting discount. ------------------------- The underwriters expect to deliver the shares against payment in New York, New York on , 2000. GOLDMAN, SACHS & CO. DEUTSCHE BANC ALEX. BROWN DAIN RAUSCHER WESSELS THOMAS WEISEL PARTNERS LLC ------------------------- Prospectus dated , 2000. ACQUISITION OF RUBRIC On February 1, 2000, we acquired privately-held Rubric, a leading provider of e-marketing software applications. Rubric's product, eMA, automates the planning, execution and measurement of marketing campaigns. It streamlines campaign planning by automating the process of requesting, reviewing, approving and launching campaigns. The software enables the identification of prospect and customer segments that can be targeted with personalized messages and offers. eMA then automates the execution of Internet and traditional marketing campaigns by generating personalized e-mail and web pages, personalized letters and faxes, and lists for direct mail and call center campaigns. It can manage their campaigns concurrently over a number of different channels. In addition, eMA can also automate other areas of customer interaction, such as customer service. The software also provides a communications system that facilitates personalized, targeted and interactive communications across the Internet and traditional channels over an extended period of time. Following execution of the marketing campaign, eMA's measurement capabilities allow users to close the loop by tracking campaign results, costs and revenue. By enabling users to more effectively generate leads and build customer relationships, eMA is designed to generate revenue, reduce marketing costs and improve marketing effectiveness. We believe that the combination of eMA and our existing products will allow businesses to both analyze their customer data and to plan, manage and execute marketing campaigns based on this analysis. Rubric's customers include BEA Systems, Cisco Systems, Citrix, DiTech.com, Hewlett-Packard, Internet Appliance Network, LoanCity.com, MERANT, MSHOW.com, N.E.T., Outpost.com, PeopleFirst.com, Rainmaker Systems, Sierra Atlantic and Sybase. Each of these end users has licensed products and purchase services totaling at least $100,000. Rubric had total revenue of approximately $343,000 in 1998 and approximately $3.4 million in 1999, and at December 31, 1999, Rubric had an accumulated deficit of approximately $29.3 million. Rubric grew from 38 employees at December 31, 1998 to 78 employees at December 31, 1999. In connection with this acquisition, we issued approximately 3.0 million shares of our common stock in exchange for all outstanding shares of Rubric capital stock, and converted all outstanding options and warrants to acquire Rubric capital stock into options and warrants to purchase approximately 600,000 shares of our common stock. We intend to account for the acquisition as a purchase, and the merger is intended to qualify as a tax-free reorganization. OUR BUSINESS HAS RISKS We introduced Foundation in the fourth quarter of 1997, and began offering our analytic applications in the third quarter of 1998. In May 1999, we expanded our suite by introducing our first applications designed for e-business. We expect that our future growth will depend significantly on revenue from licenses of these new applications. We have incurred net losses in each period since our inception and as of December 31, 1999 we had accumulated net losses of approximately $41.7 million. We have not achieved profitability and we expect to continue to incur losses for the foreseeable future. Our business is subject to risks, and our market is subject to rapid technological change and intense competition. In addition, our acquisition of Rubric involves risks, including the possibility that costs or difficulties related to the integration of our businesses or products could be greater than expected. ------------------------ TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> PROSPECTUS SUMMARY..................... 1 RISK FACTORS........................... 5 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA......... 17 USE OF PROCEEDS........................ 18 DIVIDEND POLICY........................ 18 PRICE RANGE OF COMMON STOCK............ 18 CAPITALIZATION......................... 19 DILUTION............................... 20 SELECTED CONSOLIDATED FINANCIAL DATA... 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................... 24 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> BUSINESS............................... 32 MANAGEMENT............................. 50 RELATED PARTY TRANSACTIONS............. 61 PRINCIPAL AND SELLING STOCKHOLDERS..... 63 DESCRIPTION OF CAPITAL STOCK........... 66 SHARES ELIGIBLE FOR FUTURE SALE........ 69 LEGAL MATTERS.......................... 71 EXPERTS................................ 71 WHERE YOU CAN FIND ADDITIONAL INFORMATION.......................... 72 INDEX TO THE FINANCIAL STATEMENTS...... F-1 UNDERWRITING........................... U-1 </TABLE> THE OFFERING Common stock offered by Broadbase.......................... 1,500,000 shares Common stock offered by the selling stockholders..................... 1,500,000 shares Common stock to be outstanding after this offering................ 22,542,151 shares Use of proceeds.................... General corporate purposes, including working capital. See "Use of Proceeds". Nasdaq National Market symbol...... BBSW The number of shares of our common stock that will be outstanding after this offering is based on the shares outstanding on December 31, 1999 and the 2,992,064 shares that we issued in exchange for all outstanding shares of Rubric capital stock in connection with our acquisition of Rubric, and excludes: - 607,728 shares reserved for issuance pursuant to the exercise of options and warrants to purchase Rubric capital stock that were converted into options and warrants to purchase our common stock; - 3,195,489 shares subject to options outstanding as of December 31, 1999, at a weighted average exercise price of $10.12 per share; - 2,764,695 shares available for issuance under our 1999 Equity Incentive Plan as of December 31, 1999 which amount was increased by 902,504 shares on January 1, 2000; and - 500,000 shares available for issuance under our 1999 Employee Stock Purchase Plan as of December 31, 1999 which amount was increased by 180,500 shares on January 1, 2000. As of February 1, 2000, we had granted additional options to purchase an aggregate of 2,667,591 shares of common stock at a weighted average price of $86.41 per share under our 1999 Equity Incentive Plan, and options to purchase 300,000 shares of common stock at an exercise price of $54.00 per share outside of our employee benefit plans. CORPORATE INFORMATION We incorporated in California in November 1995 under the name BroadBase Information Systems, Inc., and reincorporated in Delaware in September 1999 under our current name. Our principal executive offices are located at 172 Constitution Drive, Menlo Park, California 94025. Our telephone number is (650) 614-8300. Broadbase, Foundation, Rubric and eMA are our trademarks. This prospectus also contains trademarks and trade names of other companies. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> PERIOD FROM YEARS ENDED YEAR ENDED NOVEMBER 28, 1995 DECEMBER 31, DECEMBER 31, 1999 (INCEPTION) TO ------------------ ---------------------- DECEMBER 31, 1996 1997 1998 ACTUAL PRO FORMA ------------------- ------- -------- -------- ----------- (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenue...................... $ -- $ -- $ 3,439 $ 10,442 $ 13,872 Gross margin..................... -- -- 2,472 6,395 6,437 Loss from operations............. (1,273) (5,575) (11,452) (24,135) (106,582) Net loss......................... $(1,272) $(5,487) $(11,343) $(23,570) $(106,233) Basic and diluted net loss per share.......................... $ (4.30) $ (6.19) $ (8.85) $ (3.74) $ (11.44) Weighted-average common shares -- basic and diluted.... 296 887 1,281 6,296 9,287 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ------------------------------------- PRO FORMA AS ACTUAL PRO FORMA ADJUSTED ------- ----------- ----------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................. $76,642 $ 76,852 $227,052 Working capital........................................... 69,362 60,025 210,225 Total assets.............................................. 84,770 449,280 599,480 Long-term debt and capital lease obligations, net of current portion......................................... 333 548 548 Stockholders' equity...................................... $73,206 $426,093 $576,293 </TABLE> The unaudited pro forma information reflects our recent acquisition of Rubric. The unaudited pro forma combined statement of operations data is derived from our audited statement of operations data and audited statement of operations data of Rubric, for the year ended December 31, 1999, giving effect to the acquisition as if it had occurred on January 1, 1999. The unaudited pro forma combined balance sheet data is derived from our audited balance sheet data and the audited balance sheet data of Rubric as of December 31, 1999, giving effect to the acquisition as if it had occurred on December 31, 1999. The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the transaction had been consummated at the dates indicated, nor is it necessarily indicative of the future operating results or financial position of the combined companies. The unaudited pro forma as adjusted balance sheet data above reflects the receipt of the net proceeds from the sale of the 1,500,000 shares of common stock offered by Broadbase at an assumed initial price to public of $106.00 per share after deducting the estimated underwriting discounts and commissions and estimated offering expenses. Unless otherwise indicated, all information in this prospectus (1) assumes that the underwriters will not exercise their over-allotment option to purchase additional shares in this offering, (2) does not give effect to the recently announced two-for-one split of our common stock that is planned to occur after this offering, and (3) does not include approximately 3.0 million shares of our common stock that we issued in connection with our acquisition of Rubric.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001076481_sequenom_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001076481_sequenom_prospectus_summary.txt
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+Prospectus summary This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk factors." Our principal executive offices are located at 11555 Sorrento Valley Road, San Diego, CA 92121. Our telephone number is (858) 350-0345. Our web site is http://www.sequenom.com. We do not intend the information found on our web site to be a part of this prospectus. OUR BUSINESS We are a pioneer in the new field of industrial genomics. Industrial genomics is the large scale commercial use of the knowledge of DNA variations for improving health, agriculture and livestock. These variations are the origin of most differences between individuals, including disease predispositions and variations in drug responses. Single nucleotide polymorphisms, or SNPs, are the most common variations. SNPs represent the smallest possible genetic change, and occur where the DNA molecules of different persons vary at a single location. We believe that SNP analysis will play an essential role in the development of drugs, diagnostics and other life science applications in the immediate future. Our goal is to be the leader in the commercialization of industrial-scale SNP analysis. We have developed the MassArray system, a highly accurate, cost-effective technology that is capable of high throughput SNP analysis at high speeds. Our strategy is to capitalize on the quickly emerging demand for SNP analysis in the areas of drug discovery and development, DNA diagnostics, patient stratification by genetic traits, clinical trials, seed development and livestock breeding. Six centers, including several academic and governmental sites, diagnostic laboratories and a leading biotechnology company, are using our MassArray system, assessing its performance in the field, and providing us with information regarding its performance. THE SNP ANALYSIS MARKET The SNP analysis market represents a significant portion of both the biochip, or miniaturized chips containing DNA or other substances, and the DNA sequencing markets and can be divided into three segments: . confirmation of new sites of genetic variation in DNA, which typically requires the analysis of a SNP in up to a hundred people; . determination of the medical importance of SNPs, which typically requires the analysis of a SNP in a few thousand diseased and healthy people; and . utilization of SNPs in genomics-based drug development, disease predisposition determination and diagnostic test development, which could eventually require the analysis of multiple SNPs in millions of people. Current methods of SNP analysis are inaccurate, non-automated, inflexible, expensive or slow and are therefore primarily effective only as research tools. To compensate for deficiencies in accuracy, current methods require either repetitive testing of each sample or the use of a larger test population, which makes current methods impractical for most commercial applications. OUR SOLUTION Our MassArray system directly analyzes SNPs by improving on a technology called mass spectrometry. By using mass spectrometry to measure molecular weight, our MassArray system is capable of characterizing molecules with a high level of accuracy. This is done at a competitive price and in a single reading. Our technology is also extremely versatile and can be rapidly reconfigured for different types of analyses. In addition, the MassArray system is capable of reading up to 20,000 SNPs per day, which we believe is a throughput that can meet commercial needs. PLAN OF DISTRIBUTION ALTERNATE COVER PAGE FOR SHELF PROSPECTUS - ------------------------------------------------------------------------------- The shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states the shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with. Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the shares may not simultaneously engage in market making activities with respect to our common stock for a period of two business days prior to the commencement of such distribution. In addition, each selling stockholder will be subject to applicable provisions of the Exchange Act and the associated rules and regulations under the Exchange Act, including Regulation M, which provisions may limit the timing of purchases and sales of shares of our common stock by the selling stockholders. We will make copies of this prospectus available to the selling stockholders and have informed them of the need to deliver copies of this prospectus to purchasers at or prior to the time of any sale of the shares. We will file a supplement to this prospectus, if required, to comply with Rule 424(b) under the Securities Act upon being notified by a selling stockholder that any material arrangements have been entered into with a broker-dealer for the sale of shares through a block trade, special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer, such supplement will disclose: . the name of each such selling stockholder and of the participating broker- dealer(s), . the number of shares involved, . the price at which such shares were sold, . the commissions paid or discounts or concessions allowed to such broker- dealer(s), where applicable, . that such broker-dealer(s) did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus, and . other facts material to the transaction. In addition, upon being notified by a selling stockholder that a donee or pledgee intends to sell more than 500 shares, we will file a supplement to this prospectus. We will bear all costs, expenses and fees in connection with the registration of the shares. The selling stockholders will bear all commissions and discounts, if any, attributable to the sales of the shares. The selling stockholders may agree to indemnify any broker-dealer or agent that participates in transactions involving sales of the shares against certain liabilities, including liabilities arising under the Securities Act. - ------------------------------------------------------------------------------- Our MassArray system has three components--hardware, software and disposables. The hardware components include a mass spectrometer and liquid dispensing units, which are off-the-shelf instruments modified to accommodate our MassArray technology. Our proprietary Genolyzer bioinformatics software automatically calculates, records, compares and reports genotypes at a rate of three seconds per sample. Our disposables consist of MassArray kits for SNP sample preparation, including the proprietary SpectroCHIP on which we place samples in a 96 spot array for reading by the mass spectrometer. COMMERCIALIZATION PLAN We are seeking to penetrate the SNP analysis market by identifying areas of potential widespread interest and establishing commercial relationships with opinion leaders. We have initiated this effort by selecting six highly visible academic, government and commercial centers as collaborators to validate our MassArray system in pre-launch testing. These centers are Genzyme Corporation, the US Department of Agriculture, the National Institutes of Health, the National Cancer Institute, the University of Munster and GLE Medicon in Germany. In October 1999, we contracted for the first sale of a MassArray system. We commenced a commercial launch of our MassArray system during the fourth quarter of 1999. We intend to develop proprietary disposable SNP tests, called assays, and software products that are useful initially as research tools to confirm the association of particular SNPs with particular diseases and subsequently as diagnostic kits that can be sold for SNP profiling. In addition, we will seek to retain commercial rights to assays that we develop on behalf of or together with our customers. Over time, with our customers, we intend to develop knowledge-based genomic products that combine pharmaceutical, medical and genetic information, such as validated SNP sets for specific diseases. Also, in addition to DNA, we believe our MassArray technology can serve as a platform for the analysis of many other biomolecules. We therefore intend to develop new products for applications other than DNA and SNP analysis. Alternate Cover Page For Shelf Prospectus Shares to be sold by Selling Stockholders The following information assumes that the underwriters do not exercise the over-allotment option we granted to them to purchase additional shares in the offering. <TABLE> <S> <C> Common stock our selling stockholders are offering.................................. 67,826 shares Common stock to be outstanding after the offering.................................. 22,601,477 shares </TABLE> Except as otherwise indicated, you should assume the following when analyzing information in this prospectus: . the conversion of 14,842,757 outstanding shares of our preferred stock into 14,842,757 shares of our common stock on a one-for-one basis upon the closing of this offering; . the sale of approximately $1,560,000 in shares of common stock to two German consulting firms in a private sale to be completed immediately prior to this offering, or 65,000 shares assuming an initial public offering price of $24.00 per share; . the conversion of debt owed to Technologie Beteiligungs Gesellschaft, or TBG, in the amount of DEM4 million, approximately $2.1 million, into 272,108 shares of our common stock upon the closing of this offering at an assumed price of $24.00 per share; . the issuance of 24,792 shares of our common stock upon the closing of this offering in satisfaction of accrued interest of approximately DEM1.7 million or $930,625 payable to TBG; and . no exercise of the underwriters' over-allotment option. We have an obligation to issue shares of common stock upon exercise of options and warrants outstanding at December 27, 1999, in addition to the shares of common stock to be outstanding after this offering. These shares, when issued, will include: . 750,000 shares issuable upon exercise of the underwriters' over-allotment option; . 1,287,049 shares issuable upon the exercise of options outstanding as of December 27, 1999, at a weighted average exercise price of $1.66 per share. This share amount consists of 2,475,250 shares issuable upon the exercise of options outstanding at September 30, 1999 and 335,250 shares issuable upon the exercise of options granted during October 1999, less 1,523,451 shares issued upon exercise of options during the period October 1, 1999 through December 27, 1999; . 176,503 shares issuable upon the exercise of warrants outstanding as of December 27, 1999 at a weighted average exercise price of $2.10 per share; and . 248,750 additional shares available for future grant as of December 27, 1999 under our 1998 stock plan, and an additional 850,000 shares made available for future grant under our stock plans to be adopted at the close of this offering. For a description of our stock option and stock purchase plans, please see "Management--Employee benefit plans." We base our calculation of the number of shares of common stock outstanding after the offering on shares outstanding as of December 27, 1999. Please see "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001076641_niku-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001076641_niku-corp_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read this summary together with the entire prospectus, including the more detailed information in our consolidated financial statements and accompanying notes appearing elsewhere in this prospectus. Unless otherwise indicated, all information contained in this prospectus assumes (1) no exercise of the underwriters' over-allotment option, (2) the conversion of each outstanding share of preferred stock into one share of common stock and (3) no exercise of outstanding stock options or warrants. NIKU We provide Internet software products and an online marketplace for the sourcing, management and delivery of professional services. Professional services include consulting, financial services, medicine, law, engineering, advertising and other industries in which knowledge and information, or intellectual capital, are an important element of the services. According to the U.S. Department of Commerce, the gross domestic product of the professional services industry, including business, health, legal and educational services, exceeded $900 billion in 1997. Unlike product-oriented businesses, which produce finished goods from raw materials and component parts and sell these goods on a per-item basis, professional services businesses create information-based deliverables using human resources that are often billed at time-based rates. As a result of these characteristics, professional services businesses require sophisticated applications to manage knowledge and information, including unstructured data and human resources. The market for business-to-business electronic commerce for services is large and growing, with Forrester Research estimating that it will increase from approximately $22 billion in 1999 to approximately $220 billion by 2003, representing a compound annual growth rate of approximately 78%. We offer a set of Internet software products, eNiku, xNiku and iNiku, which are designed to automate the core business processes of professional services organizations, professional services providers within enterprises, and small businesses and individual professionals. eNiku enables organizations to manage knowledge, human resources and projects, track time and expenses and analyze business performance on their corporate "intranets," internal Internet-based networks. xNiku enables organizations to extend the functions and features of eNiku to business partners, customers and suppliers using corporate "extranets," private Internet-based networks reaching beyond the enterprise. iNiku, our website for individual professionals and small businesses, allows users to gain access to relevant content and services and operate their businesses over the Internet. We have designed our products to be used in an integrated fashion. For example, an organization using eNiku on its intranet could work with business partners through its extranet with xNiku and supplement its resources with contractors who are part of the iNiku community. The common technology linking eNiku, xNiku and iNiku also allows users to easily participate in our Niku Services Marketplace, a marketplace for buyers and sellers of professional services. We believe key benefits to users of our products and services include: - significantly enhanced client service; - substantially expanded revenue opportunities; - increased profitability; and - improved recruitment and retention of employees and contractors. Our goal is to be the leading provider of Internet software products and online marketplaces for the sourcing, management and delivery of professional services in a number of professional services industries. Key elements of our strategy to achieve this goal are as follows: - target leading enterprise customers; - enhance our iNiku website; - expand the Niku Services Marketplace; - target additional professional services industries, including financial services, medicine, law and advertising; - pursue acquisitions of complementary businesses, products and technologies; and - expand our global operations in Europe and the Asia-Pacific region, where we currently have approximately 25 employees. An investment in our common stock involves risks which are described in the section entitled "Risk Factors" on page 7 as well as elsewhere in this prospectus. We have incurred net losses of $3.0 million for our fiscal year ended January 31, 1999 and $13.5 million for the nine months ended October 31, 1999. As of October 31, 1999, we had an accumulated deficit of $16.6 million. We expect to incur net losses for the foreseeable future. We have only recently introduced the latest versions of our Internet software products. For the foreseeable future, we expect that our revenues and operating results will depend upon sales of licenses of our primary Internet software product, eNiku. For the nine months ended October 31, 1999, we derived approximately 50% of our revenues from three customers and we expect that for the foreseeable future our revenues will continue to be concentrated in a relatively small number of customers. Therefore, our operating results could suffer if we cannot market eNiku successfully and obtain additional customers. We operate in a competitive industry in which a number of companies offer products that provide some of the functionality of our products. Upon completion of this offering, our officers and directors will beneficially own approximately 39% of our outstanding common stock. Other risks of an investment in our common stock include our limited operating history, the potential for fluctuations in our operating results, the long sales cycle for our products, our need to expand our sales channels, the fact that our products have not been deployed on a large scale, the complexity of implementation of our products for large customers and our ability to effectively integrate recent acquisitions. Other risks also include risks related to the Internet industry in which we operate and risks related to this offering. We were incorporated in Delaware in January 1998. In December 1999, we acquired Proamics Corporation, a provider of project accounting, time-and-expense and billing solutions for the professional services industry. In January 2000, we acquired Legal Anywhere, Inc., a provider of Internet collaboration software for the legal profession. Our principal executive offices are located at 305 Main Street, Redwood City, California 94063. Our telephone number at this location is (650) 298-4600. The information on our website does not constitute a part of this prospectus. The Niku logo, Niku, eNiku, iNiku, xNiku, Niku Adaptable KnowledgeStore, NAKS and Niku Services Marketplace are our trademarks. All other brand names and trademarks appearing in this prospectus are the property of their respective owners. THE OFFERING Common stock offered....... 8,000,000 shares Common stock to be outstanding after the offering................. 69,044,235 Use of proceeds............ For general corporate purposes, capital expenditures and working capital. See "Use of Proceeds." Proposed Nasdaq National Market symbol............ "NIKU" The number of shares of our common stock to be outstanding after the offering is based on the number of shares outstanding as of January 29, 2000. The number of shares to be outstanding excludes as of January 29, 2000: - 5,409,954 shares of our common stock subject to outstanding options and warrants; - 647,148 shares of our common stock to be available for future grant under our stock plans; and - options to purchase shares of Legal Anywhere common stock representing options to purchase up to 141,282 shares of our common stock, which were assumed in connection with our acquisition of Legal Anywhere. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> PRO FORMA ------------------------- NINE NINE MONTHS MONTHS YEAR ENDED ENDED OCTOBER 31, YEAR ENDED ENDED JANUARY 31, ------------------ JANUARY 31, OCTOBER 31, 1999 1998 1999 1999 1999 ----------- ------- -------- ----------- ----------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues................................ $ 15 $ -- $ 2,976 $ 10,933 $ 12,332 ------- ------- -------- -------- -------- Gross profit............................ 11 -- 2,373 5,772 6,287 ------- ------- -------- -------- -------- Operating expenses...................... 3,161 1,721 16,084 28,751 38,642 ------- ------- -------- -------- -------- Operating loss.......................... (3,150) (1,721) (13,711) (22,979) (32,355) ------- ------- -------- -------- -------- Net loss................................ $(3,020) $(1,665) $(13,533) $(23,340) $(32,373) Basic and diluted net loss per share.... $ (0.62) $ (0.35) $ (2.31) $ (1.48) $ (1.94) Shares used in computing basic and diluted net loss per share............ 4,882 4,800 5,871 15,729 16,718 </TABLE> <TABLE> <CAPTION> AT OCTOBER 31, 1999 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $ 19,329 $ 63,323 $218,563 Working capital............................................. 10,323 53,619 208,859 Total assets................................................ 28,738 146,300 301,540 Long-term obligations, less current portion................. 968 3,341 3,341 Redeemable convertible preferred stock...................... 28,580 100,966 -- Total stockholders' equity (deficit)........................ (13,828) 24,209 280,415 </TABLE> See note 1 of notes to our financial statements for a description of the method that we used to compute the net loss per share amounts. Niku's operations for the period from January 8, 1998 (inception) through January 31, 1998, were not significant and are included in Niku's results of operations for the year ended January 31, 1999. The unaudited pro forma combined statement of operations data give effect to our acquisition of Proamics Corporation in December 1999 and Legal Anywhere in January 2000 as if the acquisitions had occurred on February 1, 1998 and do not assume the conversion of the shares of our outstanding preferred stock into common stock upon the closing of this offering. The unaudited pro forma combined balance sheet data give effect to (1) our acquisition of Proamics, (2) our acquisition of Legal Anywhere and (3) the sale of 7,998,012 shares of our Series D preferred stock in November 1999 for proceeds of approximately $39.9 million as if the acquisitions and sale each occurred on October 31, 1999. The pro forma as adjusted balance sheet data give effect to the conversion of all outstanding shares of our preferred stock into common stock upon the closing of this offering and the sale of the 8,000,000 shares of common stock that we are offering under this prospectus, at an assumed initial public offering price of $21.00 per share, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. See "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001076643_breakaway_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001076643_breakaway_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS IMPORTANT FEATURES OF THIS OFFERING AND THE INFORMATION INCLUDED IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE RISKS OF INVESTING IN OUR COMMON STOCK DISCUSSED UNDER "RISK FACTORS" ON PAGE 5 OF THIS PROSPECTUS. BREAKAWAY SOLUTIONS Breakaway is a full service provider of e-business solutions that allow growing enterprises to capitalize on the power of the Internet to reach and support customers and markets. We have designed our services specifically for growing enterprises. These are businesses which generally fit within two broad categories: - companies or divisions of larger companies that have sales of up to $500 million per year; and - new and emerging Internet-based businesses. Growing enterprises often face significant problems in capitalizing on the opportunity to do business on the Internet, known as e-business. These problems include technological complexity, costs of and time required for implementation and support and the scarcity of qualified professionals. We enable our growing enterprise clients to solve these problems by combining high quality, cost-effective Internet professional services with our ability to host software applications installed on our computers, known as application hosting. Our combination of professional services with our application hosting ability allows us to deliver sophisticated e-business solutions that otherwise might be unavailable to our clients. The three services which we offer to our clients are: - BREAKAWAY STRATEGY SOLUTIONS. Our professionals analyze our client's markets, business processes and existing technology and provide practical advice on how to use the Internet and other information technology most effectively. - BREAKAWAY E-BUSINESS SOLUTIONS. Our professionals recommend, tailor and integrate packaged software applications from software vendors as well as design, develop and integrate our own custom e-business applications to assist our clients in using the Internet in their businesses. - BREAKAWAY APPLICATION HOSTING. We install, maintain and manage both standard and custom software applications for our clients' use on computer hardware which we locate in specially designed facilities. We believe that growing enterprises demand high quality e-business solutions which can be delivered rapidly and cost-effectively. We address these requirements through our innovative approach, which has five key elements: - we use our proprietary Breakthrough methodology to maintain quality and deliver consistent results; - we concentrate project development at centralized Breakaway Solution Centers; - we maintain close contact with our clients by delivering the solutions which we develop through small groups of senior personnel based at regional offices; - we capture and disseminate our intellectual capital through the use of our Breakaway Knowledge Innovation Team; and - we provide global application hosting as part of our full service offering, in contrast to most providers of e-business solutions who do not have this capability. We employ over 615 professionals who provide strategy solutions, e-business solutions and application hosting services. We offer services through eleven regional offices located in Boca Raton, Boston, Chicago, Dallas, Minneapolis, New York, Orlando, Philadelphia, Redwood Shores, California and Washington, D.C. and Dublin, Ireland. Our seven Breakaway Solution Centers are located in Boca Raton, Boston, Minneapolis, Philadelphia, Dallas, Redwood Shores and Dublin. We provide application hosting solutions through eleven facilities located in North America, Europe, Asia and Australia. RECENT DEVELOPMENTS On July 28, 2000, we acquired all of the issued and outstanding share capital of Zartis.com Limited, a Dublin, Ireland-based e-business consultancy. Zartis is a full service consulting and systems integration firm that focuses on delivering customer-centered e-business solutions to emerging enterprises. We believe that this acquisition will allow us to expand our business presence in Europe. As consideration for the share purchase, we issued 430,456 shares of our common stock, assumed 64,440 outstanding options and paid the former Zartis shareholders $2 million in cash. On May 26, 2000 we consummated a private placement of 1.5 million shares of our common stock to five mutual funds managed by either Putnam Investment Management, Inc. or The Putnam Advisory Company, Inc. The gross proceeds of this private placement were $39 million. Effective as of April 1, 2000, we acquired Eggrock Partners, Inc. in an all-stock merger transaction. Eggrock is a full service consulting and systems integration firm that focuses on delivering customer-centered e-business solutions to emerging enterprises. Eggrock assists growing companies in selecting and implementing software applications that will allow companies to operate their business more effectively through use of the Internet. We believe that this acquisition will enhance and expand our client base, geographic presence and our ability to provide strategy and e-business solutions to our customers. As merger consideration, we issued 6,176,331 shares of common stock and assumed 1,095,621 outstanding options. On February 18, 2000, we acquired DataCyr Corporation. DataCyr develops and markets software designed to allow enterprises to seamlessly move and transform data from multiple incompatible sources to common databases. We believe that this acquisition will enhance our ability to link our clients' legacy systems to their Web based systems. As merger consideration, we issued 110,000 shares of our common stock. THE OFFERING <TABLE> <S> <C> 1,500,000 shares Common Stock offered by selling stockholders..................................... Use of proceeds ................................... Breakaway will not receive any proceeds from the sale of shares in this offering. Nasdaq National Market symbol...................... BWAY </TABLE> ADDITIONAL INFORMATION Except as set forth in the financial statements and related notes or as otherwise indicated, all information in this prospectus reflects a two-for-one stock dividend distributed on March 23, 2000 to stockholders of record as of March 7, 2000. Our principal executive offices are located at 50 Rowes Wharf, 6th Floor, Boston, Massachusetts 02110 and our telephone number is (617) 960-3400. Our World Wide Web site address is www.breakaway.com. The information in the Web site is not incorporated by reference into this prospectus and should not be considered to be part of this prospectus. Our Web site address is included in this prospectus as an inactive textual reference only. We use the trademarks Breakaway Solutions, Breakthrough, Breakaway Solution Centers and Breakaway Knowledge Innovation Team. This prospectus also contains trademarks and trade names of other companies. SUMMARY CONSOLIDATED FINANCIAL DATA The following summary historical and pro forma consolidated financial data should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited consolidated financial statements and related notes thereto included elsewhere in this prospectus. The summary pro forma data do not purport to represent what our results would have been if the events below had occurred at the dates indicated. From its inception until December 31, 1998, Breakaway was an S corporation and, accordingly, was not subject to federal and state income taxes, except for certain Massachusetts income taxes on S corporations with annual revenues in excess of $6 million. The pro forma net income (loss) and pro forma net income (loss) per share--basic and diluted information presented below have been computed as if Breakaway were subject to all federal and all applicable state corporate income taxes since 1997, based on the statutory tax rates and the tax laws then in effect. The following summary pro forma consolidated statement of operations data for Breakaway for the year ended December 31, 1999 and the three months ended March 31, 1999 and 2000 give effect to the acquisitions of Applica Corporation, WPL Laboratories, Inc., Web Yes, Inc. and Eggrock Partners, Inc. as if these acquisitions had occurred on January 1, 1999. The summary pro forma consolidated balance sheet data as of March 31, 2000 gives effect to (i) the acquisition of Eggrock Partners, Inc. as if it had occurred on March 31, 2000 and (ii) the consummation of a private placement of 1.5 million shares of common stock to five mutual funds managed by either Putnam Investment Management, Inc. or The Putnam Advisory Company, Inc., the gross proceeds of which were $39.0 million. <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, ----------------------------------------- ----------------------------------------- 1999 PRO 1999 PRO 2000 PRO 1997 1998 1999 FORMA 1999 FORMA 2000 FORMA ---- ---- ---- -------- ---- -------- ---- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenue..................... $6,118 $10,018 $ 25,390 $ 39,096 $ 3,111 $ 10,602 $18,147 $ 23,993 Income (loss) from operations................ 1,016 (700) (10,865) (74,631) (274) (18,334) (3,594) (23,104) Net income (loss)........... 1,074 (575) (10,367) (74,096) (236) (18,398) (3,223) (22,660) Net income (loss) per share-- basic and diluted......... $ 0.08 $ (0.05) $ (0.59) $ (2.80) $ (0.02) $ (1.04) $ (0.09) $ (0.53) Weighted average shares outstanding............... 12,826 12,680 17,440 26,459 9,847 17,689 35,106 43,054 Pro forma net income (loss).................... $ 644 $ (380) Pro forma net income (loss) per share-- basic and diluted......... $ 0.05 $ (0.03) </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, 2000 --------------------- PRO ACTUAL FORMA ------ ----- (IN THOUSANDS) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 6,667 49,471 Total assets................................................ 86,575 440,862 Total long-term liabilities................................. 3,418 3,418 Stockholders' equity........................................ 72,270 392,089 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001076732_usinternet_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001076732_usinternet_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL DATA AND RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS REFLECTS BOTH A THREE-FOR-TWO STOCK SPLIT EFFECTED BY A STOCK DIVIDEND DISTRIBUTED ON DECEMER 17, 1999 TO ALL SHAREHOLDERS OF RECORD AT THE CLOSE OF BUSINESS ON DECEMBER 3, 1999 AND AN ADDITIONAL THREE-FOR-TWO STOCK SPLIT THAT WILL BE EFFECTED BY AN ADDITIONAL STOCK DIVIDEND TO ALL SHAREHOLDERS OF RECORD AT THE CLOSE OF BUSINESS ON MARCH 14, 2000. THIS ADDITIONAL STOCK DIVIDEND WILL BE DISTRIBUTED ON OR ABOUT MARCH 28, 2000. USINTERNETWORKING USI implements, operates and supports packaged software applications that can be accessed and used over the Internet. These IMAP, or Internet Managed Application Provider, services are based on packaged applications from leading software vendors and are designed to meet the needs of middle market and global 1000 companies for business functions such as e-commerce, sales force automation and customer support, human resource and financial management, messaging and collaboration and professional services automation. In order to deliver and support our IMAP solutions, we have constructed a highly reliable, secure global network, including four Enterprise Data Centers located around the world. We implement selected packaged software applications in our data centers, configure them to meet the needs of our clients and bundle them with Internet access, back-up, security and operational support. We integrate these elements of technology and sell them to clients as a service for a recurring monthly fee over a fixed term. In addition, as part of our IMAP services, we offer complex web hosting services to clients who want to run their own software applications using our highly reliable and secure network. The advantages our clients realize by purchasing our IMAP services rather than purchasing the application software and implementing it themselves include: - faster time to benefit; - reduced technical and integration risk; - reduced reliance on internal IT staff; and - lower total costs and elimination of capital investment. We are able to deliver these benefits to our clients in part because we have designed and implemented a network of four Enterprise Data Centers located in Annapolis, Silicon Valley, Amsterdam and Tokyo. The data centers are linked by a dedicated network and by robust transit connections to twelve major Internet backbones--eight in North America and two in Europe and two in Asia. Our data centers comprise standardized hardware environments to support our applications, embedded security, EMC disk arrays for storage and real-time back-up and significant levels of infrastructure redundancy. Our network is monitored and managed through USIView, which enables a client engineer to see all hardware, software and network elements of a client application in a single view. Cisco assisted in the design of our network and has designated it as a Cisco Powered Network. We believe that controlling all elements of the network from the client's Internet backbone provider or LAN enables us to deliver superior response time, reliability and security for our clients. We can substantially reduce implementation time because we implement our applications in a consistent and pre-configured environment. Moreover, our clients do not need to mediate among disparate vendors, because we take total responsibility for application support and system performance and availability. We implement and manage applications that are developed by others. To execute this strategy, we have established agreements with leading software vendors in key application areas, including: - BroadVision and Microsoft in e-commerce; - Ariba in business to business electronic commerce; - Siebel in sales force automation, customer service and enterprise marketing; - Lawson and PeopleSoft in human resources and financial management; - Microsoft in enterprise messaging and collaboration; - Niku in professional services automation; and - Sagent in decision-making support. Our IMAP clients sign contracts that provide for fixed monthly service fees, typically for a three- to five-year term, in exchange for the service we provide. Once a client signs an IMAP contract, we invest in the additional hardware, software and implementation needed to deliver that client's service. This requires a substantial investment in the early years to build our client base. Since we own or provide most of the elements and operational support for a client's implementation, we anticipate that we will experience a high level of client retention, even at the end of the contract's term. We also expect to benefit from rapidly growing recurring revenue, which we believe will generate substantial positive cash flow in later years. We introduced our IMAP services in late 1998. For the year ended December 31, 1999, we generated $35.5 million in revenues, of which 61% was derived from IMAP sales and the balance from traditional IT services. As of December 31, 1999, we had 109 signed contracts with 88 clients for our IMAP services. The total expected revenue from these contracts, assuming payment over the full contract terms, exceeds $140 million. MARKET TREND HIGHLIGHTS We believe there are several key trends occurring in our marketplace that create a substantial market opportunity for a single-source service solution that combines implementation and operation of software, hardware, systems integration and Internet-based communications for middle market businesses at a competitive price. INCREASING ACCEPTANCE OF THE APPLICATION SERVICE PROVIDER MODEL. The Application Service Provider model is being increasingly validated by the emergence of new entrants into this market. International Data Corporation estimates that the market opportunity in the high-end Application Service Provider market will reach $2 billion by 2003, representing a four-year compound annual growth rate of 91%. RAPID GROWTH OF E-COMMERCE AND INTERNET-BASED COMMUNICATIONS. E-commerce is becoming a critical element of many businesses' strategies, as companies increasingly demand that their vendors communicate ordering, invoicing and payment transactions through Internet-enabled applications. International Data Corporation estimates that commerce on the Internet will be more than $1 trillion by 2003, reflecting a four-year compound annual growth rate of 85%. COMPETITIVE NEED OF MIDDLE MARKET ENTERPRISES TO AUTOMATE KEY BUSINESS PROCESSES. Middle market enterprises increasingly face competitive demands to automate business processes, but they frequently have not been able to afford the functionality available to their larger competitors. Many businesses recognize that they do not have an infrastructure sufficient to ensure reliable and responsive deployment of mission-critical applications on the Internet, and so they are increasingly turning to Application Service Providers for outsourced solutions. Moreover, many middle market enterprises lack the staff to implement, operate and maintain these complex applications. AVAILABILITY OF INTERNET-ENABLED PACKAGED SOFTWARE APPLICATIONS. The trend among packaged software providers to Internet enable their software is continuing. This is particularly true for those applications with distributed users such as e-commerce, enterprise resource planning applications and sales force automation, where the increasing ubiquity of the Internet makes it a cost-efficient mechanism for implementing distributed functions. COMPETITIVE STRENGTHS We have built and are capitalizing on a number of key strengths to develop a leading market position as a facilities-based Application Service Provider. These strengths include: SPECIALIZED GLOBAL NETWORK ALREADY IN PLACE. We have a highly reliable, redundant global network specifically designed to support our IMAP solutions. Our network is designed to provide the fastest possible response time, the highest level of security and 99.9% availability to our clients. FIRST MOVER ADVANTAGE. We believe we have created a recognized brand name in the emerging Application Service Provider market by establishing relationships with leading software providers in key application areas and by promoting our superior levels of client service. We believe this is a first mover advantage that should give us leverage in attracting new customers and in building additional partnerships with leading software application providers. SINGLE POINT OF RESPONSIBILITY. Our IMAP solutions enable clients to buy the functionality of leading enterprise software applications as a service from a single service provider, rather than as a collection of technologies from multiple vendors. We take full responsibility for the deployment and maintenance of these IMAP best-of-breed packaged software applications. This allows our clients to focus on their core competencies without mediating among disparate vendors. KEY ALLIANCES WITH LEADING APPLICATION PROVIDERS. We have established relationships with vendors in key application areas. These agreements provide us with a software portfolio that can meet a broad range of clients' e-commerce, enterprise resource planning and communication needs. Some of these agreements also provide USI with an advantageous market position. For example, we are the exclusive Application Service Provider of Siebel enterprise relationship management applications for direct customers of SiebelNet, headquartered in North America. RECURRING REVENUE AND CLIENT RETENTION MODEL. Our business model is designed to capture significant recurring revenue because our clients sign contracts that provide for fixed monthly service fees, generally over a three- to five-year term. Furthermore, our ongoing support of our clients provides us the opportunity to identify and supply additional IMAP solutions. We believe that the level of integration and complexity associated with our service offerings will create a significant inducement for our clients to remain with us after their contract terms expire. EXPERIENCED MANAGEMENT. We have assembled a highly qualified management team that has considerable experience in the management and growth of Internet, software, hardware and telecommunications businesses. We believe that our management's experience in the development of similar systems and services will be of significant value in ensuring the quality and success of the IMAP service offerings. Key members of management have previously held senior operating and management positions with ARINC, Booz Allen & Hamilton, Clarus, Data General, DIGEX, EDS, IBM, Silicon Graphics, Sprint, Sun Microsystems and Sybase. BUSINESS STRATEGY The focus of our strategy is to deliver timely, reliable and secure IMAP services to our clients. We believe that by doing so we will rapidly build our client base and secure long-term relationships, especially with those clients in the middle market. We intend to continue investing to maintain a value advantage over our competitors and to capitalize on our first mover advantages, as follows: DEVELOP NEW BUSINESS. We will continue to develop new business by soliciting potential clients through joint marketing campaigns with our hardware, software and integration partners, advertising in periodicals and newspapers, sponsoring seminars and trade shows in selected markets and conducting targeted mass mailings of marketing material. CROSS-SELL PRODUCTS TO INCREASE PENETRATION OF ACCOUNTS. We are able to provide a range of packaged software applications and complex Web hosting services to our clients. We actively seek to increase our sales to clients by cross-selling our products and services. Our aim is to increase our implementation and provision of our clients' mission-critical business processes. EXPAND OUR PORTFOLIO OF IMAP SOLUTIONS. We have entered into strategic partnerships with numerous application software vendors. These vendors are offering or developing additional applications in specific vertical market segments which we expect to deploy in order to expand our portfolio of IMAP solutions. ENHANCE THE CAPACITY AND FUNCTIONALITY OF OUR GLOBAL NETWORK. We will continue to deploy enhanced value features into our network. In addition, as we begin to address clients located in Europe and Asia, we will expand our capacity in those regions. Today, we provide European and Asian mirror sites to our clients from collocated EDCs in Amsterdam and Tokyo. EMPHASIZE THE IMAP BRAND. We have focused our sales and marketing efforts to distinguish IMAP as a branded product offering focused on the middle market and selected divisions of larger multi-national organizations. Our direct sales organization allows our sales representatives to understand each client's specific business needs better and provide the ongoing support that facilitates effective cross-selling. SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA The summary historical financial data for the period from our date of inception, January 14, 1998, through December 31, 1998 and for the year ended December 31, 1999, presented below was derived from our audited consolidated financial statements. You should read this information in conjunction with the sections of this prospectus entitled "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in conjunction with the historical consolidated financial statements and Notes included in the back of this prospectus. <TABLE> <CAPTION> FOR THE PERIOD FROM JANUARY 14, 1998 (DATE OF INCEPTION) THROUGH YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1999 ------------------- ----------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue..................................................... $ 4,122 $ 35,513 Costs and expenses: Direct cost of services................................... 3,425 23,570 Network and infrastructure costs.......................... 2,186 16,239 Selling, general and administrative....................... 25,240 63,998 Non-cash stock compensation expense....................... 231 10,351 Depreciation and amortization............................. 3,179 22,480 -------- --------- Total costs and expenses.................................... 34,261 136,638 -------- --------- Operating loss.............................................. (30,139) (101,125) Interest (expense) income................................... (2,314) (2,193) -------- --------- Net loss.................................................... (32,453) (103,318) Dividends accrued on Series A Convertible Preferred Stock and Series B Convertible Redeemable Preferred Stock(a).... (1,503) (2,328) Accretion of common stock subject to repurchase to fair value..................................................... (3,904) (23,938) Accretion of Series B Convertible Redeemable Preferred Stock to fair value(a).......................................... (237) (99) -------- --------- Net loss attributable to common stockholders................ $(38,097) $(129,683) ======== ========= Basic and diluted loss per common share attributable to common stockholders....................................... $ (27.09) $ (1.95) ======== ========= OTHER DATA: Capital expenditures...................................... 20,128 79,858 EBITDA(b)................................................. (26,729) (65,533) Cash used in operating activities......................... (21,184) (78,214) Cash used in investing activities......................... (37,087) (121,721) Cash provided by financing activities..................... 102,074 268,435 Ratio of earnings to fixed charges(c)..................... -- -- </TABLE> The following table summarizes consolidated balance sheet data as of December 31, 1999 and as adjusted to give effect to our sale of 3,000,000 shares of common stock in an offering of our common stock consummated in February 2000, including the receipt by us of approximately $119.0 million in net proceeds from that offering. <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 -------------------------- ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $112,303 $231,323 Available-for-sale securities............................... 31,707 31,707 Working capital............................................. 117,167 236,187 Total assets................................................ 325,454 444,474 Current portion of long-term debt and capital lease obligations............................................... 18,421 18,421 Short-term obligations expected to be refinanced............ 2,117 2,117 Long-term debt, capital lease obligations and convertible subordinated notes, excluding current portion............. 168,671 168,671 Stockholders' equity........................................ 102,461 221,481 </TABLE> - ------------------------ (a) Our Series A Convertible Preferred Stock and our Series B Convertible Redeemable Preferred Stock all converted to common stock upon the consummation of our initial public offering on April 14, 1999. (b) EBITDA consists of earnings (loss) before net interest, income taxes, depreciation and amortization, stock option compensation expense (a non-cash charge) and amortization of deferred IMAP costs. EBITDA is presented to clarify our operating results and it is not intended to represent cash flow or results of operations in accordance with generally accepted accounting principles. EBITDA is not calculated under generally accepted accounting principles and is not necessarily comparable to similarly titled measures of other companies. For a presentation of cash flows calculated under generally accepted accounting principles, see our historical consolidated financial statements contained in this prospectus. (c) The ratio of earnings to fixed charges is computed by dividing net loss before fixed charges by fixed charges. Fixed charges consist of interest charges, and amortization of discount related to indebtedness and that portion of rental expense we believe to be representative of interest. Earnings were insufficient to cover fixed charges by $26.8 million for the period from our date of inception, January 14, 1998, through December 31, 1998 and $89.6 million for the year ended December 31, 1999.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001076804_adaytum_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001076804_adaytum_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001076870_noosh-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001076870_noosh-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding NOOSH, Inc., and our financial statements and the related notes appearing elsewhere in this prospectus. Unless otherwise indicated, this summary and all the information in this prospectus assumes the automatic conversion of all outstanding shares of our preferred stock into shares of common stock upon the closing of this offering and no exercise of the underwriters' over-allotment option. Our Business We are a provider of business-to-business e-commerce solutions for the printing industry. We have developed and operate noosh.com, an Internet-based service for managing the design, procurement and production of print orders. Our service can be used to manage print products as diverse as business cards and stationery, promotional brochures and direct mail, customized packaging and labels, and books and magazines. Our service leverages the benefits of the Internet to enable print buyers, print vendors and other providers of related services to communicate and collaborate efficiently through the complex, multi- step process of a print job. Our service is primarily targeted at large corporations which budget at least $10 million annually for their print buying requirements and their print vendors. Print vendors who use our service generally pay us a transaction fee based on the size and volume of the print order, and print buyers who use our service generally pay us a monthly fee. As of May 11, 2000 over 40 print buyers have signed agreements with us to use our service. Of these, Bank of America Corp., the General Electric Company and Wells Fargo & Company have encouraged their printers to use our noosh.com service. In addition, to promote the acceptance of our service by large national corporations, we have entered into agreements with national vendors in the print industry under which they have agreed to market our service to their customers. To date, we have entered into four such print vendor agreements with Consolidated Graphics, Inc., Moore North America, Inc., R.R. Donnelley & Sons Company and Wallace Computer Services, Inc. under which they have agreed to market our services to their customers. As of May 11, 2000, we have also entered into agreements to use our service with over 198 smaller printers, pre-press vendors and print brokers. None of our company agreements obligate the print buyers, print vendors, pre-press vendors and print brokers to use our service and as of March 31, 2000 we had not generated significant revenue from these agreements. From January 1, 2000 through March 31, 2000, over 487 print orders have been issued by print buyers and accepted by print vendors through our noosh.com service. We were incorporated in August 1998 and have a limited operating history. For the three-month period ended March 31, 2000, we had revenue of $68,000. From inception through December 31, 1999, we were a development stage company and did not have any revenue. We also have a history of significant losses. We incurred a net loss of $17.6 million for the year ended December 31, 1999 and a net loss of $20.7 million for the three-month period ended March 31, 2000. As of March 31, 2000, we had an accumulated deficit of $38.6 million. We anticipate that we will continue to incur operating losses and negative operating cash flow in the foreseeable future. In addition, we operate in a competitive industry in which new competitors can enter with little difficulty. Accordingly, we expect competition in the market for print management services to intensify in the future. See "Risk Factors" beginning on page 6 to read about these and other factors you should consider before buying our shares. Corporate Information We were incorporated in California in August 1998 and reincorporated in Delaware in March 2000. Our corporate offices are located at 3401 Hillview Avenue, Palo Alto, California 94304. Our telephone number at that location is (650) 320-6000. Information contained on our Web site does not constitute part of this prospectus. We have filed for federal trademark registration for NOOSHSM, the NOOSHSM logo and LiveJobsSM. Other trademarks and tradenames appearing in this prospectus are the property of their holders. The Offering <TABLE> <C> <S> Common stock offered by NOOSH.............. 4,000,000 shares Common stock to be outstanding after this offering.................................. 37,602,173 shares Use of proceeds............................ For working capital and general corporate purposes. See "Use of Proceeds". Proposed Nasdaq National Market symbol..... "NOSH" </TABLE> The number of shares of common stock to be outstanding after this offering is stated as of April 4, 2000 and includes: . 21,981,137 shares of common stock and Class B common stock to be issued upon automatic conversion of preferred stock upon completion of this offering, based on an assumed initial public offering price of $12.00 per share; . 4,000,000 shares of common stock to be issued upon completion of this offering; and . 35,000 shares of common stock issuable upon exercise of a portion of an outstanding warrant at an exercise price of $7.45 per share prior to this offering. The number of shares of common stock to be outstanding after this offering excludes: . 14,950,000 shares of common stock authorized for issuance under our employee stock option plans, non-employee directors' stock option plan and our employee stock purchase plan, of which 4,392,538 shares, at a weighted average exercise price of $2.06, were subject to outstanding options as of April 4, 2000; . warrants for 1,573,308 shares of common stock and Class B common stock that are exercisable as of April 4, 2000 at a weighted average exercise price of $11.31; and . warrants for an additional 2,785,250 shares of common stock that may become exercisable in the future based on the holders meeting stated volume targets for business conducted over our service. Upon completion of this offering, our executive officers, directors, principal stockholders and their affiliates will beneficially own, in the aggregate, approximately 64.3% of our outstanding common stock. In addition, following this offering, our existing stockholders will own approximately 89.4% of our stock. As a result, these stockholders may be able to control all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could delay or prevent a change of control of NOOSH. SUMMARY FINANCIAL DATA The following summary financial data are derived from our financial statements included elsewhere in this prospectus. The pro forma balance sheet data reflects the receipt of net proceeds of $10.0 million upon the issuance and sale of 769,231 shares of Series E preferred stock to GE Capital Equity Investments, Inc., an affiliate of the General Electric Company, in April 2000. The pro forma as adjusted balance sheet data reflects the receipt of net proceeds from the sale of 4,000,000 shares of common stock offered by us at an assumed initial public offering price of $12.00 per share after deducting an assumed underwriting discount and estimated offering expenses payable by us. The pro forma as adjusted balance sheet data also assumes the exercise of a portion of an outstanding warrant for a total of 35,000 shares of common stock at an exercise price of $7.45 per share prior to this offering. We have assumed that this portion of the warrant will be exercised prior to this offering because the exercise price is less than the assumed initial public offering price and this portion of the warrant expires on the closing of the offering. <TABLE> <CAPTION> Period from Period from August 3, August 3, 1998 (date 1998 (date Period from of of August 3, inception) inception) Three Months Ended 1998 (date of to Year Ended to March 31 inception) to December 31, December 31, December 31, ---------------------- March 31, 1998 1999 1999 1999 2000 2000 ------------ ------------ ------------ --------- ----------- ------------- (in thousands, except share and per share data) <S> <C> <C> <C> <C> <C> <C> Revenue................. -- -- -- -- 68 68 Cost of Revenue......... -- -- -- -- 141 141 --------- ----------- --------- --------- ----------- --------- Gross Profit............ -- -- -- -- (73) (73) Statements of Operations Data: Operating expenses: Research and development (exclusive of non-cash compensation expense of $771, $17 (unaudited) and $718 (unaudited) in the year ended December 31, 1999, and the three month periods ended March 31, 1999 and 2000, respectively reported below)....... $ 111 $ 3,053 $ 3,164 273 2,039 5,203 Sales and marketing (exclusive of non-cash compensation expense of $984, $18 (unaudited) and $2,266 (unaudited) in the year ended December 31, 1999, and the three month periods ended March 31, 1999 and 2000, respectively and value of warrants granted of $1,468 and $3,914 (unaudited) in the year ended December 31, 1999 and the three month periods ended March 31, 2000, respectively reported below)....... 96 9,412 9,508 300 9,979 19,487 Value of warrants granted in connection with marketing agreements............ -- 1,468 1,468 -- 3,914 5,382 General and administrative (exclusive of non-cash compensation expense of $813, $1 unaudited and $1,289 unaudited in the year ended December 31, 1999, and the three month periods ended March 31, 2000 respectively reported below)....... 107 1,795 1,902 128 1,197 3,099 Amortization of deferred stock compensation.......... -- 2,568 2,568 36 4,273 6,841 --------- ----------- --------- --------- ----------- --------- Total operating expenses.............. 314 18,296 18,610 737 21,402 40,012 --------- ----------- --------- --------- ----------- --------- Loss from operations... (314) (18,296) (18,610) (737) (21,475) (40,085) Interest income, net.... -- 648 648 4 801 1,449 --------- ----------- --------- --------- ----------- --------- Net loss................ $ (314) $ (17,648) $ (17,962) (733) (20,674) (38,636) --------- ----------- --------- --------- ----------- --------- Net loss per share-- basic and diluted...... $ (0.12) $ (4.13) $ (4.77) $ (0.22) $ (3.91) $ (7.76) ========= =========== ========= ========= =========== ========= Shares used in per share calculation--basic and diluted................ 2,521,485 4,275,090 3,763,399 3,405,069 5,292,410 4,978,794 ========= =========== ========= ========= =========== ========= Pro forma net loss per share--basic and diluted................ $ (1.15) $ (0.79) =========== =========== Shares used in pro forma net loss per share--basic and diluted................ 15,356,918 26,025,280 =========== =========== </TABLE> <TABLE> <CAPTION> As of March 31, 2000 ------------------------------ Pro Forma Actual Pro Forma As Adjusted ------- ---------- ----------- (in thousands) <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents........................ $48,917 $58,917 $102,618 Working capital.................................. 49,076 59,076 102,777 Total assets..................................... 56,327 66,327 110,028 Long-term debt................................... 79 79 79 Total stockholders' equity....................... 54,213 64,213 107,914 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001077152_commerx_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001077152_commerx_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary highlights some of the important information in the prospectus. It may not contain all of the information that is important to you. You should read this summary together with the more detailed information about us and our financial statements and related notes appearing elsewhere in this prospectus. Commerx, Inc. Commerx creates business-to-business electronic marketplaces that enable buyers and sellers in industrial processing markets to transact business on the Internet. We target industrial processing markets characterized by large numbers of buyers and sellers, high levels of fragmentation, inefficient supply chains and large transaction volume. Our first marketplace is PlasticsNet. PlasticsNet provides a secure, supplier-neutral, buyer-focused marketplace that streamlines the procurement of plastics products and services. We currently offer for sale on our procurement center over 30,000 plastics products, or SKU's, from approximately 50 suppliers. We also have recently signed strategic agreements with suppliers that provide us access to additional products that we are currently adding to the PlasticsNet marketplace. These agreements will provide us with over 1,000 direct materials products, such as resins and additives, from a relationship with Ashland Inc. and over 400,000 maintenance, repair and operations, or MRO, products from a relationship with MSC Industrial Direct Co. Inc. Our marketplace had approximately 73,000 user sessions during December 1999 and currently has over 35,000 registered user accounts. In 1999, Business Marketing, an Advertising Age publication, ranked PlasticsNet as the fourth-best business-to-business Web site out of 300 surveyed in the U.S. based on a variety of criteria, including ease of navigation, design, presentation of information and e-commerce capabilities. The plastics industry, which we estimate represented over one trillion dollars in annual product shipments worldwide in 1999, is one of the largest manufacturing industries in the world. According to The Society of Plastics Industry's latest available data, the plastics industry ranked fourth in U.S. product shipments by dollar volume among top manufacturing industry groups in 1996. The plastics industry is characterized by a complex supply chain, a high degree of fragmentation among buyers and sellers, large transaction volume and a significant dependence on information exchange. As a result, traditional information flows and purchasing methods are inefficient, costly and time consuming. These dynamics create the need for a business-to-business e-commerce solution that provides a marketplace for buyers and sellers of plastics products and services. Our solution, the PlasticsNet marketplace, enables buyers and sellers to execute transactions on the Internet and provides the tools, content and community to help them make more informed decisions. Through the PlasticsNet marketplace, suppliers can cost-effectively provide current product offering and pricing information to a large pool of buyers. In addition, buyers can efficiently search for products, identify suppliers, compare product prices and specifications, and complete a purchase. We seek to capitalize upon our position as the first company to offer a comprehensive Internet-based e-commerce solution to the plastics industry. Our strategy is to gain market share aggressively by continuing to expand the selection of plastics products, services and related content offered on our marketplace. We will also continue to concentrate our efforts to attract new participants and increase usage by current participants in our marketplace. We intend to leverage our expertise and leadership in the plastics industry to target other industrial processing and international markets that represent significant business-to-business e-commerce opportunities. Corporate Information We were incorporated in Illinois in July 1995 and reincorporated in Delaware in December 1998. Our principal executive offices are located at 350 North LaSalle Street, Suite 1000, Chicago, Illinois 60610, and our telephone number at that address is (312) 464-7340. Our address on the World Wide Web is http://www.commerx.com, and the address of the PlasticsNet marketplace is http://www.plasticsnet.com. References to our Web site do not incorporate by reference the information contained at our Web site into this prospectus. Unless otherwise indicated, this prospectus reflects a -for-one split of our outstanding shares of common stock prior to the closing of this offering and assumes the automatic conversion of all of our outstanding preferred stock into shares of common stock upon the closing of this offering. This prospectus also assumes no exercise of the underwriters' over-allotment option. The Offering <TABLE> <S> <C> Common stock offered by Commerx................... shares Common stock to be outstanding after this offering......................................... shares Proposed Nasdaq National Market symbol............ "CMRX" Use of proceeds................................... For working capital and general corporate purposes. See "Use of Proceeds". </TABLE> The number of shares to be outstanding excludes 4,058,875 shares of common stock issuable upon exercise of options outstanding under our stock option plan on December 31, 1999 at a weighted average exercise price of $1.32 per share and 137,648 shares of common stock which will be issuable upon exercise of warrants at a weighted average exercise price of $3.10 per share. SUMMARY FINANCIAL DATA The following summary financial data are derived from our financial statements. You should read this summary financial information in conjunction with our financial statements and the related notes. Pro forma per share data reflect the conversion of all outstanding preferred stock into common stock, even if the effect of the conversion is antidilutive. The pro forma balance sheet data give effect to our issuance and sale of 3,128,732 shares of Series B preferred stock in November and December 1999 for net proceeds of approximately $36.9 million. The net proceeds include approximately $2.1 million that reflect the November 1999 conversion of all management notes and accrued interest into shares of Series B preferred. The pro forma balance sheet data also includes the write-off of $185,747 of remaining management loan discounts, and the conversion of all Series A and Series B preferred stock into 11,698,732 shares of common stock upon the closing of this offering. The pro forma as adjusted balance sheet data give effect to our sale of the shares of common stock in this offering at an assumed initial public offering price of $ per share and after deducting the estimated underwriting discounts and commissions and our estimated offering expenses. <TABLE> <CAPTION> July 1995 (inception) Nine Months Ended through Year Ended December 31, September 30, December 31, ---------------------------------- ----------------------- 1995 1996 1997 1998 1998 1999 ------------ ---------- ---------- ---------- ----------- ---------- (unaudited) (unaudited) (in thousands, except per share data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Total revenue............. $ 3 $ 53 $ 305 $ 375 $ 264 $ 833 Cost of revenue........... -- -- -- -- -- 426 ---------- ---------- ---------- ---------- ---------- ---------- Gross profit.............. 3 53 305 375 264 407 Total operating expenses.. 302 955 1,081 2,367 1,364 8,507 ---------- ---------- ---------- ---------- ---------- ---------- Net loss.................. $ (312) $ (952) $ (894) $ (2,178) $ (1,234) $ (8,080) ========== ========== ========== ========== ========== ========== Historical basic and diluted loss per common share.................... $ (0.02) $ (0.06) $ (0.05) $ (0.13) $ (0.07) $ (1.09) ========== ========== ========== ========== ========== ========== Pro forma loss per share (unaudited).............. $ (0.15) $ (0.54) ========== ========== Weighted average shares used to compute historical basic and diluted loss per share... 16,950,000 16,950,000 16,950,000 16,897,835 16,950,000 7,430,000 Weighted average shares used to compute pro forma loss per share (unaudited).............. 14,095,000 14,836,096 </TABLE> <TABLE> <CAPTION> As of September 30, 1999 ------------------------- Pro Pro Forma As Actual Forma Adjusted ------- ------- -------- (unaudited) <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents............................. $ 1,800 $36,642 $ Working capital (deficit)............................. (3,035) 33,613 Total assets.......................................... 3,927 38,769 Long-term debt, net of current portion................ 997 997 Redeemable convertible preferred stock................ 7,010 -- Total stockholders' equity (deficit).................. (9,506) 34,152 </TABLE>
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+SUMMARY THIS SUMMARY MAY NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE FINANCIAL DATA AND RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION. THE TERMS "MIH", "OUR COMPANY", "WE", "US" AND "OUR" AS USED IN THIS PROSPECTUS REFER TO MIH LIMITED TOGETHER WITH ITS SUBSIDIARIES AND JOINT VENTURES, EXCEPT WHERE THE CONTEXT REQUIRES OTHERWISE. ALL REFERENCES TO "U.S. DOLLARS", "DOLLARS" AND "$" ARE TO UNITED STATES DOLLARS, "ZAR" AND "RAND" ARE TO SOUTH AFRICAN RAND, "GRD" AND "DRACHMA(E)" ARE TO GREEK DRACHMA(E), AND "BAHT" ARE TO THAI BAHT. MIH LIMITED From our origin as the leading provider of pay-television services in South Africa, we have grown into a multinational provider of pay-television and interactive technology services. We are now creating multimedia platforms in the markets we serve by leveraging our core media-based competencies of content aggregation, subscriber management, platform development and marketing and branding to expand our Internet operations. Our company is divided into three principal business segments: - pay-television platforms, - technology and - the Internet. Through our subsidiaries and joint ventures, we now provide terrestrial and cable analog, digital satellite and other pay-television services to over 2.0 million households in Africa, the Mediterranean and Asia. Our extensive pay-television experience forms the basis of our approach to our technology and Internet operations. Through our Mindport technology division, we develop and acquire technologies that support and enhance the services provided by pay-media companies. Mindport, through its majority-owned subsidiary OpenTV, is the leading provider of software that enables digital interactive television. In addition, Mindport currently provides pay-media companies worldwide with proprietary software solutions for subscriber management, conditional access and other pay-media related services. We believe the Internet is a natural extension of our core media-based competencies. We have invested in leading Internet operations in South Africa and Thailand, and have recently begun investing in Internet operations in China. PAY-TELEVISION PLATFORMS We operate our pay-television businesses in three major regions: - the African continent (South Africa, sub-Saharan Africa, Egypt and the Middle East), - the Mediterranean (Greece and Cyprus) and - Asia (Thailand and development operations based out of Beijing and Hong Kong). In each region, we have implemented a strategy that emphasizes being the leading supplier of pay-television services, offering exclusive programming, continually improving our customer care and offering new services and technology. With the exception of Cyprus, where only analog service is offered, we provide both analog and digital platform services in each of these three regions. We believe that two of the reasons we are the leading pay-television operator in each of the markets we serve--South Africa, the rest of sub-Saharan Africa, Greece, Cyprus and Thailand--are our exclusive, high quality content and our early introduction of emerging technologies such as digital television. In most markets in which we operate, we have exclusive pay-television rights to transmit premium movies, major sporting events and popular children's programming. We believe that access to rate. Translations appearing in this prospectus of: (1) rand to dollars have been conducted at a rate of $1.00 = ZAR6.51; (2) drachmae to dollars have been conducted at a rate of $1.00 = GRD351.40; and (3) baht to dollars have been conducted at a rate of $1.00 = Baht 37.79. These rates of exchange reflect the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York as of March 29, 2000, except as otherwise provided. Unless otherwise indicated, the information in this prospectus assumes no exercise of the underwriters' over-allotment option. this programming gives us the content necessary to attract and retain subscribers and grow successful pay-media services. We have experienced significant growth in the number of our subscribers, revenue per subscriber and total pay-television revenue. From the fiscal year ended March 30, 1996 to December 31, 1999, we increased our number of subscribers under management from 1,137,167 to 2,078,505. Over the same period, our digital subscribers as a percentage of our total subscribers increased from 2.0% to 39.1%, which significantly impacted our revenue per subscriber as digital subscription fees are approximately two-thirds higher than analog fees. As a result, we have increased our monthly revenue per subscriber, excluding Asia and the Middle East, which are not consolidated, by 9.0% annually, from $18.63 for the fiscal year ended March 31, 1996 to $24.11 for the fiscal year ended March 31, 1999. Over the same period, subscription revenues increased 23.8% annually, from $233.3 million to $442.7 million. TECHNOLOGY We have developed a reputation as an early mover in key pay-media technologies, such as conditional access and interactive broadcast operating systems. We believe that our ability to apply our operating knowledge has been an important factor in our successful design, development and marketing of new pay-media technologies. Our technology division, Mindport, provides a comprehensive package of technology products and support services to pay-media operators worldwide. Mindport seeks to capitalize upon the pay-media industry's evolution from analog to digital and then to interactive and Internet services. Mindport's customers include some of the leading international pay-media companies, such as EchoStar, BSkyB, Canal+, Galaxy Latin America, Television Par Satellite (TPS), Television Broadcasting Limited (TVB) and Foxtel, as well as our own pay-television businesses. We also have an agreement to provide Mindport's pay-television technology to the China Broadcasting Film and Television Satellite Co. Ltd., a subsidiary of China Central Television, which is currently using Mindport technology to distribute digital television signals to rural villages in the People's Republic of China. The Mindport product line includes pay-television and Internet subscriber management systems (marketed under the IBS brand name), conditional access systems (Mindport's Irdeto Access unit), operating software for interactive television (OpenTV), set-top box design and specification and systems integration and consulting services. OpenTV is the leading worldwide provider of software that enables digital interactive television. OpenTV's software is running on more than 6.1 million set-top boxes worldwide, with 25 network operators in 20 countries having selected OpenTV as their interactive platform. In November 1999, OpenTV raised $172.5 million, before expenses, in an initial public offering of 8.625 million of its Class A Ordinary Shares. We now own 30,631,746 of OpenTV's Class B Ordinary Shares (representing approximately 46.3% of the economic interest, and 74.7% of the voting rights, of OpenTV's fully diluted ordinary shares). OpenTV has recently entered into strategic agreements with America Online, News Corporation, Time Warner, General Instrument Corp. and EchoStar Communications Corporation. INTERNET We believe that the Internet business is a natural extension of our core media-based competencies of content aggregation, subscriber management, marketing and branding and platform management. By leveraging these competencies, we plan to offer a range of Internet services, including Internet access, local content, e-commerce and subscriber management, both within our current pay-television markets and in new markets. We are currently developing leading Internet operations in South Africa and Thailand, and have begun making investments in Internet operations in China. We believe that what differentiates our approach, and what will be an important component of the success of our Internet operations, is our experience in creating and aggregating linguistically and culturally tailored local content. We plan to continue to pursue this strategy both as we develop our current Internet content portals and as we establish content portals in new markets. While our initial Internet initiatives were located in countries where we own pay-television platforms, we are now actively pursuing opportunities in other markets throughout Africa and Asia, such as China. AFRICA Our first Internet venture began with the successful development and subsequent spin-off, in 1997, of M-Web Holdings, the leading Internet service provider and content portal in South Africa. We continue to manage M-Web Holdings, which is 48.4% owned by our parent company, Naspers Limited, and 16.8% owned by us, and are entitled to direct the voting of Naspers's shares pursuant to a voting pool agreement between us and Naspers. As of December 31, 1999, M-Web Holdings had 195,775 subscribers and logged approximately 18 million page views per month. Recently, we have expanded our African Internet business to include Internet service provider operations in several sub-Saharan African countries, including Namibia, Zambia and Botswana. ASIA In May 1999, we commenced operations in Thailand through a new subsidiary, M-Web (Thailand) Limited. In July 1999, M-Web (Thailand) acquired the Thai language portal Sanook.com, the leading Internet content portal in Thailand. M-Web (Thailand) is currently developing other content portals in Thailand. Through a company that we control, we have recently acquired a 75% interest in a holding company that has a majority stake in KSC Commercial Internet Co. Ltd., or KSC Comnet. We believe that KSC Comnet is the largest Internet service provider in Thailand, with more than 300,000 customers. Through our M-Web China subsidiary, we are currently developing and investigating several business operations in the Chinese Internet market. Since opening our Asia representative office in Beijing in 1998, our Chinese operations have expanded significantly and M-Web China currently has over 170 employees. M-Web China is currently focused on establishing MWEB.COM.CN as a comprehensive horizontal portal with focused vertical categories of content, including a personal finance site being developed in conjunction with the owner of EEFOO.COM, the fourth largest financial portal in China. M-Web China and the owner of the leading private Chinese ISP, A-1 Net, have entered into strategic agreements for the development of a Chinese-language, subscription-based Internet content and information service. This service is intended to be bundled with Internet access services offered by A-1 Net. MIH Limited has also established a joint venture with an affiliate of Tsinghua University to develop and produce online information systems to be used for the delivery of educational services over the Internet in China. RECENT DEVELOPMENTS On March 26, 2000, OpenTV announced that it had signed a definitive merger agreement with Spyglass, Inc., a leading provider of Internet consulting, software and professional services and products. Spyglass's technologies include Spyglass Prism, a server-based product that reorganizes and reformats standard Web content to display on set-top boxes, mobile phones and other non-PC devices. These technologies provide a platform for OpenTV to expand into the wireless communications market. Spyglass has provided its technologies and consulting services to companies such as GTE, Microsoft, Motorola, NEC, Nokia and Sony. Under the terms of the agreement, OpenTV will acquire all of Spyglass's outstanding stock in a tax-free, stock-for-stock transaction. Spyglass stockholders will receive 0.7236 OpenTV Class A Ordinary Shares in exchange for each share of Spyglass common stock. The estimated cost of the acquisition will be approximately $2.1 billion. On a fully diluted basis, Spyglass stockholders and holders of Spyglass options and warrants will receive approximately 15.0 million OpenTV Class A Ordinary Shares and own approximately 18% of the combined company's stock. On a fully diluted basis after giving pro forma effect to the Spyglass transaction, MIH Limited will own shares representing approximately 37.7% of the economic rights and 72.0% of the voting rights of OpenTV's shares. Subject to certain customary closing conditions, including regulatory approvals and the approval of the stockholders of both companies, the transaction is expected to close within three to four months. CORPORATE INFORMATION Our corporate headquarters are located at Abbot Building, Mount Street, Tortola, Road Town, British Virgin Islands, and our telephone number is (284) 494-5471. Our registration number under the BVI International Business Companies Ordinance is 47572. The address of our web site is WWW.MIH.COM. Information contained in our web site is not a part of this prospectus. THE OFFERINGS <TABLE> <S> <C> Class A Ordinary Shares offered: U.S. offering.............................. 800,000 shares International offering..................... 3,200,000 shares Total.................................... 4,000,000 shares Ordinary Shares to be outstanding after the offerings: Class A Ordinary Shares.................... 26,464,456 shares(1) Class B Ordinary Shares.................... 30,787,319 shares Total.................................... 57,251,775 shares(1) Use of proceeds.............................. We intend to use these net proceeds as follows: - to finance potential strategic investments in and acquisitions of pay-television, Internet services and pay-media technology businesses in both new and existing markets; - to fund the expansion of our Internet businesses, with a focus on Asian development opportunities, including those in Thailand and China; and - to fund the growth of our other existing businesses. We will also retain some cash proceeds for general working capital purposes. Risk factors................................. See "Risk Factors" for a discussion of important factors that you should carefully consider before deciding whether to invest in our Class A Ordinary Shares. Voting and certain other rights.............. The rights of holders of Class A Ordinary Shares and holders of Class B Ordinary Shares are identical in most respects, including as to dividends. However, holders of Class B Ordinary Shares are entitled to three votes per share while holders of Class A Ordinary Shares are entitled to one vote per share. Holders of Class A Ordinary Shares and Class B Ordinary Shares vote together as a single class, except as otherwise required by British Virgin Islands law or our Memorandum and Articles. A more complete description of these rights can be found under the heading "Description of Capital Stock--Class A Ordinary Shares and Class B Ordinary Shares". </TABLE> <TABLE> <S> <C> Nasdaq National Market and Amsterdam Exchanges N.V.'s stock market ("Amsterdam Stock Exchange") symbol.................... "MIHL". </TABLE> - ------------------------------ (1) Does not include up to 600,000 shares that may be issued upon exercise of over-allotment options granted to the underwriters. SUMMARY HISTORICAL FINANCIAL INFORMATION The following tables contain summary historical information for each of the fiscal years ended March 31, 1999, 1998, 1997, as of September 30, 1999 and for the six months ended September 30, 1999 and 1998. The information for the fiscal years ended March 31, 1999, 1998 and 1997 has been derived from our audited consolidated and combined financial statements and the notes to those financial statements included elsewhere in this prospectus, and the information as of September 30, 1999 and for the six months ended September 30, 1999 and 1998 has been derived from our unaudited condensed consolidated interim financial statements and the notes to those financial statements included elsewhere in this prospectus. This summary financial information should be read in conjunction with those financial statements and related notes. All of our financial statements have been prepared in accordance with International Accounting Standards ("IAS"), which differ in certain significant respects from generally accepted accounting principles in the United States ("US GAAP"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations--US GAAP Reconciliation" and Note 19 of the notes to our unaudited condensed consolidated interim financial statements and Note 29 of the notes to our consolidated financial statements for a description of the relevant differences. The combined financial statements have eliminated all accounts among the Acquired MIH Businesses, but they do not eliminate amounts due from the Acquired MIH Businesses to MIH Limited, which the consolidated financial statements do eliminate, nor do they include purchase accounting adjustments that occurred as a result of the Canal+ Transaction described in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Presentation of Financial Information". <TABLE> <CAPTION> ACQUIRED MIH BUSINESSES COMBINED COMPANY CONSOLIDATED(1) (PREDECESSOR)(1) ------------------------------------------------- ---------------- SIX MONTHS ENDED SEPTEMBER 30, YEAR ENDED MARCH 31, ----------------------- ------------------------------------------ 1999 1998 1999 1998 1997 ---------- ---------- ---------- ---------- ---------------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: AMOUNTS IN ACCORDANCE WITH IAS: Revenues: Subscriptions.................................... $245.7 $205.4 $442.7 $404.5 $315.5 Decoder sales and repair......................... 41.9 44.1 72.0 63.1 60.2 Technology and other............................. 65.6 35.1 93.2 32.9 16.2 ---------- ---------- ---------- ---------- ---------------- Total revenues, net.......................... 353.2 284.6 607.9 500.5 391.9 Operating expenses: Cost of providing services....................... (203.2) (187.4) (390.5) (308.8) (259.4) Selling, general and administrative.............. (145.0) (76.6) (203.8) (175.2) (140.4) Depreciation and amortization(2)................. (37.1) (25.0) (51.4) (58.0) (16.2) ---------- ---------- ---------- ---------- ---------------- Operating loss................................... (32.1) (4.4) (37.8) (41.5) (24.1) Financial results, net(3)........................ (8.4) (8.8) (9.1) (5.5) (5.3) Equity results in joint ventures and associates..................................... (20.0) (14.2) (43.3) (7.9) 3.8 Profit on sale of joint ventures and associates..................................... 18.0 31.1 31.1 -- -- ---------- ---------- ---------- ---------- ---------------- (Loss)/profit before taxation.................. (42.5) 3.7 (59.1) (54.9) (25.6) (Loss)/profit from continuing operations......... (40.5) 0.1 (59.0) (58.5) (26.0) Net loss....................................... (47.9) (0.7) (68.8) (63.8) (26.0) Net (loss)/profit per share from continuing operations(4).................................. $(0.81) $0.01 $(1.54) $(1.53) Net loss per share(4)............................ (0.95) (0.02) (1.80) (1.67) Dividends(5)..................................... -- -- -- 1.36 Weighted average shares outstanding.............. 50,230,474 38,235,000 38,235,000 38,235,000 AMOUNTS IN ACCORDANCE WITH US GAAP: Loss from continuing operations.................. $(51.2) $(5.0) $(64.1) $(74.1) $(26.0) Net loss......................................... (58.6) (5.9) (74.0) (79.3) (26.0) Net loss per share from continuing operations(4).................................. (1.02) (0.13) (1.68) (1.94) Net loss per share(4)............................ (1.17) (0.16) (1.94) (2.07) </TABLE> <TABLE> <CAPTION> AS OF SEPTEMBER 30, 1999 ----------------------- AS ACTUAL ADJUSTED(6) -------- ------------ (DOLLARS IN MILLIONS) <S> <C> <C> BALANCE SHEET DATA: AMOUNTS IN ACCORDANCE WITH IAS: Cash and cash equivalents................................... $167.3 $318.9 Total assets................................................ 948.5 1,100.1 Total debt(7)............................................... 275.1 275.1 Minority interest........................................... 0.4 0.4 Total shareholders' equity.................................. 343.3 494.9 AMOUNTS IN ACCORDANCE WITH US GAAP: Cash and cash equivalents................................... $167.3 $318.9 Total assets................................................ 918.6 1,070.2 Total debt(7)............................................... 275.1 275.1 Minority interest........................................... 0.4 0.4 Total shareholders' equity.................................. 311.2 462.8 </TABLE> - ------------------------------ (1) See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Presentation of Financial Information".
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+PROSPECTUS SUMMARY This summary highlights material information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including "Risk Factors" and our financial statements and the notes to those statements, before making an investment decision. LifeMinders.com We are an online direct marketing company that provides personalized information, or content, and advertisements via e-mail to a community of members. Our e-mail messages contain helpful reminders and tips that enable our members to better organize and manage their busy lives. Our proprietary information about our members and highly-precise targeting capabilities provide our advertising partners the opportunity to more effectively reach their target markets. Members can create profiles in one or more of our 14 e-mail categories, including family, entertainment, home, personal events, automotive, horoscope, cooking, pet, health, small business, personal finance, sports and recreation, travel and shopping, On average, each member creates profiles in four e-mail categories and receives an average of eight e-mails per month. We gather member profile data from several sources, including information provided by our members during the sign up process and through member preferences and buying habits automatically collected through interaction with our e-mail messages. We also supplement our profile data with information obtained from third-party sources. Our proprietary matching process correlates member profile data to uniquely identified messages that we personalize and deliver to each member via e-mail. Using our direct marketing expertise and our proprietary member database we create highly-targeted e-mail messages that enable our advertising partners to reach a receptive audience. We generate revenue primarily through advertising and opt-in services. As of December 31, 1999, we had approximately 7.0 million members. As of the same date, we had 90 advertising partners. The value of our service to our members is also evidenced by our growth from 311,000 members at March 31, 1999, which represents a compounded quarterly growth rate of over 180%. The Online Direct Marketing Opportunity According to the Direct Marketing Association, advertising expenditures in the United States totaled approximately $285.2 billion in 1998, of which approximately $162.7 billion or 57% was spent on direct marketing and 43% on brand advertising. Traditional advertisers and direct marketers face numerous challenges, primarily the inability to accurately target consumers, resulting in low return on advertising investments. While the Internet offers advertisers a number of advantages over traditional media, there remain significant challenges to realizing the full potential of online advertising. Response rates, or click through rates, for the top banner advertisements averaged just under 0.5% during the month of November 1999, as reported by The Nielsen//NetRatings Reporter. Furthermore, large, unsolicited e-mail message campaigns, or "spamming," have met with considerable negative consumer reaction and low response rates. As a result of the limitations in both online advertising and direct marketing, businesses continue to seek more effective approaches to deliver highly-targeted advertisements in a more personalized and content-rich editorial environment from which advertisers receive real-time feedback. At the same time, many Internet users seeking greater personalized content have increasingly migrated from broadbased, untargeted portals and search sites to portals organized around specific interests, or vertically-oriented portals, and Web sites aggregating groups of Internet users with common interests, or online communities, which were designed to provide an improved platform for Internet users with similar interests to obtain relevant information. We believe that these sites continue to provide a poor context for users to discover customized and individual content because users lack the affinity and opportunity to relate personally to their online experiences. Accordingly, we believe that Internet users have a significant and growing need for a trusted online service that can automatically provide relevant, personalized and timely information. Our Solution Our solution offers the following benefits to both our members and our advertising partners: Benefits to Members . Highly targeted and relevant content that becomes more personalized and useful as our members continue to interact with our e-mail messages . Enhanced personalization and user efficiency that enables our members to avoid the mass of extraneous information received through untargeted e- mails and obtained from most portals and search engines . Access to e-commerce opportunities that are delivered within our relevant and timely e-mail messages and highlight useful and appropriate products and services based on each member's profile . Member trust and confidence developed by providing content that we believe our members consider valuable without compromising their privacy Benefits to Advertising Partners . Large and targeted member base of approximately 7.0 million members who have generated extensive demographic, behavioral and performance information . Detailed real-time reporting and proprietary data mining technology that provides our advertising partners the ability to immediately determine the effectiveness of a given advertising campaign and to precisely target their marketing messages . Enhanced targeting capability and increased return on advertising investment based on our ability to target members on numerous variables resulting in high click through rates and low delivery costs Our Strategy Our objective is to be the leading online direct marketing company that provides personalized content and advertisements via e-mail to a loyal community of users. The key elements of this strategy include: . Aggressively and cost-effectively expanding our member base . Improving member experience and retention . Expanding and pursuing multiple revenue streams . Enhancing advertiser effectiveness . Increasing awareness and understanding of the LifeMinders.com brand . Pursuing strategic acquisitions and alliances We were incorporated in Maryland on August 9, 1996 and reincorporated in Delaware on July 2, 1999. Our principal executive offices are located at 1110 Herndon Parkway, Herndon, Virginia 20170 and our telephone number is (703) 707- 8261. We maintain a Web site on the World Wide Web at www.lifeminders.com. The information on our Web site is not part of this prospectus. We have filed trademark applications for "LifeMinders.com," "LifeMinders," "backslashSanity" and the LifeMinders.com logo. All brand names and trademarks appearing in this prospectus are the property of their respective holders. The Offering Common stock offered by 2,250,000 shares LifeMinders.com........................ Common stock offered by the selling 500,000 shares stockholders........................... Common stock to be outstanding after 22,577,320 shares this offering.......................... Underwriters' over-allotment option..... 412,500 shares Primarily for general corporate Use of proceeds......................... purposes, including working capital, marketing, member acquisition activities, international expansion, capital expenditures, and potential strategic acquisitions or investments. See "Use of Proceeds." We will not receive any of the proceeds from the shares sold by the selling stockholders. See "Principal and Selling Stockholders." Nasdaq National Market Symbol........... LFMN Summary Financial Information <TABLE> <CAPTION> Period from August 9, 1996 (date of Year Ended Nine Months Ended inception) to December 31, September 30, December 31, ----------------------- ------------------------- 1996 1997 1998 1998 1999(1) ------------- ---------- ----------- ----------- ------------ <S> <C> <C> <C> <C> <C> Statement of Operations Data: Revenue................. $ -- $ 67,126 $ 56,750 $ 26,750 $ 5,979,493 Gross margin (loss)..... -- 29,877 (2,722) (3,750) 5,507,586 Loss from operations.... (35,073) (485,078) (1,971,721) (1,366,527) (14,577,478) Net loss................ (35,073) (479,100) (1,947,206) (1,343,977) (14,453,241) Net loss available to common stockholders.... (35,073) (479,100) (2,104,243) (1,452,477) (15,117,618) Basic and diluted net loss per common share.. $ (0.04) $ (0.19) $ (0.64) $ (0.44) $ (4.59) ======== ========== =========== =========== ============ Weighted average common shares outstanding (basic and diluted).... 798,220 2,530,228 3,275,000 3,275,000 3,296,181 ======== ========== =========== =========== ============ Pro forma basic and diluted net loss per common share(2)........ $ (0.40) $ (1.50) =========== ============ Pro forma weighted average common shares and common share equivalents (basic and diluted)(2)............ 5,202,083 10,082,775 =========== ============ </TABLE> <TABLE> <CAPTION> As of September 30, 1999 -------------------------------------------------- Actual Pro Forma(3) Pro Forma As Adjusted(4) ----------- ------------ ------------------------ <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents.. $11,279,137 $72,966,082 $138,018,754 Working capital............ 17,940,409 79,627,354 144,680,026 Total assets............... 25,348,586 87,035,531 152,088,203 Long term debt, including current maturities........ 161,986 161,986 161,986 Mandatorily redeemable convertible preferred stock..................... 37,720,790 -- -- Stockholders' equity (deficit)................. (17,002,861) 82,404,874 147,457,546 </TABLE> (1) Summary Statement of Operations Data for the Three Month Periods Ended March 31, June 30, and September 30, 1999 and for the Nine Months Ended September 30, 1999 are as follows: <TABLE> <CAPTION> Three Months Ended Nine Months Ended --------------------------------------- ----------------- March 31, June 30, September 30, September 30, 1999 1999 1999 1999 ----------- ----------- ------------- ----------------- (unaudited) (unaudited) (unaudited) <S> <C> <C> <C> <C> Revenue................. $ 23,322 $ 1,418,899 $ 4,537,272 $ 5,979,493 Gross margin (loss)..... (75,192) 1,271,500 4,311,278 5,507,586 Loss from operations.... (1,647,525) (5,028,707) (7,901,246) (14,577,478) Net loss................ (1,624,745) (4,983,264) (7,845,232) (14,453,241) Net loss available to common stockholders.... (1,724,791) (5,114,840) (8,277,987) (15,117,618) </TABLE> (2) The "pro forma" basic and diluted net loss per common share is computed using the weighted average number of common shares outstanding giving effect to the automatic conversion of all series of mandatorily redeemable convertible preferred stock into shares of our common stock which occurred upon our initial public offering on November 19, 1999. (3) The "pro forma" summary balance sheet data as of September 30, 1999 reflects the events described above in note 2 as if the events had occurred as of September 30, 1999 and reflects the sale of 4,830,000 shares of our common stock at our initial public offering price of $14.00 per share and our receipt of the net proceeds of the offering. (4) The "pro forma as adjusted" summary balance sheet as of September 30, 1999 reflects the sale of 2,250,000 shares of our common stock at an assumed offering price of $30.75 per share and our receipt of the estimated net proceeds of this offering and the receipt of $22,625 of proceeds from the exercise of 28,281 stock options in January 2000. Recent Developments Our results of operations for the three months ended December 31, 1998 (unaudited) and 1999 (unaudited) and for the years ended December 31, 1998 and 1999 (unaudited) are summarized below. For more complete information on our financial condition at December 31, 1998 and 1999 (unaudited) and our results of operations for the three months ended December 31, 1998 (unaudited) and 1999 (unaudited) and for the years ended December 31, 1998 and 1999 (unaudited), see "Supplemental Financial Data."
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+PROSPECTUS SUMMARY This section sets forth a summary of all material information that is described in more detail throughout this prospectus. This summary is not complete and may not contain all the information you should consider before investing in our common stock. You should read the entire prospectus, including the financial statements and their related notes, before making an investment decision. Except as otherwise indicated, all information in this prospectus reflects the conversion of all shares of our preferred stock into shares of common stock automatically upon completion of this offering, and assumes that the underwriters' over-allotment option will not be exercised. Upon completion of this offering, our executive officers and directors will beneficially own 18,021,129 shares or approximately 57.7% of our outstanding common shares assuming the exercise of all warrants and options held by them. If they choose to act together, they could control all matters requiring approval by shareholders. [LOGO OF LINUXCARE] We are a provider of services for Linux. We offer a comprehensive range of services spanning the entire software and hardware life cycle for Linux, open- source software packages and related technologies. We offer services for 21 distributions of Linux. We help our customers choose the best Linux solution, integrate it with their existing computing infrastructure and provide them with ongoing support. We have assembled a worldwide team of individuals who we believe are Linux experts and who actively participate in the Linux and open- source communities. We are implementing an advanced Internet-based infrastructure to communicate with and to deliver services to our customers. This infrastructure is designed to deliver our services remotely, by telephone or over the Internet, thereby reducing the need for on-site professionals. As part of this infrastructure, we have built a knowledge sharing and management database consisting of information gained from all of our business units. Since our inception, we have targeted our services toward large business customers. We focus our sales and marketing efforts on original equipment manufacturers, software vendors, Global 1000 companies and Internet infrastructure providers. During 1999, we derived 55% of our revenues from three customers, Motorola, Silicon Graphics, Inc. and Sun Microsystems. Our next five largest customers were Dell Computer, Densa Techno Tokyo, Hewlett- Packard, KPMG Peat Marwick and Macmillan USA. Linux is emerging as the leading operating system for the Internet. According to an April 1999 survey conducted by the Internet Operating System Counter, Linux ran on approximately 31% of the Web servers polled, more than any other operating system. As compared with other operating systems, we believe that Linux offers multiple benefits to businesses, including reliability, reduced total cost of ownership, greater flexibility and improved compatibility with existing computing infrastructures. To enable customers to benefit fully from their Linux investments, we offer a broad range of services, including: . professional services--consulting services to help customers successfully implement Linux solutions; . technical support--customer support services 24 hours a day, seven days a week on complex issues ranging from operating system installation to application usage; . education--courseware for Linux and other open-source technologies through Linuxcare University, our group that provides education for Linux; and . product certification--vendor-neutral certification of hardware for use with Linux by Linuxcare Labs, our group devoted to assuring compatibility with the Linux operating system. Our objective is to become the leading provider of Linux-related services by: . establishing relationships with other companies that are direct consumers of our services and provide us with an opportunity to reach a broad customer base; . expanding our sales and marketing efforts and strengthening our brand; . extending our technical knowledge to increase the effectiveness of our services and attract and retain Linux experts; . using our advanced Internet-based infrastructure to deliver quality services; and . continuing to promote the adoption and development of Linux. We believe it is imperative for us to maintain a close relationship with the open-source community. Therefore, we actively support open-source initiatives, dedicating time and resources to projects that improve the Linux operating system and related applications. We also sponsor and participate in organizations that foster the development and adoption of Linux. Through our active involvement in the Linux and open-source communities, we feel that we have made ourselves an attractive company for Linux experts to join. We were incorporated in Delaware in December 1998. For the year ended December 31, 1999, we incurred losses of $21.2 million. We operate in a competitive market and, in an effort to establish our business, we anticipate recording substantial net losses in the foreseeable future. Many of our competitors, including Caldera Systems, Red Hat and VA Linux Systems have longer operating histories, better name recognition, larger client bases and greater financial, technical, marketing and public relations resources than we do. Our principal executive offices are located at 650 Townsend Street, San Francisco, California 94103 and our telephone number is (415) 354-4878. Our corporate website is located at www.linuxcare.com. Information contained on this website or on any other website referenced elsewhere in this prospectus does not constitute a part of this prospectus. The Offering <TABLE> <S> <C> Common stock offered................ 4,500,000 shares Common stock to be outstanding after this offering...................... 30,214,721 shares Use of proceeds..................... For general corporate purposes, expansion of our information technology infrastructure, working capital and potential acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol............................. LXCR </TABLE> The total number of outstanding shares of our common stock above is based on: . the assumed conversion of all shares of Series A preferred stock outstanding as of January 31, 2000 into 7,917,536 shares of common stock upon completion of this offering. . the assumed conversion of all shares of Series B preferred stock as of January 31, 2000 into 7,297,900 shares of common stock upon completion of this offering; . 10,499,285 shares of our common stock outstanding as of January 31, 2000; This number assumes no exercise of the underwriters' over-allotment option and excludes the following: . 391,744 shares represented by warrants for Series A redeemable convertible preferred stock; . 3,089,060 shares of common stock available for grant under our 1999 Stock Plan as of January 31, 2000; . 1,000,000 shares of common stock available for issuance under our 2000 Employee Stock Purchase Plan immediately following the offering; . 300,000 shares of common stock available for issuance under our 2000 Director Option Plan immediately following the offering; and . 2,897,501 shares of common stock issuable upon exercise of options outstanding as of January 31, 2000 with a weighted average exercise price of $0.31 per share. Summary Consolidated Financial Information The following summary financial data has been derived from our unaudited 1999 pro forma combined statement of operations which reflect the acquisitions of the Puffin Group and Prosa Progettazione Suiluppo Agento S.r.l. as if such transactions had occurred on January 1, 1999 and our audited December 31, 1999 consolidated balance sheet. You should read the information set forth below in conjunction with our "Unaudited Pro Forma Combined Financial Statements," "Selected Financial Data," "Consolidated Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. <TABLE> <CAPTION> Pro forma combined year ended December 31, 1999 ------------ <S> <C> Statement of Operations Data: Revenues.......................................................... $ 1,531,471 Cost of revenues.................................................. 2,987,049 Gross margin...................................................... (1,455,578) Loss from operations ............................................. (20,727,157) Net loss applicable to common stockholders........................ (21,423,683) Basic and diluted net loss per share.............................. $(7.37) Weighted average shares used in computing pro forma combined basic and diluted net loss per share ............................ 2,908,756 Pro forma basic and diluted net loss per share.................... $ (2.27) Weighted average shares used in computing pro forma combined basic and diluted net loss per share............................. 9,327,635 </TABLE> <TABLE> <CAPTION> December 31, 1999 ------------------------ Pro Forma Actual As adjusted ----------- ----------- <S> <C> <C> Balance Sheet Data: Cash and cash equivalents............................ $29,994,575 $86,584,595 Working capital ..................................... 25,029,759 81,619,759 Total assets......................................... 36,366,003 92,956,003 Note payable and equipment financing, less current portion............................................. 1,926,018 1,926,018 Redeemable convertible preferred stock............... 40,374,016 -- Total stockholders' (deficit) equity................. (12,628,592) 84,335,424 </TABLE> See note 1 of notes to financial statements included elsewhere in this prospectus for an explanation of the determination of the number of shares used in computing basic and diluted net loss per share data and in computing pro forma basic and diluted net loss per share. Also see note (b) of our unaudited pro forma combined statement of operations for an explanation of shares used in computing unaudited pro forma loss per share. The pro forma as adjusted amounts above give effect to the sale of the 4,500,000 shares of common stock offered hereby at an assumed public offering price of $14.00 per share (less underwriting discounts and commissions and estimated offering expenses) and the conversion at the closing of this offering of 14,999,803 shares of preferred stock into 15,215,436 shares of common stock as of January 31, 2000. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001080034_conversant_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001080034_conversant_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS THE INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, AND YOU SHOULD CONSIDER THE INFORMATION UNDER "RISK FACTORS" AND IN THE FINANCIAL STATEMENTS AND NOTES, BEFORE DECIDING TO INVEST IN THE SHARES OF OUR COMMON STOCK. OUR COMPANY ValueClick is a leading provider of performance-based Internet advertising solutions for publishers of Web sites and online advertisers, based on the size and reach of our network. We focus on an advertising model known as cost-per-click or CPC, in which an advertiser only pays us, and we in turn only pay a publisher of a Web site, when an Internet user clicks on an advertiser's banner advertisement. Our network consists of over 10,600 small- to medium-sized independent Web sites which have agreed to sell advertising inventory to us on a non-exclusive basis. Each of these Web sites must satisfy our strict quality standards for content and traffic. This network, which reaches approximately 28% of U.S.-based Internet users, provides our advertising customers access to one of the largest networks of Web sites for banner advertising. In January 2000, we delivered in excess of 2.0 billion Web advertisements and registered over 7.7 million clicks across our network. As one of the largest aggregators of banner advertising on small- to medium-sized Web sites, we believe that we provide Internet advertisers a cost-effective solution for purchasing advertising space from thousands of Web publishers through a single source. In addition, we believe our CPC model offers several advantages for both advertisers and Web publishers over the traditional cost-per-thousand-impressions model, commonly referred to as CPM, including: - a low-risk solution for advertisers, since they do not pay us for advertisements which do not result in an action by Internet users; - an opportunity to generate advertising revenue for Web publishers whose sites have low to moderate rates of traffic; and - for publishers of high-traffic Web sites, the ability to capture additional revenue from unsold advertising inventory. On February 28, 2000, we completed a strategic investment transaction with DoubleClick, a provider of Internet advertising solutions for advertisers and Web publishers. As part of this agreement, we sold to DoubleClick approximately 30% of our common stock and we issued a 15-month warrant to DoubleClick allowing it to increase its ownership to 45% of our fully diluted common stock. In addition, among other things, we have agreed to enter into an agreement to use DoubleClick's ad serving technology known as DART. We believe this would allow us to enhance our performance-based solution by integrating DoubleClick's dynamic ad matching, targeting and delivery technology into our existing services. OUR MARKET OPPORTUNITY The market for Internet advertising is projected to grow rapidly over the next few years, and performance-based Internet advertising is projected to capture an increased share. Forrester Research projects that Internet advertising in the United States will grow from $2.8 billion in 1999 to $22.2 billion in 2004, a compound annual growth rate of 57%. In addition, Forrester Research projects that performance-based advertising models, such as CPC, will account for 50% of online advertising budgets by 2003, up from 15% in 1999. OUR SOLUTION AND STRATEGY Our solution provides publishers of small- to medium-sized Web sites the opportunity to generate advertising revenue at little or no added cost while allowing publishers of high-traffic Web sites the ability to capture additional revenue for excess advertising inventory that would otherwise remain unsold. Our CPC solution also gives Internet advertisers a convenient way to measure ad effectiveness, because they only pay for visitors to their sites. Our objective is to be the leading provider of performance-based Internet advertising solutions. Key elements of our strategy include: - Grow our network of high-quality Web sites; - Expand the solutions that we provide to our Web publishers and advertisers; - Increase our sales and marketing efforts; - Extend our global presence; - Continue to provide superior customer service; and - Take advantage of our strategic relationship with DoubleClick. OTHER INFORMATION Our Internet advertising business began in July 1997, as a line of business within Web-Ignite Corporation. In May 1998, the Internet advertising business of Web-Ignite was transferred to ValueClick, LLC, a newly-formed California limited liability company controlled by Web-Ignite's sole stockholder. On December 31, 1998, ValueClick, LLC reorganized as ValueClick, Inc., a Delaware corporation. Our principal executive offices are located at 6450 Via Real, Carpinteria, California 93013. Our telephone number at that location is (805) 684-6060 and our Web site is www.valueclick.com. Information contained on our Web site does not constitute part of this prospectus. We have registered the trademark "ValueClick" in the European Union and have applied for registration of the trademark in the United States and Japan. This prospectus also contains product names, trade names and trademarks that belong to other organizations. THE OFFERING <TABLE> <S> <C> Total common stock offered by ValueClick................... 4,000,000 shares Outstanding common stock after the offering................ 27,912,536 shares Outstanding common stock owned by our affiliates after the offering......................................... 18,892,557 shares Outstanding common stock owned by our non-affiliates after the offering................................... 9,019,979 shares Use of proceeds............................................ For general corporate purposes including expansion of sales and marketing activities, enhancement of our technology, possible acquisitions and international expansions. See "Use of Proceeds." Nasdaq National Market symbol.............................. VCLK </TABLE> The number of shares of common stock to be outstanding after the offering is based on the number of shares outstanding as of March 13, 2000 and assumes the conversion of our preferred stock into 5,293,572 shares of common stock at that date. This number excludes: - shares issuable to DoubleClick under a warrant entitling DoubleClick to purchase enough shares to result in DoubleClick owning 45% of our common stock on a fully-diluted basis, at $21.76 per share, - 2,849,337 shares subject to outstanding options under our 1999 Stock Option Plan with a weighted average exercise price of $2.64 per share as of March 13, 2000, and - 649,264 shares of common stock reserved for future issuance under our 1999 Stock Option Plan as of March 13, 2000. See "The DoubleClick Investment" for more information about the DoubleClick warrant. See also "Management--Employee Benefit Plans" and Notes 1 and 8 of Notes to Financial Statements for further information concerning our Stock Option Plan. ------------------------ UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT: - THE INITIAL PUBLIC OFFERING PRICE WILL BE $19.00 PER SHARE; - THE COMMON STOCK HAS BEEN SPLIT ON A 2-FOR-1 BASIS AS A RESULT OF STOCK SPLITS EFFECTED IN OCTOBER 1999 AND MARCH 2000; - EACH SHARE OF OUR PREFERRED STOCK HAS BEEN CONVERTED INTO TWO SHARES OF COMMON STOCK, WHICH WILL OCCUR AUTOMATICALLY UPON THE CLOSING OF THIS OFFERING; AND - THE UNDERWRITERS WILL NOT EXERCISE THEIR OVER-ALLOTMENT OPTION AND NO OTHER PERSON WILL EXERCISE ANY OTHER OUTSTANDING OPTION OR WARRANT. ------------------------ SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) The following tables set forth summary consolidated financial data for ValueClick to aid investors in their analysis of this potential investment. The summary financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," our consolidated financial statements and the notes to those financial statements appearing elsewhere in this prospectus. The pro forma information at December 31, 1999 includes the DoubleClick investment. See "The DoubleClick Investment" on page 58. <TABLE> <CAPTION> PERIOD FROM COMBINED MAY 1, 1998 HISTORICAL PRO FORMA (INCEPTION) THROUGH YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1998(3) 1999 1999(4) ------------------- ------------ ------------- ------------- <S> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues............................ $2,053 $2,306 $20,288 $21,081 Gross profit........................ 948 1,113 10,131 10,458 Loss from operations................ (221) (190) (1,567) (2,261) Net loss............................ (222) (191) (2,489) (3,054) Net loss per common share: Basic and diluted(1).............. $(0.02) -- $ (0.26) -- Weighted average shares used to calculate basic and diluted(1)...................... 9,912 -- 9,687 -- Pro forma basic and diluted(1)(4)................... -- -- -- $ (0.21) Weighted average shares used to calculate pro forma basic and diluted(1)(4)................... -- -- -- 14,634 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ------------------------------------------- PRO FORMA ACTUAL PRO FORMA(2) AS ADJUSTED(2)(5) -------- ------------ ----------------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............................. $ 2,129 $ 12,129 $ 81,609 Investment in DoubleClick common stock................ -- 85,796 85,796 Working capital....................................... 4,929 14,929 84,409 Total assets.......................................... 14,973 110,769 180,249 Deferred stock compensation........................... (5,678) (5,678) (5,678) Total stockholders' equity............................ 9,400 105,196 174,676 </TABLE> (1) See Notes 1 and 9 of Notes to Consolidated Financial Statements for determination of shares used in computing basic and diluted net loss per common share. (2) Pro forma to give effect to the conversion of all issued and outstanding shares of preferred stock into common stock and the issuance of 7,878,562 shares of our common stock and a warrant upon the closing of the DoubleClick investment on February 28, 2000 for proceeds comprised of $10.0 million cash and DoubleClick common stock valued at $85.8 million, but not giving effect to the exercise of outstanding options to purchase 2,847,820 shares of common stock, the exercise by DoubleClick of its warrant or the vesting of 361,483 restricted shares of common stock as of December 31, 1999. (3) Combined historical statement of operations data for the year ended December 31, 1998 reflects the combined historical operating results for ValueClick for the period May 1, 1998 through December 31, 1998, and the ValueClick line of business of Web-Ignite for the four months ended April 30, 1998. (4) Pro forma statement of operations data for the year ended December 31, 1999 reflects the acquisition of a majority interest in ValueClick Japan on August 6, 1999 for 320,000 shares of common stock, giving effect to the acquisition as if it had occurred on January 1, 1999. (5) As adjusted to reflect the sale of 4,000,000 shares of common stock offered by us at an assumed initial public offering price of $19.00 per common share after deducting the underwriting discounts and estimated offering expenses payable by ValueClick. See "Use of Proceeds" on page 20 for more information on our intended use of proceeds from this offering and "Capitalization" on page 21 for more information on our capital structure.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001081394_scient_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001081394_scient_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read this summary together with the more detailed information about our company, the common stock being sold in this offering and our consolidated financial statements and notes appearing elsewhere in this prospectus. OUR COMPANY Scient is a leading provider of the new category of professional services called systems innovation. We provide integrated eBusiness strategy and technology implementation services to clients who are creating eBusinesses or are rethinking or expanding their existing businesses to integrate eBusiness capabilities. eBusinesses are businesses that combine the reach and efficiency of the Internet with both emerging and existing technologies to enable companies to strengthen relationships with customers and business partners, create new revenue opportunities, reduce costs, improve operating efficiencies, optimize supply chains, shorten cycle times and improve communications. Our services include strategy consulting, customer experience design, systems architecture, application and technology infrastructure development and asset-based services. Our services are designed to rapidly improve and sustain a client's competitive position through the development of innovative business strategies enabled by the integration of emerging and existing technologies. We have developed a methodology, the Scient Approach, that provides a framework for each stage of a client engagement from helping the client conceive its strategy to architecting, engineering and operating and extending its eBusiness. We believe that our integrated methodology allows us to deliver reliable, robust, secure, scalable and extensible systems innovation in rapid timeframes. We have performed professional services for over 65 clients, including BenefitPoint, Carstation.com, Chase Manhattan, First Union, Hambrecht & Quist, homestore.com, InnoVentry, Johnson & Johnson, living.com, Miadora, Nasdaq, PlanetRx.com, sales.com, sephora.com, Washington Mutual Bank, WineShopper.com and several telecommunications companies. OUR MARKET OPPORTUNITY Scient believes that most companies seeking to build or enhance their eBusiness capabilities require a professional services provider with a broad range of integrated capabilities. Such a services provider must provide strategic industry insights combined with extensive technological skills to design and create applications, technology infrastructure and business systems that are reliable, robust, secure, scalable and extensible. Moreover, it must have a structured approach and the skills necessary to achieve the rapid innovation and deployment of eBusinesses demanded by today's competitive marketplace. Such a skill set must include the ability to understand and integrate a wide spectrum of both emerging and existing technologies. Scient believes that many existing service providers are not well suited to address the broad range of challenges posed by eBusiness because they lack the necessary combination of strategic consulting and technological expertise. As a result, Scient believes that there is a growing need for the new category of professional services called systems innovation. Scient provides the integrated services required to rapidly design, build and improve eBusinesses. We provide strategy consulting that combines expertise in eBusiness with market-specific knowledge in order to produce a combined business and technology strategy for our clients. We also architect and build applications and technology infrastructure that support a wide variety of eBusiness functions. We believe that we have a set of integrated skills that enable our clients to create or enhance competitive eBusinesses in rapid timeframes. This skill set includes: - A broad range of integrated strategy and technology capabilities; - Strategic industry insight; - Extensive skill with both emerging and existing technologies; - Customer experience design expertise; - Back-end integration skills; - Networking and security expertise; - Remote systems management, release management, customer intelligence management and customer experience management; - A structured and integrated approach to client engagements; - Rapid deployment and execution capabilities; and - Knowledge management expertise. OUR STRATEGY Scient's objective is to build upon its position as a leader in systems innovation. Our strategies for achieving that objective are as follows: Target Critical Engagements for Emerging eBusiness Leaders. To continue to differentiate our services, we intend to continue to be selective with respect to the clients we serve and the engagements we undertake, and focus on engagements that are critical to the efforts of emerging market leaders building and enhancing innovative eBusinesses. Hire and Retain Outstanding Professionals and Maintain a Culture that Fosters Innovation. We place a strong focus on attracting, hiring, developing and retaining outstanding professionals. We also focus on maintaining a one-firm culture that fosters innovation and emphasizes professional development. Target Potential Clients Through Market-Specific Business Units. Our marketing and sales strategy includes targeting potential clients through market-specific business units that operate globally. Thus far, we have established six market-specific business units through which we market and sell our services, including Financial Services, eMarkets, Enterprise, Telecommunications, Retail and Consumer Products and Media and Entertainment. We intend to add additional market-specific business units as our capabilities and client opportunities warrant. Establish Global Presence to Support Emerging eBusiness Leaders. In order to better serve the needs of enterprises operating on a worldwide basis, we intend to expand our geographic presence within the United States and abroad. In addition to our offices in San Francisco, New York and Dallas, we recently opened offices in Boston, Chicago, Sunnyvale, Austin, London and Singapore. Continue to Develop and Refine the Scient Approach Methodology and Knowledge Management. In order to capture, upgrade and refine our intellectual capital, including the Scient Approach methodology, we intend to continue to invest in our knowledge management processes and systems. We believe that these processes and systems will allow us to use our intellectual capital in order to accelerate the delivery of our services, reduce our costs and leverage our industry expertise. RECENT DEVELOPMENTS For the quarter ended December 31, 1999, our revenues were $42.7 million, compared to revenues of $6.3 million for the quarter ended December 31, 1998. Our net loss for the quarter ended December 31, 1999 was $4.0 million, or $0.07 per share, compared to a net loss of $3.7 million, or $0.28 per share, for the quarter ended December 31, 1998. THE OFFERING Common stock offered: Shares offered by us.......... 1,500,000 shares Shares offered by the selling stockholders.................. 850,000 shares Total........................... 2,350,000 shares Common stock to be outstanding after the offering.............. 71,754,204 shares Over-allotment option........... 352,500 shares Use of proceeds................. For general corporate purposes, including working capital and international expansion. See "Use of Proceeds." Nasdaq National Market symbol... SCNT The foregoing information is based on the number of shares outstanding as of September 30, 1999. Excludes 11,605,828 shares of common stock issuable upon exercise of outstanding options as of September 30, 1999 at a weighted average exercise price of $8.93, and 1,089,056 shares of common stock available for issuance under our 1999 Equity Incentive Plan as of September 30, 1999. See "Management -- Employee Stock Plans" and Notes 6 and 8 of Notes to Consolidated Financial Statements. SUMMARY FINANCIAL DATA (IN THOUSANDS EXCEPT PER SHARE DATA) <TABLE> <CAPTION> NOVEMBER 7, 1997 (INCEPTION) YEAR SIX MONTHS ENDED THROUGH ENDED SEPTEMBER 30, MARCH 31, MARCH 31, ------------------- 1998 1999 1998 1999 ---------------- --------- ------- -------- (UNAUDITED) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues............................................ $ 179 $ 20,675 $ 5,018 $ 47,209 Total operating expenses............................ 1,394 33,022 7,094 63,010 Loss from operations................................ (1,215) (12,347) (2,076) (15,801) Net loss............................................ (1,159) (11,701) (1,811) (14,213) Net loss per share: Basic and diluted................................. $ (.10) $ (.89) $ (.15) $ (.30) Weighted average shares........................... 11,894 13,198 12,136 46,828 </TABLE> The following table presents our summary balance sheet as of September 30, 1999. The data in the "As Adjusted" column has been adjusted to reflect the sale of 1,500,000 shares of common stock offered by us at an assumed public offering price of $90.88 per share, after deducting the underwriting discount and estimated offering expenses. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001081630_healthgate_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001081630_healthgate_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING IS ONLY A SUMMARY. YOU SHOULD CAREFULLY READ THE MORE DETAILED INFORMATION CONTAINED IN THIS PROSPECTUS, INCLUDING OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES. OUR BUSINESS INVOLVES SIGNIFICANT RISKS. YOU SHOULD CAREFULLY CONSIDER THE INFORMATION UNDER THE HEADING "RISK FACTORS" BEGINNING ON PAGE 10. UNLESS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO REFLECT A 3.966 -FOR-1 STOCK SPLIT WHICH WAS EFFECTED ON DECEMBER 23, 1999 AND ASSUMES (1) THE CONVERSION OF ALL OUTSTANDING SHARES OF OUR PREFERRED STOCK INTO 7,530,556 SHARES OF COMMON STOCK UPON THE CLOSING OF THIS OFFERING; (2) THE ISSUANCE AND SALE OF 875,000 SHARES OF COMMON STOCK, BASED ON AN $8.75 MILLION INVESTMENT AT AN ASSUMED PURCHASE PRICE PER SHARE OF $10.00, IN A PRIVATE PLACEMENT THAT WILL CLOSE CONCURRENTLY WITH THE CLOSING OF THIS OFFERING; AND (3) NO EXERCISE BY THE UNDERWRITERS OF THE OVER-ALLOTMENT OPTION. THE COMPANY HealthGate is an Internet provider of reliable, objective, comprehensive and up-to-date healthcare information helping physicians and other healthcare professionals, patients and health-conscious consumers make better informed healthcare decisions. We have aggregated and developed what we believe are the most extensive health and medical libraries of any online provider, currently totaling approximately 27 million different pages of health and medical information from approximately 300 sources representing 27 independent content providers. In November 1999, our users viewed approximately 4.1 million content pages on our own Web sites. Given the depth and breadth of our content, we provide healthcare information to a wide range of online users. We facilitate user-friendly access to our content libraries by segmenting them into collections for professionals, patients and consumers. Content from any collection is available to any type of user under a variety of pricing structures, including free access, per transaction fee access and subscription. Our online library targeted to physicians and other healthcare professionals includes internationally recognized journals such as the NEW ENGLAND JOURNAL OF MEDICINE, bibliographic databases such as MEDLINE, handbooks such as the Drug Information Handbook, decision support materials such as the Poisoning and Toxicology Compendium and Continuing Medical Education programs from the Boston University School of Medicine and Professional Postgraduate Services. Our patient focused online library includes patient education materials such as a series of over 3,000 patient education brochures published by the Clinical Reference Systems division of Access Health. We have also created "Healthy Living" Webzines, a proprietary series of consumer health magazines distributed exclusively through the Web, and have produced Wellness Centers, which are compilations of selected information from our online libraries for consumers, on 100 of the most prevalent illnesses, diseases and medical conditions. We adapt and integrate this diverse content through our internally developed software programs, which include our proprietary ReADER-Registered Trademark- natural language searching software, designed to facilitate the search and retrieval of relevant information in response to each user's searching needs. In addition, our activePress-TM- service uses our technology to provide text conversion and Web site development and hosting services for traditional print publishers. We distribute our content through a network of proprietary and affiliated Web sites that comprise the HealthGate Network. The HealthGate Network includes: - our own Web sites, www.healthgate.com in the United States and www.healthgate.co.uk in the United Kingdom; - customized, co-branded CHOICE-Registered Trademark- Web sites for institutions, principally hospitals, and businesses, which carry both HealthGate's and the entity's name, are designed as a seamless component of the entity's own Web site and, for certain institutions and businesses, complement the healthcare information, products and services they already offer or sell through their own Web sites; and - other co-branded third party Web sites to which we provide our proprietary and licensed content, including the Medical Journal Databases area of www.intelihealth.com. To further broaden the HealthGate Network, we have established a Web portal alliance with Snap! LLC, which is wholly owned by NBC Internet, Inc. Following our payment of the $10.3 million cash component of our first year fees to Snap with a portion of the proceeds of this offering, Snap will feature us on its www.snap.com Web portal site as the anchor tenant, or most prominent provider of healthcare information, for seven of the major content areas of Snap's Health Channel. Snap's Health Channel, which is the area on the www.snap.com Web site to which users are linked when they click on the word "Health" on the Snap Web Directory, will also contain a link to a co-branded Snap/ HealthGate Web site which will be jointly developed by HealthGate and Snap. We have established marketing and distribution affiliations with Columbia Information Systems, a subsidiary of Columbia/HCA Healthcare Corporation, GE Medical Systems, the medical diagnostic equipment and services division of General Electric Company and Data General Corporation, an information technology and services company recently acquired by EMC Corporation. Columbia Information Systems may provide up to 280 customized co-branded CHOICE Web sites to hospitals and other health affiliates of Columbia/HCA Healthcare. GE Medical Systems and Data General Corporation serve as value added resellers of versions of our CHOICE Web site product to their target hospital and health institution customers. Subject specific Web sites dedicated to healthcare are one of the most popular segments of the Internet. A July 1999 research report published by Cyber Dialogue, Inc., an industry research firm, estimates that approximately 25 million adults in the United States search online for health and medical information, a number which Cyber Dialogue projects will grow to approximately 30 million in 2000. We believe that with our extensive content libraries and distribution network we are positioned to capture a leading share of the online health audience as this industry continues to grow. Our strategy includes the following key elements: - providing leading healthcare content and technology; - expanding the HealthGate Network; - continuing to build the HealthGate brand; - broadening the range of offered products and services; - pursuing acquisitions and additional strategic affiliations; and - continuing to grow internationally. We currently generate revenue from the following activities: - providing content to third party Web sites; - providing our activePress Web publishing services to traditional print publishers; - offering banner advertising and sponsorship of discrete portions of our content libraries to pharmaceutical companies, other healthcare advertisers and other businesses and organizations; - participating in electronic commerce opportunities, also known as e-commerce, including selling articles from full-text journals, monthly online subscriptions and medical text books; and - developing co-branded CHOICE Web sites for hospitals and other institutions, and distributing content through these CHOICE Web sites. For the nine months ended September 30, 1999, the above activities generated approximately 33%, 32%, 20%, 10% and 5%, respectively, of our total revenue. We are incorporated under the laws of the State of Delaware and our executive offices are located at 25 Corporate Drive, Suite 310, Burlington, Massachusetts 01803. Our telephone number is (781) 685-4000.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001081798_esat-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001081798_esat-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company, the risks of investing in our common stock, and our financial statements and notes to those statements appearing elsewhere in this prospectus. OUR BUSINESS We were incorporated in the State of Nevada on June 23, 1995 under the name U.S. Connect 1995, Inc. On October 8, 1998, we became the surviving corporation in a merger with Technology Guardian, Inc., a California corporation. As a part of that merger, we changed our name to Technology Guardian, Inc. We changed our name to eSAT, Inc. on January 26, 1999. In April 2000, we acquired the businesses of PacificNet Technologies, Inc. and InterWireless, Inc. Our principal executive offices are located at 10 Universal City Plaza, Suite 1130, Universal City, California 91608. Our telephone number is 818-464-2670 and our fax number is 818-464-2799. Our Web site address is www.esatinc.com. Information accessed on or through our Web site does NOT constitute a part of this prospectus. Our principal line of business consists of providing products and services for long haul, or satellite, Internet access and data delivery, last mile, or wireless and traditional terrestrial, Internet service, and Internet management services. When combined with satellite delivery, wireless or traditional terrestrial delivery permits us to broadcast to a distant satellite reception dish and then re-broadcast from that dish to customers without satellite reception capability. Our customers are local, national and international businesses, educational institutions and governmental agencies. Our long haul, or satellite, Internet business presently is based on one-way and bi-directional satellite service products which are primarily targeted at rural customers and the business continuity (disaster recovery) markets. We expect our innovative satellite Internet backbone system, known as SIBONE(TM), to be our primary long haul delivery platform. Our SIBONE system is now finishing development and testing. SIBONE will be an interconnected network of satellite based ground stations that act as local access points for customers that require high capacity access to the Internet. Potential customers include local telephone companies and local Internet service providers, or ISPs. Our last mile, wireless Internet access products and Internet management services are delivered through our recently acquired subsidiaries, PacificNet and InterWireless. PacificNet provides software support and managed Internet access to individuals and businesses. InterWireless is a wireless Internet service provider that provides both traditional and broadband wireless Internet access services. We currently are able to provide wireless Internet services only in Southern California, but plan to market the capability on a national and international basis. Through these two subsidiaries, we will focus on using technology to provide cost-effective, uniform Internet delivery without geographic limitations. <TABLE> <CAPTION> Form S-1 Item Number and Heading Caption in Prospectus -------------------------------------------- ----------------------------------------- <S> <C> <C> (h) Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. Management's discussion and analysis of financial condition and results of operations (i) Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................... Management's discussion and analysis of financial condition and results of operations -- Change in accountants (j) Quantitative and Qualitative Disclosures about Market Risk........... Not applicable (k) Directors and Executive Officers........ Management -- Directors and executive officers (l) Executive Compensation.................. Management -- Executive compensation (m) Security Ownership of Certain Beneficial Owners and Management........ Principal stockholders (n) Certain Relationships and Related Transactions............................ Certain transactions 12 Disclosure of Commission Position on Description of securities -- Director and Indemnification for Securities Act officer liability and indemnification Liabilities.................................. 13 Other Expenses of Issuance and Part II -- Item 13 -- Other Expenses of Distribution................................. Issuance and Distribution 14 Indemnification of Directors and Officers.... Part II -- Item 14 -- Indemnification of Directors and Officers 15 Recent Sales of Unregistered Securities...... Part II -- Item 15 -- Recent Sales of Unregistered Securities 16 Exhibits and Financial Statement Schedules... Part II -- Item 16 -- Exhibits and Financial Statement Schedules 17 Undertakings................................. Part II -- Item 17 -- Undertakings </TABLE> THE OFFERING <TABLE> <CAPTION> <S> <C> Shares offered.............................. 28,036,389 shares of common stock Proceeds to us.............................. None. All proceeds will be for the benefit of selling stockholders who will have previously paid the company for common stock or convertible preferred stock pursuant to direct sales or upon exercise of warrants. Common stock to be outstanding after the offering.................................... 49,918,410 shares OTC Electronic Bulletin Board symbol........ ASAT Deutsche Borse AG Xetra(TM) (Frankfurt, ES8 Germany) </TABLE> In addition to 49,918,410 shares of common stock outstanding after the offering, we are obligated to issue 5,603,773 shares of common stock on exercise of other outstanding warrants, and 7,685,211 shares of common stock on exercise of outstanding options. We do not expect these warrants or options to be exercised in the near future since, in most cases, the exercise price is higher than the market price for our common stock. To be sure we have enough shares to complete this offering and honor all exercises of warrants and options, we expect to increase our authorized common stock from 50,000,000 shares to 100,000,000 shares in our annual shareholders' meeting scheduled for September 15, 2000. SUBJECT TO COMPLETION, DATED AUGUST 21, 2000 Prospectus 28,036,389 Shares eSAT, INC. Common Stock Selling stockholders are offering up to 28,036,389 shares of common stock. We will not receive any of the proceeds from the sale of this common stock. We will have been paid for all the shares offered prior to the sale of the shares under this prospectus. The selling stockholders may sell these shares from time to time in the over-the-counter market or otherwise. Our common stock is traded on the OTC Electronic Bulletin Board under the symbol "ASAT," and on the Deutsche Borse AG Xetra(TM) (Frankfurt, Germany) under the symbol "ES8." On August 14, 2000, the last reported bid price of the common stock on the OTC Electronic Bulletin Board was $1.1875 per share. Wentworth, LLC is an underwriter with respect to the shares it is offering pursuant to this prospectus. INVESTING IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED ON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. August 21, 2000 SUMMARY CONSOLIDATED FINANCIAL DATA CONSOLIDATED STATEMENTS OF OPERATIONS DATA: <TABLE> <CAPTION> YEARS ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, -------------------------------------- ----------------------------- 1999 1998 1997 2000 1999 ------------ ----------- ------------ -------------- -------------- (RESTATED) (UNAUDITED) (UNAUDITED) (in thousands except per share data) <S> <C> <C> <C> <C> <C> NET REVENUE........................... $ 3,676,217 $ 2,474,617 $2,872,547 $ 2,396,203 $ 1,824,167 Gross margin...................... 77,431 (181,473) 1,200,058 (65,439) (101,511) Loss from operations.............. (8,084,757) (3,123,514) (291,649) (6,523,577) (3,886,054) Net income (loss)................... 73,438,652 (93,675,433) (338,160) (1,714,097) 63,904,548 EARNINGS PER COMMON SHARE: Net income (loss)................... $ 3.50 $ (4.97) $ (0.02) $ (0.08) $ 3.01 =========== ============ ========== =========== =========== EARNINGS PER COMMON SHARE - ASSUMING DILUTION Net income (loss)................... $ 2.77 $ (4.97) $ (0.02) $ (0.08) $ 2.33 =========== ============ ========== =========== =========== </TABLE> CONSOLIDATED BALANCE SHEET: <TABLE> <CAPTION> DECEMBER 31, JUNE 30, 1999 1998 2000 ------------- ------------ -------------- (RESTATED) (UNAUDITED) <S> <C> <C> <C> Cash and cash equivalents................... $3,412,205 $2,703,516 $ 667,375 Working capital............................. 1,993,158 2,058,707 (3,609,129) Total assets................................ 5,980,825 3,973,771 8,732,836 Total stockholders' equity ................. 3,298,674 2,622,993 3,035,507 </TABLE> (1) These amounts do not include the receipt of net proceeds of $2,633,333 from the sale of 30,000 shares of Series E 6% Convertible Preferred Stock at $100 per share, which occurred in August 2000. You may rely only on the information contained in this prospectus. We have not authorized anyone to provide information different from that contained in this prospectus. Neither the delivery of this prospectus nor sale of shares means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or solicitation of an offer to buy these securities in any circumstances under which the offer or solicitation is unlawful. TABLE OF CONTENTS <TABLE> <CAPTION> Page <S> <C> Prospectus summary......................................................................... 3 Risk factors............................................................................... 6 Forward-looking statements................................................................. 14 Use of proceeds............................................................................ 14 Price range of common stock................................................................ 14 Dividend policy............................................................................ 15 Capitalization............................................................................. 15 Selected consolidated financial data....................................................... 16 Management's discussion and analysis of financial condition and results of operations...... 18 Business................................................................................... 21 Management................................................................................. 31 Certain transactions....................................................................... 37 Principal stockholders..................................................................... 39 Selling stockholders....................................................................... 42 Description of securities.................................................................. 44 Shares eligible for future sale............................................................ 50 Plan of distribution....................................................................... 51 Legal matters.............................................................................. 52 Experts ................................................................................... 52 Additional information..................................................................... 52 </TABLE> Until September 30, 2000 (40 days after the date of this prospectus), all dealers effecting transactions in the common stock may be required to deliver a prospectus. This is in addition to the obligations of dealers to deliver a prospectus when acting as underwriters.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001081824_carrier1_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001081824_carrier1_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..83f38eba4f748a8abe07c19d2d82557c3d79006e
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+SUMMARY THIS IS ONLY A SUMMARY AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO YOU. BEFORE YOU DECIDE TO INVEST IN OUR SHARES OR ADSS, YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE SECTION ENTITLED "RISK FACTORS" AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES. CARRIER1 We are a rapidly expanding European facilities-based provider of voice, Internet and bandwidth and related telecommunications services. We offer these services primarily to other telecommunications service providers. In March 1998, our experienced management team and Providence Equity Partners formed Carrier1 to capitalize on the significant opportunities emerging for facilities-based carriers in Europe's rapidly liberalizing telecommunications markets. By September 1998, we had deployed our initial network and commenced selling services. By June 30, 2000, we had 352 contracts with voice customers and 154 contracts with Internet and bandwidth customers. We are developing an extensive city-to-city European fiber optic network accessing and linking key population centers. In select European cities, we are also developing: o intra-city networks, and o data centers for housing and managing equipment. We expect these intra-city networks to give us faster, lower cost access to customers, with better quality control. We also expect to bundle and cross-sell our intra-city network and data center capabilities with our other services. As of June 30, 2000, we offered voice, Internet and bandwidth and related services in over 20 cities and 12 countries. In addition, as of June 30, 2000 we had arranged to secure, through a combination of building, buying and swapping assets, a network of approximately 11,000 kilometers, which we expect to become operational in stages through the end of 2000. This network will consist of wholly-owned fiber in Germany, France, the United Kingdom, The Netherlands, Norway and Sweden, and wholly owned capacity at speeds greater than 2.5 Gbps in Denmark, Italy, Switzerland and Belgium. The network will include a 2,370 kilometer network in Germany, a 2,650 kilometer network in France, a 1,150 kilometer network in the United Kingdom and intra-city networks in Amsterdam, Paris, Milan, Rotterdam, Berlin and Munich. We expect to complete the Amsterdam and Paris networks by the end of 2000. We intend to continue rapidly expanding our network in a cost-effective manner by building, buying or swapping network assets. For example, we completed construction of the 2,370 kilometer German network in mid-July 2000 and, except for a few segments for which we expect final regulatory approval later in the third quarter, it is in commercial service. The German network connects 14 principal cities and passes a number of other major cities. We built the German network with partners to lower our fixed cost of construction. We own our own duct, which contains 72 fiber strands. We have swapped excess capacity on the German network for fiber capacity on other networks in our target markets to increase the reach of our owned and controlled network in a capital-efficient way. INDUSTRY AND MARKET OPPORTUNITY We believe that the market for advanced, high bandwidth, transmission capacity and related voice and Internet services in Europe will grow significantly due to a number of factors, including: o LIBERALIZATION. As a result of liberalization, we expect the European telecommunications market to experience an increase in both international and national traffic volume, reduced prices, increased service offerings and the emergence of new entrants seeking to outsource some or all of their telecommunications infrastructure and service needs. o LARGE AND RAPIDLY GROWING MARKET FOR VOICE SERVICES. Industry sources report that the European international long distance market is among the largest in the world and is continuing to grow rapidly. o RAPIDLY GROWING DEMAND FOR INTERNET AND BANDWIDTH SERVICES. Industry sources estimate that the penetration rate of web users in Europe will grow from a level of approximately 10% at the end of 1998 to approximately 45% in 2003. We believe that substantial additional bandwidth and faster transmission speeds will be required to accommodate new Internet intensive business applications. o DEMAND FOR RELATED SERVICES. Increasing demand for basic telecommunications services presents opportunities for companies to market other related services, such as data center services. BUSINESS STRATEGY Our objective is to be a leading European provider to our target customers of high quality voice, Internet and bandwidth and related services. Our target customers are telecommunications service providers and other large telecommunications users with similar needs. The key elements of our strategy are: o TARGET TELECOMMUNICATIONS SERVICE PROVIDERS AND OTHER LARGE TELECOMMUNICATIONS USERS WITH SIMILAR NEEDS. By focusing on telecommunications operators and other large telecommunications users with similar needs, we can take advantage of our management's strong market-oriented skills, first-hand understanding of the European telecommunications markets and long-standing customer relationships, with less overhead than a mass retail carrier. We believe telecommunications operators prefer an independent supplier to an incumbent telephone operator or other supplier with which they compete directly for mass retail customers. o FOCUS ON CUSTOMER NEEDS. We will continue to build relationships with a large number of telecommunications service providers by providing quality, customized service and a superior level of customer support. o QUALITY OF SERVICE. Based on our management's experience in telecommunications markets, we believe that we offer among the highest minimum service levels for voice and Internet and bandwidth services in Europe. Owning fiber optic networks, switches, multiplexers and routers helps us to control the quality and breadth of our service offerings. o SUPERIOR CUSTOMER SUPPORT. We have designed our systems with the goal of providing a level of customer support significantly higher than that generally offered in our target market in Europe. o RAPID AND CAPITAL-EFFICIENT NETWORK EXPANSION. We seek to invest in key strategic assets, such as our German and various intra-city networks, which we can use as a currency for swaps to extend our European coverage as rapidly as possible. We have reduced the capital necessary to assemble our expanding network by: sharing the cost of building the German network with partners, selling or pre-selling conduit rights or capacity to defray costs, and swapping capacity or services. We plan to continue to take this rapid and capital-efficient approach in implementing our strategy to secure intra-city networks in up to 20 cities throughout Europe. o EXPLOIT LOW COST PROVIDER POSITION. Owning a high capacity, cross-border network in Europe gives us a significant cost advantage over incumbent providers with extensive legacy networks and newer competitors that currently lease the majority of their network or will be required to lease a significant amount of capacity in the future to meet increased demand or that are incurring the full cost of building networks without the use of capital-efficient swapping or pre-selling. o PURSUE GROWING DEMAND FOR BANDWIDTH. We believe that demand for high bandwidth and Internet transmission capacity will increase substantially over the next several years. o BUNDLE AND CROSS-SELL A COMPREHENSIVE RANGE OF NETWORK SOLUTIONS. We can customize our voice, Internet and bandwidth and other capabilities in combinations, or as comprehensive European end-to-end network solutions. We offer customers these comprehensive network solutions to create a virtual carrier network in which we will provide all of the European telecommunications network infrastructure and services they require, except for branding, sales and features customized for their specific end users. o In connection with this strategy, we and several other parties formed Digiplex, a joint venture to build data centers in which we can house and manage mission-critical data and networking equipment both for ourselves and for our customers. We have invested $23.25 million of the $155 million in total equity committed in the project to develop these full-service facilities in major markets throughout Europe. Digiplex intends to build up to 20 to 25 facilities, generally ranging in size from 100,000 to 350,000 square feet in major markets in Europe during 2000 and 2001. We expect to have a minimum of between 10,000 and 25,000 square feet available for our use and the use of our customers in each facility. We expect to connect each facility that we use to our fiber optic network. In furtherance of our business strategy, we regularly explore possible strategic partnerships, acquisitions, business combinations and other similar transactions. MANAGEMENT AND EQUITY SPONSORS Stig Johansson, Chief Executive Officer, and our management have extensive experience in European telecommunications markets and longstanding relationships with European customers and suppliers. Funds managed by Providence Equity Partners Inc. and Primus Venture Partners, Inc. have invested $60 million to finance the deployment of our network and to fund our operations. As of June 30, 2000, the Providence funds indirectly hold approximately 55.7%, or 50.6% on a fully diluted basis, and the Primus funds indirectly hold approximately 11.1%, or 10.1% on a fully diluted basis, of the shares of Carrier1 International. Providence is a private investment firm that specializes in equity investments in telecommunications and media companies in the United States and Europe. Primus is a private investment firm that focuses on equity investments in telecommunications and other high-technology industries. * * * Carrier1 International is a holding company and renders its services indirectly through subsidiaries primarily located in various Western European countries. Its registered office is located at L-8009, Strassen, Route d'Arlon 3, Luxembourg. Executive offices of Carrier1 International GmbH, its principal management services subsidiary, are located at Militarstrasse 36, CH-8004 Zurich, Switzerland. Its phone number is 011-41-1-297-2600. SUMMARY OF THE OFFERING BY SELLING SHAREHOLDERS Unless otherwise indicated, the information throughout this prospectus assumes that all outstanding euro warrants and dollar warrants are exercised and the shares issued upon such exercise are sold. Shares offered by selling shareholders......... Up to 1,685,813 shares, in the form of shares or, in the United States, ADSs. Shares to be outstanding after exercise of all 43,406,991 shares, not including euro warrants and dollar warrants........... the exercise of any outstanding options or other warrants. As of June 30, 2000 we had outstanding options which, if fully exercised, would allow the holders to purchase an aggregate of 2,612,718 shares. The ADSs....................................... For shares sold in the form of ADSs, each ADS represents 0.2 shares. Dividend policy................................ We have never declared or paid dividends, and we do not expect to do so in the foreseeable future. Use of proceeds................................ We will not receive any of the proceeds from the sale of the shares by the selling shareholders. Neuer Market symbol............................ "CJN" for the shares. Nasdaq National Market symbol.................. "CONE" for the ADSs.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001081935_rosetta_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001081935_rosetta_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. OVERVIEW OF OUR BUSINESS We are a leader in the emerging field of informational genomics. Informational genomics involves acquiring and analyzing information gathered from throughout the cell, to identify a majority of the medically important drug targets and gene functions. We combine the power of informatics, which is the use of computers and sophisticated algorithms to store, analyze and interpret large volumes of information, and genomics, which is the study of genomes, or all of the genetic material in an organism's chromosomes, to create a proprietary platform that accelerates and enhances the drug discovery process for pharmaceutical and biotechnology companies and improves agricultural products. The growing availability of DNA sequence information, genome-wide expression data and proteomic measurements, which measure protein levels and activity within the cell, has created high expectations for improvements in drug discovery, healthcare and agriculture. However, these desired improvements are hampered by the limitations of currently available measurement technologies, and by a shortage of powerful integrated analysis tools that are capable of managing both large amounts and disparate types of data. Limitations of current approaches include: - DNA sequences and protein levels do not give direct clues to cellular function; - current gene expression technologies are expensive and of limited accuracy; and - current gene expression analysis tools and approaches are inadequate. Our informational genomics platform can accelerate the transformation of drug discovery and healthcare research by converting the rapidly growing amount of gene expression data, or information about a gene's activity, into organized, statistically driven, information-based solutions. By improving the quality of lead compounds and providing early indications of the potential side effects of drugs, we believe our solution is critical to solving fundamental inefficiencies in the drug discovery process. We provide a proprietary gene expression profiling platform, consisting of hardware and software products, that uses gene expression profiles, i.e., patterns of gene activity, to provide seamless solutions for efficient, cost-effective and powerful discovery programs. Our technology builds a critical mass of coherent gene expression data, collected from DNA microarrays which are made of DNA fragments attached to glass slides in a grid-like formation, and provides comprehensive, simultaneous descriptions of a compound's effect on all relevant targets within a cell. By coherent data, we mean data that can be compared in a meaningful manner. Our integrated technology platform consists of: - our Rosetta Resolver Expression Data Analysis System; - our FlexJet DNA microarrays; and - our coherent expression profile data sets. We generate revenue by providing our technologies as separate components or as an integrated informational genomics system. Additionally, we offer professional consulting services to complement and enhance our products. To date, our revenue has been derived principally from revenue earned under our collaboration agreements and from government grants. We have received a purchase order from Harvard University's Center for Genomics Research for a commercial sale of the Rosetta Resolver system. In addition, discussions are ongoing with major pharmaceutical and biotechnology companies regarding additional commerical sales. OUR PRODUCTS AND SERVICES Our products and services enable efficient and accurate gene expression reporting and analysis. They can be used as individual components or as an integrated platform. Our platform of products and services includes: - ROSETTA RESOLVER EXPRESSION DATA ANALYSIS SYSTEM. The Rosetta Resolver system is an integrated organization-wide solution for storing, retrieving and analyzing large quantities of gene expression data generated from DNA microarrays. It allows users to securely assemble and store information concerning gene expression in a single database and rapidly conduct sophisticated matching of expression profile patterns on very large data sets. - FLEXJET DNA MICROARRAYS. Our FlexJet DNA microarrays consist of different DNA sequences built up in a grid at tens of thousands of different positions on glass slides using a modified inkjet printer head. Our inkjet technology is flexible, reproducible, economical, and can produce new designs significantly faster than other array technologies. We synthesize oligonucleotides, which are short, single strands of DNA, directly on glass slides. - COHERENT DATA SETS AND REFERENCE LIBRARIES. We build coherent sets of data generated from DNA microarrays that represent the responses of cells to different genetic and disease states and to drug treatments. These data sets provide detailed biological references against which other expression measurements, whether generated by us, by our collaborators or by our customers, can be compared. We refer to this comparibility as being coherent. We have developed experiment protocols, process controls and analysis techniques that allow the cross-comparison of data between experiments. - INTEGRATED PROFESSIONAL SERVICES. We combine our informational genomics tools together with our consulting services to provide enhanced value to selected customers. These services include optimization of the Rosetta Resolver system, customized FlexJet DNA microarrays and the creation of highly accurate coherent data sets. We have entered into a seven-year strategic collaboration with Agilent Technologies, Inc. to co-market the Rosetta Resolver system and for Agilent to manufacture and sell FlexJet DNA microarrays. OUR STRATEGY Our goal is to be the leader in informational genomics by providing the standard platform for gene expression data analysis. By providing this standard platform, we hope to increase demand for each of our component technologies. The specific elements of our strategy are to: - become the standard informational genomics approach; - develop multiple product revenue sources; - establish collaborations using our gene expression tools; - expand our informational genomics platform; and - sell high-value information products. THIS OFFERING Unless otherwise indicated, information in this prospectus assumes that the underwriters do not exercise their over-allotment options and assumes the conversion of all of our preferred stock into common stock upon completion of this offering. We will also sell to Agilent, concurrent with the closing of this offering, $10.0 million of our common stock at the price per share to be paid by the public in this offering. <TABLE> <S> <C> Common stock offered by us..................... 7,000,000 shares Common stock offered in the concurrent private placement to Agilent (assuming the initial public offering price is $11.00 per share)... 909,090 shares Common stock to be outstanding after this offering..................................... 29,943,205 shares Proposed Nasdaq National Market symbol......... RSTA Use of proceeds................................ We intend to use the net proceeds of this offering for continued research and development, including expanding our informational genomics platform to include other data types and analysis tools. We intend to use net proceeds of this offering to purchase DNA microarrays used in our research and development activities. Subject to certain conditions, we are required to purchase at least $29.7 million of DNA microarrays through the end of 2001 in connection with a supply agreement we entered into with Agilent. We also intend to increase our marketing and sales efforts to support our products and services, including the Rosetta Resolver system. In addition, the proceeds will be used for working capital, reduction of debt incurred pursuant to equipment financing agreements, and other general corporate purposes and capital expenditures. </TABLE> The number of shares of our common stock to be outstanding after this offering is based on the number of shares outstanding at March 31, 2000, and assumes the sale by us of 909,090 shares of our common stock at an assumed price of $11.00 per share to Agilent in the concurrent private placement, but excludes the following: - 2,130,946 shares of common stock issuable upon exercise of outstanding options as of March 31, 2000 at a weighted average exercise price of $2.36 per share; - 7,423,948 shares of common stock available for issuance as of March 31, 2000 under our stock option and stock purchase plans; and - 1,363,297 shares of common stock issuable upon exercise of outstanding warrants as of March 31, 2000, at a weighted average exercise price of $2.04 per share. We were incorporated in Delaware in December 1996 as Rosetta Biosystems, Inc. In September 1997, we changed our name to Rosetta Inpharmatics, Inc. Our principal executive offices are located at 12040 115th Avenue N.E., Kirkland, WA 98034. Our telephone number is (425) 820-8900 and our fax number is (425) 821-5354. Our Web site is located at www.rii.com. We do not intend for information found on our Web site to be incorporated into or be a part of this prospectus. Rosetta, Rosetta Inpharmatics, Rosetta Resolver and FlexJet are trademarks of Rosetta Inpharmatics, Inc. All other brand names or trademarks appearing in this prospectus are the property of their respective holders. SUMMARY CONSOLIDATED FINANCIAL DATA We have prepared this information using our financial statements for the period from inception (December 19, 1996) to March 31, 2000, the years ended December 31, 1997, 1998 and 1999 and the three months ended March 31, 1999 and 2000. The financial statements for each of the three years in the period ended December 31, 1999 have been audited. The financial statements for the quarters ended March 31, 1999 and 2000 and for the period from inception (December 19, 1996) to March 31, 2000 have not been audited. The following summary historical data should be read in conjunction with our consolidated financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. See Note 1 of notes to consolidated financial statements for an explanation of the determination of the weighted average shares used to compute pro forma net loss per share amounts. <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED PERIOD FROM YEARS ENDED DECEMBER 31, MARCH 31, INCEPTION ------------------------------ ------------------------- (DECEMBER 19, 1996) 1997 1998 1999 1999 2000 TO MARCH 31, 2000 ---- ---- ---- ---- ---- ------------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> Revenues....................... $ -- $ -- $ 983 $ 292 $ 548 $ 1,531 Total operating expenses....... 2,293 7,693 21,561 3,678 8,712 40,259 Loss from operations........... (2,293) (7,693) (20,578) (3,386) (8,164) (38,728) Net loss....................... (1,885) (7,112) (20,314) (3,338) (7,896) (37,207) Deemed dividend upon issuance of convertible preferred stock........................ (7,285) Net loss attributable to common stockholders................. (1,885) (7,112) (20,314) (3,338) (15,181) Basic and diluted net loss per share........................ $ (5.29) $ (5.29) $ (5.04) $ (1.26) $ (2.77) Pro forma basic and diluted net loss per share............... $ (1.73) $ (0.49) Weighted average shares used in computing pro forma basic and diluted net loss per share... 11,741 16,171 </TABLE> The unaudited consolidated pro forma balance sheet data reflects the automatic conversion of all preferred shares into shares of our common stock on a one-for-one basis upon the closing of this offering as well as the sale of 7,000,000 shares of our common stock in this offering at an assumed price to the public of $11.00 per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, and the proceeds from the sale of 909,090 shares of common stock to Agilent in a concurrent private placement at an assumed price of $11.00 per share. <TABLE> <CAPTION> AS OF MARCH 31, 2000 --------------------- ACTUAL PRO FORMA ------ --------- <S> <C> <C> (AS ADJUSTED) <CAPTION> CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS) Cash, cash equivalents and short-term investments. $ 55,195 $ 135,780 <S> <C> <C> Working capital............................................. 51,076 131,661 Total assets................................................ 79,550 160,135 Convertible preferred stock................................. 82,738 -- Long-term obligations, less current portion................. 1,123 1,123 Additional paid-in capital.................................. 38,221 201,521 Total stockholders' equity (deficit)........................ (12,946) 150,377 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001082064_backweb_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001082064_backweb_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read this entire prospectus carefully, including the risk factors beginning on page 4. BACKWEB TECHNOLOGIES LTD. We are a leading provider of Internet communication infrastructure software and application-specific software that enable companies to communicate business-critical, time-sensitive information throughout their extended enterprise of customers, partners and employees. Our products provide a reliable solution for communicating large amounts of data in any digital format by enabling our customers to automatically gather and disseminate information. Our products efficiently disseminate this information across a network of any speed by automatically adapting the rate of transmission to match the available network capacity, commonly referred to as bandwidth. Our software enables companies to adapt quickly to changing market conditions through direct interaction with their customers, partners and employees, thereby accelerating the execution of their business processes. Although we have a limited operating history, industry leaders such as AT&T, Cisco Systems, Goldman Sachs, Pacific Bell, Rite Aid and Schlumberger have chosen our products to address a variety of their critical business communication needs. We intend to pursue additional customers in each of these industries to expand our customer base. Our infrastructure software, BackWeb Foundation, is a platform that allows organizations to efficiently gather, target and deliver sizeable digital data of any format to users' desktops across their extended enterprise. Our software enables management to capture the immediate attention of targeted recipients and monitor the recipients' level of interaction with the information delivered. We work with our customers, partners and third-party software vendors to develop applications built on top of BackWeb Foundation. Our infrastructure software platform is powered by three core technologies that we have developed: - Polite Communications, a unique technology that enables the transmission of significant volumes of digital data through existing networks without interfering with normal network applications and traffic. - Attention Management, a technology that uses a variety of display techniques to alert desktop users to the delivery of business-critical information. - Closed Loop Delivery, a technology that allows companies to track, manage and survey the effectiveness of communications throughout their extended enterprise. We have also developed two packaged applications, BackWeb Sales Accelerator and BackWeb Service Accelerator. BackWeb Sales Accelerator enables organizations to strengthen their customer relationships by accelerating the response times of the organizations' sales forces and partners to critical market changes. BackWeb Sales Accelerator provides a geographically dispersed sales organization with up-to-date information, such as competitive and customer information from external sources, internal sales and marketing materials, product pricing information and critical management announcements. BackWeb Service Accelerator enables a product support organization to stay instantly updated about product information, service requests, product training information and software diagnostic tools. Our ordinary shares are listed on the Nasdaq National Market under the symbol "BWEB." The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. PROSPECTUS (SUBJECT TO COMPLETION, DATED MARCH 30, 2000) 1,514,104 SHARES [BACKWEB LOGO] BACKWEB TECHNOLOGIES LTD. ------------------------- Ordinary Shares ------------------------- This prospectus relates to the public offering, which is not being underwritten, of up to 1,514,104 shares of our common stock which is held by some of our current shareholders. The prices at which such shareholders may sell the shares will be determined by the prevailing market price for the shares or in negotiated transactions. We will not receive any of the proceeds from the sale of the shares. Our ordinary shares are listed on the Nasdaq National Market under the symbol "BWEB." On March 28, 2000, the average of the high and low price for our common stock was $37.63 per share. ------------------------- Investing in our ordinary shares involves risks. See "Risk Factors" beginning on page 4. ------------------------- THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. We have received from the Securities Authority of the State of Israel an exemption from Israel's prospectus publication requirements. Nothing in such exemption should be construed as authenticating the matters contained in this prospectus or as an approval of their reliability or adequacy or as an expression of opinion as to the quality of the securities offered in this prospectus. ------------------------- The date of this prospectus is , 2000. OUR STRATEGY Our objective is to establish ourselves as the leading provider of Internet communication infrastructure and applications software. The key elements of our strategy include: - becoming the de facto standard for Internet communication infrastructure software; - leveraging our infrastructure software platform to introduce multiple communication applications; - focusing on selected vertical markets; - extending our technological leadership position; and - expanding our direct and indirect distribution channels. OUR OFFICES Our principal executive offices are located at 3 Abba Hillel Street, Ramat Gan, 52136 Israel and our telephone number is 011-972-3-751-8464. Our U.S. subsidiary, BackWeb Technologies Inc. is located at 2077 Gateway Place, Suite 500, San Jose, California 95110 and its telephone number is (408) 933-1700. TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Prospectus Summary................... 1 Risk Factors......................... 4 Special Note Regarding Forward Looking Statements................. 12 Use of Proceeds...................... 12 Dividend Policy...................... 12 Capitalization....................... 13 Selected Consolidated Financial Data............................... 14 Management's Discussion and Analysis of Financial Condition and Results Operations......................... 15 Business............................. 25 Selling Shareholders................. 51 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> Plan of Distribution................. 54 Description of Share Capital......... 56 Material United States Federal Income Tax Considerations................. 60 Israeli Taxation and Investment Programs........................... 64 Conditions in Israel................. 68 Where You Can Find More Information........................ 70 Legal Matters........................ 71 Experts.............................. 71 ISA Exemption........................ 71 Index to Financial Statements........ F-1 </TABLE> YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table sets forth our consolidated statement of operations data for the periods presented. <TABLE> <CAPTION> TWO MONTHS YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, ---------------------------------------- 1995 1996 1997 1998 1999 ------------ ------- -------- -------- -------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues......................................... $ -- $ 71 $ 5,601 $ 9,537 $ 23,263 Gross profit..................................... -- 71 4,623 7,918 19,086 Loss from operations............................. (236) (7,641) (15,094) (14,825) (13,429) Net loss......................................... (238) (7,684) (14,962) (14,607) (11,489) Basic and diluted net loss per share............. (6.95) (6.96) (6.07) (0.59) Shares used in computing basic and diluted net loss per share................................. 1,106 2,151 2,408 19,575 Pro forma basic and diluted net loss per share(1)....................................... $ (0.69) $ (0.39) Shares used in computing pro forma basic and diluted net loss per share(1).................. 21,208 29,115 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ------------ ACTUAL ------------ <S> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $ 75,607 Working capital............................................. 71,323 Total assets................................................ 86,049 Total shareholders' equity.................................. 73,129 </TABLE> - ------------------------- (1) The pro forma information gives effect to the conversion of all outstanding shares of our preferred stock into ordinary shares (using the as-if converted method) from original date of issuance, other than the one share of Series E preferred stock.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001082129_telergy_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001082129_telergy_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary contains basic information about Telergy and this offering. It may not contain all the information that may be important to you. You should read this entire prospectus before making an investment decision. References in this prospectus to "we" includes Telergy, Inc. and our subsidiaries and our investment in Telergy East. THE COMPANY OVERVIEW We are a facilities-based provider of integrated broadband telecommunications services and high-bandwidth fiber optic capacity in the northeastern United States. Our network is designed to be a regional fiber optic intranet combining direct last-mile connections to our customers, intracity rings and long-haul capacity. We are building our network on what we believe to be the broadest contiguous rights-of-way in the region, primarily using access rights granted to us by four utility companies with which we have developed unique relationships. We currently offer both traditional telecommunications services as well as enhanced services such as video storage and streaming. We are installing equipment necessary to provide additional enhanced services, including data storage and disaster recovery, and expect to offer these services by the end of 2000. We market our services to large businesses and institutions in the healthcare, education, finance and government sectors, medium- and small-sized businesses with enterprise networking needs and telecommunications carriers. Our agreements with Niagara Mohawk Power Corporation, or Niagara Mohawk; Consolidated Edison Company of New York, or ConEd; New York State Electric and Gas, or NYSEG; and GPU Telcom Services, Inc., or GPU Telcom, provide us with last-mile access to virtually every customer and building in our region, including those in New York City. By the end of 2001, we expect our network to be comprised of approximately 586,000 fiber miles over 3,200 route miles extending from Washington, D.C. to Montreal. As of April 15, 2000, we had constructed or entered into agreements for indefeasible rights-of-use for approximately 202,000 fiber miles over 1,800 route miles in New York, New Jersey, Pennsylvania, Washington, D.C. and Maryland. Our agreements with utilities allow us to build our network in a capital efficient manner by significantly reducing the last-mile barriers to entry, construction time and associated costs. In addition, these agreements eliminate most recurring fees typically paid to owners of rights-of-way, in exchange for telecommunications capacity. Substantially all of the utility rights-of-way have never before been used for commercial telecommunications purposes, making our services attractive to customers seeking a geographically diverse network. In addition to our utility relationships, we have formed strategic relationships with MasTec North America, Inc.; or MasTec, Nortel Networks, or Nortel; and EMC Corp., or EMC. MasTec provides us with network construction expertise. Nortel offers advanced equipment, support services and vendor financing. Through our relationship with EMC, we are jointly developing customized data and video storage solutions for our customers. In connection with this relationship, we are the first telecommunications company to install and operate an EMC video server. Our goal is to leverage our network and relationships to become the preferred provider of broadband services in our markets. To achieve this goal, we are rapidly expanding our direct sales force and have entered into joint marketing agreements. As of April 15, 2000, we had a direct sales, marketing and customer care team of 129 employees located in five sales offices in our region. Our arrangements with Niagara Mohawk Energy, a subsidiary of Niagara Mohawk and GPU Telcom allow us to jointly market our services to their business and institutional customers. We believe these arrangements enhance our credibility with our target customers and our ability to enter new markets quickly. Since our formation in 1995, we have raised more than $133.0 million in equity capital. THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION. DATED MAY 10, 2000. Shares [LOGO] TELERGY, INC. Class A Common Stock ---------------------- This is an initial public offering of shares of Class A common stock of Telergy, Inc. All of the shares of Class A common stock are being sold by Telergy. Prior to this offering, there has been no public market for the Class A common stock. It is currently estimated that the initial public offering price per share will be between $ and $ . Telergy intends to make application for quotation of the Class A common stock on the Nasdaq National Market under the symbol "TLGY". Telergy has two classes of common stock, Class A common stock and Class C common stock. Holders of each class have identical rights, except for differences in voting. Holders of Class A common stock have one vote per share, while holders of Class C common stock have 90,000 votes per share. After this offering, the holders of Class C common stock will have % of the combined voting power of the common stock. See "Risk Factors" beginning on page 6 to read about certain factors you should consider before buying shares of Class A common stock. ---------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------------- <TABLE> <CAPTION> Per Share Total --------- ----- <S> <C> <C> Initial public offering price............................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to Telergy....................... $ $ </TABLE> To the extent that the underwriters sell more than shares of Class A common stock, the underwriters have the option to purchase up to an additional shares from Telergy at the initial public offering price, less the underwriting discount. ---------------------- The underwriters expect to deliver the shares against payment in New York, New York on , 2000. GOLDMAN, SACHS & CO. MERRILL LYNCH & CO. ---------------------- BANC OF AMERICA SECURITIES LLC CIBC WORLD MARKETS RBC DOMINION SECURITIES ---------------------- Prospectus dated , 2000. BUSINESS STRATEGY Our business strategy includes the following elements: - Build an end-to-end network to maximize profitability. - Complete our network build-out and pursue additional utility relationships. - Build out our network efficiently and cost effectively. - Offer enhanced video and data services. - Enhance our access to customers through joint marketing with utilities. - Leverage our operational support system. - Capitalize on management ability and relationships. PRINCIPAL OFFICES Our principal executive offices are located at One Telergy Parkway, East Syracuse, New York 13057, and our telephone number is (315) 362-2000. Our website address is www.telergy.net. Information on our website does not constitute part of this prospectus. ARTWORK [Network map depicting long-haul capacity, intracity rings and switch locations.] THE OFFERING <TABLE> <S> <C> Class A common stock offered................. shares Common stock to be outstanding after this offering: Class A common stock....................... shares Class C common stock....................... 100 shares Total.............................. shares Voting rights................................ Holders of each class of our common stock have identical rights, except for differences in voting. Holders of our Class A common stock have one vote per share, while holders of our Class C common stock have 90,000 votes per share. After this offering, the holders of our Class C common stock will have % of the combined voting power of the common stock. Brian P. Kelly and Kevin J. Kelly, through their ownership of our Class C common stock, will continue to have the power to elect all of our directors and control stockholder decisions. Proposed Nasdaq National Market symbol....... TLGY Use of proceeds.............................. We expect to use the net proceeds for further development of our network, expansion of our sales and marketing organization, working capital, capital expenditures, acquisitions and other general corporate purposes. </TABLE> The number of shares of our Class A common stock outstanding excludes shares issuable: - upon the exercise of outstanding stock options and warrants except for warrants to acquire 564,227 shares of our Class A common stock which expire upon completion of this offering; and - for payment of current returns on 358,239 shares of our Class A common stock. See "Description of Capital Stock -- Minimum Returns on Investment". Except as otherwise indicated, all information in this prospectus assumes: - no exercise of the underwriters' over-allotment option; - the conversion or exchange of all of our preferred stock for shares of our Class A common stock; and - the conversion of Niagara Mohawk Energy's membership interest in Telergy Central into shares of our Class A common stock. ------------------------ You should refer to the section entitled "Risk Factors" for an explanation of certain risks of investing in our Class A common stock. SUMMARY CONSOLIDATED FINANCIAL DATA The following summarizes the consolidated financial data and operating data for our business. You should read this data along with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes presented elsewhere in this prospectus. The pro forma as adjusted consolidated balance sheet data reflect: - the issuance in May 2000 of our Series B preferred stock and related warrants for aggregate proceeds of $20.0 million and the subsequent conversion of the Series B preferred stock and related warrants upon completion of this offering into shares of our Class A common stock, assuming an initial public offering price of $ per share; - the exercise of warrants to acquire 564,227 shares of our Class A common stock which expire upon completion of this offering, and the cancellation and exchange of our Series A preferred stock along with the payment of $ in connection with that exercise; - the conversion of Niagara Mohawk Energy's membership interest in Telergy Central into shares of our Class A common stock, assuming an initial public offering price of $ per share; and - the issuance of shares of Class A common stock in this offering at an assumed initial public offering price of $ per share, but after deducting the underwriting discount and estimated expenses. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------------- 1997 1998 1999 ---------- ---------- ----------- (IN THOUSANDS, EXCEPT OPERATING DATA) <S> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Service revenue........................................ $ 2,516 $ 5,206 $ 7,944 Operating expenses: Cost of services..................................... 2,709 7,477 15,503 Selling, general and administrative.................. 4,642 8,998 19,659 Depreciation and amortization........................ 321 1,737 4,587 Non-cash stock-based compensation.................... 124 5,999 2,687 -------- -------- --------- Total operating expenses............................... 7,796 24,211 42,436 -------- -------- --------- Operating loss......................................... (5,280) (19,005) (34,492) Interest expense, net.................................. (522) (14,625) (28,879) Net loss............................................... $ (5,394) $(34,957) $ (62,874) ======== ======== ========= OTHER CONSOLIDATED FINANCIAL DATA: Capital expenditures(1)................................ $ 26,162 $ 35,599 $ 131,450 EBITDA(2).............................................. (4,836) (11,269) (27,219) Net cash used in operations............................ (418) (14,764) (34,751) Net cash used in investing activities.................. (24,739) (37,120) (105,618) Net cash provided by financing activities.............. 26,174 52,451 138,409 OPERATING DATA AT END OF PERIOD: Route miles............................................ 325 650 1,000 Fiber miles............................................ 31,200 76,500 170,000 Employees.............................................. 57 127 341 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ----------------------- PRO FORMA ACTUAL AS ADJUSTED -------- ----------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 278 $ Working capital deficit..................................... (150,729) Property and equipment, net................................. 201,806 201,806 Investment in Telergy East.................................. 3,241 3,241 Total assets................................................ 219,919 Unearned fiber lease revenue................................ 10,386 10,386 Total debt.................................................. 156,441 156,441 Stockholders' equity........................................ 27,245 </TABLE> - --------------- (1) Capital expenditures include cash expenditures plus additions to property and equipment financed through trade payables and capital lease obligations. Amounts also include capitalized interest. (2) EBITDA is defined as operating income plus depreciation, amortization and non-cash stock-based compensation. EBITDA is used by management and some investors as an indicator of a company's historical ability to service debt. However, EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to either (1) operating income (as determined by generally accepted accounting principles) as an indicator of operating performance or (2) cash flows from operating, investing and financing activities (as determined by generally accepted accounting principles).
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001082397_viewlocity_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001082397_viewlocity_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information found in greater detail elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk Factors" and the financial statements and the notes to those statements, before you decide to buy our common stock. SYNQUEST, INC. OUR BUSINESS We provide advanced e-business solutions designed to optimize supply chain performance. A supply chain is a network of facilities and trading partners that enables procurement of materials, transformation of materials into finished products and distribution of these products to customers. Our SynQuest One2One suite of software solutions enables our clients to fulfill each order they receive in the most profitable manner by analyzing relevant variables that affect the entire supply chain, whether traditional or web-based, including materials supply, transportation, manufacturing, distribution and customer service. By improving supply chain processes, our solutions enable our clients to improve their financial and operational performance, increase market share and enhance customer service. We target traditional bricks and mortar companies with annual revenues between $100 million and $2 billion, web-based companies and market exchanges. As of June 30, 2000, we had implemented our solutions for over 100 customers. Our clients include The B.F. Goodrich Company, Ford Motor Company, Herman Miller, Inc.'s SQA Division, Nordstrom.com, Pioneer Electronic Corp., Reynolds Metals Company, STMicroelectronics N.V., and Titleist and Footjoy Worldwide. The key features that differentiate our solutions are as follows: Financial optimization. Each product in our SynQuest One2One suite of solutions is designed to achieve a single goal: financial optimization. This means that our solutions enable our clients to determine the extent to which a potential order will be profitable before they accept it, and to fulfill each order they accept in the manner that maximizes financial return from that order. As a result, our clients typically recover their investments in our products quickly and achieve substantial ongoing financial benefits. Real-time management. Our solutions plan, coordinate and control each order to facilitate fast and reliable fulfillment. After analyzing all relevant variables and selecting the financially optimal means of fulfillment, our software creates a time-stamped operational plan for fulfillment of each order that is disseminated for execution throughout the supply chain. As execution occurs, our software analyzes the events of the supply chain in real-time, publishes the impact of the events on order delivery, and re-plans as necessary to keep the orders on schedule. We refer to this process as real-time management. Our solutions analyze real-time changes in fulfillment constraints and re-determine the optimal means of fulfillment. By improving the efficiencies of the supply chain, our solutions often allow our clients to fulfill more orders with the same resources. Turnkey solutions. Our turnkey solutions are easy to deploy, interface readily with most existing enterprise systems and e-commerce platforms, and require little or no custom programming to implement. After easily linking to our clients' systems, our solutions use customer supply chain data to generate financially optimal fulfillment plans. In addition, we believe the turnkey nature of our solutions is a competitive advantage because we can demonstrate, with little advance preparation and set-up, a prospective client's ability to realize significant bottom-line savings and incremental revenue opportunities with our solutions. Comprehensive, high-performance solutions. Our solutions are comprehensive and operate robustly in a variety of environments. Our solutions cover the entire array of supply chain issues that arise from both short, vertical supply chains contained largely within a single enterprise to distributed, complex supply chains crossing numerous enterprises. Our products are built to address the performance requirements of the largest, most complex supply chains and the demands of business-to-business e-commerce, and to THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED AUGUST 11, 2000 PROSPECTUS 5,000,000 SHARES (SYNQUEST LOGO) COMMON STOCK ------------------------------ This is an initial public offering of 5,000,000 shares of our common stock. We are selling all of the shares of common stock offered under this prospectus. There is currently no public market for our shares. The initial public offering price of our common stock is expected to be between $7.00 and $8.00 per share. Our common stock has been approved for listing on The Nasdaq National Market under the symbol "SYNQ", subject to notice of issuance. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7 TO READ ABOUT RISKS YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------------ <TABLE> <CAPTION> PER SHARE TOTAL ------- ------- <S> <C> <C> Public offering price....................................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds, before expenses, to us............................ $ $ </TABLE> ------------------------------ We have granted the underwriters a 30-day option to purchase up to an additional 750,000 shares of common stock from us at the initial public offering price less the underwriting discount. The underwriters expect to deliver the shares on , 2000. ------------------------------ BEAR, STEARNS & CO. INC. J.P. MORGAN & CO. WIT SOUNDVIEW The date of this prospectus is , 2000. operate in mission-critical situations. As a result, our products are well suited for the most traditional industrial companies as well as newer web-based businesses and market exchanges. OUR MARKET OPPORTUNITY The supply chain management software market is projected to grow at a 40% compounded annual rate from $3.8 billion in 1999 to $20.3 billion by 2004, according to AMR Research, Inc., an independent market research company. In addition, we expect that as business-to-business e-commerce develops, supply chain management solutions will gain share in e-commerce application budgets. We believe that this will further increase the size of the potential market for supply chain management solutions. The e-commerce applications market is estimated to grow at a 56% compounded annual rate from $1.7 billion in 1999 to $16.0 billion by 2004, according to AMR Research. We believe that several trends will drive the projected growth in the e-business solutions market. First, competitive pressures arising from the Internet will continue to force businesses to extract efficiencies from their supply chains. Second, the projected rapid growth in business-to-business e-commerce will necessitate e-business solutions that can support high-volume activity. Third, as customers increasingly demand products that are tailored to their specific requirements and that are delivered rapidly, businesses will seek solutions that enable their supply chains to produce mass customized goods in less time. Fourth, the rapidly growing class of market exchanges will require supply chain management solutions as they attempt to position themselves at the center of business-to-business e-commerce. Finally, increasing market globalization is creating more diffuse, complex supply chains. OUR STRATEGY Our strategy to become the leading provider of advanced e-business solutions that optimize supply chain performance consists of the following key elements: - Increase our brand awareness through new marketing campaigns and additional strategic partnerships; - Expand and deepen our market coverage by increasing our direct sales force and developing strategic alliances to support indirect sales activities; - Broaden and enhance our suite of products to increase their competitiveness; - Target additional vertical markets by hiring industry experts and expanding our products to address the specific challenges presented by each new market; and - Pursue strategic acquisition opportunities to accelerate any of the foregoing elements of our strategy. RECENT DEVELOPMENTS Financial Results. We are in the process of completing the year end audit of our June 30, 2000 financial statements. For the quarter ended June 30, 2000, we anticipate $8.0 million in total revenue consisting of $5.4 million in revenue from software license fees and $2.6 million in revenue from services, and a net loss of $2.6 million. For the fiscal year ended June 30, 2000, we anticipate $25.1 million in total revenue consisting of $13.1 million in revenue from software license fees and $12.0 million in revenue from services, and a net loss of $15.8 million. Ford License Agreement. On May 19, 2000, we finalized the largest software transaction in our history, a second multi-million dollar software agreement with Ford Motor Company. Ford will use our e-business software as part of a supply chain logistics initiative to increase supply chain velocity and to reduce transportation, distribution and inventory costs. The agreement totaled $9.4 million and provided for the license of five of our standard software products, first year maintenance and a warrant to purchase [INSIDE FRONT COVER] WHAT'S THE BEST WAY FOR A COMPANY TO PROFITABLY FULFILL A CUSTOMER'S ORDER? SynQuest, Inc. provides advanced e-business solutions designed to help traditional bricks-and-mortar companies, web-based companies and market exchanges fulfill orders in the most efficient, profitable manner. We help our clients uncover the best answers to their business issues, and then we put those answers to work for them -- increasing their profits and promoting customer satisfaction. [company logo] [INSIDE FRONT -- SECOND PAGE OF FOLD-OUT] THE SYNQUEST METHOD. The screens below illustrate some of the functionality we provide our clients and the supply chain goals we help them achieve. [screen shots of some components of the SynQuest products with the following text below each screen shot:] Supply Chain Models graphically depict supplier, processing and delivery locations for optimal financial and operational performance. Supplier Forecasts accelerate a company's communications with its suppliers through web-enabled visibility to short, medium and long-term expectations. Projection Simulation helps a company detect market trends and consider real-world experience for accurate demand planning. Plan Performance lets a company evaluate optimized planning scenarios by considering on-time, financial and capacity implications. Order Status Details provide customers and employees with web-enabled real-time status of orders. 400,000 shares of our common stock. We allocated approximately $6.9 million of the total fee to software licenses, $1.2 million to maintenance and $1.3 million to the fair value of the warrant. We shipped a portion of the software in June 2000 and recognized approximately $4.7 million of software license revenue. We expect to ship the balance of the products in the quarter ending September 30, 2000 and recognize the remaining $2.2 million of the software license revenue at that time. OUR OFFICES Our principal executive offices are located at 3500 Parkway Lane, Suite 555, Norcross, Georgia 30092, and our telephone number at that address is (770) 325-2000. Our website address is www.synquest.com. Information contained on our website is not incorporated by reference into this prospectus and should not be considered a part of this prospectus. We were incorporated as Factory Automation & Computer Technologies, Inc. in New York in May 1986. In January 1997, we were reincorporated in Georgia under the name SynQuest, Inc. SynQuest(R) is a registered trademark of SynQuest. This prospectus also includes trademarks, service marks, trade names and references to intellectual property owned by other companies. THE OFFERING <TABLE> <S> <C> Common stock offered......................... 5,000,000 shares Common stock outstanding after this 27,615,779 shares offering................................... Use of proceeds.............................. We intend to use approximately $9.7 million of the net proceeds of this offering to repay outstanding indebtedness and the balance for general corporate purposes. We may also use a portion of the proceeds to expand our business through strategic alliances and acquisitions. Nasdaq National Market symbol................ SYNQ </TABLE> --------------- The number of shares of common stock outstanding after this offering is based on shares of our common stock outstanding as of July 31, 2000. This calculation: - includes an aggregate of 14,244,805 shares of common stock to be issued upon conversion of all of our outstanding redeemable preferred stock, plus accrued and unpaid dividends as of July 31, 2000, assuming an initial public offering price of $7.50 per share, less underwriting discounts and commissions, at the completion of this offering; - includes an aggregate of 3,018,507 shares of common stock to be issued at the completion of this offering upon conversion of our outstanding subordinated promissory notes held by E.M. Warburg, Pincus & Co., our principal shareholder, in the aggregate principal amount of $15.0 million plus accrued interest as of July 31, 2000, assuming an initial public offering price of $7.50 per share, less underwriting discounts and commissions; - includes 3,589,563 shares of common stock to be issued upon the cashless exercise of warrants held by E.M. Warburg, Pincus, which E.M. Warburg, Pincus has agreed to exercise upon completion of this offering, assuming an initial public offering price of $7.50 per share, less underwriting discounts and commissions; - excludes 4,345,128 shares of common stock to be issued upon the exercise of options outstanding at July 31, 2000 that have a weighted average exercise price of $3.07 per share; and [INSIDE FRONT -- FIRST PAGE OF FOLD-OUT] [company logo] THE BUSINESS CHALLENGE. THE SYNQUEST SOLUTION. Considering the complexity and fast pace of the business world, many companies' needs are simple. Help them get the best financial performance from their supply chain -- every day, order by order. Give them the ability to differentiate themselves through customer service. Provide them with solutions that are easy to implement and adapt. SynQuest One2One Solutions do just that. Our solutions select the financially best way to fulfill orders, considering supply chain constraints and customer requirements. Real-time management of every customer order ensures fast and reliable fulfillment. We've helped more than 100 clients in the electronics, automotive, fabrication and assembly, aerospace, printing, packaging, and industrial machinery industries improve financial and operational performance, increase market share, and adapt quickly to change. THE SYNQUEST MISSION. We plan to become the leading provider of advanced e-business solutions to help companies get the best performance from their supply chains. How? With proven products that are easy to deploy and that often demonstrate a fast return on investment. SYNQUEST PRODUCT FUNCTIONALITY [graphic depiction of each product and its funtionality] [legend:] SynQuest Products -- And what they can do for you. Supply Chain Design Engine -- Evaluate Business Strategies Inbound Planning Engine -- Plan Inbound Logistics Tactical Planning Engine -- Create Sales & Operations Plan Open Demand Engine -- Forecast Collaboratively with Customers Dynamic Sourcing Engine -- Source Orders Across the Supply Chain Order Promising Engine -- Determine Product Availability via the Web Virtual Production Engine -- Manage Production Customer Service Engine -- Check Order Status via the Web - excludes 400,000 shares of common stock to be issued upon the exercise of warrants outstanding at July 31, 2000, except those held by E.M. Warburg, Pincus, that have a weighted average exercise price of $8.00 per share. Unless we indicate otherwise, all information in this prospectus reflects no exercise by the underwriters of their over-allotment option to purchase up to 750,000 additional shares of common stock. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The following tables set forth summary financial data for our company. You should read this information together with the financial statements and the notes to those statements appearing elsewhere in this prospectus and the information under "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> NINE MONTHS ENDED FISCAL YEAR ENDED JUNE 30, MARCH 31, ------------------------------------- ------------------------ 1997 1998 1999 1999 2000 ---------- ---------- ----------- ---------- ----------- (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue: Software license fees............ $ 4,333 $ 10,392 $ 10,521 $ 6,993 $ 7,721 Services......................... 3,887 8,014 12,760 9,246 9,429 ---------- ---------- ----------- ---------- ----------- Total revenue............ 8,220 18,406 23,281 16,239 17,150 Operating expenses: Cost of license fees............. 11 524 576 477 415 Cost of services................. 4,419 6,714 9,308 6,535 5,869 Research and development......... 6,320 9,368 10,179 7,614 7,689 Purchased in-process research and development................... 2,083 -- -- -- -- Sales and marketing.............. 6,344 9,485 13,731 10,248 10,077 General and administrative....... 3,663 3,984 4,850 3,613 3,793 Provision for doubtful accounts...................... 1,600 373 753 276 596 ---------- ---------- ----------- ---------- ----------- Total operating expenses............... 24,440 30,448 39,397 28,763 28,439 ---------- ---------- ----------- ---------- ----------- Operating loss..................... (16,220) (12,042) (16,116) (12,524) (11,289) Other income (expense)............. (1,507) (3,487) (3,444) (3,032) (1,913) ---------- ---------- ----------- ---------- ----------- Loss before income taxes........... (17,727) (15,529) (19,560) (15,556) (13,202) ---------- ---------- ----------- ---------- ----------- Net loss................. (17,727) (15,529) (19,560) (15,556) (13,202) Accretion of redeemable preferred stock............................ (1,309) (1,833) (2,534) (1,607) (2,766) ---------- ---------- ----------- ---------- ----------- Net loss attributable to common stock............................ $ (19,036) $ (17,362) $ (22,094) $ (17,163) $ (15,968) ========== ========== =========== ========== =========== Basic and diluted net loss per common share..................... $ (16.02) $ (13.98) $ (15.21) $ (11.85) $ (10.52) ========== ========== =========== ========== =========== Weighted average number of shares used in computing basic and diluted net loss per common share............................ 1,188,204 1,242,381 1,452,363 1,447,808 1,517,734 Pro forma basic and diluted net loss per share (unaudited)....... $ (1.25) $ (0.73) =========== =========== Weighted average number of shares used in computing pro forma basic and diluted net loss per share (unaudited)...................... 17,622,041 21,893,150 </TABLE> In the balance sheet data presented below, pro forma information reflects (a) the conversion of all of our outstanding redeemable preferred stock, plus accrued and unpaid dividends as of March 31, 2000, into an aggregate of 14,116,033 shares of our common stock, assuming an initial public offering price of $7.50 per share, less underwriting discounts and commissions, upon completion of this offering, (b) the conversion of our outstanding subordinated promissory notes held by E.M. Warburg, Pincus in the aggregate principal amount of $15.0 million, plus accrued interest as of March 31, 2000, into 2,940,388 shares of our common stock, assuming an initial public offering price of $7.50 per share, less underwriting discounts and commissions, and (c) the issuance of 3,589,563 shares of common stock upon the cashless exercise of warrants held by E.M. Warburg, Pincus upon completion of this offering, assuming an initial public offering price of $7.50 per share, less underwriting discounts and commissions. Pro forma as adjusted information also reflects the sale of 5,000,000 shares of our common stock in this offering at an assumed initial public offering price of $7.50 per share, less underwriting discounts and commissions and estimated offering expenses payable by us. This table excludes the effect of dividends and interest accrued after March 31, 2000. <TABLE> <CAPTION> AS OF MARCH 31, 2000 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 193 $ 193 $ 23,207 Working capital............................................. (35,655) (15,131) 18,779 Total assets................................................ 6,898 6,898 29,912 Long-term debt, less current portion........................ 129 129 129 Redeemable preferred stock.................................. 60,022 -- -- Shareholders' equity (deficit).............................. (93,366) (12,820) 21,090 </TABLE>
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+SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully. MYPOINTS.COM MyPoints.com is a leading provider of internet direct marketing services and customer loyalty infrastructure. Our database-driven direct marketing service, MyPoints, offers direct marketers an approach to internet advertising that is designed to enhance customer acquisition and retention efforts by integrating targeted email and web-based offers with incentives to respond to those offers. Our rewards-based shopping channel, MyPoints Shopping!, provides web users with the ability to earn points for every dollar spent at select retail sites. Points earned in the MyPoints program may be redeemed for a wide variety of products and services, such as gift certificates, travel awards and prepaid phone cards. Our approach to e-commerce provides internet consumers with the opportunity to earn rewards by responding to direct offers and by shopping, and provides businesses with an integrated set of online customer acquisition and retention tools. In addition, we build and manage co-branded and private label online customer loyalty programs for our loyalty partners. When consumers enroll in the MyPoints program, they give us permission to send them targeted online offers, and they receive rewards points for completing surveys that provide us with demographic and behavioral information. MyPoints members earn additional points by responding to direct marketing offers, making online and offline purchases, and providing us with additional demographic and behavioral data through surveys on a secure, confidential basis. Members may redeem points they earn online for products and services from our rewards providers. Our member profile database is continuously enriched with transactional data gathered through members' interactions with promotional offers, select retail sites, the completion of surveys and the redemption of points. We have built a member database containing more than six million consumer data profiles. We principally earn revenues by delivering online direct marketing offers to our membership base. We charge advertisers a fee based on offers delivered, qualified responses generated and qualified purchases made. In the fourth quarter of 1999, we provided direct marketing services to 284 advertisers, including leading brands such as BMG Entertainment, Garden.com, MotherNature.com and Sprint. Our more than 50 rewards providers include Barnes & Noble, Macy's, Sprint and Tower Records. According to PC Data, a leading web rating service, the MyPoints.com web site, www.mypoints.com, was the internet's fifth most popular shopping site in December 1999. MARKET OPPORTUNITY Businesses engage in various forms of offline and online direct marketing to generate sales of products or services. Traditional forms of offline direct marketing include catalog mailings, magazine inserts and telesales. Online direct marketing takes the form of email and web-based promotional offers. Online direct marketing allows advertisers to use technology-based tools to give them rapid feedback on campaigns, which can be used to tailor new campaigns and targeted offers. Advertisers are committing relatively more dollars to online direct marketing than to other forms of internet advertising, such as brand marketing using banner advertisements. Forrester Research, a leading internet research firm, projects internet advertising expenditures in the U.S. to increase from $2.8 billion in 1999 to $22.2 billion in 2004. Forrester estimates that direct marketing will account for 53% of total online advertising expenditures in the U.S. in 2004, up from 15% in 1999. In addition to the growing use of the internet as a direct marketing medium, as the number of internet users and web sites increases, the relative importance to businesses of customer retention is also increasing. The most recent survey by the web research firm NFO Interactive found that approximately 53% of online customers would increase the amount they spend in online transactions if loyalty points were offered. As a result of these factors, leading online merchants and content providers are launching and testing programs aimed at retaining their most valuable customers. The challenges that these businesses face in establishing online loyalty programs include the costs of implementing and operating the programs and the ability to provide customers with sufficient opportunities to earn and redeem awards. We believe that these challenges will lead many companies to outsource this aspect of their customer retention programs to providers capable of delivering comprehensive loyalty management services. Because of continuing corporate interest in using the internet to acquire customers, and because of the need for online businesses to find effective ways to retain customers once they have attracted them, we believe there is a significant opportunity for a company that can overcome the barriers to direct marketing and loyalty on the internet, and bring cost-effective, integrated direct marketing and loyalty solutions to the online market. CORPORATE INFORMATION MyPoints.com was incorporated in Delaware under the name Intellipost Corporation in November 1996. In March 1999, we changed our name to MyPoints.com, Inc. Our principal executive offices are located at 100 California Street, 11th Floor, San Francisco, California 94111. Our telephone number at this location is (415) 676-3700. Our corporate email address is info@mypoints.com. ------------------------- THE OFFERING Common stock offered by MyPoints.com........ 2,300,000 shares Common stock offered by selling stockholders................................ 1,700,000 shares Common stock to be outstanding after the offering.................................... 28,224,533 shares Use of proceeds............................. For general corporate purposes, including working capital, membership expansion, advertising, expansion of our sales and marketing operations, branding, technology enhancements, new products and services including international ventures, funding of points liability, expansion of network infrastructure, as well as possible strategic investments or acquisitions. See "Use of Proceeds." Nasdaq National Market symbol............... MYPT Common stock to be outstanding after the offering is based on 25,924,533 shares of common stock outstanding as of December 31, 1999. It does not include: - 5,388,218 shares issuable upon exercise of stock options outstanding as of December 31, 1999; - 437,810 shares available for future grant or issuance under our stock option and stock purchase plans as of December 31, 1999; and - 277,477 shares issuable upon exercise of warrants outstanding as of December 31, 1999. Except as otherwise indicated, all of the information in this prospectus assumes no exercise of the underwriters' over-allotment option. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) See Note 3 of Notes to Consolidated Financial Statements for an explanation of the determination of the number of weighted average shares used in computing per share data. <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------------ 1997 1998 1999 ------- ------- -------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................................................. $ 151 $ 1,286 $ 24,140 Gross profit............................................. 73 165 16,733 Total operating expenses................................. 3,018 8,494 54,683 Operating loss........................................... (2,945) (8,329) (37,950) Net loss................................................. (2,889) (8,266) (37,456) Net loss attributable to common stockholders............. $(2,889) $(8,266) $(47,256) Net loss per share: Basic and diluted...................................... $ (2.56) $ (4.37) $ (3.53) Weighted average shares -- basic and diluted........... 1,127 1,890 13,397 </TABLE> In the pro forma column, we have adjusted the actual balance sheet data to give effect to receipt of the net proceeds from the sale in this offering of the 2,300,000 shares of common stock offered by us at an assumed public offering price of $44.88 per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses. <TABLE> <CAPTION> DECEMBER 31, 1999 --------------------- ACTUAL PRO FORMA -------- --------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 21,792 $118,586 Working capital............................................. 10,948 107,742 Total assets................................................ 55,669 152,463 Long-term obligations, less current maturities.............. 1,029 1,029 Accumulated deficit......................................... (58,478) (58,478) Total stockholders' equity.................................. 28,853 125,647 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001083243_nzch-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001083243_nzch-corp_prospectus_summary.txt
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+Prospectus Summary.......................................... 1 Risk Factors................................................ 8 Special Note Regarding Forward-Looking Statements........... 24 Plan of Distribution........................................ 25 Use of Proceeds............................................. 32 Dividend Policy............................................. 32 Price Range of Zap.Com's Common Stock....................... 32 Capitalization.............................................. 33 Selected Financial Data..................................... 34 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 35 Business.................................................... 39 Management.................................................. 50 Related Party Transactions.................................. 55 Principal Stockholders...................................... 58 Federal Income Tax Considerations........................... 58 Description of Securities................................... 59 Experts..................................................... 62 Legal Matters............................................... 62 Additional Information...................................... 62 Index to Financial Statements............................... F-1 </TABLE> ------------------------ Our World Wide Web site is www.zap.com. Neither the information in this Web site, the ZapBox nor any of our other Internet properties nor any Web site on the ZapNetwork is incorporated by reference into this prospectus. You should rely only on the information contained in this prospectus, the related registration statement and any documents incorporated by reference into the registration statement. Zap.Com has not authorized any person to provide you with different or inconsistent information. If anyone provides you with different or inconsistent information, you should not rely on it as having been authorized by Zap.Com. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus. This prospectus shall not constitute an offer to sell these securities, or solicitation of an offer to buy, in any jurisdiction where the offer or sale is not permitted. Zap.Com, ZapNetwork, ZapBox and My ZapBox are some of our service marks. As of the date of this prospectus, we have registered the securities, or an exemption from registration has been obtained (or is otherwise available), only in the states of Colorado, Delaware, Georgia, Idaho, Florida, Illinois, Louisiana, Nevada, New York, Oregon, Rhode Island, South Carolina, Utah, Washington and Wyoming and initial sales may only be made in these jurisdictions. Those Website owners that subscribe to securities in this offering must be residents of these states. EXPLANATORY NOTE This registration statement covers the registration of 20,000,000 shares of common stock, $.001 par value per share, of Zap.Com Corporation ("Zap.Com") to be issued from time to time as payment for all or some portion of the purchase price for certain rights granted to Zap.Com with respect to one or more Web sites by Web site owners who join the ZapNetwork (the "Offering Registration"). This registration statement also covers the registration of up to an additional 30,000,000 shares of common stock, $0.001 par value per share, of Zap.Com to be issued from time to time as payment for all or some portion of the purchase price for one or more acquisitions of companies, businesses or assets complementary to Zap.Com's existing business (including future acquisitions of rights granted with respect to one or more Web sites) or which may be offered in connection with promotions or similar events or for sale or other distribution by persons who acquire such shares in the acquisitions or promotional events or by the donees of such persons or by other persons acquiring such shares (the "Shelf Registration"). The complete prospectus (the "Offering Prospectus") relating to the Offering Registration immediately follows this explanatory note. Following the Offering Prospectus are certain pages relating solely to the Shelf Registration (together with the remainder of the Offering Prospectus as modified as indicated below, including an alternate front and back cover page the "Shelf Prospectus"). The Shelf Prospectus will not include the information in the prospectus summary under the heading "Offering", or under the sections of the Offering Prospectus entitled "Use of Proceeds" and "Federal Income Tax Considerations", but will include a "Selling Stockholder" section. All other sections of the Offering Prospectus will be used in the Shelf Prospectus, except that a different Plan of Distribution section will be used and additional non-substantive changes will be made to reflect the offering being made under the Offering Prospectus if the Shelf Prospectus is used concurrently with the Offering Prospectus. Each of the alternate or additional pages for the Shelf Prospectus included herein has been labeled "Alternate Page for Shelf Prospectus." If required, each of the prospectuses in the forms in which they are used after the registration statement becomes effective will be filed with the Securities and Exchange Commission pursuant to Rule 424(b) of the General Rules and Regulations under the Securities Act of 1933, as amended. for the ZapBox and Direct Hit Technologies, Inc. to support the search function for the ZapBox. We also intend to rely on a third party to provide us with sales representation and other third parties for various operational needs. To date, our operations have consisted primarily of organizational and capital raising activities, research and analysis with respect to Internet industry opportunities, development of strategic relationships, the creation and launch of our homepage at www.zap.com and the first two releases of the ZapBox. As of the date of this prospectus, we have not generated any, nor do we have any source of revenue. Therefore, to a significant extent, the description of our business in this prospectus is based on a business model and activities in the early execution stages. In the future, we may acquire or establish strategic relationships with Internet service organizations, electronic commerce companies and traditional companies that have attractive electronic commerce opportunities, including broadcasting, media, entertainment and communications companies. As of the date of this prospectus, we do not have any specific plans, proposals, arrangements or understandings with any Web site owner or anyone else for any acquisition, investment or similar transaction. At any given time, however, we may be in discussions or negotiations regarding any of these opportunities. Our principal executive offices are located at 100 Meridian Centre, Suite 350, Rochester, New York 14618. Our telephone number is (716) 242-8600.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001083712_mecklermed_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001083712_mecklermed_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE ITEMS IN THE FOLLOWING SUMMARY ARE DESCRIBED IN MORE DETAIL LATER IN THIS PROSPECTUS. THIS SUMMARY PROVIDES AN OVERVIEW OF SELECTED INFORMATION AND DOES NOT CONTAIN ALL THE INFORMATION YOU SHOULD CONSIDER. THEREFORE, YOU SHOULD ALSO READ THE MORE DETAILED INFORMATION SET OUT IN THIS PROSPECTUS, THE FINANCIAL STATEMENTS AND THE OTHER INFORMATION INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL REFERENCES IN THIS PROSPECTUS TO "INTERNET.COM," "WE," "US" OR "OUR" ARE TO INTERNET.COM CORPORATION OR INTERNET.COM LLC, OUR PREDECESSOR ENTITY. INTERNET.COM internet.com owns and operates a network of 89 Web sites and related Internet media properties focused solely on the Internet industry. In addition to our 89 Web sites, our network includes 71 e-mail newsletters, which are periodical publications delivered by electronic mail; 101 online discussion forums, which are electronic message centers where members of specific interest groups review messages left by others and leave their own messages; and 75 moderated e-mail discussion lists, which are similar to online discussion forums, except that members' messages are transmitted and received by e-mail broadcast. Our network is organized into twelve subject areas, or vertical content channels. These vertical content channels serve our Internet users, which include Internet industry and Internet technology professionals, Web developers and experienced Internet users. We provide our audience, or community of Internet users, with the following resources: - real-time Internet industry news - tutorials, training and skills development - Internet market research - buyer's guides and products reviews - archives of definitive industry publications - discussion forums - software downloads - expert advice The Internet has emerged as a global distribution network for real-time news and information, an environment for online communities and a marketplace in which commerce is conducted. International Data Corporation, or IDC, estimates that the number of Uniform Resource Locators, the addresses of documents on the World Wide Web, will grow from approximately 925 million in 1998 to 13.1 billion in 2003. This growth has created a rapidly expanding group of Internet professionals with a critical need for news and information resources to assist them in their daily work and purchasing decisions. Our network provides a comprehensive source of the latest Internet news and information for our community of Internet users. It also provides the ability to share information and evaluate, compare and purchase Internet-related products and services. We also provide advertisers and vendors with a means through which they can reach our community of Internet industry and Internet technology professionals, many of whom either make or influence Internet technology purchasing decisions. We have had over 850 advertisers on our network, including International Business Machines Corporation, Sun Microsystems, Hewlett-Packard Company, Lucent Technologies Inc., Microsoft Corporation, EarthLink Network, Inc., Compaq Computer Corporation, Inktomi Corporation, GoTo.com, Inc. and uBid, Inc., which were our 10 largest advertisers based on revenues during the nine months ended September 30, 1999. We have rapidly built a network of Internet media properties through internal development and acquisitions. We have experience identifying, evaluating, acquiring and integrating Internet media properties which are complementary to our content offerings and services. Since July 1995, we have made 42 acquisitions of Internet media properties, consisting of 55 Web sites, 40 e-mail newsletters, 74 online discussion forums and 61 moderated e-mail discussion lists. Our size and recent growth are illustrated by the following statistics for the months of November 1998 and November 1999: <TABLE> <CAPTION> NOVEMBER NOVEMBER 1998 1999 ---------- ---------- <S> <C> <C> Web site page views.................................. 23,200,000 84,500,000 Unique Web site visitors............................. 1,168,000 1,880,000 E-mail newsletters distributed....................... 1,777,000 19,100,000 E-mail newsletter subscribers........................ 218,000 2,030,000 E-mail discussion list postings...................... 5,010,000 41,100,000 E-mail discussion list subscribers................... 18,000 80,000 </TABLE> Our objective is to maintain and strengthen our position as a provider of business information focused solely on the Internet industry. We intend to achieve this objective by continuing to execute the following strategies: - increase our proprietary content offerings and services; - grow through targeted acquisitions; - enhance worldwide brand recognition; - expand revenue opportunities; and - increase our international presence. In part due to our rapid and recent growth, we have a history of significant losses. Since inception, internet.com and its predecessor business have a cumulative loss of approximately $26.1 million, of which $18.1 million was incurred during the nine months ended September 30, 1999. Our plans for continued acquisitions of Internet media properties, as well as our operating in highly competitive markets, will contribute to our anticipated continued losses for the foreseeable future. Prior to the acquisition of Mecklermedia Corporation by Penton Media, Inc. in November 1998, we operated since December 1994 as one of three divisions which comprised Mecklermedia. We have a limited operating history. Our predecessor Web sites, MECKLERWEB.COM and IWORLD.COM, were also dedicated to covering the Internet industry. In connection with this acquisition, Penton Media determined that Mecklermedia's Internet business was not consistent with its planned strategic direction. To address this issue, Alan M. Meckler, Mecklermedia's Chairman and Chief Executive Officer, purchased an 80.1% interest in internet.com LLC, a business formed by Penton Media to hold the Internet business acquired from Mecklermedia. See "Certain Transactions--Formation Transactions." As of December 31, 1999, Mr. Meckler beneficially owned approximately 51.7% of our outstanding common stock, after giving effect to this offering. internet.com Corporation was incorporated on April 5, 1999 in the State of Delaware. internet.com LLC was merged with and into internet.com Corporation upon consummation of our initial public offering in June 1999. Our principal executive offices are located at 23 Old Kings Highway South, Darien, Connecticut 06820 and our telephone number is (203) 662-2800. The information on our Web sites, e-mail newsletters, online discussion forums and moderated e-mail discussion lists is not a part of this prospectus. "internet.com" and the internet.com logo are two of our trademarks and service marks. We have numerous other trademarks and service marks as well. See "Business--Intellectual Property." This prospectus also references trademarks and trade names of other companies. RECENT DEVELOPMENTS On January 20, 2000, we reported revenues of $7.5 million for the three months ended December 31, 1999, a 383% increase as compared to the three months ended December 31, 1998 revenues of $1.6 million. Net loss applicable to common stockholders, excluding amortization of intangibles, was $482,000, or $0.02 per share for the three months ended December 31, 1999, as compared to $723,000, or $0.04 per share for the three months ended December 31, 1998. Including amortization of intangibles, net loss for the three months ended December 31, 1999 was $3.9 million, or $0.17 per share. For the year ended December 31, 1999, our revenues were approximately $16.1 million, an increase of 272% over the $4.3 million in revenues for the year ended December 31, 1998. Net loss applicable to common stockholders for the year ended December 31, 1999, excluding amortization of intangibles and a non-cash compensation charge, was approximately $4.2 million, or $0.21 per share, as compared to approximately $2.3 million, or $0.14 per share for the year ended December 31, 1998. Including amortization of intangibles and the non-cash compensation charge, net loss for the year ended December 31, 1999 was $22 million, or $1.08 per share. THE OFFERING <TABLE> <S> <C> Common stock offered by internet.com......... 1,750,000 shares Common stock offered by the selling stockholder................................ 2,000,000 shares Common stock outstanding after the offering................................... 25,084,520 shares(1) Use of proceeds.............................. Potential strategic acquisitions, venture capital investments and general corporate purposes, including working capital and expansion of editorial, information technology, marketing and sales activities. See "Use of Proceeds." Nasdaq National Market symbol................ INTM </TABLE> - ------------------------ (1) Based on shares outstanding as of December 31, 1999, excluding 1,090,730 shares of common stock that are reserved for issuance upon exercise of stock options issued under our stock incentive plan. There are 899,750 additional shares available for issuance under our stock incentive plan. UNLESS OTHERWISE SPECIFICALLY STATED, INFORMATION CONTAINED IN THIS PROSPECTUS DOES NOT TAKE INTO ACCOUNT THE EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION TO PURCHASE UP TO 562,500 SHARES OF OUR COMMON STOCK FROM THE SELLING STOCKHOLDER. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table summarizes the financial data for internet.com and its predecessor business, the iWorld division of Mecklermedia. The share information reflects the conversion upon consummation of our initial public offering of internet.com from a limited liability company into a corporation as if such conversion had occurred at the beginning of each period indicated. Effective with the formation of internet.com LLC in November 1998, our fiscal year end was changed to December 31. The following summary financial data should be read in conjunction with the internet.com and iWorld audited financial statements and accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> INCEPTION FISCAL YEAR ENDED OCT. 1 NOV. 24 (DEC. 7, 1994) --------------------------------- THROUGH THROUGH THROUGH SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, NOV. 23, DEC. 31, 1995(1) 1996(1) 1997(1) 1998(1) 1998(1) 1998(2) ------------------ --------- --------- --------- -------- -------- <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues....................... $ 123 $ 498 $ 1,479 $ 3,544 $ 778 $ 772 Gross profit................... 84 (38) 308 1,373 322 369 Amortization................... -- 109 505 920 86 632 Non-cash compensation charge... -- -- -- -- -- -- Operating loss................. (404) (1,244) (2,155) (2,731) (467) (966) Net loss....................... (404) (1,244) (2,155) (2,731) (467) (974) Basic and diluted net loss per share........................ Common shares used to compute basic and diluted net loss per share.................... <CAPTION> PRO FORMA NINE MONTHS NINE ENDED MONTHS --------------------- ENDED SEPT. 30, SEPT. 30, SEPT. 30, 1998(1) 1999(2) 1999(3) --------- --------- ---------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues....................... $ 2,775 $ 8,598 $ 9,941 Gross profit................... 947 3,660 4,484 Amortization................... 712 6,372 9,632 Non-cash compensation charge... -- 7,975 7,975 Operating loss................. (2,287) (18,491) (21,326) Net loss....................... (2,287) (18,110) (20,946) Basic and diluted net loss per share........................ $ (0.94) $ (1.03) Common shares used to compute basic and diluted net loss per share.................... 19,326 20,258 </TABLE> - ------------------------------ (1) Represents the financial data of the iWorld division of Mecklermedia Corporation. (2) Represents the financial data of internet.com. (3) Gives effect to the acquisitions described in unaudited condensed combined financial information. See pages F-59 through F-62. The following table summarizes our balance sheet as of September 30, 1999 on an historical basis, on a pro forma basis to give effect to certain acquisitions described in unaudited condensed combined financial information, included elsewhere herein, and pro forma as adjusted to reflect the sale of the 1,750,000 shares of common stock offered by us hereby at the assumed public offering price of $55.625 per share, after deducting underwriting discounts and estimated offering expenses. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001084329_digital_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001084329_digital_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary contains basic information about us and this offering. Because it is a summary, it does not contain all of the information that you should consider before investing. You should read the entire prospectus carefully, including the section entitled "Risk Factors" and our consolidated financial statements and the related notes before making an investment decision. Our fiscal year ends on September 30. Unless we indicate otherwise, all information in this prospectus assumes no exercise of the underwriters' over-allotment option. Digital Island, Inc. We provide a global e-Business delivery network and suite of services for enterprises that use the Internet to deploy critical business applications and conduct e-commerce worldwide. We offer a comprehensive solution that integrates content delivery, hosting, intelligent networking and applications services. Our services enable enterprises to effectively deploy and manage their global applications by combining the reliability, performance and broad range of functions available in private networks with the ubiquitous access of the public Internet. We target global enterprises that increasingly rely on the Internet to conduct business, but are constrained by the unreliability, slow performance and limited range of functions of the public Internet. Our customers use our services and proprietary technology to facilitate the deployment of a wide variety of electronic commerce applications, including online marketing and sales, customer service, fulfillment, software, document and multimedia distribution and online training. As of December 31, 1999, we had contracts with 169 customers, of which 132 were deployed, including Activision, America Online, Autodesk, Blue Mountain, Canon, Cisco Systems, CNBC.com, E*TRADE, ft.com, Intuit, Microsoft, National Semiconductor, NetGravity, PBS.org and Value America. The Internet, a network of hundreds of interconnected, separately administered public and private networks, was not originally designed to handle either the large traffic levels or the vast array of content types being transmitted today. Organizations cannot predict or control the network path that their data will travel over the Internet and, as a result, are unable to avoid network congestion or bottlenecks that degrade performance. For companies conducting business over the Internet, poor website performance, such as failed commerce transactions, slow downloads or site crashes, can create dissatisfied users and result in lost customer goodwill and revenue opportunities. For enterprises using the Internet for global operations, the U.S.-centric nature of the public Internet also results in poor response times. Businesses are increasingly demanding Internet networks that operate with the functionality and performance levels previously available only on private corporate networks. Our solution includes a global e-Business delivery network consisting of a high speed network that connects our five geographically dispersed data centers and a suite of services that integrates content delivery services, hosting, intelligent networking and application services. Our core network architecture has 55 different connection points to the Internet and connects directly to local Internet service providers in 22 countries. The network is supplemented by over 1,200 content distributors, which provide improved reach to countries not directly accessed by our network. This minimizes the number of separate transmissions necessary to transmit data, resulting in greater speed and reliability for our customers' end-users. We also help our customers distribute content over the Internet by replicating and storing their applications and Internet content in multiple locations close to their end-users. This allows our customers to benefit from the lower overall cost of data storage versus transport and to provide a better online experience for their end-users. We offer service level guarantees, customized billing, security services to protect the integrity of data transmissions, network management and other high quality services designed to improve the content and applications delivered through our network. In addition, we operate Web sites and Internet applications, manage computer servers and maintain networking equipment for our customers in our advanced network data centers, and offer a range of data transport options which allow customers to reserve network capacity consistent with their expected network usage. These services are designed to allow customers to outsource Internet activities to us, thereby transferring to us the burden of attracting and retaining scarce technical staff and adopting continuously changing technologies, while lowering their operating costs and speeding deployment of applications over the Internet. Our objective is to become the leading global e-Business delivery network. In order to achieve this objective, we intend to continue to: . focus on leading global e-Business customers in targeted industries that rely on the Internet to provide critical business applications; . develop and implement new technologies and services that will allow our customers to improve the deployment and operation of their Internet applications globally; . expand the size and reach of our e-Business delivery network; . expand strategic technology and marketing/reselling relationships and establish new relationships with systems integrators, hardware and software vendors and application service providers; and . expand our sales capabilities in the U.S., Asia and Europe by hiring more direct sales personnel and developing additional agents and reseller channels. Recent Developments Sandpiper Merger On December 28, 1999, we completed our acquisition of Sandpiper Networks, Inc. through the merger of a wholly owned subsidiary of Digital Island with and into Sandpiper, in which Sandpiper survived as a wholly owned subsidiary of Digital Island. We pursued this merger to enhance our comprehensive network services for providing global e-Business applications. In the merger, each outstanding share of Sandpiper capital stock was converted into the right to receive 1.0727 shares of our common stock. We also assumed outstanding options and warrants to acquire Sandpiper common stock and converted those options and warrants into options and warrants to acquire our common stock at the same exchange ratio. Overall, we issued or have reserved for issuance approximately 24.6 million shares of our common stock in connection with the merger. Under the merger agreement, the former Sandpiper shareholders agreed to indemnify and hold harmless Digital Island and some related parties from and against losses, costs, damages, liabilities and expenses arising from any breach of or default in any representation, warranty, covenant or agreement made by Sandpiper in the merger agreement or related agreements and instruments. To secure this indemnification obligation, 10% of the total number of shares of our common stock issued in the merger to Sandpiper shareholders have been deposited in escrow for a period of one year; the escrow will be our sole recourse for any such breach or default absent fraud, intentional misrepresentation or willful breach. In connection with the merger, Digital Island and Sandpiper stockholders holding approximately 57% of our common stock outstanding immediately after the merger entered into market standoff agreements restricting them from selling or otherwise transferring any of our equity securities. These market standoff agreements expire by their terms upon the completion of our proposed separate public offering of common stock. However, as further described in "Underwriting", a number of these holders have entered into lockup agreements in connection with this offering. In addition, we entered into employment agreements with Leo Spiegel, Andrew Swart and David Farber, former executive officers of Sandpiper. Mr. Spiegel became our President and agreed to restructure the vesting schedule of his unvested shares of Digital Island common stock so that 50% will vest on March 24, 2000 and the balance will vest on November 24, 2000, the expiration date of his employment agreement. Mr. Swart became our Vice President of Software Engineering and Mr. Farber became our Chief Scientist. Each agreed to remain with us for one year following the merger, and was granted a stock option (vesting over a 50-month period following the merger) to purchase 150,000 shares. For a more detailed description of these arrangements, see "Certain Transactions." Upon completion of the merger, Leo Spiegel, the former president and chief executive officer of Sandpiper, and G. Bradford Jones and Robert Kibble, former directors of Sandpiper, became directors of Digital Island as Sandpiper designees under the merger agreement. SRI International Transaction On November 22, 1999, we acquired Internet technology from SRI International, a California nonprofit public benefit corporation, for $6,000,000 of our common stock. Additionally, pursuant to the agreement, we will obtain consulting services from SRI International for an additional $4,000,000 of our common stock. SRI's patent-pending technology is designed to improve download times for Internet content by intelligently avoiding network congestion. We will incorporate SRI technology into our e-Business delivery network to help ensure fast performance for e-Business applications, including transactions and other forms of dynamic processing. Strategic Relationship with Sun Microsystems and Inktomi On December 7, 1999, we entered into memoranda of understanding with Sun Microsystems, Inc. and Inktomi Corporation providing for a joint strategic relationship. Under the relationship, we have agreed to purchase, over a two year period, up to $150 million of Sun servers, storage operating systems and server software, using Inktomi network caching applications. The total purchase would consist of 5,000 Sun servers. Sun and Inktomi also agreed to participate and invest in joint marketing and sales activities with us to support broadband and streaming media content delivery over the Internet. Sun agreed to provide $100 million of lease financing for the acquisition of the equipment, consisting of: . a $30 million initial line of credit; . a $30 million line of credit available in nine months upon meeting specified working capital maintenance and financing milestones; and . a $40 million line of credit available in fifteen months upon meeting specified additional working capital maintenance and financing milestones. In exchange for this lease financing, we agreed to grant Sun warrants to purchase up to $10 million of our common stock in three tranches corresponding on a pro rata basis with the above three lines of credit; the warrants will be exercisable at the five-day average trading price preceding the grant dates, and will expire in 48 months (in the case of the first warrant) and 36 months (in the case of the second and third warrant). The lease financing facility and the marketing and sales relationship are subject, in part, to definitive documentation. In connection with this strategic relationship, in January 2000, Sun purchased 391,869 shares of our common stock for $20 million, and Inktomi purchased 117,561 shares of our common stock for $6 million. Live On Line Acquisition On January 18, 2000, we acquired Live On Line, Inc., a privately-held company located in New York City, through the merger of a subsidiary of Digital Island into Live On Line. As a result of the merger, Live On Line became a wholly owned subsidiary of Digital Island. Live On Line provides internet content and streaming media technology through its high-bandwidth, worldwide server network to clients in the entertainment, media, consumer products, pharmaceutical and education industries. In connection with this acquisition, the former shareholders of Live On Line were issued a total of 799,989 shares of our common stock, and will receive a total of $5,250,000 in exchange for all outstanding shares of Live On Line common stock and our assumption of all outstanding warrants of the company. The former shareholders of Live On Line received fifty percent of the cash consideration on the closing date and the remaining fifty percent will be paid upon the completion of this offering or July 18, 2000, if earlier. In addition, the former shareholders of Live On Line are entitled to require us to file a registration statement on Form S-3 with the Securities and Exchange Commission to register the offering of shares of common stock issued to them in the merger on or before July 17, 2000 or, if we are not permitted to use Form S-3 at such date, as soon as practicable after we become eligible to use such form. ---------------- We were incorporated in the State of California on February 10, 1994. We changed our name to Digital Island, Inc. on August 15, 1996 and reincorporated in the State of Delaware on June 22, 1999. Our principal headquarters are located at 45 Fremont Street, 12th Floor, San Francisco, California 94105, and our telephone number is (415) 738-4100. Information contained on our web site is not a part of this prospectus. The Digital Island name and logo, Digital Island Intelligent Network, Digital Island Global IP Applications Network, Digital Island Application Hosting and Content Distribution, Globeport, Digital Island Local Content Managers, TraceWare, Footprint and the names of products and services offered by Digital Island (including those referred to in "Business") are trademarks, registered trademarks, service marks or registered service marks of Digital Island. This prospectus also includes product names, trade names and trademarks of other companies. THE OFFERING <TABLE> <C> <S> Securities Offered......................... $300 million aggregate principal amount of our % Convertible Subordinated Notes due , 2005. We have granted the underwriters an option to purchase up to $45 million additional aggregate principal amount of the notes in the event that sales of the notes exceed this amount. Interest................................... The notes bear interest at the annual rate shown on the front cover of this prospectus from , 2000. Interest will be paid twice a year, on each and , beginning on , 2000, until the principal is paid or made available for payment. Maturity Date.............................. , 2005 Conversion Right........................... You may convert the notes into shares of our common stock initially at a conversion rate of shares per $1,000 principal amount of notes at any time before the close of business on , 2005, unless the notes have been previously redeemed or repurchased. The conversion rate is equivalent to a conversion price of approximately per share. The conversion rate may be adjusted in certain circumstances. See "Description of the Notes--Conversion Rights." Subordination.............................. The notes are subordinated to our Senior Debt, as described herein. As a result, the payment of the principal, any premium and interest on the notes, including amounts payable on any redemption or repurchase, will be subordinated to the prior payment in full of all our Senior Debt. The Indenture does not restrict our ability to incur Senior Debt. As of December 31, 1999, we had approximately $14.1 million in Senior Debt outstanding. See "Description of the Notes--Subordination." Optional Redemption........................ We may redeem some or all of the notes at our option at any time on or after , 2003, at the redemption prices set forth herein, plus accrued and unpaid interest to the redemption date. See "Description of the Notes--Optional Redemption." </TABLE> <TABLE> <S> <C> Repurchase at Option of Holders upon a If we are the subject of a Change in Change of Control......................... Control, we must give you the right to require us to repurchase your notes. See "Description of the Notes--Repurchase at Option of Holders Upon a Change in Control." Use of Proceeds............................ We plan to use our net proceeds from this offering, together with existing cash, for general corporate purposes including capital expenditures and working capital needs. We may also use a portion of the proceeds for strategic investments or acquisitions. See "Use of Proceeds." Form and Description of Notes.............. The notes will initially be represented by a global note, which will be deposited with a custodian for, and registered in the name of a nominee of, The Depository Trust Company, or DTC, in New York City. Beneficial interests in the global note will be shown on, and transfers of the global note will be made only through, records maintained by DTC and its participants. See "Description of Notes-- Form, Denomination, Transfer, Exchange and Book-Entry Procedures."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001084361_yupi_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001084361_yupi_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY. YUPI INTERNET INC. We are a leading online Spanish language destination, delivering a wide variety of content and services and an intuitive navigational experience to a broad and diverse community of Spanish speakers around the world. We attract users through grass roots, traditional media and online marketing efforts, and we provide them with aggregated entertainment, news and other content through relationships with media companies. We also provide our users with relevant search results exclusively in Spanish through our proprietary search engine. For the year ended December 31, 1999, we had revenues of approximately $3.2 million and a net loss, excluding a deemed dividend on our preferred stock, of approximately $35.3 million. We work with our advertisers and marketers to design, execute and evaluate online advertising and promotional campaigns that segment and target our users. As of February 28, 2000, we had approximately 3.8 million registered users. According to I/PRO, in February 2000, our sites generated approximately 143 million page views and we recorded approximately 9.1 million visits to our sites, with an average duration of approximately 15 minutes per visit. Our target market of Spanish-speaking Internet users represents one of the fastest growing groups of Internet users today. IDC estimates that the number of Spanish-speaking Internet users outside the United States will increase from approximately 8.3 million in 1999 to 20.6 million in 2002. Forrester Research estimates that by the end of 2000, there will be approximately 3.6 million U.S. Hispanic Internet users. Jupiter Communications estimates that the percentage of Latin Americans outside of Brazil using the Internet will increase from approximately 1.0% in 1999 to 4.7% in 2003, representing a compound annual growth rate of approximately 50%, compared to an estimated rate of approximately 12% in the United States for the same period. As Internet usage in Latin America increases, we believe that Spanish-speaking Internet users will become a more diverse group. According to Nazca S & S, the percentage of Internet users from the highest socio-economic level in the eight largest Latin American countries declined from 41% in 1997 to 30% in 1999 and the percentage of female Internet users increased from 24% to 38% during the same period. We believe Yupi provides an effective medium for advertisers and marketers to reach this increasingly diverse audience. We attract users and increase usage by providing: /bullet/ aggregated quality content from leading media companies and publications, such as BMG Entertainment, Cinemark, COMPUTER WORLD, News Corp., PC WORLD, Sony, Universal Music Group, THE WALL STREET JOURNAL OF THE AMERICAS, Warner Bros. Studios and WRIGHT INVESTOR SERVICES; /bullet/ relevant search and intuitive navigational services, through our proprietary search engine and a database of Spanish language sites that has been manually reviewed and categorized by our Spanish-speaking employees, as well as through AltaVista's proprietary Spanish language database; and /bullet/ our simple and efficient presentation of content that allows users to quickly navigate through our sites. Our large and diverse online user base enables us to conduct targeted marketing analyses for advertisers and marketers. We provide advertisers and marketers with a wide range of media consulting services, including strategic planning and creative development. In addition, we provide them with access to real-time feedback on user traffic, click-through rates, demographics, online surveys and other information that allows them to reach their target markets more easily and cost effectively. Our objective is to be the most valuable medium for advertisers and marketers to reach the Spanish-speaking online community. To achieve this goal, we intend to: /bullet/ attract new users and broaden our audience by continuing our marketing efforts, cross-promotional activities and acquiring existing Internet sites; /bullet/ continue to strengthen audience loyalty and increase frequency of use by furnishing diverse content, pursuing additional strategic alliances, enhancing the functionality of our core services and introducing user loyalty and affinity programs; /bullet/ create value for advertisers and marketers by continuing to offer consulting services, such as strategic planning, collection and aggregation of user demographic information, online research and analysis of advertising data; and /bullet/ expand electronic commerce opportunities. Our ability to achieve our objectives is subject to numerous risks and uncertainties, many of which are beyond our control. For example, our ability to attract new users or strengthen audience loyalty may be adversely affected if we are unable to promote our brands successfully or if we fail to establish and maintain relationships with content providers and electronic commerce merchants. These risks and other risks to our business are more fully discussed elsewhere in this prospectus under the heading "Risk Factors." We were incorporated in Florida on October 20, 1997. Our principal executive offices are located at 1688 Meridian Avenue, 10th Floor, Miami Beach, Florida 33139, and our telephone number is (305) 604-0366. THE OFFERING <TABLE> <S> <C> Common stock offered ......... 7,000,000 shares Common stock to be outstanding after this offering ......... 42,746,141 shares Use of proceeds .............. For general corporate purposes, including working capital. See "Use of Proceeds." </TABLE> - ---------------- The number of shares of common stock to be outstanding after this offering is based on our shares outstanding at March 24, 2000. This information excludes: /bullet/ 10,000,000 shares of common stock reserved for issuance under our Stock Incentive Plan, of which 9,979,052 shares are issuable upon exercise of stock options outstanding as of March 24, 2000; /bullet/ 4,000,000 shares of common stock reserved for issuance under our 2000 Stock Option and Incentive Plan; and /bullet/ 200,000 shares of common stock reserved for issuance under our 2000 Employee Stock Purchase Plan. ASSUMPTIONS Unless otherwise specified, all information in this prospectus: /bullet/ assumes no exercise of the underwriters' over-allotment option; /bullet/ reflects the filing of an amended and restated articles of incorporation; /bullet/ reflects the mandatory conversion of all outstanding shares of preferred stock into an aggregate of 19,558,460 shares of common stock upon the closing of this offering; and /bullet/ does not reflect any adjustment to the conversion ratios for the Class B Convertible Preferred Stock and Class C Convertible Preferred Stock in the event the initial public offering price of the common stock offered by this prospectus is less than $15.295 per share. At an assumed initial public offering price of $14.00 per share, an aggregate of 582,468 additional shares of common stock would be issued upon conversion of the Class B Convertible Preferred Stock and Class C Convertible Preferred Stock. See "Description of Capital Stock--Conversion of Outstanding Preferred Stock." SUMMARY FINANCIAL DATA The statement of operations data for the period from October 20, 1997 (date of incorporation) through December 31, 1997 and the years ended December 31, 1998 and 1999 and the balance sheet data as of December 31, 1999 are derived from the audited consolidated financial statements appearing elsewhere in this prospectus. The historical results are not necessarily indicative of the operating results to be expected in the future. For more information, see "Unaudited Pro Forma Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and notes included elsewhere in this prospectus. <TABLE> <CAPTION> OCTOBER 20, 1997 (DATE OF YEAR ENDED INCORPORATION) TO DECEMBER 31, DECEMBER 31, ---------------------------------- 1997 1998 1999 ------------------ --------------- ---------------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues ......................................................... $ 2,095 $ 77,147 $ 3,206,932 Operating expenses ............................................... 23,572 1,948,499 38,044,704 ----------- ------------ ------------- Loss from operations ............................................. (21,477) (1,871,352) (34,837,772) Net loss available to common shareholders ........................ $ (21,477) $ (1,873,091) $ (42,901,953) =========== ============ ============= Basic and diluted net loss per common share .................................................... $ (0.00) $ (0.16) $ (2.64) Weighted average number of shares used in computing basic and diluted net loss per common share ............................... 10,625,000 11,903,777 16,269,836 Pro forma basic and diluted net loss per common share(1) ......... $ (2.66) Pro forma weighted average number of shares used in computing basic and diluted net loss per common share(1) .................. 16,439,087 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ------------------------------------------------- PRO FORMA ACTUAL PRO FORMA(2) AS ADJUSTED(3) -------------- -------------- --------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents ........... $ 48,611,519 $48,611,519 $137,711,519 Working capital ..................... 44,556,464 44,556,464 133,656,464 Total assets ........................ 68,151,555 68,151,555 157,251,555 Convertible preferred stock ......... 110,672,402 -- -- Total shareholders' equity .......... 60,117,979 60,117,979 149,217,979 </TABLE> - ---------------- (1) The pro forma summary statement of operations data reflects the acquisitions of CiudadFutura.com/trademark/ in March 1999 and Bogota.com/trademark/ in August 1999 as if they were completed on January 1, 1999. These acquisitions were accounted for using the purchase method of accounting. (2) The pro forma summary balance sheet data reflects the conversion of all outstanding shares of preferred stock into 19,558,460 shares of common stock upon the closing of this offering; and a deemed dividend on convertible preferred stock of approximately $23.9 million representing the beneficial conversion feature embedded in the Class B Convertible Preferred Stock and Class C Convertible Preferred Stock on the date of their issuance, which dividend will be recognized upon conversion. (3) The pro forma as adjusted summary balance sheet data reflects the conversion of all outstanding shares of preferred stock into 19,558,460 shares of common stock upon the closing of this offering; a deemed dividend on convertible preferred stock of approximately $23.9 million representing the beneficial conversion feature embedded in the Class B Convertible Preferred Stock and Class C Convertible Preferred Stock on the date of their issuance, which dividend will be recognized upon conversion; and the sale of 7,000,000 shares of common stock in this offering at an assumed initial offering price of $14.00 per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001084465_essential_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001084465_essential_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..9a2a26095da1e70bc88dc47f2f4aacd452e63e5c
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE RISK FACTORS AND THE FINANCIAL STATEMENTS AND RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION. ESSENTIAL.COM, INC. THE COMPANY We are a leading online communications and energy marketplace offering a broad range of branded essential services to residential and small business customers. We define essential services to be the recurring services necessary to operate a residence or small business. The essential services we currently offer in selected areas include telecommunications services, such as long distance telephone service, local telephone service and Internet access, and energy services, such as electricity and home heating products. We intend to expand the geographic areas in which we offer these services and to offer additional essential services such as wireless telecommunications, natural gas and satellite television. We generally enter into contracts to buy essential services from leading service providers at wholesale prices and resell these services online to our customers at retail prices. As of March 31, 2000 approximately 55,000 customers were purchasing services from us and we had signed agreements with 42 service providers. OUR MARKET OPPORTUNITY The Internet has emerged as a significant global medium for communications, information and commerce. The emergence of the Internet has coincided with a period of extensive deregulation of the large telecommunications and energy markets by state and federal lawmakers. According to the Federal Communications Commission, the telecommunications industry generated 1997 telephone services revenues of approximately $78 billion from households in the United States. According to the Department of Energy, the electric power industry generated 1998 revenues of approximately $93 billion from residential customers in the United States. Deregulation is intended to promote competition by opening markets to new entrants and ultimately to promote consumer choice. As deregulation leads to increased competition and more complex essential service offerings, customers face numerous challenges including identifying and locating essential service providers; researching and comparing service plans and prices; analyzing usage data to optimize service selection; and manually paying multiple monthly bills. Suppliers of essential services face challenges including cost-effectively increasing revenues and capacity utilization; increasing brand awareness; reducing high costs associated with servicing and billing individual customers; and developing and implementing an online strategy. We believe that these challenges, combined with the large and recurring nature of the demand for essential services by residential and small business customers, provide a significant opportunity for an online communications and energy marketplace. OUR SOLUTION BENEFITS TO OUR CUSTOMERS Our online communications and energy marketplace provides our customers with convenience, choice, simplicity and value in selecting, managing and paying for essential services. We offer access to essential service offerings and billing information 24 hours a day, seven days a week from anywhere that a customer has Internet access. We are able to provide our customers with one consolidated online bill for the essential services we provide to them. Customers may pay their consolidated bills electronically by either credit card or bank account debit. We intend to offer a choice of multiple branded service providers representing a mix of price and service plans within each service offering. We intend to offer up to four brands within each service category at our online marketplace. Detailed information, such as monthly fees, surcharges, service fees and rates, may be compared for each available service plan at our web site. Using our proprietary tools, customers can easily evaluate different service plans by sorting by rates or monthly fees. Through aggregation of customer demand, we believe that we will be able to negotiate favorable pricing for most of our services and to pass on a portion of these savings to our customers. BENEFITS TO OUR SERVICE PROVIDERS Deregulation is creating a more competitive market for telecommunication and energy service providers in which they are increasingly seeking to maximize capacity utilization while reducing costs. Our marketplace offers service providers a distribution channel which enables them to increase revenues without incurring direct customer acquisition costs. This results in greater utilization by service providers of existing capacity. Service providers are seeking to differentiate themselves in increasingly competitive markets through branding. This is particularly true for service providers that are new entrants in their markets or participants in deregulating markets. Visitors to our web site, as well as our customers, are exposed to the brands of the service providers we select. By providing comprehensive support services to our customers, including customer service and billing, we enable service providers to reduce their operating costs. We also assume the responsibility for collections and the related credit risks. By providing services through our online marketplace, service providers gain immediate e-commerce capabilities, expand their existing capabilities or gain an Internet presence with a low up-front investment. OUR STRATEGY Our goal is to be the leading online marketplace for essential services for residential and small business customers. Our strategy includes the following key elements: - expand geographic coverage of our current service offerings and include additional essential services in our marketplace; - establish a national brand by expanding our marketing campaign to increase awareness of our online communications and energy marketplace and drive traffic to our web site; - establish partnerships and strategic alliances in order to provide marketing and customer acquisition opportunities; - offer essential services that generate recurring monthly revenue streams, and cross-sell additional essential services to our customer base; - develop and maintain long-term relationships with our customers by becoming their primary source for essential services; - continue to invest in technology to support our growing business and ensure high standards of reliability; and - focus on the residential and small business markets where provisioning and billing of services are standardized, scalable and can take advantage of the capabilities of the Internet. OUR CORPORATE INFORMATION We were founded as a Massachusetts corporation in 1995 and reincorporated in Delaware in 1998. Our principal executive office is located at Three Burlington Woods Drive, Burlington, Massachusetts 01803-4543 and our telephone number is (781) 229-9599. Our web site is located at WWW.ESSENTIAL.COM. The information contained on our web site is not a part of this prospectus. ESSENTIAL, ESSENTIAL.COM, ESSENTIAL.COM and design, TELEGUARD and COMPARILATOR are trademarks or service marks of essential.com, inc. Other trademarks and tradenames in this prospectus are the property of their respective owners. THE OFFERING <TABLE> <S> <C> Common stock offered by essential.com............ shares Common stock outstanding after this offering..... shares Use of proceeds.................................. We intend to use the net proceeds for working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol........... ESSE </TABLE> The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding on April 6, 2000. This number does not include: - 2,392,385 shares of common stock issuable upon the exercise of outstanding options with a weighted average exercise price of $0.74 per share; - 5,379,003 shares available for issuance and grant under our stock incentive plans; or - 338,851 shares issuable upon the exercise of outstanding warrants with a weighted average exercise price of $3.76 per share. ------------------------ UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS: - REFLECTS THE CONVERSION OF ALL OF OUR OUTSTANDING SHARES OF PREFERRED STOCK INTO A TOTAL OF 18,404,581 SHARES OF COMMON STOCK UPON THE COMPLETION OF THIS OFFERING; - REFLECTS THE EFFECTIVENESS UPON COMPLETION OF THIS OFFERING OF OUR FIFTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION, WHICH SETS THE AUTHORIZED NUMBER OF SHARES OF COMMON STOCK AT 395,000,000 AND SETS THE AUTHORIZED NUMBER OF SHARES OF PREFERRED STOCK AT 5,000,000; AND - ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SUMMARY FINANCIAL DATA The following tables are a summary of financial data for our business. The information should be read in conjunction with the financial statements and related notes appearing elsewhere in this prospectus. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Pro forma net loss per share amounts reflect the conversion of our preferred stock into shares of common stock upon the completion of this offering. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------------- 1997 1998 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue..................................................... $ 45 $ 142 $ 527 Total operating expenses.................................... 84 709 13,440 Loss from operations........................................ (39) (567) (12,913) Net loss.................................................... (41) (584) (12,954) Net loss applicable to common stockholders.................. (41) (584) (13,522) Net loss per share: Basic and diluted......................................... $ (0.02) $ (0.14) $ (3.03) Pro forma basic and diluted............................... $ (1.18) Weighted average shares outstanding: Basic and diluted......................................... 2,540 4,211 4,459 Pro forma basic and diluted............................... 10,990 </TABLE> The summary balance sheet data as of December 31, 1999 are prepared: - on an actual basis; - on a pro forma basis to reflect our sale of 6,411,004 shares of Series C redeemable convertible preferred stock in February and March 2000 and the conversion of all of our outstanding preferred stock into 18,404,581 shares of common stock upon completion of this offering; and - on a pro forma as adjusted basis to also give effect to our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting the estimated underwriting fees and estimated offering expenses payable by us, and our receipt of the estimated net proceeds from this offering. <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ---------------------------------- ACTUAL PRO FORMA PRO FORMA AS ADJUSTED (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 3,341 $ 74,591 Working capital............................................. 1,660 72,909 Total assets................................................ 5,947 77,197 Redeemable convertible preferred stock...................... 15,342 -- Total stockholders' equity (deficit)........................ (12,789) 74,130 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001084577_cyren-ltd_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001084577_cyren-ltd_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..a0d9364905f3ded07a88ded098ca4a0943b25aa4
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001084577_cyren-ltd_prospectus_summary.txt
@@ -0,0 +1 @@
+SUMMARY The items in the following summary are described in more detail later in this prospectus. This summary provides an overview of selected information and does not contain all the information you should consider. Therefore, you should also read the more detailed information set out in this prospectus, the financial statements and the other information incorporated by reference into this prospectus. Unless otherwise indicated, all references in this prospectus to "Commtouch," "the Company," "we," "us" or "our" are to Commtouch Software Ltd. or its wholly-owned subsidiaries, Commtouch Software, Inc. and Commtouch (UK) Ltd. Except as set forth in the Consolidated Financial Statements and the Notes thereto, or as otherwise indicated, all information in this prospectus assumes the issuance of 901,471 ordinary shares upon the assumed net exercise at an assumed share price of $62.00 per share of an in-the-money warrant to purchase 1,136,000 ordinary shares issued to Go2Net, Inc. at an exercise price of $12.80 per share. Commtouch We are a leading global provider of outsourced integrated Web-based email and messaging solutions to businesses. Our solutions are flexible, highly customizable and enable us to satisfy the unique email and messaging needs of our customers worldwide. Our customers are large and small businesses who offer our Web-based email through their websites to their end users and employees. Email is one of the most widely used applications on the Internet and has become a primary platform for business and personal communication. According to Forrester Research, over 80% of Internet users access their email while online, making this activity the most popular use of the Internet. International Data Corporation estimates that at the end of 1999 there were over 180 million emailboxes in the United States and over 130 million outside of the United States. IDC projects that by the end of 2003, these numbers will increase to over 280 million emailboxes in the United States and over 305 million emailboxes outside the United States. As of December 31, 1999, we had over 250 global customers. Through our customers' sites we serve approximately 8.4 million active emailboxes. We also serve over 1.0 million active emailboxes to small businesses and websites through our ZapZone Network. Our comprehensive Web-based email and messaging solutions offer the following benefits: o Extensive email features. Our services are easy to use, and include a broad set of email capabilities, including a highly integrated contact book and calendar. o Ability to support hundreds of millions of emailboxes. Our system architecture and software platform have been designed to support hundreds of millions of emailboxes across millions of domains while maintaining a highly reliable service. o Customization. Our customers use our proprietary customization tool to make the look and feel of their Web-based email interface consistent with their own brand image. o Rapidly deployable and cost-effective solutions. Our solutions can be quickly implemented and can save our customers the significant costs of developing and maintaining an email service in-house. o Extensive language capabilities. Our email services are available in 18 languages. Additionally, we can support more than one language on any of our customers' websites. o Increased website usage. We believe that our services increase the frequency and duration of users' visits to our customers' websites. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- o Online marketing capabilities. Our customers and third parties selling goods and services online can leverage our services and the demographic information of our end users to conduct one-to-one direct marketing and targeted advertising campaigns. Office Location Our principal executive offices are located at 6 Hazoran Street, Poleg Industrial Park, Netanya 42504, Israel, where our telephone number is 011-972-9-863-6888, and 3945 Freedom Circle, Santa Clara, California 95054, where our telephone number is (408) 653-4330. Our website addresses are www.commtouch.com and www.zzn.com. The information contained on our websites is not a part of this prospectus. <TABLE> The Offering <S> <C> Ordinary shares offered: By Commtouch Software Ltd. .................. 1,669,000 shares By selling shareholders ..................... 1,331,000 shares --------- Total ................................. 3,000,000 shares Ordinary shares outstanding after the offering 18,131,449 shares Offering price ................................. $ per share Use of proceeds ................................. Expansion of sales and marketing activities; capital expenditures; expansion of research and development activities; expansion of international operations; working capital and other general corporate purposes. See "Use of Proceeds." We will not receive any of the proceeds from the sale of the shares by the selling shareholders in this offering. NASDAQ National Market Symbol .................. CTCH </TABLE> - ------------ Except as set forth in the Consolidated Financial Statements and the Notes thereto included as part of this prospectus and as otherwise specified, all information in this prospectus (except for the information set forth above regarding the ordinary shares offered and the ordinary shares to be outstanding after the offering, which includes shares being offered by the Company in this prospectus) is based on the number of shares outstanding as of February 29, 2000,and: o assumes the issuance of 901,471 ordinary shares upon the assumed net exercise at an assumed share price of $62.00 per share of the in-the-money warrant to purchase 1,136,000 ordinary shares issued to Go2Net, at an exercise price of $12.80 per share; o with respect to financial information, is reported in U.S. dollars; and does not include: o 1,370,792 ordinary shares issuable to employees and consultants upon exercise of outstanding options under our stock option plans and stock option agreements as of February 29, 2000 at a weighted average exercise price of $21.20 per share; - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- o 2,544,439 ordinary shares available for future grant or issuance under our stock option and stock purchase plans as of February 29, 2000; and o 381,180 ordinary shares issuable upon exercise of options granted to executive officers and directors as of February 29, 2000 at a weighted average exercise price of $20.41 per share. Summary Consolidated Financial Data (in thousands, except per share data) <TABLE> The following tables set forth our summary consolidated financial data. You should read the following information together with our Consolidated Financial Statements and the Notes thereto beginning on page F-1 of this prospectus, the information under "Selected Consolidated Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." <CAPTION> Year Ended December 31, ------------------------------------- 1997 1998 1999 -------- -------- --------- (in thousands, except per share data) <S> <C> <C> <C> Consolidated Statement of Operations Data: Revenues: Email services .................................... $ -- $ 389 $ 4,251 Software licenses, maintenance and services ...... 899 -- -- -------- -------- --------- Total revenues ................................. 899 389 4,251 Operating loss .................................... (3,405) (4,025) (21,083) Net loss .......................................... (3,473) (4,351) (19,851) Basic and diluted net loss per share ............... (2.40) (3.00) (2.65) Weighted average number of shares -- basic and diluted ....................................... 1,450 1,450 7,487 </TABLE> The following data is presented: o on an actual basis; and o on a pro forma as adjusted basis to give effect to (1) the sale of 1,669,000 ordinary shares in this offering, at an assumed offering price of $62.00 per share (after deducting estimated underwriting discounts and commissions and estimated offering expenses) and (2) the issuance of 901,471 ordinary shares upon the assumed net exercise at an assumed share price of $62.00 per share, of an in-the-money warrant held by Go2Net, Inc. to purchase 1,136,000 ordinary shares an exercise price of $12.80 per share. December 31, 1999 ----------------------- Pro Forma Actual As Adjusted ------ ----------- (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents ............................ $ 65,996 $162,912 Marketable securities ................................ 18,050 18,050 Working capital ...................................... 88,053 184,969 Total assets ......................................... 100,336 197,252 Long-term liabilities ................................ 497 497 Shareholders' equity ................................. 95,312 192,228 - --------------------------------------------------------------------------------
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001084587_360network_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001084587_360network_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..01fbcc12f24c0d4f17a59303c4c66b31096d164d
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY. WORLDWIDE FIBER INC. RECENTLY HAS BEEN RENAMED 360NETWORKS INC. TO REFLECT OUR GLOBAL FOCUS AND EVOLUTION FROM CONSTRUCTING NETWORKS TO OFFERING A RANGE OF NETWORK AND VALUE-ADDED SERVICES. REFERENCES IN THIS PROSPECTUS TO "360NETWORKS," "WE," "OUR" AND "US" REFER TO 360NETWORKS INC. (AND ITS PREDECESSOR) AND ALL OF ITS SUBSIDIARIES AS A COMBINED ENTITY, EXCEPT WHERE IT IS CLEAR THAT THOSE TERMS MEAN ONLY THE PARENT COMPANY. INDUSTRY AND MARKET DATA IN THIS PROSPECTUS ARE BASED ON OR DERIVED FROM SOURCES THAT WE BELIEVE ARE RELIABLE. THERE CAN BE NO ASSURANCE, HOWEVER, AS TO THE ACCURACY OF THE INDUSTRY OR MARKET DATA. THE COMPANY We are a leading independent, facilities-based provider of fiber optic communications network products and services. By the end of 2001, we expect our network to consist of approximately 56,300 route miles: - 24,100 route miles in North America (of which more than 12,200 route miles have been developed to date); - 10,600 route miles in Europe (of which more than 4,900 route miles have been developed to date); - a 7,600 route mile fully protected undersea cable between North America and Europe; and - a 14,000 route mile fully protected undersea cable between South America and North America. We intend to expand our network to provide connectivity on a global basis. Our network's design uses state-of-the-art optical technologies that we believe greatly reduce complexity and cost while allowing us to offer increased reliability and a wide range of products and services. We recently agreed, subject to execution of definitive agreements, to acquire colocation facilities or site rights in ten cities in North America comprising approximately 2.9 million square feet. We offer network services to meet our customers' demands and enable Internet services and intend to develop products and services that capitalize on the convergence of telecommunications and high-bandwidth applications and services. We believe that there is growing demand for fiber optic capacity and related network elements to transmit and service high-bandwidth data, voice and video. This growing demand is being accelerated by new applications and services and by improvements in "last mile" technology such as digital subscriber line and cable modems. In this changing market environment, we believe that we are in a favorable competitive position to satisfy this demand relative to other service providers due to our low-cost, seamless technologies and consistent network architecture. We have achieved a low-cost position by: - leveraging our construction skills; - co-developing and swapping along some corridors of our network; - using equity as payment for important elements such as bulk rights-of-way; and - using optical design and technologies that eliminate layers of equipment traditionally required to support legacy systems. Our current and targeted customers include new and incumbent telecommunications service providers, Internet service providers, application service providers, storage service providers and large organizations with enterprise network needs. We believe that these customers have a limited choice of independent service providers capable of offering high-capacity, reliable, secure and cost-effective services, including enabling Internet services, between major population centers in North America, Europe and South America. As a result, we believe that our targeted customers will TABLE OF CONTENTS <TABLE> <CAPTION> PAGE -------- <S> <C> U.S. Prospectus Prospectus Summary........................................ 1 Risk Factors.............................................. 11 Use of Proceeds........................................... 30 Dividend Policy........................................... 31 Description of Our Capital Stock.......................... 31 Exchange Rates............................................ 32 Dilution.................................................. 32 Capitalization............................................ 33 Selected Financial Data................................... 34 Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 38 Business.................................................. 45 Management................................................ 62 Principal and Selling Shareholders........................ 72 Relationships and Related Party Transactions.............. 73 Share Capital Reorganization and Description of Capital Stock.................................................. 77 Shares Eligible for Future Sale........................... 80 Regulation................................................ 82 Description of Indebtedness............................... 97 Material United States and Canadian Income Tax Considerations......................................... 101 Underwriting.............................................. 105 Legal Matters............................................. 108 Experts................................................... 108 Enforceability of Civil Liabilities against Foreign Persons................................................ 109 Where you Can find More Information....................... 109 Index to Pro Forma Financial Information.................. PF-1 Index to Financial Statements............................. F-1 Supplemental Canadian Disclosure Corporate Matters......................................... C-1 Financial Presentation.................................... C-1 Capitalization............................................ C-2 Dilution.................................................. C-4 Management's Discussion and Analysis of Financial Condition and Results of Operations.................... C-4 Prior Sales of Class A Non-Voting Shares.................. C-4 Material Contracts........................................ C-4 Auditors, Registrar and Transfer Agent.................... C-5 Promoter.................................................. C-5 Eligibility for Investment................................ C-5 Purchasers' Statutory Rights.............................. C-6 Continuous Disclosure..................................... C-6 Information Incorporated By Reference..................... C-6 Index to Pro Forma Financial Information.................. CPF-1 Index to Canadian Financial Statements.................... CF-1 Certificate of the Company................................ CC-1 Certificate of the Canadian Underwriters.................. CC-2 </TABLE> buy services from us rather than purchase them from another source or build these service capabilities themselves. To meet our customers' requirements, we offer a wide range of services on a scalable basis, including: - network services--optical channels, private line transmission, packet-based data services such as Internet protocol transport and Asynchronous Transfer Mode, and virtual voice trunking; and - network infrastructure--dark fiber and conduit for sale, grant of indefeasible right of use or lease and construction services supporting the development of our network. Through the colocation facilities that we have agreed to acquire and additional colocation facilities that we intend to acquire, we intend to provide additional network services such as Internet data centers, applications hosting, electronic commerce support and web hosting. We also intend to expand our business to include additional network services such as video transport, independent Internet access for transport and peering and management services to allow carriers to migrate from circuit-switched technologies to packet-based technologies. We expect to enable our customers to establish and maintain a strong competitive position in providing services to their end users. We believe that our independence, product design, seamless technology, consistent network architecture, simple billing systems and end-to-end international connectivity will enable us to gain a strong market position. BUSINESS STRATEGY To exploit the growing demand for bandwidth and enhanced network services, our strategy is to: - provide high-bandwidth connectivity between, and colocation facilities in, major global population centers; - develop and operate a technologically advanced, high-capacity, low-cost network; - extend the reach of our network through development, swaps and acquisitions of fiber and capacity; - expand our marketing capabilities; - increase, in collaboration with our customers, the number of products and services that we offer, including managed bandwidth and Internet enabling products and services; - capitalize on management experience and relationships; and - pursue additional strategic alliances in network services and technology. THE NETWORK Our 56,300 route mile network is scheduled to be completed by the end of 2001. We plan to further develop and expand our network footprint in response to customer demand. Our network consists of fiber optic assets and capacity that we have installed or acquired from other developers and carriers through swaps, purchases, leases, indefeasible rights of use or other contractual rights along diverse rights-of-way. - NORTH AMERICA. In North America, our network is expected to cover approximately 24,100 route miles, of which more than 12,200 route miles have been developed to date, encompassing both long-haul and intra-city route miles and providing connectivity among approximately 50 major population centers. - EUROPE. In Europe, our network is expected to cover approximately 10,600 long-haul route miles (assuming, with respect to 1,300 route miles, the exercise of an option that we have), of which more than 4,900 route miles have been developed to date, providing connectivity among approximately 35 major population centers.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001084654_broadband_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001084654_broadband_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..8d91c74aa58088121b8849574d05214d79eeb460
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001084654_broadband_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering and our Consolidated Financial Statements and Notes to Consolidated Financial Statements appearing elsewhere in the prospectus. BROADBAND SPORTS Broadband Sports is an online sports media company that produces original content and commerce for groups of sports enthusiasts who have a common interest in following a particular sport, team or athlete. These geographically dispersed groups of sports enthusiasts are composed of fans who desire content and commerce relating to their particular sports interests. In aggregate, sports fans spent approximately $64 billion in 1999 on such sports related items as spectator sports, equipment, licensed goods, publications, apparel and footwear, according to a December 1999 report in Street & Smith's Sports Business Journal. We believe that our distinct online media divisions position us to effectively reach these groups of sports fans and deliver the sports content and commerce that these groups desire. Each of our online media divisions create content and commerce that target these sports enthusiasts. We currently offer our content and commerce through our own web sites. In addition, we have distribution relationships for our content and commerce with AOL, DIRECTV, eBay, Fox Sports, Lycos, uBid and Yahoo!. This allows us to derive revenues from multiple sources including: content syndication, advertising, electronic commerce and subscriptions. To date, we have developed four online media divisions: . AthletesDirect - AthletesDirect is a branded network of exclusive web sites for more than 275 athletes and sports personalities. Our contracts with these individuals provide us with exclusive online rights for each of these athletes and sports personalities, with the exception that these individuals can participate in a limited number of online chats outside AthletesDirect's network. We currently operate and market the exclusive web sites for athletes and sports personalities such as: <TABLE> <S> <C> <C> <C> Troy Aikman Sergei Fedorov Anna Kournikova Alex Rodriguez Barry Bonds Kevin Garnett Karl Malone Keith Van Horn Kobe Bryant Ken Griffey, Jr. Reggie Miller Michael Waltrip Ward Burton Tony Gwynn Mike Piazza Ricky Williams Brett Favre Mia Hamm Dennis Rodman Steve Young </TABLE> We create web sites that offer unique content and commerce related to our athletes and sports personalities. These individuals regularly provide us with fresh interactive content and authentic sports-related merchandise and collectibles. By aggregating a large number of athlete and sports personality web sites under one branded network, we believe AthletesDirect provides sports fans with exclusive and original content and commerce. . SportsWritersDirect--SportsWritersDirect is an online publisher and distributor of in-depth team and player information. SportsWritersDirect covers all Major League Baseball, National Football League, National Basketball Association and National Hockey League sports teams and players, as well as every Division I college football and basketball team. We believe that sports enthusiasts who follow these teams and players are seeking the most up-to-date and inside information, which may not be available through other online or offline media sources. SportsWritersDirect is able to provide original and timely information through its network of over 315 local and regional sports writers, all of whom are under contract to provide us with exclusive online content. In addition, we distribute this content through our distribution relationships and directly through our subscription products. . RotoNewsDirect--RotoNewsDirect is an online fantasy sports web site. Since 1997, RotoNewsDirect has provided content and services to online consumers who engage in simulations that track the performance of actual sports teams and players. RotoNewsDirect offers consumers proprietary news and analysis, games, statistical services and league management services that enable fantasy sports participants to compete against one another. . SportsAuthenticsDirect--SportsAuthenticsDirect is an online retailer of sports collectibles and merchandise. Because of the large number of teams and available products, we believe traditional retailers cannot effectively offer the full range of sports-related products necessary to satisfy the demand of fans of different teams and players. We believe that we address these limitations of traditional distribution channels by providing team and athlete-related products to fans outside of their local markets and by providing authentic player/team endorsed products. The distribution of our content and commerce across multiple platforms and across our own web sites enables us to target groups of sports enthusiasts, increase the awareness of our four online media divisions and promote our product offerings. Revenues from our distribution relationships represented approximately 80% of our total revenues for the 12 months ended December 31, 1999, with AOL and uBid representing approximately 44% and 17% of our total revenues, respectively. Our four online media divisions derive revenues from multiple sources, including: . Content Syndication. We currently receive syndication fees from AOL, Fox Sports, Lycos and Yahoo! for the right to distribute our original sports content on their online sites. Our distribution relationships allow us to promote our online media divisions and attract online traffic to our web sites, including the web sites of our athletes and sports personalities. . Advertising. We offer advertisers the opportunity to reach an attractive demographic, the 18 to 35 year-old male audience. Our advertising revenues are generated by the sale of advertising banners, as well as the sale of sponsorships that provide an advertiser with the right to be promoted as a sponsor of a specific area within our web sites. We also allow advertisers the opportunity to associate their brands with high profile athletes and sports personalities. . Electronic Commerce. We offer sports fans an easy-to-use online environment to purchase authentic player and team-related merchandise and collectibles. . Subscriptions. We sell subscription products, such as Baseball Insider, that provide in-depth and original information about teams and players. Information included in our subscription products is generated by our network of sports writers and generally consists of information that is not available through traditional media sources. We will encounter various risks and uncertainties in connection with the implementation of our strategy. These include uncertainties regarding our ability to enter into new distribution relationships, to continue to develop original content, and to attract and retain athletes and sports personalities. In addition, we have incurred significant losses, including approximately $17.7 million for the year ended December 31, 1999, and we had an accumulated deficit of $22.2 million as of December 31, 1999. We operate in an emerging and highly competitive marketplace, and anticipate incurring losses in the foreseeable future which may be substantial. We are a Delaware corporation. Our principal executive offices are located at 2120 Colorado Avenue, Santa Monica, California 90404, and our telephone number is (310) 453-8100. References to and information contained on our web sites do not constitute part of this prospectus. ATHLETESDIRECT, BROADBAND SPORTS, SPORTSWRITERSDIRECT, ROTONEWSDIRECT, THE WRITER NETWORK, SPORTSAUTHENTICSDIRECT, WHERE ATHLETES AND FANS INTERACT and the AthletesDirect, RotoNewsDirect, SportsWritersDirect, SportsAuthenticsDirect and Broadband Sports logos are trademarks and service marks of Broadband Sports. All other brand names and trademarks appearing in this prospectus are the property of their respective holders. THE OFFERING <TABLE> <C> <S> Common stock offered.................... 3,300,000 shares Common stock to be outstanding after this offering.................... 32,133,514 shares(1) Use of proceeds......................... Approximately $4.5 million to repay outstanding indebtedness, approximately $2.3 million to redeem our outstanding mandatorily redeemable shares of series A preferred stock, approximately $6.0 million for advertising and promotion of our brands, our web sites, approximately $6.0 million for sports content production and the development and enhancement of our own web sites, approximately $5.0 million to enhance our technology platform, approximately $2.0 million for expansion into other markets, and the balance of the proceeds for general corporate purposes, including working capital. We may use a portion of the net proceeds to acquire or invest in complementary businesses, technologies, or products. See "Use of Proceeds." Proposed Nasdaq National Market symbol.. FANS </TABLE> - ------------------- (1) Outstanding share information excludes 2,090,125 shares of restricted common stock and excludes an aggregate of 12,492,280 shares of common stock reserved for issuance under our stock option plans, of which options to purchase 5,750,702 shares of common stock were outstanding as of March 31, 2000 at a weighted average price of $6.26 per share, assuming a public offering price of $9.00. In addition, outstanding share information also excludes warrants to purchase an aggregate of 1,911,342 shares of common stock at a weighted average price of $13.29 per share (including a warrant to purchase 1,360,883 shares of common stock at a price of $14.00 per share, subject to adjustment). The number of shares of common stock to be outstanding is based on the number of shares outstanding as of March 31, 2000, and includes an aggregate of 1,097,109 shares of common stock to be issued in connection with agreements entered into in March and April 2000. In this prospectus, "Broadband Sports," "we," "us," and "our" refer to Broadband Sports, Inc. and our wholly owned subsidiaries, and not to the underwriters. Unless otherwise stated, all information in this prospectus: . gives effect to a 20-for-1 stock split, which was effective on December 4, 1998; . assumes the redemption upon the closing of this offering of all of our outstanding mandatorily redeemable series A preferred stock for approximately $2.3 million; . assumes the conversion of our outstanding shares of series C preferred stock and our outstanding shares of series B preferred stock into an aggregate of 4,771,666 shares of common stock; . assumes the effectiveness prior to the closing of this offering of an amendment to our certificate of incorporation providing for (i) an authorized capital of 100,000,000 shares of common stock and 10,000,000 shares of preferred stock and (ii) a 1-for-10 reverse stock split of the outstanding common stock; and . assumes no exercise of the underwriters' over-allotment option. SUMMARY CONSOLIDATED AND COMBINED FINANCIAL INFORMATION The combined financial statements of Athlete Direct LLC and Pro Sports Xchange LLC (the "Predecessor Companies") as of December 31, 1997 and for the period from February 1, 1996 through December 31, 1996 and for the year ended December 31, 1997 and the two months ended February 27, 1998, have been prepared on a combined basis due to the respective companies' common ownership. The summary consolidated and combined financial data presented below are derived from our financial statements included at the end of this prospectus. The pro forma consolidated balance sheet data reflects the conversion of the series B and series C convertible preferred stock into an aggregate of 4,771,666 shares of common stock. In addition, the pro forma consolidated balance sheet data reflects the application of the proceeds from the sale of 1,097,109 shares of our common stock for $13.2 million and the exercise of stock options for 312,133 shares of our common stock for $452,000 after December 31, 1999. The pro forma as adjusted consolidated balance sheet data reflects the application of net proceeds from the sale of our common stock in this offering at an assumed initial public offering price of $9.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses, the repayment of outstanding indebtedness of approximately $4.5 million and the redemption of our outstanding mandatorily redeemable series A preferred stock for approximately $2.3 million. See "Use of Proceeds" and "Capitalization."
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully. Efficient Networks, Inc. ---------------- Efficient Networks is a worldwide developer and supplier of high-speed digital subscriber line customer premises equipment for the high-speed, high- volume digital communication, or broadband, access market. Digital subscriber line, or DSL, solutions enable telecommunications and other communication network service providers to provide high-speed, cost-effective broadband access services over the existing copper wire telephone infrastructure. We believe there is significant demand for broadband access, especially among business users and consumers who have found current solutions to be inadequate or too expensive. DSL networks generally consist of two core components, one installed at the network operator's facility--typically referred to as the central office--and one installed at the customer's home or business. The DSL equipment installed at the customer premises is generally referred to as customer premises equipment. We develop and produce DSL customer premises equipment, and in particular single- and multiple-user DSL customer premises equipment for small- to medium-size businesses, branch offices of large corporations and consumers. Our DSL products enable applications such as high- speed Internet access, electronic commerce, access to computer networks from remote locations, telecommuting and extensions of corporate networks to branch offices. Business-critical Internet-based applications, such as electronic commerce, Web browsing and access to computer networks from remote locations for telecommuters, generate enormous data traffic over the existing communications infrastructure. The growth in Internet use, increased competition resulting from domestic and international deregulation, and pressure from alternative means of providing high-speed, high-volume access services have led both traditional and new operators of the existing copper telephone wire-based networks to deploy DSL. DSL technology enables these network service providers to rely upon the existing copper telephone wire infrastructure to cost- effectively provide broadband access to most businesses and homes currently connected by telephone lines. In order to offer cost-effective DSL services to end users, network service providers are actively seeking DSL customer premises equipment solutions that offer interoperability from the end user's personal computer through the service provider's networks and which provide for simple and low-cost installation and maintenance. The products that make up our SpeedStream family of customer premises equipment satisfy the requirements of network service providers as they: . Enable DSL Deployments. We enable network service providers to rapidly deploy DSL services, thereby allowing them to quickly capture market share in today's intensely competitive broadband services market. By offering a broad product line we can support DSL services targeted at both businesses and consumers. . Ensure End-To-End Interoperability. Our technology expertise and ongoing product development coordination with network equipment vendors, such as ADC Telecommunications, Advanced Fibre Communications, Alcatel, Copper Mountain Networks, Ericsson, Lucent Technologies, Newbridge Networks, Nokia, Nortel Networks and Siemens, and network service providers enable us to ensure interoperability between the end user's personal computer and the service provider's network. . Provide for Efficient and Cost-Effective Installation. The software included with many of our products allows a network service provider to pre-configure the customer premises equipment to the parameters of a particular network, reducing the costs associated with having installers perform these activities during each end-user installation. As demand for DSL service grows, pre- configuration helps network operators meet their customers' expectations for rapid service activation. . Provide for Cost-Effective Maintenance. Our Advanced Status software allows a network service provider to easily monitor, diagnose and often remotely fix the customer's problems quickly, which can substantially reduce the network service provider's customer support costs. Our objective is to be the leading worldwide provider of high-performance DSL broadband access customer premises equipment for businesses, remote offices, telecommuters and consumers. To achieve this goal, we intend to capitalize on our early market acceptance by network service providers and to leverage our relationships with network equipment vendors. In addition, we will continue developing enhancements to our current DSL products and expect to develop products that are capable of processing both voice and data communications through the same DSL equipment and network. Also, we intend to continue to target strategic partnerships and acquisitions to augment our product offerings, sales channels and worldwide operations. Finally, we plan to extend our distribution channels to meet the growing demand for broadband access solutions and increase our brand awareness. We sell our products to network equipment vendors and DSL network service providers. As of December 31, 1999, our products have been deployed by Ameritech, Bell Atlantic, BellSouth, Covad Communications, Hanaro Telecom, Hong Kong Telecom, Pacific Bell, Singapore Telecom, Southwestern Bell, and TeleDanmark, among others, and purchased by several network equipment vendors. A number of other network service providers have begun to test our customer premises equipment solutions. We were incorporated in Delaware in 1993. Our principal executive offices are located at 4201 Spring Valley Road, Suite 1200, Dallas, Texas 75244-3666 and our telephone number is (972) 991-3884. Our Website is located at http://www.efficient.com. Information contained on our Website does not constitute part of this prospectus. Recent Developments On December 17, 1999 we completed the acquisition of FlowPoint Corporation, a wholly-owned subsidiary of Cabletron Systems, Inc., based in Santa Clara, California, in exchange for a combination of common stock and convertible preferred stock equal to an aggregate of 13,500,000 shares of our common stock on an as-converted basis. FlowPoint's primary business is the design, manufacture and sale of a comprehensive line of advanced broadband routers for deployment at customer premises. FlowPoint's product line consists of routing products for use in business-class DSL services. According to the Dell'Oro Group's November 1999 study of market performance for the first three quarters of 1999, FlowPoint was the market leader in SDSL and IDSL customer premises equipment. We now provide the industry's most comprehensive line of DSL customer premises equipment, including internal and universal serial bus modems for personal computers, DSL local area network modems, small office and telecommuter DSL routers, and DSL routers for small businesses and branch offices. FlowPoint's customers include major incumbent and competitive local exchange carriers, including Ameritech, Covad and NorthPoint, and several European incumbent carriers such as British Telecom. FlowPoint also works closely with a number of Internet service providers offering DSL services to businesses. FlowPoint recently announced the availability of an integrated access device that supports both voice and data service delivery over a single DSL line. The acquisition of FlowPoint is expected to increase our revenue and market share, it expands our product line and customer base, adds key personnel, and establishes a presence for Efficient Networks in Silicon Valley. The Offering <TABLE> <S> <C> Common stock offered by 2,000,000 shares Efficient........................ Common stock offered by the 3,000,000 shares selling stockholders............. Common stock outstanding after 53,156,248 shares this offering.................... Use of proceeds................... For general corporate purposes, principally working capital, additional sales and marketing efforts, and potential acquisitions. Nasdaq National Market symbol..... EFNT </TABLE> - -------- The above table is based on shares outstanding as of December 31, 1999. See "Capitalization." This table includes 6,300,000 shares of common stock issuable to Cabletron Systems, Inc. upon conversion of preferred stock held by Cabletron. For a description of the preferred stock held by Cabletron, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Recent Developments" and "Description of Capital Stock." This table excludes: . options outstanding to purchase a total of 8,164,384 shares of common stock at a weighted average exercise price of $10.73 per share and 2,778,750 shares reserved for grant of future options under our stock option plans; . 184,889 shares reserved for future grants under our 1999 Employee Stock Purchase Plan; and . 34,246 shares issuable upon exercise of outstanding warrants. ---------------- You should be aware that our fiscal year ends on June 30; thus, a reference to "fiscal 1999," for example, is to the fiscal year ended June 30, 1999. In addition, except as otherwise indicated, information in this prospectus assumes that the underwriters' over-allotment option will not be exercised. Summary Consolidated Financial Information (in thousands, except per share data) <TABLE> <CAPTION> Pro Forma Three Months Ended Three Months Ended Fiscal Year Ended June 30, September 30, September 30, ----------------------------- -------------------- ------------------ 1997 1998 1999 1998 1999 1999 -------- -------- --------- --------- --------- ------------------ <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues............ $ 4,122 $ 3,370 $ 14,828 $ 1,174 $ 12,171 $ 19,601 Cost of revenues........ 2,386 2,160 14,344 863 11,706 16,552 -------- -------- --------- --------- --------- -------- Gross profit............ 1,736 1,210 484 311 465 3,049 Loss from operations.... (6,760) (9,421) (18,505) (3,455) (7,677) (53,662) Net loss................ $ (6,635) $ (9,291) $ (26,405) $ (3,375) $ (7,754) $(53,588) ======== ======== ========= ========= ========= ======== Net loss per share: Basic and diluted..... $ (2.19) $ (2.86) $ (6.87) $ (0.93) $ (0.25) $ (1.42) ======== ======== ========= ========= ========= ======== Weighted average shares............... 3,027 3,254 3,893 3,713 30,496 37,696 ======== ======== ========= ========= ========= ======== Pro forma net loss per share: Basic and diluted..... $ (0.97) ========= Weighted average shares............... 28,342 ========= </TABLE> <TABLE> <CAPTION> September 30, 1999 ------------------------------- Pro Forma Actual Pro Forma As Adjusted -------- ---------- ----------- <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents....................... $ 47,456 $ 47,758 $ 177,354 Working capital................................. 69,051 58,447 188,043 Total assets.................................... 88,680 1,026,163 1,155,719 Total stockholders' equity...................... 72,252 560,482 690,078 </TABLE> ---------------- See Note 2 of Notes to Consolidated Financial Statements for an explanation of the determination of the number of shares used in computing per share data. The pro forma numbers give effect to the issuance of 7,200,000 shares of common stock and 6,300 shares of redeemable preferred stock (convertible into an aggregate of 6,300,000 shares of common stock) to Cabletron in connection with the acquisition of FlowPoint Corporation in December 1999. The as adjusted numbers give effect to our receipt of the estimated net proceeds from the sale of the 2,000,000 shares of common stock offered by Efficient hereby at an assumed public offering price of $68.375 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001085076_callnow_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001085076_callnow_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary sets forth the material highlights of the information contained elsewhere in this prospectus. It does not contain all the information that you should consider before investing in us, and you should read the entire prospectus carefully. OUR BUSINESS We offer our customers a variety of telecommunications services through our e-commerce Web site (www.callnow.com) and any touch tone telephone. Our services are provided globally and currently consist of international long distance, national long distance, and a free global online telephone directory, which currently generates over 1.6 million page impressions (page views) and over 400,000 user sessions (unique visitors) per month. Our customers currently consist primarily of individuals and small businesses, 80% of whom are located outside of the U.S. Our Web site is a communications portal with a look and feel that is tailored to local markets, currently with a choice of four languages in approximately 200 countries. Our Web site is driven by our software that enables our customers in real time to: o Survey global telephone rates; o Sign up online for international and national long distance telephone service; o Have their credit cards automatically validated and pre-authorized; o Activate their accounts; o Review the details of each of their calls from the date of inception of their account; o Review current account information, including cumulative amounts, through the last call made; and o Review monthly invoices. We offer international and national long distance telephone service through call re-origination or "call-back" service, which we refer to on our Web site as "ReturnCall." Our customer typically dials a unique U.S. telephone number to our switch, allows the telephone to ring once, hangs up and then receives a return call from our switch providing U.S. dial-tone. Alternatively, a customer connected to the Internet can initiate a ReturnCall through our switch to any telephone providing them with U.S. dial-tone. We refer to this service on our Web site as "Internet Trigger." Generally, ReturnCall offers our customers significant savings on international and national long distance calls. Approximately 67 countries have stated that call re-origination services are prohibited in their country. For a more detailed discussion and potential impact on our business, see "Risk Factors--Risks Related to the Telecommunications Business--35 Countries Have Notified The Federal Communications Commission That ReturnCall Services Violate Their Local Laws, And 67, Countries From Which We Derived Approximately 21% Of Our Revenues In 1999 Have Stated That Call Re-origination Is Prohibited In Their Country." We launched our telecommunications services using the Internet in September 1998. In the fourth quarter of 1999, we billed an aggregate of approximately 4,000 customers for using our service. For the fiscal year ended December 31, 1999, we had revenues of $1.0 million and a loss of $3.1 million. Through a contract with Equinox International LLC, a U.S. telecommunications wholesale provider, we will offer an online calling card and fax services over the Internet, commencing in the second quarter of 2000. With the proceeds of this offering, we plan to add direct dial service in Europe, Japan and Australia and to continue to tailor our Web site to the approximately 200 local ALTERNATE PAGE FOR SELLING STOCKHOLDER PROSPECTUS--(CONTINUED) SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION The selling stockholders have advised us that they may from time to time sell all or a portion of the shares offered hereby in one or more transactions in the over-the-counter market, on the Nasdaq SmallCap Market, on any exchange on which the common stock may then be listed, in underwritten offerings, negotiated transactions or otherwise, or a combination of such methods of sale, at market prices prevailing at the time of sale or prices related to such prevailing market prices or at negotiated prices. The selling stockholders may effect such transactions by selling the shares to or through broker-dealers, and such broker-dealers may receive compensation in the form of underwriting discounts, concessions or commissions from the selling stockholders and/or purchasers of the shares for whom they may act as agent (which compensation may be in excess of customary commissions). In connection with such sales, the selling stockholders and any broker-dealers or agents participating in such sales may be deemed to be underwriters as that term is defined under the Securities Act. Neither we nor the selling stockholders can presently estimate the amount of commissions or discounts, if any, that will be paid by the selling stockholders on account of their sales of the shares from time to time. The shares are subject to an agreement between the holders thereof and the representatives restricting the sale thereof within 90 days from the date of this prospectus without the prior written consent of the representatives. Under the securities laws of certain states, the shares may be sold in such states only through registered or licensed broker-dealers or pursuant to available exemptions from such requirements. In addition, in certain states the shares may not be sold therein unless the shares have been registered or qualified for sale in such state or an exemption from such requirement is available and satisfied. We will pay certain expenses in connection with this offering, estimated to be approximately $ , but will not pay for any underwriting commissions and discounts, if any, or counsel fees or expenses of the selling stockholders. We have agreed to indemnify the selling stockholders, their directors, officers, agents and representatives, and any underwriters, against certain liabilities, including certain liabilities under the Securities Act. The selling stockholders have also agreed to indemnify us, our directors, officers, agents and representatives against certain liabilities, including liabilities under the Securities Act. The selling stockholders and other persons participating in the distribution of the shares offered hereby are subject to the applicable requirements of Regulation M promulgated under the Exchange Act in connection with sales of the shares. The following table sets forth information with respect to the selling stockholders as of February 28, 2000: <TABLE> <CAPTION> SELLING STOCKHOLDERS --------------------------------------------- NUMBER OF PERCENTAGE NUMBER OF NAME AND ADDRESS OF SHARES OWNED BEFORE SHARES BENEFICIAL OWNER BEFORE OFFERING OFFERING OFFERED - --------------------------------- ----------------- ------------ ---------- <S> <C> <C> <C> Upper Brook Ltd. c/o Citco Bank and Trust Company (Bahamas) Limited P.O. Box CB-13136 Nassau Bahamas ................. 507,272 8.03% 126,818 Eden Capital Fund Limited P.O. Box 309 George Town Cayman Islands, B.W.I. ......... 38,182 * 9,546 New York Community Investment Company L.L.C. 120 Broadway, 36th Floor New York, NY 10271 ............. 114,109 1.81% 28,527 </TABLE> - ------------ * less than 1% markets we serve, including expanding the choice of languages available on our Web site. In addition, we intend to add paging, a global online directory for renting cellular phones, and other services designed to make our Web site a single source solution for all of our customers' telecommunications needs. OUR MARKET OPPORTUNITY We are benefiting from four converging trends: o Explosive growth in access to and use of the Internet worldwide, particularly outside the U.S.; o Deregulation of the telecommunications industry in overseas markets; o Growing consumer awareness in these markets of low-cost alternatives to the high-cost of their national telephone company services; and o Increasing transmission capacity of carriers globally. We believe that the convergence of these trends has created a significant opportunity for us to offer our one-stop shop for telecommunications services in an e-commerce platform. OUR STRATEGY Our goal is to establish ourselves as a leading Web portal providing access to international and national telecommunications services. Our strategy is to drive traffic to our CallNOW.com Web site and to develop the CallNOW.com brand through traditional marketing and advertising and through Internet related promotion and advertising. We are developing a network of affiliates to promote and drive traffic to our site. Our affiliates are compensated monthly with a percentage of revenue derived from customers that have signed up for our services from their sites. Our affiliate network currently includes: o Major global search engines, which are accessed in many languages; o Country and language specific search engines aimed at country nationals and others who use non-English language sites; o Web sites of telecommunications resellers who are looking for interactive enhancements to their static sites; and o Web-based e-commerce retailers and other Web sites, including those that want to add an interactive service for telecommunications. We have contracted with Be Free, Inc., a provider of services that enables its customers to generate, place and manage hyperlink promotions for their products and services, to manage the administration of our affiliate programs. We are targeting those countries with substantial amounts of international and national long distance traffic and that also account for the deepest non-U.S. Internet penetration. For example, in June 1999, we entered into contracts with Lycos-Bertelsmann GmbH, a Pan European joint venture between Lycos Inc. and Bertelsmann GmbH, and with Lycos Japan, a joint venture between Lycos Inc., Sumitomo Corporation and Internet Initiative Japan. In both Europe and Japan, these Lycos joint ventures will periodically place banners, promotional buttons, text links and other hyperlinks from their home pages to our Web site. Additionally, they will place promotional items on their search results pages. In return, we are obligated to make minimum guaranteed payments in the aggregate amount of $460,000 to these Lycos joint ventures in the next 18 months. In addition, we are obligated to pay these Lycos joint ventures a commission, based on recurring monthly revenue derived from ALTERNATE PAGE FOR SELLING STOCKHOLDER PROSPECTUS--(CONTINUED) LEGAL MATTERS The validity of the shares offered hereby will be passed upon by Stairs Dillenbeck & Finley, New York, New York and Swidler Berlin Shereff Friedman, LLP has acted as regulatory counsel to us in connection with certain matters. See "Selling Stockholders and Plan of Distribution." each customer they deliver to us, which is offset against the guaranteed payments. However, as of the date of this prospectus, the links which would direct users of Lycos Japan to our Web site are still being developed. Thus, the implementation of our contract with Lycos Japan has not yet occurred, and no assurance can be made when, if ever, such contract will be implemented. These contracts are non-exclusive. Telecommunications services are typically recurring monthly purchases. Accordingly, we expect our subscribers and others to visit our Web site frequently to review their call detail reports and monthly invoices and to use our free global online telephone directory and the other telecommunications services we will offer. This will provide us with the opportunity to cross sell other products and services and sell targeted advertising that will reach our subscribers while they navigate our Web site. We currently provide our customers international and national long distance telecommunications services through our own switch. We have contracted with Exodus Communications, Inc., a leader in complex Internet hosting and services, to provide facilities, bandwidth, and managed services for our switch and servers in their secure facility on a 24 hour, 7 day a week basis. We expect to be operational at Exodus commencing in the second quarter of 2000. This will allow us to focus our resources on the execution of our strategy to become a leading Internet portal for the telecommunications market. Our principal executive offices are located at 50 Broad Street, New York, New York 10004, and our telephone number is (212) 686-2000. We maintain a Web site at www.callnow.com. Information on our Web site is not intended to be a part of this prospectus. THE OFFERING <TABLE> <S> <C> Units offered by us .................................. 4,000,000 units, each unit consisting of one share of common stock and one redeemable common stock purchase warrant. The warrant is exercisable at a price equal to 150% of the public offering price of the units per share for a period of forty-eight months commencing twelve months from the effective date of the registration statement of which this prospectus forms a part. We may redeem the warrants starting eighteen months after such effective date at $0.10 per warrant, if the average closing sale price for our common stock equals or exceeds 200% of the public offering price of the units for any twenty trading days within a period of thirty consecutive trading days ending on the fifth trading day prior to the date of the notice of redemption. You may trade the common stock and warrants separately starting twelve months after such effective date, unless we agree with the representatives of the underwriters that trading may begin sooner. See "Description of Securities." Total shares outstanding after this offering ......... 10,314,666 Shares (1) Redeemable common stock purchase warrants outstanding after this offering ............ 4,000,000 Warrants (2) Use of proceeds ...................................... For working capital, including advertising and promotion, repayment of convertible debentures, repayment of accrued liabilities owed to senior management, retroactive salary increases and upgrading our computer hardware and software. You should read "Use of Proceeds" for an expanded discussion of our intentions with respect to the proceeds of this offering. Proposed Nasdaq SmallCap Market Unit Symbol (3) .......................................... CALNU Proposed Nasdaq SmallCap Market Common Stock Symbol (3) .................................... CALN Proposed Nasdaq SmallCap Market Redeemable Common Stock Purchase Warrant Symbol (3) .................................. CALNW </TABLE> - ---------- (1) Based on shares outstanding as of the date of this prospectus. Excludes: o 282,825 shares of common stock issuable upon exercise of options at exercise prices ranging from $.01 to $2.75 per share, which options include an anti-dilution provision which will result in the additional issuance of options to purchase 200,000 shares of common stock at the offering price; o 2,200,000 shares of common stock reserved for future issuance under a stock option plan, of which options to purchase 1,162,400 shares of common stock at exercise prices of $2.75 per share have been granted; o 400,000 shares of common stock issuable upon exercise of the representatives' warrants at an exercise price of 120% of the public offering price of the units per share; o 400,000 shares of common stock issuable upon exercise of 400,000 redeemable common stock purchase warrants issuable upon exercise of the representatives' warrants at an assumed exercise price of 150% of the public offering price of the units per share; o a maximum of 181,232 shares of common stock issuable upon conversion of $1,276,300 in principal amount of convertible debentures outstanding as of the date of this prospectus at an effective conversion price of $7.06; and o 4,000,000 shares of common stock issuable upon exercise of the warrants. For a description of the convertible debentures, see "Description of Securities--Convertible Debentures." For information regarding options granted prior to this offering, see "Management--Employment and Consulting Agreements," "Related Party Transactions" and "Notes to Consolidated Financial Statements." (2) Excludes 400,000 redeemable common stock purchase warrants issuable upon exercise of the representatives' warrants. (3) We filed an application for our units, shares and warrants to be included for quotation on the Nasdaq SmallCap Market under the symbols "CALNU", "CALN" and "CALNW", respectively. However, we cannot assure you that we will be successful in our efforts to list our units, shares and warrants on the Nasdaq SmallCap Market and may only trade on the OTC Bulletin Board or in the National Quotation Bureau, LLC's Pink Sheets. For discussion of the effects of the failure to have our units, shares or warrants listed on the Nasdaq SmallCap Market, see "Risk Factors--Risks Related To This Offering--Failure To Be Approved For Listing On The Nasdaq SmallCap Market Or The Absence Of An Active Trading Market For The Common Stock And Warrants Could Make It Difficult For Investors To Resell Their Shares And Warrants At Or Above The Public Offering Price" and "--Failure To Satisfy Listing Standards For Nasdaq Could Subject Us To The "Penny Stock" Rules And Severely Limit The Liquidity Of Our Common Stock And Warrants." ------------------------- SUMMARY FINANCIAL DATA The following tables present summary financial data derived from our financial statements included elsewhere in this prospectus. The statement of operations data for the year ended December 31, 1995 has not been audited by independent auditors, but in the opinion of our management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. For additional information, you should refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes thereto. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------- 1995 1996 1997 1998 1999 ------------- ------------- ------------- ------------- --------------- (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues ............... $ 453,273 $1,674,955 $5,010,027 $2,295,202 $ 1,004,636 Loss from operations ......... (253,087) (929,640) (858,771) (550,942) (2,499,257) Interest expense ............. -- (1,154) (58,568) (90,436) (618,791) Net loss ..................... (253,087) (930,794) (917,339) (641,378) (3,118,048) Net loss per share ........... (0.08) (0.24) (0.24) (0.17) (0.60) Common shares ................ 3,055,525 3,875,000 3,875,000 3,875,000 5,157,964 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ------------------------------- ACTUAL PRO FORMA(1) --------------- ------------- <S> <C> <C> BALANCE SHEET DATA: Cash ................................... $ 80,542 $11,363,942 Current assets ......................... 109,598 11,392,998 Current liabilities .................... 2,007,120 181,387 Working capital (deficit) .............. (1,897,522) 11,211,611 Long-term assets ....................... 2,082,507 11,897,511 Total assets ........................... 2,192,105 23,290,509 Long-term liabilities .................. 1,090,867 240,000 Stockholders' equity (deficit) ......... (905,882) 22,869,122 </TABLE> - ---------- (1) Adjusted for the sale of the units offered hereby and application of the estimated net proceeds therefrom.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001085117_air_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001085117_air_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety. This Prospectus contains forward looking statements that involve risk and uncertainties. The Company's actual results could differ materially from those anticipated in such forward looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. Except as otherwise noted, all information in this Prospectus assumes the Debentures have not been converted. See, "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Description of Securities", and the Company's Consolidated Financial Statements and Notes thereto. The Company Since 1992, Air Packaging Technologies, Inc., a Delaware corporation ("herein referred to as "APTI" or the "Issuer" as the text may dictate) has been engaged in the manufacturing, distribution, marketing, and continued development of inflatable, protective packaging for use in shipment of higher value and fragile products. It holds worldwide patents on a packaging system which utilizes chambered packing material to provide a cushion of air around products during shipment. Its Air Box system competes favorably against materials like bubble wrap, urethane foam, etc., in terms of protection, ease of use and storage, for shipment of higher value items throughout the world. APTI's corporate offices are located at 25620 Rye Canyon Road, Valencia, California 91355; its telephone number is (661) 294-2222; its facsimile number is (661) 294-0947; its facsimile number is (661 294-0947 An investment in the shares of the Common Stock offered hereby involves a high degree of risk. See "Risk Factors." The Offering Securities Offered by the Company None Securities Offered by the Selling Stockholders up to 1,485,000 shares of Common Stock Common Stock Outstanding prior to the Offering (1) 7,966,409 shares Common Stock Outstanding after the Offering (1)(2) 8,966,409 shares Use of proceeds The Company will not receive any proceeds from the conversion of the Debentures or the sale of Common Stock by the Selling Shareholders. Risk Factors The Common Stock offered by the Selling Stockholders involves a high degree of risk. See "Risk Factors." Market Symbol (3) AIRP ______________________________ (1) Based upon the number of shares outstanding as of January 5, 2000 and does not include options and warrants to purchase 609,500 shares of the Company's common stock. (2) Assumes the conversion of $1,500,000 Debentures and the resulting issuance of the 1,000,000 Shares. (3) The Common Stock of the Company is traded on the NASD, Inc. OTC Bulletin Board under the symbol "AIRP". _____________________ FORWARD LOOKING STATEMENTS This Prospectus contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Actual results could differ materially from those discussed in the forward-looking statements as a result of certain factors, including those set forth below and elsewhere in this Prospectus. An investment in the Common Stock offered hereby involves a high degree of risk and is not an appropriate investment for persons who cannot afford the loss of their entire investment. Prospective investors should be aware of the following risk factors and should review carefully the financial and other information provided by the Company.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001085280_tibco_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001085280_tibco_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..f5ad5151749000f8ca0d97df323fcf0f77f8d1e4
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold and our financial statements and notes to those statements appearing elsewhere in this prospectus. Except as otherwise specified, all information in this prospectus (1) does not take into account the possible issuance of up to 750,000 additional shares of common stock upon the exercise of the underwriters' right to purchase such shares and (2) reflects a 3-for-1 split of our outstanding capital stock effected on February 18, 2000. Our Business We are a leading provider of eBusiness infrastructure software products that enable business-to-business, business-to-consumer and business-to-employee solutions. Our software products allow businesses to integrate internal operations, business partners and customer channels in real-time. Through our products and services, we enable computer applications and systems to communicate efficiently across the Internet and intranets to conduct electronic business, or eBusiness. Our TIB products facilitate the distribution of information and integration of business processes by connecting applications and data sources through a technology called The Information Bus, or the TIB. This technology uses a publish/subscribe model, in which a user specifies the type of information desired only once, and the specified information is then delivered to the user automatically each time it becomes available. The TIB technology allows multiple applications, web sites, databases and other content sources to be integrated and managed in real-time within a common framework. The TIB products also enable enterprises to extend their information technology infrastructures and business processes across the Internet. Our products are employed in high- performance environments and provide enterprises with a comprehensive and scalable method of conducting eBusiness. Our products are currently in use by over 300 companies in diverse markets such as telecommunications, manufacturing, energy, financial services and Internet portals. Current users of our TIB products include 3Com, Adidas, AltaVista, Banque Nationale de Paris, Bechtel, BellSouth, Cedel Global Services, Chevron, Cisco Systems, Compaq, Dalkia, Delta Air Lines, Digital Impact, Ericsson, Fidelity, Financial Times, First National Bank of South Africa, Gateway, Goldman Sachs, Hyundai, Intel, Intuit, Level 3, Lucent Technologies, Marubeni, Mobil, Motorola, The Nasdaq Stock Market, National Westminster Bank, NEC Electronics, Pacific Power, PageNet, Philips Medical, Procter & Gamble, SAP, Seagate, Telia, Taiwan Semiconductor Manufacturing Company, United Microelectronics Corp., Unibank and Yahoo!. Each of these companies, other than financial services companies, accounted for at least $500,000 of our revenue over the period from January 1997 through November 30, 1999. Each of the financial services companies accounted for at least $200,000 of our revenue during that period. In fiscal 1997, 1998 and 1999, we had revenue of $35.3 million, $52.8 million and $96.4 million. During those periods, we incurred net losses of $4.7 million, $13.0 million and $19.5 million. As of November 30, 1999, we had an accumulated deficit of approximately $37.1 million. Our Market Opportunity As the range of computing environments and software applications used across the typical business grows, creating a real-time eBusiness enterprise is becoming vastly more complex. In today's increasingly global and competitive environment, applications must be tightly integrated within and between enterprises in order to effectively manage, grow and extend the business. Enabling real-time transactions and information exchange among suppliers, customers and partners can enhance management and employee productivity, create manufacturing efficiencies and improve customer service. We believe that many application integration and niche eBusiness connectivity solutions have failed to address all of today's eBusiness needs because they lack comprehensiveness or flexibility, or use network resources inefficiently. Our Strategy Our objective is to establish the TIB technology as the leading software solution for eBusiness infrastructure. The core elements of our strategy include: . Promote the widespread adoption of our technology. We seek to establish our technology and products as the industry standard by embedding our technology in leading vendors' products and further extending the functionality of our solution. . Enhance our position as a provider of portal infrastructure. We plan to leverage our technology to offer solutions that enable companies to build robust eBusiness portals. . Focus on licensing our products. We plan to focus on licensing our products. To support this strategy, we plan to expand our relationships with systems integrators and professional services firms. . Leverage our expertise in specific markets. We plan to expand our presence in markets such as telecommunications, manufacturing, energy and Internet portals and capitalize on the presence of Reuters, the global news and information group, in the financial services sector. . Expand our international market presence. We intend to continue building the strength of our international presence in regions such as Europe and Asia. Company Background We are the successor to a portion of the business of Teknekron Software Systems, Inc., a leading innovator in the development of software infrastructure for the integration and delivery of market data, such as stock quotes, news and other financial information, in trading rooms of large banks and financial services institutions. Teknekron was acquired by Reuters in March 1994. In January 1997, we were established as a separate entity to focus on creating and marketing software solutions for use in the integration of business information, processes and applications in diverse industries outside the financial services market. Reuters holds a majority equity interest in our company, but has agreed to limit its voting rights. Nevertheless, Reuters has significant influence over our company. See "Relationship with Reuters and Certain Transactions-- Stockholders Agreement" beginning on page 57 for a description of arrangements that enables Reuters to exercise influence over our company. We license the technology underlying some of our TIB products from Reuters, and Reuters is our preferred distributor in the financial services market. When we refer to Reuters in this prospectus, we include Reuters Group PLC and its consolidated subsidiaries, including TFT, but excluding our company, TIBCO Software. Recent Developments On March 9, 2000, we announced that we expect first quarter revenues to be in the range of $41 to $42 million. This represents an increase in the range of 128-133% over 1999 first quarter revenue of $18 million. License revenues are expected to be approximately 68% of total revenue, compared to 54% of total revenue for first quarter 1999. This represents an increase of approximately 190% in license revenue over 1999 first quarter license revenue. In February 2000, our board of directors increased its size by one seat and nominated Matthew J. Szulik to serve as a director. Mr. Szulik has served as Chief Executive Officer of Red Hat, Inc. since November 1999, as its President since November 1998 and as a director of Red Hat since April 1999. Prior to that, he served as Red Hat's Chief Operating Officer from November 1998 to April 1999. Our stockholders will vote on the election of Mr. Szulik to our board of directors at our 2000 Annual Meeting of Stockholders, which is scheduled to occur on April 12, 2000. The Offering <TABLE> <C> <S> Shares offered by TIBCO Software.............. 4,000,000 shares Shares offered by the selling stockholders.... 1,000,000 shares Shares to be outstanding after the offering .. 185,215,000 shares (1) Use of proceeds............................... For general corporate purposes, principally working capital and capital expenditures, and investments in, or acquisitions of, complementary technologies or products. No such investments or acquisitions have been specifically identified. Nasdaq National Market symbol................. TIBX </TABLE> - -------- (1)Based on 181,215,000 shares outstanding as of November 30, 1999. Summary Financial Information (in thousands, except per share data) The "As Adjusted" column under Balance Sheet Data gives effect to the sale of 4,000,000 shares in this offering and our application of the net proceeds therefrom. <TABLE> <CAPTION> Eleven Year Ended Months Ended November 30, November 30, --------------------- 1997 1998 1999 ------------ -------- ----------- Statement of Operations Data: <S> <C> <C> <C> Revenue: License................................... $ 6,219 $ 17,495 $ 56,916 Service and maintenance................... 29,055 35,262 39,524 -------- -------- -------- Total revenue............................ 35,274 52,757 96,440 Gross profit............................... 19,427 25,075 59,828 Loss from operations....................... (5,203) (14,043) (21,582) Net loss................................... (4,663) (12,951) (19,481) Net loss per share-basic and diluted....... $ (0.08) $ (0.22) $ (0.19) Weighted average common shares outstanding........................ 57,606 60,033 104,112 <CAPTION> November 30, 1999 November 30, --------------------- 1998 Actual As Adjusted ------------ -------- ----------- Balance Sheet Data: <S> <C> <C> <C> Cash, cash equivalents, deposits held by Reuters and short-term investments........ $ 15,970 $ 89,807 $ Working capital............................ 18,301 95,603 Total assets............................... 36,289 179,638 Accumulated deficit........................ (17,614) (37,095) (37,095) Stockholders' equity....................... 21,704 137,918 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001085586_interland_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001085586_interland_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..adc31d2497647e2dbeb74efbafb471dc97c2f43c
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary contains basic information about us and this offering. Because it is a summary, it does not contain all the information that you should consider before investing. You should read the entire prospectus carefully, including the section entitled "Risk Factors" and our financial statements and the accompanying notes included elsewhere in this prospectus. Interland provides a broad range of web and applications hosting and other related web-based business solutions specifically designed to meet the needs of small to medium-sized businesses. Our solutions are secure, reliable, affordable, and we can easily upgrade them to provide additional capacity and functions. Our web hosting services include the computer hardware, software, network technology and systems management necessary to support our customers' web sites. Through our application hosting services, we deploy, configure and support various software applications that our customers can access over the Internet. We base our services mainly on the Microsoft NT and Red Hat Linux operating systems, providing diversity and flexibility to our customers. We generally sell our services to customers under fully pre-paid contracts that are typically between three months and two years in length. We are committed to supporting all of our services with superior customer service. Our web hosting business began in September 1997 and as of March 31, 2000 had 61,442 customer accounts, an increase of approximately 269% compared to March 31, 1999. Our revenues have grown from approximately $1.4 million in 1998 to over $9.1 million in 1999, and from $1.0 million for the three months ended March 31, 1999 to $6.3 million for the three months ended March 31, 2000, representing increases of over 550% and 521%, respectively. We have achieved this growth without making any acquisitions and with less than $6.8 million of total invested cash capital until December 1999, when we closed a $25.0 million round of venture financing. We experienced net losses of approximately $16.8 million for the year ended December 31, 1999 and $10.8 million for the quarter ended March 31, 2000 and we anticipate continuing and increasing losses. Key factors that we believe will continue to drive our growth include: - Providing a broad and growing range of high quality services for small to medium-sized businesses. - Key strategic relationships with Microsoft, Network Solutions, Bell Atlantic, and Road Runner. - State-of-the-art data centers. - Global expansion with initial efforts focused in Europe. - A creative, highly aggressive multimedia advertising campaign designed to establish our brand. - An experienced direct sales force. - Our proprietary customer management system that allows our salespeople to activate a web site or provide other services for a customer during the order process -- that is, in "real-time." OUR SOLUTION For a number of small and medium-sized businesses, many of whom do not have internal technical resources dedicated to Internet services, establishing a presence on the Internet has proven to be a complicated and time consuming task. We are dedicated to providing small to medium-sized businesses with a comprehensive bundle of services, which enables them to quickly, easily and affordably capitalize on the benefits of the Internet. We provide the following benefits to our customers: - A broad range of high-quality web and applications hosting and other related web-based solutions; - Services which are affordable, quick to deploy, and easy to use; - State-of-the-art security and reliability; and - Personalized customer service and technical support available 24 hours a day, seven days a week. The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission becomes effective. This preliminary prospectus is not an offer to sell these securities nor a solicitation of an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED JULY 24, 2000 PRELIMINARY PROSPECTUS 5,000,000 SHARES (INTERLAND LOGO) COMMON STOCK ------------------------------- This is an initial public offering of 5,000,000 shares of common stock of Interland, Inc. We are selling all of the shares of common stock offered under this prospectus. We currently estimate that the initial public offering price will be between $12.00 and $14.00 per share. We have applied to have our common stock approved for listing on the Nasdaq National Market under the symbol "ILND." SEE "RISK FACTORS" BEGINNING ON PAGE 8 ABOUT RISKS YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------------- <TABLE> <CAPTION> Per Share Total ----- ----------- <S> <C> <C> Public offering price....................................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to us............................ $ $ </TABLE> ------------------------------- The underwriters may purchase up to an additional 750,000 shares of common stock from us at the initial public offering price less the underwriting discount to cover over-allotments. The underwriters expect to deliver the shares against payment in New York, New York on , 2000. ------------------------------- BEAR, STEARNS & CO. INC. THOMAS WEISEL PARTNERS LLC PAINEWEBBER INCORPORATED The date of this prospectus is , 2000. OUR STRATEGY Our strategy has the following key components: Provide a Broad Range of Services on Multiple Operating Systems. We currently provide a wide range of services and intend to continue to provide additional services so that we can serve the expanding needs of our existing customers and attract new customers. Expand Sales Capabilities and Distribution Channels. We intend to increase our revenue through the expansion of our direct sales force, our reseller network and our strategic relationships. Expand International Presence. In April 2000, we opened a sales and customer service center in Amsterdam which will enable us to sell and support our services throughout Western Europe from a centrally based location. We also intend to pursue opportunities to expand our reach to other parts of the world, including Asia and Latin America. Increase Brand Awareness and Market Presence. We intend to continue to build our brand recognition by continuing to implement our aggressive multimedia advertising campaign. Take Advantage of Innovative and Proprietary Technology. We intend to continue to develop specialized technology and systems to give us advantages in delivering high-quality, price competitive services to our customers. Pursue Additional Strategic Alliances and Relationships. We will seek to expand our services, our technological capabilities and our customer base through the formation of additional strategic relationships and acquisitions. --------------------------- We incorporated our company as a Georgia corporation on August 21, 1985, and we capitalized our business and commenced web hosting operations in September 1997. The address of our principal executive offices is 101 Marietta Street, Suite 200, Atlanta, Georgia 30303, and our telephone number is (404) 720-8301. Our web site address is www.interland.net. We do not intend for the information on our web site to be a part of this prospectus. [Inside Front Cover] The inside of the front cover begins with the Interland logo. Below the logo is a graphic depicting a globe surrounded by images of some of our customers' web pages. At the bottom of the page is the sentence, "We make the web work for you." THE OFFERING Common stock offered................ 5,000,000 shares Common stock to be outstanding after the offering........................ 46,464,943 shares Use of proceeds..................... We intend to use the net proceeds from this offering to enhance and expand our network infrastructure and for other capital expenditures, to build our brand through marketing and advertising activities, both domestically and internationally, and to fund operating losses, working capital requirements and general corporate purposes. Proposed Nasdaq National Market symbol.............................. ILND We have calculated the number of shares that will be outstanding after this offering based on the 24,935,554 shares outstanding as of June 15, 2000, plus: - 5,000,000 shares of common stock we are selling in this offering; - 14,337,082 shares of common stock we will issue when all of our outstanding convertible preferred stock converts into common stock at the closing of this offering; and - assuming a public offering price of $13.00, 576,923, 461,538 and 1,153,846 shares of common stock that Microsoft, Network Solutions, and Bell Atlantic, respectively, have agreed to purchase at the time of this offering. The number of shares of common stock that will be outstanding after this offering excludes: - 750,000 shares of common stock that we will issue if the underwriters exercise the over-allotment option in full; - 5,587,056 shares of common stock that we may issue upon the exercise of outstanding options having a weighted average exercise price of $4.42 as of June 15, 2000; - 2,404,944 shares of common stock reserved in connection with future grants under our stock option plan as of June 15, 2000; - 540,000 shares of common stock reserved under our employee stock purchase plan; - up to 1,317,413 shares of common stock that we may issue under the exercise of currently outstanding warrants having a weighted average exercise price of $6.27 per share. We have issued five-year, fully vested warrants to purchase a total of 918,893 shares of our common stock to Microsoft and Network Solutions in connection with their investments in our company. We have also issued a warrant to purchase up to 376,920 shares of our common stock to Road Runner in connection with a co-marketing agreement. Of the shares subject to this warrant, 108,000 vested immediately upon the execution of our co-marketing agreement on January 27, 2000 and the balance vests in equal increments on June 30, 2000, September 30, 2000, December 31, 2000, and December 31, 2001, subject to performance criteria. We have also issued a warrant to purchase up to 21,600 shares of our common stock at $8.33 per share and warrants to purchase up to 135,720 shares of our common stock at $11.11 per share to Compaq and Hewlett-Packard in connection with equipment financing transactions; and - assuming a public offering price of $13.00, up to 909,614 shares of common stock that we may issue under the exercise of additional warrants that we have agreed to grant to Microsoft, Network Solutions, Compaq, and Hewlett-Packard at the time of this offering at an assumed exercise price of $13.00 per share. The issuance of the warrants to Compaq and Hewlett-Packard are conditioned upon increases in equipment financing lines of credit with each of them. The number of shares outstanding after the offering also excludes any shares that we may issue under a warrant that we may also grant to Bell Atlantic to purchase up to 3,132,000 shares of common stock as part of our proposed strategic relationship. As reflected in a letter of intent relating to this relationship, we expect the exercise price per share for the common stock underlying this warrant will equal 150% of the actual per share public offering price of the common stock sold in this offering. We have retroactively adjusted all share information in this prospectus to reflect a 1.08 for one stock split that we plan to implement before the completion of the offering. SUMMARY FINANCIAL DATA The following table shows our summary financial data for the period from inception (September 18, 1997) to December 31, 1997, for the years ended December 31, 1998 and 1999 and for the three months ended March 31, 1999 and 2000. We have derived the financial data for the period from inception (September 18, 1997) to December 31, 1997 and for the years ended December 31, 1998 and 1999 from financial statements that Arthur Andersen LLP, independent public accountants, has audited. We derived the financial data for the three months ended March 31, 1999 and March 31, 2000 from our unaudited financial statements. In our opinion this data includes all adjustments consisting of only normal and recurring adjustments necessary for a fair presentation of the information. The financial data may not necessarily be an indicator of our results for the year ending December 31, 2000. You should read this data together with "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," our financial statements and accompanying notes and the other financial data included elsewhere in this prospectus. The following data is in thousands, except per share, share, web site, customer, and average monthly revenue per customer data. <TABLE> <CAPTION> FOR THE PERIOD FROM INCEPTION THREE MONTHS ENDED (SEPTEMBER 18, YEAR ENDED YEAR ENDED ----------------------- 1997) TO DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, DECEMBER 31, 1997 1998 1999 1999 2000 ----------------- ------------ ------------ ---------- ---------- (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues.................. $ 5 $ 1,387 $ 9,121 $ 1,009 $ 6,268 Operating expenses........ (119) (3,708) (25,891) (2,434) (17,308) ----------- ----------- ----------- ---------- ---------- Operating loss............ (114) (2,321) (16,770) (1,425) (11,040) Interest income (expense), net..................... -- (18) (14) (11) 251 ----------- ----------- ----------- ---------- ---------- Net loss.................. (114) (2,339) (16,784) (1,436) (10,789) Preferred stock beneficial conversion and dividends............... -- -- (9,559)(1) -- (586) ----------- ----------- ----------- ---------- ---------- Net loss applicable to common shareholders..... $ (114) $ (2,339) $ (26,343) $ (1,436) $ (11,375) =========== =========== =========== ========== ========== Basic and diluted net loss per common share........ $ (0.01) $ (0.13) $ (1.23) $ (0.07) $ (0.48) =========== =========== =========== ========== ========== Shares used in computing net loss per share...... 17,631,191 18,316,449 21,461,161 19,654,296 23,936,350 OTHER DATA: Adjusted EBITDA(2)........ $ (114) $ (2,206) $ (12,221) $ (1,213) $ (9,048) Net cash used in operating activities.............. (110) (30) (2,397) (54) (2,645) Net cash used in investing activities.............. (2) (1,102) (8,752) (682) (7,785) Net cash provided by financing activities.... 139 1,811 34,953 966 4,859 Number of web sites....... 0 10,611 45,731 16,658 61,442 Number of customers....... 0 6,796 27,173 10,186 36,469 Average monthly revenue per customer............ $ 0 $ 34.26 $ 45.49 $ 39.73 $ 65.66 </TABLE> --------------- (1) This amount consists of approximately $9.4 million associated with the beneficial conversion of our preferred stock into common stock and approximately $150,000 in an accrued preferred stock dividend. The beneficial conversion is a result of the difference between the initial purchase price paid by the preferred stock holders and the actual conversion price of the preferred stock into common stock. (2) Adjusted EBITDA consists of net loss excluding interest income (expense), net, and depreciation and amortization, as further adjusted to exclude non-cash stock compensation expense and non-cash operating expenses incurred as a result of the issuance of equity securities to third parties in the total amount of $3.6 million, $101,000 and $1.4 million for the year ended December 31, 1999, and the three months ended March 31, 1999 and 2000, respectively. Adjusted EBITDA does not represent funds available for discretionary use and is not intended to represent cash flow from operations as measured under generally accepted accounting principles. Adjusted EBITDA should not be considered as an alternative to net loss or net cash used in operating activities, but may be useful to investors as an indication of operating performance. Our calculations of Adjusted EBITDA may not be consistent with similarly titled calculations used by other companies. We present the following balance sheet data: - on a pro forma basis to reflect the conversion of all convertible preferred stock outstanding at March 31, 2000 into 13,137,083 shares of common stock at the time we complete this offering. - on a pro forma, as adjusted basis to reflect the sale of 1,199,999 shares of our preferred stock to Bell Atlantic (and the later conversion to common stock at the time we complete this offering), the recording of the related beneficial conversion feature of approximately $4.4 million in the form of a dividend, the payment in cash of $1.5 million of preferred stock dividends accrued through the closing date, the sale of 576,923, 461,538 and 1,153,846 shares of our common stock at an assumed price of $13.00 per share to Microsoft, Network Solutions and Bell Atlantic, respectively at the time of this offering, the grant of warrants to purchase up to 778,845 shares of common stock to Microsoft and Network Solutions at the time of this offering, the exercise on April 14, 2000 of an option to purchase 540,000 shares of our common stock, the issuance on May 15, 2000 of 32,400 shares of our common stock valued at $12.00 per share and the sale of 5,000,000 shares of our common stock we are offering under this prospectus, at an assumed initial offering price of $13.00 per share, after deducting the underwriting discount and estimated offering expenses that we will pay. <TABLE> <CAPTION> MARCH 31, 2000 --------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $18,939 $ 18,939 $116,732 Total assets................................................ 42,717 42,717 140,898 Working capital............................................. 1,555 1,555 100,295 Total long-term liabilities................................. 4,994 4,994 4,994 Preferred stock............................................. 40,630 -- -- Other shareholders' equity.................................. (28,959) 11,671 110,799 </TABLE> We have derived the following summary financial and operating data for our most recent five quarters in part from our unaudited consolidated financial statements. <TABLE> <CAPTION> THREE MONTHS ENDED(1) ------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, 1999 1999 1999 1999 2000 --------- -------- --------- -------- --------- (IN THOUSANDS, EXCEPT WEB SITE, CUSTOMER DATA AND AVERAGE MONTHLY REVENUE PER CUSTOMER) <S> <C> <C> <C> <C> <C> Revenue......................................... $ 1,009 $ 1,688 $ 2,582 $ 3,842 $ 6,268 Operating expenses.............................. 2,434 5,280 7,457 10,720 17,308 Net loss........................................ (1,436) (3,610) (4,887) (6,851) (10,789) Number of web sites............................. 16,658 24,235 33,705 45,731 61,442 Number of customers............................. 10,186 14,357 19,822 27,173 36,469 Average monthly revenue per customer............ $ 39.73 $ 45.86 $ 50.36 $ 54.50 $ 65.66 </TABLE> --------------- (1) The operating results for any quarter are not necessarily an indicator of results for any future period. See "Risk Factors -- Our quarterly and annual results may fluctuate, resulting in fluctuations of the price of our common stock" and "Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Selected Quarterly Operating Results."
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+PROSPECTUS SUMMARY BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS AND THE ACCOMPANYING NOTES BEFORE DECIDING TO INVEST IN OUR COMMON STOCK. UNLESS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS GIVES EFFECT TO THE CHANGE IN OUR FISCAL YEAR END TO DECEMBER 31 FROM MARCH 31, EFFECTIVE AT DECEMBER 31, 1999. GOMEZ ADVISORS, INC. We help businesses grow online by providing them with targeted customer leads as well as data and tools relating to the e-commerce competitive environment and consumer marketplace. To address the consumer's time-consuming and confusing task of finding and selecting a provider of products and services on the Internet and the difficulty for e-commerce businesses to attract and retain customers, we have developed a proprietary methodology of collecting and cataloging consumer experience data. At the core of our GOMEZ.COM and GOMEZPRO service offerings is our proprietary database of online consumer experience data. This data is presented to consumers as our INTERNET SCORECARD ranking system. This unique ranking system defines the standards of quality in specific e-commerce industries and measures e-commerce providers in those industries against these standards. Our GOMEZ.COM portal provides objective e-commerce information that is designed to attract consumers who are in the process of selecting an e-commerce provider and who are, therefore, more likely to transact business contemporaneously with selecting that provider. Our GOMEZPRO.COM subscription Web site and additional GOMEZPRO services leverage our proprietary methodology by providing online consumer experience data and measurement tools that allow businesses to better formulate and execute their e-commerce strategy. We believe that through providing targeted lead generation and consumer experience measurement tools, we have developed a business model with multiple revenue streams that utilizes common resources and is replicable across industries, both domestic and international. GOMEZ.COM We provide targeted leads for e-commerce businesses through objective tools and content designed to help consumers select the most suitable e-commerce provider. The INTERNET SCORECARD ranking system and other tools and content provided on our GOMEZ.COM portal make it easier for consumers to objectively identify and evaluate e-commerce businesses, engage in transactions with these businesses, learn more about select e-commerce industries and obtain special values on e-commerce products and services. We provide targeted leads to a variety of companies including CarOrder.com, Charles Schwab and E*TRADE. We use our proprietary data analysis tools to collect and organize e-commerce Web site information in a SCORECARD format for 28 industries. Each SCORECARD ranks established and emerging e-commerce businesses within an industry based upon a proprietary methodology. An example is our INTERNET BROKER SCORECARD, which reviews 142 Internet securities brokerage firms and ranks 57 of these firms based on 290 criteria. Our SCORECARDS cover a range of industries, including Internet banking, Internet travel agents, Internet auto buying and Internet auctions. We have included a complete list of the SCORECARDS we provide as of March 31, 2000 on page 37 of this prospectus. We have added 23 SCORECARDS since August 1, 1999, and expect to add an additional 5 by year end. We believe that our SCORECARDS have become a leading source on the analysis of e-commerce businesses as evidenced by over 300 media mentions a month for each of the last six months on cable networks such as CNN and CNBC and in publications such as THE NEW YORK TIMES and THE WALL STREET JOURNAL. We also provide other services to consumers, including news, editorials and commentary through GOMEZWIRE, educational content and tutorials through JUMPSTART, special promotions designed to facilitate e-commerce transactions through SAVINGSCENTER, and links to e-commerce businesses through ASK GOMEZ. GOMEZPRO We believe GOMEZPRO provides e-commerce businesses a unique solution for reducing the costs associated with acquiring and retaining customers. Through GOMEZPRO, we provide businesses with real-time data and analysis of customer experience. The detailed data that we summarize in our INTERNET SCORECARDS is provided to our GOMEZPRO clients, and we complement this data with analysis tools and additional services. Our data analysis tools enable e-commerce businesses to understand more effectively the e-commerce competitive environment, target e-commerce consumers, attract and retain more customers and align business strategies and initiatives with consumer needs. Because our GOMEZPRO services utilize the same proprietary data analysis tools used to develop our INTERNET SCORECARDS, we believe that we provide businesses with a unique ability to evaluate consumer experience and the detailed competitive landscape within e-commerce industries. The client base for our GOMEZPRO services includes "bricks and mortar" businesses seeking to establish an e-commerce presence as well as existing online businesses that seek the tools to execute their e-commerce strategy. A sample of these clients includes DLJDIRECT, Fidelity Investments and PayLess Drug Stores. In addition to a more detailed SCORECARD analysis, GOMEZPRO.COM subscribers receive analysis tools including comparative up to the minute reports monitoring the speed at which Web sites are downloaded and displayed from multiple geographic locations, polls and surveys analyzing customer behavior, e-commerce and technology news and trend analysis, and vendor reviews. We also provide advanced market data analysis reports that include online consumer trend data and Web site performance monitoring data in the Internet banking, brokerage and retail industries. Furthermore, we make available to our GOMEZPRO clients advisory services designed to align businesses' growth with consumer needs. GROWTH STRATEGY Our objective is to be the leading provider of customer acquisition and retention solutions to e-commerce businesses. We intend to achieve our objective by increasing the visibility of our SCORECARDS in the media, which we believe will result in increased consumer awareness and use. Consequently, we believe increased consumer use will result in business awareness of GOMEZ ADVISORS and greater demand for our services. To achieve our objective we intend to: - build on our existing brand awareness and maintain the trust of e-commerce consumers and businesses; - syndicate our content to increase consumer exposure to our services; - expand our GOMEZ.COM service offerings to additional industries; - expand GOMEZPRO services into e-commerce industries for which we provide SCORECARDS; and - expand our international efforts in selected markets. ------------------------ We were incorporated in the State of Delaware on May 22, 1997. Our principal executive offices are located at 55 Old Bedford Road, Lincoln, Massachusetts 01773. Our telephone number is (781) 257-2000 and our Web site addresses are www.gomez.com and www.gomezpro.com. Information contained on our Web sites is not a part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered by Gomez Advisors............................. shares Shares outstanding after the offering............................. shares Use of proceeds........................ We intend to use the net proceeds: - to market existing services, - to develop and market new products and services, - to add personnel, - to expand our network operations and physical facilities, - for working capital, and - for other general corporate purposes, including possible acquisitions of or investments in complementary businesses, products or technologies. We cannot specify with certainty all of the particular uses for the net proceeds. See "Use of Proceeds." Risk factors........................... See "Risk Factors" and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock. Proposed Nasdaq National Market symbol............................... GOMZ </TABLE> The number of shares of common stock outstanding is based on 15,360,949 shares of common stock outstanding on March 31, 2000. This number excludes: - 6,012,085 shares of common stock authorized for issuance under our stock options plans, under which options to purchase 5,693,584 shares were outstanding at a weighted average exercise price of $3.50 per share and 318,501 shares were available for grant as of March 31, 2000; and - 247,059 shares of common stock issuable upon the exercise of warrants outstanding as of March 31, 2000 at a weighted average exercise price of $7.08 per share. This number assumes that the underwriters' over-allotment options are not exercised. If the over-allotment options are exercised in full, we will issue and sell an additional shares. INFORMATION IN PROSPECTUS You should be aware that, except as otherwise noted, all information in this prospectus: - reflects the automatic conversion of all of our outstanding shares of redeemable convertible preferred stock and preferred stock into a total of 11,282,112 shares of common stock upon the completion of this offering; - reflects the amendment and restatement of our restated certificate of incorporation upon completion of this offering; and - reflects the reclassification and conversion of our class A common stock into our common stock in October 1999. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The following table summarizes our historical statements of operations for the period from inception (May 22, 1997) through March 31, 1998, the twelve months ended March 31, 1999, and the nine months ended December 31, 1999. Also set forth below is our summary consolidated balance sheet data as of December 31, 1999: - on an actual basis; - on a pro forma basis giving effect to the automatic conversion of all of our shares of redeemable convertible preferred stock and Series A Preferred Stock outstanding as of December 31, 1999 into a total of 9,752,839 shares of common stock upon the completion of this offering; and - on a pro forma as adjusted basis giving effect to the automatic conversion of all outstanding shares of redeemable convertible preferred stock and Series A Preferred Stock into a total of 11,282,112 shares of common stock (which includes 1,996,273 shares of redeemable convertible preferred stock sold subsequent to December 31, 1999), the repurchase of 500 shares of Series A Preferred Stock in February 2000, and the accretion of additional dividends on Series B Redeemable Convertible Preferred Stock at March 31, 2000 and the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting the underwriters' fees and estimated offering expenses payable by us. This information should be read in conjunction with our consolidated financial statements and the accompanying notes which are included in this prospectus. <TABLE> <CAPTION> PERIOD FROM INCEPTION TWELVE MONTHS NINE MONTHS (MAY 22, 1997) TO ENDED ENDED MARCH 31, 1998 MARCH 31, 1999 DECEMBER 31, 1999 ----------------- -------------- ----------------- <S> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS: Net revenues.................................... $ 298 $ 1,539 $ 3,241 Loss from operations............................ (357) (16,366) (13,557) Net loss........................................ (357) (17,859) (13,462) Net loss applicable to common stockholders...... (357) (17,859) (13,698) Net loss per share: Basic and diluted net loss per common share(1)...................................... $(370.27) $ (44.87) $ (6.53) Basic and diluted weighted average common shares outstanding................................... 963 398,044 2,096,595 Pro forma net loss per common share (unaudited)(1)................................ $ (1.11) Pro forma basic and diluted common shares outstanding................................... 12,356,567 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- ---------- ------------- (UNAUDITED) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents.............................. $ 16,427 $ 16,427 Working capital........................................ 14,256 14,256 Total assets........................................... 19,960 19,960 Redeemable convertible preferred stock................. 22,143 -- Stockholders' equity (deficit)......................... (5,920) 16,223 </TABLE> - ------------------------ (1) Computed on the basis described in Note 2(k) of the Notes to our consolidated financial statements.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001085707_nextel_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001085707_nextel_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS BUT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR CLASS A COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY "RISK FACTORS" BEGINNING ON PAGE 9. AS USED IN THIS PROSPECTUS, "WE," "US" AND "OUR" REFER TO NEXTEL PARTNERS, INC., "NEXTEL" REFERS TO NEXTEL COMMUNICATIONS, INC. (AND/OR, WHERE APPROPRIATE, ITS SUBSIDIARIES), AND "NEXTEL WIP" REFERS TO NEXTEL WIP CORP., AN INDIRECT WHOLLY OWNED SUBSIDIARY OF NEXTEL. NEXTEL PARTNERS We provide digital wireless communications services in mid-sized and smaller markets throughout the United States. We hold or have the right to use broadband wireless frequencies that cover 40 million persons, or Pops, in 46 markets. We are licensed to operate in 12 of the top 100 metropolitan statistical areas in the United States ranked by population and 51 of the top 200 metropolitan statistical areas. We also have the option, under certain circumstances, to acquire from a subsidiary of Nextel frequencies that cover an additional 13 million Pops, of which we currently intend to acquire frequencies covering 2.3 million Pops. In January 1999, we entered into an affiliation with Nextel, whose wholly owned subsidiary owns 36.5% of our common stock prior to this offering and is our largest stockholder. This affiliation was created to accelerate the build-out of the Nextel digital mobile network by granting us the exclusive right to offer wireless communications services under the Nextel brand in selected mid-sized and smaller markets. The Nextel digital mobile network utilizes a single digital transmission technology called integrated digital enhanced network, or iDEN, which was developed by Motorola, Inc. This network constitutes one of the largest fully-integrated wireless communications systems in the United States. By the end of 2000, we and Nextel together plan to provide service in all of the top 100 metropolitan statistical areas in the United States. We offer a differentiated package of services under the Nextel brand name targeted to business users. We currently offer the following fully-integrated services accessible through a single wireless telephone: - digital mobile, or interconnect, telephone service; - Nextel Direct Connect service that allows users to contact co-workers instantly, on private one-to-one calls or on a group call; and - the ability to receive pages and short-text messages. In addition, Nextel has announced its plan to offer users access to digital two-way mobile data and Internet connectivity services, expected to be commercially available in mid-2000. As part of our agreements with Nextel WIP, we expect to offer these same data services in our markets after their commercial implementation by Nextel. Our senior management team has substantial operating experience, averaging over 15 years in the communications industry. Each member of senior management has significant experience working at AT&T Wireless, McCaw Cellular and/or Nextel. Our senior management and employees collectively own 6.7% of our common stock on a fully diluted basis prior to this offering. Other key stockholders, in addition to Nextel's subsidiary, include DLJ Merchant Banking Partners, Madison Dearborn Capital Partners, Eagle River Investments, an investment company controlled by Craig O. McCaw, and Motorola. STRATEGIC ALLIANCE WITH NEXTEL Our affiliation with Nextel is an integral part of our strategy. Nextel WIP has contributed to us licenses and cash in exchange for an ownership stake in our company. Pursuant to our agreements with Nextel WIP, we enjoy numerous important benefits, including the following: - NEXTEL BRAND AND DIFFERENTIATED MARKETING PROGRAMS. We have the exclusive right to offer digital wireless communications services using the Nextel brand in all of our markets. We believe the Nextel brand is among the most recognized wireless brands in the United States. In particular, we believe that the Nextel brand represents a differentiated and value-added product in the wireless marketplace. In using the Nextel brand name, we also benefit from Nextel's national marketing campaigns. - INTEGRATED NATIONWIDE NETWORK. Our systems are operationally seamless with those of Nextel, enabling customers of both companies to roam on each other's portion of the Nextel digital mobile network. As customers increasingly choose national rate plans, we believe that the ability to offer national coverage is a competitive advantage. Additionally, we believe that offering users a full digital interconnect feature set wherever they travel within the Nextel digital mobile network differentiates our service from the services of many of our competitors. - EXCLUSIVE ROAMING PARTNERSHIP. Under our agreements with Nextel WIP, we are the exclusive provider of wireless communication services to Nextel's iDEN/800 MHz frequency customers who roam into our markets. We believe this affiliation will continue to provide us with a consistent base of recurring roaming services revenue and allow us to offer our customers roaming services on Nextel's portion of the Nextel digital mobile network in a cost-effective manner. - INFRASTRUCTURE AND RELATIONSHIPS. In exchange for a fee, we have the right to utilize Nextel's current infrastructure, including certain switching facilities and network monitoring systems, until such time as our customer volume indicates that we should build our own. While we have implemented our own customer activation, billing and customer care systems, we use Nextel's systems to offer our national account subscribers seamless customer service. Additionally, we expect that Nextel's strong relationships with its vendors and national account customers will allow us in many cases to secure wireless equipment at competitive rates and penetrate national accounts within our service area. For example, under our agreement with Motorola, subject to certain exceptions, we purchase wireless telephones and infrastructure equipment from Motorola at the same prices as Motorola offers such equipment to Nextel. BUSINESS STRATEGY Our goal is to become the leading provider of integrated digital wireless communication services in our markets. We believe the following elements of our business strategy will distinguish our wireless service offerings from those of our competitors and will enable us to compete successfully: - PROVIDE DIFFERENTIATED PACKAGE OF WIRELESS SERVICES. We offer a package of services and features that combines multiple wireless communications options in a single wireless telephone. We will continue to emphasize the differentiated features of iDEN technology and implement advancements in this technology platform as they become available. In addition, we maintain uniformity with Nextel by offering consistent rates to our customers anywhere on the Nextel digital mobile network, billing based upon the actual numbers of seconds of airtime after the first minute, and rate plans that do not distinguish between "peak" and "off-peak" minutes. - TARGET BUSINESS CUSTOMERS. We believe that our focus on business customers will result in higher monthly average revenue per unit and lower average monthly service cancellations or terminations. This is a market segment for which we believe our product has high utility, and we further believe that we and Nextel are the only major U.S. wireless carriers directing fully integrated, nationwide offerings to this segment. - DEPLOY ROBUST NETWORK RAPIDLY. Our objective is to build robust wireless systems that cover all key areas of a given market before we launch our network in that market. We are deploying these systems rapidly to capture the current and projected growth in wireless usage in the United States. We are also building our customer care and internal systems to support future anticipated demand. - OPERATE IN MID-SIZED AND SMALLER MARKETS. We focus on mid-sized and smaller markets with demographics we believe to be similar to those served by Nextel. We believe that this strategy will allow us to rapidly increase penetration within our targeted customer base, which we believe has historically been underserved in these markets. We believe that this focus, combined with our differentiated service offerings, will give us the ability to sustain our pricing strategy. MARKETS As of January 15, 2000, we had commercial operations in markets with total Pops of 9.9 million and the ability to offer service to, or cover, 7.7 million Pops. These operational markets are in Hawaii, New York, Texas and Pennsylvania. As of December 31, 1999, we had approximately 46,000 digital subscribers with a covered market penetration of approximately 0.75%. We intend to be able to provide service to over 21 million Pops by the end of 2000 and over 27 million Pops by the end of 2001. The following table sets forth those markets with over one million Pops in which we have launched or intend to launch digital wireless service: <TABLE> <CAPTION> MARKETS TOTAL POPS MARKET LAUNCH - ------- ---------- -------------- <S> <C> <C> Kentucky (Lexington-Fayette, Louisville).................... 2,543,523 1st Half 2000 Syracuse/Utica-Rome/Binghamton/Elmira, NY................... 2,308,433 Launched Eastern Iowa (Waterloo, Dubuque, Davenport, Cedar Rapids, Iowa City)................................................ 1,829,046 1st Half 2000 Arkansas (Fayetteville, Ft. Smith, Pine Bluff).............. 1,804,738 1st Half 2001 Central Illinois (Peoria, Springfield, Champaign, Bloomington, Decatur)..................................... 1,757,899 1st Half 2000 Evansville/Owensboro, IN.................................... 1,652,709 1st Half 2001 Harrisburg/York/Lancaster, PA............................... 1,641,088 Launched Shreveport/Monroe/Tyler/Longview, LA/TX..................... 1,597,763 2nd Half 2000 Green Bay/Fond du Lac/Appleton/Sheboygan, WI................ 1,435,451 1st Half 2001 Albany/Glens Falls, NY...................................... 1,407,264 Launched Hattiesburg/Jackson, MS..................................... 1,390,583 1st Half 2001 Central Pennsylvania (Altoona, Williamsport, State College).................................................. 1,366,464 2nd Half 2001 Buffalo, NY................................................. 1,282,387 Launched Hawaii (all islands)........................................ 1,197,687 Launched Roanoke/Lynchburg/Charlottesville, VA....................... 1,175,872 1st Half 2001 Rochester, NY............................................... 1,049,391 Launched </TABLE> We have calculated total Pops for a given market by utilizing the 1990 census data for each county within the market and extrapolating such data through 1997 based on estimated population growth rates. Future launch schedules for our markets are subject to the various factors discussed under the heading "Risk Factors" in this prospectus. We were incorporated in the State of Delaware in July 1998. Our principal executive offices are located at 4500 Carillon Point, Kirkland, Washington 98033. Our telephone number is (425) 828-1713. THE OFFERING <TABLE> <S> <C> Total Class A common stock offered: U.S. offering............................................. shares International offering.................................... shares Total Class A common stock to be outstanding after this offering.................................................. 158,927,974 shares Total Class A common stock and Class B common stock to be outstanding after this offering........................... 236,710,600 shares </TABLE> <TABLE> <S> <C> Use of proceeds............... We expect to use the estimated $376.5 million in net proceeds from this offering for our general corporate purposes, including: - capital expenditures in connection with the build-out and expansion of our portion of the Nextel digital mobile network, including build-out of the territories for which we have an option and intend to acquire; - future acquisition of additional frequencies; and - introduction of new services, sales and marketing activities and working capital. </TABLE> <TABLE> <S> <C> Nasdaq National Market Symbol............................... "NXTP" </TABLE> Except where otherwise indicated, all information in this prospectus: - reflects the conversion of all outstanding Series A preferred stock into shares of Class A common stock and the conversion of all outstanding shares of Series C preferred stock and Series D preferred stock into shares of Class B common stock upon the closing of this offering; our Class B common stock is convertible on a one-for-one basis into shares of our Class A common stock at any time, at the option of the holder, upon a transfer to a person other than Nextel, a majority-owned Nextel subsidiary or a person or entity controlling Nextel, and is substantially similar to our Class A common stock; the holders of our Class A and Class B common stock are entitled to one vote per share on all matters; - gives effect to a six-for-one stock split to be effective prior to the closing of this offering; - excludes 5,049,600 shares of Class A common stock issuable upon exercise of options outstanding as of January 15, 2000 at a weighted average exercise price of $1.78 per share; - excludes 2,434,260 shares of Class A common stock issuable upon exercise of outstanding warrants at an exercise price of less than $0.01 per share; and - assumes no exercise of the underwriters' over-allotment options. Please see "Capitalization" on page 23 for a more complete discussion regarding the outstanding shares of Class A common stock and other related matters. ------------------------ This prospectus contains registered trademarks and service marks of: Nextel, including "Nextel," "Nextel Direct Connect" and "Nextel Online"; Motorola, including "Motorola," "iDEN," "i1000 plus," "i500 plus," and "i700 plus"; and other companies. SUMMARY CONSOLIDATED FINANCIAL DATA You should read the following consolidated summary financial data together with "Management's Discussion and Analysis" and our consolidated financial statements and the related notes, all of which appear elsewhere in this prospectus. Our historical financial results discussed throughout this prospectus include the operations we acquired from Nextel WIP on January 29, 1999 in connection with our initial capitalization, which operations had previously been managed by Nextel. See Note 1 of our audited consolidated financial statements for a discussion of our formation, capitalization and basis of presentation. The as adjusted balance sheet information set forth below reflects: - the receipt of estimated net proceeds from this offering; and - the reclassification of the Series B preferred stock, plus accrued dividends, from stockholders' equity to the section of the balance sheet between liabilities and stockholders' equity. <TABLE> <CAPTION> YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1998 1999 -------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Operating revenues: Service revenues.......................................... $3,745 $28,136 Equipment revenues........................................ 1,564 4,584 ------------- ------------- Total revenues.............................................. 5,309 32,720 ------------- ------------- Operating expenses: Cost of service revenues.................................. 6,108 18,807 Cost of equipment revenues................................ 2,935 10,742 Selling, general and administrative....................... 13,531 34,862 Stock-based compensation.................................. 447 27,256 Depreciation and amortization............................. 4,586 12,689 ------------- ------------- Total operating expenses.................................... 27,607 104,356 ------------- ------------- Operating loss.............................................. (22,298) (71,636) ------------- ------------- Other income (expense): Interest expense, net..................................... -- (65,362) Interest income........................................... -- 24,585 ------------- ------------- Total other (expense)....................................... -- (40,777) ------------- ------------- Loss before income tax provision............................ (22,298) (112,413) Income tax provision........................................ -- -- ------------- ------------- Net loss.................................................... $(22,298) $(112,413) ============= ============= Basic and diluted net loss per common share(1).............. $(38.18) ============= Weighted average common shares outstanding(1)............... 2,944,218 Pro forma basic and diluted net loss per common share(1)(2)............................................... $(0.66) ============= Pro forma weighted average common shares outstanding(1)..... 170,107,513 </TABLE> - -------------------------- (1) Weighted average common shares outstanding above were calculated assuming that the shares of Class A and Class B common stock were issued and split on January 29, 1999, the date of the initial capitalization transactions. Pro forma weighted average common shares outstanding above were calculated assuming that the shares of Series A preferred stock were converted into shares of Class A common stock and shares of Series C and Series D preferred stock were converted into shares of Class B common stock, after giving effect to the six-for-one stock split, on January 29, 1999. Per share information is not included for periods prior to 1999 because the capitalization transactions that occurred on January 29, 1999 substantially altered our capital structure. (2) Pro forma basic and diluted net loss per common share was calculated assuming a $2,551 accrued dividend on the Series B preferred stock. Upon consummation of this offering, the Series B preferred stock becomes subject to mandatory redemption in February 2010. This accrued dividend increases the net loss attributable to common stockholders to $114,964. <TABLE> <CAPTION> AS OF AS OF DECEMBER 31, DECEMBER 31, 1999 1998 ------------------------- ACTUAL ACTUAL AS ADJUSTED -------------- ---------- ------------ (IN THOUSANDS) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents, short-term investments and restricted cash(1)....................................... $16 $ 568,729 $945,257 Plant, property and equipment, net......................... 107,948 252,223 252,223 FCC operating licenses, net................................ 133,180 151,056 151,056 Total assets............................................. 247,666 1,015,327 1,391,855 Current liabilities........................................ 8,995 58,503 58,503 Long-term debt............................................. -- 785,484 785,484 Series B redeemable preferred stock........................ -- -- 24,401 Total stockholders' equity................................. 238,671 170,616 522,743 Total liabilities and stockholders' equity........... $247,666 $1,015,327 $1,391,855 </TABLE> - -------------------------- (1) Short-term investments include marketable debt securities and corporate commercial paper with original purchase maturities greater than three months. Restricted cash reflects the cash collateral account maintained under our credit facility equal to borrowings outstanding under one of our term loans, until the FCC approved Nextel WIP's transfer of the broadband wireless licenses to us. <TABLE> <CAPTION> YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1998 1999 -------------- -------------- (DOLLARS IN THOUSANDS) <S> <C> <C> OTHER DATA: Covered Pops (end of period) (millions)..................... 6.1 Subscribers (end of period)................................. 46,083 EBITDA as adjusted (1)...................................... $(17,265) $(31,691) Capital expenditures (2).................................... $104,334 $133,210 </TABLE> - -------------------------- (1) Earnings Before Interest, Taxes, Depreciation and Amortization, or EBITDA as adjusted, represents net loss before interest expense, interest income, depreciation, amortization and stock-based compensation expense. EBITDA is commonly used to analyze companies on the basis of operating performance, leverage and liquidity. While EBITDA as adjusted should not be construed as a substitute for operating income or a better measure of liquidity than cash flow from operating activities, which are determined in accordance with generally accepted accounting principles, we have presented EBITDA as adjusted to provide additional information with respect to our ability to meet future debt service, capital expenditure and working capital requirements. EBITDA as adjusted is not a measure determined under generally accepted accounting principles. Also, as calculated above, EBITDA as adjusted may not be comparable to similarly titled measures reported by other companies. (2) Capital expenditures are expenditures (exclusive of $22 million Motorola vender credits and non-cash capitalized interest) during the period related to depreciable property, plant and equipment. Capital expenditures are required to purchase network equipment, such as switching and radio transmission equipment. Capital expenditures also include purchases of other equipment used for administrative purposes, such as office equipment and computer and telephone systems.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001085770_move-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001085770_move-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read this summary together with the more detailed information regarding our company and the common stock being offered in this offering and our consolidated financial statements and accompanying notes appearing elsewhere in this prospectus. We are the leading destination on the Internet for home and real estate- related information, advertising products and services, based on the number of visitors, time spent on our web sites and number of property listings, and are pioneering the use of the Internet to bring the real estate industry online. Our family of web sites, consisting of Homestore.com, REALTOR.com, HomeBuilder.com, SpringStreet.com, Remodel.com and Homefair.com, provides the most comprehensive source of real estate listings and home-related content on the Internet. Through our family of web sites, we provide a wide variety of information and tools for consumers, real estate industry professionals, advertisers and providers of home and real estate-related products and services. To provide consumers with real estate listings, access to real estate professionals and other home and real estate- related information and resources throughout the home and real estate life cycle, we have established relationships with key industry participants. These participants include real estate market leaders such as the National Association of REALTORS, or the NAR, the National Association of Home Builders, or the NAHB, the largest Multiple Listing Services, or MLSs, the NAHB Remodelors Council, the National Association of the Remodeling Industry, or NARI, real estate franchises, brokers, builders and agents. The NAR is a not for profit trade organization whose members include over 720,000 real estate brokers and agents across the U.S. The NAHB is the largest trade organization of new home builders in the U.S. MLSs operate proprietary networks that provide real estate professionals with listings of properties for sale and are regulated by a governing body of local brokers and/or agents. The NAHB Remodelers Council and the NARI, the remodeling industry's two leading professional organizations, together represent more than 100,000 contractors and home improvement specialists. In order to draw additional traffic to our family of web sites, we also have distribution agreements with the following Internet portal sites: America Online, Excite@Home and Go Network/Infoseek. These agreements typically provide that our content will be displayed on the real estate related sections of those sites along with links to our web sites. We generate revenues from several sources, including fees from agents, brokers, home builders, rental property owners and other advertisers. Our Market Opportunity Every participant in the home and real estate life cycle faces a unique set of challenges. Consumers are continually searching for a comprehensive, convenient and integrated source of information to assist them in every aspect of the real estate transaction. Real estate agents and brokers depend on attracting and retaining customers in order to generate increasing numbers of transactions and are looking for additional opportunities to market their services, become more productive and compete more effectively for transactions. Home building and real estate professionals also depend on attracting and retaining customers in order to sell new properties in a timely manner and continue to seek new ways to market their products and services as well as inform prospective home buyers of the availability of new properties. To make an informed decision, renters need access to comprehensive information about available rental units, specific neighborhoods and rental prices in a given geographic location. In addition, due to the high turnover rate in rental units, property managers and owners must regularly attract new tenants to minimize their vacancy rates and consequently continue to seek to market their available units in a cost-effective manner. Consumers require a number of ancillary services relating to activities such as home maintenance and repairs, refinancing, remodeling, landscaping and moving. Finally, service providers and retailers of home and real estate-related products or services need an effective mechanism or centralized location to reach consumers who are most interested in their offerings. Because of the size and fragmented nature of the real estate industry and its reliance on the exchange of information, the Internet offers a compelling means for consumers, real estate professionals, home builders, renters, property managers and owners and ancillary service providers to come together to improve the dissemination of information and enhance communications. Our Web Sites We operate the Homestore.com, REALTOR.com, HomeBuilder.com, SpringStreet.com, Remodel.com, and Homefair.com web sites. . Homestore.com serves as a gateway to our entire family of web sites. . REALTOR.com contains listings for over 1.35 million of the approximately 1.45 million homes that we estimate are listed nationally for sale as of November 30, 1999. Users can search our database of homes for sale and find detailed information on the available homes and their surrounding neighborhoods. They can also use REALTOR.com to find REALTORS to assist them in the buying or selling process. The site's primary areas, Getting Started, Buying, Selling, Offer/Closing, Moving and Owning, also provide users with information for each stage of the home and real estate life cycle. Our consumer products and services are available free of charge. REALTORS can purchase our advertising products and services, which provide detailed information about their listings, including photos, and can link their listings to their personal web site pages. . HomeBuilder.com contains listings of over 120,000 new homes and planned developments across the U.S. as of November 30, 1999. Users can use HomeBuilder.com, free of charge, to search for detailed information on a particular builder or geographic location as well as home attributes. Builders of all sizes can purchase our advertising products and services and display their new homes, models or floor plans. Potential buyers can also contact builders through the site via electronic mail or facsimile. . SpringStreet.com contains listings for over 45,000 rental properties in over 6,000 U.S. cities as of November 30, 1999. Users can use SpringStreet.com, free of charge, to search for detailed information on particular rental units, buildings and neighborhoods. SpringStreet.com also provides information for services targeted at renters, such as insurance, furniture rental and other local services. Property owners and managers can list their rental properties using basic text-based listings or, for additional fees, list their properties using enhanced listings containing additional features, such as color photos and maps. . Remodel.com provides home improvement and maintenance ideas and information for both consumers and remodeling professionals. Consumers can search for a home improvement professional, free of charge, as well as submit their job requirements to Remodel.com in order to receive estimates from selected professionals. . Homefair.com provides interactive tools, calculators and reports to assist users in moving and relocating. Users can access these features, free of charge, to conduct research on communities, schools and cost of living and determine costs and tasks associated with moving. Homefair.com also offers consumers numerous opportunities to access related service providers focused on making their move less stressful and more successful. In addition to fees we receive from real estate professionals for our advertising products and services, we also offer to other types of advertisers a variety of standard Internet advertising products and services on our family of web sites, such as banner advertisements and sponsorships. Our Strategy Our objective is to extend our position as the leading home and real estate destination on the Internet. The key elements of our strategy include: increasing the number of listings and enhancing the home-related content on our web sites; increasing the number of users on our web sites as well as the amount of time they spend on the sites; pursuing additional relationships with key real estate industry participants and home service providers; continuing to extend our brand name and brand recognition among consumers and home service professionals; and incorporating new Internet technologies into our web sites to provide enhanced functions and features. We Have a History Of Losses And May Not Achieve Profitability We have incurred losses from our operations since we were formed in 1993. In 1998, we incurred operating losses on a pro forma basis of $87.1 million and for the nine months ended September 30, 1999, we incurred operating losses on a pro forma basis of $96.6 million. On an actual basis, we incurred operating losses of $64.3 million for the nine months ended September 30, 1999. We also have an accumulated deficit of $125.7 million as of September 30, 1999. Therefore, we may not achieve or sustain profitability. THE OFFERING <TABLE> <C> <S> Common stock offered: Shares offered by us............................. 4,073,139 shares Shares offered by the selling stockholders....... 4,226,861 shares Total.......................................... 8,300,000 shares Total common stock to be outstanding after this offering......................................... 74,262,225 shares Over-allotment option............................. 1,245,000 shares Use of proceeds................................... For accelerated payment of a $37.5 million promissory note issued in connection with the Homefair acquisition, including accrued interest and for general corporate purposes, capital expenditures and working capital. See "Use of Proceeds." Nasdaq National Market symbol..................... HOMS </TABLE> The number of shares of our common stock to be outstanding after this offering is based on the number of shares outstanding at December 31, 1999. This number excludes: . 10,269,139 shares issuable upon the exercise of outstanding stock options as of December 31, 1999, at a weighted average per share exercise price of $12.60; and . 2,623,432 shares issuable upon the exercise of warrants outstanding as of December 31, 1999, at a weighted average per share exercise price of $17.39. Following this offering, the NAR will own approximately 5.4% of our common stock, venture capital funds and other entities affiliated with our board members will own approximately 28.6% of our common stock and our remaining officers and directors will own approximately 6.1% of our common stock. SUMMARY CONSOLIDATED FINANCIAL DATA (in thousands, except per share data) The following table presents consolidated statement of operations data of Homestore.com. The pro forma statement of operations data below gives effect to (1) our October 1999 acquisition of Homefair and (2) the pro forma basis of presentation described in "Selected Consolidated Financial Data" on page 24. See Note 2 of Notes to Homestore.com's Consolidated Financial Statements and Unaudited Pro Forma Condensed Combined Consolidated Financial Information. <TABLE> <CAPTION> Actual Pro Forma ------------------------------------------ ------------------------------ Year Ended Nine Months Ended December 31, September 30, Year Ended Nine Months Ended ---------------------- ------------------ December 31, September 30, 1996 1997 1998 1998 1999 1998 1999 ------ ------ ------ -------- --------- ------------ ----------------- <S> <C> <C> <C> <C> <C> <C> <C> Consolidated statement of operations data: Revenues............... $1,360 $ 42 $ -- $ -- $ 35,211 $ 23,123 $ 45,306 Gross profit........... 1,318 36 -- -- 22,204 12,990 29,090 Loss from operations... (231) (16) (3) (2) (64,266) (87,115) (96,615) Net loss............... $ (252) $ (17) $ (3) $ (2) $ (62,992) $ (93,205) $(100,025) Net loss applicable to common stockholders... $ (252) $ (17) $ (3) $ (2) $ (64,838) $(100,932) $(100,025) Net loss per share applicable to common stockholders: Basic and diluted..... $ (.07) $ -- $ -- $ -- $ (2.06) $ (2.33) $ (1.67) Weighted average shares--basic and diluted.............. 3,477 8,650 9,173 8,901 31,421 43,251 59,914 </TABLE> The following table presents consolidated balance sheet data of Homestore.com at September 30, 1999. The pro forma column below gives effect to our acquisition of Homefair. The pro forma as adjusted column gives effect to the sale of the shares of common stock that we are offering, at an assumed public offering price of $122 1/4 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses. See "Use of Proceeds." and "Capitalization." <TABLE> <CAPTION> As of September 30, 1999 ------------------------------ Pro Forma Actual Pro Forma As Adjusted -------- --------- ----------- <S> <C> <C> <C> Consolidated balance sheet data: Cash and cash equivalents....................... $144,304 $110,503 $540,168 Working capital ................................ 130,247 57,726 524,891 Total assets.................................... 240,330 291,483 721,148 Notes payable, long-term and current portion.... 3,130 40,667 3,167 Total stockholders' equity...................... 198,501 209,751 676,916 </TABLE> Recent Operating Results On January 13, 2000, we announced selected operating results for the fourth quarter and year ended December 31, 1999. The following pro forma statement of operations data gives effect to (1) our acquisition of The Homebuyer's Fair, Inc. and FAS-Hotline, Inc., or Homefair, and (2) the pro forma basis of presentation described in "Selected Consolidated Financial Data" on page 24. <TABLE> <CAPTION> Actual Pro Forma --------------------------------------- --------------------------------------------------------------- Three Months Three Months Ended Ended Three Months Year Ended -------------------------- Year Ended December 31, Ended December 31, September 30, December 31, December 31, --------------------- September 30, --------------------- 1999 1999 1999 1998 1999 1999 1998 1999 ------------- ------------ ------------ -------- -------- ------------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Revenues........ $ 18,625 $ 27,369 $ 62,580 $ 8,420 $ 28,061 $ 20,651 $ 23,123 $ 73,367 Net loss........ $ (34,226) $ (30,015) $(93,007) $(15,484)(a) $(16,231)(a) $(16,790)(a) $(44,853)(a) $(71,125)(a) Basic and diluted net loss per share.......... $ (.65) $ (.43) $ (2.26) $ (.32) $ (.23) $ (.25) $ (1.04) $ (1.14) Weighted average shares basic and diluted.... 52,903 69,986 41,142 48,762 70,068 66,313 43,251 62,474 </TABLE> - ------- (a) Excludes the effects of non-cash charges for: (i) stock-based charges, (ii) amortization of intangible assets and (iii) a litigation settlement in the third quarter of 1999. Recent Developments In October 1999, we acquired all of the outstanding capital stock of Homefair, the owners and operators of the Homefair.com web site, a web site designed to assist consumers in moving and relocating. In connection with this acquisition, we issued 250,000 shares of our common stock, with an estimated value of $11.2 million, a $37.5 million promissory note and $35.8 million in cash and other acquisition-related expenses. Our History We were incorporated in July 1993 as InfoTouch, Inc. InfoTouch's initial business plan was to develop kiosks, or booths with computer screens, to allow consumers to search for home listings. In December 1996, our RealSelect subsidiary was formed to operate the REALTOR.com web site. RealSelect was initially owned by the NAR and an entity called NetSelect LLC. NetSelect LLC was in turn owned by InfoTouch and another holding company, NetSelect, Inc. In February 1999, NetSelect, Inc. and NetSelect LLC were merged into InfoTouch and InfoTouch was renamed NetSelect, Inc. In August 1999, we changed our name to Homestore.com, Inc. Concurrently with our initial public offering on August 4, 1999, the NAR exchanged substantially all of its RealSelect shares for shares of our common stock. Currently, we own in excess of 99% of RealSelect's stock and the NAR owns less than 1%. Our current subsidiaries include: . RealSelect, Inc. which owns our REALTOR.com and Remodel.com web sites; . SpringStreet, Inc. which owns the SpringStreet.com web site; . National New Homes Co., Inc., which owns the HomeBuilder.com web site; and . Homebuyer's Fair, Inc. and FAS-Hotline, Inc. which collectively own the Homefair.com web site. The NAR has the right to appoint one member to our board of directors and two members to RealSelect's board of directors. The RealSelect board members appointed by the NAR must approve RealSelect's undertaking of a number of actions. Under a stockholders agreement with the NAR, if we propose to enter into a new real estate related business, we must first give RealSelect the opportunity to invest in that business. We pay royalties to the NAR on a quarterly basis based on revenues. In addition, the NAR must consent to transfers of stock by many of our existing stockholders and to any proposed sale of substantially all of our assets. This could have the effect of delaying or restricting a change of control. Our relationship with the NAR is described in more detail on pages 8-10 and 73-77. We are a Delaware corporation. Our principal executive offices are located at 225 West Hillcrest Drive, Suite 100, Thousand Oaks, California 91360. Our general telephone number is (805) 557-2300. Our world wide web addresses are "www.Homestore.com," "www.REALTOR.com," "www.HomeBuilder.com," "www.SpringStreet.com," "www.Remodel.com" and "www.Homefair.com." The information on our family of web sites is not incorporated into this prospectus. We face a number of risks related to our business including the potential termination of our agreements with the NAR and NAHB, the influence the NAR has over how we operate the REALTOR.com and SpringStreet.com web sites and our need to obtain real estate listings. You should read the information contained in the section entitled "Risk Factors" carefully. The NAR, the NAHB and the NARI make no endorsement or recommendation regarding any purchase of the shares of common stock being sold in this offering.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001085776_liberate_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001085776_liberate_prospectus_summary.txt
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+PROSPECTUS SUMMARY YOU SHOULD READ THIS SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION AND OUR FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. LIBERATE TECHNOLOGIES We are a leading provider of a comprehensive software platform for delivering Internet-enhanced content and applications to information appliances, such as television set-top boxes, game consoles, smart phones and personal digital assistants. Our software allows network operators, such as telecommunications companies, cable and satellite television operators and Internet service providers, or ISPs, and information appliance manufacturers to provide consumers access to Internet-based applications and services from anywhere at anytime. Network operators are investing billions of dollars to deliver high speed Internet access to their customers so that they can deliver new and enhanced voice, video and data services. As a result, the number of U.S. households with access to high speed networks is expected to grow significantly. At the same time, network operators seek to deliver these services to an increasing number of electronic devices being adopted by consumers. These "information appliances," a new category of low-cost devices used for everyday activities that are designed to be connected to the Internet, are becoming increasingly popular with consumers. In particular, network operators have identified the television as the most attractive device for the delivery of these new services because it has powerful sound and display capabilities and is so broadly owned. We provide network operators and information appliance manufacturers with a software platform that manages the delivery of Internet content and applications to a large number of consumers employing many different information appliances. Our platform includes server and client software and adheres to Internet standards. Our server software is designed to allow network operators to offer these services to millions of subscribers. Using our client software, information appliance manufacturers can enhance their products, even those with limited memory and computing resources, by adding Internet capability. Our open platform also creates a uniform environment for developers to enhance existing content and create new Internet applications and services. As of December 31, 1999, we have licensed our server and client software to over 30 network operators and information appliance manufacturers. Our network operator customers include America Online, Cable & Wireless, Comcast, Cox Communications, MediaOne, NTL, STAR TV, Shaw Communications and U S WEST. Our information appliance manufacturer customers include Acer, General Instrument, Hughes Network Systems, Pace Micro Technology and Philips Electronics. In addition, we have developed strategic alliances with leading technology vendors such as Cisco Systems, Inktomi, Lucent Technologies, Netscape, Oracle, Sun Microsystems and TiVo. Our principal executive offices are located at 2 Circle Star Way, San Carlos, California 94070 and our telephone number is (650) 701-4000. Our World Wide Web address is www.liberate.com. Information on our web site does not constitute part of this prospectus. RECENT DEVELOPMENT In January 2000, we entered into a Merger Agreement and Plan of Reorganization to acquire SourceSuite for approximately 1,772,000 shares of our common stock, or approximately $190.5 million based on a common stock price of $107.53. The acquisition will be accounted for as a purchase. We intend to hire various individuals who provide services to SourceSuite. Also in connection with the acquisition, we expect to expense up to $4.0 million of acquired in-process research and development, which in the opinion of our management, has not reached technological feasibility and has no alternative future use. We also expect to record goodwill and other intangibles of up to $200.0 million to be amortized over an estimated economic life of three years. THE OFFERING <TABLE> <CAPTION> <S> <C> Common stock offered by Liberate..................... 2,890,000 shares Common stock offered by the selling stockholders..... 5,610,000 shares Common stock to be outstanding after this offering...................................... 86,493,312 shares Use of proceeds...................................... For general corporate purposes, including the expansion of our research and development and services capabilities and other working capital requirements. See "Use of Proceeds." Nasdaq National Market symbol........................ LBRT </TABLE> The table above is based on shares outstanding as of December 31, 1999 as adjusted to give effect to our two-for-one stock split effected on January 14, 2000. This table excludes: - 14,404,351 shares of common stock issuable upon the exercise of stock options outstanding under our stock option plans, and 2,120,266 additional shares of common stock available for issuance under these stock option plans; - 1,666,666 shares of common stock available for issuance under our 1999 employee stock purchase plan; - 1,536,662 shares of common stock issuable upon the exercise of warrants that have been earned by network operators; - Warrants to purchase up to an aggregate of 3,063,330 shares of our common stock that may be issued in the future if particular network operator customers satisfy commercial milestones; and - 1,772,000 shares of common stock to be issued in connection with the closing of our pending acquisition of SourceSuite. ------------------ Except as otherwise indicated, information in this prospectus is based on the following assumptions: - A two-for-one stock split of all outstanding shares of our common stock effected on January 14, 2000; and - No exercise of the underwriters' option to acquire additional shares to cover over-allotments of shares. ------------------ Our logo and certain titles and logos of our products mentioned in this prospectus are our service marks or trademarks. Each trademark, trade name or service mark of any other company appearing in this prospectus belongs to its holder. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED NOVEMBER 30, YEARS ENDED MAY 31, (UNAUDITED) ------------------------------------------ ------------------------------- 1997 1998 1999 1998 1999 -------- -------- -------------------- -------- -------------------- ACTUAL PRO FORMA ACTUAL PRO FORMA -------- --------- -------- --------- <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues........... $ 275 $ 10,272 $ 17,313 $ 17,313 $ 7,709 $ 11,362 $ 11,362 Gross margin............. 275 4,263 6,787 6,787 3,522 (439) (439) Total operating expenses............... 30,549 100,679 40,485 109,376 18,219 26,880 61,115 Loss from operations..... (30,274) (96,416) (33,698) (102,589) (14,697) (27,319) (61,554) Net loss................. (18,989) (94,391) (33,053) (101,944) (13,990) (25,030) (59,265) Pro forma basic net loss per share.............. $ (0.58) $ (1.75) $ (0.25) $ (0.32) $ (0.75) Shares used in computing pro forma basic net loss per share......... 56,586 58,358 55,286 77,776 79,548 </TABLE> <TABLE> <CAPTION> NOVEMBER 30, 1999 (UNAUDITED) ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............................... $ 40,947 $ 40,947 $255,349 Working capital......................................... 85,859 81,970 296,372 Total assets............................................ 154,433 346,932 561,334 Deferred revenues....................................... 34,350 34,350 34,350 Total stockholders' equity.............................. 105,585 294,130 508,532 </TABLE> See Note 2 of Notes to Consolidated Financial Statements for an explanation of the determination of the number of shares used in computing per share data. The pro forma financial information reflects the acquisition of SourceSuite and is derived from, and should be read in conjunction with, the unaudited pro forma combined condensed financial statements of Liberate and SourceSuite and the corresponding notes, which are included elsewhere in this prospectus. In preparing the pro forma combined statement of operations data, the SourceSuite results of operations have been included as if the acquisition had occurred at the beginning of the earliest period presented. The pro forma combined balance sheet data has been prepared as if the acquisition had occurred as of November 30, 1999. The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have actually occurred if the acquisition had been consummated as of the beginning of the earliest period presented or at November 30, 1999, nor is it necessarily indicative of future operating results or our financial position following the acquisition of SourceSuite. The pro forma as adjusted consolidated balance sheet data gives effect to the net proceeds from the sale of the 2,890,000 shares of common stock offered in this offering by us, after deducting the underwriting discounts and commissions and estimated offering expenses.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001085866_dsl-net_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001085866_dsl-net_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights certain important information regarding our business and this offering. You should read this entire prospectus, including the "Risk Factors" and the financial statements and all related notes, before deciding to purchase our common stock. All share information reflects all stock splits effected prior to the date of this prospectus. Except as otherwise indicated, the information in this prospectus assumes the underwriters will not exercise their over-allotment option. DSL.net Our Business We provide high-speed data communications and Internet access services using digital subscriber line, or DSL, technology to small and medium sized businesses. We primarily target select second and third tier cities, generally with populations of less than 900,000. Our networks enable data transport over existing copper telephone lines at speeds of up to 1.5 megabits per second. Our services, marketed under the NETgain brand name, offer customers high-speed digital connections at prices that are attractive compared to the cost and performance of alternative data communications services. We offer our customers a single point of contact for a complete business solution that includes all of the necessary equipment and services for high- speed data communications. As of February 1, 2000, we provided service or had installed equipment in more than 140 cities. We intend to continue our expansion into a total of more than 300 cities by the end of 2000. Our Strategy Our objective is to become the leading provider of DSL-based services to small and medium sized businesses in second and third tier cities throughout the United States. Several DSL service providers have taken advantage of the opportunity created by the rapidly growing data communications industry by providing DSL-based services in large metropolitan areas. However, second and third tier cities remain a significant underserved market. Key elements of our strategy are to: . be the first DSL-based service provider in select second and third tier cities throughout the United States; . utilize our rapid deployment model and leverage our centralized network management to implement our rollout plan quickly and cost effectively; . develop direct relationships with customers in order to better understand and serve their needs; . establish relationships in each local market with select local and regional integrators of computer networks and systems and consultants who can help market our services and provide us with customer referrals; . leverage our systems and network design to capitalize on the cost efficiencies of DSL technology; and . develop relationships with companies that provide complementary products and services or that can assist us in attracting our target customers. Recent Developments As of February 1, 2000, we provided service or had installed equipment in more than 140 cities. On December 1, 1999, we acquired Tycho Networks, Inc., which provides Internet access, web hosting and related services throughout central coastal California. The total purchase price approximated $3.3 million, excluding transaction costs. Our results of operations include the results of Tycho Networks from December 1, 1999. Our History We were incorporated in Delaware on March 3, 1998. Our principal executive offices are located at 545 Long Wharf Drive, New Haven, Connecticut 06511, and our telephone number is (203) 772-1000. We maintain a corporate website at www.dsl.net. The contents of our website are not part of this prospectus. The Offering <TABLE> <C> <S> Common stock offered................ 5,000,000 shares Common stock to be outstanding after the offering....................... 63,382,196 shares Use of proceeds..................... To continue building our network and for working capital and other general corporate purposes. We may also use a portion of the proceeds to acquire complementary businesses. Nasdaq National Market symbol....... DSLN </TABLE> The shares of common stock to be outstanding after the offering exclude, as of December 31, 1999: . 12,364,200 shares of common stock reserved for issuance under our stock option plan, of which 5,874,302 shares with a weighted average exercise price of $2.32 per share were subject to outstanding options; . 300,000 shares of common stock reserved for issuance under our employee stock purchase plan; and . 194,556 shares of common stock issuable upon exercise of outstanding warrants with a weighted average exercise price of $0.68 per share. Summary Financial Data You should read the following summary financial data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements of DSL.net and Tycho Networks, and the related notes, and the proforma condensed combined financial information and related notes, which are included elsewhere in this prospectus. We were incorporated on March 3, 1998 and commenced operations on March 28, 1998. The pro forma statement of operations data below gives effect to our acquisition of Tycho Networks, Inc. as if the acquisition had occurred at the beginning of the period presented. The as adjusted balance sheet data below gives effect to the sale of 5,000,000 shares of common stock offered by us, after deducting estimated underwriting discounts and commissions and estimated offering expenses. See "Use of Proceeds." <TABLE> <CAPTION> Actual Pro forma ----------------------------- ------------ Period from Inception (March 3, 1998) through Year Ended Year Ended December 31, December 31, December 31, 1998 1999 1999 --------------- ------------- ------------ <S> <C> <C> <C> Statement of Operations Data: Revenue.......................... $ 31,533 $ 1,312,546 $ 2,906,271 Operating loss................... (2,785,026) (23,871,392) (27,007,828) Net loss......................... (2,789,637) (21,988,313) (25,328,578) Net loss per common share........ $ (0.55) $ (2.05) $ (2.26) Other Data: EBITDA........................... $ (356,010) $ (17,917,617) Capital expenditures............. 290,082 33,811,121 Cash Flow Data: Used in operating activities..... $ (153,505) $ (6,342,720) Used in investing activities..... (290,082) (48,660,812) Provided by financing activities...................... 483,066 121,142,314 </TABLE> <TABLE> <CAPTION> December 31, 1999 ------------------------- Actual As Adjusted ------------ ------------ <S> <C> <C> Balance Sheet Data: Cash, cash equivalents and marketable securities..... $ 79,452,444 $221,849,319 Total assets......................................... 117,631,772 260,028,647 Long-term obligations (including current portion).... 3,055,625 3,055,625 Total stockholders' equity........................... 100,732,886 243,129,761 </TABLE> EBITDA, shown above under "Other Data," consists of net loss excluding net interest, taxes, depreciation of capital assets and noncash stock compensation expense. Other companies, however, may calculate it differently from us. We have provided EBITDA because it is a measure of financial performance commonly used for comparing companies in the telecommunications industry in terms of operating performance, leverage, and ability to incur and service debt. EBITDA is not a measure determined under generally accepted accounting principles. EBITDA should not be considered in isolation from, and you should not construe it as a substitute for: . operating loss as an indicator of our operating performance, . cash flows from operating activities as a measure of liquidity, . other consolidated statement of operations or cash flows data presented in accordance with generally accepted accounting principles, or . a measure of profitability or liquidity.
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering and our Consolidated Financial Statements and Notes to Consolidated Financial Statements appearing elsewhere in this prospectus. drugstore.com is a leading online drugstore: a retail store and information site for health, beauty, wellness, personal care and pharmacy products. As of January 2, 2000 we had sold our products to approximately 695,000 customers. We designed our store to provide a convenient, private and informative shopping experience that encourages consumers to purchase products essential to healthy, everyday living. We believe that our online store delivers a superior customer experience, making buying What Every Body Needs(TM) less of a chore. International Data Corporation estimates that worldwide business-to-consumer sales over the Internet will increase from approximately $11 billion in 1998 to approximately $93 billion by 2002. The Internet has also become an important personal tool for accessing health and medical information. According to a recent Forrester Research report, 32% of online consumers shop for healthcare products online. We believe there is a significant market opportunity for an online store that can offer consumers an enhanced shopping experience for health, beauty, wellness, personal care and pharmacy products. We seek to attract and retain consumers by emphasizing the following key attributes: . Convenience. We feature 24 hour a day access to our user-friendly Web store, direct home or office delivery, a personalized shopping list and confidential access to a personal medication profile. . Selection. We believe we offer a significantly greater number of products than are available in a typical traditional chain drugstore. . Information. We have assembled a broad array of product information to assist customers in making informed buying decisions. We offer full product packaging information, extensive drug information, customer reviews of products, and a Solutions area which includes buying guides, reference information, interactive shopping advisors and articles on beauty trends and products. . Communication. We can communicate with customers on a regular basis through the convenience of e-mail. We also offer our popular "Ask Your Pharmacist" and "Ask Your Beauty Expert" features. . Privacy. Consumers can shop in the privacy of their own homes or offices and can obtain answers to questions that they might otherwise be uncomfortable asking in public. . Pharmacy. We employ licensed pharmacists and are able to ship prescription products to all 50 U.S. states and we offer customers the opportunity to order refills of their existing Rite Aid prescriptions on our Web site for pick-up at conveniently located Rite Aid stores nationwide. Our objective is to become one of the world's leading retailers of health, beauty, wellness, personal care and pharmacy products. Key elements of our strategy include: strengthening the drugstore.com brand, continuously improving our Web store and service, taking advantage of repeat purchasing patterns, developing technologies to enhance our offerings and capitalize on the benefits of the Internet, improving the efficiency of our distribution activities and developing strategic relationships. In addition, we will also continue to make significant investments in technology and distribution. Consistent with our strategy, in June 1999 we entered into strategic relationships with Rite Aid Corporation and General Nutrition Companies, Inc. (GNC). Benefits of our Rite Aid relationship include additional revenue and traffic generated by Rite Aid customers who visit our Web site, the pharmacy benefit coverage provided by the insurance companies and pharmacy benefit management companies (PBMs) with which Rite Aid has a relationship, including PCS Health Systems, Inc. (PCS), the co-promotion and co-branding activities that we have undertaken and our ability to offer customers the opportunity to order refills of their existing Rite Aid prescriptions on our Web site for pick up at Rite Aid stores nationwide or delivery to the customer's home or office. The benefits of our GNC relationship include the opportunity to be the exclusive online provider of GNC-branded products and each party's co-promotion of products in traditional and online marketing efforts. We face many risks and challenges in our business. Some consumers may prefer to shop at traditional retail stores, especially consumers who do not have easy access to the Internet or who need products immediately. As part of our relationship with Rite Aid, we have agreed not to operate physical stores. An investment in our common stock involves risks and uncertainties, including the fact that we are an early stage company in a new market and that we expect continuing losses for the foreseeable future. See "Risk Factors" below for further information. Recent Developments Operating Results for the Fourth Quarter of Fiscal 1999. For the quarter ended January 2, 2000, our net sales were $18.5 million, a $6.3 million, or 51.6%, increase over the immediately preceding quarter, reflecting an increase in sales of both pharmaceutical and non-pharmaceutical products. These increases were due to an increase in new customers as well as an increase in repeat orders. Total costs and expenses for the quarter ended January 2, 2000 were approximately $64.0 million, a $7.9 million, or 14.1%, increase over the immediately preceding quarter. The increase in costs and expenses primarily reflects increases in fulfillment-related expenses due to the increase in order volume, as well as increases in other marketing and sales expenses relating to our ongoing customer acquisition and corporate branding campaigns. Our net loss for the quarter ended January 2, 2000 was $43.5 million, or $1.02 per share, compared to $42.0 million, or $1.04 per share (on a pro forma basis to give effect to the conversion of all of our preferred stock into common stock at the time of our initial public offering as if such conversion occurred at the beginning of the period), for the immediately preceding quarter. Strategic Agreement with, and Investment by, Amazon.com. On January 24, 2000, we entered into an agreement with Amazon.com to integrate various shopping features of our Web sites and to create a persistent drugstore.com shopping presence as the exclusive health and beauty product section on Amazon.com's Web site. This integration and shopping presence will enable Amazon.com's significant customer base to access our Web site from the Amazon.com Web site for purchases of health, beauty, wellness, personal care and pharmaceutical products. The benefits of this agreement are expected to include an increase in traffic and revenue generated by Amazon.com customers who visit our Web site as well as various advertising and promotional initiatives the parties have agreed to undertake. The parties will also work to implement additional features on Amazon.com's Web site designed to improve customer shopping experiences, including integrated search and browse capabilities and a shared shopping basket. We agreed to pay Amazon.com a total of $105 million over the three-year term of the agreement, of which $30 million was paid at the time the agreement was executed. Concurrently with this agreement, we sold Amazon.com 1,066,667 shares of our common stock in a private placement transaction for $28.125 per share, or approximately $30 million in the aggregate. All of the proceeds to us from this private placement transaction were paid to Amazon.com to satisfy our initial payment obligations under the commercial agreement, of which $27 million reflects a prepayment of amounts due for the first year following the launch of the drugstore.com health and beauty product section on Amazon.com's Web site. Acquisition of Beauty.com. On February 2, 2000, we acquired Beauty.com, Inc., a leading online retailer of prestige beauty products, and entered into an agreement to retain the employment of its founder, Roger Barnett, for a total of 1,266,289 shares of drugstore.com common stock (approximately $40.4 million based on the price of our common stock on January 12, 2000, the date the transaction was announced). Beauty.com offers prestige brands, including specialty lines exclusive to the site, and has ongoing relationships with a team of industry experts. Roger Barnett, the founder of Beauty.com, will continue as president of Beauty.com following the acquisition. We believe that the acquisition of Beauty.com will accelerate the expansion of our product offerings in the prestige beauty market and enhance our ability to enter into relationships with prestige beauty product vendors. We will account for the acquisition as a purchase. Distribution Center. In January 2000, we began limited operations at our own 290,000 square foot distribution center in New Jersey, and we are in the process of transitioning our distribution capabilities for pharmaceutical and non-pharmaceutical products from third party distributors to our center. We continue to rely primarily on third party distributors to fill customer orders, although we expect that the transition to our own distribution facility will be completed by the end of the second quarter of 2000. We believe that operating our own distribution center will allow us to achieve greater control over the distribution process and help us to ensure adequate supplies of products to our customers. In connection with opening our distribution center, we also opened our own pharmacy as part of our arrangement with Rite Aid. Operating our own distribution facility will require us to increase inventory levels substantially and establish a significant number of direct relationships with manufacturers in the near term. THE OFFERING <TABLE> <C> <S> Common stock offered by drugstore.com...... 6,000,000 shares Common stock offered by the selling stockholder............................... 20,000 shares Common stock to be outstanding after the offering.................................. 52,022,560 shares Use of proceeds............................ We intend to use the proceeds for general corporate purposes, including working capital to fund anticipated operating losses and purchases of inventory for our new distribution center, and capital expenditures. We will not receive any proceeds from the sale of the shares of common stock by the selling stockholder. See "Use of Proceeds." Nasdaq National Market symbol.............. DSCM </TABLE> The number of shares of our common stock to be outstanding immediately after the offering is based on the number of shares outstanding at February 3, 2000, which includes (1) 1,066,667 shares of our common stock issued on January 24, 2000 to Amazon.com in a private placement transaction and (2) 1,266,289 shares of our common stock issued on February 2, 2000 in connection with our acquisition of Beauty.com. This number does not include approximately 11,640,000 shares of our common stock subject to options outstanding or reserved for issuance under our stock option and stock purchase plans at February 3, 2000. Except as otherwise noted, all information in this prospectus assumes no exercise of the underwriters' overallotment options. DRUGSTORE.COM(TM), the drugstore.com logo, THE BOUTIQUE(TM), WHAT EVERY BODY NEEDS(TM), WHERE EVERY BODY SHOPS(TM), WHAT YOUR BODY NEEDS(TM), HEALTH . BEAUTY . WELLNESS(TM), WELLNESS CONNECTIONS(TM), LET THE DRUGSTORE COME TO YOU(TM), QUICK LISTS(TM), TEST DRIVE(TM), ONE VERY HEALTHY ATTITUDE(TM) and EPUNCHCARD(TM) are our trademarks. This prospectus also includes trade dress, trade names, trademarks and service marks of other companies. Use or display by drugstore.com of other parties' trademarks, trade dress or products is not intended to and does not imply a relationship with, or endorsement or sponsorship of drugstore.com by, the trademark or trade dress owners. ---------------- We were incorporated in Delaware in April 1998. Our principal executive offices are located at 13920 Southeast Eastgate Way, Suite 300, Bellevue, Washington 98005, and our telephone number is (425) 372-3200. Our World Wide Web site is www.drugstore.com. The information contained on our Web site is not part of this prospectus. SUMMARY CONSOLIDATED FINANCIAL DATA (in thousands, except share and per share data) The balance sheet data displayed in the "Pro Forma" column is as of January 2, 2000, with adjustments to give effect to (1) our sale of 1,066,667 shares of common stock to Amazon.com on January 24, 2000 in a private placement transaction and the application of the net proceeds therefrom and (2) our acquisition of Beauty.com on February 2, 2000. The data displayed in the "Pro Forma As Adjusted" column gives further effect to the receipt of the estimated proceeds from our sale of 6,000,000 shares of our common stock at an assumed public offering price of $19 1/8 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. See "Use of Proceeds" for a description of how we intend to use the net proceeds of this offering. <TABLE> <CAPTION> Period from April 2, 1998 (Inception) through Year Ended December 31, January 2, 1998 2000 ------------------- ---------- (in thousands, except share and per share data) <S> <C> <C> Consolidated Statements of Operations Data: Net sales...................................... $ -- $ 34,848 Total cost and expenses........................ 8,201 155,591 Operating loss................................. (8,201) (120,743) Net loss....................................... (8,027) (115,831) Basic and diluted net loss per share........... $(14.70) $ (6.13) Weighted average shares used to compute basic and diluted net loss per share................ 546,149 18,880,969 Pro forma basic and diluted net loss per share (unaudited)(1)................................ $ (3.73) Weighted average shares outstanding used to compute pro forma basic and diluted net loss per share (unaudited)(1)...................... 31,045,835 </TABLE> <TABLE> <CAPTION> As of January 2, 2000 ------------------------------ Pro Forma Actual Pro Forma As Adjusted -------- --------- ----------- (in thousands) <S> <C> <C> <C> Consolidated Balance Sheet Data: Cash, cash equivalents and marketable securities.................................... $132,754 $132,735 $241,048 Working capital................................ 106,960 115,844 224,157 Total assets................................... 395,708 460,549 568,862 Capital lease obligations, less current portion....................................... 2,687 2,687 2,687 Total stockholders' equity..................... 350,749 403,954 512,267 </TABLE> - -------- (1) See Note 1 of Notes to Consolidated Financial Statements for an explanation of the method used to compute pro forma basic and diluted net loss per share.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001086620_iown_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001086620_iown_prospectus_summary.txt
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+SUMMARY You should read the following summary together with the more detailed information, financial statements and notes to financial statements appearing elsewhere in this prospectus. Our Business We are an Internet enabler of the home mortgage industry. Our technology tools enable a streamlined mortgage origination process for businesses and consumers. Our proprietary Internet technology applications enable retail mortgage originators to access a broad range of wholesale and correspondent lenders. We are creating a business-to-business mortgage industry hub that we believe will allow retail mortgage originators to access a wide range of capital sources effectively and to deliver a high-quality tailored customer service to their end consumers. We believe that our solution allows wholesale lenders to fund or purchase loans more efficiently, which can improve both their profitability and service delivery, and empowers homeowners with better ways to identify, purchase, finance and manage their most significant asset, their home. We deliver our products and services through multiple channels, including our website, www.iown.com, and our relationships with mortgage brokers, real estate agents, home builders and relocation companies. Our multi-channel distribution approach allows us to: . Internet-enable a broad cross-section of mortgage brokers and other real estate professionals; and . reach a broad group of homeowners and prospective homeowners. We believe that we are the first business-to-business enabler of the mortgage industry, and the only company with an integrated set of business-to- business-to-consumer channels for distribution of home mortgages and related homeownership services. As of March 31, 2000, we accessed the computer desktops of over 12,000 mortgage brokers through our Genesis 2000 software and distribution partners, and we provided mortgage services for 15 national homebuilders with over $2.0 billion in annual new home sales. In addition, we have established consumer-direct distribution arrangements with online leaders such as AOL's Netscape/Netcenter and Digital City, AT&T and NBCi/Snap!. In 1999, we originated approximately $1.5 billion in mortgages. Our Market Opportunity Mortgage originations in the United States averaged more than $1.0 trillion annually from 1995 to 1999, and are expected to total $1.1 trillion in 2000. The total dollar amount of mortgages used to purchase homes grew at an average annual rate of 19% from 1995 to 1998, according to the Mortgage Bankers Association of America. Forrester Research estimates that the online purchase mortgage market will grow to over $91.2 billion in 2003, representing approximately 10% of total U.S. originations, from approximately $18.7 billion in 1999, or 1.5% of total U.S. mortgage originations. In addition, since approximately 67% of households in the United States own homes, there is a substantial market for ancillary services, such as title insurance, appraisals, insurance and home improvement. The home buying process is complex and difficult; it often results in a confusing and frustrating home buying experience for consumers and it is cumbersome and inefficient for mortgage brokers, Realtors and other real estate professionals. Through our Internet-enabled services, we believe we offer businesses and consumers a more satisfying and cost-efficient process than is currently available. Through our Genesis 2000 ePASS service, mortgage brokers are able to submit loans for automated underwriting, order title and other settlement services and interact with lenders to obtain electronic pricing, rate locks and document delivery. Through our eWholesale service, mortgage brokers can access iOwn lender partners for electronic pricing and loan fulfillment. We simplify shopping for a mortgage by making it easier to compare loans from multiple lenders. We provide businesses and consumers with rich content and easy-to-use tools at each step in the home buying process. We simplify mortgage applications by providing both mortgage brokers and consumers with online application and tracking tools. Our Strategy Our objective is to Internet-enable the mortgage industry. We are building a business-to-business mortgage industry hub to allow retail mortgage originators to access a broader range of capital sources, at lower cost, more efficiently, and to deliver higher quality services tailored to their customers' needs. Key elements of our strategy include: . Expanding participation in our business-to-business mortgage hub for wholesale and correspondent lending; . Expanding into new business-to-business-to-consumer channels; . Developing iOwn as a leading brand associated with the complete homeownership experience through advertising, co-branded partnerships and business-to-business distribution relationships; . Capturing synergies between our channels, such as referring customers to mortgage brokers and Realtors who may originate loans through our eWholesale business; . Expanding revenues and profitability on each transaction by serving as a mortgage bank and by offering a wide range of loan products, such as sub-prime loans and home equity credit lines, and ancillary services, such as appraisal, title, escrow, insurance, home warranties and home improvement services; and . Maintaining and leveraging our technology leadership by continuing to invest in our proprietary systems and processes to Internet-enable the mortgage industry. Our Corporate Information We were incorporated in California in July 1996, and reincorporated in Delaware in September 1999. Our executive office is located at 333 Bryant Street, Lower Level, San Francisco, California 94107. Our telephone number at that location is (415) 618-3600 and our Internet address is www.iown.com. Information contained on our website does not constitute part of this prospectus. This Offering <TABLE> <S> <C> Common stock offered by iOwn Holdings, Inc. ..................................... 6,000,000 shares Common stock to be outstanding after this offering.................................. 29,552,475 shares Use of proceeds............................. We intend to use the net proceeds for investment in marketing and promotion, strategic acquisitions, debt repayment up to $15.0 million, technology development, and general corporate purposes. Proposed Nasdaq National Market symbol...... IOWN </TABLE> Shares of common stock to be outstanding after this offering is based on shares outstanding as of April 30, 2000. It does not include: . 3,913,094 shares issuable upon exercise of outstanding options; . 200,392 shares available for grant under our 1997 Stock Option Plan; . 1,533,333 shares available for grant or issuance under our 2000 Stock Option Plan and 500,000 shares available for purchase under our 2000 Employee Stock Purchase Plan; and . 909,715 shares issuable upon exercise of outstanding warrants. Summary Consolidated Financial and Other Data The following table presents our consolidated statement of operations data. The table also presents unaudited pro forma statement of operations data for the years ended December 31, 1998 and 1999 as if the acquisitions of Genesis 2000, Inc. and HomeBuilders Financial Network, Inc. had occurred on January 1, 1998, after giving effect to purchase accounting adjustments. You should refer to our unaudited pro forma combined financial information contained elsewhere in this prospectus. <TABLE> <CAPTION> Pro Forma (unaudited) Inception -------------------- (July 11, 1996) Years Ended through Years Ended December 31, December 31, December 31, --------------------------- -------------------- 1996 1997 1998 1999 1998 1999 --------------- ------- -------- -------- -------- ---------- (in thousands, except per share data and number of loans) <S> <C> <C> <C> <C> <C> <C> Consolidated Statement of Operations Data: Revenues: Transactions............ $ -- $ 51 $ 1,224 $ 4,065 $ 5,505 $ 9,017 Other Internet and e-commerce............ 25 18 89 469 89 469 Software licenses and maintenance........... -- -- -- 33 6,167 5,286 ------ ------- -------- -------- -------- ---------- Total revenues......... $ 25 $ 69 $ 1,313 $ 4,567 $ 11,761 $ 14,772 Operating expenses....... (74) (2,414) (17,417) (49,216) (47,836) (78,047) Loss from operations..... (49) (2,345) (16,104) (44,649) (36,075) (63,275) Net loss................. (48) (2,363) (16,015) (45,031) (37,100) (63,812) Net loss attributable to common stockholders.... (48) (2,433) (17,341) (49,834) (37,100) (63,812) Net loss per share attributable to common stockholders, basic and diluted................ $(0.09) $ (1.74) $ (11.66) $ (27.08) $ (3.15) $ (3.33) Shares used in computing net loss attributable to common stockholders, basic and diluted...... 547 1,402 1,487 1,840 11,791 19,135 Other Data (unaudited): Loans closed (dollar volume)................ $ -- $ 8,606 $192,389 $511,450 $955,063 $1,489,891 Loans closed (loan volume)................ -- 38 1,028 3,200 6,415 9,635 </TABLE> The following table presents our consolidated balance sheet data as of December 31, 1999. The pro forma information gives effect to the conversion of all outstanding shares of preferred stock into common stock and the acquisition of HomeBuilders Financial Network, including the issuance of 2,666,666 shares of common stock. The pro forma as adjusted data gives effect to the sale of 6,000,000 shares of common stock that we are offering under this prospectus at an assumed initial offering price of $10.00 per share, after deducting the underwriting discounts and commissions and estimated offering expenses, and application of the net proceeds. The December 31, 1999 pro forma and pro forma as adjusted balance sheets are unaudited. You should refer to our unaudited pro forma combined financial information contained elsewhere in this prospectus. <TABLE> <CAPTION> December 31, 1999 ------------------------------ Pro Pro Forma Actual Forma as Adjusted -------- -------- ----------- (in thousands) <S> <C> <C> <C> Consolidated Balance Sheet Data: Cash and cash equivalents....................... $ 27,329 $ 24,629 $ 70,679 Other current assets............................ 4,484 4,925 4,925 Property and equipment, net..................... 6,080 6,125 6,125 Total assets.................................... 63,245 104,439 149,622 Current liabilities............................. 19,234 28,296 20,546 Long-term obligations, less current portion..... 8,183 13,183 13,183 Redeemable convertible preferred stock ......... 94,123 -- -- Total stockholders' equity (deficit)............ (58,295) 62,960 115,893 </TABLE> Except as otherwise noted, all information in this prospectus: . reflects a 1-for-3 reverse stock split effective January 11, 2000; . assumes that the holders of the convertible debt issued in connection with the Genesis 2000 acquisition is repaid solely in cash; . assumes the closing of the acquisition of HomeBuilders Financial Network; . reflects the conversion of all outstanding shares of preferred stock into shares of common stock and conversion of warrants to purchase preferred stock into warrants to purchase common stock upon completion of this offering; . assumes no exercise of outstanding warrants; and . assumes no exercise of the underwriters' over-allotment option.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001086637_u-s_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001086637_u-s_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information and financial statements and notes appearing elsewhere in this prospectus. Generally, this prospectus does not take into account the possible sale of additional shares of common stock to the underwriters under the over-allotment option granted to the underwriters. U.S. Interactive, Inc. Our Business We are a leading Internet professional services firm focused on providing end-to-end (e2e) solutions to Global 2000 organizations. e2e SolutionsSM utilize Internet, wireless and broadband technologies to enable organizations to fully leverage their information resources to effectively communicate, share knowledge and conduct business transactions with key constituencies such as employees, customers, suppliers and partners. When developing our solutions, we draw upon our expertise in Internet strategy consulting, application development, digital brand creation, security and enterprise application integration. We deliver our services through a development platform that we created and call e-Roadmap(R). e-Roadmap is a group of service offerings that can be customized to meet the needs of each client. These services are delivered through our IVL MethodologySM, a process comprised of three phases. These phases include: o an "Innovation" phase, during which we define the overall vision and scope for a project o a "Validation" phase, during which we create and test a prototype that addresses the client's objective o a "Launch" phase, during which we refine, integrate and deploy the final solution To facilitate our implementation process, we employ an extranet template, which we refer to as CAPTURESM for ongoing client communication on individual projects. Extranets are linked computer networks designed for use by a company and third parties that the company designates. CAPTURE serves as a communications center for a client project that enables our clients to monitor and comment on a project's direction and progress on a real-time basis. To provide a comprehensive, integrated solution for our clients, we have created a strategic alliance network with over 25 leading providers of e-business applications, infrastructures and promotions. Some of these alliances include Akamai, BroadVision, IBM, Intel, Microsoft and Vignette. We have performed over 500 client projects since we commenced operations in May 1994. For the 12 month period ending December 31, 1999, we worked on approximately 200 client projects for companies such as AIG, adidas, Citigroup, Commerce One, Sprint, Thomson Consumer Electronics, Toyota and Universal Music Group. Our Market Opportunity The emergence and adoption of the Internet are changing the way consumers and organizations communicate, share information and conduct business. Businesses are attempting to utilize innovative Internet strategies to develop a competitive advantage to: o attract and retain customers o lower sales costs o improve operational efficiencies o strengthen supplier relationships o improve communications However, many businesses lack the in-house expertise required to develop and deploy these solutions. Instead, many of these businesses are seeking third-party service providers that can deliver integrated Internet strategy consulting, marketing and technology expertise to develop and deploy Internet business solutions. For instance, International Data Corp. (IDC) estimates that the market for Internet professional services will grow from $7.8 billion in 1998 to $78.6 billion in 2003. Our Strategy Our strategy is to strengthen our position as a provider of Internet-based business solutions. Key elements of this strategy include: o developing technology frameworks for repeatable e-business solutions o continuing vertical market penetration to take advantage of Business to Business (B2B) e-commerce opportunities o strengthening our relationships with technology companies such as Akamai, BroadVision, IBM, Intel, Microsoft and Vignette o increasing the size and scope of our business opportunities with our clients o enhancing our knowledge management and knowledge distribution capabilities o hiring and retaining skilled professionals in the areas of strategic business consulting, online marketing and Internet technology o expanding geographically into other metropolitan markets, both domestically and internationally Recent Developments On March 8, 2000, we acquired by merger (the Merger) Soft Plus, Inc., a California corporation with headquarters in Cupertino, California, which provides electronic customer relationship management (e-CRM) solutions, primarily to wireless communications providers and to other companies in the emerging communications industry. We paid to the Soft Plus shareholders: (i) 3,391,106 unregistered shares of our common stock, (ii) $20 million in cash, and (iii) an unsecured $80 million note due to the former shareholders of Soft Plus to be paid upon the earlier of one year or the receipt by us of not less than $80 million from the net proceeds of a public offering of our capital stock. In addition, we assumed the stock options which were outstanding under the Soft Plus stock option plans, which became options to purchase a total of 1,408,866 shares of our common stock. The Offering <TABLE> <S> <C> Common stock offered by U.S. Interactive ................. 2,274,567 shares Common stock offered by the selling stockholders ......... 225,433 shares Common stock outstanding after this offering including the shares issued in connection with the Merger ............ 25,310,046 shares Use of proceeds .......................................... Repayment of debt under credit facilities with a commercial bank, opening of new offices, capital expenditures, funding of potential acquisitions and other general corporate purposes. In addition, we may repay a portion of the $80 million note issued in the Merger. U.S. Interactive will not receive any proceeds from the sale of shares by the selling stockholders. Nasdaq National Market symbol ............................ USIT </TABLE> Common stock outstanding after this offering is based on the pro forma number of shares outstanding as of February 29, 2000, including the shares issued in the Merger and excluding: o 4,668,605 shares of common stock issuable upon the exercise of stock options outstanding at February 29, 2000, at a weighted average exercise price of $24.92 per share o 658,493 shares of common stock reserved for future grant under U.S. Interactive's stock option plans o 70,000 shares of common stock issuable upon the exercise of a warrant outstanding at February 29, 2000, at an exercise price of $3.50 per share o on a pro forma basis, 1,408,866 shares of common stock issuable upon the exercise of stock options assumed in connection with the Soft Plus Merger, at a weighted average exercise price of $1.86 per share Additional Information We were formed in August 1991 and commenced operations in May 1994. We changed our name from MasterSmith, Inc. to U.S. Interactive, Inc. in November 1995 and reincorporated in Delaware in September 1998. We completed our initial public offering in August 1999. Our principal executive offices are located at 2012 Renaissance Boulevard, King of Prussia, Pennsylvania 19406, and our telephone number is (610) 313-9700. We maintain a site on the World Wide Web at www.usinteractive.com. The information found on our site is not a part of this prospectus and should not be relied upon when making a decision to invest in our common stock. Summary Consolidated Financial Information The following summary historical consolidated financial data has been derived from our audited consolidated financial statements and is not necessarily indicative of future anticipated results of operations. This financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements and the notes thereto, and the other information contained in this prospectus. On March 8, 2000, we completed a merger with Soft Plus. The unaudited pro forma consolidated statements of operations data for the year ended December 31, 1999, reflects the effect of the Soft Plus merger as if the transaction had occurred on January 1, 1999. The unaudited pro forma consolidated balance sheet data as of December 31, 1999, reflects the effect of the Merger as if the transaction had occurred on December 31, 1999. On July 2, 1998, we completed a merger with Digital Evolution, Inc., an Internet professional services company. The results of operations of Digital Evolution have been included in our consolidated financial statements since July 1, 1998. The pro forma, as adjusted, balance sheet data gives effect to the sale of the shares offered by us at an assumed public offering price of $19.625 per share and the application of the net proceeds as described in "Use of Proceeds," after deducting underwriting discounts and commissions and estimated offering expenses. Summary Consolidated Financial Information <TABLE> <CAPTION> Year Ended Year Ended December 31, December 31, ---------------------------------------------------------------------- ------------- 1995 1996 1997 1998 1999 1999 ----------- ---------- ---------- ------------- -------------- ------------- (Pro Forma (in thousands, except per share data) Unaudited) <S> <C> <C> <C> <C> <C> <C> Consolidated Statements of Operations Data: Revenue ..................... $ 935 $ 1,950 $ 6,061 $ 13,636 $ 35,255 $ 59,540 Operating expenses .......... 882 2,295 6,319 21,927 50,098 151,274 ----- ------- ------- --------- ---------- --------- Income (loss) from opera- tions ...................... 53 (345) (258) (8,291) (14,843) (91,734) Other income (expense), net ........................ (2) 235 (32) (152) 454 (4,654) ----- ------- ------- --------- ---------- --------- Income (loss) before income tax expense ......... 51 (110) (290) (8,443) (14,389) (96,388) Income tax expense .......... 13 19 -- -- -- -- ----- ------- ------- --------- ---------- --------- Net income (loss) ........... 38 (129) (290) (8,443) (14,389) (96,388) Accretion of mandatorily redeemable preferred stock to redemption value ...................... -- -- -- (625) (916) (916) ----- ------- ------- --------- ---------- --------- Net income (loss) attribut- able to common stock- holders .................... $ 38 $ (129) $ (290) $ (9,068) $ (15,305) $ (97,304) ===== ======= ======= ========= ========== ========= Net income (loss) per common share: Basic and diluted ........... $ .01 $ (.03) $ (.06) $ (1.36) $ (1.19) $ (6.00) ===== ======= ======= ========= ========== ========= Weighted average shares outstanding used in the basic and diluted per common share calcula- tion ....................... 2,813 4,486 4,737 6,670 12,826 16,217 </TABLE> <TABLE> <CAPTION> December 31, 1999 ----------------------------------------- Pro Forma, Pro Forma As Adjusted Actual (Unaudited) (Unaudited) ---------- ------------- ------------ (in thousands) <S> <C> <C> <C> Consolidated Balance Sheet Data: Cash and cash equivalents ...................... $34,130 $ 9,953 $ 51,671 Working capital (deficit) ...................... 38,504 (64,520) (22,802) Total assets ................................... 62,278 411,754 453,473 Acquisition note payable ....................... -- 80,000 80,000 Long-term debt, net of current portion ......... 1,666 3,366 3,366 Total stockholders' equity ..................... 49,976 311,996 353,715 </TABLE>
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001086757_braun_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001086757_braun_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a06fa62b8eadc729b13930aaa4f00bc8c1c075ce
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001086757_braun_prospectus_summary.txt
@@ -0,0 +1,815 @@
+PROSPECTUS SUMMARY
+
+ 
+
+ This
+ summary is qualified by more detailed information appearing in other
+ sections of this prospectus. The other information is important, so please
+ read this entire prospectus carefully.
+
+ 
+
+ OUR 
+ COMPANY
+ 
+
+ 
+
+ Braun
+ Consulting is an Internet professional services provider delivering
+ comprehensive business solutions to clients. Our service approach combines
+ strategy, advanced Internet application development skills and information
+ technology. We identify these comprehensive business solutions as
+ eSolutions. Our eSolutions are designed to help clients enable
+ electronic commerce, improve customer relationships, drive revenue growth
+ and provide a measurable return on their investments. Through our
+ proprietary project management approach, we provide services to our Fortune
+ 500 and middle-market clients to help them achieve competitive advantage in
+ changing markets.
+
+ 
+
+ The rapid
+ adoption of the Internet is transforming the business marketplace and
+ accelerating the shift toward electronic commerce, including both
+ business-to-business and business-to-consumer applications. According to
+ International Data Corporation, the demand by businesses for
+ Internet-related professional services will grow to $78.6 billion by 2003.
+ We help clients identify opportunities and transform their businesses by
+ combining our skills and expertise in the following areas:
+
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ creating business and
+ Internet strategies focused on a client s customers to improve
+ relationships and interactions with a client s most profitable
+ customers;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ using customer
+ relationship management and data warehousing capabilities through the
+ Internet to sustain a client s revenue growth and enhance the
+ profitability of its products and services; and
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ developing Internet,
+ intranet and extranet applications that enable a client s electronic
+ commerce and facilitate the broad and immediate distribution of
+ information.
+
+ 
+ 
+
+ 
+ 
+
+ Customer
+ relationship management is the process of capitalizing on information
+ relative to the preferences, buying patterns and other attributes of our
+ clients customers. Data warehousing involves the collection and
+ organization of data from disparate sources and data warehouses make that
+ data available for reporting and analysis. Customer relationship management
+ and data warehousing are part of a larger information technology concept
+ known as business intelligence. Business intelligence is the collection and
+ analysis of business and customer information through the Internet and from
+ other sources, which is then used by business managers to make strategic
+ decisions.
+
+ 
+
+ By
+ integrating our business intelligence experience with our ability to develop
+ business strategies and Internet applications for our clients, we are well
+ positioned to provide comprehensive Internet professional services. Since
+ 1993, we have provided services to more than 240 companies, including
+ Ameren, Ameritech, AT&T, BidBuyBuild.com, Chase, Cintas, Cummins Engine,
+ Eaton, Eli Lilly, Embratel, General Electric, Motorola, Pharmacia &
+ Upjohn, Ralston Purina, The CIT Group, Thomson Consumer Electronics, TMP
+ Worldwide (Monster.com owner) and Xerox.
+
+ 
+
+ OUR 
+ BUSINESS 
+ STRATEGY
+ 
+
+ 
+
+ 
+ Turbulence and changes in previously established markets, which can
+ result from innovation, globalization, deregulation or emerging
+ technologies, provide tremendous opportunities for organizations that are
+ insightful and focused on their customers. In the new millennium, businesses
+ working to attain competitive advantage in changing markets will be forced
+ to use Web-based business approaches and efficient management of business
+ and customer information. The Internet combined with strategies focused on
+ customers and business intelligence will enable a new era of
+ business.
+
+ 
+
+ We
+ believe clients dependent upon business and customer information and
+ effective use of the Internet will purchase Internet professional services
+ from qualified and proven providers. Our services are based on the
+ integration of the following:
+
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ our Transform
+ methodology, which is our proprietary project management approach,
+ specifically designed to deliver comprehensive Internet professional
+ services;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ experience in working with
+ business and customer information, with an emphasis on customer
+ relationship management applications and data warehousing;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ development of
+ customer-focused and Internet business strategies; and
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ development and
+ integration of Web-based technologies, including Internet, intranet and
+ extranet applications.
+
+ 
+ 
+
+ 
+ 
+
+ The
+ execution of our business strategy subjects us to risk. For example, we
+ operate in a competitive industry, and many of the larger competitors in our
+ industry have greater financial resources, larger client bases and greater
+ brand or name recognition than us. Our success and growth depend on our
+ ability to increase our client engagements and to continue recruiting and
+ retaining qualified professionals to meet client demand. Our ability to
+ retain our senior management team is crucial to our success. Upon completion
+ of this offering, our directors, executive officers and their affiliates
+ will beneficially own, in the aggregate, 55.3% of our outstanding common
+ stock.
+
+ 
+
+ OUR 
+ GROWTH 
+ STRATEGY
+ 
+
+ 
+
+ Our goal
+ is to continue our growth by capitalizing on our position as a provider of
+ Internet professional services. Our strategies for achieving this objective
+ include:
+
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ expanding our existing
+ client relationships and maintaining a reputation for delivering
+ innovative Internet professional services and providing client
+ satisfaction that helps attract new clients;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ maintaining our culture by
+ attracting qualified professionals and retaining them with our training
+ curriculum and our focus on leading-edge technologies, professional
+ development programs, incentive-based compensation and a balanced
+ lifestyle;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ capitalizing on our
+ infrastructure, which includes an experienced senior management team, a
+ business development group and our proprietary Transform
+ Methodology and database; and
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ pursuing strategic
+ acquisitions, such as the acquisition of Emerging Technologies
+ Consultants, Inc., known as ETCI, described below, to expand our expertise
+ in new technologies, gain access to additional talented professionals,
+ expand our geographic presence and increase our client base.
+
+ 
+ 
+
+ 
+ 
+
+ 
+
+ THE 
+ OFFERING
+ 
+
+ 
+
+ 
+ 
+ Common stock offered by
+ Braun Consulting
+ 
+ 2,400,000 shares
+ 
+
+ 
+ Common stock offered by
+ the Selling Stockholders
+ 
+ 1,600,000 shares
+ 
+
+ 
+ Common stock to be
+ outstanding after this offering
+ 
+ 19,530,783 shares (1)
+ 
+
+ 
+ 
+
+ 
+ 
+ Use of proceeds
+ 
+ The net proceeds from this offering are
+ estimated to be
+ 
+
+ approximately $134 million. We will use the net proceeds for:
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ possible strategic acquisitions; and
+ 
+
+ 
+ 
+ 
+ working capital and other general corporate
+ purposes.
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ Nasdaq National Market
+ symbol
+ 
+ BRNC
+ 
+
+ 
+ 
+
+ Unless
+ stated otherwise, the information contained in this prospectus (i) gives
+ effect to the acquisition of all of the capital stock of ETCI and (ii)
+ assumes that the underwriters over-allotment option is not
+ exercised.
+
+ 
+
+ 
+
+ 
+ 
+ (1)
+
+ 
+ The number of shares of
+ common stock to be outstanding is as of December 31, 1999 and excludes (i)
+ options outstanding as of December 31, 1999 to purchase 2,662,260 shares
+ of common stock at a weighted average exercise price of $5.75 per share
+ and (ii) 1,615,759 shares of common stock reserved as of December 31, 1999
+ for issuance upon exercise of options that may be granted in the future
+ under our stock plans. See Management Stock Plans.
+ 
+
+ 
+ 
+
+ 
+ 
+
+ RECENT 
+ DEVELOPMENTS
+ 
+
+ 
+
+ Since our
+ initial public offering in August 1999, we have experienced the following
+ significant developments in our business:
+
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ ETCI. In December 1999,
+ we acquired Emerging Technologies Consultants, Inc. by exchanging cash and
+ our common stock with a value of approximately $27.0 million. ETCI
+ provides specialized customer relationship management consulting services,
+ and has offices in Mount Laurel, New Jersey and Reston, Virginia. We
+ accounted for this transaction using the purchase method of
+ accounting.
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ New Senior Vice
+ President and Vice President. In March 2000, we hired Claudia Imhoff,
+ Ph.D. as a Senior Vice President. Dr. Imhoff has 13 years of experience in
+ business intelligence and data warehousing. Dr. Imhoff will focus on the
+ development of intellectual capital and industry marketing. In January
+ 2000, we hired Lou Rubino as Vice President of Employment. Mr. Rubino has
+ over 15 years of recruiting management and human resources experience. Mr.
+ Rubino will focus on continuing to expand our recruiting efforts to
+ support our growth through the development of new recruiting programs that
+ attract and retain qualified professionals. In connection with the hiring
+ of these and other employees in the first quarter of 2000, we expect to
+ record increased stock compensation expense of approximately $1.0 million
+ for the quarter.
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ Clients. We have added
+ numerous new clients, including the following:
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ BidBuyBuild.com
+
+ Charles Schwab
+
+ Cintas
+
+ Eisai
+
+ 
+ 
+ General
+ Electric
+
+ General Motors
+
+ Omnova
+
+ Retail.com
+
+ 
+ 
+ 
+
+ 
+ 
+
+ CORPORATE 
+ INFORMATION
+ 
+
+ 
+
+ Braun
+ Consulting, Inc. was incorporated as RNW, Inc. on April 20, 1990. In May
+ 1993, RNW, Inc. changed its name to Shepro Braun Consulting, Inc., and
+ subsequently changed its name to Braun Consulting, Inc. We reincorporated in
+ Delaware on August 3, 1999. References in this prospectus to Braun
+ Consulting, we, our and us refer
+ to Braun Consulting, Inc., a Delaware corporation, and its subsidiaries and
+ predecessors. Braun Consulting s principal executive offices are
+ located at 30 West Monroe, Suite 300, Chicago, Illinois, 60603, and our
+ telephone number is (312) 984-7000. We invite you to visit our Internet site
+ at www.braunconsult.com. The information contained on our Internet site is
+ not incorporated in this prospectus.
+
+ 
+
+ SUMMARY 
+ CONSOLIDATED 
+ FINANCIAL 
+ DATA
+ 
+
+ 
+
+ The
+ following table summarizes the consolidated financial data for our business.
+ You should read the following summary consolidated financial data together
+ with Management s Discussion and Analysis of Financial Condition
+ and Results of Operations and our Consolidated Financial Statements
+ and the Notes thereto beginning on page F-1 of this prospectus.
+
+ 
+
+ 
+ 
+ 
+ 
+ Years Ended December
+ 31,
+ 
+
+ 
+ 
+ 
+ 1995
+ 
+ 1996
+ 
+ 1997
+ 
+ 1998
+ 
+ 1999
+ 
+
+ 
+ 
+ 
+ (In thousands, except
+ per share data)
+ 
+
+ 
+ Statement of
+ Income Data:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Total revenues
+ 
+ $8,435
+ 
+ $11,272
+ 
+ $19,508
+ 
+ $27,862
+ 
+ $47,304
+ 
+
+ 
+ Operating
+ income
+ 
+ 712
+ 
+ 1,697
+ 
+ 1,859
+ 
+ 748
+ 
+ 3,945
+ 
+
+ 
+ Net income
+ 
+ 647
+ 
+ 1,659
+ 
+ 1,635
+ 
+ 783
+ 
+ 3,039
+ 
+
+ 
+ Pro forma net income
+ (1)
+ 
+ 358
+ 
+ 975
+ 
+ 1,014
+ 
+ 323
+ 
+ 2,020
+ 
+
+ 
+ Pro forma earnings per
+ share (2):
+ 
+
+ 
+ 
+ Basic
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ $ 0.14
+ 
+
+ 
+ 
+ Diluted
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 0.13
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ As of December
+ 31, 1999
+ 
+
+ 
+ 
+ 
+ Actual
+ 
+ As Adjusted
+ (3)
+ 
+
+ 
+ 
+ 
+ (In
+ thousands)
+ 
+
+ 
+ Balance Sheet
+ Data:
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Cash, cash equivalents and
+ marketable securities
+ 
+ $ 9,849
+ 
+ $143,839
+ 
+
+ 
+ Total assets
+ 
+ 53,092
+ 
+ 187,082
+ 
+
+ 
+ Total debt
+ 
+ 639
+ 
+ 639
+ 
+
+ 
+ Stockholders 
+ equity
+ 
+ 47,986
+ 
+ 181,976
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ (1)
+
+ 
+ For all periods indicated
+ prior to July 28, 1999, we operated as an S corporation and were not
+ subject to federal and certain state income taxes. On July 28, 1999, we
+ terminated our status as an S corporation and became subject to federal
+ and state income taxes. Pro forma net income for periods prior to July 28,
+ 1999 reflects federal and state income taxes as if we had not elected S
+ corporation status for income tax purposes. Pro forma net income for the
+ period beginning on July 28, 1999 reflects federal and state income taxes
+ on a basis consistent with other periods.
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ (2)
+
+ 
+ Pro forma net income per
+ share for the year ended December 31, 1999 is calculated by dividing pro
+ forma net income by the weighted average number of common shares
+ outstanding.
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ (3)
+
+ 
+ As adjusted reflects the
+ sale of the shares of common stock offered by this prospectus and after
+ deducting the underwriting discounts and commissions and estimated
+ offering expenses and the application of the estimated net proceeds from
+ this offering.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001087008_orius-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001087008_orius-corp_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0536611b2665c02a3cbb0208a88d0323b9e992e3
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001087008_orius-corp_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights the material information about our company and this offering. This summary does not contain all of the information that may be important to you in deciding to invest in our common stock. You should read the entire prospectus, including the financial data and related notes, carefully before making an investment decision. Unless otherwise indicated, pro forma revenue data presented in this prospectus gives effect to the acquisitions we completed in 1999 and 2000, as if each of these transactions had occurred at the beginning of the period presented. ORIUS CORP. Orius is a leading nationwide provider of technical expertise and comprehensive network services to the telecom industry, which includes the telecommunications and broadband industries. With operations in 48 states, we offer a full spectrum of network services, including the design, engineering, deployment and maintenance of our customers' fiber optic, coaxial and copper cable networks. We provide both internal network services, primarily within the central offices of our customers, and external network services in the field. We believe that we are the largest independent provider of central office services in the U.S. We believe our comprehensive range of capabilities and mix of internal and external network services are unique and position us to realize multiple cross-selling opportunities and to satisfy all of our customers' network infrastructure needs. In 1999, we provided services to more than 300 customers and completed more than 10,000 individual projects. We have developed strong and long-standing relationships with many established and emerging telecommunications and broadband service providers by providing high quality, responsive and reliable service. Through our operating divisions, we have enjoyed business relationships with many of our larger customers for more than 20 years. Our telecommunications customers include Ameritech, AT&T, DTI, MCI Worldcom, Qwest, SBC Communications, Verizon, Williams Communications and Universal Access. Our broadband customers include Adelphia, AT&T Broadband & Internet Services, Charter Communications, Clearsource, Comcast, Cox Communications and Digital Access. We provide integrated premise services for commercial, governmental and institutional customers such as Compaq, Dell, EDS and the World Bank. Additionally, we install equipment from leading manufacturers such as NEC, Lucent Technologies, Nortel Networks and Siemens. For the six months ended June 30, 2000, over 85% of our pro forma revenue was generated from repeat customers. Our pro forma revenue has increased 47.2% to $369.5 million in the first six months of 2000 from $251.1 million in the comparable 1999 period. In our customers' competitive environment where speed to market is essential, our comprehensive range of capabilities provides the critical, often scarce, resources that our customers need. With more than 250 engineers and significant technical expertise, we have the ability to design, engineer, deploy and maintain networks more quickly and cost effectively than many of our customers could themselves. We believe that our existing and new customers will increasingly use our services as a result of our comprehensive range of technical capabilities, mix of internal and external network services, ability to provide high quality, responsive service on a consistent basis and our broad geographic coverage. We offer the following services: - Internal Network Services. We design, engineer, deploy and maintain a broad range of network solutions within the central offices of our telecommunications customers, including broadband digital cross connect systems, digital subscriber lines, or DSLs, and platforms. We refer to this as "central office services." We also provide interior wiring services to commercial, governmental and institutional entities, which we refer to as "integrated premise services." Our internal network services are characterized by strong growth, low capital requirements and fragmented competition. In addition, our maintenance services, which include the daily maintenance and upgrades of systems to restore network integrity and increase network capacity, provide steady, recurring revenues. Our internal network services The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any State where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED OCTOBER 2, 2000 Shares (ORIUS LOGO) ORIUS CORP. Common Stock ------------------ Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $ and $ per share. We have applied to list our common stock on The Nasdaq Stock Market's National Market under the symbol "ORIS." The underwriters have an option to purchase a maximum of additional shares to cover over-allotments of shares. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 6. <TABLE> <CAPTION> UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS ORIUS CORP. -------- ------------- ----------- <S> <C> <C> <C> Per Share............................................ $ $ $ Total................................................ $ $ $ </TABLE> Delivery of the shares of common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON DEUTSCHE BANC ALEX. BROWN FIRST UNION SECURITIES, INC. SUNTRUST EQUITABLE SECURITIES The date of this prospectus is , 2000. revenue increased on a pro forma basis 51.4% to $154.4 million for the six months ended June 30, 2000 from $102.0 million for the six months ended June 30, 1999. - External Network Services. We design, engineer, deploy and maintain entire communications networks located outside our customers' central offices, including fiber optic, coaxial and copper cable networks, as well as other Internet infrastructure. We provide end-to-end solutions for our customers, from planning and designing to deploying and maintaining our customers' networks. These services complement our internal network capabilities and enhance our ability to increase market share within our customer base. Additionally, by providing on-going maintenance and network upgrades, our external services generate steady, recurring revenues. Our external network services revenue increased on a pro forma basis 44.3% to $215.1 million for the six months ended June 30, 2000 from $149.0 million for the six months ended June 30, 1999. We believe the overall market for our services in 1999 was approximately $61 billion. Industry sources expect this market to grow 19% per annum to $103 billion by 2002. Included in this total market in 1999 is the approximately $7 billion central office services market, which industry sources expect to grow at 41% per annum to $20 billion by 2002. We believe that we have significant growth opportunities for the following reasons: - Our customers are making large capital investments as they build and expand their networks to accommodate the increased voice, video and data traffic on their networks and as they race to enter new markets in response to the Telecommunications Act of 1996. - Our customers increasingly outsource the services we provide so that they can focus on their core businesses. - Our customers are beginning to simplify their vendor management and rely on fewer preferred network infrastructure service providers. Our comprehensive range of technical capabilities, mix of internal and external network services, ability to provide high quality, responsive service on a consistent basis and our broad geographic coverage position us to fulfill an increasing percentage of our customers' network service requirements. - We are technology and vendor independent. This independence allows us to provide service across nearly all competing network infrastructure technologies and minimizes our risk of technological obsolescence. Our objective is to exploit the rapid growth within the telecom industry and enhance our position as a leading nationwide provider of technical expertise and comprehensive network services in the U.S. The key elements of our strategy are to: - Focus on the growth prospects of our existing operations, and specifically: -- Create new revenue streams by expanding our service offerings and focusing on establishing new customers in both the wireline and wireless markets, -- Increase our market share within our existing customer base by focusing on providing high quality, responsive service and on realizing cross-selling opportunities between our internal and external network services, -- Continue to increase profitability by streamlining our operations and gaining operating efficiencies through more effective utilization of resources, and -- Continue to enhance our national service capabilities through ongoing expansion into new geographic markets. - Pursue selected acquisitions that expand our service capabilities, provide access to new customers and broaden our geographic presence. - Attract, motivate and retain a highly qualified workforce that is capable of consistently delivering innovative customer solutions and high quality service. RECENT DEVELOPMENTS In July 2000, we entered into a non-binding letter of intent to acquire a northeastern provider of central office services for approximately $20 million. This central office service provider generated approximately $15 million of revenue in 1999. Completion of this acquisition is conditioned upon satisfactory completion of due diligence and negotiation of a definitive agreement. If we complete this acquisition, we would expect the closing to occur in the fourth quarter of 2000. ADDITIONAL INFORMATION Orius Corp. was incorporated under the laws of Florida in January 1999. Our principal executive office is located at 1401 Forum Way, Suite 400, West Palm Beach, Florida 33401, and our telephone number is (561) 687-8300. (This Page Intentionally Left Blank) THE OFFERING Common stock offered....... shares Common stock to be outstanding after this offering................. shares Use of proceeds............ We intend to use the net proceeds of this offering: - to repay a portion of the indebtedness outstanding under our senior credit facility; - to repay a portion of our outstanding junior subordinated notes and interest accrued on those notes; and - for general corporate purposes. Proposed Nasdaq National Market symbol............ ORIS Unless otherwise indicated, the share numbers used in this prospectus are based on the number of shares of common stock outstanding as of September , 2000 and give effect to the automatic conversion of all of our series C preferred stock into common stock immediately prior to this offering. See "The Reclassification." Unless otherwise indicated, the share numbers exclude: - shares of common stock that may be issued to cover over-allotments of shares; - shares of common stock issuable upon exercise of outstanding stock options; and - approximately additional shares of common stock expected to be reserved for future grants, awards or sale under our stock incentive plans. See "Management."
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+SUMMARY Because this is only a summary, it does not contain all the information that may be important to you. You should read the entire prospectus, especially "Risk Factors" and the financial statements and notes, before deciding to invest in shares of our common stock. OUR COMPANY Accrue is a leading provider of Internet data collection and analysis software which enables business decision makers to address critical marketing and merchandising questions concerning the effectiveness of their Web sites. Our products, Accrue Insight, Hit List and Decision Series are comprehensive solutions that we believe help Internet businesses increase numbers of visitors, customer loyalty and sales by collecting, storing, analyzing and reporting Web site activity data at a level of detail and accuracy that distinguishes our technology from others. Accrue products are highly scalable, meaning they are detailed and robust enough to meet the needs of successful and rapidly expanding Web sites as their user volumes greatly expand. Merchandising managers traditionally depend on analysis of marketing metrics like campaign effectiveness, shopping patterns or price elasticity, and the quantity of that data has increased dramatically as the information age has extended the number of methods and reach for marketing communications. Conducting traditional marketing analysis has therefore become more complicated. In addition, the Internet has now emerged as the fastest growing communication and commerce medium in history, creating new challenges which further compound the complexity of collecting and analyzing valuable merchandising information. As a result, businesses are demanding analysis that provides a measure of return on investment for their Internet initiatives. Despite the need for a detailed, flexible, robust and easy-to-use approach to Internet merchandising analysis, we believe Accrue is the only company available that delivers an integrated solution addressing all of these requirements. The Internet is a global medium enabling millions of people worldwide to communicate and conduct business electronically. As a result, many organizations are implementing Web-based business initiatives to automate business processes, transact sales, and manage customer service, commonly referred to as conducting "e-business." The growing adoption of the Web represents a significant opportunity for businesses to effectively conduct commercial transactions over the Internet, such as the sale of goods and services, commonly referred to as "e-commerce." According to International Data Corporation, the total value of e-commerce revenue is expected to increase from approximately $32.0 billion in 1998 to approximately $426 billion in 2002. Organizations must support their e-business initiatives by investing heavily in Internet technology, content, and infrastructure software. Forrester Research estimates that spending on software and services to support e-commerce alone exceeded $5.6 billion in 1998 and will grow to $35 billion by 2002. Accrue products enable businesses to assess the effectiveness of their Web sites by collecting, storing, analyzing and reporting comprehensive, detailed Web site traffic information and visitor activity data such as the date, time and duration of visit, Web pages viewed, and visitor identification information. The most precise way to analyze this data is to collect it directly from packets of data that move across the network, analysis referred to as "packet sniffing." This network-based analysis provides a factual and complete picture of a visitor's activity at a Web site beyond that which can be achieved through more common approaches which analyze data from log files of a Web server computer. Our packet sniffing technology summarizes the details of each interaction to prepare the [ACCRUE LOGO] 3,225,261 SHARES COMMON STOCK ------------------------------ INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ------------------------------ The 3,225,261 shares of our common stock, $0.001 par value, covered by this prospectus are offered for the account of the selling stockholders listed under "Principal and Selling Stockholders" below. 2,880,475 of the shares were issued to the selling stockholders in connection with an Agreement and Plan of Merger and Reorganization dated as of September 14, 1999 among Accrue, Marketwave Acquisition Corp., and Marketwave Corporation, pursuant to which Marketwave Corporation became our wholly-owned subsidiary. 344,786 of the shares were issued upon exercise by the selling stockholders of outstanding Marketwave options that were assumed by Accrue in connection with our acquisition of Marketwave. We have agreed to maintain the effectiveness of this registration statement for one hundred twenty (120) days. No sales may be made pursuant to this prospectus after that time unless we amend or supplement this prospectus to indicate that we have agreed to extend the period of its effectiveness. The selling stockholders may sell the shares from time to time on the over-the-counter market in regular brokerage transactions, in transactions directly with market makers or in certain privately negotiated transactions. Each selling stockholder has advised us that no sale or distribution other than as disclosed in this prospectus will be effected until after this prospectus has been appropriately amended or supplemented, if required, to set forth those terms. We will not receive any proceeds from the sale of the shares by the selling stockholders. Each of the selling stockholders may be deemed to be an "underwriter," as such term is defined in the Securities Act of 1933, as amended. On March 6, 2000, the last sale price of our common stock on the Nasdaq National Market was $55.625 per share. Our common stock is listed on the Nasdaq National Market under the symbol "ACRU." THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <S> <C> <C> <C> - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND SELLING PUBLIC COMMISSIONS(1) STOCKHOLDERS(1) - ----------------------------------------------------------------------------------------------------------------- Per Share...................................... Total.......................................... See Text Above See Text Above See Text Above - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- </TABLE> (1) All expenses of registration of the shares, estimated to be approximately $377,000 shall be borne by Accrue. Selling commissions, brokerage fees, any applicable stock transfer taxes and any fees and disbursements of counsel to the selling stockholders are payable individually by the selling stockholders. The date of this prospectus is March , 2000. data for storage and analysis. The benefits of our packet sniffing analysis include the ability to collect data pertaining to: - Visitors -- understanding who Web site visitors are, where they came from, and how long they stayed. - Visits -- exploring behavioral (duration and page depth) patterns of visitors over repeat visits. - Content -- measuring the effectiveness of content, including the actual delivered content, the most popular content, and the stickiness, or duration of viewing, of content. - Navigation -- determining the flow of visitors through a Web site to measure the effectiveness of site layout, and the most common path to purchase for each market segment. Increasing numbers of Web sites receive millions of hits per day and this traffic is growing exponentially. To enable effective e-business analysis, companies must collect, process, store and make available for analysis the data generated from these millions of hits. Accrue products are designed to operate effectively across Web sites with the following characteristics: - 50 million hits per day; - hundreds of Web servers supporting over 2,000 Web sites; - generation of thousands of unique reports per day; - storage of hundreds of gigabytes of historical activity data; and - complex, globally-distributed content. We also provide professional services to assist customers at every stage of Accrue product deployment, from identification of specific business needs through enterprise integration and customization of e-business analysis reporting, to delivering a rapid and effective implementation. Our objective is to extend our position as a leading provider of enterprise-class e-business analysis software. To achieve this objective, our strategy includes the following key elements: extend leadership in high-end e-business analysis, maintain technological leadership in e-business analysis software, leverage Web data platform, leverage and expand blue chip customer base, continue developing strategic alliances, expand sales and distribution channels, and pursue strategic acquisitions. In January 2000, to complement and expand our existing product offerings and services, we acquired NeoVista Software, Inc., a provider of decision support software applications and services. Accrue was incorporated in Delaware under the name "Plumb, Inc." in February 1996 and changed our name to "Gauge Technologies, Inc." in April 1996. In October 1996 we changed our name from "Gauge Technologies, Inc." to "Accrue Software, Inc." Our principal executive offices are located at 48634 Milmont Drive, Fremont, California 94538-7353, and our telephone number is (510) 580-4500. The address of our Web site is http://www.accrue.com. Information contained on our Web site shall not be deemed to be a part of this prospectus. THE OFFERING Common stock offered by selling stockholders........................ 3,225,261 shares Common stock to be outstanding after the offering........................ 26,824,782 shares Use of proceeds..................... We will not receive any proceeds from this offering. All proceeds will be received by the selling stockholders. Nasdaq National Market symbol....... ACRU The common stock to be outstanding after the offering is based on the number of shares outstanding as of January 15, 2000. This number excludes: - 2,773,849 shares subject to outstanding options as of January 15, 2000 at a weighted average exercise price of approximately $4.41 per share; - 14,000 shares subject to outstanding warrants as of January 15, 2000 at an exercise price equal to $10.00 per share and 3,421 shares subject to outstanding warrants as of January 15, 2000 at an exercise price equal to approximately $17.54 per share. - 796,284 additional shares available for grant under our stock plans as of January 15, 2000. We have agreed to maintain the effectiveness of this registration statement for one hundred twenty (120) days. No sales may be made pursuant to this prospectus after that time unless we amend or supplement this prospectus to indicate that we have agreed to extend the period of effectiveness. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) In the following summary financial data, the statement of operations data for the years ended March 31, 1997, 1998 and 1999 are derived from and qualified in their entirety by our audited consolidated financial statements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The statement of operations data for the nine months ended December 31, 1998 and 1999 and the balance sheet data as of December 31, 1999 are derived from our unaudited consolidated financials included elsewhere in this prospectus. The unaudited pro forma information reflects our recent acquisition of NeoVista Software, Inc., and has been derived from our unaudited pro forma combined condensed financial statements included elsewhere in this prospectus. The unaudited pro forma combined condensed statement of operations data is derived from our statement of operations data for the nine months ended December 31, 1999 combined with the statement of operations data of NeoVista for the nine months ended September 30, 1999, giving effect to the acquisition as if it occurred on April 1, 1999. The unaudited pro forma combined condensed balance sheet data presents our balance sheet data as of December 31, 1999 combined with the balance sheet data of NeoVista, as of September 30, 1999, giving effect to the acquisition as if it had occurred on December 31, 1999. The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the transaction had been consummated at the dates indicated, nor is it necessarily indicative of the future operating results or financial position of the combined company. <TABLE> <CAPTION> NINE MONTHS NINE MONTHS ENDED ENDED YEAR ENDED MARCH 31, DECEMBER 31, DECEMBER 31, --------------------------- ------------------ 1999 1997 1998 1999 1998 1999 PRO FORMA ------- ------- ------- ------- -------- ------------ (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenue................. $ 430 $ 2,057 $ 4,684 $ 2,658 $ 11,353 $ 13,701 Gross profit.................. 400 1,829 4,215 2,330 9,860 10,300 Loss from operations.......... (2,076) (4,280) (7,651) (5,467) (10,227) (49,199) Net loss...................... (1,969) (4,201) (7,601) (5,437) (9,481) (48,539) Net loss per share, basic and diluted.................... (0.73) (0.99) (1.63) (1.17) (0.67) (3.04) Shares used in computing net loss per share, basic and diluted.................... 2,690 4,264 4,670 4,640 14,183 15,962 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ---------------------- PRO ACTUAL FORMA ------- ----------- (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................. $37,931 $ 38,356 Working capital........................................... 36,181 28,872 Total assets.............................................. 45,518 176,310 Long-term debt, net of current portion.................... -- 89 Total stockholders' equity................................ 38,876 160,896 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001087279_opensite_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001087279_opensite_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following is only a summary. You should carefully read the more detailed information contained in this prospectus, including our financial statements and accompanying notes appearing elsewhere in this prospectus. Our business involves significant risks. You should carefully consider the information under the heading "Risk Factors." Unless otherwise stated, this prospectus (1) assumes no exercise of the underwriters' over-allotment option, (2) assumes the conversion of all outstanding shares of our preferred stock into shares of common stock upon the effectiveness of this offering, and (3) assumes a two-for-three reverse split of our outstanding shares to be effected immediately prior to consummation of this offering. OpenSite provides software products and services that facilitate online auctions and other forms of dynamic pricing. We have delivered over 600 licensed auction products and outsourced services to customers. We provide a variety of cost-effective software and services that automate the process for businesses to create and maintain branded, Internet-based business-to-business and business-to-consumer auctions on their own Web sites. We believe we are the only company offering small, medium and large businesses dynamic pricing through a full range of licensed software, products and related services, as well as outsourcing services that eliminate the need for technical infrastructure and expertise on the part of the customer. By bringing together buyers and sellers, our products and services help businesses create new sales channels, manage inventory, attract new customers, introduce new products and strengthen customer and other business relationships. We commenced operations and introduced our first auction software product in 1996. In 1998, we recognized total revenue of $1.3 million and incurred a net loss of $2.4 million. In 1999, we recognized total revenue of $7.9 million and incurred a net loss of $12.2 million. As of December 31, 1999, our accumulated deficit was $67.6 million, $53.5 million of which was attributable to accretion on mandatorily redeemable preferred stock. Dynamic pricing, in which prices are determined by buyers and sellers on a transaction-by-transaction basis, has become more accepted as a form of electronic commerce. Dynamic commerce refers to the spectrum of online commerce, encompassing not only dynamic pricing but also an entire range of dynamically determined elements of a transaction including such items as quantity, qualitative attributes and delivery terms. Dynamically priced auctions are among the most well known forms of dynamic commerce. The Internet auction market initially gained acceptance in person-to-person transactions. However, by 2003 Forrester Research expects that only $6.4 billion is expected to be generated from online person-to-person online auction transactions, while $12.6 billion is expected to be generated from business-to-consumer online auction transactions. Forrester Research expects that business-to-business electronic commerce as a whole will be $2.7 trillion in 2004. We plan to expand on our market position in the online auction and dynamic pricing market by providing an infrastructure for businesses to operate other forms of dynamic commerce, including demand aggregation, online procurement, market making and other new electronic commerce marketplace business models. We provide businesses with a number of dynamic pricing product choices based on their level of sophistication and their need to have products with strong features and functionality that will integrate with other systems within their organizations and grow as their needs expand. The OpenSite family of software products, including OpenSite Auction, AuctionNow and Dynamic Pricing Toolkit, as well as the OpenSite Concierge outsourcing and hosting service, allow businesses of all sizes to set up and conduct auctions on the Internet. We also provide related consulting, education and technical support services both directly and through our indirect sales channel. We act as an Application Service Provider with our OpenSite Concierge service offering, which allows our customers to outsource completely to us the process of running Internet auctions, including development, deployment, maintenance and hosting. In addition, our THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION. DATED , 2000. 5,000,000 Shares [OPENSITE LOGO] Common Stock ------------------------ This is an initial public offering of shares of common stock of OpenSite Technologies, Inc. All of the 5,000,000 shares of common stock are being sold by OpenSite. Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price will be between $13.00 and $15.00 per share. Application has been made for quotation of the common stock on the Nasdaq National Market under the symbol "OPNS". See "Risk Factors" beginning on page 6 to read about factors you should consider before buying shares of our common stock. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ <TABLE> <CAPTION> Per Share Total --------- ----- <S> <C> <C> Initial public offering price............................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to OpenSite...................... $ $ </TABLE> To the extent that the underwriters sell more than 5,000,000 shares of common stock, the underwriters have the option to purchase up to an additional 750,000 shares from OpenSite at the initial public offering price less the underwriting discount. ------------------------ The underwriters expect to deliver the shares to purchasers on , 2000. GOLDMAN, SACHS & CO. CHASE H&Q THE ROBINSON-HUMPHREY COMPANY WIT SOUNDVIEW ------------------------ Prospectus dated , 2000. BidStream.com Web site, which was launched in April 1999, aggregates the content of OpenSite-powered auction Web sites and is designed to generate increased traffic to these Web sites, while providing Internet users with a central location from which to access the items put up for auction. BidStream.com also provides valuable customer demographic information along with buying attributes for demand analysis. Currently, participation in BidStream.com is free to our customers; however, we intend to charge a fee for participation in the future. Our customers operate in a wide variety of industries and include British Airways, The Chase Manhattan Bank, CNET, Excite@Home, Hewlett-Packard -- Asia (Regional Hub), John Deere, Nortel Networks, QVC, The Sharper Image and VerticalNet. Our products have received the following awards and recognition: "Best of Show" for Outstanding E-commerce Applications -- Fall Internet World 1999 and Fall Internet World 1998, "Five Star Rating" -- Internet.com, "Analyst's Choice" -- PC Week magazine, and "Best of Class" in Web-based Selling -- Fall Internet Commerce Expo 1998. A description of the criteria and other information regarding these awards can be found under "Business -- Products and Services." We have entered into a letter of intent to acquire Bidder's Edge, Inc., an auction portal with over 3.5 million page views per month that aggregates over 5 million items from over 150 auction sites. BiddersEdge.com is a search engine that uses proprietary technology to create a single directory that conveniently categorizes auction items. BiddersEdge.com also provides content, including news, information and featured items for bid, that is indexed for easy access and use to over 345,000 unique monthly auction users. If we complete our acquisition of Bidder's Edge, we plan to incorporate our BidStream.com aggregated content into a combined BiddersEdge.com product offering. We expect BidStream.com to significantly enhance the business-to-business auction content of BiddersEdge.com and to accelerate the growth of its market position as a provider of aggregated content for businesses through the addition of auction content from approximately 180 business-to-business sites to Bidder's Edge. We believe that the acquisition of Bidder's Edge, if consummated, will accelerate the strength of our business model by significantly expanding the content, functionality, customer reach, time to market and market position of our products and services. In December 1999, we entered into an agreement with Excite@Home to jointly create an auction network through its business-to-business sites, Work.com and Excitestorebuilder.com. Under the agreement, Excite@Home will offer and distribute auction and dynamic pricing functionality to its visitors through its business-to-business sites using our AuctionNow software. We will also produce co-branded BidStream.com Web sites. We are incorporated under the laws of the State of Delaware, and our executive offices are located at 2800 Meridian Parkway, Durham, North Carolina 27713. Our telephone number is (919) 287-0200. Our World Wide Web address is www.opensite.com. "OpenSite" and "AuctionWatch" are registered trademarks of OpenSite, and "AuctionNow," "Dynamic Pricing Toolkit," "Dynamic Pricing Engine," "OpenSite Auction," "BidStream," "OpenSite Concierge" and "Where Dynamic Commerce Begins" are unregistered trademarks of OpenSite. This prospectus also includes trademarks, service marks and trade names of other companies. [ARTWORK DEPICTED IN PROSPECTUS] 1. Inside front page portrays the following: The title bar at the top of the page reads as follows: "Where Dynamic Commerce Begins(TM)" In the center of the page is the company's logo. On the left side of the page and centered vertically is the following text: OpenSite(R) Technologies, Inc., a provider of online auction software and services, is enabling the dynamic commerce revolution. Our powerful flexible suite of products, outsourcing solutions and services allow small, medium and large businesses to create branded, Internet-based dynamic commerce sites. By having delivered over 600 licensed auction products and outsourced auction services to businesses worldwide, OpenSite brings together buyers and sellers, helping businesses dynamically manage inventory, establish sales channels, build dynamic marketplaces, attract customers and test market new products to create efficient markets for goods and services. In addition, our BidStream.com Web site aggregates the content of Opensite-powered auctions, providing Internet users with a central location from which to access and search multiple Web auction sites. We have signed a letter of intent to acquire Bidder's Edge, Inc., a significantly larger aggregator of auction content, which we would expect to be our primary offering of aggregated auction content upon completion of the transaction. Our mission is to provide software, services and content that create the defacto standard for businesses offering branded, Web-based dynamic commerce. At the bottom left corner of the page is the word "OpenSite" and below it is the following text: "Where Dynamic Commerce Begins." At the bottom right corner of the page are boxes that contain the following text: top box: "internet world" and beneath it is the text "Best of Show Fall 1999" top box: "internet world" and beneath it is the text "Best of Show Fall 1998" second box from the top: at the top is "PCWEEKLABS" and beneath it is the text "Analyst's Choice" with the word "Analyst" covering the top portion of a star. third box from the top: centered at the top of the box is the text "The Internet Open." In the center of the box is an object representing a trophy. At the bottom of the box is the word "ICE." Beneath the word "ICE" is the text "Internet Commerce Expo." The bottom box contains the word "E-Commerce" at the top. Beneath the word E-Commerce are five stars going across the page. Beneath the stars is the word "Guide" which is underlined. At the bottom of the box is the word "internet.com." 2. At the top of the front gate fold is the following text: "OpenSite Technologies: Enabling the Dynamic Commerce Revolution" On the left side of the page and centered vertically are three paragraphs including the following text: "The Internet enables online auctions and dynamic commerce to offer more products to more people - all without geographic limitations and in real time. Our combination of software, outsourcing solutions, services and content aggregation provides a self-reinforcing, full spectrum of dynamic commerce solutions for leading corporations in a range of industries." In the left center section of the page is the screenshot of a web page for Bidstream.com. Beneath the web page is the following text: "BidStream.com provides bidders with a central point for locating items for sale on participating OpenSite-powered auction sites." In the center of the page are words formed in a circle which are "Software," "Services" and "Content Aggregation." At the top right corner of the page is the screen shot of a web page for VerticalNet. Beneath the webpage is the following text: "OpenSite provides a full suite of dynamic pricing software products, from packaged auction applications that are easy to use and fast to implement, to our Dynamic Pricing Toolkit, which enables customers to build integrated and customized dynamic pricing applications. For example, VerticalNet uses OpenSite software to create vertical net markets (or dynamic marketplaces) within its trading communities." At the bottom right center section of the page is a screen shot of a web page for Machinefinder. To the left of the web page is the following text: "OpenSite acts as an Application Service Provider with our OpenSite Concierge service that provides an outsourced option for business. For example, Deere & Company utilizes OpenSite Concierge service to host Machinefinderauction.com, which allows customers to bid on used equipment posted for auction by Deere & Company dealers." At the bottom right corner of the page is the word "OpenSite" and beneath it are the words "Where Dynamic Commerce Begins." THE OFFERING Shares offered by OpenSite.......... 5,000,000 shares Shares to be outstanding after the offering............................ 23,489,896 shares Use of proceeds..................... We intend to use the net proceeds from the offering primarily for advertising and marketing activities, our obligations to Excite@Home, our international expansion, capital expenditures and for general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol.............................. "OPNS" The number of shares of our common stock to be outstanding immediately after the offering is based on the number of shares outstanding as of December 31, 1999. This number does not take into account (1) 1,209,081 shares of our common stock subject to options outstanding under our stock option plan, (2) 130,838 shares of common stock subject to outstanding warrants as of December 31, 1999 and (3) 5,960,871 shares to be issued to Bidder's Edge if the acquisition is completed. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following financial data at December 31, 1999 and for the years ended 1997, 1998 and 1999 is a summary of the more complete financial information provided in our financial statements and accompanying notes appearing elsewhere in this prospectus. The statement of operations data for the period from inception to December 31, 1996 has been derived from our audited financial statements, which are not included in this prospectus. See Note 2 of Notes to Financial Statements for an explanation of basic and diluted net income (loss) per common share and the weighted average shares used in computing basic and diluted net income (loss) per common share. The pro forma statement of operations for the year ended December 31, 1999 gives effect to our proposed acquisition of Bidder's Edge as if such transaction had been consummated on January 1, 1999 using the pooling-of-interests method of accounting and the conversion of all outstanding shares of mandatorily redeemable convertible preferred stock into common stock as of the later of January 1, 1999 or the date of issuance. This statement of operations is presented for illustrative purposes only and is not necessarily indicative of what our results of operations would have been had this transaction been consummated on January 1, 1999 or our future results of operations. The pro forma balance sheet data gives effect to the proposed acquisition of Bidder's Edge as if the transaction had been consummated as of December 31, 1999 and accounted for as a pooling-of-interests and the conversion of all outstanding shares of mandatorily redeemable convertible preferred stock into common stock. The pro forma as adjusted balance sheet is adjusted to give effect to: - our sale of 5,000,000 shares of common stock offered at an assumed initial public offering price of $14.00 per share; and - the receipt of the estimated net proceeds from the sale. <TABLE> <CAPTION> PERIOD FROM INCEPTION (JULY 24, 1996) YEAR ENDED DECEMBER 31, TO ------------------------------------------- DECEMBER 31, PRO FORMA 1996 1997 1998 1999 1999 --------------- ---- ---- ---- --------- (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenue.................. $ 12 $ 340 $ 1,281 $ 7,878 $ 7,878 Gross profit................... 11 312 1,132 6,015 6,015 Operating income (loss)........ 0 127 (2,404) (12,804) (15,965) Net income (loss).............. 0 130 (2,361) (12,205) (15,206) Net income (loss) available to common stockholders......... -- 130 (2,725) (65,369) (15,206) Basic and diluted net income (loss) available to common stockholders per common share....................... $0.00 $0.02 $ (0.47) $ (12.51) $ (0.70) Weighted average shares used in computing basic and diluted net income (loss) per common share....................... 5,010 5,428 5,748 5,225 21,725 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 --------------------------------------- PRO FORMA AS ACTUAL PRO FORMA ADJUSTED ------ ----------- ------------ (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents and investments........... $ 10,599 $17,365 $81,575 Working capital..................................... 8,323 14,064 78,274 Total assets........................................ 14,948 22,756 86,966 Mandatorily redeemable convertible preferred stock............................................ 80,459 -- -- Total stockholders' equity (deficit)................ (70,512) 16,687 80,897 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001087401_co-space_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001087401_co-space_prospectus_summary.txt
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+PROSPECTUS SUMMARY The items in the following summary are described in more detail later in this prospectus. This summary provides an overview of selected information and does not contain all the information you should consider. Therefore, you should also read the more detailed information set out in this prospectus and the financial statements. OUR COMPANY We offer a Complete Collocation(TM) solution to our Internet, telecommunications and data storage customers that combines high-quality collocation facilities with a comprehensive suite of value-added services. Our OpenCenter(TM) collocation facilities provide a fully conditioned environment with high levels of security, reliable, high-capacity power supply and multi-stage fire detection and suppression systems in which our customers can locate their telecommunications, computer, network, data storage and other related equipment. Our value-added services encompass network design and integration, Internet and telecommunications network interconnection, access and transport services, data backup and equipment monitoring. The combination of our facilities and services enables our customers to outsource the location and operations of their equipment and we believe cost-effectively deepen their own service offerings, expand their geographic reach and shorten their time to market. We differentiate ourselves from our competition by designing flexible facilities that can accommodate a wide variety of Internet, telecommunications and data storage equipment and by offering what we believe to be the broadest array of services available. In addition, unlike many of our competitors, we are a licensed common carrier, enabling us to enter into interconnection agreements with local and long-distance telephone companies. This accelerates our customers' access to multiple carrier networks and expands their network service options. Our facilities are located in major metropolitan areas. As of March 31, 2000, we had entered into leases for nine sites, four of which are operational and one of which is under construction. We intend to have approximately eight facilities operational by the end of 2000. Beyond 2000, our strategy is to aggressively expand our presence by opening additional facilities targeting key communications centers in the U.S. and abroad. The names CO Space(TM), Complete Collocation(TM), OpenCenter(TM), CO FlexSpace(TM), CO Connect(TM) and CO Services(TM) are trademarks or service marks that belong to us. This prospectus also contains the trademarks and trade names of other entities, which are the property of their respective owners. OUR SOLUTION The intense competition in the Internet, telecommunications and data storage markets has led many service providers to outsource the housing, maintenance and support of their equipment and network operations in order to reduce capital expenditures, lower operating costs and speed time to market. We believe that historically the outsourcing alternatives available have not provided the services and flexibility that our target customers require. Our Complete Collocation(TM) solution is designed to address the individual and evolving needs of our customers. It combines our high-quality collocation facilities with what we believe is the broadest range of value-added services available. The key elements of our Complete Collocation(TM) solution include: - STATE-OF-THE-ART FACILITIES. Our OpenCenters(TM) are designed and constructed to exceed the highest standards of telecommunications carriers. These facilities provide our customers with a fully conditioned environment with high levels of security, a reliable, high-capacity power supply, multi-stage fire detection and suppression systems, and comprehensive systems monitoring. <PAGE> 4 - CUSTOMER EQUIPMENT FLEXIBILITY. Our Complete Collocation(TM) solution satisfies our customers' needs to house their diverse Internet, telecommunications and data storage equipment in a single location. - OPEN NETWORK ACCESS. We have developed relationships with several carriers to provide our customers maximum flexibility in choosing among multiple bandwidth providers. As a result, our customers are able to avoid a single point of network failure and can reduce their network costs. - VALUE-ADDED SERVICES. We provide a comprehensive suite of value-added services to meet our customers' evolving needs. In addition to traditional collocation services, we provide our customers with network design and integration, Internet and telecommunications network interconnection, access and transport services, data backup and equipment monitoring. - OPERATIONS CENTER. Our network operations center enables our customers to rely on us as a single source to monitor, troubleshoot and support their networks and equipment. We provide these services twenty-four hours a day, seven days a week. - ANCHOR CUSTOMERS. We plan to license a significant portion of the space in each of our facilities to our anchor customers. Anchor customers are typically larger customers who themselves provide services that we believe our target customers will utilize. OUR STRATEGY Our goal is to be a world-class provider of collocation facilities and operational services for businesses in the Internet, telecommunications, and data storage industries. To achieve our goal, we have developed a business strategy that defines collocation as a full-service offering, rather than just providing a physical location for customer equipment. Our strategy includes the following elements: - Create, implement and support tailored solutions to address our customers' critical operational requirements; - Develop strong carrier relationships to ensure that our facilities are serviced by multiple carriers; - Capitalize on our common carrier status and interconnection rights to allow our customers to easily access networks and to significantly reduce their time to market;. - Pursue long-term contracts with customers, which provide us with a stable stream of revenues and allows us to better manage our future infrastructure and bandwidth requirements; - Continue to utilize and improve our standardized facility design to provide our customers with uniform services from facility to facility, reduce our operating costs and enable us to rapidly deploy new facilities; - Up-sell our existing customer base by continually identifying, developing and implementing higher value services; and - Promote proprietary brands to strengthen our position within our target markets and continue to build customer confidence in our service offerings. 2 <PAGE> 5 OUR CORPORATE HISTORY We began our operations in November 1998 under the name of CO Space Services, LLC. We subsequently reorganized our company under the name CO Space, Inc. and were incorporated in Delaware on April 12, 1999. We opened our first facility in Somerville, Massachusetts in August 1999. The address of our principal executive offices is 200 Wheeler Road, Burlington, Massachusetts 01803, and our telephone number is (617) 788-0900. Our website is www.cospace.com. The information on our website is not part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered....................................... shares Common stock to be outstanding after this offering......... shares Use of proceeds............................................ We intend to use the net proceeds of this offering to construct and equip our facilities, for working capital, and other general corporate purposes. Proposed Nasdaq National Market System Symbol.............. COSP </TABLE> The number of shares of common stock that will be outstanding after this offering is based on the 4,965,000 shares outstanding as of March 31, 2000, plus: - shares of common stock to be sold by us in this offering; and - shares of common stock to be issued at the completion of this offering upon the conversion of all of our outstanding redeemable convertible preferred stock. The shares of common stock to be outstanding after this offering exclude: - shares of common stock issuable pursuant to the over-allotment option; - 670,846 shares of common stock issuable upon the exercise of outstanding options at a weighted average exercise price of $0.40 per share, as of March 31, 2000; - 15,000 shares of common stock and 21,000 shares of redeemable convertible preferred stock issuable upon the exercise of warrants at an exercise price of $1.50 per share and $1.00 per share, respectively; - 2,864,154 shares of common stock reserved for future issuance under our stock incentive plan; - 1,000,000 shares of common stock reserved for issuance under our employee stock purchase plan; and - 100,000 shares of common stock issued in connection with our acquisition of the personnel and a portion of the assets and liabilities of KennTech, a consulting firm with which we formerly contracted for the selection, design and construction program management of our OpenCenters(TM). 3 <PAGE> 6 SUMMARY CONSOLIDATED FINANCIAL DATA You should read the following summary consolidated financial data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes, all of which appear elsewhere in this prospectus. The pro forma net loss per share is computed based upon the weighted of average number of common shares outstanding and the conversion of all outstanding redeemable convertible preferred stock into an equivalent number of shares of common stock. <TABLE> <CAPTION> PERIOD FROM NOVEMBER 10, 1998 (DATE OF INCEPTION) YEAR ENDED TO DECEMBER 31, DECEMBER 31, 1998 1999 ------------------- ------------ (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues.................................................... $ -- $ 258 OPERATING EXPENSES: Costs of revenues......................................... -- 2,439 Selling and marketing..................................... -- 488 General and administrative................................ 85 2,970 Depreciation and amortization............................. -- 267 Amortization of stock-based compensation.................. -- 89 --------- --------- Loss from operations.............................. (85) (5,995) Interest income, net........................................ -- 38 --------- --------- Net loss.................................................... (85) (5,957) Accretion of preferred stock redemption premium and issuance costs..................................................... -- (331) --------- --------- Net loss attributable to common stockholders................ $ (85) $ (6,288) ========= ========= Net loss per share attributable to common stockholders...... $ (0.03) $ (2.10) ========= ========= Weighted average common shares.............................. 3,000,000 3,000,000 ========= ========= Pro forma net loss per share: Basic and diluted........................................... $ (0.74) ========= Pro forma weighted average shares of common stock outstanding: Basic and diluted........................................... 8,039,630 ========= </TABLE> The pro forma as adjusted balance sheet data reflects: - The conversion of 22,322,502 shares of series A and B redeemable convertible preferred stock into an identical number of shares of common stock; and - The issuance by us of shares of common stock in this offering at an assumed initial public offering price of $ , after deducting the underwriting discount and our estimated offering expenses of approximately $ . 4 <PAGE> 7 <TABLE> <CAPTION> AS OF DECEMBER 31, PRO FORMA 1999 AS ADJUSTED ------------------- ------------ (IN THOUSANDS) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 17,564 Property and equipment, net................................. 12,304 12,304 Total assets................................................ 30,415 Total debt, including capital leases........................ 2,247 2,247 Redeemable convertible preferred stock...................... 31,384 -- Stockholders' equity (deficit).............................. (6,275) </TABLE> As used in the table below, EBITDA consists of net loss excluding interest income, net, income taxes, depreciation and amortization and amortization of stock-based compensation. We expect that depreciation and amortization will increase considerably as we add additional facilities. We believe that because EBITDA is a measure of financial performance, it is useful to investors and analysts as an indication of a company's ability to fund its operations and to service or incur debt. However, EBITDA is not a measure calculated under generally accepted accounting principles and may not be comparable to similarly titled amounts reported by other companies. We do not expect to generate positive EBITDA in the near term. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 1999 -------------- (IN THOUSANDS) <S> <C> OTHER OPERATING DATA: Capital expenditures........................................ $ 12,571 EBITDA...................................................... (5,639) Net cash used in operating activities....................... (3,087) Net cash used in investing activities....................... (12,055) Net cash provided by financing activities................... 32,706 </TABLE> 5 <PAGE> 8
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001087423_red-hat_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001087423_red-hat_prospectus_summary.txt
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION AND OUR FINANCIAL STATEMENTS AND NOTES TO THOSE STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. RED HAT OUR BUSINESS We are a leading global developer and provider of open source software and solutions. Unlike proprietary software, open source software has publicly available source code and can be copied, modified and distributed with minimal restrictions. Our software and solutions are provided for a variety of computing systems, ranging from desktops, workstations and servers to special-purpose computing devices such as wireless telephones, personal digital assistants, routers and phone switches. Our principal product, Red Hat Linux, represented approximately 56% of new license shipments of Linux-based server operating systems in the U.S. in 1998 and was the most popular Linux-based system, preferred by 68% of U.S. users, according to International Data Corporation. We offer professional services for the Red Hat Linux operating system, related tools and libraries and popular open source applications. Our services include technical support and maintenance, developer support, custom development, consulting, training and education and hardware certification. Our web site, REDHAT.COM, is a leading destination for open source software users and developers and serves as the primary delivery mechanism and customer interface for many of our solutions. REDHAT.COM also offers extensive news and content for the open source community, an important forum for open source software development, a commerce site and priority access for software downloads and upgrades. We are committed to serving the interests and needs of open source software users and developers and to sharing our product developments with the open source community. We generated, on a pooled basis with Cygnus Solutions, which we acquired in January 2000, approximately $29.6 million in revenue for the nine months ended November 30, 1999. Companies with which we have strategic relationships include Cisco, Compaq, Dell, Hewlett Packard, IBM, Intel, Nokia, Nortel, Oracle, SAP, Silicon Graphics and Sony Computer Entertainment. OUR MARKET OPPORTUNITY We believe open source software offers many potential benefits for customers, users and vendors. Customers and users are able to acquire the software at little or no cost, install the software on as many computing devices as they wish, and customize the software to suit their particular needs. Vendors are able to leverage the community of open source developers, allowing them to reduce development costs and decrease their time to market. Vendors are also able to distribute their products freely over the internet, enabling them to create large global user bases quickly. We believe open source solutions are particularly well-suited for a new category of computing devices that provide low-cost, easy access to the internet. Open source solutions are flexible, modular, and robust, and can be tailored to fit within resource-constrained environments, while still taking advantage of common application programming interfaces from desktop programming environments. This new category of computing platforms includes mobile devices such as personal digital assistants, wireless telephones, television set top boxes, kiosks and game consoles, as well as special-purpose server devices such as routers, phone switches, and dedicated file and e-mail servers. The growth of the internet has generated significant demand for these devices. For example, IDC predicts that by 2002, there will be more than 55 million mobile computing devices and that by 2005, shipment of these devices will exceed shipment of personal computers. We believe there is a growing opportunity to provide extensive professional services relating to the development and use of open source products across computing platforms, particularly for the enterprise market. Furthermore, we believe that we are well positioned to realize this opportunity, given our comprehensive suite of open source offerings and the popularity of Linux-based solutions. Open source operating systems based on the Linux kernel are some of the better known open source products. Linux-based operating systems represented 17% of new license shipments of server operating systems in 1998, according to IDC. In addition, Linux-based operating systems are now the most commonly used operating systems for web servers, representing approximately 29% of all installations, according to the December 1999 Netcraft Web Server Survey. OUR STRATEGY We seek to enhance our position as a leading provider of open source software and solutions by: - increasing the adoption of open source software across all computing platforms from servers to mobile computing devices, particularly through technology alliances and through the sharing of our development efforts and resources with third-party developers; - expanding our presence in the enterprise market by increasing our professional services capabilities and providing comprehensive offerings of open source systems, tools and applications; - continuing to enhance and expand our web site to create the definitive online destination for the open source community; - continuing to pursue strategic acquisitions and alliances; - furthering our penetration into international markets; and - continuing to invest in the development of open source technology. RECENT DEVELOPMENTS Since our initial public offering in August 1999 we have: - acquired Cygnus Solutions, a leading developer and provider of open source development tools and custom engineering services, which we believe positions us to be the open source leader in both operating systems and development tools; - acquired Hell's Kitchen Systems, Inc., a leading developer of Linux- and UNIX- based credit card processing software; - enhanced our REDHAT.COM web site by launching "Wide Open News", a news site, and our "Developer Network," a collection of technical and business resources for developing software that runs on Red Hat Linux; - released Red Hat Linux 6.1 in October 1999, including localized versions for the German, French and Japanese markets; and - established subsidiaries in Japan and Australia. OUR HISTORY Red Hat, Inc. was incorporated in Connecticut in March 1993 as ACC Corp., Inc. In September 1995, ACC Corp., Inc. changed its name to Red Hat Software, Inc. In September 1998, Red Hat Software, Inc. reincorporated in Delaware. In June 1999, Red Hat Software, Inc. changed its name to Red Hat, Inc. We made an initial public offering of our common stock in August 1999. Unless the context otherwise requires, any reference to "Red Hat", "we", "our" and "us" in this prospectus refers to Red Hat, Inc., a Delaware corporation, and its subsidiaries and predecessors; all references to "Cygnus" in this prospectus refer to Cygnus Solutions, Inc., a wholly-owned subsidiary of Red Hat; and all references to "HKS" in this prospectus refer to Hell's Kitchen Systems, Inc., a wholly-owned subsidiary of Red Hat. Our principal executive offices are located at 2600 Meridian Parkway, Durham, N.C. 27713. Our telephone number is (919) 547-0012. "Red Hat", the Red Hat "Shadow Man" logo, "RPM", "PowerTools", "Red Hat Certified Engineer", "RHCE", "Wide Open", "Always Open", "Red Hat Ready" and the "Red Hat Ready" logo are trademarks or service marks of Red Hat. "Cygnus Solutions", "GNUPro", "eCos", "eCosystem", "Source Navigator", "EL/IX" and "Cygwin" are trademarks or service marks of Cygnus. Other trademarks and tradenames in this prospectus are the property of their respective owners. Except as presented in the financial statements or as otherwise specified in this prospectus, all information in this prospectus: - assumes no exercise of the underwriters' over-allotment option; - gives effect to a two-for-one stock split effected on January 7, 2000; and - gives effect to our acquisitions of Cygnus and HKS, including our issuance of common stock and assumption of options in connection with the Cygnus acquisition. THE OFFERING <TABLE> <S> <C> Shares offered by Red Hat................... 2,750,000 shares Shares offered by the selling 1,250,000 shares stockholders................................ Shares to be outstanding after the 151,683,572 shares offering.................................... Use of proceeds............................. To provide working capital and for other general corporate purposes including geographic expansion and possible strategic acquisitions or alliances. See "Use of Proceeds". Nasdaq National Market symbol............... RHAT </TABLE> The number of shares of common stock to be outstanding after the offering is based on the number of shares outstanding on December 31, 1999. This number includes 11,345,970 shares issued in connection with our acquisitions of Cygnus and HKS. This number does not include 12,827,622 shares of common stock issuable upon the exercise of stock options outstanding under Red Hat's stock plans on December 31, 1999 with a weighted average exercise price of $8.15 per share and 2,412,737 shares of common stock issuable upon exercise of options outstanding under Cygnus's stock plans on December 31, 1999 with a weighted average exercise price of $2.87 per share, or 4,814,900 shares of common stock issuable upon exercise of warrants outstanding on December 31, 1999 with an exercise price of $0.0001 per share. This number also does not include an aggregate of 13,224,110 shares reserved as of December 31, 1999 for future stock option grants and purchases under Red Hat's equity compensation plans. See "Management Employee Benefit Plans" and note 11 of notes to Red Hat's historical financial statements. SUMMARY FINANCIAL DATA The following table summarizes the historical financial data of our business and supplementary pooled financial data reflecting our acquisition of Cygnus in January 2000 in a merger accounted for using the pooling of interests method of accounting. You should read this information with the discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and notes to those statements included elsewhere in this prospectus. <TABLE> <CAPTION> YEAR ENDED FEBRUARY 28, ---------------------------------------------------- 1995 1996(1) 1997 1998 1999 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue.................... $ 482 $ 930 $2,603 $5,156 $10,790 Net income (loss).......... (128) (155) 33 8 (91) Net income (loss) available to common stockholders... (128) (155) 33 8 (130) Earnings (loss) per common share: Basic.................... $ 0.00 $ 0.00 $0.00 $0.00 $(0.01) Diluted.................. 0.00 0.00 0.00 0.00 (0.01) Weighted average common shares outstanding: Basic.................... 24,000 45,252 47,000 47,000 47,100 Diluted.................. 24,000 45,252 54,465 69,157 47,100 Pro forma earnings (loss) per common share (2): Basic.................... $ 0.00 $ 0.00 $ 0.00 $ 0.00 $0.00 Diluted.................. 0.00 0.00 0.00 0.00 0.00 Pro forma weighted average common shares outstanding (2): Basic.................... 24,000 45,252 47,000 61,684 87,860 Diluted.................. 24,000 45,252 54,465 61,684 87,860 <CAPTION> SUPPLEMENTAL POOLED SUPPLEMENTAL NINE MONTHS NINE MONTHS POOLED ENDED ENDED YEAR ENDED NOVEMBER 30, NOVEMBER 30, FEBRUARY 28, ------------------- --------------------- 1999 1998 1999 1998 1999 -------------- -------- -------- --------- --------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue.................... $ 33,032 $ 7,113 $ 12,596 $ 23,590 $ 29,612 Net income (loss).......... (5,788) 200 (8,776) (4,564) (15,233) Net income (loss) available to common stockholders... (5,827) 184 (8,859) (4,580) (15,315) Earnings (loss) per common share: Basic.................... $(0.12) $0.01 $(0.11) $(0.10) $ (0.18) Diluted.................. (0.12) 0.00 $(0.11) (0.10) $ (0.18) Weighted average common shares outstanding: Basic.................... 47,628 47,052 84,355 47,438 85,692 Diluted.................. 47,628 89,502 84,355 47,438 85,692 Pro forma earnings (loss) per common share (2): Basic.................... $(0.07) $0.00 $(0.06) $(0.05) $(0.12) Diluted.................. (0.07) 0.00 0.06 (0.05) (0.12) Pro forma weighted average common shares outstanding (2): Basic.................... 88,388 81,577 151,880 81,984 127,048 Diluted.................. 88,388 89,502 151,880 81,984 127,048 </TABLE> - ------------------------------ (1) Red Hat's fiscal year ended on February 29, 1996. (2) These numbers are presented on a pro forma basis to reflect the conversion of all of our outstanding preferred stock into our common stock at the beginning of the period indicated or the date of issuance of the preferred stock, if later. The following table presents a summary of our unaudited balance sheet at November 30, 1999: - on an actual basis; - on a pooled pro forma basis to reflect the consummation of our acquisitions of Cygnus and HKS; and - on a pooled pro forma as adjusted basis to reflect the sale by us of 2,750,000 shares of common stock in this offering at an estimated public offering price of $131.3125 per share after deducting the estimated underwriting discount and estimated offering expenses. <TABLE> <CAPTION> NOVEMBER 30, 1999 -------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED --------- ----------- ------------ (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 11,997 $21,453 $364,812 Working capital............................................. 15,195 19,361 362,720 Total assets................................................ 110,298 185,339 528,698 Long-term liabilities....................................... 203 835 835 Total stockholders' equity.................................. 98,535 162,395 505,754 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001087432_intermune_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001087432_intermune_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE RISKS OF INVESTING IN OUR COMMON STOCK DISCUSSED UNDER "RISK FACTORS." OUR BUSINESS InterMune Pharmaceuticals develops and commercializes innovative products for the treatment of serious pulmonary and infectious diseases and congenital disorders. We have the exclusive license rights in the United States and Canada to ACTIMMUNE for a range of diseases, including: - chronic granulomatous disease, a life-threatening congenital disorder of the immune system; - osteopetrosis, a life-threatening congenital disorder causing an overgrowth of bony structures; - idiopathic pulmonary fibrosis, a life-threatening lung condition; - infections caused by a type of bacteria known as mycobacteria (mycobacterial infections), such as tuberculosis; - infections caused by various fungi that attack patients with weakened immune systems (systemic fungal infections), such as cryptococcal meningitis and pneumonia; and - cystic fibrosis, a congenital disorder that leads to chronic pulmonary infections in children. We currently market ACTIMMUNE in the United States for chronic granulomatous disease and severe, malignant osteopetrosis. We have active development programs underway for the other disease areas, several of which are in mid-or advanced-stage human testing, known as clinical trials. Idiopathic pulmonary fibrosis, mycobacterial infections and systemic fungal infections are serious and difficult to treat diseases that we believe represent a combined maximum market opportunity for ACTIMMUNE of approximately $3.5 billion annually in the United States, based on $2.5 billion for idiopathic pulmonary fibrosis, $500 million for mycobacterial infections and $500 million for systemic fungal infections. Interferon gamma-1b, the active ingredient in ACTIMMUNE, is a human protein which plays a key role in preventing the formation of excessive scar, or fibrotic, tissue and is a potent stimulator of the immune system. Interferon gamma is biologically distinct from interferon alpha and interferon beta, two related proteins that are currently marketed for the treatment of diseases such as hepatitis B infection and multiple sclerosis. Interferon gamma has a superior safety profile as compared to interferon alpha and interferon beta because it results in fewer and less severe adverse side effects. ACTIMMUNE--MARKETED DISEASE TREATMENTS CHRONIC GRANULOMATOUS DISEASE. The U.S. Food and Drug Administration has approved ACTIMMUNE for the treatment of chronic granulomatous disease, and we currently market and sell ACTIMMUNE in the United States for this disease. Chronic granulomatous disease causes patients to be vulnerable to severe recurrent infections. This disease affects children, and no other FDA-approved treatment specific to this disease currently exists. ACTIMMUNE was approved by the FDA based on its ability to reduce the frequency and severity of infections in these patients. OSTEOPETROSIS. In February 2000, we received approval from the FDA for the use of ACTIMMUNE for the treatment of severe, malignant osteopetrosis, and we currently market and sell ACTIMMUNE in the United States for this disease. The FDA has granted ACTIMMUNE orphan drug status for the treatment of osteopetrosis. Osteopetrosis leads to blindness, deafness and increased susceptibility to infection. This disorder primarily affects children, and no other effective treatment is currently available. ACTIMMUNE--DISEASE TREATMENTS IN DEVELOPMENT IDIOPATHIC PULMONARY FIBROSIS. We believe the most significant near-term use of ACTIMMUNE is for the treatment of idiopathic pulmonary fibrosis, which afflicts approximately 50,000 persons in the United States. Idiopathic pulmonary fibrosis is characterized by progressive scarring of the lungs, which leads to their deterioration and destruction. The prognosis of patients with idiopathic pulmonary fibrosis is poor and most patients die from progressive loss of lung function, which leads to suffocation. Treatment options for idiopathic pulmonary fibrosis are limited and only minimally effective. The results of testing to determine dosing and efficacy, known as a Phase II clinical trial, published in October 1999 in THE NEW ENGLAND JOURNAL OF MEDICINE showed statistically significant evidence that interferon gamma-1b can halt and reverse the progression of idiopathic pulmonary fibrosis. We are continuing the clinical development of ACTIMMUNE for idiopathic pulmonary fibrosis by developing a clinical trial intended to provide sufficient data for approval, known as a Phase III pivotal clinical trial. OTHER DISEASES. We are also developing ACTIMMUNE to treat a variety of other diseases, including infectious diseases and cystic fibrosis. Preclinical studies and clinical trials have demonstrated the therapeutic potential of ACTIMMUNE against a broad range of infectious diseases, notably mycobacterial and systemic fungal infections. A study published in May 1997 in THE LANCET showed that interferon gamma-1b was effective in the treatment of multidrug-resistant tuberculosis, a type of mycobacterial infection. As a result of these studies, in July 2000, we commenced enrollment in a Phase III pivotal clinical trial, for ACTIMMUNE in the treatment of multidrug-resistant tuberculosis. In January 2000, we commenced enrollment in a Phase II clinical trial in cryptococcal meningitis, a type of systemic fungal infection. We intend to initiate Phase II clinical trials in cystic fibrosis and in atypical mycobacterial infections, which are infections caused by mycobacteria that differ appreciably from those that cause tuberculosis. We believe that the risks and time required to obtain FDA approval for the treatment of new diseases with ACTIMMUNE may be reduced because ACTIMMUNE has proven to be safe for patients since its approval by the FDA in 1990 for the treatment of chronic granulomatous disease. OTHER PRODUCTS IN DEVELOPMENT We also have two preclinical development programs that address infections caused by two types of bacteria, pseudomonas aeruginosa and staphylococcus aureus. STRATEGY We plan to pursue a growth strategy through: - growing product revenue; - expanding the number of FDA-approved indications for ACTIMMUNE; - developing a sales and marketing organization to serve pulmonologists and infectious disease specialists; and - in-license or acquire preclinical and development-stage programs. BACKGROUND InterMune was formed in 1998 and began operations as a wholly owned subsidiary of Connetics Corporation. In 1998, Connetics acquired from Genentech, Inc., and subsequently sublicensed to us, rights to develop and commercialize ACTIMMUNE for a broad range of diseases. We initially focused on marketing ACTIMMUNE for chronic granulomatous disease and developing it for serious infectious diseases and congenital disorders. We have since expanded our development and commercialization plans to include idiopathic pulmonary fibrosis as well as other life-threatening pulmonary diseases. In June 2000, Connetics assigned the Genentech license to us. Our principal executive offices are located at 1710 Gilbreth Road, Suite 301, Burlingame, CA 94010. Our telephone number is (650) 409-2020. Our websites are http://www.intermune.com and http://www.actimmune.com. We do not intend for the information found on our website to be incorporated into or be a part of this prospectus.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001087779_netro-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001087779_netro-corp_prospectus_summary.txt
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+PROSPECTUS SUMMARY This is a summary. You should read the entire prospectus carefully, including the financial data and related notes, before making an investment decision. NETRO CORPORATION We are a leading provider of wireless networking equipment used by telecommunications service providers to provide businesses with high-speed telecommunications connections. Our wireless system, called AirStar, features a single central hub providing telecommunications services to multiple points. This point-to-multipoint architecture allows a service provider to connect many of its customers using a single AirStar radio. AirStar is designed to allow telecommunications service providers to offer voice and high-speed data connections to business customers rapidly and cost-effectively. We have engineered AirStar to support broad service rollouts and to operate at radio frequencies licensed for these applications in different countries. AirStar's point-to-multipoint architecture reduces equipment requirements. AirStar also increases efficient use of transmission capacity; instead of allocating a static amount of capacity to every subscriber, AirStar dynamically allocates capacity based on each subscriber's needs at any given moment. We believe that AirStar is one of the first commercially available high-speed wireless telecommunications systems providing integrated voice and high-speed data connections using a point-to-multipoint architecture. We began shipping a trial version of the AirStar system to service providers in the third quarter of 1998, and the first commercial version in the first quarter of 1999. We began shipping a trial version of the second release of AirStar in the third quarter of 1999. The AirStar system is currently deployed in 44 trials, 8 of which are commercial pilots. These trials and commercial pilots are being conducted by 32 service providers, system integrators and enterprises in 24 countries worldwide. Most of these service providers are served through our relationships with Lucent and Siemens or local country distributors. In recent years, the volume of high-speed data traffic across communications networks worldwide has grown dramatically as the public Internet and private corporate intranets have become essential for communications and e-commerce. This traffic growth has created demand for cost-effective, high-speed telecommunications connections, as business users increasingly rely on applications and content that require higher-speed data connections. In many countries, the telecommunications industry has been deregulated, which has created the opportunity for new service providers to offer telecommunications services to subscribers. There are a number of alternatives that deliver high-speed connections through existing wire-based technologies, but technical, performance, cost or availability issues often limit the ability of these alternatives to satisfy the needs of service providers and businesses worldwide. High-speed, wireless, point-to-multipoint technology offers new competing telecommunications service providers the ability to rapidly serve many businesses in a metropolitan area without the constraints of existing wire-based networks. Telecommunications service providers deploying high-speed wireless networks today must differentiate their services to a wide base of business users and compete effectively with services offered through fiber optic cable, digital subscriber lines, cable modems and wires leased from the traditional telecommunications service provider in a given locale. Our system is designed to address these needs and deliver the following benefits to service providers: Service Integration and Bandwidth on Demand. AirStar supports both voice and high-speed data services and can dynamically allocate capacity among subscribers, which means that capacity is allocated to subscribers based on actual usage at a given moment. This enables service providers to increase revenue from the radio frequency licensed to them. AirStar allows service providers to offer symmetrical high-speed connections, with on-demand peak transmission rates of up to 16 Mbps. Cost-Effective Deployment and Operation. AirStar allows a service provider to compete effectively in the market to provide subscribers with high-speed telecommunications connections. AirStar is designed to provide for low overall system costs and to enable service providers to invest capital in additional equipment only when new subscribers are added. Additionally, the AirStar system THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION. DATED MARCH 1, 2000 6,000,000 Shares [Netro Logo] Common Stock ---------------------- Netro is offering 4,466,465 of the shares to be sold in the offering. The selling shareholders identified in this prospectus are offering an additional 1,533,535 shares. Netro will not receive any of the proceeds from the sale of the shares being sold by the selling shareholders. The common stock is quoted on the Nasdaq National Market under the symbol "NTRO". The last reported sale price of the common stock on February 28, 2000 was $42.50 per share. See "Risk Factors" beginning on page 4 to read about factors you should consider before buying shares of the common stock. ---------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------------- <TABLE> <CAPTION> Per Share Total --------- ----- <S> <C> <C> Initial price to public..................................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to Netro......................... $ $ Proceeds, before expenses, to the selling shareholders...... $ $ </TABLE> To the extent that the underwriters sell more than 6,000,000 shares of common stock, the underwriters have the option to purchase up to an additional 900,000 shares from Netro at the initial price to public less the underwriting discount. ---------------------- The underwriters expect to deliver the shares against payment in New York, New York on , 2000. GOLDMAN, SACHS & CO. DAIN RAUSCHER WESSELS LEHMAN BROTHERS ROBERTSON STEPHENS ---------------------- Prospectus dated , 2000. allocates capacity dynamically based on usage patterns. This feature allows a service provider to optimize the use of radio frequencies and the deployment of equipment by expanding effective transmission capacity. Quality of Service and Reliability. Service providers using AirStar can deploy voice and high-speed data services at different prices to different market segments with the option for guaranteed quality of service levels and up to 99.999% availability. The AirStar system is engineered to enable service providers that are new to a market to offer the same high reliability and availability that wire-based solutions have historically offered. Rapid Time to Market. Service providers using AirStar can achieve rapid time to market for integrated voice and high-speed data connections through AirStar's efficient installation, network management software and ability to dynamically allocate capacity among subscribers. By installing a single AirStar base station, the service provider can attain coverage of many potential subscribers. For example, a typical base station at a frequency of 26 GHz, the frequency of our current highest-volume product, can cover ranges from 5 to 15 square miles, depending on local conditions, and has an aggregate transmission capacity of over 600 Mbps. Our objective is to be the leading worldwide supplier of wireless, high-speed equipment used by telecommunications service providers. Key elements of our strategy include the following: - increase deployments with service providers worldwide; - increase manufacturing capacity for large scale deployments; - provide competitive advantages to service providers; - capitalize on technology leadership to introduce new products rapidly and cost effectively; - build sales and customer advocacy infrastructure; and - strengthen relationships with leading communications equipment vendors. We were incorporated in California in November 1994 and our initial public offering was in August 1999. Our principal executive offices are located at 3860 N. First Street, San Jose, California 95134, and our telephone number is (408) 216-1500. THE OFFERING Shares offered by Netro............. 4,466,465 shares Shares offered by the selling shareholders........................ 1,533,535 shares Shares outstanding after this offering............................ 49,379,238 shares. The number of shares that will be outstanding after the offering is based on the actual number outstanding as of December 31, 1999. It excludes: - options to purchase 6,844,460 shares of common stock outstanding as of December 31, 1999 at a weighted average exercise price of $7.18 per share; and - 57,028 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $7.39 per share. Nasdaq National Market symbol....... NTRO Use of proceeds..................... For general corporate purposes, including expansion of our sales and customer advocacy organizations, research and development and working capital. [INSIDE FRONT COVER] [COLOR ARTWORK] SUMMARY CONSOLIDATED FINANCIAL DATA The summary consolidated financial data below should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the related notes included elsewhere in this prospectus. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------ 1997 1998 1999 -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues.................................................... $ 5,601 $ 5,438 $ 18,185 Gross profit (loss)......................................... (2,672) (4,202) 3,311 Loss from operations........................................ (25,237) (29,132) (29,153) Net loss.................................................... (24,534) (28,828) (28,800) Basic and diluted net loss per share........................ $ (5.11) $ (4.07) $ (1.31) Shares used to compute basic and diluted net loss per share..................................................... 4,798 7,087 21,988 Pro forma basic and diluted net loss per share (unaudited)............................................... $ (0.71) Shares used to compute pro forma basic and diluted net loss per share (unaudited)..................................... 40,616 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ---------------------- ACTUAL AS ADJUSTED ------- ----------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $45,337 $224,946 Working capital............................................. 44,417 224,026 Total assets................................................ 65,814 245,423 Long-term debt and capital leases........................... 10,397 10,397 Total shareholders' equity.................................. 45,556 225,165 </TABLE> For an explanation of the determination of the number of shares used to compute basic and diluted net loss per share and unaudited pro forma basic and diluted net loss per share, see note 2 of notes to consolidated financial statements. The consolidated balance sheet data as of December 31, 1999, as adjusted, reflects our sale of the 4,466,465 shares of common stock under this prospectus at an estimated public offering price of $42.50 per share, after deducting the estimated underwriting discount and offering expenses that we will pay. See "Use of Proceeds" and "Capitalization".
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001087823_packetvide_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001087823_packetvide_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before buying shares in this offering. You should read the entire prospectus carefully. PACKETVIDEO CORPORATION ------------------------ We develop software that enables the delivery, management and viewing of full-motion video and audio over wireless networks. Our software is designed to allow live and pre-encoded video and audio content, which we refer to as rich digital media, to be viewed on mobile information devices, including Internet-enabled cellular telephones, or smart phones, handheld devices, wireless personal digital assistants, or PDAs, and laptop computers. Our technology is based on our unique implementation of the Motion Pictures Expert Group 4, or MPEG4, standard. The MPEG4 standard defines a framework for encoding, transmitting and decoding multimedia content over error-prone communications networks. We have applied our knowledge of MPEG4, mobile information devices and wireless networks to create unique performance enhancements to this standard, while maintaining interoperability with fully-compliant MPEG4 products and technologies. We believe this will enable wireless service providers to address a broader user base and allow programming providers to deliver a wider array of multimedia content. Specifically, our technology has been designed to address challenges inherent in the delivery of multimedia content to mobile information devices over wireless networks. These challenges include: - Delivering rich digital media over wireless networks with high error rates and low and varying transmission speeds; - Delivering rich digital media without adversely affecting the delivery of voice and data services; and - Optimizing rich digital media for mobile information devices with limited processing power and battery life and varying display sizes. Our end-to-end software solution, which we call PVPlatform, represents the initial implementation of our technology for use today in trials and demonstrations. Our PVPlatform consists of our: PVAuthor, which encodes rich digital media for transmission over wireless networks; PVServer, which stores and distributes rich digital media to subscribers over wireless networks; and PVPlayer, which decodes rich digital media for viewing on mobile information devices. Over the next 12 months, we will incorporate additional aspects of our technology into our PVPlatform in connection with the commercial deployment of rich digital media services by wireless service providers. Our software has been designed to support all major digital wireless telephony standards in use today, as well as next-generation wireless networks currently being developed. Our objective is to be the leading provider of software solutions that enable the encoding, storage, transmission and decoding of rich digital media over wireless networks. We intend to provide our software solutions through license, sale and service arrangements. Our strategy includes the following key elements: - Initiate and extend relationships with wireless service providers; - Propagate widespread use of our decoder in mobile information devices; - Promote the development of multimedia content and applications; - Maintain and extend our technology leadership; - Capitalize on international opportunities; and - Build the PacketVideo brand name. We intend to market our software solutions primarily through our direct sales force as well as through strategic relationships with leading wireless service providers, semiconductor and device designers and ------------------ TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> PROSPECTUS SUMMARY.................... 3 RISK FACTORS.......................... 6 SPECIAL NOTE REGARDING FORWARD- LOOKING STATEMENTS.................. 16 USE OF PROCEEDS....................... 17 DIVIDEND POLICY....................... 17 CAPITALIZATION........................ 18 DILUTION.............................. 19 SELECTED FINANCIAL DATA............... 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 21 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> BUSINESS.............................. 25 MANAGEMENT............................ 39 CERTAIN TRANSACTIONS.................. 47 PRINCIPAL STOCKHOLDERS................ 48 DESCRIPTION OF CAPITAL STOCK.......... 50 SHARES ELIGIBLE FOR FUTURE SALE....... 53 UNDERWRITING.......................... 55 NOTICE TO CANADIAN RESIDENTS.......... 58 LEGAL MATTERS......................... 59 EXPERTS............................... 59 ADDITIONAL INFORMATION................ 59 INDEX TO FINANCIAL STATEMENTS......... F-1 </TABLE> ------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL (25 DAYS AFTER COMMENCEMENT OF THE OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. manufacturers and programming providers. While we have only recently begun to market our software and technologies, we have established a number of preliminary relationships with wireless service providers, semiconductor and device designers and manufacturers and programming providers, including Casio, CNBC/ Dow Jones Business Video, Infineon Technologies, Intel, Philips, Sanyo, Sonera, Sony Pictures Entertainment, Texas Instruments, The Weather Channel, US West and Warner Bros. Our current stockholders include the following companies and their affiliates: <TABLE> <S> <C> <C> Infineon Technologies Reuters Sony Intel Siemens Texas Instruments Philips Sonera Time Warner QUALCOMM </TABLE> We were incorporated in Delaware on July 22, 1998 and our fiscal year is on a calendar year basis. On February 29, 2000, we had 82 employees. Our principal executive offices are located at 10350 Science Center Drive, Suite 210, San Diego, California 92121. Our telephone number is (858) 455-2500. Our website is www.packetvideo.com or www.pv.com. The information found on our website is not a part of this prospectus. PacketVideo, the PacketVideo logo, PV, PVPlatform, PVAuthor, PVServer and PVPlayer are trademarks of PacketVideo Corporation. All other trade names and trademarks appearing in this prospectus are the property of their holders. THE OFFERING Common stock offered............... shares Common stock outstanding after this offering........................... shares Use of proceeds.................... We intend to use the net proceeds of this offering to fund the growth of our business, and for working capital and general corporate purposes. Proposed Nasdaq National Market symbol............................. PVDO The share amounts in this table are based on shares outstanding as of December 31, 1999. This table: - excludes 225,000 shares subject to outstanding options to purchase our common stock and 2,151,000 shares of common stock available for future issuance under our 2000 Equity Incentive Plan; and - assumes conversion of all outstanding shares of convertible preferred stock into shares of common stock. ------------------ ASSUMPTIONS USED IN THIS PROSPECTUS Except as otherwise indicated, information in this prospectus is based on the following assumptions: - the conversion of all outstanding shares of our convertible preferred stock into 19,913,790 shares of common stock upon the closing of this offering; - the filing of an amended and restated certificate of incorporation after the closing of this offering; and - no exercise of the underwriters' over-allotment option to purchase shares. SUMMARY FINANCIAL DATA The following financial information should be read together with the "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. <TABLE> <CAPTION> PERIOD FROM JULY 22, 1998 (INCEPTION) TO YEAR ENDED DECEMBER 31, DECEMBER 31, 1998 1999 --------------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> STATEMENT OF OPERATIONS DATA: Operating expenses: Research and development.................................. $ 253 $ 1,584 Sales and marketing....................................... -- 861 General and administrative................................ 130 762 Amortization of deferred compensation..................... -- 4,976 ------- ------- Loss from operations........................................ 383 8,183 Interest income........................................... 1 164 Net loss.................................................... $ (382) $(8,019) ------- ------- Basic and diluted net loss per share(1)..................... $ (0.02) $ (0.63) ======= ======= Weighted average shares used in computation of basic and diluted net loss per share................................ 18,186 12,708 ======= ======= Pro forma basic and diluted net loss per share(1)........... $ (0.34) ======= Weighted average shares used in computation of pro forma basic and diluted net loss per share(1)................... 23,846 ======= </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ----------------------------------------- PRO FORMA ACTUAL PRO FORMA(2) AS ADJUSTED(3) ------- ------------ -------------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short-term investments...... $23,087 $38,587 $ Working capital........................................ 22,375 37,875 Total assets........................................... 23,796 39,296 Total stockholders' equity............................. 22,890 38,390 </TABLE> - --------------- (1) For a description of the computation of the net loss per share, on a regular and pro forma basis, and the number of shares used in the per share calculations, see Note 1 of Notes to Financial Statements. (2) The Pro Forma column reflects our receipt of net proceeds from the sale of 1,443,569 shares of series D convertible preferred stock in March 2000 estimated at $15.5 million. (3) The Pro Forma As Adjusted column reflects our receipt of the net proceeds from the offering after deducting estimated underwriting discounts and commissions and estimated offering expenses. See "Capitalization" and "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001087875_coolsaving_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001087875_coolsaving_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including "Risk Factors" and the financial statements, before making an investment decision. CoolSavings We provide a comprehensive set of e-marketing services used by online and offline advertisers to build one-to-one customer relationships. Under our established brand, advertisers can deliver, target and track a wide array of incentives to promote their products or services. We deliver these incentives to targeted segments of our large audience of consumers, known as members, who have registered their demographic profiles with us and have given us permission to deliver personalized savings opportunities to them. These incentives can be redeemed by our members either online or in stores depending on the particular promotion. We generate substantially all of our revenues by providing e- marketing services to our advertisers. Approximately 1% of our revenues are generated from royalty and license fees and other miscellaneous sources. The top ten advertisers from which we generated the most revenues in 1999 were Bigstar, eNutrition.com, First USA, InsWeb, Kids "R" Us, MCI WorldCom, overstock.com, petopia.com, petsmart.com and SmarterKids.com. During 1999, no advertiser accounted for more than 6.8% of our revenues. During the first quarter of 2000, no advertiser accounted for more than 10.9% of our revenues. As of March 31, 2000, we had over 6.6 million registered members, representing nearly 5.4 million households. The compelling advantages of the Internet as a direct marketing medium have led to the development of e-marketing services that are designed to enable businesses to acquire and retain customers and build customer loyalty. The Direct Marketing Association projects that online direct marketing expenditures will increase from approximately $1.3 billion in 1999 to approximately $8.6 billion in 2004. In our experience, while online companies are the most frequent users of our e-marketing services, traditional offline businesses such as national retailers and consumer packaged goods manufacturers are increasingly seeking to use our e-marketing services to drive offline sales and build customer relationships. Furthermore, we believe many online companies and traditional businesses are devoting larger portions of their marketing budgets to Internet direct marketing. Our web site, coolsavings.com, offers convenient and personalized incentives for goods and services from a broad range of advertisers, including online retailers, national brick-and-mortar chains, consumer packaged goods manufacturers, large consumer service providers and neighborhood businesses. We offer a wide array of promotional services for advertisers including printed and electronic coupons, personalized e-mails, rebates, samples, sales notices, gift certificates, contests and banner advertisements. According to Media Metrix, for March 2000, CoolSavings was the eleventh most frequently visited shopping web site and the eighth most frequently visited shopping site by women. During the first quarter of 2000, we sent an average of approximately 22.8 million e-mails to our members per month. With our members' permission, we capture and store detailed member demographic information, track shopping preferences and behavior, and with advertiser cooperation can track redemption of these incentives back to our members' households. In doing so, we have developed an extensive database of information that we use for the benefit of our advertisers. Although we keep our members' identities private, we analyze our database with sophisticated data analysis, targeting and tracking technology to help our advertisers execute effective promotional campaigns. As our members use the incentives we offer, we gather extensive shopping behavior and preference information which further enriches our member profiles for future database marketing. Our objective is to be the leading provider of e-marketing services to advertisers. To achieve this objective, we plan to continue to add to our base of members and advertisers through an active online and offline marketing program that enhances the CoolSavings brand. We must also continue to enrich our database and develop deeper data for predictive modeling and targeting purposes. Our business is subject to risks. In particular, we have incurred significant losses since our inception, including net losses of $16.9 million in 1999. Our accumulated deficit as of March 31, 2000 was $28.7 million, and we expect to continue to incur losses for the foreseeable future. Furthermore, we operate in an emerging and highly competitive market with relatively low barriers to entry. We were incorporated as Interactive Coupon Marketing Group, Inc. in Michigan in December 1994. In November 1998, we changed our corporate name to coolsavings.com inc. Our corporate offices are located at 360 N. Michigan Avenue, Suite 1900, Chicago, Illinois 60601. Our telephone number at that location is (312) 224-5000. Our Internet address is http://www.coolsavings.com. Information contained on our web site is not a part of this prospectus. The Offering <TABLE> <C> <S> Common stock offered by CoolSavings................. 3,300,000 shares Common stock to be outstanding after this offering.. 38,678,021 shares Use of proceeds..................................... For general corporate purposes, including operational expenses, such as personnel and sales and marketing, and capital expenditures Proposed Nasdaq National Market Symbol.............. CSAV </TABLE> Unless otherwise indicated, share information in this prospectus: . is based on our shares outstanding as of March 31, 2000; . assumes conversion of our convertible subordinated notes into 793,076 shares of common stock upon completion of this offering, based on an assumed initial public offering price of $7.00 per share; . assumes conversion of our Series A convertible preferred stock into 2,822,133 shares of common stock upon completion of this offering; . gives effect to a 1,150-for-1 stock split which occurred on April 7, 2000; and . assumes the underwriters' over-allotment option is not exercised. ------------ The number of shares to be outstanding after this offering excludes, as of March 31, 2000: . 6,352,562 shares of common stock reserved for issuance under our 1997 Stock Option Plan, of which 4,282,600 shares are subject to outstanding options at a weighted average exercise price of $4.23 per share; . 324,737 shares subject to options granted outside of our 1997 Stock Option Plan at an exercise price of $0.28 per share; and . 635,256 shares of common stock reserved for issuance under our 1999 Non- Employee Director Stock Option Plan, of which 63,250 shares are subject to outstanding options at a weighted average exercise price of $4.69 per share. Unless otherwise indicated, all statistical data regarding CoolSavings referenced in this prospectus is as of March 31, 2000. This prospectus contains statistical data regarding Internet usage and the advertising and marketing industry that we obtained from industry publications, including reports generated by International Data Corporation, the Direct Marketing Association, Mediamark Research Inc., NPD Online Research and Media Metrix, Inc. We own service mark registrations for the mark COOLSAVINGS, as well as several other service marks, including, among others, COOLMALLS, COOLTRAVEL, COOLSAMPLES and COOLCATALOGS, in the United States. We also own common law rights in these and other marks. In addition, we have applied for United States federal registrations of several service marks, including our stylized piggy- bank logo, SAVE. THEN SHOP., SQUEALS OF THE DAY, COOLSAVINGS COUPON MANAGER and SAVINGSCENTER. We have also obtained a trademark registration in Australia for COOLSAVINGS and have registration applications pending in the United Kingdom and Canada. All other trademarks or service marks appearing in this prospectus are trademarks or service marks of others. The summary financial data presented below are derived from the financial statements of CoolSavings. The pro forma balance sheet data includes the automatic conversion of our convertible subordinated notes and Series A convertible preferred stock upon the completion of this offering. The pro forma as adjusted balance sheet data reflects the receipt of the net proceeds from the sale of the 3,300,000 shares of common stock offered by CoolSavings at an assumed initial public offering price of $7.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses. The pro forma loss per common share for the year ended December 31, 1999 and the three months ended March 31, 2000 reflects the effects of a deemed dividend of $19,868,000 representing the beneficial conversion feature of the Series A convertible preferred stock and a beneficial conversion feature of $555,000 relating to the conversion of the convertible subordinated notes. The shares used to compute pro forma loss per share at December 31, 1999 and March 31, 2000 were calculated by adding to the historical weighted average common shares outstanding the number of shares which will be issued upon the conversion of the convertible subordinated notes and the Series A convertible preferred stock using the if converted method from the respective dates of issuance. Summary Financial Data (in thousands, except share and per share data) <TABLE> <CAPTION> Inception Three Months Ended through Year Ended December 31, March 31, December 31, ---------------------------------------------- ----------------------- 1995 1996 1997 1998 1999 1999 2000 ------------ ---------- ---------- ---------- ---------- ----------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> Statement of Operations Data: (unaudited) Net revenues.......... $ -- $ -- $ 110 $ 1,143 $ 12,916 $ 890 $ 8,086 Gross profit (loss)... -- -- (38) 715 11,098 634 7,017 Loss from operations.. (16) (883) (2,725) (5,346) (17,133) (2,694) (7,713) Net loss.............. (16) (874) (2,732) (5,741) (16,868) (2,624) (7,638) Historical loss per common share, basic and diluted.......... $ (0.00) $ (0.06) $ (0.15) $ (0.27) $ (0.57) $ (0.10) $ (0.40) Weighted average shares used to compute historical basic and diluted loss per common share................ 10,962,809 13,697,334 18,266,572 21,547,177 29,804,681 25,249,484 31,729,705 Pro forma loss per common share, basic and diluted (unaudited).......... $ (1.24) $ (0.79) Weighted average shares used to compute pro forma basic and diluted loss per share (unaudited).......... 30,058,750 35,340,788 </TABLE> <TABLE> <CAPTION> March 31, 2000 --------------------------- Pro Pro Forma Actual Forma As Adjusted ------- ------- ----------- (unaudited) <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents......................... $ 9,543 $ 9,543 $30,830 Working capital................................... 6,907 11,904 32,304 Total assets...................................... 25,122 25,122 45,522 Long-term debt, including current portion......... 825 825 825 Total stockholders' equity........................ 11,585 16,581 36,981 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001088022_ipix-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001088022_ipix-corp_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights the information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before investing in the common stock. To understand this offering fully, you should read the entire prospectus carefully, including the risk factors and the financial statements and notes. We use the term "we," "the company," or "iPIX" to refer to Internet Pictures Corporation, a corporation organized under Delaware law created by the merger of Interactive Pictures Corporation and bamboo.com, Inc. We refer to Interactive Pictures Corporation as "Interactive Pictures" and to bamboo.com, Inc. as "bamboo.com." INTERNET PICTURES CORPORATION OVERVIEW iPIX is a leading Internet infrastructure company that provides visual content and other digital media solutions to facilitate commerce, communication and entertainment. We offer both businesses and consumers complete end-to-end solutions that include the capture, processing, hosting and distribution of visual content and other digital media for the Internet. Our infrastructure enables us to deliver digital media content to web sites accessed from a variety of platforms, including personal computers, interactive televisions and wireless devices. Our solutions help businesses increase the relevance and enjoyment of users' web site visits, resulting in increased traffic and repeat usage. This, in turn, provides our customers with increased e-commerce and advertising revenue opportunities without requiring significant investment in digital media infrastructure. We have targeted the following global vertical markets: real estate, travel and hospitality, automotive, e-retail, electronic publishing, education and entertainment. Our customers include Carnival Cruise Lines, Cendant, Century 21, CNN, Coldwell Banker, Discovery.com, Disney, ERA, General Motors, Hilton Hotels, Intel, Microsoft, Prudential Real Estate, RE/MAX, Rent.Net, Swissotel, The Washington Post, Ticketmaster Online-Citysearch and Warner Brothers. MARKET OPPORTUNITY International Data Corporation, or IDC, estimates e-commerce revenues will grow from approximately $130 billion worldwide in 1999 to $1.6 trillion worldwide by 2003. Additionally, IDC estimates the number of URLs on the web will grow from 2.2 billion in 1999 to 4.3 billion in 2000. To remain competitive, businesses must devote significant time and resources to attract and retain web site traffic and generate e-commerce transactions. In order to fulfill these objectives, companies are seeking more compelling visual content and other digital media to significantly enhance the quality of their online presence. Technological innovations, such as immersive images, web cams and streaming video, offer businesses the opportunity to provide visual content and other digital media of a more realistic and interactive nature. Businesses are seeking to take advantage of these innovations without having to incur the expense of creating and maintaining their own digital media infrastructure. THE IPIX SOLUTION Our end-to-end solutions include the capture, processing, hosting and distribution of visual content and other digital media for the Internet. Our solutions are designed for many types of digital content, including still images, immersive images, slide shows, video, animation and audio. Utilizing an extensive network of photographers, we offer our content capture services in over 90 of the top 100 metropolitan areas across the United States and Canada. We have a patented technology for the capture and processing of immersive images utilizing a standard digital camera fitted with a fisheye lens. An iPIX immersive image is a 360 degrees by 360 degrees image that users can easily navigate on a computer screen by moving a cursor inside the image. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS SUBJECT TO COMPLETION DATED MAY 3, 2000 5,000,000 Shares Internet Pictures (TM) (LOGO) Visual Content Solutions for the Internet Common Stock Internet Pictures Corporation is offering 5,000,000 shares of its common stock. Our common stock is listed on the Nasdaq National Market under the symbol IPIX. On May 2, 2000, the reported last sale price of our common stock was $15.00 per share. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 7. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------- PROCEEDS TO INTERNET PRICE TO UNDERWRITING PICTURES PUBLIC DISCOUNT CORPORATION - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Per Share $ $ $ Total $ $ $ </TABLE> We have granted the underwriters a 30-day option to purchase up to an additional 750,000 shares of common stock to cover over-allotments. J.P. MORGAN & CO. CHASE H&Q ROBERTSON STEPHENS DAIN RAUSCHER WESSELS PRUDENTIAL VOLPE TECHNOLOGY A UNIT OF PRUDENTIAL SECURITIES , 2000 We have recently introduced iPIX Movies, our new offering which combines the interactivity of our immersive images with full-motion video. Using our scalable hosting and distribution infrastructure with ViewAlways technology, we enable high speed delivery of digital media content over the Internet to multiple user platforms, including personal computers and wireless devices. We believe that our visual content and other digital media solutions provide businesses with more compelling content for attracting and retaining web site visitors and increasing e-commerce opportunities. OUR BUSINESS STRATEGY The key elements of our strategy are as follows: - Enhance our leadership position in visual content and digital media solutions; - Leverage our end-to-end solutions to generate multiple revenue sources; - Expand our visual content infrastructure with new offerings; - Expand strategic relationships; and - Expand internationally. RECENT DEVELOPMENTS Merger of Interactive Pictures and bamboo.com We are the result of the merger of Interactive Pictures and bamboo.com that occurred on January 19, 2000. Interactive Pictures was founded in 1986 at the Oak Ridge National Laboratory in Tennessee to develop remote robotic systems for the United States Department of Defense, the Department of Energy, NASA and other government departments. bamboo.com was founded in 1995 in Toronto, Canada to provide virtual tours for online residential real estate listings. Acquisition of PictureWorks On March 31, 2000, we acquired all of the capital stock of PictureWorks Technology, Inc. We believe that this acquisition will extend our visual content infrastructure and enable us to provide solutions to customers who depend on user-submitted content, including e-commerce web sites, community web sites and Internet portals. PictureWorks' Rimfire technology enables end-users to post a variety of media -- including still photos, audio and video -- to the web by simply pointing a cursor at the desired media and dragging it to a Rimfire supported web site. On April 18, 2000, we issued a press release that contained unaudited financial information for the first quarter ended March 31, 2000. Revenues for the quarter ended March 31, 2000 were $8.3 million, compared to $1.3 million for the similar period in 1999, and $5.3 million in the fourth quarter of 1999. Net loss for the first quarter, excluding merger expenses and non-cash charges related to stock-based compensation, was $18.9 million or $0.41 per share compared to a net loss of $6.2 million or $0.73 per share in the first quarter of 1999. We provided our results on a supplemental pooled basis to reflect the merger of Interactive Pictures and bamboo.com. Other recent developments include: - Starwood Resorts and Hotels selected the iPIX infrastructure to showcase across the Internet its travel destinations around the world. As part of the agreement, we will capture, process, host and distribute the rich media content to Starwood's web site and to leading travel portals. - We signed a technology partnership agreement with POP.com to develop interactive movie content for the Internet. POP.com, an independent digital entertainment company founded by Brian Grazer, Ron Howard, Steven Spielberg, Jeffrey Katzenberg, David Geffen and Paul G. Allen, will use iPIX images and iPIX Movies technology to produce original Internet entertainment. - We signed a content development and licensing agreement with America Online that will enable AOL 5.0+ subscribers to view enhanced, interactive visual content developed by us. AOL has selected iPIX visual content to power its e-commerce initiatives in the travel section of AOL. Consumers can visit popular tourist destinations with iPIX before booking their travel on AOL. - We announced a series of agreements with the leading real estate companies in North America including Coldwell Banker, ERA, Prudential and RE/MAX. These agreements include commitments to purchase over 100,000 virtual tours. - Several of the leading auto sites in the emerging online auto market, including Excite@Home, CarOrder.com, Autoweb.com, AutoVantage.com and AutoNation.com announced agreements to use our technology to allow consumers to view the interior of new and used cars online to drive site traffic and transaction velocity. - We extended our visual content infrastructure through partnerships with Akamai, Exodus and Savvis to provide enhanced performance, reliability and scalability of visual content distribution. - On April 20, 2000, we announced a multi-year exclusive agreement to develop and implement powerful and easy to use imaging solutions for eBay's community of over 10 million registered users. We will collaborate with eBay to offer eBay users an integrated solution to allow sellers to quickly and easily include high-quality digital media in their listings. We will design our imaging infrastructure to make it easy for eBay users to submit and view images. STATEMENT OF OPERATIONS <TABLE> <CAPTION> ------------------- THREE MONTHS ENDED MARCH 31, ------------------- 1999 2000 In thousands, except per share amounts ------- -------- <S> <C> <C> Revenues.................................................... $ 1,318 $ 8,283 Cost of revenues............................................ 661 4,766 ------- -------- Gross profit................................................ 657 3,517 ------- -------- Operating expenses: Sales and marketing....................................... 4,058 15,507 Research and development.................................. 792 2,365 General and administrative................................ 2,013 5,478 Stock-based compensation.................................. 3,563 2,774 Merger expenses........................................... -- 15,175 ------- -------- Total operating expenses............................... 10,426 41,299 ------- -------- Loss from operations........................................ (9,769) (37,782) Interest and other income, net.............................. 38 892 ------- -------- Net loss.................................................... $(9,731) $(36,890) ======= ======== Basic and diluted net loss per common share................. $ (1.15) $ (0.79) ======= ======== Shares used to calculate net loss per share................. 8,464 46,645 ======= ======== Net loss, excluding merger expenses and non-cash charges related to stock-based compensation....................... $(6,168) $(18,941) ======= ======== Basic and diluted net loss per common share, excluding merger expenses and non-cash charges related to stock-based compensation.................................. $ (0.73) $ (0.41) ======= ======== </TABLE> OUR ADDRESS We are a corporation organized under the laws of Delaware. Our headquarters are located at 1009 Commerce Park Drive, Oak Ridge, TN 37830, with co-headquarters at 124 University Avenue, Palo Alto, CA 94301. Our telephone number is 865-482-3000. We can be found on the Internet at www.ipix.com. Information contained on our web site does not constitute part of this prospectus. THE OFFERING COMMON STOCK OFFERED BY IPIX.... 5,000,000 shares COMMON STOCK OUTSTANDING AFTER THE OFFERING.................... 57,521,512 shares USE OF PROCEEDS................. We intend to use the net proceeds we receive from this offering for sales and marketing activities, including international expansion, to advance the development of new visual content solutions, for working capital and general corporate purposes and to repay indebtedness. NASDAQ NATIONAL MARKET SYMBOL... IPIX DIVIDEND POLICY................. We do not anticipate paying any cash dividends any time in the foreseeable future. Unless otherwise indicated, the share information in this prospectus is stated as of March 31, 2000 and: - excludes up to 750,000 shares that may be issued and sold by us to the underwriters pursuant to their rights to purchase shares to cover over-allotments; - includes 6,894,692 shares of our outstanding Class B common stock; - excludes 10,514,883 shares of common stock issuable upon the exercise of outstanding stock options granted under our 1997 equity compensation plan, our amended and restated 1998 employee, director and consultant stock plan and our 1999 employee stock purchase plan, of which options to purchase 3,339,761 shares are currently exercisable; - excludes 2,519,307 shares of common stock reserved for future grant or award under our stock option and stock purchase plans; - excludes 501,944 shares of common stock issuable upon the exercise of warrants and 733,097 shares of common stock issuable upon the exercise of stock options assumed upon the acquisition of PictureWorks; - excludes 200,000 shares of common stock issuable upon the exercise of outstanding warrants; and - includes 4,644,334 shares of common stock issued upon the acquisition of PictureWorks. SUMMARY FINANCIAL INFORMATION The following table summarizes the historical financial data of our business and supplemental pooled financial data reflecting the merger of Interactive Pictures and bamboo.com in January 2000 in a merger accounted for using the pooling of interests method of accounting. You should read this information with the discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and notes to those statements included elsewhere in this prospectus. <TABLE> <CAPTION> ------------------------------------------------- SUPPLEMENTAL POOLED FISCAL YEARS ENDED DECEMBER 31, YEAR ENDED -------------------------------- DECEMBER 31, 1997 1998 1999 1999 In thousands, except per share amounts ------- -------- --------- ------------- <S> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenues............................................ $ 46 $ 77 $ 3,756 $ 12,523 Cost of revenues.................................... 15 67 2,880 7,262 ------ ------- -------- -------- Gross profit........................................ 31 10 876 5,261 Operating expenses: Sales and marketing............................... 10 300 18,044 37,785 Research and development.......................... 42 110 1,366 5,359 General and administrative........................ 122 278 8,007 13,906 Stock-based compensation.......................... -- 1,162 20,079 20,675 ------ ------- -------- -------- Total operating expenses................... 174 1,850 47,496 77,725 ------ ------- -------- -------- Loss from operations................................ (143) (1,840) (46,620) (72,464) Interest expense.................................... -- -- (6,672) (6,684) Other income (expense), net......................... -- -- 647 2,545 ------ ------- -------- -------- Net loss............................................ (143) (1,840) (52,645) (76,603) Beneficial conversion feature of Series B convertible preferred stock....................... -- -- (1,000) (1,000) ------ ------- -------- -------- Net loss attributable to common stockholders........ $ (143) $(1,840) $(53,645) $(77,603) ====== ======= ======== ======== Net loss per common share -- basic and diluted...... $(0.05) $ (0.31) $ (4.13) $ (3.01) ====== ======= ======== ======== Weighted average common shares -- basic and diluted........................................... 2,819 5,953 12,990 25,757 ====== ======= ======== ======== </TABLE> The following table presents a summary of our balance sheet at December 31, 1999: - on a supplemental pooled basis after giving effect to the merger of Interactive Pictures and bamboo.com accounted for as a pooling of interests; - on a combined basis after giving effect to our acquisition of PictureWorks; and - on a supplemental pooled pro forma as adjusted basis after giving effect to the sale of 5,000,000 shares of common stock by us in this offering assuming a public offering price of $15.00 per share after deducting the underwriting discount and estimated offering expenses and reflecting the repayment of the borrowings outstanding at December 31, 1999 under the bank line of credit and notes payable of $1,780 and $2,700, respectively. <TABLE> <CAPTION> ---------------------------------------- AS OF DECEMBER 31, 1999 ---------------------------------------- PRO FORMA SUPPLEMENTAL COMBINED AS ADJUSTED ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> In thousands BALANCE SHEET DATA: Cash, cash equivalents and securities available-for-sale.... $73,366 $ 73,464 $139,384 Working capital............................................. 58,617 57,603 123,523 Total assets................................................ 95,803 313,714 379,634 Long-term liabilities....................................... 387 4,867 387 Total stockholders' equity.................................. 81,041 293,148 363,548 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001088033_quest_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001088033_quest_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..8ebd728c48bc9303967ce4e3719c17884c88dec1
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+SUMMARY You should read the following summary together with the more detailed information and consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus. This prospectus contains forward looking statements that involve risks and uncertainties. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of the factors set forth under "Risk Factors" and elsewhere in this prospectus. QUEST SOFTWARE, INC. We provide application and information availability software solutions that enhance the performance and reliability of an organization's e-business, enterprise and custom applications and enable the delivery of information across the entire enterprise. Organizations are constantly seeking ways to use information and technology to compete more effectively. Today, organizations must deliver relevant information and provide increasingly sophisticated and time-sensitive services to a rapidly expanding audience, including employees, customers, suppliers and partners both inside and outside the traditional enterprise. Many organizations are beginning to extend their business over the Internet to directly reach a large number of geographically dispersed end-users. These initiatives, commonly referred to as e-business, are raising the strategic importance of real-time information and are increasing the challenges of building and maintaining the systems to effectively manage and distribute information. As a result, organizations must assure that their systems provide: - Application availability -- uninterrupted and high performance access to applications under widely varying conditions; and - Information availability -- broad distribution of critical business information from underlying applications to decision-makers throughout the entire enterprise. We offer a family of products that provide both application and information availability solutions. Our products are designed to work individually and together to provide immediate and continuous availability of applications and information. Our application availability products are designed to help ensure uninterrupted and high performance access to software systems by utilizing a number of integrated products that tune the performance and monitor the operation of applications and the underlying database which stores an enterprise's critical information. Other primary components of our application availability solution include our database products that maintain a real-time copy of a database for offloading critical systems and assuring high availability, as well as our products that manage the complex and error-prone process of development and deployment of rapidly changing applications. Our information availability products deliver an enterprise, report-based information management solution that captures, stores, indexes, prints and archives report data or electronic documents from virtually any application for instant distribution over intranets or the Internet. The key elements of our strategy include extending our product leadership, continuing our focus on the e-business applications market, leveraging our significant installed base, expanding our sales force and international distribution channels and extending our existing strategic relationships and developing new partnerships with leading global systems integrators. We have thousands of customers across a range of industries including technology, financial services, manufacturing, healthcare, energy, insurance and telecommunications. We market and sell our software and services worldwide through a combination of direct sales and telesales in the United States, Canada, Australia, the United Kingdom and Germany, as well as through resellers and distributors. In August 1999, we completed an initial public offering of our common stock, raising net proceeds of approximately $64.9 million. In December 1999, we acquired MBR Technologies, Inc. In January 2000, we acquired Foglight Software, Inc. and in February 2000, we acquired QMaster Software Solutions, Inc. THE OFFERING Common stock offered by Quest......... 1,904,230 shares Common stock offered by selling shareholders.......................... 2,295,770 shares Common stock to be outstanding after this offering......................... 40,809,574 shares Use of proceeds....................... We intend to use the net proceeds for general corporate purposes, including working capital, expanding our sales and marketing efforts, product development, expanding our customer support organization, possible acquisitions and capital expenditures. Nasdaq National Market symbol......... QSFT The number of shares of common stock to be outstanding after this offering is based on the actual number of shares outstanding as of December 31, 1999 which excludes: - 5,061,200 shares of common stock issuable upon exercise of stock options outstanding as of February 16, 2000, at a weighted average exercise price of $7.14 per share; - 190,974 shares of common stock issued upon the exercise of options in between January 1, 2000 and February 16, 2000; - 2,210,320 shares of common stock reserved for future issuance under our stock incentive plans; - 600,000 shares of common stock reserved for issuance under our employee stock purchase plan, of which 119,097 shares were issued in February 2000. See "Capitalization," "Management -- 1999 Stock Incentive Plan," "-- 1999 Employee Stock Purchase Plan" and Note 8 of the notes to our consolidated financial statements; and - 1,187,603 shares of common stock issued in connection with an acquisition in January 2000. CORPORATE INFORMATION We were incorporated in California in April 1987. Our principal executive offices are located at 8001 Irvine Center Drive, Irvine, CA 92618 and our telephone number is (949) 754-8000. Our Web site is located at www.quest.com. Information contained on our Web site does not constitute part of this prospectus. Except as otherwise noted, all information in this prospectus assumes that the underwriters' over-allotment option is not exercised. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table should be read with the consolidated financial statements and notes thereto appearing elsewhere in this prospectus. The as adjusted information reflects our receipt of the estimated net proceeds from the sale of 1,904,230 shares of our common stock offered by us hereby at a public offering price of $118.00 per share and the application of the estimated proceeds described in "Use of Proceeds." <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ---------------------------------------------- 1995 1996 1997 1998 1999 ------ ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF INCOME DATA: Total revenues................................ $9,524 $12,862 $18,315 $34,790 $70,868 Gross profit.................................. 8,284 10,445 15,036 28,850 63,675 Income (loss) from operations................. 2,335 (372) 1,448 3,689 4,468 Net income.................................... 2,358 16 289 2,346 3,397 Net income applicable to common shareholders................................ 2,807 Basic and diluted net income per share:....... $ 0.12 $ -- $ 0.01 $ 0.05 $ 0.07 Weighted average common shares outstanding: Basic....................................... 19,500 38,350 40,373 44,261 37,677 Diluted..................................... 19,500 38,350 40,617 44,459 41,800 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 --------------------- ACTUAL AS ADJUSTED ------- ----------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $39,643 $253,231 Short-term marketable securities............................ 11,000 11,000 Working capital............................................. 38,670 252,258 Total assets................................................ 99,149 312,737 Retained earnings........................................... 1,864 1,864 Total shareholders' equity.................................. 62,669 276,257 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001088242_elastic_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001088242_elastic_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..b7a86607ac3aecdccb93d09a4a515b44b1608fda
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION ABOUT ELASTIC NETWORKS AND THE COMMON STOCK BEING SOLD IN THIS OFFERING, AS WELL AS OUR FINANCIAL STATEMENTS AND THE RELATED NOTES, APPEARING ELSEWHERE IN THIS PROSPECTUS. BECAUSE THIS IS ONLY A SUMMARY, YOU SHOULD READ THE ENTIRE PROSPECTUS, ESPECIALLY THE RISKS DESCRIBED UNDER "RISK FACTORS," BEFORE YOU DECIDE TO INVEST IN OUR COMMON STOCK. ELASTIC NETWORKS INC. We design, develop and market high-speed digital subscriber line, or DSL, communications products. Our products enable service providers to deliver easy to deploy and cost-effective broadband access solutions over the existing copper telephone wire infrastructure. We design our products based on our patented EtherLoop technology that combines the best attributes of DSL with those of Ethernet technology to deliver a next generation access solution. EtherLoop's advantages overcome many of the deployment, performance, cost and quality of service limitations of conventional DSL technologies. Our products consist of Internet protocol DSL access multiplexers that connect DSL signals with the Internet and other networks, DSL modems and complementary software. We sell our products directly to domestic and international service providers for deployment in various environments, such as central offices to reach business and residential users or on any premises where multiple end users are located, including hotels, multi-tenant business complexes, apartment buildings, condominiums and university campuses. In addition to our direct selling efforts, we have distribution arrangements with companies such as Nortel Networks Inc. and Westcon Group Inc. that allow us to expand our market presence. In the first six months of 2000, sales to Nortel Networks accounted for approximately 21% of our total revenues and sales to Westcon accounted for approximately 14% of our total revenues. We were originally formed in January 1997 as the Elastic Networks group of Nortel Networks Inc. and began doing business as a separate company in May 1999. For the year ended December 31, 1999, we incurred a net loss of approximately $20.7 million and used cash in operations of $16.4 million. Upon completion of this offering, Nortel Networks Limited and Nortel Networks Inc. together will own approximately 46% of our outstanding common stock. MARKET OPPORTUNITY The demand for broadband access is growing rapidly as the number of Internet users continues to increase, and these users rely on the Internet for more advanced applications such as e-commerce, telecommuting, distance learning and online entertainment. As these applications require more bandwidth, the ability to connect to the Internet at high speeds is becoming increasingly important. DSL technology is designed to address this need by delivering broadband access to end users over existing copper telephone wires, an infrastructure that connects to over 850 million homes and businesses worldwide. However, to date the deployment and maintenance of conventional DSL technologies have been complex, costly and subject to quality of service issues. We believe that widespread deployment of DSL services requires technology that overcomes these challenges. OUR SOLUTION AND STRATEGY Our access solution enables service providers to simplify DSL deployment and provide a cost-effective means of delivering high-speed access to more of their subscriber base. Our EtherLoop-based products offer the following benefits: - MAXIMIZE AVAILABLE BANDWIDTH. Our EtherLoop technology maximizes available bandwidth by enabling both upstream and downstream access speeds of up to 4 megabits per second, or Mbps, based on end user demands. This technology advantage over fixed bandwidth solutions provides the functionality to deliver an array of value-added business services and applications on a common platform. - AVOID INTERFERENCE. Our EtherLoop technology constantly monitors for potential signal interference on each line over which EtherLoop signals are transmitted and can automatically adjust transmission frequencies to avoid potential signal degradation. This enables service providers to deploy more broadband lines in the same bundled group of telephone lines, and improves quality of service. - EASY TO DEPLOY AND USE. Our access products are easy to deploy and do not require re-engineering or rewiring of the local telephone network or time consuming service calls. Our DSL modems are also designed for easy installation, providing the end user with simple plug and play connectivity. - HIGHLY SCALABLE. Our products are designed for quick adjustment of features such as line capacity and bandwidth, without the cost of replacing the product. - GREATER TRANSMISSION DISTANCE. Our technology also provides reliable service coverage beyond the typical range of conventional DSL technologies. With this extended reach, service providers are able to maximize their technology investment to deliver high-speed access to more of their subscriber base. Additionally, unlike conventional DSL technologies, EtherLoop transmits signals in small packets that are capable of being repeated to extend service over even greater distances. Key elements of our strategy include: - Continuing to capitalize on the advantages of our EtherLoop technology; - Expanding our penetration within the broadband access market; - Increasing our direct and indirect sales channels, and expanding internationally; - Leveraging our business relationships to improve our products, reduce our costs and increase our speed to market; and - Facilitating further market adoption by licensing our technology. CORPORATE INFORMATION We were incorporated as a Delaware corporation in September 1998 and began doing business as a separate company in May 1999. Our principal executive office is located at 6120 Windward Parkway, Suite 100, Alpharetta, Georgia 30005. Our telephone number is (678) 297-3100 and our Web address is WWW.ELASTIC.COM. Information contained on our Web site does not constitute part of this prospectus, and you should rely only on the information contained in this prospectus in deciding whether to invest in our common stock. This prospectus refers to market research reports prepared by various organizations, which typically do not disclose their underlying limitations or assumptions. You should not rely on these market reports as being necessarily indicative of future developments. THE OFFERING <TABLE> <S> <C> Common stock offered by Elastic Networks................... 6,800,000 shares Common stock offered by the selling stockholder............ 1,000,000 shares Common stock to be outstanding after this offering......... 31,292,821 shares Use of proceeds by Elastic Networks........................ To repay short term debt, to fund the expansion of our business, our operating deficits and other working capital needs, as well as general corporate purposes. Proposed Nasdaq National Market symbol..................... ELAS </TABLE> The number of shares of common stock to be outstanding after this offering is based on shares outstanding as of August 31, 2000, and excludes: - 5,512,162 shares of common stock issuable upon exercise of outstanding options; - 1,126,311 shares reserved for future grants under our 1999 stock incentive plan; and - 114,899 shares of common stock issuable upon exercise of outstanding warrants. ------------------------ EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS: - REFLECTS THE CONVERSION OF ALL THE OUTSTANDING SHARES OF OUR SERIES A AND B PREFERRED STOCK INTO 9,084,913 SHARES OF OUR COMMON STOCK, WHICH WILL AUTOMATICALLY OCCUR ON THE CLOSING OF THIS OFFERING; - REFLECTS THE AMENDMENT AND RESTATEMENT OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS, WHICH WILL OCCUR IMMEDIATELY BEFORE THE CLOSING OF THIS OFFERING; AND - ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table is a summary of the financial data for our business. You should read this information together with the financial statements and the related notes appearing at the end of this prospectus and the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations." For an explanation of the determination of the number of shares used to compute historical and pro forma basic and diluted net loss per share, see note 2 of the notes to our financial statements. The pro forma balance sheet data summarized below gives effect to the conversion of all outstanding shares of our preferred stock into 9,084,913 shares of our common stock, which will automatically occur on the closing of this offering. The pro forma as adjusted balance sheet data summarized below also reflects the sale of the common stock offered by us at the estimated initial public offering price of $11.00 per share, the mid-point of the estimated offering price range, after deducting underwriting discounts and estimated offering expenses payable by us, and our receipt and application of the net proceeds from this offering, including the repayment of an aggregate of $6.0 million in short term debt borrowed under two secured promissory notes issued in August 2000 for up to $5.0 million each. To the extent that we borrow additional amounts of the remaining $4.0 million available under those notes prior to the closing of this offering, we will use an additional portion of the net proceeds to repay those amounts. <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------ ------------------- 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues................................ $ -- $ 233 $ 8,215 $ 2,600 $ 14,693 Gross profit (loss)........................... -- (1,913) (6,075) (2,909) 562 Operating expenses............................ 4,503 13,317 14,830 5,887 13,874 Operating loss................................ (4,503) (15,230) (20,905) (8,796) (13,312) Net loss...................................... $(4,503) $(15,230) $(20,731) $ (8,760) $(13,259) ======= ======== ======== ======== ======== Net loss attributable to common stockholders................................ $(4,503) $(15,230) $(21,064) $ (8,827) $(13,525) ======= ======== ======== ======== ======== Basic and diluted net loss per common share... $ (0.27) $ (0.91) $ (1.26) $ (0.53) $ (0.81) ======= ======== ======== ======== ======== Weighted average shares used in computing basic and diluted net loss per common share....................................... 16,670 16,670 16,671 16,670 16,675 ======= ======== ======== ======== ======== Pro forma basic and diluted net loss per common share (unaudited).................... $ (1.03) $ (0.58) ======== ======== Weighted average shares used in computing unaudited pro forma basic and diluted net loss per common share amounts (unaudited)... 20,548 23,504 ======== ======== </TABLE> <TABLE> <CAPTION> JUNE 30, 2000 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (UNAUDITED) <S> <C> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $ 4,518 $ 4,518 $ 66,757 Working capital............................................. 7,189 7,189 69,428 Total assets................................................ 20,198 20,198 82,437 Capital lease obligations long term......................... 304 304 304 Redeemable convertible participating preferred stock........ 30,861 -- -- Total stockholders' equity (deficit)........................ (21,953) 8,908 77,147 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001088244_intermix_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001088244_intermix_prospectus_summary.txt
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+SUMMARY THE ITEMS IN THE FOLLOWING SUMMARY ARE DESCRIBED IN MORE DETAIL LATER IN THIS PROSPECTUS. THIS SUMMARY PROVIDES AN OVERVIEW OF SELECTED INFORMATION AND DOES NOT CONTAIN ALL THE INFORMATION YOU SHOULD CONSIDER. THEREFORE, YOU SHOULD ALSO READ THE MORE DETAILED INFORMATION SET OUT IN THIS PROSPECTUS, THE FINANCIAL STATEMENTS AND THE NOTES TO THESE STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. eUniverse operates a network of entertainment-related web sites focused on music, filmed and interactive entertainment. eUniverse's web properties include CD Universe, an online retailer of music products and accessories; Video Universe, an online retailer of video cassettes, DVDs and laser discs; and Games Universe, an online retailer of single and multiplayer computer games. We do not offer and do not intend to offer online gambling or other activities associated with gambling. eUniverse also provides a unique library of proprietary community-building software technologies, named LivePlace. LivePlace combines group browsing, chat, instant messaging and a host of other advanced features to introduce social interaction to the web browsing and shopping experience. eUniverse is a Nevada corporation with principal executive offices at 101 North Plains Industrial Road, Wallingford, Connecticut 06492, telephone number (203) 265-6412. Neither eUniverse nor any of its subsidiaries has ever made a profit in any fiscal quarter. Historically, we primarily have generated revenue from merchandise sales. We have implemented a program to generate advertising revenue through paid third-party advertising on eUniverse's web sites and licensing revenue from licensing our LivePlace software to third parties. We also intend to diversify our retail offerings to include a greater selection of products, such as online downloads of content, clothing, sports items and accessories. Music Entertainment The online store (www.cduniverse.com) of eUniverse's wholly owned subsidiary, CD Universe, Inc., currently offers Internet customers a selection of over 240,000 individual CD titles as well as proprietary content and features. Recently, we established a Japanese version of the CD Universe web site that markets and sells CDs and related products to Japanese customers. Filmed Entertainment eUniverse's Video Universe online store (www.videouniverse.com) offers Internet users a selection of over 40,000 movie titles in videocassette, DVD and laser disc formats. Additionally, the online store (www.dvdwave.com) of eUniverse's wholly owned subsidiary, Falcon Ventures Corporation, offers a selection of over 5,000 DVD titles. Interactive Entertainment eUniverse's Games Universe site (www.gamesuniverse.com) sells interactive computer games and links users to eUniverse's online interactive gaming sites operated by our subsidiaries, which include Case's Ladder (www.casesladder.com), an online portal to a variety of games that provides competitive rankings for online game players and allows game players to compete against one another in a variety of tournaments and leagues, Gamer's Alliance (www.gagames.net), a network of online gaming editorial web sites devoted to interactive PC games, and The Big Network (www.bignetwork.com), a site offering classic board and card games (e.g., chess, checkers, backgammon, spades). eUniverse also operates other entertainment web sites, including: Pokemonvillage.com, an online community for enthusiasts of Pokemon, computer/video games, and other collectibles; Funone.com, a web site that provides online greetings, cartoons, joke lists and gags. Subscribers can receive weekly jokes and send fun electronic greetings to their friends. Forumnation.com, a youth focused web site allowing the users to discuss a variety of subjects, such as music, comics, and games that are of interest to them; and ReserveAuction.com, a site allows the owners of Pokemon cards, comics, and other collectibles to meet and auction their items. Expansion eUniverse intends to continue to leverage its online retailing expertise into other e-commerce areas by expanding its current product offerings through acquisitions of content-oriented web sites that have experienced high growth in unique monthly visitors and attractive demographics that cater to specific communities of interest in the music, video and games businesses. Concurrently with its acquisition strategy, eUniverse is actively adding to and improving upon the existing content and functionality of its web sites. THE OFFERING <TABLE> <S> <C> Common stock offered by the selling stockholders 125,000 shares Common stock to be outstanding after the Offering 17,140,354 shares Use of proceeds eUniverse will not receive any proceeds from the sale of common stock by the selling stockholders under this prospectus. OTC symbol EUNI </TABLE> Common stock to be outstanding after the offering is based on 17,140,354 shares of common stock outstanding as of March 3, 2000. This number does not include: - 1,795,024 shares of convertible preferred stock (see "DESCRIPTION OF CAPITAL STOCK -- Preferred Stock"; - 4,232,500 shares of common stock subject to outstanding options under our 1999 Stock Awards Plan; - 978,145 shares of common stock subject to outstanding warrants; - 354,600 shares of common stock to be issued in connection with our acquisition of outstanding shares of Big Network held by unaffiliated shareholders; and - 11,696 shares of common stock issued in connection with our acquisition of Justsaywow.com; and - 23,668 shares of common stock issued in connection with our acquisition of Dustcloud Media.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001088626_releasenow_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001088626_releasenow_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering and our financial statements and notes to those statements appearing elsewhere in this prospectus. This prospectus contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements contained in this prospectus that are not historical facts. When used in this prospectus, the words "expects," "anticipates," "intends," "plans," "believes," "seeks" and "estimates" and similar expressions are generally intended to identify forward- looking statements. Except as otherwise indicated, all information in this prospectus assumes: . that the underwriters will not exercise the option granted by us and a selling stockholder to purchase additional shares in this offering; . the conversion of all of our preferred stock into common stock on a one- to-one basis upon the closing of this offering; and . the effectiveness of a two-for-one reverse stock split to be effected prior to the consummation of this offering. ReleaseNow.com We have developed an e-commerce infrastructure that we call our PowerCommerce platform. We use this infrastructure to market, sell and deliver digital goods online, including business-to-consumer software, business-to- business software licenses, music and documents. We obtain digital goods, such as software titles, from publishers who choose to outsource all or a portion of their online marketing, sales and delivery needs. We believe our technology is a best-of-class, one-stop method for selling digital goods online. On this basis, we believe we are well positioned in three converging Internet markets: Internet infrastructure, outsourced e-commerce and the online sale of digital goods. Using our PowerCommerce platform, we sell digital products to end-users through our customers' Web sites, provide reporting, and process credit card and purchase order transactions. We also build, host and manage the e-commerce portion of our customers' Web sites, reflecting their brand identity and providing marketing, merchandising and digital distribution capabilities. We believe our expertise in systems integration will allow us to coordinate the e- commerce capabilities we provide for our customers with their internal information systems, such as accounting and inventory management. To date, we have focused on selling software, rather than other digital goods. We have currently deployed hundreds of Web-based software stores and try-and-buy software products, referred to as e-commerce points of sale, for our software publisher and retailer customers. We developed the PowerCommerce platform to be able to run thousands of points of sale and to use off-the-shelf servers that can be easily deployed to handle increased traffic at those points of sale. We currently generate revenue primarily from the sale of third-party software. Fees charged for the construction, hosting and management of the e- commerce portion of software publishers' Web sites accounted for less than 5% of net revenue for the year ended December 31, 1999. Our four largest customers by revenue for the year ended December 31, 1999, were Macromedia, Inc., Network ICE Corporation, WebTrends Corporation and GameSpot, a unit of Ziff-Davis Inc. We have used our expertise in business-to-consumer software to move into the business-to-business software market, announcing the PowerCommerce e-Business Center in the first quarter of 2000. The PowerCommerce e-Business Center is our name for Web-based stores that we build, host and manage, permitting corporate purchasers to buy and download software licenses using purchase orders, as well as providing volume licensing and custom pricing over the Internet. Because downloading software licenses helps eliminate the need for physical shipments and makes it possible for corporate personnel to obtain access to software almost immediately, at almost any time of the day or night, we believe the PowerCommerce e-Business Center will allow us to address the needs of the large and rapidly growing business-to-business software market. To date, we have not generated any revenue from our PowerCommerce e-Business Center. We intend to use our expertise in the marketing, sale and delivery of digital goods online to pursue other digital content opportunities such as music, documents, images and video. For example, in January 2000, we launched a prototype store for the H.E.A.R. Foundation which permits end-users to download standard digital music, or mp3 files. Additionally, we currently maintain a store permitting download of digital documents in the form of game guides, which are reference documents that provide tips and strategies for popular computer games. We believe that the delivery of other digital goods can be similarly implemented using the PowerCommerce platform. However, we are only now entering these markets and have no current expectation as to when we will generate revenue, if at all, from digital goods other than software and documents. The worldwide packaged software market, which according to International Data Corporation, or IDC, reached $135.1 billion in 1998, has emerged as one of the first digital goods e-commerce markets to experience widespread adoption of digital delivery. IDC estimates that the market for the online sale of software reached $1.6 billion in 1998 and will grow to approximately $32.9 billion by 2003. IDC also estimates that the market for the sale of electronic licenses for corporate software reached $20.1 billion in 1998 and will grow to over $174.5 billion by 2003. Risks of Investment Our net revenues were $12.7 million for the year ended December 31, 1999, and our net loss was $19.4 million. Since inception and as of December 31, 1999, we incurred net losses of an aggregate of $32.4 million. We anticipate continuing to incur losses in the foreseeable future. Also, we derived 73% of our net revenues in 1999 from two clients, Macromedia, which accounted for 57%, and Network ICE, which accounted for 16%. Macromedia may terminate its relationship with us upon 60 days notice and, similarly, Network ICE may terminate its relationship with us upon 60 days notice, each with little or no penalty. In addition, investors should note that our officers, directors, principal stockholders and their respective affiliates will beneficially own approximately 50.5% of the outstanding shares of our common stock following completion of this offering. As such, they will be able to exert substantial influence over the election of directors and other matters requiring stockholder approval. Please also review each of the risk factors beginning on page 5 of this prospectus. Corporate History We incorporated in Delaware on March 28, 1994 under the name Digital Money, Inc. In February 1996, we changed our name to Release Software Corporation, and on May 20, 1999 we changed our name to ReleaseNow.com Corporation. We incorporated a wholly-owned subsidiary in Canada as a technical development center, ReleaseNow.com Canada, Inc., in July 1999. We acquired Client Server Designs, Inc. in May 1999 and substantially all of the assets of Get Software.com in February 2000. References to "us," "we," "our company" and "ReleaseNow.com" include ReleaseNow.com Corporation, ReleaseNow.com Canada, Inc. and Client Server Designs, Inc. Our principal executive offices are located at 990 Commercial Street, San Carlos, California 94070. Our telephone number is 650-622-1000. Our Web site address is www.releasenow.com. Information contained on our Web site does not constitute a part of this prospectus. The Offering <TABLE> <S> <C> Common stock offered by ReleaseNow.com.................. 3,250,000 shares Common stock outstanding after the offering.................. 15,226,814 shares Use of proceeds.................. We expect to use the net proceeds of the offering for general corporate purposes, including working capital and capital expenditures, enhancing our product development efforts, expanding our sales and marketing efforts, acquiring or licensing technology, products or businesses and expanding internationally. See "Use of Proceeds." Proposed Nasdaq National Market symbol........................... RNOW </TABLE> The common stock to be outstanding after the offering is based on the number of shares outstanding as of February 29, 2000 and includes the 174,321 shares we issued in connection with the Get Software asset acquisition. It also reflects the automatic conversion into common stock upon completion of this offering of all outstanding shares of preferred stock. This excludes the following issuances which we may make pursuant to plans or arrangements entered into prior to February 29, 2000: . 1,083,699 shares of common stock issuable upon exercise of outstanding stock options at a weighted average exercise price of $6.56 per share; and . 73,147 shares of common stock issuable upon conversion of preferred stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $2.40 per share. In addition, this excludes the following issuances which we may make pursuant to plans or arrangements entered into subsequent to February 29, 2000: . 3,750,000 shares of common stock available for grant under our 2000 Stock Incentive Plan; and . 450,000 shares of common stock reserved for issuance under our 2000 Employee Stock Purchase Plan. Summary Financial Data The following table summarizes the financial data of our business. You should read this information together with the financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. See also Note 1 to the financial statements for an explanation of the determination of the number of shares used in computing per share data. <TABLE> <CAPTION> Period from March 28, 1994 (inception) Through Year Ended December 31, December 31, ------------------------------------ 1995 1996 1997 1998 1999 -------------- ------- ------- ------- --------- (in thousands, except share and per share data) <S> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues............. $ 19 $ 160 $ 2,349 $ 6,573 $ 12,749 Gross profit............. 7 36 450 691 1,666 Net loss................. (33) (1,637) (3,625) (7,856) (19,354) Net loss available to common stockholders..... (33) (1,637) (3,625) (7,856) (23,194) Basic and diluted net loss per share available to common stockholders.. $ (33) $ (5.09) $ (5.66) $ (7.92) $ (15.96) Shares used in per share calculation............. 1,000 321,495 639,908 981,526 1,453,631 Unaudited pro forma basic and diluted net loss per share available to common stockholders..... $ (2.64) Shares used in pro forma per share calculation... 7,329,908 </TABLE> The unaudited pro forma net loss information above gives effect on a one- for-one basis to the conversion into common stock of all preferred stock outstanding as of December 31, 1999. <TABLE> <CAPTION> As of December 31, 1999 ----------------------------- Pro Forma Actual Pro Forma As Adjusted ------- --------- ----------- (in thousands) <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents......................... $14,435 $22,129 $66,067 Short-term investments............................ 2,200 2,200 2,200 Working capital................................... 11,528 19,228 63,160 Total assets...................................... 21,849 32,479 76,457 Long-term debt.................................... 861 861 861 Stockholders' equity.............................. 15,363 25,993 69,931 </TABLE> The pro forma information reflects: . the net proceeds of $8.2 million from the sale of 824,999 shares of Series F preferred stock on January 19, 2000; . the issuance of an additional 94,540 shares of common stock; . the cash payment of $496,000 and the issuance of 174,321 shares of common stock in connection with the Get Software acquisition; and . the automatic conversion on a one-for-one basis of all outstanding shares of preferred stock into common stock upon completion of this offering. The pro forma as adjusted information gives effect to the receipt of the estimated net proceeds of $43.9 million from the sale of 3,250,000 shares of common stock in this offering at an assumed public offering price of $15.00 per share after deducting the estimated underwriting discount and estimated offering expenses. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001088628_petsmart_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001088628_petsmart_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..5d588063d57e88c3fcb74b12e69bb48f257894b1
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. Since this is only a summary, it does not contain all of the information that may be important to you. You should read the entire prospectus carefully and consider the information under "Risk Factors" and in our financial statements and the notes relating to these financial statements, together with the information included elsewhere in this prospectus, before deciding whether to invest in our common shares. The terms "PETsMART.com," "we," "us," "our," and the "Company" as used in this prospectus refer to PETsMART.com, Inc. PETsMART.com We are the most popular Internet destination for pet products, information and community. Our online store is designed to provide a convenient, informative and fulfilling shopping experience, with a high level of customer service that encourages consumers to purchase products and services to satisfy their pet care needs. The PETsMART.com site contains extensive product and pet information, expert advice and community activities, allowing our visitors to learn about pet care issues and interact with other pet owners. We have been the top-ranked pet product Web site every month since our first full month of commerce operations, according to Media Metrix, Nielsen NetRatings and PC Data. We were the only pet product retailer ranked among the top 50 online shopping sites according to Media Metrix's December statistics. From the commercial launch of our online store on June 29, 1999 through January 2, 2000, we sold pet products to over 180,000 customers and generated net revenues of $10.4 million. We have entered into a strategic alliance with PETsMART, Inc., the world's largest pet products specialty retailer and have the exclusive, worldwide right to use the PETsMART trademark royalty free for online retailing. This strategic alliance provides an immediately identifiable brand that is known and trusted by millions of pet owners and enables us to differentiate ourselves from other online competitors by marketing our "click and mortar" relationship with PETsMART, Inc. Through this relationship, we are able to leverage PETsMART, Inc.'s infrastructure to gain significant economies of scale in purchasing, distribution, and customer service, enabling us to operate with limited direct investment in inventory, warehouses and support systems. PETsMART, Inc. also provides us with numerous co-promotional and marketing opportunities and access to PETsMART, Inc.'s popular proprietary branded products. We believe the industry experience of our management, several of whom have come from PETsMART, Inc., is a key competitive advantage and differentiates us from other online pet product companies. We believe the market for pet products and services represents an attractive online opportunity due to its size, anticipated growth and suitability to the online marketplace. The American Pet Product Manufacturers Association estimates the market for pet products and services was $23 billion in 1998 and will grow to $29 billion by 2001, driven in part by increases in the pet population and a trend toward providing improved pet care. Approximately 60% of U.S. households own a pet and 40% of those households own more than one pet. We believe that the industry is well suited to the online marketplace due to consumers' demand for information to assist in the purchase decision, the absence of the need to handle products prior to purchase and the need for frequent orders resulting from the consumable nature of most pet products. We intend to capitalize on this online market opportunity by offering pet owners an enhanced shopping experience. We seek to attract and retain consumers by providing the following: Selection--We are able to offer a broader product selection than most store- based retailers because we do not face the same inventory and shelf-space limitations. We provide products for nearly every type of household pet, including dogs, cats, birds, fish, reptiles and other small animals. Convenience--Our online store is open 24 hours a day, seven days a week and provides an easy and accessible way to identify and order products, combined with the convenience of home delivery. Information--Our Web site provides detailed product and pet information, expert pet care advice, editorials and professional resources. We offer content on the most popular types of pets, including a library reference section, breed specific guides and other general care and behavior information. Community--We believe we operate the largest and most active online pet community. We provide a variety of interactive opportunities, including our weekly Vet Expert Chats, message boards and PAWsPECTIVES(TM), our bi-weekly online newsletter. Customer Service--We are committed to making every aspect of browsing and shopping on our Web site an enjoyable experience by emphasizing superior customer service. We provide knowledgeable and experienced pre- and post-sales support, timely purchase related information and referrals to pet-related services. Our objective is to become the leading retailer of pet products and services. Key elements of our strategy include continuing to: . capitalize on our strong brand recognition; . leverage PETsMART, Inc.'s purchasing power and distribution infrastructure; . expand our product and service offering; . enhance the user experience; . maintain the largest and most active online pet community; and . build strategic alliances. Risk Factors An investment in shares of our common stock involves a high degree of risk. You should carefully consider these risks and uncertainties as well as those other risks and uncertainties described in "Risk Factors" beginning on page 9 of this prospectus before deciding whether to invest in shares of our common stock. Corporate History and Information Interpet Inc. was formed on February 25, 1999. Interpet acquired the assets of K&K Hansen, Inc. (dba Mason Distributing Company) in March 1999 and the domain name PetJungle.com in April 1999. Interpet subsequently changed its corporate name to PetJungle.com, Inc. On May 12, 1999, PETsMART.com was incorporated and PetJungle.com, Inc. was merged into PETsMART.com. Our corporate offices are located at 35 Hugus Alley, Suite 210, Pasadena, CA 91103. Our telephone number at that location is (626) 817-7100. Information contained on our Web site does not constitute part of this prospectus. The Offering <TABLE> <S> <C> Common Stock offered by PETsMART.com........... shares Common Stock outstanding after the offering..... shares Use of proceeds......... For general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol.......... "PSCM" </TABLE> The number of shares that will be outstanding after the offering is based on the number of shares outstanding as of , 2000 and excludes: . shares of common stock issuable upon exercise of stock options outstanding as of , 2000, with a weighted average exercise price of $ per share, of which options to purchase shares were then exercisable; . shares of common stock issuable upon exercise of outstanding warrants; and . shares of common stock reserved for future grant under our stock option plans. ---------------- Unless specifically stated, the information in this prospectus: . assumes no exercise of the underwriters' over allotment option; . assumes an initial offering price of $ per share, the midpoint of our initial public offering price range; . reflects a -for- stock split which will be effected prior to this offering; . assumes the automatic conversion of all shares of preferred stock into common stock upon completion of this offering on the following basis: each share of Series A preferred converts into shares of common stock; each share of Series C preferred converts into shares of common stock; and each share of Series B preferred stock and Series D preferred stock converts into shares of common stock (in each case on a post stock split basis); and . reflects the filing, as of the closing of the offering, of our Second Amended and Restated Certificate of Incorporation, referred to in this prospectus as the restated certificate of incorporation, and the adoption of our Amended and Restated By-Laws, referred to in this prospectus as the restated by-laws, implementing the provisions described below under "Description of Capital Stock--Delaware Anti- Takeover Law and Our Restated Certificate of Incorporation and Restated By-Law Provisions." Summary Financial Information The summary financial information for the period from inception (February 25, 1999) to January 2, 2000 is derived from our audited financial statements included elsewhere in this prospectus and should be read in conjunction with those financial statements and the related notes. The historical statement of operations data for the thirteen weeks ended October 3, 1999 and January 2, 2000 have been derived from our unaudited financial statements. The unaudited statements have been prepared on substantially the same basis as the audited financial statements and include all adjustments consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial position and results of operations for the period. The historical results are not necessarily indicative of results that may be expected for any future period. The balance sheet data displayed in the "As Adjusted" column reflect the application of the net proceeds from this offering, after deducting the underwriting discount and estimated offering expenses. See "Use of Proceeds" and "Capitalization." <TABLE> <CAPTION> Thirteen Weeks Thirteen Weeks From Inception Ended Ended (February 25, 1999) October 3, 1999 January 2, 2000 to January 2, 2000 --------------- --------------- ------------------- (in thousands, except per share data) <S> <C> <C> <C> Statement of Operations Data: Net revenues.............. $ 2,090 $ 7,787 $ 10,446 Costs of net revenues..... 3,287 13,034 16,739 -------- -------- -------- Gross margin............ (1,197) (5,247) (6,293) Operating expenses: Sales and marketing..... 9,949 23,213 33,476 Product development..... 784 1,102 2,359 General and administrative......... 1,389 1,474 3,351 Equity-based charges.... 359 1,496 2,542 -------- -------- -------- Total operating expenses............. 12,481 27,285 41,728 -------- -------- -------- Loss from operations...... (13,678) (32,532) (48,021) -------- -------- -------- Interest income, net...... 84 387 526 -------- -------- -------- Net loss................ (13,594) (32,145) (47,495) Deduction for beneficial conversion feature....... -- -- (4,548) -------- -------- -------- Net loss attributable to common stockholders...... $(13,594) $(32,145) $(52,043) ======== ======== ======== Basic and diluted net loss per common share......... $ ======== Shares used to calculate basic and diluted net loss per common share.... ======== Unaudited pro forma net loss per common share(1)................. $ ======== Unaudited pro forma shares used to calculate pro forma net loss per share(1)............. ======== </TABLE> <TABLE> <CAPTION> As of January 2, 2000 ------------------- Actual As Adjusted ------- ----------- (in thousands) <S> <C> <C> Balance Sheet Data: Cash and cash equivalents................................... $26,350 Working capital............................................. 8,735 Total assets................................................ 38,269 Notes payable, net of current portion....................... 156 Total stockholders' equity.................................. 18,674 </TABLE> - -------- (1) See notes 1 and 7 of notes to financial statements for an explanation of the number of shares used in per share computations.
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+SUMMARY This summary may not contain all the information that may be important to you. You should read the entire prospectus, including the financial statements and related notes, before making an investment decision. CORPORATE AND TRANSACTION STRUCTURE Chart of Corporate and Transaction Structure appears here. * TXU Europe Funding I, L.P. will also invest in junior subordinated debentures of one or more eligible subsidiaries of TXU Europe Limited and eligible debt securities, as described in this prospectus. The junior subordinated debentures will be guaranteed by TXU Europe Limited. TXU EUROPE LIMITED AND TXU EASTERN FUNDING COMPANY TXU Europe Limited, formerly TXU Eastern Holdings Limited, is a private limited company (Company No. 3505836) incorporated under the laws of England and Wales on February 5, 1998. TXU Europe Limited is an indirect wholly-owned subsidiary of Texas Utilities Company. Texas Utilities Company is now doing business as TXU Corp. TXU Europe Limited is a holding company for TXU Corp's UK and other European operations. TXU Eastern Funding Company (Funding) is a private unlimited company (Company No. 3710529) incorporated on February 4, 1999 under the laws of England and Wales. It is a wholly-owned indirect subsidiary of TXU Europe Limited. Funding was organized solely to provide funding for the operations of TXU Europe Limited and its subsidiaries by issuing debt securities, including the subordinated debentures that will be issued to the partnership, and lending the proceeds to TXU Europe Limited. In May 1999, Funding issued $1.5 billion ((pound)921 million) of senior notes guaranteed on a senior basis by TXU Europe Limited. On December 17, 1999, Funding exchanged these senior notes for the same amount of new senior notes registered under the Securities Act of 1933. Funding is currently offering in the UK (pound)200 million of senior notes guaranteed on a senior basis by TXU Europe Limited. The proceeds of this offering are expected to be used to repay corporate debt. TXU Europe Limited's and Funding's principal offices are located at The Adelphi, 1-11 John Adam Street, London, England WC2N 6HT and the telephone number is (011) 44 207 879-8081. TXU EUROPE GROUP PLC TXU Europe Group plc (TXU Europe Group or Group), formerly Eastern Group plc, which is an indirect subsidiary of TXU Europe Limited, is the holding company for a group of companies engaged in a variety of energy businesses in Europe. The management of these businesses is coordinated to give TXU Europe Group access to many energy markets, to provide the Group's customers access to a range of energy products and to enable the Group to respond efficiently to changes in demand for and prices of energy throughout Europe. The Group's principal business operations are electricity networks and energy businesses in the UK. The networks, or electricity distribution, business of TXU Europe Group is the largest distributor of electricity in England and Wales, with over 3 million customers in an authorized service area covering approximately 20,300 square kilometers in the east of England and parts of north London. The energy businesses include retailing of electricity and gas, as well as generation of electric power, gas production and energy portfolio management operations. TXU Europe Group is one of the largest generators of electricity in the UK, based on registered generating capacity as of December 31, 1999. It currently owns, operates or has an interest in approximately 9.4% of the total UK generating capacity. TXU Europe Group is also one of the largest retailers of electricity and natural gas in England and Wales, with approximately 3.9 million electric and natural gas customers. TXU Europe Group is also forming business alliances with European power companies in order to position itself to implement its strategy of integrating energy businesses across the rest of Europe, as these markets open to competition. SUMMARY INFORMATION REGARDING TXU EUROPE CAPITAL I, TXU EUROPE FUNDING I, L.P. AND THE TOPRS This summary includes questions and answers that highlight selected information from this prospectus to help you understand the TOPrS. You should carefully read this prospectus to fully understand the terms of the TOPrS, as well as the tax and other considerations that are important in making a decision about whether to invest in the TOPrS. You should pay special attention to the section of this prospectus titled RISK FACTORS to determine whether an investment in the TOPrS is appropriate for you. WHAT ARE THE TOPRS? Each TOPrS represents an undivided beneficial interest in the assets of TXU Europe Capital I, or the trust. The assets of the trust will be Preferred Partnership Securities of TXU Europe Funding I, L.P., or the partnership, which represent preferred ownership interests in the partnership. The partnership will use the proceeds from the sale of the Preferred Partnership Securities and the capital contribution from TXU Europe Limited, as general partner of the partnership, to purchase subordinated debentures of Funding and one or more other eligible subsidiaries of TXU Europe Limited and certain eligible debt securities as described in this prospectus under DESCRIPTION OF THE PREFERRED PARTNERSHIP SECURITIES -- "Partnership Investments." WHAT IS THE TRUST? TXU Europe Capital I is a Delaware statutory business trust that exists for the sole purpose of issuing the TOPrS, investing the proceeds from that issuance and engaging in incidental activities. The sole assets of the trust will be the Preferred Partnership Securities. WHAT IS THE PARTNERSHIP? TXU Europe Funding I, L.P. is a Delaware limited partnership. Generally, the partnership, subject to the investment criteria described in this prospectus, may invest in debentures of eligible subsidiaries of TXU Europe Limited and in other eligible debt securities. The assets of the partnership initially will consist solely of subordinated debentures of Funding and, to a limited extent, one or more other eligible subsidiaries of TXU Europe Limited and other eligible debt securities. TXU Europe Limited is the general partner of the partnership. WHAT DISTRIBUTIONS WILL I RECEIVE ON THE TOPRS? The trust expects to pay the holders of the TOPrS a quarterly cash distribution at the rate of % per annum. Distributions are expected to be paid on each March 31, June 30, September 30 and December 31, commencing June 30, 2000. Distributions on the TOPrS will be paid out of distributions by the partnership on the Preferred Partnership Securities if declared by the general partner. These distributions will accumulate from February , 2000, the date of original issuance of the TOPrS. The initial cash distribution is expected to be paid on June 30, 2000, and to equal $ for each $25 TOPrS. Distributions on the TOPrS will be deferred if interest payments on the subsidiary debentures are deferred as described below. WHAT WILL AFFECT THE TRUST'S DISTRIBUTIONS? The ability of the trust to pay the holders of the TOPrS is entirely dependent on its receipt of corresponding distributions on the Preferred Partnership Securities held by the trust. In turn, the partnership's ability to pay the trust is entirely dependent on its receipt of payments on the subsidiary debentures and the eligible debt securities held by the partnership. In addition, the partnership has no obligation to make distributions to the trust. If distributions are not made to the holders of the TOPrS, TXU Europe Limited and its subsidiaries will not be permitted to make specified payments and loans as described below. WHAT ARE THE SUBSIDIARY DEBENTURES? The subsidiary debentures are long term debt obligations of Funding and one or more other eligible subsidiaries of TXU Europe Limited. These subsidiary debentures will be unsecured and subordinated obligations and will be junior in right of payment to the senior debt of those subsidiaries, as defined in the indentures under which the subsidiary debentures are issued. All of the subsidiary debentures in which the partnership initially holds beneficial interests will be fully and unconditionally guaranteed on a subordinated basis by TXU Europe Limited. An issuer of subsidiary debentures may elect to defer interest payments for a period not exceeding six consecutive quarters. WHAT ARE THE GUARANTEES? TXU Europe Limited provides several subordinated guarantees in connection with the issuance of the TOPrS. These are guarantees of o distributions by the partnership to the trust, and by the trust to the holders of the TOPrS; o the amount due to the holders of the TOPrS upon redemption of the TOPrS; o the liquidation amount of the TOPrS if the trust is dissolved; and o payments under the subsidiary debentures initially held by the partnership. The guarantees, when taken together with TXU Europe Limited's obligations to pay all fees and expenses of the trust and the partnership, constitute a guarantee, to the extent set forth in the guarantees, by TXU Europe Limited of selected obligations relating to the distribution, redemption and liquidation amounts payable to the holders of the TOPrS. However, the guarantees do not apply to (1) current distributions by the partnership unless and until the partnership declares distributions out of funds legally available for payment, (2) current distributions by the trust unless and until the trust has funds legally available for payment or (3) liquidating distributions by the partnership and the trust unless there are partnership or trust assets, as the case may be, legally available for payment. TXU Europe Limited's obligations under the guarantees of subsidiary debentures are subordinate and junior in right of payment to all other unsubordinated liabilities of TXU Europe Limited and will be effectively subordinated to existing and future liabilities and preference share capital of TXU Europe Limited's subsidiaries. TXU Europe Limited's obligations under the guarantees of subsidiary debentures will rank equally with other subordinated obligations of TXU Europe Limited that are not subordinated by their terms to the guarantees and with similar guarantees issued by TXU Europe Limited in respect of any subordinated debentures of any other subsidiary. TXU Europe Limited's obligations under the guarantees of the TOPrS and the Preferred Partnership Securities will be subordinated to its obligations under the guarantees of subsidiary debentures and will rank equally with any preference share capital of TXU Europe Limited issued in the future and with similar guarantees issued by TXU Europe Limited in respect of any preferred security of any other finance subsidiary. ARE THERE ANY RISKS ASSOCIATED WITH AN INVESTMENT IN THE TOPRS? Yes, an investment in the TOPrS involves risks. Please refer to the section entitled RISK FACTORS in this prospectus. WHAT HAPPENS IF THE TRUST DOESN'T PAY A DISTRIBUTION ON THE TOPRS? If at any time: o the holders of the TOPrS have not received a distribution in the full expected quarterly amount of $ for each $25 TOPrS (plus any compounded amounts) for six consecutive quarters, o an investment event of default occurs and is continuing on any subsidiary debentures and on the related guarantee by TXU Europe Limited, or o TXU Europe Limited defaults on its obligations under the trust guarantee or the partnership guarantee, then: o the Property Trustee on behalf of the trust may direct a special representative appointed on behalf of holders of Preferred Partnership Securities to enforce the partnership's creditors' rights and other rights, including the right to receive payments under the subsidiary debentures and any of TXU Europe Limited's guarantees of the subsidiary debentures, o the Property Trustee on behalf of the trust has the right to direct the special representative to enforce the terms of the Preferred Partnership Securities to receive distributions only if and to the extent declared out of funds legally available for payment on the Preferred Partnership Securities, and o the Trust Guarantee Trustee, as the holder of the trust guarantee, the Partnership Guarantee Trustee, as the holder of the partnership guarantee, or the special representative appointed on behalf of holders of Preferred Partnership Securities may enforce those guarantees, including the right to enforce the covenant restricting specified payments and loans by TXU Europe Limited and its subsidiaries as described below. You should be aware that a special representative would not have the authority to cause the partnership to declare distributions on the Preferred Partnership Securities. If the partnership does not declare and pay distributions on the Preferred Partnership Securities, the trust will not have sufficient funds to make distributions on the TOPrS. TXU Europe Limited and any issuer of subsidiary debentures will agree that if: o for any quarterly period, the trust does not pay to holders of TOPrS an amount equal to distributions at the full fixed rate on a cumulative basis on any Preferred Partnership Securities, o an investment event of default occurs and is continuing on any subsidiary debentures and on the related guarantee by TXU Europe Limited, or o TXU Europe Limited is in default on any of its obligations under the trust guarantee or the partnership guarantee, then, during that period, TXU Europe Limited and any issuer of subsidiary debentures will not, directly or indirectly, make distributions on their issued share capital or payments on specified obligations that rank equally with or junior to the subsidiary debentures or the guarantees. In addition, TXU Europe Limited, any issuer of subsidiary debentures and any subsidiary of TXU Europe Limited will not make specified payments in respect of debt held or issued by, or loans to, affiliates (other than TXU Europe Limited or its subsidiaries). There are a number of exceptions to this limitation. For a more detailed discussion, see DESCRIPTION OF THE TRUST GUARANTEE -- "Covenants in the Trust Guarantee" and DESCRIPTION OF THE PARTNERSHIP GUARANTEE -- "Covenants in the Partnership Guarantee". OPTIONAL REDEMPTION The partnership has the option to redeem the Preferred Partnership Securities, in whole at any time or in part from time to time, on and after for an amount equal to $25 per Preferred Partnership Security plus accumulated and unpaid distributions on the Preferred Partnership Securities. If the Preferred Partnership Securities are redeemed, the TOPrS will in turn be redeemed for $25 per TOPrS plus accumulated and unpaid distributions. Neither the Preferred Partnership Securities nor the TOPrS have any scheduled maturity. WHO WILL CONTROL THE TRUST? A wholly-owned subsidiary of TXU Europe Limited organized in the US and designated under the terms of the trust agreement, known as the Control Party, will retain administrative and appointment powers with respect to the trust by virtue of its ownership of the trust's control certificate. The control certificate will not provide any economic interest in the trust to the Control Party. DO I HAVE VOTING RIGHTS? Generally, holders of the TOPrS will not have any voting rights. However, the holders of a majority in liquidation amount of the TOPrS have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Property Trustee on behalf of the Trust, or direct the exercise of any trust or power conferred upon the Property Trustee on behalf of the Trust. See DESCRIPTION OF THE TOPrS -- "Voting Rights" and DESCRIPTION OF THE PREFERRED PARTNERSHIP SECURITIES -- "Voting Rights". WHAT HAPPENS IF THE TRUST IS DISSOLVED? If the trust is dissolved, other than in connection with the occurrence of changes in the US or UK tax laws, sometimes referred to as a tax event, or changes in the US Investment Company Act of 1940, sometimes referred to as an investment company event, that affect the status of the trust, the partnership or the subsidiary debentures, the partnership will be dissolved and the Preferred Partnership Securities will be redeemed, in whole, but not in part, for $25 per Preferred Partnership Security plus accumulated and unpaid distributions on the Preferred Partnership Securities. This, in turn, would cause a redemption of the TOPrS at the same price. WHAT ARE ADDITIONAL AMOUNTS? All payments made on the subsidiary debentures or with respect to the TXU Europe Limited subordinated guarantees will be made without withholding or deduction for taxes or other governmental charges, unless required by law. Subject to customary exceptions, if withholding is required with respect to payments made on the subsidiary debentures or these guarantees, the issuers of the subsidiary debentures or TXU Europe Limited, as applicable, will pay "Additional Amounts" so that the partnership, in the case of the subsidiary debentures or the related TXU Europe Limited guarantees, or the holders of the Preferred Partnership Securities or the holders of the TOPrS, in the case of the Partnership Guarantee and the Trust Guarantee, respectively, would receive the same payments with respect to these instruments as if no withholding or deduction had been made. WHAT HAPPENS IF A TAX EVENT OR AN INVESTMENT COMPANY EVENT OCCURS? Upon the occurrence of a trust tax event, which event will generally be triggered upon the occurrence of specified adverse tax consequences with respect to the trust, Additional Amounts being payable on the subsidiary debentures or the TXU Europe Limited subordinated guarantees, or the denial of an interest deduction on the subsidiary debentures held by the partnership, in each case, as a result of a change in law, or upon the occurrence of a trust investment company event, which event will generally be triggered if the trust is considered an "investment company" under the Investment Company Act as a result of a change in law, except in limited circumstances, the Administrative Trustees will have the right to liquidate the trust and cause Preferred Partnership Securities to be distributed to the holders of the TOPrS. In most circumstances involving a partnership tax event, which event will generally be triggered upon the occurrence of specified adverse tax consequences with respect to the partnership, Additional Amounts being payable on the subsidiary debentures or the TXU Europe Limited subordinated guarantees, or the denial of an interest deduction on the subsidiary debentures held by the partnership, in each case, as a result of a change in law, or upon the occurrence of a partnership investment company event, which event will generally be triggered if the partnership is considered an "investment company" under the Investment Company Act as a result of a change in law, the partnership will have the right to redeem the Preferred Partnership Securities, in whole, but not in part, at $25 per Preferred Partnership Security plus accumulated and unpaid distributions on the Preferred Partnership Securities and, therefore, cause a redemption of the TOPrS at the same price. LISTING TXU Europe Limited will apply to have the TOPrS listed on The New York Stock Exchange, or NYSE. FORM OF THE TOPRS The TOPrS will be represented by one or more global certificates registered in the name of Cede & Co., as nominee for The Depository Trust Company, or DTC. Beneficial interests in the TOPrS will be evidenced by, and transfers of beneficial interests will be effected through, records maintained by the participants in either DTC (in the United States) or Clearstream Banking, societe anonyme, or Morgan Guaranty Trust Company of New York, Brussels Office, as operator of Euroclear (in Europe). Except in certain limited circumstances, TOPrS in certificated form will not be issued in exchange for the global certificate or certificates. USE OF PROCEEDS All of the proceeds from the issuance and sale of the TOPrS will be invested by the trust in the Preferred Partnership Securities. The partnership will use the funds, together with the capital contribution of TXU Europe Limited, as general partner, to make investments in the subsidiary debentures and other eligible debt securities. Funding will lend the proceeds from the sale of its junior subordinated debentures to TXU Europe Limited. TXU Europe Limited will use the funds to repay corporate debt and for general corporate purposes. Any other subsidiary of TXU Europe Limited that will issue initial subsidiary debentures will use the proceeds from the sale of these debentures to repay corporate debt and for general corporate purposes. SELECTED FINANCIAL INFORMATION On May 19, 1998, TXU Europe Limited obtained control of The Energy Group PLC, or TEG, the former holding company of TXU Europe Group. At the same time, TEG disposed of its US and Australian coal businesses and its US energy marketing business. For financial reporting purposes, TXU Europe Group is considered to be the "Predecessor Company" to TXU Europe Limited. TXU Europe Group constituted 97% of TXU Europe Limited's assets as of September 30, 1999 and generated 100% of TXU Europe Limited's operating revenues for the nine months ended September 30, 1999. The principal difference between the results of operation of TXU Europe Group and the results of operation of the continuing businesses of TEG is the interest expense associated with debt securities issued by Energy Group Overseas, B.V., or Overseas, a financing subsidiary of TEG. See TXU Europe Limited's unaudited condensed consolidated pro forma statement of income for the year ended December 31, 1998 included elsewhere in this prospectus. This pro forma statement of income includes TXU Europe Group's operation and the interest expense of Overseas, as if TXU Europe Limited had acquired TEG on January 1, 1998. See also the financial statements of Overseas included elsewhere in this prospectus. The selected financial data of TXU Europe Group for, and as of, each of the four years in the period ended March 31, 1998 and for the period from April 1, 1998 through May 18, 1998, have been derived from financial statements of TXU Europe Group, which have been audited by PricewaterhouseCoopers, independent accountants. The financial statements of TXU Europe Group for each of the four years in the period ended March 31, 1998 have been prepared in accordance with UK GAAP. The financial statements of TXU Europe Group for the years ended March 31, 1997 and 1998 also have been prepared in accordance with US GAAP. TXU Europe Group's financial statements for the period from April 1, 1998 through May 18, 1998 have been prepared in accordance with US GAAP. In October 1997, Overseas issued $500 million aggregate principal amount of guaranteed debt securities. Overseas is now a subsidiary of TXU Europe Limited, and its financial statements for the periods from its formation through March 31, 1998 and from April 1, 1998 through May 18, 1998 are included elsewhere in this prospectus. If interest expense of Overseas had been included in TXU Europe Group's financial statements, (1) UK GAAP net income/(loss), ratio of earnings to fixed charges and net interest expense would have been (pound)42 million, 2.5 and (pound)95 million, respectively, for the year ended March 31, 1998, (2) US GAAP net income/(loss), ratio of earnings to fixed charges and net interest expense would have been (pound)(45) million, 1.7 and (pound)136 million, respectively, for the year ended March 31, 1998 and (pound)(23) million, 0.1 and (pound)19 million, respectively, for the period from April 1, 1998 through May 18, 1998, (3) UK GAAP long-term debt and other obligations, less amounts due currently, would have been (pound)1.8 billion as of March 31, 1998 and (4) US GAAP long-term debt and other obligations, less amounts due currently, would have been (pound)2.3 billion as of March 31, 1998. The selected financial data of TXU Europe Limited for the period from formation (February 5, 1998) through December 31, 1998, for the period from formation through March 31, 1999 and as of December 31, 1998 and March 31, 1999, have been derived from financial statements of TXU Europe Limited, which have been audited by PricewaterhouseCoopers, independent accountants. The selected financial data of TXU Europe Limited for the nine months ended September 30, 1999 have been derived from the unaudited financial statements of TXU Europe Limited. The financial statements of TXU Europe Limited have been prepared in accordance with US GAAP. TXU Europe Limited recorded its approximately 22% equity interest in the net income of TEG for the period from March to May 18, 1998 and has accounted for TEG and TXU Europe Group as consolidated subsidiaries since May 19, 1998. Results of TXU Europe Limited for the periods from formation through December 31, 1998 and March 31, 1999 and for the nine months ended September 30, 1999 are not indicative of results for an annual period. Because TXU Europe Limited obtained control of TEG on May 19, 1998, earnings of TXU Europe Group are not reflected in TXU Europe Limited's results before May 19, 1998, other than as a result of TXU Europe Limited's 22% equity interest in the net income of TEG for the period from March through May 18, 1998. In addition, TXU Europe Limited's operations are affected by seasonal weather patterns. For more information, see MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and the consolidated financial statements and related notes of TXU Europe Group as of March 31, 1998 and for the two years in the period then ended, and for the period from April 1, 1998 through May 18, 1998 and of TXU Europe Limited as of, and for the periods from formation through December 31, 1998 and March 31, 1999 and as of, and for, the nine months ended September 30, 1999 included elsewhere in this prospectus. TXU Europe Limited's unaudited pro forma condensed consolidated income statement and other consolidated data presented below for the year ended December 31, 1998 reflect the acquisition by TXU Europe Limited of TEG as if it had occurred as of January 1, 1998. That unaudited pro forma condensed consolidated income statement and other consolidated data have been prepared by TXU Europe Limited from US GAAP historical information and assumptions deemed proper by it and include the effects of an allocation of the purchase price paid. The unaudited pro forma condensed consolidated income statement and other data presented in this prospectus are shown for illustrative purposes only and are not necessarily indicative of the future results of operations of TXU Europe Limited or of the results of operations of TXU Europe Limited if the transaction had occurred as of January 1, 1998. This information should be read in conjunction with the unaudited condensed consolidated pro forma statement of income and related notes of TXU Europe Limited included elsewhere in this prospectus. TXU EUROPE GROUP PLC (PREDECESSOR COMPANY) <TABLE> <CAPTION> UK GAAP US GAAP ---------------------------- ----------------------------------------------- PERIOD FROM PERIOD FROM APRIL 1, JANUARY 1, YEAR ENDED MARCH 31, 1998 THROUGH 1998 THROUGH 1995 1996 1997 1998 1997 1998 MAY 18, 1998 MAY 18, 1998 ---- ---- ---- ---- ---- ---- ------------ ------------ ((POUND)MILLION) (UNAUDITED) CONSOLIDATED INCOME STATEMENT DATA: <S> <C> <C> <C> <C> <C> <C> <C> <C> Operating revenues................ 2,061 2,119 2,984 3,475 2,984 3,475 425 1,563 Operating income/(loss)........... 244 43 346 337 298 267 (11) 91 Net income/(loss)................. 141 221 265 49 (90) (38) (21) 16 </TABLE> <TABLE> <CAPTION> UK GAAP US GAAP -------------------------------------- ----------------------------------- AS OF MARCH 31, ------------------------------------------------------------------------------ 1995 1996 1997 1998 1997 1998 ---- ---- ---- ---- ---- ---- ((POUND) MILLION) CONSOLIDATED BALANCE SHEET DATA: <S> <C> <C> <C> <C> <C> <C> Total assets...................... 2,053 2,364 3,709 3,888 5,422 5,826 Common stock equity............... 832 1,189 1,314 1,167 2,025 1,802 Minority interest................. (1) (2) 19 6 19 6 Long-term debt and other obligations, less amounts due currently....................... 484 682 1,466 1,499 1,837 1,976 </TABLE> <TABLE> <CAPTION> UK GAAP US GAAP ---------------------------- ----------------------------------------------- PERIOD FROM PERIOD FROM APRIL 1, JANUARY 1, YEAR ENDED MARCH 31, 1998 THROUGH 1998 THROUGH 1995 1996 1997 1998 1997 1998 MAY 18, 1998 MAY 18, 1998 ---- ---- ---- ---- ---- ---- ------------ ------------ ((POUND)MILLION, EXCEPT RATIOS) (UNAUDITED) CONSOLIDATED CASH FLOW DATA (1): <S> <C> <C> <C> <C> <C> <C> <C> <C> Operating activities.............. 284 (189) (116) 614 292 341 74 154 Investing activities.............. (452) 306 (1,052) (238) (229) (234) (78) (139) Financing activities.............. (5) 560 915 (148) (316) 121 16 27 OTHER CONSOLIDATED DATA: Earnings before interest, taxes and minority interest (EBIT) (unaudited)(2).................. 217 280 364 347 303 277 (10) 92 Earnings before interest, taxes, minority interest, depreciation and amortization (EBITDA) (unaudited)(2).................. 273 345 436 436 464 462 16 165 Ratio of earnings to fixed charges (unaudited)(3).................. 5.8 4.9 4.2 2.6 2.5 1.7 0.1 1.6 Net interest expense.............. 14 22 46 85 88 126 16 41 </TABLE> TXU EUROPE LIMITED (SUCCESSOR COMPANY) US GAAP <TABLE> <CAPTION> PERIOD FROM FORMATION (FEBRUARY 5, 1998) THROUGH PERIOD FROM -------------------------- PRO FORMA YEAR FORMATION NINE MONTHS ENDED THROUGH ENDED DECEMBER 31, MARCH 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1998 1999 1998 1998 1999 ------------- ----------- --------------- -------------- -------------- (UNAUDITED) ((POUND) MILLION) CONSOLIDATED INCOME STATEMENT DATA: <S> <C> <C> <C> <C> <C> Operating revenues................. 2,165 3,338 3,690 939 2,686 Operating income................... 314 484 508 53 354 Net income (loss).................. 77 126 94 (25) 71 </TABLE> <TABLE> <CAPTION> AS OF AS OF AS OF DECEMBER 31, 1998 MARCH 31, 1999 SEPTEMBER 30, 1999 ------------------ ---------------- ------------------ (UNAUDITED) ((POUND) MILLION) CONSOLIDATED BALANCE SHEET DATA: <S> <C> <C> <C> Total assets....................... 8,529 8,583 8,429 Total common stock equity.......... 1,535 1,581 1,607 Minority interest.................. 190 200 197 Note payable to TXU Corp........... 682 682 - Long-term debt, less amounts due currently........................ 3,629 3,754 4,495 </TABLE> <TABLE> <CAPTION> PERIOD FROM FORMATION NINE MONTHS (FEBRUARY 5, 1998) THROUGH PERIOD FROM ENDED -------------------------- FORMATION THROUGH SEPTEMBER 30, DECEMBER 31, 1998 MARCH 31, 1999 SEPTEMBER 30, 1998 1999 ----------------- -------------- ------------------ -------------- (UNAUDITED) ((POUND) MILLION) CONSOLIDATED CASH FLOW DATA: <S> <C> <C> <C> <C> Operating activities............... 37 44 12 447 Investing activities............... (1,767) (1,858) (1,569) (347) Financing activities............... 2,197 2,228 3,427 (206) </TABLE> <TABLE> <CAPTION> PERIOD FROM FORMATION PERIOD FROM (FEBRUARY 5, 1998) THROUGH PRO FORMA YEAR FORMATION NINE MONTHS -------------------------- ENDED THROUGH ENDED DECEMBER 31, MARCH 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1998 1999 1998 1998 1999 ------------- ------------ ---------------- ------------- -------------- (UNAUDITED) ((POUND) MILLION) OTHER CONSOLIDATED DATA: <S> <C> <C> <C> <C> <C> <C> Earnings before interest, taxes and minority interest (EBIT) (unaudited)(2)................... 360 531 539 81 359 Earnings before interest, taxes, minority interest, depreciation and amortization (EBITDA) (unaudited)(2)................... 504 733 771 165 542 Ratio of earnings to fixed charges (unaudited)(3)..................... 1.5 1.7 1.4 0.7 1.6 Net interest expense................. 205 278 341 128 213 </TABLE> (1) Cash flow information on a UK GAAP basis for the years ended March 31, 1995, 1996, 1997 and 1998 has been reformatted to US GAAP presentation style. (2) EBIT equals earnings before interest income, interest expense, income taxes and minority interest. EBITDA equals earnings before interest income, interest expense, income taxes, minority interest, depreciation and amortization. This information is provided for informational purposes only. EBIT and EBITDA are not measures defined under US GAAP and have not been presented in accordance with US GAAP. Neither EBIT nor EBITDA should be construed as an alternative to operating income under US GAAP as an indicator of operating performance, or as an alternative to cash flows from operating activities under US GAAP as a measure of liquidity. EBIT and EBITDA are widely accepted financial indicators of a company's ability to incur and service debt. However, these measures of EBIT and EBITDA may not be comparable to similar measures presented by other companies. (3) The ratio of earnings to fixed charges is computed as the sum of earnings plus fixed charges divided by fixed charges. Earnings consist of the aggregate of net income (loss) before minority interests, income taxes and fixed charges excluding interest capitalized. Fixed charges consist of interest expensed and capitalized and the estimated interest portion of rent expense. For TXU Europe Group, for the period from April 1, 1998 through May 18, 1998 total fixed charges exceeded total earnings by (pound)26 million. FOR TXU Europe Limited, for the period from formation through September 30, 1998, total fixed charges exceeded total earnings by (pound)50 million.
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+SUMMARY You should read the following summary together with the more detailed information in this prospectus, including risk factors, regarding our company and the common stock being sold in this offering. Our Company Beatnik brings interactive music and sound to the Web through our combination of technology, content and community. The Internet is still essentially a silent movie. We believe the next step in the evolution of Internet infrastructure will be the proliferation of rich media content across the Web, requiring the integration of audio content into Web sites. Our solution includes a line of software technologies, applications and production music and sound content that enables the integration of interactive audio content into the Web experience, known as sonification. Because our interactive audio solution provides benefits to Web sites, content providers and users, we believe that our success is closely tied to the rapid growths of audio content across the Web and to the expansion of audio enabled digital devices. We are building a community of creative professionals and consumers, and have begun to drive our sonification solutions across the Web and into other digital devices through our licensing agreements with companies such as Liberate, Nokia and Sun; our relationships with Web media sites and software companies such as Macromedia, Media 100, MTV.com and its affiliated sites and Yahoo!; our relationships with production music libraries such as FirstCom Music, Killer Tracks and Network Music; our relationships with leading media, art and design schools; and our relationships with major record labels such as BMG, Sony Music and Zomba, which provide us access to Top 40 and other popular music artists including Lou Bega, David Bowie and Puff Daddy. The gap between the audio experience of traditional media, such as television and movies, and the Internet creates substantial opportunities for our solutions, which enable the integration of interactive audio solutions into the Web experience. Current audio solutions on the Web have focused on the distribution of music through streaming and download technologies. Our interactive audio platform provides a fundamentally different way to use the Internet, wherein sound is interwoven directly with the text and graphics contained in a Web page. Emerging interactive audio technologies and solutions must provide opportunities to music, entertainment and ecommerce Web sites and creative professionals to make their online offerings more compelling and to leverage the Internet to reach new markets more quickly. To take full advantage of the Internet's potential as a new medium for music entertainment, new interactive audio solutions must foster development of a community to provide artists with a platform to connect with their fans and for music hobbyists to create and share music. To achieve these goals, we believe professional music and sound content providers require solutions to transform their audio assets into formats more ideally suited for the Internet. We believe that creative professionals, content providers and Internet users will increasingly seek rich media Web experiences that match the current capabilities of audio in traditional media and leverage the interactive capabilities of the Internet. We provide our interactive audio solution to a community of creative professionals, potential licensees of our technology and consumers enabling them to build and interact with music and sound over the Web, on personal computers and other digital devices. Our platform is comprised of the following elements: . We license and resell our technology enabling the integration of our solution into new interactive technologies, applications and digital devices. . Through our proprietary Web ready, compact and secure audio file format, or Rich Music Format, technology, we put music on the Web page to allow users both to experience audio content real time and to interact with that content. . We have recently launched our Beatnik Music site targeted at media professionals, including post production video producers and Web developers. This ecommerce initiative enables creative professionals to browse, audition, license and download professional music and sound content for synchronization into Web pages, digital applications and video. . Through our Beatnik portal, we provide a forum for a Web based community where professionals can acquire the tools, content and information to sonify the Web. We also provide sonification services through our consulting organization. . Through our relationships with popular record labels and our content driven applications, we enable consumers to create, remix, process, edit, publish and share music. These relationships also give us the ability to meet the demand for content from the most searched music artists and provide access to that content on Web sites such as MTV.com and its affiliated sites and Yahoo! Our objective is to build on our platform of technology, content and community to become the leading provider of interactive audio solutions that sonify the Web and digital content and devices. By establishing our Beatnik portal as the ultimate source of interactive audio technology, content, applications and information, we believe we can create a Web destination that will meet the interactive audio needs of creative professionals, music enthusiasts and hobbyists, while providing music publishers and record companies with a new revenue source on the Internet. To achieve this objective, we intend to focus our efforts in the following areas: . Expand the technology adoption--We target leading Web and media production software companies and digital device manufacturers to promote the integration of our sonification solutions into their Web pages, interactive applications and products. . Expand our Beatnik Music site--We intend to establish Beatnik as the leading provider on the Internet of production music and sound content for professional Web developers and other media professionals. . Extend Professional Sonification--We will continue to develop and provide enhanced software tools, information and services to enable a turnkey solution for sonifying the Web and other digital devices. . Establish a consumer community of music enthusiasts--We target the most popular and highly trafficked Web sites to extend sonification across the Web and continue to develop, market and sell new Web based interactive audio applications. Our Address We were incorporated in California on May 1, 1996 and changed our name to Beatnik, Inc. on April 12, 1999. We will be reincorporated as a Delaware corporation prior to completion of this offering. Our principal executive offices are located at 2600 El Camino Real, San Mateo, California 94403, and our telephone number at that address is (650) 295-2300. Our Web site is located at www.beatnik.com. The information on our Web site is not part of this prospectus. Recent Events On March 10, 2000, 6,750,951 shares of Series E convertible preferred stock were issued at a price of $5.00 per share for cash proceeds of approximately $29.8 million and $4.0 million in services. These investors included MTVN Online, Hikari Tsushin America, Cyber Lifestyle Limited, Sun Microsystems and Media 100. The Series E preferred stock contains substantially the same rights and preferences as the Series A, B, C and D preferred stock. The Series E preferred stock will convert to common stock at a one to one ratio upon completion of this offering. The Offering <TABLE> <S> <C> Common stock offered by Beatnik......... shares Common stock to be outstanding after the shares offering.............................. Use of proceeds......................... For working capital and other general corporate purposes Proposed Nasdaq National Market symbol.. BTNK </TABLE> The number of shares of common stock to be outstanding after this offering is based on the total number of shares outstanding on December 31, 1999, includes 6,750,951 shares of common stock issuable upon conversion of our Series E preferred stock and excludes: . 5,566,576 shares issuable upon exercise of options outstanding at December 31, 1999 at a weighted average exercise price of $0.10 per share; . 833,888 shares issuable upon exercise of warrants outstanding at a weighted average exercise price of $1.67 per share; and . additional shares available for future issuance under our stock plans. In addition, we entered into a promotions agreement with Yahoo! in August 1999 for a term of one year. The agreement is automatically renewed at the end of the one year term unless either party gives the other notice that it does not want to renew the agreement. If the agreement is renewed, Yahoo! Inc. will receive an additional warrant for shares equal to one percent of our outstanding capital stock exercisable at the then fair market value of the stock. Summary Consolidated Financial Data (dollars in thousands, except per share data) The following summary financial information sets forth historical information for Beatnik, as well as Beatnik's unaudited pro forma information for the year ended December 31, 1999. The pro forma statement of operations data reflects the combination of Beatnik with Mixman as if this combination had occurred on January 1, 1999. The pro forma balance sheet data as of December 31, 1999 reflects the conversion of our outstanding preferred stock into common stock upon completion of this offering, the proceeds of $29.8 million in cash and $4.0 million in services from the sale of 6,750,951 shares of Series E preferred stock. The pro forma as adjusted balance sheet reflects the application of the net proceeds from the sale of the shares of common stock offered by Beatnik at an assumed initial public offering price of $ per share, after deducting the underwriting discounts and commissions and our estimated offering expenses. Please see note 2 of the notes to the consolidated financial statements for an explanation of the determination of the number of shares used in computing per share data and for an explanation of the determination of the number of shares used in computing pro forma basic and diluted net loss per share. <TABLE> <CAPTION> Year Ended December 31, -------------------------- 1997 1998 1999 ------- ------- -------- <S> <C> <C> <C> Consolidated Statement of Operations Data: Total revenue..................................... $ 194 $ 675 $ 1,492 Cost of revenue................................... 296 294 1,036 Gross profit (loss)............................... (102) 381 456 Total operating expense(1)........................ 1,523 1,941 11,110 Loss from operations.............................. (1,625) (1,560) (10,654) Net loss.......................................... (1,527) (1,596) (10,473) Basic and diluted net loss per share.............. (0.35) (0.35) (1.60) Pro forma basic and diluted net loss per share (unaudited)..................................... (0.65) </TABLE> <TABLE> <CAPTION> Year Ended December 31, 1999 ----------------- (unaudited) <S> <C> Pro Forma Consolidated Statement of Operations Data: Total revenue................................................. $ 3,491 Cost of revenue............................................... 1,304 Gross profit.................................................. 2,187 Total operating expenses...................................... 21,940 Loss from operations.......................................... (19,753) Net loss...................................................... (19,568) Basic and diluted net loss per share.......................... (1.44) </TABLE> - -------- (1) Included in total operating expense for the year ended December 31, 1999 is amortization of deferred stock based compensation of $2,972,000, amortization of purchased goodwill and other intangibles of $364,000 and a writeoff of in process research and development of $241,000. <TABLE> <CAPTION> December 31, 1999 ------------------------------- Pro Forma Actual Pro Forma as Adjusted ------- ----------- ----------- (unaudited) (unaudited) <S> <C> <C> <C> Consolidated Balance Sheet Data: Cash and cash equivalents....................... $ 6,191 $35,946 $ Working capital................................. 4,507 38,262 Total assets.................................... 36,786 70,541 Convertible preferred stock..................... 22,221 -- Stockholders' equity............................ 9,649 65,625 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001089443_digimarc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001089443_digimarc_prospectus_summary.txt
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+SUMMARY You should read the following summary, together with the more detailed information in this prospectus, including risk factors, regarding our company and the common stock being sold in this offering. Digimarc Corporation Digimarc is a leading provider of patented digital watermarking technologies that allow imperceptible digital code to be embedded in the printed or digital versions of media content, such as commercial and consumer photographs, movies, music, magazine advertisements, catalogs, product packages and valuable documents like financial instruments, passports and event tickets. In addition to a code that can be embedded within various types of media content, our technologies include reader software that, as a resident application on PCs and other devices, enables the recognition of embedded codes. We believe our technologies have many potential applications. We are developing products and services to address what we believe are our two largest near-term market opportunities--the deterrence of digital counterfeiting and piracy and the enhancement of Internet access and navigation. In addition, we continue to pursue commercial applications in audio and video digital watermarking. Recent advances in multimedia, digital imaging and printing technologies have given computer users at every level of sophistication access to highly advanced image manipulation and reproduction capabilities. This access has led to new challenges in the areas of document security, counterfeiting and piracy deterrence by allowing virtually any user to create expert-quality copies of traditional and digital content. At the same time, advances in technology have introduced millions of people to the Internet, which has allowed the Web to become a global distribution channel for unauthorized reproductions of proprietary content. Our reader software can render scanners, digital cameras and PCs ineffective for use in duplicating or distributing proprietary content into which our digital code has been embedded. One area of critical concern in the field of digital counterfeiting is the protection of currency, where the cost of failure is extremely high and the standards for imperceptibility and reliability are equally important. We have been awarded a multi-year contract by a global consortium of leading central banks to develop a system to deter the use of PCs in the counterfeiting of currency. We believe the same core technologies can be used to enhance e-commerce. The increasing volume of Internet content and number of Web destinations has made Internet navigation and information retrieval more challenging. Despite the availability of numerous search methods, research indicates that users often experience difficulty when retrieving information on desired products or services, causing a loss of potential e-commerce revenue. We have used our technologies to develop the MediaBridge system, which is planned for release in the second half of 2000. This application is intended to enable imperceptible digital code to be embedded within print media, such as magazine advertisements and articles, direct mailers, coupons, catalogs, bank cards, and business cards. When recognized by PC cameras enabled by our patented reader software, the code will automatically launch the user to the specific Internet destination chosen by the producer of the printed content. In this way, we believe that the MediaBridge system will deliver more efficient Internet navigation and access to consumers and more effective means for print publications to link readers directly to supplemental news and entertainment, and targeted e-commerce points-of-sale. To further our MediaBridge initiative, we have entered into letters of intent with PC camera vendors such as Logitech and 3Com and agreements with magazines and magazine publishers such as Wired magazine and Hearst. We believe that our applications offer strong advantages over other media commerce and secure documents approaches because our digital watermark codes are imperceptible, persistent and format-independent, allowing them to operate in both analog and digital environments. Our applications are relevant to a wide variety of Internet, computing and communications solutions because virtually any media content can contain our imperceptible digital watermarking code. We will continue to address both the security and the access problems increasingly arising as the world grows more dependent on multimedia computing and the Internet. Our core goals are to establish our patented technologies as basic components of industry standards for controlling the use of media content and to establish the MediaBridge system as a leading means of Internet access and navigation. We intend to achieve these objectives by encouraging widespread adoption of our reader software through marketing and strategic relationships with leading publishers or advertisers and leading manufacturers of PC cameras or other personal computer peripheral devices. To this end, we are working with Logitech and 3Com to bundle our reader software into their PC camera software packages. We also plan to continue to develop new applications that rely upon our technology for other customers in communications, image processing and electronic commerce. We believe that successful new applications would further increase demand for our reader technology. We intend to maintain our technology leadership in digital watermarking through continued innovation and rigorous intellectual property development and protection. By broadly licensing our technologies for deterring copyright infringement, counterfeiting and piracy, and for linking digital content with the physical world, we intend to build long-term demand for our technologies and promote public awareness of our brand. We derived 51% of our total revenue in 1998 and 89% of our total revenue in 1999 from an agreement with a consortium of leading central banks, and any change in, or early termination of, our relationship with this customer could seriously harm our business. We anticipate that this agreement will account for most of our revenue until we are able to generate revenue from the introduction of other new products and services that we are currently developing, including the MediaBridge system. We are not profitable and we expect to continue to incur losses for the foreseeable future. We were incorporated in Oregon on January 3, 1995, and reincorporated in Delaware on December 1, 1999. Our principal executive offices are located at 19801 S.W. 72nd Avenue, Tualatin, Oregon 97062, and our telephone number is (503) 885-9699. Our Web site is located at www.digimarc.com. Information contained on our Web site does not constitute part of this prospectus. Unless otherwise indicated, the information in this prospectus assumes no exercise by the underwriters of their option to purchase up to an additional 450,000 shares of our common stock and reflects a one-for-two reverse stock split effected on December 1, 1999. The Offering <TABLE> <S> <C> Common stock offered by Digimarc 2,000,000 shares Corporation....................... Common stock offered by the selling 1,000,000 shares stockholders...................... Common stock to be outstanding 14,764,145 shares after this offering............... Use of proceeds.................... For general corporate purposes and working capital, including expansion of our sales and marketing efforts, product and technology development, expansion of our customer support organization, capital expenditures and possible strategic acquisitions or investments. See "Use of Proceeds." Nasdaq National Market Symbol...... DMRC </TABLE> The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of March 10, 2000 and excludes: . 3,239,311 shares of common stock issuable upon exercise of options outstanding as of March 10, 2000 at a weighted average exercise price of $14.11 per share; . 1,107,854 shares of common stock reserved for future issuance as of March 10, 2000 under our 1999 stock incentive plan, our 1999 non-employee director option plan, and our 1999 employee stock purchase plan; and . 150,000 shares of common stock issuable upon exercise of a warrant outstanding as of March 10, 2000 at an exercise price of $20.00 per share. Summary Financial Data The following summary financial data should be read in conjunction with our financial statements and related notes, "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this prospectus. The as adjusted column in the balance sheet data below reflects adjustments to the actual data to show our receipt of the estimated net proceeds of $137.7 million from our sale of 2,000,000 shares of our common stock in this offering at an assumed public offering price of $72.88 per share, after deducting underwriting discounts and commissions and estimated offering expenses. <TABLE> <CAPTION> Period from January 3, 1995 (inception) to Year Ended December 31, December 31, ------------------------------------------ 1995 1996 1997 1998 1999 --------------- --------- --------- --------- --------- (in thousands, except share and per share data) <S> <C> <C> <C> <C> <C> Statement of Operations Data: Total revenue........... $ -- $ 236 $ 186 $ 984 $ 6,929 Gross margin............ -- 229 60 (596) 3,303 Total operating expenses............... 840 1,900 3,999 2,890 6,085 Operating loss.......... (840) (1,671) (3,939) (3,486) (2,782) Net loss................ $ (874) $ (1,578) $ (3,979) $ (3,442) $ (2,389) Net loss per share-- basic and diluted...... $ (1.01) $ (0.71) $ (1.88) $ (1.50) $ (0.78) Weighted average shares used in computing net loss per share--basic and diluted............ 869,478 2,226,519 2,120,477 2,288,442 3,052,671 </TABLE> <TABLE> <CAPTION> December 31, 1999 ------------------- Actual As Adjusted ------- ----------- <S> <C> <C> Balance Sheet Data: (in thousands) Cash and cash equivalents................................... $90,830 $228,543 Working capital............................................. 89,900 227,613 Total assets................................................ 94,903 232,616 Capital lease obligations, less current portion............. 119 119 Total stockholders' equity ................................. 90,795 228,508 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001089448_servicesof_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001089448_servicesof_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding Servicesoft and the common stock being sold in this offering and our Consolidated Financial Statements and Notes thereto appearing elsewhere in this prospectus. SERVICESOFT, INC. We develop, market and deliver sophisticated software products and professional services that help both traditional and Internet businesses provide superior Internet-based service, or e-service, to their customers, employees and business partners. We believe that our Servicesoft 2000 suite of products helps our clients build personalized and sustainable on-line customer relationships that maximize lifetime customer value. Our Servicesoft 2000 suite enables our clients to design their Web sites to more easily enable their customers to answer questions on their own, known as self-service, as well as to answer their customers' inquiries through e-mail, live Internet-based interactions and traditional phone-based communications. Our products also enable our clients to build a knowledge base, which is an aggregation of product information, customer information, transaction data and individual employee expertise, which is usually dispersed throughout a company. The software tools used to create the knowledge base allow our clients to index the aggregated information, create associations between individual pieces of information and assign relevance to particular pieces of information. By integrating this knowledge base with self-service, e-mail and live interaction applications and traditional phone-based communications, our products help our clients to consistently deliver prompt, relevant and intelligent responses that directly address issues raised by their customers, employees and business partners. By enabling our clients' customers to escalate their inquiries from self-help to e-mail response to live interaction, our products help our clients to efficiently apply the appropriate level of resources while enhancing customer satisfaction. We also believe our products increase employee productivity and decrease cost per customer service interaction. Our Servicesoft 2000 suite of products integrates with existing business systems, including industry leading automated call distribution systems, such as those provided by Lucent and Nortel, industry leading customer relationship management applications, such as those provided by Siebel, Clarify and Vantive, as well as leading database and e-commerce applications. We complement our products with a professional services organization that offers a range of services, including rapid implementation assistance, e-service system design, knowledge engineering and project management. We have designed these services to decrease implementation risk, shorten the time it takes to provide superior e-service, improve our clients' competitive position and maximize return on investment. We believe that our ability to successfully deliver an integrated, knowledge base-enabled solution to our clients provides us with a significant competitive advantage in the market for e-service solutions. We market our products through our direct sales force, third party resellers and systems integrators to e-businesses seeking to improve their relationships with their customers, employees and business partners. We also leverage strategic alliances with a number of information technology and professional services organizations to increase the penetration and market acceptance of our e-service suite of products. To date, we have licensed our products to clients across a variety of industries, including telecommunications, e-commerce, financial services, technology (software and hardware), services providers, manufacturing and healthcare. Our clients include GTE, Eddie Bauer, American Express, Akamai, Intel, Getronics Wang, John Deere and Shared Medical Systems. These eight clients accounted for 15% of our total revenue in 1999. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (Subject to Completion) Issued August 25, 2000 3,500,000 SHARES SERVICESOFT LOGO COMMON STOCK ------------------------ SERVICESOFT, INC. IS OFFERING 3,500,000 SHARES OF ITS COMMON STOCK. THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $13 AND $15 PER SHARE. ------------------------ WE HAVE APPLIED TO HAVE THE COMMON STOCK APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "SRVS." ------------------------ INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4. ------------------------ PRICE $ A SHARE ------------------------ <TABLE> <CAPTION> UNDERWRITING PROCEEDS PRICE TO DISCOUNTS AND TO PUBLIC COMMISSIONS SERVICESOFT --------- -------------- ----------- <S> <C> <C> <C> Per Share.............................. $ $ $ Total.................................. $ $ $ </TABLE> The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Servicesoft, Inc. has granted the underwriters the option to purchase up to an additional 525,000 shares to cover over-allotments. Morgan Stanley & Co. Incorporated expects to deliver the shares of common stock to purchasers on , 2000. ------------------------ MORGAN STANLEY DEAN WITTER ROBERTSON STEPHENS SG COWEN , 2000 THE OFFERING Common stock offered.......... 3,500,000 shares Common stock to be outstanding after the offering............ 23,943,993 shares Use of proceeds............... Working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol................. SRVS The number of shares of our common stock that will be outstanding after this offering is based on the number outstanding on July 31, 2000, and includes 995,545 shares of common stock and Series H preferred stock issuable upon the exchange of Servicesoft Technologies Canada Inc. exchangeable shares held by former shareholders of Balisoft Technologies Inc. as a result of our merger with Balisoft in February 1999. The number of shares that will be outstanding after this offering excludes: - 4,278,481 shares of common stock issuable upon exercise of stock options outstanding as of July 31, 2000 at a weighted average price of $5.33 per share. - 201,007 shares of common stock available as of July 31, 2000 for future issuance under our Amended and Restated 1994 Stock Option Plan and our 1999 Stock Option and Grant Plan. - 83,807 shares of common stock issuable upon exercise of warrants outstanding as of July 31, 2000 at a weighted average price of $4.48 per share. ADDITIONAL INFORMATION Unless otherwise indicated, this prospectus assumes that the underwriters have not exercised their option to purchase additional shares, and also assumes that all shares of convertible preferred stock have been automatically converted into shares of common stock. We own or have rights to trademarks that we use in conjunction with the sale of our products. "Servicesoft," "Servicesoft 2001," "WebAdvisor," "Knowledge Builder," "Liveline," "Livesupport," "LiveContact," "LiveChat" and "E-mailContact" are our trademarks. All other trade names and trademarks used in this prospectus are the property of their respective owners. We were first incorporated in Delaware in June 1987 as Rosh Intelligent Systems, Inc. We changed our name to ServiceSoft Corporation in October 1993. We merged with Balisoft Technologies Inc. in February 1999 and changed our name to Servicesoft Technologies, Inc. In December 1999, we acquired Internet Business Advantages, Inc. In March 2000, we changed our name to Servicesoft, Inc. Our principal executive offices are located at Two Apple Hill Drive, Natick, Massachusetts 01760 and our telephone number is 508-653-4000. Our art work will consist of diagrams displaying how our clients and their customers, employees and business partners interact with the e-service applications that compose our Servicesoft 2000 suite of products. Descriptive captions will be used to describe the diagrams. In addition, we plan to use our corporate logo which contains the word "Servicesoft." SUMMARY CONSOLIDATED FINANCIAL DATA The following summary historical and pro forma financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes appearing elsewhere in this prospectus. Our merger with Balisoft Technologies Inc. and our acquisition of Internet Business Advantages, Inc. were accounted for using the purchase method. Accordingly, the results of operations of Balisoft and Internet Business Advantages are included in our results from the applicable closing dates in 1999. Pro forma net loss per common share reflects the assumed conversion of all outstanding convertible preferred stock upon completion of this offering as if converted on the later of January 1, 1999 or the date of original issue. The summary pro forma combined statement of operations data for the year ended December 31, 1999 presents the results of operations of Servicesoft, Balisoft and Internet Business Advantages on a combined basis as if the transactions had occurred on January 1, 1999. The summary balance sheet data as of June 30, 2000 includes information on an actual, pro forma and pro forma as adjusted basis. Since the merger with Balisoft and the acquisition of Internet Business Advantages were completed in 1999, the effects of these transactions are reflected in the summary actual balance sheet data as of June 30, 2000. The summary pro forma balance sheet data reflects the automatic conversion of all outstanding convertible preferred stock into common stock upon completion of this offering. The summary pro forma as adjusted balance sheet data further adjusts the pro forma data to reflect the net proceeds of $44.3 million from the sale of common stock in this offering at an assumed initial offering price of $14.00 per share, after deducting the underwriting discounts and commissions and estimated offering expenses. <TABLE> <CAPTION> PRO FORMA ACTUAL COMBINED ACTUAL ---------------------------- --------- ------------------ SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ---------------------------------------- ------------------ 1997 1998 1999 1999 1999 2000 ------- ------- -------- --------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenue......................... $ 2,526 $ 4,290 $ 7,144 $ 10,479 $ 2,213 $ 12,034 Gross profit.......................... 1,649 3,041 3,363 2,923 1,033 3,539 Operating expenses.................... 2,663 6,384 27,130 35,802 8,876 30,485 Loss from operations.................. (1,014) (3,343) (23,767) (32,879) (7,843) (26,946) Net loss.............................. (1,104) (3,963) (23,553) (32,274) (7,844) (26,493) Net loss attributable to common stockholders........................ (1,444) (4,994) (26,278) (35,071) (8,793) (47,182) Pro forma basic and diluted net loss per common share.................... $ (1.99) $ (1.39) Shares used in computing pro forma basic and diluted net loss per common share........................ 11,862 19,017 </TABLE> <TABLE> <CAPTION> JUNE 30, 2000 ------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ----------- --------- ----------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and marketable securities............ $ 14,343 $14,343 $ 58,663 Working capital............................................. 8,892 8,892 53,212 Total assets................................................ 44,953 44,953 89,273 Capital lease obligations, net of current portion........... 549 549 549 Redeemable convertible preferred stock...................... 87,075 -- -- Stockholders' equity (deficit).............................. (58,106) 28,969 73,289 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001089484_mercata_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001089484_mercata_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding Mercata and the financial statements and the notes to those statements appearing elsewhere in this prospectus. Our Business We are a provider of Internet-based demand aggregation services. Our business model empowers buyers with common purchasing interests to achieve discounts on high-quality, brand-name products and services. Demand aggregation operates on two basic principles: (1) sellers are more likely to offer discounts to buyers when merchandise is purchased in volume and (2) buyers are more likely to purchase merchandise as prices decrease. We call our Internet- based form of demand aggregation "We-Commerce(TM)". On our Mercata.com Web site, buyers participate in group buying through PowerBuy(TM) group purchases. PowerBuys are limited-time buying opportunities in which the price of the featured product or service dynamically decreases, based on parameters determined by the seller, as more visitors join the buying group. Through the use of our proprietary business methods and technology, individual buyers are able to combine their purchasing power to receive volume pricing benefits on featured merchandise. Using this same technology, a seller may gain access to actual buyer demand and price sensitivity data, enabling the seller to adjust prices during a PowerBuy in order to achieve sales objectives, such as increasing units sold, revenues, gross profit dollars or gross margin percentage. For online businesses, we offer an e-commerce solution through our We- Commerce Network. Currently, the We-Commerce Network has two principal types of participants: . merchants that desire to sell their products and services on their Web sites using a dynamic pricing mechanism and extend the reach of their merchandise offerings to other Web sites; and . portal, community and content Web sites that desire to enhance their e- commerce capabilities by providing users a novel buying experience. Within this network of online businesses, PowerBuy group purchases can be conducted simultaneously on multiple Web sites, thus potentially increasing the number of individual buyers within any given PowerBuy. To date, participants in the We-Commerce Network include DealTime.com, Inc., Football Northwest LLC (Seahawks.com), Go2Net, Inc., Mercata.com, the Microsoft Network LLC (MSN), mybytes.com (a division of Youthstream Media Networks, Inc.), Online Office Supplies Company and SAVIshopper.com, Inc. We began offering products for sale on Mercata.com in May 1999. In the fiscal year ended December 31, 1999, we generated net revenues of $6.3 million and received orders from over 72,000 customer accounts. Corporate Information We were incorporated in Delaware on September 23, 1998. Our principal executive offices are located at 110 --110th Avenue N.E., Bellevue, Washington 98004. Our telephone number is (425) 468-9800. Our Web site is located at http://www.mercata.com. Information contained on our Web site does not constitute part of this prospectus. Mercata(TM), We-Commerce(TM), PowerBuy(TM), Share the Power(TM), Buying Power to the People(TM), the Power Swirl design and The Power of We(TM) are trademarks held by us. This prospectus also includes trademarks, trade names and service marks of other companies. Use or display by Mercata of other parties' trademarks, trade names or service marks is not intended to and does not imply an endorsement or sponsorship of Mercata by these parties. The Offering <TABLE> <C> <S> Common stock offered by Mercata............ shares Common stock to be outstanding after the offering.................................. shares Proposed Nasdaq National Market symbol..... MCTA Use of proceeds............................ For working capital and general corporate purposes, including marketing and the expansion of the We-Commerce Network; further development of our demand aggregation service; potential acquisitions or development of complementary products, services, technologies or businesses; and potential strategic investments. </TABLE> Common stock outstanding after this offering is based on shares outstanding as of March 1, 2000. The share numbers above exclude: . 2,560,094 shares of common stock issuable upon exercise of outstanding stock options as of March 1, 2000 at a weighted average exercise price of $0.54 per share; . 1,664,205 shares of common stock available for future grant or issuance pursuant to our 1999 Equity Incentive Plan as of March 1, 2000, which shares will be unavailable for future grant or issuance upon the closing of this offering; and . 4,750,000 shares of common stock available for future grant or issuance after the closing of this offering pursuant to our 2000 Equity Incentive Plan and our 2000 Employee Stock Purchase Plan. Except as otherwise noted, all information in this prospectus: . reflects the issuance of 2,522,250 shares of Series C preferred stock in March 2000; . reflects the automatic conversion of all shares of our preferred stock outstanding as of March 1, 2000 into 27,722,250 shares of common stock upon the closing of this offering; . excludes the potential issuance of 840,750 shares of Series C preferred stock upon conversion of an outstanding $10.0 million convertible note, which transaction currently is subject to regulatory review; . assumes the underwriters do not exercise the overallotment option granted to them. Summary Financial Information (in thousands, except per share data) The following summary financial information is derived from our financial statements included elsewhere in this prospectus. You should read the following summary financial information in conjunction with those financial statements and the notes to those statements. <TABLE> <CAPTION> Period from September 23, 1998 (inception) Year Ended to December 31, December 31, 1998 1999 ---------------- ------------ <S> <C> <C> Statement of Operations Data: Net revenues.................................. $ -- $ 6,308 Cost of revenues.............................. -- 5,775 ------- -------- Gross profit.................................. -- 533 Operating expenses: Sales and marketing.......................... 498 29,683 Technology and development................... 664 3,915 General and administrative................... 761 3,494 ------- -------- Total operating expenses.................... 1,923 37,092 ------- -------- Operating loss................................ (1,923) (36,559) Interest income (expense), net................ (12) 467 ------- -------- Net loss...................................... $(1,935) $(36,092) ======= ======== Basic and diluted net loss per common share... $ (0.48) $ (21.33) ======= ======== Pro forma basic and diluted net loss per common share ................................ $ -- $ (2.25) ======= ======== Weighted average shares used to compute basic and diluted net loss per common share........ 4,000 1,692 Weighted average shares used to compute pro forma basic and diluted net loss per common share........................................ -- 16,044 </TABLE> See Note 1 to the financial statements for an explanation of the determination of the number of shares and share equivalents used in computing per share and pro forma per share amounts. The following table presents summary balance sheet data as of December 31, 1999 on an actual basis; on a pro forma basis to reflect the issuance of 2,522,250 shares of our Series C preferred stock and the issuance in March 2000 of a $10.0 million convertible note payable, and the automatic conversion of all our preferred stock outstanding as of March 1, 2000 into common stock upon the closing of this offering; and on an as adjusted basis to give effect to the pro forma adjustments and the receipt of the estimated net proceeds from the sale of shares of our common stock in this offering at an assumed initial public offering price of $ per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. <TABLE> <CAPTION> December 31, 1999 ----------------------------- Pro Forma Actual Pro Forma As Adjusted ------- --------- ----------- <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents........................ $13,874 $53,874 $ Convertible note payable......................... -- 10,000 Working capital.................................. 8,309 38,309 Total assets..................................... 22,793 62,793 Total stockholders' equity....................... 12,235 42,235 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001089567_edison_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001089567_edison_prospectus_summary.txt
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+PROSPECTUS SUMMARY Because this is only a summary, it does not contain all the information that may be important to you. You should read the entire prospectus, especially "Risk Factors" and our financial statements and the related notes included in this prospectus, before deciding to invest in shares of our class A common stock. EDISON SCHOOLS INC. Edison is the nation's largest private operator of public schools serving students from kindergarten through 12th grade. We contract with local school districts and public charter school boards to assume educational and operational responsibility for individual schools in return for per-pupil funding that is generally comparable to that spent on other public schools in the area. We opened our first four schools in August 1995, and served approximately 37,500 students in 79 schools located in 16 states across the country and the District of Columbia in the 1999-2000 school year, an increase of 14,000 students from the 1998-1999 school year. Approximately 26,700 students were enrolled in our schools in grades K-5, approximately 9,700 in grades 6-8 and approximately 1,600 in grades 9-12 in the 1999-2000 school year. In the 2000-2001 school year, we expect to enroll between 57,000 and 59,000 students in 108 schools located in 21 states and the District of Columbia. Our model offers public school authorities, who face concern about student achievement, the benefits of a large private sector company with national support systems. These benefits contribute to an enhanced educational experience that has proven attractive to public school authorities, parents and teachers alike. Elements of that experience include a longer school day and year and a strong emphasis on technology. We recognize that there are many excellent public schools in the United States. We also believe, however, that the overall performance of public schools has been compromised by several inherent constraints that may inhibit many districts from implementing a systemic program of improvement. These constraints may include a lack of consistency in leadership due to the relatively brief tenure of superintendents and school boards, the inability to exploit the advantages of scale because school districts tend to be small and independent operations and the inability to invest for the future due to school districts' annual budget cycles. We believe our school design addresses these issues through system-wide accountability and incentives, economies of scale and an investment in research and development. During the 1997-1998 school year, over 14,000 school districts comprising 89,000 K-12 schools enrolled an estimated 46.1 million students. We currently concentrate our business development efforts on the approximately 1,800 medium and large school districts that each have more than 5,000 students. We estimate that these districts had annual operating budgets aggregating $190 billion for the 1998-1999 school year. We are retained by public school authorities to implement our school design and curriculum in one of two ways. In most instances, an elected school board votes to enter into a contract with us to manage one or more schools in the district. In other cases, we manage the school pursuant to a contract granted by a public charter school board. Thirty-six states and the District of Columbia have now enacted charter school legislation. Under a typical charter school statute, identified entities, such as a state board of education or state university, are authorized to grant a "charter" to create and operate a public school. In some cases, we operate charter schools under a charter granted by the local school board, which provides the facility. In these cases, we categorize these schools as contract schools because we do not provide the facility and therefore the economics of these arrangements closely resemble those of a contract school. We have a limited operating history on which you can base your evaluation of our business and prospects. We have incurred substantial net losses in every fiscal period since we began operations. As of March 31, 2000, our accumulated deficit since November 1996, when we converted from a partnership to a corporation, was approximately $106.8 million. Our net loss per student was $1,597 in fiscal 1997, $1,739 in fiscal 1998, $2,068 in fiscal 1999 and $743 in the nine months ended March 31, 2000. Net loss per student includes noncash stock-based compensation and non-recurring design-team compensation charges per student of $6, $263, $937 and $75 for these periods.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001089613_e-piphany_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001089613_e-piphany_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the risk factors beginning on page 5. E.PIPHANY, INC. We develop and market software that helps companies establish, maintain and continually improve customer relationships across both Internet and traditional sales, marketing and distribution channels. Our E.piphany E.4 System is an integrated family of software solutions that companies can deploy to collect and analyze data from their existing software systems, and from third party data providers, to profile their customers' characteristics and preferences. Business users within these companies can then act on this information by using the E.piphany E.4 System to design and execute marketing campaigns as well as personalize products, services and related transactions. We have recently expanded our product offerings to enable companies to make marketing offers in real time during interactions initiated by customers. By using our software to address the unique characteristics and preferences of each customer, we believe companies are able to improve the longevity and profitability of their customer relationships. We believe that the E.piphany E.4 System is differentiated from other software by its combination of the following characteristics: - Our software is designed to establish, maintain and improve customer relationships. Our software solutions are designed to enable a continuous process that helps businesses identify and differentiate their customers and then personalize products, services and related interactions based on customer characteristics and preferences. - Our software utilizes a Web-based design to promote ease of use and wide scale deployment to business users. Our software is easy-to-use and is accessed by business users across a corporate network or the Internet using only a standard Web browser. This Web-based design does not require our software to be installed on each user's computer, but only in a single location, which reduces the costs of deploying and maintaining the software. - Our software is packaged for faster and less expensive implementation. Our software is a single integrated family of software solutions that includes technologies to extract, manage, analyze and act on customer data. This eliminates the need for a company to integrate multiple software tools from various vendors or develop custom software to solve specific business problems. Our software solutions can generally be implemented in 16 weeks or less. - Our software is designed to generate marketing offers in real time. Our software delivers marketing offers to customers in real time by immediately analyzing current customer behavior in the context of all past interactions to determine the optimal offer for each individual customer when they initiate contact with a company. The offer is delivered to the customer through integration with call center automation applications, Internet infrastructure applications and other software systems at the point of customer interaction. We generate revenue by licensing our software to large and medium sized businesses and by providing related consulting, implementation and maintenance services. We market our products through our direct sales force, and indirectly through agreements with third parties to resell our software. Our customers include Acxiom, Amazon.com, American Express, Autodesk, California State Automobile Association, Capital BlueCross, Charles Schwab, DIRECTV, Edify, GTE, Hewlett-Packard, Hilton Hotels, KPMG, Lucent Technologies, Microsoft, Procter & Gamble, SportsLine, Sallie Mae, VoiceStream and Wingspan Bank. After giving effect to our acquisition of RightPoint Software, Inc. described below, our pro forma revenue increased from $4.7 million in 1998 to $14.3 million in the first nine months of 1999. We have a limited operating history and have incurred significant losses, including a pro forma loss of $138.0 million for the nine months ended September 30, 1999, which includes $118.0 million from the amortization of intangible assets recorded in connection with the RightPoint acquisition. On a pro forma basis, we had an THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE CANNOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION DATED JANUARY 20, 2000 3,000,000 Shares [LOGO] Common Stock ------------------ We are selling 1,448,745 shares of common stock and the selling stockholders are selling 1,551,255 shares of common stock. We will not receive any of the proceeds from shares sold by the selling stockholders. The underwriters have an option to purchase a maximum of 450,000 additional shares, of which 250,000 are from us and 200,000 are from a selling stockholder, to cover over-allotments of shares. Our shares are listed for trading on The Nasdaq Stock Market's National Market under the symbol "EPNY." On January 19, 2000, the last reported sales price for our common stock was $168.50 per share. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 5. <TABLE> <CAPTION> UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS E.PIPHANY STOCKHOLDERS -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Per Share............................ $ $ $ $ Total................................ $ $ $ $ </TABLE> Delivery of the shares of common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Joint Book-Running Managers CREDIT SUISSE FIRST BOSTON MORGAN STANLEY DEAN WITTER ------------------ CHASE H&Q MERRILL LYNCH & CO. ROBERTSON STEPHENS The date of this prospectus is , 2000. accumulated deficit of $51.6 million as of September 30, 1999, including an in-process research and development charge of approximately $22 million. We expect to incur losses in the foreseeable future, and these losses may be substantial. The market in which we compete is highly competitive. RECENT DEVELOPMENT We acquired RightPoint in a merger transaction on January 4, 2000. RightPoint develops and markets real-time marketing software. RightPoint's software solutions enable companies to optimize and present marketing offers, promotions, and communications while a customer is interacting with a web site, call center agent or other point of customer interaction. RightPoint's real-time marketing software applications provide a single integrated view of the customer across multiple channels, allowing consistent marketing messages and promotions to customers regardless of which channel a customer is using. In connection with the acquisition, we issued approximately 3.1 million shares of our common stock. In addition, options and warrants of RightPoint were converted into options and warrants to purchase approximately 530,000 shares of our common stock. This transaction has been accounted for under the purchase method of accounting. ------------------ We were incorporated in Delaware in November 1996 as Epiphany Marketing Automation, Inc. In March 1997, we changed our name to Epiphany Marketing Software, Inc., and in April 1999, we changed our name to E.piphany, Inc. Our principal executive offices are located at 1900 South Norfolk Street, Suite 310, San Mateo, California 94403. Our telephone number is (650) 356-3800. Our World Wide Web site is located at http://www.epiphany.com. Information contained on our World Wide Web site, or available by links from our Web site, does not constitute part of this prospectus. Adaptive Schema Generator, E.4, EpiCenter, E.piphany E.4 System, E.piphany, the E.piphany logo and RightPoint are our trademarks. Other trademarks or service marks appearing in this prospectus are trademarks or service marks of the companies that use them. THE OFFERING Common stock offered by E.piphany........................ 1,448,745 shares Common stock offered by the selling stockholders............. 1,551,255 shares Common stock to be outstanding after this offering.............. 31,557,385 shares Use of proceeds.................. For general corporate purposes, principally working capital and capital expenditures. Nasdaq National Market symbol.... EPNY The share amounts in this table are based on shares outstanding as of January 5, 2000. Except as otherwise indicated, information in this prospectus assumes no exercise of the underwriters' option to purchase 450,000 additional shares, of which 250,000 are from us and 200,000 are from a selling stockholder. This table excludes, as of January 5, 2000: - 8,267,503 shares of common stock reserved for issuance under our stock plans and warrants, including RightPoint's options and warrants, of which 3,841,223 shares are subject to outstanding options and warrants, with a weighted average exercise price of $14.55 per share, and - 3,081,964 shares of common stock reserved for issuance under our employee stock purchase plan. SUMMARY FINANCIAL INFORMATION <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- ------------------------------------ 1998 1999 ---------------------- ---------------------- 1997 ACTUAL PRO FORMA 1998 ACTUAL PRO FORMA ------- -------- ----------- ----------- -------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues........................... $ $ 3,377 $ 4,666 $ 1,975 $ 10,468 $ 14,269 Cost of revenues....................... -- 1,400 1,527 850 5,528 6,167 Gross profit........................... -- 1,977 3,139 1,125 4,940 8,102 Amortization of goodwill and intangibles.......................... -- -- 157,319 -- -- 117,990 Stock-based compensation............... 1 799 799 395 2,314 2,814 Loss from operations................... (3,220) (10,613) (173,362) (6,952) (16,218) (138,331) Net loss............................... (3,149) (10,330) (173,185) (6,799) (16,135) (138,032) Basic and diluted net loss per share... $ (2.90) $ (7.19) $ (112.53) $ (3.62) $ (2.90) $ (24.27) Shares used in computing basic and diluted net loss per share........... 1,087 1,437 1,539 1,877 5,563 5,688 Pro forma basic and diluted net loss per share (unaudited)................ $ (1.17) $ (16.85) $ (1.00) $ (7.45) Shares used in computing pro forma basic and diluted net loss per share (unaudited).......................... 8,833 10,281 16,197 18,537 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1999 ----------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $89,701 $ 93,930 $324,938 Working capital........................................... 85,765 83,114 314,122 Total assets.............................................. 97,976 577,616 808,624 Long-term obligations, net of current portion............. 7,830 7,868 7,868 Total stockholders' equity................................ 80,862 550,775 781,783 </TABLE> The statement of operations data for the year ended December 31, 1997 is presented for the period from inception in November 1996 to December 31, 1997. Operating expenses totaled $12,000 for the period from inception in November 1996 to December 31, 1996. See Note 2 of Notes to E.piphany's Financial Statements for an explanation of the determination of the number of shares used in computing per share data. The pro forma financial information reflects the acquisition of RightPoint and is derived from the unaudited pro forma combined condensed financial statements and should be read in conjunction with such pro forma statements and the notes thereto, which are included elsewhere in this prospectus. In preparing the pro forma combined statement of operations data, the RightPoint operations have been included as if the acquisition had occurred at the beginning of the earliest period presented. The pro forma combined balance sheet data has been prepared as if the acquisition had occurred at that date. The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have actually occurred if the acquisition had been consummated as of the beginning of the earliest period presented or at September 30, 1999, nor is it necessarily indicative of future operating results or our financial position following the acquisition of RightPoint. The pro forma as adjusted amounts reflect the receipt of the net proceeds from the sale of the 1,448,745 shares of common stock offered by us, after deducting the underwriting discount and estimated offering expenses payable by us.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001089708_buildnet_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001089708_buildnet_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information and our financial statements and notes appearing elsewhere in this prospectus before you decide to purchase our common stock. BUILDNET, INC. OUR BUSINESS Our objective is to be the business-to-business e-commerce solution for the residential construction industry. We have designed the BuildNet Exchange to provide secure Internet-based procurement, e-commerce and information services for homebuilders, suppliers and manufacturers. We believe that the BuildNet Exchange addresses many of the supply chain inefficiencies that adversely impact the residential construction industry. The supplier and homebuilder segments of the residential construction industry are highly fragmented and driven by regional and local demand. Participants lack accurate and timely information on product requirements, building materials are transferred multiple times through the supply chain and most procurement processes are paper-based and labor-intensive. The BuildNet Exchange allows users to confirm pricing and product specifications, place purchase orders and add both product and order information automatically to builders' and suppliers' management systems. In addition, manufacturers can place product information and catalogs on the BuildNet Exchange for access by homebuilders and suppliers. We are testing the BuildNet Exchange and expect to initiate a limited market rollout in two cities in the second quarter of 2000 and to commence a commercial rollout in an additional four to six cities in the second half of 2000. Our position as a leading provider of management software to homebuilders and suppliers gives us a critical mass of software users to connect to the BuildNet Exchange. Our aggregated software customer base includes homebuilders that accounted for approximately 43% of 1999 U.S. single-family home closings, according to our estimates, and three of the top ten residential construction suppliers in the U.S., according to Pro Sales magazine. Our customers currently use our software to plan and manage projects and back-office functions. We have already upgraded four of our six existing builder management software products and our two principal supplier management software products so that they connect to the BuildNet Exchange. We refer to the process by which we connect the BuildNet Exchange to the back-office systems of homebuilders and suppliers as BuildNet Enabling. We will BuildNet Enable our remaining builder management software products prior to our commercial rollout. We believe that BuildNet Enabling our software products gives us a significant competitive advantage since it connects builders and suppliers with minimal disruption to their existing systems and processes. We are also developing software to enable homebuilders, suppliers and manufacturers who are not users of our management software products to connect to the BuildNet Exchange. We believe that the BuildNet Exchange will provide significant benefits to homebuilders, suppliers and manufacturers. Homebuilders will be able to automate and streamline their procurement process and improve their production planning efficiency. Suppliers will be able to improve inventory management and enjoy greater lead times for providing value-added services. Manufacturers will be able to provide updated and cost-effective online product information to buyers and increase the efficiency of their marketing efforts. We have established relationships with many major homebuilders, suppliers and manufacturers through equity investments and our warrant incentive program to encourage the rapid adoption of the BuildNet Exchange. We also have an existing strategic relationship with EDS, which has built and will host our transaction hub and is promoting the BuildNet Exchange as the standard for the homebuilding industry. In addition, we have a relationship with mortgage.com under which we have exclusive rights to offer to homebuilders the ability to arrange mortgage loans for their homebuyers through mortgage.com. OUR MARKET OPPORTUNITY Business-to-business e-commerce is expected to grow rapidly as the widespread adoption of intranets and the acceptance of the Internet has created a business communications platform that offers the potential for companies to streamline complex processes, lower costs and improve productivity. Business- to-business e-commerce is expected to grow from an estimated $406 billion in 2000 to $2.7 trillion in 2004, according to Forrester Research. The residential construction industry is one of the largest sectors of the U.S. economy. According to the U.S. Census Bureau, the value of residential construction in the United States in 1997 was approximately $238 billion. Also, according to the Census Bureau, there were approximately 1.3 million single-family housing starts in 1999. We believe that this industry has characteristics that create an attractive opportunity for business-to-business e-commerce, including large numbers of buyers and sellers, a high degree of fragmentation among buyers and sellers, significant dependence on information exchange and large transaction volume. OUR STRATEGY Our objective is to be the business-to-business e-commerce solution for the residential construction industry. Key elements of our strategy to achieve our objective include the following: - Roll out the BuildNet Exchange commercially; - Leverage strategic relationships; - Generate multiple revenue streams; - Connect manufacturers to the BuildNet Exchange; - Build brand recognition; - Expand e-commerce solutions into complementary markets; and - Pursue strategic acquisitions and relationships. OUR HISTORY BuildNet was incorporated in the state of North Carolina in October 1996. Prior to the consummation of this offering, we will reincorporate as a Delaware corporation. In 1999, we acquired F.A.S.T Management, McCosker Corporation, Systems Analysis and Maxwell & Company, providers of builder management software products, and also Site Trak, a management software product for the subcontractor segment of the homebuilding industry. In January 2000, we purchased software products for the processing of electronic commerce transactions in the electrical, plumbing, appliances and HVAC market from The UniLink Group, LLC and the software and customer base for the homebuilder module of the World Software System from J.D. Edwards World Source Company. In February 2000, we entered into an agreement to purchase NxTrend Technology, Inc., subject to regulatory approval. NxTrend is a leading provider of supplier management software to suppliers and distributors in the residential and commercial construction industry and other industries. BUILDNET(R), BUILDSOFT(R), TREND(R), SHIMS(R), NXTREND(R) and the NxTrend Logo are registered trademarks, and BUILDNET ENABLED, FAST, TRUELINE, TOM SYSTEMS, LLOYD's, the BuildNet logo, the BuildSoft logo, Strategic Exchange, SX, WDS-II, the FAST logo, the TrueLine logo and the TOM Systems logo are trademarks of BuildNet. This prospectus also includes trademarks of entities other than BuildNet, as to which BuildNet claims no interest. In addition, buildnet.com, buildnet.net, buildsoft.com and nxtrend.com are domain names that are owned by BuildNet. CORPORATE INFORMATION BuildNet's executive offices are located at 4813 Emperor Boulevard, Suite 130, Durham, North Carolina 27703, and its telephone number at that location is (919) 941-4000. Our primary Web site is located at www.buildnet.com. Information on our Web sites is not part of this prospectus. THE OFFERING Common Stock Offered................ shares Common Stock Outstanding after the Offering............................ shares Use of Proceeds..................... General corporate purposes, potential acquisitions and repayment of NxTrend notes Proposed Nasdaq National Market Symbol.............................. BNET The outstanding share information set forth above is based on the number of shares of our common stock outstanding on March 1, 2000. This information includes: - 2,678,760 shares of common stock issued upon the assumed exercise of the outstanding warrants that will expire if not exercised prior to the consummation of this offering; and - shares issued upon the assumed conversion of convertible notes with an aggregate principal of approximately $ as of , 2000 (at a conversion price equal to the midpoint of the price range set forth on the front cover of this prospectus). The outstanding share information above excludes: - 19,275,363 shares of common stock issuable upon the exercise of stock options outstanding as of March 1, 2000 under our 1997 stock plan, our 1999 stock plan, the F.A.S.T. Management Group, Inc. 1997 stock option plan and the NxTrend 1999 amended and restated equity incentive plan, with a weighted average exercise price of $0.87 per share; - an additional 28,125,900 shares reserved for issuance under our stock plans as of March 17, 2000; and - 16,014,880 shares of common stock issuable upon exercise of outstanding warrants as of March 17, 2000 with a weighted average exercise price of $2.38 per share which are not required to be exercised in connection with and will not expire upon the consummation of this offering. Except as otherwise indicated, information in this prospectus is based on the following assumptions: - the issuance of a total of 94,473,379 shares of common stock upon the consummation of this offering as a result of the conversion of all outstanding shares of our Series A preferred stock, Series B preferred stock and Series C preferred stock; - no exercise of the underwriters' over-allotment option; - a for stock split of our common stock which will become effective before consummation of this offering; - the consummation of our acquisition of NxTrend Technology, Inc., which is subject to regulatory approval; and - our reincorporation as a Delaware corporation. SUMMARY FINANCIAL DATA The following financial data is a summary of the more complete financial data information provided in our financial statements elsewhere in this prospectus. <TABLE> <CAPTION> INCEPTION (OCTOBER 24, YEARS ENDED PRO FORMA 1996) TO ------------------------------------------ YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1997 1998 1999 1999 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues:.................................. $ 388 $ 4,257 $ 4,506 $ 14,601 $ 85,806 Cost of revenues........................... 164 1,369 1,436 9,026 45,836 ------ ------- ------- -------- -------- Gross profit............................... 224 2,888 3,070 5,575 39,970 Operating expenses: General and administrative............... 96 1,348 1,969 8,151 Sales and marketing...................... 224 1,594 2,073 4,845 Research and development................. 168 1,122 2,035 9,898 Amortization of stock based compensation.......................... -- 202 22 666 ------ ------- ------- -------- -------- Total operating expenses......... 488 4,266 6,099 23,560 95,586 ------ ------- ------- -------- -------- Operating loss............................. (264) (1,378) (3,029) (17,986) (55,616) Interest, net.............................. (11) (288) (210) (10,515) (11,158) ------ ------- ------- -------- -------- Provision for income taxes................. -- -- -- -- (1,788) Loss before extraordinary item............. (275) (1,666) (3,239) (28,501) (68,562) Extraordinary loss on early extinguishment of debt.................................. -- -- (107) (28) (28) ------ ------- ------- -------- -------- Net loss................................... (275) (1,666) (3,346) (28,529) (68,590) Accretion of mandatorily redeemable preferred stock.......................... -- -- -- (2,069) -- Preferred stock dividends.................. -- -- -- (167) -- ------ ------- ------- -------- -------- Net loss available to common stockholders............................. $ (275) $(1,666) $(3,346) $(30,765) $(68,590) Net loss per common share -- basic and diluted.................................. $(0.01) $ (0.08) $ (0.17) $ (0.84) Weighted average common shares outstanding -- basic and diluted......... 20,043 20,043 20,043 36,527 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 --------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $51,875 $ $ Working capital............................................. 67,495 Total assets................................................ 134,726 Long term liabilities....................................... 13,746 Mandatorily redeemable convertible preferred stock.......... 135,723 Stockholder's equity (deficit).............................. (28,775) </TABLE> The pro forma statement of operations data for the year ended December 31, 1999 combine the historical statements of operations of BuildNet, Inc., NxTrend Technology, Inc., The UniLink Group, LLC, Key Prestige Inc., McCosker Corporation, F.A.S.T. Management Group, Inc., Systems Analysis, Inc., and Maxwell & Company, Inc. as if the acquisitions by BuildNet of NxTrend, UniLink, McCosker, FAST, Systems Analysis, and Maxwell & Company and the acquisition by UniLink of Key Prestige had been completed on January 1, 1999. In addition, the pro forma statement of operations data and balance sheet information gives effect to the following: - the conversion of all outstanding shares of our preferred stock into shares of our common stock upon closing of this offering; - the assumed exercise of warrants to purchase 2,890,960 shares of our common stock that will expire if not exercised prior to the consummation of this offering; - the issuance, and reservation for issuance upon exercise of outstanding options, of 25,954,659 shares of our common stock and notes payable in the aggregate amount of $32.5 million to the former stockholders and optionees of NxTrend Technology, Inc. in connection with our pending acquisition of NxTrend, the assumed conversion of $4.4 million of the principal of the notes payable into shares of common stock (assuming a conversion price equal to the midpoint of the range set forth on the front cover page of this prospectus) and the assumed repayment of the remaining balance of $28.1 million of the notes payable; - the issuance of a note payable in the amount of $27.0 million in connection with our acquisition of UniLink and the assumed conversion of the principal balance of this note payable into 6,136,363 shares of our common stock; and - the issuance of a note payable in the amount of $5.9 million in connection with our purchase of software from J.D. Edwards World Source Company and the assumed conversion of this note payable into shares of our common stock (assuming a conversion price equal to the midpoint of the range set forth on the front cover page of this prospectus). The pro forma as adjusted balance sheet information reflects our sale of shares in this offering at an assumed initial public offering price of $ per share, after deducting underwriting discounts, commissions and estimated offering expenses payable by us.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001089717_intertrust_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001089717_intertrust_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding InterTrust and the common stock being sold in this offering in our consolidated financial statements and notes appearing elsewhere in this prospectus and our risk factors beginning on page 6. InterTrust Technologies Corporation We have developed a general purpose digital rights management, or DRM, platform to serve as a foundation for providers of digital information, technology, and commerce services to participate in a global e-commerce system for digital commerce. We license our DRM platform to partners to build digital commerce services and applications. These partners intend to offer digital commerce services and applications that collectively will form a global commerce system, which we have branded as the MetaTrust Utility. We maintain the MetaTrust Utility's foundation and will receive as a fee from our partners a small percentage of the value of goods and services that run through the system. DRM technologies protect and manage rights and interests in digital information. DRM is needed by any industry that distributes information that can be put into digital form. These types of information include music, videos, software, games, publications, business information, and images. DRM also applies to organizations and individuals who want to protect the vast amount of proprietary and personal information that has been computerized. Our technology is designed to enable all these industries, organizations, and individuals, and each of their constituencies, to protect and manage their rights and interests in digital information. Holders of these rights and interests can easily associate usage rules with the digital information and persistently apply these rules throughout the lifecycle of the information. When these rights and rules are based on a common foundation, they can form the basis for a global system for digital commerce. We believe our DRM platform represents a new computing technology that addresses a key threat to digital commerce--the threat of a user who has been authorized to receive and decrypt digital information and then seeks to use it in an unauthorized way. Our DRM platform enables automation of many aspects of the secure commercial exchange of digital information and is designed to allow digital commerce to be conducted more efficiently. We believe our platform provides the following benefits: <TABLE> <S> <C> . robust security; . multiple content and media types; . persistent protection and management; . efficient transaction processing; . flexible business models; . new advertising models; and . superdistribution; . personalized marketing. </TABLE> Our current partners include ASPSecure.com, ARM, BMG Entertainment Storage Media, Cirrus Logic, Creative Technology, Computacenter, Diamond Multimedia Systems, LOAD Media Network, Massive Media Group, Mediascience, Mitsubishi Corporation, MusicMatch, National Westminster Bank (Magex), PricewaterhouseCoopers, PublishOne, Reciprocal, RioPort, Samsung SDS, SingTel, Spectra.Net, Universal Music Group and Wave Systems. We also have alliances with Adobe Systems, Digital Theater Systems, Dolby, Fraunhofer-Institut, Marimba, Portal Software, QDesign and Sony Corporation. Some of our partners are conducting, or are planning to conduct, commercial trials, and have announced that their applications and services will be commercially available in the MetaTrust Utility in 2000. Our goal is to empower multiple providers of digital information, technology, and commerce services to build a global system for digital commerce based on our DRM platform. The key elements of our strategy are to: . expand our key strategic partnerships; . promote widespread deployment of our technology; . leverage our neutral MetaTrust Utility model; and . maintain our technology lead. We were incorporated in Delaware in January 1990. Our principal executive offices are located at 4750 Patrick Henry Drive, Santa Clara, California 95054, and our telephone number is (408) 855-0100. InterTrust, DigiBox, and our logo are our registered trademarks. MetaTrust, MetaTrust Utility, InterRights, Powerchord, Rights/PD, RightsWallet, TrustMail, and TrustNet are our trademarks. This prospectus also contains trademarks of other companies. ---------------- Except as otherwise indicated, information in this prospectus: . gives effect to our two-for-one stock split of all outstanding shares of our common stock which occurred on February 24, 2000 through the issuance of a stock dividend; and . assumes no exercise of the underwriters' over-allotment option. THE OFFERING <TABLE> <C> <S> Common stock offered by us......................... 2,000,000 shares Common stock offered by the selling stockholders... 2,800,000 shares Common stock to be outstanding after the offering.. 81,216,996 shares Use of proceeds.................................... General corporate purposes, including working capital and potential strategic investments and acquisitions. For more information about our use of proceeds, please see the use of proceeds section on page 18. Dividend policy.................................... Currently, we do not anticipate paying cash dividends. Nasdaq National Market symbol...................... ITRU </TABLE> - -------- The table above is based on the number of shares outstanding as of December 31, 1999 as adjusted to give effect to our two-for-one stock split effected on February 24, 2000. It excludes: . 16,255,090 shares of common stock issuable upon the exercise of stock options and warrants outstanding as of December 31, 1999 at a weighted average exercise price of $3.11 and 1,088,600 additional shares of common stock available for issuance under our stock option plan as of December 31, 1999. From December 31, 1999 through February 29, 2000 we issued options to purchase 132,000 shares of common stock at a weighted average exercise price of $74.82. . 700,000 shares of common stock available for issuance under our 1999 employee stock purchase plan as of December 31, 1999. . 700,000 shares of common stock available for issuance under our 1999 non-employee directors plan as of December 31, 1999. . 230,464 shares of common stock issued in connection with our acquisition of Infinite Ink on March 8, 2000 and 68,052 shares issuable upon exercise of options we assumed as part of that acquisition. SUMMARY CONSOLIDATED FINANCIAL DATA (in thousands, except per share data) <TABLE> <CAPTION> Years Ended December 31, ---------------------------------------------- 1995 1996 1997 1998 1999 ------- ------- -------- -------- -------- <S> <C> <C> <C> <C> <C> Consolidated Statements of Operations Data: Total revenues................ $ -- $ 25 $ 1,100 $ 152 $ 1,541 Loss from operations.......... (3,423) (8,140) (11,938) (19,667) (30,156) Net loss...................... (3,583) (7,960) (11,709) (19,662) (28,605) Basic and diluted net loss per share........................ $ (0.18) $ (0.33) $ (0.43) $ (0.70) $ (0.71) Shares used in computing basic and diluted net loss per share........................ 20,446 23,826 27,278 27,932 40,426 </TABLE> <TABLE> <CAPTION> December 31, 1999 ----------------- As Actual Adjusted -------- -------- <S> <C> <C> Consolidated Balance Sheet Data: Cash and cash equivalents and short-term investments......... $140,834 $200,931 Working capital.............................................. 136,551 196,648 Total assets................................................. 151,497 211,594 Total stockholders' equity................................... 133,352 193,449 </TABLE> The as adjusted column in the consolidated balance sheet data table above reflects our sale of 2,000,000 shares of common stock in this offering, at an assumed public offering price of $32.13 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001089754_nbc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001089754_nbc_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND OUR PRO FORMA FINANCIAL INFORMATION AND THE FINANCIAL STATEMENTS OF XOOM.COM, INC., SNAP! LLC AND NBC MULTIMEDIA DIVISION BEFORE MAKING AN INVESTMENT DECISION. EXCEPT AS OTHERWISE REQUIRED BY THE CONTEXT, REFERENCES IN THIS PROSPECTUS TO "WE", "US", "OUR" OR "NBCI" REFER TO NBC INTERNET, INC. AND ITS SUBSIDIARIES. THE TERM "YOU" REFERS TO PROSPECTIVE INVESTORS IN OUR CLASS A COMMON STOCK. THE TERM "NBC" REFERS TO NATIONAL BROADCASTING COMPANY, INC. OUR BUSINESS NBCI OVERVIEW NBCi is an integrated Internet media company that combines portal, community and e-commerce services designed to deliver a comprehensive, next-generation online experience to a global audience. Our online properties ranked in the top ten of the most visited sites on the Internet in December 1999 with over 14.9 million unique visitors and an aggregate Internet reach among home and work users of 22.9%, according to Media Metrix reports. We deliver enhanced branded services and content with a growing emphasis on services that take advantage of Internet ubiquity and broadband access. NBCi integrates fast-growing and premier assets such as Snap.com, Xoom.com, NBC.com, VideoSeeker.com and NBC-IN.com and content from AccessHollywood.com. We combine the NBC media brand and related content with the complementary portal and navigation services of Snap.com and community and direct e-commerce services of Xoom.com to deliver a comprehensive, entertaining and compelling Internet experience to a broad audience. We believe our core services will provide the foundation for a next-generation media company whose e-commerce and community orientation will reach a diverse user base through a variety of interactive media including broadcast and cable television, radio and the Internet. We believe that our services create an environment that attracts users and encourages both longer and repeat visits as well as customer loyalty, resulting in a large base of registered members. These services are focused on generating both advertising and e-commerce revenue by allowing advertisers and merchants to reach a broad and segmented audience of Internet users. Our portfolio of content, community and e-commerce services include: - ENTERTAINMENT SERVICES: free rich media and broadband content, user-generated content, chat rooms and online greeting cards - INFORMATION SERVICES: free directory, global resources and information, local and personalized content and personal finance information - UTILITY SERVICES: e-mail, search engine, Web development tools, home pages, digital user storage and software libraries - E-COMMERCE SERVICES: business-to-consumer services and business-to-business tools such as auctions, price comparison shopping engine, database marketing, shopping directory, digital wallet, business portal and business directory We believe our ability to aggregate information about our consumers' interests across these online services, in combination with our ability to coordinate network advertising with NBC, will provide cross-selling and promotional opportunities that distinguish us from most of our competitors in the Internet industry. In addition, we have the ability to target customers with advertising and e-commerce opportunities using demographic data and information on buying habits, services used and lifestyle interests. This information is collected on a permission basis and we use it to assist advertisers in focusing and monitoring the effectiveness of their presentations, as well as to offer relevant e-commerce opportunities. We facilitate these transactions through our direct e-commerce platform and proprietary database management system. The total number of registered users on our various properties was over 16 million as of December 31, 1999, with new members registering at the rate of 33,000 per day during December 1999. In December 1999, our Internet properties had over 783 million collective page views. From these users we have generated $45.3 million and $10.4 million in pro forma revenues from advertising and e-commerce, respectively, in the nine months ended September 30, 1999. OUR MARKET OPPORTUNITY The Internet has emerged as a global medium, enabling millions of people worldwide to share information, communicate and conduct business electronically. The proliferation of Internet users, combined with the Web's reach and lower cost of marketing, has created a powerful channel for conducting commerce, marketing and advertising. The ability to compete effectively in the current environment will require Internet companies to offer high quality products and multimedia content, to maintain a sufficiently high level of service to attract a strong and diverse user base, to access capital and to establish partnerships with companies offering complementary services. The growing adoption of the Web has created an important new advertising channel and represents a significant opportunity for businesses to conduct commerce over the Internet. Online community sites provide more detailed demographic data on self-selected groups of consumers with an affinity for particular products, services and lifestyles. As a result, advertisers can more easily deliver targeted messages in a cost-effective manner. The Internet also allows companies to develop one-to-one relationships with customers worldwide without making significant investments in traditional infrastructure such as retail outlets, distribution networks and sales personnel. Increased consumer acceptance of online shopping and targeted product offerings is expected to be a significant factor in the growth of e-commerce. The development of higher speed access to the home and the proliferation of Internet devices other than the PC are beginning to result in significant changes in the dynamics of Internet usage. The Internet is increasingly being used as a means to distribute video, audio and other high-data rate content, as well as distributed applications. Additionally, devices such as Internet-enabled wireless phones and personal digital assistants are enabling users to access Internet content and services outside the home and office. As a result, consumers will access the Internet with greater frequency and duration, building a more valuable and loyal interaction between Internet services and users. OUR STRATEGY By providing a broad array of professionally created and user-generated content in a single service, we intend to develop the leading integrated media properties on the Internet. We will continually upgrade and expand NBCi's portfolio of services to create a more entertaining and dynamic online experience. We believe this will enable us to grow our registered user base and increase the level of Internet traffic on the NBCi properties. We also intend to capture relevant data on our users to enhance our proprietary database of user demographics and to provide them with more personalized services. A key element of our business strategy is the development and introduction of new services designed for specific user groups with particular demographic characteristics and geographic concentration. We plan to accomplish these goals through the following strategies: - Build and enhance our core brands - Increase content and service offerings to grow our user base - Create a valuable advertising and e-commerce franchise - Aggregate users around selected vertical content areas - Lead next-generation broadband and wireless initiatives - Build our business-to-business offerings - Accelerate pursuit of international opportunities - Continue to develop or acquire leading-edge targeting technology and software Under our brand integration and license agreement with NBC, we are the exclusive vehicle for NBC to operate a general portal service, a broad-based community service and a direct broad-based e-commerce service. The NBC relationship will offer us opportunities to access content and extend NBCi's brand awareness in defining the next-generation Internet user experience. We believe our brands will be ideally suited for this accessible, immersive, rich media environment and will enable a high value relationship with our users and a dynamic selling environment for our business partners. We intend to leverage NBC's extensive advertising relationships to create unique ways for advertisers to reach consumers by capitalizing on synergies between on-air and online media. We have also entered into a multi-year television network advertising agreement with NBC enabling us to market the integrated NBCi services to viewers of the NBC television network, which attracted the highest percentage of Internet users among all major networks during the February 1999 sweeps period according to Nielsen Media Research. This relationship combined with our attractive offering of free services and content, as well as our large and diverse range of active communities, will encourage users of our Web sites to become members. Finally, with our proprietary consumer database of purchasing information, we intend to offer advertisers and e-commerce partners the ability to deliver highly targeted messages and product offerings to our members. We plan to grow our e-commerce activities through investments, strategic partnerships and complementary acquisitions. We will continue to build our business-to-consumer e-commerce platform by aggregating buyers, creating innovative and targeted promotional opportunities for high quality products and services, and enhancing the user experience to encourage completion of online transactions. Similarly, we will develop our business-to-business e-commerce platform by leveraging our auction, business portal, business directory and database services. "NBCi", "Snap" and "Xoom.com" are some of our trademarks. This prospectus also contains other product names, trade names and trademarks of other organizations that belong to such organizations. RECENT EVENTS On November 29, 1999 and November 30, 1999, respectively, the transactions contemplated by the agreement and plan of contribution and merger dated May 9, 1999 as amended on October 20, 1999, among us, CNET, Inc., Xoom.com, Xenon 3, Inc. and Snap! LLC and by the second amended and restated agreement and plan of contribution, investment and merger dated July 8, 1999, as amended on October 20, 1999, among us, NBC, GE Investments Subsidiary, Inc., Neon Media Corporation, and Xoom.com, were consummated. As a result of these transactions, Xoom.com and Snap became our wholly owned subsidiaries and we became the owners of the businesses related to NBC.com, NBC-IN.com and VideoSeeker.com and of a 10% ownership interest in CNBC.com LLC. RECENT OPERATING RESULTS On January 27, 2000, we announced our unaudited results of operations for the year ended December 31, 1999. Under generally accepted accounting principles, our financial results are reported treating Xoom.com as the accounting acquiror in the purchase business combination that resulted in the formation of our company. Under this accounting treatment, the financial results of Snap and the NBC Multimedia Division (which consists of NBC.com, NBC-IN.com, and VideoSeeker.com) are excluded prior to November 30, 1999. On this basis, our unaudited revenues were approximately $35.6 million for the year ended December 31, 1999, which compares to revenues of approximately $8.3 million for the year ended December 31, 1998. Our net loss was approximately $86.8 million and our net loss per basic and diluted share was $4.26 for the year ended December 31, 1999, which compares to a net loss of approximately $10.8 million and a net loss per basic and diluted share of $1.37 for the year ended December 31, 1998. On a pro forma combined basis, as defined by SEC rules and regulations, our statement of operations as described above is combined with the historical statements of operations of (i) Snap! LLC; (ii) the businesses related to NBC.com, NBC-IN.com, and VideoSeeker.com; (iii) MightyMail Networks, Inc.; (iv) Paralogic Software Corporation; and (v) LiquidMarket, Inc. for the year ended December 31, 1999, giving effect to these acquisitions, including the amortization of goodwill and intangible assets, as if they had occurred on January 1, 1999. On this basis, our pro forma revenues were approximately $101.5 million, our pro forma net loss was approximately $397.0 million, and our pro forma net loss per basic and diluted share was $8.17 for the year ended December 31, 1999. These financial results are preliminary, are subject to the completion of an audit of our December 31, 1999 financial statements, and are not necessarily indicative of the results to be expected for future periods. OUR OFFICES We were incorporated in Delaware on May 7, 1999 under the name Xenon 2, Inc. and changed our name to NBC Internet, Inc. on July 8, 1999. Our headquarters are located at 225 Bush Street, San Francisco and our telephone number is (415) 375-5000. Our Web site is WWW.NBCI.COM. This reference to our Web site does not constitute incorporation by reference of the information contained at our site. CONCURRENT OFFERING Concurrent with this offering, the NBCi Internet Automatic Common Exchange Security Trust, or the TRACES Trust, a stockholder named in this prospectus is offering up to 1,250,000 shares of Class A common stock (or up to 1,437,500 shares if the underwriters' over-allotment option in the Traces offering is exercised in full) that may be delivered by the TRACES Trust upon exchange of such securities on the Exchange Date as defined in the TRACES Trust prospectus. The Automatic Common Exchange Securities are being sold by the TRACES Trust in an offering described in the Trust prospectus. The respective closings of the offerings of the Class A common stock and the Automatic Common Exchange Securities are not dependent upon one another. ------------------------ THIS PROSPECTUS INCLUDES STATISTICAL DATA ABOUT THE INTERNET INDUSTRY THAT COMES FROM INFORMATION PUBLISHED BY SOURCES INCLUDING MEDIA METRIX, INC., A MEDIA RESEARCH FIRM SPECIALIZING IN MARKET AND TECHNOLOGY MEASUREMENT ON THE INTERNET. WE ALSO REFER TO NIELSEN MEDIA RESEARCH, JUPITER COMMUNICATIONS, LLC, A MEDIA RESEARCH FIRM FOCUSING ON THE INTERNET INDUSTRY, AND INTERNATIONAL DATA CORPORATION, ALSO KNOWN AS IDC, AND FORRESTER RESEARCH, PROVIDERS OF MARKET INFORMATION AND STRATEGIC INFORMATION FOR THE INFORMATION TECHNOLOGY INDUSTRY. ALTHOUGH WE BELIEVE THAT DATA FROM THESE COMPANIES IS GENERALLY RELIABLE, THIS TYPE OF DATA IS INHERENTLY IMPRECISE. WE CAUTION YOU NOT TO PLACE UNDUE RELIANCE ON THIS DATA. THE OFFERING The following information assumes that the underwriters do not exercise the option to purchase additional shares in the offering. See "Underwriting." <TABLE> <S> <C> Class A common stock offered by NBC Internet................................... 3,650,000 shares Class A common stock offered by selling shareholders............................... 950,000 shares Common stock to be outstanding after the offering: Class A common stock....................... 30,396,708 shares Class B common stock....................... 24,550,708 shares Total.................................. 54,947,416 shares Use of proceeds.............................. For general corporate purposes, including developing new e-commerce channels, expanding our operations internationally, enhancing the value of our brands, potential acquisitions and minority investments and working capital. Listing...................................... The Class A common stock is quoted on The Nasdaq National Market. Nasdaq National Market Symbol................ NBCI </TABLE> In addition to the offering described in this prospectus, the TRACES Trust stockholder named in this prospectus is offering up to 1,250,000 shares of the Class A common stock (or up to 1,437,500 shares if the underwriters' over-allotment option is exercised in full) that may in certain circumstances be delivered by the TRACES Trust to holders of its Automatic Common Exchange Securities upon exchange of those securities on the exchange date. ------------------------ The number of shares of Class A common stock to be outstanding after this offering is based on the pro forma number of shares outstanding as of September 30, 1999 and does not include the following: - 6,548,329 shares of Class A common stock issuable upon exercise of options outstanding at September 30, 1999 at a weighted average exercise price of $21.53 per share; - 3,155,002 shares of Class A common stock issuable upon exercise of options outstanding subsequent to September 30, 1999 at a weighted average exercise price of $61.38 per share; - 924,526 shares issued upon exercise of stock options and 4,311 shares issued to directors, employees and consultants subsequent to September 30, 1999; - 4,437,038 shares of Class A common stock reserved for future issuance subsequent to September 30, 1999 under our 1999 stock incentive plan and our 1999 employee stock purchase plan; - 5,809,388 shares of Class B common stock issuable upon conversion of two subordinated zero coupon convertible notes subsequent to September 30, 1999 held by affiliates of NBC; - 244,004 shares of Class A common stock issuable upon the exercise of a warrant held by ValueVision International, Inc. at an exercise price of $40.893 per share; or - 24,550,708 shares of Class B common stock convertible into 24,550,708 shares of Class A common stock subsequent to September 30, 1999 at the discretion of NBC and its affiliates. Please see "Capitalization" for a more complete description regarding the outstanding shares of our Class A common stock and options to purchase our Class A common stock and other related matters. UNLESS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT: - THE UNDERWRITERS WILL NOT EXERCISE THEIR OPTION TO PURCHASE ADDITIONAL SHARES OF CLASS A COMMON STOCK TO COVER OVER-ALLOTMENTS, IF ANY; AND - THE OFFERING PRICE WILL BE $95.13 PER SHARE, BASED ON THE LAST REPORTED SALES PRICE OF OUR CLASS A COMMON STOCK ON JANUARY 31, 2000. SUMMARY SELECTED PRO FORMA FINANCIAL INFORMATION SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA The following selected unaudited pro forma condensed combined financial data of Xoom.com, Snap and the NBC Multimedia Division, which previously owned the Internet assets contributed by NBC, are derived from the unaudited pro forma condensed combined financial information, which gives effect to the purchase of the businesses related to the NBC Multimedia Division and to NBCi's acquisition of CNET's and NBC's ownership interests in Snap, with Xoom.com treated as the accounting acquiror, and should be read in conjunction with the unaudited pro forma condensed combined financial information and related notes, which begin on page F-1 of this prospectus. The unaudited pro forma condensed combined statement of operations data assumes that the transactions occurred on the first day of each of the periods presented. The unaudited pro forma condensed combined balance sheet data assumes that the transactions took place as of September 30, 1999 and combines the historical balance sheets of Xoom.com, Snap and the NBC Multimedia Division and other purchase adjustments at that date. The final purchase price allocation was calculated based on the values as represented on the balance sheets of NBC Multimedia Division and Snap, as of November 30, 1999, the date the transactions were completed. The unaudited pro forma condensed combined information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the transaction had been consummated at the dates indicated, nor is it necessarily indicative of future operating results or financial condition of NBCi. The pro forma as adjusted balance sheet data has been adjusted to reflect the sale by us of 3,650,000 shares of Class A common stock in this offering, assuming a public offering price of $95.13 per share, based on the last reported sales price of our Class A common stock on January 31, 2000, after deducting the underwriting discount and estimated offering expenses. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001089874_golden_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001089874_golden_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following is a summary of this prospectus. Please do not rely on any part of this summary without referring to the more detailed information contained in the other sections of this prospectus. OUR COMPANY We are a leading facilities-based provider of integrated telecommunications services to businesses and other high-usage customers and telecommunications operators in Moscow, Kiev, St. Petersburg and other major population centers throughout Russia and other countries of the Commonwealth of Independent States. We organize our operations into two business divisions, Business Services (Items (1), (2) and (3) below) and Mobile Services (Item (4) below): - (1) Competitive Local Exchange Carrier (CLEC) Services using our local access overlay networks in Moscow, Kiev and St. Petersburg; - (2) Long Distance Services using a fiber optic and satellite-based network. - (3) Data and Internet Services using our fiber optic and satellite-based networks, including more than 100 combined points of presence in Russia and other countries of the Commonwealth of Independent States. Our data and Internet services product portfolio is currently comprised of: (a) Business to Business services, such as dedicated Internet access, web design and web hosting: and (b) Business to Consumer services, such as dial-up Internet access; and - (4) Mobile Services using cellular networks in Kiev, Vladivostok and six other population centers throughout Russia. We hold an ownership interest in ventures in an additional seven regions in Russia; however, we abandoned those ventures effective August 31, 1999 as part of our revised strategic plan. We are approximately 63% owned by Global TeleSystems, Inc. (GTS). BUSINESS SERVICES Competitive Local Exchange Carrier (CLEC) Services. In Moscow, Kiev and St. Petersburg, we provide a range of services including local exchange and access services, international and domestic long distance services, data communications, Internet access and the design and installation of corporate networks. We offer these services through our local access networks comprising over 1,000 kilometers of fiber optic rings that are integrated with our long distance network facilities and the incumbent networks in these cities. We provide local exchange services primarily through our operating companies EDN Sovintel LLC, the CLEC Services division (formerly TCM) of TeleRoss and Golden Telecom BTS. Long Distance Services. In Russia, we offer international and domestic, satellite based, long distance voice services, primarily through the Long Distance Services division of TeleRoss and TeleRoss ventures. Data and Internet Services. In major population centers throughout Russia and other countries of the Commonwealth of Independent States, we offer traditional and high-speed data services, using X.25, frame relay and asynchronous transfer mode, technologies that offer varying degrees of speed and capacity for data transmission, primarily through the Data Services division of TeleRoss (formerly Sovam). We also offer Internet services, which include Web design, Web hosting, and Internet Protocol (IP) based Virtual Private Networks (VPN), through dedicated lines and dial-up access, with transmission through a fiber optic network leased from Rostelecom, Sonera and our satellite-based long distance network. MOBILE SERVICES Mobile Services. In Kiev, Vladivostok and six other metropolitan areas of Russia, we offer mobile telephony services. We provide mobile services with value-added features, such as voicemail, roaming and message services on a subscription and prepaid basis, through our operating companies Golden Telecom GSM in Kiev and the Vostok Mobile ventures in Russia, including PrimTelefone in Vladivostok. In accordance with our current business strategy, we have ceased to provide further financial support to certain of the ventures in less-developed urban areas. We abandoned those ventures effective August 31, 1999 and, as a result, took a charge to earnings of $18.5 million in the third quarter of 1999. As a result of our strategy to operationally merge our significant Russia based consolidated entities, the formal merger of TCM and Sovam Teleport into TeleRoss operating company was completed on November 1, 1999. The following table summarizes the three business groups through which we currently conduct our operations: <TABLE> <CAPTION> BUSINESS GROUP REGION OF OPERATIONS -------------- -------------------- <S> <C> CLEC SERVICES: Sovintel............................... Moscow and St. Petersburg CLEC Services division (formerly TCM) of TeleRoss......................... Moscow CLEC Services division of Golden Telecom BTS......................... Kiev LONG DISTANCE SERVICES: Long Distance Services division (formerly TeleRoss operating company) of TeleRoss................ Russia TeleRoss ventures...................... 14 cities in Russia DATA AND INTERNET SERVICES: Data and Internet Services division (formerly Sovam) of TeleRoss........ Russia and the Commonwealth of Independent States Data and Internet Services division (formerly Sovam Teleport Ukraine) of Golden Telecom BTS.................. Ukraine Commercial Information Networks (KIS)............................... Nizhny Novgorod MOBILE SERVICES: Golden Telecom GSM..................... Kiev Vostok Mobile ventures................. 7 cities in Russia </TABLE> OUR STRATEGY Our objective is to be the leading alternative telecommunications service provider to the business market in Moscow, Kiev, St. Petersburg and select population centers throughout Russia and other countries of the Commonwealth of Independent States. To achieve this objective, we intend to: - Pursue Consolidation Opportunities The August 1998 Russian financial crisis and its aftermath have created significant consolidation opportunities. We intend to pursue those opportunities through acquisitions that allow us to improve and expand our service offerings and maintain operational control. We will target complementary opportunities that will enable us to achieve synergies and economies of scale. - Increase Market Share by Offering Bundled Data and Voice Services Over an Integrated Network Corporate customers increasingly demand integrated telecommunications solutions from one-stop providers that are able to deliver a full service offering in the areas in which the corporate customers operate. As a result, we plan to continue to develop and combine our businesses to create a unified service platform for local access, local exchange, domestic and international long distance, data and systems integration services. - Extend Leading Position in High Growth Data and Internet Markets We plan to build on our position as a leading provider of data communication services in Russia and other countries of the Commonwealth of Independent States by increasing the number of network access points in our network to facilitate the growing demand for data communications. In addition, we plan to expand our Business to Business and Business to Consumer services through dedicated and dial-up Internet access and connectivity, web hosting, web design and other Internet service offerings by increasing our direct marketing efforts and through acquisitions. - Reduce Operating Costs and Satisfy Capacity Needs through Network Planning and Optimization Our network strategy is to build and own our local exchange and customer access networks. We typically lease digital terrestrial channels to supply our regional connectivity, supplementing these channels with satellite circuits for redundancy and remote connectivity. We intend to incrementally expand the fiber optic capacity along our heavy traffic and high cost routes, from Moscow to Stockholm in accordance with an agreement executed with Sonera and its subsidiaries, to reduce our unit transmission costs and ensure sufficient capacity to meet the growing demand for Internet and data services. - Focus Operating Activities and Capital Investments in Major Metropolitan Areas We plan to deploy our capital investments primarily in Moscow, Kiev, St. Petersburg and other major population centers in the countries of the CIS, where demand for our services is most heavily concentrated. We also intend to consider opportunities to expand our operations in regional cities with sufficiently strong local economies, and where we believe potential exists to grow businesses, which complement our current operations. You should consider all the information contained in this prospectus before making an investment in the common stock. In particular, you should consider the factors described under "Risk Factors", beginning on page 6. OUR ADDRESS Our principal executive offices are the Representation Offices of Golden TeleServices, Inc. 12 Trubnaya Ulista, Moscow, Russia 103045. Our telephone number is (011-7-501) 797-9300. THE OFFERING Shares offered by the Selling Stockholders....... 2,145,633 shares Shares outstanding immediately after the Shelf Offering................. 24,080,125 shares. This number of shares does not include shares of common stock that will be issuable upon the exercise of employee stock options or of warrants to purchase our common stock, none of which are currently exercisable. Trading.................... Our common stock is traded on the Nasdaq National Market under the symbol "GLDN". Use of proceeds............ We will not receive any proceeds from the shares sold by the selling stockholders.
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the consolidated financial statements and notes appearing elsewhere in this prospectus. Unless otherwise indicated, information in this prospectus assumes that the underwriters do not exercise their over-allotment option. We are a leading provider of next generation Internet infrastructure solutions that are designed to enable e-businesses to meet the demands resulting from the rapid growth of the Internet. Our Web data center products, which include switches, server adapters and software, are optimized to meet the specific challenges of managing Web traffic and provide the high performance and availability of leading networking infrastructure solutions. We refer to this combination of capabilities as Web-working. Our solutions are designed to increase the performance, availability, scalability, manageability and control of Web servers and Web data center infrastructure. Our solutions are built on a technology core that consists of our Web operating system, or Web OS, a suite of Internet traffic management software, a distributed processing architecture and our family of custom semiconductors, which we refer to as WebICs. Our customers consist of e-commerce companies, Web portals, content publishers, Web hosting companies, Internet service providers, server vendors and enterprises, including the following customers which have purchased at least $100,000 of our products: Concentric Network Corp., DLJdirect, Inc., IBM Corporation, Inktomi Corporation, Intermedia Communications Inc., Sandpiper Networks, Inc. and UUNET Technologies, Inc. We have experienced operating losses in each quarterly and annual period since inception. We incurred a net loss of $12.1 million for the quarter ended September 30, 1999 and had an accumulated deficit of $43.5 million at September 30, 1999. According to International Data Corporation, an industry research firm, the number of users of the Internet will increase from 142 million in 1998 to 502 million by the end of 2003. With the emergence of faster access technologies such as digital subscriber line, cable modem and wireless, the speed and flexibility with which users are accessing the Internet are also increasing. Because of the increasing capabilities and accessibility of the Internet, companies are building their business models around the Internet and developing Internet-based mission-critical business applications. These e-businesses rely on the Web to communicate with customers, access and share business information, engage in marketing activities and conduct e-commerce transactions. However, existing Internet traffic management solutions, consisting of traditional switches and routers as well as single function, software-based traffic management devices, generally lack the combination of speed and intelligence required to manage Web traffic efficiently. All of our products are designed to enhance the performance of Web data centers for e-businesses. Our products include the ACEdirector and Alteon 180 Series of Web switches, Web OS and our ACEnic server adapters, as well as our Alteon 700 Series of Web switches, which are in customer testing which is expected to continue until at least March 2000. The key benefits of our products include: . High-Speed, Web Intelligent Switching. Our Web switches and Web OS combine high performance Fast Ethernet and Gigabit Ethernet connectivity and Web session switching capabilities with a broad set of Web traffic control functions. Our current Web switches are designed to offer Web session management at a rate of approximately 74,000 sessions per second on a Fast Ethernet port, which we believe is the maximum possible session switching rate, or "wire speed," for Fast Ethernet. Web session management rate means the speed at which a traffic management device can process new incoming TCP connections. . Rapid and Efficient Scalability. Web OS, our distributed architecture and WebICs allow the capacity of our Web switches to be increased rapidly and efficiently simply by adding more ports. . System-Level High Availability. Our Web switches monitor the status and performance of each server, server farm and server location and redirect traffic to alternate servers and Web data centers in the event of a system failure or server overload. The Web switches themselves can be set up in a redundant design to provide resilience in the event of a switch failure. . Increased Flexibility. Our Web switches are designed to select and direct Internet traffic flexibly and transparently, enabling e-businesses to increase infrastructure efficiency. . Enhanced Control. Our Alteon 700 Series of Web switches is designed to allow Web data center administrators to allocate and prioritize bandwidth to control resource usage. . Cost Effectiveness. Our Web data center infrastructure solutions integrate multiple traffic management functions in a single Web switch, which is intended to allow e-businesses to reduce capital, management and training costs. Our objective is to be the leading supplier of Web-working infrastructure solutions. The key elements of our strategy are to: . Extend our early market leadership in the Web-working market; . Leverage our Web-working technology leadership; . Build our relationships with key companies in the Internet marketplace; . Increase our penetration of leading e-businesses; . Expand our supplier relationships with leading server manufacturers; and . Enhance our customer service and support. Our principal executive offices are located at 50 Great Oaks Boulevard, San Jose, California 95119. Our telephone number is (408) 360-5500. We were incorporated in Delaware on March 18, 1996. Our Web site address is www.alteonwebsystems.com. Information contained on our Web site does not constitute part of this prospectus. Recent Developments For the quarter ended December 31, 1999, our net revenue was $17.1 million, compared to net revenue of $6.6 million for the quarter ended December 31, 1998. Our gross profit for the quarter ended December 31, 1999 was $10.5 million, or 61.6% of net sales, compared to gross profit of $2.9 million, or 44.0% of net sales, for the quarter ended December 31, 1998. Our net loss for the quarter ended December 31, 1999 was $4.0 million, or ($0.11) per share, compared to a net loss of $3.4 million, or ($0.46) per share, for the quarter ended December 31, 1998. For the period ended December 31, 1999, shares used in the computation of loss per share were 35.5 million. For the period ended December 31, 1998, shares used in the computation of loss per share were 7.3 million. Operating expenses for the quarter ended December 31, 1999 were $15.7 million, comprised as follows: $8.6 million of sales and marketing expenses, $5.5 million of research and development expenses and $1.6 million of general and administrative expenses. The net loss from operations was $5.1 million for this quarter, with interest income (expense), net of $1.4 million, resulting in a loss before income taxes of $3.7 million. As of December 31, 1999, we had cash and equivalents and short-term investments of $90.6 million, total assets of $119.9 million and total stockholders' equity of $99.6 million. The Offering <TABLE> <C> <S> Common stock offered by Alteon WebSystems.......... 1,250,000 shares Common stock offered by the Selling Stockholders... 3,750,000 shares Common stock to be outstanding after the offering.. 40,384,087 shares Use of proceeds.................................... For general corporate purposes. See "Use of Proceeds." We will not receive any proceeds from the shares sold by selling stockholders Nasdaq National Market symbol...................... "ATON" </TABLE> The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of December 31, 1999, and excludes: . 6,369,516 shares underlying options outstanding as of December 31, 1999 at a weighted average exercise price of $11.81 per share; . 3,159,914 shares available for future grants under our option plan; and . 1,500,000 shares available for issuance under our employee stock purchase plan. Summary Consolidated Financial Data The following tables summarize our consolidated financial data. The as adjusted column of the consolidated balance sheet data reflects the sale of 1,250,000 shares of our common stock at an assumed public offering price of $76.50 per share, after deducting the estimated underwriting discount and estimated offering expenses payable by us. <TABLE> <CAPTION> Quarter Ended March 18, 1996 Year Ended June 30, September 30, (Inception) to --------------------------------------- ----------------- June 30, 1996 1997 1998 1999 1998 1999 --------------- ------------- ------------- -------- ------- -------- (in thousands, except per share amounts) <S> <C> <C> <C> <C> <C> <C> Consolidated Statements of Operations Data: Net sales............... $ -- $ 178 $ 13,572 $ 26,254 $ 5,127 $ 12,750 Cost of sales........... -- 637 7,893 13,385 2,549 5,447 ------------ ------------- -------------- -------- ------- -------- Gross profit (loss)..... -- (459) 5,679 12,869 2,578 7,303 Operating expenses: Sales and marketing... 19 1,921 6,485 13,061 2,516 6,820 Research and development.......... 176 4,782 8,816 10,004 2,165 3,989 General and administrative....... 98 744 1,505 2,538 492 1,283 Stock compensation to consultants.......... -- -- -- -- -- 7,638 ------------ ------------- -------------- -------- ------- -------- Total operating expenses........... 293 7,447 16,806 25,603 5,173 19,730 ------------ ------------- -------------- -------- ------- -------- Loss from operations.... (293) (7,906) (11,127) (12,734) (2,595) (12,427) Interest income (ex- pense), net............ 20 122 322 264 65 331 ------------ ------------- -------------- -------- ------- -------- Loss before income tax- es..................... (273) (7,784) (10,805) (12,470) (2,530) (12,096) Income taxes............ 1 1 1 73 -- 40 ------------ ------------- -------------- -------- ------- -------- Net loss................ $ (274) $ (7,785) $ (10,806) $(12,543) $(2,530) $(12,136) ============ ============= ============== ======== ======= ======== Basic and diluted loss per common share....... $ (0.48) $ (5.15) $ (2.18) $ (1.65) $ (0.39) $ (1.20) ============ ============= ============== ======== ======= ======== Basic and diluted common shares used in computation............ 569 1,511 4,951 7,610 6,540 10,095 ============ ============= ============== ======== ======= ======== As adjusted basic and diluted loss per common share.................. $ (1.07) ======== Shares used in as adjusted basic and diluted loss per common share.................. 11,345 ======== </TABLE> <TABLE> <CAPTION> September 30, 1999 ----------------- As Actual Adjusted -------- -------- <S> <C> <C> Consolidated Balance Sheet Data: Cash and equivalents......................................... $107,103 $197,664 Working capital.............................................. 100,121 190,682 Total assets................................................. 122,355 212,916 Long-term obligations, less current portion.................. 1,570 1,570 Common stock................................................. 153,220 243,781 Total stockholders' equity................................... 103,360 193,921 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001090710_emachines_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001090710_emachines_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information described more fully elsewhere in this prospectus. This summary is not complete and does not contain all the information you should consider before investing in our common stock. eMachines, Inc. We sell high-quality, low-priced personal computers, or PCs, to develop ongoing Internet-based consumer relationships designed to provide us with a continuous stream of advertising and related revenues. We provide Internet advertisers with an integrated approach to building their online brands that includes our client-server software, promotional materials packaged with our PCs and keyboards that provide one-touch access to selected Web sites. In November 1998, we introduced the first branded sub-$400 PC to the U.S. retail market. We have sold over two million PCs to date. We sold the third largest number of desktop PCs through U.S. retailers in 1999, according to PC Data, and sold the largest number of sub-$600 PCs, the low-priced PC market, through U.S. retailers in July 1999, according to Ziff Davis' InfoBeads. In 1999, our products won prestigious awards in the low-priced PC desktop category, including PC Computing's Most Valuable Product, number one on Windows Magazine's "WinList 100" and CNET.com's Editors' Choice award. Our affordable PCs and the variety of Internet access options that we offer make the Internet experience available to a broader spectrum of consumers. Approximately half of our consumers are first-time PC buyers who may have limited experience using the Internet and whose first point of contact with the Internet is our PC. We believe that these first-time PC buyers represent significant opportunities for Internet advertisers to reach Internet users who are not likely to have pre-established Internet brand loyalties. We intend to aggressively pursue recurring revenue generating opportunities that extend beyond the purchase of the PC or other Internet connected devices. To this end, in January 2000, we acquired FreePC, Inc., a Bill Gross' idealab! company that was one of the first companies to subsidize the purchase price of the PC and Internet access with advertising sponsorships. Our acquisition of FreePC's expertise, relationships, technology and technical experience is a key element of our strategy to enhance our Internet revenues. We offer multiple, integrated advertising programs, including our eWare and eBoards, that we believe an Internet advertiser may combine into a powerful campaign capable of dramatically increasing the effectiveness of its offer. Our computing and Internet advertising offerings create an integrated PC and Internet-based service that includes links to selected Web sites and other Internet resources. This combination extends a Web-based portal business model to the hardware itself. We intend to lead this new business category by: . increasing penetration of the consumer market by providing low-priced, high-quality integrated computing and Internet offerings; . using our PC business to cost-effectively acquire Internet consumers; . enhancing recurring Internet revenues through opportunities such as Internet service payments, e-commerce and Web-based advertising; . leveraging our established brand to broaden our PC line and to introduce Internet appliances and Internet-connected peripheral products; and . continuing to strengthen our strategic relationships with leading retailers to capture and retain prime shelf space. We were incorporated in Delaware in September 1998. Our principal executive offices are located at 14350 Myford Road, Suite 100, Irvine, California 92606 and our telephone number is (714) 481-2828. Our Web site is located at "www.e4me.com." Information contained on our Web site does not constitute a part of this prospectus. ----------- E-MACHINES(R) is our registered United States trademark. The "e" logo, eMachines(TM), eTower(TM), eView(TM), eOne(TM), eSlate(TM), AdOptimizer(TM), FreePC(TM) and FreePC Network(TM) are also our trademarks. This prospectus contains other trademarks and trade names of other companies. The Offering <TABLE> <S> <C> Common stock offered............................ 20,000,000 shares Common stock to be outstanding after this offering....................................... 144,690,425 shares Use of proceeds................................. General corporate purposes, including working capital and capital expenditures. Proposed Nasdaq National Market symbol.......... EEEE </TABLE> The total number of shares of our common stock to be outstanding after this offering is based on: . 82,777,170 shares of common stock and 41,913,255 shares of preferred stock outstanding as of January 31, 2000; . 41,913,255 shares of common stock issuable upon automatic conversion of outstanding shares of preferred stock referred to above upon completion of this offering; and . 20,000,000 shares of common stock offered in this offering. The above information excludes: . 1,532,200 shares of common stock issuable upon exercise of options outstanding as of January 31, 2000, at a weighted average exercise price of $5.85 per share, which options were issued under our 1998 stock plan, 3,467,800 additional shares authorized to be issued under our 1998 stock plan plus an automatic annual increase to be added on the first day of our fiscal year beginning in 2001; . 360,297 shares of common stock issuable upon exercise of options outstanding as of January 31, 2000, at a weighted average exercise price of $2.40 per share, issued outside of our 1998 stock plan; . 2,062,394 shares of common stock issuable upon exercise of options assumed by us in connection with the FreePC acquisition and warrants to purchase 883,843 shares of common stock issuable upon the exercise of these assumed options at a warrant exercise price of $17.13 per share as of January 31, 2000; . 9,596,404 shares of common stock issuable upon exercise of warrants issued in connection with the FreePC acquisition at a warrant exercise price of $17.13 per share; . up to 1,566,219 shares of common stock issuable to America Online upon exercise of its warrants. See "Related Party Transactions--Relationship with America Online, Inc." for a discussion of the America Online warrants; . 300,000 shares of common stock to be authorized for issuance under our 2000 employee stock purchase plan plus an annual increase to be added on the first day of our fiscal year beginning in 2001; and . 2,000,000 shares of common stock issuable upon exercise of an option granted on March 19, 2000, to Stephen A. Dukker, our President and Chief Executive Officer, with an exercise price of $9.00 per share. Summary Financial Information The pro forma FreePC acquisition statement of operations data below gives effect to our acquisition of FreePC as if it had taken place on January 1, 1999. The pro forma FreePC acquisition balance sheet data below gives effect to the FreePC acquisition as if it had taken place on December 31, 1999. The pro forma statement of operations data reflects $49.0 million of amortization of intangible assets arising from the acquisition. The pro forma data is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have resulted if the acquisition had been in effect during the periods presented, nor is it necessarily indicative of future operating results or financial position. For an explanation of the calculation of pro forma amounts see Notes to the Unaudited Pro Forma Condensed Combined Financial Information included elsewhere in this prospectus. During 1999, FreePC's business model included distributing free PCs and free Internet access to its customers. The costs related to these activities in 1999 approximated $21.2 million. Subsequent to our acquisition of FreePC we have ceased distributing free computers and will cease providing free Internet service and, accordingly, expect these costs and associated revenues to decrease substantially. We restated our financial statements for 1998 and 1999. See Note 11 of Notes to Financial Statements. <TABLE> <CAPTION> Year Ended Dec. 31, 1999 Period From ------------------------ Sept. 18, 1998 Pro Forma (inception) to FreePC Dec. 31, 1998 Actual Acquisition -------------- ----------- ----------- (in thousands, except share and per share data) <S> <C> <C> <C> Statements of Operations Data: Net revenues.......................... $ 58,283 $ 814,317 $ 815,518 Cost of revenues...................... 58,088 780,945 784,265 ----------- ---------- ---------- Gross profit.......................... 195 33,372 31,253 Loss before amortization of intangible assets............................... (1,913) (1,842) (32,491) Amortization of intangible assets..... 49,000 ----------- ---------- ---------- Loss from operations.................. (1,913) (1,842) (81,491) ----------- ---------- ---------- Net loss.............................. $ (2,802) $ (5,728) $ (84,515) =========== ========== ========== Net loss per common share: Basic and diluted................... $ (0.05) $ (0.14) $ (1.21) =========== ========== ========== Basic and diluted-pro forma......... $ (0.07) $ (0.85) ========== ========== Shares used to compute net loss per share: Basic and diluted................... 57,600,000 68,933,254 72,928,887 =========== ========== ========== Basic and diluted-pro forma......... 77,913,294 99,542,813 ========== ========== <CAPTION> Dec. 31, 1999 --------------------------------------- Pro forma Pro Forma FreePC FreePC Acquisition Actual Acquisition As Adjusted -------------- ----------- ----------- (in thousands) <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents............. $ 114,823 $ 125,762 $ 292,077 Short-term investments................ 19,897 19,897 19,897 Working capital....................... 140,166 141,257 307,572 Total assets.......................... 331,713 495,587 661,902 Long-term obligations................. 1,903 3,131 3,131 Redeemable convertible preferred stock................................ 150,014 150,014 -- Total stockholders' equity (deficiency)......................... (7,736) 142,264 458,593 </TABLE> See Note 2 of Notes to Financial Statements for an explanation of the determination of the number of shares used in computing per share data. The pro forma FreePC acquisition information reflects: . 3,995,633 shares of common stock and 17,633,886 shares of convertible preferred stock issued in connection with the FreePC acquisition completed in January 2000; and . 2,891,275 shares of common stock issuable upon exercise of options assumed by us in connection with the FreePC acquisition and warrants to purchase 1,239,067 shares of common stock issuable upon the exercise of these assumed options at a warrant exercise price of $17.13. The pro forma FreePC acquisition as adjusted data includes the pro forma FreePC acquisition information and: . the conversion of all outstanding shares of preferred stock into 41,913,255 shares of common stock automatically upon completion of this offering; and . the issuance of 20,000,000 shares of common stock offered in this offering. Unless otherwise specifically stated, information throughout this prospectus reflects the eight-for-one stock split of our common stock effected on August 13, 1999 (all share and per share amounts of our common stock have been retroactively restated to reflect the stock split).
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001090908_determine_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001090908_determine_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding Selectica and the common stock being sold in this offering in our financial statements and notes appearing elsewhere in this prospectus and our risk factors beginning on page 6. SELECTICA, INC. Selectica is a leading provider of Internet selling system software and services that enable companies to efficiently sell complex products and services over intranets, which are networks of computers that are internal to companies and use Internet technologies, extranets, which are intranets that outsiders, such as suppliers and customers, are allowed to access, and the public Internet. Our ACE suite of software products is a comprehensive Internet selling system solution that guides a new customer through an analysis of its needs and product or service selection and also guides an experienced customer, partner or employee through product or service configuration, pricing and order creation over the Internet, thereby helping convert potential buyers into customers. Our Internet selling system solution allows companies to use the Internet platform to deploy a selling application to many points of contact, including personal computers, in-store kiosks and mobile devices, while offering customers, partners and employees an interface customized to their specific needs. The Internet is transforming the business environment by increasing competition and enabling the development of new business models. In order to remain competitive, companies must find innovative ways to sell, increase efficiencies in the sales cycle and deliver greater customer satisfaction. A growing number of companies are seeking to leverage the Internet to market and sell their products and services. To date, many electronic commerce transactions have been simple purchases of products such as books, compact discs, stocks and toys. We believe, however, that growth in electronic commerce will be driven by the ability of companies to complete complex transactions such as business-to-business electronic commerce, which is the sale of products and services over the Internet from businesses to other businesses, and the sale of consumer products and services involving multiple features and options. The completion of a complex sales transaction depends on a seller's ability to identify and satisfy a buyer's needs. In traditional sales, companies rely on trained salespeople to interact with customers to address customer needs, explain product features and ultimately consummate the sale. To date, many electronic commerce web sites have been static collections of non-interactive content, and have limited ability to assist and guide a customer through a purchase decision. Using the Internet to complete complex sales transactions, however, requires businesses to implement a sophisticated system that performs the traditional role of the salesperson throughout the sales lifecycle of the products and services. In parallel with the growth of electronic commerce, the Internet is becoming a technology platform for business application deployment. With the emergence of the Internet platform, which includes intranets, extranets and the public Internet, companies are able to more broadly and cost-effectively deploy business applications to customers, partners and employees and make the most current applications and information immediately available on Internet-enabled devices. Our ACE suite of products enables businesses to easily develop and rapidly deploy an Internet sales channel, or a means for selling products and services over the Internet, that interactively assists their customers, partners and employees through the selection, configuration, pricing, quoting and fulfillment processes. ACE is a comprehensive Internet selling system that meets the needs of companies looking to efficiently sell complex products and services. Our product architecture has been designed specifically for the Internet, providing our solution with scalability, which is the ability to accommodate substantial increases in the number of users concurrently using the product, reliability and flexibility. Additionally, our Internet selling system solution has been developed with an open architecture that leverages data in existing enterprise applications, such as enterprise resource planning systems, providing an easy-to-install application that is designed to reduce deployment time. Our current customers include 3Com, Allied Signal, Aspect Communications, BMW, Centigram, Cisco, Cooper Cameron, Dell, Fireman's Fund, Fujitsu, Hewlett-Packard, Highmark Blue Cross Blue Shield, Louis Vuitton Moet & Hennessy, Network Appliance, Redback Networks, RTS Software, Samsung and Smart Pipes. We have developed strong working relationships with system integrators, such as Andersen Consulting, Arthur Andersen, EDS, A.T. Kearny, KPMG and PricewaterhouseCoopers, with independent software vendors, such as BroadVision, InterWorld, Netscape/AOL and Tibco, and with application service providers such as Asera and Corio. Our strategic investors are the Intel 64 Fund and ITOCHU Corporation. Selectica was incorporated in June 1996. Our principal offices are located at 3 West Plumeria Drive, San Jose, California 95134 and our telephone number is (408) 570-9700. THE OFFERING <TABLE> <S> <C> Common stock offered by us................................. 2,000,000 shares Common stock offered by the selling stockholders........... 2,000,000 shares Common stock to be outstanding after this offering......... 37,935,812 shares Use of proceeds from this offering......................... Working capital and general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol.............................. SLTC </TABLE> The table above is based on shares outstanding as of June 30, 2000. This table excludes: - 3,603,688 shares of common stock issuable upon exercise of stock options outstanding under our stock option plans at a weighted average exercise price of $14.56 per share at June 30, 2000 and 2,161,569 shares of common stock available for issuance under our stock option plans as of June 30, 2000; - 800,000 shares of common stock issuable upon exercise of a warrant with an exercise price of $13.00 per share; - 1,000,000 shares of common stock available for issuance under our 1999 Employee Stock Purchase Plan; and - An aggregate of 52,750 shares of common stock issuable pursuant to options granted between July 1, 2000 and July 25, 2000 at a weighted average exercise price of $70.07 per share. ------------------ Except as otherwise indicated, information in this prospectus assumes no exercise of the underwriters' over-allotment option. ------------------ Selectica, ACE and Selectica's logo are our trademarks and we have filed applications to register Selectica and ACE. Trade names, service marks or trademarks of other companies appearing in this prospectus are the property of their respective holders. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED PERIOD FROM INCEPTION YEARS ENDED MARCH 31, JUNE 30, (JUNE 6, 1996) TO ---------------------------- --------------------- MARCH 31, 1997 1998 1999 2000 1999 2000 --------------------- ------- ------- -------- ------- ----------- <S> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Total revenues........................ $ 55 $ 170 $ 3,444 $ 16,088 $ 1,201 $ 7,581 Loss from operations.................. $ (256) $(3,188) $(7,636) $(32,045) $(3,917) $(16,935) Net loss applicable to common stockholders........................ $ (251) $(3,101) $(7,537) $(31,779) $(3,990) $(13,593) Net loss per share applicable to common stockholders: Basic and diluted................... $(0.15) $ (0.91) $ (1.58) $ (4.54) $ (0.21) $ (0.41) Weighted average shares -- basic and diluted........................... 1,634 3,425 4,782 6,999 19,380 33,340 </TABLE> <TABLE> <CAPTION> JUNE 30, 2000 -------------------------- ACTUAL AS ADJUSTED ----------- ----------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $182,310 $288,095 Working capital............................................. $167,299 $273,084 Total assets................................................ $232,720 $338,505 Total stockholders' equity.................................. $201,515 $307,300 </TABLE> See Note 1 of notes to consolidated financial statements for the year ended March 31, 2000 and Note 5 of notes to condensed consolidated financial statements for the period ended June 30, 2000, for a description of the method that we used to compute our basic and diluted net loss per share applicable to common stockholders. The as adjusted column in the consolidated balance sheet data table above reflects our sale of 2,000,000 shares of common stock by us in this offering, at an assumed public offering price of $56.50 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. RECENT DEVELOPMENT In July 2000, we entered into an agreement to acquire Wakely Software, Inc., a provider of rating software and actuarial services for the insurance industry for total consideration of stock and cash valued at approximately $18 million on July 17, 2000, excluding transaction costs. Combined with Wakely Software, we intend to offer a multi-channel Internet sales solution developed for the insurance industry. The closing of the acquisition is subject to a number of closing conditions, including our right to terminate the acquisition if it is determined that Wakely Software would be deemed a significant subsidiary of us.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001090932_sightsound_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001090932_sightsound_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and notes appearing elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully. Our Business: We have pioneered a revolutionary approach for the worldwide commercial distribution of movies. Our service provides for the digital download of feature films over broadband Internet connections. We enable content owners to distribute their movies and other video content via the Internet without the need for physical distribution. In turn, we enable consumers to download these movies for rental or purchase over the Internet 24 hours a day, seven days a week, for uninterrupted full-screen viewing. We believe we were the first company to commercially distribute a feature film via the Internet. We currently rent and sell movies for download from our "virtual video store," www.sightsound.com. We also intend to expand the locations from which consumers can rent and purchase downloadable movies to include: . official movie or studio websites, for consumers who know what movie they want to watch; and . banner ads triggering direct downloads, for impulse buyers from a targeted audience. We currently have the hardware capacity, based on even demand, to download approximately 380,000 feature length movies per day, with the ability to rapidly scale that amount as demand dictates. Through our service, a broadband user who can sustain a one megabit per second Internet connection can download a 90 minute feature film in less than 30 minutes. We believe this download time will decrease with continuing improvements in technology. Additionally, all movies offered through our service are rights managed, allowing us to: . inhibit unauthorized duplication and piracy; . rent movies by limiting the number of days the movies can be viewed; . sell movies by granting unlimited viewing rights; and . designate the countries in which a movie can be downloaded and viewed. The viewing of motion pictures is one of the most popular forms of entertainment in the United States and is becoming increasingly popular in other parts of the world. In 1999, total U.S. revenue from major motion picture ticket sales and various in-home viewing options, such as video purchase and rental, cable TV, and pay-per-view exceeded $30 billion. The current distribution channel for the rental and sale of videos imposes substantial limitations on content owners and consumers. The process of physically producing videos, coupled with reliance on video stores for distribution, restricts the ability of content owners to distribute their movies efficiently. "Brick and mortar" video stores carry a limited number of titles and a limited number of copies of each title. These video stores also have limited locations and limited hours of operation and consumers are forced to leave their homes to rent and return movies. We own three patents and have several pending patent applications covering the method and system for delivering movies and other digital video and digital audio recordings for commercial purposes via telecommunications lines, including the Internet. We have developed and use proprietary software that leverages Microsoft Windows Media Technologies and other commercially available software to deliver movies. Movies downloaded through our service can be viewed using Microsoft Windows Media Player, which is currently available for free. Forrester Research estimates that there are currently over 40 million consumers who have Microsoft Windows Media Player. Our proprietary technology and patented method and system for delivering movies, combined with the growth of Internet and broadband users, positions us to provide a revolutionary method for the distribution of movies. Our service provides content owners with a powerful, efficient, previously untapped distribution channel and provides consumers with increased convenience and selection. Our goal is to become the leading distributor of movies and video content via the Internet. In furtherance of our goal, we intend to: . continue to create strategic relationships with movie content owners in order to license movies that are the most desirable to consumers; . promote the distribution of movies over the Internet and enhance awareness of the SightSound brand; . take advantage of technological advances to continue to deliver a high- quality consumer experience; . capitalize on global distribution opportunities through our rights management technology; . obtain distribution rights for other desirable video content, such as sporting events and educational programming; and . defend our intellectual property. We recently have formed several strategic relationships with content owners. In March 2000, we signed an agreement with Miramax under which Miramax granted us the non-exclusive right to distribute at least 12 movies from Internet sites controlled by Miramax or its affiliates. In February 2000, we entered into a five-year exclusive license with Franchise Pictures that gives us the rights to distribute all movies in their library to which they own the Internet distribution rights. We also currently distribute movies from over 30 independent movie producers. In addition, we have established relationships with owners of other types of video content as well, such as our agreement with Showtime to distribute the Tyson/Norris boxing match. We are a development stage company and have experienced net losses since our inception in 1995. We intend to invest aggressively to implement our strategy, and expect to continue to incur net losses for the foreseeable future.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001091226_numerical_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001091226_numerical_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information and financial statements and notes thereto appearing elsewhere in this prospectus. Numerical Technologies, Inc. We are a leading commercial provider of proprietary technologies and software products used to produce semiconductors with subwavelength feature sizes of 0.18 micron and below that enable the design and manufacture of faster, smaller and more power efficient electronic products. A semiconductor's "feature size" relates to the size of the integrated circuit, or IC, components on the semiconductor and is measured in microns, or millionths of a meter. In semiconductors with "subwavelength" feature sizes, the wavelength of light used to create the IC features on the semiconductor is larger than the feature sizes themselves. Our subwavelength solution exceeds the predictions of industry roadmaps by producing semiconductors with feature sizes of 0.09 micron and below using existing semiconductor equipment. We believe our patented technologies and software products are critical to key markets of the semiconductor industry as they strive to design and manufacture subwavelength semiconductors. Our industry partners and customers demonstrate the success of our proprietary technologies and software products. Motorola used our proprietary technologies in its 0.18 micron fabrication facilities to produce 0.10 micron microprocessor features. One of our industry partners announced that it developed the world's fastest one volt digital signal processor, or DSP, by reducing feature sizes from 0.25 micron to 0.12 micron using our proprietary technologies. DSPs manipulate large volumes of video or sound in products such as cell phones or video cameras. MIT Lincoln Laboratory, a research laboratory, used our proprietary technologies to achieve the first successful creation of 0.05 micron features. We have industry partner and customer relationships with leading companies in all key markets of the semiconductor industry, including vendors of tools used to design semiconductors, such as Cadence Design Systems; manufacturers of photomasks, or templates used in creating ICs, such as Dupont Photomask and Photronics; manufacturers of sophisticated equipment used to manufacture semiconductors, such as Applied Materials and KLA-Tencor; and semiconductor manufacturers, or foundries, such as TSMC and UMC. Through our industry partner relationships, our industry partners resell, market, either jointly with us or unilaterally, and promote our technologies and products to their own customers. Our customers are the actual users of our technologies and products. Our Market and the Subwavelength Challenge The proliferation of semiconductors in a broad range of electronic products, including personal computers, mobile phones, Internet appliances, video game consoles, and high-speed networking and communications products that serve as the backbone of the Internet, is driving the growth in the worldwide market for semiconductors. To capitalize on this growing market, electronics manufacturers must continuously introduce higher-performance products that are cheaper and more portable. These advanced products must incorporate semiconductors that are faster and smaller, consume less power and can be manufactured at a lower cost. As a result, the growth in manufacturing of semiconductors with feature sizes of less than 0.25 micron is expected to be significantly greater than the growth for semiconductors with larger feature sizes. The ability to produce advanced ICs depends on developing technologies that enable the design and manufacture of devices with increasingly smaller feature sizes. As a result of advances in semiconductor design and manufacturing processes, feature sizes decreased from 3.0 micron in 1980 to 0.18 micron in today's advanced fabrication facilities. This progression requires large research and development investments in sophisticated semiconductor design tools, photomask manufacturing and semiconductor equipment. In addition, each incremental reduction in feature size requires significant capital expenditures. The purchase and installation of new equipment and the construction of new fabrication facilities can require billions of dollars and several years before becoming operational. At 0.18 micron and smaller, traditional technology approaches are no longer adequate. The wavelength of light used in production semiconductor equipment to manufacture these features is significantly larger than the features themselves. This is like trying to paint a one-inch wide line with a four-inch wide paint brush. This growing disparity between feature sizes and the wavelength of light is referred to as the "subwavelength gap." We do not expect alternative manufacturing processes that can bridge the subwavelength gap will be commercially viable for many years. We believe advances in manufacturing equipment technology alone can no longer enable the progression to smaller feature sizes. Our Solution We provide patented phase shifting and proprietary optical proximity correction and process modeling technologies that are integral to our subwavelength solution. Phase-shifting technologies manipulate light wave patterns to create high-resolution images of IC features. Optical proximity correction technologies, or OPC, help to reduce distortions in IC features. Process modeling technologies allow semiconductor designers and manufacturers to accurately translate IC designs to photomasks and then to the actual semiconductor. These technologies enable the progression to subwavelength feature sizes. Our comprehensive subwavelength solution allows our industry partners and customers to produce smaller, faster and more power efficient semiconductors with existing semiconductor equipment. This saves them the time and cost necessary to establish a more advanced fabrication facility. As a result, our industry partners and customers can earn revenues more quickly and increase their return on invested capital. We license our proprietary technology and software products to semiconductor designers, design tool vendors, photomask manufacturers, semiconductor equipment manufacturers and foundries. By providing a subwavelength solution employable in every key stage of the semiconductor design and manufacturing process, our technologies and products integrate the entire subwavelength "design-to-silicon flow." We believe that we can capitalize on the pressing need for proven subwavelength solutions by leveraging our technology leadership and our relationships with leading companies within the semiconductor industry to drive the adoption of our solution as the industry standard. Our company incorporated in California in October 1995 and will reincorporate in Delaware prior to the closing of this offering. Our principal executive office is located at 70 West Plumeria Drive, San Jose, CA 95134. Our telephone number is (408) 919-1910. Unless otherwise indicated, information in this prospectus assumes the following: . a three-for-two forward stock split of preferred stock and common stock prior to the closing of this offering; . the automatic conversion of all outstanding shares of preferred stock into shares of common stock immediately prior to the completion of this offering; . our reincorporation in Delaware prior to the closing of this offering; and . no exercise of the underwriters' over-allotment option. The Offering <TABLE> <S> <C> Common stock offered by us.................. 5,534,000 shares Common stock to be outstanding after the offering................................... 29,082,005 shares Use of proceeds............................. For the repayment of outstanding promissory notes issued pursuant to our acquisition of Transcription Enterprise Limited and for general corporate purposes. Nasdaq National Market Symbol............... NMTC </TABLE> The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of February 15, 2000 and excludes: . 1,238,155 shares outstanding under our stock option plans with a weighted average exercise price of $1.40 per share and 2,412,911 additional shares that we could issue under our stock option plans; and . 300,000 shares issuable under our employee stock purchase plan. Summary Financial Information (in thousands, except per share data) <TABLE> <CAPTION> Years Ended December 31, ----------------------- 1997 1998 1999 ------ ------ ------- <S> <C> <C> <C> Statement of Operations Data: Revenue.............................................. $ 620 $ 736 $ 5,492 Total costs and expenses............................. 1,239 7,469 14,693 Loss from operations................................. (619) (6,733) (9,201) Net loss............................................. (584) (6,551) (8,828) Pro forma net loss per common share, basic and diluted (unaudited)................................. $ (0.64) Pro forma weighted average common shares, basic and diluted (unaudited)................................. 13,885 </TABLE> <TABLE> <CAPTION> December 31, 1999 ----------------------------- Pro Forma Actual Pro Forma As Adjusted ------- --------- ----------- <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents........................ $13,486 $ 8,236 $ 33,063 Working capital.................................. 10,499 (3,469) 21,358 Total assets..................................... 17,605 99,119 123,946 Notes payable, including short-term portion...... -- 35,000 -- Total stockholders' equity....................... 12,405 57,825 117,652 </TABLE> - -------- See Note 1 of Notes to Financial Statements for an explanation of the determination of the number of shares used in computing per share data. The pro forma balance sheet data reflects our acquisition of Transcription Enterprises Limited effected in January 2000 and the conversion of approximately 11,913,000 shares of preferred stock into shares of common stock. The pro forma as adjusted amounts give effect to the sale of 5,534,000 shares of common stock in this offering at an assumed initial public offering price of $12.00 per share after deducting estimated underwriting discounts and commissions and estimated offering expenses and the application of the net proceeds from this offering. See Note 9 of Notes to Financial Statements.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001091621_mediaplex_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001091621_mediaplex_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the securities being sold in this offering and the financial statements and notes to those statements appearing elsewhere in this prospectus. Mediaplex We provide technology-based services that enable companies to integrate their internal business data with their online advertising and direct marketing activities to deliver customized messages and offers to Web site visitors. Our services encompass planning, executing, monitoring and analyzing Web-based advertising and marketing campaigns, and are based upon our proprietary technology, tradenamed "MOJO." MOJO is an acronym for "mobile Java objects," which are discrete pieces of software written in Java code that perform specialized functions and communicate with each other. The objects are mobile because they can reside on our servers or our clients' servers, and can be moved with ease. Our technology, which was designed with the privacy of consumers in mind, can automatically change the content of an advertiser's Internet messages and offers in real time, or virtually instantaneously, in response to changes in their underlying business variables, such as inventory levels, product pricing and customer data. For example, companies try to avoid marketing goods that are out of stock, and often want to discount items that are overstocked or perishable, such as hotel rooms or airline seats. In addition, marketers may wish to target a particular geographic area or group of consumers. Our technology draws upon a company's up-to-the-minute business data to tailor the message for an adjusted price, a different product or mix of products, or any other message the company would like to communicate. We believe the real-time customization of messages will increase consumer response to online advertisements and marketing, thereby improving companies' returns on advertising and marketing expenditures. The rapid growth in the worldwide online population and spending related to e-commerce, or commerce conducted over the Internet, has established the Internet as an important advertising medium. Forrester Research, Inc. anticipates that U.S. online advertising spending will grow from $2.8 billion in 1999 to $17.2 billion in 2003. To date, online advertising has not achieved effective "one-to-one" marketing, which entails delivery of the right message to the right consumer at the right time. The ability to send a customized message in real time and in compliance with privacy standards remains a significant challenge, which if met, would enable companies to use the Internet as an effective marketing and sales channel. We believe we are the first company to offer a solution for businesses that integrates their internal business data with online advertising and direct marketing campaigns to deliver customized messages to consumers in real time. The benefits of our services include the following: . Comprehensive Online Advertising Campaigns. We provide a wide range of online campaign services including strategic planning, consumer targeting, media buying, ad serving, and results measurement and reporting for advertisements that have been designed and created by our clients or their advertising agencies. . Real-time Tracking and Measuring of Campaign Results. We continually monitor a variety of measures, such as click-through and conversion rates, and provide Internet access to performance reports 24 hours a day. . Message Re-targeting. We can use Internet browser-based tracking tools to capture and analyze data on site visitation patterns, although we do not maintain, share or sell any personally identifiable data or anonymous user profile information. We can, however, use this data to refine future messages to consumers whose visitation patterns we have tracked. . Real-time Messaging. We can change the content and site placement of online advertisements in real time. This enables a company to tailor a message based on predefined business parameters and a Web site visitor's general profile in order to deliver the right message virtually instantaneously. . Integration of Customers' Business Information. Our MOJO technology enables us to integrate business information with an online advertising campaign to customize and deliver advertisements in real time based on Web site visitors' general profiles and a client's relevant business information such as inventory and pricing levels. . Consumer Privacy. Our MOJO architecture was designed with the privacy of consumers in mind. MOJO does not rely on personally identifiable information or anonymous user profiles to deliver a message. We currently generate the substantial majority of our revenues from advertising campaign management services. We have also deployed campaigns for eleven clients utilizing varying features of our message management services. To date, we have not generated material revenue from our message management services. Although our revenues have increased from $3.6 million for 1998 to $26.4 million for 1999, we have lost approximately $39.6 million since inception. We have not been profitable in any quarter and expect to continue to incur losses for the foreseeable future. After the consummation of this offering, our executive officers and directors will, directly or indirectly, control approximately 19,414,157 shares of our common stock, representing approximately 46.9% of the total shares that will be outstanding. As a result, these persons will be able to control the election of our directors and other matters requiring stockholder approval. Our principal executive offices are located at 177 Steuart Street, Second Floor, San Francisco, California 94105 and our telephone number is (415) 808- 1900. Our Web site is located at www.mediaplex.com. Information contained on our Web site does not constitute part of this prospectus. We were incorporated in California in September 1996 as Internet Extra Corporation. On April 1, 1998, we set up a wholly-owned subsidiary, MediaPlex, Inc., a California corporation, to conduct our current business. We merged MediaPlex, Inc. with Internet Extra Corporation and reincorporated the merged entity under the name "Mediaplex, Inc." in Delaware in November 1999. As used in this prospectus, "we" and "us" refers to Mediaplex, Inc. and not to the underwriters. Mediaplex(TM), MOJO(TM), the Mediaplex logo, Storyboard Messaging (SM), Multiple Messaging (SM), eBusiness Messaging (SM) and Queued Creative (SM) are our trademarks and service marks. We have applied to register Mediaplex and MOJO, our trademarks. All trademarks, service marks and trade names appearing in this prospectus are the property of their respective holders. The Offering <TABLE> <C> <S> Common stock offered by Mediaplex................. 4,371,457 shares Common stock offered by the selling stockholders.. 1,128,543 shares Common stock outstanding after the offering....... 36,183,687 shares Use of proceeds................................... For working capital, capital expenditures, potential acquisitions and other general corporate purposes, including expenses associated with international expansion. See "Use of Proceeds." Nasdaq National Market symbol..................... MPLX </TABLE> The share amounts in this table are based on shares outstanding as of February 29, 2000, as adjusted to reflect the exercise and sale in this offering of options and warrants to purchase 112,250 shares. This table excludes: . 9,466,871 shares underlying options outstanding at a weighted average exercise price of $2.40 per share, of which 5,470,802 were exercisable under the 1997 Stock Plan and the Amended and Restated 1999 Stock Plan; . 2,432,439 shares available for future issuance under the Amended and Restated 1999 Stock Plan; . 800,000 shares issuable upon the exercise of warrants outstanding at a weighted average exercise price of $1.02 per share; and . 800,000 shares available for issuance under our 1999 Employee Stock Purchase Plan. -------- Except as otherwise indicated, all information in this prospectus assumes that the underwriters do not exercise the option granted by us to purchase additional shares of common stock in this offering. See "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001091840_sitara_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001091840_sitara_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should carefully read the entire prospectus, including "Risk Factors" and the financial statements, before making an investment decision. OUR BUSINESS Sitara Networks designs, develops, and markets a comprehensive, integrated suite of high-performance quality of service networking products for enterprises and communications service providers. Quality of service, or QoS, is an umbrella term for techniques used to monitor network resource usage and to intelligently match the needs of specific applications such as video conferencing, email, voice over IP, or VoIP, and other data traffic with available network resources based on pre-determined business priorities and allocations. Our products are designed to address the inherent limitations of Internet protocol, or IP, in order to optimize overall network performance, ensure the availability of mission-critical applications, and ultimately allow service providers to deliver additional revenue-generating services, on demand, with the level of service their customers require. The rapid growth of the Internet and the transition from multiple dedicated communications networks to converged IP networks has resulted in a loss of control over the reliability, predictability and manageability of network traffic. This loss of control has limited the ability of enterprises and service providers to fully realize the many potential benefits of IP convergence, such as improved business process efficiency, greater connectivity between employees, customers and suppliers, as well as significant revenue-generating opportunities and cost savings. We believe that our QoS products provide the intelligence and control necessary for our customers to efficiently operate converged IP networks. Our products integrate a variety of QoS techniques into a single platform to allow enterprises and service providers to monitor, set, and enforce network resource usage policies based on business priorities and the intelligence gained from real-time analysis of data traffic across an entire network. Our products can scale from low-speed connections at remote offices to large network aggregation points with higher data throughput requirements. We have architected our products to be independent from the physical network infrastructure so that they have the flexibility to adapt to changes in network configuration and business needs. Our products include QoSWorks, QoSArray and QoSDirector. QoSWorks is a QoS device designed for deployment on enterprise premises, whether at headquarters, remote offices or data centers that require data transmission speeds, or throughput, of up to 100 million bits per second, or Mbps. QoSArray is a multi-module QoS system that supports complex network configurations and is designed for deployment at large enterprises and by service providers that require throughput of up to optical carrier 3, or OC3. QoSDirector is a central policy management software system that is designed to enable our customers to manage large installations of QoSWorks and QoSArray systems from a single intuitive user interface. Our QoS products provide the following operational benefits: Improved application and network performance. Our products are designed to optimize utilization of network resources and improve the performance of applications. Specifically, our products can improve network and application response time and reliability while minimizing data loss and network downtime. As a result, mission-critical application performance is protected against degradation by traffic from lower-priority applications. Our products also enable the efficient deployment of emerging IP-based applications, such as VoIP and multimedia applications that are more demanding of network resources. Scalability over multiple network sizes and speeds. Our QoS products are designed to deliver quality of service to any point on a network ranging in speed from 64 kilobits per second, or Kbps, to OC3. Our products can be scaled from a single unit deployment to across an entire service provider network. We believe that our product architecture will be able to support a migration to higher speed applications and larger network deployments in our future product releases. Real-time network performance visibility and resource control. Our QoS products are designed to enable network managers to use a single user interface to view and monitor all traffic types and set and refine policies for all QoS functions network-wide on a continuous basis. Flexibility to handle any IP-based application and many other diverse data types. Enterprises and service providers that implement our QoS products can quickly and easily deploy additional IP-based applications without reconfiguration of their networks because of the ability of our products to operate with any IP traffic. Our QoS products are also able to operate with traffic from many legacy non-IP applications. Ease of use. Our QoS products can be installed to implement an end-to-end QoS solution across a network with no changes to routers or other network equipment and minimal, if any, changes to customer or host application software. In addition, our products are transparent on a network and contain monitoring features and an intuitive user interface to enable network managers to set and implement network-wide QoS policies expeditiously. Our products reduce the time and complexity of deployment of QoS across a network. These operational benefits can provide the following financial benefits to our customers: Enhanced service provider revenue opportunities. We believe our QoS products enable service providers to deliver additional revenue-generating services beyond merely providing bandwidth. Service providers can use our QoS products to enable the delivery of additional services, such as bandwidth on demand, VoIP and other offerings based on differing guaranteed levels of service. Cost savings. Our QoS products are designed to enable enterprises and service providers to realize potential cost savings by utilizing a converged IP network rather than multiple dedicated networks. In addition, the comprehensive nature of our QoS products allow our customers to address their QoS needs with a single product rather than having to purchase multiple single-point QoS products. Our goal is to become the leading worldwide provider of QoS solutions to enterprises and service providers. Key elements of our strategy include: Leveraging our product architecture to extend technological leadership. We intend to leverage our unique product architecture to enable us to respond quickly to evolving market requirements through periodic enhancements of existing products and rapid development of new QoS products. Increasing our focus on the service provider market. We are actively pursuing opportunities to expand sales of our products to and through service providers. We believe that service providers represent a large market opportunity and that our products can provide them and their customers with multiple benefits. Growing our global sales force, distribution channel network and support capabilities. We are investing significant resources worldwide to expand our direct sales force and further develop our indirect sales channels to accelerate sales of our expanding product line. In addition, we intend to expand our support capabilities to ensure our customers and distribution channels receive the level of support that they require. Accelerating our product introductions. We are focusing on providing comprehensive, high-performance, easy-to-use and cost-effective QoS solutions to enterprises and service providers operating converged IP networks. We intend to continue to enhance and expand our suite of QoS products to broaden our QoS solutions portfolio and bolster our competitive position in the market. Expanding our strategic relationships. We continue to seek to expand our distribution, marketing and technology relationships with new and existing strategic partners that will enable us to increase the market opportunity for our products. Establishing global brand recognition for our products. We are investing significant resources in expanding and enhancing our global brand recognition to establish Sitara Networks as the standard for comprehensive QoS solutions. We sell and support our products through a network of resellers and a direct sales force. We have sales representatives located in ten metropolitan areas across the United States and in 12 foreign countries. As of September 30, 2000, we had 66 resellers, including 27 in the United States and 39 in 19 foreign countries. Our principal offices are located at 52 Second Avenue, Waltham, Massachusetts 02451. Our telephone number is (781) 487-5900. Our website address is www.sitaranetworks.com, but the information on our website does not constitute a part of this prospectus. THE OFFERING Common stock offered by Sitara Networks............................ shares Common stock to be outstanding after this offering....................... shares Use of proceeds..................... We plan to use the proceeds from the offering for working capital and general corporate purposes. Dividend policy..................... We intend to retain all future earnings, if any, to fund the development and growth of our business. We do not anticipate paying cash dividends on our common stock. Proposed Nasdaq National Market symbol.............................. SITA The number of shares of our common stock outstanding after the offering is based on shares outstanding as of October 31, 2000. This number assumes the conversion into common stock of all shares of our preferred stock but does not include: - 6,304,216 shares of common stock issuable upon exercise of outstanding stock options under our stock incentive program as of October 31, 2000 at a weighted average exercise price of $2.26, - 679,819 shares of common stock reserved and available for issuance under our stock incentive program, - 2,000,000 shares of common stock reserved and available for issuance under our employee stock purchase plan, and - 591,429 shares of common stock issuable upon exercise of warrants at a weighted average exercise price of $2.53 as of October 31, 2000. ------------------------ Unless otherwise indicated, all information contained in this prospectus assumes: - no exercise of the underwriters' over-allotment option, - a three-for-two stock split of our stock effected on June 16, 2000, - the conversion of all outstanding shares of our preferred stock into 34,400,573 shares of common stock concurrently with the closing of this offering, and - the filing of our amended and restated certificate of incorporation which will increase the number of authorized shares of our common stock and decrease the number of authorized shares of our preferred stock. "Sitara," the Sitara Networks logo, and "Sitara" together with the Sitara Networks logo are registered trademarks, and "Sitara Networks," "QoSWorks," "QoSArray," "QoSDirector" and "AccuRate" are trademarks, of Sitara Networks. This prospectus also contains tradenames, trademarks and service marks of other companies. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------- ---------------------- 1997 1998 1999 1999 2000 ------- ------- -------- ----------- -------- (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue..................................................... $ -- $ 175 $ -- $ -- $ 2,353 Cost of revenue (excluding stock-based compensation of $0, $0, $0, $0 and $100, respectively)........................ -- 104 -- -- 1,639 ------- ------- -------- ------- -------- Gross margin................................................ -- 71 -- -- 714 Operating expenses: Selling and marketing (excluding stock-based compensation of $0, $0, $441, $96 and $448, respectively)............ 1,517 3,785 3,588 2,603 14,963 General and administrative (excluding stock-based compensation of $0, $0, $0, $0 and $44, respectively)... 989 1,413 1,485 1,073 1,881 Research and development (excluding stock-based compensation of $37, $40, $345, $65 and $1,260, respectively)........................................... 2,058 2,959 6,831 4,343 8,125 Stock-based compensation.................................. 37 40 786 161 1,852 ------- ------- -------- ------- -------- Total operating expenses................................ 4,601 8,197 12,690 8,180 26,821 ------- ------- -------- ------- -------- Loss from operations........................................ (4,601) (8,126) (12,690) (8,180) (26,107) Interest income, net........................................ 244 294 312 128 717 ------- ------- -------- ------- -------- Net loss.................................................... (4,357) (7,832) (12,378) (8,052) (25,390) Accrued dividends for preferred stockholders................ (736) (1,448) (2,825) (1,752) (3,711) Accretion of preferred stock to redemption value............ (1) (3) (104) (63) (203) ------- ------- -------- ------- -------- Net loss attributable to common stockholders................ $(5,094) $(9,283) $(15,307) $(9,867) $(29,304) ======= ======= ======== ======= ======== Basic and diluted net loss per share........................ $ (1.26) $ (1.60) $ (2.09) $ (1.41) $ (3.36) ======= ======= ======== ======= ======== Shares used in computing basic and diluted net loss per share..................................................... 4,035 5,790 7,307 7,006 8,711 Pro forma basic and diluted net loss per share (unaudited)............................................... $ (0.39) $ (0.66) ======== ======== Shares used in computing pro forma basic and diluted net loss per share (unaudited)................................ 31,620 38,759 </TABLE> Shares used in computing pro forma share amounts reflect the conversion of all of the outstanding shares of our preferred stock as of September 30, 2000 into shares of our common stock as if the shares had converted into shares of common stock immediately upon their issuance. The pro forma balance sheet data shown below assumes the conversion of all of our outstanding shares of preferred stock as of September 30, 2000 into common stock upon the closing of this offering. The pro forma as adjusted data gives effect to this conversion and to the sale of [ ] shares of common stock that we are offering under this prospectus at an initial public offering price of $ per share after deducting the underwriting discounts and commissions and estimated offering expenses. The actual, pro forma and pro forma as adjusted balance sheet data excludes issuances of our capital stock after September 30, 2000, including 897,078 shares of our series G convertible redeemable preferred stock. <TABLE> <CAPTION> SEPTEMBER 30, 2000 ----------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $18,055 $18,055 $ Working capital............................................. 15,986 15,986 Total assets................................................ 23,858 23,858 Long-term portion of capital lease obligations.............. 1,133 1,133 Convertible redeemable preferred stock...................... 73,201 -- Total stockholders' equity (deficit)........................ (55,328) 17,873 </TABLE>
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding us and our common stock and our financial statements appearing elsewhere in this prospectus. Unless otherwise specifically stated, all information in this prospectus gives effect to the 354.59715614-for-1 split of our common stock which will occur prior to the closing of this offering and does not take into account the possible issuance of additional shares of common stock to the U.S. underwriters pursuant to their right to purchase additional shares to cover over-allotments. Choice One Communications We are an integrated communications provider offering broadband data and voice telecommunications services primarily to small and medium-sized busi- nesses in second and third tier markets in the northeastern United States. Our offerings include high speed data and Internet service, principally utilizing digital subscriber line, or DSL, technology, local exchange service and long distance service. DSL is a technology enabling high-speed data access across existing local telephone lines. We seek to become the leading integrated commu- nications provider in each of our target markets by offering a single source for competitively priced, high quality, customized telecommunications services. A key element of our strategy is to be one of the first integrated communica- tions providers to provide comprehensive coverage in each of the markets we serve. We are achieving this market coverage by installing both data and voice network equipment in the central offices of established telephone companies. As of December 31, 1999, we had installed our equipment in 141 of these central offices. We also intend to maximize utilization of our market network coverage by offering data and voice services on a wholesale basis to Internet service and other telecommunications providers. Through our strategy of connecting sub- stantially all of our clients directly to our own switches, we are able to more efficiently route traffic, ensure quality service and control costs. As of De- cember 31, 1999, we had initiated service with 3,125 clients for 20,096 access lines, including 206 DSL lines. We have experienced significant losses in our business to date and we anticipate that we will continue to have losses in the future before we realize any significant revenues. In addition, our ability to implement our business strategy may be impaired by the types of risks described in the section entitled "Risk Factors." We currently offer data and voice services in nine markets and intend to expand into approximately 11 additional markets by the end of the second quarter 2001. Following completion of our planned expansion to these approximately 20 markets, we believe our networks will be able to reach approximately 3.7 million business lines, which constitute more than 75% of the estimated business lines in these markets, and 5.3 million households. While our network expansion would allow us to reach this number of business lines and households, the number of business lines and households that we actually service will depend on our ability to obtain market share from our competitors. We have developed a flexible network buildout strategy allowing us to leverage rapidly evolving telecommunications technology. In each of our first nine markets, we have deployed or intend to deploy both data and voice switches. We are entering three additional markets by initially offering only data services. We will then add voice services within 12 months after entering these markets. We believe this "DSL first" strategy provides for faster time to market and lower initial capital costs, while preserving flexibility for our future development. We expect that our market entry strategy and network architecture will continue to evolve in order to capitalize on advances in telecommunications technology and to satisfy the changing needs of our clients. EXPLANATORY NOTE This registration statement contains two separate prospectuses. The first prospectus relates to a public offering in the United States and Canada of an aggregate of 5,716,000 shares of common stock. The second prospectus relates to a concurrent offering outside the United States and Canada of an aggregate of 1,429,000 shares of common stock. The prospectuses for each of the offerings will be identical with the exception of an alternate front cover page for the offering outside the United States and Canada. Such alternate cover page appears in this registration statement immediately following the cover page for the offering in the United States and Canada. Business Strategy The key elements of our business strategy are to: . capitalize on early to market advantage; . offer broad coverage to small and medium-sized businesses in our target markets; . lead competition in providing DSL services; . use our flexible network buildout strategy to rapidly and cost effectively enter new markets; . target underserved clients in second and third tier markets; . offer customized bundled services with a single point of contact and a single bill; . utilize efficient automated and integrated back office systems that can support rapid and sustained growth; . increase market share by establishing service-driven client relationships and creating a local presence; . accelerate growth through acquisitions of telecommunications and related businesses; and . leverage management's experience by drawing upon its expertise and success in the telecommunications industry. We are a Delaware corporation with our principal executive offices located at 100 Chestnut Street, Suite 700, Rochester, New York 14604. Our telephone number is 716-CHOICE1. THE OFFERING Common stock offered: <TABLE> <C> <S> U.S. offering...................................... 5,716,000 shares International offering............................. 1,429,000 shares Total.............................................. 7,145,000 shares Common stock to be outstanding after the offering.. 29,938,047 shares, excluding up to an additional 1,071,750 shares issuable upon exercise of the underwriters' over- allotment option, an aggregate of 644,934 shares issuable upon exercise of stock options granted as of January 17, 2000 and 132,148 shares issuable upon conversion of a promissory note. Over-allotment option.............................. 1,071,750 shares Use of proceeds.................................... We estimate that our net proceeds from the offering will be approximately $124.5 million, based on an assumed initial public offering price of $19.00 per share. We plan to use net proceeds from the offering for capital expenditures, repayment of indebtedness and general corporate purposes, including possible future investments, acquisitions or strategic alliances. See "Use of Proceeds." Dividend policy.................................... We do not intend to pay dividends on our common stock. We plan to retain any earnings for use in the operation of our business and to fund future growth. Proposed Nasdaq National Market symbol............. CWON </TABLE> SUMMARY CONSOLIDATED AND COMBINED FINANCIAL AND OPERATING DATA The following table sets forth our selected consolidated financial data for the periods indicated. The consolidated statement of operations data and consolidated balance sheet data for the period from inception through December 31, 1998 and as of and for the year ended December 31, 1999 have been derived from our consolidated financial statements included elsewhere in this prospectus, which have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report included elsewhere in this prospectus. The unaudited pro forma combined statement of operations data and other financial and operating data give effect to the acquisition of Atlantic Connections, LLC as if it had occurred on January 1, 1999. The as adjusted combined balance sheet data set forth below are unaudited and give effect to the offering and the application of the net proceeds of the offering, assuming an initial offering price of $19.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, as if they had occurred on December 31, 1999. The unaudited pro forma statements do not give effect to the up to $2.1 million additional purchase price payable in cash or, at our option, our common stock, in connection with the acquisition of Atlantic Connections if specified performance criteria are met in the 12 months following the acquisition. The results of our operations for the periods indicated are not necessarily indicative of the results of operations in the future. Included in other financial data are EBITDA, as adjusted, amounts. EBITDA, as adjusted, represents earnings before interest, income taxes, depreciation and amortization and non-cash deferred compensation. EBITDA, as adjusted, reflects non-cash deferred compensation of $.4 million in 1998 and $2.0 million for the year ended December 31, 1999. EBITDA is used by management and certain investors as an indicator of a company's historical ability to service debt. Management believes that an increase in EBITDA is an indicator of improved ability to service existing debt, to sustain potential future increases in debt and to satisfy capital requirements. However, EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to either operating income, as determined by generally accepted accounting principles, nor as an indicator of operating performance or cash flows from operating, investing and financing activities, as determined by generally accepted accounting principles, and is thus susceptible to varying calculations. EBITDA as presented may not be comparable to other similarly titled measures of other companies. We expect that under the credit facility, our discretionary use of funds reflected by EBITDA will be limited in order to conserve funds for debt service. You should read the financial data set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," our audited financial statements with related notes and our unaudited pro forma financial data with related notes contained elsewhere in this prospectus. <TABLE> <CAPTION> Period ended Year Ended December 31, 1998 December 31, 1999 ----------------- --------------------- Actual Pro forma -------- ----------- (unaudited) (in thousands, except per share data) <S> <C> <C> <C> Statement of Operations Data: Revenues............................... $ - $ 4,518 $ 11,658 Operating expenses: Network costs........................ - 6,979 12,406 Selling, general and administrative, including noncash deferred compensation of $2,048 and $376 in 1999 and 1998, respectively, and $2,048 in pro forma 1999............ 5,060 22,978 24,593 Depreciation and amortization........ 36 5,153 6,248 ------- -------- -------- Total operating expenses............. 5,096 35,110 43,247 ------- -------- -------- Loss from operations................... (5,096) (30,592) (31,589) Interest income (expense), net......... 22 (1,883) (2,626) ------- -------- -------- Net loss............................... $(5,074) $(32,475) $(34,215) ======= ======== ======== Net loss per share, basic and diluted(1)............................ $ (0.28) $ (1.47) $ (1.55) ======= ======== ======== </TABLE> <TABLE> <CAPTION> As of December 31, 1999 -------------------------- Actual As adjusted -------- ----------- (unaudited) <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents......................... $ 3,615 $76,567 Working capital (deficit)......................... (9,035) 63,917 Property and equipment, net....................... 72,427 72,427 Total assets...................................... 94,512 167,464 Long-term debt.................................... 51,500 -- Stockholder's equity.............................. 26,724 151,176 </TABLE> <TABLE> <CAPTION> Period Ended Year Ended December 31, 1998 December 31, 1999 --------------------- --------------------- Actual Pro forma Actual Pro forma -------- ----------- -------- ----------- (unaudited) (unaudited) (in thousands, except per share data) <S> <C> <C> <C> <C> Other Financial Data: Net cash provided by (used in) operating activities............. $ 6,587 $(24,319) Net cash used in investing activities....................... (21,146) (56,077) Net cash provided by financing activities....................... 16,050 82,520 Capital expenditures.............. 21,146 56,077 EBITDA, as adjusted............... (4,684) (23,391) Operating Data: Lines sold........................ - 1,854 21,683 26,646 Lines installed: UNE's installed................. - - 12,527 12,527 T-1 channels installed.......... - - 2,400 2,400 DSL lines installed............. - - 206 206 Resold lines installed.......... - 1,854 4,963 4,963 -------- ----- -------- ------ Total lines installed........... - 1,854 20,096 20,096 Collocations installed............ - - 141 141 Markets in operation.............. - 2 9 9 Number of switches deployed....... - - 8 8 </TABLE> - -------- (1) Unaudited pro forma net loss per share, as adjusted to give effect to the offering would be $(2.94) per share in 1999.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001092325_resourceph_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001092325_resourceph_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus, including "Risk Factors" and the financial statements, carefully before making an investment decision. RESOURCEPHOENIX.COM ReSourcePhoenix.com provides outsourced financial and management reporting, accounting management, transaction processing and record keeping services. We allow our clients to focus on their core businesses by outsourcing the infrastructure and operations of these critical back-office functions. Our primary service offerings include: - financial and management reporting; - accounting and finance management; - transaction processing; - financial budgeting and analysis; - implementation, integration and operation of financial and management reporting software, hardware, and network and communications infrastructure; - sales tracking; - sales force contact management; and - investor services record keeping. Today's companies increasingly need financial and management reporting systems that can collect, organize and disseminate business information in a timely, accurate, relevant and easy-to-use format. This need is particularly acute for early stage and middle market companies that rely upon this information, but have limited capital and personnel resources to manage these systems and simultaneously focus on growing their businesses. We are pioneering the use of the Internet to integrate leading enterprise resource planning software applications with the expertise of information technology, finance, accounting and transaction processing professionals. Enterprise resource planning software integrates the back-office aspects of the business, including planning, inventory management, customer service, manufacturing, sales and marketing. Our solution offers the cost-effective benefits of outsourcing while providing the flexibility, control, customization, integration and scalability of an in-house system. We offer our clients access to the leading enterprise resource planning software applications, which often are too costly and complex for early stage and middle market companies to obtain and operate. We believe that our success will be driven by the increased demand for outsourced financial and management reporting solutions. Reasons for this growth include a desire by companies to focus on their core businesses, the inability of many early stage and middle market companies to cost-effectively acquire complete financial management solutions, and difficulties in attracting and retaining qualified information technology, accounting, finance and transaction processing professionals. In addition, we believe that this growth will be fueled by the inability of many companies to effectively adopt and implement leading enterprise resource planning applications in-house, as well as the challenges inherent in developing and maintaining software applications, hardware, and data and communications networks. The information in this prospectus is not complete and may be changed. The selling stockholder may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED AUGUST 21, 2000 PROSPECTUS [RESOURCEPHOENIX.COM LOGO] 8,800,000 Shares Class A Common Stock This prospectus may be used only in connection with the resale by Torneaux Ltd. from time to time of up to 8,800,000 shares of Class A common stock of ReSourcePhoenix.com, consisting of: - 7,000,000 shares of Class A common stock which may be issued by us to Torneaux pursuant to a common stock purchase agreement; and - 1,800,000 shares of Class A common stock issuable by us upon exercise of warrants held by Torneaux. The shares of Class A common stock offered may be sold from time to time for the account of the selling stockholder. We will not receive any of the proceeds from the sale of the Class A shares by the selling stockholder. We have agreed to pay the costs of registering the Class A common stock, excluding commissions, transfer taxes and other expenses related to the resale of the Class A common stock by Torneaux. The price at which the common shares will be issued by us to Torneaux will be approximately 94% of the daily volume weighted average closing price of our Class A common stock on the Nasdaq National Market over a 20-day trading period, and the price at which we issue the common shares to Torneaux may fluctuate. See "Financing Arrangement with Torneaux Ltd." beginning on page 16. We issued warrants to Torneaux to purchase up to 1,800,000 shares of our Class A common stock. Torneaux may purchase up to 500,000 warrant shares at $2.50 per share, 500,000 warrant shares at $4.00 per share, 400,000 warrant shares at $6.00 per share, and 400,000 warrant shares at $7.00 per share. The selling stockholder may offer, pursuant to this prospectus, shares of Class A common stock to purchasers from time to time in transactions on the Nasdaq National Market, in negotiated transactions, or otherwise or by a combination of these methods. Torneaux is an "underwriter" within the meaning of the Securities Act. Our Class A common stock is traded on the Nasdaq National Market under the symbol "RPCX." On August 14, 2000 the last reported sale price for the Class A common stock on the Nasdaq National Market was $2.25 per share. INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. By outsourcing these critical back-office functions, companies can reduce or eliminate the costs of: - purchasing leading enterprise resource planning applications and associated hardware; - integrating and implementing the software and hardware with existing systems; - recruiting, hiring and training an extensive staff of information technology, accounting, finance and transaction processing professionals; - ongoing training of these professionals in their respective operational areas; - expanding overhead to support the growing organization; and - ongoing technology and process upgrades. We provide comprehensive, high-quality client service through our three primary service offerings. Our Financial Outsourcing service, formerly known as ReFOCOS, includes reporting, accounting, transaction processing, budgeting and analysis solutions. Our S.T.A.R. services are similar to our Financial Outsourcing service, but are designed to provide investor services to sponsors of limited partnerships and real estate investment trusts. M.A.R.S. is a sales force automation software application for specialized financial services clients that can be licensed to clients or purchased by clients as a hosted application service. In providing our services, we offer our clients access to a broad range of professionals who are highly qualified and specialized in their areas of functional expertise. In addition, we develop a business partnership with each client by assessing the client's needs and implementing a value-added solution based on our internally developed best practices. At the time of our formation, we provided information technology, accounting, finance and transaction processing services to entities affiliated with Phoenix Leasing Incorporated, a commercial lender and sponsor and syndicator of publicly-traded limited partnerships. Phoenix Leasing is controlled by Gus Constantin, our chairman, chief executive officer and controlling stockholder. As of June 30, 2000, we had 65 clients, including 62 unaffiliated clients and three clients affiliated with Phoenix Leasing. CORPORATE INFORMATION We incorporated in Delaware in July 1999 and our operating subsidiary was incorporated in California in September 1996. Our headquarters are located at 2401 Kerner Boulevard, San Rafael, California 94901 and our telephone number is (415) 485-4600. Our Web site address is www.resourcephoenix.com. The information on our Web site is not a part of this prospectus. ReSourcePhoenix.com, ReFOCOS, S.T.A.R. and M.A.R.S. are trademarks of ReSourcePhoenix.com. This prospectus contains trademarks and trade names of other companies. TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Prospectus Summary.................. 1 Risk Factors........................ 5 Information Regarding Forward Looking Statements................ 15 Financing Arrangement with Torneaux Ltd. ............................. 16 Use of Proceeds..................... 19 Market for Our Class A Common Stock and Dividend Policy............... 20 Capitalization...................... 21 Selected Financial Data............. 22 Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 24 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> Business............................ 36 Management.......................... 48 Relationship with Phoenix Companies and Certain Transactions.......... 55 Principal Stockholders.............. 57 Description of Capital Stock........ 58 Selling Stockholder................. 60 Plan of Distribution................ 60 Legal Matters....................... 64 Experts............................. 64 Where You Can Find More Information....................... 64 Index to Consolidated Financial Statements........................ F-1 </TABLE> THE OFFERING We entered into a common stock purchase agreement on June 6, 2000 with Torneaux Ltd. Pursuant to this agreement: - we have the right, subject to certain conditions, to sell up to 7,000,000 shares of Class A common stock to Torneaux, which Torneaux may resell to the public through this prospectus; and - we issued warrants to Torneaux to purchase up to 1,800,000 shares of our Class A common stock at exercise prices ranging from $2.50 to $7.00 per share. Shares issuable upon exercise of Torneaux's warrants may also be resold to the public through this prospectus. Through this prospectus, the selling stockholder may offer to the public the Class A common stock acquired under the common stock purchase agreement. SHARES OFFERED BY THE SELLING STOCKHOLDER 8,800,000 shares of Class A common stock of ReSourcePhoenix.com, par value $0.001 OFFERING PRICE Determined at the time of sale by the selling stockholder. COMMON STOCK OUTSTANDING AS OF JULY 31, 2000 4,262,080 shares of Class A common stock 7,172,000 shares of Class B common stock USE OF PROCEEDS We will not receive any of the proceeds of the shares offered by the selling stockholder. Any proceeds we receive from the sale of our Class A common stock pursuant to the equity line agreement will be used primarily for general corporate purposes. See "Use of Proceeds." DIVIDEND POLICY We currently intend to retain any future earnings to fund the development and growth of our business. Therefore, we do not currently anticipate paying cash dividends. See "Dividend Policy."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001092367_sycamore_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001092367_sycamore_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified by the more detailed information and the consolidated financial statements and related notes appearing elsewhere in this prospectus. SYCAMORE NETWORKS, INC. We develop and market products that transport voice and data traffic over wavelengths of light. Our products are designed to enable our customers to quickly and cost effectively create usable network capacity over existing fiber and thereby to create new high speed data services. Our target customers are new and established providers of local voice and data transport services, long distance carriers, Internet service providers, cable operators, foreign telephone companies and carriers who provide services to other carriers, all of which we refer to as service providers. These companies may provide such high speed data services as access to the Internet, high speed data connections between company sites, video conferencing and remote access to corporate databases. We believe that the existing public network is unable to meet the demand for high speed data transport services that are driving network growth. As data traffic on the public network continues to grow at rates that surpass available network capacity, we believe that service providers will require new solutions to relieve network congestion and create new data services. We call our products intelligent optical networking products because they are designed to transmit and manage data directly on wavelengths of light, for transmission over fiber optic cable. This will improve the efficiency of the network, because data can be moved across the network and managed entirely in the optical medium. In contrast, the existing public network is based on a transmission technology, known as SONET/SDH, which requires optical signals travelling across the network to be converted into electrical signals at each network transit point, and then re-converted into optical signals for transport to the next transit point. The multiple conversions required in a SONET/SDH network increase network complexity and cost. Our products are based on a common software architecture that we believe has a number of significant benefits, including accelerating our release of new products and enabling our customers to upgrade their networks without significant new capital equipment or retraining. Prior to May 1999, we were a development stage company principally engaged in research and development. We began shipping our SN 6000 Intelligent Optical Transport product in May 1999, our SN 8000 Intelligent Optical Node in August 1999 and our SilvxManager Network Management System in November 1999. Our SN 16000 Intelligent Optical Switch is currently in the test stage. Substantially all of our revenues to date have been from sales of these products to one customer, Williams Communications. We have incurred significant losses since our inception, and as of January 29, 2000 we had an accumulated deficit of $27.5 million. Our products are designed to address the current and future needs of service providers by offering an end-to-end optical networking solution that provides the following benefits: . Improves Network Flexibility and Scalability. Our software-based equipment is designed to allow service providers to improve the flexibility of, and the ability to expand, their networks without the long lead times and large initial capital investment presently required for a network buildout. . Enables Rapid Service Delivery. Our products are designed to shorten the time it takes for service providers to increase bandwidth and provide services. . Facilitates Introduction of New Data Services and Creation of New Revenue Opportunities for Service Providers. The software-based intelligence of our products allows us to rapidly introduce new features into our products, which can in turn be offered as new services by service providers to their customers. . Protects Existing Investments. Our products are designed to enable service providers to increase the functionality and improve the performance of their networks without sacrificing their existing infrastructure investments in SONET/SDH equipment. We market our products through a direct sales force and are currently developing relationships with selected original equipment manufacturers and other marketing partners, both domestically and internationally. In addition, we work collaboratively with our customers and prospective customers to help them identify and create new high speed data services that they can offer to their customers. We believe that this assistance is an integral aspect of our sales and marketing efforts. We are a Delaware corporation. Our principal executive offices are located at 10 Elizabeth Drive, Chelmsford, Massachusetts 01824 and our telephone number is (978) 250-2900. Our World Wide Web site address is www.sycamorenet.com. The information in the Web site is not incorporated by reference into this prospectus. Sycamore Networks, SN 6000, SN 8000, SilvxSource, SilvxManager, SN 16000, SilvxONMS and SILVX are our trademarks. This prospectus also contains trademarks of other companies. THE OFFERING <TABLE> <C> <S> Common stock offered by Sycamore Networks........... 12,394,707 shares Common stock offered by the selling stockholders.... 2,605,293 shares Common stock to be outstanding after this offering.. 248,489,559 shares Use of proceeds..................................... We intend to use the net proceeds from this offering for general corporate purposes, principally working capital and capital expenditures. See "Use of Proceeds." Nasdaq National Market symbol....................... "SCMR" </TABLE> The above information is based upon the number of shares of common stock outstanding as of January 29, 2000, giving effect to a 3-for-1 stock split effected on February 11, 2000, and excludes 17,849,484 shares of common stock issuable upon exercise of outstanding options at an average exercise price of $19.37 per share and 43,292,112 shares of common stock reserved for future issuance under our stock plans as of January 29, 2000. SUMMARY CONSOLIDATED FINANCIAL DATA (in thousands, except per share data) <TABLE> <CAPTION> Period from Inception Six Months Ended (February 17, 1998) Year Ended --------------------------------- through July 31, 1998 July 31, 1999 January 30, 1999 January 29, 2000 --------------------- ------------- ---------------- ---------------- <S> <C> <C> <C> <C> Consolidated Statement of Operations Data: Revenues................ $ -- $ 11,330 $ -- $ 48,559 Total operating expenses............... 793 22,893 4,243 34,679 Loss from operations.... (793) (20,049) (4,482) (11,856) Net loss................ (693) (19,490) (4,289) (7,351) Pro forma basic and diluted net loss per share (unaudited)...... $ (.01) $ (.17) $ (.05) $ (.04) Weighted average shares used in computing pro forma basic and diluted net loss per share (unaudited)............ 56,268 114,435 87,655 172,244 </TABLE> Weighted average shares used in computing pro forma basic and diluted net loss per share shown above exclude unvested shares of common stock subject to repurchase rights, which totaled 15,768,000 and 36,261,000 for the period from inception (February 17, 1998) through July 31, 1998 and year ended July 31, 1999, respectively; and 29,952,000 and 53,218,000 for the six months ended January 30, 1999 and January 29, 2000, respectively. The as adjusted column in the consolidated balance sheet data below gives effect to the sale by us of 12,394,707 shares of common stock in this offering at an assumed public offering price of $172.00, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. <TABLE> <CAPTION> As of January 29, 2000 -------------------- Actual As Adjusted -------- ----------- <S> <C> <C> Consolidated Balance Sheet Data: Cash, cash equivalents and marketable securities........... $288,576 $2,344,824 Working capital............................................ 292,043 2,348,291 Total assets............................................... 344,678 2,400,926 Total stockholders' equity................................. 307,180 2,363,428 </TABLE> Except as set forth in the consolidated financial statements or as otherwise indicated, all information in this prospectus: . assumes no exercise of the underwriters' over-allotment option; and . reflects a 3-for-1 stock split of the common stock effected on February 11, 2000.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001092536_fn-estate_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001092536_fn-estate_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS PROSPECTUS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE RISK FACTORS SECTION STARTING ON PAGE 8 AND THE FINANCIAL STATEMENTS, BEFORE MAKING AN INVESTMENT DECISION. FASTNET OVERVIEW We are a growing Internet service provider offering Internet access and enhanced services, such as Web hosting, managed security solutions and other value added products, to small and medium sized enterprises through our regional customer network facilities. We primarily offer our services to the mid- Atlantic area of the United States and our strategy is to expand by replicating our customer network facilities and our services offered to small and medium sized enterprises in selected high growth secondary markets throughout the United States. We currently have customer network facilities in Pennsylvania, New Jersey and Maryland that enable us to service markets in Pennsylvania, New Jersey, New York, Maryland and Delaware. We have been providing Internet access services to our customers since 1994. The services we provide include: - INTERNET ACCESS SERVICES--connectivity to our regional networks that provides our customers access to the Internet; - TOTAL MANAGED SECURITY--electronic protection for a customer's computer network; - WEB HOSTING SERVICES--shared and dedicated hosting of Web servers, including colocation services, where a customer locates its Web servers at our facilities; - INTERNET APPLICATIONS HOSTING SERVICES--hosting, monitoring and management of Internet-based applications; - VIRTUAL PRIVATE NETWORKS--a secure seamless network connecting a company's remote offices, employees and customers via our CC/vpn product; - UNIFIED MESSAGING--remote access to faxes, paging messages and e-mail messages through a single Internet application; and - TOTAL MANAGED BACKUP AND RECOVERY SERVICES--Internet-enabled backup and recovery services for a company's data network through off-site data storage. As of December 31, 1999, we provided Internet access and enhanced products and services to approximately 300 enterprise customers, of which approximately 275 were small and medium sized enterprises, and approximately 15,800 dial-up customers in the mid-Atlantic area. We charge a fee to our customers for our products and services, including Internet access services. As of December 31, 1999, the number of our Web hosting customers was approximately 4,400. We also provide Web server colocation services, which includes necessary floor space, electrical and environmental control, physical and electronic security, Internet bandwidth, monitoring and maintenance to customers who wish to outsource their Web site or application site servers to a service provider. We have developed a highly reliable and scalable network architecture that is designed to be efficiently deployed and operated in each of our target markets. Our network architecture is designed around our customer network facilities, which are high capacity data centers that provide our customers with not less than two direct connections to the Internet as well as access to our enhanced products and services. Each customer network facility is connected to our centralized network operations center. We currently have seven customer network facilities in operation servicing the regions in and around Allentown, Pennsylvania, Harrisburg, Pennsylvania, Basking Ridge, New Jersey, Holland Township, New Jersey, and Jersey City, New Jersey, and the secondary markets surrounding Baltimore, Maryland and Philadelphia, Pennsylvania. We are in the process of constructing three additional customer network facilities to service Scranton/Wilkes Barre, Pennsylvania, Pittsburgh, Pennsylvania, and the secondary market surrounding Washington, D.C. OUR CUSTOMERS We target primarily small and medium sized enterprise customers located in selected high growth secondary markets that generally have less than 100 employees and annual revenues of less than $100 million. Our target markets are typically smaller than the 100 most populated U.S. metropolitan markets. We select these markets based upon specific criteria, such as the density of target customers, expected population and economic growth and existing competitive factors. Small and medium sized enterprises are often concentrated in these markets to avoid the higher cost associated with locating in a metropolitan area. We target small and medium sized enterprises because, based upon our experience, we believe that: - These enterprises increasingly need high-speed data and Internet connections to access business information and to communicate more effectively with employees, customers, vendors and business partners. - A relatively small percentage of these enterprises currently utilize the Internet. This number is increasing rapidly. The small and medium sized enterprise segment of the Internet industry is growing quickly. According to International Data Corporation, Web-related expenditures by small businesses in the United States are expected to grow from $9.6 billion in 1999 to over $32 billion by 2003. - Many of these enterprises lack the resources and expertise to develop, maintain and expand the facilities and network systems necessary for successful Internet operations. - These enterprises often prefer an Internet service provider with locally-based personnel who are available to assist in developing and implementing their growing use of the Internet and to respond to technical problems in a timely manner. - These enterprises rely more heavily on their Internet service provider than larger enterprises. Although our primary business strategy is to target small and medium sized enterprises, we currently derive a significant portion of our revenues from a small number of our business customers that are not small and medium sized enterprises. OUR GROWTH STRATEGY Our goal is to be the premier provider of Internet access and enhanced Internet products and services to small and medium sized enterprises in our target markets. Key elements of our strategy include: - replicating our model rapidly in selected secondary markets; - leveraging customer relationships to market enhanced services; - leveraging our centralized sales and marketing operations to take advantage of economies of scale; and - entering into strategic relationships and making selected acquisitions. Our headquarters are located at Two Courtney Place, Suite 130, 3864 Courtney Street, Bethlehem, Pennsylvania 18017 and our telephone number is (610) 266-6700.
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+PROSPECTUS SUMMARY eMERGE INTERACTIVE, INC. OVERVIEW We are a business-to-business electronic commerce company combining content, community and transaction services to create an online marketplace for the cattle industry. We offer our products and services to cattle industry participants through our family of integrated Web sites, our proprietary information management application and our direct sales force. Our products and services are designed to create an efficient market for the purchase and sale of cattle and to improve quality and productivity in the cattle industry. Our current products and services include: - Livestock procurement services consisting of cattle sales and auctions; - Daily performance analyses of a customer's feedlot operations; - Comparative cattle industry analysis and feedlot operations benchmarking studies; - Cattle inventory management tools; and - Livestock health management and quality enhancement products. THE ONLINE LIVESTOCK OPPORTUNITY We believe that the production chain of the cattle industry, which includes cattle producers, feedlots, packers and suppliers, contains inefficiencies that reduce animal health and value. These inefficiencies, which include excessive animal transportation and handling, result in additional transaction costs and reduced beef quality. Further, we believe that inadequate access to current and accurate data and a lack of integrated information management tools have limited the ability of industry participants to optimize their operating results and performance. Due to its functionality, scalability and accessibility, the Internet is emerging as a single destination for commerce and information related to the livestock industry. Many of the variables that affect beef quality can be addressed by using the Internet's open architecture, universal accessibility and ability to provide more timely and comprehensive information. According to Forrester Research, business-to-business electronic commerce in the United States is expected to grow from $43.0 billion in 1998 to $1.3 trillion in 2003. THE eMERGE INTERACTIVE EXPERIENCE We offer commerce, information and technology to cattle industry participants. Our complementary products and services are designed to reduce inefficiencies throughout the cattle production chain, improve cattle quality and improve overall productivity in the cattle industry. Our current products and services include the following: - Cyberstockyard.com, our online cattle sales and auction services Web site, allows our customers to participate in our live cattle sales and auctions, thereby providing efficient and effective access to an inventory of cattle by directly connecting buyers and sellers of cattle. We believe a less fragmented market for cattle sales may reduce the excessive handling of cattle that results from transportation and commingling during transactions, thereby reducing animal stress, which can lead to improved cattle quality. In addition, by reducing the need for multiple transactions, we seek to lower overall transaction costs associated with cattle sales. - The Feedlot Information System, our cattle information management product, is designed to assist in the effective daily management of our customers' cattle operations. Using our proprietary information management application, subscribing feedlot customers transmit raw operating data to us on a daily basis over the Internet. We then use each subscribing customer's raw data to compile customer-specific information and performance data and analyses, such as feed consumption data, feed- to-gain ratios and a comprehensive summary of health results, which we disseminate daily to that customer over the Internet. - PCC-online.com, our Professional Cattle Consultants service, is designed to provide our customers with national, regional and customer-specific industry analysis services that are derived from our proprietary centralized database of cattle industry information. This information has been compiled from over 90 different feedlots over the last 26 years. These services include feed performance benchmarking services and monthly market analysis that we provide to subscribing customers on a periodic basis. PCC-online.com enables our feedlot customers to compare the performance of their feedlot to the average performance of other feedlots in our database. - NutriCharge, our therapeutic product for livestock, is a restorative feed supplement designed to reduce the effects of stress on the animals caused by transportation, handling and commingling. We sell our NutriCharge product over our Web sites and through our direct sales force. Our customers can access our family of integrated Web sites through our platform site, CattleInfoNet.com. This industry-specific Web site features general industry information, such as current industry news, links to commodities pricing and weather updates, as well as personalized information based upon customers' individual preferences and geographic location. CattleInfoNet.com also provides customers with an online community to facilitate the exchange of information among livestock producers, feedlots and packers and to provide access to our in-house cattle industry experts. FINANCIAL INFORMATION We currently derive our revenue from: - Purchasing and selling cattle through our online cattle sales and auction services, which accounted for approximately 96% of our revenues in 1999; - Subscription fees for our PCC-online information management services, which we provide over the Internet and through our periodic marketing reports and newsletters; and - Sales of our proprietary products. You should be aware that we incurred net losses of approximately $7.8 million for the year ended December 31, 1998 and approximately $10.7 million for the nine months ended September 30, 1999, resulting in an accumulated deficit of approximately $27.5 million at September 30, 1999. We expect to continue to incur substantial losses in the future related to expanding our network, expanding our product and service offerings, establishing brand recognition and upgrading and enhancing our technology. ------------------------ We are a Delaware corporation originally incorporated on September 12, 1994 under the name Enhanced Vision Systems, Inc. On June 11, 1999, we changed our name to eMerge Interactive, Inc. Our principal executive offices are located at 10315 102nd Terrace, Sebastian, Florida 32958 and our telephone number is 561-589-5310. THE OFFERING Class A common stock offered by: eMerge Interactive.......................... 6,500,000 shares The Selling Stockholders.................... 1,500,000 shares Common stock to be outstanding after the offering......................................... 32,232,902 shares Use of proceeds.................................. For repayment of debt, working capital and general corporate purposes, including sales and marketing expenditures, research and development expenditures and capital expenditures. See the section entitled Use of Proceeds. Proposed Nasdaq National Market symbol........... EMRG In addition to the 32,232,902 shares of common stock to be outstanding after this offering, there are: - 2,769,116 shares of class A common stock issuable upon the exercise of outstanding options granted under our equity compensation plans as of December 31, 1999 at a weighted average exercise price of $2.93 per share, of which options to purchase 761,045 shares of class A common stock were exercisable at a weighted average exercise price of $1.68 per share; - 1,597,875 additional shares of class A common stock available for issuance under our 1996 and 1999 equity compensation plans as of December 31, 1999; and - 1,138,889 shares of class B common stock issuable on the exercise of a warrant that will be exercisable upon consummation of this offering at an exercise price equal to the initial public offering price. For a description of our equity compensation plans, please see the section entitled Management -- Equity Compensation. SAFEGUARD SUBSCRIPTION PROGRAM As part of this offering, we are offering shares of our class A common stock to shareholders of Safeguard Scientifics, Inc. that owned at least 100 shares of Safeguard common stock on October 20, 1999 in the Safeguard Subscription Program. The program is described in greater detail in the section of this prospectus entitled Plan of Distribution -- Safeguard Subscription Program. ------------------------ Unless otherwise noted, the information in this prospectus takes into account the conversion of preferred stock into shares of common stock, which will automatically occur immediately before this offering is completed. Each outstanding share of series A preferred stock, series B preferred stock and series C preferred stock will convert into 1.25 shares of class A common stock and each outstanding shares of series D preferred stock will convert into 1.25 shares of class B common stock. All shares offered by this prospectus are shares of class A common stock. The holders of class A common stock are entitled to one vote per share. Holders of our class B common stock are entitled to two and one-half votes per share. Unless otherwise indicated, the references to common stock in this prospectus refer to both our class A and class B common stock. The information in this prospectus also takes into account a 5-for-4 common stock split which was authorized by the Company's Board of Directors on December 6, 1999 and was effective on December 23, 1999. The references to Safeguard in this prospectus refer to Safeguard Scientifics, Inc. and its affiliates. The information throughout this prospectus also assumes that all of the shares offered in the Safeguard Subscription Program are purchased by shareholders of Safeguard Scientifics, Inc. and, as a result, no shares are shown as purchased by Safeguard under the Standby Stock Purchase Agreement. In addition, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option. Please see the section entitled Capitalization for more information regarding the outstanding shares of our common stock and options to purchase our common stock. SUMMARY CONSOLIDATED FINANCIAL DATA The following table summarizes consolidated statements of operations data for our business. The pro forma consolidated statements of operations data gives effect to our acquisition of CIN, LLC and Professional Cattle Consultants, L.L.C. as if we had consummated these acquisitions at the beginning of each period. Cyberstockyard, Inc. is not included because the pro forma effects are not significant. We acquired CIN, LLC in February 1999 for an aggregate purchase price of approximately $2.3 million, which consisted of cash, shares of our class A common stock, assumption of liabilities, future contingent payments relating to sales of products over the CIN Web site and transaction costs. We acquired Professional Cattle Consultants, L.L.C. in May 1999 for an aggregate purchase price of approximately $1.8 million, which consisted of cash, the assumption of liabilities and transaction costs. We acquired Cyberstockyard, Inc. in March 1999 for an aggregate purchase price of approximately $542,000, which consisted of shares of our class A common stock and transaction costs. Business activities related to our continuing operations began on January 1, 1997. From our inception in 1994 until January 1997, our business activities related to the development and commercialization of infrared products focused on the transportation industry, primarily the maritime transportation industry. The historical data for the nine months ended September 30, 1998 and the pro forma data for the year ended December 31, 1998 and the nine months ended September 30, 1999 are unaudited. <TABLE> <CAPTION> NINE MONTHS YEAR ENDED NINE MONTHS ENDED YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, ----------------- ------------------ 1998 1999 1997 1998 1998 1999 PRO FORMA PRO FORMA ------- ------- ------- -------- ------------ ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenue............................ $ -- $ 1,792 $ 1,106 $ 18,339 $ 2,283 $ 18,505 Cost of revenue.................... -- 2,623 1,629 18,283 2,801 18,354 Operating expenses................. 1,356 4,769 3,187 10,296 6,266 10,784 Interest expense/other income, net.............................. 141 332 231 443 315 454 ------- ------- ------- -------- ------- -------- Profit (loss) from continuing operations....................... $(1,497) $(5,932) $(3,941) $(10,683) $(7,099) $(11,087) ======= ======= ======= ======== ======= ======== Profit (loss) from continuing operations per common share -- basic and diluted................ $ (3.91) $ (1.36) $ (0.67) $ (1.59) $ (1.39) $ (1.62) ======= ======= ======= ======== ======= ======== Weighted average number of common shares outstanding -- basic and diluted.......................... 382 4,357 5,846 6,710 5,107 6,854 ======= ======= ======= ======== ======= ======== </TABLE> The following table summarizes our balance sheet data as of September 30, 1999. The unaudited pro forma consolidated balance sheet data give effect to: - The issuance of 4,555,556 shares of series D preferred stock and a warrant to purchase 1,138,889 shares of class B common stock at an exercise price equal to the initial public offering price, for $38.8 million ($18.0 million of cash and a $20.8 million note receivable) under a securities purchase agreement dated October 27, 1999, and the application of a portion of the proceeds from that agreement which repaid indebtedness to XL Vision of approximately $4.5 million; - The issuance of 500,000 shares of class A common stock in the concurrent private placement; - The automatic conversion of all outstanding shares of series A, series B, series C and series D preferred stock into shares of our common stock, which will occur immediately prior to the consummation of the offering; - The termination of the redemption right relating to 62,500 shares of class A common stock, which will occur immediately prior to the consummation of the offering; and - The repayment of $1,400,000 of a note payable to Turnkey Computer Systems, Inc., which is due upon the completion of this offering. The unaudited pro forma as adjusted consolidated balance sheet data below give effect to: - The events described in the five preceding paragraphs; and - The sale of 6,500,000 shares of class A common stock in this offering and our application of the estimated net proceeds from the sale of these shares, as described in the section entitled Use of Proceeds. <TABLE> <CAPTION> SEPTEMBER 30, 1999 ------------------------------------ PRO FORMA AS ACTUAL PRO FORMA ADJUSTED ------- --------- ------------ (IN THOUSANDS) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash........................................... $ 1,650 $13,750 $ 83,726 Total assets................................... 16,229 28,329 97,563 Total indebtedness............................. 15,133 9,233 -- Total stockholders' equity..................... (3,907) 14,499 92,966 </TABLE> Total indebtedness as of September 30, 1999 includes amounts due to XL Vision totaling $6.1 million and to Safeguard totaling $7.3 million. We intend to use a portion of the net proceeds from this offering to pay in full amounts due to XL Vision and Safeguard. As of December 31, 1999, approximately $1.6 million was owed to XL Vision after repayment of $4.5 million with the net proceeds from the sale of series D preferred stock and a warrant to purchase 1,138,889 shares of class B common stock to Internet Capital Group, Inc.; the remaining $1.6 million will be paid with a portion of the net proceeds from this offering. The amount owed to Safeguard as of December 31, 1999 was approximately $10.3 million, and is to be repaid with the net proceeds of this offering. Safeguard owns approximately 14% of the outstanding common stock of Internet Capital Group, Inc., and owns approximately 55% of the outstanding capital stock of XL Vision.
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+PROSPECTUS SUMMARY This section is a summary and does not contain all of the information that will be important to you. You should also read the more detailed information regarding our company, including the "Risk Factors" section and our financial statements, and the notes to those statements appearing elsewhere in this prospectus, before deciding to invest in shares of our common stock. Moai Technologies, Inc. We are a leading provider of negotiated eCommerce solutions for online auctions, online procurement and eMarketplaces. Negotiated eCommerce involves the buying and selling of goods and services online through flexible transaction models that change over time based on multiple terms such as price, condition of goods, warranty and shipping costs. Our solutions address the unique challenges faced by companies looking to initiate or expand their eCommerce initiatives in the technologically complex and rapidly changing Internet business climate. We provide companies doing business online with a comprehensive eCommerce solution featuring sophisticated negotiated eCommerce capabilities designed to help them increase revenues and market share, improve business operations efficiency, and engage and retain customers. In addition, our solution is rapidly deployable, easily integrated into existing business processes, customizable and built on a scalable and robust architecture. Our customers operate in a wide range of vertical markets, including computer and high tech, transportation and logistics, wholesale distribution and manufacturing. While our primary focus is on customers in the business-to- business market, we also have customers in the business-to-consumer and consumer-to-consumer markets. The Internet's emergence as a highly efficient medium through which companies can interact and transact commerce, often referred to as business-to- business eCommerce, has fundamentally changed the way that many companies conduct business with each other. By overcoming geographic constraints and enabling the dissemination of information about products and services, the Internet is creating new business opportunities and challenges. To compete in this rapidly-evolving market, many businesses today face the strategic imperative of embracing eCommerce initiatives. With so many new entrants, eCommerce is rapidly evolving from its early days of online catalogs and simple storefronts. New and more sophisticated forms of business-to-business eCommerce are emerging and are prompting companies to seek competitive advantage and to expand their business opportunities by offering differentiated and unique online services. In particular, many companies today are supplementing their traditional operations with online auctions, online procurement and, increasingly, eMarketplaces. Online auctions. Online auctions allow sellers to obtain demand-driven pricing in eCommerce transactions. This typically involves a standard auction format where multiple buyers submit bids to purchase an item offered by a single seller. The price increases with each subsequent bid and the auction winner is decided when the seller accepts the bid with the highest price and/or the best other terms. Online procurement. Online procurement allows a single buyer to interact with multiple sellers during a single transaction to achieve the most favorable terms. This typically involves a buyer who makes a request to buy a particular item online with multiple sellers offering to sell the item in a reverse auction format. In a reverse auction format, the price declines with each subsequent offer and the auction winner is decided when the buyer ultimately accepts the offer with the lowest price and/or the best other terms. eMarketplaces. eMarketplaces allow multiple sellers and buyers to transact business at a comprehensive trading hub designed to efficiently manage transactions and services among buyers and sellers. These marketplaces typically involve communities of buyers and sellers who negotiate and trade online based on a bid and ask format, similar to a stock exchange. Our LiveExchange product suite, comprised of LiveExchange Enterprise and LiveExchange Marketplace, is a customer-focused, comprehensive solution for online auctions, online procurement and eMarketplaces. We offer our solutions directly through our sales force and indirectly through our relationships with application service providers, vertical solution providers and resellers. In addition, our relationships with systems integrators, technology companies and consulting firms strengthen our technological capabilities and provide us access to additional customers. We also offer our customers a range of services that enable them to rapidly integrate and deploy our products. Our objective is to be the premier provider of negotiated eCommerce solutions for online auctions, online procurement and eMarketplaces. Key elements of our strategy include: . expanding and leveraging our diverse and fast growing customer base; . expanding and leveraging our base of strategic relationships; . extending our technological leadership; and . expanding our international presence. Corporate Information We were incorporated in Colorado in October 1995 and reincorporated in California in June 1997. We intend to reincorporate in Delaware prior to the completion of this offering. Our principal executive offices are located at 25 Lusk Street, San Francisco, CA 94107. Our telephone number at that location is (415) 625-0601. Information contained in our web site at www.moai.com does not constitute a part of this prospectus. The Offering The following information assumes that the underwriters do not exercise their option to purchase additional shares in the offering. See "Underwriting." <TABLE> <C> <S> Common stock offered by Moai Technologies, Inc...... shares Common Stock to be outstanding after this offering.. shares Use of proceeds..................................... For working capital and general corporate purposes, funding operating losses, product development, capital expenditures, expanding our sales and marketing organization, and any acquisitions of complementary products, technologies and businesses. Proposed Nasdaq National Market symbol.............. MOAI </TABLE> The above information is based on 27,510,762 shares outstanding as of December 31, 1999 and is presented on a pro forma basis, after giving effect to our issuance of 3,745,318 shares of Series D preferred stock issued in the first quarter of 2000, our issuance of 583,334 shares of Series A preferred stock upon exercise of warrants in January 2000, and our expected issuance of 262,266 shares of Series D preferred stock upon exercise of warrants prior to or upon the closing of this offering. The information above excludes the following shares: . 2,847,972 shares issuable upon exercise of outstanding options at a weighted average exercise price of $0.36 per share; . 156,630 shares issuable upon exercise of outstanding warrants at a weighted average exercise price of $0.56 per share; and . an aggregate of 639,338 shares available for future grant under our 1997 stock plan. Subsequent to December 31, 1999, we increased the number of shares of common stock reserved under our 1997 stock plan by 4,000,000 shares and reserved an aggregate of 9,850,000 shares under our 2000 stock plan, 2000 executive stock incentive plan, 2000 directors' stock option plan and 2000 employee stock purchase plan. See "Management--Stock Plans" and Notes 9 and 11 of Notes to Financial Statements. Subsequent to December 31, 1999, we issued options to purchase 2,098,096 shares of common stock under our 1997 stock plan and our 2000 executive stock incentive plan and warrants to purchase 61,210 shares of Series D preferred stock. Other Information Except as otherwise indicated, information in this prospectus is based on the following assumptions: . the automatic conversion of all outstanding shares of preferred stock into shares of common stock on a one-for-one basis upon the closing of this offering; . no exercise of the underwriters' over-allotment option; . our reincorporation into Delaware prior to the closing of this offering; and . the 2-for-1 forward split of our preferred and common stock effected on January 14, 2000. Summary Financial Data The summary table sets forth a summary of our statement of operations data for the periods presented, and should be read in conjunction with our financial statements and the related notes included elsewhere in this prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Figures in the Statement of Operations table below are in thousands, except per share figures. <TABLE> <CAPTION> Period from October 4, 1995 (Inception) through Year ended December 31, December 31, ------------------------- 1996 1997 1998 1999 --------------- ------ ------- -------- <S> <C> <C> <C> <C> Statements of Operations Data: Revenues........................... $ -- $ 60 $ 60 $ 1,164 Cost of revenues (includes $339 of stock-based compensation in 1999)............................ -- 6 29 1,815 ----- ------ ------- -------- Gross profit (loss)................ -- 54 31 (651) Operating expenses (includes $1,211 of stock-based compensation in 1999)............................ 88 284 2,321 13,777 ----- ------ ------- -------- Loss from operations............... (88) (230) (2,290) (14,428) Interest and other income (expense), net................... 134 (5) 49 188 ----- ------ ------- -------- Net income (loss).................. $ 46 $ (235) $(2,241) $(14,240) ===== ====== ======= ======== Net income (loss) per share: Basic and diluted................. $0.01 $(0.14) $ (0.75) $ (3.12) ===== ====== ======= ======== Weighted average shares........... 3,960 1,730 2,984 4,559 ===== ====== ======= ======== Proforma net loss per share (unaudited): Basic and diluted................. $ (0.69) ======== Weighted average shares........... 20,633 ======== </TABLE> - -------- See Note 1 of Notes to Financial Statements for an explanation of the method used to determine the number of shares used in computing pro forma basic and diluted net loss per share. The following table sets forth a summary of our balance sheet data as of December 31, 1999: . on an actual basis; . on a pro forma basis, after giving effect to our issuance of 3,745,318 shares of Series D preferred stock in the first quarter of 2000, our issuance of 583,334 shares of Series A preferred stock upon exercise of warrants in January, 2000, our expected issuance of 262,266 shares of Series D preferred stock upon exercise of warrants prior to or upon the closing of this offering, and the automatic conversion of all then- outstanding shares of preferred stock into 24,568,988 shares of common stock upon the closing of this offering; and . on a pro forma as adjusted basis, after giving effect to our sale of shares of common stock at an assumed initial public offering price of $ per share in this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses that we expect to pay in connection with this offering, and the authorization of 150,000,000 shares of common stock and 10,000,000 shares of preferred stock upon the closing of the offering. <TABLE> <CAPTION> As of December 31, 1999 ------------------------------- Pro Forma Actual Pro Forma As Adjusted -------- --------- ----------- (unaudited) (in thousands) <S> <C> <C> <C> Balance Sheet Data: Cash, cash equivalents and short-term investments................................. $ 6,391 $38,667 $ Working capital............................... 3,720 35,996 Total assets.................................. 10,912 43,188 Capital lease obligations, long-term.......... 355 355 355 Mandatorily redeemable convertible preferred stock....................................... 20,645 -- -- Total stockholders' equity (deficit).......... (14,890) 38,031 </TABLE>
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and may not contain all of the information that investors should consider before investing in the common stock of Velocity.com. Investors should read the entire prospectus carefully. Velocity.com We develop, and deploy over the Internet, software applications that help healthcare clinics and physician group practices process clinical information and manage the day-to-day operations of their businesses. Our customers can access and use our software applications over the Internet or their local or private information networks. We charge our customers a monthly subscription fee for these applications. We rely on a third party to provide the application hosting, Internet infrastructure and data centers necessary to deploy our applications over the Internet. The business of providing software applications over the Internet for a monthly fee is known as the "application service provider" or "ASP" business. We currently have developed ASP applications in three areas: disease management and clinical drug trials recruitment, which were first implemented in February 1999, and credentialing, which was developed in November 1999. We are developing applications designed to manage all elements of the business and clinical processes of our customers within a single integrated system. The growth of the managed care, risk sharing and other alternative payment and reimbursement mechanisms, increased government regulation and the rise of healthcare delivery networks have increased the need for information technology products and services. In order to reduce unnecessary spending and manage costs while delivering quality care, healthcare providers are increasingly demanding software solutions that enable them to effectively extract and analyze data located throughout their enterprises, measure clinical results, evaluate operational efficiency and support process improvement. The Internet has emerged as an accessible, low-cost and flexible means of accessing and distributing information, making it particularly well-suited for deploying software solutions for the healthcare industry. We believe that providing software applications over the Internet for a monthly fee addresses many of the shortcomings of traditional healthcare information technology. Customers rent, rather than own, the applications they require, reducing the capital commitment necessary for information technology and reducing the need for a dedicated staff of information technology personnel. Our ASP applications are built using a technology we created that represents a major change in the way software is built and deployed. Traditionally, software has been built as a linear "program" using a programing language called "code." Building an application with code and modifying it after it is built are time-consuming and expensive processes. Software can also be structured in a non-linear architecture using what is known as "object- oriented" technology which requires a less time-consuming and expensive process. Until now, object-oriented software has been built with both object- oriented technology and linear programming using code. We have developed a new object-oriented technology, which we refer to as the Organic Architecture, that allows us to create applications without any code or linear programming. We have applied for five patents on our technology and have received a Notice of Allowance from the United States Patent and Trademark Office on each of the first three applications. All our ASP applications are built on our CoreModel, which is a representation of the clinical and business processes in the healthcare industry. To develop our CoreModel and applications, we selectively acquired companies with expertise in particular areas of healthcare. These acquisitions also provided us with traditional code-based legacy software products and related service capabilities, customers and revenues. We intend to phase out sales of these legacy products and related services, which historically represented substantially all of our revenues, while simultaneously selling our ASP applications as upgrades to our legacy products. Our objective is to become the leading healthcare ASP serving clinics and group practices by capitalizing on our early market entrance, extending our technology and continuing to implement a subscription-based business model that generates recurring revenue. We intend to achieve this objective by: . leveraging our proprietary technology platform by rapidly developing additional applications, functions and features; . achieving rapid market penetration by focusing on customers within our target market segments and cross-selling our ASP applications to our existing base of customers; and . enhancing our capabilities by forming strategic alliances that provide us with specific expertise and access to new customer channels. Our ASP applications provide the following advantages: Comprehensive. Our applications are designed to enable our customers to rely on us as the single source for their software, whether these applications are deployed over the Internet or their own local or private information networks. Cost-effective. Our applications eliminate the need for our customers to incur significant capital expenditures for hardware, operating systems and application software and significantly reduce the costs for technical support and training. Adaptable. Our applications are built with flexible links between data sets instead of code, which makes them easier and less expensive to tailor to accommodate practice variations and workflow of each user. Integrated. Information and applications are stored on a single remote database and can be accessed simultaneously by multiple users in geographically dispersed locations. In addition, our ASP applications are scalable, modular, secure and easy to use. As part of our strategy, we have entered into relationships with strategic partners for distribution, consulting and implementation services, Internet infrastructure and application hosting. Our initial ASP application, which manages patient-reported health and clinical data, is being distributed as part of our strategic relationship with Pfizer Health Solutions Inc, with whom we have had a relationship since 1997. We also have entered into an alliance with Superior Consultant Holdings Corporation. Under this agreement, Superior will introduce and outline the advantages of our ASP applications based on client interests, as well as provide systems integration, process improvement, consulting and implementation services to healthcare organizations. Superior is a leading provider of business solutions, including consulting, systems integration, e-health and outsourcing to the healthcare industry. Superior serves clients nationally and internationally and has over 1,500 professionals located throughout the United States. We also have entered into agreements with Conxion Corporation, which provides us with application hosting, Internet infrastructure and data centers. We depend on Conxion to provide these services and support the delivery of our software applications and do not intend to provide these services ourselves. Our business relationship with Conxion began in May 1997, and in April 1999 Conxion purchased $550,000 of our preferred stock. We were incorporated in California in January 1995 under the name Object Products, Inc. and reincorporated in Delaware in April 1996. The company changed its name to OrganicNet, Inc. in May 1999 and to Velocity.com, Inc. in January 2000. Our principal executive offices are located at 330 Townsend Street, Suite 206, San Francisco, California, 94107-1630. Our telephone number is (415) 495-4741. Our website is www.velocity.com. Information contained on our website is not a part of this prospectus. -------------- The terms "Velocity.com", "company", "we", "our" and "us" refer to Velocity.com, Inc. and its subsidiaries unless the context suggests otherwise. The term "you" refers to a prospective investor. Velocity.com, the Velocity.com logo, Organic Architecture, Object Products, CoreModel and Organic Browser are trademarks of Velocity.com, Inc. Each trademark, trade name or service mark of any other company appearing in this prospectus belongs to its holder. The Offering <TABLE> <C> <S> Shares offered by Velocity.com................ 3,000,000 shares Total shares outstanding after this offering.. 10,729,506 shares Use of proceeds............................... To repay short-term debt, including amounts owed to or guaranteed by certain of our directors, officers and stockholders, to continue development of our solutions and architecture, expand our sales and marketing efforts, expand our administrative infrastructure, acquisitions and for working capital and other general corporate purposes. Nasdaq National Market symbol................. VCTY </TABLE> The common stock to be outstanding after this offering is based on the shares outstanding as of February 29, 2000 and excludes: . 1,241,580 shares of common stock issuable as of February 29, 2000 upon the exercise of outstanding stock options issued at a weighted average exercise price of $4.15 per share under our stock option plans; . 2,918,931 shares of common stock reserved for issuance under our stock option plans as of February 29, 2000; . 300,000 shares of common stock reserved for issuances under our employee stock purchase plan as of February 29, 2000; . 14,880 shares of common stock reserved for issuance under stock options held by former PSI-Med Corporation optionholders as of February 29, 2000. If shares are issued upon exercise of such options, Velocity.com will remove that same number of shares from an escrow of shares to former PSI-Med shareholders to satisfy that obligation; and . the exercise of warrants for a total of 168,750 shares of common stock outstanding as of February 29, 2000. Except as otherwise indicated, information in this prospectus assumes the following: . the 0.56 for 1 reverse split of the outstanding shares of our capital stock; . the conversion of all outstanding shares of preferred stock into common stock upon consummation of this offering; . the filing of our amended and restated certificate of incorporation, the provisions of which are summarized in "Description of Capital Stock;" . no exercise of the underwriters' over-allotment option; and . shareholder approval of the 1999 Equity Incentive Plan and employee stock purchase plan. Risk Factors You should consider the risk factors before investing in Velocity.com's common stock and the impact from various events which could adversely affect our business. Summary Financial Data The following table summarizes our consolidated statements of operations for the years ended December 31, 1996, 1997, 1998 and 1999, as well as our unaudited pro forma combined statements of operations for the years ended December 31, 1998 and 1999 that gives effect to our acquisition of PSI-Med Corporation as if the acquisition occurred at the beginning of the periods presented. The unaudited pro forma information is not necessarily indicative of the results that would have occurred had the acquisition taken place as of the beginning of the periods presented, nor is it necessarily indicative of results that may occur in the future. The table also includes consolidated balance sheet data as of December 31, 1999 on an actual and pro forma as adjusted basis. See the consolidated financial statements and related notes included elsewhere in this prospectus. <TABLE> <CAPTION> Year Ended Years Ended December 31, December 31, -------------------------------------- -------------------- Pro Forma Pro Forma 1996 1997 1998 1998 1999 1999 ------- ------- ------- ----------- ------- ----------- (unaudited) (unaudited) (in thousands, except per share information) <S> <C> <C> <C> <C> <C> <C> Consolidated Statement of Operations: Revenue: License................ $ -- $ 424 $ 571 $ 1,087 $ 963 $ 1,262 Product development.... -- 1,375 565 565 337 337 Service................ 371 1,173 3,488 5,182 4,415 5,554 ------- ------- ------- ------- ------- ------- Total revenue.......... 371 2,972 4,624 6,834 5,715 7,153 ------- ------- ------- ------- ------- ------- Cost of revenue: License................ -- 475 756 756 845 890 Product development.... -- 320 209 209 79 79 Service................ 238 892 2,314 3,850 2,880 3,753 ------- ------- ------- ------- ------- ------- Total cost of revenue.. 238 1,687 3,279 4,815 3,804 4,722 ------- ------- ------- ------- ------- ------- Gross profit............ 133 1,285 1,345 2,019 1,911 2,431 ------- ------- ------- ------- ------- ------- Operating expense: Sales and marketing.... 24 1,395 1,644 1,812 1,215 1,277 Research and development........... 724 1,345 1,833 2,069 2,670 2,896 General and administrative........ 1,690 3,332 3,768 4,677 4,070 4,508 ------- ------- ------- ------- ------- ------- Total operating expense............... 2,438 6,072 7,245 8,558 7,955 8,681 ------- ------- ------- ------- ------- ------- Operating loss.......... (2,305) (4,787) (5,900) (6,539) (6,044) (6,250) Interest expense........ (9) (20) (93) (93) (141) (150) Other income (expense).. 7 13 (9) (95) 27 2 ------- ------- ------- ------- ------- ------- Loss before income taxes.................. (2,307) (4,794) (6,002) (6,727) (6,158) (6,398) Provision for income taxes.................. 4 6 4 5 5 5 ------- ------- ------- ------- ------- ------- Net loss................ $(2,311) $(4,800) $(6,006) $(6,732) $(6,163) $(6,403) ======= ======= ======= ======= ======= ======= Net loss per share: Basic and diluted...... $ (.80) $ (1.58) $ (1.97) $ (2.21) $ (2.00) $ (2.08) Weighted average shares outstanding: Basic and diluted...... 2,906 3,038 3,051 3,051 3,077 3,077 </TABLE> <TABLE> <CAPTION> As of December 31, 1999 --------------------------- Pro Forma Actual As Adjusted ----------- -------------- (unaudited) (in thousands) <S> <C> <C> Consolidated Balance Sheet Data: Cash and cash equivalents........................... $ 566 $ 25,322 Working capital (deficit)........................... (3,057) 21,999 Total assets........................................ 6,563 31,319 Total stockholders' equity (deficit)................ (856) 24,903 </TABLE> The preceding consolidated balance sheet data is shown on a pro forma as adjusted basis to give effect to: . the conversion of all outstanding shares of preferred stock into shares of common stock upon consummation of this offering; . the sale of 3,000,000 shares of common stock in this offering at an assumed initial public offering price of $10.00 per share, after deducting the underwriting discounts and commissions and estimated offering expenses; and . the use of proceeds of $2.75 million to repay notes payable in the amount of $1.3 million which existed at December 31, 1999, after consideration of expensing a $297,000 note discount upon payment, and $1,450,000 of debt incurred subsequent to December 31, 1999.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001093218_emed_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001093218_emed_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary contains basic information about eMed and this offering. It may not contain all the information that may be important to you. You should read the entire prospectus, including the financial statements and related notes, before making an investment decision. Except as otherwise noted, all information in this prospectus (1) assumes no exercise of the underwriters' over-allotment option and (2) assumes the conversion of all outstanding classes of preferred stock into common stock. Overview Our Company We provide Internet-based business services to health care professionals and others who require access to medical image information. Our offerings, in a cost-effective manner, significantly improve how physicians, health care professionals, payors and others use and share medical images. We believe our recently introduced eMed.net web service is the first to integrate and deliver over the Internet medical images with other clinical information and practice tools. eMed.net Internet-enables radiology groups and imaging departments by providing individualized websites for image distribution, physician practice facilitation, education, commerce and marketing. Customers can obtain the benefits of our eMed.net web service without replacing their existing communications infrastructure, imaging devices or film printer networks. We also offer communications infrastructure components to capture, compress, transmit, route, display and store medical images, including x-rays, MRIs, CTs and ultrasounds. In addition, we intend to offer our web services technology to other vendors to enable them to distribute medical images through their Internet-based health care applications under the brand name "Images by eMed". Our Market Opportunity Medical images and related information are utilized in forming patient diagnosis, care judgments, reimbursement decisions, consultations, research and education by a broad cross-section of health care professionals, payors and others. Based on historical data, we believe 350 million radiology studies, often consisting of multiple images, are conducted each year. Medical images are also used in a variety of other specialties, including dentistry. In addition to the 600,000 physicians and 140,000 dentists in the United States, there are payors and others who require access to medical images. Frequently, multiple parties at different locations simultaneously need to access the same medical images. The film and paper-based method for capturing, analyzing, distributing and storing medical images and associated medical reports is inherently inefficient. Traditional electronic solutions offered by others to address this inefficiency require significant initial capital outlays, are narrow in scope and are difficult to implement, resulting in limited adoption of these technologies. The Internet represents a significant advance in the technology available to health care professionals to decrease operating costs and improve the quality of the services they provide. We believe that physicians are increasingly using Internet-based medical applications. We believe these market dynamics, coupled with accelerated Internet use, will drive adoption of our Internet-based solutions. eMed Solutions We have developed Internet-based offerings which we believe are cost- effective, easy to use and provide our customers with increased efficiencies and greater revenue opportunities. We offer all of our web services and communications infrastructure on a subscription and transaction fee basis which permits customers to obtain the benefits of our offerings without the more significant initial capital outlays associated with one-time, up front purchases. Our offerings include: . eMed.net, introduced in December 1999, allows for secure delivery of medical images and reports over the Internet on individualized websites, which are designed, produced and hosted by eMed. . Images by eMed is the brand name under which we intend to offer our technology to other vendors to enable them to distribute medical images through their Internet-based health care applications. For example, we have entered into a letter of intent with rdental.com to establish an exclusive relationship under which we will enable rdental.com to distribute dental images over the Internet for both referrals and claims. . FrameWave is our suite of communications infrastructure offerings that capture, compress, transmit, route, display and store medical images. These offerings are sold on either a one-time or a subscription fee basis. Our Strategy Our objective is to become the leading provider of Internet-based medical image distribution and management services. Elements of our strategy to achieve this objective include: . Increasing market penetration of our eMed.net web service in radiology and other image-intensive health care applications . Pursuing strategic relationships with health care application service providers who lack Internet-based image distribution functionality . Expanding our web service offerings to include additional services, such as integrated transcription services, exam scheduling, secure email, literature search, and continuing medical education credit with group and personal links . Maintaining and expanding our technological expertise in web services and communications infrastructure Corporate History and Information Prior to 1996, our business consisted primarily of providing network management services that permit health care professionals to access, transmit and review medical images at remote locations. We began selling FrameWave communications infrastructure in late 1996 and introduced eMed.net, the first of our web services, in December 1999. Our headquarters are located at 25 Hartwell Avenue, Lexington, MA 02421. Until August 1999, we were known as ACCESS Radiology Corporation. Our telephone number is (781) 862-0000 and our internet website address on the Worldwide Web is www.eMed.com. The contents of our website are not part of this prospectus. eMed Technologies Corporation has registered or applied to register the names eMed, Images by eMed, eMed.net, Secure Desktop and FrameWave as trademarks. All other brand names or trademarks appearing in this prospectus are the property of their respective owners. The Offering <TABLE> <S> <C> Common Stock offered by eMed...... shares Common Stock outstanding after the offering......................... shares Use of Proceeds................... We estimate that the net proceeds from this offering, without exercise of the over- allotment option, will be approximately $ million. We intend to use these net proceeds to repay approximately $3.0 million of indebtedness and for general corporate purposes, including, capital expenditures, the expansion of our sales, marketing and development efforts and possibly acquisitions and partnerships. Risk Factors...................... See "Risk Factors" for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock. Proposed Nasdaq National Market symbol........................... "EMDT" </TABLE> The number of shares of common stock outstanding after the offering is based on the number outstanding as of January 31, 2000, and excludes: . 2,206,961 shares of our common stock subject to options outstanding as of January 31, 2000 at a weighted average exercise price of $1.80 per share; . warrants to purchase 522,440 shares of common stock at exercise prices from $0.02 to $1.20 per share and warrants to purchase 409,091 shares of Series J preferred stock outstanding as of January 31, 2000 at an exercise price of $1.10 per share. Upon completion of this offering, the warrants to purchase Series J preferred stock will become warrants to purchase 170,449 shares of common stock. SUMMARY FINANCIAL DATA (in thousands, except per share data) You should read the following summary financial data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and notes thereto included elsewhere in this prospectus. <TABLE> <CAPTION> Year Ended December 31, -------------------------------------------- 1995 1996 1997 1998 1999 ------- ------- ------- ------- -------- <S> <C> <C> <C> <C> <C> Statement of Operations Data: Revenue.......................... $ 466 $ 1,009 $ 8,027 $12,594 $ 23,571 Cost of revenue.................. (313) (1,404) (7,012) (8,976) (12,318) ------- ------- ------- ------- -------- Gross margin..................... 153 (395) 1,015 3,618 11,253 ------- ------- ------- ------- -------- Operating expenses: Research and development........ 239 610 1,300 2,362 3,364 Sales and marketing............. 571 1,319 2,912 3,498 5,313 General and administrative...... 1,476 1,331 1,982 2,722 4,346 Stock-based compensation........ -- -- -- -- 635 ------- ------- ------- ------- -------- Total operating expenses....... 2,286 3,260 6,194 8,582 13,658 ------- ------- ------- ------- -------- Loss from operations............. (2,133) (3,655) (5,179) (4,964) (2,405) Interest income (expense), net... (119) (70) (204) (106) (112) Other income (expense)........... 218 (21) (242) (43) (44) ------- ------- ------- ------- -------- Net loss......................... $(2,034) $(3,746) $(5,625) $(5,113) $ (2,561) ======= ======= ======= ======= ======== Basic and diluted net loss per share........................... $ (5.08) $ (8.39) $(12.45) $(11.70) $ (5.12) Shares used in computing basic and diluted net loss per share.. 400 446 452 437 500 Unaudited pro forma basic and diluted net loss per share...... $ (0.31) Shares used in computing unaudited proforma basic and diluted net loss per share...... 8,356 </TABLE> <TABLE> <CAPTION> As of December 31, 1999 -------------------------- Actual As Adjusted ----------- -------------- <S> <C> <C> Balance Sheet Data: Cash and cash equivalents............................ $ 4,464 $ Working capital...................................... 3,262 Total assets......................................... 13,277 Total long-term liabilities.......................... 79 Total stockholders' equity........................... 4,424 </TABLE> The as adjusted balance sheet data and pro forma per share data reflects the conversion of all preferred stock into common stock. The as adjusted balance sheet data also reflects the sale by us of shares of common stock at an assumed public offering price of $ per share in the offering, after deducting the underwriters' discount and our estimated offering expenses.
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding us and our common stock being sold in this offering, especially "Risk Factors" beginning on page 9 and our consolidated financial statements and the notes thereto, before deciding to invest in our common stock. Except as otherwise noted, all information in this prospectus assumes no exercise of the underwriters' over-allotment option. We are a broadband telecommunications company offering automated web design and web hosting, high-speed data and voice services. Our goal is to become the leading single-source, web-based communications company serving small and medium-sized businesses in the southeastern United States. Our principal product is our Broadband Bundle, which provides automated web design and web hosting, high-speed data and Internet access using digital subscriber line, or DSL, technology and local and long distance voice services. The Broadband Bundle is sold for a single price based on the customer's selected bandwidth capacity and number of access lines. We believe we are the only company providing this all-inclusive bundle in our markets. Our Broadband Bundle has been designed to increase customer loyalty and provide a cost-effective, web-based communications solution to our target customers. To complement our Broadband Bundle we will offer carrier grade data centers for dedicated web hosting and bandwidth connectivity in 33 of our 36 target markets by the end of 2001. We also offer network and data integration services, such as dedicated server colocation, and local area network and wide area network solutions, as well as on-premise voice and data equipment, hubs, routers and cabling services. As part of our Broadband Bundle, we offer our proprietary web architecture service, TriEWeb, that enables our customers to design and maintain their own websites using our template-driven web design Internet application. Our customers can edit their web sites and update e-mail addresses through a secure on-line, interactive control panel 24 hours a day without contacting our customer care representatives. We also provide our customers with high-speed Internet connectivity through our DSL services, unlimited local service and 100 minutes of free long distance usage per line, as well as web hosting. We believe this affordable, scalable solution enables our small and medium-sized business customers to take advantage of web related and connectivity services more typically utilized by larger companies. Since we began offering the Broadband Bundle in January 2000, approximately 90% of our new customers have entered into at least one-year contracts for service. At March 31, 2000, approximately 50% of our Broadband Bundled customers had three-year contracts. We also intend to release the second version of TriEWeb in third quarter 2000, to allow our customers to develop e-commerce applications and conduct transactions using their websites. We currently offer our products and services in six markets across South Carolina, North Carolina and Georgia. We intend to serve an additional 18 markets throughout nine southeastern states by the end of 2000, and a total of 36 markets by the end of 2001. We expect our total network footprint to cover more than 70% of BellSouth's business access line market, encompassing 5.4 million business access lines. We believe our network will ultimately cover over 90% of the business access lines in our target markets. We believe the number and size of our colocations positions us with the broadest colocation foot print in the BellSouth region. Our scale and unified network design of converged voice and data services allow us to accommodate future access line growth in our target markets both rapidly and cost-effectively. At March 31, 2000, we had: - secured 256 central office colocation facilities representing approximately 50,000 square feet of caged-in space and passing over 10 million access lines; - installed voice and data equipment in 82 of these colocation facilities, with 47 others under construction; and (Graphical depiction of TriVergent's network, overlayed on a map of the southeastern United States. The map identifies the locations of our DMS sites, ATM sites and transmission facilities.) - deployed three asynchronous transfer mode, or ATM, switches, 2,400 route miles of lit fiber optic capacity, and three Nortel voice-switching platforms. Our network is designed to include six voice switches complemented by 33 ATM switches to provide our Broadband Bundle to our customers throughout the southeastern region. We currently have three voice switches installed and expect to install three more by the end of 2000 which will complete the voice switch deployment necessary to cover all of our currently planned markets. We intend to construct data centers in substantially all of our markets to house our ATM switches and provide dedicated and shared web hosting services to our customers. Because many of the traditional data service providers have targeted only the largest cities in our target market, we believe the market for data centers in small and medium sized cities in this region is currently underserved. We expect to house our carrier-grade data centers connected directly to our ATM switch. These data centers will have auxiliary battery and diesel power restoration, fire suppression, security clearance and access to customers' workstations and access to the Internet through our fiber network. We will offer our customers a complete solution that includes web hosting and high-speed Internet connections. We believe we will be first to market this service in many of our target markets. Since our inception, we have raised approximately $137 million in equity from a number of experienced investors in the telecommunications industry, including Moore Capital, Richland Ventures, Boston Millenia Partners, First Union Capital Partners, Bank of America Securities, CIT Group, TD Securities, CIBC, Southeastern Technology Fund, Wachovia Bank and Nortel Networks. Our management team, board of directors and affiliates have invested over $7 million in us. We also have a $120 million senior credit facility from a syndicate of financial institutions and a $45 million credit facility from Nortel Networks. BUSINESS STRATEGY We have been pursuing our current business strategy since February 1999. Prior to that time, our business strategy was to resell to residential customers local and long distance voice services. With the exception of our prepaid business, we discontinued marketing resold residential service in April 1999 and expect this business to decline over the next two years. Our current business strategy is to become the leading single-source, web-based communications company serving small and medium-sized businesses in the southeastern United States. To achieve this goal, we have developed the following business strategy: - Offer a Complete, Bundled Broadband Internet Communications Solution - Target Small and Medium-Sized Businesses in the Southeastern United States - Capitalize on First Mover Advantage in Bundled Services and Data Centers - Leverage Proven Distribution Channels - Capitalize on our Colocation Footprint - Implement Scalable and Integrated Back Office Systems - Leverage Management Expertise - Accelerate Growth and Expand Product Offering through Acquisitions In most of our target markets, we expect to have a locally based sales force led by a sales manager and a team of six to 40 account executives responsible for customer acquisition and retention in their market. We also intend to use third-party agents to enhance the reach of our direct sales force. We currently have developed strong relationships with voice and data equipment distributors located throughout the southeastern region of the United States, including those affiliated with Teleco, Inc. Our management team is led by Charles S. Houser, our Chairman and Chief Executive Officer, who has had a distinguished career in the telecommunications industry, including serving as: - chairman and chief executive officer of Corporate Telemanagement Group, Inc., or CTG, a switch-based long distance carrier acquired by LCI International, Inc.; - chief executive officer of Tel/Man, a switch-based long distance carrier; - chief operating officer of SouthernNet, a facilities-based long distance carrier that was acquired by MCI in 1989; and - chairman of Teleco, Inc. THE OFFERING The calculation of the number of shares outstanding after this offering includes the automatic conversion of all outstanding shares of preferred stock into common stock but does not reflect shares that may be issued upon the exercise of options and warrants. Unless otherwise specifically stated, information in this prospectus assumes the underwriters do not exercise their option to purchase additional shares in this offering. <TABLE> <S> <C> Common stock offered by us.................... shares Common stock outstanding after this offering................................ shares Use of proceeds............................... We plan to use the net proceeds from this offering: - for capital expenditures relating to the planned expansion of our network; - to fund operating losses during the rollout of services in new markets; and - for working capital and other general corporate purposes. See "Use of Proceeds." Dividend policy............................... We have never paid or declared any cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. We currently intend to retain all future earnings, if any, for use in the operation of our business and to fund future growth. Proposed Nasdaq National Market symbol........ TRIV </TABLE> - -------------- PRINCIPAL OFFICES We are a Delaware corporation. Our predecessor was a South Carolina corporation. Our principal executive offices are located at 200 North Main Street, Greenville, South Carolina 29601. Our telephone number is (864) 370-4500. SUMMARY CONSOLIDATED FINANCIAL DATA The following table sets forth our summary consolidated financial data for the periods indicated. The consolidated statement of operations data for the period from October 29, 1997 (date of inception) through December 31, 1997 and for the years ended December 31, 1998 and 1999 and the consolidated balance sheet data as of December 31, 1999 have been derived from our consolidated financial statements included elsewhere in this prospectus, which have been audited by KPMG LLP, independent public accountants, as indicated in their report included elsewhere in this prospectus. The results of our operations for the periods indicated are not necessarily indicative of the results of operations in the future. The as adjusted balance sheet data gives effect to the following as if each had taken place on December 31, 1999: - the issuance of Series C preferred stock in February and March 2000 for which we received total net proceeds of $67.1 million; - the automatic conversion of Series A, B and C preferred stock into shares of common stock and the issuance of shares of common stock in payment of dividends accrued on the Series A, B and C preferred stock through the closing of this offering; and - our receipt of net proceeds from the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and offering expenses. EBITDA, shown below under "Other Financial Data," consists of net loss before extraordinary item, excluding net interest, taxes, depreciation and amortization and noncash compensation expense. We have provided EBITDA because it is a measure of financial performance commonly used for comparing companies in the telecommunications industry in terms of operating performance, leverage and ability to incur and service debt. EBITDA provides an alternative measure of cash flow from operations as determined under generally accepted accounting principles. You should not consider it as a substitute for operating loss, as an indicator of our operating performance nor as an alternative to cash flows from operating activities as a measure of liquidity. We may calculate EBITDA differently from other companies. For further information, see our consolidated financial statements and related notes included elsewhere in this prospectus. You should read the summary consolidated financial data set forth below in conjunction with our consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. <TABLE> <CAPTION> PERIOD FROM OCTOBER 29 (INCEPTION ) THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, -------------------- -------------------------------- 1997 1998 1999 (IN THOUSANDS, EXCEPT SHARE DATA) <S> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues .............................................. $ -- $ 5,261 $ 25,037 Cost of services ...................................... -- 3,802 17,704 Selling, general and administrative ................... 40 12,166 23,523 Provision for uncollectible accounts .................. -- 1,976 7,285 Depreciation and amortization ......................... -- 150 1,318 Operating loss ........................................ (40) (12,833) (24,793) Net loss .............................................. (40) (12,723) (25,664) Net loss per common share ............................. (.01) (1.37) (2.60) OTHER FINANCIAL DATA: Net cash used in operating activities ................. $ (56) $(11,072) $(19,956) Net cash used in investing activities ................. -- 1,465) (38,764) Net cash provided by financing activities ............. 110 13,883 72,558 Capital expenditures .................................. -- 1,465 34,966 EBITDA ................................................ (40) (12,683) (23,475) <CAPTION> AS OF DECEMBER 31, 1999 -------------------------------------------------- ACTUAL AS ADJUSTED (IN THOUSANDS) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and investments ................ $ 17,928 $ Working capital ....................................... 5,485 Net property and equipment ............................ 44,057 44,057 Total assets .......................................... 67,277 Long-term debt ........................................ 18,200 18,200 Redeemable preferred stock ............................ 65,780 Stockholders' deficit ................................. (31,158) </TABLE>
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+SUMMARY THE ITEMS IN THE FOLLOWING SUMMARY ARE DESCRIBED IN MORE DETAIL LATER IN THIS PROSPECTUS. THIS SUMMARY PROVIDES AN OVERVIEW OF SELECTED INFORMATION AND DOES NOT CONTAIN ALL THE INFORMATION YOU SHOULD CONSIDER. THEREFORE, YOU SHOULD ALSO READ THE MORE DETAILED INFORMATION SET OUT IN THIS PROSPECTUS, INCLUDING THE FINANCIAL STATEMENTS. THE TERMS "WE" AND "CARLSON RESTAURANTS" MEAN CARLSON RESTAURANTS WORLDWIDE INC. AND ITS SUBSIDIARIES. THE TERM "CARLSON COMPANIES" MEANS CARLSON COMPANIES, INC. AND ITS SUBSIDIARIES. CARLSON RESTAURANTS WORLDWIDE INC. Carlson Restaurants is a global leader in the development, operation and franchising of casual dining restaurants, principally under the T.G.I. Friday's brand. Our T.G.I. Friday's system has grown since its inception in 1965 to become one of the largest casual dining restaurant companies worldwide. The T.G.I. Friday's system, which currently includes T.G.I. Friday's, Front Row Sports Grill and Friday's American Bar, includes 589 restaurants, with 142 restaurants located outside the United States. Of the 589 restaurants, 198 are owned and operated by us or operated by us under management agreements and 391 are operated by our global franchise network. As part of our growth strategy, we have developed or acquired seven additional restaurant concepts, totaling 30 company owned or operated and franchised restaurants. While we plan to focus our growth on the T.G.I. Friday's system, we also intend to selectively expand some of these innovative concepts based on strict performance criteria. Including these additional concepts, Carlson Restaurants' worldwide system currently includes over 600 company owned or operated and franchised restaurants located in 52 countries which generated system-wide sales of over $1.7 billion in fiscal 1999. Since the first T.G.I. Friday's opened in New York City in 1965, we have offered guests high quality, moderately priced, innovative menu and drink items served by a friendly, knowledgeable staff in a fun atmosphere. Our selection of approximately 100 menu items includes signature dishes such as our Jack Daniel's Grill items and Tex-Mex Tower, as well as a variety of other beef, chicken, seafood and pasta items. Our entrees are complemented by a wide assortment of appetizers, salads and desserts. Our menu variety, coupled with our extensive selection of creative adult beverages, enables us to enhance the appeal of our T.G.I. Friday's restaurants and attract guest traffic from lunch time through late evening. Our business strategy is to expand our position as a global leader of branded restaurants based on the following: - CAPITALIZE ON THE STRENGTH OF THE T.G.I. FRIDAY'S BRAND. As a global leader of branded restaurants in the casual dining industry, our business strategy is based on the continued investment in our successful brand. Through the development of innovative food items and creative adult beverages, and by using national advertising campaigns and our guest loyalty program, we believe that we will be able to differentiate ourselves from our competitors and continue enhancing the T.G.I. Friday's brand. - CONTINUE WORLDWIDE GROWTH OF THE T.G.I. FRIDAY'S SYSTEM. We intend to continue the domestic and international expansion of the T.G.I. Friday's system of restaurants by building upon our leadership position as one of the largest systems of casual dining restaurants worldwide. Our new unit development will focus on both company owned restaurants and restaurants owned by our strong global network of franchisees. Together with our franchisees, in fiscal 2000 we plan to open a total of 79 restaurants in the T.G.I. Friday's system. - CAPITALIZE ON OUR STRONG GLOBAL FRANCHISING NETWORK. Our development agreements with experienced multi-unit restaurant operators will continue to be a key component of our continuing expansion of the T.G.I. Friday's system. We currently have 44 domestic franchisees operating 249 restaurants and 43 international franchisees operating 142 restaurants. In addition to continuing the growth of our T.G.I. Friday's franchising system both domestically and internationally, we currently offer our international franchisees the opportunity to develop our Italianni's concept and plan to offer both our domestic and international franchisees the opportunity to develop additional concepts in the future. - PROVIDE AN EXCEPTIONAL DINING EXPERIENCE. We offer our guests an exceptional dining experience by providing innovative, cravable menu and drink items, coupled with efficient and friendly service in a comfortable, relaxing environment. We believe that our eleven consecutive quarters of increases in comparable restaurant sales at company owned or operated restaurants indicate our ability to consistently deliver exceptional value to our guests. - DELIVER ATTRACTIVE UNIT ECONOMICS. Our restaurants generate attractive unit level economics. We currently own or operate 44 restaurants that are similar in size to our 6,800 square foot prototype. We anticipate that restaurants to be developed based on the 6,800 square foot prototype will have average restaurant sales of approximately $3.1 million, average operating income of approximately $360,000, or 11.6% of restaurant sales, average cash investment of approximately $1.9 million and average cash flow of approximately $597,000, or 31.4% of our average cash investment. We have recently developed a smaller 5,600 square foot prototype which we expect to have average restaurant sales of approximately $2.8 million, average operating income of approximately $381,000, or 13.6% of restaurant sales, average cash investment of approximately $1.6 million and average cash flow of approximately $581,000, or 36.3% of our average cash investment. - UTILIZE OUR MANAGEMENT'S EXPERIENCE AND EXPERTISE. Our talented senior management team, led by Wallace B. Doolin who has over 30 years of experience in the restaurant industry, has extensive expertise in the operation of company owned or operated restaurants and the management of domestic and international franchisee networks. This expertise also extends to the development and implementation of multiple concepts across a broad range of dining segments. - ENHANCE GROWTH THROUGH ADDITIONAL CONCEPTS. While we plan to focus our growth on the T.G.I. Friday's system, we also intend to draw on our industry and operational expertise by selectively expanding certain of our additional concepts in order to capitalize on opportunities in attractive segments of the dining market. Several factors may pose obstacles to us in executing our business strategy and achieving our anticipated growth. The growth of our system of restaurants may be limited by an inability to locate and obtain suitable restaurant sites, construct and develop new restaurants in a timely and cost-efficient manner and recruit and retain qualified employees, including experienced management. In addition, we will need to identify and attract suitable franchisees in order to meet our desired restaurant expansion, particularly for our international growth. Carlson Restaurants was incorporated on December 13, 1990 as a Delaware corporation. Through our subsidiary, TGI Fridays Inc., we have been operating our T.G.I. Friday's system since 1965. TGI Fridays Inc. was a public company from 1983 until it was purchased by a wholly-owned subsidiary of Carlson Companies in 1990. Our principal executive offices are located at 7540 LBJ Freeway, Suite 100, Dallas, Texas 75251, and our telephone number is (972) 450-5400. CARLSON COMPANIES' OWNERSHIP INTEREST IN CARLSON RESTAURANTS Carlson Companies, one of the largest privately held corporations in the United States, is a leading provider of services to corporations and consumers, with system-wide sales of approximately $29.7 billion in 1999. Carlson Companies serves its corporate customers by providing expertise in integrated marketing and relationship management services, business travel management and hospitality services for business travelers. Carlson Companies serves consumers with its worldwide restaurant, hotel, cruise and leisure travel agency brands. In addition to the Carlson Restaurants' brands, Carlson Companies' brands include Radisson Hotels Worldwide, Regent International Hotels, Country Inns & Suites by Carlson, Radisson Seven Seas Cruises, Carlson Lifestyle Living, Carlson Vacation Ownership, Carlson Wagonlit Travel, Travel Agents International and Carlson Marketing Group. Carlson Companies operates in more than 140 countries around the world. Following this offering Carlson Companies will own 100% of our outstanding Class B common stock, representing 95.1% of the voting power of all classes of our voting stock and 66.1% of the total outstanding shares of our common stock. Carlson Companies' voting power of all classes of our voting stock will be 94.4% if the underwriters exercise their over-allotment option in full, representing 62.9% of the total outstanding shares of our common stock. We have been advised by Carlson Companies that it has no present intention to dispose of any of the shares of our capital stock that it will own after this offering. Prior to this offering, there have been significant transactions between us and Carlson Companies. These transactions have involved us utilizing certain of Carlson Companies' marketing, financial and administrative support, purchasing and other services. We have or will enter into various agreements and relationships with Carlson Companies to provide for the continuity of these services after this offering. For more information about these agreements, see "Relationship with Carlson Companies and Related Transactions." THE OFFERING <TABLE> <S> <C> Class A common stock offered............................ 9,500,000 shares Common stock to be outstanding after the offering: Class A common stock.................................. 9,500,000 shares Class B common stock.................................. 18,500,000 shares Total............................................... 28,000,000 shares Use of proceeds......................................... For repayment of intercompany indebtedness to Carlson Companies. See "Use of Proceeds." Voting rights: Class A common stock.................................. One vote per share Class B common stock.................................. 10 votes per share Other common stock provisions........................... Apart from the different voting rights, the holders of Class A common stock and Class B common stock generally have identical rights. See "Description of Capital Stock." </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> FISCAL YEAR ENDED(1) ------------------------------------------ PRO FORMA DECEMBER 29, DECEMBER 28, DECEMBER 27, DECEMBER 27, 1997 1998 1999(2) 1999(3) ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA Revenue Company restaurant sales.................................. $418,468 $483,311 $563,729 $563,729 Managed restaurant revenue................................ 76,779 74,905 81,235 81,235 Franchising revenue....................................... 35,199 38,292 41,877 41,877 Licensing revenue......................................... 3,627 2,780 4,450 4,450 -------- -------- -------- -------- Total revenue........................................... 534,073 599,288 691,291 691,291 Cost of sales............................................... 143,228 165,221 187,512 187,512 Restaurant operating expenses............................... 286,077 315,513 370,638 370,638 General and administrative expenses(4)...................... 55,218 64,582 54,648 54,792 Depreciation and amortization expense....................... 23,401 27,457 31,198 31,198 Other (income) expense...................................... (863) 533 10,787 10,787 -------- -------- -------- -------- Income from operations.................................... 27,012 25,982 36,508 36,364 Interest expense............................................ 2,571 4,216 10,344 8,175 -------- -------- -------- -------- Income before income taxes.................................. 24,441 21,766 26,164 28,189 Provision for income taxes.................................. 8,740 7,875 9,155 9,925 -------- -------- -------- -------- Net income.................................................. $ 15,701 $ 13,891 $ 17,009 $ 18,264 ======== ======== ======== ======== Pro forma net income per share Basic..................................................... $ 0.92 $ 0.65 Diluted................................................... 0.92 0.65 Shares used in calculation of pro forma net income per share (in thousands) Basic..................................................... 18,500 28,000 Diluted................................................... 18,500 28,051 </TABLE> - ------------------------ (1) Our fiscal year ends on the last Monday in December. All fiscal years presented are comprised of 52 weeks. Our historical capital structure consists of one share of common stock; therefore, net income per share amounts for historical periods have not been presented. (2) Pro forma net income per share in fiscal 1999 is based on the reclassification of our one share of outstanding common stock into 18,500,000 shares of Class B common stock. (3) The pro forma information gives effect to the offering of Class A common stock and the application of the net proceeds of this offering as if the offering occurred at the beginning of the relevant period. The resulting adjustments are as follows: - The addition of $900 in fiscal 1999 in general and administrative expenses that we expect to incur on an annual basis following this offering as a separately reporting public company. - The elimination of $756 of compensation expense in fiscal 1999 related to the replacement of our previous long-term incentive plan with a stock option plan upon completion of this offering, under which we do not anticipate incurring any compensation expense. See "Management-Incentive Compensation Plans." - The elimination of $10,019 of interest expense on debt from Carlson Companies in fiscal 1999 and replacement of that interest with interest expense of $7,850 in fiscal 1999 attributed to the refinancing of all intercompany indebtedness, after giving effect to the application of the net proceeds of this offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Overview." - The inclusion of the 9,500,000 shares of Class A common stock issued in this offering in the number of shares used in the calculation of pro forma basic and diluted net income per share. - The inclusion of common stock equivalents related to stock options outstanding upon completion of the offering in the number of shares used in the calculation of pro forma diluted net income per share. (4) The fiscal years ended December 29, 1997, December 28, 1998 and December 27, 1999 include Year 2000 remediation expenses of $550, $3,823 and $2,001, respectively, which are included in general and administrative expenses. Also included in general and administrative expenses is $7,142 and $11,360 in expenses allocated to us by Carlson Companies in fiscal 1997 and 1998, respectively. No similar amounts were allocated to us in fiscal 1999. See "Relationship with Carlson Companies and Related Transactions."
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+PROSPECTUS SUMMARY This summary does not contain all the information that may be important to you. You should read the entire prospectus carefully, including the financial data and related notes beginning on page F-1, before making an investment decision. OUR COMPANY We provide wireless data services, systems and software enabling people to use handheld devices for mobile data communications and real-time transactions. We design, develop, sell and support complete wireless systems for corporations seeking to make data available to mobile workers or consumers. Our full mobile and wireless solution, including our wireless data engineering and development expertise, our wireless integration software and mobile data management software products, our customer service center and our network operations centers, positions us to take advantage of the growing demand for wireless data services. We seek to develop and deliver wireless data services across a variety of industries and market segments in the United States and internationally. Our strategy initially focused on developing services for the financial services sector, whose participants we believe were among the earliest adopters of wireless data services. We currently offer and are developing wireless trading and financial services for several major financial institutions. We also currently offer and are developing financial news and information services through major content providers. We have moved and continue to move into other industries and market segments, including software products, logistics, field sales, healthcare, wireless commerce, mobile government and messaging. Since January 1, 2000, we have pursued this strategy through acquisitions, joint ventures and strategic relationships and have entered into the following transactions or agreements: Acquisitions. We have acquired six companies: LocusOne Communications, Inc., a company that develops wireless data systems primarily for companies that distribute goods and services using their own delivery fleets; Riverbed Technologies, Inc., a company that develops and licenses mobile data management software; NetSearch, LLC, a company that provides wireless field sales solutions for companies selling products and services via the Internet; Cerulean Technology, Inc., a company that provides wireless software products for the public safety sector; Sunpro, Inc., a company that provides software for use in the fire and emergency medical fields; and IFX Group Plc, a European company that provides foreign exchange information to financial professionals. We later contributed IFX to Sila Communications Limited, a joint venture with Reuters. We have also entered into a binding letter of intent with Motient Corporation to acquire Motient's retail transportation business unit. Joint ventures. We have entered into or increased our investment in three joint ventures: we increased our investment in OmniSky Corporation, a company that we formed with 3Com Corporation that provides wireless e-mail, Internet access and other electronic transactions primarily for the consumer market; together with Metrocall, Inc., PSINet, Inc., Hicks, Muse, Tate & Furst Incorporated and other investors, we formed Inciscent, Inc., a company that develops wireless e-mail, two-way wireless data applications, Internet access and other applications to the small business and home office segments; and together with Reuters, we formed Sila, a company that develops wireless data systems in Europe. We have also entered into a non-binding letter of intent with Sylvan Learning Centers, Inc. and Critical Path Inc. to form MindSurf, Inc. to provide wireless applications to the kindergarten to twelfth grade education market. Strategic relationships. We have entered into strategic relationships with the following companies: in the healthcare industry, Data Critical Corporation and ParkStone Medical Information Systems, Inc.; in the wireless commerce industry, VISA U.S.A. Inc., First Data Merchant Services Corporation, CyberBills, Inc., S1 Corporation and MICROS Systems, Inc.; in the financial services industry, Multex.com, Inc.; in the transportation and field services industry, Videre, LLC; and in the messaging industry, Research in Motion, Limited, or RIM, and Critical Path. We have also entered into strategic relationships with companies that develop new technology or have products that can be used in combination with our services, including systems integrators Proxicom, Inc. and TIBCO Software, Inc.; wireless carrier Nextel Communications, Inc.; biometric technology developer VeriStar Corporation; and e-commerce distributor Skyway Communications, Inc. or ePhones. In connection with our strategic relationships we may also make equity investments when we believe it will strengthen our working relationships. Resources and offerings. We have all the resources necessary to provide our customers with complete wireless data systems. We have a large, experienced development team with over 290 engineers. We have developed our package of wireless messaging software and software development tools known as Aether Intelligent Messaging, or AIM, which serves as a bridge to integrate diverse corporate in-house data systems with a wide variety of wireless carrier networks and end-user devices. We also provide a suite of software products that extend corporate data to mobile handheld devices. We operate our own high-security network operations centers, which connect customer and other data to wireless networks, and we maintain our own customer service center. We established the WAP Enterprise Center, which is comprised of engineers who develop applications for wireless phones that use the Wireless Application Protocol, known as WAP smartphones, and the systems to support data communication to these devices. We have also cultivated close relationships with major wireless network carriers, including Verizon Wireless, AT&T Wireless Services and BellSouth Wireless Data and mobile equipment and software vendors such as 3Com, RIM, Ericsson LM, Novatel Wireless, Inc. and Phone.com, Inc. We believe we can provide our corporate customers with more attractive service offerings by coupling general wireless applications like e-mail and Internet access with custom corporate applications. We believe our involvement with OmniSky and Inciscent and our relationship with Critical Path will allow us to achieve this. Our strategy. Our strategy is to be the dominant provider in the United States and internationally of wireless data services and systems to corporations by using our engineering expertise, our software platforms, our customer service center, our network operations centers and our other resources. We believe our capabilities and experience have established us as an early market leader in wireless data services, and a key element of our strategy is to move quickly into new opportunities to extend our leadership position. Our strategy also includes the following other key elements: - target a variety of industries and market segments for development of wireless data communications and services in the United States and internationally; - offer a wide range of software products to address every aspect of wireless integration and mobile data management for mobile workers and consumers; - expand our customer base and strengthen the Aether brand through enhanced sales and marketing efforts; - maintain and strengthen our strategic relationships with suppliers and network carriers; - seek to maximize our recurring revenue; and - apply the expertise we gain through engineering services and research and development activities to emerging business opportunities. Operating results. We had revenue of $1.8 million in 1997, $1.5 million in 1998, $6.3 million in 1999 and $16.2 million in the first six months of 2000. We had net losses of $2.7 million in 1997, $4.7 million in 1998, $30.7 million in 1999 and $123.2 million in the first six months of 2000. As of December 31, 1999, we had cumulative losses of $38.5 million. As of June 30, 2000, we had cumulative losses of $161.7 million. On a pro forma basis, giving effect to the acquisitions of Mobeo, Inc. in September 1999, LocusOne in February 2000, Riverbed in March 2000 and NetSearch in April 2000, and the acquisition of IFX in April 2000 and the related formation of Sila in May 2000, we had revenue of $31.8 million and a net loss of $302.7 million in 1999 and revenue of $21.5 million and a net loss of $174.0 million in the first six months of 2000. Cerulean and Sunpro, which we recently acquired, had combined revenue of approximately $22.9 million and a net loss of approximately $3.7 million in 1999 and combined revenue of approximately $12.6 million and a net loss of approximately $2.2 million in the first six months of 2000. Other information. We are a Delaware corporation. In October 1999, we completed our initial public offering of 6,900,000 shares of our common stock at an initial offering price of $16.00 per share, which resulted in net proceeds of approximately $101.1 million. In March 2000, we completed the offering of an additional 5,411,949 shares of our common stock at a price of $205.00 per share and issued $310.5 million of 6% convertible subordinated notes due 2005, which together resulted in net proceeds of approximately $1.4 billion. All references to "we," "us," "our" or "Aether" in this prospectus mean Aether Systems, Inc. and its subsidiaries or predecessors. Our principal executive offices are located at 11460 Cronridge Drive, Owings Mills, Maryland 21117, and our telephone number is (410) 654-6400. We maintain a Web site at www.aethersystems.com. Information contained in our Web site does not constitute a part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered by the selling stockholders............................... 537,642 shares Total common stock to be outstanding after the offering............................... 39,079,487 shares. This excludes: - 1,272,802 shares of common stock issuable upon conversion of the 6% convertible notes due 2005; - 4,357,014 shares of common stock issuable upon exercise of options outstanding at September 15, 2000, with a weighted average exercise price of $63.65 per share; - 2,702,060 additional shares of common stock that are available for future issuance under our 1999 equity incentive plan; - 1,031,833 shares of common stock issuable upon exercise of warrants with a weighted average exercise price of $2.01 per share outstanding at September 15, 2000; and - 893,665 shares of common stock contingently issuable upon exercise of warrants with an exercise price of $.01 per share, which may be exercised if certain conditions are met. This includes shares that we expect will be issued upon exercise of options in connection with the underwritten offering of shares pursuant to a registration statement initially filed August 25, 2000. Use of proceeds.............................. We will not receive any proceeds from the sale of common stock by the selling stockholders. Risk factors................................. See "Risk Factors" beginning at page 9 for a discussion of factors you should consider carefully before deciding to invest in shares of our common stock. Nasdaq National Market symbol................ AETH </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (in thousands, except per share data) The following table summarizes our consolidated statements of operations for each of the years ended December 31, 1997, 1998 and 1999 and for the six months ended June 30, 1999 and 2000 and our consolidated balance sheets as of December 31, 1999 and as of June 30, 2000. The pro forma consolidated financial information gives effect to the acquisitions of Mobeo, LocusOne, Riverbed, NetSearch and IFX and the related formation of Sila and the investments in VeriStar, ePhones, ParkStone and MindSurf. The pro forma net loss per share information for the historical periods presented gives effect to our conversion from a limited liability company to a corporation immediately prior to our initial public offering. We have provided the pro forma consolidated financial information for informational purposes only and you should not assume that our results would actually have been as shown if we had acquired Mobeo, LocusOne, Riverbed, IFX and NetSearch or had formed Sila on the assumed dates or had made the investments on the assumed dates, or that the information projects what our results will be as a result of the acquisitions, the formation of Sila or the investments. The pro forma consolidated statement of operations information assumes that the transactions occurred on January 1, 1999, and the pro forma consolidated balance sheet information assumes that the transactions occurred on June 30, 2000. See our, Mobeo's, LocusOne's and Riverbed's financial statements and notes to those statements included in this prospectus beginning on page F-1. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ------------------------------------------- ---------------------------------- HISTORICAL 1999 HISTORICAL 2000 ---------------------------- PRO FORMA ------------------- PRO FORMA 1997 1998 1999 CONSOLIDATED 1999 2000 CONSOLIDATED ------- ------- -------- ------------ ------- --------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue: Subscriber revenue..................... $ 161 $ 549 $ 3,732 $ 26,720 $ 599 $ 9,674 $ 14,770 Engineering services revenue........... 1,625 963 2,594 2,594 188 3,040 3,040 Software and related services revenue.............................. -- -- -- 2,443 -- 3,442 3,696 ------- ------- -------- --------- ------- --------- --------- Total revenue.......................... 1,786 1,512 6,326 31,757 787 16,156 21,506 Gross profit............................. 493 411 2,850 16,552 136 7,505 10,202 Total operating expenses................. 2,801 5,178 30,887 328,112 4,597 135,500 193,305 ------- ------- -------- --------- ------- --------- --------- Operating loss........................... (2,308) (4,767) (28,037) (311,560) (4,461) (127,995) (183,103) ------- ------- -------- --------- ------- --------- --------- Net loss................................. $(2,747) $(4,693) $(30,691) $(302,742) $(4,320) $(123,185) $(174,040) ======= ======= ======== ========= ======= ========= ========= Net loss per share--basic and diluted.... $ (3.65) ========= Weighted average shares used in computing net loss per share--basic and diluted................................ 33,765 ========= Pro forma net loss per share--basic and diluted................................ $ (0.22) $ (0.29) $ (1.45) $ (11.76) $ (0.22) $ (4.92) ======= ======= ======== ========= ======= ========= Pro forma weighted average shares used in computing net loss per share--basic and diluted................................ 12,656 15,916 21,207 25,745 19,878 35,369 ======= ======= ======== ========= ======= ========= </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 2000 ------------------------- PRO FORMA ACTUAL CONSOLIDATED ---------- ------------ <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................. $1,193,450 $1,134,850 Working capital........................................... 1,212,670 1,154,070 Total assets.............................................. 2,703,242 2,703,242 Total debt................................................ 324,411 324,411 Stockholders' equity...................................... 2,266,472 2,266,472 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001093576_mck_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001093576_mck_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This is only a summary and may not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including the "Risk Factors" section and our financial statements and the notes thereto included elsewhere in this prospectus. Unless otherwise indicated, this prospectus assumes that the underwriters have not exercised their option to purchase additional shares and that all shares of convertible preferred stock have been automatically converted into shares of common stock, and all common stock share information has been adjusted to reflect a 1.53 for-one stock split of the common stock effected as a dividend on October 8, 1999 and the filing of our amended and restated certificate of incorporation. We own or have rights to trademarks that we use in conjunction with the sale of our products. EXTender, MCK, MCK EXTender, PBXtender, PBXgateway, RVP and Telebridge are our trademarks. All other trade names and trademarks used in this prospectus are the property of their respective owners. MCK COMMUNICATIONS, INC. MCK Communications is a leading provider of products that provide remote employees access to corporate voice systems and applications. These products enable corporations to extend the features and applications of large corporate telephone systems known as private branch exchanges, or PBXs, from the corporate office to remote branch offices and telecommuters over public and private networks. PBX systems are the most commonly used corporate telephone systems and deliver features such as three- or four-digit internal dialing and call forwarding and applications such as voicemail. Our EXTender products cost-effectively deliver a unified, enterprise-wide voice network by enabling the PBX to function as a corporate voice server that transmits voice and PBX applications to remote locations over corporations' existing data networks. Branch office employees benefit from having digital telephone sets that function as extensions of the corporate telephone systems, providing these employees with the same features and applications utilized by employees at the corporate headquarters. In addition, our products reduce the total cost of ownership by allowing corporations to use their existing voice and data equipment, and streamline network administration through the utilization of industry standard network management techniques. Large corporations are increasingly shifting towards a decentralized business model. This model of distributed work forces with multiple branch offices and numerous telecommuters enables corporations to realize the competitive advantages of being located near key customers, suppliers and partners and to attract qualified employees. We believe Fortune 5000 businesses maintain approximately 1.6 million branch offices. According to the Gartner Group, the number of telecommuters worldwide is expected to grow from 35 million in 1998 to 140 million in 2003. As corporations decentralize, they seek to extend their voice and data networks across multiple locations due to their dependence upon company-wide communications to facilitate internal collaboration, provide superior customer service and maintain efficiency and productivity. Advances in data networking technologies and the deployment of interoperable equipment from multiple vendors has enabled cost-effective, high-speed remote access and communication over local and wide area data networks, including virtual private networks. In contrast, corporate voice systems, which are known for their reliability and functionality in centralized environments, have not been efficiently extended from corporate locations to branch offices and telecommuters due to technical limitations and cost constraints. As a result, corporations have had to deploy separate telephone systems for each remote location, limiting the effectiveness of corporate communications and increasing the burden on systems administrators. Furthermore, in order to lower costs and simplify network administration, corporations are increasingly demanding that voice and data services be offered over one centrally-managed corporate communications infrastructure. Technology which converts voice transmissions into packets of data, and advances in Quality of Service which enable the transmission of voice over private managed data networks and public data networks such as the Internet, make this convergence of voice and data possible. Thus, solutions for the remote voice marketplace must offer a centrally-managed interface to corporate telephone systems and have the capability of packetizing and transmitting voice over both traditional circuit-based data networks and emerging packet networks. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED APRIL 4, 2000 [MCK COMMUNICATIONS LOGO] 3,000,000 SHARES COMMON STOCK MCK Communications, Inc. is offering 1,500,000 shares of its common stock and the selling stockholders are selling an additional 1,500,000 shares. MCK's common stock is traded on the Nasdaq National Market under the symbol "MCKC." The last reported sale price of the common stock on the Nasdaq National Market on April 3, 2000 was $42.625 per share. ------------------------------ INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ------------------------------ <TABLE> <CAPTION> PER SHARE TOTAL -------------- ----------- <S> <C> <C> Public Offering Price....................................... $ $ Underwriting Discounts and Commissions...................... $ $ Proceeds to MCK............................................. $ $ Proceeds to the Selling Stockholders........................ $ $ </TABLE> THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Certain of our existing stockholders have granted the underwriters a 30-day option to purchase up to 450,000 additional shares of common stock to cover over-allotments. ------------------------------ ROBERTSON STEPHENS CHASE H&Q DAIN RAUSCHER WESSELS U.S. BANCORP PIPER JAFFRAY THE DATE OF THIS PROSPECTUS IS , 2000 Our remote access solutions enable corporations to realize the following key benefits: - Full-Featured Remote Voice Access. Our solutions effectively provide the rich features and applications of PBX systems to branch office employees and telecommuters over existing data networks. - Digital Line Extension Technology. Our solutions utilize our proprietary hardware and software interfaces to: (1) extract voice and the signaling information necessary to interface with proprietary PBX systems from the user or line side of the PBX; and (2) access the rich features and applications of corporate telephone systems for transmission across data networks. - Packet Voice Architecture. Utilizing our proprietary Remote Voice Protocol, or RVP, software platform, we packetize voice transmission and voice applications extracted from PBXs for transmission over data networks to remote locations. - Lower Cost Solution. Our solutions enable corporations to lower costs, including network transmission, network management, equipment and infrastructure costs. By transmitting voice over data networks, our products eliminate the need for corporations to install separate, parallel wiring architectures for voice and data. - Compatibility with Leading PBX Manufacturers. Our solutions are compatible with the proprietary PBX systems of Alcatel, Lucent, NEC, Nortel Networks and Toshiba, whose products collectively have a market share of approximately 65% in the U.S. PBX market. Our objective is to become the leading provider of remote voice access solutions to Fortune 5000 businesses for their branch offices and telecommuters. Key components of our strategy include: - maintaining our technology leadership; - establishing our PBXgateway products as platforms for new voice applications; - enhancing the functionality of our multi-user customer premise equipment; - expanding our distribution, marketing and technology relationships; - working with broadband equipment vendors and next generation service providers; and - targeting Fortune 5000 corporations. We primarily sell our products through an indirect distribution system including the following channels: original equipment manufacturers and private label partners, incumbent local exchange carriers, systems integrators and distributors, telecom and datacom value-added resellers and broadband service providers. We support our sales channels with our own internal sales professionals as well as marketing programs, educational programs, and field and telephone technical support. Our principal executive offices are at 117 Kendrick Street, Needham, Massachusetts 02494 and our telephone number at that address is (617) 454-6100. Edgar description for Interior Fold-out Page: (MCK LOGO) CAPTION: EXTENDING CORPORATE TELEPHONE SYSTEMS TO REMOTE EMPLOYEES OVER MANY NETWORKS The page is divided into three sections, labeled "Corporate Office" on the left, "Branch Office" in the top center and "Telecommuter or Home Office" on the right and at the bottom center. The diagram shows a large corporate office with a PBX connected to a PBXgateway and a non-MCK product. The PBXgateway connects to public and private networks. The non-MCK product independently connects to public and private networks. At the branch office location, the diagram shows a network termination device that connects to public and private networks. A Branch Office EXTender 6000 connects to a network termination device and multiple telephone sets connect to the Branch Office EXTender 6000. Multiple telephone sets connect to the Branch Office EXTender 6000s and one telephone set connects to the EXTender 4000. At the telecommuter or home office locations, the diagram shows three single-user locations: (i) a telephone set and a personal computer connected to an EXTender 1000+; (ii) a telephone set and personal computer connected to an EXTender 3000, and (iii) a telephone set and personal computer connected to an EXTender 4000 which is connected to a network termination device; each connected to public and private networks over a traditional telephone network, ISDN and cable or DSL networks, respectively. THE OFFERING Common stock offered by MCK............. 1,500,000 shares Common stock offered by the selling stockholders............................ 1,500,000 shares Common stock to be outstanding after the offering................................ 19,567,556 shares(1) Use of proceeds......................... We expect to use the net proceeds for working capital and general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol........... MCKC - --------------- (1) Based on the number of shares outstanding as of February 29, 2000. Excludes: - 2,061,808 shares issuable upon exercise of outstanding options at a weighted average exercise price of $7.39 per share; and - 2,290,344 additional shares of common stock reserved for future issuance under our 1996 and 1999 Stock Option and Grant Plans. See "Management -- Executive Compensation," "-- 1996 Stock Option Plan" and "-- 1999 Stock Option and Grant Plan." SUMMARY CONSOLIDATED FINANCIAL DATA The as adjusted consolidated balance sheet data summarized below reflects the completion of this offering and the application of the net proceeds from the sale of 1,500,000 shares of common stock issued hereby at an assumed offering price of $42.625 per share and after deducting the underwriting discounts and commissions and our estimated offering expenses. The number of shares used to compute basic and diluted earnings per share gives effect to the 1.53 for one stock split of our common stock effected on October 8, 1999, and such information for the years ended April 30, 1995 and 1996 gives effect to the recapitalization that occurred during the year ended April 30, 1997 as if it had occurred at the beginning of each fiscal year. See Note 11 of Notes to Consolidated Financial Statements for an explanation of the number of shares used in computing per share data. <TABLE> <CAPTION> NINE MONTHS ENDED YEARS ENDED APRIL 30, JANUARY 31, --------------------------------------------------------------- ------------------------ 1995 1996 1997 1998 1999 1999 2000 ---------- ---------- ---------- ---------- ----------- ---------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues........................... $ 1,810 $ 5,339 $ 5,921 $ 7,876 $ 14,270 $ 10,166 $ 16,763 Cost of goods sold................. 796 2,423 2,313 2,800 5,390 3,894 6,274 ---------- ---------- ---------- ---------- ----------- ---------- ----------- Gross profit....................... 1,014 2,916 3,608 5,076 8,880 6,272 10,489 Operating expenses: Research and development......... 266 344 815 1,758 3,349 2,401 3,433 Sales and marketing.............. -- 576 1,145 2,191 3,888 2,702 4,994 General and administrative....... 626 319 607 1,485 1,617 1,153 1,778 Amortization of stock based compensation................... -- -- -- -- 406 248 3,460 Transaction-related charges...... -- -- 493 -- -- -- -- ---------- ---------- ---------- ---------- ----------- ---------- ----------- Total operating expenses..... 892 1,239 3,060 5,434 9,260 6,504 13,665 ---------- ---------- ---------- ---------- ----------- ---------- ----------- Income (loss) from operations...... 122 1,677 548 (358) (380) (232) (3,176) Other income (expense)............. 12 7 (343) (595) (207) (228) 258 ---------- ---------- ---------- ---------- ----------- ---------- ----------- Income (loss) before provision for income taxes and dividends on redeemable preferred stock of subsidiary....................... 134 1,684 205 (953) (587) (460) (2,918) Provision for income taxes......... 13 652 302 -- -- -- -- Dividends on redeemable preferred stock of subsidiary.............. -- -- 133 160 197 144 97 ---------- ---------- ---------- ---------- ----------- ---------- ----------- Net income (loss).................. $ 121 $ 1,032 $ (230) $ (1,113) $ (784) $ (604) $ (3,015) Dividends on redeemable preferred stock............................ -- -- 1,011 1,220 1,966 1,458 1,285 ---------- ---------- ---------- ---------- ----------- ---------- ----------- Net income (loss) applicable to common shares.................... $ 121 $ 1,032 $ (1,241) $ (2,333) $ (2,750) $ (2,062) $ (4,300) ========== ========== ========== ========== =========== ========== =========== Basic and diluted net income (loss) per common share................. $ .04 $ .33 $ (0.39) $ (0.67) $ (0.71) $ (0.54) $ (0.47) Shares used in computing basic and diluted net income (loss) per common share..................... 3,108,373 3,108,373 3,188,152 3,476,282 3,881,526 3,814,543 9,078,711 Pro forma basic and diluted loss per share........................ $ (0.20) $ (0.18) $ (0.30) Shares used in computing pro forma basic and diluted loss per share............................ 12,012,167 11,764,572 14,547,220 </TABLE> <TABLE> <CAPTION> JANUARY 31, 2000 ---------------------- ACTUAL AS ADJUSTED ------- ----------- (UNAUDITED) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and equivalents........................................ $ 8,424 $68,382 Working capital............................................. 32,002 91,961 Total assets................................................ 37,994 97,953 Total common stockholders' equity........................... 33,413 93,372 </TABLE> (This page intentionally left blank) \
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001093709_organic_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001093709_organic_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..cac1d2089223a49d7092a8625792abcd9138ac0b
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in the common stock. You should read the entire prospectus carefully, including "Risk Factors" and our consolidated financial statements before making an investment decision. OUR BUSINESS Organic is an international Internet professional services firm. We provide our clients various services to build and operate online businesses. These services include iBusiness, media, communications and logistics. - iBusiness refers to our consulting, Web site design and software engineering services through which we develop online business plans and create Web sites; - Media refers to our services through which we plan and manage online advertising campaigns including electronic mail promotions and affiliate program management; - Communications refers to our public relations services through which we plan and manage our clients' press and publication relationships as well as product and company launches; and - Logistics refers to our customer service and fulfillment consulting and transaction management services through which we evaluate, assist and manage for our clients' warehouse and customer call center facilities. We believe that the Internet has shifted the balance of power from businesses to customers and has created the first truly global marketplace. We also believe the ultimate customer, whether a business or consumer, is the central and most influential participant in a commercial relationship. We believe the key to our business is our complete focus on our clients' customers -- the customer-to-business market. We designed our services in recognition of the challenges our clients face due to this shift. Founded in 1993 as a sole proprietorship and incorporated in January 1995, we have a history as an innovator in the Internet professional services industry. We have designed and developed a number of Web sites that were the first in their industry category. We have performed work for over 250 clients and have gained significant experience by working with both major offline and emerging Internet companies. We have organically grown our business, creating one of the largest independent Internet professional services organizations with nearly 700 employees in eight offices worldwide including Asia, Europe and Latin America. Through September 30, 1999, we have experienced significant losses, with a total loss of $20.5 million since inception largely due to a cumulative stock compensation charge of $12.3 million. We expect to continue to have operating losses in the future, mostly due to increased operating expenses from stock compensation and other stock-based charges and increased capital expenses incurred to create a leadership position in the highly competitive market in which we operate. In addition, we derive a significant portion of our revenues from a limited number of clients. For example, DaimlerChrysler and Blockbuster accounted for approximately 12% and 10% of our total revenues during the nine months ended September 30, 1999. OUR MARKET OPPORTUNITY Few businesses have the internal capabilities to address the opportunities and challenges of the Internet. The complexity of conducting business online, the rapidly changing technological environment, the need to improve time-to-market and the limited supply of technically proficient internal personnel creates significant demand for Internet professional services. According to a 1998 Dataquest survey, 83% of Fortune 1000 companies currently purchase, or plan to purchase, Internet professional services solutions such as those we provide. Furthermore, International Data Corporation estimates the worldwide market for Internet professional services will grow from $7.8 billion in 1998 to $78.6 billion in 2003, which represents a compound annual growth rate of more than 58%. OUR OFFICES Our headquarters are located at 510 Third Street, San Francisco, California 94107 and our telephone number is (415) 365-5500. Our Web site is www.organic.com. This reference to our Web site does not constitute incorporation by reference of the information contained at our site. CONTROL OF OUR COMPANY BY INSIDERS Immediately following the offering, Organic Holdings, Inc. will own 64.9% of our outstanding common stock, and Omnicom Group will own 18.7% of our outstanding common stock. Jonathan Nelson, through his ownership in Organic Holdings, Inc., after the offering will beneficially own 64.9% of our common stock. Jonathan Nelson, through his ownership in Organic Holdings, Inc., will have the power to control the election of our directors, the appointment of new management and the approval of any other action requiring the approval of our stockholders, including any amendments to our certificate of incorporation and mergers or sales of any or all of our assets. THE OFFERING <TABLE> <S> <C> Common stock offered by Organic................... 5,500,000 shares Common stock to be outstanding after this offering................................... 78,857,200 shares Use of proceeds................................... To expand our corporate infrastructure, reduce outstanding debt of $4 million to Omnicom Group, which will own 18.7% of our common stock after the offering, and for general corporate purposes, including working capital, and capital expenditures. Nasdaq National Market symbol..................... "OGNC" </TABLE> ------------------------ The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of September 30, 1999 and does not include the following: - 15,712,932 shares of common stock issuable upon exercise of stock options outstanding at a weighted average exercise price of $0.72 per share granted under our 1997 stock option plan and 5,392,953 shares available for future issuance under our 1997 stock option plan; - 10,500,000 shares of common stock reserved for future issuance under our 1999 long-term stock incentive plan; or - 10,000,000 shares of common stock reserved for future issuance under our 2000 employee stock purchase plan. Please see "Capitalization" for a more complete description regarding the outstanding shares of our common stock and options to purchase our common stock and other related matters. ------------------------ Unless otherwise noted, all information in this prospectus assumes that: - the underwriters will not exercise their option to purchase additional shares of common stock to cover over-allotments, if any; - each outstanding share of our preferred stock will convert into three shares of common stock prior to the closing of this offering; - our outstanding warrant issued to Omnicom Group for 2,249,076 shares of common stock at $0.0033 per share, which expires on the closing of this offering, will be exercised prior to or upon the closing of this offering; - we will complete a 3-for-1 split of our common stock before our preferred stock converts into common stock and before this offering is completed; and - the public offering price will be $19.00 per share. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) The following table is a summary of our consolidated statement of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". The financial results for the nine months ended September 30, 1998 are unaudited. <TABLE> <CAPTION> JANUARY 31, FOR THE 1995 NINE MONTHS ENDED (INCEPTION) TO YEARS ENDED DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ----------------------------------- ------------------------- 1995 1996 1997 1998 1998 1999 -------------- ----------- ------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues..................................... $ 1,895 $ 4,294 $ 6,780 $ 27,734 $ 20,744 $ 51,781 Operating expenses: Professional services (exclusive of $0, $0, $0, $183, $57 and $3,355 reported below of stock-based compensation for the years ended 1995, 1996, 1997 and 1998 and for the nine months ended September 30, 1998 and 1999, respectively).................. 530 1,889 4,285 16,801 11,191 29,929 Selling, general and administrative (exclusive of $14, $53, $87, $511, $234 and $8,102 reported below of stock-based compensation for the years ended 1995, 1996, 1997 and 1998 and for the nine months ended September 30, 1998 and 1999, respectively)............................ 655 2,104 5,473 12,068 7,276 26,018 Stock compensation and other stock-based charges.................................. 14 53 87 694 291 11,457 Total operating expenses................. 1,199 4,046 9,845 29,563 18,758 67,404 Operating income (loss)...................... 696 248 (3,065) (1,829) 1,986 (15,623) Net income (loss)............................ $ 412 $ 237 $(1,785) $ (2,766) $ 1,146 $ (15,737) Net income (loss) per share:(1) Basic...................................... $ 45,768 $ 26,286 $ (668) $ (10.81) $ 8.41 $ (13.01) Diluted.................................... $ 0.01 $ 0.00 $ (668) $ (10.81) $ 0.02 $ (13.01) Weighted average common shares outstanding:(1) Basic...................................... 9 9 2,671 255,888 136,259 1,209,591 Diluted.................................... 65,025,009 65,025,009 2,671 255,888 65,424,719 1,209,591 Unaudited pro forma basic and diluted net loss per share(2).......................... $ (0.04) $ (0.22) Unaudited pro forma weighted average common shares outstanding(2)...................... 65,280,888 70,389,036 </TABLE> (1) See Note 1 of Notes to Consolidated Financial Statements for an explanation of the determination of the number of weighted average shares used in computing per share data. (2) Unaudited pro forma net loss per share has been computed by dividing net loss by the pro forma weighted average number of shares outstanding. The pro forma weighted average number of common shares outstanding includes the pro forma effects of the automatic conversion on a weighted average basis of our preferred stock, and the exercise of a warrant for 2,249,076 shares of common stock as if such conversion had occurred on January 1, 1998 for the year ended December 31, 1998 and on January 1, 1999 for the nine months ended September 30, 1999, or at the date of original issuance, if later. The following table provides a summary of our consolidated balance sheet as of September 30, 1999. The pro forma column gives effect to the conversion of all outstanding preferred stock and the exercise of a warrant for 2,249,076 shares of common stock upon the closing of the offering. The pro forma as adjusted column reflects the receipt of the net proceeds from the sale in this offering of 5,500,000 shares of common stock at an assumed initial public offering price of $19.00 per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses. See "Use of Proceeds" and "Capitalization".
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001093815_ecal-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001093815_ecal-corp_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..ac86b4e57fcb10a79b97b6923ceda0b0a31e3dee
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001093815_ecal-corp_prospectus_summary.txt
@@ -0,0 +1 @@
+Basic and diluted net loss per share applicable to common shareholders$ (0.05)$ (0.13)$ (0.95)$(1.48) Basic and diluted weighted-average shares outstanding6,055,3467,343,0709,288,89210,846,645 Pro forma basic and diluted net loss per share applicable to common shareholders(1)$(0.86)$(1.37) Pro forma basic and diluted weighted-average shares outstanding(1)9,824,50611,382,259 December 31, 1999 Pro Forma ActualAs Adjusted(2) Balance Sheet Data: Cash and cash equivalents$4,973,345 Working capital3,517,339 Total assets8,041,635 Total debt and capital leases, including current portion617,307 Redeemable convertible preferred stock6,398,749 Shareholders' equity (deficit)(789,021) (1) Gives effect to the automatic conversion of all preferred stock outstanding as of December 31, 1999 into common stock, as if the conversion occurred on January 1, 1999 or at the date of original issuance, if later. The resulting pro forma adjustment includes an increase in weighted average shares of 535,614 used to compute pro forma basic and diluted net loss per share for the year ended December 31, 1999. (2) Gives effect to the public offering of _____ shares of common stock at an assumed initial public offering price of $____ per share, net of estimated related issuance costs of $_____. Also gives effect to the automatic conversion of all preferred stock outstanding as of December 31, 1999 into 1,503,013 shares of common stock, as if the conversion occurred on December 31, 1999.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001093885_sonicwall_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001093885_sonicwall_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9678241794a3eb3d70f50ce162af423825236b77
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001093885_sonicwall_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY You should read this summary together with the more detailed information regarding our company and the common stock being sold in this offering and our consolidated financial statements and related notes to financial statements appearing elsewhere in this prospectus. Because this is only a summary, you should read this entire prospectus carefully, especially the risks described under "Risk Factors." SonicWALL, Inc. SonicWALL, Inc. designs, develops, manufactures and sells Internet security infrastructure products designed to provide secure Internet access to our broadband customers. Broadband access, such as digital subscriber line, or DSL, and cable modems, allows users to connect to the Internet at speeds significantly greater than analog modems. We believe our security appliances provide high performance, robust, reliable, easy-to-use and affordable Internet security. We also sell content filtering services on an annual subscription basis. We sell our products to customers in the small to medium enterprise, branch office, telecommuter and education markets. Small to medium enterprises are generally considered to have less than 1,000 people. As of December 31, 1999, we had sold more than 35,000 of our Internet security appliances worldwide. An investment in our shares involves a high degree of risk. The risks associated with investing in our stock include the following. We may not be able to maintain profitability in the future. We compete in a highly competitive market and competition may intensify. After the offering, our officers and directors and their affiliates will own approximately 55.3% of our outstanding stock and, if acting together, would be able to significantly influence all matters requiring shareholder approval. We depend on two distributors for approximately 46% of our revenue. Due to any of these risks, the trading price of our common stock could decline and you could lose all or part of your investment. From inception in 1991 through 1996, we derived substantially all of our revenue from the sale of networking products for Apple Computer Inc. Macintosh computers. These products enable Apple Macintosh computers to connect to computer networks using Ethernet communications standards. The Ethernet standard was developed in the 1970s by Xerox Corporation and is the most widely used technology to facilitate communication between computers on local area networks. The Ethernet standard is defined by the Institute of Electrical and Electronics Engineers and specifies the speed and other characteristics of a computer network. In 1998, we made a strategic business decision to concentrate our resources in the Internet security market due to our belief that this market had better long-term growth prospects. As a result, we stopped shipments of our Ethernet product line during December 1999. In October 1997, we began shipments of our Internet security appliance products, and we now focus all of our development, sales and marketing efforts on the Internet security appliance market. In 1998, our Internet security products represented approximately 31% of our total revenue and in 1999, they represented 92% of our total revenue. In 1998, our Ethernet products represented approximately 69% of our total revenue and in 1999, Ethernet products represented approximately 8% of our total revenue. In the years ended December 31, 1997 and 1998 we incurred losses of $467,000 and $1,461,000, respectively. In 1999, our net income was $158,000 and we had an accumulated deficit of $850,000. Although the need for Internet security solutions is widespread, security vendors generally have focused on providing solutions for large enterprises with highly complex needs and extensive information technology, or IT, support organizations. These solutions have typically involved expensive enterprise firewall software that runs on a dedicated server or personal computer, or PC, and requires extensive support, constant monitoring, and regular updates to maintain effectiveness. In addition, these solutions often require additional products to incorporate enhanced functionalities such as virtual private networking and content filtering. We believe the expense and complexity of these solutions make them impractical for the majority of small to medium enterprises, branch offices, telecommuters and education users. These users are increasingly demanding robust, reliable, easy-to-use and affordable Internet security products. Our SonicWALL product line provides our customers with a comprehensive integrated security solution that includes a firewall, content filtering and virtual private networking. A firewall blocks access to the network by unauthorized persons. Content filtering blocks access to objectionable web sites. Virtual private networking enables secure communications between branch offices or telecommuters and their corporate networks. We believe the SonicWALL product line is easy to install and use and minimizes the purchase, installation and maintenance costs of Internet security. With suggested retail prices ranging from $495 to $2,995, our products are designed to enable customers to reduce purchase costs and avoid hiring costly IT personnel. Our SonicWALL products are designed to maximize reliability and uptime, can be used in networks ranging in size from 1 to 1,000 users, and are fully compatible with more expensive enterprise security products offered by, among others, Check Point Software Technologies, Ltd. and Cisco Systems, Inc. We initially incorporated in California in 1991 as Sonic Systems. In August 1999 we changed our name to SonicWALL, Inc. References to "we," "our" and "us" in this prospectus refer to SonicWALL, Inc. Our executive offices are located at 1160 Bordeaux Drive, Sunnyvale, California 94089, and our telephone number is (408) 745-9600. Our Web site is located at http://www.sonicwall.com. Any information that is included on or linked to our Web site is not a part of this prospectus. We own or have rights to various trademarks and trade names used in our business. These include the SonicWALL name and our logo. This prospectus also includes trademarks, service marks and trade names of other companies, which remain the property of their owners. The Offering Common stock offered by: SonicWALL................... 1,750,000 shares Selling shareholders........ 1,750,000 shares Common stock to be outstanding after this offering...................... 25,425,385 shares Use of proceeds............... General corporate purposes to support our growth, working capital, and potential acquisitions of complementary products and technologies. We will not receive any proceeds from shares sold by the selling shareholders. See "Use of Proceeds." Nasdaq National Market SNWL symbol........................ The number of shares of common stock to be outstanding after this offering is based upon shares outstanding as of December 31, 1999, and this number excludes 849,261 shares of common stock reserved for issuance under our stock plans, 3,794,208 shares of common stock issuable upon exercise of outstanding stock options and 250,000 shares of common stock available for issuance under our employee stock purchase plan. ---------------- Except where stated otherwise, the information we present in this prospectus (1) gives effect to a 2 for 1 split of our common stock effected on August 25, 1999 and (2) assumes no exercise by the underwriters of their over-allotment option. Summary Financial Data (In thousands, except per share data) <TABLE> <CAPTION> Year Ended December 31, ------------------------ 1997 1998 1999 ------ ------- ------- <S> <C> <C> <C> Statement of Operations Data: Revenue Internet security................................. $ 250 $ 2,349 $19,403 Ethernet.......................................... 9,092 5,166 1,644 ------ ------- ------- Total revenue................................... 9,342 7,515 21,047 Cost of revenue..................................... 4,842 3,308 5,961 ------ ------- ------- Gross margin........................................ 4,500 4,207 15,086 Operating expenses Research and development.......................... 1,983 2,051 3,634 Sales and marketing............................... 2,468 2,870 5,342 General and administrative........................ 644 753 1,761 Deferred stock compensation....................... -- 42 2,895 ------ ------- ------- Total operating expenses........................ 5,095 5,716 13,632 ------ ------- ------- Income (loss) from operations....................... (595) (1,509) 1,454 Other income (expense), net......................... 29 54 536 ------ ------- ------- Income (loss) before income taxes................... (566) (1,455) 1,990 Benefit from (provision for) income taxes........... 99 (6) (1,832) ------ ------- ------- Net income (loss)................................... $ (467) $(1,461) $ 158 ====== ======= ======= Basic net income (loss) per share................... $(0.06) $ (0.13) $ 0.01 ====== ======= ======= Diluted net income (loss) per share................. $(0.06) $ (0.13) $ 0.01 ====== ======= ======= Shares used in computing basic net income (loss) per share.............................................. 8,461 11,251 17,334 ====== ======= ======= Shares used in computing diluted net income (loss) per share.......................................... 8,461 11,251 21,196 ====== ======= ======= </TABLE> <TABLE> <CAPTION> December 31, 1999 -------------------- Actual As Adjusted -------- ----------- <S> <C> <C> Consolidated Balance Sheet Data: Cash and cash equivalents.................................. $ 62,589 $206,789 Total assets............................................... 71,239 215,439 Total shareholders' equity................................. 60,750 204,950 </TABLE> The preceding table summarizes . actual balance sheet data; and . as adjusted balance sheet data to give effect to the sale by SonicWALL, Inc. of 1,750,000 shares of common stock in this offering at an assumed price of $86.75 per share, after deducting underwriting discounts and commissions and estimated offering expenses. See Note 1 of Notes to Consolidated Financial Statements for information concerning the calculation of basic and diluted net income (loss) per share.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001093954_asia_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001093954_asia_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information from this prospectus and does not contain all of the information that may be important to you. You should read the entire prospectus carefully in evaluating an investment in our shares. ASIA ONLINE, LTD. OUR BUSINESS We provide Internet-related services focusing primarily on the needs of small and medium-sized enterprises in the Asia-Pacific region. We offer our customers a single source of cost-efficient, reliable Internet solutions, including: - Internet access ranging from narrow-band dial-up to dedicated high-speed broadband, global roaming, prepaid Internet access cards, and a unified messaging system including fax and telephone based email; - Web hosting including shared and dedicated hosting and co-location services using our 10 data centers and leased capacity from third-party data centers; and - Professional services including web solutions (consisting of web design, web content translation and eCommerce), systems integration, enhanced communications services, and application service provisioning. We offer our web solutions to companies in North America, capitalizing on our cost competitiveness in providing such services as our operations are based in Asia, where labor and infrastructure costs are generally lower. As a provider of outsourced Internet solutions, we provide a single source for the services, professionals, and infrastructure that enable our customers to reach new customers, increase revenues, reduce operating costs and operate regionally and internationally. Since our inception in late 1998, we have grown to provide Internet-related services to over 60,000 business and consumer customers primarily located throughout the Asia-Pacific region from our operations in Australia, New Zealand, Hong Kong, Malaysia, the Philippines, Canada and the United States. Our pro forma revenues for the year ended December 31, 1999 were $27.1 million, and for the six months ended June 30, 2000 were $17.1 million. OUR MARKET OPPORTUNITY Small and medium-sized businesses in the Asia-Pacific region, our primary target customer base, are demanding expanded Internet services to reach new customers, increase revenues, reduce operating costs, and operate regionally and internationally. We believe the following will continue to expand our market opportunity: - Growth of small and medium-sized businesses Internet solutions market; - Growing trend toward outsourcing and demand for single source Internet communications solutions; - Lack of focus on the small and medium-sized business market by large Internet service providers; - More favorable regulatory environment; - Fragmented Internet service market and inconsistent service quality; and - Cost competitiveness for web solutions services. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED , 2000 [ ] Shares Asia Online, Ltd. [LOGO] Common Stock ------------------ shares of common stock are initially being offered in the United States and Canada by the U.S. underwriters and shares are initially being concurrently offered outside the United States and Canada by the international managers. The offering price and underwriting discounts and commissions for both offerings are identical. Prior to this offering, there has been no public market for our common stock. The initial public offering price is expected to be between $ and $ per share. We have applied to list our common stock on The Nasdaq Stock Market's National Market under the symbol "AONL." The U.S. underwriters and international managers have an option to purchase on a pro rata basis up to additional shares to cover over-allotments. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 6. <TABLE> <CAPTION> UNDERWRITING PRICE DISCOUNTS AND PROCEEDS TO TO PUBLIC COMMISSIONS ASIA ONLINE --------------- ------------- ----------- <S> <C> <C> <C> Per Share...................................... $ $ $ Total.......................................... $ $ $ </TABLE> Delivery of the shares of common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON The date of this prospectus is , 2000. OUR STRATEGY Our goal is to be the premier provider of Internet solutions to small and medium-sized businesses in the Asia-Pacific region. Key elements of our strategy are to: - Expand our market presence through acquisitions, start-up organizations and organic growth throughout the Asia-Pacific region; - Integrate operations to leverage economies of scale, reduce costs, and provide consistent and professionally managed customer support services; - Be a single source of Internet solutions to meet our customers' evolving business needs and build strong, long-term customer relationships; - Develop strategic relationships with technology companies to enable us to offer leading edge Internet solutions; - Build and enhance our unified brand globally; - Expand and upgrade our network and data center infrastructure on a "just-in-time" basis; and - Continue to attract and retain highly qualified and professional personnel. CORPORATE INFORMATION As of June 30, 2000 we had acquired 15 businesses. Two additional acquisitions are currently pending subject to closure. We regularly evaluate potential acquisition candidates, are currently holding preliminary discussions with a number of such candidates, and are in active negotiations with a number of other candidates. If after due diligence and negotiation, such companies can be acquired on a basis considered fair to Asia Online and our stockholders, we may proceed with the acquisitions. We were incorporated in Delaware in December 1998 under the name Conrad ISP, Inc. In April 1999, we changed our name to Asia Online, Ltd. Our principal executive office is located at 16/F One International Finance Center, No 1 Harbour View Street, Central, Hong Kong. The corporate office telephone number is +852 2152 1888. The Asia Online, Ltd. homepage is located at www.AsiaOnlineLtd.com. This is a textual reference only. The information on our web site or any other web site does not constitute a part of this prospectus. --------------- As used in this prospectus, references to "us," "we," "our," "our company" and "Asia Online" are to Asia Online, Ltd. As used in this prospectus, references to "$" shall mean United States dollars. Unless otherwise indicated, all references in this prospectus to the number of outstanding shares of our common stock: - give effect to the mandatory conversion of our Series A, B-1, B-2 and C preferred stock into common stock upon the consummation of this offering; and - do not include the number of shares that we will issue if the United States underwriters and international managers exercise their over-allotment option. In addition, the information in this prospectus assumes that the initial public offering price will be $ per share, the mid-point of the estimated offering price range set forth on the cover of this prospectus. [INSIDE COVER] [Artwork and Description attached separately] THE OFFERING This offering consists of the United States offering and the international offering, each of which is described below. A total of shares will be offered (plus shares subject to the United States underwriters' and international managers' over-allotment option). United States offering..... An offering in the United States and Canada of shares. International offering..... An offering outside the United States and Canada of shares at the same time as the United States offering. Common stock to be outstanding after this offering................. shares or shares if the United States underwriters and international managers exercise their over-allotment option in full. This does not include stock options and warrants outstanding to purchase an aggregate of shares of our common stock at a weighted average exercise price of $ per share. Use of proceeds............ We intend to use the net proceeds from this offering for general corporate purposes, including start-ups or acquisitions in our target markets, to purchase certain minority interest holdings in our Australian subsidiaries, to further expand our professional services, sales and marketing capabilities, product development, capital expenditures, and working capital. See "Use of Proceeds." SUMMARY CONSOLIDATED FINANCIAL DATA AND SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA The tables below summarize: - our historical consolidated financial data for the period from our inception, December 8, 1998, to December 31, 1998, for the year ended December 31, 1999 and for the six months ended June 30, 1999 and June 30, 2000; and - our combined pro forma financial data for the year ended December 31, 1999 and for the six months ended June 30, 2000. Our historical statement of operations data for the period from our inception, December 8, 1998, to December 31, 1998 and for the year ended December 31, 1999 are derived from our audited consolidated financial statements. Our statement of operations data for the six months ended June 30, 1999 and for the six months ended June 30, 2000 and our balance sheet data as of June 30, 2000 are derived from our unaudited interim financial statements and, in the opinion of our management, include all material adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the results of operations and financial condition. Operating results for the six months ended June 30, 2000 are not necessarily indicative of the results that may be expected for the full year. The pro forma statement of operations data for the year ended December 31, 1999 and the six months ended June 30, 2000 and the pro forma balance sheet data as of December 31, 1999 and as of June 30, 2000 give effect to our acquisition of 15 businesses between February 1999 and June 2000, and also give effect to two pending acquisitions. The pro forma statement of operations and balance sheet data also give effect to the conversion of all of our outstanding convertible preferred stock into common stock upon the consummation of this offering. The pro forma financial data for the year ended December 31, 1999 and the six months ended June 30, 2000 are not necessarily indicative of the results that would have occurred if the acquisitions had been consummated as of January 1, 1999 and are not intended to indicate expected results for any future period. The summary consolidated and combined pro forma financial data shown below should be read together with our audited consolidated financial statements, our unaudited interim financial statements, our unaudited pro forma condensed combined financial statements, our acquired companies' financial statements and related notes, and other financial information including "Management's Discussion and Analysis of Financial Condition and Results of Operations," all of which appear elsewhere in this prospectus. <TABLE> <CAPTION> HISTORICAL PRO FORMA ------------------------------------------------ ---------------------------- PERIOD FROM (UNAUDITED) (UNAUDITED) DECEMBER 8, SIX MONTHS ENDED (UNAUDITED) SIX MONTHS 1998 TO YEAR ENDED JUNE 30, YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, ------------------ DECEMBER 31, JUNE 30, 1998 1999 1999 2000 1999 2000 ------------ ------------ ------- -------- ------------ ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues.................... -- $ 7,092 $ 1,841 $ 14,388 $ 27,090 $ 17,077 Total operating costs and expenses........................ -- 20,212 6,359 37,149 60,648 45,867 Loss from operations.............. -- (13,120) (4,518) (22,761) (33,558) (28,790) Net loss attributable to common stockholders.................... -- (12,507) (4,517) (20,177) (33,378) (27,440) Net loss per share attributable to common stockholders, basic and diluted......................... -- $ (5.53) $ (2.57) $ (6.01) Shares used in computing net loss per share attributable to common stockholders, basic and diluted......................... -- 2,262 1,758 3,357 Pro forma net loss per share attributable to common stockholders, basic and diluted......................... -- $ (0.93) $ (0.70) $ (2.03) $ (0.89) Shares used in computing pro forma net loss per share attributable to common stockholders, basic and diluted..................... -- 13,385 28,643 16,467 30,959 OTHER FINANCIAL DATA: Net cash used in operating activities...................... -- $ (6,290) $(1,950) $(10,715) Net cash used in investing activities...................... -- (19,527) (3,877) (40,349) Net cash provided by financing activities...................... -- 43,029 11,234 97,163 EBITDA(1)......................... -- (7,477) (3,033) (12,132) Amortization...................... -- 2,964 567 5,628 Non-cash stock compensation charges......................... -- 1,769 521 3,512 Capital expenditure............... -- $ 2,351 $ 222 $ 9,760 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 2000 ----------------------- HISTORICAL PRO FORMA ---------- --------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and marketable securities............ $ 84,635 $ 68,209 Working capital............................................. 81,471 65,059 Total assets................................................ 142,615 157,435 Long-term obligations, net of current portion............... 855 855 Minority interest in consolidated subsidiaries.............. 4,213 1,378 Convertible preferred stock................................. 143,566 -- Total stockholders' (deficit)/equity........................ $(20,600) $140,553 </TABLE> --------------- (1) "EBITDA" represents earnings or loss from operations before interest, taxes, depreciation, amortization and non-cash compensation charges. Although EBITDA is a measure commonly used in our industry, it should not be considered an alternative to net earnings, when determined in accordance with generally accepted accounting principles, or GAAP, or as an alternative to cash flows from operating activities, determined in accordance with GAAP. In addition, the measure of EBITDA we use may not compare to other similarly titled measures used by other companies.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001094087_jni-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001094087_jni-corp_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION APPEARING IN OTHER SECTIONS OF THIS PROSPECTUS. YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY. UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. JNI CORPORATION We are a leading designer and supplier of Fibre Channel hardware and software products that connect servers and data storage devices to form storage area networks, or SANs. SANs were made possible by the emergence of Fibre Channel technology, a new generation of server-to-storage communications technology that improves data communication speeds, connectivity, distance between connections, reliability and accessibility. We currently market a broad range of Fibre Channel host bus adapters and software that connect servers and storage subsystems to facilitate the integration and management of SAN devices. We also design and market high-performance application specific integrated circuits, or ASICs, based on our proprietary technology. Throughout our history, we have designed Fibre Channel products for the most demanding enterprise-level systems running mission critical SAN applications that are integral to our customers' businesses. We were the first in the industry to demonstrate products capable of sustained two gigabit per second Fibre Channel transmissions. According to International Data Corporation, or IDC, a leading independent research firm, we were the second largest non-captive Fibre Channel host bus adapter company, as measured by revenues in 1999, and the fastest growing non-captive host bus adapter supplier in 1999 with a 230% increase in revenues over 1998. We design our products to operate with all major server operating systems and network configurations used in SANs. Our Fibre Channel host bus adapters, many of which incorporate our proprietary ASIC technology, can be used both with UNIX and PC-based server platforms and their associated interfaces. We have designed our proprietary driver software on a common code base to facilitate the deployment of our host bus adapters across a wide variety of network configurations and server operating systems, including Microsoft Windows NT and Windows 2000, Novell NetWare, Red Hat Linux, Apple Macintosh, Sun Microsystems Solaris, Hewlett-Packard HP-UX and IBM AIX. Our software drivers significantly reduce the variety of adapters used in heterogeneous environments and ensure interoperability between different sets of platforms and servers. Our EZ Fibre configuration and management software simplifies the installation of our adapters in these environments. We sell our products domestically and internationally primarily through OEM and distribution channel customers including distributors, system integrators and value-added resellers who sell directly to end-users. Our significant customers include leading storage solution providers and OEMs, such as Amdahl Corporation, Chaparral Network Storage, Inc., Compaq Computer Corporation, EMC Corporation/Data General Corporation/CLARiiON, Hitachi, Ltd., McData Corporation and Storage Technology Corporation, or StorageTek, and distributors, such as ACAL Electronics Ltd., Bell Microproducts Inc., Info-X, Inc., Netmarks Inc. and Polaris Service, Inc. End-users of our products include America Online, Inc., The Boeing Company, British Airways Plc, Charles Schwab & Co., DaimlerChrysler, Deutsche Telekom AG, E*TRADE Securities, Inc., Federal Express Corporation, GTE Corporation, Lexis Nexis, Morgan Stanley & Co. and US WEST Capital Funding. THE MARKET OPPORTUNITY In recent years, the volume of electronic data generated, processed, stored and manipulated has expanded significantly as a result of the growth of data-intensive applications such as transaction processing, data mining, data warehousing, multimedia and Internet applications. IDC estimates that the amount of stored network data grew from 750 terabytes in 1994 to 10,500 terabytes in 1998, and that it will increase to 420,000 terabytes in 2002. With the dramatic increase in information storage and data retrieval requirements, system performance has become increasingly constrained by traditional input/output technologies which limit network size, distance between interconnects and the reliability of data transfer. Fibre Channel technology overcomes the limitations of traditional data communications technologies, because it offers the connectivity, distance and access benefits of networking architectures combined with the high performance and quick response needed for data storage applications. IDC forecasts that the market for products based on Fibre Channel technology will grow from approximately $4.1 billion in 1999 to approximately $18.0 billion by 2003. In addition, IDC projects the market for Fibre Channel host bus adapters to grow from $269 million in 1999 to approximately $1.7 billion in 2003. These adapters are sold primarily into storage area network disk storage systems, 67% of which used UNIX-based servers in 1999. THE JNI SOLUTION Our advanced technology and broad product offerings enable us to offer our customers and end-users the following key benefits: - FLEXIBILITY. Our products can be used with both PCI and SBus interfaces, work with all SAN topologies and are designed to interoperate with all major operating systems and computer platforms. - RELIABILITY. We conduct extensive testing with complex simulations of user configurations to help ensure that our products will not cause any data loss, data interruption, SAN crashes or lockups and that our products can withstand most failures or interruptions in other parts of the system. - MANAGEABILITY. Our EZ Fibre management software is a powerful and easy-to-use tool for configuring and managing a SAN and its components, helping to eliminate configuration errors. - PERFORMANCE. Our ASIC technology enables a high performance connection to the SAN with extremely low central processing unit utilization and sustained two gigabit per second Fibre Channel transmissions. - SCALABILITY. Our products enable customers to add storage seamlessly to a SAN while it is operating, and to migrate easily from simple to complex topologies to support larger networks. - QUALITY. We focus on continuously improving product quality, delivery, performance and service, and achieving the next level of ISO certification. - CUSTOMIZATION. Our architecture and processes allow us to tailor our products to meet the specific requirements of our customers. OUR STRATEGY Our objective is to become the market leader in high-speed Fibre Channel connectivity products for SANs and other applications by providing a family of ASIC, integrated host bus adapter and software products that exceed competitive offerings in features, flexibility and price/performance. Key elements of our strategy include the following: - focus exclusively on Fibre Channel; - leverage our Sun Solaris expertise to continue to develop products compatible with all major operating systems and all interfaces; - expand penetration of our existing OEM customers and leverage multiple distribution channels; - provide the highest quality products and superior customer support; - promote the JNI brand; and - establish and maintain strategic alliances and pursue acquisitions. ------------------------ Our principal offices are located at 9775 Towne Centre Drive, San Diego, California 92121. Our telephone number is (858) 535-3121. THE OFFERING <TABLE> <S> <C> Common stock offered by JNI.......................... 1,000,000 shares Common stock offered by the selling stockholders..... 3,500,000 shares Total............................................ 4,500,000 shares Common stock to be outstanding after this offering... 25,155,139 shares Use of proceeds...................................... Our net proceeds from this offering are estimated to be approximately $71.6 million. We will use the net proceeds for working capital and general corporate purposes, including: - product development; - selling and marketing; and - potential acquisitions of products, technologies or companies. We will not receive any of the proceeds from the sale of shares by the selling stockholders. See "Use of Proceeds." Nasdaq National Market symbol........................ JNIC </TABLE> The number of shares of common stock to be outstanding after this offering is based on 24,155,139 shares outstanding as of August 31, 2000 and excludes 8,284,241 shares of common stock reserved for issuance under our stock option and stock purchase plans, of which 4,042,055 shares are subject to outstanding options as of August 31, 2000 at a weighted average exercise price per share of $15.14. RECENT DEVELOPMENTS On October 16, 2000, we announced our results for the three and nine-month periods ended September 30, 2000. Net income (including amortization) for the quarter ended September 30, 2000 was $4.4 million, or $0.16 per share, compared to $440,000, or $0.02 per share, for the same period last year. Net revenues for the quarter ended September 30, 2000 increased $19.1 million, or 177%, to $30.0 million in the quarter ended September 30, 2000 from $10.9 million in the third quarter of 1999. Third quarter net revenues increased approximately 25% compared to the second quarter of 2000. Sales of our SBus host bus adapters increased 32% compared to the second quarter of 2000, reflecting the continued strong demand for Solaris storage connection products. Sales of our PCI host bus adapters increased 10% compared to the second quarter. Gross margins in the third quarter of 2000 improved slightly to 59.3% from 58.8% in the second quarter primarily due to production efficiencies. This improvement was partially offset by a decrease in gross margins associated with the industry wide component shortages and associated higher prices. Net income (including amortization) for the nine-month period ended September 30, 2000 was $8.0 million, or $0.30 per share, compared to $2.2 million, or $0.10 per share, for the same period last year. Net revenues for the nine-months ended September 30, 2000 increased $46.7 million, or 182%, to $72.5 million in the nine-months ended September 30, 2000 from $25.8 million in the nine-months ended September 30, 1999. SUMMARY FINANCIAL DATA The tables below summarize financial data of JNI set forth in more detail in the financial statements at the end of this prospectus. The as adjusted balance sheet data at June 30, 2000 has been adjusted to reflect: - the sale of 1,000,000 shares of common stock by JNI at an assumed public offering price of $76.5625 per share; and - the application of the net proceeds from such sale as described in "Use of Proceeds." For more information regarding the calculation of the number of shares used in per share computations, see Note 1 to the Financial Statements included elsewhere in this prospectus. <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------ ------------------- 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenues.................................. $2,903 $12,189 $40,171 $14,912 $42,501 Gross margin.................................. 1,651 6,828 24,769 9,459 25,266 Operating income (loss)....................... (1,054) 603 2,188 651 4,775 Net income (loss)............................. (1,184) 311 2,758 1,767 3,616 Earnings (loss) per common share: Basic....................................... $(2.82) $ 0.74 $ 0.64 $ 4.21 $ 0.16 Diluted..................................... (2.82) 0.02 0.12 0.08 0.13 Number of shares used in per share computations: Basic....................................... 420 420 4,285 420 22,499 Diluted..................................... 420 17,977 23,789 22,726 26,915 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 2000 ---------------------- ACTUAL AS ADJUSTED -------- ----------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and marketable securities.......... $44,794 $116,416 Working capital........................................... 55,201 126,823 Total assets.............................................. 81,981 153,603 Stockholders' equity...................................... 69,698 141,320 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001094215_convergent_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001094215_convergent_prospectus_summary.txt
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+SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including Risk Factors, before investing in our common stock. CONVERGENT GROUP CORPORATION OUR BUSINESS We are a provider of consulting, software engineering, systems integration and project management services that enable our utility and local government clients to implement Internet-based business solutions, also known as eBusiness solutions. These solutions enable our clients to transform their organizations into digital business environments that integrate data from various isolated sources to create a single, Web-based point of entry through which internal decision-makers, business partners, suppliers, customers and constituents can access business information on a real-time basis. By combining our use of existing and emerging digital technologies with our business expertise in the utility and local government sectors, we are able to help our clients increase revenues, reduce costs, improve customer services, ensure service reliability, improve resource management and exploit their information assets. We work with our clients through all phases of their eBusiness transformation process. Throughout this process we: - Engineer -- with our clients' input, an information technology infrastructure and internal business processes that tailor our proprietary Digital Utility and Government Gateway eBusiness frameworks to our clients' particular needs; - Build -- the infrastructure, systems and processes with minimal disruption to our clients' organizations and provide comprehensive training and change management services; and - Manage -- our solutions for our clients to help them minimize the internal resources they must commit to maintain their systems and to help them maximize their return on investment. The two large vertical markets we address, utilities and local governments, have only recently begun converting their traditional customer service and business models to eBusiness platforms. We were one of the first companies to integrate energy and service delivery management systems in our core markets. We have completed engagements for clients such as Alliant Energy Corporation, Cinergy Corp., City of Indianapolis, Indiana and Citizens Utility Company. During the past five years, we have completed over 270 major information technology engagements. OUR OPPORTUNITY According to International Data Corporation, Internet services expenditures by the U.S. utilities industry, one of the five largest vertical markets in the United States, are estimated to grow from approximately $345 million in 1999 to approximately $2.0 billion by 2003, representing a 55% compound annual growth rate. As the industry continues the process of deregulation, gas and electric utilities face a new, highly-competitive marketplace in which success will require that they enhance the nature, quality and efficiency of their services. International Data Corporation also estimates that government spending on Internet services will grow from approximately $505 million in 1999 to approximately $2.8 billion by 2003, representing a 55% compound annual growth rate. We believe that that growth is being driven by the fact that governments face demands from their constituents to transition from labor-intensive, paper-based processes which rely on incompatible computer and telephone systems to processes which consume fewer resources, maintain or improve service levels, speed response to constituent demands and allow real-time access to information by administrators, policy-makers and constituents. We believe that because of those demands as well as the opportunities afforded by the Internet, utilities and local governments now realize that they must deliver functional, Web-based integrated services to their business partners, suppliers, customers and constituents. [GRAPHIC] [FRONT FOLD OUT GRAPHIC DESCRIPTION] In the upper left hand corner is the Company's logo. Immediately below is the title of the foldout, which reads: "Transforming to the Digital Enterprise." In the center of the foldout are four square boxes of equal size entitled, from left to right: "Architect Infrastructure for eBusiness," "Integrate Existing Applications," "Deploy Integrated Solutions Across the Enterprise," and "Exploit Digital Opportunities." The first box contains eight small unattached cubes. As the reader moves across the page from left to right, the cubes converge further in each box into a single large cube, which appears in the rightmost box in the foldout. To the left of the first box are the following eight lines, which represent each of the small eight cubes in the box: "Field Workforce Management," "Customer Relationship Management," "Sales and Marketing," "Financial Systems," "Energy Delivery Management," "Work Process Management," "Facilities Management" and "Human Resource Management." Wording below the first box reads: "Architect the IT infrastructure required to support the business processes and information content required for the digital business environment." Wording below the second box reads: "Install and customize our proprietary Model Office as a working solution for enterprise integration." Wording below the third box reads: "Deploy solutions to provide on-line access to information from across the enterprise." Wording below the fourth box reads: "Complete transformation to digital enterprise and develop intranet, internet and extranet applications that provide on-line access for decision makers, partners, suppliers and customers." Across the bottom of the page is a series of interconnected cubes running across the page. OUR SOLUTION Our objective is to transform the operations of our utility and local government clients from paper-based processes into seamless, digital business environments, which we call the "Digital Utility" and "Government Gateway." Both the Digital Utility and the Government Gateway enable our clients to integrate their core functions, such as maintaining their extensive physical infrastructures of wires, pipes, roads and sewage systems, with the data supporting front and back office functions such as customer relationship management and billing and application processing. OUR STRATEGY Our strategic goal is to be the global leader in eBusiness services serving the utility and local government markets. In order to achieve this goal, we intend to: - differentiate ourselves from our potential competitors by capitalizing on and deepening our industry expertise; - expand our Internet-based customer relationship management (eCRM) service offerings by introducing new eCRM service offerings and instituting partnerships with leading eBusiness and eCRM software companies; - respond quickly to changing market conditions and evolving client needs by expanding our repeatable eBusiness components library through the addition of components based on emerging Internet technologies; - increase brand awareness by launching an aggressive multi-media marketing campaign to build brand recognition of our Digital Utility and Government Gateway solutions; - recruit and retain highly-qualified professionals by offering them continuing exposure to new and developing technologies as well as competitive compensation plans; and - continue geographic expansion by pursuing both domestic and international business opportunities and strengthening our long-term client relationships. DEPENDENCE ON PRINCIPAL CLIENTS We derive a significant portion of our revenues from a limited number of clients. In 1997, our five largest clients accounted for approximately 54% of our revenues, with Cinergy Corp. representing 15%, Alliant Energy Corporation representing 14% and Tucson Electric Power representing 10% of our revenues. In 1998, our five largest clients accounted for approximately 59% of our revenues, with Cinergy representing 20%, Alliant representing 16% and Citizens Utilities Company representing 11% of our revenues. In 1999, our five largest clients accounted for approximately 49% of our revenues, with Cinergy representing 18%, and Alliant and Citizens Utilities each representing 9% of our revenues. Additionally, approximately 84% of our total revenues in 1997 and 78% of our total revenues in each of 1998 and 1999 were derived from contracts with our utility clients. CORPORATE INFORMATION We were incorporated in Delaware in April 1994. Our principal executive offices are located at 6399 South Fiddler's Green Circle, Suite 600, Englewood, Colorado 80111, and our telephone number is (303) 741-8400. Our Web site is located at www.convergentgroup.com. Information contained on our Web site does not constitute part of this prospectus. [CONVERGENT GROUP LOGO] [FRONT INSIDE COVER GRAPHIC DESCRIPTION] In the upper half of the page is a picture of city buildings in a circle. Three arrows point to the circle. One arrow is entitled "Deregulation," one arrow is entitled "Internet" and one arrow is entitled "Service Demands." Two arrows come out of the circle. The first arrow points to a box entitled "Digital Utility" and the second arrow points to a box entitled "Government Gateway." The "Digital Utility" box on the left contains a picture of a light bulb, a picture of a power grid and the letters "UTIL." The "Government Gateway" box on the right contains a picture of a government building, a picture of the scales of justice and the letters "GOV." The Company logo is in the lower right hand corner. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE AND THE SELLING STOCKHOLDERS HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. SUBJECT TO OUR OBLIGATION TO AMEND OR SUPPLEMENT THIS PROSPECTUS AS REQUIRED BY LAW AND THE RULES OF THE SECURITIES AND EXCHANGE COMMISSION, THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK. UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. THE OFFERING Common stock offered by Convergent Group................................... 5,000,000 shares Common stock to be outstanding after this offering........................... 43,412,418 shares Use of proceeds......................... To repay outstanding indebtedness, to pay certain fees to one of our principal stockholders and for working capital and general corporate purposes. Nasdaq National Market symbol........... CVGP The number of shares to be outstanding after this offering is based on the number of shares outstanding on March 31, 2000 after giving effect to: - the issuance between April 1, 2000 and June 15, 2000 of 113,066 shares of common stock upon the exercise of stock options; - the issuance in a private placement in June 2000 of 1,237,000 shares of common stock to Cinergy Communications, Inc. for $10,000,000; and - the issuance of additional shares of our common stock to Cinergy Communications in a private placement to occur concurrently with the closing of this offering in an amount, currently estimated at 929,279 shares, such that it will own 4.99% of the common stock to be outstanding after this offering. The private placement transactions with Cinergy Communications are described in detail under "Concurrent Private Placement." The common stock to be outstanding after the offering excludes: - 3,141,987 shares issuable upon the exercise of options outstanding as of March 31, 2000 at a weighted average exercise price of $0.13 per share; and - 2,163,931 shares reserved for future grant under our stock option plan. Unless otherwise indicated, all share and per share information in this prospectus gives effect to: - the declaration of a 1-for-2 reverse stock split of the common stock effected on July 24, 2000; and - the conversion of all outstanding shares of our preferred stock into 21,243,850 shares of common stock at the time of the closing of this offering, based on a conversion rate of 0.5 shares of common stock for each share of preferred stock. Substantially all of the preferred stock was issued in our August 1999 recapitalization at a purchase price of $1.08 per share, equivalent to $2.16 per share of common stock issuable on conversion of the preferred stock. The remaining shares of preferred stock were issued during the first quarter of 2000 in exchange for an equal number of shares of common stock before giving effect to the reverse stock split. Except as otherwise indicated in this prospectus, we have presented information in this prospectus based on the assumption that the underwriters do not exercise their over-allotment option. SUMMARY FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) The following table sets forth our summary historical financial data. You should read this information together with our consolidated financial statements and the notes to those statements included in this prospectus and the information under "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> THREE MONTHS ENDED YEARS ENDED DECEMBER 31(1), MARCH 31(1), -------------------------------------------------------------- ------------------------- 1995(2) 1996(2)(3) 1997 1998 1999 1999 2000 ---------- ---------- ---------- ---------- ---------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA Revenues......................... $ 57,980 $ 51,742 $ 40,856 $ 47,415 $ 66,610 $ 14,809 $ 18,633 Gross profit..................... 17,244 22,403 10,520 15,892 24,109 5,311 8,069 Restructuring and recapitalization costs (recovery)............... -- 16,360 (1,218) (95) 23,255(4) -- -- Operating income (loss).......... (10,907) (26,279) (17) 3,759 (16,001) 1,444 (24) Net income (loss)................ (11,061) (26,753) (1,105) 5,677 (15,256) 1,587 (899) Preferred stock adjustments(5)... (3,256) (802) (776) (853) 12,432 (207) -- Net income (loss) available to common stockholders............ (14,317) (27,555) (1,881) 4,824 (2,824) 1,380 (899) Basic net income (loss) per share(5)....................... $ (0.97) $ (1.42) $ (0.12) $ 0.32 $ (0.20) $ 0.09 $ (0.06) Diluted net income (loss) per share(5)....................... $ (0.97) $ (1.42) $ (0.12) $ 0.20 $ (0.20) $ 0.06 $ (0.06) Weighted average shares of common stock used in computing basic and diluted net income (loss) per share Basic.......................... 14,709,120 19,462,165 16,234,348 15,135,368 14,310,546 15,478,085 14,487,160 Diluted........................ 14,709,120 19,462,165 16,234,348 23,771,852 14,310,546 23,634,615 14,487,160 Pro forma basic net income (loss) per share(5)(6)................ -- -- -- -- $ (0.10) -- $ (0.03) Pro forma diluted net income (loss) per share(5)(6)......... -- -- -- -- $ (0.10) -- $ (0.03) Pro forma weighted average number of shares used in calculating pro forma net income (loss) per share(6): Basic.......................... -- -- -- -- 27,424,410 -- 35,731,010 Diluted........................ -- -- -- -- 27,424,410 -- 35,731,010 </TABLE> --------------- (1) All periods presented reflect certain reclassifications, disclosures and restatements which have been made to conform to the requirements of the Securities and Exchange Commission. (2) Results for 1995 and 1996 include revenues from our discontinued graphic data systems software product line. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
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+SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully. Trintech Group PLC We are a leading provider of secure electronic payment infrastructure solutions, known as e-payment solutions, for payment card transactions. We develop, market and sell a comprehensive suite of software products, and electronic point of sale systems known as PoS systems, that enable end-to-end card-based electronic payments in the physical world and over the Internet. We offer vendor-neutral, open, feature-rich software products that provide a highly secure e-payment solution for each of the parties to an e-payment transaction--the bank or other financial transaction processor, the merchant and the cardholder. With the launch of our first Internet product in 1996, we shifted our growth strategy to emphasize e-commerce software products for Internet applications. In addition, in February 2000 we jointly announced with Motorola the availability of an e-payment software application for mobile commerce, or m-commerce, transactions involving mobile phones. We have also established strategic relationships with VISA, MasterCard, VeriSign, RSA Security, Compaq, SAP and Intershop. Our customers include banks, card associations, financial transaction processors and Internet service providers in major markets including Germany, the United States, Scandinavia, the United Kingdom and South America. The growth of payment card transactions, in conjunction with increased payment card fraud, has driven the need for more comprehensive, secure and effective hardware and software payment products to process these transactions. More recently, the growth of the Internet as a medium for commerce has significantly increased the risk that payment card fraud and repudiation can occur. According to a study conducted by VISA International in 1999, several member banks in its European region were experiencing repudiation and discovered fraud rates as high as 50% for Internet transactions while transactions originating on the Internet represent only 1% to 2% of total transaction volumes. The results of this study support our belief that the growth of e-commerce has further driven the demand for comprehensive and effective solutions for secure e-payment transactions. Our mission is to become the leading worldwide provider of secure e-payment infrastructure solutions for payment card transactions. Our product suite consists of software and electronic PoS systems for use with a variety of operating systems, databases, merchant web servers, and networked and standalone computers. Our product suite consists of more than 20 modules designed to perform authorization, data capture and settlement for e-payment transactions, as well as management of merchant e-payment systems. These modules can be deployed as an end-to-end solution or integrated with modules of other vendors. Our software products for the Internet incorporate the principal security standards for e-payment transactions, secure socket layer, known as SSL, and secure electronic transaction, known as SET. We were incorporated in 1987. As of February 29, 2000, we had 306 employees operating from offices in Dublin, Ireland, San Mateo, California, Austin, Texas, Princeton, New Jersey, Miami, Florida and Frankfurt, Germany. Our principal executive office, which is also our registered office, is located at Trintech Building, South County Business Park, Leopardstown, Dublin 18, Ireland. Our telephone number at that location is 353-1-207-4000. This prospectus contains forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of unexpected events and trends, as well as the factors described in the section of this prospectus entitled "Risk Factors." This prospectus may not be used in connection with the offer or sale of any ADSs to the public in any jurisdiction where the offer or sale would be unlawful. The Offering <TABLE> <S> <C> ADSs offered by us.............................. 4,000,000 shares ADSs offered by selling shareholders............ 2,000,000 shares Equivalent ADSs to be outstanding after the offering....................................... 54,281,444 shares Use of proceeds................................. For working capital and general corporate purposes, including product development, sales and marketing, international expansion and the acquisition of complementary products or businesses. See "Use of Proceeds." Nasdaq National Market symbol................... TTPA Neuer Markt symbol.............................. TTP </TABLE> The number of equivalent ADSs to be outstanding after the offering is based on 25,140,722 ordinary shares outstanding as of January 31, 2000, after giving effect to a two-for-one ADS split effected on March 21, 2000. As a result of the two-for-one ADS split, each ordinary share equals two equivalent ADSs. The number of equivalent ADSs to be outstanding after the offering excludes 7,222,654 equivalent ADSs, or 3,611,327 ordinary shares, issuable upon exercise of options outstanding under our share option schemes at January 31, 2000 and 500,000 equivalent ADSs, or 250,000 ordinary shares, issuable upon the exercise of a warrant outstanding at January 31, 2000. The following table summarizes the financial data of our business. Note 11 of the notes to the consolidated financial statements provides an explanation of the method used to calculate pro forma basic and diluted net income (loss) per equivalent ADS. The information presented under "As Adjusted" reflects the receipt of net proceeds of approximately $161.9 million, or approximately (Euro)168.8 million, from the sale of 4,000,000 ADSs offered by us at an assumed public offering price of $43.25, or (Euro)45.10, per ADS. Summary Consolidated Financial Data (in thousands of U.S. dollars, except share and per share data) <TABLE> <CAPTION> Year Ended January 31, --------------------------------- 1998 1999 2000 ---------- ---------- ---------- <S> <C> <C> <C> Consolidated Statement of Operations Data: Revenue: Product................................... $ 10,824 $ 14,554 $ 18,457 License................................... 4,101 4,477 9,158 Service................................... 1,721 2,002 2,629 ---------- ---------- ---------- Total revenue........................... 16,646 21,033 30,244 Total cost of revenue...................... 9,694 13,913 17,257 ---------- ---------- ---------- Gross margin............................... 6,952 7,120 12,987 Total operating expenses................... 6,733 13,944 27,145 ---------- ---------- ---------- Income (loss) from operations.............. 219 (6,824) (14,158) Net income (loss).......................... $ 175 $ (6,873) $ (12,111) ========== ========== ========== Basic net income (loss) per equivalent ADS....................................... $ 0.01 $ (0.21) $ (0.31) ========== ========== ========== ADSs used in computation of basic net income (loss) per equivalent ADS.......... 31,376,670 32,315,662 38,619,928 ========== ========== ========== Diluted net income (loss) per equivalent ADS....................................... $ 0.01 $ (0.21) $ (0.31) ========== ========== ========== ADSs used in computation of diluted net income (loss) per equivalent ADS.......... 31,498,322 32,315,662 38,619,928 ========== ========== ========== </TABLE> <TABLE> <CAPTION> January 31, 2000 ------------------- Actual As Adjusted ------- ----------- <S> <C> <C> Consolidated Balance Sheet Data: Cash and cash equivalents................................... $10,862 $172,739 Marketable securities....................................... 48,830 48,830 Working capital............................................. 57,803 219,680 Total assets.............................................. 74,295 236,172 Long-term obligations, less current portion................. 1,127 1,127 Series B preference shares.................................. -- -- Total shareholders' equity ............................... 61,116 222,993 </TABLE> ---------------- Except as otherwise specified, all information in this prospectus assumes no exercise of the underwriters' over-allotment option. All share and per share numbers in this prospectus have been adjusted to give effect to a two-for-one split of our ADSs effected on March 21, 2000. As a result of the ADS split, each of our ordinary shares is represented by two ADSs. PayGate Acquirer(TM), PayGate NetIssuer(TM), PayWare PurchaseCard(TM), PayWare SmartCard(TM), PayWare ERP(TM), PayWare Net(TM), PayWare NetHost(TM), NetWallet(TM), EzCard(TM), Compact 9000(TM), Compact 9002(TM), S/PAY(TM) and Trintech(TM) and our logo are our trademarks and PayGate(R), PayWare(R) and PayPurse(R) are our registered trademarks. SAP R/3(R) is a registered trademark of SAP AG. This prospectus also includes product names and other trade names and trademarks of other organizations.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001094348_mattersigh_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001094348_mattersigh_prospectus_summary.txt
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+SUMMARY This summary highlights selected information from this information statement/prospectus, but does not contain all details concerning the spin-off and eLoyalty, including information that may be important to you. To better understand the spin-off and the business and financial position of eLoyalty you should carefully review this entire document. In this information statement/prospectus, "eLoyalty," "we," "our" and "us" each refers to eLoyalty Corporation and the business we conducted as a division of Technology Solutions Company. QUESTIONS AND ANSWERS ABOUT eLOYALTY AND THE SPIN-OFF What is the spin-off?........ The spin-off is designed to separate Technology Solutions Company's E-Solutions and eLoyalty businesses into separate publicly traded companies. Technology Solutions Company will accomplish the spin-off by distributing to Technology Solutions Company stockholders as a dividend all of the outstanding common stock of eLoyalty owned by Technology Solutions Company. For every share of Technology Solutions Company common stock that you own of record on February , 2000 you will receive one share of eLoyalty common stock. For example, if you own 200 shares of Technology Solutions Company common stock on the record date, you will receive 200 shares of eLoyalty common stock in the spin-off. Why is Technology Solutions Company effecting the spin-off?................. Technology Solutions Company's board of directors and management believe that separating eLoyalty from the rest of Technology Solutions Company's business will allow both Technology Solutions Company and eLoyalty to: - focus their attention and financial resources on their respective businesses; - pursue different strategies; - react quickly to changing market environments; - focus on each company's own strategic plan; - develop incentive programs tailored to their own business; and - have greater capital planning flexibility and simplify their organizational and internal reporting structures. What is the business of eLoyalty?................. eLoyalty is a management consulting and information technology services company that provides solutions designed to improve customer relationships for our clients. eLoyalty is currently a subsidiary of Technology Solutions Company and will become an independent publicly traded company upon completion of the spin-off. What are customer relationships?............ Companies build relationships with their customers through a chain of events including marketing, sales and post sale customer service. During this chain of events, companies communicate and interact with their customers in a variety of different ways including: - person to person; - over the Internet; [TSC LETTERHEAD] February , 2000 Dear Stockholders: The Board of Directors of Technology Solutions Company (TSC) has decided to separate the two divisions of TSC through a spin-off of the eLoyalty division. TSC will accomplish this spin-off by transferring the eLoyalty business to a newly created company called eLoyalty Corporation and then distributing the common stock of eLoyalty owned by TSC to TSC stockholders. Following the spin-off, eLoyalty will be a new, independent public company that will trade on The Nasdaq National Market under the symbol "ELOY." The spin-off will occur on or about February , 2000. TSC will continue to be a public company and TSC common stock will continue to trade on The Nasdaq National Market under the symbol "TSCC." TSC will focus on its remaining business, the E-Solutions division. The E-Solutions division provides consulting and systems integration services that help companies apply technology to improve the way they do business, specifically in the areas of eCommerce, supply chain management, computer based training and resource planning. If you own TSC common stock as of the close of business on February , 2000, you will receive one share of eLoyalty common stock for every one share of TSC common stock you own at that time. You should receive your eLoyalty shares shortly after February , 2000. You do not need to take any action for the spin-off to occur. You do not have to pay for the shares of eLoyalty common stock that you will receive in the spin-off, nor do you have to surrender or exchange shares of TSC common stock in order to receive your shares of eLoyalty common stock. The number of shares of TSC common stock that you own will not change as a result of the spin-off. TSC has received a ruling from the IRS that the spin-off will be tax-free to TSC and its stockholders. This information statement/prospectus gives you information about TSC, eLoyalty and the spin-off. We are enthusiastic about the spin-off and the opportunities that await these two separate companies. We encourage you to read this document carefully to learn more about the two companies and this spin-off. Sincerely, William H. Waltrip Chairman of the Board [TSC LETTERHEAD] - by telephone; - by e-mail; and - by fax. We believe the complexity increases as the customer purchases more than one product or service. Therefore, large companies are often organized into separate product divisions that communicate with customers independently of other divisions. In addition, we believe each division commonly separates the management of each communication with the customer by creating separate marketing, sales and customer service groups. Furthermore, each of these groups may then focus separate teams of employees (for instance field sales force, eCommerce group, call center, etc.) to respond to the different ways companies interact with their customers. In many cases these teams may have overlapping or conflicting goals. Companies may establish different policies, personnel and management of customer relationships in each distinct area. This sometimes results in the purchase of different software products to support each separate business aim. In our experience, these software products are not compatible with each other without customization and technology integration. The internal business and technology infrastructure may serve to manage each function of the company and the result can be a fragmented picture of each customer. The effect for the customer is the appearance of a disjointed organization that does not fully recognize the customer's specific needs. This lack of understanding can lead to companies losing their customers. Why is it important to improve customer relationships?............ Improved customer relationships can lead to higher revenues and improved profitability for companies. Companies today are increasingly aware of the significant financial impact associated with losing high value customers, particularly in the early stages of the relationship. According to research presented by Frederick R. Reichheld and W. Earl Sasser, Jr. in a Harvard Business Review article, "companies can boost their profits by almost 100% by retaining just 5% more of their customers." What are loyalty solutions?................ A loyalty solution is a combination of business strategy and technology integration that seeks to improve customer relationships. A loyalty solution focuses on: - improving the efficiency and effectiveness of the communications with the customer; and - taking advantage of customer interactions to sell more products and services to customers. [eLOYALTY LOGO] February , 2000 Dear Future Stockholders, Welcome to eLoyalty. It is with great pleasure that we are sharing with you the exciting news about eLoyalty. In March of 1999, the Technology Solutions Company Board of Directors announced its decision to spin-off eLoyalty into a separate, publicly traded company. If you own Technology Solutions Company common stock on the record date of February , 2000 you will become a stockholder in eLoyalty as well as retain your ownership of Technology Solutions Company. We believe that the spin-off will have significant impact on advances in the arena of customer loyalty. Consider the following: - After the spin-off, we will be the largest pure-play customer relationship solutions provider in the industry; - We design solutions to help companies build loyalty across the various ways that companies communicate with their customers; - We offer a broad knowledge of electronic customer relationship management technologies to deploy loyalty solutions across the Internet, e-mail, web-chat, telephone and fax; - We have highly experienced professionals specializing in customer loyalty; and - Our investment in research and development improves the effectiveness of our solutions and will enable us to remain a driving force in the evolution of customer loyalty. We encourage you to read this information statement/prospectus to learn more about eLoyalty. We look forward to the focus and expansion that will be possible for eLoyalty as a stand-alone public company. We believe that eLoyalty, as an independent company, will be better able to provide complete solutions for our clients and adapt to rapid technology change. We are committed to building an exciting and rewarding company that is worthy of your investment. Sincerely, /s/ Kelly D. Conway Kelly D. Conway President and Chief Executive Officer [ELOYALTY LETTERHEAD] We believe that several different and specialized skills are required to create a loyalty solution. These skills include: - strategic business consulting to define a company's policies for managing customers in each division and group within the organization; - technical knowledge of the different products that a company needs to communicate with their customers using the Internet, telephone, e-mail and fax; - integration techniques to enable each of these software products to be tied together; and - ongoing support of their loyalty solution to meet changing business requirements and emerging technology. What is new about loyalty solutions?................ eLoyalty believes that loyalty solutions are the next step in the customer relationship management or CRM market. This market refers to consulting services and software products that focus on helping a company manage communications with its customers. With the emergence of the Internet, managing customer relationships has become more complex. The Internet is available at all times of the day and night and almost anywhere in the world. This freedom of access can create an expectation with customers that they should be able to communicate with any part of a company about any matter relating to their products or services at any time. To meet these new expectations, a company needs to link their existing customer relationship management solution with this new electronic environment. We define this market opportunity as electronic customer relationship management or eCRM. Electronic customer relationship management is an expansion of customer relationship management to further include the Internet, e-mail and web-chat across each division of a company. We view a loyalty solution as an electronic customer relationship management business and technology solution that is designed to: - help companies build lasting relationships with their customers; - maximize the efficiency and effectiveness of customer interactions; and - capitalize on selling opportunities based on customer information gathered during these interactions. What are eLoyalty's key objectives?............... eLoyalty's objective is to be the leading international provider of loyalty solutions. We intend to substantially increase our revenues and profitability and to create an international brand name. Our strategy to attain these goals is: - to focus on providing business benefits to our clients; - to enhance our loyalty solutions to include hosting capabilities; - to build strategic vendor relationships; THE MATERIAL IN THIS INFORMATION STATEMENT/PROSPECTUS MAY BE REVISED OR COMPLETED. WE HAVE FILED A REGISTRATION STATEMENT RELATING TO THE COMMON STOCK OF eLOYALTY WITH THE SECURITIES AND EXCHANGE COMMISSION. WE WILL NOT ISSUE THESE SECURITIES BEFORE THE REGISTRATION STATEMENT BECOMES EFFECTIVE. SUBJECT TO COMPLETION, DATED FEBRUARY 8, 2000 INFORMATION STATEMENT/PROSPECTUS [ELOYALTY LOGO] eLOYALTY CORPORATION COMMON STOCK We are furnishing you with this information statement/prospectus in connection with the spin-off by Technology Solutions Company of all of the outstanding shares of common stock of eLoyalty Corporation owned by Technology Solutions Company to stockholders of Technology Solutions Company. Technology Solutions Company will accomplish the spin-off by distributing all issued and outstanding shares of our common stock owned by Technology Solutions Company to holders of record of Technology Solutions Company common stock. The distribution of eLoyalty common stock will be made on February , 2000 to holders of record of Technology Solutions Company common stock at the close of business on February , 2000. This spin-off will be accomplished through a distribution of one share of common stock of eLoyalty for every one share of Technology Solutions Company common stock. NO CONSIDERATION WILL BE PAYABLE BY TECHNOLOGY SOLUTIONS COMPANY STOCKHOLDERS FOR THE eLOYALTY SHARES, NOR WILL THEY BE REQUIRED TO SURRENDER OR EXCHANGE SHARES OF TECHNOLOGY SOLUTIONS COMPANY COMMON STOCK OR TAKE ANY OTHER ACTION IN ORDER TO RECEIVE THE eLOYALTY SHARES. There is currently no public market for the common stock of eLoyalty, although it is expected that a "when-issued" trading market may develop prior to the time of the spin-off. eLoyalty common stock has been approved for listing on The Nasdaq National Market under the symbol "ELOY," subject to official notice of issuance. IN REVIEWING THIS INFORMATION STATEMENT/PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER THE CAPTION "RISK FACTORS" COMMENCING ON PAGE 9. --------------------- WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS INFORMATION STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS INFORMATION STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES. --------------------- THE DATE OF THIS INFORMATION STATEMENT/PROSPECTUS IS FEBRUARY , 2000 - to invest in brand awareness; - to invest in operational and management systems; and - to expand our international presence. What will be the relationship between eLoyalty and Technology Solutions Company after the spin-off?................. After the spin-off, Technology Solutions Company will not own any of our common stock. Technology Solutions Company and eLoyalty will enter into agreements in connection with the spin-off to allocate responsibility for obligations arising prior to the spin-off and for some obligations that might arise in the future. Technology Solutions Company will retain responsibility for liabilities and obligations relating to its business and we will assume responsibility for liabilities and obligations relating to our business. For a more complete discussion of the obligations of eLoyalty and Technology Solutions Company to each other after the spin-off, see "eLoyalty's Relationship with Technology Solutions Company After the Spin-Off." What do I have to do to participate in the spin-off?................. Nothing. You are not required to take any action to receive eLoyalty common stock in the spin-off. No proxy or vote is necessary for the spin-off. You should not mail in Technology Solutions Company stock certificates to receive eLoyalty shares. Our transfer agent will send to you your eLoyalty share certificates shortly after February , 2000. The number of shares of Technology Solutions Company common stock you own will not change as a result of the spin-off. When will I receive my eLoyalty shares?.......... If you hold your Technology Solutions Company shares in your own name, your share certificates will be mailed to you on or about February , 2000. You should allow several days for the mail to reach you. If you hold your Technology Solutions Company shares through your stockbroker, bank or other nominee, you are probably not a stockholder of record. Your receipt of eLoyalty shares depends on your arrangements with the nominee that holds your Technology Solutions Company shares for you. For a more complete discussion of how the spin-off will be accomplished, see "The Spin-Off -- Manner of Effecting the Spin-Off." Is the spin-off taxable for United States federal income tax purposes?...... The spin-off is conditioned on, among other things, TSC receiving a ruling from the United States Internal Revenue Service that the spin- off will be tax-free to Technology Solutions Company and its United States stockholders. Technology Solutions Company has received that ruling (which has been received). See "The Spin-Off -- Material Federal Tax Consequences" for a more complete discussion of the United States federal income tax consequences of the spin-off to holders of Technology Solutions Company common stock. Where will my shares of our common stock trade?....... Currently, there is no public market for eLoyalty common stock. eLoyalty common stock has been approved for listing on The Nasdaq National Market under the symbol "ELOY," subject to official notice of issuance. We expect that a "when-issued" trading market for eLoyalty common stock will develop prior to February , 2000, and that "regular-way" trading will begin on that date. For a more complete discussion of the public market for our shares following the spin-off, see "The Spin-Off -- Market for eLoyalty Common Stock." What will happen to the listing of Technology Solutions Company's shares on The Nasdaq National Market?................... Technology Solutions Company common stock will continue to be listed on The Nasdaq National Market under the symbol "TSCC." Technology Solutions Company expects that its common stock will continue to trade on a regular basis through and after the spin-off date. Who do I contact for information regarding the spin-off, Technology Solutions Company and eLoyalty?................. Before the spin-off, you should direct inquiries relating to the spin-off to: ChaseMellon Shareholder Services, L.L.C. 111 Founders Plaza, 11th Floor East Hartford, Connecticut 06108 (860) 282-3512 Technology Solutions Company 205 North Michigan Avenue Chicago, Illinois 60601 Attention: Investor Relations (312) 228-4500 After the spin-off, you should direct inquiries relating to your investment in eLoyalty common stock to: eLoyalty 205 North Michigan Avenue Chicago, Illinois 60601 Attention: Timothy J. Cunningham (312) 228-4540 ir@eloyaltyco.com After the spin-off, the transfer agent and registrar for the eLoyalty common stock will be ChaseMellon Shareholder Services, L.L.C. RECENT DEVELOPMENTS On January 26, 2000 we announced operating income of $0.3 million on revenues of $38.4 million for the three months ended December 31, 1999. eLOYALTY CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> FOR THE THREE FOR THE TWELVE MONTHS MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, ----------------- --------------------- 1999 1998 1999 1998 ------- ------- --------- --------- <S> <C> <C> <C> <C> Revenues................................................ $38,351 $27,550 $146,003 $105,235 Revenues less project personnel......................... 18,525 14,327 73,591 54,548 Operating income (loss)................................. 294 (1,234) 8,042 2,718 Net (loss) income....................................... $ (28) $ (947) $ 4,058 $ 1,067 Basic net (loss) income per common share................ $ (0.00) $ (0.02) $ 0.10 $ 0.03 Diluted net (loss) income per common share.............. $ (0.00) $ (0.02) $ 0.08 $ 0.02 Shares used to calculate basic net (loss) income per share (in millions)(1)................................ 41.4 41.4 41.4 41.4 Shares used to calculate diluted net (loss) income per share (in millions)(1)................................ 41.4 41.4 48.0 46.6 </TABLE> - --------------- (1) In December 1999, eLoyalty issued 41.4 million shares to Technology Solutions Company. Basic earnings per share have been computed by dividing the net income/(loss) for each period presented by the 41.4 million shares. Diluted net earnings per share was computed by dividing the net income/(loss) for each period presented by the 41.4 million shares plus the estimated effect of dilutive stock options using the "treasury stock" method. See Note 8 to the Notes to Combined Financial Statements for a discussion of stock options. SUMMARY FINANCIAL DATA The following tables present summary selected historical financial data of eLoyalty. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements and notes thereto included in this information statement/prospectus. The statement of operations data for the seven month period ended December 31, 1998 and for each of the three years ended May 31, 1998, 1997 and 1996 and the balance sheet data as of December 31, 1998 set forth below are derived from the audited combined financial statements included in this information statement/prospectus. They should be read in conjunction with those financial statements and the notes. The statement of operations data for the nine month periods ended September 30, 1999 and 1998 and for the seven month period ended December 31, 1997 and for years ended May 31, 1995 and 1994 and the balance sheet data as of September 30, 1999 are derived from unaudited combined financial statements. The historical financial information may not be indicative of our future performance and does not necessarily reflect what our financial position and results of operations would have been had we operated as a separate, stand-alone entity during the periods covered. eLOYALTY STATEMENTS OF OPERATIONS DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> FOR THE NINE FOR THE SEVEN MONTH MONTH PERIODS PERIODS ENDED ENDED SEPTEMBER 30, DECEMBER 31, FOR THE YEARS ENDED MAY 31, ------------------ --------------------- --------------------------------------------- 1999 1998 1998 1997 1998 1997 1996 1995 1994 -------- ------- ------- ----------- ------- ------- ------- ------ ------ (UNAUDITED) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Revenues(1).......................... $107,652 $77,685 $64,415 $43,668 $84,488 $43,181 $26,516 $6,132 $1,333 Revenues less project personnel(1)... $ 55,066 $40,221 $33,113 $21,339 $43,159 $25,103 $14,842 $2,995 $ 618 Operating income (loss)(1, 2)........ $ 7,748 $ 3,952 $ (230) $ 911 $ 4,259 $ 4,808 $ 4,907 $ (179) $ (101) Net income (loss)(1, 2).............. $ 4,086 $ 2,014 $ (543) $ 335 $ 2,213 $ 2,926 $ 3,050 $ (128) $ 2 Basic net income (loss) per common share(3)........................... $ 0.10 $ 0.05 $ (0.01) $ 0.01 $ 0.05 $ 0.07 $ 0.07 $(0.00) $ 0.00 Diluted net income (loss) per common share(3)........................... $ 0.09 $ 0.04 $ (0.01) $ 0.01 $ 0.05 $ 0.06 $ 0.07 $(0.00) $ 0.00 Shares used to calculate basic net income (loss) per share (in millions)(3)....................... 41.4 41.4 41.4 41.4 41.4 41.4 41.4 41.4 41.4 Shares used to calculate diluted net income (loss) per share (in millions)(3)....................... 47.6 46.5 41.4 45.8 46.8 46.6 45.5 41.4 46.0 </TABLE> eLOYALTY BALANCE SHEET DATA (IN THOUSANDS) <TABLE> <CAPTION> AS OF AS OF SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ (UNAUDITED) <S> <C> <C> Cash and cash equivalents................................... $10,654 $ 4,411 Working capital............................................. $51,932 $26,231 Total assets................................................ $92,792 $63,904 Stockholders' Equity........................................ $71,289 $47,888 </TABLE> - --------------- (1) Includes the results of acquired businesses since their acquisition dates. See Note 3 to the Notes to Combined Financial Statements. (2) Includes goodwill amortization of $3,748, $2,704, $2,450, $1,856, $3,201 and $376 for the nine month periods ended September 30, 1999 and 1998, the seven month periods ended December 31, 1998 and 1997, and the years ended May 31, 1998 and 1997, respectively, and amortization of capitalized software to be sold of $320, $447, $206, $354 and $110 for the nine months ended September 30, 1998, the seven month periods ended December 31, 1998 and 1997, and the fiscal years ended May 31, 1998 and 1997, respectively. There was no goodwill amortization for the years ended May 31, 1996, 1995 and 1994. There was no amortization of capitalized software to be sold during the nine month period ended September 30, 1999 and the years ended May 31, 1996, 1995 and 1994. (3) In December 1999, eLoyalty issued 41.4 million shares to Technology Solutions Company. Basic earnings per share have been computed by dividing the net income/(loss) for each period presented by the 41.4 million shares. Diluted net earnings per share was computed by dividing the net income/(loss) for each period presented by the 41.4 million shares plus the estimated effect of dilutive stock options using the "treasury stock" method. See Note 8 to the Notes to Combined Financial Statements for a discussion of stock options. All other share numbers in this information statement/prospectus, unless we specifically state otherwise, assume that we have issued: - 41.4 million shares of our common stock to Technology Solutions Company; and - 2.4 million shares of our common stock to Sutter Hill Ventures and four entities controlled by Technology Crossover Management III, L.L.C. ("Technology Crossover Ventures") under an agreement that we have with them. See "Certain Transactions."
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully. We are a provider of training courses that are accessible by users through corporate intranets or remotely through the internet. Our courses cover a variety of professional effectiveness and business topics (commonly called "soft skills"). All of our courses and support tools have been specifically designed to take advantage of the benefits offered by the internet and the Web-based environments of our customers and are accessible through standard Web browsers, which are common software applications that allow users to access and interact with Web sites. This enables users of our products to access the material they need, with the specificity or breadth that they require, anytime or anywhere that they may need it. Our customers receive comprehensive training and support solutions for their employees, comprised of our library of courses and our job performance support tools. Our library of over 215 courses encompasses a wide array of professional effectiveness skills, such as management, leadership, communication, project management and customer service, as well as business topics such as finance, marketing, sales and strategy. We develop all of our courses in cooperation with outside organizations that provide course content or assemble the courses according to our design models. Our job performance support tools, which are accessible on demand through a Web browser via computer networks or the internet, are designed to assist users to improve their ability to perform job related tasks. These performance support tools include: - Search-and-Learn technology, which permits users to perform online searches of their company's entire library of SkillSoft courses for a specific training topic and to directly access only what they need; - Online Mentoring, which enables users to interact via e-mail with experts on a topic from any Web connection; and - Online Job Aids, which consist of over 600 topical refreshers and worksheets that are accessible online and designed to assist users with job-related tasks. Our training resources are designed to increase the competitive strength and productivity of organizations by improving employee performance with immediate, universally accessible skill enhancers and job support tools. We believe that our courses appeal to a broader range of employees than do courses on information technology and other specialized topics, and assist in improving employee retention by sending a positive message to employees that they are valued. We market our courses primarily to large businesses, governmental organizations and educational institutions. As of December 31, 1999, we had 87 direct customers, including GTE. There are a number of problems that make it increasingly difficult for traditional classroom instruction to address the training needs of many larger corporations, such as: - travel costs; - scheduling difficulties; - the opportunity costs of employees' time; and - the inability of classroom instruction to deliver training at the time and place an employee most needs it -- right before the employee needs to apply the skill in the workplace. As a result, companies are increasingly utilizing technology-based training solutions to meet the educational needs of their employees. To date, companies have typically relied upon CD-ROMs and other technology-based forms of instruction to alleviate the shortcomings of instructor-led training. We believe, however, that our Web-based training solution provides a number of significant advantages over other technology-based [Graphics appearing on inside front cover: Picture of individuals using the SkillSoft products against a backdrop stating "SkillSoft eLearning for the Knowledge Economy." [Graphics appearing on inside back cover: Picture of a globe in the center of a spider's web with software program screens depicting the learning resources offered by SkillSoft with the statement "SkillSoft eLearning for the Knowledge Economy" in the bottom left corner.] [Graphics appearing on gatefold following inside front cover: Picture of a globe in the center of a spider's web with the SkillSoft logo in the center of the globe and software program screens around the web depicting the learning resources offered by SkillSoft. The upper left corner states "SkillSoft eLearning for the Knowledge Economy."] training products -- such as CD-ROMS, satellite broadcasts and client/server applications -- including: - more flexible and cost-efficient deployment of courses, enabling users to access our training materials anywhere, anytime and only in the amounts they need; - job performance support tools that are accessible by using a Web browser via a computer network or the internet, such as Search-and-Learn technology, Online Mentoring and Online Job Aids; these tools allow users to tailor our educational resources to their individual needs and pace and to obtain specific, real-time assistance with job related tasks when they need it most; - easier to use products that incorporate features that allow users to interact intuitively with our programs, without prior training or instruction; - improved means of product and user support through electronic distribution of products and updates over the internet or corporate intranets; and - increased ability for users to track and bookmark their progress, and for administrators to monitor use and effectiveness of courses. Our Web-based products represent a new and emerging approach for the soft skills training market. Our products apply new technological capabilities of the internet, such as search engines, which allow a user to quickly locate and access information without having to know where that information resides, and hypertext links, which allow a user to use a computer mouse to click on highlighted text in one electronic document to locate and display other electronic documents. As a result, we believe that our training resources will transform corporate training from a distinct event, often off-site and limited in scope, to a process of continuous learning and improvement that will inherently maximize time utilization and employee effectiveness. Our goal is to be the leading global provider of high-quality, Web-based learning and job performance support products. To achieve this objective, we are continuing to expand our library of courses and to integrate new technologies that address the needs of our customers and make our products easier to use and more effective. We are also increasing our domestic sales force and developing an international sales organization, while leveraging our client relationships to deepen our penetration within those companies and in the market. Finally, we are continuing to increase our reseller network and are expanding our strategic alliances with educational institutions to further diversify our distribution channels. Our executive management team, led by our President and Chief Executive Officer, Charles E. Moran, has over 70 years of combined experience in the technology and education industries. We commenced operations in January 1998 and commercially released our first product in March 1999. Our net loss for the nine months ended October 31, 1999 was $12,233,201 and our accumulated deficit through October 31, 1999 was $25,095,175. OUR ADDRESS Our principal executive offices are located at 20 Industrial Park Drive, Nashua, New Hampshire 03062, and our telephone number at that location is (603) 324-3000. Our Web site is located at www.skillsoft.com. We were incorporated in Delaware in October 1997. SkillSoft has applied for federal registration of some of its trademarks, including "NetPlay" and "NetUniversity" and "eLearning for the Knowledge Economy." Other trademarks or service marks appearing in this prospectus are the property of their respective holders. THE OFFERING Common stock offered.......... 3,100,000 shares Common stock to be outstanding after the offering.......... 12,583,514 shares Use of proceeds............... For general corporate purposes, including working capital. See "Use of Proceeds." Proposed Nasdaq National Market symbol............... SKIL The number of shares of common stock to be outstanding after the offering is based on the number of shares outstanding on December 31, 1999. This number does not include 720,080 shares of common stock issuable upon the exercise of stock options outstanding on December 31, 1999. Unless otherwise specified, all information in this prospectus: - assumes no exercise of the underwriters' over-allotment option; - reflects a two-for-three reverse split of our common stock that occurred in December 1999; - reflects the automatic conversion into common stock of all outstanding shares of preferred stock that will occur upon the closing of this offering; and - reflects the reclassification of all outstanding shares of Class A common stock into common stock that will occur prior to the closing of this offering. SUMMARY FINANCIAL DATA (IN THOUSANDS) You should read this summary information with the discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and notes to those statements included elsewhere in this prospectus. <TABLE> <CAPTION> PERIOD FROM NINE MONTHS ENDED INCORPORATION YEAR ENDED OCTOBER 31, (OCTOBER 15, 1997) JANUARY 31, ------------------- TO JANUARY 31, 1998 1999 1998 1999 ------------------------- ---------------- ------- -------- <S> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenue.................... $ -- $ -- $ -- $ 2,371 Cost of revenue............ -- -- -- 497 ----- ------- ------- -------- Gross profit............... -- -- -- 1,874 Total operating expenses... 827 8,609 4,977 14,253 Interest income, net....... 3 336 271 146 ----- ------- ------- -------- Net loss................... $(824) $(8,273) $(4,706) $(12,233) ===== ======= ======= ======== </TABLE> The following balance sheet table presents our balance sheet as of October 31, 1999 on an actual basis, on a pro forma basis giving effect to the conversion of all outstanding convertible preferred stock into common stock, and on a pro forma as adjusted basis giving effect to the sale of 3,100,000 shares of common stock offered hereby at an assumed initial public offering price of $13.00 per share, after deducting estimated underwriting discounts and commissions and offering expenses. <TABLE> <CAPTION> AS OF OCTOBER 31, 1999 ------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- ---------- ----------- <S> <C> <C> <C> BALANCE SHEETS DATA: Cash, cash equivalents, and short-term investments...................................... $ 528 $ 528 $37,232 Working capital (deficit)........................... (482) (482) 36,222 Total assets........................................ 3,385 3,385 40,089 Long-term liabilities............................... -- -- -- Convertible preferred stock......................... 20,710 -- -- Stockholders' equity................................ 79 79 36,783 </TABLE>
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in the common stock. You should read the entire prospectus carefully, including "Risk Factors" and our financial statements before making an investment decision. THE MANAGEMENT NETWORK GROUP, INC. We provide management consulting services to the global telecommunications industry, including communications service providers, technology companies and financial services firms. We provide a comprehensive range of services, including strategic, management and operational advice, that enable our clients to meet the challenges of today's competitive and dynamic telecommunications environment, including the growing demand for electronic business, known as e-business, infrastructure. Since our inception in 1990, we have performed services for approximately 235 clients. Based on revenues, our top two clients for fiscal 1999 and for the six month period ended July 1, 2000 were Williams Communications Group and diAx. Our industry-focused services help our broad range of clients capitalize on the vast opportunities brought about by a rapidly changing telecommunications market. Our complete range of solutions include: - strategic assessments; - design and evaluation of telecommunications infrastructure; - operational support and process improvement; and - system evaluation, selection and implementation advice. The sophisticated services we provide make extensive use of the proprietary methodologies we have developed, ensuring the high quality and timeliness of our services. Our solutions enable our clients to compete more effectively by aligning their service offerings with their chosen market strategies. In addition, our solutions allow them to offer their services cost-effectively and accelerate the introduction of new technologies, while improving overall customer satisfaction and retention, all of which are critical components of their profitability. We provide our services through highly experienced consultants who average over ten years of industry experience. In 1998 and 1997, our President and Chief Executive Officer was named by Phone+ magazine, a trade publication, to its annual list of the most influential people in competitive long distance telecommunications. In both years he was the highest-ranking non-carrier executive selected for this list. We believe our clients value the extensive expertise and industry knowledge our consultants provide, enabling us to develop relationships with many of our clients, who in many cases rely on our advice and services to make critical strategic and business decisions. Our key growth initiatives include: - combining our telecommunications and e-business expertise to help our clients successfully develop and deploy the underlying infrastructure to support the internet and to meet their growing e-business requirements; - capitalizing on our competitive telecommunications experience to expand globally to serve our clients' growing global needs as overseas markets continue to face increasing deregulation and competition; - further enhancing our long-term client relationships to allow us to jointly plan future projects and develop large, multi-year contracts; - building our brand through several marketing initiatives; and - extending our business model by enhancing our business processes that can be duplicated worldwide. THE OFFERING Common stock offered by us....... 1,000,000 shares Common stock offered by the selling stockholders............. 3,000,000 shares Common stock outstanding after this offering.................... 28,496,444 shares Use of Proceeds.................. To enhance our European initiative, enhance our toolsets, support TMNG.com and for general corporate purposes, including working capital and potential acquisitions. Nasdaq National Market symbol.... TMNG ------------------------ The number of shares of common stock outstanding after this offering is based on the number of shares outstanding as of July 1, 2000 and does not include the following: - 2,528,216 shares of common stock subject to options issued at a weighted average exercise price of $7.14 per share granted under our 1998 equity incentive plan; and - 500,000 shares of our common stock subject to an outstanding warrant issued to Williams Communications Group at an exercise price of $2.00 per share. Please see "Capitalization" for a more complete discussion regarding the outstanding shares of our common stock and options to purchase our common stock and other related matters. ------------------------ RECENT DEVELOPMENTS Since our initial public offering on November 23, 1999 through the six month period ended July 1, 2000, we have experienced the following developments in our business: - Clients and Alliances. We have added 42 high quality new clients, including communication service providers, technology companies, and investment banking and financial services firms. We have expanded our alliances with large systems integration and applications development organizations to expand our distribution channels and provide clients a complete solution. - International Operations. During the six month period ended July 1, 2000, revenues from international operations were 29.1% of our total revenues with the European market being the focus of such growth and initiative. Also during the six month period ended July 1, 2000, we increased our presence in Latin America, anchored by our consulting agreement with iPlan Networks, a facilities-based telecommunications provider headquartered in Argentina that combines fiber optics and wireless technology. - TMNG.com. TMNG.com generated 28 new engagements with new and existing clients since introduction in third quarter 1999. TMNG.com assists companies pursuing e-business opportunities with the construction of the infrastructure, systems and processes needed to support e-business. For example, TMNG.com addresses the back-office requirements of Internet and Application Service Providers (ISP and ASP), two growth strategies common to many communication service providers. ------------------------ CORPORATE INFORMATION Our principal executive offices are located at 7300 College Boulevard, Suite 302, Overland Park, Kansas 66210 and our telephone number is (913) 345-9315. Our web site is www.tmng.com and our corporate email address is "info@tmng.com." Any reference contained in this prospectus to our web site, or to any other web site, shall not be deemed to incorporate information from those sites into this prospectus. ------------------------ Unless otherwise noted, all information in this prospectus assumes that the underwriters will not exercise their option to purchase additional shares of common stock to cover over-allotments. SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The following summary financial information should be read in conjunction with our consolidated financial statements and their related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this prospectus. Listed below is our statement of operations data for fiscal years 1995 through 1999 and for the six months ended July 3, 1999 and July 1, 2000 and our balance sheet data as of July 1, 2000. The results for the interim periods are not necessarily indicative of the results for the full fiscal year or any future period. Interim results reflect all adjustments, which are in the opinion of management, necessary to a fair statement of these results. To calculate the pro forma provision for income taxes and pro forma net income available to stockholders for fiscal year 1998 and earlier, we have assumed the pro forma provision for income taxes reflects adjustments to historical net income as if we had not elected subchapter "S" corporation status for federal and state income tax purposes. Beginning with fiscal 1998, we switched to a four week -- four week -- five week quarterly accounting system in which each quarter is 13 weeks long and ends on a Saturday. As a result of this change, our fiscal year end changed from December 31 to the Saturday which is 13 weeks from the end of the third fiscal quarter. The words "fiscal year" in this prospectus refer to the fiscal year most closely coinciding with the related calendar year. Our 1998 fiscal year therefore ended on January 2, 1999. Our 1999 fiscal year ended on January 1, 2000. When we refer to the "six month period for 1999" and to the "six month period for 2000" in this prospectus, we mean the six month periods ended on July 3, 1999 and July 1, 2000, respectively. <TABLE> <CAPTION> SIX MONTHS ENDED FISCAL YEAR ------------------ --------------------------------------------------- JULY 3, JULY 1, 1995 1996 1997 1998 1999 1999 2000 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues.............................................. $ 7,299 $17,279 $20,184 $32,103 $50,322 $23,856 $35,866 ------- ------- ------- ------- ------- ------- ------- Cost of services: Direct cost of services............................. 4,303 9,648 11,384 17,411 26,109 12,377 18,638 Equity related charges.............................. 239 2,780 956 3,917 ------- ------- ------- ------- ------- ------- ------- Total cost of services........................ 4,303 9,648 11,384 17,650 28,889 13,333 22,555 ------- ------- ------- ------- ------- ------- ------- Gross profit.......................................... 2,996 7,631 8,800 14,453 21,433 10,523 13,311 ------- ------- ------- ------- ------- ------- ------- Operating expenses: Selling, general and administrative expenses........ 1,242 2,798 3,280 6,158 9,777 4,886 7,448 Equity related charges.............................. 22 1,998 570 810 ------- ------- ------- ------- ------- ------- ------- Total operating expenses...................... 1,242 2,798 3,280 6,180 11,775 5,456 8,258 ------- ------- ------- ------- ------- ------- ------- Income from operations................................ 1,754 4,833 5,520 8,273 9,658 5,067 5,053 ------- ------- ------- ------- ------- ------- ------- Total other income (expense).......................... 4 (120) (16) (1,948) (1,789) (1,193) 1,499 Income before provision for income taxes and extraordinary item.................................. 1,758 4,713 5,504 6,325 7,869 3,874 6,552 Provision for income taxes............................ (3,282) (3,208) (1,612) (2,621) ------- ------- ------- ------- ------- ------- ------- Income available to common stockholders before extraordinary item.................................. 1,758 4,713 5,504 3,043 4,661 2,262 3,931 Extraordinary item.................................... (200) ------- ------- ------- ------- ------- ------- ------- Net income available to common stockholders........... $ 1,758 $ 4,713 $ 5,504 $ 3,043 $ 4,461 $ 2,262 $ 3,931 ======= ======= ======= ======= ======= ======= ======= Income before extraordinary item per common share: Basic............................................... $ 0.08 $ 0.21 $ 0.24 $ 0.14 $ 0.20 $ 0.10 $ 0.14 ======= ======= ======= ======= ======= ======= ======= Diluted............................................. $ 0.08 $ 0.21 $ 0.24 $ 0.13 $ 0.20 $ 0.10 $ 0.14 ======= ======= ======= ======= ======= ======= ======= Net income per common share: Basic............................................... $ 0.08 $ 0.21 $ 0.24 $ 0.14 $ 0.19 $ 0.10 $ 0.14 ======= ======= ======= ======= ======= ======= ======= Diluted............................................. $ 0.08 $ 0.21 $ 0.24 $ 0.13 $ 0.19 $ 0.10 $ 0.14 ======= ======= ======= ======= ======= ======= ======= Weighted average common shares outstanding: Basic............................................... 22,500 22,500 22,500 22,500 23,056 22,507 27,443 ======= ======= ======= ======= ======= ======= ======= Diluted............................................. 22,500 22,500 22,500 22,944 23,807 22,991 28,664 ======= ======= ======= ======= ======= ======= ======= Pro forma provision for income taxes(1)............... $ 703 $ 1,885 $ 2,202 $ 2,530 Pro forma net income available to stockholders........ $ 1,055 $ 2,828 $ 3,302 $ 3,795 ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> JULY 1, 2000 ------------------------- PRO FORMA ACTUAL AS ADJUSTED(2) ------- -------------- (IN THOUSANDS) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Net working capital......................................... $68,455 $ 99,579 Total assets................................................ $78,626 $109,749 Common stockholders' equity................................. $72,654 $103,777 </TABLE> --------------- (1) Before February 12, 1998, we were a subchapter "S" corporation and, accordingly, federal and state income taxes were paid at the stockholder level only. Upon consummation of the February 1998 leveraged recapitalization, we terminated our subchapter "S" corporation status and, accordingly, became subject to federal and state income taxes. The pro forma provision for income taxes and pro forma net income available to stockholders reflect adjustment to historical net income as if we had not elected subchapter "S" corporation status for federal and state income tax purposes. (2) As adjusted reflects the issuance of 1,000,000 shares of common stock by us in this offering at an assumed offering price of $33.00 per share and deducting the underwriting discounts and commissions and estimated offering expenses.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001094819_intellesal_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001094819_intellesal_prospectus_summary.txt
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+SUMMARY The information below is only a summary of more detailed information included in other sections of this prospectus. The other information is important, so please read this entire prospectus carefully. Unless otherwise stated, the information contained in this prospectus assumes that the underwriters' over-allotment option to purchase a total of 855,000 shares of common stock from us and from Applied Digital Solutions is not exercised and that we issue 1,629,889 shares of common stock to the sellers of businesses we previously acquired as described under "Certain Relationships and Related Transactions -- Acquisition of Minority Interests." INTELLESALE.COM, INC. OUR BUSINESS Intellesale sells refurbished and new computer equipment and related products. We sell products online through our website at www.Intellesale.com and through other Internet companies, as well as through traditional channels, which include sales made by our sales force and through products advertised via catalogs and other conventional media advertising. Our business consists of the operations of 14 businesses acquired by Applied Digital Solutions from 1995 through 1999 that have been operated by our senior management as a separate operating unit of Applied Digital Solutions. These predecessor businesses acquired by Applied Digital Solutions were combined into Intellesale in July 1999 in anticipation of this offering. We began offering products on the Internet in the second quarter of 1998 with our acquisition of Data Path Technologies, one of our predecessor companies. We established the Intellesale.com website in January 1999 and began to focus our business on, and migrate our business to, the Internet. The Internet is our fastest growing sales channel, and we believe that the Internet will be the basis for our future growth. In addition to selling products on our website, we distribute products over the Internet through arrangements with other online companies. In addition to our Internet retail business, we buy and remarket computer equipment and components to traditional wholesalers, retailers and value-added resellers, as well as individual and corporate end users, and provide integration and consulting services, computer recycling, parts-on-demand services and transportation services for computer and other equipment. We are transitioning this traditional commerce business to the Internet to the extent feasible. We offer a wide range of refurbished and new products, including laptop and desktop computers, monitors, disk drives, modems, printers, scanners, memory, expansion boards, cables and connectors. The majority of the products we offer are brand name Intel Pentium(R) class or equivalent products manufactured by IBM, Toshiba, Sony, Fujitsu, Compaq, Hewlett-Packard and other major manufacturers. We offer our customers complete packages including monitors, regularly-featured specials and the ability to purchase selected merchandise on an auction basis. We provide a minimum six-month warranty for most products not covered by manufacturer warranties. In addition, we offer our customers the opportunity to purchase an extended warranty, which is priced on the basis of the selling price of the item covered. <PAGE> 5 We are not aware of any major online retailers currently focusing principally on refurbished computer equipment. We believe the demand for refurbished brand name computer equipment is growing as consumers realize they can purchase refurbished products that can serve their needs at substantial discounts to the price of new merchandise. At the same time, shorter product cycles result in frequent replacement of equipment. This leads to increased quantities of off-lease and excess inventory computer equipment which vendors and leasing companies need to dispose of in large quantities without adversely affecting their lease or sale of new products. We offer such vendors and leasing companies the ability to conveniently sell all their products in a single transaction. We believe that our ability to acquire many different types of equipment in large quantities through our established vendor relationships provides us with a significant competitive advantage both with consumers and vendors. According to International Data Corporation, a market research firm, the number of people making purchases over the Internet will increase from approximately 31 million in 1998 to approximately 183 million in 2003. According to Jupiter Communications, another market research firm, the second largest category of e-commerce spending is computer hardware and software, which Jupiter projects will grow from approximately $3.1 billion in 1998 to approximately $15.8 billion in 2003. Our goal is to become the website of choice for consumers and businesses seeking refurbished and new computer equipment. Our strategy to achieve our goal includes the following: Increase Brand Awareness. Although we have not devoted significant resources to the marketing and promotion of our brand, for the first nine months of 1999 our Internet revenues represented 35.8% of our total revenues. We intend to use a portion of the proceeds from this offering to increase our marketing and promotional efforts in order to increase our brand awareness. We believe that a strong brand name is critical to differentiating Intellesale and attracting a high level of customer traffic and purchases. Increase Cooperative Relationships. We have established cooperative relationships with several online companies, including Egghead.com (formerly OnSale) which hosts auctions of our products in exchange for a commission. We also advertise on, and sell our products through, other Internet portals and websites. We intend to expand our existing programs and establish new programs under which other online companies will promote our products on their websites and in their other customer communications. Continue Improving Our Website. We intend to expand our Internet sales through continued upgrading and improvements to our website. We plan to add new features to our website and improve its design on an ongoing basis. Migrate Other Parts of Our Business to the Internet. We believe most of our products can be marketed more effectively through our website. As we expand our Internet presence, we have begun to migrate the traditional commerce segment of our business to the Internet to the extent feasible, which should allow us to expand our customer base, increase efficiency and reduce our operating costs. Expand and Improve Procurement Sources. In order to be able to offer attractive prices to customers yet maintain our margins, we must be able to acquire a sufficient amount of product at favorable prices. In order to continue and expand our procurement capability, we intend to maintain and enhance our existing relationships with leasing companies, manufacturers and other sources of equipment and to pursue new relationships. 2 <PAGE> 6 ABOUT US We were incorporated in Delaware in December 1998 by our parent corporation, Applied Digital Solutions, Inc., and in July 1999 we combined the predecessor businesses operated by our senior management as a separate operating unit of Applied Digital Solutions into Intellesale. When we refer to "we" or "us" in describing our business or operations, we are referring to these businesses and operations which have been combined to make up Intellesale. Applied Digital Solutions, which currently owns approximately 80% of our outstanding stock and is the selling stockholder in this offering, is principally engaged in the communications industry and is publicly traded on the Nasdaq National Market. Following completion of this offering Applied Digital Solutions will beneficially own approximately 49.9% of our common stock. Applied Digital Solutions has agreed to vote its shares in proportion to the votes of the other stockholders. Our principal offices are located at 510 Ryerson Road, Lincoln Park, New Jersey 07035, and our telephone number is (973) 686-9100. Our website is www.Intellesale.com. The information on our website is not incorporated by reference into this prospectus.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001094959_h-power_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001094959_h-power_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE RISKS OF INVESTING IN OUR COMMON STOCK DISCUSSED UNDER "RISK FACTORS." OUR FISCAL YEAR ENDS MAY 31. OUR COMPANY H Power is a leading fuel cell development company. We believe that we were the first to complete a commercial sale of proton-exchange membrane, or PEM, fuel cell systems. Our PEM fuel cells are designed to provide electricity for a wide range of stationary, portable and mobile applications. We believe that our residential cogeneration products will be adopted in our first target market, consisting of rural, remote homes, because they will best meet the criteria used by the customer in choosing a residential power source. These criteria include price, operating cost, noise, pollution, reliability and maintenance. We believe that as our stationary, portable and mobile products gain acceptance in the market and are manufactured in large quantities, their cost will decline and their reliability will increase until they can provide electricity competitively for a wide variety of applications and geographical territories. PEM fuel cells are devices that generate electricity efficiently and cleanly from the electrochemical reaction of hydrogen and oxygen. Hydrogen is typically derived from conventional fuels such as natural gas or propane, while oxygen is drawn from the air. In August 1999, we entered into a ten-year agreement with ECO Fuel Cells, LLC, a subsidiary of Energy Co-Opportunity, Inc. (ECO), to market, sell, install and service our stationary power fuel cell systems. ECO is an association of approximately 250 U.S. rural electric cooperatives. We have granted ECO the right to market our products to more than 900 cooperatives whose service territory includes 83% of the U.S. counties in 47 states. These cooperatives supply power to approximately 14 million U.S. households, farms and small businesses. ECO also has the right to market H Power's products to the additional 37 million households in this service territory that are served by municipal and investor-owned electric utilities. ECO has agreed to purchase 12,300 of our stationary fuel cell systems over several years for an aggregate purchase price of approximately $81 million. ECO's ability to purchase these systems from us depends on its ability to resell the systems to its cooperatives and customers. In March 2000, we completed the first installation of our prototype stationary fuel cell system to an ECO cooperative. We have not yet completely developed and produced the stationary fuel cell systems we have agreed to sell to ECO. We believe that ECO's rural customer base will be among the most likely early adopters of fuel cell technology. As of May 31, 2000, we delivered and installed five test and evaluation units to ECO. We intend to establish manufacturing facilities in the first half of the calendar year 2001 to meet our goal of shipping initial commercial units in the second half of calendar year 2001. We expect that the introductory price of our stationary power fuel cell systems will be less than $10,000. Our product cost analyses indicate that after two to three years of commercial production, efficiencies in production and learning experience should reduce substantially the cost of our PEM fuel cell systems. During this two to three year period, our fuel cell systems will likely be sold to ECO at a price below the costs of production. We believe that our systems would then become attractive to a significant percentage of the additional 37 million households, particularly those in areas where the cost of electricity is relatively high and the cost of natural gas is relatively low. We seek to be among the first to mass market stationary and portable and mobile fuel cell systems. We first achieved commercial operation and sale of our low power systems in 1998 and are now offering for sale five portable and mobile fuel cell systems ranging in power from 35 watts to 250 watts under the trade name PowerPEM-Registered Trademark-. These products are designed as battery substitutes and power <PAGE> sources for potential applications ranging from traffic systems to golf carts to consumer devices. We believe that demand for portable and mobile fuel cell systems will be driven by consumer preference for smaller power sources with longer operating lives and lighter weights. We have installed our first prototype stationary fuel cell systems and expect these multi-kilowatt systems to be commercially available in the second half of calendar year 2001. Our stationary products in development include a residential cogeneration system, designed to meet the electricity requirements of a typical home, and a system which is designed as a backup power source during grid power outages. We are also developing products targeted for telecommunications backup which we believe will be available in the second half of calendar year 2001. FIRST TO COMMERCIALIZE FUEL CELLS In June 1998, we began fulfilling our commitment to deliver 65 backup power units to the New Jersey Department of Transportation for use with its variable message highway signs. As of May 31, 2000, we had delivered 53 of these units, all of which are in operation. We believe that this transaction represents the world's first commercial sale of a sizeable number of competitively-bid, non-subsidized PEM fuel cell systems offered with a warranty. This sale has been our only commercial sale to date. FAVORABLE INDUSTRY AND MARKET TRENDS According to the Gas Research Institute, the percentage of power generation supplied by central utilities will continue to decline over the next ten years due in large part to state deregulation legislation which should increase competitive pricing and make power generation less profitable for those utilities. A growing share of total generation will be provided by non-utility generators, of which merchant generators will provide the biggest share. Generation by large non-central generators and distributed generators will also grow. In particular, we believe that demand for fuel cell products will increase as the worldwide need for distributed, off-grid electric power grows. We believe that a number of market trends favor significant penetration of fuel cells into the distributed power generation market, including the: - increasing requirements for continuous, reliable primary and backup electric power, particularly in rural areas and in developing countries; - continuing privatization and deregulation of utilities, which is likely to open the market for alternative power; and - increasing desire of utilities to avoid costly central generation, transmission, maintenance and distribution expenditures. OUR STRATEGY Our strategy is to establish PEM fuel cells as a major alternative power source and to become the leading commercial provider of PEM fuel cells and fuel cell systems for applications below 25 kilowatts. We intend to implement this strategy by: - focusing on existing markets for stationary power products, such as rural areas; - strengthening our existing strategic relationships and aggressively pursuing additional manufacturing, marketing and distribution partnerships; - penetrating markets for portable and mobile fuel cell products; - developing low-cost, state-of-the-art manufacturing capabilities; - capitalizing on our technological advantages over other fuel cell developers and other potential alternative power sources; and - developing and acquiring advanced, complementary technologies. 2 <PAGE> OUR HISTORY We were incorporated in Delaware in June 1989. We have incurred a cumulative net loss since inception through May 31, 2000 of approximately $44.7 million. We anticipate incurring significant additional losses through at least our fiscal year 2002, primarily as a result of our substantial research and development expenditures and increased sales and marketing expenses. Our industry is new and is characterized by significant capital investment, intense competition and ongoing technical development. Since 1996, we have received an aggregate of approximately $46.5 million in equity financing from strategic and financial investors. Our principal executive offices are located at 1373 Broad Street, Clifton, New Jersey 07013 and our telephone number is (973) 450-4400. THE OFFERING <TABLE> <S> <C> Common stock offered......................... 7,000,000 shares Common stock to be outstanding............... 52,756,860 shares after the offering Use of proceeds.............................. For the acquisition of new manufacturing facilities, capital expenditures, research and product development, sales and marketing, potential acquisitions and for general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol....... "HPOW" </TABLE> UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS WILL NOT EXERCISE THEIR OVER-ALLOTMENT OPTION TO PURCHASE 1,050,000 SHARES OF OUR COMMON STOCK AT THE PRICE SET FORTH ON THE COVER PAGE OF THIS PROSPECTUS. IN ADDITION, UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS, INCLUDING THE OUTSTANDING SHARE INFORMATION ABOVE, IS BASED UPON THE NUMBER OF SHARES OUTSTANDING AS OF MAY 31, 2000 AND GIVES EFFECT TO A 5-FOR-1 STOCK SPLIT OF OUR COMMON STOCK WHICH WAS EFFECTED ON JULY 24, 2000 AND THE FOLLOWING TRANSACTIONS TO BE EFFECTED IMMEDIATELY PRIOR TO THE CONSUMMATION OF THIS OFFERING: - the conversion of all of our outstanding shares of mandatorily redeemable convertible preferred stock into a total of 6,000,000 shares of common stock; and - the issuance of 1,666,665 shares of our common stock to outside investors upon conversion of their 50% equity interest in our subsidiary, H Power Enterprises of Canada. The share information in the table above excludes: - 5,491,625 shares of common stock issuable upon the exercise of outstanding stock options at a weighted average exercise price of $4.91 per share; - 500,000 shares of common stock issuable upon the exercise of outstanding warrants at an exercise price of $5.00 per share; and - approximately 268,000 shares of common stock issuable to DQE Enterprises in payment of accrued dividends to which they are entitled. 3 <PAGE> SUMMARY FINANCIAL DATA The following table sets forth our summary financial data. You should read this information carefully together with our consolidated financial statements and the notes to those statements beginning on page F-1 of this prospectus, and the information under "Selected Financial Data," "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Our pro forma financial information gives effect to the conversion of all of our outstanding shares of mandatorily redeemable convertible preferred stock into a total of 6,000,000 shares of our common stock and the issuance of 1,666,665 shares of our common stock to outside investors upon conversion of their 50% equity interest in H Power Enterprises of Canada, all of which will be effected immediately prior to the consummation of this offering. For purposes of calculating our pro forma net loss per share, the pro forma items described above are assumed to have occurred on June 1, 1999. Our pro forma as adjusted results also give effect to our sale of 7,000,000 shares of common stock in this offering at an assumed initial public offering price of $12.00 per share, after deducting the underwriting discount and estimated offering expenses and the application of the net proceeds of that sale. <TABLE> <CAPTION> FISCAL YEAR ENDED MAY 31, ---------------------------------------------------- 1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenues................................ $ 1,935 $ 246 $ 718 $ 1,018 $ 3,680 Loss from operations........................ (2,857) (4,717) (6,400) (6,926) (17,681) Net loss.................................... (3,045) (4,746) (5,718) (6,766) (17,012) ------- -------- -------- ------- ------- Net loss attributable to common stockholders.............................. (3,045) (4,921) (5,928) (6,976) (17,222) ======= ======== ======== ======= ======= Loss per share, basic and diluted........... $ (0.11) $ (0.17) $ (0.20) $ (0.24) $ (0.49) ======= Weighted average shares outstanding, basic and diluted............................... 28,840 28,939 29,011 29,015 34,879 Pro forma net loss per share, basic and diluted................................... $ (0.40) ======= Pro forma weighted average shares outstanding, basic and diluted............ 42,546 </TABLE> <TABLE> <CAPTION> AS OF MAY 31, 2000 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................. $11,257 $11,257 $ 88,114 Working capital........................................... 13,213 13,213 89,434 Total assets.............................................. 18,650 18,650 94,191 Long-term debt............................................ 67 67 67 Minority interest......................................... 5,000 -- -- Mandatorily redeemable convertible preferred stock........ 15,327 -- -- Total stockholders' (deficit) equity...................... (6,938) 13,389 89,610 </TABLE> 4 <PAGE> RISK FACTORS BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD BE AWARE OF VARIOUS RISKS, INCLUDING THOSE DESCRIBED BELOW. YOU SHOULD CAREFULLY CONSIDER THESE RISK FACTORS, TOGETHER WITH ALL OF THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, BEFORE YOU DECIDE TO PURCHASE SHARES OF OUR COMMON STOCK. WE HAVE A HISTORY OF LOSSES SINCE OUR INCEPTION, WE EXPECT FUTURE LOSSES AND WE MAY NEVER ACHIEVE OR SUSTAIN PROFITABILITY. We have incurred net losses each year since our inception in 1989 and had an accumulated loss of approximately $44.7 million as of May 31, 2000. We expect to continue to incur net losses at least through our fiscal year 2002 and these losses may be substantial. To implement our business strategy, we will have to incur a high level of fixed operating expenses and we will continue to incur considerable research and development expenses and capital expenditures. Accordingly, if we are unable to generate substantial revenues and positive cash flows we will not achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase our profitability on a quarterly or annual basis. Our ability to generate future revenues will depend on a number of factors, many of which are beyond our control. These factors include the rate of market acceptance of our products, regulatory developments and general economic trends. Due to these factors, we cannot anticipate with any degree of certainty what our revenues, if any, will be in future periods. You have limited historical financial data and operating results with which to evaluate our business and our prospects. As a result, you should consider our prospects in light of the early stage of our business in a new and rapidly evolving market. SOME SHARES IN THIS OFFERING MAY HAVE BEEN OFFERED TOGETHER WITH MATERIALS DISTRIBUTED IN VIOLATION OF THE SECURITIES ACT OF 1933. IF ANY OF THESE OFFEREES PURCHASE SHARES IN THIS OFFERING, THEY MAY HAVE THE RIGHT TO RESCIND THEIR PURCHASES AND RECOVER THEIR PURCHASE PRICE, OR, TO THE EXTENT THEY HAVE SUFFERED DAMAGES, ASSERT CLAIMS AGAINST US FOR RECOVERY OF MONETARY DAMAGES. Prior to the effectiveness of the registration statement of which this prospectus is a part, a certain registered broker-dealer engaged in the distribution of research and other materials, including information pertaining to the fuel cell power industry, to approximately 131 recipients. This distribution was unauthorized by us, the lead underwriter for this offering or any of the several underwriters. We believe that the distributed research materials likely constituted a "prospectus" within the meaning of the Securities Act and that this prospectus did not satisfy the form and content requirements of the Securities Act. Accordingly, recipients of these materials who purchase common stock in this offering may have the right to rescind their purchases and recover their purchase price from us, or may be entitled to assert claims against us for recovery of monetary damages. These damages could be substantial if these investors were to seek and recover damages in a judicial proceeding following a material diminution in value of their investment in H Power. For example, assuming an initial public offering price of $12.00 per share, a sale of 50,000 shares to these recipients, and that these recipients suffer a total loss of their investment, these recipients ultimately may be entitled to recover up to $600,000 from us. To the extent that other investors purchasing shares in this offering have received these materials, our damages could be substantially greater and could materially harm our business, results of operations and financial condition. The research material distributed by the broker-dealer contained a market update, an equity research report on the fuel cell industry and a brochure regarding the brokerage firm. The market update sets forth an analysis of market conditions as well as featured investment recommendations which this prospectus does not address. Accordingly, we do not adopt any of the views set forth in this update. The equity research report on the fuel cell power industry contains statements which do not appear in this prospectus and which we do not endorse. These statements include "As we surge into the new millenium, investors are demonstrating a growing interest in fuel cell companies," "We believe this fascination is due to the tremendous multi-year investment potential offered by the sector," "In 5 <PAGE> particular, investors now have a growing number of publicly traded fuel cell companies to choose from..." and "...the possibility that fuel cell powered cars and buses may actually be on the market and available for purchase during the next 2-4 years." This report also contains various market statistics and certain investment recommendations relating to our competitors and their products. These statistics and recommendations are not presented in this prospectus and we express no opinion as to these statistics and recommendations. H Power has been advised that upon becoming aware of the unauthorized activities of this broker-dealer, the underwriters for this offering immediately terminated this broker-dealer's participation in the underwriting syndicate and required this firm to immediately cease and desist from the distribution of all materials and discontinue all contacts and communications with respect to this offering. No shares of our common stock will be allocated, directly or indirectly, to this broker-dealer and this firm will not be soliciting orders for or effecting any sales of our common stock in this offering. Investors who received any of the information referred to above should not rely on this information when considering an investment in our common stock. We urge all persons to read and base their investment decision solely on the disclosures contained in this prospectus. WE HAVE HAD ONLY ONE COMMERCIAL PRODUCT SALE. WE MAY NOT BE ABLE TO MANUFACTURE OR COMMERCIALIZE OUR PRODUCTS IN A COST-EFFECTIVE MANNER. To date, we have derived revenues principally from government research and development contracts. For our fiscal year ended May 31, 2000, we generated approximately $985,000 from sales of our fuel cell systems. Our only commercial order occurred in June 1998 and consisted of 65 backup power units to the New Jersey Department of Transportation, 53 of which have been delivered as of May 31, 2000. Our other product sales have been limited to demonstration and prototype models. We have not made any commercial sales of units that include fuel processing capabilities. We may not be able to produce or commercialize any of our products in a cost-effective manner, and, if produced, we may not be able to successfully market these products. We expect the production costs of the initial commercial units to be delivered under the ECO contract to be higher than their sales price and there can be no assurance that higher production levels will occur or that sales prices will ever exceed production costs. We do not have the manufacturing experience to handle large commercial requirements. We may not be able to develop manufacturing technologies and processes and expand our plant facilities to the point where they are capable of satisfying large commercial orders, including the demand for stationary fuel cell systems under the current ECO contract. Development and expansion of these technologies and processes require extensive lead times and the commitment of significant financial, engineering and human resources. We may not successfully develop the required manufacturing technologies and processes. WE MAY NOT BE ABLE TO DEVELOP THE NECESSARY TECHNOLOGY TO INTRODUCE AND MARKET OUR PRODUCTS IN A TIMELY FASHION, IF AT ALL. Our product and technology development efforts are subject to unanticipated and significant delays, expenses and technical or other problems, as well as the possible lack of funding to complete this development. Our success will depend upon our products and technologies meeting acceptable cost and performance criteria, and upon their timely introduction into the marketplace. None of our proposed products and technologies may ever be successfully developed, and even if developed, they may not actually perform as designed. Failure to develop or significant delays in the development of our products and technology would have a material adverse effect on our ability to sell our products and generate sufficient cash to achieve profitability. ANY ADVERSE CHANGE IN OUR RELATIONSHIP WITH ECO FUEL CELLS, LLC WOULD DELAY OUR ABILITY TO GENERATE REVENUES. We believe that a substantial portion of our revenues over the next two to three years will be derived from sales of our residential cogeneration unit, or RCU, to ECO. However, we have not yet fully developed and produced the RCU product we have agreed to sell to ECO. Economic and 6 <PAGE> technical difficulties may prevent us from completing development of the RCUs and delivering them on schedule to ECO. Moreover, ECO's financial ability to perform under the agreement and to purchase the units from us is entirely dependent on its ability to resell the units to its customer base. ECO's failure to successfully market our RCU, or a decision by ECO to alter its commitment to our fuel cell technology in favor of other energy product solutions, would substantially delay our ability to generate revenues and could negatively impact our liquidity and harm our reputation. Under the terms of our agreement, ECO has the right to delay delivery of our contracted-for units until the later of December 30, 2003 or thirty months from when the 10th commercial unit is shipped. In addition, ECO will be permitted to purchase fuel cell products that compete with our RCU and sell these competitive products to its customer base if our RCU does not remain competitive in terms of quality, price and performance. For a discussion of the material terms of our relationship with ECO, see "Business--Our ECO Relationship." MARKET ACCEPTANCE OF OUR FUEL CELL PRODUCTS MAY TAKE LONGER TO DEVELOP THAN WE ANTICIPATE OR MAY NEVER DEVELOP. Our stationary PEM fuel cell products represent a new technology and our success will depend on this technology achieving market acceptance. Because we design our products to capitalize on markets that presently utilize or are serviced by products from traditional and well-established power generation sources, such as engine-generators, we may face significant resistance from end-users to adopt a new and alternative power source technology. Fuel cell products for portable and mobile applications represent an emerging market and we do not know whether our targeted distributors, resellers or end-users will purchase our products. The development of a mass market for our portable and mobile products may be impacted by many factors, some of which are out of our control, including: - cost competitiveness of portable and mobile products; - consumer reluctance to try our products; - consumer perception of our systems' safety; and - emergence of newer, more competitive technologies and products. If a mass market develops more slowly than we anticipate or fails to develop, we may not be able to recover the expenses we incurred to develop these products. FAILURE OF OUR FIELD TESTS COULD NEGATIVELY IMPACT DEMAND FOR OUR PRODUCTS. We are currently field testing a number of our products and we plan to conduct additional field tests in the future. Field tests for the RCU to be sold to ECO have only recently begun. We may encounter problems and delays during these field tests for a number of reasons, including the failure of our technology or the technology of third parties, as well as our failure to maintain and service our prototypes properly. Many of these potential problems and delays are beyond our control. Any problem or perceived problem with our field tests could materially harm our reputation and impair market acceptance of, and demand for, our products. WE MAY NOT BE ABLE TO SATISFY OUR CONTRACTUAL OBLIGATIONS TO OUR CUSTOMERS IF WE ARE UNABLE TO RELOCATE TO NEW MANUFACTURING FACILITIES. We currently have only limited production facilities that are not capable of mass producing fuel cell systems. We will not be able to meet our obligations to ECO unless we promptly identify, acquire and bring on-line new large-scale manufacturing facilities. We have not yet identified suitable facilities and may not be able to do so. If we encounter delays in identifying suitable manufacturing plant facilities for purchase or lease, in obtaining the necessary equipment or in hiring and training personnel to commence large-scale manufacturing, we will not be able to fill customer orders, including prospective orders from ECO, or profitably manufacture our various fuel cell systems. 7 <PAGE> WE MAY NOT BE ABLE TO MEET OUR CUSTOMERS' DEMAND FOR OUR PRODUCTS IF WE DO NOT SUCCESSFULLY MANAGE THE EXPANSION OF OUR OPERATIONS. Locating and establishing new manufacturing facilities will place significant demands on our managerial, technical, financial and other resources. We will be required to make significant investments in our engineering and logistics systems, financial and management information systems and to retain, motivate and effectively manage our employees. There can be no assurance that our management skills and systems currently in place will enable us to implement our strategy or enable us to attract and retain skilled management and production personnel. Our failure to manage our growth effectively or to implement our strategy would have a material adverse effect on our ability to produce products and meet our contractual obligations. BECAUSE WE DEPEND ON THIRD-PARTY SUPPLIERS, WE MAY EXPERIENCE DELAYS IN RECEIVING KEY MATERIALS AND COMPONENTS NECESSARY TO PRODUCE OUR FUEL CELL SYSTEMS. We depend on third parties for the manufacture and assembly of materials and components used to make our products. If any of our suppliers are unable or unwilling to provide us with materials and components on commercially reasonable terms, or at all, delays in identifying and contracting for alternative sources of supply would adversely affect our ability to develop, manufacture and market our products. In addition, some of these materials and components, including the Nafion-Registered Trademark- polymer electrolyte membranes and bipolar plates, are purchased from a single or limited number of supply sources. WE MAY NOT BE ABLE TO SELL OUR FUEL CELL SYSTEMS IF THEY ARE NOT COMPATIBLE WITH THE PRODUCTS OF THIRD-PARTY MANUFACTURERS OR OUR POTENTIAL CUSTOMERS. Our success will depend upon our ability to make our products compatible with the products of third-party manufacturers. In addition, our mobile and portable products will be successful only if our potential customers redesign or modify their existing products to fully incorporate our products and technologies. Our failure to make our products and technologies compatible with the products of third-party manufacturers or the failure of potential customers to redesign or make necessary modifications to their existing products to accommodate our products would cause our products to be significantly less attractive to customers. THE FUELS ON WHICH OUR FUEL CELL PRODUCTS RELY MAY NOT BE READILY AVAILABLE ON A COST-EFFECTIVE BASIS. Our fuel cell products require oxygen and hydrogen to operate. While ambient air supplies the necessary oxygen, our fuel cells derive hydrogen from fuels such as natural gas, propane, methanol and other petroleum products. Even if these fuels are available to us, if their prices are such that electricity produced by our systems would cost more than electricity provided through the grid, potential users would have less of an economic incentive to purchase our units. WE MAY BE UNABLE TO COMPETE SUCCESSFULLY IN A HIGHLY COMPETITIVE MARKET. The development and marketing of fuel cells and fuel cell systems is extremely competitive. In many cases, we compete directly with alternative energy and entrenched power-generation and power-storage technologies. In addition, a number of firms throughout the world have established PEM fuel cell development programs. Competitors range from development stage companies to major domestic and international companies, many of which have: - substantially greater financial, technical, marketing and human resource capabilities; - established relationships with original equipment manufacturers; - name-brand recognition; and - established positions in the markets that we have targeted for penetration. These or other companies may succeed in developing and bringing to market products or technologies that are more cost-effective than those being developed by us or that would render our products and technology obsolete or non-competitive in the marketplace. 8 <PAGE> WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS. Our ability to compete effectively will depend, in part, on our ability to maintain the exclusive ownership of our technology and manufacturing processes through a combination of patent and trade secret protection, non-disclosure agreements and other arrangements. Patents may not be issued under pending applications and any issued patents that we hold may not provide adequate protection for our products or processes. Moreover, patent applications filed in foreign countries are subject to laws, rules and procedures that differ from those of the United States and any resulting patents may be difficult to enforce. There can be no assurance that our competitors will not either independently develop proprietary information that is the same or similar to ours or obtain access to our proprietary information. In addition, there can be no assurance that we would prevail if challenges to our intellectual property rights are asserted by third parties against us. We could incur substantial costs defending patent infringement suits brought by others and prosecuting patent infringement suits against third party infringers. Moreover, some foreign countries provide significantly less patent protection than the United States. Competitors' products may infringe upon our patents and the cost of protecting our rights may be substantial, if not cost prohibitive, thereby undermining our ability to protect our products effectively. We rely on confidentiality agreements with our employees and third parties to protect our unpatented proprietary information, know-how and trade secrets but we have no effective means to enforce compliance with the terms of these agreements. GOVERNMENT REGULATION COULD IMPOSE BURDENSOME REQUIREMENTS AND RESTRICTIONS THAT COULD IMPAIR DEMAND FOR OUR STATIONARY FUEL CELL PRODUCTS. Stationary power systems, such as our RCUs, cannot be operated without permits in some of the markets in which we will be marketing and selling our products. At this time, we do not know which jurisdictions will impose regulations upon our stationary fuel cell products as these regulations may depend, in part, upon whether a fuel cell system is placed outside or inside a home. In addition, our stationary fuel cell products and their installation may be subject to oversight and regulation at the local level in accordance with state and local ordinances relating to building codes, safety, pipeline connections and related matters. We also do not know the extent to which any existing regulations may impact our ability to distribute, install and service our stationary fuel cell products. Once our stationary fuel cell products reach the commercialization stage and we begin distributing our systems to our target early markets, federal, state or local government agencies may seek to impose regulations. Any government regulation of our stationary fuel cell products, whether at the federal, state or local level, including any regulations relating to installation and servicing of these products, may increase our costs and the price of our systems, and may have a negative impact on our revenue and profitability. ANY ACCIDENTS INVOLVING THE FLAMMABLE FUELS USED WITH OUR PRODUCTS COULD IMPAIR THEIR MARKET ACCEPTANCE. Our fuel cell products use hydrogen which is typically generated from gaseous and liquid fuels, such as propane, natural gas or methanol in a process known as reforming. While our fuel cell products do not use these fuels in a combustion process, natural gas and propane are flammable fuels that could leak into a residence or commercial location and combust if ignited by another source. Since our products have not yet gained widespread market acceptance, any accidents involving our systems or other fuel cell-based products could materially impede demand for our products. In addition, we may be held responsible for damages beyond the scope of our insurance coverage. WE COULD BE LIABLE FOR ENVIRONMENTAL DAMAGES RESULTING FROM OUR RESEARCH, DEVELOPMENT AND MANUFACTURING OPERATIONS. Our business exposes us to the risk of harmful substances escaping into the environment, resulting in personal injury or loss of life, damage to or destruction of property, and natural resource damage. Depending on the nature of the claim, our current insurance policies may not adequately reimburse us for costs incurred in settling environmental damage claims, and in some 9 <PAGE> instances, we may not be reimbursed at all. Our business is subject to numerous federal, state and local laws, regulations and policies that govern environmental protection. These laws and regulations have changed frequently in the past and it is reasonable to expect additional changes in the future. Our operations may not comply with future laws and regulations and we may be required to make significant unanticipated capital and operating expenditures. If we fail to comply with applicable environmental laws and regulations, governmental authorities may seek to impose fines and penalties on us or to revoke or deny the issuance or renewal of operating permits and private parties may seek damages from us. Under those circumstances, we might be required to curtail or cease operations, conduct site remediation or other corrective action, or pay substantial damage claims. UTILITY COMPANIES COULD PLACE BARRIERS ON OUR ENTRY INTO THE MARKET FOR RESIDENTIAL POWER WHICH WOULD REDUCE DEMAND FOR OUR PRODUCTS. Utility companies often charge fees to industrial customers for using less electricity, using the grid for backup purposes only or disconnecting from the grid altogether. Though these fees are not currently charged to residential users, it is possible that utility companies could charge similar fees to residential customers in the future. These fees could increase the cost to residential customers of using our stationary power products, making them less cost-effective and less attractive to potential customers. OUR SUCCESS DEPENDS ON ATTRACTING AND RETAINING KEY PERSONNEL. The successful development, marketing and manufacturing of our products will depend upon the skills and efforts of a small group of management and technical personnel, including Dr. H. Frank Gibbard, our Chief Executive Officer and Dr. Arthur Kaufman, our Chief Technology Officer. The loss of any of our key personnel could adversely impact our ability to execute our business plan. Furthermore, recruiting and retaining qualified executive, technical, marketing, manufacturing and support personnel in our emerging industry in the future will be critical to our success and there can be no assurance that we will be able to do so. We do not maintain "key-man" life insurance policies on any of our key personnel. OUR PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS HAVE SUBSTANTIAL CONTROL OVER OUR AFFAIRS AND YOU WILL NOT BE ABLE TO INFLUENCE THE OUTCOME OF ANY IMPORTANT TRANSACTIONS INVOLVING H POWER. After consummation of this offering, executive officers and directors and stockholders who beneficially own more than 5% of our common stock will have the power to, in the aggregate, direct the vote of approximately 24.1% of our voting securities (assuming that the underwriters do not exercise their over-allotment option). Therefore, these persons may have the power to influence our business policies and affairs and determine the outcome of any matter submitted to a vote of our stockholders, including mergers, sales of substantially all of our assets and changes in control. BECAUSE OUR MAJOR CUSTOMER HAS A REPRESENTATIVE ON OUR BOARD OF DIRECTORS, CONFLICTS OF INTERESTS MAY ARISE. A representative of ECO is currently a member of our Board of Directors and we have agreed to use our best efforts to nominate one designee of ECO at each election of our Board of Directors. ECO is our principal customer and strategic partner in the marketing and sales of our RCUs. The presence of a representative of our major customer on our Board could influence certain decisions and present a conflict of interest. WE MAY BECOME SUBJECT TO RISKS INHERENT IN INTERNATIONAL OPERATIONS INCLUDING CURRENCY EXCHANGE RATE FLUCTUATIONS AND TARIFF REGULATIONS. If we sell or license our products or technologies outside the United States, we will be subject to the risks associated with fluctuations in currency exchange rates. We do not intend to enter into any hedging or other similar agreements or arrangements to protect us against any of these currency risks. We also may be subject to tariff regulations and requirements for export licenses, particularly with respect to the export of certain technologies, unexpected changes in regulatory requirements, longer accounts receivable requirements and collections, difficulties in managing international operations, potentially adverse tax consequences, restrictions on repatriation of earnings and the burdens of complying with a wide variety of foreign laws. 10 <PAGE> WE MAY BE UNABLE TO OBTAIN THE ADDITIONAL CAPITAL NEEDED TO OPERATE AND GROW OUR BUSINESS, THEREBY REQUIRING US TO CURTAIL OR CEASE OPERATIONS. Our capital requirements in connection with our development activities and transition to commercial operations have been and will continue to be significant. We will require substantial additional funds to continue the research, development and testing of our technologies and products, to obtain patent protection relating to our technologies when appropriate, and to manufacture and market our products. There is no assurance that any additional financing will be available on commercially attractive terms, in a timely fashion, in sufficient amounts, or at all. If adequate funds are not available, we may have to scale back our operations, including our product development, manufacturing and marketing activities, all of which could cause us to lose both customers and market share and ultimately cease operations. OUR QUARTERLY OPERATING RESULTS ARE LIKELY TO BE VOLATILE IN THE FUTURE. Our quarterly operating results are likely to vary significantly in the future. Fluctuations in our quarterly financial performance may result from, for example: - unevenness in demand and orders for our products; - significant short-term capital expenses as we develop our manufacturing facilities; - a shortage of the raw materials used in the production of our fuel cell systems; and - difficulties with our manufacturing operations. Because of these anticipated fluctuations, our sales and operating results in any fiscal quarter are likely to be inconsistent, may not be indicative of our future performance and may be difficult for investors to properly evaluate. OUR STOCK PRICE MAY BE VOLATILE AND, AS A RESULT, YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT. Prior to this offering there has been no public market for our common stock. We cannot predict the extent to which, or if, investor interest will lead to the development of an active and liquid trading market. The initial public offering price for the shares of our common stock will be determined by negotiations between us and the representatives of the several underwriters and may not be indicative of the market price of the common stock that will prevail in the trading market. The market price of the common stock may decline below the initial public offering price and this decline may be significant. The value of your investment could decline due to the impact of any of the following factors upon the market price of our common stock: - variations in our actual and anticipated operating results; - changes in our earnings estimates by research analysts; - our failure to meet analysts' performance expectations; and - lack of liquidity. In addition, stock markets, particularly the Nasdaq National Market, have experienced extreme price and volume fluctuations, and the market prices of securities of technology companies have been highly volatile. These fluctuations are often unrelated to operating performance and may adversely affect the market price of our common stock. As a result, investors may not be able to resell their shares at or above the initial public offering price. THERE MAY BE AN ADVERSE EFFECT ON THE MARKET PRICE OF OUR COMMON STOCK AS A RESULT OF A SIGNIFICANT NUMBER OF SHARES BEING AVAILABLE FOR FUTURE SALE BY OUR EXISTING STOCKHOLDERS. Future sales of a substantial amount of our common stock in the public market, or the perception that these sales may occur, could adversely affect the market price of our common stock from time to time. In this regard, immediately following the consummation of this offering, holders of 4,141,405 shares will be eligible to freely sell 11 <PAGE> these shares in the open market. These future sales or perceptions could also impair our ability to raise additional capital through the sale of our equity securities after completion of the offering. Our officers, directors and substantially all of our principal stockholders will be permitted to dispose of an aggregate of 30,427,170 shares of common stock commencing on the 181st day following the date of this prospectus. In addition, the underwriters have agreed to allow Frederick Entman and Norman Rothstein, each of whom are principal stockholders, and their affiliates to sell up to an aggregate of 1,388,875 shares commencing on the 91st day following the date of this prospectus. A substantial number of our common shares will become available for sale in the public market simultaneously, including through private sales transactions, which could cause the market price of our shares to decline. After this offering, the holders of up to 30,555,415 shares of common stock will have registration rights to have their shares included for sale in subsequent registered public offerings of our common stock. Furthermore, the holders of substantially all of the above shares of common stock will be able to require us to conduct a registered public offering for up to the following number of shares at the times indicated below: - 20,555,415 shares of common stock at any time following the date that is one year after the closing of this offering; - 5,000,000 shares of common stock at any time after August 27, 2001; and - 4,000,000 shares of common stock at any time after November 29, 2001. The exercise of these registration rights would allow these stockholders to sell these shares in the market simultaneously with any further public offerings by us of our equity securities. Any sales of significant shares could prevent us from raising needed equity in the future or adversely affect the market prices of our publicly traded shares. THE TANGIBLE BOOK VALUE OF OUR COMMON STOCK WILL BE SUBSTANTIALLY LOWER THAN THE OFFERING PRICE. The initial public offering price will be substantially higher than the pro forma as adjusted tangible book value per share of our outstanding common stock. If you purchase our common stock in this offering, the shares you buy will experience an immediate and substantial dilution in tangible book value per share. The shares of common stock owned by our existing stockholders will receive a material increase in the tangible book value per share. The dilution to investors in this offering will be approximately $10.31 per share. We also have a significant number of outstanding options to purchase our common stock with exercise prices significantly below the initial public offering price of the common stock. To the extent these options are exercised, there will be substantial further dilution to you as new investors in our common stock. BECAUSE WE DO NOT INTEND TO PAY ANY DIVIDENDS, STOCKHOLDERS MUST RELY ON STOCK APPRECIATION FOR ANY RETURN ON THEIR INVESTMENT IN OUR COMMON STOCK. We have not paid any dividends on our common stock and we do not intend to declare and pay any dividends on our common stock. Earnings, if any, are expected to be retained by us to finance and expand our business. FORWARD LOOKING STATEMENTS This prospectus, including the sections entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," contains forward-looking information. In some cases, you can identify forward-looking statements by phrases such as "in our view," "there can be no assurance," "although no assurance can be given" or "there is no way to anticipate with certainty" as well as by terminology such as "may," "will," "should," "expects," "intends," "plans," "objectives," "goals," "aims," "projects," "forecasts," "possible," "seeks," "could," "might," "likely," "enable," "anticipates," "believes," "estimates," 12 <PAGE> "predicts," "potential" or "continue," or the negative of these terms or other comparable terminology. These statements generally constitute statements of expectation, intent and anticipation and may be inaccurate. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined under "Risk Factors." These factors may cause our actual results to differ materially from any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. USE OF PROCEEDS We estimate that the net proceeds from our sale of the 7,000,000 shares of our common stock in this offering, at an assumed initial public offering price of $12.00 per share, and after deducting underwriting discounts, commissions and other estimated offering expenses payable by us, will be approximately $77 million (or approximately $89 million if the underwriters exercise their over-allotment option from us in full). We expect to use the net proceeds from this offering in the following ways: - approximately $21 million to locate and acquire new manufacturing facilities and fund other capital expenditures over the next 18 months; - approximately $18 million to fund our continued research and product development; - approximately $10 million to expand our marketing and sales efforts; and - approximately $28 million for general corporate purposes. We may also use a portion of the net proceeds to acquire or to invest in complementary businesses, technologies, products or services, but we have no current plans or commitments to do so. Our management will retain broad discretion in the allocation of the net proceeds of the offering. Actual expenditures may vary substantially from these estimates. The amounts and timing of our actual expenditures will depend on numerous factors, including the status of our research and product development efforts, marketing and sales activities, and the growth of our manufacturing and distribution arrangements. We may find it necessary to use portions of the net proceeds for other purposes. We believe that cash from operations, together with the net proceeds of the sale of common stock in this offering, will be adequate to fund our operations for the next 18 months (whether or not the underwriters exercise their over-allotment option from us). Pending these uses, we intend to invest our net proceeds in short-term, investment grade securities, at prevailing market rates of interest. If our selling stockholders elect to sell 1,050,000 of their shares of our common stock to the underwriters pursuant to the underwriters' over-allotment option, all of the net proceeds from this sale will be payable to our selling stockholders. DIVIDEND POLICY We have never declared nor paid any cash dividends to the holders of our common stock. We intend to retain any future earnings, if any, for the development and operation of our business. Accordingly, we do not anticipate paying cash dividends on our common stock. 13 <PAGE> CAPITALIZATION The following table sets forth our capitalization as of May 31, 2000: - on an actual basis; - on a pro forma basis giving effect to the conversion of all of our outstanding shares of mandatorily redeemable convertible preferred stock into 6,000,000 shares of our common stock and the issuance of 1,666,665 shares of our common stock to outside investors upon conversion of their 50% equity interest in H Power Enterprises of Canada; and - on a pro forma as adjusted basis to reflect the adjustments described above as well as our sale of 7,000,000 shares of common stock in this offering at an assumed initial public offering price of $12.00 per share, after deducting the underwriting discount, commissions and estimated offering expenses and the application of the net proceeds of that sale. <TABLE> <CAPTION> AS OF MAY 31, 2000 ------------------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- -------------------------- (IN THOUSANDS) <S> <C> <C> <C> Cash and cash equivalents................................... $ 11,257 $ 11,257 $ 88,114 ======== ======== ========================== Long-term debt, including current portion................... 190 190 190 Minority interest........................................... 5,000 -- -- Series A, Series B, and Series C mandatorily redeemable convertible preferred stock--$.001 par value; 1,800,000 shares authorized; 1,200,000 shares issued and outstanding, actual; 0 shares, pro forma and pro forma as adjusted.................................................. 15,327 -- -- Stockholder's equity: Common Stock--$.001 par value; 20,000,000 shares authorized; 38,090,195 shares issued and outstanding, actual; 45,756,860 shares, pro forma; 52,756,860 shares, pro forma as adjusted................................... 38 46 53 Additional paid-in capital................................ 38,127 58,446 134,660 Accumulated deficit....................................... (44,747) (44,747) (44,747) Accumulated other comprehensive loss...................... (356) (356) (356) -------- -------- -------------------------- Total stockholders' (deficit) equity...................... (6,938) 13,389 89,610 -------- -------- -------------------------- Total capitalization........................................ $ 13,579 $ 13,579 $ 89,800 ======== ======== ========================== </TABLE> On July 7, 2000, our Board of Directors approved an increase in the number of authorized preferred and common shares to 10,000,000 and 150,000,000, respectively. The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of May 31, 2000. It does not include: - 5,491,625 shares of common stock issuable upon the exercise of outstanding stock options at a weighted average exercise price of $4.91 per share; - 500,000 shares of common stock issuable upon the exercise of outstanding warrants at an exercise price of $5.00 per share; and - approximately 268,000 shares of common stock issuable to DQE Enterprises immediately prior to this offering in payment of accrued dividends to which they are entitled. 14 <PAGE> DILUTION Our pro forma net tangible book value as of May 31, 2000 was approximately $12,950,000 or $0.28 per share of common stock after giving effect to the conversion of all of our outstanding shares of mandatorily redeemable convertible preferred stock into 6,000,000 shares of our common stock and the issuance of 1,666,665 shares of our common stock to outside investors upon conversion of their 50% equity interest in H Power Enterprises of Canada, all of which will be effected immediately prior to the consummation of this offering. Pro forma net tangible book value per share is equal to our pro forma tangible assets, less our total liabilities, divided by the pro forma number of shares of our common stock outstanding as of May 31, 2000. After giving effect to the sale of 7,000,000 shares of our common stock at the assumed initial public offering price of $12.00 per share, and after deducting the underwriting discounts, commissions and estimated offering expenses, and the application of the net proceeds of that sale, our pro forma as adjusted net tangible book value at May 31, 2000 would have been approximately $89,171,000 or $1.69 per share of common stock. This amount represents an immediate increase in the pro forma net tangible book value of $1.41 per share to existing stockholders and an immediate dilution in the pro forma as adjusted net tangible book value of $10.31 per share to the investors who purchase our common stock in this offering. The following table illustrates this per share dilution: <TABLE> <S> <C> <C> Assumed initial public offering price per share............. $ 12.00 Pro forma net tangible book value per share at May 31, 2000.................................................... $ 0.28 Increase per share attributable to new investors.......... 1.41 Pro forma net tangible book value per share after the offering.................................................. 1.69 ------- Dilution per share to new investors......................... $ 10.31 ======= </TABLE> The following table summarizes, on a pro forma basis as of May 31, 2000, the total number of shares of common stock purchased from us, the total amount paid to us, and the average price per share paid by our existing stockholders and by new investors purchasing shares of common stock from us in this offering, at an assumed initial public offering price of $12.00, before deducting underwriting discounts, commissions and the estimated offering expenses payable by us: <TABLE> <CAPTION> SHARES PURCHASED TOTAL CONSIDERATION AVERAGE --------------------- ----------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ---------- -------- ------------ -------- --------- <S> <C> <C> <C> <C> <C> Existing stockholders..................... 45,756,860 86.7% $ 53,245,000 38.8% $ 1.16 New investors............................. 7,000,000 13.3% $ 84,000,000 61.2% $12.00 ---------- ----- ------------ ----- Total................................... 52,756,860 100% $137,245,000 100% ========== ===== ============ ===== </TABLE> This table excludes: - 5,491,625 shares of common stock issuable upon the exercise of outstanding stock options at a weighted average exercise price of $4.91 per share; - 500,000 shares of common stock issuable upon the exercise of outstanding warrants at an exercise price of $5.00 per share; and - approximately 268,000 shares of common stock issuable to DQE Enterprises immediately prior to this offering in payment of accrued dividends to which they are entitled. To the extent these shares are issued, new investors will own 11.86% of our outstanding common stock for which they will have paid $84 million or 50.39% of total cash consideration, provided, however, if we were to issue and sell to the underwriters 1,050,000 shares of common stock pursuant to the underwriters' over-allotment option, new investors would own 13.40% of our outstanding common stock for which they will have paid $96.6 million or 53.87% of total cash consideration. 15 <PAGE> SELECTED FINANCIAL DATA The selected financial data set forth below as of and for the years ended May 31, 1996, 1997, 1998, 1999 and 2000 have been derived from financial statements, including those set forth elsewhere in this prospectus, audited by PricewaterhouseCoopers LLP, independent accountants. The following should be read in conjunction with the consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus: <TABLE> <CAPTION> FISCAL YEAR ENDED MAY 31, ---------------------------------------------------- 1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Products.................................................. $ -- $ 54 $ 99 $ 501 $ 985 Contracts................................................. 1,935 192 619 517 2,695 ------- ------- -------- ------- -------- 1,935 246 718 1,018 3,680 ------- ------- -------- ------- -------- OPERATING EXPENSES: Cost of revenues--products................................ 123 355 614 1,101 Cost of revenues--contracts............................... 1,036 172 436 466 2,356 Research and development.................................. 1,622 2,106 2,813 3,051 5,339 Selling, general and administrative....................... 2,134 2,562 3,514 3,813 12,565 ------- ------- -------- ------- -------- Total operating expenses.................................. 4,792 4,963 7,118 7,944 21,361 ------- ------- -------- ------- -------- Loss from operations...................................... (2,857) (4,717) (6,400) (6,926) (17,681) Interest and other income, net............................ 2 145 723 182 746 Interest expense.......................................... (190) (174) (41) (22) (77) ------- ------- -------- ------- -------- Net loss.................................................. $(3,045) $(4,746) $ (5,718) $(6,766) $(17,012) ======= ======= ======== ======= ======== Net loss attributable to common stockholders.............. $(3,045) $(4,921) $ (5,928) $(6,976) $(17,222) ======= ======= ======== ======= ======== Loss per share, basic and diluted......................... $ (0.11) $ (0.17) $ (0.20) $ (0.24) $ (0.49) ======= ======= ======== ======= ======== Weighted average shares outstanding, basic and diluted.... 28,840 28,939 29,011 29,015 34,879 </TABLE> <TABLE> <CAPTION> AS OF MAY 31, ---------------------------------------------------- 1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................. $ 1,002 $ 13,146 $ 4,961 $ 242 $ 11,257 Working capital (deficit)................................. (2,669) 11,015 4,476 (1,955) 13,213 Total assets.............................................. 2,186 14,272 7,436 3,472 18,650 Long-term debt............................................ -- -- 4 69 67 Minority Interest......................................... -- 5,000 5,000 5,000 5,000 Mandatorily redeemable convertible preferred stock........ 1,000 15,327 15,327 15,327 15,327 Total stockholders' deficit............................... (3,930) (8,386) (14,356) (20,464) (6,938) </TABLE> 16 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS AND OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. OUR FISCAL YEAR ENDS MAY 31. OVERVIEW We design, develop and manufacture proton-exchange membrane, or PEM, fuel cell systems. Fuel cells are devices that produce electrical energy without combustion and its associated environmental contaminants. The fuel cell systems we make and market are designed to complement or replace conventional power sources such as batteries and electric power generators. The use of alternative electric power systems is desirable in situations where conventional power sources cannot adequately, economically or technologically supply the power required. We were incorporated in June 1989 under the laws of the State of Delaware. A substantial portion of our business activity, from our inception through our fiscal year ended May 31, 1995, was based on a U.S. Department of Energy program. As prime contractor under that program, we developed, fabricated and delivered to the DOE three phosphoric acid fuel cell/battery power sources for installation in buses. These buses were among the first to operate under a hybrid fuel cell system. During this early period, we also continued developing our PEM fuel cell technologies, principally for portable applications. From 1995 through May 31, 2000, we had various government contracts. The most significant of these contracts were used to develop fuel cell powered vehicles, stationary power systems, communications backup power systems and diesel reformers. Although these contracts have accounted for a substantial portion of our revenues, we believe that they will diminish in importance as a result of our focus on commercialization. In subsequent years, while continuing our commitment to government programs, we accelerated the development of our core technologies and began applying our technologies to develop and fabricate different portable PEM fuel cell products. Sales of these products have been modest and, until June 1998, were comprised mainly of test and prototype units for evaluation by prospective users. In June 1998, we made what we believe to be the world's first commercial sale of a PEM fuel cell product used in the regular course of daily operations. This sale to the New Jersey Department of Transportation of an initial order of 65 backup power units for its variable message highway signs was competitively-bid, non-government subsidized and came with a two-year product and maintenance warranty. As of May 31, 2000, we had delivered 53 of these units, all of which are in operation. To date, we have made no other commercial sales. After an infusion of capital in 1996 and the establishment of our Canadian subsidiary, H Power Enterprises of Canada, Inc., or HPEC, in 1997, we began to use our technologies to develop higher power, stationary PEM fuel cell products for use as primary and supplemental on-site electric power systems for residential use. As of May 31, 2000, we have delivered 5 initial test units of our residential electric primary power system to ECO Fuel Cells, LLC, a subsidiary of Energy Co-Opportunity, Inc., an association of approximately 250 U.S. rural electric cooperatives. We believe we will be producing commercial units for sale commencing June 2001. We have a limited history of generating revenues and many of our products have only been recently introduced or are in a formative stage of development. Through May 31, 2000, we have incurred accumulated losses of approximately $44.7 million since our inception in 1989 and we anticipate incurring significant losses in the future. Most of our operating expenses will be fixed in the near term. Therefore, if we are unable to generate significant revenues, our net losses in any given quarter could be greater than expected. We intend to significantly increase our capital expenditures and operating expenses to rapidly expand our manufacturing capabilities and for general corporate purposes, including product development activities, sales and marketing, administration and data 17 <PAGE> processing systems. You have limited historical financial data and operating results with which to evaluate our business and our prospects. As a result, you should consider our prospects in light of the early stage of our business in a new and rapidly evolving market. REVENUES. We derive revenue from the sale of our products and from contracts. Revenues on products are recognized when the product has been shipped and the Company has met its obligations under the sales contract. These obligations vary based on the specific product and customer. Revenues on products requiring the Company to perform installation are recognized when installation has been completed (i.e., New Jersey Department of Transportation sales). Revenues on products allowing a 30-day customer acceptance period are recognized at the conclusion of the acceptance period (i.e., ECO). Revenues on test and evaluation products used by customers primarily for research and development purposes are sold without a right of return and without a customer acceptance period and revenues on these units are recognized when the product has been shipped. The revenues related to contracts which qualify as best-efforts arrangements are treated as an offset to H Power's research and development expenses. Revenues on contracts include reimbursed direct costs and allowable allocated indirect costs incurred, plus recognized profits. Profit is recognized on cost-reimbursable contracts as costs are incurred, and under fixed-price contracts on the cost-to-cost method of the percentage-of-completion basis. Revenue recognized on contracts in excess of related billings is reflected as unbilled receivables. Cost reimbursable contracts are billed one month in arrears, coincident with the preparation of the required billing detail. When it is determined that a loss will result from the performance of a fixed-price contract, the entire amount of the estimated ultimate loss is charged against income. We believe our agreement to sell 12,300 units of our stationary fuel cell systems to ECO could result in more than $81 million in revenue beginning in fiscal 2002. We began to ship our initial test and evaluation units to ECO in March 2000 and our goal is to commence shipping our initial commercial units in the second half of calendar year 2001. Our product cost analyses indicate that for the first two to three years, the costs of production will exceed the price at which our fuel cell systems will be sold to ECO. We expect to continue to pursue new contracts with government agencies and to further expand our product development efforts with respect to stationary and portable fuel cell systems. In addition, we expect to continue to find new customers and applications for our commercial fuel cells. COST OF REVENUES. Cost of revenues includes compensation related to engineering and manufacturing staff, inventory and supplies used in the manufacturing process and fees paid to subcontractors and consultants directly related to the manufacture of our products. We expect our cost of product revenue to continue to increase as a percentage of product revenue over the next year, when we expect to deliver initial prototype units under the ECO contract. In addition, we intend to relocate and significantly expand our manufacturing facilities and capabilities. Initially, we expect the costs of producing our first units to be higher than their sales price until we achieve significantly higher production levels. We expect that the cost of revenue as a percentage of product revenue will decrease as we significantly increase our commercial sales. Cost of revenues for contracts will vary as the amount of costs are predicated on whether or not the contract is a cost sharing or cost plus arrangement. RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs include materials, salaries and wages, subcontracting and other costs related to further developing our commercial products. We believe that research and development expenditures are essential to establishing and maintaining our competitive position in the PEM fuel cell markets and anticipate that these annual expenditures will continue to increase significantly in absolute dollars for at least the next few years. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses include compensation related to general corporate functions, including management, finance, sales and 18 <PAGE> information systems and related expenses. These expenses are expected to continue to increase significantly commensurate with increased staffing and infrastructure costs over the next few years. RESULTS OF OPERATIONS YEAR ENDED MAY 31, 2000 COMPARED TO YEAR ENDED MAY 31, 1999 REVENUES. Revenues were $3,680,000 for the year ended May 31, 2000 compared to $1,018,000 for fiscal 1999, an increase of $2,662,000. Our revenues for the year ended May 31, 2000 were derived approximately 73% from contract revenues and 27% from products. Contract revenues for the year ended May 31, 2000 were $2,695,000, an increase of $2,178,000 from $517,000 for fiscal 1999. The increase in contract revenues is principally due to two new contracts. A contract with the Naval Surface Warfare Center to develop and provide a 3 to 5 kilowatt fuel cell system integrated with a fuel reformer for military field communications generated 20% of contract revenue for the year ended May 31, 2000. A contract with the National Institute of Standards & Technology to build and demonstrate a 5 kilowatt fuel cell system for primary and backup power for telecommunication systems generated 78% of contract revenues for the year ended May 31, 2000. The principal product sales for the year ended May 31, 2000 were backup power units sold to the New Jersey Department of Transportation. COST OF REVENUE. Cost of revenue was $3,457,000 for the year ended May 31, 2000 compared to $1,080,000 for fiscal 1999, an increase of $2,377,000. The cost of revenue for the year ended May 31, 2000 was derived approximately 68% from contracts and 32% from products. The increase in the cost of revenue for contracts and products is proportionate to the increase in revenue. RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs were $5,339,000 for the year ended May 31, 2000 compared to $3,051,000 for fiscal 1999, an increase of $2,288,000. The increase in research and development costs is primarily related to the continuing development of our 1 to 10 kilowatt stationary power fuel cell systems in conjunction with the contract we entered into with ECO during the year ended May 31, 2000 and development of our portable and mobile products. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative costs were $12,565,000 for the year ended May 31, 2000 compared to $3,813,000 for fiscal 1999, an increase of $8,752,000. This increase was primarily due to cash payments totaling $2,100,000 to terminate our agreements with Norman Rothstein, Fredrick Entman and NBG Technologies, Inc., and an associated stock compensation charge of $4,764,000 relating to the issuance of 850,000 stock options granted concurrently with the termination of those agreements, and a stock compensation charge of $411,000 related to options granted in payment of services for fiscal 2000 compared to a stock compensation charge of $711,000 for fiscal 1999, or a net increase in stock compensation charges of $4,482,000 for fiscal 2000. Other factors contributing to the increase from fiscal 1999 to fiscal 2000 include an increase in the number of employees and a resulting increase in salaries, benefits and recruiting expenses of approximately $545,000, increased legal and professional expenses of $364,000, increased rent, telephone and other office expenses of $456,000 and increased selling and travel expenses of $405,000 attributable to the increased activity required to support the ECO contract and increased trade show participation. General insurance expense increased by $107,000 and HPEC's selling, general and administrative expenses increased by $296,000 for the year ended May 31, 2000 compared to fiscal 1999. INTEREST AND OTHER INCOME, NET. Interest and other income was $746,000 for the year ended May 31, 2000 compared to $182,000 for fiscal 1999, an increase of $564,000. The increase is primarily related to interest income resulting from the investment of the net proceeds of equity funding from ECO, Sofinov and Hydro-Quebec Capi-Tech received during the year ended May 31, 2000. This was partially offset by a loss on foreign exchange for the year ended May 31, 2000 of $23,000 compared to a gain of $156,000 for fiscal 1999. 19 <PAGE> INTEREST EXPENSE. Interest expense was $77,000 for the year ended May 31, 2000 compared to $22,000 for fiscal 1999, an increase of $55,000. The increase is related to the additional borrowings outstanding during the year ended May 31, 2000 which were repaid using the proceeds from equity funding. YEAR ENDED MAY 31, 1999 COMPARED TO YEAR ENDED MAY 31, 1998 REVENUES. Revenues were $1,018,000 for fiscal 1999 compared to $718,000 for fiscal 1998, an increase of $300,000. Our revenues for fiscal 1999 were derived approximately 51% from contracts and 49% from product sales. Product revenue for 1999 was $501,000, an increase of $402,000 from the prior comparable period. Product sales were primarily to the New Jersey Department of Transportation for both periods as we commenced shipments pursuant to their purchase order in the second half of 1998. Contract revenues for fiscal 1999 were $517,000 as compared to $619,000 for fiscal 1998. The decline in contract revenue is principally due to reduced revenue recognized on work performed under a contract with the U.S. Army for Communication Electronic Command which was substantially completed during fiscal 1998. COST OF REVENUE. Cost of revenue was $1,080,000 for fiscal 1999 compared to $791,000 for fiscal 1998, an increase of $289,000. Cost of revenue for products was $614,000 for fiscal 1999 compared to $355,000 for fiscal 1998, an increase of $259,000. This is principally due to increases in revenue from the New Jersey Department of Transportation and an increasing number of prototype units sold to other customers. Cost of revenue for contracts was $466,000 for fiscal 1999 as compared to $436,000 for the same comparable period in 1998, or an increase of $30,000. RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs were $3,051,000 in fiscal 1999 compared to $2,813,000 in fiscal 1998, an increase of $238,000. The increases were primarily due to activities related to the development of our stationary power products from 1 to 10 kilowatts that will be targeted towards the residential market. In addition, in 1999, we extended the expiration dates of stock options for some employees resulting in a non-cash stock compensation expense. The amount attributable to research and development was $107,000. There was no comparable expense in fiscal 1998. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative costs were $3,813,000 in fiscal 1999 compared to $3,514,000 in fiscal 1998, an increase of $299,000. Several offsetting factors resulted in this increase. In fiscal 1999, we recognized additional stock compensation expense of $711,000 that was discussed above. HPEC's selling, general and administrative expenses increased by approximately $86,000 to approximately $284,000 in fiscal 1999 from approximately $198,000 in fiscal 1998. In an effort to conserve cash in fiscal 1999, we made reductions in many discretionary expenses, including $250,000 in professional, legal and consulting fees, $105,000 in recruiting costs, $60,000 in computer expenses, and other expenses when compared to fiscal 1998. INTEREST AND OTHER INCOME, NET. Interest and other income was $182,000 in fiscal 1999 compared to $723,000 in fiscal 1998, a decrease of $541,000. Of this amount, interest income declined by $373,000 when comparing fiscal 1999 with 1998 primarily due to lower cash and cash equivalents and the gain on foreign exchange in fiscal 1999 decreased by approximately $161,000 from fiscal 1998. These foreign exchange effects resulted from transactions associated with the HPEC operations in Canada. This decrease was due to a lower Canadian dollar when compared to the U.S. dollar during fiscal 1999 when compared to the same period in 1998. INTEREST EXPENSE. Interest expense was $22,000 in fiscal 1999 compared to $41,000 in fiscal 1998, a decrease of $19,000. The decrease was due to lower average borrowings in fiscal 1999 when compared to fiscal 1998. 20 <PAGE> YEAR ENDED MAY 31, 1998 COMPARED TO YEAR ENDED MAY 31, 1997 REVENUES. Revenues were $718,000 in fiscal 1998 compared to $246,000 in fiscal 1997, an increase of $472,000. In fiscal 1998, we derived approximately 86% of our revenues from government contracts and approximately 14% from product sales. This increase was principally due to contract revenue increasing by $427,000 to $619,000 in fiscal 1998 from $192,000 in fiscal 1997. These increases were primarily a result of increased activity on existing contracts. Product revenues increased by $45,000 from fiscal 1997 to fiscal 1998 due to the sale of more prototypes and evaluation units. COST OF REVENUE. Cost of revenue was $791,000 in fiscal 1998 compared to $295,000 in fiscal 1997, an increase of $496,000. Cost of revenue from contracts was $436,000 for fiscal year 1998 compared to $172,000 in fiscal 1997, an increase of $264,000. The increase in cost of revenue contracts is due primarily to higher cost associated with increased contract revenue, although cost of revenue contracts decreased as a percentage of contract revenue primarily as a result of a CECOM contract which had higher margins when compared with other contracts. The cost of revenue from products increased by $232,000 in fiscal 1998 when compared to fiscal 1997, due principally to increasing costs of prototype systems sold to customers. The costs of these fuel cells in both fiscal 1997 and fiscal 1998 exceeded the sales value due to the utilization of engineers in building these systems as opposed to production workers and the high cost of materials that were purchased in low quantities. RESEARCH AND DEVELOPMENT. Total research and development costs were $2,813,000 in fiscal 1998 compared to $2,106,000 in fiscal 1997, an increase of $707,000. The increase in expenses in fiscal 1998 as compared to 1997 was largely due to the establishment of a research and development facility in Canada in fiscal 1998 where we incurred $221,000 in expenses. In addition, we incurred higher costs associated with development of our stationary power and our portable and mobile products. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative costs were $3,514,000 in fiscal 1998 compared to $2,562,000 in fiscal 1997, an increase of $952,000. In addition, in conjunction with the opening of our Canadian facility in May of 1997, we had approximately $198,000 of additional selling, general and administrative expenses in Canada in fiscal 1998. Salaries and benefits in fiscal 1998 also increased by $328,000 as we increased the number of employees in sales and administration from 9 to 17 consistent with our plans to begin limited production in our New Jersey facility. Professional fees for marketing and financial services increased by $154,000 in fiscal 1998 as compared to fiscal 1997. Other cost increases in fiscal 1998 as compared to fiscal 1997 were for the addition of a facility in New Jersey, additional costs for general insurance coverage including product liability and for other office expenses related to the increase in number of employees. INTEREST AND OTHER INCOME, NET. Interest and other income was $723,000 in fiscal 1998 compared to $145,000 in fiscal 1997, an increase of $578,000. Interest income increased to $455,000 in fiscal 1998 from approximately $145,000 in fiscal 1997. The increase was primarily due to the higher levels of invested cash due to the purchase of an equity interest in HPEC by Sofinov Societe Financiere D'Innovation Inc., or Sofinov. Gain on foreign exchange was approximately $261,000 for fiscal 1998 due to exchange gains associated with transactions with HPEC. There were no comparable gains recorded in fiscal 1997. INTEREST EXPENSE. Interest expense was $41,000 in fiscal 1998 compared to $174,000 in fiscal 1997, a decrease of $133,000. At May 31, 1996, we had loans outstanding to a company then affiliated with us, Teledata International, Inc., and other investors, totaling approximately $2.3 million which were payable at an interest rate of 8% to 10% per annum. During fiscal 1998, all of these loans were repaid. LIQUIDITY AND CAPITAL RESOURCES Our capital requirements depend on numerous factors, including completion of our product development activities and market acceptance of our systems. We expect to allocate substantial capital resources to expand our manufacturing capacity to meet near-term commercial production 21 <PAGE> requirements, to fund our working capital requirements and to continue development work on our PEM fuel cell systems. At May 31, 2000, we had working capital of approximately $13.2 million which consisted primarily of cash and cash equivalents compared to a working capital deficit of $2.0 million at May 31, 1999. This increase was primarily the result of net proceeds received from private placements of our equity securities consummated during fiscal 2000 as described below. Cash flows used by operating activities for fiscal 2000 were $11.8 million as compared to $5.0 million for fiscal 1999. For the year ending May 31, 2000, cash was used primarily to fund the net loss of $17.0 million offset by net changes in operating assets and liabilities primarily for the following reasons: - increases in accounts receivable of $743,000 consistent with increased revenue from contracts and products; - increases in inventory of $960,000 for increased production of our stationary power systems primarily for ECO and increasing production of our portable and mobile PEM fuel cell systems; - increases in prepaid expenses and other assets of $1,684,000 primarily due to the increase of deferred IPO charges of $1,316,000; - decreases in accounts payable of $203,000 and increases in other accrued expenses of $700,000 for a total increase of $497,000 are due to increases in inventory purchases, capital expenditures, deferred IPO charges, and increases in expenses and accrued compensation; and - increases in deferred revenue of $2.5 million for an initial payment by ECO for the exclusive distribution rights in its territory. Net cash used by investing activities totaled $1,120,000 for fiscal 2000 primarily as a result of purchases of new machinery and equipment in support of our development and commercialization activities as compared to $919,000 for fiscal 1999. Substantially all of our capital has been raised through the issuance of our common and preferred stock in private equity transactions. Since 1989, approximately $53.2 million of equity has been invested in us. Of this amount, our founders and other individual investors have contributed approximately $6.7 million in common equity. In July 1996, DQE Enterprises, Inc. invested $3.0 million for 200,000 shares of Series A convertible preferred stock. The Series A convertible preferred stock is entitled to cumulative dividends at a rate of 7.0% per annum. These dividends are payable in the form of common stock, valued at a market price of $3.00 per share in the absence of a public market price. DQE Enterprises has agreed to convert all shares of its Series A convertible preferred stock into 1,000,000 shares of our common stock immediately prior to the closing of this offering. At that time, we will also issue to DQE Enterprises approximately 268,000 shares of our common stock in payment of all cumulative dividends to which they are entitled. In July 1996, Singapore Technologies Kinetics Ltd. invested $5.0 million for 400,000 shares of Series B convertible preferred stock. The Series B convertible preferred stock is entitled to dividends in the event that dividends or distributions are paid on our common stock, in an amount per share equal to the as-if-converted common stock equivalent of its Series B convertible preferred shares. The Series B convertible preferred stock will automatically convert into 2,000,000 shares of our common stock immediately prior to the closing of this offering. In May 1997, Sofinov invested $7.5 million for 500,000 shares of Series C convertible preferred stock. The Series C convertible preferred stock is entitled to dividends in the event that dividends or distributions are paid on our common stock, in an amount per share equal to the as-if-converted common stock equivalent of the Series C convertible preferred shares. On December 31, 1997, we issued an additional 100,000 shares of Series C convertible preferred stock to Sofinov for no consideration as a result of our contractual obligation to do so upon DQE Enterprises' failure to 22 <PAGE> exercise warrants issued to them. Sofinov has agreed to convert all shares of its Series C convertible preferred stock into 3,000,000 shares of our common stock immediately prior to the closing of this offering. Simultaneously with the purchase of the Series C convertible preferred stock, Sofinov, Societe Innovatech du Grand Montreal, or Innovatech, and 9042-0175 Quebec Inc., a Sofinov affiliate, invested $5.0 million in exchange for a 50% interest in HPEC. HPEC is developing, among other things, our electrical/thermal co-generation stationary power product and has the exclusive rights to market this product in Canada. Immediately prior to the consummation of this offering, this equity interest will be exchanged for 1,666,665 shares of our common stock and HPEC will become our wholly-owned subsidiary. HPEC will have exclusive marketing rights to our stationary power products throughout North, Central and South America to the extent these rights do not infringe upon the license we granted to ECO. In August 1999, ECO invested $15.0 million for 5,000,000 shares of our common stock. At the same time, we entered into an agreement with ECO pursuant to which ECO paid us an initial territory licensing fee of $2.5 million and agreed to purchase, market and service our stationary power fuel cell systems in exchange for the exclusive marketing, distribution and servicing rights to those areas in the United States that are being serviced by ECO's affiliated rural electric cooperative members. The $2.5 million license fee has been deferred and will be recognized over a ten-year period, commencing with the first commercial sale. In November 1999, we issued a total of 2,000,000 shares of our common stock to Sofinov at a price of $2.50 per share, or $5.0 million in total, pursuant to the terms of a May 1999 letter agreement. Under this agreement, Sofinov agreed to lend us up to $5.0 million in increments of at least $150,000, payable on demand. Sofinov had the right to convert the outstanding balance of these advances into shares of our common stock at a conversion price of $2.50 per share. In addition, if the outstanding balance of the advances at the time of conversion was less than $5.0 million, Sofinov had the right to purchase additional shares of our common stock at $2.50 per share to bring its total purchase up to $5.0 million. On November 30, 1999, the date Sofinov exercised its conversion right, the outstanding balance of Sofinov's advances was $2.1 million, and was converted into 840,000 shares of our common stock. Furthermore, Sofinov exercised its purchase right in full and purchased an additional 1,160,000 shares of our common stock. On November 30, 1999, we issued 2,000,000 shares of our common stock, at a price of $3.00 per share, or $6.0 million in total, to Hydro-Quebec CapiTech. In April 2000, H Power made cash payments totalling $2.1 million to Messrs. Rothstein and Entman and NBG Technologies Inc. to terminate agreements with them. A discussion of the termination arrangements of Messrs. Rothstein and Entman is set forth in "Certain Relationships and Related Transactions." Our capital requirements will be affected by many factors, including the success of current product offerings, the ability to enhance our current products and our ability to develop and introduce new products that keep pace with technological developments in the marketplace. We intend to use the proceeds of this offering for general corporate purposes including continued research and product development, expanded marketing and sales efforts, locating and acquiring a new manufacturing facility and for working capital. Additionally, we may also use a portion of the net proceeds to acquire or to invest in complementary businesses, technologies, products or services. We believe that cash from operations, together with the net proceeds of the sale of common stock in this offering, will be adequate to fund our operations for the next 18 months (whether or not the underwriters exercise their over-allotment option from us). We expect to spend in excess of $21 million on property, plant and equipment. We anticipate that we will incur substantial losses over at least the next few years due to numerous factors, including completion of our product development activities in 23 <PAGE> our efforts to commercialize our fuel cell systems, increasing our sales and marketing activities, hiring and training our production staff, expanding our manufacturing capacity, and acquiring and installing new management information systems. As of May 31, 2000, we had notes and notes payable of $190,000. Of this amount, $122,000 is an unsecured payment that was due pending resolution with the lender. We also have a $67,000 government loan that is non-interest bearing that was used to finance the last phase of a HPEC development project. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The new standard establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 is effective for all quarters of fiscal years beginning after June 15, 2000. We do not expect SFAS No. 133 to have a material effect on our financial condition or results of operations. SECTION 382 OF THE INTERNAL REVENUE CODE Section 382 of the Internal Revenue Code limits the ability of a corporation that undergoes an "ownership change" to use its net operating losses to reduce its tax liability. While this offering of our common stock will not trigger such an ownership change, later transactions may do so. In that event, we would not be able to use our net operating losses from before our ownership change in excess of the limitation imposed by Section 382. This limitation generally would be calculated by multiplying the value of our stock immediately before the ownership change by the long-term tax-exempt rate as provided in Section 382(f) of the Internal Revenue Code. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our financial market risk includes risks associated with international operations and related foreign currencies, as we have a significant operation in Canada. Expenses in this operation are incurred in Canadian dollars and therefore are subject to foreign currency exchange risk. Through May 31, 2000, we have not experienced any significant negative impact on our operations as a result of fluctuations in foreign currency exchange rates. In addition our international business is subject to the risks typical of an international business including, but not limited to differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our future results could be materially and adversely affected by changes in these and other factors. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. We maintain our portfolio of cash equivalents and investments in marketable securities in a variety of securities, including both government and corporate obligations and money market funds. We do not utilize any derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions in any material fashion. We believe that the investment-grade securities we hold are not subject to any material risks arising from changes in interest rates, however, they may be subject to changes in the financial standing of the issuer of these securities. 24 <PAGE> BUSINESS INTRODUCTION We are a leader in developing, and believe that we were the first to complete a commercial sale of proton-exchange membrane, or PEM, fuel cell systems. Fuel cells are devices that generate electricity efficiently and cleanly from the electrochemical reaction of hydrogen and oxygen. Hydrogen is typically derived from conventional fuels such as natural gas or propane, while the oxygen is drawn from the air. We have sold fuel cell systems for stationary and portable and mobile applications on a limited basis to the U.S. Government, state agencies and domestic and multinational corporations. We expect demand for our fuel cell products to be driven by the increasing worldwide need for distributed, off-grid electric power, as well as consumer preference for smaller power sources with longer operating lives and lighter weights. We believe that our residential cogeneration products will be adopted in our first target market, consisting of rural, remote homes, because they will best meet the criteria used by the customer in choosing a residential power source. These criteria include price, operating cost, noise, pollution, reliability and maintenance. We believe that as our stationary, portable and mobile products gain acceptance in the market and are manufactured in large quantities, their cost will decline and their reliability will increase until they can provide electricity competitively for a wide variety of applications and geographical territories. We were founded in 1989 and have developed, own or have been granted the exclusive rights to significant patents, proprietary technology and trade secrets covering fuel cells and ancillary systems. OUR PRODUCT FOCUS Our business focus is to design, manufacture and sell PEM fuel cell systems that address the needs of existing and near-term commercial markets. We focus on two major product areas: - ON-SITE STATIONARY POWER UNITS WITH OUTPUTS OF 1 TO 25 KILOWATTS Stationary fuel cell systems can provide on-site power to replace or supplement the electric grid for use in residences, farms, small commercial establishments and industrial facilities, and telecom applications. - PORTABLE AND MOBILE POWER UNITS WITH OUTPUTS UP TO 15 KILOWATTS Portable fuel cell systems can power electronic equipment such as highway variable message signs, communications apparatus, sensor and metering devices, and personal portable electronic devices, such as video cameras and laptop computers. Mobile fuel cell systems can provide auxiliary power to operate the air conditioning and electronic systems of large vehicles, such as recreational vehicles or light rail coaches. These systems also can provide primary power for small, specialty vehicles such as forklifts, golf carts and airport terminal cars. FAVORABLE INDUSTRY AND MARKET TRENDS STATIONARY POWER. According to the GRI Baseline Projection of U.S. Energy Supply and Demand-2000 Edition, the share of power generation represented by central utilities will decline sharply over the next ten years. We believe demand for fuel cell products will correspondingly increase as the worldwide need for distributed, off-grid electric power grows. The restructuring of the electric utility industry is contributing to a move away from large central power generating plants with high-voltage transmission lines, to a new model whereby power is increasingly generated and distributed locally. In addition, environmental compliance requirements and higher air-quality standards are causing significant and continuous changes in power generation in the U.S. and worldwide. The distributed power applications sector, in which a dedicated electricity generator is located at or near the end user's site, is our principal target market. We believe that fuel cell systems will allow residential and small commercial consumers to generate electricity on-site from readily available and potentially renewable fuel sources. PORTABLE AND MOBILE POWER. We believe that demand for portable and mobile systems will be driven by consumer preference for smaller power sources with longer lives and lighter weights. We 25 <PAGE> believe that one of the earliest commercial opportunities for low-power fuel cells will be as battery substitutes. A 1997 study by the Freedonia Group, a market research organization, has estimated that worldwide battery sales will increase by 8% per year, reaching $89 billion by 2005. This growth is based on increased demand for an expanding variety of battery-powered consumer devices, from video cameras and laptop computers to industrial applications. We believe that a number of industry and market trends favor significant penetration by fuel cells into the distributed power generation market. These trends include: - increasing requirements for continuous, reliable primary and backup electric power at residences, on farms, in commercial establishments and at small manufacturing facilities; - increasing trend toward decentralized communications systems requiring more reliable power than is available on the current electric grid; - continuing privatization and deregulation of utilities, which opens the market for alternative power; - rising demand for electric power in rural areas as well as in developing countries with minimal existing infrastructure; - increasing desire on the part of utilities to avoid costly transmission, maintenance and distribution expenditures; and - increasing regulation of the environmental impact of conventional fossil fuel and nuclear power generation and transmission. PATH TO COMMERCIAL PRODUCTION We believe that we were the first to commercialize fuel cells and that the following represent key milestones towards our commercialization efforts: <TABLE> <CAPTION> DATE MILESTONE ----------------- ------------------------------------------------------------ <S> <C> February 1998 We began delivering limited-production quantities of 50-watt and 100-watt fuel cells to Ball Aerospace & Technologies Corp., a major aerospace company, for integration into systems it is delivering to the U.S. military. June 1998 We made our first commercial sale when we began supplying the New Jersey Department of Transportation with 65 backup power units for its variable message highway signs. As of May 31, 2000, we had already delivered 53 of these units, all of which are in operation. We believe that this sale represents the world's first commercial order for a sizeable number of competitively-bid, non-subsidized PEM fuel cell systems offered with a warranty. November 1998 We sold fifteen 50-watt and one 100-watt evaluation systems to a major Scandinavian energy company for remote telecommunications backup power applications. August 1999 We entered into a ten-year agreement with ECO. Under this agreement, ECO invested $15 million in our company and paid us $2.5 million as a downpayment for licensing fees, in exchange for a mutually exclusive marketing, distribution and servicing arrangement for all of our stationary power products in the 1 to 25 kilowatt range. March 2000 We have begun delivering to ECO, as its exclusive supplier, the prototype of our residential cogeneration unit, or RCU, which is designed to serve as a primary residential electric power source. Our goal is to commence shipping our initial commercial units in the second half of calendar year 2001. May 2000 We entered into a renewable two-year distribution arrangement with Mitsui & Co., Ltd. under which they will market our entire line of fuel cell products in Japan. </TABLE> 26 <PAGE> OUR ECO RELATIONSHIP ECO is a national energy services cooperative structured as an independent organization formed in 1998 to assist rural electric cooperatives' efforts to diversify into fuel cells, distributive generation products, and natural gas and propane. ECO provides its members with products and services to help them take advantage of new energy technologies, supports them in their acquisition of natural gas and propane companies, obtains energy products and services and provides consulting services. Currently, approximately 250 of the more than 900 rural electric cooperatives in the U.S. are ECO members (who are also its owners) and membership continues to grow at a rapid pace. ECO is controlled by a board of directors who are appointed by these same cooperative members. Rural electric cooperatives have a service territory that includes 83% of US counties in 47 states. These cooperatives supply power to approximately 14 million U.S. households, farms and small businesses. ECO also has the right to market H Power's products to the additional 37 million households in this service territory that are served by municipal and investor-owned electric utilities. Our product cost analyses indicate that after two to three years of commercial production, efficiencies in production and learning experience should reduce the cost of our PEM fuel cell systems substantially. We believe that our systems would then become attractive to a significant percentage of the additional 37 million households, particularly those in areas where the cost of electricity is relatively high and the cost of natural gas is relatively low. The 250 rural cooperatives, which are currently the ECO members, currently service in excess of 9 million homes. ECO has selected us to be its exclusive supplier of stationary fuel cells in the 1 to 25 kilowatt range. In addition, ECO has agreed not to sell to its cooperative members any of our competitors' fuel cell systems, so long as our fuel cell systems are not significantly less competitive in terms of quality, price and performance. ECO has already started its marketing efforts nationwide. ECO, has entered into arrangements with various cooperatives to install 44 of our initial production units in test sites throughout the country. These locations were chosen based on geography, climatic conditions (e.g. temperature and humidity) and traditional load curves. It is intended that the data obtained from these test units will be used to further develop our fuel cell size, design and operational components. Participation in this testing program was voluntary, and required participants to pay a test participation fee which will be refunded against future fuel cell purchases, and territory license purchases. In furtherance of this testing program, ECO created a fuel cell engineering committee, consisting of 50 managers, engineers and technical representatives from these cooperatives. Four sub-committees have also been established to focus on the fuel cell design and test protocol, safety and interconnection, code and building inspection and training and maintenance. The objective of these committees will be to provide guidance on the final commercial development of the stationary fuel cell. ECO purchased the exclusive rights on a per-household basis to be the supplier of fuel cells in the 1 to 25 kilowatt range in the U.S. and made an initial $2.5 million payment to us in August of 1999. These rights exclude sales of fuel cells to the national accounts of telecommunications companies for systems that power telecommunications equipment. The ultimate customer of the fuel cells will be the rural electric cooperatives. ECO has subdivided its distribution rights by county, and has itself begun to sell its rights to sell, distribute, lease, finance and service to ECO members, or to electric cooperatives which become ECO members. ECO members will be able to purchase the exclusive rights to the territories to which the cooperatives currently provide energy services as of August 15, 1999 on an exclusive basis until December 1, 2000. All unsold territories will then be available to be purchased by cooperatives on a "first come, first serve" basis. Any remaining unsold territories will revert back to us on the third anniversary of the date on which fuel cells are first available in commercial quantities. The purchase price paid to ECO will be based on the number of households in the purchased territory and a portion of the fee received by ECO will be paid to us. In addition to the exclusive distribution rights, the rural electric cooperatives will be required to purchase a minimum number of fuel cells each year, but will also be given volume discounts based on units purchased. 27 <PAGE> Under the terms of our agreement, ECO has agreed to purchase 12,300 of our stationary fuel cell systems over several years at established unit prices, representing approximately $81 million in revenues. We began to ship our initial test and evaluation units to ECO in March 2000 and our goal is to commence shipping our initial commercial units in the second half of calendar year 2001. ECO, however, has the right to review and revise the delivery schedule for these units to meet the demand of its customer base and may delay delivery until the later of December 30, 2003 or thirty months from when the 10th commercial unit is shipped. We also have agreed to sell our units to ECO at most preferred customer prices. To the extent that our sales to third parties requires us to lower the price of the RCUs that ECO has committed to purchase, the aggregate purchase price under our ECO agreement would be correspondingly reduced. ECO's financial ability to perform under the agreement and to purchase units from us is entirely dependent on its ability to resell the units to its customer base, the rural electric cooperatives. OUR COMPETITIVE ADVANTAGES We believe we have developed a leadership position in the commercialization of low and medium power sectors of the PEM fuel cell industry. We believe our fuel cell systems effectively address the requirements of a wide range of stationary, portable and mobile power applications. Our competitive advantages include: - EXISTING PRODUCTION CAPABILITY. Since June 1998, we have been delivering PEM fuel systems to the New Jersey Department of Transportation, which we believe represents the world's first commercial fuel cell sale. We recently have begun to ship our initial prototype stationary RCU units to ECO for which we have a production capability of approximately 216 systems per year. Our existing manufacturing capacity for portable and mobile systems is in excess of 10,000 units per year. - EXCLUSIVE LICENSE TO FUEL PROCESSING TECHNOLOGY. We licensed from Harvest Energy Technology Inc. the exclusive right to use a proprietary, fuel-processing technology for fuel cell systems in the 1 to 10 kilowatt range, which encompasses the entire range suitable for remote and grid-connected residential cogeneration. This technology is used to process commonly available fuels, such as natural gas or propane, via steam-reforming, a highly efficient chemical process for extracting hydrogen from hydrocarbon fuels. We licensed the technology to reduce the scale of steam-reforming equipment to meet the needs of a residential-power fuel cell system. We believe that the high-efficiency of this equipment will provide electricity at a lower cost per kilowatt-hour than can be achieved by fuel cell generators that use other types of fuel processors. - LEADERSHIP IN FUEL CELL AND RELATED TECHNOLOGY. We currently hold 20 U.S. and international patents related to fuel cells and fuel cell systems. We have applied for additional domestic and international patents related to fuel cell technology. While some of our competitors hold more patents related to fuel cells and fuel cell systems than we do, we believe our comprehensive knowledge of fuel cell technology permits us to improve on its key elements and positions us to lead further technological advances in the industry. - COGENERATION CAPABILITIES. We believe our initial stationary systems will be the first to incorporate cogeneration capabilities. Cogeneration allows us to enhance significantly the overall efficiency of our fuel cell systems by capturing byproduct heat and supplying it and hot water to homes in addition to electricity. - EXPERTISE IN FUEL CELL SYSTEM DESIGN AND INTEGRATION. As of May 31, 2000, we employed 61 engineers and technical professionals in our engineering and product development activities who as a group have the expertise to design and develop the elements required for complete fuel cell systems and to select appropriate ancillary components and subsystems from outside vendors. 28 <PAGE> We assist our customers in integrating our systems into their products and provide them with a complete, integrated solution. - ECO DISTRIBUTION CHANNEL. Our arrangement with ECO provides us with a primary distribution channel for our RCU product through which we can penetrate our target markets. OUR BUSINESS STRATEGY Our goal is to establish PEM fuel cells as a major alternative energy source and to become the leading commercial provider of PEM fuel cells and fuel cell systems. The following are key elements in our strategy: - FOCUS ON EXISTING MARKETS FOR STATIONARY POWER PRODUCTS SUCH AS RURAL AREAS. We intend to initially distribute our stationary products to rural areas through ECO. We believe rural areas will be among the most likely early adopters of fuel cell systems because these markets require alternative stationary power sources such as our RCU systems. In the future, our goal is for manufacturing efficiencies to lead to cost reductions that will make our products attractive to more price-sensitive, grid-connected urban and suburban locations. - STRENGTHEN AND EXPAND OUR STRATEGIC RELATIONSHIPS. We are seeking to strengthen our existing strategic relationships, such as our ECO relationship, as well as aggressively pursue additional manufacturing, marketing and distribution partnerships. - PENETRATE MARKETS FOR PORTABLE AND MOBILE FUEL CELL PRODUCTS. We will seek to increase sales of our portable and mobile fuel cell systems in addition to continuing to supply demonstration and prototype models of these systems to a broad range of customers with multiple potential applications. - DEVELOP LOW-COST, STATE-OF-THE-ART MANUFACTURING CAPABILITIES. Our goal is to acquire state-of-the-art manufacturing facilities and develop strategic manufacturing partnerships, including outsourcing relationships, necessary to produce our fuel cell systems in commercial quantities on a low-cost, high-quality basis. - CAPITALIZE ON OUR TECHNOLOGICAL ADVANTAGES OVER OTHER FUEL CELL DEVELOPERS AND OTHER POTENTIAL ALTERNATIVE POWER SOURCES. We are seeking to continue to capitalize on our proprietary technologies in developing our fuel cell systems. For example, we believe our license for the exclusive use of steam reforming technology will provide our products with a significant advantage in hydrogen yield and overall system efficiency as compared with other fuel processing methodologies. - DEVELOP AND ACQUIRE ADVANCED COMPLEMENTARY TECHNOLOGIES. We believe that several new technologies could provide advantages for certain applications over systems that require fuel processing equipment to deliver hydrogen to a fuel cell. For example, the direct methanol fuel cell, or DMFC, converts the chemical energy of liquid methanol directly into electrical energy. We have been pursuing the development of DMFC technology under U.S. Government contracts and through internally-funded projects. In addition, we will evaluate acquiring advanced, complementary technologies. The competitiveness of our products depends on several factors, including the application and the environment in which they will be operated. Another major factor is cost to the customer. To quantify the cost of our products, we have carried out detailed economic analyses. These analyses have shown the competitiveness of our products, against particular alternative products, for specific applications. For example, the cost of a solar voltaic system to power an average residence in a remote, rural environment, our initial preferred market, is approximately $25,000. The introductory price of under $10,000 for our fuel cell power generator suggests that it would be competitive with this alternative method of generation. Other traditional residential power sources for remote locations, such as internal 29 <PAGE> combustion engine-generators, may currently be less expensive but may not be competitive because of their noise, pollution, and inconvenient maintenance requirements. We believe that our residential cogeneration products will be readily adopted in rural, remote locations because they will best meet the complete set of criteria used by the customer in choosing a residential power source. OUR PRODUCTS Our current products consist of PEM fuel cell systems for stationary power and portable and mobile power. We consider our stationary power products to be medium and high power products and our portable and mobile products to be low power products. Our low power products have power ratings of up to 250 watts; our medium power products have power ratings of 250 watts to 1,000 watts; and our high power products have power ratings in excess of 1,000 watts. STATIONARY POWER PRODUCTS Stationary fuel cell systems can provide on-site power to replace or supplement the electric grid for use in residences, farms, small commercial establishments and industrial facilities, and telecom applications. Our fuel cells' low emissions, low noise and high efficiency will allow them to be installed near or at the end-user's location, which will eliminate expensive transmission and distribution costs. Additionally, our fuel cells' negligible regulated emissions and quiet operation significantly reduce complex issues associated with siting and licensing traditional power sources. The following table outlines each of our stationary power products and the current status of our commercialization efforts. <TABLE> <CAPTION> PRODUCT NAME AND DESCRIPTION APPLICATION STATUS ----------------------------- ----------------------------- ----------------------------- <S> <C> <C> RCU - Residential cogeneration of - Commenced shipping of field 1 to 10 kilowatt AC electricity and heat test units in March 2000 generator of electricity (providing all the - Commercial production is and by-product heat electricity needs of a expected to commence in the home) second half of calendar - Initial market is off-grid year 2001 sites fueled with propane - Follow-up market is grid- connected sites fueled with natural gas EPAC - Backup power for homes - Available in pre-production 250 or 500 watt AC, during grid power outages quantities for evaluation hydrogen-fueled power by selected customers supply TELPAC - Distributed telecom backup - In preliminary development 500 to 5000 watt, liquid power fuel power supply </TABLE> According to data provided to us by the National Electric Rural Cooperative association, over the course of a year, the average U.S. home consumes, on average, approximately 1 kilowatt of energy each day. There are specific circumstances, however, especially during the use of air-conditioning in the summertime, when the power draw could be as much as 4 to 5 kilowatts for a period of several hours. Power peaks in a home could be on the order of 20 kilowatts, for example, during motor-starting. These peak loads are inherently very short in duration (on the order of a second or less); therefore, they represent an insignificant energy burden for the battery, which can easily respond to such instantaneous peak-power demands. During these peak periods, the power provided from a fuel cell system, economically sized to meet a small multiple of the average power need, would be insufficient without the use of supplemental batteries. The amount of incremental energy required from batteries will vary depending on the size of the home and on the climatic conditions to which it is subject. For 30 <PAGE> the typical home, averaging less than 2,400 square feet of floor space, the battery energy storage requirement in expected to be less than 8 kilowatt-hours, except in those areas that experience very high temperatures for a large fraction of the summertime day. The first prototype of our primary cogeneration system for residences, or RCU, provides 3 kilowatts of continuous power and peak power of up to 10 to 15 kilowatts. This system would not be adequate to power average homes with high air-conditioning requirements. Our second generation prototype RCU system, which we expect to begin shipping in the second half of calendar year 2000, will increase the level of continuous power to 4 to 5 kilowatts. We believe that these second generation prototypes and the commercial systems that are planned to follow will be suitable to power most homes in the U.S. Our RCU system will process propane or natural gas, yielding electricity and heat for hot water as well as space heating. In addition, we are designing our systems to provide for net metering, which we believe will eventually allow our customers to sell power back to the grid. The RCU will incorporate a fuel processor based on proprietary steam reforming technology, for which we have obtained exclusive rights. The economics of replacing grid-delivered electricity with home-generated power are sensitive to fuel efficiency and we believe that our licensed steam reforming technology will provide a competitive advantage over other types of fuel processing in the potentially large urban, grid-connected market for distributed power generation. Our fuel cell stack operates at near atmospheric pressures, which allows the use of an air blower, instead of a compressor. This results in substantially lower power consumption, greater fuel efficiency, less system complexity and less noise. [DIAGRAM] In February 1999, our EPAC furnace power backup unit won a first prize in the home energy category at the 20th Salon National de l'Habitation, a major home show held annually in Montreal. Approximately 15 other companies participated in the show's home energy category and the sponsors granted more than one award in this category. The EPAC unit is designed to provide backup power to gas or oil furnaces during power outages and it also can supply power to run appliances such as refrigerators, freezers, televisions or sump pumps. PORTABLE AND MOBILE PRODUCTS Portable fuel cell systems can power electronic equipment and personal portable electronic devices. Mobile fuel cell systems can provide auxiliary power for applications that operate the air conditioning and electronic systems of large vehicles. The power requirements for portable and mobile electronic devices continue to expand. Leading battery technologies, however, are rapidly approaching the practical limits of their energy storage capabilities. In response to the growing demand for portable and mobile power, we have produced a wide array of prototypes and commercial portable and mobile fuel cell systems for product applications that require a low, steady state power draw for long durations. 31 <PAGE> The following table outlines each of our portable and mobile power products and the current status of our commercialization efforts. <TABLE> <CAPTION> PRODUCT NAME AND DESCRIPTION APPLICATION STATUS ----------------------------- ----------------------------- ----------------------------- <S> <C> <C> POWERPEM(-REGISTERED TRADEMARK-)-D35-- - Educational - Limited production 35 watt, 12 volt DC, - Demonstration hydrogen-fueled power - Scientific supply POWERPEM(-REGISTERED TRADEMARK-)-VMS50-- - Backup power for solar - Limited commercial 50-100 watt, 12 volt DC, variable-message road signs production hydrogen-fueled power supply for battery charging POWERPEM(-REGISTERED TRADEMARK-)-SSG50-- - General purpose power - Limited production 50 watt, 12 volt DC, - Remote communications and hydrogen-fueled power instrumentation supply - Railroad and traffic equipment POWERPEM(-REGISTERED TRADEMARK-)-PS100/250-- - Telecommunications backup - Limited production 100 or 250 watt DC, power hydrogen-fueled power - Auxiliary power units supplies (railroad/medical) - Electric wheelchairs - Small electric vehicles - Remote power </TABLE> In addition to the products outlined above, we are also completing the design of a hydrogen-fueled, 500 watt DC power supply to extend the range of applications now addressed by the POWERPEM(-REGISTERED TRADEMARK-)-PS100 and -PS250. We are also developing products that can be used to power diverse applications such as radio transmitters and robotic vehicles. Our development activities are targeted towards capitalizing on major market opportunities in both military and commercial sales. Our remote-lighting system products incorporating the POWERPEM-REGISTERED TRADEMARK--VMS50 are currently under development and have the potential for wide use in applications such as construction, advertising and transportation. KEY BUSINESS RELATIONSHIPS OUR EQUITY INVESTORS. Our major investors have invested an aggregate of approximately $46.5 million in cash for the funding of our ongoing and planned operations. These investors' contributions are not purely financial. Individually and collectively, they have helped us identify new business opportunities and potential technology partners. These investors also participate actively in the management of our business affairs through their respective representatives or observers on our board of directors. Our major investors include: - DQE Enterprises, Inc. is a wholly-owned subsidiary of DQE, Inc. (NYSE:DQE), which delivers essential products, such as electricity, gas, water and communications to homes and businesses and offers services which use technology to increase the value of these essential products for customers. DQE Enterprises acquires and develops companies involved in electronic commerce, communications and energy services and technologies, including power systems for distributed energy generation. We have received a purchase order from an affiliate of DQE Enterprises to purchase an RCU system for use in demonstration, such as an all-propane home. In addition, Duquesne Light Company, a wholly-owned subsidiary of DQE, Inc., has placed an order for backup power systems for sale and demonstration to customers with needs for reliable backup to the electric grid. 32 <PAGE> - ECO markets services and products to the more than 900 rural electric cooperatives that operate in territories comprising about two-thirds of the land mass of the U.S. ECO will sell, market and distribute our stationary power products in the 1 to 25 kilowatt range. - Hydro-Quebec CapiTech Inc. is a division of Hydro-Quebec, a major Canadian electric utility, that specializes in technology investments. - Singapore Technologies Kinetics Ltd., a division of Singapore Technologies Engineering Ltd., a large conglomerate headquartered in Singapore. They principally make ordnance products, such as heavy vehicles for military use, and invest in promising technologies, including power generation. - Sofinov Societe Financiere d'Innovation, Inc. is the technology investment arm of Caisse de Depot, a large Canadian pension fund with more than $70 billion in assets under management. OUR VENDORS AND TECHNOLOGY PROVIDERS. Several of our suppliers of key components or materials are working with us in cooperative technology development programs to improve and optimize system performance through a closer sharing of development data than is typical in a vendor/user relationship. Examples of relationships that we currently have in place or are developing include development programs in the areas of fuel processing, fuel cell stack components and test equipment. These relationships not only have the potential to optimize the performance of our fuel cells, but also may decrease our manufacturing costs significantly. OTHER STRATEGIC AND MARKETING ALLIANCES. We have identified, and will continue to seek out, partners for strategic alliances that meet our defined business needs. In January 1999, we established a joint-technology development program with Epyx, Inc., which recently merged with De Nora Fuel Cells to form Nuvera Fuel Cells, dedicated to fuel processing technology for stationary and transportation applications. Our development program is designed to integrate our fuel cell stack and system technology with the fuel processing technology of Epyx. This two-year, $6.4 million-program is being partially supported by the National Institute of Science and Technology under its advanced technology program. In addition, in May 2000, we entered into a renewable two-year distribution arrangement with Mitsui & Co., Ltd. Under the terms of this arrangement, we granted Mitsui the right to distribute and sell our fuel cell products in Japan. The terms and conditions of each purchase and sale of our fuel cell products by and to Mitsui, if any, will be determined through the negotiation of separate purchase and sales contracts. We intend to aggressively pursue additional manufacturing, marketing and distribution alliances in the future. GOVERNMENT SPONSORED RESEARCH AND DEVELOPMENT CONTRACTS. Since inception, we have been awarded approximately $19.5 million in federal and state government contracts. We believe most of the technology developed under these government contracts can be utilized in our fuel cell product applications. 33 <PAGE> HOW A PEM FUEL CELL FUNCTIONS A PEM fuel cell is a device that silently produces electricity through an electrochemical reaction in which hydrogen and oxygen are combined to generate electricity, with usable heat and water as the principal by-products. The hydrogen used in the process is derived from fuels such as natural gas, propane, methanol or other petroleum products and the oxygen is drawn from the air. As is illustrated by the following diagram, our fuel cells consist principally of two electrodes, the anode and the cathode, separated by a polymer electrolyte membrane. Each of the electrodes is coated on one side with a platinum-based catalyst. Hydrogen fuel is fed into the anode and air enters through the cathode. In the presence of the platinum catalyst, the hydrogen molecule splits into two protons and two electrons. The electrons from the hydrogen molecule flow through an external circuit creating an electric current. Protons from the hydrogen molecule are transported through the polymer electrolyte membrane and combine at the cathode with the electrons and oxygen from the air, to form water and generate by-product heat. [DIAGRAM] Individual fuel cells are positioned between electrically conducting bipolar plates and combined into a fuel cell stack as is illustrated in the following diagram. The voltage of a stack of cells is proportional to the number of cells. The number of cells in a stack and the cell surface area determine the amount of electrical power that can be generated. The DC power produced by a fuel cell stack is either applied directly to a DC load or converted to AC power by an inverter. The heat generated in the process can be used in cogeneration heating and offers the potential to enhance significantly the overall efficiency of a PEM fuel cell system. [DIAGRAM] 34 <PAGE> FUEL CELL SYSTEMS COMPARED TO OTHER ENERGY STORAGE AND PRODUCTION ALTERNATIVES Compared with currently available energy storage and production alternatives, fuel cell systems have a combination of characteristics that make them attractive for a wide variety of current niche applications. Typically, fuel cell systems are attractive to users of electricity who require portability, mobility, an independent off-grid power source, a remotely located electrical power source or an on-site backup power source when the grid fails. Fuel cell systems, nonetheless, today are significantly more expensive than other currently available energy storage and production alternatives. PEM FUEL CELLS COMPARED TO OTHER TYPES OF FUEL CELLS. Other types of fuel cells have been under development for a variety of applications but we believe that PEM fuel cells have distinct advantages over each of these for immediate commercialization. PEM fuel cells can provide power ranging from milliwatts to kilowatts, depending on their size and configuration. PEM fuel cells operate at low temperatures, which allows for faster start-ups. They also respond rapidly to changes in demand for power. Other types of fuel cells, however, have a greater tolerance to operating on different fuels than PEM fuel cells and are more suitable for high (up to 250 kilowatt) power applications. Nonetheless, we believe that PEM fuel cells have the greatest potential for rapid and profitable commercialization of systems that can be utilized for the broadest range of commercial, industrial and consumer products. We also believe that PEM fuel cells are better suited for small portable and mobile applications than other types of fuel cells. PEM FUEL CELLS COMPARED TO COMBUSTION-POWERED GENERATORS. PEM fuel cell systems have inherent operational and environmental advantages over combustion-powered generators: <TABLE> <CAPTION> ATTRIBUTE ADVANTAGE --------------------------------------------- --------------------------------------------- <S> <C> Fuel cells are electrochemical devices, Greater efficiency and lower operating costs rather than combustion-powered generators. through fuel savings. Fuel cells are virtually pollution and More suitable for home use; can be located odor-free. within the home or business. Fuel cells operate quietly. More suitable for residential and densely populated environments. Fuel cells are reliable and require minimal Better adapted to intermittent use in backup maintenance. power systems. Even small units can efficiently recover Greater fuel economy through cogeneration of by-product heat. power and heat. While PEM fuel cells are advantageous in many respects, they are significantly more expensive and have a slower start-up time than combustion-powered generators. Unlike PEM fuel cells, combustion-powered generators are also widely available today in the marketplace. </TABLE> 35 <PAGE> PEM FUEL CELLS AND BATTERY/FUEL CELL HYBRIDS COMPARED TO BATTERIES. Fuel cell systems have the potential to solve the most challenging current battery problem, which is insufficient energy at a given weight or volume: <TABLE> <CAPTION> ATTRIBUTE ADVANTAGE --------------------------------------------- --------------------------------------------- <S> <C> The energy of a fuel cell is limited only by Fuel cells can operate indefinitely when the availability of its external fuel supply. connected to a pipeline fuel source; fuel cells can operate longer than batteries for a given system weight and volume since the energy of a battery is limited by its size. Fuel cells can operate more effectively than Greater tolerance to elevated temperatures conventional batteries at elevated means longer system life and higher temperatures. reliability in harsh environments. Commercial fuel cell technology is still in Leading battery technologies are nearing the the early stages of development. practical limits of their energy storage capabilities. While PEM fuel cells and battery/fuel cell hybrids are advantageous in many respects, batteries are significantly less expensive and have a greater tolerance to very low temperatures. Batteries also have an instantaneous start-up time unlike fuel cells operating with reformers that can take up to 30 minutes to start. Moreover, batteries have a dynamic power range and more readily provide bursts of high power when required than do PEM fuel cells and battery/fuel cell hybrids. </TABLE> RESEARCH AND DEVELOPMENT Our research team focuses on improving PEM fuel cell performance by working to optimize materials and processes. These activities are critical to achieving a higher cell power density, which leads directly to smaller, lighter, lower-cost and more fuel-efficient fuel cell stacks and systems. Our materials research efforts address the function, durability and cost of our fuel cell stack components, including electrode materials, membranes, bipolar plates and seals. The bipolar plates are a key area of focus because they perform a variety of critical fuel cell functions. These functions include conducting electricity from cell to adjacent cell, distributing the hydrogen and oxygen over the electrodes and removing the water that is produced as a by-product. Our development team improves the designs of our existing products and generates new product concepts. This team initiates advanced fuel cell stack and system concepts and develops associated pre-prototype and prototype hardware. This team also develops new methods for the removal of heat from a fuel cell and for the humidification of the cell membrane, thereby increasing the utility of existing products. The activities of our development team are complemented by the multi-kilowatt system development team efforts at HPEC. This team, in concert with our system integration engineers, provides for the specification, procurement, evaluation and optimization of key subsystem hardware such as fuel processors, power conditioners and overall system assembly. We expect to spend in excess of $10 million on our research and development activities in fiscal 2001. STATUS OF OUR TECHNOLOGY Our in-house PEM fuel cell system development efforts have concentrated on fuel cell components, fuel cell stack, system components and system integration, as well as hydrogen storage and 36 <PAGE> generation subsystems for low- and medium-power applications. The proprietary technologies that we have developed include: - formulation and fabrication of electrodes and membrane-electrode assemblies; - design and fabrication of bipolar plates; - management of heat and water within the fuel cell stack and overall system; - fabrication and assembly methodologies for cells and stacks; and - hydrogen fuel storage and generation. Our technologies have resulted in compact, efficient fuel cell systems that we believe can be mass produced, reliably and cost-effectively for a wide array of current applications. We believe that our fuel processing and overall system-integration experience, as well as our established relationships with third-party suppliers, allows us to acquire effectively and economically all necessary auxiliary components for our fuel cell systems. OUR FUEL CELL STACKS. Our development program has emphasized the design and fabrication technologies for fuel cell stacks. The design characteristics differ between "higher-power," multi-kilowatt stacks, which are used for stationary power applications and "lower-power" stacks, which are used for portable power and battery replacement. Our proprietary low-power stack design achieves compactness and internal humidification, as well as user-friendly features such as external air-cooling and non-humidified reactants. We have successfully implemented this technology in many prototype, pre-commercial and commercial fuel cell systems. We cool high-power stacks by directing a flow of water through them. This approach allows the stacks to operate at a higher power and provides by-product heat for hot water and space heating. Since 1997, we have utilized a platelet-type bipolar plate technology acquired on an exclusive basis from Aerojet Corporation, which provides for the incorporation of cooling-water flow-fields within the bipolar plates of our high-power stacks. We have fabricated and assembled dozens of developmental fuel cell stacks of this type in the 1 to 5 kilowatt range. Our internal test results have confirmed that this platelet-type bipolar plate technology provides compactness and a particularly high degree of temperature uniformity throughout the fuel cell stack. We believe that this offers a significant advantage with respect to the reliability and durability of our PEM fuel cells. OUR FUEL STORAGE AND PROCESSING-INTEGRATED SYSTEMS. Our low-power fuel cell systems generally incorporate some means of hydrogen storage and supply. Examples are pressurized hydrogen vessels, metal-hydride canisters and chemical hydrides that generate hydrogen upon reaction with water. We typically integrate pressurized hydrogen or metal-hydride units into our fuel cell systems. We have delivered many prototype, pre-commercial and commercial systems based on hydrogen and metal-hydride fuel supplies. To expand the utility of our portable and mobile fuel cell systems in the marketplace, we are developing fuel reformers which extract hydrogen from common, widely-available fuels such as natural gas, liquid propane or methanol. For these fuels, we are working with selected outside development companies to obtain fuel reforming technologies suitable for use in PEM fuel cell systems. We expect these reformers to be completed and available in the next three to five years. Fuel reformers for our stationary power systems will be fabricated by suitable outside contractors in accordance with our specifications. We have acquired pre-prototype and prototype fuel processor hardware suitable for residential applications and this hardware is undergoing evaluation, optimization and integration within fuel cell systems at our facilities. We expect that these fuel reformers for the beta units of our RCUs will be completed in the fourth quarter of calendar year 2000 and that the fuel processing hardware for our commercial RCUs will be available in the second half of calendar year 2001. 37 <PAGE> Power conditioning hardware, such as DC-to-AC inverters, for our products will similarly be specified by us and procured from outside contractors. We are evaluating performance, availability and cost profiles from potential suppliers, and we have acquired our initial hardware. We expect that this power conditioning hardware for the beta units of our RCUs will be completed in the fourth quarter of calendar year 2000 and that the power conditioning hardware for our commercial RCUs will be available in the second half of calendar year 2001. MANUFACTURING PHASE I--LOW VOLUME COMMERCIAL PRODUCTION. Our research and product development process has evolved over the past two years to the point where we are in low-volume commercial production of a number of fuel cell systems and are producing prototype versions of other systems. Though the level of automation has been low, with much of the assembly being manual, we have gone through the early stages of design optimization and, over time, have produced fuel cells with increasing power per unit weight and at significantly lower cost than earlier models. Unit cost reductions achieved by these efforts over the past two years are attributable to, among other things, volume purchases of components and materials, technological advances and the redesign of our products for ease of manufacturing. Our goal is to achieve additional cost reductions as we move into higher-volume manufacturing phases. PHASE II--MEDIUM TO HIGH VOLUME COMMERCIAL PRODUCTION. The next stage of our manufacturing strategy is to implement a major upgrade of our production capabilities to enable medium-to-high- volume commercial production and become registered under ISO 9000. Existing forms of equipment and manufacturing processes currently available in the battery industry are directly applicable to our fuel cell technology. We recently received a comprehensive manufacturing plant siting study from a major international consulting firm identifying potential plant locations in the eastern United States and Canada. We estimate that the size of the facilities necessary to meet the anticipated demand for our products through 2002 will exceed 100,000 square feet. We intend to acquire and occupy a new manufacturing facility by the end of 2000 and our goal is to commence commercial sales of stationary units by the second half of calendar year 2001. PHASE III--HIGH VOLUME COMMERCIAL PRODUCTION. To progress to the next stage of volume manufacturing, we will selectively upgrade a number of the manufacturing steps to semi-automated operation or create automated cells that can perform a series of processes. We intend to: - upgrade product designs for automated production; - identify and contract with suppliers to outsource non-critical parts and assemblies; - develop our vendor networks for materials sourcing; and - procure and install equipment needed to meet production demands. As we reach successively higher volumes of production, we believe that we can achieve substantial cost reductions through improved equipment and operator efficiencies, and by taking advantage of high-volume orders in the purchase of materials. SALES AND MARKETING We plan to market and sell our products globally through distribution channels that we consider to be appropriate for the particular product and geographical area. Our immediate focus is to access markets that offer near-term opportunities for the sale of our stationary and portable and mobile fuel cell systems. We are strengthening our existing strategic relationships and pursuing new marketing and distribution partnerships with companies that have established distribution networks. These new relationships, for example, could be with companies who sell generators, batteries or certain power protection equipment. Additionally, we plan to be a leading supplier of fuel cell products to large original equipment manufacturers for applications that could include motorized wheelchairs, golf carts, forklifts and small electric vehicles. 38 <PAGE> We believe that the rural community will be among the first early adopters of fuel cell technology. In the U.S., ECO sells, markets and distributes our stationary power products, with a power range of 1-25 kilowatts, in the counties in which rural electric cooperatives are active. We are also working closely with ECO to train participating cooperatives in the installation and maintenance of our products. ECO initiated its program to sell our products with a series of seven meetings across the U.S. in January and February of 2000. More than 900 representatives of the rural cooperative community attended these meetings to learn how ECO and H Power plan to provide stationary power fuel cell products, which are specifically designed to meet the needs of the cooperatives. Subsequently, ECO, H Power and representatives of many of the cooperatives set up a 50-member engineering committee to establish the specifications for the product that ECO will market. This committee will complete its work in June 2000 with a set of recommendations on the specifications and attributes for our initial stationary power units and for a series of product enhancements to be introduced over the next two years. ECO has also created programs to secure early orders of our commercial fuel cells by creating awareness of the product through presentations in cooperative territories. We are actively seeking or have completed business arrangements with major companies that will distribute our stationary power products in industrialized regions such as Europe and Japan, and in developing countries. For example, we have entered into an arrangement with Mitsui & Co., Ltd. to sell our full cell products in Japan. Mitsui will also assist in developing new strategic partners for sales, marketing and distribution in Japan. After our stationary products have been introduced to the rural, remote market, where we believe they will command an initial price of $8,000 to $10,000, we believe that manufacturing economies of scale and production efficiency will permit us to further reduce our selling price. As unit costs decrease, we believe that a mass market will develop in grid-connected areas in which natural gas is available. We believe that the combination of electricity and heat generated by our cogeneration systems from natural gas will then be cost-competitive with electricity from the grid in many areas of the U.S. In addition to our ECO distribution channel, we believe that other types of companies will choose to enter into agreements to distribute our stationary power products. These include natural gas and propane distributors, electric utilities, manufacturers and distributors of electric and heating equipment, and home builders. We expect that these distributors will have existing sales organizations, and that some of them will have the capability, or will acquire it, to install and service our products. We are taking a number of steps to increase our sales and marketing capability. We have retained a large executive search firm to find a senior executive to head up our sales and marketing functions and to build a larger professional staff to support these functions. We already use a variety of channels to market and sell our stationary and portable and mobile products. We actively participate in domestic and international conferences and trade shows to make direct contact with potential customers and distributors. We also distribute product literature at trade shows and by direct mail and advertise our products in various industry publications and journals. Under the direction of our expanded sales and marketing staff, we plan to extend our network of representatives and distributors to achieve worldwide distribution of our products. Most of our sales contacts for our portable and mobile products are generated by customer visits to our internet web site. When these contacts lead to new applications for our products, our engineering team works closely with the customer to design specific product features, including appropriate mechanical and electrical interfaces, for the particular application. INTELLECTUAL PROPERTY In general, our proprietary technology is comprised of the physical and chemical design of our fuel cell components, fuel cell stacks and our manufacturing and assembling methodology and procedures. We have 17 patents issued or allowed in the U.S. and one patent issued or allowed in each of Europe, Taiwan and Singapore covering our proprietary technology. The issued patents will remain in effect for the next fourteen to eighteen years. In addition, we have filed patent applications domestically and internationally relating to fuel cell technology to protect proprietary features arising from our 39 <PAGE> development efforts. We also have filed numerous "Document Disclosures" with the U.S. Patent and Trademark Office in preparation for submitting corresponding patent applications. We license some of our technology from third parties. For example, in August 1998, we acquired from Harvest Energy Technology Inc. the right to use steam reforming technology pursuant to the grant of an exclusive worldwide license. This license will remain exclusive unless we fail to meet minimum levels of production and royalty payments during the next several years. Our agreement with Harvest expires in August 2018, at which point we have the option to renew the license for an additional 20-year period. We have also accumulated substantial trade secrets and "know-how" since our inception relating to fuel cell design and assembly. For example, in 1995 we acquired platelet technology from Aerojet-General Corporation. In connection with this agreement, Aerojet granted us an exclusive, worldwide, royalty free license to use all of its information and trade secrets (whether or not patentable) for use in developing fuel cells. This license is perpetual but may be canceled by Aerojet in the event of our bankruptcy or our material breach of the agreement. We rely on confidentiality agreements to protect our unpatented proprietary information, know-how and trade secrets. We believe, however, that our success is substantially dependent on the knowledge, experience and technical expertise of our employees. In this regard, our employees are required to enter into agreements providing for confidentiality and the assignment of rights to inventions made by them while employed by us. These agreements also contain non-competition and non-solicitation clauses for the term of employment and for one year thereafter. OUR COMPETITIVE ENVIRONMENT We compete primarily on the basis of reliability, efficiency, cost and environmental considerations. A number of companies located in the United States, Canada and abroad are developing PEM fuel cell technology. Many of these companies possess greater financial, technological and personnel resources than we do and represent significant competition. Ballard Power Systems has been developing PEM fuel cell technology with a number of partners and is a potential competitor. A number of major automotive and manufacturing companies also have in-house PEM fuel cell development efforts. Although we believe several companies have established residential fuel cell system development programs, we believe that these companies are still in the development stage. Plug Power Inc. and Avista Corp. are potential competitors for residential applications. We are not aware of any competitors in the less than 1 kilowatt segment of the market, wherein we have four products now in low-volume production. We also compete with companies that are developing other types of fuel cells. In addition to PEM fuel cells, phosphoric acid fuel cells, molten carbonate fuel cells, solid oxide fuel cells and alkaline fuel cells are generally considered to have viable commercial applications. These fuel cells differ in regard to cell materials and operating temperature. While all fuel cell types have potential environmental and efficiency advantages over traditional power sources, we believe that PEM fuel cells can be manufactured less expensively and are more efficient and more practical in small-scale applications. We believe that our systems will also compete with other distributed generation technologies, including microturbines and engine-generators. For example, current engine-generators below 25 kilowatts which supply continuous power have approximately the same installed price as the anticipated introductory price of our RCU. We believe that our fuel cell systems will have a competitive advantage because they can be more easily scaled to residential size and will be more efficient in handling the load profile of residential customers. We also believe that they will be quieter, environmentally cleaner, more efficient, and less expensive to install, service and maintain. We also expect that our systems will compete very favorably from a cost standpoint with solar- and wind-powered systems. Furthermore, our products could potentially compete with current conventional power sources such as batteries and providers of on-grid electricity. To be competitive with electricity provided by the grid, we believe that our products need to be at or near parity with on-grid electricity on the basis of electricity cost, and provide additional benefits. 40 <PAGE> We expect that the most important additional benefit will be immunity to utility "brown-outs" and "black-outs" that have affected many areas of the U.S., particularly in the summertime. We believe that to those who rely on electricity for their livelihood, power reliability is a major concern, and that these consumers of electricity will be highly motivated to adopt fuel-cell-generated electric power because it is immune to defects in the electric utility power grid. We divide the market for PEM fuel cells into three power ranges, as follows: - Low power, less than 1 kilowatt; - Medium power, between 1 kilowatt and 25 kilowatts; and - High power, more than 25 kilowatts. THE MARKET FOR LOW POWER PEM FUEL CELLS IS MOSTLY FOR BATTERY REPLACEMENT. The known market for sub-kilowatt fuel cells consists mostly of replacement or supplementation of the rechargeable batteries that now meet most needs for these power systems. The total annual worldwide market for rechargeable batteries as estimated in a 1997 study by the Freedonia Group is approximately $25 billion. Except for small batteries for consumer electronics, such as laptop computers and cell phones, lead-acid and nickel cadmium batteries largely dominate the rechargeable battery industry. Each of these systems is relatively large and heavy, contains toxic materials, and loses energy upon storage. Our PEM fuel cells contain no toxic materials, are capable of indefinite storage without loss of energy, and are designed to supplement or replace these batteries in many applications. Of the many potential uses for sub-kilowatt power sources, we have chosen to concentrate in the next few years on a small number of uses that can command an attractive price and for which the issues of fuel infrastructure are relatively simple. The largest markets for low power PEM fuel cells that we have identified and are pursuing are for backup power systems and small, hybrid electric vehicles. Examples of backup power systems are the Variable Message Sign fuel cell power source that we have supplied on a commercial basis to the New Jersey Department of Transportation, and the microwave repeater and remote weather station power sources that we supply in limited quantities to a major Scandinavian energy company. Each of these systems supplies supplementary power to a system consisting of a solar photovoltaic array and a reserve rechargeable battery. Each operates on compressed hydrogen gas. We plan to expand our product offerings in the backup power category to include emergency power for homes, small businesses and government use. We are aware of very little competition in this product segment. Our demonstration systems have been used to power wheelchairs, electric bicycles and battery/fuel cell hybrid specialty vehicles similar to golf carts. We expect to sell a substantial number of power systems for use in this kind of small electric vehicle. We are not aware of any serious commitment of a competitor to enter this market. Our principal market thrust is in the 1 to 25 kilowatt sector of the high power market. Based on data from a 1999 report of Allied Business Intelligence, we estimate the worldwide fuel cell market for stationary power in 2006 will be between two billion and eight billion dollars. Our first product in the stationary power market will be a generator powered either by propane or natural gas and sized to meet the electric power needs of a single home. The most direct competitor for this market appears to be Plug Power, which relies heavily on its relationship with General Electric. Other potential competitors include Ballard, International Fuel Cells and IdaTech. WE DO NOT PLAN TO COMPETE IN MARKETS REQUIRING POWER ABOVE 25 KILOWATTS FOR THE NEXT FIVE YEARS. The market for high power systems is divided into transportation applications such as electric vehicle propulsion, and stationary applications such as generator systems for businesses, hospitals, and multiple- occupancy dwellings. Some companies such as Ballard and International Fuel Cells have chosen to devote significant efforts to commercial production of high power systems. For several reasons, we have chosen not to devote any efforts to the market for high power systems over 25 kilowatts for the next five years. We believe that fuel cells for automobile propulsion will have to be priced competitively with the gasoline and diesel internal combustion engines currently used for that purpose, at about $50 or less 41 <PAGE> per kilowatt of system power. It is not our strategy to pursue technology that has such aggressive cost targets. We also believe that other technologies may provide lower costs and similar performance for stationary applications above 25 kilowatts. Solid oxide and molten carbonate fuel cells may be developed to serve the high-power market within the next 5 to 10 years. These high-temperature fuel cells may be able to process hydrocarbon fuels more simply than PEM fuel cell systems. We believe that non-fuel-cell power sources may compete effectively with PEM fuel cells in the power range above 25 kilowatts. Several companies, including Honeywell/Allied Signal and Capstone Turbine Corporation, are developing microturbines in the range of 25 to 75 kilowatts. These generators may precede PEM fuel cells in introduction to the markets for prime power generation and backup power applications, and their projected prices (well below $1,000 per kilowatt) may be difficult for PEM fuel cell systems to achieve. GOVERNMENT REGULATION We do not believe that we will be subject to existing federal and state regulatory commissions governing traditional electric utilities and other regulated entities. We anticipate, however, that our products and their installation will be subject to oversight and regulation at the local level in accordance with state and local ordinances relating to building codes, safety, pipeline connections and related matters. Any government regulation may depend, in part, upon whether a system is placed outside or inside a home. At this time, we do not know which jurisdictions, if any, will impose regulations upon our products or installation. We also do not know the extent to which any existing or new regulations may impact our ability to distribute, install and service our products. Once our products reach the commercialization stage and we begin distributing our systems to our early target markets, federal, state or local government entities or competitors may seek to impose regulations. We intend to encourage the standardization of industry codes to avoid having to comply with differing regulations on a state-by-state or locality-by-locality basis. EMPLOYEES As of May 31, 2000, we employed 141 persons. None of our employees is represented by a labor union. We consider our relationships with our employees to be satisfactory. All key employees have signed confidentiality and non-competition agreements. These agreements prohibit our employees from disclosing any of our confidential information at any time during or after their employment with us and prohibit them from competing with us for one year following termination of their employment. FACILITIES We lease through two separate leases approximately 27,000 square feet in two buildings in an industrial park located in Belleville, New Jersey. Each of these leases expires in July 2001. We have an option to renew the lease for the building that is dedicated to our product engineering and manufacturing of fuel cells for an additional year. In December 1999, we entered into a lease for approximately 4,400 square feet of office space in Clifton, New Jersey. Our executive offices are located at this location. This lease expires in July 2001. We intend to consolidate all of our New Jersey operations into a separate facility also located in New Jersey. HPEC leases approximately 9,000 square feet in an industrial park near Montreal which expires in September 2001. In March 2000, HPEC entered into a lease for approximately 2,900 square feet of manufacturing space near Montreal which expires in March 2003. We estimate that we will need at least 100,000 square feet of manufacturing space in the next few months in order to meet demand for our products through 2002. We have not yet identified suitable facilities. We believe that additional space will be available on commercially reasonable terms as and when needed. LEGAL PROCEEDINGS We are not a party to any material pending legal proceedings, nor is any of our property, including intellectual property, the subject of any material pending legal proceedings. 42 <PAGE> MANAGEMENT OUR DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES Our directors, executive officers and key employees, and their ages and positions, are: <TABLE> <CAPTION> NAME AGE POSITION --------------------------- -------- ---------------------------------------------------------------------- <S> <C> <C> H. Frank Gibbard........... 59 Chief Executive Officer, Director Arthur Kaufman............. 63 Chief Technology Officer William L. Zang............ 47 Chief Financial Officer, Director Alan Attia................. 57 Vice President, Research and Development Thomas H. Michael.......... 44 Vice President, Administration and Assistant Secretary Jean-Guy Chouinard......... 49 General Manager--H Power Enterprises of Canada Fong Saik Hay.............. 43 Director Rachel K. Lorey............ 35 Director John A. McSweeney(1)....... 54 Director Ivan Roch(1)............... 57 Director Howard L. Clark, Jr.(2).... 56 Director Gary K. Willis(1),(2)...... 54 Director Leonard A. Hadley(1),(2)... 66 Director </TABLE> ------------------------ (1) Member of the compensation committee. (2) Member of the audit committee. DR. H. FRANK GIBBARD has served as our Chief Executive Officer since October 1996 and has been a member of our Board of Directors since June 1997. From 1995 through 1996, Dr. Gibbard operated his own research company, Gibbard Research and Development Corporation. From 1991 to 1995, Dr. Gibbard was employed by Duracell Inc. as Vice President, R&D and Advanced Engineering. Dr. Gibbard holds a B.S. degree in Chemistry from the University of Oklahoma and a Ph.D. in Chemistry from the Massachusetts Institute of Technology. DR. ARTHUR KAUFMAN has served as our Chief Technology Officer since June 2000. He previously served as our Vice President of Technology from October 1999 to May 2000, as our Vice President, Technology & Engineering from November 1996 through October 1999 and as our Director of Technology from July 1995 through November 1996. In addition, Dr. Kaufman served as our President from 1989 through 1995. Dr. Kaufman has been responsible for our research and development programs and the administration and performance of all government programs. Dr. Kaufman was previously employed by Engelhard Corporation, where he served as Research Manager for that company's fuel cell program, and by United Technologies Corporation, where he served as Research Engineer in a broad range of fuel cell development activities. Dr. Kaufman holds B.S., M.S. and Ph.D. degrees in Chemical Engineering from the Massachusetts Institute of Technology, the University of Florida and the University of Connecticut, respectively. WILLIAM L. ZANG has served as our Chief Financial Officer since December 1999 and has been a member of our Board of Directors since March 2000. From February 1997 to December 1999, Mr. Zang served as a business and financial consultant. From March 1997 to June 1999 in a consulting capacity, he acted as Vice President, General Manager International of Alpha Technologies, a manufacturer of cable telecommunications power supplies. Mr. Zang was employed by Alpha Technologies as its Vice President, Corporate Development from June 1996 to February 1997. Prior to June 1996, Mr. Zang served for approximately 10 years as the Vice President, Finance and Secretary of International Power Machines, a manufacturer of high technology power supply systems. Mr. Zang 43 <PAGE> holds a B.S. degree in Accountancy from the University of Illinois, Champaign and an M.B.A. in Finance from Loyola University. DR. ALAN ATTIA has served as our Vice President, Research and Development since June 2000 and as our High Power Program Director since June 1997. From 1992 to 1997, Dr. Attia was Director of Emerging Technologies at Duracell, where for two years he headed the advanced materials development group, focusing principally on new materials for lithium-ion batteries, and prior to this served as Director of Nickel Metal Hydride Cell Development. Dr. Attia holds a B.S. degree in chemistry and a Ph.D. degree in physical chemistry from the University of Illinois. THOMAS H. MICHAEL has served as our Vice President, Administration since October 1999 and as our Assistant Secretary since December 1999. He previously served as Director, Corporate Finance of our Canadian subsidiary, H Power Enterprises of Canada, or HPEC, from April 1998 to October 1999. Mr. Michael has over 20 years experience in public accounting, finance and international business. Prior to joining H Power, from 1997 to 1998, Mr. Michael was employed as a financial and management consultant for JRM Global. From 1994 to 1997, Mr. Michael served as Chief Financial Officer of Decolin Inc. Mr. Michael holds a Bachelor of Commerce and a graduate Diploma in Accountancy from Concordia University. Mr. Michael is also a Chartered Accountant and a member of The Canadian Institute of Chartered Accountants. JEAN-GUY CHOUINARD has served as General Manager of H Power Enterprises of Canada, Inc. since April 1998. Prior to joining HPEC, from 1994 to 1998, Mr. Chouinard served as Director of Research for Natural Gas Technologies Centre where he led a research team in the development of gas technologies that resulted in the issuance of six patents. Prior to 1994, Mr. Chouinard held several positions at Gaz Metropolitan Limited Partnership, DATECH. Mr. Chouinard holds B.S. and M.S. degrees in Physics from the University of Montreal and the University of Toronto, respectively, and received an M.B.A. from Concordia University. FONG SAIK HAY has been a Director since July 1996. Since 1990, Mr. Fong has been the Director of Engineering of Singapore Technologies Kinetics Ltd. His principal roles during this time have involved leading a development staff of approximately 300 people in developing military and commercial vehicles and acting as Chief Technology Officer in identifying new technologies. From 1986 to 1989, Mr. Fong was a Principal Engineer in Chartered Industries of Singapore Ltd. RACHEL K. LOREY has been a Director since July 1999. Ms. Lorey has served as Vice President of DQE Enterprises, Inc. since February 1999. Prior to then, Ms. Lorey practiced as an attorney in the Pittsburgh offices of Jones, Day, Reavis & Pogue from January 1996 through February 1999, and of Kirkpatrick & Lockhart L.L.P. from 1989 through 1995. Her practice area focused on corporate transactions, including mergers and acquisitions, divestitures, joint ventures and financings. JOHN A. MCSWEENEY has been a Director since October 1999. Mr. McSweeney has served as President and Chief Executive Officer of Energy Co-Opportunity, Inc., the parent company of ECO Fuel Cells, LLC, since June 1999. Prior to this, Mr. McSweeney served as a Vice President & General Manager for AmeriGas Propane, L.P. from 1995 through 1998, where he oversaw AmeriGas' Midwest region, which consisted of 50 locations and approximately 400 employees. IVAN ROCH has been a Director since December 1999. From 1997 to 1999, Mr. Roch served as a consultant (in the capacity of a general manager) to Ateliers Wood Inc., a company that specializes in electromechanical equipment repairs. Mr. Roch was employed from 1995 to 1997 as the President and General Manager of Les Materiaux De Pointe Precitech Inc., a start-up venture that manufactured powder metal parts for industrial uses. From 1994 to 1995, Mr. Roch was a Project Manager for Les Enterprises Barrette Ltee and focused on developing products from excess raw material used in a saw milling operation. HOWARD L. CLARK, JR. has been a Director since June 2000. Mr. Clark has served as Vice-Chairman of Lehman Brothers Inc., an investment banking and brokerage firm, since 1993. From February 1990 44 <PAGE> until February 1993, Mr. Clark served as Chairman, President and Chief Executive Officer of Shearson Lehman Brothers Holdings, Inc. Before that, Mr. Clark served as Executive Vice President and Chief Financial Officer of American Express Company, having held various positions with that firm since 1981. From 1968 to 1981, Mr. Clark served as Managing Director of Blyth Eastman Paine Webber Incorporated or predecessor firms. Mr. Clark also serves as a director of Lehman Brothers Inc., White Mountains Insurance Group, Ltd., Maytag Corporation and Walter Industries, Inc. Mr. Clark holds an M.B.A. degree from Columbia University. GARY K. WILLIS has been a Director since June 2000. Mr. Willis has served as Chairman of the Board of Directors of Zygo Corporation, a supplier of high precision yield improvement and metrology systems, since November 1998. Mr. Willis has been a director of Zygo since February 1992 and has also served as President from 1992 to 1999 and as Chief Executive Officer from 1993 to 1999 of that corporation. Prior to joining Zygo, Mr. Willis served as the President and Chief Executive Officer of The Foxboro Company, a manufacturer of process control instruments and systems. Mr. Willis is also a director of Rofin-Sinar Technologies, Inc., Benthos Corporation and Middlesex Health Services, Inc. Mr. Willis holds a B.S. degree in mechanical engineering from Worcester Polytechnical Institute. LEONARD A. HADLEY has been a Director since June 2000. Mr. Hadley retired as Chairman and Chief Executive Officer of Maytag Corporation in August 1999 after having served in those capacities since 1993. Mr. Hadley serves as a director of Deere & Co. and Snap-On Inc. Mr. Hadley holds a B.S.C. degree in accounting from the University of Iowa. He also attended Drake University and the University of Iowa College of Law. BOARD COMMITTEES We formed an audit committee of our board of directors in April 2000. Our audit committee currently consists of Messrs. Clark, Jr., Willis and Hadley, each of whom is an independent director. Our audit committee has the responsibility of reviewing our audited financial statements and accounting practices. This committee considers and recommends the appointment of independent accountants and approves fee arrangements with them for audit functions and for advisory and other consulting services. Our compensation committee has been in existence since November 1996 and currently consists of Messrs. Hadley, Willis, McSweeney and Roch. Our compensation committee reviews and approves compensation and benefits for our employees, consultants and directors and administers our employee plans. DIRECTOR COMPENSATION Directors are reimbursed for expenses actually incurred in connection with attendance at each meeting of the board or any committee thereof. In June 2000, we granted to each of Messrs. Clark, Jr., Hadley and Willis, upon their becoming directors of H Power, options to purchase 80,000 shares of our common stock, at an exercise price per share equal to the initial public offering price of our common stock. 45 <PAGE> EXECUTIVE COMPENSATION The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to our chief executive officer and to all other executive officers whose total cash consideration exceeded $100,000 for services rendered to us during the fiscal year ended May 31, 2000. SUMMARY COMPENSATION TABLE <TABLE> <CAPTION> ANNUAL COMPENSATION LONG-TERM COMPENSATION ---------------------------------- ------------------------- SECURITIES OTHER UNDERLYING ALL NAME AND ANNUAL OPTIONS/ OTHER PRINCIPAL POSITION SALARY BONUS COMPENSATION SARS COMPENSATION ----------------------------------------- -------- -------- ------------ ---------- ------------ <S> <C> <C> <C> <C> <C> H. Frank Gibbard, Chief Executive Officer................................ $195,776 -- $20,271 -- -- Arthur Kaufman, Chief Technology Officer................................ $134,722 -- $ 4,997 -- -- William Zang, Chief Financial Officer(a)............................. $ 55,392 -- $ 1,677 -- -- </TABLE> ------------------------ (a) William Zang's annual base salary is $120,000. The amounts reflected above represent his salary from December 1999, when he joined H Power, until the end of our most recent fiscal year. STOCK OPTIONS The following table sets forth information concerning the grant of options to purchase shares of our common stock to each of our chief executive officer, chief technology officer, and chief financial officer during the fiscal year ended May 31, 2000. OPTION GRANTS IN LAST FISCAL YEAR <TABLE> <CAPTION> INDIVIDUAL GRANTS ------------------------------------------------------------------------------------- POTENTIAL REALIZABLE PERCENT OF VALUE AT TOTAL ASSUMED ANNUAL RATES OPTIONS OF NUMBER OF GRANTED STOCK PRICE SECURITIES TO APPRECIATION FOR UNDERLYING EMPLOYEES EXERCISE OPTION TERM (5) OPTIONS IN FISCAL PRICE EXPIRATION --------------------- NAME AND PRINCIPAL POSITION GRANTED YEAR ($/SHARE) DATE 5% 10% --------------------------- ---------- ---------- --------- ---------- --------- --------- <S> <C> <C> <C> <C> <C> <C> H. Frank Gibbard, Chief Executive Officer............ 500,000 18.52% $ 3.00(1) 12/22/04 $414,422 $915,765 Arthur Kaufman, Chief Technology Officer........... 15,625 0.58% $12.00(2) 3/17/05 $ 51,803 $114,471 William Zang, Chief Financial Officer...................... 250,000 9.26% $ 3.00(3) 12/22/04 $207,211 $457,883 125,000 4.63% $12.00(4) 12/22/04 $414,422 $915,765 </TABLE> ------------------------ (1) The options to purchase 500,000 shares of common stock held by H. Frank Gibbard at May 31, 2000 are exercisable as to 250,000 shares on October 6, 2000 and as to the remaining 250,000 shares on October 6, 2001. (2) The options to purchase 15,625 shares of common stock held by Arthur Kaufman at May 31, 2000 are exercisable annually in three equal installments starting on March 17, 2000, at a price per 46 <PAGE> share equal to the initial public offering price of our common stock, assumed for purposes of this table to be $12.00 per share. (3) The options to purchase 250,000 shares of common stock held by William Zang at May 31, 2000 are exercisable annually in three equal installments starting on December 5, 2000. (4) The options to purchase 125,000 shares of common stock held by William Zang at May 31, 2000 are exercisable annually in three equal installments starting on December 5, 2000, at a price per share equal to the initial public offering price of our common stock, assumed for purposes of this table to be $12.00 per share. (5) These amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. These gains are based on assumed rates of stock price appreciation of 5% and 10% compounded annually from the date the respective options were granted to their expiration date. These assumptions are not intended to forecast future appreciation of our stock price. The potential realizable value computation does not take into account federal or state income tax consequences of option exercises or sales of appreciated stock. The following table sets forth at May 31, 2000 the number of options and the value of unexercised options held by each of the executive officers named in the summary compensation table. The dollar values have been calculated by determining the difference between the fair market value of the securities underlying the options at May 31, 2000 and the exercise prices of the options. Solely for purposes of determining the value of options at May 31, 2000, we have assumed that the fair market value of shares of common stock issuable upon exercise of options was $12.00 per share, the assumed initial public offering price. AGGREGATED YEAR-END OPTION VALUES <TABLE> <CAPTION> NUMBER OF SHARES VALUE OF UNEXERCISED SUBJECT TO UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT YEAR END AT YEAR END --------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- <S> <C> <C> <C> <C> H. Frank Gibbard, Chief Executive Officer..................... 750,000 750,000 $7,125,000 $6,875,000 Arthur Kaufman, Chief Technology Officer.................... 5,210 10,415 -- -- William Zang, Chief Financial Officer..................... -- 375,000 -- $2,250,000 </TABLE> COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION In November 1996, we established a compensation committee which currently consists of Messrs. Hadley, Willis, McSweeney and Roch. Prior to November 1996, matters concerning executive officer compensation were addressed by the entire board. EMPLOYMENT AGREEMENTS In October 1999, we entered into an amended and restated employment agreement with Dr. H. Frank Gibbard, our Chief Executive Officer. The term of this agreement expires in October 2002. Pursuant to the terms of this agreement, Dr. Gibbard is required to devote his full time and attention to our business and affairs and he receives an annual base salary of $203,320. As part of his compensation package, Dr. Gibbard receives an automobile allowance and other fringe benefits commensurate with his duties and responsibilities and is eligible to receive, from time to time, discretionary cash bonuses. If, within a year after a change in our control, we terminate Dr. Gibbard or 47 <PAGE> we assign him duties materially inconsistent with his position, he may be entitled to receive a lump sum payment equal to one-half of his then annual base salary and incentive compensation. Dr. Gibbard's employment agreement precludes him from competing with us or soliciting our employees during the period of his employment and for two years thereafter. In October 1999, we entered into a three-year employment agreement with Arthur Kaufman to serve as our Vice President of Technology. Dr. Kaufman is required to devote his full time and attention to our business and affairs and he receives an annual base salary of $135,000. As part of his compensation package, Dr. Kaufman receives an automobile allowance and other fringe benefits commensurate with his duties and responsibilities and is eligible to receive, from time to time, discretionary cash bonuses. Dr. Kaufman's employment agreement precludes him from competing with us during the period of his employment and for one year thereafter or from soliciting any of our employees during the period of his employment and for two years thereafter. In November 1999, we entered into a three-year employment agreement with Thomas H. Michael to serve as our Vice President, Administration. Under the terms of his agreement, Mr. Michael must devote substantially all of his business time, ability and attention to our business and affairs and he receives an annual base salary of $117,500. Mr. Michael received an option to purchase 225,000 shares of our common stock as part of his compensation package. These options have an exercise price of $3.00 per share, vest over a three-year period ending October 2002 and may be exercised until December 2004. As part of his compensation package, Mr. Michael receives an automobile allowance and is eligible, from time to time, to receive discretionary bonuses. If, within a year after a change in our control, we terminate Mr. Michael or we assign him duties materially inconsistent with his position, he may be entitled to receive a lump sum payment equal to one-half of his then annual base salary. Mr. Michael's employment agreement precludes him from competing with us or soliciting our employees during the period of his employment and for two years thereafter. In November 1999, we entered into a three year employment agreement with William L. Zang to serve as our Chief Financial Officer. Under the terms of his agreement, Mr. Zang must devote substantially all of his business time, ability and attention to our business and affairs and he receives an annual base salary of $120,000. As part of his compensation package, Mr. Zang also received an option to purchase 250,000 shares of our common stock at an exercise price of $3.00 per share. These options vest over a three-year period ending December 2002 and may be exercised until December 2004. Mr. Zang also receives an automobile allowance and other fringe benefits commensurate with his duties and responsibilities and is eligible, from time to time, to receive discretionary bonuses. If, within a year after a change in our control, we terminate Mr. Zang or we assign him duties materially inconsistent with his position, he may be entitled to receive a lump sum payment equal to one-half of his then annual base salary. Mr. Zang's employment agreement precludes him from competing with us or soliciting our employees during the period of his employment and for two years thereafter. OUR STOCK OPTION PLANS 1989 STOCK OPTION PLAN. Pursuant to our June 1989 stock option plan, which expired on June 6, 1994, options to purchase 957,500 shares of our common stock at $0.80 per share were issued to 21 employees. Of that amount, 137,500 have been exercised and 718,750 have lapsed. Options to purchase 101,250 shares are currently exercisable until May 31, 2002. Options granted under the 1989 Plan must be exercised within three months of the end of the optionee's status as an employee or consultant, or within 12 months after the optionee's termination by death or disability, but in no event later than the expiration of the option term. 2000 STOCK OPTION PLAN. This stock option plan was originally approved by our stockholders in May 1996 and at that time was named the 1996 Stock Option Plan. In March 2000, we amended and restated this plan principally to update the plan to reflect changes in applicable tax and securities laws. The 2000 Plan authorizes options to purchase up to an aggregate of 3,750,000 shares of our common 48 <PAGE> stock and is administered by the compensation committee. Options granted under the 2000 Plan are not generally transferable by the optionee except by will or by the laws of descent and distribution, and are exercisable during the lifetime of the optionee only by that optionee. Options granted under the 2000 Plan must be exercised within three months of the end of optionee's status as an employee or consultant, or within 12 months after that optionee's termination by death or disability, but in no event later than the expiration of the option term. The exercise price of all stock options granted under the 2000 Plan will be determined by the compensation committee. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of our outstanding capital stock, the exercise price of any stock option granted must equal at least 110% of the fair market value on the grant date. The exercise price of stock options for all other employees cannot be less than 100% of the fair market value per share on the date of the grant. The maximum term of an option granted under the 2000 Plan may not exceed 10 years from the date of grant, or five years in the case of an incentive stock option granted to a 10% stockholder. As of July 21, 2000, we have granted options to purchase 883,485 shares of our common stock under the 2000 Plan. OPTIONS GRANTED OUTSIDE THE PLANS. In addition to the options which may be granted under our 1989 and 2000 Stock Option Plans, as of July 21, 2000, we have options outstanding to purchase 4,730,625 shares of our common stock outside of those plans at exercise prices per share ranging from $2.50 to the initial public offering price of our common stock. These grants include options to purchase 750,000 shares of our common stock at an exercise price of $2.50 granted to Dr. Gibbard in fiscal 1997, options to purchase 250,000 shares at an exercise price of $2.50 granted to Dr. Gibbard in fiscal 1998 and options to purchase 500,000 shares of our common stock at an exercise price of $3.00 granted to Dr. Gibbard in fiscal 2000. In fiscal 2000, we also granted to Mr. Zang options to purchase 250,000 shares of our common stock at an exercise price of $3.00 per share and 125,000 shares at an exercise price equal to the initial public offering price per share of our common stock. In addition, in fiscal 2000, we granted to Mr. Michael options to purchase 225,000 shares of our common stock, to Mr. Russo options to purchase 100,000 shares of our common stock, each at an exercise price of $3.00 per share, and to Mr. Kaufman options to purchase 15,625 shares of our common stock at an exercise price equal to the initial public offering price of our common stock. Furthermore, in fiscal 2000 we granted to Mr. Chouinard options to purchase 125,000 shares of our common stock at an exercise price of $3.00 per share. 49 <PAGE> CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In July 1999, we entered into consulting agreements with Norman Rothstein and Frederick Entman, who were our founders in 1989 and who also served on our board of directors from June 1997 until their resignation in April 2000. Messrs. Rothstein and Entman had previously served as consultants to us since 1996, and Mr. Entman had been our full-time counsel from June 1989 until May 1996. Mr. Rothstein is the beneficial owner of approximately 18.1% of our outstanding common stock, and Mr. Entman is the beneficial owner of approximately 16.5% of our outstanding common stock. Under the terms of their consulting agreements, Messrs. Rothstein and Entman received annual base salaries of $113,000 for serving as our consultants on various corporate related matters and were also entitled to receive bonuses in connection with any public or private financings consummated by us other than this offering. In connection with their consulting agreements, our board of directors granted to each of Mr. Rothstein and Mr. Entman options to purchase 500,000 shares of our common stock at exercise prices of $3.00 per share, respectively. These options are fully vested and may be exercised in cash or by the delivery of other H Power options or securities. Norman Rothstein and Frederick Entman resigned from our board of directors effective April 5, 2000. Messrs. Rothstein and Entman also terminated their consulting agreements effective as of April 5, 2000 in exchange for which they each received a cash payment of $1 million and the grant of options to purchase 300,000 shares of our common stock at an exercise price per share equal to the initial public offering price of our common stock. We have agreed to include all shares of common stock underlying the options granted to Messrs. Rothstein and Entman in any future registration statement filed after this offering to register shares of common stock underlying options granted to any of our employees or officers. Furthermore, we have agreed that if such a registration statement is not filed within six months prior to the expiration date of the options granted to Messrs. Rothstein and Entman, then we will extend the expiration date of Mr. Rothstein's and Mr. Entman's options. On June 23, 1995, Messrs. Rothstein and Entman, without admitting or denying allegations, consented to an SEC order to cease and desist from violating or causing violations or future violations of Sections 5(a) and 5(c) of the Securities Act. In accepting the offers of settlement of Messrs. Rothstein and Entman, the SEC found that in 1988, Messrs. Rothstein and Entman, acting through a partnership, sold 50,000 previously registered shares of common stock of Gil-Med Industries, Inc. to the public through broker-dealers. The SEC determined that a new registration statement was required, but had not been filed, with respect to the sale of the 50,000 shares. Messrs. Rothstein and Entman maintain they were unaware of this requirement. On April 5, 2000, at the request of Lehman Brothers Inc. in connection with this offering, we entered into a stockholders' and voting agreement with Messrs. Rothstein and Entman and certain of their affiliates, who collectively own 18.1%, in the case of the Rothstein family, and 16.5%, in the case of the Entman family, of our common stock. Pursuant to this agreement, these investors have granted to our independent directors an irrevocable proxy for their shares and have agreed that: - their shares will be present and counted for quorum purposes at every meeting of our stockholders; - their shares will be voted on all matters in the same proportion as the votes cast by our other stockholders; - in the case of a tender offer or an exchange offer for our common stock, their shares will be tendered in the same proportion as the shares tendered by our other stockholders; 50 <PAGE> - they will sell or transfer their shares without the prior written consent of our independent directors, only: -- in transactions meeting the requirements of Rule 144 under the Securities Act, so long as in all cases the manner of sale requirements of Rule 144(f) are complied with; -- in underwritten public offerings conducted in a manner intended to effect a broad, unaffiliated public distribution; -- in a private sale to unaffiliated qualified institutional buyers who will own less than 10% of our outstanding common stock after the sale; -- as a bona fide pledge to an independent financial institution to secure borrowings on a full recourse basis, provided that such financial institution need not agree to be bound by the terms and conditions of the stockholders' and voting agreement if such borrowings do not exceed $2,500,000 in the aggregate; -- to other Rothstein family members in the case of Rothstein family members and to other Entman family members in the case of Entman family members; -- pursuant to a registration statement in which the sale is consistent with the manner of sale requirements of Rule 144(f) under the Securities Act; -- to H Power in a bona fide repurchase transaction; or -- pursuant to a tender or exchange offer conducted pursuant to Regulations M-A, 14D, 14E and/or Rule 13e-4 under the Exchange Act; and - they will not increase their percentage ownership in H Power by more than 3% of our outstanding common stock, in the case of each family, above the levels of fully diluted ownership that exist immediately following this offering. In all cases, the foregoing transfers are subject to the terms and conditions of the lock-up agreements described under "Underwriting." The investors have also agreed that they will not seek to be represented on, seek the removal of any directors from, or otherwise change the composition of, our board of directors or otherwise control our board of directors or have any involvement in our management. The investors have further agreed that neither they nor any person they control will: (i) conduct or participate in any solicitation of proxies or consents relating to our common stock or our other securities; (ii) conduct or participate in any meeting of our stockholders; (iii) request or obtain any lists of our stockholders; (iv) initiate or encourage the making of any stockholder proposal; (v) deposit any of their shares of common stock in a voting trust or enter into any voting agreement or grant any proxy in respect of their shares; (vi) form, join, or participate with any persons or group for the purpose of acquiring, holding, voting or disposing of our common stock; (vii) make any offer or proposal regarding the acquisition of H Power or any of its securities or assets or with respect to any merger, business combination, change-in-control, restructuring or recapitalization transaction involving H Power; (viii) facilitate, encourage, disclose or pursue any intention, purpose, plan or proposal with respect to H Power, our board of directors or our management personnel that is inconsistent with the terms of the stockholders' and voting agreement; (ix) seek any waiver or amendment of the voting and proxy provisions of the stockholders' and voting agreement; or (x) assist, advise, facilitate or encourage any person, entity or group to enter into any of the transactions contemplated by clauses (i) through (ix) above. The stockholders' and voting agreement has a 10-year term and will continue in effect until April 5, 2010. However, the agreement will automatically terminate on October 31, 2000 if we have not 51 <PAGE> completed an initial public offering of our common stock by that date, or any earlier date upon which we withdraw the registration statement of which this prospectus forms a part and abandon this offering. The agreement will also terminate with respect to the Rothstein family members when the number of shares they own collectively is less than 5% of our outstanding common stock. This same termination provision also applies with respect to the Entman family members. The agreement would again become operative if the Rothstein family investors or Entman family investors, as applicable, reacquire, on a collective basis, record or beneficial ownership of 5% or more of our outstanding common stock, in which case the agreement would terminate upon the earlier of April 5, 2010 or the date on which such Rothstein family investors or Entman family investors, as applicable, collectively own less than 5% of our outstanding common stock. If our initial public offering has not been completed by October 31, 2000, we will withdraw the registration statement of which this prospectus forms a part. We have filed this agreement as an exhibit to the registration statement and we encourage you to read the agreement carefully and in its entirety. In February 1995, we entered into an agreement with NBG Technologies, Inc. (formerly known as TechMatics, Inc.), a company controlled by Mr. Rothstein's family, whereby NBG provided us with research and development consulting services and, as consideration therefor, we granted to NBG marketing, distribution and exclusive manufacturing rights in the U.S. with respect to fuel cell systems that may be used to power consumer products. The agreement provided that NBG was entitled to any arising technology and patent rights with respect to all designs, materials and technologies they developed under this agreement and we were granted a worldwide exclusive paid-up license for any of these designs, materials and technologies. However, if we were to use NBG developed designs, materials and technologies in products that were not manufactured by them, the agreement provided that we were to pay NBG a royalty to be determined. Under this agreement, we have paid approximately $157,000 to NBG over the last three fiscal years. We believe that the amounts paid to NBG were equivalent to the amounts that would have been paid in an arm's-length transaction between unaffiliated parties. All agreements and other arrangements with NBG were terminated on March 29, 2000, in exchange for a cash payment of $100,000 and the grant of options to purchase 250,000 shares of our common stock at an exercise price per share equal to the initial public offering price of our common stock. The termination of our agreements with NBG, however, does not preclude us from continuing our involvement with NBG's activities, although we are not obligated to do so. In connection with DQE Enterprises' purchase of 200,000 shares of our Series A preferred stock in 1996 for $3 million, we granted them the exclusive right to distribute our stationary power fuel cell systems in Pennsylvania, Ohio and West Virginia. DQE Enterprises recently agreed to modify this right to allow ECO to distribute stationary power fuel cell systems in those counties in Pennsylvania, Ohio and West Virginia in which ECO's rural electric cooperative members provide energy services. As consideration for DQE Enterprises' modifying its exclusive rights, we agreed to amend our Amended and Restated Certificate of Incorporation to change the redemption price of our Series A preferred stock from $16.50 per share to $18.00 per share, thereby increasing the liquidation value of the Series A preferred stock by $300,000. We also issued to DQE Enterprises warrants to purchase 500,000 shares of our common stock at $5.00 per share. We recorded a charge to cost of revenues--products totaling $150,000 which represents the fair value of the warrants on August 25, 1999, their date of issuance. These warrants expire on July 31, 2001. Rachel K. Lorey, a Vice President of DQE Enterprises, serves as DQE Enterprises' representative on our Board of Directors. In May 1997, we entered into a 50-50 joint venture with Sofinov, Societe Innovatech du Grand Montreal and 9042-0175 Quebec Inc. to establish HPEC. We granted HPEC an exclusive license to market and distribute our stationary power products in Canada. Sofinov, Innovatech and 9042-0175 Quebec Inc. have agreed that they will exercise, effective immediately prior to this offering, their right to convert their 50% interest in HPEC into 333,333 shares of our Series C convertible preferred stock, which, in turn, will be converted into 1,666,665 shares of our common stock. Upon conversion, HPEC 52 <PAGE> will become our wholly-owned subsidiary and the territory in which HPEC has the exclusive right to market and sell our stationary fuel cell products would expand to cover most of North and South America to the extent it does not infringe upon the license we granted to ECO. In November 1999, we issued 2,000,000 shares of our common stock to Sofinov. Pursuant to the terms of a May 1999 agreement, Sofinov agreed to lend us, at 8% annual interest, up to $5 million, in increments of at least $150,000. These loans were payable on demand. Under this agreement, Sofinov could convert all or any portion of the outstanding balance of the advances and interest thereon into shares of our common stock at a conversion rate of $2.50 per share. If the outstanding balance of advances and interest thereon was less than $5 million, Sofinov was entitled to purchase additional shares of our common stock at $2.50 per share to bring its total purchase up to $5 million. Total advances to us from Sofinov under this agreement amounted to $2.1 million and on November 30, 1999, Sofinov exercised its conversion and purchase rights in full. In May and June of 1999, Allan Rothstein, a son of Norman Rothstein, a beneficial owner of more than five percent of our outstanding common stock, loaned us a total of $483,000 evidenced by promissory notes, payable on demand, with an interest rate of 8.0% per annum. We paid these loans and all accumulated interest thereon in full in August 1999. Concurrent with ECO's purchase of 5,000,000 shares of our common stock at a price of $3.00 per share in August 1999, ECO paid us an initial payment of $2.5 million for the exclusive right to market, distribute and service our 1 to 25 kilowatt stationary power products in U.S. counties in which ECO's rural electric cooperative members provide energy services. The initial term of this agreement shall remain in effect for a period of 10 years following the date that we commence shipment of our commercial units to ECO and, at ECO's option, is renewable thereafter for successive 10-year terms. In addition, we have agreed to use our best efforts to nominate one designee of ECO at each election of our board of directors. John A. McSweeney, the President and Chief Executive Officer of Energy Co-Opportunity, Inc., serves as ECO's representative on our Board of Directors. Persons or entities affiliated or associated with ECO may purchase reserved shares pursuant to the directed share program. The composition of our Board of Directors was subject to a stockholders' rights agreement among Sofinov, Singapore Technologies Kinetics and DQE Enterprises and Messrs. Entman and Rothstein and their affiliates. Under this agreement, each party was required to vote or cause to be voted all of its shares in order to fix the size of our Board of Directors at nine and to ensure representation on our Board of each of the parties thereto. This agreement will terminate immediately prior to the offering upon the conversion of all of our outstanding shares of convertible preferred stock. In June 2000, Howard L. Clark, Jr., who has served as Vice-Chairman of Lehman Brothers Inc. since 1993, was elected to our Board of Directors. Lehman Brothers Inc. is currently serving as the lead underwriter for the offering. 53 <PAGE> PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of our common stock as of May 31, 2000, and as adjusted to reflect the sale by H Power of 7,000,000 shares of common stock in this offering, by: (1) each person known to beneficially own more than 5% of our shares of common stock; (2) each of our directors; (3) each named executive officer; (4) all of our executive officers and directors as a group; and (5) certain other significant stockholders of H Power. The following table also reflects the sale of an aggregate of 1,050,000 shares of outstanding common stock by our selling stockholders, assuming the exercise in full of the underwriters' over-allotment option and the sale to the underwriters pursuant thereto of the number of shares of common stock set forth opposite the names of the selling stockholders. All persons listed have sole voting and investment power with respect to their shares unless otherwise indicated. Unless indicated otherwise, the business address of the beneficial owners is: c/o H Power Corp., 1373 Broad Street, Clifton, New Jersey 07013. <TABLE> <CAPTION> SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED(1) PRIOR OWNED AFTER TO THE OFFERING THE OFFERING -------------------- SHARES TO -------------------- NUMBER PERCENT BE SOLD** NUMBER PERCENT --------- -------- --------- --------- -------- <S> <C> <C> <C> <C> <C> Norman Rothstein (2) 311 Links Drive West Oceanside, NY 11572.......................... 8,528,125 18.1% -- 8,003,125 15.0% Frederick Entman (3) 260 Tillou Road South Orange, NJ 07079....................... 7,741,750 16.5% -- 7,216,750 13.5% Sofinov Societe Financiere D'Innovation Inc. 1981 Avenue McGill College Montreal, Quebec H3A 3C7..................... 6,458,335 14.1% -- 6,458,335 12.2% ECO Fuel Cells, LLC 2201 Cooperative Way Herndon, VA 20171............................ 4,750,000 10.4% -- 4,750,000 9.0% John McSweeney (4) ECO Fuel Cells, LLC 2201 Cooperative Way Herndon, VA 20171............................ 5,000,000 10.9% -- 5,000,000 9.5% Gerald Entman, Trustee for Elise Entman 2440 North Lakeview Avenue Chicago, IL 60614............................ 2,500,000 5.5% 225,000 2,275,000 4.3% Cynthia Rothstein 311 Links Drive West Oceanside, NY 11572.......................... 3,000,000 6.6% 525,000 2,475,000 4.7% Hydro-Quebec CapiTech Inc. 75, Rene-Levesque Blvd. West, 22nd Floor Montreal, Quebec H2Z 1AU..................... 2,000,000 4.4% -- 2,000,000 3.8% Singapore Technologies Kinetics Ltd. 5 Portsdown Road Singapore 139296............................. 2,000,000 4.4% -- 2,000,000 3.8% DQE Enterprises, Inc. (5) One North Shore Center, Suite 100 Pittsburgh, PA 15212......................... 1,500,000 3.3% -- 1,500,000 2.8% </TABLE> 54 <PAGE> <TABLE> <CAPTION> SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED(1) PRIOR OWNED AFTER TO THE OFFERING THE OFFERING -------------------- SHARES TO -------------------- NUMBER PERCENT BE SOLD** NUMBER PERCENT --------- -------- --------- --------- -------- <S> <C> <C> <C> <C> <C> Dr. H. Frank Gibbard (6)..................... 863,750 1.9% -- 863,750 1.6% Dr. Arthur Kaufman........................... 1,125,000 2.5% -- 1,125,000 2.1% Gary K. Willis............................... 0 * -- 0 * Leonard A. Hadley............................ 0 * -- 0 * Howard Clark, Jr............................. 0 * -- 0 * William L. Zang.............................. 0 * -- 0 * Ivan Roch (7)................................ 0 * -- 0 * Rachel K. Lorey (8).......................... 0 * -- 0 * Fong Saik Hay (9)............................ 0 * -- 0 * Scott Entman................................. 1,463,305 3.2% 150,000 1,313,305 2.5% Brian Entman................................. 1,442,820 3.2% 150,000 1,292,820 2.5% All directors and executive officers as a group (10 persons) (10).......................... 6,988,750 15.0% -- 6,988,750 13.1% </TABLE> ------------------------ * Less than 1% of the outstanding common stock. ** Assumes that the underwriters' over-allotment option is exercised in full and that H Power does not issue and sell any shares to the underwriters pursuant to this option. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock issuable pursuant to options, to the extent the options are currently exercisable or convertible within 60 days of May 31, 2000, are treated as outstanding for computing the percentage of the person holding these securities but are not treated as outstanding for computing the percentage of any other person. Unless otherwise noted, each person or group identified possesses sole voting and investment power with respect to shares, subject to community property laws where applicable. (2) Includes 153,125 shares held by Mr. Rothstein, 3,000,000 shares held by Cynthia Rothstein, his spouse, 75,000 shares held by his brother Carl Rothstein and 3,875,000 shares held by his children as follows: Allan Rothstein 1,625,000 shares, Steven Rothstein 1,000,000 shares and Tammy Rothstein 1,000,000 shares. Also includes 125,000 shares held by Mr. Rothstein as trustee for Jordan H. Rothstein 2000 Irrevocable Trust and 125,000 shares held by Mr. Rothstein as trustee for Nicole S. Rothstein 2000 Irrevocable Trust. Also includes 125,000 shares of common stock held by Dynamark Corp., a company controlled by members of Mr. Rothstein's family. Includes stock options to purchase 1,050,000 shares granted to Mr. Rothstein and stock options to purchase 250,000 shares granted to NBG Technologies, Inc., a company controlled by Mr. Rothstein. Mr. Rothstein disclaims beneficial ownership of all shares of common stock held by any members of his family. Substantially all of these shares are subject to a stockholders' and voting agreement as discussed under "Certain Relationships and Related Transactions." The shares beneficially owned by Mr. Rothstein after the offering have been reduced to reflect the sale, pursuant to the underwriters' over-allotment option, of shares of our common stock owned by Cynthia Rothstein whose shares Mr. Rothstein may be deemed to beneficially own. See "Underwriting--Over-Allotment Option." 55 <PAGE> (3) Includes 285,625 shares held directly by Mr. Entman and 375,000 shares held in trust for Mr. Entman. Also includes 3,125,000 shares held in trust for Elise Entman, his spouse, and 1,437,500 shares held by Brian Entman and 1,437,500 shares held by Scott Entman, his children. Includes stock options to purchase 25,805 shares granted to Scott Entman, and 5,320 shares granted to Brian Entman. Also includes options to purchase 1,050,000 shares granted to Mr. Entman. Mr. Entman disclaims beneficial ownership of all shares of common stock held by any members of his family. All of these shares are subject to a stockholders' and voting agreement as discussed under "Certain Relationships and Related Transactions." The shares beneficially owned by Mr. Entman after the offering have been reduced to reflect the sale, pursuant to the underwriters' over-allotment option, of shares of our common stock owned by Brian Entman, Scott Entman and Gerald Entman, as Trustee for Elise Entman, whose shares Mr. Entman may be deemed to beneficially own. See "Underwriting--Over-Allotment Option." (4) Includes 4,750,000 shares of common stock held by ECO over which Mr. McSweeney shares voting power. (5) Includes warrants to purchase 500,000 shares of common stock. Does not include shares of common stock issuable to DQE Enterprises in payment of dividends to which they are entitled. (6) Includes 86,750 shares owned by Dr. Gibbard, an aggregate of 26,000 shares held by his eight children and 1,000 shares held by Lindsey Hough, his nephew. Dr. Gibbard disclaims beneficial ownership of all shares held by his children and his nephew. Includes stock options to purchase 750,000 shares of common stock. (7) Mr. Roch is the designee of Sofinov on our board of directors, but he does not have or share voting or investment control over the 6,458,335 shares of common stock held by Sofinov. (8) Ms. Lorey is the designee of DQE Enterprises on our board of directors and serves as a Vice President of DQE Enterprises, but she does not have or share voting or investment control over the 1,000,000 shares of common stock and warrants to purchase 500,000 shares of common stock held by DQE Enterprises. (9) Mr. Fong is the designee of Singapore Technologies Kinetics on our board of directors and serves as a Director of Engineering of Singapore Technologies Kinetics, but he does not have or share voting or investment control over the 2,000,000 shares of common stock held by Singapore Technologies Kinetics. (10) Includes options to purchase 750,000 shares. 56 <PAGE> DESCRIPTION OF CAPITAL STOCK Upon completion of this offering, our authorized capital stock will consist of 150,000,000 shares of common stock, par value $0.001 per share and 10,000,000 shares of preferred stock, par value $0.001 per share. The following is a summary of some of the provisions of the common stock and preferred stock provisions of our amended and restated certificate of incorporation. COMMON STOCK As of May 31, 2000, there were 38,090,195 shares of common stock outstanding that were held by approximately 253 stockholders of record. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Subject to preferences that may be applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive, ratably, dividends, if any, as may be declared by the board out of funds legally available for the payment of dividends. Our common stock does not have cumulative voting rights which means that the holders of the outstanding common stock voting for the election of directors can elect all directors then being elected. If we liquidate, dissolve or wind up, the holders of our common stock will be entitled to share ratably in all assets remaining after payment of liabilities and liquidation preferences of any outstanding shares of preferred stock. Holders of our common stock have no preemptive rights or rights to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to our common stock. All outstanding shares of common stock are fully paid and non-assessable, and the shares of common stock to be issued upon completion of this offering will be fully paid and non-assessable. PREFERRED STOCK Upon the closing of this offering, we will not have any shares of our preferred stock outstanding. The 10,000,000 authorized shares of our preferred stock may be issued in one or more series without further approval from our stockholders. Our board of directors is authorized to determine the terms, limitations and relative rights, qualifications and preferences of our preferred stock, to establish several series of our preferred stock and to determine the variations among series. If we issue preferred stock, it would have priority over our common stock with respect to dividends and to other distributions, including the distribution of assets upon liquidation. In addition, we may be obligated to repurchase or redeem our preferred stock. The holders of our preferred stock may have voting and conversion rights, including multiple voting rights, which could adversely affect the rights of the holders of our common stock. We do not have any present plans to issue any shares of preferred stock. REGISTRATION RIGHTS Pursuant to agreements between us and DQE Enterprises, Inc., Singapore Technologies Kinetics Ltd., Sofinov Societe Financiere D'Innovation Inc., Societe Innovatech du Grand Montreal, 9042-0175 Quebec Inc., ECO and Hydro-Quebec CapiTech, these entities are entitled to certain rights with respect to the registration under the Securities Act of 16,666,665 shares of our common stock, including the common stock into which the preferred stock is convertible, that they currently hold. Following the closing of this offering, if we propose to register any of the shares of our capital stock under the Securities Act, either for our own account or for the account of other security holders exercising registration rights, these holders are entitled to notice of the registration and are entitled to include shares of their common stock in the registration. 57 <PAGE> DQE Enterprises, Singapore Technologies Kinetics, Sofinov, Innovatech, 9042-0175 Quebec Inc., ECO and Hydro-Quebec CapiTech have waived their rights to include their shares in this offering. Singapore Technologies Kinetics, Sofinov, Innovatech, 9042-0175 Quebec Inc., ECO and Hydro-Quebec CapiTech are also entitled to demand registration rights with respect to 15,666,665 shares of our common stock pursuant to which they may require us to file a registration statement under the Securities Act at our expense with respect to their shares of common stock, and we are required to use our best efforts to effect the registration. Singapore Technologies Kinetics, Sofinov, Innovatech, 9042-0175 Quebec Inc., ECO and Hydro-Quebec CapiTech have agreed not to exercise these rights for a period of one year following the closing of this offering. Furthermore, Messrs. Rothstein and Entman's consulting agreements provide for one collective demand registration right and unlimited piggyback registration rights with respect to an aggregate of approximately 13,888,750 shares. All fees and expenses incurred in connection with any of these registrations will be borne by us, except that Messrs. Rothstein and Entman will pay all fees and expenses of their own counsel and all underwriting discounts and commissions relating to any sale of their common stock. Messrs. Rothstein and Entman have agreed not to exercise their demand registration rights for 12 months following the closing of this offering and have waived their right to include their shares in this offering. DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS Under Section 203 of the Delaware General Corporation Law, certain "business combinations" between a Delaware corporation, whose stock generally is publicly traded or held of record by more than 2,000 stockholders, and an "interested stockholder" are prohibited for a three-year period following the date that such stockholder became an interested stockholder, unless: - the corporation has elected in its certificate of incorporation or bylaws not to be governed by the Delaware anti-takeover law (we have not made this election); - the business combination was approved by the board of directors of the corporation before the other party to the business combination became an interested stockholder; - upon consummation of the transaction that made it an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the commencement of the transaction (excluding voting stock owned by directors who are also officers or held in employee stock plans in which the employees do not have a right to determine confidentially whether to tender or vote stock held by the plan); or - the business combination was approved by the board of directors of the corporation and ratified by 66 2/3% of the voting stock which the interested stockholder did not own. The three-year prohibition does not apply to certain business combinations proposed by an interested stockholder following the announcement or notification of certain extraordinary transactions involving the corporation and a person who had not been an interested stockholder during the previous three years or who became an interested stockholder with the approval of a majority of the corporation's directors. The term "business combination" is defined generally to include mergers or consolidations between a Delaware corporation and an interested stockholder, transactions with an interested stockholder involving the assets or stock of the corporation or its majority-owned subsidiaries and transactions which increase an interested stockholder's percentage ownership of stock. The term "interested stockholder" is defined generally as a stockholder who becomes beneficial owner of 15% or more of a Delaware corporation's voting stock. Section 203 could have the effect of delaying, deferring or preventing takeover attempts that might result in your receiving a premium over the market price of our common stock. 58 <PAGE> LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS We will enter into indemnification agreements with our current directors and executive officers. These agreements and provisions of our amended and restated certificate of incorporation may have the practical effect in some cases of eliminating our stockholders' ability to collect monetary damages from our directors. We believe that these contractual agreements and the provisions of our amended and restated certificate of incorporation are necessary to attract and retain qualified persons as directors and officers. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for our common stock is American Stock Transfer & Trust Company. 59 <PAGE> SHARES ELIGIBLE FOR FUTURE SALE If our stockholders sell substantial amounts of our common stock, including shares issued upon the exercise of outstanding options, in the public market following this offering, the market price of our common stock could decline. These sales also might make it more difficult for us to sell equity or equity-related securities in the future and at a time and price that we deem appropriate. Upon completion of this offering, we will have outstanding an aggregate of 52,756,860 shares of our common stock, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options or warrants. Of these shares, all of the shares sold in this offering will be freely tradeable without restriction or further registration under the Securities Act, unless these shares are purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act. This leaves up to 45,756,860 shares eligible for sale in the public market as follows: <TABLE> <CAPTION> NUMBER OF SHARES DATE ------------------------------------- ------------------------------------------------------------ <S> <C> 4,141,405 After the date of this prospectus. 1,388,875 Commencing on the 91st day after the date of this prospectus, subject, in some cases, to volume limitations. 40,226,580 At various times commencing on the 181st day after the date of this prospectus. </TABLE> LOCK-UP AGREEMENTS All of our officers and directors and a majority of the holders of our common stock, including all 5% stockholders, have signed lock-up agreements under which they have agreed not to transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock, for a period of 180 days after the date of this prospectus. In addition, the underwriters have agreed to allow Messrs. Entman and Rothstein and their affiliates who are parties to the stockholders' and voting agreement to sell up to 10% of their common shares commencing on the 91st day after the date of this prospectus. Transfers or dispositions can be made sooner: - with the prior written consent of Lehman Brothers Inc.; - in the case of gifts or estate planning transfers where the donee signs a lock-up agreement; or - in the case of distributions to stockholders or affiliates of the stockholders where the recipient signs a lock-up agreement. In addition to the foregoing restrictions, the transfer and sale of common stock by certain of the stockholders who have entered into the lock-up agreements described above is further subject to the provisions of the stockholders' and voting agreement described under "Certain Relationships and Related Transactions." RULE 144 In general, under Rule 144 as currently in effect, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - 1% of the number of shares of our common stock then outstanding, which will equal approximately 527,569 shares immediately after this offering; or - the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding the filing with the Securities and Exchange Commission of a notice on Form 144 with respect to that sale. 60 <PAGE> Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. RULE 144(K) Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, generally including the holding period of any prior owner other than an affiliate, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, Rule 144(k) shares may be sold immediately upon the completion of this offering. However, our transfer agent may require an opinion of counsel that a proposed sale of shares comes within the terms of Rule 144 under the Securities Act prior to effecting a transfer of the shares. Upon completion of this offering and subject to the expiration of any applicable lock-up agreements, holders of 35,090,195 shares will be eligible to freely sell their shares under Rule 144(k). RULE 701 In general, subject to the volume limitations under Rule 701 of the Securities Act as currently in effect, any of our employees, consultants or advisors who purchases shares of our common stock from us in connection with a compensatory stock or option plan or other written agreement is eligible to resell those shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with some of the restrictions, including the holding period, contained in Rule 144. STOCK OPTIONS We intend to file a registration statement on Form S-8 under the Securities Act shortly after the completion of this offering covering 3,750,000 shares of our common stock reserved for issuance under our stock option plan and, as of July 21, 2000, approximately 4,730,625 shares of our common stock issuable upon exercise of options granted outside of our stock option plan. As of July 21, 2000, options to purchase 5,715,360 shares of our common stock were issued and outstanding of which 3,443,955 shares are currently exercisable. Shares of our common stock registered under the S-8 registration statement will, subject to vesting provisions and Rule 144 volume limitations applicable to our affiliates, be available for sale immediately in the open market, subject to the expiration of any applicable lock-up agreements. REGISTRATION RIGHTS After this offering, the holders of 30,555,415 shares of our common stock, or their transferees, will be entitled to have their shares included for sale in subsequent registered offerings of our common stock. Furthermore, the holders of up to the following number of shares of common stock will be able to require us to conduct a registered public offering of their shares at the times indicated below: - 20,555,415 shares of common stock at any time following the date that is one year after the closing of this offering; - 5,000,000 shares of common stock at any time after August 27, 2001; and - 4,000,000 shares of common stock at any time after November 29, 2001. If these holders exercise their registration rights, their shares of our common stock would become freely tradeable without restriction under the Securities Act. These sales could have a material adverse effect on the trading price of our common stock. 61 <PAGE> UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS The following discussion summarizes the material United States federal income and estate tax consequences generally applicable to the ownership and disposition of our common stock by a non-U.S. holder of common stock. A non-U.S. holder is a holder of common stock that is not, for United States federal income tax purposes, any of the following: - a citizen or resident of the United States; - a corporation, partnership or other entity created or organized in or under the laws of the United States or any of its political subdivisions; - an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or - a trust (a) whose administration is subject to the primary supervision of a U.S. court and which has one or more U.S. persons who have the authority to control all substantial decisions of the trust, or (b) which was in existence on August 20, 1996 and has properly elected to continue to be received as a United States person. This discussion is based on provisions of the United States Internal Revenue Code of 1986, as amended, or the "Code," Treasury regulations under the Code, published rulings, administrative pronouncements and judicial decisions, all of which are subject to change or different interpretation on a possibly retroactive basis. In addition, special rules may apply to certain non-U.S. holders, such as "controlled foreign corporations," "passive foreign investment companies," "foreign personal holding companies" or certain U.S. expatriates. This discussion does not address the treatment of any non-U.S. holders under the laws of any state, local or foreign taxing jurisdiction. This discussion is limited to non-U.S. holders who hold our common stock as a capital asset. EACH PROSPECTIVE HOLDER IS URGED TO CONSULT ITS TAX ADVISOR WITH RESPECT TO THE UNITED STATES FEDERAL INCOME AND ESTATE TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION. DIVIDENDS Dividends paid to a non-U.S. holder of common stock generally will be subject to United States federal withholding tax at a 30% rate or a lower rate as may be specified by an applicable income tax treaty. Provided that the non-U.S. holder complies with applicable certification and disclosure requirements, there will be no withholding tax with respect to dividends that are effectively connected with the non-U.S. holder's conduct of a trade or business within the United States (and if an income tax treaty applies, are attributable to a United States permanent establishment of the non-U.S. holder). Instead, the "effectively connected" dividends will be subject to net U.S. federal income tax in the same manner as dividends paid to United States citizens, resident aliens and domestic United States corporations. Any effectively connected dividends received by a corporate non-U.S. holder may also, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate or a lower rate as may be specified by an applicable income tax treaty, on the repatriation from the United States of its "effectively connected earnings and profits," subject to adjustments. Under currently effective United States Treasury regulations, dividends paid prior to January 1, 2000 to an address in a foreign country are presumed to be paid to a resident of that country, unless the payor has knowledge to the contrary, for purposes of the withholding discussed above and for purposes of determining the applicability of a tax treaty rate. Under recently finalized United States Treasury regulations that will generally be effective for distributions after December 31, 2000, or the "Final Withholding Regulations," however, a non-U.S. holder of common stock who wishes to claim the benefit of an applicable treaty rate would be required to satisfy applicable certification requirements. In addition, under the Final Withholding Regulations, in the case of common stock held 62 <PAGE> by a foreign partnership, (1) the certification requirements would generally be applied to the partners of the partnership and (2) the partnership would be required to provide certain information, including a United States taxpayer identification number. The Final Withholding Regulations provide look-through rules for tiered partnerships. A non-U.S. holder of common stock that is eligible for a reduced rate of United States withholding tax under a tax treaty may obtain a refund of any excess amounts currently withheld by filing an appropriate claim for refund with the United States Internal Revenue Service. GAIN ON DISPOSITION OF COMMON STOCK A non-U.S. holder generally will not be subject to United States federal income tax for gain recognized on a sale or other disposition of common stock unless one of the following conditions is satisfied: - the gain is effectively connected with a trade or business conducted by the non-U.S. holder in the United States (and, if an income tax treaty applies, is attributable to a permanent establishment maintained in the United States by the non-U.S. holder). The non-U.S. holder will, unless an applicable treaty provides otherwise, be taxed on its net gain derived from the sale or other disposition under regular graduated U.S. federal income tax rates. Effectively connected gains realized by a corporate non-U.S. holder may also, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate or a lower rate as may be specified by an applicable income tax treaty; - in the case of a non-U.S. holder who is an individual and holds the common stock as a capital asset, the holder is present in the United States for 183 or more days in the taxable year of the sale or other disposition and certain other conditions exist; - we are or have been a "United States real property holding corporation" for U.S. federal income tax purposes within the shorter of the five-year period preceding the disposition or the non-U.S. holder's holding period. We believe we are not currently, and do not anticipate becoming, a "United States real property holding corporation" for U.S. federal income tax purposes. Further, even if we were to become a "United States real property holding corporation" for U.S. federal income tax purposes, any gain recognized by a non-U.S. holder still would not be subject to U.S. tax if the shares were considered to be "regularly traded on an established securities market," and the non-U.S. holder did not hold, directly or indirectly at any time during the shorter of the periods described above, more than 5% of the common stock; or - the non-U.S. holder is subject to tax under certain provisions of the Code applicable to U.S. expatriates. FEDERAL ESTATE TAX CONSEQUENCES Common stock held by an individual non-U.S. holder at the time of death will be included in the holder's gross estate for U.S. federal estate tax purposes, and may be subject to U.S. federal estate tax, unless an applicable estate tax treaty provides otherwise. INFORMATION REPORTING AND BACKUP WITHHOLDING We must report annually to the United States Internal Revenue Service and to each non-U.S. holder the amount of dividends paid to, and the tax withheld with respect to, any holder, regardless of whether any tax was actually withheld. This information may also be made available to the tax authorities in the non-U.S. holder's country of residence. 63 <PAGE> Under current law, United States information reporting requirements, other than reporting of dividend payments for purposes of the withholding tax noted above, and backup withholding tax generally will not apply to dividends paid to non-U.S. holders that are either subject to the 30% withholding discussed above or that are not subject to withholding because an applicable tax treaty reduces or eliminates the withholding. Otherwise, backup withholding of United States federal income tax at a rate of 31% may apply to dividends paid with respect to common stock to holders that are not "exempt recipients" and that fail to provide certain information including the holder's United States taxpayer identification number. Under current law, generally, unless the payor of dividends has actual knowledge that the payee is a United States person, the payor may treat dividend payments to a payee with a foreign address as exempt from information reporting and backup withholding. However, under the Final Withholding Regulations, dividend payments made after December 31, 2000 generally will be subject to information reporting and backup withholding unless applicable certification requirements are satisfied. See the discussion above with respect to the rules applicable to foreign partnerships under the Final Withholding Regulations. In general, United States information reporting and backup withholding requirements also will not apply to the payment of disposition proceeds where the transaction is effected through an office outside the United States of a non-United States broker. However, United States information reporting, but not backup withholding, requirements will apply to a payment made outside the United States of the proceeds of a sale of common stock through an office outside the United States of a broker that is (i) a United States person, (ii) a foreign person that derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States, (iii) a "controlled foreign corporation" for United States federal income tax purposes, or, (iv) in the case of payments made after December 31, 2000, a foreign partnership with certain connections to the United States, unless the broker has documentary evidence in its records that the holder or beneficial owner is a non-United States person and that certain conditions are met, or the holder or beneficial owner otherwise establishes an exemption. Payment of the proceeds of the sale of common stock to or through a United States office of a broker is currently subject to both United States backup withholding and information reporting unless the holder certifies its non-United States status under penalties of perjury or otherwise establishes an exemption. Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules are generally allowable as a refund or credit against a non-U.S. holder's federal income tax liability, if any, provided that the required information is furnished to the IRS. 64 <PAGE> UNDERWRITING Under the underwriting agreement, which is filed as an exhibit to the registration statement relating to this prospectus, each of the underwriters named below for whom Lehman Brothers Inc., CIBC World Markets Corp., Deutsche Bank Securities Inc., Josephthal & Co. Inc. and Fidelity Capital Markets Corp., a division of National Financial Services Corporation, are acting as representatives, has agreed to purchase from us, on a firm commitment basis, subject only to the conditions contained in the underwriting agreement, the respective number of shares of common stock shown opposite its name below: <TABLE> <CAPTION> NUMBER OF UNDERWRITERS SHARES ------------ ---------- <S> <C> Lehman Brothers Inc......................................... CIBC World Markets Corp..................................... Deutsche Bank Securities Inc................................ Josephthal & Co. Inc........................................ Fidelity Capital Markets Corp., a division of National Financial Services Corporation............................ ---------- Total....................................................... ========== </TABLE> The underwriting agreement provides that the underwriters' obligations to purchase our common stock depend on the satisfaction of the conditions contained in the underwriting agreement, and that if any shares of common stock are purchased by the underwriters under the underwriting agreement, then all the shares of common stock which the underwriters have agreed to purchase under the underwriting agreement must be purchased. The conditions contained in the underwriting agreement include that: - the representations and warranties made by us to the underwriters are true; - there is no material change in the financial markets; and - we deliver customary closing documents to the underwriters. COMMISSIONS AND EXPENSES The representatives had advised us that the underwriters propose to offer the common stock directly to the public at the public offering price presented on the cover page of this prospectus, and to selected dealers, who may include the underwriters, at the public offering price less a selling concession not in excess of $ per share. The underwriters may allow, and the selected dealers may reallow, a concession not in excess of $ per share to brokers and dealers. After the offering, the underwriters may change the offering price and other selling terms. The following table summarizes the underwriting discounts and commissions we will pay. The underwriting discounts and commissions are equal to the public offer price per share, less the amount paid to us per share. The underwriting discounts and commissions will equal 7% of the public offering price. <TABLE> <CAPTION> TOTAL WITHOUT WITH PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT --------- -------------- -------------- <S> <C> <C> <C> Underwriting discounts and commissions to be paid by us.................................................... $ $ $ </TABLE> We estimate that the total expenses of the offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding underwriting discounts and commissions, will be approximately $ million. 65 <PAGE> OVER-ALLOTMENT OPTION Cynthia Rothstein, Scott Entman, Bryan Entman and Gerald Entman, Trustee for Elise Entman, or H Power will grant to the underwriters an option to purchase up to an aggregate of 1,050,000 shares of common stock, exercisable solely to cover over-allotments, if any, at the public offering price less the underwriting discounts and commissions shown on the cover page of this prospectus. The underwriters may exercise this option at any time until 30 days after the date of the underwriting agreement. To the extent the underwriters exercise this option, each underwriter will be committed, so long as the conditions of the underwriting agreement are satisfied, to purchase a number of additional shares proportionate to that underwriter's initial commitment as indicated in the preceding table. At the time the underwriting agreement is entered into, Cynthia Rothstein, Scott Entman, Brian Entman and Gerald Entman, as Trustee for Elise Entman, shall either elect to become parties to the underwriting agreement and sell 1,050,000 shares of common stock to the underwriters, or if they do not so elect, H Power will agree to issue and sell to the underwriters 1,050,000 additional shares of common stock, in either case pursuant to the underwriters' over-allotment option. LOCK-UP AGREEMENTS We have agreed that, without the prior written consent of Lehman Brothers Inc., we will not, directly or indirectly, offer, sell or dispose of any common stock or any securities which may be converted into or exchanged for any common stock for a period of 180 days from the date of this prospectus. We and all of our executive officers and directors, and our 5% shareholders, including Messrs. Norman Rothstein and Frederick Entman and certain members of their respective families, have agreed under lock-up agreements that, without the prior written consent of Lehman Brothers Inc., they will not, directly or indirectly, offer, sell or otherwise dispose of any common stock or any securities which may be converted into or exchanged or exercised for any common stock for a period of 180 days from the date of this prospectus. Notwithstanding the foregoing, during the period commencing on the 91st day after the date of the underwriting agreement through and including the 180th day after the date of the underwriting agreement, Messrs. Norman Rothstein and Frederick Entman and certain of their affiliates who are parties to the stockholders' and voting agreement may sell up to 10% of their shares of common stock subject, in all cases, with respect to Messrs. Rothstein and Entman and their affiliates, to the prohibitions and limitations contained in the stockholders' and voting agreement described under "Certain Relationships and Related Transactions." OFFERING PRICE DETERMINATION Prior to this offering, there has been no public market for our common stock. The initial public offering price will be negotiated between the representatives and us. In determining the initial public offering price of our common stock, the representatives will consider - prevailing market conditions; - our historical performance and capital structure; - estimates of our business potential and earnings prospects; - an overall assessment of our management; and - the consideration of these factors in relation to market valuation of companies in related businesses. INDEMNIFICATION We have agreed to indemnify the underwriters against liabilities relating to the offering, including liabilities under the Securities Act and liabilities arising from breaches of the representations and warranties contained in the underwriting agreement and liabilities incurred in connection with the 66 <PAGE> directed share program referred to below, and to contribute to payments that the underwriters may be required to make for these liabilities. We have further agreed to indemnify Lehman Brothers Inc. against liabilities relating to the directed share program conducted at H Power's request, including liabilities under the Securities Act. STABILIZATION, SHORT POSITIONS AND PENALTY BIDS Until the distribution of the common stock is completed, rules of the Securities and Exchange Commission may limit the ability of the underwriters and selling group members to bid for and purchase shares of common stock. As an exception to these rules, the representatives are permitted to engage in transactions that stabilize the price of our common stock. These transactions may consist of bids or purchases for the purpose of stabilizing, fixing or maintaining the price of our common stock. The underwriters may create a short position in the common stock in connection with the offering, which means that they may sell more shares of our common stock than are presented on the cover page of this prospectus. If the underwriters create a short position, then the representatives may reduce that short position by purchasing our common stock in the open market. The representatives also may elect to reduce any short position by exercising all or part of the over-allotment option described in this prospectus. The representatives also may impose a penalty bid on underwriters and selling group members. This means that if the representatives purchase our common stock in the open market to reduce the underwriters' short position or to stabilize the price of the common stock, they may reclaim the amount of the selling concession from the underwriters and selling group members who sold those shares of our common stock as part of the offering. In general, purchasers of a security for the purpose of stabilization or to reduce a syndicate short position could cause the price of the security to be higher than it might be in the absence of these purchases. The imposition of a penalty bid could have an effect on the price of a security to the extent that it were to discourage resales of the security by purchasers in an offering. Neither we nor any of the underwriters make any representation or prediction concerning the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor any of the underwriters make any representation that the representatives will engage in these transactions or that any such transaction, once commenced, will not be discontinued without notice. PRIVATE SALE BY H POWER EMPLOYEE On July 21, 2000, H Power's Chief Technology Officer consummated the sale to Lehman Brothers Inc. of 45,000 shares of common stock for an aggregate purchase price of $180,000 (or $4 per share). Lehman Brothers Inc. purchased these shares for its own account and has agreed not to directly or indirectly transfer, sell or otherwise dispose of these shares of common stock (or any interest therein) until after the first anniversary of the date of this prospectus. FIDELITY CAPITAL MARKETS Fidelity Capital Markets, a division of National Financial Services Corporation, is acting as an underwriter of this offering, and will be facilitating electronic distribution through the Internet. STAMP TAXES Purchasers of the shares of our common stock offered by this prospectus may be required to pay stamp taxes and other charges under the laws and practices of the country of purchase, in addition of the offering price listed on the cover of this prospectus. 67 <PAGE> OFFER AND SALES IN CANADA Any offers in Canada will be made only under an exception from the requirements to file a prospectus in each relevant province of Canada where a sale is made. DIRECTED SHARE PROGRAM At our request, the underwriters have reserved up to 700,000 shares, or 10% of our common stock offered by this prospectus, for sale under a directed share program to our officers, directors, employees and to our business associates. All of the persons purchasing the reserved shares must commit to purchase no later than the close of business on the day following the date of this prospectus. The number of shares available for sale to the general public will be reduced to the extent these persons purchase the reserved shares. Shares committed to be purchased by directed share participants which are not so purchased will be reallocated for sale to the general public in the offering. All sales of shares pursuant to the directed share program will be made at the initial public offering price set forth on the cover page of this prospectus. All of the persons purchasing the reserved shares, except for our employees who are not officers or directors, must sign lock-up agreements under which they agree not to directly or indirectly transfer or dispose of any shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock, for a period of 45 days after the date of this prospectus. The underwriters have informed us that they do not intend to confirm sales to discretionary accounts that exceed 5% of the total number of shares of our common stock offered by them. 68 <PAGE> LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for H Power by Fulbright & Jaworski L.L.P., New York, New York. Merrill M. Kraines, a partner in Fulbright & Jaworski L.L.P., has served as our Secretary since December 1999. Certain legal matters in connection with the offering will be passed upon for the underwriters by Greenberg Traurig, LLP, New York, New York. EXPERTS The financial statements as of May 31, 2000 and 1999 and for each of the three fiscal years in the period ended May 31, 2000 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a registration statement, of which this prospectus constitutes a part, on Form S-1, with respect to the common stock being sold in this offering. This prospectus constitutes a part of that registration statement. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement, because some parts have been omitted in accordance with rules and regulations of the Securities and Exchange Commission. For further information about us and the common stock being sold in this offering, please refer to the registration statement and the exhibits and schedules filed as a part of the registration statement. A copy of the registration statement, including exhibits and schedules thereto, may be inspected without charge and obtained at prescribed rates at the public reference section of the Securities and Exchange Commission at its principal offices, located at 450 Fifth Street, N.W., Washington, D.C. 20549, and maybe inspected without charge at the regional offices of the Securities and Exchange Commission located at Seven World Trade Center, 13th Floor, New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The registration statement, including the exhibits and schedules thereto, is also available at the Securities and Exchange Commission's site on the World Wide Web at http://www.sec.gov. We intend to furnish our stockholders annual reports containing financial statements audited by our independent auditors and quarterly reports containing unaudited financial information. 69 <PAGE> H POWER CORP. INDEX TO FINANCIAL STATEMENTS <TABLE> <CAPTION> PAGES -------- <S> <C> Report of Independent Accountants........................... F-2 Consolidated Balance Sheets as of May 31, 1999 and 2000 and May 31, 2000 Pro Forma (unaudited)........................ F-3 Consolidated Statements of Operations for the years ended May 31, 1998, 1999 and 2000............................... F-4 Consolidated Statements of Changes in Stockholders' Equity (Deficit) and Comprehensive Loss for the years ended May 31, 1998, 1999 and 2000............................... F-5 Consolidated Statements of Cash Flows for the years ended May 31, 1998, 1999 and 2000............................... F-6 Notes to Consolidated Financial Statements.................. F-7-F-20 </TABLE> F-1 <PAGE> REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of H Power Corp. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in stockholders' equity (deficit) and comprehensive loss and of cash flows present fairly, in all material respects, the financial position of H Power Corp. and its subsidiary (the "Company") at May 31, 1999 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2000, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Florham Park, NJ July 26, 2000 F-2 <PAGE> H POWER CORP. CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> MAY 31, ------------------------------------------ PRO FORMA 1999 2000 2000 ------------ ------------ ------------ (UNAUDITED) <S> <C> <C> <C> ASSETS Current assets Cash and cash equivalents................................. $ 242,107 $ 11,257,355 $ 11,257,355 Accounts receivable net of allowance for doubtful accounts of $0 and $60,000 at May 31, 1999 and 2000, respectively............................................ 135,229 878,310 878,310 Unbilled receivables...................................... 186,283 214,550 214,550 Inventories............................................... 341,119 1,300,999 1,300,999 Tax credit receivable..................................... 644,791 930,117 930,117 Prepaid expenses and other current assets................. 35,188 1,604,041 1,604,041 ------------ ------------ ------------ Total current assets.................................... 1,584,717 16,185,372 16,185,372 Plant and equipment, net.................................... 1,438,912 1,877,728 1,877,728 Patents, net of accumulated amortization of $18,886 and $34,288 at May 31, 1999 and 2000, respectively............ 415,362 438,847 438,847 Other assets................................................ 32,900 147,646 147,646 ------------ ------------ ------------ Total assets............................................ $ 3,471,891 $ 18,649,593 $ 18,649,593 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term debt...................... $ 124,219 $ 123,223 $ 123,223 Accounts payable.......................................... 1,400,915 1,197,803 1,197,803 Accrued expenses.......................................... 472,441 1,172,570 1,172,570 Deferred revenue.......................................... 250,000 478,351 478,351 Due to related parties.................................... 1,292,654 -- -- ------------ ------------ ------------ Total current liabilities............................... 3,540,229 2,971,947 2,971,947 Deferred revenue............................................ -- 2,222,222 2,222,222 Long-term debt.............................................. 69,280 66,765 66,765 ------------ ------------ ------------ Total liabilities....................................... 3,609,509 5,260,934 5,260,934 ------------ ------------ ------------ Commitments and contingencies Minority interest........................................... 5,000,000 5,000,000 -- ------------ ------------ ------------ Mandatorily redeemable preferred stock: Series A Convertible Preferred Stock--$.001 par value; 200,000 shares authorized; 200,000 shares issued and outstanding at May 31, 1999 and 2000; 0 shares issued and outstanding at May 31, 2000 pro forma............... 2,966,471 2,966,471 -- Series B Convertible Preferred Stock--$.001 par value; 400,000 shares authorized; 400,000 shares issued and outstanding at May 31, 1999 and 2000; 0 shares issued and outstanding at May 31, 2000 pro forma............... 4,944,118 4,944,118 -- Series C Convertible Preferred Stock--$.001 par value; 1,200,000 shares authorized; 600,000 issued and outstanding at May 31, 1999 and 2000; 0 shares issued and outstanding at May 31, 2000 pro forma............... 7,416,177 7,416,177 -- STOCKHOLDERS' EQUITY Common stock--$.001 par value; 20,000,000 shares authorized; 29,015,195 shares issued and outstanding at May 31, 1999; 38,090,195 shares issued and outstanding at May 31, 2000; 45,756,860 shares issued and outstanding at May 31, 2000 pro forma................... 29,016 38,091 45,758 Additional paid-in capital................................ 7,663,950 38,127,238 58,446,337 Accumulated deficit....................................... (27,734,495) (44,746,901) (44,746,901) Accumulated other comprehensive loss...................... (422,855) (356,535) (356,535) ------------ ------------ ------------ Total stockholders' (deficit) equity.................... (20,464,384) (6,938,107) 13,388,659 ------------ ------------ ------------ Total liabilities and stockholders' equity............ $ 3,471,891 $ 18,649,593 $ 18,649,593 ============ ============ ============ </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-3 <PAGE> H POWER CORP. CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> YEAR ENDED MAY 31, ---------------------------------------- 1998 1999 2000 ----------- ----------- ------------ <S> <C> <C> <C> REVENUES Products............................................ $ 99,071 $ 501,065 $ 984,996 Contracts........................................... 618,728 516,967 2,695,291 ----------- ----------- ------------ 717,799 1,018,032 3,680,287 ----------- ----------- ------------ OPERATING EXPENSES Cost of revenues--products.......................... 354,957 613,864 1,100,767 Cost of revenues--contracts......................... 436,216 465,806 2,356,828 Research and development............................ 2,812,786 3,051,089 5,338,727 Selling, general, and administrative................ 3,514,048 3,813,161 12,565,380 ----------- ----------- ------------ Total operating expenses.......................... 7,118,007 7,943,920 21,361,702 ----------- ----------- ------------ Loss from operations................................ (6,400,208) (6,925,888) (17,681,415) Interest and other income, net...................... 723,788 182,378 746,034 Interest expense.................................... (41,395) (22,250) (77,025) ----------- ----------- ------------ Net loss.......................................... $(5,717,815) $(6,765,760) $(17,012,406) =========== =========== ============ Loss per share attributable to common stockholders, basic and diluted................................. $ (0.20) $ (0.24) $ (0.49) =========== =========== ============ Weighted average shares outstanding, basic and diluted........................................... 29,011,040 29,015,195 34,879,061 =========== =========== ============ Pro forma net loss per share, basic and diluted..... $ (0.40) ============ Pro forma weighted average shares outstanding, basic and diluted....................................... 42,545,726 ============ </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-4 <PAGE> H POWER CORP. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS <TABLE> <CAPTION> ACCUMULATED NUMBER OF OTHER SHARES ISSUED COMMON CAPITAL IN ACCUMULATED COMPREHENSIVE COMPREHENSIVE AND OUTSTANDING STOCK EXCESS OF PAR DEFICIT LOSS LOSS --------------- -------- ------------- ------------ ------------- ------------- <S> <C> <C> <C> <C> <C> <C> Balance (deficiency)--May 31, 1997.... 29,002,695 29,003 6,835,838 (15,250,920) (4,745,718) ============ Net loss.............................. (5,717,815) (5,717,815) Issuance of common stock upon exercise of stock options.................... 12,500 13 9,987 Foreign currency translation adjustment.......................... (261,829) (261,829) ---------- ------- ----------- ------------ --------- ------------ Balance (deficiency)--May 31, 1998.... 29,015,195 29,016 6,845,825 (20,968,735) (261,829) (5,979,644) ============ Net loss.............................. (6,765,760) (6,765,760) Stock option compensation expense..... 818,125 Foreign currency translation adjustment.......................... (161,026) (161,026) ---------- ------- ----------- ------------ --------- ------------ Balance (deficiency)--May 31, 1999.... 29,015,195 29,016 7,663,950 (27,734,495) (422,855) (6,926,786) ============ Net Loss.............................. (17,012,406) (17,012,406) Sale of common stock.................. 8,160,000 8,160 22,979,124 Issuance of common stock upon conversion of debt.................. 840,000 840 2,099,160 Issuance of common stock upon exercise of stock options.................... 75,000 75 59,925 Issuance of warrants.................. 150,000 Stock option compensation expense..... 5,175,079 Foreign currency translation adjustments......................... 66,320 66,320 ---------- ------- ----------- ------------ --------- ------------ Balance (deficiency)--May 31, 2000.... 38,090,195 $38,091 $38,127,238 $(44,746,901) $(356,535) $(16,946,086) ========== ======= =========== ============ ========= ============ </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-5 <PAGE> H POWER CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> YEAR ENDED MAY 31, ---------------------------------------- 1998 1999 2000 ----------- ----------- ------------ <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net loss.................................................. $(5,717,815) $(6,765,760) $(17,012,406) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization........................... 408,076 481,977 654,917 (Gain) Loss on sale of equipment........................ (7,132) -- 3,263 Provision for losses on uncompleted contracts........... 184,525 -- -- Stock option compensation expense....................... -- 836,125 5,175,079 Warrants issued in payment of services.................. -- -- 150,000 Changes in assets and liabilities: Accounts receivables.................................. (419,592) 428,645 (743,081) Unbilled receivables.................................. (74,709) (111,574) (28,267) Inventories........................................... 4,674 (327,408) (959,880) Tax credit receivable................................. (205,131) (439,660) (285,326) Prepaid expenses and other assets..................... (152,095) 132,863 (1,683,599) Accounts payable...................................... 299,892 803,086 (203,112) Accrued expenses...................................... 47,907 175,960 700,129 Deferred revenue...................................... 75,000 -- 2,450,573 Estimated losses on uncompleted contracts............. -- (184,525) -- ----------- ----------- ------------ Total adjustments................................... 161,415 1,795,489 5,230,696 ----------- ----------- ------------ Net cash used by operating activities............... (5,556,400) (4,970,271) (11,781,710) ----------- ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures...................................... (942,930) (919,355) (1,124,691) Proceeds from sale of equipment........................... 45,000 -- 4,209 ----------- ----------- ------------ Net cash used by investing activities............... (897,930) (919,355) (1,120,482) ----------- ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock.................... 10,000 -- 23,047,284 Proceeds from related party borrowings.................... 21,700 1,267,728 1,461,987 Repayment of related party borrowings..................... (879,158) -- (654,641) Proceeds from long-term debt.............................. -- 67,912 -- Repayments of long-term debt.............................. (616,081) -- -- Other..................................................... (5,491) (3,472) (2,364) ----------- ----------- ------------ Net cash (used) provided by financing activities.... (1,469,030) 1,332,168 23,852,266 ----------- ----------- ------------ Effect of exchange rate changes on cash and cash equivalents............................................... (261,829) (161,026) 65,174 ----------- ----------- ------------ Net (decrease) increase in cash and cash equivalents....................................... (8,185,189) (4,718,484) 11,015,248 Cash and cash equivalents at beginning of period............ 13,145,780 4,960,591 242,107 ----------- ----------- ------------ Cash and cash equivalents at end of period.................. $ 4,960,591 $ 242,107 $ 11,257,355 =========== =========== ============ SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest.................................... $ 143,184 $ 522 $ 99,829 Conversion of related party borrowings to equity.......... $ -- $ -- $ 2,100,000 </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-6 <PAGE> H POWER CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS H Power Corp. (the "Company") was organized on June 6, 1989 under the laws of the State of Delaware. The Company designs, develops, markets and manufactures proton-exchange membrane fuel cells and fuel cell systems designed to provide electricity for a wide range of stationary, portable and mobile applications. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its Canadian subsidiary, H Power Enterprises of Canada, Inc. ("HPEC"). All significant intercompany accounts and transactions are eliminated. The outside investors have an ability to convert their 50% interest in HPEC into an interest in H Power and have a priority upon liquidation of HPEC. As a result, the outside investors are not at risk with respect to the losses (i.e., R&D expenses) of HPEC. The Company, therefore, presents HPEC's results of operations on a consolidated basis and has not allocated any of HPEC's losses to the outside investors. UNAUDITED PRO FORMA BALANCE SHEET AND EARNINGS PER SHARE INFORMATION The Company's Series A, Series B and Series C convertible preferred stockholders have agreed to convert all of their outstanding shares of preferred stock into common stock concurrent with the closing of this initial public offering. In addition, the other investors of the Company's 50% owned subsidiary, HPEC, have agreed to exercise their conversion right concurrent with the closing of this initial public offering. (See Note 1--Investment in Subsidiary.) These investors have also agreed to convert their Series C convertible preferred stock received in that transaction into common stock concurrent with the closing of this offering. Accordingly, the unaudited pro forma balance sheet has been presented on a basis to give effect to the conversion of the stock and equity interests described above, as of the closing date of an initial public offering, which is assumed to have been converted as of May 31, 2000. The pro forma earnings per share and share data give effect to the impact these conversions would have had on the weighted average share amounts assuming the conversion occurred on June 1, 1998. STOCK SPLIT On July 7, 2000, the Board of Directors of the Company approved an increase to the number of authorized preferred and common shares to 10,000,000 and 150,000,000, respectively. The Company declared a 5:1 stock split effective July 24, 2000 for stockholders of record at the close of business on July 21, 2000. This stock split increased the number of common shares outstanding by 30,472,156 shares at May 31, 2000. All references in the consolidated financial statements referring to share prices, conversion rates, per share amounts, stock option plans and common shares issued and/or outstanding have been adjusted retroactively for the 5-for-1 stock split. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that F-7 <PAGE> H POWER CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) affect the amounts reported in its consolidated financial statements and accompanying notes. Actual results could differ from those estimates. CASH AND EQUIVALENTS Cash and equivalents represent cash and short-term, highly liquid investments with original maturities of three months or less. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents at high quality financial institutions and limits the amount of credit exposure to any one institution. The Company had cash balances on deposit at May 31, 2000 that exceeded the $100,000 amount insured by the F.D.I.C. The Company's receivables are derived primarily from sales to U.S. government agencies. Three government contracts represent approximately 86%, 41% and 73% of consolidated revenues for the fiscal years ended May 31, 1998, 1999 and 2000, respectively. Amounts due the Company in accounts receivable and unbilled receivables under these contracts were $150,085 and $546,840 at May 31, 1999, and May 31, 2000, respectively. Additionally, one of our commercial customers of portable PEM units represents 0%, 24% and 10% of consolidated revenues for the fiscal years ended May 31, 1998, 1999 and 2000, respectively. Amounts due to the Company in accounts receivable from this customer were $0 and $73,613 at May 31, 1999 and 2000, respectively. INVENTORY Inventories, which include materials, labor, and overhead, are valued at the lower of cost or market using the first-in, first-out method. PLANT AND EQUIPMENT, NET Plant and equipment are stated at cost, net of accumulated depreciation. Repairs and maintenance costs are expensed as incurred; major renewals and betterments are capitalized. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss on the disposition is reflected in current operations. Depreciation is determined on a straight-line basis over the estimated useful lives of the applicable assets, generally five years for furniture and equipment for financial reporting purposes and determined on an accelerated method for tax purposes. Leasehold improvements are depreciated over the lesser of the lease term or the estimated useful lives of the related assets. The Company reviews long-lived assets and identifiable intangible assets for impairment whenever any events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. PATENTS Certain costs associated with obtaining and licensing patents are capitalized as incurred and are amortized on a straight-line basis over estimated useful lives up to 17 years. Costs associated with F-8 <PAGE> H POWER CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) patents are capitalized as incurred. Amortization of such costs begins once the patent has been issued. The Company evaluates the recoverability of the patent and other intangible asset costs at each balance sheet date based on estimated undiscounted future cash flows. FOREIGN CURRENCY TRANSLATION The financial statements of HPEC were prepared in Canadian dollars and translated into U.S. dollars based on the current exchange rate in effect at the end of the period for the balance sheet and a weighted-average rate for the period on the statement of operations. Translation adjustments are reflected as foreign currency translation adjustments in stockholders' equity and accordingly have no effect on net income. Transaction gains and losses are included in income. REVENUE RECOGNITION Revenues on products are recognized when the product has been shipped and the Company has met its obligations under the sales contract. These obligations vary based on the specific product type customer. Revenues on products requiring the Company to perform installation are recognized when installation has been completed (e.g., New Jersey Department of Transportation sales). Revenues on products allowing a 30 day customer acceptance period are recognized at the conclusion of the acceptance period (e.g., ECO). Revenues on test and evaluation products used by customers primarily for research and development purposes are sold without a right of return and without a customer acceptance period. Revenues on test and evaluation products are recognized when the product has been shipped. Revenues on product distribution rights fees are deferred upon receipt and recognized into revenue on a straight-line basis over the term of the distribution agreement. For the years ended May 31, 1999 and 2000, deferred revenues amounted to $250,000 and $2,700,573, respectively. As of May 31, 2000, $2,444,444 of the initial distribution rights fee received from ECO, see Note 8, was included in deferred revenues. Revenues on contracts include reimbursed direct costs and allowable allocated indirect costs incurred, plus recognized profits. Profit is recognized on cost-reimbursable contracts as costs are incurred, and under fixed-price contracts on the cost-to-cost method of the percentage-of-completion basis. Revenue recognized on contracts in excess of related billings is reflected as unbilled receivables. Cost reimbursable contracts are billed one month in arrears, coincident with the preparation of the required billing detail. When it is determined that a loss will result from the performance of a fixed-price contract, the entire amount of the estimated ultimate loss is charged against income. The revenues related to contracts which qualify as best-efforts arrangements are treated as an offset to the Company's research and development expenses. Contract costs, including indirect expenses, are subject to audit and adjustment by the Defense Contract Audit Agency. Contract costs through 1997 have been finalized, and contract revenues for the current and prior years have been recorded in amounts which are expected to be realized upon final settlement. In management's opinion, the results of such audits will not have a material effect on the Company's financial position, results of operations or cash flows. F-9 <PAGE> H POWER CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RESEARCH AND DEVELOPMENT Research and development expenses consist principally of expenditures for research conducted by the Company. Costs for contracts that qualify as best-efforts arrangements are recognized as research and development expenses. All research and development costs are expensed as incurred. Under certain arrangements in which a third party funds a portion of research and development costs on a specific project, the direct materials and labor costs of that project are recorded as costs of revenues--contracts while overhead and general and administrative expenses allowable for inclusion in the cost reimbursement calculation are recorded as selling, general and administrative expenses. INVESTMENT IN SUBSIDIARY On May 2, 1997, the Company established a Canadian subsidiary, HPEC, pursuant to an agreement with Sofinov Societe Financiere D'Innovation Inc. ("Sofinov"), Societe Innovatech du grand Montreal ("Innovatech") and 9042-0175 Quebec, Inc. ("Quebec") (collectively, the "Investors"). Sofinov, a company wholly owned by the Caisse de Depot et Placement du Quebec (the Caisse), is an agent of the Quebec government that administers and invests pension funds of government employees. Innovatech is a government agent, funded by the Quebec government, that invests in the technology industry in the greater Montreal area. Quebec is a wholly-owned subsidiary of Groupe Laperriere & Verreault Inc., a publicly traded company involved in the design and manufacture of industrial equipment. The Investors purchased 50% of the common stock of HPEC for $5 million. The Investors hold Class A common shares in HPEC, which are identical in all respects to Class B common shares in HPEC held by the Company, except that in the event of a liquidation, dissolution or other distribution of assets, Class A stockholders are entitled to receive in priority and preference to any other class of common shares an amount equal to the subscription price paid for each Class A common share. The investors have the right until May 2001 to convert their equity interest in HPEC into 333,333 shares of our Series C convertible preferred stock. The Company licensed its fuel cell technology and certain Canadian marketing rights to HPEC in exchange for the other 50% of the common shares. The Investors and the Company are not legally obligated to fund the losses of HPEC. The Company may elect to fund HPEC at its discretion, and has chosen to do so as HPEC's development efforts contribute to the Company's product commercialization. The Board of HPEC is comprised of six members. The Company is entitled to designate three members and each of the Investors is entitled to designate one member. Pursuant to a stockholder agreement, the day-to-day management and operation of HPEC is the responsibility of its president, who, as long as the Company owns at least 33 1/3% of the aggregate common shares of HPEC, will be the nominee of the Company. HPEC's current president is the chief executive officer of the Company. In addition to having responsibility for the management of all aspects of the daily operations of HPEC without Board approval, the president is responsible for the preparation of the operating and capital budgets, which are approved by the stockholders. The Board of Directors oversee the actions of the president in managing the affairs and business of HPEC through periodic meetings. The Company reports 100% of the losses of this subsidiary in the consolidated accounts as further discussed in Note 1--Principles of Consolidation. F-10 <PAGE> H POWER CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 401(k) RETIREMENT PLAN The Company has a contributory 401(k) Retirement Plan for eligible employees. Employees eligible to participate in the Plan must be of age 21 and have completed twelve months of service. Under the Plan, employees may generally contribute from 1% to 15% of their salary, however, not in excess of IRS limitations. The Company has elected not to make a discretionary matching contribution for the fiscal year ended May 31, 2000. Employees are 100% vested in their own contributions plus earnings at all times. INCOME TAXES AND TAX CREDITS Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. A subjective assessment, which includes anticipating future income, is used in assessing the likelihood of realizing deferred tax assets. Recoverable tax credits arising from the acquisition of capital assets are recorded as a deduction from the cost of the assets acquired while those arising from current expenses are deducted from those expenses in the year of expenditure. All amounts receivable at the end of fiscal 1999 have been collected during fiscal 2000. In addition, amounts receivable at May 31, 2000 are expected to be received during fiscal 2001. 2. INVENTORIES Inventories consist of the following: <TABLE> <CAPTION> MAY 31, --------------------- 1999 2000 -------- ---------- <S> <C> <C> Raw materials......................................... $149,010 $ 776,782 Work in process....................................... 192,109 340,549 Finished goods........................................ -- 183,668 -------- ---------- $341,119 $1,300,999 ======== ========== </TABLE> For the year ended May 31, 1999 all finished goods inventory was sold to customers prior to the end of that fiscal year. 3. PLANT AND EQUIPMENT Plant and equipment consists of the following: <TABLE> <CAPTION> MAY 31, ----------------------- 1999 2000 ---------- ---------- <S> <C> <C> Furniture and equipment.............................. $1,936,111 $3,056,232 Leasehold Improvements............................... 705,355 649,661 ---------- ---------- 2,641,466 3,705,893 Less: Accumulated depreciation....................... 1,202,554 1,828,165 ---------- ---------- $1,438,912 $1,877,728 ========== ========== </TABLE> Depreciation expense for the fiscal years ended May 31, 1998, 1999 and 2000 was $164,489, $473,020 and $639,515, respectively. F-11 <PAGE> H POWER CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. ACCRUED EXPENSES Accrued expenses consist of the following: <TABLE> <CAPTION> MAY 31, --------------------- 1999 2000 -------- ---------- <S> <C> <C> Salaries and related expenses......................... $294,126 $ 180,230 Initial public offering fees.......................... -- 702,585 Other................................................. 178,315 289,755 -------- ---------- $472,441 $1,172,570 ======== ========== </TABLE> 5. NOTES PAYABLE AND LONG-TERM DEBT Long-term debt consists of the following: <TABLE> <CAPTION> MAY 31, ------------------- 1999 2000 -------- -------- <S> <C> <C> Notes payable, interest at 10%; unsecured, past due.............................................. $121,875 $121,875 Government loan, non-interest bearing................... 67,912 66,765 Equipment notes payable, payable in various monthly installments, secured by related equipment............ 3,712 1,348 -------- -------- 193,499 189,988 Less: Current portion................................... 124,219 123,223 -------- -------- $ 69,280 $ 66,765 ======== ======== </TABLE> The past due notes payable were originated in 1991, the proceeds of which were used for general corporate purposes and were originally due in 1993. The due date was extended until 1997 by mutual agreement between the parties. The lender purchased 31,250 shares of H Power common stock at the time the note was issued, but has no other affiliation with the Company. Discussions were under way and preliminary agreement had been reached to convert their note into additional shares of common stock of the Company. Prior to consummation of the agreement, the lender filed for bankruptcy and is currently in the process of liquidation. The Company believes that resolution of these issues will be settled with the Bankruptcy Court and that litigation will not result therefrom. The notes are past due pending resolutions of these matters, and are included in the current position. The Government loan proceeds were used to finance the last phase of the development of a specific product by HPEC. The loan does not bear any interest and HPEC must repay the loan by paying 1% of the revenue earned on the sale of the product. The period of the loan is ten years or whenever the loan is paid, whichever comes first. Principal payment requirements subsequent to May 31, 2000 are as follows: <TABLE> <CAPTION> YEAR ENDING MAY 31, AMOUNT ------------------- -------- <S> <C> 2001........................................................ $123,223 2002........................................................ -- 2003........................................................ -- 2004........................................................ -- 2005........................................................ -- Thereafter.................................................. 66,765 </TABLE> F-12 <PAGE> H POWER CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. COMMITMENTS The Company leases five properties under leasehold agreements, three of which expire on July 31, 2001, one that expires on September 30, 2001 and one that expires on March 31, 2003. The Company has the option to renew these leases for one to two additional years. Rental expenditures for the fiscal years ended May 31, 1998, 1999 and 2000 were $156,300, $177,538 and $218,376, respectively. Commitments for minimum rentals under noncancellable operating leases having a remaining term in excess of one year at May 31, 2000 are as follows: <TABLE> <CAPTION> YEAR ENDING MAY 31, AMOUNT ------------------- -------- <S> <C> 2001........................................................ $261,118 2002........................................................ 63,518 2003........................................................ 11,350 </TABLE> The Company has agreements with four of its key officers, two of whom are directors. The agreements with its officers expire in October and November 2002. These agreements provide for base salaries with increases and bonuses at the discretion of the Board of Directors. 7. INCOME TAXES Deferred tax assets are comprised of the following: <TABLE> <CAPTION> MAY 31, -------------------------- 1999 2000 ----------- ------------ <S> <C> <C> Depreciation and amortization..................... $ 427,085 $ 364,268 Bad debt.......................................... -- 23,775 Deferred revenue.................................. -- 976,311 Other............................................. 2,608 8,344 Net operating loss carryforwards.................. 8,549,692 13,648,543 ----------- ------------ 8,979,385 15,021,241 Less valuation allowance.......................... (8,979,385) (15,021,241) ----------- ------------ Net deferred tax asset............................ $ -- $ -- =========== ============ </TABLE> The components of the provision (benefit) for income taxes are as follows: <TABLE> <CAPTION> YEARS ENDED MAY 31, ------------------------- 1999 2000 ----------- ----------- <S> <C> <C> Current: Federal.......................................... $ -- $ -- State............................................ -- -- ----------- ----------- -- -- ----------- ----------- Deferred: Federal.......................................... (1,242,251) (4,305,539) State............................................ (240,661) (784,556) Foreign.......................................... (391,384) (951,760) Change in valuation allowance.................... 1,874,296 6,041,855 ----------- ----------- -- -- ----------- ----------- Income tax provision (benefit)..................... $ -- $ -- =========== =========== </TABLE> The Company has generated net operating loss carryforwards of approximately $20 million and $28 million as of May 31, 1999 and May 31, 2000, respectively, which are due to expire between 2019 and 2020. Section 382 of the Internal Revenue Code of 1986, as amended, places a limitation on the F-13 <PAGE> H POWER CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. INCOME TAXES (CONTINUED) utilization of federal net operating loss carryforwards when an ownership change occurs. Generally, an ownership change occurs when a greater than 50% change in ownership takes place over a three-year test period. The annual utilization of net operating loss carryforwards generated prior to such change in ownership is limited, in any one year, to a percentage of the fair market value of the Company at the time of the ownership change. The provision (benefit) for income taxes differs from the amount of income tax determined by applying the applicable U.S. income tax rate to income before taxes as follows: <TABLE> <CAPTION> YEARS ENDED MAY 31, ------------------- 1999 2000 -------- -------- <S> <C> <C> U.S. statutory rate......................................... (34.0)% (34.0)% State taxes................................................. (3.8) (4.6) Foreign..................................................... (6.3) (5.6) Imputed Interest............................................ 5.4 2.0 Change in valuation allowance............................... 38.7 42.2 ------ ------ Effective tax rate.......................................... 0.0% 0.0% ====== ====== </TABLE> 8. RELATED PARTY TRANSACTIONS The Company's obligation to related parties and other investors is as follows: <TABLE> <CAPTION> MAY 31, --------------------- 1999 2000 ---------- -------- <S> <C> <C> Sofinov................................................ $ 850,000 $ -- Other stockholders..................................... 396,000 -- Note payable........................................... 23,983 -- Accrued interest....................................... 22,671 -- ---------- ------- 1,292,654 -- Less: Current portion.................................. 1,292,654 -- ---------- ------- $ -- $ -- ========== ======= </TABLE> On May 25, 1999, Sofinov entered an agreement with the Company to make advances up to $5 million, in increments of at least $150,000, bearing interest at 8% per annum, calculated and compounded monthly, both before and after default, and payable on demand. At any time prior to December 31, 1999 or the completion of an initial public offering, whichever was sooner, Sofinov was entitled to convert all or any portion of the outstanding balance of the advances and interest thereon into common stock of the Company at a conversion rate of $2.50 per common share. If Sofinov exercised its election to convert, then in the event the outstanding balance of advances and interest thereon was less that $5 million, Sofinov was entitled to purchase additional shares of the Company's common stock at $2.50 per share to bring Sofinov's purchase up to $5 million. On November 30, 1999, Sofinov exercised its conversion right as described in Note 10. During the fiscal year ended May 31, 1999, the Company received loans from certain other stockholders to fund its operations at an interest rate of 8%. These notes are payable on demand and were repayed during the fiscal year ended May 31, 2000. The Company had an arrangement with NBG Technologies, Inc. (formerly known as TechMatics Inc.) whereby NBG provided the Company with R&D consulting services. The Rothstein family is a principal stockholder of NBG and also a principal stockholder of the Company. A member of the Rothstein family serves as a director of the Company and is responsible for various aspects of F-14 <PAGE> H POWER CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. RELATED PARTY TRANSACTIONS (CONTINUED) the Company's business and strategic issues. Fees and expenses paid to NBG for consulting services for the fiscal years ended May 31, 1998, 1999 and 2000 amounted to $49,054, $63,110 and $45,065 respectively. The Company believes the fees paid were equivalent to those that would be paid under an arms-length transaction. On March 29, 2000 the Company terminated all agreements with NBG in exchange for a cash payment of $100,000 and options to purchase 250,000 shares of the Company's common stock at an exercise price equal to the initial public offering price. On April 5, 2000, two of the Company's directors resigned from the board of directors and terminated their agreements with the Company in exchange for which they each received a cash payment of $1 million and options to purchase 300,000 shares of the Company's common stock at an exercise price equal to the Company's initial public offering price. The fair value of each stock option granted to the resigning Company directors and NBG were $5.32 and $6.29, respectively based upon the Black-Scholes option pricing model which includes weighted average assumptions for the dividend yield, risk-free interest rate, volatility and expected lives of 0%, 6.3%, 52% to 58% and 3 to 5 years, respectively. The total expense related to these option grants of $4,764,510 has been included in the results of operations for the year ended May 31, 2000. For the fiscal year ended May 31, 2000, the Company recognized $252,000 and $55,556 in revenues for sales of fuel cell products and initial distribution rights fees, respectively, under the ECO operating agreement described in Note 10. F-15 <PAGE> H POWER CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. EMPLOYEE STOCK OPTION PLANS In March 2000, the Company amended and restated their May 1996 stock option plan. Under the stock option plan adopted in March 2000, a maximum of 3,750,000 shares of the Company's common stock have been made available for the granting of options and stock appreciation rights to officers and other key employees of the Company at prices not less than 100% of fair market value of a share of common stock on the date of grant. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of our outstanding capital stock, the exercise price of any stock option granted must equal 110% of the fair market value on the grant date. 10% of such options granted will generally become exercisable upon date of grant and the remaining 90% of such options will generally vest ratably over a five year period. The stock option will generally expire within seven years from the date of grant. At May 31, 2000 we have granted 359,751 options to purchase common stock under our 2000 plan. Under the stock option plan adopted on June 6, 1989, a maximum of 2,500,000 shares of the Company's common stock were made available for the granting of options and stock appreciation rights to officers and other key employees of the Company at prices not less than 80% of fair market value of a share of common stock on the date of grant. Such options generally become exercisable upon date of grant and expire within five years from the date of grant. No further options may be granted under this plan. The Company has granted options to purchase shares of the Company's common stock to certain officers and key employees outside of the 1989 and 2000 Stock Option Plans. Such options generally become exercisable on the date of grant and expire within five years from the date of grant. These options were generally granted at the fair market value of the stock on the date of grant. The Company has adopted the disclosure only provisions of SFAS No. 123 and, accordingly, applies Accounting Principles Board Opinion ("APB") No. 25 and related interpretations in accounting for its employee stock option plans. Had the Company elected to recognize compensation expense in accordance with the provisions of SFAS No. 123, for the stock option awards granted, its net loss and loss per basic and diluted share attributable to common stockholders for the fiscal years ended 1998, 1999 and 2000 would have been $(6,232,540), $(7,975,157) and $(19,922,223) or $(0.22), $(0.28) and $(0.57) per share, respectively. On May 31, 1999, 488,750 employee stock options lapsed. The Company extended the life of 481,250 of the options, until May 31, 2002 at the same option price of $0.80. The options were vested upon extension. Under APB No. 25, the extension created an additional compensation charge for the difference between the option price and the fair market value of the shares at May 31, 1999 in the amount of $836,125 of which $711,125, $107,000 and $18,000 has been recorded in selling, general and administrative, research and development and cost of revenue--contracts, respectively. The fair value of the Company's stock options used to compute the pro forma net loss and loss per share disclosures is the estimated present value on grant date using the Black-Scholes option pricing model with the following weighted average assumptions: <TABLE> <CAPTION> YEARS ENDED MAY 31, ------------------------------ 1998 1999 2000 -------- -------- -------- <S> <C> <C> <C> Dividend yield...................................... 0% 0% 0% Risk-free interest rate............................. 5.92% 5.27% 6.10% Volatility.......................................... 0% 0% 0% Expected life (years)............................... 5 1.5 4 </TABLE> F-16 <PAGE> H POWER CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. EMPLOYEE STOCK OPTION PLANS (CONTINUED) Changes in stock options are as follows: <TABLE> <CAPTION> 1998 1999 2000 -------------------- -------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- -------- --------- -------- --------- -------- <S> <C> <C> <C> <C> <C> <C> Beginning balance................................ 1,838,750 $1.96 1,988,750 $2.08 1,981,250 $2.09 Granted or reissued.............................. 250,000 2.50 481,250 0.80 3,590,375 6.38 Exercised........................................ (12,500) 0.80 -- -- (75,000) 0.80 Canceled or expired.............................. (87,500) 0.80 (488,750) 0.80 (5,000) 0.80 --------- ----- --------- ----- --------- ----- Ending balance................................. 1,988,750 $2.08 1,981,250 $2.09 5,491,625 $4.91 ========= ===== ========= ===== ========= ===== Exercisable...................................... 744,375 $1.94 1,731,250 $2.03 3,742,194 $4.73 Fair value of options granted during the year.... $ .77 $1.76 $2.19 </TABLE> Summarized information about stock options outstanding and exercisable at May 31, 2000 is as follows: <TABLE> <CAPTION> OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------- --------------------- WEIGHTED- AVG. WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICE OF SHARES LIFE IN YEARS PRICE OF SHARES PRICE --------------------- --------- ------------- -------- --------- -------- <S> <C> <C> <C> <C> <C> $ .80 401,250 2.0 $ .80 401,250 $ .80 2.50 1,540,000 1.9 2.50 1,290,000 2.50 3.00 2,200,000 4.3 3.00 1,162,500 3.00 12.00 1,350,375 9.5 12.00 888,444 12.00 -------------- --------- --- ----- --------- ----- $.80 to $12.00 5,491,625 8.0 $4.91 3,742,194 $4.73 ============== ========= === ===== ========= ===== </TABLE> 10. COMMON STOCK The Company's common stockholders are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. The Company's common stockholders have no preemptive rights or rights to convert their common stock into any other security. On August 25, 1999, ECO Fuel Cells, LLC ("ECO") purchased 5,000,000 shares of the Company's common stock, $.001 par value, at a price of $3.00 per share for a total investment of $15,000,000. In addition to the stock purchase, the Company and ECO entered into a ten year operating agreement, as amended, pursuant to which ECO paid to the Company an initial distribution rights fee of $2,500,000 and agreed to purchase, market and service the Company's stationary power fuel cell systems in exchange for the exclusive marketing, distribution and servicing rights to those areas in the United States that are being serviced by ECO's affiliated rural electric cooperative members (the "Agreement"). Revenue will be recognized on the initial distribution rights fee on a straight-line basis over the contractual period. In order to enter into the Agreement, the Company modified its pre-existing agreement with DQE Enterprises to allow ECO to have exclusive marketing, distribution and servicing rights under the Agreement in certain geographic areas that had previously been granted to DQE Enterprises. As part of the consideration for modifying the DQE Enterprises agreement, the Company agreed to amend F-17 <PAGE> H POWER CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. COMMON STOCK (CONTINUED) article IV B3(a)(i) of the Amended and Restated Certificate of Incorporation to change the redemption price of the Company's Series A convertible preferred stock from $16.50 per share to $18.00 per share, thus increasing the liquidation value of the Series A convertible preferred stock by $300,000. Also as part of the consideration, the Company issued common stock purchase warrants, which expire on July 31, 2001, to purchase 500,000 shares of its common stock at $5.00 per share to DQE Enterprises. The Company recorded a charge to cost of revenues--products totaling $150,000 which represents the fair value of the warrants on August 25, 1999, their date of issuance. On November 30, 1999, pursuant to its May 25, 1999 agreement with the Company as described in Note 8, Sofinov exercised its conversion right and converted its outstanding advances at that date of $2,100,000 into 840,000 shares of our common stock. Furthermore, Sofinov exercised its purchase right in full and purchased an additional 1,160,000 shares of our common stock for $2,900,000. On November 30, 1999, Hydro-Quebec CapiTech Inc. purchased 2,000,000 shares of the Company's common stock, $.001 par value, at a price of $3.00 per share for a total investment of $6,000,000. In conjunction with ECO, Sofinov, and Hydro-Quebec CapiTech Inc.'s purchases of the Company's common stock, the Company incurred stock issue costs approximating $913,000. $685,000 of the stock issue costs are payable to a consultant to the Company for services rendered in connection with the foregoing transactions. 11. REDEEMABLE PREFERRED STOCKS The Company's Series A, Series B and Series C convertible preferred stock are classified as mandatorily redeemable as (i) the holders of the Series A, Series B and Series C convertible preferred stock are entitled to be paid the original issue price for such class of preferred stock plus all accumulated or declared and unpaid dividends if the Company enters into any transaction in which the stockholders of the Company immediately prior to the transaction own less than 50% of the voting power immediately after the transaction and (ii) preventing the completion of such a change in control transaction as described in (i) is considered to be outside the control of the Company. On May 22, 1996, the Company issued 80,000 shares of Series B convertible preferred stock, $.001 par value, at $12.50 per share, or $1,000,000 in total, to Singapore Technologies Kinetics Ltd. ("STK"). One share of the Series B convertible preferred stock may be converted into five shares of the Company's common stock. The Series B shares are entitled to dividends or distributions in an amount equal per share (on an as-if converted to common stock basis) to the amount paid, distributed or set aside for five shares of common stock. Upon any liquidation, the holder of the Series B convertible preferred stock is entitled to be paid out an amount equal to the original issue price plus all accumulated or declared and unpaid dividends. The Company has the option to redeem the Series B convertible preferred stock, unless it is converted, any time after May 22, 1998, or the closing of an initial public offering, at the purchase price plus 10%. On July 30, 1996, the remaining 320,000 authorized shares of Series B convertible preferred stock were issued at $12.50 per share to STK. In connection with the preferred stock issuance, proceeds of $770,105 were used to repay $550,000 of long-term debt for acquired technology and $220,105 of short-term debt to STA. On July 30, 1996, the Company issued 200,000 shares of Series A convertible preferred stock, $.001 par value, at $15.00 per share, to DQE Enterprises. One share of Series A convertible preferred stock F-18 <PAGE> H POWER CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. REDEEMABLE PREFERRED STOCKS (CONTINUED) may be converted into five shares of the Company's common stock. The holders of the Series A convertible preferred stock are entitled to receive cumulative dividends in the form of shares of common stock at the rate of 7% per annum. In connection with the issuance, proceeds of $300,000 were used to repay short-term debt to DQE Enterprises. Upon any liquidation, the holder of the Series A convertible preferred stock is entitled to be paid an amount equal to the original issuance price plus all accumulated or declared and unpaid dividends. The Company has the option to redeem the Series A convertible preferred stock, unless it is converted, at any time after July 30, 1998, or the closing of an initial public offering, at $18.00 per share and all accrued but unpaid dividends. On May 2, 1997, the Company issued 500,000 shares of Series C convertible preferred stock, $.001 par value at $15.00 per share or $7,500,000 in total, to Sofinov. One share of the Series C convertible preferred stock may be converted into five shares of the Company's common stock. The Series C convertible preferred shares are entitled to dividends or distributions in an amount equal per share (on an as-if converted to common stock basis) to the amount paid, distributed or set aside for five shares of common stock. Upon any liquidation, the holder of the Series C convertible preferred stock is entitled to be paid an amount equal to the original issuance price plus all accumulated or declared and unpaid dividends. The Company has the option to redeem the Series C convertible preferred stock, unless it is converted, any time after May 2, 1999, or the closing of an initial public offering, at a price of $15.00 per share. The holders of Series A and B convertible preferred stock each had the right to exercise warrants to purchase up to 1,000,000 shares of common stock at $5.00 per share during the period January 1, 1997 through December 31, 1997. All of the warrants lapsed on December 31, 1997. In the agreement, if DQE Enterprises failed to exercise their warrants, the Company was required to issue an additional 100,000 shares of Series C preferred stock to Sofinov for no consideration. On December 31, 1997, the DQE Enterprises warrants lapsed unexercised and the additional 100,000 shares were issued to Sofinov, thus reducing the redemption price of Series C convertible preferred stock to $12.50 per share. At May 31, 2000, $805,000 of retained earnings was restricted due to undeclared and unpaid cumulative dividends on Series A preferred stock. The redemption value of Series A, B and C convertible preferred stock at May 31, 2000 was $4,105,000, $5,500,000 and $7,500,000, respectively. 12. EARNINGS PER SHARE Basic earnings per share (EPS) is computed by dividing income available to common stockholders by the weighted average number of common shares actually outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. F-19 <PAGE> H POWER CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. EARNINGS PER SHARE (CONTINUED) The following table illustrates the calculation of both basic and diluted EPS: <TABLE> <CAPTION> YEAR ENDED MAY 31, ---------------------------------------- 1998 1999 2000 ----------- ----------- ------------ <S> <C> <C> <C> BASIC AND DILUTED EARNINGS PER SHARE Net loss.................................................. $(5,717,815) $(6,765,760) $(17,012,406) Accrued dividends on Series A Convertible Preferred Stock................................................... (210,000) (210,000) (210,000) ----------- ----------- ------------ Net loss attributable to common stockholders.............. (5,927,815) (6,975,760) (17,222,406) Weighted average number of common shares.................. 29,011,040 29,015,195 34,879,061 ----------- ----------- ------------ Basic and diluted earnings per share...................... $ (0.20) $ (0.24) $ (0.49) =========== =========== ============ </TABLE> If potential common shares were assumed converted, the effect would have been antidilutive to EPS for all periods. These antidilutive securities are summarized below. <TABLE> <CAPTION> YEAR ENDED MAY 31, ------------------------------------ 1998 1999 2000 ---------- ---------- ---------- <S> <C> <C> <C> Number of potential common shares........................... 9,832,840 9,993,915 11,410,332 </TABLE> 13. INFORMATION ABOUT GEOGRAPHIC AREAS The Company operates primarily in one industry segment, that being the development of technologies, systems and products utilizing hydrogen as an alternative source of energy. The geographic distributions of the Company's revenues and identifiable assets are summarized in the following table: <TABLE> <CAPTION> YEAR ENDED MAY 31, ------------------------------------- 1998 1999 2000 ---------- ---------- ----------- <S> <C> <C> <C> Revenues from unrelated entities United States......................... $ 717,799 $1,007,216 $ 3,332,908 Canada................................ -- 10,816 10,702 Europe................................ -- -- 19,240 Asia.................................. -- -- 9,881 ---------- ---------- ----------- $ 717,799 $1,018,032 $ 3,372,731 Assets United States......................... $2,534,652 $2,074,111 $17,360,541 Canada................................ 4,901,211 4,425,330 2,273,026 ---------- ---------- ----------- Total identifiable assets............. 7,435,863 6,499,441 19,633,567 Corporate eliminations................ -- (3,027,550) (983,974) ---------- ---------- ----------- Total assets.......................... $7,435,863 $3,471,891 $18,649,593 ========== ========== =========== </TABLE> F-20 <PAGE> [GRAPHICS OMITTED] <PAGE> 7,000,000 SHARES [LOGO] H POWER CORP. COMMON STOCK ---------------- P R O S P E C T U S , 2000 ------------------------ LEHMAN BROTHERS CIBC WORLD MARKETS DEUTSCHE BANC ALEX. BROWN JOSEPHTHAL & CO. INC. FIDELITY CAPITAL MARKETS A DIVISION OF NATIONAL FINANCIAL SERVICES CORPORATION <PAGE> PART II ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by H Power in connection with the sale of the common stock being registered hereby. All the amounts shown are estimated, except the Securities and Exchange Commission ("SEC") registration fee, the National Association of Securities Dealers, Inc., ("NASD") filing fee and the Nasdaq National Market listing fee. <TABLE> <S> <C> SEC Registration Fee........................................ $ 33,000 NASD Filing Fee............................................. 10,500 Nasdaq National Market Listing Fee.......................... 95,000 Printing Expenses........................................... 300,000 Legal Fees and Expenses..................................... 650,000 Accounting Fees and Expenses................................ 750,000 Blue Sky Expenses and Counsel Fees.......................... 10,000 Transfer Agent and Registrar Fees........................... 3,000 Miscellaneous............................................... 55,500 ---------- Total................................................... $1,907,000 ========== </TABLE> ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145(a) of the General Corporation Law of the State of Delaware ("DGCL") provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), by reason of the fact that the person is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if he acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no cause to believe his conduct was unlawful. Section 145(b) of the DGCL provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person acted in any of the capacities set forth above, against expenses (including attorneys' fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted under similar standards, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the court in which such action or suit was brought shall determine that despite the adjudication of liability, such person is fairly and reasonably entitled to be indemnified for such expenses which the court shall deem proper. Section 145 of the DGCL further provides that to the extent a director or officer of a corporation has been successful in the defense of any action, suit or proceeding referred to in subsections (a) and (b) or in the defense of any claim, issue or matter therein, such person shall be indemnified against expenses actually and reasonably incurred by such person in connection therewith; that indemnification provided for by Section 145 shall not be deemed exclusive of any other rights to which the indemnified party may be entitled; and that the corporation may purchase and maintain insurance on behalf of any II-1 <PAGE> person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise, against any liability asserted against such person and incurred by such person in any such capacity or arising out of such person's status as such whether or not the corporation would have the power to indemnify such person against such liabilities under such Section 145. Section 102(b)(7) of the DGCL provides that a certificate of incorporation may contain a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director provided that such provision shall not eliminate or limit the liability of a director: (i) for any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under Section 174 of the DGCL; or (iv) for any transaction from which the director derived an improper personal benefit. Our Amended and Restated Certificate of Incorporation provides that we may indemnify all persons who we are entitled to indemnify under the DGCL to the fullest extent permitted thereunder. Furthermore, our Amended and Restated Certificate of Incorporation provides that, to the extent permitted under Section 102(b)(7) of the DGCL, none of our directors will be personally liable to H Power or its stockholders for monetary damages for breach of fiduciary duty as a director. We have entered or will enter into indemnification agreements with each of our directors and executive officers, which will indemnify these persons to the fullest extent permitted under the DGCL. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since May 22, 1996, we have sold unregistered securities in the amounts, at the times, and for the aggregate amounts of consideration listed below. No underwriters were engaged in connection with any of the following sales of securities. Each sale of common stock and preferred stock was made in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act of 1933, as amended, (the "Act"), and Rule 506 of Regulation D promulgated thereunder for transactions not involving a public offering, and all purchasers were accredited investors as such term is defined in Rule 501(a) of Regulation D. Furthermore, from inception to June 15, 2000 we have issued 6,645,240 options to purchase shares of our common stock to our employees, directors and consultants. These issuances of options were made pursuant to Rule 701 promulgated under the Act. On May 22, 1996, we issued 80,000 shares of Series B mandatorily redeemable convertible preferred stock, $.001 par value, at $12.50 per share, or $1,000,000 in total, to Singapore Technologies Kinetics, Ltd. in satisfaction of the initial closing of a stock purchase agreement relating to the purchase of a total of 400,000 shares of Series B preferred stock by Singapore Technologies Kinetics. The Series B mandatorily redeemable convertible preferred stock will automatically convert to 2,000,000 shares of common stock immediately prior to the consummation of this offering. On July 30, 1996, we issued 200,000 shares of our Series A preferred stock, $.001 par value, at $15.00 per share, or $3,000,000 in total, to DQE Enterprises. DQE Enterprises has agreed to convert all of its Series A preferred stock to 1,000,000 shares of our common stock immediately prior to this offering. In addition, we will issue approximately 234,375 shares of common stock to DQE Enterprises immediately prior to the consummation of this offering in payment of dividends to which they are entitled. Until October 15, 1996, our noteholders had the option to convert some or all of their debt, including accrued interest, into our common stock. As of October 15, 1996, $249,844 of debt had been converted into 104,075 shares of common stock. The remaining noteholders elected an interest payment on October 15, 1996 and full principal payment on October 15, 1997. II-2 <PAGE> On May 2, 1997, we issued 500,000 shares of Series C preferred stock, $.001 par value, at $15.00 per share, or $7,500,000 in total, to Sofinov. Sofinov has agreed to convert these shares of Series C preferred stock into 2,500,000 shares of our common stock immediately prior to this offering. The holders of Series A and Series B preferred stock each had the right to exercise warrants to purchase up to 1,000,000 shares of common stock at $5.00 per share during the period January 1, 1997 through December 31, 1997. All of the warrants lapsed on December 31, 1997. The terms of Sofinov's warrant agreement provided that if DQE Enterprises failed to exercise their warrants, we were required to issue an additional 100,000 shares of Series C preferred stock to Sofinov for no consideration. On December 31, 1997, the DQE Enterprises warrants lapsed unexercised and the additional 100,000 shares were issued to Sofinov, thus reducing the redemption price of the Series C preferred stock to $12.50 per share. Sofinov has agreed to convert these shares into 500,000 shares of our common stock immediately prior to the consummation of the offering. On August 25, 1999, ECO Fuel Cells, LLC purchased 5,000,000 shares of our common stock, $.001 par value, at a price of $3.00 per share for a total investment of $15,000,000. In order to enter into the agreement, we modified our agreement with DQE Enterprises to allow ECO to have exclusive marketing, distribution and servicing rights under the agreement in certain geographic areas that had previously been granted to DQE Enterprises. As part of the consideration for modifying the DQE Enterprises agreement, on July 28, 1999 we issued warrants to purchase 500,000 shares of our common stock at $5.00 per share to DQE Enterprises. These warrants expire on July 31, 2001. On November 29, 1999, we issued 2,000,000 shares of our common stock, $.001 par value, to Hydro-Quebec CapiTech Inc. at a price of $3.00 per share, or $6,000,000 in total, pursuant to a letter of intent dated September 7, 1999. On November 29, 1999, we issued a total of 2,000,000 shares of our common stock, $.001 par value, to Sofinov at a price of $2.50 per share, or $5,000,000 in total, pursuant to a letter agreement dated May 24, 1999. Under this agreement, Sofinov agreed to lend us up to $5 million in increments of at least $150,000, payable on demand. Sofinov had the right to convert the outstanding balance of these advances into shares of our common stock at a conversion price of $2.50 per share. In addition, if the outstanding balance of the advances at the time of conversion was less than $5 million, Sofinov had the right to purchase additional shares of our common stock at $2.50 per share to bring its total purchase up to $5 million. On November 30, 1999, the date Sofinov exercised its conversion right, the outstanding balance of the advances was $2.1 million which was converted into 840,000 shares of our common stock. Furthermore, Sofinov exercised its purchase right in full and purchased an additional 1,160,000 shares of our common stock. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibit Index <TABLE> <CAPTION> NO. DESCRIPTION --------------------- ----------- <C> <S> 1.1 Underwriting Agreement.** 3.1 Amended and Restated Certificate of Incorporation.** 3.2 Restated Certificate of Incorporation.** 3.3 By-Laws.** 3.4 Amended and Restated By-Laws.** 4.1 Registration Rights Agreement, dated March 25, 1996, between H Power Corp. and Duquesne Enterprises.** </TABLE> II-3 <PAGE> <TABLE> <CAPTION> NO. DESCRIPTION --------------------- ----------- <C> <S> 4.2 Investor Rights Agreement, entered into as of May 22, 1996, by and between H Power Corp. and Singapore Technologies Automotive Ltd.** 4.3 Investor Rights Agreement, entered into as of May 2, 1997, by and between H Power Corp. and Sofinov Societe Financiere D'Innovation Inc., Societe Innovatech Du Grand Montreal and 9042-0175 Quebec Inc.** 4.4 Letter agreement, dated as of May 2, 1997, between certain common stockholders of H Power Corp. and Sofinov Societe Financiere D'Innovation Inc., Societe Innovatech Du Grand Montreal and 9042-0175 Quebec Inc.** 4.5 Stockholders' and Voting Agreement, dated as of April 5, 2000, by and among H Power Corp. and certain common stockholders.** 4.6 Specimen Common Stock Certificate.** 5.1 Opinion of Fulbright & Jaworski L.L.P.** 10.1 H Power Corp 1989 Stock Option Plan.** 10.2 H Power Corp. 2000 Stock Option Plan.** 10.3 Amended and Restated Officer's Employment Agreement, dated as of October 1, 1999, between H Power Corp. and H. Frank Gibbard.** 10.4 Executive's Employment Agreement, dated as of October 11, 1999, between H Power Corp. and Arthur Kaufman.** 10.5 Officer's Employment Agreement, dated as of November 1, 1999, between H Power Corp. and Thomas H. Michael.** 10.6 Officer's Employment Agreement, dated as of November 23, 1999, between H Power Corp. and William L. Zang.** 10.7 Consulting Agreement made and entered into as of July 28, 1999, between H Power Corp. and Frederick Entman.** 10.8 Consulting Agreement made and entered into as of July 28, 1999, between H Power Corp. and Norman Rothstein.** 10.9 Termination Agreement, dated as of April 5, 2000, by and between H Power Corp. and Norman Rothstein.** 10.10 Termination Agreement, dated as of April 5, 2000, by and between H Power Corp. and Frederick Entman.** 10.11 Consulting Agreement, dated as of March 15, 2000, between H Power Corp. and Millennium Capital Resources, LLC.** 10.12 Letter Agreement, dated March 10, 2000, between H Power Corp. and R. Michael Fromer.** 10.13 Stock Purchase Agreement made and entered into as of August 25, 1999, between H Power Corp. and ECO Fuel Cells, LLC.** 10.14 Stock Purchase Agreement made and entered into as of November 29, 1999, between H Power Corp. and Hydro-Quebec CapiTech Inc.** 10.15 Stock Purchase Agreement made and entered into as of November 29, 1999, between H Power Corp. and Sofinov Societe Financiere D'Innovation Inc.** 10.16 Letter Agreement, dated May 24, 1999, between H Power Corp. and Sofinov Societe Financiere D'Innovation Inc.** 10.17 Agreement, dated July 28, 1999, between H Power Corp. and Duquesne Enterprises, Inc.** 10.18 Subscription Agreement, made and entered into on May 2, 1997, by and between H Power Corp. and 3362469 Canada Inc.** </TABLE> II-4 <PAGE> <TABLE> <CAPTION> NO. DESCRIPTION --------------------- ----------- <C> <S> 10.19 Shareholders Agreement made and entered into on May 2, 1997, by and among H Power Corp., Sofinov Societe Financiere D'Innovation Inc., Societe Innovatech Du Grand Montreal, 9042-0175 Quebec Inc. and 3362469 Canada Inc.** 10.20 Stock Exchange Agreement made and entered into on May 2, 1997, by and among H Power Corp. and Sofinov Societe Financiere D'Innovation Inc., Societe Innovatech Du Grand Montreal and 9042-0175 Quebec Inc.** 10.21 Amended and Restated Stockholders Agreement made and entered into as of May 2, 1997, by and among H Power Corp., certain common stockholders of H Power Corp., Duquesne Enterprises, Singapore Technologies Automotive Ltd., Sofinov Societe Financiere D'Innovation Inc., Societe Innovatech Du Grand Montreal and 9042-0175 Quebec Inc.** 10.22 Joint Venture Agreement, dated as of December 18, 1998, between H Power Corp. and Arthur D. Little, Inc.** 10.23 Memorandum of Agreement, dated February 9, 2000, between H Power Corp., Societe Innovatech Du Grand Montreal, Sofinov Societe Financiere D'Innovation Inc. and 9042-0175 Quebec Inc.** 10.24 Agreement, dated February 15, 1995, between H Power Corp. and TechMatics Inc.** 10.25 Termination Agreement, dated as of March 29, 2000, between H Power Corp. and NBG Technologies, Inc. (formerly TechMatics Inc.).** 10.26 Letter Agreement, dated March 25, 1996, between H Power Corp. and Duquesne Enterprises.** 10.27 Amended and Restated Fuel Cell Operating Agreement, dated March 9, 2000, between H Power Corp., H Power Enterprises of Canada, Inc., and ECO Fuel Cells LLC.+** 10.28 Agreement dated August 20, 1999, between H Power Corp. and H Power Enterprises of Canada Inc.** 10.29 Technology Licensing Agreement made and entered into on May 2, 1997, by and between H Power Corp. and 3362469 Canada Inc.** 10.30 First Amendment to Technology Licensing Agreement, entered into as of August 20, 1999, between H Power Corp. and H Power Enterprises of Canada Inc.** 10.31 Development and License Agreement, dated as of August 17, 1998, by and between H Power Enterprises of Canada Inc. and Harvest Energy Technology Inc.+** 10.32 Letter Agreement, dated November 18, 1999, between H Power Corp. and AvantCell Technologies Inc.** 10.33 Amending Agreement, dated January 11, 2000 between H Power Corp. and AvantCell Technologies Inc.** 10.34 Form of Employee's Agreement Re: Inventions, Confidential Information and Covenant not to Compete.** 10.35 Form of Indemnification Agreement.** 10.36 Lease, dated August 8, 1991, between Montbell Associates, L.L.C. and H Power Corp. ("Lease I").** 10.37 Lease, dated August 8, 1991, between Montbell Associates, L.L.C. and H Power Corp. ("Lease II").** 10.38 Addendum, dated April 4, 1996, to Leases dated August 8, 1991, between Montbell Associates, L.L.C. and H Power Corp.** 10.39 Addendum, dated March 29, 1999, to Leases dated August 8, 1991, as Modified by Subsequent Addendum dated April 4, 1996 between Montbell Associates, L.L.C. and H Power Corp.** </TABLE> II-5 <PAGE> <TABLE> <CAPTION> NO. DESCRIPTION --------------------- ----------- <C> <S> 10.40 Agreement of Lease, dated September 17, 1997, between SITQ Inc. and H Power Enterprises of Canada Inc.** 10.41 Lease, dated December 8, 1999, between Khubani Enterprises, Inc. and H Power Corp.** 10.42 Letter Agreement, dated March 29, 2000, between NBG Technologies, Inc. and H Power Corp.** 10.43 Transfer of Technology Agreement, dated May 16, 1995, between Aerojet-General Corporation and H Power Corp.** 10.44 Letter Agreement, dated May 16, 2000, between ECO Fuel Cells LLC and H Power Corp.** 10.45 Contract between H Power Corp. and the Naval Surface Warfare Center.** 10.46 Participation Agreement, dated August 5, 1997, by and between H Power Corp. and Sacramento Municipal Utility District ("SMUD I").** 10.47 Contract Change No. 1 to SMUD I.** 10.48 Contract Change No. 2 to SMUD I.** 10.49 Contract Change No. 3 to SMUD I.** 10.50 Contract Change No. 4 to SMUD I.** 10.51 Agreement between H Power Corp. and USA CECOM Acquisition Center--Washington, dated December 23, 1997 (the "CECOM Contract").** 10.52 Modification 01 to the CECOM Contract for Fuel Cell/Battery Hybrid.** 10.53 Modification 02 to the CECOM Contract for Fuel Cell/Battery Hybrid.** 10.54 Modification 03 to the CECOM Contract for Fuel Cell/Battery Hybrid.** 10.55 Modification 04 to the CECOM Contract for Fuel Cell/Battery Hybrid.** 10.56 Modification 05 to the CECOM Contract for Fuel Cell/Battery Hybrid.** 21.1 List of subsidiaries of H Power Corp.** 23.1 Consent of Fulbright & Jaworski L.L.P. (included in Exhibit 5.1).** 23.2 Consent of PricewaterhouseCoopers LLP. 24.1 Power of attorney (on signature page).** 27.1 Financial Data Schedule, fiscal year ended May 31, 1999.** 27.2 Financial Data Schedule, period ended November 30, 1999.** 27.3 Financial Data Schedule, period ended February 29, 2000.** 27.4 Financial Data Schedule, fiscal year ended May 31, 2000.** </TABLE> ------------------------ ** Previously filed. + A request for confidential treatment was filed for portions of this document. Confidential portions have been omitted and filed separately with the Commission as required by Rule 406. (b) Financial Statement Schedules. The following financial statement schedules are filed herewith: All other schedules are omitted because they are not required or are not applicable or the information is included in the financial statements or notes thereto. II-6 <PAGE> ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers, and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, as amended, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-7 <PAGE> SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Amendment No. 6 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on August 8, 2000. <TABLE> <S> <C> <C> H POWER CORP. By: /s/ H. FRANK GIBBARD ----------------------------------------- H. Frank Gibbard CHIEF EXECUTIVE OFFICER AND DIRECTOR </TABLE> Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 6 to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. <TABLE> <CAPTION> SIGNATURE TITLE DATE --------- ----- ---- <C> <S> <C> /s/ H. FRANK GIBBARD Chief Executive Officer, ------------------------------------------- Director (principal August 8, 2000 H. Frank Gibbard executive officer) Chief Financial Officer, /s/ WILLIAM L. ZANG Director (principal ------------------------------------------- financial and accounting August 8, 2000 William L. Zang officer) * Director ------------------------------------------- August 8, 2000 Fong Saik Hay * Director ------------------------------------------- August 8, 2000 Rachel K. Lorey * Director ------------------------------------------- August 8, 2000 John McSweeney * Director ------------------------------------------- August 8, 2000 Ivan Roch * Director ------------------------------------------- August 8, 2000 Gary K. Willis * Director ------------------------------------------- August 8, 2000 Howard L. Clark, Jr. * Director ------------------------------------------- August 8, 2000 Leonard A. Hadley </TABLE> <TABLE> <S> <C> <C> <C> *By: /s/ WILLIAM L. ZANG -------------------------------------- William L. Zang Attorney-in-fact </TABLE> II-8 <PAGE> EXHIBIT INDEX <TABLE> <C> <S> 23.2 Consent of PricewaterhouseCoopers LLP </TABLE> </TEXT> </DOCUMENT>
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+PROSPECTUS SUMMARY This summary highlights information contained in other parts of this prospectus. Because it is a summary, it does not contain all of the information that you should consider before investing in the shares. You should read the entire prospectus carefully. THE COMPANY We are a biotechnology company developing and marketing innovative products to guide and improve treatment of viral diseases. We have developed a practical way of directly measuring the impact of genetic mutations on drug resistance and using this information to guide therapy. We have a proprietary technology, called PhenoSense, for testing drug resistance in viruses that cause serious diseases such as AIDS, hepatitis B and hepatitis C. We believe our products have the potential to revolutionize the way physicians treat these diseases. Our first product, PhenoSense HIV, is a test that directly and quantitatively measures resistance of a patient's HIV to anti-viral drugs. The results help physicians select appropriate drugs for their HIV patients. When a physician requests a PhenoSense HIV test for a patient, a clinical laboratory or a hospital draws a blood sample from the patient and then sends this sample to us. We receive the sample and perform the test ourselves in our clinical laboratory which contains all the equipment necessary to perform the test. We then send a report detailing the results to the physician and invoice and receive payment from the clinical laboratory or hospital that sent the blood sample to us. The clinical laboratory or hospital is responsible for billing the patient or the patient's insurance company, as appropriate. We began actively marketing PhenoSense HIV to physicians in November 1999. We are also developing PhenoSense products for other viral diseases. Additionally, we are developing an interactive database built from the results of our PhenoSense tests and other clinical data, which we call the Therapy Guidance System. We intend to make the Therapy Guidance System available to physicians via the Internet as a tool to guide patient therapy. VIRAL DRUG RESISTANCE Physicians treat viruses like HIV with drugs that inhibit the virus' reproduction and therefore slow the progression of disease. However, during reproduction, viruses often change slightly, or mutate. As a result, anti-viral drugs are typically effective for only a limited time because viruses develop resistance through mutation. To address this problem, physicians must use anti-viral drugs in combination, to simultaneously attack different targets within a virus and slow the development of drug resistance. However, even the most potent drug combinations eventually fail in the majority of patients. A physician who is able to select drugs that maximally suppress viral reproduction and to avoid drugs to which a patient's virus is resistant is better positioned to achieve long term clinical benefit for the patient. As a result, physicians critically need products that can directly measure viral drug resistance. Drug resistance in HIV is a serious crisis despite the availability of 14 approved drugs. HIV infection cannot be cured with these drugs, requiring lifelong treatment with complex drug combinations. When these combinations fail, which can occur multiple times per year for many patients, physicians must make difficult treatment decisions to select effective alternative drugs. A panel led by the Department of Health and Human Services has recently issued guidelines that recommend routine use of resistance tests for HIV patients. OUR SOLUTION PhenoSense is our proprietary phenotypic drug resistance testing technology. Phenotypic drug resistance tests directly measure the susceptibility of a patient's virus to anti-viral drugs by adding a drug to a virus sample and determining whether the virus reproduces. We believe that we are revolutionizing phenotypic testing by avoiding the need to grow, or "culture," viruses during testing, thereby dramatically shortening the time required to perform the tests and improving the consistency and accuracy of the tests. Also, we can perform our tests in large numbers, making them practical for routine use in managing patient care. OUR PRODUCTS PhenoSense HIV. PhenoSense HIV is a patented phenotypic drug resistance test that directly measures the resistance of HIV to all approved HIV drugs. Phenotypic resistance tests measure resistance by adding each drug to a virus sample and determining whether the virus can reproduce in the presence of the drug. Phenotypic resistance tests differ from genotypic tests, which attempt to predict drug resistance by identifying certain mutations in a virus' genes that may be associated with drug resistance. HIV infects nearly one million people in the United States, of whom approximately 300,000 are currently receiving anti-viral therapy. Assuming resistance testing becomes widely accepted, we believe these treated patients would require a total of at least 500,000 tests per year. We are marketing the product to physicians in the United States through our own sales force, initially focusing on the 1,000 leading physicians who treat 80% of the total HIV/AIDS patient population. When developing new drugs, overcoming resistance to existing drugs is a critical objective. In November 1999, the FDA Antiviral Drugs Advisory Committee emphatically recommended that resistance tests should be utilized in the development of new anti-viral drugs for HIV. To date, we have signed testing agreements with the following pharmaceutical and biotechnology companies involved in AIDS drug development: Abbott Laboratories, Agouron, Bristol-Myers Squibb, Gilead Sciences, Glaxo Wellcome and Merck. In addition to increasing the use of PhenoSense HIV in clinical trials, we intend to form collaborations with pharmaceutical companies for the application of our viral resistance technology to the discovery and development of new anti-viral drugs. PhenoSense HBV. We are currently developing PhenoSense HBV for hepatitis B virus. HBV infects over one million people in the United States, and we estimate that approximately half of those infected would benefit from anti-viral drug therapy. Pharmaceutical companies are developing additional drugs for treatment of HBV infection, of which more than 15 drugs are in the preclinical or clinical stage of development. Just as with HIV, we believe our PhenoSense HBV drug resistance testing will play a significant role in guiding HBV treatment and in clinical trials for new HBV drugs. PhenoSense HCV. We have designed and intend to develop PhenoSense HCV, for hepatitis C virus. HCV infects approximately four million people in the United States, of whom we estimate that approximately 75% could benefit from anti-viral drug therapy. Pharmaceutical companies are developing additional drugs for treatment of HCV, many of which are in the preclinical or clinical stage of development. We expect PhenoSense HCV will be used to assist in the discovery and development of HCV drugs and, in the longer term, the assessment of drug resistance in HCV patients. Other Products. We are developing and marketing a number of additional products. We sell GeneSeq HIV, a genotypic test. We are also developing a test to measure viral fitness, a measure of a virus' ability to reproduce and infect new cells. Therapy Guidance System. We are building a proprietary database of test results and other patient information that we expect to combine with sophisticated data mining and outcome modeling software to build our Therapy Guidance System. Our Therapy Guidance System will be a computer tool designed to help physicians select optimal therapies for each patient. We expect to provide our Therapy Guidance System as a fee-based service over the Internet. GENERAL INFORMATION We were incorporated in Delaware in November 1995. Our principal executive offices are located at 270 East Grand Avenue, South San Francisco, CA 94080. Our telephone number is (650) 635-1100. Our website is located at "www.virologic.com." We do not intend the information on our website to be considered a part of or incorporated by reference into this prospectus. THE OFFERING Common stock offered...................... 5,000,000 shares Common stock to be outstanding after the offering.................................. 19,687,397 shares Use of proceeds........................... We intend to use the net proceeds from this offering for sales and marketing, capital expenditures including the expansion of our clinical laboratory capabilities, research and development, and general corporate purposes. Proposed Nasdaq National Market symbol.... VLGC The number of shares of common stock to be outstanding after the offering in the table above is based on the number of shares outstanding as of March 24, 2000. The number excludes: - 1,434,028 shares of common stock issuable upon exercise of options outstanding as of March 24, 2000, at a weighted average exercise price of $3.45 per share - 742,082 shares of common stock issuable upon exercise of warrants to purchase our common stock or preferred stock outstanding as of March 24, 2000, at a weighted average exercise price of $4.82 per share ViroLogic, the ViroLogic logo, PhenoSense, GeneSeq, Therapy Guidance System, TGS and Choosing the Path of Least Resistance are trademarks of ViroLogic. All other product names, trade names and trademarks included in this prospectus are the property of their respective owners. Unless otherwise stated, all information contained in this prospectus assumes: - no exercise of the over-allotment option granted to the underwriters - a one for two reverse stock split of our common stock, which was effected on April 17, 2000 - the conversion of all outstanding shares of our preferred stock into shares of common stock SUMMARY FINANCIAL INFORMATION (in thousands, except per share data) <TABLE> <CAPTION> PERIOD FROM INCEPTION (NOVEMBER 14, 1995) TO YEAR ENDED DECEMBER 31, DECEMBER 31, ---------------------------- 1996 1997 1998 1999 ------------- ------- ------- -------- <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue...................................... $ -- $ -- $ 102 $ 1,069 Operating costs and expenses: Cost of revenue............................ -- -- 17 627 Research and development................... 867 2,458 5,977 9,588 General and administrative................. 510 858 1,782 6,804 Sales and marketing........................ -- -- 484 1,196 ------- ------- ------- -------- Total costs and operating expenses........... 1,377 3,316 8,260 18,215 ------- ------- ------- -------- Operating loss............................... (1,377) (3,316) (8,158) (17,146) Interest income.............................. 116 262 302 249 Interest expense............................. (13) (83) (198) (243) ------- ------- ------- -------- Net loss..................................... (1,274) (3,137) (8,054) (17,140) Deemed dividend to preferred stockholders.... -- -- -- 3,100 ------- ------- ------- -------- Net loss allocable to common stockholders.... $(1,274) $(3,137) $(8,054) $(20,240) ======= ======= ======= ======== Basic and diluted net loss per common share...................................... $ (0.74) $ (1.21) $ (1.71) $ (4.24) ======= ======= ======= ======== Shares used in computing basic and diluted net loss per common share.................. 1,720 2,591 4,700 4,772 Pro forma basic and diluted net loss per common share............................... $ (2.53) ======== Shares used in computing pro forma basic and diluted net loss per common share.......... 8,015 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ---------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- ------------ -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents........................ $ 2,208 $17,862 $51,037 Restricted cash.................................. 950 950 950 Working capital.................................. 522 16,176 49,351 Total assets..................................... 9,777 25,431 58,606 Long term obligations, less current portion...... 1,051 1,051 1,051 Total stockholders' equity....................... 4,698 20,352 53,527 </TABLE> See notes to the financial statements for a description of the number of shares used in the computation of the basic and diluted net loss per common share and pro forma basic and diluted net loss per common share. The pro forma balance sheet data above reflects the January and February 2000 sale of our Series C preferred stock for proceeds of approximately $15.7 million. The pro forma as adjusted balance sheet data above gives effect to our sale of 5,000,000 shares to be sold in the initial public offering at an assumed offering price of $7.50 per share, less underwriters' discounts and offering expenses.
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+PROSPECTUS SUMMARY This summary may not contain all of the information that is important to you. You should read the entire prospectus, including "Risk Factors" and the financial statements and related notes, before deciding to invest in our common stock. CAMINUS CORPORATION We are a leading provider of software solutions and strategic consulting services to participants in energy markets throughout North America and Europe, including utilities, electrical power generating companies, energy marketers, electric power pools, gas producers, processors and pipelines. We offer a suite of software solutions and associated services to enable energy market participants to manage complex risk scenarios and effectively trade and manage energy transactions, addressing multiple types of risk and energy commodities, such as electric power, natural gas, crude oil and coal, across varied geographies. In addition, we provide strategic consulting services to many of the leading European energy market participants. The energy industry is currently one of the five largest vertical markets in the United States, with 1998 revenue of approximately $300 billion. As a result of global deregulation in the energy industry, vertically integrated suppliers are breaking up and energy trading is becoming more complex. New participants are entering the market, and trading volumes, price volatility and risk exposure are increasing significantly. In order to compete, energy market participants must find information technology solutions and services that are targeted to address the risks associated with buying, selling and trading multiple energy commodities in deregulating markets. Our Zai*Net suite of software products enables energy market participants to trade, process transactions and manage risk from the wholesale acquisition of energy through its sale and scheduling. Using our software solutions, energy market participants can analyze and manage risk among multiple energy commodities, traded via various energy trading instruments, across varied geographies. Our strategic consulting practice provides energy market participants with strategic advice on the deregulation and restructuring of the energy industry. We assist energy companies with global operations in choosing and implementing long-term strategies to remain competitive, including decisions relating to the appropriate use of energy assets and the most effective operating strategies in deregulating energy markets. We have significant expertise in economics, regulation and strategy, and have been at the forefront of changes in the United Kingdom energy sector, which has one of the most deregulated natural gas and electric power markets in the world. We currently have approximately 100 energy enterprise customers of our software solutions and strategic consulting services. Many of our customers are leaders in the energy industry, including American Electric Power, Consolidated Edison, Conoco, PG&E Energy Trading, Preussen Elektra and TXU Electric and Gas. THIS OFFERING Common stock offered by Caminus.......... 3,572,235 shares Common stock offered by the selling stockholders........................... 799,765 shares Common stock to be outstanding after this offering............................... 14,609,212 shares Use of proceeds.......................... - Repayment of borrowings under our credit facility - Payment of a consulting and advisory termination fee to GFI - Special bonus payments - Working capital - Other general corporate purposes, including possible acquisitions Proposed Nasdaq National Market symbol... CAMZ The number of shares of our common stock that will be outstanding after this offering excludes 926,258 and 28,572 shares subject to outstanding options under our 1998 and 1999 stock incentive plans, respectively, at a weighted average exercise price of $4.76 per share and 568,978 additional shares available for issuance under our stock plans. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell shares of common stock and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the common stock. ------------------------ We were originally organized in April 1998 as a Delaware limited liability company under the name "GFI Caminus LLC." We changed our name to "Caminus Energy Ventures LLC" in September 1998 and "Caminus LLC" in January 1999. Immediately prior to this offering, the limited liability company will merge with and into Caminus Corporation, a Delaware corporation incorporated in September 1999. Our principal executive offices are located at 747 Third Avenue, New York, New York 10017 and our telephone number is (212) 888-3600. Our World Wide Web site address is www.caminus.com. The information in the Web site is not incorporated by reference into this prospectus. For additional information regarding our initial formation and subsequent acquisitions, please see "Caminus Corporation" below. GFI Energy Ventures, LLC and its affiliated entities, which are collectively referred to in this prospectus as GFI, and an affiliate of Oaktree Capital Management, LLC originated and were the principal investors in the transactions that created us. RIT Capital Partners plc -- the publicly traded, London-based investment company chaired by Lord Rothschild -- is also a substantial investor. SUMMARY CONSOLIDATED FINANCIAL DATA The following tables present summary consolidated, pro forma and pro forma as adjusted financial data for us and our predecessor, Zai*Net Software, Inc. The consolidated financial data, except for the pro forma data, are based on the historical financial statements of us and our predecessor for the year ended December 31, 1997, for the four months ended April 30, 1998 and for the period from our inception (April 29, 1998) through December 31, 1998, which are derived from the respective audited consolidated financial statements of us and our predecessor. The consolidated financial data from our inception through September 30, 1998 and as of and for the nine months ended September 30, 1999 are derived from our unaudited consolidated financial statements and include, in the opinion of our management, all adjustments, consisting only of normal recurring adjustments, that are necessary for the fair presentation of our financial position and results of operations as of and for such periods. The pro forma financial data give effect to the acquisitions of Zai*Net, Caminus Energy Limited, which is now known as Caminus Limited, and DC Systems, Inc. as if the acquisitions had occurred at the beginning of the respective periods presented. The pro forma financial data do not give retroactive effect to our acquisition of Positron Energy Consulting, whose results of operations prior to the acquisition were immaterial to our results of operations. The following summary historical and pro forma financial data should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes included elsewhere in this prospectus. In the following table, "Adjusted EBITDA" is defined as earnings before interest and other income, income taxes, depreciation, amortization, acquired in-process research and development, non-cash compensation expense and terminated acquisition costs. Terminated acquisition costs represent costs associated with a potential acquisition that we ultimately decided not to pursue. EBITDA is a non-GAAP measure commonly used by investors and analysts to analyze companies on the basis of operating performance, leverage and liquidity. We present Adjusted EBITDA, which is also a non-GAAP measure, to enhance the understanding of our operating results. We believe Adjusted EBITDA is an indicator of our operating profitability since it excludes items which are not directly attributable to our ongoing business operations. However, Adjusted EBITDA relies upon management's judgment to determine which items are directly attributable to our ongoing business operations and as such is subjective in nature. Neither EBITDA nor Adjusted EBITDA should be construed as an alternative to net income as an indicator of a company's operating performance or as an alternative to cash flow from operations as a measure of a company's liquidity. For information about cash flows or results of operations in accordance with generally accepted accounting principles, please see the audited consolidated financial statements included elsewhere in this prospectus. The pro forma balance sheet data as of September 30, 1999 below give effect to the issuance of an aggregate of 57,486 shares of common stock in November 1999 to three employees in connection with our acquisition of Positron, the issuance upon the closing of this offering of 160,209 shares of common stock to David M. Stoner as a bonus for his services, the forgiveness of Mr. Stoner's $1,000,000 loan, which was previously recorded, and the issuance of an aggregate of 1,581,194 shares of common stock upon the expected exercise prior to or in connection with this offering of options to purchase common stock issued to GFI, Nigel L. Evans, Michael Morrisson and SS&C Technologies, Inc. The pro forma as adjusted balance sheet data as of September 30, 1999 give effect to our sale of 3,572,235 shares of common stock in this offering, at an assumed initial public offering price of $14.00 per share, after deducting estimated underwriting discounts and our estimated offering expenses and after the application of a portion of the proceeds to pay a special one-time bonus to Nigel L. Evans and Michael Morrison, pay GFI a termination fee for its consulting and advisory services and repay borrowings under our credit facility. <TABLE> <CAPTION> ZAI*NET (PREDECESSOR) CAMINUS ------------------------- ----------------------------------------------------------- INCEPTION PRO FORMA INCEPTION FOUR (APRIL 29, TWELVE (APRIL 29, NINE MONTHS 1998) MONTHS 1998) MONTHS YEAR ENDED ENDED THROUGH ENDED THROUGH ENDED DECEMBER 31, APRIL 30, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1997 1998 1998 1998 1998 1999 ------------ ---------- ------------ ------------ ------------- ------------- <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Licenses..................... $1,521,447 $1,495,221 $ 3,639,143 $ 5,455,014 $ 1,925,858 $ 8,088,621 Software services............ 2,667,807 1,334,473 3,090,758 4,947,199 1,881,417 5,679,513 Strategic consulting......... -- -- 2,896,102 4,354,096 1,720,550 4,757,425 ---------- ---------- ------------ ------------ ----------- ----------- Total revenues............. 4,189,254 2,829,694 9,626,003 14,756,309 5,527,825 18,525,559 ---------- ---------- ------------ ------------ ----------- ----------- Acquired in-process research and development.............. -- -- 4,822,000 -- 3,053,000 1,000,000 Operating income (loss)........ (4,236) 436,030 (10,133,366) (13,272,778) (4,489,767) (5,781,600) Net income (loss).............. 13,355 420,508 (10,371,188) (13,319,684) (4,680,440) (6,242,750) Basic and diluted net loss per common share................. $ (1.41) $ (1.76) $ (0.65) $ (0.76) Weighted average shares -- basic and diluted............ 7,360,634 7,578,987 7,215,030 8,264,075 OTHER DATA: Cash provided by (used in) operating activities......... $ 401,048 $1,053,662 $ 951,676 $ 456,381 $ (932,513) Cash used in investing activities................... 206,245 99,881 10,892,906 10,264,424 10,719,054 Cash provided by (used in) financing activities......... (290,050) (3,000) 12,699,637 12,874,999 9,693,866 Adjusted EBITDA................ 118,854 482,171 355,155 $ 397,280 382,350 2,079,747 <CAPTION> CAMINUS ------------- PRO FORMA NINE MONTHS ENDED SEPTEMBER 30, 1999 ------------- <S> <C> STATEMENT OF OPERATIONS DATA: Revenues: Licenses..................... $ 8,129,621 Software services............ 5,981,134 Strategic consulting......... 4,757,425 ------------ Total revenues............. 18,868,180 ------------ Acquired in-process research and development.............. -- Operating income (loss)........ (11,843,964) Net income (loss).............. (12,308,591) Basic and diluted net loss per common share................. $ (1.46) Weighted average shares -- basic and diluted............ 8,405,529 OTHER DATA: Cash provided by (used in) operating activities......... Cash used in investing activities................... Cash provided by (used in) financing activities......... Adjusted EBITDA................ $ 1,738,853 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1999 --------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ----------- ----------- ----------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 801,351 $ 2,125,329 $44,010,829 Total assets................................................ 40,868,631 42,192,609 84,078,109 Borrowings under credit facility, net of current portion.... 1,000,000 1,000,000 -- Current portion of borrowings under credit facility......... 1,000,000 1,000,000 -- Stockholders' equity........................................ 27,050,273 27,662,471 71,547,971 </TABLE> ------------------------ All information in this prospectus assumes our reorganization as a corporation immediately prior to this offering, and the conversion of each membership interest in the limited liability company into .095238 of one share of common stock of the corporation. Except as set forth in the financial statements and related notes or as otherwise indicated, all information in this prospectus assumes: - no exercise of the underwriters' over-allotment option; - the issuance of an aggregate of 57,486 shares of common stock in November 1999 to three employees in connection with the acquisition of Positron Energy Consulting; - the issuance upon the closing of this offering of 160,209 shares of common stock to David M. Stoner, our President and Chief Executive Officer, as a bonus for his services; and - the exercise prior to or in connection with this offering of options to purchase common stock issued to GFI, Nigel L. Evans, Michael Morrison and SS&C Technologies, Inc. We use the following registered trademarks: Caminus(R) and Zai*Net(R). We also use the following trademarks: Zai*Net Manager(TM), Zai*Net Risk Analytics(TM), Zai*Net Physicals(TM), Zai*Net Models(TM), PowerMarkets(TM), PowerOptions(TM), GasOptions(TM), ProjectFinance(TM), Zai*Net Weather Delta(TM), Gas*Master(TM), Power*Master(TM) and Plant*Master(TM). This prospectus also contains trademarks and registered trademarks of other companies, which are the property of those other companies.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001095271_zebu_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001095271_zebu_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD CAREFULLY READ THE ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS, BEFORE MAKING AN INVESTMENT DECISION. Our Business We believe that we provide the most effective infrastructure solution to the application processing and information-sharing problems of the insurance industry. We believe that our state-of-the-art technology provides significant time and cost savings and other efficiencies to insurance carriers, data providers and distributors in this increasingly competitive marketplace by using a common, Internet-based platform that facilitates the standardization and transfer of insurance application information. We use our technology solutions in our retail term life insurance business, which currently generates approximately 90% of our revenues, to prove the efficacy of our technology solutions prior to deploying them to the rest of the industry. We intend to license our technology to as many insurance carriers, agents and information providers as possible, thereby standardizing the sale and processing of insurance. We expect that a significant portion of our future revenue growth will depend upon our ability to license our technology. Through our technology and retail term life insurance businesses, we aspire to be a part of the application and issuance process for every life insurance policy. Our Market Opportunity Most insurance carriers utilize traditional paper- and labor-intensive processing for both Internet-generated and traditional agency-sourced applications at high cost and with substantial delays. We believe there are significant competitive advantages to insurance marketers and carriers that implement recent technological developments, including the Internet. To capitalize on the benefits of Internet-based technology and compete effectively, we believe that life insurance marketers and carriers must achieve -- - a faster, more efficient application and policy issuance process; - lower origination and application processing costs; - more opportunities for consumers to access and compare insurance product information; - more choices of insurance products and prices; and - a consumer-friendly method for obtaining the best coverage at the lowest possible price. In attempting to achieve these objectives, insurance businesses face serious data processing obstacles because their diverse computing environments and outdated data processing, or legacy, systems are unable to share information easily among insurance carriers, information providers and general agencies. Our Solution Our automated insurance management, or AIM, system solution is based on a unique, easily accessible, or open, database architecture that permits -- - improved management of information; - data to be moved between remote work sites faster, more efficiently and in real time through an advanced method of synchronizing that data; and - rapid development of other advanced applications utilizing our data distribution process. The core of our technology solution, our AIM Central Communications System, or Hub, is a system of hardware, software and modern relational database technology that facilitates and manages workflow between multiple remote users in real time. Our AIMSuite software products connect insurance carriers, their agents and other participants in the life insurance policy application, underwriting and issuance process to the Hub. We believe that this technology offers an end-to-end solution to the information processing problems facing life insurance carriers and agents. We connected the first insurance carrier to our Hub in April 1998. Today, over 1,100 general agencies and more than 30 insurance carriers have adopted our technology. The number of new policy applications processed using the Hub currently exceeds 30,000 per month. Our Strategy We aspire to become the acknowledged agent of change for the entire insurance industry by transforming the way insurance policies are sold, processed and issued. We intend to become the dominant provider of technology solutions to the insurance industry, and to strengthen our position as a leading independent marketer of term life insurance. The key elements of our strategy include -- - establishing the AIMSuite as the technology standard for the insurance industry; - streamlining our operations and increasing our sales efficiency; - using our technology to process insurance policies for the insurance industry; - reducing policy acquisition costs; - expanding brand awareness and presence; - expanding our lines of business; and - expanding the application of the Hub. Our Company SelectQuote began business in 1985 as an independent insurance agency, and markets term life insurance products to consumers in most of the United States. SelectTech was founded in September 1995 by SelectQuote and two of our current officers, Steven Gerber and Michael Feroah, to develop data movement and integration solutions to address insurance industry-wide infrastructure inefficiencies in the processing of applications and issuance of policies. Zebu was founded in August 1999. We did not conduct any operations until December 23, 1999, on which date SelectQuote acquired SelectTech and Zebu acquired SelectQuote through its merger with Zebu's wholly owned subsidiary. In these transactions, the shareholders of SelectTech and SelectQuote exchanged their stock for shares of Zebu stock, and Zebu replaced options and other securities convertible into shares of SelectTech or SelectQuote stock with options or convertible securities to acquire shares of Zebu stock. Our principal executive offices are located at 595 Market Street, 6th Floor, San Francisco, California 94105, and our telephone number is (415) 543-7338. Our web sites are located at WWW.ZEBUINC.COM WWW.AIMSUITE.COM AND WWW.SELECTQUOTE.COM. The information contained on our web sites does not constitute a part of this prospectus. ------------------------ UNLESS OTHERWISE INDICATED, THIS PROSPECTUS ASSUMES -- - THAT THE UNDERWRITERS HAVE NOT EXERCISED THEIR OPTION TO EXERCISE THEIR OVERALLOTMENT OPTION; AND - ALL SHARES OF PREFERRED STOCK HAVE BEEN CONVERTED INTO 5,181,806 SHARES OF COMMON STOCK AND ALL CONVERTIBLE DEBENTURES HAVE BEEN CONVERTED INTO 731,420 SHARES OF COMMON STOCK UPON OR IMMEDIATELY PRIOR TO THE CLOSING OF THIS OFFERING. Zebu-TM-, SelectQuote-TM-, SelectTech-TM-, AIMSuite-TM-, AIM Quickview-TM-, AIM GA-TM- and AIM ITS-TM- are our trademarks, service marks and trade names. This prospectus also includes trademarks, service marks and trade names other than those identified in this paragraph, each of which is the property of its respective holder. The Offering <TABLE> <S> <C> Common stock offered by Zebu................ shares Common stock to be outstanding after the offering.................................. shares Use of proceeds............................. We intend to use the proceeds of this offering to develop and install new technology products and services, to expand our sales and marketing efforts and for general corporate purposes, including working capital. Proposed Nasdaq National Market symbol...... ZEBU </TABLE> The outstanding share information is based on our shares outstanding as of March 31, 2000. This information excludes -- - 6,921,109 shares of common stock subject to outstanding options granted under our 1999 Stock Option Plan as of March 31, 2000 at a weighted average exercise price of $4.04 per share; - 3,078,891 shares of common stock reserved for future issuance of options under our 1999 Stock Option Plan as of March 31, 2000; and - 1,000,000 additional shares of common stock reserved for issuance under our 1999 Employee Stock Purchase Plan. Summary and Pro Forma Condensed Combined Financial and Operating Data <TABLE> <CAPTION> Six Months Ended December 31, 1999 ------------------------------------------------------- Zebu Pro Forma Zebu SelectTech Zebu Pro Forma Combined As Actual Actual Combined Adjusted -------- ---------- -------------- -------------- (in thousands, except per share data) <S> <C> <C> <C> <C> Statement of Operations Data: Revenues................................................... $10,344 $ 1,444 $ 11,307 $ Total operating expenses................................... 12,603 3,808 27,127 Net loss................................................... (2,011) (2,625) (14,259) Basic and diluted net loss per share....................... (1.36) -- (1.36) Shares used in computation of basic and diluted net loss per share................................................ 5,222 -- 10,498 Shares used in computation of basic and diluted net loss per share assuming conversion of preferred stock and convertible debentures into 5,181,806 shares and 731,420 shares of common stock, respectively..................... -- 16,411 Unaudited pro forma basic and diluted loss per share, as converted................................................ -- $ (.87) Consolidated Balance Sheet Data: Cash and cash equivalents.................................. $ 2,845 $ 56 $ Working capital (deficiency) 4,772 (6,222) Goodwill and other intangible assets....................... 61,559 -- Total assets............................................... 73,978 946 Current liabilities........................................ 5,576 6,826 Long-term liabilities...................................... 845 1,016 Mandatorily redeemable convertible preferred............... 4,744 1,000 Total shareholders' equity (deficit)....................... $62,814 $(7,896) $ </TABLE> <TABLE> <CAPTION> As of December 31, 1999 ----------------- <S> <C> Other Operating Data: SELECTTECH AIM QuickView software licenses--carriers................... 33 AIM QuickView software installations--general agencies...... 1,134 AIM GA software installations--general agencies............. 23 SELECTQUOTE Cumulative policies sold.................................... 253,600 Licensed agents............................................. 39 </TABLE> <TABLE> <CAPTION> Six Months Ended December 31, 1999 ------------------ <S> <C> SELECTTECH Applications submitted to the Hub........................... 204,044 SELECTQUOTE Leads....................................................... 93,194 Applications................................................ 25,831 Policies sold............................................... 19,131 </TABLE> The Summary and Selected Financial and Operating Data for SelectTech reflects actual results through December 23, 1999. The Summary Financial and Operating Data for Zebu, formerly SelectQuote, and the Pro Forma Combined Financial and Operating Data set forth above includes all our operating results through December 31, 1999, including the operating results of the acquired SelectTech business for the last week of December 1999. The foregoing information gives effect to the following: - The pro forma combined operating data as of December 31, 1999 accounts for SelectQuote's acquisition of SelectTech and Zebu's contemporaneous acquisition of Select Quote, completed on December 23, 1999, using the purchase method of accounting and the conversion of preferred stock and convertible debentures as if they had been converted on December 31, 1999; and - The as adjusted data above reflects the application of the net proceeds from the sale of shares of common stock offered by us at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and offering expenses.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001095330_symyx_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001095330_symyx_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary highlights information we present more fully elsewhere in this prospectus. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors described under the heading "Risk Factors" and elsewhere in this prospectus. SYMYX TECHNOLOGIES, INC. We are a pioneer of high-speed technologies for the discovery of new materials. Materials and their diverse properties contribute in a vital way to many of the products we use everyday. Examples include catalysts used in the manufacture of major chemicals, pharmaceuticals, plastics and rubbers, the plastics in many of our household goods, phosphorescent materials in x-rays and computer screens, and polymers on the bottom of sneakers. The life science, chemical and electronics companies that produce these materials often face heightened pressure to achieve growth targets and increase profitability. As a result, these companies need to reduce costs, increase innovation, and create new businesses based on proprietary materials. We believe that we can assist life science, chemical and electronics companies by discovering new materials faster and in a more productive and cost-effective manner than by using traditional methods. Our proprietary technologies, including instruments, software and methods, represent complete processes designed to cost-effectively accelerate and fundamentally change materials discovery. We create hundreds to thousands of unique materials at one time and screen those materials rapidly and automatically for desired properties. Our process of simultaneously making and then screening large numbers of different materials is called the "combinatorial" approach. We believe our combinatorial approach is up to 100 times faster than traditional research methods and reduces the cost per experiment to as low as 1% of traditional research methods. We apply our proprietary combinatorial technologies to discover materials both for ourselves in our Symyx Proprietary Materials business and in collaboration with major companies under our Industry Collaborations programs. Most of these companies are in the life science, chemical and electronics industries. Our current partners include Agfa, BASF, Bayer, Celanese, Ciba Specialty Chemicals, Dow Chemical, Osram OS (an affiliate of Siemens), PE Biosystems and Unilever. These partners, government agencies and other collaborators have committed a total of over $90 million in near-term research funding, of which we have recognized revenue of $49 million through December 31, 1999. If we discover a new material and our partner commercializes the material, we generally will receive either royalties or milestone payments. We are applying our technology to discover a wide range of materials, including catalysts to manufacture a broad array of chemicals and pharmaceuticals, polymers for DNA separation and genomics testing, and materials for electronic applications. These areas all represent substantial worldwide markets. In addition to our alliances, we are seeking to meet the growing demand for combinatorial technologies by offering selective access to some of our equipment and technologies, through our Discovery Tools(TM) Technology Access program. Dr. Alejandro Zaffaroni and Dr. Peter Schultz founded Symyx in 1994. Dr. Zaffaroni is also a founder of ALZA, Affymax, Affymetrix, Maxygen and DNAX Research Institute. The conceptual basis for Symyx draws from Affymax and Affymetrix, which commercialized the use of high-speed combinatorial methods for pharmaceutical and genetic research, respectively. As a pioneer of high-speed materials discovery, we have focused on building a strong competitive position through both our people and our intellectual property. We have assembled a diverse technical and scientific team to enable us to create, validate and apply high-speed discovery technologies. Our team includes chemists, physicists, engineers and programmers. We have eight issued United States patents and an additional two patent applications allowed in the United States. In addition, we have over 90 patent applications pending in the United States and over 50 foreign patent applications pending, covering combinatorial methodologies, instruments and software and novel materials. Our main facility is located at 3100 Central Expressway, Santa Clara, CA 95051 and our telephone number is (408) 764-2000. We were incorporated in California in September 1994 and reincorporated in Delaware in February 1999. ACHIEVEMENTS SINCE OUR INITIAL PUBLIC OFFERING Since completing our initial public offering in November 1999, we have made progress in advancing both our technology and each of our business areas. Our key accomplishments include: - execution of our first Proprietary Materials license and development agreement; - completion of the sale and first shipment of a Discovery Tools system; - transfer of a lead compound to a partner in our Industry Collaborations business; - expansion of our validated technology platforms from 17 to 20; - identification of three additional development candidates, two in life science and one in chemicals; and - issuance of three U.S. patents covering our high speed discovery methodologies. THE OFFERING <TABLE> <S> <C> Common stock offered by Symyx............. 1,250,000 shares Common stock offered by the selling stockholders............................ 1,500,000 shares Common stock to be outstanding after this offering................................ 30,951,014 shares Use of proceeds........................... General corporate purposes, including working capital. Nasdaq National Market symbol............. SMMX </TABLE> Common stock to be outstanding after this offering is based on 29,701,014 shares of common stock outstanding as of March 3, 2000. It does not include: - 4,025,772 shares subject to stock options outstanding as of March 3, 2000; - 834,819 shares available for future grant or issuance under our stock plan as of March 3, 2000; and - 596,386 shares available for issuance under our employee stock purchase plan as of March 3, 2000. Except as otherwise indicated, all of the information in this prospectus assumes no exercise of the underwriters' over-allotment option. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) See Note 1 of Notes to Financial Statements for an explanation of the method used to determine the number of shares used in computing per share data below. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------------------- 1995 1996 1997 1998 1999 ----- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenue.............................. $ -- $ -- $ 4,806 $13,787 $30,497 Operating expenses................... 508 3,050 10,893 22,328 34,252 Loss from operations................. (508) (3,050) (6,087) (8,541) (3,755) Net loss............................. (508) (2,681) (5,596) (8,155) (2,147) Pro forma basic and diluted net loss per share.......................... (0.46) (0.10) ======= ======= Shares used in computing pro forma basic and diluted net loss per share.............................. 17,737 22,167 ======= ======= </TABLE> In the "as adjusted" column below, we have adjusted the actual balance sheet data to give effect to receipt of the net proceeds from the sale in this offering of the 1,250,000 shares of common stock being offered by us at an assumed public offering price of $ per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses. <TABLE> <CAPTION> DECEMBER 31, 1999 ----------------------- ACTUAL AS ADJUSTED -------- ----------- <S> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and investments.................. $119,270 $ Working capital......................................... 33,299 Total assets............................................ 148,305 Long-term obligations, net of current portion........... 6,729 6,729 Total stockholders' equity.............................. 119,943 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001095478_interwave_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001095478_interwave_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..48c297057549d6e5bafb02159af8af52eccd74b3
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. SINCE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY AND CONSIDER THE INFORMATION UNDER "RISK FACTORS" AND IN OUR FINANCIAL STATEMENTS AND THE NOTES RELATING TO THESE FINANCIAL STATEMENTS, TOGETHER WITH THE INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS, BEFORE DECIDING WHETHER TO INVEST IN OUR COMMON SHARES. OUR FISCAL YEAR ENDS ON THE FRIDAY NEAREST JUNE 30. EXCEPT WHERE OTHERWISE NOTED, THE INFORMATION IN THIS PROSPECTUS IS BASED UPON INFORMATION AS OF JANUARY 18, 2000. OUR COMPANY We provide compact wireless communications systems using GSM, an international standard for voice and data communications. We have pioneered what we believe is the only commercially available system that provides all of the infrastructure equipment and software necessary to support an entire wireless network within a single, compact enclosure. We have designed our systems to serve the following applications in a cost-effective manner: - WIRELESS OFFICES. Our systems allow wireless users in organizations such as large corporations, government entities and universities to maintain contact with the organization's private telephone network whether the users are in their offices, out of their offices or moving between locations. - COMMUNITY NETWORKS. Our systems enable wireless service providers to add capacity in heavy usage areas and to provide telephone service in previously unserved communities. Our core product, WAVEXpress, delivers a comprehensive set of wireless network capabilities which are based on the GSM standard. WAVEXpress systems can serve as: - a base station to receive and transmit voice and data signals over radio frequencies; - a switch to route voice and data signals to their correct destinations; - a base station controller to manage voice and data signals between the base station and the switch; or - any combination of these functions depending on our system's hardware and software configuration. Our all-in-one solution, the Network In A Box, provides the capabilities of a complete wireless network in an enclosure approximately the size of a personal computer tower. We market and sell our systems around the world utilizing a three-pronged sales strategy which includes selling to communications equipment providers, to systems integrators which integrate our systems with the products of other companies and through our own direct sales force. Since 1997 we have sold over 1,000 units which have been installed in 17 countries worldwide. We have established a strategic alliance with Nortel Networks, which accounted for 51% of our revenues in 1999 and which, assuming the exercise of all warrants, owns approximately 22.4% of our outstanding shares. Despite our successes, we face many challenges and risks. For example, we did not record any revenue from our first product sale until 1997 and we have not achieved, and we may never achieve, profitability. In fact, we expect to incur net losses in the future and these losses may be substantial. Accordingly, you should carefully consider the information set forth in the "Risk Factors" section of this prospectus. OUR STRATEGY Our goal is to be the premier global provider of cost-effective, compact wireless systems in targeted segments of the GSM market. As key elements of our strategy, we intend to: - Provide wireless office systems that will replace traditional office telephone equipment with wireless equipment - Deliver wireless systems using the Internet Protocol, which is the networking standard used to deliver voice and data over the Internet - Further penetrate existing market opportunities - Strengthen and expand relationships with communications equipment providers - Use technological leadership to provide competitive advantages for wireless service providers CORPORATE INFORMATION We were incorporated in Bermuda on June 17, 1994. Our principal executive office is located at Clarendon House, 2 Church Street, P.O. Box HM 1022, Hamilton HM DX, Bermuda, and our telephone number is (441) 295-5950. Our principal operating offices are located at 656 Bair Island Road, Redwood City, California 94063, and our telephone number is (650) 482-2100. Our World Wide Web address is www.iwv.com. Information on our web site does not constitute part of this prospectus. THE OFFERING <TABLE> <S> <C> Common shares offered........................ 8,500,000 shares Common shares to be outstanding after the offering............................... 44,370,878 shares Use of proceeds.............................. To increase working capital, to fund both capital investment and research and development and for general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol....... IWAV </TABLE> ------------------------ Unless otherwise indicated, all information in this prospectus, including the outstanding share information above is based on the number of shares outstanding as of January 18, 2000 and: - gives effect to the exercise of a warrant for 2,000,000 preferred shares and 188,410 common shares that the warrant holders have committed to exercise on the effectiveness of this offering at exercise prices ranging from $0.70 to $7.00 per share; - gives effect to the conversion of all outstanding preferred shares into 29,006,193 common shares immediately prior to the completion of the offering; - excludes 7,286,594 common shares issuable upon exercise of warrants outstanding at January 18, 2000 at an exercise price ranging from $0.70 to $1.15 per share; - excludes 5,308,295 common shares issuable upon the exercise of options outstanding at January 18, 2000 at a weighted average exercise price of $1.89 per share; - excludes 1,818,867 common shares available for issuance under our 1999 option plan; - excludes 300,000 common shares available for issuance under our 1999 employee share purchase plan; and - assumes no exercise of the underwriters' over-allotment option. ------------------------ All dollar amounts in this prospectus are expressed in U.S. dollars, except where we state otherwise. SUMMARY FINANCIAL INFORMATION The following table sets forth our summary financial data. You should read this information together with our consolidated financial statements, the notes to those statements beginning on page F-1 of this prospectus, the information under "Selected Financial Data," "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The pro forma numbers in the table give effect to: - proceeds from the sale of 3,526,663 Series I1 preferred shares which closed in November and December 1999; - the issuance of 602,256 common shares upon exercise of options under our 1994 stock plan between September 30, 1999 and January 18, 2000; - the exercise of a warrant for 2,000,000 preferred shares and 188,410 common shares that the warrant holders have committed to exercise on the effectiveness of this offering at exercise prices ranging from $0.70 to $7.00 per share; and - the conversion of all outstanding preferred shares into 29,006,193 common shares immediately prior to the completion of the offering. The capitalization on a pro forma as adjusted basis reflects the sale of 8,500,000 common shares offered by us at an assumed initial public offering price of $11.00 per share after deducting the underwriting discount and estimated offering expenses payable by us, and the receipt of net proceeds from this offering. Our consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States. All dollar amounts set forth below are stated in U.S. dollars. Our fiscal year ends on the Friday nearest June 30, and our first fiscal quarter ends on the Friday nearest September 30. <TABLE> <CAPTION> THREE MONTHS ENDED FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30, ------------------------------ ------------------- 1997 1998 1999 1998 1999 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenues.................................. $ 1,841 $ 12,995 $ 17,293 $ 4,487 $ 5,377 Gross profit.................................. (1,776) 744 4,762 2,010 1,404 Loss from operations.......................... (29,245) (29,902) (22,106) (5,144) (7,570) Net loss...................................... $(29,182) $(30,822) $(24,468) $(5,091) $(9,470) Net loss attributable to common shareholders................................ $(29,182) $(30,822) $(24,468) $(5,091) $(11,525) ======== ======== ======== ======= ======= Loss per share, basic and diluted............. $ (7.12) $ (6.68) $ (4.96) $ (1.05) $ (2.10) ======== ======== ======== ======= ======= Weighted average common shares outstanding.... 4,099 4,614 4,934 4,840 5,480 Pro forma net loss per share, basic and diluted..................................... $ (0.76) $ (0.36) ======== ======= Shares used in computing pro forma net loss per share, basic and diluted................ 32,345 32,345 </TABLE> <TABLE> <CAPTION> AS OF SEPTEMBER 30, 1999 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................. $12,988 $56,327 $141,932 Working capital........................................... 17,739 61,076 146,683 Total assets.............................................. 35,080 78,419 164,024 Long term debt, net of current portion.................... 261 261 261 Total shareholders' equity................................ 25,568 68,907 154,512 </TABLE>
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully. The term "home entertainment," as used in this prospectus, is limited to home video distribution and excludes all forms of television distribution, including pay per view, pay and free television. The term "independent," as used in this prospectus, is used to distinguish Artisan Entertainment Inc. from entertainment companies that are members of the Motion Picture Association of America and their affiliates. Artisan Entertainment Inc. We are a leading independent entertainment company that distributes motion pictures in the home entertainment, theatrical and broadcast and pay television markets. Our primary asset is our extensive library of over 3,300 feature length and 3,400 non-feature length titles for which we have predominately United States and Canadian home entertainment distribution rights. We believe that our ability to distribute video product directly to over 12,000 retail stores in the United States is unique among independent entertainment companies. We manage our library as a collection of brands and seek to maximize revenues and cash flow from our library through retail direct distribution and focused marketing. We intend to capitalize on high margin new distribution technologies, for example, digital video disc, commonly known as DVD, through early adoption and aggressive exploitation. Our library includes distribution rights for: . Box office successes including Terminator, Terminator 2: Judgment Day, Dirty Dancing, the Rambo series, Basic Instinct, Total Recall, Young Guns and Stargate; . Classic movies including It's a Wonderful Life, High Noon and The Quiet Man, as well as Academy Award winners including On Golden Pond, The Last Emperor, The Piano, The Crying Game and Sophie's Choice; and . Titles grouped within branded labels including Discovery, Hallmark and Family Home Entertainment, including Merlin, Alice in Wonderland, Gulliver's Travels, The Velveteen Rabbit, The Tales of Beatrix Potter and other family entertainment programs. We continually market and repackage individual titles within our library. We seek opportunities to expand our library through acquisitions of individual titles and catalogs and through distribution agreements and alliances. Since our management team assumed control in July 1997, we have tripled the size of our library, primarily through our exclusive home video distribution agreements with Hallmark and Republic Pictures. We recently acquired home entertainment distribution rights in the United States to the educational titles from the Discovery Channel and in the United States and Canada to the award-winning educational titles created by The Baby Einstein Company. We are also a leading independent distributor of newly-produced films for theatrical release worldwide, which complements our library distribution business. Our recent films include The Blair Witch Project, Stir of Echoes and The Buena Vista Social Club. We focus on selecting theatrical films that have been independently produced outside of the major studios, and our marketing expertise enables us to successfully distribute these films in wide release or to specialized markets. Our strategic output agreements with domestic partners, including Showtime Networks, and international partners, including Alliance Atlantis, enhance our in-house distribution capabilities. As demonstrated by The Blair Witch Project, we believe that we have significant growth opportunities to capitalize on the films we distribute through various channels, including theatrical, home entertainment and television, as well as ancillary businesses including licensing, merchandising and publishing. We believe our new theatrical releases enhance and refresh our library, maintain our connections with the artistic community and increase our visibility among retailers. For the year ended December 31, 1999, we generated net sales of $383.3 million and earnings before interest, taxes, depreciation and non-film amortization, which we refer to as EBITDA, of $38.1 million, as compared to $173.5 million of net sales and $20.6 million of EBITDA during the same period of the prior year. Business Strategy Our goal is to be the largest, most profitable independent distributor of filmed entertainment product. To accomplish this goal, we intend to continue to pursue the following strategies: . Build and capitalize on our library. We believe our library can continue to generate stable and growing cash flows. We intend to expand the size of our library, exploit new growth opportunities and technologies, for example DVD, and market titles to enhance sales and capitalize on the key brands in our library. . Continue our retail direct approach to marketing our library titles. Through strategic arrangements, we have large-scale retail distribution capabilities which we believe to be unique among independent distributors. These capabilities enable us to control the marketing process, increase penetration among retailers, improve our retail shelf placement and seek economies of scale comparable to those of the major studios. . Establish brands that may be widely exploited. We intend to use our library assets to develop and build brand identity. We believe that the continued association of our Family Home Entertainment division and Family Home Entertainment Kids trademarks with quality, parent- approved programming will create opportunities for us to exploit these brands beyond the home entertainment market. In addition, we have established wide recognition through our merchandising of diverse Blair Witch products on a worldwide basis. . Customize our distribution and marketing strategy to best complement our theatrical releases. We intend to release 10 to 12 theatrical motion pictures annually in either wide release or to specialized markets and to creatively market each individual film to reach the appropriate target audience in the most cost-effective way. . Acquire product for distribution in a manner that mitigates our financial risk. We select product for theatrical release that is typically produced for under $30 million in negative costs, and predominantly for under $15 million. The decision to commit to the financing of a motion picture is referred to in our industry and throughout this prospectus as "greenlighting." We utilize a conservative greenlighting process involving detailed financial projections and our senior management team, and we have instituted rigorous budgeting and cost control procedures. We believe that our focus on economic aspects of financing and producing films mitigates our financial risk associated with investing in new motion pictures. We cannot assure you that we will be successful in implementing these strategies. Achieving our goal will depend upon, among other things, our ability to compete with larger, better capitalized companies, maintain our retail direct distribution capability, maintain public interest in the titles in our library and obtain sufficient financing. Competitive Strengths We intend to implement our business strategies by exploiting our competitive strengths, which we believe include: . a diverse and extensive library of titles, including brands which have broad and favorable consumer recognition as providers of entertainment and educational titles; . the ability to distribute home entertainment products on a retail direct basis to over 12,000 stores nationwide; . a rigorous budgeting and approval process and ongoing cost control procedures that enable us to enhance the profitability of our portfolio of produced and distributed films; and . a low overhead cost structure. Corporate History In July 1997, a group of private investors, led by Bain Capital, Inc. and Mr. Alan D. Gordon of Richland, Gordon & Co., formed our company to acquire LIVE Entertainment Inc., a publicly held company which owned an extensive library of home video distribution rights. After this acquisition, the private investors brought in a new management team, and Mr. Geoffrey S. Rehnert, formerly of Bain Capital, Inc., who currently serves as the Chairman of our board of directors and Chairman of our board's operating committee, was instrumental in recruiting the key members of this management team. Mr. Rehnert has also played an active role in developing our company's business strategy. In April 1998, we changed our name to Artisan Entertainment Inc. In July 1999, Messrs. Geoffrey S. Rehnert and Marc B. Wolpow left Bain Capital and acquired an option to buy Bain Capital's interest in our company. Subsequently, Messrs. Rehnert and Wolpow formed Audax Entertainment, L.P., a special purpose partnership, which purchased Bain Capital's interest in our company on September 30, 1999. Audax Entertainment currently controls our board of directors. Mr. Alan D. Gordon of Richland, Gordon & Co. serves as Vice Chairman of our board of directors. We believe that Audax Entertainment and Richland, Gordon & Co. will continue to play active roles in developing and implementing our company's strategy and working closely with the management team to ensure effective operations. Our principal executive offices are located at 2700 Colorado Avenue, 2nd Floor, Santa Monica, California 90404, and our telephone number is (310) 449- 9200. Our website address is www.artisanent.com. The information contained on our website is not part of this prospectus. The Offering <TABLE> <C> <S> Common stock offered by Artisan Entertainment Inc. .................... 6,000,000 shares Common stock offered pursuant to the underwriters' over-allotment option: By Artisan Entertainment Inc......... 450,000 shares By the selling stockholders.......... 450,000 shares -------------- 900,000 shares Common stock estimated to be outstanding after the offering, assuming the underwriters' over-allotment option is exercised in full...................... 22,821,691 shares Use of proceeds......................... We estimate that the net proceeds after underwriting discounts and estimated offering expenses to Artisan from this offering will be approximately $93.4 million. This assumes an initial public offering price of $17.00 per share. We intend to use the net proceeds from the offering: . to redeem $15.0 million aggregate principal amount of our 13.5% senior subordinated secured notes plus premium and accrued and unpaid interest; . to make a one-time payment of $8.0 million to terminate a management agreement prior to its expiration; and . to repay some of our borrowings under our senior credit facility. See "Use of Proceeds." Proposed Nasdaq National Market Symbol.. "RTSN" </TABLE> Immediately prior to the closing of this offering, we will effect a reclassification of our capital stock, which is described under "The Reclassification." The share numbers in this preliminary prospectus assume an initial public offering price of $17.00, an effective date of May 15, 2000, and an issuance of 6,000,000 shares in this offering. The share numbers in this preliminary prospectus, other than the 6,000,000 shares issued in this offering, will vary depending on the timing and actual pricing of this offering. See "The Reclassification." The common stock to be outstanding after this offering does not include 4,873,901 shares issuable upon the exercise of all outstanding options, at a weighted average exercise price of $2.59 per share, of which 2,545,042 will be exercisable immediately after the offering. See "The Reclassification." Unless we indicate otherwise, the information in this prospectus reflects: . the reclassification of our capital stock; . a 1.397819593 to 1 stock split of our common stock to be effected prior to the closing of this offering; . no exercise by the underwriters of their option to purchase up to 450,000 additional shares of common stock from us and 450,000 additional shares of common stock from some of our existing stockholders, whom we refer to in this prospectus as the selling stockholders, to cover over-allotments; and . no exercise of outstanding options. Summary Historical Financial Data The following table provides summary historical consolidated financial data of Artisan Entertainment Inc., including our predecessor, LIVE Entertainment Inc., for each of the years ended December 31, 1995, 1996, 1998 and 1999 and for each of the periods January 1 to July 9, 1997 and July 10 to December 31, 1997. This data is derived from our audited consolidated financial statements and notes to the financial statements. The summary historical consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Selected Historical Financial Data" and the consolidated financial statements and the related notes to the financial statements included elsewhere in this prospectus. <TABLE> <CAPTION> Predecessor ------------------------------ Year Ended January 1- July 10- Year Ended December 31, July 9, December 31, December 31, ------------------ ---------- ------------ ------------------ 1995 1996 1997 1997 1998 1999 -------- -------- ---------- ------------ -------- -------- (in thousands, except share and per share data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net sales............... $140,112 $151,425 $53,698 $ 66,663 $173,504 $383,293 Cost of sales........... 113,025 127,560 47,680 50,309 131,030 313,975 Selling, general and administrative expenses............... 19,174 19,831 12,472 11,308 27,893 38,116 Gain on disposal of subsidiary............. 2,913 -- -- -- -- -- -------- -------- ------- -------- -------- -------- Operating income (loss)................. 10,826 4,034 (6,454) 5,046 14,581 31,202 Interest expense and other income, net...... 565 529 516 (3,778) (13,429) (17,432) -------- -------- ------- -------- -------- -------- Income (loss) before income taxes........... 11,391 4,563 (5,938) 1,268 1,152 13,770 Provision for income taxes.................. 600 8,000 -- -- -- -- -------- -------- ------- -------- -------- -------- Net income (loss) ...... $ 10,791 $ (3,437) $(5,938) $ 1,268 $ 1,152 $ 13,770 ======== ======== ======= ======== ======== ======== Net income per class A common share: Basic.................. $ 0.03 ($ 0.13) $ 1.21 Diluted (1)............ 0.01 0.01 0.13 Weighted average number of shares used in computation of net income per class A common share: Basic.................. 9,000 9,000 9,182 Diluted................ 91,342 96,894 110,179 Pro forma net income per common share (unaudited)(2): Basic.................. $ 0.97 Diluted................ 0.84 Weighted average number of shares used in computation of pro forma net income per common share (unaudited): Basic.................. 11,504 Diluted................ 13,303 Other Data: Cash flow provided by (used for) operating activities............. $ 32,682 $ (3,823) $(8,795) $(12,122) $(54,891) $ 31,779 Cash flow provided by (used for) investing activities............. (460) (510) (473) (162) (7,084) (4,427) Cash flow provided by (used for) financing activities............. (6,999) (3,162) (9,601) 9,322 59,566 (27,042) EBITDA (3).............. 17,890 10,613 (2,782) 8,381 20,640 38,086 Balance Sheet Data (at end of period): Film costs.............. 100,959 $108,821 Total assets............ 259,201 301,115 Total debt.............. 163,283 135,714 Stockholders' equity.... 18,977 34,396 </TABLE> - ------- (1) The diluted net income per class A common share is based on the assumed conversion of class L common shares to class A common shares as of the beginning of the respective period. (2) Assumes conversion of class L common stock to class A common stock based on an estimated fair market value at December 31, 1999 of $12.88 per share after giving effect to the stock split and a conversion date of December 31, 1999. (3) EBITDA or earnings before interest, taxes, depreciation and non-film amortization is not intended to represent cash flow in accordance with generally accepted accounting principles and does not represent the measure of cash flow available for distribution. While we believe EBITDA provides a more complete analysis of our operating performance, it should not be used as an alternative to operating income or cash flows from operating activities, as determined in compliance with generally accepted accounting principles, and should not be considered an indicator of overall financial performance. EBITDA does not reflect cash available to fund cash requirements, and the items excluded from EBITDA, for example, depreciation and non-film amortization, are significant components in assessing our financial performance. Other significant uses of cash flows are required before cash will be available to us, including debt service, taxes and cash expenditures for various long-term assets. Our calculation of EBITDA may be different from the calculation used by other companies and, therefore, may not be comparable with other similarly titled measures of other companies.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001095594_t-r_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001095594_t-r_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read this summary together with the entire prospectus, especially "Risk Factors" and the financial statements and related notes, before deciding to invest in shares of our common stock. Unless otherwise indicated, the information contained in this prospectus assumes the underwriters do not exercise their over-allotment option and gives effect to the conversion of all outstanding shares of our preferred stock into common stock, which will occur before the closing of this offering. Our fiscal year ends on January 31. References to fiscal 2000, fiscal 1999, fiscal 1998 and fiscal 1997 each refer to the corresponding year ended January 31, 2000, 1999, 1998 and 1997. T/R SYSTEMS, INC. T/R Systems, Inc. designs, develops and markets digital document processing and printing systems, consisting of proprietary software and hardware, for the print-on-demand market. Our highly functional product, the MicroPress Cluster Printing System, manages multiple digital print devices provided by us or by third parties as an integrated printing system. The MicroPress is a server-based software and hardware system built on industry-standard open-architecture technologies. This system allows our customers to flexibly and economically print desired quantities with minimum lead time. The MicroPress fills the critical gap in the digital document production market by delivering a high-quality solution to mid-range users at prices that are often significantly lower than those of traditional high-end digital systems. Key features of the MicroPress include consistent color quality across multiple print devices as well as the capability to simultaneously support color and black and white digital printing devices and digital input. Other features available with the MicroPress include: - Internet-based remote job submission, ticketing, proofing, monitoring and managing; - document merging, distribution and archiving; - variable data printing; - electronic collation; and - imposition, a document layout tool used most commonly to produce booklets and proof-reading sheets. The emergence of digital printing technologies is driving significant changes in all sectors of the printing and publishing industry. Among the sectors that have experienced the most significant changes is the rapidly growing print-on-demand market. CAP Ventures, Inc., a consulting and research firm focused on this market, estimates the U.S. market for print-on-demand equipment, supplies and services to be approximately $6.1 billion in 1999 and that it will grow to approximately $11.8 billion in 2003. We distribute our products in North America and internationally through a network of independent dealers and through our distribution relationship with Minolta Co., Ltd. We also maintain a sales force consisting of regional managers located throughout the United States, as well as one in each of Canada, the United Kingdom and Germany. EXPLANATORY NOTE This registration statement contains two forms of prospectus: (a) one prospectus to be used in connection with an offering in the United States and Canada and (b) one prospectus to be used in connection with a concurrent offering outside of the United States and Canada. The U.S. prospectus and the international prospectus are identical in all respects except for the front cover page and the "Underwriting" section. The front cover page and the "Underwriting" section of the international prospectus are included immediately before Part II of this registration statement. THE OFFERING <TABLE> <S> <C> Common stock offered by T/R Systems.................. 2,880,000 shares Common stock offered by the selling shareholder...... 120,000 shares Common stock to be outstanding after the offering.... 11,733,234 shares Use of proceeds...................................... For general corporate purposes, including working capital, research and development, capital expenditures and possible acquisitions of technology. See "Use of Proceeds." Proposed Nasdaq National Market symbol............... TRSI </TABLE> The number of shares to be outstanding after the offering excludes: - 1,447,911 shares issuable under outstanding options at a weighted average exercise price of $2.60 per share; and - 904,286 additional shares reserved for issuance under our stock plans, after giving effect to the adoption of our 1999 stock option plan. NOTES TO PROSPECTIVE INVESTORS T/R Systems was incorporated in Georgia in September 1991. Our principal executive office is located at 1300 Oakbrook Drive, Norcross, Georgia 30093, and our telephone number at that office is (770) 448-9008. Our world wide web home page is located at http://www.trsystems.com. Information contained on our website does not constitute a part of this prospectus. We own or have rights to the product names, trade names and trademarks that we use in conjunction with the sale of our products, including T/R Systems(TM), MicroPress(R), Cluster Printer(TM), and Cluster Printing System(TM). This prospectus also contains product names, trade names and trademarks that belong to other organizations, including the following registered trademarks: PostScript(R), a registered trademark of Adobe Systems Incorporated, Harlequin(R) and ScriptWorks(R), registered trademarks of Harlequin Group plc., Microsoft(R), Microsoft Windows NT(R) and Visual Basic(R), registered trademarks of Microsoft Corporation, Macintosh(R), a registered trademark of Apple Computer, Inc. and Intel(R) and Pentium(R), registered trademarks of Intel Corporation. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell securities, and we are not soliciting offers to buy these securities, in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED JANUARY 21, 2000 [TR SYSTEMS LOGO] 3,000,000 SHARES COMMON STOCK T/R Systems, Inc. is offering 2,880,000 shares of its common stock and one of our shareholders listed under "Principal and Selling Shareholders" on page 50 is selling an additional 120,000 shares. This is our initial public offering and no public market currently exists for our shares. Our common stock has been approved for quotation on the Nasdaq National Market under the symbol TRSI. We estimate that the initial public offering price will be between $8.00 and $10.00 per share. ------------------------------ INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4. ------------------------------ <TABLE> <CAPTION> PER SHARE TOTAL --------- ---------- <S> <C> <C> Public offering price....................................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds to T/R Systems..................................... $ $ Proceeds to the selling shareholder......................... $ $ </TABLE> THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Some of our shareholders have granted the underwriters a 30-day option to purchase up to 450,000 additional shares of common stock to cover over-allotments. ------------------------------ ROBERTSON STEPHENS U.S. BANCORP PIPER JAFFRAY RAYMOND JAMES & ASSOCIATES, INC. The date of this prospectus is January , 2000 SUMMARY FINANCIAL DATA The following table is a summary of the financial data for our business. You should read this information together with our financial statements and the related notes appearing at the end of this prospectus and the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations." The pro forma as adjusted balance sheet data give effect to: - the conversion of all outstanding shares of our preferred stock into 6,068,913 shares of common stock before the closing of this offering; and - the sale of 2,880,000 shares of common stock offered by T/R Systems at an assumed initial public offering price of $9.00 per share, the mid-point of the estimated offering price range, and our receipt of the net proceeds of the sale of those shares, after deducting estimated underwriting discounts and offering expenses payable by us. <TABLE> <CAPTION> NINE MONTHS FISCAL YEAR ENDED JANUARY 31, ENDED OCTOBER 31, ----------------------------------------------- ------------------ 1995 1996 1997 1998 1999 1998 1999 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue............................ $ 94 $ 1,194 $ 4,036 $12,032 $15,847 $12,034 $15,704 Cost of sales...................... 27 1,013 3,387 6,107 6,579 5,041 6,662 Gross profit....................... 67 181 649 5,925 9,268 6,993 9,042 Total operating expenses........... 1,725 3,051 4,982 7,329 9,801 7,240 8,711 Operating income (loss)............ (1,658) (2,870) (4,333) (1,404) (533) (247) 331 Net income (loss).................. (1,657) (2,819) (4,120) (1,218) (623) (352) 412 Basic net income (loss) per share............................ $ (1.14) $ (1.82) $ (2.43) $ (0.60) $ (0.26) $ (0.15) $ 0.16 Basic weighted average shares outstanding...................... 1,460 1,555 1,702 2,052 2,444 2,429 2,532 Diluted net income (loss) per share............................ $ (1.14) $ (1.82) $ (2.43) $ (0.60) $ (0.26) $ (0.15) $ 0.04 Diluted weighted average shares outstanding...................... 1,460 1,555 1,702 2,052 2,444 2,429 9,700 </TABLE> <TABLE> <CAPTION> OCTOBER 31, 1999 ------------------------ PRO FORMA ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 3,344 $26,437 Working capital............................................. 5,444 28,589 Total assets................................................ 10,067 33,160 Redeemable, convertible preferred stock..................... 15,059 -- Total shareholders' equity (deficit)........................ (8,781) 29,484 </TABLE> Graphics on inside front cover: Text "the MICROPRESS(R) is a scalable document production system that accepts files from multiple print sources, processes them, and then outputs black and white, color, and wide format documents across multiple print devices." The text is accompanied by an illustration of work flow into the MicroPress, from digital, Macintosh, personal computer or scanner input, and each input has a corresponding icon. The illustrations show information processed by the MicroPress, which is pictured, as output to either black and white output, color output, wide format or digital, and each output format has a corresponding icon. There is a line showing ten print devices connected to the MicroPress picture and the word "MicroPress."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001096000_worldres_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001096000_worldres_prospectus_summary.txt
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+PROSPECTUS SUMMARY This is only a summary and may not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including the "'Risk Factors" section and our financial statements and the related notes included in this prospectus. WorldRes.com WorldRes.com provides a leading business-to-business e-commerce solution for online marketing and reservations to the highly fragmented global hotel industry. Our Internet-based reservation system connects hotels to travel web sites creating an e-commerce network. This network enables these web sites to provide travelers with the ability to collect information and make real-time, confirmed hotel reservations online. Since inception, we have processed approximately 325,000 reservations at a broad range of hotels globally. During the three months ended March 31, 2000, we processed $31.1 million in gross value of hotel bookings, compared to $16.4 million in the three months ended December 31, 1999 and $9.3 million in the three months ended March 31, 1999. As of February 29, 2000, our network consisted of approximately 11,500 hotel properties in 142 countries and 1,075 travel web sites and call centers as well as over 1,800 web sites that are part of our affiliate program managed by Be Free. As of that date, we also had contracts in place to add approximately 12,900 additional properties to our network. Our network includes large hotel chains such as Choice Hotels and Accor, as well as many independent hotels and resorts including Vail Resorts and St. Moritz. Our travel web site partners include broad travel sites such as Yahoo! Lodging and Travelocity.com, as well as activity-based web sites such as Resort Sport Network, SkiNet.com and MountainZone.com. Through our network, these travel web site partners are able to offer their users the ability to check availability on a real-time basis and book a room through their web sites at any of the hotels that are part of our network. In addition, we maintain two branded web sites, PlacesToStay.com and BedandBreakfast.com, which offer a reservation solution to travel web sites desiring an established brand to include on their web site. The worldwide hotel industry is particularly well suited for business-to- business e-commerce because it is large and fragmented, spends billions of dollars on marketing and distribution, and still operates at significantly less than full occupancy. The Internet has emerged as a more convenient, efficient and cost-effective medium than either the phone or fax for hotels to distribute inventory and for travelers to book accommodations. The Internet's capabilities, however, remain underutilized in generating and processing online reservations, particularly for the leisure market. We believe that our network and reservation solution provide significant benefits to hotels and travel web site partners. We enable hotels to reach more customers and increase occupancy through our growing network of travel web sites and other distribution partners. Additionally, our Internet-based reservation system allows hotels to differentiate themselves by offering descriptive content and photographs on our network. Hotels can easily and continuously update their descriptive information, available inventory and pricing across multiple web sites simply by accessing and updating our system. Our solution aggregates a supply of hotel rooms and enables travel web sites to provide their customers with the ability to search for rooms and make confirmed reservations online. These online reservations generate additional transaction revenue for travel web sites. Our objective is to be the leading business-to-business e-commerce reservation solution for the global hotel industry. To reach our goal, we intend to: . increase reservations by increasing the number of hotels and travel web site partners that comprise our network; . increase reservations by actively managing hotel and travel web site relationships; . pursue acquisitions; . expand our service offerings; and . maintain our technological leadership. We will encounter various risks and uncertainties in connection with the implementation of our strategy. We have a limited operating history and have incurred substantial losses. As of December 31, 1999, we had an accumulated deficit of approximately $34.9 million. We expect to incur substantial losses for the foreseeable future. WorldRes.com, formerly WorldRes, Inc., was incorporated as Places To Stay, Inc. in California in October 1995. Prior to the completion of this offering, we intend to reincorporate under the laws of the State of Delaware. Our principal executive offices are located at 1510 Fashion Island Boulevard, Suite 100, San Mateo, California 94404. Our telephone number at that location is (650) 372-1700. Our World Wide Web site is www.worldres.com. The information contained on our web site is not a part of this prospectus. The Offering <TABLE> <C> <S> Common stock offered................................ shares Common stock to be outstanding after this offering.. shares Use of proceeds..................................... For general corporate purposes, including working capital to fund anticipated operating losses and expenses associated with sales and marketing efforts. See "Use of Proceeds." Proposed Nasdaq National Market symbol.............. WRES </TABLE> The common stock to be outstanding after this offering is based on the number of shares outstanding as of February 29, 2000. The number of shares outstanding excludes: . 1,898,653 shares of common stock issuable as of February 29, 2000 upon the exercise of outstanding stock options issued under our stock plans at a weighted average exercise price of $3.98 per share; . 765,961 shares of common stock available for future issuance under our stock plans as of February 29, 2000; and . 637,840 shares of common stock issuable upon the exercise of warrants outstanding as of February 29, 2000 at a weighted average exercise price of $3.31 per share. Summary Consolidated Financial and Operating Data (in thousands, except per share data) The tables below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the consolidated financial statements and related notes thereto included elsewhere in this prospectus. <TABLE> <CAPTION> October 10, 1995 Three Months (inception) Fiscal Years Ended Ended through September 30, December 31, September 30, -------------------------- ---------------- 1996 1997 1998 1999 1998 1999 ------------- ------- ------- -------- ------- ------- (unaudited) Consolidated Statement of Operations Data: <S> <C> <C> <C> <C> <C> <C> Net revenue: Reservation............ $ 3 $ 71 $ 294 $ 1,322 $ 151 $ 479 Other.................. -- -- 162 406 105 179 ------- ------- ------- -------- ------- ------- Total net revenue.... 3 71 456 1,728 256 658 Gross profit............. 3 67 398 1,496 226 566 Total operating expenses................ 1,762 4,350 6,629 15,098 2,321 9,848 Loss from operations..... (1,759) (4,283) (6,231) (13,602) (2,095) (9,282) Net loss................. $(1,796) $(4,350) $(6,147) $(13,489) $(2,075) $(9,170) Basic and diluted net loss per share.......... $(12.71) $(10.77) $(10.80) $ (18.03) $ (3.12) $ (4.31) Shares used in computing basic and diluted net loss per share.......... 141 404 569 748 666 2,128 Pro forma basic and diluted net loss per share (unaudited)....... $ (1.96) $ (0.80) Shares used in computing pro forma basic and diluted net loss per share (unaudited)....... 6,865 11,427 <CAPTION> Supplemental Data: <S> <C> <C> <C> <C> <C> <C> Gross value of hotel bookings................ $ 119 $ 1,748 $ 8,577 $ 41,368 $ 4,856 $16,401 </TABLE> <TABLE> <CAPTION> December 31, 1999 --------------------------- Pro Pro Forma Actual Forma As Adjusted ------- ------- ----------- (unaudited) Consolidated Balance Sheet Data: <S> <C> <C> <C> Cash and cash equivalents........................... $24,242 $29,242 $ Working capital..................................... 21,939 26,939 Total assets........................................ 36,372 41,372 Long-term obligations less current portion.......... 642 642 Additional paid-in capital.......................... 71,459 76,457 Total shareholders' equity.......................... 31,016 36,016 </TABLE> Gross value of hotel bookings equals the number of nights per stay times the hotel room rate for all the reservations processed through our system. Gross value of hotel bookings is not equivalent to and is not intended to represent our revenue or backlog. Gross value of hotel bookings has not been prepared or disclosed in accordance with generally accepted accounting principles and should not be considered in isolation or as a substitute for other information prepared or disclosed in accordance with generally accepted accounting principles. We use gross value of hotel bookings as an indicator of general business activity, success of promotional efforts and capacity to handle customer demand. In addition, we believe that gross value of hotel bookings may provide a useful comparison between historical periods, and year to year changes of this information may provide a useful measure of market acceptance of our network. The "Pro Forma" column reflects our summary consolidated balance sheet data after giving effect to the conversion of all shares of outstanding preferred stock into shares of common stock upon the consummation of this offering and the sale to Accor of 430,293 shares of Series E preferred stock in April 2000. The "Pro Forma As Adjusted" column reflects our pro forma balance sheet data as adjusted to reflect the receipt of the estimated net proceeds of $ from the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting the underwriting discount and estimated offering expenses.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001096219_neoforma_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001096219_neoforma_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary may not contain all of the information that may be important to you. You should carefully read the entire prospectus, including "Risk Factors" and the financial statements and related notes included in the prospectus, before making an investment decision. NEOFORMA.COM, INC. Neoforma.com is a leader in the emerging market of providing business-to-business e-commerce services to purchasers and sellers of medical products, supplies and equipment. Our services provide an open, online marketplace where any manufacturer or distributor may list and sell medical products. By aggregating a large number of suppliers and products, our services enable physicians, hospitals and other healthcare providers to efficiently purchase a wide range of new and used medical products. To increase the breadth and usage of our services, we have entered into strategic alliances with leading Internet, technology and healthcare-related organizations and medical products suppliers, such as Dell, General Electric Medical Systems, Owens & Minor, SAP, Superior Consultant and VerticalNet. We offer three primary services that together address the entire healthcare purchasing lifecycle. Our Shop service, introduced in August 1999, provides a unified marketplace where purchasers can easily locate and buy new medical products, and suppliers can access new customers and markets. Healthcare providers can use Shop to purchase a wide range of products, from disposable gloves to surgical instruments and diagnostic equipment. Our Auction service creates an efficient marketplace for idle assets by enabling users to list, sell and buy used and refurbished equipment and surplus medical products. We introduced our initial Auction service, an online listing service called AdsOnline, in May 1999, our second Auction service, a live auction service called AuctionLive, in August 1999, and our third Auction service, an online auction service called AuctionOnline, in November 1999. Our Plan service, introduced in July 1998, provides interactive content to healthcare planners and designers, including 360 degree interactive photographs of rooms and suites in medical facilities that we believe represent industry best practices, together with floor plans and information about the products in the room. This information helps reduce the complexities of planning and outfitting healthcare facilities, which we believe increases the appeal of our website to the facility planners responsible for many product purchasing decisions. In the U.S. alone, there are over 20,000 manufacturers and distributors that supply new medical products to over 200,000 healthcare providers, including hospitals, physicians' offices and other healthcare delivery sites. In the market for used or surplus medical products, sellers typically are manufacturers and large healthcare providers located in U.S. urban centers, while buyers typically are healthcare providers located outside of the U.S. or in rural markets in the U.S. Recently the widespread adoption of the Internet for business communications and transactions has created an opportunity for organizations to streamline business processes and to connect purchasers and sellers in otherwise fragmented markets. Because of the inefficiencies inherent in the traditional procurement process for medical products and the industry's high degree of fragmentation, we believe that participants in this industry will increasingly conduct business online to take advantage of the efficiencies of business-to-business e-commerce. Our online marketplace provides significant benefits to both purchasers and sellers of new and used medical products, supplies and equipment. By aggregating product information from numerous suppliers, we offer healthcare providers a central, easy-to-use location for the purchase of medical products, enabling them to significantly reduce transaction and procurement costs. By aggregating a wide range of purchasers, we enable any supplier to offer its new and used medical products on a global basis, significantly expanding its market exposure without the expense associated with building or extending traditional distribution channels. TABLE OF CONTENTS <TABLE> <S> <C> Prospectus Summary.......................................... 3 Risk Factors................................................ 6 Special Note Regarding Forward-Looking Statements and Industry Data............................................. 19 Use of Proceeds............................................. 21 Dividend Policy............................................. 21 Capitalization.............................................. 22 Dilution.................................................... 23 Selected Consolidated Financial Data........................ 24 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 25 Business.................................................... 35 Management.................................................. 51 Certain Transactions........................................ 64 Principal Stockholders...................................... 69 Description of Capital Stock................................ 72 Shares Eligible for Future Sale............................. 76 Underwriting................................................ 78 Legal Matters............................................... 81 Experts..................................................... 81 Where You Can Find More Information......................... 81 Index to Consolidated Financial Statements.................. F-1 </TABLE> ------------------------ You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date. Except as otherwise indicated, all information in this prospectus assumes: - the conversion of all outstanding shares of preferred stock into 39,990,988 shares of common stock upon the consummation of this offering; and - no exercise of the underwriters' over-allotment option. Neoforma, Neoforma.com, the Neoforma.com logo, Shop, Auction and Plan are our trademarks or service marks. Each trademark or service mark of any other company appearing in this prospectus belongs to its holder. We incorporated in California on March 4, 1996 and reincorporated in Delaware on November 4, 1998. Our address is 3255-7 Scott Boulevard, Santa Clara, California, 95054, and our telephone number is (408) 654-5700. Our objective is to become the leading online marketplace for new and used medical products. Key elements of our strategy to meet this objective include: - Build on our position as one of the first to offer comprehensive e-commerce services to our market and increase recognition of our brand; - Increase adoption of our online marketplace to create a network effect where the value of our marketplace significantly increases with each additional user; - Increase functionality of our services to drive broad market adoption; - Establish strategic alliances with leading industry participants; and - Expand internationally. Because we have only recently introduced our services, it is difficult to evaluate our business and our future prospects. We have generated revenue of only $464,000 for the nine months ended September 30, 1999, which consisted primarily of transaction fees paid by sellers of medical products using our AuctionLive service. We have recognized limited revenue to date from services offered through our website. We expect that in the future, our principal source of revenue will be transaction fees paid by the sellers of medical products that use our Shop and Auction services. We also expect to generate revenue from sponsorship fees paid by suppliers and service providers for the right to feature their brands and products on our Plan service. We expect to continue to have operating losses and negative cash flow for the foreseeable future. THE OFFERING <TABLE> <S> <C> Common stock offered............................... 7,000,000 shares Common stock to be outstanding after this offering......................................... 56,364,868 shares Use of proceeds.................................... For general corporate purposes, including sales and marketing, product development and working capital. Nasdaq National Market symbol...................... NEOF </TABLE> The number of shares of our common stock that will be outstanding after this offering is based on the actual number outstanding on September 30, 1999, and includes the shares of common stock issuable upon conversion of the 12,693,633 shares of our Series E and Series E-1 preferred stock that we issued in October 1999 and of the 176,057 shares of our Series E preferred stock that in November 1999 we agreed to issue and sell to Fisher Scientific International, Inc., and the 350,000 shares of common stock that we issued to the former shareholders of FDI Information Resources, Inc. in connection with our acquisition of substantially all of the assets of FDI in November 1999. The number of shares outstanding also assumes the conversion of all outstanding shares of preferred stock into 39,990,988 shares of common stock upon the completion of this offering. The number of shares outstanding excludes: - 5,112,965 shares issuable upon the exercise of stock options outstanding as of September 30, 1999, at a weighted average exercise price of $0.20 per share; - 858,147 shares issuable upon the exercise of warrants outstanding as of September 30, 1999, at a weighted average exercise price of $0.61 per share; - 13,876,213 shares available for future issuance under our stock plans as described under "Management -- Employee Benefit Plans;" since September 30, 1999, we have granted options to purchase 1,520,000 of these shares to new members of our management team; and - 2,000,000 shares of our common stock that we issued to the former shareholders of Pharos Technologies, Inc., including shares issuable upon the exercise of assumed options. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The summary consolidated financial information below should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the related notes included elsewhere in this prospectus. <TABLE> <CAPTION> PERIOD FROM INCEPTION YEAR ENDED NINE MONTHS ENDED (MARCH 6, 1996) DECEMBER 31, SEPTEMBER 30, TO DECEMBER 31, ---------------- ------------------ 1996 1997 1998 1998 1999 ---------------- ------ ------- ------- -------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Total revenue......................... $ -- $ -- $ -- $ -- $ 464 Loss from operations.................. (196) (408) (4,607) (2,350) (25,420) Net loss.............................. (54) (416) (4,563) (2,308) (25,614) Basic and diluted net loss per share............................... (0.01) (0.05) (1.65) (0.61) (14.20) Weighted-average shares -- basic and diluted............................. 8,000 8,083 2,762 3,807 1,804 Pro forma basic and diluted loss per share............................... (0.36) (0.94) Weighted average shares -- pro forma basic and diluted................... 12,848 27,225 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1999 ------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............................ $ 655 $72,155 $142,365 Working capital...................................... (9,110) 62,390 132,600 Total assets......................................... 16,003 87,503 157,713 Notes payable, less current portion.................. 8,069 8,069 8,069 Mandatorily redeemable convertible preferred stock... 15,870 -- -- Total stockholders' equity (deficit)................. (18,771) 74,902 145,112 </TABLE> See Note 2 of notes to consolidated financial statements for a description of the method we used to compute our basic and diluted net loss per share. The above table summarizes our consolidated balance sheet as of September 30, 1999: - on an actual basis; - on a pro forma basis to reflect - the sale of 12,418,633 shares of our Series E and Series E-1 preferred stock for net proceeds of approximately $70.5 million and the issuance of 275,000 shares of our Series E-1 preferred stock in connection with a strategic alliance in October 1999, - the issuance of 176,057 shares of our Series E preferred stock that in November 1999 we agreed to sell to Fisher Scientific for net proceeds of approximately $1.0 million, - the issuance of 350,000 shares of common stock to the former shareholders of FDI Information Resources in connection with our acquisition of substantially all of the assets of FDI in November 1999, and - the conversion of all outstanding shares of preferred stock into 39,990,988 shares of common stock upon the completion of this offering; and - on a pro forma as adjusted basis to further reflect the application of the net proceeds from the sale of 7,000,000 shares of common stock in this offering at an assumed initial public offering price of $11.00 per share, after deducting the underwriting discount and estimated offering expenses.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001096573_participat_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001096573_participat_prospectus_summary.txt
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+SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS, INCLUDING RISK FACTORS AND FINANCIAL STATEMENTS AND RELATED NOTES REGARDING OUR COMPANY AND THE COMMON STOCK BEING SOLD IN THIS OFFERING. PARTICIPATE.COM, INC. OUR BUSINESS We are a management service provider, or MSP, that enables successful eBusiness strategies by offering an integrated management solution for online communities. Online communities are groups of businesses, customers or employees with common interests that interact via the Internet to share business practices, provide feedback and build relationships. We receive recurring fees to develop, manage and host successful online communities using our community management expertise and proprietary service delivery platform, the Community Management System, or CMS. Our full-service approach is designed to enable eBusinesses to strengthen relationships, build loyalty, reduce their operating and customer acquisition costs, and create new revenue opportunities. We provide our services primarily to Global 1000 and leading Internet companies. Our clients include Ace Hardware, Ask Jeeves, AT&T WorldNet-Registered Trademark- Service, Columbia TriStar Interactive, Kodak, mySAP, NBC Internet, Reuters, SciQuest.com and Staples.com. We expand our market opportunities through our strategic channel relationships with a number of leading Internet professional services firms and technology providers, including Breakaway Solutions, Cisco Systems, Diamond Technology Partners Incorporated and Kana Communications. OUR MARKET The projected growth of the Internet over the next five years is dramatic, particularly in the business-to-business market. The Gartner Group, an independent research firm, projects that the volume of non-financial goods and services sold through business-to-business eCommerce will grow from $145.0 billion in 1999 to $7.3 trillion worldwide in 2004. To capitalize fully on the new opportunities presented by the Internet, businesses demand both solution DEVELOPMENT, which includes strategy, design, and implementation, and solution MANAGEMENT, which includes ongoing active supervision, innovation, strategic use of technology and hosting of applications. International Data Corporation, an independent research firm, expects the worldwide market for Internet services, including consulting, systems integration, management and outsourcing services, to grow from $7.8 billion in 1998 to $78.5 billion in 2003. We believe every enterprise will face significant ongoing challenges in the management of its eBusiness initiatives, including the need to acquire and retain customers, differentiate itself from competitors, scale its eBusiness and build relationships with the most valuable business customers. Traditional Internet services organizations presently provide development solutions, technology and hosting services to build eBusiness initiatives. We believe that these services providers lack the focus and expertise required to specifically address the ongoing management challenges of eBusiness initiatives. We believe that a professionally managed online community uniquely addresses these recurring management challenges. As a result, we believe there is a significant market opportunity for an MSP offering online community solutions. OUR SOLUTION We believe we are the only MSP to offer the full range of services needed to manage our clients' online community needs. Our solution has the following key elements: - INTEGRATED FULL-SERVICE APPROACH. We use our proprietary CMS methodology to provide a completely outsourced, comprehensive community solution for our clients. The CMS includes five key capabilities: <TABLE> <S> <C> KEY CAPABILITY DESCRIPTION - ----------------------- ---------------------------------------------------- <S> <C> Strategy Design and develop integrated communities Management Deliver a comprehensive approach to measure, analyze and provide feedback on community participation Research Conduct ongoing analysis of online community evolution, metrics and best practices Service Innovation Continually identify, develop and implement new community service offerings Application Hosting Rapidly implement a hosted community solution </TABLE> - SIGNIFICANT COMMUNITY MANAGEMENT EXPERTISE. Through our ongoing deployment of a significant number of online community management programs, we have developed extensive community knowledge that we disseminate across multiple industries and clients. - VALUE DRIVEN RESULTS. For each of our ongoing engagements, we generate and analyze metrics that assess performance on several dimensions, including return on investment, customer insight and community effectiveness. - SPEED OF EXECUTION. Through our concentrated focus on online community management, proprietary processes and dedicated resources, we believe that our approach rapidly delivers continuously improving, comprehensive management solutions to clients. - SCALABLE SOLUTIONS. Our internal management practices and the architecture of our solutions allow us to develop and expand programs and capabilities as our clients' communities grow. OUR STRATEGY Our objective is to be the leading global MSP of online community solutions. We intend to pursue this objective in the following ways: - further penetrate an underserved market for management services; - expand relationships with current clients; - strengthen and expand strategic relationships; - actively build the Participate.com brand within our target markets; - continue to develop intellectual capital and proprietary methodologies; and - attract and retain high quality professionals. OUR CORPORATE HEADQUARTERS Our headquarters are located at 945 West George Street, Third Floor, Chicago, Illinois 60657-5007 and our telephone number at that location is (773) 665-0020. THE OFFERING <TABLE> <S> <C> Common stock offered by Participate.com..................... shares Common stock to be outstanding after this offering.......... shares Use of proceeds............................................. For general corporate and working capital purposes, including increases in our marketing initiatives, hiring of additional personnel and redemption of our Series A preferred stock. See "Use of Proceeds." Proposed Nasdaq National Market symbol...................... PRTP </TABLE> - ------------------------ Except as otherwise indicated, all information in this prospectus assumes: - no exercise of the underwriters' over-allotment option; and - a two-for-one stock split of our Series B preferred stock and common stock effective in January 2000. Except as otherwise indicated, the total number of shares to be outstanding after the offering excludes: - 2,062,604 shares issuable upon the exercise of stock options outstanding at April 12, 2000 at a weighted average exercise price of $1.20 per share; - 3,232,076 shares in aggregate available for future issuance under our 1999 Stock Plan, 2000 Stock Plan and 2000 Employee Stock Purchase Plan; and - 525,000 shares issuable upon the exercise of outstanding warrants at a weighted average exercise price equal to the price per share in this offering. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The summary financial information set forth below is derived from our financial statements. You should read it in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes included elsewhere in this prospectus. The pro forma basic and diluted net loss per share attributable to common stockholders gives effect to the assumed conversion of our Series B preferred stock into shares of common stock, weighted for the period outstanding, for the year ended December 31, 1999. The as adjusted balance sheet data summarized below reflect the application of the net proceeds from the sale of the shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting the underwriting discounts and commissions and our estimated offering expenses. <TABLE> <CAPTION> PERIOD FROM OCTOBER 30 (INCEPTION) TO YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------ 1997 1998 1999 -------------- ---------- ----------- <S> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenues.............................................. $ 6 $ 507 $ 1,885 Gross profit.......................................... 1 184 599 Operating loss........................................ (4) (93) (2,792) Net loss attributable to common stockholders.......... (4) (98) (2,733) ========== ========== =========== Basic and diluted net loss per share attributable to common stockholders................................. $ 0.00 $ (0.02) $ (0.33) ========== ========== =========== Shares used in computing basic and diluted net loss per share attributable to common stockholders....... 5,752,050 6,368,178 8,200,621 ========== ========== =========== Pro forma basic and diluted net loss per share attributable to common stockholders................. $ (0.26) =========== Shares used in computing pro forma basic and diluted net loss per share attributable to common stockholders........................................ 10,703,930 =========== </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ---------------------- ACTUAL AS ADJUSTED -------- ----------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................. $10,609 Working capital........................................... 10,249 Total assets.............................................. 11,896 Capital lease obligations, net of current portion......... 91 Redeemable preferred stock................................ 13,214 Accumulated deficit....................................... (1,824) Total stockholders' equity (deficit)...................... (2,528) </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001096658_centra_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001096658_centra_prospectus_summary.txt
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+SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION IN THIS PROSPECTUS, INCLUDING RISK FACTORS, REGARDING OUR COMPANY AND THE COMMON STOCK SOLD IN THIS OFFERING. OUR COMPANY OUR BUSINESS We design, develop and support software and services that provide live business collaboration over the Internet, enabling the development of stronger customer, partner and employee relationships, collaborative commerce, and corporate learning and training. Our products provide Internet infrastructure for comprehensive live collaboration and include functionalities such as voice over the Internet, software application sharing, real-time data exchange and shared workspaces. Our products are accessible by users of intranets, business partners on extranets and remote constituents over the Internet. Our products provide for the exchange of business-critical information in a variety of contexts, including one-to-one customer and sales interactions, one-to-many seminar and presentation events, and many-to-many learning and interactive teamwork sessions. OUR MARKET Companies are increasingly using the Internet as a means for conducting business online. Forrester Research estimates that business-to-business e-commerce will increase from $43 billion in 1998 to $1.3 trillion in 2003. To date, companies have focused their Internet infrastructure spending primarily on technologies designed to enhance the efficiency of processing commercial transactions. Companies increasingly seek technologies that complement the transactional processing of electronic commerce applications with a live, interactive environment for the exchange of important information with their constituents, including customers, partners and employees. In order to collaborate with multiple constituents more effectively and efficiently, companies need a comprehensive, flexible and broadly accessible Web-based solution that supports a broad range of live interactions. OUR PRODUCTS We have three primary offerings: Centra 99, a software application that supports live business collaboration online; CentraNow, a Web collaboration service; and the Centra Business Collaboration Network, or Centra BCN, a network that enables content and service providers and users to conduct business-to-business interactions over the Web. These products and services are designed to enable companies to strengthen their customer, partner and employee relationships, promote revenue growth through frequent customer interaction, use their employee knowledge and expertise more effectively, improve the productivity of their employees and reduce the costs associated with traditional live collaboration. Our software products and online services take advantage of the power and accessibility of the Internet to support live business collaboration with broad audience reach and the ability to handle many concurrent users and are designed to integrate easily with existing computer systems and emerging Web technologies. We intend to continue to engage selected online content and service providers to be members of Centra BCN, which we believe will increase market awareness of the value of live business collaboration as well as the benefits of our products and services. OUR CUSTOMERS As of December 31, 1999, we had over 170 customers, including the following, each of which has accounted for at least $25,000 of our revenues to date: Clarke American, Compaq, i2 Technologies, Kraft Foods, MCI WorldCom, Nationwide Mutual Insurance, Nortel Networks, PricewaterhouseCoopers, Schering Plough, University of Tennessee and Viacom. OUR ADDRESS Our executive offices are located at 430 Bedford Street, Lexington, Massachusetts 02420, and our telephone number at that location is (781) 861-7000. Our Web site address is WWW.CENTRA.COM. Information contained on our Web site is not part of this prospectus. ADDITIONAL CONSIDERATIONS We began shipping our first product in July 1997, and to date we have derived all of our revenues from Centra 99 software products and related services. Broad and timely acceptance of our CentraNow Web service and Centra BCN, which were introduced in October 1999, is critical to our future success. Because our market is rapidly changing and highly competitive, we may not succeed in generating significant revenues from our CentraNow Web service and Centra BCN and our revenues from Centra 99 may not meet our expectations. Since inception, we have incurred substantial net losses in each fiscal period, resulting in an accumulated deficit of $26.5 million at December 31, 1999. We expect to continue to incur losses for the foreseeable future. For a discussion of these and other risks relating to an investment in our common stock, see "Risk Factors" below. THE OFFERING <TABLE> <S> <C> Common stock offered by Centra............... 5,000,000 shares Common stock to be outstanding after the offering................................... 23,250,052 shares Use of proceeds.............................. To pay $6.5 million due to holders of our series A and series B preferred stock upon completion of the offering and to fund working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol....... CTRA </TABLE> The number of shares of common stock to be outstanding after the offering is based on shares outstanding as of December 31, 1999. This number includes 13,746,735 shares of common stock to be issued upon conversion of our outstanding preferred stock upon completion of the offering. It excludes (a) 1,604,288 shares issuable upon exercise of options outstanding as of February 2, 2000, which have a weighted average exercise price of $2.57 per share, and (b) 4,613,472 additional shares reserved as of February 2, 2000 for future issuance under our stock-based compensation plans. After this offering, our directors and executive officers and their affiliates will collectively control over 44% of our common stock, which will enable them to influence all matters requiring stockholder approval, including any proposed change in control of our company. See "Risk Factors" below. ------------------------ EXCEPT WHERE WE STATE OTHERWISE, THE INFORMATION WE PRESENT IN THIS PROSPECTUS REFLECTS: - THE AUTOMATIC CONVERSION OF OUR OUTSTANDING PREFERRED STOCK INTO COMMON STOCK UPON COMPLETION OF THIS OFFERING, - AMENDMENTS TO OUR CERTIFICATE OF INCORPORATION AND BY-LAWS EFFECTIVE UPON COMPLETION OF THIS OFFERING, AND - NO EXERCISE OF THE UNDERWRITERS' OPTION TO PURCHASE ADDITIONAL SHARES IN THE OFFERING. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following tables summarize the financial data of our business. The pro forma share information included in the consolidated statement of operations data have been computed as described in note 1(k) of the notes to consolidated financial statements included elsewhere in this prospectus. The pro forma column in the consolidated balance sheet data reflects the conversion of our outstanding preferred stock into common stock upon completion of this offering and an increase in the book value of the series A and series B preferred stock to reflect amounts payable to holders upon conversion. The pro forma as adjusted column in the consolidated balance sheet data also reflects our sale of the 5,000,000 shares of common stock offered by us at an assumed public offering price of $11.00 per share and after deducting the estimated underwriting discounts and commissions and the estimated offering expenses that we will pay, and the application of the estimated net proceeds as described under "Use of Proceeds," including our payment of $6.5 million to the holders of the series A and series B preferred stock. <TABLE> <CAPTION> PERIOD FROM INCEPTION (APRIL 4, 1995) YEAR ENDED DECEMBER 31, TO DECEMBER 31, ----------------------------------------- 1995 1996 1997 1998 1999 --------------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: License........................................... -- -- $ 234 $ 3,356 $ 7,017 Service........................................... -- -- 55 870 1,578 Total revenues.................................. -- -- 289 4,226 8,595 Gross profit...................................... -- -- 84 3,122 6,879 Operating loss.................................... $ (646) $(2,634) (6,406) (6,464) (8,931) Net loss.......................................... (614) (2,569) (6,371) (6,253) (8,623) Net loss attributable to common stockholders...... (699) (2,942) (6,877) (6,759) (9,130) Basic and diluted net loss per share.............. $(0.45) $ (0.75) $ (1.33) $ (1.16) $ (1.39) Weighted average shares outstanding............... 1,561 3,935 5,156 5,845 6,588 Pro forma basic and diluted net loss per share.... $ (0.64) Pro forma weighted average shares outstanding..... 15,281 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 7,878 $ 7,878 $39,390 Working capital............................................. 5,828 (652) 37,829 Total assets................................................ 13,296 13,296 46,103 Term loan, net of current maturities........................ 376 376 376 Redeemable convertible preferred stock...................... 32,480 -- -- Total stockholders' equity (deficit)........................ (24,787) 1,213 40,989 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001096839_prime_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001096839_prime_prospectus_summary.txt
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+SUMMARY You should read the following summary together with the more detailed information in this prospectus, including risk factors, regarding our company and the common stock being sold in this offering. Our Company We develop and sell advanced software solutions that permit a company to promote its products or services over both the Internet and more traditional marketing channels on an automated and integrated basis. Our solutions enable businesses with large numbers of customers to create, manage and execute targeted Internet and traditional marketing campaigns to build more loyal and profitable customer relationships. We have drawn on over twelve years of experience in the design, implementation and management of marketing campaigns to develop products that draw on all of the business's data regarding its customers, including information generated by its sales, marketing, service and accounting organizations, to formulate highly targeted marketing campaigns. Our products are designed to permit clients to more effectively market and sell to their customers by delivering highly personalized marketing messages over a customer's marketing channel, whether it is the Internet, or traditional channels such as direct mail or radio and television advertising. Using our products, business are able to: . lower the cost of acquiring and retaining customers; . focus marketing efforts on their most profitable customers; . optimize the use of marketing channels based on customer preferences; . increase customer retention and loyalty; and . maximize their lifetime value of customers through more effective cross selling. Our latest product offerings, Prime@Vantage and Prime@Vantage.com, which were released in December 1999, provide clients with a web-based, multi-channel marketing solution. Using Prime@Vantage.com, our clients are able to create and manage comprehensive marketing campaigns that utilize inbound and outbound e- mail, customized website content, banner advertising and other internet advertising, along with more traditional direct and indirect marketing techniques, to develop and deploy immediate, personalized marketing messages to existing and potential customers. We focus on key vertical industries that have a critical need for advanced marketing management solutions, including communications and media, financial services and retail and e-commerce. Our clients include Fortune 1000 businesses as well as leading e-commerce businesses. Today, more than 70 clients use our products to manage millions of customer relationships. Our clients include leaders in communications and media, including Air Touch and Media One, in the financial services industry, such as Deutsche Bank and the Royal Bank of Scotland, in retail and e-commerce, including Boots and CVS, as well as such other major enterprises as British Airways and Dell Computer. We utilize our direct sales force and key industry partners such as Andersen Consulting, NCR and SAS Institute to sell and market our products. We were founded in 1987 in the United Kingdom. Prior to 1999, our corporate headquarters were located in London, and our primary focus was on the European market. In 1998, we began to increasingly target the United States market, and in July 1999, moved our corporate headquarters to Cambridge, Massachusetts. Our strategy is to become a leading supplier of integrated eMarketing solutions by building on our position in Europe, rapidly expanding our presence in the United States and other key markets, continuing to grow our direct sales force and expanding our strategic marketing relationships. Our Address Prime Response's principal executive offices are located at 150 CambridgePark Drive, Cambridge, Massachusetts 02140 and our telephone number at that location is (617) 876-8300. Our website is located at www.primeresponse.com. Information contained in our website is not part of this prospectus. -------------------- The Offering <TABLE> <C> <S> Common stock offered............................ 3,500,000 shares Common stock outstanding after the offering..... 19,828,002 shares Use of proceeds................................. An aggregate of approximately $10.4 million of the net proceeds will be paid to some holders of series B preferred stock upon the closing of this offering in accordance with the terms of the preferred stock, approximately $4.3 million will be used to pay a promissory note to be issued to one of our stockholders, and the remaining net proceeds will be used to expand our United States operations and to fund continued growth and expansion of our business, product development, potential acquisitions and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol.......... PRME Proposed EASDAQ symbol.......................... PRME </TABLE> -------------------- Common stock outstanding after the offering is based on the number of shares outstanding as of December 31, 1999, and except as otherwise noted, all information in this prospectus: . reflects the issuance of 251,538 shares of common stock upon exercise of warrants at $0.0133 per share immediately prior to the completion of this offering; . reflects the automatic conversion of all of our outstanding shares of preferred stock into an aggregate of 6,323,867 shares of common stock upon completion of this offering; . reflects the conversion of 427,807 shares of redeemable common stock into common stock upon completion of this offering; . reflects the issuance of an aggregate of 2,871,284 shares of common stock to holders of the preferred stock upon completion of this offering in payment of accrued dividends and as required by other terms of the preferred stock and assumes the closing of this offering on March 7, 2000 (includes 29,801 shares of common stock issued for dividends accrued in the period January 1, 2000 through March 7, 2000); . reflects the exercise of the option to repurchase 1,249,500 shares of redeemable common stock from a principal shareholder at $3.42 per share upon completion of this offering; . excludes 3,600,000 shares issuable under our 1998 stock option Stock Issuance Plan and upon the exercise of outstanding warrants, for additional information regarding these shares. Please see "Capitalization."; . reflects a three-for-four reverse stock split of all of our outstanding shares of common stock which was effected on February 2, 2000; and . assumes no exercise of the underwriters' over-allotment option. Summary Consolidated Financial Data (dollars in thousands, except per share data) Set forth below are summary consolidated statements of operations data for the years ended December 31, 1997, 1998 and 1999. Also set forth below are summary consolidated balance sheet data as of December 31, 1999, which were prepared as follows: . on an actual basis, without any adjustments to reflect subsequent events or anticipated events; . on a pro forma basis to reflect the following: . automatic conversion of all outstanding shares of preferred stock into an aggregate of 6,323,867 shares of common stock; . reflects the conversion of 427,807 shares of redeemable common stock into common stock upon completion of this offering; . issuance of an aggregate of 2,841,483 shares of common stock to holders of the preferred stock in payment of accrued dividends and participation feature and an aggregate cash payment of $10.3 million to some holders of preferred stock; and . on a pro forma as adjusted basis to reflect the following: . issuance of 251,538 shares of common stock upon the exercise of warrants at $0.0133 per share immediately prior to the completion of this offering; . sale of the 3,500,000 shares of common stock offered by us in this offering and our receipt of the estimated net proceeds, after deducting the estimated underwriting discounts and commissions and the estimated offering expenses that we expect to pay in connection with this offering; . accretion of preferred stock dividends of approximately $497,000 from January 1, 2000 through March 7, 2000 which will be paid in a cash payment of approximately $140,000 and 29,801 shares of common stock; and . exercise of option to repurchase 1,249,500 shares of redeemable common stock from a principal shareholder at $3.42 per share. This information should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this prospectus. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001097119_zengine_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001097119_zengine_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. HOWEVER, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE INFORMATION UNDER "RISK FACTORS" BEGINNING ON PAGE 9, AND THE FINANCIAL STATEMENTS BEGINNING ON PAGE F-1, BEFORE MAKING AN INVESTMENT DECISION. ZENGINE, INC. Zengine provides a comprehensive suite of technology-based solutions that enable businesses to conduct electronic commerce. We offer a full range of integrated services for both business-to-business, or B2B, and business-to-consumer, or B2C, e-commerce including Web site user interface design, product content and merchandising, personalization and customer relationship management, advertising and sponsorship management, order management, inventory management and order fulfillment, end-user customer service and reporting and analysis. We provide our services as a complete, or "turn-key," package or as component features. We believe our solution allows our clients to achieve rapid deployment of e-commerce platforms, results in greater economies of scale and provides cost-effective, ongoing access to leading edge e-commerce technology. We market our services to businesses seeking to initiate, expand or enhance their ability to conduct e-commerce. Our solutions are delivered on an outsourced basis, which means we produce and operate our client's e-commerce Web sites under their brand. This allows our clients to quickly and cost-effectively create, maintain and enhance their e-commerce presence. The functional components of KORE are stored on a centralized server array which services all of our e-commerce clients. This architecture minimizes development costs and reduces time to market because we are able to leverage existing functionality previously developed within KORE rather than re-engineering the functionality for each application. Upon completion, the component or feature can be made available to other Zengine clients without added development time or cost. In addition, the KORE Engine is built to be highly-scalable, permitting our clients to deliver consistent quality of service as transaction volumes increase, enabling the rapid deployment of high-speed, dynamic e-commerce Web sites. The real-time personalization technology proprietary to KORE allows businesses to manage online customer relationships and personalize communication with their customers and trading partners. Widespread acceptance of the Internet has opened tremendous opportunities for companies seeking growth and increased efficiencies through B2B and B2C e-commerce. Although companies are eager to take advantage of these opportunities, many may lack the internal resources that the analysis, design and implementation of an effective Internet solution requires. It is often very inefficient, expensive and time-consuming for companies to develop and staff their own e-commerce solutions or to purchase currently available application software packages that require sophisticated integration and maintenance. As a result, companies increasingly seek to outsource these services. We believe our ability to offer a full range of integrated e-commerce services demanded by clients on a turn-key and outsourced basis provides us a competitive advantage in today's marketplace. We actively market our services through a direct sales force to businesses seeking to initiate, expand or enhance their ability to conduct e-commerce, including: - original equipment manufacturers; - wholesalers, distributors and other businesses that create customized vendor and supply chain relationships over the Internet or a secure extranet, a computer network used to communicate business related information to a particular vendor, distributor or customer; - bricks and mortar retailers; - online-only retailers; and - Web sites that have a large and loyal user base, including portals, pure content sites, communities, directories and service providers. We plan to continue to pursue these target clients and to penetrate other markets through indirect distribution channels such as consulting firms, systems integrators, advertising firms, and other professional services firms. After the commercial introduction of the Zengine service, we have successfully launched our client's e-commerce platforms within an average of 40 days after engagement. We currently have 15 e-commerce clients. We also sell advertising and sponsorship packages through our clients' Web sites primarily to original equipment manufacturers whose products are featured in our client's online stores. We have placed advertisements for 16 companies. Our revenue is generated through a combination of one or more of the following: initial set-up and integration fees, subscription fees, transaction fees and advertising and sponsorship fees through our clients' Web sites. We intend to grow our business by pursuing five key strategies: - target companies seeking to initiate, expand or enhance their ability to conduct e-commerce; - extend the capabilities of our KORE Engine; - leverage our client base; - expand our strategic alliances; and - assist our clients in increasing their revenues using our state-of-the-art e-commerce solutions. OUR RELATIONSHIP WITH MCSI We are a subsidiary of MCSi, Inc., a systems integrator of state-of-the-art presentation and broadcast facilities throughout the United States, Canada and certain foreign countries. MCSi offers design-build and engineering, computer networking and configuration services, an extensive product line and technical support to the converging audio-visual systems, broadcast media and computer technology industries. MCSi's common stock is traded on the Nasdaq National Market under the symbol "MCSI." After the completion of this offering, MCSi will own approximately 50.7% of the outstanding shares of our common stock, or approximately 48.9% if the underwriters exercise their over-allotment option in full. In addition to the MCSi Subscription Program, MCSi has advised us that it intends to evaluate, from time to time, alternatives to maximize, for the benefit of MCSi's stockholders, the value of its Zengine ownership. These alternatives could include retention of all or a portion of MCSi's shareholdings, the sale in one or more transactions of all or a portion of MCSi's shareholdings, the distribution of MCSi's shareholdings to MCSi shareholders possibly through a tax free spin-off under Section 355 of the Internal Revenue Code, the issuance of debt or equity securities that enable MCSi to monetize all or a portion of its investment in Zengine or other transactions. We cannot assure you as to which alternative MCSi may choose, or which may be achievable, or whether or when any such transaction will occur. We have entered into a number of agreements with MCSi relating to our business. Under these agreements, MCSi will continue to provide us with certain administrative, product fulfillment and customer support services and facilities, and we will provide MCSi with e-commerce services for its computer products and accessories and audio-visual products business. For more information, please see "Risk Factors--Risks Related to Our Relationship With MCSi" and "Certain Transactions." ------------------------ We were incorporated in Delaware in March 1999. Our principal executive offices are located at 6100 Stewart Avenue, Fremont, California 94538, and our telephone number is (510) 651-6400. We maintain a Web site at www.zengine.com, and MCSi maintains a Web site at www.mcsinet.com. Information contained on these as well as other Web sites referred to herein do not constitute part of this prospectus and are not incorporated by reference in this prospectus. ------------------------ Unless otherwise indicated, all references to "Zengine," "we," "us" and "our" refer to Zengine, Inc., a Delaware corporation. THE OFFERING <TABLE> <S> <C> Shares offered by Zengine............ 4,290,000 Shares outstanding after the offering........................... 16,473,480 Shares reserved for issuance with respect to outstanding options and a warrant.......................... 1,660,167 Use of proceeds...................... For general corporate purposes, including working capital, sales and marketing activities, development of our service offerings, capital expenditures and potential investments or acquisitions in order to execute our key strategies. Please see "Use of Proceeds." Nasdaq National Market symbol........ "ZNGN" </TABLE> Unless otherwise noted, the information in this prospectus assumes the underwriters do not exercise their option to purchase an additional 585,000 shares of common stock from us to cover over-allotments. The number of outstanding shares used in this prospectus is 12,183,480 and excludes: - 1,380,118 shares of common stock issuable upon exercise of outstanding options at a weighted average exercise price of $0.89; - 2,004,182 shares of common stock available for the future grant of stock options under our stock option plan; and - 280,049 shares of common stock issuable upon the exercise of a warrant to be issued on the date of the initial public offering at an exercise price per share equal to the initial public offering price. MCSi SUBSCRIPTION PROGRAM As part of this offering, we are offering shares of our common stock at the initial public offering price to stockholders of MCSi that owned at least 100 shares of MCSi common stock on May 15, 2000 in the MCSi Subscription Program. MCSi stockholders may subscribe for one share of common stock for every 30 shares of MCSi common stock held by them. The program is described in greater detail in the section of this prospectus entitled "Plan of Distribution--MCSi Subscription Program." ------------------------ All information in this prospectus relating to the number of shares of our common stock, options or warrants, unless otherwise noted, is based upon information as of June 30, 2000, assuming that our amended and restated certificate of incorporation has been filed to increase the authorized common stock to 100,000,000 shares, a 6.7686 to one stock split before the offering and that the MCSi Subscription Program is fully subscribed by MCSi stockholders. SUMMARY FINANCIAL INFORMATION The summary financial information set forth below for the period from inception, which was as of January 1, 1999, to September 30, 1999 and the six months ended March 31, 2000, has been derived from our financial statements which have been audited by PricewaterhouseCoopers LLP, independent accountants, whose report is included elsewhere in this prospectus. The unaudited interim financial data for the three and nine month periods ended June 30, 2000 has been derived from our unaudited interim financial statements, which in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation thereof. The summary financial information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our financial statements and the accompanying notes thereto included elsewhere in this prospectus. <TABLE> <CAPTION> PERIOD FROM INCEPTION SIX MONTHS ENDED (JANUARY 1, 1999) TO MARCH 31, THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1999(1) 2000(1) JUNE 30, 2000(1) JUNE 30, 2000(1) ---------------------- ---------------- ------------------ ----------------- <S> <C> <C> <C> <C> RESULTS OF OPERATIONS DATA: Revenue Third party............... $ 4,089 $1,354,088 $1,295,077 $2,649,165 Related Party............. -- 1,356,828 1,098,293 2,455,121 ---------- ---------- ---------- ---------- 4,089 2,710,916 2,393,370 5,104,286 ---------- ---------- ---------- ---------- Cost of revenue Third party............... 23,511 231,752 203,791 435,543 Related party............. -- 55,253 24,000 79,253 Non-cash stock based compensation............ -- 45,357 43,703 89,060 ---------- ---------- ---------- ---------- 23,511 332,362 271,494 603,856 ---------- ---------- ---------- ---------- Gross profit (loss)........... (19,422) 2,378,554 2,121,876 4,500,430 ---------- ---------- ---------- ---------- Selling, general and administrative expenses(2) Third party............... 311,598 1,784,029 1,546,670 3,330,699 Related party............. 513,120 435,000 794,251 1,229,251 Non-cash stock based compensation............ 89,483 67,816 72,880 140,696 ---------- ---------- ---------- ---------- 914,201 2,286,845 2,413,801 4,700,646 ---------- ---------- ---------- ---------- Income (loss) from operations.................. (933,623) 91,709 (291,925) (200,216) Interest income............... -- 81,464 42,291 123,755 ---------- ---------- ---------- ---------- Income (loss) before income taxes....................... (933,623) 173,173 (249,634) (76,461) Provision for income taxes.... -- -- -- -- ---------- ---------- ---------- ---------- Net income (loss)............. $ (933,623) $ 173,173 $ (249,634) $ (76,461) ========== ========== ========== ========== Earnings (loss) per share of common stock--basic......... $ (.08) $ .02 $ (.02) $ (.01) ========== ========== ========== ========== Earnings (loss) per share of common stock-diluted........ $ (.08) $ .01 $ (.02) $ (.01) ========== ========== ========== ========== Weighted average number of common shares outstanding-- basic....................... 11,377,184 11,091,515 11,196,537 11,143,051 ========== ========== ========== ========== Weighted average number of common shares outstanding-diluted......... 11,377,184 13,338,169 11,196,537 11,143,051 ========== ========== ========== ========== </TABLE> <TABLE> <CAPTION> AT SEPTEMBER 30, AT 1999(1) JUNE 30, 2000(1) -------------- ---------------- <S> <C> <C> BALANCE SHEET DATA: Working capital (deficit)................................... $(92,167) $3,549,790 Total assets................................................ $355,320 $5,447,043 Long-term debt.............................................. -- -- Total debt.................................................. -- -- Stockholders' equity........................................ $262,747 $4,287,091 </TABLE> ------------------------------ Notes: (1) The data reflects selected results of operations and balance sheet data from the period from our inception, which was as of January 1, 1999, through September 30, 1999, for the six month period ended March 31, 2000, for the three month period ended June 30, 2000 and for the nine month period ended June 30, 2000. Because our inception was on January 1, 1999, comparable data for the six month period ended March 31, 1999 and for the nine month period ended June 30, 2000 is not available. For all periods presented, revenue, cost of revenue and selling, general and administrative expenses include related party transactions with MCSi. See Note 4 to our financial statements included elsewhere in this prospectus.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001097264_allos_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001097264_allos_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following is only a summary. You should carefully read the more detailed information contained in this prospectus, including our financial statements and related notes included in this prospectus. Our business involves significant risks. You should carefully consider the information under the heading "Risk Factors" beginning on page 9. Unless otherwise noted, all information in this prospectus: - has been adjusted to reflect a 0.62-for-one reverse stock split of our common stock which will be effected prior to consummation of this offering; - assumes the conversion of all outstanding shares of our preferred stock into 15,678,737 shares of common stock upon the closing of this offering; and - assumes no exercise by the underwriters of the over-allotment option. THE COMPANY Allos Therapeutics is a pharmaceutical company focused on developing and commercializing innovative small molecule drugs, initially for improving cancer treatments. Our lead product candidate is RSR13. RSR13 is a synthetic small molecule that increases the release of oxygen from hemoglobin, the oxygen-carrying protein contained within red blood cells. In February 2000, we commenced a Phase III trial of RSR13 in combination with radiation therapy for the treatment of brain metastases, or tumors which have spread to the brain. We believe that this trial, if positive, will serve as the basis for seeking marketing approval for RSR13 from the U.S. Food and Drug Administration, or FDA, for this indication. In addition to improving existing treatments for cancer, we believe RSR13 can be used to treat many other diseases and clinical conditions attributed to or aggravated by oxygen deprivation in the body, known as hypoxia. We currently retain worldwide commercialization rights for all of our product candidates for all target indications. The presence of oxygen in tumors is an essential element for the effectiveness of radiation therapy in the treatment of cancer. Our studies indicate that RSR13 effectively increases tumor oxygenation, thereby reducing the percentage of hypoxic cells within malignant tumors and enhancing the cell-killing, or cytotoxic, effects of radiation therapy. The fact that RSR13 does not have to actually enter the cancer cell to increase radiosensitivity is an important difference between RSR13 and other pharmacological attempts to improve the efficacy of radiation therapy. The beneficial effects of RSR13 are the result of causing increased amounts of oxygen release from blood flowing through the tumor. It is the oxygen, and not the drug, which diffuses across the cancer cell membranes to oxygenate the tumors. This is particularly important in the case of primary or metastatic brain tumors, where the blood brain barrier acts to exclude or impede the entry of most chemical agents into the brain tissue. Each year in the United States, approximately 50% of all newly diagnosed cancer patients, or 600,000 patients, receive radiation therapy as part of their primary treatment, in addition to 150,000 patients who receive radiation therapy for persistent or recurrent cancer. The 750,000 cancer patients who receive radiation therapy annually is approximately twice the number of cancer patients who are treated with chemotherapy. Although radiation therapy can be effective in treating certain types of cancer, an unmet medical need exists for products to increase the effectiveness of radiation therapy. RSR13 has been administered safely to more than 360 patients, over 250 of whom were cancer patients receiving concurrent radiation therapy. We have 15 completed or ongoing clinical trials of RSR13, five of which have been completed in patients receiving radiation therapy. We have demonstrated in Phase II clinical trials that RSR13 significantly improves the efficacy of radiation therapy for treating brain metastases and glioblastoma multiforme, a highly aggressive form of primary brain cancer. In our Phase II brain metastases trial, the primary efficacy endpoint was survival compared to historical data using the Brain Metastases Database maintained by the Radiation Therapy Oncology Group of the American College of Radiology. In this trial, RSR13-treated patients, when compared to the historical database, demonstrated: - overall median survival time of 6.9 months compared to 4.1 months, or a 68% improvement in median survival time; - one-year survival rates of 32% compared to 15%, or an approximate doubling of survival rates; and - death due to tumor progression in the brain of 9% compared to 37%. When case-match analysis was performed using patient information from the historical database that most closely paralleled RSR13 patients, overall median survival time showed a 92% improvement over the historical database and one-year survival rates were improved from 9% to 32%. Our Phase II glioblastoma multiforme trial results showed that RSR13-treated patients, when compared to a different, applicable historical database, demonstrated overall survival of 12.1 months compared to 9.2 months. We are also currently conducting a Phase II clinical trial of RSR13 in combination with radiation therapy in patients with locally advanced, inoperable non-small cell lung cancer, and plan to develop RSR13 for improving the efficacy of radiation therapy in treating other forms of cancer. In addition to improving the treatment of cancer, we believe RSR13 can be used to treat many other diseases and clinical conditions. We intend to seek corporate partners to jointly develop RSR13 for treating the hypoxic effects of acute blood loss and decreased blood flow encountered in surgical procedures and also for improving the effectiveness of treatments for cardiovascular disease and stroke. Moreover, we plan to extend our expertise in developing drugs to other compounds and technology platforms to which we have access through our research collaborations or that we may acquire or in-license from third parties. Our strategy includes the following key elements: - focus on commercializing RSR13 in oncology markets; - establish collaborations to commercialize RSR13 in additional therapeutic applications; and - expand our product candidate portfolio. We intend to market RSR13 directly to the approximately 3,700 radiation therapists in the United States through a specialty sales force. We expect to begin hiring this sales force around the time we submit a New Drug Application to the FDA for the use of RSR13. To penetrate the non-oncology market in the United States and all markets outside the United States, we will seek to develop relationships with one or more pharmaceutical companies with established distribution systems and direct sales forces. We were incorporated in the Commonwealth of Virginia in September 1992 as Hemotech Sciences, Inc., we changed our name to Allos Therapeutics, Inc. in 1994 and reincorporated in Delaware in October 1996. Our executive office is located at 7000 North Broadway, Suite 400, Denver, Colorado 80221. Our telephone number at that location is (303) 426-6262 and our Internet address is www.allos.com. Information contained on our web site is not intended to constitute part of this prospectus. THE OFFERING Common stock we are offering............ 5,000,000 shares Common stock to be outstanding after the offering................................ 22,837,151 shares Underwriters' over-allotment option..... 750,000 shares Use of proceeds......................... We intend to use the net proceeds for research and development activities, including clinical trials, process development and manufacturing support, and for general corporate purposes, including working capital. See "Use of Proceeds." Proposed Nasdaq National Market symbol.................................. ALTH The number of shares of our common stock to be outstanding immediately after this offering is based on the number of shares outstanding on March 24, 2000. This number does not take into account: - 1,781,881 shares of our common stock issuable upon exercise of options outstanding under our stock option plan at March 24, 2000, with a weighted average exercise price of $1.24 per share; - 802,705 shares of our common stock available for future grant or issuance under our stock option plan; and - 14,275 shares of our common stock issuable upon conversion of preferred stock issuable upon exercise of outstanding warrants at March 24, 2000, excluding warrants which will expire without exercise prior to consummation of this offering, with a weighted average exercise price of $2.66 per share. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table contains a summary of our statement of operations data. The pro forma net loss per share data below gives effect to (1) the conversion of each outstanding share of preferred stock into 0.62 shares of common stock upon the closing of this offering and (2) the pro forma basis of presentation described in "Selected Financial Data" on page 21. See Note 2 to Financial Statements. <TABLE> <CAPTION> CUMULATIVE PERIOD FROM SEPTEMBER 1, 1992 (DATE OF INCEPTION) YEARS ENDED DECEMBER 31, THROUGH -------------------------------------------------------------- DECEMBER 31, 1995 1996 1997 1998 1999 1999 --------- ---------- ---------- ---------- ----------- ------------- <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Operating expenses........... Research and development... $ 1,807 $ 2,842 $ 3,865 $ 5,942 $ 7,836 $ 22,946 Clinical manufacturing..... 113 269 1,564 1,768 1,382 5,164 General and administrative.......... 542 1,262 1,262 1,486 2,379 7,171 --------- ---------- ---------- ---------- ----------- ----------- Total operating expenses......... 2,462 4,373 6,691 9,195 11,598 35,281 Loss from operations......... (2,462) (4,373) (6,691) (9,195) (11,598) (35,281) Interest and other income, net........................ 78 320 178 621 310 1,546 --------- ---------- ---------- ---------- ----------- ----------- Net loss..................... (2,384) (4,053) (6,513) (8,574) (11,288) (33,735) Dividend related to beneficial conversion feature of preferred stock...................... -- -- -- -- (9,613) (9,613) Net loss attributable to common stockholders........ $ (2,384) $ (4,053) $ (6,513) $ (8,574) $ (20,901) $ (43,348) ========= ========== ========== ========== =========== =========== Weighted-average basic and diluted net loss per share...................... $ (1.92) $ (2.46) $ (3.52) $ (4.38) $ (10.48) Weighted-average shares used in computing basic and diluted net loss per share...................... 1,240 1,645 1,848 1,959 1,995 Pro forma basic and diluted net loss per share......... $ (1.38) Shares used in computing pro forma basic and diluted net loss per share............. 15,184 </TABLE> The following table contains a summary of our balance sheet at December 31, 1999: - on an actual basis; - on a pro forma basis to reflect the conversion of each of the 25,288,286 outstanding shares of preferred stock into 0.62 shares of common stock, or an aggregate of 15,678,737 shares of common stock, effective upon the closing of this offering; and - on a pro forma as adjusted basis to additionally reflect the sale of 5,000,000 shares of common stock offered hereby at an assumed initial public offering price per share of $18.00. <TABLE> <CAPTION> DECEMBER 31, 1999 ------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- ----------- ----------- (UNAUDITED) <S> <C> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $ 9,475 $ 9,475 $ 92,175 Working capital............................................. 8,784 8,784 91,484 Total assets................................................ 10,206 10,206 92,906 Long-term obligations, less current portion................. 69 69 69 Convertible preferred stock................................. 49,899 -- -- Common stock................................................ 7,022 56,921 139,621 Accumulated deficit......................................... (43,348) (43,348) (43,348) Total stockholders' equity.................................. 8,991 8,991 91,691 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001097297_tippingpoi_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001097297_tippingpoi_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, especially the risks discussed under "Risk Factors." Netpliance, Inc. We offer Internet-based content, applications and services through devices specifically designed for Internet access, commonly known as Internet appliances. In November 1999 we introduced our current i-opener service, which combines our i-opener Internet appliance, Internet access and our own consumer portal. Our i-opener service includes all of the elements required for a user to access the Internet. We believe that our i-opener offering simplifies Internet access and appeals to both novice and veteran Internet users. Our i-opener service consists of the following three integrated elements: . i-opener Internet Appliance -- arrives ready to use and personalized to the new user based on information provided while ordering. Our i-opener Internet appliance is tailored to provide our i-opener service and comes with a 10-inch flat-panel color screen, a standard-sized keyboard that includes a pointer and an optional mouse. A new user is ready to access our i-opener service and the Internet after plugging the i-opener Internet appliance into an electric outlet, connecting it to a phone line and turning it on. Because our i-opener Internet appliance requires no boot-up, unlike a personal computer, our consumer portal appears immediately after the i-opener Internet appliance is turned on. . i-opener Internet Access -- comes prepackaged with our i-opener Internet appliance and is delivered over a nationwide dial-up network. Our i- opener Internet appliance can only access the Internet through our network. Our system software enables us to deliver content over our network to be stored locally on our i-opener Internet appliance, allowing the user to access content even when the appliance is not connected to the Internet. Our i-opener Internet appliance is programmed to automatically dial into our network remotely several times a day to retrieve new or updated content, email, system software upgrades and software applications. . i-opener Consumer Portal -- provides an entry point to the Internet and provides links to consumer content and e-commerce sites tailored to the user's age and geographic location. In the future we intend to further tailor content to the personal preferences of each user. Our portal provides access to stored content on our content channels, including news, weather, sports, entertainment and finance, and e-mail. In addition, our portal features an online shopping mall and a guide to the Internet with direct links to pre-selected, consumer-oriented content sites as well as an Internet browser. We currently are deriving substantially all of our revenues from monthly subscriptions from our users. In the future we expect to derive additional revenue from selling advertisements featured on our portal and from revenue sharing on e-commerce transactions initiated from our portal. We may also receive revenue in the future from licensing our technology to manufacturers of other Internet appliances and from selling additional applications to our users for additional fees. We charge, and expect to continue to charge, significantly less than our cost for our Internet appliance in order to acquire users. Our i- opener Internet appliance is manufactured by a third party and is shipped directly from the manufacturer to the new user. Our objective is to establish ourselves as the leader in the new market of delivering user-friendly Internet access, content and applications through Internet appliances. We intend to consistently upgrade and customize our portal and add new features to ensure user satisfaction. Our infrastructure, operating system and network are designed to provide access to our i-opener service over broadband digital subscriber lines and cable, and through wireless telephones and other handheld communication devices. Our ability to remotely upgrade and deliver software to Internet appliances through our network will allow us to provide users with new and emerging Internet-based applications and services as they become available. We were incorporated in Texas in January 1999, and we began offering our i- opener service in November 1999. We have virtually no operating history and have not proven our ability to generate revenues. As of December 31, 1999, we had an accumulated deficit of $43.5 million and only $25,716 in revenues from inception through December 31, 1999. We reincorporated in Delaware on March 15, 2000. Our principal executive offices are located at 7600A North Capital of Texas Highway, Austin, Texas 78731 and our telephone number is (512) 493-8300. Our Web site address is www.netpliance.com. Information contained on our Web site should not be considered a part of this prospectus. Strategic Relationships In December 1999 we entered into an agreement with GO.com, an affiliate of The Walt Disney Company, under which GO.com will act as our exclusive provider of specified content to be locally stored in our children, family, sports, news and entertainment content channels. Also in December 1999, we entered into a non-binding letter of intent with U S WEST regarding the joint marketing and distribution of our i-opener service to U S WEST's subscribers through dial-up and digital subscriber lines. Affiliates of GO.com and U S WEST invested in our Series D preferred stock. Under agreements we entered into in February 2000 with two Canadian cable companies, Rogers Communications and Shaw Communications, we agreed to negotiate final agreements relating to the joint marketing and distribution of our i-opener service in Canada through broadband cable with Rogers and Shaw. Also in February 2000, we entered into a non-binding letter of intent with Thomson Multimedia and ATLINKS, an affiliate of Thomson, regarding the manufacture and sale by ATLINKS of Internet access devices, including screen phones, enabled with our i-opener service. Rogers and affiliates of Shaw and Thomson invested in our Series E preferred stock. The Offering <TABLE> <C> <S> Common stock offered.............................. 8,000,000 shares Common stock to be outstanding after the offering. 60,435,935 shares Use of proceeds................................... We plan to use the proceeds from this offering for working capital, general corporate purposes and other operating expenses, including sales and marketing, subsidies for the purchase price of our i-opener Internet appliance and further development of our services. However, we do not have specific uses planned for the net proceeds of this offering. See "Use of Proceeds." Nasdaq National Market symbol..................... NPLI </TABLE> The number of shares of common stock to be outstanding after the offering is based on: .19,036,446 shares of common stock outstanding as of March 15, 2000; . 32,932,455 shares of common stock issuable upon conversion of our preferred stock outstanding as of March 15, 2000; and . 467,034 shares of common stock that we expect to issue upon the exercise of warrants that will expire upon the closing of this offering. The above number excludes: . 8,812,422 shares of common stock issuable upon exercise of outstanding options under our stock option plan as of March 15, 2000 at a weighted average exercise price of $4.13 per share; . 1,687,578 shares reserved for future issuance under our stock option plan; and . 600,000 shares of common stock issuable upon the exercise of an outstanding common stock purchase warrant that does not expire upon the closing of this offering. See "Capitalization." Generally, unless otherwise indicated, all information in this prospectus: . assumes a three for one stock split; . gives effect to the conversion of all preferred stock into common stock and the exercise of warrants to purchase 467,034 shares of common stock; . assumes the reservation of a total of 10,500,000 shares of common stock issuable under our stock option plan upon the closing of this offering; . gives effect to our reincorporation in Delaware; and . assumes no exercise of the underwriters' over-allotment option. We have applied to register the trademarks Netpliance(TM) and i-opener(TM). Every other trademark, trade name or service mark appearing in this prospectus belongs to its owner. Summary Historical and Pro Forma Financial Information (In thousands, except per share data) The following table summarizes our historical financial information. This table does not present all of our financial information. You should read this information together with our financial statements and the notes to those statements beginning on page F-1 of this prospectus, and the information under "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> From January 12, 1999 (inception) through December 31, 1999 <S> <C> Statement of Operations Data: Subscription revenue...................................... $ 26 Operating expenses........................................ 27,477 ----------- Loss from operations...................................... (27,451) Other income, net....................................... 165 ----------- Net loss.................................................. $ (27,286) =========== Net loss applicable to common stock....................... (43,528) =========== Weighted average common shares outstanding................ 15,588,420 =========== Loss per common share--basic and diluted.................. $ (2.79) =========== </TABLE> <TABLE> <CAPTION> As of December 31, 1999 --------------------------- Pro Pro Forma Actual Forma As Adjusted <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents........................... $ 9,563 $71,139 $189,179 Working capital..................................... 10,990 72,566 190,606 Total assets........................................ 20,625 82,180 199,758 Non-current portion of capital lease obligations.... 636 636 636 Total stockholders' equity.......................... 12,917 76,493 194,533 </TABLE> The table above summarizes our balance sheet data: . on an actual basis as of December 31, 1999; . on a pro forma basis to reflect the conversion of all shares of preferred stock outstanding as of December 31, 1999 into common stock, issuance and conversion into common stock of 1,430,000 shares of Series D and 1,127,675 shares of Series E preferred stock, the issuance and exercise of warrants to purchase 467,034 shares of common stock and the exercise of options to purchase 129,375 shares of common stock subsequent to December 31, 1999; and . on a pro forma as adjusted basis to reflect the pro forma transactions described above and the sale of 8,000,000 shares of common stock offered by this prospectus at an assumed initial offering price of $16.00 per share after deducting estimated underwriting discounts and commissions and estimated offering expenses.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001097335_victory_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001097335_victory_prospectus_summary.txt
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+Prospectus Summary.................... 1 Risk Factors.......................... 7 Forward-Looking Statements............ 17 Use of Proceeds....................... 18 Dividend Policy....................... 19 Capitalization........................ 20 Dilution.............................. 21 Selected Historical Financial Data.... 22 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 24 </TABLE> <TABLE> <CAPTION> PAGE -------- <S> <C> Business.............................. 31 Management............................ 41 Principal Shareholders................ 48 Related Party Transactions............ 49 Description of Capital Stock.......... 50 Shares Eligible for Future Sale....... 53 Underwriting.......................... 55 Legal Matters......................... 58 Experts............................... 58 Where You Can Find Additional Information......................... 58 Index to Consolidated Financial Statements.......................... F-1 </TABLE> ------------------------ Until , 2000, all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. -- Together with television personality Ed McMahon, we produce NEXTBIGSTAR.COM, an online entertainment talent search, where, after viewing contestants' performances online, viewers can vote for contestants in a series of competitive rounds, including four telecast finals, the first of which was broadcast live on NEXTBIGSTAR.COM on July 22, 2000. - ANIMATION AND SPECIAL EFFECTS. We produce state-of-the-art animation and special effects, including multimedia 3-D graphics and animation, for our own programming as well as programming for third parties. Our animation and special effects team is led by Art David, a member of the special effects team for the feature motion picture THE MATRIX. -- Our animation and special effects team currently provides animation for THE DOOLEY AND PALS SHOW and is developing, in association with Fred Silverman Productions, EXTREME TEAM and SK8RATZ, two animated series targeted for the six-to-twelve year old market. - BRANDED MERCHANDISE. -- LICENSING AND DIRECT SALES. We will offer a wide variety of branded, retail merchandise through domestic and international licensing programs, e-commerce and a direct sales effort. We and our licensees will market our merchandise worldwide through a variety of distribution channels, including mass market and specialty retailers, our television programs and websites. Images of our characters will appear on numerous retail products, including various types of apparel, toys and video games, and a wide assortment of other items. We intend to retain creative approval over all licensed products. -- HOME VIDEO. We intend to build a video library containing programming from our television shows as well as programs specifically designed for home video use. -- MUSIC. Our programming features original music, including theme songs composed specifically for our performers. Music is an integral part of the entertainment experience in our television programs. We intend to compile our original songs onto compact discs which will be available for retail sale. REVENUE SOURCES Through March 31, 2000, we derived substantially all of our revenues from our animation and special effects projects, and during the fourth quarter of our fiscal year ended June 30, 2000, we derived substantially all of our revenues from sponsorships relating to our NEXTBIGSTAR.COM promotional bus tour. We are in the process of implementing our business plan in our other business areas. We anticipate our future sources of revenue will include: - TELEVISION. We expect to receive revenues as a producer of television programming through domestic network and cable cash licensing fees and domestic first run syndication fees (other than for THE DOOLEY AND PALS SHOW). We expect to receive revenues as a distributor of television programming through international distribution fees and domestic re-run fees. - INTERNET. We expect to receive revenues from Internet advertising on our websites through cross-promotional agreements with other websites, direct sales of our products online and, for our NEXTBIGSTAR.COM website, an integrated Internet and television advertising package including Internet and television commercials, category-specific sponsorship packages, banner ads, tags and website links. - MERCHANDISING. We expect to receive revenues from the licensing, marketing and distribution and direct sales of our program-related merchandise, which includes toys, CDs and interactive CD-Roms, board games, apparel and home videos. OUR STRATEGIES Our goal is to continue to be an innovative developer, producer and distributor of television and Internet programming. Our strategies are to: - develop, produce and distribute quality television and Internet programming; - operate the largest worldwide online talent search domestically and internationally; - expand upon our animation and special effects studio capabilities by continuing our commitment to state-of-the-art technology and by continuing to hire experienced creative personnel who specialize in the creation, development and production of 3-D computer animation and special effects; - maximize our licensing, marketing, distribution and direct online sales opportunities for our program-related merchandise; and - expand our revenues by continuing to capitalize on our existing business and strategic relationships. CHALLENGES WE FACE As discussed elsewhere in this prospectus, including under the heading "Risk Factors," our future success depends on many factors, some of which are outside of our control. Challenges we face include the following: - We will need to successfully implement our business plan in one or more of our business areas before we can become profitable. - We are currently losing money and cannot predict when we will become profitable, and we have had and may continue to have difficulty paying our debts on time. - Our markets are extremely competitive and the success of our businesses is dependent on changing consumer preferences and other factors outside of our control. ADDITIONAL INFORMATION We were incorporated in Florida in May 1999. On July 1, 1999, we acquired Lightpoint Entertainment, Inc., which was founded in 1997 and is now our wholly owned subsidiary. Our principal executive offices are located at 1000 Universal Studios Plaza, Building 22A, Orlando, Florida 32819, and our telephone number is (407) 224-5360. The address of our website is WWW.VICTORYENTERTAINMENT.COM. Information contained on our website is not part of this prospectus. We own or have rights to various trademarks and trade names used in our business. "DOOLEY" is our registered trademark. We have applied for federal registration of the marks "DOOLEY AND PALS," "THE DOOLEY AND PALS SHOW," "NEXTBIGSTAR.COM," "NEXTBIGSTAR.COM" design and "THE NEXTBIGSTAR.COM." This prospectus also includes trademarks, service marks and trade names owned by other companies. THE OFFERING <TABLE> <S> <C> COMMON STOCK OFFERED................. 2,300,000 shares COMMON STOCK TO BE OUTSTANDING AFTER 12,492,339 shares THIS OFFERING........................... USE OF PROCEEDS...................... We intend to use the net proceeds from this offering: - to repay an outstanding promissory note; - to fund our NEXTBIGSTAR.COM joint venture; - to settle litigation relating to our Lightpoint subsidiary; and - for general corporate purposes, including expanding our television and Internet programming and other working capital requirements and identifying and funding potential acquisitions of complementary and/or Internet-based businesses, technologies, product lines or products. PROPOSED NASDAQ NATIONAL MARKET VICT SYMBOL............................. </TABLE> The share information above is stated as of June 30, 2000 and includes 160,428 shares of common stock to be issued upon the consummation of this offering in connection with the resolution of litigation relating to our Lightpoint subsidiary which is further described under "Business--Legal Proceedings" and to which we refer to in this prospectus as the CMI litigation, assuming a public offering price of $11.00 per share, the midpoint of the range shown on the cover of this prospectus, and excludes: - 5,002,866 shares of common stock issuable upon the exercise of outstanding warrants; - 668,000 shares of common stock issuable upon the exercise of outstanding stock options; and - an additional 332,000 shares of common stock reserved for issuance under our stock option plan. We have filed a shelf registration statement registering for resale the 160,428 shares referred to above and up to 880,000 shares issuable upon the exercise of outstanding warrants. We will not receive any proceeds from the sale of these shares, and any proceeds we receive upon the exercise of warrants will be used for general corporate purposes. The immediate resale of these shares is restricted as further described under the heading "Shares Eligible for Future Sales--Lock-ups." SUMMARY FINANCIAL DATA The following table summarizes: - the statements of operations of Lightpoint Entertainment, Inc., our predecessor, for the period from July 31, 1997 (Lightpoint's date of inception) through June 30, 1998 and for the fiscal year ended June 30, 1999; and - our consolidated statement of operations for the fiscal year ended June 30, 2000. The table below does not include our results of operations from May 27, 1999 (the date of our inception) through June 30, 1999 since that information is not considered meaningful for purposes of this presentation as we had minimal activity. Diluted loss per share does not differ from basic loss per share since the effect of potential common shares is anti-dilutive. <TABLE> <CAPTION> LIGHTPOINT (OUR PREDECESSOR) VICTORY ----------------------------- ------------- FOR THE PERIOD FOR THE YEAR FOR THE YEAR FROM JULY 31, ENDED ENDED 1997 THROUGH JUNE 30, JUNE 30, JUNE 30, 1998 1999 2000 -------------- ------------ ------------- (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) <S> <C> <C> <C> STATEMENTS OF OPERATIONS DATA Revenues.................................................... $ 579 $ 222 $ 310 ------- ------- -------- Expenses: Operating................................................. 860 1,335 4,490 General and administrative................................ 1,248 3,039 4,539 Common stock, options and warrants issued for general and administrative services................................. -- 2,875 3,199 Depreciation and amortization............................. 137 348 404 Abandonment of software and equipment..................... 150 8 8 ------- ------- -------- Total expenses.......................................... 2,395 7,605 12,640 ------- ------- -------- Loss from operations........................................ (1,816) (7,383) (12,330) Interest expense, net....................................... (194) (357) (1,010) ------- ------- -------- Net loss.................................................... $(2,010) $(7,740) $(13,340) ======= ======= ======== Net loss per common share--basic and diluted................ $(19.01) $ (5.05) $ (1.42) ======= ======= ======== Weighted average common shares outstanding--basic and diluted................................................... 106 1,534 9,382 ======= ======= ======== </TABLE> The following table summarizes: - our historical consolidated balance sheet as of June 30, 2000; and - our consolidated balance sheet as of June 30, 2000 on an as adjusted basis to give effect to the sale of 2,300,000 shares of common stock by us in this offering, after deducting the underwriting discounts and commissions and estimated offering expenses; the repayment of our $5,000,000 promissory note from the net proceeds of this offering and the write-off of unamortized loan costs of $679,322 and unamortized debt discount of $1,176,000; and the payment of $1,000,000 in cash and the issuance of 160,428 shares of common stock in settlement of our $2,820,417 notes payable and accrued interest upon consummation of this offering in connection with the resolution of the CMI litigation, assuming a public offering price of $11.00, the midpoint of the range shown on the cover of this prospectus. The table below does not show our historical balance sheet at June 30, 1999, since that information is not meaningful for purposes of this presentation as we had minimal activity. <TABLE> <CAPTION> VICTORY ------------------- AS OF JUNE 30, 2000 ------------------- AS ACTUAL ADJUSTED -------- -------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA Cash and cash equivalents................................... $ 1,517 $16,928 Working capital (deficit)................................... (5,876) 16,329 Total assets................................................ 4,015 18,312 Short-term debt, net of debt discount....................... 5,824 -- Total liabilities........................................... 7,591 797 Total shareholders' equity (deficit)........................ (3,576) 17,515 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001097338_witness_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001097338_witness_prospectus_summary.txt
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+PROSPECTUS SUMMARY The summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all the information you should consider before investing in our common stock. You should read the entire prospectus carefully, including "Risk Factors" and the financial statements, before making an investment decision. WITNESS SYSTEMS We provide business-driven multimedia recording and analysis software that enables companies to enhance their customer interactions. Our eQuality software is designed to enable companies to optimize their customer relationship management. As a result, we believe our customers are able to generate additional revenue opportunities, improve profitability, enhance customer retention and achieve greater customer intimacy. Our eQuality software is designed to enable customer contact centers within a company to record and evaluate complete customer interactions through multiple communications media, such as telephone, Web chat and e-mail. By capturing both voice and computer desktop activity and synchronizing them during replay, a company can observe and analyze complete customer interactions as they actually occurred. Our software allows companies to selectively record and analyze customer interactions based on business criteria which they define, such as key customers, important marketing campaigns, specific products and selected customer service representatives. Our customers include American Express, Bank of America, Bell Atlantic Mobile, Capital One, Chase Manhattan Bank, CheckFree, CompUSA, EDS, Federal Express, Federated Department Stores, General Motors/Saturn, GTE, MCI WorldCom, Merck-Medco, Pepsi, Sabre, Southern Company, Travelocity.com, VISA, Wells Fargo and Xerox. THE MARKET OPPORTUNITY The rapid growth of the Internet and eCommerce permits customers to easily change vendors at relatively low cost, consequently increasing the importance companies place on their customer relationships. As a result, companies increasingly are seeking customer relationship management products and services that enhance their direct customer interactions. AMR Research predicted that the market for customer relationship management will grow at a compound annual rate of 49% from 1998 to 2003, reaching $16.8 billion by 2003. To understand and improve customer relationships, companies must first improve specific business processes which involve a high degree of direct customer interaction. Today, many of a company's direct customer interactions occur through contact centers. The PELORUS Group estimates that by the end of 2003, the number of installed call center systems will exceed 117,000, with the number of agent positions reaching approximately 5.3 million. As a result, many companies are focused on developing and improving the efficiency of their contact center operations. While a number of applications have emerged to attempt to address the need to better manage the increasing complexity of customer interactions conducted over a variety of media, such as telephone, Web chat and e-mail, we believe that most currently available solutions do not provide active recording, evaluation and analysis of customer service representative performance. As a result, we believe that there is a significant opportunity for a comprehensive, integrated multimedia solution which optimizes a company's customer interactions. OUR EQUALITY SOLUTION We believe our software provides our customers with the following key business benefits: - Increases revenue opportunities. Our software enables companies to customize sales and marketing efforts to individual customer preferences, improve the selling techniques of customer service representatives and sell additional complementary or higher-end products and services to existing customers. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED FEBRUARY 9, 2000 PROSPECTUS 3,800,000 SHARES WITNESS SYSTEMS INC LOGO COMMON STOCK This is an initial public offering of common stock by Witness Systems, Inc. We are selling 3,800,000 shares of common stock. The estimated initial public offering price is between $15.00 and $17.00 per share. ------------------ Prior to this offering, there has been no public market for the common stock. The shares of common stock have been approved for quotation on the Nasdaq National Market under the symbol WITS. ------------------ <TABLE> <CAPTION> PER SHARE TOTAL --------- ----- <S> <C> <C> Initial public offering price............................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds to Witness Systems, before expenses................ $ $ </TABLE> Witness Systems and two selling stockholders have granted the underwriters an option for a period of 30 days to purchase up to 570,000 additional shares of common stock. ------------------ INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6. ------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. CHASE H&Q U.S. BANCORP PIPER JAFFRAY WIT SOUNDVIEW , 2000 - Enables improved profitability. Our software enables companies to increase profitability by improving the efficiency of customer service representatives and by reducing costs associated with customer service representative turnover and customer turnover. - Enhances customer retention. Using our software, companies can develop more intimate knowledge of their customers, which should improve the overall quality of the products and services being delivered to customers and facilitate longer-term, more profitable customer relationships. We believe that we are able to provide these key business benefits through the innovative features of our software solution, which include the following: - Enables synchronized replay of voice and computer desktop data. Our software captures both voice and computer desktop activity and enables synchronized replay, which allows companies to observe and analyze complete customer interactions as they actually occurred. - Captures customer interactions across multiple communications media. Our software captures customer interactions from a variety of communications media, including telephone, Web chat and e-mail. This multimedia capability allows companies to deliver consistent, high quality customer service regardless of the communication channel. - Records based on company-selected criteria. Our software allows companies to selectively record and analyze customer interactions based on business criteria which they define, such as key customers, important marketing campaigns, specific products and selected customer service representatives. - Provides performance analysis and feedback. Our software facilitates the evaluation and analysis of customer service representative performance through easy-to-use reports, graphs and tables. - Integrates with third party software and hardware. Our software is designed to integrate with a variety of third party software, such as customer relationship management and enterprise resource planning applications, and with existing telephony and computer network hardware and software. - Provides an open architecture that scales to support small to large installations. Our software operates on the Windows NT platform and is compatible with standard voice cards and databases. It is also designed to support the needs of small single site installations, as well as large multi-site installations. - Enables rapid deployment. We typically implement our software at a customer's initial site within 30 to 45 days from the date the software agreement is signed by a new customer. We ordinarily complete the actual software installation within three to five days. We can implement additional sites for that customer in five to seven days. OUR STRATEGY Our objective is to be the leading provider of software that enables companies to optimize their customer interactions across a variety of communications media, including telephone, Web chat, Internet self-service and e-mail. Key elements of our strategy include: - extend the breadth and depth of our product offerings; - increase sales to existing and new customers; - expand our network of application software and Internet infrastructure business alliances; and - expand our international presence. Artwork Depicted in Prospectus 1. Inside front page gate-fold portrays the following: Title bar at the top of page states: "Recording, evaluating and analyzing" underneath which is an indented title bar stating "Multimedia Customer Interactions". In the center of the page are three concentric circles each with a line of text. The text in the center circle states: "eQuality". On the top the first layered circle text states: "eQuality Analysis". On the left side of the second layered circle text states: "telephone...web chat...e-mail... e-commerce." On the right side of the third concentric circle text states: "optimizing customer relationships." Three boxes of text extend from the left side of the circle diagram. The text in the top box states: "Key Customers". The text in the second box states "Marketing Campaigns". The text in the third and bottom box states "Specific Products". Below the bottom box of text is the stylized Witness Systems logo. Underneath the logo are three lines of text stating "WITNESS SYSTEMS INC," "www.witness.com," and "(c) 2000 Witness Systems Inc." Four triangles extend from the right side of the circle diagram. At the end of the first triangle text states: "improve customer loyalty. At the end of the second triangle text states: "increase revenue opportunities." At the end of the third triangle text states: "enhance profitability." At the end of the fourth triangle text states "improve quality of services." On the top right corner of the page is the stylized Witness logo. Lightly shaded strings of numerals are embedded in the background of the page. RECENT DEVELOPMENTS For the twelve months ended December 31, 1999, we had total revenues of approximately $23.0 million, consisting of license revenues of $16.7 million, services revenues of $6.2 million, and hardware revenues of $46,000, compared to total revenues of $13.3 million for the twelve months ended December 31, 1998, consisting of license revenues of $8.7 million, services revenues of $2.4 million, and hardware revenues of $2.2 million. For the three months ended December 31, 1999, we had total revenues of $7.8 million, consisting of license revenues of $5.7 million and services revenues of $2.1 million, compared to total revenues of $4.2 million for the three months ended December 31, 1998, consisting of license revenues of $3.0 million, services revenues of $787,000, and hardware revenues of $421,000. We had no hardware revenues during the three months ended December 31, 1999 because we discontinued hardware sales in the first quarter of 1999. We currently anticipate that the higher revenue levels for the three months ended December 31, 1999 will not result in correspondingly lower net losses for that period. Our headquarters are located at 1105 Sanctuary Parkway, Suite 210, Alpharetta, Georgia 30004, our telephone number is (770) 754-1900 and our Web site address is www.witness.com. We were originally incorporated in Georgia in 1988 and reincorporated in Delaware in 1997. Information contained on our Web site does not constitute part of this prospectus, and you should rely only on the information contained in this prospectus in deciding whether to invest in our common stock. WITNESS(R) and the WITNESS logo are our registered trademarks, and we have filed applications with the United States Patent and Trademark Office to register our marks eQuality(TM) and Bringing eQuality to eBusiness(TM). This prospectus also includes trademarks, service marks and trade names of other companies. This prospectus refers to market research reports prepared by various organizations, which typically do not disclose their underlying limitations or assumptions. You should not rely on these market reports as being necessarily indicative of future developments. TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Prospectus Summary.......................................... 1 Risk Factors................................................ 6 Forward-Looking Statements.................................. 20 Use of Proceeds............................................. 20 Dividend Policy............................................. 20 Capitalization.............................................. 21 Dilution.................................................... 22 Selected Consolidated Financial Data........................ 23 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 25 Business.................................................... 39 Management.................................................. 55 Related Party Transactions.................................. 64 Principal and Selling Stockholders.......................... 67 Description of Capital Stock................................ 70 Shares Eligible for Future Sale............................. 73 Underwriting................................................ 75 Legal Matters............................................... 78 Experts..................................................... 78 Additional Information...................................... 78 Index to Consolidated Financial Statements.................. F-1 </TABLE> THE OFFERING <TABLE> <S> <C> <C> Common stock offered by Witness Systems................. 3,800,000 shares Common stock to be outstanding after this offering...... 21,243,515 shares Use of proceeds......................................... For repayment of debt, expansion of sales and marketing capabilities, product development, working capital and potential acquisitions of products, technologies and businesses. See "Use of Proceeds." Nasdaq National Market symbol........................... WITS </TABLE> The number of shares to be outstanding after this offering is based on the number of shares outstanding as of February 8, 2000 and does not include the following: - 2,693,814 shares of common stock issuable under options outstanding as of February 8, 2000 with a weighted average exercise price of $2.49 per share; - 153,000 shares of common stock that could be issued under warrants outstanding as of February 8, 2000 with a weighted average exercise price of $2.58 per share; and - 1,682,887 shares of common stock that could be issued under our amended and restated stock incentive plan and 990,000 shares of common stock reserved for issuance under our employee stock purchase plan. --------------- Except as otherwise indicated, all information in this prospectus: - reflects the payment of preferred stock dividends in the form of additional shares of our preferred stock and the conversion of each outstanding share of our preferred stock into 1.8 shares of our common stock, which will occur immediately before the completion of this offering; - reflects a 1.8 for 1 stock split of the issued and outstanding shares of common stock that occurred on December 27, 1999; - reflects the amendment and restatement of our certificate of incorporation and bylaws, which will occur immediately before the completion of this offering; - assumes no exercise of the underwriters' over-allotment option; and - assumes the initial public offering price of our common stock will be $16.00 per share. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table is a summary of the consolidated financial data for our business. You should read this information together with the consolidated financial statements and the related notes appearing at the end of this prospectus and the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Use of Proceeds." For an explanation of the determination of the number of shares used to compute historical and pro forma basic and diluted net loss per share, see note 1(l) of the notes to our consolidated financial statements. The pro forma consolidated balance sheet data summarized below gives effect to the payment of preferred stock dividends in the form of additional shares of our preferred stock and the conversion of each outstanding share of our preferred stock into 1.8 shares of our common stock, which will occur immediately before the completion of this offering as if the conversion occurred on September 30, 1999. The pro forma as adjusted consolidated balance sheet data summarized below also reflects the sale of the common stock offered by us at an assumed initial offering price of $16.00 per share, after deducting underwriting discounts and estimated offering expenses payable by us, and our receipt and application of the net proceeds from the offering. <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------- --------------------- 1996 1997 1998 1998 1999 ------- ------- ------- ----------- ------- (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: License............................... $ 764 $ 3,775 $ 8,682 $ 5,726 $11,011 Services.............................. 425 1,138 2,444 1,657 4,079 Hardware.............................. 632 1,271 2,171 1,750 46 ------- ------- ------- ------- ------- Total revenues................ 1,821 6,184 13,297 9,133 15,136 ------- ------- ------- ------- ------- Gross profit............................ 249 3,242 7,979 5,057 12,236 Acquired in-process research and development........................... -- -- -- -- 3,506 Operating loss.......................... (2,195) (2,275) (4,738) (3,922) (6,040) Net loss................................ $(2,191) $(2,213) $(4,769) $(3,948) $(6,360) ======= ======= ======= ======= ======= Net loss applicable to common stockholders.......................... $(2,191) $(2,297) $(5,271) $(4,025) $(7,450) ======= ======= ======= ======= ======= Historical net loss per share -- basic and diluted........................... $ (0.21) $ (0.32) $ (0.76) $ (0.56) $ (1.15) ======= ======= ======= ======= ======= Shares used in computing historical net loss per share -- basic and diluted... 10,307 7,238 6,964 7,245 6,469 ======= ======= ======= ======= ======= Pro forma net loss per share -- basic and diluted........................... $ (0.36) $ (0.42) ======= ======= Shares used in computing pro forma net loss per share -- basic and diluted... 13,399 15,276 ======= ======= </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1999 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (UNAUDITED) <S> <C> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $ 52 $ 52 $52,293 Working capital (deficit)................................... (1,873) (1,873) 51,270 Total assets................................................ 8,919 8,919 61,160 Long-term debt, less current portion........................ 2,210 2,210 -- Stockholders' (deficit) equity.............................. (24,297) (2,184) 53,169 </TABLE>
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE COMMON SHARES. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES. 724 SOLUTIONS INC. We provide an Internet infrastructure solution to financial institutions that enables them to offer personalized and secure on-line banking, brokerage and e-commerce services across a wide range of Internet-enabled wireless and consumer electronic devices. Our solution currently enables consumers to access on-line banking and brokerage services through network service providers using digital mobile phones, personal digital assistants, two-way pagers and personal computers. With critical security features built in, our solution can be quickly implemented and integrated with existing systems, and scaled or expanded to accommodate future growth. Using our platform, financial institutions may build on their consumers' trust and provide new levels of service in an easy to use, personalized way. The emergence of the Internet is having a significant effect on the delivery of financial services to consumers. As a group, on-line consumers represent an affluent and important market segment. These consumers are increasingly using new methods, including wireless technologies, to access the Internet. The convergence of the Internet and digital wireless technologies presents new opportunities for financial institutions. Using our platform, financial institutions can differentiate their services to retain and strengthen their existing customer relationships and attract new customers. Our objective is to become the leading provider of Internet infrastructure solutions for the secure delivery of transaction and information services to consumers. To differentiate us from our competitors, our strategy is to: - FOCUS INITIALLY ON LEADING FINANCIAL INSTITUTIONS: Our target market includes the largest financial institutions worldwide. Currently, Bank of America, Citigroup, Bank of Montreal and Wells Fargo, four of our shareholders, are in various stages of implementing our solution on a non-exclusive basis. These institutions have a worldwide customer base with approximately 152 million customer relationships. - ACCELERATE ADOPTION OF OUR SOLUTION BY CONSUMERS WORLDWIDE: Dataquest projects that there will be 828 million digital wireless subscribers worldwide by the end of 2003. To enable our customers to offer their services to these subscribers, we are currently working with network service providers including Bell Mobility and Sprint to provide broad geographic coverage. We are also working with device manufacturers including Ericsson, Motorola, Neopoint, Nokia, Palm Computing, Qualcomm and Research In Motion to support a wide range of Internet-enabled devices. We intend to deliver a consistent and compelling consumer experience worldwide across a broad range of networks and devices. - ACCELERATE ADOPTION OF OUR SOLUTION BY FINANCIAL INSTITUTIONS: In order to enable rapid implementation of our platform, we are working with system integrators, including Deloitte & Touche. In the future, we intend to provide an application hosting service that will enable financial institutions to operate the software and other components of our solution on equipment maintained by us or by one or more third parties. We are currently building the capacity to provide this service. - EXPAND THE FUNCTIONALITY OF OUR PLATFORM: We work with technology providers such as Certicom to provide robust security, and with Sun Microsystems to provide highly scalable and manageable features for our platform. Our customers do not currently offer e-commerce services based upon our solution, but have advised us that they expect to begin to do so this year. We intend to continue to introduce new services, applications and support for additional Internet-enabled devices, including set-top boxes that permit television sets to display electronic data, and game consoles. - PURSUE ACQUISITIONS OF COMPANIES AND TECHNOLOGIES: We intend to pursue acquisitions of technologies and service capabilities that will enable us to accelerate the introduction of new and innovative products and services. - ADAPT OUR PLATFORM FOR OTHER INDUSTRY SECTORS: Key elements of our platform and strategy are transferable to other industries, such as insurance, sales force management and logistics. We intend to address these opportunities after establishing our position as the leading provider of an Internet infrastructure solution for the on-line financial services sector. We believe that our solution benefits our customers and the companies with which we have strategic relationships by enabling the delivery of differentiated on-line financial services. These services increase consumer loyalty and drive wireless airtime usage, consumer electronic device sales and the purchase of other products and services. In May 1999, Bank of Montreal conducted a market trial in which banking and brokerage applications using our solution were offered to approximately 350 users. Bank of Montreal has announced the success of its market trial and is currently in the process of rolling out these services throughout Canada. The initial term of our license agreement with Bank of Montreal will expire in February 2000. Bank of Montreal has informed us that it intends to extend this agreement for an additional one year term. Our net revenue was approximately $0.8 million during the nine months ended September 30, 1999 and we incurred net losses during this period of approximately $7.6 million. We are incorporated under the laws of Ontario, Canada. Our principal executive offices are located at 4101 Yonge Street, Suite 702, Toronto, Ontario, M2P 1N6, and our telephone number is (416) 226-2900. THE OFFERING <TABLE> <S> <C> <C> Common shares offered U.S. offering...................................... shares Canadian offering.................................. shares ----------------- Total:............................................... 6,000,000 shares ================= </TABLE> <TABLE> <S> <C> Common shares to be outstanding after this offering...................................... 35,402,426 shares Use of proceeds...................................... For general corporate purposes, including the development of our application hosting service, and potential acquisitions Proposed Nasdaq National Market symbol............... SVNX Proposed Toronto Stock Exchange symbol............... SVN </TABLE> The table above is based on common shares outstanding as of December 31, 1999 and excludes the following: - outstanding options as of the date of this prospectus to purchase 2,809,098 common shares under our stock option plans at a weighted average exercise price of $3.25 per share; and - common shares issued upon the exercise of stock options after September 30, 1999. -------------- All references to "$" or dollars in this prospectus refer to U.S. dollars and all references to "Cdn.$" refer to Canadian dollars. SUMMARY CONSOLIDATED FINANCIAL INFORMATION Our consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles. These principles conform in all material respects with U.S. generally accepted accounting principles except as disclosed in note 11 of our consolidated financial statements. You should read the following selected consolidated financial data with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and notes appearing elsewhere in this prospectus. The consolidated statements of operations data for the period from July 28, 1997 (inception) to December 31, 1997, for the year ended December 31, 1998 and for the nine months ended September 30, 1998 and 1999, and the consolidated balance sheet data as of September 30, 1999, are derived from our consolidated financial statements that have been audited by KPMG LLP, Independent Auditors, which are included elsewhere in this prospectus. <TABLE> <CAPTION> PERIOD FROM NINE MONTHS ENDED JULY 28, 1997 SEPTEMBER 30, (INCEPTION) TO YEAR ENDED ------------------- DECEMBER 31, 1997 DECEMBER 31, 1998 1998 1999 ------------------- ------------------- -------- -------- (IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenue: Software development from related party.................................. $ -- $ 1,678 $ 1,049 $ 1,314 Services................................. -- 208 208 788 Less: Stock-based compensation related to software development................... -- (1,395) (785) (1,273) ------ ------- ------- ------- Net revenue............................ -- 491 472 829 Total operating expenses................... 165 3,297 1,659 8,720 ------ ------- ------- ------- Income (loss) from operations.............. (165) (2,806) (1,187) (7,891) Interest income............................ 10 107 69 341 ------ ------- ------- ------- Net income (loss).......................... $ (155) $(2,699) $(1,118) $(7,550) ====== ======= ======= ======= Basic and diluted net income (loss) per share.................................... $(0.06) $ (0.47) $ (0.24) $ (0.57) ====== ======= ======= ======= Shares used in computing basic and diluted net income (loss) per share (in thousands)............................... 2,752 5,784 4,564 13,301 ====== ======= ======= ======= </TABLE> <TABLE> <CAPTION> AS OF SEPTEMBER 30, 1999 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (IN THOUSANDS OF U.S. DOLLARS) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $28,044 $69,134 $184,064 Working capital............................................. 25,716 66,806 181,736 Total assets................................................ 32,444 73,534 188,464 Total shareholders' equity.................................. 27,353 68,443 183,373 </TABLE> The pro forma numbers in the table above are adjusted to give effect to the issuance of 10,082,066 common shares for aggregate proceeds of $41.1 million in October 1999. The pro forma as adjusted numbers in the table above are adjusted to give effect to receipt of the net proceeds from the sale of 6,000,000 common shares offered by us at the estimated initial public offering price of $21.00 per share after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. See also "Use of Proceeds," "Capitalization" and "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001097892_lightspan_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001097892_lightspan_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before buying shares in this offering. You should read the entire prospectus carefully, including "Risk Factors" and our financial statements, before making an investment decision. LIGHTSPAN, INC. Lightspan, Inc. provides curriculum-based educational software and Internet products and services used both in school and at home. We were founded in 1993 on the philosophy of using technology to increase student achievement by connecting the school to the home. Our technology, delivery systems and content help increase student interest in learning, parental involvement in their children's education, and productive interaction among teachers, parents and students. Over 400 studies by schools that use our products and services show that our products improve overall student performance. Lightspan Achieve Now, our product for students in kindergarten through eighth grade, or K-8, is a series of media-rich, interactive software programs that covers the core curriculum -- language arts, reading and math. We sell it exclusively to schools and school districts for use in both the classroom and at home. As of June 30, 2000, the Lightspan Achieve Now curriculum has already been purchased by over 950 school districts in 46 states and implemented in 2,714 schools and 13,600 classrooms, representing a total of 151,200 student and teacher licenses. Our Academic products provide a series of curriculum-based software that addresses the math and writing needs of under-prepared college students. As of June 30, 2000, these products are in use in over 270 colleges and universities across the United States. Also as of June 30, 2000, our Internet preK-12 products and services are used in over 18,200 schools, of which over 1,600 schools are using the Lightspan Network. In June 2000, Lightspan.com was used by over 425,000 unique users. We offer the following integrated family of Internet products and services through our Web site, Lightspan.com: - The Lightspan Network, a curriculum-based online subscription service marketed to schools for classroom and home use; - eduTest@School and eduTest@School Plus, services that offer a combination of online assessment products and proprietary test questions covering language arts, mathematics, history and science, allowing educators to assess their students' progress in the classroom; - Lightspan Early Learning, a subscription-based online education service for preschoolers; - Global Schoolhouse, a Web site where teachers can develop and manage collaborative learning projects online; - Lightspan Learning Search, a service that sorts the most valuable educational Web sites, lesson plans and activities from the Internet by grade and subject for easy access for teachers, students and parents; - StudyWeb, a leading research Web site that helps parents, teachers and students find educational information and resources on the Web; - LearningPlanet.com, a popular education Web site for students and parents that features creative and instructional learning activities in mathematics and language arts; - Your Class Online, a service that enables teachers to easily create customized Web pages for their classrooms; 1,872,513 Shares LIGHTSPAN LOGO Common Stock ------------------------- THE SELLING STOCKHOLDERS IDENTIFIED IN THIS PROSPECTUS ARE SELLING UP TO 1,872,513 SHARES OF OUR COMMON STOCK. THESE SHARES MAY BE OFFERED FROM TIME TO TIME BY THE SELLING STOCKHOLDERS THROUGH PUBLIC OR PRIVATE TRANSACTIONS, ON OR OFF THE NASDAQ NATIONAL MARKET, AT PREVAILING MARKET PRICES OR AT PRIVATELY NEGOTIATED PRICES. THE SELLING STOCKHOLDERS WILL RECEIVE ALL OF THE PROCEEDS FROM THE SALE OF THE SHARES AND WILL PAY ALL UNDERWRITING DISCOUNTS AND SELLING COMMISSIONS, IF ANY, APPLICABLE TO THE SALE OF THE SHARES. WE WILL PAY THE EXPENSES OF REGISTRATION OF THE SALE OF THE SHARES. ------------------------- OUR COMMON STOCK IS LISTED ON THE NASDAQ STOCK MARKET'S NATIONAL MARKET UNDER THE SYMBOL "LSPN." ON AUGUST 8, 2000, THE LAST SALE PRICE OF ONE SHARE OF OUR COMMON STOCK ON THE NASDAQ STOCK MARKET'S NATIONAL MARKET WAS $3.8125 PER SHARE. SEE "PRICE RANGE OF COMMON STOCK." ------------------------- INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4. ------------------------- Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------------- August 9, 2000 - Your School Online, a school Web site builder that easily integrates with Your Class Online and with existing school or district Web sites; - e-commerce affiliate relationships including our partnership with SmarterKids.com, a Web site that sells educational products online; and - Selected additional content for teachers, parents and students. Through June 1996, our activities consisted primarily of designing and developing Lightspan Achieve Now. To supplement our product offerings, we introduced The Lightspan Network in January 1997 and launched Lightspan PageOne, the predecessor to Your Class Online, in June 1999. We acquired Academic and Global Schoolhouse in September 1999 and StudyWeb in October 1999. We also introduced Lightspan.com in September 1999, and enhanced it with the Lightspan Learning Store in October 1999 and Your School Online and Your Class Online in February 2000. We changed our name to Lightspan, Inc. in April 2000. In May 2000 we acquired LearningPlanet.com and in June 2000 we acquired Edutest, Inc. Our principal executive offices are located at 10140 Campus Point Drive, San Diego, CA 92121, where our telephone number is (858) 824-8000. On February 15, 2000, we completed our initial public offering of 7,500,000 shares of common stock at an initial offering price of $12 per share. We also completed private placement sales concurrently with our initial public offering to CINAR, Cox Communications and Gateway Companies, Inc. of 833,333, 1,041,667 and 250,000 shares, respectively. The proceeds from the public offering and the private sales after deducting the underwriting discount and commissions and offering expenses, and payment of financial advisory fees relating to our private placements, was approximately $106.1 million. In March 2000, the underwriters exercised 655,150 shares of their overallotment option, for total proceeds to us, net of discounts and commissions, of $7.3 million.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001098114_netjewels_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001098114_netjewels_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and our financial statements and the notes accompanying the financial statements appearing elsewhere in this prospectus. The company NetJewels.com, Inc. is a start-up Internet-based retailer and wholesaler focused exclusively on jewelry and related products. By combining the expertise of our employees and DG Jewelry Inc., our strategic partner and owner of 50% of our parent company's stock, in the jewelry industry and our commitment to customer service with the benefits of Internet retailing, we intend to deliver our customers a first-rate shopping experience. Our online store offers a selection of competitively priced jewelry including rings, earrings, pendants, bracelets, watches, chains, and accessories which generally features over 5,000 different products. Most of the products offered at our online store range in price from $25 to $10,000, and we believe our products generally cater to the value conscious consumer. Our Web site features what we believe to be detailed product information and innovative merchandising through an easy-to-use interface. In addition, we offer our products on independent third-party Web sites and have an exclusive arrangement to offer our products on UBid.com. We have also entered into advertising and promotion agreements with Web portal and community sites including AOL, on a non-exclusive basis, and theglobe.com, on an exclusive basis, in order to direct consumers to our online store. DG is a party to the agreement with theglobe.com and is a guarantor of our financial obligations under various agreements, although the agreements are intended to promote the sale of our products. Our total sales from inception in January 1999 through December 31, 1999, including our parent company's sales from February 1999 to June 1999, have amounted to $1,581,280, in approximately 25,000 separate transactions, 65% of which have occurred on independent third-party Web sites. All of our sales volume occurred since February 1999. Since inception to December 31, 1999, we have incurred losses of $1,404,833 which includes our parent's losses from January 1999 to June 1999. All of our products are currently supplied through an intercompany services agreement with DG Jewelry Inc., a manufacturer and distributor of stone-set jewelry in the middle market. DG is a 50% shareholder of our parent company, NetJewels.com, Inc. ("NetJewels Canada"), an Ontario corporation, and DG's Chief Executive Officer is the chairman of our board of directors and the father of our CEO. Our strategy We seek to become the leading online retailer of jewelry and complementary products. In order to achieve this goal, we will implement the following strategies: o continually enhance our customers' experience at our online store; o offer a large product selection and continue to expand such selection; o ensure fast delivery, generally within five business days; o continue to expand the product offering within our online store; o offer an on-line store which is available 24 hours a day 7 days a week and may be electronically visited from any PC with access to the Internet; o build brand awareness through advertising and promotion; o enter into, strengthen and expand strategic alliances with independent third-party Web sites and content providers; o pursue acquisitions, joint ventures and other similar strategic investments and relationships with complementary businesses and companies; o establish an affiliate program of independent Web sites, which may or may not be on an exclusive basis; and o continue to invest in technology to further develop state-of-the-art product, service and logistics platforms. Our history We were incorporated in Delaware in June 1999 as Exite Jewelry.com, Inc. In October 1999, we changed our name to NetJewels.com, Inc. Our principal executive offices are located at 1001 Petrolia Road, North York, Ontario Canada M3J2X7 and our phone number is (877) NetJewels. From January 1999 until June 1999, our business was conducted through our parent company XiteJewelry.com Canada, incorporated in January 1999 which changed its name to NetJewels.com Inc. in August 1999. Our business activities prior to February 1999 consisted of market research, the negotiation of third party contracts and the development of our on-line store. Prior to this offering, we were a wholly-owned subsidiary of NetJewels Canada. In January 1999, NetJewels Canada, purchased all of the intellectual property involved in DG's Internet business, including the domain names (which are still currently registered in DG's name) for nominal consideration ($100), and began to develop our online store. In January 1999 our parent issued 50% of its common stock to DG in exchange for DG's commitment to fund our parent's and our operations until the earlier of (a) our ability to fund our own operations; or (b) upon completion of this offering. In May 1999, NetJewels Canada purchased all of the third party internet contracts of DG for $1.8 million. In June 1999, we purchased these contracts from NetJewels Canada in exchange for our assumption of NetJewels Canada's $1.8 million obligation to DG. The contracts purchased were with UBid, Bid.com and Ideal International Inc. which operates the web site DealDeal.com and DG remains as a guarantor of each of these contracts. Our online store is located at www.NetJewels.com. Information contained on our Web pages does not constitute part of this prospectus. Industry overview The retail jewelry industry, which according to the U.S. Department of Commerce, generated $22.3 billion dollars in retail sales in 1998, grew at a 8.5% rate from the prior year. Internet and online commerce provides retailers with the opportunity to serve a rapidly growing market as consumers increasingly accept the Internet as an alternative shopping channel. Forrester Research in a report dated May 1999 entitled "Apparel's On-line Makeover," predicts that online sales of jewelry and accessories will reach $2.58 billion by 2003. We believe that traditional store-based retailers face a number of challenges in providing a satisfying shopping experience for purchasers of jewelry. These challenges include limited product selection, location and levels of customer service. As a result, we believe that many consumers will find the jewelry shopping experience more convenient over the Internet because of the potential for larger selection, ability to customize selections and lower prices that can be offered online. However, online retailers face challenges including the uncertainty of consumer acceptance of the Internet and intense competition, as well as other risks outlined in the "Risk Factors" section. The offering o Units, each consisting of one share of our com- 2,200,000 mon stock and one redeemable common stock purchase warrant offered by us: <TABLE> <S> <C> o Terms of redeemable common purchase warrants: Each warrant entitles the holder to purchase one share of our common stock, at an exercise price of $15.54 per share (140% of the purchase price of units offered in this offering), for a four year period beginning twelve (12) months from the date of this prospectus. Beginning eighteen (18) months from the completion of this offering, we will be able to redeem these warrants at a price equal to $0.10 per warrant if the average closing price of our common stock on the Nasdaq SmallCap Market is equal to or greater than $25.00 per share for any 20 trading days within a 30 day period. o Common stock to be outstanding after the completion of this offering: 5,500,000 shares o Warrants to be outstanding after the completion of this offering: 2,200,000 warrants o Use of proceeds: o Marketing and sales; o Acquisitions; o Technological and system upgrades; o Expansion of facilities; and o Working capital and general corporate purposes. o Proposed Nasdaq SmallCap Symbols: common stock: NTJL warrants: NTJLW </TABLE> Except as noted, all of the information in this prospectus assumes that none of the following have been exercised: o the 2,200,000 redeemable warrants offered by this prospectus; o the over-allotment option granted to the representative by us to purchase 330,000 additional shares and/or 330,000 warrants; o warrants to purchase 220,000 shares of our common stock and/or 220,000 warrants to be granted to the representative upon completion of this offering; and o options available for grant to purchase 750,000 shares of our common stock pursuant to our 1999 stock option plan. Following the offering our affiliates will beneficially own 60% of our common stock, DG (30%), Dan Berkovits (15%) and Ben Berkovits (15%) through their ownership of our parent. Jack Berkovits may be deemed to be the beneficial owner of the DG shares as a result of being chairman and CEO of DG. Ben Berkovits is our former president and is the brother of our CEO, Dan Berkovits, and the son of our chairman, Jack Berkovits. Summary Financial Data The following summary financial and other data are qualified by reference to, and should be read in conjunction with, our financial statements and their related notes appearing elsewhere in this prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected statement of operations data shown below for the six months ended December 31, 1999 and the balance sheet data as of December 31, 1999 are derived from our unaudited financial statements included elsewhere in this prospectus and have been prepared on the same basis as the audited financial statements, and in our opinion, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such data. The unaudited results of operations for the interim periods are not necessarily indicative of the results for the full year or any future period. The selected statement of operations data shown below for the fiscal year ended June 30, 1999 and the balance sheet data as of June 30, 1999 are derived from our audited financial statements included elsewhere in this prospectus. They include the financial performance of NetJewels Canada for the period between January 1999 and June 1999. <TABLE> <CAPTION> Six Months Ended Fiscal Year Ended December 31, 1999 June 30, 1999 ------------------- ------------------ (unaudited) <S> <C> <C> Statement of Operations Data: Revenues .............................................................. $1,505,841 $ 75,439 Cost of revenues ...................................................... 1,175,715 64,009 ---------- ---------- Gross profit .......................................................... 330,126 11,430 ---------- ---------- Expenses: ............................................................. Sales and marketing ................................................. 775,712 325,495 Financial ........................................................... 30,404 0 General and administrative .......................................... 305,696 36,166 Web site development ................................................ 0 62,916 Amortization ........................................................ 180,000 30,000 ---------- ---------- Total Expenses ........................................................ 1,291,812 454,577 ---------- ---------- Operating income (loss) ............................................... (961,686) (443,147) Net interest income (expense) ......................................... 0 0 Income (loss) from continuing operations .............................. (961,686) (443,147) Net loss .............................................................. (961,686) (443,147) Net loss applicable to common shares .................................. (961,686) (443,147) Net loss per basic and diluted common share ........................... (0.29) (1.61) Shares used in computing basic and diluted net loss per share ......... 3,300,000 275,000 </TABLE> <TABLE> <CAPTION> As of December 31, 1999 --------------------------------- Actual As Adjusted(1) June 30, 1999 --------------- ---------------- -------------- <S> <C> <C> <C> Balance Sheet Data (at period end): Cash and cash equivalents ....................... 57,204 21,513,104 0 Working capital (deficiency) .................... (1,081,147) 20,374,753 (496,805) Total assets .................................... 1,700,427 23,156,327 1,770,000 Total liabilities ............................... 3,101,960 3,101,960 2,209,847 Total shareholders' equity (deficiency) ......... (1,401,533) 20,054,367 (439,847) </TABLE> - ------------- (1) Reflects the receipt of the net proceeds from the sale of 2,200,000 units offered hereby at an assumed initial public offering price of $11.10 per unit, and the application thereof.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001098155_excelergy_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001098155_excelergy_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully. Excelergy We offer leading business-to-business transaction management, customer relationship management and e-commerce solutions for the deregulating retail energy industry. Leveraging our extensive industry expertise, we have designed an end-to-end suite of Internet-enabled solutions and services that allow retail energy companies to capitalize on opportunities arising from the convergence of energy market deregulation and the Internet. The retail energy industry is well-positioned to benefit from new Internet- based technology solutions. According to The Edison Electric Institute and the American Gas Association, the electric power and natural gas energy industries in the United States generated 1998 retail revenues of approximately $265 billion, making it one of the largest markets in the country. Deregulation of the retail energy market is creating a complex, competitive business environment with new participants, relationships and interactions. In this new environment, complex information, including enrollment, historical usage and monthly consumption, billing and payment information, which previously had been processed within a single entity, must now be coordinated and communicated among several companies, each with different types of information systems and data exchange capabilities. These companies also need to provide end users, particularly commercial and industrial end users, with a broad range of value- added services, including consolidated invoices covering multiple products, services and sites, real-time access to energy usage information and online bill presentment. Retail energy companies are seeking cost-effective information technology solutions that enable them to better manage their complex business-to-business interactions, while improving their ability to attract, service and retain end users. By using Internet-enabled solutions tailored to address their specific needs, these companies can enter a market more quickly, regardless of their size, location, function or existing technology. Further, the Internet can serve as a key component of their customer acquisition and retention strategies because of its easy accessibility, wide reach and flexibility. The Internet also facilitates consumer choice through the creation of centralized marketplaces where retail energy end users can choose among competing suppliers offering different products and services. Our current product offerings consist of: . Excelergy ABP 3000--a scalable, flexible customer relationship management and billing system for retail energy companies; . Excelergy eXACT--business-to-business transaction management solutions that enable our customers to manage and exchange data electronically; and . e-ChoiceNet--solutions that enable retail energy companies to establish privately branded Internet portals that let end users conduct online auctions to select their energy providers and access pricing and service information. In addition, we provide consulting and implementation services to configure our software to meet a customer's particular business needs and information system requirements. Further, we are creating a centralized, business-to-business web site, or e-hub, where retail energy companies can exchange information using our eXACT transaction management solutions. We are enhancing our product offerings to integrate seamlessly with this e-hub, creating a powerful technology platform for the deregulating retail energy industry. Key benefits of our product offerings include: . streamlined communication flow among retail energy market participants, which lowers transaction costs and increases customer satisfaction; . open architecture that uses eXtensible Mark-up Language, or XML, and standard application programming interfaces, is easily configurable, and integrates with legacy and other enterprise systems; . business processes automation, which replaces a broad range of manual and labor-intensive tasks, allowing companies to respond more quickly to changing market conditions, while lowering their operating costs; . a versatile and scalable customer relationship management system that provides Internet enrollment, flexible billing and other value-added capabilities, which enhances our customers' ability to acquire, service and retain end users; and . a foundation for establishing industry-wide standards for electronic business transactions and communications among retail energy companies. Our objective is to provide the leading business-to-business e-commerce platform for the deregulating retail energy industry. We intend to achieve market leadership by providing the most comprehensive suite of cost-effective, end-to-end solutions that retail energy companies need to compete in the emerging, competitive retail energy market. The key elements of our strategy are to: . expand our solutions into a comprehensive, business-to-business platform that will integrate seamlessly with our retail energy market e-hub; . create a network effect by attracting the largest retail energy companies to our platform; . utilize transaction-based pricing to accelerate market penetration and develop recurring revenue streams; . build strong product and integration alliances; . continue efforts to establish energy industry standards; and . expand our international presence. We began marketing our products in 1998. Our customers include Allegheny Power Services Corporation, BP Amoco, Boston Gas, Computer Sciences Corporation, Constellation Energy Group, First Energy Services Corporation and Niagara Mohawk. We were originally organized in February 1998 as a Massachusetts limited liability company under the name of Customer Care Solutions, LLC. In July 1998, we merged into a newly formed Massachusetts corporation, which changed its name to Customer Care Solutions, Inc. In April 1999, we changed our name to Excelergy Corporation. We reincorporated in Delaware on December 30, 1999. Our principal executive offices are located at 3 Cambridge Center, Cambridge, Massachusetts 02142, and our telephone number is (617) 452-1600. Our corporate web site is located at www.excelergy.com. The information contained in our web site is not made a part of this prospectus. The Offering <TABLE> <C> <S> Common stock offered by Excelergy............ shares Common stock to be outstanding after this offering.................................... shares Use of proceeds.............................. For general corporate purposes, including working capital, as well as potential acquisitions of, or investments in, complementary businesses or technologies Proposed Nasdaq National Market symbol....... XCEL </TABLE> The number of shares of common stock to be outstanding after this offering is based on the shares outstanding as of March 1, 2000 and excludes: . shares of common stock reserved for issuance under our 1998 stock plan, of which shares were subject to outstanding options with a weighted average exercise price of $ per share; . shares of common stock reserved for issuance under our 2000 employee stock purchase plan; and . shares of common stock issuable upon exercise of an outstanding warrant with an exercise price of $ per share. Summary Financial Data (in thousands, except per share data) You should read the following summary financial data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes included elsewhere in this prospectus. The pro forma balance sheet data gives effect to the issuance of our Series C convertible preferred stock in February 2000 as if it occurred on December 31, 1999. The pro forma as adjusted balance sheet also gives effect to the conversion of all outstanding redeemable convertible preferred stock into common stock upon the closing of this offering and the sale of shares of common stock offered by us at an assumed initial public offering price of $ (the midpoint of the range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses. See "Use of Proceeds" and "Capitalization." <TABLE> <CAPTION> For the period from inception (February 8, 1998) Year Ended to December 31, December 31, 1998 1999 ------------------ ------------ <S> <C> <C> Statement of Operations Data: Revenue: License....................................... $ -- $ 1,113 Service....................................... 982 3,044 ----- -------- Total revenue................................ 982 4,157 ----- -------- Gross margin................................... 438 2,777 ----- -------- Loss from operations........................... (855) (12,479) ----- -------- Net loss....................................... (862) (12,131) ----- -------- Net loss attributable to common stockholders... $(862) $(16,107) ===== ======== Basic and diluted net loss per share........... $(.20) $ (2.76) ===== ======== Weighted average shares of common stock outstanding used in computing basic and diluted net loss per share.................... 4,237 5,830 Pro forma as adjusted basic and diluted net loss per share (unaudited) ................... $ (1.07) Weighted average shares of common stock outstanding used in computing pro forma as adjusted basic and diluted net loss per share (unaudited)................................... 11,342 </TABLE> <TABLE> <CAPTION> December 31, 1999 ------------------------------ Pro Forma Actual Pro Forma As Adjusted ------- --------- ----------- <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents ........... $18,835 41,885 Working capital...................... 12,064 35,114 Total assets......................... 22,949 45,999 Long-term debt (including current portion)............................ 1,427 1,427 Redeemable convertible preferred stock............................... 28,547 51,597 Total stockholders' equity (deficit)........................... (14,822) (14,822) </TABLE> ---------------- Unless otherwise indicated, all information in this prospectus assumes: . that the underwriters have not exercised their option to purchase additional shares; . all stock splits effected prior to the date of this prospectus; . conversion of all shares of our preferred stock into shares of our common stock upon completion of this offering; and . the effectiveness of our amended and restated certificate of incorporation to be filed after completion of this offering. Excelergy(TM), the Excelergy logo, Excelergy ABP(TM), Excelergy eXACT(TM), e-ChoiceNet(TM) and Exceleration(TM) are trademarks of Excelergy. All other trade names and trademarks referred to in this prospectus are the property of their respective owners.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001098277_websense_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001098277_websense_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in the common stock. You should read the entire prospectus carefully, including "Risk Factors" and the financial statements and notes thereto, before making an investment decision. WEBSENSE, INC. We provide employee Internet management products that enable businesses to monitor, report and manage how their employees use the Internet. We believe we have the largest market share and revenues among providers of employee Internet management products to large businesses. Our Websense Enterprise software and database product gives managers the ability to implement Internet access policies for different users and groups within their businesses, and supports their efforts to improve employee productivity, conserve network bandwidth and mitigate potential legal liability. Websense Enterprise is sold on a subscription basis and consists of a software application that references our proprietary database of Web site addresses. As of January 31, 2000, our products were in use by more than 7,500 organizations in over 50 countries. The top ten users of Websense Enterprise based on subscription fees since January 1999, include American Express Company, AT&T Wireless Services, Compaq Computer Corporation, Department of the Army, IBM Corp., J.C. Penney Company, Inc., Japan Ministry of Education, Merrill Lynch & Co., Inc., Proctor & Gamble Co. and Saudi Aramco. Our business faces numerous risks. We operate in a highly competitive market and have a history of significant net losses. We have incurred net losses in each of the last 12 fiscal quarters. Our net losses totaled approximately $1.5 million, $5.6 million and $9.3 million for the fiscal years 1997, 1998 and 1999, respectively. We anticipate that we will experience significant losses and negative operating cash flow for the foreseeable future. As of December 31, 1999, we had an accumulated deficit of $14.9 million. The Internet has emerged as an important communications and commerce platform for enterprises around the world. Many companies are using the Internet to streamline business processes and enable business applications that are accessed over the corporate network. These companies are making substantial investments to provide high-speed Internet access to large numbers of their employees. The Internet has also become a highly popular consumer medium for entertainment, information and commerce. International Data Corporation, a market research firm, projects that the number of Internet users worldwide will reach 316 million by 2002. Because Internet access in the workplace is fast, convenient and essentially free to employees, employees tend to use their employers' Internet connections for personal or recreational purposes during work hours. We believe that a substantial amount of employee Internet activity in the workplace is non-work-related, and that a significant portion of non-business-related e-commerce is conducted through an Internet connection at work. Employees' personal use of company Internet access during business hours can result in lost employee productivity, increased network bandwidth consumption and potential legal liability. Given the Internet's increasingly important role as a business tool and its continuing adoption as a consumer medium for entertainment, information and commerce, management of employee Internet access is increasingly becoming a priority for businesses worldwide. Our products enable businesses to rapidly implement and configure Internet access policies for specific groups, user types and individuals within an organization. Our flexible and easy-to-use software applications operate in conjunction with our proprietary database, which categorizes Web sites by their content. These software applications, which make up our Websense Enterprise product, provide managers with various reporting features and policy options such as blocking Web sites completely or partially, setting time periods for access, allowing access but generating an exception report or postponing access until after work hours. Our software enforces these management policies by comparing Web site requests with the Web site addresses we have categorized in our database. Our database, which is downloaded to a customer's network, is organized in 54 categories and encompasses more than 900,000 Web sites representing approximately 95 million Web page addresses. We add approximately 2,000 newly categorized Web sites to our database each business day using a proprietary process of automated content assessment and classification with manual verification, and we make these updates available to our customers for incremental daily downloads. Websense Enterprise is easy to deploy and use, and has minimal impact on an organization's information technology department. In addition, our products require no additional hardware, can grow with our customers as they expand and support a broad range of network platforms, including proxy servers, firewalls and other network appliances and software. Our primary strategic objective is to maintain and strengthen our position in the market for employee Internet management products. We plan to achieve this objective by acquiring new customers and pursuing subscription renewals and enterprise-wide deployment of our software within existing customers. We also believe that our installed base of large, established companies provides our software application with market credibility, and that our use of the names of these customers and statements from their representatives in our marketing materials will enable us to attract new customers and deepen our market penetration. We also intend to expand our global network of more than 450 value-added resellers and distributors. We plan to leverage our relationships with our original equipment manufacturers and technology providers, a complete list of which includes CacheFlow Inc., Check Point Software Technologies Ltd., Cisco Systems, Inc., eSoft, Inc., Inktomi Corporation, Nokia Corporation, SecurIt, Global Technology Associates, Inc., NetScreen Technologies, Inc., and Netopia, Inc. We also plan to expand the functionality of Websense Enterprise, further develop our database-building technologies and capitalize on incremental revenue opportunities through the introduction of new products and databases. Our business was founded in 1994 as NetPartners Internet Solutions, a reseller of computer network security products. In 1996, we released Websense Internet Screening System, our first product as a software developer, and, in 1999, we changed our name to Websense, Inc. We maintain a Web site at www.websense.com. Information contained on our Web site does not constitute part of this prospectus. Our principal executive offices are located at 10240 Sorrento Valley Road, San Diego, California 92121, and our telephone number is (858) 320-8000. THE OFFERING Common stock offered by us ................. 4,000,000 shares Common stock to be outstanding after this offering.................................... 19,394,698 shares Use of proceeds............................. Selling and marketing, research and development, working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol...... WBSN - ------------------------- This table is based upon shares outstanding as of December 31, 1999, and excludes the following shares: - 3,161,551 shares of common stock issuable upon exercise of outstanding options at a weighted average exercise price $0.83 per share; - 112,500 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $1.69 per share; and - 336,328 shares available for future grant as of December 31, 1999 under our 1998 stock plan, and an additional approximately 1,000,000 shares available for future grant under our stock plans to become effective at the close of this offering. Except as otherwise indicated, all information in this prospectus is based on the following assumptions: - the conversion of each outstanding share of preferred stock into one share of common stock upon completion of this offering; - no exercise of the underwriters' overallotment option; and - amendments to our certificate of incorporation and bylaws to be effective upon completion of this offering. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table sets forth summary financial data for our company. You should read this information together with the financial statements and the notes to those statements appearing elsewhere in this prospectus and the information under "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------------------------- 1995 1996 1997 1998 1999 ---- ------ ------- ------- ------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Subscriptions...................................... $ -- $ 14 $ 637 $ 2,503 $ 7,141 Other products and services........................ 882 2,576 4,383 4,416 1,506 ---- ------ ------- ------- ------- Total revenues................................ 882 2,590 5,020 6,919 8,647 ---- ------ ------- ------- ------- Gross margin......................................... 403 1,021 1,588 2,459 6,372 Income (loss) from operations........................ 276 31 (1,427) (5,642) (9,479) Net income (loss).................................... 276 27 (1,462) (5,609) (9,254) Historical net income (loss) per share(1): Basic and diluted.................................. -- $ 0.00 $ (0.21) $ (0.80) $ (1.25) ==== ====== ======= ======= ======= Weighted average shares -- basic and diluted....... -- 7,000 7,000 7,000 7,403 ==== ====== ======= ======= ======= Pro forma net income (loss) per share(1): Basic and diluted.................................. $ (0.71) ======= Weighted average shares............................ 12,979 ======= </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ------------------------ PRO FORMA ACTUAL AS ADJUSTED -------- ------------ <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $10,735 $ 65,580 Working capital............................................. 5,222 60,067 Total assets................................................ 16,756 71,601 Deferred revenue............................................ 11,593 11,593 Long-term debt.............................................. 1,497 1,497 Total stockholders' equity.................................. 1,642 56,487 </TABLE> The pro forma as adjusted column in the balance sheet data reflects: - the conversion of all of our outstanding preferred stock into common stock upon completion of this offering; and - our sale of 4,000,000 shares of common stock at an assumed initial public offering price of $15.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses that we will pay. - --------------- (1) See Note 1 of "Notes to Financial Statements" for a description of the computation of per share information. We have not presented share and per share data for 1995 because we operated as a sole proprietorship during that period.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001098300_integrated_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001098300_integrated_prospectus_summary.txt
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS" SECTION BEGINNING ON PAGE 5. INTEGRATED COMMUNICATION NETWORKS, INC. We are a provider of domestic and international long distance and related telecommunications services. We have had very limited operations and revenues, have incurred significant losses and expect to continue to incur significant losses. In addition, we will have substantial capital requirements in the future. We had no revenues for the period from January 16, 1997 to February 28, 1999. We began material operations on February 28, 1999 when we purchased a majority of the issued and outstanding shares of common stock of phoneXchange, Inc. in exchange for shares of our common stock and warrants to purchase additional shares of our common stock. See "Certain Relationships and Related Transactions." From February 28, 1999 through December 31, 1999, our revenues were $2.1 million, and we incurred a net loss of $10.9 million. We operate our business through our majority owned subsidiary, phoneXchange, Inc. phoneXchange is a publicly traded company that offers domestic and international long distance services for both voice and data on a wholesale basis, primarily to U.S. based carriers, agents and resellers. phoneXchange provides long distance service to numerous foreign markets through a combination of: o termination relationships, which consist of agreements with other carriers to complete the final segment of a telephone call, o international gateway switches, which consists of switching equipment that can interface with international networks, o leased and owned transport lines or circuits that span large distances, and o resale arrangements with other long distance providers, which are agreements to purchase wholesale telephone services to be resold under phoneXchange's name. We are continuing to expand the phoneXchange telecommunications network through acquisitions and internal growth. In addition to the long distance services provided by phoneXchange, we expect to be able to offer call center services through our other wholly owned subsidiary, Internet Call Centers, Inc. We intend to form a joint venture by issuing approximately 40% of Internet Call Centers, Inc.'s common stock to Global Industry Development & Trade Ltd., a British Virgin Islands company. We are developing Internet Call Centers to provide customer support and customer management services to other companies. We believe that through Internet Call Centers we may be able to offer these services for less than it would cost many companies to develop and train support staffs of their own because we can benefit from economies of scale by sharing labor and equipment costs across a larger base of users. In addition, we could offer overflow services to companies with existing customer support departments who would like to improve their response time. We already have the facilities required for the launch of this business and our joint venture partner has trained a staff of employees to provide the call center services. We are currently negotiating the necessary operating agreements and currently anticipate that Internet Call Centers will commence operations in the third quarter of 2000. Our executive offices are located at 27061 Aliso Creek Road, Suite 100, Aliso Viejo, CA 92656. Our telephone number is 949-349-1770. Our website address is www.icnwusa.com. The information on this website is not incorporated by reference into this prospectus.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001098402_via-net_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001098402_via-net_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..973b42b60a602752afec7e554ec5e7a7d4fa9e2f
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+PROSPECTUS SUMMARY The information below is only a summary of more detailed information included in other sections of this prospectus. This summary may not contain all the information that is important to you or that you should consider before buying shares in this offering. The other information is important, so please read this entire prospectus carefully. VIA NET.WORKS, Inc. VIA NET.WORKS is a leading international provider of Internet access and services focused on small and mid-sized businesses in Europe and Latin America. By targeting these customers and regions, we are positioned to capitalize on some of the most rapidly growing areas of the Internet market. Both of these regions have a relatively low number of total Internet users, and small and mid-sized businesses in each region have a relatively low number of Internet services available to them. By choosing to serve these market segments, we have the opportunity to sell our services to a large number of small and mid-sized businesses who have identifiable Internet needs but little or no Internet experience. Once we have developed relationships with these customers, we can upgrade them from entry-level Internet access services to more sophisticated and higher margin products and services like web hosting, virtual private networks and e-commerce solutions which will allow them to compete in both local and global markets. Since our founding in late 1997, we have rapidly established our international presence by acquiring, integrating and growing 19 business- focused Internet services providers in 12 European and Latin American countries. In addition, we recently agreed to purchase one additional Internet services provider, ISAR, located in Munich, Germany, on or shortly after the closing of this offering. As of September 30, 1999, pro forma for four acquisitions we made after September 30, 1999 and one pending acquisition, we had 87,900 customers in Europe, of which 45.7% were businesses, and 25,500 customers in Latin America, of which 32.7% were businesses. Pro forma for these acquisitions, as of September 30, 1999 we hosted 18,200 web sites and had registered 50,700 domain names. For the nine months ended September 30, 1999, we had pro forma revenue of $48.7 million and pro forma net losses of $33.0 million. To date, our operations have been funded by investments of $181.0 million from our current investors, which include The Centennial Funds, Norwest Equity Capital, Telecom Partners II, HarbourVest International, Providence Equity Partners, Verio Inc. and Boston Millennia Partners. We are a customer-focused sales, marketing and service organization. We leverage our local marketing, sales and customer care efforts with the benefits of our global scale by providing our local operations international network capacity, marketing support, capital and management resources. We believe that our local focus combined with our global capabilities will allow us to increase both our market share and revenue. Our Products and Services We offer a suite of bundled and stand-alone Internet products and services which can be tailored to the individual needs of our small and mid-sized business customers. Our products and services include . dedicated high speed and dial-up Internet access . hosting of customer web sites . co-location services, where a customer places equipment in our facilities for the purposes of hosting software, database, web site and other applications . e-mail services . e-commerce solutions including secure electronic payment processing, electronic procurement and business portal design and hosting . Internet virtual private networks which provide individual commercial customers with greater security for their electronic communications over the Internet . domain name registration of Internet addresses, such as www.customername.com . Internet security products, which protect the integrity of customer data and networks, authenticate users and provide secure data transmissions Our Markets Internet access and services markets are among the fastest growing segments of the global telecommunications marketplace. Favorable trends which should help fuel continued growth in Europe and Latin America include . increasing availability and affordability of computer hardware . increasing Internet penetration, which is the ratio of World Wide Web users to total population . increasing adoption of the Internet and related technologies to drive productivity and e-commerce revenue . continuing telecommunications industry deregulation, which encourages improved infrastructure and competitive pricing Our Network We own and operate a European and trans-Atlantic network which carries Internet traffic generated by our operating companies. The backbone of this network provides 155 Mbps of redundant capacity on two fiber optic rings. The first ring provides trans-Atlantic capacity between New York City and London. The second ring provides pan-European capacity with network connection points in London, Dusseldorf and Amsterdam, and we plan to establish connection points in four additional cities during 2000. We also operate 138 network points of presence throughout Europe and Latin America which provide our customers with access to the Internet. We plan to add points of presence to further expand our international service capabilities. We believe that combining the transmission capacity requirements of our operating companies onto our network increases efficiency, reduces costs and results in higher service quality than our operating companies could obtain on their own. Our Strategy Our goal is to become the premier international provider of Internet access and services to small and mid-sized businesses in Europe and Latin America. We intend to reach our goal by . maintaining a strong local presence through locally managed operating companies . leveraging our brand name and international network . delivering single-source Internet solutions to our customers . delivering quality customer service supported by continued investment in billing, back-office and customer care systems . continuing investment in network infrastructure and product development . accelerating our growth through strategic acquisitions The Offerings <TABLE> <S> <C> Common stock offered by us in our underwritten initial public offering... 14,300,000 shares Common stock offered directly by us in a concurrent offering to our preferred stockholders........................... 700,000 shares Total common stock offered by us........ 15,000,000 shares Common stock to be outstanding after 57,068,821 shares this offering.......................... Use of proceeds......................... We intend to use the net proceeds of these offerings for general corporate purposes, including funding our operations, capital expenditures, network expansion, working capital and acquisitions of Internet services providers in our target markets. Nasdaq National Market and Amsterdam Stock Exchange symbol.................. VNWI </TABLE> We are making our offering of 700,000 shares directly to our preferred stockholders in fulfillment of our obligations under a stockholders agreement. Although our underwritten initial public offering is not contingent on our completing the offering to our preferred stockholders, the completion of our offering to our preferred stockholders is contingent on our completing our underwritten initial public offering. We refer to these offerings throughout this prospectus collectively as this offering. The common stock to be outstanding after this offering is based on the number of shares outstanding as of January 14, 2000 and assumes the underwriters do not exercise their over-allotment option. For further information regarding how we calculated the number of our outstanding shares, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," "Management," "Transactions with Related Parties," "Description of Capital Stock." A prior version of this prospectus incorrectly described lock-up agreements to be signed by some of our directors pursuant to requirements of the Amsterdam Stock Exchange. Please see the revised description on page 69 of this prospectus. ------------ We were incorporated in Delaware in June 1997. Our principal executive offices are located at 12100 Sunset Hills Road, Suite 110, Reston, Virginia 20190 and our telephone number is (703) 464-0300. Our website can be found at www.via-net-works.com. Information contained on our website is not intended to be a prospectus and is not incorporated into this prospectus. Summary Consolidated and Combined Pro Forma Financial Data The table below summarizes . our historical consolidated financial data for the period from inception, June 13, 1997, to December 31, 1997, for the year ended December 31, 1998 and for the nine months ended September 30, 1998 and September 30, 1999 . our combined pro forma financial data for the year ended December 31, 1998 and for the nine months ended September 30, 1999 . our pro forma as adjusted balance sheet data as of September 30, 1999, which give effect to our sale of 15,000,000 shares of common stock at an assumed initial public offering price of $20.00 per share less applicable underwriting fees and estimated offering expenses, and the issuance of an estimated 332,632 shares of common stock and payment of $1.8 milion on or shortly after the closing of this offering to repay indebtedness associated with prior acquisitions and to acquire the minority interest in our Brazilian operating company, Dialdata Our historical statement of operations data for the period from inception, June 13, 1997, to December 31, 1997 and for the year ended December 31, 1998 are derived from our audited consolidated financial statements. Our statement of operations data for the nine months ended September 30, 1998 and 1999 and our balance sheet data as of September 30, 1999 are derived from our unaudited interim financial statements and, in the opinion of our management, include all material adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the results of operations and financial condition. Operating results for the nine months ended September 30, 1999 are not necessarily indicative of the results that may be expected for the full year. Our pro forma statement of operations and other financial data for the year ended December 31, 1998 and the nine months ended September 30, 1999 give effect to our acquisition of 19 companies between January 1, 1998 and January 14, 2000 and one pending acquisition as though these acquisitions had occurred on January 1, 1998. The pro forma balance sheet data and operating statistics as of September 30, 1999 give effect to our acquisition of four companies after September 30, 1999 and one pending acquisition. The pro forma statement of operations and balance sheet data also give effect to the conversion of all of our outstanding mandatorily redeemable convertible preferred stock into common stock and the pro forma balance sheet data are further adjusted to reflect this offering. The pro forma financial data for the year ended December 31, 1998 and the nine months ended September 30, 1999 are not necessarily indicative of the results that would have occurred if the transactions had been consummated as of January 1, 1998 and are not intended to indicate expected results for any future period. As used in the table below, "EBITDA" represents earnings or loss from operations before interest, taxes, depreciation, amortization and non-cash stock compensation charges. Although EBITDA is a measure commonly used in our industry, it should not be considered an alternative to net earnings, when determined in accordance with generally accepted accounting principles, or GAAP, or as an alternative to cash flows from operating activities, determined in accordance with GAAP. In addition, the measure of EBITDA we use may not compare to other similarly titled measures used by other companies. The summary consolidated and combined pro forma financial data shown below should be read together with our audited consolidated financial statements, our unaudited interim financial statements, our unaudited pro forma condensed combined financial statements, our acquired companies' financial statements and related notes, and other financial information including "Management's Discussion and Analysis of Financial Condition and Results of Operations," all of which are included elsewhere in this prospectus. <TABLE> <CAPTION> Historical Pro Forma ------------------------------------------------ -------------------------- Period from Inception Nine Months Ended Year Nine Months (June 13, 1997) Year Ended September 30, Ended Ended to December 31, December 31, ------------------- December 31, September 30, 1997 1998 1998 1999 1998 1999 --------------- ------------ -------- --------- ------------ ------------- (Dollars in thousands, except per share data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Revenues: Europe................. $ -- $ 2,697 $ -- $ 18,373 $ 33,315 $ 35,508 Latin America.......... -- 651 -- 3,988 13,946 13,237 ------- -------- -------- --------- ---------- ---------- Total revenues........ -- 3,348 -- 22,361 47,261 48,745 Operating costs and expenses............... 336 9,415 2,867 41,973 86,735 84,203 ------- -------- -------- --------- ---------- ---------- Loss from operations.... (336) (6,067) (2,867) (19,612) (39,474) (35,458) Interest income, net.... 15 1,425 962 1,308 (210) 951 Loss in unconsolidated affiliate.............. -- (1,199) (447) (177) -- -- Foreign currency gains.. -- 115 -- 1,283 194 1,123 ------- -------- -------- --------- ---------- ---------- Loss before minority interest and income taxes................... (321) (5,726) (2,352) (17,198) (39,490) (33,384) Income tax benefit (expense).............. -- 145 -- -- (673) (649) Minority interest....... -- 239 -- 1,241 (317) 1,006 ------- -------- -------- --------- ---------- ---------- Net loss attributable to common stockholders..... $ (321) $ (5,342) $ (2,352) $ (15,957) $ (40,480) $ (33,027) ======= ======== ======== ========= ========== ========== Net loss per common share.................. $(10.66) $ (24.29) $ (11.64) $ (20.17) $ (3.20) $ (2.24) ======= ======== ======== ========= ========== ========== Weighted average common shares outstanding..... 30,063 219,964 202,077 790,953 12,661,530 14,733,293 Other Financial Data: Cash flows from operating activities... $ (233) $ (3,784) $ (1,618) $ (6,877) Cash flows from investing activities... (8) (14,383) (3,185) (61,616) Cash flows from financing activities... 1,048 52,187 52,237 125,994 EBITDA.................. (336) (4,763) (2,864) (8,494) Depreciation and amortization........... -- 1,304 3 10,635 Non-cash stock compensation charges... -- -- -- 483 Capital expenditures.... 8 520 45 11,318 </TABLE> <TABLE> <CAPTION> As of September 30, 1999 -------------------------------- Pro Forma Historical Pro Forma As Adjusted ---------- --------- ----------- (Dollars in thousands) <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents.................... $ 91,502 $ 21,178 $297,164 Restricted cash.............................. -- 15,000 15,000 Goodwill..................................... 91,535 147,602 147,602 Total assets................................. 215,095 227,498 503,484 Total long-term debt and capital leases, net of current portion.......................... 13,551 14,973 11,011 Mandatorily redeemable convertible preferred stock....................................... 180,933 -- -- Total stockholders' (deficit) equity ........ (13,245) 169,487 453,941 Operating Statistics: Number of PoPs............................... 101 138 Number of business customers................. 38,876 48,517 Number of consumer customers................. 50,083 64,877 Number of web-sites hosted................... 16,612 18,163 Number of domain names registered............ 45,947 50,683 </TABLE>
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+PROSPECTUS SUMMARY The information below is only a summary of more detailed information included in other sections of this prospectus. This summary may not contain all the information that is important to you or that you should consider before buying shares in the offering. The other information is important, so please read this entire prospectus carefully. netLIBRARY, INC. We are the leading provider of electronic book technology and services to publishers, educational and corporate libraries and other book industry participants. Through our technology and services, which we call our platform, we create, sell and manage electronic books while protecting the copyrights of the digital content. Our electronic books can be securely delivered to audiences over the Internet and corporate intranets for use with different reader devices and reader software products. We offer publishers and customers an end-to-end solution, including the conversion, copyright protection, hosting, management and distribution of electronic books. We have converted over 28,000 titles, which represent the largest collection of electronic books available from a single source. The Internet is the fastest growing communications medium in history, and one of the most efficient distribution channels for commerce. Companies can use the Internet to disseminate digital content efficiently to broad audiences across geographic boundaries and to eliminate many traditional manufacturing, packaging and distribution costs. Electronic books provide the publishing industry with a significant opportunity to take advantage of this rapid and cost efficient distribution capability. A recent study by Andersen Consulting projected total retail revenue for electronic books of between $1.0 and $3.4 billion by 2005, with less than half replacing hardcopy sales and the remainder representing incremental sales. The traditional publishing industry has been slow to adopt the Internet as a vehicle for distributing published content, largely because of concerns about protecting content and maintaining established industry relationships. For the industry to take full advantage of the compelling opportunities presented by the Internet, industry participants must find an acceptable means of addressing these concerns. We have designed a secure, cost-effective solution with the functionality, scalability and flexibility to address current and anticipated needs of book industry participants. We believe our platform offers the following benefits: o a proprietary digital rights management system that incorporates both content-specific digital copyright protection and a digital rights ownership management solution; o additional revenue streams and significant cost savings to publishers, book distributors and libraries; o flexible and scalable business models to allow publishers, distributors and other book industry participants to adopt the business model most suitable to their business requirements; o high functionality, increased accessibility and convenience for end users; o device independence which allows our electronic books to be moved from one reader device or reader software product to another; and o detailed usage reports for publishers and libraries to allow a more accurate forecast of demand. We sell our electronic books directly and through distribution partners in the institutional market, and through our subsidiary peanutpress.com, Inc.'s Web site and online retailers in the consumer market. Our customers in the institutional market include academic, corporate, K-12 and public libraries and library consortia. As of June 30, 2000, we have sold over 162,000 copies of our electronic books. Our electronic books are currently available to patrons of more than 1,100 academic, corporate, K-12 and public libraries. Building on our recent acquisition of MetaText, Inc., we have begun efforts to sell electronic textbooks in the academic and K-12 markets. We have developed strategic relationships with many leading book industry participants, including publishers, book distributors, library automation software vendors and providers of electronic book reading devices and software. These relationships help us acquire electronic book rights to a broad selection of titles in demand by our library customers, sell books to our library customers through existing sales channels and integrate our electronic books into the library management systems used by libraries. These efforts facilitate the adoption and use of electronic books by library patrons and encourage the purchase of additional electronic books by libraries. We believe that our strategic relationships and our industry expertise have enabled us to structure our products and services to complement, rather than compete with, the products and services of participants in the traditional book industry. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED AUGUST ___, 2000 Shares ---------- [netLIBRARY LOGO] Common Stock ---------- Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $_____ and $_____ per share. We have applied to list our common stock on The Nasdaq Stock Market's National Market under the symbol "EBKS." The underwriters have an option to purchase a maximum of ____________ additional shares to cover over-allotments of shares. INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 5. <TABLE> <CAPTION> UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS netLIBRARY -------- ------------- ----------- <S> <C> <C> <C> Per Share................................ $ $ $ Total.................................... $ $ $ </TABLE> Delivery of the shares of common stock will be made on or about ____________, 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON DEUTSCHE BANC ALEX. BROWN J.P. MORGAN & CO. The date of this prospectus is _____, 2000. To maintain our position as the leading provider of electronic book technology and services, we intend to: o leverage and expand our strategic relationships; o enhance our platform and functionality; o extend our reader device and reader software product leadership by ensuring that our platform remains compatible with all existing and future reader devices and electronic book file formats; o grow our electronic book collection with additional quality titles; and o increase our penetration into existing and new markets. CORPORATE INFORMATION We incorporated in Delaware in June 1998 under the name staX netLibrary, Inc. We changed our name to Interactive Knowledge, Inc. in August 1998, and to netLibrary, Inc. in August 1999. Our principal executive offices are located at 3080 Center Green Drive, Boulder, Colorado 80301, and our telephone number is 303-415-2548. We can be visited on the World Wide Web at www.netLibrary.com. Information contained on our Web site does not constitute any part of this prospectus. netLibrary and www.netLibrary.com are trademarks of netLibrary, Inc. All other brand names, trademarks, trade names and service marks appearing in this prospectus are the property of their respective holders. TABLE OF CONTENTS <TABLE> <CAPTION> PAGE PAGE ---- ---- <S> <C> <S> <C> PROSPECTUS SUMMARY.................................1 MANAGEMENT.....................................47 RISK FACTORS.......................................5 RELATED PARTY TRANSACTIONS.....................55 FORWARD-LOOKING STATEMENTS........................16 PRINCIPAL STOCKHOLDERS.........................57 USE OF PROCEEDS...................................16 DESCRIPTION OF CAPITAL STOCK...................59 DIVIDEND POLICY...................................16 SHARES ELIGIBLE FOR FUTURE SALE................63 CAPITALIZATION....................................17 UNDERWRITING...................................65 DILUTION..........................................18 NOTICE TO CANADIAN RESIDENTS...................67 SELECTED FINANCIAL DATA...........................19 LEGAL MATTERS..................................68 MANAGEMENT'S DISCUSSION AND ANALYSIS OF EXPERTS........................................68 FINANCIAL CONDITION AND RESULTS OF OPERATIONS...22 CHANGE IN ACCOUNTANTS..........................68 BUSINESS..........................................31 WHERE YOU CAN FIND MORE INFORMATION............68 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.....F-1 </TABLE> ---------- YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. THE OFFERING <TABLE> <CAPTION> <S> <C> Common stock offered............................... _______ shares Common stock outstanding after the offering........ _______ shares Use of proceeds from this offering................. We estimate that our net proceeds from this offering without exercise of the over-allotment option will be approximately $____ million. We intend to use these net proceeds for selling and marketing our products and services, continuing to develop and enhance our technology, acquiring rights to additional book titles for conversion to electronic books and general corporate purposes, including working capital and capital needs. We may also use a portion of the net proceeds to acquire or invest in complementary businesses, technologies and products. Nasdaq National Market symbol...................... EBKS </TABLE> The number of shares outstanding after this offering is based on our shares outstanding as of June 30, 2000. The number of shares outstanding excludes: o 2,428,592 shares of common stock underlying options granted under our 1998 Stock Option Plan and outstanding as of June 30, 2000, at a weighted average exercise price of $7.85 per share; o 83,532 shares of common stock (20,625 of which are based upon the automatic conversion of Series A preferred stock) issuable upon the exercise of outstanding warrants and options as of June 30, 2000, at a weighted average exercise price of $2.86 per share; and o 1,046,252 shares reserved for future issuance under our 1998 Stock Option Plan as of June 30, 2000. ASSUMPTIONS ABOUT THIS PROSPECTUS Unless we indicate otherwise, all information in this prospectus assumes: o the automatic conversion of our Series A preferred stock, Series B preferred stock, Series C preferred stock and Series D preferred stock on a one-for-one basis into 19,192,614 shares of our common stock upon completion of this offering; o an increase in the number of our authorized shares of common stock from _______________ to ____________ to be effected concurrently with this offering; o no exercise by the underwriters of their over-allotment option to purchase up to ____________ additional shares of common stock; and o no exercise by any of our security holders of any outstanding options or warrants. If (i) the initial public offering price for our common stock is less than $25.00 per share and the closing of this offering occurs on or before October 31, 2000 or (ii) the initial public offering price is less than $30.00 per share and the closing occurs after October 31, 2000, our preferred stock will not automatically convert into common stock upon the closing of this offering unless the holders of two-thirds of the outstanding shares of each series of our preferred stock elect to convert their shares. See "Description of Capital Stock." If the initial public offering price minus the underwriting discount is less than $17.675 per share, the ratio at which our Series D preferred stock converts into common stock will be greater than one-to-one. The section entitled "Description of Capital Stock - Anti-Dilution Provisions of our Preferred Stock" provides additional information regarding anti-dilution. [Graphic material omitted depicting the process of converting hardcopy books into digital electronic book format, and the sale and use of electronic books on personal computers and other reader devices using different reader software products.] SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Below is our summary financial data. We derived the condensed statements of operations and balance sheet data from our audited and unaudited financial statements. You should read this summary data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes appearing elsewhere in this prospectus. From June 1998 until March 31, 1999, we had a March 31 fiscal year end. Effective April 1, 1999, we changed our fiscal year end to December 31. <TABLE> <CAPTION> SIX MONTHS ENDED PERIOD FROM JUNE 30, JUNE 5, 1998 (DATE NINE MONTHS ENDED --------------------------------------- OF INCEPTION) DECEMBER 31,1999 1999 2000 THROUGH ----------------- ---- ------------------------- MARCH 31, 1999 ACTUAL PRO FORMA(a) ACTUAL ACTUAL PRO FORMA(a) ------------------ --------- ------------ --------- -------- ------------ CONDENSED STATEMENTS OF OPERATIONS DATA: (UNAUDITED) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> Revenue .................................... $ 18 $ 157 $ 224 $ 21 $ 4,264 $ 4,293 Loss from operations ....................... (4,299) (20,824) (26,074) (5,273) (27,522) (28,847) Net loss before extraordinary lien ......... (4,274) (19,652) (24,893) (5,169) (25,620) (26,940) Net loss attributable to common stock ...... (4,274) (22,691) (28,506) (5,470) (31,352) (32,783) Basic and diluted loss per share:(b) Net loss before extraordinary item ......... $ (3.18) $ (8.47) $ (8.69) $ (2.99) $ (6.32) $ (6.65) Net loss attributable to common stock ...... $ (3.18) $ (9.78) $ (9.95) $ (3.16) $ (7.74) $ (8.09) Shares used in computing basic and diluted loss per share ................... 1,345 2,320 2,865 1,729 4,053 4,053 </TABLE> <TABLE> <CAPTION> JUNE 30, 2000 ---------------------------------------------- PRO FORMA AS ACTUAL PRO FORMA(c) ADJUSTED(d) ----------- ------------ ------------ (UNAUDITED) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents ......... $ 44,195 $ 51,695 $ Working capital ................... 38,684 46,184 Total assets ...................... 102,990 110,490 Long-term obligation .............. 189 189 Non current deferred revenue ...... 1,147 1,147 Redeemable preferred stock ........ 128,290 -- Stockholders' equity (deficit) .... (38,200) 97,590 </TABLE> ---------- (a) The pro forma financial information reflects the acquisition of peanutpress and is derived from, and should be read in conjunction with, the unaudited pro forma condensed combining financial statements of netLibrary and peanutpress and the corresponding notes, which are included elsewhere in this prospectus. In preparing the pro forma condensed statement of operations data, the peanutpress results of operations have been included as if the acquisition had occurred at April 1, 1999. (b) We calculate loss per share of common stock by dividing the loss attributable to common stock by the weighted average number of shares outstanding. We do not include outstanding common stock options and warrants in the loss per share of common stock calculation, as their effect is anti-dilutive. (c) The unaudited pro forma balance sheet data gives effect to the issuance of 424,328 shares of Series D preferred stock at $17.67 per share in July 2000 and the conversion of all outstanding shares of our preferred stock to common stock on a one-for-one basis. (d) Unaudited pro forma as adjusted balance sheet data gives effect to this offering, assuming net proceeds of $____ million as if this offering had occurred on June 30, 2000.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001098432_lumenon_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001098432_lumenon_prospectus_summary.txt
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+PROSPECTUS SUMMARY As used in this prospectus, unless the context otherwise requires, the terms "Lumenon," "we" or "us" mean Lumenon Innovative Lightwave Technology, Inc. This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully. LUMENON We are a development stage company. We design and develop products related to the Dense Wavelength Division Multiplexing (DWDM) market and other optical or photonic segments of the telecommunications market. DWDM is a technology that permits a user to send multiple sources of information and data to be sent at the same time over a single optic fiber. DWDM allows network operators to remove an entire class of equipment in their networks. We are developing and manufacturing devices for use in the DWDM market under a teaming agreement with Molex Incorporated. We do not expect to generate product revenues until 2001. We had accumulated net losses of CDN$252,118,000 (US$167,298,000) as of September 30, 2000. Our plan of operations for fiscal year 2001 is to finalize the development of our DWDM devices and to bring them to market. We will focus product development on four aspects: -- perfecting manufacturing steps for DWDM devices; -- readying automation equipment in our new manufacturing facility; -- setting quality control criteria for our operations; and -- expanding our packaging and pigtailing capability for our optical chips. We have begun producing and testing a limited number of product devices and intend to market 4, 8, 16, 32 and 40 channel DWDM chips. In addition, we intend to offer services based on our capability to design new customized DWDM devices according to specific client needs. Service providers like AT&T and MCI WorldCom are creating fiber optic networks to transmit large quantities of data at high speeds. They must meet demand for uses such as the Internet, e-mail, and electronic commerce. Service providers desire to increase the capacity of their networks without installing new fiber optic cable. DWDM products are designed to allow them to greatly increase their information carrying capacity on existing fiber. Although the number of service providers operating in the market is relatively small, based upon our experience in the industry, we believe that there is a substantial market for our devices in DWDM systems. We make our devices in the form of an "optical chip" on silicon through a patented sol-gel process. To our knowledge, there are no other manufacturers of DWDM devices on silicon using a sol-gel manufacturing process. The advantages of our process include: -- lower capital investment; -- less manual labor required in the assembly process; -- fewer process steps, reducing the likelihood of manufacturing defects; and -- the cost of manufacturing an optical chip does not increase proportionally with the number of channels that are placed on the chip. We acquired our initial rights to our patented manufacturing process under a license agreement with Polyvalor and McGill University. Specifically, Polyvalor and McGill University hold patents and know-how relating to the materials and process used to produce integrated optical circuits on silicon microchips. Polyvalor and McGill University have also licensed that technology to QPS Technology, Inc. Through our research and development, we believe that, based on our experience in the industry, we have improved the process. Accordingly, we have filed two patent applications relating to this process. Our only material obligation to the licensors is to pay a royalty of 5% on our gross sales, subject to a cumulative maximum of CDN$3,500,000 (US$2,367,104). See "Business -- Material Agreements -- Agreement with Polyvalor and McGill University." We have entered into an agreement with Polaroid Corporation for the license of patents held by Polaroid in connection with array wave-guide gratings (AWG). We agreed to pay to Polaroid an initial licensing fee of CDN$584,047 (US$395,000). In addition, we will pay royalties on the net selling price of our products, at an annual rate of 5% for aggregate net selling prices of US$5,000,000, 3.5% for aggregate net selling prices over five and up to US$40,000,000, and 1.75% for aggregate net selling prices over US$40,000,000, for each year of the agreement. See "Business -- Material Agreements -- Agreement with Polaroid." We have entered into agreements with Molex that contain restrictions on our ability to sell our products. Under a teaming agreement, we agreed with Molex to jointly develop DWDM products. Subject to our testing and proving our technology and our ability to manufacture and deliver the devices, Molex is committed to purchase our entire DWDM production for the first 12 months of production, up to 400 units per month. Molex also has the option to buy 50% of our remaining chip production. After the first 12-month period, Molex will have the option to purchase 50% of our DWDM production for the succeeding three-year period. Any product sold by us to Molex will be priced at our gross cost. In addition, Molex will pay to us 30% of the profits obtained on final products built from the chips supplied, 50% of the profits from sales of functionally unmodified packaged products and 30% of the profits from sales of other final products. We are free to package and sell any remaining products, with all profits going to us. However, we cannot sell unpackaged chips for telecommunications applications, except for special order or exploratory purposes, without written agreement from Molex. If we are unable to supply Molex on a timely basis with a commercially reasonable quantity of the devices or in the event we experience a change of control, Molex has the non-exclusive right to manufacture all components of the devices in return for a royalty equal to 50% of the profits from sales of functionally unmodified packaged products and 30% of the profits from sales of other final products. See "Material Agreements -- Agreements with Molex" for a detailed description of our agreements with Molex. We are incorporated under the laws of the State of Delaware. Our principal executive offices are located at 8851 Trans-Canada Highway, Ville Saint-Laurent, (QC) Canada H4S 1Z6, and our telephone number at that address is (514) 331-3738. THE OFFERING Common stock offered by the selling stockholders..................... 10,800,000 shares, of which 2,616,414 have been issued and 8,183,586 are issuable upon exercise of outstanding warrants and conversion of outstanding convertible notes.(1) Common stock outstanding........... 36,069,153 shares(2) Common stock to be outstanding after the offering................. 44,252,739(2) Use of proceeds.................... We will not receive any proceeds from the sale of the shares of common stock by the selling stockholders. We could receive proceeds of up to US$50,008,000, if warrants held by the selling stockholders were exercised at their minimum exercise price, and proceeds of up to US$150,024,000 if warrants held by the selling stockholders were exercised at their maximum exercise price. Given the uncertainty as to any exercise, the timing of any exercise and the amount that we would receive, we have not established any specific use for these proceeds. They will be used for working capital and general corporate purposes. Risk factors....................... An investment in the common stock offered by the selling stockholders involves a high degree of risk. See "Risk Factors" beginning on page 9. Nasdaq National Market symbol...... LUMM --------------- (1) Represents approximately 18.49% of the outstanding shares of our common stock assuming the issuance of the 8,183,586 shares to be issued. On July 25, 2000, we sold CDN$51,243,000 (US$35,000,000) aggregate principal amount of convertible notes due July 25, 2005 to two institutional investors. The notes bear interest at rate of 7.5% per year, which is payable upon the earlier to occur of the repayment or conversion of the notes. The notes are convertible into shares of common stock at a price equal to the average of the closing bid prices of our common stock for the five consecutive trading days ending immediately prior to conversion, but in no event less than US$7.00 nor more than US$25.00 per share (unless a default under the notes has occurred). For example, if the notes had converted on December 18, 2000, the conversion price would have been US$7.00, which would have resulted in an aggregate of 4,000,000 shares of common stock being issued upon the conversion of the notes. To date, CDN$30,893,500 (US$20,500,000) of these notes have been converted into 2,600,000 shares of common stock. In connection with the financing, we issued to the investors five year warrants to purchase an aggregate of 5,000,800 shares of our common stock. These warrants are exercisable beginning 18 months after issuance, at an exercise price determined as follows: -- If the volume weighted average price, which is determined by adding up all of the dollars traded on every transaction on a given day (price times number of shares purchased) and dividing that number by the shares traded during the day, of our common stock during the five consecutive trading days prior to the date the warrants became exercisable is equal to or less than US$30.00, then the exercise price of the warrants will be US$10.00; -- If the volume weighted average price of our common stock during the five consecutive trading days prior to the date the warrants became exercisable is greater than US$30.00, but less than US$70.00, then the exercise price of the warrants will be the sum of US$10.00, plus one-half of the excess over US$30.00; and -- If the volume weighted average price of our common stock during the five consecutive trading days prior to the date the warrants became exercisable is more than US$70.00, then the exercise price of the warrants will be US$30.00. The number of shares of common stock issuable upon exercise of the warrants and the exercise price of the warrants are subject to adjustment upon the occurrence of the issuance of convertible securities at a conversion/exercise price that is less than the then current market price, stock splits, stock dividends and other recapitalizations. In addition, upon a consolidation, merger or sale in which we are not the surviving entity, we must require that our successor assume our obligations under the warrants. If we declare or make any distribution of assets or rights to acquire shares to our stockholders, the holders of the warrants, upon the exercise of those warrants, will be entitled to receive the amount of those assets or rights as if those holders had been holders of common stock on the date of that distribution. In the event of a default under the notes or in others of our obligations to the purchasers, vesting of the warrants may be accelerated. See the Risk Factor entitled "We have a significant number of outstanding convertible notes, warrants and options, the exercise or conversion of which could adversely affect the price of our common stock and could result in increased dilution in the book value of our stock" on page 15 and the Selling Stockholder table on page 52. (2) Does not include: -- 5,112,650 shares of common stock reserved for issuance upon exercise of options granted or to be granted under our stock option incentive plan, under which options to purchase 3,590,150 shares of common stock are outstanding; -- 5,757,811 shares of common stock reserved for issuance upon exercise of outstanding common stock purchase warrants; or -- 4,383,586 shares of common stock reserved for issuance upon conversion of outstanding convertible notes. Except as otherwise indicated, all references in this prospectus to the number of shares of common stock outstanding do not include the foregoing shares. SUMMARY FINANCIAL INFORMATION The following summary financial information is taken from our financial statements included elsewhere in this prospectus. The summary financial statements should be read in conjunction with the financial statements and related notes, and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Our financial statements as of and for the fiscal years ended June 30, 2000, June 30, 1999 and December 31, 1998 have been audited by KPMG LLP, Montreal, Canada, independent chartered accountants. Our financial statements as of and for the three months ended September 30, 1999 and September 30, 2000 are derived form our unaudited financial statements also appearing elsewhere in this document, and which, in the opinion of our management, include all adjustments, consisting of only normal recurring adjustments necessary to present fairly our unaudited results of operations and financial condition for those periods and at that date. The financial results below for the three months ended September 30, 1999 and 2000 are not necessarily indicative of the results to be expected for any future period. Unless otherwise indicated, all dollar amounts in this prospectus are expressed in United States dollars. We changed our fiscal year end to June 30, effective in 1999. The amounts reported below for fiscal year 1999 are for the six-month period ended June 30, 1999. <TABLE> <CAPTION> DECEMBER 31, 1998 JUNE 30, 1999 JUNE 30, 2000 ----------------- ------------- ------------- (IN THOUSANDS OF CANADIAN DOLLARS) <S> <C> <C> <C> Current Assets..................... $553 $2,045 $ 6,059 Capital Assets..................... -- 1,492 4,603 Total Assets....................... 553 3,547 12,200 Liabilities........................ 119 1,003 1,886 Stockholders' Equity............... $434 $2,544 $10,314 ---- ------ ------- </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 SEPTEMBER 30, 2000(3) ------------------ ------------------ --------------------- (IN THOUSANDS OF (IN THOUSANDS OF CANADIAN DOLLARS) US DOLLARS) <S> <C> <C> <C> Current Assets.................... $4,442 $49,371 $32,761 Capital Assets.................... 1,937 19,016 12,618 Total Assets...................... 6,389 70,255 46,619 Liabilities....................... 624 29,644 19,671 Stockholders' Equity.............. $5,765 $40,611 $26,948 ------ ------- ------- </TABLE> <TABLE> <CAPTION> SIX MONTHS FISCAL YEAR FROM INCEPTION TO ENDED ENDED DECEMBER 31, 1998 JUNE 30, 1999 JUNE 30, 2000 ------------------ ------------- ------------- (IN THOUSANDS OF CANADIAN DOLLARS) <S> <C> <C> <C> Research and Development Expenditures(1)................. $ 12 $ 162 $218,968 General and Administrative........ 290 570 4,020 Depreciation...................... 894 Other Expenses (Income)........... 15 18 (320) Net Loss.......................... 288 750 223,562 Loss Per Share(2)................. $0.02 $ 0.04 $ 8.80 ----- ------ -------- </TABLE> <TABLE> <CAPTION> THREE MONTHS THREE MONTHS THREE MONTHS ENDED ENDED ENDED SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 SEPTEMBER 30, 2000(3) ------------------ ------------------ --------------------- (IN THOUSANDS OF (IN THOUSANDS OF CANADIAN DOLLARS) US DOLLARS) <S> <C> <C> <C> Research and Development Expenditures(1)................ $2,034 $ 1,344 $ 891 General and Administrative....... 487 3,639 2,415 Depreciation..................... 91 548 364 Other Expenses................... 52 21,988 14,591 Net Loss......................... 2,664 27,519 18,261 Loss Per Share(2)................ $ 0.13 $ 0.80 $ 0.53 ------ ------- ------- </TABLE> --------------- (1) Amounts shown are net of tax credits and grants and include non-cash expenses resulting from the issuance of common stock upon exercise of the Molex services warrant. (2) For the periods ended December 31, 1998, June 30, 1999, September 30, 1999, June 30, 2000 and September 30, 2000, the weighted average number of shares outstanding were 14,972,188, 17,480,967, 21,116,992, 25,415,601 and 34,511,352 respectively. We have never paid dividends on our common stock. (3) Translated solely for the convenience of the reader at the noon buying rate on September 29, 2000 of US$1.00 to CDN$1.507.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001098489_linc-net_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001098489_linc-net_prospectus_summary.txt
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+PROSPECTUS SUMMARY YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL SHARES OF COMMON STOCK AND SEEKING OFFERS TO BUY SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THE COMMON STOCK. YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING OUR COMPANY AND THE COMMON STOCK BEING SOLD IN THIS OFFERING AND OUR FINANCIAL STATEMENTS AND RELATED NOTES AND OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. LINC.NET, INC. Linc.net is a full-service provider of network infrastructure services, with significant operations in the network infrastructure engineering, last mile deployment and central office installation markets. Our network infrastructure engineering capabilities include, among other things, the development of complete detailed specifications, material lists, construction and design drawings for all types of local and long-distance network infrastructure projects. We perform engineering, program management and installation of fiber optic and other cabling and related equipment for wireless and wireline telecommunications providers, much of which is performed in the "last mile" of network infrastructure required to bring high speed communications to the end user. We also engineer, install and maintain electronic, digital subscriber line and optical telecommunications equipment in the central offices of major network providers. Central offices are the network hubs maintained by telecommunications providers throughout their service areas. We offer our full range of services, either bundled or separately, under the Linc.net national brand. We were formed in October 1999 and have completed ten acquisitions in order to build a national presence and develop a full range of service offerings, which allows us to market our capabilities and cross-sell our service offerings to national customers. Our business units have been in the network infrastructure service business, on average, for more than 20 years. We will selectively pursue additional acquisitions to bolster our national presence and to augment our service offerings. Our diverse customer base includes incumbent local exchange carriers, competitive local exchange carriers, rural exchange carriers, telecommunications equipment manufacturers, Internet providers, cable television operators, long distance carriers, wireless phone companies, co-location facilities providers and public and private energy companies. At November 15, 2000, on a pro forma basis for the InterCon acquisition, Linc.net had approximately 3,800 employees, including over 420 network engineers and over 780 network technicians. OUR STRATEGY Our objective is to become the leading national provider of end-to-end network infrastructure services to telecommunications, Internet and cable television providers. We believe we are currently one of the largest providers of end-to-end network infrastructure services in the United States based on our pro forma revenues for the year ended December 31, 1999 as compared with publicly available information about others in our industry during the same period. Our strategy for achieving this objective is as follows: - EXPAND POSITION IN KEY MARKETS. We have significant operations in three key markets: network infrastructure engineering, last mile deployment and central office installation. We will continue to focus resources on these key markets. - ESTABLISH LINC.NET BRAND. We are developing a national brand under which we will offer end-to-end network infrastructure solutions through our system of regional and national specialty hubs. - ATTRACT, RETAIN AND TRAIN HIGHLY SPECIALIZED WORK FORCE. We will continue to devote significant resources and attention to the recruitment and retention of highly skilled employees. - UTILIZE RESOURCES AND KNOWLEDGE ACROSS BUSINESS UNITS. We intend to continue to utilize the substantial experience and resources of our various business units across our organization to ensure cost-effective, efficient and high-quality delivery of services to our customers. - SELECTIVELY PURSUE STRATEGIC ACQUISITIONS. We will selectively pursue strategic acquisitions to round out our geographic coverage and to complement our existing service offerings. THE OFFERING <TABLE> <S> <C> Common stock offered......................... 4,700,000 shares Common stock to be outstanding after this 21,500,000 shares offering................................... Over-allotment option........................ 705,000 shares Use of proceeds.............................. We will receive net proceeds from this offering of approximately $67.9 million. We intend to use 50% of the net proceeds to repay outstanding indebtedness under our senior credit facility and the remainder for general corporate purposes. For more information, see "Use of Proceeds." Dividend policy.............................. We do not intend to pay dividends on our common stock. We plan to retain any earnings for use in the operation of our business and to fund future growth. Proposed New York Stock Exchange symbol...... LN </TABLE> The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of November 15, 2000. Shares of our common stock outstanding after this offering do not include: - 115,334 shares issuable upon the exercise of outstanding options granted under our existing stock option and long-term equity incentive plans; - 1,151,338 additional shares reserved for future grants, awards or sales under our existing stock option and long-term equity incentive plans; and - 622,953 additional shares reserved for sale under our employee stock purchase plan. Immediately prior to this offering, we intend to reclassify all of our outstanding shares of Series A mandatorily redeemable preferred stock and Series B redeemable preferred stock into a single class of common stock. This reclassification is described further in the section titled "Description of Capital Stock--The Reclassification." Except as otherwise indicated, the number of shares of our outstanding common stock in this prospectus assumes: - no exercise of the underwriters' over-allotment option; - the completion of the reclassification of our existing preferred stock; and - a one-for-4.1530 stock split. In addition, the common stock to be outstanding after this offering assumes the reclassification of our existing preferred stock on January 31, 2001, the expected effective date of this offering. ------------------------ Linc.net is a Delaware corporation organized in October 1999. Our principal executive offices are located at 6161 Blue Lagoon Drive, Suite 300, Miami, Florida 33126, and our telephone number is (305) 266-7670. Our World Wide Web address is www.lincnetinc.com. Our website and the information contained therein are expressly intended not to be included in or as a part of this prospectus. THE INTERCON ACQUISITION On August 31, 2000, we agreed to acquire all of the outstanding capital stock of InterCon Construction, Inc. for approximately $43.0 million, including approximately $2.4 million of estimated transaction costs. We expect to complete the acquisition of InterCon prior to the completion of this offering. Some of the information contained in this prospectus assumes that the acquisition of InterCon will be completed on the terms set forth in the InterCon purchase agreement dated August 31, 2000, as subsequently amended by and among InterCon, certain sellers named therein and us, which is attached as an exhibit to the registration statement of which this prospectus is a part. If the acquisition of InterCon is not completed, the shares of common stock offered hereby would represent an ownership interest in Linc.net as it exists on the date of this prospectus and not of Linc.net as combined with InterCon. Therefore, if the acquisition of InterCon is not completed, the information contained in this prospectus assuming the completion of such acquisition would not be relevant. For more information, see "Risk Factors--Risks Relating to Our Company--In the event we are unable to complete the InterCon acquisition, some of the information and financial data contained in this prospectus will not be relevant to you" and "Unaudited Pro Forma Condensed Consolidated Financial Statements." SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA Below is a summary of our consolidated financial data for the periods and as of the dates indicated. HISTORICAL FINANCIAL DATA. We were formed in October 1999. We acquired M&P Utilities, Inc. and its affiliate Muller & Pribyl Utilities, Inc., which we collectively refer to as Muller & Pribyl, on December 21, 1999. Muller & Pribyl is our corporate predecessor for accounting purposes and, therefore, its historical financial statements are deemed to be our historical financial statements. The following summary historical financial data for our predecessor, Muller & Pribyl, for the period from January 1, 1999 to December 21, 1999 have been derived from Muller & Pribyl's audited financial statements and notes thereto, which are included elsewhere in this prospectus. We acquired our first company on October 19, 1999. The historical financial statements for the period from October 19, 1999 to December 31, 1999 relate to Linc.net and the companies it acquired from its inception through December 31, 1999 and have been derived from our audited financial statements and notes thereto, which are included elsewhere in this prospectus. Data for the nine months ended September 30, 1999 are derived from Muller & Pribyl's accounting records and are unaudited. Data as of and for the nine months ended September 30, 2000 were derived from our unaudited consolidated financial statements. The summary historical financial data as of September 30, 2000 and for the nine months ended September 30, 2000 and 1999 have been prepared, in the opinion of management, on the same basis as the audited financial statements and reflect all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the financial condition and results of operations for such periods. Results for the nine months ended September 30, 2000 are not necessarily indicative of results that may be expected for the entire year. PRO FORMA FINANCIAL DATA. We prepared the summary condensed consolidated pro forma financial data to illustrate the estimated effects of the acquisitions, including the proposed InterCon acquisition described under "Unaudited Pro Forma Condensed Consolidated Financial Statements." We prepared the summary pro forma, as adjusted balance sheet data to illustrate the estimated effects of the acquisitions and: - the reclassification of all of our outstanding capital stock into a single class of common stock and the elimination of accrued dividends on our two series of preferred stock and - this offering and our use of the estimated net proceeds of $67.9 million, assuming an estimated initial public offering price of $16.00 per share, the midpoint of the range set forth on the cover page of this prospectus, to repay debt and for general corporate purposes. The pro forma statement of operations data for the year ended December 31, 1999 are presented as if these transactions had occurred on January 1, 1999. The pro forma statement of operations data for the nine months ended September 30, 1999 are presented as if these transactions had occurred on January 1, 1999 and the pro forma statement of operations data for the nine months ended September 30, 2000 are presented as if these transactions had occurred on January 1, 2000. The pro forma balance sheet data is presented as if these transactions, to the extent not included in Linc.net's historical consolidated balance sheet at September 30, 2000, had occurred on September 30, 2000. We believe that the assumptions used provide a reasonable basis for presenting the significant effects directly attributable to these transactions. However, the pro forma and pro forma, as adjusted data do not purport to represent what our results of operations would actually have been if such transactions had in fact occurred on such dates or to project results for any future period. The following summary consolidated historical and pro forma financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Unaudited Pro Forma Condensed Consolidated Financial Statements," our financial statements and related notes and other financial information appearing elsewhere in this prospectus. <TABLE> <CAPTION> HISTORICAL PRO FORMA -------------------------------------------------------- ----------------------------------------- PERIOD FROM PERIOD FROM JANUARY 1, OCTOBER 19, NINE MONTHS ENDED NINE MONTHS ENDED 1999 TO 1999 TO SEPTEMBER 30, YEAR ENDED SEPTEMBER 30, DECEMBER 21, DECEMBER 31, ------------------------ DECEMBER 31, ------------------------- 1999 1999 1999 2000 1999 1999 2000 ------------- ------------- ----------- ---------- ------------- ----------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenue................ $43,916 $ 1,760 $30,215 $ 174,536 $ 420,124 $ 316,849 $ 434,002 Costs of sales............. 32,701 1,581 21,651 146,122 348,658 257,291 357,054 ------- -------- ------- ---------- ----------- ----------- ----------- Gross profit............... 11,215 179 8,564 28,414 71,466 59,558 76,948 Costs and expenses: General and administrative expenses................. 1,781 868 1,250 12,285 37,282 25,567 29,038 Amortization of goodwill... -- 107 -- 4,084 13,170 9,879 9,879 Management fees............ -- 250 -- 667 250 -- 667 Noncash stock compensation............. -- -- -- -- 560 560 -- ------- -------- ------- ---------- ----------- ----------- ----------- Income (loss) from operations............... 9,434 (1,046) 7,314 11,378 20,204 23,552 37,364 Other (income) expenses: Interest (income) expense, net...................... (63) 360 -- 10,560 23,709 18,662 18,662 Transaction-related expenses................. 4,485 -- -- -- -- -- -- Other (income) expense, net...................... 31 (47) (10) (21) (430) 71 (546) ------- -------- ------- ---------- ----------- ----------- ----------- Income (loss) before income taxes and equity in income of investee....... 4,981 (1,359) 7,324 839 (3,075) 4,819 19,248 Equity in income of investee................. -- -- -- 3,325 -- -- -- ------- -------- ------- ---------- ----------- ----------- ----------- Income (loss) before income taxes.................... 4,981 (1,359) 7,324 4,164 (3,075) 4,819 19,248 Income taxes............... 71 (529) 4 336 (1,200) 1,879 7,507 ------- -------- ------- ---------- ----------- ----------- ----------- Net income (loss).......... 4,910 (830) 7,320 3,828 (1,875) 2,940 11,741 Preferred stock dividends................ -- (252) -- (5,366) -- -- -- ------- -------- ------- ---------- ----------- ----------- ----------- Net income (loss) to common stockholders............. $ 4,910 $ (1,082) $ 7,320 $ (1,538) $ (1,875) $ 2,940 $ 11,741 ======= ======== ======= ========== =========== =========== =========== Net income (loss) per share: Basic.................... $ (1.81) $ (.35) $ (.09) $ .14 $ .55 Diluted.................. $ (1.81) (.35) (.09) .14 .55 Weighted average common shares outstanding: Basic.................... 597,841 4,447,115 21,500,000 21,500,000 21,500,000 Diluted.................. 597,841 4,447,115 21,500,000 21,500,000 21,500,000 OTHER FINANCIAL DATA: EBITDA..................... $ 6,458 $ (845) $ 8,138 $ 23,176 $ 42,503 39,820 54,094 Depreciation............... 1,540 47 814 4,368 8,699 6,460 6,304 Amortization............... -- 107 -- 4,084 13,170 9,879 9,879 Cash provided by (used in): Operating activities..... 7,251 (42) (2,726) (34,969) 11,416 15,981 (28,989) Investing activities..... (1,251) (97,103) (50) (200,638) (116,106) 415,082 (101,417) Financing activities..... (7,305) 100,694 900 238,167 98,466 (432,932) 137,417 </TABLE> <TABLE> <CAPTION> AS OF SEPTEMBER 30, 2000 ------------------------------------- PRO FORMA, AS ACTUAL PRO FORMA ADJUSTED -------- ---------- ------------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Working capital............................................. $ 66,101 $ 59,222 $ 93,190 Total assets................................................ 408,799 470,127 504,095 Debt and capital lease obligations.......................... 214,537 248,553 214,585 Stockholders' equity........................................ 13,927 17,035 225,864 </TABLE> EBITDA is defined in this prospectus as income (loss) before provision for income taxes, plus depreciation, amortization of goodwill and interest expense, net. EBITDA is presented because we believe it is a widely accepted financial indicator of a company's ability to service and/or incur indebtedness. However, EBITDA should not be considered as an alternative to net income as a measure of operating results or to cash flows as a measure of liquidity in accordance with generally accepted accounting principles. Additionally, EBITDA may not be comparable to similarly titled measures reported by other companies.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001098574_firepond_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001098574_firepond_prospectus_summary.txt
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+PROSPECTUS SUMMARY This is only a summary and may not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including the "Risk Factors" section and our financial statements and the related notes included in this prospectus. Unless otherwise indicated, this prospectus assumes that the underwriters have not exercised their option to purchase additional shares. This prospectus also assumes that the warrants to purchase series F preferred stock have been exercised, that all shares of preferred stock have been automatically converted into shares of common stock and that the priority payments have been made through the issuance of additional shares of common stock to some common and preferred stockholders. This prospectus has been adjusted to reflect a two-for-three reverse stock split of the common stock effected on January 4, 2000. FIREPOND, INC. FirePond is a leading provider of integrated e-business sales and marketing solutions for companies wishing to offer complex products and services through business-to-business and business-to-consumer e-commerce channels. We provide software and services that allow companies to merge their e-commerce selling, customer relationship management, and channel management strategies on a single, Internet-based platform. Our FirePond Application Suite allows companies to offer personalized products, services and content to their customers over the Internet, as well as through more traditional selling channels, to convert potential customers into customers and to increase repeat business. Our products are able to link information obtained from business-to-business or business-to-consumer e-commerce transactions into traditional sales channels, where it can improve the ability of both sales models to transact business effectively. Our products can also share the information from these interactive, Internet-based transactions across the enterprise to help develop a company's common view of individual customers. This approach allows companies to manage their ongoing sales, marketing, product planning and fulfillment activities in a fashion that encourages long-term customer loyalty. We target the largest 2,000 companies in the world, commonly known as Global 2000 companies, in selected industries characterized by complex products, services or channel relationships, including health care/insurance, financial services, high technology, telecommunications, automotive/trucking and manufacturing. Our customers include ADP, Empire Blue Cross Blue Shield, KLA-Tencor, Renault V.I. and Sprint. Our goal is to be the leading provider of integrated e-business sales and marketing solutions. To achieve this goal, key elements of our strategy are to: - build on our experience to expand into new markets; - utilize our established international organization to target leading businesses worldwide; - utilize our development organization to expand our products' packaged e-business application functionality; - expand our relationships with systems integrators and complementary software vendors to expand our market reach and implementation capacity; - provide a range of product packaging options to better penetrate Global 2000 accounts; and - take advantage of our 16 years of implementation expertise to provide individualized solutions for our customers. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED FEBRUARY 3, 2000 [FIREPOND LOGO] 5,000,000 SHARES COMMON STOCK FirePond, Inc. is offering 5,000,000 shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We have applied to have the common stock approved for quotation on the Nasdaq National Market under the symbol FIRE. We anticipate that the initial public offering price will be between $17.00 and $19.00 per share. ------------------------ INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4. ------------------------ <TABLE> <CAPTION> PER SHARE TOTAL --------- ------ <S> <C> <C> Public Offering Price....................................... $ $ Underwriting Discounts and Commissions...................... $ $ Proceeds to FirePond........................................ $ $ </TABLE> THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. FirePond and one of its stockholders, who is identified on page 56, have granted the underwriters a 30-day option to purchase up to 750,000 additional shares of common stock to cover over-allotments. FleetBoston Robertson Stephens Inc. expects to deliver the shares of common stock to purchasers on , 2000. ------------------------ ROBERTSON STEPHENS DAIN RAUSCHER WESSELS SG COWEN E*OFFERING The date of this prospectus is , 2000 We were incorporated in Minnesota in 1983 as a provider of custom developed interactive selling solutions. Although we undertook a strategic restructuring in late 1996 to focus on providing more standardized software products, we continue to depend on revenue from our custom development services. For example, in fiscal 1999 our custom development services revenue accounted for almost half of our total revenue. In addition, custom development services revenues from two customers accounted for more than a quarter of our total revenues in fiscal 1999. We released our current product, the FirePond Application Suite, in October 1999, and we are dependent upon its acceptance by our target markets to complete our transition to a packaged software company. If the FirePond Application Suite is not widely adopted, we may never be profitable. We became a Delaware corporation as a result of a reincorporation merger effected in December 1999. Our principal executive offices are at 890 Winter Street, Waltham, Massachusetts 02451 and our telephone number at that address is (781) 487-8400. Information contained on our web site at http://www.firepond.com does not constitute part of this prospectus. We own or have rights to trademarks that we use in conjunction with the sale of our products. FirePond, our logo and our product names including FirePond Application Suite, FirePond Business Rule Engine, FirePond Commerce, FirePond Sales, FirePond Sales Manager, FirePond Process Server, FirePond Enterprise Workbench and Signature Plus are our trademarks. All other trade names and trademarks used in this prospectus are the property of their owners. THE OFFERING <TABLE> <S> <C> Common stock offered by FirePond........................... 5,000,000 shares Common stock to be outstanding after the offering.......... 32,751,713 shares Use of proceeds............................................ For debt repayment, working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol..................... FIRE </TABLE> The number of shares of common stock outstanding after this offering excludes: - 10,047,234 shares issuable upon exercise of outstanding options as of January 31, 2000 at a weighted average exercise price of $5.75 per share; - 901,234 shares issuable upon exercise of outstanding warrants as of January 31, 2000 at a weighted average exercise price of $8.14 per share; and - warrants to purchase 190,438 shares of series B preferred stock at an exercise price of $19.69 per share, which will convert into warrants to purchase 634,794 shares of common stock at an exercise price of $5.91 per share upon completion of this offering. As of January 31, 2000, we have also reserved an additional 2,734,808 shares of common stock for future issuance under our stock option plans. We also plan to issue warrants to purchase up to 500,000 shares of our common stock over the next 12 months in connection with sales of our products as well as to our present and future strategic partners. (inside front cover) DESCRIPTION OF ARTWORK At the top of the page is the name "FirePond" with the company's logo above it. The following caption is beneath the name of the company and its logo: The text "FirePond Application Suite(TM) enables selling complex products and services through e-commerce channels, integrates e-commerce selling channels with established sales channels, and shares customer information across the entire enterprise." In the center of the page is a small shaded circle with the following text: "FirePond Business Rules Engine." There are two shaded quarter-circles protruding from the top of the center circle on the left and right. The quarter circle on the left is labeled: "FirePond Commerce, Internet Selling Software for E-Commerce." The quarter circle on the right is labeled: "FirePond Sales, Internet Selling Software for Direct and Indirect Sales Channels." There is one large rectangle protruding from the bottom of the center circle. The rectangle is labeled: "FirePond Sales Manager, Enterprise Sales Administration and Customer Information Management." SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following tables are a summary of financial data for our business. The pro forma net loss per share calculation reflects the conversion of our preferred stock into shares of common stock upon the completion of this offering. See note 3 of notes to consolidated financial statements for an explanation of the number of shares used in computing per share data. The pro forma consolidated balance sheet data summarized below reflects: - the exercise of warrants to purchase series F preferred stock on a net exercise basis; - the conversion of all outstanding shares of preferred stock into shares of common stock; and - the payment of priority payments through the issuance of additional shares of common stock to some common and preferred stockholders upon completion of this offering. The pro forma as adjusted consolidated balance sheet data summarized below reflects the sale of the common stock in this offering at an assumed initial public offering price of $18.00 per share, after deduction of estimated underwriting discounts and commissions and our estimated offering expenses and the use of net proceeds as described in "Use of Proceeds." <TABLE> <CAPTION> FISCAL YEARS ENDED OCTOBER 31, ------------------------------- 1997 1998 1999 -------- ------- -------- <S> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Product-related revenues.................................. $ 416 $ 6,860 $ 18,381 Custom development services............................... 27,747 22,142 15,904 -------- ------- -------- Total revenues......................................... 28,163 29,002 34,285 Loss from operations........................................ (25,444) (8,715) (28,224) Net loss.................................................... (27,035) (9,041) (28,855) Net loss per share: Basic and diluted net loss per share...................... $ (2.62) $ (0.91) $ (2.88) Basic and diluted weighted average common shares outstanding............................................ 10,319 9,925 10,024 Pro forma net loss per share (unaudited): Pro forma net loss per share.............................. $ (1.12) Pro forma basic and diluted weighted average common shares outstanding............................................ 25,799 </TABLE> <TABLE> <CAPTION> OCTOBER 31, 1999 ------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................. $ 2,120 $ 2,120 $77,530 Working capital (deficit)................................. (11,380) (11,380) 70,770 Total assets.............................................. 21,660 21,660 97,070 Long-term debt, less current portion...................... 702 702 702 Convertible preferred stock............................... 191 -- -- Total stockholders' equity (deficit)...................... (5,354) (5,354) 76,796 </TABLE>
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+PROSPECTUS SUMMARY This summary highlights some of the information in this prospectus. It may not contain all the information that is important to you. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. We were formed as a Delaware corporation on November 8, 1999, and immediately prior to this offering will issue shares of our common stock in exchange for all membership interests in Mediacom LLC. Upon completion of the exchange, Mediacom LLC will become our subsidiary and will continue to serve as the holding company for our operating subsidiaries. Unless we tell you otherwise, the information in this prospectus assumes that Mediacom LLC is our subsidiary, that the underwriters will not exercise their over-allotment option and that the Class A common stock being offered will be sold at $17.50 per share, which is the mid-point of the range set forth on the cover page of this prospectus. Overview We are the ninth largest cable operator in the United States, based on customers served by wholly-owned systems after giving effect to our pending acquisitions and recently announced industry transactions. Our cable systems pass approximately 1.1 million homes and serve approximately 744,000 basic subscribers, including our pending acquisitions. We were founded in July 1995 by Rocco B. Commisso, our Chairman and Chief Executive Officer, to acquire and develop cable television systems serving principally non-metropolitan markets of the United States. Since commencement of our operations in March 1996, we have experienced significant growth by deploying a disciplined strategy of acquiring underperforming cable systems primarily in markets with favorable demographic profiles. Through September 1999, we spent approximately $432.4 million to complete nine acquisitions of cable systems that served 358,000 basic subscribers. In October and November 1999, we acquired for approximately $759.6 million the cable systems of Triax Midwest Associates, L.P. and Zylstra Communications Corporation that served 358,000 basic subscribers as of September 30, 1999. We have also generated strong internal growth and improved the operating and financial performance of our systems. These results have been achieved primarily through the introduction of an expanded array of core cable television products and services made possible by the rapid upgrade of our cable network. Assuming all our systems, excluding the Triax and Zylstra systems, were acquired on January 1, 1997, in 1998 our internal subscriber growth was 2.5% and for the nine months ended September 30, 1999 our internal subscriber growth was 1.8%. Since commencement of our operations, we have also experienced significant increases in operating losses and net losses. We believe that advancements in digital technologies, together with the explosive growth of the Internet, have positioned the cable industry's high- speed, interactive, broadband network as the primary platform for the delivery of video, voice and data services to homes and businesses. We believe that there is considerable demand in the communities we serve for these products and services. To capitalize on these opportunities, we are rapidly upgrading our cable network to provide our customers with an expanded array of broadband products and services. These include digital cable television, two-way, high- speed Internet access, interactive video and telephony. Approximately 73% of our customers are currently served by systems which have been upgraded to higher bandwidth capacities, excluding those customers served by the Triax and Zylstra systems. Our upgrade program already has enabled us to begin introducing new broadband products and services. As of December 1999, we offered digital cable services in systems passing more than 243,000 homes. In addition, through our strategic relationship with SoftNet Systems, Inc.'s subsidiary, ISP Channel, which was finalized in November 1999, we have deployed two-way, high-speed Internet access service in systems passing more than 177,000 homes as of December 1999. Business Strategy Our objective is to become the leading cable operator focused on providing entertainment, information and telecommunications services in non-metropolitan markets of the United States. The key elements of our strategy are to: . Improve the operating and financial performance of our acquired cable systems; . Develop efficient operating clusters; . Rapidly upgrade our cable network; . Introduce new and enhanced products and services; . Maximize customer satisfaction to build customer loyalty; . Acquire underperforming cable systems principally in non-metropolitan markets; and . Implement a flexible financing structure. Principal Executive Offices Our principal executive offices are located at 100 Crystal Run Road, Middletown, New York 10941. Our telephone number is (914) 695-2600, and our website is located at www.mediacomllc.com. The information on our website is not part of this prospectus. The Offering <TABLE> <S> <C> Class A common stock offered.......... 20,000,000 shares Common stock to be outstanding after this offering........................ 60,977,562 shares of Class A common stock 29,022,438 shares of Class B common stock 90,000,000 shares Voting rights......................... Holders of each class of our common stock generally have identical rights, except for differences in voting. Holders of our Class A common stock have one vote per share, while holders of our Class B common stock have ten votes per share. After this offering, the holders of our Class B common stock will have 82.6% of the combined voting power of our common stock. Mr. Commisso, through his ownership of our Class B common stock, will have the power to elect all of our directors and control stockholder decisions immediately following this offering. Nasdaq National Market symbol......... MCCC </TABLE> The outstanding shares of common stock excludes 1,971,108 shares of Class A common stock and 8,148,892 shares of Class B common stock issuable upon the exercise of stock options to be outstanding upon completion of this offering, none of which will then be exercisable. Summary Unaudited Pro Forma Consolidated Financial and Operating Data The following summary unaudited pro forma consolidated financial and operating data has been derived from and should be read in conjunction with "Unaudited Pro Forma Consolidated Financial Data," "Selected Historical Consolidated Financial and Operating Data" and the historical financial statements included elsewhere in this prospectus. <TABLE> <CAPTION> Nine Months Year Ended Ended December 31, September 30, 1998 1999 ---------------- ----------------- (dollars in thousands, except per share and per subscriber data) <S> <C> <C> Statement of Operations Data: Revenues................................ $ 272,258 $ 218,631 Costs and expenses: Service costs.......................... 90,928 73,154 Selling, general and administrative expenses.............................. 51,355 37,504 Corporate expense...................... 7,254 6,048 Depreciation and amortization.......... 175,047 145,778 ---------------- ---------------- Operating loss.......................... (52,326) (43,853) Interest expense, net................... 59,855 44,999 Other expenses.......................... 4,058 979 ---------------- ---------------- Loss before income taxes................ (116,239) (89,831) Provision (benefit) for income taxes.... -- -- ---------------- ---------------- Net loss from continuing operations..... $ (116,239) $ (89,831) ================ ================ Pro forma basic and diluted net loss per share(1)............................... $ (1.29) $ (1.00) Pro forma weighted average common shares outstanding............................ 90,000,000 90,000,000 Balance Sheet Data (end of period): Total assets............................ $ 1,232,718 Total debt.............................. 812,475 Total stockholders' equity.............. 374,152 Other Data: System cash flow(2)..................... $ 129,975 $ 107,973 System cash flow margin(3).............. 47.7% 49.4% EBITDA(4)............................... $ 122,721 101,925 EBITDA margin(5)........................ 45.1% 46.6% Net cash flows from operating activities............................. $ 88,386 $ 54,746 Net cash flows used in investing activities............................. (93,091) (98,027) Net cash flows from financing activities............................. 8,719 46,347 Operating Data (end of period, except average): Homes passed(6)......................... 1,051,000 1,069,000 Basic subscribers(7).................... 707,500 716,000 Basic penetration(8).................... 67.3% 67.0% Premium service units(9)................ 592,850 567,500 Premium penetration(10)................. 83.8% 79.3% Average monthly revenues per basic subscriber(11)......................... $34.00 </TABLE> (notes on following page) Notes to Summary Unaudited Pro Forma Consolidated Financial and Operating Data (1) Pro forma basic and diluted loss per share is calculated based on 90,000,000 shares of common stock. The number of shares of common stock reflects the 40,977,562 Class A shares and 29,022,438 Class B shares issued to effect the exchange of membership interests of Mediacom LLC and the 20,000,000 Class A shares that will be issued in this offering as if these shares were outstanding for all periods presented. The shares issued to effect the exchange for the membership interests are based upon the relative ownership percentages of membership interests in Mediacom LLC immediately prior to the completion of this offering and are based on an initial public offering price of $17.50 per share. (2) Represents EBITDA, as defined in note 4 below, before corporate expense. System cash flow: . is not intended to be a performance measure that should be regarded as an alternative either to operating income or net income as an indicator of operating performance or to the statement of cash flows as a measure of liquidity; . is not intended to represent funds available for debt service, dividends, reinvestment or other discretionary uses; and . should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. System cash flow is included in this prospectus because our management believes that system cash flow is a meaningful measure of performance commonly used in the cable television industry and by the investment community to analyze and compare cable television companies. Our definition of system cash flow may not be identical to similarly titled measures reported by other companies. (3) Represents system cash flow as a percentage of revenues. This measurement is used by us, and is commonly used in the cable television industry, to analyze and compare cable television companies on the basis of operating performance, for the reasons discussed in note 2 above. (4) Represents operating income (loss) before depreciation and amortization. EBITDA: . is not intended to be a performance measure that should be regarded as an alternative either to operating income or net income as an indicator of operating performance or to the statement of cash flows as a measure of liquidity; . is not intended to represent funds available for debt service, dividends, reinvestment or other discretionary uses; and . should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. EBITDA is included in this prospectus because our management believes that EBITDA is a meaningful measure of performance commonly used in the cable television industry and by the investment community to analyze and compare cable television companies. Our definition of EBITDA may not be identical to similarly titled measures reported by other companies. (5) Represents EBITDA as a percentage of revenues. This measurement is used by us, and is commonly used in the cable television industry, to analyze and compare cable television companies on the basis of operating performance, for the reasons discussed in note 4 above. (6) Represents the number of single residence homes, apartments and condominium units passed by the cable distribution network in a cable system's service area. (7) Represents subscribers of a cable system who receive a package of over- the-air broadcast stations, local access channels and/or certain satellite-delivered cable television services, and who are usually charged a flat monthly rate for a number of channels. (8) Represents basic subscribers as a percentage of total number of homes passed. (9) Represents the number of subscriptions to premium services. A subscriber may purchase more than one premium service, each of which is counted as a separate premium service unit. For the nine months ended September 30, 1999, premium service units decreased primarily due to the Disney Channel being moved from a premium service to the basic programming packages in several of our cable systems. (10) Represents premium service units as a percentage of total number of basic subscribers. (11) Represents average monthly revenues for the period divided by average monthly basic subscribers for such period. This measurement is commonly used in the cable television industry to analyze and compare cable television companies on the basis of operating performance. Summary Historical Consolidated Financial and Operating Data The following summary historical consolidated financial and operating data of Mediacom LLC should be read in conjunction with "Selected Historical Consolidated Financial and Operating Data," "Management's Discussion and Analysis of Financial Conditions and Results of Operations" and the historical consolidated financial statements of Mediacom LLC included elsewhere in this prospectus. <TABLE> <CAPTION> March 12 Nine Months Ended Through Year Ended Year Ended September 30, December 31, December 31, December 31, --------------------- 1996 1997 1998 1998 1999 ------------ ------------ ------------ --------- ---------- (Unaudited) (dollars in thousands, except per share and per subscriber data) <S> <C> <C> <C> <C> <C> Statement of Operations Data: Revenues............... $ 5,411 $ 17,634 $ 129,297 $ 94,374 $ 113,230 Costs and expenses: Service costs......... 1,511 5,547 43,849 32,873 36,571 Selling, general and administrative expenses............. 931 2,696 25,596 18,101 21,816 Management fee expense(1)........... 270 882 5,797 4,340 5,150 Depreciation and amortization......... 2,157 7,636 65,793 44,338 66,154 -------- -------- ---------- --------- ---------- Operating income (loss)................ 542 873 (11,738) (5,278) (16,461) Interest expense, net(2)................ 1,528 4,829 23,994 17,786 20,577 Other expenses......... 967 640 4,058 3,838 979 -------- -------- ---------- --------- ---------- Net loss............... $ (1,953) $ (4,596) $ (39,790) $ (26,902) $ (38,017) -------- -------- ---------- --------- ---------- Pro forma provision (benefit) for income taxes(3).............. -- -- ---------- ---------- Pro forma net loss(4).. $ (39,790) $ (38,017) ========== ========== Pro forma basic and diluted net loss per share(5).............. $ (0.57) $ (0.54) Pro forma weighted average common shares outstanding........... 70,000,000 70,000,000 Balance Sheet Data (end of period): Total assets........... $ 46,560 $102,791 $ 451,152 $ 447,666 $ 455,155 Total debt............. 40,529 72,768 337,905 317,398 377,500 Total members' equity.. 4,537 24,441 78,651 91,539 40,634 Other Data: System cash flow(6).... $ 2,969 $ 9,391 $ 59,852 $ 43,400 $ 54,843 System cash flow margin(7)............. 54.9% 53.3% 46.3% 46.0% 48.4% EBITDA(8).............. $ 2,699 $ 8,509 $ 54,055 $ 39,060 $ 49,693 EBITDA margin(9)....... 49.9% 48.3% 41.8% 41.4% 43.9% Net cash flows from operating activities.. $ 237 $ 7,007 $ 53,556 $ 47,796 $ 29,795 Net cash flows used in investing activities.. (45,257) (60,008) (397,085) (372,452) (60,632) Net cash flows from financing activities.. 45,416 53,632 344,714 324,597 32,325 Operating Data (end of period, except average): Homes passed(10)....... 38,749 87,750 520,000 512,000 525,000 Basic subscribers(11).. 27,153 64,350 354,000 348,000 358,000 Basic penetration(12).. 70.1% 73.3% 68.1% 68.0% 68.2% Premium service units(13)............. 11,691 39,288 407,100 387,100 396,500 Premium penetration(14)....... 43.1% 61.1% 115.0% 111.2% 110.8% Average monthly revenues per basic subscriber(15)........ $32.14 $35.34 </TABLE> (notes on following page) Notes to Summary Historical Consolidated Financial and Operating Data (1) Represents fees paid to Mediacom Management Corporation for management services rendered to our operating subsidiaries. Mediacom Management utilizes these fees to compensate its employees as well as to fund its corporate overhead. The management agreements with Mediacom Management were amended effective November 19, 1999 in connection with an amendment to Mediacom LLC's operating agreement. The amended agreements provide for management fees equal to 2% of annual gross revenues. Each of the management agreements will be terminated upon the completion of this offering. At that time, Mediacom Management's employees will become our employees and its corporate overhead will become our corporate overhead. These expenses will be reflected as our corporate expense, which we estimate will amount to approximately 2% of our annual gross revenues. (2) Net of interest income. Interest income for the periods presented was not material. (3) Represents an income tax provision (benefit) assuming the exchange of membership interests in Mediacom LLC for shares of our common stock. We have operating losses for the periods presented and have not reflected any tax benefit for such losses. (4) Pro forma net loss does not include a $628,000 expense associated with the amendments to our management agreements with Mediacom Management, for which additional membership interests will be issued to an existing member of Mediacom LLC and one-time $9.3 million and $12.8 million non-recurring, non-cash compensation charges associated with a grant of equity interests, based on an initial public offering price of $17.50 per share, by an existing member of Mediacom LLC to certain members of our management team for the year ended December 31, 1998 and the nine months ended September 30, 1999, respectively. See note 6 of Mediacom LLC's interim financials for further discussion. (5) Pro forma basic and diluted loss per share is calculated based on 70,000,000 shares of common stock. The number of shares of common stock reflects the 40,977,562 Class A shares and 29,022,438 Class B shares issued to effect the exchange of membership interests of Mediacom LLC as if these shares were outstanding for all periods presented and excludes the shares that will be issued in this offering. The shares issued to effect the exchange for the membership interests are based upon the relative ownership percentages of membership interests in Mediacom LLC immediately prior to the completion of the offering and are based on an initial public offering price of $17.50 per share. (6) Represents EBITDA, as defined in note 8 below, before management fee expense. System cash flow: . is not intended to be a performance measure that should be regarded as an alternative either to operating income or net income as an indicator of operating performance or to the statement of cash flows as a measure of liquidity; . is not intended to represent funds available for debt service, dividends, reinvestment or other discretionary uses; and . should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. System cash flow is included in this prospectus because our management believes that system cash flow is a meaningful measure of performance commonly used in the cable television industry and by the investment community to analyze and compare cable television companies. Our definition of system cash flow may not be identical to similarly titled measures reported by other companies. (7) Represents system cash flow as a percentage of revenues. This measurement is used by us, and is commonly used in the cable television industry, to analyze and compare cable television companies on the basis of operating performance, for the reasons discussed in note 6 above. (8) Represents operating income (loss) before depreciation and amortization. EBITDA: . is not intended to be a performance measure that should be regarded as an alternative either to operating income or net income as an indicator of operating performance or to the statement of cash flows as a measure of liquidity; . is not intended to represent funds available for debt service, dividends, reinvestment or other discretionary uses; and . should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. EBITDA is included in this prospectus because our management believes that EBITDA is a meaningful measure of performance commonly used in the cable television industry and by the investment community to analyze and compare cable television companies. Our definition of EBITDA may not be identical to similarly titled measures reported by other companies. (9) Represents EBITDA as a percentage of revenues. This measurement is used by us, and is commonly used in the cable television industry, to analyze and compare cable television companies on the basis of operating performance, for the reasons discussed in note 8 above. (10) Represents the number of single residence homes, apartments and condominium units passed by the cable distribution network in a cable system's service area. (11) Represents subscribers of a cable television system who receive a package of over-the-air broadcast stations, local access channels and/or certain satellite-delivered cable television services and who are usually charged a flat monthly rate for a number of channels. (12) Represents basic subscribers as a percentage of total number of homes passed. (13) Represents the number of subscriptions to premium services. A subscriber may purchase more than one premium service, each of which is counted as a separate premium service unit. For the nine months ended September 30, 1999, premium service units decreased primarily due to the Disney Channel being moved from a premium service to the basic programming packages in several of our cable systems. (14) Represents premium service units as a percentage of total number of basic subscribers. This ratio may be greater than 100% if the average basic subscriber subscribes to more than one premium service unit. (15) Represents average monthly revenues for the period divided by average monthly basic subscribers for such period. This measurement is commonly used in the cable television industry to analyze and compare cable television companies on the basis of operating performance.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001098834_fargo_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001098834_fargo_prospectus_summary.txt
new file mode 100644
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--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001098834_fargo_prospectus_summary.txt
@@ -0,0 +1,4297 @@
+Summary of Significant Accounting Policies:
+
+Cash and Cash Equivalents:
+
+ All highly liquid investments with original maturities of three months or less are considered cash equivalents. Substantially all of the Company's cash and
+cash equivalents are held by one financial institution.
+
+Inventories:
+
+ Inventories, which consist primarily of raw materials, are stated at the lower of cost or market, with cost being determined by the first-in,
+first-out (FIFO) method.
+
+Equipment and Leasehold Improvements:
+
+ Equipment and leasehold improvements are stated at cost. Depreciation is recorded over the estimated useful lives of the assets (three to five years) using
+accelerated methods. Leasehold improvements are amortized over the terms of the related leases.
+
+ Major
+renewals or betterments are capitalized, while repair and maintenance expenditures are charged to operations as incurred. The cost and accumulated depreciation or amortization
+of equipment and leasehold improvements disposed of or sold are eliminated from their respective accounts, and the resulting gain or loss is recorded in operations.
+
+Valuation of Long-Lived Assets:
+
+ The Company periodically analyzes its long-lived assets for potential impairment, assessing the appropriateness of lives and recoverability of
+unamortized balances through measurement of undiscounted operating cash flows on a basis consistent with generally accepted accounting principles.
+
+Revenue Recognition:
+
+ Revenue is recognized at the time of shipment. The Company provides for estimated warranty costs in the period revenue is recognized. Certain of the Company's
+customer arrangements include stock balancing and return provisions. The Company provides an allowance for estimated returns when revenue is recognized.
+
+Research and Development:
+
+ Research and development costs are charged to expense as incurred.
+
+Deferred Financing Costs:
+
+ Deferred financing costs are being amortized to interest expense over the term of the related debt using the effective interest rate method.
+
+Income Taxes:
+
+ Prior to the Recapitalization, the Company had elected S Corporation status under the applicable sections of the Internal Revenue Code (IRC) and relevant state
+income tax regulations, whereby income of the Company was included in the income tax returns of its founder and sole stockholder. Accordingly, the financial statements for the periods prior to the
+Recapitalization do not reflect the income tax effects of the Company's operations. Effective February 18, 1998, the Company elected to be taxed as a C Corporation under the provisions of the
+IRC.
+
+ For
+the periods subsequent to February 18, 1998, deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between
+the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and tax rates in effect for the periods in which the differences are expected
+to reverse. The tax effects of the temporary differences which resulted from the "step-up" in tax basis (Notes 2 and 9) have been reflected in stockholders' equity (deficiency) at
+February 18, 1998. The provision for income taxes is the tax payable for the period and the change during the period in deferred income taxes. Valuation allowances are established when
+necessary to reduce deferred tax assets to the amount expected to be realized.
+
+Fair Value of Financial Instruments:
+
+ The Company considers that the carrying amount of financial instruments, including accounts receivable, accounts payable, accrued liabilities and notes
+payable, approximates fair value. Interest on notes payable is payable at rates which approximate fair value.
+
+Derivative Financial Instruments:
+
+ Derivative financial instruments are used by the Company principally in the management of its interest rate exposure.
+
+ Amounts
+to be paid or received under interest rate swap agreements are accrued as interest rates change and are recognized over the life of the swap agreements as an adjustment to
+interest expense. The fair value of swap agreements is not recognized in the financial statements, since they are accounted for as hedges. Written options associated with interest rate swap agreements
+are recognized
+in the financial statements at their fair market value. Adjustments to the written option fair value are recorded in other income (expense) during the related period.
+
+Net Income (Loss) Per Common Share:
+
+Historical
+
+ The difference in the weighted average shares outstanding for calculating basic and diluted earnings per share is attributable to the assumed exercise of stock
+options, if dilutive, and also includes the effect of the assumed conversion of the convertible participating preferred stock into common stock. The options and the convertible participating preferred
+stock were not included in the computation of diluted net income (loss) per common share for the year ended December 31, 1998, and the nine months ended September 30, 1999 and 1998,
+because they would not have had a dilutive effect.
+
+Pro Forma (Unaudited)
+
+ Pro forma net income (loss) per common share is calculated assuming conversion of all convertible participating preferred stock, which converts automatically
+upon the completion of the initial public offering into 5,000,000 shares of common stock.
+
+ The
+following provides a reconciliation of shares used in the computation of pro forma basic and diluted earnings per share:
+
+ 
+
+ 
+ 
+
+ 
+Nine Months Ended
+
+September 30
+
+ 
+
+ 
+Year Ended December 31
+
+1998
+
+ 
+
+ 
+1998
+ 
+1999
+
+Pro forma basis shares outstanding:
+ 
+ 
+ 
+ 
+ 
+ 
+
+Weighted average shares, including restricted stock, for basic earnings per share
+ 
+4,307,366
+ 
+5,190,252
+ 
+1,723,558
+
+Dilutive effect of convertible participating preferred stock
+ 
+4,378,768
+ 
+4,102,564
+ 
+5,000,000
+
+ 
+ 
+
+ 
+
+ 
+
+Weighted average pro forma basis shares outstanding
+ 
+8,636,134
+ 
+9,792,816
+ 
+6,773,558
+
+ 
+ 
+
+ 
+
+ 
+
+Pro forma diluted shares outstanding:
+ 
+ 
+ 
+ 
+ 
+ 
+
+Weighted average pro forma basis shares outstanding
+ 
+8,636,134
+ 
+9,292,816
+ 
+6,723,558
+
+Dilutive effect of stock options
+ 
+ 
+ 
+ 
+ 
+161,025
+
+ 
+ 
+
+ 
+
+ 
+
+Weighted average pro forma diluted shares outstanding
+ 
+8,636,134
+ 
+9,292,816
+ 
+6,884,583
+
+ 
+ 
+
+ 
+
+ 
+
+Use of Estimates:
+
+ The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
+affect the reported amounts of assets and liabilities as of the date of the financial statements and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates
+also affect the reported amounts of revenues and expenses during the periods reported. Actual results could differ from those estimates.
+
+Recently Issued Accounting Standards:
+
+ Effective with its year end 1998 financial statements, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which established standards
+for reporting and display of comprehensive
+income and its components in a full set of general purpose financial statements. The Company's comprehensive income is equal to its net income for all periods presented.
+
+ In
+March 1998, the AICPA issued SOP No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP
+No. 98-1). SOP No. 98-1 requires entities to capitalize certain costs related to internal-use software once certain criteria have been met. The
+Company adopted SOP No. 98-1 beginning on January 1, 1999. The adoption did not have a material impact on the Company's financial position or results of operations.
+
+ In
+June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company must adopt this
+standard no later than January 1, 2001. The Company is reviewing the requirements of this standard. Although the Company expects that this standard will not materially affect its financial
+position or results of operations, it has not yet determined the impact of this standard on its financial statements.
+
+4. Selected Balance Sheet Information:
+
+Accounts Receivable, Net:
+
+ 
+
+ 
+December 31,
+ 
+ 
+
+ 
+
+ 
+
+ 
+September 30,
+
+1999
+ 
+
+ 
+
+ 
+1997
+ 
+1998
+ 
+
+Trade accounts receivable
+ 
+$
+3,266,913
+ 
+$
+5,025,204
+ 
+$
+6,615,715
+ 
+
+Less allowance for doubtful accounts and sales returns
+ 
+ 
+(440,000
+)
+ 
+(250,000
+)
+ 
+(300,000
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+2,826,913
+ 
+$
+4,775,204
+ 
+$
+6,315,715
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Inventories:
+
+Raw materials and purchased parts
+ 
+$
+5,092,247
+ 
+$
+4,496,883
+ 
+$
+5,647,433
+ 
+
+Work in process
+ 
+ 
+70,461
+ 
+ 
+186,797
+ 
+ 
+214,304
+ 
+
+Finished goods
+ 
+ 
+736,629
+ 
+ 
+532,789
+ 
+ 
+492,858
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+5,899,337
+ 
+ 
+5,216,469
+ 
+ 
+6,354,595
+ 
+
+Less allowance for obsolete inventories
+ 
+ 
+(1,300,000
+)
+ 
+(925,000
+)
+ 
+(825,000
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+4,599,337
+ 
+$
+4,291,469
+ 
+$
+5,529,595
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Equipment and Leasehold Improvements, Net:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+Tooling and manufacturing equipment
+ 
+ 
+ 
+$
+ 
+
+2,713,009
+ 
+ 
+ 
+$
+ 
+
+2,199,610
+ 
+ 
+ 
+$
+ 
+
+3,135,126
+ 
+ 
+
+Office and other equipment
+ 
+ 
+1,941,956
+ 
+ 
+2,027,024
+ 
+ 
+2,450,754
+ 
+
+Leasehold improvements
+ 
+ 
+185,812
+ 
+ 
+488,108
+ 
+ 
+488,108
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+4,840,777
+ 
+ 
+4,714,742
+ 
+ 
+6,073,988
+ 
+
+Less accumulated depreciation and amortization
+ 
+ 
+(3,681,004
+)
+ 
+(3,486,958
+)
+ 
+(3,996,112
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+1,159,773
+ 
+$
+1,227,784
+ 
+$
+2,077,876
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Deferred Financing Costs, Net:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+Deferred financing costs
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+$
+ 
+
+973,532
+ 
+ 
+ 
+$
+ 
+
+1,106,557
+ 
+ 
+
+Less accumulated amortization
+ 
+ 
+ 
+ 
+ 
+(211,778
+)
+ 
+(390,813
+)
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+$
+761,754
+ 
+$
+715,744
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+Accrued Liabilities:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+Accrued compensation and benefits
+ 
+ 
+ 
+$
+ 
+
+336,081
+ 
+ 
+ 
+$
+ 
+
+373,960
+ 
+ 
+ 
+$
+ 
+
+463,364
+ 
+ 
+
+Accrued warranty
+ 
+ 
+249,860
+ 
+ 
+246,257
+ 
+ 
+226,000
+ 
+
+Accrued interest
+ 
+ 
+ 
+ 
+ 
+457,000
+ 
+ 
+1,324,000
+ 
+
+Payable to stockholder (Note 10)
+ 
+ 
+ 
+ 
+ 
+422,833
+ 
+ 
+291,083
+ 
+
+Interest rate swap written option (Note 5)
+ 
+ 
+ 
+ 
+ 
+303,250
+ 
+ 
+55,650
+ 
+
+Other
+ 
+ 
+219,081
+ 
+ 
+406,143
+ 
+ 
+714,696
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+805,022
+ 
+$
+2,209,443
+ 
+$
+3,074,793
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+5. Financing Arrangements:
+
+Notes Payable, Bank:
+
+ In connection with the Recapitalization, the Company entered into a $58,000,000 Revolving Credit and Term Loan Agreement, as amended, (Senior Bank Facility)
+with a syndicate of banks. The Senior Bank Facility, as amended, provides for two term loans aggregating $55,000,000 (Loan A is $30,000,000 and Loan B is $25,000,000) and a revolving credit loan
+facility of $3,000,000. At December 31, 1998, and September 30, 1999, $53,500,000 and $50,850,000, respectively, were outstanding on the term loans, and there were no borrowings under
+the revolving credit loan. The term loans provide for mandatory quarterly repayments, with a final payment due on February 18, 2004 of $14,238,000.
+
+ Borrowings
+under the Senior Bank Facility bear interest at variable rates, generally based on the Eurodollar rate plus applicable margin (2.75% margin in the case of Loan A and the
+revolving credit loan facility, and 3.0% margin in the case of Loan B). The weighted average interest rates on the Senior Bank Facility for the year ended December 31, 1998, and the nine months
+ended September 30, 1999, were 8.4% and 8.3%, respectively. At December 31, 1998, and September 30, 1999, the Eurodollar interest rates were 5.1% and 5.5%, respectively.
+
+ The
+Senior Bank Facility requires the Company to enter into an interest rate protection agreement to the extent necessary to provide that at least 50% of the Company's Senior Bank
+Facility is subject to either fixed interest rate or interest rate protection for a minimum of two years. Accordingly, the Company entered into an interest rate swap agreement with an initial term
+that expires in May 2000, and can be extended at the option of the bank for an additional one year period. The average fixed interest rate on the interest rate swap during 1998 and the nine
+months ended September 30, 1999, was 5.79% plus the applicable margin. The swap agreement effectively fixed the interest rate on a portion of the Company's floating rate debt at a rate of 5.79%
+plus the applicable margin for the notional principal amount of $35,000,000. The swap rate is compared with the LIBOR rate quarterly. If the LIBOR index rate is less than the swap rate, the Company
+will pay the differential. If the LIBOR index rate is greater than the swap rate, the other party will pay the Company. The fair value of the interest rate swap, based on quoted market prices, at
+December 31, 1998, and September 30, 1999, was $380,800 and $3,750, respectively. The fair value of the swap is not recognized in the financial statements. The fair value of the interest
+rate swap written option, based on quoted market prices, at December 31, 1998, and September 30, 1999, was $303,250 and $55,650, respectively. The adjustments to the written option fair
+value were $163,250 expense for the year ended December 31, 1998 and $247,600 income for the nine months ended September 30, 1999.
+
+ The
+Senior Bank Facility contains a number of significant covenants that, among other things, restrict the ability of the Company to incur additional indebtedness; create liens on
+assets; make investments or acquisitions; make distributions; engage in mergers, consolidations or disposition of assets; repay other indebtedness; or other similar activities. In addition, the
+Company is required to comply with specified minimum earnings before interest, taxes, depreciation and amortization levels, and with maximum leverage and minimum fixed charge coverage ratios. The
+Senior Bank Facility is collateralized by a first priority interest on all assets of the Company.
+
+ Principal
+payments on notes payable, bank at September 30, 1999, are as follows:
+
+ 
+
+ 
+Loan A
+ 
+Loan B
+ 
+Total
+ 
+
+2000
+ 
+$
+3,750,000
+ 
+$
+500,000
+ 
+$
+4,250,000
+ 
+
+2001
+ 
+ 
+6,200,000
+ 
+ 
+500,000
+ 
+ 
+6,700,000
+ 
+
+2002
+ 
+ 
+8,400,000
+ 
+ 
+500,000
+ 
+ 
+8,900,000
+ 
+
+2003
+ 
+ 
+8,237,000
+ 
+ 
+4,450,000
+ 
+ 
+12,687,000
+ 
+
+2004
+ 
+ 
+ 
+ 
+ 
+18,313,000
+ 
+ 
+18,313,000
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+26,587,000
+ 
+ 
+24,263,000
+ 
+ 
+50,850,000
+ 
+
+Less current portion
+ 
+ 
+(3,750,000
+)
+ 
+(500,000
+)
+ 
+(4,250,000
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+22,837,000
+ 
+$
+23,763,000
+ 
+$
+46,600,000
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Note Payable, Stockholder:
+
+ In connection with the Recapitalization, the Company issued a $10,000,000 subordinated promissory note payable to the Company's founder. This note bears an
+interest rate of 12%, payable annually. Subject to the terms of the Senior Bank Facility, this note is payable at the earliest to occur of (a) the liquidation of the Company, (b) an
+initial public offering (IPO), or (c) August 18, 2004. Interest expense incurred under this note for the year ended December 31, 1998, and the nine months ended
+September 30, 1998 and 1999, was $1,038,904, $736,438 and $897,534, respectively.
+
+6. Preferred Stock:
+
+ In connection with the Recapitalization, the Company issued 30,000 shares of Series B, 8% redeemable preferred stock (Redeemable Preferred) and 8,000
+shares of convertible participating preferred stock (Convertible Preferred).
+
+ The
+holders of the Redeemable Preferred are entitled to receive quarterly cash dividends at the rate of 8% per year subject to the restrictions of the Senior Bank Facility. These
+dividends are mandatory, cumulative and compound semi-annually until paid. The Redeemable Preferred has liquidation preference to the Convertible Preferred and common stock. Subject to the
+terms of the Senior Bank Facility, the Redeemable Preferred shares will be redeemed upon the closing of an IPO or, in the case of a vote by a majority of the outstanding stockholders of the Redeemable
+Preferred, 50% of the outstanding shares will be redeemed between August 2004 and August 2005 and 50% between August 2005 and August 2007 at a redemption price of $1,000
+per share plus an amount in cash equal to all accrued dividends. At September 30, 1999, no dividends have been paid on the Redeemable Preferred.
+
+ The
+Convertible Preferred participates with the Company's common stock in voting and has liquidation preference to common stock. The Convertible Preferred may be required to be
+redeemed by the Company on or after February 18, 2007 upon the vote by a majority of the outstanding stockholders of the Convertible Preferred. The redemption price is the greater of $1,000 or
+the amount that the holders of the outstanding Convertible Preferred would receive in the event that their shares were converted into common stock and sold for their fair market value. The Convertible
+Preferred can
+
+be converted into the Company's common stock on a 625 for 1 basis any time prior to redemption and automatically converts upon the closing of an IPO of the Company's common stock. At
+September 30, 1999, the Convertible Preferred has been recorded at the expected fair market value of the common stock which is approximately $15 per share.
+
+7. Stock Option and Grant Plan:
+
+ In February 1998, the Board of Directors and stockholders adopted the Fargo Electronics, Inc. 1998 Stock Option and Grant Plan (the Plan) which,
+as amended in 1999, authorizes and reserves a total of 937,500 shares of common stock for issuance under the Plan. The Plan is administered by the Compensation Committee of the Board of Directors and
+provides for the grant of: (a) incentive stock options; (b) nonqualified stock options; (c) restricted stock; and (d) unrestricted stock awards to employees, officers,
+directors and others, subject to certain limitations, as defined by the Plan. Stock options issued under the Plan generally have an exercise price equal to the fair market value on the date of grant,
+vest and become exercisable over four years, and expire seven years from the date of grant.
+
+ The
+restricted stock has an exercise price equal to the fair market value on the date of grant. Shares are awarded to employees, which are subject to certain forfeiture and
+transferability restrictions that lapse after specified employment periods. The restrictions on the awards expire upon an IPO or over a period not to exceed four years. Sales of the restricted stock
+are paid for by means of recourse promissory notes with payment terms of four years. The restricted stock has a weighted average exercise price of $1.60.
+
+ Stock
+option and restricted stock activity for the year ended December 31, 1998, and the nine months ended September 30, 1999, was as follows:
+
+ 
+
+ 
+Shares
+
+Available for
+
+Grant
+ 
+Options
+
+Outstanding
+ 
+Restricted
+
+Stock
+
+Outstanding
+ 
+Weighted
+
+Average
+
+Exercise
+
+Price Per
+
+Share of
+
+Options
+
+Plan adoption
+ 
+694,375
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Granted
+ 
+(582,188
+)
+144,688
+ 
+437,500
+ 
+$
+1.60
+
+Cancelled
+ 
+2,188
+ 
+(2,188
+)
+ 
+ 
+$
+1.60
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Balance, December 31, 1998
+ 
+114,375
+ 
+142,500
+ 
+437,500
+ 
+$
+1.60
+
+Plan amendment
+ 
+243,125
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Granted
+ 
+(173,125
+)
+95,000
+ 
+78,125
+ 
+$
+3.97
+
+Cancelled
+ 
+9,687
+ 
+(9,687
+)
+ 
+ 
+$
+1.60
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Balance, September 30, 1999
+ 
+194,062
+ 
+227,813
+ 
+515,625
+ 
+$
+2.59
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ All
+outstanding options have exercise prices between $1.60 per share and $6.40 per share. The weighted average remaining contractual life of these outstanding options at
+September 30, 1999, was approximately six years. At September 30, 1999, no options were exercisable. At September 30, 1999, 46,875 options become fully vested upon an IPO.
+
+ During
+the nine months ended September 30, 1999, the Company recorded deferred compensation of $112,000 for 8,750 options granted at a discount from the estimated fair market
+value of the Company's common stock. For the nine months ended September 30, 1999, the Company recorded compensation expense of $4,900 for these grants.
+
+ The
+Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation," for disclosure purposes. Under SFAS No. 123, the Company measures compensation expense
+for its stock-based compensation plans using the intrinsic value method prescribed in Accounting Principles Board (APB) No. 25, "Accounting for Stock Issued to Employees." The Company provides
+disclosure of the effect on net loss as if the fair value-based method prescribed in SFAS No. 123 has been applied in measuring compensation expense.
+
+ If
+the Company had adopted the fair value based accounting method in SFAS No. 123 to account for the cost of stock options occurring in 1998 and the nine months ended
+September 30, 1999, and charged compensation cost against income over the vesting period based on the fair value of options at the date of grant, net income (loss) for the year ended
+December 31, 1998 and the nine months ended September 30, 1999, would have been $(4,207,746) and $1,838,041, respectively, and basic net income per share for the year ended
+December 31, 1998 and the nine months ended September 30, 1999, would have been $(0.98) and $1.07, respectively.
+
+ The
+weighted average grant-date fair value of options granted during 1998 and the nine months ended September 30, 1999, was $1.60 and $3.97, respectively, which was
+determined using the Black Scholes method and the following key assumptions:
+
+ 
+
+ 
+Year Ended
+
+December 31,
+
+1998
+ 
+Nine Months Ended
+
+September 30,
+
+1999
+
+Volatility
+ 
+50.76%
+ 
+43.41%
+
+Risk-free interest rates
+ 
+4.16% to 5.60%
+ 
+4.64% to 5.76%
+
+Expected life
+ 
+Four years
+ 
+Four years
+
+Expected dividends
+ 
+None
+ 
+None
+
+8. Benefit Plan:
+
+ The Company has a retirement savings plan pursuant to Section 401(k) of the IRC whereby eligible employees may contribute up to 15% of their earnings
+either before taxes (subject to IRS limitation) or after tax, not to exceed annual amounts allowed under the IRC. In addition, the Company may also make discretionary matching contributions. Company
+matching contributions for the years ended December 31, 1996, 1997, 1998 and the nine months ended September 30, 1998 and 1999, were $85,000, $83,000, $109,000, $109,000 and $138,000,
+respectively.
+
+9. Income Taxes:
+
+ As discussed in Note 3, the Company's financial statements for the periods prior to February 18, 1998, do not reflect income taxes as the Company
+had elected S Corporation status.
+
+ The
+components of the provision for income taxes for the year ended December 31, 1998 and the nine months ended September 30, 1999, are as follows:
+
+ 
+
+ 
+December 31,
+
+1998
+ 
+September 30,
+
+1999
+
+Currently payable:
+ 
+ 
+ 
+ 
+ 
+ 
+
+Federal
+ 
+$
+904,000
+ 
+$
+465,000
+
+State
+ 
+ 
+91,000
+ 
+ 
+51,000
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+995,000
+ 
+ 
+516,000
+
+ 
+ 
+
+ 
+
+Deferred:
+ 
+ 
+ 
+ 
+ 
+ 
+
+Federal
+ 
+ 
+1,700,000
+ 
+ 
+1,540,000
+
+State
+ 
+ 
+105,000
+ 
+ 
+127,000
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+1,805,000
+ 
+ 
+1,667,000
+
+ 
+ 
+
+ 
+
+Provision for income taxes
+ 
+$
+2,800,000
+ 
+$
+2,183,000
+
+ 
+ 
+
+ 
+
+ Temporary
+differences comprising the net deferred tax assets recognized in the accompanying balance sheets at December 31, 1998, and September 30, 1999, are as follows:
+
+ 
+
+ 
+December 31,
+
+1998
+ 
+September 30,
+
+1999
+
+Tax goodwill
+ 
+$
+33,867,000
+ 
+$
+31,978,000
+
+Allowance for doubtful accounts
+ 
+ 
+44,000
+ 
+ 
+88,000
+
+Allowance for obsolete inventories
+ 
+ 
+82,500
+ 
+ 
+87,500
+
+Depreciation and amortization
+ 
+ 
+46,500
+ 
+ 
+169,500
+
+Accrued warranty
+ 
+ 
+48,500
+ 
+ 
+81,000
+
+Accrued vacation
+ 
+ 
+42,500
+ 
+ 
+40,000
+
+Other
+ 
+ 
+ 
+ 
+ 
+20,000
+
+ 
+ 
+
+ 
+
+Net deferred tax assets
+ 
+$
+34,131,000
+ 
+$
+32,464,000
+
+ 
+ 
+
+ 
+
+ A
+reconciliation between the Company's effective tax and the federal statutory tax is as follows:
+
+Provision for federal income taxes at statutory rate
+ 
+$
+242,000
+ 
+$
+2,037,000
+
+State income taxes, net of federal benefit
+ 
+ 
+15,000
+ 
+ 
+115,000
+
+S Corporation loss from January 1, 1998 to February 18, 1998
+ 
+ 
+2,394,000
+ 
+ 
+ 
+
+Other
+ 
+ 
+149,000
+ 
+ 
+31,000
+
+ 
+ 
+
+ 
+
+Total
+ 
+$
+2,800,000
+ 
+$
+2,183,000
+
+ 
+ 
+
+ 
+
+ The
+$2,394,000 income tax expense relates to the S Corporation loss prior to the recapitalization transaction. The S Corporation received the tax deduction for this loss. Since
+the C Corporation did not get the benefit of these expenses, they are considered to be income tax expense for the Company.
+
+ For
+federal and state income tax purposes, the Recapitalization (Note 2) is a taxable business combination and is a qualified stock purchase. The buyer and seller have elected
+jointly to treat the Recapitalization as an asset acquisition under Section 338(h)(10) of the IRC. In connection with the Recapitalization, the Company recorded a deferred tax asset with a
+corresponding credit to retained earnings of $35,936,000 at February 18, 1998, related to future tax deductions for the net excess of the tax bases of the assets and liabilities over the
+financial statement carrying amounts.
+
+ Historically,
+the Company has generated operating income. The realization of the deferred tax assets is dependent upon the Company's ability to generate sufficient future taxable
+income which management believes is more likely than not. The Company anticipates future taxable income sufficient to realize the recorded deferred tax assets. Future taxable income is based on
+management's forecasts of the operating results of the Company, and there can be no assurance that such results will be achieved.
+
+10. Other Related Party Transactions:
+
+Contract Assembly:
+
+ Fargo contracts with Fargo Electronics Jamaica, Ltd., a company solely owned by the Company's founder and minority stockholder, to assemble certain
+components. Assembly charges paid to Fargo Electronics Jamaica, Ltd. for the years ended December 31, 1996, 1997, 1998, and the nine month periods ended September 30, 1998 and
+1999, were approximately $712,000, $721,000, $774,000, $477,000 and $673,000, respectively.
+
+Travel Services:
+
+ The Company historically had contracted with Fargo Aviation, Inc. (FAI), a company solely owned by the Company's founder to provide travel services for
+the Company and its founder. All contracts and obligations of the Company relating to FAI were terminated in connection with the Recapitalization. Expenses incurred under these arrangements were
+approximately $783,000, $899,000 and $141,000 in 1996, 1997 and 1998, respectively, and have been included in other expense.
+
+Agreement:
+
+ The Company has an agreement with the Company's founder, which has been assigned to PTI. The agreement requires Fargo to pay approximately $27,000 per month
+for a period of three years from the date of the Recapitalization. The agreement provides that the Company may terminate the agreement, at its discretion, upon completion of an IPO prior to the end of
+the agreement and upon payment of 50% of any unpaid balance. Payments under the agreement reimburse the founder for personal income tax expense incurred as a result of the transaction structure. The
+agreement does not require any specific performance by the Company's founder or PTI and accordingly, the entire estimated obligation under the agreement was recorded at the time the agreement was
+entered into. At December 31, 1998 and September 30, 1999, the Company has recorded a liability of $422,833 and $291,083, respectively, in connection with its obligations under this
+agreement.
+
+11. Commitments:
+
+ The Company leases office, warehouse and manufacturing space under an operating lease that expires in September 2001. Future minimum lease payments at
+December 31, 1998, consist of the following:
+
+1999
+ 
+$
+349,000
+
+2000
+ 
+ 
+349,000
+
+2001
+ 
+ 
+246,000
+
+ 
+ 
+
+Total minimum lease payments
+ 
+$
+944,000
+
+ 
+ 
+
+ Total
+rent expense for the years ended December 31, 1996, 1997 and 1998 and for the nine months ended September 30, 1998 and 1999, was $757,000, $823,000, $1,141,000,
+$873,000 and $482,000, respectively.
+
+12. Segment Information and Export Sales:
+
+Business Segments:
+
+ Effective with its year end 1998 financial statements, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure About
+Segments of an Enterprise and Related Information," which requires disclosure of segment data in a manner consistent with that used by an enterprise for internal management reporting and decision
+making. Accordingly, the Company reports its operations as a single segment under SFAS No. 131.
+
+Export Sales:
+
+ Export sales were as follows:
+
+ 
+
+ 
+Year Ended December 31
+ 
+Nine Months Ended
+
+September 30
+
+ 
+
+ 
+1996
+ 
+1997
+ 
+1998
+ 
+1998
+ 
+1999
+
+Europe
+ 
+$
+9,095,000
+ 
+$
+8,531,000
+ 
+$
+7,312,000
+ 
+$
+5,427,000
+ 
+$
+5,758,000
+
+Asia
+ 
+ 
+4,469,000
+ 
+ 
+4,791,000
+ 
+ 
+3,078,000
+ 
+ 
+2,535,000
+ 
+ 
+2,459,000
+
+North and South America (other than the United States)
+ 
+ 
+2,453,000
+ 
+ 
+3,862,000
+ 
+ 
+3,950,000
+ 
+ 
+2,857,000
+ 
+ 
+2,617,000
+
+Other
+ 
+ 
+2,800,000
+ 
+ 
+3,957,000
+ 
+ 
+3,015,000
+ 
+ 
+1,853,000
+ 
+ 
+2,695,000
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+$
+18,817,000
+ 
+$
+21,141,000
+ 
+$
+17,355,000
+ 
+$
+12,672,000
+ 
+$
+13,529,000
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS 
+
+ The following Unaudited Pro Forma Condensed Financial Statements have been derived by the application of pro forma adjustments to the Company's historical
+financial statements included elsewhere in this prospectus. The Unaudited Pro Forma Condensed Statement of Operations for the periods presented give effect to the recapitalization and the offering as
+if such transactions were consummated as of January 1, 1998. The Unaudited Pro Forma Condensed Balance Sheet gives effect to the offering as if such transaction had occurred at
+September 30, 1999. The adjustments are described in the accompanying notes to the Unaudited Pro Forma Condensed Balance Sheet and to the Unaudited Pro Forma Condensed Statements of Operations.
+The Unaudited Pro Forma Condensed Financial Statements should not be considered indicative of actual results that would have been achieved had the recapitalization and the offering been consummated on
+the dates or for the periods indicated and do not purport to indicate balance sheet data or results of operations as of any future date or for any future period. The Unaudited Pro Forma Condensed
+Financial Statements should be read in conjunction with the Company's historical financial statements and the notes thereto included elsewhere in this prospectus.
+
+FARGO ELECTRONICS, INC.
+
+UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
+
+AT SEPTEMBER 30, 1999
+
+ 
+
+ 
+Historical
+ 
+Pro Forma
+
+Adjustments
+ 
+Pro Forma
+ 
+
+ASSETS
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Current assets:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Cash and cash equivalents
+ 
+$
+2,635,060
+ 
+ 
+ 
+ (a)
+$
+2,635,060
+ 
+
+Accounts receivable, net
+ 
+ 
+6,315,715
+ 
+ 
+ 
+ 
+ 
+6,315,715
+ 
+
+Inventories
+ 
+ 
+5,529,595
+ 
+ 
+ 
+ 
+ 
+5,529,595
+ 
+
+Prepaid expenses
+ 
+ 
+190,018
+ 
+ 
+ 
+ 
+ 
+190,018
+ 
+
+Deferred income taxes
+ 
+ 
+2,706,000
+ 
+ 
+ 
+ 
+ 
+2,706,000
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+Total current assets
+ 
+ 
+17,376,388
+ 
+ 
+ 
+ 
+ 
+17,376,388
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+Equipment and leasehold improvements, net
+ 
+ 
+2,077,876
+ 
+ 
+ 
+ 
+ 
+2,077,876
+ 
+
+ 
+
+Other assets:
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+Deferred income taxes
+ 
+ 
+29,758,000
+ 
+$
+174,000
+ (c)
+ 
+29,932,000
+ 
+
+Deferred financing costs, net
+ 
+ 
+715,744
+ 
+ 
+(484,000
+)(d)
+ 
+231,744
+ 
+
+Other
+ 
+ 
+54,338
+ 
+ 
+ 
+ 
+ 
+54,338
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Total assets
+ 
+$
+49,982,346
+ 
+$
+(310,000
+)
+$
+49,672,346
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+Current liabilities:
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+Current portion of notes payable, bank
+ 
+ 
+4,250,000
+ 
+ 
+(4,250,000
+)(a)
+ 
+ 
+ 
+
+Accounts payable
+ 
+ 
+1,956,909
+ 
+ 
+ 
+ 
+ 
+1,956,909
+ 
+
+Accrued liabilities
+ 
+ 
+3,074,793
+ 
+ 
+(898,000
+)(a)
+ 
+2,176,793
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Total current liabilities
+ 
+ 
+9,281,702
+ 
+ 
+(5,148,000
+)
+ 
+4,133,702
+ 
+
+ 
+
+Note payable, bank, less current portion
+ 
+ 
+ 
+ 
+ 
+
+46,600,000
+ 
+ 
+ 
+ 
+ 
+
+(19,792,000
+ 
+)(a)
+ 
+ 
+ 
+
+26,808,000
+ 
+ 
+
+Note payable, stockholder
+ 
+ 
+10,000,000
+ 
+ 
+(10,000,000
+)(a)
+ 
+ 
+ 
+
+ 
+
+Series B, 8% redeemable preferred stock including accrued dividends, $.01 par value; 30,000 shares authorized, 30,000 shares issued and outstanding
+ 
+ 
+ 
+ 
+ 
+
+34,060,000
+ 
+ 
+ 
+ 
+ 
+
+(34,060,000
+ 
+)(a)
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+Convertible participating preferred stock, $.01 par value; 10,000 shares authorized, 8,000 shares issued and outstanding
+ 
+ 
+75,000,000
+ 
+ 
+(75,000,000
+)(b)
+ 
+ 
+ 
+
+Stockholders' equity (deficiency):
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Common stock
+ 
+ 
+17,656
+ 
+ 
+100,000
+ (b)
+ 
+117,656
+ 
+
+Additional paid-in capital
+ 
+ 
+1,781,844
+ 
+ 
+143,900,000
+ (b)
+ 
+145,681,844
+ 
+
+Retained earnings (accumulated deficit)
+ 
+ 
+(125,826,756
+)
+ 
+(310,000
+)(b)
+ 
+(126,136,756
+)
+
+Deferred compensation
+ 
+ 
+(107,100
+)
+ 
+ 
+ 
+ 
+(107,100
+)
+
+Stock subscription receivable
+ 
+ 
+(825,000
+)
+ 
+ 
+ 
+ 
+(825,000
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Total stockholders' equity (deficiency)
+ 
+ 
+(124,959,356
+)
+ 
+143,690,000
+(b)
+ 
+18,730,644
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Total liabilities and stockholders' equity (deficiency)
+ 
+$
+49,982,346
+ 
+$
+(310,000
+)
+$
+49,672,346
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+The accompanying notes are an integral part of the unaudited pro forma condensed balance sheet.
+
+FARGO ELECTRONICS, INC.
+
+NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
+
+AT SEPTEMBER 30, 1999
+
+(a)
+ 
+Adjustments reflect the assumed cash proceeds from the Offering and application of proceeds as follows:
+
+ 
+ 
+Gross proceeds from the Offering of 5,000,000 shares of common stock
+ 
+$
+75,000,000
+ 
+
+ 
+ 
+Uses:
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Redemption of Series B, 8% redeemable preferred
+
+ stock including accrued dividends
+ 
+ 
+(34,060,000
+)
+
+ 
+ 
+ Redemption of note payable, stockholder
+ 
+ 
+(10,000,000
+)
+
+ 
+ 
+ Repayment of accrued interest on note payable, stockholder
+ 
+ 
+(898,000
+)
+
+ 
+ 
+ Paydown on note payable, bank
+ 
+ 
+(24,042,000
+)
+
+ 
+ 
+ Fees and expenses
+ 
+ 
+(6,000,000
+)
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ Net adjustment to cash
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+(b)
+ 
+ 
+ 
+
+Adjustments reflect the effect of the Offering on
+
+stockholders' equity (deficiency) as follows:
+
+ 
+ 
+Gross proceeds from the Offering of 5,000,000 shares of common stock
+ 
+$
+75,000,000
+ 
+
+ 
+ 
+Fees and expenses
+ 
+ 
+(6,000,000
+)
+
+ 
+ 
+Conversion of convertible participating preferred stock, into 5,000,000 shares of common stock
+ 
+ 
+75,000,000
+ 
+
+ 
+ 
+Extraordinary charge, net of tax benefit
+ 
+ 
+(310,000
+)
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ Net increase in stockholders' equity (deficiency)
+ 
+$
+143,690,000
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+The extraordinary charge consists of the write-off of deferred financing costs of $484,000 to be recognized in connection with the expected paydown and amendment of the note payable, bank, less related income tax benefit of $174,000. The
+extraordinary charge will be recorded in the period during which the amendment occurs.
+
+ 
+
+(c)
+ 
+ 
+ 
+
+The adjustment represents the income tax benefit related to the $484,000 write off of deferred financing costs related to the notes assumed to be repaid. The income tax benefit of $174,000 was computed at an effective rate of 36%.
+
+ 
+
+(d)
+ 
+ 
+ 
+
+The adjustment represents the writeoff of deferred financing costs related to the notes assumed to be paid from the proceeds of the offering.
+
+FARGO ELECTRONICS, INC.
+
+UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
+
+FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
+
+ 
+
+ 
+September 30,
+
+1999
+ 
+Pro Forma
+
+Adjustments
+ 
+Pro Forma
+ 
+
+Net sales
+ 
+$
+41,147,102
+ 
+ 
+ 
+ 
+$
+41,147,102
+ 
+
+Cost of sales
+ 
+ 
+21,226,620
+ 
+ 
+ 
+ 
+ 
+21,226,620
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+Gross profit
+ 
+ 
+19,920,482
+ 
+ 
+ 
+ 
+ 
+19,920,482
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+Operating expenses:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Research, and development
+ 
+ 
+2,795,718
+ 
+ 
+ 
+ 
+ 
+2,795,718
+ 
+
+Selling, general and administrative
+ 
+ 
+7,011,487
+ 
+ 
+ 
+ 
+ 
+7,011,487
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+Total operating expenses
+ 
+ 
+9,807,205
+ 
+ 
+ 
+ 
+ 
+9,807,205
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+Operating income
+ 
+ 
+10,113,277
+ 
+ 
+ 
+ 
+ 
+10,113,277
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+Other income (expense):
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Interest expense
+ 
+ 
+(4,452,243
+)
+$
+2,543,350
+(a)
+ 
+(1,908,893
+)
+
+Interest income
+ 
+ 
+71,267
+ 
+ 
+ 
+ 
+ 
+71,267
+ 
+
+Other, net
+ 
+ 
+258,283
+ 
+ 
+ 
+ 
+ 
+258,283
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Total other expense
+ 
+ 
+(4,122,693
+)
+ 
+2,543,350
+ 
+ 
+(1,579,343
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Income before provision for income taxes and extraordinary item (c)
+ 
+ 
+5,990,584
+ 
+ 
+2,543,350
+ 
+ 
+8,533,934
+ 
+
+Provision for income taxes
+ 
+ 
+2,183,000
+ 
+ 
+915,606
+(b)
+ 
+3,098,606
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Net income before extraordinary item (c)
+ 
+ 
+3,807,584
+ 
+ 
+1,627,744
+ 
+ 
+5,435,328
+ 
+
+Accrued dividends on Series B, 8% redeemable preferred stock
+ 
+ 
+(1,947,000
+)
+ 
+1,947,000
+(d)
+ 
+ 
+ 
+
+Accretion of convertible participating preferred stock
+ 
+ 
+(67,000,000
+)
+ 
+67,000,000
+(d)
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Net income available to common stockholders
+ 
+$
+(65,139,416
+)
+$
+70,574,744
+ 
+$
+5,435,328
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Net income per common share:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Basic
+ 
+$
+(37.79
+)
+ 
+ 
+ 
+$
+0.46
+ 
+
+Diluted
+ 
+ 
+(37.79
+)
+ 
+ 
+ 
+ 
+0.46
+ 
+
+Weighted average common shares outstanding:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Basic
+ 
+ 
+1,723,558
+ 
+ 
+ 
+ 
+ 
+11,723,558
+ 
+
+Diluted
+ 
+ 
+1,723,558
+ 
+ 
+ 
+ 
+ 
+11,884,583
+ 
+
+The accompanying notes are an integral part of the unaudited pro forma condensed statement of operations.
+
+FARGO ELECTRONICS, INC.
+
+UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
+
+FOR THE YEAR ENDED DECEMBER 31, 1998
+
+ 
+
+ 
+December 31,
+
+1998
+ 
+Pro Forma
+
+Adjustments
+ 
+Pro Forma
+ 
+
+Net sales
+ 
+$
+47,647,263
+ 
+ 
+ 
+ 
+$
+47,647,263
+ 
+
+Cost of sales
+ 
+ 
+23,195,068
+ 
+ 
+ 
+ 
+ 
+23,195,068
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+Gross profit
+ 
+ 
+24,452,195
+ 
+ 
+ 
+ 
+ 
+24,452,195
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+Operating expenses:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Research, and development
+ 
+ 
+1,586,168
+ 
+ 
+ 
+ 
+ 
+1,586,168
+ 
+
+Selling, general and administrative
+ 
+ 
+8,306,993
+ 
+ 
+ 
+ 
+ 
+8,306,993
+ 
+
+Recapitalization costs
+ 
+ 
+8,385,942
+ 
+ 
+ 
+ 
+ 
+8,385,942
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+Total operating expenses
+ 
+ 
+18,279,103
+ 
+ 
+ 
+ 
+ 
+18,279,103
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+Operating income
+ 
+ 
+6,173,092
+ 
+ 
+ 
+ 
+ 
+6,173,092
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+Other income (expense):
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Interest expense
+ 
+ 
+(5,297,985
+)
+$
+2,533,653
+(a)
+ 
+(2,764,332
+)
+
+Interest income
+ 
+ 
+108,339
+ 
+ 
+ 
+ 
+ 
+108,339
+ 
+
+Other, net
+ 
+ 
+(272,797
+)
+ 
+ 
+ 
+ 
+(272,797
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Total other expense
+ 
+ 
+(5,462,443
+)
+ 
+2,533,653
+ 
+ 
+(2,928,790
+)
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Income before provision for income taxes and extraordinary item (c)
+ 
+ 
+710,649
+ 
+ 
+2,533,653
+ 
+ 
+3,244,302
+ 
+
+Provision for income taxes
+ 
+ 
+2,800,000
+ 
+ 
+(1,604,885)
+(b)
+ 
+1,195,115
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Net (loss) income before extraordinary item (c)
+ 
+ 
+(2,089,351
+)
+ 
+4,138,538
+ 
+ 
+2,049,187
+ 
+
+Accrued dividends on Series B, 8% redeemable preferred stock
+ 
+ 
+(2,113,000
+)
+ 
+2,113,000
+(d)
+ 
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Net (loss) income available to common stockholders
+ 
+$
+(4,202,351
+)
+$
+6,251,538
+ 
+$
+2,049,187
+ 
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+Net (loss) income per common share:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Basic
+ 
+$
+(0.98
+)
+ 
+ 
+ 
+$
+0.15
+ 
+
+Diluted
+ 
+ 
+(0.98
+)
+ 
+ 
+ 
+ 
+0.15
+ 
+
+Weighted average common shares outstanding:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Basic
+ 
+ 
+4,307,366
+ 
+ 
+ 
+ 
+ 
+13,636,134
+ 
+
+Diluted
+ 
+ 
+4,307,366
+ 
+ 
+ 
+ 
+ 
+13,661,939
+ 
+
+The accompanying notes are an integral part of the unaudited pro forma condensed statement of operations.
+
+FARGO ELECTRONICS, INC.
+
+NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
+
+FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
+
+ 
+
+ 
+ 
+
+ 
+For the
+
+Year Ended
+
+December 31,
+
+1998
+ 
+For the Nine
+
+Months Ended
+
+September 30,
+
+1999
+ 
+
+(a)
+ 
+Interest expense with respect to the note payable, bank and stockholder at the weighted average interest rate of 8.4% and 12.0%, respectively, for January 1, 1998 to February 18, 1998.
+ 
+$
+783,000
+ 
+ 
+ 
+ 
+
+ 
+ 
+Reduction of interest expense related to the payment on the note payable, stockholder and paydown on the note payable, bank, at an assumed weighted average interest rate of 8.4% and 12.0%, respectively.
+ 
+ 
+(3,224,000
+)
+$
+(2,407,000
+)
+
+ 
+ 
+Net effect of amortization and writeoff of deferred financing costs
+ 
+ 
+(92,653
+)
+ 
+(136,350
+)
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+Total adjustment
+ 
+$
+(2,533,653
+)
+$
+(2,543,350
+)
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ Upon paydown of the notes payable bank, the Company intends to adjust the notional amount subject to the swap agreement to 50% of the then outstanding borrowings under the Senior Bank
+Facility. As of September 30, 1999, Fargo has estimated that the impact on Fargo's operations or cash flows for an adjustment to the notional amount subject to the swap agreement to reflect the expected paydown, would be less than $15,000 and
+was deemed to be immaterial. Accordingly, no amounts have been included in the pro forma adjustments.
+
+ 
+
+(b)
+ 
+ 
+ 
+
+The adjustment reflects the tax effect of the pro forma adjustments at a 36% statutory income tax rate for the 1998 and 1999 and for the income taxes which would have been recorded if the Company had been a C Corporation for all of 1998 based on a
+36% statutory income tax rate.
+
+ 
+
+(c)
+ 
+ 
+ 
+
+The pro forma net income before extraordinary item amounts are before, and do not include, an extraordinary loss of approximately $310,000 related to the writeoff of deferred financing costs related to the payment of the note payable, bank. The loss
+has been reduced by the related income tax benefit.
+
+ 
+
+(d)
+ 
+ 
+ 
+
+The adjustment reflects the redemption of Series B, 8% redeemable preferred stock, giving effect to the offering as if it had occurred as of January 1, 1998.
+
+(This
+page has been left blank intentionally.)
+
+(This
+page has been left blank intentionally.)
+
+Until , all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a
+prospectus. This
+is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
+
+[LOGO]
+
+Prudential Volpe Technology
+a unit of Prudential Securities
+
+Robertson Stephens
+
+Raymond James & Associates, Inc.
+
+REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
+
+To the Stockholders and Board of Directors of
+
+Fargo Electronics, Incorporated:
+
+ Our
+audits of the financial statements referred to in our report dated November 12, 1999, appearing on page F-2 of this Registration Statement on
+Form S-1 also included an audit of the financial statement schedule listed in item 16(b) of this Form S-1. In our opinion, this financial statement schedule
+presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements.
+
+/s/ PRICEWATERHOUSECOOPERS LLP 
+
+Minneapolis,
+Minnesota
+
+November 12, 1999
+
+REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
+
+To Fargo Electronics, Incorporated:
+
+ We
+have audited in accordance with generally accepted auditing standards the financial statements of Fargo Electronics, Incorporated as of and for the year ended December 31,
+1997 and have issued our report thereon dated March 19, 1998. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in
+the index in Item 16(b) of this Form S-1 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission rules is not part of
+the 1997 basic financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the 1997 basic financial statements and, in our opinion, fairly states in all
+material respects the financial data required to be set forth therein in relation to the 1997 basic financial statements taken as a whole.
+
+/s/
+ARTHUR ANDERSEN LLP
+
+Minneapolis,
+Minnesota,
+
+March 19, 1998
+
+FARGO ELECTRONICS, INC.
+
+SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
+
+COL. A
+ 
+COL. B
+ 
+COL. C
+ 
+COL. D
+ 
+COL. E
+
+ 
+
+ 
+ 
+
+ 
+Additions
+ 
+ 
+
+ 
+ 
+
+Description
+
+ 
+Balance at
+
+beginning
+
+of period
+ 
+Charged to
+
+costs and
+
+expense
+ 
+Charged to
+
+other
+
+accounts
+ 
+Deductions
+
+from
+
+reserves
+ 
+Balance at
+
+end of
+
+period
+
+Allowance for doubtful accounts and sales returns
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+Nine months ended September 30, 1999
+ 
+$
+250,000
+ 
+$
+73,941
+ 
+ 
+ 
+$
+23,941
+ 
+$
+300,000
+
+Year ended December 31, 1998
+ 
+ 
+440,000
+ 
+ 
+123,759
+ 
+ 
+ 
+ 
+313,759
+ 
+ 
+250,000
+
+Year ended December 31, 1997
+ 
+ 
+416,000
+ 
+ 
+62,421
+ 
+ 
+ 
+ 
+38,421
+ 
+ 
+440,000
+
+Year ended December 31, 1996
+ 
+ 
+416,000
+ 
+ 
+106,195
+ 
+ 
+ 
+ 
+106,195
+ 
+ 
+416,000
+
+ 
+
+ PART II
+ INFORMATION NOT REQUIRED IN PROSPECTUS 
+
+Item 13. Other Expenses of Issuance and Distribution.
+
+ The following table sets forth the costs and expenses, other than the underwriting discount, payable by the Company in connection with the sale of common stock
+being registered. All of the amounts shown are estimates.
+
+ 
+
+ 
+Amount to be Paid
+
+SEC registration fee
+ 
+$
+26,000
+
+NASD fee
+ 
+ 
+10,000
+
+Nasdaq listing fee
+ 
+ 
+90,000
+
+Blue Sky fees and expenses
+ 
+ 
+5,000
+
+Legal fees and expenses
+ 
+ 
+150,000
+
+Accounting fees and expenses
+ 
+ 
+125,000
+
+Printing expenses
+ 
+ 
+125,000
+
+Transfer agent fees
+ 
+ 
+5,000
+
+Miscellaneous
+ 
+ 
+214,000
+
+ 
+ 
+
+Total
+ 
+$
+750,000
+
+ 
+ 
+
+Item 14. Indemnification of Directors and Officers.
+
+ Delaware Law and Fargo's certificate of incorporation provide that Fargo shall, under certain circumstances and subject to certain limitations, indemnify any
+director, officer, employee or agent of the corporation made or threatened to be made a party to a proceeding, by reason of the former or present official capacity (as defined) of the person, against
+judgments, penalties, fines, settlements and reasonable expenses incurred by the person in connection with the proceeding if certain statutory standards are met. Any such person is also entitled,
+subject to certain limitations, to payment or reimbursement of reasonable expenses in advance of the final disposition of the proceeding. "Proceeding" means a threatened, pending or completed civil,
+criminal, administrative, arbitration or investigative proceeding, including one by or in the right of the corporation.
+
+ Fargo
+has also entered into indemnification agreements with all of the directors and executive officers of Fargo whereby Fargo has agreed to indemnify and hold harmless the directors
+and executive officers from and against any claims, liability, damages or expenses incurred by them in or arising out of their status, capacities and activities with respect to Fargo to the maximum
+extent permitted by Delaware
+law. Fargo believes that these agreements are necessary to attract and retain qualified persons as directors and executive officers.
+
+ Fargo
+also maintains a directors and officers insurance policy pursuant to which directors and officers of Fargo are insured against liability for certain actions in their capacity as
+directors and officers.
+
+ Reference
+is also made to Section 6 of the Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying officers and directors of Fargo against certain
+liabilities.
+
+Item 15. Recent Sales of Unregistered Securities.
+
+ Since October 1, 1996 we have issued and sold the following securities without registration under the Securities Act (references to common shares
+reflect the 1,000-for-1 split of the outstanding common stock effected on March 6, 1998 and the 5-for-8 reverse stock split effected on
+November 12, 1999):
+
+ (1) On
+February 18, 1998 we issued 8,000 shares of Convertible Participating Preferred Stock and 24,000 shares of Series A 8% Redeemable Preferred Stock
+to Fargo Electronics Holdings, Inc. in exchange for 6,571,056.25 shares of our previously issued and outstanding common stock. On the same date, we issued 1,250,000 shares of common stock, 6,000
+shares of Series A 8% Redeemable Preferred Stock and a warrant to purchase 1 share of common stock to an existing stockholder and certain employees of Fargo in exchange for 1,642,731.25 shares
+of our previously issued and outstanding common stock.
+
+ (2) On
+March 31, 1998 we sold 312,500 shares of restricted common stock for $500,000 paid in the form of a promissory under our 1998 Stock Option and Grant Plan.
+
+ (3) On
+April 15, 1998 we sold 62,500 shares of restricted common stock for $100,000 paid in the form of a promissory under our 1998 Stock Option and Grant Plan.
+
+ (4) On
+May 15, 1998 we sold 62,500 shares of restricted common stock for $100,000 paid in the form of a promissory under our 1998 Stock Option and Grant Plan.
+
+ (5) On
+May 28, 1998 we sold 78,125 shares of restricted common stock for $125,000 paid in the form of a promissory under our 1998 Stock Option and Grant Plan.
+
+ (6) On
+September 2, 1999 we issued 30,000 shares of Series B 8% Redeemable Preferred Stock and 8,000 shares of Series B Convertible Participating
+Preferred Stock to several stockholders in exchange for all outstanding shares of our Series A 8% Redeemable Preferred Stock and Convertible Preferred Stock.
+
+ (7) As
+of September 30, 1999, we have granted options to purchase 239,687 shares of common stock to employees and directors under our 1998 Stock Option and Grant
+Plan. Options to purchase 10,937 of these shares have been cancelled without being exercised, none have been exercised and options to purchase 227,813 shares remain outstanding.
+
+ All
+of the above sales were made in reliance on Rule 701, Regulation D or Section 4(2) under the Securities Act. With regard to our reliance upon the exemptions
+set forth in the previous sentence, we made certain inquiries to establish that such sales qualified for such exemptions from the registration requirements. In particular, we confirmed that:
+(i) all offers of sales and sales were made by personal contact from our officers or directors or other persons closely associated with us; (ii) each investor made representations that
+he or she was sophisticated in relation to this investment (and we have no reason
+to believe such representations were incorrect); (iii) each purchaser gave assurance of investment intent and the certificates for the shares bear a legend accordingly; and (iv) offers
+and sales within any offering were made to a limited number of persons.
+
+Item 16. Exhibits and Financial Statement Schedules.
+
+(a)Exhibits
+
+Exhibit No.
+
+ 
+Description
+
+ 
+ 
+ 
+
+1.1
+ 
+Form of Underwriting Agreement
+
+2.1*
+ 
+Stock Purchase and Redemption Agreement, dated February 18, 1998 between Robert Cummins and Fargo Electronics, Inc.
+
+2.2*
+ 
+Form of Certificate of Ownership and Merger between Fargo Electronics, Inc., a Minnesota corporation and Fargo Electronics, Inc., a Delaware corporation (to become effective prior to the effective date of this offering)
+
+2.3*
+ 
+Form of Articles of Merger (to become effective prior to the effective date of this offering)
+
+2.4*
+ 
+Form of Agreement and Plan of Merger, between Fargo Electronics, Inc., a Minnesota corporation and Fargo Electronics, Inc., a Delaware corporation (to become effective prior to the effective date of this offering)
+
+3.1*
+ 
+Amended and Restated Articles of Incorporation (as currently in effect)
+
+3.2*
+ 
+Form of Amended and Restated Certificate of Incorporation (as will be in effect upon completion of the offering)
+
+3.3*
+ 
+Amended and Restated Bylaws, dated March 6, 1998 (as currently in effect)
+
+3.4*
+ 
+Bylaws (as will be in effect upon completion of the offering)
+
+4.1*
+ 
+Form of Stockholder Rights Agreement
+
+5.1*
+ 
+Opinion of Oppenheimer Wolff & Donnelly LLP
+
+10.1*
+ 
+Office/Warehouse Lease, dated June 15, 1996, between Fargo Electronics, Inc. and Opus Northwest L.L.C., as amended
+
+10.2*
+ 
+Amended and Restated 1998 Stock Option and Grant Plan
+
+10.3*
+ 
+Form of Restricted Stock Agreement under the Amended and Restated 1998 Stock Option and Grant Plan
+
+10.4*
+ 
+Form of Non-qualified Stock Option Agreement under the Amended and Restated 1998 Stock Option and Grant Plan
+
+10.5*
+ 
+Form of Incentive Stock Option under the Amended and Restated 1998 Stock Option and Grant Plan
+
+10.6*
+ 
+Technology and Trademark License Agreement, dated February 17, 1998, between Fargo Electronics, Inc. and Primera Technology, Inc.
+
+10.7*
+ 
+Consulting Agreement, dated March 16, 1999, between Fargo Electronics, Inc. and William Gibbs
+
+10.8*
+ 
+Amended and Restated Employment Agreement, dated April 15, 1999, between Fargo Electronics, Inc. and Gary R. Holland
+
+10.9*
+ 
+Form of Indemnification Agreement for directors and executive officers of Fargo Electronics, Inc.
+
+10.10*
+ 
+Stockholders' Agreement, dated February 18, 1998, between Fargo Electronics, Inc., Robert Cummins and certain Investors, as amended
+
+10.11*
+ 
+Revolving Credit and Term Loan Agreement, dated February 18, 1998, between Fargo Electronics, Inc. and BankBoston, N.A., as amended.
+
+10.12*
+ 
+Subordination Agreement, dated February 18, 1998, by and between Fargo Electronics, Inc., Robert Cummins and BankBoston, N.A.
+
+10.13*
+ 
+Subordinated Promissory Note dated February 18, 1998 between Fargo Electronics, Inc. and Robert Cummins
+
+10.14*
+ 
+Security Agreement, dated February 18, 1998, between Fargo Electronics, Inc. and BankBoston, N.A.
+
+10.15*
+ 
+Trademark Collateral Security and Pledge Agreement, dated February 18, 1998, between Fargo Electronics, Inc. and BankBoston, N.A.
+
+10.16*
+ 
+Patent Collateral Assignment and Security Agreement, dated February 18, 1998, between Fargo Electronics, Inc. and BankBoston, N.A.
+
+10.17*
+ 
+Non-Compete Agreement dated Feb. 18, 1998 between Fargo Electronics, Inc., Robert Cummins and Primera Technology, Inc.
+
+10.18*
+ 
+Amended and Restated Consulting Agreement, dated February 18, 1998, between Fargo Electronics, Inc. and Primera Technology, Inc.
+
+10.19
+ 
+Third Amendment to Revolving Credit and Term Loan Facility, dated February 7, 2000, between Fargo Electronics, Inc. and BankBoston N.A.
+
+16.1*
+ 
+Letter dated December 23, 1999 from Arthur Andersen LLP.
+
+16.2*
+ 
+Letter dated December 23, 1999 from Larson, Allen, Weishair & Co., LLP
+
+23.1
+ 
+Consent of PricewaterhouseCoopers LLP
+
+23.2
+ 
+Consent of Arthur Andersen LLP
+
+23.3
+ 
+Consent of Larson, Allen, Weishair & Co., LLP
+
+23.4*
+ 
+Consent of Oppenheimer Wolff & Donnelly LLP (included in Exhibit 5.1)
+
+24.1*
+ 
+Power of Attorney
+
+27.1*
+ 
+Financial Data Schedule
+
+*Previously
+filed
+
+(b)Financial Statement Schedules.
+
+ The
+following financial statement schedule is included herein and should be read in conjunction with the financial statements referred to above:
+
+ Reports
+of Independent Accountants on Financial Statement Schedule
+
+ Schedule II.
+Valuation and Qualifying Accounts
+
+ All
+other schedules are omitted as the required information is unapplicable or the information is presented in the financial statements or related notes.
+
+Item 17. Undertakings.
+
+ Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant
+pursuant to the Delaware General Corporation Law, the Certificate of Incorporation or Bylaws of the Registrant, the Underwriting Agreement, or otherwise, the Registrant has been advised that in the
+opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for
+indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense
+of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its
+counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the
+Securities Act and will be governed by the final adjudication of such issue.
+
+ The
+undersigned Registrant hereby undertakes that:
+
+ (1) It
+will provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as
+required by the Underwriters to permit prompt delivery to each purchaser.
+
+ (2) For
+purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement
+in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
+of this Registration Statement as of the time it was declared effective.
+
+ (3) For
+the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed
+to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
+
+ 
+
+ SIGNATURES 
+
+ Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Pre-Effective Amendment No. 4 to the Registration Statement on
+Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in Minneapolis, Minnesota on this 8th day of February, 2000.
+
+FARGO ELECTRONICS, INC.
+ 
+ 
+ 
+
+ 
+By:
+ 
+
+/s/ GARY R. HOLLAND Gary R. Holland
+President and Chief Executive Officer
+ 
+ 
+ 
+
+By:
+ 
+
+/s/ KENT O. LILLEMOE Kent O. Lillemoe
+Chief Financial Officer
+
+ Pursuant to the requirements of the Securities Act of 1933, Pre-Effective Amendment No. 4 to the Registration Statement has been signed by the following persons in the capacities
+indicated, on February 8, 2000.
+
+Signature
+ 
+Title
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+/s/ GARY R. HOLLAND Gary R. Holland
+ 
+Director, President and Chief Executive Officer (Principal Executive Officer)
+ 
+ 
+
+ 
+
+/s/ KENT O. LILLEMOE Kent O. Lillemoe
+ 
+ 
+ 
+
+Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+* Michael C. Child
+ 
+ 
+ 
+ 
+
+ 
+
+Director
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+* Everett V. Cox
+ 
+ 
+ 
+ 
+
+ 
+
+Director
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+* William H. Gibbs
+ 
+ 
+ 
+ 
+
+ 
+
+Director
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+* Elaine A. Pullen
+ 
+ 
+ 
+ 
+
+ 
+
+Director
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+/s/ GARY R. HOLLAND Gary R. Holland
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+*Attorney-in-fact
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+/s/ KENT O. LILLEMOE Kent O. Lillemoe
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+*Attorney-in-fact
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ EXHIBIT INDEX 
+
+Exhibit No.
+
+ 
+Description
+
+ 
+ 
+ 
+
+1.1
+ 
+Form of Underwriting Agreement
+
+2.1*
+ 
+Stock Purchase and Redemption Agreement, dated February 18, 1998 between Robert Cummins and Fargo Electronics, Inc.
+
+2.2*
+ 
+Form of Certificate of Ownership and Merger between Fargo Electronics, Inc., a Minnesota corporation and Fargo Electronics, Inc., a Delaware corporation (to become effective prior to the effective date of this offering)
+
+2.3*
+ 
+Form of Articles of Merger (to become effective prior to the effective date of this offering)
+
+2.4*
+ 
+Form of Agreement and Plan of Merger, between Fargo Electronics, Inc., a Minnesota corporation and Fargo Electronics, Inc., a Delaware corporation (to become effective prior to the effective date of this offering)
+
+3.1*
+ 
+Amended and Restated Articles of Incorporation (as currently in effect)
+
+3.2*
+ 
+Form of Amended and Restated Certificate of Incorporation (as will be in effect upon completion of the offering)
+
+3.3*
+ 
+Amended and Restated Bylaws, dated March 6, 1998 (as currently in effect)
+
+3.4*
+ 
+Bylaws (as will be in effect upon completion of the offering)
+
+4.1*
+ 
+Form of Stockholder Rights Agreement
+
+5.1*
+ 
+Opinion of Oppenheimer Wolff & Donnelly LLP
+
+10.1*
+ 
+Office/Warehouse Lease, dated June 15, 1996, between Fargo Electronics, Inc. and Opus Northwest L.L.C., as amended
+
+10.2*
+ 
+Amended and Restated 1998 Stock Option and Grant Plan
+
+10.3*
+ 
+Form of Restricted Stock Agreement under the Amended and Restated 1998 Stock Option and Grant Plan
+
+10.4*
+ 
+Form of Non-qualified Stock Option Agreement under the Amended and Restated 1998 Stock Option and Grant Plan
+
+10.5*
+ 
+Form of Incentive Stock Option under the Amended and Restated 1998 Stock Option and Grant Plan
+
+10.6*
+ 
+Technology and Trademark License Agreement, dated February 17, 1998, between Fargo Electronics, Inc. and Primera Technology, Inc.
+
+10.7*
+ 
+Consulting Agreement, dated March 16, 1999, between Fargo Electronics, Inc. and William Gibbs
+
+10.8*
+ 
+Amended and Restated Employment Agreement, dated April 15, 1999, between Fargo Electronics, Inc. and Gary R. Holland
+
+10.9*
+ 
+Form of Indemnification Agreement for directors and executive officers of Fargo Electronics, Inc.
+
+10.10*
+ 
+Stockholders' Agreement, dated February 18, 1998, between Fargo Electronics, Inc., Robert Cummins and certain Investors, as amended
+
+10.11*
+ 
+Revolving Credit and Term Loan Agreement, dated February 18, 1998, between Fargo Electronics, Inc. and BankBoston, N.A., as amended.
+
+10.12*
+ 
+Subordination Agreement, dated February 18, 1998, by and between Fargo Electronics, Inc., Robert Cummins and BankBoston, N.A.
+
+10.13*
+ 
+Subordinated Promissory Note dated February 18, 1998 between Fargo Electronics, Inc. and Robert Cummins
+
+10.14*
+ 
+Security Agreement, dated February 18, 1998, between Fargo Electronics, Inc. and BankBoston, N.A.
+
+10.15*
+ 
+Trademark Collateral Security and Pledge Agreement, dated February 18, 1998, between Fargo Electronics, Inc. and BankBoston, N.A.
+
+10.16*
+ 
+Patent Collateral Assignment and Security Agreement, dated February 18, 1998, between Fargo Electronics, Inc. and BankBoston, N.A.
+
+10.17*
+ 
+Non-Compete Agreement dated Feb. 18, 1998 between Fargo Electronics, Inc., Robert Cummins and Primera Technology, Inc.
+
+10.18*
+ 
+Amended and Restated Consulting Agreement, dated February 18, 1998, between Fargo Electronics, Inc. and Primera Technology, Inc.
+
+10.19
+ 
+Third Amendment to Revolving Credit and Term Loan Facility, dated February 7, 2000, between Fargo Electronics, Inc. and BankBoston N.A.
+
+16.1*
+ 
+Letter dated December 23, 1999 from Arthur Andersen LLP.
+
+16.2*
+ 
+Letter dated December 23, 1999 from Larson, Allen, Weishair & Co., LLP
+
+23.1
+ 
+Consent of PricewaterhouseCoopers LLP
+
+23.2
+ 
+Consent of Arthur Andersen LLP
+
+23.3
+ 
+Consent of Larson, Allen, Weishair & Co., LLP
+
+23.4*
+ 
+Consent of Oppenheimer Wolff & Donnelly LLP (to be included in Exhibit 5.1)
+
+24.1*
+ 
+Power of Attorney
+
+27.1*
+ 
+Financial Data Schedule
+
+*Previously
+filed
+
+QuickLinks
+
+TABLE OF CONTENTS
+
+<A HREF="#ca3088_
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001099146_ebaseone_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001099146_ebaseone_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fbc2bbe55dc8b05dd9f696155c581af4bae9ddc3
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001099146_ebaseone_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights selected information contained in this prospectus. To understand this offering fully, you should read the entire prospectus carefully, including the risk factors beginning on page 6 and the financial statements. Unless otherwise indicated, this prospectus assumes that no outstanding options or warrants are exercised. ebaseOne Corporation We are an application service provider, or ASP. We currently support two ASP offerings, OneServ(SM) for the small and medium sized business market and CorServ(SM) for independent software vendors and other third party software providers. In today's fast paced and competitive business environment, we believe it is essential for small and medium sized businesses to utilize leading packaged software solutions and Internet-based technology to compete. However, we believe these solutions are often too expensive for many small and medium sized businesses. Through our OneServ(SM) offering, we provide an integrated and comprehensive solution of leading packaged software applications hosted in a high quality data center all for a flat monthly fee. Through our CorServ(SM) offering, we provide state-of-the-art server technology, technical infrastructure and network connectivity for independent software vendors and systems integrators to host their applications and to allow their customers to access them through our high-speed fiber optics network. We began offering our ASP services in November 1999. Before November 1999, our revenue came from our software application reseller business provided by Prime Net, our subsidiary. We maintain a web site at www.ebaseone.com. Information contained on our web site is not part of this prospectus. Our principal executive offices are located at 6060 Richmond, Houston, Texas 77057, and our telephone number is (713) 975-8700. All references to we, our, or us refer to ebaseOne Corporation, a Delaware corporation, and our subsidiaries. THE OFFERING Common stock outstanding 38,039,133 shares. Common stock to be offered by our selling stockholders......... 7,198,502 shares underlying warrants. Market for our common stock...... Our common stock currently trades on the OTC Bulletin Board under the symbol EBAS. The market for our common stock is highly volatile. We can provide no assurance that there will be a market in the future for our common stock. SUMMARY FINANCIAL DATA The following table contains historical and operating data of ebaseOne: . for the three fiscal years ended September 30, which is derived from our consolidated audited financial statements; and . for the six month periods ended March 31, 2000 and 1999, which is derived from our unaudited financial statements. This data is in the thousands of dollars, except for per share amounts. <TABLE> <CAPTION> Six Months Ended Year Ended September 30, March 31, ----------------------------- -------------------- 1999 1998 1997 2000 1999 ------ -------- -------- --------- -------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues........................ $ 654 $ 684 $ 65 $ 381 $ 359 Operating Expenses.............. 3,966 1,139 281 8,481 730 Net Loss........................ (3,459) (472) (225) (8,061) (387) Loss Per Share - Basic and Diluted..................... $(.13) $(.03) $(.02) $(.22) $ (.02) Weighted Average Shares Outstanding Basic and Diluted... 26,967 15,660 12,608 37,168 22,670 As of September 30, As of ------------------------------- March 31, 1999 1998 1997 2000 ------- ------- -------- --------- BALANCE SHEET DATA: Working Capital (Deficit)....... (458) 66 (15) 4,396 Total Assets.................... 701 371 97 6,500 Stockholders' Equity (Deficit).. (524) 121 14 5,083 </TABLE>
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001099156_plastics_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001099156_plastics_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5fe62a9f82903a392b92b976e8f22fe955d78428
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001099156_plastics_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE RISKS OF INVESTING IN OUR COMMON STOCK DISCUSSED UNDER "RISK FACTORS" ON PAGE 6. In this prospectus, the terms "we," "us" and "our" refer to Plastics Mfg. Company. Unless otherwise noted, these terms also include our wholly owned subsidiary, TecStar Mfg. Company. PLASTICS MFG. COMPANY We manufacture plastic parts through the injection molding process. Our manufacturing business is conducted through our wholly owned subsidiary, TecStar Mfg. Company. Our principle executive offices are located at W190 N11701 Moldmakers Way, Germantown, Wisconsin 53022-8214, telephone number (262) 255-5790. PRODUCTS Our customers use the parts made by us to manufacture end-products or components for industry and the consumer markets. For example, some of our plastic parts are now used to make cellular telephones, pagers, nailguns, and computers. AFFILIATED COMPANIES AND RELATED PARTY TRANSACTIONS - THE MGS GROUP. Twenty companies are affiliated with us through common ownership. These affiliated companies are collectively referred to as the "MGS Group." Mark G. Sellers is our Chairman, President, and Chief Executive Officer and he controls directly or indirectly at least 51% of the voting interests of each company in the MGS Group. Mr. Sellers and the MGS Group collectively own approximately 60% of our outstanding common stock and will continue to own at least 53% of our stock if 500,000 shares of stock are sold in the offering. In addition, Mr. Sellers and two of the MGS Group companies hold options with respect to an additional 5,000,000 shares. See "Principal Stockholders." Before part production by us can take place, the molds used to form the plastic must be designed, tested, and manufactured. In addition, maintenance on and adjustments to the molds must be performed during the production process. We often rely on MGS Group companies to <TABLE> <CAPTION> <S> <C> Common stock offered for cash: 500,000 shares Common stock subject to our offer to repurchase: 722,490 shares Common stock to be outstanding after this offering: 4,250,000 shares* Closing date of the offering On or before June 30, 2000 Use of proceeds: Working capital, equipment lease deposits, and general corporate purposes. See "Use of Proceeds." <FN> *Includes 722,490 shares which are the subject of our rescission offer. </TABLE> SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA The table below provides you with our summary historical financial information. The following consolidated statement of operations data for the years ended September 30, 1997, 1998 and 1999 and the balance sheet data as of September 30, 1999 is derived from our audited consolidated financial statements included elsewhere in this prospectus. The following consolidated statements of operations data for the three month periods ended December 31, 1998 and 1999, and the consolidated balance sheet data as of December 31, 1999 have been derived from our unaudited financial statements which in the opinion of management, have been prepared on the same basis as the audited financial statements and reflect all adjustments, consisting of normal recurring adjustments, necessary for fair presentation. The following financial data should be read in conjunction with, and is qualified by reference to, "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our consolidated financial statements and the notes to those financial statements, included elsewhere in this prospectus.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001099231_pathnet_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001099231_pathnet_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..83a00a10ed6e4fc74e1634640090234ed310f21d
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001099231_pathnet_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights information that we believe is especially important concerning our business, the offering of our guarantees and Pathnet's noteholder consent solicitation. As a summary, it does not contain all of the information that you should consider before accepting our guarantees and granting your consent to the requested waivers and amendments to the Indenture that we describe in this prospectus. Please read the entire prospectus carefully. Except as otherwise required by the context, references in this prospectus to "Pathnet Telecom," "we," "us," or "our" refer to Pathnet Telecommunications, Inc., and references to "Pathnet" refer to Pathnet, Inc. only. OVERVIEW We are Pathnet Telecommunications, Inc., a newly formed Delaware corporation and the issuer of the guarantees in this offering. We are offering to all holders of Pathnet's 12 1/4% senior notes due 2008 our absolute, unconditional and continuing guarantee of Pathnet's performance and compliance with its obligations under the indenture that governs the terms of those notes, including Pathnet's obligations to make interest and principal payments on the notes. Concurrent with our offer, Pathnet is seeking consents from the noteholders to the waiver and amendment of certain provisions of the indenture. OUR REORGANIZATION Pathnet is seeking your consent to these waivers and amendments in connection with a single plan of contribution and reorganization in which: - the existing shareholders of Pathnet will exchange their shares of Pathnet's common stock and series A, B and C convertible preferred stock solely in return for substantially similar shares of our common stock and our series A, B, and C convertible preferred stock; - Pathnet will become our wholly owned subsidiary; - three new investors in the Pathnet business -- The Burlington Northern and Santa Fe Railway Company, CSX Transportation, Inc. and Colonial Pipeline Company -- will contribute to us rights of way to permit us to build our telecommunications network along their existing railroad and pipeline corridors, with an estimated value of $187 million in return for an aggregate of 8,511,607 shares of our series D convertible preferred stock; - Colonial will also contribute -- in two separate tranches -- an aggregate of $68 million in cash in return for: - an aggregate of 2,867,546 shares of our series E convertible preferred stock at a price of $21.97 per share; - an option, exercisable by Colonial and certain of Colonial's affiliates, to purchase up to 1,593,082 shares of our series E convertible preferred stock at a price of $21.97 per share; - an option to purchase a number of shares of our common stock equal to up to 10% of the number of shares that we actually issue in an underwritten initial public offering, at a price equal to 90% of the per share price that we charge for the sale of the shares in our initial public offering; and - a single fiber optic conduit along a portion of the Colonial right of way corridors or other telecommunications assets of equivalent value; - Pathnet will lend to us $50 million of the proceeds remaining from Pathnet's initial equity investments and the issue of its notes; and The information in this preliminary prospectus is not complete and may be changed. We may not sell the securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Subject to completion. Preliminary Prospectus dated March 13, 2000 PATHNET TELECOMMUNICATIONS, INC. SENIOR GUARANTEES OF PATHNET, INC. 12 1/4% SENIOR NOTES DUE 2008 [PATHNET LOGO] Pathnet Telecommunications, Inc. is offering to all holders of Pathnet, Inc.'s 12 1/4% Senior Notes due 2008 our absolute, irrevocable and unconditional senior guarantees of those notes. Concurrent with our offer, Pathnet, Inc. is seeking consents from the holders of those notes to the waiver and amendment of certain provisions of the indenture governing those notes. Pathnet, Inc. is seeking these consents in connection with a contribution and reorganization transaction in which Pathnet, Inc. will become our wholly owned subsidiary. In addition to our guarantees, each holder of the notes on the record date who consents to the requested waivers and amendments in connection with our reorganization will receive a consent fee payment of $25.00 per $1,000 in face amount of notes owned of record by the consenting holder on the record date. Pathnet, Inc. is also agreeing to purchase and pledge for the benefit of the holders of the notes, additional United States Treasury securities sufficient to cover the October 16, 2000 interest payment on the notes. Pathnet, Inc. has conditioned its payment of the consent fee and pledge of additional securities upon the receipt of the requisite consents to approve the requested waivers and amendments. PUBLIC OFFERING PRICE: None PROCEEDS TO PATHNET TELECOM: None THIS INVESTMENT INVOLVES SUBSTANTIAL RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7 TO READ ABOUT CERTAIN FACTORS YOU SHOULD CONSIDER BEFORE INVESTING IN THE SECURITIES. ------------------------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED WHETHER THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this prospectus is March , 2000. TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> PROSPECTUS SUMMARY.......................................... 1 RISK FACTORS................................................ 7 USE OF PROCEEDS............................................. 26 CAPITALIZATION.............................................. 27 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA.......... 29 BUSINESS.................................................... 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................. 51 MANAGEMENT.................................................. 60 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 73 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................ 77 DESCRIPTION OF OUR REORGANIZATION........................... 80 THE PATHNET SENIOR NOTEHOLDER WAIVERS AND OTHER PROPOSED INDENTURE AMENDMENTS...................................... 91 DESCRIPTION OF THE GUARANTEES............................... 105 DESCRIPTION OF THE CONSENT SOLICITATION PROCESS............. 106 DESCRIPTION OF THE NOTES AND THE INDENTURE.................. 109 DESCRIPTION OF OTHER INDEBTEDNESS AND OTHER FINANCING ARRANGEMENTS.............................................. 143 DESCRIPTION OF CAPITAL STOCK................................ 145 FEDERAL INCOME TAX CONSEQUENCES............................. 151 PLAN OF DISTRIBUTION........................................ 156 LEGAL MATTERS............................................... 156 EXPERTS..................................................... 156 WHERE YOU CAN FIND MORE INFORMATION......................... 156 INDEX TO FINANCIAL STATEMENTS............................... F-1 </TABLE> - Pathnet will sell to us, for a $70 million promissory note, three fiber optic development contracts, related assets, other agreements and the rights to use Pathnet's name and other intellectual property as well as fiber assets currently held by Pathnet's subsidiary, Pathnet Fiber Optics, LLC. Following the conclusion of our reorganization, our beneficial ownership will be allocated among the participants in our reorganization as set forth in the following table. For purposes of determining the beneficial ownership of our voting capital stock following the completion of our reorganization, we assume in the table: - Colonial's purchase of the second tranche of shares of our series E preferred stock and the conversion of those shares into shares of our common stock; - except for the Colonial option to purchase shares of our common stock in connection with our initial public offering, the exercise of all options to purchase shares of our common stock; - the exercise of the Colonial option to purchase additional shares of our series E convertible preferred stock and the conversion of all of our series of preferred stock into our common stock; and - the conversion of all outstanding warrants to purchase shares of Pathnet common stock into warrants to purchase shares of our common stock and the full exercise of those warrants. Because we cannot at this time determine the precise number of our shares that are covered by Colonial's option to purchase our common stock prior to our initial public offering, we have not assumed the exercise of that option in our determination of beneficial ownership interests in the table. <TABLE> <CAPTION> BENEFICIAL OWNERSHIP OF CATEGORY OF EQUITY HOLDER OUR VOTING STOCK ------------------------- ----------------------- <S> <C> Holders of existing shares of Pathnet series A, B and C preferred stock........................................... 44.4% Holders of existing shares of Pathnet common stock (assuming the conversion and exercise in full of all existing warrants and options for Pathnet common stock into shares of our common stock)...................................... 19.2% The Burlington Northern and Santa Fe Railway Company........ 9.6% Colonial Pipeline Company and affiliates.................... 17.2% CSX Transportation, Inc. ................................... 9.6% ------ Total................................................... 100.0% ====== </TABLE> CONSENT SOLICITATION FOR PATHNET NOTEHOLDER WAIVERS AND OTHER INDENTURE AMENDMENTS The structure of our proposed reorganization requires Pathnet to obtain waivers and consents from the holders of a majority in principal amount of Pathnet's notes. In consideration for the required consents: - we are offering our guarantees for all of the notes; - Pathnet will make a consent payment of $25 per $1,000 in face amount of the notes to each of the consenting noteholders who held notes on the record date of the consent solicitation; and - Pathnet will purchase and pledge as additional security to the indenture trustee, for the benefit of the noteholders, additional United States Treasury securities sufficient to cover the October 16, 2000 interest payment on the notes. To consent to the transaction, the noteholders will need to: - waive Pathnet's compliance, for purposes of the transaction, with the "Change of Control" repurchase obligation and the "Excess Proceeds Offer" requirements of the indenture, which otherwise would be triggered by the closing of the transaction; and - agree to the adoption of amendments to the terms of the indenture that are intended to subject us to indenture covenants parallel to those currently applicable to Pathnet and extend the scope of indenture tests and covenants to us and any of our future subsidiaries. The amendments will permit transactions between Pathnet, us and our other future subsidiaries to the same extent that the indenture now permits those transactions between Pathnet and its subsidiaries. We describe specific amendments of the terms of the indenture below in "THE PATHNET SENIOR NOTEHOLDER WAIVERS AND OTHER PROPOSED INDENTURE AMENDMENTS". TAX MATTERS Pathnet has obtained an opinion from Covington & Burling regarding the material federal income tax consequences to you and to Pathnet if the proposed indenture amendments are approved, the waivers are obtained and Pathnet makes the consent payment. You may be subject to federal income taxation as a consequence of the proposed indenture amendments, the waivers and the consent payment, and Pathnet may incur substantial federal income taxes as a consequence of the proposed indenture amendments, the waivers and the consent payment. Covington has advised Pathnet that, due to the lack of specific guidance and inherently factual nature of the issues involved, Covington is unable to opine definitively on the consequences of the proposed indenture amendments, the waivers and the consent payment. For a description of the potential tax consequences of the proposed indenture amendments, the waivers and the consent payment, see "FEDERAL INCOME TAX CONSEQUENCES." THE CONSENT SOLICITATION AND THIS OFFERING WILL END ON MARCH 27, 2000, UNLESS EXTENDED. IF WE HAVE NOT RECEIVED BEFORE THE EXPIRATION DATE THE REQUISITE CONSENTS FROM THE HOLDERS OF A MAJORITY IN OUTSTANDING PRINCIPAL AMOUNT OF THE NOTES, OUR OFFER OF THE GUARANTEES WILL TERMINATE AND OUR REORGANIZATION WILL NOT TAKE PLACE AS PLANNED. OUR COMPANY We were formed on November 1, 1999, in order to give effect to our reorganization and become Pathnet's parent company. Pathnet was formed on August 25, 1995. Since inception, Pathnet has operated as a development stage enterprise, and its operations have resulted in cumulative net losses of $101.5 million through December 31, 1999. Together, we are a wholesale telecommunications provider building a nationwide network designed to provide other wholesale and retail telecommunications service providers with access to underserved and second and third tier markets throughout the United States. We plan to serve those second and third tier markets with telecommunications network backbone infrastructure products and services, long distance network services and local access services. We also expect to capture a portion of the long distance network services segment between first tier markets. We estimate that our addressable market for these products and services was $13 billion in 1999, growing to $27 billion in 2004. As of December 31, 1999, our network consisted of over 6,300 wireless route miles, providing wholesale transport services to 30 cities, and 500 route miles of installed fiber. We are constructing an additional 600 route miles of fiber optic network scheduled for completion in the first half of 2000. We have also entered into two co-development agreements for the construction of an additional 750 route miles of fiber optic network. We expect to develop more backbone network from a pool of over 12,000 route miles of right of way -- 8,000 of which will have some form of exclusivity -- that we will receive from our new investors in our reorganization. Our network will enable our customers, including existing local telephone companies, long distance companies, Internet service providers, competitive telecommunications companies, cellular operators and other telecommunications service providers to offer additional services to new and existing customers in these markets without having to expend their own resources to build, expand or upgrade their networks. We expect our nationwide network to grow to approximately 20,000 route miles using both fiber optic and wireless microwave technologies. We intend to continue to develop our backbone on a "smart build" basis by prioritizing route development along corridors with high demand for inactive fiber optic strands and conduit or by partnering with established companies in the joint development of those routes. This prospectus contains the trademark of Pathnet, which is the property of Pathnet and is licensed to us. Our principal executive office is located at 1015 31st Street, N.W., Washington, D.C. 20007, and our telephone number is (202) 625-7284. SUMMARY CONSOLIDATED FINANCIAL DATA We present below summary historical consolidated financial data for Pathnet and the pro forma balance sheet data for Pathnet Telecom. The summary historical statements of operations data for the years ended December 31, 1997, 1998 and 1999 and the period from August 25, 1995 (the date of Pathnet's inception) to December 31, 1999 and the summary historical balance sheet data as of December 31, 1999 have been derived from Pathnet's audited financial statements that are included elsewhere in this prospectus. The unaudited pro forma balance sheet data as of December 31, 1999 gives effect to our reorganization as if it occurred on January 1, 1999. We have provided the unaudited pro forma balance sheet data for informational purposes only. <TABLE> <CAPTION> PATHNET ----------------------------------------------------------- PERIOD FROM AUGUST 25, 1995 (DATE OF YEAR ENDED DECEMBER 31, INCEPTION) TO ----------------------------------------- DECEMBER 31, 1997 1998 1999 1999 ----------- ------------ ------------ --------------- <S> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenue................................ $ 162,500 $ 1,583,539 $ 3,311,096 $ 5,058,135 Operating loss......................... (4,131,243) (16,312,761) (31,280,939) (53,495,700) Net loss............................... $(3,977,400) $(36,296,596) $(59,036,312) $(101,480,769) Basic and diluted loss per common share................................ $ (1.37) $ (12.51) $ (20.14) Weighted average number of common shares outstanding................... 2,900,000 2,902,029 2,931,644 OTHER FINANCIAL DATA: Ratio of earnings to fixed charges..... <1 <1 <1 Deficiency of earnings to fixed charges.............................. $(3,977,400) $(36,658,917) $(62,626,459) </TABLE> <TABLE> <CAPTION> December 31, ---------------------------- 1999 ---------------------------- HISTORICAL PRO FORMA (a) ------------ ------------- (unaudited) <S> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and marketable securities (excluding marketable securities pledged as collateral) (b).......... $138,402,131 $170,448,726 Property and equipment, net................................. 131,928,365 131,928,365 Intangible assets -- rights of way.......................... -- 187,275,006 Total assets................................................ 320,535,987 547,188,488 Long-term obligations (c)................................... 349,714,404 353,989,404 Total liabilities........................................... 380,303,073 383,749,675 Redeemable preferred stock.................................. 35,969,639 37,871,959 Stockholders' equity (deficit) (d).......................... (95,736,725) 125,566,854 </TABLE> - --------------- (a) Our unaudited pro forma balance sheet data as of December 31, 1999 gives effect to our reorganization as if it occurred on January 1, 1999. The unaudited pro forma balance sheet was derived by adjusting Pathnet's historical balance sheet as of December 31, 1999 to reflect the transaction described below: - Contribution of over 12,000 route miles of rights of way with an estimated value of $187 million for 8,511,607 shares of our series D preferred stock; - Receipt of $38 million in cash at the initial closing for 1,729,631 shares of our series E preferred stock. Another $25 million in cash (which is excluded from our above pro forma balance sheet data) will be received in exchange for 1,137,915 shares of our series E preferred stock (conditioned upon the completion of a fiber optic network segment build that we expect to complete during the second calendar quarter of 2000); - Exchange of 2,977,593 shares of outstanding Pathnet common stock for 2,977,593 shares of our common stock; - Exchange of 5,470,595 shares of Pathnet mandatorily redeemable preferred stock into 15,864,715 shares of our convertible preferred stock; - Receipt of $1 million in cash for options to purchase 1,593,082 shares of our series E preferred stock at $21.97 per share and shares of our common stock at the time of an initial public offering; - Receipt of $4 million in cash for our sale to Colonial of rights in a specified number of conduit miles of our future network; - Receipt of $275,000 in rights of way for our sale to CSX of rights a specified number of conduit miles of our future network; and - Payment by Pathnet of the proposed 2.5% consent fee to consenting holders of the notes (assuming all noteholders provide their consent) of approximately $8.8 million. See "DESCRIPTION OF OUR REORGANIZATION" included elsewhere in this prospectus. (b) Cash, cash equivalents and marketable securities include investments in marketable securities available for sale. (c) Long term obligations include other noncurrent liabilities of $3,092,779. (d) We have not included unaudited pro forma statement of operations information to give effect to our reorganization as if it occurred on January 1, 1999. An unaudited pro forma statement of operations would reflect only amortization expense of approximately $939,000 of deferred financing cost attributable to the consent fee that we plan to pay in connection with our reorganization and approximately $2,878,000 of anticipated transaction costs, of which $2,398,000 will be expensed as incurred and the remainder offset against the carrying value of the series D and series E preferred stock. The deferred financing cost will be amortized and charged to interest expense over the remaining life of the notes. Generally, we do not begin amortizing rights of way used in our network until the network is completed and available for use. As of December 31, 1999, none of the rights of way contemplated by our reorganization were used in our fiber optic network. Because the amortization of the deferred financing cost and expensed transaction costs would have represented the only pro forma adjustments to the statement of operations data, we have not presented unaudited pro forma statement of operations data. Instead, we have adjusted our pro forma stockholders' equity (deficit) to account for these expenses.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001099363_net2000_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001099363_net2000_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1dcb504ed7e30c61c7d9c4ac87074cebd33472ef
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding us and our common stock being sold in this offering and our financial statements and the notes to those statements appearing elsewhere in this prospectus. Net2000 Communications is a rapidly-growing, innovative provider of state-of-the-art broadband telecommunications services. As a competitive telecommunications provider, we offer businesses located throughout the mid-Atlantic and northeastern regions of the United States cutting-edge, responsive solutions as an alternative to traditional telephone companies. We focus on high-end customers, primarily large- and medium-sized businesses, having a minimum of 50 business access lines and spending $50,000 annually for Internet, data and voice telecommunications services. Today, we offer an integrated package of high-speed data services, Internet services, local telephone services and long distance services, primarily delivered from our own network over a single, high capacity "broadband" connection and conveniently billed on a single invoice. Since the introduction of our Net2000-branded services in July 1998, we have successfully acquired over 1,100 new business customers, representing approximately 78,000 access lines. In January 2000, we entered into a letter of intent to sell approximately 250 resale customer accounts representing approximately 10,000 access lines, reducing our customer count from 1,100 to 850. This sale will result in a 15% increase to our average access lines per customer. We intend to offer services in major markets throughout the United States in three phases over the next 24 months. Our Phase I deployment consists of 13 switches that transfer data traffic and 5 switches that transfer voice traffic in 10 markets in the telecommunications-rich Boston to Washington, D.C. corridor. Our Phase II deployment will establish our national presence with 10 additional data switches and 2 additional voice switches in 10 markets and is scheduled to be completed in December 2000. Our Phase III deployment, scheduled to be completed by late 2002, entails adding 4 additional markets and upgrading all of our existing data switches to Internet protocol-based (IP) switches that can provide both data and voice services. We are building our network by initially deploying lower-cost data switches and leasing fiber optic lines from others. As we experience increases in customer traffic in a given market, we will consider deploying voice switches and owning a portion of the fiber optic lines. By deploying this "smart-build" network strategy, we believe that we will gain capital efficiencies that may lead to stronger operating results. After five years of successfully identifying and acquiring business customers by selling advanced data and voice services as Bell Atlantic's number one sales agent, we transitioned out of the agency program and launched our Net2000-branded services in July 1998. Since this transition, we have incurred significant expense for the establishment of our brand and the build-out of our network and, as a result, we have not generated any net income. We expect significant losses and negative cash flow to continue for at least the next several years. Our objective is to become the provider of choice of integrated business telecommunications services in our target markets. We believe we are well-positioned to compete effectively against other traditional telephone companies and competitive telecommunications providers. The key differentiators of our business are: - proven sales and marketing track record; - strong relationships with over 3,000 businesses; - focus on complex, communications-intensive business customers; - e.mpower, our next generation, web-enabled proprietary customer self-care system; - state-of-the-art, readily expandable customer care and back office systems; - data-focused, innovative smart-build network; and - experienced and proven management team. We believe these key differentiators will enable us to capitalize on the rapid growth of the Internet and e-commerce, and the resultant increased demand for broadband data services. THE INFORMATION CONTAINED IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THE PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. Subject to Completion. Dated March 6, 2000. [NET2OOO COMMUNICATIONS LOGO] 10,000,000 Shares NET2000 COMMUNICATIONS, INC. Common Stock ---------------------- This is an initial public offering of shares of common stock of Net2000 Communications, Inc. The initial public offering price is expected to be between $18.00 and $20.00 per share. Prior to this offering, there has been no public market for the common stock. Application has been made for quotation of the common stock on the Nasdaq National Market under the symbol "NTKK." SEE "RISK FACTORS" ON PAGE 6 TO READ ABOUT CERTAIN FACTORS YOU SHOULD CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK. ---------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------------- <TABLE> <CAPTION> Per Share Total --------- ----- <S> <C> <C> Initial public offering price............................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to Net2000....................... $ $ </TABLE> To the extent that the underwriters sell more than 10,000,000 shares of common stock, the underwriters have the option to purchase up to an additional 1,500,000 shares from Net2000 at the initial public offering price less the underwriting discount. ---------------------- The underwriters expect to deliver the shares in New York, New York on , 2000. GOLDMAN, SACHS & CO. DONALDSON, LUFKIN & JENRETTE J.P. MORGAN & CO. LEGG MASON WOOD WALKER INCORPORATED ---------------------- Prospectus dated , 2000. BUSINESS STRATEGY The key elements of our business strategy include the following: - acquire customers and expand existing customer relationships by using our proven sales and marketing techniques; - target complex telecommunications-intensive businesses; - use technology, including web-based customer account and state-of-the-art back office systems, to deliver superior customer care; - continue build-out of our data-focused expandable network to maximize speed to market and minimize investment risk; - benefit from the 19 year average industry experience of our proven management team; and - capitalize on our relationship with Nortel Networks, which provides technical and operational support and the ability to economically upgrade our network switches. RECENT EVENTS In February 2000, we and Williams Communications entered into a non-binding letter of intent detailing a proposed transaction between the two parties in which we will purchase from Williams $128 million of telecommunications services over 20 years, of which $75 million will be paid in cash or through the utilization of network credits over the first seven years of the term. These services will include service on Williams' fiber optic lines between cities and within cities, advanced data services and collocation services. We expect this arrangement to lower our network costs, allow us to offer new and improved services to our customers and provide better control of our network connections. In addition, Williams will purchase $15 million of equity from us in exchange for network credits and cash. THE OFFERING Shares of common stock offered....... 10,000,000 shares Shares of common stock outstanding after this offering................ 34,862,607 shares Proposed Nasdaq National Market symbol............................. NTKK Use of proceeds...................... To expand our sales force and sales office locations, fund the expansion and development of our network and information technology systems, repay debt and provide for working capital and other general corporate purposes, including funding operating losses. The calculation of the number of shares outstanding after this offering is based on the number of shares outstanding on December 31, 1999, and does not reflect shares that may be issued upon the exercise of options and warrants. Unless otherwise specifically stated, information in this prospectus, including the foregoing numbers, assumes the underwriters do not exercise their option to purchase additional shares in the offering. See "Underwriting." ------------------------ PRINCIPAL OFFICES Our principal executive offices are located at 2180 Fox Mill Road, Herndon, VA 20171 and our telephone number is 1-800-825-2000. Our website address is www.net2000.com. Information on our website does not constitute part of this prospectus. SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA The following table presents our summary consolidated financial and other data which should be read together with our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" presented elsewhere in this prospectus. EBITDA consists of net income (loss) excluding net interest, taxes, depreciation and amortization (including amortization of deferred compensation). EBITDA is provided because it is a measure of financial performance commonly used in the telecommunications industry. EBITDA is used by management and certain investors as an indicator of a company's historical ability to service debt. Management believes that an increase in EBITDA is an indicator of improved ability to service existing debt, to sustain potential future increases in debt and to satisfy capital requirements. We have presented EBITDA to enhance your understanding of our operating results. You should not construe it as an alternative to operating income as an indicator of our operating performance nor as an alternative to cash flows from operating activities as a measure of liquidity determined in accordance with GAAP. We may calculate EBITDA differently than other companies. For further information, see our financial statements and related notes elsewhere in this prospectus. The pro forma net income (loss) per share data summarized below gives effect to the automatic conversion of all of our preferred stock into common shares as if the conversion occurred at the beginning of the respective period. The pro forma balance sheet data gives effect to the automatic conversion of the preferred stock as of December 31, 1999. The pro forma as adjusted balance sheet data gives effect to the issuance and sale of 10,000,000 shares of common stock in this offering, as if these transactions occurred on December 31, 1999. See "Use of Proceeds." <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) <S> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Operating revenue................................... $1,238 $1,939 $ 3,544 $ 9,419 $ 27,693 Operating income (loss)............................. 334 85 (1,318) (14,294) (41,355) Other (expenses) income............................. (15) (17) 817 527 2,562 ------ ------ ------- -------- -------- Net income (loss)................................... $ 319 $ 68 $ (501) $(13,767) $(38,793) Net income (loss) applicable to common stockholders...................................... 319 68 (501) (22,670) (60,330) Net income (loss) per share applicable to common stockholders -- basic and diluted................. 0.03 0.01 (0.05) (2.25) (5.97) Pro forma net income (loss) per share applicable to common stockholders -- basic and diluted.......... (1.57) OTHER FINANCIAL DATA: Capital expenditures................................ (27) (34) (88) (2,031) (36,147) Cash flows provided by (used in) operating activities........................................ 220 1 (476) (11,717) (27,695) Cash flows (used in) provided by investing activities........................................ (27) (34) (88) (2,980) (38,715) Cash flows (used in) provided by financing activities........................................ (222) 2 2,909 45,788 38,494 EBITDA.............................................. 329 106 (313) (13,604) (33,898) OPERATING DATA: Total access line equivalents billed(1)(2).......... -- -- -- 10,554 45,762 Total customers billed(3)........................... 1 21 87 490 795 Total employees..................................... 12 18 58 164 485 Switches in service:................................ -- -- -- -- 9 Voice............................................. -- -- -- -- 3 Data.............................................. -- -- -- -- 6 </TABLE> - --------------- (1) Line equivalents calculated on the basis of 64 kilobits per second per line. (2) Includes approximately 10,000 access lines which we intend to sell. (3) Includes approximately 250 customers which we intend to sell. <TABLE> <CAPTION> DECEMBER 31, 1999 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------ --------- ----------- (UNAUDITED) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 5,523 $ 5,523 $180,923 Property and equipment, net................................. 72,592 72,592 72,592 Working capital............................................. (4,264) (4,264) 171,136 Total assets................................................ 101,668 101,668 277,068 Long-term debt.............................................. 46,039 46,039 46,039 Redeemable preferred stock.................................. 80,940 -- -- Common stock................................................ 102 249 349 Total stockholders' (deficit) equity........................ (74,381) 6,559 181,959 </TABLE> Net2000, Net2000 Group and the Net2000 logo as displayed on the cover of this prospectus are our registered service marks. Service mark registration applications are pending for e.mpower and the phrase "Leading the Telecommunications Revolution." All other trade names, trademarks and service marks used in this prospectus are the property of their respective owners. Except as otherwise indicated, information in this prospectus gives effect to: - a five-for-four stock split in the form of a stock dividend of all outstanding shares of our common stock effected on January 12, 2000; and - conversion of all outstanding shares of our preferred stock into 14,673,045 shares of our common stock upon the closing of this offering.
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+SUMMARY This summary may not contain all the information that may be important to you. You should read the entire prospectus, including the financial statements and related notes, before making an investment decision. CORPORATE AND TRANSACTION STRUCTURE Chart of Corporate and Transaction Structure appears here. * TXU Europe Funding I, L.P. will also invest in junior subordinated debentures of one or more eligible subsidiaries of TXU Europe Limited and eligible debt securities, as described in this prospectus. The junior subordinated debentures will be guaranteed by TXU Europe Limited. TXU EUROPE LIMITED AND TXU EASTERN FUNDING COMPANY TXU Europe Limited, formerly TXU Eastern Holdings Limited, is a private limited company (Company No. 3505836) incorporated under the laws of England and Wales on February 5, 1998. TXU Europe Limited is an indirect wholly-owned subsidiary of Texas Utilities Company. Texas Utilities Company is now doing business as TXU Corp. TXU Europe Limited is a holding company for TXU Corp's UK and other European operations. TXU Eastern Funding Company (Funding) is a private unlimited company (Company No. 3710529) incorporated on February 4, 1999 under the laws of England and Wales. It is a wholly-owned indirect subsidiary of TXU Europe Limited. Funding was organized solely to provide funding for the operations of TXU Europe Limited and its subsidiaries by issuing debt securities, including the subordinated debentures that will be issued to the partnership, and lending the proceeds to TXU Europe Limited. In May 1999, Funding issued $1.5 billion ((pound)921 million) of senior notes guaranteed on a senior basis by TXU Europe Limited. On December 17, 1999, Funding exchanged these senior notes for the same amount of new senior notes registered under the Securities Act of 1933. Funding is currently offering in the UK (pound)200 million of senior notes guaranteed on a senior basis by TXU Europe Limited. The proceeds of this offering are expected to be used to repay corporate debt. TXU Europe Limited's and Funding's principal offices are located at The Adelphi, 1-11 John Adam Street, London, England WC2N 6HT and the telephone number is (011) 44 207 879-8081. TXU EUROPE GROUP PLC TXU Europe Group plc (TXU Europe Group or Group), formerly Eastern Group plc, which is an indirect subsidiary of TXU Europe Limited, is the holding company for a group of companies engaged in a variety of energy businesses in Europe. The management of these businesses is coordinated to give TXU Europe Group access to many energy markets, to provide the Group's customers access to a range of energy products and to enable the Group to respond efficiently to changes in demand for and prices of energy throughout Europe. The Group's principal business operations are electricity networks and energy businesses in the UK. The networks, or electricity distribution, business of TXU Europe Group is the largest distributor of electricity in England and Wales, with over 3 million customers in an authorized service area covering approximately 20,300 square kilometers in the east of England and parts of north London. The energy businesses include retailing of electricity and gas, as well as generation of electric power, gas production and energy portfolio management operations. TXU Europe Group is one of the largest generators of electricity in the UK, based on registered generating capacity as of December 31, 1999. It currently owns, operates or has an interest in approximately 9.4% of the total UK generating capacity. TXU Europe Group is also one of the largest retailers of electricity and natural gas in England and Wales, with approximately 3.9 million electric and natural gas customers. TXU Europe Group is also forming business alliances with European power companies in order to position itself to implement its strategy of integrating energy businesses across the rest of Europe, as these markets open to competition. SUMMARY INFORMATION REGARDING TXU EUROPE CAPITAL I, TXU EUROPE FUNDING I, L.P. AND THE TOPRS This summary includes questions and answers that highlight selected information from this prospectus to help you understand the TOPrS. You should carefully read this prospectus to fully understand the terms of the TOPrS, as well as the tax and other considerations that are important in making a decision about whether to invest in the TOPrS. You should pay special attention to the section of this prospectus titled RISK FACTORS to determine whether an investment in the TOPrS is appropriate for you. WHAT ARE THE TOPRS? Each TOPrS represents an undivided beneficial interest in the assets of TXU Europe Capital I, or the trust. The assets of the trust will be Preferred Partnership Securities of TXU Europe Funding I, L.P., or the partnership, which represent preferred ownership interests in the partnership. The partnership will use the proceeds from the sale of the Preferred Partnership Securities and the capital contribution from TXU Europe Limited, as general partner of the partnership, to purchase subordinated debentures of Funding and one or more other eligible subsidiaries of TXU Europe Limited and certain eligible debt securities as described in this prospectus under DESCRIPTION OF THE PREFERRED PARTNERSHIP SECURITIES -- "Partnership Investments." WHAT IS THE TRUST? TXU Europe Capital I is a Delaware statutory business trust that exists for the sole purpose of issuing the TOPrS, investing the proceeds from that issuance and engaging in incidental activities. The sole assets of the trust will be the Preferred Partnership Securities. WHAT IS THE PARTNERSHIP? TXU Europe Funding I, L.P. is a Delaware limited partnership. Generally, the partnership, subject to the investment criteria described in this prospectus, may invest in debentures of eligible subsidiaries of TXU Europe Limited and in other eligible debt securities. The assets of the partnership initially will consist solely of subordinated debentures of Funding and, to a limited extent, one or more other eligible subsidiaries of TXU Europe Limited and other eligible debt securities. TXU Europe Limited is the general partner of the partnership. WHAT DISTRIBUTIONS WILL I RECEIVE ON THE TOPRS? The trust expects to pay the holders of the TOPrS a quarterly cash distribution at the rate of % per annum. Distributions are expected to be paid on each March 31, June 30, September 30 and December 31, commencing June 30, 2000. Distributions on the TOPrS will be paid out of distributions by the partnership on the Preferred Partnership Securities if declared by the general partner. These distributions will accumulate from February , 2000, the date of original issuance of the TOPrS. The initial cash distribution is expected to be paid on June 30, 2000, and to equal $ for each $25 TOPrS. Distributions on the TOPrS will be deferred if interest payments on the subsidiary debentures are deferred as described below. WHAT WILL AFFECT THE TRUST'S DISTRIBUTIONS? The ability of the trust to pay the holders of the TOPrS is entirely dependent on its receipt of corresponding distributions on the Preferred Partnership Securities held by the trust. In turn, the partnership's ability to pay the trust is entirely dependent on its receipt of payments on the subsidiary debentures and the eligible debt securities held by the partnership. In addition, the partnership has no obligation to make distributions to the trust. If distributions are not made to the holders of the TOPrS, TXU Europe Limited and its subsidiaries will not be permitted to make specified payments and loans as described below. WHAT ARE THE SUBSIDIARY DEBENTURES? The subsidiary debentures are long term debt obligations of Funding and one or more other eligible subsidiaries of TXU Europe Limited. These subsidiary debentures will be unsecured and subordinated obligations and will be junior in right of payment to the senior debt of those subsidiaries, as defined in the indentures under which the subsidiary debentures are issued. All of the subsidiary debentures in which the partnership initially holds beneficial interests will be fully and unconditionally guaranteed on a subordinated basis by TXU Europe Limited. An issuer of subsidiary debentures may elect to defer interest payments for a period not exceeding six consecutive quarters. WHAT ARE THE GUARANTEES? TXU Europe Limited provides several subordinated guarantees in connection with the issuance of the TOPrS. These are guarantees of o distributions by the partnership to the trust, and by the trust to the holders of the TOPrS; o the amount due to the holders of the TOPrS upon redemption of the TOPrS; o the liquidation amount of the TOPrS if the trust is dissolved; and o payments under the subsidiary debentures initially held by the partnership. The guarantees, when taken together with TXU Europe Limited's obligations to pay all fees and expenses of the trust and the partnership, constitute a guarantee, to the extent set forth in the guarantees, by TXU Europe Limited of selected obligations relating to the distribution, redemption and liquidation amounts payable to the holders of the TOPrS. However, the guarantees do not apply to (1) current distributions by the partnership unless and until the partnership declares distributions out of funds legally available for payment, (2) current distributions by the trust unless and until the trust has funds legally available for payment or (3) liquidating distributions by the partnership and the trust unless there are partnership or trust assets, as the case may be, legally available for payment. TXU Europe Limited's obligations under the guarantees of subsidiary debentures are subordinate and junior in right of payment to all other unsubordinated liabilities of TXU Europe Limited and will be effectively subordinated to existing and future liabilities and preference share capital of TXU Europe Limited's subsidiaries. TXU Europe Limited's obligations under the guarantees of subsidiary debentures will rank equally with other subordinated obligations of TXU Europe Limited that are not subordinated by their terms to the guarantees and with similar guarantees issued by TXU Europe Limited in respect of any subordinated debentures of any other subsidiary. TXU Europe Limited's obligations under the guarantees of the TOPrS and the Preferred Partnership Securities will be subordinated to its obligations under the guarantees of subsidiary debentures and will rank equally with any preference share capital of TXU Europe Limited issued in the future and with similar guarantees issued by TXU Europe Limited in respect of any preferred security of any other finance subsidiary. ARE THERE ANY RISKS ASSOCIATED WITH AN INVESTMENT IN THE TOPRS? Yes, an investment in the TOPrS involves risks. Please refer to the section entitled RISK FACTORS in this prospectus. WHAT HAPPENS IF THE TRUST DOESN'T PAY A DISTRIBUTION ON THE TOPRS? If at any time: o the holders of the TOPrS have not received a distribution in the full expected quarterly amount of $ for each $25 TOPrS (plus any compounded amounts) for six consecutive quarters, o an investment event of default occurs and is continuing on any subsidiary debentures and on the related guarantee by TXU Europe Limited, or o TXU Europe Limited defaults on its obligations under the trust guarantee or the partnership guarantee, then: o the Property Trustee on behalf of the trust may direct a special representative appointed on behalf of holders of Preferred Partnership Securities to enforce the partnership's creditors' rights and other rights, including the right to receive payments under the subsidiary debentures and any of TXU Europe Limited's guarantees of the subsidiary debentures, o the Property Trustee on behalf of the trust has the right to direct the special representative to enforce the terms of the Preferred Partnership Securities to receive distributions only if and to the extent declared out of funds legally available for payment on the Preferred Partnership Securities, and o the Trust Guarantee Trustee, as the holder of the trust guarantee, the Partnership Guarantee Trustee, as the holder of the partnership guarantee, or the special representative appointed on behalf of holders of Preferred Partnership Securities may enforce those guarantees, including the right to enforce the covenant restricting specified payments and loans by TXU Europe Limited and its subsidiaries as described below. You should be aware that a special representative would not have the authority to cause the partnership to declare distributions on the Preferred Partnership Securities. If the partnership does not declare and pay distributions on the Preferred Partnership Securities, the trust will not have sufficient funds to make distributions on the TOPrS. TXU Europe Limited and any issuer of subsidiary debentures will agree that if: o for any quarterly period, the trust does not pay to holders of TOPrS an amount equal to distributions at the full fixed rate on a cumulative basis on any Preferred Partnership Securities, o an investment event of default occurs and is continuing on any subsidiary debentures and on the related guarantee by TXU Europe Limited, or o TXU Europe Limited is in default on any of its obligations under the trust guarantee or the partnership guarantee, then, during that period, TXU Europe Limited and any issuer of subsidiary debentures will not, directly or indirectly, make distributions on their issued share capital or payments on specified obligations that rank equally with or junior to the subsidiary debentures or the guarantees. In addition, TXU Europe Limited, any issuer of subsidiary debentures and any subsidiary of TXU Europe Limited will not make specified payments in respect of debt held or issued by, or loans to, affiliates (other than TXU Europe Limited or its subsidiaries). There are a number of exceptions to this limitation. For a more detailed discussion, see DESCRIPTION OF THE TRUST GUARANTEE -- "Covenants in the Trust Guarantee" and DESCRIPTION OF THE PARTNERSHIP GUARANTEE -- "Covenants in the Partnership Guarantee". OPTIONAL REDEMPTION The partnership has the option to redeem the Preferred Partnership Securities, in whole at any time or in part from time to time, on and after for an amount equal to $25 per Preferred Partnership Security plus accumulated and unpaid distributions on the Preferred Partnership Securities. If the Preferred Partnership Securities are redeemed, the TOPrS will in turn be redeemed for $25 per TOPrS plus accumulated and unpaid distributions. Neither the Preferred Partnership Securities nor the TOPrS have any scheduled maturity. WHO WILL CONTROL THE TRUST? A wholly-owned subsidiary of TXU Europe Limited organized in the US and designated under the terms of the trust agreement, known as the Control Party, will retain administrative and appointment powers with respect to the trust by virtue of its ownership of the trust's control certificate. The control certificate will not provide any economic interest in the trust to the Control Party. DO I HAVE VOTING RIGHTS? Generally, holders of the TOPrS will not have any voting rights. However, the holders of a majority in liquidation amount of the TOPrS have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Property Trustee on behalf of the Trust, or direct the exercise of any trust or power conferred upon the Property Trustee on behalf of the Trust. See DESCRIPTION OF THE TOPrS -- "Voting Rights" and DESCRIPTION OF THE PREFERRED PARTNERSHIP SECURITIES -- "Voting Rights". WHAT HAPPENS IF THE TRUST IS DISSOLVED? If the trust is dissolved, other than in connection with the occurrence of changes in the US or UK tax laws, sometimes referred to as a tax event, or changes in the US Investment Company Act of 1940, sometimes referred to as an investment company event, that affect the status of the trust, the partnership or the subsidiary debentures, the partnership will be dissolved and the Preferred Partnership Securities will be redeemed, in whole, but not in part, for $25 per Preferred Partnership Security plus accumulated and unpaid distributions on the Preferred Partnership Securities. This, in turn, would cause a redemption of the TOPrS at the same price. WHAT ARE ADDITIONAL AMOUNTS? All payments made on the subsidiary debentures or with respect to the TXU Europe Limited subordinated guarantees will be made without withholding or deduction for taxes or other governmental charges, unless required by law. Subject to customary exceptions, if withholding is required with respect to payments made on the subsidiary debentures or these guarantees, the issuers of the subsidiary debentures or TXU Europe Limited, as applicable, will pay "Additional Amounts" so that the partnership, in the case of the subsidiary debentures or the related TXU Europe Limited guarantees, or the holders of the Preferred Partnership Securities or the holders of the TOPrS, in the case of the Partnership Guarantee and the Trust Guarantee, respectively, would receive the same payments with respect to these instruments as if no withholding or deduction had been made. WHAT HAPPENS IF A TAX EVENT OR AN INVESTMENT COMPANY EVENT OCCURS? Upon the occurrence of a trust tax event, which event will generally be triggered upon the occurrence of specified adverse tax consequences with respect to the trust, Additional Amounts being payable on the subsidiary debentures or the TXU Europe Limited subordinated guarantees, or the denial of an interest deduction on the subsidiary debentures held by the partnership, in each case, as a result of a change in law, or upon the occurrence of a trust investment company event, which event will generally be triggered if the trust is considered an "investment company" under the Investment Company Act as a result of a change in law, except in limited circumstances, the Administrative Trustees will have the right to liquidate the trust and cause Preferred Partnership Securities to be distributed to the holders of the TOPrS. In most circumstances involving a partnership tax event, which event will generally be triggered upon the occurrence of specified adverse tax consequences with respect to the partnership, Additional Amounts being payable on the subsidiary debentures or the TXU Europe Limited subordinated guarantees, or the denial of an interest deduction on the subsidiary debentures held by the partnership, in each case, as a result of a change in law, or upon the occurrence of a partnership investment company event, which event will generally be triggered if the partnership is considered an "investment company" under the Investment Company Act as a result of a change in law, the partnership will have the right to redeem the Preferred Partnership Securities, in whole, but not in part, at $25 per Preferred Partnership Security plus accumulated and unpaid distributions on the Preferred Partnership Securities and, therefore, cause a redemption of the TOPrS at the same price. LISTING TXU Europe Limited will apply to have the TOPrS listed on The New York Stock Exchange, or NYSE. FORM OF THE TOPRS The TOPrS will be represented by one or more global certificates registered in the name of Cede & Co., as nominee for The Depository Trust Company, or DTC. Beneficial interests in the TOPrS will be evidenced by, and transfers of beneficial interests will be effected through, records maintained by the participants in either DTC (in the United States) or Clearstream Banking, societe anonyme, or Morgan Guaranty Trust Company of New York, Brussels Office, as operator of Euroclear (in Europe). Except in certain limited circumstances, TOPrS in certificated form will not be issued in exchange for the global certificate or certificates. USE OF PROCEEDS All of the proceeds from the issuance and sale of the TOPrS will be invested by the trust in the Preferred Partnership Securities. The partnership will use the funds, together with the capital contribution of TXU Europe Limited, as general partner, to make investments in the subsidiary debentures and other eligible debt securities. Funding will lend the proceeds from the sale of its junior subordinated debentures to TXU Europe Limited. TXU Europe Limited will use the funds to repay corporate debt and for general corporate purposes. Any other subsidiary of TXU Europe Limited that will issue initial subsidiary debentures will use the proceeds from the sale of these debentures to repay corporate debt and for general corporate purposes. SELECTED FINANCIAL INFORMATION On May 19, 1998, TXU Europe Limited obtained control of The Energy Group PLC, or TEG, the former holding company of TXU Europe Group. At the same time, TEG disposed of its US and Australian coal businesses and its US energy marketing business. For financial reporting purposes, TXU Europe Group is considered to be the "Predecessor Company" to TXU Europe Limited. TXU Europe Group constituted 97% of TXU Europe Limited's assets as of September 30, 1999 and generated 100% of TXU Europe Limited's operating revenues for the nine months ended September 30, 1999. The principal difference between the results of operation of TXU Europe Group and the results of operation of the continuing businesses of TEG is the interest expense associated with debt securities issued by Energy Group Overseas, B.V., or Overseas, a financing subsidiary of TEG. See TXU Europe Limited's unaudited condensed consolidated pro forma statement of income for the year ended December 31, 1998 included elsewhere in this prospectus. This pro forma statement of income includes TXU Europe Group's operation and the interest expense of Overseas, as if TXU Europe Limited had acquired TEG on January 1, 1998. See also the financial statements of Overseas included elsewhere in this prospectus. The selected financial data of TXU Europe Group for, and as of, each of the four years in the period ended March 31, 1998 and for the period from April 1, 1998 through May 18, 1998, have been derived from financial statements of TXU Europe Group, which have been audited by PricewaterhouseCoopers, independent accountants. The financial statements of TXU Europe Group for each of the four years in the period ended March 31, 1998 have been prepared in accordance with UK GAAP. The financial statements of TXU Europe Group for the years ended March 31, 1997 and 1998 also have been prepared in accordance with US GAAP. TXU Europe Group's financial statements for the period from April 1, 1998 through May 18, 1998 have been prepared in accordance with US GAAP. In October 1997, Overseas issued $500 million aggregate principal amount of guaranteed debt securities. Overseas is now a subsidiary of TXU Europe Limited, and its financial statements for the periods from its formation through March 31, 1998 and from April 1, 1998 through May 18, 1998 are included elsewhere in this prospectus. If interest expense of Overseas had been included in TXU Europe Group's financial statements, (1) UK GAAP net income/(loss), ratio of earnings to fixed charges and net interest expense would have been (pound)42 million, 2.5 and (pound)95 million, respectively, for the year ended March 31, 1998, (2) US GAAP net income/(loss), ratio of earnings to fixed charges and net interest expense would have been (pound)(45) million, 1.7 and (pound)136 million, respectively, for the year ended March 31, 1998 and (pound)(23) million, 0.1 and (pound)19 million, respectively, for the period from April 1, 1998 through May 18, 1998, (3) UK GAAP long-term debt and other obligations, less amounts due currently, would have been (pound)1.8 billion as of March 31, 1998 and (4) US GAAP long-term debt and other obligations, less amounts due currently, would have been (pound)2.3 billion as of March 31, 1998. The selected financial data of TXU Europe Limited for the period from formation (February 5, 1998) through December 31, 1998, for the period from formation through March 31, 1999 and as of December 31, 1998 and March 31, 1999, have been derived from financial statements of TXU Europe Limited, which have been audited by PricewaterhouseCoopers, independent accountants. The selected financial data of TXU Europe Limited for the nine months ended September 30, 1999 have been derived from the unaudited financial statements of TXU Europe Limited. The financial statements of TXU Europe Limited have been prepared in accordance with US GAAP. TXU Europe Limited recorded its approximately 22% equity interest in the net income of TEG for the period from March to May 18, 1998 and has accounted for TEG and TXU Europe Group as consolidated subsidiaries since May 19, 1998. Results of TXU Europe Limited for the periods from formation through December 31, 1998 and March 31, 1999 and for the nine months ended September 30, 1999 are not indicative of results for an annual period. Because TXU Europe Limited obtained control of TEG on May 19, 1998, earnings of TXU Europe Group are not reflected in TXU Europe Limited's results before May 19, 1998, other than as a result of TXU Europe Limited's 22% equity interest in the net income of TEG for the period from March through May 18, 1998. In addition, TXU Europe Limited's operations are affected by seasonal weather patterns. For more information, see MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and the consolidated financial statements and related notes of TXU Europe Group as of March 31, 1998 and for the two years in the period then ended, and for the period from April 1, 1998 through May 18, 1998 and of TXU Europe Limited as of, and for the periods from formation through December 31, 1998 and March 31, 1999 and as of, and for, the nine months ended September 30, 1999 included elsewhere in this prospectus. TXU Europe Limited's unaudited pro forma condensed consolidated income statement and other consolidated data presented below for the year ended December 31, 1998 reflect the acquisition by TXU Europe Limited of TEG as if it had occurred as of January 1, 1998. That unaudited pro forma condensed consolidated income statement and other consolidated data have been prepared by TXU Europe Limited from US GAAP historical information and assumptions deemed proper by it and include the effects of an allocation of the purchase price paid. The unaudited pro forma condensed consolidated income statement and other data presented in this prospectus are shown for illustrative purposes only and are not necessarily indicative of the future results of operations of TXU Europe Limited or of the results of operations of TXU Europe Limited if the transaction had occurred as of January 1, 1998. This information should be read in conjunction with the unaudited condensed consolidated pro forma statement of income and related notes of TXU Europe Limited included elsewhere in this prospectus. TXU EUROPE GROUP PLC (PREDECESSOR COMPANY) <TABLE> <CAPTION> UK GAAP US GAAP ---------------------------- ----------------------------------------------- PERIOD FROM PERIOD FROM APRIL 1, JANUARY 1, YEAR ENDED MARCH 31, 1998 THROUGH 1998 THROUGH 1995 1996 1997 1998 1997 1998 MAY 18, 1998 MAY 18, 1998 ---- ---- ---- ---- ---- ---- ------------ ------------ ((POUND)MILLION) (UNAUDITED) CONSOLIDATED INCOME STATEMENT DATA: <S> <C> <C> <C> <C> <C> <C> <C> <C> Operating revenues................ 2,061 2,119 2,984 3,475 2,984 3,475 425 1,563 Operating income/(loss)........... 244 43 346 337 298 267 (11) 91 Net income/(loss)................. 141 221 265 49 (90) (38) (21) 16 </TABLE> <TABLE> <CAPTION> UK GAAP US GAAP -------------------------------------- ----------------------------------- AS OF MARCH 31, ------------------------------------------------------------------------------ 1995 1996 1997 1998 1997 1998 ---- ---- ---- ---- ---- ---- ((POUND) MILLION) CONSOLIDATED BALANCE SHEET DATA: <S> <C> <C> <C> <C> <C> <C> Total assets...................... 2,053 2,364 3,709 3,888 5,422 5,826 Common stock equity............... 832 1,189 1,314 1,167 2,025 1,802 Minority interest................. (1) (2) 19 6 19 6 Long-term debt and other obligations, less amounts due currently....................... 484 682 1,466 1,499 1,837 1,976 </TABLE> <TABLE> <CAPTION> UK GAAP US GAAP ---------------------------- ----------------------------------------------- PERIOD FROM PERIOD FROM APRIL 1, JANUARY 1, YEAR ENDED MARCH 31, 1998 THROUGH 1998 THROUGH 1995 1996 1997 1998 1997 1998 MAY 18, 1998 MAY 18, 1998 ---- ---- ---- ---- ---- ---- ------------ ------------ ((POUND)MILLION, EXCEPT RATIOS) (UNAUDITED) CONSOLIDATED CASH FLOW DATA (1): <S> <C> <C> <C> <C> <C> <C> <C> <C> Operating activities.............. 284 (189) (116) 614 292 341 74 154 Investing activities.............. (452) 306 (1,052) (238) (229) (234) (78) (139) Financing activities.............. (5) 560 915 (148) (316) 121 16 27 OTHER CONSOLIDATED DATA: Earnings before interest, taxes and minority interest (EBIT) (unaudited)(2).................. 217 280 364 347 303 277 (10) 92 Earnings before interest, taxes, minority interest, depreciation and amortization (EBITDA) (unaudited)(2).................. 273 345 436 436 464 462 16 165 Ratio of earnings to fixed charges (unaudited)(3).................. 5.8 4.9 4.2 2.6 2.5 1.7 0.1 1.6 Net interest expense.............. 14 22 46 85 88 126 16 41 </TABLE> TXU EUROPE LIMITED (SUCCESSOR COMPANY) US GAAP <TABLE> <CAPTION> PERIOD FROM FORMATION (FEBRUARY 5, 1998) THROUGH PERIOD FROM -------------------------- PRO FORMA YEAR FORMATION NINE MONTHS ENDED THROUGH ENDED DECEMBER 31, MARCH 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1998 1999 1998 1998 1999 ------------- ----------- --------------- -------------- -------------- (UNAUDITED) ((POUND) MILLION) CONSOLIDATED INCOME STATEMENT DATA: <S> <C> <C> <C> <C> <C> Operating revenues................. 2,165 3,338 3,690 939 2,686 Operating income................... 314 484 508 53 354 Net income (loss).................. 77 126 94 (25) 71 </TABLE> <TABLE> <CAPTION> AS OF AS OF AS OF DECEMBER 31, 1998 MARCH 31, 1999 SEPTEMBER 30, 1999 ------------------ ---------------- ------------------ (UNAUDITED) ((POUND) MILLION) CONSOLIDATED BALANCE SHEET DATA: <S> <C> <C> <C> Total assets....................... 8,529 8,583 8,429 Total common stock equity.......... 1,535 1,581 1,607 Minority interest.................. 190 200 197 Note payable to TXU Corp........... 682 682 - Long-term debt, less amounts due currently........................ 3,629 3,754 4,495 </TABLE> <TABLE> <CAPTION> PERIOD FROM FORMATION NINE MONTHS (FEBRUARY 5, 1998) THROUGH PERIOD FROM ENDED -------------------------- FORMATION THROUGH SEPTEMBER 30, DECEMBER 31, 1998 MARCH 31, 1999 SEPTEMBER 30, 1998 1999 ----------------- -------------- ------------------ -------------- (UNAUDITED) ((POUND) MILLION) CONSOLIDATED CASH FLOW DATA: <S> <C> <C> <C> <C> Operating activities............... 37 44 12 447 Investing activities............... (1,767) (1,858) (1,569) (347) Financing activities............... 2,197 2,228 3,427 (206) </TABLE> <TABLE> <CAPTION> PERIOD FROM FORMATION PERIOD FROM (FEBRUARY 5, 1998) THROUGH PRO FORMA YEAR FORMATION NINE MONTHS -------------------------- ENDED THROUGH ENDED DECEMBER 31, MARCH 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1998 1999 1998 1998 1999 ------------- ------------ ---------------- ------------- -------------- (UNAUDITED) ((POUND) MILLION) OTHER CONSOLIDATED DATA: <S> <C> <C> <C> <C> <C> <C> Earnings before interest, taxes and minority interest (EBIT) (unaudited)(2)................... 360 531 539 81 359 Earnings before interest, taxes, minority interest, depreciation and amortization (EBITDA) (unaudited)(2)................... 504 733 771 165 542 Ratio of earnings to fixed charges (unaudited)(3)..................... 1.5 1.7 1.4 0.7 1.6 Net interest expense................. 205 278 341 128 213 </TABLE> (1) Cash flow information on a UK GAAP basis for the years ended March 31, 1995, 1996, 1997 and 1998 has been reformatted to US GAAP presentation style. (2) EBIT equals earnings before interest income, interest expense, income taxes and minority interest. EBITDA equals earnings before interest income, interest expense, income taxes, minority interest, depreciation and amortization. This information is provided for informational purposes only. EBIT and EBITDA are not measures defined under US GAAP and have not been presented in accordance with US GAAP. Neither EBIT nor EBITDA should be construed as an alternative to operating income under US GAAP as an indicator of operating performance, or as an alternative to cash flows from operating activities under US GAAP as a measure of liquidity. EBIT and EBITDA are widely accepted financial indicators of a company's ability to incur and service debt. However, these measures of EBIT and EBITDA may not be comparable to similar measures presented by other companies. (3) The ratio of earnings to fixed charges is computed as the sum of earnings plus fixed charges divided by fixed charges. Earnings consist of the aggregate of net income (loss) before minority interests, income taxes and fixed charges excluding interest capitalized. Fixed charges consist of interest expensed and capitalized and the estimated interest portion of rent expense. For TXU Europe Group, for the period from April 1, 1998 through May 18, 1998 total fixed charges exceeded total earnings by (pound)26 million. FOR TXU Europe Limited, for the period from formation through September 30, 1998, total fixed charges exceeded total earnings by (pound)50 million.
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+SUMMARY This summary may not contain all the information that may be important to you. You should read the entire prospectus, including the financial statements and related notes, before making an investment decision. CORPORATE AND TRANSACTION STRUCTURE Chart of Corporate and Transaction Structure appears here. * TXU Europe Funding I, L.P. will also invest in junior subordinated debentures of one or more eligible subsidiaries of TXU Europe Limited and eligible debt securities, as described in this prospectus. The junior subordinated debentures will be guaranteed by TXU Europe Limited. TXU EUROPE LIMITED AND TXU EASTERN FUNDING COMPANY TXU Europe Limited, formerly TXU Eastern Holdings Limited, is a private limited company (Company No. 3505836) incorporated under the laws of England and Wales on February 5, 1998. TXU Europe Limited is an indirect wholly-owned subsidiary of Texas Utilities Company. Texas Utilities Company is now doing business as TXU Corp. TXU Europe Limited is a holding company for TXU Corp's UK and other European operations. TXU Eastern Funding Company (Funding) is a private unlimited company (Company No. 3710529) incorporated on February 4, 1999 under the laws of England and Wales. It is a wholly-owned indirect subsidiary of TXU Europe Limited. Funding was organized solely to provide funding for the operations of TXU Europe Limited and its subsidiaries by issuing debt securities, including the subordinated debentures that will be issued to the partnership, and lending the proceeds to TXU Europe Limited. In May 1999, Funding issued $1.5 billion ((pound)921 million) of senior notes guaranteed on a senior basis by TXU Europe Limited. On December 17, 1999, Funding exchanged these senior notes for the same amount of new senior notes registered under the Securities Act of 1933. Funding is currently offering in the UK (pound)200 million of senior notes guaranteed on a senior basis by TXU Europe Limited. The proceeds of this offering are expected to be used to repay corporate debt. TXU Europe Limited's and Funding's principal offices are located at The Adelphi, 1-11 John Adam Street, London, England WC2N 6HT and the telephone number is (011) 44 207 879-8081. TXU EUROPE GROUP PLC TXU Europe Group plc (TXU Europe Group or Group), formerly Eastern Group plc, which is an indirect subsidiary of TXU Europe Limited, is the holding company for a group of companies engaged in a variety of energy businesses in Europe. The management of these businesses is coordinated to give TXU Europe Group access to many energy markets, to provide the Group's customers access to a range of energy products and to enable the Group to respond efficiently to changes in demand for and prices of energy throughout Europe. The Group's principal business operations are electricity networks and energy businesses in the UK. The networks, or electricity distribution, business of TXU Europe Group is the largest distributor of electricity in England and Wales, with over 3 million customers in an authorized service area covering approximately 20,300 square kilometers in the east of England and parts of north London. The energy businesses include retailing of electricity and gas, as well as generation of electric power, gas production and energy portfolio management operations. TXU Europe Group is one of the largest generators of electricity in the UK, based on registered generating capacity as of December 31, 1999. It currently owns, operates or has an interest in approximately 9.4% of the total UK generating capacity. TXU Europe Group is also one of the largest retailers of electricity and natural gas in England and Wales, with approximately 3.9 million electric and natural gas customers. TXU Europe Group is also forming business alliances with European power companies in order to position itself to implement its strategy of integrating energy businesses across the rest of Europe, as these markets open to competition. SUMMARY INFORMATION REGARDING TXU EUROPE CAPITAL I, TXU EUROPE FUNDING I, L.P. AND THE TOPRS This summary includes questions and answers that highlight selected information from this prospectus to help you understand the TOPrS. You should carefully read this prospectus to fully understand the terms of the TOPrS, as well as the tax and other considerations that are important in making a decision about whether to invest in the TOPrS. You should pay special attention to the section of this prospectus titled RISK FACTORS to determine whether an investment in the TOPrS is appropriate for you. WHAT ARE THE TOPRS? Each TOPrS represents an undivided beneficial interest in the assets of TXU Europe Capital I, or the trust. The assets of the trust will be Preferred Partnership Securities of TXU Europe Funding I, L.P., or the partnership, which represent preferred ownership interests in the partnership. The partnership will use the proceeds from the sale of the Preferred Partnership Securities and the capital contribution from TXU Europe Limited, as general partner of the partnership, to purchase subordinated debentures of Funding and one or more other eligible subsidiaries of TXU Europe Limited and certain eligible debt securities as described in this prospectus under DESCRIPTION OF THE PREFERRED PARTNERSHIP SECURITIES -- "Partnership Investments." WHAT IS THE TRUST? TXU Europe Capital I is a Delaware statutory business trust that exists for the sole purpose of issuing the TOPrS, investing the proceeds from that issuance and engaging in incidental activities. The sole assets of the trust will be the Preferred Partnership Securities. WHAT IS THE PARTNERSHIP? TXU Europe Funding I, L.P. is a Delaware limited partnership. Generally, the partnership, subject to the investment criteria described in this prospectus, may invest in debentures of eligible subsidiaries of TXU Europe Limited and in other eligible debt securities. The assets of the partnership initially will consist solely of subordinated debentures of Funding and, to a limited extent, one or more other eligible subsidiaries of TXU Europe Limited and other eligible debt securities. TXU Europe Limited is the general partner of the partnership. WHAT DISTRIBUTIONS WILL I RECEIVE ON THE TOPRS? The trust expects to pay the holders of the TOPrS a quarterly cash distribution at the rate of % per annum. Distributions are expected to be paid on each March 31, June 30, September 30 and December 31, commencing June 30, 2000. Distributions on the TOPrS will be paid out of distributions by the partnership on the Preferred Partnership Securities if declared by the general partner. These distributions will accumulate from February , 2000, the date of original issuance of the TOPrS. The initial cash distribution is expected to be paid on June 30, 2000, and to equal $ for each $25 TOPrS. Distributions on the TOPrS will be deferred if interest payments on the subsidiary debentures are deferred as described below. WHAT WILL AFFECT THE TRUST'S DISTRIBUTIONS? The ability of the trust to pay the holders of the TOPrS is entirely dependent on its receipt of corresponding distributions on the Preferred Partnership Securities held by the trust. In turn, the partnership's ability to pay the trust is entirely dependent on its receipt of payments on the subsidiary debentures and the eligible debt securities held by the partnership. In addition, the partnership has no obligation to make distributions to the trust. If distributions are not made to the holders of the TOPrS, TXU Europe Limited and its subsidiaries will not be permitted to make specified payments and loans as described below. WHAT ARE THE SUBSIDIARY DEBENTURES? The subsidiary debentures are long term debt obligations of Funding and one or more other eligible subsidiaries of TXU Europe Limited. These subsidiary debentures will be unsecured and subordinated obligations and will be junior in right of payment to the senior debt of those subsidiaries, as defined in the indentures under which the subsidiary debentures are issued. All of the subsidiary debentures in which the partnership initially holds beneficial interests will be fully and unconditionally guaranteed on a subordinated basis by TXU Europe Limited. An issuer of subsidiary debentures may elect to defer interest payments for a period not exceeding six consecutive quarters. WHAT ARE THE GUARANTEES? TXU Europe Limited provides several subordinated guarantees in connection with the issuance of the TOPrS. These are guarantees of o distributions by the partnership to the trust, and by the trust to the holders of the TOPrS; o the amount due to the holders of the TOPrS upon redemption of the TOPrS; o the liquidation amount of the TOPrS if the trust is dissolved; and o payments under the subsidiary debentures initially held by the partnership. The guarantees, when taken together with TXU Europe Limited's obligations to pay all fees and expenses of the trust and the partnership, constitute a guarantee, to the extent set forth in the guarantees, by TXU Europe Limited of selected obligations relating to the distribution, redemption and liquidation amounts payable to the holders of the TOPrS. However, the guarantees do not apply to (1) current distributions by the partnership unless and until the partnership declares distributions out of funds legally available for payment, (2) current distributions by the trust unless and until the trust has funds legally available for payment or (3) liquidating distributions by the partnership and the trust unless there are partnership or trust assets, as the case may be, legally available for payment. TXU Europe Limited's obligations under the guarantees of subsidiary debentures are subordinate and junior in right of payment to all other unsubordinated liabilities of TXU Europe Limited and will be effectively subordinated to existing and future liabilities and preference share capital of TXU Europe Limited's subsidiaries. TXU Europe Limited's obligations under the guarantees of subsidiary debentures will rank equally with other subordinated obligations of TXU Europe Limited that are not subordinated by their terms to the guarantees and with similar guarantees issued by TXU Europe Limited in respect of any subordinated debentures of any other subsidiary. TXU Europe Limited's obligations under the guarantees of the TOPrS and the Preferred Partnership Securities will be subordinated to its obligations under the guarantees of subsidiary debentures and will rank equally with any preference share capital of TXU Europe Limited issued in the future and with similar guarantees issued by TXU Europe Limited in respect of any preferred security of any other finance subsidiary. ARE THERE ANY RISKS ASSOCIATED WITH AN INVESTMENT IN THE TOPRS? Yes, an investment in the TOPrS involves risks. Please refer to the section entitled RISK FACTORS in this prospectus. WHAT HAPPENS IF THE TRUST DOESN'T PAY A DISTRIBUTION ON THE TOPRS? If at any time: o the holders of the TOPrS have not received a distribution in the full expected quarterly amount of $ for each $25 TOPrS (plus any compounded amounts) for six consecutive quarters, o an investment event of default occurs and is continuing on any subsidiary debentures and on the related guarantee by TXU Europe Limited, or o TXU Europe Limited defaults on its obligations under the trust guarantee or the partnership guarantee, then: o the Property Trustee on behalf of the trust may direct a special representative appointed on behalf of holders of Preferred Partnership Securities to enforce the partnership's creditors' rights and other rights, including the right to receive payments under the subsidiary debentures and any of TXU Europe Limited's guarantees of the subsidiary debentures, o the Property Trustee on behalf of the trust has the right to direct the special representative to enforce the terms of the Preferred Partnership Securities to receive distributions only if and to the extent declared out of funds legally available for payment on the Preferred Partnership Securities, and o the Trust Guarantee Trustee, as the holder of the trust guarantee, the Partnership Guarantee Trustee, as the holder of the partnership guarantee, or the special representative appointed on behalf of holders of Preferred Partnership Securities may enforce those guarantees, including the right to enforce the covenant restricting specified payments and loans by TXU Europe Limited and its subsidiaries as described below. You should be aware that a special representative would not have the authority to cause the partnership to declare distributions on the Preferred Partnership Securities. If the partnership does not declare and pay distributions on the Preferred Partnership Securities, the trust will not have sufficient funds to make distributions on the TOPrS. TXU Europe Limited and any issuer of subsidiary debentures will agree that if: o for any quarterly period, the trust does not pay to holders of TOPrS an amount equal to distributions at the full fixed rate on a cumulative basis on any Preferred Partnership Securities, o an investment event of default occurs and is continuing on any subsidiary debentures and on the related guarantee by TXU Europe Limited, or o TXU Europe Limited is in default on any of its obligations under the trust guarantee or the partnership guarantee, then, during that period, TXU Europe Limited and any issuer of subsidiary debentures will not, directly or indirectly, make distributions on their issued share capital or payments on specified obligations that rank equally with or junior to the subsidiary debentures or the guarantees. In addition, TXU Europe Limited, any issuer of subsidiary debentures and any subsidiary of TXU Europe Limited will not make specified payments in respect of debt held or issued by, or loans to, affiliates (other than TXU Europe Limited or its subsidiaries). There are a number of exceptions to this limitation. For a more detailed discussion, see DESCRIPTION OF THE TRUST GUARANTEE -- "Covenants in the Trust Guarantee" and DESCRIPTION OF THE PARTNERSHIP GUARANTEE -- "Covenants in the Partnership Guarantee". OPTIONAL REDEMPTION The partnership has the option to redeem the Preferred Partnership Securities, in whole at any time or in part from time to time, on and after for an amount equal to $25 per Preferred Partnership Security plus accumulated and unpaid distributions on the Preferred Partnership Securities. If the Preferred Partnership Securities are redeemed, the TOPrS will in turn be redeemed for $25 per TOPrS plus accumulated and unpaid distributions. Neither the Preferred Partnership Securities nor the TOPrS have any scheduled maturity. WHO WILL CONTROL THE TRUST? A wholly-owned subsidiary of TXU Europe Limited organized in the US and designated under the terms of the trust agreement, known as the Control Party, will retain administrative and appointment powers with respect to the trust by virtue of its ownership of the trust's control certificate. The control certificate will not provide any economic interest in the trust to the Control Party. DO I HAVE VOTING RIGHTS? Generally, holders of the TOPrS will not have any voting rights. However, the holders of a majority in liquidation amount of the TOPrS have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Property Trustee on behalf of the Trust, or direct the exercise of any trust or power conferred upon the Property Trustee on behalf of the Trust. See DESCRIPTION OF THE TOPrS -- "Voting Rights" and DESCRIPTION OF THE PREFERRED PARTNERSHIP SECURITIES -- "Voting Rights". WHAT HAPPENS IF THE TRUST IS DISSOLVED? If the trust is dissolved, other than in connection with the occurrence of changes in the US or UK tax laws, sometimes referred to as a tax event, or changes in the US Investment Company Act of 1940, sometimes referred to as an investment company event, that affect the status of the trust, the partnership or the subsidiary debentures, the partnership will be dissolved and the Preferred Partnership Securities will be redeemed, in whole, but not in part, for $25 per Preferred Partnership Security plus accumulated and unpaid distributions on the Preferred Partnership Securities. This, in turn, would cause a redemption of the TOPrS at the same price. WHAT ARE ADDITIONAL AMOUNTS? All payments made on the subsidiary debentures or with respect to the TXU Europe Limited subordinated guarantees will be made without withholding or deduction for taxes or other governmental charges, unless required by law. Subject to customary exceptions, if withholding is required with respect to payments made on the subsidiary debentures or these guarantees, the issuers of the subsidiary debentures or TXU Europe Limited, as applicable, will pay "Additional Amounts" so that the partnership, in the case of the subsidiary debentures or the related TXU Europe Limited guarantees, or the holders of the Preferred Partnership Securities or the holders of the TOPrS, in the case of the Partnership Guarantee and the Trust Guarantee, respectively, would receive the same payments with respect to these instruments as if no withholding or deduction had been made. WHAT HAPPENS IF A TAX EVENT OR AN INVESTMENT COMPANY EVENT OCCURS? Upon the occurrence of a trust tax event, which event will generally be triggered upon the occurrence of specified adverse tax consequences with respect to the trust, Additional Amounts being payable on the subsidiary debentures or the TXU Europe Limited subordinated guarantees, or the denial of an interest deduction on the subsidiary debentures held by the partnership, in each case, as a result of a change in law, or upon the occurrence of a trust investment company event, which event will generally be triggered if the trust is considered an "investment company" under the Investment Company Act as a result of a change in law, except in limited circumstances, the Administrative Trustees will have the right to liquidate the trust and cause Preferred Partnership Securities to be distributed to the holders of the TOPrS. In most circumstances involving a partnership tax event, which event will generally be triggered upon the occurrence of specified adverse tax consequences with respect to the partnership, Additional Amounts being payable on the subsidiary debentures or the TXU Europe Limited subordinated guarantees, or the denial of an interest deduction on the subsidiary debentures held by the partnership, in each case, as a result of a change in law, or upon the occurrence of a partnership investment company event, which event will generally be triggered if the partnership is considered an "investment company" under the Investment Company Act as a result of a change in law, the partnership will have the right to redeem the Preferred Partnership Securities, in whole, but not in part, at $25 per Preferred Partnership Security plus accumulated and unpaid distributions on the Preferred Partnership Securities and, therefore, cause a redemption of the TOPrS at the same price. LISTING TXU Europe Limited will apply to have the TOPrS listed on The New York Stock Exchange, or NYSE. FORM OF THE TOPRS The TOPrS will be represented by one or more global certificates registered in the name of Cede & Co., as nominee for The Depository Trust Company, or DTC. Beneficial interests in the TOPrS will be evidenced by, and transfers of beneficial interests will be effected through, records maintained by the participants in either DTC (in the United States) or Clearstream Banking, societe anonyme, or Morgan Guaranty Trust Company of New York, Brussels Office, as operator of Euroclear (in Europe). Except in certain limited circumstances, TOPrS in certificated form will not be issued in exchange for the global certificate or certificates. USE OF PROCEEDS All of the proceeds from the issuance and sale of the TOPrS will be invested by the trust in the Preferred Partnership Securities. The partnership will use the funds, together with the capital contribution of TXU Europe Limited, as general partner, to make investments in the subsidiary debentures and other eligible debt securities. Funding will lend the proceeds from the sale of its junior subordinated debentures to TXU Europe Limited. TXU Europe Limited will use the funds to repay corporate debt and for general corporate purposes. Any other subsidiary of TXU Europe Limited that will issue initial subsidiary debentures will use the proceeds from the sale of these debentures to repay corporate debt and for general corporate purposes. SELECTED FINANCIAL INFORMATION On May 19, 1998, TXU Europe Limited obtained control of The Energy Group PLC, or TEG, the former holding company of TXU Europe Group. At the same time, TEG disposed of its US and Australian coal businesses and its US energy marketing business. For financial reporting purposes, TXU Europe Group is considered to be the "Predecessor Company" to TXU Europe Limited. TXU Europe Group constituted 97% of TXU Europe Limited's assets as of September 30, 1999 and generated 100% of TXU Europe Limited's operating revenues for the nine months ended September 30, 1999. The principal difference between the results of operation of TXU Europe Group and the results of operation of the continuing businesses of TEG is the interest expense associated with debt securities issued by Energy Group Overseas, B.V., or Overseas, a financing subsidiary of TEG. See TXU Europe Limited's unaudited condensed consolidated pro forma statement of income for the year ended December 31, 1998 included elsewhere in this prospectus. This pro forma statement of income includes TXU Europe Group's operation and the interest expense of Overseas, as if TXU Europe Limited had acquired TEG on January 1, 1998. See also the financial statements of Overseas included elsewhere in this prospectus. The selected financial data of TXU Europe Group for, and as of, each of the four years in the period ended March 31, 1998 and for the period from April 1, 1998 through May 18, 1998, have been derived from financial statements of TXU Europe Group, which have been audited by PricewaterhouseCoopers, independent accountants. The financial statements of TXU Europe Group for each of the four years in the period ended March 31, 1998 have been prepared in accordance with UK GAAP. The financial statements of TXU Europe Group for the years ended March 31, 1997 and 1998 also have been prepared in accordance with US GAAP. TXU Europe Group's financial statements for the period from April 1, 1998 through May 18, 1998 have been prepared in accordance with US GAAP. In October 1997, Overseas issued $500 million aggregate principal amount of guaranteed debt securities. Overseas is now a subsidiary of TXU Europe Limited, and its financial statements for the periods from its formation through March 31, 1998 and from April 1, 1998 through May 18, 1998 are included elsewhere in this prospectus. If interest expense of Overseas had been included in TXU Europe Group's financial statements, (1) UK GAAP net income/(loss), ratio of earnings to fixed charges and net interest expense would have been (pound)42 million, 2.5 and (pound)95 million, respectively, for the year ended March 31, 1998, (2) US GAAP net income/(loss), ratio of earnings to fixed charges and net interest expense would have been (pound)(45) million, 1.7 and (pound)136 million, respectively, for the year ended March 31, 1998 and (pound)(23) million, 0.1 and (pound)19 million, respectively, for the period from April 1, 1998 through May 18, 1998, (3) UK GAAP long-term debt and other obligations, less amounts due currently, would have been (pound)1.8 billion as of March 31, 1998 and (4) US GAAP long-term debt and other obligations, less amounts due currently, would have been (pound)2.3 billion as of March 31, 1998. The selected financial data of TXU Europe Limited for the period from formation (February 5, 1998) through December 31, 1998, for the period from formation through March 31, 1999 and as of December 31, 1998 and March 31, 1999, have been derived from financial statements of TXU Europe Limited, which have been audited by PricewaterhouseCoopers, independent accountants. The selected financial data of TXU Europe Limited for the nine months ended September 30, 1999 have been derived from the unaudited financial statements of TXU Europe Limited. The financial statements of TXU Europe Limited have been prepared in accordance with US GAAP. TXU Europe Limited recorded its approximately 22% equity interest in the net income of TEG for the period from March to May 18, 1998 and has accounted for TEG and TXU Europe Group as consolidated subsidiaries since May 19, 1998. Results of TXU Europe Limited for the periods from formation through December 31, 1998 and March 31, 1999 and for the nine months ended September 30, 1999 are not indicative of results for an annual period. Because TXU Europe Limited obtained control of TEG on May 19, 1998, earnings of TXU Europe Group are not reflected in TXU Europe Limited's results before May 19, 1998, other than as a result of TXU Europe Limited's 22% equity interest in the net income of TEG for the period from March through May 18, 1998. In addition, TXU Europe Limited's operations are affected by seasonal weather patterns. For more information, see MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and the consolidated financial statements and related notes of TXU Europe Group as of March 31, 1998 and for the two years in the period then ended, and for the period from April 1, 1998 through May 18, 1998 and of TXU Europe Limited as of, and for the periods from formation through December 31, 1998 and March 31, 1999 and as of, and for, the nine months ended September 30, 1999 included elsewhere in this prospectus. TXU Europe Limited's unaudited pro forma condensed consolidated income statement and other consolidated data presented below for the year ended December 31, 1998 reflect the acquisition by TXU Europe Limited of TEG as if it had occurred as of January 1, 1998. That unaudited pro forma condensed consolidated income statement and other consolidated data have been prepared by TXU Europe Limited from US GAAP historical information and assumptions deemed proper by it and include the effects of an allocation of the purchase price paid. The unaudited pro forma condensed consolidated income statement and other data presented in this prospectus are shown for illustrative purposes only and are not necessarily indicative of the future results of operations of TXU Europe Limited or of the results of operations of TXU Europe Limited if the transaction had occurred as of January 1, 1998. This information should be read in conjunction with the unaudited condensed consolidated pro forma statement of income and related notes of TXU Europe Limited included elsewhere in this prospectus. TXU EUROPE GROUP PLC (PREDECESSOR COMPANY) <TABLE> <CAPTION> UK GAAP US GAAP ---------------------------- ----------------------------------------------- PERIOD FROM PERIOD FROM APRIL 1, JANUARY 1, YEAR ENDED MARCH 31, 1998 THROUGH 1998 THROUGH 1995 1996 1997 1998 1997 1998 MAY 18, 1998 MAY 18, 1998 ---- ---- ---- ---- ---- ---- ------------ ------------ ((POUND)MILLION) (UNAUDITED) CONSOLIDATED INCOME STATEMENT DATA: <S> <C> <C> <C> <C> <C> <C> <C> <C> Operating revenues................ 2,061 2,119 2,984 3,475 2,984 3,475 425 1,563 Operating income/(loss)........... 244 43 346 337 298 267 (11) 91 Net income/(loss)................. 141 221 265 49 (90) (38) (21) 16 </TABLE> <TABLE> <CAPTION> UK GAAP US GAAP -------------------------------------- ----------------------------------- AS OF MARCH 31, ------------------------------------------------------------------------------ 1995 1996 1997 1998 1997 1998 ---- ---- ---- ---- ---- ---- ((POUND) MILLION) CONSOLIDATED BALANCE SHEET DATA: <S> <C> <C> <C> <C> <C> <C> Total assets...................... 2,053 2,364 3,709 3,888 5,422 5,826 Common stock equity............... 832 1,189 1,314 1,167 2,025 1,802 Minority interest................. (1) (2) 19 6 19 6 Long-term debt and other obligations, less amounts due currently....................... 484 682 1,466 1,499 1,837 1,976 </TABLE> <TABLE> <CAPTION> UK GAAP US GAAP ---------------------------- ----------------------------------------------- PERIOD FROM PERIOD FROM APRIL 1, JANUARY 1, YEAR ENDED MARCH 31, 1998 THROUGH 1998 THROUGH 1995 1996 1997 1998 1997 1998 MAY 18, 1998 MAY 18, 1998 ---- ---- ---- ---- ---- ---- ------------ ------------ ((POUND)MILLION, EXCEPT RATIOS) (UNAUDITED) CONSOLIDATED CASH FLOW DATA (1): <S> <C> <C> <C> <C> <C> <C> <C> <C> Operating activities.............. 284 (189) (116) 614 292 341 74 154 Investing activities.............. (452) 306 (1,052) (238) (229) (234) (78) (139) Financing activities.............. (5) 560 915 (148) (316) 121 16 27 OTHER CONSOLIDATED DATA: Earnings before interest, taxes and minority interest (EBIT) (unaudited)(2).................. 217 280 364 347 303 277 (10) 92 Earnings before interest, taxes, minority interest, depreciation and amortization (EBITDA) (unaudited)(2).................. 273 345 436 436 464 462 16 165 Ratio of earnings to fixed charges (unaudited)(3).................. 5.8 4.9 4.2 2.6 2.5 1.7 0.1 1.6 Net interest expense.............. 14 22 46 85 88 126 16 41 </TABLE> TXU EUROPE LIMITED (SUCCESSOR COMPANY) US GAAP <TABLE> <CAPTION> PERIOD FROM FORMATION (FEBRUARY 5, 1998) THROUGH PERIOD FROM -------------------------- PRO FORMA YEAR FORMATION NINE MONTHS ENDED THROUGH ENDED DECEMBER 31, MARCH 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1998 1999 1998 1998 1999 ------------- ----------- --------------- -------------- -------------- (UNAUDITED) ((POUND) MILLION) CONSOLIDATED INCOME STATEMENT DATA: <S> <C> <C> <C> <C> <C> Operating revenues................. 2,165 3,338 3,690 939 2,686 Operating income................... 314 484 508 53 354 Net income (loss).................. 77 126 94 (25) 71 </TABLE> <TABLE> <CAPTION> AS OF AS OF AS OF DECEMBER 31, 1998 MARCH 31, 1999 SEPTEMBER 30, 1999 ------------------ ---------------- ------------------ (UNAUDITED) ((POUND) MILLION) CONSOLIDATED BALANCE SHEET DATA: <S> <C> <C> <C> Total assets....................... 8,529 8,583 8,429 Total common stock equity.......... 1,535 1,581 1,607 Minority interest.................. 190 200 197 Note payable to TXU Corp........... 682 682 - Long-term debt, less amounts due currently........................ 3,629 3,754 4,495 </TABLE> <TABLE> <CAPTION> PERIOD FROM FORMATION NINE MONTHS (FEBRUARY 5, 1998) THROUGH PERIOD FROM ENDED -------------------------- FORMATION THROUGH SEPTEMBER 30, DECEMBER 31, 1998 MARCH 31, 1999 SEPTEMBER 30, 1998 1999 ----------------- -------------- ------------------ -------------- (UNAUDITED) ((POUND) MILLION) CONSOLIDATED CASH FLOW DATA: <S> <C> <C> <C> <C> Operating activities............... 37 44 12 447 Investing activities............... (1,767) (1,858) (1,569) (347) Financing activities............... 2,197 2,228 3,427 (206) </TABLE> <TABLE> <CAPTION> PERIOD FROM FORMATION PERIOD FROM (FEBRUARY 5, 1998) THROUGH PRO FORMA YEAR FORMATION NINE MONTHS -------------------------- ENDED THROUGH ENDED DECEMBER 31, MARCH 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1998 1999 1998 1998 1999 ------------- ------------ ---------------- ------------- -------------- (UNAUDITED) ((POUND) MILLION) OTHER CONSOLIDATED DATA: <S> <C> <C> <C> <C> <C> <C> Earnings before interest, taxes and minority interest (EBIT) (unaudited)(2)................... 360 531 539 81 359 Earnings before interest, taxes, minority interest, depreciation and amortization (EBITDA) (unaudited)(2)................... 504 733 771 165 542 Ratio of earnings to fixed charges (unaudited)(3)..................... 1.5 1.7 1.4 0.7 1.6 Net interest expense................. 205 278 341 128 213 </TABLE> (1) Cash flow information on a UK GAAP basis for the years ended March 31, 1995, 1996, 1997 and 1998 has been reformatted to US GAAP presentation style. (2) EBIT equals earnings before interest income, interest expense, income taxes and minority interest. EBITDA equals earnings before interest income, interest expense, income taxes, minority interest, depreciation and amortization. This information is provided for informational purposes only. EBIT and EBITDA are not measures defined under US GAAP and have not been presented in accordance with US GAAP. Neither EBIT nor EBITDA should be construed as an alternative to operating income under US GAAP as an indicator of operating performance, or as an alternative to cash flows from operating activities under US GAAP as a measure of liquidity. EBIT and EBITDA are widely accepted financial indicators of a company's ability to incur and service debt. However, these measures of EBIT and EBITDA may not be comparable to similar measures presented by other companies. (3) The ratio of earnings to fixed charges is computed as the sum of earnings plus fixed charges divided by fixed charges. Earnings consist of the aggregate of net income (loss) before minority interests, income taxes and fixed charges excluding interest capitalized. Fixed charges consist of interest expensed and capitalized and the estimated interest portion of rent expense. For TXU Europe Group, for the period from April 1, 1998 through May 18, 1998 total fixed charges exceeded total earnings by (pound)26 million. FOR TXU Europe Limited, for the period from formation through September 30, 1998, total fixed charges exceeded total earnings by (pound)50 million.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001099413_more-com_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001099413_more-com_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in the common stock. You should read the entire prospectus carefully, including "Risk Factors" and our financial statements, before making an investment decision. more.com, Inc. more.com is a leading online health superstore that currently offers its customers more than 45,000 stock keeping units, or SKUs, in a variety of health product categories at everyday low prices. Our online health superstore contains over-the-counter medicine products, health and beauty aids, vision care products, nutritional supplements, baby products, prescription medications and other health products. Through our relationship with our third-party distribution and fulfillment providers, we have the opportunity to access over 300,000 health product SKUs that we could make available to our customers. In an effort to further enhance our customers' shopping experience, we have also created five customized specialty stores that are built around specific product categories and are closely integrated with our broader more.com superstore. These specialty stores include Acumins for personalized vitamins, GreenTree for natural health and beauty products, Clearly Contacts for vision products, Comfort Living for baby, back and healthy home products and Pharmacy for prescription drugs. In addition, we plan on increasing the number of specialty stores on our Web site over the next few years. To ensure that our customers can quickly find and purchase the health products they need, we have designed our Web site, www.more.com, with navigation tools that provide our customers with an intuitive, easy-to-use shopping interface. For example, we have developed proprietary solutions, such as our QuickShop(TM) technology, that dramatically reduce the amount of time necessary for customers to find and purchase products in our online health superstore. We use a business model that involves outsourcing the majority of our operating infrastructure including distribution and fulfillment, credit card processing and the hosting of our system infrastructure and database servers. We believe that these outsourcing arrangements provide us with a variety of benefits, including capital and cost efficiencies, operating flexibility and enhanced scalability. By taking advantage of these benefits, we believe we are able to offer a broader selection of products at lower prices and operate with significantly lower operating expenses than many of our competitors. Additionally, this operating model allows us to easily add new product categories and specialty stores, minimizes the cost of carrying inventory and enables us to focus on maintaining a superior customer experience, which is critical to building customer loyalty. As of December 31, 1999, we have sold our products to more than 57,000 customers, of which more than 46,000 were added during the fourth quarter of 1999. During January 2000, approximately 45.8% of our total revenue came from repeat customers. Media Metrix estimates that approximately 584,000 unique visitors came to our site in December 1999, representing a 10.6% increase over the estimated 528,000 unique visitors to our site in November 1999. "Unique visitor" is an industry term used to describe an individual that has visited a particular Internet site once or more during a specific period of time. We believe that the increase in visitor traffic to our Web site and relatively high levels of repeat purchases demonstrate our customers' growing satisfaction with our shopping experience and value proposition. Our objective is to become the world's leading online health superstore, offering a broad selection of products and services at everyday low prices, backed by superior customer service. We plan to expand our product offerings and specialty stores through both internal growth and acquisitions. Additionally, we intend to continue to work with our distribution and fulfillment providers to obtain more timely and accurate product information, shipping and fulfillment. Our business strategy focuses on offering our customers low prices, and we intend to offer the lowest prices online for the most frequently purchased health products. Initially, however, we offered a broad range of products at very low prices and pursued aggressive marketing campaigns, such as free shipping for life, $1.00-for-life and fixed prices-for-life product promotions as part of our charter customer promotion, to drive traffic to our Web site. As customer loyalty and recognition of our brand name have increased, we have recently begun to modify our pricing and merchandising strategy to improve our overall gross margins without experiencing a decline in the growth of overall sales volumes or customer levels. Additionally, the creation of our specialty stores on our Web site has promoted cross-selling opportunities that enable us to migrate our customers to higher margin products. We intend to further refine this pricing strategy over time. In early February 2000, we acquired Comfort Living, Inc., an Internet retailer specializing in personal care and comfort products, back care and pain reduction products, baby care and maternity products and allergy control products. Under the terms of the agreement, the stockholders of Comfort Living received $2.5 million in cash and 1,500,000 shares of our common stock. Comfort Living's net revenues were $4.6 million for the year ended December 31, 1999. In early February 2000 we also completed the private placement of our Series E convertible preferred stock to a group of investors led by Bain Capital and its affiliates for $25.5 million. more.com was formed as a California limited liability company in January 1998 under the name Nutrition Direct, LLC and was incorporated in Delaware as GreenTree Nutrition, Inc. in May 1998. In July 1999, we changed our name to more.com. Our executive offices are located at 520 Third Street, Suite 245, San Francisco, California 94107, and our telephone number is (415) 979-9597. Our primary Web site is located at www.more.com. Information on our Web site does not constitute part of this prospectus. The Offering <TABLE> <C> <S> Common stock offered................................ shares Common stock to be outstanding after this offering.. shares Use of proceeds..................................... We estimate that our net proceeds from this offering without exercise of the over-allotment option will be approximately $ million. We intend to use the net proceeds to build out our Web site and our specialty stores within our Web site, acquire and develop complementary businesses, technologies and strategic relationships and for general corporate purposes, including working capital and capital expenditures. Pending these uses, the net proceeds of this offering will be invested in short- term, investment grade, interest-bearing instruments. Risk factors........................................ See "Risk Factors" and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock. Proposed Nasdaq National Market symbol.............. MORE </TABLE> --------------- Unless otherwise noted, all information in this prospectus assumes that: . the underwriters will not exercise their option to purchase additional shares of common stock to cover over-allotments, if any; and . all outstanding shares of our preferred stock will convert into shares of common stock upon the completion of this offering. Summary Consolidated Financial Information <TABLE> <CAPTION> Period from January 9, 1998 (inception) to Year Ended December 31, 1998 December 31, 1999 ------------------ ------------------- (in thousands, except per share data) <S> <C> <C> Consolidated Statement of Operations Data: Net revenues............ $ 99 $ 2,923 Gross profit (loss)..... (44) (830) Operating loss.......... (5,236) (34,812) Net loss................ (5,169) (34,685) Accretion of discount on mandatorily redeemable convertible preferred stock........ (101) (1,597) Net loss available to common stockholders.... (5,270) (36,282) Basic and diluted net loss per share......... $ (5.90) $ (15.74) Shares used in computing basic and diluted net loss per share......... 893 2,305 Pro forma basic and diluted net loss per share (unaudited)...... $ (2.68) Shares used in computing pro forma basic and diluted net loss per share (unaudited)...... 13,556 </TABLE> <TABLE> <CAPTION> December 31, 1999 -------------------------- Actual As Adjusted ------------- ------------ (unaudited) (in thousands) <S> <C> <C> <C> <C> Consolidated Balance Sheet Data: Cash and cash equivalents........................ $ 24,655 $ Working capital.................................. 17,576 Total assets..................................... 40,161 Borrowings under lines of credit, less current portion......................................... 1,376 1,376 Mandatorily redeemable convertible preferred stock........................................... 58,064 -- Total stockholders' equity (deficit)............. (27,765) <CAPTION> Three Months Ended ----------------------------------------------- March 31, June 30, September 30, December 31, 1999 1999 1999 1999 --------- -------- ------------- ------------ (in thousands) (unaudited) <S> <C> <C> <C> <C> Quarterly Consolidated Statement of Operations Data: Net revenues.................. $ 162 $ 260 $ 666 $ 1,835 Gross profit (loss)........... (44) (63) (90) (633) Operating loss................ (2,533) (4,285) (9,759) (18,235) Net loss...................... (2,458) (4,240) (9,907) (18,080) </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001099414_tanox-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001099414_tanox-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED IN OTHER PARTS OF THIS PROSPECTUS. BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE SHARES. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY. THE COMPANY OVERVIEW Tanox identifies and develops therapeutic monoclonal antibodies to address significant unmet medical needs in the areas of immunology, infectious diseases and cancer. Monoclonal antibodies are genetically engineered antibodies that target a specific foreign substance, or antigen. E25, our most advanced product in development, is an anti-immunoglobulin E, or anti-IgE, antibody. We are developing E25 in collaboration with Novartis Pharma AG and Genentech, Inc. E25 has successfully completed Phase III clinical trials in both allergic asthma and seasonal allergic rhinitis (hay fever). Based on the results of these trials, our collaboration partners intend to file for marketing approval in the United States and Europe in mid-2000. In addition, we are developing a number of monoclonal antibodies to treat other allergic diseases or conditions, such as severe allergic reactions to peanuts, autoimmune diseases, HIV and to restore the suppressed immune systems of chemotherapy patients. MONOCLONAL ANTIBODY THERAPEUTICS Monoclonal antibodies represent an exciting area of novel therapeutic development. Because of advances in antibody technologies, scientists are now able to develop antibody products that can be administered to patients on a chronic basis with reduced concern for adverse responses by the human immune system. Companies can also manufacture these antibody products more cost- effectively. As a result, a large number of monoclonal antibodies are now in clinical and preclinical development. According to an industry survey, 74 out of 350, or 21% of all, biotechnology medicines in clinical trials in 1998 were antibodies. The FDA has approved eight therapeutic antibodies, six of them in the last three years. In 1999, total sales of these products exceeded $1.3 billion. OUR PRODUCTS IN DEVELOPMENT E25. In 1987, we discovered a novel approach for treating allergies and asthma by using monoclonal antibodies to inhibit IgE. E25, a product based on this discovery, is a humanized (human-like) anti-IgE monoclonal antibody in development for allergic asthma and allergic rhinitis. We estimate that, in the United States, allergic asthma afflicts approximately 11 million people, and allergic rhinitis afflicts approximately 40 million people, of whom approximately 32 million are seasonal sufferers. A pivotal Phase III clinical trial and a pivotal Phase IIb clinical trial have demonstrated E25's ability to prevent or reduce symptoms of seasonal allergic rhinitis. Two Phase III clinical trials in allergic asthma have demonstrated E25's ability to reduce symptoms related to asthma. Clinicians who participated in the studies presented the results of those trials at the American Academy of Allergy Asthma and Immunology in March 2000. As mentioned above, Novartis and Genentech intend to file for marketing approval for both indications in the United States and Europe in mid-2000. OTHER PRODUCT CANDIDATES. Using our comprehensive understanding of the human immune system, we are building a diverse pipeline of monoclonal antibody product candidates. In addition to E25, we have two other products in clinical development and we are evaluating several product candidates in preclinical and research studies. o HU-901 is a humanized anti-IgE monoclonal antibody similar to E25 that is in a Phase I/II trial to test its effectiveness in reducing severe allergic reactions to peanuts. According to a recently published survey, peanut or tree nut (e.g., walnut, almond and cashew) allergy affects about 3 million people in the United States. If our clinical trial indicates that Hu-901 reduces sensitivity to peanuts, we may also investigate its benefit to patients with other food allergies. Novartis and Genentech are currently disputing our right to independently develop this product. o 5D12 is an anti-CD40 monoclonal antibody that we are developing to treat autoimmune diseases. We are currently conducting a Phase I/II trial in patients with Crohn's disease. We expect the results of this trial to play an important role in determining clinical indications that we intend to pursue with this product. We have exclusive rights to 5D12 in Europe and Japan under a license from Chiron Corporation. We believe potential autoimmune disease indications, such as Crohn's disease, rheumatoid arthritis, multiple sclerosis and psoriasis, represent significant market opportunities in Europe and Japan. o 5A8 is an anti-CD4 antibody that is in preclinical development for treating HIV. o 166-32 is a complement factor D inhibiting antibody in research for treating acute inflammation. o 163-93 is an anti-G-CSF receptor activating antibody in research for treating neutropenia, or suppression of the immune system caused by depletion of white blood cells during chemotherapy. OUR STRATEGY Our objective is to leverage our expertise in monoclonal antibodies and our understanding of the human immune system to advance our product pipeline and become a profitable biopharmaceutical company. We intend to accomplish this through the following strategic initiatives: o continuing to identify and develop novel monoclonal antibodies using our demonstrated expertise in immunology and monoclonal antibody technology; o maximizing the market opportunity for anti-IgE antibodies by exploring indications beyond allergic asthma and seasonal allergic rhinitis; o expanding our product pipeline through attractive acquisition and in-licensing opportunities; o forming strategic collaborations to complement our research and development resources and enhance the value of our product development programs; and o capturing additional value from our pipeline by retaining marketing rights for products that we can effectively sell using a small, targeted sales force. OTHER INFORMATION We were incorporated in Texas in March 1986 and we reincorporated in Delaware in January 2000. Our corporate headquarters, manufacturing facility and principal research laboratories are located at 10301 Stella Link, Houston, Texas 77025-5497 and our telephone number is 713-664-2288. Tanox(R) and our logo are our registered service marks. THE OFFERING <TABLE> <S> <C> Common stock offered................. 7,000,000 shares Common stock to be outstanding after the offering....................... 40,973,123 shares Use of proceeds...................... For research and development activities, for capital expenditures, to finance possible acquisitions and investments in technology, products or businesses and for working capital and other general corporate purposes. Proposed Nasdaq National Market symbol............................. TNOX </TABLE> The share amounts in the table above are based on the number of shares outstanding at March 31, 2000 and excludes: o 2,586,993 shares of common stock issuable on exercise of outstanding options at a weighted average exercise price of $5.36 per share; and o 8,172,980 shares of common stock reserved for issuance pursuant to future grants under our stock option plans. Unless otherwise stated, all information contained in this prospectus assumes no exercise of the underwriters' over-allotment option. On February 1, 2000, we effected a 1.6 for 1 stock split by paying a stock dividend. All common share numbers in this prospectus reflect the stock split. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (in thousands, except per share data) YEAR ENDED DECEMBER 31, --------------------------------- 1997 1998 1999 --------- ---------- ---------- STATEMENT OF OPERATIONS DATA: Revenues............................. $ 8,939 $ 2,422 $ 1,405 Research and development............. 6,926 11,933 17,163 General and administrative........... 2,230 3,431 8,582 --------- ---------- ---------- Total operating costs and expenses... 9,156 15,364 25,745 --------- ---------- ---------- Income (loss) from operations........ (217) (12,942) (24,340) Other income, net.................... 1,045 1,240 1,028 --------- ---------- ---------- Income (loss) before income taxes.... 828 (11,702) (23,312) (Provision) benefit of income taxes.............................. (198) 1,533 (34) --------- ---------- ---------- Net income (loss).................... $ 630 $ (10,169) $ (23,346) ========= ========== ========== Earnings (loss) per share: Basic........................... $ 0.02 $ (0.35) $ (0.75) ========= ========== ========== Diluted......................... $ 0.02 $ (0.35) $ (0.75) ========= ========== ========== Shares used in computing earnings (loss) per share: Basic........................... 27,909 29,105 31,113 Diluted......................... 31,190 29,105 31,113 DECEMBER 31, 1999 -------------------------- ACTUAL AS ADJUSTED --------- -------------- BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........................ $ 47,254 $231,704 Working capital...................... 42,718 227,168 Total assets......................... 55,328 239,778 Long term debt....................... 10,000 10,000 Retained earnings (deficit).......... (30,461) (30,461) Total stockholders' equity........... 40,007 224,457 The as adjusted balance sheet data in the table above reflects the sale of 7,000,000 shares of common stock in this offering at an assumed public offering price of $28.50 per share, after deducting estimated underwriters' discounts and commissions and offering expenses.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001099421_stockpoint_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001099421_stockpoint_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..bb0d23e6bc47026bc0ac266c144e2ab293ea5587
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+Prospectus summary Because this is only a summary, it does not contain all of the information that may be important to you. For a more complete understanding of this offering, we encourage you to read the entire prospectus, including the information under "Risk Factors" and the consolidated financial statements and related notes, before making an investment decision. STOCKPOINT Stockpoint is a leading provider of online investment analysis tools and financial information. We develop and integrate sophisticated financial applications to provide our clients customized financial web pages. We "host" these web pages by maintaining the data and applications on our web servers and by applying Internet-based data management technology we have developed. This enables our clients to outsource their financial web page production and maintenance, and provide extensive financial content and analysis tools to their users. Our clients include web portals, media companies, traditional and online brokerage firms, commercial banks, asset managers, electronic communication networks, 401(k) sponsors and insurance companies. As of June 30, 2000, we had license agreements with approximately 250 clients. Our business generated revenues of $6.8 million during 1999 and $6.5 million during the first six months of 2000. We incurred losses of $3.2 million and $3.7 million during these periods. The Internet today is rapidly changing the way individuals conduct financial transactions. The convenience, speed and the lower cost of conducting trades over the Internet and the immediate availability of financial information on the Internet, combined with the current demographic trends favoring investment, have converged to produce a significant movement to online investing. Forrester Research has projected that online investment accounts in the U.S. will grow from $374 billion of assets in 5.4 million online accounts in 1999 to $3.1 trillion of assets in 20.4 million online accounts by 2003, a number that would represent nearly 53% of U.S. households. Similar developments in electronic banking, driven by the convenience of electronic bill payment, online fund transfers, the monitoring of account balances and the trend toward integrated financial services, are helping to reshape the way both individual and corporate banking is conducted. To accommodate this shift, the financial industry has become one of the largest consumers of Internet technology, demanding both transactional technology and technology that delivers the online financial information needed to make intelligent transactional decisions. We believe that the quality and breadth of the financial information that is offered is rapidly becoming a differentiator among financial services providers. With our products and services, our clients are able to offer their users Internet-based real-time and delayed stock quotes, charting capabilities, portfolio management and analysis tools, currency utilities, company research and business news. We also enable our customers to offer many of these features over wireless devices. We purchase financial content on a nonexclusive basis, and combine, integrate and manipulate this content with software we have developed and in a format customized for our clients, to enable users to easily analyze and manage financial information and to make investment decisions. Our Internet technologies allow us to rapidly develop financial web pages for customers desiring to differentiate their financial web sites from others. Our objective is to be the leading provider of global online investment analysis tools and financial information that enables our clients to provide extensive financial content and decision-making tools on their web sites. Key elements of our strategy include: + Enabling the online financial services markets. We intend to rapidly expand our sales force to reach businesses in the financial services industry and other financial information providers that require extensive online market analysis tools and financial information on their web sites. We -------------------------------------------------------------------------------- Through and including , 2000, the 25th day after the commencement of this offering, federal securities law may require all dealers selling shares of our common stock, whether or not participating in this offering, to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to unsold allotments or subscriptions. TABLE OF CONTENTS -------------------------------------------------------------------------------- <TABLE> <S> <C> Prospectus summary..................... 3 Risk factors........................... 6 Forward-looking information............ 17 Use of proceeds........................ 18 Dividend policy........................ 18 Dilution............................... 19 Capitalization......................... 20 Selected consolidated financial information.......................... 21 Management's discussion and analysis of financial condition and results of operations........................... 23 Business............................... 35 Management............................. 48 Certain transactions................... 54 Principal stockholders................. 58 Description of capital stock........... 60 Shares eligible for future sale........ 63 Underwriting........................... 65 Legal matters.......................... 67 Experts................................ 67 Where you can find more information.... 67 Index to financial statements.......... F-1 </TABLE> -------------------------------------------------------------------------------- In making a decision to buy our common stock, you should only rely on the information contained in this prospectus. We have not authorized anyone to provide you with other information. We are offering to sell these shares only where it is legal to sell them. The information in this prospectus is complete and accurate as to the date on the front cover, but the information may have changed since that date. -------------------------------------------------------------------------------- believe our broad client experience enables us to intelligently recommend and sell new products, content and services to improve web site functionality. + Expanding our existing client relationships. We intend to continue to expand our relationships with our existing clients by offering additional value-added products and services that we create or obtain through partnership or acquisition. + Developing innovative product offerings. We intend to focus our development efforts on refining and extending the capabilities of our current product suite as well as capitalizing on emerging trends to construct leading edge products that facilitate data analysis and more informed investment decisions. + Creating a worldwide presence. We intend to expand our product offerings and international presence to serve the global online financial information needs of our clients and their users. To further our international objectives, we recently opened an office in London, England and intend to open an office in Hong Kong or Singapore during 2000. + Pursuing strategic alliances or acquisitions. We intend to accelerate our global sales and marketing efforts and technology development, and gain access to compelling content, applications and functionality, through strategic alliances and acquisitions. We intend to seek acquisitions of businesses to complement our products or services or to give us access to new markets. Our corporate headquarters are located at 2600 Crosspark Road, Coralville, Iowa 52241 and our phone number is (319) 626-5000. Our Internet address is www.stockpoint.com. Information on our web site is not part of this prospectus. RISKS Investing in our common stock involves a number of risks that we have attempted to summarize under "Risk Factors" starting on page 6. These risks include the risk that the pending merger announced on August 17, 2000, between Telescan (one of our competitors) and GlobalNetFinancial.com may cause us to lose our relationship with GlobalNetFinancial.com as our largest customer. GlobalNetFinancial.com accounted for 14% of our revenues in 1999, 17.2% of our revenues in the first six months of 2000, and 4.4% of the revenues that we had under contract at June 30, 2000 but had not yet recognized. THE OFFERING Common stock offered................ 5,000,000 shares. Common stock to be outstanding after the offering (1).................... 11,178,239 shares. Use of proceeds..................... We intend to use the net proceeds to repay most of our outstanding indebtedness, to add sales and marketing personnel, to continue Internet product development, to finance one or more data centers and foreign offices and for working capital and other general corporate purposes. Proposed Nasdaq National Market symbol.............................. "STKP." ------------ (1) The number of shares of our common stock to be outstanding immediately after this offering excludes 2,852,550 shares of common stock issuable upon the exercise of options and 2,832,517 shares of common stock issuable upon the exercise of warrants outstanding as of June 30, 2000, assuming an initial public offering price of $9.00 per share. The actual number of warrants and their exercise price will depend on the initial public offering price. See "Certain Transactions-Bridge Loan Financing." "Stockpoint" is our federally registered trademark. This prospectus also contains names, trademarks, service marks and registered trademarks and service marks of other companies. SUMMARY CONSOLIDATED FINANCIAL INFORMATION <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, STATEMENT OF OPERATIONS DATA 1997 1998 1999 1999 2000 ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Revenues.......................... $1,427,908 $2,177,946 $6,829,869 $2,438,609 $6,467,852 Cost of revenues.................. 308,608 764,965 2,289,881 913,882 3,078,951 ----------- ----------- ----------- ----------- ----------- Gross profit...................... 1,119,300 1,412,981 4,539,988 1,524,727 3,388,901 Operating expenses................ 4,366,476 6,856,777 7,429,328 3,243,082 6,354,866 ----------- ----------- ----------- ----------- ----------- Operating loss from continuing operations...................... (3,247,176) (5,443,796) (2,889,340) (1,718,355) (2,965,965) Other expense, primarily interest........................ (688,525) (784,546) (1,058,545) (438,823) (946,247) Income (loss) from discontinued operations (1).................. (405,722) (356,946) 780,808 780,808 -- Extraordinary item-gain on extinguishment of debt.......... -- -- -- -- 233,600 ----------- ----------- ----------- ----------- ----------- Net loss.......................... $(4,341,423) $(6,585,288) $(3,167,077) $(1,376,370) $(3,678,612) =========== =========== =========== =========== =========== Basic and diluted loss per common share: Loss from continuing operations.................... $(1.27) $(2.10) $(1.35) $(0.74) $(1.25) Net loss........................ $(1.40) $(2.21) $(1.11) $(0.50) $(1.18) Weighted average common shares outstanding................... 3,134,552 3,160,359 3,212,106 3,194,831 3,283,247 Pro forma basic and diluted loss per common share (2): Loss from continuing operations.................... $(0.66) $(0.65) Pro forma net loss.............. $(0.53) $(0.61) Weighted average common shares outstanding................... 5,921,672 6,053,576 OTHER OPERATING DATA: Unrecognized contracted revenue at period end (3)............. $140,078 $1,458,000 $10,703,000 $4,903,000 $26,004,000 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 2000 BALANCE SHEET DATA ACTUAL AS ADJUSTED (4) ----------------------------------------------------------------------------------------------- <S> <C> <C> Cash and cash equivalents................................... $2,403,390 $30,817,335 Working capital (deficit)................................... (15,979,432) 24,468,832 Total assets................................................ 8,081,690 35,937,396 Total debt.................................................. 12,306,435 272,116 Stockholders' equity (deficiency)........................... (13,799,038) 26,090,987 </TABLE> ------------ (1) On May 29, 1999, we sold the technology and operational assets related to the products we had marketed to the steel-making industry, recognizing a gain of $433,133. (2) As adjusted for the conversion of all outstanding shares of preferred stock into common stock upon completion of this offering. (3) Represents contracted revenues at period end less amounts recognized as revenue in the statement of operations. The balance of unrecognized contracted revenue at period end will be recognized ratably in future periods over the duration of our contracts. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001099425_insilicon_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001099425_insilicon_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE BUYING OUR SHARES. YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, AND THE NOTES TO THOSE CONSOLIDATED FINANCIAL STATEMENTS, APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED IN THOSE FORWARD-LOOKING STATEMENTS AS A RESULT OF THE FACTORS DESCRIBED UNDER THE HEADING "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. OUR BUSINESS inSilicon is a leading provider of communications technology that is used by semiconductor and systems companies to design complex semiconductors called systems-on-a-chip that are critical components of digital devices. Over 400 customers use our communications technology in hundreds of different digital devices ranging from network routers to cellular phones. Our modular approach emphasizes customer-proven reusable semiconductor intellectual property that focuses on communications and connectivity, and are compatible with a wide range of microprocessor designs. Semiconductor and systems companies integrate our communications technology into their overall semiconductor designs, saving time and money and allowing them to focus on their core competencies that differentiate their products. By integrating our communications technology into their complex designs, our customers are better able to solve the widening "design gap" caused by the difficulty of designing complex systems-on-a-chip in the time necessary to get to market with their products. The internet is creating the demand for all digital devices to be connected. This demand is generating a proliferation of communications standards. These standards include Ethernet, which is a widely used local area networking standard; USB, which is a standard designed to simplify personal computer connections to peripheral devices; and IrDA, which is a standard that allows a wireless signal to be sent between appliances across short distances. The proliferation of these standards and products based on them is driving the demand for complex semiconductors. Improvements in semiconductor design and manufacturing processes have enabled the integration of entire systems on a single chip, thus creating a system-on-a-chip solution. Due to the complexity of designing systems-on-a-chip, the multiplicity of communications standards and time-to-market requirements, the design capabilities of semiconductor and systems companies have not kept pace with the increase in the number of transistors that can be placed on single chip. Consequently, a significant "design gap" has developed. To address this gap, semiconductor and systems companies are increasingly licensing proven and reusable intellectual property from merchant semiconductor intellectual property suppliers, such as inSilicon. Integrated Circuit Engineering, an independent research firm, estimates that the merchant semiconductor intellectual property market will grow from approximately $732 million in 2000 to approximately $1.9 billion in 2003, which represents a compounded annual growth rate of approximately 37%. We provide communications and connectivity solutions that allow semiconductor and systems companies to focus their development resources on their core competencies that differentiate their products. This reduces development costs and improves time to market in the design of complex systems-on-a-chip, thus narrowing the design gap with reusable technology. We offer: - proven solutions; - a broad portfolio of communications technology for a wide range of standards; - integrated systems that combine our communications technology and related software; - extensive test and verification tools; - portability and flexibility; and - standards leadership. Our goal is to be a leading provider of semiconductor intellectual property for communications and connectivity. Key elements of our strategy include: - targeting high growth communications applications; - expanding our portfolio of communications technology and related software; - expanding distribution channels and brand awareness; and - developing e-commerce channels. CORPORATE INFORMATION inSilicon was incorporated in Delaware on November 1, 1999 as a wholly owned subsidiary of Phoenix. Before November 1999, we were operated as a division of Phoenix. Our principal executive offices are located at 411 East Plumeria Drive, San Jose, CA 95134 and our telephone number is (408) 894-1900. We expect to move to new executive offices in the Silicon Valley area. Our web site address is http://www.in-silicon.com. Information on our web site and on web sites linked to it is not part of this prospectus. OUR RELATIONSHIP WITH PHOENIX So long as Phoenix owns a substantial amount of our common stock, Phoenix can exercise a controlling influence over our business. Phoenix has advised us that it intends to hold its inSilicon shares after this offering. However, Phoenix has no contractual or other obligation to hold any or all of our shares of common stock, except that it has agreed that it will not dispose of any inSilicon shares for 365 days after the date of this prospectus without the prior written consent of FleetBoston Robertson Stephens Inc. See "Underwriting--Future Sales." Therefore, you cannot be sure how long Phoenix will continue to own our common stock after this offering. Phoenix may dispose of our common stock in one or more transactions, in one or more ways, including a public offering, a distribution to Phoenix stockholders, an exchange offer involving Phoenix common stock or other transactions. We granted Phoenix registration rights for our common stock that it will own after this offering, which will make it easier for Phoenix to dispose of its inSilicon common stock. inSilicon and Phoenix have executed agreements addressing interim and ongoing relationships between them. See "Arrangements between inSilicon Corporation and Phoenix Technologies Ltd." THE OFFERING <TABLE> <S> <C> Common stock offered......................... 3,500,000 shares Common stock to be outstanding after the offering................................... 14,051,330 shares Use of proceeds.............................. General corporate purposes, including working capital, sales and marketing, and research and development. Proposed Nasdaq National Market symbol....... INSN </TABLE> The above information assumes the automatic conversion of our Series A Preferred Stock into common stock and that the underwriters do not exercise their option to purchase additional shares in the offering. The information excludes the following: - 2,546,567 shares of common stock issuable as of March 15, 2000, upon exercise of options under our 1999 stock option plan; - 50,000 shares of common stock issuable upon exercise of a warrant held by Phoenix; - 1,302,113 shares of common stock available for future issuance, upon exercise of options not yet granted as of March 15, 2000 under our 1999 stock option plan and 2000 stock plan; and - 250,000 shares of common stock available for future issuance under our 2000 employee stock purchase plan. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The historical financial information may not be indicative of our future performance and does not reflect what our financial position and results of operations would have been had we operated as a separate, stand-alone entity during the periods presented. <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, ---------------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1998 1999 -------- -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenue........................... $ 2,106 $ 3,330 $ 5,111 $ 8,792 $18,955 $ 4,866 $ 5,257 Gross margin............................ 1,702 2,666 3,501 6,835 14,994 4,148 4,182 Merger and restructuring charges........ -- 318 -- 5,778 6,050 86 -- Net income (loss)....................... 48 (1,232) (1,986) (7,101) (12,082) (1,315) (991) Pro forma net loss...................... (8,566) (817) Pro forma net loss per share............ $ (0.82) $ (0.08) Shares used in computing pro forma net loss per share........................ 10,400 10,400 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ----------------------- ACTUAL AS ADJUSTED -------- ------------ <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ -- $31,150 Working capital (deficit)................................... (1,995) 29,155 Total assets................................................ 22,023 53,173 Long-term obligations, less current portion................. -- -- Total stockholder's equity.................................. 13,784 44,934 </TABLE> See Note 2 of Notes to Consolidated Financial Statements of inSilicon for an explanation of the determination of the number of shares used in computing per share data. "As adjusted" amounts reflect the application of the net proceeds from the sale of 3,500,000 shares of common stock by inSilicon at an assumed initial public offering price of $10.00 per share, after deducting the underwriting discounts, commissions and the estimated offering expenses. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001099488_nexgenix_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001099488_nexgenix_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information from this prospectus and does not contain all of the information that may be important to you. You should read the entire prospectus, including the section entitled "Risk Factors" and our consolidated financial statements and related notes, before deciding to invest in our common stock. In this prospectus, unless the context otherwise requires, the terms "we," "us," "our," "our company" and "Nexgenix" refer to Nexgenix, Inc. and its predecessor, NexGen SI, Inc. and to its majority-owned subsidiary. The term "fiscal" refers to our fiscal year, which is comprised of a twelve-month period ending on June 30 of each year. Nexgenix We provide a new category of Internet professional services that we call e- Relationship services. e-Relationship services are an integrated offering of business strategy, branding, marketing, creative design and technology services. We utilize our extensive technology expertise to implement reliable and scalable web sites, and use our advanced information gathering and analytic customer profiling capabilities to create more effective branding and marketing campaigns consistent with our client's overall marketing strategy. Furthermore, our loyalty building programs and customer service solutions allow our clients to create more personalized e-businesses. As a result, our services add significant value to our clients by helping them build next generation e- businesses that efficiently acquire and retain customers and improve profitability. We target startup and emerging e-businesses as well as traditional brick-and-mortar companies that are developing and implementing e- business solutions. Our clients include business-to-business and business-to- consumer companies, such as Alcatel Internetworking Division, CBS SportsLine, Ecolab, iMotors, Military.com and Sage Software. Companies are increasingly building e-businesses in response to the rapid growth in the commercial use of the Internet and are seeking the expertise of outside Internet professional service providers to implement these e- businesses. International Data Corporation, an independent research firm, estimates that the worldwide market for Internet services will grow from $16.5 billion in 1999 to $102.7 billion in 2004. We believe the marketplace is entering the next generation of e-businesses. The first generation focused primarily on creating transactive web sites and not on helping clients build stronger customer relationships. We believe that next generation e-businesses must invest more efficiently to acquire customers and increase customer retention rates in order to improve profitability. e- businesses can achieve these objectives by more effectively managing relationships with their online customers as well as investing in brand differentiation. Relationship management helps identify the right customers through segmentation analysis, creates loyalty by employing targeted marketing and incentive campaigns and increases revenues per customer through personalized marketing. We believe next generation e-businesses are seeking Internet professional services firms that can provide all the services that enable clients to build profitable and longer-lasting e-relationships. We believe we are well positioned to benefit from this market opportunity because of our ability to help clients establish long term, stronger and more profitable customer relationships, instead of simply acquiring customers on an individual transaction basis. We believe the following elements of our solution distinguish us as a leading provider of Internet professional services: . our development and use of proprietary measurement tools, which we refer to as eRMetrics, to help evaluate the effectiveness of an e-business; . our ability to offer specific e-Relationship service offerings following our eRMetrics evaluation; . our use of reusable frameworks and tools and geographically dispersed delivery centers to increase speed of execution and quality of the solution; . our use of integrated, multi-disciplinary client teams organized on a regional basis; and . our extensive technology expertise, which stems from our 10 year history of implementing complex technology solutions. Our objective is to become the leading provider of e-relationships services. Our strategy to achieve this goal is to: . use our performance centers to develop new service offerings; . enhance and capitalize on eRMetrics; . target new industries; . continue to build our brand; . attract and retain highly qualified professionals; and . continue to develop industry relationships. We were incorporated in 1990 in Delaware under the name NexGen SI, Inc. and changed our name to Nexgenix, Inc. on October 27, 1999. As of December 31, 1999, we had 260 billable employees. We have 22 offices located across the United States in California, Florida, Georgia, Illinois, New Jersey, New York, North Carolina, Pennsylvania and Texas, and one international office located in India. Our principal executive office is located at 30 Corporate Park Plaza, Suite 410, Irvine, California 92606 and our telephone number is (949) 476-4097. Our web site is located at www.nexgenix.com. The information on our web site is not part of this prospectus. The Offering Common stock offered by us.......... shares Common stock to be outstanding after this offering................ shares, or shares if the underwriters exercise their over- allotment option in full. We will not receive any of the proceeds from the sale of the shares by the selling stockholders. Over-allotment option by selling stockholders....................... shares Use of proceeds..................... For general corporate purposes, including repayment of debt, working capital and capital improvements. Nasdaq National Market symbol....... NXGN Risk Factors........................ See "Risk Factors" beginning on page 4 for a discussion of factors you should carefully consider before deciding to buy our common stock. ------------ The number of shares of our common stock that will be outstanding after this offering is based on the number of shares of common stock outstanding on December 31, 1999. This number excludes 9,200,000 shares of common stock reserved for issuance under our stock option plans, of which options to purchase 6,405,614 shares were outstanding on December 31, 1999 at a weighted average exercise price of $0.52 per share. Unless otherwise indicated, all information in this prospectus (other than information in the consolidated financial statements): . reflects the automatic conversion of all outstanding shares of our preferred stock into a total of 8,313,728 shares of our common stock upon the closing of this offering; and . assumes no exercise of the underwriters' over-allotment option. "Nexgenix" and the Nexgenix logo are our trademarks or service marks. Other trademarks appearing in this prospectus are the property of their respective owners, including us. Summary Consolidated Financial Data (in thousands, except per share data) The following presents our summary consolidated financial data and has been derived from our audited consolidated financial statements for the three-year period ended June 30, 1999, and from our unaudited interim consolidated financial statements for the six-month periods ended December 31, 1998 and 1999, all of which are included elsewhere in this prospectus. The pro forma as adjusted column in the consolidated balance sheet data below gives effect to the automatic conversion of all outstanding shares of our preferred stock upon the closing of this offering, the issuance and sale of shares of our common stock in this offering and our receipt of the net proceeds from the sale of these shares after deducting underwriting discounts and commissions and estimated offering expenses payable by us. You should read the following summary financial information along with "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes, each of which is included elsewhere in this prospectus. <TABLE> <CAPTION> Six-month period ended Year ended June 30, December 31, ------------------------- ---------------- 1997 1998 1999 1998 1999 ------- ------- ------- ------- ------- (unaudited) <S> <C> <C> <C> <C> <C> Statement of Operations Data: Revenues.......................... $16,790 $23,421 $32,376 $16,562 $20,715 ------- ------- ------- ------- ------- Operating expenses: Professional services (exclusive of $16 reported below as stock- based compensation)............ 9,568 15,155 17,771 9,569 11,369 Selling, general and administrative (exclusive of $1,768 reported below as stock- based compensation)............ 6,542 7,972 14,663 6,473 12,405 Stock based compensation........ -- -- -- -- 1,784 ------- ------- ------- ------- ------- Total operating expenses...... 16,110 23,127 32,434 16,042 25,558 ------- ------- ------- ------- ------- Income (loss) from operations..... 680 294 (58) 520 (4,843) Other income (expenses)........... (49) (64) (146) (77) (28) Income tax (provision) benefit.... (219) (122) 54 (117) 1,169 ------- ------- ------- ------- ------- Income (loss) before minority interest......................... $ 412 $ 108 $ (150) $ 326 $(3,702) ======= ======= ======= ======= ======= Net income (loss)................. $ 362 $ 106 $ (171) $ 334 $(3,652) Accretion of preferred stock discount and dividends........... -- -- -- -- (350) ------- ------- ------- ------- ------- Net income (loss) available to common stockholders.............. $ 362 $ 106 $ (171) $ 334 $(4,002) ======= ======= ======= ======= ======= Net income (loss) per common share: Basic........................... $ 0.01 $ 0.00 $ (0.01) $ 0.01 $ (0.15) ======= ======= ======= ======= ======= Diluted......................... $ 0.01 $ 0.00 $ (0.01) $ 0.01 $ (0.15) ======= ======= ======= ======= ======= Shares used in computation: Basic........................... 28,000 28,000 28,000 28,000 27,386 ======= ======= ======= ======= ======= Diluted......................... 29,344 29,344 28,000 29,344 27,386 ======= ======= ======= ======= ======= Pro forma basic and diluted net loss per common share............ $ (0.12) ======= Shares used in pro forma basic and diluted net loss per common share............................ 30,003 ======= </TABLE> <TABLE> <CAPTION> As of December 31, 1999 ------------------------ Pro forma Actual as adjusted ------- ----------- <S> <C> <C> Consolidated Balance Sheet Data: Cash and cash equivalents........................ $11,758 $ Working capital.................................. 13,914 Total assets..................................... 23,172 Mandatorily redeemable preferred stock........... 20,663 Long-term debt, net of current portion........... 557 Total stockholders' equity (deficit)............. (4,902) </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001099517_port_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001099517_port_prospectus_summary.txt
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+SUMMARY You should read this entire document carefully, including the consolidated financial statements and the notes to the consolidated financial statements. Our Conversion and Stock Offering Cambridgeport Mutual Holding Company is converting to a stock holding company, Port Financial Corp., which will own all of the stock of Cambridgeport Bank after the conversion. As part of the conversion, Port Financial Corp. is offering shares of its common stock in a subscription offering on a priority basis to qualifying depositors, tax-qualified employee benefit plans such as an employee stock ownership plan (ESOP), and employees, officers, directors, trustees and corporators of Cambridgeport Bank or Cambridgeport Mutual Holding Company (Management). Any remaining stock not subscribed for in the subscription offering will be offered in a community offering with preference given to natural persons residing in our local community which consists of the cities and towns of Cambridge, Arlington, Bedford, Belmont, Boston, Braintree, Brookline, Burlington, Canton, Dedham, Dover, Framingham, Lexington, Lincoln, Medford, Milton, Natick, Needham, Newton, Norwood, Quincy, Randolph, Sherbourne, Somerville, Stoneham, Walpole, Waltham, Watertown, Wayland, Wellesley, Weston, Westwood, Weymouth, Winchester and Woburn, and possibly to the general public. The Companies Cambridgeport Bank We are a Massachusetts-chartered stock savings bank that is currently a wholly owned subsidiary of Cambridgeport Mutual Holding Company, a Massachusetts-chartered mutual holding company. We were formed in 1853 and reorganized into a mutual holding company structure without a stock offering in 1994. Our mission in to be a profitable community-oriented provider of banking products and services to individuals and businesses, including residential and commercial mortgages, consumer loans, commercial loans, and a variety of deposit instruments. We operate through ten full service banking offices located in the cities and towns in and around Cambridge, Massachusetts. Six of these banking offices are located in Middlesex County and four are located in Norfolk County. In addition, we operate a Telebanking Center located in Cambridge, Massachusetts to service loan and deposit customers, including opening checking and deposit accounts and accepting loan applications. Cambridgeport Mutual Holding Company Cambridgeport Mutual Holding Company is a Massachusetts-chartered mutual holding company formed in 1994 in connection with Cambridgeport Bank's reorganization. Cambridgeport Mutual Holding Company is governed by its Board of Corporators and its Board of Trustees. On a consolidated basis at September 30, 1999, Cambridgeport Mutual Holding Company had unaudited total assets of approximately $721.8 million and deposits and retained earnings of approximately $596.1 million and $78.6 million, respectively. Under the conversion, Cambridgeport Mutual Holding Company will convert to stock form and be renamed Port Financial Corp. Port Financial Corp. Port Financial Corp. will be the stock holding company for Cambridgeport Bank after the conversion. Port Financial Corp. has not engaged in any business to date. The following are highlights of Cambridgeport Bank's operating strategy: . Community Banking and Customer Service We are a service-oriented bank providing retail and business customers with value driven products and services designed to create long term, profitable relationships. Our focus is to develop core banking relationships by securing checking accounts and then to provide customers appropriate loan and other services from among a full array of banking products. In this regard, we offer residential mortgage loans, commercial real estate loans and business banking loans and services to customers throughout eastern Massachusetts. . Residential Lending Our strategy is to offer customers a broad range of mortgage products including adjustable and fixed rate loans and "jumbo" loan products, which are loans with balances that exceed Federal National Association (Fannie Mae) guidelines. Our Telebanking Center is equipped with a special toll free number for loan customers and handles information requests and accepts mortgage applications over the telephone. We also offer home equity lines of credit to complement our mortgage services. . Commercial Real Estate Lending Beginning in 1994, we developed an expertise in commercial real estate lending throughout the Boston metropolitan area as a means to increase the yield on our loan portfolio and diversify our assets. Currently the commercial real estate portfolio represents a significant portion of our lending activity. . Business Banking We plan to increase our emphasis on business banking and to utilize our existing branch franchise to provide expanded commercial deposit products and services to business customers. Our service-oriented relationship banking philosophy is targeted to capture business customers disenfranchised by recent bank mergers. We currently offer traditional lending products such as lines of credit and term loans and we will be expanding our services in 2000 by introducing cash management services, sweep accounts and business banking using the internet, which will benefit our customers and increase our non-interest income. . Business Diversification Strategies We plan to become a broader provider of financial services, enhancing our ability to attract and retain both retail and commercial customers and diversifying our income stream. We intend to increase both our customer base and our share of customers' financial services business by offering a diverse range of products and services that formerly were offered only by insurance companies and securities brokerage firms. . Expanded Delivery Systems To serve our existing customers better and to complement our expanded product line and presence in the business banking market, we will increase the channels through which we deliver products and services. The increased use of alternative delivery channels has simplified and reduced the costs of financial transactions for consumers, businesses and financial institutions. In addition to conducting financial transactions at branch offices, customers are increasingly using ATMs and online banking. In response to these trends, we offer 24 hour telebanking services which provide our customers with continuous access to their accounts through the use of a touch tone telephone. We plan to introduce home and business internet banking products which will give our retail and business customers access to their accounts and the ability to conduct account transactions such as online bill payment and electronic funds transfers. . Asset Quality We have a commitment to conservative loan underwriting policies and investing in high grade assets. As a result of such practices and a relatively stable economy, at September 30, 1999, we had $507,000 in non-performing assets, or loans with principal payments 90 days past due. . Interest Rate Strategy We seek to maintain an acceptable balance between maximizing potential yield and limiting exposure to changing interest rates. To reduce the risk that our earnings will be impacted if interest rates change, we: . sell most of our fixed rate one- to four-family mortgage loans rather than retain them in our loan portfolio; . emphasize investments with adjustable rates and/or short and intermediate-term maturities of less than ten years; . structure most of our commercial real estate loans with adjustable rates; and . offer home equity credit lines with variable rates indexed to the prime rate. Reasons for the Conversion The conversion is intended to provide an additional source of capital not available to us as a mutual institution. Funds raised in the offering will allow Cambridgeport Bank to serve better the needs of our local community through: . increased lending especially to support the growth of business banking; . opportunistic branch expansion; . diversifying the products that we offer; . increasing delivery systems, including the introduction of internet banking; and . marketing to customers disenfranchised by recent consolidations in the local banking market. The conversion is also intended to provide an additional source of capital to Port Financial Corp. in order to allow it to: . finance acquisitions of other financial institutions or other businesses related to banking; . pay dividends to stockholders; and . repurchase shares of our common stock. Additionally, after the conversion, Port Financial Corp. will have the ability to issue additional shares of common stock to raise capital or to support mergers or acquisitions, although no additional capital issuance and no mergers or acquisitions are planned or contemplated at the present time. In addition, stock ownership by officers and other employees, through stock-based benefit plans, has proven to be an effective performance incentive and an effective means of attracting and retaining qualified personnel. We also believe that the conversion will provide local customers and other residents with an opportunity to become equity owners of Port Financial Corp., and thereby participate in possible stock price appreciation and cash dividends. This is consistent with our objective of being a locally-owned financial institution. We believe that, through expanded local stock ownership, current customers and non- customers who purchase common stock will seek to enhance the financial success of Cambridgeport Bank through consolidation of their banking business and increased referrals to Cambridgeport Bank. After considering the advantages and risks of the conversion, as well as applicable fiduciary duties, the Board of Trustees of Cambridgeport Mutual Holding Company and the Board of Directors of Cambridgeport Bank unanimously approved the conversion as being in the best interests of Cambridgeport Bank and Cambridgeport Mutual Holding Company, our depositors and the communities that we serve. Terms of the Offering We are offering between 6,800,000 and 9,200,000 shares of common stock of Port Financial Corp. to qualifying depositors, to tax-qualified employee plans, to employees, officers, directors, trustees and corporators of Cambridgeport Bank or Cambridgeport Mutual Holding Company, and possibly to the public. The maximum number of shares that we sell in the offering may increase by 15% to 10,580,000 shares as a result of regulatory considerations or changes in financial markets. Unless the number of shares to be issued is increased to more than 10,580,000 or decreased below 6,800,000 you will not have the opportunity to change or cancel your stock order. The offering price is $10.00 per share. Ryan, Beck & Co., Inc., our financial and marketing advisor in connection with the conversion, will use its best efforts to assist us in selling our stock. Persons Who May Order Stock in the Offering We are offering the shares of common stock of Port Financial Corp. in what we call a "subscription offering" in the order of priority listed below: (1) Depositors with accounts at Cambridgeport Bank with aggregate balances of at least $50 on July 31, 1998; (2) Depositors with accounts at Cambridgeport Bank with aggregate balances of at least $50 on September 30, 1999; (3) The tax-qualified employee plans of Cambridgeport Bank (including the ESOP), which will provide retirement benefits to our employees; and (4) Employees, officers, directors, trustees and corporators of Cambridgeport Bank or Cambridgeport Mutual Holding Company at the time of the offering who do not already have subscription rights in the above priorities. The shares of common stock not purchased in the subscription offering will be offered in what we call a "direct community offering," on a priority basis, with preference to the natural persons residing within our Community Reinvestment Act assessment area which consist of cities and towns of Cambridge, Arlington, Bedford, Belmont, Boston, Braintree, Brookline, Burlington, Canton, Dedham, Dover, Framingham, Lexington, Lincoln, Medford, Milton, Natick, Needham, Newton, Norwood, Quincy, Randolph, Sherbourne, Somerville, Stoneham, Walpole, Waltham, Watertown, Wayland, Wellesley, Weston, Westwood, Weymouth, Winchester and Woburn. Shares may also be offered to the general public. We also may offer shares of common stock not purchased in the subscription offering or the direct community offering to the public in a "syndicated community offering." We have the right to accept or reject orders received in the direct community offering and the syndicated community offering at our sole discretion. How We Determined the Offering Range and the $10.00 Price Per Share The offering range is based on an independent appraisal of the common stock to be offered. RP Financial, LC., an appraisal firm experienced in appraisals of banks and financial institutions, has estimated as of January 7, 2000 that the market value of the common stock to be between $68,000,000 and $92,000,000. This results in an offering of between 6,800,000 and 9,200,000 shares of common stock at an offering price of $10.00 per share. RP Financial's estimate of our market value was based in part upon our financial condition and results of operations and the effect of the additional capital raised in this offering. RP Financial's independent appraisal will be updated before we complete our conversion. The $10.00 price per share was selected primarily because $10.00 is the price per share most commonly used in stock offerings involving conversions of savings institutions. See "Pro Forma Data." Limits on Your Purchase of the Common Stock Your orders for common stock will be limited in the following ways: (1) the minimum order is 25 shares or $250; (2) in the subscription offering, the maximum amount that an individual may purchase is $250,000; (3) in the direct community offering and in the syndicated community offering, the maximum amount that an individual may purchase is $250,000; (4) in all categories of the offering combined, the total amount that an individual may purchase, acting together with others, is $1,000,000; and (5) if we receive orders for a greater number of shares than we are offering, then we will allocate the available shares that we issue based upon deposit balances. This may result in your receiving a smaller number of shares than you ordered. See "The Conversion and The Offering." We may increase the $250,000 and $1,000,000 purchase limitations at anytime. The ESOP is authorized to purchase up to 8% of the shares issued without regard to these purchase limitations. For additional information on these purchase limitations see "The Conversion and The Offering - Limitations on Common Stock Purchases." How You May Pay for Your Shares In the subscription offering and the direct community offering you may pay for your shares only by: (1) personal check, bank check or money order; or (2) authorizing us to withdraw money from your non-check writing deposit accounts maintained with Cambridgeport Bank. You May Not Sell or Transfer Your Subscription Rights If you order stock in the subscription offering, you will be required to state that you are purchasing the stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights. We intend to take legal action, including reporting persons to federal or state regulatory agencies, against anyone who we believe sells or gives away their subscription rights. We will not accept your order if we have reason to believe that you sold or transferred your subscription rights. Deadline for Orders of Common Stock If you wish to purchase shares, a properly completed stock order form, together with payment for the shares, must be received by the Stock Information Center or our main office no later than 10:00 a.m., Massachusetts time, on [ ], 2000, unless we extend this deadline. You must submit your order forms by mail, overnight courier or by dropping off your order at our stock information center at our main office. Termination of the Offering The subscription offering will terminate at 10:00 a.m., Massachusetts time, on [ ], 2000. We expect that the community offering will terminate at the same time. We may extend this expiration date without notice to you, until [ ], 2000, unless regulators approve a later date. If the subscription offering and/or community offering is extended beyond [ ], 2000, we will be required to resolicit subscriptions before proceeding with the offering. All further extensions, in the aggregate, may not last beyond [ ]. Steps We May Take If We Do Not Receive Orders for the Minimum Number of Shares If we do not receive orders for at least 6,800,000 shares of common stock, we may take several steps in order to sell the minimum number of shares in the offering range. Specifically, we may increase the $250,000 and $1,000,000 purchase limitations to a maximum of $4,600,000, which is 5% of the maximum of the offering range. In addition, we may seek regulatory approval to extend the offering beyond the [ ], 2000 expiration date, provided that any such extension will require us to resolicit subscriptions received in the offering. See "The Conversion and The Offering - Limitations on Common Stock Purchases." Market for the Common Stock We have applied to have the common stock of Port Financial Corp. quoted on the Nasdaq National Market System under the symbol "PORT". Ryan, Beck & Co. intends to make a market in the common stock but it is under no obligation to do so. See "Market for Common Stock." How We Intend to Use the Proceeds We Raise from the Offering Assuming we sell 9,200,000 shares in the offering, we intend to distribute the net proceeds from the offering as follows: . $44,866,000 will be contributed to Cambridgeport Bank; . $7,360,000 will be loaned to the ESOP to fund its purchase of common stock; and . $37,506,000 will be retained by Port Financial Corp. Port Financial Corp. intends to use the net proceeds retained from the offering to invest in securities, to finance the possible acquisition of other financial institutions and other businesses that are related to banking, to pay dividends, to repurchase common stock or for other general corporate purposes. The Bank may use the proceeds it receives for the expansion of its lending activities, especially to support the emphasis of business banking; opportunistic branch expansion; expanding delivery systems, including the introduction of internet banking; and capitalization on opportunities to serve customers disenfranchised by recent consolidations in the local banking market. Our Policy Regarding Dividends Although no decision has been made yet regarding the payment of dividends, we will consider a policy of paying quarterly cash dividends on the common stock beginning in the first full quarter after we complete the conversion. We do not guarantee that we will pay dividends, or that we will not reduce or eliminate dividends in future periods. Our Directors, Officers and Employees Will Have Additional Compensation and Benefit Programs After the Conversion We are adding new benefit plans for our officers and employees at no cost to them, including an Employee Stock Ownership Plan [ESOP], an ESOP Restoration Plan and a Long-Term Incentive Plan. We also plan to add a stock option plan and management recognition plan after the conversion. These new benefit plans and the employment agreements, change of control agreements and directors' emeritus consultation plan already in place may increase our future costs of compensating our directors and employees, thereby reducing our earnings. Additionally, stockholders will experience a reduction in ownership interest if newly issued shares are used to fund stock options and restricted stock awards. See "Risk Factors--The implementation of stock-based benefits will increase our future compensation expense, reduce our earning and cause dilution" and "Management--Employment Agreements,--Change of Control Agreements,--Benefit Plans, and --Future Stock Benefit Plans."
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+SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE RISK FACTORS SECTION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS BEFORE MAKING AN INVESTMENT DECISION. OUR BUSINESS VantageMed is a provider of healthcare information systems and services distributed to over 10,000 customer sites through a national network of 15 regional offices. Our suite of software products and services automates administrative, financial, clinical and management functions for physicians, dentists, other healthcare providers and provider organizations. We provide our customers with: - Windows-based software products that are enabled for easy access to the Internet; - computer hardware and supplies; - product maintenance and support services; and - electronic processing of patient statements and insurance claims, commonly referred to as electronic transaction services. Since July 1997, we have acquired 26 healthcare information systems companies in order to build a national distribution network and increase our customer base. Historically, approximately 50% of our revenues have been generated from the sale of software and systems, with the remaining 50% of our revenues generated from customer support and electronic services. Initially, our products were sold primarily to physicians. Through our acquisitions, we have expanded our customer base to include dentists, behavioral health providers and provider organizations. Currently, in excess of 80% of our total revenues come from sales of products and services to existing customers. We believe these recurring revenues are a strong indicator of customer satisfaction and future revenue potential. We are leveraging our distribution network to increase our revenues through the sale of our Windows-based products and services. We have enhanced several of our products and services to provide easy access to the Internet and to facilitate the transfer of information over the Internet. These enhanced products and services are referred to throughout this prospectus as "Internet-enabled" products and services. Our installed customer base, software products and services, and Internet strategy have positioned us to address the information needs of healthcare providers through the implementation and continued development of our integrated technology solution. OUR INDUSTRY The healthcare industry's information technology infrastructure is characterized by numerous, incompatible and, in many cases, old or outdated software systems known as legacy products. Healthcare information is often communicated via paper, fax, and telephone, resulting in errors and delays. We believe that these inefficiencies lead to wasteful spending and have contributed to rising healthcare costs. In order to compete effectively in today's complex healthcare environment, healthcare providers need advanced integrated systems that streamline access to information and improve the flow of information among healthcare participants. The Internet has created a new means for healthcare providers and provider organizations to interact directly with patients and other healthcare participants. As a result, we believe that healthcare providers can benefit from technology solutions that integrate Internet functionality with software systems that support the management of healthcare practices. We are continuing to expand the Internet capabilities of our existing Windows-based products and developing new Windows-based, Internet-enabled products to increase our customers' access to information and their ability to communicate with numerous other healthcare participants. Since our customers are already utilizing our software products and services, we are a logical candidate to provide them with the next generation of Internet-based technology solutions. We believe both the healthcare information systems industry and the market it serves are highly fragmented, with over 500 geographically dispersed healthcare information systems companies serving healthcare providers throughout the U.S., primarily on a regional basis. This market dynamic presents significant opportunities to grow our business through strategic business combinations. OUR STRATEGY Our objective is to expand our market share through acquisitions and internal growth and to increase our recurring revenues in order to strengthen our position as a supplier of healthcare information systems and services. We intend to increase our revenues and market share through growth strategies that focus on: - offering Windows-based, Internet-enabled products and services; - enabling our customers to move from legacy products to our Windows-based, Internet-enabled products; - strengthening our national distribution network through the selective acquisition of established healthcare information systems companies in attractive regional markets; - cross-selling our products and services to existing customers and pursuing opportunities with new customers; and - forming strategic Internet affiliations to develop a full range of services for clinical, administrative and electronic commerce functions in order to become our customers' primary Internet interface. THE OFFERING <TABLE> <S> <C> Common stock offered by VantageMed........... 3,000,000 shares Common stock outstanding after this offering................................... 8,655,116 shares Use of proceeds by VantageMed................ Repayment of approximately $3.5 million of indebtedness, working capital and general corporate purposes, including financing of possible future acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol....... VMDC </TABLE> The number of shares outstanding after the offering is based upon shares outstanding as of December 31, 1999 and assumes an initial public offering price of $11.00 per share and a closing date of January 31, 2000 for purposes of determining the number of shares we will issue upon conversion of the promissory notes in the principal amount of $3.0 million issued to Friedli Corporate Finance. The number of shares outstanding excludes, as of December 31, 1999, 451,878 shares of common stock available for issuance under our 1998 Stock Option/Stock Issuance Plan, 548,122 shares of common stock issuable upon exercise of outstanding stock options, 46,666 shares of common stock issuable upon the exercise of outstanding warrants and 83,784 shares of common stock issuable on the conversion of promissory notes convertible at the election of the holders. ASSUMPTIONS GENERALLY APPLICABLE TO THIS PROSPECTUS Unless we specifically indicate otherwise, this prospectus assumes that: - the underwriters have not exercised their option to purchase additional shares of common stock; - the one-for-three reverse stock split which became effective on February 7, 2000 has occurred; - all shares of convertible preferred stock have been automatically converted into shares of common stock; and - a promissory note in the principal amount of $3.0 million issued to Friedli Corporate Finance has been automatically converted into shares of common stock. VantageMed, DentalMate, Ridgemark, eMCee, Therapist Helper, ChartKeeper and MedSoft are trademarks of VantageMed Corporation or its wholly-subsidiaries. This prospectus also contains other trade names and trademarks of VantageMed and of other companies. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The following summary financial data should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the notes thereto included elsewhere in this prospectus. The pro forma consolidated statement of operations data shown below presents our consolidated results of operations as if our acquisitions had occurred as of January 1, 1998. This pro forma information is not necessarily indicative of what would have occurred had the acquisitions been made as of such periods, nor is it indicative of future results of operations. Common equivalent shares from preferred stock, stock options, warrants and convertible notes have been excluded from computation (A) of pro forma diluted earnings (loss) per share in all loss periods, as their effect is antidilutive. Computation (B) is the same as (A), except that it includes shares of preferred stock converted to common shares as if the shares had been converted on the dates of their issuance. Series A-1 and B preferred shares convert into 0.33386 and 1.09 shares of common stock, respectively, assuming an offering price of $11 per share. <TABLE> <CAPTION> YEAR ENDED NINE MONTHS ENDED DECEMBER 31, 1998 SEPTEMBER 30, 1999 --------------------- --------------------- ACTUAL PRO FORMA ACTUAL PRO FORMA -------- ---------- -------- ---------- <S> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Software and systems...................................... $ 3,943 $ 10,053 $ 5,751 $ 9,654 Customer support and electronic services.................. 5,430 13,335 6,709 10,857 ------- -------- ------- -------- Total revenues.......................................... 9,373 23,388 12,460 20,511 Operating Costs and Expenses: Software and systems...................................... 2,146 4,464 2,603 3,803 Customer support and electronic services.................. 3,606 7,354 4,462 5,956 Selling, general and administrative....................... 4,706 13,174 6,213 11,107 Product development....................................... 1,500 3,330 2,797 3,543 Depreciation and amortization............................. 1,472 5,943 2,600 4,539 ------- -------- ------- -------- Total operating costs and expenses...................... 13,430 34,265 18,675 28,948 ------- -------- ------- -------- Loss From Operations........................................ (4,057) (10,877) (6,215) (8,437) Interest expense, net....................................... (207) (274) (419) (484) ------- -------- ------- -------- Loss Before Income Taxes.................................... (4,264) (11,151) (6,634) (8,921) ------- -------- ------- -------- Benefit for income taxes.................................... (343) (1,387) (3,284) (3,652) ------- -------- ------- -------- Net loss.................................................... $(3,921) $ (9,764) $(3,350) $ (5,269) ======= ======== ======= ======== Basic and diluted loss per share (A)........................ $ (1.82) $ (3.22) $ (1.17) $ (1.54) Weighted-average shares--basic and diluted (A).............. 2,158 3,032 2,874 3,415 Basic and diluted loss per share (B)........................ $ (2.96) $ (1.28) Weighted-average shares--basic and diluted (B).............. 3,301 4,141 </TABLE> The consolidated balance sheet data below presents information as if our acquisitions that occurred after September 30, 1999 occurred as of September 30, 1999. The pro forma balance sheet data has been adjusted to record the October 1999 issuance of a $3.0 million convertible promissory note with a beneficial conversion feature in the amount of $3.0 million. The pro forma as adjusted balance sheet data has been adjusted to reflect conversion of all outstanding shares of preferred stock into 730,334 shares of common stock upon completion of this offering, conversion of the $3.0 million promissory note plus accrued interest into 555,856 shares of common stock upon completion of this offering, and receipt of the estimated net proceeds from the sale of the 3,000,000 shares of common stock offered by us at an assumed offering price of $11.00 per share, after deducting the estimated underwriting discounts and commissions and the estimated offering expenses. The pro forma as adjusted balance sheet data also recognizes the beneficial conversion feature of the $3.0 million promissory note and records the effect of a warrant to purchase 13,333 shares of common stock at 60% of the initial price of shares of our common stock sold in this offering. <TABLE> <CAPTION> AS OF SEPTEMBER 30, 1999 ---------------------------------- PRO FORMA AS ACTUAL PRO FORMA ADJUSTED -------- ---------- ---------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Net working capital......................................... $(4,170) $ (2,099) $ 27,261 Total assets................................................ 30,715 46,341 72,701 Long-term debt, net of current portion...................... 2,243 3,095 3,095 Series A-1 preferred stock.................................. 2 2 -- Series B preferred stock.................................... -- -- -- Accumulated deficit......................................... (7,612) (7,612) (10,642) Total stockholders' equity.................................. 20,456 30,511 59,871 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001099589_bolt-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001099589_bolt-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights the most important features of this offering and the information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk Factors" beginning on page 6. BOLT, INC. Our Web site, Bolt.com, is a leading online destination that targets 15 to 20 year old teens. We feature teen-focused content generated primarily by our members, a platform for teens to interact with other teens and proprietary tools that allow our members to personalize their user experience. Our site enables members to create and actively participate in what we believe is one of the most teen-relevant environments found anywhere. We have designed Bolt.com to facilitate communication among teens, to empower them to express their opinions and ideas as a community and to shop in an online store that our members help create. While the growth of our site to date has been driven largely by word-of-mouth, we are also building brand awareness through relationships with America Online and MSN Hotmail that drive traffic to our site and with Ford Motor Company and AT&T that expand the services we provide; these relationships are described in further detail below. As a result, according to our database, our member base has grown to more than 1.9 million as of February 29, 2000 from about 340,000 as of December 1, 1998. According to Media Metrix, in December 1999, Bolt.com was the "stickiest" site for 12 to 17 year old Internet users of all the sites on the Internet, as measured by minutes per user per month. According to Nielsen I/PRO, we had over 196 million page views and over 6.6 million user sessions in January 2000 as compared to 28 million page views and 1.4 million user sessions in December 1998. Bolt.com generates revenues through advertising and sponsorship fees including fees paid for our expertise in managing other companies' relationships with teens, product sales and transactional fees, and we expect to generate revenues from market research fees in the future. Advertisers and retailers have increasingly sought access to a rapidly growing teen audience. The growth in the number of 10 to 24 year olds is expected to outpace the growth in the general population by nearly 10% over the next ten years. Advertisers have turned to the Internet to reach teens because teens have adopted this medium as a primary form of entertainment, communication and information gathering. We believe there is a significant opportunity to advertise and sell products and services to teens online because teens possess substantial disposable income. Based on third-party market research data, we believe that online commerce sales to 13 to 17 year olds will increase to $1.4 billion in 2002 from $161 million in 1999. Bolt.com is a site that empowers our teen audience to express opinions and ideas regarding the ever-changing issues and trends that impact their lives. Our members communicate on our site and provide content for our site using their chosen Bolt Member IDs. This ensures anonymity and encourages frank and open discussion. Our members provide most of the content of Bolt.com, unlike other sites where the non-teen staff or third parties generate most of the content. Because our teen audience determines significant portions of Bolt.com's content, we believe we deliver a continually relevant experience. Our more than 1.9 million members can also use our personalized tools, such as email, instant messaging, personal diaries and personal calendars, to help them manage their lives, making the site more valuable to them the more they use it. In addition, in September 1999, we launched the online Bolt Store, which offers more than 450 products based on what our members have told us they want to buy. We expect this to be an increasingly important aspect of our business. We have developed a site that we believe is highly desirable to advertisers for the following reasons: - Audience. We provide a highly-targeted, growing, and demographically-focused audience. - Size. We have a large and active user base, as demonstrated by the over 196 million page views and over 6.6 million user sessions in January 2000. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (Subject to Completion) Issued March 2, 2000 3,700,000 Shares BOLT.COM LOGO COMMON STOCK ------------------------ Bolt, Inc. is offering shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $10 and $12 per share. ------------------------ We have applied to list our common stock on the Nasdaq National Market under the symbol "BOLT." ------------------------ INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 6. ------------------------ PRICE $ A SHARE ------------------------ <TABLE> <CAPTION> UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS PUBLIC COMMISSIONS TO BOLT -------- ------------- -------- <S> <C> <C> <C> Per Share................................................... $ $ $ Total....................................................... $ $ $ </TABLE> Bolt has granted the underwriters the right to purchase up to an additional 555,000 shares of common stock to cover over-allotments. The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on , 2000. ------------------------ MORGAN STANLEY DEAN WITTER THOMAS WEISEL PARTNERS LLC J. P. MORGAN & CO. , 2000 - Contextual Relevance and Targeting. Marketers can target their messages in a way that is particularly relevant to the interests of our members. - Member Loyalty. According to Media Metrix, in December 1999, Bolt.com was the stickiest site for 12 to 17 year old Internet users of all the sites on the Internet, as measured by minutes per user per month. Our goal is to be the leading media company focusing on teens. We intend to achieve this goal by continuing to build brand awareness, continuing to develop and extend our relationships with strategic partners and advertisers, enhancing our online features, expanding our e-commerce offerings and expanding our international presence. We currently have strategic relationships that are designed to increase our brand awareness and drive significant new teen traffic to our site. Our partners include: - America Online. We are the only teen community partner for the AOL branded service's teen message boards and teen chat rooms. We provide management of AOL's teen community tools, including its teen message boards and teen chat rooms. In return, we receive brand exposure because we have established and we maintain a linked, customized, user-generated content environment at aol.bolt.com, and all teen-focused message boards, chat rooms, and teen community areas within the AOL service, including aol.bolt.com, are Bolt branded. - MSN Hotmail. We provide teen content for the MSN Hotmail WebCourier Newsletter Program. The Bolt newsletter is delivered twice per week to over 2.2 million Hotmail users who elected to receive our content when they registered with Hotmail. We also advertise on the MSN Shopping Channel, MSN Hotmail and the MSN service targeted to teens. - Ford Motor Company. On November 17, 1999, we entered into an agreement with Ford Motor Company to develop Cars.bolt.com, a co-branded destination on our site, which we launched in January 2000. Cars.bolt.com features auto-related content geared towards teens. Cars.bolt.com provides features like personalized classified ads, an automotive dictionary, teen-focused buyer guides, information on how to buy or lease a car and an interactive driver's education seminar. - AT&T Wireless Initiative. On January 28, 2000, we entered into an agreement with AT&T Wireless Services, Inc. Under the agreement, we will promote AT&T's wireless services on Bolt.com and solicit and refer subscribers of these services to AT&T. Using these services, members will be able to access "BoltEverywhere" -- the wireless version of several of Bolt's proprietary applications such as Bolt Notes and Tagbooks. Also, members that purchase AT&T wireless services through Bolt.com will have BoltEverywhere as a default mobile channel on their wireless phones. See "Business -- Bolt.com Strategic Relationships" on page 38 for a more complete description of these agreements. ------------------------ We were incorporated in Delaware on August 15, 1996 as Concrete Media, Inc. On February 16, 1999, we changed our name to Bolt Media, Inc., and on November 17, 1999, we changed our name to Bolt, Inc. Our principal executive offices are located at 304 Hudson Street, 7th Floor, New York, New York 10013 and our telephone number at that address is (212) 620-5900. Our World Wide Web site address is www.bolt.com. The information on our Web site is not incorporated by reference into this prospectus. [DESCRIPTION OF GRAPHICS] The inside front cover displays a large text box in the lower right-hand corner with the language "2000:" followed by the Bolt logo. Above the logo appears a series of text boxes, which read from top to bottom: "1969: Woodstock", "1978: the roller rink", "1983: MTV", and "1991: the mall". The graphics consist of a two-page fold-out containing a sample of our website homepage, quotes from several registered users, or members, samples of click-through pages and applications available on our website and other statistics concerning our website. The left column of the fold-out has three quotes from members of our site which state: "I have met a lotta people here. It's da bomb diggity shish boom snap"; "On Bolt, we can be open and honest with each other, give advice, and learn more about people all over" and "I would much rather come to Bolt than watch TV". The left column also contains a sample of a user profile page which is accessed from our homepage containing certain information regarding a member. Additionally, the left column contains a sample of the homepage for our e-commerce store, which can be accessed from our homepage. The graphic to the right of the left column at the top of the fold-out contains our logo as well as the phrase "Bolt empowers teens to express their opinions, meet new friends, and find the products and services they're interested in." It also contains the following phrases: "Metrics: 1.5 million registered members, 141 million page views per month", 6.1 million users sessions per month". The lower left corner of the fold-out contains a sample view of the Bolt homepage, which features links to the various components of the site ("members", "notes", "email", and "homepages" among others), as well as the "Quote of the Day", "Hot Stuff from the Store!", "Daily Poll", "About Face", and "New Features" from the sample view displayed homepage. To the right of the view of the homepage is a sample of our "About Face" page, which is accessed from our homepage containing question and answer series presented by Neutrogena, a sample of the "integrated sponsorships" section of the site. Above the graphic of the "About Face" page an example of "member- created content" appears, featuring a link from the "Style & Looks" page. Above the "Style & Looks" page appears a quote from a member; "The first day I was on Bolt I made three friends in about an hour. That normally doesn't happen for me because I'm a shy person." THE OFFERING Common stock offered in this offering.................... 3,700,000 shares Common stock to be outstanding after this offering........... 24,881,985 shares Use of proceeds............... To expand our marketing and promotion activities, to launch international operations, to expand and upgrade our technology infrastructure, to expand our staff and for working capital and general corporate purposes, including possible acquisitions of or investments in complementary businesses, products or technologies. See "Use of Proceeds" on page 16 for a more detailed discussion of our anticipated use of the proceeds from this offering. Proposed Nasdaq National Market symbol................. BOLT The information above includes 1,442,803 shares to be issued pursuant to anti-dilution rights upon the conversion of the Series C preferred stock based on an assumed initial public offering price of $11.00 per share. These shares are in addition to the shares to be issued on a 1.25-for-1 basis upon conversion of the Series C preferred stock without regard to these anti-dilution rights. If the initial public offering price exceeds $11.00 per share, fewer shares will be issued pursuant to these anti-dilution rights upon the conversion of the Series C preferred stock. If the initial public offering price exceeds $14.35 per share, none of these additional shares will be issued. The information above does not include: - 3,508,077 shares of common stock issuable upon the exercise of stock options outstanding as of February 28, 2000 at a weighted average exercise price of $1.75 per share; and - 150,709 shares of common stock issuable upon the exercise of warrants outstanding as of February 28, 2000 at a weighted average exercise price of $8.20 per share. ------------------------ Unless otherwise indicated, all information contained in this prospectus: - Assumes that the underwriters do not exercise their over-allotment option; - Reflects a 4-for-1 split of our common stock on November 17, 1999; - Reflects a 1.25-for-1 split of our common stock on February 29, 2000; and - Reflects the mandatory conversion of all of our outstanding shares of preferred stock into a total of 16,911,142 shares of common stock upon completion of this offering, including the 1,442,803 additional shares to be issued pursuant to anti-dilution rights upon the conversion of the Series C preferred stock based on an assumed initial public offering price of $11.00 per share. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (Subject to Completion) Issued March 2, 2000 3,700,000 Shares BOLT.COM LOGO COMMON STOCK ------------------------ Bolt, Inc. is offering shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $10 and $12 per share. ------------------------ We have applied to list our common stock on the Nasdaq National Market under the symbol "BOLT." ------------------------ INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 6. ------------------------ PRICE $ A SHARE ------------------------ <TABLE> <CAPTION> UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS PUBLIC COMMISSIONS TO BOLT -------- ------------- -------- <S> <C> <C> <C> Per Share................................................... $ $ $ Total....................................................... $ $ $ </TABLE> Bolt has granted the underwriters the right to purchase up to an additional 555,000 shares of common stock to cover over-allotments. The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on , 2000. ------------------------ MORGAN STANLEY DEAN WITTER THOMAS WEISEL PARTNERS LLC J. P. MORGAN & CO. , 2000 SUMMARY FINANCIAL DATA The following table summarizes our financial data for the period from August 15, 1996 (date of inception) through December 31, 1996 and for the years ended December 31, 1997, 1998 and 1999, which have been derived from our financial statements and the notes to those financial statements. The summary balance sheet data as of December 31, 1999 are presented (1) on an actual basis, (2) on a pro forma basis to give effect to: - our sale of 418,060 shares of our Series D Redeemable Convertible Preferred Stock for $17.94 per share on February 29, 2000, and - the mandatory conversion of all of our outstanding preferred stock into a total of 16,911,142 shares of common stock upon the completion of this offering, including the 1,442,803 additional shares to be issued pursuant to anti-dilution rights upon the conversion of the Series C preferred stock based on an assumed initial public offering price of $11.00 per share, and (3) on a pro forma basis as adjusted to give effect to the receipt of the estimated proceeds from our sale of 3,700,000 shares of common stock in this offering at an assumed initial public offering price of $11.00 per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. For a more detailed explanation of these financial data, see "Selected Financial Data" on page 20, "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 21 and our financial statements and the notes to those financial statements beginning on page F-1 of this prospectus. <TABLE> <CAPTION> PERIOD FROM AUGUST 15, 1996 (DATE OF INCEPTION) THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, -------------------------------------- 1996 1997 1998 1999 ------------------- ---- ---- ---- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Bolt revenues....................................... $ -- $ 32 $ 404 $ 4,362 Revenues related to the Girls On and custom publishing divisions.............................. 19 446 2,281 38 ---------- ---------- ---------- ---------- Total revenues............................. 19 478 2,685 4,400 ---------- ---------- ---------- ---------- Costs and expenses: Production and technology......................... 15 810 1,138 3,526 E-commerce........................................ -- -- -- 1,119 Sales and marketing............................... 1 287 630 9,084 General and administrative........................ 51 549 1,327 1,766 Depreciation and amortization..................... 4 25 75 536 Stock-based compensation.......................... -- -- -- 3,007 ---------- ---------- ---------- ---------- Total costs and expenses................... 71 1,671 3,170 19,038 ---------- ---------- ---------- ---------- Loss from operations................................ (52) (1,193) (485) (14,638) Other income (expense): Interest income................................... -- 42 7 418 Interest expense.................................. -- -- (60) (133) Gain on sale of Girls On.......................... -- -- -- 1,436 ---------- ---------- ---------- ---------- Net loss............................................ $ (52) $ (1,151) $ (538) $ (12,917) ========== ========== ========== ========== Basic loss per share................................ $ (.01) $ (.21) $ (.10) $ (3.43) ========== ========== ========== ========== Weighted average number of shares of common stock outstanding used in computing basic loss per share............................................. 5,500,000 5,500,000 5,461,063 3,765,080 ========== ========== ========== ========== </TABLE> [INSIDE FRONT COVER AND GATEFOLD] <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ---------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- -------------- ----------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $37,148 $44,648 $ 81,499 Working capital............................................. 32,606 40,106 76,957 Total assets................................................ 44,534 52,034 88,885 Capital lease obligations, less current portion............. 514 514 514 Redeemable convertible preferred stock...................... 46,712 -- -- Stockholders' equity (deficiency)........................... (9,850) 44,362 81,213 </TABLE> We calculate loss per common share by dividing the loss attributable to common shares by the weighted average number of shares outstanding. We do not include outstanding common stock options, outstanding warrants or the conversion of our outstanding convertible preferred stock in the loss per common share calculation as their effect is anti-dilutive. The Series B and Series C preferred stock have been recorded at their redemption values, net of offering costs, and have been classified as redeemable convertible preferred stock on our balance sheet as of December 31, 1999.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001099595_onsite_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001099595_onsite_prospectus_summary.txt
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+PROSPECTUS SUMMARY The information in this prospectus assumes that the initial public offering price will be $12.00 per share, the midpoint of the range disclosed on the cover of this prospectus. Unless otherwise indicated, all references in this prospectus to the number of outstanding shares of our common stock: give effect to the conversion of our outstanding Series A, Series C and Series D preferred stock into common stock on a one-for-one basis and the conversion of our outstanding Series B preferred stock into common stock based on the assumed initial public offering price, both of which will occur immediately prior to the completion of this offering; and do not include the number of shares that we will issue if the underwriters exercise their over-allotment option. OUR BUSINESS We provide comprehensive communications solutions for small and medium-sized business customers in multi-tenant commercial office buildings. We offer a suite of data, voice and enhanced services delivered through in-building broadband communications networks that we own and operate. Our offerings include data networking, high speed Internet access, local and long distance voice services and enhanced services. We began offering services in the New York metropolitan area in September 1997. To date, we have contracts with real estate owners that will enable us, upon the execution of property-specific access agreements, to offer our services in buildings representing approximately 362 million rentable square feet of commercial office space. We currently have property-specific access agreements for approximately 120 million rentable square feet of commercial office space, with 118 buildings in service representing approximately 26.5 million rentable square feet. We are also developing a nationwide data network and have constructed 10 data network access points to serve 22 metropolitan areas. We intend to offer our services in up to approximately 50 metropolitan areas over the next two to three years. OUR STRATEGY Our objective is to be the complete communications solutions provider to small and medium-sized business customers in multi-tenant commercial office buildings within our markets. To achieve our objective, we: Offer a bundled package of communications services, including data, voice and enhanced services, billed in a single invoice for customer convenience. Establish lasting relationships with our customers by delivering responsive, high quality service and customer care on a personalized basis. Expect to expand our service offerings and create new communications channels, such as business web portals, to address our customers' evolving communications and Internet needs. Partner with real estate owners to facilitate our access to buildings and penetration of our target customer base. To implement these strategies, we have designed and deployed a high speed communications network architecture that addresses the current and expected communications needs of our small and medium-sized business customers. We invest in, own and control network facilities only when we believe that such investment provides competitive cost and performance advantages. We believe our network architecture is: Flexible -- we offer high speed data services through either copper or fiber-based technologies based on the individual needs of our customers. Cost effective -- we achieve economies of scale by aggregating demand from many smaller business customers within a commercial office building while creating operating efficiencies through our building-centric service approach. Capital efficient -- we first deploy copper-based digital subscriber line equipment within our served buildings and allow for demand-driven deployment of more expensive fiber-optic equipment as customer usage of high-bandwidth communications services increases. Scalable -- our in-building broadband network enables us to increase a customer's bandwidth easily and efficiently. OUR SOLUTION Our solution offers a number of advantages to small and medium-sized business customers, including: comprehensive service offerings designed to meet the current and expected communications services needs of small and medium-sized business customers. competitively priced services. dedicated building communications managers who offer individualized and customized service. rapid and easy provisioning. responsive customer service available 24 hours a day, 365 days a year. additional enhanced communications services. - ------------------- As a result of our development activities and the deployment of our networks, from inception to date, we have incurred operating losses, net losses and negative operating cash flow. As of December 31, 1999, we had an accumulated deficit of approximately $40.7 million. We currently intend to increase substantially our capital expenditures and operating expenses in an effort to expand rapidly our infrastructure and network services on a nationwide basis as well as to develop and integrate our billing and collections, operational support and administrative systems. We expect to incur substantial operating losses, net losses and negative cash flow during our network buildout and initial penetration into each new market we enter. We expect these losses and negative cash flows to continue for at least the next several years. THE OFFERING <TABLE> <S> <C> Common stock offered by OnSite Access................ 16,670,000 shares. Common stock to be outstanding after this offering... 62,875,657 shares. Proposed Nasdaq National Market symbol............... 'OSAX' </TABLE> In the above table and throughout this prospectus, unless otherwise indicated, the number of shares of common stock that will be outstanding after this offering is based on 10,708,245 shares outstanding as of December 31, 1999, plus: 16,670,000 shares of common stock to be sold by us in this offering; and 35,497,412 shares of common stock to be issued upon the conversion of all of our preferred stock. The number of shares of common stock to be outstanding after this offering excludes: 22,863,170 shares of common stock that we have agreed to issue to real estate owners and agents upon the exercise of warrants having an exercise price of $2.36 per share, which warrants vest upon the execution of, or the occurrence of events relating to the execution of, property-specific access agreements; up to 1,275,718 shares of common stock that may be issued to real estate owners and agents upon the exercise of warrants that we may agree to issue having an exercise price of no less than $2.36 per share; 800,000 shares of restricted common stock sold to officers under our stock incentive plan at $5.13 per share in January 2000; 3,177,500 shares of common stock issuable upon the exercise of outstanding options at a weighted average exercise price of $2.40; 103,375 shares of common stock reserved for issuance under our stock incentive plan; and up to 611,112 shares of common stock that may be issued to our Canadian joint venture partner upon the conversion of its joint venture interests. - ------------------- Our principal executive office is located at 1372 Broadway, New York, New York 10018, and our telephone number is (212) 324-1500. We maintain a site on the World Wide Web at www.onsiteaccess.com; HOWEVER, THE INFORMATION FOUND ON OUR WEBSITE IS NOT A PART OF THIS PROSPECTUS. OnSite Access, the OnSite Access logo, The First Foot and Building-Centric are service marks owned by our company. We have filed for registration of these service marks.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001099613_md2patient_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001099613_md2patient_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. It is not complete and may not contain all of the information that you should consider before investing in our stock. MD2PATIENT.COM We were incorporated in July 1999 to develop and operate a web site to provide access to selected on-line healthcare content and services and to develop customized web pages for our physician subscribers. Our web site became operational during January 2000 for the limited purpose of accepting subscriptions for our proposed Internet services. Based on our current development schedule, we believe that during the second quarter of 2000, our web site will include customized web pages for our physician subscribers, links to other healthcare web sites or clinical information databases and other general healthcare information. Our focus will be to enhance the relationship between our physician subscribers and their patients by providing on our web site content and services available on the Internet that will be useful in educating patients, improving administrative efficiency and improving communications between physicians, or their staff, and patients. The selection of our content and services will be made by panels of physicians, organized by specialty, that we will form to help us select content and services. Although we have not yet formed any of these physician panels, we believe that at least four will be formed during the first and second quarters of 2000. Our staff will regularly survey the Internet to identify and recommend to our physician panels new content and service offerings that may be of benefit to our physician subscribers, their staff and their patients. Our physician panels will be responsible for reviewing the content and services recommended by our staff and selecting content and services for inclusion on or through our web site. We will regularly upgrade our site as our physician panels select new offerings. We are a development stage company and, to date, we have not generated any revenues. Since our inception we have incurred losses and negative cash flow and, as of December 31, 1999, we had an accumulated deficit of $650,469. We expect negative cash flow and operating losses to continue for the foreseeable future, and we may never become profitable. We expect to incur costs of no more than $1,000,000 associated with the initial development and launch of our web site. Through December 31, 1999, we had incurred approximately $260,000 of such costs. The market for the Internet services and products we intend to offer is intensely competitive. Since the commercialization of the Internet in the early 1990s, the number of web sites on the Internet competing for users' attention has proliferated with no substantial barriers to entry, and we expect that competition will continue to intensify. As of March 1, 2000, we had 1,015 subscribers to our web site, of which 139 received their subscriptions for free in connection with their participation as investors in a November 1999 private placement of our Series A Convertible Preferred Stock. THE OFFERING Series B Convertible Preferred Stock. We are offering a minimum of 5,000,000 shares and a maximum of 34,000,000 shares of our Series B Convertible Preferred Stock at a price of $1.00 per share. The shares of our Series B Convertible Preferred Stock will only be offered and sold to physicians (or the physician groups in which they practice) who have subscribed for our web services. This is the initial public offering of our Series B Convertible Preferred Stock. This offering will terminate on the earlier to occur of (a) the sale of all of the shares offered hereby, (b) December 31, 2000 or (c) our decision to terminate the offering. The offering price of $1.00 per share was determined arbitrarily by us and does not necessarily reflect the value of a share of Series B Convertible Preferred Stock. Series A Convertible Preferred Stock. We are also offering up to 2,000,000 shares of our Series A Convertible Preferred Stock at a price of $1.00 per share. The shares of our Series A Convertible Preferred Stock will only be offered and sold to physicians who have subscribed to our web services and that we determine have played or will play an important role in the development or market acceptance of our web site, including members of our physician panels, members of our Physician Advisory Board and physicians with whom we enter into endorsement relationships. This is the initial public offering of our Series A Convertible Preferred Stock. The offering of Series A Convertible Preferred Stock will terminate at the same time the offering of Series B Convertible Preferred Stock terminates. The offering price of $1.00 per share was determined arbitrarily by us and does not necessarily reflect the value of a share of Series A Convertible Preferred Stock. Warrants to Purchase Series A Convertible Preferred Stock. We are also offering Warrants to purchase up to 4,000,000 shares of our Series A Convertible Preferred Stock. The Warrants will only be offered to (a) physicians who have subscribed to our web services and that we determine have played an important role in the development and market acceptance of our web site, including members of our physician panels, members of our Physician Advisory Board and physicians with whom we enter into endorsement relationships (b) physician subscribers who refer other physicians who subscribe to our web services, and (c) employees and independent contractors who assist us in marketing our web services. Each Warrant will entitle the holder thereof to purchase the number of shares of Series A Convertible Preferred Stock underlying the Warrant for $1.00 per share. Offerees will not pay any consideration in connection with our grant or their receipt of the Warrants. The Warrants are exercisable at any time beginning on the date of issuance and ending on the third anniversary of their date of issuance. Our Board of Directors will have the discretion to determine the offerees of the Warrants and, if appropriate, adopt specific criteria for determining the number of underlying shares for which each Warrant is exercisable. This is neither a solicitation of an offer to buy nor an offer to sell our securities to persons in the following jurisdictions: Florida, Guam, Idaho, Iowa, Maryland, Minnesota, Montana, Nebraska, New Mexico, Puerto Rico, South Dakota, Vermont, West Virginia, and Wyoming. Persons in these jurisdictions are not authorized to purchase any of our securities under this prospectus. Investing in this offering involves a high degree of risk. See "Risk Factors" beginning on page 7. THE SHARES OFFERED Shares of Series B Convertible Preferred Stock automatically convert into shares of Series A Convertible Preferred Stock on a one-for-one basis at the rate of one-third per year on each anniversary of their issuance. Shares of Series A Convertible Preferred Stock are convertible at any time at the election of the holder into shares of Common Stock on a one-for-one basis. If we complete an underwritten public offering of our Common Stock in which at least $10,000,000 worth of our Common Stock is sold at a price of not less than $1.00 per share, then: (1) our Series B Convertible Preferred Stock will automatically become convertible into shares of our Common Stock on the same terms that it is presently convertible into shares of our Series A Convertible Preferred Stock; and (2) all outstanding shares of our Series A Convertible Preferred Stock will automatically convert into shares of our Common Stock on a one-for-one basis. Shares of Series A and Series B Convertible Preferred Stock may not be transferred or re-sold without our prior written consent. Shares of Series A or Series B Convertible Preferred Stock do not have any voting rights, except with respect to a proposed merger or sale of the company and except as otherwise required by law. Upon the liquidation, dissolution or winding up of md2patient.com, holders of shares of Series A or Series B Convertible Preferred Stock sold in this offering would be entitled to be paid, before any payment to holders of our Common Stock, an amount equal to $1.00 per share. These terms and all other material terms of the Series A and Series B Convertible Preferred Stock are described in greater detail under the heading "Description of Capital Stock" later in this prospectus. CONDITIONS OF THIS OFFERING This offering will terminate on the earlier to occur of the sale of all of the shares offered hereby or December 31, 2000. All payments for shares offered hereby will be deposited into an escrow account at SunTrust Bank until we receive payments for at least 5,000,000 shares of Series B Convertible Preferred Stock. If we do not receive payments for at least 5,000,000 shares of Series B Convertible Preferred Stock by December 31, 2000, we will terminate this offering and promptly return all payments together with interest, if any. Our officers and directors will not be able to purchase shares of Series B Convertible Preferred Stock in order to meet the minimum of 5,000,000 shares. USE OF PROCEEDS After deducting fees of WR Hambrecht and estimated offering expenses of $450,000, we expect to receive a minimum of (1) $4,150,000 in net proceeds from the offering of Series B Convertible Preferred Stock, (2) no proceeds from the offering of Series A Convertible Preferred Stock and (3) no proceeds from the offering of Warrants. We cannot assure you that we will receive any net proceeds in excess of these estimated minimums. We plan to use the proceeds from this offering for implementing and expanding the functionality of our web site and associated databases, enhancing our marketing and sales organizations, pursuing relationships with third party vendors of on-line content and services, and expanding our customer support functions. The potential uses of proceeds and the amounts allocated to each such use are subject to management's discretion. ------------------------- Our principal executive offices are located at 501 Corporate Centre Drive, Suite 200, Franklin, Tennessee 37067. Our telephone number is (615) 383-8400. Our Internet address is www.md2patient.com. We do not intend for information contained on or linked to our web site to be incorporated into this prospectus. In this prospectus, references to the "company," "md2patient.com," "we," "us," and "ours" refer to MD2patient, Inc.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001099827_ansell_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001099827_ansell_prospectus_summary.txt
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+PROSPECTUS SUMMARY This is a summary and does not contain all the information that may be important to you. You should read the more detailed information included elsewhere in this prospectus. Except as otherwise noted, the information contained in this prospectus assumes that the underwriters will not exercise the over-allotment option and that our reorganization has been completed. References to "Ansell Group" mean the businesses that are included in the Ansell segment data as historically reported by Pacific Dunlop Limited and that have been reorganized into Ansell. "Pacific Dunlop Group" refers to Pacific Dunlop Limited and its direct and indirect subsidiaries. We call those companies in the Pacific Dunlop Group that will own our shares after completion of this offering the "Pacific Dunlop Stockholders." Our fiscal year ends on June 30 of each year, so that references to fiscal 1999 and the like are to the year ended June 30 of the referenced year. All financial information presented in this prospectus is in U.S. dollars and is presented in accordance with U.S. GAAP. Certain market size information and other statements relating to our position relative to our competitors are not based entirely on published statistical data or information obtained from independent third parties, but reflect our best estimates. We have based these estimates on third party reports and on information obtained from our customers, competitors, distributors, trade and business organizations and associations and other contacts in our industry. ANSELL HEALTHCARE INCORPORATED We are a global leader in the design, development, manufacture and marketing of protective gloves and condoms. Our operations are organized into three business segments: - Professional Healthcare, which consists of medical examination and surgical gloves, - Occupational Healthcare, which consists of industrial and consumer gloves, and - Personal Healthcare, which consists of condoms. We compete in the worldwide protective glove and condom markets that we estimated to be $5.8 billion in 1998. We believe that we have the leading global market share in, and the broadest product range of, protective gloves serving the healthcare and occupational sectors of the protective barrier market. We also believe that we are one of the world's largest manufacturers and marketers of condoms. In fiscal 1999, we generated $738 million in net sales of which: - Professional Healthcare contributed 36%, - Occupational Healthcare contributed 51%, and - Personal Healthcare contributed 13%. In fiscal 1999, we sold products into more than 100 countries, including: - the Americas, which accounted for approximately 56% of our net sales, - Europe, which accounted for approximately 32% of our net sales, and - Asia/Pacific, which accounted for approximately 12% of our net sales. We are an innovator in the design and manufacture of protective gloves and condoms. In each of the past three years more than 15% of our sales have come from products that have been on the market for three years or less and that we have developed internally. We have been an active acquirer of businesses within the protective barrier products industry. We have pursued acquisitions to expand and augment our main product lines, provide additional distribution channels, add new technologies, enhance our manufacturing capabilities and enter new geographic markets. We are in the process of acquiring, for approximately $97.6 million, the medical glove business of Johnson & Johnson which will enable us to further our leadership position in the medical glove market The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED , 2000 PROSPECTUS 8,700,000 SHARES ANSELL HEALTHCARE INCORPORATED COMMON STOCK ---------------------- P.D. International Pty Ltd, a wholly owned indirect subsidiary of Pacific Dunlop Limited, is selling 8,700,000 shares of Ansell Healthcare Incorporated's common stock. This is the initial public offering of Ansell's common stock. Ansell will not receive any proceeds from the offering. We expect the public offering price to be between $ and $ per share. Currently, no public market exists for the shares. After pricing of the offering, we expect that the shares of common stock will trade on the New York Stock Exchange under the symbol "AHX." Prior to the offering, Pacific Dunlop Limited indirectly owned beneficially all of our common stock. Following the offering, Pacific Dunlop Limited will indirectly beneficially own at least 80% of our common stock. INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 6 OF THIS PROSPECTUS. ---------------------- <TABLE> <CAPTION> PER SHARE TOTAL --------- -------- <S> <C> <C> Public offering price........................... $ $ Underwriting discount........................... $ $ Proceeds, before expenses, to the selling stockholder................................... $ $ </TABLE> The underwriters may also purchase up to an additional 1,300,000 shares of common stock at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. Ansell will not receive any proceeds from the sale of the additional shares by P.D. International Pty Ltd. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The shares of common stock will be ready for delivery in New York, New York on or about , 2000. ---------------------- MERRILL LYNCH & CO. BEAR, STEARNS & CO. INC. J.P. MORGAN & CO. ---------------------- The date of this prospectus is , 2000 and obtain a modern manufacturing facility in Malaysia. This acquisition is expected to close in early 2000. We currently operate 31 facilities in 16 countries. The majority of our manufacturing facilities are located in Southeast Asia in close proximity to the rubber tree plantations that serve as our source of natural latex. Our products are made predominantly of natural and synthetic latex, which share common manufacturing processes and polymer dipping technologies. Our proprietary formulations and related manufacturing processes enable us to produce many different types and styles of high quality gloves and condoms. We maintain a flexible supply and logistics infrastructure that allows us to switch production between various products based on market demand. We believe that we are well positioned to capitalize on the technology transfer opportunities that exist among our three business segments, our recent acquisitions and our manufacturing facilities. We believe that we have some of the most recognizable brands in the protective glove and condom markets. Our medical gloves are marketed principally under the umbrella brands of Ansell and Ansell Perry. Specific product brands include: Gammex, Conform, Encore, NuTex, MicrOptic, X-AM, Synsation, DermaClean and Nitra-Touch. Through our pending acquisition of the medical glove business of Johnson & Johnson, we will acquire the brands Micro-Touch, Maxxus, Neutralon, Ultralon, Surgikos, Dispos-a-Glove and Allergard. Our Occupational Healthcare gloves are principally branded Ansell Edmont. Specific product brands include: Ansell, Nitrilite, Solvex, Hynit, Touch'n Tuff, Duratouch, Hycron, Golden Needles and Hyflex. Our condoms are principally branded LifeStyles, Mates, Manix, Contempo, Primex, Chekmate and KamaSutra, as well as Benetton, which is sold under license. We intend to be the leading designer, developer, manufacturer and marketer of protective gloves, condoms and other healthcare barrier products worldwide. In order to achieve our objective, we will continue to: - offer a broad range of products and brands, - focus on value added, higher margin branded products, - leverage research and development, - augment internal growth with acquisitions, - leverage manufacturing where we have a technological advantage, and - focus on customer service. RELATIONSHIP WITH THE PACIFIC DUNLOP GROUP We were founded in 1905 by Eric Ansell in Melbourne, Australia and acquired by Dunlop Australia Limited (now Pacific Dunlop Limited) in 1969. Pacific Dunlop Limited is a diversified multinational marketer and manufacturer of consumer and industrial products based in Australia. In 1997, we relocated our executive offices from Melbourne, Australia to Red Bank, New Jersey. Prior to this offering, Pacific Dunlop Limited indirectly owned 100% of our common stock. After completion of this offering, the Pacific Dunlop Stockholders will own at least 80% of our common stock. We believe that the Pacific Dunlop Stockholders will continue to exercise influence and control over us and currently intend to retain at least 80% of our common stock, so that we remain a part of the Pacific Dunlop Group's U.S. federal income tax consolidated group. CORPORATE INFORMATION We were incorporated in Delaware in 1999. Our executive offices are located at 200 Schulz Drive, Red Bank, New Jersey 07701 and our telephone number is (732)345-5400. We maintain websites at www.ansell.com, www.anselledmont.com, www.ansellhealthcare.com, www.safetynews.com/ansell and www.lifestyles.com. Information contained on our websites is not part of this prospectus. [Insert "Ansell Healthcare Incorporated" as graphics text] [Photos/Graphics: 1 medical glove; 1 glove from occupational healthcare segment; packaging for condoms]. THE OFFERING Common stock offered by the selling stockholder...................... 8,700,000 shares Common stock outstanding after the offering........................... 50,000,000 shares Use of proceeds.................... We will not receive any of the proceeds from the offering. Dividend policy.................... We do not anticipate paying any dividends in the foreseeable future. See "Dividend Policy." Risk factors....................... See "Risk Factors" and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock. New York Stock Exchange symbol..... "AHX" Ownership by the Pacific Dunlop Group.............................. We are currently wholly owned by companies in the Pacific Dunlop Group. After the offering, the Pacific Dunlop Stockholders will beneficially own at least 80% of our common stock. TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Prospectus Summary.......................................... 1 Risk Factors................................................ 6 Forward-Looking Statements.................................. 14 Capitalization.............................................. 15 The Reorganization.......................................... 16 Use of Proceeds............................................. 16 Dividend Policy............................................. 16 Selected Combined Financial Data............................ 17 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 20 Business.................................................... 34 Management.................................................. 55 Relationship and Agreements with the Pacific Dunlop Group... 61 Principal and Selling Stockholders.......................... 66 Description of Capital Stock................................ 66 Shares Eligible for Future Sale............................. 68 Certain United States Federal Tax Considerations for Non-United States Holders................................. 69 Underwriting................................................ 72 Legal Matters............................................... 75 Experts..................................................... 75 Where to Find More Information.............................. 75 Index to Financial Statements............................... F-1 Unaudited Pro Forma Condensed Combined Financial Statements................................................ P-1 </TABLE> ---------------------- You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date. SUMMARY COMBINED FINANCIAL DATA (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) The following table presents summary combined historical financial data of Ansell Group and pro forma financial data. The pro forma data set forth below is derived from the Unaudited Pro Forma Condensed Combined Financial Statements included elsewhere in this prospectus and gives effect to: - the reorganization of Ansell Group into Ansell Healthcare Incorporated, including the elimination of a substantial portion of debt owed to affiliates and cash, and - the sale of up to 20% of Ansell Healthcare Incorporated by the selling stockholder which results in the transfer of Ansell Group's U.S. tax net operating loss carryforwards to other members of the Pacific Dunlop Group. The reorganization and the offering have been recorded as if they had actually occurred on the first day of our 1999 and 2000 fiscal years with respect to the pro forma statement of operations data for the fiscal year ended June 30, 1999 and the six months ended December 31, 1999, respectively, and on December 31, 1999 with respect to pro forma balance sheet data. The pro forma data does not necessarily represent what our financial position or results of operations would have been had such transactions been completed on such dates, nor does it give effect to any events other than those discussed in the notes to the Unaudited Pro Forma Condensed Combined Financial Statements. The pro forma data also does not project our financial position or results of operations as of any future date or for any future period. You should also refer to the more complete information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations," the audited Combined Financial Statements of the Ansell Group and the Unaudited Pro Forma Condensed Combined Financial Statements which are included elsewhere in this prospectus. <TABLE> <CAPTION> FISCAL YEARS ENDED JUNE 30, ------------------------------------------------------------------ 1999 1995 1996 1997 1998 1999 PRO FORMA -------- -------- -------- -------- -------- ----------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales.......................... $534,366 $627,004 $669,749 $735,263 $738,382 $738,382 Cost of goods sold................. 354,514 413,965 452,529 487,785 483,464 483,464 -------- -------- -------- -------- -------- -------- Gross profit....................... 179,852 213,039 217,220 247,478 254,918 254,918 Costs and expenses: Selling, general and administrative.................. 93,652 127,035 125,760 138,501 149,621 150,621 Research and development.......... 3,426 4,550 10,435 8,824 8,315 8,315 Restructuring charges(1).......... -- 5,258 -- -- 1,298 1,298 Amortization of intangibles....... 4,344 5,412 5,877 7,127 8,786 8,786 -------- -------- -------- -------- -------- -------- Income from operations............. 78,430 70,784 75,148 93,026 86,898 85,898 Interest expense, net.............. 26,990 25,735 25,055 21,054 21,128 16,134 Foreign currency transactions and other, net........................ (78) (2,991) 1,216 (4,441) (1,284) (1,284) Income taxes....................... 10,758 8,998 10,026 9,202 10,967 12,485 Minority interests................. 3,795 3,111 3,085 4,343 3,468 3,468 -------- -------- -------- -------- -------- -------- Net income before cumulative effect of accounting change.............. 36,965 35,931 35,766 62,868 52,619 55,095 Cumulative effect of accounting change, net of income tax(2)...... 3,538 -- -- -- -- -- -------- -------- -------- -------- -------- -------- Net income......................... $33,427 $35,931 $35,766 $62,868 $52,619 $55,095 ======== ======== ======== ======== ======== ======== Pro forma basic and diluted net income per share(3)............... $1.10 ======== Weighted avg. shares outstanding(3).................... 50,000 OTHER DATA: EBITDA(4)......................... $94,174 $96,270 $96,528 $119,253 $115,228 $114,228 Adjustments(5).................... 7,255 5,378 4,301 (98) 3,482 2,184 -------- -------- -------- -------- -------- -------- Adjusted EBITDA(5)................ $101,429 $101,648 $100,829 $119,155 $118,710 $116,412 ======== ======== ======== ======== ======== ======== <CAPTION> SIX MONTHS ENDED DECEMBER 31, --------------------------------------- 1999 1998 1999 PRO FORMA ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales.......................... $358,708 $354,747 $354,747 Cost of goods sold................. 233,792 228,481 228,481 -------- -------- -------- Gross profit....................... 124,916 126,266 126,266 Costs and expenses: Selling, general and administrative.................. 72,254 79,621 80,121 Research and development.......... 4,176 4,488 4,488 Restructuring charges(1).......... 1,046 -- -- Amortization of intangibles....... 4,432 4,461 4,461 -------- -------- -------- Income from operations............. 42,738 37,696 37,196 Interest expense, net.............. 10,062 12,548 8,067 Foreign currency transactions and other, net........................ 498 (831) (831) Income taxes....................... 4,588 4,971 6,484 Minority interests................. 2,214 1,275 1,275 -------- -------- -------- Net income before cumulative effect of accounting change.............. 25,376 19,733 22,201 Cumulative effect of accounting change, net of income tax(2)...... -- -- -- -------- -------- -------- Net income......................... $25,376 $19,733 $22,201 ======== ======== ======== Pro forma basic and diluted net income per share(3)............... $0.44 ======== Weighted avg. shares outstanding(3).................... 50,000 OTHER DATA: EBITDA(4)......................... $54,742 $53,498 $52,998 Adjustments(5).................... 3,758 444 444 -------- -------- -------- Adjusted EBITDA(5)................ $58,500 $53,942 $53,442 ======== ======== ======== </TABLE> footnotes on following page SUMMARY COMBINED FINANCIAL DATA -- (CONTINUED) (IN THOUSANDS, UNLESS OTHERWISE STATED) <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 1999 --------------------------------------------------------- --------------------- 1995 1996 1997 1998 1999 ACTUAL PRO FORMA --------- --------- --------- --------- --------- --------- --------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents........... $54,838 $23,197 $28,242 $53,668 $59,132 $65,564 $10,000 Working capital (deficit)........... (141,626) (169,208) (166,884) (100,027) (146,394) (155,292) 19,565 Total assets........................ 770,172 718,672 817,962 755,923 836,394 860,755 805,191 Total debt(6)....................... 375,437 373,048 361,820 349,885 408,671 440,421 210,000 Total liabilities................... 506,088 491,823 532,464 460,836 525,740 558,106 340,385 Stockholder's equity(7)............. 264,083 218,129 275,529 287,779 301,530 292,192 454,349 </TABLE> - --------------- (1) Restructuring charges consist of the costs related to the closure of Ansell Group's balloon production and marketing operations in 1996, and the severance costs and the writedown to net realizable value of equipment related to the restructuring of two manufacturing facilities and certain administrative functions in 1999. (2) In 1995 the method of amortizing goodwill was changed to straight-line. (3) The weighted average shares are calculated assuming the shares outstanding immediately after the reorganization were outstanding for the entire period. For purposes of the pro forma net income per share data, net interest expense and income taxes are adjusted to reflect the elimination of $230.4 million of debt owed to affiliates and $55.6 million of cash balances as part of the reorganization, and $1.0 million and $0.5 million in additional costs were added to selling, general and administrative expenses for fiscal 1999 and the six months ended December 31, 1999, respectively. (4) "EBITDA" represents net income before net interest expense, income taxes, depreciation and amortization. EBITDA is not intended to represent and should not be considered more meaningful than, or an alternative to, net income, cash flow or other performance measures in accordance with generally accepted accounting principles. (5) Adjusted EBITDA represents "EBITDA" as defined in Note (4) before adjustments for restructuring charges; foreign currency transactions and other, net; minority interest and cumulative effect of accounting change, net of tax effect. Adjusted EBITDA is not intended to represent and should not be considered more meaningful than or an alternative to, net income, cash flow or other performance measures in accordance with generally accepted accounting principles. (6) Total debt includes revolving lines of credit due to affiliates, current portion of long-term debt and long-term debt. (7) Stockholder's equity consists of the combined net assets of the Ansell Group prior to the offering.
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+SUMMARY You should read the following summary together with the more detailed information about Delano and the common shares being sold in this offering, including our consolidated financial statements and the related notes appearing elsewhere in this prospectus. DELANO TECHNOLOGY CORPORATION We provide communications software that enables companies to rapidly develop and deploy applications that automate business processes and personalize and manage interactions over the internet with their existing and prospective customers, partners, suppliers and employees. These interactions, or e-business communications, consist of inbound and outbound communications through e-mail as well as communications through companies' web sites. Companies can use applications developed with our software to initiate, route, track, analyze, respond to and manage inbound and outbound e-business communications. These applications can include marketing campaigns, tracking and management of business leads, electronic surveys, personalized newsletters, inbound e-mail support, automated customer support, and procurement and inventory management. We are focusing our sales efforts on businesses in the financial services, technology, telecommunications, transportation, retail and marketing services industries, as well as other organizations engaged in, or focused on, business-to-business or business-to-consumer commercial opportunities using the internet. Where desirable, our professional services group can assist our clients' internal information technology, or IT, personnel to implement our products. To date, we have derived substantially all of our revenues from the sale of software product licenses. As the internet becomes an accepted channel for business-to-business and business-to-consumer interactions, businesses increasingly need an effective and reliable solution that enables them to manage the growing volume of inbound and outbound traffic associated with the increased use of the internet. For example, Jupiter Communications conducted a survey among 125 companies with content, consumer brands, travel, retail and financial services web sites and discovered that 51% of those sites either took longer than five days to reply to e-mail inquiries or failed to respond at all. International Data Corporation estimates that the worldwide customer relationship management application market will grow from $1.9 billion in 1998 to $11.0 billion by 2003, and the Direct Marketing Association estimates that interactive direct-marketing expenditures for the business market will increase from $379.7 million in 1998 to $3.2 billion by 2003. We believe our products provide the following principal benefits to our clients: - Enhanced Communications. Our products help a client develop and deploy e-business communications applications across many operational areas, enabling the client to respond rapidly and effectively to large volumes of e-mail and other communications over the internet. - Rapid Deployment. Our products are designed to enable our clients to develop a wide range of e-business communications applications in a matter of days or weeks. - Scalability. We have designed our products to reliably support multiple business processes and thousands of simultaneous e-business interactions. - Increased Revenue Opportunities and Reduced Operating Costs. Clients can generate revenues through our applications for marketing campaigns and for lead tracking and management. Our products enable clients to process large volumes of e-business communications automatically, using a reduced number of support and administrative personnel. Our objective is to establish our products as the leading e-business communications software. The following are the key elements of our strategy for achieving this objective: - extend our technology leadership by developing new and enhanced products, including products designed to manage higher volumes of communications, improve integration with our clients' existing IT infrastructures and further reduce the time required to develop and deploy e-business communications applications; PART I INFORMATION REQUIRED TO BE DELIVERED TO OFFEREES OR PURCHASERS EXPLANATORY NOTE This registration statement contains two forms of prospectus: (a) one prospectus to be used in connection with an offering in the United States and certain provinces of Canada and (b) one prospectus to be used in connection with a concurrent offering outside of the United States and Canada. The U.S./Canadian prospectus and the international prospectus are identical in all respects except for the front cover page and the "Underwriting" section. The front cover page and the "Underwriting" section of the international prospectus are included immediately before Part II of this registration statement. - increase our penetration of our target markets by, for example, introducing new products for particular application areas relevant to our target industries; - increase our presence worldwide beyond our historical focus on North America to take advantage of the growing worldwide demand for e-business communications applications; and - increase our distribution capabilities to enhance our market presence and leverage our sales and service resources by continuing to develop relationships with established third-party distribution companies, consulting organizations and software vendors. Potential investors should consider the following additional considerations before deciding to invest in our common shares. We first recorded revenues in the quarter ended June 30, 1999 and have a limited operating history, making it difficult to evaluate our business and prospects. Since our inception, we have incurred substantial operating losses in every quarter, resulting in an accumulated deficit of $6.2 million at December 31, 1999. We expect to continue to incur losses for the foreseeable future. To date, a significant portion of our total revenues has been derived from licenses of our Delano e-Business Interaction Suite and related services to a small number of clients. We expect that we will continue to be dependent upon a limited number of clients for a significant portion of our revenues in future periods. Broad and timely market acceptance of our products is critical to our future success. Because our market is rapidly changing and highly competitive, we may not be able to compete successfully against current or potential competitors. For a discussion of these and other risks relating to an investment in our common shares, see "Risk Factors." Delano was incorporated under the laws of the Province of Ontario on May 7, 1998. Our principal executive offices are located at 40 West Wilmot Street, Richmond Hill, Ontario, Canada L4B 1H8. Our telephone number at that location is (905) 764-5499. Our web site address is www.delanotech.com. The information contained on our web site is not part of this prospectus. CONCURRENT CANADIAN PRIVATE PLACEMENT On February 7, 2000, we entered into an agreement with Nortel Networks for the purchase by Nortel Networks of 500,000 common shares in a private placement in Canada. The common shares will be purchased at the initial public offering price. The closing of the private placement will occur at the same time as the closing of this offering. Nortel Networks has agreed not to dispose of or hedge any of its common shares for 180 days following the date of this prospectus without the consent of FleetBoston Robertson Stephens Inc. We will not pay any placement fees or commissions for the common shares sold in the private placement. The private placement is conditional upon the closing of this offering. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED FEBRUARY 8, 2000 [DELANO LOGO] 5,000,000 SHARES COMMON SHARES Delano Technology Corporation is offering 5,000,000 of its common shares. This is our initial public offering and no public market currently exists for our shares. The shares have been approved for quotation on the Nasdaq National Market under the symbol "DTEC." We anticipate that the initial public offering price will be between $14.00 and $16.00 per share. ------------------------------ INVESTING IN THE COMMON SHARES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ------------------------------ <TABLE> <CAPTION> PER SHARE TOTAL --------- ---------- <S> <C> <C> Public Offering Price....................................... $ $ Underwriting Commissions.................................... $ $ Proceeds to Delano.......................................... $ $ </TABLE> THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. We have granted the underwriters a 30-day option to purchase up to 750,000 additional common shares to cover over-allotments. ------------------------------ ROBERTSON STEPHENS U.S. BANCORP PIPER JAFFRAY THE DATE OF THIS PROSPECTUS IS , 2000 THE OFFERING Common shares offered by Delano......... 5,000,000 shares Common shares to be outstanding after the offering............................ 29,174,598 shares Use of proceeds......................... To fund sales and marketing activities, research and development, and working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol.................................. DTEC The number of common shares to be outstanding after the offering is based on common shares outstanding as of January 31, 2000. This number includes 18,174,598 common shares to be issued upon completion of this offering as the result of the conversion of our outstanding redeemable convertible special shares and exercises of our outstanding special warrants, as well as 500,000 common shares to be issued to Nortel Networks in a private placement in Canada. This number excludes (1) 3,749,850 common shares issuable upon exercise of options outstanding at January 31, 2000 under our stock option plan, which have a weighted average exercise price of $1.94 per share, and (2) 394,737 common shares issuable upon the exercise of a warrant outstanding at January 31, 2000, which has an exercise price of $0.44 per share. The underwriters have reserved up to 400,000 common shares for sale to Canada Life Assurance at the initial public offering price. Canada Life Assurance has not committed to purchasing these common shares. ------------------------------ Unless otherwise indicated, the information in this prospectus assumes: - the underwriters have not exercised the option granted by us to purchase additional shares in this offering; - the conversion of all outstanding redeemable convertible special shares into an aggregate of 11,684,212 common shares, which will occur automatically upon the completion of this offering; - the exercise of all outstanding special warrants to purchase an aggregate of 6,490,386 common shares in connection with the completion of this offering; - the issuance of 500,000 common shares to Nortel Networks in a private placement in Canada at the initial public offering price, which will close concurrently with this offering; and - the completion of a 3-for-2 split of our common shares, which was made effective by articles of amendment filed on February 7, 2000. See "Underwriting" and "Description of Share Capital." ------------------------------ Our financial statements are reported in United States dollars and have been prepared in accordance with accounting principles generally accepted in the United States. We express all dollar amounts in this prospectus in United States dollars, except where otherwise indicated. References to "$" are to United States dollars and references to "Cdn$" are to Canadian dollars. This prospectus contains a translation of some Canadian dollar amounts into U.S. dollars at specified exchange rates solely for your convenience. Unless otherwise indicated, these Canadian dollar amounts were translated into U.S. dollars based on Cdn$1.00 per US$0.6925, which was the inverse of the noon buying rate in The City of New York for cable transfers in Canadian dollars as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 1999. See "Exchange Rate Information." [DESCRIPTION OF INSIDE FRONT COVER ARTWORK] [The Delano logo appears in the upper left corner. To its right appear pictures of (1) a globe floating above two hands, (2) a computer screen and (3) a man and a woman shaking hands. Underneath the logo and pictures appear the following:] DELANO TECHNOLOGY CORPORATION is a provider of e-business communications software DELANO E-BUSINESS INTERACTION SUITE SALES - order confirmation - order fulfillment - e-coupons... MARKETING - lead tracking/management - customer registration - customer surveys - marketing campaigns - winback programs... SERVICE - customer support - personalized newsletters - event notification - personal page... OPERATIONS - destination reports - equipment dispatch reports - advanced shipping notices... HR - T&E reporting - resume tracking - suggestion box... FINANCE - aged A/R notification - credit management - invoice notification - investor relations... DELANO'S products and services enable e-businesses to use e-mail and the web to interact with their customers, partners, suppliers and employees. Our e-business communications software can be used by most operational areas within an organization, including finance, marketing, sales, service, operations and human resources. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following tables summarize the financial data of our business. The pro forma share information included in the consolidated statements of operations data has been computed as described in note 2 of the notes to consolidated financial statements included elsewhere in this prospectus. The pro forma column in the consolidated balance sheet data reflects the conversion of our outstanding redeemable convertible special shares into common shares and the exercise of our outstanding special warrants to acquire common shares, all in connection with the completion of this offering. The pro forma as adjusted column in the consolidated balance sheet data also reflects our sale of the 5,000,000 common shares offered by us at an assumed public offering price of $15.00 per share after deducting estimated underwriting commissions and estimated offering expenses, the private placement in Canada of 500,000 shares to Nortel Networks at an assumed price of $15.00 per share and the application of the estimated net proceeds as described under "Use of Proceeds." <TABLE> <CAPTION> PERIOD FROM MAY 7, PERIOD FROM MAY 7, NINE MONTHS 1998 (INCEPTION) TO 1998 (INCEPTION) TO ENDED MARCH 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1999 ------------------- ------------------- ----------------- <S> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues: Products................................ -- -- $ 5,061 Services................................ -- -- 296 Total revenues....................... -- -- 5,357 Gross profit.............................. -- -- 4,636 Loss from operations...................... $(1,702) $ (677) (4,600) Loss for the period applicable to common shares.................................. (1,790) (677) (4,458) Basic and diluted loss per common share... $ (2.40) $ (1.35) $ (1.85) ======= ======= ======= Shares used in computing basic and diluted loss per common share................... 746 503 2,415 ======= ======= ======= Pro forma basic and diluted loss per common share............................ $ (0.30) $ (0.24) ======= ======= Shares used in computing pro forma basic and diluted loss per common share....... 6,010 18,584 ======= ======= </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ----------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................ $11,940 $11,940 $88,390 Working capital.......................................... 12,187 12,187 88,637 Total assets............................................. 16,590 16,590 93,040 Long-term obligations, net of current portion............ 267 267 267 Redeemable convertible special shares.................... 3,851 -- -- Special warrants......................................... 14,703 -- -- Shareholders' equity (deficiency)........................ (5,458) 13,096 89,546 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001100112_realmed_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001100112_realmed_prospectus_summary.txt
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION ABOUT REALMED AND THE COMMON SHARES BEING SOLD IN THIS OFFERING IN OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS AND OUR RISK FACTORS BEGINNING ON PAGE 5. REALMED CORPORATION We own and operate the RealMed Network, an Internet-based, business-to-business healthcare connectivity solution for payers and providers. The RealMed Network fully automates the healthcare claims process from downloading patient information to resolving payments owed to providers. As a result, claims resolution can be achieved in seconds, at the point of care in an efficient and cost-effective manner. We believe that by re-engineering this process, we can reduce the processing cost per claim by more than 50% for both payers and providers. To accomplish process automation and claims resolution, we provide a secure, two-way link between the provider's desktop and the payer's legacy computer system. The RealMed Network directly accesses the payer's claims adjudication logic and customer database. Through our Network we provide: - eligibility verification; - deductible and co-payment status; - claims error correction requests; - claims submission; - auto adjudication; - delivery of an explanation of benefits, or EOB, at the point of care; and - certainty of payment for providers through electronic funds transfer. We have received initial commitments from five regionally dominant payers to integrate the RealMed Network with these payers in selected markets: (1) Anthem Insurance Companies, Inc; (2) WellPoint Health Networks, Inc.; (3) Blue Cross/Blue Shield of North Carolina; (4) CareFirst Blue Cross; and (5) Blue Cross/Blue Shield of Illinois. These payers collectively represent a potential market of 13 states and the District of Columbia, 22 million covered lives and 128 million annual private physician claims, which is approximately 13% of the U.S. private physician claims market. While the RealMed Network is presently built to resolve private physician claims, we are actively working to expand the functionality of the Network to include Medicare and pharmaceuticals claims processing. We estimate the Medicare annual claims market to be approximately 350 million physician claims and the pharmaceuticals annual claims market to be approximately 1.6 billion physician and Medicare claims. In total, approximately 4.7 billion healthcare claims were processed in the United States in 1999. In April 2000, we launched the RealMed Network with Anthem of Indiana. We are currently in various stages of integration with our other payers. We will earn transaction-based revenues from our payers, monthly subscription fees from our providers and revenues from other related opportunities. The U.S. healthcare system is generally regarded as expensive, fragmented and inefficient. The U.S. Healthcare Financing Administration, or HCFA, estimates that in 1999, healthcare expenditures represented approximately $1.2 trillion, or 13.3%, of the U.S. Gross Domestic Product. An estimated $210 billion, or 17.5%, of healthcare expenditures are related to administration. Included in administration are claims submission processing and settlement expenses. The settlement of healthcare claims is a complex process, involving detailed contractual, legal and regulatory relationships between payers, providers and patients. Payers and providers must also contend with continually evolving healthcare regulation. HCFA recently proposed new regulations under the Health Insurance Portability and Accountability Act, or HIPAA. These regulations would impose stringent privacy and security standards on the storage and transfer of healthcare information. Healthcare claims are typically submitted to a payer through a clearinghouse or other third party via electronic data interchange, or EDI, regular mail, or fax. These traditional processes are inefficient, time intensive and costly, due to their inability to automatically process and adjudicate claims. In addition to slow turnaround times for standard claims, the length of time and cost per claim increases significantly if any information submitted by a provider is incorrect, incomplete or inconsistent with the policies of a payer. The current sequential process of submitting, adjudicating and approving the payment of healthcare claims averages 42 days at an average cost of $19 per claim. We expect our Internet-based resolution platform to minimize the inefficiencies of EDI or paper-based claims settlement by re-engineering the claims process to streamline workflow and enable the resolution of claims in seconds. The RealMed Network also supports HIPAA compliance by tracking electronic transactions and assuring the security and privacy of patient information. We believe that the rate of adoption of the RealMed Network will be driven by our ability to significantly improve the efficiency of healthcare claims resolution and to ultimately reduce the cost of healthcare. As a result, we believe that the RealMed Network will improve the relationship between healthcare payers and providers. We believe that we provide our customers with the following benefits: - significantly reduced time and expense associated with processing claims; - accelerated payment and certainty of amounts owed; - improved accuracy and efficiency of data transfer; - enhanced management information; and - increased data security and reduced opportunity for fraud. Our goal is to become the industry standard for healthcare connectivity. A significant step toward achieving our goal will be executing the integration and roll-out process of the Network with our payers and providers. The key elements of our growth strategy include: - maximizing our market opportunities with our existing payers and providers; - increasing our market penetration on a national level by focusing first on leading regional payers and providers and then on national payers; - expanding technological leadership by increasing our portfolio of applications, services and product offerings; and - generating additional revenue opportunities using the RealMed Network. Our executive offices are located at 510 East 96th Street, Suite 400, Indianapolis, Indiana, 46240. Our telephone number is (317) 580-0658. Our corporate Internet address is WWW.REALMED.COM. The information contained on our website is not part of this prospectus. THE OFFERING <TABLE> <S> <C> Common shares offered by RealMed in this public offering................................................ shares Common shares offered directly by RealMed in a concurrent offering to certain payers.............................. shares Common shares to be outstanding after this offering....... shares Proposed Nasdaq National Market symbol.................... RMED Use of proceeds........................................... - integration with payers; - further research and development; - repayment of existing debt; and - other general corporate purposes. </TABLE> We are directly offering common shares to certain payers under a separate prospectus. These payers have signed letters of understanding to utilize the RealMed Network. Although our underwritten initial public offering is not contingent on our completing the offering to the payers, the completion of our offering to the payers is contingent on our completing our underwritten initial public offering. For convenience, we refer to these offerings throughout this prospectus collectively as this offering. The number of common shares to be outstanding immediately after the offering excludes 10,168,168 common shares reserved for issuance under our stock plans, of which 6,430,934 common shares were subject to outstanding options as of February 29, 2000, at a weighted average exercise price of $.887 per share. ASSUMPTIONS THAT APPLY TO THIS PROSPECTUS Unless we indicate otherwise, all information in this prospectus assumes the following: - completion of a for reverse stock split of common shares; - the conversion of $17.5 million under a line of credit entered into with The CIT Group, Inc. (the 1999 CIT Line of Credit) into a total of 19,531,250 common shares at an exercise price of $.896 per share; and - no exercise by the underwriters of their over-allotment option to purchase up to additional common shares. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) This summary historical consolidated financial information below was derived from the financial statements beginning on page F-1. This summary should be read together with the financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page . <TABLE> <CAPTION> PERIOD FROM NOVEMBER 13, 1995 (DATE OF INCEPTION) YEAR ENDED DECEMBER 31, THROUGH --------------------------------------- DECEMBER 31, 1997 1998 1999 1999 ----------- ----------- ----------- ------------ <S> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA(1): Revenues................................ $ 369 $ 509 $ 517 $ 1,395 Total costs and operating expenses...... 5,590 8,151 13,638 27,379 Income (loss) from operations........... (5,221) (7,642) (13,121) (25,984) Net income (loss)....................... (5,221) (7,709) (15,488) (28,418) Basic and diluted net income (loss) per common share(2)....................... $ (0.25) $ (0.24) $ (0.45) $ (0.99) Weighted-average shares outstanding used in computing basic and diluted net income (loss) per common share(2)..... 20,526,112 31,677,289 34,262,007 28,747,716 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 -------------------------- ACTUAL AS ADJUSTED(3) --------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 1,383 Working capital (deficit)................................... (289) Total assets................................................ 3,758 Subordinated line of credit to shareholder.................. 7,469 Other long-term obligations, net of current portion......... 4,993 Total shareholders' equity (deficit)........................ (10,765) </TABLE> - ------------------------ (1) As a result of completing this offering, we will record in our second quarter, - a charge of $ , or $ per share, in connection with a fee on a $10.0 million line of credit entered into with The CIT Group, Inc. in 2000 (the 2000 CIT Line of Credit); and - a non-cash charge of $2,001,953, or $ per share, in connection with the conversion of $17.5 million under the 1999 CIT Line of Credit into a total of 19,531,250 common shares at an exercise price of $.896 per share. (2) For a description of the computation of the net income (loss) per share, see note 11 of the notes to the audited financial statements. (3) As adjusted to reflect the full conversion of $17.5 million under the 1999 CIT Line of Credit into common shares and the sale by us of common shares offered by this prospectus and common shares offered in our concurrent offering, at the public offering price and after deducting the estimated underwriting discounts and commissions, the placement agent's fee and offering expenses payable by us.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001100338_omm-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001100338_omm-inc_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8dee723033d6e1f6847077d1e0d80e4f07549496
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001100338_omm-inc_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights selected information from this prospectus and does not contain all of the information that may be important to you. To understand the risks involved in your investment decision, you should carefully read this entire prospectus, including the risk factors and our financial statements, and the documents to which we refer you. OMM, INC. We make a family of all-optical, or photonic, switching subsystems that are used to direct communications traffic within and across fiber optic communications networks. Our products are based on a technology called MEMS, or micro-electromechanical systems, and consist of arrays of microscopic mirrors, lenses and other optical components that steer beams of light onto and off of specific optical fibers without converting pulses of light into electricity for processing and switching. By eliminating the need to convert light into electrical signals for processing and switching, our products enable optical network systems manufacturers to build scalable, cost-effective systems that address next generation switching needs in the long distance, metropolitan and local neighborhood segments of communication networks. As of September 30, 2000 we have sold our products to 14 customers, including Cisco Systems, Inc., Corvis Corporation, Nortel Networks Corporation, Siemens AG and Village Networks, Inc., each of which accounted for at least 10% of our revenue for the quarter ended September 30, 2000. We design our products to be manufacturable in high volume, and we continuously review and modify our product designs to ensure product quality, reliability and durability. In addition, we have implemented several proprietary automated and semi-automated manufacturing systems and processes to enhance our manufacturing yields and reliably produce higher volumes of products than generally possible using manual production techniques. We were incorporated in California in June 1997 and reincorporated in Delaware in March 2000. From our inception in June 1997 through April 2000, our operating activities were primarily devoted to research and development and we only recently began recognizing revenue on commercial shipments of our products in the quarter ended June 30, 2000. We recognized revenue of approximately $1.5 million and incurred a net loss of approximately $31.9 million for the nine months ended September 30, 2000. We used approximately $13.9 million in cash for operations over the same period, primarily as a result of our net losses in the period, partially offset by non-cash charges. Communications service providers have invested significant capital in optical networks to address the increasing demand for high capacity, or high bandwidth, communications networks, as well as demand for enhanced services and improved connection times. As demand for communications services increases, the need to efficiently move optical data streams onto, around and off of the network is becoming more acute. Switches, which control the movement of optical data streams on the network, are becoming an increasingly critical element of the communications infrastructure. Optical network switching systems in use today are based on a hybrid technology that converts optical signals into electrical signals for processing. After electronic processing, the information must be converted back into an optical data stream for transmission to its next destination. These complex devices are becoming increasingly challenged to support the growth in optical networks due to a number of limitations, including: - an inability to readily support additional signal wavelengths, increases in data rates or different transmission protocols as they are added to the network; - difficulty in provisioning new services, which involves establishing new services or adding or decreasing bandwidth to existing services; - difficulty in changing the configuration of the network; and - significant power, cooling and space requirements. These and other factors can add to costs or limit new revenue opportunities for communications service providers. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. Subject to Completion, Dated December 15, 2000. 9,000,000 Shares [OMM logo] COMMON STOCK ------------------ OMM, Inc. is offering shares of its common stock. Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $10.00 and $12.00 per share. We have applied to list our common stock on The Nasdaq Stock Market's National Market under the symbol "OMMI". The underwriters have an option to purchase a maximum of 1,350,000 additional shares to cover over-allotments of shares. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 5. <TABLE> <CAPTION> UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS OMM -------- ------------- ----------- <S> <C> <C> <C> Per Share............................................ $ $ $ Total................................................ $ $ $ </TABLE> Delivery of the shares of common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON CHASE H&Q CIBC WORLD MARKETS DAIN RAUSCHER WESSELS The date of this prospectus is , 2000. OMM was established to address these challenges by developing a family of products that eliminate the need to convert optical signals into electrical signals before switching the signals. Our family of all-optical switching subsystems enable optical network systems manufacturers to design and build switching systems that can switch optical data streams without regard to the format and sequence in which information is transmitted and exchanged, rate at which data is transmitted or the wavelength associated with a signal. Our products enable optical network systems manufacturers to deliver systems to communications service providers that lower their total cost of ownership and simplify the process of installing and modifying communications services. Our objective is to be the leading supplier of highly scalable and reliable photonic switching subsystems that are integrated into products built by optical network systems manufacturers. Key elements of our strategy to attain this goal are to: - extend our leadership position in supplying all-optical switching subsystems; - leverage our automation capabilities; - broaden our product portfolio; - design products for manufacturability; - focus exclusively on subsystems; and - develop and enhance strategic relationships with customers. Our principal offices are located at 9410 Carroll Park Drive, San Diego, California 92121. Our telephone number is (858) 362-2800, and our website is http://www.omminc.com. We do not intend the information found on our website, nor information contained on any website linked to it, to constitute a part of this prospectus. [INSIDE COVER ART] THE OFFERING Common stock offered.................. 9,000,000 shares Common stock to be outstanding after this offering......................... 103,501,500 shares Use of proceeds....................... To expand our manufacturing capabilities, marketing and sales organizations and research and development efforts, as well as for working capital and general corporate purposes, including to support our expected net operating losses over the next twelve months. Proposed Nasdaq National Market symbol................................ OMMI The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of September 30, 2000 and includes the assumed issuance of 83,901 shares of our common stock issuable upon the exercise of warrants that, if not exercised by the holders will expire upon the closing of this offering at a weighted average exercise price of $0.24 per share. Such number of outstanding stock excludes: - 14,971,037 shares of common stock issuable upon exercise of outstanding stock options as of September 30, 2000 at a weighted average exercise price of $1.15 per share; - 1,980,158 shares of common stock issuable upon exercise of outstanding warrants, as adjusted to reflect the conversion of preferred stock into common stock, at a weighted average exercise price of $0.62 per share; and - 14,229,250 shares reserved for future issuance under our stock option and employee stock purchase plans, [INSIDE FRONT COVER] The inside front cover page of the prospectus starts with the heading "OMM All-optical Switching Subsystems." Below that text is a subheading that reads "for optical communications equipment manufacturers." To the right of that text is a circle with a graphic of three photonic switch subsystem packages. Below that, in the lower left-hand corner of the page, is the OMM logo. On the right-hand side of the cover page is a graphic of optical streams and a globe which encompasses approximately one-third of the page. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <TABLE> <CAPTION> PERIOD FROM JUNE 30, 1997 (INCEPTION) NINE MONTHS ENDED TO YEAR ENDED DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ------------------------- -------------------------- 1997 1998 1999 1999 2000 ------------ ---------- ----------- ---------- ------------ (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................. $ -- $ -- $ -- $ -- $ 1,521 Cost of revenues......... -- -- -- -- 2,098 Gross margin............. -- -- -- -- (577) Loss from operations..... (55) (1,311) (7,441) (4,583) (33,196) Net loss................. $ (54) $ (1,249) $ (7,358) $ (4,564) $ (31,888) ======= ========== =========== ========== ============ Historical net loss per share, basic and diluted................ $ (0.60) $ (0.49) $ (1.03) $ (0.68) $ (3.07) ======= ========== =========== ========== ============ Weighted average shares, basic and diluted...... 89,934 2,572,477 7,148,210 6,710,892 10,399,460 ======= ========== =========== ========== ============ Pro forma net loss per share: Basic and diluted...... $ (0.18) $ (0.43) =========== ============ Weighted average shares.............. 41,436,092 73,897,832 =========== ============ </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 2000 ---------------------------------------- PRO FORMA AS ACTUAL PRO FORMA ADJUSTED -------- ------------ ------------ (UNAUDITED) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents and short-term investments... $ 66,492 $66,512 $156,982 Working capital........................................ 62,798 62,818 153,288 Total assets........................................... 98,369 98,390 188,860 Long-term obligations, less current portion............ 5,592 5,592 5,592 Redeemable convertible preferred stock................. 103,317 -- -- Total stockholders' equity (deficit)................... (22,704) 80,633 171,103 </TABLE> --------------- See note 2 of notes to the financial statements for an explanation of the determination of the number of shares used in computing basic and diluted net loss and pro forma basic and diluted net loss per share data. - The pro forma amounts on the balance sheet at September 30, 2000 give effect to the conversion of all outstanding shares of preferred stock into common stock upon the closing of the offering and the issuance of 83,901 shares of our common stock upon the exercise of outstanding warrants that, if not exercised by the holders, will expire upon the closing of this offering, at a weighted average exercise price of $0.24 per share. - The pro forma as adjusted amounts on the balance sheet at September 30, 2000 give effect to the sale of the shares at an assumed initial public offering price of $11.00, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Unless otherwise indicated, the information in this prospectus: - assumes the conversion of all of our outstanding shares of preferred stock into 70,751,886 shares of common stock upon the closing of this offering; - assumes the issuance of 83,901 shares of our common stock upon the exercise of warrants that, if not exercised by the holders, will expire upon the closing of this offering at a weighted average exercise price of $0.24 per share; and - assumes no exercise of the underwriters' over-allotment option. ------------------ TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> PROSPECTUS SUMMARY.................... 1 RISK FACTORS.......................... 5 NOTE REGARDING FORWARD-LOOKING STATEMENTS.......................... 16 USE OF PROCEEDS....................... 16 DIVIDEND POLICY....................... 16 CAPITALIZATION........................ 17 DILUTION.............................. 18 SELECTED FINANCIAL DATA............... 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 21 BUSINESS.............................. 27 MANAGEMENT............................ 43 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> TRANSACTIONS WITH RELATED PARTIES AND INSIDERS............................ 54 PRINCIPAL STOCKHOLDERS................ 56 DESCRIPTION OF CAPITAL STOCK.......... 58 SHARES ELIGIBLE FOR FUTURE SALE....... 61 UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS.................... 63 UNDERWRITING.......................... 66 NOTICE TO CANADIAN RESIDENTS.......... 69 WHERE YOU CAN FIND ADDITIONAL INFORMATION......................... 70 LEGAL MATTERS......................... 70 EXPERTS............................... 70 INDEX TO FINANCIAL STATEMENTS......... F-1 </TABLE> ------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 2001 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001100370_lante-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001100370_lante-corp_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..51de06015f9f7e340964ceeed9c0e25796ea8021
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001100370_lante-corp_prospectus_summary.txt
@@ -0,0 +1,3132 @@
+PROSPECTUS SUMMARY
+
+ 
+
+ This
+ summary highlights selected information from this prospectus and does not
+ contain all of the information that may be important to you. To understand
+ the risks involved in your investment decision, you should read carefully
+ this entire prospectus, including the risk factors and our financial
+ statements, and the documents to which we refer you.
+
+ 
+
+ In this
+ prospectus, Lante, we, us and our
+ refer to Lante Corporation. Unless otherwise indicated, all share
+ amounts and financial information presented in this prospectus:
+
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ assume the underwriters
+ over-allotment option is not exercised;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ assume the initial public
+ offering price will be $18.00 per share, the midpoint of the range
+ disclosed on the cover of this prospectus;
+
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ give effect to a 2-for-1
+ stock split of our common stock, which occurred on October 22, 1999;
+ and
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ give effect to the
+ conversion of all outstanding shares of our preferred stock into shares of
+ our common stock upon consummation of this offering.
+
+ 
+ 
+
+ 
+ 
+
+ The
+ clients identified on the inside front cover of this prospectus were clients
+ of ours during 1999. Many of these engagements were project-based, and many
+ of these clients do not have ongoing contractual obligations to use our
+ services. We cannot assure you that these clients will use our services in
+ the future.
+
+ 
+
+ Our Business
+
+ 
+
+ Lante
+ Corporation is an Internet services company that develops sophisticated
+ technology-based solutions for electronic markets. These markets, which we
+ refer to as e-markets, are Internet based networks through which multiple
+ buyers and sellers efficiently conduct business online. We believe e-markets
+ are the next stage in the evolution of e-commerce and will be the
+ predominant business model of the digital economy. To date, most of our
+ e-market engagements have been with Internet startup companies. Our
+ solutions have included designing, developing and building: 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ an online solution for
+ eppraisals.com that will connect collectors of art, antiques and other
+ collectibles with a network of appraisal experts;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ a new business model for
+ Etera that enables its network of more than 6,000 independent lawn and
+ garden centers to offer products and information from multiple vendors
+ through customized web sites;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ a highly secure extranet
+ for IntraLinks that is used for document-intensive applications including
+ loan syndications; and
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ an interactive online
+ marketplace for SciQuest.com that links lab technicians and purchasing
+ agents with suppliers of scientific products.
+
+ 
+ 
+
+ 
+ 
+
+ We
+ believe our success with these early adopters of e-markets and our focus on
+ e-market solutions position us to obtain engagements with other Internet
+ startup companies, as well as with larger, more traditional companies as
+ they progress from their existing business models toward
+ e-markets.
+
+ 
+
+ Since our
+ inception in 1984, we have been innovators in applying emerging technologies
+ to businesses, evolving from personal computer networks to database
+ applications to distributed client-server architectures to our current
+ exclusive focus on Internet services. Today, we employ more than 375 people
+ who serve our clients from offices in Chicago, Seattle, San Francisco, New
+ York, Los Angeles, Dallas, Boston and Charlotte. We have an experienced
+ management team led by Rudy Puryear, our president and chief executive
+ officer, and a distinguished advisory group of investors that includes
+ industry luminaries Michael Dell, John Landry, Michael Maples and Morton
+ Meyerson.
+
+ 
+
+ In
+ December 1999, we entered into a strategic relationship with Dell Computer
+ Corporation. As part of this relationship, Dell purchased 2.0 million shares
+ of our common stock, 1.0 million shares of which were purchased from us, and
+ we have entered into a master services agreement that contemplates Dell
+ providing us with at least $40.0 million of total revenues over a five-year
+ period. We expect to use the net proceeds from our issuance of these shares
+ for general corporate purposes, including working capital.
+ International Data Corporation, an independent research firm, estimates that
+ the worldwide e-commerce market will grow from approximately $64.8 billion
+ in 1999 to more than $978.4 billion in 2003, representing a compound annual
+ growth rate of 97%. We believe this growth in the worldwide e-commerce
+ market will lead to a significant increase in demand for Internet services.
+ International Data Corporation also forecasts that the worldwide market for
+ Internet services will grow from approximately $12.9 billion in 1999 to
+ $78.5 billion in 2003, representing a compound annual growth rate of
+ 57%.
+
+ 
+
+ We
+ believe the next stage of growth for Internet services will involve building
+ solutions that:
+
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ accommodate rapidly
+ increasing functionality and user volume;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ provide a highly secure
+ computing environment;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ reliably process extremely
+ large volumes of information;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ integrate with the
+ databases and information systems of multiple participants;
+ and
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ adapt to the ever-changing
+ needs of the markets they serve.
+
+ 
+ 
+
+ 
+ 
+
+ We
+ believe that we are well-positioned to benefit from this market opportunity
+ because of our experience and expertise in building complex solutions that
+ are integrated with multiple back-end systems. Our professionals possess the
+ vision and understanding of e-markets necessary to help our clients build
+ innovative Internet based business models. We help our clients think big,
+ start smart, scale fast and realize the potential of their e-market
+ opportunities.
+
+ 
+
+ We deploy
+ an integrated, multi-disciplinary team approach to developing solutions for
+ our clients. Each team is composed of experts from each of our four
+ competencies strategy, user experience, technology and delivery
+ management. Our professionals work closely with the client through an
+ iterative development process in which we incrementally refine our
+ assumptions from engagement inception to a final delivered solution. We
+ believe this approach strikes a healthy and successful balance between the
+ desire for a structured process and the dynamic nature of our clients 
+ needs.
+
+ 
+
+ Our
+ objective is to be one of the recognized leaders in the Internet services
+ industry by continuing to:
+
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ focus on building
+ solutions for e-markets;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ maintain our technological
+ leadership and know-how;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ attract and retain
+ talented professionals;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ invest in strengthening
+ our brand; and
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ expand into new
+ geographical markets.
+
+ 
+ 
+
+ 
+ 
+
+ Lante
+ Corporation was originally incorporated in Illinois in 1984 and
+ reincorporated in Delaware on October 1, 1999. Our principal executive
+ offices are located at 161 North Clark Street, Suite 4900, Chicago, Illinois
+ 60601 and our telephone number is (312) 696-5000. Our web site is located at
+ www.lante.com. The information on our web site is not a part of this
+ prospectus.
+
+ Recent Developments
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ Three month
+ period
+ 
+
+ ended December 31,
+ 
+ Year ended
+ 
+
+ December 31,
+ 
+
+ 
+ 
+ 
+ 1998
+ 
+ 1999
+ 
+ 1998
+ 
+ 1999
+ 
+
+ 
+ 
+ 
+ (amounts in
+ thousands)
+ 
+
+ 
+ 
+ 
+ (unaudited)
+ 
+
+ 
+ Revenues
+ 
+ $4,242
+ 
+ $11,621
+ 
+ 
+ 
+ $15,369
+ 
+ $32,964
+ 
+ 
+ 
+
+ 
+ Cost of providing
+ professional services
+ 
+ 1,831
+ 
+ 6,214
+ 
+ 
+ 
+ 7,001
+ 
+ 17,477
+ 
+ 
+ 
+
+ 
+ Income (loss) from
+ operations
+ 
+ 496
+ 
+ (2,544
+ )
+ 
+ 1,565
+ 
+ (3,805
+ )
+ 
+
+ 
+ Net income
+ (loss)
+ 
+ 504
+ 
+ (2,275
+ )
+ 
+ 1,556
+ 
+ (2,582
+ )
+ 
+
+ 
+
+ 
+
+ 
+
+ Revenues
+ increased $7.4 million, or 174.0%, for the three-month period ended December
+ 31, 1999, as compared to the same period in 1998. This increase in revenues
+ reflects an increase in the average size of our engagements and the
+ completion of our engagement with ZixIt Corporation in the fourth quarter of
+ 1999. Revenues from the ZixIt engagement were approximately $1.9 million in
+ the fourth quarter of 1999. Our revenues less costs of providing
+ professional services, stated as a percentage of revenues, decreased to
+ 46.5% for the three-month period ended December 31, 1999 from 56.8% for the
+ same period in 1998. This decrease is attributable to an increased use of
+ subcontractors in 1999 and the completion of engagements in 1998 that had
+ better than expected margins for that period. Loss from operations reflects
+ a $10.4 million, or 278.1%, increase in operating expenses for the
+ three-month period ended December 31, 1999, as compared to the same period
+ in 1998. This increase is attributable to the hiring of additional billable
+ professionals, increases in selling, general and administrative expenses and
+ a $0.6 million charge related to the amortization of deferred compensation
+ expense. Net loss for the three-month period ended December 31, 1999
+ reflects a $3.4 million charge related to a one-time contribution we made to
+ the Lante Foundation and a $3.6 million net benefit related to the exchange
+ of options with ZixIt Corporation upon the completion of that engagement.
+ Cash and cash equivalents and total stockholders equity at December
+ 31, 1999 were approximately $13.7 million and $1.2 million,
+ respectively.
+
+ 
+
+ The Offering
+
+ 
+
+ Common stock offered by Lante...
+
+ 
+ 
+ 
+ 4,000,000
+ shares
+
+ 
+ 
+
+ 
+
+ 
+
+ Common stock to be outstanding after this offering...
+
+ 
+ 
+ 
+ 38,489,947 shares or
+ 39,089,947 shares if the underwriters exercise their over-allotment option
+ in full. These shares do not include an aggregate of 13,478,702 additional
+ shares reserved as of February 10, 2000 for issuance (1) pursuant to our
+ 1998 stock option plan and our stock purchase plan and (2) upon exercise
+ of outstanding warrants.
+
+ 
+ 
+
+ 
+
+ 
+
+ Use of proceeds...
+
+ 
+ 
+ 
+ For general corporate
+ purposes, including working capital and capital improvements.
+ 
+
+ 
+ 
+
+ 
+ 
+
+ Nasdaq National Market symbol...
+
+ 
+ 
+ 
+ LNTE
+
+ 
+ 
+
+ 
+ 
+
+ Risk factors...
+
+ 
+ 
+ 
+ See Risk Factors
+ beginning on page 5 for a discussion of factors you should
+ carefully consider before deciding to buy our common stock.
+
+ 
+ 
+
+ 
+ 
+
+ Lante and
+ Lante Corporation are trademarks or service marks and in some jurisdictions,
+ including the United States, are registered trademarks or service marks of
+ Lante. Other trademarks appearing in this prospectus are the property of
+ their respective owners.
+
+ 
+
+ Summary Financial Information
+
+ 
+
+ The
+ following table presents our summary consolidated financial information and
+ has been derived from our audited consolidated financial statements for the
+ three-year period ended December 31, 1998, from our audited consolidated
+ interim financial statements for the nine-month period ended September 30,
+ 1999 and from our unaudited interim financial statements for the nine-month
+ period ended September 30, 1998, all of which are included in this
+ prospectus. Pro forma net income (loss) reflects an adjustment to show
+ assumed federal and state income taxes based on statutory (federal and
+ state) tax rates for the periods presented, during which we were treated as
+ an S-corporation for income tax purposes. The pro forma consolidated balance
+ sheet data give effect to the conversion of all of our preferred stock into
+ our common stock. The subsequent transaction balance sheet data give further
+ effect to the common stock issuances to Dell Computer Corporation, some of
+ our preferred and common stockholders and key management in December 1999
+ and January 2000. The as adjusted consolidated balance sheet data give
+ further effect to our issuance and sale of 4,000,000 shares of common stock
+ in this offering and our receipt of the net proceeds from the sale of these
+ shares after deducting underwriting discounts and commissions and estimated
+ offering expenses payable by us. You should read the following summary
+ financial information along with Selected Consolidated Financial Data,
+ Management s Discussion and Analysis of Financial
+ Condition and Results of Operations and our consolidated financial
+ statements and the related notes, each of which is included in this
+ prospectus.
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ Year ended December
+ 31,
+ 
+ Nine months ended
+ 
+
+ September 30,
+ 
+
+ 
+ 
+ 
+ 1996
+ 
+ 1997
+ 
+ 1998
+ 
+ 1998
+ 
+ 1999
+ 
+
+ 
+ 
+ 
+ (In thousands, except
+ per share data)
+ 
+
+ 
+ Statement of Operations
+ Data:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Revenues
+ 
+ $ 8,640
+ 
+ 
+ 
+ $11,134
+ 
+ 
+ 
+ $15,369
+ 
+ 
+ 
+ $11,128
+ 
+ 
+ 
+ $ 21,343
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ Operating
+ expenses:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Professional services
+ 
+ 4,381
+ 
+ 
+ 
+ 6,175
+ 
+ 
+ 
+ 7,001
+ 
+ 
+ 
+ 5,170
+ 
+ 
+ 
+ 11,263
+ 
+ 
+ 
+
+ 
+ 
+ Selling, general and
+ administrative
+ 
+ 4,019
+ 
+ 
+ 
+ 4,722
+ 
+ 
+ 
+ 6,803
+ 
+ 
+ 
+ 4,893
+ 
+ 
+ 
+ 10,711
+ 
+ 
+ 
+
+ 
+ 
+ Amortization of deferred
+ compensation
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 631
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Total operating
+ expenses
+ 
+ 8,400
+ 
+ 
+ 
+ 10,897
+ 
+ 
+ 
+ 13,804
+ 
+ 
+ 
+ 10,063
+ 
+ 
+ 
+ 22,605
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Income (loss) from
+ operations
+ 
+ 240
+ 
+ 
+ 
+ 237
+ 
+ 
+ 
+ 1,565
+ 
+ 
+ 
+ 1,065
+ 
+ 
+ 
+ (1,262
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Other income (expense),
+ net
+ 
+ (19
+ )
+ 
+ (20
+ )
+ 
+ (1
+ )
+ 
+ (12
+ )
+ 
+ 353
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Income (loss) before
+ income taxes
+ 
+ 221
+ 
+ 
+ 
+ 217
+ 
+ 
+ 
+ 1,564
+ 
+ 
+ 
+ 1,053
+ 
+ 
+ 
+ (909
+ )
+ 
+
+ 
+ Income tax (provision)
+ benefit
+ 
+ (1
+ )
+ 
+ (4
+ )
+ 
+ (8
+ )
+ 
+ (5
+ )
+ 
+ 602
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Net income
+ (loss)
+ 
+ $ 220
+ 
+ 
+ 
+ $ 213
+ 
+ 
+ 
+ $ 1,556
+ 
+ 
+ 
+ $ 1,048
+ 
+ 
+ 
+ $ 
+ (307
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ Net income (loss)
+ available to common stockholders(1)
+ 
+ $ 220
+ 
+ 
+ 
+ $ 213
+ 
+ 
+ 
+ $ 1,556
+ 
+ 
+ 
+ $ 1,048
+ 
+ 
+ 
+ $ 
+ (828
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ Net income (loss) per
+ share, basic and diluted
+ 
+ $ 
+ 0.01
+ 
+ 
+ 
+ $ 
+ 0.01
+ 
+ 
+ 
+ $ 
+ 0.08
+ 
+ 
+ 
+ $ 
+ 0.05
+ 
+ 
+ 
+ $ (0.04
+ )
+ 
+
+ 
+ 
+ 
+ 
+ Pro forma net income
+ (loss) available to common
+ 
+
+ stockholders
+ 
+ $ 
+ 157
+ 
+ 
+ 
+ $ 
+ 153
+ 
+ 
+ 
+ $ 
+ 881
+ 
+ 
+ 
+ $ 
+ 571
+ 
+ 
+ 
+ $ (1,357
+ )
+ 
+
+ 
+ 
+ 
+ 
+ Pro forma net income
+ (loss) per share, basic and diluted
+ 
+ $ 
+ 0.01
+ 
+ 
+ 
+ $ 
+ 0.01
+ 
+ 
+ 
+ $ 
+ 0.04
+ 
+ 
+ 
+ $ 
+ 0.03
+ 
+ 
+ 
+ $ (0.06
+ )
+ 
+
+ 
+ 
+ 
+ 
+ Weighted average
+ number of shares outstanding, basic and
+ 
+
+ diluted
+ 
+ 
+ 20,250
+ 
+ 
+ 
+ 
+ 20,167
+ 
+ 
+ 
+ 
+ 20,607
+ 
+ 
+ 
+ 
+ 20,384
+ 
+ 
+ 
+ 
+ 22,113
+ 
+ 
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ September 30,
+ 1999
+ 
+
+ 
+ 
+ 
+ Actual
+ 
+ Pro
+ 
+
+ forma
+ 
+ Subsequent
+ 
+
+ transaction
+ 
+ As
+ 
+
+ adjusted
+ 
+
+ 
+ 
+ 
+ (In
+ thousands)
+ 
+
+ 
+ Balance Sheet
+ Data:
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Cash and cash
+ equivalents
+ 
+ $13,206
+ 
+ 
+ 
+ $13,206
+ 
+ $29,818
+ 
+ $ 
+ 94,678
+ 
+
+ 
+ Working
+ capital
+ 
+ 14,091
+ 
+ 
+ 
+ 14,091
+ 
+ 30,703
+ 
+ 95,563
+ 
+
+ 
+ Total
+ assets
+ 
+ 27,176
+ 
+ 
+ 
+ 27,176
+ 
+ 43,788
+ 
+ 
+ 108,648
+ 
+
+ 
+ Long-term debt and
+ redeemable preferred stock, net of current portion
+ 
+ 27,339
+ 
+ 
+ 
+ 2,005
+ 
+ 2,005
+ 
+ 2,005
+ 
+
+ 
+ Total stockholders
+ (deficit) equity
+ 
+ (7,688
+ )
+ 
+ 17,646
+ 
+ 34,258
+ 
+ 99,118
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ (1)
+
+ 
+ Net loss
+ available to common stockholders for the nine-month period ended
+ September 30, 1999 gives effect to $521 of dividends and accretion
+ related to our Series A convertible preferred stock.
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ RISK FACTORS
+
+ 
+
+ 
+ This offering involves a high degree of risk. We have
+ attempted to identify all of the material risks that we believe exist.
+ You should carefully consider the following risks, as well as all of
+ the other information contained in this prospectus, before purchasing
+ any of our common stock. Any of the following risks could materially
+ adversely affect our business, financial condition and operating
+ results. If this occurs, the trading price of our common stock could
+ decline, and you may lose all or part of your
+ investment.
+
+ 
+
+ Risks Relating to Our Business
+
+ 
+
+ We expect to report an operating loss in 1999 and
+ 2000 and may not achieve or sustain future
+ profitability
+
+ 
+
+ 
+ Although Lante was incorporated in 1984, our business strategy
+ has been constantly evolving and, since 1996, we have primarily
+ focused on competing in the Internet services market. In 1999, we
+ expect to report an operating loss, and we anticipate incurring losses
+ in 2000 as well. As we strive to grow our business, we expect to spend
+ significant funds for general corporate purposes, including working
+ capital, marketing, recruiting and hiring additional personnel,
+ upgrading our infrastructure, including internal information systems,
+ and expanding into new geographical markets. To the extent that our
+ revenues do not increase as quickly as these costs and expenditures,
+ our results of operations and liquidity could be materially and
+ adversely affected. In particular, we expect that our plans for
+ increases in expenses and capital expenditures over the next year to
+ support our expected growth will adversely affect our operating
+ results. We may not sustain our historical revenue growth rates. If we
+ experience slower revenue growth than expected or if our operating
+ expenses exceed our expectations, we may not achieve profitability. If
+ we achieve profitability in the future, we may not sustain
+ it.
+
+ 
+
+ If we lose a major client or complete an engagement
+ for a major client, our revenues could decline and our operating
+ results could be adversely affected to the extent we are unable to
+ quickly redeploy our billable professionals
+
+ 
+
+ 
+ Since we began shifting our focus to Internet based businesses
+ in 1996, our client base has been concentrated among, and our revenues
+ have depended upon, a few companies. For example, ZixIt Corporation
+ and Microsoft Corporation accounted for 37% and 16% of our revenues,
+ respectively, for the nine-month period ended September 30, 1999, and
+ our five largest clients accounted for 69% of our revenues during this
+ period. These clients also utilized a significant portion of our
+ resources during this period. To the extent that any significant
+ client uses less of our services or terminates its relationship with
+ us, our revenues in the relevant fiscal period could substantially
+ decline and our operating results could be adversely affected to the
+ extent we are unable to quickly redeploy our billable professionals to
+ other client engagements. We expect a relatively high level of client
+ concentration to continue, but not necessarily involve the same
+ clients from period to period. For example, we completed our
+ engagement with ZixIt in the three-month period ended December 31,
+ 1999, and we do not anticipate material revenues from ZixIt in the
+ near future.
+
+ 
+
+ The loss of executive management personnel or
+ regional managing directors may harm our ability to obtain and retain
+ client engagements, maintain a cohesive culture and compete
+ effectively
+
+ 
+
+ 
+ We believe that our success will depend on the continued
+ employment of our executive management personnel and regional managing
+ directors because personal relationships are critical to obtaining and
+ retaining client engagements and maintaining a cohesive culture. If
+ one or more members of our executive management personnel or any of
+ our regional managing directors were unable or unwilling to continue
+ in their present positions, these persons would be very difficult to
+ replace. In addition, if any of these key employees joined a
+ competitor or formed a competing company, some of our clients might
+ choose to use the services of that competitor or new company instead
+ of our own. Furthermore, clients or other companies seeking management
+ talent may hire away some of our executive management personnel or
+ regional managing directors. This would not only result in the loss of
+ key employees, but could also result in the loss of client
+ relationships or new
+ business opportunities and impede our ability to implement our business
+ strategy. Many of our key employees have entered into agreements with
+ us that contain covenants not to solicit business from our clients for
+ periods of up to two years following termination. To date, we have not
+ sought judicial enforcement of these restrictive covenants. The
+ enforceability of restrictive covenants of these types is difficult to
+ predict because a court would have the authority to consider a variety
+ of equitable factors. If a court were to view the scope or duration of
+ the restrictive covenants as excessive, the covenants may not be
+ enforceable as written or at all.
+
+ 
+
+ The loss of our professionals, or inability to hire
+ new qualified professionals, could hinder our ability to grow and
+ serve our clients
+
+ 
+
+ 
+ The Internet services market is labor intensive. Currently,
+ companies in our industry and similar industries face a shortage of
+ qualified personnel, and we do not foresee any improvement in this
+ situation. We compete intensively with other companies to hire and
+ retain qualified labor from the available pool of talent. We may not
+ be successful in hiring and retaining qualified personnel. If we
+ cannot hire, train and retain qualified personnel or if a significant
+ number of our current employees depart, we may be unable to complete
+ or retain existing engagements or bid for new engagements of similar
+ scope and revenues.
+
+ 
+
+ Our business may be harmed if we fail to accurately
+ estimate the cost, scope or duration of an engagement or fail to
+ communicate changes to these specifications to our
+ clients
+
+ 
+
+ 
+ Approximately 70% of our revenues were derived from fixed-fee
+ engagements during the nine-month period ended September 30, 1999.
+ Because of the complexity of many of our client engagements,
+ accurately estimating the cost, scope and duration of a particular
+ engagement can be a difficult task. If we fail to accurately estimate
+ the cost, scope or duration of one or more engagements, we could be
+ forced to devote additional resources to these engagements for which
+ we will not receive additional compensation. To the extent that an
+ expenditure of additional resources is required on an engagement, this
+ could reduce the profitability of, or result in a loss on, the
+ engagement. In the past, we have, on occasion, engaged in significant
+ negotiations with clients regarding changes to the cost, scope or
+ duration of specific engagements. To the extent we do not sufficiently
+ communicate to our clients, or our clients fail to adequately
+ appreciate, the nature and extent of any of these types of changes to
+ an engagement, our reputation may be harmed and we may suffer losses
+ on an engagement.
+
+ 
+
+ Our revenues are difficult to predict because they
+ are derived from project-based client engagements
+
+ 
+
+ 
+ We primarily derive our revenues from project-based client
+ engagements, which vary in size and scope. As a result, our revenues
+ are difficult to predict from period to period, as any client that
+ accounts for a significant portion of our revenues in a given period
+ may not generate a similar amount of revenues, if any, in subsequent
+ periods. After completion of an engagement, a client may not retain us
+ in the future. For example, we completed our engagement with ZixIt in
+ the three-month period ended December 31, 1999, and we do not
+ anticipate material revenues from ZixIt in the near future. In
+ addition, because several of our client engagements involve sequential
+ stages, each of which represents a separate contractual commitment,
+ there is a risk that a client may choose not to retain us for
+ additional stages of an engagement. Furthermore, our existing clients
+ can generally reduce the scope of an engagement or cancel their use of
+ our services without penalty and with little or no notice. If clients
+ terminate existing engagements or if we are unable to enter into new
+ engagements, our revenues in the relevant fiscal period could
+ substantially decline and we may underutilize existing resources that
+ we cannot quickly redeploy to other client engagements.
+
+ 
+
+ Our quarterly financial results are subject to
+ significant fluctuations due to many factors, any of which could
+ adversely affect our stock price
+
+ 
+
+ 
+ Our revenues and operating results may vary significantly from
+ quarter to quarter. It is possible that in some future periods our
+ operating results may fall below the expectations of public market
+ analysts and investors. Any decline in revenues or earnings or a
+ greater than expected loss for any quarter could cause the
+ market price of our common stock to decline. The factors, some of which
+ are outside our control, which may cause our financial results to vary
+ from quarter to quarter include:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ the number,
+ size and scope of our client engagements;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ unanticipated delays, deferrals or cancellations of major
+ client engagements;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ unanticipated changes in the scope of major client
+ engagements;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ the
+ efficiency with which we utilize our billable professionals, plan
+ and manage our existing and new client engagements and manage future
+ growth;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ the extent
+ to which we use subcontractors or hire new billable professionals
+ whom we may not be able to immediately utilize on client
+ engagements;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ variability
+ in market demand for Internet services;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ our ability
+ to attract qualified professionals in a timely and effective
+ manner;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ our ability
+ to complete fixed-fee engagements on budget;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ changes in
+ pricing policies by us or our competitors; and
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ general
+ economic conditions.
+
+ 
+ 
+
+ 
+ 
+
+ 
+ In addition, because a percentage of our expenses, particularly
+ labor costs, are fixed in amount, these factors may cause our
+ operating income and operating margins to vary significantly from
+ quarter to quarter. Due to these factors, we believe that
+ quarter-to-quarter comparisons of our operating results may not be
+ meaningful. Therefore, you should not rely on quarter-to-quarter
+ comparisons of our operating results as an indication of our future
+ performance.
+
+ 
+
+ If we are unable to manage our growth, it will
+ adversely affect our business, the quality of our solutions and our
+ ability to retain key personnel
+
+ 
+
+ 
+ Although we have grown rapidly in recent years, we may not be
+ able to continue to grow at a similar pace or manage our growth. Our
+ growth has placed significant demands on our management and other
+ resources and will continue to do so in the future. Our revenues
+ increased 91.8% for the nine-month period ended September 30, 1999
+ compared to the same period in 1998. Our number of employees increased
+ from 94 on January 1, 1997 to 345 on December 31, 1999. Managing our
+ growth effectively will involve:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ accurately
+ estimating time and resources for engagements;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ improving
+ our business development capabilities;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ continuing
+ to retain, motivate and manage our existing employees and attract
+ and integrate new employees;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ maintaining
+ the quality of our solutions;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ maintaining
+ acceptable utilization rates for our billable
+ professionals;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ opening and
+ staffing offices in new geographic areas; and
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ developing
+ and improving our operational, financial, accounting and other
+ internal systems and controls on a timely basis.
+
+ 
+ 
+
+ 
+ 
+
+ 
+ If we are unable to manage our growth effectively, it could have
+ a material adverse effect on our ability to achieve or maintain
+ profitability, the quality of the solutions we provide and our ability
+ to retain key personnel.
+
+ 
+
+ Our executive management team has limited experience
+ working together, which may make it difficult to conduct and grow our
+ business
+
+ 
+
+ 
+ Our president and chief executive officer has only been employed
+ by us since June 30, 1999 and our chief financial officer and chief
+ technology officer have only been employed by us since October 29,
+ 1999. Therefore, there has been little or no opportunity to evaluate
+ the effectiveness of our executive management team as a combined unit.
+ The failure of executive management to function effectively as a team
+ may have an adverse effect on our ability to obtain and execute client
+ engagements, maintain a cohesive culture and compete
+ effectively.
+
+ 
+
+ Intense competition in the Internet services market
+ could impair our ability to grow and achieve
+ profitability
+
+ 
+
+ 
+ We may not be able to compete effectively with current or future
+ competitors. The Internet services market is relatively new and highly
+ competitive. We expect competition to further intensify as this market
+ rapidly evolves. Some of our competitors have longer operating
+ histories, larger client bases, longer relationships with their
+ clients, greater brand or name recognition and significantly greater
+ financial, technical and marketing resources than we do. As a result,
+ our competitors may be in a stronger position to respond more quickly
+ to new or emerging technologies and changes in client requirements and
+ to devote greater resources than we can to the development, promotion
+ and sale of their services. Competitors could lower their prices,
+ potentially forcing us to lower our prices and suffer reduced
+ operating margins. We face competition from the following
+ companies:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Internet
+ services firms, including Scient Corporation, Viant Corporation,
+ Razorfish, Inc., Proxicom Inc., Sapient Corporation and
+ USWeb;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ technology
+ consulting firms and integrators, including Andersen Consulting, the
+ major accounting firms, Diamond Technology Partners, Inc., EDS and
+ IBM;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ strategy
+ consulting firms, including Bain & Company, Booz Allen &
+ Hamilton Inc., The Boston Consulting Group, Inc. and McKinsey &
+ Company; and
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ in-house
+ information technology, marketing and design service departments of
+ our current and potential clients.
+
+ 
+ 
+
+ 
+ 
+
+ 
+ In addition, there are relatively low barriers to entry into the
+ Internet services market. We do not own any patented technology that
+ would stop competitors from entering this market and providing
+ services similar to ours. As a result, the emergence of new
+ competitors may pose a threat to our business. Existing or future
+ competitors may develop and offer services that are superior to, or
+ have greater market acceptance than, ours, which could significantly
+ decrease our revenues and the value of your investment.
+
+ 
+
+ We may need additional capital in the future, which
+ may not be available to us; the raising of additional capital would
+ dilute your ownership in Lante
+
+ 
+
+ 
+ In the future, we may need to raise additional funds, either
+ through public or private debt or equity financing, to take advantage
+ of expansion or acquisition opportunities, develop new solutions or
+ compete effectively in the marketplace. Any additional capital raised
+ through the sale of equity or equity-linked securities would dilute
+ your ownership percentage in us. These securities could also have
+ rights, preferences or privileges senior to those of your common
+ stock. Furthermore, we may not be able to obtain additional financing
+ when needed or on terms favorable to us or our stockholders. If
+ additional financing is not available on favorable terms or at all,
+ this may adversely affect our ability to develop or enhance our
+ services, take advantage of business opportunities or respond to
+ competitive pressures.
+
+ 
+
+ Our business may suffer if growth in Internet usage
+ does not continue to increase
+
+ 
+
+ 
+ If the usage and volume of commercial transactions on the
+ Internet does not continue to increase, demand for our services may
+ decrease and our business and results of operations could materially
+ suffer. The future of our business depends upon continued growth in
+ Internet usage by our clients, prospective clients and their customers
+ and suppliers. Growth in Internet usage has caused capacity
+ constraints which may potentially impede further growth if left
+ unresolved. Factors which may affect Internet usage or e-commerce
+ adoption include:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ actual or
+ perceived lack of security of information;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ congestion
+ of Internet traffic or other usage delays;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ inconsistent quality of service;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ increases
+ in Internet access costs;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ increases
+ in government regulation;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ uncertainty
+ regarding intellectual property ownership;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ reluctance
+ to adopt new business methods;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ costs
+ associated with the obsolescence of existing infrastructure;
+ and
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ economic
+ viability of e-commerce models.
+
+ 
+ 
+
+ 
+ 
+
+ It is possible that other parties may assert that we
+ have infringed on their intellectual property rights or that our
+ employees have misappropriated their proprietary information, which
+ could result in substantial costs and diversion of management s
+ attention
+
+ 
+
+ 
+ It is possible that other parties may assert infringement claims
+ against us in the future or claim that we have violated their
+ intellectual property rights. While we know of no basis for any claims
+ of this type, authorship of intellectual property rights can be
+ difficult to verify. Competitors could assert, for example, that
+ former employees of theirs whom we have hired have misappropriated
+ their proprietary information for our benefit. Regardless of the
+ merits, infringement or misappropriation claims by third parties could
+ be time consuming and costly to defend, divert our attention and
+ resources or require us to make changes to our
+ technologies.
+
+ 
+
+ Our business may suffer if we have disputes over our
+ right to reuse intellectual property developed for specific
+ clients
+
+ 
+
+ 
+ Part of our business involves the development of software
+ applications for discrete client engagements. Ownership of
+ client-specific software is generally retained by the client, although
+ we typically retain the right to reuse some of the applications,
+ processes and other intellectual property developed in connection with
+ client engagements. Issues relating to the rights to intellectual
+ property can be complicated, and disputes may arise that could
+ adversely affect our ability to reuse these applications, processes
+ and other intellectual property. These disputes could damage our
+ relationships with our clients and our business reputation, divert our
+ management s attention and have a material adverse effect on our
+ ability to grow our business.
+
+ 
+
+ Our business could be adversely affected by year
+ 2000 issues
+
+ 
+
+ 
+ There are year 2000 risks due to the potential of system or
+ related processing failures as computer- controlled systems may not be
+ able to recognize date-related data arising from the use of two digits
+ rather than four digits to define the applicable year. The year 2000
+ problem is not limited to information technology systems, but may also
+ impact computer technology embedded in other systems, including those
+ that control elevators, alarm systems and many other
+ devices.
+
+ 
+
+ 
+ As of the date of this prospectus, our systems have functioned
+ properly with respect to dates starting in the year 2000 and, to date,
+ our clients have not informed us of any year 2000 problems associated
+ with the solutions we developed for them. However, year 2000 problems
+ may still affect us or our clients. If we or our clients experience
+ year 2000 problems, we may incur material financial losses, liability
+ to our clients or damage to our reputation.
+
+ 
+
+ Our current services may become obsolete and
+ unmarketable if we are not able to keep pace with the latest
+ technological changes and client preferences
+
+ 
+
+ 
+ Our business and the Internet services market are characterized
+ by rapid technological change. We must respond successfully on a
+ timely and cost-effective basis to changes in technology, industry
+ standards and client preferences to remain competitive and serve our
+ clients effectively. We may experience technical or other difficulties
+ that prevent or delay our development or introduction of solutions
+ that address changes in technology, industry standards and client
+ preferences. These difficulties could cause our current services to
+ become obsolete and unmarketable.
+
+ 
+
+ If we are unable to maintain our reputation and
+ expand our name recognition, we may have difficulty attracting new
+ business and retaining current clients and employees, and our business
+ may suffer
+
+ 
+
+ 
+ We believe that establishing and maintaining a good reputation
+ and name recognition are critical for attracting and retaining clients
+ and employees. We also believe that the importance of reputation and
+ name recognition is increasing and will continue to increase due to
+ the growing number of providers of Internet services. If our
+ reputation is damaged or if potential clients are not familiar with us
+ or the solutions we provide, we may be unable to attract new, or
+ retain existing, clients and employees. Promotion and enhancement of
+ our name will depend largely on our success in continuing to provide
+ effective solutions. If clients do not perceive our solutions to be
+ effective or of high quality, our brand name and reputation will
+ suffer. In addition, if solutions we provide have defects, critical
+ business functions of our clients may fail, and we could suffer
+ adverse publicity as well as economic liability.
+
+ 
+
+ Increasing government regulation could adversely
+ affect our business
+
+ 
+
+ 
+ Due to the increasing popularity of the Internet, various laws
+ or regulations relating to the Internet may be adopted. An increase in
+ federal, state or foreign legislation or regulation of e-commerce
+ could hinder the Internet s growth and could decrease its usage
+ as a commercial marketplace. If this decline occurs, existing and
+ prospective clients may decide not to use our solutions. In addition,
+ a number of legislative proposals have been made at the federal, state
+ and local levels and by foreign governments that could impose taxes on
+ online commerce. The three-year moratorium preventing state and local
+ governments from taxing Internet access, taxing electronic commerce in
+ multiple states and discriminating against electronic commerce is
+ scheduled to expire on October 21, 2001. If the moratorium ends, state
+ and local governments could impose these types of taxes or
+ discriminate against electronic commerce. In addition, existing state
+ and local laws that tax Internet related matters were expressly
+ excluded from this moratorium. These regulations, and other attempts
+ at regulating commerce over the Internet, could impair the viability
+ of e-commerce and the growth of our business.
+
+ 
+
+ Potential acquisitions may result in increased
+ expenses, difficulties in integrating target companies and diversion
+ of management s attention
+
+ 
+
+ 
+ We may attempt to expand our solutions and service offerings and
+ gain access to new markets through strategic acquisitions and
+ investments. We may encounter the following risks in implementing this
+ strategy:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ diversion
+ of management s attention during the acquisition and
+ integration process;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ costs,
+ delays and difficulties of integrating the acquired company s
+ operations, technologies and personnel into our existing operations,
+ organization and culture;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ adverse
+ impact on earnings of amortizing the acquired company s
+ intangible assets, which could be significant in light of the high
+ valuations of many Internet and other information technology
+ services companies;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ issuances
+ of equity securities which may be dilutive to existing stockholders
+ to pay for acquisitions;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ impact on
+ our financial condition due to the timing of the acquisition or our
+ failure to meet operating expectations for acquired businesses;
+ and
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ expenses of
+ any undisclosed or potential legal liabilities of the acquired
+ company, including intellectual property, employment and warranty
+ and product liability-related problems.
+
+ 
+ 
+
+ 
+ 
+
+ If realized, any of these risks could have a material
+ adverse effect on our business, financial condition and results of
+ operations.
+
+ 
+
+ We may encounter problems with any potential
+ international operations
+
+ 
+
+ 
+ We have no experience in promoting and selling our solutions
+ within foreign countries or in integrating international operations
+ into our company. As we begin pursuing international opportunities,
+ including acquisitions, we will face a number of potential
+ difficulties, including cultural differences, currency exchange risks,
+ the underdevelopment of an Internet infrastructure in some
+ international markets and different government regulatory schemes.
+ Additionally, we will need to devote significant managerial and
+ financial resources to locate and retain qualified personnel for
+ international operations, as well as to obtain the necessary technical
+ and strategic support for international expansion. As a result, we may
+ not be able to successfully promote our services or perform client
+ engagements in international markets. If we fail to expand our
+ operations internationally in a timely and effective manner, it may
+ hinder our growth and ability to compete effectively and could harm
+ our business reputation.
+
+ 
+
+ Risks Relating to this Offering
+
+ 
+
+ If the market price of our common stock fluctuates
+ significantly, you may not be able to sell our shares at or above the
+ initial public offering price and, therefore, you may suffer a loss on
+ your investments
+
+ 
+
+ 
+ The initial public offering price will be determined through
+ negotiations between representatives of the underwriters and us and
+ may not be representative of the price of our common stock after this
+ offering. The market price of our common stock could fluctuate
+ significantly after this offering in response to any of the
+ following:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ changes in
+ financial estimates or investment recommendations by securities
+ analysts following our business;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ quarterly
+ variations in our operating results falling below analysts or
+ investors expectations in any given period;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ general
+ economic and information technology services market
+ conditions;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ changes in
+ economic and capital market conditions for Internet and other
+ information technology services companies;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ changes in
+ market valuations of, or earnings and other announcements by,
+ providers of Internet and other information technology
+ services;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ announcements by us or our competitors of new solutions,
+ service offerings, acquisitions or strategic
+ relationships;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ changes in
+ business or regulatory conditions; and
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ trading
+ volume of our common stock.
+
+ 
+ 
+
+ 
+ 
+
+ 
+ Many companies equity securities, including equity
+ securities of Internet and other technology companies, have
+ experienced extreme price and volume fluctuations in recent years.
+ Often, these fluctuations are unrelated to the companies 
+ operating performance. Elevated levels in market prices for
+ securities, often reached following these companies initial
+ public offerings, may not be sustainable and may not bear any
+ relationship to operating performances. Our common stock may not trade
+ at the same levels as other Internet stocks, and Internet stocks in
+ general may not sustain their current market prices. In the past,
+ following periods of market volatility, stockholders have instituted
+ securities class action litigation. If we were involved in securities
+ litigation, it could have a substantial cost and divert resources and
+ the attention of executive management from our business.
+
+ 
+
+ Because an active trading market for our common
+ stock may not develop after this offering, it may be difficult for you
+ to sell your shares
+
+ 
+
+ 
+ There is currently no public market for our common stock.
+ Accordingly, an active public trading market may not develop or be
+ sustained after this offering. If an active and liquid trading market
+ does not develop, you may have difficulty selling your
+ shares.
+
+ 
+
+ The sale or availability for sale of substantial
+ amounts of our shares could cause our stock price to
+ decline
+
+ 
+
+ 
+ Sales of a substantial number of shares of our common stock
+ after this offering, or the public perception that these sales may
+ occur, could cause the market price of our common stock to decline and
+ could materially impair our ability to raise capital through the sale
+ of additional equity securities. Immediately after this offering,
+ 38,489,947 shares of common stock will be outstanding, or 39,089,947
+ shares if the underwriters fully exercise their over-allotment option.
+ All of the 4,000,000 shares sold in this offering will be freely
+ transferable without restriction or further registration under the
+ Securities Act, except for any shares purchased by our
+ affiliates, as defined in Rule 144 promulgated under the
+ Securities Act. After this offering, our affiliates will own
+ 30,921,779 shares in the aggregate. The 34,489,947 shares of common
+ stock outstanding prior to this offering are restricted
+ securities as defined in Rule 144. These shares may be sold in
+ the future without registration only as permitted by Rule 144 or Rule
+ 701 under the Securities Act or another exemption from
+ registration.
+
+ 
+
+ 
+ In connection with this offering, we, our executive officers and
+ directors and all of our existing stockholders have agreed, with
+ limited exceptions, not to sell any shares of common stock for 180
+ days after this offering without the consent of Credit Suisse First
+ Boston Corporation and Lante. However, these shares may be released
+ from these restrictions by Credit Suisse First Boston Corporation at
+ any time with our consent. The effect that sales in the public market
+ of shares held by principal stockholders or other stockholders or the
+ potential availability for future sale of these shares will have on
+ our common stock s market price is unpredictable.
+
+ 
+
+ 
+ We have entered into an agreement with a number of our
+ stockholders that provide these stockholders with the right to compel
+ us to register their shares for sale. These registration rights apply
+ to approximately 29,736,324 shares and will also apply to any shares
+ owned by these stockholders in the future. We have also entered into
+ an agreement with Rudy Puryear, our chief executive officer, providing
+ him with resale registration rights on Form S-8 for 2,400,000 shares.
+ Registration of these shares would permit a sale without regard to the
+ restrictions of Rule 144.
+
+ 
+
+ The net proceeds of this offering may be allocated
+ in ways with which our stockholders may disagree
+
+ 
+
+ 
+ Management will have significant flexibility in applying the net
+ proceeds of this offering and the net proceeds from our issuance of
+ 1.0 million shares of our common stock to Dell. Management need not
+ specifically allocate these proceeds to any investment or transaction.
+ You will have to rely on the judgment of our management and may
+ disagree with their decisions as to the application of these
+ proceeds.
+
+ 
+
+ Investors in this offering will experience immediate
+ and substantial dilution
+
+ 
+
+ 
+ If you purchase common stock in this offering, you will pay more
+ for your shares than existing stockholders paid for their shares.
+ Accordingly, you will experience immediate and substantial dilution of
+ approximately $15.39 per share, representing the difference between
+ our book value per share after giving effect to this offering and the
+ initial public offering price. In addition, further dilution may occur
+ to the extent that shares of our common stock are issued upon the
+ exercise of existing stock options or under our stock purchase plan.
+ All of the shares issuable upon the exercise of currently outstanding
+ stock options will be issued at a lesser purchase price than the
+ initial public offering price per share. We also expect to offer stock
+ options to employees, customers and suppliers in the future. These
+ issuances will cause further dilution to investors.
+
+ 
+
+ Provisions of our charter and bylaws and Delaware
+ law could deter takeover attempts that may offer you a premium, which
+ could adversely affect our stock price
+
+ 
+
+ 
+ Provisions of our certificate of incorporation, our bylaws and
+ Delaware law make acquiring control of us without the support of our
+ board of directors difficult for a third party, even if the change of
+ control would be beneficial to you. The existence of these provisions
+ may deprive you of an opportunity to sell your shares at a premium
+ over prevailing prices. The potential inability of our stockholders to
+ obtain a control premium could adversely affect the market price for
+ our common stock. For example, our certificate of incorporation
+ provides that the board of directors will be divided into three
+ classes as nearly equal in size as possible with staggered three-year
+ terms. This classification of the board of directors has the effect of
+ making it more difficult for stockholders to change the composition of
+ the board of directors. In addition, our certificate of incorporation
+ authorizes our board of directors to issue up to 10,000,000 shares of
+ blank check preferred stock. This means that, without
+ stockholder approval, the board of directors has the authority to
+ attach special rights to this preferred stock, including voting and
+ dividend rights. With these rights, preferred stockholders could make
+ it more difficult for a third party to acquire our company. A special
+ meeting of stockholders may only be called by a majority of the board
+ of directors or by our president, chief executive officer or chairman.
+ In addition, a stockholder proposal for an annual meeting must be
+ received within a specified period of time to be placed on the agenda.
+ Because stockholders do not have the ability to require the calling of
+ a special meeting of stockholders and are subject to timing
+ requirements in submitting stockholder proposals for consideration at
+ an annual meeting, any third-party takeover not supported by the board
+ of directors would be subject to significant delays and
+ difficulties.
+
+ 
+
+ Absence of dividends could reduce our attractiveness
+ to investors
+
+ 
+
+ 
+ Some investors favor companies that pay dividends. We anticipate
+ that for the foreseeable future we will follow a policy of not
+ declaring dividends on common stock and instead retaining earnings, if
+ any, for use in our business. If we do not pay dividends, your return
+ on an investment in our common stock likely will depend on your
+ ability to sell our stock at a profit.
+
+ 
+
+ Our affiliates can control matters requiring
+ stockholder approval because they own a large percentage of our common
+ stock, and they may vote this common stock in a way with which you do
+ not agree
+
+ 
+
+ 
+ After this offering, our affiliates will own approximately 80.3%
+ of the outstanding shares of our stock. As a result, if these persons
+ act together, they will have the ability to exercise substantial
+ control over our affairs and corporate actions requiring stockholder
+ approval, including the election of directors, a sale of substantially
+ all our assets, a merger with another entity or an amendment to our
+ certificate of incorporation. The ownership position of these
+ stockholders could delay, deter or prevent a change in control and
+ could adversely affect the price that investors might be willing to
+ pay in the future for shares of our common stock.
+
+ 
+
+ 
+ 
+ CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
+
+ 
+
+ 
+ This prospectus includes forward-looking statements that reflect
+ our current expectations and projections about our future results,
+ performance, prospects and opportunities. We have tried to identify
+ these forward-looking statements by using words such as may,
+ will, expect, anticipate, 
+ believe, intend, estimate, 
+ continue and similar expressions. These forward-looking
+ statements are based on information currently available to us and are
+ subject to a number of risks, uncertainties and other factors that
+ could cause our actual results, performance, prospects or
+ opportunities to differ materially from those expressed in, or implied
+ by, these forward-looking statements. These risks, uncertainties and
+ other factors include:
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ our ability
+ to hire and retain executive management, regional managing directors
+ and other qualified personnel;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ the intense
+ competition within the Internet professional services
+ market;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ future
+ regulations that may affect our business or the Internet generally;
+ and
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ other
+ factors set forth under Risk Factors in this
+ prospectus.
+
+ 
+ 
+
+ 
+ 
+
+ 
+ You should not place undue reliance on any forward-looking
+ statements. Except as otherwise required by federal securities laws,
+ we undertake no obligation to publicly update or revise any
+ forward-looking statements, whether as a result of new information,
+ future events, changed circumstances or any other reason after the
+ date of this prospectus.
+
+ 
+
+ 
+ 
+ CAUTIONARY NOTE REGARDING STATISTICAL DATA
+
+ 
+
+ 
+ This prospectus contains statistical data regarding, among other
+ things, the past and projected growth of the worldwide e-commerce
+ market and the market for Internet services. We have taken this data
+ from information published by sources specializing in research of the
+ relevant subject matter. However, this data is by its nature
+ imprecise, and we caution you not to unduly rely on it.
+
+ 
+
+ 
+ 
+ USE OF PROCEEDS
+
+ 
+
+ 
+ We estimate that our net proceeds from this offering, after
+ deducting underwriting discounts and commissions and estimated
+ offering expenses payable by us, will be approximately $64.9 million,
+ or $74.9 million if the underwriters exercise their over-allotment
+ option in full.
+
+ 
+
+ 
+ The primary purposes of this offering are to obtain additional
+ equity capital, create a public market for our common stock and
+ facilitate future access to public markets. We expect to use the net
+ proceeds for general corporate purposes, including working capital and
+ capital improvements. For example, we expect capital expenditures
+ through December 31, 2000 will be between $8.0 million and $13.0
+ million. We may also use a portion of the net proceeds for the
+ acquisition of businesses that are complementary to ours. We have no
+ current loans, agreements or commitments and are not currently engaged
+ in any negotiations with respect to any transaction. Pending these
+ uses, we will invest the net proceeds of this offering in investment
+ grade, interest-bearing securities.
+
+ 
+
+ 
+ 
+ DIVIDEND POLICY
+
+ 
+
+ 
+ Prior to June 17, 1999, we were an S-corporation and paid out
+ dividends to compensate stockholders for their estimated tax
+ liabilities. These dividends totaled approximately $59,000, $20,000
+ and $582,000 for 1997, 1998 and 1999, respectively. In addition, on
+ June 15, 1999, we declared a dividend in conjunction with our
+ conversion to a C-corporation consisting of, in the aggregate, an
+ undivided interest in approximately $2.5 million of our accounts
+ receivable and $1.5 million in cash.
+
+ 
+
+ 
+ We plan to retain all future earnings to finance the development
+ and growth of our business. Therefore, we do not currently anticipate
+ paying any further cash dividends on our common stock in the
+ foreseeable future. Any future determination as to the payment of
+ dividends will be at our board of directors discretion and will
+ depend on our results of operations, financial condition, capital
+ requirements and other factors our board of directors considers
+ relevant.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001100389_palm-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001100389_palm-inc_prospectus_summary.txt
new file mode 100644
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering and our historical consolidated financial statements and notes to those statements included elsewhere in this prospectus. PALM We are the leading global provider of handheld computing devices. We develop, design and market our Palm-branded handheld devices, which currently include our Palm III, Palm V and Internet-enabled Palm VII product families. According to International Data Corporation, in 1998 we had a 68% market share of the worldwide personal companion handheld device market, which International Data Corporation defines as small, pocket-sized devices that feature pen-based input and allow users to automatically copy and conform, or synchronize, information between the device and a personal computer. We believe our emphasis on simplicity, elegance and ease of use and our focus on consumer needs have contributed to our success to date. Our devices have also won numerous awards, including Business Week's "Design of the Decade--Gold Award" and PC Computing's Most Valuable Product award for "Best Pocket PC" in 1999. We intend to build on our global market leadership in handheld computing devices through continued innovation and focus on addressing customer needs. The Palm operating system and related software, which we refer to as our Palm platform, have been the cornerstone of our success in the handheld device market. The Palm platform combines the distinctive look, feel and ease of use of our Palm OS operating system with HotSync technology that enables users to synchronize information between a Palm device and a personal computer, pen-based input technology and personal information management applications such as datebook and address book. Our Palm VII product also includes web- clipping software that allows Internet content providers and users to send and receive information via the Internet in a format optimized for handheld devices. In addition to including the Palm platform in our Palm-branded devices, we license the Palm platform to manufacturers of information appliances, which we define as handheld devices that enable users to access and manage information. Most recently, Nokia and Sony agreed to license the Palm platform for use in their future products. We intend to establish our Palm platform as the leading operating system in the rapidly converging markets of handheld computing devices, information appliances, mobile phones and handheld entertainment devices. We have also established a wireless Internet access service, Palm.net, which supports the Palm VII device and generates revenue from monthly subscription fees. Palm.net subscribers can obtain wireless access to information such as real-time stock quotes, news headlines and airline flight schedules. In addition, our Palm.net service enables mobile users to access an increasing array of enterprise data and applications. We have also developed our Palm.com website, which is emerging as an important destination site for our customers, users and developer community. As part of our Internet strategy, we are expanding our Internet destination sites to provide new web-clipping applications and facilitate e-commerce. We believe that the continued adoption of handheld devices as well as our strategic focus on Palm platform licensing and Internet services present us with significant growth opportunities. We will continue our efforts to identify and respond to customer needs as handheld computing devices become more sophisticated, reach a broader customer base and become an increasingly important means of Internet access on a global basis. As of December 31, 1999, we had sold over 5.5 million Palm devices worldwide. As of December 31, 1999, more than 33,000 third-party developers had registered to create applications based on the Palm platform. Our revenues have increased from approximately $1 million in fiscal 1995 to $564 million in fiscal 1999. We outsource the manufacturing of all of our devices to Manufacturers' Services Limited and Flextronics. OUR RELATIONSHIP WITH 3COM We are currently a wholly-owned subsidiary of 3Com Corporation. After the completion of this offering and the private placements, 3Com will own approximately 94.6% of the outstanding shares of our common stock, or approximately 94.0% if the underwriters fully exercise their option to purchase additional shares. 3Com currently plans to complete its divestiture of Palm approximately six months following this offering by distributing all of the shares of Palm common stock owned by 3Com to the holders of 3Com's common stock. However, 3Com is not obligated to complete the distribution, and the distribution may not occur by the anticipated time or at all. 3Com will, in its sole discretion, determine the timing, structure and all terms of its distribution of our common stock that it owns. 3Com's distribution is subject to receiving a private letter ruling from the Internal Revenue Service that the distribution of its shares of Palm common stock to 3Com stockholders will be tax-free to the stockholders and that our separation from 3Com qualifies as a reorganization for United States federal income tax purposes. Prior to the completion of this offering, we will enter into agreements with 3Com related to the separation of our business operations from 3Com. These agreements provide for, among other things: . the transfer from 3Com to us of assets and the assumption by us of liabilities relating to our business; . the allocation of intellectual property between us and 3Com; and . various interim and ongoing relationships between us and 3Com. The agreements regarding the separation of our business operations from 3Com are described more fully in the section entitled "Arrangements Between Palm and 3Com" included elsewhere in this prospectus. The terms of these agreements, which are being negotiated in the context of a parent-subsidiary relationship, may be more or less favorable to us than if they had been negotiated with unaffiliated third parties. See "Risk Factors--Risks Related To Our Separation From 3Com." The assets and liabilities to be transferred to us are described more fully in our consolidated financial statements and notes to those statements that are also included elsewhere in this prospectus. CONCURRENT PRIVATE PLACEMENTS America Online, Inc., Motorola, Inc. and Nokia have agreed to purchase from us shares of our common stock in private placements that will occur concurrently with the closing of this offering. These investors will pay a per share purchase price for this common stock equal to the initial public offering price in this offering. Based on an assumed public offering price of $31.00, America Online will purchase 2,580,645 shares, Motorola will purchase 2,096,775 shares and Nokia will purchase 2,580,645 shares of our common stock. THE OFFERING <TABLE> <S> <C> Common stock offered....................... 23,000,000 shares Common stock to be outstanding immediately after this offering and the private placements................................ 562,258,065 shares Common stock to be held by 3Com immediately after this offering and the private placements................................ 532,000,000 shares Use of proceeds............................ For payment of a dividend of at least $50 million to 3Com and up to $184.4 million based on an assumed initial public offering price of $31.00 per share, repayment of our intercompany payable to 3Com, which was approximately $58 million as of November 26, 1999, capital expenditures, marketing expenses, working capital and potential investments in, or acquisitions of, other businesses or technologies. Nasdaq Stock Market symbol................. PALM </TABLE> This information is based on 532,000,000 shares outstanding immediately prior to this offering and the private placements, all of which are owned by 3Com. Unless we specifically state otherwise, the information in this prospectus does not take into account the issuance of up to 3,450,000 shares of common stock that the underwriters have the option to purchase. If the underwriters exercise in full their option to purchase additional shares, 565,708,065 shares of common stock will be outstanding after this offering and the private placements. The number of shares of our common stock to be outstanding immediately after this offering listed above does not take into account approximately 25,500,000 shares of our common stock reserved for issuance under our stock plans, of which no options to purchase shares have been granted as of January 27, 2000, but does include an aggregate of 7,258,065 shares to be issued to America Online, Motorola and Nokia in private placements concurrently with the closing of this offering. In addition, we will assume substantially all of the 3Com options held by our employees on the date 3Com distributes our common stock, which options will convert into options to purchase our common stock. We were incorporated in California in January 1992 as Palm Computing, Inc. In connection with this offering and our separation from 3Com, we intend to reincorporate in Delaware and change our name to Palm, Inc. We were acquired by 3Com in June 1997 as part of 3Com's acquisition of U.S. Robotics Corporation. We had been acquired by U.S. Robotics in September 1995. From June 1997 to the time of this offering, we have been operated as a wholly-owned subsidiary of 3Com. Our principal executive offices are located at 5400 Bayfront Plaza, Santa Clara, California 95052-8145, and our telephone number is (408) 326-9000. Our websites are http://www.palm.com and http://www.palm.net. The information on these websites is not a part of this prospectus. In this prospectus, "Palm," "we," "us" and "our" each refers to Palm, Inc. and its subsidiaries, and not to the underwriters or 3Com. "3Com" refers to 3Com Corporation and its subsidiaries. Palm, our logo and other trademarks of Palm mentioned in this prospectus are the property of Palm. All other trademarks or trade names referred to in this prospectus are the property of their respective owners. SUMMARY CONSOLIDATED FINANCIAL DATA The following tables present our summary consolidated financial data. The data presented in these tables are from "Selected Consolidated Financial Data" and our historical consolidated financial statements and notes to those statements included elsewhere in this prospectus. You should read those sections for a further explanation of the financial data summarized here. The historical financial information may not be indicative of our future performance and does not reflect what our financial position and results of operations would have been had we operated as a separate, stand-alone entity during the periods presented. <TABLE> <CAPTION> Years Ended Six Months Ended ---------------------------------------------- ----------------- June 30, May 26, May 25, May 31, May 28, Nov. 27, Nov. 26, 1995(1) 1996(2) 1997 1998 1999 1998 1999 -------- ------- -------- -------- -------- -------- -------- (in thousands, except per share amounts) <S> <C> <C> <C> <C> <C> <C> <C> Consolidated Statements of Operations Data: Revenues................ $ 1,403 $ 7,054 $114,157 $272,137 $563,525 $263,302 $435,060 Gross profit............ 1,229 2,575 36,472 114,388 247,909 116,015 188,718 Operating income (loss)................. (2,231) (6,777) (13,513) 6,461 48,339 26,389 36,745 Net income (loss)....... (2,166) (3,062) (7,862) 4,171 29,628 16,187 22,520 Basic and diluted net income (loss) per share.................. $ -- $ (.01) $ (.01) $ .01 $ .06 $ .03 $ .04 Shares used in computing basic and diluted net income (loss) per share.................. 532,000 532,000 532,000 532,000 532,000 532,000 532,000 Unaudited pro forma basic and diluted net income per share(3).... $ .06 $ .04 Shares used in computing unaudited pro forma basic and diluted net income per share(3).... 538,389 538,389 </TABLE> <TABLE> <CAPTION> Nov. 26, 1999 ----------------------- Pro Forma Actual As Adjusted(4) -------- -------------- (in thousands) <S> <C> <C> Consolidated Balance Sheet Data: Cash and cash equivalents............................... $ 29,568 $676,026 Working capital......................................... 3,765 623,812 Total assets............................................ 247,369 764,101 Payable to 3Com Corporation............................. 57,935 -- Stockholder's net investment............................ 26,431 646,478 </TABLE> - ------- Notes: (1) Our fiscal year end was June 30 prior to our acquisition by U.S. Robotics. (2) Fiscal 1996 includes only eleven months of operating results. (3) Pro forma basic and diluted net income per share amounts are calculated using the common shares outstanding prior to the offering of 532,000,000 shares plus the 6,389,158 shares of common stock whose proceeds will be used to pay an assumed $184.4 million dividend to 3Com, based on an assumed initial public offering price of $31.00, reduced by the estimated per share offering costs. (4) Pro forma as adjusted amounts give effect to the following actions as though these actions had been taken as of November 26, 1999: . our sale of 23,000,000 shares of common stock in this offering at an assumed initial public offering price of $31.00 per share and after deducting an assumed underwriting discount and estimated offering expenses payable by us; . our sale of 7,258,065 shares of common stock to America Online, Motorola and Nokia concurrently with the closing of this offering at an assumed offering price of $31.00 per share; . for administrative convenience, 3Com intends to retain most of our accounts receivable and accounts payable at the time of our separation; accordingly, such accounts receivable and accounts payable are excluded from our pro forma balance sheet as of November 26, 1999; . payment of a dividend to 3Com of an assumed $184.4 million; and . repayment of an intercompany payable to 3Com, which was approximately $58 million at November 26, 1999.
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+PROSPECTUS SUMMARY The following summary highlights information contained in this prospectus and does not contain all the information that may be important to you. You should read the entire prospectus carefully, including the section entitled "Risk Factors" and our financial data and related notes, before making an investment decision. Modus Media We are a leading, global provider of supply chain management services for the technology industry. Our clients are software and hardware manufacturers and Internet companies who engage us to manage and perform the multiple steps that make up the supply chain for their products, including: . handling customer orders for our clients that we receive by telephone, fax or email or over the web; . acquiring hardware components and other materials, such as paper and CDs, that we use to produce and assemble our clients' products; . managing inventory that we acquire or produce for our clients; . reproducing software onto CDs and diskettes; . assembling hardware components, such as keyboards and other accessories; and . fulfilling of orders by picking, packing, warehousing and shipping products. We also provide e-commerce support services, such as developing web site storefronts, processing on line orders and payments, tracking orders on line and managing product returns, rebates and refunds. We have been in operation since 1982 and have built a worldwide infrastructure in 12 countries, consisting of 20 facilities, which we refer to as solution centers, and over 4,500 employees. Our clients include original equipment manufacturers, known as OEMs, such as Dell, Hewlett Packard, IBM and Sun Microsystems; independent software vendors, known as ISVs, such as Intuit, Microsoft, Network Associates and Novell; and leading consumer electronics, telecommunications and Internet companies such as AT&T, Beyond.com, E-Stamp and Sony. The length of our relationships with our five leading clients, based on 1999 revenue, has averaged over ten years. Companies, particularly in the technology industry, have increasingly sought to outsource to third parties critical non-core business processes so that they can focus on their core competencies. Market demands for increased productivity have led companies to move beyond outsourcing only their basic production and fulfillment processes to outsourcing all of the business processes involved in their supply chains. The goal of supply chain management is to link supply and demand as closely as possible in order to reduce costs, minimize business risk and better meet client expectations for performance and quality. We believe that the growth of e-commerce is increasing demand for supply chain outsourcing. According to G2R, a subsidiary of Gartner Group, the market for supply chain management outsourcing is estimated to grow from $17.0 billion in 1998 to $42.2 billion in 2003, representing a compound annual growth rate of 20%. We offer a range of services that provide our clients with a "one-stop shop" for their outsource requirements. Our capabilities include: . e-commerce support services, which enable us to transmit customer orders that we receive over the web directly to our production and distribution centers so that we can quickly produce, pack and ship ordered products; . flexible production, which allows us to meet our clients' time to market and volume requirements during periods of varying demand; . a global presence, which enables us to coordinate our clients' worldwide product introductions and provide customization of products to meet local language and other requirements; and . substantial experience in supply chain management, which has earned us a reputation as a trusted part of our clients' supply chains. We refer to our services as content manufacturing services and e-fulfillment services. By content manufacturing services, we mean the supply chain management services that we provide to OEMs and ISVs. Our e-fulfillment services consist of content manufacturing services plus customer care and e- commerce support activities that we provide directly to our clients' customers. Although a majority of the orders received through our e-fulfillment services currently are submitted by telephone or fax, we expect that an increasing portion will be received over the web as we provide more e- fulfillment services and the Internet becomes a more prevalent medium for commerce. To date, we have built more than 40 e-commerce sites for our clients, ranging from web sites for the sale of products, known as web site storefronts, to on line order tracking and order information sites. The following table shows our principal services: e-Fulfillment Services Content Manufacturing Services . Development of web site storefronts and . Maintaining clients' software connection to our production and code for replication in distribution centers where we package multiple versions and multiple and ship our clients' products; languages; . Customer response centers, which process . Selection of vendors and orders and inquiries received by procurement of materials for telephone, fax, email and web; hardware assembly and software manufacturing; . Processing online payments in multiple currencies; . Software production and hardware assembly of our . Processing product returns, refunds and clients' products; rebates; . Management of inventory levels . Reporting on the ordering activities of for our clients; and our clients' customers; and . Fulfillment, where we pick, . Managing the licensing of our clients' pack and ship our clients' software by electronically registering products to their customers. users and providing passwords. Examples of typical services that we provide for our clients include the following: . For one ISV, we reproduced its software in 1,400 versions, including in 34 languages for a worldwide product launch. Each software package contained software replicated on CD or diskette, printed documentation, registration and marketing materials. . For one OEM, we assemble hardware packages containing more than 100 components including, for example, a mouse, keyboard, CDs and instruction manuals. Each package is shipped to the OEM where it is combined with a personal computer prior to delivery. . For one Internet company, we developed a website storefront, which offers 10,000 products to its customers. We process orders our client's customers place over the web, manage its product inventory, and distribute ordered products to its customers. Our strategy is to take advantage of the market trends towards more frequent product introductions, mass customization and growth of e-commerce by implementing strategies to: . Expand our e-fulfillment services; . Expand services to existing clients; . Capitalize on worldwide presence and integrated information technology capabilities; . Continue to achieve high ratings in outsourcing industry performance measurements; . Improve our financial returns through investments in technology and more efficient use of resources; . Pursue select, high-growth markets; and . Pursue strategic acquisitions. ------------ Effective March 2, 2000, we changed our name from Modus Media International Holdings, Inc. to Modus Media, Inc. We are a Delaware corporation. Our principal executive offices are located at 690 Canton Street, Westwood, Massachusetts 02090 and our telephone number is (781) 407-2000. Our World Wide Web site address is www.modusmedia.com. This reference is not intended to incorporate the information on our web site into this prospectus. The Offering <TABLE> <S> <C> Common stock offered........ 8,000,000 shares Common stock to be outstanding after this offering................... 34,006,116 shares Use of proceeds............. For general corporate purposes, including working capital, payment of debt and potential acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol.............. EMMI </TABLE> The number of shares that will be outstanding after the offering is based on the number of shares outstanding as of December 31, 1999 and excludes: . 6,310,616 shares of common stock issuable upon exercise of stock options outstanding as of December 31, 1999, with a weighted average exercise price of $2.14 per share, of which options to purchase 1,673,506 shares were then exercisable; and . 266,500 shares of common stock reserved for future grant under our stock option plans. ------------ Unless specifically stated, the information in this prospectus: . assumes no exercise of the underwriters' over-allotment option; . assumes an initial offering price of $12.00 per share, the midpoint of our initial public offering price range; . reflects a 2-for-1 stock split effective as of January 24, 2000; . assumes the conversion of all shares of non-voting common stock into common stock; and . reflects the filing, as of the closing of the offering, of our Second Amended and Restated Certificate of Incorporation, referred to in this prospectus as the restated certificate of incorporation, and the adoption of our Second Amended and Restated By-Laws, referred to in this prospectus as the restated by-laws, implementing the provisions described below under "Description of Capital Stock--Delaware Law and Certain Charter and By-Law Provisions, Anti-Takeover Effects." Modus Media, Modus Media International, MMI and their logos are trademarks of Modus Media. All other trademarks or tradenames referred to in this prospectus are the property of their respective owners. Summary Consolidated Financial Data The following summary historical consolidated financial data should be read along with "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the consolidated financial statements and related notes included elsewhere in this prospectus. The as adjusted balance sheet data gives effect to our receipt of the estimated proceeds from the sale of 8,000,000 shares of common stock we are selling in this offering at an assumed public offering price of $12.00 per share, after deducting estimated underwriting discounts and commissions and offering expenses. <TABLE> <CAPTION> Years Ended December 31, --------------------------------------------- 1996 1997 1998 1999 --------- --------- ----------- ----------- (in thousands, except share and per share data) <S> <C> <C> <C> <C> Statement of Operations Data: Revenue........................ $ 811,905 $ 684,523 $ 630,082 $ 697,468 Gross profit................... 124,116 119,735 133,902 147,787 Restructuring charges.......... 100,883 -- -- -- Operating income (loss)(1)..... (107,675) (17,014) 17,172 18,826 Income (loss) before income taxes(1)...................... (122,107) (29,843) 15,012 15,782 Net income (loss)(1)........... $(111,096) $ (32,667) $ 10,747 8,232 ========= ========= =========== =========== Preferred stock dividends, net........................... 172 5,922 (6,659) --------- ----------- ----------- Net income (loss) available to common shareholders........... $ (32,839) $ 4,825 $ 14,891 ========= =========== =========== Net income (loss) per share(2): Basic........................ $ 0.19 $ 0.59 =========== =========== Diluted...................... $ 0.18 $ 0.51 =========== =========== Number of shares used in per share calculations(2): Basic........................ 25,497,466 25,227,672 Diluted...................... 26,144,234 29,428,426 Selected Operating Data: Depreciation and amortization.. $ 28,200 $ 26,371 $ 18,731 $ 17,407 EBITDA(3)...................... (79,475) 9,357 35,903 36,851 Capital expenditures........... 15,800 34,032 12,307 17,123 </TABLE> <TABLE> <CAPTION> As of December 31, 1999 -------------------- Actual As Adjusted -------- ----------- (in thousands) <S> <C> <C> Balance Sheet Data: Cash and cash equivalents.................................. $ 29,759 $ 69,539 Working capital............................................ 29,589 69,369 Total assets............................................... 286,610 326,390 Total debt................................................. 56,303 8,603 Total shareholders' equity................................. 43,369 130,849 </TABLE> - -------- (1) Year ended December 31, 1999 includes a stock-based compensation charge of $9.7 million. (2) Prior to the Reorganization on December 15, 1997, as described in Note 2 of the Consolidated Financial Statements, no common shares were outstanding; therefore, income per share data prior to 1998 is not meaningful and has been excluded. (3) EBITDA is defined as operating income before depreciation and amortization, and amortization of stock compensation expense (a non-cash charge). EBITDA is presented because we believe that EBITDA is a widely accepted financial indicator of an entity's ability to incur and service debt. EBITDA should not be considered by an investor as an alternative to net income or income from operations, as an indicator of our operating performance or other combined operations or cash flow data prepared in accordance with generally accepted accounting principles, or as an alternative to cash flows as a measure of liquidity. Our computation of EBITDA may differ from similarly titled computations of other companies.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001100412_array_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001100412_array_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering and the financial statements and notes to those statements appearing elsewhere in this prospectus. ARRAY BIOPHARMA Array BioPharma is a discovery research company creating drug candidates through innovations in chemistry. Our experienced scientists provide premium products and services to create, evaluate and optimize potential drug candidates in collaboration with pharmaceutical and biotechnology companies. We believe our information-based approach improves the efficiency of the drug discovery process and increases the quality of potential drug candidates. In addition, we apply these capabilities internally for our own drug discovery programs. The drug industry is experiencing revolutionary change fueled by genomics, which is the study of all genes, and by the tremendous progress in the biological understanding of disease. Historically, a key bottleneck in the development of new drugs has been the identification by biologists of the proteins that may cause disease. However, recent advances in genomics and biology have resulted in the identification of thousands of new disease-related proteins. As a result, we believe the drug research and development bottleneck is shifting to the discovery by chemists of safe and effective new drugs to treat the diseases caused by these proteins. Chemists create drugs known as small molecule drugs used to treat these disease-related proteins. We estimate that 90% of the revenue in 1999 generated by the 200 top selling drugs worldwide was attributable to small molecule drugs created through the application of chemistry. Small changes in chemistry design can differentiate the ability of drugs to effectively treat disease and therefore determine their potential success or failure in the marketplace. Despite recent advances in technology, the process of discovering new drugs remains slow, expensive and risky. To address these inefficiencies, it is critical to apply high quality chemistry and predictive information technology early in the discovery process to identify and eliminate inferior drug candidates and to design safe and effective new drugs. We provide a broad range of premium drug discovery products and services to bridge the gap between the discovery of disease-related proteins and the testing of drug candidates in animals and humans, including: - The starting materials, which we call our Optimer building blocks, used to create the chemical compounds that may become potential drug candidates; - The creation and sale of collections of chemical compounds, which we call our Diversity Library, that have the potential to become drug candidates through further refinement; - The optimization of potential drug candidates to maximize their effectiveness in treating disease; and - The design and refinement of the manufacturing process required to produce large quantities of drug candidates for testing in animals and humans. We believe our information-driven technology platform enables our scientists to make better decisions throughout the drug discovery process and thereby create higher quality drugs more quickly and less expensively. Our technology platform includes: - Proprietary software and predictive databases that facilitate drug discovery; - Proprietary technologies that enable our scientists to perform high-speed chemical synthesis; - Analytical and computational technologies to determine and predict the three-dimensional structure of disease-related proteins and drug candidates; and THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY. Subject to completion, dated November 16, 2000 PROSPECTUS 6,000,000 Shares [Array BioPharma Logo] Common Stock -------------------------------------------------------------------------------- This is our initial public offering of shares of common stock. We are offering 6,000,000 shares. We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol "ARRY." We expect the public offering price to be between $8.00 and $9.00 per share. INVESTING IN THE SHARES INVOLVES RISKS. "RISK FACTORS" BEGIN ON PAGE 7. <TABLE> <CAPTION> Per Share Total --------- ------ <S> <C> <C> Public offering price....................................... $ $ Underwriting discount....................................... $ $ Proceeds to Array BioPharma Inc. ........................... $ $ </TABLE> We have granted the underwriters a 30-day option to purchase up to 800,000 additional shares of common stock, and two of our stockholders have granted the underwriters a 30-day option to purchase up to 100,000 additional shares of their common stock, on the same terms and conditions as set forth above, solely to cover over-allotments, if any. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Lehman Brothers, on behalf of the underwriters, expects to deliver the shares on or about , 2000. -------------------------------------------------------------------------------- LEHMAN BROTHERS DEUTSCHE BANC ALEX. BROWN LEGG MASON WOOD WALKER INCORPORATED , 2000 - Technology to test and rapidly screen those compounds with the greatest potential to effectively treat a particular disease. Our objective is to become the leading creator of high quality potential drug candidates by providing premium discovery chemistry products, services and technologies. Key elements of our strategy are to: - Provide an integrated chemistry solution to drug discovery and become the partner of choice for pharmaceutical and biotechnology companies; - Combine state-of-the-art technology with innovative chemistry to accelerate drug discovery; - Create our own drug candidates for partnering with pharmaceutical and biotechnology companies; - Increase our scientific resources by continuing to attract world-class scientists; and - Expand our capabilities through acquisitions and internal development. Our achievements to date include: - Creating our own potential drug candidates and entering into a research and license agreement with Amgen Inc. providing for the development and possible commercialization of one of these potential drug candidates; - Entering into collaboration agreements with pharmaceutical companies such as Eli Lilly and Company and Merck & Co., Inc.; - Entering into collaboration agreements with biotechnology companies such as Celltech Chiroscience Ltd., through its subsidiary Darwin Discovery Limited, ICOS Corporation and Tularik Inc.; - Discovering a drug candidate suitable for human testing with our first collaboration partner, ICOS; - Creating a technology platform to identify new drug candidates from genomic information; and - Growing our staff since our inception in 1998 to 124 full-time employees as of October 31, 2000, including 92 scientists, of whom 87 are chemists, 54 have Ph.D.'s and 47 have large pharmaceutical company experience. We intend to grow revenue and achieve profitability through fee-for-service revenue and product sales while sharing in the success we aim to create for our collaborators. To maximize the value we capture, we intend to allocate our scientific resources to: - Build upon our foundation of fee-for-service business with leading pharmaceutical and biotechnology companies; - Leverage our drug discovery products and services through sales to multiple customers; - Initiate additional collaborations with leading pharmaceutical and biotechnology companies that include fee-for-service revenue plus milestone and/or royalty payments; and - Generate our own potential drug candidates for partnering with pharmaceutical and biotechnology companies under terms that include licensing fees, fee-for-service revenue and milestone and/or royalty payments. We have assembled a scientific team with experience in both the pharmaceutical and biotechnology industries. At our inception, we had the distinct advantage of recruiting 20 former Amgen scientists, who had previously been recruited from large pharmaceutical companies. This nucleus afforded us a critical mass of experienced chemists, which we believe has been a competitive advantage in recruiting additional scientists. We have a limited operating history and may not be successful in executing our business strategy due to a number of risks, as described in "Risk Factors." Since our inception in 1998, we have incurred operating [Inside front cover graphic depicts Array's logo and the statement "We Accelerate Drug Discovery Through Innovations in Chemistry."] and net losses and negative cash flows. As of September 30, 2000, we had an accumulated deficit of $12.6 million and had net losses of $4.3 million and $5.1 million for the fiscal years ended June 30, 1999 and 2000, respectively, and $3.1 million for the three-month period ended September 30, 2000. In addition, the drug research and development industry is highly competitive. Our competitors include pharmaceutical and biotechnology companies, chemistry outsourcing companies and others, many of which have greater resources. We incorporated in Delaware in February 1998 under the name Array BioPharma Inc. Our principal executive offices are located at 1885 33rd Street, Boulder, Colorado 80301, and our telephone number is 303-381-6600. You can visit us on the World Wide Web at www.arraybiopharma.com. Information contained on our Web site does not constitute any part of this prospectus. "Array BioPharma," the Array BioPharma logo, "Array BioPharma The Discovery Research Company," "The Discovery Research Company," "Optimer" and "Radical" are trademarks of Array BioPharma Inc. Other trademarks and trade names appearing in this prospectus are the property of their holders. THE OFFERING Common stock offered by us.................... 6,000,000 shares Common stock to be outstanding after the offering................. 21,466,922 shares Use of proceeds............ We currently intend to use the net proceeds of this offering to fund our operations, including continued development and manufacturing of existing products as well as research and development of additional products and services, hire additional personnel and expand our facilities. We may also use a portion of the proceeds to acquire or invest in new products or technologies, pay down indebtedness or acquire complementary businesses. As of October 31, 2000, we had approximately $5.9 million of outstanding indebtedness. We intend to use the balance of the net proceeds for general corporate purposes, including working capital requirements. See the section entitled "Use of Proceeds" for more information. Proposed Nasdaq National Market symbol............ ARRY The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of October 31, 2000. This number excludes: - 3,266,016 shares of common stock underlying options outstanding as of October 31, 2000, at a weighted-average exercise price of $0.64 per share, of which 301,504 were exercisable; - 110,750 shares of common stock, assuming the automatic conversion of our preferred stock, underlying warrants to purchase preferred stock outstanding as of October 31, 2000, at a weighted-average exercise price of $3.15 per share; - 2,682,094 shares of common stock that will be available for issuance under our stock option plan following this offering; and - 800,000 shares of common stock that will be available for purchase under our employee stock purchase plan following this offering. ASSUMPTIONS IN THIS PROSPECTUS Unless we indicate otherwise, all information in this prospectus assumes: - the automatic conversion of our Series A preferred stock, Series B preferred stock and Series C preferred stock, on a one-to-one basis, into 11,501,666 shares of our common stock upon the closing of this offering; - the filing of our amended and restated certificate of incorporation that provides for, among other things, an increase in the number of our authorized shares of common stock from 20,225,000 to 60,000,000 to be effected concurrently with this offering; - no exercise by the underwriters of their over-allotment option to purchase up to 800,000 additional shares of common stock from us and up to 100,000 shares of common stock from two of our stockholders; and - no exercise by any of our security holders of any outstanding options or warrants prior to the closing of this offering. SUMMARY FINANCIAL DATA The following tables summarize our financial data, which we derived from our historical financial statements and related notes for the following periods: - our statements of operations data from February 6, 1998 (inception) to June 30, 1998, for the twelve-month periods ended June 30, 1999 and 2000, and for the three-month periods ended September 30, 1999 and 2000; and - our balance sheet data at June 30, 1999 and 2000, and at September 30, 2000. The pro forma net loss per share data gives effect to the automatic conversion of all of our outstanding preferred stock upon the closing of this offering. The pro forma as adjusted balance sheet data at September 30, 2000 reflects the conversion of all of our outstanding preferred stock into common stock upon the closing of this offering and our receipt of the estimated net proceeds from the sale of 6,000,000 shares of our common stock in this offering at an assumed initial public offering price of $8.50 per share, after deducting the estimated underwriting discount and offering expenses. The cost of revenue, research and development expenses, and selling, general and administrative expenses data below includes compensation related to stock option grants. You should read the summary financial data for the periods indicated together with our audited financial statements and related notes and other financial information, including the "Management's Discussion and Analysis of Financial Condition and Results of Operations," all of which we have included elsewhere in this prospectus. <TABLE> <CAPTION> PERIOD FROM FEBRUARY 6, 1998 THREE MONTHS ENDED (INCEPTION) TO YEARS ENDED JUNE 30, SEPTEMBER 30, JUNE 30, ---------------------- ---------------------- 1998 1999 2000 1999 2000 -------------- --------- ---------- --------- ---------- (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenue: Collaboration service revenue...... $ -- $ 992 $ 4,629 $ 730 $ 2,110 Product revenue.................... -- 512 2,145 620 651 ------- --------- ---------- --------- ---------- Total revenue...................... -- 1,504 6,774 1,350 2,761 Cost of revenue*................... -- 1,033 4,445 817 2,408 ------- --------- ---------- --------- ---------- Gross profit....................... -- 471 2,329 533 353 Research and development expenses*........................ -- 3,301 3,963 696 1,702 Selling, general and administrative expenses*........................ 62 1,522 3,470 439 1,694 ------- --------- ---------- --------- ---------- Total operating expenses........... 62 4,823 7,433 1,135 3,396 ------- --------- ---------- --------- ---------- Loss from operations............... (62) (4,352) (5,104) (602) (3,043) Interest expense................... -- (136) (384) (84) (173) Interest income.................... 13 181 356 25 130 ------- --------- ---------- --------- ---------- Net loss........................... (49) (4,307) (5,132) (661) (3,086) Deemed dividend related to beneficial conversion feature of preferred stock.................. -- -- -- -- (5,000) ------- --------- ---------- --------- ---------- Net loss applicable to common stockholders..................... $ (49) $ (4,307) $ (5,132) $ (661) $ (8,086) ======= ========= ========== ========= ========== Basic and diluted net loss per share applicable to common stockholders..................... $ (0.06) $ (1.48) $ (1.68) $ (0.22) $ (2.17) ======= ========= ========== ========= ========== Shares used in computing basic and diluted net loss per share....... 863,964 2,918,367 3,063,439 2,968,575 3,718,550 ======= ========= ========== ========= ========== </TABLE> <TABLE> <CAPTION> PERIOD FROM FEBRUARY 6, 1998 THREE MONTHS ENDED (INCEPTION) TO YEARS ENDED JUNE 30, SEPTEMBER 30, JUNE 30, ---------------------- ---------------------- 1998 1999 2000 1999 2000 -------------- --------- ---------- --------- ---------- (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> <C> <C> <C> Pro forma basic and diluted net loss per share applicable to common stockholders (unaudited)...................... $ (0.44) $ (0.57) ========== ========== Shares used in computing pro forma basic and diluted net loss per share (unaudited)................ 11,697,343 14,109,105 ========== ========== * Includes compensation related to stock option grants: Cost of revenue.................. $ 43 $ 210 Research and development expenses...................... 35 140 Selling, general and administrative expenses....... 1,040 357 ---------- ---------- Total.................... $ 1,118 $ 707 ========== ========== </TABLE> <TABLE> <CAPTION> AS OF SEPTEMBER 30, 2000 AS OF JUNE 30, ------------------------- ---------------- PRO FORMA 1999 2000 ACTUAL AS ADJUSTED ------ ------- --------- ------------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> <C> <C> BALANCE SHEET DATA: Total current assets.................................. $4,005 $ 8,548 $14,180 $60,710 Property, plant and equipment, net.................... 2,872 6,911 10,236 10,236 Total assets.......................................... 7,125 15,823 24,787 71,317 Total current liabilities............................. 2,744 6,338 6,634 6,634 Long-term debt, less current portion.................. 1,824 2,833 3,620 3,620 Total stockholders' equity............................ 2,557 6,652 14,533 61,063 </TABLE>
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS" SECTION AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE ACCOMPANYING NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. REGENERATION TECHNOLOGIES, INC. We are a leader in the use of natural tissue and innovative technologies to repair and promote the natural healing of human bone and other human tissues. Using core human physiology--the basic biology of natural tissues as they function in the body--our human tissue implants are improving surgical outcomes. We process "allograft" tissue, which is tissue recovered from deceased human donors, for biologic safety and implant mechanical characteristics. A surgeon transplants these allografts into a patient's body to make the needed repair. By contrast, an "autograft" procedure is one in which the surgeon harvests tissue from one part of a patient's body for transplant to another part of the body to make the needed repair. Our goal is to replace conventional implant approaches, including metals, synthetics and autograft implants with allograft, and to establish our allografts as the implant of choice for tissue repair. We are a provider of comprehensive healing and natural tissue products in a broad range of markets. In addition, we were the largest U.S. processor and distributor of allografts that are precisely tooled for specific surgical uses, in terms of revenues, for the year ended December 31, 1999. Our allografts are distributed in all 50 states and in nine countries internationally. We are also a processor of "conventional allografts," which are allografts that are not tooled by the processor for a specific surgical use. We process human musculoskeletal and other tissues, including bone, cartilage, tendon, ligament, pericardial and cardiovascular tissue in producing our allografts. Surgeons then use these tissues to repair and promote the healing of a wide variety of bone and other tissue defects, including spinal vertebrae repair, musculoskeletal reconstruction, fracture repair, repairs to the jaw and related tissues, urinary incontinence and heart valve disorders. Our current grafts range from conventional allografts to precision tooled grafting material, including bone dowels, that are cylindrical-shaped round pins that join adjacent tissues, wedges, pastes and pins, urological allografts and heart valves. During 1999, we shipped over 90,000 processed allografts used in an estimated 60,000 procedures. Often, surgeons use more than one allograft in a given procedure. The overall market in the United States for tissue repair and healing through the use of surgical implants, including metals, synthetics and allografts, has grown considerably over the last several years, with revenues in the orthopedic and cardiovascular segments of this market exceeding an estimated $6.4 billion in 1999. In these segments, procedures using allografts, either conventional graft, bone paste, or specialty tooled tissues, totaled over 310,000 during 1999, accounting for revenues of over $410.0 million. We believe that the use of allografts will continue to increase and represent a growing portion of the surgical implant market. Processors of tissue supply allografts to hospitals and surgeons for use in surgery. The need for tissue is increasing each year and currently is served by approximately 30 tissue banks in the United States that process and/or distribute bone or cardiovascular allografts. We have one of the most extensive tissue recovery programs in the United States, recovering bone or cardiovascular tissue from over 4,000 human donors during 1999, up from over 2,300 in 1998 and 1,500 in 1997. We believe our network of recovery groups accounted for approximately 32% of the human tissue recovered for processing in the United States during 1999. We pursue a market-by-market approach to distribution of our allografts, including strategic arrangements in order to increase our penetration in selected markets. We have an alliance with Medtronic Sofamor Danek in the spinal market, with Exactech, Inc. in portions of the bone paste market, and with C.R. Bard, Inc. in the urological market. Using our proprietary BioCleanse system, we believe we are the only processor of human tissue currently able to safely process tissue in a single system from multiple donors simultaneously. This system, which kills or inactivates all classes of conventional pathogens, viruses, microbes, bacteria and fungi, and which cleanses tissue both before and after processing, allows us to safely process tissue from up to 100 donors at the same time, thereby significantly increasing the efficiency of our tissue processing. In addition, our BioCleanse system is able to remove blood, fats, lipids and other unwanted materials from the tissue we process more successfully than traditional processing. We believe the removal of blood, fat, lipids and other unwanted materials results in faster patient healing since it eliminates the need for the patient's body to remove these substances using natural processes following surgery. In contrast to traditional tissue processing, our BioCleanse system also permits us to process tissue at lower average cost and to safely and economically process tissue from donors and age groups that might not have been feasible without BioCleanse. We plan to continue to develop new allografts and technologies within the orthopedics, urological and cardiovascular markets, and to develop additional tissue-related technologies for other markets. To accomplish this, we intend to continue to use our core technologies and processes which include precision machined bone tissue, allograft bone pastes that stimulate the growth of new bone, our proprietary BioCleanse system, segmentally demineralized bone allografts which have been treated to remove unwanted materials, osteoarticular grafts designed to fit specific surgical instruments, growth factors to stimulate bone or tissue growth, allografts assembled from various smaller bone pieces, xenograft, or animal tissue, and bone treated to significantly reduce materials that could cause immune responses. THE OFFERING <TABLE> <S> <C> Common stock offered by: Regeneration Technologies, Inc....... 3,800,000 shares Selling stockholder.................. 1,900,000 shares Total............................ 5,700,000 shares Common stock to be outstanding after the offering......................... 21,308,562 shares Use of proceeds........................ To fund continued research and development, to construct and equip a new manufacturing facility, to construct additional BioCleanse systems and other automated processing systems, to expand our tissue recovery and distribution activities, and for general corporate purposes, including working capital. In addition, we may use a portion of the proceeds to acquire businesses, assets, technologies or product lines that complement our existing business. We will not receive any proceeds from the shares sold by the selling stockholder. See "Use of Proceeds." Proposed Nasdaq National Market Symbol............................... RTIX </TABLE> ------------------------ The above information excludes: - 1,825,166 shares of our common stock subject to options granted under our Omnibus Stock Option Plan and outstanding as of June 30, 2000 at a weighted average exercise price of $4.29 per share; - 226,930 shares of our common stock reserved for issuance upon the exercise of warrants outstanding as of June 30, 2000 at a weighted average exercise price of $5.65 per share; and - 269,231 shares of our common stock we anticipate issuing when we complete our acquisition of Alabama Tissue Center when we complete this offering, assuming an initial public offering price of $13.00 per share. Unless otherwise indicated, the information in this prospectus assumes: - that the underwriters will not exercise their over-allotment option; - the conversion of 2,894,490 shares of outstanding preferred stock into 13,893,552 shares of common stock; - a 4.8-for-1 stock split of our common stock to be effected prior to the completion of this offering; - the reorganization of our company as a Delaware corporation; and - the completion of our acquisition of the tissue processing and distribution business of Alabama Tissue Center. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) You should read the following summary consolidated financial data together with (1) the statements of revenues and direct costs and accompanying notes of our predecessor business; (2) our consolidated financial statements and accompanying notes; and (3) "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. Set forth below are the statement of operations data for the years ended December 31, 1995, 1996 and 1997 and the period from January 1, 1998 to February 11, 1998 for our predecessor business. In addition, set forth below are statement of operations data for the period from February 12, 1998 to December 31, 1998, the year ended December 31, 1999 and the six months ended June 30, 1999 and 2000 and the balance sheet data as of June 30, 2000 (1) on an actual basis and (2) on an as-adjusted basis to give effect to the sale by us of 3,800,000 shares of our common stock in this offering at an assumed initial public offering price of $13.00 per share, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us, and the application of net proceeds from this offering. <TABLE> PERIOD FROM PERIOD FROM SIX MONTHS JANUARY 1, FEBRUARY 12, ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1998 TO 1998 TO YEAR ENDED JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, FEBRUARY 11, DECEMBER 31, DECEMBER 31, ---------- 1995 1996 1997 1998 1998 1999 1999 ------------ ------------ ------------ ----------- ------------ ------------ ---------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues........... $1,192 $2,291 $13,509 $2,826 $ 35,257 $ 73,020 $ 31,561 Net revenues............. 1,192 1,726 4,634 894 11,128 33,026 14,099 Total costs and expenses............... 1,304 2,555 5,180 866 15,304 30,587 13,648 Operating (loss) income................. (4,176) 2,439 451 Net (loss) income........ $ (4,142) $ 2,960 $ 155 ========== =========== ========== Net (loss) income per common share--basic.... $ (1.12) $ 0.81 $ 0.04 Net (loss) income per common share--diluted.. $ (1.12) $ 0.18 $ 0.01 Weighted average shares outstanding--basic..... 3,686,770 3,669,970 3,672,790 Weighted average shares outstanding--diluted... 3,686,770 16,636,791 15,936,747 Pro forma net income per common share--basic.... $ 0.18 Pro forma net income per common share--diluted.. $ 0.18 Pro forma weighted average shares outstanding--basic..... 16,161,269 Pro forma weighted average shares outstanding--diluted... 16,636,791 <S> <C> SIX MONTHS ENDED JUNE 30, ----------- 2000 ----------- STATEMENT OF OPERATIONS DATA: Total revenues........... $ 54,079 Net revenues............. 25,144 Total costs and expenses............... 22,859 Operating (loss) income................. 2,285 Net (loss) income........ $ 1,219 =========== Net (loss) income per common share--basic.... $ 0.34 Net (loss) income per common share--diluted.. $ 0.07 Weighted average shares outstanding--basic..... 3,629,400 Weighted average shares outstanding--diluted... 18,312,307 Pro forma net income per common share--basic.... $ 0.07 Pro forma net income per common share--diluted.. $ 0.07 Pro forma weighted average shares outstanding--basic..... 17,522,952 Pro forma weighted average shares outstanding--diluted... 18,312,307 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 2000 ------------------------ ACTUAL AS ADJUSTED BALANCE SHEET DATA: ---------- ----------- <S> <C> <C> Cash and cash equivalents................................... $ 763 $45,705 Working capital............................................. 12,600 57,542 Total assets................................................ 56,341 101,283 Long-term obligations, less current portion................. 3,912 3,912 Total stockholders' equity.................................. 17,113 62,055 </TABLE> ---------------------------------- We originally incorporated in Florida on August 21, 1997 and began operations on February 12, 1998 upon our separation from the University of Florida Tissue Bank, Inc. Prior to the completion of this offering, we intend to reorganize as a Delaware corporation. Our principal executive offices are located at One Innovation Drive, Alachua, Florida 32615 and our telephone number is (904) 418-8888. Our Web site is located at www.rtitechnology.com. The information contained on our Web site should not be considered a part of this prospectus. Alloanchor-TM-, BioCleanse-TM-, Cornerstone-TM- SR, FasLata-TM- Fascia Lata Allograft, MD-Series-TM- Threaded Bone Dowels, Opteform-TM-, Osteofil-TM-, Precision-TM- Cortical Bone Wedge, Regenaderm-TM-, Regenafil-TM-, Regenaform-TM-, Regeneration Technologies, Inc.-TM- and Tangent-TM- Cortical Bone Wedge are some of our trademarks. Any other trademark, trade name or service mark of any other company appearing in this prospectus belongs to its holder.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001100672_petopia_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001100672_petopia_prospectus_summary.txt
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+Prospectus Summary This summary highlights information contained in other parts of this prospectus. Because it is a summary, it does not contain all of the information that you should consider before investing in the shares. You should read the entire prospectus carefully. Petopia.com is a leading online pet products retailer that integrates a "bricks and clicks" business model with a multi-channel sales approach. We provide a convenient, one-stop shop for all our customers' pet-related needs by offering a comprehensive range of pet supplies, specialty items, relevant content, and online community. We believe our online strategy, when compared to our competitors, will allow us to achieve better margins, lower customer acquisition costs, and increased customer satisfaction. We are implementing our "bricks and clicks" model through our exclusive relationship with PETCO Animal Supplies, Inc. or PETCO, a leading specialty retailer of premium pet food and supplies with approximately 500 retail stores. We believe this model combines the advantages of both online and offline retailing to better serve customers through comprehensive product selection, competitive pricing, access to expert information, around-the-clock availability and convenient home delivery. Our strategic relationship with PETCO also allows us to integrate our systems and operations to achieve significant efficiencies, including rapid development of a nationwide distribution network, ability to acquire merchandise at favorable volume-based rates, reduced inventory and infrastructure investment, lower shipping costs, and efficient customer acquisition through in-store promotion and database marketing. Our multi-channel sales approach increases the reach of our web site and provides our customers with the flexibility and convenience of purchasing products and accessing pet-related information through the medium of their choice, including our web site, catalog, television program, customer call center, and Petopia Internet stations located in PETCO stores. A key benefit of our multi-channel sales approach is the opportunity to promote our brand and acquire customers through active cross-marketing between our sales channels. To help execute this plan, we have formed an exclusive partnership with ValueVision International, Inc. or ValueVision, with whom we intend to deliver weekly pet-related programming to approximately 30 million cable television households. We also publish a leading high-end specialty catalog offering approximately 6,000 pet-related product SKUs, a large portion of which are proprietary to us. In addition, we promote and sell specialty products through our in-store Petopia Internet stations. The pet products and services industry represents an attractive opportunity due to its large size and broad customer base. According to the Pet Industry Joint Advisory Council, U.S. consumer spending on pet products was approximately $23 billion in 1997, and the market is expected to grow to $29 billion by 2001. The American Pet Products Manufacturers Association or APPMA, estimates that over 60% of all U.S. households own at least one pet, while 40% of these households have multiple pets. According to the American Animal Hospital Association, 70% of pet owners consider their pets as children, and 63% celebrate their pet's birthday. We believe this bond between pets and their owners results in a high level of discretionary spending on pets. In addition, the care of pets requires the regular purchase of core products, such as food and litter and offers an attractive opportunity for an online product replenishment service. Our solution provides the following benefits to consumers: . Convenience of a Multi-Channel Sales Approach. By offering products, services and information through our web site, catalog, television program, customer call center, and Petopia Internet stations located in PETCO stores, we allow our customers to shop through the medium of their choice. . Trusted Brand. We believe our customers have confidence in our product and content offerings due to our affiliation with trusted pet industry brands, such as PETCO and the American Society for the Prevention of Cruelty for Animals or ASPCA. We further enhance our credibility by offering proprietary content from respected sources, such as the Veterinary Medicine Publishing Group. . Efficient Fulfillment and Distribution. We currently operate out of a nationwide network of five distribution centers which allow us to fulfill orders and ship products in a quick and cost efficient manner. . Exceptional Customer Service. We believe the pet-related knowledge of our customer service team and their ability to answer a wide variety of both product and pet care questions reinforces customer loyalty and enhances our brand image. . Comprehensive Product Selection. As an Internet-based retailer, our product offerings are not limited by in-store shelf space. As a result, we are able to offer a comprehensive selection of both pet products and supplies for all pet types. We are also well positioned to offer a full range of pet- lifestyle products, including apparel, home furnishings, and accessories for pets and their owners. Our objective is to be the leading retailer serving pet owners and enthusiasts. In order to achieve this goal, we intend to: . strengthen the Petopia.com brand; . acquire customers through multiple channels at low cost; . leverage PETCO's buying power, merchandising expertise and operations infrastructure; . rapidly scale a nationwide distribution network supporting all of our sales channels from a common platform; . encourage customer loyalty through exceptional customer service and subscription-based product replenishment programs; and . further enhance our gross margin through an emphasis on higher-end lifestyle, hobbyist and specialty products. Other Information Unless otherwise noted, this prospectus assumes: . the automatic conversion of our outstanding convertible preferred stock into common stock on a one-for-one basis upon the closing of this offering; . an initial public offering price of $ per share, the midpoint of the range set forth on the cover of this prospectus; . the filing of our amended and restated certificate of incorporation authorizing 150,000,000 shares of common stock and a class of 10,000,000 shares of undesignated preferred stock upon the closing of the offering; . that options and warrants to purchase 18,952,360 shares of common stock in the aggregate will remain outstanding after the closing of the offering; and . no exercise by the underwriters of their option to purchase additional shares of our common stock in the offering. Our principal executive offices are located at 1200 Folsom Street, San Francisco, California 94103. Our telephone number is (415) 503-2700. Our web sites are located at www.petopia.com and www.inthecompanyofdogs.com. Information contained in our web sites does not constitute part of this prospectus. The Offering <TABLE> <C> <S> Common stock offered by Petopia.com................ shares. Common stock to be outstanding after the offering.. shares. The number of shares of common stock to be outstanding after the offering is based on the number of shares outstanding as of March 10, 2000. This number includes 2,956,760 shares which are subject to a right of repurchase that will expire over the following 25 months. This number does not include: . 9,006,322 shares issuable upon exercise of outstanding warrants; . 9,946,038 shares issuable upon exercise of stock options outstanding as of March 10, 2000, with a weighted average exercise price of $1.11 per share, of which options to purchase 923,743 shares have vested and are exercisable; . 6,721,957 shares reserved for future grant under our employee equity plans; and . 585,000 shares issuable to Loveland upon the achievement of certain milestones. Use of proceeds.................................... We intend to use the net proceeds of this offering for: . the repayment of $2,000,000 of indebtedness; and . general corporate purposes, including expansion of our marketing and brand building efforts. Proposed Nasdaq National Market symbol............. PTOP </TABLE> Summary Financial Data 1316703 Ontario Limited, an Ontario, Canada corporation doing business as Paw.net, was formed on September 28, 1998. On March 9, 1999, we incorporated as a Delaware corporation under the name Spot & Jack, Inc. On April 15, 1999, the assets of 1316703 Ontario Limited were distributed to its shareholders, who then contributed these assets to Spot & Jack, Inc. in exchange for shares of that company. Spot & Jack, Inc. changed its name to Petopia.com, Inc. on May 3, 1999. The pro forma statement of operations data includes the results of operations for 1316703 Ontario Limited, our predecessor, from January 3, 1999 to April 15, 1999, and gives effect to our acquisition of C/R Catalog Corp. (d/b/a In the Company of Dogs) as though it had occurred on January 3, 1999. The pro forma balance sheet data gives effect to our acquisition of C/R Catalog Corp. as though it had occurred on January 1, 2000. The pro forma as adjusted column gives additional effect to the sale of the shares of common stock that we are offering under this prospectus after deducting the estimated underwriting discounts and our estimated offering expenses and the use of the estimated net proceeds from the sales of shares and to the automatic conversion of all of the outstanding shares of our convertible preferred stock upon the closing of this offering. The following tables summarize our financial results and should be read in conjunction with "Selected Financial Data," our financial statements and related notes, 1316703 Ontario Limited's financial statements and related notes, our pro forma financial information and related notes, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this prospectus. <TABLE> <CAPTION> 1316703 Ontario Limited, our Petopia.com predecessor, period from Pro Forma period from March 9, period from September 28, 1999 January 3, 1998 (inception) 1999 (inception) through through through January 1, January 1, April 15, 1999 2000 2000 --------------- ----------- ----------- (in thousands, except share and per share data) <S> <C> <C> <C> Statement of Operations Data: Net sales............................. $ -- $ 3,452 $ 8,801 Gross margin.......................... -- (2,187) 335 Loss from operations(1)............... (615) (41,601) (48,527) Net loss(1)........................... (612) (40,865) (47,987) Basic and diluted net loss per equivalent share(2).................. $ (7.20) $ (10.84) $ (8.74) Pro forma basic and diluted net loss per equivalent share(2).............. $ (2.50) $ (2.39) Shares used to compute basic and diluted net loss per equivalent share(2).................. 85,000 3,770,437 5,489,681 Shares used to compute pro forma basic and diluted net loss per equivalent share(2)............................. 16,339,184 20,073,035 <CAPTION> January 1, 2000 ---------------------------------------- Petopia.com Pro Forma Actual Pro Forma As Adjusted --------------- ----------- ----------- <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents and short- term investments..................... $36,528 $36,346 Working capital....................... 30,997 25,966 Total assets.......................... 52,840 70,384 Convertible preferred stock, warrants and related paid-in capital.......... 80,390 91,940 Total stockholders' equity............ 41,304 52,854 </TABLE> - -------- (1) Pro forma loss from operations and pro forma net loss includes $3,600,000 and $3,517,000 of amortization of purchased intangibles and equity-based charges, respectively. (2) See note 2 of notes to our financial statements for a description of the method that we used to compute our net loss per equivalent share, and how we calculated the number of shares used in that computation.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001100683_ipet_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001100683_ipet_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and financial statements appearing elsewhere in this prospectus. PETS.COM, INC. We are a leading online retailer of pet products, integrating product sales with expert information on pets and their care. We are committed to serving pets and their owners with the best care possible through a broad product selection, expert information and superior service. We seek to address the entire pet products market, transcending the limited product selection of superstores, specialty stores and grocery stores. Our broad selection of approximately 12,000 SKUs is integrated with extensive pet-related information and resources designed to help consumers make informed purchasing decisions. We designed our Web store to provide our customers with a convenient, one-stop shopping experience that is organized to reflect how consumers think about shopping for their pets. Our Web store addresses the needs of many of the most popular pets, including dogs, cats, birds, fish, reptiles, ferrets, and other small pets. We provide quality customer service through our in-house distribution, fulfillment, customer service, and technology operations. Furthermore, we encourage participation in the pet community both through our Web store and through Pets.commitment, our charitable foundation that supports the role that pets and people play in each others' lives. The pet products industry in the United States is a large and growing market characterized by a loyal and emotion-driven customer base. According to the Pet Industry Joint Advisory Council, U.S. consumer spending on pet products and services grew at an annual rate of approximately 9% per year between 1993 and 1997, totaling approximately $23 billion at the end of 1997. More than 60% of U.S. households owned a pet and 40% of those households owned more than one pet in 1998, according to a recent American Pet Products Manufacturers Association study. The pet products market has traditionally been served by a combination of traditional store-based retailers, including superstores, independent specialty stores and grocery stores. This market is highly fragmented, and generally requires consumers to expend considerable time and effort shopping for pet products in multiple stores to meet all their needs. We provide consumers with one-stop shopping for their pet care needs. We seek to attract and retain consumers by emphasizing the following key attributes: Extensive Product Selection. With only one distribution center at this time, our SKU count is currently equivalent to the number available at the largest pet superstores, and by the middle of 2000 we expect our SKU count will increase to approximately two times the SKUs available at these stores. Expert Information and Professional Resources. We provide consumers extensive pet and pet care information integrated throughout our Web store through our in-house staff of pet experts and strategic relationships. Superior Shopping Experience. We believe that we provide an intuitive, easy-to-use Web store, categorized and organized the way people think about shopping for their pets. We also offer our customers a highly streamlined checkout experience and direct delivery to their doors. Quality Customer Service. We have invested significant resources to create our own fulfillment, distribution, and both online and in-person help service functions to enable us to better control all aspects of the customers' shopping experience. Community. Visitors to our Web store can participate online in 60 different pet discussion forums, sign up for our online newsletter and get information on our Pets.commitment charitable foundation. THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. [greenpaw.eps] SUBJECT TO COMPLETION, PRELIMINARY PROSPECTUS DATED FEBRUARY 9, 2000 PROSPECTUS 7,500,000 SHARES LOGO COMMON STOCK ------------------------ This is Pets.com's initial public offering of common stock. The U.S. underwriters are offering 6,000,000 shares in the U.S. and Canada and the international managers are offering 1,500,000 shares outside the U.S. and Canada. We expect the public offering price to be between $9.00 and $11.00 per share. After pricing this offering, we expect that the common stock will be quoted on the Nasdaq National Market under the symbol "IPET." INVESTING IN THE COMMON STOCK INVOLVES MATERIAL RISKS WHICH ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 5 OF THIS PROSPECTUS. ------------------------ <TABLE> <CAPTION> PER SHARE TOTAL --------- ----- <S> <C> <C> Public offering price....................................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to Pets.com, Inc................. $ $ </TABLE> The U.S. underwriters may also purchase up to an additional 900,000 shares from Pets.com at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. The international managers may similarly purchase up to an additional 225,000 shares from Pets.com. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The shares will be ready for delivery on or about , 2000. ------------------------ MERRILL LYNCH & CO. BEAR, STEARNS & CO. INC. THOMAS WEISEL PARTNERS LLC WARBURG DILLON READ ------------------------ The date of this prospectus is February , 2000. Our objective is to become one of the world's leading retailers of pet products. Key elements of our strategy include: - Building enduring brand equity through an advertising strategy which includes our Pets.com sock puppet brand icon, relationships with select online companies, and support for national events and pet-related local market activities; - Offering the broadest possible pet product selection available to our customers at competitive prices; - Establishing our private label brands for pet products marketed under the Pets.complete and Pets.com brand names; - Providing increasingly comprehensive and relevant content in conjunction with a range of consumer and veterinary care partners; - Delivering superior customer service and promoting repeat purchases through investments in people, technology and distribution facilities; - Continuing to maintain and expand our relationships with Amazon.com, which is currently our largest stockholder, and GO.com; and - Expanding internationally in order to capitalize on the global market. OTHER INFORMATION Unless otherwise noted, this prospectus assumes: - the automatic conversion of our outstanding convertible preferred stock into common stock on a one-for-one basis upon the closing of this offering; - the split of our common stock on the basis of 0.8 shares for each share of common stock; - our reincorporation in Delaware and the filing of our amended and restated certificate of incorporation authorizing 150,000,000 shares of common stock and a class of 5,000,000 shares of undesignated preferred stock upon the closing of the offering; and - no exercise by the underwriters of their options to purchase additional shares of our common stock in the offering. Our net sales were $5.8 million for the period from February 1999 (inception) through December 31, 1999. Our net losses were $61.8 million for the same period. We were formed in February 1999. Our principal executive offices are located at 435 Brannan Street, Suite 100, San Francisco, California 94107. Our telephone number is (415) 222-9999. Our Web store address is www.pets.com. Information contained in our Web store does not constitute part of this prospectus. TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Prospectus Summary.......................................... 1 Risk Factors................................................ 5 Forward-Looking Statements.................................. 20 Use of Proceeds............................................. 20 Dividend Policy............................................. 20 Capitalization.............................................. 21 Dilution.................................................... 22 Selected Financial and Operating Data....................... 23 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 24 Business.................................................... 28 Management.................................................. 45 Related Party Transactions.................................. 57 Principal Stockholders...................................... 60 Description of Capital Stock................................ 62 Shares Eligible for Future Sale............................. 64 Underwriting................................................ 66 Legal Matters............................................... 70 Experts..................................................... 70 Additional Information...................................... 70 Index to Financial Statements............................... F-1 </TABLE> ------------------------ You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operation and prospects may have changed since that date. Pets.com(TM), the Pets.com logo, Because Pets Can't Drive(TM), Keep It Comin'(TM), More Products Than A Superstore Delivers(TM), People Helping Animals, Animals Helping People(TM), and Pets.commitment(TM) are trademarks of Pets.com and Pets.com has the right to use Pets.complete(TM). All other brand names or trademarks appearing in this prospectus are the property of their respective holders. Use or display by Pets.com of other parties' trademarks, trade dress or products is not intended to and does not imply a relationship with, or endorsement or sponsorship of, Pets.com by the trademark or trade dress owners. THE OFFERINGS <TABLE> <S> <C> Shares offered by Pets.com U.S. offering........................ 6,000,000 shares International offering............... 1,500,000 shares ----------------- Total........................ 7,500,000 shares </TABLE> Shares outstanding after the offering, excluding unvested shares............ 26,392,410 shares, excluding 3,152,327 shares issued pursuant to the exercise of unvested stock options which are subject to our right of repurchase as of December 31, 1999. Shares outstanding after the offering, including unvested shares............ 29,544,737 shares, including 3,152,327 shares issued pursuant to the exercise of unvested stock options which are subject to our right of repurchase as of December 31, 1999. Use of proceeds.............. We estimate that our net proceeds from this offering without exercise of the over-allotment options will be approximately $68.8 million. We intend to use these net proceeds for general corporate purposes, including expansion of our marketing and brand building efforts, expansion and building of distribution centers, and working capital. See "Use of Proceeds." Risk factors................. See "Risk Factors" and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of the common stock. Proposed Nasdaq National Market symbol................ "IPET" In addition, the information above excludes, as of December 31, 1999, 983,400 shares issuable upon exercise of options granted under our stock plans at a weighted average exercise price of $1.86 per share, and 2,068,000 shares available for grant under our stock plans. This number assumes that the underwriters' over-allotment options are not exercised. If the over-allotment options are exercised in full, we will issue and sell an additional 1,125,000 shares. SUMMARY FINANCIAL DATA (IN THOUSANDS) The following table sets forth a summary of our statement of operations data for the periods presented. The pro forma net loss per share for the period from February 17, 1999 (inception) through December 31, 1999 reflects the conversion of our convertible preferred stock upon completion of this offering. <TABLE> <CAPTION> PERIOD FROM FEBRUARY 17, 1999 (INCEPTION) QUARTER ENDED QUARTER ENDED THROUGH QUARTER ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, JUNE 30, 1999 1999 1999 1999 ------------- ------------- ------------- ----------------- <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales.......................... $ 39 $ 568 $ 5,168 $ 5,787 Gross margin....................... (37) (1,198) (6,402) (7,625) Total operating expenses........... 3,584 15,231 36,512 55,344 ---------- ---------- -------- ----------- Operating loss..................... (3,621) (16,429) (42,914) (62,969) Net loss........................... $ (3,498) $ (15,852) (42,423) $ (61,778) ========== ========== ======== =========== Basic and diluted net loss per share............................ $ (2.41) $ (10.91) $ (28.92) $ (42.42) Weighted average shares outstanding used to compute basic and diluted net loss per share............... 1,453,470 1,453,470 1,466,803 1,456,489 Pro forma basic and diluted net loss per share................... $ (3.48) Weighted average shares outstanding used to compute pro forma basic and diluted net loss per share... 17,757,028 </TABLE> The following data sets forth a summary of our balance sheet data as of December 31, 1999 - On an actual basis; - On a pro forma basis to give effect to the automatic conversion of all of the outstanding shares of our convertible preferred stock into shares of common stock upon the closing of this offering; and - On a pro forma as adjusted basis to reflect the automatic conversion of all of the outstanding shares of our convertible preferred stock and our receipt of the estimated net proceeds from the sale of 7,500,000 shares of common stock in this offering at an estimated price of $10.00 per share. <TABLE> <CAPTION> DECEMBER 31, 1999 ------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.................................. $ 30,196 $30,196 $ 98,946 Working capital............................................ 36,088 36,088 104,838 Total assets............................................... 60,310 60,310 129,060 Convertible preferred stock and related paid-in capital.... 109,637 -- -- Total stockholders' equity, including convertible preferred stock.................................................... 51,120 51,120 119,870 </TABLE>
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information and financial statements and notes appearing elsewhere in this prospectus. Unless we indicate otherwise, the information in this prospectus assumes that: o the over-allotment option granted to the underwriters by the selling shareholders is not exercised; o the conversion of our outstanding Series A convertible preferred stock into common stock and the cancellation of warrants to purchase common stock occurs prior to this offering; and o a 1.075-for-1 split of our common stock is effected immediately prior to this offering. Our Company Our Dollar Express Stores We are a leading operator of fixed $1.00 price point stores in the United States, based on sales. We currently operate 101 stores located in six states. Our Dollar Express stores operate in the deep discount segment of the discount retail industry, which is among the fastest growing segments in the $420 billion mass market retail industry. We offer our customers a wide assortment of regularly available merchandise, such as housewares, food and other consumable items, giftware, health and beauty care items and toys. We supplement this merchandise with ever-changing seasonal and first quality closeout offerings. This merchandise mix is selected to create a "treasure hunt" shopping experience. Our products include national brand name merchandise, which is prominently displayed in our stores, as well as our own and other private label products. Almost all of our products are sold at our fixed $1.00 price point and are intended to exceed customers' expectations of the range and quality of items that can be purchased at this price. We believe we distinguish ourselves from our competition in the following ways: o we balance our merchandising mix between regularly available consumables and variety merchandise and a changing combination of seasonal and closeout products; o we emphasize seasonal and holiday merchandise throughout the year in our ever-changing product mix; o we focus attention on the selection and presentation of our merchandise, considering fashion and color, and emphasize the design and packaging of those items over which we have control, particularly our Today's Home private label line; o we have established a style and look to our stores that we believe is more upscale than that of other retailers in our segment of the retail industry; and o our stores are typically larger than other dollar stores, averaging 8,700 square feet. We believe these features attract customers to our stores, encourage repeat visits, and generate greater spending. Each of our founders, Bernard Spain and Murray Spain, has more than 40 years of experience in retail. In addition, the five other members of our senior management team average more than 20 years of retail experience. Most of these executives have spent their entire business careers working for us. In 1998, our Dollar Express stores generated net sales of $111.6 million, representing a compound annual growth rate of 24.9% over the last three years. In 1998, our Dollar Express stores that were open the entire year averaged $1.4 million in net sales and had net sales per estimated selling square foot of $240. Our stores opened in 1998 generated an average first year pre-tax cash-on-cash return on investment in excess of 100%. This return on investment measures a store's first year operating income, exclusive of depreciation expense against the cash cost of opening and operating the store in its first year of operation. We believe that historically, our new stores have become profitable during their first full year of operation. We currently operate 101 Dollar Express stores in six states: Pennsylvania, New Jersey, Maryland, Delaware, New York and Virginia. We plan to increase our Dollar Express store count by approximately 25% per year, and believe that we could operate up to 250 stores within our current 250 mile distribution radius. Our Spain's Cards & Gifts Stores We are one of the largest specialty greeting card vendors in the Philadelphia metropolitan area, based on number of stores. Our Spain's Cards & Gifts stores offer our customers a wide selection of greeting cards, moderately priced giftware, fad and novelty products, candy and other consumer items. During 1998, our Spain's stores generated net sales of $19.2 million. We currently operate 25 Spain's stores, primarily in the Philadelphia metropolitan area. We do not anticipate significant growth in the number of Spain's stores, but we will take advantage of attractive opportunities for new stores as they arise. Our Controlling Shareholders Bernard Spain and his brother Murray Spain currently control 100% of our issued and outstanding common stock and hold two seats on our board of directors. After the completion of the offering, Bernard Spain and Murray Spain will together beneficially own 47.6% of our common stock (46.5% if the underwriters exercise their over-allotment option). Through their common stock ownership and board positions, the Spain brothers will be in a position to exert significant control over our corporate actions. See "Risk Factors." Our Corporate Structure We are a Pennsylvania corporation formed in 1998. Our operations are conducted through Dollar Express Stores, Inc., our wholly-owned subsidiary, which was formed in 1992 as the successor to the partnership formed by the Spain brothers in 1959. Our executive offices are located at 1700 Tomlinson Road, Philadelphia, Pennsylvania 19116-3848. Our telephone number is (215) 969-7888. The Offering <TABLE> Common stock offered: <S> <C> By us ............................................ 2,333,333shares By our selling shareholders....................... 1,066,667shares Total shares offered ........................ 3,400,000shares Common stock to be outstanding after this offering ........................................ 13,083,333shares(1) Use of proceeds ...................................... We intend to use the net proceeds to be received by us from this offering: o to repay the approximately $19.5 million that we anticipate will be outstanding under our $20.0 million term loan facility upon completion of this offering; o to repay the approximately $11.0 million we anticipate will be outstanding under our revolving credit facility upon completion of this offering; and o for general corporate purposes. We will not receive any proceeds from the sale of shares of common stock by our selling shareholders. Proposed NASDAQ National Market symbol............................................ DLRX </TABLE> - ------------------ (1) Does not include: o 279,500 shares of common stock issuable upon exercise of options granted under our 1999 Stock Option Plan at an exercise price of $8.96 per share; o ________ shares of common stock issuable upon the exercise of options that will be granted under our 1999 Stock Option Plan on the date of this prospectus at an exercise price equal to the initial public offering price; and o _________ shares of common stock issuable upon exercise of options reserved for future grants under our 1999 Stock Option Plan. <TABLE> <CAPTION> Nine Months Thirty Nine Year Ended December 31, Ended Weeks Ended -------------------------------- September 30, September 30, 1996 1997 1998 1998 1999 ------------------------------------------------------------------ (Dollars in thousands, except per share data) Statement of Operations Data: <S> <C> <C> <C> <C> <C> Net sales...........................................$ 88,362 $ 103,030 $ 130,802 $ 86,290 $ 100,438 Gross profit........................................ 22,617 25,716 38,495 24,091 29,141 Operating profit.................................... 4,279 4,696 10,949 5,344 5,939 Interest expense, net............................... 156 277 283 195 1,640 Income before income taxes.......................... 4,259 4,677 10,853 5,313 4,112 Income taxes (benefit).............................. 35 28 50 26 (333) Net income ......................................... 4,224 4,649 10,803 5,287 4,445 Net income (loss) available to common shareholders.. 4,224 4,649 10,803 5,287 (639) Net income (loss) per common share: Basic......................................$ 0.61 $ 0.67 $ 1.55 $ 0.76 $ (0.09) Diluted....................................$ 0.61 $ 0.67 $ 1.55 $ 0.76 $ (0.09) Pro forma net income per common share: Basic......................................... $ 0.94 $ 0.26 Diluted....................................... $ 0.94 $ 0.26 Pro forma, as adjusted net income per common share: </TABLE> <TABLE> <CAPTION> Nine Months Thirty Nine Year Ended December 31, Ended Weeks Ended -------------------------------- September 30, September 30, 1996 1997 1998 1998 1999 ----------------------------------------------------------------- (Dollars in thousands, except per share data) <S> <C> <C> <C> <C> <C> Basic......................................... $ 0.72 $ 0.28 ------ --------- Diluted....................................... $ 0.72 -- $ 0.28 ------ --------- Weighted average number of common shares and common share equivalents outstanding (in thousands): Basic......................................... 6,955 6,955 6,955 6,955 6,955 Diluted....................................... 6,955 6,955 6,955 6,955 6,955 Pro forma basic............................... 6,955 10,249 Pro forma diluted............................. 6,955 10,335 Pro forma, as adjusted, basic................. 9,289 12,583 Pro forma, as adjusted, diluted............... 9,289 12,668 Dollar Express Stores Operating Data: Number of stores at end of period................... 63 70 82 78 93 Average annual net sales per store ................. $ 1,243 $ 1,30 $ 1,430 N/A N/A Change in comparable store net sales................ 10.7% 0.5% 2.8% 1.4% 2.6% Average annual net sales per estimated selling square foot $ 245 $ 232 $ 240 N/A N/A Estimated selling square footage at period end...... 341,252 406,586 531,263 483,350 670,115 Spain's Stores Operating Data: Number of stores at end of period................... 24 23 24 24 24 Average annual net sales per store.................. $ 587 $ 706 $ 797 N/A N/A Change in comparable store net sales................ (4.0)% 16.8% 11.7% 18.9% (11.3)% Average annual net sales per estimated selling square foot ...................................... $ 186 $ 211 $ 236 N/A N/A Estimated selling square footage at period end...... 78,833 77,079 81,541 81,541 81,541 September 30, 1999 ----------------------------------------- Pro Forma Consolidated Balance Sheet Data: Actual Pro Forma As Adjusted --------- ------------- ------------ Working capital (deficit)........................... $ (647) $ (647) $ 12,432 Total assets........................................ 43,590 43,590 43,262 Total debt, including current portion............... 35,994 35,994 4,294 Common stock warrants............................... 4,294 -- -- Redeemable convertible preferred stock.............. 31,295 -- -- Total common shareholders' (deficit) equity......... (44,578) (7,056) 24,316 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001100775_flonetwork_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001100775_flonetwork_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following is a summary of key aspects of this offering. You should carefully read the more detailed information contained elsewhere in this prospectus, including the consolidated financial statements and related notes. Our business involves significant risks. You should carefully consider the information under the heading "Risk Factors." FLONETWORK INC. We provide Internet direct marketing and communications services. Our technology infrastructure, software and services enable businesses to market to and communicate with their customers through personalized and targeted e-mail messaging campaigns. Our clients access our technology and services, and retain control of their e-mail campaigns, through the Internet. Our technology platform is comprised of specialized hardware and software applications which we host for clients who wish to outsource any or all aspects of e-mail messaging. We also provide our clients with a full range of Internet direct marketing and communications services, or e-marketing services, on an outsourced basis to assist our clients in the development, execution and assessment of their e-mail campaigns. Currently, we manage all aspects of permission-based e-mail messaging campaigns, including designing the campaigns, building and managing e-mail address lists, testing and deploying the campaigns and tracking, reporting and analyzing the results. Permission-based e-mail involves sending e-mails to individuals who have given their prior consent by subscribing to receive e-mails on specific topics. Our objective is to broaden our e-mail messaging services and to develop other hosted direct marketing applications and services over the Internet. According to Forrester Research, total Internet marketing and advertising expenditures in the United States will increase from $2.8 billion in 1999 to $22.2 billion in 2004. We believe that a growing portion of these total expenditures will be devoted to e-mail marketing because of the perceived cost savings of e-mail marketing relative to traditional marketing methods and the perceived effectiveness of e-mail marketing relative to other forms of Internet marketing and Internet banner advertising. According to Forrester Research, the market for e-mail marketing services will grow from $156.4 million in 1999 to $4.8 billion in 2004. We believe that, as businesses rely more on e-mail messaging to communicate with and market to existing and potential customers, the costs and resources required to implement e-mail communication systems in-house will lead many companies to seek an outsourced solution to their e-mail messaging needs. We have provided e-mail messaging services to over 100 clients since May 1998 when we began offering these services. To date, we have targeted clients in the electronic publishing, or e-publishing, and electronic business, or e-business, market segments because of their e-mail volume potential, the range of e-mail services they require and their desire to outsource their e-mail messaging needs. Our five largest clients based on volume of e-mails deployed in the five months ended December 31, 1999 were CNET, barnesandnoble.com, Continental Airlines, LowestFare.com and iPrint.com. Our e-mail messaging services provide our clients with the following benefits: Lower Cost of Ownership and Quicker Time to Market. By outsourcing their e-mail messaging functions to us, our clients eliminate the need to lease, buy and continually upgrade bandwidth, hardware and software, and recruit and retain systems engineers and skilled personnel to run and monitor their e-mail messaging systems and campaigns. This also reduces the time it takes our clients to begin their e-mail campaign deployment. Reliable and Scalable High Volume Deployment. We have developed a network of specialized servers and software, which have been engineered to handle high volumes of personalized and trackable THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED APRIL 3, 2000 PROSPECTUS 3,750,000 SHARES [FLONETWORK LOGO] COMMON SHARES This is an initial public offering of our common shares. We expect that the public offering price of our common shares will be between $10.00 and $12.00 per share. We have applied to have our common shares approved for quotation and trading on the Nasdaq National Market under the symbol "FNWK." OUR BUSINESS INVOLVES SIGNIFICANT RISKS. THESE RISKS ARE DESCRIBED UNDER THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 6. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------------- <TABLE> <CAPTION> PER SHARE TOTAL <S> <C> <C> Public offering price....................................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds, before expenses, to FloNetwork.................... $ $ </TABLE> The underwriters may also purchase up to an additional 562,500 of common shares from us to cover over-allotments. The underwriters expect to deliver the shares against payment in New York, New York on , 2000. ------------------------- SG COWEN PRUDENTIAL VOLPE TECHNOLOGY A UNIT OF PRUDENTIAL SECURITIES WILLIAM BLAIR & COMPANY , 2000 e-mail messages. This network has been designed to be reliable and secure and easily-scaled to handle large volumes of e-mail messages. Web-based Client Control. Our clients have access to our technology infrastructure, software and services through the Internet, seven days a week, 24 hours a day, giving them control over their e-mail messaging campaigns by enabling them to organize their campaigns, compose messages, personalize messages, choose the time and pace of delivery, perform test campaigns and evaluate reports while the campaign is being executed. Personalization and Targeting. Our services enable our clients to personalize messages to the needs and interests of particular recipients. Our tracking capabilities enable us to collect data on customer behavior and response rates and create a database of customer value information. This assists our clients in more effectively targeting their audiences and evaluating the effectiveness of their campaigns. Instantaneous Reporting. Our continuously updated Internet-based reports enable our clients to quickly evaluate the effectiveness of a campaign and to make immediate adjustments to the campaign during execution. These reports provide transactional and response statistics which allow our clients to identify their most active customers and prospects. We were incorporated in Toronto, Ontario in August 1993 under the name Media Synergy Inc. and in November 1999 changed our name to FloNetwork Inc. Our initial business involved the development, sale and licensing of multimedia consumer software products. In 1998, we began developing and selling e-mail messaging software applications and services. In January 1999, we discontinued the development, sale and licensing of our multimedia consumer software products and adopted a business strategy to offer e-mail messaging services over a hosted technology platform. Our decision to shift our business focus to e-mail messaging services was based on the size of the potential market for e-mail messaging services, as well as our belief that we could more quickly and easily scale our business in the e-mail messaging services market as compared to the multimedia consumer software products market. Since we shifted our focus to the e-mail messaging services business, our percentage of revenue derived from e-mail messaging has increased from 42.1% of our total revenue for the five month period ended December 31, 1998, to 99.8% for the five month period ended December 31, 1999. We operate in a highly competitive market. We have recently adopted our new business model and have a limited operating history based on that model. We have a history of losses including losses of approximately $2.1 million for the year ended July 31, 1999 and $2.1 million for the five month period ended December 31, 1999, and, as of December 31, 1999, had an accumulated deficit of approximately $6.0 million. During the five months ended December 31, 1999, our two largest customers accounted for 27.3% of our revenue. Our executive officers and directors and their respective affiliates will own approximately 52.5% of our common shares after this offering. Our executive offices are located at 260 King Street East, Toronto, Ontario, Canada, M5A 1K3, and our telephone number at that location is (416) 369-1100. Our web site address is www.flonetwork.com. Information contained on our web site is not a part of this prospectus. Description of inside front cover: Centered at the top of the page is the heading "flonetwork," with the letters "flo" in orange and the remaining letters in black. Under this heading is the phrase "the future of direct marketing" in gray. In the center of the page are four computer screen shots. Beneath the screen shots is a stick figure sitting at a desk working at a computer. Below the stick figure is the text "The clients identified in the screenshots above represent our four largest clients based on number of e-mails deployed for the five months ended December 31, 1999. Each accounted for between 2% and 17% of our total revenue for the five months ended December 31, 1999." Coming from the rear of the computer is a blue line with the words "Permission-based e-mail communications" in white. Above the blue line are three images of envelopes. Above the three envelopes are the words "Promotions & Discounts," "Newsletters" and "Product Releases." Below the blue line are also three images of envelopes. Below the three envelopes are the words "Advertising & Marketing," "Alerts & Reminders" and "Market Research." Description of two-page graphical foldout: This two-page layout has a heading flush right in gray, reading "the future of direct marketing." Beneath this heading is an orange line that runs horizontally across the page. Beneath this line is the heading "flonetwork." This heading is flush left, with the letters "flo" in orange and the remaining letters in black. Underneath these headings is a large box containing seven smaller boxes in a horizontal line. Above these boxes is the heading "FloNetwork Technology & Services" in orange. Each box contains an image and has text at the bottom. The first box features a stick figure examining a poster of a rocket. The text at the bottom of this box reads "(1) DESIGN." The second box features a stick figure applying a blow torch to the base of a rocket. The text at the bottom reads "(2) BUILD." The third box features a stick figure holding a remote control and has a rocket taking off in the background. The text at the bottom reads "TEST (3)." The fourth box features a stick figure standing behind a podium and waving. The text at the bottom reads "(4) DEPLOY." The fifth box depicts a stick figure looking at a radar screen. The text at the bottom reads "(5) TRACK." The sixth box features a stick figure reading a data printout. The text at the bottom reads "(6) REPORT." The seventh box features three stick figures sitting at a table observing a fourth stick figure giving a presentation. The text at the bottom reads "(7) ANALYZE." Underneath these boxes is a series of connected images. From left to right, the images are as follows. The first image consists of two screen monitors featuring stick figures. The first television monitor reads "E-marketing Services Consulting." The second reads "Client Services & Support." The monitors are connected to an image of a stick figure wearing a hat and carrying a pitchfork. Under this image is the text "FloServer Farms." Connected to this image is an image of a stick figure manipulating the controls of a machine. Under this image is the text "Database Warehouse & Network." Connected to this image is an image of a flying stick figure carrying an envelope. Above this image is the text "High Speed Internet Connection." Originating from the large box are four images. The first image is connected by an orange line to the right hand side of the large box. This image consists of three computer screen shots tiled diagonally and a vertical list reading "Trackable Behaviors," "View Message," "Click-Through," "Request Info," "Buy Product," "Pass-Along" and "Unsubscribe." Above this image is the heading "Tracking & Reporting." The second image is connected by an orange line to the lower right hand corner of the large box. This image is of an envelope. Next to the image is the text "Secure, Reliable, High-Volume E-mail Messaging." The third image is connected by an orange line to the base of the large box. This image is an orange cloud with the text "Internet" inside the cloud in black. The fourth image is connected to the third image by an orange line and sits to the left of the third image. This image consists of a stick figure sitting at a desk working on a computer. Above the image is the text "Direct Client Access to FloNetwork Technology & Services through the Internet." THE OFFERING Common shares offered by FloNetwork......................... 3,750,000 shares Common shares to be outstanding after this offering................ 16,648,977 shares Use of proceeds.................... For general corporate purposes, including sales and marketing expansion, research and development activities, capital expenditures and working capital and possible acquisitions. See "Use of Proceeds." Ownership of common shares by our executive officers and directors and their respective affiliates after this offering.............. 52.5% Proposed Nasdaq National Market symbol............................. FNWK The number of common shares to be outstanding after this offering is based on the number of common shares outstanding as of December 31, 1999, which was 12,898,977, after giving effect to: - the conversion upon the consummation of this offering of our outstanding class A preferred shares, class B preferred shares, class C preferred shares and class D preferred shares into an aggregate of 5,011,134 common shares (assuming an initial public offering price of $11.00 per share); - the issuance of 800,000 common shares concurrent with the consummation of this offering upon the exercise of warrants outstanding as of December 31, 1999, at a weighted-average exercise price of approximately $0.85 per share; - the issuance of 874,870 common shares concurrent with the consummation of this offering upon the exercise of an option pursuant to an Option Agreement held by CNET, Inc. dated September 15, 1999 at a price of approximately $6.23 per share (assuming an initial public offering price of $11.00 per share); and - a 1-for-5 reverse split of our common shares to be effected prior to the consummation of this offering. The number of common shares to be outstanding after this offering does not include 1,723,302 common shares issuable upon the exercise of options outstanding as of December 31, 1999 at a weighted-average exercise price of approximately $1.54 per share, and an additional 1,427,336 common shares available for issuance under our share incentive plan and employee share purchase plan. ------------------------ ASSUMPTIONS THAT APPLY TO THIS PROSPECTUS This offering is for 3,750,000 shares. The underwriters have a 30-day option to purchase up to 562,500 additional shares from us to cover over-allotments. Some of the disclosures in this prospectus would be different if the underwriters exercise their over-allotment option. Except as otherwise noted, all information in this prospectus assumes no exercise of the underwriters' over-allotment option. ------------------------ All references in this prospectus to "we," "us," "ours" and "FloNetwork" are intended to include FloNetwork Inc., FloNetwork US, Inc., our wholly-owned subsidiary, and their predecessor businesses and entities. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following tables summarize our consolidated financial data. For a more detailed explanation of our financial condition and operating results, you should read "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the more detailed consolidated financial statements and notes included elsewhere in this prospectus. <TABLE> <CAPTION> FIVE MONTHS ENDED YEAR ENDED JULY 31, DECEMBER 31, ---------------------------- ------------------------ 1997 1998 1999 1998 1999 ------ ------ ---------- ----------- ---------- (UNAUDITED) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue: E-mail service revenue................ $ -- $ 14 $ 431 $ 93 $ 1,194 License and software revenue(1)....... 1,155 734 346 129 2 ------ ------ ---------- ------ ---------- 1,155 748 777 222 1,196 E-mail service cost of revenues......... -- -- 331 82 741 Total operating expenses.............. 1,306 1,527 2,597 857 2,629 Net loss attributable to common shareholders.......................... $ (174) $ (811) $ (2,429) $ (768) $ (2,384) ====== ====== ========== ====== ========== Net loss per common share: Basic and diluted..................... $(0.05) $(0.22) $ (0.66) $(0.21) $ (0.58) ====== ====== ========== ====== ========== Weighted average shares outstanding... 3,672 3,672 3,672 3,672 4,079 ------ ------ ---------- ------ ---------- Pro forma net loss per common share: Basic and diluted..................... $ (0.65) $ (0.25) ========== ========== Weighted average shares outstanding... 7,533 8,543 ---------- ---------- </TABLE> - --------------- (1) Costs related to the sale and licensing of our discontinued multimedia consumer software products are operational in nature and were included in sales and marketing expenses during the periods we generated revenue from this business. These costs consisted primarily of nominal expenditures related to the printing, shipping and distribution of our multimedia consumer software products. (THIS PAGE INTENTIONALLY LEFT BLANK) The following table is a summary of our balance sheet at December 31, 1999: - on an actual basis after giving effect to a 1-for-5 reverse split of our common shares to be effected prior to the consummation of this offering; - on a pro forma basis to give effect to (1) the conversion upon the consummation of this offering of our outstanding class A, B, C and D preferred shares into an aggregate of 5,011,134 common shares (assuming an initial public offering price of $11.00 per share), (2) the issuance of 800,000 common shares concurrent with the consummation of this offering upon the exercise of warrants outstanding as of December 31, 1999 at a weighted average exercise price of approximately $0.85 per share and the receipt of net proceeds of $678,670 from the sale thereof, and (3) the issuance of 874,870 common shares concurrent with the consummation of this offering upon the exercise of an option pursuant to an Option Agreement held by CNET dated September 15, 1999 at a price of approximately $6.23 per share and the receipt of net proceeds of approximately $5.4 million from the sale thereof (assuming an initial public offering price of $11.00 per share); and - on a pro forma basis to give effect to the sale of 3,750,000 common shares in this offering at an assumed initial public offering price of $11.00 per share and the application of the estimated net proceeds from the sale. <TABLE> <CAPTION> DECEMBER 31, 1999 ----------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............................. $13,538 $19,669 $57,032 Working capital....................................... 12,507 18,638 56,345 Total assets.......................................... 17,005 23,136 60,154 Redeemable convertible class A preferred shares....... 1,369 -- -- Total shareholders' equity............................ 13,507 21,007 58,370 </TABLE>
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+PROSPECTUS SUMMARY This summary highlights selected information in this prospectus, but it may not contain all of the information that is important to you. To better understand this offering, and for a more complete description of the offering and related transactions, you should read this entire prospectus carefully, including the "Risk Factors" section and the combined financial statements and the notes to those statements, which are included elsewhere in this prospectus. AltaVista Company AltaVista is an Internet search, new media and commerce network that delivers personalized, relevant information and e-commerce services to millions of users worldwide. With our patented technologies, international user base and relationships with content and service providers, we seek to provide a single destination for all of a user's search, information, communication and commerce needs on the Internet. Our goal is to expand our user base by building on our strength in search, and extending our content and e-commerce capabilities, thereby increasing the attractiveness of our Internet properties to advertisers and merchants. We generate revenues through sales of advertising and sponsorships, fees for search services, product and development fees, licensing of our search product, software and related support services and shopping services. The quality of our services has enabled us to be one of the top web sites in terms of user reach. We target our services and branding toward Web enthusiasts. Web enthusiasts, whether experienced Internet users or newly online, are passionate about the Internet and view it as a powerful tool to obtain knowledge and to communicate. We believe that the AltaVista user base, which we estimate, based on internally generated data, consisted of more than 54 million different visitors worldwide during the month of January 2000, is one of the most Web-savvy and brand-loyal on the Internet. Data from @Plan, a market research company, in the Fall of 1999 shows that the typical AltaVista user is a more frequent online user and more likely to buy products online than the typical Internet user. We believe that as Internet use continues to increase and users become more familiar and comfortable with using the Internet, the number of Web enthusiasts as a percentage of total Internet users will increase. Market research firm International Data Corporation estimates that the number of Internet users will increase from approximately 142 million at the end of 1998 to approximately 502 million by the end of 2003, representing a compound annual growth rate of approximately 29%. Internet advertising revenues in the United States are expected to increase from $2.1 billion in 1998 to over $11.5 billion by 2003, according to Jupiter Communications, a market research company. Forrester Research has estimated that consumer purchases of goods and services over the Internet in the United States alone will increase from approximately $20 billion in 1999 to approximately $184 billion in 2004, representing a compound annual growth rate of over 56%. We combine search technology, timely media content, local content and e- commerce offerings with a broad network of relationships with content and service providers to supply our users with an easy-to-use tool for their Internet navigation and commerce needs. Our web sites offer users ways to quickly, accurately and dynamically access the knowledge they seek. During January 2000, we delivered over 1.9 billion page views to our users, based on internally generated data. Our portal has the following capabilities: Search Platform. AltaVista Search offers search functionality that enables Internet users to find information on the Internet. We believe that AltaVista Search produces highly relevant search results. We also believe that our index, which is frequently updated, contained over 250 million web pages at January 31, 2000, based on internally generated data. AltaVista Live!. We offer users a comprehensive destination for Internet navigation, directory services, personalized content and rich local community information on the AltaVista Live! service. As part of our commitment to provide our users with finance-oriented content as well as to further broaden the community aspects of AltaVista Live!, on February 1, 2000, we acquired Raging Bull, Inc. AltaVista Shopping.com. AltaVista Shopping.com is an e-commerce service that provides customers with the information necessary to make online buying decisions and gives retailers the ability to reach a large customer base. AltaVista Shopping.com's goal is to make the shopping experience informed, quick, interactive and personalized. We use our search technology to enhance the shopping experience by increasing the speed and accuracy of the shopping search, enabling our users to research and compare merchandise from among millions of products. Free Communications Services. We offer a number of free services to help attract users to the AltaVista portal. We offer e-mail service and dial-up Internet access through our AltaVista FreeAccess program to our users. CMGI, Inc. will own approximately 73.8% of our outstanding common stock upon completion of this offering. Accordingly, CMGI will have the power, acting alone, to elect a majority of our board of directors and will have the ability to determine the outcome of any corporate actions requiring stockholder approval, regardless of how our other stockholders may vote. CMGI may exercise its voting power by written consent, without convening a meeting of the stockholders. This means CMGI will be able to effect a sale or merger of AltaVista without prior notice to, or the consent of, our other stockholders. CMGI's ownership may have the effect of delaying, deferring or preventing a change in control of AltaVista. CMGI's interests could conflict with the interests of our other stockholders. We have incurred significant net operating losses in each fiscal quarter since our inception, including an operating loss of $542.9 million for the six months ended January 31, 2000. As of January 31, 2000, we had an accumulated deficit of $765.1 million. We expect to incur additional losses and continued negative cash flow from operations for the foreseeable future. For the six months ended January 31, 2000, advertising, service and other revenue comprised approximately 75% of our total revenue and product revenue accounted for approximately 25% of our total revenue. Approximately 71% of our advertising, service and other revenue during this period was derived from customer advertising contracts serviced by DoubleClick, Inc., our outside sales agent. We record DoubleClick's commission and service fees as sales and marketing expense. In October 1999, we changed the focus of our e-commerce business strategy from selling products to providing shopping services, including directing traffic to merchant web sites for product sales. Revenue from the sale of products on our web sites for the three-month period ended January 31, 2000 was less than 10% of our total revenue for the same period. To date, revenue from shopping services, including commissions earned on sales of products on merchant web sites, has not been significant. The market we serve is highly competitive, and our revenue could be adversely affected by increased competition. History Historically, we were operated within Digital Equipment Corporation, which was acquired by Compaq Computer Corporation in June 1998. In January 1999, we were incorporated and began doing business as a separate business unit within Compaq. To broaden the capabilities of AltaVista, in February 1999, Compaq acquired Shopping.com, an e-commerce company, and, in April 1999, acquired Zip2 Corp., a local portal service. In August 1999, CMGI acquired approximately 81.5% of our equity ownership and Compaq retained approximately 18.5% of our equity ownership. In connection with this acquisition, the AltaVista Search web site and associated intellectual property, Shopping.com, Zip2 and other assets were contributed to us. In October 1999, we acquired iAtlas from CMGI to enhance our search service with iAtlas' filtering technology, and distributed a stock dividend of all Zip2 stock owned by us to our stockholders. In February 2000, we acquired Raging Bull, a finance-oriented content provider and online community and an affiliate of CMGI. In February 2000, we also acquired Transium Corporation. Transium's primary business is providing search services to customers such as e-commerce companies and Internet portal operators. Transium receives and indexes data from customers and supplies the search services available on their web sites to end users. THE OFFERING <TABLE> <C> <S> Common stock offered: United States offering............................ 11,840,000 shares International offering............................ 2,960,000 shares Total........................................... 14,800,000 shares Common stock to be outstanding after the offering.. 153,995,511 shares Use of Proceeds.................................... For working capital, including sales and marketing, and other general corporate purposes. In addition, we may use a portion of the net proceeds to invest in joint ventures or other collaborative arrangements, or to invest in or acquire businesses, technologies, products or services. See "Use of Proceeds" on Page 18. Proposed Nasdaq National Market Symbol............. ALTA </TABLE> The common stock to be outstanding after the offering is based on shares outstanding as of January 31, 2000, plus approximately 7,364,000 shares of common stock issuable upon conversion of outstanding convertible notes and convertible preferred stock, including the assumed exercise of Compaq's pre- emptive rights to purchase additional convertible notes, as of that date. The shares outstanding exclude: . 16,474,667 shares of common stock issuable as of January 31, 2000 upon the exercise of outstanding stock options issued under our stock option plans at a weighted average exercise price of $11.45 per share and options to purchase 1,220,830 shares of common stock granted during January 2000 with exercise prices equal to the initial public offering price . 7,488,384 shares of common stock and options to purchase common stock issued after January 31, 2000 in connection with our acquistions of Raging Bull and Transium . 2,600,000 shares of common stock initially reserved for issuance under our employee stock purchase plan ---------------- Unless otherwise specifically stated, information in this prospectus (with the exception of the financial statements) assumes: . Conversion of $129.8 million of our convertible notes by CMGI and Compaq into shares of convertible preferred stock prior to the closing of this offering . Compaq's exercise of its pre-emptive right to purchase additional convertible notes in an amount not to exceed $17.5 million, and conversion of these notes into convertible preferred stock prior to the closing of this offering . Conversion of all outstanding shares of our convertible preferred stock into an aggregate of approximately 7,364,000 shares of common stock upon completion of this offering . No exercise of the underwriters' over-allotment option . A 1.3-for-one split of our outstanding common stock to be approved and effected prior to the closing of this offering ---------------- This prospectus includes statistical data regarding our company, the Internet and the industries in which we compete. This data is based on our records or taken or derived from information published or prepared by various sources, including International Data Corporation, a provider of market and strategic information for the information technology industry, and Jupiter Communications, a market research company. Market data used throughout this prospectus relating to our relative position in our industry is based upon industry sources and the good faith estimates of our management, based upon relevant information known to them. The respective trademarks and logos of AltaVista, Shopping.com, iAtlas, Raging Bull, Transium, and our other trademarks mentioned in this prospectus are the property of AltaVista. All other trademarks or trade names referred to in this prospectus are the property of their respective owners. SUMMARY FINANCIAL DATA The following table presents our summary pro forma financial data. We have derived this data from "Unaudited Pro Forma Condensed Statements of Operations," and the financial statements and notes that are included elsewhere in this prospectus. You should read those sections for a further explanation of the financial data summarized here. The summary pro forma financial data may not be indicative of our future performance and does not reflect what our financial position would have been had we operated as a separate, stand-alone entity during the periods presented. The pro forma statement of operations data reflect the acquisition by CMGI of an 81.495% equity interest in us and the acquisition by us of Shopping.com as if they had occurred as of January 1, 1998. The summary pro forma financial data exclude results of Zip2, which was acquired on April 1, 1999 and distributed as a stock dividend to our stockholders on October 20, 1999. Prior to August 18, 1999, our fiscal year ended on December 31. In August 1999, we retroactively adopted the CMGI fiscal year end of July 31. <TABLE> <CAPTION> Seven Months Three Months Ended Year Ended Ended --------------------------------------------- December 31, July 31, March 31, June 30, October 31, January 31, 1998 1999 1999 1999 1999 2000 ------------ ------------ --------- --------- ----------- ----------- (in thousands, except per share information) <S> <C> <C> <C> <C> <C> <C> Summary Pro Forma Statement of Operations Data: Advertising, service and other revenue, net..... $ 37,139 $ 47,087 $ 16,705 $ 21,601 $ 30,196 $ 46,865 Product revenue, net.... 8,122 26,212 4,862 12,397 22,421 4,030 --------- --------- --------- --------- --------- --------- Total revenue......... 45,261 73,299 21,567 33,998 52,617 50,895 Gross profit ........... 24,730 30,848 10,532 15,396 21,150 34,522 Product development (a).................... 15,911 16,728 5,324 7,773 10,630 11,571 Sales and marketing (a).................... 39,413 52,048 23,203 20,212 50,348 64,085 General and administrative and other (a).............. 26,282 23,690 3,597 5,539 6,471 7,171 Stock-based compensation and amortization of intangibles............ 875,067 510,456 218,767 218,767 219,795 222,300 --------- --------- --------- --------- --------- --------- Loss from operations.... (931,943) (572,074) (240,359) (236,895) (266,094) (270,605) Net loss................ $(939,162) $(572,504) $(240,467) $(236,952) $(267,993) $(272,221) Loss per share--basic and diluted (b)........ $ (7.22) $ (4.40) $ (1.85) $ (1.82) $ (2.06) $ (2.07) </TABLE> - ------- (a) Excludes stock-based compensation for the three months ended October 31, 1999 and January 31, 2000 as follows (in thousands): Product development $83 and $235; Sales and marketing $56 and $156; and General and administrative $139 and $391. (b) Per share results for all periods presented prior to August 18, 1999, the date of the CMGI acquisition, have been determined assuming a retroactive application of our capital structure as of August 18, 1999. All periods have been adjusted for a proposed 1.3-for-one stock split. The summary pro forma consolidated balance sheet data below reflect the conversion into common stock of amounts outstanding under our convertible notes payable to CMGI and Compaq, and exercise of Compaq's pre-emptive right to purchase additional convertible notes, based on CMGI's and Compaq's irrevocable election to convert these amounts into equity upon the closing of this offering. The summary pro forma as adjusted balance sheet data also reflect the receipt of the net proceeds from the sale of the shares of our common stock in this offering. <TABLE> <CAPTION> As of January 31, 2000 --------------------------------- Pro Forma Actual Pro Forma As Adjusted ---------- ---------- ----------- (in thousands) <S> <C> <C> <C> Summary Pro Forma Balance Sheet Data: Cash and cash equivalents................... $ 12,368 $ 29,827 $ 288,343 Goodwill and other intangibles, net......... 2,252,216 2,252,216 2,252,216 Total assets................................ 2,402,724 2,420,183 2,678,699 Demand convertible notes payable to CMGI and Compaq..................................... 129,814 -- -- Total stockholders' equity.................. $2,188,893 $2,336,166 $2,594,682 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001100893_southern_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001100893_southern_prospectus_summary.txt
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+PROSPECTUS SUMMARY Because this is a summary, it does not contain all the information that may be important to you. You should read the entire document before making your investment decision. Southern States Cooperative, Incorporated's fiscal year ends on June 30. In this prospectus, the term "Southern States" refers to Southern States Cooperative, Incorporated. The term "Southern States Capital Trust" refers to Southern States Capital Trust II, a subsidiary of Southern States. The term "Gold Kist Inputs Business" refers to the agriservices business that Southern States acquired in October 1998 from Gold Kist Inc., a large agricultural cooperative headquartered in Atlanta, Georgia. SOUTHERN STATES COOPERATIVE, INCORPORATED Southern States is a regional farmers' supply and marketing cooperative. . As a supply cooperative, Southern Sates provides agricultural supplies and services to its members and others through its crops, feed, petroleum, retail farm supply, and farm and home divisions. . As a marketing cooperative, Southern States provides marketing services for its members through its grain marketing and livestock marketing divisions. For many years, Southern States has served a wide range of rural and urban customers in its traditional Mid-Atlantic territory of Delaware, Maryland, Virginia, West Virginia, Kentucky and North Carolina. As a result of the acquisitions of Michigan Livestock Exchange in April 1998 and the Gold Kist Inputs Business in October 1998, Southern States also currently operates in Michigan, Ohio, Indiana, Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi and South Carolina. Southern States is owned by over 300,000 farmer and local cooperative members. It is the principal cooperative in a cooperative distribution system that encompassed over 700 retail locations as of December 31, 1999. Southern States operates through several divisions: . Crops division -- procures, manufactures and distributes fertilizer, seed and crop protectants to members and other customers. . Feed division -- procures, manufactures and distributes a wide range of dairy, livestock, equine, poultry, pet and aquaculture feeds. . Petroleum division -- sells petroleum products, including all grades of gasoline, kerosene, fuel oil, diesel fuel and propane, as well as petroleum equipment. . Retail Farm Supply division -- operates approximately 284 company-owned and managed local cooperative retail farm supply locations throughout the Mid-Atlantic, Southeast and South Central regions of the United States. . Farm and Home division -- distributes farm and home products at wholesale to retail farm supply locations and at retail through 26 metropolitan retail locations. . Grain Marketing division -- operates a year-round market for produced grains, primarily corn, soybeans, wheat and barley. . Livestock Marketing division -- operates 11 livestock auction facilities and 19 swine buying stations in Michigan, Ohio, Indiana and Kentucky. Southern States' executive offices are located at 6606 West Broad Street, Richmond, Virginia 23230, and the telephone number is 804-281-1000. SOUTHERN STATES CAPITAL TRUST II Southern States Capital Trust exists solely to: . issue and sell capital securities to the public; . issue and sell common securities to its parent company, Southern States; and . use the proceeds from the sale of its capital securities and its common securities to purchase and hold ____% junior subordinated debentures issued by Southern States. The principal executive office of Southern States Capital Trust II is located at 6606 West Broad Street, Richmond, Virginia 23230, Attention: Chief Financial Officer. Its telephone number is (804) 281-1000. THE OFFERING <TABLE> <S> <C> The Capital Securities to Be Offered by Southern States Capital Trust ......................Southern States Capital Trust will sell its capital securities to the public and its common securities to its parent company, Southern States. The capital securities sold to the public will aggregate $75 million in liquidation amount (or $86.25 million if the underwriters exercise their over-allotment option in full). The liquidation amount is $25 per capital security. Use of Proceeds From the Sale of the Common and Capital Securities to Purchase Junior Subordinated Debentures From Southern States........................Southern States Capital Trust will purchase a series of ____% deferrable interest junior subordinated debentures from Southern States with the proceeds from the sale of its common securities and capital securities. Unless Southern States redeems them, the junior subordinated debentures will mature on _______, 2030. You Will Be Entitled to Receive Quarterly Distributions on the Capital Securities.....................................If you purchase the capital securities from Southern States Capital Trust, you will be entitled to receive cumulative cash distributions at an annual rate of ____% of the $25 liquidation amount per capital security. Distributions will accumulate from the date Southern States Capital Trust issues the capital securities. Southern States Capital Trust will pay distributions quarterly in arrears on January 1, April 1, July 1, and October 1 of each year, beginning ___________ 1, 2000. Quarterly Distributions on the Capital Securities May Be Deferred for Up to 20 Consecutive Quarters...............................................As long as Southern States is not in default with respect to the junior subordinated debentures, it may defer interest payments to Southern States Capital Trust on the junior subordinated debentures for up to 20 consecutive quarterly periods, but not beyond _______, 2030. There is no limitation on the number of times that Southern States may begin an interest deferral period if Southern States is not in default </TABLE> <TABLE> <S> <C> with respect to the junior subordinated debentures. See "Description of the Junior Subordinated Debentures--Option to Extend Interest Payment Period." If Southern States defers interest payments on the junior subordinated debentures, Southern States Capital Trust will defer distributions to you on the capital securities. During this deferral period, you will still accumulate distributions. You will also be required to accrue interest income and include it in your gross income for United States federal income tax purposes, even if you are a cash basis taxpayer. The Capital Securities May Be Redeemed Prior to Maturity.............................Southern States may, at its option, redeem for the liquidation amount plus any unpaid distributions: . all or some of the junior subordinated debentures at any time on or after ______, 2005, or . all of the junior subordinated debentures at any time within 90 days of an unfavorable change in specific regulatory or tax laws. If Southern States redeems some or all of the junior subordinated debentures, Southern States Capital Trust must redeem the same dollar amount of its capital securities. Upon any redemption of your capital securities, you will receive the $25 liquidation amount per capital security plus any unpaid distributions accrued to the date of redemption. As Owner of the Capital Securities, You Will Have Limited Voting Rights....................If you purchase the capital securities from Southern States Capital Trust, you will have very limited voting rights. You will have the right to vote: . with respect to changes to the trust agreement and the guarantee agreement that adversely affect your rights as a holder of capital securities, and . to direct the time, method and place of conducting any proceeding for any remedy available to the property trustee, or to direct the exercise of any trust or power conferred upon the property trustee. </TABLE> <TABLE> <S> <C> See "Description of the Capital Securities--Voting Rights." Southern States Has Fully, Irrevocably and Unconditionally Guaranteed the Capital Securities on a Subordinated Basis..................................................Southern States has fully, irrevocably and unconditionally guaranteed on a subordinated basis all of Southern States Capital Trust's obligations under the capital securities. This guarantee is based on: . Southern States' obligation to make payments to Southern States Capital Trust on the junior subordinated debentures, and . Southern States' obligations under the guarantee agreement, expense agreement, trust agreement and indenture. Southern States' obligation to make payments under the guarantee will be junior to Southern States' obligation to make payments on its senior indebtedness. Southern States' senior indebtedness includes all of its obligations to current and future creditors except for those liabilities incurred in the ordinary course of business and those obligations specifically stating they are not senior indebtedness. Senior indebtedness also includes any subordinated debt securities issued by Southern States in the future, other than junior subordinated debt securities or debentures with subordination terms substantially similar to those of the junior subordinated debentures involved in this offering. See "The Guarantee" and "Effect of Obligations Under the Junior Subordinated Debentures, the Guarantee and the Expense Agreement." Southern States' guarantee is limited to the amount of funds held by Southern States Capital Trust. If Southern States does not make a payment to Southern States Capital Trust on the junior subordinated debentures, Southern States Capital Trust will not have sufficient funds available to make distributions to you on the capital securities, and will not make those distributions. As a result, you will not be able to rely upon the guarantee for payment of these amounts. Instead, you or the property trustee may </TABLE> <TABLE> <S> <C> enforce the rights of Southern States Capital Trust under the junior subordinated debentures directly against Southern States. The Junior Subordinated Debentures Will Be Subordinate to Existing and Future Senior Indebtedness of Southern States........................................Southern States' obligations under the junior subordinated debentures will be contingent upon payment of its senior indebtedness, and will be effectively subordinated to all of Southern States' existing secured and unsecured debt. The junior subordinated debentures also will be subordinate to all future debt of Southern States unless, by its terms, the future debt ranks equally with or is subordinate to the junior subordinated debentures. See "Description of the Junior Subordinated Debentures--Subordination." As of December 31, 1999, the aggregate amount of Southern States' senior indebtedness and liabilities and obligations that would effectively rank senior to the junior subordinated debentures was approximately $188.3 million. You Have Rights in the Event of Default by Southern States..........................The following are events of default by Southern States under both the indenture and the trust agreement: . failure for 30 days or more to pay interest on the junior subordinated debentures when due; . failure to pay principal of or premium, if any, on the junior subordinated debentures when due; . failure for 60 days after written notice to perform any other covenant in the indenture; and . specific bankruptcy, insolvency or reorganization events. If any of these events of default occurs and is continuing, either the property trustee or the holders of at least 25% of the principal amount of the junior subordinated debentures may declare the principal of and interest on the junior subordinated debentures due and payable immediately. Since Southern States Capital Trust will hold all of the junior subordinated </TABLE> <TABLE> <S> <C> debentures, the property trustee will have the authority to declare the principal of and interest on the junior subordinated debentures due and payable immediately. The holders of a majority of the principal amount of the junior subordinated debentures may, under certain circumstances, rescind and annul any acceleration of the payment of the principal and interest as a result of an event of default. See "Description of the Junior Subordinated Debentures--Debenture Events of Default." If the property trustee fails to enforce its rights, you may proceed directly against Southern States to enforce the property trustee's rights. In addition, if an event of default arises due to Southern States' failure to pay principal of or interest on the junior subordinated debentures, you may proceed directly against Southern States to collect your proportionate share of unpaid principal and interest. You have similar rights in the event of a default by Southern States under the guarantee. If an event of default has occurred or if Southern States has defaulted on its obligations under the guarantee, Southern States will not be permitted to: . declare or pay any dividends or make any distributions with respect to its capital stock or patrons' equity; . redeem, purchase, acquire or make a liquidation payment with respect to its capital stock or patrons' equity; . redeem any patronage refund allocations; or . pay any principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities that rank equal with or junior to the junior subordinated debentures. Those limitations do not operate in some circumstances, however. See "Description of the Junior Subordinated Debentures--Covenants and Restrictions on Payments." </TABLE> <TABLE> <S> <C> Southern States May Liquidate Southern States Capital Trust at Any Time............................................Southern States may liquidate Southern States Capital Trust at any time and cause the junior subordinated debentures to be distributed to the holders of the capital securities and common securities of Southern States Capital Trust as a liquidation payment. If Southern States liquidates Southern States Capital Trust, after Southern States has satisfied its creditors you will be entitled to receive the liquidation amount of $25 per capital security plus accumulated and unpaid distributions to the date of payment. This payment may be made in the form of a distribution to you of the junior subordinated debentures. See "Description of the Capital Securities--Liquidation Amount Upon Dissolution" and "--Distribution of the Junior Subordinated Debentures." If the junior subordinated debentures are distributed this way, Southern States will use its best efforts to list them on the New York Stock Exchange or other stock exchange or automated quotation system, if any, on which the capital securities are then listed or quoted. You Will Not Receive a Certificate for the Capital Securities.............................The capital securities will be represented by a global security that will be deposited with and registered in the name of The Depository Trust Company, New York, New York, or its nominee. This means that you will not receive a certificate for the capital securities you purchase. Southern States expects the capital securities to be ready for delivery, in book-entry form only, through The Depository Trust Company, on or about ____________, 2000. </TABLE> UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA The following unaudited pro forma combined condensed financial data give effect to: . the acquisition of the Gold Kist Inputs Business using the purchase method of accounting (this adjustment only impacts the pro forma statement of operations for the year ended June 30, 1999), and . the issuance of the capital securities. The unaudited pro forma combined condensed financial data are intended for information purposes only and are not necessarily indicative of the future financial position or results of operations of Southern States had the acquisition described above occurred on the indicated dates or been in effect for the period presented. The unaudited pro forma combined condensed financial data should be read in conjunction with, and is qualified in its entirety by, the unaudited pro forma financial statements and the historical consolidated financial statements of Southern States and the Gold Kist Inputs Business, including in each case the related notes, included elsewhere in this prospectus, and with "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> Three Months Fiscal Year Ended Ended September 30, 1999 June 30, 1999 ------------------ ------------- (amounts in thousands) <S> <C> <C> Statement of Operations Data: Sales and other operating revenue .............. $287,005 $1,457,867 Cost of products purchased and marketed ........ 232,090 1,193,396 Selling, general and administrative expenses ... 62,017 269,689 -------- ---------- Loss on operations (1) ......................... $ (7,102) $ (5,218) ======== ========== Interest expense ............................... 7,381 27,952 <CAPTION> As of September 30, 1999 ------------------ <S> <C> Balance Sheet Data: Working capital................................ $157,279 Total assets................................... 695,076 Long-term debt................................. 215,513 <CAPTION> As of June 30, 1999 ------------- <S> <C> <C> Other Data: Cash flows from operations .................... $(26,534) $ 137,654 Cash flows used in investing activities ....... 15,967 (268,090) Cash flows from financing activities .......... 12,061 127,562 Ratio of earnings to fixed charges (4) (5) .... N/A N/A EBITDA (2) .................................... 7,365 42,189 EBITDA adjusted (3) ........................... 9,138 49,127 Ratio of EBITDA adjusted to interest expense .. 1.24x 1.78x Current ratio (6) ............................. 1.73x N/A Long-term debt to total capitalization (7) .... .47x N/A </TABLE> (1) Loss on operations represents loss before other deductions, other income, income taxes and distributions on capital securities of trust subsidiary. (2) EBITDA is defined as savings (loss) before income tax and after distributions on mandatorily redeemable capital securities of trust subsidiary plus interest, depreciation and amortization expenses after the cumulative effect of change in accounting method, net of tax. EBITDA adjusted should not be considered as an alternative to net savings (as determined in accordance with generally accepted accounting principles), as a measure of operating performance or as an alternative to net cash provided by operating, investing and financing activities (as determined in accordance with generally accepted accounting principles) as a measure of its ability to meet cash needs. Southern States believes that EBITDA is a measure commonly reported and widely used by investors as a measure of operating performance and debt servicing ability because it assists in comparing performance on a consistent basis without regard to interest, taxes, depreciation and amortization, which can vary significantly depending upon capitalization structure, tax status (particularly when comparing a cooperative company to a non-cooperative company), accounting methods (particularly when acquisitions are involved) or non operating factors (such as historical cost). Accordingly, this information and the related other EBITDA ratios, including the ratio of EBITDA to interest expense, have been disclosed in this prospectus to permit a more complete comparative analysis of operating performance relative to companies within and outside of the industry and of Southern States' debt servicing ability. However, EBITDA and EBITDA to interest expense may not be comparable in all instances to other similar types of measures used by other companies in the agricultural industry. (3) EBITDA adjusted is defined as EBITDA prior to distributions on mandatorily redeemable capital securities of trust subsidiary. (4) In the calculation of the ratio of earnings to fixed charges, earnings consist of net savings (loss) before income taxes after consideration of distributions on the capital securities plus fixed charges. Fixed charges consist of interest expense on indebtedness, amortization of financing costs, that portion of rental expense representative of the interest factor and distributions on the capital securities. (5) On a pro forma basis, earnings were insufficient to cover fixed charges by $5.1 million and $10.9 million for the three months ended September 30, 1999 and the year ended June 30, 1999, respectively. (6) Current ratio is defined as total current assets divided by total current liabilities. (7) Total capitalization is defined as the total of long-term debt, company-obligated mandatorily redeemable capital securities of trust subsidiary, net, mandatorily redeemable preferred stock, capital stock and patrons' equity. SELECTED UNAUDITED HISTORICAL DATA (in thousands) Southern States: <TABLE> <CAPTION> Fiscal Year Ended June 30 -------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Supply Feed--tons ................ 1,276 917 924 895 875 Fertilizer--tons .......... 1,891 1,155 1,137 1,054 1,021 Seed--pounds, 100 wt ...... 1,948 1,673 1,384 1,305 1,412 Petroleum--gallons ........ 325,527 314,614 349,863 340,556 306,874 Marketing Grain marketing--bushels .. 22,456 24,830 29,380 27,637 28,517 Livestock marketing--head Cattle .................. 596 642 599 N/A N/A Swine ................... 1,446 2,689 2,516 N/A N/A Other ................... 136 136 120 N/A N/A </TABLE> Gold Kist Inputs Business: <TABLE> <CAPTION> Fiscal Year Ended ------------------------------------------ June 27, June 28, June 29, 1998 1997 1996 ---- ---- ---- <S> <C> <C> <C> Supply Feed--tons............................. 272 279 292 Fertilizer--tons....................... 1,126 1,127 1,036 Grain--bushels handled................. 10,563 13,862 N/A Cotton--bales ginned................... 102 110 N/A Peanuts--tons handled.................. 35 57 N/A </TABLE>
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+SUMMARY The following is only a summary of the terms of the notes. It does not contain all the information that may be important to you. You should read this entire prospectus. In addition, you may wish to read the documents governing the transfer of the contracts, the formation of the trust and the issuance of notes. Those documents have been filed as exhibits to the registration statement of which this prospectus is a part. There are material risks associated with an investment in the notes. See "Risk Factors" on page 10 for a discussion of factors you should consider before making an investment in the notes. OBJECTIVE..................... The trust will issue notes to investors. The notes will be secured by commercial finance contracts acquired by the trust depositor from the originator. THE TRUST..................... ORIX Credit Alliance Receivables Trust 2000-A, a Delaware business trust, was established pursuant to the trust agreement dated as of January 27, 2000. The Trust's offices will be in care of The Bank of New York (Delaware), as owner trustee, at 502 White Clay Center, Newark, Delaware 19714-6973, telephone number (302) 283-8079. THE ORIGINATOR................ The contracts are originated by ORIX Credit Alliance, Inc. either directly from end-users of financed equipment or indirectly from vendors, that is manufacturers or dealers in the financed equipment who assign their contracts with end-users to ORIX Credit Alliance, Inc. ORIX Credit Alliance, Inc's principal executive offices are located at 300 Lighting Way, Secaucus, New Jersey 07096-1525, telephone (201) 601-9000 THE TRUST DEPOSITOR........... ORIX Credit Alliance Receivables Corporation III. The trust depositor is a wholly owned, limited purpose subsidiary of ORIX Credit Alliance, Inc. The trust depositor's principal executive offices are located at 300 Lighting Way, Secaucus, New Jersey 07096-1525, telephone (201) 601-9618. THE SERVICER.................. ORIX Credit Alliance, Inc. THE INDENTURE TRUSTEE......... Harris Trust and Savings Bank, an Illinois state banking corporation. THE TRUST'S ASSETS A. THE CONTRACTS............ The trust's assets will primarily consist of the contracts. The contracts consist of installment loan and installment sale contracts, finance leases and title retention and other security agreements with companies. The contracts have financed equipment purchased for commercial purposes. The equipment is typically "low-obsolescence," "multiple-use" capital equipment. It is used in industries and businesses such as trucking and transportation, construction and road building, wood and pulp, machine shop, crane and crane rental and printing, publishing and photoengraving, among others. Most of the contracts provide for a series of scheduled payment installments calculated to amortize fully the principal balance of the contract over its term at the contract rate. The principal THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED FEBRUARY 17, 2000 PRELIMINARY PROSPECTUS ORIX CREDIT ALLIANCE RECEIVABLES TRUST 2000-A RECEIVABLE-BACKED NOTES, SERIES 2000-A <TABLE> <S> <C> ORIX CREDIT ALLIANCE ORIX CREDIT ALLIANCE, INC., RECEIVABLES CORPORATION III, AS SERVICER AS TRUST DEPOSITOR </TABLE> $287,081,347 (approximate) ------------------------ We are offering the following six classes of Receivable-Backed Notes, Series 2000-A: <TABLE> <CAPTION> INITIAL AGGREGATE FIRST UNDERWRITING CLASS OF PRINCIPAL AMOUNT PAYMENT STATED MATURITY PRICE TO PUBLIC DISCOUNT NOTES (APPROXIMATE) COUPON RATE DATE DATE PER NOTE PER NOTE - -------- ----------------- ----------- ------- ------------------ --------------- ------------ <S> <C> <C> <C> <C> <C> <C> A-1 $ 95,789,957 % 3/15/00 March 15, 2001 % % A-2 $ 50,780,218 % 3/15/00 April 15, 2002 % % A-3 $112,957,133 % 3/15/00 May 15, 2004 % % A-4 $ 14,570,460 % 3/15/00 March 15, 2005 % % B $ 8,655,719 % 3/15/00 September 15, 2005 % % C $ 4,327,860 % 3/15/00 November 15, 2007 % % </TABLE> The total price to the public is $ . The total underwriting discount is $ . The total proceeds to the trust is $ . YOU SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS" ON PAGE 10 OF THIS PROSPECTUS. The notes are not obligations of and will not represent interests in, and are not guaranteed or insured by, the trust depositor, the owner trustee, the indenture trustee, ORIX Credit Alliance, Inc. or any of their respective affiliates, or any governmental agency. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ FIRST UNION SECURITIES, INC. The date of this prospectus is February , 2000. balance of a contract is the sum of the total scheduled remaining amounts of principal payable to the originator by an obligor under a contract, exclusive of finance charges. The initial principal amount is typically the amount advanced to fund the equipment purchased and is in most instances less than the cost to the obligor of the financed equipment. As of February 1, 2000, approximately 14.56% by aggregate outstanding principal balance of the contracts had customized payment schedules and balloon payments. Customized payment contracts are obligations of obligors who have seasonal downtimes or variations in cash flow typically arising from weather conditions or industry characteristics. During such downtimes, the contract payment schedules may omit or reduce required payments for generally up to three months per year. The scheduled payments are at higher amounts to assure that the contract does not extend beyond a term appropriate for the creditworthiness of the obligor and to meet the originator's yield requirements. Balloon contracts provide for a series of scheduled payments over the term of the contract and a larger amount, generally up to 30% of the original principal balance, at the end of the contract. The monthly payment includes the amount necessary to amortize the non-balloon payment portion of the contracts over the term of the contract plus interest on the balloon portion of the contract. On the closing date ORIX Credit Alliance, Inc. will transfer the contracts and security interests in the related equipment to the trust depositor. The trust depositor will then transfer them to the trust on the same date. The contracts have been selected on a random basis from ORIX Credit Alliance, Inc.'s portfolio of contracts that meet the eligibility criteria specified in the transfer and servicing agreement. None of the obligors on the contracts are located outside of the United States and its territories. As of February 1, 2000, contracts of any single obligor or commonly controlled group of obligors do not constitute more than approximately 1.0% of the aggregate outstanding principal balance of the contracts, and no more than 10.28% of the aggregate outstanding principal balance of the contracts relates to obligors located in the same state. As of February 1, 2000, no contract has any scheduled payments that are more than 60 days delinquent. A contract is considered delinquent if anything less than each full payment is received by its contractual due date. See "The Transfer and Servicing Agreement -- Representations and Warranties; Definition of Eligible Contracts" and "The Contracts" and "Composition of the Contracts". TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Important Notice about Information Presented in this Prospectus............. i Summary.................................... 1 Risk Factors............................... 10 The Absence of Existing Markets for the Notes May Limit Your Ability to Resell the Notes.............................. 10 Prepayments on the Contracts May Cause an Earlier Repayment of the Notes than You Expect and You May Not Be Able To Find Investments with the Same Yield as the Notes at the Time of the Repayment..... 10 The Price at Which You Can Resell Your Notes May Decrease if the Ratings of Your Notes Change...................... 10 The Subordination of the Class A-2 Notes, Class A-3 Notes, Class A-4 Notes, Class B Notes and the Class C Notes is a Limited Form of Credit Enhancement..... 10 Limited Assets Secure the Notes; Noteholders Will Have No Recourse to the Originator, Servicer or their Affiliates in the Event Delinquencies and Losses Deplete the Trust's Assets................................. 11 Because Disproportionate Amounts of Contracts Relate to Three States, Adverse Events in Those States and Surrounding Regions May Cause Increased Defaults and Delinquencies............. 11 Because Disproportionate Amounts of Contracts Relate to Equipment Used in Particular Industries, Adverse Economic Conditions in Those Industries May Cause Increased Defaults and Delinquencies.......................... 11 Even if We Repossess and Sell the Equipment Relating to a Contract After an Obligor Defaults, Shortfalls in Amounts Available To Pay the Notes May Occur if the Market Value of the Equipment Has Declined................. 11 Servicer's Retention of Contract Files May Hinder Our Ability to Realize the Value of Equipment Securing the Contracts.............................. 12 Failure to Record Assignment of Perfected Security Interest May Hinder Our Ability to Realize the Value of Equipment Securing the Contracts....... 12 Repurchase Obligation of Trust Depositor and Originator Provides You Only Limited Protection Against Liens on the Contracts.............................. 12 If a Bankruptcy Court Rules that the Transfer of Contracts from the Originator to the Trust Depositor was not a True Sale then Payments on the Contracts Could Be Reduced or Delayed................................ 13 Insolvency of the Trust Depositor or the Trust Could Delay or Reduce Payments to You.................................... 13 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> Proceeds From Required Sale of the Contracts Following Trust Depositor Bankruptcy May Not Be Sufficient to Repay the Notes in Full................ 13 End-User Bankruptcy May Reduce or Delay Collections on the Contracts........... 14 Transfer of Servicing May Delay Payments to Noteholders Due to Contract Processing Delays...................... 14 Year 2000 Issues May Impact ORIX Credit Alliance's Ability to Service the Contracts.............................. 14 Book-Entry Registration Will Result in Your Inability to Exercise Directly Your Rights as a Noteholder............ 14 Use of Proceeds............................ 15 Calculation of Contract Principal Balance.................................. 15 Composition of the Contracts............... 15 Distribution of the Contracts by Contract Interest Rate.......................... 16 Distribution of the Contracts by Payment Frequency.............................. 17 Distribution of the Contracts by State in Which Obligors Are Located............. 18 Distribution of the Contracts by Obligor Industry............................... 19 Distribution of the Contracts by Original Principal Balance...................... 19 Distribution of the Contracts by Current Principal Balance...................... 19 Distribution of the Contracts by Original Contract Term.......................... 20 Distribution of the Contracts by Remaining Months to Stated Maturity.... 20 Distribution of Contracts by New/Used Equipment Financed..................... 20 Delinquency and Loss Information........... 21 Definition of Delinquency for the Contracts Transferred to the Trust................. 23 The Contracts.............................. 23 End-User Contracts....................... 23 Conditional Sale Agreements.............. 24 Leases................................... 24 Secured Promissory Notes................. 25 Equipment................................ 26 Contract Files........................... 26 How Collections on the Contracts are Treated................................ 26 Prepayment and Yield Considerations........ 26 Weighted Average Life...................... 33 </TABLE> As of February 1, 2000, the contracts had the following characteristics: <TABLE> <S> <C> Number of contracts....................... 4,387 Aggregate contract outstanding principal balance................................. $288,523,968 Average contract outstanding principal balance................................. $65,768 Weighted average contract rate............ 9.80% Weighted average original term............ 51.1 months Range..................................... 10-84 months Weighted average remaining term........... 37.3 months Range..................................... 7-80 months </TABLE> Changes in characteristics of the contracts between February 1, 2000 and the closing date will not affect more than 5.00% of the aggregate outstanding principal balance of the contracts. For further information regarding the contracts, see "Composition of the Contracts" and "The Contracts", as well as "The Transfer and Servicing Agreement -- Representations and Warranties; Definition of Eligible Contracts" and "-- Concentration Amounts; Definition of Excess Contract". We may replace a contract that is part of the trust's assets with a substitute contract or contracts: - if we subsequently determine that a contract was not eligible to be sold to the trust at the time of its sale to the trust; - if the terms of such contract are to be subsequently amended in a manner not permitted by the transfer and servicing agreement; - if such contract is subject to a casualty loss; - if we did not remove and replace that contract, the obligor or equipment concentrations of contracts would exceed the limits described in "The Transfer and Servicing Agreement -- Concentration Amounts; Definition of Excess Contract"; - if such contract is prepaid; or - if such contract becomes a defaulted contract. See "The Transfer and Servicing Agreement -- Substitute Contracts". The substitute contracts will have been originated under the same credit criteria and policies as the contracts they replace. B. RESERVE FUND............. On the closing date the trust depositor will establish in bank accounts in the name of the indenture trustee a reserve fund. This fund provides you with limited protection in the event collections from obligors on the contracts are insufficient to make payments on the notes. We cannot assure you, however, that this protection will be adequate to prevent shortfalls in amounts <TABLE> <CAPTION> PAGE ---- <S> <C> ORIX Credit Alliance, Inc. ................ 35 Equipment Finance Business............... 35 Ancillary Businesses..................... 35 Summary Financial Data................... 36 Management............................... 36 Credit Approval, Collection and Review Process......................... 38 Terms of Contracts..................... 39 Recourse Provisions.................... 39 Extension/Revision Procedures.......... 40 Pre-Litigation Workout/Judgment Recovery............................ 40 Legal Proceedings...................... 40 Year 2000 Readiness Disclosure......... 41 Mainframe Systems and Applications..... 41 Personal Computer and Network Applications........................ 41 Third-Party Compliance................. 41 Contingency Plans...................... 42 Cost................................... 42 The Trust.................................. 42 General.................................. 42 Termination of Trust..................... 43 Other Information........................ 43 The Trust Depositor........................ 43 Description of the Notes and Indenture..... 44 General.................................. 44 Interest and Principal................... 44 Amounts Available for Payments on the Notes.................................. 45 Allocations.............................. 46 Prior to an Event of Default........... 46 Following an Event of Default.......... 48 Reserve Fund............................. 51 Spread Fund.............................. 52 Collection Account and Collection Period................................. 52 Events of Default........................ 54 Remedies After Events of Default......... 55 The Indenture Trustee.................... 55 Governing Law............................ 56 Amendments............................... 56 Servicing Compensation and Payment of Expenses............................... 57 Optional Redemption...................... 58 Mandatory Redemption..................... 58 Reports.................................. 58 List of Noteholders...................... 59 Administration Agreement................. 59 Book-Entry Registration.................. 60 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> Issuance of Certificated Notes at a Later Date................................... 63 The Certificates........................... 63 The Transfer and Servicing Agreement....... 64 Conveyance of the Contracts.............. 64 Representations and Warranties; Definition of Eligible Contracts....... 64 Remedies for Breaches of Representations and Warranties; Definition of Ineligible Contracts................... 67 Concentration Amounts; Definition of Excess Contract........................ 68 Material Modifications to Contracts...... 69 Substitute Contracts..................... 70 Definition of Defaulted Contracts........ 70 Indemnification.......................... 70 Servicing Standard and Servicer Advances............................... 71 Servicer Resignation..................... 71 Servicer Default......................... 71 Evidence as to Compliance................ 73 Amendments............................... 73 The Owner Trustee........................ 74 Material Federal Income Tax Considerations........................... 75 General.................................. 75 Classification of the Notes and the Trust.................................. 75 General Tax Treatment of Noteholders..... 76 United States Holders.................. 76 Payments of Interest................... 76 Purchase, Sale and Retirement of the Notes............................... 76 Backup Withholding and Information Reporting........................... 76 United States Alien Holders............ 77 Backup Withholding and Information Reporting........................... 78 State and Local Tax Considerations......... 78 New Jersey Tax Considerations............ 78 Other States............................. 78 Legal Investment........................... 78 ERISA Considerations....................... 79 Prohibited Transactions.................. 79 Plan of Distribution....................... 80 General.................................. 80 Rating of the Notes........................ 81 Legal Matters.............................. 82 Experts.................................... 82 Index of Terms............................. 83 Report of Independent Public Accountants... F-1 Balance Sheet.............................. F-2 </TABLE> available to make payment on the notes. The initial balance of the reserve fund will be approximately $4,306,220, which will equal 1.5% of the original principal balance of the notes. Additional deposits will be required to be made in subsequent months out of available collections on the contracts to this fund (a) to increase the reserve fund to an amount equal to the greater of (i) 3% of the outstanding principal of the notes and (ii) the lesser of (A) 1% of the initial principal of the notes and (B) the outstanding principal of the notes and (b) in subsequent months thereafter, if necessary, to maintain the required amount in the fund. If, on any payment date, the amounts available for distribution exceed the amounts needed to pay amounts owed to the servicer and to the indenture trustee and to pay interest and principal on the notes, the excess will be deposited into this fund. However, the amount deposited in the reserve fund shall not exceed the amount required above. Investment earnings on amounts held in the reserve fund will be available for distribution to you. If on any payment date, collections on the contracts and amounts, if any, on deposit in the spread fund are less than the amount needed to pay interest on or principal of the notes then due, the indenture trustee will withdraw funds from the reserve fund to pay the interest and principal due. The conditions under which we will withdraw amounts from the reserve fund are more specifically described in the "Description of the Notes and Indenture -- Allocations" and "-- Reserve Fund". C. SPREAD FUND................ On the closing date the trust depositor will establish an additional bank account, the spread fund, in the name of the indenture trustee to hold available funds whenever a spread event exists. A spread event will exist if any of the following occurs and is continuing: (a) ORIX Credit Alliance, Inc. is no longer the servicer, (b) the average monthly rate of delinquencies on contracts in excess of 90 days over any three consecutive months exceeds 5% of the aggregate outstanding principal balance of the contracts or (c) the cumulative net loss percentage with respect to the contracts exceeds a specified "loss trigger percentage" (initially 1.00%) that will be increased over time. Notwithstanding the foregoing: (i) the spread event referred to in clause (b) above may be cured on any distribution date if the three-month delinquency percentage for the preceding two collection periods is less than or equal to 5% for each of such periods and (ii) the spread event referenced in clause (c) may be cured if the cumulative net loss percentage is less than the associated loss trigger percentage for that period. Amounts that may be held in this fund provide you with additional limited protection in the event collections from obligors on the contracts are insufficient to make payments on the notes. We cannot assure you, however, that this additional protection will be adequate to prevent shortfalls in amounts available to make payment on the notes. If on any payment date, a spread event exists and the amounts available for distribution exceed the amounts needed to pay amounts owed to the servicer (including amounts due to the indenture trustee) to pay interest and principal on the notes and to make any required deposits to the reserve fund, the excess will be deposited into the spread fund. Investment earnings on amounts held in the spread fund will be available for distribution to you. If on any payment date, collections on the contracts are less than the amount needed to pay interest and principal due on the notes and make all required deposits to the reserve fund, the indenture trustee will withdraw funds from the spread fund to pay the interest and principal and make such deposits. If on any subsequent payment date, no spread event continues to exist, amounts in the spread fund will be distributed in the same order of priority as are amounts in the collection account. The calculations related to a spread event and the conditions under which we will withdraw amounts from the spread fund are more specifically described in the "Description of the Notes and Indenture -- Allocations" and "-- Spread Fund". TERMS OF THE NOTES............ The basic terms of the notes will be as described below. See "Description of the Notes and Indenture". We will pay principal and interest due on the notes using: - collections of payments due under the contracts held by the trust; - earnings on amounts held in the collection account; - late charges relating to a contract if the late charges were included in the contract's terms as of the date the contract was purchased by the trust; - amounts earned on amounts held in the reserve fund and the spread fund (if any); - amounts received upon the prepayment or purchase of contracts or liquidation of the contracts and disposition of the related equipment upon defaults under contracts; - amounts received from vendor recourse, if any; - amounts in the reserve fund more specifically described in "Description of the Notes and Indenture -- Reserve Fund"; and - amounts in the spread fund more specifically described in "Description of the Notes and Indenture -- Spread Fund". See "Description of the Notes and Indenture -- Amounts Available for Payments on the Notes". You may purchase the notes in minimum denominations of $1,000, and in integral multiples of $1,000 in excess of the minimum denominations; provided, however, that one note of each class will be available for purchase in an incremental denomination of less than $1,000. We will offer the notes only in book-entry form. A. EVENTS OF DEFAULT........ Events of default with respect to the notes include: - failure to pay accrued interest on any payment date, - failure to pay outstanding principal on the maturity date, - breach of representations and warranties with respect to the contracts which are materially incorrect and which have a material adverse effect on the noteholders and continues unremedied for a period of sixty days, and - the occurrence of insolvency events with respect to the trust depositor or the trust. See "Description of the Notes and Indenture -- Events of Default". B. INTEREST................. On a payment date, we will first repay any outstanding servicer advances. Second, we will pay the servicer's monthly servicing fee (which includes therein amounts due to the indenture trustee). Third, we will pay interest on the notes at the rates specified on the cover of this prospectus in the following order: <TABLE> <CAPTION> CLASS OF NOTES RECEIVING INTEREST PAYMENT NOTES PRIOR TO SPECIFIED CLASS -------- ------------------------------------- <S> <C> A-1, A-2, A-3, A-4........... None B.................. Class A-1 Notes, Class A-2 Notes, Class A-3 Notes, Class A-4 Notes C.................. Class A-1 Notes, Class A-2 Notes, Class A-3 Notes, Class A-4 Notes, Class B Notes </TABLE> See "Description of the Notes and Indenture -- Allocations". We will calculate interest on the Class A-1 Notes on the basis of actual days elapsed over a year of 360 days. We will calculate interest on all other notes on the basis of a year of 360 days consisting of twelve 30-day months. C. PRINCIPAL................ On a payment date, after we pay interest on the notes, we will pay principal on the notes in the following order: <TABLE> <CAPTION> CLASS OF NOTES RECEIVING PRINCIPAL PAYMENT NOTES PRIOR TO SPECIFIED CLASS -------- ----------------------------------------------- <S> <C> A-1 None A-2 Class A-l Notes </TABLE> <TABLE> <CAPTION> CLASS OF NOTES RECEIVING PRINCIPAL PAYMENT NOTES PRIOR TO SPECIFIED CLASS -------- ----------------------------------------------- <S> <C> A-3 Class A-1 Notes, Class A-2 Notes Class B Notes and Class C Notes will receive principal payments prior to Class A-3 Notes on any payment date on which the outstanding principal amount of the Class A-2 Notes is greater than $0. A-4 Class A-1 Notes, Class A-2 Notes, Class A-3 Notes Class B Notes and Class C Notes will receive principal payments prior to Class A-4 Notes on any payment date on which the outstanding principal amount of the Class A-3 Notes is greater than $0. B Class A-1 Notes, Class A-2 Notes Class A-3 Notes will receive principal payments prior to Class B Notes after the outstanding principal amount of the Class A-1 Notes and Class A-2 Notes is reduced to $0. Class A-4 Notes will receive principal payments prior to Class B Notes only after the outstanding principal amount of the Class A-1 Notes, Class A-2 Notes and Class A-3 Notes is reduced to $0. C Class A-l Notes, Class A-2 Notes, Class B Notes Class A-3 Notes will receive principal payments prior to Class C Notes only after the outstanding principal amount of the Class A-1 Notes and Class A-2 Notes is reduced to $0. Class A-4 Notes will receive principal payments prior to Class C Notes only after the outstanding principal amount of the Class A-1 Notes, Class A-2 Notes and Class A-3 Notes is reduced to $0. </TABLE> See "Description of the Notes and Indenture -- Allocations". The amount of principal paid on a Class A-1 Note prior to its stated maturity date will be based on the amount that the aggregate principal balance of the contracts has declined during the most recent full collection period. Each collection period is approximately a month. After the Class A-1 Notes have been paid in full, the amount of principal paid on any other class of notes will be the amount necessary to reduce the outstanding principal of that class of notes to an amount equal to a specified percentage of the aggregate principal balance of the contracts as of the related determination date. The percentage used is the ratio of the initial principal amount of such class of notes to the original pool balance of the contracts minus the initial principal amount of the Class A-1 Notes. Following an event of default, we will not make principal payments in the order described above. Instead, we will pay principal on the notes in the following order: - outstanding principal of Class A-l Notes - pro rata, to the outstanding principal of Class A-2 Notes, Class A-3 Notes and Class A-4 Notes - outstanding principal of Class B Notes - outstanding principal of Class C Notes See "Description of the Notes and Indenture -- Allocations" and "-- Events of Default". D. PAYMENT DATES............ You will receive distributions of interest and principal on the 15th day of each month, or if that day is not a business day, the next business day. E. STATED MATURITY DATE..... The notes will mature on the date shown on the cover of this prospectus, except that if the day is not a business day, then the stated maturity date will be the next business day. F. OPTIONAL REDEMPTION...... If the aggregate outstanding principal balance of the contracts at the time is less than or equal to 15% of the initial aggregate principal balance of the contracts as of February 1, 2000, the trust may redeem all, but not less than all, of the outstanding notes. If the trust does redeem all of the outstanding notes, the redemption price will be equal to the unpaid principal amount of the notes plus accrued and unpaid interest through the date of redemption. G. MANDATORY REDEMPTION....... If on any payment date, the aggregate amounts on deposit in the collection account, the reserve fund and the spread fund are greater than or equal to the sum of (i) the entire outstanding note principal balance, (ii) the interest accrued thereon, (iii) any accrued and unpaid servicing fee (including therein amounts owed to the indenture trustee) and (iv) unreimbursed servicer advances, the amounts on deposit in the reserve fund and the spread fund will be deposited in the collection account and used to redeem the notes in full. The redemption price will be equal to the unpaid principal amount of the notes plus accrued and unpaid interest through the date of redemption. SERVICING; SERVICING FEE...... The servicer will be responsible for servicing, managing and administering the contracts and related interests, and enforcing and making collections on the contracts. See "The Transfer and Servicing Agreement -- Servicing Standard and Servicer Advances". The servicer will be entitled to receive a monthly fee equal to the product of: (1) one-twelfth of 1.00% and (2) the aggregate outstanding principal balance of the contracts in the trust as of the beginning of the related collection period. The fee is payable out of amounts we receive on the contracts. Amounts payable to the indenture trustee are included in such fee. See "Description of the Notes and Indenture -- Servicing Compensation and Payment of Expenses" and "The Transfer and Servicing Agreement". MATERIAL FEDERAL INCOME TAX CONSIDERATIONS.............. In the opinion of Sullivan & Cromwell, federal tax counsel to the trust depositor, for federal income tax purposes, the notes will be characterized as debt, and the trust will not be characterized as an association or a publicly traded partnership taxable as a corporation. You, by accepting a note, agree to treat the note as indebtedness. See "Material Federal Income Tax Considerations". ERISA CONSIDERATIONS.......... Subject to the considerations discussed under "ERISA Considerations", the notes will be eligible for purchase by some employee benefit plans. Any benefit plan fiduciary considering purchase of the notes should, however, consult with its counsel regarding the consequences of its purchase under ERISA and the Internal Revenue Code. See "ERISA Considerations". RATING........................ We will not issue the notes unless they receive ratings from the following rating agencies as set forth below: <TABLE> <CAPTION> CLASS MOODY'S STANDARD & OF INVESTORS POOR'S FITCH NOTE SERVICE RATINGS GROUP IBCA, INC. ----- --------- ------------- ---------- <S> <C> <C> <C> A-1 P-1 A-1+ F1+/AAA A-2 Aaa AAA AAA A-3 Aaa AAA AAA A-4 Aaa AAA AAA B A2 A A C Baa2 BBB BBB </TABLE> A rating is not a recommendation to purchase, hold or sell notes since a rating does not address market price or suitability for a particular investor. A rating may be subject to revision or withdrawal at any time by the assigning rating agency. See "Rating of the Notes".
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001100917_onvia-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001100917_onvia-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering and our financial statements and notes to those statements appearing elsewhere in this prospectus. Onvia.com, Inc. We are the leading business-to-business emarketplace for small business buyers and sellers. Our emarketplace is designed to help small businesses succeed by providing a single online destination where small businesses can buy and sell services and products, exchange valuable news, product and service information and access productivity tools. We have designed our emarketplace to incorporate all of these functions so that small businesses can conduct e-commerce and exchange information without leaving our web site. By aggregating a large and targeted audience of small businesses, our emarketplace provides an effective sales channel for both small and large vendors to the small business market. Businesses are increasingly using the Internet to communicate and transact commerce with their partners, suppliers and customers. To facilitate the electronic exchange of information, services and products, businesses are beginning to form electronic marketplaces, or emarketplaces, that aggregate buyers and sellers in a central Internet destination. As small businesses, which we define as businesses with fewer than 100 employees and income-generating home offices, increasingly rely on the Internet, we believe that a significant market opportunity exists to provide small businesses with an emarketplace specifically designed for their needs. Small businesses account for roughly half of the United States gross domestic product, according to the U.S. Small Business Administration. We believe that the growth in the number of small businesses and in the volume of small business e-commerce will drive the need for an emarketplace that offers sellers a channel to reach the large, fragmented market of small business buyers and provides these buyers with a single Internet location to meet all of their needs. Our emarketplace currently consists of: . a small business services trading hub, which includes more than 20,000 businesses that act as suppliers across 100 services in our request for quote network, a network which enables buyers to submit electronically requests for quotes for various business services and sellers to respond with pricing and fulfillment information; . more than 37,000 products and nine business services selected for the particular needs of small businesses that can be purchased quickly and conveniently through our "Purchase Now" system; and . a collection of timely news, information, editorial content and business tools designed to help small businesses enhance their operations. We intend to build on our leadership position as the first comprehensive emarketplace for small businesses by expanding our service, product and information offerings to become the single source for all small business needs. We believe that by expanding our offerings we will attract more small businesses to our emarketplace, creating additional marketing opportunities for our sellers. We believe that this will create a network effect in which the value of our emarketplace increases with the addition of each participant. Onvia.com was incorporated as MegaDepot, Inc. in Washington in March 1997. In February 1999, we changed our name to MegaDepot.com, Inc., and in May 1999 we changed our name to Onvia.com, Inc. In February 2000, we reincorporated in Delaware. Our principal executive offices are located at 1000 Dexter Avenue, Suite 400, Seattle, Washington 98109, and our telephone number is (206) 282-5170. Our web site is located at www.onvia.com. The information contained on our web site is not part of this prospectus. The Offering <TABLE> <C> <S> Common stock offered................................ 8,000,000 shares Common stock offered in the concurrent private 2,666,666 shares, placement.......................................... assuming an initial public offering price of $20.00 per share Common stock to be outstanding after the offering... 78,847,428 shares Use of proceeds..................................... For general corporate purposes, including working capital. See "Use of Proceeds." Nasdaq National Market symbol....................... ONVI </TABLE> This table is based on shares outstanding as of December 31, 1999 and excludes the following shares: . 1,262,638 shares issuable upon exercise of warrants outstanding as of December 31, 1999 at a weighted average exercise price of $0.93 per share; . 5,875,382 shares issuable upon exercise of options outstanding as of December 31, 1999 at a weighted average exercise price of $1.60 per share; . 5,678,412 shares of common stock available for future grant under our 1999 stock option plan; . 600,000 shares of common stock available for issuance under our 2000 directors' stock option plan; and . 600,000 shares of common stock available for issuance under our 2000 employee stock purchase plan. ---------------- Unless otherwise indicated, the information in this prospectus reflects the number of shares outstanding on December 31, 1999 assuming: . the conversion of all outstanding shares of preferred stock into common stock upon the closing of this offering; . a two-for-one forward stock split of our capital stock effected in February 2000; . our reincorporation into Delaware in February 2000; . the filing of our amended and restated certificate of incorporation; . the sale by us of 2,666,666 shares of our common stock at an assumed initial public offering price of $20.00 per share to Internet Capital Group in a private placement concurrent with this offering; . the exercise of warrants to purchase 705,144 shares of our common stock that will expire if not exercised before the closing of this offering; and . no exercise of the underwriters' over-allotment option. Summary Consolidated Financial Data <TABLE> <CAPTION> March 25, 1997 (inception) to Year Ended Year Ended December 31, December 31, December 31, 1997 1998 1999 ------------ ------------ ------------ (in thousands, except per share data) <S> <C> <C> <C> Consolidated Statements of Operations Data: Revenue................................ $ 62 $1,037 $ 27,177 Gross margin........................... 15 (45) (4,397) Total operating expenses............... 146 623 38,428 Loss from operations................... (130) (669) (42,825) Net loss............................... $( 130) $ (672) $(43,366) Net loss attributable to common stockholders.......................... $ (130) $ (672) $(57,373) Basic and diluted net loss per common share................................. $(0.02) $(0.08) $ (4.59) Basic and diluted weighted average shares outstanding.................... 8,001 8,001 12,508 </TABLE> <TABLE> <CAPTION> December 31, 1999 ------------------- Pro Forma Actual As Adjusted ------- ----------- (in thousands) <S> <C> <C> Consolidated Balance Sheet Data: Cash and cash equivalents................................... $38,518 $238,801 Total assets................................................ 50,279 250,562 Long-term debt.............................................. 5,171 5,171 Total stockholders' equity.................................. 26,613 226,898 </TABLE> The pro forma as adjusted information in the above consolidated balance sheet data table is adjusted to reflect the sale of 8,000,000 shares of common stock offered by us in this offering and 2,666,666 shares of common stock to be sold in the concurrent private placement at an assumed initial public offering price of $20.00 per share, after deduction of the estimated underwriting discounts and commissions and estimated offering expenses, and the exercise of warrants to purchase 705,144 shares of our common stock that will expire if not exercised before the closing of this offering. See note 1 of the notes to our consolidated financial statements for an explanation of the determination of the number of weighted average shares used to compute net loss per share amounts.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001100969_asiainfo_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001100969_asiainfo_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the shares of the common stock being sold in this offering and our historical financial statements and notes thereto included elsewhere in this prospectus. AsiaInfo Holdings, Inc. Our Business We are a leading provider of Internet-related, information technology professional services and software products in the People's Republic of China. We offer total network solutions and proprietary software to meet our customers' Internet and telecommunications infrastructure and operating needs. Our customers are leading telecommunications service providers, Internet service providers and Internet content providers in China, including the China Telecom system, which comprises the Directorate General of Telecommunications, a state owned enterprise, provincial post and telecommunication administrations and city and county telecommunications bureaus, and China United Telecommunications Corporation, or China Unicom, the two largest Chinese telecommunications and Internet service providers, as well as China Mobile Communications Corporation, or China Mobile, the largest wireless telephony service provider in China. We provide network solutions for large Internet and telecommunications projects. We deliver Internet infrastructure solutions such as backbone and access networks, operations support solutions using our proprietary and third party software, service applications such as Internet protocol telephony, commonly known as IP telephony, and virtual private networks, and network performance and security solutions. In response to customer preferences in China, we often offer services in the context of total solutions, which include systems integration and customization of our proprietary and third party software. With an early entry into the market, we are now a leading provider of network solutions for large Internet and telecommunications companies in China. Our Chinese, western-trained senior management and technical personnel have a proven track record of delivering high performance, cost effective solutions for the specific needs of these companies. We designed and built ChinaNET, China's first commercial and largest national Internet backbone, the physical network of cables and computers which carries Internet traffic. We are in the process of designing and building UniNET, China's second-largest national commercial Internet backbone, for China Unicom and CNCNET, China's third national commercial Internet backbone for China Netcom Corporation, or China Netcom. We have also built numerous provincial Internet backbones, including GuangdongNET, the first and largest provincial commercial Internet backbone in China. We develop and sell carrier class, meaning high performance, highly fault tolerant, software products tailored for the specific needs of the China market. These products include real time, highly scalable customer management and billing software and carrier-scale messaging software for Internet service providers, Internet content providers and wireless telephony service providers. We have historically sold our software products as part of our network solutions projects, but we are increasingly marketing these products on a stand-alone basis. Our software can support up to millions of users and is designed with open architecture to facilitate customization. We have the largest user base for customer management and billing software among large Internet service providers in China, having sold software licenses to our customers for approximately 1.8 million end users as of December 31, 1999. AsiaInfo Mail Center ("AIMC"), the latest version of our messaging software, was launched in April 1999 and within eight months has been licensed by our customers for over 9 million of their end users. As of December 31, 1999, we had sold licenses for our wireless telephony customer management and billing software to our customers for over 7 million end users. Our Market Opportunity The Internet market in China has been growing rapidly due primarily to increased access to telecommunications services and declining personal computer prices. International Data Corp. ("IDC") estimates that China will have 3.8 million users at the end of 1999 and forecasts that China's Internet population will grow at a compound rate of 54% per year to 33 million users in 2004. Chinese telecommunications carriers have made significant investments in Internet and telecommunications infrastructures using advanced technologies. The Internet and telecommunications markets in China have become increasingly competitive as the Chinese government has taken measures to deregulate the telecommunications industry and introduce competition. China's expected entry into the World Trade Organization (the "WTO") is expected to stimulate spending on the Internet and telecommunications infrastructures, particularly broadband networks. Increased demand for Internet services and competition have also prompted service providers to offer varying, customer-tailored service plans and focus on customer care and support. We believe that the combined effects of increased deregulation and industry competition, coupled with a growing demand for Internet services and multimedia applications, have created opportunities for us in the following areas: . high value Internet-related information technology services in an increasingly complex network environment; . real-time, scalable customer management and billing software that meets the specific requirements of Chinese service providers; and . broadband network and convergent communications solutions including unified messaging software, which integrates email, voicemail and fax functions. Our Strategy Our strategy is to be the leading China-based, world-class provider of Internet-related, information technology professional services and software products to enable our customers to build, maintain, operate and continuously improve their Internet and communications infrastructures. Key aspects of this strategy are to: . Maintain our leading position in providing Internet and telecommunications infrastructure solutions in China . Focus on high value information technology professional services . Significantly grow our software business to maximize opportunities in the Internet software market in China . Develop broadband and convergent communications solutions . Leverage our large customer base to generate recurring revenues . Develop outsourcing solutions . Attract and retain highly qualified personnel Our Competitive Strengths We believe that we are well positioned to meet our customers' Internet infrastructure and software applications needs in China. The key factors which contribute to our strong competitive position are: . Internet infrastructure technology leadership in China . Combined international and China expertise . Established customer relationships . Real time, scalable and adaptable proprietary software . Total solutions approach Corporate Information We started our business in Texas through a predecessor company in 1993 and are now incorporated in Delaware. In 1995, we moved our base of operations from Dallas, Texas to Beijing, China to capitalize on emerging opportunities in the rapidly developing Internet market in China. Today, almost all our operations and employees are based in China. While we source hardware for our customers through our U.S. holding company, AsiaInfo Holdings, Inc., we conduct the bulk of our business through our two wholly-owned operating subsidiaries, each of which is a Chinese company. Our executive offices are located at Ligong Science & Technology Tower, 4th Floor, 11 Baishiqiao Road, Haidian District, Beijing 100081, China, and our telephone number is (8610) 6846-7058. THE OFFERING <TABLE> <C> <S> Common stock offered................................ 5,000,000 shares Common stock to be outstanding after this offering.. 37,500,297 shares Use of proceeds..................................... We intend to use the estimated net proceeds of approximately $87.3 million from this offering for working capital, expansion of sales and marketing activities, software product development, acquisitions and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol.............. "ASIA" </TABLE> The total number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of December 31, 1999 and 6,952,153 shares of common stock issuable upon the automatic conversion of all outstanding shares of our convertible preferred stock upon the completion of this offering, but excludes . options granted under our stock option plans to purchase 8,891,811 shares of common stock at a weighted average exercise price of $2.99 per share outstanding as of December 31, 1999, . 1,821,300 shares of common stock available for issuance upon the exercise of future grants under our stock option plans and . 40,000 shares of common stock issuable upon the exercise of warrants to purchase shares of common stock at an exercise price of $0.01 per share. SUMMARY CONSOLIDATED FINANCIAL DATA The following table sets forth our summary consolidated financial data. You should read this information together with our consolidated financial statements, the notes to those statements beginning on page F-1 of this prospectus and the information under "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."The summary consolidated balance sheet data and summary consolidated statements of operations data in the table below as of and for the years ended December 31, 1996, 1997, 1998 and 1999 have been derived from our audited consolidated financial statements. The summary consolidated statement of operations data for the year ended December 31, 1995 and the summary consolidated balance sheet data as of the same date are derived from our unaudited consolidated financial statements, which have been prepared on the same basis as our audited consolidated financial statements and contain normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for such unaudited periods. Historical results are not necessarily indicative of the results to be expected in the future. <TABLE> <CAPTION> Years Ended December 31, ---------------------------------------------------------------------------- 1995 1996 1997 1998 1999 -------------- -------------- -------------- -------------- -------------- (Amounts in thousands of U.S. dollars except share and per share data) <S> <C> <C> <C> <C> <C> Consolidated Statements of Operations Data: Revenues: Network Solutions...... $ 1,799 $ 14,781 $ 36,509 $ 41,964 $ 53,786 Software License....... -- 762 775 2,258 6,494 -------------- -------------- -------------- -------------- -------------- Total revenues......... 1,799 15,543 37,284 44,222 60,280 Gross profit............ 546 6,445 7,728 12,033 18,317 Operating income (loss)................. (598) 2,186 (713) 681 (4,964) Net income (loss)....... (578) 1,670 (382) 1,536 (4,946) Net income (loss) per share: Basic.................. $ (0.05) $ 0.12 $ (0.03) $ 0.11 $ (0.34) Fully diluted(/1/)..... $ (0.05) $ 0.10 $ (0.03) $ 0.05 $ (0.34) Shares used in computation: Basic.................. 12,273,628 13,530,000 13,530,000 13,616,412 14,630,145 Fully diluted(/1/)..... 12,273,628 15,999,133 13,530,000 31,765,534 14,630,145 </TABLE> <TABLE> <CAPTION> As of December 31, As of December 31, 1999 ------------------------------ ------------------------ 1995 1996 1997 1998 Actual As Adjusted(/2/) ------ ------ ------- ------- ------- ---------------- (Amount in thousands of U.S. dollars) <S> <C> <C> <C> <C> <C> <C> Consolidated Balance Sheet Data: Cash and cash equivalents............ $1,732 $2,221 $24,066 $ 9,749 $25,404 $113,056 Total current assets.... 3,747 8,325 36,131 42,805 64,772 152,022 Total assets............ 3,787 9,227 37,085 45,359 71,427 158,677 Total liabilities (excluding minority interest).............. 4,089 6,429 20,008 26,048 31,639 31,639 Total stockholders' equity (deficit)....... (567) 1,333 16,179 19,247 39,788 127,038 </TABLE> - -------- (/1/) In 1997 and 1999, the diluted net loss per share computation excludes shares of common stock issuable under stock option plans, upon the exercise of warrants and upon the automatic conversion of our convertible preferred stock which, if included, would have an antidilutive effect on the net loss reported in these periods. See note 11 of Notes to Consolidated Financial Statements for a detailed explanation of the determination of the shares used in computing basic and diluted net income (loss) per share. (/2/) Consolidated balance sheet data, as adjusted, assume (a) the sale of 5,000,000 shares of common stock offered by AsiaInfo hereby at an initial public offering price of $19.00 per share and after deducting the underwriting discount and estimated offering expenses, and (b) the conversion of all outstanding shares of our convertible preferred stock into 6,952,153 shares of common stock as of the closing of this offering as if the closing occurred on December 31, 1999. Excludes (a) 8,891,811 shares of common stock underlying options granted under our stock option plans and outstanding as of December 31, 1999 at a weighted average exercise price of $2.99 per share, (b) 1,821,300 shares of common stock available for issuance upon the exercise of future grants under our stock option plans and (c) 40,000 shares of common stock issuable upon the exercise of outstanding warrants to purchase shares of common stock at an exercise price of $0.01 per share.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001100985_broadbandn_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001100985_broadbandn_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including our consolidated financial statements and related notes, and consider the information set forth under "Risk Factors" before making an investment decision. Unless we indicate otherwise, the information set forth in this prospectus includes reference to our subsidiary prior to our reincorporation in Delaware and assumes a two for one stock split and the conversion of all of our preferred stock, Class B common stock and Class C common stock into common stock to be effected on March 31, 2000. OUR COMPANY We provide high-speed, high-bandwidth Internet access and customized broadband content and applications under the BroadbandNOW(TM) tradename. We provide these data services to our subscribers via our private, national Internet protocol network which we manage on an end-to-end basis to ensure peak performance. By utilizing multiple broadband access technologies, including cable modem, xDSL, Ethernet and wireless, we connect subscribers directly to our network. Our mission is to provide our subscribers with the "always on, always fast, always fun(TM)" experience of BroadbandNOW(TM) at data transmission speeds substantially faster than typical dial-up connections. We have established and are pursuing strategic relationships with service partners to gain access more rapidly to potential subscribers and deliver our services. Our service partners currently include: - utility companies, such as Northern States Power through its communications subsidiary, Seren Innovations; - property managers and owners and real estate investment trusts, or REITs, such as Archstone Communities, AvalonBay Communities, Camden Property and Forest City Residential; and - private cable operators, or PCOs, such as Direct Digital Communications, Global Interactive and GTE Media Ventures. We also intend to pursue service partner relationships with other emerging data communications providers such as multiple system cable operators. As part of our service partner agreements, which currently average seven years in duration, we share both in the funding of capital and operating expenditures and in the revenue generated. As of December 31, 1999, we had executed master service agreements with our service partners that cover approximately 600,000 potential passings and obtained approximately 2,300 broadband subscribers for our BroadbandNOW(TM) service from the approximately 39,000 passings constructed at that time. Our product offering is based upon the premise that sustainable, high-performance, broadband Internet access requires a high-capacity, scalable, national network architecture and server platform to alleviate public Internet bottlenecks and enable true end-to-end network management capabilities. As such, we have designed and deployed our own private, national Internet protocol network that currently has 25 points-of-presence, or POPs, serving 26 markets. Our network is managed on an end-to-end basis, 24 hours a day, seven days a week from our network operations center in Dallas, Texas. Our network is scalable to OC-48 and we expect to have 47 POPs, serving 48 markets, covering 18,000 route miles by the end of 2000. Through strategic affiliations with Adaptive Broadband, Lucent Technologies and Nortel Networks, we have developed certain customized network solutions that ensure consistent quality and interoperability between our private, national network infrastructure and the multiple broadband access technologies we use for "last mile" access, which is the local portion of our network that connects subscribers' premises to our POP. Lucent Technologies and Nortel Networks are investors in our company with a combined equity investment of $30 million. A key part of our strategy is to provide our subscribers with content enhanced for broadband connectivity. Access to this enhanced content is initiated through our integrated BroadbandNOW(TM) launch THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED MARCH 21, 2000 PROSPECTUS SHARES BroadbandNOW, INC. [LOGO] (FORMERLY I(3)S, INC.) COMMON STOCK --------------------------- This is an initial public offering of shares of common stock of BroadbandNOW, Inc. We are selling all of the shares of common stock offered under this prospectus. We expect the initial public offering price to be between $ and $ per share. Currently, no public market exists for our shares. Application has been made for quotation of the common stock on the Nasdaq National Market under the symbol "BBNW." SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT CERTAIN RISKS THAT YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------------- <TABLE> <CAPTION> PER SHARE TOTAL ---------------- ---------------- <S> <C> <C> Public offering price....................................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds, before expenses, to us............................ $ $ </TABLE> --------------------------- The underwriters may also purchase up to an additional shares at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over allotments. The underwriters are severally underwriting the shares being offered. The underwriters expect to deliver the shares in New York, New York on , 2000. --------------------------- BEAR, STEARNS & CO. INC. CHASE H&Q JEFFERIES & COMPANY, INC. The date of this prospectus is , 2000. TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Prospectus Summary.......................................... 1 Risk Factors................................................ 5 Special Note Regarding Forward-Looking Statements........... 16 Use of Proceeds............................................. 16 Dividend Policy............................................. 16 Capitalization.............................................. 17 Dilution.................................................... 18 Unaudited Pro Forma Consolidated Financial Information...... 19 Selected Historical Consolidated Financial Data............. 22 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 24 Business.................................................... 31 Management.................................................. 49 Principal Stockholders...................................... 59 Certain Relationships and Related Party Transactions........ 62 Description of Capital Stock................................ 65 Shares Eligible for Future Sale............................. 71 Underwriting................................................ 73 Experts..................................................... 76 Legal Matters............................................... 76 Where You Can Find More Information......................... 76 Glossary of Terms........................................... 77 Index to Consolidated Financial Statements.................. F-1 </TABLE> YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE, AND THE UNDERWRITERS, HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS. OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE THAT DATE. We have included definitions of technical terms important to your understanding of our business under "Glossary of Terms" on page 77. screen where we present internally developed, as well as aggregated, broadband content. Through our directPEER(TM) program we aggregate sources of broadband content by connecting the servers of other providers and aggregators of broadband content directly to our private network and subscribers. To date we have established a directPEER(TM) partnership with Yahoo! and are pursuing agreements with other broadband content providers. In addition to our directPEER(TM) program, we also work closely with a number of quality software vendors, such as Microsoft, and broadband content providers, such as Liberty Media, to develop the key components of our product offering that enable us to more rapidly deliver broadband access, applications and content to our subscribers. Liberty Media and Microsoft are investors in our company with a combined equity investment of $40 million. People are increasingly using the Internet for work, personal communications, commerce and leisure. The growth in the number of subscribers, the increase in Internet usage, the growth in e-commerce business and the development of bandwidth-intensive applications are imposing burdens on the current Internet infrastructure, resulting in primarily slower transmission speeds and reduced network availability. The increasing demand by subscribers for reasonably priced high-speed service that can handle bandwidth-intensive applications is projected to cause the market for broadband Internet service to grow rapidly. Our Strategy. We intend to become a leading provider of high-speed, high-bandwidth Internet access and broadband content and applications. To achieve this objective, we intend to: - Establish strategic relationships with service partners nationwide; - Provide high quality services and a full range of high-speed data solutions for our service partners; - Utilize and leverage multiple broadband access technologies for "last mile" access; - Continue the deployment of our private, nationwide Internet protocol network; - Link directPEER(TM) content partners directly to our private, nationwide Internet protocol network; - Develop, aggregate and deliver additional broadband content and applications; - Invest in our BroadbandNOW(TM) brand; and - Leverage our key supplier relationships to create customized technology. ------------------------------ Our principal executive offices are located at 1440 Corporate Drive, Irving, Texas 75038, and our telephone number is (972) 650-6900. Our websites are located at http://www.broadbandnow.net and http://www.bbnow.com. Information contained on our websites is not a part of this prospectus. On January 6, 2000, the Company formed a Delaware holding company, BroadbandNOW, Inc., from the existing capital structure of its former company, I 3S, Inc. All company operations will continue to be conducted in the Texas corporation, which has been renamed BroadbandNOW Texas, Inc. and which is a wholly-owned subsidiary of BroadbandNOW, Inc. SUMMARY CONSOLIDATED FINANCIAL DATA The following table sets forth our summary historical consolidated financial and other data as of and for each of the three years ended December 31, 1997, 1998 and 1999; and consolidated balance sheet data as of December 31, 1999, pro forma for the private placement of our Series A redeemable convertible preferred stock subsequent to December 31, 1999, and as adjusted for the consummation of this offering. The following summary consolidated financial data has been derived from our audited consolidated financial statements and the notes to those statements included in this prospectus beginning on page F-1. You should read this information together with the information under "Selected Historical Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." You should not assume that the summary consolidated financial data is indicative of our future performance. Our revenue streams were largely derived from our systems integration business through December 31, 1998. Beginning in late 1998, we strategically de-emphasized our systems integration business and began to focus on our Internet subscriber services. Therefore, results for these periods are not directly comparable and are not indicative of future results. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ---------------------------------- 1997 1998 1999 -------- ---------- ---------- (ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Internet subscriber services.............................. $ -- $ 17 $ 444 All other revenues........................................ 3,801 1,338 464 ------ -------- -------- Total revenues.............................................. 3,801 1,355 908 Operating expenses.......................................... 4,615 5,073 16,797 ------ -------- -------- Operating loss.............................................. (814) (3,718) (15,889) Net loss attributable to common stockholders................ (883) (3,775) (17,492) Basic and diluted net loss per share........................ $(0.06) $ (0.20) $ (0.75) ====== ======== ======== Shares used to compute basic and diluted net loss per share (in thousands)............................................ 14,695 19,164 23,437 ====== ======== ======== OTHER DATA(1): Passings.................................................... -- 127,000 613,000 Passings constructed........................................ -- 2,762 39,127 Subscribers................................................. -- 84 2,313 Penetration................................................. -- 3.0% 5.9% </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ---------------------------------------- PRO FORMA ACTUAL PRO FORMA(2) AS ADJUSTED(3) -------- ------------ -------------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................. $ 52,802 $ 76,388 Working capital........................................... 45,764 69,350 Total assets.............................................. 76,735 100,321 Long-term debt and capital leases......................... 14,159 14,159 Redeemable convertible preferred stock.................... 66,915 90,501 Stockholders' equity (deficit)............................ (12,431) (12,431) </TABLE> - --------------- (1) "Passings" include all of the doors for potential subscribers which, through our existing agreements with our service partners, we have the right to be granted access to and/or the right to construct facilities to provide our services. We do not include passings attributable to service partners who do not have the financial strength to construct the necessary infrastructure to allow us to provide high-speed data services. "Passings constructed" identifies the number of doors for potential subscribers where we have built out the infrastructure necessary to provide high-speed data services within 24 hours of receiving a request to do so. "Subscribers" is the number of customers that have subscribed to our service. "Penetration" is equal to the number of subscribers divided by the passings constructed. (2) The "pro forma" column reflects the issuance of 1,265,723 shares of Series A redeemable convertible preferred stock issued after December 31, 1999, in exchange for approximately $23.6 million in cash net of expenses. (3) The "pro forma as adjusted" column reflects our capitalization as of December 31, 1999, with adjustments to give effect to the stock split to be effected on March 31, 2000 and the conversion of all shares of outstanding preferred stock, including those issued after December 31, 1999, into 9,693,690 shares of common stock upon the closing of this offering, and the receipt of the estimated proceeds from the sale of our common stock offered hereby (after deducting the estimated offering expenses and underwriting discounts and commissions).
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001101012_venture_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001101012_venture_prospectus_summary.txt
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+SUMMARY You should read the following summary together with the more detailed information and financial statements and the notes to those statements appearing elsewhere in this prospectus. This prospectus contains forward looking statements that involve risks and uncertainties. Our actual results could differ materially from the results anticipated in these forward looking statements as a result of the factors set forth under "Risk Factors" and elsewhere in this prospectus. Venture Capital.Com, Incorporated We intend to offer venture capital to parties and companies in development. In addition we plan to offer business financing of various types to start up businesses and established companies. Our
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001101022_cayenta_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001101022_cayenta_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD CONSIDER BEFORE BUYING SHARES IN THIS OFFERING. YOU SHOULD READ THE ENTIRE PROSPECTUS, AND ESPECIALLY THE "RISK FACTORS" SECTION, CAREFULLY. EXCEPT IN THE FINANCIAL STATEMENTS INCLUDED IN THIS PROSPECTUS OR AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED AND A 2.065 FOR 1 SPLIT IN OUR CLASS A AND CLASS B COMMON STOCK THAT WILL BECOME EFFECTIVE PRIOR TO THE EFFECTIVENESS OF THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART. THE COMPANY OUR BUSINESS Our objective is to be a total services provider of information technology products and services for our customers' business functions. We define a total services provider, or TSP, as an information technology services company that can provide software applications and services to customers to solve specific business problems. These services include providing information technology and business consulting services as well as the implementation, operation and support of software applications. These applications can be tailored for the customers' business requirements and made accessible via the Internet. We believe that, by using a total services provider, companies can outsource business and technology requirements to a single third party provider. We expect customers to generally pay a fixed monthly fee for some or all of these services to avoid making significant capital investments in software and hardware and in developing internal information technology expertise. Historically, we have derived our revenues from information technology consulting services and sales of our proprietary software applications. Through experience gained by providing these consulting services and software products to our customers, we recognized a significant market opportunity for information technology companies that had an understanding of their customers' businesses and could provide customized software applications and consulting and integration services. In order to create our TSP offering, we expanded our consulting and software expertise in the following manner: - We used internally developed and third party software to make our existing portfolio of proprietary software applications accessible and functional for delivery to customers over the Internet. - We entered into rental agreements with third parties to house, at facilities operated by these third parties, all of the computer, network, and computer disk storage systems that we need to install, operate and manage, or host, software applications for our customers. These data centers have back-up power supplies, multiple telecommunication links, physical site security, and hardware monitoring systems. - We constructed a network operating center in San Diego to complement our existing network operating center in Reston, Virginia. These two network operating centers have advanced telecommunications, server and security infrastructure that, along with our staff, enable us to monitor and support all the software applications installed at the data centers mentioned above. We can also use our network operating centers to provide additional data center capabilities. - We formed a Business Services Management group to provide ongoing business consulting services for customers utilizing our software applications. The combination of the data centers and the network operating centers enables us to provide our software applications on a hosted monthly subscription basis to our customers. Customers will access our software applications using secure Internet connections and rely on us to provide ongoing, real-time maintenance and support. Since October 1999, we have been providing TSP services through Soliance, a joint venture in which we hold a 10% equity interest. Beginning in April 2000, we started making our TSP services directly available from us to new and existing customers and to date have entered into six TSP contracts from which we began generating revenues in the second quarter of 2000. During 1999, our revenues from our consulting services represented 94.6% of our actual revenues and our revenues from sales of our software applications represented 5.4% of our actual revenues. As part of a typical TSP offering, we provide the following services to our customers: - determining which proprietary or commercially available software applications are best suited to meet our customers' business needs and licensing that software to the customer; - integrating these software applications with the customers' existing information technology infrastructure and providing information technology support services; - operating and managing these software applications in a reliable and secure data center; and - providing business services where we tailor our software applications to support our customers' business processes, for example billing, so that our software better addresses those customers' specific business needs. We provide these four components--information technology consulting, identifying, licensing and integrating software applications, installing, operating and managing these software applications at data centers, and providing customized business services--in what we term our TSP offering. We also include in our TSP offering third party software applications and other business services, like payment processing, if those software applications and services address our customers' business needs. We believe that our ability to offer our own software applications in addition to identifying and delivering software applications that are commercially available from third parties allows us to provide our customers with additional value. We currently offer proprietary software applications and related customized business services that consist of the following: - E-commerce: We integrate a customers' web site with the customer's existing software applications and systems to support order processing, catalog management, customer service, inventory management, order fulfillment, billing and collections and account settlement. We have historically provided this software to business-to-consumer companies and have recently begun to offer it to business-to-business companies. - Revenue Cycle Management: We offer software applications that our customers use to track, collect and settle billing and payment transactions with their customers and trading partners. These software applications help our customers address their needs relating to customer enrollment, credit worthiness, purchasing, contract management, bill generation, bill presentment, collections and settlement. - Equipment Maintenance and Monitoring: Our customers use our equipment maintenance and monitoring software to manage their equipment maintenance processes including scheduling, materials and parts management and work order processing. We believe that a significant market opportunity exists for information technolology providers such as ourselves that understand their customers' businesses and provide customized software applications and consulting and integration services. Currently, companies called application service providers are already offering their customers access to third party software applications via data centers as well as ongoing maintenance and support. International Data Corporation expects the application service provider market to grow from $300 million in 1999 to $7.7 billion in 2004, a compound annual growth rate of over 90%. We believe that the size of the application service provider market demonstrates the market opportunity that exists for our TSP offering, which provides consulting and application integration services in addition to those services offered by application service providers. We target industries with complex and substantial information technology requirements. We also target emerging companies seeking to do business on the Internet, known as e-commerce. We have expertise in multiple industries, including utilities, telecommunications, and retail. We intend to further penetrate these industries by establishing strategic alliances and joint ventures. In addition to our network operating centers in San Diego, California and Reston, Virginia, we have facilities located in Burnaby, British Columbia, Orlando, Florida, Reston, Virginia, Salt Lake City, Utah, San Diego, California, and Washington, D.C. We currently have approximately 330 professionals developing and implementing our services. For the year ended December 31, 1999, we had net losses of $16.5 million on a pro forma basis. We had net losses of $10.3 million during the first six months of 2000. We expect to incur losses for the foreseeable future. In addition, three of our customers, Sempra Energy, the District of Columbia government and the FAA, accounted for approximately 85.8% of our revenues on an actual basis and 55.2% of our revenues on a pro forma basis during 1999. These customers accounted for 21.9% of our revenues during the first six months of 2000. Waste Management accounted for 12.3% of our revenues, and Soliance, an affiliated company, accounted for 16.1% of our revenues, during the first six months of 2000. Furthermore, the industry in which we compete, the information technology services industry, is highly competitive. OUR STRATEGY - Build our TSP customer base - Continue to enhance our TSP offering - Target specific industries - Promote the Cayenta brand - Attract and train qualified personnel - Continue to develop core competencies RELATIONSHIP WITH TITAN We were formed as a wholly-owned subsidiary of The Titan Corporation in 1997 when Titan separated its business that focused on integrating commercial software applications with customers' systems from its other information technology services. Upon completion of this offering, Titan will own all of our Class B common stock, which will represent more than 61% of our outstanding common stock and more than 94% of our voting power, and will be able to control the election of our directors and all other matters requiring stockholder approval. Titan is a publicly traded company, and its filings with the Securities and Exchange Commission, or SEC, are available to the public over the Internet at the SEC's web site at http://www.sec.gov, at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC located at 7 World Trade Center, Suite 1300, New York, New York 10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Titan's SEC recording number is 1-6035. Our relationship with Titan is described more fully in the "Relationship with Titan and Certain Transactions" section of this prospectus. Our principal executive offices are located at 5910 Pacific Center Boulevard, San Diego, CA 92121-6301, and our telephone number is (858) 550-5500. THE OFFERING <TABLE> <S> <C> Class A common stock offered.............. 6,500,000 shares Common stock to be outstanding after the offering Class A common stock.................... 13,028,410 shares Class B common stock.................... 20,650,000 shares Total................................. 33,678,410 shares Use of proceeds........................... For operating activities, including expansion of our sales and marketing programs and continued development of our proprietary software applications, and for capital expenditures and general corporate purposes. Proposed Nasdaq National Market Symbol.... CYTA </TABLE> SHARES OUTSTANDING AFTER THE OFFERING The number of shares of common stock to be outstanding after the offering is based upon the number of shares of Class A common stock and Class B common stock outstanding as of August 7, 2000, giving effect to the conversion of all of our outstanding shares of preferred stock into 4,842,425 shares of Class A common stock upon the closing of this offering, and does not include the following: - 7,124,250 shares of Class A common stock reserved for issuance under our 1997 and Nonstatutory Stock Option Plans, of which 5,512,001 shares were covered by outstanding options as of August 7, 2000 at a weighted average exercise price of $2.57 per share; and - 1,023,827 shares of Class A common stock subject to warrants outstanding as of August 7, 2000, at a weighted average exercise price of $6.35 per share. SUMMARY HISTORICAL ACTUAL AND PRO FORMA FINANCIAL INFORMATION The following financial information should be read together with the "Selected Historical Actual and Pro Forma Financial Information" and "Management's Discussion and Analysis of Financial Condition and Operating Results" included elsewhere in this prospectus. The unaudited pro forma statement of operations information for the year ended December 31, 1999 assumes that we completed our acquisitions of Mainsaver, Assist Cornerstone and SFG Technologies as of January 1, 1999. The unaudited pro forma statement of operations information is based on our historical actual operating results and those of Mainsaver, Assist Cornerstone and SFG Technologies for the period presented and gives effect to the amortization of goodwill related to the acquisitions, the interest expense relating to the acquisitions, and the resulting provision for income taxes. Our historical actual statement of operations information for the year ended December 31, 1999 and balance sheet information as of December 31, 1999 are derived from our audited financial statements, which are included elsewhere in this prospectus. Our historical statement of operations information for the six months ended June 30, 2000 and balance sheet information as of June 30, 2000 are derived from our unaudited financial statements, which are included elsewhere in this prospectus. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 1999 ------------------------- SIX MONTHS ENDED PRO FORMA JUNE 30, 2000 ACTUAL (UNAUDITED)(1) (UNAUDITED) -------- -------------- ---------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS INFORMATION: Revenues.................................................... $ 40,262 $65,578 $ 34,978 Gross profit................................................ 11,907 27,775 19,525 Income (loss) from operations............................... 4,664 (8,534) (7,026) Net income (loss)........................................... 532 (16,459) (10,330) Diluted earnings (loss) per share(2)........................ $ 0.04 $ (1.56) $ (0.97) Weighted average common shares and common share equivalents used in computing diluted earnings per share(2)........... 13,182 10,521 10,694 OTHER INFORMATION: EBITDA(4)................................................... 9,927 7,848 819 EBITDA margin(5)............................................ 24.7% 12.0% 2.3% Depreciation and amortization............................... 5,263 16,382 7,845 Cash flows from operating activities........................ 16,391 NA (15,276) Cash flows from investing activities........................ (54,085) NA (14,911) Cash flows from financing activities........................ 44,632 NA 25,440 </TABLE> <TABLE> <CAPTION> JUNE 30, 2000 ------------------------- AS ADJUSTED(3) ACTUAL (UNAUDITED) -------- -------------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET INFORMATION: Cash........................................................ $ 2,191 $ 79,091 Working capital............................................. 6,182 83,082 Total assets................................................ 107,291 184,191 Total long-term obligations................................. 76,717 76,717 Total stockholders' equity.................................. 7,497 84,397 </TABLE> ------------------------------ (1) The pro forma column gives effect to the acquisitions of Mainsaver, Assist Cornerstone and SFG Technologies as if they had occurred as of January 1, 1999. (2) For the number of shares used in the per share calculations, see the historical pro forma Cayenta financial statements and Note 2 to the historical actual Cayenta financial statements. (3) The as adjusted column gives effect to the conversion of all of our outstanding shares of preferred stock into shares of Class A common stock upon the closing of this offering and reflects our receipt of the net proceeds from the offering (at an assumed initial public offering price of $13.00 per share), after deducting underwriting discounts and commissions and estimated offering expenses. (4) EBITDA represents net income plus income taxes, interest expense, depreciation and amortization and non-recurring charges. Our management considers EBITDA to be a widely accepted financial indicator of a company's ability to service debt, fund capital expenditures and expand its business, and, accordingly, important information for prospective investors; however, EBITDA is not calculated in the same way by all companies and is neither a measurement required, nor represents cash flow from operations as defined, by generally accepted accounting principles. You should not consider EBITDA to be an altenative to net income, an indicator of operating performance or an altenative to cash flow as a measure of liquidity. (5) Represents EBITDA divided by net sales.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001101144_playboy_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001101144_playboy_prospectus_summary.txt
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+PROSPECTUS SUMMARY BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS AND THE NOTES TO THE FINANCIAL STATEMENTS, BEFORE DECIDING TO INVEST IN OUR COMMON STOCK. INFORMATION CONTAINED ON OUR ONLINE SITES DOES NOT CONSTITUTE PART OF THIS PROSPECTUS. REFERENCES IN THIS PROSPECTUS TO "PLAYBOY.COM," "WE," "OUR" AND "US" REFER TO PLAYBOY.COM, INC. REFERENCES IN THIS PROSPECTUS TO "PLAYBOY ENTERPRISES" REFER TO PLAYBOY ENTERPRISES, INC. AND ITS SUBSIDIARIES, OTHER THAN PLAYBOY.COM, INC. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. PLAYBOY.COM, INC. OUR BUSINESS We are a leading Internet company dedicated to the adult entertainment interests of young men around the world. We are uniquely positioned to capitalize on the Playboy brand, which is one of the most recognized in the world, to provide a compelling Playboy online entertainment experience. We believe we are also able to exploit Playboy Enterprises' editorial, pictorial and video libraries in a variety of exciting new ways, including broadband interactive programming. Our network of sites combines Playboy's distinct attitude and vast libraries with extensive and original content, a large community of loyal users and a wealth of e-commerce offerings. Our business model is based on monetizing the growing traffic on our sites through multiple revenue streams, including e-commerce, advertising and sponsorships, subscriptions and pay-per-view. Our PLAYBOY.COM Web site offers original content focusing on topics such as love and sex, gaming, pop culture, campus life, travel and nightlife, Playboy Playmates and celebrities and sports. We also offer pay-per-view events such as Mardi Gras, lingerie fashion shows and parties at the Playboy Mansion. Our Playboy Cyber Club, a subscription-based Web site designed to address the privacy and security concerns of our users, offers services such as VIP access to over 45,000 photos, live Playmate chats, video clips and free online backstage passes to events and pay-per-view specials. As of February 29, 2000, we had 43,958 subscribers to the Playboy Cyber Club. Our e-commerce business is driven by the Playboy Store, which is the primary source for purchasing over 2,000 high margin Playboy-branded products, including apparel, videos, jewelry and collectibles. Additionally, our Playboy Marketplace enables us to receive commissions from the sale of a wide range of third party products tailored to the Playboy user such as videos, music, books, software, games, cigars, wine, consumer electronics and travel packages. In addition, in December 1999, we launched the Playboy Auctions Web site to capitalize on the thriving market for Playboy collectibles. We also offer a separately branded online adult entertainment site located at CYBERSPICE.COM. This site capitalizes on Playboy Enterprises' acquisition of Spice Entertainment Companies, a leading provider of adult television entertainment throughout the world. We currently generate revenues from the sale of various items in our Spice Store, including adult videos, lingerie and sensual products. For the month of February 2000, we had over 120 million page views and over 19 million visits to our Web sites, as audited by ABC Interactive. Our Web sites also generate significant international traffic and, in February 2000, approximately 25% of our traffic originated outside of the United States. OUR OPPORTUNITY We believe that we are uniquely positioned to provide the leading online site addressing the adult entertainment interests of young men around the world. By using the power of the Playboy brand and leveraging the libraries and other assets of Playboy Enterprises, we believe we will be able to grow our online businesses more successfully than our competitors, many of which must incur significant expenses to build brand awareness. Our relationship with Playboy Enterprises provides us the following key competitive advantages: - online use of leading trademarks, including Playboy, Playmate and the Rabbit Head Design; - an extensive array of articles, interviews and cartoons from PLAYBOY magazine, as well as a photo library of more than nine million images; - access to over 1,500 hours of Playboy television and video programming and various exclusive rights to develop interactivity for such programming; - access to millions of subscribers and customers around the world; and - promotional space in PLAYBOY magazine and on the Playboy television networks and the ability to cross-promote the Playboy brand through multiple media. OUR STRATEGY To be the leading online adult entertainment site for young men around the world, we intend to: - leverage our strong brand recognition; - maximize revenues from multiple current and future revenue streams, including e-commerce, advertising and sponsorships, subscription and pay-per-view and Playboy-branded online gaming; - enhance and expand adult entertainment content offerings and services, including increased broadband interactive programming; and - expand our international presence through joint ventures and other alliances. RECENT DEVELOPMENTS On February 15, 2000, we purchased substantially all of the assets of Rouze Media, Inc., which operated a free Web site located at ROUZE.COM. Launched in September 1999, ROUZE.COM offers cutting-edge entertainment content targeted to young men, including articles, pictorials, interviews with celebrities and sports stars, interactive games and an online emporium that features trendy gifts and gadgets. As part of the transaction, a majority of the employees of Rouze Media, Inc., including its two founders, joined us. We expect to continue to operate ROUZE.COM as a separate Web site as well as to incorporate some of the ROUZE.COM content into PLAYBOY.COM and the Playboy Cyber Club. OUR ADDRESS Our principal executive offices are located at 730 Fifth Avenue, New York, NY 10019. Our telephone number at that location is (212) 261-5000. Our Web sites are located at WWW.PLAYBOY.COM, WWW.ROUZE.COM and WWW.CYBERSPICE.COM. THE OFFERING <TABLE> <S> <C> Common stock offered by us................... shares Common stock to be outstanding after this offering................................... shares Use of proceeds.............................. We intend to use the net proceeds of this offering to develop, enhance and expand our Web sites, including the creation of original content, to pursue e-commerce opportunities, to increase our sales and marketing activities, to enhance our technology infrastructure, to explore potential acquisitions and for other purposes. We also intend to use approximately $1.0 million of the net proceeds of this offering to repay a loan from Playboy Enterprises that was used to fund our acquisition of Rouze Media, Inc. Proposed Nasdaq National Market symbol....... PBYI </TABLE> The outstanding share information is based on our shares outstanding as of April 10, 2000, all of which were owned by Playboy Enterprises. This information excludes shares of common stock issuable upon the exercise of stock options outstanding under our option plan as of April 10, 2000 with a weighted average exercise price of $ per share. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------------------------------- 1996 1997 1998 1999 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total net revenues............................ $ 1,566 $ 3,391 $ 5,561 $ 13,601 Total cost of revenues, related party......... 393 1,407 2,597 7,165 ---------- ---------- ---------- ---------- Gross profit.................................. 1,173 1,984 2,964 6,436 Total operating expenses, related party....... 2,494 4,663 8,652 15,390 ---------- ---------- ---------- ---------- Operating loss................................ (1,321) (2,679) (5,688) (8,954) ---------- ---------- ---------- ---------- Net loss...................................... $ (1,674) $ (3,318) $ (6,917) $ (11,359) ========== ========== ========== ========== Basic and diluted net loss per share.......... $ (0.08) $ (0.16) $ (0.34) $ (0.56) ========== ========== ========== ========== Weighted average shares used in computing basic and diluted net loss per share........ 20,312,500 20,312,500 20,312,500 20,312,500 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ---------------------- ACTUAL AS ADJUSTED -------- ----------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ -- $ Working capital............................................. 517 Total assets................................................ 5,852 Total stockholders' equity.................................. 1,402 </TABLE> - ------------------------ As adjusted amounts reflect the sale of shares of common stock in this offering, assuming an initial public offering price of $ and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
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+PROSPECTUS SUMMARY This summary highlights information found in greater detail elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, including the risks of investing in our common stock discussed under "Risk Factors," before you decide to buy our common stock. ITERIS, INC. Our Company We design, develop, market and implement software based solutions that improve the safety and efficiency of vehicle transportation. Using our proprietary software and industry expertise, we are a leading provider of video sensor systems and transportation management and traveler information systems for the intelligent transportation systems, or ITS, industry. The ITS industry is comprised of companies applying a variety of technologies to enable the safe and efficient movement of people and goods. Our systems and solutions are designed to address three critical demands of vehicle transportation: improving vehicle safety, reducing traffic congestion and increasing the availability of personalized traveler information. According to the U.S. Department of Transportation and the National Highway Traffic Safety Administration, more than six million motor vehicle accidents occurred in the United States in 1998. Accidents in 1998 resulted in more than 40,000 fatalities, approximately 39.4% of which were related to drivers departing unintentionally from their designated lanes according to NHTSA. To help prevent accidents caused by unintended lane departures, we developed AutoVue, a small windshield mounted sensor that detects and warns drivers of unintended lane departures. AutoVue is currently being installed in heavy trucks for pre-production testing and marketed to passenger car and light and medium truck manufacturers. There were more than 200 million vehicles in operation in the United States in 1998 according to Automotive News. The U.S. DOT estimated that in 1996 drivers on U.S. highways spent more than two billion hours in traffic congestion. According to a study conducted for the U.S. DOT, traffic congestion cost the American public $72 billion in 1997 in lost time and wasted fuel. As an alternative to expanding a substantially built-out infrastructure of highways, transportation agencies are turning to ITS to increase the efficiency of the existing highway infrastructure. As a result, we developed our Vantage video vehicle sensing systems to detect the presence of vehicles at signalized intersections, enabling an efficient allocation of green signal time. In addition, our transportation management and traveler information systems enable traffic managers to monitor transportation networks in real-time and to implement corrective actions to relieve traffic congestion. Each of our AutoVue and Vantage systems incorporate our proprietary software algorithms designed to maximize the accuracy of outdoor video imaging. We have entered into strategic relationships with DaimlerChrysler Corporation and its subsidiary, Freightliner Corporation, to jointly develop software applications for AutoVue and to install AutoVue in their heavy trucks. We also intend to sell AutoVue to manufacturers for installation on passenger cars and light and medium trucks. We believe AutoVue is currently the only commercially-available unintended lane departure warning system for vehicles and Vantage is a market leader for video vehicle detection systems in the United States. In addition to focusing on vehicle safety and traffic congestion, drivers are increasingly demanding the availability of timely and accurate traffic information. Traditionally, traffic information has been provided over the radio and more recently over the Internet. Our transportation management and traveler information systems enable the dissemination of information on current traffic conditions through changeable message signs, radio, telephone, cable television, paging networks and the Internet. We also are developing personalized traveler information services that will be customized to the travel patterns and information needs of individual travelers, to be delivered in real-time through personal digital assistants, or PDAs, cellular telephones, pagers, the mobile Internet and in-vehicle computers. We are one of only two companies awarded a contract to develop and maintain the National ITS Architecture, a federal program designed to create a single national architecture to enable seamless communication among ITS systems. We believe our involvement in the National ITS Architecture provides us with unique vision and insight into emerging market trends and product opportunities and a significant competitive market advantage. We have the experience to design and implement transportation management systems that perform the functions necessary to conform with the National ITS Architecture. Through the training programs we conduct on the Architecture, we have developed strong relationships and credibility with national, regional, state and local transportation agencies responsible for managing funds allocated for ITS systems. We have assembled an experienced management team and board of directors focused on the ITS industry. Our management team and board of directors include two former U.S. Secretaries of Transportation, a former Deputy Insurance Commissioner for the State of California, a former General Manager for the Los Angeles Department of Transportation and a founding board member of ITS America, a leading industry trade association and federal advisory agency. Our board also includes a former Technical Director of the ITS program for General Motors Corporation and a former Chairman of Chrysler Technologies Corporation. Our Strategy Our objective is to enhance our position as a leading provider of software based ITS systems and solutions for the safe and efficient movement of people and goods. Our strategies to achieve this objective are: . Combine our proprietary software with our ITS industry expertise to provide transportation solutions; . Establish AutoVue as the leading platform for in-vehicle video sensing; . Provide personalized traveler information to travelers through wireless communication devices and the mobile Internet; . Pursue strategic acquisitions and alliances; and . Broaden our systems and solutions offerings and expand our penetration of international markets. Corporate Information; Spin-Off from Odetics We were formed in 1994 as a division of Odetics, Inc., a publicly-held company based in Anaheim, California that serves as an incubator for technology-oriented businesses. We were incorporated as Odetics ITS, Inc. in October 1998 as a California corporation and reincorporated in Delaware as Iteris, Inc. in January 2000. Odetics currently owns approximately 93% of our outstanding common stock. Immediately prior to this offering, Odetics will distribute to its stockholders all of the outstanding common stock of our company owned by Odetics in a tax-free spin-off. The shares distributed in the spin-off will not be transferable for a period of 180 days following the date of this prospectus. In preparation for the spin-off, we will enter into the following agreements with Odetics: separation and distribution agreement, services agreement, tax allocation agreement, promissory note and technology license agreement. Please see "Arrangements with Odetics." Any references to "we," "our," "us" or "Iteris" refer to Iteris, Inc. and our subsidiary. Our executive offices are located at 1515 S. Manchester Avenue, Anaheim, California 98202. Our telephone number is (714) 758-0200. Our website address is www.iteris.com. Information contained in our website does not constitute part of this prospectus. AutoVue(TM), DATEX Toolkit(TM), EzHCM(TM), Lane Tracker(TM), Iteris(TM), Odetics ITS(TM), SpecWizard(TM), Vantage(TM), Vantage One(TM), Vantage Plus(TM), Vantage Edge(TM), Vantage Remote Access System(TM), VRAS(TM), Vantage Wireless Systems(TM) and Vectura(TM) are our logos and trademarks. This prospectus also includes the tradenames and trademarks of other companies whose mention in this prospectus is with due recognition of and without intent to misappropriate such names or marks. Except as otherwise noted, all information in this prospectus assumes: . outstanding options to purchase shares of common stock are not exercised; . the underwriters' over-allotment option is not exercised; . that the spin-off from Odetics is consummated immediately prior to this offering; and . the issuance of 433,405 shares of common stock to DaimlerChrysler Venture GmbH upon the conversion of the Subordinated Convertible Promissory Note issued to DaimlerChrysler Venture on January 25, 2000, assuming no adjustment to the number of shares issued upon conversion. THE OFFERING <TABLE> <S> <C> Common stock offered by us..................... 4,173,616 shares Common stock offered by selling stockholders... 126,384 shares Common stock to be outstanding after this offering...................................... 16,666,667 shares Use of proceeds................................ We intend to use the net proceeds from this offering to repay $10.0 million of debt payable to Odetics, expand sales and marketing activities, acquire or invest in complementary businesses and for working capital and other general corporate purposes. Proposed Nasdaq National Market symbol......... ITER </TABLE> The number of shares of common stock outstanding after this offering is based on shares outstanding on December 31, 1999 and excludes: . 2,631,000 shares of common stock issuable upon exercise of options outstanding with a weighted average exercise price of $2.02 per share. 773,000 of these options were exercisable as of December 31, 1999 and the balance are subject to future vesting requirements; and . 1,269,000 additional shares of common stock reserved for issuance under our stock option plan. If the underwriters exercise their over-allotment option in full, there will be 17,311,667 shares outstanding after this offering. RECENT DEVELOPMENT On January 25, 2000, we entered into a subordinated convertible note purchase agreement in which DaimlerChrysler Venture invested $3.75 million that shall automatically convert immediately prior to the closing of this offering into approximately 2.5% of our outstanding common stock after this offering. This investment enhances our strategic relationship with DaimlerChrysler. As part of the agreement, DaimlerChrysler Venture has agreed to facilitate the adoption of AutoVue in DaimlerChrysler's commercial vehicles and passenger cars. In addition, DaimlerChrysler Venture will support our efforts to develop a personalized traveler information system targeted at DaimlerChrysler's customer base. This investment is the first of its kind by DaimlerChrysler Venture in North America. It is seen as a model for future investments in U.S. firms with advanced technologies that are of strategic importance to DaimlerChrysler. The number of shares of common stock into which the promissory note is convertible will fluctuate depending on the number of shares sold by us in this offering and the initial public offering price per share. Assuming the sale by us of 4,173,616 shares of common stock at an initial public offering price of $12.00 per share, the promissory note will convert into 433,405 shares of our common stock. If the price per share at which our common stock is sold or the number of shares sold in this offering decrease, then DaimlerChrysler Venture will be entitled to receive additional shares of common stock or the repayment of a portion of the principal amount under the promissory note in an amount in excess of the amount that, upon conversion, would result in DaimlerChrysler Venture owning approximately 2.5% of our common stock after this offering. If the price per share at which our common stock is sold or the number of shares sold in this offering increase, then DaimlerChrysler Venture may elect to receive fewer shares or pay an additional sum to us such that, upon conversion, DaimlerChrysler Venture will own approximately 2.5% of our common stock after this offering. All shares of common stock issued to DaimlerChrysler Venture upon conversion of the promissory note shall be subject to restrictions on sale and transfer, as contained in the related purchase agreement, until April 25, 2001. We have recorded a non-cash charge to interest expense of approximately $1.45 million in January 2000 to give financial accounting recognition to the beneficial conversion feature contained in the promissory note. SUMMARY FINANCIAL DATA (in thousands, except share and per share data) The following table summarizes the financial data for our business during the periods indicated. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus. Also, with respect to information relating to the number of shares used in per share calculations, please see Note 1 of Notes to Consolidated Financial Statements for an explanation of the determination of the number of shares used in computing basic and diluted net loss per share. <TABLE> <CAPTION> Nine Months Ended Years Ended March 31, December 31, ---------------------------------------------------------- ---------------------- 1995 1996 1997 1998 1999 1998 1999 ---------- ---------- ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> Consolidated Statement of Operations Data: Total revenue........... $ 200 $ 287 $ 538 $ 5,841 $ 14,580 $ 10,400 $ 17,447 Gross profit (loss)..... 85 (71) 68 471 4,256 2,967 5,700 Loss from operations.... (742) (2,455) (3,826) (6,085) (5,206) (3,319) (3,391) Net loss................ (849) (2,759) (4,506) (7,429) (7,373) (4,869) (5,582) Basic and diluted net loss per share......... (.08) (.25) (.40) (.66) (.63) (.42) (.46) Shares used in computation of net losses per share, basic and diluted............ 11,249,500 11,249,500 11,249,500 11,249,500 11,642,200 11,489,400 12,076,500 </TABLE> <TABLE> <CAPTION> December 31, 1999 ------------------------------- Pro Forma Actual Pro Forma As Adjusted -------- --------- ----------- <S> <C> <C> <C> Consolidated Balance Sheet Data: Working capital (deficit)....................... $ 2,069 $(4,181) $41,497 Total assets.................................... 18,676 12,426 58,104 Total liabilities............................... 43,716 20,771 20,771 Total stockholders' equity (deficit)............ (25,040) (8,345) 37,332 </TABLE> At December 31, 1999, the amount of indebtedness owed to Odetics was $37.6 million. Upon completion of this offering, Odetics will contribute to our capital approximately $12.9 million in the form of cancellation of indebtedness, which is reflected in the pro forma column. Also upon completion of this offering, we will pay Odetics $10.0 million from the proceeds of this offering and enter into a promissory note payable to Odetics in the principal amount of $14.7 million, representing the balance of our obligations to Odetics. This promissory note will be payable in interest only for the first year and in 16 quarterly installments of principal and interest thereafter. The actual amount of indebtedness cancelled by Odetics will vary from the amount reflected in the pro forma column depending on the actual total amount of indebtedness owed to Odetics at the completion of this offering. In addition to the anticipated transactions with Odetics described above, the pro forma consolidated balance sheet data reflects the issuance of 433,405 shares of common stock upon conversion of the promissory note issued to DaimlerChrysler Venture for proceeds of $3.75 million, and the recognition of a non-cash charge of $1.45 million to interest expense (accumulated deficit) and an offsetting credit to additional paid-in capital to give financial accounting recognition to the beneficial conversion feature contained in the promissory note. The pro forma as adjusted information also gives effect to the sale of 4,173,616 shares of common stock offered by us at an assumed initial public offering price of $12.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001101179_uproar-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001101179_uproar-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY Because this is only a summary, it does not contain all of the information that may be important to you. You should read the entire prospectus, including the "Risk Factors" section and the consolidated financial statements and the notes thereto, before deciding to invest in our common stock. Our Company We are a leading online entertainment destination. Through our network of Web sites, we provide online game shows and interactive single- and multi-player games that appeal to a broad audience. Our registered users have grown from 96,000 in January 1998 to 5.2 million in December 1999. Our unique user audience has similarly grown from 1.2 million in October 1998 to 3.6 million in December 1999. Moreover, Media Metrix, a leading Internet audience measurement service, estimates that the number of unique pages viewed on our consolidated network of Web sites grew from 43.6 million in December 1998 to 106.1 million in December 1999. Our sites are very sticky, which means that our users consistently spend significantly more time per visit on our sites than the industry average. According to Media Metrix, in December 1999, our users in the United States spent an average of 17.1 minutes per usage day on our sites and we were the fifth stickiest consolidated network of Web sites on the Internet, as defined by average minutes spent per usage day. In addition, according to Media Metrix, we were among the top five stickiest consolidated networks of Web sites in each month during 1999. We derive substantially all of our revenues from the sale of advertisements on our network of Web sites. We believe that our large user base and the stickiness of our sites provide advertisers with an attractive platform to reach their target audiences. As a result, the number of advertisers and sponsors on our network has grown from 99 as of December 1998 to 256 as of December 31, 1999. Similarly, the number of advertising impressions served over our Web sites increased from 70.7 million in December 1998 to 327 million in December 1999. Because we attract a large, diversified user base and can segment it based upon information we collect, such as geography, age and gender, we believe we will be able to target advertisements to particular demographic profiles specified by our advertisers. We believe that our technology platform is integral to maintaining the entertaining and engaging nature of our content. We have made significant investments in developing and implementing a technology platform to support our interactive multi-user game shows and games. We believe that our Web sites are among a few in the world that enable large numbers of users to simultaneously play interactive multi-player game shows and games. Moreover, we have designed our technology platform to easily accommodate our growing user base and to take advantage of emerging technology trends such as alternative access devices, interactive television platforms and broadband distribution services. Our Market Opportunity As a result of the growing popularity of the Internet, an increasing number of users are looking beyond traditional media, such as radio and television, to the Internet as a source of entertainment. Game shows are among the most popular and long-lived programs on television in both the United States and worldwide. They were among the first entertainment formats to be successfully adapted to television from radio. Moreover, new game shows are frequently developed and introduced in order to capitalize on the popularity of the format and to draw larger audiences to television. Games and game shows are particularly well suited for online entertainment content, especially with the development of higher bandwidth distribution channels, and can be easily adapted to the Internet. We believe that online games and game shows are a compelling entertainment medium for a mass user audience because they: o provide users with an opportunity to win prizes; o allow users to access entertaining content according to their own schedule from any location; and o enable users to participate interactively in the games and game shows and to compete against other users. Despite the opportunity presented by the widespread adoption of the Internet as a medium for delivering entertainment content to a growing user base, only a limited number of Web sites are currently dedicated to providing a broad array of fun and challenging interactive entertainment. We believe that we can grow our revenues by leveraging our large audience and our engaging content through targeting our advertising placement to specific demographics within our audience in order to attract more advertisers to our network. Our Strategy Our objective is to be the leading online entertainment destination. We believe we can achieve this objective through the following strategies: o enhancing our content; o aggressively expanding our audience; o further monetizing our audience and building additional revenue streams; o capitalizing on the popularity of our PrizePoint rewards program; o continuing to expand internationally; and o pursuing strategic acquisitions and alliances. Recent Developments On February 2, 2000, we sold 1,265,372 shares of our common stock to a strategic investor, Trans Cosmos USA, Inc., for approximately $25.0 million. We intend to establish a joint venture with Trans Cosmos USA to produce a local language version of our flagship entertainment site, uproar.com, in Japan. Trans Cosmos USA is a subsidiary of Trans Cosmos, Inc., which is headquartered in Tokyo, Japan. ------------- As used in this prospectus, UPROAR and the UPROAR logo are service marks. The registration of the Uproar service mark has been applied for and is pending in the United States and in other markets in which we register our marks. The UPROAR service mark is registered in Germany and the United Kingdom. We have also applied for the registration of numerous other trademarks in the United States and those applications are pending. Those marks include BINGO BLITZ, BLOWOUT BINGO, GAMESCENE, LET THERE BE FUN, MENTAL STATE, PRIZEPOINT, PRIZEPOINTS and TRIVIA BLITZ. All other trademarks and service marks used in this prospectus are the property of their respective owners. The Offering Common stock offered..... 3,500,000 shares Common stock outstanding after this offering..... 28,737,320 shares Use of proceeds.......... We intend to use the proceeds of this offering to fund our marketing activities, expand our sales force, enhance our products and services, expand our business internationally, enter into distribution and affiliate arrangements with other Web sites, potentially make strategic investments and acquisitions, and for general corporate purposes. Proposed Nasdaq National Market Symbol........... "UPRO" Current EASDAQ Symbol.... "UPROrs" We have applied to list the shares of common stock offered by this prospectus with the European Association of Securities Dealers' Automated Quotation System, or EASDAQ, under the symbol "UPRO". The shares of our common stock that are already listed on EASDAQ will trade under the symbol "UPROrs", the "rs" indicating that these shares are restricted securities in the United States. This information is based on our shares of common stock outstanding as of December 31, 1999 and gives effect to 1,265,372 additional shares of common stock issued to a strategic investor at approximately $19.76 per share on February 2, 2000. This information: o excludes 5,904,408 shares subject to options outstanding as of December 31, 1999 with a weighted average exercise price of $8.52; and o assumes no exercise of the underwriters' over-allotment option. ------------- Uproar Inc. was incorporated in Delaware on December 16, 1999 and is the successor to Uproar Ltd., a Bermuda limited liability company that was formed on July 7, 1997, and redomesticated into Delaware on January 26, 2000. Our principal executive offices are located at 240 West 35th Street, 9th Floor, New York, New York 10001. Our telephone number at that location is (212) 714-9500. Information contained on our Web sites does not constitute part of this prospectus. References in this prospectus to "Uproar," "we," "our," and "us" refer to Uproar Inc., its predecessor Uproar Ltd., and its subsidiaries. ------------- You should rely only on the information contained in this prospectus. Uproar has not authorized anyone to provide you with different information. Uproar is not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information provided by this prospectus is accurate as of any date other than the date on the front of this prospectus. <TABLE> <CAPTION> December 31, 1999 --------------------------------------- Pro Forma Actual Pro Forma As Adjusted ---------- ----------- ------------ (in thousands) <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents ................................ $15,136 $40,131 $172,967 Working capital .......................................... 18,555 43,550 176,386 Total assets ............................................. 42,816 67,811 200,647 Total indebtedness, including current maturities ......... 154 154 154 Total stockholders' equity ............................... 37,204 62,199 195,035 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001101268_purple_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001101268_purple_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, especially "Risk Factors" beginning on page 6 and our financial statements and related notes. GoAmerica, Inc. Our Company We are a nationwide wireless Internet services provider. We enable our individual and business subscribers to access remotely the Internet, email and corporate intranets in real time through a wide variety of mobile computing and communications devices. Through our Wireless Internet Connectivity Center, we offer our subscribers comprehensive and flexible mobile data solutions for wireless Internet access by providing wireless network services, mobile devices, software and subscriber service and support. We have a limited operating history and have incurred operating losses since our inception. We expect to continue to incur increasing operating and net losses for at least the next several quarters. Our Go.Web technology and Wireless Internet Connectivity Center enable our subscribers to access a wide variety of Internet content, such as business and financial data, news, sports, travel, entertainment, personal contact and other information. Our subscribers can conduct ecommerce transactions, such as shopping, reservations and stock trading, to the extent permitted by their mobile device of choice. Our subscribers can also customize their personal Web site or "personal portal," www.mygoweb.com, to access their favorite Web sites quickly. In addition, we offer a variety of email solutions which allow our subscribers to access their email at their existing Internet and business email accounts as well as a GoAmerica email address. We provide our subscribers with flexible and reliable wireless Internet services across a number of wireless networks and mobile device platforms. To provide our subscribers with nationwide access, we have established strategic relationships with many leading wireless network carriers. Our subscribers are able to use our wireless Internet services with their choice of a wide variety of leading mobile devices, including Palm operating system-based computing devices, Research In Motion's interactive pagers, laptop computers, Microsoft Windows CE-based computers and wirelessly-enabled smart phones. We also have engineered our wireless Internet services to operate with new versions of many wireless devices. We seek to enhance our offerings with value-added services and additional functionality to expand our subscriber base and increase our recurring revenues. Our Opportunity We believe that the growth of the Internet, email and mobile wireless communications has created a significant market opportunity for service providers capable of efficiently delivering wireless Internet and email services over wireless communication networks. While the wireless data services market is developing rapidly, widespread adoption of wireless data services has been hindered by a number of challenges, including limited wireless data service coverage areas, incompatible mobile devices and wireless networks, and slow wireless data transmission speeds. We believe that adoption of wireless data applications that serve specific industries, such as financial services, or enterprise solutions, such as sales force automation, have shown the greatest penetration to date. However, the rapid development of the Internet, with the resulting nearly unlimited access to content and to corporate intranets, has created the opportunity for rapid adoption of wireless devices for large scale applications, including messaging, email connectivity, personal information management (address and calendar) connectivity, and access to the Internet. As a result, we believe that a significant opportunity exists for wireless Internet service providers that are capable of offering individuals and businesses easy-to-use, cost-effective and reliable wireless data service. <PAGE> The Offering <TABLE> <C> <S> Common Stock offered by us.............. 10,000,000 shares Common Stock to be outstanding after this offering.......................... 47,136,760 shares Use of proceeds......................... We expect to use the net proceeds from this offering to expand sales and marketing initiatives, expand customer service and support systems and capabilities, build a redundant network operating center, acquire and implement new operational and financial systems, increase working capital and for possible future acquisitions. Proposed Nasdaq National Market symbol.. GOAM </TABLE> The number of shares of common stock to be outstanding after this offering include 13,222,760 shares of common stock to be issued upon automatic conversion of all outstanding shares of our preferred stock upon completion of this offering. The shares of common stock to be outstanding after this offering exclude: . 10,716,000 shares of common stock authorized for issuance under our stock option plans and employee stock purchase plan, of which 2,440,008 shares were subject to outstanding options as of December 31, 1999 at a weighted average exercise price of $0.92; and . 1,276,800 shares of common stock issuable upon exercise of outstanding warrants as of December 31, 1999 at a weighted average exercise price of $1.17. ---------------- Except as otherwise noted, the information in this prospectus reflects a 2,000-for-one split of our outstanding shares of common stock on May 28, 1998 and an eight-for-one split of our outstanding shares of common stock on February 25, 2000 and assumes (1) the conversion of all outstanding shares of preferred stock into shares of common stock prior to the closing of this offering and (2) no exercise of the underwriters' overallotment option. GoAmerica Communications Corp. was incorporated in Delaware in 1996. In December 1999, GoAmerica, Inc. was incorporated in Delaware and each of the security holders of GoAmerica Communications Corp. exchanged all their outstanding securities for newly issued securities of GoAmerica, Inc. with equivalent rights and preferences. As a result, GoAmerica Communications Corp. became a wholly-owned subsidiary of GoAmerica, Inc. See "Description of Capital Stock." Our principal offices are located at 401 Hackensack Avenue, Hackensack, New Jersey 07601, and our telephone number is (201) 996-1717. We maintain a Web site at http://www.goamerica.net. The information contained at our Web site is not incorporated into and does not constitute part of this prospectus, and the only information that you should rely on in making your decision whether to invest in our common stock is the information contained in this prospectus. 2 <PAGE> SUMMARY FINANCIAL DATA The following summary statement of operations data for the period from August 6, 1996, our date of inception, to December 31, 1996 and for the years ended December 31, 1997, 1998 and 1999 are derived from our audited financial statements. The pro forma statement of operations data presented below give effect to the conversion of all of our Series A Preferred Stock into an aggregate of 8,038,304 shares of common stock upon the closing of this offering, as if such conversion had occurred at the dates of issuance. The pro forma balance sheet data reflects the conversion of our Series A Preferred Stock described above and the issuance and sale of 648,057 shares of our Series B Preferred Stock after December 31, 1999 for total net proceeds of approximately $25.2 million; the issuance of 226,816 shares of common stock in connection with the Series B Preferred Stock financing; and the conversion of all of our Series B Preferred Stock into an aggregate of 5,184,456 shares of common stock. The pro forma as adjusted balance sheet data further reflects the sale of the 10,000,000 shares of common stock offered by us in this offering at an assumed initial public offering price of $15.00 per share, after deducting the underwriting discount and estimated offering expenses payable by us. You should read the selected financial data together with our financial statements and the sections of this prospectus entitled "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 3 <PAGE> <TABLE> <CAPTION> Period from August 6, 1996 (date of Years Ended inception) to December 31, December 31, -------------------------- 1996 1997 1998 1999 ------------- ------- ------- -------- (in thousands, except per share data) <S> <C> <C> <C> <C> Statement of Operations Data: Revenue: Subscriber......................... $ -- $ 115 $ 360 $ 1,183 Equipment.......................... -- 33 449 1,341 Other.............................. -- 25 18 207 ------ ------- ------- -------- Total revenue........................ -- 173 827 2,731 Costs and expenses: Cost of subscriber revenue......... -- 88 304 4,051 Cost of equipment revenue.......... -- 15 532 1,648 Sales and marketing................ 43 243 909 3,283 General and administrative......... 175 841 1,549 4,810 Depreciation and amortization...... 3 32 124 275 Settlement costs................... -- -- -- 297 Interest income.................... -- -- (14) (165) ------ ------- ------- -------- Net loss............................. $ (221) $(1,046) $(2,577) $(11,468) Beneficial conversion feature and accretion of redemption value of mandatorily redeemable convertible preferred stock..................... -- -- -- (10,464) ------ ------- ------- -------- Net loss applicable to common stockholders........................ $ (221) $(1,046) $(2,577) $(21,932) ====== ======= ======= ======== Basic net loss per share applicable to common stockholders.............. $(0.02) $ (0.07) $ (0.14) $(1.02) Diluted net loss per share applicable to common stockholders.............. $(0.02) $ (0.06) $ (0.14) $(1.00) ====== ======= ======= ======== Weighted average shares used in computation of basic net loss per share applicable to common stockholders........................ 13,947 16,083 18,391 21,590 Weighted average shares used in computation of diluted net loss per share applicable to common stockholders........................ 14,382 16,518 18,826 22,025 Pro forma basic net loss per share... $ (0.45) Pro forma diluted net loss per share............................... $ (0.45) ======== Weighted average shares used in computation of pro forma basic net loss per share...................... 25,258 Weighted average shares used in computation of pro forma diluted net loss per share...................... 25,693 </TABLE> <TABLE> <CAPTION> As of December 31, 1999 ------------------------------- Pro Forma As Actual Pro Forma Adjusted ------- --------- ------------ (in thousands) <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents.................... $ 6,344 $31,534 $169,684 Working capital.............................. 2,426 27,616 165,766 Total assets................................. 9,757 34,947 173,097 Series A redeemable convertible preferred stock....................................... 20,755 -- -- Series B redeemable convertible preferred stock....................................... -- -- -- Stockholders' equity (deficit)............... (16,658) 29,287 167,437 </TABLE> 4 <PAGE> <TABLE> <CAPTION> Period from August 6, 1996 (date of inception) to Years Ended December 31, December 31, -------------------------- 1996 1997 1998 1999 ------------- ---------------- -------- (in thousands) <S> <C> <C> <C> <C> Other Financial Data: Cash provided by (used in): Operating activities............. $ (338) $ (803) $ (2,215) $ (6,745) Investing activities............. (74) (180) (498) (643) Financing activities............. 1,000 415 4,654 11,771 </TABLE> Recent Developments On January 17, 2000, we executed a binding stock purchase agreement with Dell USA L.P., Impact Venture Partners, L.P., Carousel Capital Partners, L.P. and Forstmann Little & Co. Equity Partnership-VI, L.P. On January 28, 2000, we completed this transaction and issued and sold an aggregate of 648,057 shares of Series B Preferred Stock and issued 226,816 shares of common stock for net proceeds of approximately $25.2 million. Each share of Series B Preferred Stock will convert into eight shares of common stock upon completion of this offering, or an aggregate of 5,184,456 shares. In connection with the issuance and sale of the Series B Preferred Stock in January 2000, assuming an initial public offering price of $15.00 per share, we would expect to incur a non-cash, non-recurring charge to net loss applicable to common stockholders in the amount of approximately $22 million in the first quarter of 2000. 5 <PAGE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001101290_demandstar_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001101290_demandstar_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information appearing elsewhere in this prospectus. Except as otherwise noted, all information in this prospectus reflects: (1) the adoption and filing by DemandStar of the Amended and Restated Articles of Incorporation and the Amended and Restated By-Laws described in this prospectus; and (2) a 1,250-for-one share split of DemandStar common stock effected in December 1999. BUSINESS OF DEMANDSTAR DemandStar is a provider of Internet-based procurement systems for governmental agencies. Our procurement systems enable governments to purchase goods and services more efficiently and at lower administrative costs while at the same time providing valuable services to businesses selling to government agencies. The businesses pay a membership fee to get the benefit of "real time" notification of new bid opportunities. The DemandStar system handles all goods and services that agencies acquire through a mandatory bid process. OUR HISTORY We were formed as "HTE-IOD, Inc.," a Florida corporation, on June 1, 1999. On June 18, 1999, we acquired the business and specified net assets of our predecessor, Information On Demand, Inc., a Florida corporation formed in June 1997. In connection with that acquisition, we changed our name to "Information On Demand, Inc." On December 21, 1999, we then changed our name to "DemandStar.com, Inc." We have a limited operating history. We have a history of significant losses, with a net loss of ($1,138,842) for the period from June 18, 1999 to December 31, 1999. We anticipate that we will continue to incur significant losses into the foreseeable future. In that 1999 was our first year of operation, our accumulated deficit is the same as our net loss. Our auditors have expressed a "going concern" opinion. OUR BUSINESS MODEL Our services are provided at no-cost to participating government agencies. Businesses that provide goods and services to agencies are provided the opportunity to register with us as member vendors for an annual fee. We bring together agencies and vendors for e-procurement. Our focus is on the bid/request for proposal process. Our Internet-based products and services offer the agencies and vendors the opportunity to quickly, efficiently and seamlessly communicate information regarding bids, goods and services. Our system allows governments to reduce administrative overhead in bid notification and follow-up. Governments can often use other agencies' contracts, and our site allows governments to quickly find similar contracts and bids. A larger vendor community available through the DemandStar website can improve the responses that agencies get back on bids. Member vendors receive "real time" notification of bids and can immediately access them on the web. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. WE MAY NOT SELL OR DISTRIBUTE THESE SECURITIES UNTIL THE REGISTRATION STATEMENT IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED , 2000 PROSPECTUS - -------------------------------------------------------------------------------- (Demandstar.com Logo) DEMANDSTAR.COM, INC. (18,811,330 RIGHTS TO PURCHASE COMMON STOCK) 18,811,330 SHARES OF COMMON STOCK - -------------------------------------------------------------------------------- We are distributing, at no cost, non-transferable rights to purchase our common stock to: - persons who own shares of common stock of H.T.E., Inc., our parent company, on the record date of March 6, 2000; - persons who held HTE stock options on December 16, 1999 and who are also employees or directors of HTE, or a subsidiary of HTE, as of February 1, 2000; and - persons who are employees of HTE, or a subsidiary of HTE, as of February 1, 2000. You may purchase one share of our common stock for each right you are issued for the price of $1.00 per share. You will be able to exercise your rights only during a limited period. If you do not exercise your rights before 5:00 p.m., Eastern Standard Time, on , 2000, your rights will expire. We may decide to extend the rights offering, in our discretion, for up to 15 calendar days. No public market currently exists for our common stock or the rights. Our common stock will be traded over the OTC Electronic Bulletin Board. The rights will not be listed on Nasdaq or any securities exchange. <TABLE> <CAPTION> MAXIMUM PROCEEDS AFTER DEDUCTING PRICE TO THE PUBLIC OFFERING EXPENSES(1) ------------------- -------------------- <S> <C> <C> Subscription Price............................. $ 1.00 $ .97 Total Offering................................. $18,811,330 $18,288,754 </TABLE> - --------------- (1) Offering expenses estimated at $522,576. INVESTING IN OUR COMMON STOCK INVOLVES SUBSTANTIAL RISK. SEE "RISK FACTORS"
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001101322_embedded_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001101322_embedded_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. It may not contain all of the information investors should consider before investing in the common stock of EST. Investors should read the entire prospectus carefully. Embedded Support Tools Corporation We design, manufacture, sell and support integrated hardware and software tools for programming, testing and debugging embedded systems. Our products enable developers to quickly and reliably program and debug the embedded systems that manufacturers build into their industrial and consumer products. As the complexity and speed of embedded systems increase, we believe that embedded systems developers will require more efficient solutions to program their products and that we are well positioned to offer these solutions. A significant portion of our customers are in the communications industry, including telecommunications, data communications and Internet infrastructure equipment suppliers. Our largest customers by revenue include Hewlett-Packard, Lucent Technologies, Motorola, Nortel Networks, Tellabs Wireless and 3Com. We were incorporated in Massachusetts in 1989. Our principal executive offices are located at 120 Royall Street, Canton, Massachusetts 02021 and our telephone number is (781) 828-5588. Our World Wide Web site address is www.estc.com. The information contained on our Web site is not part of this prospectus. Our Market Opportunity Embedded systems are the special purpose computers within intelligent industrial and consumer products such as network switches and routers, cellular base stations, process control systems, cell phones, printers and anti-lock braking systems. As with all computers, embedded systems minimally consist of a microprocessor, memory and software, and the level of complexity of that system can be enhanced with additional components. Embedded systems differ from general purpose computers, such as PCs, workstations and mainframes, in that they are designed to run only the specific set of tasks required for the end product to operate as intended. Manufacturers use embedded systems to enhance functionality and performance, reduce cost and size, and improve reliability of a broad variety of products, ranging from simple systems found in microwave ovens to complex multiprocessor driven systems controlling the infrastructure of the Internet. Embedded systems development tools enable the developer to edit and compile code, transfer the operating system and application software to the microprocessor, and test and debug the program and the functionality of the embedded system as a whole. According to industry and market research firms, at least 55% of the more than 265 million microprocessors produced by the semiconductor industry in 1998 were used in embedded systems, while the remainder were used in general purpose computers such as PCs. We participate in the market for the higher-end 32-bit and greater embedded microprocessors, which is forecast to grow at a rate of 21%, from 106 million units in 1998 to 228 million units in 2002. Motorola is the largest supplier of embedded microprocessors, with a market share of 35% in 1997, the latest year for which data is available. The market for embedded software development tools is part of the overall embedded operating systems and development tools market, which was approximately $550 million in 1998 and is forecast to grow 14% annually through 2003. Our Solution We design, manufacture, sell and support a comprehensive suite of high performance, open and scalable embedded systems development tools, consisting of both hardware and software components. Our tools enable development engineers to program, test and debug embedded systems quickly and reliably at each stage of the development process. We believe that our leadership position arises from the following: Superior Development Tools - Our tools offer the following advantages: . Bundled - We bundle software debuggers and other graphical utilities with hardware tools to produce a complete solution for early stage hardware and firmware development; . Open - We enable developers using our tools to incorporate a variety of real-time operating systems into their products and to use a wide range of software tools with our hardware products; . Graphical - Our software tools provide a rich graphical user interface, which gives programmers easy access to multiple in-depth views of microprocessor data and development status; and . Scalable - Our hardware tools are modular and designed to easily allow developers to configure and scale their development environments to meet their specific needs. Microprocessor Knowledge Base - We were one of the first companies in the industry to develop and market tools for debugging Motorola microprocessors using its on-chip debug capabilities. We have been able to adapt our tools to work with over 50 different microprocessors within the Motorola and IBM families. Through our relationships with Motorola and IBM, we gain early access to new microprocessor designs prior to commercial release. Comprehensive Customer Support - We deploy a team of 41 field salespeople and support engineers to assist our customers throughout the development process. This support includes providing early development kits containing single board computers and board support packages. We also offer our customers formal one-day and three-day training sessions on microprocessor architectures. Our Strategy Our goal is to maintain and enhance our position as a technological and market leader in embedded systems development tools. In order to achieve this goal, we intend to: Extend Our Technological Leadership - We have established leadership in development tools by bundling hardware and software solutions, and we must insure that our products continue to embody the latest technologies and features. Continue Our Focus on Communications Applications - A significant number of our customers build highly complex data communications, telecommunications and Internet networking equipment. We plan to expand our product offerings to address the specific needs of developers by leveraging our strengths within these markets. Increase Our Software Product Offerings - We intend to use our strengths in the hardware bring-up development stage to extend and enhance our software solutions, while remaining operating system independent. Satisfy Customer Demand for Additional Microprocessor Architectures - Our tools work with more than 50 different microprocessors from Motorola and IBM. We intend to meet the needs of our customers by continuing to adapt our development tools for an even wider range of microprocessor architectures. Strengthen and Develop Strategic Alliances - We have developed significant relationships with Motorola and Wind River Systems, and we intend to strengthen these relationships as well as seek new alliances. The Offering <TABLE> <S> <C> Shares offered by EST............... 4,100,000 shares Shares offered by the selling stockholder ....................... 400,000 shares Total shares outstanding after this offering........................... 16,994,000 shares (1) Use of proceeds by EST.............. To (i) make a distribution of previously undistributed subchapter S corporation income of approximately $4.6 million, (ii) repay a $2.4 million line of credit and (iii) for general corporate purposes, including working capital and capital expenditures. Nasdaq National Market Symbol....... ESTC </TABLE> (1) The common stock to be outstanding after this offering is based on shares outstanding as of February 1, 2000 and excludes 2,555,500 shares of common stock issuable upon the exercise of options outstanding as of such date at a weighted average exercise price of $3.27 per share and 1,444,500 shares available for future grant under our stock plans. See Note 8 of Notes to Consolidated Financial Statements. Except as set forth in the consolidated financial statements or as otherwise indicated, all information in the prospectus: . reflects a two-for-one stock split effective December 21, 1999; and . does not include the 475,000 shares offered by EST and the 200,000 shares offered by another selling stockholder if the underwriters exercise their over-allotment option in full. Risk Factors You should consider the risk factors before investing in EST's common stock and the impact from various events which could adversely affect our business. Summary Consolidated Financial Data EST has been treated as a Subchapter S corporation for federal income tax purposes since its organization on January 5, 1989. As a Subchapter S corporation, EST has not been subject to federal and certain state income taxes. The pro forma net income (loss) reflects the provision for income taxes that would have been recorded had EST been a Subchapter C corporation, assuming an effective tax rate of 40%, 32%, 34%, 40%, and 11% for the years ended December 31, 1995, 1996, 1997, 1998 and 1999, respectively. See Notes 2 and 10 of Notes to Consolidated Financial Statements. Pro forma as adjusted balance sheet data set forth below reflects the distribution of an estimated $4.6 million of cumulative undistributed Subchapter S corporation taxable income for which stockholders of record prior to the closing of this offering have been taxed. The distribution will be made out of the net proceeds of this offering. The pro forma as adjusted balance sheet data also reflects the sale of 4,100,000 shares of common stock by EST at an assumed initial public offering price of $11.00 per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by EST. <TABLE> <CAPTION> Year Ended December 31, ------------------------------------- 1995 1996 1997 1998 1999 ------ ------ ------- ------- ------- (in thousands, except per share data) <S> <C> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Total revenues.................. $4,787 $8,262 $11,766 $18,250 $28,451 Total cost of revenues.......... 1,326 1,945 2,874 3,823 5,349 ------ ------ ------- ------- ------- Gross profit.................... 3,461 6,317 8,892 14,427 23,102 Selling and marketing........... 1,575 2,833 4,052 7,236 10,595 Research and development........ 1,100 1,636 2,150 3,085 4,838 General and administrative...... 314 541 721 1,040 1,815 Stock-related compensation expense(1)..................... -- -- -- -- 9,437 ------ ------ ------- ------- ------- Total operating expenses........ 2,989 5,010 6,923 11,361 26,685 ------ ------ ------- ------- ------- Income (loss) from operations... 472 1,307 1,969 3,066 (3,583) Net income (loss)............... $ 269 $1,101 $ 1,860 $ 2,890 $(3,747) ====== ====== ======= ======= ======= </TABLE> <TABLE> <S> <C> <C> <C> <C> <C> Pro Forma Statement of Operations Data(2): Pro forma net income (loss)................. $ 283 $ 874 $1,314 $1,865 $(2,977) Pro forma net income (loss) per share - basic and diluted.......................... $0.03 $0.09 $ 0.13 $ 0.18 $ (0.26) </TABLE> <TABLE> <CAPTION> December 31, 1999 ------------------- Pro Forma Actual As Adjusted ------- ----------- (in thousands) <S> <C> <C> Balance Sheet Data: Cash and cash equivalents................................... $ 1,552 $37,846 Working capital............................................. 3,401 39,695 Total assets................................................ 13,261 49,555 Redeemable common stock..................................... 1,893 -- Total stockholders' equity.................................. $ 3,995 $41,632 </TABLE> - -------- (1) The stock-related compensation expense relates to the issuance of 2,783,000 shares of common stock and the grant of options to purchase 1,692,000 shares of common stock to employees in June 1999. See Note 8 to Notes to Consolidated Financial Statements. (2) Pro forma net income (loss) and net income (loss) per share data assumes: (i) the termination of the redemption rights of certain common stockholders and therefore excludes related accretion charges and (ii) that EST was subject to income taxation as a Subchapter C corporation for all periods presented. See Note 2 to Notes to Consolidated Financial Statements.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001101376_alamosa_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001101376_alamosa_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..b5ff912f54c0450f8f9b3daa2d8820720bf50228
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights information that we believe is especially important concerning our business and this offering of notes. It does not contain all of the information that may be important to your investment decision. You should read the entire prospectus, including "Risk Factors" and our financial statements and related notes, before deciding to invest in our notes. ALAMOSA GENERAL Alamosa is a provider of wireless personal communications services, commonly referred to as PCS, in the southwestern and midwestern United States. We are a network partner of Sprint PCS, the personal communications services group of Sprint Corporation. Sprint PCS, directly and through affiliates such as us, provides wireless services in more than 4,000 cities and communities across the country. We have the exclusive right to provide digital personal communications services under the Sprint and Sprint PCS brand names in a territory comprising approximately 8.4 million residents. These residents are primarily located in smaller cities and in markets with above average growth rates in Texas, New Mexico, Arizona, Colorado and Wisconsin. We are a development stage company with very limited operations, very limited revenues, significant losses, substantial future capital requirements and an expectation of continued significant losses. We launched Sprint PCS service in Laredo in June 1999, and have since commenced service in ten additional markets: Albuquerque, Santa Fe, El Paso, Las Cruces, Lubbock, Amarillo, Midland, Odessa, Abilene and San Angelo. Our systems cover approximately 2.7 million residents out of approximately 3.9 million total residents in those markets. We expect to cover a total of approximately 4.1 million residents by the end of 2000 and 5.5 million residents by the end of 2001, at which point we expect to have completed our build-out obligations to Sprint PCS and expect to have covered approximately 65% of the resident population in our territory. The number of residents covered by our systems does not represent the number of Sprint PCS subscribers that we expect to be based in our territory. As of December 31, 1999, approximately 31,850 Sprint PCS subscribers were based in our territory. We were formed in July 1998, as a Texas limited liability company. Prior to the closing of this offering, we will reorganize into a Delaware holding company structure. Alamosa PCS Holdings, Inc., the issuer of the notes, is a holding company for our operating subsidiaries. See "The Reorganization." Our principal executive office is located at 4403 Brownfield Highway, Lubbock, Texas 79407. Our telephone number is (806) 722-1100. STRATEGIC RELATIONSHIP WITH SPRINT PCS We believe that our strategic relationship with Sprint PCS provides significant competitive advantages. Sprint PCS is a national provider of wireless services and products. Sprint PCS's subscriber base has more than tripled in size since the end of June 1998, making Sprint PCS one of the fastest growing wireless service providers in the United States. Under our affiliation agreements with Sprint PCS, we have the exclusive right to provide wireless services under the Sprint and Sprint PCS brand names in our territory. Sprint PCS handles our billing and collections and pays us 92% of "collected revenues" from subscribers based in our territory and retains the remaining 8%, as more fully described in "Our Affiliation Agreements with Sprint PCS -- The Management Agreement -- Service Pricing, Roaming and Fees." We also receive other revenues, including Sprint PCS roaming revenues for each minute that Sprint PCS customers based outside our territory use our portion of the Sprint PCS network and 100% of revenues from handset sales. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED FEBRUARY 2, 2000 PROSPECTUS $ [ALAMOSA LOGO] ALAMOSA PCS HOLDINGS, INC. % SENIOR DISCOUNT NOTES DUE 2010 ------------------ We are offering $ aggregate principal amount at maturity of our % Senior Discount Notes due 2010. We are also currently offering 10,714,000 shares of our common stock in a separate offering. The issue price of the notes will be $ per $ principal amount at maturity, which represents a yield to maturity of %, calculated from . Interest on the notes will be payable semi-annually on and beginning , 2005. The notes will be unsecured senior obligations and will rank equally with all of our existing and future senior debt. The subsidiaries of Alamosa PCS Holdings, Inc. own substantially all of our operating assets. All of those subsidiaries will guarantee the notes on a senior subordinated basis. The guarantees will be subordinate to all of the subsidiaries' designated senior debt. We have made application to list the notes on the American Stock Exchange. ------------------ INVESTING IN THESE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 8. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------ <TABLE> <CAPTION> PER NOTE TOTAL -------- ------------ <S> <C> <C> Principal amount at maturity of the notes % $ Price to investors % $ Underwriting discount % $ Proceeds to Alamosa PCS Holdings, Inc. (before expenses) % $ </TABLE> Original issue discount on the notes will accrete from until the date of delivery. The underwriters are offering the notes subject to various conditions. The underwriters expect to deliver the notes to purchasers on or about , 2000. SALOMON SMITH BARNEY CREDIT SUISSE FIRST BOSTON LEHMAN BROTHERS , 2000 We believe that our affiliation with Sprint PCS allows us to establish high quality, branded wireless services more quickly, at a lower cost and with lower initial capital requirements than would otherwise be possible. For example, we benefit from Sprint PCS's: - Marketing. We market products and services through Sprint PCS's existing relationships with major national retailers under the highly recognizable Sprint and Sprint PCS brand names. - National Network. Customers in our territory can immediately access Sprint PCS's growing network in 280 major metropolitan areas across the country. - Advanced Technology. We believe that the technology used by Sprint PCS provides advantages in capacity and voice-quality, as well as access to advanced features such as wireless Internet access. - Handset and Equipment Availability and Pricing. Sprint PCS's purchasing leverage allows us to acquire handsets and network equipment more quickly and at a lower cost than we could without our affiliation with Sprint PCS. ATTRACTIVE TERRITORY We believe that our territory is attractive for several reasons, including: - High Growth Markets. The overall population growth rate in our territory has been approximately 42% above the national average. - Fewer Competitors. We expect to face fewer competitors in our markets than is generally the case for wireless service providers operating in more urban areas. - Opportunity for Sprint PCS Roaming Revenue. We anticipate that we will have significant roaming revenue from Sprint PCS subscribers based outside our territory who use our portion of the Sprint PCS network. ADEQUATE FUNDING TO COMPLETE OUR NETWORK Starting in June 1999, we have launched Sprint PCS service in eleven markets. We anticipate that the proceeds of our initial public offering of common stock, when combined with the committed level of debt financing from Nortel Networks, Inc., will be adequate to fund future required capital expenditures, working capital requirements, operating losses and other cash needs of our business. Further, we believe that this level of financing is adequate to achieve the objective in our business plan of covering approximately 65% of the resident population in our territory by the end of 2001 and to exceed the build-out requirements contained in our affiliation agreements with Sprint PCS. However, we may need additional capital or debt financing due to greater than expected operating losses, the addition of new markets to our territory or unanticipated increases in the capital required to build-out our portion of the Sprint PCS network. [Pictures of the inside of three of our retail store locations, the Alamosa logo and two wireless handsets] [Fold-out page showing the Alamosa logo and a map of United States showing areas where Alamosa PCS, a Sprint PCS affiliate, has the right to provide wireless services and will derive its revenues in yellow and areas where Sprint PCS and other Sprint PCS affiliates have the right to provide wireless services in red.] Sprint PCS customers can use their phones in 280 major metropolitan areas and connecting travel corridors throughout the United States. THE OFFERING Senior Discount Notes...... $ million aggregate principal amount at stated maturity of % senior discount notes due 2010. We will issue the senior discount notes at a price to investors that will yield gross proceeds to us at issuance of approximately $156.0 million. Issuer..................... Alamosa PCS Holdings, Inc. Issue Price................ % Maturity Date.............. , 2010 Accretion.................. Accretion means adjustment of the price of a note to reflect the difference between the price of a note bought at an original issue discount and the stated amount of maturity of the note. The aggregate accreted value of the senior discount notes will increase from approximately $156.0 million at issuance at a rate of %, compounded semi-annually, to a final accreted value equal to their aggregate principal amount of $ million at , 2005. Interest Rate.............. Prior to , 2005, no cash interest will accrue on the senior discount notes. The senior discount notes will accrue interest at the rate of % per annum, payable semi-annually in cash in arrears on and of each year, commencing , 2005. Subsidiary Guarantees...... The senior discount notes will be guaranteed on a senior subordinated basis by our current subsidiaries and all of our future domestic restricted subsidiaries. See "Description of Notes -- Subsidiary Guarantees." Ranking.................... The senior discount notes will be: - senior unsecured obligations of Alamosa PCS Holdings, Inc.; - equal in right of payment to all of the existing and future senior debt of Alamosa PCS Holdings, Inc.; and - senior in right of payment to all of the existing and future subordinated debt of Alamosa PCS Holdings, Inc. The guarantees will be unsecured obligations of the guarantors and will be: - subordinated in right of payment to each guarantor's obligations under the Nortel financing and other credit facilities with banks or institutional lenders, referred to as designated senior debt; - equal in right of payment to all existing and future senior subordinated debt of each guarantor; and - senior in right of payment to all existing and future subordinated debt of each guarantor. Our guarantors generate all of our operating income, and we are dependent on them to meet our obligations under the notes. See "Description of Notes -- Ranking." TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Prospectus Summary.......................................... 1 Risk Factors................................................ 8 This Prospectus Contains Forward-Looking Statements......... 21 Ratio of Earnings to Fixed Charges.......................... 22 Use of Proceeds............................................. 22 Capitalization.............................................. 23 Selected Financial Data..................................... 24 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 26 Business.................................................... 34 Our Affiliation Agreements with Sprint PCS.................. 56 Management.................................................. 65 Principal Stockholders...................................... 77 Certain Relationships and Related Transactions.............. 80 The Reorganization.......................................... 83 Regulation of the Wireless Telecommunications Industry...... 84 Description of Other Indebtedness........................... 89 Description of Notes........................................ 96 United States Federal Tax Consequences...................... 138 Underwriting................................................ 142 Legal Matters............................................... 143 Experts..................................................... 143 Where You Can Find Additional Information................... 143 Index to Financial Statements............................... F-1 </TABLE> Optional Redemption........ During the first 36 months after this offering, we may use the net proceeds from an equity offering to redeem up to 35% of the accreted value of the senior discount notes originally issued at a redemption price of % of the accreted value as of the date of redemption, provided that at least 65% of the accreted value of the senior discount notes originally issued remains outstanding immediately after the redemption. See "Description of Notes -- Optional Redemption." On or after , 2005, we may redeem all or part of the senior discount notes at redemption prices set forth under "Description of Notes -- Optional Redemption," together with accrued and unpaid interest, if any, to the date of redemption. Change of Control.......... If we experience a change of control, we will be required to make an offer to repurchase your senior discount notes at a price equal to 101% of the accreted value, if before , 2005, or 101% of the principal amount at maturity thereafter, as applicable, together with accrued and unpaid interest, if any, to the date of repurchase. See "Description of Notes -- Repurchase at the Option of Holders Upon a Change of Control." Restrictive Covenants...... The indenture governing the senior discount notes will contain covenants that, among other things and subject to important exceptions, will limit our ability and the ability of our subsidiaries and certain of our future subsidiaries to: - incur additional debt or issue preferred stock; - pay dividends, redeem capital stock or make other restricted payments or investments; - create liens on assets; - merge, consolidate or dispose of assets; - enter into transactions with affiliates; and - change lines of business. See "Description of Notes -- Certain Covenants." Original Issue Discount.... The accretion of the senior discount notes from their issue price to their principal amount at maturity will produce taxable ordinary interest income in the amount of the accretion for holders of the senior discount notes during the accretion period. The Internal Revenue Code calls this original issue discount. Thus, although interest will not be payable on the senior discount notes prior to , 2005, U.S. holders will be required to include original issue discount amounts in gross income for U.S. federal income tax purposes over the term of the senior discount notes in advance of receipt of cash payments to which such income is attributable. See "United States Federal Tax Consequences." Listing.................... We have made application to list the notes on the American Stock Exchange. Trustee.................... Norwest Bank Minnesota, N.A. Use of Proceeds............ We will use a portion of the proceeds of this offering of our senior discount notes to prepay $75.0 million of indebtedness outstanding under the Nortel credit facility. We may decide to use the remaining proceeds to: - accelerate coverage within our existing territory; - build-out additional areas within our existing territory; - expand our existing territory; - pursue additional telecommunications business opportunities or acquire other telecommunications businesses or assets; or - cover general corporate purposes. THE COMMON STOCK OFFERING We are also offering common stock in a separate initial public offering pursuant to a separate prospectus. This prospectus relates only to the offering of notes and not to the offering of common stock. SUMMARY FINANCIAL AND OPERATING DATA The financial data presented below under the captions "Statement of Operations Data," "Per Share Data," "Other Data" and "Balance Sheet Data" for, and as of the end of, the period from inception to December 31, 1998, the nine-month period ended September 30, 1999 and the period from inception to September 30, 1999 are derived from the audited financial statements of Alamosa PCS LLC, the predecessor to Alamosa PCS Holdings, Inc. These financial statements have been audited by PricewaterhouseCoopers LLP, independent certified public accountants. It is important that you also read "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements for the periods ended December 31, 1998 and September 30, 1999, the related notes and the independent auditors' report. The summary unaudited financial data presented below as of and for the period from inception to September 30, 1998 are derived from our unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements include all adjustments, consisting of normal recurring accruals, that management considers necessary for a fair presentation of financial position and results of operations. Operating results for the nine-month period ended September 30, 1999 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1999. <TABLE> <CAPTION> FOR THE PERIOD JULY 16, FOR THE PERIOD JULY 16, FOR THE NINE-MONTH FOR THE PERIOD JULY 16, 1998 (INCEPTION) 1998 (INCEPTION) PERIOD ENDED 1998 (INCEPTION) THROUGH DECEMBER 31, THROUGH SEPTEMBER 30, SEPTEMBER 30, THROUGH SEPTEMBER 30, 1998 1998 1999 1999 ----------------------- ----------------------- ------------------ ----------------------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA, SUBSCRIBER DATA AND RATIO OF EARNINGS TO FIXED CHARGES) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................ $ -- $ -- $ 2,000 $ 2,000 Cost of sales........... -- -- 1,614 1,614 Total operating expenses............. 958 401 17,634 18,592 Operating loss.......... (958) (401) (17,247) (18,206) Net loss................ (924) (400) (17,688) (18,612) PER SHARE DATA: Basic and diluted net loss per share of common stock(1)(2)... $(0.02) $(0.01) $ (0.36) $ (0.38) Pro forma net loss per share of common stock(1)(2).......... (0.02) (0.01) (0.36) (0.38) OTHER DATA: EBITDA(3)............... (956) (401) (16,311) (17,267) Adjusted EBITDA(3)...... (956) (401) (9,489) (10,445) Ratio of earnings to fixed charges(4)..... -- -- -- -- Number of subscribers... -- -- 9,850 9,850 </TABLE> <TABLE> <CAPTION> AS OF SEPTEMBER 30, 1999 AS OF ------------------------ DECEMBER 31, 1998 ACTUAL AS ADJUSTED(5) ----------------- ------- -------------- <S> <C> <C> <C> BALANCE SHEET DATA: (DOLLARS IN THOUSANDS) Cash and cash equivalents........................... $13,529 $ 7,454 $237,587 Construction in progress............................ 1,979 28,940 28,940 Property and equipment, net......................... 114 36,930 36,930 Total assets........................................ 15,674 88,412 323,585 Total debt.......................................... 752(6) 60,885(7) 157,207 Equity.............................................. 14,076 13,210 152,061 </TABLE> - --------------- (1) For the period ended September 30, 1999, diluted weighted average shares outstanding exclude the common shares issuable on exercise of stock options because inclusion would have been antidilutive. ]The presentation of the pro forma net loss per share of common stock gives effect to adjustments for federal and state income taxes as if Alamosa had been taxed as a C Corporation for the periods presented. (2) Reflects the reorganization as if it had occurred upon inception of Alamosa PCS, LLC. (3) Included in Other Data are EBITDA and Adjusted EBITDA amounts. EBITDA represents earnings before interest, income taxes, depreciation and amortization. Adjusted EBITDA represents earnings before interest, income taxes, depreciation and amortization and equity participation compensation expense. EBITDA and Adjusted EBITDA are used by management and certain investors as indicators of a company's historical ability to service debt. Management believes that increases in EBITDA and Adjusted EBITDA are indicators of improved ability to service existing debt, to sustain potential future increases in debt and to satisfy capital requirements. However, EBITDA and Adjusted EBITDA are not intended to represent cash flows for the period, nor have they been presented as alternatives to either operating income, as determined by generally accepted accounting principles, as indicators of operating performance or cash flows from operating, investing and financing activities, as determined by generally accepted accounting principles, and are thus susceptible to varying calculations. EBITDA and Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies. (4) For the purpose of calculating the ratio of earnings to fixed charges, earnings are defined as earnings or loss before income taxes and extraordinary items and fixed charges. Fixed charges are the sum of (1) interest costs, (2) amortization of deferred financing costs, and (3) one-third of operating lease rental expense (deemed to be interest). Earnings were inadequate to cover fixed charges by 923,822 and 18,341,790 for the period from July 16, 1998 (Inception) to December 31, 1998 and the nine-month period ended September 30, 1999. (5) As adjusted Balance Sheet Data reflects (a) the sale in the common stock offering of 10,714,000 shares of common stock at an initial offering price of $14.00 per share, the midpoint of the range on the cover of the common stock prospectus, less underwriting discounts and commissions and estimated offering expenses of $11.1 million, (b) the issuance of an aggregate principal amount at maturity of $ million in senior discount notes with estimated gross proceeds of $156.0 million, less underwriting discounts and commissions and estimated offering expenses of $5.0 million and (c) the prepayment of an aggregate of $75.0 million of indebtedness under the Nortel facility, consisting of the prepayment of $59.7 million outstanding on September 30, 1999 and cash equal to $15.3 million designated to prepay borrowings under the Nortel facility incurred after September 30, 1999. (6) Reflects capital lease obligations of $728,219 and other notes payable of $23,637. (7) Reflects indebtedness incurred under the Nortel facility of $59,678,288, other notes payable of $353,988 and capital lease obligations of $853,965.
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+PROSPECTUS SUMMARY This summary highlights information that we believe is especially important concerning our business and this offering of notes. It does not contain all of the information that may be important to your investment decision. You should read the entire prospectus, including "Risk Factors" and our financial statements and related notes, before deciding to invest in our notes. ALAMOSA GENERAL Alamosa is a provider of wireless personal communications services, commonly referred to as PCS, in the southwestern and midwestern United States. We are a network partner of Sprint PCS, the personal communications services group of Sprint Corporation. Sprint PCS, directly and through affiliates such as us, provides wireless services in more than 4,000 cities and communities across the country. We have the exclusive right to provide digital personal communications services under the Sprint and Sprint PCS brand names in a territory comprising approximately 8.4 million residents. These residents are primarily located in smaller cities and in markets with above average growth rates in Texas, New Mexico, Arizona, Colorado and Wisconsin. We are a development stage company with very limited operations, very limited revenues, significant losses, substantial future capital requirements and an expectation of continued significant losses. We launched Sprint PCS service in Laredo in June 1999, and have since commenced service in ten additional markets: Albuquerque, Santa Fe, El Paso, Las Cruces, Lubbock, Amarillo, Midland, Odessa, Abilene and San Angelo. Our systems cover approximately 2.7 million residents out of approximately 3.9 million total residents in those markets. We expect to cover a total of approximately 4.1 million residents by the end of 2000 and 5.5 million residents by the end of 2001, at which point we expect to have completed our build-out obligations to Sprint PCS and expect to have covered approximately 65% of the resident population in our territory. The number of residents covered by our systems does not represent the number of Sprint PCS subscribers that we expect to be based in our territory. As of December 31, 1999, approximately 31,850 Sprint PCS subscribers were based in our territory. We were formed in July 1998, as a Texas limited liability company. Prior to the closing of this offering, we will reorganize into a Delaware holding company structure. Alamosa PCS Holdings, Inc., the issuer of the notes, is a holding company for our operating subsidiaries. See "The Reorganization." Our principal executive office is located at 4403 Brownfield Highway, Lubbock, Texas 79407. Our telephone number is (806) 722-1100. STRATEGIC RELATIONSHIP WITH SPRINT PCS We believe that our strategic relationship with Sprint PCS provides significant competitive advantages. Sprint PCS is a national provider of wireless services and products. Sprint PCS's subscriber base has more than tripled in size since the end of June 1998, making Sprint PCS one of the fastest growing wireless service providers in the United States. Under our affiliation agreements with Sprint PCS, we have the exclusive right to provide wireless services under the Sprint and Sprint PCS brand names in our territory. Sprint PCS handles our billing and collections and pays us 92% of "collected revenues" from subscribers based in our territory and retains the remaining 8%, as more fully described in "Our Affiliation Agreements with Sprint PCS -- The Management Agreement -- Service Pricing, Roaming and Fees." We also receive other revenues, including Sprint PCS roaming revenues for each minute that Sprint PCS customers based outside our territory use our portion of the Sprint PCS network and 100% of revenues from handset sales. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED FEBRUARY 2, 2000 PROSPECTUS $ [ALAMOSA LOGO] ALAMOSA PCS HOLDINGS, INC. % SENIOR DISCOUNT NOTES DUE 2010 ------------------ We are offering $ aggregate principal amount at maturity of our % Senior Discount Notes due 2010. We are also currently offering 10,714,000 shares of our common stock in a separate offering. The issue price of the notes will be $ per $ principal amount at maturity, which represents a yield to maturity of %, calculated from . Interest on the notes will be payable semi-annually on and beginning , 2005. The notes will be unsecured senior obligations and will rank equally with all of our existing and future senior debt. The subsidiaries of Alamosa PCS Holdings, Inc. own substantially all of our operating assets. All of those subsidiaries will guarantee the notes on a senior subordinated basis. The guarantees will be subordinate to all of the subsidiaries' designated senior debt. We have made application to list the notes on the American Stock Exchange. ------------------ INVESTING IN THESE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 8. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------ <TABLE> <CAPTION> PER NOTE TOTAL -------- ------------ <S> <C> <C> Principal amount at maturity of the notes % $ Price to investors % $ Underwriting discount % $ Proceeds to Alamosa PCS Holdings, Inc. (before expenses) % $ </TABLE> Original issue discount on the notes will accrete from until the date of delivery. The underwriters are offering the notes subject to various conditions. The underwriters expect to deliver the notes to purchasers on or about , 2000. SALOMON SMITH BARNEY CREDIT SUISSE FIRST BOSTON LEHMAN BROTHERS , 2000 We believe that our affiliation with Sprint PCS allows us to establish high quality, branded wireless services more quickly, at a lower cost and with lower initial capital requirements than would otherwise be possible. For example, we benefit from Sprint PCS's: - Marketing. We market products and services through Sprint PCS's existing relationships with major national retailers under the highly recognizable Sprint and Sprint PCS brand names. - National Network. Customers in our territory can immediately access Sprint PCS's growing network in 280 major metropolitan areas across the country. - Advanced Technology. We believe that the technology used by Sprint PCS provides advantages in capacity and voice-quality, as well as access to advanced features such as wireless Internet access. - Handset and Equipment Availability and Pricing. Sprint PCS's purchasing leverage allows us to acquire handsets and network equipment more quickly and at a lower cost than we could without our affiliation with Sprint PCS. ATTRACTIVE TERRITORY We believe that our territory is attractive for several reasons, including: - High Growth Markets. The overall population growth rate in our territory has been approximately 42% above the national average. - Fewer Competitors. We expect to face fewer competitors in our markets than is generally the case for wireless service providers operating in more urban areas. - Opportunity for Sprint PCS Roaming Revenue. We anticipate that we will have significant roaming revenue from Sprint PCS subscribers based outside our territory who use our portion of the Sprint PCS network. ADEQUATE FUNDING TO COMPLETE OUR NETWORK Starting in June 1999, we have launched Sprint PCS service in eleven markets. We anticipate that the proceeds of our initial public offering of common stock, when combined with the committed level of debt financing from Nortel Networks, Inc., will be adequate to fund future required capital expenditures, working capital requirements, operating losses and other cash needs of our business. Further, we believe that this level of financing is adequate to achieve the objective in our business plan of covering approximately 65% of the resident population in our territory by the end of 2001 and to exceed the build-out requirements contained in our affiliation agreements with Sprint PCS. However, we may need additional capital or debt financing due to greater than expected operating losses, the addition of new markets to our territory or unanticipated increases in the capital required to build-out our portion of the Sprint PCS network. [Pictures of the inside of three of our retail store locations, the Alamosa logo and two wireless handsets] [Fold-out page showing the Alamosa logo and a map of United States showing areas where Alamosa PCS, a Sprint PCS affiliate, has the right to provide wireless services and will derive its revenues in yellow and areas where Sprint PCS and other Sprint PCS affiliates have the right to provide wireless services in red.] Sprint PCS customers can use their phones in 280 major metropolitan areas and connecting travel corridors throughout the United States. THE OFFERING Senior Discount Notes...... $ million aggregate principal amount at stated maturity of % senior discount notes due 2010. We will issue the senior discount notes at a price to investors that will yield gross proceeds to us at issuance of approximately $156.0 million. Issuer..................... Alamosa PCS Holdings, Inc. Issue Price................ % Maturity Date.............. , 2010 Accretion.................. Accretion means adjustment of the price of a note to reflect the difference between the price of a note bought at an original issue discount and the stated amount of maturity of the note. The aggregate accreted value of the senior discount notes will increase from approximately $156.0 million at issuance at a rate of %, compounded semi-annually, to a final accreted value equal to their aggregate principal amount of $ million at , 2005. Interest Rate.............. Prior to , 2005, no cash interest will accrue on the senior discount notes. The senior discount notes will accrue interest at the rate of % per annum, payable semi-annually in cash in arrears on and of each year, commencing , 2005. Subsidiary Guarantees...... The senior discount notes will be guaranteed on a senior subordinated basis by our current subsidiaries and all of our future domestic restricted subsidiaries. See "Description of Notes -- Subsidiary Guarantees." Ranking.................... The senior discount notes will be: - senior unsecured obligations of Alamosa PCS Holdings, Inc.; - equal in right of payment to all of the existing and future senior debt of Alamosa PCS Holdings, Inc.; and - senior in right of payment to all of the existing and future subordinated debt of Alamosa PCS Holdings, Inc. The guarantees will be unsecured obligations of the guarantors and will be: - subordinated in right of payment to each guarantor's obligations under the Nortel financing and other credit facilities with banks or institutional lenders, referred to as designated senior debt; - equal in right of payment to all existing and future senior subordinated debt of each guarantor; and - senior in right of payment to all existing and future subordinated debt of each guarantor. Our guarantors generate all of our operating income, and we are dependent on them to meet our obligations under the notes. See "Description of Notes -- Ranking." TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Prospectus Summary.......................................... 1 Risk Factors................................................ 8 This Prospectus Contains Forward-Looking Statements......... 21 Ratio of Earnings to Fixed Charges.......................... 22 Use of Proceeds............................................. 22 Capitalization.............................................. 23 Selected Financial Data..................................... 24 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 26 Business.................................................... 34 Our Affiliation Agreements with Sprint PCS.................. 56 Management.................................................. 65 Principal Stockholders...................................... 77 Certain Relationships and Related Transactions.............. 80 The Reorganization.......................................... 83 Regulation of the Wireless Telecommunications Industry...... 84 Description of Other Indebtedness........................... 89 Description of Notes........................................ 96 United States Federal Tax Consequences...................... 138 Underwriting................................................ 142 Legal Matters............................................... 143 Experts..................................................... 143 Where You Can Find Additional Information................... 143 Index to Financial Statements............................... F-1 </TABLE> Optional Redemption........ During the first 36 months after this offering, we may use the net proceeds from an equity offering to redeem up to 35% of the accreted value of the senior discount notes originally issued at a redemption price of % of the accreted value as of the date of redemption, provided that at least 65% of the accreted value of the senior discount notes originally issued remains outstanding immediately after the redemption. See "Description of Notes -- Optional Redemption." On or after , 2005, we may redeem all or part of the senior discount notes at redemption prices set forth under "Description of Notes -- Optional Redemption," together with accrued and unpaid interest, if any, to the date of redemption. Change of Control.......... If we experience a change of control, we will be required to make an offer to repurchase your senior discount notes at a price equal to 101% of the accreted value, if before , 2005, or 101% of the principal amount at maturity thereafter, as applicable, together with accrued and unpaid interest, if any, to the date of repurchase. See "Description of Notes -- Repurchase at the Option of Holders Upon a Change of Control." Restrictive Covenants...... The indenture governing the senior discount notes will contain covenants that, among other things and subject to important exceptions, will limit our ability and the ability of our subsidiaries and certain of our future subsidiaries to: - incur additional debt or issue preferred stock; - pay dividends, redeem capital stock or make other restricted payments or investments; - create liens on assets; - merge, consolidate or dispose of assets; - enter into transactions with affiliates; and - change lines of business. See "Description of Notes -- Certain Covenants." Original Issue Discount.... The accretion of the senior discount notes from their issue price to their principal amount at maturity will produce taxable ordinary interest income in the amount of the accretion for holders of the senior discount notes during the accretion period. The Internal Revenue Code calls this original issue discount. Thus, although interest will not be payable on the senior discount notes prior to , 2005, U.S. holders will be required to include original issue discount amounts in gross income for U.S. federal income tax purposes over the term of the senior discount notes in advance of receipt of cash payments to which such income is attributable. See "United States Federal Tax Consequences." Listing.................... We have made application to list the notes on the American Stock Exchange. Trustee.................... Norwest Bank Minnesota, N.A. Use of Proceeds............ We will use a portion of the proceeds of this offering of our senior discount notes to prepay $75.0 million of indebtedness outstanding under the Nortel credit facility. We may decide to use the remaining proceeds to: - accelerate coverage within our existing territory; - build-out additional areas within our existing territory; - expand our existing territory; - pursue additional telecommunications business opportunities or acquire other telecommunications businesses or assets; or - cover general corporate purposes. THE COMMON STOCK OFFERING We are also offering common stock in a separate initial public offering pursuant to a separate prospectus. This prospectus relates only to the offering of notes and not to the offering of common stock. SUMMARY FINANCIAL AND OPERATING DATA The financial data presented below under the captions "Statement of Operations Data," "Per Share Data," "Other Data" and "Balance Sheet Data" for, and as of the end of, the period from inception to December 31, 1998, the nine-month period ended September 30, 1999 and the period from inception to September 30, 1999 are derived from the audited financial statements of Alamosa PCS LLC, the predecessor to Alamosa PCS Holdings, Inc. These financial statements have been audited by PricewaterhouseCoopers LLP, independent certified public accountants. It is important that you also read "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements for the periods ended December 31, 1998 and September 30, 1999, the related notes and the independent auditors' report. The summary unaudited financial data presented below as of and for the period from inception to September 30, 1998 are derived from our unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements include all adjustments, consisting of normal recurring accruals, that management considers necessary for a fair presentation of financial position and results of operations. Operating results for the nine-month period ended September 30, 1999 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1999. <TABLE> <CAPTION> FOR THE PERIOD JULY 16, FOR THE PERIOD JULY 16, FOR THE NINE-MONTH FOR THE PERIOD JULY 16, 1998 (INCEPTION) 1998 (INCEPTION) PERIOD ENDED 1998 (INCEPTION) THROUGH DECEMBER 31, THROUGH SEPTEMBER 30, SEPTEMBER 30, THROUGH SEPTEMBER 30, 1998 1998 1999 1999 ----------------------- ----------------------- ------------------ ----------------------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA, SUBSCRIBER DATA AND RATIO OF EARNINGS TO FIXED CHARGES) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................ $ -- $ -- $ 2,000 $ 2,000 Cost of sales........... -- -- 1,614 1,614 Total operating expenses............. 958 401 17,634 18,592 Operating loss.......... (958) (401) (17,247) (18,206) Net loss................ (924) (400) (17,688) (18,612) PER SHARE DATA: Basic and diluted net loss per share of common stock(1)(2)... $(0.02) $(0.01) $ (0.36) $ (0.38) Pro forma net loss per share of common stock(1)(2).......... (0.02) (0.01) (0.36) (0.38) OTHER DATA: EBITDA(3)............... (956) (401) (16,311) (17,267) Adjusted EBITDA(3)...... (956) (401) (9,489) (10,445) Ratio of earnings to fixed charges(4)..... -- -- -- -- Number of subscribers... -- -- 9,850 9,850 </TABLE> <TABLE> <CAPTION> AS OF SEPTEMBER 30, 1999 AS OF ------------------------ DECEMBER 31, 1998 ACTUAL AS ADJUSTED(5) ----------------- ------- -------------- <S> <C> <C> <C> BALANCE SHEET DATA: (DOLLARS IN THOUSANDS) Cash and cash equivalents........................... $13,529 $ 7,454 $237,587 Construction in progress............................ 1,979 28,940 28,940 Property and equipment, net......................... 114 36,930 36,930 Total assets........................................ 15,674 88,412 323,585 Total debt.......................................... 752(6) 60,885(7) 157,207 Equity.............................................. 14,076 13,210 152,061 </TABLE> - --------------- (1) For the period ended September 30, 1999, diluted weighted average shares outstanding exclude the common shares issuable on exercise of stock options because inclusion would have been antidilutive. ]The presentation of the pro forma net loss per share of common stock gives effect to adjustments for federal and state income taxes as if Alamosa had been taxed as a C Corporation for the periods presented. (2) Reflects the reorganization as if it had occurred upon inception of Alamosa PCS, LLC. (3) Included in Other Data are EBITDA and Adjusted EBITDA amounts. EBITDA represents earnings before interest, income taxes, depreciation and amortization. Adjusted EBITDA represents earnings before interest, income taxes, depreciation and amortization and equity participation compensation expense. EBITDA and Adjusted EBITDA are used by management and certain investors as indicators of a company's historical ability to service debt. Management believes that increases in EBITDA and Adjusted EBITDA are indicators of improved ability to service existing debt, to sustain potential future increases in debt and to satisfy capital requirements. However, EBITDA and Adjusted EBITDA are not intended to represent cash flows for the period, nor have they been presented as alternatives to either operating income, as determined by generally accepted accounting principles, as indicators of operating performance or cash flows from operating, investing and financing activities, as determined by generally accepted accounting principles, and are thus susceptible to varying calculations. EBITDA and Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies. (4) For the purpose of calculating the ratio of earnings to fixed charges, earnings are defined as earnings or loss before income taxes and extraordinary items and fixed charges. Fixed charges are the sum of (1) interest costs, (2) amortization of deferred financing costs, and (3) one-third of operating lease rental expense (deemed to be interest). Earnings were inadequate to cover fixed charges by 923,822 and 18,341,790 for the period from July 16, 1998 (Inception) to December 31, 1998 and the nine-month period ended September 30, 1999. (5) As adjusted Balance Sheet Data reflects (a) the sale in the common stock offering of 10,714,000 shares of common stock at an initial offering price of $14.00 per share, the midpoint of the range on the cover of the common stock prospectus, less underwriting discounts and commissions and estimated offering expenses of $11.1 million, (b) the issuance of an aggregate principal amount at maturity of $ million in senior discount notes with estimated gross proceeds of $156.0 million, less underwriting discounts and commissions and estimated offering expenses of $5.0 million and (c) the prepayment of an aggregate of $75.0 million of indebtedness under the Nortel facility, consisting of the prepayment of $59.7 million outstanding on September 30, 1999 and cash equal to $15.3 million designated to prepay borrowings under the Nortel facility incurred after September 30, 1999. (6) Reflects capital lease obligations of $728,219 and other notes payable of $23,637. (7) Reflects indebtedness incurred under the Nortel facility of $59,678,288, other notes payable of $353,988 and capital lease obligations of $853,965.
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+PROSPECTUS SUMMARY This summary highlights information that we believe is especially important concerning our business and this offering of notes. It does not contain all of the information that may be important to your investment decision. You should read the entire prospectus, including "Risk Factors" and our financial statements and related notes, before deciding to invest in our notes. ALAMOSA GENERAL Alamosa is a provider of wireless personal communications services, commonly referred to as PCS, in the southwestern and midwestern United States. We are a network partner of Sprint PCS, the personal communications services group of Sprint Corporation. Sprint PCS, directly and through affiliates such as us, provides wireless services in more than 4,000 cities and communities across the country. We have the exclusive right to provide digital personal communications services under the Sprint and Sprint PCS brand names in a territory comprising approximately 8.4 million residents. These residents are primarily located in smaller cities and in markets with above average growth rates in Texas, New Mexico, Arizona, Colorado and Wisconsin. We are a development stage company with very limited operations, very limited revenues, significant losses, substantial future capital requirements and an expectation of continued significant losses. We launched Sprint PCS service in Laredo in June 1999, and have since commenced service in ten additional markets: Albuquerque, Santa Fe, El Paso, Las Cruces, Lubbock, Amarillo, Midland, Odessa, Abilene and San Angelo. Our systems cover approximately 2.7 million residents out of approximately 3.9 million total residents in those markets. We expect to cover a total of approximately 4.1 million residents by the end of 2000 and 5.5 million residents by the end of 2001, at which point we expect to have completed our build-out obligations to Sprint PCS and expect to have covered approximately 65% of the resident population in our territory. The number of residents covered by our systems does not represent the number of Sprint PCS subscribers that we expect to be based in our territory. As of December 31, 1999, approximately 31,850 Sprint PCS subscribers were based in our territory. We were formed in July 1998, as a Texas limited liability company. Prior to the closing of this offering, we will reorganize into a Delaware holding company structure. Alamosa PCS Holdings, Inc., the issuer of the notes, is a holding company for our operating subsidiaries. See "The Reorganization." Our principal executive office is located at 4403 Brownfield Highway, Lubbock, Texas 79407. Our telephone number is (806) 722-1100. STRATEGIC RELATIONSHIP WITH SPRINT PCS We believe that our strategic relationship with Sprint PCS provides significant competitive advantages. Sprint PCS is a national provider of wireless services and products. Sprint PCS's subscriber base has more than tripled in size since the end of June 1998, making Sprint PCS one of the fastest growing wireless service providers in the United States. Under our affiliation agreements with Sprint PCS, we have the exclusive right to provide wireless services under the Sprint and Sprint PCS brand names in our territory. Sprint PCS handles our billing and collections and pays us 92% of "collected revenues" from subscribers based in our territory and retains the remaining 8%, as more fully described in "Our Affiliation Agreements with Sprint PCS -- The Management Agreement -- Service Pricing, Roaming and Fees." We also receive other revenues, including Sprint PCS roaming revenues for each minute that Sprint PCS customers based outside our territory use our portion of the Sprint PCS network and 100% of revenues from handset sales. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED FEBRUARY 2, 2000 PROSPECTUS $ [ALAMOSA LOGO] ALAMOSA PCS HOLDINGS, INC. % SENIOR DISCOUNT NOTES DUE 2010 ------------------ We are offering $ aggregate principal amount at maturity of our % Senior Discount Notes due 2010. We are also currently offering 10,714,000 shares of our common stock in a separate offering. The issue price of the notes will be $ per $ principal amount at maturity, which represents a yield to maturity of %, calculated from . Interest on the notes will be payable semi-annually on and beginning , 2005. The notes will be unsecured senior obligations and will rank equally with all of our existing and future senior debt. The subsidiaries of Alamosa PCS Holdings, Inc. own substantially all of our operating assets. All of those subsidiaries will guarantee the notes on a senior subordinated basis. The guarantees will be subordinate to all of the subsidiaries' designated senior debt. We have made application to list the notes on the American Stock Exchange. ------------------ INVESTING IN THESE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 8. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------ <TABLE> <CAPTION> PER NOTE TOTAL -------- ------------ <S> <C> <C> Principal amount at maturity of the notes % $ Price to investors % $ Underwriting discount % $ Proceeds to Alamosa PCS Holdings, Inc. (before expenses) % $ </TABLE> Original issue discount on the notes will accrete from until the date of delivery. The underwriters are offering the notes subject to various conditions. The underwriters expect to deliver the notes to purchasers on or about , 2000. SALOMON SMITH BARNEY CREDIT SUISSE FIRST BOSTON LEHMAN BROTHERS , 2000 We believe that our affiliation with Sprint PCS allows us to establish high quality, branded wireless services more quickly, at a lower cost and with lower initial capital requirements than would otherwise be possible. For example, we benefit from Sprint PCS's: - Marketing. We market products and services through Sprint PCS's existing relationships with major national retailers under the highly recognizable Sprint and Sprint PCS brand names. - National Network. Customers in our territory can immediately access Sprint PCS's growing network in 280 major metropolitan areas across the country. - Advanced Technology. We believe that the technology used by Sprint PCS provides advantages in capacity and voice-quality, as well as access to advanced features such as wireless Internet access. - Handset and Equipment Availability and Pricing. Sprint PCS's purchasing leverage allows us to acquire handsets and network equipment more quickly and at a lower cost than we could without our affiliation with Sprint PCS. ATTRACTIVE TERRITORY We believe that our territory is attractive for several reasons, including: - High Growth Markets. The overall population growth rate in our territory has been approximately 42% above the national average. - Fewer Competitors. We expect to face fewer competitors in our markets than is generally the case for wireless service providers operating in more urban areas. - Opportunity for Sprint PCS Roaming Revenue. We anticipate that we will have significant roaming revenue from Sprint PCS subscribers based outside our territory who use our portion of the Sprint PCS network. ADEQUATE FUNDING TO COMPLETE OUR NETWORK Starting in June 1999, we have launched Sprint PCS service in eleven markets. We anticipate that the proceeds of our initial public offering of common stock, when combined with the committed level of debt financing from Nortel Networks, Inc., will be adequate to fund future required capital expenditures, working capital requirements, operating losses and other cash needs of our business. Further, we believe that this level of financing is adequate to achieve the objective in our business plan of covering approximately 65% of the resident population in our territory by the end of 2001 and to exceed the build-out requirements contained in our affiliation agreements with Sprint PCS. However, we may need additional capital or debt financing due to greater than expected operating losses, the addition of new markets to our territory or unanticipated increases in the capital required to build-out our portion of the Sprint PCS network. [Pictures of the inside of three of our retail store locations, the Alamosa logo and two wireless handsets] [Fold-out page showing the Alamosa logo and a map of United States showing areas where Alamosa PCS, a Sprint PCS affiliate, has the right to provide wireless services and will derive its revenues in yellow and areas where Sprint PCS and other Sprint PCS affiliates have the right to provide wireless services in red.] Sprint PCS customers can use their phones in 280 major metropolitan areas and connecting travel corridors throughout the United States. THE OFFERING Senior Discount Notes...... $ million aggregate principal amount at stated maturity of % senior discount notes due 2010. We will issue the senior discount notes at a price to investors that will yield gross proceeds to us at issuance of approximately $156.0 million. Issuer..................... Alamosa PCS Holdings, Inc. Issue Price................ % Maturity Date.............. , 2010 Accretion.................. Accretion means adjustment of the price of a note to reflect the difference between the price of a note bought at an original issue discount and the stated amount of maturity of the note. The aggregate accreted value of the senior discount notes will increase from approximately $156.0 million at issuance at a rate of %, compounded semi-annually, to a final accreted value equal to their aggregate principal amount of $ million at , 2005. Interest Rate.............. Prior to , 2005, no cash interest will accrue on the senior discount notes. The senior discount notes will accrue interest at the rate of % per annum, payable semi-annually in cash in arrears on and of each year, commencing , 2005. Subsidiary Guarantees...... The senior discount notes will be guaranteed on a senior subordinated basis by our current subsidiaries and all of our future domestic restricted subsidiaries. See "Description of Notes -- Subsidiary Guarantees." Ranking.................... The senior discount notes will be: - senior unsecured obligations of Alamosa PCS Holdings, Inc.; - equal in right of payment to all of the existing and future senior debt of Alamosa PCS Holdings, Inc.; and - senior in right of payment to all of the existing and future subordinated debt of Alamosa PCS Holdings, Inc. The guarantees will be unsecured obligations of the guarantors and will be: - subordinated in right of payment to each guarantor's obligations under the Nortel financing and other credit facilities with banks or institutional lenders, referred to as designated senior debt; - equal in right of payment to all existing and future senior subordinated debt of each guarantor; and - senior in right of payment to all existing and future subordinated debt of each guarantor. Our guarantors generate all of our operating income, and we are dependent on them to meet our obligations under the notes. See "Description of Notes -- Ranking." TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Prospectus Summary.......................................... 1 Risk Factors................................................ 8 This Prospectus Contains Forward-Looking Statements......... 21 Ratio of Earnings to Fixed Charges.......................... 22 Use of Proceeds............................................. 22 Capitalization.............................................. 23 Selected Financial Data..................................... 24 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 26 Business.................................................... 34 Our Affiliation Agreements with Sprint PCS.................. 56 Management.................................................. 65 Principal Stockholders...................................... 77 Certain Relationships and Related Transactions.............. 80 The Reorganization.......................................... 83 Regulation of the Wireless Telecommunications Industry...... 84 Description of Other Indebtedness........................... 89 Description of Notes........................................ 96 United States Federal Tax Consequences...................... 138 Underwriting................................................ 142 Legal Matters............................................... 143 Experts..................................................... 143 Where You Can Find Additional Information................... 143 Index to Financial Statements............................... F-1 </TABLE> Optional Redemption........ During the first 36 months after this offering, we may use the net proceeds from an equity offering to redeem up to 35% of the accreted value of the senior discount notes originally issued at a redemption price of % of the accreted value as of the date of redemption, provided that at least 65% of the accreted value of the senior discount notes originally issued remains outstanding immediately after the redemption. See "Description of Notes -- Optional Redemption." On or after , 2005, we may redeem all or part of the senior discount notes at redemption prices set forth under "Description of Notes -- Optional Redemption," together with accrued and unpaid interest, if any, to the date of redemption. Change of Control.......... If we experience a change of control, we will be required to make an offer to repurchase your senior discount notes at a price equal to 101% of the accreted value, if before , 2005, or 101% of the principal amount at maturity thereafter, as applicable, together with accrued and unpaid interest, if any, to the date of repurchase. See "Description of Notes -- Repurchase at the Option of Holders Upon a Change of Control." Restrictive Covenants...... The indenture governing the senior discount notes will contain covenants that, among other things and subject to important exceptions, will limit our ability and the ability of our subsidiaries and certain of our future subsidiaries to: - incur additional debt or issue preferred stock; - pay dividends, redeem capital stock or make other restricted payments or investments; - create liens on assets; - merge, consolidate or dispose of assets; - enter into transactions with affiliates; and - change lines of business. See "Description of Notes -- Certain Covenants." Original Issue Discount.... The accretion of the senior discount notes from their issue price to their principal amount at maturity will produce taxable ordinary interest income in the amount of the accretion for holders of the senior discount notes during the accretion period. The Internal Revenue Code calls this original issue discount. Thus, although interest will not be payable on the senior discount notes prior to , 2005, U.S. holders will be required to include original issue discount amounts in gross income for U.S. federal income tax purposes over the term of the senior discount notes in advance of receipt of cash payments to which such income is attributable. See "United States Federal Tax Consequences." Listing.................... We have made application to list the notes on the American Stock Exchange. Trustee.................... Norwest Bank Minnesota, N.A. Use of Proceeds............ We will use a portion of the proceeds of this offering of our senior discount notes to prepay $75.0 million of indebtedness outstanding under the Nortel credit facility. We may decide to use the remaining proceeds to: - accelerate coverage within our existing territory; - build-out additional areas within our existing territory; - expand our existing territory; - pursue additional telecommunications business opportunities or acquire other telecommunications businesses or assets; or - cover general corporate purposes. THE COMMON STOCK OFFERING We are also offering common stock in a separate initial public offering pursuant to a separate prospectus. This prospectus relates only to the offering of notes and not to the offering of common stock. SUMMARY FINANCIAL AND OPERATING DATA The financial data presented below under the captions "Statement of Operations Data," "Per Share Data," "Other Data" and "Balance Sheet Data" for, and as of the end of, the period from inception to December 31, 1998, the nine-month period ended September 30, 1999 and the period from inception to September 30, 1999 are derived from the audited financial statements of Alamosa PCS LLC, the predecessor to Alamosa PCS Holdings, Inc. These financial statements have been audited by PricewaterhouseCoopers LLP, independent certified public accountants. It is important that you also read "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements for the periods ended December 31, 1998 and September 30, 1999, the related notes and the independent auditors' report. The summary unaudited financial data presented below as of and for the period from inception to September 30, 1998 are derived from our unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements include all adjustments, consisting of normal recurring accruals, that management considers necessary for a fair presentation of financial position and results of operations. Operating results for the nine-month period ended September 30, 1999 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1999. <TABLE> <CAPTION> FOR THE PERIOD JULY 16, FOR THE PERIOD JULY 16, FOR THE NINE-MONTH FOR THE PERIOD JULY 16, 1998 (INCEPTION) 1998 (INCEPTION) PERIOD ENDED 1998 (INCEPTION) THROUGH DECEMBER 31, THROUGH SEPTEMBER 30, SEPTEMBER 30, THROUGH SEPTEMBER 30, 1998 1998 1999 1999 ----------------------- ----------------------- ------------------ ----------------------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA, SUBSCRIBER DATA AND RATIO OF EARNINGS TO FIXED CHARGES) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................ $ -- $ -- $ 2,000 $ 2,000 Cost of sales........... -- -- 1,614 1,614 Total operating expenses............. 958 401 17,634 18,592 Operating loss.......... (958) (401) (17,247) (18,206) Net loss................ (924) (400) (17,688) (18,612) PER SHARE DATA: Basic and diluted net loss per share of common stock(1)(2)... $(0.02) $(0.01) $ (0.36) $ (0.38) Pro forma net loss per share of common stock(1)(2).......... (0.02) (0.01) (0.36) (0.38) OTHER DATA: EBITDA(3)............... (956) (401) (16,311) (17,267) Adjusted EBITDA(3)...... (956) (401) (9,489) (10,445) Ratio of earnings to fixed charges(4)..... -- -- -- -- Number of subscribers... -- -- 9,850 9,850 </TABLE> <TABLE> <CAPTION> AS OF SEPTEMBER 30, 1999 AS OF ------------------------ DECEMBER 31, 1998 ACTUAL AS ADJUSTED(5) ----------------- ------- -------------- <S> <C> <C> <C> BALANCE SHEET DATA: (DOLLARS IN THOUSANDS) Cash and cash equivalents........................... $13,529 $ 7,454 $237,587 Construction in progress............................ 1,979 28,940 28,940 Property and equipment, net......................... 114 36,930 36,930 Total assets........................................ 15,674 88,412 323,585 Total debt.......................................... 752(6) 60,885(7) 157,207 Equity.............................................. 14,076 13,210 152,061 </TABLE> - --------------- (1) For the period ended September 30, 1999, diluted weighted average shares outstanding exclude the common shares issuable on exercise of stock options because inclusion would have been antidilutive. ]The presentation of the pro forma net loss per share of common stock gives effect to adjustments for federal and state income taxes as if Alamosa had been taxed as a C Corporation for the periods presented. (2) Reflects the reorganization as if it had occurred upon inception of Alamosa PCS, LLC. (3) Included in Other Data are EBITDA and Adjusted EBITDA amounts. EBITDA represents earnings before interest, income taxes, depreciation and amortization. Adjusted EBITDA represents earnings before interest, income taxes, depreciation and amortization and equity participation compensation expense. EBITDA and Adjusted EBITDA are used by management and certain investors as indicators of a company's historical ability to service debt. Management believes that increases in EBITDA and Adjusted EBITDA are indicators of improved ability to service existing debt, to sustain potential future increases in debt and to satisfy capital requirements. However, EBITDA and Adjusted EBITDA are not intended to represent cash flows for the period, nor have they been presented as alternatives to either operating income, as determined by generally accepted accounting principles, as indicators of operating performance or cash flows from operating, investing and financing activities, as determined by generally accepted accounting principles, and are thus susceptible to varying calculations. EBITDA and Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies. (4) For the purpose of calculating the ratio of earnings to fixed charges, earnings are defined as earnings or loss before income taxes and extraordinary items and fixed charges. Fixed charges are the sum of (1) interest costs, (2) amortization of deferred financing costs, and (3) one-third of operating lease rental expense (deemed to be interest). Earnings were inadequate to cover fixed charges by 923,822 and 18,341,790 for the period from July 16, 1998 (Inception) to December 31, 1998 and the nine-month period ended September 30, 1999. (5) As adjusted Balance Sheet Data reflects (a) the sale in the common stock offering of 10,714,000 shares of common stock at an initial offering price of $14.00 per share, the midpoint of the range on the cover of the common stock prospectus, less underwriting discounts and commissions and estimated offering expenses of $11.1 million, (b) the issuance of an aggregate principal amount at maturity of $ million in senior discount notes with estimated gross proceeds of $156.0 million, less underwriting discounts and commissions and estimated offering expenses of $5.0 million and (c) the prepayment of an aggregate of $75.0 million of indebtedness under the Nortel facility, consisting of the prepayment of $59.7 million outstanding on September 30, 1999 and cash equal to $15.3 million designated to prepay borrowings under the Nortel facility incurred after September 30, 1999. (6) Reflects capital lease obligations of $728,219 and other notes payable of $23,637. (7) Reflects indebtedness incurred under the Nortel facility of $59,678,288, other notes payable of $353,988 and capital lease obligations of $853,965.
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+PROSPECTUS SUMMARY This summary highlights information that we believe is especially important concerning our business and this offering of notes. It does not contain all of the information that may be important to your investment decision. You should read the entire prospectus, including "Risk Factors" and our financial statements and related notes, before deciding to invest in our notes. ALAMOSA GENERAL Alamosa is a provider of wireless personal communications services, commonly referred to as PCS, in the southwestern and midwestern United States. We are a network partner of Sprint PCS, the personal communications services group of Sprint Corporation. Sprint PCS, directly and through affiliates such as us, provides wireless services in more than 4,000 cities and communities across the country. We have the exclusive right to provide digital personal communications services under the Sprint and Sprint PCS brand names in a territory comprising approximately 8.4 million residents. These residents are primarily located in smaller cities and in markets with above average growth rates in Texas, New Mexico, Arizona, Colorado and Wisconsin. We are a development stage company with very limited operations, very limited revenues, significant losses, substantial future capital requirements and an expectation of continued significant losses. We launched Sprint PCS service in Laredo in June 1999, and have since commenced service in ten additional markets: Albuquerque, Santa Fe, El Paso, Las Cruces, Lubbock, Amarillo, Midland, Odessa, Abilene and San Angelo. Our systems cover approximately 2.7 million residents out of approximately 3.9 million total residents in those markets. We expect to cover a total of approximately 4.1 million residents by the end of 2000 and 5.5 million residents by the end of 2001, at which point we expect to have completed our build-out obligations to Sprint PCS and expect to have covered approximately 65% of the resident population in our territory. The number of residents covered by our systems does not represent the number of Sprint PCS subscribers that we expect to be based in our territory. As of December 31, 1999, approximately 31,850 Sprint PCS subscribers were based in our territory. We were formed in July 1998, as a Texas limited liability company. Prior to the closing of this offering, we will reorganize into a Delaware holding company structure. Alamosa PCS Holdings, Inc., the issuer of the notes, is a holding company for our operating subsidiaries. See "The Reorganization." Our principal executive office is located at 4403 Brownfield Highway, Lubbock, Texas 79407. Our telephone number is (806) 722-1100. STRATEGIC RELATIONSHIP WITH SPRINT PCS We believe that our strategic relationship with Sprint PCS provides significant competitive advantages. Sprint PCS is a national provider of wireless services and products. Sprint PCS's subscriber base has more than tripled in size since the end of June 1998, making Sprint PCS one of the fastest growing wireless service providers in the United States. Under our affiliation agreements with Sprint PCS, we have the exclusive right to provide wireless services under the Sprint and Sprint PCS brand names in our territory. Sprint PCS handles our billing and collections and pays us 92% of "collected revenues" from subscribers based in our territory and retains the remaining 8%, as more fully described in "Our Affiliation Agreements with Sprint PCS -- The Management Agreement -- Service Pricing, Roaming and Fees." We also receive other revenues, including Sprint PCS roaming revenues for each minute that Sprint PCS customers based outside our territory use our portion of the Sprint PCS network and 100% of revenues from handset sales. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED FEBRUARY 2, 2000 PROSPECTUS $ [ALAMOSA LOGO] ALAMOSA PCS HOLDINGS, INC. % SENIOR DISCOUNT NOTES DUE 2010 ------------------ We are offering $ aggregate principal amount at maturity of our % Senior Discount Notes due 2010. We are also currently offering 10,714,000 shares of our common stock in a separate offering. The issue price of the notes will be $ per $ principal amount at maturity, which represents a yield to maturity of %, calculated from . Interest on the notes will be payable semi-annually on and beginning , 2005. The notes will be unsecured senior obligations and will rank equally with all of our existing and future senior debt. The subsidiaries of Alamosa PCS Holdings, Inc. own substantially all of our operating assets. All of those subsidiaries will guarantee the notes on a senior subordinated basis. The guarantees will be subordinate to all of the subsidiaries' designated senior debt. We have made application to list the notes on the American Stock Exchange. ------------------ INVESTING IN THESE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 8. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------ <TABLE> <CAPTION> PER NOTE TOTAL -------- ------------ <S> <C> <C> Principal amount at maturity of the notes % $ Price to investors % $ Underwriting discount % $ Proceeds to Alamosa PCS Holdings, Inc. (before expenses) % $ </TABLE> Original issue discount on the notes will accrete from until the date of delivery. The underwriters are offering the notes subject to various conditions. The underwriters expect to deliver the notes to purchasers on or about , 2000. SALOMON SMITH BARNEY CREDIT SUISSE FIRST BOSTON LEHMAN BROTHERS , 2000 We believe that our affiliation with Sprint PCS allows us to establish high quality, branded wireless services more quickly, at a lower cost and with lower initial capital requirements than would otherwise be possible. For example, we benefit from Sprint PCS's: - Marketing. We market products and services through Sprint PCS's existing relationships with major national retailers under the highly recognizable Sprint and Sprint PCS brand names. - National Network. Customers in our territory can immediately access Sprint PCS's growing network in 280 major metropolitan areas across the country. - Advanced Technology. We believe that the technology used by Sprint PCS provides advantages in capacity and voice-quality, as well as access to advanced features such as wireless Internet access. - Handset and Equipment Availability and Pricing. Sprint PCS's purchasing leverage allows us to acquire handsets and network equipment more quickly and at a lower cost than we could without our affiliation with Sprint PCS. ATTRACTIVE TERRITORY We believe that our territory is attractive for several reasons, including: - High Growth Markets. The overall population growth rate in our territory has been approximately 42% above the national average. - Fewer Competitors. We expect to face fewer competitors in our markets than is generally the case for wireless service providers operating in more urban areas. - Opportunity for Sprint PCS Roaming Revenue. We anticipate that we will have significant roaming revenue from Sprint PCS subscribers based outside our territory who use our portion of the Sprint PCS network. ADEQUATE FUNDING TO COMPLETE OUR NETWORK Starting in June 1999, we have launched Sprint PCS service in eleven markets. We anticipate that the proceeds of our initial public offering of common stock, when combined with the committed level of debt financing from Nortel Networks, Inc., will be adequate to fund future required capital expenditures, working capital requirements, operating losses and other cash needs of our business. Further, we believe that this level of financing is adequate to achieve the objective in our business plan of covering approximately 65% of the resident population in our territory by the end of 2001 and to exceed the build-out requirements contained in our affiliation agreements with Sprint PCS. However, we may need additional capital or debt financing due to greater than expected operating losses, the addition of new markets to our territory or unanticipated increases in the capital required to build-out our portion of the Sprint PCS network. [Pictures of the inside of three of our retail store locations, the Alamosa logo and two wireless handsets] [Fold-out page showing the Alamosa logo and a map of United States showing areas where Alamosa PCS, a Sprint PCS affiliate, has the right to provide wireless services and will derive its revenues in yellow and areas where Sprint PCS and other Sprint PCS affiliates have the right to provide wireless services in red.] Sprint PCS customers can use their phones in 280 major metropolitan areas and connecting travel corridors throughout the United States. THE OFFERING Senior Discount Notes...... $ million aggregate principal amount at stated maturity of % senior discount notes due 2010. We will issue the senior discount notes at a price to investors that will yield gross proceeds to us at issuance of approximately $156.0 million. Issuer..................... Alamosa PCS Holdings, Inc. Issue Price................ % Maturity Date.............. , 2010 Accretion.................. Accretion means adjustment of the price of a note to reflect the difference between the price of a note bought at an original issue discount and the stated amount of maturity of the note. The aggregate accreted value of the senior discount notes will increase from approximately $156.0 million at issuance at a rate of %, compounded semi-annually, to a final accreted value equal to their aggregate principal amount of $ million at , 2005. Interest Rate.............. Prior to , 2005, no cash interest will accrue on the senior discount notes. The senior discount notes will accrue interest at the rate of % per annum, payable semi-annually in cash in arrears on and of each year, commencing , 2005. Subsidiary Guarantees...... The senior discount notes will be guaranteed on a senior subordinated basis by our current subsidiaries and all of our future domestic restricted subsidiaries. See "Description of Notes -- Subsidiary Guarantees." Ranking.................... The senior discount notes will be: - senior unsecured obligations of Alamosa PCS Holdings, Inc.; - equal in right of payment to all of the existing and future senior debt of Alamosa PCS Holdings, Inc.; and - senior in right of payment to all of the existing and future subordinated debt of Alamosa PCS Holdings, Inc. The guarantees will be unsecured obligations of the guarantors and will be: - subordinated in right of payment to each guarantor's obligations under the Nortel financing and other credit facilities with banks or institutional lenders, referred to as designated senior debt; - equal in right of payment to all existing and future senior subordinated debt of each guarantor; and - senior in right of payment to all existing and future subordinated debt of each guarantor. Our guarantors generate all of our operating income, and we are dependent on them to meet our obligations under the notes. See "Description of Notes -- Ranking." TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Prospectus Summary.......................................... 1 Risk Factors................................................ 8 This Prospectus Contains Forward-Looking Statements......... 21 Ratio of Earnings to Fixed Charges.......................... 22 Use of Proceeds............................................. 22 Capitalization.............................................. 23 Selected Financial Data..................................... 24 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 26 Business.................................................... 34 Our Affiliation Agreements with Sprint PCS.................. 56 Management.................................................. 65 Principal Stockholders...................................... 77 Certain Relationships and Related Transactions.............. 80 The Reorganization.......................................... 83 Regulation of the Wireless Telecommunications Industry...... 84 Description of Other Indebtedness........................... 89 Description of Notes........................................ 96 United States Federal Tax Consequences...................... 138 Underwriting................................................ 142 Legal Matters............................................... 143 Experts..................................................... 143 Where You Can Find Additional Information................... 143 Index to Financial Statements............................... F-1 </TABLE> Optional Redemption........ During the first 36 months after this offering, we may use the net proceeds from an equity offering to redeem up to 35% of the accreted value of the senior discount notes originally issued at a redemption price of % of the accreted value as of the date of redemption, provided that at least 65% of the accreted value of the senior discount notes originally issued remains outstanding immediately after the redemption. See "Description of Notes -- Optional Redemption." On or after , 2005, we may redeem all or part of the senior discount notes at redemption prices set forth under "Description of Notes -- Optional Redemption," together with accrued and unpaid interest, if any, to the date of redemption. Change of Control.......... If we experience a change of control, we will be required to make an offer to repurchase your senior discount notes at a price equal to 101% of the accreted value, if before , 2005, or 101% of the principal amount at maturity thereafter, as applicable, together with accrued and unpaid interest, if any, to the date of repurchase. See "Description of Notes -- Repurchase at the Option of Holders Upon a Change of Control." Restrictive Covenants...... The indenture governing the senior discount notes will contain covenants that, among other things and subject to important exceptions, will limit our ability and the ability of our subsidiaries and certain of our future subsidiaries to: - incur additional debt or issue preferred stock; - pay dividends, redeem capital stock or make other restricted payments or investments; - create liens on assets; - merge, consolidate or dispose of assets; - enter into transactions with affiliates; and - change lines of business. See "Description of Notes -- Certain Covenants." Original Issue Discount.... The accretion of the senior discount notes from their issue price to their principal amount at maturity will produce taxable ordinary interest income in the amount of the accretion for holders of the senior discount notes during the accretion period. The Internal Revenue Code calls this original issue discount. Thus, although interest will not be payable on the senior discount notes prior to , 2005, U.S. holders will be required to include original issue discount amounts in gross income for U.S. federal income tax purposes over the term of the senior discount notes in advance of receipt of cash payments to which such income is attributable. See "United States Federal Tax Consequences." Listing.................... We have made application to list the notes on the American Stock Exchange. Trustee.................... Norwest Bank Minnesota, N.A. Use of Proceeds............ We will use a portion of the proceeds of this offering of our senior discount notes to prepay $75.0 million of indebtedness outstanding under the Nortel credit facility. We may decide to use the remaining proceeds to: - accelerate coverage within our existing territory; - build-out additional areas within our existing territory; - expand our existing territory; - pursue additional telecommunications business opportunities or acquire other telecommunications businesses or assets; or - cover general corporate purposes. THE COMMON STOCK OFFERING We are also offering common stock in a separate initial public offering pursuant to a separate prospectus. This prospectus relates only to the offering of notes and not to the offering of common stock. SUMMARY FINANCIAL AND OPERATING DATA The financial data presented below under the captions "Statement of Operations Data," "Per Share Data," "Other Data" and "Balance Sheet Data" for, and as of the end of, the period from inception to December 31, 1998, the nine-month period ended September 30, 1999 and the period from inception to September 30, 1999 are derived from the audited financial statements of Alamosa PCS LLC, the predecessor to Alamosa PCS Holdings, Inc. These financial statements have been audited by PricewaterhouseCoopers LLP, independent certified public accountants. It is important that you also read "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements for the periods ended December 31, 1998 and September 30, 1999, the related notes and the independent auditors' report. The summary unaudited financial data presented below as of and for the period from inception to September 30, 1998 are derived from our unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements include all adjustments, consisting of normal recurring accruals, that management considers necessary for a fair presentation of financial position and results of operations. Operating results for the nine-month period ended September 30, 1999 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1999. <TABLE> <CAPTION> FOR THE PERIOD JULY 16, FOR THE PERIOD JULY 16, FOR THE NINE-MONTH FOR THE PERIOD JULY 16, 1998 (INCEPTION) 1998 (INCEPTION) PERIOD ENDED 1998 (INCEPTION) THROUGH DECEMBER 31, THROUGH SEPTEMBER 30, SEPTEMBER 30, THROUGH SEPTEMBER 30, 1998 1998 1999 1999 ----------------------- ----------------------- ------------------ ----------------------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA, SUBSCRIBER DATA AND RATIO OF EARNINGS TO FIXED CHARGES) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................ $ -- $ -- $ 2,000 $ 2,000 Cost of sales........... -- -- 1,614 1,614 Total operating expenses............. 958 401 17,634 18,592 Operating loss.......... (958) (401) (17,247) (18,206) Net loss................ (924) (400) (17,688) (18,612) PER SHARE DATA: Basic and diluted net loss per share of common stock(1)(2)... $(0.02) $(0.01) $ (0.36) $ (0.38) Pro forma net loss per share of common stock(1)(2).......... (0.02) (0.01) (0.36) (0.38) OTHER DATA: EBITDA(3)............... (956) (401) (16,311) (17,267) Adjusted EBITDA(3)...... (956) (401) (9,489) (10,445) Ratio of earnings to fixed charges(4)..... -- -- -- -- Number of subscribers... -- -- 9,850 9,850 </TABLE> <TABLE> <CAPTION> AS OF SEPTEMBER 30, 1999 AS OF ------------------------ DECEMBER 31, 1998 ACTUAL AS ADJUSTED(5) ----------------- ------- -------------- <S> <C> <C> <C> BALANCE SHEET DATA: (DOLLARS IN THOUSANDS) Cash and cash equivalents........................... $13,529 $ 7,454 $237,587 Construction in progress............................ 1,979 28,940 28,940 Property and equipment, net......................... 114 36,930 36,930 Total assets........................................ 15,674 88,412 323,585 Total debt.......................................... 752(6) 60,885(7) 157,207 Equity.............................................. 14,076 13,210 152,061 </TABLE> - --------------- (1) For the period ended September 30, 1999, diluted weighted average shares outstanding exclude the common shares issuable on exercise of stock options because inclusion would have been antidilutive. ]The presentation of the pro forma net loss per share of common stock gives effect to adjustments for federal and state income taxes as if Alamosa had been taxed as a C Corporation for the periods presented. (2) Reflects the reorganization as if it had occurred upon inception of Alamosa PCS, LLC. (3) Included in Other Data are EBITDA and Adjusted EBITDA amounts. EBITDA represents earnings before interest, income taxes, depreciation and amortization. Adjusted EBITDA represents earnings before interest, income taxes, depreciation and amortization and equity participation compensation expense. EBITDA and Adjusted EBITDA are used by management and certain investors as indicators of a company's historical ability to service debt. Management believes that increases in EBITDA and Adjusted EBITDA are indicators of improved ability to service existing debt, to sustain potential future increases in debt and to satisfy capital requirements. However, EBITDA and Adjusted EBITDA are not intended to represent cash flows for the period, nor have they been presented as alternatives to either operating income, as determined by generally accepted accounting principles, as indicators of operating performance or cash flows from operating, investing and financing activities, as determined by generally accepted accounting principles, and are thus susceptible to varying calculations. EBITDA and Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies. (4) For the purpose of calculating the ratio of earnings to fixed charges, earnings are defined as earnings or loss before income taxes and extraordinary items and fixed charges. Fixed charges are the sum of (1) interest costs, (2) amortization of deferred financing costs, and (3) one-third of operating lease rental expense (deemed to be interest). Earnings were inadequate to cover fixed charges by 923,822 and 18,341,790 for the period from July 16, 1998 (Inception) to December 31, 1998 and the nine-month period ended September 30, 1999. (5) As adjusted Balance Sheet Data reflects (a) the sale in the common stock offering of 10,714,000 shares of common stock at an initial offering price of $14.00 per share, the midpoint of the range on the cover of the common stock prospectus, less underwriting discounts and commissions and estimated offering expenses of $11.1 million, (b) the issuance of an aggregate principal amount at maturity of $ million in senior discount notes with estimated gross proceeds of $156.0 million, less underwriting discounts and commissions and estimated offering expenses of $5.0 million and (c) the prepayment of an aggregate of $75.0 million of indebtedness under the Nortel facility, consisting of the prepayment of $59.7 million outstanding on September 30, 1999 and cash equal to $15.3 million designated to prepay borrowings under the Nortel facility incurred after September 30, 1999. (6) Reflects capital lease obligations of $728,219 and other notes payable of $23,637. (7) Reflects indebtedness incurred under the Nortel facility of $59,678,288, other notes payable of $353,988 and capital lease obligations of $853,965.
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the section entitled "Risk Factors," our financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. CHAPARRAL NETWORK STORAGE, INC. ------------------ We develop and market high performance products that facilitate the movement of data between networked storage devices. We are focused primarily on developing products for use in the emerging market for Storage Area Networks, or SANs. SANs are high-speed data networks that interconnect storage systems and servers using a widely accepted protocol known as Fibre Channel. Our products include storage routers and external Redundant Array of Independent Disks, or RAID, controllers for open systems network storage solutions. Storage routers connect servers and storage systems in a SAN to enable communication among devices that use different protocols for the input/output, or I/O, of data. RAID controllers distribute blocks of data across multiple disks to improve performance and ensure availability of data. In the last decade, there has been a dramatic increase in the volume of data created, processed and accessed throughout the business enterprise. This growth has placed a significant strain on storage systems used in the backup, sharing and management of this data. In addition, organizations have recognized the importance and value of enterprise data as mission-critical to their employees, customers and suppliers and are demanding rapid and reliable access to data 24 hours a day, seven days a week. The congestion caused by users trying to access large amounts of data across local area networks, or LANs, has created a bottleneck between the server and the storage devices. The limitations of today's most commonly used server-attached storage architecture, where storage devices are typically connected to only one server using an I/O protocol called the Small Computer System Interface, or SCSI, have exacerbated this bottleneck. As a result, enterprises are demanding a faster, more efficient and manageable means to interconnect new and existing servers, storage devices and LANs. Our Intelligent Storage Routers facilitate the interconnection of SANs with existing SCSI-based servers and storage systems. Our external RAID controllers dynamically distribute data across multiple hard disk drives to increase data transfer speeds and deliver fault tolerance. Our products are designed to provide a high level of performance, availability and functionality. They incorporate a common high-performance hardware platform and foundation software layer that enable a wide range of SAN applications. Key benefits of our solutions include the following: - Increased Performance. We believe our products provide industry-leading performance based on throughput, as measured by both megabytes per second and I/O transfers per second. - High Availability and Reliability. Our products increase the accessibility and protection of enterprise data by providing redundant I/O paths to storage devices. - Improved SAN Performance with New Applications. Our products are designed using a highly flexible and modular embedded software architecture, enabling us to quickly and cost-effectively implement new SAN applications. - Differentiation and Manageability. We have developed a robust, well-defined user interface called a Common Application Programming Interface, or CAPI, that enables our customers to incorporate their proprietary functionalities into our products to differentiate their solutions in the market. In addition, our customers can design their own graphical user interface, or GUI, to manage our equipment in conjunction with their solutions. We sell our products to original equipment manufacturers, or OEMs, including Eurologic Systems, MicroNet Technology, Inc., Qualstar Corporation, Quantum Corporation/ATL Products, Inc., Trimm Technologies, Inc. and Xyratex International Ltd., as well as to distribution partners, including Arrow Electronics, Inc., Bell Microproducts, Inc., CONSAN Inc. and Hammer, PLC. Through March 31, 2000, we sold approximately 6,000 units of our Intelligent Storage Routers and external RAID controllers. We intend to capitalize on our Fibre Channel technological expertise to address the growing SAN market. In addition, we will continue to focus on expanding and developing distribution relationships with leading computer and storage systems OEMs, as well as with value added resellers and systems integrators, to increase our geographic coverage and address new markets. We intend to continue to work closely with our strategic partners and participate in industry alliances to facilitate the widespread adoption of SANs and SAN applications. We were incorporated in January 1998 as Chaparral Technologies, Inc., a Delaware corporation. In July 1999, we changed our name to Chaparral Network Storage, Inc. to reflect our emphasis on providing network storage products. Our principal executive offices are located at 1951 S. Fordham Street, Longmont, Colorado 80503, and our telephone number is (303) 684-3200. The address of our Web site is www.chaparralnet.com. Information contained on our Web site should not be considered part of this prospectus. This prospectus contains trademarks and trade names of other companies. THE OFFERING Common stock offered................ shares Common stock outstanding after this offering............................ shares Use of proceeds..................... We intend to use the net proceeds from this offering for working capital and other general corporate purposes, including expenditures for research and development, sales and marketing efforts and potential acquisitions of or investments in complementary businesses, technologies or products. Proposed Nasdaq National Market symbol.............................. CHAP The number of shares of common stock outstanding as of March 31, 2000 excludes: - 4,322,707 shares subject to outstanding options as of March 31, 2000, with a weighted average exercise price of $1.89 per share; - 300,000 shares subject to an outstanding warrant as of March 31, 2000, with an exercise price of $20.00 per share; and - 11,683,920 shares available for grant under stock option, stock incentive and stock purchase plans. ------------------ Our fiscal year ends on March 31; thus, a reference to "fiscal 2000" or "fiscal year 2000," for example, is to the fiscal year ended March 31, 2000. In addition, except as otherwise indicated, information in this prospectus is based on the following assumptions: - our convertible preferred stock will convert to 15,128,853 shares of common stock upon completion of this offering; - the underwriters' over-allotment option will not be exercised; and - we will file our amended and restated certificate of incorporation. SUMMARY FINANCIAL DATA The following tables summarize our financial data. For a more detailed explanation of our financial condition and operating results, you should read "Management's Discussion and Analysis of Financial Condition and Results of Operations," our financial statements and the notes to those statements included in this prospectus. <TABLE> <CAPTION> FISCAL YEAR ENDED MARCH 31, --------------------- 1999 2000 ----------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue..................................................... $ 237 $ 8,842 Cost of sales............................................... 156 4,590 Gross profit................................................ 81 4,252 Loss from operations........................................ (3,623) (7,942) Net loss.................................................... $(3,695) $(7,969) Net loss per share -- basic and diluted..................... $ (1.40) $ (0.68) Weighted average shares..................................... 2,640 11,701 Pro forma net loss per share -- basic and diluted........... $ (0.31) Pro forma weighted average shares........................... 25,519 </TABLE> Pro forma basic and diluted net loss per share is computed using the weighted average shares of common stock outstanding, including the pro forma effects of the automatic conversion of all outstanding series of preferred stock into common stock upon completion of this offering as if the conversion occurred on April 1, 1999, or at the date the preferred stock was actually issued, if later. Per share and weighted average share amounts exclude shares of common stock that may be issued upon exercise of outstanding options and warrants or that may be issued under our various stock compensation plans. For additional information regarding these shares, see note 1 to the table in "Capitalization." The following table is a summary of our balance sheet as of March 31, 2000. The as adjusted column reflects our receipt of the estimated net proceeds from the sale of the shares of common stock we are selling in this offering at an assumed initial public offering price of $ per share, after deducting underwriting discounts and commissions and estimated offering expenses. <TABLE> <CAPTION> AS OF MARCH 31, 2000 -------------------- AS ACTUAL ADJUSTED -------- --------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $16,707 $ Working capital............................................. 18,949 Total assets................................................ 23,521 Total stockholders' equity.................................. 20,159 </TABLE>
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+PROSPECTUS SUMMARY This summary is not complete and may not contain all of the information that may be important to you. You should read the entire prospectus carefully, including the financial information and related notes, before making an investment decision. Except as otherwise indicated, information in this prospectus assumes that the underwriters do not exercise their over-allotment option and gives effect to a 3-for-2 stock split for our previously issued shares of common stock. REAL MEDIA Real Media provides comprehensive Internet advertising solutions for web sites and advertisers throughout the world. Web sites use our products and services to increase ad sales, to improve pricing for their ad space and to manage the targeting and delivery of advertisements to site users. We focus on developing relationships with leading web sites worldwide whose brands are widely recognized and trusted by Internet users. These relationships allow us to offer advertisers opportunities to target their ads to large online audiences in environments that are favorable to generating user interest and response. Our complementary products and services for Internet advertising consist of: The Real Media Network. We provide ad sales representation services to over 1,000 web sites in 33 countries, which we call the Real Media Network. Our global sales forces sells the ad space of our network sites to advertisers through a sales process that emphasizes the unique qualities of each site, including brand and user base characteristics. During 1999, over 900 advertisers throughout the world purchased ad space on our network, including British Telecom, Ford Motor Company, IBM, Intel, Microsoft, Swisscom and UBS. Open AdStream(TM). Our proprietary ad management software is used by over 700 web sites worldwide to manage the planning, delivery, measurement and reporting of ad campaigns on their sites. Open AdStream provides web sites the ability to target advertisements to individual site users and maintain exclusive ownership of information collected from users as they interact with site content and advertisements. Our top 25 web sites use Open AdStream to deliver over six billion advertisements per month. Media and Marketing Services. We offer a suite of media and marketing services to web sites that include user base analysis and profiling tools, as well as consulting and other services. We currently provide our products and services to over 1,400 web sites in 40 countries, including key operations in the United States (founded May 1995), Switzerland (February 1996), Germany (October 1997), the United Kingdom (October 1997) and France (January 1998). Our clients include web sites of: <TABLE> <CAPTION> EUROPE NORTH AMERICA LATIN AMERICA ASIA/PACIFIC AFRICA ------ ------------- ------------- ------------ ------ <S> <C> <C> <C> <C> Excite@Home The New York Times Universo Online (UOL) Lycos Times Media The Times Qualcomm Eudora Infosel South China Morning Post iAfrica Suddeutsche Zeitung The Weather Channel El Tiempo Apple Daily Independent Online Swiss Online Bloomberg O Globo Pacific Internet SABC Bonjour Playboy El Mercurio Netvigator Mweb </TABLE> STRATEGY We believe that as the number of web sites throughout the world continues to increase, those with widely recognized and trusted brands will become increasingly attractive to advertisers. Our objective is to be the leading provider of comprehensive products and services that enable branded web sites worldwide to increase revenue from Internet advertising. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED MARCH 22, 2000 7,100,000 Shares [REALMEDIA LOGO] REAL MEDIA, INC. Common Stock ------------------ Prior to this offering, there has been no public market for our common stock. The initial public offering price of the common stock is expected to be between $9.00 and $11.00 per share. We have applied to list our common stock on the Nasdaq Stock Market's National Market and on the SWX New Market of the SWX Swiss Exchange under the symbol "RLMD." The underwriters have an option to purchase a maximum of 1,065,000 additional shares to cover over-allotments of shares. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 4. <TABLE> <CAPTION> UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS REAL MEDIA, INC. ------------------- ------------------- ------------------- <S> <C> <C> <C> Per Share................................ $ $ $ Total.................................... $ $ $ </TABLE> Delivery of the shares of common stock will be made on or about , . Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON BANC OF AMERICA SECURITIES LLC LAZARD FRERES & CO. LLC The date of this prospectus is , . The key elements of our strategy are to: - expand operations in existing global markets and extend into new markets; - add selected sites to our network; - enhance and extend Open AdStream(TM) capabilities; - further develop media and marketing services; - continue to develop cross-media platforms for our products and services; and - pursue selected acquisitions and joint ventures. HISTORY OF SIGNIFICANT LOSSES We have a history of significant losses, including a pro forma net loss of approximately $41.4 million for the year ended December 31, 1999, including the amortization of goodwill and intangibles of $28.1 million for that year. As of December 31, 1999, we had an accumulated deficit of $14.2 million. We anticipate incurring substantial losses and negative operating cash flow in the foreseeable future. For more information regarding these and other risks involved in investing in our common stock, you should read the "Risk Factors" section in this prospectus beginning on page 4. OUR RELATIONSHIP WITH PUBLIGROUPE We maintain a close strategic relationship with our principal stockholder, PubliGroupe, which will own approximately 63.1% of our common stock immediately after this offering. PubliGroupe is a leading seller of print advertising throughout the world, with approximately $1.5 billion in revenue in 1999 and a 100-year history of media representation. As we have expanded globally, we have taken advantage of PubliGroupe's relationships with publishers, media buyers and advertisers, and its extensive resources in and operating knowledge of local markets worldwide. Our relationship with PubliGroupe also provides cross-promotional marketing opportunities, such as jointly planned and executed ad campaigns that use both print and online media. ------------------------ Our principal executive offices are located at 260 Fifth Avenue, New York, NY 10001, and our telephone number at that location is (212) 725-4537. We maintain a web site at www.realmedia.com. The information on our web site is not part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered......................... 7,100,000 shares Common stock to be outstanding after this offering................................... 46,719,013 shares Use of proceeds.............................. For general corporate purposes and to repay loans from our principal stockholders. Proposed Nasdaq National Market and SWX New Market symbol.............................. RLMD </TABLE> The information in the above table excludes: - 2,242,809 shares subject to outstanding stock options at a weighted average exercise price of $2.74 as of December 31, 1999; and - 149,907 shares issuable upon exercise of unissued stock options under our 1999 employee stock option plan as of December 31, 1999. [REALMEDIA(TM) LOGO] A GLOBAL INTERNET ADVERTISING NETWORK, FEATURING INTERNATIONAL BRAND NAME WEB SITES, PROPRIETARY TECHNOLOGY AND MEDIA AND MARKETING SERVICES. SUMMARY CONDENSED AND PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION OF REAL MEDIA, INC. The following table presents summary condensed and pro forma combined condensed financial information with respect to Real Media and has been derived from (1) the audited financial statements of Real Media, Inc. for the three-year period ended December 31, 1999, included elsewhere in this prospectus, (2) the audited financial statements of Real Media, Inc. for the year ended December 31, 1996, which are not included in this prospectus, and (3) the unaudited pro forma combined condensed financial information of Real Media included elsewhere in this prospectus that gives effect to the business combination of Real Media, Inc. and Real Media Europe completed on March 15, 2000. The information set forth below should be read in conjunction with "Unaudited Pro Forma Combined Condensed Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the financial statements of Real Media, Inc. and the notes thereto and the combined financial statements of Real Media Europe and the notes thereto, included elsewhere in this prospectus. Pro forma information assumes the completion of the business combination of Real Media, Inc. and Real Media Europe as of January 1, 1999. The weighted average shares outstanding used to calculate pro forma net loss per share assumes the issuance of 24,189,788 shares of Real Media's common stock and 675,000 shares of Real Media's common stock issuable upon the conversion of Real Media's Series A Convertible Preferred Stock, which were issued in connection with the business combination, as if such shares were outstanding from the beginning of the periods presented. Pro forma as adjusted information assumes the completion of the business combination and the completion of this offering as of December 31, 1999, assuming the sale of 7,100,000 shares of our common stock at an assumed initial public offering price of $10.00 per share (the midpoint of the range of initial public offering prices set forth on the cover page of this prospectus), after deducting the underwriting discounts and estimated offering expenses, and the application of the net proceeds of this offering. <TABLE> <CAPTION> ACTUAL PRO FORMA ------------------------------------------------- ------------ YEAR ENDED DECEMBER 31, YEAR ENDED ------------------------------------------------- DECEMBER 31, 1996 1997 1998 1999 1999 ---------- ---------- ---------- ---------- ------------ (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS INFORMATION: Revenue.............................................. $ 93 $ 553 $ 2,103 $ 8,115 $ 24,843 Cost of revenue...................................... 72 335 868 3,522 15,380 ---------- ---------- ---------- ---------- ------------ Gross profit......................................... 21 218 1,235 4,593 9,463 Operating expenses................................... 491 1,997 3,389 14,323 22,470 Amortization of goodwill and intangibles............. -- -- -- -- 28,136 ---------- ---------- ---------- ---------- ------------ Loss from operations................................. $ (470) $ (1,779) $ (2,154) $ (9,730) $ (41,143) ========== ========== ========== ========== ============ Net loss............................................. $ (476) $ (1,797) $ (2,116) $ (9,803) $ (41,430) ========== ========== ========== ========== ============ Net loss per share: Basic and diluted.................................. $ (0.23) $ (0.20) $ (0.18) $ (0.70) $ (1.06) ========== ========== ========== ========== ============ Weighted average shares outstanding: Basic and diluted.................................. 2,034,740 8,953,151 11,773,880 14,038,458 38,903,246 ========== ========== ========== ========== ============ </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ------------------------------------ PRO PRO FORMA ACTUAL FORMA AS ADJUSTED ------ ----------- ----------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET INFORMATION: Cash and cash equivalents................................... $1,389 $ 7,154 $ 71,814 Total assets................................................ 6,513 103,012 167,542 Total long-term debt........................................ -- -- -- Total stockholders' equity (deficiency)..................... (6,066) 89,746 154,276 </TABLE> AD NETWORK We provide ad sales representation to a global network of over 1,000 web sites, featuring brand name sites in over 30 countries. The focus of our network is to increase advertising revenue and enhance the brand value for each web site in the network. Advertisers purchase ad inventory on one web site or across multiple web sites, depending upon the size and type of audience they are trying to reach. We also offer customized opportunities that combine online and offline advertising space. Over 900 advertisers throughout the world have used our network, including British Telecom, Ford Motor Company, IBM, Intel, Microsoft, Swisscom and UBS. TECHNOLOGY [Open Adstream Logo] Open AdStream, our proprietary ad management software, provides web sites with the technology platform to manage all aspects of targeted ad campaigns, including campaign planning, delivery, measurement and reporting. Open AdStream's unique architecture enables it to maintain high performance levels during periods of extremely high web site traffic, scaling to over 100 million advertisements per web site, per day. Over 700 web sites worldwide use Open AdStream to power targeted ad delivery and measure campaign performance. Our top 25 clients use Open AdStream to serve over 6 billion ads per month on their sites. MEDIA SERVICES We offer a suite of media and marketing services to Web sites that include user base analysis and profiling tools, as well as consulting and other services. REALMEDIA(TM) [ARTWORK] [The New York Times on the web Logo] [EUDORA Logo] [Bloomberg.com Logo] [THE WEATHER CHANNEL Logo] [Playboy Online Logo] North America [Artwork] [MAP of North America & South America] Latin America [INFOSEL Logo] [EL TIEMPO Logo] [O GLOBO Logo] [el mercurio Logo] [UOI Logo]
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001101706_partminer_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001101706_partminer_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read this prospectus summary together with the more detailed information contained in the remainder of this prospectus carefully, including the risk factors and the consolidated financial statements and notes, before you decide to buy shares of our common stock. PartMiner, Inc. We are a leading provider of business-to-business services for the procurement of electronic components worldwide. We provide proprietary Internet-based applications to buyers of electronic components to facilitate their product selection and purchasing processes. We act as a market maker, meaning we source electronic components and resell them to our customers, in the electronic components spot market. The spot market is the market in which buyers purchase electronic components on an unscheduled, as needed basis. Buyers often use our market maker services when their usual sources of supply fail, which occurs on a regular basis due to market inefficiencies. The price that buyers are willing to pay in this spot market is not dictated by the intrinsic value of the needed component, but instead reflects opportunity costs that may include costs associated with a potential interruption of the manufacturing process. We address market inefficiencies and generate revenues in the spot market by purchasing components against a customer's buy order and reselling these components to the customer. We have developed an extensive electronic supplier network that tracks pricing and availability of electronic components at over 4,000 suppliers worldwide. We have been a market maker in the electronic components spot market since 1993, and in 1999 we had a customer base of over 5,000 customers in 52 countries. In mid-1998, we began an initiative to move our business to the Internet with the release of our Internet procurement agent, a software application that can be downloaded from the Internet. Our procurement agent allows users to source electronic components from multiple suppliers online and facilitates the online purchase of these components. As of March 31, 2000, there were over 100,000 registered users of our procurement agent. We believe the success of our procurement agent has created significant awareness of our brand and services, and the number of our customers in 1999 more than doubled over 1998, excluding new customers attributable to our acquisitions in 1999. To further automate transaction activity between buyers and sellers of electronic components, we are developing the Free Trade Zone, a suite of Internet-based software applications, including an Internet marketplace, which we expect to commercially launch in the second half of 2000. In addition to the current functionality provided by our Internet products, our Free Trade Zone will enable component buyers to use the Internet to transact business with their preferred suppliers by transmitting requests for quotation, receiving quotes, negotiating terms, and placing orders online. The Free Trade Zone will automatically detect when these preferred suppliers are unable to provide a requested component, and, in such event, we will source the component and quote a price to the buyer. We intend to offer our Free Trade Zone to users at no charge, and expect that our revenues will continue to be generated primarily from acting as a market maker in the spot market. We believe that the supply and demand information we will obtain from activity on our Free Trade Zone will significantly enhance our ability to source components for our customers. Over time, we expect to fully automate our market making function as part of the Free Trade Zone. We also provide other services designed to further reduce inefficiencies in the electronic components supply chain, including access to our online CAPSXpert databases, which contain over 12,000,000 component part numbers; our component and supplier management software and services; and our excess inventory management services. We believe providing this broad range of services affords us with a significant competitive advantage over those companies that do not provide as broad a range of services. We expect in the future to integrate these services into our Free Trade Zone to provide additional value to our users and further increase adoption of our Free Trade Zone. Our objective is to be the leading online provider of business-to-business services for the procurement of electronic components. Our strategy to achieve this objective includes the following key elements: . establishing our Free Trade Zone as the leading network for the procurement of electronic components; . expanding our brand awareness; . leveraging our existing expertise and infrastructure; and . pursuing strategic relationships and strategic acquisitions. We were incorporated in New York on September 9, 1993. Our principal executive offices are located at 432 Park Avenue South, New York, New York 10016 and our telephone number is (212) 725-8884. Our Web site is located at www.partminer.com. Information contained on, or linked to, our Web site is not part of this prospectus. The Offering <TABLE> <S> <C> Common stock offered................................ 5,000,000 shares Common stock to be outstanding after this offering.. 72,468,805 shares Use of proceeds..................................... For working capital and other general corporate purposes, including sales and marketing activities, capital expenditures and research and development. Proposed Nasdaq National Market symbol.............. PTMR </TABLE> The number of shares to be outstanding after this offering is based on the number of shares of common stock outstanding as of April 4, 2000 and excludes: . 3,679,075 shares of common stock issuable upon the exercise of outstanding options at a weighted average exercise price of $3.78 per share; and . 30,555 shares (at an assumed initial public offering price of $9.00 per share) subject to outstanding options with an exercise price equal to the initial public offering price. Except as otherwise noted in this prospectus, all information contained in this prospectus: . assumes that the underwriters' over-allotment option is not exercised; and . reflects the automatic conversion of all outstanding shares of our mandatorily redeemable convertible preferred stock into 20,915,105 shares of common stock upon the closing of this offering. ------------ PartMiner(R), Free Trade Zone(TM), PartMiner Free Trade Zone(TM), Electronic Commerce Free Trade Zone(TM), Fast. Simple. Complete. Which part don't you get?(TM), Market-Trak(TM), Accu-Trak(TM), Req-Trak(TM), CAPS(R), ItemQuest(R), CAPSXpert(TM) and IQXpert (and design)(TM) are our trademarks and service marks. This prospectus also includes the tradenames, service marks and trademarks of other companies whose mention in this prospectus is with due recognition of the rights of these companies and without any intent to misappropriate such names or marks. Summary Consolidated Financial Data (in thousands, except per share data) The following tables set forth summary consolidated historical financial data and certain pro forma financial data for our business during the years and as of the date indicated. The 1999 pro forma consolidated statement of operations data gives effect to the acquisitions of Accurate Components Inc. and its affiliate and of IQXpert Holdings Inc. as if these acquisitions had been completed on January 1, 1999. Each acquisition was accounted for under the purchase method of accounting. <TABLE> <CAPTION> Year Ended December 31, ---------------------------------------------------------- Pro forma 1995 1996 1997 1998 1999 1999 ------- ------- ------- -------- --------- ----------- <S> <C> <C> <C> <C> <C> <C> Consolidated Statement of Operations Data: Total revenues.......... $ 5,990 $ 8,389 $18,255 $ 20,655 $ 41,503 $ 76,439 Cost of revenues........ 4,079 5,821 12,737 14,711 29,669 50,074 ------- ------- ------- -------- -------- -------- Gross profit............ 1,911 2,568 5,518 5,944 11,834 26,365 Total operating expenses............... 1,545 2,853 5,094 6,074 28,251 74,606 ------- ------- ------- -------- -------- -------- Income (loss) from operations............. 366 (285) 424 (130) (16,417) (48,241) Net income (loss)....... 315 (343) (117) (1,850) (17,931) (49,683) Accretion of mandatorily redeemable convertible preferred stock........ -- -- -- -- (12,075) (12,075) ------- ------- ------- -------- -------- -------- Net income (loss) applicable to common shareholders........... $ 315 $ (343) $ (117) $ (1,850) $(30,006) $(61,758) ======= ======= ======= ======== ======== ======== Basic and diluted net income (loss) per common share........... $ 0.02 $ (0.02) $ -- $ (0.06) $ (0.82) $ (1.30) ======= ======= ======= ======== ======== ======== Weighted average shares used in computing basic and diluted net income (loss) per common share.................. 20,000 20,000 24,219 30,000 36,676 47,400 ======= ======= ======= ======== ======== ======== </TABLE> <TABLE> <CAPTION> December 31, 1999 -------------------------------- Pro forma Actual Pro forma as adjusted -------- --------- ----------- <S> <C> <C> <C> Consolidated Balance Sheet Data: Cash and cash equivalents....................... $ 5,063 $ 52,063 $ 90,063 Working capital................................. 7,718 54,718 92,718 Total assets.................................... 146,901 193,901 231,901 Long-term debt, net of current portion.......... 4,331 1,331 1,331 Mandatorily redeemable securities............... 68,038 -- -- Total shareholders' equity...................... 54,602 172,640 210,640 </TABLE> The pro forma consolidated balance sheet data give effect to the following: . the issuance of 10,302,905 shares of Series B mandatorily redeemable convertible preferred stock for $50.0 million consummated on February 16, 2000; . the repayment of $3.0 million of indebtedness outstanding at December 31, 1999 with a portion of the proceeds of that issuance; . the automatic termination of the mandatorily redeemable feature of our mandatorily redeemable common stock upon the closing of this offering; and . the automatic conversion of all outstanding shares of our Series A and B mandatorily redeemable convertible preferred stock into 20,915,105 shares of common stock upon the closing of this offering. The pro forma as adjusted data reflect our receipt of the estimated net proceeds from our sale of 5,000,000 shares of our common stock in this offering at an assumed initial public offering price of $9.00 per share after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
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+SUMMARY This summary highlights selected information contained elsewhere in this prospectus. To better understand the distribution and Semiconductor, you should read the entire prospectus carefully, including the risk factors and financial statements. WHY THIS PROSPECTUS WAS SENT TO YOU This prospectus is being delivered by C-Cube Microsystems Inc. to you because you were an owner of C-Cube Microsystems common stock on April 25, 2000. This entitles you to receive a distribution of one share of the common stock of a new company, C-Cube Semiconductor Inc. or Semiconductor, a Delaware corporation, for each share of C-Cube Microsystems common stock owned by you on April 25, 2000. Although no action is required on your part to cause this to happen and you do not have to pay cash or other consideration to receive these shares, the distribution of these shares to you will have certain tax and other consequences, so please read the information in this document carefully. You do not need to surrender shares of C-Cube Microsystems common stock to receive Semiconductor common stock in the distribution. The number of shares of C-Cube Microsystems common stock you own will not change as a result of the distribution. Semiconductor was formed in conjunction with C-Cube Microsystems' merger with Harmonic Inc. This prospectus describes the business of Semiconductor, the relationship between C-Cube Microsystems and Semiconductor, how this transaction benefits C-Cube Microsystems and its stockholders and provides other information to assist you in evaluating the benefits and risks of holding or disposing of your shares of Semiconductor common stock. BUSINESS OF SEMICONDUCTOR Semiconductor designs, develops, has manufactured and sells semiconductors, software and systems for digital video applications. As a major supplier of such products, Semiconductor has played a role in enabling the growth of digital video. Semiconductor is focused on working with its original equipment manufacturer customers to enable key applications in its consumer and communications target markets. In the consumer market, it is focused on playback and recordable video compact disc and digital video disc as well as digital VHS players. The communications market targets interactive set-top boxes, broadcast encoders, which compress data into a more compact form making the data easier to store and transmit, and other emerging appliances. Users of these products will be able to record hours of digital video disc-quality video obtained from any video source, whether television, video cassette recorder, digital video camcorder or analog camcorder. Once they have recorded the video, they will be able to edit and play back the video on standard personal computers and store the resulting video to digital video disc, web pages, e-mail, recordable compact disc or personal computer hard-disk drives. RELATIONSHIP BETWEEN C-CUBE MICROSYSTEMS AND SEMICONDUCTOR All Semiconductor common stock is being distributed to the C-Cube Microsystems stockholders as described in this prospectus. C-Cube Microsystems will have no ownership interest in Semiconductor after the distribution. Semiconductor's board of directors will consist of five to seven directors. At the outset, all of the Semiconductor directors, with the exception of Semiconductor's new Chief Executive Officer, will be former directors of C-Cube Microsystems. Upon consideration of the proposed merger of C-Cube Microsystems and Harmonic, Harmonic will succeed to all obligations of C-Cube Microsystems. REASONS FOR THE DISTRIBUTION The merger agreement with Harmonic contemplates the sale or distribution of Semiconductor immediately prior to and in connection with the merger. After thorough consideration, the board of directors of C-Cube Microsystems determined that a distribution of shares of Semiconductor was in the best interest of the stockholders of C-Cube Microsystems. The C-Cube Microsystems board of directors considered a number of factors in determining to recommend approval of the spin-off of Semiconductor. THE DISTRIBUTION Each C-Cube Microsystems stockholder will receive one share of Semiconductor common stock for every share of C-Cube Microsystems common stock held. Distribution and Transfer Information. Boston EquiServe, L.P. will act as the distribution and transfer agent for the distribution. The distribution agent will mail stock certificates beginning on or about the distribution date. Record Date, Distribution Date. The record date for the distribution will be the close of business on April 25, 2000. No Fractional Shares. No fractional shares of Semiconductor common stock will be distributed. Fractional shares of Semiconductor common stock will be aggregated and sold by Boston EquiServe to provide cash to holders in lieu of such fractional shares. Trading Market. Semiconductor has applied to have the Semiconductor common stock included for quotation on the Nasdaq National Market under the symbol "CUBE." TAX TREATMENT OF THE DISTRIBUTION We have been advised by Ernst & Young LLP that in their opinion, the distribution will qualify as a tax-free distribution to C-Cube Microsystems stockholders, although C-Cube Microsystems itself will recognize substantial gain in connection with the distribution as a result of Section 355(e) of the Internal Revenue Code because it is undertaken as part of the same plan as the Harmonic merger, which will result in a change of control of C-Cube Microsystems, and also as a result of certain internal restructuring transactions undertaken prior to the distribution of the Semiconductor stock. This opinion is based on certain representations by C-Cube Microsystems and Semiconductor and is subject to certain limitations and qualifications, however, and you are urged to read the information set forth under the caption "Material Federal Income Tax Considerations". This opinion does not preclude the Internal Revenue Service from successfully asserting that the distribution is taxable to our stockholders. Accordingly, please consult your tax advisor with respect to the tax consequences of the distribution to you. INVESTOR CONTACT Semiconductor and C-Cube Microsystems stockholders with questions about the distribution should contact Walt Walczykowski, Chief Financial Officer, at C-Cube Microsystems' principal executive offices at 1778 McCarthy Boulevard, Milpitas, California 95035; telephone (408) 490-8000. This contact information will remain the same after the distribution.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001102233_aucxis_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001102233_aucxis_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE COMMON SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS." THE COMPANY e-Auction was originally organized by the filing of articles of incorporation (the "Articles of Incorporation") with the Secretary of State of the State of Nevada on January 8, 1998 under the name "Kazari International, Inc." ("Kazari"). The Articles of Incorporation of Kazari authorized the issuance of forty million (40,000,000) shares of common stock at a par value of $0.001 per share. On February 26, 1999, Kazari, e-Auction Global Trading Inc. (Barbados) ("e-Auction (Barbados)") and QFG Holdings Limited ("QFG") entered into a share exchange agreement (the "Share Exchange Agreement"). At the time of the Share Exchange Agreement, QFG was the owner of thirty four million five hundred thousand (34,500,000) common shares in the capital of e-Auction (Barbados) (the "e-Auction (Barbados) Shares"), which e-Auction (Barbados) Shares represented all of the issued and outstanding common shares in the capital of e-Auction (Barbados). Pursuant to the terms of the Share Exchange Agreement, Kazari purchased the e-Auction (Barbados) Shares in exchange for thirty four million five hundred thousand (34,500,000) common shares in the capital of Kazari being issued from treasury to the shareholders of e-Auction (Barbados) on a one for one basis. Kazari had no viable business activities at the time of the Share Exchange Agreement. On June 10, 1999, Kazari amended its articles of incorporation by filing a Certificate of Amendment of Articles of Incorporation (the "Certificate") with the Secretary of the State of Nevada, which Certificate amended Kazari's name to "e-Auction Global Trading Inc." and increased the number of authorized shares of common stock from forty million (40,000,000) shares of common stock, par value $0.001 to two hundred and fifty million (250,000,000) shares of common stock, par value $0.001. e-Auction currently has a wholly owned subsidiary, e-Auction (Barbados), which in turn has one wholly owned subsidiary, e-Auction Global Trading Inc. (Canada). The Company has a 50.01% ownership interest in e-Auction Austrailasia Pay Limited, an Austrailian Company. The Company also owns e-Auction Belgium N.V., directly, which in has one wholly owned subsidiary, Schelfhout Computer Systemen N.V. ("Schelfhout"), a Belgium company. See "Business - Acquisition of Schelfhout". SUMMARY CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> PERIOD FROM JANUARY 8, 1998 TO YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1999 ----------------------------------------- Audited Unaudited <S> <C> <C> Consolidated Statement of Operations Data: Total Revenues $0 $685 Income - (Loss) from Operations $(291,569) $(1,537,432) Income - (Loss) $(291,569) $(1,537,432) Pro forma basic and diluted net income per share $(0.068) $(0.045) Shares used in computing pro forma basic and diluted net income per share 4,266,704 34,432,329 <CAPTION> DECEMBER 31, 1999 ACTUAL <S> <C> CONSOLIDATED BALANCE SHEET DATA Cash and cash equivalents $100,181 Long-term debt, less current portion $0 Total shareholders' equity $(50,319) </TABLE> - ---------------------- <PAGE> (1) Based on the number of shares outstanding as of December 31, 1999. Excludes 4,300,000 shares issuable upon exercise of outstanding stock options as of December 31, 1999 granted under the Company's Stock Option Plan. See "Management -- Stock Option Plan." RISK FACTORS IN ADDITION TO OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS IN EVALUATING INVESTMENT IN THE COMPANY AND BEFORE PURCHASING ANY COMMON SHARES OFFERED HEREBY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. WHEN USED IN THIS PROSPECTUS, THE WORDS "WILL", "ANTICIPATE", "BELIEVE", " ESTIMATE", "EXPECT" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENT MAY DIFFER MATERIALLY FROM THE RESULTS, PERFORMANCE OR ACHIEVEMENT DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW IN "RISK FACTORS", "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, A REFERENCE TO e-AUCTION OR THE COMPANY INCLUDES e-AUCTION AND ALL OF ITS SUBSIDIARIES INCLUDING SCHELFHOUT. e-AUCTION SHOULD BE CONSIDERED SPECULATIVE DUE TO THE NATURE OF THE BUSINESS IN WHICH e-AUCTION WILL BE ENGAGED, ITS EARLY STATE OF DEVELOPMENT AND THE DEGREE OF RELIANCE e-AUCTION PLACES ON THE EXPERTISE OF MANAGEMENT. SPECIFICALLY, WITH THE COMPLETION OF THE SCHELFHOUT ACQUISITION, e-AUCTION'S BUSINESS IS SUBJECT TO NUMEROUS RISK FACTORS, INCLUDING BUT NOT LIMITED TO THE FOLLOWING: e-AUCTION'S LIMITED OPERATING HISTORY AND EVOLVING BUSINESS MODEL Although the completion of the acquisition of Schelfhout provides the Company with more extensive operating knowledge, e-Auction has a limited operating history under its current business model upon which it can be evaluated. There can be no assurance that the Company will be successful in addressing the risks inherent in its business model and the failure to do so could have a material adverse effect on the Company's business, operating results and financial condition. DEPENDENCE ON EMERGING MARKET FOR APPLICATIONS e-Auction's software products are based on programming languages, which to date have been used primarily for specialized applications on the desktop. The future success of e-Auction will depend, in large part, on the acceptance of Internet based applications for wide spread commercial use in server based environments. DEPENDENCE ON MARKET ACCEPTANCE OF e-AUCTION PACKAGED APPLICATIONS The vast majority of e-Auction's revenues will be derived from the implementation of packaged applications around the perishable commodity auction process. e-Auction's success will depend on the acceptance of financial services and settlement services application software and services by the market, as well as e-Auction's ability to enhance its products and services to meet the evolving needs of customers on a timely basis. There can be no assurance of the market's acceptance of e-Auction's solutions or e-Auction's ability to meet customers' needs. INTENSE COMPETITION The e-commerce business to business market is highly competitive, is rapidly changing, and is significantly affected by new product introductions and geographical regional market growth. Barriers to entry into this market are relatively low and e-Auction expects that competition will intensify in the future. Specific factors upon which e-Auction competes include, but are not limited to, functionality of its applications and services, technological sophistication, ease of use, timing for implementation, quality of support and services, price and breadth of experience. e-Auction believes that it will compete favorably on all of these competitive factors. However, there remains significant risk that competitive forces may effect e-Auction's ability to compete and generate revenue. Some of the potential competitors to e-Auction in the fish commodity space are: Fishmonger, Gofish, French Fish, Nieaff-Smidt and OES. In the flower commodities space: WCOL, American Clock, Nieaff-Smidt and OES. In the fruits and vegetables commodities space: WCOL, Nieaff-Smidt and OES. <PAGE> RISKS ASSOCIATED WITH PAST AND FUTURE ACQUISITIONS e-Auction intends to engage in selective acquisitions of perishable commodity businesses in the future, which may include software vendors, auction houses and information technology service companies. There are no assurances that e-Auction will be able to identify suitable acquisition candidates available for sale at reasonable prices, complete any acquisitions or successfully integrate any acquired business, including Schelfhout when completed, into e-Auction's operations. RISKS ASSOCIATED WITH ADDITIONAL FINANCING e-Auction intends to raise additional financing, which financing is critical in furthering its business plan. There are no assurances that e-Auction will be successful in capitalizing the company and therefore the business plan may not be able to be executed as stated herein. THE PROPOSED OPERATIONS OF e-AUCTION ARE SPECULATIVE The success of e-Auction's proposed plan of operation depends to a great extent on the operations, financial condition and management of Schelfhout and other target companies. While business combinations with entities having established operation histories are preferred, there are no assurances that e-Auction will be successful in locating candidates meeting such criteria. In the event that e-Auction completes business combinations, the success of the e-Auction's operations will depend on the management of the target companies and numerous other factors. BROAD MANAGEMENT DISCRETION AS TO USE OF PROCEEDS A substantial portion of the net proceeds to be received by the Company in connection with the offering is allocated to working capital and general corporate purposes. Accordingly, management will have broad discretion with respect to the expenditure of such proceeds. Purchasers of Common Shares offered hereby will be entrusting their funds to the Company's management, upon whose judgment they must depend, with limited information concerning the specific working capital requirements and general corporate purposes to which the funds will ultimately be applied. See "Use of Proceeds." UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY RIGHTS The Company's success depends, in part, upon the protection of its proprietary rights in its products, technology and trade secrets. The Company relies on a combination of patent, copyright, and trademark laws, confidentiality procedures and licensing arrangements to protect its proprietary rights. There can be no assurance, however, that the confidentiality and license agreements on which the Company relies to protect its trade secrets and proprietary technology will be adequate. Further, the laws of certain countries in which the Company does business, do not protect the Company's proprietary rights to the same extent as the laws of the United States. Legal protections of the Company's proprietary rights may be ineffective in such countries. Policing unauthorized use of the Company's products is difficult, and litigation to defend and enforce the Company's intellectual property rights could result in substantial costs and diversion of resources. Despite the Company's efforts to safeguard and maintain its proprietary rights both in the United States and abroad, there can be no assurance that the Company will be successful in doing so, or that the steps taken by the Company in this regard will be adequate to deter misappropriation or independent third party development of the Company's technology or to prevent an unauthorized third party from copying or otherwise obtaining and using the Company's products or technology. Any failure in the protection of the Company's proprietary rights could have a material adverse effect on the Company's business, financial condition and results of operations. As the number of industry-specific packaged application and service vendors in the industry increases and the functionality of these products further overlaps, software development and services companies like the Company may increasingly become subject to claims of infringement or misappropriation of the intellectual property rights of others. There can be no assurance that third parties will not assert infringement or misappropriation claims against the Company in the future with respect to current or future products. Any claims or litigation, with or without merit, <PAGE> could be time-consuming, result in costly litigation, diversion of management's attention and cause product shipment delays or require the Company to enter into royalty or licensing arrangements. Such royalty or licensing arrangements, if required, may not be available on terms acceptable to the Company, if at all, which could have a material adverse effect on the Company's business, financial condition and results of operations. Adverse determinations in such claims or litigation could also have a material adverse effect on the Company's business, financial condition and results of operations. RAPID TECHNOLOGICAL CHANGE; RISKS OF DEVELOPMENT; DEPENDENCE ON NEW PRODUCTS AND SERVICES The Company currently has a substantial number of products and services under development. There can be no assurance that the Company will not experience difficulties that delay or prevent the successful development of these new services. In most cases, substantial expenses will be incurred prior to any payment by customers. Rapid technological change, dynamic demands and frequent introductions of new products and product enhancements characterize the market for the Company's services. Customer requirements for services can change rapidly as a result of innovations and changes within the computer hardware and software industries and the customers' vertical markets, the introductions of new products and technologies and the emergence, evolution or widespread adoption of industry standards. The actual or anticipated introduction of new services can render existing services obsolete or unmarketable or result in delays in the purchase of such services. The Company's future success will depend in large part on its ability to improve its current services and to develop and market new services that address these changing markets and market requirements on a timely basis. There can be no assurance that the Company will be successful in developing and marketing any new services, that the Company will not experience difficulties that delay or prevent the successful development, introduction or marketing of such services or that any new services will adequately address market requirements and achieve market acceptance. If the Company is unable, for technological or other reasons, to develop new services in a timely manner in response to, among other things, changing market conditions or customer requirements, the Company's business, operation results and financial condition will be materially adversely affected. Although the Company has no current plans to the contrary, there can be no assurance that the Company's future services will be similar to, or bear any resemblance to, its current services. USE OF PROCEEDS The Company is not receiving any of the proceeds from the sale of the Shares being registered hereunder. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain any future earnings of its business, and therefore does not anticipate paying any cash dividends in the foreseeable future. CAPITALIZATION The following table sets forth as of December 31, 1999 (i) the actual capitalization of the Company; (ii) the capitalization of the Company giving pro forma effect to the issuance of Common Shares on the acquisition of Schelfhout; and (iii) the pro forma capitalization of the Company as adjusted to reflect the issue of 16,885,447 common shares of the Company on the exercise of Special Warrants issued in the Special Warrant Transaction <PAGE> <TABLE> <CAPTION> DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1999 1999 -------------------------------------------------------------- ACTUAL(i) WITH SCHELFHOUT (ii) WITH WARRANTS (iii) (UNAUDITED) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> Stockholders' equity: Common Shares, no par value, 250,000,000 authorized: 39,820,000 issued and outstanding, actual..... $39,820 $43,456 $60,394 Contributed Surplus.................................... $235,930 $6,232,292 $14,511,260 Retained earnings (Deficit)............................ $(1,829,001) $(1,829,001) $(1,829,001) ------------ ------------ ------------ Total shareholders' equity......................... $(1,553,251) $4,446,749 $12,742,653 ------------ ------------ ------------ </TABLE> - -------------------------- (1) See Notes to Consolidated Financial Statements. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with the Company's consolidated financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. The consolidated statement of operations data for the period from January 8, 1998 to December 31, 1998 and the 12 month period ended December 31, 1999, and the consolidated balance sheet data at December 31, 1998 and 1999 are derived from the audited consolidated financial statements included elsewhere in this Prospectus. Historical results are not necessarily indicative of results to be expected in the future. <TABLE> <CAPTION> --------------------------------------------- PERIOD FROM INCORPORATION ON YEAR ENDED JANUARY 8, 1998 TO DECEMBER 31, 1999 DECEMBER 31, 1998 CONSOLIDATED STATEMENT OF OPERATIONS DATA: <S> <C> <C> Revenue: $0 $685 Expense: Salaries and Benefits $- $646,370 Legal $23,005 $87,345 Sales, General and Administration $218,564 $804,402 --------------------------------------------- Net Income (Loss) $(291,569) $(1,537,432) <CAPTION> --------------------------------------------- CONSOLIDATED BALANCE SHEET DATA: 1998 1999 <S> <C> <C> Cash $100,181 $301,164 Deposit in Schelfhout $- $1,000,000 Total Assets $102,181 $1,371,911 Payables and Accruals $152,500 $1,725,162 Loan Payable $- $1,000,000 Shareholders' Equity $(50,319) $(1,553,251) </TABLE> <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF e-AUCTION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," AND ELSEWHERE IN THIS PROSPECTUS. SELECTED FINANCIAL INFORMATION The Company's consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles. The following table sets forth selected financial information of the Company extracted from the Company's unaudited and audited consolidated financial statements. <TABLE> <CAPTION> STATEMENT OF OPERATIONS DATA: - -------------------------------------------------------------------------------------------------- 1999 (1) 1998 (2) - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- <S> <C> <C> Salaries and Benefits $646,370 $- - -------------------------------------------------------------------------------------------------- Legal $87,345 $23,005 - -------------------------------------------------------------------------------------------------- Sales, General and Administration $804,402 $218,564 - -------------------------------------------------------------------------------------------------- Loss $(1,537,432) $(291,569) - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Loss per Common Share $(0.045) $(0.068) - -------------------------------------------------------------------------------------------------- Weighted Average Common Shares Outstanding 34,432,329 4,266,704 - -------------------------------------------------------------------------------------------------- Accumulated deficit $(1,829,001) $(50,319) - -------------------------------------------------------------------------------------------------- <CAPTION> BALANCE SHEET DATA: - -------------------------------------------------------------------------------------------------- As at December 31 - -------------------------------------------------------------------------------------------------- 1999 (1) 1998 (2) - -------------------------------------------------------------------------------------------------- <S> <C> <C> - -------------------------------------------------------------------------------------------------- Cash $301,164 $100,181 - -------------------------------------------------------------------------------------------------- Deposit in Schelfhout $1,000,000 $- - -------------------------------------------------------------------------------------------------- Total Assets $1,371,911 $102,181 - -------------------------------------------------------------------------------------------------- Payables and Accruals $1,725,162 $152,500 - -------------------------------------------------------------------------------------------------- Loan Payable $1,000,000 $- - -------------------------------------------------------------------------------------------------- Shareholders' Equity $(1,553,251) $(50,319) - -------------------------------------------------------------------------------------------------- </TABLE> (1) This information was extracted from the Company's unaudited financial statements contained in this prospectus. (2) This information was extracted from the Company's audited financial statements contained in this prospectus. LIQUIDITY AND CAPITAL RESOURCES Changes in non-cash operating accounts at December 31, 1999 was $1,061,869 compared to $2,500 for the previous period from January 8, 1998 to December 31, 1998. The increase in non-cash operating accounts was due to an increase in payables of $861,869. The company also increased its amount due to Ventures North Investment Partners by $860,793. Prior to the completion of the January fund raising, Ventures North Investment Partners has been funding the day to day operations of the Company. The amounts are payable on demand and bear interest at 0% per annum. At year end the Company held cash of $301,164. Subsequent to year end the Company raised an additional $2.5 million, net of expenses, through a special warrant financing and $2.2 million convertible debenture financing, the proceeds of which are being used to complete the Schelfhout acquisition and to fund ongoing operations. See "Business - Completion of Debenture Offering". RESULTS OF OPERATIONS <PAGE> Nineteen ninety nine was a year of business development for e-Auction. The company spent considerable time and effort in defining its market space and in acquiring Schelfhout Computer Systemen N.V. (which closed on January 7, 2000). During the year the company spent $1,537,432 in operating expenses (compared to $241,569 for the period of January 8, 1998 (date of incorporation) to December 31, 1999). The majority of these costs were in relation to business development efforts. On February 26, 1999 Kazari International, Inc. was involved in a Share Exchange Agreement with e-Auction Global Trading Inc. (Barbados) and Kazari International, Inc. subsequently changed its name to e-Auction Global Trading Inc. The financial effect of the purchase of e-Auction Global Trading Inc. is accounted for as a reverse takeover, as the shareholders of e-Auction Global Trading Inc. (Barbados) now control e-Auction Global Trading Inc. - - RESEARCH AND DEVELOPMENT On February 1, 1999, e-Auction (Barbados) acquired the internet auctioning software, technology and other intellectual property assets of Generated Solutions Ltd. ("GSL"). GSL had been providing its propriety internet auctioning technology to a number of auction houses conducting electronic auctions. On February 1, 1999, e-Auction (Barbados) acquired the intellectual property assets of National Electronic Marketing Inc. ("NEMI"). NEMI assets included the exclusive rights to market GSL's internet auctioning software outside of North America and non-exclusive North American rights. Upon the completion of the Share Exchange Agreement, e-Auction acquired the rights to market and exploit the GSL and NEMI technologies. - - SELLING, GENERAL AND ADMINISTRATIVE Selling, General and Administrative increased from $218,564 in 1998 to $804,402 in 1999. The 1999 SG&A is consistent with the Company's business development growth. In June, with the continued growth the Company hired David Hackett as the Chief Financial Officer. Mr. Hackett is responsible for the Finance and Administration department as well as the day to day operations of the Company. In January 2000, with the completion of the Schelfhout acquisition, the Company hired Daniel McKenzie as the Chief Executive Officer and the Chairman of the Board. - - RISKS AND UNCERTAINTIES e-Auction's business plan is largely dependent upon the perishable commodity auction marketplace and the business to business electronic commerce marketplace. This marketplace has been experiencing a dramatic increase in size over the past few years. The Company believes in the strengths of its capabilities, and in its ability to adapt to changes in this marketplace environment. However there is no assurance that the perishable commodity auction marketplace and the business to business electronic commerce marketplace will continue to exist or that the skills of the Company will not become obsolete, or be circumvented. Due to the significant and rapid technological changes in the perishable commodity auction marketplace and the business to business electronic commerce there can be no assurance that the introduction of new products or the development of technologies by other entities will not render the Companies products and services obsolete or unmarketable. - - OUTLOOK e-Auction will continue to focus on delivering to the perishable commodity auction marketplace and the business to business electronic commerce marketplace. Management is committed to grow by providing products and services that meet the needs of its customer base. BUSINESS e-Auction is a development stage company with the principal objective to be a provider of real time, electronic auction and related financial services to auctioneers selling commodities. e-Auction's market strategy is <PAGE> to become a world leader in the electronic perishable commodity auctions in the short term, and expand its world leadership into the electronic commodity auctions in the longer term. According to Forrester Research Inc.1 ("Forrester"), the on-line auction market is divided into the following four categories; (i) commodity auctions; (ii) business consignment auctions; (iii) consumer auctions; and (iv) private auctions. e-Auction will specialize in commodity auctions, which Forrester estimates to account more than 50% of the total value of business auction transactions. [GRAPHIC] THE EMERGING ELECTRONIC AUCTION MARKET The on-line auction model has emerged as a significant channel and electronic commerce methodology in the business to consumer market ("B2C"), also referred to as "Independent Auctions", with such companies as eBay, Onsale, uBid and Bid.com currently providing such services. However, according to Forrester, the real potential for electronic auctions lies in the business to business market ("B2B") also referred to as "Commodity Auctions". Forrester predicts the trade in Commodity Auctions will reach US$32.2 billion by the year 2002 versus only US$5.5 billion dollars for Independent) Auctions. e-Auction was founded to capitalize on the market opportunity to provide B2B electronic auction services. On February 1, 1999, e-Auction (Barbados) acquired the internet auctioning software, technology and other intellectual property assets of Generated Solutions Ltd. ("GSL"). GSL had been providing its propriety internet auctioning technology to a number of auction houses conducting electronic auctions. On February 1, 1999, e-Auction (Barbados) acquired the intellectual property assets of National Electronic Marketing Inc. ("NEMI"). NEMI assets included the exclusive rights to market GSL's internet auctioning software outside of North America and non-exclusive North American rights. Upon the completion of the Share Exchange Agreement, e-Auction acquired the rights to market and exploit the GSL and NEMI technologies. There are a number of components to the e-Auction/GSL trading platform, as discussed below: DYNAMIC TRADE SERVER(S) These server applications are written in Java (and/or C++). They are the multi-threaded engines that manage all dynamic trading (auctioning). They support English and Dutch style auctioning as well as bid/offer and bid/ask trading. They also support reverse or procurement auctions. <PAGE> The servers communicate to the client through sockets, RMI (Remote Method Invocation) and/or HTML pages (Java Server Pages). The C++ implementation of the trade server must be hosted on a Windows NT platform. The Java implementations of the trade servers are platform independent and may be hosted on any computer platform that provides a Java Virtual Machine version 1.1.7 or above. DYNAMIC TRADE CLIENT(S) There are different trade clients depending on the style of dynamic trade server used. For Dutch, English and Procurement auctions, the client is either a Java applet or application. For bid/offer auctions, the client is provided as HTML pages hosted on a web site. The bid/ask trading server will support both a Java client and HTML page interface. TRADE INFO CATALOGUE The trade info catalogue is the repository that contains all lot listings for the sales that are scheduled on the platform. This data is managed by a SQL database and can be accessed through the trade info manager. The information is also accessed by the trade servers when the auctions are running. TRADE INFO MANAGER The trade info manager is available as a Java application or as a set of HTML pages (JSP/Servlet based). It is used to maintain the information contained in the trade info catalogue. The info manager provides a generic interface through which an auction house may enter the lot information for their sales and configure their sale parameters. TRADE ACCOUNTING SERVER As auction sales are completed, the data from those sales is summarized and copied to the trade accounting server. This repository and interface is used to provide billing information for customer settlement with e-Auction. This is not the settlement of the auction sale itself, but rather the transactional fees due to e-Auction for the use of the platform. TRADE HISTORY SERVER As auction sales are completed, the data from those sales is moved to the trade history server. This repository and interface is used to provide historical analysis of the auction results. It provides a JSP/Servlet interface to produce historical reports. TRADE SETTLEMENT SYSTEM The trade settlement system for any particular dynamic trader (auction house) typically includes invoice printing for buyers, cheque printing for sellers, collection or deduction of commissions, insurance fees, taxes, etc. It may also include lot delivery scheduling and lot grading or inspection processes. There is no generic system for trade settlement, but rather there is a framework that is tailored to each dynamic trader (auction house). The system can be web-based (HTML, Java Applet) or client-based (Java or other application). FINANCIAL SERVICES INTERFACE Integration to e-Auction's financial services back-end will be offered through an integration interface. This interface will allow a dynamic trader to host the financial services on a web-site or access them through e-Auction's web site(s). e-Auction believes that an good opportunity awaits the Company which can successfully integrate and efficiently deliver the various components and services of a dynamic global trading solution. e-Auction intends to deliver such a global trading system in the form of an entirely new distribution channel which will: <PAGE> (i) improve economic efficiency in the management of sales and distribution; (ii) improve information flow and product availability to potential purchasers; and (iii) lower the cost of sales by exploiting internet technologies and sharing a technology platform. e-Auction has the potential to be successful and profitable because it is targeting low risk established high volume B2B auction and commodity exchange markets. e-Auction's high value and high margin transactional revenue model will help ensure sustainable growth for the long term. REVENUE FROM FINANCIAL SERVICE e-Auction's intention is not to disintermediate the auction house, but rather make the process more transparent to those involved in the auction process. Currently, there are multiple steps in the auction process (from the actual auction to providing foreign exchange services, settlement services, the insurance of goods in transit and the delivery of the goods). Therefore, individual buyers and sellers have to arrange the ancillary services around the auction themselves. e-Auction proposes to provide a cradle to grave solution for the buyers and sellers. Initially, e-Auction will focus on the financial services component which includes foreign exchange services and settlement services. With the acquisition of Schelfhout, the Schelfhout computer system will continue to provide software solutions to an existing customer base with international trade. The "new" Schelfhout system will allow individual buyers to conduct their auction purchases on the Internet in their own domestic currency. e-Auction will generate revenue from both the foreign exchange and the settlement services. SCHELFHOUT COMPUTER SYSTEMEN N.V. Schelfhout was acquired by the Company on January 10, 2000. See "Business - Acquisition of Schelfhout". When Schelfhout was established in 1983, it focused on two market sectors: (i) the computerization of auctions; and (ii) automation for the preservation of perishable products. As an ancillary to the auction system, a modular graphic display panel was developed by Schelfhout in 1992 and added to the product range. As one of the world's leading solutions provider for perishable commodity (fish, flower, fruits and vegetables) auction houses, Schelfhout has developed over 150 electronic trading systems for numerous selling organizations all over the world. Schelfhout delivers the tools to bring together supply and demand under optimum conditions and thus create a better market situation. Because of its experience in the marketing of perishable goods and the development of customized hardware and software solutions in this niche market, Schelfhout takes pride in its unsurpassed knowledge of the sector of which it has now become Europe's leading manufacturer. Schelfhout has developed a range of controllers with microprocessors, customized for the following market segments : * ULO (ultra low oxygen) preservation of hard fruit, * Short-term preservation of soft fruit, exotic fruit, vegetables, plants and flowers, and * General temperature control for preservation of deep- frozen and cooled products. Schelfhout's controllers are also used to control condensers, gas analysis, energy management, etc. Schelfhout has developed a graphic modular display panel on which text, logos and drawings can be displayed. This innovative concept offers numerous advantages over standard systems: * unlimited dimensions, <PAGE> * storage capacity of more than 100 graphic images, and * various special effects are included as standard: scrolling, blinking and animation via fast displays of successive images [GRAPHIC] EURONET PORTALS As the acquisition of Schelfhout has been completed, e-Auction and Schelfhout are to jointly launch EuroNet Trading Portals which can be described as pan-European networks targeted to link Schelfhout's existing standalone European systems, which currently trade approximately US$7 billion dollars in perishable commodities per year. The networks will be launched into the following three vertical markets: - - 38 Fish Auctions Approximately US $2.0 billion in trade volume annually - - 29 Fruits and Vegetables Auctions Approximately US $2.4 billion in trade volume annually - - 11 Flower Auctions Approximately US $2.4 billion in trade volume annually The EuroNet Trading Portals will link existing Schelfhout clients using the Internet, extranet and X.25 networks, as well as clients interested in migrating to Internet Protocol ("IP") based networks. The EuroNet Trading Portals for fish, fruit, vegetables and flower will consist of the development of European auction networks which will offer financial settlement services and foreign exchange services as their main services. The Internet will enable individual buyers to participate in the auction process remotely. The current European landscape of auctions is highly fragmented. This fragmentation has not allowed for economies of scale to occur as each auction house has been saddled with expenses. These expenses will be reduced significantly with the implementation of e-Auction's business proposition. e-Auction will link existing stand-alone auction houses in each perishable commodity vertical, which in turn will benefit from the centralization of ancillary services around the auction process, such as foreign exchange services and financial settlement services. Stand-alone auction houses currently do credit checks and receive letters of credit for each buyer. The buyers, in turn, must repeat the process with each auction house they deal with. e-Auction will eliminate these redundancies by implementing a centralized financial settlement solution which will benefit all the parties involved. <PAGE> [GRAPHIC] The solution will make it possible for a remote buyers to participate in auctions using their own currency while the auction houses and producers will also be paid in their own local currencies. Hence, a foreign currency service is an integral part of the bundled financial services offered by e-Auction. The whole financial settlement for both buyer and seller (auction house and producer) should be as understandable and as customer-friendly as possible. All of these services will be offered on the basis of a transaction fee. The advantage with this cost structure is that auctions will not need to make substantial investments in Information Technology ("IT") and infrastructure. The use of these services is therefore a variable cost. When a network has been established with the Schelfhout customers, it is the objective of e-Auction to extend that network to include the remaining European auctions which are not currently Schelfhout's clients, as well as adding additional international demand. <PAGE> BENEFITS OF EURONET TRADING PORTALS [GRAPHIC] Benefits to Auction Houses on Network * Increased numbers of buyers and sellers; * Focuses on core competency rather than issues such as credit checks and limits; * Offers value added service; * Offers competitive advantage over other European auction houses; and, * Serves as a deterrent for non-payment, since only buyers with credit approval may participate in the auctions. Benefits to Buyers on Network * Need only one letter of credit or a single escrow account; * Can purchase from all the auction houses on the network; * Receive better quality product; and, * Better selection available. Benefits to Seller on Network * Better prices through transparency; * Increased number of purchasers; and * Guaranteed payment. INTELLECTUAL PROPERTY The Company relies primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary technology. For example, the Company licenses its software pursuant to signed license agreements, which impose certain restrictions on the licensee's ability to utilize the software. Additionally, the Company seeks to avoid disclosure of its trade secrets, including requiring those persons with access to the Company's proprietary information to execute confidentiality agreements and restricting access to the Company's source code. The Company seeks to protect its software, <PAGE> documentation and other written materials under trade secret and copyright laws, which afford only limited protection. The Company currently has no patents or patent applications pending. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products, obtain or use information that the Company regards as proprietary or use or make copies of the Company's products in violation of license agreements. Policing unauthorized use of the Company's products is difficult. In addition, the laws of many jurisdictions do not protect the Company's proprietary rights to as great an extent as do the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology. To date, the Company has not been notified that its products infringe the proprietary rights of any third parties, but there can be no assurance that third parties will not claim that the Company's current or future products infringe such rights. The Company expects that developers of object-oriented technology will be increasingly subject to infringement claims as to the number of products, competitors and patents in the Company's industry segment grows. Any such claim, whether meritorious or not, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements might not be available on terms acceptable to the Company or at all, which could have a material adverse effect upon the Company's business, operating results and financial condition. COMPETITION The electronic auction market is highly competitive, is changing rapidly, and is significantly affected by new product and service introductions. Companies are increasing the demand for industry-specific solutions to meet their needs in providing products and services to customers and trading partners. Barriers to entry into this market are relatively low, and the Company expects that competition will intensify in the future. The market environment in which the Company operates is extremely dynamic and is characterized by constantly evolving standards and new market entrants. The Company's primary competition currently comes from traditional auction suppliers of hardware and software services such as OES and Palm-Nieaf. OES is North Americas Largest traditional auction builder specialising on flowers and tobacco. Palm-Nieaf is Europe oldest auction builder. The company once dominated the space, now it has 30 installations left predominantly in flowers and fish. The Company's secondary competition comes from new internet companies such as World Commerce On-line (WCOL), Decofrut, Farms.com, Pan European Fish Auction (PEFA), Vertical Net, Moai, OpenSite Technologies, FairMarket-SM-, Inc, Ariba and Trade'ex, Gofish, Fishmonger, FreeMarkets and many other. A brief description is included below: WCOL delivers Internet-based, global e-commerce solutions to large international organisations and worldwide vertical industries. Decofrut: provides the verification of the quality of fruits shipped into the world's largest port, Rotterdam, and Philadelphia. Farms.com will shortly be offering a Bid-Ask marketplace. Commodity traders will be able to participate in Real Time Bid-Ask trading with bids exchanged instantaneously. Pan European Fish Auction (PEFA): operates a network of electronic Fish Auctions spread over Europe. These auctions are linked together and accessible to the buyers via the internet, thus creating a virtual marketplace on a " business-to-business" level. VerticalNet, Inc. is a creator and operator of vertical trade communities. VerticalNet leverages the interactive features and global reach of the Internet to create multi-national, targeted business-to-business communities. Moai provides commerce solutions for the Internet. Moai provides companies with the technology and services for customized online auctions and trading exchanges. OpenSite Technologies: provides online auction solutions. Since 1996, OpenSite has offered online auction software with quick implementation and ease of management. FairMarket-SM-, Inc. is a provider of networked, online dynamic pricing solutions that are designed to allow customers to expand their distribution channels and create new online revenue opportunities. Their primary service offering is an outsourced, private-label auction solution that is used by some of merchants and portals on the Web. Ariba and Trade'ex: the evolution of the Internet economy and the creation of new Digital Marketplaces will <PAGE> streamline the commerce process and totally transform the way businesses exchange goods, services, and information. Sorcity is an Internet hosted, business-to-business reverse-auction service for buyers and sellers of both direct and indirect items. Respond.co is a online shopping service, a way of matching buyers and sellers of a wide range of products and services. Gofish: creates a single resource for everyone connected with the seafood industry. Where buyers and sellers can do business faster and easier than ever before--with features like real-time pricing and up-to-date credit reporting. FishMonger is based adjacent to the bustling seafood industry of Seattle, the Puget Sound, and the North Pacific. It has been developed by combining the talent from the seafood industry with exceptional expertise from the world of e-commerce. FreeMarkets creates business-to-business online auctions for buyers of industrial parts, raw materials, commodities and services. Since 1995, it has created auctions for goods and services in more than 50 product categories, including injection molded plastic parts, commercial machinings, metal fabrications, chemicals, printed circuit boards, corrugated packaging and coal. Many of the Company's competitors have longer operating histories, significantly greater financial, technical, marketing and other resources than the Company, greater name recognition, more strategic relationships and a larger installed base of customers. In addition, certain competitors have well-established relationships with current or potential customers of the Company. As a result, the Company's competitors may be able to devote greater resources to the development, promotion and sale of their services, may have more direct access to corporate decision-makers based on previous relationships and may be able to respond more quickly to new or emerging technologies and changes in customer requirements. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressure will not have a material adverse effect on its business, operating results and financial condition. EMPLOYEES The Company considers its labour relations to be good and, none of its employees is covered by a collective bargaining agreement. As of February 1, 2000 e-Auction has thirty five full time employees and five part time employees and independent contractors. e-Auction is currently dependent upon Daniel McKenzie, President, C.E.O. and Chairman of e-Auction, Luc Schelfhout, President of Schelfhout Computer System N.V. and David Hackett, the Chief Financial Officer of e-Auction and Shane Maine for its success. Mr. Maine has agreed to allocate a portion of his time to the activities of e-Auction without cash compensation but has agreed to accept stock options granted as discussed below. None of the Company's employees is represented by a labor union, and the Company considers its employee relations to be good. Competition for qualified personnel in the Company's industry is intense, particularly among software development and other technical staff. The Company believes that its future success will depend in part on its continued ability to attract, hire and retain qualified personnel. FACILITIES e-Auction currently has no properties and has not entered into any agreements to acquire any properties. e-Auction has offices located at 181 Bay Street, Suite 3730, BCE Place, Toronto, Ontario, Canada, M5J 2T3 and at Bormte 204/A, Stekene, Belgium 9190. The offices at 181 Bay Street are leased by Venture North Investment Partners Inc. ("Ventures North") from which e-Auction sublets office space. e-Auction has not entered into a lease agreement and pays all rental charges on a month to month basis. As part of the Schelfhout acquisition, the land and building were removed from the company prior to the acquisition. As part of the acquisition, Schelfhout shall be entitled to remain on the premises where Schelfhout currently operates and carries on business for a period of twelve (12) months from January 7, 2000 on a rent free basis and that following such twelve (12) month period, Schelfhout shall lease the building at a rate of 2,400 BEF per square metre for office space, 1,800 BEF per square metre for the work room and 1,200 per square metre for the warehouse, for a term of 10 years, which terms of the lease can be considered as normal at January 7, 2000. <PAGE> LEGAL PROCEEDINGS Except as described below, e-Auction is not presently a party to any litigation, nor to the knowledge of the board of directors is there any litigation threatened against e-Auction. (i) An action (the "Action") was commenced by Icon Capital Corporation (the "Plaintiff") in the United States District Court - Central District of California on November 17, 1999 against John Andrews, e-Auction Global Trading Inc. (a Nevada Corporation), e-Auction Global Trading Inc. (a Barbados Corporation), e-Medsoft.com, e-Net Global Financial Services, Inc., Kazari International, Inc., Shane Maine, Shaun Maine, John McLennan, QFG Holdings Limited, Ventures North International Inc, Jeff Wheeler, 582976 BC Ltd. and Sanga International, Inc. ("Sanga") as a nominal defendant. The Action is a shareholder derivative action brought on behalf of the nominal defendant Sanga. The Plaintiff, on behalf of Sanga, alleges that the defendants damaged Sanga by: (i) engaging in conversion; (ii) engaging in fraud; (iii) interfering with Sanga's prospective business advantage; (iv) breach of contract; (v) violating California usury laws; and (vi) breach of fiduciary duty. As such, the Plaintiff claims that the defendants' actions have not only damaged Sanga, but also the Plaintiff and the remaining shareholders of Sanga totaling as much as $100 million dollars. The Plaintiff also seeks a preliminary and permanent injunction restraining and enjoining all defendants from: (i) using the proprietary internet auction software of Sanga; (ii) using the proprietary financial services technology of Sanga; (iii) representing that the defendants own or have the right to utilize the internet auction software, the financial services technology or other assets from Sanga; (iv) continuing to conceal any true and material facts regarding e-Auction; (v) transferring Sanga's financial services technology; (vi) transferring any assets of Sanga; and (vii) enforcing any loans. The Action was stayed on November 29, 1999 as a result of Sanga filing for protection pursuant to Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court - Central District of California. (ii) A second action (the "ICON Action") was commenced by Icon Capital Corporation (the "Plaintiff") in the United States District Court - Central District of California on February 7, 2000 against John Andrews, e-Auction Global Trading Inc. (a Nevada Corporation), e-Auction Global Trading Inc. (a Barbados Corporation), e-Medsoft.com, e-Net Global Financial Services, Inc., Kazari International, Inc., Shane Maine, Shaun Maine, John McLennan, QFG Holdings Limited, Ventures North International Inc, Jeff Wheeler, 582976 BC Ltd. and DOES 1-50. The Plaintiff, a shareholder of Sanga International Inc., alleges that the defendants breached their fidiciary duties to the Plaintiff. As such, the Plaintiff claims that the defendants' actions have damaged the Plaintiff totaling several millions of dollars. ACQUISITION OF SCHELFHOUT COMPUTER SYSTEMEN N.V. By a share purchase agreement dated as of January 10, 2000 between the Company, Luc Schelfhout, Hilde De Laet ("SCS Agreement"), the Company, through its subsidiary, e-Auction Belgium N.V., acquired all of the shares of Schelfhout, a Belgium company, from Luc Schelfhout and Hilde De Laet. The purchase price for the shares of Schelfhout was $10 million, paid by the Company by $4 million cash and by the issuance to 3,636,364 common shares to Luc Schelfhout and Hilde De Laet. The Company in the SCS Agreement agreed to not sell or otherwise transfer the shares of Schelfhout during the 12 month period ending on January 10, 2001. As security for the covenant not to sell the shares and for other matters, the Company has pledged the shares of Schelfhout in favour of Luc Schelfhout and Hilde De Laet. <PAGE> MANAGEMENT The following table sets forth the names, positions and ages of the executive officers and directors of e-Auction as at February 1, 2000. Directors are elected at e-Auction's annual meeting of shareholders and serve for one year or until their successors are elected. Officers are elected by the board of directors and their terms of office are, except to the extent governed by employment contracts, at the discretion of the board of directors. <TABLE> <CAPTION> - ----------------------- ------------------ ----------------------------------- NAME Age Title - ----------------------- ------------------ ----------------------------------- <S> <C> <C> Daniel McKenzie 45 President, C.E.O. and Chairman - ----------------------- ------------------ ----------------------------------- Luc Schelfhout 38 President, Schelfhout Computer System N.V. - ----------------------- ------------------ ----------------------------------- David Hackett 34 Chief Financial Officer - ----------------------- ------------------ ----------------------------------- Philip Lapp 71 Director - ----------------------- ------------------ ----------------------------------- Phillip MacDonnell 58 Director - ----------------------- ------------------ ----------------------------------- Eric White 46 Director - ----------------------- ------------------ ----------------------------------- </TABLE> BIOGRAPHIES Dan A. McKenzie, President, C.E.O. and Chairman. Mr. McKenzie brings a strong and diversified background in corporate management and technology development. Mr. McKenzie has 19 years of high tech management experience, with 15 as an owner/manager. He is the principal founder of two successful businesses, McKenzie Brown Canada and EveryWare Development Inc. His experience in mapping out strategic directions, operational skills, and turnaround techniques have, in each case, maximized shareholder returns. McKenzie Brown, a national computer peripheral distribution company, was founded in 1983 and reached sales in excessive of $30 million per year. Mr. McKenzie was the initial investor and founding partner of EveryWare Development Inc. in 1990 and built the business through sales and software development with a record of profit for 5 consecutive years as President and CEO. EveryWare is a market leader in providing innovative cross-platform development tools for creating dynamic Web-based applications. Dan took the company public in 1995 as CEO and Chairman of the Board. Dan led the company through numerous financings and acquisitions, including InContext Systems Inc. (TSE:INI) and in November 1998 EveryWare was purchased by Pervasive Software Inc. Mr. McKenzie's experience in growing and merging early stage technology companies enables him to identify the needs of the marketplace to bring new products and services quickly and profitably to market. Mr. McKenzie's entrepreneurial spirit developed after working his way up through management at Corvus Computer Corporation and Maclean Hunter Limited. Mr. McKenzie was National Sales Manager for Corvus, responsible for developing revenues and reseller relationships across Canada, and at Maclean Hunter he served in their Business Press Division. Luc Schelfhout, President, Schelfhout Computer Systemen N.V. Mr. Schelfhout created the company in 1983 which has grown under his management into the market leader in the development and implementation of electronic trading systems. Prior to starting Schelfhout, Mr. Schelfhout worked for Stafa Control Systems, a company specialising in control and measurement systems. Mr. Schelfhout also has a degree in Electronics (A1-B1) and is a licensed pilot. Through Mr. Schelfhout's leadership, Schelfhout has lead in the development of more than 100 electronic trading systems world-wide. In addition, numerous feasibility studies have been prepared the highlights are as follows: - - Apeda, New Delhi, India: establishment of 4 flower markets in Pune, Bombay, Bangalore & Madras. - - European Commission: Information and trading network for the marketing of fresh fish in Europe (INFOMAR). - - Irish Fish Producers' Organisation Dublin, Ireland : fish auction network. - - Meat & Livestock Commission, Milton Keynes : Improvement of IT in UK cattle markets. - - F.A.O. of the UNITED NATIONS : establishment of fish markets in Morocco. <PAGE> David Hackett, Chief Financial Officer David Hackett attained his Chartered Accountant designation in 1989 while at Ernst & Young. Mr. Hackett also holds a Master of Business Administration from the University of Western in Ontario, Canada. In 1992, Mr. Hackett co-founded 323-2323- The Infotainment Line, a movie, restaurant, kids and special events information telephone service. From 1994 to 1996, Mr. Hackett was a consultant for the television production industry with Alliance Atlantis Communications Inc. (formerly "Atlantis Communications Inc.") and CanWest Global Communications Corp. In 1996, Mr. Hackett joined EveryWare Development Inc. ("EveryWare"), a provider of middleware database conductivity tools. As Chief Financial Officer of EveryWare, Mr. Hackett was responsible for the finance and administration department as well as the day to day operations of EveryWare and its subsidiaries. While at EveryWare, Mr. Hackett completed numerous financings, acquisitions and divestitures including the sale of EveryWare to Pervasive Software Inc. in November 1998. Mr. Hackett is not a director of any other reporting company. Philip A. Lapp, Director Dr. Lapp has been Senior Vice President and Director of SPAR Aerospace Limited, responsible for all engineering and technical programs. While there, Mr. Lapp established and developed entry into the medical and technological markets. Dr.Lapp served as both Director of Technical Operations and Chief Engineer at de Havilland Aircraft of Canada. At the Massachusetts Institute of Technology Dr. Lapp was a research Associate and Instuctor in Aeronautical Engineering. Dr. Lapp has received a Centennial Medal 1967, Honorary Member, Engineering Institute of Canada 1973, Fellow of Ryerson Polytechnical Institute 1987, Gold Medal from the Association of Professional Engineers of Ontario in1992, Officer of the Order of Canada in 1995. Dr. Lapp still holds many present Directorships including CDM Information Inc., InfoWest Services Inc., Kenneth Molson Foundation (Chairman), EMR Microwave Technology Corporation, PCI Enterprises Inc. Mind The Store Inc. (Chairman), VisuaLabs Inc., and Honorary Governor, York University. Dr. Lapp also holds professional affiliations with; Canadian Council of Professional Engineers, (President 1987-1988), Fellow of the Royal Society of Canada, Fellow of the Canadian Academy of Engineering, (President 1988), Member of the Association of Professional Engineers of Ontario (President 1982-1983), Senior Member of the Institute of Electrical and Electronics Engineers, Fellow of Canadian Aeronautics and Space Institute (President 1967-1968), Member of Canadian Remote Sensing Society and Senior Member of American Aeronautics and Astronautics. Phil MacDonnell, Director Mr. MacDonnell is presently Vice President and a Director of Hawk Capital Corporation and Hawk Partners Ltd., which provides financial services to Canadian companies, he has held these positions since 1998 and 1997 respectively. Mr. MacDonnell is also currently President and Director of P.G. MacDonnell Services Ltd., a Director of Constitution Insurance Company since 1987, Director of Syntex Systems Ltd. (a publicly traded company on the ASE, since 1997), Director of World Wide Warranty (CDNX) and a Director of Palco Communications, apriate Alabama company since 1999. Mr. MacDonnell obtained an Honors Business Administration Degree at the University of Western Ontario in 1960, later in 1964 he obtained a Chartered Accountants Degree from the Institute of Chartered Accountants. Mr. MacDonnell became a founding partner in Loewen Ondaattje McCutheon & Co. Ltd. (an international institutional stock Brokerage Company and publicly traded on the TSE). From 1989-1991 Mr. MacDonnell was the President of Family Trust Corporation before it was sold to Manulife Insurance. Mr. MacDonnell has sat on the Board of the Vancouver Stock Exchange and was a Director of Grand Field Pacific Ltd., (a publicly traded hotel company on the TSE 1996-1998) and EveryWare Development Inc., (a publicly traded software company on the ASE 1997-1998) Eric White, Director Mr. White is currently a Partner with The Chancellor Partners, a executive recruiting firm, and has held that position since 1993. From 1989-1993 Mr. White was a Partner with Chowne Beaston White & Hoogstra. In 1986-1989 Mr. White was a Partner with Corporate Recruiters Ltd. Mr. White served as Director, Personnel for Expo 86 with the Expo 86 Corporation from 1983-1986. Mr. White was a management consultant with Touche Ross & Partners from 1981-1983. In 1980-1981 Mr. White was a self-employed search consultant. Mr. White was also the <PAGE> Principal for Real Estate Development and Retail Building Supplies for two locations with the Scotia Development Corporation from 1975-1980. Mr. White graduated from the St. Thomas University in New Brunswick with a B.A. (Honors). The experience that Mr. White brings is in, assisting management in solving organizational challenges, managing organizational change, merging/rationalizing staffing & designing/implementation of strategic plans. His experience also includes large national consulting firms and local consulting firms. DIRECTOR COMPENSATION The Company has not yet instituted any standard arrangement for the compensation of its directors. On August 29, 1999 Michael Gilley, a former Director, received stock options to purchase up to 250,000 shares of common stock in e-Auction. The options vest over 3 years and are exercisable at $5.00 per common share. Under an agreement dated March 1, 1999 with Millennium Advisors Inc., of which Mr. Gilley is President, e-Auction agreed to pay to Millennium Advisors a management fee of $20,000 per month for advice and services with respect to mergers and acquisitions, corporate structuring, corporate administration, and financing. As of the date of filing this Registration Statement, the total amount of management fees due payable to Millennium Advisors Inc. as fees has accrued to approximately $200,000 and as of the date of this Registration Statement has not been yet paid. On December 1, 1999, Mr. McKenzie, Mr. Hackett and Mr. Maine, a former director and acting Chief Executive Officer, each received stock options to purchase up to 1,000,000 shares of common stock in e-Auction. The options vest over 3 years and are exercisable at $0.85 per common share. STOCK OPTION PLAN e-Auction established a stock option plan on March 1, 1999 (the "Stock Option Plan") to provide incentives to attract, retain and motivate eligible persons whose presence and potential contributions are important to the success of e-Auction. The purpose of the Stock Option Plan is to further the interest of e-Auction and its stockholders by providing incentives in the form of stock or stock options to key employees and directors who contribute materially to the success of e-Auction. The grant of options will recognize and reward outstanding individual performances and contributions and will give such persons a proprietary interest in e-Auction, thus enhancing their personal interest in e-Auction's continued success and progress. This program will also assist e-Auction in attracting and retaining key employees and directors. To date 4,600,000 options have been granted with exercise prices ranging from $0.01 to $5.00 per common share. Options to purchase 3,250,000 common shares of e-Auction have been issued to the officers and directors as a group. <TABLE> <CAPTION> Date Number Price - ---- ------ ----- <S> <C> <C> March 1, 1999 1,000,000 $0.01 August 29, 1999 250,000 $5.00 December 1, 1999 3,050,000 $0.85 January 20, 2000 300,000 $2.00 ---------------- Total 4,600,000 ---------------- </TABLE> EXECUTIVE COMPENSATION The following table sets forth certain information for the years ended December 31, 1999 and 1998 regarding the compensation of the Company's Chief Executive Officer and each of the other most highly compensated executive officers whose compensation on an annualized basis (salary and bonus) for services rendered in all capacities to the Company during the year ended December 31, 1999 or 1998 exceeded $100,000 (collectively, the "Named Executive Officers"). <PAGE> <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------- SUMMARY COMPENSATION TABLE - ------------------------------------------------------------------------------------------------------------------------- Long-term compensation - ------------------------------------------------------------------------------------------------------------------------- Annual compensation Awards Payouts - ------------------------------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (e) (f) (g) (h) (i) - ------------------- ------- ------------ --------- --------------- ------------ -------------- ---------- --------------- Restricted Securities Other annual stock underlying LTIP All other Name and Salary Bonus compensation awards options/ SARs payouts compensation Principal Position Year ($) ($) ($) ($) (#) ($) ($) - ------------------- ------- ------------ --------- --------------- ------------ -------------- ---------- --------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Fred Tham, 1999 - - - - - - - CEO & President(1) 1998 $39,500 - ------------------- ------- ------------ --------- --------------- ------------ -------------- ---------- --------------- Shane Maine, CEO 1999 - - - - 1,000,000 - - & President (2) 1998 - ------------------- ------- ------------ --------- --------------- ------------ -------------- ---------- --------------- David Hackett, 1999 C$58,333 1,000,000 Chief Financial 1998 Officer - ------------------- ------- ------------ --------- --------------- ------------ -------------- ---------- --------------- </TABLE> (1) Mr. Tam resigned as CEO and President on February 26, 1999. (2) Mr. Maine resigned as acting CEO and director of the Company on January 17, 2000 and was replaced as CEO by Dan McKenzie on January 17, 2000. Shane Maine, a former director and acting CEO of e-Auction, does not receive any compensation, other than options as indicated below, for his services rendered to e-Auction, has not received such compensation in the past, and is not accruing any compensation pursuant to any agreement with e-Auction. However, Mr. Maine anticipates receiving benefits as a beneficial shareholder of e-Auction. Should e-Auction become profitable and produce commensurate cash flows from operations and/or through the sale of strategic investments, there may be some level of compensation paid to Mr. Maine in the future. However, such compensation will be subject to approval by e-Auction's board of directors. Dan McKenzie, e-Auction's President, Chief Executive Officer, and Chairman has an employment contract with the Company whereby he receives a base salary of Cdn$150,000 per annum. If the Company terminates Mr. McKenzie without just cause before December 31, 2000 Mr. McKenzie will receive a total amount equal to the 6 months compensation; without just cause after December 31, 2000 Mr. McKenzie will receive a total amount equal to the 12 months compensation. Mr. McKenzie was granted 1,000,000 options in e-Auction. The options vest over 3 years and are exercisable at $0.85 per common share. Furthermore, during the month of April 2000, the Board will review Mr. McKenzie's option amount with the ability to grant an additional 500,000 options which will be vesting based on specific performance goals of e-Auction. Option pricing will be determined based on the share price at the time of grant in April 2000. Should there be a change in control of the Company, all of Mr. McKenzie's unvested options will vest. David Hackett, e-Auction's Chief Financial Officer, has an employment contract with the Company whereby he receives a base salary of Cdn$100,000 per annum and is entitled to bonuses of up to Cdn$100,000 per annum. If the Company terminates Mr. Hackett without just cause Mr. Hackett will receive a total amount equal to the greater of (i) 12 months compensation; and (ii) $150,000.00 plus bonuses. Mr. Hackett was granted 1,000,000 options in e-Auction. The options vest over 3 years and are exercisable at $0.85 per common share. Should there be a change in control of the Company, all of Mr. Hackett's unvested options will vest. No retirement, pension, annuity benefits have been adopted by e-Auction for the benefit of its employees. <PAGE> INCENTIVE STOCK OPTIONS GRANTED TO NAMED EXECUTIVE OFFICERS DURING THE FINANCIAL YEAR ENDED DECEMBER 31, 1999 The following table sets forth the particulars of individual grants of options to purchase Common Shares made to each of the Named Executive Officers who were granted options during the financial year ended December 31, 1999: <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------------------- MARKET VALUE OF % OF TOTAL SECURITIES OPTIONS GRANTED UNDERLYING SECURITIES UNDER TO EMPLOYEES IN OPTIONS ON THE NAME OPTION GRANTED FISCAL YEAR EXERCISE PRICE DATE OF THE GRANT EXPIRATION DATE - --------------------- ------------------ ------------------- ------------------ ------------------- ------------------------ <S> <C> <C> <C> <C> <C> Dan McKenzie 1,000,000 23% $0.85 $0.84375 November 30, 2009 - --------------------- ------------------ ------------------- ------------------ ------------------- ------------------------ David Hackett 1,000,000 23% $0.85 $0.84375 November 30, 2009 - --------------------- ------------------ ------------------- ------------------ ------------------- ------------------------ Shane Maine 1,000,000 23% $0.85 $0.84375 November 30, 2009 - --------------------- ------------------ ------------------- ------------------ ------------------- ------------------------ </TABLE> LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Articles of Incorporation of e-Auction contain the following provisions which limit the liability of directors: Article V The personal liability of the directors of the corporation is hereby eliminated to the fullest extent permissible under the General Corporation Law of the State of Nevada, as the same may be amended and supplemented. Article VI The corporation shall, to the fullest extent permitted by the General Corporation Law of the State of Nevada, as the same may be amended and supplemented (the "Law") indemnify and any all persons whom it shall have power to indemnify under the Law from and against any and all of the expenses, liabilities, or other matters referred to in or covered by the Law. The indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any Bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors and administrators. Section 9 of e-Auction's By-laws, which reads as follows, provides for the indemnification of agents of and the purchase of liability insurance: For purposes of this Section 9, "agent" means any person who is or was a director, officer, employee or other agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation; "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative; and "expenses" included without limitation, attorneys' fees and any expenses of establishing a right to indemnification under this Section 9. The Corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any proceeding) other than an action by or in the right of the Corporation to procure a judgement in its favor) by reason of the fact that such person is or was an agent of the Corporation, against expenses, judgements, fines, settlements and other amounts actually and reasonably incurred in connection with such proceedings to the fullest extent permitted under the General Corporation Law of the State of Nevada, as amended from time to time. <PAGE> CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On January 10, 2000, e-Auction, though its subsidiary e-Auction Belgium N.V., purchased all of the shares of Schelfhout in exchange for consideration of US$10 million, of which 1,818,182 common shares of e-Auction was issued to Luc Schelfhout, a current officer of the Company, and 1,818,182 common shares of e-Auction were issued to Mr. Schelfhout's spouse, Hilde de Laet. PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of the Company's Common Shares as of February 1, 2000, by (i) each person who is known by the Company to own beneficially more than five percent of the Company's Common Shares, (ii) each of the Named Executive Officers, and (iii) each of the Company's directors. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------ NUMBER OF NAME AND ADDRESS OF BENEFICIAL OWNER SHARES(1) PERCENTAGE OF CLASS - ------------------------------------------------------------------------ ------------------ ---------------------- <S> <C> <C> J. Andrews in Trust for the Shareholders of Sanga International Inc. C/O Blake, Cassels & Graydon 45 O'Connor Street, Ottawa, Ontario K1P 1A4 16,500,000 27.2% - ------------------------------------------------------------------------ ------------------ ---------------------- QFG Holding Limited P.O. Box 659, Roadtown, Tortola, BVI 8,474,193 14.0% - ------------------------------------------------------------------------ ------------------ ---------------------- Luc Schelfhout(2) Bornte 204/A, Stekene, Belgium 9190 3,636,364 6.0% - ------------------------------------------------------------------------ ------------------ ---------------------- Daniel McKenzie (3) RR5, Georgetown, Ontario L5G 4S8 161,987 0.27% - ------------------------------------------------------------------------ ------------------ ---------------------- David Hackett(4) 20 Astley Avenue, Toronto, Ontario M4W 3B4 236,987 0.39% - ------------------------------------------------------------------------ ------------------ ---------------------- </TABLE> 1. The number and percentage of shares beneficially owned is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rule, beneficial ownership includes any share as to which the individual or entity has voting power or investment power. Unless otherwise indicated, each person or entity has sole voting and investment power with respect to shares shown as beneficially owned. A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days, whether pursuant to the exercise of options, conversion of securities or otherwise. 2. Includes 1,818,182 common shares held by Mr. Schelfhout's spouse, Hilde de Laet. 3. Includes 161,987 common shares held by a holding company. 4. Includes 236,987 common shares held by a holding company for Mr. Hackett's wife and children. <PAGE> SELLING STOCKHOLDERS The following table provides certain information regarding the Selling Stockholders and the number of Shares being offered by them as of February 28, 2000. Shares Beneficially Owned Prior To Offering <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- Percentage of Common Shares That May Stock Be Sold (1) Name Amount Outstanding - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> J. Andrews itf Shareholders of Sanga International 16,500,000 27.23% 16,500,000 Inc. Q.F.G. Holdings Limited 8,474,193 14.0% 9,076,693 Flynn, Von Shubert & Associates Attorneys 2,250,000 3.71% 2,250,000 Escrow Account v-Wholesaler.com Inc. 2,000,000 3.30% 2,000,000 Ventures North Investment Partners Inc. 2,000,000 3.30% 2,000,000 e-Ventures Investments Inc. 2,000,000 3.30% 2,000,000 Online Global Commodities Exchange Limited 2,000,000 3.30% 2,000,000 Institute of Global Trading Communities Limited 2,000,000 3.30% 2,000,000 Luc Schelfhout 1,818,182 3.00% 1,818,182 Hilde de Laet 1,818,182 3.00% 1,818,182 Zorba Holdings Limited 1,500,000 2.48% 1,500,000 Platinium Capital Management Inc. 1,500,000 2.48% 1,500,000 e-Auction Global Trading Inc. (BVI) 1,500,000 2.48% 1,500,000 BFM Enterprises 1,500,000 2.48% 1,500,000 Platinium Capital Management Inc. Trust for John 1,000,000 1.65% 1,000,000 Andrews Troy Lalonde 901,530 1.49% 901,530 Hartford Group Holdings Limited 830,000 1.37% 830,000 Web CCB (BVI) 750,000 1.24% 750,000 Assayriska Investments Inc. 642,500 1.06% 642,500 Tradwinds Investments Ltd. 550,000 0.91% 550,000 T.F Fred Tham 500,000 0.83% 500,000 Hartford Holdings Limited 500,000 0.83% 500,000 SABE Holdings Inc. 376,304 0.62% 376,304 John & Victoria O'Toole 239,727 0.40% 239,727 Brian Antonen 205,480 0.34% 205,480 Parkplace Finance Limited as trustee for the 205,479 0.34% 205,479 Parkplace Trust Nesbit Burns in Trust For Trophy Foods Inc. 205,479 0.34% 205,479 HSBC Securities (Canada) Inc. 205,479 0.34% 205,479 Hani Rasid 200,000 0.33% 200,000 Edith M. Michel 200,000 0.33% 200,000 Millenium Advisors Inc. 197,219 0.33% 197,219 Ron Engineering & Consruction (Eastern) Ltd. 150,000 0.25% 150,000 Shenkman Corporation. In Trust 100,000 0.17% 100,000 Sabe Holdings, Inc. 100,000 0.17% 100,000 Elias Haloute 100,000 0.17% 100,000 Albert Haloute 100,000 0.17% 100,000 <PAGE> Stephen Greenberg 50,000 0.08% 50,000 John Naime 50,000 0.08% 50,000 John O'Toole & Victoria O'Toole 43,602 0.07% 43,602 Soloway Holdings Limited 40,000 0.07% 40,000 S&O Building Partnership 40,000 0.07% 40,000 Richard J. Valentine & Penny E. Valentine 40,000 0.07% 40,000 JTWROS ###-##-#### Frederick H. Stierheim TTEE FBO Frederick H. 33,000 0.05% 33,000 Stierheim Revocable Living Trust Murray Hill Investments Limited 20,000 0.03% 20,000 Ana Teresa Segarra 20,000 0.03% 20,000 Efthymios Kyriakopoulos 19,000 0.03% 19,000 FR Holdings, Ltd. 12,000 0.02% 12,000 Scott Family Investments 11,335 0.02% 11,335 Trendafile Rose Ahmet 10,989 0.02% 10,989 Michael Williamson 10,967 0.02% 10,967 Jeff Figliuzzi 10,902 0.02% 10,902 Bruno Figliuzzi 10,902 0.02% 10,902 Richard G. Harrington,Jr. 10,000 0.02% 10,000 Peter F. Anderson 10,000 0.02% 10,000 LJ, Inc. Of Central Florida 10,000 0.02% 10,000 Dennis A. Lavia 10,000 0.02% 10,000 John F. Doen 8,333 0.01% 8,333 Linda Morrison 8,000 0.01% 8,000 Sterling A. Farmer 7,000 0.01% 7,000 Mark Alex Marchque 6,667 0.01% 6,667 Julie Duffy 6,500 0.01% 6,500 Bill Duffy 6,500 0.01% 6,500 Frank Marceau 6,181 0.01% 6,181 Everen Securities C/F William Racine IRA 6,000 0.01% 6,000 Rollover Account #838-5798 Scott C. Basnan 5,000 0.01% 5,000 Robert Dorsey 5,000 0.01% 5,000 Patrick McNerney 5,000 0.01% 5,000 Lee Jensen 5,000 0.01% 5,000 Hugh Dorsey IRA 5,000 0.01% 5,000 Donald Dandelski 5,000 0.01% 5,000 Brian Griffin 5,000 0.01% 5,000 Douglas Andrews 4,000 0.01% 4,000 Bob Peterson 4,000 0.01% 4,000 Andre Bourgon 4,000 0.01% 4,000 Mark Morrison 3,400 0.01% 3,400 Gary Windt 3,400 0.01% 3,400 Geoff Mather 3,333 0.01% 3,333 David Griffin 3,333 0.01% 3,333 Ken Mulvaney & Brian Mulvaney JTWROS 3,000 0.00% 3,000 Mike Marshall 2,000 0.00% 2,000 Michelle Saber & Jeff Knight JTWROS 2,000 0.00% 2,000 Anton Hammerschmidt 2,000 0.00% 2,000 Jandy Kerby-Miller 1,666 0.00% 1,666 Gretchen Bastian 1,666 0.00% 1,666 <PAGE> Robert Davies 1,600 0.00% 1,600 Bruce Andree 1,400 0.00% 1,400 Tim Over 1,000 0.00% 1,000 Sheila Davies 1,000 0.00% 1,000 Kasie Worrel 1,000 0.00% 1,000 John Morrison 1,000 0.00% 1,000 David Williamson 1,000 0.00% 1,000 Victor Chapman 400 0.00% 400 Cindy Phoel 200 0.00% 200 ---------- ---------- Total 55,719,030 92.0% 55,719,030 ---------- ---- ---------- ---------- ---- ---------- </TABLE> (1) Assumes the sale of all of the Shares offered by each of the Selling Shareholders. The Selling Stockholders have represented to the Company that they acquired the Shares for their own account for investment only and not with a view toward the public sale or distribution thereof, except pursuant to sales registered under the 1933 Act or exemptions therefrom. In recognition of the fact that the Selling Stockholders, even though acquiring the Shares for investment, may wish to be legally permitted to sell their Shares when they deem appropriate, the Company agreed with the Selling Stockholders to file with the Commission under the 1933 Act a Registration Statement with respect to the resale of the Shares from time to time and agreed to prepare and file such amendments and supplements to the Registration Statement as may be necessary to keep the Registration Statement effective during the periods while the registration statement is effective. See "Plan of Distribution." PLAN OF DISTRIBUTION All the Shares offered hereby may be sold from time to time by the Selling Stockholders, or by their pledgees, donees, distributees, transferees or other successors-in-interest. The sale of the Shares by the Selling Stockholders may be effected from time to time in one or more types of transactions (which may include block transactions) on the quotation system operated by the National Quotation Bureau, LLC, known as the Pink Sheets, or on one or more other securities markets and exchanges, in privately negotiated transactions, through put or call options transactions relating to the Shares, through short sales of Shares, or through a combination of such methods of sale, at fixed prices that may be changed, at market prices prevailing at the time of sale, at prices relating to such prevailing market prices or at negotiated prices. The Selling Stockholders may effect the above-mentioned transactions by selling the Shares directly to purchasers, acting as principals for their own accounts, or by or through broker-dealers acting as agents for the Selling Stockholders, or to broker-dealers who may purchase Shares as principals and thereafter sell such Securities from time to time in transactions on any exchange or market on which such securities are listed or quoted, as applicable, in negotiated transactions, through a combination of such methods of sale, or otherwise. Such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the Selling Stockholders and/or the purchasers of the Shares for whom such broker-dealers may act as agents or to whom they may sell as principals, or both (which compensation as to a particular broker- dealer may be in excess of customary commissions). None of the proceeds from the sale of the Shares by the Selling Stockholders will be received by the Company. In addition, any of the Shares that qualify for sale pursuant to Rule 144 promulgated under the 1933 Act may be sold in transactions complying with such Rule, rather than pursuant to this Prospectus. In connection with distributions of the Shares or otherwise, the Selling Stockholders may enter into hedging transactions with broker-dealers. In connection with such transactions, broker-dealers may engage in short sales of the Shares in the course of hedging the positions they assume with Selling Stockholders. The Selling Stockholders may also sell shares short and redeliver the Shares to close out such short positions. The Selling Stockholders may also enter into option or other transactions with broker-dealers which require the delivery to the broker-dealer of the Shares, which the broker-dealer may resell or otherwise transfer pursuant to this Prospectus. The Selling Stockholder may also loan or pledge the Shares to a broker-dealer and the broker-dealer may sell the Shares so loaned or upon a default the broker-dealer may effect sales of the pledged Shares pursuant to this Prospectus. <PAGE> The Selling Stockholders and any broker-dealers who act in connection with the sale of the Shares hereunder may be deemed to be "underwriters" within the meaning of Section 2(11) of the 1933 Act, and any commissions received by them and profit on any resale of the Shares as principal may be deemed to be underwriting discounts and commissions under the 1933 Act. The Company has agreed to bear all reasonable expenses (other than broker's commissions and similar charges) in connection with the registration and sale of the Shares being offered by the Selling Stockholders that initially were issued as a result of the Transactions. The Company has agreed to indemnify the Selling Stockholders and any agent, dealer or broker-dealer who acts in connection with the sale of the Shares hereunder that initially were issued as a result of the Transactions against certain liabilities, including liabilities under the 1933 Act. If one or more Selling Stockholders shall propose to sell Shares pursuant to this Prospectus, such Selling Stockholders shall deliver to the Company at least three full trading days prior to such proposed sale a written notice notifying the Company of their intent to sell (including the proposed manner and timing of all sales), and the provision of such notice to the Company shall conclusively be deemed to establish and confirm an agreement by such Selling Stockholders to sell such Shares, in whole, in part or not at all, within a period ending on the tenth trading day following the first such sale and to comply with the other contractual registration provisions. To the extent the Company has not exercised its rights to suspend (as described below), the Company shall provide written notice to each of the other Selling Stockholders regarding the availability of such ten trading day period. The Company has the right to suspend use of this Prospectus for certain periods of time (which may or may not last for a period of weeks) under certain circumstances. The Company has agreed to use reasonable efforts to ensure that the Selling Stockholders shall have an aggregate of at least ten trading days (prorated for partial fiscal quarters) under this Prospectus during each fiscal quarter during the effective period hereof. Upon the Company being notified by a Selling Stockholder that any material arrangement has been entered into with a broker-dealer for the sale of Shares through a block trade, special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer, a supplement to this Prospectus will be filed, if required, pursuant to Rule 424(b) under the Securities Act, disclosing (i) the name of each such Selling Stockholder and of the participating broker-dealer(s), (ii) the number of Shares involved, (iii) the price at which such Shares were sold, (iv) the commissions paid or discounts or concessions allowed to such broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not conduct any investigation to verify the information set forth or incorporated by reference in this Prospectus, and (vi) other facts material to the transaction. In addition, upon the Company being notified by a Selling Stockholder that a donee or pledgee intends to sell more than 500 Shares, a supplement to this Prospectus will be filed. In addition, to the extent required, the number of the Shares to be sold, purchase prices, public offering prices, the names of any agents, dealers or underwriters, and any applicable commissions or discounts with respect to a particular offer will be set forth by the Company in a supplement to this Prospectus or, if appropriate, a post-effective amendment to the Registration Statement. Offers or sales of the Shares have not been registered or qualified under the laws of any country other than the United States. To comply with certain states' securities laws, if applicable, the Shares will be offered or sold in such jurisdictions only through registered or licensed brokers or dealers. Under applicable rules and regulations under the Exchange Act, any person engaged in a distribution of the Shares may be limited in its ability to engage in market activities with respect to such Shares. In addition and without limiting the foregoing, each Selling Stockholder will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, which provisions may limit the timing of purchases and sales of any of the Shares by the Selling Stockholders. The foregoing may affect the marketability of the Shares. There can be no assurance that the Selling Stockholders will sell any or all of the Shares offered by them hereunder. DESCRIPTION OF CAPITAL STOCK e-Auction is authorized to issue two hundred and fifty million (250,000,000) shares of common stock, of which 60,591,530 common shares are currently issued and outstanding. The holders of common stock are entitled <PAGE> to one vote per share on each matter submitted to a vote of shareholders, including the election of directors. No stockholder is entitled to cumulative votes, preemptive, subscription or conversion rights. The election of directors and other general stockholder action requires the affirmative vote of a majority of shares represented at a duly held meeting at which a quorum is represented, except that pursuant to the by-laws, a written consent to corporate action by a majority of stockholders entitled to vote on a matter is permitted. The outstanding shares of common stock are validly issued, fully paid and non-assessable. The holders of common stock are entitled to receive dividends when and if declared by the board of directors. In the event of liquidation, dissolution or winding up of the affairs of e-Auction, the holders of common stock are entitled to share ratably in all assets remaining for distribution to them subject to the rights of holders of senior securities, if any. There are no provisions in the charter or by-laws of e-Auction that would delay, defer or prevent a change in control. At the present time, no preferred stock is authorized in the Articles of Incorporation, and there are no warrants outstanding. e-Auction approved the issuance of up to 6,000,000 options to acquire common stock in the company on March 1, 1999 pursuant to the Company's Stock Option Plan. At the time of filing the Registration Statement, there were 4,300,000 options outstanding. TRANSFER AGENT AND REGISTRAR Interwest Transfer Co., Inc., located at 100-1981 East Murray Holiday Road, Salt Lake City, Utah, 84117 was appointed transfer agent, registrar and dividend disbursing agent for all of the shares of common stock of e-Auction on April 15, 1999 and continues to act in those capacities as of the date of filing this Registration Statement. SHARES ELIGIBLE FOR FUTURE SALE Of the 60,539,030 outstanding shares of common stock of e-Auction, 4,800,000 are free trading shares as of the date of filing this Registration Statement and 55,719,030 shares of common stock are restricted securities as that term is defined in Rule 144 promulgated under the Securities Exchange Act of 1934 ("Restricted Securities"). Rule 144 governs resale of Restricted Securities for the account of any person, other than the issuer, and restricted and unrestricted securities for the account of an "affiliate" of the issuer. Restricted securities generally include any securities acquired directly or indirectly from an issuer or its affiliates, which were not issued or sold in connection with a public offering registered under the Securities Exchange Act of 1934. An affiliate of the issuer is any person who directly or in directly controls, is controlled by, or is under common control with the issuer. Affiliates of e-Auction may include its directors, executive officers and persons directly or indirectly owning 10% or more of the outstanding common stock. Under Rule 144, unregistered resale of restricted common stock cannot be made until it has been held for a minimum of one year from the later of its acquisition from e-Auction or an affiliate of e-Auction. Thereafter, shares of common stock may be resold without registration subject to Rule 144's volume limitation aggregation, broker transaction, notice filing requirements, and requirements concerning publicly available information about e-Auction ("Applicable Requirements"). Resale by e-Auction's affiliates of restricted and unrestricted common stock is subject to the Applicable Requirements. The volume limitations provide that a person, or persons who must aggregate their sale cannot, within any three-month period, sell more than the greater of (i) one percent of the then outstanding shares, or (ii) the average weekly reported trading volume during the four calendar weeks preceding each such sale. A person who is not deemed an "affiliate" of e-Auction and who has beneficially owned shares for at least two years would be entitled to sell such shares under Rule 144 without regard to the Applicable Requirements. At the time of filing this Registration Statement, the Restricted Securities have not been held for more than two years. However, if this Registration Statement becomes effective, approximately 55,779,030 of the Restricted Securities will be eligible to be sold without limitation. No prediction can be made as to the effect, if any, that sales <PAGE> of shares of common stock or the availability of such shares for sale will have on the market prices prevailing from time to time. Nevertheless, the possibility that substantial amounts of common stock may be sold in the public market would likely have a material adverse effect on prevailing market prices for the common stock and could impair e-Auction's ability to raise capital through the sale of its equity securities. Any employee of the Company who has been granted options to purchase Shares or who has purchased Shares pursuant to a written compensatory plan or written contract prior to the date of this offering pursuant to Rule 701 will be entitled to rely on the resale provisions of Rule 701, which permits such persons who are not "affiliates" of the Company to sell such Shares without compliance with the public information, holding-period, volume limitation or notice provisions of Rule 144 and permits such persons who are "affiliates" to sell such Shares without compliance with the Rule 144 holding period restrictions, in each case commencing 90 days after the date of this Prospectus. Shortly after this Registration Statement becomes effective, the Company intends to file a registration statement on Form S-8 under the Securities Act to register Shares reserved for issuance under the stock option, the Purchase Plan and the Savings Plan including, in some cases, Shares for which an exemption under Rule 144 or Rule 701 would also be available, thus permitting the resale of Shares issued under those Plans by non-affiliates in the public market without restriction under the Securities Act. Such registration statement will become effective immediately upon filing. As of February 25, 2000, stock options to purchase 4,300,000 Shares were outstanding. EXPERTS The consolidated financial statements and related schedules for each of the period between June 2, 1998 and December 31, 1998, and the 12 month period ended December 31, 1999, appearing in this Prospectus and Registration Statement have been audited by Dale Matheson Carr-Hilton, Chartered Accountants, independent auditors, as set forth in their respective reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firms as experts in accounting and auditing. The consolidated financial statements and related schedules for the period between January 8, 1998 and June 1, 1998, appearing in this Prospectus and Registration Statement has been audited by David A. Cox, a Chartered Accountant, independent auditor, as set forth in his report thereon appearing elsewhere herein, and is included in reliance upon such report given upon the authority of such individual as expert in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement, of which this Prospectus constitutes a part, under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus omits certain information contained in the Registration Statement, and reference is made to the Registration Statement and the exhibits thereto for further information with respect to the Company and the Common Stock offered hereby. Statements contained herein concerning the provisions of any documents are not necessarily complete, and in each instance reference is made to the copy of such document filed as an exhibit to the Registration Statement. Each such statement is qualified in its entirety by such reference. The Registration Statement, including exhibits filed therewith, may be inspected without charge at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at 7 World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may be obtained from the Public Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as the Company, that file electronically with the Commission. <PAGE> e-AUCTION GLOBAL TRADING INC. INDEX TO FINANCIAL STATEMENTS <TABLE> <CAPTION> PAGE <S> <C> Report of Dale Matheson Carr-Hilton, Chartered Accountants, Independent Auditors..................... 35 Consolidated Balance Sheets as of December 31, 1998.................................................. 36 Consolidated Statements of Operations for the period from June 2, 1998 to December 31, 1998.......... 37 Consolidated Statements of Cash Flows for the period from June 2, 1998 to December 31, 1998.......... 38 Notes to Consolidated Financial Statements for the period from June 2, 1998 to December 31, 1998..... 39 Report of David A. Cox, Chartered Accountant, Independent Auditors................................... 46 Consolidated Balance Sheet as of June 1, 1998........................................................ 47 Statement of Income and Deficit for the period from January 8, 1998 to June 1, 1998.................. 48 Statement of Changes in Cash for the period from January 8, 1998 to June 1, 1998..................... 49 Notes to Interim Financial Statements for the period from January 8, 1998 to June 1, 1998............ 50 Interim Financial Statements (unaudited) for the three month period ended March 31, 1999............. 52 Interim Financial Statements (unaudited) for the six month period ended June 30, 1999................ 57 Interim Financial Statements (unaudited) for the nine month period ended September 30, 1999.......... 62 </TABLE> <PAGE> e-AUCTION GLOBAL TRADING INC. (FORMERLY KAZARI INTERNATIONAL, INC.) (A NEVADA CORPORATION) FINANCIAL STATEMENTS DECEMBER 31, 1998 (IN U.S. FUNDS) <PAGE> AUDITORS' REPORT TO THE SHAREHOLDERS e-AUCTION GLOBAL TRADING INC. (FORMERLY KAZARI INTERNATIONAL, INC.) We have audited the balance sheet of e-AUCTION GLOBAL TRADING INC. (formerly Kazari International, Inc.) as at December 31, 1998 and the statements of operations and deficit and cash flows for the period June 2, 1998 to December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1998 and the results of its operations and cash flows for the period from June 2, 1998 to December 31, 1998 in accordance with Canadian generally accepted accounting principles. The financial statements as at June 1, 1998 and for the period then ended were audited by another auditor who expressed an opinion without reservation on these financial statements. /s/ Alvin F. Dale, Ltd. Dale Matheson Carr-Hilton VANCOUVER, B.C. DECEMBER 17, 1999 CHARTERED ACCOUNTANTS <PAGE> e-AUCTION GLOBAL TRADING INC. (FORMERLY KAZARI INTERNATIONAL, INC.) (A NEVADA CORPORATION) BALANCE SHEET - DECEMBER 31, 1998 (IN U.S. FUNDS) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------- DECEMBER 31, JUNE 1, 1998 1998 $ $ - ----------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS CURRENT ASSETS Cash 100,181 211,222 INCORPORATION COSTS 2,000 2,000 - ----------------------------------------------------------------------------------------------------- 102,181 213,222 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- LIABILITIES CURRENT LIABILITIES Accounts payable 2,500 10,700 Due to related parties (NOTE 4) 150,000 20,275 ------- -------- 152,500 30,975 ------- -------- SHAREHOLDERS' EQUITY SHARE CAPITAL (NOTE 5) 5,320 5,320 CONTRIBUTED SURPLUS (NOTE 5) 235,930 235,930 ------- ------- 241,250 241,250 DEFICIT (291,569) (59,003) ------- ------- (50,319) 182,247 - ----------------------------------------------------------------------------------------------------- 102,181 213,222 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- </TABLE> CONTINGENCY (NOTE 9) APPROVED BY THE DIRECTORS DIRECTOR - ---------------------------------------- DIRECTOR - ---------------------------------------- SEE ACCOMPANYING NOTES <PAGE> e-AUCTION GLOBAL TRADING INC. (FORMERLY KAZARI INTERNATIONAL, INC.) (A NEVADA CORPORATION) STATEMENT OF OPERATIONS AND DEFICIT FOR THE PERIOD FROM JUNE 2, 1998 TO DECEMBER 31, 1998 (IN U.S. FUNDS) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------ DECEMBER 31, JUNE 1, 1998 1998 $ $ - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> EXPENSES Accounting, audit and bookkeeping 2,841 3,200 Bank charges 602 118 Consulting fees 110,000 687 Entertainment 1,608 1,378 Legal 19,505 3,500 Office and printing 3,969 3,105 Management fees 39,500 37,500 Telephone 1,537 2,489 Travel and lodging 3,004 7,026 --------- -------- 182,566 59,003 --------- -------- LOSS BEFORE OTHER ITEM 182,566 59,003 OTHER ITEM Allowance for loan receivable (NOTE 3) 50,000 --------- -------- NET LOSS FOR THE PERIOD 232,566 59,003 DEFICIT, beginning of period 59,003 - - ------------------------------------------------------------------------------------------------------------ DEFICIT, end of period 291,569 59,003 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ </TABLE> SEE ACCOMPANYING NOTES <PAGE> e-AUCTION GLOBAL TRADING INC. (FORMERLY KAZARI INTERNATIONAL, INC.) (A NEVADA CORPORATION) STATEMENT OF CASH FLOWS FOR THE PERIOD FROM JUNE 2, 1998 TO DECEMBER 31, 1998 (IN U.S. FUNDS) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------ DECEMBER 31, JUNE 1, 1998 1998 $ $ - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES Net loss (232,566) (59,003) Add items not affecting cash Allowance for loan receivable 50,000 - Net changes in non-cash operating accounts Accounts payable (8,200) 10,700 --------- ------- (190,766) (48,303) --------- ------- FINANCING ACTIVITIES Due to related parties 129,725 20,275 Issuance of share capital - 251,250 Share issue costs - (10,000) --------- ------- 129,725 261,525 --------- ------- INVESTING ACTIVITIES Incorporation costs - (2,000) Loan receivable (50,000) - --------- ------- (50,000) (2,000) --------- ------- INCREASE (DECREASE) IN CASH (111,041) 211,222 CASH, beginning of period 211,222 - - ------------------------------------------------------------------------------------------------------------ CASH, end of period 100,181 211,222 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ </TABLE> SEE ACCOMPANYING NOTES <PAGE> e-AUCTION GLOBAL TRADING INC. (FORMERLY KAZARI INTERNATIONAL, INC.) (A NEVADA CORPORATION) NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD FROM JUNE 2, 1998 TO DECEMBER 31, 1998 (IN U.S. FUNDS) - ------------------------------------------------------------------------------- 1. INCORPORATION AND NATURE OF BUSINESS - ------------------------------------------------------------------------------- The Company was incorporated on January 8, 1998 in Nevada, U.S.A. On March 23, 1999 the directors acting in lieu of a special meeting approved the name change to e-AUCTION Global Trading Inc. The Company was organized with the intent to be a holding company which will acquire and/or form joint ventures with corporate entities conducting various types of businesses throughout the world. (NOTE 8) - ------------------------------------------------------------------------------- 2. SIGNIFICANT ACCOUNTING POLICIES - ------------------------------------------------------------------------------- a) Foreign currency translation The Company follows the "temporal" method of accounting for foreign currency translations. Balance sheet items are translated into Canadian dollars at exchange rates prevailing at the balance sheet date for monetary items and at exchange rates in effect at the transaction date for non-monetary items. Income statement items are translated at average rates prevailing during the year. Unrealized gains and losses are deferred and amortized over their expected life. Realized gains and losses are charged to operations. b) Loss per common share Loss per common share on a fully diluted basis is not presented as it would be anti-dilutive. c) Measurement uncertainty The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant areas requiring the use of management estimates relate to the determination of impairment of assets and useful lives for depreciation and amortization. Financial results as determined by actual events could differ from those estimates. d) Financial instruments The Company's financial instruments consist of cash, loan receivable and accounts payable, the fair market value of which approximates their carrying value. <PAGE> e-AUCTION GLOBAL TRADING INC. (FORMERLY KAZARI INTERNATIONAL, INC.) (A NEVADA CORPORATION) NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD FROM JUNE 2, 1998 TO DECEMBER 31, 1998 (IN U.S. FUNDS) - ------------------------------------------------------------------------------- 2. SIGNIFICANT ACCOUNTING POLICIES - CONT'D - ------------------------------------------------------------------------------- e) Related party transactions Related party transactions are recorded at their exchange amounts which approximate fair market value. f) Uncertainty due to the Year 2000 Issue The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect an entity's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the entity, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. - ------------------------------------------------------------------------------- 3. LOAN RECEIVABLE - ------------------------------------------------------------------------------- <TABLE> <CAPTION> DECEMBER 31, JUNE 1, 1998 1998 $ $ ------------ ------------ <S> <C> <C> Due from Intrepidus, Inc. 50,000 - Less: allowance (50,000) - --------- -------- - - --------- -------- --------- -------- </TABLE> During the period the Company signed a letter of intent to merge with Intrepidus, Inc. ("Intrepidus"). As part of the deal the Company entered into a Bridge Loan Agreement whereby $150,000 was to be made available to Intrepidus. The balance of the funds were advanced subsequent to year end. (SEE NOTE 8) Subsequent to period end the Company's management decided not to proceed with the merger. The advance then became a receivable with a due date of June 22, 2000. The loan bears interest at 10% per annum. The loan has been provided for in full. <PAGE> e-AUCTION GLOBAL TRADING INC. (FORMERLY KAZARI INTERNATIONAL, INC.) (A NEVADA CORPORATION) NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD FROM JUNE 2, 1998 TO DECEMBER 31, 1998 (IN U.S. FUNDS) - ------------------------------------------------------------------------------- 4. RELATED PARTY TRANSACTIONS - ------------------------------------------------------------------------------- <TABLE> <CAPTION> DECEMBER 31, JUNE 1, 1998 1998 $ $ -------------- -------------- <S> <C> <C> Management fees paid to directors and a company controlled by a director 39,500 37,500 Reimbursement to the directors for expenses incurred on behalf of the Company 13,393 13,998 Consulting fees paid to shareholders of the Company 110,000 - </TABLE> The amounts due to related parties are non-interest bearing, unsecured, and have no specific terms of repayment (SEE NOTE 8) - ------------------------------------------------------------------------------- 5. SHARE CAPITAL AND CONTRIBUTED SURPLUS - ------------------------------------------------------------------------------- a) Authorized - 40,000,000 common shares with a par value of $0.001 <TABLE> <CAPTION> DECEMBER 31, JUNE 1, NUMBER OF 1998 CONTRIBUTED NUMBER OF 1998 CONTRIBUTED SHARES $ SURPLUS SHARES $ SURPLUS -------------- --------------- ------------- ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> <C> b) Issued - Balance, beginning of period 5,320,000 5,320 235,930 - - - Private placement - - - 1,250,000 1,250 - Private placement - - - 4,000,000 4,000 36,000 Private placement - - - 70,000 70 209,930 ---------------- --------- ------------- ----------- -------- ------- 5,320,000 5,320 235,930 5,320,000 5,320 245,930 Share issue Costs - - - - - (10,000) ---------------- ---------- ------------ ---------------- ---------- ------- Balance, end of period 5,320,000 5,320 235,930 5,320,000 5,320 235,930 ---------------- ---------- ------------ ---------------- ---------- ------- ---------------- ---------- ------------ ---------------- ---------- ------- </TABLE> (SEE NOTE 8) <PAGE> e-AUCTION GLOBAL TRADING INC. (FORMERLY KAZARI INTERNATIONAL, INC.) (A NEVADA CORPORATION) NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD FROM JUNE 2, 1998 TO DECEMBER 31, 1998 (IN U.S. FUNDS) - ------------------------------------------------------------------------------- 6. LOSS PER SHARE - ------------------------------------------------------------------------------- Loss per share for the period from January 8, 1998 (date of incorporation) to December 31, 1998 is $0.06. - ------------------------------------------------------------------------------- 7. COMPARATIVE FIGURES - ------------------------------------------------------------------------------- Comparative figures are for the period from January 8, 1998 (date of incorporation) to June 1, 1998. Certain of the comparative figures have been reclassified to conform to the current presentation. - ------------------------------------------------------------------------------- 8. SUBSEQUENT EVENTS - ------------------------------------------------------------------------------- Subsequent to year end: a) The Company entered into an agreement to acquire 100% of the issued and outstanding shares of e-Auction Global Trading Inc., a Barbados company (the legal subsidiary). The purchase price was 34,500,000 common shares of the Company. The acquisition will be accounted for as a reverse takeover where the financial statements will be issued under the name of the legal parent but will be a continuation of the financial statements of the legal subsidiary. As preparation for the acquisition the Company increased its authorized capital stock to 250,000,000 shares of common stock. In connection with the acquisition of the Barbados subsidiary the company granted 1,000,000 stock options with an exercise price of $0.01 per share to the former employees, officers and directors of this company. b) The Company entered into an agreement to acquire 100% of the issued and outstanding shares of Schelfhout Computer Systemen N.V.("Schelfhout"), a Belgian company. The purchase price is to be $10,000,000 and is to be paid as follows: <TABLE> <S> <C> <C> Deposit $1,000,000 (paid) At closing $3,000,000 cash At closing $6,000,000 in common shares of the Company </TABLE> The $6,000,000 in shares are not free trading and are subject to a timed release formula. If the Company's shares are not freely trading on any given release date the equivalent cash is to be paid by the Company and the shares are to be returned to the Treasury. The agreement is still subject to final approval by all parties. <PAGE> e-AUCTION GLOBAL TRADING INC. (FORMERLY KAZARI INTERNATIONAL, INC.) (A NEVADA CORPORATION) NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD FROM JUNE 2, 1998 TO DECEMBER 31, 1998 (IN U.S. FUNDS) - ------------------------------------------------------------------------------- 8. SUBSEQUENT EVENTS - CONT'D - ------------------------------------------------------------------------------- c) In connection with the Schelfhout acquisition the Company received a loan of $1,000,000 from Millennium Advisors Inc., ("Millennium") a company related through a common director, acting as agent for undisclosed lenders. In addition Millennium received 197,219 common shares of the Company worth $1,000,000 as a financing fee. The Company also entered into a contract for services whereby Millenium would be paid 25% of any funds raised by the sale of equity or issuance of debt by the Company in excess of the amount reasonably required by the Company to complete the Schelfhout acquisition. d) The Company, through its Canadian subsidiary, made two purchases of intellectual property. The first purchase was for $300 Cdn. paid in the form of 30,000 options for common shares with an exercise price of $0.01 Cdn. per share. In connection with this acquisition the Company entered into a consulting agreement where a company associated with the vendor would be paid $5,000 Cdn. per month and would also receive 65,000 options for common shares with an exercise price of $0.01 Cdn. per share. The second purchase was for $50,000 Cdn. in cash. In connection with this acquisition the Company entered into a management services agreement where $1,000 Cdn. per month would be paid to the vendor who also received 80,000 options for common shares with an exercise price of $0.01 Cdn. per share. e) Approved a stock option plan where 6,000,000 common shares are reserved for issuance on the exercise of options. Options are exercisable for a period of 10 years from the date of the grant. f) Granted a director of the Company 250,000 stock options with an exercise price of $5 per share. Granted employees 3,050,000 stock options with an exercise price of $0.85 per share. g) The Company advanced a further $100,000 to Intrepidus, Inc. in connection with the Bridge loan agreement. h) The Company received an additional $2,200,000 in the form of a convertible debenture, the terms of which still have to be finalized. - ------------------------------------------------------------------------------- 9. CONTINGENCY - ------------------------------------------------------------------------------- A shareholder derivative action was brought against the Company on November 17, 1999 in the United States District Court against the Company, its subsidiaries, two of its directors and several other companies and individuals. The action alleges Sanga International, Inc.'s ("Sanga") reputation was damaged by the Defendants (i) engaging in conversion (ii) engaging in fraud (iii) interfering with Sanga's prospective business advantage (iv) breach of contract (v) violating California usury laws and (vi) breach of fiduciary duty. <PAGE> e-AUCTION GLOBAL TRADING INC. (FORMERLY KAZARI INTERNATIONAL, INC.) (A NEVADA CORPORATION) NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD FROM JUNE 2, 1998 TO DECEMBER 31, 1998 (IN U.S. FUNDS) - ------------------------------------------------------------------------------- 9. CONTINGENCY- CONT'D - ------------------------------------------------------------------------------- The plaintiff claims the defendants'actions have not only damaged Sanga but also the plaintiff and the remaining shareholders of Sanga by as much as $100 million dollars. The Action was stayed on November 29, 1999 as a result of Sanga filing for Chapter 11 bankruptcy protection in the United States Bankruptcy Court. Exposure to the Company is not determinable at this time. - ------------------------------------------------------------------------------- 10. RECONCILIATION OF UNITED STATES TO CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES - ------------------------------------------------------------------------------- a) Basic and diluted loss per share under U.S. GAAP are equal to the loss per share under Canadian GAAP. The weighted average number of shares for calculating loss per share is 4,266,704. b) Under U.S. GAAP, the Company would record a deferred tax asset subject to an evaluation allowance where that asset is impaired or not expected to be realized. The Company has deferred tax assets of approximately $78,800. The Company's valuation allowance would be equal to the amount of the deferred tax assets. Therefore, there have been no amounts booked in the accounts of the Company. <PAGE> KAZARI INTERNATIONAL, INC. (a Nevada Corporation) REPORT AND INTERIM FINANCIAL STATEMENTS JUNE 1, 1998 (in U.S. funds) <TABLE> <CAPTION> CONTENTS: PAGE <S> <C> Auditor's Report 1 Interim Balance Sheet 2 Interim Statement of Income and Deficit 3 Interim Statement of Changes in Cash 4 Notes to Interim Financial Statements 5,6 </TABLE> <PAGE> AUDITOR'S REPORT TO THE SHAREHOLDERS, KAZARI INTERNATIONAL, INC. I have audited the interim balance sheet of KAZARI INTERNATIONAL, INC. as at JUNE 1, 1998 and the interim statements of income and deficit and changes in cash for the period from the date of incorporation on January 8, 1998 to June 1, 1998. These interim financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these interim financial statements based on my audit. I conducted my audit in accordance with Canadian generally accepted auditing standards. Those standards require that I plan to perform an audit to obtain reasonable assurance whether the interim financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the interim financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall interim financial statement presentation. In my opinion, these interim financial statements present fairly, in all material respects, the financial position of the company as at June 1, 1998 and the results of its operations and the changes in its financial position from the period from the date of incorporation on January 8, 1998 to June 1, 1998 in accordance with Canadian generally accepted accounting principles. /s/ David A. Cox Vancouver, British Columbia June 8, 1998 Chartered Accountant Suite 1500-701 West Georgia Street Vancouver, B.C. V7Y 1C6 <PAGE> KAZARI INTERNATIONAL, INC. (a Nevada Corporation) INTERIM BALANCE SHEET AS AT JUNE 1, 1998 (in U.S. funds) <TABLE> <CAPTION> 1998 <S> <C> ASSETS CURRENT Cash $211,222 INCORPORATION COSTS 2,000 ------------ $ 213,222 ------------ LIABILITIES CURRENT Accounts payable, audit and bookkeeping $ 10,700 Due to a director (note 2) 20,275 ------------ 30,975 ------------ EQUITY CAPITAL STOCK (NOTE 3) Authorized: 40,000,000 common shares, with a par value of $.001 Issued and outstanding: 5,320,000 common shares, with a par value of $.001 5,320 CONTRIBUTE SURPLUS (NOTE 3) 235,930 DEFICIT (59,003) ------------ 182,247 ------------ ------------ $ 213,222 ------------ </TABLE> APPROVED BY THE DIRECTORS: /s/ Fred Tham Chief Executive Officer /s/ Shelley James Chief Financial Officer See accompanying notes to financial statements <PAGE> KAZARI INTERNATIONAL, INC. (a Nevada Corporation) INTERIM STATEMENT OF INCOME AND DEFICIT FOR THE PERIOD FROM THE DATE OF INCORPORATION ON JANUARY 8,1998 TO JUNE 1, 1998 (in U.S. funds) <TABLE> <CAPTION> 1998 <S> <C> EXPENSES Accounting, audit and bookkeeping $ 3,200 Bank charges 118 Consulting fees 687 Entertainment 1,378 Legal 3,500 Office and printing 3,105 Management fees 37,500 Telephone 2,489 Travel and lodging 7,026 ------------ 59,003 ------------ NET LOSS FOR THE PERIOD 59,003 DEFICIT AT THE BEGINNING OF PERIOD - ------------ DEFICIT AT END OF PERIOD $ 59,003 ------------ </TABLE> See accompanying notes to financial statements <PAGE> KAZARI INTERNATIONAL, INC. (a Nevada Corporation) INTERIM STATEMENT OF CHANGES IN CASH FOR THE PERIOD FROM THE DATE OF INCORPORATION ON JANUARY 8, 1998 TO JUNE 1, 1998 (in U.S. funds) <TABLE> <CAPTION> 1998 <S> <C> OPERATING ACTIVITIES Net loss for the period (59,003) Net decrease in non-cash working capital balances 30,975 ------------ (28,028) ------------ FINANCING ACTIVITIES Issuance of capital stock 251,250 Share issue costs (10,000) ------------ 241,250 ------------ INVESTING ACTIVITIES Incorporation costs (2,000) ------------ CHANGE IN CASH DURING THE PERIOD 211,222 CASH AT BEGINNING OF PERIOD - ------------ CASH AT END OF PERIOD $ 211,222 ------------ </TABLE> See accompanying notes to financial statements <PAGE> KAZARI INTERNATIONAL, INC. (a Nevada Corporation) NOTES TO INTERIM FINANCIAL STATEMENTS JUNE1, 1998 (in U.S. funds) 1. INCORPORATION AND NATURE OF BUSINESS The company was incorporated on January 8, 1998 in Nevada, U.S.A. The company was organized with the intent to be a holding company, which will acquire and/or form joint ventures with corporate entities conducting various types of business throughout the world. 2.RELATED PARTY TRANSACTIONS During the period, the Company incurred $7,500 in management fees to a director. Also during the period, the Company reimbursed $13,998 to the directors for expenses incurred on behalf of Kazari International, Inc. The amount due to a director is non-interest bearing, unsecured, and has no specific terms of repayment. 3. CAPITAL STOCK AND CONTRIBUTED SURPLUS During the period the company issued the following common shares: <TABLE> <CAPTION> Capital stock at #Shares Total proceeds Par Value Contributed Surplus ------- <S> <C> <C> <C> 1,250,000 at 0.001each $ 1,250 $ 1,250 $ - 4,000,000 at 0.010each 40,000 4,000 36,000 70,000 at 3.000each 210,000 70 209,930 - --------------- -------------------- --------------------- -------------------- 5,320,000 $ 251,250 $ 5,320 $ 245,930 - --------------- Less share issue costs: 10,000 10,000 -------------------- --------------------- -------------------- -------------------- --------------------- -------------------- $ 241,250 $ 5,320 $ 235,930 -------------------- --------------------- -------------------- </TABLE> <PAGE> KAZARI INTERNATIONAL, INC. (a Nevada Corporation) NOTES TO INTERIM FINANCIAL STATEMENTS JUNE 1, 1998 (in U.S funds) 4. INCOME TAXES The Company has an interim net loss and other expenditures which may give rise to future tax benefits. The potential benefit from these losses has not been reflected in the financial statements. 5. LOSS PER SHARE Loss per share information is not disclosed as it is not considered meaningful at this stage of the Company's development. 6. CONTINUING OPERATIONS These financial statements have been based upon accounting principles which presume the realization of assets and the settlement of liabilities as they become due in the course of continuing operations. The Company's ability to maintain operations is contingent upon successful completion of additional financing arrangements. <PAGE> <TABLE> <CAPTION> e-AUCTION GLOBAL TRADING INC. INCOME STATEMENT 1999 1998 - ---------------------------------------------------------------------------------------------------------- FOR THE THREE MONTHS ENDING MARCH 31 January 1 to January 8 to UNAUDITED - PREPARED BY MANAGEMENT (IN US DOLLARS) March 31 March 31 <S> <C> <C> REVENUE - - EXPENSES Salaries and benefits 64,909 - Legal 5,716 - Sales, general and administrative 61,852 7,571 -------------------------------------- TOTAL EXPENSES 132,477 7,571 -------------------------------------- -------------------------------------- Net Loss (132,477) (7,571) -------------------------------------- Opening retained earnings (deficit) (291,569) - Closing retained earnings (deficit) (424,046) (7,571) </TABLE> <TABLE> <CAPTION> e-AUCTION GLOBAL TRADING INC. BALANCE SHEET AS AT MARCH 31 1999 1998 - ---------------------------------------------------------------------------------------------------------- UNAUDITED - PREPARED BY MANAGEMENT (IN US DOLLARS) <S> <C> <C> ASSETS CURRENT ASSETS Cash - 249 Accounts Receivable - - -------------------------------------- - 249 Deposit in Schelfhout - - Software Assets 68,747 - Incorporation Costs 2,000 422 -------------------------------------- 70,747 422 -------------------------------------- 70,747 671 -------------------------------------- LIABILITIES & SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts Payable & Accruals 136,566 2,992 Due to Related Parties - 4,000 Due to Ventures North Investment Partners 82,477 - Loan Payable - - -------------------------------------- 219,043 6,992 EQUITY Share Capital 39,820 1,250 Contributed Surplus 235,930 - Retained Earnings (Deficit) (424,046) (7,571) -------------------------------------- (148,296) (6,321) -------------------------------------- 70,747 671 -------------------------------------- </TABLE> <PAGE> <TABLE> <CAPTION> e-AUCTION GLOBAL TRADING INC. STATEMENT OF CASH FLOWS 1999 1998 - ---------------------------------------------------------------------------------------------------------- FOR THE THREE MONTHS ENDING MARCH 31 January 1 to January 8 to UNAUDITED - PREPARED BY MANAGEMENT (IN US DOLLARS) March 31 March 31 <S> <C> <C> CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES Net loss (132,477) (7,571) Add items not affecting cash Allowance for loan receivable - - Net changes in non-cash operating accounts Accounts payable 134,066 2,992 -------------------------------------- 1,588 (4,579) -------------------------------------- FINANCING ACTIVITIES Due to related parties (67,523) 4,000 Issuance of share capital 34,500 1,250 Share issue costs - - -------------------------------------- (33,023) 5,250 -------------------------------------- INVESTING ACTIVITIES Incorporation costs - (422) Software assets (68,747) - Deposit in Schelfhout - - -------------------------------------- (68,747) (422) -------------------------------------- INCREASE (DECREASE) IN CASH (100,181) 249 CASH, beginning of period 100,181 - -------------------------------------- CASH, end of period - 249 -------------------------------------- </TABLE> e-AUCTION GLOBAL TRADING INC. (FORMERLY KAZARI INTERNATIONAL, INC.) (A NEVADA CORPORATION) NOTES TO UNAUDITED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 (IN U.S. FUNDS) - -------------------------------------------------------------------------------- 1. INCORPORATION AND NATURE OF BUSINESS - -------------------------------------------------------------------------------- The Company was incorporated on January 8, 1998 in Nevada, U.S.A. On March 23, 1999 the directors acting in lieu of a special meeting approved the name change to e-Auction Global Trading Inc. The Company was organized with the intent to be a holding company which will acquire and/or form joint ventures with corporate entities conducting various types of businesses throughout the world. (NOTE 5) <PAGE> - -------------------------------------------------------------------------------- 2. SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- a) Foreign currency translation The Company follows the "temporal" method of accounting for foreign currency translations. Balance sheet items are translated into Canadian dollars at exchange rates prevailing at the balance sheet date for monetary items and at exchange rates in effect at the transaction date for non-monetary items. Income statement items are translated at average rates prevailing during the year. Unrealized gains and losses are deferred and amortized over their expected life. Realized gains and losses are charged to operations. b) Loss per common share Loss per common share on a fully diluted basis is not presented as it would be anti-dilutive. c) Measurement uncertainty The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant areas requiring the use of management estimates relate to the determination of impairment of assets and useful lives for depreciation and amortization. Financial results as determined by actual events could differ from those estimates. d) Financial instruments The Company's financial instruments consist of cash, loan receivable and accounts payable, the fair market value of which approximates their carrying value. e) Related party transactions Related party transactions are recorded at their exchange amounts which approximate fair market value. f) Uncertainty due to the Year 2000 Issue The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect an entity's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the entity, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. - -------------------------------------------------------------------------------- 3. SHARE CAPITAL AND CONTRIBUTED SURPLUS - -------------------------------------------------------------------------------- a) Authorized - 250,000,000 common shares with a par value of $0.001 <TABLE> <CAPTION> MARCH 31, NUMBER OF 1999 CONTRIBUTED SHARES $ SURPLUS <S> <C> <C> <C> b) Issued - Balance, January 1, 1999 5,320,000 5,320 235,930 <PAGE> Share Exchange Agreement 34,500,000 34,500 - ---------- -------- ------- Balance, end of period 39,820,000 39,820 235,930 ========== ======== ======= </TABLE> The Company entered into an agreement to acquire 100% of the issued and outstanding shares of e-Auction Global Trading Inc., a Barbados company (the legal subsidiary). The purchase price was 34,500,000 common shares of the Company. The acquisition will be accounted for as a reverse takeover where the financial statements will be issued under the name of the legal parent but will be a continuation of the financial statements of the legal subsidiary. As preparation for the acquisition the Company increased its authorized capital stock to 250,000,000 shares of common stock. In connection with the acquisition of the Barbados subsidiary the company granted 1,000,000 stock options with an exercise price of $0.01 per share to the former employees, officers and directors of this company. (SEE NOTE 5) - -------------------------------------------------------------------------------- 4. LOSS PER SHARE - -------------------------------------------------------------------------------- Loss per share for the period from January 1, 1999 to March 31, 1999 is $0.01. - -------------------------------------------------------------------------------- 5. SUBSEQUENT EVENTS - -------------------------------------------------------------------------------- Subsequent to quarter end: a) The Company entered into an agreement to acquire 100% of the issued and outstanding shares of Schelfhout Computer Systemen N.V.("Schelfhout"), a Belgian company. The purchase price is to be $10,000,000 and is to be paid as follows: <TABLE> <S> <C> <C> Deposit $1,000,000 (paid in August 1999) At closing $3,000,000 cash At closing $6,000,000 in common shares of the Company </TABLE> The $6,000,000 in shares are not free trading and are subject to a timed release formula. If the Company's shares are not freely trading on any given release date the equivalent cash is to be paid by the Company and the shares are to be returned to the Treasury. The agreement is still subject to final approval by all parties. b) In connection with the Schelfhout acquisition the Company received a loan of $1,000,000 from Millennium Advisors Inc., ("Millennium") a company related through a common director, acting as agent for undisclosed lenders. In addition Millennium received 197,219 common shares of the Company worth $1,000,000 as a financing fee. The Company also entered into a contract for services whereby Millenium would be paid 25% of any funds raised by the sale of equity or issuance of debt by the Company in excess of the amount reasonably required by the Company to complete the Schelfhout acquisition. c) The Company, through its Canadian subsidiary, made two purchases of intellectual property. The first purchase was for $300 Cdn. paid in the form of 30,000 options for common shares with an exercise price of $0.01 Cdn. per share. In connection with this acquisition the Company entered into a consulting agreement where a company associated with the vendor would be paid $5,000 Cdn. per month and would also receive 65,000 options for common shares with an exercise price of $0.01 Cdn. per share. <PAGE> The second purchase was for $50,000 Cdn. in cash. In connection with this acquisition the Company entered into a management services agreement where $1,000 Cdn. per month would be paid to the vendor who also received 80,000 options for common shares with an exercise price of $0.01 Cdn. per share. d) Approved a stock option plan where 6,000,000 common shares are reserved for issuance on the exercise of options. Options are exercisable for a period of 10 years from the date of the grant. f) Granted a director of the Company 250,000 stock options with an exercise price of $5 per share. Granted employees 3,050,000 stock options with an exercise price of $0.85 per share. g) The Company advanced a further $100,000 to Intrepidus, Inc. in connection with the Bridge loan agreement. h) The Company received an additional $2,200,000 in the form of a convertible debenture, the terms of which still have to be finalized. - -------------------------------------------------------------------------------- 6. CONTINGENCY - -------------------------------------------------------------------------------- A shareholder derivative action was brought against the Company on November 17, 1999 in the United States District Court against the Company, its subsidiaries, two of its directors and several other companies and individuals. The action alleges Sanga International, Inc.'s ("Sanga") reputation was damaged by the Defendants (i) engaging in conversion (ii) engaging in fraud (iii) interfering with Sanga's prospective business advantage (iv) breach of contract (v) violating California usury laws and (vi) breach of fiduciary duty. The plaintiff claims the defendants' actions have not only damaged Sanga but also the plaintiff and the remaining shareholders of Sanga by as much as $100 million dollars. The Action was stayed on November 29, 1999 as a result of Sanga filing for Chapter 11 bankruptcy protection in the United States Bankruptcy Court. Exposure to the Company is not determinable at this time. - -------------------------------------------------------------------------------- 7. RECONCILIATION OF UNITED STATES TO CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES - -------------------------------------------------------------------------------- a) Basic and diluted loss per share under U.S. GAAP are equal to the loss per share under Canadian GAAP. The weighted average number of shares for calculating loss per share is 17,970,000. b) Under U.S. GAAP, the Company would record a deferred tax asset subject to an evaluation allowance where that asset is impaired or not expected to be realized. The Company has deferred tax assets of approximately $78,800. The Company's valuation allowance would be equal to the amount of the deferred tax assets. Therefore, there have been no amounts booked in the accounts of the Company. <PAGE> <TABLE> <CAPTION> e-AUCTION GLOBAL TRADING INC. INCOME STATEMENT 1999 1999 1998 1998 - -------------------------------------------------------------------------------------------------------------------------------- FOR THE SIX MONTHS ENDING JUNE 30 January 1 to April 1 to January 8 to April 1 to UNAUDITED - PREPARED BY MANAGEMENT (IN US DOLLARS) June 30 June 30 June 30 June 30 <S> <C> <C> <C> <C> REVENUE - - - - EXPENSES Salaries and benefits 315,351 250,442 - - Legal 33,254 27,538 3,500 3,500 Sales, general and administrative 289,646 227,794 73,232 65,661 --------------------------------------------------------------- TOTAL EXPENSES 638,251 505,774 76,732 69,161 --------------------------------------------------------------- --------------------------------------------------------------- Net Loss (638,251) (505,774) (76,732) (69,161) --------------------------------------------------------------- Opening retained earnings (deficit) (291,569) (424,046) - (7,571) Closing retained earnings (deficit) (929,820) (929,820) (76,732) (76,732) </TABLE> <TABLE> <CAPTION> e-AUCTION GLOBAL TRADING INC. BALANCE SHEET AS AT JUNE 30 1999 1998 - ---------------------------------------------------------------------------------------------------- UNAUDITED - PREPARED BY MANAGEMENT (IN US DOLLARS) <S> <C> <C> ASSETS CURRENT ASSETS Cash 1,023 173,293 Accounts Receivable - - ---------------------------------- 1,023 173,293 Deposit in Schelfhout - - Software Assets 68,747 - Incorporation Costs 2,000 2,000 ---------------------------------- 70,747 2,000 ---------------------------------- 71,770 175,293 ---------------------------------- LIABILITIES & SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts Payable & Accruals 335,912 - Due to Related Parties - 10,775 Due to Ventures North Investment Partners 389,928 - Loan Payable - - ---------------------------------- 725,840 10,775 EQUITY Share Capital 39,820 5,320 Contributed Surplus 235,930 235,930 Retained Earnings (Deficit) (929,820) (76,732) ---------------------------------- (654,070) 164,518 ---------------------------------- 71,770 175,293 ---------------------------------- </TABLE> <PAGE> <TABLE> <CAPTION> e-AUCTION GLOBAL TRADING INC. STATEMENT OF CASH FLOWS 1999 1999 1998 1998 - --------------------------------------------------------------------------------------------------------------------------------- FOR THE SIX MONTHS ENDING JUNE 30 January 1 to April 1 to January 8 to April 1 to UNAUDITED - PREPARED BY MANAGEMENT (IN US DOLLARS) June 30 June 30 June 30 June 30 <S> <C> <C> <C> <C> CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES Net loss (638,251) (505,774) (76,732) (69,161) Add items not affecting cash Allowance for loan receivable - - - - Net changes in non-cash operating accounts Accounts payable 333,412 199,346 - (2,992) ---------------------------------------------------------------- (304,839) (306,427) (76,732) (72,153) ---------------------------------------------------------------- FINANCING ACTIVITIES Due to related parties 239,928 307,451 10,775 6,775 Issuance of share capital 34,500 - 251,250 250,000 Share issue costs - - (10,000) (10,000) ---------------------------------------------------------------- 274,428 307,451 252,025 246,775 ---------------------------------------------------------------- INVESTING ACTIVITIES Incorporation costs - - (2,000) (1,578) Software assets (68,747) - - - Deposit in Schelfhout - - - - ---------------------------------------------------------------- (68,747) - (2,000) (1,578) ---------------------------------------------------------------- INCREASE (DECREASE) IN CASH (99,158) 1,023 173,293 173,044 CASH, beginning of period 100,181 - - 249 ---------------------------------------------------------------- CASH, end of period 1,023 1,023 173,293 173,293 ---------------------------------------------------------------- </TABLE> e-AUCTION GLOBAL TRADING INC. (FORMERLY KAZARI INTERNATIONAL, INC.) (A NEVADA CORPORATION) NOTES TO UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 (IN U.S. FUNDS) - ------------------------------------------------------------------------------- 1. INCORPORATION AND NATURE OF BUSINESS - ------------------------------------------------------------------------------- The Company was incorporated on January 8, 1998 in Nevada, U.S.A. On March 23, 1999 the directors acting in lieu of a special meeting approved the name change to e-Auction Global Trading Inc. The Company was organized with the intent to be a holding company which will acquire and/or form joint ventures with corporate entities conducting various types of businesses throughout the world. (NOTE 5) <PAGE> - ------------------------------------------------------------------------------- 2. SIGNIFICANT ACCOUNTING POLICIES - ------------------------------------------------------------------------------- a) Foreign currency translation The Company follows the "temporal" method of accounting for foreign currency translations. Balance sheet items are translated into Canadian dollars at exchange rates prevailing at the balance sheet date for monetary items and at exchange rates in effect at the transaction date for non-monetary items. Income statement items are translated at average rates prevailing during the year. Unrealized gains and losses are deferred and amortized over their expected life. Realized gains and losses are charged to operations. b) Loss per common share Loss per common share on a fully diluted basis is not presented as it would be anti-dilutive. c) Measurement uncertainty The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant areas requiring the use of management estimates relate to the determination of impairment of assets and useful lives for depreciation and amortization. Financial results as determined by actual events could differ from those estimates. d) Financial instruments The Company's financial instruments consist of cash, loan receivable and accounts payable, the fair market value of which approximates their carrying value. e) Related party transactions Related party transactions are recorded at their exchange amounts which approximate fair market value. f) Uncertainty due to the Year 2000 Issue The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect an entity's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the entity, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. - ------------------------------------------------------------------------------- 3. SHARE CAPITAL AND CONTRIBUTED SURPLUS - ------------------------------------------------------------------------------- a) Authorized - 250,000,000 common shares with a par value of $0.001 <TABLE> <CAPTION> JUNE 30, NUMBER OF 1999 CONTRIBUTED SHARES $ SURPLUS --------- ----------- --------- <S> <C> <C> <C> b) Issued - Balance, <PAGE> January 1, 1999 5,320,000 5,320 235,930 Share Exchange Agreement 34,500,000 34,500 - ---------- ------ ------- Balance, end of period 39,820,000 39,820 235,930 ========== ====== ======= </TABLE> The Company entered into an agreement to acquire 100% of the issued and outstanding shares of e-Auction Global Trading Inc., a Barbados company (the legal subsidiary). The purchase price was 34,500,000 common shares of the Company. The acquisition will be accounted for as a reverse takeover where the financial statements will be issued under the name of the legal parent but will be a continuation of the financial statements of the legal subsidiary. As preparation for the acquisition the Company increased its authorized capital stock to 250,000,000 shares of common stock. In connection with the acquisition of the Barbados subsidiary the company granted 1,000,000 stock options with an exercise price of $0.01 per share to the former employees, officers and directors of this company. (SEE NOTE 5) - ------------------------------------------------------------------------------- 4. LOSS PER SHARE - ------------------------------------------------------------------------------- Loss per share for the period from January 1, 1999 to June 30, 1999 is $0.02. - ------------------------------------------------------------------------------- 5. SUBSEQUENT EVENTS - ------------------------------------------------------------------------------- Subsequent to quarter end: a) The Company entered into an agreement to acquire 100% of the issued and outstanding shares of Schelfhout Computer Systemen N.V.("Schelfhout"), a Belgian company. The purchase price is to be $10,000,000 and is to be paid as follows: <TABLE> <S> <C> <C> Deposit $1,000,000 (paid in August 1999) At closing $3,000,000 cash At closing $6,000,000 in common shares of the Company </TABLE> The $6,000,000 in shares are not free trading and are subject to a timed release formula. If the Company's shares are not freely trading on any given release date the equivalent cash is to be paid by the Company and the shares are to be returned to the Treasury. The agreement is still subject to final approval by all parties. b) In connection with the Schelfhout acquisition the Company received a loan of $1,000,000 from Millennium Advisors Inc., ("Millennium") a company related through a common director, acting as agent for undisclosed lenders. In addition Millennium received 197,219 common shares of the Company worth $1,000,000 as a financing fee. The Company also entered into a contract for services whereby Millenium would be paid 25% of any funds raised by the sale of equity or issuance of debt by the Company in excess of the amount reasonably required by the Company to complete the Schelfhout acquisition. c) The Company, through its Canadian subsidiary, made two purchases of intellectual property. The first purchase was for $300 Cdn. paid in the form of 30,000 options for common shares with an exercise price of $0.01 Cdn. per share. In connection with this acquisition the Company entered into a consulting agreement where a company associated with the vendor would be paid $5,000 Cdn. per month and would also receive 65,000 options for common shares with an exercise price of $0.01 Cdn. per share. <PAGE> The second purchase was for $50,000 Cdn. in cash. In connection with this acquisition the Company entered into a management services agreement where $1,000 Cdn. per month would be paid to the vendor who also received 80,000 options for common shares with an exercise price of $0.01 Cdn. per share. d) Approved a stock option plan where 6,000,000 common shares are reserved for issuance on the exercise of options. Options are exercisable for a period of 10 years from the date of the grant. f) Granted a director of the Company 250,000 stock options with an exercise price of $5 per share. Granted employees 3,050,000 stock options with an exercise price of $0.85 per share. g) The Company advanced a further $100,000 to Intrepidus, Inc. in connection with the Bridge loan agreement. h) The Company received an additional $2,200,000 in the form of a convertible debenture, the terms of which still have to be finalized. - ------------------------------------------------------------------------------- 6. CONTINGENCY - ------------------------------------------------------------------------------- A shareholder derivative action was brought against the Company on November 17, 1999 in the United States District Court against the Company, its subsidiaries, two of its directors and several other companies and individuals. The action alleges Sanga International, Inc.'s ("Sanga") reputation was damaged by the Defendants (i) engaging in conversion (ii) engaging in fraud (iii) interfering with Sanga's prospective business advantage (iv) breach of contract (v) violating California usury laws and (vi) breach of fiduciary duty. The plaintiff claims the defendants' actions have not only damaged Sanga but also the plaintiff and the remaining shareholders of Sanga by as much as $100 million dollars. The Action was stayed on November 29, 1999 as a result of Sanga filing for Chapter 11 bankruptcy protection in the United States Bankruptcy Court. Exposure to the Company is not determinable at this time. - ------------------------------------------------------------------------------- 7. RECONCILIATION OF UNITED STATES TO CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES - ------------------------------------------------------------------------------- a) Basic and diluted loss per share under U.S. GAAP are equal to the loss per share under Canadian GAAP. The weighted average number of shares for calculating loss per share is 28,955,359. b) Under U.S. GAAP, the Company would record a deferred tax asset subject to an evaluation allowance where that asset is impaired or not expected to be realized. The Company has deferred tax assets of approximately $78,800. The Company's valuation allowance would be equal to the amount of the deferred tax assets. Therefore, there have been no amounts booked in the accounts of the Company. <PAGE> <TABLE> <CAPTION> e-AUCTION GLOBAL TRADING INC. INCOME STATEMENT 1999 1999 1998 1998 - ------------------------------------------------------------------------------------------------------------------------------ FOR THE NINE MONTHS ENDING SEPTEMBER 30 January 1 to July 1 to January 8 to July 1 to UNAUDITED - PREPARED BY MANAGEMENT (IN US DOLLARS) September 30 September 30 September 30 September 30 <S> <C> <C> <C> <C> REVENUE - - - - EXPENSES Salaries and benefits 559,931 244,580 - - Legal 86,697 53,443 21,500 18,000 Sales, general and administrative 549,958 260,312 196,955 123,724 ------------------------------------------------------------------ TOTAL EXPENSES 1,196,586 558,335 218,455 141,724 ------------------------------------------------------------------ ------------------------------------------------------------------ Net Loss (1,196,586) (558,335) (218,455) (141,724) ------------------------------------------------------------------ Opening retained earnings (deficit) (291,569) (929,820) - (76,732) Closing retained earnings (deficit) (1,488,155) (1,488,155) (218,455) (218,455) </TABLE> <TABLE> <CAPTION> e-AUCTION GLOBAL TRADING INC. BALANCE SHEET AS AT SEPTEMBER 30 1999 1998 - ------------------------------------------------------------ UNAUDITED - PREPARED BY MANAGEMENT (IN US DOLLARS) <S> <C> <C> ASSETS CURRENT ASSETS Cash 1,015 31,570 Accounts Receivable - - ---------------------------------- 1,015 31,570 Deposit in Schelfhout 1,000,000 - Software Assets 68,747 - Incorporation Costs 2,000 2,000 ---------------------------------- 1,070,747 2,000 ---------------------------------- 1,071,762 33,570 ---------------------------------- LIABILITIES & SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts Payable & Accruals 514,864 - Due to Related Parties - 10,775 Due to Ventures North Investment Partners 769,303 - Loan Payable 1,000,000 - ---------------------------------- 2,284,167 10,775 EQUITY Share Capital 39,820 5,320 Contributed Surplus 235,930 235,930 Retained Earnings (Deficit) (1,488,155) (218,455) ---------------------------------- (1,212,405) 22,795 ---------------------------------- 1,071,762 33,570 ---------------------------------- </TABLE> <PAGE> <TABLE> <CAPTION> e-AUCTION GLOBAL TRADING INC. STATEMENT OF CASH FLOWS 1999 1999 1998 1998 - ------------------------------------------------------------------------------------------------------------------------------ FOR THE NINE MONTHS ENDING SEPTEMBER 30 January 1 to July 1 to January 8 to July 1 to UNAUDITED - PREPARED BY MANAGEMENT (IN US DOLLARS) September 30 September 30 September 30 September 30 <S> <C> <C> <C> <C> CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES Net loss (1,196,586) (558,335) (218,455) (141,724) Add items not affecting cash Allowance for loan receivable - - - - Net changes in non-cash operating accounts Accounts payable 512,364 178,952 - - ------------------------------------------------------------------ (684,223) (379,384) (218,455) (141,724) ------------------------------------------------------------------ FINANCING ACTIVITIES Due to related parties 619,303 379,376 10,775 - Loan payable 1,000,000 1,000,000 - - Issuance of share capital 34,500 - 251,250 - Share issue costs - - (10,000) - ------------------------------------------------------------------ 1,653,803 1,379,376 252,025 - ------------------------------------------------------------------ INVESTING ACTIVITIES Incorporation costs - - (2,000) - Software assets (68,747) - - - Deposit in Schelfhout (1,000,000) (1,000,000) - - ------------------------------------------------------------------ (1,068,747) (1,000,000) (2,000) - ------------------------------------------------------------------ INCREASE (DECREASE) IN CASH (99,166) (8) 31,570 (141,724) CASH, beginning of period 100,181 1,023 - 173,293 ------------------------------------------------------------------ CASH, end of period 1,015 1,015 31,570 31,570 ------------------------------------------------------------------ </TABLE> e-AUCTION GLOBAL TRADING INC. (FORMERLY KAZARI INTERNATIONAL, INC.) (A NEVADA CORPORATION) NOTES TO UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (IN U.S. FUNDS) - ------------------------------------------------------------------------------- 1. INCORPORATION AND NATURE OF BUSINESS - ------------------------------------------------------------------------------- The Company was incorporated on January 8, 1998 in Nevada, U.S.A. On March 23, 1999 the directors acting in lieu of a special meeting approved the name change to e-Auction Global Trading Inc. The Company was organized with the intent to be a holding company which will acquire and/or form joint ventures with corporate entities conducting various types of businesses throughout the world. (NOTE 5) <PAGE> - ------------------------------------------------------------------------------- 2. SIGNIFICANT ACCOUNTING POLICIES - ------------------------------------------------------------------------------- a) Foreign currency translation The Company follows the "temporal" method of accounting for foreign currency translations. Balance sheet items are translated into Canadian dollars at exchange rates prevailing at the balance sheet date for monetary items and at exchange rates in effect at the transaction date for non-monetary items. Income statement items are translated at average rates prevailing during the year. Unrealized gains and losses are deferred and amortized over their expected life. Realized gains and losses are charged to operations. b) Loss per common share Loss per common share on a fully diluted basis is not presented as it would be anti-dilutive. c) Measurement uncertainty The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant areas requiring the use of management estimates relate to the determination of impairment of assets and useful lives for depreciation and amortization. Financial results as determined by actual events could differ from those estimates. d) Financial instruments The Company's financial instruments consist of cash, loan receivable and accounts payable, the fair market value of which approximates their carrying value. e) Related party transactions Related party transactions are recorded at their exchange amounts which approximate fair market value. f) Uncertainty due to the Year 2000 Issue The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect an entity's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the entity, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. - ------------------------------------------------------------------------------- 3. SHARE CAPITAL AND CONTRIBUTED SURPLUS - ------------------------------------------------------------------------------- a) Authorized - 250,000,000 common shares with a par value of $0.001 <TABLE> <CAPTION> SEPTEMBER 30, NUMBER OF 1999 CONTRIBUTED SHARES $ SURPLUS --------- ------------- --------- <S> <C> <C> <C> b) Issued - Balance, <PAGE> January 1, 1999 5,320,000 5,320 235,930 Share Exchange Agreement 34,500,000 34,500 - ---------- ------ ------- Balance, end of period 39,820,000 39,820 235,930 ========== ====== ======= </TABLE> The Company entered into an agreement to acquire 100% of the issued and outstanding shares of e-Auction Global Trading Inc., a Barbados company (the legal subsidiary). The purchase price was 34,500,000 common shares of the Company. The acquisition will be accounted for as a reverse takeover where the financial statements will be issued under the name of the legal parent but will be a continuation of the financial statements of the legal subsidiary. As preparation for the acquisition the Company increased its authorized capital stock to 250,000,000 shares of common stock. In connection with the acquisition of the Barbados subsidiary the company granted 1,000,000 stock options with an exercise price of $0.01 per share to the former employees, officers and directors of this company. (SEE NOTE 5) - ------------------------------------------------------------------------------- 4. LOSS PER SHARE - ------------------------------------------------------------------------------- Loss per share for the period from January 1, 1999 to September 30, 1999 is $0.04. - ------------------------------------------------------------------------------- 5. SUBSEQUENT EVENTS - ------------------------------------------------------------------------------- Subsequent to quarter end: a) The Company entered into an agreement to acquire 100% of the issued and outstanding shares of Schelfhout Computer Systemen N.V.("Schelfhout"), a Belgian company. The purchase price is to be $10,000,000 and is to be paid as follows: <TABLE> <S> <C> <C> Deposit $1,000,000 (paid in August 1999) At closing $3,000,000 cash At closing $6,000,000 in common shares of the Company </TABLE> The $6,000,000 in shares are not free trading and are subject to a timed release formula. If the Company's shares are not freely trading on any given release date the equivalent cash is to be paid by the Company and the shares are to be returned to the Treasury. The agreement is still subject to final approval by all parties. b) In connection with the Schelfhout acquisition the Company received a loan of $1,000,000 from Millennium Advisors Inc., ("Millennium") a company related through a common director, acting as agent for undisclosed lenders. In addition Millennium received 197,219 common shares of the Company worth $1,000,000 as a financing fee. The Company also entered into a contract for services whereby Millenium would be paid 25% of any funds raised by the sale of equity or issuance of debt by the Company in excess of the amount reasonably required by the Company to complete the Schelfhout acquisition. c) The Company, through its Canadian subsidiary, made two purchases of intellectual property. The first purchase was for $300 Cdn. paid in the form of 30,000 options for common shares with an exercise price of $0.01 Cdn. per share. In connection with this acquisition the Company entered into a consulting agreement where a company associated with the vendor would be paid $5,000 Cdn. per month and would also receive 65,000 options for common shares with an exercise price of $0.01 Cdn. per share. <PAGE> The second purchase was for $50,000 Cdn. in cash. In connection with this acquisition the Company entered into a management services agreement where $1,000 Cdn. per month would be paid to the vendor who also received 80,000 options for common shares with an exercise price of $0.01 Cdn. per share. d) Approved a stock option plan where 6,000,000 common shares are reserved for issuance on the exercise of options. Options are exercisable for a period of 10 years from the date of the grant. f) Granted a director of the Company 250,000 stock options with an exercise price of $5 per share. Granted employees 3,050,000 stock options with an exercise price of $0.85 per share. g) The Company advanced a further $100,000 to Intrepidus, Inc. in connection with the Bridge loan agreement. h) The Company received an additional $2,200,000 in the form of a convertible debenture, the terms of which still have to be finalized. - ------------------------------------------------------------------------------- 6. CONTINGENCY - ------------------------------------------------------------------------------- A shareholder derivative action was brought against the Company on November 17, 1999 in the United States District Court against the Company, its subsidiaries, two of its directors and several other companies and individuals. The action alleges Sanga International, Inc.'s ("Sanga") reputation was damaged by the Defendants (i) engaging in conversion (ii) engaging in fraud (iii) interfering with Sanga's prospective business advantage (iv) breach of contract (v) violating California usury laws and (vi) breach of fiduciary duty. The plaintiff claims the defendants' actions have not only damaged Sanga but also the plaintiff and the remaining shareholders of Sanga by as much as $100 million dollars. The Action was stayed on November 29, 1999 as a result of Sanga filing for Chapter 11 bankruptcy protection in the United States Bankruptcy Court. Exposure to the Company is not determinable at this time. - ------------------------------------------------------------------------------- 7. RECONCILIATION OF UNITED STATES TO CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES - ------------------------------------------------------------------------------- a) Basic and diluted loss per share under U.S. GAAP are equal to the loss per share under Canadian GAAP. The weighted average number of shares for calculating loss per share is 32,616,703. b) Under U.S. GAAP, the Company would record a deferred tax asset subject to an evaluation allowance where that asset is impaired or not expected to be realized. The Company has deferred tax assets of approximately $78,800. The Company's valuation allowance would be equal to the amount of the deferred tax assets. Therefore, there have been no amounts booked in the accounts of the Company. <PAGE> - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE COMMON SHARES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY, TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. <TABLE> <CAPTION> TABLE OF CONTENTS Page ---- <S> <C> Prospectus Summary............................... 5 Risk Factors..................................... 6 Use of Proceeds.................................. 8 Dividend Policy.................................. 8 Capitalization................................... 8 Selected Consolidated Financial Data............. 9 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 10 Business......................................... 11 Management....................................... 21 Certain Relationships and Related Transactions... 26 Principal Stockholders........................... 26 Selling Stockholders............................. 27 Plan of Distribution............................. 29 Description of Capital Stock..................... 30 Transfer Agent................................... 31 Shares Eligible for Future Sale.................. 31 Experts.......................................... 32 Additional Information........................... 32 Index to Financial Statements.................... 33 </TABLE> Until ____________ (25 days after the date of this Prospectus), all dealers effecting transactions in the Common Shares, whether or not participating in this distribution, may be required to deliver a Prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a Prospectus when acting as Underwriters and with respect to their unsold allotments or subscriptions. 55,771,530 SHARES e-AUCTION GLOBAL TRADING INC. PROSPECTUS FEBRUARY 28, 2000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- <PAGE> PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, payable by the Registrant in connection with the sale of Common Shares being registered. All amounts are estimates except the SEC registration fee. <TABLE> <S> <C> SEC registration fee................................................................... $53,323 Printing and engraving costs........................................................... 10,000 Legal fees and expenses................................................................ 15,000 Accounting fees and expenses........................................................... 5,000 Blue Sky fees and expenses............................................................. 1,000 Miscellaneous expenses................................................................. 10,000 ------- Total............................................................................ $94,323 ======= </TABLE> ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Articles of Incorporation of e-Auction contain the following provisions which limit the liability of directors: Article V The personal liability of the directors of the corporation is hereby eliminated to the fullest extent permissible under the General Corporation Law of the State of Nevada, as the same may be amended and supplemented. Article VI The corporation shall, to the fullest extent permitted by the General Corporation Law of the State of Nevada, as the same may be amended and supplemented (the "Law") indemnify and any all persons whom it shall have power to indemnify under the Law from and against any and all of the expenses, liabilities, or other matters referred to in or covered by the Law. The indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any Bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors and administrators. Section 9 of e-Auction's By-laws, which reads as follows, provides for the indemnification of agents of and the purchase of liability insurance: For purposes of this Section 9, "agent" means any person who is or was a director, officer, employee or other agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation; "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative; and "expenses" included without limitation, attorneys' fees and any expenses of establishing a right to indemnification under this Section 9. II-2 <PAGE> The Corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any proceeding) other than an action by or in the right of the Corporation to procure a judgement in its favor) by reason of the fact that such person is or was an agent of the Corporation, against expenses, judgements, fines, settlements and other amounts actually and reasonably incurred in connection with such proceedings to the fullest extent permitted under the General Corporation Law of the State of Nevada, as amended from time to time. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since the date of its incorporation, the following transactions were effected by e-Auction in reliance upon exemptions from registration under the Securities Act of 1933, as amended, (the "1933 Act") as provided in Section 4(6) thereof. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Act and setting forth the restrictions on the transferability and the sale of the securities. On January 8, 1998, e-Auction issued 1,250,000 Common Shares equally to Fred Tham, Kam Chun Hui, Noni Wee, Kar Chun Chow and AiNgoh Chiam for an aggregate purchase price of $1,250.00 pursuant to Section 4(6) of Regulation D of the 1933 Act. E-Auction believes that the investors had knowledge and experience in financial and business matters which allowed them to evaluate the merits and risks of the receipt of these securities and that they were knowledgeable about e-Auction's operations and financial condition. On January 30, 1998, e-Auction issued 4,000,000 shares of common stock at a purchase price of one cent ($0.01) per share for an aggregate purchase price of $40,000.00 through an offering circular under Rule 504 of Regulation D promulgated under the 1933 Act. e-Auction believes that the investors had knowledge and experience in financial and business matters which allowed them to evaluate the merits and risks of the receipt of these securities and that they were knowledgeable about e-Auction's operations and financial condition. On April 26, 1998, e-Auction issued 70,000 shares of common stock at a purchase price of three dollars ($3.00) per share for an aggregate purchase price of $210,000.00 pursuant to an offering under Rule 504 of Regulation D promulgated under the 1933 Act. e-Auction believes that the investors had knowledge and experience in financial and business matters which allowed them to evaluate the merits and risks of the receipt of these securities and that they were knowledgeable about e-Auction's operations and financial condition. On February 26, 1999, e-Auction entered into a Stock Exchange Agreement with the stockholders of e-Auction (Barbados). e-Auction issued a total of 34,500,000 shares of common stock of e-Auction pursuant to Regulation S to the e-Auction (Barbados) stockholders in exchange for all of the outstanding shares of e-Auction (Barbados). e-Auction believes that the stockholders of e-Auction (Barbados) had knowledge and experience in financial and business matters which allowed them to evaluate the merits and risks of the receipt of these securities and that they were knowledgeable about e-Auction's operations and financial condition. On August 13, 2000, e-Auction issued 197,217 common shares to Millenium Advisors Inc. as their fee and interest on a $1 million loan made to the Company. The issuance was made in reliance on Regulations Promulgated under the 1933 Act. e-Auction believes that Millenium Advisors Inc. had knowledge and experience in financial and business matters which allowed them to evaluate the merits and risks of the receipt of these securities and that they were knowledgeable about e-Auction's operating and financial condition. On January 7, 2000, the Company issued 16,885,447 Common Shares to various non-United States purchasers pursuant to Regulation S promulgated under the 1933 Act upon the exercise of special warrants previously issued by the Company . e-Auction believes that the purchasers of the special warrants had knowledge and experience in financial and business matters which allowed them to evaluate the merits and risks of the receipt of these securities and that they were knowledgeable about e-Auction's operations and financial condition. On January 10, 2000, the Company issued 3,636,364 shares to the former shareholders of Schelfhout pursuant to Regulation S promulgated under the 1933 Act as partial consideration for the purchase by the Belgium subsidiary of the Company of all of the shares of Schelfhout. e-Auction believes that the stockholders of Schelfhout had knowledge and experience in financial and business matters which allowed them to evaluate the merits and risks of the receipt of these securities and that they were knowledgeable about e-Auction's operations and financial condition. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES II-3 <PAGE> (a) Exhibits <TABLE> <CAPTION> Number Description <S> <C> 3.1 Articles of the Company 3.2 By-laws of the Company 10.1 Share Exchange Agreement dated as of February 26, 1999 between Kazar International Inc. (now e-Auction Global Trading Inc.) and QFG Holdings Inc. 10.2 Share Purchase Agreement dated Jnuary 10, 2000 between e-Auction Global Trading In., e-Auction Belgium N.V., Luc Schelfhout, and Hilde Dee Laet 10.3 Pledge Agreement dated January 10, 2000 between e-Auction Belgium N.V., Luc Schelfhout, and Hilde De Laet 15.1 Letter re: unaudited financial statements 21.1 Subsidiaries of the Company 27.1 Financial Data Schedule </TABLE> (b) Financial Statement Schedules All schedules are omitted because they are inapplicable or the requested information is shown in the financial statements of the registrant or related notes thereto. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 14, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 <PAGE> SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Canada on the 28th day of February, 2000. e-AUCTION GLOBAL TRADING INC. By: /s/ Dan McKenzie -------------------------------- Dan McKenzie, President & Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dan McKenzie and David Hackett and each of them, his attorneys-in-fact, each with the power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with all exhibits thereto in all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. II-5 <PAGE> Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on February 28, 2000: <TABLE> <CAPTION> SIGNATURE TITLE --------- ----- <S> <C> /s/ Dan McKenzie Chief Executive Officer, President & Director ---------------------------- Dan McKenzie /s/ David Hackett Chief Financial Officer ---------------------------- David Hackett /s/ Philip Lapp Director ---------------------------- Philip Lapp /s/ Phil MacDonnell Director ---------------------------- Phil MacDonnell /s/ Eric White Director ---------------------------- Eric White </TABLE> II-6 <PAGE> CONSENT OF DALE MATHESON CARR-HILTON, CHARTERED ACCOUNTANTS, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated Febt, 1999, in the Registration Statement (Form S-1) and related Prospectus of e-Auction Global Trading Inc., for the registration of its common shares to filed on February 28, 2000 or thereabout. /s/ Alvin F. Dale, Ltd. Dale Matheson Carr-Hilton February 28, 2000 <PAGE> CONSENT OF DAVID A. COX, CHARTERED ACCOUNTANT, INDEPENDENT AUDITOR I consent to the reference to myself under the caption "Experts" and to the use of my report dated June 8, 1998, in the Registration Statement (Form S-1) and related Prospectus of e-Auction Global Trading Inc., for the registration of its common shares to filed on February 28, 2000 or thereabout. /s/ David A. Cox February 28, 2000 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3.1 <SEQUENCE>2 <DESCRIPTION>EX-3.1 <TEXT> <PAGE> SECRETARY OF STATE [NEVADA STATE SEAL] STATE OF NEVADA CORPORATE CHARTER I, DEAN HELLER, the duly elected and qualified Nevada Secretary of State, do hereby certify that KAZARI INTERNATIONAL, INC. did on JANUARY 8, 1998 file in this office the original Articles of Incorporation; that said Articles are now on file and of record in the office of the Secretary of State of the State of Nevade, and further, that said Articles contain all the provisions required by the law of said State of Nevada. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the Great Seal of State, at my office, in Carson City, Nevada, on January 8, 1998. /s/ Dean Heller [SEAL] Secretary of State By /s/ Illegible Certification Clerk <PAGE> FILED IN THE OFFICE OF THE SECRETARY OF STATE OF THE STATE OF NEVADA ARTICLES OF INCORPORATION JAN 08 1998 OF NO. C-353-98 --------------- KAZARI INTERNATIONAL, INC. /s/ Dean Heller DEAN HELLER, SECRETARY OF STATE I, the person hereinafter named as incorporator, for the purpose of associating to establish a corporation under the provisions and subject to the requirements of Title 7, Chapter 78 of Nevada Revised Statutes, and the acts amendatory thereof, and hereinafter sometimes referred to as the General Corporation Law of the State of Nevada, do hereby adopt and make the following Articles of Incorporation: ARTICLE I. NAME The name of this corporation is Kazari International, Inc. ARTICLE II. AGENT FOR SERVICE OF PROCESS The name of this corporation's initial agent in the State of Nevada for service of process is CSC Services of Nevada, Inc. The address of the agent is 502 East John Street, Carson City, Nevada 89706. ARTICLE III. STOCK The corporation is authorized to issue only one class of shares of stock, to be known as "common stock." The total number of shares that the corporation is authorized to issue is Forty Million (40,000,000), all of which are of a par value of $.001 each. ARTICLE IV. DIRECTORS The governing board of the corporation shall be styled as a "Board of Directors," and any member of the Board shall be styled as a "Director." <PAGE> The number of members constituting the first Board of Directors of the corporation is two (2). The names and post office boxes or street addresses, either residence or business, of said members are as follows: <TABLE> <CAPTION> Name Address ---- ------- <S> <C> T.F. Fred Tham 1304 Pik Hoi House Choi Hung Estate Kowloon, Hong Kong Terry Woo 745 E. 50th Ave. Vancouver, B.C. Canada V5X 1B4 </TABLE> The number of directors of the corporation may be increased or decreased in the manner provided in the Bylaws of the corporation; provided, that the number of directors shall never be less than one. In the interim between elections of directors by stockholders entitled to vote, all vacancies, including vacancies caused by an increase in the number of directors and including vacancies resulting from the removal of directors by the stockholders entitled to vote which are not filled by said stockholders, may be filled by the remaining directors, though less than a quorum. ARTICLE V. LIMITATION OF DIRECTOR LIABILITY The personal liability of the directors of the corporation is hereby eliminated to the fullest extent permissible under the General Corporation Law of the State of Nevada, as the same may be amended and supplemented. ARTICLE VI. INDEMNIFICATION The corporation shall, to the fullest extent permitted by the General Corporation Law of the State of Nevada, as the same may be amended and supplemented (the "Law"), indemnify any and all persons whom it shall have power to indemnify under the Law from and against any and all of the expenses, liabilities, or other matters referred to in or covered by the Law. The indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any Bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors and administrators of such a person, -2- <PAGE> [LETTERHEAD] CERTIFICATE OF ACCEPTANCE OF APPOINTMENT BY RESIDENT AGENT In the matter of KAZARI INTERNATIONAL, INC. - ------------------------------------------------------------------------------ Name of Corporation I, CSC SERVICES OF NEVADA, INC. with address at Suite F ---------------------------- ------------------------, Name of Resident Agent Street 502 E JOHN ST ----------------------------------------------------------------------, City of CARSON CITY, State of Nevada, Zip Code 89706 ------------- ------------------------------, hereby accept appointment as resident agent of the above-named corporation in accordance with NRS 78.090. (mailing address if different: ) ------------------------------------------------ JAN 8 1998 BY: /s/ [Illegible] - -------------- -- ------------------------------------------------------ Signature of Resident Agent NRS 78.090. Except during any period of vacancy described in NRS 78.097, every corporation must have a resident agent, who may be either a natural person or a corporation, resident, or located in this state. Every resident agent must have a street address, where he maintains an office for the service of process, and may have a separate mailing address such as a Post Office Box, which may be different from the street address. The address of the resident agent is the registered office of the corporation in this state. The resident agent may be any bank or banking corporation or other corporation located and doing business in this state. The Certificate of Acceptance must be filed at the time of the initial filing of the corporate papers. <PAGE> CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF KAZARI INTERNATIONAL, INC. Pursuant to the provisions of Nevada Revised Statutes, Title 7, Chapter 78, it is hereby certified that: FIRST: The name of the Corporation is Kazari International, Inc. SECOND: The Board of Directors of the corporation duly adopted the following resolutions on March 23, 1999: "RESOLVED FURTHER that Article 1 of the Articles of Incorporation of the Corporation be amended to read in full as follows: Article I. NAME The name of this corporation is e-Auction Global Trading Inc." THIRD: The total number of outstanding shares having voting power of the corporation is 39,820,000 and the total number of votes entitled to be cast by the holders of all of said outstanding shares is 39,820,000. FOURTH: The holders of at least a majority of the aforesaid total number of outstanding shares having voting power, to wit, 34,500,000 shares, dispensed with the holding of a meeting of stockholders and adopted the amendment herein certified by a consent in writing signed by such majority in accordance with the provisions of Nevada Revised Statutes, Title 7, Section 78.320. IN WITNESS WHEREOF the undersigned President and Secretary of Kazari International, Inc. have executed this certificate on this 24 day of March, 1999. /s/ Shane Maine ------------------------------------ SHANE MAINE, President /s/ Michael Gilley ------------------------------------ MICHAEL GILLEY, Secretary <PAGE> City of Toronto ) ) ss Province of Ontario ) On April 1, 1999 before me, the undersigned a notary public personally appeared Shane Maine, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s) or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal, /s/ Alex Moore - ------------------------------------ Name of Notary Public Notary Expiration Date: N/A [SEAL] ------------ * * * * * City of Vancouver ) ) ss Province of British Columbia ) On March 24, 1999 before me, the undersigned a notary public personally appeared Michael Gilley, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s) or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal, /s/ Joel A. Guralnick - ------------------------------------ Name of Notary Public Notary Expiration Date: N/A [SEAL] ------------- -2- <PAGE> CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF KAZARI INTERNATIONAL, INC. Pursuant to the provisions of Nevada Revised Statutes. Title 7, Chapter 78, it is hereby certified that: FIRST: The name of the Corporation is Kazari International, Inc. SECOND: The Board of Directors of the corporation duly adopted the following resolutions on March 23, 1999; "RESOLVED FURTHER that Article 1 of the Articles of Incorporation of the Corporation be amended to read in full as follows: Article 1. NAME The name of the corporation is "Auction Global Trading, Inc." THIRD: The total number of outstanding shares having voting power of the corporation is 39,820,000 and the total number of votes entitled to be cast by the holders of all of said outstanding shares is 39,820,000. FOURTH: The holders of at least a majority of the aforesaid total number of outstanding shares having voting power, to wit, 34,500,000 shares, dispensed with the holding of a meeting of stockholders and adopted the amendment herein certified by a consent in writing signed by such majority in accordance with the provisions of Nevada Revised Statutes, Title 7, Section 78.32D. IN WITNESS WHEREOF the undersigned President and Secretary of Kazari International, Inc. have executed this certificate on this 24 day of March 1999. /s/ Shane Maine -------------------------- SHANE MAINE, President /s/ Michael Gilley -------------------------- MICHAEL GILLEY, Secretary <PAGE> City of Toronto ) ) ss Province of Ontario ) On April 1, 1999 before me, the undersigned a notary public personally appeared Shane Maine personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the name in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s) or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. [ILLEGIBLE] - ------------------------ Name of Notary Public Notary Expiration Date: N/A [SEAL] * * * * * City of Vancouver ) ) ss Province of British Columbia ) On March 24, 1999 before me, the undersigned a notary public personally appeared Michael Gilley personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the name in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s) or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. [ILLEGIBLE] - ------------------------ [STAMP] Name of Notary Public Notary Expiration Date: N/A [SEAL] -2- <PAGE> OFFICERS' CERTIFICATE OF KAZARI INTERNATIONAL, INC. We, the undersigned President and Secretary of Kazari International, Inc., a Nevada [ILLEGIBLE] (the "Company"), in accordance with Sections 78.207 and 78.209 of the Nevada General Corporation Law, do hereby certify: (1) that the Board of Directors of the Company has authorized the cancellation of the reverse split of all of its issued and outstanding shares of Common Stock of the Company (the "Common Stock") that took effect on January 29, 1999 (the "Reverse Split") pursuant to that certain Officers' Certificate of the Company that was filed with the Secretary of State of Nevada on January 22, 1999; (2) that the Board of Directors has authorized an increase in the number of authorized shares of Common Stock of the Company from 40,000,000 shares of Common Stock to 250,000,000 shares of Common Stock; and (3) as follows: (a) that the number of authorized shares of the Company prior to the Reverse Split was 40,000,000 shares of Common Stock, par value $0.001; (b) that effective as of the Reverse Split, the number of authorized shares of the Company remained at 40,000,000 shares of Common Stock, par value $0.001; (c) that there were no exchanges of stock certificates in accordance with the Reverse Split whereby for every two (2) existing issued and outstanding shares of Common Stock held, the holder was to receive one (1) share of new Common Stock, par value $0.001 per share; and (d) that effective as of the filing of this Officers' Certificate, the number of authorized shares of the Company shall increase from 40,000,000 shares of Common Stock, par value of $0.001 to 250,000,000 shares of Common Stock, par value of $0.001. IN WITNESS WHEREOF, we have executed this Officers' Certificate on this 24 day of March, 1999. /s/ Shane Maine ------------------------------------ SHANE MAINE President /s/ Michael Gilley ------------------------------------ MICHAEL GILLEY Secretary <PAGE> City of Toronto ) ) as Province of Ontario ) On April 1, 1999 before me, the undersigned a notary public in and for said county and state, personally appeared Shane Maine, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS My hand and Official Seal /s/ John Alexander Moore - ------------------------------------- John Alexander Moore - ------------------------------------- Printed Name of Notary Public My Commission Expires N/A [SEAL] ------------ - ------------------------------------------------------------------------------ City of Vancouver ) ) as Province of British Columbia ) On March 29, 1999 before me, the undersigned a notary public in and for said county and state, personally appeared Michael Gilley, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS My hand and Official Seal /s/ Joel A. [ILLEGIBLE] - ------------------------------------- Joel A. [ILLEGIBLE] - ------------------------------------- Printed Name of Notary Public My Commission Expires N/A [SEAL] ------------ </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3.2 <SEQUENCE>3 <DESCRIPTION>EX-3.2 <TEXT> <PAGE> BYLAWS FOR THE REGULATION, EXCEPT AS OTHERWISE PROVIDED BY STATUTE OR ITS ARTICLES OF INCORPORATION, OF KAZARI INTERNATIONAL, INC. (A NEVADA CORPORATION) ARTICLE I. OFFICES. Section 1. PRINCIPAL EXECUTIVE OFFICE. The principal executive office of the Corporation shall be fixed and located at such place as the Board of Directors (herein referred to as the "Board") shall determine. The Board is granted full power and authority to change said principal executive office from one location to another. Section 2. OTHER OFFICES. Branch or subordinate offices may be established at any time by the Board at any place or places. ARTICLE II. SHAREHOLDERS. Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be held on the principal executive office of the Corporation unless another place within or without the State of Nevada is designated by the Board. Section 2. ANNUAL MEETINGS. The annual meetings of shareholders shall be held on the last Friday in August of each year, at 10:00 A.M., local time, or such other date or such other time as may be fixed by the Board, provided, however, that should said day fall upon a Saturday, Sunday or legal holiday observed by the Corporation at its principal executive office, then any such annual meeting of shareholders shall be held at the same time and place on the next day thereafter ensuing which is a business day. At such meetings, directors shall be elected and any other proper business may be transacted. 1 <PAGE> Section 3. SPECIAL MEETINGS. Special meetings of the shareholders may be called at any time by the Board, the Chairman of the Board, the President or by the holders of shares entitled to cast not less than ten percent of the votes at such meeting. Section 4. NOTICE OF ANNUAL OR SPECIAL MEETINGS. Written notice of each annual or special meeting of shareholders shall be given not less than 10 nor more than 60 days before the date of the meeting to each shareholder entitled to vote thereat. Such notice shall be given either personally or by first-class mail, postage prepaid, or by other means of written communication, addressed to the shareholder at the address of such shareholder appearing on the books of the Corporation or given by the shareholder to the Corporation for the purpose of notice, or if no such address appears or is given, at the place where the principal executive office of the Corporation is located or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located. After notice is given by mail, the Secretary or the Assistant Secretary, if any, or transfer agent, shall execute an affidavit of mailing in accordance with this section. The notice shall state the place, date and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted, or (ii) in the case of the annual meeting, those matters which the Board, at the time of the mailing of the notice, intends to present for action by the shareholders, but, subject to the provisions of applicable law, any proper matter may be presented at the meeting for such action. The notice of any meeting at which directors are to be elected, shall include the names of nominees intended at the time of notice to be presented by the Board for election. Section 5. QUORUM. A majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at any meeting of the shareholders. Subject to the Articles of Incorporation of the Corporation (herein referred to as the "Articles of Incorporation"), the shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave 2 <PAGE> less than a quorum, if any action taken (other than adjournment) is approved by at lease a majority of the shares required to constitute a quorum. Section 6. ADJOURNED MEETINGS AND NOTICE THEREOF. Any meeting of shareholders, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares, the holders of which are either present in person or represented by proxy thereat, but in the absence of a quorum (except as provided in Section 5 of this Article) no other business may be transacted at such meeting. It shall not be necessary to give any notice of the time and place of the adjourned meeting or of the business to be transacted thereat, other than by announcement at the meeting at which such adjournment is taken; provided, however, when any shareholders' meeting is adjourned for more than 45 days or, if after adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given as in the case of an original meeting. Section 7. VOTING. The shareholders entitled to notice of any meeting or to vote at any such meeting shall be only those persons in whose names shares are registered in the stock records of the Corporation on the record date determined in accordance with Section 8 of this Article. Except as provided below and except as may be otherwise provided in the Articles of Incorporation, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of shareholders. Subject to the requirements of the next sentence, every shareholder entitled to vote at any election of directors may cumulate such shareholder's votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which such shareholder's shares are normally entitled, or distribute the shareholder's votes on the same principle among as many candidates as the shareholder thinks fit. No shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such shareholder normally is entitled to cast) unless such candidate or candidates' names have been placed in nomination prior 3 <PAGE> to the voting and any shareholder has given notice at the meeting prior to the voting of such shareholder's intention to cumulate the shareholder's votes. Any holder of shares entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, other than elections to office, but, if the shareholder fails to specify the number of shares such shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares such shareholder is entitled to vote. Elections for directors need not be by ballot unless a shareholder demands election by ballot at the meeting and before the voting begins. Provided that the quorum requirements of Section 5 above are satisfied: the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the Nevada General Corporation Law or the Articles of Incorporation, provided that whenever under the Nevada General Corporation Law shares are disqualified from voting on any matter, they shall not be considered outstanding for the purposes of the determination of a quorum at any meeting to act upon, or the required vote to approve action upon any matter; and in any election of directors, the candidates receiving the highest number of affirmative votes of the shares entitled to be voted for them, up to the number of directors to be elected by such shares, are elected; votes against the director and votes withheld shall have no legal effect. Section 8. RECORD DATE. The Board may fix, in advance, a record date for the determination of the shareholders entitled to notice of, or to vote at, any meeting of the shareholders, or the shareholders entitled to receive payment of any dividend or other distribution, or any allotment of rights, or to exercise rights in respect of any other lawful action. 4 <PAGE> The record date so fixed shall be not more than 60 days nor less than 10 days prior to the date of the meeting nor more than 60 days prior to any other action. If no record date is fixed by the Board, (i) the record date for determining shareholders entitled to notice of, or to vote at, a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held, and (ii) the record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board has been taken, shall be the day on which the first written consent is given. A determination of shareholders of record entitled to notice of, or to vote at, a meeting of shareholders shall apply to any adjournment of the meeting unless the Board fixes a new record date for the adjourned meeting. The board shall fix a new record date if the meeting is adjourned for more than 45 days from the date set for the original meeting. Section 9. CONSENT OF ABSENTEES. The transactions of any meeting of shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice, or a consent to the holding of the meeting, or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Neither the business to be transacted at nor the purpose of any annual or special meeting of shareholders, need be specified in any written waiver of notice, except as provided in the Nevada General Corporation Law. Section 10. ACTION WITHOUT MEETING. Subject to the applicable section of the Nevada General Corporation Law, any action which, under any provision of the Nevada General Corporation Law, any be taken at any annual or special meeting of shareholders, may be taken without a meeting and without prior notice if a consent in writing, setting forth the action so 5 <PAGE> taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Section 11. PROXIES. Every person entitled to vote shares shall have the right to do so either in person or by one or more persons authorized by a valid written proxy signed by such person or such person's attorney in fact and filed with the Secretary. Subject to the provision of this bylaw and applicable law, any duly executed proxy continues in full force and effect until revoked by the person executing it prior to the vote pursuant thereto. Section 12. INSPECTORS OF ELECTION. Prior to any meeting of shareholders, the Board may appoint inspectors of election to act at the meeting or any adjournment thereof. If inspectors of election are not so appointed, or if any persons so appointed fail to appear or refuse to act, the chairman of the meeting may, and on the request of any shareholder or his proxy shall, appoint inspectors of election or persons to replace those who fail to appear or refuse to act at the meeting. The number of inspectors shall be either one or three. If appointed at a meeting on the request of one or more shareholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one or three inspectors are to be appointed. The inspectors of election shall (i) determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum and the authenticity, validity and effect of proxies, (ii) receive votes, ballots or consents, (iii) hear and determine all challenges and questions in any way arising in connection with the right to vote, (iv) count and tabulate all votes or consents, (v) determine when the poll shall close and the election result and (vi) do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as it is practicable. If there are three inspectors of election, 6 <PAGE> the decision, act or certificate of majority is effective in all respects as the decision, act or certificate of all. ARTICLE III. DIRECTORS. Section 1. POWERS. Subject to limitations of the Articles of Incorporation, these Bylaws and the Nevada General Corporation Law relating to actions required to be approved by the shareholders or by the outstanding shares, the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board. Section 2. COMMITTEES. The Board may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two or more directors, to serve at the pleasure of the Board. The Board may designate one or more directors as alternate members of any committee, who may replace any absent member of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any such committee, to the extent provided in the resolution of the Board, shall have all the authority of the Board, except with respect to (i) the approval of any action required to be approved by the shareholders or by the outstanding shares under the Nevada General Corporation Law, (ii) the filling of vacancies on the Board or in any committee, (iii) the fixing of compensation of the directors for serving on the Board or on any committee, (iv) the adoption, amendment or repeal of Bylaws, (v) the amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable, (vi) a distribution to the shareholders, except at a rate or in a periodic amount or within a price range determined by the Board and (viii) the appointment of other committees of the Board or the members thereof. Section 3. NUMBER OF DIRECTORS. The authorized number of directors shall be two (2) until changed by an amendment of the Articles of Incorporation or this Section 3 duly approved by the shareholders, subject to the Nevada General Corporation Law. However, any 7 <PAGE> reduction of the authorized number of directors does not remove any director prior to the expiration of such director's term of office. Section 4. ELECTION AND TERM OF OFFICE. The directors shall be elected at each annual meeting of the shareholders, but if any such annual meeting is not held or the directors are not elected thereat, the directors may be elected at any special meeting of shareholders held for that purpose. Subject to Section 5 of this Article, each director shall hold office until the next annual meeting and until a successor has been elected and qualified. Section 5. VACANCIES. A vacancy or vacancies in the Board shall be deemed to exist in case of the death, resignation or removal of any director, if the authorized number of directors be increased or if the shareholders fail at any annual or special meeting of shareholders at which any directors are elected, to elect the full authorized number of directors to be voted at that meeting. Vacancies in the board, except those existing as a result of a removal of a director, may be filled by a majority of the remaining directors, or, if the number of remaining directors is less than a quorum, by (i) the unanimous written consent of the remaining directors, (ii) the affirmative vote of a majority of the remaining directors at a meeting held pursuant to notice or waivers of notice complying with the applicable section of the Nevada General Corporation Law, or (iii) by a sole remaining director, and each director so elected shall hold office until the next annual meeting and until such director's successor has been elected and qualified. Vacancies in the Board created by the removal of a director may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) or by the unanimous written consent of all shares entitled to vote for the election of directors. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. Any such election by written consent other than to fill a 8 <PAGE> vacancy created by removal requires the consent of a majority of the outstanding shares entitled to vote. Section 6. RESIGNATION. Any director may resign effective upon giving written notice to the President, the Secretary or the Board, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. Section 7. PLACE OF MEETINGS. Regular or special meetings of the Board shall be held at any place with or without the State of Nevada which has been designated in the notice of the meeting or, if not stated therein, as designated by resolution of the Board. In the absence of such designation, meetings shall be held at the principal executive office of the Corporation. Section 8. ANNUAL MEETINGS. Immediately following each annual meeting of shareholders, the Board may, but shall not be required to, hold an annual meeting at the same place, or at any other place that has been designated by the Board, for the purpose of organization, election of officers or transaction of other business as the Board may determine. Call and notice of this meeting of the Board shall be in the manner for the conduct of special meetings as provided in Section 9 unless the board has determined by resolution to conduct a regular meeting at such time and place, in which event call and notice of this meeting of the Board shall not be required unless some place other than the place of the annual shareholders' meeting has been designated. Section 9. SPECIAL MEETINGS. Special meetings of the Board for any purpose or purposes may be called at any time by the Chairman of the Board, the President, the Secretary or by any two directors upon four days' notice by mail or 48 hours' notice given personally or by telephone, telegraph, telex or other similar means of communication. Any such notice shall be addressed or delivered to each director at such director's address as it is shown upon the records of the Corporation or as may have been given to the Corporation by the director for purposes of notice. 9 <PAGE> Section 10. QUORUM. A majority of the authorized number of directors constitutes a quorum of the Board for the transaction of business, except to adjourn as hereinafter provided. Every act or decision done or made by a majority of the directors present at a meeting duly held at which quorum is present shall be regarded as the act of the Board, unless a greater number be required by law or by the Articles. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. Section 11. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE. Members of the Board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Section 12. WAIVER OF NOTICE. Notice of a meeting need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 13. ADJOURNMENT. A majority of the directors present, whether or not a quorum is present, may adjourn any directors' meeting to another time and place. If a meeting is adjourned for more than 24 hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors that were not present at the time of adjournment. Section 14. FEES AND COMPENSATION. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by the Board. 10 <PAGE> Section 15. ACTION WITHOUT MEETING. Any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. Such action by written consent shall have the same effect as a unanimous vote of the members of the Board. ARTICLE IV. OFFICERS. Section 1. OFFICERS. The officers of the Corporation shall be a President, a Secretary and a Chief Financial Officer. The Corporation may also have, at the discretion of the Board, a Chairman, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Financial Officers and such other officers as may be elected or appointed in accordance with the provisions of Section 3 of this Article. Section 2. ELECTION. The officers of the Corporation, except such officers as may be elected or appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen by, and shall serve at the pleasure of, the Board, and shall hold their respective offices until their resignation, removal or other disqualification from service, or until their respective successors shall be elected and qualified. Section 3. SUBORDINATE OFFICERS. The Board may elect, and may empower the President to appoint, such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in these Bylaws or as the Board may from time to time determine. Section 4. REMOVAL AND RESIGNATION. Any officer may be removed, either with or without cause, by the Board at any time. Any officer may resign at any time upon written notice to the Corporation without prejudice to the rights, if any, of the Corporation under any contract to which the office is a party. 11 <PAGE> Section 5. VACANCIES. A vacany in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular election or appointment to such office. Section 6. PRESIDENT. The President is the general manager and chief executive officer of the Corporation and has, subject to the control of the Board, general supervision, direction and control of the business and officers of the Corporation. The President shall preside at all meetings of the shareholders and at all meetings of the Board. The President has the general powers and duties of management usually vested in the office of president and general manager of a corporation and such other powers and duties as may be prescribed by the Board. Section 7. VICE PRESIDENTS. In the absence or disability of the President, unless a Chairman has been elected, the Vice Presidents in order of their rank as fixed by the Board or, if not ranked, the Vice President designated by the Board, shall perform all the duties of the President and, when so acting, shall have all the powers of and be subject to all the restrictions upon the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board. Section 8. SECRETARY. The Secretary shall keep or cause to be kept, at the principal executive office and such other place as the Board may order, a book of minutes of all meeting of shareholders and the Board, with the time and place of holding, whether regular or special, and if special, how authorized, the notice thereof given, the names of those present or represented at meetings of shareholders, and the proceedings thereof. The Secretary shall keep, or cause to be kept, a copy of the Bylaws of the Corporation at the principal executive office or business office in accordance with the applicable section of the Nevada General Corporation Law. The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the Corporation's transfer agent or registrar, if one be appointed, a share register, or a duplicate share register, showing the names of the shareholders and their addresses, the number 12 <PAGE> and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and the Board required by these Bylaws or by law to be given, shall keep the seal of the Corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board. Section 9. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the properties and business transactions of the Corporation, and shall send or cause to be sent to the shareholders of the Corporation such financial statements and reports as are by law or these Bylaws required to be sent to them. The books of account shall at all times be open to inspection by any director. The Chief Financial Officer shall deposit all moneys and other valuables in the name and to the credit of the Corporation with such depositories as may be designated by the Board. The Chief Financial Officer shall disburse the funds of the Corporation as may be ordered by the Board, shall render to the President and directors, upon their request, an account of all transactions as Chief Financial Officer and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board. Section 10. CHAIRMAN OF THE BOARD. If such an officer be elected, the Chairman of the Board shall preside at meetings of the board of directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the board of directors or prescribed by the Bylaws. In the absence of the President, or if there is no President, the Chairman of the Board shall, in addition, be the chief executive officer of the Corporation and shall have the powers and duties described in Section 6 above. ARTICLE V. OTHER PROVISIONS. Section 1. INSPECTION OF CORPORATE RECORDS. The record of shareholders shall be open to inspection and copying, and the accounting books and records and minutes of 13 <PAGE> proceedings of the shareholders and the Board and committees of the Board, if any, shall be open to inspection, upon written demand on the Corporation of any shareholder at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder. Section 2. INSPECTION OF BYLAWS. The Corporation shall keep at its principal executive office in the State of Nevada, or if its principal executive office is not in Nevada, at its principal business office in Nevada, the original or a copy of these Bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the Corporation is outside Nevada and the Corporation has no principal business office in Nevada, it shall upon the written request of any shareholder furnish to such shareholder a copy of these Bylaws as amended to date. Section 3. ENDORSEMENT OF DOCUMENTS; CONTRACTS. Subject to the provisions of applicable law, any note, mortgage, evidence of indebtedness, contract, share certificate, initial transaction statement or written statement, conveyance or other instrument in writing and any assignment or endorsement thereof executed or entered into between the Corporation and any other person shall be valid and binding on the Corporation, when signed by the Chairman, the President or any Vice President and the Secretary, any Assistant Secretary, the Chief Financial Officer or any Assistant Financial Officer of the Corporation unless the other party knew that the signing officers had no authority to execute the same. Any such instruments may be signed by any other person or persons and in such manner as from time to time shall be determined by the Board, and, unless so authorized by the Board, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or amount. Section 4. CERTIFICATES OF STOCK. Every holder of shares of the Corporation shall be entitled to have a certificate signed in the name of the Corporation by the President or a Vice President and by the Chief Financial Officer or an Assistant Financial Officer or the 14 <PAGE> Secretary or an Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. Except as provided in this Section, no new certificate for shares shall be issued in lieu of an old one unless the latter is surrendered and cancelled at the same time. The Board may, however, if any certificate for shares is alleged to have been lost, stolen or destroyed, authorize the issuance of a new certificate in lieu thereof, and the Corporation may require that the Corporation be given a bond or other adequate security sufficient to indemnify it against any claim that may be made against it (including expense or liability) on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate. Section 5. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The President or any other officer or officers authorized by the Board or by the President are each authorized to vote, represent and exercise on behalf of the Corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of the Corporation. The authority herein granted may be exercised either by any such officer in person or by any other person authorized so to do by proxy or power of attorney duly executed by said officer. Section 6. ANNUAL REPORT TO SHAREHOLDERS. The requirement of sending an annual report to shareholders which is set forth in the Nevada General Corporation Law is expressly waived, but nothing herein shall be interpreted as prohibiting the Board from issuing annual or other periodic reports to shareholders. Notwithstanding the immediately preceeding paragraph, if the Corporation has 100 or more holders of record of its shares (determined as provided in the Nevada General Corporation Law), the Board shall cause an annual report to be sent to the shareholders not later than 120 days after the close of the fiscal year. Such report, in addition to such information as may be required by the Nevada General Corporation Law, shall contain a balance sheet as of the end of that fiscal year and an income statement and statement of changes in financial position for that fiscal year, accompanied by any report thereon of independent accountants or, if there is no such report, the 15 <PAGE> certificate of an authorized officer of the Corporation that the statements were prepared without audit from the books and records of the Corporation. The requirement of sending such report to the shareholders at least 15 (or, if sent by third-class mail, 35) days prior to the annual meeting of shareholders to be held during the next fiscal year is expressly waived. Section 7. CONSTRUCTION AND DEFINITIONS. Unless the context otherwise requires, the general provisions, rules of construction and definitions contained in the General Provisions of the Nevada Corporations Code and in the Nevada General Corporation Law shall govern the construction of these Bylaws. Section 8. COMPENSATION. The salaries of all officers and agents of the Corporation shall be fixed by the Board. Section 9. INDEMNIFICATION OF AGENTS OF THE CORPORATION; PURCHASE OF LIABILITY INSURANCE. For purposes of this Section 9, "agent" means any person who is or was a director, officer, employee or other agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation; "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative; and "expenses" includes without limitation, attorneys' fees and any expenses of establishing a right to indemnification under this Section 9. The Corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the Corporation to procure a judgment in its favor) by reason of the fact that such person is or was an agent of the Corporation, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding to the fullest extent 16 <PAGE> permitted under the General Corporation Law of the State of Nevada, as amended from time to time. Section 10. CORPORATE LOANS AND GUARANTEES TO DIRECTORS AND OFFICERS. The Corporation shall not make any loan of money or property to, or guarantee the obligation of, any director or officer of the Corporation or of its parent, if any, unless the transaction, or an employee benefit plan authorizing the loans or guarantees after disclosure of the right under such a plan to include officers or directors, is approved by a majority of the shareholders entitled to act thereon. The Corporation shall not make any loan of money or property to, or guarantee the obligation of, any person upon the security of shares of the Corporation or of its parent, if any, if the Corporation's recourse in the event of default is limited to the security for the loan or guaranty, unless the loan or guaranty is adequately secured without considering these shares, or the loan or guaranty is approved by a majority of the shareholders entitled to act thereon. Notwithstanding the first paragraph of this Section 10, the Corporation may advance money to a director or officer of the Corporation or of its parent, if any, for any expenses reasonably anticipated to be incurred in the performance of the duties of the director or officer, provided that in the absence of the advance the director or officer would be entitled to be reimbursed for the expenses by the Corporation, its parent, or subsidiary, if any. The provisions of the first paragraph of this Section 10 do not apply to the payment of premiums in whole or in part by the Corporation on a life insurance policy on the life of a director or officer so long as repayment to the Corporation of the amount paid by it is secured by the proceeds of the policy and its cash surrender value. The provisions of this Section 10 do not apply to any transaction, plan or agreement permitted under the applicable section of the Nevada General Corporation Law relating to employee stock purchase plans. 17 <PAGE> For the purposes of this Section, " approval by a majority of the shareholders entitled to act" means either (1) written consent of a majority of the outstanding shares without counting as outstanding or as consenting any shares owned by any officer or director eligible to participate in the plan or transaction that is subject to this approval, (2) the affirmative vote of a majority of the shares present and voting at a duly held meeting at which a quorum is otherwise present, without counting for purposes of the vote as either present or voting any shares owned by any officer or director eligible to participate in the plan or transaction that is subject to the approval, or (3) the unanimous vote or written consent of the shareholders. If the Corporation has more than one class or series of shares outstanding, the "shareholders entitled to act" within the meaning of this Section includes only holders of those classes or series entitled under the articles to vote on all matters before the shareholders or to vote on the subject matter of this Section, and includes a requirement for separate class or series voting, or for more or less than one vote per share, only to the extent required by the Articles. ARTICLES VI. AMENDMENTS. These Bylaws may be amended or repealed either by approval of the outstanding shares or by the approval of the Board; provided, however, that after the issuance of shares, a Bylaw specifying or changing a fixed number of directors or the maximum or minimum number or changing from a fixed to a variable number of directors or vice versa may be adopted only by approval of the outstanding shares. 18 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.1 <SEQUENCE>4 <DESCRIPTION>EX-10.1 <TEXT> <PAGE> SHARE EXCHANGE AGREEMENT THIS SHARE EXCHANGE AGREEMENT is made effective as at the 26th day of February, 1999. BETWEEN: QFG HOLDINGS LIMITED, on behalf of itself and on behalf of the other shareholders of e-Auction Global Trading Inc. (hereinafter called the "Vendor"), AND: KAZARI INTERNATIONAL INC., a Nevada Corporation, a company whose common shares are eligible for trading on the NASDAQ OTC system (hereinafter called the "Purchaser") AND: e-AUCTION GLOBAL TRADING INC., a company duly incorporated under the laws of Barbados (hereinafter called the "Company") WHEREAS: A. The Vendor either holds the proxy to vote or is the owner of 34,500,000 common shares of e-Auction Global Trading Inc. (the "Company"), representing all of the issued and outstanding shares in the capital of e-Auction; B. The Vendor, on behalf of itself and on behalf of the other shareholders of e-Auction executed a binding letter of intent dated February 26, 1999 with the Purchaser pursuant to which the Purchaser has agreed to purchase all of the issued and outstanding shares in the capital of e-Auction in exchange for 34,500,000 common shares of the Purchaser being issued from treasury to the shareholders of e-Auction on a one for one basis; <PAGE> C. Based upon the representations and warranties set forth herein, the Vendor has agreed to sell to the Purchaser the Vendor's Shares (as hereinafter defined) and the Purchaser has agreed to purchase the same from the Vendor, on the terms and conditions and for the consideration set forth herein; WITNESSETH THAT in consideration of the premises and of the respective warranties, representations, covenants and agreements contained herein, the parties hereto agree as follows: ARTICLE 1 INTERPRETATION AND DEFINITIONS 1.1 DEFINITIONS For all purposes of this Agreement: (i) "BUSINESS" means the business carried on by the Company which primarily involves the provision of an electronic auction service; (ii) "CLOSING" means the definition set forth in Article 6.1 hereof; (iii) "CLOSING DATE" means the date of the Closing referred to in Article 6.1 hereof; (iv) "COMPANY" means e-Auction Global Trading Inc.; (v) "INTELLECTUAL PROPERTY" means all rights to and interests in: (a) all business and trade names, corporate names, brand names and slogans Related to the Business; (b) all inventions, patents, patent rights, patent applications (including all reissues, divisions, continuations, continuations-in-part and extensions of any patent or patent application), industrial designs and applications for registration of industrial designs Related to the Business; (c) all copyrights and trade marks (whether used with wares or services and including the goodwill attaching to such trade marks), registrations and applications for trade marks and copyrights (and all future income from such trade marks and copyrights) Related to the Business; (d) all rights and interests in and to processes, lab journals, notebooks, data, trade secrets, designs, know-how, product formulae and information, manufacturing, engineering and other drawings and manuals, technology, <PAGE> blue prints, research and development reports, agency agreements, technical information, technical assistance, engineering data, design and engineering specifications, and similar materials recording and evidencing expertise or information Related to the Business; (e) all of the intellectual property listed in Schedule 2.1; (f) all other intellectual and industrial property rights throughout the world Related to the Business; (g) all licenses of the intellectual property listed in items (a) to (f) above; (h) all future income and proceeds from any of the intellectual property listed in items (a) to (f) above and the licenses listed in item (g) above; and (i) all rights to damages and profits by reason of the infringement of any of the intellectual property listed in items (a) to (g) above. (vi) "PAYMENT SHARES" means 34,500,000 common shares without par value in the capital of the Purchaser described in Article 5.2 hereof; (vii) "PURCHASER" means Kazari International Inc.; (vii) "RELATED TO THE BUSINESS" means, directly or indirectly, used in, arising from or relating in any manner to the Business; (viii) "VENDOR" means QFG Holdings Limited; and (ix) "VENDORS SHARES" means the 34,500,000 shares in the capital of the Company as set forth in Article 2.1(i) hereof. 1.2 INTERPRETATION For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: (i) "this Agreement" means this Agreement and all Schedules attached hereto; (ii) any reference in this Agreement to a designated "Article", "Section", "Schedule" or other subdivision refers to the designated Article, Section, Schedule or other subdivision of this Agreement; <PAGE> (iii) the words "herein" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision of this Agreement; (iv) the word "including", when following any general statement term or matter, is not to be construed to limit such general statement, term or matter to the specific items or matters set forth immediately following such word or to similar items or matters, whether or not non-limited language (such as "without limitation" or "but not limited to" or words of similar import) is used with reference thereto but rather refers to all other items or matters that could reasonably fall within the broadest possible scope of such general statement, term or matter; (v) any reference to a statute includes and, unless otherwise specified herein, is a reference to such statute and to the regulations made pursuant thereto, with all amendments made thereto and in force from time to time, and to any statute or regulations that may be passed which has the effect of supplementing or superseding such statute or such regulation; and (vi) words importing the masculine gender include the feminine or neuter gender and words in the singular include the plural, and vice versa. ARTICLE 2 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE VENDORS AND THE COMPANY 2.1 REPRESENTATIONS AND WARRANTIES The Vendor and the Company represent and warrant, jointly and severally, to the Purchaser, as continuing representations and warranties which are true and correct on the date hereto or, if any such representation and warranty is expressed to be made and given in respect of a particular date other than the date hereto, then such representation and warranty shall be true and correct on the earlier of such date or the Closing Date, and all representations and warranties herein shall be true and correct on each day thereafter to and including the Closing Date with the same effect as if made and given on and as of each such day that: (i) each of the following is the beneficial and recorded owner of such number of common shares in the capital of the Company as is hereinafter set opposite each Vendor's name (collectively the "Vendor's Shares"); <PAGE> <TABLE> <CAPTION> NAME OF VENDOR NO. OF SHARES -------------- ------------- <S> <C> Platinum Capital Management Inc. 2,500,000 Platinum Capital Management Inc. 1,000,000 in trust for John Andrews Zorba Holdings Limited 1,500,000 e-Auction Global Trading Inc. (BVI) 1,500,000 QFG Holdings Limited 4,000,000 China Capital Financial Corp 1,500,000 Web CCB (BVI) 750,000 CCS Technologies Inc. 750,000 Hartford Holdings Limited 3,000,000 BFM Enterprises Inc. 1,500,000 John Andrews in trust for the 16,500,00 Shareholders of Sanga International Inc. </TABLE> (ii) the Vendor's Shares are free and clear of any liens, charges, claims, options, set-offs, encumbrances, voting agreements, voting trusts, escrow restrictions or other limitations or restrictions of any nature whatsoever, except as expressly provided for or disclosed herein; (iii) the Vendor's Shares represent 100% of the Company's issued and outstanding share capital; (iv) no person, firm or corporation has any right, agreement or option, present or future, contingent or absolute, or any right capable of becoming a right, agreement or option to purchase or otherwise acquire any of the Vendor's Shares; (v) the Vendor has the full and absolute right, power and authority to enter into this Agreement on the terms and subject to the conditions herein set forth, to carry out the transactions contemplated hereby and to transfer, or cause to be transferred, on the Closing Date, legal and beneficial title and ownership of the Vendor's Shares to the Purchaser. (vi) the Company is duly incorporated, validly existing and in good standing under the laws of Barbados and in each other jurisdiction in which it carries on business or hold assets and the Company has the necessary corporate capacity to carry on the business which it now carries on in such jurisdictions and to own the assets which it now owns; <PAGE> (vii) the authorized capital of the Company consists of an unlimited number of common shares without par value, of which a total of 34,500,000 common shares have been validly issued, are outstanding and are fully paid and non-assessable; (viii) no person, firm or corporation has any right, agreement or option, present or future, contingent or absolute, or any right capable of becoming a right, agreement or option to require the Company to issue any shares in its capital or to convert any securities of the Company or of any other company into shares in the capital of the Company; (ix) the corporate records of the Company, as required to be maintained by it under its statute of incorporation and constating documents, are accurate, complete and up-to-date in all material respects and all material transactions of the Company have been promptly and properly recorded in their books or filed with their records; (x) the Company does not have any liability, due or accruing, contingent or absolute, and is not directly or indirectly subject to any guarantee, indemnity or other contingent or indirect obligation with respect to the obligation of any other person or company, other than any such liability, guarantee, indemnity or obligation incurred or assumed by it in the course of their normal and ordinary day to day business and no such liability, guarantee, indemnity or obligation has been paid or discharged by the Company other than in the course of their normal and ordinary day to day business; (xi) the Company does not beneficially own, directly or indirectly, shares in any other corporate entity; (xii) the Company has good and marketable title to all of its assets, and such assets are free and clear of any material financial encumbrances; (xiii) the Company holds all permits, licenses, consents and authorizations issued by any government or governmental authority which are necessary in connection with the operation of its business and the ownership of its properties and assets; (xiv) the Company has filed all necessary tax returns in all jurisdictions required to be filed by them, all returns affecting workers, compensation with the appropriate agency, corporation capital tax returns, if required, and any other material reports and information required to be filed by the Company with any governmental authority; the Company has paid all income, sales and capital taxes payable by them as and when due; the Company has withheld and remitted to tax collection authorities such taxes as are required by law to be <PAGE> withheld and remitted as and when due; the Company has paid all instalments of corporate taxes due and payable, and there is not presently outstanding and nor does the Company expect to receive any notice of re-assessment from any applicable tax collecting authority; (xv) the Company has not declared or paid any dividends of any kind or declared or made any other distributions of any kind whatsoever including, without limitation, by way of redemption, repurchase or reduction of its authorized capital; (xvi) the Company has not engaged in any transaction or made any disbursement or assumed or incurred any liability or obligation or made any commitment, including, without limitation, any forward purchase commitment or similar obligation, to make any expenditure which would materially affect their operations, property, assets or financial condition; (xvii) the Company has not waived or surrendered any right of substantial value and has not made any gift of money or of any of its property or assets; (xviii) the Company has carried on business in the normal course; (xix) the Vendor has entered into a letter agreement ("Letter Agreement") dated February 2, 1999 with Jameson Investment Corporation ("Jameson") pursuant to which the Vendor is to obtain from Jameson all of the issued and outstanding shares in the capital of Jameson International Foreign Corporation ("JFX"), a copy of such Letter Agreement has been previously delivered to the Purchaser. The Letter Agreement is in full force and effect and neither party thereto is in breach of any provision. The Vendor is entitled to the full benefit and advantage of the Letter Agreement in accordance with its terms. The Vendor has not received any notice of default by the Vendor or a dispute between the Vendor and any other party in respect of the Letter Agreement and the parties are continuing to proceed to a closing. There has not occurred any event which, with the lapse of time or giving of notice or both, would constitute a default under the Letter Agreement by the Vendor or any other party to the Letter Agreement. At or before the closing of the transaction contemplated in the Letter Agreement, the Vendor shall immediately transfer and assign absolutely all of the shares of JFX to the Company. The Vendor hereby assigns all of its interest in the Letter Agreement to the Company. Except as described above, the Company does not have outstanding any material continuing contractual obligations whatsoever relating to or affecting the conduct of its business or any of its property or assets or for the purchase, sale or leasing of any property other than those contracts entered into by the Company in the course of their normal and ordinary day to day business; <PAGE> (xx) there are no material management contracts or consulting contracts to which the Company is a party or by which either is bound, and no amount is payable or has been agreed to be paid by the Company to any persons as remuneration, pension, bonus, share of profits or other similar benefit and no director, officer or member, or former director, officer or member, of the Company, nor any associate or affiliate of any such person, has any claim of any nature against, or is indebted to, the Company; (xxii) the Company is not in default under or in breach of, or would, after notice or lapse of time or both, be in default under any contract, agreement, indenture or other instrument to which it is a party or by which it is bound nor will the consummation of the transactions contemplated hereby conflict with, constitute a default under, result in a breach of, entitle any person or company to a right of termination under, or result in the creation or imposition of any lien, encumbrance or restriction of any nature whatsoever upon or against the property or assets of the Company, under their constating documents, any contract, agreement, indenture or other instrument to which the Company is a party or by which either is bound, any law, judgment, order, writ, injunction or decree of any court, administrative agency or other tribunal or any regulation of any governmental authority, and all such contracts, agreements, indentures, or other instruments are in good standing and the Company is entitled to all benefits thereunder; (xxiii) there are no claims threatened or against or affecting the Company nor are there any actions, suits, judgments, proceedings or investigations pending or, threatened against or affecting the Company, at law or in equity, before or by any Court, administrative agency or other tribunal or any governmental authority; (xviii) Intellectual Property: (a) Schedule 2.1 lists the Intellectual Property and such Intellectual Property is sufficient to allow the Company to conduct the Business. The Vendor obtained the Intellectual Property pursuant to an asset purchase agreement dated the 1st day of February, 1999 between the Vendor and Generated Solutions (1993) Ltd. and an asset purchase agreement dated the 1st day of February, 1999 between the Vendor and National Electronic Marketing Inc., copies of such agreements have been previously provided to the Purchaser, which transactions have closed and the Intellectual Property has been transferred. The Vendor has further transferred all of its rights <PAGE> to the Intellectual Property to the Company and such transfer has been completed. (b) The Company is the owner of the Intellectual Property and is entitled to the exclusive and uninterrupted use of the Intellectual Property without payment of any royalty or other fees. No Person has any right, title or interest in any of the Intellectual Property and all such persons have waived their moral rights in any copyright works within the Intellectual Property. The Company has diligently protected its legal rights to the exclusive use of the Intellectual Property. (c) The Company has not permitted or licensed any Person to use any of the Intellectual Property. (d) No person has challenged the Company's rights to any of the Intellectual Property. (e) Neither the use of the Intellectual Property nor the conduct of the Business has infringed or currently infringes upon the industrial or intellectual property rights of any other person. (f) No other person has infringed the Company's rights to the Intellectual Property. (g) There is no government prohibition or restriction on the use of Intellectual Property. (h) Neither the Company, the Vendor or any of the other shareholders of the Company are aware of any infringement by the Company of any registered patent, trademark or copyright; (xix) the Company shall obtain and maintain until the Closing Date such insurance against loss or damage to their assets and with respect to public liability as is reasonably prudent for companies carrying on businesses similar to that of the Company; (xx) the Vendor has duly and validly authorized, executed and delivered this Agreement; and (xxi) the Vendor has the power and capacity to enter into this Agreement and to carry out its obligations hereunder. <PAGE> 2.2 COVENANTS OF THE VENDOR AND THE COMPANY Each of the Vendor and the Company, joint and severally, covenant and agree with the Purchaser that: (i) both before and after the Closing Date, each of the Vendor and the Company shall execute and do all such further deeds, acts, things and give such assurances as may be required in the reasonable opinion of the Purchaser's counsel for more perfectly consummating the transactions contemplated hereby and referenced herein. 2.3 COVENANTS OF THE COMPANY The Company covenants and agrees with the Purchaser that the Company shall not, prior to the Closing Date, except with the prior consent of the Purchaser: (i) make or permit to be made any employment contracts or other arrangements with any directors, officers, agents, servants or employees of the Company; (ii) make or assume or permit to be made or assumed any commitment, obligation or liability which is outside of the usual and ordinary course of the business of the Company, and for the purpose of carrying on the same, but the Company will operate its properties and carry on its business as heretofore and will maintain all of its properties, rights and assets in good standing, order, and repair; (iii) declare or pay any dividends or make any other distributions or appropriations of profits or capital or make any other distributions or appropriations of its profits or of its capital; (iv) create or assume any indebtedness other than in the ordinary course of business or guarantee the obligations of any third party other than in the ordinary course of its business; or (v) sell or otherwise in any way alienate or dispose of or encumber any of its assets; provided however, that the Company shall, both before and after the Closing Date, execute and do all such further deeds, acts, things and give such assurances as may be required in the reasonable opinion of the Purchaser's counsel for more perfectly consummating the transactions contemplated herein, and shall, without limitation, use its best efforts to obtain any approvals from third parties as may be required to all of the transactions contemplated hereby and referenced herein. <PAGE> ARTICLE 3 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASER 3.1 REPRESENTATIONS AND WARRANTIES The Purchaser represents and warrants to the Vendor, as continuing representations and warranties which are true and correct on the date hereof or, if any such representation and warranty is expressed to be made and given in respect of a particular date other than the date hereof, then such representation and warranty shall be true and correct on such date, and all representations and warranties herein shall be true and correct on each day thereafter to and including the Closing Date with the same effect as if made and given on and as of each such day, that: (i) subject to fulfilment of the conditions hereinafter enumerated, the Purchaser has the power and capacity to enter into this Agreement and to carry out its obligations hereunder; (ii) the Purchaser has duly and validly authorized, executed and delivered this Agreement; (iii) the Purchaser is a company duly incorporated, validly existing and in good standing under the laws of Nevada, United States and has the necessary corporate capacity and is fully qualified in the State of Nevada and each other jurisdiction in which it carries on business or holds assets to carry on the business which it now carries on and to hold the assets which it now holds; (iv) the authorized capital of the Purchaser consists of 40,000,000 common shares without par value, of which 5,320,000 shares have been validly issued and are outstanding and are fully paid and non-assessable; (v) no person or company has any right, agreement or option, present or future, contingent or absolute, or any right capable of becoming a right, agreement or option to require the Purchaser to issue any share in its capital or to convert any securities of the Purchaser of any other company into shares in its capital; (vi) the Purchaser holds all permits, licenses, consents and authorities issued by any government or governmental authority which are necessary in connection with the operations of its business and of the ownership of its business and of the ownership of its properties and assets; (vii) the Purchaser has filed all necessary federal and provincial tax returns affecting workers compensation with the appropriate agency, corporation capital tax <PAGE> returns and any other reports and information required to be filed by the Purchaser with any governmental authority; the Purchaser has paid all federal, state and foreign income, sales and capital taxes payable by it; the Purchaser has withheld and remitted the appropriate taxes to the Internal Revenue Service or any other applicable governmental authority; the purchaser has paid all instalments of corporate taxes due and payable, and there is not presently outstanding any notice of re-assessment from the Internal Revenue Service or any applicable tax collecting authority; (viii) the Purchaser has not declared or paid any dividends of any kind nor declared nor made any other distributions of any kind whatsoever including, without limitation, by way of redemption or repurchase of the Purchaser's common shares or deduction of capital; (ix) the Purchaser has no liability, due or accruing, contingent or absolute, and is not directly or indirectly subject to any guarantee, indemnity or other contingent or indirect obligation with respect to the obligation of any other person or company, other than any such liability, guarantee, indemnity or obligation incurred or assumed by the Purchaser in the course of its normal and ordinary day to day business and no such liability, guarantee, indemnity or obligation has been paid or discharged by the Purchaser after the date of the Financial Statements of the Purchaser other than in the course of the Purchaser's normal and ordinary day to day business; (x) the Purchaser has not waived or surrendered any right of substantial value and has not made any gift of money or of any of its property or assets; (xi) the Purchaser has carried on its business in the normal course; (xii) the Purchaser does not have outstanding any material continuing contractual obligations whatsoever relating to or affecting the conduct of its business or any of its property or assets or for the purchase, sale or leasing of any property other than those contracts entered into by it in the course of its normal and ordinary day to day business; (xiii) there are no material management contracts or consulting contracts to which the Purchaser is a party or by which it is bound, no amount is payable or has been agreed to be paid by the Purchaser to any person as remuneration, pension, bonus, share of profits or other similar benefit, and no director, officer or member, or former director, officer or member, of the Purchaser, nor any associate or affiliate of any such person, has any claims of any nature against, or is indebted to the Purchaser; <PAGE> (xiv) the Purchaser is not in default under or in breach of, or would, after notice or lapse of time or both, be in default under or in breach of, and neither this Agreement nor the consummation of the transactions contemplated hereby will conflict with, constitute a default under, result in a breach of, entitle any person or company to a right of termination under, or result in the creation or imposition of any lien, encumbrance or restriction of any nature whatsoever upon or against the property or assets of the Purchaser, under its constating documents, any contract, agreement, indenture or other instrument to which it is a party or by which it is bound, any law, judgment, order, writ, injunction or decree of any court, administrative agency or other tribunal or any regulation of any governmental authority, and all such contracts, agreements, indentures, or other instruments are in good standing and the Purchaser is entitled to all benefits thereunder; (xv) there are no actions, suits, proceedings or investigations pending or, to the knowledge of the Purchaser, threatened against or affecting the Purchaser, at law or in equity, before or by any court, administrative agency or other tribunal or any governmental authority; (xvi) the Purchaser has good and marketable title or leasehold title to all of its properties and assets and such properties and assets are free and clear of any liens, charges or encumbrances; (xvii) the Purchaser does not beneficially own, directly or indirectly, shares of any corporate entity or any interest in a partnership, joint venture or other business entity; (xviii) the Purchaser has filed annual reports and documents required to be filed with the NASDAQ OTC market, the United States Securities and Exchange Commission (but is not a reporting company in any jurisdiction) and any other applicable corporate or securities authority and is not in default of any applicable law or regulation; and (xix) At the Closing Date, the Payment Shares shall be issued and outstanding as fully paid and non-assessable common shares of the Purchaser duly registered in the names of those persons listed in section 6.2 hereof, and such persons shall have good and marketable title to the Payment Shares, free and clear of all liens, encumbrances, charges or security interests whatsoever. 3.2 COVENANTS OF THE PURCHASER The Purchaser covenants and agrees with the Vendor that: <PAGE> (i) the Purchaser will forthwith use its best efforts to obtain the necessary approvals of any applicable regulatory authorities of the terms of this Agreement; and (ii) the Purchaser will, both before and after the Closing Date, execute and do all such further deeds, things and assurances as may be required in the reasonable opinion of the Vendor's counsel for more perfectly consummating the transactions contemplated hereby and referenced herein. 3.3 NEGATIVE COVENANTS The Purchaser further covenants and agrees with the Vendors that it will not, prior to the Closing Date, except with the prior consent of the Vendor: (i) make or assume any commitment, obligation or liability which is outside of the usual and ordinary course of the business of the Purchaser and for the purpose of carrying on the same, but the Purchaser will operate its properties and carry on its business as heretofore and will maintain all of its properties, rights and assets in good order and repair; (ii) declare or pay any dividends on its common shares or make any other distributions or appropriations of profits or capital; (iii) create or assume any indebtedness or guarantee the obligations of any third party, other than in the ordinary course of its business; (iv) sell or otherwise in any way alienate or dispose of any of its assets other than in the ordinary course of business; or (v) issue any shares in its capital to any person. ARTICLE 4 CONDITIONS 4.1 PURCHASER'S CONDITIONS The obligations of the Purchaser to complete the transactions contemplated hereby are subject to the following conditions (which are for the exclusive benefit of the Purchaser) having been satisfied or expressly waived in writing by the Purchaser: (i) prior to the Closing Date neither the Vendor nor the Company shall have breached any of the warranties and representations of the Vendor and the Company set forth in this Agreement; <PAGE> (ii) all of the covenants and agreements of the Vendors and the Company to be observed or performed on or before the Closing Date pursuant to the terms hereof shall have been duly observed or performed; (iii) all of the transactions contemplated by this Agreement, shall have been properly and duly approved; and (iv) on the Closing Date the Company shall have delivered to the Purchaser a certificate of an officer or director of the Company, dated the Closing Date and certifying the truth, accuracy and correctness of the representations and warranties contained in this Agreement and the other closing documents referenced in sections 6.2(i) and (ii) hereof; 4.2 VENDOR'S CONDITIONS The obligations of the Vendor to complete the transactions contemplated hereby are subject to the following conditions (which are for the exclusive benefit of the Vendor) having been satisfied or expressly waived in writing by the Vendor: (i) prior to or on the Closing Date the Purchaser shall not have breached any breach of any of the warranties and representations of the Purchaser set forth in this Agreement; (ii) all of the covenants and agreements of the Purchaser to be observed or performed on or before the Closing Date pursuant to the terms hereof shall have been duly observed or performed; (iii) all of the transactions contemplated by this Agreement, shall have been properly and duly approved; and (iv) on the Closing Date the Purchaser shall have delivered to the Vendor a certificate of an officer or director of the Purchaser, dated the Closing Date and certifying the truth, accuracy and correctness of the representations and warranties contained in this Agreement and the rest of the closing documents referenced in section 6.1(iii) hereof. <PAGE> ARTICLE 5 PURCHASE AND SALE 5.1 PURCHASE AND SALE Based upon the representations, warranties and covenants of the parties herein contained and subject to the conditions herein contained, the Purchaser hereby purchases and the Vendor hereby transfers, assigns and sells, or will cause such transfer, assignment and sale, to the Purchaser on the Closing Date, all rights, titles and interests in and to the Vendor's Shares free and clear of all liens, charges and encumbrances. 5.2 CONSIDERATION In consideration of the purchase and sale herein contemplated and in complete satisfaction of the purchase price for the Vendor's Shares, the Purchaser hereby agrees to issue to the Vendor and the other shareholders of the Company, a total of 34,500,000 common shares without par value in the capital of the Purchaser (the "Payment Shares") as follows: <TABLE> <CAPTION> Name of Vendor No. of Common Shares -------------- -------------------- <S> <C> Platinum Capital Management Inc. 2,500,000 Platinum Capital Management Inc. 1,000,000 in trust for John Andrews Zorba Holdings Limited 1,500,000 e-Auction Global Trading Inc. (BVI) 1,500,000 QFG Holdings Limited 4,000,000 China Capital Financial Corp 1,500,000 Web CCB (BVI) 750,000 CCS Technologies Inc. 750,000 Hartford Holdings Limited 3,000,000 BFM Enterprises Inc. 1,500,000 John Andrews in trust for the 16,500,00 Shareholders of Sanga International Inc. </TABLE> 5.3 DELIVERY OF PAYMENT SHARES The Purchaser shall deliver the Payment Shares to the Vendors on the Closing Date in the following manner: (i) the Purchaser shall deliver to the Vendor, or to its direction, share certificates registered in the respective names for such number of Payment Shares in the Purchaser as is set opposite each name in Article 5.2 hereof. <PAGE> 5.4 HOLD PERIOD REQUIREMENT The Vendor acknowledges and agrees that the Payment Shares will be subject to applicable hold periods as provided under applicable United States securities laws and regulations, and will be legended accordingly. ARTICLE 6 CLOSING 6.1 CLOSING DATE The completion of the transactions contemplated hereby (the "Closing"), to be effective as at February 26, 1999, shall occur at the offices of Blake, Cassels & Graydon, 20th Floor, 45 O'Connor Street, Ottawa, Ontario on the Closing Date, which shall take place as soon as possible following the execution of this Agreement on a date as agreed to between the Vendor and the Purchaser. 6.2 DELIVERIES ON CLOSING On the Closing Date: (i) the Vendor shall: 1. deliver to the Purchaser a share certificate representing 34,500,000 common shares of the Company, duly recorded in the name of the Purchaser; (ii) the Company and the Vendor shall deliver to the Purchaser the following: 1. the certificate of an officer or director of the Company contemplated in Article 4.1(iv) hereof; 2. a certified extract of a resolution of the directors of the Company approving the transfer of the Vendor's shares to the Purchaser; 3. the written resignations of each director and officer of the Company; 4. share certificates representing the Vendors' Shares duly endorsed for transfer. (iii) the Purchaser shall deliver or cause to be delivered to the Vendor the following: <PAGE> 1. share certificates representing the Payment Shares. 2. the certificate of an officer or director of the Purchaser contemplated in Article 4.2(iv) hereof. ARTICLE 7 MISCELLANEOUS 7.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES All of the representations, warranties and, covenants of the Vendor and the Company contained in Article 2 of the Agreement and the representations, warranties and covenants of the Purchaser contained in Article 3 of this Agreement shall survive the Closing Date for a period of six (6) months only and continue in full force and effect for that time for the benefit of the party to which it was given regardless of any knowledge or investigation by or on behalf of any party with respect thereto. 7.2 NON-MERGER Each party hereby agrees that all provisions of this Agreement, other than the representations, warranties and covenants of the Vendor and Company in Article 2 and the Purchaser in Article 3 hereof (which shall be subject section 7.1 hereof), shall forever survive the execution, delivery and performance of this Agreement, Closing and the execution, delivery and performance of any and all documents delivered in connection with this Agreement. 7.3 INDEMNITY The Vendor and the Company, jointly and severally, shall indemnify and save the Purchaser harmless from any loss or damage sustained by the Purchaser arising out of or in connection with any breach of any representation, warranty, covenant, agreement or condition of the Vendor or the Company contained herein, and the same rights shall apply to the Vendors against the Purchaser mutatis mutandis. 7.4 NOTICE Any notice, document or communication required or permitted to be given hereunder shall be in writing at the addresses as indicated on the execution page of this Agreement or such other addresses as the parties may specify in writing. Notices shall be effective and deemed to have been duly given and received if delivered personally or by telecopier. <PAGE> 7.5 TIME Time shall be of the essence hereof. 7.6 ENTIRE AGREEMENT This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior contracts, agreements and understandings between the parties. There are no representations warranties, collateral agreements or conditions affecting this transaction other than as are expressed or referred to herein in writing. 7.7 CONSENT OF THE COMPANY AND THE PURCHASER The Company and the Purchaser and the Vendor consent to the transactions contemplated herein and hereby acknowledge and agree to execute and perform all such further deeds, acts, things and give such assurances as may be required in the reasonable opinion of counsel for more perfectly consummating the transactions contemplated herein, and shall, without limitation, use their best efforts to obtain as required, approval from such parties as may be required to give their approval to the transactions contemplated hereby and herein referenced. 7.8 GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario. 7.9 ENUREMENT This Agreement shall enure to the benefit of and be binding upon the respective heirs, successors and assigns of the parties hereto. 7.10 HEADINGS The headings in this Agreement have been inserted for convenience only, and do not define, limit, alter or enlarge the meaning of any provision of this Agreement. 7.11 SCHEDULES Wherever any term or conditions, expressed or implied, in such schedules conflicts or is at variance with any term or conditions of this Agreement, the terms or conditions of this Agreement shall prevail. <PAGE> 7.12 SEVERABILITY If a provision of this Agreement is deemed to be wholly or partly invalid, this Agreement will be interpreted as if the invalid provision had not been a part thereof. 7.13 COUNTERPARTS This Agreement may be executed in one or more counterparts which, when so executed, by facsimile signature or otherwise, shall be read together and be construed as one agreement. <PAGE> IN WITNESS WHEREOF the parties hereto have executed this Agreement on the day and year first set forth above. QFG HOLDINGS LIMITED Per: /s/ Shane Maine ------------------------------- Address: 12 Anderson St. --------------------------- Chelsea, UK --------------------------- 5W3 3NH --------------------------- Facsimile: --------------------------- KAZARI INTERNATIONAL INC. Per: /s/ Mike Gilley ------------------------------- Address: 1304 Pik Hoi House --------------------------- Choi Hung Estate --------------------------- Kowboon, Hong Kong --------------------------- Facsimile: 604-689-3348 --------------------------- E-AUCTION GLOBAL TRADING INC. Per: /s/ Shane Maine ------------------------------- Address: 13 Anderson St --------------------------- Chelsea, London, UK --------------------------- 5W3 3NH --------------------------- Facsimile: --------------------------- <PAGE> SCHEDULE 2.1 INTELLECTUAL PROPERTY (i) Interactive Auction Software The Auction Server - multi-threaded C++ Windows NT application that supports multiple Java clients using its own communications protocol The Client - a Java applet written in JDK 1.02 Administrative Web Pages (ii) Bid and Offer Software Active Server Pages - hosted on Windows NT Webserver (IIS 4.0) (iii) Other Microsoft Access Database and schema to support both types of auction </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.2 <SEQUENCE>5 <DESCRIPTION>EX-10.2 <TEXT> <PAGE> SHARE PURCHASE AGREEMENT THIS AGREEMENT is made as of the 7th day of January, 2000. BETWEEN: LUC SCHELFHOUT, of Stekene (hereinafter referred to as "L. Schelfhout") - and - HILDE DE LAET, of Stekene (hereinafter referred to as "H. De Laet") - and - e-AUCTION BELGIUM N.V., a corporation incorporated under the laws of Belgium (hereinafter referred to as the "Purchaser") - and - e-AUCTION GLOBAL TRADING INC., a corporation incorporated under the laws of the State of Nevada (hereinafter referred to as "e-Auction") - and - WHEREAS L. Schelfhout, H. De Laet, and Schelfhout-De Laet (collectively referred to as the "Vendors") are the registered and beneficial owners of all the issued and outstanding share capital of Schelfhout Computer Systemen N.V. ("Schelfhout"). AND WHEREAS the Purchaser is willing to purchase and the Vendors are willing to sell all of the issued and outstanding share capital of Schelfhout on the terms and conditions contained in this Agreement; NOW THEREFORE this Agreement witnesses that, in consideration of the mutual covenants and agreements contained herein, the parties covenant and agree as follows: ARTICLE 1 INTERPRETATION <PAGE> -2- 1.1 DEFINITIONS. In this Agreement or in any amendment hereto, the following terms shall have the meanings set out below unless the context requires otherwise: (a) "AFFILIATE" means, with respect to any Person, any other Person who directly or indirectly controls, is controlled by, or is under direct or indirect common control with, such Person, and includes any Person in like relation to an Affiliate. A Person shall be deemed to control a Person if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the term "controlled" shall have a similar meaning. (b) "AGREEMENT" means this Agreement, including the Schedules to this Agreement, as it or they may be amended or supplemented from time to time, and the expressions "HEREOF", "HEREIN", "HERETO", "HEREUNDER", "HEREBY" and similar expressions refer to this Agreement and not to any particular Section or other portion of this Agreement. (c) "APPLICABLE LAW" means, with respect to any Person, property, transaction, event or other matter, any law, rule, statute, regulation, order, judgement, decree, treaty or other requirement having the force of law (collectively, the "LAW") relating or applicable to such Person, property, transaction, event or other matter. Applicable Law also includes, where appropriate, any interpretation of the Law (or any part thereof) by any Person having jurisdiction over it, or charged with its administration or interpretation. (d) "ASSETS" means all of the property, assets, interests and rights of Schelfhout of every kind and description and wherever situated including, without limiting the generality of the foregoing, the following: (i) the Real Property; (ii) the Personal Property; (iii) the Inventories; (iv) the Receivables; (v) all rights and interests under or pursuant to all warranties, representations and guarantees, express, implied or otherwise, of or made by suppliers or others in connection with the Assets or otherwise Related to the Business; (vi) the Intellectual Property; (vii) the Material Contracts; (viii) the Licences and Permits; (ix) the Books and Records; (x) all goodwill Related to the Business, the present telephone numbers, internet domain addresses and other communications numbers and addresses of Schelfhout; and (xi) all proceeds of any or all of the foregoing received or receivable after the Closing Time. <PAGE> -3- (e) "BOOKS AND RECORDS" means all books, records, files and papers of Schelfhout, Related to the Business including without limitation, financial, operating, inventory, legal and payroll information, drawings, engineering information, computer programs (including source code), software programs, manuals and data, sales and advertising materials, sales and purchases correspondence, trade association files, research and development records, lists of present and former customers and suppliers, personnel, employment and other records, and the minute and share certificate books of Schelfhout, and all copies and recordings of the foregoing. (f) "BUSINESS" means the business carried on by Schelfhout which primarily involves the facilitating of electronic auctions of perishable commodities (fish, flowers, fruits and vegetables). (g) "BUSINESS DAY" means any day except Saturday, Sunday, a statutory holiday in the Province of Ontario or any other day on which banks are generally not open for business in the City of Toronto, Ontario. (h) "CLAIM" has the meaning ascribed thereto in Section 6.1. (i) "CLOSING" means the completion of the purchase and sale of the Shares in accordance with the provisions of this Agreement. (j) "CLOSING DATE" means January 7, 2000 or such earlier or later date as may be agreed upon in writing by the parties to this Agreement. (k) "CLOSING TIME" means the time of closing on the Closing Date provided for in Section 3.1. (l) "CONDITION OF THE BUSINESS" means the condition (financial or otherwise) of the Business taken as a whole, having regard to its earnings, Assets, Liabilities, properties, operations and prospects. (m) "CONSENTS AND APPROVALS" means all consents and approvals required to be obtained in connection with the execution and delivery of this Agreement and the completion of the transactions contemplated by this Agreement including any and all third party consents required under any of the Contracts in connection with or as a result of the transfer of the Assets and Shares to the Purchaser. (n) "DEPOSIT" has the meaning ascribed thereto in Section 2.3. (o) "DIRECT CLAIM" shall have the meaning ascribed thereto in Section 6.4. <PAGE> -4- (p) "e-AUCTION SHARES" means 3,636,364 common shares in the capital of e-Auction Global Trading Inc. to be delivered to the Vendors pursuant to section 2.4(c) hereof. (q) "EMPLOYEES" means an individual who is employed by Schelfhout in the Business, and "EMPLOYEES" means every Employee. (r) "INDEMNIFIED PARTY" means a Person whom Schelfhout, the Purchaser or e-Auction, as the case may be, has agreed to indemnify under Article 6. (s) "INDEMNIFYING PARTY" means, in relation to an Indemnified Party, the party to this Agreement which has agreed to indemnify that Indemnified Party under Article 6. (s1) "INITIAL SHARE VALUE" shall have the meaning ascribed thereto in section 2.4 hereof. (t) "INTELLECTUAL PROPERTY" means all rights to and interests in: (i) all business and trade names, corporate names, brand names and slogans Related to the Business; (ii) all inventions, patents, patent rights, patent applications (including all reissues, divisions, continuations, continuations-in-part and extensions of any patent or patent application), industrial designs and applications for registration of industrial designs Related to the Business and developed by Schelfhout; (iii) all copyrights and trade-marks (whether used with wares or services and including the goodwill attaching to such trade-marks), registrations and applications for trade-marks and copyrights (and all future income from such trade-marks and copyrights) Related to the Business and developed by Schelfhout; (iv) all rights and interests in and to processes, lab journals, notebooks, data, trade secrets, designs, know-how, product formulae and information, manufacturing, engineering and other drawings and manuals, technology, blue prints, research and development reports, agency agreements, technical information, technical assistance, engineering data, design and engineering specifications, and similar materials recording or evidencing expertise or information Related to the Business and developed by Schelfhout; (v) all of the intellectual property listed in Schedule 5.1(q)(i); <PAGE> -5- (vi) all other intellectual and industrial property rights throughout the world Related to the Business and developed by Schelfhout; (vii) all licences of the intellectual property listed in items (i) to (vi) above; (viii) all future income and proceeds from any of the intellectual property listed in items (i) to (vi) above and the licences listed in item (vii) above; and (ix) all rights to damages and profits by reason of the infringement of any of the intellectual property listed in items (i) to (vii) above. (u) "INTERIM PERIOD" means the period commencing on June 30, 1999 and ending at the Closing Time; (v) "LIABILITIES" means all costs, expenses, charges, debts, liabilities, claims, demands and obligations, whether primary or secondary, direct or indirect, fixed, contingent, absolute or otherwise, under or in respect of any contract, agreement, arrangement, lease, commitment, undertaking, Applicable Law or Taxes. (w) "LICENCES AND PERMITS" means all licences, permits, filings, authorizations, approvals or indicia of authority Related to the Business or required for the ownership and/or operation of the Business and/or the Assets. (x) "LIEN" means any lien, mortgage, charge, hypothec, pledge, security interest, prior assignment, option, warrant, lease, sublease, right to possession, encumbrance, claim, right or restriction which affects, by way of a conflicting ownership interest or otherwise, the right, title or interest in or to any particular property. (y) "MATERIAL ADVERSE CHANGE" means a change in the business, operations or capital of Schelfhout or e-Auction which has had or could reasonably be expected to have a significant adverse effect on the value of the Business or the Shares. (z) "MATERIAL CONTRACT" means an agreement (whether oral or written) Related to the Business to which Schelfhout is a party or by which Schelfhout or any of the Assets or the Business is bound or affected except an agreement which involves or may reasonably be expected to involve the payment to or by Schelfhout of less than US$25,000 over the term of the agreement and is not otherwise material to the Condition of the Business. (aa) "PARTY" means a party to this Agreement and any reference to a party includes its successors and permitted assigns; and "PARTIES" means every party. (bb) "PERSON" is to be broadly interpreted and includes an individual, a corporation, a partnership, a trust, an unincorporated organization, and the successors, assigns, <PAGE> -6- executors, heirs, administrators or other legal representatives of an individual in such capacity. (cc) "PERSONAL PROPERTY" means, without limitation, all machinery, equipment, furniture, fixtures, fittings, motor vehicles and other chattels Related to the Business (including those in possession of third parties). (dd) "PERSONAL PROPERTY LEASES" means all chattel leases, equipment leases, rental agreements, conditional sales contracts and other similar agreements. (ee) "PRO-RATA BASIS" means, with respect to each Vendor, the proportion of his holdings of shares in the capital of Schelfhout, as set out in the recitals to this Agreement, to the total number of shares in the capital of Schelflout outstanding as at the Closing Time, being 50% each. (ff) "PURCHASE PRICE" has the meaning ascribed thereto in Section 2.4. (gg) "PURCHASER" means e-Auction Belgium N.V., a corporation incorporated under the laws of Belgium. (hh) "REAL PROPERTY" means all real property owned or used by Schelfhout Related to the Business including, without limitation, the Improvements. (ii) "RECEIVABLES" means all accounts receivable, bills receivable, trade accounts, book debts and insurance claims Related to the Business together with any unpaid interest accrued on such items and any security or collateral for such items, including recoverable deposits. (jj) "RELATED TO THE BUSINESS" means, directly or indirectly, used in, arising from or relating in any manner to the Business. (kk) "SCHELFHOUT" means Schelfhout Computer Systemen N.V., a corporation incorporated under the laws of Belgium. (ll) "SHARES" means all of the issued and outstanding share capital of Schelfhout more specifically set out in the recitals to this Agreement. (mm) "TAXES" means all taxes, charges, fees, levies, imposts and other assessments, including all income, sales, use, goods and services, value added, capital, capital gains, alternative, net worth, transfer, profits, withholding, payroll, employer health, excise, franchise, real property and personal property taxes, and any other taxes, customs duties, fees, assessments or similar charges in the nature of a tax including pension plan contributions, unemployment insurance payments and workers' compensation premiums, together with any installments with respect thereto, and any interest, fines and penalties imposed by any governmental <PAGE> -7- authority (including federal, state, provincial, municipal and foreign governmental authorities), and whether disputed or not. (nn) "THIRD PARTY" has the meaning given in Section 6.6. (oo) "THIRD PARTY CLAIM" has the meaning given in Section 6.4. (pp) "VENDORS" means collectively L. Schelfhout and H. De Laet. 1.2 HEADINGS. The division of this Agreement into Articles and Sections and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of this Agreement. 1.3 NUMBER AND GENDER. Unless the context requires otherwise, words importing the singular include the plural and vice versa and words importing gender include all genders. 1.4 BUSINESS DAYS. If any payment is required to be made or other action is required to be taken pursuant to this Agreement on a day which is not a Business Day, then such payment or action shall be made or taken on the next Business Day. 1.5 CURRENCY AND PAYMENT OBLIGATIONS. All dollar amounts referred to in this Agreement are stated in United States Dollars and any payment required to be made hereunder shall be made by electronic transfer or any other method as agreed to from time to time by the parties hereto that provides immediately available funds. In the case of the Vendors, payment by certified cheque, bank draft or electronic transfer shall be made payable to the order of or to the account of each Vendor, on a Pro-Rata Basis, or as they may otherwise direct in writing. 1.6 STATUTE REFERENCES. Any reference in this Agreement to any statute or any section thereof shall, unless otherwise expressly stated, be deemed to be a reference to such statute or section as amended, restated or re-enacted from time to time. 1.7 SECTION AND SCHEDULE REFERENCES. Unless the context requires otherwise, references in this Agreement to Sections or Schedules are to Sections or Schedules of this Agreement. The Schedules to this Agreement are as follows: <TABLE> <CAPTION> SCHEDULES --------- <S> <C> Schedule 5.1(i) - Financial Statements of Schelfhout Schedule 5.1(l) - Real Property Schedule 5.1(n) - Insurance Schedule 5.1(o) - Material Contracts Schedule 5.1(p) - List of Receivables Schedule 5.1(q) - Intellectual Property Schedule 5.1(y)(i) - Employees Schedule 5.1(y)(vii) - Benefit Plan </TABLE> <PAGE> -8- ARTICLE 2 PURCHASE OF SHARES 2.1 AGREEMENT TO PURCHASE AND SELL. At the Closing Time, subject to the terms and conditions hereof, the Vendors shall sell to the Purchaser and the Purchaser shall purchase from the Vendors, the Shares. 2.2 AMOUNT OF PURCHASE PRICE. The purchase price (the "Purchase Price") payable by the Purchaser to the Vendors for the Shares shall be the sum of ten million dollars (US$10,000,000) in United States funds. 2.3 DEPOSIT. The Vendors acknowledge and agree that the Purchaser has already deposited the sum of one million dollars (US$1,000,000) in United States funds in trust with L. Schelfhout and H. De Laet (the "Deposit"), which Deposit shall be applied towards the payment of the Purchase Price. 2.4 PAYMENT OF PURCHASE PRICE. The Purchase Price shall be paid and satisfied by the Purchaser to the Vendors as follows: (a) at the Closing Time, the Deposit shall be paid to the Vendors, on a Pro-Rata Basis, by L. Schelfhout and H. De Laet and credited against the Purchase Price; (b) at the Closing Time, by delivery to the Vendors, on a Pro-Rata basis, of an aggregate of three million dollars (US$3,000,000) in United States funds; and (c) at the Closing Time, by delivery to the Vendors, on a Pro-Rata Basis, of an aggregate of 3,636,364 common shares in the capital of e-Auction, which shares shall at the Closing Time have an aggregate value of six million dollars (US$6,000,000) in United States funds, and a per share value equal to US$1.65 ("Initial Share Value"), subject to the terms and conditions contained in Section 2.5 below. 2.5 e-AUCTION SHARES. The Vendors agree not to sell, transfer, convey or dispose ("Sell") of any of the e-Auction Shares delivered to the Vendors pursuant to Section 2.4(c) above except on the following basis: (a) the Vendors shall not Sell any of the e-Auction Shares until the date which is six (6) months after the Closing Date, and following such date the Vendors shall only be entitled to sell their Pro-rata Share of such number of e-Auction Shares having an aggregate value, calculated on the basis of a per share value equal to the Initial Share Value, of seven hundred and fifty thousand dollars (US$750,000) in United States funds (454,545 common shares in the aggregate), on each of the six (6) month, twelve (12) month, eighteen (18) month and twenty four (24) month anniversary of the Closing Date; and <PAGE> -9- (b) the Vendors shall be entitled to Sell their Pro-rata Share of such number of e-Auction Shares having an aggregate value, calculated on the basis of a per share value equal to the Initial Share Value, of one million dollars (US$1,000,000) in United States funds (606,061 common shares in the aggregate), on each of the thirty six (36) month, forty-eight (48) month and sixty (60) month anniversary of the Closing Date. The Vendors agree to allow a legend to be placed upon the e-Auction Shares referencing the above restrictions which legend shall remain until the date which is sixty (60) months following the Closing Date. 2.6 FREELY TRADABLE e-AUCTION SHARES. (a) Subject to (c) below, in the event that the e-Auction Shares referred to in Section 2.5(a) above are not freely tradable on any one of the six (6), twelve (12), eighteen (18) or twenty four (24) month anniversary of the Closing Date, the Purchaser agrees to pay to the Vendors, by way of electronic transfer, within ten (10) Business Days after the date of the applicable anniversary, an amount equal to seven hundred and fifty thousand dollars (US$750,000) in United States funds. (b) Subject to (c) below, in the event that the e-Auction Shares referred to in Section 2.5(b) above are not freely tradable on any one of the thirty six (36), forty eight (48) or sixty (60) month anniversary of the Closing Date, the Purchaser agrees to pay to the Vendors, by way of electronic transfer, within ten (10) Business Days after the date of the applicable anniversary, an amount equal to one million dollars (US$1,000,000) in United States funds. (c) Upon any payment by the Purchaser pursuant to Section 2.6 (a) or Section 2.6(b), the Vendors agree to transfer ownership to the Purchaser, within ten (10) Business Days after receipt of any payment, such number of e-Auction Shares equal to the amount paid by the Purchaser to the Vendors, with each share having a value equal to the Initial Share Value. (d) As security for the cash payments which may be due to the Vendors pursuant to (a) or (b) above, the Purchaser agrees to pledge a portion of the Shares pursuant to the terms of the pledge agreement referred to in section 4.3(h) below. In the event that the Purchaser fails to make a payment referred to above in (a) or (b), the Vendors shall be entitled to be transferred from the Purchaser the portion of the Shares which are used to secure the applicable amount as their sole and exclusive remedy all in accordance with the terms of the pledge agreement referred ot in section 4.3(h) below. 2.7 GUARANTEE. e-Auction unconditionally and irrevocably guarantees the prompt payment to the Vendors of all the indebtedness, liabilities and obligations of any kind whatsoever which the Purchaser is under an obligation to pay to the Vendors pursuant to Sections 2.4 and 2.6 above. <PAGE> -10- ARTICLE 3 CLOSING ARRANGEMENTS 3.1 CLOSING. The Closing shall take place at 2:00 p.m. (the "Closing Time") on the Closing Date at the offices of the auditor of Schelfhout, Gislenus Bats & Co. b.v.b.a., located at Europark-Oost 7, B-9100 Sint-Niklaas, Belgium, or at such other time or place as may be agreed upon orally or in writing by the parties to this Agreement. 3.2 VENDORS' CLOSING DELIVERIES. At the Closing Time, the Vendors shall deliver or cause to be delivered to the Purchaser the following: (a) the certificate of registration of the Purchaser in the register of shareholders of Schelfhout as owner of the Shares; (b) a certified copy of a resolution of the board of directors of Schelfhout authorizing the transfer of the Shares from the Vendors to the Purchaser; (c) a certificate executed by each of the Vendors certifying that the representations, warranties and covenants in Section 5.1 are true and correct as at the Closing; (d) a release of all claims against Schelfhout in favour of the Purchaser and Schelfhout in the form attached hereto as Schedule 3.2(e), duly executed by each of the Vendors; and (e) all such other assurances, consents, agreements, documents and instruments as may be reasonably required by the Purchaser to complete the transactions provided for in this Agreement. 3.3 PURCHASER'S CLOSING DELIVERIES. At the Closing, the Purchaser shall deliver or cause to be delivered to the Vendors the following: (a) the payments referred to in Sections 2.4 above; (b) the certificate or certificates representing the e-Auction Shares, duly registered in the names of each Vendor, on a Pro-rata Basis; (c) a certificate executed by the Purchaser certifying that the representations, warranties and covenants in Section 5.2 are true and correct as at the Closing; (d) evidence in a form satisfactory to the Vendors, acting reasonably, that the Purchaser was incorporated and acquired legal status and that the person signing on the Purchaser's behalf has the power to represent the Purchaser; and <PAGE> -11- (e) all such other assurances, consents, agreements, documents and instruments as may be reasonably required by the Vendors to complete the transactions provided for in this Agreement. 3.4 POST CLOSING DELIVERIES. Within fifteen (15) Business Days following the Closing Date, the Vendors shall deliver or cause to be delivered to the Purchaser the following: (a) copies of any applicable schedule referenced in this Agreement which the Vendors are unable to deliver to the Purchaser on the Closing Date; and (b) legal opinion of the Vendors' solicitors (lawyers) addressed to the Purchaser and the Purchaser's solicitors (lawyers) in a form satisfactory to the Purchaser acting reasonably. ARTICLE 4 CONDITIONS OF CLOSING 4.1 PURCHASER'S CONDITIONS. The Purchaser shall not be obliged to complete the purchase and sale of the Shares pursuant to this Agreement unless, at or before the Closing Time, each of the following conditions have been satisfied, it being understood that the following conditions are included for the exclusive benefit of the Purchaser and may be waived, in whole or in part, in writing by the Purchaser at any time; and each of the Vendors hereby, jointly and severally, covenant and agree with the Purchaser to take all such actions, steps and proceedings as are reasonably within their control as may be necessary to ensure that the following conditions are fulfilled at or before the Closing Time: (a) REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations, warranties and covenants of the Vendors in Section 5.1 shall be true and correct at the Closing Time. (b) VENDORS' COMPLIANCE. The Vendors shall have performed and complied with, or caused to be performed or complied with, all of the terms and conditions in this Agreement on their part to be performed or complied with at or before Closing Time and shall have executed and delivered or caused to have been executed and delivered to the Purchaser at the Closing Time all the documents contemplated in Section 3.2 or elsewhere in this Agreement. (c) GOOD TITLE. The Vendors shall have good and marketable title to the Shares, free and clear of any and all Liens of any kind and nature whatsoever. (d) MATERIAL ADVERSE CHANGE. During the Interim Period, there shall have been no Material Adverse Change. (e) CONSENTS AND APPROVALS. All the Consents and Approvals have been obtained. (f) NO LITIGATION. Except as set out below, there shall be no litigation or proceedings: <PAGE> -12- (i) pending or threatened against any of the Vendors or against Schelfhout or any of its directors or officers, for the purpose of enjoining, preventing or restraining the completion of the transactions contemplated by this Agreement; and (ii) pending or threatened against any of the Vendors or against Schelfhout or any of its directors or officers which: (1) if decided adversely, could adversely affect the right of the Purchaser to acquire or retain the Shares; or (2) in the judgement of the Purchaser, acting reasonably, would make the completion of the transactions contemplated by this Agreement inadvisable; except for (i) Menillo v. Schelfhout which is presently under appeal, in which the French Court ordered Schelfhout and the Chamber of Commerce of Cherbourg on November 6, 1998 to pay damages to Menillo in the amount of FRF200.000; and (ii)Menillo v. Schelfhout (II): in this case, Menillo has withdrawn its suit and the Court of Rennes (France) condemned Menillo to pay the costs of the procedure and (iii) UNIT 4 BELGIUM N.V., in which UNIT 4 BELGIUM N.V. lodged on May 12, 1998 an appeal against the judgement of the Commercial Court of Dendermonde, division of Sint-Niklaas, of 28.04.1998 and lodged a counterclaim as follows: - payment of invoice nr. 97 0335 of 6.6.97 ad 247,953 BEF; - the cancellation of the contract at the charge of Schelfhout; - the restitution of the software, manual and demonstration version; - damages of 1,000,000 BEF. 4.2 CONDITION NOT FULFILLED. If any condition in Section 4.1 has not been fulfilled at or before the Closing Time, then the Purchaser in its sole discretion may, without limiting any rights or remedies available to the Purchaser at law or in equity, either: (a) terminate this Agreement by notice to the Vendors, in which event the Purchaser shall be released from its obligations under this Agreement to complete the purchase of the Shares; or (b) waive compliance with any such condition in whole or in part without prejudice to its right of termination in the event of non-fulfilment of any other condition in whole or in part. 4.3 VENDORS' CONDITIONS. The Vendors shall not be obliged to complete the purchase and sale of the shares pursuant to this Agreement and to complete the transactions contemplated by this Agreement unless, at or before the Closing Time each of the following conditions have been satisfied, it being understood that the following conditions are included for the exclusive benefit <PAGE> -13- of the Vendors, and may be waived, in whole or in part, in writing by the Vendors at any time; and the Purchaser hereby covenants and agrees with the Vendors to take all such actions, steps and proceedings as are reasonably within the Purchaser's control as may be necessary to ensure that the following conditions are fulfilled at or before the Closing Time: (a) REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations, warranties and covenants of the Purchaser in Section 5.2 shall be true and correct at the Closing Time. (b) PURCHASER'S COMPLIANCE. The Purchaser shall have performed and complied with all of the terms and conditions in this Agreement on its part to be performed or complied with at or before the Closing Time and shall have executed and delivered or caused to have been executed and delivered to the Vendors at the Closing Time all the documents contemplated in Section 3.3 or elsewhere in this Agreement. (c) GOOD TITLE. The Purchaser shall have good and marketable title to the e-Auction Shares, free and clear of any and all Liens of any kind and nature whatsoever. (d) MATERIAL ADVERSE CHANGE. During the Interim Period, there shall have been no Material Adverse Change in the business and assets of e-Auction. (e) NO LITIGATION. There shall be no litigation or proceedings pending or threatened against e-Auction or the Purchaser or any of its directors and officers which, in the judgement of the Vendors, acting reasonably, would make the completing of the transactions contemplated by this Agreement inadvisable. (f) INCORPORATION OF THE PURCHASER. The Purchaser shall have been incorporated and shall have acquired legal status. (g) CONTRIBUTION IN KIND AND CAPITAL DECREASE. Schelfhout shall have decreased its capital for the amount of 15,864,040 BEF. (h) PLEDGE AGREEMENT. The Purchaser shall have completed a pledge agreement with the Vendors, by which the Shares are pledged to the Vendors, and shall have been registered the pledge in the shareholders register. (i) LEASE. Schelfhout shall have taken the commitment to rent the premises where Schelfhout currently operates and carries on business at a rate of 2,400 BEF/m2 for office space, 1,800 BEF/m2 for the work room and 1,200 BEF/m2 for the warehouse, for a term of ten years, on terms and conditions which shall correspond to the normal commercial terms and conditions at that moment. 4.4 CONDITION NOT FULFILLED. If any condition in Section 4.3 shall not have been fulfilled at or before the Closing Time, then the Vendors, in their sole discretion may, without limiting any rights or remedies available to the Vendors at law or in equity, either: <PAGE> -14- (a) terminate this Agreement by notice to the Purchaser in which event the Vendors shall be released from all obligations under this Agreement to complete the sale of the Shares; or (b) waive compliance with any such condition in whole or in part without prejudice to its right of termination in the event of non-fulfilment of any other condition in whole or in part. ARTICLE 5 REPRESENTATIONS, WARRANTIES AND COVENANTS 5.1 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE VENDORS. As a material inducement to the Purchaser entering into this Agreement and completing the transactions contemplated by this Agreement and acknowledging that the Purchaser is entering into this Agreement in reliance upon the representations, warranties and covenants of the Vendors, the Vendors hereby, jointly and severally, represent, warrant and covenant to and with the Purchaser as follows: (a) OWNERSHIP OF SHARES. The Vendors are, and at the Closing Time will be, the registered and beneficial owners of the Shares, with good and marketable title thereto, free and clear of all Liens of any kind and nature whatsoever. No Person, other than the Purchaser, has any agreement, option, right or privilege of any kind capable of becoming an agreement for the purchase from the Vendors of any of the Shares. (b) ENFORCEABILITY OF OBLIGATIONS. This Agreement constitutes a valid and binding obligation of each of the Vendors enforceable against each of them in accordance with its terms, subject however, to limitations with respect to enforcement imposed by law in connection with bankruptcy, insolvency, reorganization or other laws affecting creditors' rights generally and to the extent that equitable remedies such as specific performance and injunction are only available in the discretion of the court from which they are sought. (c) AUTHORIZATION BY THE VENDORS. Each of the Vendors has the legal capacity to enter into this Agreement and all other agreements and instruments to be executed by any of them as contemplated by this Agreement and to carry out their respective obligations under this Agreement and such other agreements and instruments and the Vendors have the exclusive right, power and authority to sell the Shares in accordance with the terms of this Agreement. (d) BANKRUPTCY. Neither Schelfhout nor any Vendor has committed an act of bankruptcy (within the meaning of the BANKRUPTCY AND INSOLVENCY ACT (Canada) or similar laws of any other jurisdiction) nor made an assignment in favour of its creditors nor made a proposal in bankruptcy to its creditors or any class thereof nor had any petition for a receiving order presented in respect of it. Neither Schelfhout nor any Vendor has initiated proceedings with respect to a compromise or arrangement with its creditors nor initiated any proceedings for its winding up, liquidation or dissolution. No receiver has been appointed in respect of Schelfhout <PAGE> -15- or any Vendor or any of the Assets or Shares and no execution or distress has been levied upon any of the Assets or Shares. (e) INCORPORATION AND POWER. Schelfhout is a corporation duly incorporated, organized, validly subsisting and in good standing under the laws of Belgium. Schelfhout is duly licensed, registered and qualified to do business and is in good standing under the laws of Belgium. Schelfhout has the full corporate power and authority to carry on the Business and to own, lease and operate the Assets and the Business as now carried on and owned, leased and operated by it. (f) SHARE CAPITAL. The authorized capital of Schelfhout consists of 640 shares and there are 640 shares issued and outstanding. Schelfhout does not have a stock option plan and there are no outstanding securities convertible into or exchangeable for any shares of capital stock or any rights (either pre-emptive or other) to subscribe for or to purchase, or any options, rights or warrants for the purchase of, or any agreements providing for the issuance of, or any calls, commitments, agreements or claims of any character relating to the issuance of, any securities in the capital of Schelfhout, except for the usual preferential rights for the existing shareholders of Schelfhout in the case of capital increases as provided for in Article 7 of the articles of incorporation of Schelfhout. (g) TITLE TO ASSETS. Schelfhout has good and marketable title to all the Assets, free and clear of any and all Liens. All machines, machinery, equipment, tools or other moveable or mechanical property forming part of the Assets are in good operating condition and are in a state of good repair and maintenance, reasonable wear and tear excepted. The Assets are sufficient to permit the continued operation of the Business in substantially the same manner as now being conducted. There is no agreement, option or other right or privilege outstanding in favour of any Person for the purchase from Schelfhout of the Business or of any of the Assets out of the ordinary course of Business. (h) NO SUBSIDIARY. Schelfhout has no subsidiaries or agreements of any nature to acquire any subsidiary or to acquire or lease any other business operations, except for the shares in the company into which the buildings were contributed. (i) FINANCIAL STATEMENTS. The Purchaser has been furnished with the financial statements of Schelfhout for the 1996, 1997 and 1998 fiscal years ending December 31, (the "Financial Statements") prepared in accordance with Belgium generally accepted accounting principles (GAAP), copies of which are attached hereto as Schedule 5.1(i). The balance sheets contained in such Financial Statements fairly present in all material respects the financial position of Schelfhout as of its date and the statements of earnings and retained earnings contained in the Financial Statements fairly present in all material respects the results of operations for the period indicated. Since December 31, 1998, Schelfhout has carried on its business in the ordinary course and there has been no Material Adverse Change in the Business, financial condition, Assets, results of operations or prospects of Schelfhout, except for the contribution in kind of the building. <PAGE> -16- (j) CORPORATE RECORDS. The minute books of Schelfhout contain true, correct and complete copies of its articles, its by-laws, the minutes of every meeting of its board of directors and every committee thereof and of its shareholders and every written resolution of its directors and shareholders. The register of shareholders of Schelfhout is complete and accurate in all material respects. (k) PERSONAL PROPERTY. All Personal Property is in good operating condition, and repair, ordinary wear and tear excepted. (l) REAL PROPERTY. Schedule 5.1(l) lists the municipal address for and a general description of each parcel of land owned, leased or used in the Business. The Real Property and the current use thereof comply with Applicable Law. No notice of violation of any Applicable Law or of any covenant, restriction or easement affecting the Real Property or with respect to the use or occupancy of the Real Property, has been given by any governmental authority having jurisdiction over the Real Property or by any other Person entitled to enforce the same. (m) PERSONAL PROPERTY LEASES. Each Personal Property Lease is in full force and effect and has not been amended, and Schelfhout is entitled to the full benefit and advantage of each Personal Property Lease in accordance with its terms. Each Personal Property Lease used in the Business is in good standing and there has not been any default by any party under any Personal Property Lease nor any dispute between Schelfhout and any other party under any Personal Property Lease. (n) INSURANCE. The Business, properties and Assets of Schelfhout are insured for the benefit of Schelfhout in amounts deemed adequate by Schelfhout's management against risk usually insured against by Persons operating a business similar to the Business of Schelfhout in the localities where such properties are located. Particulars of the policies of insurance maintained by Schelfhout as at the Closing Date are set out in Schedule 5.1(n) hereto. All policies are in full force and effect and Schelfhout is not in default, whether as to payment of premiums or otherwise, under the terms of such policies. (o) MATERIAL CONTRACTS. Schedule 5.1(o) lists all the Material Contracts. Schelfhout is not in default under any Material Contract and neither Schelfhout nor the Vendors have received notice of a default and there has not occurred any event which, with the lapse of time or giving of notice or both, would constitute a default under any Material Contract by Schelfhout or any other party to the Material Contract. Each Material Contract is in full force and effect, unamended by written or oral agreement, and Schelfhout is entitled to the full benefit and advantage of each Material Contract in accordance with its terms. Each Material Contract is in good standing and there has not been any default by any party under any Material Contract nor any dispute between Schelfhout and any other party under any Material Contract, except for the Material Contract with GPLM (Groupement des Producteurs de Legumees de la Manche, S.C. AGRICOLE) (France) of April 3, 1996. Parties entered into a formal serrement agreement on December 18, 1999. <PAGE> -17- (p) RECEIVABLES. Schedule 5.1(p) lists all of the Receivables as at the Closing Date. The Receivables are valid obligations which arose in the ordinary course of business and are enforceable and fully collectable accounts not subject to any setoff or counterclaim. None of the Receivables are due from a Person with whom Schelfhout does not deal at arm's length. (q) INTELLECTUAL PROPERTY. (i) Schedule 5.1(q)(i) lists the Intellectual Property for products developed by Schelfhout. The Intellectual Property, and all registrations of the Intellectual Property, are valid and subsisting. All of the registrations and applications for registration of the Intellectual Property are in good standing and are recorded in the name of Schelfhout. No application for registration of any of the Intellectual Property has been rejected. (ii) Schelfhout is the first and only owner of the Intellectual Property and is entitled to the uninterrupted use of the Intellectual Property without payment of any royalty or other fees. No Person has any right, title or interest in any of the Intellectual Property and all such persons have waived their moral rights in any copyright works within the Intellectual Property. Schelfhout has diligently protected its legal rights to the exclusive use of the Intellectual Property. (iii) There is no current litigation pending or threatened against or relating to the Intellectual Property. (iv) Schelfhout has not permitted or licensed any Person to use any of the Intellectual Property, except for Schelfhout's customers. (v) No Person has challenged the validity of any registrations for the Intellectual Property or the rights of Schelfhout to any of the Intellectual Property, except for the litigation Menillo v. Schelfhout II in which Menillo finally has withdrawn its suit (art. 4.1 f). (vi) To the best of the knowledge of the Vendors, neither the use of the Intellectual Property (which includes products, processes, methods, substances, parts and other materials presently sold by or used by Schelfhout in connection with the Business) nor the conduct of the Business has infringed or currently infringes upon the industrial or intellectual property rights of any other Person. (vii) To the best of the knowledge of the Vendors, no other Person has infringed the Schelfhout rights to the Intellectual Property. (viii) There is no governmental prohibition or restriction on the use of the Intellectual Property. <PAGE> -18- (r) LICENCES AND PERMITS. Schelfhout is registered with the Ministry of Finance of Belgium by decision dated January 1, 1990 as a building contractor under the number 429.285.178.06.26.12. Schelfhout holds this registration free and clear of any and all Liens. This registration is in good standing and in full force and effect, Schelfhout is not in violation of any term or provision or requirement of such registration, and no Person has threatened to revoke, amend or impose any condition in respect of, or commenced proceedings to revoke, amend or impose conditions in respect of this registration. Schelfhout does not hold any Licenses or Permits other than described in this Section 5.1(r). (s) UNDISCLOSED LIABILITIES. Schelfhout does not have any other liabilities, obligations, indebtedness or commitments, whether accrued, absolute, contingent or otherwise, other than the liabilities which have been previously disclosed in writing to the Purchaser and which do not exceed in the aggregate twenty thousand dollars (US$20,000) in United States funds. (t) CONSENTS AND APPROVALS. No consent or approval of any Person is required in connection with the execution and delivery of this Agreement and the completion of the transactions contemplated by this Agreement or to permit Schelfhout to carry on the Business after the Closing as the Business is currently carried on by it. (u) NOTICES. no Notices are required to be delivered to any Person in connection with the execution and delivery of this Agreement and the completion of the transactions contemplated by this Agreement or to permit Schelfhout to carry on the Business after the Closing as the Business is currently carried on by Schelfhout. (v) ABSENCE OF CONFLICTING AGREEMENTS. The execution, delivery and performance of this Agreement by the Vendors and the completion (with any required Consents and Approvals) of the transactions contemplated by this Agreement do not and will not result in or constitute any of the following: (i) a default, breach or violation or an event that, with notice or lapse of time or both, would be a default, breach or violation of any of the terms, conditions or provisions of the articles or by-laws of Schelfhout; (ii) an event which, pursuant to the terms of any Material Contract or Licence and Permit, causes any right or interest of Schelfhout to come to an end or be amended in any way that is detrimental to the Business or entitles any other Person to terminate or amend any such right or interest; (iii) the creation or imposition of any Lien on any Asset; or (iv) the violation of any Applicable Law by the Vendors or Schelfhout. <PAGE> -19- (w) LITIGATION. There is no action, suit, proceeding, claim, application, complaint or investigation in any court or before any arbitrator or before or by any regulatory body or governmental or non-governmental body pending or threatened by or against the Vendors or Schelfhout, or Related to the Business or affecting the Business or the operations or capital of Schelfhout or the transactions contemplated by this Agreement, and there is no factual or legal basis which could give rise to any such action, suit, proceeding, claim, application, complaint or investigation except for (i) Menillo v. Schelfhout which is presently under appeal, in which the French Court ordered Schelfhout and the Chamber of Commerce of Cherbourg on January 1, 1999 to pay damages to Menillo in the amount of FRF200.000; and (ii) Menillo v. Schelfhout (II): in this case, Menillo has withdrawn its suit and the Court of Rennes (France) condemned Menillo to pay the costs of the procedure and (iii) UNIT 4 BELGIUM N.V., in which UNIT 4 BELGIUM N.V. lodged on May 12, 1998 an appeal against the judgement of the Commercial Court of Dendermonde, division of Sint-Niklaas, of 28.04.1998 and lodged a counterclaim as follows: - payment of invoice nr. 97 0335 of 6.6.97 ad 247,953 BEF; - the cancellation of the contract at the charge of Schelfhout; - the restitution of the software, manual and demonstration version; - damages of 1,000,000 BEF. (x) NO CONFLICT. No current director or officer of Schelfhout (nor anyone who was a director or officer of Schelfhout in the last fiscal year) and, to the knowledge of each Vendor, no current shareholder of Schelfhout, nor any associate of any such Person, is presently, directly or indirectly through his or her affiliation with any other Person, a party to any transaction with Schelfhout providing for the furnishing of services by or to (except services related to such person acting as a director or officer of Schelfhout), or rental of real or personal property from or to, or otherwise requiring cash payments to or by any such Person except for (i) either: an agreement between Infomar C.V.B.A. and Schelfhout for the furnishing of management, consulting and related services by Infomar C.V.B.A. or an employment agreement between Hilde De Laet and Schelfhout and an agreement between Infomar C.V.B.A. and Schelfhout for the furnishing of management, consulting and related services by Infomar C.V.B.A. or an employment agreement between Hilde De Laet and Schelfhout and between Luc Schelfhout and Schelfhout; (ii) the Lease Agreement referred to in Section 5.1(hh), and (iii) the option to acquire the shares in the company into which the buildings were contributed and (iv) the agreement of September 1, 1998, between Schelfhout and European Auction Builders c.v.b.a. at present INFOMAR c.v.b.a. providing the payment by Schelfhout of 90,000 Euro, at the moment that Schelfhout receives the last payment from the European Community via VEGA Plc. (which will exceed said 90,000 Euro). (y) EMPLOYEES. (i) Schedule 5.1(y)(i), which will be provided to the Purchaser on the Closing Date, lists all the Employees and the age, position, status, length of service, compensation and all other benefits of each of them, <PAGE> -20- respectively. The Purchaser has been provided with the opportunity to review all contracts or arrangements with or relating to any Employee and will be provided with copies of such contracts or arrangements on the Closing Date. All Employees have written employment agreements. (ii) There is no labour strike, dispute, slowdown or stoppage actually pending or involving or, to the best of the knowledge of each Vendor, threatened against Schelfhout with respect to the Business; (iii) No union representation question exists respecting the Employees in connection with the Business and no collective bargaining agreement is in place or currently being negotiated by Schelfhout; (iv) Other than as set out in their written contracts of employment with Schelfhout, no Employee has any agreement as to length of notice required to terminate his or her employment; (v) All required withholding of amounts from the employees have been paid to the appropriate authority in compliance with Applicable Law. (vi) No notice has been received by Schelfhout or any Vendor of any complaint which has not been resolved, filed by any of its employees claiming that Schelfhout has violated any applicable employee or human rights or similar legislation in any jurisdictions in which Schelfhout operates), or of any complaints or proceedings which have not been resolved of any kind involving Schelfhout or, to the Vendors' knowledge, after due inquiry, any of the Employees before any labour relations board. There are no outstanding orders or charges against Schelfhout under any applicable health and safety legislation in any jurisdictions in which Schelfhout carries on business). All levies, assessments and penalties made against Schelfhout pursuant to the workers' compensation legislation in the jurisdictions in which Schelfhout carries on business have been paid by Schelfhout and Schelfhout has not been reassessed under any such legislation except such as have been resolved. (vii) The only benefit plans of Schelfhout (the "Benefit Plans") are listed in Schedule 5.1(y)(vii) hereto. All contributions or premiums required to be made by Schelfhout under the terms of the Benefit Plans have been made. Schelfhout may terminate the Benefit Plans. Schelfhout has furnished to the Purchaser all related documentation and plan summaries, booklets and personal manuals related to the Benefit Plans. No material changes have occurred to the Benefit Plans or are expected to occur which would affect the actuarial reports or financial statements provided to the Purchaser, except for the hospitalisation and group insurance which will be introduced by Schelfhout on or about January 1, 1999 as far as the group <PAGE> -21- insurance is concerned for two of the employees and January 1, 2000 as far as hospitalisation is concerned. (z) Intentionally omitted. (aa) CUSTOMERS. None of the Vendors is aware of, nor has any of them received notice of, any intention on the part of any such customer to cease doing business with Schelfhout or to modify or change in any material manner any existing arrangement with Schelfhout for the purchase of any products or services. The relationships of Schelfhout with each of their respective principal customers are satisfactory, and there are no unresolved disputes with any such customer. (bb) AFFILIATED TRANSACTIONS. Schelfhout is not liable in respect of advances, loans, guarantees to or on behalf of any shareholder, officer, director, employee or any other Person with whom Schelfhout does not deal at arm's length. (cc) TAXES. Schelfhout has filed with appropriate taxing authorities on a timely basis all returns, reports and estimates relating to Taxes which are required to be filed by or on behalf of Schelfhout to the date hereof, and each such return, report and estimate is complete and accurate in all material respects. Schelfhout has paid, or made adequate provision in accordance with generally accepted accounting principles for the payment of, all Taxes which are shown to be due on such returns, reports or estimates. There are no current assessments, liens or claims issued by any taxing authority regarding any Taxes of Schelfhout. All assessments of Taxes with respect to Schelfhout have either been paid or provided for or are being contested in good faith by appropriate proceedings as to which adequate reserves have been provided. No action, proceeding or investigation has been threatened by any governmental authority for the assessment or collection of any Taxes for which Schelfhout would be liable. (dd) ACTION DURING INTERIM PERIOD. During the Interim Period, Schelfhout has not: (i) made or agreed to make any change in the compensation of any director, officer or Employee, except for the normal increases which are necessary in the Business to retain Employees, and has not paid or agreed to pay or set aside any bonus, profit sharing, retirement, insurance, death, severance, fringe benefit, or other extraordinary or indirect compensation to, for, or on behalf of any director, officer or Employee, except for the hospitalisation and group insurance for Employees which will be introduced by Schelfhout on or about January 1, 1999 as far as the group insurance is concerned for two of the employees and January 1, 2000 as far as hospitalisation is concerned; (ii) suffered any Material Adverse Change; <PAGE> -22- (iii) declared or made any payment of any dividend or other distribution in respect of its shares and has not redeemed, purchased or otherwise acquired any shares; (iv) issued or sold any shares or other securities or issued, sold or granted any option, warranty or right to purchase any shares or other securities of Schelfhout or its Affiliates; (v) sold, assigned, transferred, mortgaged, pledged, granted a security interest in or otherwise encumbered any of the Assets except sales of Inventories in the normal course of business which, individually and in the aggregate are not material to the financial condition of the operation of the Business, except for the contribution by Schelfhout of the building according to Section 4.3(g) and except for the granting of an irrevocable option on the shares in the company into which the buildings were contributed; (vi) changed any accounting or costing systems or methods in any material respect; (vii) suffered any extraordinary loss or cancelled or waived any debt, claim or other right; (viii) incurred or assumed any liabilities, obligations or indebtedness (whether accrued, absolute, contingent or otherwise), except unsecured current liabilities, obligations and indebtedness incurred in the normal course of business; (ix) entered into any Material Contract or any other transaction that was not in the normal course of business; or (x) terminated, cancelled or modified in any material respect or received notice or a request for termination, cancellation or modification in any material respect of any Material Contract, including any policy of insurance which related to Schelfhout or any of the Assets, except for the maintenance contract with Socave-Vergt which was terminated on August 17, 1999. (ee) DIRECTORS AND OFFICERS. At the request of the Purchaser any time on or following the Closing Date, the Vendors shall cause their nominees on the board of directors of Schelfhout to tender resignations. (ff) E-AUCTION SHARES. The Vendors acknowledge that: <PAGE> -23- (i) the e-Auction Shares were issued in accordance with Rule 144 pursuant to the UNITED STATES SECURITIES ACT of 1933 (the "1933 Act") and are known as restricted shares; (ii) the Vendors may only make offers or sales of the e-Auction Shares to non-U.S. Persons outside the United States pursuant to Rule 904 of Regulation S of the 1933 Act. The Vendors may offer or sell the e-Auction Shares only: outside the United States in accordance with the provisions of Rule 904 of Regulation S; pursuant to registration of the e-Auction Shares under the 1933 Act; or in the United States pursuant to an available exemption from the registration requirements of the 1933 Act. Such an exemption would be available for persons who are not Underwriters, Distributors or Affiliates of e-Auction. The foregoing is only a summary of the applicable United States securities laws and regulations governing the resale of the e-Auction Shares within the United States. The determination of the status of the Vendors for such purpose and the availability of any exemption from registration will depend on the prevailing facts and circumstances. Accordingly, the Vendors should consult appropriate United States counsel prior to any resale of the e-Auction Shares within the United States; (iii) the e-Auction Shares acquired pursuant to this Agreement may be resold in other jurisdictions not listed above only in accordance with applicable securities laws in effect in that jurisdiction; (iv) upon the original issuance thereof, and until such time as the same is no longer required under applicable requirements of the 1933 Act or applicable state laws, the certificates representing the e-Auction Shares sold in the United States, and all certificates issued in exchange therefor or in substitution thereof, shall bear the following legend: "No sale, offer to sale, or transfer of the shares represented by this certificate shall be made unless a registration statement under the FEDERAL SECURITIES ACT of 1993, as amended, with respect to such shares is then in effect or an exemption from the registration requirements of said Act is then in fact applicable to said shares." (v) pursuant to applicable securities legislation it may be necessary to place a legend, different or in addition to the one listed in paragraph 5.1(ff)(vi) above, relating to resale restrictions on the certificates representing the e-Auction Shares purchased hereunder and to the extent that such is required by applicable securities legislation, and the Vendors consent to the same. <PAGE> -24- (gg) FULL DISCLOSURE. None of the foregoing representations and warranties and no document furnished by or on behalf of Schelfhout and the Vendors to the Purchaser in connection with the negotiation of the transactions contemplated by this Agreement contain any untrue statement of a material fact or omit to state any material fact necessary to make any such statement or representation not misleading to a prospective purchaser of the Shares seeking full information as to Schelfhout and its respective properties, businesses and affairs. Except for those matters disclosed in this Agreement, there are no facts not disclosed in this Agreement which, if learned by the Purchaser, might reasonably be expected to materially diminish its evaluation of the value of the Shares and the Business or to deter the Purchaser from completing the transactions contemplated by this Agreement on the terms of this Agreement. (hh) LEASE. The Vendors acknowledge and agree that Schelfhout shall be entitled to remain on the premises where Schelfhout currently operates and carries on business for a period of twelve (12) months following the Closing Date on a rent free basis and that following such twelve (12) month period, the Vendors or the company into which the building were contributed shall lease the building to Schelfhout at a rate of 2,400 BEF per square metre for office space, 1,800 BEF per square metre for the work room and 1,200 per square metre for the warehouse, for a term of 10 years (the "Lease Agreement"), which terms of the lease can be considered as normal at the Closing Date. 5.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER AND E-AUCTION. As a material inducement to the Vendors entering into this Agreement and completing the transactions contemplated by this Agreement and acknowledging that the Vendors are entering into this Agreement in reliance upon the representations, warranties and covenants of the Purchaser and e-Auction, the Purchaser and e-Auction hereby represents, warrants and covenants to the Vendors as follows: (a) INCORPORATION. The Purchaser is a corporation duly incorporated and validly subsisting and in good standing under the laws of Belgium. (b) DUE AUTHORIZATION. The Purchaser has all necessary corporate power, authority and capacity to enter into, execute and deliver this Agreement and all other agreements and instruments required to be delivered hereunder and to perform its obligations hereunder and under such other agreements and instruments. The execution and delivery by the Purchaser of this Agreement and such other agreements and instruments to be delivered hereunder, and the completion of the transactions contemplated by this Agreement and under such other agreements and instruments have been duly authorized and approved by all necessary corporate action on the part of the Purchaser. (c) ENFORCEABILITY OF OBLIGATIONS. This Agreement constitutes a valid and binding obligation of the Purchaser enforceable against the Purchaser in accordance with its terms subject, however, to limitations on enforcement imposed by bankruptcy, insolvency, reorganization or other laws affecting creditors' rights generally and to the extent that equitable remedies such as specific performance and injunctions are only available in the discretion of the court from which they are sought. <PAGE> -25- (d) OWNERSHIP OF SHARES. The Purchasers at the Closing Time will be the registered and beneficial owners of the e-Auction Shares, with good and marketable title thereto, free and clear of all Liens of any kind and nature whatsoever. No Person, other than the Purchaser, has any agreement, option, right or privilege of any kind capable of becoming an agreement for the purchase from the Purchaser of any of the e-Auction Shares. (e) BANKRUPTCY. The Purchaser and e-Auction has not committed an act of bankruptcy (within the meaning of the BANKRUPTCY AND INSOLVENCY ACT (Canada) or similar laws of any other jurisdiction) nor made an assignment in favour of its creditors nor made a proposal in bankruptcy to its creditors or any class thereof nor had any petition for a receiving order presented in respect of it. The Purchaser and e-Auction has not initiated proceedings with respect to a compromise or arrangement with its creditors nor initiated any proceedings for its winding up, liquidation or dissolution. No receiver has been appointed in respect of the Purchaser and e-Auction or any of the assets or shares of the Purchaser or e-Auction and no execution or distress has been levied upon any of the assets or shares. (f) LITIGATION. There is no action, suit, proceeding, claim, application, complaint or investigation in any court or before any arbitrator or before or by any regulatory body or governmental or non-governmental body pending or threatened by or against the Purchaser or e-Auction, related to its business or affecting the business or the operations or capital of the Purchaser or e-Auction or the transactions contemplated by this Agreement, and there is no factual or legal basis which could give rise to any such action, suit, proceeding, claim, application, complaint or investigation. (g) CORPORATE RECORDS. The minute books of the Purchaser contain true, correct and complete copies of its articles, its by-laws, the minutes of every meeting of its board of directors and every committee thereof and of its shareholders and every written resolution of its directors and shareholders. The share certificate book, register of shareholders, register of transfers and register of directors and officers of the Purchaser are complete and accurate in all material respects. (h) FULL DISCLOSURE. None of the foregoing representations and warranties and no document furnished by or on behalf of the Purchaser and e-Auction in connection with the negotiation of the transactions contemplated by this Agreement contain any untrue statement of a material fact or omit to state any material fact necessary to make any such statement or representation not misleading to the Vendors seeking full information as to e-Auction and its respective properties, businesses and affairs. Except for those matters disclosed in this Agreement, there are no facts not disclosed in this Agreement which, if learned by the Vendors, might reasonably be expected to deter the Vendors from completing the transactions contemplated by this Agreement on the terms of this Agreement. (i) NO TRANSFER OF SHARES. The Purchaser shall not, during a period of thirteen (13) months following the Closing Date, transfer any or all of the Shares in any way whatsoever which would make article 90, 9e and 94 of the Belgium Income Tax Code applicable. The <PAGE> -26- Purchaser shall be accountable for any breach of this covenant, whether by the Purchaser itself, one of its assigns, successors or creditors. (j) CONTRIBUTION IN KIND The Purchaser and e-Auction acknowledge and agree that Schelfhout shall contribute the buildings of Schelfhout into S.D.L. INVEST N.V., a company to be incorporated, for their bookkeeping value as per 31.12.99, i.e. 19,503,468 BEF. As compensation, S.D.L. INVEST N.V. will take over the balance of the debt related to the buildings (4,214,646 BEF) and receive shares in S.D.L. INVEST N.V. for 15,288,822 BEF. 5.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. (a) The representations and warranties of the Vendors contained in this Agreement or contained in any agreement, certificate or other document delivered or given pursuant to or in connection with this Agreement or the transactions provided for herein shall survive the Closing, and regardless of any investigation by or on behalf of the Purchaser with respect thereto, shall continue in full force and effect for the benefit of the Purchaser for a period of two (2) years from the Closing Date. (b) The representations and warranties of the Purchaser and e-Auction contained in this Agreement or contained in any agreement, certificate or document delivered or given pursuant to or in connection with this Agreement or the transactions provided for herein shall survive the Closing, and regardless of any investigation by or on behalf of the Vendors with respect thereto, shall continue in full force and effect for the benefit of the Vendors for a period of two (2) years from the Closing Date. ARTICLE 6 INDEMNIFICATION 6.1 INDEMNITY BY THE VENDORS. The Vendors shall, jointly and severally, indemnify and hold the Purchaser and e-Auction, its directors, officers, employees, agents, representatives, assigns and the Purchaser's Affiliates, and their respective directors, officers and employees harmless in respect of any claim, demand, action, cause of action, damage, loss, cost, liability or expense (hereinafter referred to as "Claim") which may be made or brought against an Indemnified Party or which it may suffer or incur directly or indirectly as a result of, in respect of or arising out of: (a) any incorrectness in or breach of any representation or warranty of the Vendors contained in this Agreement or in any other agreement, certificate or instrument executed and delivered pursuant to this Agreement; or (b) any breach of or any non-fulfillment of any covenant or agreement on the part of the Vendors under this Agreement or under any other agreement, certificate or instrument executed and delivered pursuant to this Agreement; 6.2 INDEMNITY BY THE PURCHASER AND E-AUCTION. The Purchaser and e-Auction shall indemnify and hold the Vendors and their respective heirs and legal representatives harmless in <PAGE> -27- respect of any Claim which may be made or brought against an Indemnified Party or which it may suffer or incur directly or indirectly as a result of in respect of or arising out of: (a) any incorrectness in or breach of any representation or warranty of the Purchaser or e-Auction, contained in this Agreement or in any other agreement, certificate or instrument executed and delivered pursuant to this Agreement; (b) any breach of or any non-fulfillment of any covenant or agreement on the part of the Purchaser or e-Auction under this Agreement or under any other agreement, certificate or instrument executed and delivered pursuant to this Agreement; or (c) in the event of a breach of Section 5.2(i) above, the Purchaser and e-Auction, their assigns and creditors, agree to pay to the Vendors ispo jure, an indemnity equal to the taxes to be paid by the Vendors, including any and all fines, interest and increases thereof. The Purchaser and e-Auction agree to pay this indemnity to the Vendors within fourteen (14) days of the receipt of the copy of the notice of assessment provided by the Vendors. 6.3 LIMITATIONS. No party shall have any Liability for indemnification pursuant to Sections 6.1 or 6.2 unless and until the accumulated aggregate amount of Claims of the Indemnified Party exceeds twenty thousand dollars (US$20,000) in United States funds, following which all such accumulated Claims and all further Claims of the Indemnified Party shall be recoverable as provided in this Agreement. 6.4 NOTICE OF CLAIM. If an Indemnified Party becomes aware of a Claim in respect of which indemnification is provided for pursuant to either of Section 6.1 or 6.2, as the case may be, the Indemnified Party shall promptly give written notice of the Claim to the Indemnifying Party. Such notice shall specify whether the Claim arises as a result of a claim by a Person against the Indemnified Party (a "Third Party Claim") or whether the Claim does not so arise (a "Direct Claim"), and shall also specify with reasonable particularity (to the extent that the information is available): (a) the factual basis for the Claim; and (b) the amount of the Claim, if known. If, through the fault of the Indemnified Party, the Indemnifying Party does not receive notice of any Claim in time effectively to contest the determination of any liability susceptible of being contested, then the Liability of the Indemnifying Party to the Indemnified Party under this Article shall be reduced by the amount of any losses incurred by the Indemnifying Party resulting from the Indemnified Party's failure to give such notice on a timely basis. 6.5 DIRECT CLAIMS. In the case of a Direct Claim, the Indemnifying Party shall have sixty (60) days from receipt of notice of the Claim within which to make such investigation of the Claim as the Indemnifying Party considers necessary or desirable. For the purpose of such investigation, the Indemnified Party shall make available to the Indemnifying Party the <PAGE> -28- information relied upon by the Indemnified Party to substantiate the Claim, together with all such other information as the Indemnifying Party may reasonably request. If both parties agree at or before the expiration of such sixty (60) day period (or any mutually agreed upon extension thereof) to the validity and amount of such Claim, the Indemnifying Party shall immediately pay to the Indemnified Party the full agreed upon amount of the Claim, failing which the matter shall be referred to binding arbitration in such manner as the parties may agree or shall be determined by a court of competent jurisdiction. 6.6 THIRD PARTY CLAIMS. In the case of a Third Party Claim, the Indemnifying Party shall have the right, at its expense, to participate in or assume control of the negotiation, settlement or defence of the Claim and, in such event, the Indemnifying Party shall reimburse the Indemnified Party for all of the Indemnified Party's out-of-pocket expenses as a result of such participation or assumption. If the Indemnifying Party elects to assume such control, the Indemnified Party shall have the right to participate in the negotiation, settlement or defence of such Third Party Claim and to retain counsel to act on its behalf, provided that the fees and disbursements of such counsel shall be paid by the Indemnified Party unless the Indemnifying Party consents to the retention of such counsel at its expense or unless the named parties to any action or proceeding include both the Indemnifying Party and the Indemnified Party and a representation of both the Indemnifying Party and the Indemnified Party by the same counsel would be inappropriate due to the actual or potential differing interests between them (such as the availability of different defences). If the Indemnifying Party, having elected to assume such control, thereafter fails to defend the Third Party Claim within a reasonable time, the Indemnified Party shall be entitled to assume such control and the Indemnifying Party shall be bound by the results obtained by the Indemnified Party with respect to such Third Party Claim. If any Third Party Claim is of a nature such that (i) the Indemnified Party is required by Applicable Law or the order of any court, tribunal or regulatory body having jurisdiction, or (ii) it is necessary in the reasonable view of the Indemnified Party acting in good faith and in a manner consistent with reasonable commercial practices, in respect of (A) a Third Party Claim by a customer relating to products or services supplied by the Business or (B) a Third Party Claim relating to any Contract which is necessary to the ongoing operations of the Business or any material part thereof in order to avoid material damage to the relationship between the Indemnified Party and any of its major customers or to preserve the rights of the Indemnified Party under such an essential Contract, to make a payment to any Person (a "Third Party") with respect to the Third Party Claim before the completion of settlement negotiations or related legal proceedings, as the case may be, the Indemnified Party may make such payment and the Indemnifying Party shall, promptly after demand by the Indemnified Party, reimburse the Indemnified Party for such payment. If the amount of any liability of the Indemnified Party under the Third Party Claim in respect of which such a payment was made, as finally determined, is less than the amount which was paid by the Indemnifying Party to the Indemnified Party, the Indemnified Party shall, promptly after receipt of the difference from the Third Party, pay the amount of such difference to the Indemnifying Party. If such a payment, by resulting in settlement of the Third Party Claim, precludes a final determination of the merits of the Third Party Claim and the Indemnified Party and the Indemnifying Party are unable to agree whether such payment was unreasonable in the circumstances having regard to the amount and merits of the Third Party Claim, then such <PAGE> -29- dispute shall be referred to and finally settled by binding arbitration from which there shall be no appeal. 6.7 SETTLEMENT OF THIRD PARTY CLAIMS. If the Indemnifying Party fails to assume control of the defence of any Third Party Claim, the Indemnified Party shall have the exclusive right to contest, settle or pay the amount claimed. Whether or not the Indemnifying Party assumes control of the negotiation, settlement or defence of any Third Party Claim, the Indemnifying Party shall not settle any Third Party Claim without the written consent of the Indemnified Party, which consent shall not be unreasonably withheld or delayed; provided, however, that the liability of the Indemnifying Party shall be limited to the proposed settlement amount if any such consent is not obtained for any reason within a reasonable time after the request therefor. 6.8 SET-OFF. The Purchaser shall be entitled to set-off the amount of any Claim submitted under Section 6.1 as damages or by way of indemnification against any other amounts payable by the Purchaser to the Vendors whether under this Agreement or otherwise. ARTICLE 7 DISPUTE RESOLUTION 7.1 ARBITRATION. Any dispute concerning the validity, the interpretation or the execution of this Agreement or any agreement or document entered into pursuant to this Agreement, shall be definitively settled in accordance with the Rules of the Cepani, by one or several arbitrators appointed in accordance these Rules. The Arbitration Tribunal shall be composed of three arbitrators. The place of the arbitration shall be Sint-Niklaas, Belgium. ARTICLE 8 GENERAL 8.1 FURTHER ASSURANCES. Each of the parties hereto from time to time at the request and expense of any other party hereto and without further consideration, shall execute and deliver such other instruments of transfer, conveyance and assignment and take such further action as the other party may require to more effectively complete any matter provided for herein. 8.2 EXPENSES. Unless otherwise provided in this Agreement, each of the parties hereto shall bear its or his own expenses (including those of legal counsel and advisors) incurred in connection with this Agreement and the transactions contemplated by this Agreement. 8.3 ENTIRE AGREEMENT. This Agreement and the Schedules hereto together with any agreements referenced herein constitute the entire agreement between the parties pertaining to the subject matter hereof and supersede all prior agreements, understandings, negotiations and discussions, whether oral or written, of the parties respecting the subject matter hereof and there are no implied representations, warranties or conditions, statutory or otherwise, except as expressly set forth herein. There are no oral representations or warranties among the parties <PAGE> -30- hereto of any kind. This Agreement may not be amended or modified in any respect except by written instrument signed by all the parties hereto. 8.4 TIME OF THE ESSENCE. Time shall be of the essence of this Agreement. 8.5 NOTICES. Any notice required or permitted to be given hereunder shall be in writing and shall be effectively given if (i) delivered personally or (ii) sent by fax or other similar means of electronic communication, in each case to the applicable address set out on the execution page of this Agreement. Any notice so given shall be deemed conclusively to have been given and received when so personally delivered or on the day of faxing or sending by other means of recorded electronic communication, provided that such day in either event is a Business Day. Otherwise, such communication shall be deemed to have been given and made and to have been received on the next following Business Day. Any party hereto or others mentioned above may change any particulars of its address for notice by notice to the others in the manner aforesaid. 8.6 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of Belgium. 8.7 SEVERABILITY. Any covenant or provision hereof determined to be void or unenforceable in whole or in part shall not be deemed to affect or impair the validity of any other covenant or provision hereof and the covenants and provisions hereof are declared to be separate and distinct. 8.8 WAIVER. A waiver of any default, breach or non-compliance under this Agreement is not effective unless in writing and signed by the party to be bound by the waiver. No waiver shall be inferred from or implied by any failure to act or delay in acting by a party in respect of any default, breach or non-observance or by anything done or omitted to be done by the other party. The waiver by a party of any default, breach or non-compliance under this Agreement shall not operate as a waiver of that party's rights under this Agreement in respect of any continuing or subsequent default, breach or non-observance (whether of the same or any other nature). 8.9 SUCCESSORS AND ASSIGNS. This Agreement shall not be assignable by any of the parties hereto without the prior written consent of the other parties hereto and the Agreement shall enure to the benefit of and be binding upon the respective successors and permitted assigns of the parties hereto. 8.10 NON-MERGER. Each party hereby agrees that all provisions of this Agreement, other than the representations and warranties contained in Article 5, and the indemnities in Sections 6.1 and 6.2 hereof (which shall be subject to the special arrangements provided in such Articles or Sections), shall survive the execution, delivery and performance of this Agreement, the Closing Date and the execution, delivery and performance of any and all documents delivered in connection with this Agreement. 8.11 COUNTERPARTS AND FACSIMILE. This Agreement may be executed by the parties in any number of separate counterparts each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute one and the same instrument. Counterparts may be executed either in original or faxed form and the parties adopt any <PAGE> -31- signatures received by a receiving fax machine as original signatures of the parties, provided, however that any party providing its signature in such manner shall promptly forward to the other party an original of the signed copy of this Agreement which was so faxed. [THE REMAINDER OF THIS PAGE WAS INTENTIONALLY LEFT BLANK] <PAGE> -32- IN WITNESS WHEREOF this Agreement has been executed by the parties hereto. <TABLE> <CAPTION> <C> <S> /s/ Luc Schelfhout - ---------------------------- -------------------------------------------------------- Witness LUC SCHELFHOUT Address: 9190 STEKENE, Bormte 204/A Facsimile: 03/779.99.89 /s/ Hilde De Laet - ---------------------------- -------------------------------------------------------- Witness HILDE DE LAET Address: 9190 STEKENE, Bormte 204/A Facsimile: 03/779.99.89 E-AUCTION BELGIUM N.V. e-Auction Global Trading Inc. (Nevada) Per: /s/ David Hackett ----------------------------------------- Name: David Hackett ----------------------------------------- Address: 9190 STEKENE, Zavelstraat 7 Facsimile: ------------------------------------ e-Auction Global Trading Inc. (Canada) Per: /s/ David Hackett ----------------------------------------- Name: David Hackett ----------------------------------------- Address: 9190 STEKENE, Zavelstraat 7 Facsimile: ------------------------------------ E-AUCTION GLOBAL TRADING INC. Per: /s/ David Hackett ----------------------------------------- Name: David Hackett ----------------------------------------- Address: 181 Bay Street, BCE Place, Suite 3730 Wellington Tower, Toronto, Ontario M5J 2T3 Facsimile: 416-214-0585 </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.3 <SEQUENCE>6 <DESCRIPTION>EX-10.3 <TEXT> <PAGE> PLEDGE AGREEMENT BETWEEN: E-Auction Belgium N.V. Zavelstraat 7, 9190 STEKENE Represented by e-Auction Global Trading Inc., Nevada, USA and e-Auction Global Trading Inc., Canada, Represented by Mr. HACKETT, David, Hereafter referred to as "the pawner"; AND: Mr. Luc SCHELFHOUT and Mrs. Hilde DE LAET, Living together at 9190 STEKENE, Bormte, 204A; Hereafter referred to as "the pledgees"; Whereas the pledgees are willing to sell their shares in the share capital of Schelfhout Computersystemen N.V. (hereinafter: "SCHELFHOUT"); In the share purchase agreement, IN ART. 2.6 (a) subject to art. 2.6 (c) the pawner agrees, in the event that the e-Auction shares referred to in section 2.5 (a) are not freely tradable on any one of the six (6), twelve (12), eighteen (18) or twenty four (24) month anniversary of the Closing Date, the pawner agrees to pay to the pledgees, by way of electronic transfer, within ten (10) business days after the date of the applicable anniversary, an amount equal to USD 750,000 in United States funds. IN ART. 2.6 (b) SUBJECT TO ART. 2.6 (c) the pawner agrees, in the event that the e-Auction shares referred to in section 2.5 (b) are not freely tradable on one of the thirty six (36), forty eight (48) or sixty (60) month anniversary of the Closing Date, the pawner agrees to pay to the pledgees, by way of electronic transfer, within ten (10) business days from the date of the applicable anniversary, an amount equal to USD 1,000,000 in United States funds. IN ART, 6.2 (c) in the event of breach of section 5.2 (i), the pawner agrees to pay to the pledgees ipso ure, an indemnity equal to the taxes to be paid by the pledgees, including any and all fines, interest and increases thereof. The pawner wishes to guarantee the good performance of these commitments by the pledging of all the shares in the capital of SCHELFHOUT. Now therefore the parties covenant and agree as follows: 1. The pawner pledges all the 640 shares in the capital of SCHELFHOUT to the pledgees as guarantee for the payment of the indemnity referred to in art. 6.2,c. <PAGE> 2 2. The pawner pledges the following shares in the capital of SCHELFHOUT to the pledgees as guarantee for the payment of the following amounts: - - shares numbers 1-48: the 750,000 USD which could become due on the six (6) month anniversary of the Closing Date according to art. 2.6 (a); - - shares numbers 49-96: the 750,000 USD which could become due on the twelve (12) month anniversary of the Closing Date, according to art. 2.6 (a); - - shares numbers 97-144: the 750,000 USD which could become due on the eighteen (18) month anniversary of the Closing Date, according to art. 2.6 (a); - - shares numbers 145-192: the 750,000 USD which could become due on the twenty-four (24) month anniversary of the Closing Date, according to art. 2.6 (a); - - shares numbers 193-256: the 1,000,000 USD which could become due on the thirty-six (36) month anniversary of the Closing Date, according to art. 2.6 (b); - - shares numbers 257-320: the 1,000,000 USD which could become due on the forty-eight (48) month anniversary of the Closing Date, according to art. 2.6 (b); - - shares numbers 321-384: the 1,000,000 USD which could become due on the sixty (60) month anniversary of the Closing Date, according to art. 2.6 (b). To that effect, the pledges put the shares into the possession of the pledgees by the registration and the signing in the register of shareholders of SCHELFHOUT of the following formula: "DE AANDELEN NUMMERS 1 TOT EN MET 640 WORDEN IN PAND GEGEVEN AAN DE HER LUC SCHELFHOUT EN MEVROUW HILDE DE LAET, VOLGENS GEREGISTREERDE ONDERHANDSE OVEREENKOMST VAN ......... 1999. DE PANDGEVERS DE PANDNEMERS" TRANSLATION: The shares number 1 until 640 are pledged to Mr. Luc SCHELFHOUT en Mrs. Hilde DE LAET according to a private deed (private agreement signed but not sealed) which was registered with the Registry. 3. The pawner preserves all his rights in connection with the pledged shares, including the voting rights, the dividend rights and the preferential rights. <PAGE> 3 4. The pledgees will give notice of the pledging of the shares to Schelfhout Computer Systemen N.V. by registered letter. 5. The pledgees shall only be entitled to enforce upon the pledge granted under this pledge agreement provided they are not in default under the share purchase agreement and the amount owed by the pawner to the pledgees has not been set off pursuant to Art. 6.8 of the share purchase agreement. The pledgees will be entitled again to enforce upon the pledge granted if and as far the arbitration tribunal provided for in art. 7 of the share purchase agreement decides that the pledgees are not in default under the share purchase agreement. 6. In the event that the e-Auction shares referenced in section 2.6(a) or section 2.6(b) are freely tradable on the applicable anniversary date, or the pawner has made the applicable payment to the pledgees, the pledge referred in section 2 as applicable to the shares referenced therein shall cease to apply to such shares. In the event that the pledgees enforce the pledge and take the applicable pledged shares on an applicable anniversary date, the pledged shares shall be the pledgees' sole remedy against the pawner under this agreement and the share purchase agreement and the applicable payment obligation shall be satisfied and treated as paid in full. In the event that any of the pledged shares are not subject to a definitive pledge event, the pledgees shall promptly deliver to the pawner the shares not used to satisfy the obligation to the pawner. 7. In the event the pledgees enforce upon the pledge to satisfy a claim under art. 6.2 of the share purchase agreement, the pledgees shall only be entitled to obtain such number of the pledged shares having a fair market value equal to the taxes paid or due by the pledgees due to a breach by the pawner of art. 5.2 (i) of the share purchase agreement. The fair market value of the pledged shares shall be determined by at the time of the obligation to pay and shall be as agreed to by the pledgee and pawner, failing which the fair market value shall be determined in accordance with the arbitration provisions as set out in art. 7 of the share purchase agreement. Any pledged shares not otherwise pledged herein and not required to satisfy the tax obligation under art. 5.2 (i), shall be returned to the pawner and the pledge under section 1 above shall cease to apply. Notwithstanding anything to the contrary herein, the pledge in section 1 shall cease to apply and be of no further force and effect following the expiration of the period which thirteen (13) months following the closing date. 8. The pledge agreement shall terminate when all of the pledged shares have been distributed to the pawner or the pledgees or on the date which is the later of: (i) thirteen months following the closing date, and (ii) when all of the obligations subject to the pledge herein shall have been satisfied. Upon termination of the pledge agreement for any reason, the shares pledged herein shall forthwith be delivered to the pledge and the register of shareholders shall be amended to reflect that the pledge as to the shares being released from the pledge. <PAGE> 4 9. All costs related to the pledging are to borne by the pawner. 10. The agreement shall be governed by and construed in accordance with the laws of Belgium. Any dispute shall be brought before the Court competent for Stekene. Executed at Stekene On January 7/00 in three counterparts, each party recognizing having received her counterpart. The third counterpart is for the Registry. The pawner The pledgees /s/ David Hackett /s/ Hilde DE LAET /s/ Luc SCHELFHOUT David HACKETT Hilde DE LAET Luc SCHELFHOUT </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-15.1 <SEQUENCE>7 <DESCRIPTION>EX-15.1 <TEXT> <PAGE> [LETTERHEAD] - ------------------------------------------------------------------------------- February 25, 2000 David Hackett e-Auction Global Trading Inc. 181 Bay Street, Suite 3730 Toronto, Ontario, Canada M5J 2T3 Dear Sir: RE: e-AUCTION GLOBAL TRADING INC. (FORMERLY NAMED KAZARI INTERNATIONAL, INC.) CONSENT of David A. Cox, Chartered Accountant, INDEPENDENT AUDITOR I consent to the reference to myself under the caption "Experts" (referring to my audit report), and to the use of my audit report dated June 8, 1998 relating to the Interim Financial Statements of Kazari International, Inc. as at June 1, 1998, in the Registration Statement (Form S-1) and related Prospectus of e-Auction Global Trading Inc. to be filed on February 28, 2000 or thereabout. /s/ David A. Cox David A. Cox Chartered Accountant </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-21.1 <SEQUENCE>8 <DESCRIPTION>EX-21.1 <TEXT> <PAGE> Exhibit 21.1 SUBSIDIARIES OF e-AUCITON GLOBAL TRADING INC. 1. e-Auction Global Trading Inc., a Barbados corporation, wholly owned by the Company 2. e-Auction Global Trading Inc., a Canadian corporation, wholly owned by e-Auction Global Trading Inc. (Barbados) 3. e-Auction Belgium N.V., a Belgium Company, wholly owned by the Company and e-Auction Global Trading Inc. (Canada) 4. Schelfhout Computer Systemen N.V., a Begium corporation, wholly owned by e-Auction Belgium N.V. 5. e-Auction Austrailasia Pty Limited, an Austrailian corporation, owned 50.01% by the Company. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.1 <SEQUENCE>9 <DESCRIPTION>EX-27.1 <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 5 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 31, 1999 AND 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS. </LEGEND> <MULTIPLIER> 1,000 <S> <C> <C> <PERIOD-TYPE> YEAR YEAR <FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998 <PERIOD-START> JAN-01-1999 JAN-08-1998 <PERIOD-END> DEC-31-1999 DEC-31-1998 <CASH> 0 0 <SECURITIES> 0 0 <RECEIVABLES> 0 0 <ALLOWANCES> 0 0 <INVENTORY> 0 0 <CURRENT-ASSETS> 301,164 100,181 <PP&E> 68,747 0 <DEPRECIATION> 0 0 <TOTAL-ASSETS> 1,371,911 102,181 <CURRENT-LIABILITIES> 2,925,162 152,500 <BONDS> 1,860,793 0 <PREFERRED-MANDATORY> 0 0 <PREFERRED> 0 0 <COMMON> 39,820 5,320 <OTHER-SE> (1,553,251) (50,319) <TOTAL-LIABILITY-AND-EQUITY> 1,371,911 102,181 <SALES> 0 0 <TOTAL-REVENUES> 685 0 <CGS> 0 0 <TOTAL-COSTS> 0 0 <OTHER-EXPENSES> 1,538,117 182,566 <LOSS-PROVISION> 0 50,000 <INTEREST-EXPENSE> 0 0 <INCOME-PRETAX> (1,537,432) (291,569) <INCOME-TAX> 0 0 <INCOME-CONTINUING> (1,537,432) (291,569) <DISCONTINUED> 0 0 <EXTRAORDINARY> 0 0 <CHANGES> 0 0 <NET-INCOME> (1,537,432) (291,569) <EPS-BASIC> 0.045 0.068 <EPS-DILUTED> 0.045 0.068 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----
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+PROSPECTUS SUMMARY The following summary highlights information we present more fully elsewhere in this prospectus. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors described under the heading "Risk Factors" and elsewhere in this prospectus. COLO.COM We are rapidly deploying an international platform of colocation facilities, called Neutral Optical Hubs, in which our customers can install equipment, connect to a choice of network providers and connect with our other customers. We believe our Neutral Optical Hubs will be best-in-class facilities that will offer a broad choice of network providers and the most flexible means to access these providers. Our carrier neutral facilities enable our target customers to use any of the network providers available at our facilities to deliver high quality broadband services and applications to their end users. We are not a communications carrier, and because our facilities are carrier neutral, our customers will be able to connect their communications equipment located in our facilities to any of the carriers that are connected to our facilities. As of May 31, 2000, we had signed contracts with 53 customers to locate equipment in one or more Neutral Optical Hubs, including: - Internet-based businesses, such as Campsix, Inc., RateXchange Corporation and ShockWave.com, Inc.; - application service providers, such as Evolve Software, Inc. and Musicbank, Incorporated; - Internet service providers, such as InterNAP Network Services Corporation, Madge Networks, N.V., The Masterlink Group, Inc. and SAVVIS Communications Corporation; - competitive local phone companies, such as Mpower Communications Corp., Telseon Inc. and 2nd Century Communications Inc.; and - other voice and data communications companies, such as MCI WorldCom and NeuMedia Inc. The deregulation of the telecommunications industry and the significant growth in Internet users and bandwidth intensive applications has increased the demand for the existing communications infrastructure. This demand has strained the performance of the infrastructure, leading to problems with latency, data loss and security. These and other problems are impacting the ability of our target customers to effectively use the Internet for new services such as voice-over-Internet protocol and some applications that use streaming and broadcast capabilities. Content distribution companies and advanced switch providers have been able to improve existing bottlenecks and network congestion through technology, but depend on others to provide facilities and interconnect networks. Internet-based businesses, application service providers, Internet service providers, competitive local phone companies and other voice and data communications companies, which are our target customers, are increasingly turning to colocation options as the need to be close to their end users and the cost of building in-house facilities increases. These target customers have traditionally had limited colocation choices in carrier operated facilities, carrier hotels or web-hosting facilities. International Data Corporation predicts that the U.S. market for Internet hosting, which consists of shared server hosting, several categories of dedicated server hosting and related services, will grow from an estimated $3.7 billion in 2000 to $18.9 billion in 2003. Within this market, IDC predicts that the market for colocation services will be one of the THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED JULY 21, 2000 [COLO.COM LOGO] -------------------------------------------------------------------------------- Shares Common Stock -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- This is the initial public offering of COLO.COM and we are offering shares of our common stock. The initial public offering price of our common stock is expected to be between $ and $ per share. We have made application to list our common stock on The Nasdaq Stock Market's National Market under the symbol "COLC." INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS COLO.COM <S> <C> <C> <C> Per Share $ $ $ Total $ $ $ </TABLE> We have granted the underwriters the right to purchase up to additional shares to cover over-allotments. DEUTSCHE BANC ALEX. BROWN ROBERTSON STEPHENS BEAR, STEARNS & CO. INC. UBS WARBURG LLC THE DATE OF THIS PROSPECTUS IS , 2000 -------------------------------------------------------------------------------- fastest growing segments, growing from an estimated $710 million in 2000 to $4.2 billion in 2003. We believe that our carrier neutral colocation solution addresses the limitations of the traditional alternatives. Our customers will be able to purchase a variety of colocation, cross connection and technical support services in all facilities across our broad geographic presence. We believe our solution provides the foundation for building networks that enable customers to locate equipment close to end users, thereby enhancing performance and enabling them to provide more competitive service offerings. Our Neutral Optical Hubs will offer a number of compelling advantages to our customers, including: - international platform and rapid time to market; - network and service neutrality; - cost savings; - best-in-class facilities; and - superior customer service. To achieve our goal of becoming the premier, international, single-source supplier for carrier neutral colocation facilities to our targeted customer base, our strategy is to: - be first-to-market with broad geographic presence; - maintain neutrality; - strategically deploy multiple Neutral Optical Hubs in key geographic regions; - enter into strategic and commercial relationships to extend sales reach; - expand our service offerings and enable marketplace exchanges; and - build the COLO.COM brand. We intend to have at least 40 Neutral Optical Hubs generating revenue or ready for carriers and customers to install their equipment by the end of June 2001. As of May 31, 2000, we had signed leases for 46 facilities in the United States and Europe totaling more than 1.1 million square feet, of which 11 facilities in the U.S. were ready for carriers and customers to install their equipment. We believe our Neutral Optical Hubs will become the preferred platform for companies that want to enhance service for their end users, will facilitate business-to-business commerce among our customers and will enable the convergence of Internet and telecommunication services. ------------------------ We were incorporated in California under the name Colomotion, Inc. in April 1997 and changed our name to COLO.COM in July 1999. We reincorporated in Delaware in 2000. Our principal executive office is located at 2000 Sierra Point Parkway, Brisbane, California 94005, and our telephone number is (650) 292-2656. Our corporate website is www.colo.com. The information contained on our website is not incorporated by reference into this prospectus. THE OFFERING Common stock offered................ shares Common stock to be outstanding after this offering....................... shares Use of proceeds..................... To fund capital expenditures in the leasing and buildout of colocation facilities in the U.S. and internationally, to provide working capital, including expenses associated with sales and marketing activities, to fund operating losses, for general corporate purposes and potentially to fund acquisitions. Proposed Nasdaq National Market symbol.............................. COLC Common stock to be outstanding after this offering is based on 62,885,699 shares of common stock outstanding as of May 31, 2000. It does not include: - 3,199,400 shares issuable upon exercise of stock options outstanding as of May 31, 2000, with exercise prices ranging from $0.05 to $5.00 per share; and - 7,103,945 shares issuable upon exercise of warrants outstanding as of May 31, 2000, with exercise prices ranging from $0.01 to $10.00 per share. ------------------------ Except as otherwise indicated, all of the information in this prospectus: - reflects the automatic conversion of each outstanding share of preferred stock into one share of common stock upon the closing of this offering; - assumes no exercise of the underwriters' over-allotment option; and - assumes our reincorporation from California into Delaware prior to the closing of this offering. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) See Note 2 of Notes to Consolidated Financial Statements for an explanation of the method used to determine the number of shares used in computing per share and pro forma per share data below. <TABLE> <CAPTION> PERIOD FROM INCEPTION YEAR ENDED THREE MONTHS ENDED (APRIL 2) TO DECEMBER 31, MARCH 31, DECEMBER 31, ----------------- ------------------ 1997 1998 1999 1999 2000 ------------ ------- ------- ------- -------- (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenue...................................... $ 31 $ 190 $ 218 $ 55 $ 192 Operating costs and expenses................. 108 1,740 9,596 1,233 11,804 Loss from operations......................... (77) (1,550) (9,378) (1,178) (11,612) Net loss..................................... (78) (1,553) (8,887) (1,176) (11,892) Basic and diluted net loss per share......... $(0.03) $ (0.28) $ (1.86) $ (0.26) $ (1.49) Shares used in computing basic and diluted net loss per share.................................. 2,612 5,554 4,771 4,461 7,985 Pro forma basic and diluted net loss per share (unaudited).......................... $ (0.34) $ (0.13) $ (0.21) Shares used in computing pro forma basic and diluted net loss per share (unaudited)..... 26,460 8,717 57,155 </TABLE> In the "as adjusted" column below, we have given effect to the receipt of the net proceeds from the sale of our common stock in this offering at an assumed initial public offering price of $ per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses. <TABLE> <CAPTION> MARCH 31, 2000 ---------------------- ACTUAL AS ADJUSTED -------- ----------- (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $381,010 $ Property and equipment, net................................. 49,033 49,033 Restricted cash and cash equivalents(1)..................... 3,765 3,765 Restricted investments(2)................................... 77,729 77,729 Total assets................................................ 525,108 Current portion of notes payable, net of discount(3)........ 478 478 Non-current liabilities, net of discount on long term notes payable(3)................................................ 219,041 219,041 Total stockholders' equity.................................. 279,332 </TABLE> ------------------------- (1) Reflects funds set aside as collateral for letters of credit issued under building lease agreements. (2) Reflects investments set aside as collateral for the first four interest payments relating to our senior notes. (3) The unamortized portion of the estimated fair value of warrants issued in connection with financing transactions is recorded as a discount to the related note payable. The actual amount payable at maturity on these obligations at March 31, 2000 is $303.4 million.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001102329_wrc-media_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001102329_wrc-media_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights some of the information described in greater detail in other parts of this prospectus and may not contain all of the information that is important to you. Before making an investment decision, you should read this entire prospectus, including "Risk Factors" and the financial statements, including the related notes to the financial statements, that we have included. Unless the context otherwise requires, the terms "we," "our" and "us" refer to WRC Media Inc. and its subsidiaries and their predecessor companies after giving effect to the transactions described under "The Acquisition and Recapitalization." When we refer to "pro forma" financial results, we mean the financial results of WRC Media and its subsidiaries on a consolidated basis as if the transactions described under "The Acquisition and Recapitalization" had occurred at the beginning of the relevant time period. See "Summary Unaudited Pro Forma Consolidated Financial Information." WRC MEDIA We are a leading publisher of supplemental education materials for the pre-kindergarten to twelfth grade market. Our portfolio of products includes a broad range of print and electronic supplemental instructional materials, testing and assessment products and library materials. We believe our products have well-known brand names and we believe our customers recognize these brand names for their effectiveness and consistent, high quality educational content. Our strong brand names, several of which have been published for over 40 years, include: - WEEKLY READER; - TEEN NEWSWEEK; - the PEABODY PICTURE VOCABULARY TEST; - TOMORROW'S PROMISE; - THE WORLD ALMANAC AND BOOK OF FACTS; and - FACTS ON FILE WORLD NEWS DIGEST. Utilizing sophisticated sales and marketing methods, which include the use of proprietary databases, we have established long standing customer relationships and an extensive network with direct distribution channels. Our targeted customers are: - teachers; - school and school district-level administrators; - librarians; - other educational professionals; and - parents. Operations and Financial Condition" and a report, with respect to the annual information only, by our certified independent public accountants; and (2) all reports that would be required to be filed with the Securities and Exchange Commission on Form 8-K if we were required to file these reports. In addition, for so long as any of the senior preferred stock remain outstanding, we have agreed to make available to any prospective purchaser of the senior preferred stock or beneficial owner of the senior preferred stock in connection with their sale, the information required by Rule 144A(d)(4) under the Securities Act of 1933. We will also furnish other reports as we may determine or as the law requires. Information that we file with the Securities and Exchange Commission after the date of this prospectus will automatically supersede the information in this prospectus and any earlier filed incorporated information. We are also incorporating any future filings made with the Securities and Exchange Commission under sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934. You may read and copy the registration statement, including the attached exhibits, and any reports, statements or other information that we file, at the Securities and Exchange Commission's public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the operation of the public reference room. Our Securities and Exchange Commission filings will also be available to the public from commercial document retrieval services and at the Securities and Exchange Commission's Internet site (http://www.sec.gov). You may request a copy of any of our filings with the Securities and Exchange Commission, or any of the agreements or other documents that constitute exhibits to those filings, at no cost, by writing or telephoning us at the following address or phone number: WRC Media Inc. 1 Rockefeller Plaza, 32nd Floor New York, NY 10020 (212) 582-6700 Attention: Charles L. Laurey INTERNET WEB SITES This prospectus includes references to Internet web sites that we maintain. None of these web sites, or their content, are incorporated by reference in this prospectus. Over 90% of the school districts and over 80,000, or approximately 75%, of the elementary, middle and secondary schools in the United States use one or more of our products. WRC Media and its subsidiaries' pro forma revenue and net loss for the twelve months ended December 31, 1999 were $214.1 million and $21.7 million, respectively. Additionally, WRC Media and its subsidiaries' pro forma earnings for the twelve months ended December 31, 1999 were insufficient to cover WRC Media and its subsidiaries' pro forma fixed charges for the twelve months ended December 31, 1999 by $21.7 million. We sell our products and services in the rapidly growing supplemental education materials segment of the education materials market. We estimate this segment had approximately $3.6 billion in sales in 1998, representing 58% of the overall Pre K-12 education materials market. The supplemental education materials segment consists of: - print and electronic instructional materials; - testing and assessment products; and - materials for school libraries. Together, Simba Information Inc.'s Print Publishing for the School Market, 1999-2000 and Simba Information Inc.'s Print Publishing for the School Market, 1997-1998 show that the supplemental education materials segment, excluding the materials described immediately below, has grown at a compound annual growth rate of 10.7% during the five-year period ending December 31, 1998. Simba Information Inc. does not report statistics for some supplemental education materials included in this segment, consisting primarily of some testing and assessment products and library materials, which we estimate accounted for approximately $1.3 billion in sales during 1998. We conduct our operations primarily through the four operating subsidiaries listed below, each of which is a market leader in its product categories: - Weekly Reader; - American Guidance; - CompassLearning; and - World Almanac. ------------------------ The principal executive offices of WRC Media are located at 1 Rockefeller Plaza, 32nd Floor, New York, New York 10020. The telephone number for that location is (212) 582-6700. CORPORATE STRUCTURE The following chart shows our corporate structure and ownership of the common stock of WRC Media's subsidiaries as of the date of this prospectus. The chart assumes the warrants to purchase common stock of Weekly Reader and CompassLearning, two of our subsidiaries, issued to the senior preferred stockholders have not been exercised. [LOGO] DESCRIPTION OF SENIOR PREFERRED STOCK The senior preferred stock will have the financial terms and covenants as follows: <TABLE> <S> <C> Securities Offered........................ The selling stockholders are offering up to 3,000,000 shares of 15% senior preferred stock due 2011 with a liquidation preference of $25.00 per share. Dividends................................. WRC Media will pay dividends on the senior preferred stock out of funds legally available for the payment of dividends at an annual fixed rate of 15%. In addition, if WRC Media fails to redeem all outstanding shares of the senior preferred stock in connection with a mandatory redemption of the senior preferred stock on November 17, 2011 or if there is a change of control, WRC Media must increase this dividend rate by 0.50% each quarter or portion of the quarter following the date of its failure to redeem until the default is cured to a maximum aggregate increase in such dividend rate of 10%. See "Risk Factors--Dividends." WRC Media will declare and pay dividends on March 31, June 30, September 30 and December 31 of each year. Prior to December 31, 2004, or an earlier dividend payment date as WRC Media may elect in its sole discretion, WRC Media will not pay dividends in cash. Instead, dividends will accrete to the liquidation preference of the shares of the senior preferred stock except as described in the next sentence. Prior to December 31, 2004, at the request of a majority of the holders of the senior preferred stock, in lieu of dividends accreting to the liquidation preference during this period, WRC Media will pay dividends in fully paid and nonassessable shares of senior preferred stock with an aggregate liquidation preference equal to the amount of the accrued and unpaid cash dividends. After December 31, 2004, WRC Media will pay dividends only in cash on the liquidation preference per share of the senior preferred stock. Optional Redemption....................... From November 17, 1999 until November 17, 2002 and after November 17, 2004, to the extent WRC Media has legally available funds for the payment, WRC Media may, at its option, redeem, in whole but not in part, the shares of the senior preferred stock at the applicable redemption prices listed under "Description of Senior Preferred Stock--Redemption of Senior Preferred Stock--Optional." Mandatory Redemption...................... WRC Media must redeem all shares of the senior preferred stock outstanding on November 17, 2011, to the extent it has legally available funds for the payment, at a redemption price equal to the aggregate liquidation preference of the shares of senior preferred stock, in cash, plus accrued and unpaid cash dividends, if any, to the date of redemption, without interest on the redemption price. </TABLE> <TABLE> <S> <C> Change of Control......................... If a change of control occurs, to the extent WRC Media has legally available funds for the payment and to the extent permitted by our notes indenture, WRC Media must offer to redeem all shares of the senior preferred stock then outstanding in cash at the redemption prices listed under "Description of Senior Preferred Stock--Redemption of Senior Preferred Stock--Change of Control." If WRC Media fails to satisfy any of its redemption obligations upon a change of control then holders of the senior preferred stock would be entitled to: - additional voting rights; and - an increase in the dividend rate; and WRC Media would be prevented from: - purchasing or redeeming securities that are on a parity with the senior preferred stock; and - making any distribution to securities that rank junior to senior preferred stock. Material Covenants........................ The certificate of designations governing the senior preferred stock contains covenants for your benefit which, among other things, limit WRC Media's ability to: - authorize, create or issue any class of securities that rank senior to or equally with the senior preferred stock; and - declare or pay dividends on, or redeem, purchase or acquire, any class of our capital stock that ranks junior to or equally with the senior preferred stock. These covenants are subject to important exceptions and qualifications which are described in "Description of Senior Preferred Stock--Covenants." Voting Rights............................. Holders of the senior preferred stock will not have any voting rights other than: - as required by law, and - to elect one additional member of WRC Media's board of directors, upon WRC Media's failure to: -- pay in full four consecutive or six quarterly cash dividends; -- discharge a mandatory or change of control redemption of senior preferred stock; -- give the mandatory redemption notice required by the certificate of designations; or -- comply with the covenants described in the certificate of designations. </TABLE> <TABLE> <S> <C> For more details on voting rights, see "Description of Senior Preferred Stock--Voting Rights." Exchange Feature.......................... In connection with a reorganization transaction relating to an initial public offering, WRC Media may redeem all but not less than all of the outstanding shares of the senior preferred stock in exchange for an equivalent number of shares of preferred stock of Weekly Reader. These Weekly Reader shares will be of identical type and liquidation preference and will have the same terms and conditions as the senior preferred stock and equal amounts of accrued and unpaid cash dividends. DLJ Merchant Banking Partners II, L.P. and its affiliates and their permitted transferees who invested in the senior preferred stock as part of the transactions described under "The Acquisition and Recapitalization," may, at their option, cause WRC Media to exchange all, but not less than all, outstanding shares of the senior preferred stock for an equal number of shares of preferred stock of Weekly Reader and/or CompassLearning of identical type and liquidation preference, with identical terms and conditions as the senior preferred stock and equal amounts of accrued and unpaid cash dividends. For more details on the exchange feature of the senior preferred stock, see "Description of Senior Preferred Stock--Exchange." Registration Rights....................... WRC Media agreed to exchange the senior preferred stock within 210 days after issuance of the senior preferred stock for a new issue of substantially identical preferred stock registered under the Securities Act of 1933 as evidence of the same underlying obligation. WRC Media also agreed to file and keep effective a shelf registration statement, which this is in satisfaction of, to cover resales of the senior preferred stock if: - applicable law or, rules, regulations or policies of the Securities and Exchange Commission do not permit the exchange offer for the senior preferred stock; or - any holder of the senior preferred stock notifies us, prior to the 20th day following the completion of the exchange offer, that it cannot participate in the exchange offer due to law, securities law policy or prospectus delivery requirements or because it is a broker-dealer who acquired the senior preferred stock from us or an affiliate of ours. </TABLE> <TABLE> <S> <C> If WRC Media fails to satisfy its obligations relating to registration, WRC Media will increase the dividend rate applicable to the senior preferred stock. See "Registration Rights--The Senior Preferred Stock." In addition, the senior preferred stockholders will be entitled to the demand registration rights and the "piggy-back" registration rights under the senior preferred stockholders agreement. See "Ownership of Stock--Senior Preferred Stockholders Agreement." Preferred Stockholders Agreement.......... For a summary of the terms of the agreement among WRC Media and the initial senior preferred stockholders concerning the relative rights and relationships of the senior preferred stockholders with respect to the senior preferred stock, governing, among other things: - corporate governance; - transfer rights and restrictions; - tag-along and drag-along rights; and - registration rights, see "Ownership of Stock--Senior Preferred Stockholders Agreement." Constructive Distributions................ The senior preferred stock will be considered to be issued with redemption premium for U.S. Federal income tax purposes. The redemption premium is the excess of the redemption price of the senior preferred stock over its issue price. U.S. Federal income tax authorities require you to include this excess in your gross income over the life of the senior preferred stock notwithstanding that the cash attributable to this excess will not be received until a subsequent period. In addition, you must pay tax on any distributions on the senior preferred stock in the form of additional shares of senior preferred stock on the distribution date in the same manner as a cash distribution on the senior preferred stock. The additional shares of senior preferred stock may be subject to the redemption premium rules referred to above. For more details on the constructive distributions, see "Material U.S. Federal Tax Considerations." </TABLE> YOU SHOULD REFER TO THE SECTION ENTITLED "RISK FACTORS" FOR AN EXPLANATION OF THE RISKS OF INVESTING IN THE SENIOR PREFERRED STOCK. SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION This table presents summary unaudited pro forma consolidated financial information derived from our unaudited pro forma consolidated financial statement for the year ended December 31, 1999, which is included in this prospectus. The summary unaudited pro forma consolidated operating information gives effect to the transactions described under "The Acquisition and Recapitalization," as if they had occurred on January 1, 1999. The summary unaudited pro forma consolidated financial information does not purport to represent what our consolidated results of operations would have been had the transactions described under "The Acquisition and Recapitalization" in fact occurred on January 1, 1999 and does not project our consolidated financial position or consolidated results of operations for the current year or any future period. <TABLE> <CAPTION> PRO FORMA YEAR ENDED DECEMBER 31, 1999 ---------------------- (DOLLARS IN THOUSANDS) <S> <C> INCOME STATEMENT DATA: Sales, net................................................ $214,088 Cost of goods sold........................................ 65,244 Gross profit.............................................. 148,844 Operating costs and expenses: Sales and marketing..................................... 45,798 Research and development................................ 7,692 Distribution, circulation and fulfillment............... 13,172 Editorial............................................... 10,046 General, administrative and other....................... 27,936 Depreciation and amortization (a)....................... 31,643 Write-off of in-process research and development costs (b)................................................... -- Net Income from operations................................ 12,557 Other expense............................................. (149) Interest expense (c)...................................... (34,126) -------- Loss before income taxes.................................. (21,718) Income tax benefit........................................ -- -------- Net loss.................................................. $(21,718) ======== BALANCE SHEET DATA (AT DECEMBER 31, 1999--ACTUAL): Cash and cash equivalents................................. $ 15,521 Total assets.............................................. 572,229 Total debt................................................ 276,556 Senior preferred stock and preferred stockholder warrants (d)..................................................... 76,518 Stockholders' equity...................................... $105,283 OTHER DATA: Depreciation and amortization (e)......................... $ 36,049 Capital expenditures...................................... 6,386 Cash interest expense (f)................................. 32,883 EBITDA (g)................................................ $ 48,457 </TABLE> (FOOTNOTES APPEAR ON THE FOLLOWING PAGE) (FOOTNOTES FROM TABLE ON PRIOR PAGE) (a) Some depreciation and amortization charges are reflected in other expense line items. (b) As part of the acquisition by WRC Media, CompassLearning wrote off various costs, totaling $9,000, related to in-process research and development activities. (c) For more information regarding our calculation of pro forma interest expense, see note (f) to the Unaudited Pro Forma Consolidated Statements of Operations included in this prospectus. (d) Represents $75.0 million in initial liquidation value of the senior preferred stock issued in connection with the transactions described under "The Acquisition and Recapitalization," which includes approximately $11.8 million attributable to the value of the warrants to acquire 13.0% of the common stock of Weekly Reader and 13.0% of the common stock of CompassLearning. These warrants were issued in connection with the senior preferred stock mentioned above. In addition, $1.5 million represents accrued in-kind preferred dividends payable and the accretion of the warrant value. (e) Represents pro forma depreciation and amortization including depreciation and amortization reflected in other cost line items, other than amortization of deferred financing costs, which is included in interest expense. (f) Cash interest expense excludes amortization of deferred financing costs and original issue discount. (g) EBITDA is calculated as income before income taxes, interest expense, depreciation and amortization. EBITDA includes a non-recurring gain by CompassLearning on the sale of stock of $396 and non-recurring expenses, net of non-recurring revenues of WRC Media and its subsidiaries of $1,495. For more information regarding our calculations, see note (h) to the Unaudited Pro Forma Consolidated Statement of Operations included in this prospectus. EBITDA data is included because we understand that this information is considered by various investors as an additional basis on which to evaluate WRC Media and its subsidiaries' ability to pay interest, repay debt and make capital expenditures. Because all companies do not calculate EBITDA identically, the presentation of EBITDA in this financial information is not necessarily comparable to similarly titled measures of other companies. EBITDA does not represent and should not be considered more meaningful than, or an alternative to, measures of operating performance as determined by generally accepted accounting principles. RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS) We present below the deficiency of earnings to fixed charges and preferred stock dividends. Earnings consist of net income (loss) plus fixed charges. Fixed charges consist of interest expense, including amortization of debt issuance costs. The "pro forma" information for the year ended December 31, 1999 and the year ended December 31, 1998, reflects the original issuance of the 12 3/4% senior subordinated notes due 2009 and the issuance of the 15% senior preferred stock due 2011, as if these events had occurred as of January 1, 1998. <TABLE> <CAPTION> FROM MAY 14, 1999 (INCEPTION) THREE MONTHS TO YEAR ENDED ENDED DECEMBER 31, 1999 DECEMBER 31, 1999 MARCH 31, 2000 ------------------ ----------------- -------------- (PRO FORMA) <S> <C> <C> <C> WRC MEDIA AND ITS SUBSIDIARIES Deficiency of earnings to fixed charges and preferred stock dividends.................... $(15,995) $(21,718) $(11,171) </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001102341_tallan-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001102341_tallan-inc_prospectus_summary.txt
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+SUMMARY You should read the following summary together with the more detailed information in this prospectus, including risk factors, regarding our company and the common stock being sold in this offering. OUR BUSINESS We are an Internet professional services firm that creates fully-integrated, technologically advanced solutions for our clients. We focus on high-impact projects that can directly increase revenues and create operating efficiencies for our clients. Our eBusiness solutions leverage our core competencies in the design and implementation of high-volume transaction processing, data warehousing and data mining systems and enable our clients to capitalize on the opportunities presented by the rapidly growing digital marketplace. OUR SERVICES We offer our clients a broad range of strategy, technology and creative design services required to develop and deliver advanced eBusiness solutions. Our comprehensive offering is designed either to extend or complement our clients' existing operating models or create entirely new Internet-based operating models. Our professionals have experience with a wide range of technologies and vendors. However, we offer our clients a vendor-neutral approach to ensure the design and delivery of the most appropriate solution. Our revenues are principally derived from the design, development and delivery of technologically advanced eBusiness solutions. We provide a comprehensive approach to the provision of technology services that includes the following components: - technology benchmarking and product analysis; - applications architecture and infrastructure; - software development; - technology implementation and integration; and - technology transfer. We deliver all of our services based on BLUEprint, our proprietary methodology. BLUEprint assists our professionals in clarifying the business objectives and technical requirements of each of our client engagements and helps us deliver our solutions in a rapid timeframe which reduces our clients time-to-market. OUR MARKET We believe we are well-positioned to capitalize on the significant demand for Internet professional services that has been driven by the dramatic growth in commerce conducted over the Internet. According to International Data Corporation, the amount of commerce conducted over the Internet is expected to exceed $1.3 trillion by 2003. In connection with this growth, we believe there will be increased competition from traditional bricks-and-mortar competitors and Internet-based competitors. As a result, companies are looking to utilize technology to help develop and sustain a competitive advantage. However, companies are looking to third-party providers with technical expertise to develop and deliver complex Internet-enabling technologies. International Data Corporation estimates that the demand for Internet professional services will increase from $7.8 billion in 1998 to $78.5 billion in 2003. OUR STRATEGY Our goal is to become a leading provider of fully-integrated, technologically-advanced Internet and eBusiness solutions to a broad range of industry segments. To achieve this goal, we are pursuing the following strategies: - maintaining our focus on attracting and retaining the most highly talented technology professionals; - further developing and expanding strategic client relationships; - leveraging and evolving our intellectual assets and technical expertise; and - selectively expanding our geographic presence. OUR CLIENTS We provide our services to a broad range of clients in traditional industries and the rapidly evolving Internet sector and digital marketplace. Our clients have included barnesandnoble.com, Best Buy, Capital One, ditech.com, Ingram Micro, Pepsi, Priceline.com and Wit Capital. Our top five clients accounted for 66.8% and 56.1% of our revenues in 1998 and 1999, respectively. OUR CORPORATE INFORMATION We were initially incorporated in Connecticut in 1985 under the name BDS Business Center, Inc. We reincorporated in Delaware in August 1999. In December 1999, we changed our name to Tallan, Inc. Our executive offices are located at 628 Hebron Avenue, Building Two, Suite 502, Glastonbury, CT 06033, and our telephone number is (860) 633-3693. Our web site is www.tallan.com. Information contained on our web site does not constitute part of this prospectus. THE OFFERING Common stock offered by Tallan.......... shares Common stock to be outstanding after the offering................................ shares Use of proceeds......................... To redeem all outstanding shares of our Series A redeemable preferred stock for approximately $20.0 million and for working capital and other general corporate purposes. We also may use a portion of the net proceeds for acquisitions of complementary businesses or technologies. See "Use of Proceeds." Proposed Nasdaq National Market symbol.................................. TALN The number of shares outstanding after this offering is based on shares outstanding as of December 31, 1999 and excludes: - 17,631,388 shares subject to options outstanding as of December 31, 1999 at a weighted average exercise price of $0.89 per share; and - 10,156,000 shares reserved for issuance under our 1999 Stock Option and Incentive Plan, our 2000 Employee Stock Purchase Plan and our 2000 Non-Employee Director Stock Option Plan. ------------------------ Except as otherwise noted, all information in this prospectus: - reflects the redemption of all of our outstanding shares of Series A redeemable preferred stock upon the completion of this offering; - reflects the automatic conversion of all of our outstanding shares of Series B convertible preferred stock into an aggregate of 3,412,970 shares of common stock upon the completion of this offering; - reflects a 2-for-1 stock split of all of our outstanding shares of common stock to be effected immediately prior to the effectiveness of this offering; - reflects the effectiveness upon the completion of this offering of our second amended and restated certificate of incorporation, which sets the number of authorized shares of common stock at 300,000,000 and sets the number of authorized shares of preferred stock at 5,000,000; and - assumes no exercise of the underwriters' over-allotment option. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) Set forth below are summary statement of operations data for the years ended December 31, 1997, 1998 and 1999, and summary balance sheet data as of December 31, 1999: - on an actual basis; - on a pro forma basis to reflect the automatic conversion of all of our outstanding shares of Series B convertible preferred stock upon completion of this offering; and - on a pro forma as adjusted basis to adjust the pro forma balances to reflect the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us, and the application of the net proceeds from this offering, including the redemption of all of our outstanding shares of Series A redeemable preferred stock for approximately $20.0 million, and reflecting a loss on redemption of the Series A redeemable preferred stock of approximately $9.5 million. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes appearing elsewhere in this prospectus. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------------------- 1997 1998 1999 ------- --------- ----------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................................................... $13,453 $22,869 $53,940 Operating expenses......................................... 13,677 19,610 41,714 ------- ------- ------- Income (loss) from operations.............................. (224) 3,259 12,226 Income (loss) before income taxes.......................... (513) 3,102 12,195 Provision (benefit) for income taxes....................... (96) 1,396 5,123 ------- ------- ------- Net income (loss).......................................... (417) 1,706 7,072 ------- ------- ------- Deemed preferred dividends and accretion................... -- -- (4,823) ------- ------- ------- Net income (loss) available for common shareholders........ $ (417) $ 1,706 $ 2,249 ======= ======= ======= Net income (loss) per common share: Basic.................................................... $ (0.01) $ 0.05 $ 0.07 ======= ======= ======= Diluted.................................................. $ (0.01) $ 0.05 $ 0.05 ======= ======= ======= Weighted average number of shares: Basic.................................................... 32,200 31,611 32,005 ======= ======= ======= Diluted.................................................. 32,200 33,505 44,621 ======= ======= ======= </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ----------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.................................. $ 9,789 $ 9,789 $ Working capital............................................ 16,891 16,891 Total assets............................................... 24,151 24,151 Long-term liabilities...................................... 336 336 Mandatorily redeemable preferred stock..................... 16,663 10,479 Total stockholders' equity................................. 2,885 9,069 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001102754_partsbase_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001102754_partsbase_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS AND MAY NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND OUR BUSINESS AND THIS OFFERING FULLY, YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE FINANCIAL STATEMENTS AND THE RELATED NOTES BEGINNING ON PAGE F-1. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. OUR BUSINESS PartsBase.com is an online provider of Internet business-to-business e-commerce services for the aviation industry. Our global e-commerce marketplace, sometimes referred to as our "e-marketplace" or our "solution," provides a means for our over 13,000 members in more than 115 countries to buy and sell new, used and overhauled aviation parts and products in an efficient, competitive and cost-effective manner. We estimate that our e-marketplace utilizes a database of approximately 1,200 suppliers, which we believe constitutes one of the largest independent databases of inventory and information in the aviation industry. Current members of our e-commerce marketplace include Boeing, Honeywell, Federal Express, Pratt & Whitney, Northrup Grumman Aviation and United Parcel Service. The worldwide market for aviation parts and products is highly fragmented and includes many types of suppliers, such as airlines, original equipment manufacturers, also known as OEMs, numerous independent distributors, on-site airport maintenance providers, also known as fixed base operators, Federal Aviation Administration certified facilities, traders and brokers. Aerospace Industries Association estimates that total exports and imports of aircraft parts and products were approximately $29 billion in 1999. Furthermore, in recent years, the airline industry has experienced rapid growth in business and leisure travel. As a result, the world fleet of aircraft is projected to increase from 12,600 aircraft in 1998 to 28,400 aircraft in 2018, according to Boeing's 1999 Current Market Outlook. The increase in travel and the number of aircraft have likely contributed to demand for aviation parts and products as aircraft must be serviced at scheduled intervals. In addition, management believes that as the age of the world fleet of aircraft increases, demand for new, used and overhauled parts and products may increase. Forrester Research estimates that the business-to-business e-commerce market will grow from $43 billion in 1998 to $1.3 trillion by 2003. Our goal is to solidify a position as a leading aviation industry e-commerce marketplace in order to capitalize on the continued expansion of the market for aviation parts and products. Our solution takes advantage of the growth, pervasiveness, low costs and community building nature of the Internet as a basis for e-commerce for the broad, highly fragmented aviation industry. We believe that the value of our e-marketplace grows substantially as each new member brings additional parts, products, information and buying power to our community. OUR SOLUTION Our solution is designed to streamline the procurement cycle for our members by enabling them to source, bid parts and products, and eventually manage their order payment online. Our target members are primarily the businesses that buy and sell aviation parts, supplies and components in the global marketplace, and our current members vary from small businesses to Fortune 500 companies such as General Electric, Honeywell, AMR and Boeing. We have designed our e-marketplace to meet the needs of these customers and their industry. With a standard Internet connection, a Web browser and a PartsBase.com membership, each of our e-marketplace members can immediately participate as both a buyer and a seller. Our e-marketplace is designed to provide advantages over traditional procurement processes, including: - reduced procurement costs; - more efficient pricing and improved access to sellers for buyers; - ability to locate the most geographically desirable parts; - expanded distribution opportunities for sellers; and - ease of use and better access to information. Our current Web site features include: - online buying and selling utilizing advanced parts search features, inventory listings, and requests for quotations, also known as RFQs, member access to detailed information regarding current transactions; - online auctions for aviation parts and products; - procurement controls providing members with the ability to monitor corporate purchasing; and - community-building information such as industry job and aircraft sales listings, as well as links to members and other industry Web sites. In addition, we have recently signed an agreement with Tradex Technologies, Inc., a subsidiary of Ariba, Inc., to install and implement customized software that will allow for seamless online transactions. We have also contracted with Trading Dynamics, Inc., another subsidiary of Ariba, Inc., to provide software for our auction platform. We expect that this transaction software will further enable online negotiating, pricing and bidding, as well as allow us to act as a clearing house for products, and to allow our members to complete their transactions online. We have a limited operating history, have limited revenues and have never been profitable. In 1999, we generated revenues of $362,224 and incurred a net loss attributable to holders of common stock of $7,815,409. OUR BUSINESS STRATEGY Our objective is to establish our e-marketplace as the preferred aviation industry business-to-business e-commerce solution. The key elements of our strategy include: - Achieving growth through transaction fees and other sources of revenues; - Strengthening the PartsBase.com brand; - Increasing membership and market penetration; - Establishing and expanding strategic sales and marketing relationships; - Expanding our international presence; and - Attracting and retaining members with new content, features and services. The successful implementation of our strategy will be subject to many risks and will depend on many factors, including but not limited to the continued growth and acceptance of e-commerce in the aviation industry as a whole, and the acceptance of our business model in particular. We may be adversely affected by a variety of risks and difficulties. For a detailed description of these risks, please refer to the "Risk Factors" section contained in this prospectus. OUR HISTORY We began operations in April 1996 under the name Aviation Parts Base, a division of Aviation Laboratories, Inc. While our Web site was operational in 1996, we did not begin charging subscription fees until November 1998. In April 1999, the assets of the division were conveyed to Robert A. Hammond, Jr. in connection with the sale of Mr. Hammond's equity interest in Aviation Laboratories, Inc. On April 27, 1999, Mr. Hammond transferred the assets of the division into and incorporated PartsBase.com, Inc. as a Texas corporation. Our headquarters are located at 7171 N. Federal Highway, Boca Raton, Florida 33487 and our telephone number is (561) 443-3302. Our Web site address is WWW.PARTSBASE.COM. The information contained on our Web site is not a part of this prospectus. THE OFFERING Unless otherwise indicated, the following information assumes that the underwriters do not exercise the over-allotment option to purchase up to 525,000 additional shares in the offering and reflects the automatic conversion of all outstanding shares of preferred stock and all outstanding convertible notes into shares of our common stock upon completion of this offering. <TABLE> <S> <C> COMMON STOCK OFFERED BY US................... 3,500,000 shares COMMON STOCK OUTSTANDING AFTER THIS 14,087,500 shares (1) OFFERING................................... USE OF PROCEEDS.............................. We intend to use substantially all the proceeds of this offering for general corporate purposes, including working capital, information technology, expansion of sales and marketing activities and possible acquisitions. We may also use a portion of the net proceeds for the development of business-to-business e-commerce solutions for other industries. SHARES BEING REGISTERED FOR THE ACCOUNT OF EXISTING STOCKHOLDERS...................... An additional 1,336,250 shares are being registered pursuant to the registration statement of which this prospectus is a part on behalf of the existing stockholders identified in the registration statement. These shares may not be sold, transferred or assigned without the consent of the underwriters during the 180 day period following the effective date of this offering. These shares are not being underwritten by the underwriters and we will not receive any of the proceeds from their sale. </TABLE> - ------------------------ (1) Excludes: - 175,000 shares issuable upon exercise of outstanding stock purchase warrants; - 2,000,000 shares reserved for issuance under our stock option plan, under which options to acquire 987,875 shares are outstanding as of the date of this prospectus; and - 262,500 shares of common stock issuable upon exercise of a stock purchase warrant to be issued to Roth Capital Partners, Inc. and Pennsylvania Merchant Group, the representatives of the underwriters, upon completion of the offering at an exercise price equal to 165% of the initial public offering price. SUMMARY FINANCIAL DATA <TABLE> <CAPTION> PERIOD FROM APRIL 1, 1996 (INCEPTION) TO YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------------------ 1996 1997 1998 1999 ------------- ------------ ------------ ------------ <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenue............................................ $ -- $ 2,861 $ 3,504 $ 362,224 Cost of revenue........................................ 16,842 104,041 43,462 1,412,532 Noncash compensation expense........................... -- -- -- 1,799,139 ---------- ---------- ---------- ----------- Total cost of revenue.................................. 16,842 104,041 43,462 3,211,671 ---------- ---------- ---------- ----------- Gross loss............................................. (16,842) (101,180) (39,958) (2,849,447) Operating expenses General and administrative........................... 55,064 90,452 108,163 1,293,091 Noncash compensation expense......................... 899,821 ---------- ---------- ---------- ----------- Total operating expenses........................... 55,064 90,452 108,163 2,192,912 ---------- ---------- ---------- ----------- Operating loss..................................... (71,906) (191,632) (148,121) (5,042,359) Other income (expense) Interest expense..................................... -- -- -- (881,652) Interest income...................................... -- -- -- 10,977 ----------- Total other income (expense)....................... -- -- -- (870,675) ---------- ---------- ---------- ----------- Net loss (1)....................................... (71,906) (191,632) (148,121) (5,913,034) Value of preferred stock beneficial conversion feature.......................................... -- -- -- (1,902,375) ---------- ---------- ---------- ----------- Net loss applicable to common stockholders......... $ (71,906) $ (191,632) $ (148,121) $(7,815,409) ========== ========== ========== =========== Net loss per common share--basic and diluted (1)....... $ (0.84) Weighted average common shares outstanding--basic and diluted.............................................. 9,251,250 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ---------- ---------- ----------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 735,276 $ 735,276 $37,995,276 Working capital (deficit)................................... (687,172) (687,172) 36,572,828 Total assets................................................ 4,729,295 2,955,517 40,215,517 Convertible notes payable................................... 962,500 -- -- Total stockholders' equity.................................. 1,541,916 730,638 38,953,138 </TABLE> The pro forma balance sheet data gives effect to the mandatory conversion of all outstanding convertible notes into common stock under the terms of the June 9, 1999 private placement, the mandatory conversion of the convertible notes issued on November 10, 1999, and the issuance and mandatory conversion of outstanding convertible preferred stock into common stock. Additionally, the pro forma as adjusted balance sheet data gives effect to the sale of 3,500,000 shares of our common stock at an assumed initial public offering price of $12.00 per share after deducting underwriters discounts and commissions and estimated offering expenses. - ------------------------ (1) Since we have incurred net losses since inception, we would not have incurred any income tax liabilities during the periods prior to incorporation on April 27, 1999, and any deferred tax assets would have had a corresponding valuation allowance and therefore pro forma presentation is not required.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001102934_cmc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001102934_cmc_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information about our company and common stock and our financial statements and the notes to those statements appearing elsewhere in this prospectus. The information in this prospectus assumes that the initial public offering price will be $16.00 per share, the midpoint of the range disclosed on the cover of this prospectus. Unless otherwise indicated, all references in this prospectus to us are to Cabot Microelectronics, to Cabot Corporation are to Cabot and its subsidiaries other than us, and to years are to our fiscal years ended September 30 of the year indicated. Unless otherwise indicated, all references in this prospectus to the number of outstanding shares of our common stock give effect to an increase in the number of our authorized shares of common stock from 5,000 shares to 200,000,000 shares and an 18,989.744 to 1 stock split, both of which will be effected prior to the completion of this offering. Unless otherwise indicated, all information in this prospectus assumes the underwriters' option to purchase additional shares in this offering will not be exercised. OUR BUSINESS We are the leading supplier of slurries used in chemical mechanical planarization, or CMP, a polishing process used in the manufacturing of integrated circuit, or IC, devices. CMP is an increasingly important part of the IC device manufacturing process because it helps manufacturers make smaller, faster and more complex IC devices and improves their production efficiency. CMP slurries are liquids containing abrasives and chemicals that facilitate and enhance the CMP polishing process. We believe that our products account for approximately 80% of all CMP slurry revenue from IC device manufacturers worldwide. For the fiscal year ended September 30, 1999, our sales increased 68% over the prior year to approximately $98.7 million and our net income increased 190% over the prior year to approximately $12.3 million. On a pro forma basis, for the fiscal year ended September 30, 1999, our sales would have been approximately $97.7 million and our net income would have been approximately $7.9 million. For the three months ended December 31, 1999, our sales increased 68% over the same period in the prior year to approximately $35.0 million and our net income increased 142% over the same period in the prior year to approximately $5.7 million. On a pro forma basis, for the three months ended December 31, 1999, our sales would have been approximately $34.8 million and our net income would have been approximately $4.7 million. For a discussion of the pro forma adjustments, see "Unaudited Pro Forma Combined Statements of Income". Since the first significant commercial sales of CMP slurries to the semiconductor industry in the early 1990s, use of CMP in the production of IC devices has grown rapidly. We estimate that sales of CMP slurries have grown at an average annual compound rate of 60% since 1997 and increased to a total of approximately $120 million for 1999. CMP is used in the production of a wide variety of IC devices, including logic devices, such as microprocessors, and memory chips that store computer data. The benefits of CMP become increasingly important to IC device manufacturers as the size of the devices shrink and their complexity increases. By reducing the size of IC devices, manufacturers increase their throughput, or the number of IC devices that they manufacture in a given time period. CMP also helps reduce the number of defective or substandard IC devices produced, which increases the device yield. Improvements in throughput and yield reduce an IC device manufacturer's total production costs. Based on existing technology, we believe that CMP is required for the efficient manufacturing of today's advanced IC devices. We have developed several different types and generations of slurries for polishing the insulating layers of IC devices, historically the most common use of CMP. We developed and introduced in 1994 a CMP slurry for polishing the tungsten plugs used to connect the multiple wiring layers of IC devices. In 1999, sales of CMP slurries for polishing insulating layers represented approximately two-thirds of our total sales and sales of CMP slurries for polishing tungsten plugs represented almost all of the balance. We have also begun selling new slurries for CMP polishing of the magnetic heads and the coating on hard disks in hard disk drives. In addition, we recently began limited production of CMP polishing pads for customer evaluation and qualification. INDUSTRY TRENDS The rapid growth of the CMP slurry market has been driven in large part by the significant growth and technological advances the semiconductor industry has experienced over the past decade. IC devices have become critical components in an increasingly wide variety of products and applications and the use of IC devices in these products and applications has grown significantly in recent years. According to industry sources, the worldwide semiconductor market as measured by total sales grew at an average annual compound rate of 11% in the period from 1988 through 1998. We believe that worldwide revenues from the sale of CMP slurries to IC device manufacturers grew to approximately $120 million in 1999. Industry surveys project that annual worldwide revenues in this market will grow to between approximately $300 and $400 million by 2003. STRATEGY Our objective is to maximize our profitability and stockholder value by maintaining and leveraging our leading position in the CMP slurry market. We will pursue the following strategies to achieve our objective: - - remain the technology leader in CMP slurries; - - build and maintain customer intimacy; - - expand globally; - - attract and retain top quality personnel; - - maintain top quality products and supply; and - - expand into new applications and products. RELATIONSHIP WITH CABOT CORPORATION We are a wholly owned subsidiary of Cabot Corporation, a global chemical manufacturing company based in Boston, Massachusetts. Prior to the transfer to us of the assets and liabilities relating to our business, our business was operated as a division of Cabot. After this offering, we will continue to be controlled by Cabot, which will own at least 80% of the outstanding shares of our common stock. As our controlling stockholder, Cabot will be able to approve or reject major corporate transactions without the support of any other stockholder, including a merger, consolidation or sale of substantially all our assets. Cabot has indicated that, following this offering, it intends to divest its remaining equity interest in us by means of a distribution to its stockholders within six to twelve months after the date of a private letter ruling from the IRS confirming that the spin-off is tax-free to Cabot. This transaction is sometimes referred to in this prospectus as the spin-off. Cabot may not complete its divestiture of its remaining equity interest in us in this time frame or at all. We have entered into agreements with Cabot governing various interim and ongoing relationships between us and Cabot. For a further discussion of these agreements, see "Relationships Between Our Company and Cabot Corporation". THE OFFERING <TABLE> <S> <C> Common stock offered by us................... 4,000,000 shares Common stock to be outstanding after this offering................................... 22,989,744 shares or 23,589,744 shares if the underwriters exercise their over-allotment option in full. These shares do not include 3,500,000 shares reserved for issuance pursuant to options that we may issue in the future pursuant to our stock option plan. In addition, these shares do not include 475,000 shares available for purchase under our employee stock purchase plan. Use of proceeds.............................. We expect that all or substantially all of the net proceeds of this offering will be paid to Cabot in the form of a dividend. Proposed Nasdaq symbol....................... CCMP </TABLE> ---------------------- We were incorporated in Delaware in October 1999. Our principal executive offices are located at 870 North Commons Drive, Aurora, Illinois, 60504. Our telephone number at that location is (630) 375-6631. SUMMARY AND PRO FORMA FINANCIAL DATA The following table presents our summary and pro forma condensed combined financial data and has been derived from our audited financial statements for the fiscal years ended September 30, 1997, 1998 and 1999 and from our unaudited financial statements for the three months ended December 31, 1998 and 1999, each of which are included elsewhere in this prospectus, and from our unaudited financial statements for the fiscal years ended September 30, 1995 and 1996. The unaudited interim financial information for the three month periods ended December 31, 1998 and 1999 has been prepared on the same basis as the annual financial statements and includes all adjustments, consisting only of normal recurring adjustments, which management considers necessary for the fair presentation of that financial information. The unaudited results for interim periods are not necessarily indicative of results to be expected for any other interim period or the full year. The unaudited pro forma combined statement of operations data give effect to our new fumed metal oxide supply agreement and new dispersion services agreement with Cabot, each of which will become effective upon completion of this offering, as if they had been in effect since October 1, 1998 and do not purport to represent our results of operations for any future period. Because we began to operate as a separate division of Cabot in July 1995, the statement of operations data for 1995 include only three months of activity. As adjusted balance sheet data give effect to the proceeds from the sale of 4,000,000 shares of common stock in this offering, the dividends to Cabot and the transfer of our business from Cabot to us. The data below should be read in conjunction with "Selected Financial Data", "Unaudited Pro Forma Combined Statements of Income", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our combined financial statements and the notes to our combined financial statements, each of which is included elsewhere in this prospectus. An income tax benefit was recorded in 1997 as a result of a tax credit for research and development activities that exceeded our statutory taxes for that period. <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, THREE MONTHS --------------------------------------------------- --------------------------- ENDED PRO PRO SEPTEMBER 30, FORMA FORMA 1995 1996 1997 1998 1999 1999 1998 1999 1999 ------------- ---- ---- ---- ---- ----- ---- ---- ----- (in thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> COMBINED STATEMENT OF OPERATIONS DATA: Total revenue........ $5,003 $24,334 $35,211 $58,831 $98,690 $97,695 $20,875 $35,046 $34,804 Gross profit......... 1,978 10,987 15,290 29,176 50,799 45,223 10,839 18,858 17,554 Income (loss) before income taxes....... 577 (1,513) 663 6,448 19,076 12,287 3,690 9,048 7,428 Net income (loss).... 355 (866) 708 4,237 12,280 7,910 2,377 5,748 4,719 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ------------------------ PRO FORMA ACTUAL AS ADJUSTED ------ ----------- (in thousands) <S> <C> <C> COMBINED BALANCE SHEET DATA: Cash........................................................ $ 103 $ 3,103 Working capital............................................. 25,293 27,280 Total assets................................................ 82,986 84,386 Current liabilities......................................... 7,402 8,415 Total liabilities........................................... 7,930 24,930 Division equity............................................. 75,056 59,456 Total liabilities and division equity....................... 82,986 84,386 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001103013_pec_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001103013_pec_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY IS QUALIFIED BY MORE DETAILED INFORMATION APPEARING IN OTHER SECTIONS OF THIS PROSPECTUS. THE OTHER INFORMATION IS IMPORTANT, SO PLEASE READ THIS ENTIRE PROSPECTUS CAREFULLY. PEC SOLUTIONS PEC Solutions provides professional technology services that enable government entities to harness the power of the Internet and other advanced technologies to enhance productivity and improve services to the public. We migrate computer systems using older technologies and paper-intensive processes to integrated electronic government solutions, which are referred to as eGovernment solutions. We web-enable government by designing, building and managing Internet-based solutions. Our solutions provide users with rapid and easy access to large amounts of data and result in improved information flows among government workers as well as between government entities and their constituents. We are a TOTAL solutions provider of eGovernment services addressing the full technology lifecycle. We formulate technology strategies with our clients, we create fully integrated technology solutions and we manage and enhance these solutions over time. The substantial experience we have gained in the government marketplace allows us to design and implement complex mission-critical solutions that meet the unique challenges presented by our clients. Our eGovernment solutions include: - designing and developing technology strategies and web-enabled enterprise system architectures; - building and engineering complex intranets, extranets and other high performance infrastructures; - integrating older technology or "legacy" systems with web-based applications; - applying leading encryption security technologies; and - deploying and operating automated enterprise management systems. We serve clients at all levels of government. We have worked with organizations representing every cabinet-level department of the federal government. Our largest clients include federal organizations such as: the Bureau of Alcohol, Tobacco and Firearms; the Drug Enforcement Administration; the Immigration and Naturalization Service; the Internal Revenue Service; the intelligence community; and the Veterans Benefits Administration. We also provide services to various state and local government entities as well as private sector organizations. Over the last five years, we have provided more than $145 million worth of services in the government market and have increased our revenues at approximately a 48% compound annual growth rate. OUR MARKET OPPORTUNITY The emergence of the Internet as a means of handling information presents numerous opportunities for government to improve the way it communicates internally and with its constituents. Procurement reform has paved the way for government organizations to obtain outsourced technology services to apply the Internet and related technologies to their functions. According to International Data Corporation, overall government spending on information technology services is expected to increase from $11.8 billion in 1997 to $17.3 billion in 2002. Government spending on Internet services alone is expected to grow at approximately a 56% compound annual rate, reaching $2.8 billion in 2003. We believe that the government market for technology services is unlike the private sector market. Most agencies have made substantial investments in legacy systems and are forced by budgetary constraints to update rather than replace these systems. Government systems must handle extremely large amounts of data for large and widely dispersed workforces. Governments require heightened security to protect sensitive and personal information. In addition, agencies must operate in a complex environment of strict government regulations. OUR ADVANTAGE Our focus on eGovernment solutions enables us to address an organization's most difficult technology challenges. From the executive management level to our project leaders, we employ people who have substantial government knowledge and experience. We use our broad technical skills and capabilities to design solutions that interface with, and often salvage, the significant investments that were made in aging legacy systems. For portions of our business, we develop reusable solution sets, enhanced through numerous client engagements, that allow us to deliver results to our clients faster, cheaper and with greater reliability. OUR STRATEGY We intend to: - maintain our leading-edge position in emerging technologies such as the Internet and advanced security; - increase federal government market penetration; - enhance our brand and culture to continue to attract and retain clients and top quality professionals; - expand into state and local government and selected highly-regulated commercial markets; and - undertake a disciplined acquisition program to broaden our client base, service offerings and geographic presence. THE OFFERING <TABLE> <S> <C> PEC Solutions common stock offered........... 3,500,000 shares (a) Common stock to be outstanding after the offering................................. 22,459,046 shares (b) Use of proceeds.............................. The net proceeds to us from the offering are estimated to be $31.7 million. We will use the net proceeds for general corporate purposes, including working capital and potential acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol....... PECS </TABLE> UNLESS STATED OTHERWISE, THE INFORMATION IN THIS PROSPECTUS: - ASSUMES OUR COMMON STOCK WILL BE SOLD AT $10.00 PER SHARE, WHICH IS THE PRICE SET FORTH ON THE COVER OF THIS PROSPECTUS; - ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED; AND - GIVES EFFECT TO A THREE-FOR-ONE STOCK SPLIT ON JANUARY 1, 2000, AND A FURTHER TWO-FOR-ONE STOCK SPLIT ON MARCH 1, 2000. - ------------------------ (A) IF THE UNDERWRITERS FULLY EXERCISE THEIR OVER-ALLOTMENT OPTION, THE SELLING STOCKHOLDERS WILL SELL 525,000 SHARES OF COMMON STOCK THROUGH THE OFFERING. (B) THE NUMBER OF SHARES OF COMMON STOCK TO BE OUTSTANDING AFTER THE OFFERING EXCLUDES (1) OPTIONS TO PURCHASE 4,622,797 SHARES OF COMMON STOCK OUTSTANDING AT MARCH 1, 2000, AT A WEIGHTED AVERAGE EXERCISE PRICE OF $2.39 PER SHARE, AND (2) 1,287,807 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UPON EXERCISE OF OPTIONS THAT MAY BE GRANTED DURING 2000 UNDER OUR 2000 STOCK INCENTIVE PLAN. SUMMARY FINANCIAL DATA (In thousands, except per share data) The following table presents summary historical financial data for our business. You should read the following summary financial data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes included elsewhere in this prospectus. <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ---------------------------------------------------- 1995 1996 1997 1998 1999 <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues....................................... $11,146 $16,216 $24,630 $41,457 $53,202 Gross profit (a)............................... 4,970 6,907 10,754 17,942 22,793 Operating income............................... 1,555 2,203 3,615 6,891 8,975 Net income..................................... 1,093 1,452 2,305 4,455 5,639 Earnings per share: Basic........................................ $ 0.07 $ 0.08 $ 0.13 $ 0.26 $ 0.33 Diluted...................................... 0.06 0.07 0.10 0.20 0.24 </TABLE> - ------------------------ (a) Gross profit represents revenues less direct costs, which consist primarily of project personnel salaries and benefits and direct expenses incurred to complete projects. The following table presents summary balance sheet data as of December 31, 1999. The as adjusted information illustrates the impact of the offering. <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ------------------------- ACTUAL AS ADJUSTED <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 7,981 $39,631 Working capital............................................. 13,311 44,961 Total assets................................................ 24,400 56,050 Long-term debt.............................................. -- -- Total stockholders' equity.................................. 15,283 46,933 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001103088_blaze_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001103088_blaze_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read this summary together with the more detailed information and our consolidated financial statements and notes thereto appearing elsewhere in this prospectus. Unless otherwise indicated, this prospectus assumes that the underwriters have not exercised their option to purchase additional shares, all shares of preferred stock have been automatically converted into shares of common stock, we have completed a 1 for 2 reverse stock split and we have completed our reincorporation in Delaware. Blaze Software We are a leading provider of software that enables companies to provide their customers, employees, partners and suppliers with adaptable and personalized interactions that are consistent across all company communication channels, including the Internet, automated telephone response systems, manned customer service centers, automated self-service electronic kiosks and others. Companies have policies, practices and procedures that constitute the rules under which the company's business is to be conducted. These policies, practices and procedures are commonly referred to as business rules and embody a company's best marketing practices and collective knowledge of customer characteristics and preferences. Typical business rules reflecting a business's policies, practices and procedures may include setting special price discounts for certain types of customers, checking for regulatory compliance before allowing a transaction to proceed or offering different promotional items to users based on their characteristics or profiles. Our Blaze Advisor Solutions Suite enables companies to translate these business rules into a format that can be used by business applications. A company's business applications can draw upon the business rules encoded in our software to individually tailor interactions with customers, employees, partners and suppliers based on market conditions, business practices and user preferences and profiles. Blaze Advisor also enables companies to communicate their unique way of doing business through these interactions, thereby differentiating themselves from their competitors and providing incentives for customers to use their products and services. Blaze Advisor allows business persons to modify the business rules included in our software quickly and easily, enabling companies to respond quickly to changes in market conditions, business practices and user preferences. We also provide consulting and professional services to help customers plan, develop and implement personalization solutions using our software. Many organizations are implementing Internet-based and electronic business initiatives in order to extend and automate traditional business processes and compete more effectively. These initiatives, commonly referred to as e- business, allow companies to transact sales, manage customer service, and interact and communicate with customers, employees, partners and suppliers using both traditional and e-business communication channels, including the Internet and other electronic means. Companies increasingly need software solutions to help them capitalize on these interactions, maintain their corporate personality and style and distinguish themselves from their competitors while conducting an increasing number of transactions over a wide variety of communication channels. The rapid growth of the Internet has made e- business an important and fast-growing business channel for many companies, who have begun to invest significantly in software to support their growing e- business initiatives. International Data Corporation, a market research firm, estimates that worldwide license revenues from Internet commerce application software, which includes software for both business-to-business and business- to-consumer applications, will grow from $1.7 billion in 1999 to $13.1 billion in 2003. Our objective is to maintain our leading position as a provider of software for personalized e-business interactions. Key elements of our strategy include: . expand our market presence; . extend our technology and product leadership; . target leading customers and independent software vendors; . increase our professional services capabilities; and . expand strategic alliances with key business partners. We maintain operations worldwide to sell and support our products through a direct sales force and third-party system integrators. We have sold our products to customers in the technology, financial, insurance, manufacturing, telecommunications, and healthcare industries and our software is embedded in many leading e-business software applications. Corporate Information We were incorporated in California as Neuron Data, Inc. in 1985. In August 1999, we changed our name to Blaze Software, Inc. We reincorporated in Delaware in March 2000. Our headquarters are located at 150 Almaden Boulevard, San Jose, California 95113 and our telephone number at that location is (408) 275-6900. Our Web site is www.blazesoft.com. Our Web site is not part of this prospectus. The Offering <TABLE> <C> <S> Common stock offered by Blaze Software............. 4,000,000 shares Common stock to be outstanding after the offering.. 21,319,244 shares Use of proceeds.................................... For general corporate purposes, including working capital. See "Use of Proceeds." Proposed Nasdaq National Market symbol............. BLZE </TABLE> The number of shares of common stock to be outstanding after the offering is based on the number of shares outstanding as of December 31, 1999. This number excludes: . 4,287,034 shares issuable upon the exercise of outstanding common stock options at a weighted average exercise price of $0.52 per share; . 6,005 shares issuable upon the exercise of outstanding common stock warrants at a weighted average exercise price of $5.60 per share; and . 445,491 shares available for future issuance under our 1996 stock plan and 250,000 shares available for future issuance under our 2000 stock plan. After December 31, 1999, an additional 1,250,000 shares were reserved for future issuance under our 1996 stock plan and 750,000 shares were reserved for future issuance under our 2000 employee stock purchase plan. Summary Consolidated Financial Data (in thousands, except per share data) The As Adjusted consolidated balance sheet data summarized below reflects the conversion of all our preferred stock into shares of common stock upon the completion of this offering and the application of the net proceeds from the sale of the 4,000,000 shares of common stock offered by Blaze Software at an assumed initial public offering price of $13.00 per share after deducting the estimated underwriting discounts and commissions and offering expenses. See note 2 of the notes to our consolidated financial statements for an explanation of the determination of the number of shares used in computing per share data. <TABLE> <CAPTION> Nine Months Ended Year ended March 31, December 31, ------------------------ ----------------- 1997 1998 1999 1998 1999 ------ ------- ------- ------- -------- (unaudited) <S> <C> <C> <C> <C> <C> Consolidated Statements of Operations Data: Net revenues: Product licenses................ $3,296 $ 3,559 $ 3,722 $ 2,556 $ 5,371 Services and maintenance........ 327 803 5,332 3,486 6,378 Total revenues.................... 3,623 4,362 9,054 6,042 11,749 Gross profit...................... 2,980 3,776 6,122 4,145 7,366 Operating loss.................... (1,689) (2,970) (5,512) (4,592) (16,916) Net loss from continuing operations...................... (2,723) (3,631) (5,848) (4,756) (17,241) Basic and diluted net loss per common share from continuing operations attributable to common stockholders............. $(3.56) $(37.37) $(19.15) $(16.09) $ (5.88) Number of shares used in calculation of basic and diluted net loss per share.............. 920 125 371 361 4,997 </TABLE> <TABLE> <CAPTION> December 31, 1999 --------------------- Actual As Adjusted -------- ----------- (unaudited) <S> <C> <C> Consolidated Balance Sheet Data: Cash and cash equivalents................................. $ 16,326 $63,386 Working capital .......................................... 10,785 57,845 Total assets.............................................. 23,850 70,910 Capital lease obligations, net of current portion......... 298 298 Accumulated deficit....................................... (49,864) (49,864) Total stockholders' equity ............................... 12,054 59,114 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001103234_moldflow_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001103234_moldflow_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..bd2aff7ab9ba034b6dce1dd52672fb8f76236f9c
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION AND OUR CONSOLIDATED FINANCIAL STATEMENTS, THE NOTES TO THOSE STATEMENTS AND THE OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. MOLDFLOW CORPORATION We believe we are the world's leading developer of software solutions that enhance the design, analysis and manufacture of injection molded plastic parts. We have developed a suite of software applications that address the difficulties and variables inherent in the design and production of injection molded plastic parts. We believe we have the widest and most advanced range of software solutions and proprietary technology to address the problems that arise in each phase of the process of designing and manufacturing injection molded plastic parts. Our products enable our customers to speed their products to market, decrease manufacturing costs and reduce costly design and manufacturing errors with an automated and integrated process. Our products are used by more than 3,400 customers at more than 3,800 sites in over 55 countries around the world. Representative customers include Baxter International, BMW, DuPont, Fuji Xerox, Hewlett-Packard, Lego, Motorola, Nokia and Samsung. The use of plastics as a manufacturing material is widespread because plastic parts can be formed into an almost limitless number of shapes, are relatively inexpensive to manufacture in volume and are easy to assemble. Injection molding, the dominant method by which plastic parts are produced, is extremely complex due to the inherent difficulties and the many variables encountered in transforming various molten plastic materials into sophisticated part shapes. Common consumer products that make extensive use of injection molded plastic parts include cellular telephones, personal digital assistants, pagers, automobiles, televisions, cameras, toys and personal computers. As product life cycles shrink and the importance of time to market increases, successful manufacturers in these industries must design and build products quickly. In particular, product delays or high product defect rates for manufacturers in rapidly changing industries can result in significant economic and opportunity costs. We believe a substantial portion of companies producing injection molded plastic parts continue to employ trial-and-error at most steps of the design and production process. We believe this condition exists today primarily because of the limited availability of specific software tools which are capable of addressing many of the complex and unique issues involved in designing injection molded plastic parts and their molds. Further, the trend toward outsourcing and supply chain management across multiple geographic time zones has exacerbated the inefficiencies and costs occurring in the design and manufacturing of plastic parts. Prior to 1997, our products were designed to be used by highly specialized engineers conducting in-depth plastics simulation. Since then, we have developed two new product lines that can be used by design engineers and injection molding machine operators who do not specialize in plastic part design. We believe a large untapped market exists for these new product lines. In particular, we believe that up to 750,000 injection molding machines are currently in use and are being operated without integrated software solutions that can analyze and improve the efficiency of their production. Our strategy includes capitalizing on the universal accessibility of the Internet to further grow our business. We have developed several Internet and network-based offerings to expand the usefulness and reach of our products. Earlier this year we introduced plasticszone.com, a business and productivity website for professionals working with injection molded plastics. The plasticszone.com site currently offers, among other things, an application service provider, or ASP, version of one of our product lines on demand via the Internet on a pay-per-use basis. In addition, we recently introduced a browser-based production monitoring system that enables customers to view production data remotely over corporate intranets. Our products are available on a global basis and address each stage of the plastics product development process. We believe that this provides an environment for continuous collaboration across all participants in a supply chain for every plastic part made. We operate facilities in 14 countries. We sell our products worldwide primarily through our direct sales force in North America, Europe and Asia and, to a lesser extent, through original equipment manufacturers and distributors. We have distribution arrangements with Parametric Technology Corporation or PTC, Structural Dynamics Research Corporation or SDRC, Unigraphics Solutions, CoCreate and resellers of products of SolidWorks, a subsidiary of Dassault Systemes, and Autodesk. Our research and development efforts involve over 70 research and development personnel located at our United States, Australia and United Kingdom facilities. As a result, our research and development is conducted on an around-the-clock basis. RECENT DEVELOPMENT On November 9, 2000, we entered into a non-binding letter of intent with XBOX Technologies, Inc. to acquire assets relating to its FullMetrics plastics business. We believe that the FullMetrics lines of products for plastic injection molding applications will supplement one of our product lines by adding scheduling functionality and expanded reporting capabilities. We expect this proposed acquisition would expand the range of products that our sales representatives can offer to companies manufacturing plastic parts. The proposed purchase price consists of a $500,000 initial payment and payments of $200,000 to $350,000 per year for five years based on the achievement of revenue targets. The letter of intent is non-binding and the proposed transaction may not occur. ------------------------ We were reincorporated in Delaware as Moldflow Corporation on January 15, 1997. From 1994 to 1997, we existed as an Australian corporation under the name Moldflow International Pty. Ltd. From 1980 to 1994, we existed as an Australian corporation under the name Moldflow Pty. Ltd. In April 2000, we acquired Advanced CAE Technology, Inc., which had been conducting business as C-Mold, a developer of software solutions for the design and analysis of injection molded plastic parts headquartered in Ithaca, New York. Our principal executive offices are located at 430 Boston Post Road, Wayland, Massachusetts 01778. Our telephone number at that location is (508) 358-5848 and our Internet address is www.moldflow.com. The information contained on our website is not part of this prospectus. The name Moldflow and our logo are names and trademarks that belong to us. We have registrations for other names and marks used in this prospectus. This prospectus also contains the trademarks and trade names of other entities that are the property of their respective owners. THE OFFERING <TABLE> <S> <C> Shares offered by Moldflow................... 575,000 shares Shares offered by the selling stockholders... 1,760,000 shares Common stock to be outstanding after this offering................................... 9,871,137 shares Use of proceeds.............................. For general corporate purposes, including working capital, capital expenditures, potential strategic investments or acquisitions. See "Use of Proceeds." Nasdaq National Market symbol................ MFLO Risk factors................................. See "Risk Factors" for discussion of factors you should carefully consider before deciding to invest in shares of our common stock. </TABLE> The number of shares of our common stock that will be outstanding after this offering excludes 946,715 shares of common stock issuable upon exercise of stock options outstanding at November 1, 2000 at a weighted average exercise price of $9.72 per share. ------------------------ EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. IN ADDITION, WE HAVE ADJUSTED ALL OF THE INFORMATION IN THIS PROSPECTUS, EXCEPT AS OTHERWISE NOTED, TO REFLECT A 2.4-TO-1 REVERSE STOCK SPLIT OF OUR COMMON STOCK EFFECTED IN CONNECTION WITH OUR INITIAL PUBLIC OFFERING. SUMMARY FINANCIAL DATA The tables below present our summary consolidated financial data which you should read together with our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" presented elsewhere in this prospectus. The pro forma combined statement of operations data for the fiscal year ended June 30, 2000 reflects the combined results of Moldflow and C-Mold as if we had acquired C-Mold on July 1, 1999. The as adjusted balance sheet data as of September 30, 2000 reflects the sale of 575,000 shares of common stock by us in this offering at an assumed price of $24.00 per share after deducting the estimated underwriting discount and offering expenses payable by us. <TABLE> <CAPTION> FISCAL YEAR THREE MONTHS ENDED FISCAL YEAR ENDED ENDED ----------------------------- JUNE 30, JUNE 30, 2000 ------------------------------ PRO FORMA OCTOBER 2, SEPTEMBER 30, 1998 1999 2000 COMBINED 1999 2000 -------- -------- -------- -------------- ------------ -------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue: Software licenses............................. $ 8,514 $12,238 $16,742 $19,412 $2,823 $ 5,222 Services...................................... 7,875 7,983 10,627 14,083 2,358 3,602 ------- ------- ------- ------- ------ ------- Total revenue............................... 16,389 20,221 27,369 33,495 5,181 8,824 Operating expenses, excluding litigation, nonrecurring charges and amortization......... 15,734 18,675 24,429 30,526 5,014 7,947 Litigation...................................... -- 620 785 1,536 280 -- Nonrecurring charges............................ -- -- 284 70 -- -- Amortization of goodwill and other intangible assets........................................ 84 -- 311 1,470 -- 367 ------- ------- ------- ------- ------ ------- Income (loss) from operations................... 571 926 1,560 (107) (113) 510 Net income...................................... 189 481 3,453 2,063 69 534 Net income per common share: Basic......................................... $ 1.29 $ 0.06 Diluted....................................... $ 0.48 $ 0.06 Shares used in computing net income per common share: Basic......................................... 2,667 9,186 Diluted....................................... 7,190 9,698 </TABLE> <TABLE> <CAPTION> AS OF SEPTEMBER 30, 2000 ----------------------- ACTUAL AS ADJUSTED -------- ------------ (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and marketable securities............ $33,755 $46,262 Total assets................................................ 55,508 68,015 Stockholders' equity........................................ 43,007 55,514 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001103241_zland-com_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001103241_zland-com_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..b940970d88856771b2ee3cf750cdc799058d9458
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+PROSPECTUS SUMMARY This summary may not contain all of the information that may be important to you. You should read the entire prospectus, including the financial data and related notes, before making an investment decision. The terms "ZLand.com," "our," "we," "us" and "our company" as used in this prospectus refer to ZLand.com, Inc. Except as otherwise indicated, information in this prospectus assumes the conversion of outstanding shares of our convertible preferred stock into shares of common stock immediately prior to completion of this offering and no exercise of the underwriters' over-allotment option. ZLAND.COM, INC. We are a leading applications service provider, or ASP, offering proprietary Web-based software applications and related services that enable small and mid-sized businesses to cost-effectively take their operations online and automate their business processes. Our e-business solutions address a full range of business functions, from establishing a basic Web presence, to selling products over the Internet, to optimizing business operations such as sales force and supply chain automation, customer support, human resources and financial management. Our software applications are deployed rapidly through the Internet to our customers on a rental basis and are easily integrated with their business processes and existing information technology, or IT, systems. We believe that a significant market opportunity exists for a single-source provider of e-business solutions to small and mid-sized businesses. We employ a franchise distribution model to target what we believe is an under-serviced market consisting of businesses with between one and 1,000 employees. Our typical customer has between 20 and 100 employees. Our software applications are specifically tailored to the needs of these businesses, providing a fully integrated and scalable suite of front- and back-office software solutions. We provide the following key competitive advantages and benefits to our customers: - One-Stop, End-to-End Solution. Our broad range of proprietary Web-based software applications enables small and mid-sized businesses to automate critical business processes throughout the enterprise. This allows our customers to use ZLand.com as a single-source provider of Web-based business software applications. - Rapid Time to Value. We offer templated software applications that enable our customers to rapidly recognize a meaningful return on investment in their e-business initiatives. - High-Value Delivery Model. Our ASP delivery model provides our customers with reliable performance and secure computing resources on a 24 x 7 basis at an affordable price and without incurring significant up-front costs. - Scalable, Flexible Solutions. Our solutions are fully scalable and platform independent, enabling our customers to integrate our software applications with their existing IT systems and cost-effectively implement additional applications as their needs evolve. - Unique Network of Local e-Business Experts. We believe that our franchise network of local sales offices staffed by e-business experts provides the only effective means to adequately service small and mid-sized businesses and deliver value-added e-business solutions to meet their needs. As of March 2000, we offered our solutions throughout the United States from 37 sales offices. We also have offices in Australia, Canada, Egypt, Germany and the United Kingdom. Our customer base has grown to over 700 customers as of March 2000 from approximately 190 customers as of January 1999. Our objective is to become the leading worldwide provider of Web-based business software applications for small and mid-sized businesses. To achieve this goal, we will continue to: - build a global ZLand.com brand; - rapidly expand through our franchise distribution model; THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED MARCH 29, 2000 Shares [ZLAND.COM LOGO] Common Stock ------------------ Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $ and $ per share. We will apply to list our common stock on The Nasdaq Stock Market's National Market under the symbol "ZLND." The underwriters have an option to purchase a maximum of additional shares to cover over-allotments of shares. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 4. <TABLE> <CAPTION> UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS ZLAND.COM ----------- ------------- ----------- <S> <C> <C> <C> Per Share....................................... $ $ $ Total........................................... $ $ $ </TABLE> Delivery of the shares of common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON ROBERTSON STEPHENS FRIEDMAN BILLINGS RAMSEY The date of this prospectus is , 2000. - enhance our end-to-end solution; - expand internationally; and - leverage our community of customers and enter into strategic partnerships. Our principal executive offices are located at 27081 Aliso Creek Road, Aliso Viejo, California 92656, and our telephone number is (949) 544-4000. Our Web site is located at www.zland.com. Information contained on our Web site is not part of this prospectus. THE OFFERING Common stock offered.................. shares Common stock to be outstanding after this offering................. shares Use of proceeds....................... To increase our sales and marketing activities, expand our international operations, fund product development and for general corporate purposes, including working capital. Proposed Nasdaq National Market symbol................................ ZLND The number of shares of common stock to be outstanding after this offering is based on our shares outstanding as of March 15, 2000. This information excludes: - 18,000,000 shares of common stock reserved for issuance under our Second Amended and Restated 1997 Stock Plan, of which 12,617,090 shares are issuable upon the exercise of stock options outstanding as of March 15, 2000; and - 5,707,688 shares of common stock issuable upon the exercise of warrants outstanding as of March 15, 2000, of which 4,743,824 are exercisable at the initial public offering price and the balance of which have a weighted average exercise price of $1.19 per share. INSIDE FRONT COVER (ARTWORK TO FOLLOW) SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following tables set forth summary consolidated historical financial data and certain pro forma financial data for our business during the years and as of the dates indicated. The 1999 pro forma consolidated statements of operations data gives effect to our acquisition of two companies, Appintec Corp., dba ActionWare, or ActionWare, and Emerging Market Technologies, Inc., or EMT, in November 1999, as if these acquisitions had been completed on January 1, 1999. Each acquisition was accounted for under the purchase method of accounting. <TABLE> <CAPTION> FROM SEPTEMBER 1, 1995 (INCEPTION) THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, -------------------------------------- PRO FORMA 1995 1996 1997 1998 1999 1999(2) ----------------- ------- ------- ------- -------- ----------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Total revenues................ $ 40 $ 791 $ 221 $ 610 $ 6,462 $ 9,413 Cost of revenues.............. 44 150 82 560 1,200 1,694 ------ ------- ------- ------- -------- -------- Gross profit (loss)........... (4) 641 139 50 5,262 7,719 ------ ------- ------- ------- -------- -------- Operating loss................ (198) (1,009) (1,663) (5,218) (13,552) $(12,755) Net loss...................... $ (198) $(1,055) $(1,885) $(5,367) $(13,643) $(12,897) ====== ======= ======= ======= ======== ======== Basic and diluted net loss per share....................... $(0.03) $ (0.18) $ (0.23) $ (0.33) $ (0.73) $ (0.68) ====== ======= ======= ======= ======== ======== Shares used to compute basic and diluted net loss per share....................... 6,000 6,000 8,342 16,072 18,570 19,082 ====== ======= ======= ======= ======== ======== Pro forma basic and diluted net loss per share (unaudited)(1).............. $ (0.46) ======== Shares used to compute pro forma basic and diluted net loss per share (unaudited)(1).............. 29,870 ======== </TABLE> - --------------- (1) The pro forma basic and diluted net loss per share (unaudited) reflects the conversion of all outstanding shares of our convertible preferred stock into 11,301 shares of common stock as if the shares had been issued and converted at the beginning of 1999. See Note 1 to our consolidated financial statements. (2) Includes adjustments directly attributable to the acquisitions, including the amortization of goodwill and other intangibles of $453 attributable to the acquisitions, amortized on a straight line basis over three to five-year periods, and the reversal of the in-process research and development charge recorded in connection with the acquisition of ActionWare. <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ----------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents.................................. $16,404 $16,404 $ Working capital............................................ 11,834 11,834 Total assets............................................... 27,319 27,319 Capitalized lease obligations, excluding current installments............................................. 467 467 Convertible preferred stock................................ 112 -- Total stockholders' equity................................. 15,975 15,975 </TABLE> The pro forma balance sheet data reflects the conversion of all outstanding shares of our convertible preferred stock into shares of common stock immediately prior to completion of this offering. The pro forma as adjusted data reflect our receipt of the net proceeds from the sale of the shares of common stock offered by us at an assumed initial public offering price of $ per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. ------------------------ TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> PROSPECTUS SUMMARY.................... 1 RISK FACTORS.......................... 4 FORWARD-LOOKING STATEMENTS............ 13 USE OF PROCEEDS....................... 13 DIVIDEND POLICY....................... 13 CAPITALIZATION........................ 14 DILUTION.............................. 15 SELECTED CONSOLIDATED FINANCIAL DATA................................ 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 18 BUSINESS.............................. 24 MANAGEMENT............................ 37 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> RELATED PARTY TRANSACTIONS............ 43 PRINCIPAL STOCKHOLDERS................ 44 DESCRIPTION OF CAPITAL STOCK.......... 46 SHARES ELIGIBLE FOR FUTURE SALE....... 50 UNDERWRITING.......................... 52 NOTICE TO CANADIAN RESIDENTS.......... 54 LEGAL MATTERS......................... 55 EXPERTS............................... 55 CHANGE IN INDEPENDENT ACCOUNTANTS......................... 55 WHERE YOU CAN FIND MORE INFORMATION... 55 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.......................... F-1 </TABLE> ------------------------- YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY BE USED ONLY WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY BE ACCURATE ONLY ON THE DATE OF THIS DOCUMENT. DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. Z LAND(R), ZLAND.COM, "E-BUSINESS FOR EVERYONE" AND THE ZLAND LOGO ARE OUR TRADEMARKS AND SERVICE MARKS. ALL OTHER TRADEMARKS OR SERVICE MARKS APPEARING IN THIS PROSPECTUS ARE THE TRADEMARKS OR SERVICE MARKS OF THEIR RESPECTIVE OWNERS.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001103345_beacon_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001103345_beacon_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE SECTION ENTITLED "RISK FACTORS." BEACON POWER CORPORATION OVERVIEW We design and develop flywheel energy storage systems that we believe will provide highly reliable, high-quality, uninterruptible electric power for communications networks, computers, the Internet, industrial manufacturing, commercial facilities and distributed generation products that allow the user to bypass the electric utility grid by generating power locally. Flywheel systems draw electrical energy from a primary power source such as the electric grid or a fuel cell, store that energy, and then convert that energy to immediately provide uninterruptible electric power when the primary power source fails or is disrupted. We believe our flywheels will offer significant advantages over conventional back-up power systems that primarily use lead-acid batteries. The expected advantages include higher reliability, longer life, lower life-cycle cost, improved recharging capability, reduced maintenance, more reliable monitoring, and environmental friendliness. We also believe that our flywheel systems will be used in conjunction with distributed power products such as gasoline or diesel generators, fuel cells, microturbines and other distributed power generators to provide benefits that are not available from these products alone, such as an instant-on capability and the ability to manage sudden changes in power. OUR PRODUCTS We have designed our initial products to specifically address the back-up powering needs of the communications markets. We believe we are the only company to have developed a proprietary composite flywheel that can store and deliver the requisite energy demanded by communications customers and can efficiently provide back-up power for long periods of time. In addition, our flywheel systems can be installed in the ground to address cost, permit, environmental and aesthetic concerns and our commercial product will have a built-in, long-life, low-cost vacuum system that will automatically restart if power is lost. Bell Atlantic, now part of Verizon Communications, WinDBreak Cable and Telcordia Technologies Inc. have provided us with application requirements that have helped us with the definition, development and testing of our 2 kilowatt-hour (kWh) product. Our field trials have provided back-up power for operating sites at Verizon Communications, Century Communications Corporation, now part of Adelphia Communications, and WinDBreak Cable, and we have demonstrated our product at our plant to AT&T Broadband, Cox Communications, Inc., Asea Brown Boveri, Kobe Steel and GTE, now part of Verizon Communications, among others. We have not entered into any agreements with, or sold any units to, any of these parties. We have sales commitments for 121 of our 2kWh commercial units, with deliveries expected to begin in early 2001, and expect that our product demonstrations will lead to additional, significant orders. We are a development stage company that has not yet begun to manufacture flywheels in large quantities and to date have not received any revenue from our existing sales commitments. INDUSTRY DYNAMICS The growing use of digital electronics and computers and the proliferation of telecommunications networks is causing a dramatic increase in the demand for more reliable, higher quality power. For example, Internet related power requires a much higher level of reliability than that provided by the electric grid. At the same time, deregulation and aging transmission and distribution lines are leading to reduced reliability in electric power that is supplied through the grid. Lead-acid battery and generator back-up power is proving to be inadequate to meet the high power quality and reliability needs of technology-oriented applications. In addition to deregulation of the utility industry, we expect these trends to accelerate the adoption of alternative power technology products such as flywheels. MARKET OPPORTUNITIES FOR OUR FLYWHEEL PRODUCTS The Electric Power Research Institute estimated that electric power reliability problems cost the U.S. more than $50 billion annually. Approximately $12 billion was spent worldwide in 1999 on power quality and reliability equipment to address these problems. Mark Mills, one of the authors of THE HUBER MILLS POWER REPORT, has estimated that sales of power reliability products will expand at a market growth rate of approximately 30% per year for the next 15 years. We believe that significant growth in demand for our flywheels will come from our targeted markets, including: COMMUNICATIONS MARKETS. The SKYLINE MARKETING GROUP estimated that power quality and reliability equipment sold into the communications markets in 1999 totaled $4 billion globally. If flywheels completely displaced batteries in the North American communications powering market, that market would require approximately 2 million 2kWh-flywheels per year. OTHER MARKET OPPORTUNITIES. Over the longer term, we intend to capitalize on our strengths in the communications market to expand into other markets. These markets include products that would be designed to: - address the high-quality power and reliability needs of the growing Internet and computer markets; - be used in industrial manufacturing facilities to protect against downtime caused by power quality and reliability problems; - provide higher quality and more reliable and cost-effective back-up power at commercial facilities such as data processing centers, call centers, telecommunications switching facilities, emergency services, hospitals, hotels and universities; and - be used in conjunction with distributed generation products such as diesel generators, fuel cells and microturbines to provide operational advantages that cannot be delivered by these products alone. OUR STRATEGY Our goal is to become the leading provider of flywheel energy storage systems. To accomplish our objective, we are pursuing the following key strategies: - initially target communications markets with superior product offerings; - over the longer term, expand into other segments of the power quality and reliability markets; - leverage key customer and strategic relationships with General Electric and others to enhance our product development and reduce product costs; - establish key strategic relationships to aid in our marketing and distribution efforts; and - protect our intellectual property. THE OFFERING <TABLE> <S> <C> Common stock offered......................... 8,000,000 shares Common stock to be outstanding after the offering................................... 38,565,974 shares Use of proceeds.............................. For general corporate purposes, including research and product development, sales and marketing expenses, working capital, capital expenditures and potential acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol....... BCON </TABLE> ------------------------ Unless otherwise indicated, all information in this prospectus, including the outstanding share information above, is based on the number of shares outstanding as of October 24, 2000 and: - assumes no exercise of the underwriters' option to purchase up to 1,200,000 additional shares of common stock to cover over-allotments; - excludes 4,769,540 shares of common stock which may be issued at a weighted average exercise price of $2.57 per share upon exercise of options outstanding as of October 24, 2000 under our stock incentive plan; - excludes 5,366,070 shares of common stock which may be issued at a weighted average exercise price of $2.21 per share upon exercise of outstanding warrants and 70,000 shares of common stock which may be issued at an exercise price equal to the initial offering price upon exercise of outstanding warrants; - excludes a number of shares of common stock which may be issued at an exercise price of 37.5% of the initial public offering price upon exercise of warrants issued as part of our class F financing equal to $14,250,000 divided by 37.5% of the initial public offering price, or 5,428,571 shares assuming a $7.00 initial public offering price; - reflects the automatic conversion of all of our outstanding preferred stock into 29,359,530 shares of common stock upon the completion of the offering; - reflects the issuance of 820,162 shares of common stock upon consummation of the offering as a dividend on our class D preferred stock; - reflects the issuance of 39,168 shares of common stock upon consummation of the offering as a dividend on our class E preferred stock; - reflects the issuance of 60,000 shares of class A preferred stock issued in payment of consulting fees accrued through October 31, 2000 which will convert into 120,000 shares of common stock upon consummation of the offering; and - gives effect to a 1.125-for-1 stock split of our common stock effective in October 1998 and a 2-for-1 stock split effective immediately prior to consummation of this offering. CORPORATE INFORMATION We are incorporated in Delaware. Our executive offices are located at 6D Gill Street, Woburn, Massachusetts 01801 and our telephone number is (781) 938-9400. SUMMARY FINANCIAL DATA The following tables set forth our summary financial data. You should read this information together with our financial statements and the notes to those statements beginning on page F-1 of this prospectus, the information under "Capitalization," "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The pro forma basic and diluted net loss per share gives effect to the conversion at the beginning of the period of each share of class A, C and D preferred stock into two shares of common stock for all periods presented and the conversion into two shares of common stock on January 1, 2000 of each share of class E and F preferred stock for the period ended September 30, 2000, including in each case shares payable for consulting services, as though they were common stock in all periods for which such shares were outstanding, the issuance upon conversion of our class D preferred stock of 820,162 shares of common stock as payment of accrued dividends on the class D preferred stock and the issuance of 39,168 shares of common stock upon consummation of the offering as a dividend on the class E preferred stock. <TABLE> <CAPTION> PERIOD FROM DATE NINE MONTHS ENDED OF INCEPTION YEAR ENDED DECEMBER 31, SEPTEMBER 30, (MAY 8, 1997) TO ----------------------- ---------------------- DECEMBER 31, 1997 1998 1999 1999 2000 ----------------- --------- ----------- ----------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues.......................... $ 232 $ -- $ 269 $ 66 $ -- Loss from operations.............. (3,228) (4,790) (5,340) (3,559) (9,772) Net loss.......................... $ (3,111) $ (4,793) $ (5,672) $ (3,787) $ (9,793) ======== ======== ========== ======== ======== Loss to common shareholders....... $ (3,111) $ (4,912) $ (6,630) $ (4,241) $(12,297) ======== ======== ========== ======== ======== Pro forma net loss per share, basic and diluted............... $ (0.42) $ (0.45) ========== ======== Shares used in computing pro forma net loss per share, basic and diluted......................... 13,493 22,017 </TABLE> The balance sheet data on a pro forma as adjusted basis reflect the conversion of our preferred stock upon consummation of this offering, the issuance upon conversion of our class D preferred stock of 820,162 shares of common stock as a dividend payable on the class D preferred stock, the issuance of 39,168 shares of common stock to be issued upon consummation of the offering as a dividend on the class E preferred stock, issuance of shares payable for consulting services, and the sale of 8,000,000 shares of common stock in this offering at an assumed initial public offering price of $7.00 per share, after deducting the estimated underwriting discounts and commissions and our estimated offering expenses. <TABLE> <CAPTION> AS OF SEPTEMBER 30, 2000 ---------------------------- ACTUAL AS ADJUSTED -------- ----------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.......................... $ 21,347 $ 72,251 Working capital.................................... 18,721 69,625 Total assets....................................... 24,159 75,063 Redeemable convertible preferred stock............. 36,682 -- Total stockholders' (deficit) equity............... (18,400) 70,616 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001103354_signalsoft_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001103354_signalsoft_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summarizes information in other sections of our prospectus, including our consolidated financial statements and the notes to those statements. This summary does not contain all of the information you should consider before investing in our common stock. You should read the entire prospectus carefully, especially the risks of investing in the shares discussed under "Risk Factors." SIGNALSOFT CORPORATION SignalSoft provides a suite of software products that enable the delivery of location-based voice and data services, or mobile location services, to wireless network operators. Our core software, which is designed to facilitate a range of applications and which we call our operating platform, and our software applications allow wireless network operators worldwide to unlock the value of a central element of mobile telephone networks -- the location of their users. The location of the wireless user will be fundamental to the delivery of many new services by wireless operators. We believe that mobile location services will be the key enabler of mobile commerce, or m-Commerce, which is the extension of Internet-based transaction activity commonly known as electronic commerce, or e-Commerce, to mobile phones and other mobile devices. We use the geographic location data generated by various third parties to offer information, billing, safety and tracking applications based on the location of the mobile user. With our products as an integral part of the wireless network, network operators can transform wireless location data into a strategic means to offer differentiated services, build customer loyalty and generate incremental revenue. Our operating platform enables wireless operators to use their network to provide mobile location services. We also offer wireless operators software applications in four categories of mobile location services: information, billing, safety and tracking. With our local.info(TM) product, a wireless user can personalize on-demand Internet content such as traffic updates, weather reports and restaurant reviews, in each case tailored to the user's current location. Our Location Sensitive Billing product allows wireless operators to customize billing plans and to charge differentiated rates based on the geographic location of the subscriber. Our Wireless 911 application ensures that the call of a wireless caller in distress is routed to the appropriate emergency services provider. Our BFound.com(TM) wireless tracking service tracks and manages trucks, freight and other portable assets using a standard wireless device and an Internet browser such as Microsoft Internet Explorer or Netscape Navigator. In order to reach wireless carriers worldwide, we market and sell our suite of products, which we call Wireless Location Services(R), to network operators through our direct sales force and to distributors, including wireless network equipment providers and other resellers, which then sublicense our products to network operators. Currently, most wireless operators that have licensed our products have done so by sublicensing our products from our distributors. We have entered into a variety of license-based and co-marketing relationships, which we call industry partnerships, with leading wireless equipment providers and other distributors in the wireless industry. We have also entered into industry partnerships with over 40 Internet content providers in connection with our local.info(TM) application, as well as with a number of companies that provide the geographic location data of wireless users. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED JULY 28, 2000 PROSPECTUS 4,400,000 SHARES [SIGNALSOFT LOGO] SIGNALSOFT CORPORATION COMMON STOCK $ PER SHARE ------------------ We are selling 4,400,000 shares of our common stock. The underwriters named in this prospectus may purchase up to 660,000 additional shares of common stock from us to cover over-allotments. This is an initial public offering of our common stock. We currently expect the initial public offering price to be between $15.00 and $17.00 per share. Our common stock has been approved for quotation on the Nasdaq National Market under the symbol "SGSF," subject to notice of issuance. ------------------ INVESTING IN OUR COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------ <TABLE> <CAPTION> PER SHARE TOTAL ----------- ---------- <S> <C> <C> Public Offering Price $ $ Underwriting Discount $ $ Proceeds to SignalSoft (before expenses) $ $ </TABLE> The underwriters are offering the shares subject to various conditions. The underwriters expect to deliver the shares to purchasers on or about August , 2000. ------------------ SALOMON SMITH BARNEY DONALDSON, LUFKIN & JENRETTE LEHMAN BROTHERS August , 2000 As of June 30, 2000, the network operators named below have commercially deployed or licensed our products. <TABLE> <S> <C> -------------------------------------------------- DEPLOYED -------------------------------------------------- NETWORK OPERATOR PRODUCT(S) -------------------------------------------------- Ameritech Wireless 911 -------------------------------------------------- AT&T Wireless Wireless 911 -------------------------------------------------- diAx (Switzerland) local.info(TM) Location Manager -------------------------------------------------- Houston Cellular Wireless 911 -------------------------------------------------- Southwestern Bell Wireless 911 Mobile -------------------------------------------------- Sprint PCS Wireless 911 -------------------------------------------------- US West Wireless Wireless 911 -------------------------------------------------- -------------------------------------------------- LICENSED -------------------------------------------------- NETWORK OPERATOR PRODUCT(S) -------------------------------------------------- AAPT (Australia) local.info(TM) Location Sensitive Billing Wireless 911 Location Manager MAPS -------------------------------------------------- BellSouth Wireless 911 -------------------------------------------------- Triton PCS Wireless 911 -------------------------------------------------- US Unwired Wireless 911 -------------------------------------------------- </TABLE> As noted above, network operators that license our products through our distributors are not our direct customers. As a result, while we believe the above list encompasses all of the network operators who have commercially deployed or licensed our products, our distributors may have licensed our products to other operators without yet giving us notice. Among direct network operator customers, AT&T Wireless Services accounted for approximately 50% of our revenue in 1997 and 19% in 1998, Ameritech accounted for approximately 12% of our revenue in 1998, and diAx accounted for approximately 20% of our revenue in the six months ended June 30, 2000. The other network operators listed above represented 1% or less of our revenue in the aggregate in each of 1997, 1998 and the six months ended June 30, 2000. Our network operator customers accounted for approximately 15% of our revenue in the aggregate in 1999. Maintenance fees from our distributors, sales of our products to our distributors and professional services to our potential distributor and network operator customers accounted for the remainder of our revenue in those periods. OUR STRATEGY Our goal is to be the leading provider of software solutions that facilitate the delivery of mobile location services. The key elements of our strategy are to: - innovate and enhance our products and services; - create market demand for mobile location services and brand awareness for our Wireless Location Services(R) products; - establish a global presence; - strengthen and expand our industry partnerships; and - pursue selective acquisitions. CORPORATE INFORMATION Our corporate headquarters are located at 1495 Canyon Boulevard, Boulder, Colorado 80302, and our telephone number is (303) 381-3000. Wireless Location Services(R), local.info(TM) and BFound.com(TM) are our trademarks. This prospectus also contains brand names, trademarks or service marks of other companies, and these brand names, trademarks or service marks are the property of those other holders. DESCRIPTION OF ARTWORK FOR GATEFOLD. The title of the graphic is Wireless Location Services: Key Enabler of Future Mobile Commerce There are four stylized concentric circles in the main body of the graphic. Each circle has a label, specifically Wireless Network, Location Technologies, Internet and Mobile Commerce. The Wireless Network circle is in the center, the Location Technologies circle is next, the Internet circle is third, and the largest circle is Mobile Commerce. Through the middle of the Wireless Network circle is a cylinder with the label, Wireless Location Services(R). Below the four concentric circles is another cylinder with icons and labels of each of SignalSoft's products, specifically local.info(TM), Location Sensitive Billing, Wireless 911/112, Tracking, Location Manager, and MAPS. Below the product icons is the label, SignalSoft's Product Suite. Around the edge of the Mobile Commerce circle are four pictures of people, each using a Mobile Commerce service. Each picture has a line leading to a small circle, which is overlaid on a picture of the New York City skyline. This small circle represents the location of the service that each person is looking for. Each picture also has a short description of a person using one of our services. DESCRIPTION OF ARTWORK FOR INSIDE FRONT COVER At the top of the page is SignalSoft's logo with the phrase, Wireless Location Services(R), directly beneath. At the bottom of the page is a picture of concentric circles formed in water with the overlaid phrase, "Now, it's not just who you are, but where you are." DESCRIPTION OF ARTWORK FOR INSIDE BACK COVER At the top of the page is the title "SignalSoft Partners." In the middle of the page is a stylized star. At each corner of the star are the categories of our various industry partners: Equipment, Location Technology, Distributors and Content. THE OFFERING Common stock offered................ 4,400,000 shares Common stock to be outstanding after this offering............... 22,820,752 shares Use of proceeds..................... We plan to use the net proceeds from this offering for research and development, capital expenditures and other general corporate purposes. Nasdaq National Market symbol....... SGSF Unless otherwise indicated, all information in this prospectus, including the outstanding share information above, is based on the number of shares outstanding as of June 30, 2000, and: - gives effect to the conversion of all outstanding shares of preferred stock into 10,981,172 shares of common stock upon the completion of this offering; - includes 9,976 shares of common stock and 548,347 shares of common stock issuable upon conversion of shares of our Nova Scotia subsidiary, in both cases issued to acquire 100% of the common stock of BFound.com Services, Inc. in April and May 2000; - excludes 1,530,781 shares of common stock issuable upon exercise of outstanding options as of June 30, 2000 at a weighted average exercise price of $1.98 per share; - excludes 25,336 shares of common stock issuable upon exercise of outstanding warrants as of June 30, 2000 at a weighted average exercise price of $1.25 per share; - excludes 474,628 shares of common stock reserved for future grants under our 1995 nonqualified stock option plan as of June 30, 2000; - excludes 3,400,000 shares of common stock reserved for future grants under our 2000 equity incentive plan; and - assumes there is no exercise of the underwriters' over-allotment option. [THIS PAGE INTENTIONALLY LEFT BLANK] SUMMARY FINANCIAL DATA You should read this summary data together with the audited consolidated financial statements, related notes and independent auditors' reports and "Management's Discussion and Analysis of Results of Operations and Financial Condition" included elsewhere in this prospectus. The following data for the years ending December 31, 1997, 1998 and 1999 have been derived from the audited financial statements included elsewhere in this prospectus. The data for the six months ended June 30, 1999 and 2000 and as of June 30, 2000 have been derived from the unaudited financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of the results to be expected in the future. Operating results for the six months ended June 30, 1999 and 2000 are not necessarily indicative of the results that may be obtained for the full year. Pro forma basic and diluted loss per share gives effect to the acquisition of BFound.com Services, Inc. and the automatic conversion of all outstanding shares of preferred stock to common stock to occur upon the completion of the offering as though it had occurred on January 1, 1999 or the issuance of the preferred stock, if later. The as adjusted balance sheet data give effect to the conversion of all outstanding shares of preferred stock upon completion of this offering, and our receipt of the estimated net proceeds from the sale of 4.4 million shares of common stock in this offering at an assumed initial public offering price of $16.00 per share, after deducting the estimated underwriting discount and estimated offering expenses payable by us. <TABLE> <CAPTION> SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, --------------------------- ------------------- 1997 1998 1999 1999 2000 ------- ------- ------- ------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenue..................................... $ 1,352 $ 1,080 $ 1,956 $ 403 $ 4,826 Gross profit (loss)............................... 963 (47) 179 (403) 3,211 Loss from operations.............................. (1,498) (4,788) (7,605) (4,110) (6,662) Net loss.......................................... (1,435) (4,451) (7,595) (4,025) (6,031) Net loss attributable to common stockholders...... $(1,601) $(5,272) $(8,616) $(4,500) $(7,922) ======= ======= ======= ======= ======= Basic and diluted loss attributable to common stockholders per share.......................... $ (0.25) $ (0.83) $ (1.35) $ (0.70) $ (1.15) ======= ======= ======= ======= ======= Shares used to compute basic and diluted loss attributable to common stockholders per share... 6,334 6,385 6,387 6,387 6,916 ======= ======= ======= ======= ======= Pro forma basic and diluted loss per share........ $ (0.58) $ (0.36) ======= ======= Shares used to compute pro forma basic and diluted loss per share.................................. 15,723 18,455 ======= ======= </TABLE> <TABLE> <CAPTION> JUNE 30, 2000 ---------------------- ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 18,496 $83,033 Working capital............................................. 19,500 84,037 Total assets................................................ 29,610 94,147 Long-term capital lease obligations......................... 4 4 Mandatorily redeemable convertible preferred stock.......... 46,219 -- Total stockholders' equity (deficit)........................ (19,668) 91,088 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001103600_digitalwor_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001103600_digitalwor_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering and the financial statements and notes to those statements appearing elsewhere in this prospectus. Except as otherwise indicated, all information in this prospectus assumes that the underwriters do not exercise the option granted by us to purchase additional shares in this offering and assumes the conversion of all of our currently outstanding preferred stock into common stock that will occur upon the completion of this offering. In addition, the share information reflects a 4-for-1 stock split that occurred in October 1999. Our Business We provide business services to the small business market through the Internet. Our offering consists of over 30 online services that are designed to streamline and automate important business functions such as launching a marketing campaign, recruiting new employees and generating sales leads. We refer to our service offering as our e-services platform. We enter into agreements and build relationships with carefully selected business services suppliers who provide some of the elements of each service. To increase the use of our services, we have entered into agreements to offer our e-services platform on over 55 business-oriented Web sites, which we refer to as business portals. Users of these business portals can directly access a version of our e-services platform from the business portal's Web site that is co-branded with our and the business portal's logos. By connecting business service suppliers, small businesses and business portals through our e-services platform, we have created a network that facilitates business-to-business e-service transactions. As of December 31, 1999, over 100,000 small businesses have registered to use our e-services platform, either through one of our business portal partners or directly at our Web site. We anticipate that business portal partners will be our primary means for registering new small business users. Our Market Opportunity The widespread adoption and interactive nature of the Internet have created new opportunities for conducting business online. As the number of Internet users has grown, businesses have increasingly recognized the power of the Internet to streamline complex processes, lower costs and improve efficiency. Given the resource and time constraints of most small businesses, which we define as businesses with less than 100 employees, managers in this environment are constantly seeking ways to complete critical business functions more efficiently. In most cases, these functions span all aspects of a business. To effectively compete in today's markets, small businesses need access to the same breadth and depth of business services that have traditionally been accessible only to larger business organizations. Likewise, business service suppliers have not been able to reach and serve the large, highly fragmented small business market efficiently. We believe a significant opportunity exists to connect small business buyers with quality business service providers using the Internet. According to International Data Corporation, or IDC, small businesses will increase their spending on e-commerce transactions from $6.2 billion in 1998 to $106.8 billion in 2002, representing a compound annual growth rate of 104%. Furthermore, IDC estimates that the number of small businesses today, 29.6 million, will grow to 38.5 million by 2002. The DigitalWork.com Solution We believe we have created a new way for small businesses to execute critical business functions. Through our e-services network, we facilitate business-to-business e-commerce transactions among small businesses, service suppliers and business portals. Small Businesses. Our e-services platform provides small businesses with online access to business services that have not previously been readily available to them. Our integrated Web-based solution allows time- and resource-constrained small businesses to complete over 30 critical business functions more efficiently than with traditional offline methods. Furthermore, our platform enables small businesses to learn about and execute each business function in an efficient step-by-step manner. Each e-service has a uniform appearance and execution process, and all of our services utilize our customer care center. Together, these factors make it easier for small businesses to complete multiple functions using our e-services platform. Business Service Suppliers. We carefully select each of the business service providers within our e-services network and act as the electronic channel for them to effectively reach the small business market. We customize and enhance the offerings of service suppliers specifically for the small business market and rapidly integrate the offerings into our e-services platform. Business Portals. There are thousands of companies with existing small business customers that have created or will create Internet portals to better reach and serve their small business customers. We license and distribute our e-services platform to these portals and allow them to integrate our e-services into their offerings. By expanding the depth and breadth of services business portals offer to their customers, we provide them the benefits of increased customer traffic, improved customer retention and new revenue streams. Our services are co-branded with each portal's logo and Web design and are hosted by our servers in order to maintain a consistent work environment for our users. We generate revenue from selling e-services to small business customers and earn fees from business portals and service suppliers for allowing them access to our e-services platform. For the year ended December 31, 1999, revenues we received from e-services transactions represented 81% of our total revenues. Our Services We provide our customers with over 30 business services that we categorize into the following eleven primary workshops: Public Relations Sales Training Online Advertising Market Research Business Software Direct Mail Tech Support Travel Recruiting Credit Our Growth Strategy Our goal is to become the dominant provider of Web-based business services to the small business market. The key elements of our strategy are to: . Capitalize on the broad reach of our existing global distribution network; . Grow our customer base by adding new business portals as our distribution partners; . Expand the depth and breadth of the e-services we offer; . Tailor our e-services to meet the specific needs of targeted industries, such as the real estate and retail industries; . Leverage our network to generate new revenue streams; . Strengthen our relationships with our small business users by continuing to provide high quality customer service and promoting specific services based on their requirements and usage; and . Pursue strategic relationships and acquisitions. To implement our growth strategy, we will be making significant expenditures before our revenues increase to cover these additional costs. We incurred a net loss of $15.4 million in the year ended December 31, 1999. Among other things, the success of our business will be tied to the ability of our distribution partnerships to attract registered users and the acceptance of our e-services by small businesses. Recent Developments Our revenues increased from $1.1 million for the three months ended December 31, 1999 to $1.65 million for the three months ended March 31, 2000. Our number of registered users increased from 103,000 as of December 31, 1999 to 164,000 as of March 31, 2000. Our operating expenses increased from $8.9 million for the three months ended December 31, 1999 to $16.15 million for the three months ended March 31, 2000. Our net loss increased from $8.7 million for the three months ended December 31, 1999 to $15.2 million for the three months ended March 31, 2000. Our financial statements for the three months ended March 31, 2000 have not yet been completed and accordingly information regarding this period is preliminary and subject to change. Additionally, our operating results for the three months ended March 31, 2000 or any other quarter are not necessarily indicative of the operating results for any future period. Additional Information About Our Company Our principal executive offices are located at 230 West Monroe Street, Suite 2050, Chicago, Illinois 60606, and our telephone number is (312) 261-4000. Our Web site is located at www.digitalwork.com. The information contained at our Web site is not a part of this prospectus. The Offering <TABLE> <S> <C> Common stock offered by us........ 6,250,000 shares Common stock to be outstanding 30,341,293 shares, excluding the shares after this offering.............. that may be issued after this offering upon the exercise of warrants and options as described below. Use of proceeds................... For general corporate purposes, including working capital to fund operating losses and capital expenditures. See "Use of Proceeds" on page 13. Risk factors ..................... For a discussion of certain risks you should consider before investing in our common stock, see "Risk Factors" beginning on page 5. Nasdaq National Market symbol..... DWRK </TABLE> Shares that May Be Issued After this Offering Upon the Exercise of Options and Warrants You should be aware that we are permitted, and in some cases obligated, to issue shares of common stock in addition to the common stock to be outstanding immediately after this offering. If and when we issue these shares, the percentage of common stock you own will be diluted. The following is a summary of additional shares of common stock that we have currently approved for issuance upon the exercise of options and warrants after this offering: . 2,375,425 shares of common stock that may be issued upon exercise of outstanding options as of December 31, 1999, at a weighted average exercise price of $0.44 per share; . 4,512,335 shares of common stock reserved for future awards under our stock option plan; . 750,000 shares of common stock reserved for future purchase under our stock purchase plan; . 235,192 shares of our common stock issuable upon exercise of warrants outstanding as of December 31, 1999, at a weighted average exercise price of $1.09 per share; . a number of shares equal to 10% of the shares of common stock we are selling in this offering issuable upon exercise of warrants outstanding as of December 31, 1999, at the initial public offering price; and . 618,261 shares of our common stock issuable upon exercise of warrants outstanding as of December 31, 1999, at an exercise price of $8.36 per share. Summary Financial Data The following table summarizes financial and other information for our business. You should read this information together with our financial statements and the notes to those statements beginning on page F-1 and the information under "Selected Financial Data" beginning on page 16 and "Management's Discussion and Analysis of Financial Conditions and Results of Operations" beginning on page 18. <TABLE> <CAPTION> March 18, 1998 Three Months Ended (inception) (unaudited) through ----------------------------------------------- Year Ended December 31, March 31, June 30, September 30, December 31, December 31, 1998 1999 1999 1999 1999 1999 ------------ --------- -------- ------------- ------------ ------------ (dollars in thousands, except per share data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data Revenues ............... $ 33 $ 112 $ 166 $ 561 $ 1,078 $ 1,917 Gross (loss) profit..... (28) (28) (64) 64 358 330 Operating expenses...... 1,455 1,097 1,855 3,849 9,254 16,055 -------- -------- -------- -------- ---------- ---------- Operating loss.......... (1,483) (1,125) (1,919) (3,785) (8,896) (15,725) Interest income, net.... 16 12 62 114 140 328 -------- -------- -------- -------- ---------- ---------- Net loss................ $ (1,467) $ (1,113) $ (1,857) $ (3,671) $ (8,756) $ (15,397) ======== ======== ======== ======== ========== ========== Basic and diluted net loss per share......... $ (6.13) $ (2.36) $ (3.15) $ (4.05) $ (4.43) $ (15.62) ======== ======== ======== ======== ========== ========== Weighted average shares of common stock--basic and diluted............ 239,370 471,282 590,032 906,608 1,975,564 985,871 Pro forma basic and diluted net loss per share.................. $ (1.22) ========== Pro forma weighted average shares of common stock--basic and diluted................ 12,659,847 </TABLE> The pro forma basic and diluted net loss per share is computed by dividing the net loss by the sum of the weighted average number of shares of common stock outstanding plus the number of shares of common stock that will be outstanding upon the automatic conversion of all shares of preferred stock actually outstanding as of December 31, 1999 and after giving effect to a 4- for-1 stock split that occurred in October 1999. The assumed conversion of the preferred stock has an antidilutive effect on the pro forma basic and diluted net loss per share. The following table is a summary of our balance sheet data: . on an actual basis; and . on an unaudited as adjusted basis to reflect the sale of 6,250,000 shares of common stock in this offering at an assumed initial public offering price of $12.00 per share, after deducting estimated underwriting discounts and commissions and offering expenses. For more information, refer to "Use of Proceeds" on page 13 and "Capitalization" on page 14. <TABLE> <CAPTION> As of December 31, 1999 ------------------- Actual As Adjusted ------- ----------- (in thousands) <S> <C> <C> <C> Balance Sheet Data Cash and cash equivalents............................... $33,751 $102,001 Working capital......................................... 31,788 100,038 Total assets............................................ 36,918 105,168 Total stockholders' equity ............................. 33,182 101,432 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001103648_furniture_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001103648_furniture_prospectus_summary.txt
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING FURNITURE.COM AND FURNITURE.COM'S CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. FURNITURE.COM, INC. OUR BUSINESS Furniture.com is a leading online retailer of furniture and home accessories. Our goal is to revolutionize the home furnishing and decorating experience by offering a comprehensive, personalized and service-oriented solution for consumers. Our initial product focus has been furniture, the foundation of home furnishings and the category around which we build customer relationships. We offer furniture for every room of the home, including beds, tables, desks, entertainment centers and upholstered sofas and chairs. As part of our complete home solution, we also sell accessories, including lamps, wall art, rugs, mattresses and linens. We offer more than 20,000 selections from more than 200 manufacturers. We believe this represents one of the largest selections of home furnishings available at any single destination. Our net sales have grown to $10.9 million in the year ended December 31, 1999. In addition, as of December 31, 1999, our customers had placed orders for $7.5 million of home furnishings that are being manufactured or are already in transit. The number of unique visitors to our Web site reached approximately 2,000,000 during December 1999, according to our internal database. According to Media Metrix, Furniture.com had greater than four times the number of unique visitors than the next most visited home furnishings shopping Web site for the month of December 1999. The home furnishings industry is large and highly fragmented. According to Furniture Today, the top 10 furniture retailers accounted for less than 15% of the retail furniture market in 1998. According to the U.S. Census Bureau, in 1998 the home furnishings market exceeded $150 billion, and the market for household furniture and home accessories was $72 billion. The home furnishings manufacturing industry is also extremely fragmented. According to the most recent U.S. Department of Commerce Economic Census, there were more than 5,500 manufacturers of household furniture in 1997, 95% of which had annual sales of less than $10 million. Given the structure and limitations of the home furnishings industry, we believe that consumers face significant challenges furnishing and decorating their homes through traditional retail channels. These challenges include inconvenience, limited information and decorating advice and poor customer service follow through. We intend to make Furniture.com the leading destination for finding all the comforts of home. Through our easy to use Web site, we provide consumers a destination to receive personalized decorating advice, purchase our products and services, and access a wide variety of information and resources. We believe that Furniture.com provides: - superior convenience through our broad product selection, simplified searching capabilities and QuickShip program; - personalized customer experiences through our Design Consultants, personal shopping service, tailored product selections, individualized online showrooms and targeted editorial content and promotional offers; - detailed product information and decorating advice to empower customers to make confident home furnishing and decorating decisions; - enhanced visualization of room solutions through our dedicated photography studio, Web site tools to experiment with room layout and fabric options, and free swatch samples to enable customers to see and feel fabrics; - superior customer service throughout the Furniture.com experience; and - compelling value to our customers through lower prices and a favorable shopping experience as compared to traditional retail stores. We capitalize on the features and functionality of the Internet to provide a comprehensive home furnishing and decorating solution. Forrester Research estimates that online revenues from home furnishings sales will grow from approximately $518 million in 1999 to $6.4 billion in 2003, a compound annual growth rate of approximately 87%. Our solution combines Internet technology with our superior merchandising and marketing expertise and key strategic relationships to create a compelling customer experience. OUR GROWTH STRATEGY We strive to be the first nationally branded home furnishing and decorating online destination. To implement our growth strategy we intend to: - ESTABLISH A POWERFUL BRAND. Capitalize on the lack of established national brands in the home furnishings industry to further develop Furniture.com as a nationally recognized brand. - REVOLUTIONIZE SUPPLY CHAIN DYNAMICS. Develop an Internet-based network that will serve as a communications platform connecting us with our product manufacturers and freight carriers. We believe that this network will enable us to shorten the time between a customer's order submission and product delivery. - LEVERAGE DATA-DRIVEN MERCHANDISING. Leverage our database of customer browsing and shopping behavior to continually optimize product selection and presentation and to identify products best suited to be offered on a QuickShip basis. - ENHANCE PRIVATE LABEL PROGRAM. Rapidly expand our private label business, which we believe will enable us to enhance customer loyalty and realize higher margins over time. - OFFER UNPARALLELED VISUALIZATION. Utilize rapidly evolving technologies to enable customers to more vividly and realistically create room solutions online. - EXPAND INTO OTHER PRODUCT CATEGORIES AND CHANNELS. Leverage our brand, operating infrastructure and customer relationships to expand into other home furnishings categories and channels. CORPORATE INFORMATION AND HISTORY Furniture.com was incorporated in Delaware under the name FurnitureSite, Inc. on June 18, 1998. On January 14, 1999, we changed our name to Furniture.com, Inc. We have one wholly owned subsidiary, Empire Furniture Warehouse, Inc., which we purchased on June 18, 1998. Empire Furniture Warehouse, Inc. was incorporated in Massachusetts on January 2, 1959. Our principal executive offices are located at 1881 Worcester Road, Framingham, Massachusetts 01701. Our telephone number at that location is (800) 687-0939. Our Internet address is WWW.FURNITURE.COM. The information contained on our Web site is not incorporated by reference in this prospectus. Furniture.com, FurnitureSite, Furniture Finder, My Selections, QuickShip, Room Planner and Style Guide are trademarks of Furniture.com, Inc. All other brand names or trademarks appearing in this prospectus are the property of their respective holders. THE OFFERING <TABLE> <S> <C> Shares offered by Furniture.com Shares to be outstanding after the (1) offering.................................... Use of proceeds............................. For capital expenditures relating to advertising, technology and system upgrades, the redemption of shares of our Series A preferred stock and general corporate purposes, principally working capital and other capital expenditures. See"Use of Proceeds". Nasdaq National Market symbol............... "FURN" </TABLE> - ------------------------ (1) The number of shares of common stock to be outstanding after the closing of this offering is based on 6,253,027 shares of common stock outstanding on December 31, 1999 plus 17,850,799 shares of common stock issuable upon conversion of outstanding convertible common stock and our preferred stock as of such date, except for our Series A preferred stock which we will redeem upon the closing of this offering. This number does not include 4,500,000 shares of common stock reserved for issuance under our stock plan, of which 2,242,810 shares were subject to options outstanding on December 31, 1999 with a weighted average exercise price of $5.60 per share. This number also does not include 202,464 shares issuable upon the exercise of warrants outstanding on December 31, 1999. See "Management-Stock Plan" and Note 9 to notes to financial statements. Throughout this prospectus, we use both "Class B common stock" and "common stock" to refer to our Class B common stock, which will be renamed common stock upon completion of the offering described in this prospectus. Unless otherwise specifically stated, information in this prospectus: - assumes the underwriters do not exercise their over-allotment option; - does not reflect a reverse stock split of common stock that we plan to effect prior to the closing of this offering; and - assumes our Series C preferred stock converts into common stock on a one-for-one basis. In the event that the initial public offering price per share is less than $11.10, the number of shares of common stock into which a single share of Series C preferred stock will convert shall increase until such number of shares multiplied by the initial public offering price per share in this offering equals $11.10. SUMMARY FINANCIAL INFORMATION The following table summarizes our statement of operations data. This financial information reflects the results of operations of Empire Furniture Warehouse, Inc. (Predecessor Company) from January 1, 1995 to June 17, 1998 and the results of operations of Furniture.com, Inc. and Empire Furniture Warehouse, Inc. (together, the Company) on a consolidated basis since June 18, 1998, the date we acquired Empire Furniture Warehouse and commenced operations. <TABLE> <CAPTION> PREDECESSOR COMPANY THE COMPANY ---------------------------------------------------- --------------------------------- YEAR ENDED PERIOD FROM DECEMBER 31, PERIOD FROM JUNE 18, 1998 TO YEAR ENDED --------------------------------- JANUARY 1, 1998 DECEMBER 31, DECEMBER 31, 1995 1996 1997 TO JUNE 17, 1998 1998 1999 ----------- -------- -------- ---------------- ---------------- -------------- (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Net revenues........................... $1,314 $1,389 $1,728 $ 1,511 $ 2,180 $ 10,904 Cost of revenues....................... 812 895 1,082 1,498 1,827 8,837 ------ ------ ------ ------- --------- ---------- Gross profit........................... 502 494 646 13 353 2,067 Operating expenses (1)................. 474 485 639 369 4,138 46,430 ------ ------ ------ ------- --------- ---------- Operating income (loss)................ 28 9 7 (356) (3,785) (44,363) Net income (loss)...................... $ 13 $ 7 $ 5 $ (361) $ (3,733) $ (43,710) ====== ====== ====== ======= ========= ========== Net income (loss) attributable to common stockholders.................. $ 13 $ 7 $ 5 $ (361) $ (3,733) $ (46,460) ====== ====== ====== ======= ========= ========== Basic and diluted net income (loss) per common share......................... $ 1.73 $ .93 $ .67 $(48.13) $ (.50) $ (6.01) Shares used to compute basic and diluted net income (loss) per common share................................ 7,500 7,500 7,500 7,500 7,472,020 7,730,413 Pro forma basic and diluted net loss per common share..................... $ (.49) $ (2.53) Shares used to compute pro forma basic and diluted net loss per common share................................ 7,543,880 17,254,833 </TABLE> - ------------------------------ (1) Includes non-cash compensation expense relating to deferred compensation of $65,000 in the period from June 18, 1998 to December 31, 1998 and $463,000 for the year ended December 31, 1999. The following table is a summary of our balance sheet data as of December 31, 1999 on an actual basis and on a pro forma as adjusted basis after giving effect to the conversion of all outstanding shares of our convertible common stock and our preferred stock into shares of common stock, except for our Series A preferred stock which we will redeem upon the closing of this offering, and adjusted to reflect the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting the underwriters discount and estimated offering expenses. The table excludes 202,464 shares issuable upon exercise of outstanding warrants. <TABLE> <CAPTION> DECEMBER 31, 1999 ----------------------- PRO FORMA ACTUAL AS ADJUSTED -------- ------------ (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $31,440 Working capital............................................. 27,240 Total assets................................................ 43,811 Long-term debt, net of current portion...................... 348 Redeemable preferred stock.................................. 3,010 Redeemable convertible preferred stock...................... 76,337 Total stockholders' equity (deficit)........................ (49,185) </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001103709_primis-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001103709_primis-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION IN THIS PROSPECTUS. YOU SHOULD CAREFULLY READ THE ENTIRE PROSPECTUS, INCLUDING THE RISK FACTORS AND THE FINANCIAL STATEMENTS, BEFORE DECIDING WHETHER TO INVEST IN OUR COMMON STOCK. PRIMIS, INC. OUR BUSINESS We are a business-to-business, web-based provider of property information services. We provide appraisals, home inspections, title services, flood determinations, energy audits, and other related property information services, all of which our clients can order, monitor, receive and pay for over the Internet using a standard web browser. We provide our services to national, regional and local mortgage lenders and brokers, Internet lenders, specialized lenders, utility companies and real estate professionals. Currently, the property information services industry is fragmented, with thousands of small, regionally focused appraisal, inspection and title services companies and few national companies. Our industry experience indicates that these smaller companies generally lack the resources to invest heavily in service delivery infrastructure and that service quality can vary significantly between firms. We believe that we provide our clients the following key benefits: NATIONAL SERVICE DELIVERY CAPABILITIES. We are a single, national provider of property information services. We currently have company-owned offices in over 40 metropolitan markets, including 29 of the top 50 residential real estate markets in the country. We have acquired 24 businesses since 1995, including 12 since the beginning of 1999. We expect to be in markets covering over 50% of all U.S. mortgage loan originations by the end of 2000, primarily through acquisitions but also through organic growth. We service customers in markets where we do not have company-owned operations through our PRIMISnet network of contract appraisers and home inspectors. FLEXIBLE WEB-BASED PLATFORM. Our web-based platform enables our clients to place orders, check the status of orders, receive reports in electronic format, receive invoices and pay for services, all by using a standard web browser. This platform is flexible because it is scalable, which enables us to accomodate new databases and applications, and can be customized for individual clients. Although we derived approximately 12% of our 1999 revenues from our web-based platform, we are continually migrating our clients to this platform, and web-based transactions represented approximately 26% of our revenues for January and February 2000. Our flexible platform gives our larger clients the option to bypass the web site and connect their loan origination systems directly with the PRIMIS engine, our transaction processing technology. This direct connection will enable these clients to order our services when they originate loans without additional data entry, and thereby encourage them to outsource more of their property information services to us. HIGH, CONSISTENT QUALITY STANDARDS. We maintain a quality assurance program designed to ensure that service across all of our offices conforms to our quality standards. This quality assurance includes senior-level review of all reports, a dedicated quality assurance team and continuing education and training for all of our professionals. In addition, we deploy technology internally to automate service delivery, improve the productivity of our field employees and improve the quality and comprehensiveness of our reports. FAST, EFFICIENT SERVICE DELIVERY. We deliver our property information services to our clients quickly and efficiently. Our web-based platform eliminates the need for many of the time-consuming faxes, phone calls, paper deliveries and other delays associated with searching for local service providers, scheduling appointments, ordering services, checking order status and receiving reports. This enables us to accelerate the turnaround time for delivery of our services. As an example, we can usually provide a full appraisal to our national clients in 5 days or less, whereas many of these clients have indicated to us that other service providers typically require 7 to 14 days. We intend to offer our larger clients one-day full appraisal services in certain areas. HISTORY OF LOSSES; CONTROL BY MANAGEMENT We have not operated with a profit since 1993. We have incurred net losses of $17.5 million from our inception through December 31, 1999. In 1999, we had a net loss of $12.6 million and a pro forma net loss of $15.5 million. We anticipate that we will incur losses in the forseeable future as we continue to invest in our e-commerce and administrative infrastructures and expand our operations. Our officers, directors and affiliates, who will have the power to vote approximately 55.0% of our outstanding common stock after this offering, will be able to control the election of directors and other matters requiring shareholder approval. OUR MARKET OPPORTUNITY Business-to-business trade over the Internet is projected to accelerate into a period of exponential growth through 2003. Forrester Research forecasts that inter-company Internet trade will double every year, growing from $43 billion in 1998 to $1.5 trillion in 2003. We believe that our web-based technology platform, national service delivery capabilities and quality control will position us well to capture a significant portion of the business-to-business market for property information services. Based on available industry estimates with respect to the volume of mortgage loan originations and our experience in the industry with respect to the usage of appraisals, home inspections, flood determinations and title services in connection with mortgage loan originations, we believe that the total market for our core property information services was in excess of $5.5 billion in 1999. We also believe there are additional market opportunities in the other property information services we provide, such as energy audits, commercial appraisals, appraisal review services, construction inspections and environmental inspections. There are two trends occurring in the mortgage lending industry which we believe will drive demand for our services. First, the mortgage lending industry is undergoing significant consolidation. According to Faulkner & Gray, in 1998, the top 20 residential lenders based on origination dollar volume originated, underwrote or funded approximately 50% of all residential mortgage loans in the United States. We believe that thousands of fragmented local appraisal, inspection and other property information service firms cannot well serve this consolidating lending industry. We believe these major lenders will increasingly seek to consolidate their property information services with fewer providers and will demand technology-based cost and time efficiencies and consistent quality. Second, Internet lenders have emerged which, according to Forrester Research, will capture a 10% share of the mortgage lending market by 2003. This trend will intensify competition, which we believe will further drive demand for faster turnaround times and cost-efficient services. OUR STRATEGY Our objective is to be the leading provider of property information services in the United States. To accomplish this objective, we intend to do the following: - Refine our flexible web-based platform to deliver our services more efficiently to our clients, and continue to develop our internal technology to improve productivity and quality; - Migrate our clients, a majority of which still obtain services through traditional phone and fax channels, to web-based service delivery; - Expand our geographic market presence, or national footprint, primarily through acquisitions but also through organic growth; - Aggressively target national accounts that we believe will benefit most from a national provider of efficiently delivered, high-quality property information services; - Develop and monetize the valuable database of property information that we are compiling into new valuation tools and service offerings; and - Evolve our PRIMISnet network of local contract appraisers and inspectors into close affiliates with whom we share our technology and clients in exchange for local business referrals and property data. ------------------------ We were incorporated in Georgia in 1990. Our principal executive offices are located at 11475 Great Oaks Way, Suite 320, Alpharetta, Georgia 30022, telephone (770) 777-8600. Our web site is located at www.primis.com. INFORMATION CONTAINED ON OUR WEB SITE IS NOT A PART OF THIS PROSPECTUS OR THE REGISTRATION STATEMENT OF WHICH IT IS A PART. We have federal registrations for the following service marks and trademarks: INSPECTECH-Registered Trademark-, VISTA-Registered Trademark- and VISTA ADVANCED INSPECTION MANAGEMENT SYSTEM-Registered Trademark-. We have applied for federal registration for or claim the following service marks and trademarks: PRIMIS(SM) and design, PRIMIS SNAPSHOT(TM) and XPEDITE(SM). All other trademarks, tradenames and service marks appearing in this prospectus are the property of other entities. ------------------------ THE OFFERING <TABLE> <S> <C> Common stock offered......................... 6,200,000 shares Common stock to be outstanding after this offering................................... 25,274,216 shares Use of proceeds.............................. Approximately $13.6 million to fund development of our technology, infrastructure, personnel and support; up to $9.7 million to repay indebtedness that may remain outstanding after this offering; approximately $4.0 million to fund sales and marketing activities; and approximately $40.2 million for acquisitions, working capital and other general corporate purposes. Proposed Nasdaq Stock Market symbol.......... PRMZ </TABLE> - ------------ The number of shares of common stock outstanding after this offering is based on 14,420,401 shares outstanding as of February 29, 2000 plus: - 6,200,000 shares being sold by us in this offering; - 3,411,574 shares to be issued upon conversion of all of our outstanding convertible preferred stock, based on aggregate stated values and accrued dividends as of February 29, 2000; and - 1,242,241 shares to be issued upon conversion of our November 1999 convertible notes, which are mandatorily convertible upon the closing of this offering, based on aggregate principal amount and accrued interest as of February 29, 2000. The number of shares of common stock outstanding after this offering excludes: - any shares issuable upon the exercise of the underwriters' over-allotment option; - 3,151,615 shares issuable upon the exercise of options outstanding as of February 29, 2000 with a weighted average exercise price of $3.73 per share; - 225,000 shares issuable upon the exercise of options outstanding as of February 29, 2000 with a weighted average exercise price equal to the initial public offering price; - 851,058 shares issuable upon the exercise of warrants outstanding as of February 29, 2000 with a weighted average exercise price of $8.21 per share; - 1,193,383 shares issuable upon the conversion of our January 2000 convertible notes, which are not mandatorily convertible upon the closing of this offering, based on aggregate principal amount and accrued interest as of February 29, 2000; and - shares issuable in payment of dividends on all of our convertible preferred stock and interest on all of our convertible notes accrued after February 29, 2000. CONVENTIONS THAT APPLY TO THIS PROSPECTUS Unless we indicate otherwise, all information in this prospectus: - reflects a 1.8622-for-1 stock split in the form of a stock dividend relating to our common stock effective April 4, 2000; - assumes no exercise by the underwriters of their over-allotment option to purchase up to 930,000 additional shares of our common stock; - reflects the conversion of all our outstanding convertible preferred stock into 3,411,574 shares of our common stock upon the closing of this offering, based on aggregate stated values and accrued dividends as of February 29, 2000; and - assumes the conversion of our November 1999 convertible notes into 1,242,241 shares of our common stock upon the closing of this offering, based on aggregate principal amount and accrued interest as of February 29, 2000. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following tables set forth summary financial data for our company. You should read this information together with the financial statements and notes to those statements appearing elsewhere in this prospectus and the information contained in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1999 1996 1997 1998 1999 PRO FORMA(1) -------- -------- -------- -------- ------------- <S> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenues.................................................... $ 1,922 $ 4,155 $14,356 $ 23,416 $ 37,429 Cost of revenues............................................ 1,001 2,537 7,824 13,071 20,172 -------- ------- ------- -------- -------- Gross profit................................................ 921 1,618 6,532 10,345 17,257 Operating expenses Selling, general and administrative....................... 1,862 2,518 7,350 20,486 27,309 Research and development.................................. -- 122 206 -- -- Depreciation and amortization............................. 175 218 522 2,265 5,103 -------- ------- ------- -------- -------- Total operating expenses................................ 2,037 2,858 8,078 22,751 32,412 -------- ------- ------- -------- -------- Loss from operations........................................ (1,116) (1,240) (1,546) (12,406) (15,155) Other income (expense)...................................... 15 41 131 (237) (280) -------- ------- ------- -------- -------- Loss before provision for income taxes...................... (1,101) (1,199) (1,415) (12,643) (15,435) Provision for income taxes.................................. -- -- -- -- 84 -------- ------- ------- -------- -------- Net loss.................................................... $ (1,101) $(1,199) $(1,415) $(12,643) $(15,519) ======== ======= ======= ======== ======== Preferred stock dividend.................................... -- -- -- (229) -- Net loss applicable to common shareholders.................. (1,101) (1,199) (1,415) (12,872) (15,519) ======== ======= ======= ======== ======== Net loss per common and common equivalent share--basic and diluted................................................... $ (.60) $ (.23) $ (.15) $ (.99) $ (.67) ======== ======= ======= ======== ======== Weighted average common and common equivalent shares outstanding--basic and diluted............................ 1,827 5,214 9,151 13,013 23,007 OTHER FINANCIAL DATA: EBITDA(2)................................................... $ (941) $(1,023) $(1,024) $(10,141) $(10,052) Cash flows from: Operating activities...................................... (1,068) (1,237) (1,935) (8,497) -- Investing activities...................................... (93) (409) (4,296) (5,201) -- Financing activities...................................... 1,187 1,655 9,238 19,007 -- </TABLE> <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 1999 ---------------------------------------- PRO PRO FORMA ACTUAL FORMA(3) AS ADJUSTED(4) -------- ----------- --------------- (UNAUDITED) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 8,994 $ 6,081 $ 73,573 Working capital............................................. (2,818) (6,795) 70,708 Total assets................................................ 27,596 42,201 109,693 Long-term debt, less current portion........................ 3,098 3,874 3,874 Series A convertible preferred stock........................ 4,543 0 0 Series B convertible preferred stock........................ 4,402 0 0 Shareholders' equity........................................ 165 31,024 98,515 </TABLE> - --------------- (1) The pro forma statements of operations data give effect to all of our acquisitions that occurred after January 1, 1999 as if they had occurred on January 1, 1999, and give effect to the issuances of our outstanding convertible preferred stock and convertible notes issued after January 1, 1999 as if such issuances had occurred on: (i) January 1, 1999 for the portion of such issuances which were used to fund acquisitions or (ii) the date of issuance for securities whose proceeds were not used to fund acquisitions. (2) EBITDA as used in this prospectus represents earnings before interest, income taxes and depreciation and amortization. Although EBITDA is not a measure of financial performance under generally accepted accounting principles, we believe it is a common measure used by analysts and investors to compare a company's results with those of similar companies as well as to evaluate the capacity of a company to service its debt obligations. EBITDA is not net income, operating income or cash flows, and items excluded from EBITDA are significant components of our financial performance. Our computation of EBITDA may not be comparable to other similarly titled measures of other companies. EBITDA should not be construed as an alternative to net income, operating income or cash flows as determined in accordance with generally accepted accounting principles. (3) The pro forma balance sheet data give effect to all of our acquisitions that occurred after December 31, 1999 as if they had occurred on December 31, 1999, and give effect to the issuance of our January 2000 convertible notes, and the conversion of all of our outstanding convertible preferred stock and our November 1999 convertible notes as if such events had occurred on December 31, 1999. (4) The pro forma as adjusted balance sheet data reflect the pro forma data adjusted for the sale of 6,200,000 shares of common stock offered by us in this offering at an assumed initial public offering price of $12.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001103740_techies_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001103740_techies_prospectus_summary.txt
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+PROSPECTUS SUMMARY Because this is only a summary, it does not contain all of the information that may be important to you. You should read the entire prospectus, including "Risk Factors" and the financial statements and the related notes, before deciding to invest in our common stock. techies.com inc. Our Business Through our techies.com Web site, we provide an online destination for technology professionals and for businesses that want to recruit, market to and interact with these professionals. techies.com allows technology professionals who become our members to pursue career opportunities, develop proactive relationships with potential employers and obtain relevant content on technology-related issues. We also offer large and small companies access to an extensive pool of technology professionals, customized recruiting services, access to market intelligence and a marketplace to sell technology-related products and services. We believe our Web site is characterized by the following: large member populations in our local markets; high number of minutes spent by members visiting our site; detailed, up-to-date member data and demographic information; and ongoing direct e-mail communications with our members. We currently generate substantially all of our revenues from subscription fees received from client companies that maintain a site on techies.com in order to recruit and communicate with the technology professionals who comprise our member base. Although we currently generate limited revenues from e-commerce opportunities, including training, advertising and sponsorships, we expect that these activities, as well as the sale of proprietary market research data, will be integral to our future business operations. We have designed our products and services specifically for the technology professional's unique professional and personal needs. techies.com provides an interactive environment in which our growing member base can target, communicate and network with approximately 1,400 local and national employers on an ongoing basis. We offer our members the opportunity to advance their professional development and careers while preserving confidentiality regarding their personal information. We also offer our members over 300 affordable technical and professional development courses which are available online 24 hours a day, seven days a week. We believe that techies.com will continue to earn the trust and loyalty of technology professionals who will increasingly rely on us for their professional development, content and community needs. We also believe that it is our member base that attracts companies that will pay for access to our services. We offer companies creative recruiting services, promotional opportunities and market data research focusing on the rapidly growing and highly specialized markets for technology professionals. Through our Web-based recruiting model, we enable our clients to create a customized Web site to promote their company, effectively and economically manage their recruiting processes and develop ongoing relationships with select members in each of our geographic markets. Our extensive member data base, which includes detailed information regarding demographics, skills, competencies, job preferences and education, offers companies current and comprehensive market data to assist them in understanding, measuring and tracking the technology professional community. Likewise, advertisers and marketers can utilize techies.com to promote and sell products and services to technology professionals in a highly targeted manner. We have grown our business by launching community sites targeting U.S. metropolitan areas. As of February 29, 2000, we launched community sites in 39 geographic markets, including the largest metropolitan areas in the country, and expect to add additional international markets during 2000. We have launched local sales teams and marketing initiatives in 34 of these 39 domestic markets. We also intend to grow our business by entering into marketing alliances and licensing agreements to increase our member base and revenue opportunities. To date, we have entered into co-branded site agreements with two of the leading technology Web sites, ZDNet and CNET, pursuant to which we are the exclusive provider of technology career information on each of these sites. We believe these agreements will allow us to increase our membership base, expand our distribution network, enhance the value of techies.com for our clients and increase the recognition of our brand name. Our Operating Results and History of Losses We have a limited operating history and we have incurred net losses since our formation. We incurred net losses of approximately $372,000 in 1996, $428,000 in 1997, $3.2 million in 1998 and $37.7 million in 1999. As of December 31, 1999, our total losses incurred since inception were approximately $42.3 million. We expect to incur significant expenditures in the future in order to expand our business and compete effectively. As a result, we expect to incur substantial operating losses and negative operating cash flow for the forseeable future. Our client and member base, as well as our revenues have been growing rapidly. As of February 29, 2000, we had approximately 300,000 members across the United States, an increase from approximately 210,000 on December 31, 1999 and approximately 26,600 on December 31, 1998. In addition, as of February 29, 2000, we had approximately 1,400 clients, an increase from approximately 1,180 on December 31, 1999 and approximately 225 on December 31, 1998. Our revenues were $6.5 million in 1999, an increase from $1.3 million in 1998 and $321,000 in 1997. Market Opportunity Technology is the largest and fastest growing segment of the U.S. economy. The rapid growth of computer technology and the Internet has created a scarcity of technology professionals who build, support and deliver technology-enabled products and services. In today's highly competitive market for technology professionals, companies are being forced to spend more time and money to attract and retain technology professionals. In addition, advertisers and marketers are seeking more effective channels to market to technology professionals, given their attractive economic and demographic characteristics. At the same time, technology professionals are seeking a comprehensive and trusted source they can rely on for career opportunities, professional development training and relevant content and information regarding the technology professional community. Our Strategy Our objective is to be the leading online destination for technology professionals and for businesses that want to recruit, market to and interact with these professionals. Key elements of our strategy include: expanding recruiting products and services available to employers; providing additional content and community features to our members; capitalizing on multiple revenue opportunities; increasing market penetration and expanding internationally; and aggressively promoting the techies.com brand. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Recent Development On March 23, 2000, we completed our acquisition of Employer Direct, Inc., which does business under the name Techound, for an aggregate purchase price of 180,000 shares of our common stock. Techound, based in Vienna, Virginia, operates a Web site targeted at technology professionals in the Washington, D.C. metropolitan area and publishes a quarterly journal that profiles its corporate clients and contains articles on technology topics. As of March 23, 2000, Techound had approximately 31,000 individual members and approximately 150 corporate clients. As part of the acquisition, we also added 13 employees. We believe this acquisition will enable us to expand our member and client bases in the Washington D.C. metropolitan area. Our History We were incorporated as a Minnesota corporation in September 1994 under the name Relevant Information and Training Systems, Inc. We changed our corporate name to techies.com inc. in March 1999. Prior to the closing of this offering, we intend to reincorporate as a Delaware corporation. We have applied for or received trademark and/or service mark registration for, among others, the marks "techies.com" and "Techies Day". Other trademarks and service marks appearing in this prospectus are the property of their respective holders. Our principal executive offices are located at 7101 Metro Boulevard, Edina, MN 55439. Our telephone number at that location is (612) 944-1020. Our Web site is located at www.techies.com. Information contained on our Web site does not constitute part of this prospectus. AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Except as otherwise indicated, information in this prospectus is based on the following assumptions: the conversion of each outstanding share of our convertible preferred stock into one share of our common stock upon completion of this offering; and no exercise of the underwriters' over-allotment option. (1)The pro forma amounts give effect to the following: the issuance of 2,617,469 shares of Series C convertible preferred stock for cash proceeds of approximately $22.2 million; and the automatic conversion of all outstanding shares of Series A, Series B and Series C convertible preferred stock into 13,103,594 shares of common stock upon the closing of this offering. (2)The pro forma as adjusted amounts reflect our sale of 6,000,000 shares in this offering at an initial public offering price of $11.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses. 7101 Metro Boulevard Edina, MN 55439 Telephone: (612) 944-1020 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Dan Frawley Chief Executive Officer and President techies.com inc. 7101 Metro Boulevard Edina, MN 55439 Telephone: (612) 944-1020 Facsimile: (612) 253-3778 (Name, address, including zip code, and telephone number, including area code of agent for service)
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001103772_replaytv_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001103772_replaytv_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information in this prospectus, but it may not contain all of the information that is important to you. To better understand this offering, and for a more complete description of this offering, you should read this entire prospectus carefully, including the "Risk Factors" section and the financial statements and the notes to those statements, which are included elsewhere in this prospectus. Information contained in our web site, located at www.replaytv.com, does not constitute part of this prospectus. REPLAYTV ReplayTV is a media company that empowers television viewers to watch what they want when they want. Our ReplayTV Service is delivered through a digital video recorder that connects to a viewer's television set and provides a living room portal through which viewers can easily access, navigate, control and store television programming. We believe the ReplayTV Service will transform the way consumers access television programming, advertising and, ultimately, commerce services. We also believe our portal creates a new, more effective medium for advertisers, content providers and cable and satellite system operators to target consumers. Based on ReplayTV-sponsored survey data, viewers using the ReplayTV Service watch and record more hours of television per week and find television viewing more appealing than before using the ReplayTV Service. We believe this is because the ReplayTV Service gives viewers greater choice and more control over their television viewing. The ReplayTV Service has been developed to offer a variety of benefits: . Benefits to Viewers. The ReplayTV Service personalizes television viewing by enabling viewers to: never miss their favorite shows; locate, capture and record the best in television from thousands of weekly programming choices; control live TV; and enjoy personal television services with no monthly fees. . Benefits to Content Providers. The ReplayTV Service allows content providers to reach a larger audience because viewers will no longer miss their favorite shows. In addition, the ReplayTV Service enables television programmers and broadcasters to pro-actively compile and promote their content as part of their efforts to achieve greater audience growth, loyalty, recognition and measurement. . Benefits to Advertisers. We believe that our ReplayTV Service provides advertisers a more effective way to deliver information to consumers, a more efficient way to spend advertising budgets and a better way to target audiences and identify, monitor and respond to consumers' programming and purchasing preferences. Our business plan is to provide a wide range of future innovative advertising services, such as graphic and full-motion video advertisements on the Replay Guide and other viewer interfaces, transitional advertisements when the pause or other features are activated, and lead-in or lead-out advertisements inserted at the beginning or end of recorded programs. . Benefits to Cable and Satellite System Operators. Key benefits for cable and satellite system operators include opportunities to reduce churn and grow subscriber bases, enhanced appeal of premium offerings, enhanced appeal of pay-per-view offerings, and a platform for new services to better utilize broadcast capacity. We announced our ReplayTV Service in January 1999, began shipment of our digital video recorders in April 1999 and began distribution in major U.S. markets through leading consumer electronics retailers in April 2000. By relying on third-party consumer electronics companies to manufacture, market and sell ReplayTV-enabled products, we intend to focus our creative resources on promoting and enhancing the ReplayTV Service. We anticipate generating revenues from the sale of advertisements, media sponsorships, premium subscription services, near video-on-demand services and TV-commerce. We continue to pursue strategic relationships with television programmers, advertising agencies and other potential media partners to expand our advertising and sponsorship opportunities, offer unique programming content, differentiate the ReplayTV Service and enhance the ReplayTV brand. The ReplayTV Service currently features NBC, Showtime and Turner ReplayZones. Our success depends upon entering into strategic manufacturing and distribution relationships to drive market penetration of ReplayTV-enabled products and grow our installed base of viewers. For example, we have entered into an agreement with Matsushita-Kotobuki Electronics Industries, Ltd., or MKE, a subsidiary of Matsushita Electric Industrial Co., Ltd., the largest manufacturer of VCRs sold in North America. MKE has begun marketing and selling the ShowStopper(TM), a ReplayTV-enabled digital video recorder, under the Panasonic brand featuring the ReplayTV logo. MKE is also working to develop new consumer electronics devices that incorporate ReplayTV technology. We are also in discussions with a number of other consumer electronics companies, cable and satellite system operators and manufacturers of cable and satellite set-top boxes. ---------------- We are a development stage company, had shipped only about 9,000 ReplayTV- enabled digital video recorders as of March 31, 2000, and have recognized no operating revenues to date from any sources. We have incurred significant losses to date and expect to incur significant losses and negative cash flow for the foreseeable future. We were incorporated in California in August 1997 and changed our name to Replay Networks, Inc. in June 1998. We changed our name to ReplayTV, Inc. in January 2000 and intend to reincorporate in Delaware prior to the completion of this offering. Our principal executive offices are located at 1945 Charleston Road, Mountain View, California 94043. Our telephone number at that location is (650) 210-1000. THE OFFERING <TABLE> <C> <S> Common stock offered................................ 8,500,000 shares Common stock to be outstanding after this offering.. 52,195,878 shares Use of proceeds..................................... We intend to use the net proceeds of this offering for working capital and general corporate purposes, including: advertising to promote the ReplayTV Service and the ReplayTV brand; subsidies related to the distribution of ReplayTV- enabled products; product development; and expansion of our sales, marketing and service capabilities. See "Use of Proceeds." Proposed Nasdaq National Market symbol.............. RPTV </TABLE> The number of shares of common stock to be outstanding after this offering is estimated based on the number of shares outstanding on March 31, 2000 on a pro forma basis to reflect the automatic conversion of all shares of preferred stock outstanding as of the date of this prospectus into shares of common stock. It excludes 11,861,582 shares subject to outstanding options and 5,724,924 shares reserved for future grants pursuant to our stock plans and 6,666 shares of common stock subject to an outstanding warrant. See "Management--Stock Plans" and "Description of Capital Stock." Except as otherwise indicated, information in this prospectus is based on the following assumptions: . The conversion of all outstanding shares of preferred stock into shares of common stock on a one-for-one basis upon the closing of this offering; . No exercise of the underwriters' over-allotment option; . Our reincorporation into Delaware at or before the closing of this offering; and . The filing of our amended and restated certificate of incorporation upon the closing of this offering. SUMMARY FINANCIAL INFORMATION The following table sets forth a summary of our statement of operations data for the periods presented. The statement of operations data does not give effect to the issuance of shares in this offering. <TABLE> <CAPTION> Period from August 27, 1997 Year Ended Three Months Period from (Inception) December 31, Ended March 31, August 27, 1997 to December 31, ----------------- ----------------- (Inception) to 1997 1998 1999 1999 2000 March 31, 2000 --------------- ------- -------- ------- -------- --------------- (in thousands, except per share data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Total costs and expenses............... $ 155 $ 3,256 $ 37,527 $3,460 $23,548 $ 64,486 Interest income (expense), net......... -- (28) 960 (33) 1,224 2,156 Net loss................ (155) (3,284) (36,567) (3,493) (22,324) (62,330) Basic and diluted net loss per share available to common stockholders........... $(0.08) $ (0.48) $ (4.83) $ (0.50) $ (4.33) $ (10.59) Basic and diluted weighted average shares used in computation of net loss per share available to common stockholders........... 2,026 6,889 7,565 6,980 8,728 7,345 Pro forma basic and diluted net loss per share.................. $ (1.38) $ (0.51) Pro forma basic and diluted weighted average shares......... 26,476 39,022 </TABLE> Pro forma net loss per share is computed using the weighted average number of common shares outstanding, including the conversion of convertible preferred stock into shares of common stock effective upon the closing of this offering, as if the conversion had occurred on January 1, 1999 or on the date of original issuance, if later. The following table summarizes our balance sheet data as of March 31, 2000: . on an actual basis; and . on a pro forma as adjusted basis to reflect the automatic conversion of 33,459,759 shares of preferred stock outstanding as of the date of this prospectus into 33,459,759 shares of common stock and the sale of 8,500,000 shares of common stock in this offering at an assumed initial public offering price of $14.00 per share after deducting estimated underwriting discounts and commissions and estimated offering expenses. <TABLE> <CAPTION> As of March 31, 2000 -------------------- Pro Forma Actual As Adjusted -------- ----------- (in thousands) <S> <C> <C> Balance Sheet Data: Cash, cash equivalents and short-term investments.......... $ 99,939 $ 209,509 Working capital............................................ 99,548 209,118 Total assets............................................... 113,215 222,785 Total stockholders' equity................................. 104,892 214,462 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001103777_sirenza_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001103777_sirenza_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that investors should consider before investing in our common stock. Investors should carefully read the entire prospectus, including "Risk Factors" and the financial statements, before making an investment decision. OUR BUSINESS We are a leading designer and supplier of high performance radio frequency, or RF, components for communications equipment. Our products are used primarily in wireless communications equipment to enable and enhance the transmission and reception of voice and data signals. Our customers include communications equipment manufacturers and a private label reseller of our RF components. We design our products to meet the rapidly evolving performance requirements for mobile wireless applications, such as cellular and mobile data networks, broadband wireline applications, such as coaxial cable and fiber optic networks, and fixed wireless applications, such as local and wide area site-to-site data networks. We offer a broad line of products that range in complexity from discrete components to integrated circuits and multi-component modules. We believe our products are well suited for existing and future communications networks which are expected to be increasingly centered on data transmission in addition to voice. We have adopted a fabless operating strategy, which we believe is unique in the RF components industry. We outsource the manufacturing of our semiconductor wafers to several wafer fabrication facilities, or third-party wafer fabs, that use leading-edge process technologies. We focus internally on our RF design and development expertise and select what we believe to be the optimal process technology for any given application without the constraint of a captive wafer fab facility. Our fabless operating strategy, combined with our RF design and test expertise, gives us the flexibility necessary to deliver a comprehensive line of high quality products at compelling prices to our customers. Our objective is to become the leading supplier of RF components for wireless and broadband wireline communications infrastructure equipment. We intend to achieve this objective by providing a comprehensive portfolio of high performance and high value standard and customized RF components optimized for their target applications. We recently established a separate business unit focused on developing customized products for our customers' specific RF applications. We plan to focus on expanding our product development initiatives in wireless and broadband wireline infrastructure markets. We will also continue to invest in research and development in the areas of semiconductor materials, device modeling, RF circuit design, packaging technology, and test and measurement. We sell our products worldwide through U.S.-based distributors, through a private label reseller who sells our products under its brand and through our direct sales force. Our products are also sold through a worldwide network of independent sales representatives whose orders are fulfilled either by us or our distributors. We are expanding our marketing efforts to create awareness for our products within our target markets and to support our direct and indirect sales efforts. We were incorporated in California on May 20, 1985 as Matrix Microassembly Corporation. We began doing business as Stanford Microdevices in 1992. On November 21, 1997 we reincorporated in Delaware as Stanford Microdevices, Inc. Our principal executive offices are located at 726 Palomar Avenue, Sunnyvale, California 94086. Our telephone number at that location is (408) 616-5400. Our web site is located at www.stanfordmicro.com. The information contained on, or linked to, our web site does not constitute part of this prospectus. The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is declared effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED MAY 18, 2000 LOGO - -------------------------------------------------------------------------------- 4,000,000 SHARES COMMON STOCK - -------------------------------------------------------------------------------- This is the initial public offering of Stanford Microdevices, Inc. and we are offering 4,000,000 shares of our common stock. We anticipate the initial public offering price will be between $12.00 and $14.00 per share. We have applied to list our common stock on the Nasdaq National Market under the symbol "SMDI." INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> UNDERWRITING DISCOUNTS PROCEEDS TO PRICE TO AND STANFORD PUBLIC COMMISSIONS MICRODEVICES ---------------- -------------- ------------ <S> <C> <C> <C> Per share $ $ $ Total $ $ $ </TABLE> We have granted the underwriters the right to purchase up to 600,000 additional shares to cover over-allotments. DEUTSCHE BANC ALEX. BROWN BANC OF AMERICA SECURITIES LLC CIBC WORLD MARKETS ROBERTSON STEPHENS The date of this prospectus is , 2000 THE OFFERING <TABLE> <S> <C> Common stock offered by Stanford Microdevices........ 4,000,000 shares Common stock to be outstanding after this offering... 25,627,412 shares Use of proceeds...................................... For working capital and general corporate purposes. See "Use of Proceeds" on page 16 for more detailed information. Proposed Nasdaq National Market symbol............... SMDI </TABLE> The number of shares of common stock to be outstanding upon completion of this offering is based on the number of shares outstanding as of March 31, 2000. This number assumes the conversion into common stock of all of our mandatorily redeemable convertible preferred stock outstanding on that date and the net exercise of outstanding warrants to purchase approximately 719,230 shares of our common stock (assuming an initial public offering price of $13.00 per share), and excludes: - 5,266,530 shares subject to outstanding options under our Amended and Restated 1998 Stock Plan; - 1,667,818 shares plus annual increases available for future option grants under our Amended and Restated 1998 Stock Plan; and - 300,000 shares plus annual increases that will be available for issuance under our 2000 Employee Stock Purchase Plan upon completion of this offering. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------------------- ----------------- 1995 1996 1997 1998 1999 1999 2000 ----------- ------ ------ ------ -------- ------ -------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenues................................. $3,185 $4,712 $6,898 $8,231 $ 18,065 $2,877 $ 7,264 Gross profit................................. 828 1,484 2,928 3,377 8,069 1,222 4,379 Income (loss) from operations................ 149 125 1,165 373 (2,523) 159 176 Net income (loss)............................ 137 101 1,105 279 (2,554) 114 206 Net income (loss) applicable to common stockholders............................... 137 101 1,105 279 (24,411) 114 (25,718) Pro forma net income (loss) (unaudited)...... $ (2,666) $ 90 $ 206 Pro forma basic net income (loss) per share (unaudited)................................ $ (0.16) $ 0.01 Pro forma diluted net income (loss) per share (unaudited)................................ $ (0.16) $ 0.01 Shares used to compute pro forma basic net income (loss) per share (unaudited)........ 16,825 21,675 Shares used to compute pro forma diluted net income (loss) per share (unaudited)........ 16,825 26,314 </TABLE> See note 1 of the notes to consolidated financial statements for an explanation of the determination of the number of shares used to compute the pro forma basic and diluted per share amount. <TABLE> <CAPTION> AS OF MARCH 31, 2000 (UNAUDITED) -------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- ----------- ----------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 3,777 $ 3,777 $50,537 Working capital............................................. 7,240 7,240 54,000 Total assets................................................ 23,625 23,625 70,385 Long term obligations, less current portion................. 1,608 1,608 1,608 Mandatorily redeemable convertible preferred stock.......... 64,781 -- -- Total stockholders' equity (net capital deficiency)......... (53,021) 11,760 58,520 </TABLE> The pro forma balance sheet data summarized above assumes the conversion of all outstanding shares of mandatorily redeemable convertible preferred stock into common stock upon completion of this offering on a one-to-one basis. The pro forma as adjusted data above adjusts the pro forma amounts to reflect the application of the net proceeds from the sale of 4,000,000 shares of common stock offered by us at an assumed initial public offering price of $13.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses. Stanford Microdevices is our trademark. All other brand names or trademarks appearing in this prospectus are the property of their respective holders. ------------------------- Unless otherwise indicated, all information in this prospectus assumes: - that the underwriters have not exercised their option to purchase additional shares; - conversion of all shares of mandatorily redeemable convertible preferred stock into shares of common stock upon completion of this offering; - the net exercise of outstanding warrants to purchase approximately 719,230 shares of common stock (assuming an initial public offering price of $13.00 per share); - the filing of an amended and restated certificate of incorporation upon completion of this offering, to increase our authorized common stock and authorize a class of 5,000,000 shares of undesignated preferred stock; and - that our first fiscal quarter ends on March 31, 2000 for convenience of presentation. The actual ending date of the first quarter of fiscal 2000 was April 2, 2000.
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+SUMMARY References to the words "Charles River," "CRL," "we," "our," and "us" refer only to Charles River Laboratories, Inc., its predecessors, its subsidiaries, its affiliates and its joint ventures. This summary highlights information contained elsewhere in this prospectus and may not contain all of the information that is important to you. For a more complete understanding of this exchange offer, we encourage you to read this entire prospectus carefully. Our fiscal year ends on the Saturday closest to December 31. Unless the context indicates otherwise, whenever we refer in this prospectus to a particular fiscal year, we mean the fiscal year ending in that particular calendar year. When we refer to "pro forma" financial results, we mean the financial results of Charles River and its subsidiaries on a consolidated basis as if the Transactions (which we define on page 2) had occurred at the beginning of the relevant time period. CHARLES RIVER LABORATORIES, INC. Overview We are a global market leader in the commercial production and supply of animal research models, meaning whole, living animals bred in a clean environment specifically for the purpose of research, most of which are rats and mice, for use in the discovery, development and testing of new pharmaceuticals. Since we have expanded our core capabilities in research models we have become a leading supplier of related biomedical products and services in several specialized niche markets. We have a broad customer base which consists primarily of: o large pharmaceutical companies, including the ten largest global pharmaceutical companies based on 1998 revenues o biotechnology, animal health, medical device and diagnostics companies o hospitals o academic institutions o government agencies On a pro forma basis, research models accounted for 62%, and biomedical products and services accounted for 38%, of net sales for the nine-month period ended September 25, 1999. Over the same time period, we reported pro forma net sales of $177.1 million and pro forma Adjusted EBITDA, which means EBITDA, as defined, adjusted for non-recurring, non-cash and cash items, as appropriate, of $45.4 million. Our principal executive offices are located at 251 Ballardvale Street, Wilmington, MA 01887 and our telephone number is (978) 658-6000. Research Models. We have a leading position in the global market for research models, which primarily consists of rats and mice bred for the specific purpose of research. The use of research models is often a critical part of scientific discovery in the life sciences and is required by FDA guidelines as well as foreign regulatory agencies for new drug approval processes. Biomedical Products and Services. The principal focus of our biomedical products and services division is to meet the research needs of large pharmaceutical companies as well as biotechnology, animal health, medical device and diagnostics companies. We are a leading supplier of endotoxin testing kits that detect fever producing toxins in injectable drugs and devices and are one of only two FDA validated in vitro alternatives to an animal test. We are one of the world's largest producers of specific pathogen free fertile chicken eggs, which are free of most viruses, bacteria and other harmful agents. We refer to such eggs as "SPF eggs". SPF eggs are principally used to produce poultry vaccines. Competitive Strengths We have a number of competitive strengths, including: o long-standing relationships with an extensive customer base o critical component of pharmaceutical research o leading market position o global presence o experienced and motivated management team Business Strategy Our business strategy combines the following elements: o increase sales in research models o expand biomedical products and services, which includes: -- capitalizing on outsourcing trends within the pharmaceutical companies, whereby these companies contract out to others functions that were previously performed internally -- building upon our existing capabilities -- increasing our global sales o undertake strategic acquisitions and alliances THE TRANSACTIONS We collectively refer to the recapitalization and the Sierra acquisition, which we describe below, as the "Transactions." The Recapitalization On September 29, 1999, we were acquired by affiliates of DLJ Merchant Banking Partners II, L.P., management and other investors while subsidiaries of Bausch & Lomb Incorporated retained a portion of their equity investment in us, for total consideration of $456.2 million. As a result, DLJ Merchant Banking Partners II, L.P. and some of its affiliates, whom we refer to collectively as the "DLJMB Funds", indirectly own 71.9% and subsidiaries of Bausch & Lomb Incorporated, whom we refer to collectively as the "Rollover Shareholders", own 12.5% of Charles River Laboratories Holdings, Inc. We are a wholly owned subsidiary of Charles River Laboratories Holdings, Inc., which does not have any material operations or assets other than its ownership of all of our capital stock. See page 22 for more information on the financing of the recapitalization. We collectively refer to the Recapitalization and all related financing as the "Recapitalization." The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED JANUARY 25, 2000 PROSPECTUS Charles River Laboratories, Inc. Offers to Exchange 13 1/2% Series A Senior Subordinated Notes Due 2009 for 13 1/2% Series B Senior Subordinated Notes Due 2009 which have been registered under the Securities Act of 1933 We are offering to exchange an aggregate principal amount of up to $150,000,000 of our new 13 1/2% series B senior subordinated notes due 2009, which we registered under the Securities Act of 1933 for our existing 13 1/2% series A senior subordinated notes due 2009. We issued units consisting of the old notes and warrants to purchase common stock of our holding company in a transaction exempt from registration under the Securities Act. We are registering the warrants and the common stock into which the warrants are exercisable on a separate "shelf" registration statement. The terms of the new notes are identical in all material respects to the terms of the old notes, except that only CRL Transaction Co., Inc., a subsidiary of Charles River, will guarantee the new notes. We merged the subsidiaries which guaranteed the old notes into Charles River Laboratories, Inc. In addition, we registered the new notes under the Securities Act. There is no existing market for the new notes, and Charles River does not intend to apply for their listing on any securities exchange. To exchange your old notes for new notes: o You must complete and send the letter of transmittal that accompanies this prospectus to the exchange agent by 5:00 p.m., New York time, on , 2000. o If your old notes are held in book-entry form at The Depository Trust Company, you must instruct The Depository Trust Company through your signed letter of transmittal that you wish to exchange your old notes for new notes. When the exchange offer closes, your Depository Trust Company account will be changed to reflect your exchange of old notes for new notes. o You should read the section called "The Exchange Offer" for additional information on how to exchange your old notes for new notes. See "Risk Factors" beginning on page 12 for a discussion of the risk factors that should be considered by you prior to tendering your old notes in the exchange offer. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. The date of this prospectus is , 2000. The Sierra Acquisition Concurrently with the recapitalization, we acquired SBI Holdings, Inc. ("Sierra") for an initial total purchase price of $24.0 million, including approximately $18.0 million in cash paid to the former shareholders, and assumed debt of approximately $6.0 million, which we immediately retired. See page 23 for more information on the funding of the acquisition of Sierra. Sierra is a pre-clinical biomedical services company with expertise in drug safety and effectiveness studies using research models. We believe that the acquisition of Sierra will contribute to our growing presence in the pre- clinical testing services business. Data from the pre-clinical stage is submitted to the applicable regulatory agency for review in order for the drug to obtain approval to advance to the human testing stage, commonly known as clinical studies. We collectively refer to the acquisition of Sierra and all related financings as the "Sierra Acquisition." THE EXCHANGE OFFER Securities Offered.................. We are offering up to $150,000,000 aggregate principal amount of 13 1/2% series B senior subordinated notes due 2009, which have been registered under the Securities Act. The terms of the new notes are identical in all material respects to the terms of the old notes, except that only CRL Transaction Co., Inc., a subsidiary of Charles River, will guarantee the new notes. We merged the subsidiaries which guaranteed the old notes into Charles River. In addition, we registered the new notes under the Securities Act and the transfer restrictions and registration rights relating to the old notes do not apply to the new notes. We are not offering to exchange the warrants that were issued with the old notes in this exchange offer. We are registering the warrants and the common stock into which the warrants are exercisable on a separate "shelf" registration statement. The Exchange Offer.................. We are offering to issue the new notes in exchange for a like principal amount of your old notes. We are offering to issue the new notes to satisfy our obligations contained in the registration rights agreement entered into when the old notes were sold in transactions under Rule 144A and Regulation S of the Securities Act and therefore not registered with the SEC. For procedures for tendering, see "The Exchange Offer." Expiration Date, Tenders, Withdrawal The exchange offer will expire at 5:00 p.m. New York City time on , 2000 unless it is extended. If you decide to exchange your old notes for new notes, you must acknowledge that you are not engaging in, and do not intend to engage in, a distribution of the new notes. If you decide to tender your old notes in the exchange offer, you may withdraw them at any time prior to , 2000. If we decide for any reason not to accept any old notes for exchange, we will return your old notes to you without expense promptly after the exchange offer expires. Federal Income Tax Consequences..... Your exchange of old notes for new notes in the exchange offer will not result in any income, gain or loss to you for Federal income tax purposes. See "Material Federal Income Tax Consequences of the Exchange Offer." Use of Proceeds..................... We will not receive any proceeds from the issuance of the new notes in the exchange offer. Exchange Agent...................... State Street Bank and Trust Company is the exchange agent for the exchange offer. See page 110 for information on how to contact the exchange agent. Accounting Treatment................ We intend to account for the exchange offer based on the historical basis of accounting for the old notes. As a result, we will report the new notes at the same carrying value as the old notes on the date of the exchange. Accordingly, we will not recognize any gain or loss related to this exchange. CONSEQUENCES OF EXCHANGING OLD NOTES IN THE EXCHANGE OFFER Based on interpretations by the SEC's staff in no-action letters issued to third parties, we believe that new notes issued in exchange for old notes in the exchange offer may be offered for resale, resold or otherwise transferred by you without registering the new notes under the Securities Act or delivering a prospectus so long as each of the following applies to you: o you are not one of our "affiliates", which is defined in Rule 405 of the Securities Act o you acquire the new notes in the ordinary course of your business o either you are a broker-dealer or you do not have any arrangement with any person to participate in the distribution of such new notes Unless you are a broker-dealer, you must acknowledge both that: o you are not engaged in, and do not intend to engage in, a distribution of the new notes o you have no arrangement or understanding to participate in a distribution of the new notes If you are an affiliate of Charles River, or you are engaged in, intend to engage in or have any arrangement or understanding with respect to, the distribution of new notes acquired in the exchange offer, you (1) should not rely on our interpretations of the position of the SEC's staff and (2) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. If you are a broker-dealer and receive new notes for your own account in the exchange offer: o you must acknowledge that you will deliver a prospectus in connection with any resale of such new notes. The letter of transmittal states that by acknowledging and delivering a prospectus, you will not be deemed to admit that you are an "underwriter" within the meaning of the Securities Act o you may use this prospectus, as it may be amended or supplemented from time to time, in connection with the resale of new notes received in exchange for old notes acquired by you as a result of market-making or other trading activities For a period of 90 days after the expiration of the exchange offer, we will make this prospectus available to any broker-dealer for use in connection with any such resale. In addition, you may offer or sell the new notes in some jurisdictions only if they have been registered or qualified for sale there, or an exemption from registration or qualification is available and is complied with. Subject to the limitations specified in the registration rights agreement, we will register or qualify the new notes for offer or sale under the securities laws of any jurisdictions that you reasonably request in writing. Unless you request that the sale of the new notes be registered or qualified in a jurisdiction, we currently do not intend to register or qualify the sale of the new notes in any jurisdiction. If you do not comply with such requirement, you could incur liability under the Securities Act, and we will not indemnify you in such circumstances. SUMMARY DESCRIPTION OF THE NOTES The terms of the new notes and the old notes are identical in all material respects, except that only CRL Transaction Co., Inc., a subsidiary of Charles River, will guarantee the new notes. We merged the subsidiaries which guaranteed the old notes into Charles River. In addition, we registered the new notes under the Securities Act and the transfer restrictions and registration rights relating to old notes do not apply to the new notes. We use "notes" to refer to both the old notes and the new notes. Maturity Date....................... October 1, 2009. Interest Rate and Payment Dates..... Interest on the notes will accrue at the rate of 13.5% per year, payable semi-annually in cash in arrears on October 1 and April 1 of each year, commencing April 1, 2000. The interest rate is subject to increase to 14% per year on August 15, 2000 in the event we do not meet a specified ratio as of June 30, 2000. Optional Redemption................. On or after October 1, 2004 we may redeem some or all of the notes at any time at the redemption prices described in the section "Description of Notes" under the heading "Optional Redemption." Prior to October 1, 2002, we may redeem up to 35% of the notes with the proceeds of a public equity offering at the redemption price listed in the section "Description of Notes" under the heading "Optional Redemption." Mandatory Repurchase Offer.......... If we sell particular assets or experience specific kinds of changes in control of our company, we must offer to repurchase the notes at the prices listed in the section "Description of Notes" under the heading "Repurchase at the Option of Holders." See "Risk Factors--We may be unable to purchase the notes upon a change of control." Ranking............................. The notes will be senior subordinated debt. The notes will rank: o junior to all of our existing and future senior debt and secured debt, including any borrowings under our new credit facility o equally with any of our future senior subordinated debt, including trade payables o senior to any of our future subordinated debt o effectively junior to all of the liabilities of our subsidiaries At September 25, 1999, on a pro forma basis, after giving effect to the Transactions, the notes would have been contractually subordinated to $163.3 million of our senior debt and effectively subordinated to $5.2 million of liabilities, including trade payables but excluding intercompany obligations, of our subsidiaries. Restrictive Covenants............... The indenture governing the notes contains covenants that limit, among other things, our ability, and the ability of some of our subsidiaries, to: o borrow money o create liens o pay dividends on stock or repurchase stock o make some investments o engage in transactions with affiliates or o sell some assets or merge with or into other companies For more details, see the section "Description of Notes" under the heading "Certain Covenants." Use of Proceeds..................... We will not receive any proceeds from the exchange of new notes for old notes. SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA The table below presents summary historical and unaudited pro forma consolidated financial data and other data for Charles River. The summary historical consolidated financial data for the fiscal years ended December 28, 1996, December 27, 1997 and December 26, 1998 are derived from our audited consolidated financial statements and the notes thereto included elsewhere in this prospectus. The summary unaudited financial data as of September 25, 1999 and for the nine months ended September 26, 1998 and September 25, 1999 are derived from our unaudited consolidated financial statements and the notes to those statements. In the opinion of management, our unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial condition and results of operations for these periods. The summary unaudited pro forma consolidated financial data, which assume the Transactions had been completed as of such dates, are derived from the Unaudited Pro Forma Condensed Consolidated Financial Data appearing elsewhere in this prospectus. The summary unaudited pro forma consolidated financial data do not purport to be indicative of the results that actually would have been obtained had the Transactions been completed as of such dates and are not intended to be a projection of our future results of operations or financial position. You should read the information contained in this table in conjunction with "Use of Proceeds," "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Unaudited Pro Forma Condensed Consolidated Financial Data" and our consolidated financial statements and the notes thereto contained elsewhere in this prospectus. <TABLE> Pro Forma ------------------------- Fiscal Year(1) Nine Months Ended Nine Months ---------------------------- --------------------------- Ended September 26, September 25, Fiscal Year September 25, 1996 1997 1998 1998 1999 Ended 1998 1999 -------- -------- -------- ------------- ------------- ----------- ------------- (dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> Income Statement Data: Net sales related to products...................$146,477 $156,800 $169,377 $128,478 $139,269 $185,969 $155,303 Net sales related to services................... 9,127 13,913 23,924 17,041 21,827 23,924 21,827 ------- ------- ------- ------- ------- ------- ------- Total net sales................................. 155,604 170,713 193,301 145,519 161,096 209,893 177,130 Cost of products sold........................... 91,600 102,980 107,146 80,067 84,557 116,551 94,146 Cost of services provided....................... 6,177 8,480 15,401 10,974 12,673 15,401 12,673 Selling, general and administrative expenses.... 28,327 30,451 34,142 25,202 29,414 39,052 34,778 Amortization of goodwill and other intangibles.. 610 834 1,287 1,036 1,114 3,354 2,553 Restructuring charges........................... 4,748 5,892 -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- Operating income................................ 24,142 22,076 35,325 28,240 33,338 35,535 32,980 Other Data: EBITDA, as defined(2)........................... $33,670 $31,779 $46,220 $36,172 $42,039 $49,146 $43,660 Adjusted EBITDA(2).............................. 39,167 38,528 47,234 37,012 43,378 50,642 45,450 Adjusted EBITDA margin.......................... 25.2% 22.6% 24.4% 25.4% 26.9% 24.1% 25.7% Depreciation and amortization................... $9,528 $9,703 $10,895 $7,932 $8,701 $13,611 $10,680 Capital expenditures............................ 11,572 11,872 11,909 5,834 7,426 13,307 8,398 Cash interest expense(3).................................................................................. 35,013 28,330 Cash flows from operating activities(4)......... $20,545 $23,684 $36,699 $23,486 $19,552 Cash flows from investing activities(4).........$(11,678) $(12,306) $(22,349) $(14,267) $(4,751) Cash flows from financing activities(4)......... $(4,068) $(12,939) $(8,018) $(2,412) $(34,554) Selected Ratios: Ratio of earnings to fixed charges(5)........... 18.8x 16.5x 25.8x 26.1x 33.7x 1.0x 1.2x Ratio of Adjusted EBITDA to cash interest expense........................................................ 1.4x 1.6x Ratio of total pro forma debt to Adjusted EBITDA...................................................................... 6.8x </TABLE> As of September 25, 1999 ---------------------------- Historical Pro Forma ---------- --------- (dollars in thousands) Balance Sheet Data: Cash and cash equivalents............. $3,457 $3,678 Working capital....................... 20,596 32,001 Total assets.......................... 210,371 332,198 Total debt(6)......................... 1,033 311,128 Total stockholder's equity............ 148,965 (30,357) - ------------ (1) Our fiscal year consists of twelve months ending on the Saturday closest to December 31. (2) EBITDA, as defined, represents operating income plus depreciation and amortization. EBITDA, as defined, is presented because it is a widely accepted financial indicator used by some investors and analysts to analyze and compare companies on the basis of operating performance. Adjusted EBITDA, which represents EBITDA, as defined, adjusted for non-recurring, non-cash and cash items, as appropriate, is presented below because we believe it is a meaningful indicator of Charles River's operating performance and it is the measure by which some of the covenants under the new credit facility are computed. EBITDA, as defined, and Adjusted EBITDA are not intended to represent cash flows for the period, nor are they presented as an alternative to operating income or as an indicator of operating performance. They should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP in the United States and are not indicative of operating income or cash flow from operations as determined under GAAP. Our method of computation may or may not be comparable to other similarly titled measures of other companies. The following table sets forth a reconciliation of EBITDA, as defined, to Adjusted EBITDA: <TABLE> Pro Forma ---------------------------- Fiscal Year Nine Months Ended -------------------------- ----------------------------- Nine Months Ended September 26, September 25, Fiscal Year September 25, 1996 1997 1998 1998 1999 Ended 1998 1999 ------ ------ ------ ------------- ------------- ----------- ------------- (dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> EBITDA, as defined..................... $33,670 $31,779 $46,220 $36,172 $42,039 $49,146 $43,660 Restructuring and other charges........ 4,748 5,892 -- -- 400 -- 400 Dividends received from equity investments......................... 725 773 681 681 815 681 815 Charles River non-cash compensation(a)..................... 24 84 333 159 124 333 124 Sierra non-cash compensation(a)........ -- -- -- -- -- 262 -- Non-recurring transaction expenses(b).. -- -- -- -- -- 220 451 ------ ------ ------ ------ ------ Adjusted EBITDA........................ $39,167 $38,528 $47,234 $37,012 $43,378 $50,642 $45,450 ====== ====== ====== ====== ====== ====== - ------------ (a) Amount represents non-cash compensation expense recorded by Charles River and Sierra as a result of options under their respective option plans being issued at below fair market value. (b) Represents expenses incurred by Sierra related to its acquisition of HTI Bio-Services, Inc., and to its acquisition by Charles River; these amounts are considered non-recurring. (3) Cash interest expense represents total interest expense less amortization of deferred financing costs and other non-cash interest charges. (4) Cash flows information is not presented with respect to the unaudited pro forma data because a statement of cash flows is not required by Article 11 of SEC Regulation S-X. (5) For purposes of calculating the ratio of earnings to fixed charges, "earnings" consist of income before income taxes, minority interests and earnings from equity investments less minority interests plus earnings from equity investments plus fixed charges. "Fixed charges" consist of interest expense on all indebtedness, amortization of deferred financing costs and one-third of rental expense from operating leases that we believe is a reasonable approximation of the interest component of rental expense. (6) Total debt includes all debt and capital lease obligations, including current portions. </TABLE>
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. For a more comprehensive understanding of this offering, you should read the more detailed information contained in this prospectus including, but not limited to, the information contained in the section entitled "Risk Factors." In this prospectus, we refer to Consolidated Stores Corporation and all of its direct and indirect subsidiaries, including KB Online Holdings LLC, as "Consolidated." "KB Toys" refers to Consolidated's retail toy store operations and includes KB Online Holdings LLC. KB Online refers only to KB Online Holdings LLC. References to "KBkids," "we," "us," and "our" are to KBkids.com Inc., except that those terms refer to KBkids.com LLC when discussing the online store and its operations. KBKIDS We are one of the fastest growing online retailers with an exclusive focus on children's products. In only our first holiday season, Media Metrix ranked us twelfth overall among all online retail sites for unique visitors during the five week holiday season ended December 26, 1999. For the same five week holiday period, Media Metrix ranked us among the top three toy sales in traffic. Currently, we sell toys, video games, software and videos, and we intend to expand our product offerings in the future. The market for children's products encompasses numerous categories, such as traditional toys, books, video games and educational software. Toy Manufacturers of America estimates that the domestic toy and video game market had retail sales in excess of $27 billion in 1998. There is a significantly larger market if we include international markets. For example, according to Toy Manufacturers of America, sales in the international toy and video game market were approximately $68 billion in 1998. In addition, we believe that businesses' and consumers' rapid acceptance of the Internet has created the foundation for significant growth in business-to-consumer electronic commerce. Forrester Research estimates that online purchases by U.S. consumers will grow from approximately $20 billion in 1999 to $184 billion by 2004. We believe that no traditional children's products retailer offers an effective combination of a broad selection of popular brand name products, a convenient shopping experience, detailed product information, expert advice and personalized service. We also believe that other online children's products retailers face challenges such as developing a brand name, establishing vendor relationships and developing their merchandising and retailing expertise. Our online store is designed to address the limitations of both traditional and online children's products retailers. Our ability to combine KB Toys' toy retailing experience and infrastructure with our entrepreneurial culture and Internet expertise has allowed us to employ a superior business model that delivers a rewarding customer experience combining the convenience and flexibility of a leading online shopping site with the benefits of a retail toy store. KB Toys is the second largest specialty toy retailer in the United States, operating approximately 1,300 stores nationwide. We believe that the brand name, cross-marketing advantages and store-based synergies that we have with KB Toys give us a strategic advantage in the area of customer acquisition. We also benefit from numerous merchandising synergies with KB Toys such as favorable allocations of popular products and cost-effective purchasing. Our online store provides a rewarding shopping experience by emphasizing the following: - CONVENIENCE AND SELECTION. Our online store provides a wide selection of products to our customers through an easy-to-use website that is available 24 hours a day, 7 days a week. - VALUE. Our customers save time and money by using our online store to purchase children's products. Through our purchasing leverage with KB Toys, we can pass on the benefits of volume discounts to our customers in the form of lower prices. - PURCHASING ADVICE. To assist our customers in selecting products, we provide consumer reviews and comments, daily spotlight products, favorites by age, special offers and featured products. In addition, we release new articles weekly to highlight toy developments observed by our editorial team and other experts. - CUSTOMER SERVICE. We emphasize customer service during all phases of a customer's shopping experience, including a toll-free pre-sale and post-sale customer service center, an integrated inventory control system designed to reflect accurately a product's availability and a product returns procedure that enables customers to return our products to us directly or to any KB Toys store nationwide. - COMMUNITY. To foster interaction among our community of customers, we host message board discussions regarding relevant topics such as video games, popular seasonal toys, collectibles and parenting. In addition, we host ask-the-experts message boards for customers to ask our editorial staff specific questions. Our goal is to become the premier online destination for purchasing a wide range of children's products. We intend to achieve this goal by pursuing the following strategies: - INCREASE ACQUISITION OF CUSTOMERS. We intend to combine our strong brand recognition and cross-marketing synergies with KB Toys and expanded online and offline marketing media to continue to aggressively acquire customers for our online store. - PROMOTE REPEAT BUSINESS FROM EXISTING CUSTOMERS. We intend to promote customer loyalty and build relationships with our customers to drive repeat sales. We plan to accomplish this by continually seeking input from our customers to enhance our online store and its features, thereby making it more attractive to them. - EXPAND OUR PRODUCT OFFERINGS. To increase our customer base and counter the seasonality of the toy business, we intend to expand our product offerings, examine geographic expansion and pursue alternative selling formats. - ENHANCE OUR TECHNOLOGY. To remain competitive, we plan to continue to augment and improve the functionality and features of our online store. We intend to incorporate features that provide customer interaction to personalize our customers' shopping experience. In addition, we intend to enhance our technology to continue to minimize downtime and support increasing levels of online traffic. - EXPAND OUR FULFILLMENT AND CUSTOMER CARE CAPABILITIES. We are examining our fulfillment and customer care operations to determine how to become the best in our class in terms of warehousing, packaging, delivery and customer service. This may result in our purchasing or leasing dedicated fulfillment centers and customer service call centers. CORPORATE INFORMATION Our executive offices are located at 1099 Eighteenth Street, Suite 1000, Denver, Colorado 80202 and our telephone number is (303) 228-9000. Our online store is located at www.kbkids.com. The information contained on our website is not a prospectus and does not constitute part of this prospectus. CORPORATE HISTORY AND STRUCTURE KBKIDS.COM LLC FORMATION On June 25, 1999, KB Online, a wholly-owned subsidiary of Consolidated, and BrainPlay.com, Inc. entered into a contribution agreement to form KBkids.com LLC as a joint venture. Under the contribution agreement, KB Online received 80% of the membership units in KBkids.com LLC in exchange for contributing cash and property valued at $80,000,000 and intangibles valued at $4,000,000. BrainPlay.com received the remaining 20% of the membership units in exchange for contributing substantially all of its assets and liabilities. REORGANIZATION In connection with this offering, KBkids.com Inc. was formed, and in addition, a subsidiary of KBkids.com Inc. was formed to be merged into BrainPlay.com. Simultaneously with the consummation of this offering, we will reorganize as follows: - KBkids.com Inc. will invest the net proceeds of this offering in KBkids.com LLC, and in return KBkids.com Inc. will receive membership units in KBkids.com LLC. These units will represent % of the then outstanding equity of KBkids.com LLC. - KB Online will contribute one membership unit in KBkids.com LLC to KBkids.com Inc. in exchange for one share of Class B common stock of KBkids.com Inc. - The newly formed subsidiary of KBkids.com Inc. will merge into BrainPlay.com resulting in BrainPlay.com becoming a wholly-owned subsidiary of KBkids.com Inc. As a result of this merger, KBkids.com Inc. will indirectly own membership units held by BrainPlay.com representing % of the then outstanding equity of KBkids.com LLC, and the equityholders of BrainPlay.com will receive, in the aggregate, shares, and/or options to acquire shares, of Class A common stock in KBkids.com Inc. based on an exchange ratio of shares, or options to acquire shares, of Class A common stock for each share of BrainPlay.com common stock and each option to acquire common stock. - KBkids.com Inc. will become the sole manager of KBkids.com LLC. Through our board of directors and our officers, we will be responsible for all operational and administrative decisions of KBkids.com LLC and the day-to-day management of its business. - KB Online's membership units will represent % of the then outstanding equity of KBkids.com LLC. KB Online will have the right to exchange its membership units in KBkids.com LLC and its share of Class B common stock into an equivalent number of shares of Class A common stock. For more detailed information regarding KB Online's exchange rights, you should read the information contained in "Description of Capital Stock and Membership Units." After this offering, each of the public stockholders, the former BrainPlay.com equityholders and Consolidated will have a direct or indirect economic interest in KBkids.com LLC equal to the respective percentage of the aggregate voting power in KBkids.com Inc. held by each of them. The following chart illustrates our structure, and the structure of KBkids.com LLC, upon completion of this offering. [KBkids.com Inc. Flowchart] After this offering: - The public stockholders purchasing stock in this offering will own shares of Class A common stock in the aggregate, which will represent % of the total issued and outstanding Class A and Class B common stock and % of the aggregate voting power. - The former equityholders of BrainPlay.com will beneficially own shares of Class A common stock in the aggregate, which will represent % of the total issued and outstanding Class A and Class B common stock and % of the aggregate voting power. - Consolidated will indirectly own 100% of the Class B common stock, which will represent less than 1% of the total issued and outstanding Class A and Class B common stock, but by reason of its ownership of the Class B common stock will control % of the aggregate voting power of KBkids.com Inc. THE OFFERING Unless otherwise indicated, information in this prospectus assumes the underwriters' over-allotment option is not exercised. As used in this prospectus and unless otherwise specified, "common stock" means our Class A common stock. Common stock offered................ shares of Class A common stock Common stock to be outstanding after this offering....................... shares of Class A common stock and one share of Class B common stock Common stock to be outstanding after this offering assuming exchange of Consolidated's membership units in KBkids.com LLC for, and conversion of its Class B common stock into, shares of Class A common stock.... shares of Class A common stock and no shares of Class B common stock Use of proceeds..................... We plan to use the net proceeds from this offering for general corporate purposes, principally working capital, capital expenditures, marketing and sales activity and product development. We may also use a portion of the proceeds for strategic acquisitions. See "Use of Proceeds." Voting rights....................... The holders of Class A common stock generally have rights identical to holders of Class B common stock, except that each holder of Class A common stock is entitled to one vote per share and each holder of Class B common stock is entitled to the number of votes per share equal to the total number of shares of Class B common stock owned by that holder plus the total number of membership units in KBkids.com LLC owned by that holder. The holders of Class A common stock and Class B common stock vote together as a single class on all matters, including the election of directors, except as otherwise required by applicable Delaware law. Membership units in KBkids.com LLC to be outstanding after this offering.......................... membership units. Membership units in KBkids.com LLC are exchangeable for shares of Class A common stock at any time by the holder on a one-for-one basis. If, immediately following this offering, Consolidated converted its Class B common share and exchanged all of its membership units, it would own approximately % of the outstanding Class A common stock. Proposed Nasdaq National Market symbol.............................. KBKD Unless otherwise specified, the number of shares of Class A common stock to be outstanding after this offering does not include: - shares issuable upon exercise of options outstanding as of , 2000 at a weighted average exercise price of $ per share; - shares issuable upon exercise of options to be granted to our executive officers at the closing of this offering at an exercise price equal to the initial public offering price per share; - additional shares that could be issued under our stock option plan; and - shares issuable upon conversion of Consolidated's one share of Class B common stock and all of its membership units in KBkids.com LLC. SUMMARY FINANCIAL DATA The following tables show summary financial information and other information about us and our predecessor, BrainPlay.com. You should read this summary information in conjunction with the more detailed financial statements and related notes in this prospectus. Our fiscal year ends on March 31 of each year. <TABLE> <CAPTION> KBKIDS.COM LLC BRAINPLAY.COM, ------------------------------------- INC. PRO FORMA BRAINPLAY.COM, INC. ------------------ PRO FORMA COMBINED, AS ------------------------- COMBINED FOR ADJUSTED, FOR YEAR ENDED MARCH 31, SIX MONTHS THE SIX MONTHS THE SIX MONTHS ------------------------- ENDED ENDED ENDED 1997 1998 1999 SEPT. 30, 1998 SEPT. 30, 1999(2) SEPT. 30, 1999(3) ----- ------- ------- ------------------ ----------------- ----------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS: Net sales........................ $ 2 $ 71 $ 596 $ 91 $ 1,545 Cost of products sold............ 2 65 675 109 2,098 ----- ------- ------- ------- -------- -------- Gross profit(loss)............... -- 6 (79) (18) (553) Total operating expenses......... 319 1,103 4,729 1,632 13,774 ----- ------- ------- ------- -------- -------- Loss from operations............. $(319) $(1,097) $(4,808) $(1,650) $(14,327) Loss before minority interest.... (314) (1,047) (4,756) (1,603) (14,138) ----- ------- ------- ------- -------- -------- Minority interest................ -- -- -- -- -- ----- ------- ------- ------- -------- -------- Net loss......................... $(314) $(1,047) $(4,756) $(1,603) $(14,138) ===== ======= ======= ======= ======== ======== Basic and diluted loss before minority interest per share on a fully converted basis........ Basic and diluted weighted average shares outstanding on a fully converted basis(1)....... Basic and diluted net loss per share.......................... Basic and diluted weighted average shares outstanding..... </TABLE> - --------------- (1) Represents total shares outstanding assuming conversion of Consolidated's membership units in KBkids.com LLC and its one share of Class B common stock. (2) Reflects the combined operations of BrainPlay.com for the period April 1, 1999 to June 25, 1999, and KBkids.com LLC for the period from June 26, 1999 to September 30, 1999; however, no adjustments have been made for amortization of intangibles. (3) Reflects the combined operations of BrainPlay.com for the period from April 1, 1999 to June 25, 1999, and KBkids.com LLC for the period from June 26, 1999 to September 30, 1999, as adjusted to reflect our receipt of the estimated net proceeds from this offering, the merger of a wholly-owned subsidiary of KBkids.com with and into BrainPlay.com and the issuance of one share of Class B common stock to KB Online. <TABLE> <CAPTION> KBKIDS.COM LLC KBKIDS.COM INC. --------------- --------------- AS OF SEPT. 30, AS OF SEPT. 30, 1999 1999 --------------- --------------- PRO FORMA, ACTUAL AS ADJUSTED --------------- --------------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> BALANCE SHEET: Cash and cash equivalents................................... $ 34,939 Working capital............................................. 30,493 Total assets................................................ 73,425 Long-term liabilities....................................... 372 Minority interest........................................... -- Members'/stockholders' equity............................... 54,249 </TABLE> The balance sheet data as of September 30, 1999 is presented: - on an actual basis, and - on a pro forma, as adjusted basis to reflect the reorganization and our receipt of the estimated net proceeds from the sale of shares of common stock offered in this offering at an assumed initial public offering price of $ per share, after deducting underwriting discounts and commissions and estimated offering expenses.
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our Class A common stock. You should read the entire prospectus carefully, especially the risks of investing in our Class A common stock discussed under "Risk Factors." In this prospectus, the terms "we," "us" and "our" refer to Crown Media Holdings, Inc. and, unless the context requires otherwise, Crown Media, Inc. and Odyssey Holdings, L.L.C., the legal entities that now operate our business and that, after this offering, will continue to operate our business as subsidiaries of Crown Media Holdings, Inc. The term "common stock" refers to our Class A common stock and Class B common stock, unless the context requires otherwise. OUR BUSINESS OVERVIEW We own and operate pay television channels dedicated to high quality family programming, which we believe represents one of the most popular television formats. We currently operate and distribute the Hallmark Entertainment Network internationally and the Odyssey Network domestically, primarily through cable and direct-to-home satellite systems. We have more than 50 million subscribers worldwide. Each of our channels benefits from a long-term program agreement with a subsidiary of Hallmark Entertainment, Inc., our parent company. These program agreements generally provide exclusive pay television access to Hallmark Entertainment, Inc.'s first-run presentations and extensive library of original made-for-television movies and miniseries. Hallmark Entertainment, Inc.'s library consists of more than 4,000 hours of programming, including eight of the 10 most highly rated made-for-television movies for the 1993 through 1999 television seasons, based on A.C. Nielsen ratings. Programs contained in this library have won more than 90 Emmy Awards, Golden Globe Awards and Peabody Awards. The Odyssey Network also licenses a substantial amount of programming produced by The Jim Henson Company, Inc., a producer of popular family and children's programming, through a long-term program agreement. Programs contained within The Jim Henson Company's library have won more than 40 Emmy Awards and Peabody Awards. In addition, we and The Jim Henson Company each own 50% of the Kermit Channel. The Kermit Channel, which we operate primarily in India, features popular family and children's programming. We believe that with the programming we license from Hallmark Entertainment, Inc. and The Jim Henson Company, we are establishing the Hallmark Entertainment Network and the Odyssey Network as destinations for viewers seeking high quality family entertainment and as attractive outlets for advertisers seeking to target these viewers. We believe our programming will continue to drive the growth in the number of our worldwide subscribers and the growth of our revenues. We have distribution agreements with leading pay television distributors in each of our markets. Internationally, for the Hallmark Entertainment Network, some of these include British Sky Broadcasting, Ltd., Multicanal, and United Pan-Europe Communications. In the United States, the nine largest pay television distributors account for approximately 80% of all pay television subscribers. We currently distribute the Odyssey Network on cable systems operated by each of these nine pay television distributors and have long term distribution agreements with the AT&T, Time Warner and DirecTV distribution systems, the three largest distributors. No individual pay television distributor accounted for more than 10% of our revenues or 15% of our subscribers for the year ended December 31, 1999 on a pro forma basis. We are in discussions to sign long-term agreements with the other six pay television distributors. We currently distribute the Odyssey Network to approximately 35% of all United States pay television subscribers. WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE PERMITTED BY US FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING THIS PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR LEGAL. SUBJECT TO COMPLETION - MAY 1, 2000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTUS , 2000 [CROWN MEDIA LOGO] 10,000,000 SHARES OF CLASS A COMMON STOCK - -------------------------------------------------------------------------------- CROWN MEDIA HOLDINGS, INC.: - - We own and operate pay television channels dedicated to high quality family programming with more than 50 million subscribers worldwide. - - Crown Media Holdings, Inc. Suite 500 6430 S. Fiddlers Green Circle Englewood, Colorado 80111 (303) 220-7990 PROPOSED SYMBOL AND MARKET: - - CRWN/Nasdaq National Market THE OFFERING: - - We are offering 10,000,000 shares of our Class A common stock. - - The underwriters have an option to purchase up to an additional 1,500,000 shares from us to cover over-allotments. - - We anticipate that the initial public offering price will be between $14.00 and $15.00 per share. - - This is our initial public offering, and no public market currently exists for our shares of Class A common stock. - - We plan to use the proceeds from this offering to pay accrued and unpaid program license fees to an affiliate, to license additional programming, to enhance our technical facilities, to expand our distribution, to expand our advertising sales staff and to fund general corporate expenditures. - - Closing: , 2000. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------- Per Share Total - ------------------------------------------------------------------------------------- <S> <C> <C> Public offering price: $ $ Underwriting fees: Proceeds to Crown Media Holdings, Inc.: - ------------------------------------------------------------------------------------- </TABLE> THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8. - -------------------------------------------------------------------------------- Neither the SEC nor any state securities commission has determined whether this prospectus is truthful or complete. Nor have they made, nor will they make, any determination as to whether anyone should buy these securities. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- DONALDSON, LUFKIN & JENRETTE LEHMAN BROTHERS SALOMON SMITH BARNEY DLJDIRECT INC. We derive revenues primarily from subscriber fees paid by television distributors for the right to carry our channels and from the sale of advertising time on our channels. We expect to increase the percentage of our revenues from the sale of advertising time. To date, we have attracted more than 40 of the leading advertisers in the United States based on total advertising expenditures, including Hallmark Cards, America Online, AT&T, Coca-Cola and Procter & Gamble. No individual advertiser accounted for more than 2% of our revenues for the year ended December 31, 1999. For the year ended December 31, 1999, we had total revenues of $49.8 million on a pro forma basis. COMPETITIVE STRENGTHS Our primary competitive strengths include the following: - unique collection of branded programming and pay television channels; - guaranteed access to high quality programming; - significant strategic benefits from our principal stockholders; and - experienced management. BUSINESS STRATEGY Our principal objectives are to grow revenues and profitability by becoming the destination of choice for viewers who seek high quality family programming and for advertisers who target these viewers. The key elements of our business strategies to achieve these objectives are to: - capitalize on our unique brands by marketing to pay television distributors, viewers and advertisers; - expand distribution of our channels worldwide through leading distributors in each market; - increase advertising revenues by targeting leading advertisers, localizing our channels and expanding our sales staff; - continue to refine the attractiveness of our channels to viewers and advertisers; - capitalize on broadband distribution to create additional revenue streams for our business; and - facilitate the implementation of our strategies through the construction of an advanced digital global network operating center. RELATIONSHIP WITH HALLMARK CARDS, INCORPORATED After this offering, Hallmark Entertainment, Inc. will own all of our shares of Class B common stock. Each share of Class B common stock is entitled to 10 votes per share. As a result, Hallmark Entertainment, Inc. will hold more than 90% of our voting power and will continue to control us. Hallmark Entertainment, Inc. is one of the world's leading producers and distributors of award-winning made-for-television movies, miniseries and series. Hallmark Entertainment, Inc. is wholly owned by Hallmark Cards, Incorporated. Hallmark Cards is the leading U.S. manufacturer of greeting cards and since 1951, has sponsored the Hallmark Hall of Fame, one of television's most honored and enduring dramatic series. Hallmark Cards formed Hallmark Entertainment, Inc. in 1994 when it acquired RHI Entertainment, Inc., a producer of television programming. THE REORGANIZATION Crown Media Holdings, Inc., a Delaware corporation, was formed to complete this offering and the reorganization. After completion of the transactions described under "Reorganization Transactions Occurring Simultaneously with the Closing of This Offering," we will own 100% of the Hallmark Entertainment Network, 77.5% of the Odyssey Network and 50% of the Kermit Channel. [INSIDE COVERPAGE] [CROWN MEDIA LOGO] [HALLMARK ENTERTAINMENT NETWORK LOGO] [ODYSSEY NETWORK LOGO] CAPITALIZING ON THE STRENGTH OF OUR FAMILY [PHOTOGRAPH [PHOTOGRAPH [PHOTOGRAPH [PHOTOGRAPH OF TED DANSON OF JAMES EARL OF ISABELLA OF PATRICK FROM "GULLIVER'S JONES FROM ROSSELLINI FROM STEWART TRAVELS"] "WHAT THE DEAF "THE ODYSSEY"] FROM "MOBY MAN HEARD"] DICK"] The following diagram illustrates the economic interests of our principal stockholders in the Hallmark Entertainment Network, the Odyssey Network and the Kermit Channel following the completion of the reorganization and this offering. For more details regarding the reorganization and interests owned by our principal stockholders, see "Reorganization Transactions Occurring Simultaneously with the Closing of This Offering," "Certain Relationships and Related Transactions" and "Principal Stockholders." [REORGANIZATION CHART] [Diagram showing ownership percentage of the Kermit Channel, the Hallmark Entertainment Network and the Odyssey Network held by Crown Media Holdings, Inc.; ownership percentage of Crown Media Holdings, Inc. held by Public Stockholders, Chase Equity Associates, L.P., Hallmark Entertainment, Inc., Liberty Media Corporation and National Interfaith Cable Coalition, Inc.; and ownership percentage of Hallmark Entertainment, Inc. held by Hallmark Cards, Incorporated.] Our websites can be found at www.crownmedia.net, www.hallmarknetwork.com and www.odysseychannel.com. Information contained on our websites is not intended to be a prospectus and is not incorporated into this prospectus. [INSIDE FRONT COVERPAGE FOLD-OUT] There are stories WAITING TO BE TOLD [PHOTOGRAPH OF [PHOTOGRAPH OF [PHOTOGRAPH OF ADVERTISING FOR ADVERTISING FOR ADVERTISING FOR "GULLIVER'S TRAVELS" "ARABIAN NIGHTS"] "SARAH, PLAIN & WITH TED DANSON TALL" WITH GLENN AND MARY STEENBURGEN] CLOSE AND CHRISTOPHER WALKEN] ONLY A TRUE STORYTELLER CAN BRING THEM TO LIFE [HALLMARK ENTERTAINMENT NETWORK LOGO] Time passes GOOD STORIES ENDURE THE OFFERING Class A common stock offered... 10,000,000 Shares (1) Common stock to be outstanding after this offering: Class A common stock...... 29,329,578 Shares(1)(2) Class B common stock...... 30,670,422 Shares Total............... 60,000,000 Shares Voting rights: Class A common stock...... One vote per share Class B common stock...... Ten votes per share Conversion rights.............. Each share of Class B common stock is convertible at the option of the holder into one share of Class A common stock. Shares of Class B common stock are generally automatically convertible into Class A common stock upon sale or other transfer by the selling stockholder. Other common stock provisions..................... With the exception of voting rights and conversion rights, shares of Class A common stock and shares of Class B common stock are identical. Dividend policy................ We anticipate that we will retain any earnings in the foreseeable future to finance the continued growth and expansion of our business and as a result, we have no current intention to pay dividends. Use of proceeds................ We plan to use the proceeds from this offering to pay accrued and unpaid program license fees to an affiliate, to license additional programming, to enhance our technical facilities, to expand our distribution, to expand our advertising sales staff and to fund general corporate expenditures. Nasdaq National Market symbol......................... CRWN - ------------------------------ (1) References in this prospectus to shares of Class A common stock exclude 1,500,000 shares of Class A common stock that would be sold by us if the over-allotment option is exercised in full. (2) Excludes 10.0 million shares of Class A common stock reserved for issuance in connection with options that may be granted under our 2000 Long Term Incentive Plan. Of these reserved shares, at the time of this offering, we expect to issue stock options to acquire 1,035,211 shares of Class A common stock at an exercise price of $8.33 per share upon conversion of outstanding share appreciation rights and to issue stock options to acquire an additional 1,399,500 shares of Class A common stock at an exercise price equal to the initial public offering price. [INSIDE FRONT COVERPAGE FOLD-OUT] [PHOTOGRAPH OF FAMILY SAM NEIL FROM ENTERTAINMENT "MERLIN"] THAT IS ENTERTAINING [PHOTOGRAPH OF What more could today's family want from a JESSICA TANDY AND network? We astonish adults, captivate kids and HUME CRONYN FROM enrich everyone with outstanding family and "TO DANCE WITH THE spiritually-oriented programming that includes WHITE DOG"] "The Collection" from the Hallmark Hall of Fame Library, The Muppet Show, critically acclaimed Movies and original programming, heartwarming Series like Doogie Howser, M.D., and spiritual Shows like Landmarks of Faith. [PHOTOGRAPH OF Odyssey is the new force in entertainment that BRENT CARVER, STAR doesn't just bring families together . . . we OF "THE LEGEND OF bring them closer. So, for entertainment that has SLEEPY HOLLOW"] more of the magical, mystical and spiritual content families want, and want to watch together, come to Odyssey. TELEVISION FOR [ODYSSEY NETWORK LOGO] TODAY'S FAMILY www.odysseychannel.com SUMMARY FINANCIAL AND OTHER DATA Crown Media, Inc. and Odyssey Holdings, L.L.C. have historically operated as separate entities and their results will only be reported on a consolidated basis with Crown Media Holdings following the reorganization that will be completed simultaneously with the closing of this offering. As a result, and in accordance with generally accepted accounting principles, we have presented separate, rather than combined, historical financial data for Crown Media and Odyssey Holdings. SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA OF CROWN MEDIA AND ITS SUBSIDIARIES AND PRO FORMA CONSOLIDATED FINANCIAL AND OTHER DATA OF CROWN MEDIA HOLDINGS AND ITS SUBSIDIARIES Crown Media operates the Hallmark Entertainment Network and the Kermit Channel. In the table below, we provide you with summary historical consolidated financial and other data of Crown Media and its subsidiaries. The following summary consolidated statement of operations data for the years ended December 31, 1996, 1997, 1998 and 1999 and the consolidated balance sheet data as of December 31, 1999 are derived from the audited financial statements of Crown Media and its subsidiaries. Crown Media Holdings' unaudited pro forma as adjusted consolidated financial information for 1999 reflects the reorganization described under "Reorganization Transactions Occurring Simultaneously with the Closing of This Offering" and the completion of this offering and should be read in conjunction with the selected unaudited pro forma consolidated financial data included elsewhere in this prospectus. [INSIDE BACK COVERPAGE] [CROWN MEDIA LOGO] [MAP DEPICTING THE COMPANY'S WORLDWIDE CHANNEL DELIVERY PROCESS] [PHOTOGRAPH [PHOTOGRAPH OF [PHOTOGRAPH [PHOTOGRAPH OF SATELLITE] ARMAND OF SATELLITE OF TINA MAJORINO, ASSANTE FROM UPLINK FACILITY] STAR OF "ALICE IN "THE ODYSSEY"] WONDERLAND"] This data should also be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included elsewhere in this prospectus. <TABLE> <CAPTION> CROWN MEDIA HOLDINGS PRO FORMA AS ADJUSTED CROWN MEDIA YEAR ENDED YEARS ENDED DECEMBER 31, DECEMBER 31, ----------------------------------------- --------------------- 1996 1997 1998 1999 1999 (UNAUDITED) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues................ $ 3,048 $ 9,802 $ 23,687 $ 31,909 $ 49,792 Total cost of sales........... 9,399 25,082 43,325 41,579 93,706 Income (loss) from operations................. (10,462) (21,399) (31,188) (35,947) (105,767) Net income (loss)............. (10,491) (21,578) (35,465) (56,697) (97,309) OTHER DATA: Capital expenditures.......... $ 1,921 $ 1,031 $ 6,665 $ 2,569 $ 7,644 Total subscribers (at year end): Hallmark Entertainment Network................. 1,942 5,121 8,710 20,794 20,794 Kermit Channel............. -- -- -- 6,721 6,721 Odyssey Network............ -- -- -- -- 27,354 -------- -------- -------- -------- -------- Total subscribers.... 1,942 5,121 8,710 27,515 54,869 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ------------------------- PRO FORMA ACTUAL AS ADJUSTED (UNAUDITED) (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................. $ 3,865 $123,950 Goodwill.................................................. -- 245,404(1) Total assets.............................................. 81,046 538,799 Total long-term debt, excluding current maturities........ --(2) -- Stockholders' equity (deficit)............................ (62,967) 353,001 </TABLE> - --------------- (1) Goodwill represents the goodwill we will generate as a result of the reorganization, which will be amortized over a 20-year period. (2) Current maturities include $10.0 million due to Odyssey Holdings as the final installment of Crown Media's $50.0 million investment in Odyssey Holdings. This $10.0 million was paid to Odyssey Holdings in February 2000 and was funded through additional equity capital contributions from Hallmark Entertainment, Inc. and Chase Equity Associates. TABLE OF CONTENTS <TABLE> <CAPTION> Page <S> <C> Prospectus Summary...................... 1 Risk Factors............................ 8 Special Note with Respect to Forward- Looking Information................... 14 Reorganization Transactions Occurring Simultaneously with the Closing of This Offering......................... 15 Use of Proceeds......................... 17 Dividend Policy......................... 17 Capitalization.......................... 18 Dilution................................ 20 Selected Historical Consolidated Financial Data........................ 21 Selected Unaudited Pro Forma Consolidated Financial Data........... 23 Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 28 </TABLE> <TABLE> <CAPTION> Page <S> <C> Business................................ 39 Management.............................. 59 Certain Relationships and Related Transactions.......................... 70 Principal Stockholders.................. 80 Description of Capital Stock............ 82 Shares Eligible for Future Sale......... 86 Material U.S. Federal Income Tax Considerations for Non-U.S. Holders... 87 Underwriters............................ 90 Legal Matters........................... 92 Experts................................. 92 Where You Can Find More Information..... 92 Index to Consolidated Financial Statements............................ F-1 </TABLE> ---------------------- We are offering shares of Class A common stock of Crown Media Holdings, Inc. Hallmark Entertainment Network and the Odyssey Network are channels that we own and operate through our subsidiaries, Crown Media, Inc. and Odyssey Holdings, L.L.C. The artwork on the adjacent pages depicts frames from motion pictures and mini-series that we have licensed and aired on our channels. We do not produce or own these motion pictures or mini-series, nor are the actors shown our employees. Information contained on the website, www.odysseychannel.com, is not intended to be a prospectus and is not incorporated into this prospectus. SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA OF ODYSSEY HOLDINGS AND ITS SUBSIDIARIES (IN THOUSANDS) Odyssey Holdings operates the Odyssey Network. In the table below, we provide you with summary historical consolidated financial and other data of Odyssey Holdings and its subsidiaries. The following summary consolidated statement of operations data for the years ended December 31, 1996, 1997, 1998 and 1999 and the consolidated balance sheet data as of December 31, 1999 are derived from the audited financial statements of Odyssey Holdings and its subsidiaries. This data should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included elsewhere in this prospectus. Odyssey Holdings is organized as a limited liability company with membership interests. Therefore, no share or per share data is presented. <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ----------------------------------------- 1996 1997 1998 1999 <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues...................................... $ 12,981 $ 15,254 $ 18,141 $ 17,883 Total cost of sales................................. 10,988 12,489 15,074 52,127 Income (loss) from operations....................... 45 (270) (3,122) (56,244) Net income (loss)................................... 19 (421) (3,170) (55,063) OTHER DATA: Capital expenditures................................ $ 448 $ 123 $ 260 $ 5,075 Total Odyssey Network subscribers (at year end)..... 26,406 27,776 29,021 27,354 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ----------------------- <S> <C> BALANCE SHEET DATA: Cash and cash equivalents................................. $ 19,485 Total assets.............................................. 137,112 Total long-term debt, excluding current maturities........ -- Members' equity (deficit)................................. (1,153) </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001103886_linkshare_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001103886_linkshare_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained in other parts of this prospectus. You should read the entire prospectus carefully, including the financial statements and related notes. Unless otherwise indicated, all information in this prospectus: . assumes a 3.5- for-1 split of our currently outstanding common stock immediately before the closing of this offering; . assumes the conversion of all of our outstanding preferred stock into shares of our common stock upon the closing of this offering; . assumes the conversion of all of our outstanding convertible notes into shares of our common stock upon the closing of this offering (based upon an assumed initial public offering price of $11.00 per share); and . assumes that the underwriters will not exercise their over-allotment option. LinkShare Our Company LinkShare creates and operates online networks that enable businesses to form commercial relationships by linking their Web sites to the Web sites of other businesses. Businesses that join one of our networks can: . find the right Web sites with which to establish links; . negotiate the terms of their relationships with the businesses that own those Web sites; and . evaluate the success of those relationships. Our first network, The LinkShare Network(TM), brings together merchants selling products or services to consumers with Web site owners willing to promote those products and services on their Web sites. Merchants who join The LinkShare Network(TM) can establish promotional links on thousands of Web sites owned by independent Web site publishers who join the network as "affiliates." When a visitor to an affiliate's Web site clicks through a promotional link to a merchant's site and takes a prescribed action, such as buying a product or completing a form, that merchant pays a commission to that affiliate and to us. We provide the software and operate the systems through which: . merchants offer to pay commissions to affiliates who agree to carry their promotional links; . merchants screen affiliates and select those with whom they wish to form a marketing relationship; . links are created between the Web sites of merchants and affiliates who form relationships; and . Internet user traffic through these links is tracked and used to create detailed online reports accessible by both merchants and affiliates. The LinkShare Network(TM) currently has over 500 merchants and hundreds of thousands of affiliates. In March 2000, we launched B2B LinkShare(TM), a network similar to The LinkShare Network(TM) but whose members are focused on the business-to-business, rather than business-to-consumer, e-commerce market. To date, we have derived substantially all of our revenues from the fees we collect from the merchant members of The LinkShare Network(TM). Merchant members of The LinkShare Network(TM) pay us commissions based on the volume and dollar amount of the transactions generated through the links with their affiliates. They also pay us fees to use our software and to access our network. In addition, some merchants pay us fees for optional software features and service packages that we offer. Affiliates do not pay anything to access our network or use our services. However, we actively recruit and support affiliates to increase the overall transaction volume over our network, thereby increasing the commissions we receive from the merchant members of our network. Risk Factors Our business faces a number of risks that you should consider before you decide to buy our common stock. We operate in a competitive market and have a limited operating history. Since our inception, we have incurred substantial losses and expect that we will continue to experience additional losses in the foreseeable future. Our net losses were $193,428 and $3.4 million for the fiscal years ended June 30, 1998 and 1999, respectively, and $3.2 million for the six months ended December 31, 1999. At December 31, 1999, we had an accumulated deficit of $6.8 million. Our Market Opportunity According to International Data Corporation, total e-commerce is expected to grow to over $1.6 trillion by 2003. This growth represents both an opportunity and a challenge for online merchants and advertisers seeking a cost-effective method of reaching target audiences dispersed over millions of Web sites. We expect these businesses to increasingly concentrate their online marketing efforts on an advertising model known as performance-based marketing, in which a merchant only pays for those promotions that produce a desired result. Forrester Research, Inc. predicts that, by 2003, performance-based marketing will account for 50% of the estimated $17.2 billion of projected annual U.S. online advertising expenditures. We believe The LinkShare NetworkTM is an efficient, performance-based marketing program that enables businesses to make better marketing decisions, reduce their customer acquisition costs and generate greater revenue. Our Strategy Our goal is to be the premier provider of open networks that facilitate online commercial activity. Key elements of our growth strategy include: . continuing to add quality merchants and affiliates to our existing networks; . introducing new affiliate networks tailored to meet the needs of identifiable business communities; . adapting our technology and network model to serve the needs of emerging online commercial activity; . continuing to expand and enhance the features and performance of our software and revenue-generating service offerings; and . introducing our network model into suitable international markets. Where to Find Us Our principal executive offices are located at 215 Park Avenue South, New York, New York 10003, and our telephone number is (646) 654-6000. Our corporate Web site is located at www.linkshare.com. The information on our Web site is not part of this prospectus. Trademarks and Brand Names LinkShare Synergy(R) is a registered trademark of LinkShare Corporation, and we have filed trademark applications for The LinkShare NetworkTM , B2B LinkShareTM and TrafficShareTM. This prospectus contains other trademarks and trade names of LinkShare and other companies. These companies are not involved with the offering of our common stock. The Offering <TABLE> <S> <C> Common stock we are offering...... 4,700,000 shares. Common stock to be outstanding after this offering.............. 31,104,084 shares. Use of proceeds................... Working capital and other general corporate purposes. Proposed Nasdaq National Market Symbol........................... LNKS </TABLE> The common stock to be outstanding after this offering excludes: . 5,900,940 shares issuable upon exercise of outstanding options at a weighted average exercise price of $3.18 per share; . 269,000 shares we expect to sell to one of our executive officers upon the closing of this offering at a per share price equal to 80% of the per share initial public offering price of our common stock ($8.80, assuming an initial offering price of $11.00 per share); . 2,848,150 shares issuable upon exercise of options available for grant under our stock option plan; . 146,895 shares of common stock issuable upon the exercise of all of our outstanding warrants; and . 705,000 shares subject to the underwriters' over-allotment option. Summary Financial Data <TABLE> <CAPTION> Six Months Ended Years Ended June 30, December 31 --------------------- --------------------- 1998 1999 1998 1999 --------- ---------- --------- ---------- (In thousands, except share and per share Statement of Operations Data data) <S> <C> <C> <C> <C> Licensing fees................... $ 8 $ 221 $ 45 $ 612 Network fees..................... 39 494 94 2,001 --------- ---------- --------- ---------- Total revenues................. 47 715 139 2,613 Operating expenses............... 240 4,156 1,205 5,283 --------- ---------- --------- ---------- Loss from operations............. (193) (3,441) (1,066) (2,670) Interest income (expense), net... -- 61 28 (531) Net loss attributable to common stockholders.................... $ (193) $ (3,381) $ (1,038) $ (3,201) ========= ========== ========= ========== Basic and diluted net loss per share........................... $ (0.05) $ (0.85) $ (0.26) $ (0.80) Shares used in computing basic and diluted net loss per share ...................... 4,000,000 4,000,000 4,000,000 4,000,000 Unaudited pro forma basic and diluted net loss per share...... (0.14) (0.13) Shares used in computing unaudited pro forma basic and diluted net loss per share...... 24,546,974 25,504,646 </TABLE> Unaudited pro forma basic and diluted net loss per share have been calculated assuming a 3.5-for-1 split of our outstanding common stock and the conversion of all outstanding shares of preferred stock and convertible notes into common stock, as if the preferred shares and notes had converted immediately upon their issuance. Balance Sheet Data The following balance sheet data is presented on: . an actual basis; . a pro forma basis to reflect: . a 3.5-for-1 split of our outstanding common stock; . the automatic conversion of all outstanding shares of preferred stock on a 3.5-for-1 basis into 11,347,518 shares of common stock upon the closing of this offering; . the issuance of convertible notes and advances from stockholders from January 1, 2000, through February 7, 2000, for net proceeds of $3,655,000; . the issuance of convertible notes from March 31, 2000, through April 14, 2000, for net proceeds of $3,400,000; and . the automatic conversion of all outstanding notes and accrued interest on those notes through April 14, 2000, into 1,056,566 shares of common stock upon the closing of this offering and the recognition of $1,625,000 of interest expense for the related beneficial conversion feature (assuming an initial public offering price of $11.00 per share); and . a pro forma as adjusted basis to reflect our receipt of the net proceeds from the sale of 4,700,000 shares of common stock in this offering at an assumed initial offering price of $11.00 per share, after deducting the underwriting discounts and commissions and our estimated offering expenses. <TABLE> <CAPTION> As of June 30, As of December 31, 1999 ------------- ------------------------------ Pro Forma 1998 1999 Actual Pro Forma as Adjusted ------ ------ ------- --------- ----------- (in thousands) <S> <C> <C> <C> <C> <C> Cash, cash equivalents and short-term investments......... $ 4 $ 637 $ 7 $ 7,062 54,143 Working capital (deficit)....... (183) (88) (4,248) 5,652 52,733 Total assets.................... 102 1,788 4,752 11,807 58,888 Advances from stockholders...... -- -- 345 -- -- Convertible notes payable....... -- -- 2,500 -- -- Total stockholders' equity (deficit)...................... (156) 563 (1,868) 8,032 55,113 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001103970_viewlocity_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001103970_viewlocity_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL THE INFORMATION YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO, BEFORE MAKING AN INVESTMENT DECISION. VIEWLOCITY, INC. WHO WE ARE We are a leading global provider of e-business software and services that enable integration and synchronization of web-enabled trading communities. Web-enabled trading communities, also referred to as trading communities, consist of a variety of trading partners that have a collective business interest and a general method established to conduct business-to-business, or B2B, e-commerce. Our software and related services synchronize and automate business processes and information flows across Internet-based networks of suppliers, manufacturers, distributors, customers and other trading partners, known as supply webs, and allow trading communities and their members to conduct B2B e-commerce in real-time. Our TradeSync family of products includes B2B integration products -- AMTrix, TradeSync Integration Connectors, TradeSync Connector Development Platform and TradeSync Process Manager -- and supply web synchronization products -- TradeSync Inventory Visibility and TradeSync Shipment Visibility. By employing our TradeSync family of products, trading partners can connect to a common network, monitor shared supply web activities, synchronize and manage interactive business processes and react quickly to dynamic events, while retaining their existing information technology, or IT, systems. Our B2B integration software and services provide integration both within a single trading partner's enterprise and across multiple trading partners by connecting disparate software, a variety of databases and multiple communication protocols. Our supply web synchronization software provides applications for managing the flow of goods and services throughout supply webs. Our software and services provide our customers the ability to interact with their trading partners during all phases of the supply process, from manufacturing to order to fulfillment. Our software can be implemented quickly and can create measured benefits to our customers by accelerating their time to market, increasing their market share and revenue opportunities, reducing their costs and improving customer satisfaction. We provide e-business software and services that offer business value by combining integration software with supply web domain expertise and software designed specifically for the Internet. We have implemented software that automates, extends and synchronizes the supply web operations of multi-national consumer products companies, leading logistics service providers and online trading communities. We generate revenue principally through the licensing of our TradeSync family of products and from related support and professional services. During the periods prior to June 30, 2000, we derived all our revenue from the licensing of AMTrix and related TradeSync Integration Connector and Connector Development Platform products and from professional services supporting these products. We introduced our TradeSync Process Manager and TradeSync supply web synchronization products in the second quarter of fiscal 2000 and made them generally available in the third quarter of fiscal 2000. For the nine months ended September 30, 2000, we derived 96.6% of our license revenue from AMTrix and related TradeSync Integration Connector and Connector Development Platform products. As of September 30, 2000, we had over 1,000 customers worldwide with over 3,200 product implementations. OUR MARKET As new business models emerge during the rapid evolution of Internet-based collaboration among businesses and the related formation of trading communities, integration and synchronization become essential to this new environment. We believe that to remain competitive, trading communities must fully synchronize the logistics operations of their trading partners. This increases the pressure placed upon all members of the extended supply web to integrate, automate and improve the efficiency of all supply web transactions. We believe that other providers do not offer a comprehensive product suite that combines both B2B integration software and supply web synchronization software. As a result, our competitors often must partner with other providers to provide a comprehensive product suite. A significant opportunity exists to provide companies with the ability to accelerate their time to market globally and to synchronize their supply webs, leveraging the full potential of trading communities. OUR STRATEGY Our strategy is to strengthen our position as a leading global provider of comprehensive software and services that integrate trading communities and synchronize supply webs. We intend to increase our supply web domain expertise through research and development and additional personnel. Our sales strategy is to focus on selected high-growth, global markets, including third-party logistics, technology, consumer packaged goods, e-commerce and traditional retail and apparel. We intend to support and leverage our existing customers and to increase our visibility to prospective customers within their existing trading communities. We also will continue to pursue acquisitions and investments in complementary businesses that provide us with the opportunity to enhance our software and service offerings and add new distribution channels. COMPANY INFORMATION We were incorporated in Delaware in February 1999. Prior to our incorporation, our business was a division of Frontec AB, a Swedish corporation publicly traded on the OM Stock Exchange (formerly the Stockholm Stock Exchange). Frontec AB marketed our AMTrix product through subsidiaries that we now wholly own. Our company was formed with the existing assets and operations of Frontec AB's AMTrix software division. Subsequent to our separation from Frontec AB, we have financed our operations primarily through private sales of convertible preferred stock to third-party investors. Frontec AB remains a significant stockholder of our company, and upon the completion of this offering Frontec AB will own approximately 34.9% of our common stock, or 32.7% if the underwriters exercise their overallotment option. Frontec AB has one representative on our board of directors. We continue to maintain a commercial relationship with Frontec AB, which includes the grant to Frontec AB of a non-exclusive, world-wide right to market, sublicense and service our AMTrix product line. We operate 20 offices located in 11 countries. As of September 30, 2000, we had a total of 453 employees, of which 176 employees were located in our U.S. offices and 277 employees were located in our international offices. For the nine months ended September 30, 2000, we derived 65.5% of our revenue from international sources. As of September 30, 2000, we had an accumulated deficit of approximately $100.5 million. We expect to continue to devote substantial financial and other resources to developing enhancements to our existing products, introducing new products and expanding our professional services, sales and marketing activities. As a result we anticipate incurring operating and net losses for the foreseeable future. Our headquarters are located at 3475 Piedmont Road, Suite 1700, Atlanta, Georgia 30305, our telephone number is (404) 267-6400 and our web site address is WWW.VIEWLOCITY.COM. Information contained on our web site does not constitute part of this prospectus, and you should rely only on the information contained in this prospectus in deciding whether to invest in our common stock. THE OFFERING <TABLE> <S> <C> Common stock offered by Viewlocity................. 5,500,000 shares Common stock to be outstanding after this 38,414,297 shares offering......................................... Use of proceeds.................................... For repayment of debt, expansion of our business and general corporate purposes, including working capital, sales and marketing, product development and potential acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol............. VIEW </TABLE> The number of shares to be outstanding after this offering is based on the number of shares outstanding as of September 30, 2000, and does not include the following: - 3,961,660 common shares subject to options outstanding as of September 30, 2000, at a weighted average exercise price of $5.34 per share; - 316,092 common shares subject to warrants outstanding as of September 30, 2000, at a weighted average exercise price of $2.54 per share; and - 865,838 additional common shares reserved for issuance under our stock incentive plans and 2,500,000 common shares reserved for issuance under our employee stock purchase plan as of September 30, 2000. ------------------- EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS: - REFLECTS THE ISSUANCE OF AN ASSUMED AGGREGATE OF 5,043,956 SHARES OF OUR SERIES B CONVERTIBLE PREFERRED STOCK UPON THE CASHLESS EXERCISE OF OUTSTANDING WARRANTS, THE CONVERSION OF ALL OUTSTANDING SHARES OF OUR SERIES A, B, D AND E CONVERTIBLE PREFERRED STOCK INTO AN AGGREGATE OF 14,757,844 SHARES OF OUR COMMON STOCK, AND THE CONVERSION OF ALL OUTSTANDING SHARES OF OUR SERIES C CONVERTIBLE PREFERRED STOCK INTO AN ASSUMED 1,576,923 SHARES OF OUR COMMON STOCK, EACH OF WHICH WILL OCCUR IMMEDIATELY UPON THE COMPLETION OF THIS OFFERING; - REFLECTS A ONE-FOR-TWO REVERSE STOCK SPLIT OF OUR COMMON STOCK EFFECTIVE ON SEPTEMBER 21, 2000, WHEREBY EVERY TWO SHARES OF OUR COMMON STOCK WERE CONVERTED AND RECLASSIFIED INTO ONE SHARE OF COMMON STOCK, THEREBY REDUCING THE NUMBER OF ISSUED AND OUTSTANDING SHARES OF COMMON STOCK AND THE NUMBER OF SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF OUR CONVERTIBLE PREFERRED STOCK OR UPON EXERCISE OF OUTSTANDING OPTIONS AND WARRANTS TO PURCHASE COMMON STOCK; - REFLECTS THE AMENDMENT AND RESTATEMENT OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS, WHICH ARE EFFECTIVE UPON THE COMPLETION OF THIS OFFERING; AND - ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SUMMARY CONSOLIDATED FINANCIAL DATA The following is a summary of the consolidated financial data for our company. You should read this information together with the consolidated financial statements and the related notes appearing at the end of this prospectus and the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations." The pro forma consolidated balance sheet data below gives effect to the issuance of an assumed aggregate of 5,043,956 shares of our Series B convertible preferred stock upon the cashless exercise of outstanding warrants, the conversion of all outstanding shares of our Series A, B, D and E convertible preferred stock into an aggregate of 14,757,844 shares of our common stock, and the conversion of all outstanding shares of our Series C convertible preferred stock into an assumed 1,576,923 shares of our common stock, each of which will occur immediately upon the completion of this offering, as if the exercise and conversion occurred on September 30, 2000. We calculated the number of weighted average shares used in computing the pro forma basic and diluted net loss per share assuming the conversion of all shares of convertible preferred stock outstanding as of September 30, 2000, into common stock as if the shares of preferred stock had converted into common stock immediately upon issuance. Accordingly, accretion to redemption value is not included in the calculation of pro forma basic and diluted net loss per share. The pro forma as adjusted consolidated balance sheet data summarized below also reflects the sale of the common stock in this offering after deducting underwriting discounts and estimated offering expenses payable by us. <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------ ------------------- 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue..................................................... $11,694 $13,664 $ 19,448 $ 15,368 $ 26,038 Gross profit................................................ 7,430 7,325 8,264 7,412 13,104 Operating loss.............................................. (9,643) (9,469) (20,340) (11,116) (43,362) Net loss.................................................... (9,661) (9,630) (20,413) (11,188) (43,172) Net loss attributable to common stockholders................ (9,661) (9,630) (23,646) (11,188) (61,533) Net loss per share: Basic and diluted......................................... $ (0.57) $ (0.57) $ (1.39) $ (0.66) $ (3.82) ======= ======= ======== ======== ======== Weighted average shares used in computation............... 17,031 17,031 17,031 17,031 16,098 ======= ======= ======== ======== ======== Pro forma net loss per share (unaudited): Basic and diluted......................................... $ (0.92) $ (1.50) ======== ======== Weighted average shares used in computation............... 22,168 28,835 ======== ======== </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 2000 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (IN THOUSANDS) (UNAUDITED) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 6,647 $ 6,647 $ 69,502 Working capital............................................. (6,157) (6,157) 59,188 Total assets................................................ 42,991 42,991 105,846 Capital lease obligation, less current portion.............. 1,482 1,482 1,482 Redeemable, convertible preferred stock..................... 83,986 -- -- Total stockholders' equity (deficit)........................ (69,951) 14,035 79,380 </TABLE> This table does not include: - 3,961,660 common shares subject to outstanding options as of September 30, 2000, at a weighted average exercise price of $5.34 per share; - 316,092 common shares subject to outstanding warrants as of September 30, 2000, at a weighted average exercise price of $2.54 per share; and - 865,838 additional common shares reserved for issuance under our stock incentive plans and 2,500,000 common shares reserved for issuance under our employee stock purchase plan as of September 30, 2000.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001104094_medcenterd_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001104094_medcenterd_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..6c88e7ab09befce7eac07ac9d7135b93fea1e8ca
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE RISKS OF INVESTING IN OUR COMMON STOCK DISCUSSED UNDER "RISK FACTORS." OUR BUSINESS medcenterdirect.com is developing and implementing an online business-to-business e-commerce marketplace for the purchase and sale of medical and non-medical products, supplies and equipment used by alternate site, hospital and other healthcare providers. We aggregate both purchasers and suppliers to create an efficient, secure and real-time exchange for the large and highly fragmented healthcare industry. We believe the services and information that we provide enable purchasers and suppliers to more efficiently and effectively manage their businesses. We have entered into a ten-year exclusive contract with HEALTHSOUTH to provide an online procurement solution for all of HEALTHSOUTH's facilities(1). In addition, we have entered into an exclusive agreement with the National Association of Community Health Centers pursuant to which the National Association of Community Health Centers will assist us in conducting a pilot program at seven of its member locations throughout the United States. The pilot program is scheduled to run for 90 days commencing on April 15, 2000. During this period, the National Association of Community Health Centers has agreed to negotiate exclusively with us with the goal of entering into a long-term agreement to exclusively sponsor our company. HEALTHSOUTH and the National Association of Community Health Centers represent more than 5,000 healthcare facilities. We also currently have relationships with leading healthcare suppliers including Owens & Minor, Inc., Johnson & Johnson, Inc. and Medline Industries, Inc. We offer four integrated services that facilitate the entire healthcare procurement process: - - E-PROCUREMENT automates the purchasing and requisition process, inventory management, order status tracking, and the accounts receivable and accounts payable process; - - E-MANAGEMENT utilizes the information derived from the e-procurement and e-selection process to allow analysis of inventory management, contract compliance, physician and procedural cost data, and product marketing data; - - E-SELECTION allows access to our Superstore, where purchasers can evaluate a broad range of products from manufacturers and distributors. Product evaluations allow the purchaser to make informed decisions while enabling suppliers to communicate accurate clinical information, allowing for more clinically effective and cost-efficient patient care; and - - E-RESOURCE CENTER provides current information on innovative surgical techniques and products, along with the means to communicate directly with peers, product manufacturers and healthcare industry experts. Each of these services is integrated into our solution in a manner that enables the constant exchange of information, enabling our users to share knowledge and identify opportunities to improve efficiency. OUR INDUSTRY The Internet is rapidly changing the way in which companies conduct and improve their business workflow. Companies are increasingly adopting the use of the Internet as a means to create integrated business-to-business solutions to streamline complex processes, enable the purchase and sale of goods - ------------------------------ (1) Definitive documentation memorializing this arrangement is currently being finalized and will be provided pursuant to an amendment - -------------------------------------------------------------------------------- Through and including , 2000 (the 25th day after commencement of this offering), federal securities law may require all dealers selling shares of our common stock, whether or not participating in this offering, to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. TABLE OF CONTENTS - -------------------------------------------------------------------------------- <TABLE> <S> <C> Prospectus summary..................... 1 The offering........................... 3 Summary financial data................. 4 Risk factors........................... 5 Forward-looking information............ 23 Use of proceeds........................ 24 Dividend policy........................ 24 Capitalization......................... 25 Dilution............................... 26 Selected financial information......... 27 Management's discussion and analysis of financial condition and results of operations........................... 28 Business............................... 32 Management............................. 44 Certain relationships and related transactions......................... 50 Principal stockholders................. 52 Description of capital stock........... 53 Shares eligible for future sale........ 57 Underwriting........................... 59 Legal matters.......................... 60 Experts................................ 61 Where you can find more information.... 61 Index to financial statements.......... F-1 </TABLE> ABOUT THIS PROSPECTUS - -------------------------------------------------------------------------------- medcenterdirect.com is a trademark of medcenterdirect.com, inc. All other trademarks, service marks or trade names referred to in this prospectus are the property of their respective owners. and effectively communicate critical information among fragmented groups of customers, manufacturers and distributors. According to Forrester Research, United States business-to-business e-commerce will increase from $109 billion in 1999 to $1.3 trillion in 2003. The worldwide market for new medical products, supplies and equipment is estimated at $150 billion, with annual growth estimated at 6% to 7%, according to the Health Industry Manufacturers' Association. The United States segment of that marketplace, estimated at $60 to $80 billion, is highly fragmented and consists of more than 20,000 manufacturers, over 100 distributors, various integrated delivery networks and numerous group purchasing organizations. This supply chain provides new medical products to over 60,000 alternate site facilities, 6,000 hospitals, 600,000 physicians, 185,000 physician groups and other healthcare providers. According to an independent study conducted by Efficient Healthcare Consumer Response, the supply chain costs of distributing medical products total approximately $23 billion per year, of which an estimated $11 billion could be eliminated by more efficient sharing of information, management of orders and movement of products. OUR STRATEGY Our objective is to become the leading online marketplace for medical products, supplies and equipment. Our goal is to provide comprehensive services that together address the entire healthcare procurement process. Key elements of our strategy include: - - Build on First Mover Advantage in the Alternate Site Care Market While Expanding the Adoption of Our Online Marketplace; - - Provide Solutions That Empower Physicians, Clinicians and Administrators; - - Enhance Our Brand Recognition Among Key Decision-Makers; - - Establish Strategic Alliances With Leading Industry Participants; and - - Expand Internationally.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001104180_drugabuse_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001104180_drugabuse_prospectus_summary.txt
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+Prospectus summary Although this summary highlights what we believe to be the most important information about this offering, you should read the entire prospectus carefully for a complete understanding of the offering and our business. OUR BUSINESS We believe we are the first biotechnology company dedicated to developing and marketing novel therapies for alcohol and drug abusers. We intend to become the leading biopharmaceutical company in addiction care by offering a broad portfolio of medications to serve the addiction care community. Our strategy is to develop several medications in the near term and expand our product portfolio through research and the acquisition of marketed products and technologies. We intend to build a sales force to market our products, taking advantage of the concentrated addiction care market. THE PROBLEM Addiction is a chronic disease of the brain. Current therapy depends heavily on psychosocial therapy and the few available medications. However, we believe psychosocial therapy alone is insufficient as it does not address the biological basis of addiction. Furthermore, because of their underlying neurological disease, addicts typically have great difficulty taking pills every day and therefore current medications usually fail. Consequently, only a minority of patients receiving treatment remain alcohol or drug free after one year. Alcohol, heroin, cocaine and methamphetamine all affect a common neurological pathway, which involves the neurotransmitter dopamine. Medications that affect the dopamine pathway are available to treat alcohol and heroin dependence. However, to be effective in maintaining abstinence, these medications need to be taken every day on a long-term basis. There are no medications for treating addiction to other drugs of abuse, such as cocaine and methamphetamine. There is a great need for novel therapies which can improve compliance with existing medications and offer new means to promote abstinence, prevent relapse, and treat overdose for alcohol, heroin, cocaine and methamphetamine abusers. OUR SOLUTION We are developing a broad portfolio of biopharmaceutical products that address key medical needs of alcohol abusers and drug addicts. We intend to introduce VIXO-TM-, our branded version of oral naltrexone, this year. In addition, we are developing product candidates for the treatment of alcohol abuse and heroin addiction, NALTREL-TM-, BUPREL-TM- and METHALiz-TM-, to improve existing medications. These products are designed to be administered only once a month by a physician or a nurse, as opposed to once a day by the patient. By putting the medical practitioner in control, our products are expected to promote continuous therapy and help overcome patient non-compliance. Our other product candidates, COC-AB-TM-, MAP-AB-TM-, DAS-431 and ITAC-TM-, are intended to provide novel means to treat patients suffering from cocaine and methamphetamine overdose and addiction. In 2000, to support prospective market approval, we expect to conduct clinical trials with NALTREL for the treatment of alcohol and heroin dependence. In parallel, in the next 18 months we expect to conduct several human trials with BUPREL and METHALiz for the treatment of severe heroin addiction and with COC-AB, DAS-431, and ITAC for the treatment of cocaine overdose and addiction. OUR STRATEGY We intend to: - Focus on the large but under-served alcohol and drug addiction care market; - Develop several medications in the near term; - Build a broad product portfolio through internal discovery research and development, and the licensing or acquisition of commercial products and product candidates; and - Market our products in the United States and Europe using our own dedicated sales force. Our principal executive offices are located at 330 Distel Circle, Suite 150, Los Altos, CA 94022. Our telephone number is (650) 417-2300. AlcoholMD-TM-, BUPREL-TM-, COC-AB-TM-, DAS-TM-, DAS-431, DASpharmacy-TM-, DrugAbuse Sciences-TM-, ITAC-TM-, Lactiz-TM-, MAP-AB-TM-, METHALiz-TM-, NALTREL-TM- and VIXO-TM- are our trademarks. Trade names, service marks or trademarks of other companies appearing in this prospectus are the property of their respective holders.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001104219_seranova_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001104219_seranova_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information from this prospectus but does not contain all the information about SeraNova that may be important to a prospective investor. To better understand our business and financial position, you should carefully review this entire prospectus. Our Business SeraNova provides Internet professional services to businesses. Our services enable our clients to combine the scope and efficiencies of the Internet with their existing business processes. We design and implement Internet-based software applications that help companies manage procurement, sell products and services, provide customer service, conduct supplier transactions and communicate with their employees over the Internet. Our services include strategy consulting, creative design, technology implementation and maintenance of Internet-based software applications. In all of our client engagements, we apply SeraNova s Time-to-Market Approach, our proprietary methodology, to deliver these services. We focus on five industry markets financial services, telecommunications, automotive, technology and healthcare. During the last three years, we have provided Internet professional services to over 80 clients. Our clients include Global 5000 companies and emerging Internet-based companies that conduct their business exclusively over the Internet. Increasingly, many companies are using the Internet as the primary platform for communications and business transactions. In order to conduct complex business-to-business transactions over the Internet, companies must build sophisticated Internet-based software applications that are consistent with their market positioning and business goals. In order to build these applications, companies must have expertise in business strategy, creative design and technology implementation. Many companies are seeking outside specialists with comprehensive and integrated offerings to provide these services. SeraNova provides an integrated set of services that enable rapid deployment of Internet-based software applications. Typically, we begin our client engagement with strategy consulting. Our team of industry experts and business process specialists help formulate a comprehensive Internet strategy for our clients. Next, our technology experts and implementation project managers identify project requirements and create a software application deployment plan. We then select and deploy a technology team from our more than 800 professionals located across our seven global delivery centers to develop and implement these applications. Once these applications are deployed, SeraNova provides software application management services, that include website and related database updates and software functionality enhancements. This improves our clients ability to dynamically adjust their business processes and effectively address changing market opportunities. We believe our proprietary methodology and our knowledge management processes allow us to reduce the time to deliver our services. We seek to continue to strengthen our relationships with key clients and further penetrate our target industry markets. We currently are executing a focused marketing strategy that is aimed at building the SeraNova brand. We intend to continue to attract and retain outstanding professionals critical to our professional services business. SeraNova places great emphasis on proactive recruiting, career development and employee retention. Corporate Information SeraNova was incorporated in New Jersey under the name Infinient, Inc. on September 9, 1999 as a wholly-owned subsidiary of Intelligroup, Inc. Effective January 1, 2000, Intelligroup contributed the assets and liabilities of its Internet solutions group including SeraNova India which commenced operations in October 1999, the capital stock of Network Publishing, Inc. and the capital stock of the Azimuth Companies to SeraNova. This contribution was accounted for using the carryover basis of accounting. Intelligroup had acquired the Azimuth Companies in a transaction accounted for as a pooling of interests and had acquired Network Publishing, Inc. through a purchase acquisition. The financial statements of Network Publishing, Inc. at December 31, 1998 and 1997, and for the years ended December 31, 1998, AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 1997 and 1996, appear in this prospectus beginning on page F-21. SeraNova began operations in India in October 1999 and the United Kingdom in November 1999. On July 5, 2000, Intelligroup distributed to its shareholders all 16,629,413 shares of the SeraNova common stock it held. For each share of Intelligroup common stock held by an Intelligroup shareholder, one share of SeraNova common stock was issued. SeraNova split the number of its outstanding shares on the record date of such dividends so that the number of SeraNova s outstanding shares equaled the number of outstanding shares of Intelligroup. Since the spin-off, SeraNova and Intelligroup have operated independently of each other as separate public companies. Prior to the spin-off, we entered into the following agreements with Intelligroup: Contribution Agreement; Services Agreement; Space Sharing Agreement; Tax Sharing Agreement and Distribution Agreement. Such agreements govern our on-going relationship with Intelligroup. See The Spin-Off and Our Relationship with Intelligroup Contractual Arrangements. Our principal executive offices are located at 499 Thornall Street, Edison, New Jersey 08837. Our telephone number at that address is (732) 362-1601. Our website is located at http://www.SeraNova.com. The information contained at our website is not incorporated into and does not constitute a part of this prospectus. All references to we, us, our or SeraNova in this prospectus means SeraNova, Inc. and SeraNova s business after the contribution of assets and liabilities of Intelligroup, Inc. s Internet services business to us by Intelligroup and certain of its subsidiaries pursuant to the contribution agreement between Intelligroup, Inc. and SeraNova dated as of January 1, 2000. The Proposed Merger On October 27, 2000, SeraNova and Silverline Technologies Limited announced that they had entered into an agreement and plan of merger, under which Silverline would acquire SeraNova in exchange for American depositary shares of Silverline then valued at approximately $99 million, and the assumption by Silverline of SeraNova indebtedness currently in the amount of approximately $12 million. The acquisition would occur by means of a merger of a wholly-owned subsidiary of Silverline into SeraNova in which each share of SeraNova common stock would be converted into 0.35 of a Silverline American depositary share. On October 26, 2000, the day before the agreement and plan of merger was signed, the closing price of a Silverline American depositary share for New York Stock Exchange composite transactions was $15.875. The merger is subject to regulatory approvals and approval by the shareholders of SeraNova and Silverline. Subject to such approvals, we expect that the merger will be complete sometime in the first quarter of 2001. The agreement and plan of merger provides that SeraNova will pay Silverline a termination fee of $4 million in certain circumstances if the agreement and plan of merger is terminated and within twelve months thereafter another person acquires at least 50% of the assets of SeraNova and its subsidiaries or at least 50% of the combined voting power of the shares of SeraNova common stock, or a merger, consolidation, business combination, recapitalization, dissolution, liquidation or similar transaction occurs involving SeraNova or any of its subsidiaries, in which the acquiring person or its stockholders will own at least 40% of the combined voting power of the parent entity resulting from any such transaction. For more information concerning Silverline and the proposed merger, see The Proposed Merger. The Offering Use of proceeds SeraNova will not receive any of the proceeds from the sale of shares in this offering by the selling shareholders. Nasdaq symbol SERA
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001104235_chematch_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001104235_chematch_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary highlights selected information from this prospectus and may not contain all the information that is important to you. To learn more about the offering and our business, you should read the entire prospectus including our financial statements and related notes appearing elsewhere in this prospectus. CHEMATCH.COM, INC. OUR BUSINESS CheMatch.com is a business-to-business Internet-based marketplace for purchasers and sellers of commodity chemicals, plastics and fuel products. Our marketplace incorporates a real-time, interactive trading exchange, where our members bid, offer and negotiate online for the purchase and sale of products 24 hours a day, seven days a week. Members of our secure, neutral exchange trade products anonymously, utilizing real-time pricing and other market information provided through our exchange. Members are pre-qualified by us and pre-selected by each other before trading on our exchange. Our members include more than 400 of the world's leading chemical companies and other leading purchasers and sellers of commodity chemicals, plastics and fuel products, including traders, distributors, brokers, manufacturers and other end users. Our trading exchange, located at www.chematch.com, was the first and is one of the largest online exchanges serving the chemical industry. Over $250 million in transactions have been traded on our exchange since February 1998, and over $160 million in transactions were traded on our exchange during the six months ended June 30, 2000. In the first half of 2000, we averaged more than 175,000 metric tons of daily product bids and offers and the average transaction value of completed trades exceeded $500,000. Benzene accounted for approximately 69% of the physical trading volume on our exchange in fiscal 1999 and approximately 39% during the six months ended June 30, 2000. We generate revenues on our trading exchange from commissions typically paid by each party to a completed transaction. During 1999, we had pro forma revenues of $0.4 million and a pro forma net loss of $9.6 million. During the first six months of 2000, we had revenues of $0.2 million and a net loss of $14.9 million. We have entered into strategic alliances with Bayer AG, Computer Sciences Corporation, E.I. duPont de Nemours and Company, General Electric Company and Muehlstein Holding Corporation to build our membership, to increase the trading volume on our exchange and to generally enhance our trading exchange. In addition, we have strategic relationships with Stolt-Nielsen Transportation Group Ltd. to facilitate logistics, with DeWitt & Company, Incorporated and a subsidiary of Reed Elsevier plc to provide information services, and with eCredit.com and TownsendTarnell, Inc. to provide credit and other services. Some of these strategic allies have and others may in the future invest in our competitors and may reduce or discontinue their use or support of our marketplace. We maintain an extensive information resource center, located at www.petrochem.net, that provides over 5,000 users access to industry news, forums, reference materials and more than 100 offerings from a number of highly respected chemical industry sources. We generate revenues through our information resource center from commissions for subscriptions and other fees paid by subscribers. Users may subscribe to market updates featuring chemical industry news, pricing information and related statistics, over 40 product-specific consulting reports containing summaries of marketing and pricing trends, and over 20 newsletters that detail market trends in the chemical industry. In addition, the CheMatch trading screen integrates relevant news, trends, commentaries and analyses from our information resource center. OUR MARKET OPPORTUNITY The Internet has emerged as a global communications medium enabling businesses worldwide to communicate, share information and transact business electronically. Businesses are increasingly using the Internet to streamline complex processes, lower costs and improve efficiency by reducing traditional DESCRIPTION OF ARTWORK (1) Inside front page: The following text appears in the center of the page: "The chemicals, plastics and fuel products market is changing . . ." (2) Left page of the gatefold: A computer screen appears on this page displaying the current posting screen of the CheMatch.com trading exchange. The page is as it appears using a Netscape browser. At the top left corner of the web page is the CheMatch.com corporate logo. Directly to the right of the corporate logo is a row with the following columns representing different web pages accessible by members: Category / Activity / Specs / Current / Create / Completed / Inactive / Summary / History. The web page selected is "Current" - and presents a member with an overview of the current postings on the CheMatch trading exchange. In the middle of the screen, a chart appears with the following column headings, some of which are abbreviated: Select / Trade / Product / Specifications / Freight / Location / Quantity / Price / Delivery / Comments. Eight current postings are listed on this screen including two benzene postings, one cumene posting, two methanol postings, one mixed xylenes posting, one PTA posting and one styrene posting. For each posting, information is provided that relates to the column headings. For example, the first posting relates to benzene. The row relating to this posting is highlighted in red to indicate that a counteroffer has been made with respect to this posting. The current posting is as offer to purchase 40Mbbl of benzene FOB Houston, Texas to be delivered in April 2000 for a specified price per gallon with a ASTM 2359 LTLD specification. The offeror has indicated the following in the "Comments" column - "zero bromine required." Below the chart is a row of buttons a member can select to access additional information with respect to the current postings, including: Respond / Inactive / Refresh / Logoff / Time Remaining. A legend exists at the end of this column to provide additional information to members for current postings. Recent postings are highlighted in green text, postings made by the member viewing the screen are highlighted in purple text, counters made by the member viewing the screen are highlighted in yellow text, and countered postings are highlighted in red text. Below this row, in the bottom half of the screen, are "DeWitt Daily Analytics." On this screen, a graph depicts the "DeWitt Index - U.S. Xylenes Contract & Spot/Blend Values." On the side of the graph is the following text: "The DeWitt index is used to monitor movement relative to historical averages. The index also yields information pertaining to present directional trends. On a contract basis, the index fell as blendvalues increased for the week. The xylenes contract-to-blendvalue ratio is 1.10, which 7% under the 5-year average. On a spot basis the business communication barriers of time, geography and number of participants. Forrester Research predicts that business-to-business electronic commerce, or e-commerce, in the United States will grow from $109 billion in 1999 to over $2.8 trillion in 2003. The global chemical industry, which is comprised of three principal segments -- commodities, specialties and life sciences -- is a $1.6 trillion annual market. The commodity chemicals -- including basic industrial chemicals, petrochemicals and agrichemicals -- and plastics market is the largest segment of the global chemical industry, representing in excess of $700 billion of products purchased and sold worldwide each year. Fuel products, an additional market segment served by our exchange, represents over $100 billion of products purchased and sold worldwide annually. The petrochemical industry is projected by Forrester Research to be the third largest segment of the Internet economy in the United States by 2003, growing from $27 billion in 2000 to $184 billion in 2003. The traditional marketplace for commodity chemicals, plastics and fuel products is characterized by a high degree of fragmentation, a lack of real-time market information, geographic insularity and relatively illiquid markets. The process of initiating, negotiating and completing a transaction is time consuming and subjects the parties to market risk related to price fluctuations. Communications between industry parties occur primarily by telephone and facsimile and require significant paper documentation. These market limitations create the need for a more efficient, information-based, business-to-business online solution. THE CHEMATCH SOLUTION Our Internet-based marketplace has the following key features: - Real-Time, Interactive Exchange. Our members bid, offer and negotiate online for the purchase and sale of commodity chemicals, plastics and fuel products in real-time 24 hours a day, seven days a week based on current market information. - Auctions, Reverse Auctions and Tenders. Our members can conduct auctions to sell products, reverse auctions to buy products, and tenders in which the winning bid can be chosen based on factors including non-price considerations. - Market Intelligence. We provide our members with real-time pricing and other relevant market information, including news, trends, commentaries and analyses, which enables them to trade on a more fully-informed basis. - Global Reach. Our trading exchange is designed to create a global marketplace that transcends time zones and established personal networks, providing our members with expanded market reach. - Qualified Traders and Products. We screen our members before they are cleared to join and participate on our trading exchange. Each product or grade of product traded on our exchange is required to meet defined specifications such as chemical composition and other attributes including content, color and purity. - Pre-Selection of Trading Partners. Prior to their participation on our exchange, our members pre-select the other members from whom they will purchase and to whom they will sell products and set the credit terms for those selected members. - Anonymity. After pre-selecting the parties with whom they will trade, our members bid, offer and negotiate online on an anonymous basis with respect to other exchange members. Only upon the matching of a trade is the identity of each party revealed and then only to the other party to the transaction. - Increased Liquidity and Velocity. We believe the efficiencies associated with our marketplace will improve liquidity and increase trading volume within our target market, which will enable our members to better manage their capacity utilization and inventory. - Reduced Cost Structure. We believe our trading exchange will allow our members to reduce the expense and streamline the processes of procurement, sales and marketing and administration. index fell as well, with spot xylenes increasing only 0.9% while blendvalues increased 14.8% maintaining the index's downward position. Theoretically, the two curves should converge with the start of a new contract month. This week's index values for contract and spot are 0.93 and 0.98, respectively. These numbers express the current ratio value as a percentage of the corresponding 5-year average. - Marcus Dotson 2/25/00." (3) Right page of the gatefold: At the top of this page the following text appears: "Introducing the CheMatch.com Marketplace - A global Internet exchange and information resource for buying and selling bulk commodity chemicals, plastics and fuel products." Below this, the following text appears under the heading "CheMatch.com Exchange": o Internet-based exchange o Real-time and interactive o Third-party neutral o Pre-selected, qualified trading partners o Anonymous trading o Confirmed transactions o Global marketplace o Defined product specifications o Market information and analytics o Auctions, reverse auctions and tenders Below this, the following text appears under the heading "Our Information Resource Center": o Real-time chemical industry news o Chemical product information o Search capabilities o NYMEX price and volume feeds o Analysis of industry trends o Foreign currency exchange data o Research reports o Newsletters and commentaries Finally, the CheMatch.com corporate logo appears in the bottom right corner of the page. - Reliability and Confirmation. We believe our members' ability to pre-select the parties with whom they will trade and our system's online documentation and confirmation procedures bring greater certainty to the trading process as compared to other Internet-based trading systems on which parties may not be able to limit their negotiating partners to creditworthy or otherwise acceptable parties. THE CHEMATCH STRATEGY Our objective is to expand upon our position as a leading Internet-based solution for purchasers and sellers of commodity chemicals, plastics and fuel products. We intend to achieve this objective by implementing the following strategies: - increase the adoption of our trading exchange through our focused sales and marketing efforts to promote liquidity within the market for commodity chemicals, plastics and fuel products; - expand the number of products eligible for trading on our exchange and about which we offer market information; - enhance functionality by offering various personalized services, integrating our exchange with our members' administrative and operational software systems and providing improved interactive content; - implement recent strategic relationships to facilitate logistics and offer credit services, and enter into additional strategic relationships to provide financial risk management products; - leverage our management's chemical industry expertise to increase the adoption of our marketplace; - maintain the integrity of our marketplace through our third-party neutral approach; - expand our international operations; and - leverage existing and new technologies. CHEMATCH.COM CheMatch.com, Inc. was incorporated in Delaware on June 21, 1999 as PetroChemNet Holdings, Inc. We acquired PetroChemNet, Inc. and CheMatch, Inc. through a series of corporate transactions shortly after we were incorporated. On November 29, 1999, we changed our name to CheMatch.com, Inc. We refer to the consolidated company in this prospectus as CheMatch. Our principal executive offices are located at 2900 North Loop West, Suite 1120, Houston, Texas 77092 and our telephone number is (713) 681-6600. We also maintain a domestic office in San Ramon, California and international offices in Brussels, Belgium, Hong Kong, Manchester, England, Singapore, Tokyo, Japan and Zurich, Switzerland. We also have local representatives in Buccinasco, Italy, Madrid, Spain, Sao Paulo, Brazil, Seoul, Korea and Valencia, Venezuela. Our web sites are located at www.chematch.com and www.petrochem.net. The information contained on our web sites is not incorporated by reference into this prospectus. WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE PERMITTED BY US FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING THIS PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR LEGAL. SUBJECT TO COMPLETION -- AUGUST 9, 2000 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PROSPECTUS , 2000 [CHEMATCH.COM LOGO] 5,000,000 SHARES OF COMMON STOCK -------------------------------------------------------------------------------- CHEMATCH.COM, INC.: - We are a business-to-business Internet-based marketplace for purchasers and sellers of commodity chemicals, plastics and fuel products. PROPOSED SYMBOL & MARKET: - CHEM/Nasdaq National Market THE OFFERING: - We are offering 5,000,000 shares of our common stock. - The underwriters have an option to purchase an additional 750,000 shares of common stock to cover over-allotments. - This is our initial public offering, and no public market currently exists for our shares. - We anticipate that the initial public offering price will be between $10.00 and $12.00 per share. - Closing: , 2000. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------ Per Share Total ------------------------------------------------------------------------------------------ <S> <C> <C> Public offering price: $ $ Underwriting fees: Proceeds to CheMatch.com, Inc.: ------------------------------------------------------------------------------------------ </TABLE> THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6. -------------------------------------------------------------------------------- Neither the SEC nor any state securities commission has determined whether this prospectus is truthful or complete. Nor have they made, nor will they make, any determination as to whether anyone should buy these securities. Any representation to the contrary is a criminal offense. -------------------------------------------------------------------------------- DONALDSON, LUFKIN & JENRETTE DEUTSCHE BANC ALEX. BROWN SALOMON SMITH BARNEY PAINEWEBBER INCORPORATED DLJDIRECT INC. THE OFFERING Common stock offered.................... 5,000,000 shares Common stock to be outstanding after this offering........................... 21,593,195 shares Use of proceeds......................... For general corporate purposes, working capital, and potential acquisitions and investments. Proposed Nasdaq National Market symbol.................................. CHEM Unless otherwise indicated, the information in this prospectus: - is based upon 5,299,395 shares of common stock outstanding as of June 30, 2000; - assumes the net exercise of all convertible preferred stock warrants immediately prior to the consummation of this offering; - assumes the conversion of all outstanding shares of convertible preferred stock into shares of common stock immediately prior to the consummation of this offering; - assumes the net exercise of 482,571 common stock warrants that would otherwise expire upon the consummation of this offering into 423,961 shares of common stock; - does not assume the issuance of 397,440 shares of common stock upon exercise of outstanding warrants at a weighted average exercise price of $3.33 per share that will remain outstanding upon consummation of this offering; - does not assume the issuance of 4,199,029 shares of common stock upon exercise of outstanding options under our stock option plans at a weighted average exercise price of $2.59 as of July 7, 2000; - does not assume the issuance of 676,012 options available for grant under our stock option plans as of July 7, 2000; and - does not assume the exercise of the underwriters' over-allotment option to purchase up to 750,000 additional shares. TABLE OF CONTENTS <TABLE> <CAPTION> PAGE <S> <C> Prospectus Summary................. 1 Risk Factors....................... 6 Special Note Regarding Forward Looking Statements............... 17 Use of Proceeds.................... 18 Dividend Policy.................... 18 Capitalization..................... 19 Dilution........................... 20 Unaudited Pro Forma Statements of Operations....................... 21 Selected Financial Data............ 23 Management's Discussion and Analysis of Financial Condition and Results of Operations........ 24 </TABLE> <TABLE> <CAPTION> PAGE <S> <C> Business........................... 33 Management......................... 52 Related Party Transactions......... 65 Principal Stockholders............. 68 Description of Capital Stock....... 70 Shares Eligible for Future Sale.... 73 Underwriting....................... 75 Legal Matters...................... 78 Experts............................ 78 Change in Independent Accountants...................... 78 Where You Can Find More Information...................... 78 Index to Financial Statements...... F-1 </TABLE> SUMMARY FINANCIAL DATA The following table presents summary unaudited consolidated financial data for our business. The pro forma statement of operations data for the year ended December 31, 1999 combine the historical statements of operations of CheMatch, PetroChemNet, Inc. and CheMatch, Inc. as if the acquisition of PetroChemNet, Inc. and CheMatch, Inc., which occurred on June 21, 1999, had been completed on January 1, 1999. You should read the following summary unaudited consolidated financial data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus. <TABLE> <CAPTION> PRO FORMA YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1999 JUNE 30, 2000 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues................................................... $ 373 $ 247 Operating loss............................................. (9,801) (15,812) Net loss................................................... (9,579) (14,882) Net loss attributable to common stockholders............... $ (39,084) $ (39,055) ========== =========== Net loss per share, basic and diluted...................... $ (12.91) $ (7.74) Pro forma net loss per share adjusted for the assumed net exercise of all convertible preferred stock warrants, the conversion of all convertible preferred stock and the net exercise of 482,571 common stock warrants into 423,961 shares of common stock, basic and diluted................ (1.19) (0.91) Shares used to compute net loss per share, basic and diluted.................................................. 3,026,581 5,047,362 Shares used to compute pro forma net loss per share adjusted for the assumed net exercise of all convertible preferred stock warrants, the conversion of all convertible preferred stock and the net exercise of 482,571 common stock warrants into 423,961 shares of common stock, basic and diluted.......................... 8,068,888 16,341,162 </TABLE> The following table presents summary consolidated balance sheet data as of June 30, 2000. The unaudited pro forma balance sheet assumes the net exercise of all outstanding warrants for the purchase of convertible preferred stock and the conversion of all convertible preferred stock into shares of common stock and includes the effect of the net exercise of 482,571 common stock warrants into 423,961 shares of common stock. The pro forma as adjusted information reflects the sale of 5,000,000 shares at a price of $11.00 and our proposed use of the estimated net proceeds. <TABLE> <CAPTION> AS OF JUNE 30, 2000 --------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............................... $ 19,428 $19,428 $69,693 Working capital......................................... 14,405 14,405 64,105 Total assets............................................ 32,832 32,832 82,232 Total convertible preferred stock....................... 91,124 -- -- Total stockholders' equity (deficit).................... (64,537) 26,587 76,287 </TABLE>
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+Our quarterly operating results have varied in the past and may vary significantly in the future depending on many factors including, among others: the size, timing and recognition of revenue from significant orders; the timing of new product releases and product enhance- Table of Contents ments and market acceptance of those releases; increases in operating expenses required for product development and marketing; customer budget constraints; our success in expanding our sales and marketing programs; and general economic conditions. Furthermore, we believe that the purchase of our products is relatively discretionary and generally involves a significant commitment of capital. As a result, purchases of our products may be deferred or canceled in the event of a downturn in any potential customer s business or the economy in general. On an annual basis, we have generally realized lower revenues in our first and second quarters than in our third and fourth quarters. We believe that these fluctuations are caused primarily by customer budgeting and purchasing patterns, particularly in the case of our government customers. A substantial portion of our operating expense level, particularly personnel and facilities costs, are based, in part, on our expectations as to future revenues and are relatively fixed in advance of any particular quarter. In addition, we typically enter into a significant portion of our new license contracts in the last two weeks of a quarter. Consequently, if revenues are below expectations, our quarterly operating results and financial condition could be adversely affected. As a result of the foregoing factors, we believe that our quarterly revenues, expenses and operating results are likely to vary significantly in the future, that period-to-period comparisons of our operating results may not be meaningful and that, in any event, such comparisons should not be relied upon as indicators of future performance. Liquidity and Capital Resources From our inception through December 30, 1999, we financed our operations and met our capital expenditure requirements primarily through funds borrowed from Telos. On December 30, 1999, we completed the sale of our Series A convertible preferred stock, which totaled $23.0 million in net proceeds, as well as several concurrent transactions which are described in Note 7 to the financial statements. As a result of these transactions, Telos ownership percentage in us decreased from 99.7% to 34.8%. Accordingly, we were deconsolidated from Telos and ceased to be funded by Telos after December 30, 1999. Our operating activities have used cash in each of the last three fiscal years. During 1997, 1998 and 1999, cash used in operating activities of $2.6 million, $6.1 million and $8.4 million, respectively, resulted principally from net losses of $4.4 million, $8.7 million and $14.0 million, respectively. Cash used in investing activities was $3.6 million, $2.6 million and $1.6 million in 1997, 1998 and 1999, respectively. The cash used in investing activities was principally used for our investment in our software products, and for the purchase of computers and other office equipment and fixtures. Cash provided by financing activities was $6.1 million, $8.8 million and $28.7 million in 1997, 1998 and 1999, respectively. The cash provided by financing activities was principally provided by the borrowings from Telos in 1997 and 1998, and by the net proceeds of the offering of Series A convertible preferred stock and borrowings from Telos in 1999. We anticipate that our liquidity needs for at least the next twelve months will be met by our existing capital resources and the net proceeds from this offering. After this time, we cannot assure you that cash generated from operations will be sufficient to satisfy our liquidity requirements, and we may need to raise additional capital by selling additional equity or debt securities or by obtaining a credit facility. Table of Contents Year 2000 Issues To date we have experienced no significant adverse effects related to the Year 2000 computer issue. We had no notable problems with equipment or our internal information technology systems which may have been affected by faulty embedded chips or other Year 2000 problems. We are not aware of Year 2000 problems with our software. In addition, we have not been made aware of, nor have we experienced, Year 2000 problems with any third-party software. We have not incurred any material costs directly associated with Year 2000 compliance efforts, except for compensation costs for certain employees who have dedicated time to our assessment of Year 2000 compliance and associated remedies. We do not expect to incur additional material costs associated with Year 2000 compliance; however, in the event that we have not identified and corrected any significant Year 2000 compliance issues, these unresolved issues could harm our business. Quantitative and Qualitative Disclosures About Market Risk Market Risk. We develop products in the United States and market our products in North America and, to a lesser extent, the rest of the world. As a result, our financial results could be affected by factors such as changes in foreign currency rates or weak economic conditions in foreign markets. Because all of our revenues are currently denominated in US dollars, a strengthening of the dollar could make our products less competitive in foreign markets. Interest Rate Risk. We have an investment portfolio of money market funds and fixed income certificates of deposit. The fixed income certificates of deposit, like all fixed income securities, are subject to interest rate risk and will fall in value if market interest rates increase. We attempt to limit this exposure by investing primarily in short-term securities. In view of the nature and mix of our total portfolio, a 10% movement in market interest rates would not have a significant impact on the total value of our portfolio as of December 31, 1999. New Accounting Pronouncements In 1999, we adopted Statement of Position (SOP) No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which provides guidance on accounting for the costs of computer software developed or obtained for internal use. SOP 98-1 was effective for fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 did not have a material impact on our results of operations. In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. SFAS 133, as amended by SFAS 137, Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133, an amendment of FASB Statement No. 133, is effective for all quarters of the year ending December 31, 2001. We currently do not engage or plan to engage in the use of derivative instruments, and do not expect SFAS 133 to have a material impact on our results of operations. Table of Contents BUSINESS Overview We develop, market and support a software framework that integrates content and processes for companies seeking to participate in e-business. We target operators and users of e-marketplaces and portals. E-marketplaces and portals are Web-based destinations where employees, customers, partners and suppliers can interact to obtain information about products and services, and conduct business more efficiently. Our products enable customers to build or join e-marketplaces and portals rapidly, add new content and e-business participants easily, and automate the end-to-end processes required for e-business interaction. In addition, our products complement and leverage companies significant investments in technology infrastructure, such as packaged or custom-built applications, information databases and integration systems. The Enterworks product suite currently consists of two components. The first component, Enterworks Content Integrator, delivers a real-time, personalized catalog of content from multiple sources, including databases, applications and HTML- and XML-based sources. Enterworks Content Integrator enables operators and users of e-marketplaces and portals to: integrate new content from customers, partners and suppliers quickly and easily; display a unified view of content in real time; and deliver integrated content to an e-business application. The second component of the Enterworks product suite, Enterworks Process Integrator, captures and automates a company s business practices and expertise. Enterworks Process Integrator enables operators and users of e-marketplaces and portals to: integrate applications and processes; automate and track information flow to coordinate e-business interactions within and between companies; and resolve problems that require user interaction and guidance through complex processes. We deliver our products through our direct sales force and strategic partners, which include traditional system integrators, e-business professional services companies, and other software vendors and technology partners. Our current customers include financial, manufacturing, government, healthcare and telecommunications enterprises, as well as professional services providers. As of December 31, 1999, we had licensed our products to more than 50 companies, including The Boeing Company, CareFirst Blue Cross Blue Shield, Cast Alloys, Inc., Jefferies Company, Inc., NonStopNet, Inc., Tivoli Systems, Inc. and the US Army. Industry Background Forrester Research estimates the annual value of business-to-business products and services that will be sold in the United States over the Internet will exceed $2.7 trillion by 2004, and that 53% of that value will be processed through e-marketplaces. In addition, industry studies indicate that many companies are implementing their own enterprise information portals. Companies in virtually every industry are developing the capabilities to take advantage of this growing Internet economy, in many cases by augmenting or abandoning their traditional business models. Companies may choose to create or participate in e-marketplaces content-rich, Web-based destinations that bring together many buyers, sellers and business prospects who seek aggregated information about products and services. For example, companies that have Table of Contents significant trading power with their suppliers, such as a large aircraft manufacturer, might open an Internet-based bidding marketplace for efficient, online purchase of components from its hundreds or thousands of suppliers. Some companies are establishing their own e-business information portals Web sites which act as single points of online access for enterprise customers, partners, suppliers and employees to find information, interact, obtain services and execute transactions. For example, a financial services company might offer to its customers a central access point to have personalized, real-time views of market data, check account balances, and then purchase securities or pay their bills online without leaving the Web site, even though much of the information resides elsewhere. Employees might access the same site for personalized views of their 401(k) account balances and to update their healthcare benefits records. Challenges faced by companies deploying and participating in e-marketplaces and portals Companies face many business challenges in deploying or participating in e-marketplaces and portals, including: Time-to-scale. The global accessibility and reach of the Internet provides significant opportunities for new online entrants to rapidly displace slower competitors. This increases the importance of time-to-market for companies seeking to deploy or participate in e-marketplaces or portals. The success of an e-marketplace will depend largely on the early capture of a large number of buyers and sellers to create market liquidity and to attract further participants to the site. In many segments of the Internet economy, only a single e-marketplace or a few portals will dominate a market. Leveraging core business processes and systems. Companies have invested significant resources in developing business practices that provide them with competitive advantages. These companies want to incorporate these business practices into e-marketplaces, portals and other online extensions of their operations. For example, a distributor may benefit from its optimized logistics process and operating infrastructure. Similarly, a supplier might compete based on a process optimized for just-in-time production, or a media company may compete based on the depth and breadth of its digitized content. Constant change. E-marketplace and portal operators and participants work in an environment characterized by frequent disruptions and change. E-marketplaces involve complex business interactions ranging from hundreds to thousands of customers, partners, suppliers and employees. E-marketplace and portal participants are under constant pressure to adapt to dramatic growth, new business practices, intense competition and increasing complexity. Any change, such as the addition or loss of participants, should be accomplished in real-time without disrupting the information flow. Customer satisfaction. While e-marketplace and portal operators and participants seek to achieve high degrees of automation and economies of scale, they often fail to provide the level of customer attention and service that customers often expect will accompany any business-to-business and business-to-consumer interaction. For example, a recent Jupiter Communications study found that 42% of top-ranked Web sites either took longer than five days to reply to customer email inquiries, never replied or were not accessible by email. Many e-commerce sites do not integrate human interaction, such as customer service, into their overall e-business processes. Total revenues $ 1,540 $ 2,209 $ 3,402 $ 7,074 $ 12,175 Table of Contents Companies need strong technological capabilities to address these significant business challenges which accompany the new models of e-business. Specifically, they need to address the following technical challenges: Connecting disparate systems. Business processes now span the extended enterprise of employees, customers, partners and suppliers, each of which rely on a broad range of incompatible applications and communications systems. META Group, Inc. estimates that the average company maintains 49 distinct enterprise applications and spends approximately 35% of its total IT budget on integration-related efforts, including internal development and consulting services as well as purchases of packaged solutions. Many of these applications were implemented in standalone fashion to address strategic business functions, including enterprise resource planning, supply chain management, customer relationship management, sales force automation, business decision support and e-commerce. These packaged applications typically were not designed to work with each other, much less with systems residing outside the enterprise. Yet e-marketplaces and information portals must be able to instantly access information from, and convey information to, these disparate systems. Aggregating content at the point of interaction. The emerging models of e-marketplaces and information portals depend significantly on the aggregation and organization of up-to-date information, including structured data such as price lists or employee records, or unstructured data such as product specifications or diagrams. Companies must access, aggregate, catalog and deliver in real-time, large volumes of information that reside in multiple and often incompatible data repositories. These challenges are compounded by the scale of many e-marketplaces or portals, which may contain product information from hundreds or thousands of suppliers, and by the security concerns of companies which are exposing some of their most valuable information over the Internet. Automating and monitoring business processes. A business process initiated at an e-marketplace or a portal will often require tracking and coordinating many sub-processes which may occur at different companies. For example, the process of taking and fulfilling an order at an e-marketplace might require checking inventory at the supplier, checking credit through a bank, creating an invoice, notifying a warehouse, delivering through a third-party logistics company and ultimately debiting the customer s internal accounts receivable system. This process requires connectivity between applications and systems, and a sophisticated monitoring capability so that all participants can have complete visibility into the overall process, as well as the ability to integrate human interactions when necessary, such as handling exceptions that might cause transactions to fail. Attempts to solve these complex technical challenges have generally involved the approaches described below: in-house IT organizations using a collection of technologies and significant custom development to enable their companies to integrate with e-marketplaces or to create portals; or enterprise application integration (EAI) products that offer packaged solutions for establishing discrete connectivity between disparate applications within and between companies. Each of these approaches has achieved a level of success in creating point-to-point connections between applications. However, we believe that, even in combination, these Table of Contents solutions fail to meet the business challenges facing companies that want to participate in e-marketplaces or portals because they are: complex, cumbersome and time-consuming to implement, requiring significant amounts of custom coding to effectively deploy and extensive resources to manage; inflexible and difficult to scale, requiring considerable effort to add or modify participant information, content sources and business processes; unable to integrate people with technology, focusing instead on routing electronic messages from one machine to another; and lacking sufficient security to control the interactions between participants. The Enterworks Solution Our product suite creates integrated, real-time catalogs of e-business content and automates e-business processes. Our products were developed to address the requirements of e-marketplaces and portals in an easy-to-use and highly manageable framework. We believe that our products provide the following strategic business benefits to e-marketplace participants and portal users: Faster time-to-market. Our products help enterprises launch e-marketplaces and portals quickly, and scale them faster, by integrating content sources wherever and in whatever form they currently exist. For example, a financial services firm that wants to offer its customers new services, such as consolidated account information through a portal, can use our products to catalog and deliver this information to the portal with minimal custom coding. By accommodating and integrating disparate business processes, our products increase the value and efficiency of e-marketplaces and portals for users, buyers and sellers. Increased customer satisfaction. We increase customer satisfaction by aggregating and delivering personalized content for greater value and higher levels of service. Customer relationships become stronger because the right information is available. Our business process management solutions increase customer satisfaction by handling problems faster and more effectively. With our products, the process for handling exceptions and responding to customer inquiries can be tailored to an individual customer s needs, automated and made part of the customer experience. Improved supply chain interactions. By integrating marketplace participants disparate business processes, our products allow buyers and sellers to gain the efficiencies of e-marketplaces without losing the advantages of using their individual business policies and best practices. For example, a manufacturing organization that wants to more efficiently manage inventory levels across multiple plant facilities and between its suppliers and partners, can use our products to catalog, aggregate and deliver single views of inventory levels, even though each plant and most suppliers may be using different inventory management systems. Greater leverage of existing infrastructure investments. Our products allow enterprises to integrate and extend the many architectures and systems in which they have made significant investments, from legacy mainframe to newer client/server systems. Our products quickly adapt the functionality of these systems to e-marketplaces and portals and maximize the investments companies have already made. Reduced operational costs. Our products help our customers reduce their operating costs. By automating business processes, including exception handling, our products enable our customers to improve the efficiency of their operations, lessening their need Table of Contents for personnel and custom coding. Our products also help our customers reduce their costs by providing them with organized and real-time business information. This information allows our customers to make informed decisions regarding their operations. For example, a healthcare organization that wants to manage its service delivery costs more effectively needs to understand the components of its costs on a patient by patient basis. Unfortunately, this information is often difficult to access because it is contained in many legacy and homegrown systems. Using our products, the organization can catalog, aggregate and view the information, individually by patient. Our content and process integration solutions are differentiated through the following design points and technical features: Ease of use and speed of implementation. Our products deliver content to, and provide process management through, whatever user interface is most familiar to e-marketplace participants and portal users. Our products offer their own user interfaces as well, combining the simplicity of a browser-based environment with a user interface typical of common operating systems. Our products support rapid implementation by allowing our customers not only to create customized, integrated views of content, but to test and refine those views in real time before rolling them out to e-marketplace participants and portal users. Flexibility and adaptability to change. Our products store the content and process models as a collection of objects making them readily available to be reused or modified. As the set of e-marketplace participants and portal users grows, it remains easy to manage and deliver personalized views of information and business processes. All of our tools support re-use of content and process models. Integration of people. By delivering content specific to an individual s requirements and seamlessly integrating people into business processes, our products offer a distinct advantage over products that offer little more than message delivery between applications. Proven security. Our products enable secure operation among organizations using the Internet. Our products use digital certificates for authentication and privacy, are compatible with standard certificate management solutions and support encrypted links through Secure Sockets Layer, or SSL, an industry-standard encryption language. Greater scalability. Our software is designed to operate in a distributed environment and take full advantage of the Internet. Our products can be segmented and hosted on multiple platforms within an enterprise and on platforms at customer and partner sites. The Enterworks Strategy Our objective is to become the leading provider of integration software for powering e-business. To achieve this objective, we are pursuing the following strategic initiatives: Increasing awareness of Enterworks and our e-marketplace and portal solutions. To strengthen our market position, we are continuing to increase the visibility of Enterworks and our Enterworks Content Integrator and Enterworks Process Integrator products among potential customers, partners and industry leaders. To achieve increased awareness, we are emphasizing key elements of our products through multiple branding programs, including participation in industry conferences and other events. In addition, we are placing bylined articles and pursuing key editorial opportunities in influential publications, and increasing our advertising in selected trade and business publications. Expanding our sales efforts. We are aggressively targeting our marketing and sales promotion programs at e-marketplace and portal builders, operators and participants. We are increasing our sales lead generation programs directed at high level business Table of Contents and technical executives in multiple key industries. In 1999, we more than doubled the size of our direct sales force and we plan to significantly increase this number over the next twelve months. We are recruiting sales representatives experienced in selling into certain vertical markets, including healthcare, manufacturing and the public sector. We are also increasing our staff of sales engineers, and we are expanding our telesales organization to supplement the efforts of our direct sales representatives. Broadening our installed base. We intend to broaden our installed user base because we believe that as more users interact with our products, the value our products provide our customers will increase. Additionally, as more customers purchase our products, our ability to customize content and business processes becomes more visible to both our existing and potential customers. To broaden our installed base we have designed scalable products and several product pricing and packaging alternatives that meet the needs of organizations of various sizes and stages of development. Building and leveraging partnerships. We are expanding our existing relationships and creating new partnerships under our E-Alliance Program with traditional system integrators, e-business professional services companies, and other software vendors and technology partners. We have developed several partners in each of these categories. See E-Alliance Program. In early 1999, we established a separate team of experienced partnership development professionals which we expect to significantly increase in the next twelve months. Our partnerships enable us to access prospective customers that we might not otherwise reach and scale our business more quickly and at lower marketing cost. Enhancing technology leadership. We are investing significant resources in our R D organization to strengthen the core functionality of our products and add industry-specific extensions. We may also consider acquiring key technologies that significantly differentiate us in the segments in which we compete. To ensure that we meet the needs of our customers we believe we must rapidly add new technologies to our products. We plan to demonstrate continued technical leadership through new technology that we will build or acquire. Products and Services The Enterworks product suite currently consists of Enterworks Content Integrator and Enterworks Process Integrator. Enterworks Content Integrator, formerly marketed as Virtual DB, is an electronic catalog that integrates and delivers dynamic, real-time content from virtually any source (databases, applications, Web sources, XML sources and others, whether internal or external to the organization) to e-marketplaces and portals. Enterworks Process Integrator, formerly marketed as Enterworks Process Manager, provides a single point of interaction for business processes that may span multiple organizations. For example, an order fulfillment process that includes an e-marketplace, a customer and several suppliers can be coordinated and tracked within Enterworks Process Integrator. Both products share a consistent and easy-to-use, browser-based, graphical user interface. The products also share a common underlying technology architecture and have interfaces between them which allow them to work together and share information. While our products are complementary, they can be purchased separately so that businesses can select the individual products they need to meet their immediate business objectives and then add additional Enterworks products as their requirements evolve. In addition, our applications are universally accessible, allowing participants to access content through their preferred reporting tool, or participate in a complex business process through their browser. Table of Contents Enterworks Content Integrator Enterworks Content Integrator integrates content from virtually any electronic source. E-marketplace participants can view a real-time catalog of content, compare supplier offerings and query order status. Portal users can quickly retrieve, analyze and distribute critical customer profiles, competitive intelligence and legacy data. [ENTERWORKS CONTENT INTEGRATOR GRAPHIC] Enterworks Content Integrator delivers to e-marketplaces and information portals a customized catalog of information that is seamlessly integrated from multiple content sources in real time. Enterworks Content Integrator comprises the following components: Content Engine requests and receives information from the Access Server and Modules. The Content Engine accesses disparate content sources and integrates the information into a single logical database underlying an electronic catalog. The Content Engine handles all security, application of data transformations and business rules. The Content Engine optimizes each request for information that it receives from a user by breaking it down into the specific requests understood by the Access Server. Access Server and Modules receive and translate content requests. The Access Server receives requests for content from the Content Engine and passes them to the correct Access Module. Access Modules translate the requests into a language that each content source understands and returns the result of the request back to the Access Server. The Access Server also manages the combination of content coming from various sources, and uses it to generate the single representation of the underlying content sources which we call the MetaCatalog. Content Modeling Tool allows businesses to define customized views of the integrated information in the MetaCatalog. The Modeling Tool is also used to define real-time content transformations to reconcile differences between systems, such as conversion of foreign currencies into US dollars. The Modeling Tool supports drag-and-drop re-use of objects and transformations within the MetaCatalog. Content Administrator provides efficient management and configuration of the system-level functions of the product. It also provides the ability to define users and roles, the ability of each user to obtain different views of information and a familiar folder-based system for organizing work. Through the Content Administrator, customers can determine access rights and assign those rights to users, roles and other system objects. Enterworks Process Integrator Developed completely in Java and using standard browsers as the interface, Enterworks Process Integrator automates the flow of tasks and information in business processes, within an enterprise, through portals, across an e-marketplace or between the e-marketplace and any number of buyers and suppliers. Examples include order processing, supply chain coordination and problem resolution. Enterworks Process Integrator integrates both applications and people, using the best practices and domain expertise of an enterprise. It coordinates activities by distributing and updating personal task lists to each person in the process. Additionally, guidance in the form of personal wizards helps keep people and their assignments on track, in the right order and with the right information. An Enterworks Process Integrator environment consists of server and client components that include graphical tools for building and managing process flows. These process flows may be easily designed to intelligently route specific information to different people. The Gross profit (loss) $ 1,027 $ 955 $ (132 ) $ 1,544 $ 4,635 Operating loss $ (503 ) $ (3,672 ) $ (5,903 ) $ (11,534 ) $ (16,961 ) Net loss $ (503 ) $ (2,618 ) $ (4,444 ) $ (8,730 ) $ (14,018 ) Basic and diluted net loss per common share (1) $ (0.16 ) $ (0.16 ) $ (0.32 ) $ (0.52 ) Weighted average number of common shares (1) 16,180 27,086 27,169 27,046 Table of Contents people, or process flow participants, may work from any location as long as there is a connection to the Internet and access to a browser. [ENTERWORKS PROCESS INTEGRATOR GRAPHIC] Enterworks Process Integrator integrates the people, applications and processes required for end-to-end e-business interactions. Enterworks Process Integrator comprises the following components: Process Engine stores all specific data pertaining to activities, participants or agents, work items and other system information. The Process Engine also manages all aspects of the execution of a given process and maintains information regarding the status of each process currently being executed. Business Integration Components (BIC) Server creates work items, receives and modifies work items, returns work items to the process flow and interfaces with external systems used primarily to integrate external third-party applications in a process flow. The BICs run under the control of the BIC Server which informs the Engine that a BIC is available for use. FlowBuilder provides an easy-to-use process modeling tool that allows a user to visually define a process flow. Users can drag-and-drop icons that represent elements of a process flow, set element properties and create links between elements to define workflows. TaskManager provides a browser-based task list for each person involved in a business process. In the TaskManager, users access tasks that have been assigned to them and generate new work items to be dropped into existing process flows. Process Administrator provides a drag-and-drop tool that manages the participants, roles, actor groups, work items and BICs within a business process. Using the Process Administrator, managers can check the status of work items in process and the status of workers involved with that task. Services As of December 31, 1999, our Services group, which includes consulting, education, customer support and distribution, comprised 37 individuals with a broad range of experience and a diverse set of complementary skills. We seek to help our customers implement our products quickly and to support them as their use of our products increases. Customer support. Our Customer Support group focuses on delivering accurate and timely information to our customers. We provide an array of support programs, which include 24x7 support, dedicated customer/partner staff, real-time status updating of case information and monthly onsite visits to discuss outstanding issues. We also enable our customers to send us questions and review the status of their support cases over the Internet. We offer direct 24-hour access to our knowledge base, which allows customers to save time by learning from our experiences. Training services. A full-time, dedicated training staff provides customer education at our Ashburn, Virginia and Pasadena, California facilities, as well as at customer locations. Our curriculum includes introductory courses up through advanced learning for sophisticated developers. We offer many forms of training, including in-house lectures, on-site training and customized workshops tailored to address unique requirements. Consulting services. Our Enterworks Services group organization comprises individuals with extensive knowledge in content and process integration. The group typically implements pilots and full production programs on a time and materials basis. Table of Contents Customers As of December 31, 1999, we had licensed our products to more than 50 companies. Our current customers include financial, manufacturing, government, healthcare and telecommunications enterprises, as well as professional services providers. The following is a partial list of customers that have licensed our software and that we believe are representative of our overall customer base: Aventis Pharmaceuticals (formerly Hoechst Marion Roussel, Inc.) The Boeing Company CareFirst Blue Cross Blue Shield Cast Alloys, Inc. Inacom, Inc. Intermec, Inc. Jefferies Company, Inc. Metamediaries, Inc. NonStopNet, Inc. Northrop Grumman Corporations OAO Technology Solutions, Inc Paradigm Genetics, Inc. Raytheon Systems Company SecureTrade, Inc. Tivoli Systems, Inc. US Department of Defense US Department of Veterans Affairs Viador, Inc. Case Studies The Boeing Company. As the manufacturer of the next generation of Navy fighter jets, Boeing tracks thousands of parts supplied by hundreds of subcontracting manufacturers. However, its schematics, order information, parts lists and inventory lists formerly were all tracked by different programs in different locations. In addition, the complexity of these systems required specialists for even basic queries about parts. Boeing initially implemented Enterworks Content Integrator to provide a single view of parts information through a portal accessed by Boeing personnel, contractors, partners and the US Navy. Boeing later used Enterworks Content Integrator to create its own e-marketplace where more than 500 of its suppliers access in real time the specifications they need to prepare and submit bids. Enterworks Content Integrator allowed Boeing to eliminate several weeks of labor-intensive preparation previously required every time specifications had to be created or changed. Cast Alloys, Inc. Cast Alloys is the world s largest producer of premium stainless steel and titanium golf club heads, and the main supplier of such heads for Calloway, Taylor Made and Titleist. The company needed stronger management of its production processes to successfully expand into manufacturing of other precision metal products. Cast Alloys chose Enterworks Process Integrator to automate and manage the interaction between receiving, warehousing and the manufacturing areas to ensure product quality, delivery and quick problem resolution. Cast Alloys also plans to implement Enterworks Content Integrator to provide a single Web-enabled portal that managers can consult when they need to validate the quality and timeliness of their production processes. Jefferies Company, Inc. This full-service investment firm had client information spread across multiple incompatible systems, preventing the firm from creating the single customer view it needed for effective marketing. Using our products, Jefferies now can access, aggregate and deliver information from its disparate systems through a portal for account executives and managers. These business users can review customer records and do accurate, timely planning and analysis with the standard Web browser on their desktop or laptop computers. With Enterworks Content Integrator Table of Contents As of December 31, 1999 Table of Contents technology as the key component of its information-reporting environment, Jefferies recently won an Application Development Trends Innovation Award. NonStopNet, Inc. NonStopNet creates network infrastructures as an outsourcing service for a number of clients. It looked to us for additional services that would differentiate its network offerings and bring greater value to its clients. NonStopNet chose us to power its eBusiness Intelligence Service, a new offering it will make available to its customers in early 2000. In the initial launch of this service, Enterworks Content Integrator will be used to aggregate Web traffic and usage statistics for a key NonStopNet customer who has become a leader in online learning. NonStopNet s customer will use Enterworks Content Integrator to craft highly-targeted marketing programs and increase its royalty-based revenue stream. US Army. The US Army tracks billions of dollars worth of inventory, needing to know at any given time where assets are located to determine battle readiness. But the complexity and age of its systems often required time-consuming efforts involving phone calls and paper-based systems which frequently resulted in misplaced status requests. Using Enterworks Content Integrator, the Army accesses decades-old, COBOL-based applications and delivers unified content though a portal. The Army has reduced from days and weeks to just minutes the time it takes to track a requisition for materiel worldwide, saving millions of dollars in storage costs and lost inventory. Sales and Marketing We target e-marketplace and portal operators, as well as the large number of traditional businesses that are seeking to deploy or participate in e-marketplaces and portals. Within these enterprises we target CEOs, CIOs, CFOs and senior level managers tasked with the company s or organization s overarching e-business strategy. We also target high-level marketing and customer relationship executives. We deliver our products though our direct sales force and E-Alliance partners, which include traditional system integrators, e-business professional services companies and other software vendors and technology providers. As of December 31, 1999, we had 52 people in our sales and marketing organization, of whom 41 were in direct and channel sales organizations and 11 were in marketing. We currently have sales representatives in Ashburn, Virginia; Chicago, Illinois; San Francisco, California; Phoenix, Arizona; Atlanta, Georgia; and Raleigh, North Carolina. Our direct sales representatives are supported by a field-based staff of sales engineers. We intend to increase the size of our direct sales force in the next twelve months and establish additional domestic sales offices. We build market awareness of Enterworks and our products through a variety of marketing programs, including regular briefings with industry analysts, public relations activities, direct mail and e-mail campaigns, Web seminars, executive breakfasts, trade show exhibitions, speaking engagements and Web site marketing. We supplement direct marketing efforts with advertising in technology, industry-specific and business publications. In addition, we pursue joint marketing and selling efforts with our strategic partners. E-Alliance Program We have established marketing and technology alliances under our E-Alliance Program with a number of strategic partners, including traditional system integrators, e-business professional services companies and other software vendors and technology providers. These partnerships enable us to access customers we might not otherwise reach and to scale our business with lower marketing costs. In addition, these relationships help our products proliferate by embedding and integrating our software into the products and services of our partners. Pro Forma Actual Pro Forma As Adjusted Table of Contents Our E-Alliance Program provides sales and marketing assistance to our partners, including lead sharing, awareness building and joint promotional campaigns. Our partners also receive complimentary or discounted training as part of their support agreements. Our program focuses on these types of strategic partners: Traditional System Integrators, E-business Professional Services Companies and VARs. We partner with traditional system integrators, e-business professional services companies and value-added resellers (VARs) who combine their products and services with our solutions to provide a comprehensive approach to addressing customer needs. Our solutions are particularly attractive to these partners because of the implementation speed, flexibility, scalability and reusability of our software. Our current integration partners include BTG, Inc., Edgemark Systems, Inc., Litton/PRC Inc., OAO Technology Solutions, Inc., Razorfish, Inc., Science Applications International Corporation (SAIC) and Telos. Technology Partners. We partner with other software vendors whose software is complementary to our products. Portal vendors who develop products for presenting information through Web sites provide an ideal front-end to our products. Our relationships range from original equipment manufacturers (OEMs) to joint marketing and selling arrangements. Our technology partners include Active Software Inc., Business Objects, Inc., Hewlett-Packard Corporation, Inprise, Inc., Sun Microsystems, Inc., Sybase, Inc. and Viador, Inc. OEM and ISV Partners. We form alliances with companies that embed our technology in their products to enhance the functionality and value of their products. Our partners include Aegis Analytical Corporation and Tivoli Systems, Inc. Technology Our products are built with a distributed architecture based on Internet standards. This architecture allows content integration across packaged applications, legacy systems and databases. It also allows integration of business processes across applications, and integration of those processes with people involved in the process flow. Graphical tools minimize the need for expensive custom programming and allow rapid incremental change and reuse. Our products support both intranet-and Internet-based e-business solutions because they were designed based on Internet standards for networking and security and use Java as the implementation language. [TECHNOLOGY DIAGRAM GRAPHIC] The Enterworks product suite uses a distributed architecture based on Internet standards to integrate multiple content sources and processes. Standards. Our products are Internet-enabled, employing HTTP, CORBA and IIOP communication facilities, and XML and HTML formats. They utilize SSL and X.509 to provide secure user management. All of our products have been developed in Java to support inherent portability across platforms. By strictly adhering to current and emerging Internet standards, we enable our products to meet the requirements of Internet business-to-business interactions. Furthermore, our products have an open architecture that is easy to integrate with our customers infrastructures. Table of Contents Scalability. Our products can be scaled because of their distributed frameworks. For example, the informational models provided by our Enterworks Content Integrator product can be partitioned and replicated across multiple servers. Enterworks Content Integrator servers can also be distributed in a hierarchical model to allow successive levels of content integration and local control and management. Enterworks Process Integrator provides distributed sub-flows and allows electronic processes to be hosted within individual organizations. This enables a network of suppliers and vendors to host their own informational models and processes and integrate those processes into a single distributed system. Flexibility. Our products are easily adapted to the environments of our customers and their partners. Enterworks Content Integrator can access more than 70 content sources and legacy systems. In addition, we provide a content access module development kit which can be used to integrate other content sources into our Enterworks Content Integrator architecture. Enterworks Process Integrator BICs provide a unique mechanism to allow external systems to easily initiate a process within the Enterworks Process Integrator framework and to pass content into a process. BICs can also be used to pass content to external systems and initiate actions within those systems. Security. Our products use standards-based security technology that permits the integration of processes and sharing of content between suppliers and customers. These security features include: Encryption. We use SSL, the Internet standard for e-business encryption, based on public key technology. Digital certificates. We base our authentication and authorization models for both server-to-server and client-to-server security on X.509 standard digital certificates. These certificates contain all the information required to verify that the public key being used for authentication belongs to a properly authorized party. Digital certificates, when coupled with a certificate authority framework, provide a framework for defining and verifying identity. Our products are designed to integrate with industry-standard certificate management frameworks such as Netscape s Certificate Server. Authorization. Our products restrict access to both data and functional interfaces so that users can only access information and perform functions for which they have been specifically authorized. Roles-based security management. We allow security profiles to be defined as roles, such as a manager or part supplier. We then allow specific users or entities to be mapped into those roles. Once mapped to a role, all users in that role have the same access privileges, allowing more cost-effective management of complex security within an e-business environment. Research and Development We invest significant time and resources in our product development. We have recruited software developers and managers with experience in e-business content and process integration. As of December 31, 1999, we employed 62 people in research and development. We have two server development groups focused on the technical evolution of our Enterworks Content Integrator and Enterworks Process Integrator products. In addition, the User Interface Engineering group builds the client tools for both products, allowing maximized reuse of code for the two product lines and ensuring a consistent look and feel across our product lines. Our Quality Assurance and Release Engineering group designs and develops test environments and code to identify problems and report software performance and quality metrics to our engineering and product marketing managers. They also manage release cycles Table of Contents and builds of the products. A separate documentation group provides technical documentation for the products targeted at the user, system administrator and developer. We intend to release major new versions of our products approximately every six months and upgrades approximately every three months. Major releases usually include significant new features and increased performance; upgrades introduce specific tactical features as part of an existing release. We are currently developing new releases in both components of our product suite. We anticipate that these new releases will provide increased scalability, advanced functionality and additional features designed for specific industry segments. We plan to continue investing significant resources in research and development, because our future success will depend in part on our ability to anticipate changes in technology, keep pace with evolving customer needs, enhance our current products and develop and deliver new products. Competition We face competition from in-house development staffs and other consultants. We also face competition from many vendors in the content and process integration areas such as OnDisplay, Inc., Hewlett-Packard Corporation and Vitria Technology, Inc., as well as from smaller private companies. We believe we may also face competition from IBM Corporation, Microsoft Corporation, Oracle Corporation and Sun Microsystems, Inc. if those companies enter into the e-business content or process integration markets. The primary competitive factors affecting us include: scope of other solutions; degree to which competing solutions interface with each other, and with existing customer applications; number of customers and strategic partners; product features and quality; time to implementation; and customer service and support. We believe our solutions compete favorably in all of these aspects. The market in which we compete, however, is new and undergoing rapid growth and change. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater name recognition and a larger installed base of customers than we have. In addition, many of our competitors have well-established relationships with our current and potential customers and have extensive knowledge of our industry. Consequently, our competitors may be able to respond more quickly to customer needs or offer competitive solutions on more favorable terms. Many current and potential competitors have established or may establish tactical or strategic relationships with each other or with third parties to increase their ability to address customer needs. As a result, new competitors or alliances among competitors may emerge and rapidly acquire significant market share. In addition, we expect industry consolidations to increase competition. We may not be able to maintain our competitive position against current and potential competitors. Intellectual Property Our success depends on our ability to develop and protect our proprietary technology and intellectual property rights. We rely on a combination of contractual provisions, confidentiality procedures, trade secrets, and patent, copyright and trademark laws to protect our rights with (in thousands) Balance Sheet Data: Cash and cash equivalents $ 18,685 $ 18,685 Working capital 16,860 16,860 Total assets 28,220 28,220 Total long-term liabilities Mandatorily redeemable preferred stock 22,773 Total stockholders (deficit) equity (3,526 ) 19,247 The above table sets forth a summary of our balance sheet as of December 31, 1999: on an actual basis; on a pro forma basis to give effect to the automatic conversion of all outstanding shares of our convertible preferred stock into 21,739,127 shares of common stock; and on a pro forma, as adjusted, basis to give effect to the automatic conversion of all outstanding shares of our convertible preferred stock into 21,739,127 shares of common stock and our receipt of the estimated net proceeds from the sale of shares of common stock in this offering at an assumed offering price of $ per share (after deducting estimated underwriting discounts and commissions and estimated offering expenses). Enterworks is a Delaware corporation. Our principal office is located at 19886 Ashburn Road, Ashburn, Virginia 20147. Our main telephone number is (703) 724-3800. The address of our Web site is www.enterworks.com. Information contained on our Web site is not a part of this prospectus. The e. logo, Enterworks and Virtual DB are our registered trademarks. Enterworks Content Integrator and Enterworks Process Integrator are also our trademarks. All other product, service and company names are trademarks or registered trademarks of other parties. Table of Contents respect to intellectual property. Generally, we require employees to sign employee agreements, through which they assign to us ownership of intellectual property developed while employed by us. We have an active patent program and encourage our entire staff to be aware of intellectual property issues. We have been granted one patent for technology within Enterworks Content Integrator and have two patents pending on our Enterworks Process Integrator technology. It is possible that no patent will be issued from our patent applications or that the patents that we have applied for, if issued, or any other patents we might obtain in the future, may be successfully challenged. It is also possible that we may not develop proprietary products or technologies that are patentable, that any patent issued to us may not provide us with any competitive advantages or that the patents of others will materially and adversely affect our business, operating results and financial condition. Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products and obtain and use information that we regard as proprietary. In addition, other parties may breach confidentiality agreements or other protective contracts we have entered into, and we may not be able to enforce our rights in the event of these breaches. Furthermore, we expect that we will increase our international operations in the future, and the laws of many foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States. The software industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement and the violation of other intellectual property rights. Although we attempt to avoid infringing known proprietary rights of third parties in our product development efforts, we expect that we may be subject to legal proceedings and claims for alleged infringement by us or our licensees of third-party proprietary rights, such as patents, trademarks or copyrights, from time to time in the ordinary course of business. Any claims relating to the infringement of third-party proprietary rights, even if not meritorious, could result in costly litigation, divert management s attention and resources, or require us to enter into royalty or license agreements which are not advantageous to us. In addition, parties making these claims may be able to obtain an injunction, which could prevent us from selling our products in the United States or abroad. Any of these results could harm our business. We may increasingly be subject to infringement claims as the number of products and competitors in our industry grows and functionalities of products overlap. Furthermore, former employers of our current and future employees may assert that our employees have improperly disclosed confidential or proprietary information to us. In addition, we license technology that is incorporated into our products from third parties, and any significant interruption in the supply or support of any licensed software could adversely affect sales, unless and until we can replace the functionality provided by this licensed software. For more information regarding our dependence on third-party technology, see
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+Net loss attributable to common stockholders $ (816 ) $(2,274 ) $(7,241 ) Basic and diluted net loss per share $(0.20 ) $ (0.24 ) $ (0.68 ) Shares used in computing basic and diluted net loss per share 4,059 9,434 10,664 Unaudited pro forma basic and diluted net loss per share $ (0.49 ) Shares used in computing pro forma basic and diluted net loss per share (unaudited) 14,717 The following table contains a summary of our consolidated balance sheet: on an actual basis at December 31, 1999; and on a pro forma as adjusted basis to reflect: (a) the conversion of all outstanding shares of our Series B, Series C, Series D and Series E common stock and convertible preferred stock into shares of Series A common stock upon the closing of this offering; and, (b) net proceeds from the sale of 4,200,000 shares of Series A common stock offered hereby at an assumed initial public offering price of $12.00 per share. December 31, (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents $ 3,202 $48,709 Working capital 3,236 48,743 Total assets 14,714 60,221 Long-term capital lease obligation 193 193 Convertible preferred stock 12,889 Total stockholders equity (deficit) (4,324 ) 54,072
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+PROSPECTUS SUMMARY This summary only highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the information under "Risk Factors" and the financial statements and the related notes included in this prospectus, before making an investment decision. OUR COMPANY ClientLogic is an international provider of marketing, customer contact management and fulfillment services focused on electronic commerce and technology companies. We are able to integrate these services for our clients, allowing them to manage their customer relationships through a single service provider. Our services, which we refer to collectively as customer relationship management services, include: - Marketing services. We create customized marketing programs which help our Internet-based clients profile and target new customers and increase the loyalty of existing customers. Our marketing services include developing, maintaining and providing access to customer information databases and analyzing this information to identify and address specific needs of our clients' customers. For the year ended December 31, 1999, we derived approximately 6.9% of our revenues from marketing services. - Customer contact management services. We provide customer service and technical support to our clients' customers 24 hours a day, seven days a week through e-mail, online chat, fax, phone and mail. Our ability to communicate with our clients' customers through multiple channels enables us to more effectively respond to their inquiries and needs. In 1999, approximately 86% of our customer contact was conducted by telephone and in December 1999 approximately 82% of our customer contact was conducted by telephone. For the year ended December 31, 1999, we derived approximately 73.7% of our revenues from customer contact management services. - Fulfillment services. We conduct our clients' order and payment processing, warehousing, inventory management, picking, packing, shipping and returns processing activities. Through these services we distribute our clients' products to their customers efficiently and cost effectively. For the year ended December 31, 1999, we derived approximately 19.4% of our revenues from fulfillment services. We believe that the breadth of our services and our ability to integrate these services for our clients are competitive advantages for our company. By outsourcing to us, our clients can avoid the complexity and costs associated with coordinating these services from multiple suppliers or providing these services in-house. Additionally, our proprietary marketing software allows us to collect and analyze valuable customer information generated by our customer contact management and fulfillment operations. This gives us the ability to help clients better design their marketing programs, develop their products, improve the effectiveness of their Web sites and further enhance their customers' satisfaction. Our range of services assist our clients in acquiring and retaining customers and in maximizing the profitability of customer relationships. Our company was formed in September 1998 and we have acquired six separate businesses since that time with the most recent acquisition completed in December 1999. During our limited history, we have incurred substantial costs to complete and integrate acquisitions, to create and introduce our services and to grow and develop our business. As a result, we incurred net losses of approximately $5.3 million in 1998 and approximately $61.1 million in 1999 and we had an accumulated deficit of approximately $66.4 million at December 31, 1999. We expect to incur losses for the next several years as we continue to integrate our businesses and implement our growth strategies. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED , 2000 PROSPECTUS [CLIENTLOGIC LOGO] 13,300,000 SHARES CLASS A COMMON STOCK $ PER SHARE ------------------ We are selling 13,300,000 shares of our Class A common stock. The underwriters named in this prospectus may purchase up to 1,995,000 additional shares of our Class A common stock to cover over-allotments. This is an initial public offering of our Class A common stock. We currently expect the initial public offering price to be between $14.00 and $16.00 per share. We have applied to have our Class A common stock included for quotation on the Nasdaq National Market under the symbol "CLGC". Following this offering, Onex Corporation, our principal stockholder, will control approximately 98.9% of the combined voting power of our outstanding Class A and Class B common stock. ------------------ INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 6. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------ <TABLE> <CAPTION> PER SHARE TOTAL --------- -------- <S> <C> <C> Public Offering Price $ $ Underwriting Discount $ $ Proceeds to ClientLogic (before expenses) $ $ </TABLE> The underwriters are offering the shares subject to various conditions. The underwriters expect to deliver the shares to purchasers on or about , 2000. ------------------ ALOMON SMITH BARNEY ROBERTSON STEPHENS DEUTSCHE BANC ALEX. BROWN DONALDSON, LUFKIN & JENRETTE THOMAS WEISEL PARTNERS LLC DLJDIRECT INC. TD SECURITIES , 2000 OUR OPPORTUNITY We believe that, to date, companies have directed most of their Internet-related investments to creating online storefronts and to advertising with the objective of creating brand awareness and achieving market leadership. As electronic commerce, or e-commerce, evolves, we believe companies will need to focus on acquiring customers more efficiently and converting Web site visits into lasting and profitable customer relationships. To do so, and as part of developing successful e-commerce strategies, we believe that companies must establish sophisticated customer relationship management systems. We believe that a large number of e-commerce companies are failing to perform customer relationship management functions adequately or are failing to integrate these functions to create a viable customer relationship management program. Jupiter Communications estimated that, as of September 1999, 44% of e-commerce Web sites lacked real-time integrated call center support, 46% lacked real-time integrated inventory management systems and 41% lacked real-time integrated fulfillment systems. In the fourth quarter of 1999, high order volume, combined with insufficient customer service support and product fulfillment capabilities, resulted in a number of e-commerce companies being unable to meet delivery deadlines, provide responsive customer service or maintain satisfactory inventory levels. Faced with the growing costs and operational complexities of developing comprehensive customer relationship management services, many e-commerce companies are seeking to outsource these critical business functions. Outsourcing allows these companies to focus on their core competencies and to take advantage of the expertise, flexibility and efficiencies of an outsourced provider. OUR COMPETITIVE ADVANTAGE We believe the following key factors position us to take advantage of this opportunity: - Integrated Service Offerings. We are able to integrate and customize our marketing, customer contact management and fulfillment services for our clients, allowing them to manage the interaction with their customers through a single service provider. By taking advantage of our integrated services, our clients do not need to expend significant management time and capital resources to coordinate these services from multiple providers or to design, build and manage in-house customer relationship management capabilities. - Technology and Systems. We have developed high quality technology systems designed to allow us to rapidly deploy our integrated service offerings and to offer customized services in response to the evolving needs of our clients. Our proprietary database technology provides a flexible system for tracking relationships between a customer and the factors affecting its buying decisions. - Business Processes. We have designed our organizational structure and business processes to allow us to effectively respond to our clients' needs, efficiently expand our business globally and consistently achieve a high level of service across the markets that we serve. - International Presence. We have 33 service facilities located throughout North America and Europe. Nineteen of our North American facilities are in the United States and one is in Canada. Four of our international facilities are in Germany, three facilities are in the United Kingdom and one facility is in each of Austria, France, Ireland, the Netherlands, Norway and Switzerland. The diverse locations of our facilities make it possible for us to efficiently serve our clients in both North America and Europe. DESCRIPTION OF INSIDE FRONT COVER ART On the left side of the page halfway down the page is the ClientLogic logo. The ClientLogic logo consists of the name ClientLogic with a globe as the letter "o" and has the phrase "The service engine of the new economy(sm)" beneath it. The "e" in economy is surrounded by a red circle. On the right side of the page, listed from the top of the page to the bottom are the following phrases, each having a representative icon to its right: -- "CUSTOMER RELATIONSHIP MANAGEMENT" -- "MARKETING SERVICES" -- "CUSTOMER CONTACT MANAGEMENT" -- "eFULFILLMENT" -- "eBUSINESS" -- "LIST SERVICES" -- "LOYALTY PROGRAMS" -- "CUSTOMIZED PROGRAM DEVELOPMENT" OUR STRATEGY Our objective is to be the leading global provider of integrated customer relationship management services to e-commerce and technology companies. To achieve this objective we plan to: - Capitalize on the rapid growth of the Internet; - Extend our global presence; - Expand our relationships with existing clients; - Attract new e-commerce clients; and - Enhance our service offerings. However, we operate in a highly competitive market, facing competition from in-house customer relationship management programs and other companies who provide customer relationship management services. This competition may adversely affect our ability to attract new e-commerce and technology clients. In 1999, our ten largest clients accounted for approximately 44.1% of our revenues. OUR PRINCIPAL STOCKHOLDER Onex Corporation is our principal stockholder and, following this offering, will control approximately 98.9% of the voting power of our company. Onex is a diversified North American company based in Toronto, Canada, with a history of investing in outsourcing companies. In 1999, Onex had consolidated revenues of approximately CDN $14.9 billion. Onex is a public company and its shares are traded on the Toronto Stock Exchange under the symbol "OCX". You can review Onex's public documents at one of the Securities and Exchange Commission's public reference rooms or by visiting the Commission's Internet site at www.sec.gov. You can also find more information about Onex on their Web site at www.onexcorp.com. Information contained in Onex's public documents and on Onex's Web site does not constitute a part of this prospectus and is not incorporated by reference in this prospectus. OUR PRINCIPAL EXECUTIVE OFFICES Our principal executive offices are located at Two American Center, 3102 West End Avenue, Suite 1000, Nashville, Tennessee 37203 and our telephone number is (615) 301-7100. DESCRIPTION OF GATEWAY ART On the far left, on the top of the page, is the ClientLogic logo. Below the ClientLogic logo extending to the bottom of the page begin some streaming lines which extend to the middle of the page into a globe and then extends to the right side of the page. There is a larger, translucent globe behind the smaller globe in the center of the page. Contained within these lines on the left side of the globe are the following images: - a computer screen showing some empty fields - a woman pointing to something on a page - a man sitting in front of a computer screen - a shopping cart - a man speaking on a cell phone - part of an email address starting info@we. . . - two men carrying boxes - a woman typing on a keyboard Contained within the streaming lines to the right of the globe are the following images: - a series of numbers - a woman talking into a headset - American and British currency - a barcode - a forklift operator in a warehouse - a woman signing for a box - a computer screen showing some icons Below the streaming lines, to the right of the globe, extending to the end of the page is the following: "ClientLogic is an international provider of integrated marketing, customer contact management and fulfillment services focused on e-commerce and technology companies. We help our clients acquire and retain customers and maximize the profitability of their customer relationships." THE OFFERING Class A common stock offered........ 13,300,000 shares Common stock to be outstanding after the offering: Class A........................... 19,251,285 shares Class B........................... 66,451,221 shares Total..................... 85,702,506 shares Recapitalization.................... On March 1, 2000, we amended and restated our certificate of incorporation to convert each outstanding share of our common stock into one share of a new class of common stock designated Class A common stock and to create another class of common stock designated Class B common stock. The amended and restated certificate of incorporation provided that, until March 15, 2000, each holder of the new Class A common stock had the option to convert all, but not less than all, of its shares into the same number of shares of Class B common stock. Only Onex elected to convert their Class A shares into shares of Class B common stock. The purpose of this recapitalization was to provide our company the flexibility to raise capital by selling shares of Class A common stock, including in this offering, while allowing our current stockholders, primarily Onex, to retain voting control over our company. Voting rights; conversion........... Our Class A common stock and Class B common stock have identical rights except for voting and conversion rights. The holders of Class A common stock are entitled to one vote per share and the holders of Class B common stock are entitled to 25 votes per share. Holders of Class A common stock have no conversion rights. Holders of shares of Class B common stock may convert some or all of their shares into the same number of shares of Class A common stock at any time. In addition, shares of Class B common stock will automatically convert into the same number of shares of Class A common stock upon the occurrence of any of the following: - if transferred to anyone except to Onex or any affiliate, director, officer or employee of Onex or to any purchaser of all of the outstanding Class A and Class B common stock, the shares of Class B common stock transferred will automatically convert into shares of Class A common stock; - if any holder of Class B common stock who is an affiliate of Onex ceases to be an affiliate of Onex, the shares of Class B common stock held by that former affiliate will automatically convert into shares of Class A common stock; - if Onex and its affiliates collectively cease to have the right, in all cases, to exercise or direct the voting rights of the Class B common stock held by them, their Class B common stock will automatically convert into shares of Class A common stock; and - if at any time the number of outstanding shares of Class B common stock represents less than 5% of the total number of outstanding shares of Class A and Class B common stock, all of the outstanding shares of Class B common stock will automatically convert into shares of Class A common stock. Use of proceeds..................... We intend to use the proceeds of this offering to repay existing indebtedness, expand our business domestically and internationally, fund other general corporate expenditures, and potentially make strategic investments and acquisitions. Nasdaq National Market symbol....... CLGC Unless we indicate otherwise, all information contained in this prospectus: - gives effect to a .642857-to-1 reverse split of our common stock which occurred on March 27, 2000; - is based on 5,951,285 shares of our Class A common stock outstanding as of March 31, 2000; - is based on 66,451,221 shares of our Class B common stock outstanding as of March 31, 2000; - excludes 5,831,121 shares of Class A common stock subject to options and warrants and 167,146 shares of Class A common stock subject to our deferred compensation plan, in each case outstanding as of March 31, 2000; the weighted average exercise price of the options and warrants as of March 31, 2000 is $3.15 per share; - excludes 1,963,321 shares of Class A common stock issuable in exchange for shares of exchangeable preferred stock of one of our subsidiaries at our option or the option of the holders; - excludes approximately 770,000 options to purchase shares of Class A common stock at an exercise price not less than the initial public offering price to be granted prior to this offering under our stock option plan to approximately 650 employees; - assumes no exercise of the underwriters' option to purchase up to 1,995,000 shares of Class A common stock to cover over-allotments; - assumes an initial public offering price of $15.00 per Class A common share, the midpoint of the initial public offering price range; and - presents financial information for ClientLogic on a consolidated basis.
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING IMPRESSE AND OUR COMMON STOCK BEING SOLD IN THIS OFFERING AND OUR FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. Impresse is a leading provider in the emerging market for business-to-business e-commerce solutions for the creation and procurement of commercially printed materials. Our hosted impresse.com service provides a platform for corporations, their commercial print suppliers, their design, advertising and marketing agencies and other participants in the print supply chain to design, specify, price, order, track, fulfill and pay for print jobs. Both corporate print buyers and their printers save time and increase their productivity by replacing inefficient manual processes with the real-time collaboration capabilities of our impresse.com service. For example, by automating the process of requesting quotes for print jobs, our impresse.com service allows corporations to access a broader range of printers and compare more bids, more efficiently, thereby creating the opportunity to reduce print product costs. Corporations further benefit from enterprise-wide consolidation of transaction information, which can be utilized to make better print procurement decisions and achieve economies of scale. Printers benefit from our service because more potential customers can reach them through our network. In addition, because our service streamlines the print procurement process, printers can better allocate their time and resources to cultivate new, and improve existing, customer relationships. Virtually all businesses rely on commercially printed materials as the primary medium for important business communications, such as marketing brochures, promotional materials, direct mail, annual reports, product and user manuals and other informational items. According to Raine Consulting, Inc., a graphic arts industry consulting firm, large corporations typically spend approximately 2% to 3% of their revenue on commercially printed materials. Based on estimates by CAP Ventures, a print industry research firm, sales in the U.S. printing and publishing industry totaled approximately $292 billion in 1998, of which over $150 billion was derived from the commercial printing segments we target. The commercial print industry is a particularly attractive market for a business-to-business e-commerce solution because: - it is highly fragmented, with over 51,000 commercial printers in the U.S., according to the Printing Industries of America, an industry trade association; - 78% of commercial printers have access to and use the Internet, according to Harris Interactive, a market research firm; - most commercial printing content is digitally stored and can be readily transferred through the Internet; and - traditional methods of print procurement can be logistically complex, time-consuming, inefficient and prone to errors. Since print buyers and the corporations they represent have significant market leverage relative to their commercial print suppliers, our strategy is to target large multinational corporations that represent the greatest aggregate demand for commercial print. We believe that their significant buying power will enable us to attract a critical mass of printers to our network. To further accelerate the growth of our network, we intend to leverage our existing strategic relationships with key industry leaders such as Adobe Systems, Ariba, Cisco Systems, Commerce One, eLance, ELetter, Hewlett-Packard, iPrint.com, Logic Associates, Oracle, PaperExchange.com, VerticalNet and WAM!NET to gain access to their corporate customers, and to establish additional strategic relationships. As of February 29, 2000 we had signed agreements to use our impresse.com service with 97 corporations and agencies and 172 of their commercial print suppliers. Some of our large corporate customers include 3Com, AutoNation, Target, Enron, McKesson HBOC, MetLife and Whirlpool. THE OFFERING <TABLE> <S> <C> Common stock offered.................................... 3,500,000 shares Common stock to be outstanding after this offering...... 28,650,121 shares Use of proceeds......................................... For working capital. See "Use of Proceeds." Proposed Nasdaq National Market symbol.................. IMPC </TABLE> The number of shares of our common stock to be outstanding immediately after this offering is based on the number of shares outstanding as of December 31, 1999. This number does not take into account the following: - 1,768,525 shares of common stock issuable on exercise of options outstanding as of December 31, 1999, with a weighted average exercise price of $1.11 per share; - 483,428 shares of common stock issuable upon the exercise of warrants outstanding as of December 31, 1999, with a weighted average exercise price of $1.98 per share; - 1,118,100 shares of common stock issuable upon exercise of options granted after December 31, 1999 through March 10, 2000 with a weighted average exercise price of $6 per share; - 149,274 shares of common stock issuable upon the exercise of warrants issued after December 31, 1999 through March 10, 2000 with an average exercise price of $13.36 per share; - 4,052,225 shares of common stock reserved for issuance under the 1997 Stock Option Plan, the 2000 Directors' Stock Plan and the 2000 Employee Stock Purchase Plan; and - the issuance of 189,668 shares of Series C convertible preferred stock in January 2000 for approximately $2.4 million. Unless otherwise specifically stated, the information in this prospectus reflects the conversion of all outstanding shares of our preferred stock into shares of common stock upon completion of this offering, reflects the Company's reincorporation into the state of Delaware prior to completion of the offering, and assumes no exercise of the underwriters' over-allotment option. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> PERIOD FROM OCTOBER 7, 1997 YEAR ENDED (INCEPTION) THROUGH DECEMBER 31, DECEMBER 31, ------------------- 1997 1998 1999 ------------------- -------- -------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue Services.............................................. $ -- $ -- $ 4 License............................................... -- -- 160 Total revenue....................................... -- -- 164 Gross loss.............................................. -- -- (357) Loss from operations.................................... (63) (4,416) (19,855) Net loss................................................ (56) (4,313) (19,800) Basic and diluted net loss per share.................... $ (.45) $ (3.45) $ (7.36) Shares used to compute basic and diluted net loss per share................................................. 124 1,252 2,691 Pro forma basic and diluted net loss per share (unaudited)........................................... $ (1.30) Shares used to compute pro forma basic and diluted net loss per share (unaudited)............................ 15,227 </TABLE> The As Adjusted column below reflects our sale of 3,500,000 shares of common stock in this offering at an assumed initial public offering price of $12.00 per share and the application of our estimated net proceeds, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ------------------------ ACTUAL AS ADJUSTED ---------- ----------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $48,077 $ 86,127 Working capital............................................. 44,834 82,884 Total assets................................................ 60,008 98,058 Long-term debt and capital lease obligation, less current portion................................................... 3,939 3,939 Total liabilities........................................... 10,922 10,922 Total stockholders' equity.................................. 49,085 87,135 </TABLE> We were incorporated in California in October 1997, and will be reincorporated in Delaware prior to the closing of this offering. Our principal executive offices are located at 1309 South Mary Avenue, Sunnyvale, California 94087, and our telephone number is (408) 530-2000. We maintain a worldwide web site at www.impresse.com. The information in our web site is not incorporated by reference into this prospectus. Impresse, Impresse's logo, and impresse.com are some of our trademarks. Each other trademark, trade name or service mark of any other company appearing in this prospectus is the property of its holder.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001104771_omnisky_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001104771_omnisky_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider before buying shares in the offering. You should read the entire prospectus carefully. Except where we state otherwise, all information in this prospectus (1) reflects the conversion of all outstanding shares of our preferred stock into 46,054,619 shares of common stock effective automatically upon the closing of this offering and (2) assumes no exercise of the underwriters' over-allotment option. OMNISKY CORPORATION OUR COMPANY We offer a wireless service under the OmniSky brand for use on handheld mobile devices. We enable our subscribers to access and navigate the Internet, send and receive e-mail messages and securely conduct e-commerce transactions. To make our service easy-to-use, we have designed a wireless Internet portal specifically for use with handheld mobile devices that organizes information into categories, including entertainment, finance, news, shopping, sports, travel and local information. Our portal, which serves as our subscribers' gateway to the Internet, also allows for text based searches and can be customized by the subscriber. We provide our subscribers with Internet content, consisting of text and in some cases related graphics, in a format that has been modified, or optimized, for viewing and use on the relatively small display screens of handheld mobile devices. We receive that optimized content from almost 1,000 links to popular data sources and content providers, including, for example, CNBC, eBay, ESPN, E*Trade, Ticketmaster, Fox Sports and Yahoo!. In addition to the optimized content that our subscribers can access through our wireless service, our subscribers also have the ability to browse web sites whose content has not been optimized. Subscribers obtain access to our service by attaching a wireless modem that they may purchase from us to their handheld mobile device. For a fixed monthly fee, we provide our subscribers with unlimited usage, nationwide access covering 118 metropolitan statistical areas, encompassing over 160 million people, and full-time customer support. On September 15, 2000, we had 22,850 subscribers. So far, we have derived nearly all of our revenue from our monthly subscription fees and the sale of wireless modems. As a result of several agreements we have with content providers and new agreements that we expect to enter into with content providers, advertising agencies and others as our subscriber base increases, we expect, because of these agreements and the higher fees we anticipate being able to charge as our subscriber base grows, to receive an increasing percentage of our revenue from advertising fees, sponsorships and mobile e-commerce transactions that are conducted with our wireless service. We also expect our revenues from the sale of wireless modems to our subscribers to decrease significantly as wireless modems become increasingly available to our subscribers through channels other than us and as the price of the modems decreases. Although we expect in the future to continue to derive a substantial portion of our revenues from our subscribers' fixed monthly fees, and do not expect to be dependent on revenues from advertising, sponsorships or mobile e-commerce transactions to achieve profitability, we do expect that revenues from advertising, sponsorships and mobile e-commerce will become increasingly important to us over time. If we are unable to generate revenues from advertising, sponsorships and mobile e-commerce transactions in the future, our revenue growth would be impaired, which could reduce the amount of cash that we would have available to spend on sales and marketing, research and development programs and administrative operations. We have not yet begun to serve advertisements to our subscribers through our service. For the six months ended June 30, 2000, we did not record any revenues from advertising or mobile e-commerce and recorded less than $150,000 from sponsorships. We currently provide our wireless service for use on the Palm V and Palm Vx handheld mobile devices manufactured by Palm, Inc. We recently demonstrated our service at the 2000 PC Expo on another handheld mobile device called the Handspring Visor, which is manufactured by Handspring Inc. We anticipate that our wireless service will be available on the Handspring Visor in late October or November of this year. We also recently signed an agreement with Hewlett Packard Company to make our wireless service available by November of this year on Hewlett Packard's Jornada 540 Series of handheld mobile devices. We are actively engaged in discussions with other handheld mobile device manufacturers to make our service available on their devices. Internet usage, including e-mail messaging, information services and e-commerce, is becoming an increasingly important part of everyday life. To date, desktop computers have been the primary means of accessing the Internet. As individuals, in both their personal and professional lives, become more mobile, we believe there is a growing trend toward remote wireless access to the Internet. As this trend builds momentum, we believe that individuals will increasingly demand real-time access to highly personalized Internet content, including e-mail, information services and e-commerce, on handheld mobile devices. Individuals seeking wireless Internet access today are faced with a number of challenges, including the limited availability of Internet data and content that has been specifically modified, or optimized, for use and viewing on the relatively small display screens of handheld mobile devices. Much of the Internet data and content available today has been developed for platforms, such as desktop computers, which use larger display screens than handheld mobile devices. It is not possible to simply deliver non-modified content to a handheld mobile device and expect to be able to use and view that information in the same manner as one would on their desktop. To address this challenge, we provide our subscribers with access to Internet data and content that has been optimized for viewing on handheld mobile devices. An optimized Web site is typically modified by the content provider, usually with our assistance, according to a specialized set of programming rules that we establish with that particular Web site, and the small display screen of the handheld mobile device, in mind. By utilizing specialized programming rules, we are able to offer our subscribers pages of optimized content that have the "look and feel" of Web pages that would ordinarily appear on a desktop computer. Our subscribers generally access all optimized content through the 11 content channels in our wireless portal, although subscribers may find other optimized content outside of our channels from content providers with whom we do not have direct relationships. In addition to optimized content, and in an effort to enhance the overall experience that our subscribers have when using our wireless service, we also provide our subscribers the ability to browse, through our wireless Internet portal, non-modified content. As part of our wireless service, we attempt, in real-time, to adapt, or convert, non-optimized content for use and viewing on handheld mobile devices. The formatting and readability of non-modified content, when viewed on a handheld mobile device, will generally be poorer than that of optimized content. For instance, columns may be misaligned, spacing between words may be inconsistent, and text may be shifted to one side of the display screen. Non-modified content may also contain more extensive graphics than optimized content, resulting in longer download times, usually ranging from an additional five to ten seconds longer than optimized content, or, in some cases, even inaccessibility, although we believe this occurs infrequently. In addition, if the download times extend significantly beyond thirty or more seconds, which occasionally happens with large Web pages, a subscriber could lose their connection to that Web site and be returned to the page they were previously viewing. In a sense, we seek to translate non-modified content into optimized content in real-time. Although subscribers may not have the same ability to use and view non-modified content as they do with optimized content, we believe that providing our subscribers with the ability to access both optimized and non- optimized data and content offers them a more complete wireless Internet experience. Individuals seeking Internet access on their handheld mobile devices also tend to face high and unpredictable costs when using wireless network technologies, limited geographic coverage areas, data security concerns and a variety of different devices and services that, individually, do not typically provide all of the functionality that we believe many individuals are seeking. We provide our subscribers with Internet access, arrange for the wireless connectivity, or carriage, with wireless carriers and deliver optimized content through our wireless portal. Our subscribers do not need to make independent arrangements with any Internet service provider, wireless carrier, content provider or other third party to receive our wireless service. WE RECENTLY LAUNCHED OUR WIRELESS SERVICE NATIONALLY We began preliminary, or beta, testing of our wireless service in December 1999 and stopped accepting new beta orders on March 31, 2000. During our beta test, our wireless service was selected from among five nominees as the best software/service for wireless data in 2000 by Mobile Insights, Inc., a leading information source for the mobile computing and data communications market. We were nominated for the Mobile Insights' award without our prior knowledge and were selected by a panel of 35 mobile computing industry analysts and journalists designated by Mobile Insights. We formally launched our wireless service nationally in May 2000. On September 15, 2000, we had 22,850 subscribers. OUR STRATEGY Our mission is to become the leading global provider of wireless service to users of handheld mobile devices. To achieve our objective, we intend to: - aggressively market the OmniSky brand; - continue to extend our service offerings to additional types of handheld mobile devices, operating systems and wireless data network technologies; - leverage our easy-to-use wireless Internet portal to generate e-commerce and advertising revenues; - expand our wireless service internationally through a joint venture we have created with News Corporation, in which we each own a 50% stake; - leverage the experience that our management team has in the Internet, wireless and handheld mobile device industries by generating opportunities from the industry relationships they have developed over many years; - further develop our web-based and retail sales and distribution channels; and - pursue selected acquisitions of businesses or technologies that may enable us to increase our subscriber base or enhance our wireless service offerings. WE HAVE A LIMITED OPERATING HISTORY, HAVE A LARGE ACCUMULATED DEFICIT AND EXPECT TO INCUR CONTINUING LOSSES We have a limited operating history and only formally launched our wireless service in May 2000. Through June 30, 2000, we had generated only $2.1 million of revenues and had an accumulated deficit of $46.8 million. We have incurred increasing losses and had an operating loss for the six month period ended June 30, 2000 of $40.8 million and an operating loss before interest, taxes, depreciation and amortization (including amortization of deferred stock compensation) of $29.4 million for that same period. We expect to continue to incur net losses for the foreseeable future and may never achieve profitable operations. The market for our wireless service has not yet developed, and we cannot assure you that it will develop or that, if it develops, individuals will use our wireless service. We will not have sufficient capital to fund our operations in a manner consistent with our current intentions and plans without the net proceeds from this offering. Without the proceeds from this offering, we would likely initiate material changes to our business plan to conserve cash resources, including, reductions of advertising and marketing expenditures. We believe that our cash, cash equivalents and the net proceeds from this offering will provide sufficient capital to fund our operations for at least the next 12 months if our assumptions about our revenues and expenses are generally accurate. Since we have a limited operating history, however, we cannot be certain that those assumptions will prove to be accurate. Even if we successfully complete this offering, we will likely need to raise additional funds in the future through public or private financings or other arrangements to continue the development and operation of our business. AS WE CONTINUE TO ROLL OUT OUR WIRELESS SERVICE, WE EXPECT TO FACE INTENSE COMPETITION The market for wireless services is becoming increasingly competitive. We expect that we will compete primarily on the basis of the functionality, breadth, quality and price of our wireless service. We expect to encounter competition from wireless Internet service providers, popular web portals, wireless telecommunications carriers and many others that may decide to enter the wireless service industry. Many of our competitors may have substantially greater financial, technical, marketing and distribution resources than we do. CONCURRENT PRIVATE PLACEMENT AND MARKETING RELATIONSHIP WITH AMERICA ONLINE America Online, Inc. has agreed to purchase from us shares of our common stock, having an aggregate value of $5 million, in a private placement that will occur concurrently with the closing of this offering. Based on an assumed purchase price of $11.00 per share, which represents the mid-point of our estimated initial public offering price range, less the estimated underwriting discount which America Online will not pay, America Online will purchase 488,759 shares from us. We have also entered into a Strategic Marketing and Content Agreement with America Online, which provides for the delivery of America Online interactive services, including AOL e-mail and instant messaging, Web content, Internet content and e-commerce services through our wireless service and the development of a customized wireless service for America Online users. We expect to launch a customized service with America Online in March 2001. We have also agreed to purchase $3 million in online advertising from America Online during the term of the agreement. THE OFFERING Common stock offered......... 9,100,000 shares Common stock to be outstanding after this offering..................... 65,153,622 shares Nasdaq National Market symbol....................... OMNY Use of proceeds.............. We plan to use the net proceeds from this offering to fund: - sales, marketing and engineering and development programs, including national advertising and branding campaigns that we began in May 2000 in connection with the formal launch of our wireless service; - expenses we expect to incur in connection with our international joint venture with News Corporation; - the continued development of our infrastructure, network and support services; and - working capital and general corporate purposes. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001104903_cyber_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001104903_cyber_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE MORE DETAILED INFORMATION REGARDING CYBER DIALOGUE, THE RISKS OF PURCHASING OUR COMMON STOCK DISCUSSED IN ``RISK FACTORS" AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES, BEFORE DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK. We provide a comprehensive suite of products and services that enables businesses to establish and maintain more profitable Internet customer relationships. We have developed a technology, Arc 360 DEG., that allows us to collect, clean and analyze large amounts of our clients' customer data from both online and offline sources. By combining Arc 360 DEG. with our proprietary Internet consumer trend data, analytical services and marketing expertise, we help businesses tailor and target marketing initiatives, improve Web site design and content and anticipate marketing opportunities. In addition, because it is an outsourced solution, Arc 360 DEG. helps clients to reduce the costs and risks associated with building and maintaining an in-house solution. We believe that our Internet customer relationship management products and services enable our clients to identify their most valuable customers, gain a better understanding of customer preferences and improve the return on both online and offline marketing investments. We were founded in 1993 and were, we believe, the first firm in the United States to conduct online market research. Since 1997, we have focused on developing our Internet customer relationship management technology and related services. Our technology was first commercially used in 1997 to profile Web site visitors for America Online, CNN, Lycos and Salon.com. In 1999, we sold products and services to over 250 clients, which consisted primarily of pharmaceutical and health care companies, media and entertainment companies, financial services firms, online communities, e-tailers and interactive agencies, including Monsanto Life Sciences, AMFM Interactive, Warner Bros. Online, General Electric Financial Assurance, About.com, IBM and Organic. The Internet has fundamentally changed the way businesses interact with their customers by creating a more competitive environment in which it is increasingly difficult to maintain customer loyalty. Businesses are now more aware of the importance of focusing their marketing strategies not only on attracting customers, but also on building long-term, profitable relationships with them. To compete effectively, businesses must gain a comprehensive understanding of each individual customer and use this insight to personalize interactive communications while maintaining respect for consumer privacy. These challenges have heightened the need for businesses to find an effective way to integrate, organize and analyze the online and offline data that they collect and to extract the meaningful information required to build customer relationships. Our objective is to set the standard for Internet customer relationship management by providing our clients with the high quality products and services they need to improve customer targeting, acquisition, retention and up-selling. The key elements of our strategy include: - Expand and enhance our product and service offerings; - Increase market penetration by expanding our sales and distribution capabilities; - Broaden relationships with existing clients; - Expand vertical industry expertise; and - Pursue strategic acquisitions and investments. Our revenue increased from approximately $1.1 million in 1997 to $8.2 million in 1999. During that same period our net losses increased from $619,000 to $2.5 million. In 1999, we had negative cash flow from operations of $650,000. As our business grows, we expect to continue to incur losses for the foreseeable future. In February 2000, we acquired Applied Information Management Marketing, Inc. for a total of $10.3 million in cash and stock. Applied Information Management Marketing provides marketing database development and sophisticated analytical services, including predictive modeling and market segmentation. Our predecessor company, BKG/Michigan Inc., was founded in 1993. In 1995, BKG's name was changed to American Dialogue, Inc., and was merged in 1997 into a newly formed Delaware corporation, Cyber Dialogue Inc. Our principal executive offices are located at 304 Hudson Street, New York, New York 10013. Our telephone number is (212) 651-7000. Our World Wide Web site is www.cyberdialogue.com. INFORMATION CONTAINED ON OUR WEB SITE DOES NOT CONSTITUTE PART OF THIS PROSPECTUS. ------------------------ CYBERCITIZEN and TELESCOPE are registered trademarks of Cyber Dialogue. Each trademark, trade name or service mark of any other company appearing in this prospectus belongs to its holder. This prospectus includes statistical data regarding Cyber Dialogue, the Internet and the industry in which we compete. This data is based on our records or is taken or derived from information published or prepared by various sources. Unless otherwise indicated, all information in this prospectus is based on the following assumptions: - the filing of an amended and restated certificate of incorporation and adoption of amended and restated by-laws upon the closing of this offering; and - no exercise of the underwriters' over-allotment option. All share amounts and per-share prices appearing in this prospectus give effect to the 200-for-1 stock split that occured on November 17, 1999. ------------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL AND SEEKING OFFERS TO BUY SHARES OF OUR COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THE PROSPECTUS OR ANY SALE OF OUR COMMON STOCK. THE OFFERING <TABLE> <S> <C> Common stock we are offering............................... 5,000,000 shares Common stock to be outstanding after the offering.......... 25,031,876 shares Use of proceeds............................................ We intend to use the net proceeds of this offering for general corporate purposes, principally working capital and capital expenditures, as well as for potential acquisitions. See "Use of Proceeds." </TABLE> Common stock to be outstanding after the offering is based on the number of shares outstanding as of April 4, 2000 and excludes: - 5,526,300 shares of common stock issuable upon the exercise of outstanding options under our stock option plans, with a weighted average exercise price of $2.90 per share; - 1,703,200 shares of common stock issuable upon the exercise of outstanding warrants, with a weighted average exercise price of $1.62 per share; and - 1,089,044 shares of common stock available for future issuance under our stock option and employee stock purchase plans, which will increase by an amount equal to 25% of the number of shares issued in this offering. SUMMARY CONSOLIDATED FINANCIAL DATA The following summary consolidated financial data is derived from and qualified in its entirety by our financial statements and the unaudited pro forma combined financial statements. You should read this summary consolidated financial data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations," our consolidated financial statements and the unaudited pro forma combined financial statements appearing elsewhere in this prospectus. The pro forma information below may not be indicative of the results that actually would have occurred or which will be obtained in the future. The following information is presented: - on an actual basis; - on a pro forma basis to give effect to the acquisition of Applied Information Management Marketing, including the issuance of 881,676 shares of our stock, as if it had occurred on January 1, 1999 for the statement of operations data and as of December 31, 1999 for the balance sheet data; and - on a pro forma as adjusted basis to give effect to the acquisition of Applied Information Management Marketing and the sale of 5,000,000 shares of common stock offered by us at an assumed initial public offering price of $11.00 per share, less underwriting discounts and commissions and estimated offering expenses. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------- 1995 1996 1997 1998 1999 ---------- ---------- ----------- ----------- ------------------------- PRO FORMA ACTUAL (UNAUDITED) ----------- ----------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue.......................... $416 $490 $1,094 $3,617 $8,227 $12,412 Cost of revenue.................. 191 497 748 2,789 5,067 9,096 ---------- ---------- ----------- ----------- ----------- ----------- Gross profit (loss).............. 225 (7) 346 828 3,160 3,316 Operating expenses............... 505 362 943 2,276 5,567 10,354 ---------- ---------- ----------- ----------- ----------- ----------- Loss from operations............. (280) (369) (597) (1,448) (2,407) (7,038) Net loss......................... $(349) $(390) $(619) $(1,479) $(2,511) $(7,633) ========== ========== =========== =========== =========== =========== Basic and diluted net loss per share.......................... $(0.09) $(0.08) $(0.05) $(0.10) $(0.15) $(0.43) ========== ========== =========== =========== =========== =========== Shares used to compute basic and diluted net loss per share..... 3,912,900 4,701,900 11,357,707 14,838,916 16,928,274 17,809,950 ========== ========== =========== =========== =========== =========== </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 --------------------------------------- PRO FORMA PRO FORMA AS ADJUSTED ACTUAL (UNAUDITED) (UNAUDITED) ----------- ----------- ----------- (IN THOUSANDS) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash........................................................ $7,975 $5,002 $54,277 Working capital............................................. 6,064 3,073 52,348 Total assets................................................ 12,406 21,098 70,373 Long-term debt.............................................. -- -- -- Total stockholders' equity.................................. 7,583 14,907 64,182 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001105102_egroups_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001105102_egroups_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all the information you should consider before buying shares in the offering. You should read the entire prospectus carefully. EGROUPS OUR BUSINESS eGroups is the most widely used email group communication platform on the Internet. Our service enables our members to easily create, join and manage online groups focused on business and personal interests. As of February 2000, we had over 14 million active members participating in approximately 600,000 member-created groups, with new members joining our service at a rate of approximately 1.5 million per month. During February 2000, our members exchanged email messages at a rate of approximately 2 billion per month, and our web site generated 163 million page views. We derive revenue from permission-based direct marketing programs, sponsorships and other forms of online advertising. By aggregating our members who have segmented themselves into groups based on their interests, we offer advertisers and direct marketers a broad audience as well as enable them to deliver highly targeted marketing messages. Our proprietary, high-volume ad-serving technology allows advertisers and direct marketers to place context-sensitive advertisements in emails and web pages based on member-designated interests, demographic information and other data. In addition, through our permission-based direct marketing programs, we deliver full-page emails to members who have elected to receive promotional offers in specific categories of interest. We currently have approximately 2.5 million subscriptions from our members for this opt-in advertising. Our rapid growth in members has been driven by the inherently viral nature of our business and the ease of using our service. The organic growth of our member base occurs as existing members expand their groups by inviting new members, who often form their own groups and invite additional new members. Our member base has expanded rapidly in both the United States and abroad, with over 20% of our members coming from international domains. BENEFITS TO OUR MEMBERS Our easy-to-use and customizable email group communication service provides numerous benefits to our members. Through our service, group members communicate with each other using a single group email address, rather than the individual email addresses of each member. We deliver group email directly to the member's email inbox, allowing the member to read and reply at his or her convenience. In addition, we archive group email communications over the prior six months, enabling prospective and existing members to search our archives for past communications among group members. Each group also has access to a group calendar, an online chat application, a group polling feature, and dedicated storage space to share files such as photographs, documents and digital music. In April 2000, our members will have access to our web-based platform in 14 different languages and will be able to continue sending emails to other group members in any language. We are able to align advertisements more effectively with our members' self-designated interests, providing them with relevant advertisements that they are more likely to find useful. BENEFITS TO ADVERTISERS AND DIRECT MARKETERS We offer advertisers and direct marketers broad reach as well as a variety of targeting capabilities. Because our 14 million active members have segmented themselves across approximately 600,000 groups based on business and personal interests, we enable advertisers and direct marketers You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of the prospectus or any sale of the common stock. In this prospectus, unless the context indicates otherwise, the Company, eGroups, we, us and our refer to eGroups, Inc., a Delaware corporation. eGroups, eGroup, email Groups, ONElist and the eGroups logo are our trademarks. This prospectus also contains trademarks and service marks of other companies. Unless otherwise indicated, all information in this prospectus: - gives effect to the conversion of all our outstanding shares of series A, B, C and D convertible preferred stock into shares of common stock upon the closing of this offering and the conversion of approximately $3.2 million in principal amount of subordinated debt into 437,500 shares of our common stock prior to the closing of this offering; - assumes the effectiveness of our amended and restated certificate of incorporation in the State of Delaware upon the completion of this offering; and - assumes no exercise of the underwriters' over-allotment option. TABLE OF CONTENTS <TABLE> <CAPTION> Page <S> <C> Prospectus Summary.................. 3 Risk Factors........................ 7 Use of Proceeds..................... 18 Dividend Policy..................... 18 Corporate Information............... 18 Forward-Looking Statements.......... 18 Capitalization...................... 19 Dilution............................ 20 Selected Consolidated Financial Data.............................. 21 Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 22 Business............................ 29 </TABLE> <TABLE> <CAPTION> Page <S> <C> Management.......................... 43 Relationships and Related Transactions...................... 52 Principal Stockholders.............. 55 Description of Capital Stock........ 57 Shares Eligible for Future Sale..... 60 Underwriting........................ 62 Legal Matters....................... 65 Experts............................. 65 Additional Information.............. 65 Index to Consolidated Financial Statements........................ F-1 </TABLE> to deliver highly targeted advertisements to specific audiences. We currently deliver approximately 2 billion emails and 163 million web page views per month, nearly all containing an advertisement. For example, online financial services firms can target advertisements to members of an investment group, while pharmaceutical companies can promote new therapies to a health-related group. Because consumers spend a significant portion of their online time using email, we believe advertisers are better able to reach these consumers by delivering advertisements in email messages. In addition, we currently have approximately 2.5 million subscriptions from our members who have elected to receive promotional offers by email in specific categories of interest. OUR MARKET OPPORTUNITY The Direct Marketing Association estimates that a total of $309 billion was spent on advertising and direct marketing in the United States in 1999. Because the Internet enables precise targeting of consumers through the use of behavioral, demographic and other data, advertisers and direct marketers are increasingly adopting online forms of advertising. Forrester Research estimates that the amount spent on online advertising and direct marketing worldwide will increase ten-fold from $3.3 billion in 1999 to $33.1 billion in 2004. The Internet enables group communications to occur on a global scale and offers efficiencies currently unavailable offline. Because email is the most widely used application on the Internet, we believe that groups will utilize email as a preferred medium for creating and managing their group communications. Given the self-segmented nature of groups, we believe that advertisers and direct marketers will embrace an email-based group communication platform that enables them to deliver highly targeted advertisements to their desired audience. THE EGROUPS STRATEGY Our objective is to maintain our leading position as the most widely used email group communication platform on the Internet. The following are key elements of our strategy: - Continue to develop, acquire and license proprietary products and technology to improve our member experience with enhanced functionality and new features; - Continue to increase the size of our member base and the level of group activity among existing members; - Maximize awareness of our brand among members and advertisers through various marketing channels; - Increase revenue by expanding our direct sales efforts, increasing our inventory of rich-media email advertisements, improving our ability to target our web and email advertising, refining our opt-in direct marketing programs, and introducing new subscription-based services; and - Leverage our email group communication platform to further expand internationally. EGROUPS, INC. We were incorporated in Delaware in June 1998. Our principal office is located at 350 Brannan Street, San Francisco, California, and our telephone number is (415) 546-2700. We maintain a web site at www.egroups.com. Information contained on our web site is not part of this prospectus. THE OFFERING Common stock offered by eGroups.......................... shares Common stock to be outstanding after the offering............... shares Use of proceeds.................. We plan to use the net proceeds from this offering for the development of our services, sales and marketing, and general corporate purposes. Proposed Nasdaq National Market symbol........................... EGPS The number of shares to be outstanding after this offering is based on shares outstanding as of March 15, 2000. This number excludes: - 8,817,293 shares of our common stock reserved for issuance under our option and employee stock purchase plans, of which 2,711,453 shares of our common stock are issuable upon the exercise of outstanding stock options; and - 8,330 shares of our common stock issuable upon exercise of an outstanding warrant. See "Capitalization," "Management--Stock Plans," and Notes 8 and 11 of Notes to our Consolidated Financial Statements. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table summarizes the consolidated statement of operations data for our business. The shares used in calculating our pro forma net loss per share data include the assumed conversion of all shares of convertible preferred stock into shares of our common stock from the date of issuance, but exclude the issuance of 437,500 shares of common stock upon the conversion of subordinated debt prior to the closing of this offering, the repurchase of 600,478 shares of our common stock from one of our founders in March 2000 under a repurchase right, and the purchase of 971,946 shares of our common stock from February 1, 2000 to March 15, 2000 by some employees through the exercise of stock options. For a more detailed explanation of this financial data, see "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our Consolidated Financial Statements located elsewhere in this prospectus. <TABLE> <CAPTION> PERIOD FROM INCEPTION SIX MONTHS ENDED (JUNE 5, 1998) TO JANUARY 31, JULY 31, ----------------------- 1999 1999 2000 (UNAUDITED) <S> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenue......................................... $ 489 $ 43 $ 3,464 Gross profit (loss)............................. 267 (44) 3,139 Operating loss.................................. (6,804) (1,240) (12,605) Net loss attributable to common stockholders.... $(6,857) $(1,235) $(12,903) Net loss per share attributable to common stockholders Basic and diluted.......................... $ (1.25) $ (0.29) $ (1.61) Shares used in per share calculation....... 5,465 4,303 8,011 Pro forma net loss per share attributable to common stockholders Basic and diluted (unaudited).............. $ (0.49) $ (0.56) Shares used in pro forma per share calculation (unaudited)................. 13,641 22,643 </TABLE> The following table summarizes our consolidated balance sheet data. The pro forma data reflects the assumed conversion of all of our shares of convertible preferred stock into shares of our common stock, the issuance of 437,500 shares of common stock upon the conversion of subordinated debt prior to the closing of this offering, the repurchase of 600,478 shares of our common stock from one of our founders in March 2000 under a repurchase right, and the purchase of 971,946 shares of our common stock from February 1, 2000 to March 15, 2000 by some employees through the exercise of stock options. The pro forma as adjusted consolidated balance sheet data also gives effect to the sale of shares of common stock at an assumed initial public offering price of $ per share in this offering, after deducting estimated underwriting discounts, commissions and offering expenses payable by us, and the application of the resulting net proceeds. <TABLE> <CAPTION> JANUARY 31, 2000 --------------------------------- PRO PRO FORMA ACTUAL FORMA AS ADJUSTED <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............................. $44,586 $44,585 $ Working capital....................................... 44,578 44,576 Total assets.......................................... 52,211 51,312 Long-term capital lease obligations and debt.......... (8,149) (4,999) (4,999) Total stockholders' equity............................ 41,555 43,806 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001105472_sonus-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001105472_sonus-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING US AND THE COMMON STOCK BEING SOLD IN THIS OFFERING AND OUR CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES TO THOSE STATEMENTS, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THIS PROSPECTUS ASSUMES: - THE CONVERSION OF OUR OUTSTANDING SHARES OF REDEEMABLE CONVERTIBLE PREFERRED STOCK INTO AN AGGREGATE OF 32,319,074 SHARES OF COMMON STOCK UPON THE CLOSING OF THIS OFFERING; AND - THAT THE UNDERWRITERS DO NOT EXERCISE THEIR OPTION GRANTED BY US TO PURCHASE ADDITIONAL SHARES IN THIS OFFERING. ABOUT SONUS NETWORKS We are a leading provider of voice infrastructure products for the new public network. Our products are a new generation of carrier-class switching equipment and software that enable voice services to be delivered over packet-based networks. Our target customers include new and established communications service providers, including long distance carriers, local exchange carriers, Internet service providers, cable operators, international telephone companies and carriers that provide services to other carriers. These service providers are rapidly building packet-based networks to support the dramatic growth in data traffic resulting from Internet use. Packet-based networks, which transport traffic in small bundles, or "packets," offer a significantly more flexible, cost-effective and efficient means for providing communications services than existing circuit-based networks, designed years ago for telephone calls. By enabling voice traffic to be carried over these packet-based networks, our products will accelerate the convergence of voice and data into the new public network. Our suite of voice infrastructure products includes the GSX9000 Open Services Switch, PSX6000 SoftSwitch, SGX2000 SS7 Signaling Gateway and System 9200 Internet offload solution. Our products, designed for deployment at the core of a service provider's network infrastructure, significantly reduce the cost to build and operate voice services compared to traditional alternatives. Moreover, our products offer a powerful and open platform for service providers to increase their revenues through the creation and delivery of new and innovative voice and data services. Our switching equipment and software can be rapidly and easily deployed, and readily expanded to accommodate growth in traffic volumes. Our products also interoperate with service providers' existing telephone infrastructure, allowing them to preserve the investment in their current networks. Designed for the largest telephone networks in the world, our products offer the reliability and voice quality that have been hallmarks of the public telephone network for decades. Two global forces -- deregulation and the Internet -- are expected to revolutionize the 100-year old public telephone network worldwide. Deregulation has fueled intense competition among service providers and is driving them to reduce their costs and establish new revenue sources. The dramatic rise in Internet use and accompanying growth in data traffic has led service providers to make major investments in high-capacity, packet-based networks. Building and maintaining these packet-based networks in parallel with traditional circuit-switched telephone networks is complex and expensive, driving the demand for a new public network that integrates both voice and data. Synergy Research Group projects that the market for voice infrastructure products to enable just two applications for the new public network, voice over Internet protocol and Internet offload, will grow dramatically to $19 billion in 2003. Our customers include Global Crossing, Intermedia Communications and Williams Communications, three of the world's leading service providers. We sell our products through a direct sales force, distributors and resellers. We also collaborate with our customers to identify and develop new advanced services and applications that they can offer to their customers. Our objective is to capitalize on our early technology and market lead and build the premier franchise in voice infrastructure solutions for the new public network. The following are key elements of our strategy: - Leverage our technology leadership to achieve key service provider design wins; - Expand and broaden our customer base by targeting specific market segments; - Expand our global sales, marketing, support and distribution capabilities; - Grow our base of software applications and development partners; - Leverage our technology platform from the core of the network out to the access edge; - Actively contribute to the standards definition and adoption process; and - Expand through investments in and acquisitions of complementary products, technologies and businesses. Our principal executive offices are located at 5 Carlisle Road, Westford, Massachusetts 01886, and our telephone number is (978) 692-8999. Sonus is a trademark and service mark of Sonus Networks. Each trademark, trade name or service mark of any other company appearing in this prospectus belongs to its holder. Information contained on our Web site, WWW.SONUSNET.COM, does not constitute part of this prospectus. We were incorporated as a Delaware corporation in August 1997. THE OFFERING <TABLE> <S> <C> Shares offered by Sonus Networks........................... 5,000,000 shares Shares to be outstanding after the offering (1)............ 60,420,966 shares Use of proceeds............................................ For general corporate purposes, including working capital and capital expenditures. Proposed Nasdaq National Market symbol..................... "SONS" </TABLE> - ------------------------ (1) Based on the number of shares outstanding as of May 15, 2000. Excludes 3,641,160 shares of common stock issuable upon exercise of outstanding stock options. Includes 13,930,248 shares of restricted common stock, which are subject to our right to repurchase upon termination of employment. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The following table contains summary financial data which should be read together with our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> PERIOD FROM INCEPTION YEAR ENDED THREE MONTHS ENDED (AUGUST 7, 1997) TO DECEMBER 31, MARCH 31, DECEMBER 31, ------------------------ ------------------------ 1997 1998 1999 1999 2000 ------------------- ---------- ----------- ---------- ----------- (UNAUDITED) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues................... $ -- $ -- $ -- $ -- $ 1,093 Loss from operations....... (486) (7,228) (24,374) (4,163) (16,263) Net loss................... (461) (6,914) (23,887) (4,043) (16,035) Net loss applicable to common stockholders...... (461) (6,914) (26,387) (4,043) (16,035) Net loss per share (1): Basic and diluted........ $ -- $ (4.27) $ (5.53) $ (1.23) $ (2.07) Pro forma basic and diluted................ (0.75) (0.41) Shares used in computing net loss per share (1): Basic and diluted........ -- 1,619,289 4,774,763 3,285,170 7,742,970 Pro forma basic and diluted................ 32,062,786 38,921,794 </TABLE> The following table is a summary of our consolidated balance sheet as of March 31, 2000: - on an actual basis; - on a pro forma basis to reflect the conversion of all outstanding shares of our redeemable convertible preferred stock into 32,319,074 shares of common stock upon the closing of this offering; and - on a pro forma as adjusted basis to give effect to the sale of the 5,000,000 shares of common stock offered in this prospectus at an assumed initial public offering price of $20.00 per share, the mid-point of the range set forth on the cover of this prospectus, and after deducting underwriting discounts and estimated offering expenses. <TABLE> <CAPTION> MARCH 31, 2000 (UNAUDITED) --------------------------------- PRO PRO FORMA ACTUAL FORMA AS ADJUSTED -------- -------- ----------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and marketable securities............ $ 41,779 $41,779 $133,529 Working capital............................................. 35,122 35,122 126,872 Total assets................................................ 52,361 52,361 144,111 Long-term obligations, less current portion................. 3,293 3,293 3,293 Redeemable convertible preferred stock...................... 70,859 -- -- Total stockholders' equity (deficit)........................ (32,695) 38,164 129,914 </TABLE> - ------------------------ (1) See note (1)(q) to our consolidated financial statements for an explanation of the method of calculation. Pro forma per share calculation reflects the conversion upon the closing of the offering of all the outstanding shares of Series A, Series B, Series C and Series D redeemable convertible preferred stock into shares of common stock, as if the conversion occurred at the date of original issue.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001105519_radvision_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001105519_radvision_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED IN THIS PROSPECTUS. BEFORE YOU DECIDE TO INVEST IN OUR ORDINARY SHARES, YOU SHOULD CAREFULLY READ THE ENTIRE PROSPECTUS, INCLUDING THE SECTION ENTITLED "RISK FACTORS" AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE FINANCIAL STATEMENTS. RADVISION We are a leading designer, developer and supplier of products and technology that enable real-time voice, video and data communications over packet networks, including the Internet and other networks based on the Internet protocol or IP. We have over 250 customers including Alcatel, Bosch, Cisco Systems, Madge Networks, Nippon Telegraph & Telephone, Nortel Networks, Philips Electronics, Shanghai Bell, Siemens and 3Com. Our products and technology are used by our customers to develop systems that enable enterprises and service providers to migrate their voice and video communications from traditional telephone networks to next generation packet networks. The use of packet networks for real-time voice, video and data communications is expected to grow dramatically. This anticipated growth is due to the inherent benefits of packet networks and the advent of new technologies and standards that have enabled real-time communications over these networks. ICM Global Intelligence, a market research firm, forecasts that revenues for network equipment associated with voice-over-IP, or IP telephony, will grow from $477 million in 1999 to $7.1 billion in 2004. Perey Research & Consulting, an industry consulting firm, forecasts revenues for network equipment associated with IP video communications to grow from $22 million in 1999 to more than $643 million in 2003. We are one of the few companies to offer customers IP communications products and technology that support both real-time voice and video as well as voice-only packet-based communications. Our products and technology consist of: - RADVision gateways, which interface between traditional telephone networks and IP networks; - RADVision gatekeepers, which control, manage and monitor real-time voice, video and data traffic over packet networks; - RADVision IP conferencing bridges, which enable voice and multimedia conferencing over packet networks among three or more participants; and - RADVision software development kits, which provide the core technology necessary to build interoperable, standards-compliant products, applications and services for real-time voice and video communication over packet networks. We believe that we have established ourselves as a technology leader in providing enabling technology and products for a broad range of standards-based IP communications products and services. Our goal is to continue to be the leading provider of innovative products and technology for real-time IP communications. Our customers rely on our accumulated expertise with IP communications standards and technology to significantly reduce their development cycle and improve their time to market in the rapidly growing market for IP-based voice and video communication. Our customers can deploy our products as a complete network solution for real-time IP communications, integrate our products into their own IP communications systems, or use our technology to build their own standards-compliant IP communications products, systems and applications for enterprises and service providers. We were incorporated under the laws of the State of Israel in 1992 and began operations in October 1992. Our principal executive offices are located at 24 Raoul Wallenberg St., Tel Aviv 69719, Israel and our telephone number is 011-972-3-645-5220. THE OFFERING <TABLE> <S> <C> Ordinary shares offered in this offering..... 3,800,000 shares Private placement Ordinary shares offered by us to Siemens... 365,767 shares Ordinary shares offered by us to Samsung... 225,055 shares Ordinary shares to be outstanding after this offering and the private placement......... 18,028,596 shares Use of proceeds.............................. We expect to use the net proceeds from this offering to finance the continued growth of our business and for general corporate purposes. Proposed Nasdaq National Market symbol....... RVSN </TABLE> The number of ordinary shares referred to in the preceding table to be outstanding after this offering excludes: - 3,048,873 shares issuable upon the exercise of outstanding options under our share option plans; and - up to 61,900 additional ordinary shares reserved for issuance under our share option plans. PRIVATE PLACEMENT Concurrently with this offering, Samsung Electro-Mechanics Co. Ltd. and Samsung Venture Investment Corporation, members of the Samsung group, and Siemens Aktiengesellschaft have agreed to purchase an aggregate of 2,625,228 of our ordinary shares at $17.00 per ordinary share in a private placement. Of the 2,625,228 ordinary shares, we will sell 590,822 ordinary shares in the private placement and the remaining 2,034,406 ordinary shares will be sold by some of our existing shareholders, including our chairman of the board, our chief executive officer and some of our other directors. ABOUT THIS PROSPECTUS Unless otherwise indicated, all information contained in this prospectus: - gives effect to the sale of an aggregate of 590,822 ordinary shares by us to Siemens and Samsung in a private placement concurrent with this offering at $17.00 per ordinary share to be effected immediately after the closing of this offering; - assumes no exercise of the underwriters' option to purchase from us up to 570,000 additional ordinary shares to cover over-allotments; - reflects the conversion of all our preferred shares into ordinary shares on a 1-to-1 basis before the share recapitalization referred to below; - reflects the conversion of 2,770 ordinary shares into deferred shares before the share dividend referred to below; - assumes an initial offering price of $19.00 per ordinary share, the midpoint of the estimated initial public offering price range; and - reflects a 211-for-1 share recapitalization of our ordinary shares, following the conversion of our preferred shares into ordinary shares, as the result of a share split and share dividend that will be effected before this offering. ------------------------ We have a registered trademark for RADVision-Registered Trademark-. All other trademarks and trade names appearing in this prospectus are owned by their holders. SUMMARY CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues.............................................. $ 871 $ 1,491 $ 4,899 $ 8,894 $17,550 Gross profit.......................................... 301 721 3,689 7,482 14,697 Operating loss........................................ (1,497) (2,067) (1,062) (852) (2,801) Net loss.............................................. (1,499) (2,025) (1,056) (829) (2,696) Basic and diluted net loss per ordinary share......... $ (0.21) $ (0.21) $ (0.10) $ (0.08) $ (0.26) Weighted average number of ordinary shares used in computing basic and diluted net loss per ordinary share............................................... 7,217 9,499 10,234 10,492 10,538 Pro forma basic and diluted net loss per ordinary share............................................... $ (0.20) Weighted average number of ordinary shares used in computing pro forma basic and diluted net loss per ordinary share...................................... 13,496 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 -------------------------- PRO FORMA ACTUAL AS ADJUSTED --------- ----------- (IN THOUSANDS) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 2,605 $77,857 Working capital............................................. 814 76,066 Total assets................................................ 13,261 88,513 Total bank debt, net of current maturities.................. 67 67 Total shareholders' equity.................................. 3,481 78,734 </TABLE> Pro forma basic and diluted net loss per ordinary share gives effect to the conversion of all outstanding preferred shares into ordinary shares, which will take place before the completion of this offering. The pro forma as adjusted information included above in the consolidated balance sheet data gives effect to: - the conversion of our preferred shares; - the issuance of 52,750 ordinary shares upon the exercise of options after December 31, 1999 and the receipt of $62,500 in proceeds from the option exercise; - this offering of our ordinary shares; and - the private placement by us of 590,822 ordinary shares to Siemens and Samsung at $17.00 per ordinary share.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001105653_mtvi_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001105653_mtvi_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read this entire prospectus carefully, including the "Risk Factors" section and the consolidated financial statements and the notes to those statements. MTVi Group is a holding company whose only asset after completion of the offering will be a % equity interest in the Partnership. The only business of MTVi Group will be to act as the sole general partner of the Partnership. The business described in this prospectus is conducted by the Partnership and its subsidiaries. OUR COMPANY We are the world's leading Internet music entertainment company, with 22 music website destinations around the world. Through our network of websites, we deliver diverse and highly personalized music and music-related experiences to a vibrant community of music fans. We were launched in 1994 by MTV Networks, a leading global media and entertainment business that has built its success on creating strong brands and delivering compelling music content to more than 300 million television homes in 80 countries around the world. We are positioning our network of websites as a comprehensive collection of branded music destinations with content that targets specific demographic segments. By amassing these consumers, we believe that we are a powerful value-creating vehicle for music enthusiasts, advertisers and commerce providers, as well as artists and record companies. We reported revenues of $18.2 million and a net loss of $46.4 million for the year ended December 31, 1999. Our websites lead the online music entertainment category based on consolidated reach among U.S. Internet users, according to Media Metrix, Inc. research. We also have a substantial international presence through our 11 international websites in Japan, Europe and Latin America that offer content and services customized to suit these regional markets. In the aggregate, our existing websites generated more than 140 million page views in January 2000. Our primary online properties include: -- MTV.com--a website that utilizes the MTV brand name to target the 13-24 year old audience, and was the #1 music entertainment site in 1999 based on average monthly unique visitors, as reported by Media Metrix; -- VH1.com--a website that utilizes the VH1 brand name to target the 25-plus age group; and -- SonicNet.com -- a comprehensive music network, with content in 11 different genres aimed at all ages. Our websites provide a variety of music-related content and community features, including: -- music and artist news, features, reviews, information, interviews and chats; -- streaming radio with both user-customized and professionally programmed formats; -- live and on-demand webcast performances, selected on-demand music videos and exclusive video programming; -- integrated online and on-air chats, polling and programming such as game shows; -- audience message boards; -- coverage of local music scenes; and -- free e-mail accounts. We also offer users an array of e-commerce opportunities, including downloading digital music and purchasing CDs, tickets, and MTV, VH1, SonicNet and other on-air franchise branded merchandise. We believe that we have a unique set of strengths in the online music industry which positions our network of websites to continue to lead this industry and makes us a powerful value-creating vehicle for music EXPLANATORY NOTE This registration statement contains two forms of prospectus: one to be used in connection with a United States and Canadian offering of the registrant's Class A common stock and one to be used in connection with a concurrent international offering of Class A common stock. The U.S. prospectus and the international prospectus will be identical in all respects except that they will have different front cover pages. The form of the U.S. prospectus is included with this registration statement and is followed by the alternate front cover page to be used in the international prospectus. The form of the front cover page of the international prospectus is labeled "Alternate Cover Page for International Prospectus." Final forms of each prospectus will be filed with the Securities and Exchange Commission under Rule 424(b) of the General Rules and Regulations under the Securities Act of 1933. enthusiasts, advertisers and commerce providers, as well as artists and record companies. We consider our relationship with MTV Networks to be our most important strength because of the brand awareness, cross promotion, convergence programming opportunities and expertise and relationships it affords us. MTV Networks has contractually committed to vigorously promote us on its television networks through advertising, VJ mentions, text on screen and other support, for no cash consideration. The value of this on-air promotion will be at least $100 million, spread over a five-year period ending July 15, 2004. MTV Networks has indicated that it intends to provide us with at least an additional $25 million of on-air promotion over this period, although it is not legally obligated to do so. We believe that the highly personalized and content-rich experience available on our network of websites is likely to increase the frequency of visits among our users, as well as the duration of each visit. Our broad international reach enables us to target specific regional audiences and to take advantage of the growth in these markets. We are pursuing a strategy consisting of the following key elements: -- offer the most compelling content; -- build the strongest brands through extensive cross-promotion; -- develop and grow multiple revenue streams; -- develop innovative application platforms; and -- capitalize on strategic relationships. As described more fully in "Risk Factors," we face a variety of obstacles in implementing our strategy, including the possible failure to develop compelling content that is attractive to our target audience, the potential decline in the strength of our brands and competition from traditional and online media companies and record labels. In addition, our relationship with MTV Networks could lead to conflicts of interest and may result in limitations on our business, including significant restrictions on our ability to use the MTV and VH1 trademarks, logos and programming licensed to us by MTV Networks. ------------------------ Our principal executive offices are located at 770 Broadway, New York, New York 10003 and our telephone number is (212) 654-9000. Our corporate website address is http://www.mtvigroup.com. The information contained in our corporate website and the other websites described in this prospectus is not part of this prospectus. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (Subject to Completion) Issued March 30, 2000 Shares mtvi group logo CLASS A COMMON STOCK ------------------------ THE MTVi GROUP, INC. IS OFFERING SHARES OF ITS CLASS A COMMON STOCK. THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND $ PER SHARE. FOLLOWING THIS OFFERING, WE WILL HAVE TWO CLASSES OF AUTHORIZED COMMON STOCK, CLASS A COMMON STOCK AND CLASS B COMMON STOCK. THE RIGHTS OF THE HOLDERS OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK ARE IDENTICAL, EXCEPT WITH RESPECT TO VOTING AND CONVERSION. ------------------------ WE HAVE APPLIED TO HAVE OUR CLASS A COMMON STOCK APPROVED FOR LISTING ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL " ." ------------------------ INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 7. ------------------------ PRICE $ A SHARE ------------------------ <TABLE> <CAPTION> UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS COMPANY -------- ------------- ----------- <S> <C> <C> <C> Per Share..................................... $ $ $ Total......................................... $ $ $ </TABLE> We have granted the underwriters the right to purchase up to an additional shares of our Class A common stock to cover over-allotments. The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on , 2000. ------------------------ MORGAN STANLEY DEAN WITTER CREDIT SUISSE FIRST BOSTON BEAR, STEARNS & CO. INC. MERRILL LYNCH & CO. UTENDAHL CAPITAL PARTNERS, L.P. WIT SOUNDVIEW , 2000 ORGANIZATION The following sets forth our simplified corporate structure as of the completion of this offering: [MTVi CORPORATE STRUCTURE FLOW CHART] - ------------ (1) % equity interest and % voting interest if the underwriters' over-allotment options are exercised in full. (2) % equity interest and % voting interest if the underwriters' over-allotment options are exercised in full. The public stockholders' percentages include the shares issued in connection with our acquisition of Mischief New Media and the employment by us of its sole shareholder. (3) % equity interest if the underwriters' over-allotment options are exercised in full. (4) % equity interest if the underwriters' over-allotment options are exercised in full. (5) % equity interest if the underwriters' over-allotment options are exercised in full. For more information regarding our corporate history and organization, see "Corporate History and Reorganization" and "Certain Relationships and Related Transactions." TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Prospectus Summary.................... 1 Risk Factors.......................... 7 Special Note Regarding Forward-Looking Statements.......................... 18 Use of Proceeds....................... 19 Dividend Policy....................... 19 Capitalization........................ 20 Dilution.............................. 21 Selected Financial Data............... 22 Unaudited Pro Forma Consolidated Condensed Financial Statements...... 23 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 28 Corporate History and Reorganization...................... 34 Business.............................. 35 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> Management............................ 50 Certain Relationships and Related Transactions........................ 55 Principal Stockholders................ 63 Description of Capital Stock and Partnership Units................... 65 Shares Eligible for Future Sale....... 70 Material United States Federal Tax Consequences to Non-United States Holders............................. 71 Underwriters.......................... 74 Legal Matters......................... 78 Experts............................... 78 Where You Can Find More Information... 79 Index to Consolidated Financial Statements.......................... F-1 </TABLE> ------------------------ You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of Class A common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of Class A common stock. ------------------------ Unless the context otherwise indicates, in this prospectus: -- "MTVi Group" refers to The MTVi Group, Inc. and, where applicable, its wholly owned subsidiary upon completion of this offering, Mischief New Media, Inc.; -- "Partnership" refers to The MTVi Group, L.P. and its subsidiaries, including all predecessor companies and other entities which operated the business currently conducted by the Partnership; -- "Viacom" refers to Viacom International Inc.; -- "Viacom affiliates" or "Viacom and its affiliates" excludes MTVi Group, unless otherwise indicated; -- "MTV Networks" refers to MTV Networks, a division of Viacom; -- "Liberty Digital" refers collectively to Liberty Digital Inc., formerly known as TCI Music, Inc., The Box Worldwide, Inc., Paradigm Music Ent. Co., LDIG Music Online, Inc., LDIG Music Online II, Inc. and SonicNet, Inc.; -- "We," "us" and "our" refer collectively to MTVi Group and the Partnership or either of these, as the case may be. ------------------------ UNTIL , 2000, WHICH IS 25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING, ALL DEALERS THAT BUY, SELL OR TRADE OUR CLASS A COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. THE OFFERING Unless otherwise indicated, all information in this prospectus assumes that the underwriters do not exercise their over-allotment options and that optionholders do not exercise any outstanding options. We refer you to "Description of Capital Stock and Partnership Units" for a discussion of the terms of our common stock and partnership units. <TABLE> <S> <C> Class A common stock offered: U.S. offering........................... shares International offering.................. shares ------------- Total................................ shares ------------- ------------- Common stock to be outstanding after this offering: Class A common stock(1)................. shares(2)(3) Class B common stock(1)................. shares ------------- Total common stock................... shares(2)(3) ------------- ------------- </TABLE> Estimated net proceeds from this offering............... $ Use of proceeds............... By MTVi Group: To acquire partnership units, including the sole general partnership unit, representing a % equity interest in the Partnership, or %, if the underwriters' over-allotment option is exercised in full. By the Partnership: For advertising, promoting and developing its brands and developing compelling music content and other general corporate purposes, including working capital, technology enhancements, international expansion and possible complementary acquisitions. Dividend policy............... We do not expect to pay any cash dividends or distributions for the foreseeable future, other than distributions by the Partnership to its partners to cover taxes incurred with respect to taxable income of the Partnership. Voting rights................. Except with respect to voting and conversion rights, the rights of the holders of Class A common stock and Class B common stock are identical. Holders of Class A common stock are entitled to one - --------------- (1) Shares of Class B common stock are convertible into shares of Class A common stock at any time by the holder thereof on a one-for- one basis. Partnership units owned by Viacom affiliates and Liberty Digital are also exchangeable for shares of Class A common stock at any time on a one-for-one basis. If, immediately following the offering, Viacom converted its Class B common stock and its affiliates exchanged all of their partnership units for Class A common stock, and Liberty Digital exchanged all of its partnership units for Class A common stock, Viacom and its affiliates, would own approximately % of the outstanding Class A common stock, or % if the underwriters' over-allotment options are exercised in full, and Liberty Digital would own approximately % of the outstanding Class A common stock, or % if the underwriters' over-allotment options are exercised in full. (2) Excludes options to purchase shares of Class A common stock granted under our stock option plan. As of , 2000, options for shares at a weighted average exercise price of $ per share were outstanding under the stock option plan. (3) The number of shares of Class A common stock to be outstanding after the offering includes 275,000 shares to be issued to the sole shareholder of Mischief New Media Inc. in exchange for the 275,000 partnership units issued in connection with our acquisition of Mischief New Media and the employment by us of its sole shareholder. We expect this exchange to occur simultaneously with the completion of this offering. vote per share. A holder of Class B common stock is entitled to a number of votes per share based on the number of shares of outstanding Class B common stock and partnership units exchangeable for Class A common stock owned by that holder and its affiliates. The result of this formula is that Viacom, as the sole holder of Class B common stock, is entitled to votes for each share of Class B common stock and each partnership unit held by Viacom and its affiliates. Holders of Class A common stock and Class B common stock generally will vote together as a single class on all matters, including the election of the directors, presented to the stockholders for their vote or approval. Upon completion of this offering, Viacom and its affiliates will own all of the issued and outstanding Class B common stock and approximately % of the outstanding partnership units and, accordingly, will control approximately % of the combined voting power of all of our Class A and Class B voting stock. Proposed New York Stock Exchange trading symbol....... Risk factors.................. You should consider the risks involved in an investment in our Class A common stock. We refer you to "Risk Factors." SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The summary financial data of the Partnership and its predecessor and the pro forma financial data of MTVi Group presented below should be read together with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and have been derived from the audited financial statements and the accompanying notes of the Partnership included elsewhere in this prospectus. The pro forma financial data assumes that the formation of the Partnership and this offering occurred on January 1, 1999 for pro forma statement of operations data and that this offering occurred on December 31, 1999 for pro forma balance sheet data. The summary unaudited pro forma financial data is derived from, and should be read together with "Unaudited Pro Forma Consolidated Condensed Financial Statements" and the accompanying notes included elsewhere in this prospectus. The pro forma data may not necessarily reflect the operating results or financial position that would have been achieved had the formation of the Partnership, this offering and all other transactions been completed at the dates or for the periods indicated or of the results that may be obtained in the future. <TABLE> <CAPTION> PRO FORMA MTVI GROUP ------------ YEAR ENDED YEAR ENDED OR AT DECEMBER 31, DECEMBER 31, ------------------------------- ------------ 1997 1998 1999 1999 ------- -------- -------- ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues.............................................. $ 5,778 $ 8,837 $ 18,247 $ 20,169 Operating income (loss)..................................... (6,933) (11,800) (46,450) (76,083) Minority interest(1)........................................ -- -- -- Net income (loss)........................................... (4,298) (7,316) (46,392) Net income (loss) per common share: Basic and diluted(2)...................................... -- -- -- $ BALANCE SHEET DATA: Total assets................................................ $ 1,884 $ 7,030 $168,098 $ Total equity................................................ 837 1,720 158,975 </TABLE> - ------------ (1) Minority interest represents the allocation of approximately % of the Partnership's net loss to the limited partners of the Partnership. (2) Immediately prior to this offering, MTVi Group will be recapitalized to provide for Class A common stock and Class B common stock. Pro forma weighted average shares outstanding reflects the issuance of all shares of Class B common stock to Viacom and the issuance of the Class A common stock in this offering, assuming the underwriters have not exercised their over-allotment options and excluding the issuance of shares in connection with the Mischief New Media acquisition, as if these shares had been outstanding since the beginning of each respective period.
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+SUMMARY The following is only a summary of the terms of the notes. It does not contain all the information that may be important to you. You should read this entire prospectus. In addition, you may wish to read the documents governing the transfer of the contracts, the formation of the trust and the issuance of notes. Those documents have been filed as exhibits to the registration statement of which this prospectus is a part. There are material risks associated with an investment in the notes. See "Risk Factors" on page 10 for a discussion of factors you should consider before making an investment in the notes. OBJECTIVE..................... The trust will issue notes to investors. The notes will be secured by commercial finance contracts acquired by the trust depositor from the originator. THE TRUST..................... ORIX Credit Alliance Receivables Trust 2000-A, a Delaware business trust, was established pursuant to the trust agreement dated as of January 27, 2000. The Trust's offices will be in care of The Bank of New York (Delaware), as owner trustee, at 502 White Clay Center, Newark, Delaware 19714-6973, telephone number (302) 283-8079. THE ORIGINATOR................ The contracts are originated by ORIX Credit Alliance, Inc. either directly from end-users of financed equipment or indirectly from vendors, that is manufacturers or dealers in the financed equipment who assign their contracts with end-users to ORIX Credit Alliance, Inc. ORIX Credit Alliance, Inc's principal executive offices are located at 300 Lighting Way, Secaucus, New Jersey 07096-1525, telephone (201) 601-9000 THE TRUST DEPOSITOR........... ORIX Credit Alliance Receivables Corporation III. The trust depositor is a wholly owned, limited purpose subsidiary of ORIX Credit Alliance, Inc. The trust depositor's principal executive offices are located at 300 Lighting Way, Secaucus, New Jersey 07096-1525, telephone (201) 601-9618. THE SERVICER.................. ORIX Credit Alliance, Inc. THE INDENTURE TRUSTEE......... Harris Trust and Savings Bank, an Illinois state banking corporation. THE TRUST'S ASSETS A. THE CONTRACTS............ The trust's assets will primarily consist of the contracts. The contracts consist of installment loan and installment sale contracts, finance leases and title retention and other security agreements with companies. The contracts have financed equipment purchased for commercial purposes. The equipment is typically "low-obsolescence," "multiple-use" capital equipment. It is used in industries and businesses such as trucking and transportation, construction and road building, wood and pulp, machine shop, crane and crane rental and printing, publishing and photoengraving, among others. Most of the contracts provide for a series of scheduled payment installments calculated to amortize fully the principal balance of the contract over its term at the contract rate. The principal THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED FEBRUARY 17, 2000 PRELIMINARY PROSPECTUS ORIX CREDIT ALLIANCE RECEIVABLES TRUST 2000-A RECEIVABLE-BACKED NOTES, SERIES 2000-A <TABLE> <S> <C> ORIX CREDIT ALLIANCE ORIX CREDIT ALLIANCE, INC., RECEIVABLES CORPORATION III, AS SERVICER AS TRUST DEPOSITOR </TABLE> $287,081,347 (approximate) ------------------------ We are offering the following six classes of Receivable-Backed Notes, Series 2000-A: <TABLE> <CAPTION> INITIAL AGGREGATE FIRST UNDERWRITING CLASS OF PRINCIPAL AMOUNT PAYMENT STATED MATURITY PRICE TO PUBLIC DISCOUNT NOTES (APPROXIMATE) COUPON RATE DATE DATE PER NOTE PER NOTE - -------- ----------------- ----------- ------- ------------------ --------------- ------------ <S> <C> <C> <C> <C> <C> <C> A-1 $ 95,789,957 % 3/15/00 March 15, 2001 % % A-2 $ 50,780,218 % 3/15/00 April 15, 2002 % % A-3 $112,957,133 % 3/15/00 May 15, 2004 % % A-4 $ 14,570,460 % 3/15/00 March 15, 2005 % % B $ 8,655,719 % 3/15/00 September 15, 2005 % % C $ 4,327,860 % 3/15/00 November 15, 2007 % % </TABLE> The total price to the public is $ . The total underwriting discount is $ . The total proceeds to the trust is $ . YOU SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS" ON PAGE 10 OF THIS PROSPECTUS. The notes are not obligations of and will not represent interests in, and are not guaranteed or insured by, the trust depositor, the owner trustee, the indenture trustee, ORIX Credit Alliance, Inc. or any of their respective affiliates, or any governmental agency. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ FIRST UNION SECURITIES, INC. The date of this prospectus is February , 2000. balance of a contract is the sum of the total scheduled remaining amounts of principal payable to the originator by an obligor under a contract, exclusive of finance charges. The initial principal amount is typically the amount advanced to fund the equipment purchased and is in most instances less than the cost to the obligor of the financed equipment. As of February 1, 2000, approximately 14.56% by aggregate outstanding principal balance of the contracts had customized payment schedules and balloon payments. Customized payment contracts are obligations of obligors who have seasonal downtimes or variations in cash flow typically arising from weather conditions or industry characteristics. During such downtimes, the contract payment schedules may omit or reduce required payments for generally up to three months per year. The scheduled payments are at higher amounts to assure that the contract does not extend beyond a term appropriate for the creditworthiness of the obligor and to meet the originator's yield requirements. Balloon contracts provide for a series of scheduled payments over the term of the contract and a larger amount, generally up to 30% of the original principal balance, at the end of the contract. The monthly payment includes the amount necessary to amortize the non-balloon payment portion of the contracts over the term of the contract plus interest on the balloon portion of the contract. On the closing date ORIX Credit Alliance, Inc. will transfer the contracts and security interests in the related equipment to the trust depositor. The trust depositor will then transfer them to the trust on the same date. The contracts have been selected on a random basis from ORIX Credit Alliance, Inc.'s portfolio of contracts that meet the eligibility criteria specified in the transfer and servicing agreement. None of the obligors on the contracts are located outside of the United States and its territories. As of February 1, 2000, contracts of any single obligor or commonly controlled group of obligors do not constitute more than approximately 1.0% of the aggregate outstanding principal balance of the contracts, and no more than 10.28% of the aggregate outstanding principal balance of the contracts relates to obligors located in the same state. As of February 1, 2000, no contract has any scheduled payments that are more than 60 days delinquent. A contract is considered delinquent if anything less than each full payment is received by its contractual due date. See "The Transfer and Servicing Agreement -- Representations and Warranties; Definition of Eligible Contracts" and "The Contracts" and "Composition of the Contracts". TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Important Notice about Information Presented in this Prospectus............. i Summary.................................... 1 Risk Factors............................... 10 The Absence of Existing Markets for the Notes May Limit Your Ability to Resell the Notes.............................. 10 Prepayments on the Contracts May Cause an Earlier Repayment of the Notes than You Expect and You May Not Be Able To Find Investments with the Same Yield as the Notes at the Time of the Repayment..... 10 The Price at Which You Can Resell Your Notes May Decrease if the Ratings of Your Notes Change...................... 10 The Subordination of the Class A-2 Notes, Class A-3 Notes, Class A-4 Notes, Class B Notes and the Class C Notes is a Limited Form of Credit Enhancement..... 10 Limited Assets Secure the Notes; Noteholders Will Have No Recourse to the Originator, Servicer or their Affiliates in the Event Delinquencies and Losses Deplete the Trust's Assets................................. 11 Because Disproportionate Amounts of Contracts Relate to Three States, Adverse Events in Those States and Surrounding Regions May Cause Increased Defaults and Delinquencies............. 11 Because Disproportionate Amounts of Contracts Relate to Equipment Used in Particular Industries, Adverse Economic Conditions in Those Industries May Cause Increased Defaults and Delinquencies.......................... 11 Even if We Repossess and Sell the Equipment Relating to a Contract After an Obligor Defaults, Shortfalls in Amounts Available To Pay the Notes May Occur if the Market Value of the Equipment Has Declined................. 11 Servicer's Retention of Contract Files May Hinder Our Ability to Realize the Value of Equipment Securing the Contracts.............................. 12 Failure to Record Assignment of Perfected Security Interest May Hinder Our Ability to Realize the Value of Equipment Securing the Contracts....... 12 Repurchase Obligation of Trust Depositor and Originator Provides You Only Limited Protection Against Liens on the Contracts.............................. 12 If a Bankruptcy Court Rules that the Transfer of Contracts from the Originator to the Trust Depositor was not a True Sale then Payments on the Contracts Could Be Reduced or Delayed................................ 13 Insolvency of the Trust Depositor or the Trust Could Delay or Reduce Payments to You.................................... 13 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> Proceeds From Required Sale of the Contracts Following Trust Depositor Bankruptcy May Not Be Sufficient to Repay the Notes in Full................ 13 End-User Bankruptcy May Reduce or Delay Collections on the Contracts........... 14 Transfer of Servicing May Delay Payments to Noteholders Due to Contract Processing Delays...................... 14 Year 2000 Issues May Impact ORIX Credit Alliance's Ability to Service the Contracts.............................. 14 Book-Entry Registration Will Result in Your Inability to Exercise Directly Your Rights as a Noteholder............ 14 Use of Proceeds............................ 15 Calculation of Contract Principal Balance.................................. 15 Composition of the Contracts............... 15 Distribution of the Contracts by Contract Interest Rate.......................... 16 Distribution of the Contracts by Payment Frequency.............................. 17 Distribution of the Contracts by State in Which Obligors Are Located............. 18 Distribution of the Contracts by Obligor Industry............................... 19 Distribution of the Contracts by Original Principal Balance...................... 19 Distribution of the Contracts by Current Principal Balance...................... 19 Distribution of the Contracts by Original Contract Term.......................... 20 Distribution of the Contracts by Remaining Months to Stated Maturity.... 20 Distribution of Contracts by New/Used Equipment Financed..................... 20 Delinquency and Loss Information........... 21 Definition of Delinquency for the Contracts Transferred to the Trust................. 23 The Contracts.............................. 23 End-User Contracts....................... 23 Conditional Sale Agreements.............. 24 Leases................................... 24 Secured Promissory Notes................. 25 Equipment................................ 26 Contract Files........................... 26 How Collections on the Contracts are Treated................................ 26 Prepayment and Yield Considerations........ 26 Weighted Average Life...................... 33 </TABLE> As of February 1, 2000, the contracts had the following characteristics: <TABLE> <S> <C> Number of contracts....................... 4,387 Aggregate contract outstanding principal balance................................. $288,523,968 Average contract outstanding principal balance................................. $65,768 Weighted average contract rate............ 9.80% Weighted average original term............ 51.1 months Range..................................... 10-84 months Weighted average remaining term........... 37.3 months Range..................................... 7-80 months </TABLE> Changes in characteristics of the contracts between February 1, 2000 and the closing date will not affect more than 5.00% of the aggregate outstanding principal balance of the contracts. For further information regarding the contracts, see "Composition of the Contracts" and "The Contracts", as well as "The Transfer and Servicing Agreement -- Representations and Warranties; Definition of Eligible Contracts" and "-- Concentration Amounts; Definition of Excess Contract". We may replace a contract that is part of the trust's assets with a substitute contract or contracts: - if we subsequently determine that a contract was not eligible to be sold to the trust at the time of its sale to the trust; - if the terms of such contract are to be subsequently amended in a manner not permitted by the transfer and servicing agreement; - if such contract is subject to a casualty loss; - if we did not remove and replace that contract, the obligor or equipment concentrations of contracts would exceed the limits described in "The Transfer and Servicing Agreement -- Concentration Amounts; Definition of Excess Contract"; - if such contract is prepaid; or - if such contract becomes a defaulted contract. See "The Transfer and Servicing Agreement -- Substitute Contracts". The substitute contracts will have been originated under the same credit criteria and policies as the contracts they replace. B. RESERVE FUND............. On the closing date the trust depositor will establish in bank accounts in the name of the indenture trustee a reserve fund. This fund provides you with limited protection in the event collections from obligors on the contracts are insufficient to make payments on the notes. We cannot assure you, however, that this protection will be adequate to prevent shortfalls in amounts <TABLE> <CAPTION> PAGE ---- <S> <C> ORIX Credit Alliance, Inc. ................ 35 Equipment Finance Business............... 35 Ancillary Businesses..................... 35 Summary Financial Data................... 36 Management............................... 36 Credit Approval, Collection and Review Process......................... 38 Terms of Contracts..................... 39 Recourse Provisions.................... 39 Extension/Revision Procedures.......... 40 Pre-Litigation Workout/Judgment Recovery............................ 40 Legal Proceedings...................... 40 Year 2000 Readiness Disclosure......... 41 Mainframe Systems and Applications..... 41 Personal Computer and Network Applications........................ 41 Third-Party Compliance................. 41 Contingency Plans...................... 42 Cost................................... 42 The Trust.................................. 42 General.................................. 42 Termination of Trust..................... 43 Other Information........................ 43 The Trust Depositor........................ 43 Description of the Notes and Indenture..... 44 General.................................. 44 Interest and Principal................... 44 Amounts Available for Payments on the Notes.................................. 45 Allocations.............................. 46 Prior to an Event of Default........... 46 Following an Event of Default.......... 48 Reserve Fund............................. 51 Spread Fund.............................. 52 Collection Account and Collection Period................................. 52 Events of Default........................ 54 Remedies After Events of Default......... 55 The Indenture Trustee.................... 55 Governing Law............................ 56 Amendments............................... 56 Servicing Compensation and Payment of Expenses............................... 57 Optional Redemption...................... 58 Mandatory Redemption..................... 58 Reports.................................. 58 List of Noteholders...................... 59 Administration Agreement................. 59 Book-Entry Registration.................. 60 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> Issuance of Certificated Notes at a Later Date................................... 63 The Certificates........................... 63 The Transfer and Servicing Agreement....... 64 Conveyance of the Contracts.............. 64 Representations and Warranties; Definition of Eligible Contracts....... 64 Remedies for Breaches of Representations and Warranties; Definition of Ineligible Contracts................... 67 Concentration Amounts; Definition of Excess Contract........................ 68 Material Modifications to Contracts...... 69 Substitute Contracts..................... 70 Definition of Defaulted Contracts........ 70 Indemnification.......................... 70 Servicing Standard and Servicer Advances............................... 71 Servicer Resignation..................... 71 Servicer Default......................... 71 Evidence as to Compliance................ 73 Amendments............................... 73 The Owner Trustee........................ 74 Material Federal Income Tax Considerations........................... 75 General.................................. 75 Classification of the Notes and the Trust.................................. 75 General Tax Treatment of Noteholders..... 76 United States Holders.................. 76 Payments of Interest................... 76 Purchase, Sale and Retirement of the Notes............................... 76 Backup Withholding and Information Reporting........................... 76 United States Alien Holders............ 77 Backup Withholding and Information Reporting........................... 78 State and Local Tax Considerations......... 78 New Jersey Tax Considerations............ 78 Other States............................. 78 Legal Investment........................... 78 ERISA Considerations....................... 79 Prohibited Transactions.................. 79 Plan of Distribution....................... 80 General.................................. 80 Rating of the Notes........................ 81 Legal Matters.............................. 82 Experts.................................... 82 Index of Terms............................. 83 Report of Independent Public Accountants... F-1 Balance Sheet.............................. F-2 </TABLE> available to make payment on the notes. The initial balance of the reserve fund will be approximately $4,306,220, which will equal 1.5% of the original principal balance of the notes. Additional deposits will be required to be made in subsequent months out of available collections on the contracts to this fund (a) to increase the reserve fund to an amount equal to the greater of (i) 3% of the outstanding principal of the notes and (ii) the lesser of (A) 1% of the initial principal of the notes and (B) the outstanding principal of the notes and (b) in subsequent months thereafter, if necessary, to maintain the required amount in the fund. If, on any payment date, the amounts available for distribution exceed the amounts needed to pay amounts owed to the servicer and to the indenture trustee and to pay interest and principal on the notes, the excess will be deposited into this fund. However, the amount deposited in the reserve fund shall not exceed the amount required above. Investment earnings on amounts held in the reserve fund will be available for distribution to you. If on any payment date, collections on the contracts and amounts, if any, on deposit in the spread fund are less than the amount needed to pay interest on or principal of the notes then due, the indenture trustee will withdraw funds from the reserve fund to pay the interest and principal due. The conditions under which we will withdraw amounts from the reserve fund are more specifically described in the "Description of the Notes and Indenture -- Allocations" and "-- Reserve Fund". C. SPREAD FUND................ On the closing date the trust depositor will establish an additional bank account, the spread fund, in the name of the indenture trustee to hold available funds whenever a spread event exists. A spread event will exist if any of the following occurs and is continuing: (a) ORIX Credit Alliance, Inc. is no longer the servicer, (b) the average monthly rate of delinquencies on contracts in excess of 90 days over any three consecutive months exceeds 5% of the aggregate outstanding principal balance of the contracts or (c) the cumulative net loss percentage with respect to the contracts exceeds a specified "loss trigger percentage" (initially 1.00%) that will be increased over time. Notwithstanding the foregoing: (i) the spread event referred to in clause (b) above may be cured on any distribution date if the three-month delinquency percentage for the preceding two collection periods is less than or equal to 5% for each of such periods and (ii) the spread event referenced in clause (c) may be cured if the cumulative net loss percentage is less than the associated loss trigger percentage for that period. Amounts that may be held in this fund provide you with additional limited protection in the event collections from obligors on the contracts are insufficient to make payments on the notes. We cannot assure you, however, that this additional protection will be adequate to prevent shortfalls in amounts available to make payment on the notes. If on any payment date, a spread event exists and the amounts available for distribution exceed the amounts needed to pay amounts owed to the servicer (including amounts due to the indenture trustee) to pay interest and principal on the notes and to make any required deposits to the reserve fund, the excess will be deposited into the spread fund. Investment earnings on amounts held in the spread fund will be available for distribution to you. If on any payment date, collections on the contracts are less than the amount needed to pay interest and principal due on the notes and make all required deposits to the reserve fund, the indenture trustee will withdraw funds from the spread fund to pay the interest and principal and make such deposits. If on any subsequent payment date, no spread event continues to exist, amounts in the spread fund will be distributed in the same order of priority as are amounts in the collection account. The calculations related to a spread event and the conditions under which we will withdraw amounts from the spread fund are more specifically described in the "Description of the Notes and Indenture -- Allocations" and "-- Spread Fund". TERMS OF THE NOTES............ The basic terms of the notes will be as described below. See "Description of the Notes and Indenture". We will pay principal and interest due on the notes using: - collections of payments due under the contracts held by the trust; - earnings on amounts held in the collection account; - late charges relating to a contract if the late charges were included in the contract's terms as of the date the contract was purchased by the trust; - amounts earned on amounts held in the reserve fund and the spread fund (if any); - amounts received upon the prepayment or purchase of contracts or liquidation of the contracts and disposition of the related equipment upon defaults under contracts; - amounts received from vendor recourse, if any; - amounts in the reserve fund more specifically described in "Description of the Notes and Indenture -- Reserve Fund"; and - amounts in the spread fund more specifically described in "Description of the Notes and Indenture -- Spread Fund". See "Description of the Notes and Indenture -- Amounts Available for Payments on the Notes". You may purchase the notes in minimum denominations of $1,000, and in integral multiples of $1,000 in excess of the minimum denominations; provided, however, that one note of each class will be available for purchase in an incremental denomination of less than $1,000. We will offer the notes only in book-entry form. A. EVENTS OF DEFAULT........ Events of default with respect to the notes include: - failure to pay accrued interest on any payment date, - failure to pay outstanding principal on the maturity date, - breach of representations and warranties with respect to the contracts which are materially incorrect and which have a material adverse effect on the noteholders and continues unremedied for a period of sixty days, and - the occurrence of insolvency events with respect to the trust depositor or the trust. See "Description of the Notes and Indenture -- Events of Default". B. INTEREST................. On a payment date, we will first repay any outstanding servicer advances. Second, we will pay the servicer's monthly servicing fee (which includes therein amounts due to the indenture trustee). Third, we will pay interest on the notes at the rates specified on the cover of this prospectus in the following order: <TABLE> <CAPTION> CLASS OF NOTES RECEIVING INTEREST PAYMENT NOTES PRIOR TO SPECIFIED CLASS -------- ------------------------------------- <S> <C> A-1, A-2, A-3, A-4........... None B.................. Class A-1 Notes, Class A-2 Notes, Class A-3 Notes, Class A-4 Notes C.................. Class A-1 Notes, Class A-2 Notes, Class A-3 Notes, Class A-4 Notes, Class B Notes </TABLE> See "Description of the Notes and Indenture -- Allocations". We will calculate interest on the Class A-1 Notes on the basis of actual days elapsed over a year of 360 days. We will calculate interest on all other notes on the basis of a year of 360 days consisting of twelve 30-day months. C. PRINCIPAL................ On a payment date, after we pay interest on the notes, we will pay principal on the notes in the following order: <TABLE> <CAPTION> CLASS OF NOTES RECEIVING PRINCIPAL PAYMENT NOTES PRIOR TO SPECIFIED CLASS -------- ----------------------------------------------- <S> <C> A-1 None A-2 Class A-l Notes </TABLE> <TABLE> <CAPTION> CLASS OF NOTES RECEIVING PRINCIPAL PAYMENT NOTES PRIOR TO SPECIFIED CLASS -------- ----------------------------------------------- <S> <C> A-3 Class A-1 Notes, Class A-2 Notes Class B Notes and Class C Notes will receive principal payments prior to Class A-3 Notes on any payment date on which the outstanding principal amount of the Class A-2 Notes is greater than $0. A-4 Class A-1 Notes, Class A-2 Notes, Class A-3 Notes Class B Notes and Class C Notes will receive principal payments prior to Class A-4 Notes on any payment date on which the outstanding principal amount of the Class A-3 Notes is greater than $0. B Class A-1 Notes, Class A-2 Notes Class A-3 Notes will receive principal payments prior to Class B Notes after the outstanding principal amount of the Class A-1 Notes and Class A-2 Notes is reduced to $0. Class A-4 Notes will receive principal payments prior to Class B Notes only after the outstanding principal amount of the Class A-1 Notes, Class A-2 Notes and Class A-3 Notes is reduced to $0. C Class A-l Notes, Class A-2 Notes, Class B Notes Class A-3 Notes will receive principal payments prior to Class C Notes only after the outstanding principal amount of the Class A-1 Notes and Class A-2 Notes is reduced to $0. Class A-4 Notes will receive principal payments prior to Class C Notes only after the outstanding principal amount of the Class A-1 Notes, Class A-2 Notes and Class A-3 Notes is reduced to $0. </TABLE> See "Description of the Notes and Indenture -- Allocations". The amount of principal paid on a Class A-1 Note prior to its stated maturity date will be based on the amount that the aggregate principal balance of the contracts has declined during the most recent full collection period. Each collection period is approximately a month. After the Class A-1 Notes have been paid in full, the amount of principal paid on any other class of notes will be the amount necessary to reduce the outstanding principal of that class of notes to an amount equal to a specified percentage of the aggregate principal balance of the contracts as of the related determination date. The percentage used is the ratio of the initial principal amount of such class of notes to the original pool balance of the contracts minus the initial principal amount of the Class A-1 Notes. Following an event of default, we will not make principal payments in the order described above. Instead, we will pay principal on the notes in the following order: - outstanding principal of Class A-l Notes - pro rata, to the outstanding principal of Class A-2 Notes, Class A-3 Notes and Class A-4 Notes - outstanding principal of Class B Notes - outstanding principal of Class C Notes See "Description of the Notes and Indenture -- Allocations" and "-- Events of Default". D. PAYMENT DATES............ You will receive distributions of interest and principal on the 15th day of each month, or if that day is not a business day, the next business day. E. STATED MATURITY DATE..... The notes will mature on the date shown on the cover of this prospectus, except that if the day is not a business day, then the stated maturity date will be the next business day. F. OPTIONAL REDEMPTION...... If the aggregate outstanding principal balance of the contracts at the time is less than or equal to 15% of the initial aggregate principal balance of the contracts as of February 1, 2000, the trust may redeem all, but not less than all, of the outstanding notes. If the trust does redeem all of the outstanding notes, the redemption price will be equal to the unpaid principal amount of the notes plus accrued and unpaid interest through the date of redemption. G. MANDATORY REDEMPTION....... If on any payment date, the aggregate amounts on deposit in the collection account, the reserve fund and the spread fund are greater than or equal to the sum of (i) the entire outstanding note principal balance, (ii) the interest accrued thereon, (iii) any accrued and unpaid servicing fee (including therein amounts owed to the indenture trustee) and (iv) unreimbursed servicer advances, the amounts on deposit in the reserve fund and the spread fund will be deposited in the collection account and used to redeem the notes in full. The redemption price will be equal to the unpaid principal amount of the notes plus accrued and unpaid interest through the date of redemption. SERVICING; SERVICING FEE...... The servicer will be responsible for servicing, managing and administering the contracts and related interests, and enforcing and making collections on the contracts. See "The Transfer and Servicing Agreement -- Servicing Standard and Servicer Advances". The servicer will be entitled to receive a monthly fee equal to the product of: (1) one-twelfth of 1.00% and (2) the aggregate outstanding principal balance of the contracts in the trust as of the beginning of the related collection period. The fee is payable out of amounts we receive on the contracts. Amounts payable to the indenture trustee are included in such fee. See "Description of the Notes and Indenture -- Servicing Compensation and Payment of Expenses" and "The Transfer and Servicing Agreement". MATERIAL FEDERAL INCOME TAX CONSIDERATIONS.............. In the opinion of Sullivan & Cromwell, federal tax counsel to the trust depositor, for federal income tax purposes, the notes will be characterized as debt, and the trust will not be characterized as an association or a publicly traded partnership taxable as a corporation. You, by accepting a note, agree to treat the note as indebtedness. See "Material Federal Income Tax Considerations". ERISA CONSIDERATIONS.......... Subject to the considerations discussed under "ERISA Considerations", the notes will be eligible for purchase by some employee benefit plans. Any benefit plan fiduciary considering purchase of the notes should, however, consult with its counsel regarding the consequences of its purchase under ERISA and the Internal Revenue Code. See "ERISA Considerations". RATING........................ We will not issue the notes unless they receive ratings from the following rating agencies as set forth below: <TABLE> <CAPTION> CLASS MOODY'S STANDARD & OF INVESTORS POOR'S FITCH NOTE SERVICE RATINGS GROUP IBCA, INC. ----- --------- ------------- ---------- <S> <C> <C> <C> A-1 P-1 A-1+ F1+/AAA A-2 Aaa AAA AAA A-3 Aaa AAA AAA A-4 Aaa AAA AAA B A2 A A C Baa2 BBB BBB </TABLE> A rating is not a recommendation to purchase, hold or sell notes since a rating does not address market price or suitability for a particular investor. A rating may be subject to revision or withdrawal at any time by the assigning rating agency. See "Rating of the Notes".
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001106593_emerald_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001106593_emerald_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information described more fully elsewhere in this prospectus. This summary may not contain all the information that you should consider before investing in our common stock. You should read the entire prospectus, including "Risk Factors" and the financial statements and related notes, before making an investment decision. OUR COMPANY Emerald Solutions is a leading provider of professional services that are designed to create, transform and integrate digital business. Digital business is conducted by organizations that use the Internet, information technology and new forms of commerce to gain competitive advantage, spur growth and enhance stockholder value. The solutions demanded by digital business are becoming increasingly complex and require more than just implementation of the latest technology. We believe that both the seamless delivery and breadth of our core services are crucial to the delivery of successful projects. Our solutions incorporate a broad range of skills encompassing business strategy, creative design and technical engineering. Our 39 strategic professionals provide executive-level business consulting as well as Internet strategy consulting. Our 46 creative professionals deliver services ranging from digital branding to user experience design to Internet advertising. Our 403 technical professionals deliver a wide variety of services, including web-based customer relationship systems, online supply chain management systems and custom enterprise application software. We deliver comprehensive digital business solutions by combining a broad range of skills and disciplines into a single delivery model providing accountability, continuity and consistency. Through this approach we create a strategic vision, identify and design a program of initiatives and build systems in a series of iterative releases. Local client management teams, located in 13 offices throughout the United States, use this approach to offer viable and successful client engagements. We supplement these local teams with the expertise of our national practices, focused on specific industries or possessing specific solution capabilities. This integrated delivery model enables us to understand key business issues facing clients in specific industries and apply a wide variety of skill sets. We have successfully provided digital business solutions for Fortune 1000 and emerging high growth companies in industries such as telecommunications, transportation, pharmaceuticals, financial services and digital markets. Our clients include American Airlines Cargo, AT&T, Coca-Cola, Disney, Dun & Bradstreet, Hasbro, Lucent Technologies, Lucy.com, Pfizer, Priceline.com, Sabre and Warner Lambert. Our objective is to become the leading provider of comprehensive digital business solutions. To achieve our objective, we seek to: - Target clients with the potential for large, complex digital business needs; - Expand our capabilities through industry and solutions expertise; - Recruit, retain and motivate experienced professionals; - Expand our geographic presence; and - Increase our brand awareness. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED AUGUST 17, 2000 EMERALD LOGO -------------------------------------------------------------------------------- 4,000,000 Shares Common Stock -------------------------------------------------------------------------------- This is the initial public offering of Emerald -- Delaware, Inc., and we are offering 4,000,000 shares of our common stock. We anticipate that the initial public offering price will be between $11.00 and $13.00 per share. We have applied to list our common stock on the Nasdaq National Market under the symbol "EMSO." INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND EMERALD PUBLIC COMMISSIONS SOLUTIONS <S> <C> <C> <C> Per Share $ $ $ Total $ $ $ </TABLE> A selling stockholder has granted the underwriters the right to purchase up to 600,000 shares to cover any over-allotments. We will not receive any proceeds from the sale of these shares in the event the over-allotment option is exercised. DEUTSCHE BANC ALEX. BROWN ROBERTSON STEPHENS ADAMS, HARKNESS & HILL, INC. PACIFIC CREST SECURITIES THE DATE OF THIS PROSPECTUS IS , 2000. RECENT DEVELOPMENTS AT&T SOLUTIONS ALLIANCE In March 2000, we entered into a strategic alliance agreement with AT&T Solutions to take advantage of both of our sales channels and our combined business expertise to provide clients with digital business solutions. Under the terms of the agreement, AT&T has incentives to direct $84 million of revenue to us by March 31, 2002 through joint marketing efforts, but there is no assurance that we will realize any future revenues as a result of this agreement. As part of the agreement, we granted AT&T a warrant to purchase up to 600,000 shares of our common stock. ALLIANCE CONSULTING GROUP ACQUISITION In July 2000, we acquired Alliance Consulting Group, Inc., a consulting firm that had 36 employees. Alliance provides strategy and management consulting services. In connection with the acquisition, we paid cash consideration, incurred acquisition costs, issued promissory notes and assumed Alliance's net current liabilities and long-term obligations totaling approximately $7.1 million, and issued 2,585,780 shares of our common stock to stockholders and employees of Alliance. We are also obligated to pay up to $5.0 million in earn-out payments in the event certain revenue and profit targets are met during the twelve-month period following the closing of the merger. This transaction has been accounted for under the purchase method of accounting. ------------------------- We incorporated in the State of Washington in November 1996 under the name Emerald Solutions, Inc. Our substantive operations began in January 1997. We reincorporated in the State of Delaware in April 1999 under the name Emerald -- Delaware, Inc., and conduct business using the name Emerald Solutions. We are not affiliated with Emerald Solutions, Inc., a Delaware corporation. Our principal executive offices are located at 111 SW 5th Avenue, 27th Floor, Portland, Oregon 97204 and our telephone number is (503) 276-2900. Our web site is located at www.emeraldsolutions.com. Information contained on our web site does not constitute a part of this prospectus. Our fiscal year ends on the last Saturday of each calendar year. ------------------------- THE OFFERING Common stock offered........................ 4,000,000 shares Common stock to be outstanding after this offering.................................... 35,713,304 shares Use of proceeds............................. For repayment of debt and general corporate purposes, including working capital Proposed Nasdaq National Market symbol...... EMSO SUMMARY FINANCIAL INFORMATION <TABLE> <CAPTION> SIX MONTHS FISCAL YEAR ENDED ENDED ------------------------------------------ ------------------- DECEMBER 27, DECEMBER 26, DECEMBER 25, JUNE 26, JUNE 24, 1997 1998 1999 1999 2000 ------------ ------------ ------------ -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenues................................ $ 2,721 $15,011 $34,711 $14,286 $ 33,966 Income (loss) from operations........... (3,816) 777 (5,440) (846) (8,863) Net income (loss)....................... (3,853) 708 (5,425) (814) (9,202) Net income (loss) available to common stockholders.......................... (3,853) 708 (6,117) (1,091) (11,668) Net earnings (loss) per share applicable to common stockholders: Basic earnings (loss) per share....... $ (0.23) $ 0.04 $ (0.31) $ (0.05) $ (0.57) Diluted earnings (loss) per share..... $ (0.23) $ 0.03 $ (0.31) $ (0.05) $ (0.57) Shares used to calculate: Basic earnings (loss) per share..... 16,739 19,488 19,930 19,904 20,405 Diluted earnings (loss) per share... 16,739 20,364 19,930 19,904 20,405 </TABLE> <TABLE> <CAPTION> AS OF JUNE 24, 2000 ------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- ----------- ----------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................... $ 350 $ 9,568 $ 44,079 Working capital (deficit)............................... (5,807) 1,887 45,724 Total assets............................................ 30,130 59,005 93,220 Total debt and capital leases including current portion............................................... 9,973 12,024 2,698 Redeemable convertible preferred stock.................. 12,834 -- -- Total stockholders' equity (deficit).................... (5,082) 33,140 76,680 </TABLE> The total number of outstanding shares of our common stock is based on 20,675,800 shares of our common stock actually outstanding as of June 24, 2000. The pro forma data above give effect to the issuance of 2,585,780 shares of common stock in connection with the acquisition of Alliance, the issuance of 2,318,392 shares of Series C Preferred Stock in July 2000 and the subsequent automatic conversion of all outstanding shares of our Series C Preferred Stock and all other outstanding shares of our preferred stock into 8,451,724 shares of common stock upon completion of this offering. The pro forma as adjusted data above also give effect to the sale of the 4,000,000 shares of common stock in this offering at an assumed public offering price of $12.00 per share, less estimated underwriting discounts and commissions, estimated offering expenses and the application of the net proceeds. See "Use of Proceeds" and "Capitalization" for additional information regarding our use of proceeds from this offering and our common stock. The above information excludes: - 6,576,198 shares of common stock issuable upon exercise of options outstanding as of June 24, 2000, at a weighted average exercise price of $2.08 per share; the grant in July 2000 of 375,250 shares of common stock issuable upon exercise of options to Alliance employees at an exercise price of $6.25; - 1,803,997 shares of common stock available for issuance under our incentive option plans as of July 31, 2000; - 28,600 shares of common stock issuable to ZCom employees in connection with the ZCom acquisition; and - 653,639 shares of common stock issuable upon exercise of outstanding warrants. See Note 7(b) of Notes to Financial Statements for an explanation of the determination of the number of shares used in computing per share data. Unless otherwise specifically stated, information throughout this prospectus: - reflects the automatic conversion of all outstanding shares of redeemable convertible preferred stock upon completion of this offering into 8,451,724 shares of common stock; and - assumes no exercise of the underwriters' over-allotment option.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001106842_seebeyond_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001106842_seebeyond_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..388a3d68ff701ad62618735a3d13cdc5da91e8ca
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering and our consolidated financial statements and accompanying notes appearing elsewhere in this prospectus. We are a leading provider of electronic business, or e-Business, integration software that enables the seamless flow of information within and among enterprises on a global basis. e*Xchange, our comprehensive software suite, provides companies with a flexible and easily configurable platform to connect applications and systems not only within an organization but also across geographically dispersed enterprises. We believe that we offer the only end-to-end e-Business integration solution encompassing intra-enterprise, or application-to-application, integration and inter-enterprise, or business-to-business, integration, as well business process management capabilities. Our e*Xchange product suite includes our core technology engine, e*Gate, together with a combination of specialized product offerings that meet specific integration needs. e*Xchange builds upon more than nine years of our dedication to the continuous development of application and systems integration solutions within and among enterprises. e*Xchange enables our customers to connect applications, databases or systems, deploy and manage trading partner paradigms, including direct business-to-business, or B2B, and trading exchanges, and manage and optimize business processes that occur within and beyond an enterprise. Our solution provides customers with the flexibility to implement and adapt their business strategies in response to market dynamics and pursue new business initiatives to enhance revenue, profit and customer service. e*Xchange's distributed architecture is designed to scale throughout an organization's network of customers, partners and suppliers and meet the performance requirements of global e-Business. Our comprehensive graphically-based solution reduces or eliminates the need for custom programming and is designed for easy deployment, enabling rapid time-to-market for e-Business initiatives. e*Xchange can also lower operational costs for customers by streamlining business processes as well as by reducing information technology investments and costs. To promote additional market penetration of our products, we have established strategic alliances with three of the largest independent systems integrators, Andersen Consulting, Computer Sciences Corporation, or CSC, and Electronic Data Systems Corporation, or EDS. The alliances provide for joint development and marketing of vertical market offerings and generation of license revenues for STC. We have incentivized each of these partners by issuing them warrants to purchase shares of our common stock, with the vesting of the shares conditioned upon achievement of agreed upon milestones, which include the generation of qualified customer introductions or revenues for STC. In addition, Andersen Consulting has an equity interest in STC, and EDS has agreed to buy shares of our common stock concurrently with our initial public offering at the public offering price. We license our products and sell our services primarily through our direct sales force, complemented by the selling and support efforts of our systems integrators and resellers. We have 12 international sales and support offices. As of December 31, 1999, we had licensed our products to over 1,200 customers globally in a variety of industries, including financial services/insurance, healthcare, manufacturing, retail/e-Commerce/services and telecommunications/utilities. Our customers include Amdahl, ABN Amro, Barnes & Noble.com, Bausch and Lomb, Denticare of California, Fluor, Hewlett-Packard, J.P. Morgan, Nike, Northern Trust, PETsMART, UBS AG and WestLB Bank. We were incorporated as STDC Corporation in the state of California in December 1989 and changed our name to Software Technologies Corporation in June 1992. Our principal executive offices are located at 404 East Huntington Drive, Monrovia, California 91016, and our telephone number at this address is (626) 471-6000. Our World Wide Web address is www.stc.com. The information on our Web site is not incorporated by reference into this prospectus. Our registered trademarks include e*Gate, DataGate and the STC logo. This prospectus also includes other trade names, trademarks and service marks of ours and of other companies and organizations. THE OFFERING Common stock offered.................. 4,000,000 shares Common stock to be outstanding after this offering......................... 67,339,928 shares Use of proceeds....................... For repayment of debt and general corporate purposes, including working capital. See "Use of Proceeds." Proposed Nasdaq National Market symbol................................ STCS The foregoing information is based on the number of shares outstanding as of March 31, 2000 and excludes: - 3,862,500 shares of common stock issuable upon exercise of outstanding warrants as of March 31, 2000 at a weighted average exercise price of $8.21 per share; - 21,375,903 shares of common stock reserved for issuance under our stock option plans, of which 12,830,610 shares at a weighted average exercise price of $2.95 per share were subject to outstanding options as of March 31, 2000; and - 2,250,000 shares of common stock reserved for issuance under our employee stock purchase plan. In addition, except as otherwise noted, all information in this prospectus assumes: - the conversion of all outstanding preferred stock into 13,972,162 shares of common stock upon the closing of this offering; - the issuance and sale of 1,200,000 shares of common stock to EDS concurrently with the closing of this offering; and - the underwriters' over-allotment option is not exercised. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) The pro forma basic and diluted share calculation below reflects the conversion upon the closing of this offering of all outstanding shares of preferred stock into 13,972,162 shares of common stock as if the conversion occurred at the date of original issuance. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, -------------------------------- 1997 1998 1999 -------- -------- -------- <S> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues......................................... $ 26,699 $ 37,461 $ 55,171 Gross profit........................................... 17,177 22,739 29,990 Income (loss) from operations.......................... 779 (11,259) (25,350) Net income (loss)...................................... 506 (11,243) (25,865) Basic and diluted net income (loss) per share available to common shareholders............................... $ .01 $ (.27) $ (.62) Weighted average shares used in computation of basic and diluted net income (loss) per share available to common shareholders.................................. 42,801 43,748 45,954 Pro forma basic and diluted net loss per share......... $ (.44) Pro forma basic and diluted weighted average shares.... 58,470 </TABLE> The pro forma column below gives effect to the automatic conversion of our redeemable convertible preferred stock into common stock upon the closing of this offering. The pro forma as adjusted column below gives effect to the sale of the 4,000,000 shares of common stock in this offering at an assumed public offering price of $12.00 per share, less the estimated underwriting discounts and commissions and estimated offering expenses, the sale of 1,200,000 shares of common stock to EDS in a concurrent private placement at the assumed initial public offering price and the repayment of outstanding debt from the proceeds of this offering. <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............................ $ 1,572 $ 1,572 $48,612 Working capital (deficit)............................ (1,917) (1,917) 45,123 Total assets......................................... 29,852 29,852 76,892 Deferred revenue..................................... 10,354 10,354 10,354 Long-term liabilities................................ 10,000 10,000 -- Redeemable convertible preferred stock............... 24,681 -- -- Total shareholders' equity (deficit)................. (28,421) (3,740) 53,300 </TABLE> RECENT FINANCIAL INFORMATION For the three months ended March 31, 2000, we will record total revenues of approximately $17.6 million. As of the date of this prospectus, our financial statements for this period have not yet been completed, and accordingly, information regarding this period is subject to change.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001106850_skystream_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001106850_skystream_prospectus_summary.txt
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+Prospectus Summary................... 1 Risk Factors......................... 5 Note Regarding Forward-Looking Statements......................... 17 Use of Proceeds...................... 17 Dividend Policy...................... 17 Capitalization....................... 18 Dilution............................. 19 Selected Consolidated Financial Data............................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 21 Business............................. 29 Management........................... 45 Related Party Transactions........... 54 Principal Stockholders............... 58 Description of Capital Stock......... 61 Shares Eligible for Future Sale...... 65 Underwriting......................... 67 Legal Matters........................ 69 Experts.............................. 69 Where You May Find Additional Information........................ 69 Index to Consolidated Financial Statements......................... F-1 </TABLE> ---------------------- Through and including , 2000 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotment or subscription. - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ ---------------------- Shares SKYSTREAM NETWORKS Common Stock ---------------------- [SkyStream Logo] ---------------------- GOLDMAN, SACHS & CO. ROBERTSON STEPHENS DAIN RAUSCHER WESSELS Representatives of the Underwriters - ------------------------------------------------------ - ------------------------------------------------------ <PAGE> 95 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by SkyStream Networks in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee. <TABLE> <S> <C> SEC registration fee........................................ $ 24,592 NASD filing fee............................................. 9,815 Nasdaq National Market listing fee.......................... 95,000 Printing and engraving costs................................ 300,000 Legal fees and expenses..................................... 550,000 Accounting fees and expenses................................ 300,000 Blue Sky fees and expenses.................................. 5,000 Transfer Agent and Registrar fees........................... 10,000 Miscellaneous expenses...................................... 205,593 Total............................................. $1,500,000 </TABLE> ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law permits a corporation to include in its charter documents, and in agreements between the corporation and its directors and officers, provisions expanding the scope of indemnification beyond that specifically provided by the current law. Article 6 of SkyStream Networks' Restated Certificate of Incorporation provides for the indemnification of directors to the fullest extent permissible under Delaware law. Article 8 of SkyStream Networks' Bylaws provides for the indemnification of officers, directors and third parties acting on behalf of SkyStream Networks if such person acted in good faith and in a manner reasonably believed to be in and not opposed to the best interest of SkyStream Networks, and, with respect to any criminal action or proceeding, the indemnified party had no reason to believe his or her conduct was unlawful. SkyStream Networks has entered into indemnification agreements with its directors and executive officers, in addition to indemnification provided for in SkyStream Networks' Bylaws, and intends to enter into indemnification agreements with any new directors and executive officers in the future. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since our incorporation in February 1996, we have issued unregistered securities to a limited number of persons as described below. None of these transactions involved any underwriters, underwriting discounts or commissions, or any public offering, and we believe that each transaction was exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated thereunder or Rule 701 pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationships with SkyStream Networks, to information about SkyStream Networks. 1. In July 1996, we issued and sold 4,676,100 shares of common stock to our founders for an aggregate purchase price of $40,000. II-1 <PAGE> 96 2. In February 1997 we issued and sold 6,637,500 shares of Series A Preferred Stock to six investors for an aggregate purchase price of $4,425,000. 3. In October and November 1997, we and sold issued four warrants to purchase an aggregate of 53,078 shares of our Series B Preferred Stock to four investors at an exercise price of $1.083 per share. 4. In March 1998 we issued and sold 3,366,670 shares of Series B Preferred Stock to eight investors for an aggregate purchase price of $5,050,003.50. 5. In August 1998, we issued and sold 113,115 shares of our common stock to one investor for aggregate consideration of $16,967.25. 6. Between February 1999 and June 1999 we issued and sold 5,256,000 shares of Series C Preferred Stock to twelve investors for an aggregate purchase price of $17,520,000. 7. In February 2000, we issued and sold a warrant to purchase 15,000 shares of our common stock at an exercise price of $8.67 per share. 8. Pursuant to our 1996 Stock Plan, from inception to December 31,1999 we issued and sold an aggregate of 3,152,154 shares of common stock to certain employees, officers, directors and consultants. II-2 <PAGE> 97 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES INDEX TO EXHIBITS <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- <C> <S> 1.1+ Form of Underwriting Agreement 2.1 Merger Agreement between SkyStream Networks Corporation, a Delaware corporation, and SkyStream Networks Corporation, a California Corporation 3.1 Certificate of Incorporation of SkyStream Networks Corporation 3.1.1 Certificate of Amendment of Certificate of Incorporation of SkyStream Networks Corporation 3.1.2 Form of Certificate of Incorporation of SkyStream Networks Corporation to be in effect after the closing of the offering made under this Registration Statement 3.2 Bylaws of SkyStream Networks Corporation 4.1+ Form of Common Stock Certificate 4.2 Second Amended and Restated Rights Agreement dated as of February 5, 1999 between SkyStream Corporation and certain stockholders of SkyStream Corporation 4.2.1 First Amendment to Second Amended and Restated Rights Agreement dated as of March 22, 1999 between SkyStream Corporation and certain stockholders of SkyStream Corporation 4.2.2 Second Amendment to Second Amended and Restated Rights Agreement dated as of June 9, 1999 between SkyStream Corporation and certain stockholders of SkyStream Corporation 4.3 Form of Warrant to Purchase Preferred Stock of SkyStream Corporation issued to William Kirsch, David Campbell, Helen E. McLaughlin O'Rourke and Glen Wallace McLaughlin 4.4 Warrant to Purchase Common Stock of SkyStream Networks Corporation issued to the David Dollinger Living Trust 4.5 Form of Restricted Stock Purchase Agreement entered into as of July 10, 1996 between SkyStream Corporation and each of Regis Gratacap, Robert S. Robinett, William Slattery and Simon Wong 4.5.1 Form of Amendment to Restricted Stock Purchase Agreement entered into as of February 7, 1997 between SkyStream Corporation and each of Regis Gratacap, Robert S. Robinett, William Slattery and Simon Wong 5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation 10.1 Form of Indemnification Agreement between SkyStream Networks Inc. and each of its directors and executive officers 10.2 1996 Stock Option Plan, as amended 10.2.1 Form of Option Agreement under the 1996 Stock Option Plan 10.2.2 Form of Exercise Notice and Restricted Stock Purchase Agreement under the 1996 Stock Option Plan 10.3 2000 Employee Stock Purchase Plan and forms of agreement thereunder 10.4 2000 Director Option Plan 10.4.1 Form of Option Agreement under the 2000 Director Option Plan 10.5 Employment Offer Letter dated June 12, 1997 from SkyStream Corporation to James D. Olson 10.6 Employment Offer Letter dated September 8, 1997 from SkyStream Corporation to Susan Ketcham 10.7 Employment Offer Letter dated January 30, 1998 from SkyStream Corporation to Chandy Nilakantan 10.8 Employment Offer Letter dated April 17, 1998 from SkyStream Corporation to Clint Chao 10.9 Employment Offer Letter dated November 1, 1998 from SkyStream Corporation to Dan Riordan </TABLE> II-3 <PAGE> 98 <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- <C> <S> 10.10 Employment Offer Letter dated October 17, 1999 from SkyStream Corporation to David Olson 10.11 Employment Offer Letter dated January 28, 2000 from SkyStream Networks to Roger E. George 10.12 Sublease Agreement dated December 31, 1999 between SkyStream Networks and ARCADIS Geraghy & Miller, Inc. (formerly, Acurex Corporation) 10.13 Lease dated October 23, 1976 between Richard N. Moseman, Bonnie Moseman Miller and Properties International, allrent, Inc. and Acurex Corporation ("Master Lease") and related agreements 10.14 Lease dated February 8, 2000 between SkyStream Networks and De Guigne Ventures, a California Limited Liability Corporation and Addendum thereto 10.15++ Nonexclusive International Value Added Reseller Agreement dated May 16, 1999 between SkyStream Networks and Miralite Communications 10.16++ International Marketing, Distribution and Support Agreement dated April 18, 1999 between SkyStream Networks and Harris Corporation 10.17++ Nonexclusive International Value Added Reseller Agreement dated December 1, 1999 between SkyStream Networks and International Datacasting Corporation 10.18 Loan and Security Agreement dated as of August 31, 1998 between Lighthouse Capital Partners II, L.P. and SkyStream Corporation 21.1 List of Subsidiaries of SkyStream Networks Inc. 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants 23.2 Consent of Counsel (included in Exhibit 5.1) 24.1 Power of Attorney (see page II-6) 27.1 Financial Data Schedule </TABLE> - --------------- + To be filed by amendment. ++ Confidential treatment requested. (b) FINANCIAL STATEMENT SCHEDULES Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the consolidated financial statements or notes thereto. II-4 <PAGE> 99 ITEM 17. UNDERTAKINGS SkyStream hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification by SkyStream for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of SkyStream pursuant to the provisions referenced in Item 14 of this registration statement or otherwise, SkyStream has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by SkyStream of expenses incurred or paid by a director, officer, or controlling person of SkyStream in the successful defense of any action, suit or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered hereunder, SkyStream will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. SkyStream hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by SkyStream Networks pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 <PAGE> 100 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF MOUNTAIN VIEW, STATE OF CALIFORNIA, ON THE 8TH DAY OF MARCH, 2000. SKYSTREAM NETWORKS, INC. By /s/ JAMES D. OLSON ------------------------------------ Name: James D. Olson Title: President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints, jointly and severally, James D. Olson and Susan Ketcham, and each of them, as his or her attorney-in-fact, with full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this registration statement (including post-effective amendments), and any and all registration statements filed pursuant to Rule 462 under the Securities Act of 1933, as amended, in connection with or related to the offering contemplated by this registration statement and its amendments, if any, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney to any and all amendments to said registration statement. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED: <TABLE> <CAPTION> SIGNATURE TITLE DATE --------- ----- ---- <S> <C> <C> /s/ JAMES D. OLSON President, Chief Executive March 8, 2000 - -------------------------------------------------------- Officer and Director James D. Olson (Principal Executive Officer) /s/ SUSAN KETCHAM Vice President, Finance and March 8, 2000 - -------------------------------------------------------- Chief Financial Officer Susan Ketcham (Principal Accounting Officer) /s/ WENDELL G. VAN AUKEN Director March 8, 2000 - -------------------------------------------------------- Wendell G. Van Auken /s/ GEOFFREY Y. YANG Director March 8, 2000 - -------------------------------------------------------- Geoffrey Y. Yang /s/ JAMES RAMO Director March 8, 2000 - -------------------------------------------------------- James Ramo </TABLE> II-6 <PAGE> 101 REPORT OF FINANCIAL ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE Our report on the consolidated financial statements of SkyStream Networks Inc. has been included in this Form S-1 on page F-2. In connection with our audit of such financial statements, we have also audited the related financial statement schedule listed in the index page II-2 of this Form S-1. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly the information required to be included therein. PricewaterhouseCoopers LLP San Jose, California March 7, 2000 II-7 <PAGE> 102 VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS) <TABLE> <CAPTION> BALANCE AT BALANCE BEGINNING CHARGED CREDITED AT END DESCRIPTION OF PERIOD TO EXPENSES TO EXPENSES OF PERIOD ----------- ---------- ----------- ----------- --------- <S> <C> <C> <C> <C> Allowance for doubtful accounts receivable: Fiscal year ended December 31, 1997.......................... $ -- $ -- $ -- $ -- Fiscal year ended December 31, 1998.......................... -- 30 -- 30 Fiscal year ended December 31, 1999.......................... $ 30 $ 164 $ 11 $ 183 Deferred tax valuation allowance: Fiscal year ended December 31, 1997.......................... $ -- $1,393 $ -- $1,393 Fiscal year ended December 31, 1998.......................... 1,393 1,959 -- 3,352 Fiscal year ended December 31, 1999.......................... $3,352 $2,291 $ -- $5,643 </TABLE> II-8 <PAGE> 103 INDEX TO EXHIBITS <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- <C> <S> 1.1+ Form of Underwriting Agreement 2.1 Merger Agreement between SkyStream Networks Corporation, a Delaware corporation, and SkyStream Networks Corporation, a California Corporation 3.1 Certificate of Incorporation of SkyStream Networks Corporation 3.1.1 Certificate of Amendment of Certificate of Incorporation of SkyStream Networks Corporation 3.1.2 Form of Certificate of Incorporation of SkyStream Networks Corporation to be in effect after the closing of the offering made under this Registration Statement 3.2 Bylaws of SkyStream Networks Corporation 4.1+ Form of Common Stock Certificate 4.2 Second Amended and Restated Rights Agreement dated as of February 5, 1999 between SkyStream Corporation and certain stockholders of SkyStream Corporation 4.2.1 First Amendment to Second Amended and Restated Rights Agreement dated as of March 22, 1999 between SkyStream Corporation and certain stockholders of SkyStream Corporation 4.2.2 Second Amendment to Second Amended and Restated Rights Agreement dated as of June 9, 1999 between SkyStream Corporation and certain stockholders of SkyStream Corporation 4.3 Form of Warrant to Purchase Preferred Stock of SkyStream Corporation issued to William Kirsch, David Campbell, Helen E. McLaughlin O'Rourke and Glen Wallace McLaughlin 4.4 Warrant to Purchase Common Stock of SkyStream Networks Corporation issued to the David Dollinger Living Trust 4.5 Form of Restricted Stock Purchase Agreement entered into as of July 10, 1996 between SkyStream Corporation and each of Regis Gratacap, Robert S. Robinett, William Slattery and Simon Wong 4.5.1 Form of Amendment to Restricted Stock Purchase Agreement entered into as of February 7, 1997 between SkyStream Corporation and each of Regis Gratacap, Robert S. Robinett, William Slattery and Simon Wong 5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation 10.1 Form of Indemnification Agreement between SkyStream Networks Inc. and each of its directors and executive officers 10.2 1996 Stock Option Plan, as amended 10.2.1 Form of Option Agreement under the 1996 Stock Option Plan 10.2.2 Form of Exercise Notice and Restricted Stock Purchase Agreement under the 1996 Stock Option Plan 10.3 2000 Employee Stock Purchase Plan and forms of agreement thereunder 10.4 2000 Director Option Plan 10.4.1 Form of Option Agreement under the 2000 Director Option Plan 10.5 Employment Offer Letter dated June 12, 1997 from SkyStream Corporation to James D. Olson 10.6 Employment Offer Letter dated September 8, 1997 from SkyStream Corporation to Susan Ketcham 10.7 Employment Offer Letter dated January 30, 1998 from SkyStream Corporation to Chandy Nilakantan 10.8 Employment Offer Letter dated April 17, 1998 from SkyStream Corporation to Clint Chao 10.9 Employment Offer Letter dated November 1, 1998 from SkyStream Corporation to Dan Riordan 10.10 Employment Offer Letter dated October 17, 1999 from SkyStream Corporation to David Olson </TABLE> <PAGE> 104 <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- <C> <S> 10.11 Employment Offer Letter dated January 28, 2000 from SkyStream Networks to Roger E. George 10.12 Sublease Agreement dated December 31, 1999 between SkyStream Networks and ARCADIS Geraghy & Miller, Inc. (formerly, Acurex Corporation) 10.13 Lease dated October 23, 1976 between Richard N. Moseman, Bonnie Moseman Miller and Properties International, allrent, Inc. and Acurex Corporation ("Master Lease") and related agreements 10.14 Lease dated February 8, 2000 between SkyStream Networks and De Guigne Ventures, a California Limited Liability Corporation and Addendum thereto 10.15++ Nonexclusive International Value Added Reseller Agreement dated May 16, 1999 between SkyStream Networks and Miralite Communications 10.16++ International Marketing, Distribution and Support Agreement dated April 18, 1999 between SkyStream Networks and Harris Corporation 10.17++ Nonexclusive International Value Added Reseller Agreement dated December 1, 1999 between SkyStream Networks and International Datacasting Corporation 10.18 Loan and Security Agreement dated as of August 31, 1998 between Lighthouse Capital Partners II, L.P. and SkyStream Corporation 21.1 List of Subsidiaries of SkyStream Networks Inc. 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants 23.2 Consent of Counsel (included in Exhibit 5.1) 24.1 Power of Attorney (see page II-6) 27.1 Financial Data Schedule </TABLE> - --------------- + To be filed by amendment. ++ Confidential treatment requested. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-2.1 <SEQUENCE>2 <DESCRIPTION>EX-2.1 <TEXT> <PAGE> 1 EXHIBIT 2.1 AGREEMENT AND PLAN OF MERGER OF SKYSTREAM NETWORKS CORPORATION A DELAWARE CORPORATION AND SKYSTREAM CORPORATION A CALIFORNIA CORPORATION THIS AGREEMENT AND PLAN OF MERGER dated as of January 31, 2000, (the "Agreement") is between SkyStream Networks Corporation, a Delaware corporation ("SkyStream-Delaware") and SkyStream Corporation, a California corporation ("SkyStream-California"). SkyStream-Delaware and SkyStream-California are sometimes referred to herein as the "Constituent Corporations." R E C I T A L S A. SkyStream-Delaware is a corporation duly organized and existing under the laws of the State of Delaware and has an authorized capital of 85,508,831 shares, 75,000,000 of which are designated "Common Stock", $0.001 par value, and 10,508,831 of which are designated "Preferred Stock", $0.001 par value. Of such authorized shares of Preferred Stock, 4,425,000 shares are designated "Series A Preferred Stock," 2,279,831 shares are designated "Series B Preferred Stock" and 3,804,000 shares are designated "Series C Preferred Stock." As of the date of this Agreement of Merger, 1,000 shares of Common Stock are issued and outstanding, all of which were held by SkyStream-California. No shares of Preferred Stock are outstanding. B. SkyStream-California is a corporation duly organized and existing under the laws of the State of California and has an authorized capital of 30,508,831 shares, 20,000,000 of which are designated "Common Stock", no par value and 10,508,831 of which are designated "Preferred Stock", no par value. Of such authorized shares of Preferred Stock, 4,425,000 shares are designated "Series A Preferred Stock," and 2,279,831 shares are designated "Series B Preferred Stock" and 3,804,000 shares are designated "Series C Preferred Stock." As of the record date of the solicitation of the consent of shareholders at which this Agreement of Merger was approved, 5,321,433 shares of Common Stock, 4,425,000 shares of Series A Preferred Stock, 2,244,446 shares of Series B Preferred Stock and 3,504,000 shares of Series C Preferred Stock were issued and outstanding. C. The Board of Directors of SkyStream-California has determined that, for the purpose of effecting the reincorporation of SkyStream-California in the State of Delaware, it is advisable and in the best interests of SkyStream-California that SkyStream-California merge with and into SkyStream-Delaware upon the terms and conditions herein provided. D. The respective Boards of Directors of SkyStream-Delaware and SkyStream-California have approved this Agreement and have directed that this Agreement be submitted to a vote of their respective stockholders and executed by the undersigned officers. <PAGE> 2 NOW, THEREFORE, in consideration of the mutual agreements and covenants set forth herein, SkyStream-Delaware and SkyStream-California hereby agree, subject to the terms and conditions hereinafter set forth, as follows: I. MERGER 1.1 Merger. In accordance with the provisions of this Agreement, the Delaware General Corporation Law and the California General Corporation Law, SkyStream-California shall be merged with and into SkyStream-Delaware (the "Merger"), the separate existence of SkyStream-California shall cease and SkyStream-Delaware shall be, and is herein sometimes referred as, the "Surviving Corporation", and the name of the Surviving Corporation shall be SkyStream Networks Corporation. 1.2 Filing and Effectiveness. The Merger shall be completed when the following actions shall have been completed: (a) This Agreement and Merger was adopted and approved by the stockholders of each Constituent Corporation in accordance with the requirements of the Delaware General Corporation Law and the California General Corporation Law on January 3, 2000 and January 3, 2000, respectively; (b) All of the conditions precedent to the consummation of the Merger specified in this Agreement shall have been satisfied or duly waived by the party entitled to satisfaction thereof; (c) An executed Agreement and Plan of Merger meeting the requirements of the Delaware General Corporation Law shall have been filed with the Secretary of State of the State of Delaware; and (d) An executed Certificate of Merger or an executed, acknowledged and certified counterpart of this Agreement meeting the requirements of the California Corporations Code shall have been filed with the Secretary of State of the State of California. Pursuant to Section 251 of the Delaware General Corporation Law and Section 1168 of the California Corporations Code, the date and time when the Merger shall become effective, shall be the date upon which subsections (a), (b) and (c) of this Section 1.2 are satisfied and as to SkyStream-California on the day subsection (d) is satisfied, is herein called the "Effective Date of the Merger." 1.3 Effect of the Merger. Upon the Effective Date of the Merger, the separate existence of SkyStream-California shall cease and SkyStream-Delaware, as the Surviving Corporation, (i) shall continue to possess all of its assets, rights, powers and property as constituted immediately prior to the Effective Date of the Merger, (ii) shall be subject to all actions previously taken by its and SkyStream-California's Board of Directors, (iii) shall succeed, without other transfer, to all of the assets, rights, powers and property of SkyStream-California in the manner more fully set forth in Section 259 of the Delaware General Corporation Law, (iv) shall continue to be subject to all of the debts, liabilities and obligations of SkyStream-Delaware as constituted immediately prior to the Effective Date of the Merger, and (v) shall succeed, without other transfer, to all of the debts, <PAGE> 3 liabilities and obligations of SkyStream-California in the same manner as if SkyStream-Delaware had itself incurred them, all as more fully provided under the applicable provisions of the Delaware General Corporation Law and the California Corporations Code. II. CHARTER DOCUMENTS, DIRECTORS AND OFFICERS 2.1 Certificate of Incorporation. The Certificate of Incorporation of SkyStream-Delaware as in effect immediately prior to the Effective Date of the Merger shall continue in full force and effect as the Certificate of Incorporation of the Surviving Corporation until duly amended in accordance with the provisions thereof and applicable law. 2.2 Bylaws. The Bylaws of SkyStream-Delaware as in effect immediately prior to the Effective Date of the Merger shall continue in full force and effect as the Bylaws of the Surviving Corporation until duly amended in accordance with the provisions thereof and applicable law. 2.3 Directors and Officers. The directors and officers of SkyStream-California immediately prior to the Effective Date of the Merger shall be the directors and officers of the Surviving Corporation until their successors shall have been duly elected and qualified or until as otherwise provided by law, the Certificate of Incorporation of the Surviving Corporation or the Bylaws of the Surviving Corporation. III. MANNER OF CONVERSION OF STOCK 3.1 SkyStream-California Common Shares. Upon the Effective Date of the Merger, each share of SkyStream-California Common Stock, no par value, issued and outstanding immediately prior thereto shall by virtue of the Merger and without any action by the Constituent Corporations, the holder of such shares or any other person, be converted into and exchanged for one fully paid and nonassessable share of Common Stock, $.001 par value, of the Surviving Corporation. No fractional share interests of Surviving Corporation Common Stock shall be issued. In lieu thereof, any fractional share interests to which a holder would otherwise be entitled shall be aggregated. 3.2 SkyStream-California Preferred Shares. (a) Upon the Effective Date of the Merger, each share of Series A Preferred, Series B Preferred, and Series C Preferred Stock of SkyStream-California, no par value, issued and outstanding immediately prior to the Merger, which shares are convertible into such number of shares of SkyStream-California Common Stock as set forth in the SkyStream-California Restated Articles of Incorporation, as amended, shall by virtue of the Merger and without any action by the Constituent Corporations, the holder of such shares or any other person, be converted into or exchanged for one fully paid and nonassessable share of Series A Preferred, Series B Preferred and Series C Preferred Stock of the Surviving Corporation, $0.001 par value, respectively, having such rights, preferences and privileges as set forth in the Certificate of Incorporation of the Surviving Corporation, which share of Preferred Stock shall be convertible into the same number of shares of the Surviving Corporation's Common Stock, $0.001 par value, as such share of SkyStream-California Preferred Stock was so convertible into immediately prior to the Effective Date of the Merger, subject to adjustment pursuant to the terms of the Certificate of Incorporation of the Surviving Corporation. <PAGE> 4 3.3 SkyStream-California Options, Warrants, Stock Purchase Rights and Convertible Securities. (a) Upon the Effective Date of the Merger, the Surviving Corporation shall assume the obligations of SkyStream-California under, and continue, the 1996 Stock Option Plan ("Stock Option Plan"),and all other employee benefit plans of SkyStream-California. Each outstanding and unexercised option, warrant, other right to purchase, or security convertible into, SkyStream-California Common Stock or SkyStream-California Preferred Stock (a "Right") shall become, subject to the provisions in paragraph (c) hereof, an option, warrant, right to purchase or a security convertible into the Surviving Corporation's Common Stock or Preferred Stock, respectively, on the basis of one share of the Surviving Corporation's Common Stock or Preferred Stock, as the case may be, for each one share of SkyStream-California Common Stock or Preferred Stock, as the case may be, issuable pursuant to any such Right, on the same terms and conditions and at an exercise price equal to the exercise price applicable to any such SkyStream-California Right at the Effective Date of the Merger. This paragraph 3.3(a) shall not apply to SkyStream-California Common Stock or Preferred Stock. Such Common Stock and Preferred Stock are subject to paragraph 3.1 and 3.2, respectively, hereof. (b) A number of shares of the Surviving Corporation's Common Stock and Preferred Stock shall be reserved for issuance upon the exercise of options, warrants, stock purchase rights and convertible securities equal to the number of shares of SkyStream-California Common Stock and SkyStream-California Preferred Stock so reserved immediately prior to the Effective Date of the Merger. (c) The assumed Rights shall not entitle any holder thereof to a fractional share upon exercise or conversion (unless the holder was entitled to a fractional interest immediately prior to the Merger). In lieu thereof, any fractional share interests to which a holder of an assumed Right (other than an option issued pursuant to SkyStream-California's 1996 Stock Option Plan) would otherwise be entitled upon exercise or conversion shall be aggregated (but only with other similar Rights which have the same per share terms). To the extent that after such aggregation, the holder would still be entitled to a fractional share with respect thereto upon exercise or conversion, the holder shall be entitled upon the exercise or conversion of all such assumed Rights pursuant to their terms (as modified herein), to one full share of Common Stock or Preferred Stock in lieu of such fractional share. With respect to each class of such similar Rights, no holder will be entitled to more than one full share in lieu of a fractional share upon exercise or conversion. Notwithstanding the foregoing, with respect to options issued under the SkyStream-California 1996 Stock Option Plan that are assumed in the Merger, the number of shares of Common Stock to which the holder would be otherwise entitled upon exercise of each such assumed option following the Merger shall be rounded down to the nearest whole number and the exercise price shall be rounded up to the nearest whole cent. In addition, no "additional benefits" (within the meaning of Section 424(a)(2) of the Internal Revenue Code of 1986, as amended) shall be accorded to the optionees pursuant to the assumption of their options. 3.4 SkyStream-Delaware Common Stock. Upon the Effective Date of the Merger, each share of Common Stock, $.001 par value, of SkyStream-Delaware issued and outstanding immediately prior thereto shall, by virtue of the Merger and without any action by SkyStream- <PAGE> 5 Delaware, the holder of such shares or any other person, be canceled and returned to the status of authorized but unissued shares. 3.5 Exchange of Certificates. After the Effective Date of the Merger, each holder of an outstanding certificate representing shares of SkyStream-California Common Stock or Preferred Stock may be asked to surrender the same for cancellation to an exchange agent, whose name will be delivered to holders prior to any requested exchange (the "Exchange Agent"), and each such holder shall be entitled to receive in exchange therefor a certificate or certificates representing the number of shares of the Surviving Corporation's Common Stock or Preferred Stock, as the case may be, into which the surrendered shares were converted as herein provided. Until so surrendered, each outstanding certificate theretofore representing shares of SkyStream-California Common Stock or Preferred Stock shall be deemed for all purposes to represent the number of shares of the Surviving Corporation's Common Stock or Preferred Stock, respectively, into which such shares of SkyStream-California Common Stock or Preferred Stock, as the case may be, were converted in the Merger. The registered owner on the books and records of the Surviving Corporation or the Exchange Agent of any such outstanding certificate shall, until such certificate shall have been surrendered for transfer or conversion or otherwise accounted for to the Surviving Corporation or the Exchange Agent, have and be entitled to exercise any voting and other rights with respect to and to receive dividends and other distributions upon the shares of Common Stock or Preferred Stock of the Surviving Corporation represented by such outstanding certificate as provided above. Each certificate representing Common Stock or Preferred Stock of the Surviving Corporation so issued in the Merger shall bear the same legends, if any, with respect to the restrictions on transferability as the certificates of SkyStream-California so converted and given in exchange therefore, unless otherwise determined by the Board of Directors of the Surviving Corporation in compliance with applicable laws. If any certificate for shares of the Surviving Corporation's stock is to be issued in a name other than that in which the certificate surrendered in exchange therefor is registered, it shall be a condition of issuance thereof that the certificate so surrendered shall be properly endorsed and otherwise in proper form for transfer, that such transfer otherwise be proper and comply with applicable securities laws and that the person requesting such transfer pay to the Exchange Agent any transfer or other taxes payable by reason of issuance of such new certificate in a name other than that of the registered holder of the certificate surrendered or establish to the satisfaction of the Surviving Corporation that such tax has been paid or is not payable. IV. GENERAL 4.1 Covenants of SkyStream-Delaware. SkyStream-Delaware covenants and agrees that it will, on or before the Effective Date of the Merger: (a) Qualify to do business as a foreign corporation in the State of California and in connection therewith irrevocably appoint an agent for service of process as required under the provisions of Section 2105 of the California General Corporation Law. <PAGE> 6 (b) File any and all documents with the California Franchise Tax Board necessary for the assumption by SkyStream-Delaware of all of the franchise tax liabilities of SkyStream-California. (c) Take such other actions as may be required by the California General Corporation Law. 4.2 Further Assurances. From time to time, as and when required by SkyStream-Delaware or by its successors or assigns, there shall be executed and delivered on behalf of SkyStream-California such deeds and other instruments, and there shall be taken or caused to be taken by it such further and other actions as shall be appropriate or necessary in order to vest or perfect in or conform of record or otherwise by SkyStream-Delaware the title to and possession of all the property, interests, assets, rights, privileges, immunities, powers, franchises and authority of SkyStream-California and otherwise to carry out the purposes of this Agreement, and the officers and directors of SkyStream-Delaware are fully authorized in the name and on behalf of SkyStream-California or otherwise to take any and all such action and to execute and deliver any and all such deeds and other instruments. 4.3 Abandonment. At any time before the Effective Date of the Merger, this Agreement may be terminated and the Merger may be abandoned for any reason whatsoever by the Board of Directors of either SkyStream-California or of SkyStream-Delaware, or of both, notwithstanding the approval of this Agreement by the shareholders of SkyStream-California or by the sole stockholder of SkyStream-Delaware, or by both. 4.4 Amendment. The Boards of Directors of the Constituent Corporations may amend this Agreement at any time prior to the filing of this Agreement (or certificate in lieu thereof) with the Secretary of State of the State of Delaware, provided that an amendment made subsequent to the adoption of this Agreement by the stockholders of either Constituent Corporation shall not: (1) alter or change the amount or kind of shares, securities, cash, property and/or rights to be received in exchange for or on conversion of all or any of the shares of any class or series thereof of such Constituent Corporation, (2) alter or change any term of the Certificate of Incorporation of the Surviving Corporation to be effected by the Merger, or (3) alter or change any of the terms and conditions of this Agreement if such alteration or change would adversely affect the holders of any class or series of capital stock of any Constituent Corporation. 4.5 Registered Office. The registered office of the Surviving Corporation in the State of Delaware is 1209 Orange Street, Wilmington, County of New Castle, DE 19801 and The Corporation Trust Company is the registered agent of the Surviving Corporation at such address. 4.6 Agreement. Executed copies of this Agreement will be on file at the principal place of business of the Surviving Corporation at 555 Clyde Avenue, Suite B, Mountain View, California 94043, and copies thereof will be furnished to any stockholder of either Constituent Corporation, upon request and without cost. 4.7 Governing Law. This Agreement shall in all respects be construed, interpreted and enforced in accordance with and governed by the laws of the State of Delaware and, so far as applicable, the merger provisions of the California General Corporation Law. <PAGE> 7 4.8 FIRPTA Notification. (a) On the Effective Date of the Merger, SkyStream-California shall deliver to SkyStream-Delaware, as agent for the shareholders of SkyStream-California, a properly executed statement (the "Statement") substantially in the form attached hereto as Exhibit A. SkyStream-Delaware shall retain the Statement for a period of not less than seven years and shall, upon request, provide a copy thereof to any person that was a shareholder of SkyStream-California immediately prior to the Merger. In consequence of the approval of the Merger by the shareholders of SkyStream-California, (i) such shareholders shall be considered to have requested that the Statement be delivered to SkyStream-Delaware as their agent and (ii) SkyStream-Delaware shall be considered to have received a copy of the Statement at the request of the SkyStream-California shareholders for purposes of satisfying SkyStream-Delaware's obligations under Treasury Regulation Section 1.1445-2(c)(3). (b) SkyStream-California shall deliver to the Internal Revenue Service a notice regarding the Statement in accordance with the requirements of Treasury Regulation Section 1.897-2(h)(2). <PAGE> 8 IN WITNESS WHEREOF, this Agreement having first been approved by the resolutions of the Board of Directors of SkyStream-Delaware and SkyStream-California is hereby executed on behalf of each of such two corporations and attested by their respective officers thereunto duly authorized. SKYSTREAM CORPORATION a California corporation By: /s/ JAMES D. OLSON ------------------------------------- James D. Olson, President and Chief Executive Officer ATTEST: /s/ SUSAN KETCHAM - ------------------------------ Susan Ketcham Secretary SKYSTREAM NETWORKS CORPORATION a Delaware corporation By: /s/ JAMES D. OLSON ------------------------------------- James D. Olson, President and Chief Executive Officer ATTEST: /s/ SUSAN KETCHAM - ------------------------------ Susan Ketcham Secretary <PAGE> 9 EXHIBIT A January 31, 2000 TO THE SHAREHOLDERS OF SKYSTREAM NETWORKS CORPORATION: In connection with the reincorporation (the "Reincorporation") in Delaware of SkyStream Corporation, a California corporation (the "Company"), pursuant to the Agreement and Plan of Merger (the "Agreement") dated as of January 31, 2000 between the Company and SkyStream Networks Corporation, a Delaware corporation and wholly-owned subsidiary of the Company ("SkyStream-Delaware"), your shares of Company stock will be replaced by shares of stock in SkyStream-Delaware. In order to establish that (i) you will not be subject to tax under Section 897 of the Internal Revenue Code of 1986, as amended (the "Code"), in consequence of the Reincorporation and (ii) SkyStream-Delaware will not be required under Section 1445 of the Code to withhold taxes from the SkyStream-Delaware stock that you will receive in connection therewith, the Company hereby represents to you that, as of the date of this letter, shares of Company stock do not constitute a "United States real property interest" within the meaning of Section 897(c) of the Code and the regulations issued thereunder. A copy of this letter will be delivered to SkyStream-Delaware pursuant to Section 4.8 of the Agreement. Under penalties of perjury, the undersigned officer of the Company hereby declares that, to the best knowledge and belief of the undersigned, the facts set forth herein are true and correct. Sincerely, ------------------------------------- James D. Olson, President and Chief Executive Officer </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3.1 <SEQUENCE>3 <DESCRIPTION>EX-3.1 <TEXT> <PAGE> 1 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF SKYSTREAM NETWORKS CORPORATION FIRST. The name of the corporation is SkyStream Networks Corporation. SECOND. The address of the corporation's registered office in the State of Delaware, is 1209 Orange Street, City of Wilmington, County of Newcastle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. THIRD. The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH. This corporation is authorized to issue two classes of shares to be designated respectively Common Stock and Preferred Stock. The total number of shares of Common Stock this corporation shall have authority to issue is 75,000,000, $0.001 par value per share, and the total number of shares of Preferred Stock this corporation shall have authority to issue is 10,508,831, $0.001 par value per share, 4,425,000 of which shares of Preferred Stock shall be designated Series A Preferred Stock ("Series A Preferred"), 2,279,831 of which shares of Preferred Stock shall be designated Series B Preferred Stock ("Series B Preferred") and 3,804,000 of which shares of Preferred Stock shall be designated Series C Preferred Stock ("Series C Preferred"). The relative rights, preferences, privileges and restrictions granted to or imposed upon the respective classes of the shares of capital stock or the holders thereof are as follows: 1. Dividends. The holders of the Series A Preferred, Series B Preferred and Series C Preferred shall be entitled to receive, when and as declared by the Board of Directors, dividends out of funds legally available therefore, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this corporation) on the Common Stock of this corporation, at the rate of $.08, $.225 and $.50 per share, per annum, respectively. Such dividends shall not be cumulative and no right to such dividends shall accrue to holders of Preferred Stock unless declared by the Board of Directors. No dividends or other distributions shall be made with respect to the Common Stock, other than dividends payable solely in Common Stock, unless at the same time an equivalent dividend with respect to the Preferred Stock has been made. <PAGE> 2 2. Liquidation Preference. In the event of any liquidation, dissolution, or winding up of the corporation ("Liquidation"), either voluntary or involuntary, distributions to the shareholders of the corporation shall be made in the following manner: (a) The holders of the Preferred shall be entitled to receive, prior and in preference to any distribution of any assets or property of the corporation to the holders of the Common Stock by reason of their ownership thereof, the amount of $1.00 per share for each share of Series A Preferred, $2.25 per share for each share of Series B Preferred or $5.00 per share for each share of Series C Preferred, respectively, then held by them, adjusted for any combinations, consolidations, stock distributions or dividends, or recapitalizations with respect to such shares and, in addition, an amount equal to all declared but unpaid dividends, if any, on the Series A Preferred, Series B Preferred or Series C Preferred, respectively. If the assets and property thus distributed among the holders of the Series A Preferred, Series B Preferred and Series C Preferred shall be insufficient to permit the payment to such holders of the full preferential amount, then the entire assets and property of the corporation legally available for distribution shall be distributed ratably according to their respective liquidation preferences among the holders of the Series A Preferred, Series B Preferred and Series C Preferred in proportion to the number of shares of Series A, Series B Preferred and Series C Preferred held by each holder. After payment has been made to the holders of the Series A Preferred, Series B Preferred and Series C Preferred of the full amounts to which they shall be entitled as aforesaid, the remaining assets of the corporation available for distribution to the shareholders shall be distributed ratably among the holders of Series A Preferred, Series B Preferred, Series C Preferred and Common Stock based on the number of shares of Common Stock held by each (assuming conversion of all such Series A Preferred, Series B Preferred and Series C Preferred) until such time as (i) the holders of Series A Preferred shall have received, inclusive of the $1.00 per share provided for in the immediately prior paragraph, an aggregate of $3.00 per share for each share of Series A Preferred then held by them adjusted for any combinations, consolidations, stock distributions or dividends, or recapitalizations with respect to such shares and, in addition, an amount equal to all declared but unpaid dividends, if any, on the Series A Preferred, (ii) the holders of Series B Preferred shall have received, inclusive of the $2.25 per share provided in the immediately prior paragraph, an aggregate of $5.50 per share for each share of Series B Preferred then held by them adjusted for any combinations, consolidations, stock distributions or dividends, or recapitalizations with respect to such shares and, in addition, an amount equal to all declared but unpaid dividends, if any, on the Series B Preferred and (iii) the holders of Series C Preferred shall have received, inclusive of the $5.00 per share provided in the immediately prior paragraph, an aggregate of $7.50 per share for each share of Series C Preferred then held by them adjusted for any combinations, stock distributions or dividends, or recapitalizations with respect to such shares and, in addition, an amount equal to all declared but unpaid dividends, or recapitalizations with respect to such shares and, in addition, an amount equal to all declared but unpaid dividends, if any, on the Series C Preferred. After payment has been made to the holders of the Series A Preferred of an aggregate of $3.00 per share for each -2- <PAGE> 3 share of Series A Preferred then held by them, to the holders of the Series B Preferred of an aggregate of $5.50 per share for each share of Series B Preferred then held by them and to the holders of the Series C Preferred of an aggregate of $7.50 per share for each share of Series C Preferred then held by them, the remaining assets and property of this corporation legally available for distribution shall be distributed ratably among the holders of Common Stock. (b) For purposes of this Section 2, a liquidation, dissolution or winding up of the corporation shall be deemed to be occasioned by, or to include, (i) the acquisition of the corporation by another entity or the acquisition of another entity or entities by the corporation by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation, but excluding any merger effected exclusively for the purpose of changing the domicile of the corporation); or (ii) a sale of all or substantially all of the assets of the corporation, unless the corporation's shareholders of record as constituted immediately prior to such acquisition or sale will, immediately after such acquisition or sale (by virtue of securities issued as consideration for the corporation's acquisition or sale or otherwise) hold at least 50% of the voting power of the surviving or acquiring entity in approximately the same relative percentages after such acquisition or sale as before such acquisition or sale. (c) Any securities to be delivered to the holders of Preferred Stock pursuant to Section 2(a) above shall be valued as follows: (i) Securities not subject to investment letter or other similar restrictions on free marketability: (1) If traded on a securities exchange, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the 30-day period ending three (3) days prior to the closing; (2) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever are applicable) over the 30-day period ending three (3) days prior to the closing; and (3) If there is no active public market, the value shall be the fair market value thereof, as mutually determined by the corporation and the holders of Preferred Stock which are entitled to receive such securities and which Preferred Stock represents at least a majority of the voting power of all then outstanding shares of such Preferred Stock. (ii) The method of valuation of securities subject to investment letter or other restrictions on free marketability shall be to make an appropriate discount from the market value determined as above in subsections 2(c)(i)(1), (2) or (3) to reflect the approximate fair market value thereof, as mutually determined by the corporation and the holders of Preferred Stock which would be entitled to receive such securities and which represent at least a majority of the voting power of all then outstanding shares of such Preferred Stock. -3- <PAGE> 4 (d) In the event the requirements of Section 2(c) are not complied with, the corporation shall forthwith either: (i) cause such closing to be postponed until such time as the requirements of this Section 2 have been complied with, or (ii) cancel such transaction, in which event the rights, preferences and privileges of the holders of the Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in Section 4(h) hereof. (e) The liquidation preference of holders of Preferred Stock provided herein shall not be deemed to be impaired by distributions made by the Corporation in connection with the repurchase of shares of Common Stock at the lower of fair market value or the original issue price from former employees or consultants upon termination of their employment or services pursuant to stock restriction agreements between the Corporation and such persons approved by the Corporation's Board of Directors, and such holders shall be deemed to have consented to such repurchases. 3. Voting Rights. (a) Vote Other Than for Directors. Holders of the Preferred Stock shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled to vote, together with the holders of Common Stock, with respect to any questions upon which holders of Common Stock have the right to vote. Except as otherwise required by law or by Section 3(b) hereof, the holder of each share of Common Stock issued and outstanding shall have one vote and the holder of each share of Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such share of Preferred Stock could be converted at the record date for determination of the shareholders entitled to vote on such matters, or, if no such record date is established, at the date such vote is taken or any written consent of shareholders is solicited, such votes to be counted together with all other shares of stock of the corporation having general voting power and not separately as a class. Fractional votes by the holders of Preferred Stock shall not, however, be permitted and any fractional voting rights shall (after aggregating all shares into which shares of Preferred Stock held by each holder could be converted) be rounded to the nearest whole number. Holders of Common Stock and Preferred Stock shall be entitled to notice of any shareholders' meeting in accordance with the Bylaws of the corporation. (b) Voting for Directors. At any such time as at least 3,000,000 shares of Preferred Stock are outstanding (as adjusted for combinations, consolidations, stock distributions or dividends, or recapitalizations), the holders of the shares of Preferred Stock voting as a class on an as-converted basis shall be entitled to elect two (2) directors. The holders of Common Stock voting -4- <PAGE> 5 as a separate class shall be entitled to elect one (1) director. The remaining directors shall be elected by the holders of the Preferred Stock and Common Stock voting as provided in Section 3(a). At any such time as less than 3,000,000 shares of Preferred Stock are outstanding (as adjusted for combinations, consolidations, stock distributions or dividends, or recapitalizations), then directors shall be elected by the holders of the Preferred Stock and Common Stock voting as provided in Section 3(a). A vacancy on the Board of Directors occurring because of the death, resignation or removal of a director elected by the holders of Preferred Stock voting as a separate class shall be filled by the vote or written consent of the holders of a majority of the Preferred Stock. Any vacancy occurring because of the death, resignation or removal of a director elected by the holders of Common Stock voting as a separate class shall be filled by the vote or written consent of the holders of a majority of the Common Stock. Any vacancy occurring because of the death, resignation or removal of a director elected by the holders of the Preferred Stock and Common Stock voting together as a single class shall be filled by the vote or written consent of the holders of a majority of the Preferred Stock and Common Stock voting as provided in Section 3(a). A director may be removed from the Board of Directors with or without cause by the vote or consent of the holders of the outstanding class or series with voting power entitled to elect him in accordance with this Section 3(b) and the General Corporation Law of the State of Delaware. (c) Cumulative Voting. The holders of Common Stock and the holders of Preferred Stock shall be entitled to cumulative voting rights as to the directors to be elected by each class or the combined classes (as provided in Section 3(b) above), in accordance with the provisions of Section 214 of the General Corporation Law of the State of Delaware. 4. Conversion. The holders of Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the corporation or any transfer agent for the Preferred Stock. Each share of Preferred Stock shall be convertible into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Conversion Price (as hereinafter defined) per share in effect for the applicable series of Preferred Stock into the per share Conversion Value (as hereinafter defined) of such series. The Conversion Price per share of Series A Preferred shall be $1.00 and the per share Conversion Value of Series A Preferred shall be $1.00. The Conversion Price per share of Series B Preferred shall be $2.25 and the per share Conversion Value of Series B Preferred shall be $2.25. The Conversion Price per share of Series C Preferred shall be $5.00 and the per share Conversion Value of Series C Preferred shall be $5.00. The Conversion Price of Series A, Series B and Series C Preferred shall be subject to adjustment from time to time as provided below. The number of shares -5- <PAGE> 6 of Common Stock to which a share of Preferred is convertible is hereinafter referred to as the Conversion Rate of such share. (b) Automatic Conversion. Each share of Preferred Stock shall automatically be converted into shares of Common Stock at the then effective Conversion Rate upon the earlier of (i) the date specified by written consent or agreement of the holders of a majority of the then-outstanding Preferred Stock (on an as-converted basis) or (ii) the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the corporation with an aggregate per share offering price to the public of not less than Seven Dollars and Fifty Cents ($7.50) (as adjusted for combinations, consolidations, stock distributions or dividends, or recapitalizations) and an aggregate offering price of not less than Fifteen Million Dollars ($15,000,000). In the event of the automatic conversion of the Preferred Stock upon a public offering as aforesaid, the person(s) entitled to receive the Common Stock issuable upon such conversion of Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. (c) Mechanics of Conversion. No fractional shares of Common Stock shall be issued upon conversion of Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the corporation shall pay cash equal to such fraction multiplied by the then effective Conversion Price. Before any holder of Preferred Stock shall be entitled to convert the same into full shares of Common Stock and to receive certificates therefor, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the corporation or of any transfer agent for the Preferred Stock, and shall give written notice to the corporation at such office that he elects to convert the same; provided, however, that in the event of an automatic conversion pursuant to Section 4(b), the outstanding shares of Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the corporation or its transfer agent, and provided further that the corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such automatic conversion unless the certificates evidencing such shares of Preferred Stock are either delivered to the corporation or its transfer agent as provided above, or the holder notifies the corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the corporation to indemnify the corporation from any loss incurred by it in connection with such certificates. The corporation shall, as soon as practicable after such delivery, or such agreement and indemnification in the case of a lost certificate, issue and deliver at such office to such holder of Preferred Stock, a certificate or certificates for the number of shares of Common Stock to which he shall be entitled as aforesaid and a check payable to the holder in the amount of any cash amounts payable as the result of a conversion into fractional shares of Common Stock. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, or in the case of automatic conversion on the date of closing of the offering, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. -6- <PAGE> 7 (d) Adjustments for Certain Splits and Combinations. (i) Adjustments for Subdivisions, Combinations or Stock Dividends of Common Stock. In the event the outstanding shares of Common Stock shall be subdivided (by stock split, or otherwise), into a greater number of shares of Common Stock, or the corporation at any time or from time to time after the date on which the first shares of Preferred Stock were issued (the "Original Issue Date") shall declare or pay any dividend on the Common Stock payable in Common Stock, the Conversion Price then in effect shall, concurrently with the effectiveness of such subdivision or stock dividend, be proportionately decreased based on the ratio of (i) the number of shares of Common Stock outstanding immediately after such subdivision or stock dividend to (ii) the number of shares of Common Stock outstanding immediately prior to such subdivision or stock dividend. In the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Conversion Price then in effect shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased on the same basis. (ii) Adjustments for Other Distributions. In the event the corporation at any time or from time to time makes, or fixes a record date for the determination of holders of Common Stock entitled to receive any distribution payable in (A) securities of the corporation or other entities (other than shares of Common Stock and other than as otherwise adjusted in this Section 4 or as otherwise provided in Section 1), or (B) evidences of indebtedness issued by the corporation or other persons, or (C) assets (excluding cash dividends) or options or rights, then and in each such event provision shall be made so that the holders of Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of such distribution which they would have received had their Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the date of conversion, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 4 with respect to the rights of the holders of Preferred Stock. (iii) Adjustments for Recapitalization, Reclassification, Exchange and Substitution. If at any time or from time to time the Common Stock issuable upon conversion of the Preferred Stock shall be changed into the same or a different number of shares of any other class or classes of stock, whether by recapitalization, capital reorganization, reclassification or otherwise (other than a subdivision, combination of shares or merger or sale of assets transaction provided for above or in Section 2(b)), the Conversion Rate then in effect shall, concurrently with the effectiveness of such recapitalization, reorganization or reclassification, be proportionately adjusted such that the Preferred Stock shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion of the Preferred Stock immediately before that change. In addition, to the extent applicable in any reorganization or recapitalization, provision -7- <PAGE> 8 shall be made so that the holders of the Preferred Stock shall thereafter be entitled to receive upon conversion of the Preferred Stock the number of shares of stock or other securities or property of the Company or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such reorganization or recapitalization. (e) No Impairment. Except as provided in Section 6, the corporation will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Preferred Stock against impairment. (f) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price or the Conversion Rate pursuant to this Section 4, the corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price and the Conversion Rate at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of Preferred Stock. (g) Reservation of Stock Issuable Upon Conversion. This corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of the Preferred Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, this corporation will take such corporate action as may, in the opinion of counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. (h) Notices of Record Date. In the event that this corporation shall propose at any time: (i) to declare any dividend or distribution upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus; -8- <PAGE> 9 (ii) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (iii) to effect any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; (iv) (A) the acquisition of the corporation by another entity or the acquisition of another entity or entities by the corporation by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation, but excluding any merger effected exclusively for the purpose of changing the domicile of the corporation ); or (B) a sale of all or substantially all of the assets of the corporation, unless the corporation's shareholders of record as constituted immediately prior to such acquisition or sale will, immediately after such acquisition or sale (by virtue of securities issued as consideration for the corporation's acquisition or sale or otherwise) hold at least 50% of the voting power of the surviving or acquiring entity in approximately the same relative percentages after such acquisition or sale as before as such acquisition or sale; or (v) to liquidate, dissolve or wind up; then, in connection with each such event, this corporation shall send to the holders of Preferred Stock: (1) at least 20 days' prior written notice of the date on which a record shall be taken for such dividend, distribution or subscription rights (and specifying the date on which the holders of Common Stock shall be entitled thereto and the amount and character of such dividend, distribution or right) or for determining rights to vote in respect of the matters referred to in (iii), (iv) and (v) above; and (2) in the case of the matters referred to in (iii), (iv) and (v) above, at least 20 days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event or the record date for the determination of such holders if such record date is earlier). Each such written notice shall be delivered personally or given by first class mail, postage prepaid, addressed to the holders of the Preferred Stock at the address for each such holder as shown on the books of this corporation. 5. Redemption. The Preferred Stock shall not be redeemable. 6. Covenants. -9- <PAGE> 10 In addition to any other rights provided by law, this corporation shall not, without first obtaining the affirmative vote or written consent of the holders of more than fifty percent (50%) of the outstanding shares of Preferred Stock, voting together as a single class on an as-converted basis: (a) amend or repeal any provision of, or add any provision to, this corporation's Certificate of Incorporation or Bylaws if such action would amend or waive, alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of the Preferred Stock; (b) authorize or issue shares of any series or class of stock, or reclassify any outstanding shares into any series or class of stock, having any preference or priority superior to or on a parity with any such preference or priority of any series of Preferred Stock, or authorize shares of stock of any class or any bonds, debentures, notes or other obligations convertible into or exchangeable for, or having option rights to purchase, any shares of stock of this corporation having any preference or priority superior to or on a parity with any such preference or priority of the Preferred Stock; (c) effect in any transaction or series of transactions (i) a sale or other conveyance of all or substantially all of the assets of the corporation or any of its subsidiaries, or (ii) any consolidation, reorganization or merger involving the corporation or any of its subsidiaries, unless the corporation's or subsidiary's (as the case may be) shareholders of record as constituted immediately prior to such consolidation, reorganization or merger will, immediately after such consolidation, reorganization or merger (by virtue of securities issued in the consolidation, reorganization or merger or otherwise) hold at least 50% of the voting power of the surviving or acquiring entity in approximately the same relative percentages after such consolidation, reorganization or merger as before such consolidation, reorganization or merger, or (iii) any sale of more than 50% of the corporation's capital stock; or (d) pay or declare any dividend on any Common Stock (except dividends payable solely in shares of Common Stock) while the Preferred Stock remains outstanding, or apply any of its assets to the redemption, retirement, purchase or acquisition directly or indirectly, through subsidiaries or otherwise, of any of its capital stock, except from officers, directors or employees of or consultants to this corporation upon termination of employment, directorship or consulting relationship pursuant to the terms of stock purchase agreements or restricted stock purchase agreements entered into with such officers, directors, employees or consultants; (e) increase or decrease the authorized number of shares of Preferred Stock. FIFTH. The Corporation reserves the right to amend, alter, change, or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon the stockholders herein are granted subject to this right. -10- <PAGE> 11 SIXTH. The Corporation is to have perpetual existence. SEVENTH. Limitation of Liability. To the fullest extent permitted by the General Corporation Law of the State of Delaware as the same exists or as may hereafter be amended, a director of the Corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Indemnification. The corporation may indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that such person or his or her testator or intestate is or was a director, officer or employee of the corporation, or any predecessor of the corporation, or serves or served at any other enterprise as a director, officer or employee at the request of the corporation or any predecessor to the corporation. Amendments. Neither any amendment nor repeal of this Article SEVENTH, nor the adoption of any provision of the corporation's Certificate of Incorporation inconsistent with this Article SEVENTH, shall eliminate or reduce the effect of this Article SEVENTH, in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this Article SEVENTH, would accrue or arise, prior to such amendment, repeal, or adoption of an inconsistent provision. EIGHTH.In the event any shares of Preferred shall be redeemed or converted pursuant to the terms hereof, the shares so converted or redeemed shall not revert to the status of authorized but unissued shares, but instead shall be canceled and shall not be re-issuable by the corporation. NINTH. For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulations of the powers of the corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that notwithstanding the provisions of Article FOURTH, Section 3 above, effective upon the closing of a Qualified Public Offering (as defined below) and at such time as the corporation is no longer subject to Section 2115 of the California Corporations Code: 1. The management of the business and the conduct of the affairs of the corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed exclusively by one or more resolutions adopted from time to time by the Board of Directors. The Board of Directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the closing of a Qualified Public Offering and at -11- <PAGE> 12 such time as the corporation is no longer subject to Section 2115 of the California Corporations Code, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the closing of Qualified Public Offering and at such time as the corporation is no longer subject to Section 2115 of the California Corporations Code, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the closing of a Qualified Public Offering and at such time as the corporation is no longer subject to Section 2115 of the California Corporations Code, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Each holder of voting stock or of any class or series thereof shall be entitled to cumulative voting rights as to the directors to be elected by each series or class or the combined classes in accordance with the provisions of Section 214 of the Delaware General Corporation Law. Notwithstanding the foregoing provisions of this Article, each director shall serve until his or her successor is duly elected and qualified or until his or her death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal, or other causes shall be filled by either (i) the affirmative vote of the holders of a majority of the voting power of the then outstanding shares of voting stock of the corporation entitled to vote generally in the election of directors (the "Voting Stock") voting together as a single class; or (ii) by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. Newly created directorships resulting from any increase in the number of directors shall, unless the Board of Directors determines by resolution that any such newly created directorship shall be filled by the stockholders, be filled only by the affirmative vote of the directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. 2. The directors of the corporation need not be elected by written ballot unless a stockholder demands election by written ballot at the meeting and before voting begins, or unless the Bylaws so provide. 3. The affirmative vote of sixty-six and two-thirds percent (66-2/3%) of the voting power of the then outstanding shares of Voting Stock, voting together as a single class, shall be required for the adoption, amendment or repeal of the following sections of the corporation's Bylaws by the stockholders of this corporation: 2.3 (Annual Meeting) and 2.4 (Special Meeting). 4. No action shall be taken by the stockholders of the corporation except at an annual or special meeting of the stockholders called in accordance with the Bylaws and no action shall be taken by the stockholders by written consent. -12- <PAGE> 13 5. Advance notice of stockholder nomination for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the corporation shall be given in the manner provided in the Bylaws of the corporation. 6. Any director, or the entire Board of Directors, may be removed from office at any time (i) with cause by the affirmative vote of the holders of at least a majority of the voting power of all of the then-outstanding shares of the Voting Stock, voting together as a single class; or (ii) without cause by the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock. "Qualified Public Offering" as used in this Certificate of Incorporation shall mean the corporation's initial firm commitment underwritten public offering pursuant to an effective registration under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the corporation to the public. TENTH. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws of the corporation. ELEVENTH. Following a Qualified Public Offering and at such time as the corporation is no longer subject to Section 2115 of the California Corporations Code, notwithstanding any other provision in this Certificate of Incorporation or in any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative voting of the holders of any particular class or series of the Voting Stock required by law, this Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least sixty six and two-thirds percent (66-2/3%) of the voting power of all of the then outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend or repeal Article NINTH or this Article ELEVENTH. TWELFTH. The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter described by statute, except as provided in Article ELEVENTH of this Certificate, and all rights conferred upon the stockholders herein are granted subject to this right. THIRTEENTH. Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside of the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. FOURTEENTH. The name and mailing address of the incorporator are: Marianne Stark Bradley Senior Legal Assistant -13- <PAGE> 14 Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304 -14- <PAGE> 15 The undersigned incorporator hereby acknowledges that the foregoing Certificate of Incorporation is the act and deed of such incorporator and that the facts stated therein are true. Dated: December __, 1999 /s/ MARIANNE STARK BRADLEY ---------------------------------- Incorporator -15- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3.1.1 <SEQUENCE>4 <DESCRIPTION>EX-3.1.1 <TEXT> <PAGE> 1 EXHIBIT 3.1.1 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF SKYSTREAM NETWORKS CORPORATION SkyStream Networks Corporation, a corporation organized and existing under the laws of Delaware (the "Company"), pursuant to the provisions of the General Corporation Law of the State of Delaware (the "DGCL"), DOES HEREBY CERTIFY as follows: FIRST. The Certificate of Incorporation of the Company is hereby amended by deleting the first paragraph of ARTICLE FIRST thereof in its present form and substituting therefor a new ARTICLE FIRST in the following form: "FIRST. The name of this corporation is SkyStream Networks Inc." SECOND. The Certificate of Incorporation of the Company is hereby amended by deleting the first paragraph of ARTICLE FOURTH thereof in its present form and substituting therefor a new first paragraph of ARTICLE FOURTH in the following form: "FOURTH. This corporation is authorized to issue two classes of shares to be designated respectively Common Stock and Preferred Stock. The total number of shares of Common Stock this corporation shall have authority to issue is 75,000,000, $0.001 par value per share, and the total number of shares of Preferred Stock this corporation shall have authority to issue is 15,313,248, $0.001 par value per share, 6,637,500 of which shares of Preferred Stock shall be designated Series A Preferred Stock ("Series A Preferred"), 3,419,748 of which shares of Preferred Stock shall be designated Series B Preferred Stock ("Series B Preferred") and 5,256,000 of which shares of Preferred Stock shall be designated Series C Preferred Stock ("Series C Preferred"). Upon the filing of this Certificate of Amendment, each outstanding share of Common Stock of this corporation shall be split up and converted into one and one-half (1.5) shares of Common Stock, each outstanding share of Series A Preferred Stock shall be split up and converted into one and one-half (1.5) shares of Series A Preferred Stock, each share of Series B Preferred Stock shall be split up and converted into one and one-half (1.5) shares of Series B Preferred Stock and each share of Series C Preferred Stock shall be split up and converted into one and one-half (1.5) shares of Series C Preferred Stock. No fractional shares will be issued upon such stock split; any fractional shares will be rounded to the nearest whole share." <PAGE> 2 THIRD. The Certificate of Incorporation of the Company is hereby amended by deleting the Section 1 of ARTICLE FOURTH thereof in its present form and substituting therefor a new Section 1 of ARTICLE FOURTH in the following form: "1. Dividends. The holders of the Series A Preferred, Series B Preferred and Series C Preferred shall be entitled to receive, when and as declared by the Board of Directors, dividends out of funds legally available therefore, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this corporation) on the Common Stock of this corporation, at the rate of $0.0533, $0.15 and $0.33 per share, per annum, respectively. Such dividends shall not be cumulative and no right to such dividends shall accrue to holders of Preferred Stock unless declared by the Board of Directors. No dividends or other distributions shall be made with respect to the Common Stock, other than dividends payable solely in Common Stock, unless at the same time an equivalent dividend with respect to the Preferred Stock has been made." FOURTH. The Certificate of Incorporation of the Company is hereby amended by deleting the Section 2(a) of ARTICLE FOURTH thereof in its present form and substituting therefor a new Section 2(a) of ARTICLE FOURTH in the following form: "2(a) The holders of the Preferred shall be entitled to receive, prior and in preference to any distribution of any assets or property of the corporation to the holders of the Common Stock by reason of their ownership thereof, the amount of $0.6666 per share for each share of Series A Preferred, $1.50 per share for each share of Series B Preferred or $3.333 per share for each share of Series C Preferred, respectively, then held by them, adjusted for any combinations, consolidations, stock distributions or dividends, or recapitalizations with respect to such shares and, in addition, an amount equal to all declared but unpaid dividends, if any, on the Series A Preferred, Series B Preferred or Series C Preferred, respectively. If the assets and property thus distributed among the holders of the Series A Preferred, Series B Preferred and Series C Preferred shall be insufficient to permit the payment to such holders of the full preferential amount, then the entire assets and property of the corporation legally available for distribution shall be distributed ratably according to their respective liquidation preferences among the holders of the Series A Preferred, Series B Preferred and Series C Preferred in proportion to the number of shares of Series A, Series B Preferred and Series C Preferred held by each holder. After payment has been made to the holders of the Series A Preferred, Series B Preferred and Series C Preferred of the full amounts to which they shall be entitled as aforesaid, the remaining assets of the corporation available for distribution to the shareholders shall be distributed ratably among the holders of Series A Preferred, Series 2 <PAGE> 3 B Preferred, Series C Preferred and Common Stock based on the number of shares of Common Stock held by each (assuming conversion of all such Series A Preferred, Series B Preferred and Series C Preferred) until such time as (i) the holders of Series A Preferred shall have received, inclusive of the $0.6666 per share provided for in the immediately prior paragraph, an aggregate of $2.00 per share for each share of Series A Preferred then held by them adjusted for any combinations, consolidations, stock distributions or dividends, or recapitalizations with respect to such shares and, in addition, an amount equal to all declared but unpaid dividends, if any, on the Series A Preferred, (ii) the holders of Series B Preferred shall have received, inclusive of the $1.50 per share provided in the immediately prior paragraph, an aggregate of $3.6667 per share for each share of Series B Preferred then held by them adjusted for any combinations, consolidations, stock distributions or dividends, or recapitalizations with respect to such shares and, in addition, an amount equal to all declared but unpaid dividends, if any, on the Series B Preferred and (iii) the holders of Series C Preferred shall have received, inclusive of the $3.333 per share provided in the immediately prior paragraph, an aggregate of $5.00 per share for each share of Series C Preferred then held by them adjusted for any combinations, stock distributions or dividends, or recapitalizations with respect to such shares and, in addition, an amount equal to all declared but unpaid dividends, or recapitalizations with respect to such shares and, in addition, an amount equal to all declared but unpaid dividends, if any, on the Series C Preferred. After payment has been made to the holders of the Series A Preferred of an aggregate of $2.00 per share for each share of Series A Preferred then held by them, to the holders of the Series B Preferred of an aggregate of $3.666 per share for each share of Series B Preferred then held by them and to the holders of the Series C Preferred of an aggregate of $5.00 per share for each share of Series C Preferred then held by them, the remaining assets and property of this corporation legally available for distribution shall be distributed ratably among the holders of Common Stock. FIFTH. The Certificate of Incorporation of the Company is hereby amended by deleting the Section 3(b) of ARTICLE FOURTH thereof in its present form and substituting therefor a new Section 3(b)) of ARTICLE FOURTH in the following form: "(b) Voting for Directors. At any such time as at least 4,500,000 shares of Preferred Stock are outstanding (as adjusted for combinations, consolidations, stock distributions or dividends, or recapitalizations), the holders of the shares of Preferred Stock voting as a class on an as-converted basis shall be entitled to elect two (2) directors. The holders of Common Stock voting as a separate class shall be entitled to elect one (1) director. The remaining directors shall be elected by the holders of the Preferred Stock and Common Stock voting as provided in Section 3(a). At any such time as less than 4,500,000 shares of Preferred Stock are outstanding (as adjusted for combinations, consolidations, stock distributions or dividends, or recapitalizations), then directors shall be elected by the holders of the Preferred Stock and Common Stock voting as provided in Section 3(a). A vacancy on the Board of Directors occurring because of the death, resignation or removal of a director elected by the holders of Preferred Stock 3 <PAGE> 4 voting as a separate class shall be filled by the vote or written consent of the holders of a majority of the Preferred Stock. Any vacancy occurring because of the death, resignation or removal of a director elected by the holders of Common Stock voting as a separate class shall be filled by the vote or written consent of the holders of a majority of the Common Stock. Any vacancy occurring because of the death, resignation or removal of a director elected by the holders of the Preferred Stock and Common Stock voting together as a single class shall be filled by the vote or written consent of the holders of a majority of the Preferred Stock and Common Stock voting as provided in Section 3(a). A director may be removed from the Board of Directors with or without cause by the vote or consent of the holders of the outstanding class or series with voting power entitled to elect him in accordance with this Section 3(b) and the General Corporation Law of the State of Delaware." (c) Cumulative Voting. The holders of Common Stock and the holders of Preferred Stock shall be entitled to cumulative voting rights as to the directors to be elected by each class or the combined classes (as provided in Section 3(b) above), in accordance with the provisions of Section 214 of the General Corporation Law of the State of Delaware. SIXTH. The Certificate of Incorporation of the Company is hereby amended by deleting the Section 4(a) of ARTICLE FOURTH thereof in its present form and substituting therefor a new Section 4(a) of ARTICLE FOURTH in the following form: "(a) Right to Convert. Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the corporation or any transfer agent for the Preferred Stock. Each share of Preferred Stock shall be convertible into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Conversion Price (as hereinafter defined) per share in effect for the applicable series of Preferred Stock into the per share Conversion Value (as hereinafter defined) of such series. The Conversion Price per share of Series A Preferred shall be $0.6666 and the per share Conversion Value of Series A Preferred shall be $0.6666. The Conversion Price per share of Series B Preferred shall be $1.50 and the per share Conversion Value of Series B Preferred shall be $1.50. The Conversion Price per share of Series C Preferred shall be $3.333 and the per share Conversion Value of Series C Preferred shall be $3.333. The Conversion Price of Series A, Series B and Series C Preferred shall be subject to adjustment from time to time as provided below. The number of shares of Common Stock to which a share of Preferred is convertible is hereinafter referred to as the Conversion Rate of such share. SEVENTH. The Certificate of Incorporation of the Company is hereby amended by deleting the Section 4(b) of ARTICLE FOURTH thereof in its present form and substituting therefor a new Section 4(b) of ARTICLE FOURTH in the following form: 4 <PAGE> 5 (b) Automatic Conversion. Each share of Preferred Stock shall automatically be converted into shares of Common Stock at the then effective Conversion Rate upon the earlier of (i) the date specified by written consent or agreement of the holders of a majority of the then-outstanding Preferred Stock (on an as-converted basis) or (ii) the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the corporation with an aggregate per share offering price to the public of not less than Five Dollars and 00 Cents ($5.00) (as adjusted for combinations, consolidations, stock distributions or dividends, or recapitalizations) and an aggregate offering price of not less than Fifteen Million Dollars ($15,000,000). In the event of the automatic conversion of the Preferred Stock upon a public offering as aforesaid, the person(s) entitled to receive the Common Stock issuable upon such conversion of Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. EIGHTH: The amendment of the Certificate of Incorporation of the Company set forth in this Certificate of Amendment has been duly adopted in accordance with the provisions of Section 242 of the DGCL by (a) the Board of Directors of the Company having duly adopted a resolution setting forth such amendment and declaring its advisability and submitting it to its stockholders for approval and (b) the stockholders of the Company having duly adopted such amendment by written consent. IN WITNESS WHEREOF, the Company has caused this Certificate of Amendment to be signed by James D. Olson, its President and Chief Executive Officer, and attested by Susan Ketcham, its Secretary, this ________ day of February, 2000. SKYSTREAM NETWORKS CORPORATION By ------------------------------------- James D. Olson President and Chief Executive Officer ATTEST: - -------------------------------- Susan Ketcham President 5 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3.1.2 <SEQUENCE>5 <DESCRIPTION>EX-3.1.2 <TEXT> <PAGE> 1 EXHIBIT 3.1.2 RESTATED CERTIFICATE OF INCORPORATION OF SKYSTREAM NETWORKS CORPORATION SkyStream Networks Corporation, a corporation organized and existing under laws of the State of Delaware, hereby certifies as follows: 1. The name of the Corporation is SkyStream Networks Corporation. The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the state of Delaware on December 17, 1999 and was amended on March __, 2000. 2. Pursuant to Sections 228, 242 and 245 of the General Corporation Laws of the State of Delaware, this Restated Certificate of Incorporation restates and integrates and further amends the provisions of the Certificate of Incorporation of this corporation. 3. The text of the Certificate of Incorporation as heretofore amended or supplemented is hereby amended and restated to read in its entirety as follows: FIRST: The name of this corporation is SkyStream Networks Corporation. SECOND: The address of the corporation's registered office in the State of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle, State of Delaware. The name of its registered agent at such address is The Corporation Trust Company. THIRD: The purpose of this corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is 360,000,000 shares. 350,000,000 shares shall be Common Stock, par value $.001 per share, and 10,000,000 shares shall be Preferred Stock, par value $.001 per share. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is authorized to fix the number of shares of any series of Preferred Stock and to determine the designation of any such series. The Board of Directors is also authorized to determine and alter the powers, rights, preferences and privileges and the qualifications, limitations and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock and within the limitations or restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series, to determine the designation of any series, and to fix the number of shares of any series. In case the number of shares of any series shall be so decreased, the share constituting such decrease shall resume <PAGE> 2 the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. FIFTH: The Corporation reserves the right to amend, alter, change, or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon the stockholders herein are granted subject to this right. SIXTH. The Corporation is to have perpetual existence. SEVENTH. Limitation of Liability. To the fullest extent permitted by the General Corporation Law of the State of Delaware as the same exists or as may hereafter be amended, a director of the Corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Indemnification. The corporation may indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that such person or his or her testator or intestate is or was a director, officer or employee of the corporation, or any predecessor of the corporation, or serves or served at any other enterprise as a director, officer or employee at the request of the corporation or any predecessor to the corporation. Amendments. Neither any amendment nor repeal of this Article SEVENTH, nor the adoption of any provision of the corporation's Certificate of Incorporation inconsistent with this Article SEVENTH, shall eliminate or reduce the effect of this Article SEVENTH, in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this Article SEVENTH, would accrue or arise, prior to such amendment, repeal, or adoption of an inconsistent provision. EIGHTH. For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulations of the powers of the corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that effective upon the closing of a Qualified Public Offering (as defined below) and at such time as the corporation is no longer subject to Section 2115 of the California Corporations Code: 1. The management of the business and the conduct of the affairs of the corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed exclusively by one or more resolutions adopted from time to time by the Board of Directors. The Board of Directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the date hereof, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the date hereof, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the date <PAGE> 3 hereof, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Each holder of voting stock or of any class or series thereof shall be entitled to cumulative voting rights as to the directors to be elected by each series or class or the combined classes in accordance with the provisions of Section 214 of the Delaware General Corporation Law. Notwithstanding the foregoing provisions of this Article, each director shall serve until his or her successor is duly elected and qualified or until his or her death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal, or other causes shall be filled by either (i) the affirmative vote of the holders of a majority of the voting power of the then outstanding shares of voting stock of the corporation entitled to vote generally in the election of directors (the "Voting Stock") voting together as a single class; or (ii) by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. Newly created directorships resulting from any increase in the number of directors shall, unless the Board of Directors determines by resolution that any such newly created directorship shall be filled by the stockholders, be filled only by the affirmative vote of the directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. 2. The directors of the corporation need not be elected by written ballot unless a stockholder demands election by written ballot at the meeting and before voting begins, or unless the Bylaws so provide. 3. The affirmative vote of sixty-six and two-thirds percent (66-2/3%) of the voting power of the then outstanding shares of Voting Stock, voting together as a single class, shall be required for the adoption, amendment or repeal of the following sections of the corporation's Bylaws by the stockholders of this corporation: 2.3 (Annual Meeting) and 2.4 (Special Meeting). 4. No action shall be taken by the stockholders of the corporation except at an annual or special meeting of the stockholders called in accordance with the Bylaws and no action shall be taken by the stockholders by written consent. 5. Advance notice of stockholder nomination for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the corporation shall be given in the manner provided in the Bylaws of the corporation. 6. Any director, or the entire Board of Directors, may be removed from office at any time (i) with cause by the affirmative vote of the holders of at least a majority of the voting power of all of the then-outstanding shares of the Voting Stock, voting together as a single class; or (ii) without cause <PAGE> 4 by the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock. "Qualified Public Offering" as used in this Certificate of Incorporation shall mean the corporation's initial firm commitment underwritten public offering pursuant to an effective registration under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the corporation to the public. NINTH. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws of the corporation. TENTH. Notwithstanding any other provision in this Certificate of Incorporation or in any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative voting of the holders of any particular class or series of the Voting Stock required by law, this Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least sixty six and two-thirds percent (66-2/3%) of the voting power of all of the then outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend or repeal Article EIGHTH or this Article TENTH. ELEVENTH. The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter described by statute, except as provided in Article TENTH of this Certificate, and all rights conferred upon the stockholders herein are granted subject to this right. TWELFTH. Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside of the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. The foregoing Restated Certificate of Incorporation has been duly approved by the Board of Directors. The foregoing Restated Certificate of Incorporation has been duly approved by the required vote of stockholders in accordance with Section 228 of the Delaware General Corporation Law. The total number of outstanding shares of the Corporation is __________ shares of Common Stock. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50% of the Common Stock. -4- <PAGE> 5 IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been signed this ____ day of May, 2000. SKYSTREAM NETWORKS CORPORATION By: --------------------------------------- James D. Olson President and Chief Executive Officer ATTEST: - --------------------------- Susan Ketcham, Secretary -5- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3.2 <SEQUENCE>6 <DESCRIPTION>EX-3.2 <TEXT> <PAGE> 1 EXHIBIT 3.2 BYLAWS OF SKYSTREAM NETWORKS CORPORATION ARTICLE 1 OFFICES Section 1.1. Registered Office. The registered office of the Corporation which is required by the state of Delaware to be maintained in the state of Delaware shall be the registered office named in the charter documents of the Corporation, or such other office as may be designated from time to time by the Board of Directors in the manner provided by law. Section 1.2. Other Offices. The Corporation may also have offices at such other places both within and without the state of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require . ARTICLE 2 STOCKHOLDERS Section 2.1. Place of Meetings. All meetings of the stockholders shall be held at the principal office of the Corporation, or at such other place within or without the state of Delaware as shall be specified or fixed in the notices or waivers of notice thereof. Section 2.2. Quorum; Adjournment of Meetings. Unless otherwise required by law or provided in the charter documents of the Corporation or these Bylaws, (i) the holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at any meeting of stockholders for the transaction of business, (ii) in all matters other than election of directors, the affirmative vote of the holders of a majority of such stock so present or represented at any meeting of stockholders at which a quorum is present shall constitute the act of the stockholders, and (iii) where a separate vote by a class or classes is required, a majority of the outstanding shares of such class or classes, present in person or represented by proxy shall constitute a quorum entitled to take action with respect to that vote on that matter and the affirmative vote of the majority of the shares of such class or classes present in person or represented by proxy at the meeting shall be the act of such class. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, subject to the provisions of clauses (ii) and (iii) above. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. <PAGE> 2 Notwithstanding the other provisions of the charter documents of the Corporation or these Bylaws, the chairman of the meeting or the holders of a majority of the issued and outstanding stock, present in person or represented by proxy and entitled to vote thereat, at any meeting of stockholders, whether or not a quorum is present, shall have the power to adjourn such meeting from time to time, without any notice other than announcement at the meeting of the time and place of the holding of the adjourned meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at such meeting. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally called. Section 2.3. Annual Meeting. (a) An annual meeting of the stockholders, for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting, shall be held at such place (within or without the state of Delaware), on such date, and at such time as the Board of Directors shall fix and set forth in the notice of the meeting, which date shall be within thirteen (13) months subsequent to the last annual meeting of stockholders. (b) At an annual meeting of stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (A) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (B) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (C) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than one hundred twenty (120) calendar days in advance of the date specified in the corporation's proxy statement released to stockholders in connection with the previous year's annual meeting of stockholders; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received a reasonable time before the solicitation is made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, (iv) any material interest of the stockholder in such business and (v) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934 Act"), in his capacity as a proponent to a stockholder proposal. Notwithstanding the foregoing, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholder's meeting, stockholders must provide notice as required by the regulations promulgated under the 1934 Act. Notwithstanding anything in these -2- <PAGE> 3 Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this paragraph (b). The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this paragraph (b), and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. (c) Only persons who are nominated in accordance with the procedures set forth in this paragraph (c) shall be eligible for election as Directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the corporation entitled to vote in the election of Directors at the meeting who complies with the notice procedures set forth in this paragraph (c). Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation in accordance with the provisions of paragraph (b) of this Section 2.2. Such stockholder's notice shall set forth (i) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a Director: (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the corporation which are beneficially owned by such person, (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, and (E) any other information relating to such person that is required to be disclosed in solicitations of proxies for elections of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the 1934 Act (including without limitation such person's written consent to being named in the proxy statement, if any, as a nominee and to serving as a Director if elected); and (ii) as to such stockholder giving notice, the information required to be provided pursuant to paragraph (b) of this Section 2.2. At the request of the Board of Directors, any person nominated by a stockholder for election as a Director shall furnish to the Secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a Director of the corporation unless nominated in accordance with the procedures set forth in this paragraph (c). The chairman of the meeting shall, if the facts warrants, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare at the meeting, and the defective nomination shall be disregarded. Section 2.4. Special Meetings. Special meetings of stockholders may be called at any time by a majority of the Board of Directors, by the Chairman of the Board, the Chief Executive Officer or by the holders of at least 10% of the shares of the corporation's capital stock entitled to vote at such meeting, but such special meetings may not be called by any other person or persons; provided, however, that effective upon closing of the Corporation's initial public offering of shares of its Common Stock pursuant to an effective registration statement filed with the Securities and Exchange Commission (the "IPO") and the corporation is no longer subject to Section 2115 of the California Corporation Code, special meetings of stockholders may be called at any time by a majority of the -3- <PAGE> 4 Board of Directors, by the Chairman of the Board, by the Chief Executive Officer or by the holders of at least 50% of the shares of the corporation's capital stock entitled to vote at such meeting, but such special meetings may not be called by any other person or persons. Section 2.5. Record Date. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders, or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors of the Corporation may fix a date as the record date for any such of stockholders, which record date shall not precede the date on which the resolutions fixing the record date are adopted and which record date shall not be more than sixty (60) days nor less than ten (10) days before the date of such meeting of stockholders, nor more than sixty (60) days prior to any other action to which such record date relates. If the Board of Directors does not fix a record date for any meeting of the stockholders, the record date for determining stockholders entitled to notice of or to vote at such meeting shall be at the close of business on the day next preceding the day on which notice is given, or, in accordance with Article 7, Section 7.3 of these Bylaws notice is waived, at the close of business on the day next preceding the day on which the meeting is held. The record date for determining stockholders for any other purpose (other than the consenting to corporate action in writing without a meeting) shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. For the purpose of determining the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If the Board of Directors does not fix the record date, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation at its registered office in the state of incorporation of the Corporation or at its principal place of business. If the Board of Directors does not fix the record date, and prior action by the Board of Directors is necessary, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. Section 2.6. Notice of Meetings. Written notice of the place, date and hour of all meetings, and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be given by or at the direction of the President, the Secretary or the other person(s) calling the meeting to each stockholder entitled to vote thereat not less than ten (10) nor more than sixty (60) days before the date of the meeting. Such notice may be delivered either personally or by mail. -4- <PAGE> 5 If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder's address as it appears on the records of the Corporation. Section 2.7. Stockholder List. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the number of shares registered in the name of such stockholder, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The stockholder list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 2.8. Proxies. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to a corporate action in writing without a meeting may authorize another person or persons to act for him by proxy. Proxies for use at any meeting of stockholders shall be filed with the Secretary, or such other officer as the Board of Directors may from time to time determine by resolution, before or at the time of the meeting. All proxies shall be received and taken charge of and all ballots shall be received and canvassed by the secretary of the meeting, who shall decide all questions touching upon the qualification of voters, the validity of the proxies, and the acceptance or rejection of votes, unless an inspector or inspectors shall have been appointed by the chairman of the meeting, in which event such inspector or inspectors shall decide all such questions. No proxy shall be valid after three (3) years from its date, unless the proxy provides for a longer period. Each proxy shall be revocable unless expressly provided therein to be irrevocable and coupled with an interest sufficient in law to support an irrevocable power. Should a proxy designate two or more persons to act as proxies, unless such instrument shall provide the contrary, a majority of such persons present at any meeting at which their powers thereunder are to be exercised shall have and may exercise all the powers of voting or giving consents thereby conferred, or if only one be present, then such powers may be exercised by that one; or, if an even number attend and a majority do not agree on any particular issue, each proxy so attending shall be entitled to exercise such powers in respect of such portion of the shares as is equal to the reciprocal of the fraction equal to the number of proxies representing such shares divided by the total number of shares represented by such proxies. Section 2.9. Voting; Election; Inspectors. Unless otherwise required by law or provided for in the charter documents of the Corporation, each stockholder shall on each matter submitted to a vote at a meeting of stockholders have one vote for each share of the stock entitled to vote which is registered in his name on the record date for the meeting. For the purposes hereof, each election to fill a directorship shall constitute a separate matter. Shares registered in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxy as the bylaws (or comparable body) of such corporation may determine. Shares registered in the name of a deceased person may be voted by the executor or administrator of such person's estate, either in person or by proxy. -5- <PAGE> 6 All voting, except as required by the charter documents of the Corporation or where otherwise required by law, may be by a voice vote; provided, however, upon request of the chairman of the meeting or upon demand therefor by stockholders holding a majority of the issued and outstanding stock present in person or by proxy at any meeting a stock vote shall be taken. Every stock vote shall be taken by written ballots, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. The directors of the corporation need not be elected by written ballot unless a stockholder demands election by written ballot at the meeting and before voting begins, or unless the Bylaws so provide. At any meeting at which a vote is taken by written ballots, the chairman of the meeting may appoint one or more inspectors; each of whom shall subscribe an oath or affirmation to execute faithfully the duties of inspector at such meeting with strict impartiality and according to the best of such inspector's ability. Such inspector shall receive the written ballots, count the votes, and make and sign a certificate of the result thereof. The chairman of the meeting may appoint any person to serve as inspector, except no candidate for the office of director shall be appointed as an inspector. Each holder of voting stock or of any class or series thereof shall be entitled to cumulative voting rights as to the directors to be elected by each series or class or the combined classes in accordance with the provisions of Section 214 of the Delaware General Corporation Law. Section 2.10. Conduct of Meetings. The meetings of the stockholders shall be presided over by the President, or, if the President is not present, by a chairman elected at the meeting. The Secretary of the Corporation, if present, shall act as secretary of such meetings, or, if the Secretary is not present, an Assistant Secretary shall so act; if neither the Secretary of or Assistant Secretary is present, then a secretary shall be appointed by the chairman of the meeting. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to the chairman in order. Section 2.11. Treasury Stock. The Corporation shall not vote, directly or indirectly, shares of its own stock owned by it and such shares shall not be counted for quorum purposes. Nothing in this Section 2.11 shall be construed as limiting the right of the Corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. Section 2.12. Action Without Meeting. Unless otherwise provided in the Certificate of Incorporation, any action which may be taken at any annual or special meeting of stockholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under -6- <PAGE> 7 any section of the General Corporation Law of Delaware if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written notice and written consent have been given as provided in Section 228 of the General Corporation Law of Delaware. Effective upon the closing of the Corporation's IPO and the date that the Corporation is no longer subject to Section 2115 of the California Corporations Code, no action of stockholders shall be taken by the stockholders except at an annual or special meeting of stockholders called in accordance with the notice requirements of Section 2.6 above and no action of the stockholders shall be taken by written consent. ARTICLE 3 BOARD OF DIRECTORS Section 3.1. Power; Number; Term of Office. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, and, subject to the restrictions imposed by law or the charter documents of the Corporation, the Board of Directors may exercise all the powers of the Corporation. Notwithstanding anything contained in these Bylaws to the contrary, at any time that a valid agreement among the stockholders is in force with respect to the nomination, election and removal of directors or similar matters, such agreement is hereby recognized and directors shall be nominated, elected and removed in accordance therewith. The number of directors which shall constitute the whole Board of Directors shall be determined from time to time by the Board of Directors (provided that no decrease in the number of directors which would have the effect of shortening the term of an incumbent director may be made by the Board of Directors). Each director shall hold office for the term for which such director is elected, and until such director's successor shall have been elected and qualified or until such director's earlier death, resignation or removal. Unless otherwise provided in the charter documents of the Corporation, directors need not be stockholders nor resident of the state of Delaware. Section 3.2. Classes of Directors. Effective upon the closing of the Corporation's IPO and the date that the Corporation is no longer subject to Section 2115 of the California Corporations Code, the Directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the closing of the IPO, the term of office of the Class I Directors shall expire and Class I Directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the closing of the IPO, the term of office of the Class II Directors shall expire and Class II Directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class III Directors shall expire and Class III Directors shall be elected for a full term of three years. At each succeeding annual meeting -7- <PAGE> 8 of stockholders, Directors shall be elected for a full term of three years to succeed the Directors of the class whose terms expire at such annual meeting. Notwithstanding the foregoing provisions of this Article, each Director shall serve until his successor is duly elected and qualified or until his earlier death, resignation or removal. No decrease in the number of Directors constituting the Board of Directors shall shorten the term of any incumbent Director. Section 3.3. Quorum; Voting. Unless otherwise provided in the charter documents of the Corporation, a majority of the number of directors then in office shall constitute a quorum for the transaction of business of the Board of Directors and the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 3.4. Place of Meetings; Order of Business. The directors may hold their meetings and may have an office and keep the books of the Corporation, except as otherwise provided by law, in such place or places, within or without the state of incorporation of the Corporation, as the Board of Directors may from time to time determine. At all meetings of the Board of Directors business shall be transacted in such order as shall from time to time be determined by the President or by the Board of Directors. Section 3.5. First Meeting. Each newly elected Board of Directors may hold its first meeting for the purpose of organization and the transaction of business, if a quorum is present, immediately after and at the same place as the annual meeting of the stockholders. Notice of such meeting shall not be required. At the first meeting of the Board of Directors in each year at which a quorum shall be present, held after the annual meeting of stockholders, the Board of Directors shall elect the officers of the Corporation. Section 3.6. Regular Meetings. Regular meetings of the Board of Directors shall be held at such times and places as shall be designated from time to time by the President, or in the President's absence, by another officer of the Corporation. Notice of such regular meetings shall not be required. Section 3.7. Special Meetings. Special meetings of the Board of Directors may be called by the President, or on the written request of any director, by the Secretary, in each case on at least twenty-four (24) hours' personal, written, telegraphic, cable or wireless notice to each director. Such notice, or any waiver thereof pursuant to Article 7, Section 7.3 hereof, need not state the purpose or purposes of such meeting, except as may otherwise be required by law or provided for in the charter documents of the Corporation or these Bylaws. Meetings may be held at any time without notice if all the directors are present or if those not present waive notice of the meeting in writing. Section 3.8. Removal. Any director or the entire Board of Directors may be removed as set forth in the Certificate of Incorporation of the corporation, as amended from time to time. Section 3.9. Vacancies; Increases in the Number of Directors. Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective. If -8- <PAGE> 9 the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. Unless otherwise provided in the Certificate of Incorporation or these bylaws, vacancies in the board of directors may be filled by a majority of the remaining directors, even if less than a quorum, or by a sole remaining director; however, a vacancy created by the removal of a director by the vote or written consent of the stockholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the required quorum), or by the unanimous written consent of all shares entitled to vote thereon. Each director so elected shall hold office until the next annual meeting of the stockholders and until a successor has been elected and qualified. Notwithstanding the foregoing, however, effective upon the closing of the Corporation's IPO and the date that the Corporation is no longer subject to Section 2115 of the California Corporations Code, the number of directors which shall constitute the whole Board of Directors shall be fixed exclusively by one or more resolutions adopted from time to time by the Board of Directors. Unless otherwise provided in the Certificate of Incorporation or these bylaws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. -9- <PAGE> 10 Section 3.10. Compensation. Directors and members of standing committees may receive such compensation as the Board of Directors from time to time shall determine to be appropriate, and shall be reimbursed for all reasonable expenses incurred in attending and returning from meetings of the board of Directors. Section 3.11. Action Without a Meeting: Telephone Conference Meeting. Unless otherwise restricted by the charter documents of the Corporation, any action required or permitted to be taken at any of the Board of Directors or any committee designated by the Board of Directors may be taken without a meeting if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Such consent shall have the same force and effect as a unanimous vote at a meeting, and may be stated as such in any document or instrument filed with the Secretary of State of the state of incorporation of the Corporation. Unless otherwise restricted by the charter documents of the Corporation, subject to the requirement for notice of meetings, members of the Board of Directors, or members of any committee designated by the Board of Directors, may participate in a meeting of such Board of Directors or committee, as the case may be, by means of a conference telephone connection or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 3.12. Approval or Ratification of Acts or Contracts by Stockholders. The Board of Directors in its discretion may submit any act or contract for approval or ratification at any annual meeting of the stockholders, or at any special meeting of the stockholders called for the purpose of considering any such act or contract, and any act or contract that shall be approved or be ratified by the vote of the stockholders holding a majority of the issued and outstanding shares of stock of the Corporation entitled to vote and present in person or by proxy at such meeting (provided that a quorum is present) shall be as valid and as binding upon the Corporation and upon all the stockholders as if it has been approved or ratified by every stockholder of the Corporation. In addition, any such act or contract may be approved or ratified by the written consent of stockholders holding a majority of the issued and outstanding shares of capital stock of the Corporation entitled to vote, and such consent shall be as valid and binding upon the Corporation and upon all the stockholders as if it had been approved or ratified by every stockholder of the Corporation. ARTICLE 4 COMMITTEES Section 4.1. Designation; Powers. The Board of Directors may, by resolution passed by a majority of the board, designate one or more committees, including, if they shall so determine, an executive committee and a compensation committee, with each such committee to consist of one or more of the directors of the Corporation. Any such designated committee shall have and may exercise such of the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation as may be provided in such resolution, except that no such committee shall have the power or authority of the Board of Directors in reference of amending the -10- <PAGE> 11 charter documents of the Corporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution of the Corporation, or amending, altering or repealing these Bylaws or adopting new bylaws for the Corporation. Any such designated committee may authorize the seal of the Corporation to be affixed to all papers which may require it. In addition to the above, such committee or committees shall have such other powers and limitations of authority as may be determined from time to time by the Board of Directors. Section 4.2. Procedure; Meetings; Quorum. Any committee designated pursuant to this Article 4 shall keep regular minutes of its actions and proceedings in a book provided for that purpose and report the same to the Board of Directors at its meeting next succeeding such action, shall fix its own rules or procedures, and shall meet at such times and at such place or places as may be provided by such rules, or by such committee or the board of Directors. Should a committee fail to fix its own rules, the provisions of these Bylaws, pertaining to the calling of meetings and conduct of business by the Board of Directors, shall apply as nearly as may be possible. At every meeting of any such committee, the presence of a majority of all the members thereof shall constitute a quorum, except as provided in Section 4.3 of this Article 4 and the affirmative vote of a majority of the members present shall be necessary for the adoption by it of any resolution. Section 4.3. Substitution and Removal of Members: Vacancies. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of such committee. In the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. The Board of Directors shall have the power at any time to remove any member(s) of a committee and to appoint other directors in lieu of the person(s) so removed and shall also have the power to fill vacancies in a committee. ARTICLE 5 OFFICERS Section 5.1. Number, Titles, and Term of Office. The officers of the Corporation shall be a President, Treasurer, a Secretary, and such other officers as the Board of Directors may from time to time elect or appoint (including, but not limited to, a Chairman of the Board, and or more Vice Presidents, (anyone or more of whom may be designated Executive Vice President or Senior Vice President) Vice Chairman of the Board, one or more Assistant Secretaries and one or more Assistant Treasurers). Each officer shall hold office until such officer's successor shall be duly elected and shall qualify or until such officer's death or until such officer shall resign or shall have been removed. Any number of offices may be held by the same person, unless the Articles of Incorporation of the Corporation provide otherwise. Except for the Chairman of the Board and the Vice Chairman of the Board, no officer need be a director. Section 5.2. Powers and Duties of the President. The President shall be the chief executive officer of the Corporation. Subject to the control of the Board of Directors and the Executive -11- <PAGE> 12 Committee (if any), the President shall have general executive charge, management and control of the properties, business and operations of the Corporation with all such powers as may be reasonably incident to such responsibilities; may agree upon and execute all leases, contracts, evidences of indebtedness and other obligations in the name of the Corporation and may sign all certificates for shares of capital stock of the Corporation; and shall have such other powers and duties as designated to the President by the Board of Directors. The President shall preside at all meetings of the stockholders and of the Board of Directors. Section 5.3. Vice Presidents. Each Vice President shall at all times possess power to sign all certificates, contracts and other instruments of the Corporation, except as otherwise limited in writing by the Chairman of the Board, the President or the Vice Chairman of the Board of the Corporation. Each Vice President shall have such other powers and duties as from time to time may be assigned to such Vice President by the Board of Directors, the Chairman of the Board, the President or the Vice Chairman of the Board. Section 5.4. Secretary. The Secretary shall keep the minutes of all meetings of the Board of Directors, committees of the Board of Directors and the stockholders, in books provided for that purpose; shall attend to the giving and serving of all notices; may in the name of the Corporation affix the seal of the Corporation to all contracts and attest the affixation of the seal of the Corporation thereto; may sign with the other appointed officers all certificates for shares of capital stock of the Corporation; shall have charge of the certificate books, transfer books and stock ledgers, and such other books and papers as the Board of Directors may direct, all of which shall at all reasonable times be open to inspection of any director upon application at the office of the Corporation during business hours; shall have such other powers and duties as designated in these Bylaws and as from time to time may be assigned to the Secretary by the Board of Directors, the Chairman of the Board, the President or the Vice Chairman of the Board; and shall in general perform all acts incident of the office of Secretary, subject to the control of the Board of Directors, the Chairman of the Board, the President or the Vice Chairman of the Board. Section 5.5. Assistant Secretaries. Each Assistant Secretary shall have the usual powers and duties pertaining to such offices, together with such other powers and duties as designated in these Bylaws and as from time to time may be assigned to an Assistant Secretary by the board of directors, the President, or the Secretary. The Assistant Secretaries shall exercise the powers of the Secretary during that officer's absence or inability or refusal to act. Section 5.6. Treasurer. The Treasurer shall have responsibility for the custody and control of all the funds and securities of the Corporation, and shall have such other powers and duties as designated in these Bylaws and as from time to time may be assigned to the Treasurer by the Board of Directors or the President. The Treasurer shall perform all acts incident to the position of Treasurer, subject to the control of the Board of Directors or the President; and the Treasurer shall, if required by the Board of Directors, give such bond for the faithful discharge of the Treasurer's duties in such form as the Board of Directors may require. Section 5.7. Assistant Treasurers. Each Assistant Treasurer shall have the usual powers and duties pertaining to such office, together with such other powers and duties as designated in -12- <PAGE> 13 these Bylaws and as from time to time may be assigned to each Assistant Treasurer by the Board of Directors, the President, or the Treasurer. The Assistant Treasurers shall exercise the powers of the Treasurer during that officer's absence or inability or refusal to act. Section 5.8. Action with Respect to Securities of Other Corporations. Unless otherwise directed by the Board of Directors, the President, together with the Secretary or any Assistant Secretary shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of security holders of or with respect to any action of security holders of any other corporation in which this Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other corporation. Section 5.9. Delegation. For any reason that the Board of Directors may deem sufficient, the Board of Directors may, except where otherwise provided by statute, delegate the powers or duties of any officer to any other person, and may authorize any officer to delegate specified duties of such office to any other person. Any such delegation or authorization by the Board shall be effected from time to time by resolution of the Board of Directors. ARTICLE 6 CAPITAL STOCK Section 6.1. Certificates of Stock. The certificates for shares of the capital stock of the Corporation shall be in such form, not inconsistent with that required by law and the charter documents of the Corporation, as shall be approved by the Board of Directors. Every holder of stock represented by certificates shall be entitled to have a certificate signed by or in the name of the Corporation by the President or a Vice President and the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer of the Corporation representing the number of shares (and, if the stock of the Corporation shall be divided into classes or series, certifying the class and series of such shares) owned by such stockholder which are registered in certified form; provided, however, that any of or all the signatures on the certificate may be facsimile. The stock record books and the blank stock certificate books shall be kept by the Secretary or at the office of such transfer agent or transfer agents as the Board of Directors may from time to time determine. In case any officer, transfer agent or registrar who shall have signed or whose facsimile signature or signatures shall have been placed upon any such certificate or certificates shall have ceased to be such officer, transfer agent or registrar before such certificate is issued by the Corporation, such certificate may nevertheless be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. The stock certificates shall be consecutively numbered and shall be entered in the books of the Corporation as they are issued and shall exhibit the holder's name and number of shares. Section 6.2. Transfer of Shares. The shares of stock of the Corporation shall be transferable only on the books of the Corporation by the holders thereof in person or by their duly authorized attorneys or legal representatives upon surrender and cancellation of certificates for a like number of shares. Upon surrender to the Corporation or a transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or -13- <PAGE> 14 authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 6.3. Ownership of Shares. The Corporation shall be entitled to treat the holder of record of any share or shares of capital stock of the Corporation as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the state of Delaware. Section 6.4. Regulations Regarding Certificates. The Board of Directors shall have the power and authority to make all such rules and regulations as they may deem expedient concerning the issue, transfer and registration or the replacement of certificates for shares of capital stock of the Corporation. Section 6.5. Lost or Destroyed Certificates. The Board of Directors may determine the conditions upon which the Corporation may issue a new certificate of stock in place of a certificate theretofore issued by it which is alleged to have been lost, stolen or destroyed and may require the owner of such certificate or such owner's legal representative to give bond, with surety sufficient to indemnify the Corporation and each transfer agent and registrar against any and all losses or claims which may arise by reason of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate in the place of the one so lost, stolen destroyed. ARTICLE 7 MISCELLANEOUS PROVISIONS Section 7.1. Fiscal Year. The fiscal year of the Corporation shall begin on the first day of January of each year. Section 7.2. Corporate Seal. The corporate seal shall be circular in form and shall have inscribed thereon the name of the Corporation and the state of its incorporation, which seal shall be in the charge of the Secretary and shall be affixed to certificates of stock, debentures, bonds and other documents, in accordance with the direction of the Board of Directors or a committee thereof, and as may be required by law; however, the Secretary may, if the Secretary deems it expedient, have a facsimile of the corporate seal inscribed on any such certificates of stock, debentures, bonds, contract or other documents. Duplicates of the seal may be kept for use by any Assistant Secretary. Section 7.3. Notice and Waiver of Notice. Whenever any notice is required to be given by law, the charter documents of the Corporation or under the provisions of these Bylaws, said notice shall be deemed to be sufficient if given (i) by telegraphic, cable or wireless transmission (including by telecopy or facsimile transmission) or (ii) by deposit of the same in a post office box or by delivery to an overnight courier service company in a sealed prepaid wrapper addressed to the person entitled thereto at such person's post office address, as it appears on the records of the Corporation, and such notice shall be deemed to have been given on the day of such transmission or mailing or delivery to courier, as the case may be. -14- <PAGE> 15 Whenever notice is required to be given by law, the charter documents of the Corporation or under any of the provisions of these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person, including without limitation a director, at meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice unless so required by the charter documents of the Corporation or these Bylaws. Section 7.4. Facsimile Signature. In addition to the provisions for the use of facsimile signatures elsewhere specifically authorized in these Bylaws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors. Section 7.5. Reliance upon Books, Reports and Records. A member of the Board of Directors, or a member of any committee designated by the Board of Directors, shall, in the performance of such person's duties, be protected to the fullest extent permitted by law in relying upon the records of the Corporation and upon information, opinion, reports or statements presented to the Corporation. Section 7.6. Application of Bylaws. In the event that any provisions of these Bylaws is or may be in conflict with any law of the United States, of the state of Delaware, or of any other governmental body or power having jurisdiction over this Corporation, or over the subject matter to which such provision of these Bylaws applies, or may apply, such provision of these Bylaws shall be inoperative to the extent only that the operation thereof unavoidably conflicts with such law, and shall in all other respects be in full force and effect. ARTICLE 8 INDEMNIFICATION OF OFFICERS AND DIRECTORS Section 8.1. Indemnification. The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, indemnify each of its directors and officers against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.1, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. Section 8.2. Indemnification of Others. The corporation shall have the power, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, to indemnify each of its employees and agents (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably -15- <PAGE> 16 incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. Section 8.3. Insurance. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware. ARTICLE 9 AMENDMENTS Section 9.1. Amendments. The Board of Directors shall have the power to adopt, amend and repeal from time to time Bylaws of the Corporation, subject to the right of the stockholders entitled to vote with respect thereto to amend or repeal such Bylaws as adopted or amended by the Board of Directors -16- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-4.2 <SEQUENCE>7 <DESCRIPTION>EX-4.2 <TEXT> <PAGE> 1 EXHIBIT 4.2 SKYSTREAM CORPORATION SECOND AMENDED AND RESTATED RIGHTS AGREEMENT February 5, 1999 <PAGE> 2 TABLE OF CONTENTS <TABLE> <CAPTION> PAGE <S> <C> SECTION 1 Restrictions on Transferability; Registration Rights...............1 1.1 Certain Definitions............................................1 1.2 Restrictions...................................................3 1.3 Restrictive Legend.............................................3 1.4 Notice of Proposed Transfers...................................4 1.5 Requested Registration.........................................4 1.6 Company Registration...........................................6 1.7 Registration on Form S-3.......................................7 1.8 Limitations on Subsequent Registration Rights..................8 1.9 Expenses of Registration.......................................8 1.10 Registration Procedures........................................8 1.11 Indemnification................................................9 1.12 Information by Holder.........................................11 1.13 Rule 144 Reporting............................................11 1.14 Transfer of Registration Rights...............................11 1.15 Standoff Agreement............................................12 1.16 Termination of Rights.........................................12 SECTION 2 Right of Participation............................................12 2.1 Purchasers' Right of Participation............................12 2.2 Termination of Participation Right............................14 SECTION 3 Miscellaneous.....................................................14 3.1 Assignment....................................................14 3.2 Third Parties.................................................14 3.3 Governing Law.................................................15 3.4 Counterparts..................................................15 3.5 Notices.......................................................15 3.6 Severability..................................................15 3.7 Amendment and Waiver..........................................15 3.8 Effect of Amendment or Waiver.................................15 3.9 Rights of Holders.............................................15 3.10 Delays or Omissions...........................................16 3.11 Restatement of Former Agreement...............................16 </TABLE> -1- <PAGE> 3 SECOND AMENDED AND RESTATED RIGHTS AGREEMENT THIS SECOND AMENDED AND RESTATED RIGHTS AGREEMENT (the "Agreement") is entered into as of the 5th day of February, 1999 by and among SkyStream Corporation, a California corporation (the "Company"), the persons and institutions listed on Exhibit A (the "Existing Shareholders") and the investors listed on Exhibit B hereto (the "Purchasers"). RECITALS WHEREAS, the Company and the Existing Shareholders are parties to an Amended and Restated Rights Agreement dated March 25, 1998 (the "Former Agreement"). WHEREAS, the parties to the Former Agreement desire to amend and restate the agreement to read as set forth below and to include the Purchasers as set forth on Exhibit B hereto. WHEREAS, the Company and the Purchasers are entering into a Series C Preferred Stock Purchase Agreement of even date herewith (the "Purchase Agreement"), pursuant to which the Company shall sell, and the Purchasers shall acquire, shares of the Company's Series C Preferred Stock (the "Preferred Shares"). WHEREAS, in order to induce the Company to enter into the Purchase Agreement and to induce the Purchasers to invest funds in the Company, the parties desire that the Purchasers be granted registration rights and rights of participation with respect to the Preferred Shares. WHEREAS, the parties understand the Purchasers on Exhibit B represent the participants in the first closing under the Purchase Agreement and that additional participants may invest in one or more second closings to be held no later than 60 days thereafter; provided, however, that the aggregate number of shares of Series C Preferred sold to the Purchasers shall not exceed 2,000,000 shares. The Existing Shareholders agree that such additional Purchasers shall be treated as Purchasers hereunder upon such party's execution of a supplemental signature page to this Agreement and the addition of such person's name to Exhibit B hereto. Thereafter, the participants in closings after the first closing, but not later than 60 days thereafter, shall be Purchasers for purposes of this Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, the parties agree as follows: SECTION 1 Restrictions on Transferability; Registration Rights 1.1 Certain Definitions. As used in this Agreement, the following terms shall have the following respective meanings: <PAGE> 4 "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Conversion Shares" means the Common Stock issued or issuable upon conversion of the Preferred Shares as defined herein. "Holder" shall mean any Purchaser holding Registrable Securities and any person holding Registrable Securities to whom the rights under this Agreement have been transferred in accordance with Section 1.14 hereof. "Initiating Holders" shall mean Holders in the aggregate of not less than forty percent (40%) of the Registrable Securities. "Preferred Shares" shall mean the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock of the Company. The terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. "Registration Expenses" shall mean all expenses incurred by the Company in complying with Sections 1.5, 1.6 and 1.7 of this Agreement, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company). "Registrable Securities" means (i) the Conversion Shares; and (ii) any Common Stock of the Company issued or issuable in respect of the Conversion Shares or other securities issued or issuable with respect to the Conversion Shares upon any stock split, stock dividend, recapitalization, or similar event, or any Common Stock otherwise issued or issuable with respect to the Conversion Shares: provided, however, that shares of Common Stock or other securities shall only be treated as Registrable Securities if and so long as they have not been (A) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (B) sold in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(l) thereof so that all transfer restrictions and restrictive legends with respect thereto are removed upon the consummation of such sale. "Restricted Securities" shall mean the securities of the Company required to bear the legend set forth in Section 1.3 of this Agreement. -2- <PAGE> 5 "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Selling Expenses" shall mean all underwriting discounts, selling commissions and stock transfer taxes applicable to the securities registered by the Holders and all fees and disbursements of counsel for the Holders (except as provided by Section 1.9). 1.2 Restrictions. The Preferred Shares and the Conversion Shares shall not be sold, assigned, transferred or pledged except upon the conditions specified in this Agreement, which conditions are intended to ensure compliance with the provisions of the Securities Act. The Purchasers will cause any proposed purchaser, assignee, transferee or pledgee of the Preferred Shares, or the Conversion Shares to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Agreement. 1.3 Restrictive Legend. Each certificate representing (i) the Preferred Shares, (ii) the Conversion Shares, and (iii) any other securities issued in respect of the securities referenced in clauses (i) and (ii) upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event, shall (unless otherwise permitted by the provisions of Section 1.4 below) be stamped or otherwise imprinted with legends in the following form (in addition to any legend required under applicable state securities laws): "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SHARES MAY NOT BE SOLD, TRANSFERRED OR PLEDGED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL (WHICH MAY BE COUNSEL FOR THE COMPANY) REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT." "THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY." Each Purchaser and Holder consents to the Company making a notation on its records and giving instructions to any transfer agent of the Restricted Securities in order to implement the restrictions on transfer established in this Section 1. -3- <PAGE> 6 1.4 Notice of Proposed Transfers. The holder of each certificate representing Restricted Securities, by acceptance thereof, agrees to comply in all respects with the provisions of this Section 1. Prior to any proposed sale, assignment, transfer or pledge of any Restricted Securities, unless there is in effect a registration statement under the Securities Act covering the proposed transfer, the holder thereof shall give written notice to the Company of such holder's intention to effect such transfer, sale, assignment or pledge. Each such notice shall describe the manner and circumstances of the proposed transfer, sale, assignment or pledge in sufficient detail, and shall be accompanied at such holder's expense by either (i) an unqualified written opinion of legal counsel who shall be, and whose legal opinion shall be, reasonably satisfactory to the Company, addressed to the Company, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Securities Act, or (ii) a "no action" letter from the Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, whereupon the holder of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by the holder to the Company. The Company will not require such a legal opinion or "no action" letter (a) in any transaction in compliance with Rule 144, (b) in any transaction in which a Purchaser which is a corporation distributes Restricted Securities after six (6) months after the purchase thereof solely to its majority-owned subsidiaries or affiliates for no consideration, or (c) in any transaction in which a Purchaser which is a partnership distributes Restricted Securities after six (6) months after the purchase thereof solely to partners thereof for no consideration, provided that each transferee agrees in writing to be subject to the terms of this Section 1.4. Each certificate evidencing the Restricted Securities transferred as above provided shall bear, except if such transfer is made pursuant to Rule 144, the appropriate restrictive legend set forth in Section 1.3 above, except that such certificate shall not bear such restrictive legend if, in the opinion of counsel for such holder and the Company, such legend is not required in order to establish compliance with any provisions of the Securities Act. 1.5 Requested Registration. (a) Request for Registration. In case the Company shall receive from Initiating Holders a written request that the Company effect any qualification, compliance or registration (which, in connection with the Company's initial public offering, must be for at least 20% of their Registrable Securities or such lesser percentage which would reasonably anticipate an aggregate price to the public net of underwriting discounts and commissions, exceeding $5,000,000): (i) promptly give written notice of the proposed registration, qualification or compliance to all other Holders; and (ii) as soon as practicable, use its best efforts to effect such registration, qualification or compliance (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act and any other governmental requirements or regulations) as may be so requested and as would -4- <PAGE> 7 permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within twenty (20) days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 1.5: (1) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (2) Prior to the earlier of (i) six (6) months following the Company's initial public offering or (ii) February 7, 2001. (3) During the period ending on the date three (3) months immediately following the effective date of, any registration statement pertaining to securities of the Company (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan); (4) After the Company has effected two (2) such registrations pursuant to this subparagraph 1.5(a), such registrations have been declared or ordered effective and the securities offered pursuant to such registrations have been sold; or (5) If the Company shall furnish to such Holders a certificate, signed by the President of the Company, stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to the Company or its shareholders for a registration statement to be filed in the near future, then the Company's obligation to use its best efforts to register, qualify or comply under this Section 1.5 shall be deferred for a single period not to exceed ninety (90) days from the date of receipt of written request from the Initiating Holders. Subject to the foregoing clauses (1) through (5), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request or requests of the Initiating Holders. (b) Underwriting. In the event that a registration pursuant to Section 1.5 is for a registered public offering involving an underwriting, the Company shall so advise the Holders as part of the notice given pursuant to Section 1.5(a)(i). The right of any Holder to registration pursuant to Section 1.5 shall be conditioned upon such Holder's participation in the underwriting arrangements required by this Section 1.5 and the inclusion of such Holder's Registrable Securities in the underwriting, to the extent requested, to the extent provided in this Agreement. The Company shall (together with all Holders proposing to distribute their securities through -5- <PAGE> 8 such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by a majority in interest of the Initiating Holders (which managing underwriter shall be reasonably acceptable to the Company). Notwithstanding any other provision of this Section 1.5, if the managing underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Company shall so advise all Holders of Registrable Securities and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all Holders thereof in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders at the time of filing the registration statement; provided, that the number of shares of Registrable Securities to be included in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting. No Registrable Securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder to the nearest 100 shares. If any Holder of Registrable Securities disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the managing underwriter and the Initiating Holders. The Registrable Securities and/or other securities so withdrawn shall also be withdrawn from registration, and such Registrable Securities shall not be transferred in a public distribution prior to one hundred eighty (180) days after the effective date of such registration. 1.6 Company Registration. (a) Notice of Registration. If at any time or from time to time, the Company shall determine to register any of its securities, either for its own account or the account of a security holder or holders other than (i) a registration relating solely to employee benefit plans, or (ii) a registration relating solely to a Commission Rule 145 transaction, the Company will: (i) promptly give to each Holder written notice thereof; and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved in such registration, all the Registrable Securities specified in a written request or requests made within twenty (20) days after receipt of such written notice from the Company by any Holder, but only to the extent that such inclusion will not diminish the number of securities included by the Company or by holders of the Company's securities who have demanded such registration. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 1.6(a)(i). In such event, the right of any Holder to registration pursuant to Section 1.6 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of Registrable Securities in the underwriting to the extent provided -6- <PAGE> 9 herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company (or by the holders who have demanded such registration). Notwithstanding any other provision of this Section 1.6, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may limit the Registrable Securities to be included in such registration or exclude them entirely. The Company shall so advise all Holders and the other holders distributing their securities through such underwriting pursuant to piggyback registration rights similar to this Section 1.6, and the number of shares of Registrable Securities and other securities that may be included in the registration and underwriting shall be first allocated among all Purchasers in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Purchasers at the time of filing the registration statement, and after satisfaction of the requirements of the Purchasers, the remaining shares that may be included in the registration and underwriting shall be allocated among the officers, directors and other shareholders of the Company in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such officers and directors of the Company at the time of filing of the registration statement. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder or other holder to the nearest 100 shares. (c) Right to Terminate Registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 1.6 prior to the effectiveness of such registration, whether or not any Holder has elected to include securities in such registration. 1.7 Registration on Form S-3. (a) If the Initiating Holder requests that the Company file a registration statement on Form S-3 (or any successor form to Form S-3) for a public offering of shares of the Registrable Securities, the reasonably anticipated aggregate price to the public of which, net of underwriting discounts and commissions, would exceed $1,000,000, and the Company is a registrant entitled to use Form S-3 to register the Registrable Securities for such an offering, the Company shall use its best efforts to cause such Registrable Securities to be registered for the offering on such form; provided, however, that the Company shall not be required to effect more than two registrations pursuant to this Section 1.7 in any twelve (12) month period. The Company will (i) promptly give written notice of the proposed registration to all other Holders, and (ii) as soon as practicable, use its best efforts to effect such registration (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act and any other governmental requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within twenty (20) days after receipt of such written notice from the -7- <PAGE> 10 Company. The substantive provisions of Section 1.5(b) shall be applicable to each registration initiated under this Section 1.7. (b) Notwithstanding the foregoing, the Company shall not be obligated to take any action pursuant to this Section 1.7: (i) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act, (ii) during the period ending on a date three (3) months following the effective date of, a registration statement (other than with respect to a registration statement relating to a Rule 145 transaction, an offering solely to employees or any other registration which is not appropriate for the registration of Registrable Securities), or (iii) if the Company shall furnish to such Holder a certificate signed by the President of the Company stating that, in the good faith judgment of the Board of Directors, it would be seriously detrimental to the Company or its shareholders for registration statements to be filed in the near future, then the Company's obligation to use its best efforts to file a registration statement shall be deferred for a single period not to exceed ninety (90) days from the receipt of the request to file such registration by such Holder or Holders. 1.8 Limitations on Subsequent Registration Rights. From and after the date of this Agreement, the Company shall not enter into any agreement granting any holder or prospective holder of any securities of the Company registration rights with respect to such securities unless such holder derives its rights as an additional Holder hereunder, or such shares or securities are entitled to be included in registrations only to the extent that the inclusion of such securities will not diminish the amount of Registrable Securities that are included. 1.9 Expenses of Registration. All Registration Expenses incurred in connection with any registration pursuant to Section 1.5, 1.6 or 1.7 and the reasonable fees and expenses (up to $30,000) of one special legal counsel to represent all of the Holders together in any such registration shall be borne by the Company, provided that the Company shall not be required to pay the Registration Expenses of any registration proceeding begun pursuant to Section 1.5, the request of which has been subsequently withdrawn by the Initiating Holders. In such case, the Holders of Registrable Securities to have been registered shall bear all such Registration Expenses pro rata on the basis of the number of shares to have been registered unless the Holders of a majority of the Registrable Securities agree to forfeit their right to one demand registration pursuant to Section 1.5. Notwithstanding the foregoing, however, if at the time of the withdrawal, the Holders have learned of a material adverse change in the condition, business or prospects of the Company from that known to the Holders at the time of their request, and have withdrawn the request with reasonable promptness following disclosure by the Company of such material adverse change, then the Holders shall not be required to pay any of said Registration Expenses or to forfeit the right to one demand registration. 1.10 Registration Procedures. In the case of each registration, qualification or compliance effected by the Company pursuant to this Section 1, the Company will keep each Holder advised in -8- <PAGE> 11 writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. At its expense the Company will: (a) Prepare and file with the Commission a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for at least one hundred eighty (180) days or until the distribution described in the registration statement has been completed; and (b) Furnish to the Holders participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such underwriters may reasonably request in order to facilitate the public offering of such securities. 1.11 Indemnification. (a) The Company will indemnify each Holder, each of its officers and directors and partners, and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Section 1, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on (i) any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or (ii) any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or (iii) any violation by the Company of the Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law applicable to the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Holder, each of its officers and directors, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder, controlling person or underwriter and stated to be specifically for use therein. (b) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each underwriter, if any, of the -9- <PAGE> 12 Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers and directors and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, and will reimburse the Company, such Holders, such directors, officers, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder and stated to be specifically for use therein; provided, however, that the liability of a Holder for indemnification under this Section 1.11(b) shall not exceed the net proceeds from the offering received by such Holder. (c) Each party entitled to indemnification under this Section 1.11 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 1 unless the failure to give such notice is materially prejudicial to an Indemnifying Party's ability to defend such action. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. (d) If the indemnification provided for in this Section 1.11 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage, or expense referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage or expense as well as any other relevant equitable considerations; -10- <PAGE> 13 provided, that, in no event shall any contribution by a Holder under this Subsection 1.11(d) exceed the net proceeds from the offering received by such Holder. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. 1.12 Information by Holder. The Holder or Holders of Registrable Securities included in any registration shall furnish to the Company such information regarding such Holder or Holders, the Registrable Securities held by them and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Section 1. 1.13 Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Securities to the public without registration, after such time as a public market exists for the Common Stock of the Company, the Company agrees to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date that the Company becomes subject to the reporting requirements of the Securities Act or the Exchange Act; (b) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and (c) So long as a Purchaser owns any Restricted Securities, to furnish to the Purchaser forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as a Purchaser may reasonably request in availing itself of any rule or regulation of the Commission allowing a Purchaser to sell any such securities without registration. 1.14 Transfer of Registration Rights. The rights to cause the Company to register Registrable Securities granted under this Section 1 may be assigned by a Holder to a transferee or assignee who acquires (i) at least 500,000 of the Registrable Securities held by such Holder or, if less, (ii) all of the Registrable Securities then held by such Holder, provided in either case, the Company is, within a reasonable time prior to such transfer, furnished with written notice of the -11- <PAGE> 14 name and address of such proposed transferee or assignee and the securities with respect to which such registration rights are being assigned; provided further that such assignment shall be effective only if the transferee enters into a written agreement providing that such transferee shall be bound by the provisions of Section 1 of this Agreement. Notwithstanding the foregoing or any other provision contained herein to the contrary, the right to cause the Company to register Registerable Securities may be assigned by a Holder to any constituent partner of a partnership Holder and any subsidiary or parent of a corporate Holder provided that such transferee agrees in writing to be bound by the terms and conditions of this Agreement. 1.15 Standoff Agreement. Each Holder agrees in connection with the initial registration of the Company's securities that, upon request of the Company or the underwriters managing any underwritten initial public offering of the Company's securities, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Registrable Securities (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed one hundred eighty (180) days from the effective date of such registration, or such longer period as may be agreed to by the holders of a majority of the outstanding Registrable Securities) as may be requested by the Company or such managing underwriters; provided, however, that all officers and directors of the Company, all one-percent securityholders, and all other persons with registration rights (whether or not pursuant to this Agreement) enter into similar agreements with respect to securities of the Company held by them. 1.16 Termination of Rights. No Holder shall be entitled to exercise any right provided for in this Section 1: (a) after five (5) years following the consummation of the sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the initial firm commitment underwritten offering of its securities to the general public, or (b) on or after the closing of a public offering of the Common Stock of the Company, initiated by the Company, when all shares of the Holder's Registrable Securities may be sold under Rule 144 during any 90-day period. SECTION 2 Right of Participation 2.1 Purchasers' Right of Participation. (a) Right of Participation. Subject to the terms and conditions contained in this Section 2.1, the Company hereby grants to each Purchaser who is the Holder of not less than 1,500,000 shares of Registrable Securities, the right of participation to purchase its Pro Rata Portion -12- <PAGE> 15 of any New Securities (as defined in subsection 2.1(b)) which the Company may, from time to time, propose to sell and issue. A Holder's "Pro Rata Portion" for purposes of this Section 2.1 is the ratio that (x) the sum of the number of shares of the Company's Common Stock then held by such Purchaser and the number of shares of the Company's Common Stock issuable upon conversion of the Preferred Stock then held by such Holder, bears to (y) the sum of the total number of shares of the Company's Common Stock then outstanding and the number of shares of the Company's Common Stock issuable upon conversion of the then outstanding Preferred Stock. (b) Definition of New Securities. Except as set forth below, "New Securities" shall mean any shares of capital stock of the Company, including Common Stock and Preferred Stock, whether authorized or not, and rights, options or warrants to purchase said shares of Common Stock or Preferred Stock, and securities of any type whatsoever that are, or may become, convertible into said shares of Common Stock or Preferred Stock. Notwithstanding the foregoing, "New Securities" does not include (i) the Preferred Shares or the Conversion Shares, (ii) securities offered to the public generally pursuant to a registration statement under the Securities Act, (iii) securities issued pursuant to the acquisition of another corporation by the Company by merger, purchase of substantially all of the assets or shares or other reorganization whereby the Company or its shareholders own not less than a majority of the voting power of the surviving or successor corporation, (iv) shares of the Company's Common Stock or related options or warrants convertible into or exercisable for such Common Stock issued to employees, officers and directors of, and consultants to, the Company, pursuant to any arrangement approved by the Board of Directors of the Company, (v) shares of the Company's Common Stock or related options convertible into or exercisable for such Common Stock issued to banks, commercial lenders, lessors and other financial institutions in connection with the borrowing of money or the leasing of equipment by the Company approved by the Board of Directors of the Company, (vi) stock issued pursuant to any rights or agreements, including, without limitation, convertible securities, options and warrants, provided that the Company shall have complied with the rights of participation established by this Section 2.1 with respect to the initial sale or grant by the Company of such rights or agreements, or (vii) stock issued in connection with any stock split, stock dividend or recapitalization by the Company. (c) Notice of Right. In the event the Company proposes to undertake an issuance of New Securities, it shall give each Purchaser written notice of its intention, describing the type of New Securities and the price and terms upon which the Company proposes to issue the same. Each Purchaser shall have twenty (20) days from the date of receipt of any such notice to agree to purchase shares of such New Securities (up to the amount referred to in subsection 2.1(a)), for the price and upon the terms specified in the notice, by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. (d) Exercise of Right. If any Purchaser exercises its right of participation under this Agreement, the closing of the purchase of the New Securities with respect to which such right has been exercised shall take place within ninety (90) calendar days after the Purchaser gives notice of such exercise, which period of time shall be extended in order to comply with applicable laws and regulations. Upon exercise of such right of participation, the Company and the Purchaser shall be -13- <PAGE> 16 legally obligated to consummate the purchase contemplated thereby and shall use their best efforts to secure any approvals required in connection therewith. (e) Lapse and Reinstatement of Right. In the event a Purchaser fails to exercise the right of participation provided in this Section 2.1 within said twenty (20) day period, the Company shall have ninety (90) days thereafter to sell or enter into an agreement (pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within sixty (60) days from the date of said agreement) to sell the New Securities not elected to be purchased by such Purchaser at the price and upon the terms no more favorable to the purchasers of such securities than specified in the Company's notice. In the event the Company has not sold the New Securities or entered into an agreement to sell the New Securities within said ninety (90) day period (or sold and issued New Securities in accordance with the foregoing within sixty (60) days from the date of said agreement), the Company shall not thereafter issue or sell any New Securities without first offering such securities to the Purchasers in the manner provided above. (f) Assignment. The right of the Purchasers to purchase any part of the New Securities may be assigned in whole or in part to any partner, subsidiary, affiliate or shareholder of a Purchaser, or other persons or organizations who acquire the lesser of (i) 20% or more shares of Registrable Securities (as adjusted for stock splits and the like) or (ii) all of the Restricted Securities then owned by such Purchaser. 2.2 Termination of Participation Right. The rights of participation granted under Section 2.1 of this Agreement shall terminate on and be of no further force or effect upon the earlier of (i) the consummation of the Company's sale of its Common Stock in an underwritten public offering pursuant to an effective registration statement filed under the Securities Act immediately subsequent to which the Company shall be obligated to file annual and quarterly reports with the Commission pursuant to Section 13 or 15(d) of the Exchange Act or (ii) the registration by the Company of a class of its equity securities under Section 12(b) or 12(g) of the Exchange Act. SECTION 3 Miscellaneous 3.1 Assignment. Except as otherwise provided in this Agreement, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties to this Agreement. 3.2 Third Parties. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties to this Agreement, and their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. -14- <PAGE> 17 3.3 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California in the United States of America without giving effect to the conflicts of laws principles thereof. 3.4 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 3.5 Notices. Any notice required or permitted by this Agreement shall be in writing and shall be sent by prepaid registered or certified mail return receipt requested, or otherwise delivered by hand or by messenger addressed to the other party at the address shown below or at such other address for which such party gives notice under this Agreement. Such notice shall be deemed to have been given when delivered if delivered personally, or, if sent by mail, at the earlier of its receipt or three (3) days after deposit in the mail. 3.6 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, portions of such provisions, or such provisions in their entirety, to the extent necessary, shall be severed from this Agreement, and the balance of this Agreement shall be enforceable in accordance with its terms. 3.7 Amendment and Waiver. Any provision of this Agreement may be amended or waived with the written consent of the Company and the Holders of at least a majority of the outstanding shares of the Registrable Securities, so long as the effect is to treat all Holders equally. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each Holder of Registrable Securities and the Company. In addition, the Company may waive performance of any obligation owing to it, as to some or all of the Holders of Registrable Securities, or agree to accept alternatives to such performance, without obtaining the consent of any Holder of Registrable Securities. In the event that an underwriting agreement is entered into between the Company and any Holder, and such underwriting agreement contains terms differing from this Agreement, as to any such Holder the terms of such underwriting agreement shall govern. 3.8 Effect of Amendment or Waiver. The Purchasers and their successors and assigns acknowledge that by the operation of Section 3.7 of this Agreement the holders of a majority of the outstanding Registrable Securities, acting in conjunction with the Company, will have the right and power to diminish or eliminate any or all rights or increase any or all obligations pursuant to this Agreement. 3.9 Rights of Holders. Each holder of Registrable Securities shall have the absolute right to exercise or refrain from exercising any right or rights that such holder may have by reason of this Agreement, including, without limitation the right to consent to the waiver or modification of any obligation under this Agreement, and such holder shall not incur any liability to any other holder of any securities of the Company as a result of exercising or refraining from exercising any such right or rights. -15- <PAGE> 18 3.10 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any party to this Agreement, upon any breach or default of the other party, shall impair any such right, power or remedy of such non-breaching party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, or by law or otherwise afforded to any holder, shall be cumulative and not alternative. 3.11 Restatement of Former Agreement. Through their execution of this Agreement, the Company and all of the Existing Shareholders agree to terminate the Former Agreement and restate the terms thereof through this Agreement, with the result that this Agreement shall constitute the sole agreement among the parties hereto with respect to the registration of Registrable Securities. -16- <PAGE> 19 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. COMPANY: EXISTING SHAREHOLDERS: SKYSTREAM CORPORATION MAYFIELD VIII, a California corporation A CALIFORNIA LIMITED PARTNERSHIP By: MAYFIELD VIII MANAGEMENT, L.L.C. A DELAWARE LIMITED LIABILITY COMPANY, its General Partner By: /s/ JAMES D. OLSON By: /s/ W. VAN AUKEN ------------------------------ ----------------------------------- James D. Olson, President Wendell Van Auken, Managing Member MAYFIELD ASSOCIATES FUND III, A CALIFORNIA LIMITED PARTNERSHIP By: MAYFIELD VIII MANAGEMENT, L.L.C. A DELAWARE LIMITED LIABILITY COMPANY, its General Partner By: /s/ W. G. VAN AUKEN ---------------------------------- Wendell Van Auken, Managing Member INSTITUTIONAL VENTURE PARTNERS VII By Its General Partner Institutional Venture Management VII By: /s/ GEOFFREY Y. YANG ---------------------------------- Geoffrey Y. Yang General Partner [Second Amended and Restated Rights Agreement] <PAGE> 20 INSTITUTIONAL VENTURE MANAGEMENT VII By: /s/ GEOFFREY Y. YANG ---------------------------------- Geoffrey Y. Yang General Partner IVP FOUNDERS FUND I, L.P. By Its General Partner Institutional Venture Management VI, L.P. By: /s/ GEOFFREY Y. YANG ---------------------------------- Geoffrey Y. Yang General Partner WS INVESTMENTS 97A WS INVESTMENTS 98A By: /s/ ROBERT P. LATTA ---------------------------------- LATTA FAMILY TRUST By: /s/ ROBERT P. LATTA ---------------------------------- /s/ MARIANNE S. BRADLEY -------------------------------------- Marianne S. Bradley [Second Amended and Restated Rights Agreement] <PAGE> 21 /s/ WILLIAM KIRSCH -------------------------------------- William Kirsch /s/ DAVID CAMPBELL -------------------------------------- David Campbell /s/ HELEN E. M.L O'ROURKE -------------------------------------- Helen E. McLaughlin O'Rourke -------------------------------------- Glen Wallace McLaughlin PURCHASERS: BROADCAST TRUST By: /s/ [SIGNATURE ILLEGIBLE] ---------------------------------- Wendell G. & Ethel S. Van Auken, TTEEs, The Wendell G. & Ethel S. Van Auken Trust U/D/T 09/17/75 By: /s/ W. G. VAN AUKEN ---------------------------------- [Second Amended and Restated Rights Agreement] <PAGE> 22 PURCHASERS (continued): MAYFIELD VIII, A CALIFORNIA LIMITED PARTNERSHIP By: MAYFIELD VIII MANAGEMENT, L.L.C. A DELAWARE LIMITED LIABILITY COMPANY, its General Partner By: /s/ W. G. Van Auken ---------------------------------- Wendell Van Auken, Managing Member MAYFIELD ASSOCIATES FUND III, A CALIFORNIA LIMITED PARTNERSHIP By: MAYFIELD VIII MANAGEMENT, L.L.C. A DELAWARE LIMITED LIABILITY COMPANY, its General Partner By: /s/ W. G. Van Auken ---------------------------------- Wendell Van Auken, Managing Member INSTITUTIONAL VENTURE PARTNERS VII By Its General Partner Institutional Venture Management VII By: /s/ GEOFFREY Y. YANG ---------------------------------- Geoffrey Y. Yang, General Partner INSTITUTIONAL VENTURE MANAGEMENT VII By: /s/ GEOFFREY Y. YANG ---------------------------------- Geoffrey Y. Yang, General Partner [Second Amended and Restated Rights Agreement] <PAGE> 23 PURCHASERS (continued): IVP BROADBAND FUND I, L.P. By Its General Partner IVP Broadband Management, LLC By Its Managing Director Institutional Venture Management VIII, LLC By: /s/ Geoffrey Y. Yang ---------------------------------- Geoffrey Y. Yang, Managing Director NORWEST VENTURE PARTNERS VII, LP By: Itasca VC Partners VII, LLP Its General Partner By: /s/ Promod Haque ---------------------------------- Promod Haque, General Partner LATTA FAMILY TRUST By: /s/ Robert P. Latta ---------------------------------- Robert P. Latta, Trustee /s/ T. S. Hollifield ---------------------------------- Ted S. Hollifield [Second Amended and Restated Rights Agreement] <PAGE> 24 EXHIBIT A EXISTING SHAREHOLDERS Mayfield VIII, a California Limited Partnership Mayfield Associates Fund III, A California Limited Partnership Institutional Venture Partners VII Institutional Venture Management VII IVP Founders Fund I, L.P. WS Investments 97A WS Investments 98A Latta Family Trust Marianne S. Bradley David Campbell* William Kirsch* Helen E. McLaughlin O'Rourke* Glen Wallace McLaughlin* - ---------------------------------------------------- * Holders of Warrants to purchase Series B Preferred. <PAGE> 25 EXHIBIT B PURCHASERS Broadcast Trust Wendell G. & Ethel S. Van Auken, TTEEs, The Wendell G. & Ethel S. Van Auken Trust U/D/T 09/17/75 Mayfield VIII Mayfield Associates Fund III Institutional Venture Partners VII Institutional Venture Management VIII IVP Broadband Fund I, L.P. Norwest Venture Partners VII, LP Latta Family Trust Ted S. Hollifield </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-4.2.1 <SEQUENCE>8 <DESCRIPTION>EX-4.2.1 <TEXT> <PAGE> 1 EXHIBIT 4.2.1 SKYSTREAM CORPORATION FIRST AMENDMENT TO SECOND AMENDED AND RESTATED RIGHTS AGREEMENT DATED FEBRUARY 5, 1999 This Amendment is made as of the 22nd day of March, 1999, by and among SkyStream Corporation, a California corporation (the "Company") and the undersigned purchasers listed on the signature page hereto under the heading Purchasers (collectively, the "Purchasers"). WHEREAS, the Company desires to raise additional capital through the sale of additional shares of Series C Preferred Stock; WHEREAS, the Company and certain of the Purchasers are parties to the Second Amended and Restated Rights Agreement dated February 5, 1999 (the "Agreement") to which the Purchasers of the additional shares of Series C Preferred Stock shall be granted registration rights and rights of participation with respect to the Preferred Shares; IT IS HEREBY AGREED THAT certain sections of the Agreement as set forth below, are hereby amended: 1. The fifth and sixth paragraphs under the section heading "Recitals" that currently read as follows: "WHEREAS, the parties understand the Purchasers on Exhibit B represent the participants in the first closing under the Purchase Agreement and that additional participants may invest in one or more second closings to be held no later than 60 days thereafter; provided, however, that the aggregate number of shares of Series C Preferred sold to the Purchasers shall not exceed 2,000,000 shares. The Existing Shareholders agree that such additional Purchasers shall be treated as Purchasers hereunder upon such party's execution of a supplemental signature page to this Agreement and the addition of such person's name to Exhibit B hereto. Thereafter, the participants in closings after the first closing, but not later than 60 days thereafter, shall be Purchasers for purposes of this Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, the parties agree as follows:" are amended to read in their entirety as follows: "NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, the parties agree as follows: The parties understand the Purchasers on Exhibit B represent the participants in the first closing under the Purchase Agreement and that additional participants may invest in one or more second closings to be held on March 22, 1999 and on or prior to 60 days from March 22, 1999; provided, however, that the aggregate number of shares of Series C Preferred sold to the Purchasers shall not exceed 3,415,000 shares. The Existing Shareholders and the Purchasers agree that such additional Purchasers shall be treated as Purchasers hereunder upon such party's execution of a supplemental signature page to this Agreement and the addition of such person's name to Exhibit B hereto. Thereafter, the participants in closings after the first closing, but not later than 60 days from March 22, 1999, shall be Purchasers for purposes of this Agreement." <PAGE> 2 2. Except as amended as set forth above, the Agreement shall continue in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first above written. The Company: SKYSTREAM CORPORATION a California corporation By: /s/ James D. Olson -------------------------------- James D. Olson, President The Purchasers: BROADCAST TRUST By: /s/ George A. Pavlov -------------------------------- Name: George A. Pavlov ------------------------------ Title: Administrative Trustee ----------------------------- WENDELL G. & ETHEL S. VAN AUKEN, AUKEN TTEEs, THE WENDELL G & ETHEL S. VAN TRUST U/D/T 09/17/75 By: /s/ W. G. Van Auken ---------------------------------- MAYFIELD VIII, A CALIFORNIA LIMITED PARTNERSHIP By: MAYFIELD VIII MANAGEMENT, L.L.C. A DELAWARE LIMITED LIABILITY COMPANY, its General Partner By: /s/ George A. Pavlov -------------------------------------- George A. Pavlov, Authorized Signatory [First Amendment to Second Amended and Restated Rights Agreement] <PAGE> 3 The Purchasers: (continued) MAYFIELD ASSOCIATES FUND III, A CALIFORNIA LIMITED PARTNERSHIP By: MAYFIELD VIII MANAGEMENT, L.L.C. A DELAWARE LIMITED LIABILITY COMPANY, its General Partner By: /s/ George A. Pavlov -------------------------------------- George A. Pavlov, Authorized Signatory INSTITUTIONAL VENTURE PARTNERS VII By Its General Partner Institutional Venture Management VII By: /s/ Geoffrey Y. Yang ---------------------------------- Geoffrey Y. Yang General Partner INSTITUTIONAL VENTURE MANAGEMENT VII By: /s/ Geoffrey Y. Yang ---------------------------------- Geoffrey Y. Yang General Partner IVP FOUNDERS FUND I, L.P. By Its General Partner Institutional Venture Management VI, L.P. By: /s/ Geoffrey Y. Yang ---------------------------------- Geoffrey Y. Yang General Partner [First Amendment to Second Amended and Restated Rights Agreement] <PAGE> 4 The Purchasers: (continued) IVP BROADBAND FUND I, L.P. By Its General Partner IVP Broadband Management, LLC By Its Managing Director Institutional Venture Management VIII, LLC By: /s/ GEOFFREY Y. YANG ---------------------------------- Geoffrey Y. Yang Managing Director NORWEST VENTURE PARTNERS VII, LP By: Itasca VC Partners VII, LLP Its General Partner By: /s/ PROMOD HAQUE ---------------------------------- Promod Haque General Partner WS INVESTMENTS By: /s/ ROBERT P. LATTA ---------------------------------- LATTA FAMILY TRUST By: /s/ ROBERT P. LATTA ---------------------------------- Robert P. Latta, Trustee /s/ T.S. HOLLIFIELD ---------------------------------- Ted S. Hollifield /s/ MARIANNE S. BRADLEY ---------------------------------- Marianne S. Bradley [First Amendment to Second Amended and Restated Rights Agreement] </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-4.2.2 <SEQUENCE>9 <DESCRIPTION>EX-4.2.2 <TEXT> <PAGE> 1 EXHIBIT 4.2.2 SKYSTREAM CORPORATION SECOND AMENDMENT TO SECOND AMENDED AND RESTATED RIGHTS AGREEMENT DATED FEBRUARY 5, 1999, AS AMENDED MARCH 22, 1999 This Amendment is made as of the 9th day of June, 1999, by and among SkyStream Corporation, a California corporation (the "Company") and the undersigned purchasers listed on the signature page hereto under the heading Purchasers (collectively, the "Purchasers"). WHEREAS, the Company desires to raise additional capital through the sale of additional shares of Series C Preferred Stock; WHEREAS, the Company and certain of the Purchasers are parties to the Second Amended and Restated Rights Agreement dated February 5, 1999, as amended (the "Agreement") to which the Purchasers of the additional shares of Series C Preferred Stock shall be granted registration rights and rights of participation with respect to the Preferred Shares; IT IS HEREBY AGREED THAT certain sections of the Agreement as set forth below, are hereby amended: 1. The fifth and sixth paragraphs under the section heading "Recitals" that currently read as follows: "WHEREAS, the parties understand the Purchasers on Exhibit B represent the participants in the first closing under the Purchase Agreement and that additional participants may invest in one or more second closings to be held no later than 60 days thereafter; provided, however, that the aggregate number of shares of Series C Preferred sold to the Purchasers shall not exceed 2,000,000 shares. The Existing Shareholders agree that such additional Purchasers shall be treated as Purchasers hereunder upon such party's execution of a supplemental signature page to this Agreement and the addition of such person's name to Exhibit B hereto. Thereafter, the participants in closings after the first closing, but not later than 60 days thereafter, shall be Purchasers for purposes of this Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, the parties agree as follows:" are amended to read in their entirety as follows: "NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, the parties agree as follows: The parties understand the Purchasers on Exhibit B represent the participants in the first and second closings under the Purchase Agreement and that additional participants may invest in a closing to be held on June 9, 1999; provided, however, that the aggregate number of shares of Series C Preferred sold to the Purchasers shall not exceed 3,804,000 shares. The Existing Shareholders and the Purchasers agree that such additional Purchasers shall be treated as Purchasers hereunder upon such party's execution of a supplemental signature page to this Agreement and the addition of such person's name to Exhibit B hereto. Thereafter, the participants in closings after the first and second closings, but not later than June 9, 1999, shall be Purchasers for purposes of this Agreement." <PAGE> 2 2. Section 1.14 of the Agreement shall be amended to read in its entirety as follows: "1.14 Transfer of Registration Rights. The rights to cause the Company to register Registrable Securities granted under this Section 1 may be assigned by a Holder to a transferee or assignee who acquires (i) at least 300,000 of the Registrable Securities held by such Holder or, if less, (ii) all of the Registrable Securities then held by such Holder, provided in either case, the Company is, within a reasonable time prior to such transfer, furnished with written notice of the name and address of such proposed transferee or assignee and the securities with respect to which such registration rights are being assigned; provided further that such assignment shall be effective only if the transferee enters into a written agreement providing that such transferee shall be bound by the provisions of Section 1 of this Agreement. Notwithstanding the foregoing or any other provision contained herein to the contrary, the right to cause the Company to register Registerable Securities may be assigned by a Holder to any constituent partner of a partnership Holder and any subsidiary or parent of a corporate Holder provided that such transferee agrees in writing to be bound by the terms and conditions of this Agreement." 3. Section 2.1(a) of the Agreement shall be amended to read in its entirety as follows: "(a) Right of Participation. Subject to the terms and conditions contained in this Section 2.1, the Company hereby grants to each Purchaser who is the Holder of not less than 300,000 shares of Registrable Securities, the right of participation to purchase its Pro Rata Portion of any New Securities (as defined in subsection 2.1(b)) which the Company may, from time to time, propose to sell and issue. A Holder's "Pro Rata Portion" for purposes of this Section 2.1 is the ratio that (x) the sum of the number of shares of the Company's Common Stock then held by such Purchaser and the number of shares of the Company's Common Stock issuable upon conversion of the Preferred Stock then held by such Holder, bears to (y) the sum of the total number of shares of the Company's Common Stock then outstanding and the number of shares of the Company's Common Stock issuable upon conversion of the then outstanding Preferred Stock." 4. Except as amended as set forth above, the Agreement shall continue in full force and effect. (Remainder of this page intentionally left blank) <PAGE> 3 IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first above written. The Company: SKYSTREAM CORPORATION a California corporation By: /s/ JAMES D. OLSON ---------------------------------- James D. Olson, President The Purchasers: BROADCAST TRUST By: /s/ GEORGE A. PAVLOV ---------------------------------- Name: George A. PaVlov -------------------------------- Title: Authorized Signatory -------------------------------- WENDELL G. & ETHEL S. VAN AUKEN, TTEEs, THE WENDELL G & ETHEL S. VAN AUKEN TRUST U/D/T 09/17/75 By: /s/ W. G. VAN AUKEN ---------------------------------- MAYFIELD VIII, A CALIFORNIA LIMITED PARTNERSHIP By: MAYFIELD VIII MANAGEMENT, L.L.C. A DELAWARE LIMITED LIABILITY COMPANY, its General Partner By: /s/ W. G. VAN AUKEN ---------------------------------- Wendell Van Auken, Managing Member [Second Amendment to Second Amended and Restated Rights Agreement] <PAGE> 4 The Purchasers: (continued) MAYFIELD ASSOCIATES FUND III, A CALIFORNIA LIMITED PARTNERSHIP By: MAYFIELD VIII MANAGEMENT, L.L.C. A DELAWARE LIMITED LIABILITY COMPANY, its General Partner By: /s/ W. G. VAN AUKEN ---------------------------------- Wendell Van Auken, Managing Member INSTITUTIONAL VENTURE PARTNERS VII By Its General Partner Institutional Venture Management VII By: /s/ GEOFFREY Y. YANG ---------------------------------- Geoffrey Y. Yang General Partner INSTITUTIONAL VENTURE MANAGEMENT VII By: /s/ GEOFFREY Y. YANG ---------------------------------- Geoffrey Y. Yang General Partner IVP FOUNDERS FUND I, L.P. By Its General Partner Institutional Venture Management VI, L.P. By: /s/ GEOFFREY Y. YANG ---------------------------------- Geoffrey Y. Yang General Partner [Second Amendment to Second Amended and Restated Rights Agreement] <PAGE> 5 The Purchasers: (continued) IVP BROADBAND FUND I, L.P. By Its General Partner IVP Broadband Management, LLC By Its Managing Director Institutional Venture Management VIII, LLC By: /s/ GEOFFREY Y. YANG ---------------------------------- Geoffrey Y. Yang Managing Director NORWEST VENTURE PARTNERS VII, LP By: Itasca VC Partners VII, LLP Its General Partner By: /s/ PROMOD HAQUE ---------------------------------- Promod Haque General Partner WS INVESTMENTS By: /s/ ROBERT P. LATTA ---------------------------------- LATTA FAMILY TRUST By: /s/ ROBERT P. LATTA ---------------------------------- Robert P. Latta, Trustee /s/ T. S. HOLLIFIELD ---------------------------------- Ted S. Hollifield ---------------------------------- Marianne S. Bradley [Second Amendment to Second Amended and Restated Rights Agreement] <PAGE> 6 INTEL CORPORATION By: /s/ Satish Rishi ---------------------------------- Satish Rishi Title: Assistant Treasurer ------------------------------- [Second Amendment to Second Amended and Restated Rights Agreement] </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-4.3 <SEQUENCE>10 <DESCRIPTION>EX-4.3 <TEXT> <PAGE> 1 EXHIBIT 4.3 THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE COMPANY, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH. PREFERRED STOCK WARRANT of SKYSTREAM CORPORATION FOR VALUE RECEIVED, SKYSTREAM CORPORATION, a California corporation (the "Company"), hereby certifies that ______________________ (the "Warrantholder") is entitled, subject to the provisions of this Warrant, to purchase from the Company shares of the Company's capital stock consisting either of its Series A Preferred Stock, no par value per share ("Series A") or Series B Preferred Stock, no par value per share ("Series B") determined as set forth below. The number of such shares purchasable hereunder shall be that number determined pursuant to the formula set forth below which shall not exceed _______ nor be less than ________ fully paid and non-assessable shares of Series A or Series B, as the case may be. This Warrant shall be exercisable at a price per share (the "Warrant Price") of (i) the average of the price per share of the Company's Series A and Series B financings, not to exceed $1.75 per share, if the Warrant is exercisable for Series B or (ii) $1.50 per share in the event that the Warrant is exercisable for Series A. The capital stock issuable upon exercise of this Warrant shall be Series B of the Company if (i) the sale of Series B to other investors is closed by June 30, 1998 and (ii) the total consideration received by the Company from the sale of Series B by such date is greater than or equal to $3.0 million. In the event that the requirements of the foregoing sentence are not met, the capital stock issuable upon exercise of this Warrant shall be the Series A of the Company. The number of shares of capital stock to be received upon the exercise of this Warrant may be adjusted from time to time as hereinafter set forth. In the event that this Warrant is exercisable for Series A, as determined in the preceding paragraph, the number of shares for which this Warrant may be exercised shall be 20,700 shares of Series A. In the event this Warrant is exercisable for Series B, as determined in the preceding paragraph, the number of shares of Series B for which this Warrant may be exercised shall be determined by the following formula rounded to the nearest whole share: Number of Series B shares = __________/Warrant Price where Warrant Price equals the lesser of (Series A Price + Series B Price)/2 or $1.75 In any event, however, if the Warrant is exercisable for Series B shares, the number of Series B shares shall not be less than ________ shares. <PAGE> 2 Upon delivery of this Warrant, together with payment of the Warrant Price multiplied by the number of shares of the Preferred thereby purchased, at the principal office of the Company or at such other office or agency as the Company may designate by notice in writing to the holder hereof, the holder of this Warrant shall be entitled to receive a certificate or certificates for the shares of Preferred so purchased. The date at which the Company receives (i) the Warrant and (ii) payment for the shares of Preferred, either by payment in cash or by check, or by notice of the Warrantholder's intent to use the proceeds from the sale of shares at a Public Offering (as defined below) or notice of intent to use shares of Preferred as payment, both as described in Section 1 below, or such later date as such notice shall specify, shall be referred to herein as the "Exercise Date." All shares of Preferred which may be issued upon the exercise of this Warrant will, upon issuance, be fully paid and non-assessable and free from all taxes, liens and charges with respect thereto. This Warrant is subject to the following terms and conditions: 1. Exercise of Warrant: Subject to the terms and conditions set forth herein, this Warrant may be exercised in whole or in part, at any time on or before the lesser of 10 years from the date hereof or two years following the effective date of the registration statement filed by the Company with the Securities and Exchange Commission for its initial public offering, by the surrender of this Warrant together with the "Notice of Exercise" and "Investment Representation Statement" attached hereto as Exhibits A and C, respectively, duly completed and executed at the principal office of the Company and by the payment to the Company, in the manner provided for in the following paragraph, of the Warrant Price multiplied by the number of the Preferred shares purchased. The Company shall, within 10 days after such delivery, prepare a certificate for the shares of Preferred purchased in the name of the holder of this Warrant, or as such holder may direct (subject to the restrictions upon transfer contained herein and upon payment by such holder hereof of any applicable transfer taxes). This Warrant may be exercised by the payment to the Company, by cash or check, or from the proceeds of the sale of shares of Common Stock issued upon conversion of shares of Preferred issued upon exercise of this Warrant sold by the Warrantholder pursuant to a Public Offering of an amount equal to the aggregate Warrant Price multiplied by the number of shares being purchased. In lieu of exercising this Warrant as described above, the Warrantholder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with notice of such election (which notice shall include the number of shares being exercised hereunder), in which event the Company shall issue to the Warrantholder a number of shares of Preferred (or Common Stock if the Preferred has been converted into Common Stock) equal to the quotient obtained by dividing (x) the value of the shares of Preferred being exercised (the "Exercised Shares") on the Exercise Date, which value shall be determined by subtracting (A) the aggregate Warrant Price of the Exercised Shares immediately prior to the exercise of the Warrant from (B) the aggregate fair market value of the Exercised Shares on the Exercise Date, by (y) the fair market value of one share of Preferred (or Common Stock if the Preferred has been converted into Common Stock) as of the Exercise Date. No fractional shares shall be issuable upon exercise of this Warrant, and if the number of shares to be issued determined in accordance with the foregoing formula is other than a whole number, the Company shall pay to the Warrantholder an amount in cash equal to the fair market value of the resulting fractional share on the Exercise Date. The exercise of this Warrant may be made contingent upon (i) the closing of a Public Offering, (ii) the closing of any consolidation or merger of the Company with or into any other unaffiliated corporation, entity or person, or any other reorganization in which the Company shall not be the continuing or surviving entity of such consolidation, merger or reorganization (a "Merger"), or (iii) the sale of all or substantially all of the assets of the Company (a "Sale"). The Company shall notify the holder if an event or transaction of the kind -2- <PAGE> 3 described in this section is proposed at least fifteen days prior to the closing of such event or transaction; such notice shall also contain such details of the proposed event or transaction as are reasonable in the circumstances. Certificates for the shares issuable upon exercise of this Warrant and, if applicable, a new warrant evidencing the balance of the shares remaining subject to this Warrant shall be issued as of the Exercise Date and shall be delivered to the holder within thirty days following the Exercise Date. For purposes of this Section 1, the fair market value of the Preferred (or Common Stock if the Preferred has been converted into Common Stock) shall be determined as follows: (i) If this Warrant is exercised in connection with and contingent upon a Public Offering, and if the Company's registration statement relating to such Public Offering has been declared effective by the Securities and Exchange Commission, then the fair market value shall be the initial "Price to Public" specified in the final prospectus with respect to such offering. (ii) If this Warrant is exercised in connection with a merger, consolidation or sale of substantially all assets of the Company, then the fair market value per share shall be equal to the sum of all cash, stock and other consideration received by the Company, divided by the number of outstanding shares of the Company's Capital stock. (iii) If this Warrant is not exercised in connection with and contingent upon a Public Offering, then the fair market value shall be determined by the Board of Directors of the Company in good faith in such fashion as is reasonable and normal for companies in a similar stage of development. 2. Transfer of Warrant. Except in accordance with the conditions contained in Section 3 hereof, this Warrant and all rights hereunder are not transferable. 3. Condition of Transfer or Exercise of Warrant. It shall be a condition to any transfer or exercise of this Warrant that the Company shall have received, at the time of such transfer or exercise, a representation in writing that this Warrant (or portion hereof transferred) or the shares of Preferred or other securities being issued upon such exercise, as the case may be, are being acquired for investment not with a view to any sale or distribution thereof, or a statement of the pertinent facts covering any proposed distribution thereof. It shall be a further condition to any transfer of this Warrant or of any or all of the shares of Preferred issued upon exercise of this Warrant, or Common Stock issued upon conversion of the Preferred, other than a transfer registered under the Act, that the Company shall have received a legal opinion, in form and substance satisfactory to the Company and its counsel, reciting the pertinent circumstances surrounding the proposed transfer and stating that such transfer is exempt from the prospectus and the registration requirements of the Act. The requirement of a legal opinion shall not apply to the transfer of this Warrant or any part thereof to a partnership of which the Warrantholder is a partner or to the beneficial owners of such partnership without further consideration, so long as such transfer is in compliance with applicable securities laws and the beneficial owners are accredited investors. Each certificate evidencing the shares of Preferred issued upon exercise of this Warrant, or Common Stock issued upon conversion of the Preferred, or upon any transfer of such shares (other than a transfer registered under the Act or any subsequent transfer or shares so registered) shall, at the option of the Company, contain a legend, in form and substance satisfactory to the Company and its counsel, restricting the transfer of such shares to sales or other dispositions exempt from the requirements of the Act substantially to the following effect: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, OFFERED FOR -3- <PAGE> 4 SALE, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF, UNLESS REGISTERED PURSUANT TO THE PROVISIONS OF THAT ACT OR UNLESS AN OPINION OF COUNSEL TO THE CORPORATION IS OBTAINED STATING THAT SUCH DISPOSITION IS IN COMPLIANCE WITH AN AVAILABLE EXEMPTION FROM SUCH REGISTRATION. Upon surrender of this Warrant to the Company, together with the assignment notice annexed hereto as Exhibit B duly executed for transfer of this Warrant as an entirety by the Warrantholder, the Company shall issue a new warrant of the same denomination to the assignee. Upon surrender of this Warrant to the Company, together with the assignment hereof properly endorsed by the Warrantholder for transfer with respect to a portion of the shares of Preferred purchasable hereunder, the Company shall issue a new warrant to the assignee, in such denomination as shall be requested by the Warrantholder hereof, and shall issue to such Warrantholder a new warrant covering the number of shares in respect of which this Warrant shall not have been transferred. 4. Adjustment of Warrant Price and Number of Shares Purchasable Hereunder. The Warrant Price and the number of shares purchasable hereunder shall be subject to adjustment from time to time in accordance with the following provisions. (a) Subdivisions or Combinations. In case the Company shall at any time subdivide the outstanding shares of its Preferred, the Warrant Price in effect immediately prior to such subdivision shall be proportionately decreased, and in case the Company shall at any time combine the outstanding shares of its Preferred, the Warrant Price in effect immediately prior to such combination shall be proportionately increased, effective at the close of business on the date of such subdivision or combination, as the case may be. (b) Stock Dividends. In case the Company shall at any time pay a dividend with respect to Preferred payable in Preferred, then the Warrant Price in effect immediately prior to the record date for distribution of such dividend shall be adjusted to that price determined by multiplying the Warrant Price in effect immediately prior to such record date by a fraction (i) the numerator of which shall be the total number of shares of Preferred outstanding immediately prior to such dividend and (ii) the denominator of which shall be the total number of shares of Preferred outstanding immediately after such dividend. (c) Number of Shares. Upon each adjustment pursuant to subdivisions (b) or (c) of this Section 4, the registered holder of this Warrant shall thereafter (until another such adjustment) be entitled to purchase, at the adjusted Warrant Price, the number of shares of Preferred, calculated to the nearest full share, obtained by multiplying the number of shares of Preferred purchasable hereunder immediately prior to such adjustment by the Warrant Price in effect prior to such adjustment and dividing the product so obtained by the adjusted Warrant Price. (d) Reclassification. In case of any reclassification, change or conversion of securities of the class or series issuable upon exercise of this Warrant (other than as a result of a merger, subdivision or combination described above), or in case of any Merger where the successor entity agrees to assume the obligations of this Warrant, the Company, or such successor or purchasing corporation, as the case may be, shall duly execute and deliver to the Warrantholder a new warrant so that the Warrantholder shall have the right to receive, at a total purchase price not to exceed that payable upon the exercise of the unexercised portion of this Warrant, and in lieu of the shares of Preferred theretofore issuable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification, change or conversion by a holder of the number of shares of Preferred then purchasable under this Warrant. Such new -4- <PAGE> 5 warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4. The provisions of this subparagraph (d) shall similarly apply to successive reclassifications, changes, and conversions. (e) Antidilution Rights. The antidilution rights applicable to the Preferred and the Common Stock of the Company are (or in the case of Series B, will be) set forth in the Articles of Incorporation (the "Articles"), as amended from time to time, a true and complete copy in its current form which is attached hereto as Exhibit C. Such rights shall not be restated, amended or modified in any manner which effects the Warrantholder differently than the holders of Series A (or Series B should the Warrant be exercisable for shares of Series B) without such Warrantholder's prior written consent. The Company shall promptly provide the Warrantholder hereof with any restatement, amendment or modification to the Articles promptly after the same has been made. 5. Notices. (a) Upon any adjustment of the Warrant Price and any increase or decrease in the number of shares of Preferred purchasable upon the exercise of this Warrant, then, and in each such case, the Company, within thirty (30) days thereafter, shall give written notice thereof to the registered holder of this Warrant at the address of such holder as shown on the books of the Company which notice shall state the Warrant Price as adjusted and the increased or decreased number of shares purchasable upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation of each. (b) In the event that the Company shall propose at any time to effect a public offering of the Company's Common Stock pursuant to an effective registration statement under the Act, the Company shall send to the Warrantholder at least twenty days' prior written notice of the date when the same is anticipated to take place; provided, however, that the failure to give such notice shall not give the Warrantholder the right to delay or otherwise restrain or affect the Public Offering. Such written notice may be in lieu of the notice required under the third paragraph of Section 1 and shall be given by first class mail, postage prepaid, addressed to the Warrantholder at the address as shown on the books of the Company for the Warrantholder. 6. Registration. The Warrantholder shall be entitled to the registration rights as set forth in that certain Rights Agreement dated February 7, 1997 entered into by the Company and certain Investors (the "Registration Rights Agreement"), provided that the Warrantholder agrees in writing to be bound by such provisions. The Company shall request that the parties to the Registration Rights Agreement amend such agreement to make the Warrantholder a party to such agreement. 7. Representations of Warrantholder. Concurrently with the receipt of this Warrant and, upon exercise of this Warrant, the Warrantholder shall have executed the Investment Representation Statement in the form attached hereto as Exhibit C. 8. Representations, Warranties and Covenants of the Company. The Company represents and warrants to the Warrantholder, as of the Effective Date set forth below, as follows: (a) This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company, enforceable in accordance with its terms except as to (i) the effect of -5- <PAGE> 6 applicable bankruptcy and similar laws affecting the rights of creditors, and (ii) the effect of rules of law governing specific performance, injunctive relief and other equitable remedies. (b) The Preferred has been duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and non-assessable, and free from all taxes, liens and changes with respect to the issues of such shares. (c) In the event that the Warrant is exercisable for Series A, the rights, preference, privileges and restrictions granted to or imposed upon the Preferred and the holders thereof are as set forth in the Company's Articles of Incorporation, as amended to date and the Series A Preferred Stock Purchase Agreement dated February 7, 1997, a true and complete copy each of which has been delivered to the Warrantholder. (d) The execution and delivery of this Warrant is not, and the issuance of the Preferred upon exercise of this Warrant in accordance with the terms hereof is not, inconsistent with the Company's Articles of Incorporation, as amended to date, or Bylaws, does not contravene any law, governmental rule or regulation, judgment or order applicable to the Company, and does not conflict with or contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require the consent or approval of, the giving of notice to, the registration or filing with or the taking of any action in respect of or by, any federal, state or local government authority or agency or other person, other than state or federal securities law filings. (e) During the period within which this Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of the issuance upon exercise of this Warrant a sufficient number of shares of its Preferred to provide for the exercise of this Warrant and a sufficient number of shares of its Common Stock to provide for the conversion of the Preferred into Common Stock. 9. Miscellaneous. (a) The terms of this Warrant shall be binding upon and shall inure to the benefit of any successors or assigns of the Company and of the holder or holders hereof and of the Preferred issued or issuable upon the exercise hereof, and all of the obligations of the Company relating to the Preferred issuable upon exercise of this Warrant shall survive the exercise of this Warrant. (b) No holder of this Warrant, as such, shall be entitled to vote or receive dividends or be deemed to be a shareholder of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the holder of this Warrant, as such, any rights of a shareholder of the Company or any right to vote, give or withhold consent to any corporate action, receive notice of meetings, receive dividends or subscription rights, or otherwise. (c) Receipt of this Warrant by the holder hereof shall constitute acceptance of and agreement to the foregoing terms and conditions. (d) The Company will not, by amendment of its Articles of Incorporation, as amended to date, or through any other means, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. -6- <PAGE> 7 (e) Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company, or in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like data and tenor. (f) This Warrant shall be governed by the internal laws of the State of California. (g) So long as this Warrant has not terminated, the Warrantholder shall be entitled to receive such financial information as the Warrantholder would be entitled to receive under Section 7 of the Series A Preferred Stock Purchase Agreement dated February 7, 1997, if Warrantholder were a party to the agreement and a holder of that number of shares issuable upon full exercise of this Warrant. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer. Effective Date of Warrant: ______________, 1997 COMPANY: SKYSTREAM CORPORATION By: ------------------------------------------ Print Name: ---------------------------------- Title: --------------------------------------- ACCEPTED AND AGREED: WARRANTHOLDER: By: ------------------------------------------ Print Name: ---------------------------------- Title: --------------------------------------- -7- <PAGE> 8 EXHIBIT A NOTICE OF ELECTION Ladies and Gentlemen: The undersigned warrantholder (the "Warrantholder") hereby elects to exercise that certain Preferred Stock Warrant (the "Warrant") by and between the Warrantholder and the Company, dated ________________, by surrendering the Warrant at the principal office of the Company, in exchange for ___________ shares of Common Stock of SKYSTREAM CORPORATION. The Warrantholder hereby confirms and acknowledges the investment representations and warranties made in Section 7 of the Warrant, a copy of which is available from the Company, provides herewith the executed Investment Representation Statement attached to the Warrant as Exhibit C, and accepts such shares subject to the restrictions of the Warrant. Dated: --------------------------------------- WARRANTHOLDER: (Signature) (Typed or Printed Name) (Title) Address: <PAGE> 9 EXHIBIT B ASSIGNMENT FORM FOR VALUE RECEIVED, ________________________ hereby sells, assigns and transfers unto __________________________________________________________ (Name and Address) the right to purchase shares of Capital Stock represented by this Warrant to the extent of __________ shares of Preferred Stock of SKYSTREAM CORPORATION and does hereby irrevocably constitute and appoint ______________________________________________________, attorney, to transfer the same on the books of the Company with full power of substitution in the premises. Dated: , 19 ------------------------- -- Signature: --------------------------- <PAGE> 10 EXHIBIT C INVESTMENT REPRESENTATION STATEMENT Warrants to Purchase Shares of Preferred Stock of SKYSTREAM CORPORATION In connection with the purchase of the above-listed securities the undersigned hereby represents to SKYSTREAM CORPORATION (the "Company") as follows: Receipt of Information. The undersigned has received all the information it considers necessary or appropriate for deciding whether to purchase the Preferred Stock issuable upon exercise of the Warrant dated ________________________ (the "Warrant") issued by the Company to the undersigned, and it has examined any information furnished to it by the Company in connection therewith. Investment Representation. (a) The shares of the Company's capital stock to be received by the undersigned upon the exercise of the Warrant (the "Securities") will be acquired for investment for its own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and the undersigned has no present intention of selling, granting participation in or otherwise distributing the same, but subject, nevertheless, to any requirement of law that the disposition of its property shall at all times be within its control. By executing this Statement, the undersigned further represents that it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer, or grant participations to such person or to any third person, with respect to any Securities issuable upon exercise of the Warrant. (b) The undersigned understands that the Securities issuable upon exercise of the Warrant at the time of issuance may not be registered under the Securities Act of 1933, as amended (the "Act"), and applicable state securities laws, on the ground that the issuance of such securities is exempt pursuant to Section 4(2) of the Act and state law exemptions relating to offers and sales not by means of a public offering, and that the Company's reliance on such exemptions is predicated on the undersigned's representations set forth herein. The undersigned is an "Accredited Investor" as such term is defined in Rule 501 promulgated by the Securities and Exchange Commission pursuant to the Act. (c) The undersigned agrees that in no event will it make a disposition of any Securities acquired upon the exercise of the Warrant unless and until (i) it shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, and (ii) it shall have furnished the Company with an opinion of counsel satisfactory to the Company and the Company's counsel to the effect that (a) appropriate action necessary for compliance with the <PAGE> 11 Act and any applicable state securities laws has been taken or an exemption from the registration requirements of the Act and such laws is available, and (b) that the proposed transfer will not violate any of said laws. (d) The undersigned represents that it is able to fend for itself in the transactions contemplated by this Statement, has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investments, and has the ability to bear the economic risks (including the risk of a total loss) of its investment. The undersigned represents that it has had the opportunity to ask questions of the Company concerning the Company's business and assets and to obtain any additional information which it considered necessary to verify the accuracy of or to amplify the Company's disclosures, and has had all questions which have been asked by it satisfactorily answered by the Company. (e) The undersigned acknowledges that the Securities issuable upon exercise of the Warrant must be held indefinitely unless subsequently registered under the Act or an exemption from such registration is available. The undersigned is aware of the provisions of Rule 144 promulgated under the Act which permit limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the existence of a public market for the shares, the availability of certain current public information about the Company, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sale being through a "broker's transaction" or in transactions directly with a "market maker" (as provided by Rule 144(f)) and the number of shares being sold during any three-month period not exceeding specified limitations. The undersigned is aware that as of the date of this statement the conditions for resale set forth in Rule 144 have not been satisfied. The Warrantholder understands that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Company, a legend prohibiting their transfer without the consent of the Commissioner of Corporations of the State of California and any other legend required under applicable state securities laws. (f) The Warrantholder further understands that in the event all of the applicable requirements of Rule 144 are not satisfied, registration under the Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rule 144 is not exclusive, the Staff of the Securities and Exchange Commission has expressed its opinion, that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. The Warrantholder understands that no assurances can be given that any such other registration exemption will be available in such event. Dated: ---------------------------- (Signature) (Typed or Printed Name) (Title) </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-4.4 <SEQUENCE>11 <DESCRIPTION>EX-4.4 <TEXT> <PAGE> 1 EXHIBIT 4.4 THE SECURITIES EVIDENCED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE COMPANY, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH. COMMON STOCK WARRANT of SKYSTREAM NETWORKS CORPORATION FOR VALUE RECEIVED, SKYSTREAM NETWORKS CORPORATION, a Delaware corporation (the "Company"), hereby certifies that the David Dollinger Living Trust (the "Warrantholder") is entitled, subject to the provisions of this Warrant, to purchase from the Company 10,000 shares of the Company's common stock at a purchase price per share of $13.00 ("Purchase Price"). The aggregate purchase price under this Warrant is $130,000.00 ("Aggregate Purchase Price"). Upon delivery of this Warrant, together with payment of the Warrant Price multiplied by the number of shares of the Common thereby purchased, at the principal office of the Company or at such other office or agency as the Company may designate by notice in writing to the holder hereof, the holder of this Warrant shall be entitled to receive a certificate or certificates for the shares of Common so purchased. The date at which the Company receives (i) the Warrant and (ii) payment for the shares of Common, either by payment in cash or by check, or by notice of the Warrantholder's intent to use the proceeds from the sale of shares at a Public Offering (as defined below) or notice of intent to use shares of Common as payment, both as described in Section 1 below, or such later date as such notice shall specify, shall be referred to herein as the "Exercise Date." All shares of Common which may be issued upon the exercise of this Warrant will, upon issuance, be fully paid and non-assessable and free from all taxes, liens and charges with respect thereto. This Warrant is subject to the following terms and conditions: 1. Exercise of Warrant: Subject to the terms and conditions set forth herein, this Warrant may be exercised in whole or in part, on or before February 9, 2005, by the surrender of this Warrant together with the "Notice of Exercise" and "Investment Representation Statement" attached hereto as Exhibits A and B, respectively, duly completed and executed at the principal office of the Company and by the payment to the Company, in the manner provided for in the following paragraph, of the Warrant Price multiplied by the number of the Common shares purchased. The Company shall, within 10 days after such delivery, prepare a certificate for the shares of Common purchased in the name of the holder of this Warrant, or as such holder may direct (subject to the restrictions upon transfer contained herein and upon payment by such holder hereof of any applicable transfer taxes). This Warrant may be exercised by the payment to the Company, by cash or check, or from the proceeds of the sale of shares of Common Stock issued upon conversion of shares of Common issued upon exercise of this Warrant sold by the Warrantholder pursuant to a Public Offering of an amount equal to the -1- <PAGE> 2 aggregate Warrant Price multiplied by the number of shares being purchased. In lieu of exercising this Warrant as described above, the Warrantholder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with notice of such election (which notice shall include the number of shares being exercised hereunder), in which event the Company shall issue to the Warrantholder a number of shares of Common (or Common Stock if the Common has been converted into Common Stock) equal to the quotient obtained by dividing (x) the value of the shares of Common being exercised (the "Exercised Shares") on the Exercise Date, which value shall be determined by subtracting (A) the aggregate Warrant Price of the Exercised Shares immediately prior to the exercise of the Warrant from (B) the aggregate fair market value of the Exercised Shares on the Exercise Date, by (y) the fair market value of one share of Common (or Common Stock if the Common has been converted into Common Stock) as of the Exercise Date. No fractional shares shall be issuable upon exercise of this Warrant, and if the number of shares to be issued determined in accordance with the foregoing formula is other than a whole number, the Company shall pay to the Warrantholder an amount in cash equal to the fair market value of the resulting fractional share on the Exercise Date. The exercise of this Warrant may be made contingent upon (i) the closing of a Public Offering, (ii) the closing of any consolidation or merger of the Company with or into any other unaffiliated corporation, entity or person, or any other reorganization in which the Company shall not be the continuing or surviving entity of such consolidation, merger or reorganization (a "Merger"), or (iii) the sale of all or substantially all of the assets of the Company (a "Sale"). The Company shall notify the holder if an event or transaction of the kind described in this section is proposed at least fifteen days prior to the closing of such event or transaction; such notice shall also contain such details of the proposed event or transaction as are reasonable in the circumstances. Certificates for the shares issuable upon exercise of this Warrant and, if applicable, a new warrant evidencing the balance of the shares remaining subject to this Warrant shall be issued as of the Exercise Date and shall be delivered to the holder within thirty days following the Exercise Date. For purposes of this Section 1, the fair market value of the Common (or Common Stock if the Common has been converted into Common Stock) shall be determined as follows: (i) If this Warrant is exercised in connection with and contingent upon a Public Offering, and if the Company's registration statement relating to such Public Offering has been declared effective by the Securities and Exchange Commission, then the fair market value per share shall be the initial "Price to Public" specified in the final prospectus with respect to such offering. (ii) If this Warrant is exercised in connection with a merger, consolidation or sale of substantially all assets of the Company, then the fair market value per share shall be equal to the sum of all cash, stock and other consideration received by the Company, divided by the number of outstanding shares of the Company's Capital stock. (iii) If this Warrant is not exercised in connection with and contingent upon a Public Offering, then the fair market value per share shall be determined by the Board of Directors of the Company in good faith in such fashion as is reasonable and normal for companies in a similar stage of development. (iv) If this Warrant is exercised at a time when shares of the Company's Common Stock are traded on a public market, then the fair market value per share shall be the closing price of one share of the Company's Common Stock reported for the business day immediately before Warrantholder delivers its Notice of Exercise to the Company. -2- <PAGE> 3 2. Transfer of Warrant. This Warrant and all rights hereunder are not transferable. 3. Condition of Transfer or Exercise of Warrant. It shall be a condition to any exercise of this Warrant that the Company shall have received, at the time of such exercise, a representation in writing that this Warrant or the shares of Common or other securities being issued upon such exercise, are being acquired for investment not with a view to any sale or distribution thereof, or a statement of the pertinent facts covering any proposed distribution thereof. It shall be a further condition to any transfer of any or all of the shares of Common issued upon exercise of this Warrant, or Common Stock issued upon conversion of the Common, other than a transfer registered under the Act, that the Company shall have received a legal opinion, in form and substance satisfactory to the Company and its counsel, reciting the pertinent circumstances surrounding the proposed transfer and stating that such transfer is exempt from the prospectus and the registration requirements of the Act. Each certificate evidencing the shares of Common issued upon exercise of this Warrant, or Common Stock issued upon conversion of the Common, or upon any transfer of such shares (other than a transfer registered under the Act or any subsequent transfer or shares so registered) shall, at the option of the Company, contain a legend, in form and substance satisfactory to the Company and its counsel, restricting the transfer of such shares to sales or other dispositions exempt from the requirements of the Act substantially to the following effect: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, OFFERED FOR SALE, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF, UNLESS REGISTERED PURSUANT TO THE PROVISIONS OF THAT ACT OR UNLESS AN OPINION OF COUNSEL TO THE CORPORATION IS OBTAINED STATING THAT SUCH DISPOSITION IS IN COMPLIANCE WITH AN AVAILABLE EXEMPTION FROM SUCH REGISTRATION. 4. Adjustment of Warrant Price and Number of Shares Purchasable Hereunder. The Warrant Price and the number of shares purchasable hereunder shall be subject to adjustment from time to time in accordance with the following provisions. (a) Subdivisions or Combinations. In case the Company shall at any time subdivide the outstanding shares of its Common, the Warrant Price in effect immediately prior to such subdivision shall be proportionately decreased, and in case the Company shall at any time combine the outstanding shares of its Common, the Warrant Price in effect immediately prior to such combination shall be proportionately increased, effective at the close of business on the date of such subdivision or combination, as the case may be. (b) Stock Dividends. In case the Company shall at any time pay a dividend with respect to Common payable in Common, then the Warrant Price in effect immediately prior to the record date for distribution of such dividend shall be adjusted to that price determined by multiplying the Warrant Price in effect immediately prior to such record date by a fraction (i) the numerator of which shall be the total number of shares of Common outstanding immediately prior to such dividend and (ii) the denominator of which shall be the total number of shares of Common outstanding immediately after such dividend. (c) Number of Shares. Upon each adjustment pursuant to subdivisions (b) or (c) of this Section 4, the registered holder of this Warrant shall thereafter (until another such adjustment) be entitled to purchase, at the adjusted Warrant Price, the number of shares of Common, calculated to the nearest full share, obtained by multiplying the number of shares of Common purchasable hereunder immediately prior to such adjustment by the Warrant Price in effect prior to such adjustment and dividing the product so obtained by the adjusted Warrant Price. -3- <PAGE> 4 (d) Reclassification. In case of any reclassification, change or conversion of securities of the class or series issuable upon exercise of this Warrant (other than as a result of a merger, subdivision or combination described above), or in case of any Merger where the successor entity agrees to assume the obligations of this Warrant, the Company, or such successor or purchasing corporation, as the case may be, shall duly execute and deliver to the Warrantholder a new warrant so that the Warrantholder shall have the right to receive, at a total purchase price not to exceed that payable upon the exercise of the unexercised portion of this Warrant, and in lieu of the shares of Common theretofore issuable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification, change or conversion by a holder of the number of shares of Common then purchasable under this Warrant. Such new warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4. The provisions of this subparagraph (d) shall similarly apply to successive reclassifications, changes, and conversions. 5. Notices. (a) Upon any adjustment of the Warrant Price and any increase or decrease in the number of shares of Common purchasable upon the exercise of this Warrant, then, and in each such case, the Company, within thirty (30) days thereafter, shall give written notice thereof to the registered holder of this Warrant at the address of such holder as shown on the books of the Company which notice shall state the Warrant Price as adjusted and the increased or decreased number of shares purchasable upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation of each. (b) In the event that the Company shall propose at any time to effect a public offering of the Company's Common Stock pursuant to an effective registration statement under the Act, the Company shall send to the Warrantholder at least twenty days' prior written notice of the date when the same is anticipated to take place; provided, however, that the failure to give such notice shall not give the Warrantholder the right to delay or otherwise restrain or affect the Public Offering. Such written notice may be in lieu of the notice required under the third paragraph of Section 1 and shall be given by first class mail, postage prepaid, addressed to the Warrantholder at the address as shown on the books of the Company for the Warrantholder. 6. Representations of Warrantholder. Concurrently with the receipt of this Warrant and, upon exercise of this Warrant, the Warrantholder shall have executed the Investment Representation Statement in the form attached hereto as Exhibit B. 7. Representations, Warranties and Covenants of the Company. The Company represents and warrants to the Warrantholder, as of the Effective Date set forth below, as follows: (a) This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company, enforceable in accordance with its terms except as to (i) the effect of applicable bankruptcy and similar laws affecting the rights of creditors, and (ii) the effect of rules of law governing specific performance, injunctive relief and other equitable remedies. (b) The Common has been duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and non-assessable, and free from all taxes, liens and changes with respect to the issues of such shares. -4- <PAGE> 5 (c) The execution and delivery of this Warrant is not, and the issuance of the Common upon exercise of this Warrant in accordance with the terms hereof is not, inconsistent with the Company's Certificate of Incorporation, as amended to date, or Bylaws, does not contravene any law, governmental rule or regulation, judgment or order applicable to the Company, and does not conflict with or contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require the consent or approval of, the giving of notice to, the registration or filing with or the taking of any action in respect of or by, any federal, state or local government authority or agency or other person, other than state or federal securities law filings. (d) During the period within which this Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of the issuance upon exercise of this Warrant a sufficient number of shares of its Common to provide for the exercise of this Warrant and a sufficient number of shares of its Common Stock to provide for the conversion of the Common into Common Stock. 8. Market Stand off Provisions. The Warrantholder agrees in connection with the initial registration of the Company's securities that, upon request of the Company or the underwriters managing any underwritten initial public offering of the Company's securities, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Registrable Securities without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed one hundred eighty (180) days from the effective date of such registration, or such longer period as may be agreed to by the holders of a majority of the outstanding Registrable Securities) as may be requested by the Company or such managing underwriters; provided, however, that all officers and directors of the Company, all one-percent securityholders, and all other persons with registration rights (whether or not pursuant to this Agreement) enter into similar agreements with respect to securities of the Company held by them. 10. Miscellaneous. (a) The terms of this Warrant shall be binding upon and shall inure to the benefit of any successors of the Company and of the holder hereof and of the Common issued or issuable upon the exercise hereof, and all of the obligations of the Company relating to the Common issuable upon exercise of this Warrant shall survive the exercise of this Warrant. (b) No holder of this Warrant, as such, shall be entitled to vote or receive dividends or be deemed to be a shareholder of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the holder of this Warrant, as such, any rights of a shareholder of the Company or any right to vote, give or withhold consent to any corporate action, receive notice of meetings, receive dividends or subscription rights, or otherwise. (c) Receipt of this Warrant by the holder hereof shall constitute acceptance of and agreement to the foregoing terms and conditions. (d) The Company will not, by amendment of its Certificate of Incorporation, as amended to date, or through any other means, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. -5- <PAGE> 6 (e) Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company, or in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like data and tenor. (f) This Warrant shall be governed by the internal laws of the State of California. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer. Effective Date of Warrant: February 9, 2000 COMPANY: SKYSTREAM NETWORKS CORPORATION By: /s/ Susan Ketcham -------------------------------------------- Print Name: Susan Ketcham ------------------------------------ Title: CFO, Treasurer & Secretary ----------------------------------------- ACCEPTED AND AGREED: WARRANTHOLDER: DAVID DOLLINGER LIVING TRUST By: /s/ David Dollinger -------------------------------------------- Print Name: David Dollinger ------------------------------------ Title: Trustee ----------------------------------------- -6- <PAGE> 7 EXHIBIT A NOTICE OF ELECTION Ladies and Gentlemen: The undersigned warrantholder (the "Warrantholder") hereby elects to exercise that certain Common Stock Warrant (the "Warrant") by and between the Warrantholder and the Company, dated February 9, 2000, by surrendering the Warrant at the principal office of the Company, in exchange for ___________ shares of Common Stock of SKYSTREAM NETWORKS CORPORATION. The Warrantholder hereby confirms and acknowledges the investment representations and warranties made in Section 7 of the Warrant, a copy of which is available from the Company, provides herewith the executed Investment Representation Statement attached to the Warrant as Exhibit B, and accepts such shares subject to the restrictions of the Warrant. Dated: ----------------------------------------- WARRANTHOLDER: - ----------------------------------------------- (Signature) - ----------------------------------------------- (Typed or Printed Name) - ----------------------------------------------- (Title) Address: - ----------------------------------------------- - ----------------------------------------------- <PAGE> 8 EXHIBIT B INVESTMENT REPRESENTATION STATEMENT Warrants to Purchase Shares of Common Stock of SKYSTREAM NETWORKS CORPORATION In connection with the purchase of the above-listed securities the undersigned hereby represents to SKYSTREAM NETWORKS CORPORATION (the "Company") as follows: 1. Receipt of Information. The undersigned has received all the information it considers necessary or appropriate for deciding whether to purchase the Common Stock issuable upon exercise of the Warrant dated ________________________ (the "Warrant") issued by the Company to the undersigned, and it has examined any information furnished to it by the Company in connection therewith. 2. Investment Representation. (a) The shares of the Company's capital stock to be received by the undersigned upon the exercise of the Warrant (the "Securities") will be acquired for investment for its own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and the undersigned has no present intention of selling, granting participation in or otherwise distributing the same, but subject, nevertheless, to any requirement of law that the disposition of its property shall at all times be within its control. By executing this Statement, the undersigned further represents that it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer, or grant participations to such person or to any third person, with respect to any Securities issuable upon exercise of the Warrant. (b) The undersigned understands that the Securities issuable upon exercise of the Warrant at the time of issuance may not be registered under the Securities Act of 1933, as amended (the "Act"), and applicable state securities laws, on the ground that the issuance of such securities is exempt pursuant to Section 4(2) of the Act and state law exemptions relating to offers and sales not by means of a public offering, and that the Company's reliance on such exemptions is predicated on the undersigned's representations set forth herein. The undersigned is an "Accredited Investor" as such term is defined in Rule 501 promulgated by the Securities and Exchange Commission pursuant to the Act. (c) The undersigned agrees that in no event will it make a disposition of any Securities acquired upon the exercise of the Warrant unless and until (i) it shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, and (ii) it shall have furnished the Company with an opinion of counsel satisfactory to the Company and the Company's counsel to the effect that (a) appropriate action necessary for compliance with the Act and any applicable state securities laws has been taken or an exemption from the registration requirements of the Act and such laws is available, and (b) that the proposed transfer will not violate any of said laws. <PAGE> 9 (d) The undersigned represents that it is able to fend for itself in the transactions contemplated by this Statement, has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investments, and has the ability to bear the economic risks (including the risk of a total loss) of its investment. The undersigned represents that it has had the opportunity to ask questions of the Company concerning the Company's business and assets and to obtain any additional information which it considered necessary to verify the accuracy of or to amplify the Company's disclosures, and has had all questions which have been asked by it satisfactorily answered by the Company. (e) The undersigned acknowledges that the Securities issuable upon exercise of the Warrant must be held indefinitely unless subsequently registered under the Act or an exemption from such registration is available. The undersigned is aware of the provisions of Rule 144 promulgated under the Act which permit limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the existence of a public market for the shares, the availability of certain current public information about the Company, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sale being through a "broker's transaction" or in transactions directly with a "market maker" (as provided by Rule 144(f)) and the number of shares being sold during any three-month period not exceeding specified limitations. The undersigned is aware that as of the date of this statement the conditions for resale set forth in Rule 144 have not been satisfied. The Warrantholder understands that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Company and any other legend required under applicable state securities laws. (f) The Warrantholder further understands that in the event all of the applicable requirements of Rule 144 are not satisfied, registration under the Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rule 144 is not exclusive, the Staff of the Securities and Exchange Commission has expressed its opinion, that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. The Warrantholder understands that no assurances can be given that any such other registration exemption will be available in such event. Dated: ---------------------------------------- - ---------------------------------------------- (Signature) - ---------------------------------------------- (Typed or Printed Name) - ---------------------------------------------- (Title) -2- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-4.5 <SEQUENCE>12 <DESCRIPTION>EX-4.5 <TEXT> <PAGE> 1 EXHIBIT 4.5 RESTRICTED STOCK PURCHASE AGREEMENT This Agreement is made as of the 1st day of July, 1996, by and between SkyStream Corporation, a California corporation (the "Corporation"), and _____ ________ ("Purchaser"). In consideration of the mutual covenants and representations herein set forth, the Corporation and Purchaser agree as follows: 1. PURCHASE AND SALE OF STOCK. (a) Subject to the terms and conditions of this Agreement, the Corporation hereby agrees to sell to Purchaser and Purchaser agrees to purchase from the Corporation on the Closing Date (as herein defined), 1,000,000 shares of the Corporation's Common Stock (the "Stock") at a price of $.01 per share, for an aggregate purchase price of $10,000. The purchase price for the Stock shall be paid in cash as full payment for all of the shares. 2. CLOSING. The purchase and sale of the Stock shall occur at a Closing to be held at such time and place (the "Closing Date"), as designated by the Corporation by written notice of at least two business days. The Closing will take place at the principal office of the Corporation or at such other place as shall be designated by the Corporation. At the Closing, Purchaser shall deliver to the Corporation a check payable to the order of the Corporation in the aggregate amount of the purchase price of the Stock, and the Corporation will issue, as promptly thereafter as practicable, a certificate representing the Stock registered in the name of Purchaser. 3. PURCHASE OPTION. (a) All of the Stock shall be subject to the right and option of the Corporation to repurchase the Stock ("Purchase Option") as set forth in this paragraph 3. In the event Purchaser shall cease to be employed by the Corporation (including a parent or subsidiary of the Corporation) for any reason or no reason, with or without cause, including disability, death, retirement or other involuntary termination (a "Termination"), the Purchase Option shall come into effect. Following a Termination, the Corporation shall have the right, as provided in Section 4 below, to purchase from the Purchaser or the estate of Purchaser, as the case may be, at the per share price per share originally paid as set forth in paragraph 1 hereof (the "Option Price"), a portion of the Stock as follows: (i) If the Termination occurs before July 1, 1997, the Purchase Option shall apply to 100% of the Stock. (ii) If the Termination occurs after July 1, 1997, the Purchase Option shall apply to that portion of the Stock which is a fraction of 100% of the Stock, the numerator of which shall be <PAGE> 2 a number equal to 48 minus the total number of calendar months of the Purchaser's Vested Service (as defined below) for the Corporation and the denominator of which shall be 48. "Vested Service" by the Purchaser for the Corporation shall be defined as that period of time during which the Purchaser is employed by the Corporation after July 1, 1996 (the vesting commencement date) excluding time periods during which Purchaser is on an unpaid leave of absence from such employment. (b) Within thirty (30) days following a Termination, the Corporation shall notify Purchaser by written notice delivered or mailed as provided in subparagraph 13(c), as to whether it wishes to purchase the Stock pursuant to exercise of the Purchase Option. If the Corporation elects to purchase the Stock hereunder, it shall set a date for the closing of the transaction at a place specified by the Corporation no later than ten (10) days from the date of such notice. At the closing, the Corporation shall tender payment for the Stock and the certificates representing the Stock so purchased shall be canceled. Purchaser hereby authorizes and directs the Secretary or Transfer Agent of the Corporation to transfer the Stock as to which the Purchase Option has been exercised from Purchaser to the Corporation. The Option Price may be payable, at the option of the Corporation, in cancellation of all or a portion of any outstanding indebtedness of Purchaser to the Corporation or in cash, as set forth below. (c) Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Corporation, or a parent or subsidiary of the Corporation, to terminate Purchaser's employment, for any reason, with or without cause. 4. LEGALITY OF CORPORATE DISTRIBUTIONS. Notwithstanding any other provision in this Agreement, the Corporation shall not be required to purchase or pay for any Stock purchasable or purchased by it hereunder, if such purchase or such payment of all or any part of the purchase price shall be or constitute, in the good faith determination of the President or Board of Directors of the Corporation, an unlawful corporate distribution in contravention of the laws of any state having jurisdiction with respect to the transactions contemplated hereby. In the event of such determination and due notice thereof to Purchaser, any transferee of the Stock or their respective estates, as the case may be, each date of making any such purchase or making any such payment hereunder by the Corporation, respectively, may be extended from time to time at the option of the Corporation for up to two (2) years. If any such purchase is not made and fully paid for within three (3) years after such purchase was to have been made pursuant to the terms of this Agreement, however, Purchaser or any transferee of the Stock or their respective estates, as the case may be, shall have the option to have the transaction rescinded. 5. STOCK SPLITS, ETC. If, from time to time during the term of this Agreement: (a) There is any stock dividend or liquidating dividend of cash and/or property, stock split or other change in the character or amount of any of the outstanding securities of the Corporation; or -2- <PAGE> 3 (b) There is any consolidation, merger or sale of all, or substantially all, of the assets of the Corporation; then, in such event, any and all new, substituted or additional securities or other property to which Purchaser is entitled by reason of Purchaser's ownership of Stock shall be immediately subject to this Agreement and be included in the word "Stock" for all purposes with the same force and effect as the shares of Stock presently subject to the terms of this Agreement. 6. RESTRICTION ON TRANSFER. Purchaser shall not sell, transfer, pledge, hypothecate or otherwise dispose of any shares of the Stock except in accordance with the terms of this Agreement. Unless prior written consent is obtained from the Corporation, any transfer, sale, assignment, hypothecation, pledge, encumbrance, alienation, or other disposition of any of the Stock, or any interest therein other than according to the terms of this Agreement, shall be void and shall transfer no right, title, or interest in or to any or all of the Stock to the purported transferee, buyer, assignee, pledgee, or encumbrance holder. Notwithstanding any provision of this Agreement to the contrary, under no circumstances shall any sale or other transfer or disposition of Stock subject to this Agreement or any interest therein be valid if such sale, transfer or disposition of Stock will, or could, impair the ability of the Corporation to be treated as an S corporation under Section 1361 of the Internal Revenue Code of 1986, as amended (or any successor statute of the same or similar effect applicable to the Corporation). The Corporation shall not be required (i) to transfer on its books any shares of Stock which shall have been disposed of in violation of any of the provisions set forth in this Agreement, or (ii) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares shall have been so transferred. 7. TERMINATION OF AGREEMENT. The provisions of this Agreement shall terminate on (i) the closing date of an underwritten public offering of Common Stock of the Corporation (the "IPO") or (ii) the closing date of a sale of substantially all of the assets of the Corporation, purchase of substantially all of the outstanding shares of the Corporation or merger of the Corporation pursuant to which shareholders of this Corporation receive cash and/or securities of a buyer whose shares are publicly traded (the "Acquisition"). 8. LEGENDS. All certificates representing the shares of Stock of the Corporation subject to the provisions of this Agreement shall have endorsed thereon the following legends: (a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED." -3- <PAGE> 4 (b) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RIGHTS OF FIRST REFUSAL CONTAINED IN THE BYLAWS OF THIS CORPORATION AND IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, COPIES OF WHICH MAY BE OBTAINED FROM THE SECRETARY OF THE CORPORATION." (c) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AS SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION." (d) "THE SECURITIES REPRESENTED HEREBY MAY BE SUBJECT TO RESTRICTIONS ON TRANSFER FOR A PERIOD OF NOT MORE THAN 180 DAYS FOLLOWING THE EFFECTIVE DATE OF A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR AN OFFERING OF THE CORPORATION'S SECURITIES PURSUANT TO THE TERMS SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION." (e) Any legend required to be placed thereon by the California Commissioner of Corporations or under other applicable state Blue Sky laws. 9. MARKET STANDOFF. Purchaser hereby agrees that Purchaser shall not, to the extent requested by the Corporation and an underwriter of common stock (or other securities) of the Corporation, offer, sell, contract to sell or grant any option to purchase or otherwise dispose of any of the Stock during a period not to exceed one hundred eighty (180) days following the effective date of a registration statement of the Corporation filed under the Securities Act; provided, however, that such agreement shall be applicable only to the first two (2) such registration statements of the Corporation which cover shares (or other securities) to be sold on behalf of the Corporation to the public in an underwritten public offering. In order to enforce the foregoing covenant, the Corporation may impose stop-transfer instructions with respect to the Stock of Purchaser (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. 10. PURCHASER'S REPRESENTATIONS. In connection with the purchase of the Stock, Purchaser hereby represents and warrants to the Corporation as follows: (a) INVESTMENT INTENT; CAPACITY TO PROTECT INTERESTS. Purchaser is purchasing the Stock solely for Purchaser's own account for investment and not with a view to or for sale in connection with any distribution of the Stock or any portion thereof and not with any present intention of selling, -4- <PAGE> 5 offering to sell or otherwise disposing of or distributing the Stock or any portion thereof in any transaction other than a transaction exempt from registration under the Securities Act. Purchaser also represents that the entire legal and beneficial interest of the Stock is being purchased, and will be held, for Purchaser's account only, and neither in whole or in part for any other person. Purchaser either has a pre-existing business or personal relationship with the Corporation (including a parent, affiliate or subsidiary of the Corporation) or any of its officers, directors or controlling persons or by reason of Purchaser's business or financial experience or the business or financial experience of Purchaser's professional advisors who are unaffiliated with and who are not compensated by the Corporation (including a parent, affiliate or subsidiary of the Corporation) or any affiliate or selling agent of the Corporation, directly or indirectly, could be reasonably assumed to have the capacity to evaluate the merits and risks of an investment in the Corporation and to protect Purchaser's own interests in connection with this transaction. (b) RESIDENCE. Purchaser's principal residence is located at the address indicated beneath Purchaser's signature below. (c) INFORMATION CONCERNING CORPORATION. Purchaser has heretofore discussed the Corporation and its plans, operations and financial position with the Corporation's officers and has heretofore received all such information as Purchaser has deemed necessary and appropriate to enable Purchaser to evaluate the financial risk inherent in making an investment in the Stock, and Purchaser has received satisfactory and complete information concerning the business and financial condition of the Corporation in response to all inquiries in respect thereof. (d) ECONOMIC RISK. Purchaser realizes that the purchase of the Stock will be a highly speculative investment and involves a high degree of risk, and Purchaser is able, without significantly impairing Purchaser's financial position, to hold the Stock for an indefinite period of time and to suffer a complete loss on Purchaser's investment. (e) RESTRICTED SECURITIES. Purchaser understands and acknowledges that: (i) the sale of the Stock has not been registered under the Securities Act, and the Stock must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available and the Corporation is under no obligation to register the Stock; (ii) the share certificate representing the Stock will be stamped with the legends specified in Section 8 hereof; and (iii) the Corporation will make a notation in its records of the aforementioned restrictions on transfer and legends. -5- <PAGE> 6 (f) DISPOSITION UNDER RULES 144 AND 701. Purchaser understands that the shares of Stock are restricted securities within the meaning of Rule 144 promulgated under the Securities Act; that the exemption from registration under Rule 144 will not be available in any event for at least two years from the date of purchase and payment (the "Holding Period") of the Stock, and even then will not be available unless (i) a public trading market then exists for the Common Stock of the Corporation, (ii) adequate information concerning the Corporation is then available to the public, and (iii) other terms and conditions of Rule 144 are complied with; and that any sale of the Stock may be made only in limited amounts in accordance with such terms and conditions. Purchaser understands that the resale provisions of Rule 701, if available, will not apply until 90 days after the Corporation becomes subject to the reporting obligation under the Securities Exchange Act of 1934 (the "Exchange Act"). There can be no assurance that the requirements of Rule 144 or Rule 701 will be met, or that the Stock will ever be saleable. (g) FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting Purchaser's representations set forth above, or the restrictions set forth in Section 6 and elsewhere herein, Purchaser further agrees that Purchaser shall in no event make any disposition of all or any portion of the Stock unless and until: (A) There is then in effect a Registration Statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with said Registration Statement; or, (B)(1) Purchaser shall have notified the Corporation of the proposed disposition and shall have furnished the Corporation with a detailed statement of the circumstances surrounding the proposed disposition, (2) Purchaser shall have furnished the Corporation with an opinion of Purchaser's counsel to the effect that such disposition will not require registration of such shares under the Securities Act, and (3) such opinion of Purchaser's counsel shall have been concurred in by counsel for the Corporation and the Corporation shall have advised Purchaser of such concurrence. (h) VALUATION OF COMMON STOCK. Purchaser understands that the Stock has been valued by the Board of Directors and that the Corporation believes this valuation represents a fair attempt at reaching an accurate appraisal of its worth; Purchaser understands, however, that the Corporation can give no assurances that such price is in fact the fair market value of the Stock and that it is possible that, with the benefit of hindsight, the Internal Revenue Service could successfully assert that the value of the common stock on the date of purchase is substantially greater than so determined. If the Internal Revenue Service were to succeed in a tax determination that the Stock received had value greater than that upon which the transaction was based, the additional value would constitute ordinary income as of the date of its receipt. The additional taxes (and interest) due would be payable by Purchaser, and there is no provision for the Corporation to reimburse Purchaser for that tax liability, and Purchaser assumes all responsibility for such potential tax liability. Under current law, in the event such additional value would represent more than 25 percent of Purchaser's gross -6- <PAGE> 7 income for the year in which the value of the shares were taxable, the Internal Revenue Service would have six years from the due date for filing the return (or the actual filing date of the return if filed thereafter) within which to assess Purchaser the additional tax and interest which would then be due. The Corporation would have the benefit, in any such transaction, if a determination was made prior to the three year statute of limitations period affecting the Corporation, of an increase in its deduction for compensation paid, which would offset its operating profits, or, if not profitable, would create net operating loss carry forward arising from operations in that year. (i) SECTION 83(b) ELECTION. Purchaser understands that Section 83 of the Internal Revenue Code of 1986, as amended (the "Code") taxes as ordinary income the difference between the amount paid for the Stock and the fair market value of the Stock as of the date any restrictions on the Stock lapse. In this context, "restriction" means the right of the Corporation to buy back the stock pursuant to this Agreement (the "Purchase Option"). In the event the Corporation has registered under the Exchange Act, "restriction" with respect to officers, directors and 10% shareholders also means the six (6) month period after the Closing during which such officers, directors and 10% shareholders are subject to suit under Section 16(b) of the Exchange Act. Purchaser understands that he may elect to be taxed at the time the Stock is purchased rather than when and as the Purchase Option or six (6) month Section 16(b) period expires by filing an election under Section 83(b) of the Code with the I.R.S. within thirty (30) days from the date of purchase. Even if the fair market value of the Stock equals the amount paid for the Stock, the election must be made to avoid adverse tax consequences in the future. The form for making this election is attached as Exhibit 1 hereto. Purchaser understands that failure to make this filing timely will result in the recognition of ordinary income by Purchaser, as the Purchase Option lapses, or after the lapse of the six (6) month Section 16(b) period, on the difference between the purchase price and the fair market value of the Stock at the time such restrictions lapse. PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE RESPONSIBILITY AND NOT THE CORPORATION'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(B), EVEN IF PURCHASER REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON PURCHASER'S BEHALF. 11. ESCROW. As security for the faithful performance of the terms of this Agreement and the Note and to ensure the availability for delivery of the Stock upon exercise of the Corporation's option to purchase the Stock as set forth in Section 3 hereof, the Purchaser agrees to deliver to and deposit with the Secretary of the Corporation, or such other person designated by the Corporation, as escrow agent in this transaction ("Escrow Agent"), two Stock Assignments duly endorsed (with date and number of shares blank) in the form attached hereto as Exhibit 2, together with the certificate or certificates evidencing the Stock (the "Collateral"); said documents are to be held by the Escrow Agent and delivered by said Escrow Agent pursuant to the Joint Escrow Instructions of the Corporation and the Purchaser set forth in Exhibit 3 attached hereto and incorporated by this reference, which instructions shall also be delivered to the Escrow Agent at the closing hereunder. -7- <PAGE> 8 12. MISCELLANEOUS. (a) Subject to the provisions and limitations hereof, Purchaser may, during the term of this Agreement, exercise all rights and privileges of a stockholder of the Corporation with respect to the Stock. (b) The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. (c) Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to Purchaser at the address shown on the Corporation's employment records and to the Corporation at the address of its principal corporate offices (attention: President) or at such other address as such party may designate by ten (10) days' advance written notice to the other party hereto. (d) Purchaser hereby authorizes and directs the Secretary or Transfer Agent of the Corporation to transfer the Stock as to which the option to buy pursuant to Section 3 has been exercised from Purchaser to the Corporation. (e) Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Corporation, or a parent or subsidiary of the Corporation, to terminate Purchaser's employment, for any reason, with or without cause. (f) No supplement, modification or amendment of any term, provision or condition of this Agreement shall be binding or enforceable unless executed in writing by the parties hereto. (g) Should any part, term or provision of this Agreement or any document required herein to be executed be declared invalid, void or unenforceable, all remaining parts, terms and provisions hereof shall remain in full force and effect and shall in no way be invalidated, impaired or affected thereby. (h) This Agreement shall be governed by and construed and enforced in accordance with and subject to the laws of the State of California. 13. ARBITRATION. At the option of either party, any and all disputes or controversies whether of law or fact and of any nature whatsoever arising from or respecting this Agreement, except for the obligation of Purchaser to make payment for the Stock, shall be decided by arbitration by the American Arbitration Association in accordance with the rules and regulations of that Association. -8- <PAGE> 9 The arbitrators shall be selected as follows: In the event the Corporation and Purchaser agree on one arbitrator, the arbitration shall be conducted by such arbitrator. In the event the Corporation and Purchaser do not so agree, the Corporation and Purchaser shall each select one independent, qualified arbitrator and the two arbitrators so selected shall select the third arbitrator. The Corporation reserves the right to object to any individual arbitrator who shall be employed by or affiliated with a competing organization. Arbitration shall take place at San Francisco, California, or any other location mutually agreeable to the parties. At the request of either party, arbitration proceedings will be conducted in the utmost secrecy; in such case all documents, testimony and records shall be received, heard and maintained by the arbitrators in secrecy under seal, available for the inspection only of the Corporation or Purchaser and their respective attorneys and their respective experts who shall agree in advance and in writing to receive all such information confidentially and to maintain such information in secrecy until such information shall become generally known. The arbitrator, who shall act by majority vote, shall be able to decree any and all relief of an equitable nature, including but not limited to such relief as a temporary restraining order, a temporary and/or a permanent injunction, and shall also be able to award damages, with or without an accounting and costs. The decree or judgment of an award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Reasonable notice of the time and place of arbitration shall be given to all persons, other than the parties, as shall be required by law, in which case such persons or those authorized representatives shall have the right to attend and/or participate in all the arbitration hearings in such manner as the law shall require. -9- <PAGE> 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. PURCHASER SKYSTREAM CORPORATION a California Corporation - ------------------------------- By: ------------------------------ Title: Address: --------------------------- ---------------------- ---------------------- THIS AGREEMENT DOES NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED EMPLOYMENT FOR THE VESTING PERIOD OR ANY OTHER PERIOD. PURCHASER UNDERSTANDS THAT PURCHASER'S EMPLOYMENT WITH THE CORPORATION IS ON AN "AT WILL" BASIS, UNLESS OTHERWISE SPECIFICALLY AGREED TO BY THE CORPORATION IN WRITING. CONSENT OF SPOUSE The undersigned spouse of Purchaser has read and hereby approves the foregoing Agreement. In consideration of the Corporation's granting my spouse the right to purchase the Stock as set forth in the Agreement, the undersigned hereby agrees to be irrevocably bound by the Agreement and further agrees that any community property interest shall be similarly bound by the Agreement. I hereby appoint my spouse as my attorney-in-fact with respect to any amendment or exercise of any rights under the Agreement. --------------------------------- -10- <PAGE> 11 EXHIBIT 1 ELECTION UNDER SECTION 83(B) OF THE INTERNAL REVENUE CODE OF 1986 The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the Internal Revenue Code of 1986 to include in Purchaser's gross income for the current taxable year, the amount of any compensation taxable to him in connection with Purchaser's receipt of the property described below: 1. The name, address, taxpayer identification number and taxable year of the undersigned are as follows: NAME OF TAXPAYER: SPOUSE: __________________ ADDRESS: ______________________________________________________________ IDENTIFICATION NO. OF TAXPAYER: ____________ SPOUSE: __________________ TAXABLE YEAR: 1996 2. The property with respect to which the election is made is described as follows: 1,000,000 shares of the Common Stock of SkyStream Corporation, a California corporation (the "Company"). 3. The date on which the property was transferred is: July 1, 1996 4. The property is subject to the following restrictions: The right of the Company to repurchase the shares, or a portion thereof, upon termination of employment at a formula price. The right lapses upon the occurrence of certain events related to the purpose of the transfer. 5. The value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: $.01 per share. 6. The amount (if any) paid for such property: $.01 per share. The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned's receipt of the above-described property. The transferee of such property is the person performing the services in connection with the transfer of said property. The undersigned understands that the foregoing election may not be revoked except with the consent of the Commissioner. Dated: ----------------- ------------------------------ Taxpayer The undersigned spouse of taxpayer joins in this election. Dated: ----------------- ------------------------------ Spouse of Taxpayer <PAGE> 12 EXHIBIT 2 ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Restricted Stock Purchase Agreement dated as of July 1, 1996 (the "Agreement") ________________ ("Purchaser") hereby sells, assigns and transfers unto SkyStream Corporation ________________________________________________ (______) shares of the Common Stock of SkyStream Corporation, a California corporation, standing in the undersigned's name on the books of said corporation represented by certificate No. herewith, and does hereby irrevocably constitute and appoint _______ ________________ attorney to transfer the said stock on the books of the said corporation with full power of substitution in the premises. THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT AND THE EXHIBITS THERETO. Dated: PURCHASER ----------------- Signature --------------------- Instruction: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Corporation to exercise its "Purchase Option" set forth in the Agreement without requiring additional signatures on the part of the Purchaser. <PAGE> 13 EXHIBIT 3 JOINT ESCROW INSTRUCTIONS July 1, 1996 Secretary SkyStream Corporation 1282 Estate Drive Los Altos, CA 94024 Dear Sir: As Escrow Agent for both SkyStream Corporation, a California corporation ("Corporation"), and the undersigned purchaser of stock of the Corporation ("Purchaser"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Restricted Stock Purchase Agreement ("Agreement") between the Corporation and the undersigned, to which a copy of these Joint Escrow Instructions is attached as Exhibit 3, in accordance with the following instructions: 1. In the event the Corporation and/or any assignee of the Corporation (referred to collectively for convenience herein as the "Corporation") exercises the option set forth in Section 3 of the Agreement, the Corporation shall give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Corporation. Purchaser and the Corporation hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 2. At the closing, you are directed (a) to date the stock assignments necessary for the transfer in question, (b) to fill in the number of shares of stock being transferred, and (c) to deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Corporation against the simultaneous delivery to you of the purchase price (by check) for the number of shares of stock being purchased pursuant to the exercise of the Corporation's Option. 3. Purchaser irrevocably authorizes the Corporation to deposit with you any certificates evidencing shares of stock (as that term is defined in the Agreement) to be held by you hereunder pursuant to Section 10 of the Agreement. Purchaser does hereby irrevocably constitute and appoint you as his attorney-in-fact and agent for the term of this escrow to execute all documents necessary or appropriate to make such securities negotiable or other property transferable, as the case may be, and to complete any transaction herein contemplated. Subject to the provisions of this paragraph 3, Purchaser shall exercise all rights and privileges of a shareholder of the Corporation while the stock is held by you. <PAGE> 14 4. None of the certificates representing the shares of stock deposited under these escrow instructions shall be released to the Purchaser if such shares of stock are subject to the Purchase Option. 5. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Purchaser, you shall deliver all of same to Purchaser and all be discharged of all further obligations hereunder. 6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law and of the arbitrator provided for in Section 13 of the Agreement, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court and of the arbitrator provided for in Section 13 of the Agreement. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You shall not be liable for the outlawing of any rights under the Statute of Limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. You shall be entitled to employ such legal counsel and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. 12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be Secretary of the Corporation or if you shall resign by written notice to each party. In the event of any such termination, the Corporation shall appoint a successor Escrow Agent. <PAGE> 15 13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of the arbitrator provided for in Section 13 of the Agreement or of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 15. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties thereunto entitled at the following addresses, or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto. CORPORATION: SkyStream Corporation 1282 Estate Drive Los Altos, CA 94024 PURCHASER: ------------------------- ------------------------- ------------------------- ESCROW AGENT: Secretary SkyStream Corporation 1282 Estate Drive Los Altos, CA 94024 16. By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. -3- <PAGE> 16 Very truly yours, SKYSTREAM CORPORATION, a California corporation By: ----------------------------- PURCHASER: -------------------------------- ESCROW AGENT: - ------------------------------ Secretary -4- <PAGE> 17 EXHIBIT A INVESTMENT REPRESENTATION STATEMENT PURCHASER : SELLER : SKYSTREAM CORPORATION COMPANY : SKYSTREAM CORPORATION SECURITY : COMMON STOCK AMOUNT : DATE : In connection with the purchase of the above-listed Securities, I, the Purchaser, represent to the Seller and to the Company the following: (i) I am aware of the Company's business affairs and financial condition, and have acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. I am purchasing these Securities for my own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Securities Act of 1933 ("Securities Act"). (ii) I understand that the Securities have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of my investment intent as expressed herein. In this connection, I understand that, in the view of the Securities and Exchange Commission ("SEC"), the statutory basis for such exemption may be unavailable if my representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. (iii) I further understand that the Securities must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from registration is otherwise available. Moreover, I understand that the Company is under no obligation to register the Securities. In addition, I understand that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel for the Company. <PAGE> 18 (iv) I am familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof in a non-public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of issuance of the Securities, such issuance will be exempt from registration under the Securities Act. In the event the Company later becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter the securities exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions specified by Rule 144, including, among other things: (1) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of certain public information about the Company and the amount of securities being sold during any three month period not exceeding the limitations specified in Rule 144(e), if applicable. Notwithstanding this paragraph (d), I acknowledge and agree to the restrictions set forth in paragraph (c) hereof. In the event that the Company does not qualify under Rule 701 at the time of issuance of the Securities, then the Securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires among other things: (1) the availability of certain public information about the Company, (2) the resale occurring not less than two years after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and, in the case of an affiliate, or of a non-affiliate who has held the securities less than three years, (3) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934) and the amount of securities being sold during any three month period not exceeding the specified limitations stated therein, if applicable. (V) I AGREE, IN CONNECTION WITH THE COMPANY'S INITIAL UNDERWRITTEN PUBLIC OFFERING OF THE COMPANY'S SECURITIES, (1) NOT TO SELL, MAKE SHORT SALE OF, LOAN, GRANT ANY OPTIONS FOR THE PURCHASE OF, OR OTHERWISE DISPOSE OF ANY SHARES OF COMMON STOCK OF THE COMPANY HELD BY ME (OTHER THAN THOSE SHARES INCLUDED IN THE REGISTRATION) WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMPANY OR THE UNDERWRITERS MANAGING SUCH INITIAL UNDERWRITTEN PUBLIC OFFERING OF THE COMPANY'S SECURITIES FOR ONE HUNDRED EIGHTY (180) DAYS FROM THE EFFECTIVE DATE OF SUCH REGISTRATION, AND (2) I FURTHER AGREE TO EXECUTE ANY AGREEMENT REFLECTING (1) ABOVE AS MAY BE REQUESTED BY THE UNDERWRITERS AT THE TIME OF THE PUBLIC OFFERING; PROVIDED, HOWEVER, THAT THE OFFICERS AND DIRECTORS OF THE COMPANY WHO OWN THE STOCK OF THE COMPANY ALSO AGREE TO SUCH RESTRICTIONS. (vi) I further understand that in the event all of the applicable requirements of Rule 144 or Rule 701 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rule 144 and Rule 701 are not exclusive, the Staff of the SEC has expressed its opinion that persons -2- <PAGE> 19 proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. (vii) I understand that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities without the consent of the Commissioner of Corporations of California. I have read the applicable Commissioner's Rules with respect to such restriction, a copy of which is attached. Signature of Purchaser: ____________________________ Date:________________, 19___ -3- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-4.5.1 <SEQUENCE>13 <DESCRIPTION>EX-4.5.1 <TEXT> <PAGE> 1 EXHIBIT 4.5.1 AMENDMENT TO RESTRICTED STOCK PURCHASE AGREEMENT This Amendment is made as of the 7th day of February, 1997, to the Restricted Stock Purchase Agreement dated as of July 10, 1996 (the "Agreement") by and between SkyStream Corporation and ________________ ("Purchaser"). 1. This Amendment confirms that the Agreement is dated as of July 10, 1996. 2. Effective upon the closing of the sale of shares of Series A Preferred Stock pursuant to the terms of the Series A Preferred Stock Purchase Agreement dated as of February 7, 1997 (the "Closing"), Section 6 of the Agreement is amended to read in its entirety as follows: 6. RESTRICTION ON TRANSFER. (a) Purchaser shall not sell, transfer, pledge, hypothecate or otherwise dispose of any shares of the Stock except in accordance with (i) the terms of this Agreement, (ii) Article VIII, Section 8.6 of the Corporation's Bylaws and (iii) the terms of that certain Right of First Refusal and Co-Sale Agreement dated February 7, 1997 (the "Co-Sale Agreement"). Unless prior written consent is obtained from the Corporation or the other parties to the Co-Sale Agreement, any transfer, sale, assignment, hypothecation, pledge, encumbrance, alienation, or other disposition of any of the Stock, or any interest therein other than according to the terms of this Agreement, the Bylaws and the Co-Sale Agreement, shall be void and shall transfer no right, title or interest in or to any or all of the Stock to the purported transferee, buyer, assignee, pledgee or encumbrance holder. (b) Involuntary Transfer. (i) Corporation's Right to Purchase upon Involuntary Transfer. In the event, at any time after the date of this Agreement, of any transfer by operation of law or other involuntary transfer (including death or divorce) of all or a portion of the Stock by the record holder thereof, the Corporation shall have an option to purchase all of the Stock transferred at the greater of the purchase price paid by the Purchaser pursuant to this Agreement or the fair market value of the Stock on the date of transfer. Upon such a transfer, the person acquiring the Stock shall promptly notify the Secretary of the Corporation of such transfer. The right to purchase such shares of Stock shall be provided to the Corporation for a period of twenty (20) days following receipt by the Corporation of written notice by the person acquiring the Stock. (ii) Price for Involuntary Transfer. With respect to any Stock to be transferred pursuant to Section 6(b)(i), the price per share shall be a price set by the Board of Directors of the Corporation that will reflect the current fair market value of the Stock in terms of present earnings and future prospects of the Corporation. The Corporation shall notify Purchaser or his or her executor, as <PAGE> 2 the case may be, of the price so determined within thirty (30) days after receipt by it of written notice of the transfer or proposed transfer of the Stock. However, if the Purchaser does not agree with the valuation as determined by the Board of Directors of the Corporation, the Purchaser shall be entitled to have the valuation determined by an independent appraiser to be mutually agreed upon by the Corporation and the Purchaser and whose fees shall be borne equally by the Corporation and the Purchaser. (c) Assignment. The right of the Corporation to purchase any part of the Stock may be assigned in whole or in part to any shareholder or shareholders of the Corporation or other persons or organizations; provided, however, that an assignee, other than a corporation that is the parent or 100% owned subsidiary of the Corporation, must pay the Corporation, upon assignment of such right, cash equal to the difference between the original purchase price and fair market value, if the original purchase price is less than the fair market value of the Stock subject to the assignment. (d) Restrictions Binding on Transferees. All transferees of Stock or any interest therein will receive and hold such Stock or interest subject to the provisions of this Agreement, the Bylaws of the Corporation and the Co-Sale Agreement including, insofar as applicable, the Repurchase Option. Any sale or transfer of the Stock shall be void unless the provisions of this Agreement, the Bylaws and the Co-Sale Agreement are met. 3. Section 7 of the Agreement shall be amended to read in its entirety as follows: 7. Termination of Rights. The restrictions set forth in Section 6 of this Agreement shall terminate on (i) the closing date of an underwritten public offering of Common Stock of the Corporation (the "IPO") or (ii) the closing date of a sale of substantially all of the assets of the Corporation, purchase of substantially all of the outstanding shares of the Corporation or merger of the Corporation pursuant to which shareholders of this Corporation receive cash and/or securities of a buyer whose shares are publicly traded (the "Acquisition"). 4. Section 9 of the Agreement shall be amended to read in its entirety as follows: 9. Market Standoff. Purchaser hereby agrees that Purchaser shall not, to the extent requested by the Corporation or the underwriters managing any underwritten public offering of common stock (or other securities) of the Corporation, offer, sell, contract to sell, make any short sale of, loan or grant any option to purchase or otherwise dispose of any of the Stock during a period not to exceed one hundred eighty (180) days following the effective date of a registration statement, or such longer period as may be agreed to by the holders of a majority of the outstanding Registrable Securities (as such term is defined in the Rights Agreement between the Purchaser and the holders of Series A Preferred Stock dated February 7, 1997) of the Corporation filed under the Securities Act; provided, however, that such agreement shall be applicable only to the first two (2) such registration statements of the Corporation which cover shares (or other securities) to be sold on behalf of the Corporation to the public in an underwritten public offering. <PAGE> 3 In order to enforce the foregoing covenant, the Corporation may impose stop-transfer instructions with respect to the Stock of Purchaser (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. 5. Except as amended herewith, all other paragraphs of the Agreement shall continue in full force and effect. In the event of any conflict between the provisions of the Agreement and this Amendment, the provisions of this Amendment will govern. 6. This Amendment, the Agreement and the documents referred to herein constitute the entire agreement among the parties as to the matters addressed herein and therein, including but not limited to the employment severance benefits granted by the Corporation to the Purchaser. <PAGE> 4 IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date and year first above written. PURCHASER SKYSTREAM CORPORATION By By ------------------------------ ------------------------------ Title ---------------------------- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-5.1 <SEQUENCE>14 <DESCRIPTION>EX-5.1 <TEXT> <PAGE> 1 EXHIBIT 5.1 WILSON SONSINI GOODRICH & ROSATI Professional Corporation 650 Page Mill Road Palo Alto, California 94304-1050 Telephone (650) 493-9300 Facsimile (650) 493-6811 March 8, 2000 SkyStream Networks Inc. 555 Clyde Avenue Mountain View, CA 94043 RE: REGISTRATION STATEMENT ON FORM S-1 Ladies and Gentlemen: We have examined the Registration Statement on Form S-1 (File No. 333-____) to be filed by you with the Securities and Exchange Commission on March __, 2000 (the "Registration Statement") in connection with the registration under the Securities Act of 1933, as amended, of ________ shares of Common Stock of Skystream Networks Inc. (the "Shares"). As your counsel in connection with this transaction, we have examined the proceedings proposed to be taken in connection with said sale and issuance of the Shares. It is our opinion that, upon completion of the proceedings being taken or contemplated by us, as your counsel, to be taken prior to the issuance of the Shares, and upon completion of the proceedings being taken in order to permit such transactions to be carried out in accordance with the securities laws of various states, where required, the Shares when issued and sold in the manner referred to in the Registration Statement will legally and validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement, and further consent to the use of our name wherever appearing in the Registration Statement, including the prospectus constituting a part thereof, and any amendment thereto. Very truly yours, /s/ WILSON SONSINI GOODRICH & ROSATI Professional Corporation WILSON SONSINI GOODRICH & ROSATI Professional Corporation </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.1 <SEQUENCE>15 <DESCRIPTION>EX-10.1 <TEXT> <PAGE> 1 EXHIBIT 10.1 SKYSTREAM NETWORKS INC. INDEMNIFICATION AGREEMENT This Indemnification Agreement ("Agreement") is effective as of January __, 2000 by and between SkyStream Networks Inc., a Delaware corporation (the "Company"), and _________________ ("Indemnitee"). WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve the Company and its related entities; WHEREAS, in order to induce Indemnitee to continue to provide services to the Company, the Company wishes to provide for the indemnification of, and the advancement of expenses to, Indemnitee to the maximum extent permitted by law; WHEREAS, the Company and Indemnitee recognize the continued difficulty in obtaining liability insurance for the Company's directors, officers, employees, agents and fiduciaries, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance; WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, agents and fiduciaries to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited; and WHEREAS, in connection with the Company's reincorporation, the Company and Indemnitee desire to continue to have in place the additional protection provided by an indemnification agreement, with such changes as are required to conform the existing agreement to Delaware law and to provide indemnification and advancement of expenses to the Indemnitee to the maximum extent permitted by Delaware law; WHEREAS, in view of the considerations set forth above, the Company desires that Indemnitee shall be indemnified and advanced expenses by the Company as set forth herein; NOW, THEREFORE, the Company and Indemnitee hereby agree as set forth below. 1. Certain Definitions. a. "Change in Control" shall mean, and shall be deemed to have occurred if, on or after the date of this Agreement, (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company acting in such capacity or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than 50% of the -1- <PAGE> 2 total voting power represented by the Company's then outstanding Voting Securities, (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of related transactions) all or substantially all of the Company's assets. b. "Claim" shall mean with respect to a Covered Event: any threatened, pending or completed action, suit, proceeding or alternative dispute resolution mechanism, or any hearing, inquiry or investigation that Indemnitee in good faith believes might lead to the institution of any such action, suit, proceeding or alternative dispute resolution mechanism, whether civil, criminal, administrative, investigative or other. c. References to the "Company" shall include, in addition to SkyStream Networks Corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger to which SkyStream Networks Corporation (or any of its wholly owned subsidiaries) is a party which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if Indemnitee is or was a director, officer, employee, agent or fiduciary of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. d. "Covered Event" shall mean any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or any subsidiary of the Company, or is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action or inaction on the part of Indemnitee while serving in such capacity. e. "Expenses" shall mean any and all expenses (including attorneys' fees and all other costs, expenses and obligations incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, to be a witness in or to participate in, any action, suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or investigation), judgments, fines, penalties and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) of any Claim -2- <PAGE> 3 and any federal, state, local or foreign taxes imposed on the Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement. f. "Expense Advance" shall mean a payment to Indemnitee pursuant to Section 3 of Expenses in advance of the settlement of or final judgement in any action, suit, proceeding or alternative dispute resolution mechanism, hearing, inquiry or investigation which constitutes a Claim. g. "Independent Legal Counsel" shall mean an attorney or firm of attorneys, selected in accordance with the provisions of Section 2(d) hereof, who shall not have otherwise performed services for the Company or Indemnitee within the last three years (other than with respect to matters concerning the rights of Indemnitee under this Agreement, or of other Indemnitees under similar indemnity agreements). h. References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee, agent or fiduciary of the Company which imposes duties on, or involves services by, such director, officer, employee, agent or fiduciary with respect to an employee benefit plan, its participants or its beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. i. "Reviewing Party" shall mean, subject to the provisions of Section 2(d), any person or body appointed by the Board of Directors in accordance with applicable law to review the Company's obligations hereunder and under applicable law, which may include a member or members of the Company's Board of Directors, Independent Legal Counsel or any other person or body not a party to the particular Claim for which Indemnitee is seeking indemnification. j. "Section" refers to a section of this Agreement unless otherwise indicated. k. "Voting Securities" shall mean any securities of the Company that vote generally in the election of directors. 2. Indemnification. a. Indemnification of Expenses. Subject to the provisions of Section 2(b) below, the Company shall indemnify Indemnitee for Expenses to the fullest extent permitted by law if Indemnitee was or is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any Claim (whether by reason of or arising in part out of a Covered Event), including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses. b. Review of Indemnification Obligations. Notwithstanding the foregoing, in the event any Reviewing Party shall have determined (in a written opinion, in any case in which Independent Legal Counsel is the Reviewing Party) that Indemnitee is not entitled to be indemnified hereunder under applicable law, (i) the Company shall have no further obligation under Section 2(a) to make any -3- <PAGE> 4 payments to Indemnitee not made prior to such determination by such Reviewing Party, and (ii) the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all Expenses theretofore paid to Indemnitee to which Indemnitee is not entitled hereunder under applicable law; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee is entitled to be indemnified hereunder under applicable law, any determination made by any Reviewing Party that Indemnitee is not entitled to be indemnified hereunder under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expenses theretofore paid in indemnifying Indemnitee until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any Expenses shall be unsecured and no interest shall be charged thereon. c. Indemnitee Rights on Unfavorable Determination; Binding Effect. If any Reviewing Party determines that Indemnitee substantively is not entitled to be indemnified hereunder in whole or in part under applicable law, Indemnitee shall have the right to commence litigation seeking an initial determination by the court or challenging any such determination by such Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and, subject to the provisions of Section 15, the Company hereby consents to service of process and to appear in any such proceeding. Absent such litigation, any determination by any Reviewing Party shall be conclusive and binding on the Company and Indemnitee. d. Selection of Reviewing Party; Change in Control. If there has not been a Change in Control, any Reviewing Party shall be selected by the Board of Directors, and if there has been such a Change in Control (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control), any Reviewing Party with respect to all matters thereafter arising concerning the rights of Indemnitee to indemnification of Expenses under this Agreement or any other agreement or under the Company's Certificate of Incorporation or Bylaws as now or hereafter in effect, or under any other applicable law, if desired by Indemnitee, shall be Independent Legal Counsel selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be entitled to be indemnified hereunder under applicable law and the Company agrees to abide by such opinion. The Company agrees to pay the reasonable fees of the Independent Legal Counsel referred to above and to indemnify fully such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. Notwithstanding any other provision of this Agreement, the Company shall not be required to pay Expenses of more than one Independent Legal Counsel in connection with all matters concerning a single Indemnitee, and such Independent Legal Counsel shall be the Independent Legal Counsel for any or all other Indemnitees unless (i) the employment of separate counsel by one or more Indemnitees has been previously authorized by the Company in writing, or (ii) an Indemnitee shall have provided to the Company a written statement that such Indemnitee has reasonably concluded that there may be a conflict of interest between such Indemnitee and the other Indemnitees with respect to the matters arising under this Agreement. e. Mandatory Payment of Expenses. Notwithstanding any other provision of this Agreement other than Section 10 hereof, to the extent that Indemnitee has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of -4- <PAGE> 5 any Claim, Indemnitee shall be indemnified against all Expenses incurred by Indemnitee in connection therewith. 3. Expense Advances. a. Obligation to Make Expense Advances. Upon receipt of a written undertaking by or on behalf of the Indemnitee to repay such amounts if it shall ultimately be determined that the Indemnitee is not entitled to be indemnified therefore by the Company hereunder under applicable law, the Company shall make Expense Advances to Indemnitee. b. Form of Undertaking. Any obligation to repay any Expense Advances hereunder pursuant to a written undertaking by the Indemnitee shall be unsecured and no interest shall be charged thereon. c. Determination of Reasonable Expense Advances. The parties agree that for the purposes of any Expense Advance for which Indemnitee has made written demand to the Company in accordance with this Agreement, all Expenses included in such Expense Advance that are certified by affidavit of Indemnitee's counsel as being reasonable shall be presumed conclusively to be reasonable. 4. Procedures for Indemnification and Expense Advances. a. Timing of Payments. All payments of Expenses (including without limitation Expense Advances) by the Company to the Indemnitee pursuant to this Agreement shall be made to the fullest extent permitted by law as soon as practicable after written demand by Indemnitee therefor is presented to the Company, but in no event later than thirty (30) business days after such written demand by Indemnitee is presented to the Company, except in the case of Expense Advances, which shall be made no later than ten (10) business days after such written demand by Indemnitee is presented to the Company. b. Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to Indemnitee's right to be indemnified or Indemnitee's right to receive Expense Advances under this Agreement, give the Company notice in writing as soon as practicable of any Claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. c. No Presumptions; Burden of Proof. For purposes of this Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by this Agreement or applicable law. In addition, neither the failure of any Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by any Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of legal proceedings by Indemnitee to secure a judicial determination that -5- <PAGE> 6 Indemnitee should be indemnified under this Agreement under applicable law, shall be a defense to Indemnitee's claim or create a presumption that Indemnitee has not met any particular standard of conduct or did not have any particular belief. In connection with any determination by any Reviewing Party or otherwise as to whether the Indemnitee is entitled to be indemnified hereunder under applicable law, the burden of proof shall be on the Company to establish that Indemnitee is not so entitled. d. Notice to Insurers. If, at the time of the receipt by the Company of a notice of a Claim pursuant to Section 4(b) hereof, the Company has liability insurance in effect which may cover such Claim, the Company shall give prompt notice of the commencement of such Claim to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Claim in accordance with the terms of such policies. e. Selection of Counsel. In the event the Company shall be obligated hereunder to provide indemnification for or make any Expense Advances with respect to the Expenses of any Claim, the Company, if appropriate, shall be entitled to assume the defense of such Claim with counsel approved by Indemnitee (which approval shall not be unreasonably withheld) upon the delivery to Indemnitee of written notice of the Company's election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees or expenses of separate counsel subsequently retained by or on behalf of Indemnitee with respect to the same Claim; provided that, (i) Indemnitee shall have the right to employ Indemnitee's separate counsel in any such Claim at Indemnitee's expense and (ii) if (A) the employment of separate counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such counsel to defend such Claim, then the fees and expenses of Indemnitee's separate counsel shall be Expenses for which Indemnitee may receive indemnification or Expense Advances hereunder. 5. Additional Indemnification Rights; Nonexclusivity. a. Scope. The Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any change after the date of this Agreement in any applicable law, statute or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder except as set forth in Section 10(a) hereof. b. Nonexclusivity. The indemnification and the payment of Expense Advances provided by this Agreement shall be in addition to any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any other agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise. The -6- <PAGE> 7 indemnification and the payment of Expense Advances provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though subsequent thereto Indemnitee may have ceased to serve in such capacity. 6. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment in connection with any Claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, provision of the Company's Certificate of Incorporation, Bylaws or otherwise) of the amounts otherwise payable hereunder. 7. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of Expenses incurred in connection with any Claim, but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses to which Indemnitee is entitled. 8. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge that in certain instances, federal law or applicable public policy may prohibit the Company from indemnifying its directors, officers, employees, agents or fiduciaries under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 9. Liability Insurance. To the extent the Company maintains liability insurance applicable to directors, officers, employees, agents or fiduciaries, Indemnitee shall be covered by such policies in such a manner as to provide Indemnitee the same rights and benefits as are provided to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee is not an officer or director but is a key employee, agent or fiduciary. 10. Exceptions. Notwithstanding any other provision of this Agreement, the Company shall not be obligated pursuant to the terms of this Agreement: a. Excluded Action or Omissions. To indemnify or make Expense Advances to Indemnitee with respect to Claims arising out of acts, omissions or transactions for which Indemnitee is prohibited from receiving indemnification under applicable law. b. Claims Initiated by Indemnitee. To indemnify or make Expense Advances to Indemnitee with respect to Claims initiated or brought voluntarily by Indemnitee and not by way of defense, counterclaim or crossclaim, except (i) with respect to actions or proceedings brought to establish or enforce a right to indemnification under this Agreement or any other agreement or insurance policy or under the Company's Certificate of Incorporation or Bylaws now or hereafter in effect relating to Claims for Covered Events, (ii) in specific cases if the Board of Directors has approved the initiation or bringing of such Claim, or (iii) as otherwise required under Section 145 of the Delaware General Corporation Law, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, Expense Advances, or insurance recovery, as the case may be. -7- <PAGE> 8 c. Lack of Good Faith. To indemnify Indemnitee for any Expenses incurred by the Indemnitee with respect to any action instituted (i) by Indemnitee to enforce or interpret this Agreement, if a court having jurisdiction over such action determines as provided in Section 13 that each of the material assertions made by the Indemnitee as a basis for such action was not made in good faith or was frivolous, or (ii) by or in the name of the Company to enforce or interpret this Agreement, if a court having jurisdiction over such action determines as provided in Section 13 that each of the material defenses asserted by Indemnitee in such action was made in bad faith or was frivolous. d. Claims Under Section 16(b). To indemnify Indemnitee for Expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. 12. Binding Effect; Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), spouses, heirs and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect, and whether by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director, officer, employee, agent or fiduciary (as applicable) of the Company or of any other enterprise at the Company's request. 13. Expenses Incurred in Action Relating to Enforcement or Interpretation. In the event that any action is instituted by Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be indemnified for all Expenses incurred by Indemnitee with respect to such action (including without limitation attorneys' fees), regardless of whether Indemnitee is ultimately successful in such action, unless as a part of such action a court having jurisdiction over such action makes a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that each of the material assertions made by Indemnitee as a basis for such action was not made in good faith or was frivolous; provided, however, that until such final judicial determination is made, Indemnitee shall be entitled under Section 3 to receive payment of Expense Advances hereunder with respect to such action. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be indemnified for all Expenses incurred by Indemnitee in defense of such action (including without limitation costs and expenses incurred with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action a court having jurisdiction over such action makes a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that each of the material defenses asserted by Indemnitee in such action was made in bad faith or was frivolous; provided, however, that until such final judicial determination is made, Indemnitee shall be entitled under Section 3 to receive payment of Expense Advances hereunder with respect to such action. -8- <PAGE> 9 14. Period of Limitations. No legal action shall be brought and no cause of action shall be asserted by or in the right of the Company against Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern. 15. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and signed for by the party addressed, on the date of such delivery, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 16. Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be commenced, prosecuted and continued only in the Court of Chancery of the State of Delaware in and for New Castle County, which shall be the exclusive and only proper forum for adjudicating such a claim. 17. Severability. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including without limitation each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 18. Choice of Law. This Agreement, and all rights, remedies, liabilities, powers and duties of the parties to this Agreement, shall be governed by and construed in accordance with the laws of the State of Delaware as applied to contracts between Delaware residents entered into and to be performed entirely in the State of Delaware without regard to principles of conflicts of laws. 19. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 20. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing signed by both the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed to be or shall constitute a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver. -9- <PAGE> 10 21. Integration and Entire Agreement. This Agreement sets forth the entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto. 22. No Construction as Employment Agreement. Nothing contained in this Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries or affiliated entities. [Remainder of Page Intentionally Left Blank] -10- <PAGE> 11 IN WITNESS WHEREOF, the parties hereto have executed this Indemnification Agreement as of the date first above written. SKYSTREAM NETWORKS INC. By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- Address: 555 Clyde Avenue, Suite B Mountain View, CA 94043 AGREED TO AND ACCEPTED INDEMNITEE: ----------------------------------- (signature) ----------------------------------- Name ----------------------------------- Address ----------------------------------- -11- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.2 <SEQUENCE>16 <DESCRIPTION>EX-10.2 <TEXT> <PAGE> 1 EXHIBIT 10.2 SKYSTREAM NETWORKS INC. 1996 STOCK OPTION PLAN (as amended February 29, 2000) 1. Purposes of the Plan. The purposes of this Stock Option Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants of the Company and its Subsidiaries and to promote the success of the Company's business. Options granted under the Plan may be incentive stock options (as defined under Section 422 of the Code) or nonstatutory stock options, as determined by the Administrator at the time of grant of an option and subject to the applicable provisions of Section 422 of the Code, as amended, and the regulations promulgated thereunder. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees appointed pursuant to Section 4 of the Plan. (b) "Applicable Laws" means the requirements relating to the administration of stock options plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options are, or will be, granted under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Committee" means a Committee appointed by the Board of Directors in accordance with Section 4 of the Plan. (f) "Common Stock" means the Common Stock of the Company. (g) "Company" means SkyStream Networks Inc., a Delaware corporation. (h) "Consultant" means any person who is engaged by the Company or any Parent or Subsidiary to render consulting or advisory services to such entity and who is compensated for such services. (i) "Director" means a member of the Board of Directors of the Company. (j) "Employee" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon <PAGE> 2 expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (k) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (l) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of the The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, or; (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (m) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. (n) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (o) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (p) "Option" means a stock option granted pursuant to the Plan. (q) "Option Agreement" means a written or electronic agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. -2- <PAGE> 3 (r) "Option Exchange Program" means a program whereby outstanding Options are exchanged for Options with a lower exercise price. (s) "Optioned Stock" means the Common Stock subject to an Option. (t) "Optionee" means the holder of an outstanding Option granted under the Plan. (u) "Parent" means a "parent corporation", whether now or hereafter existing, as defined in Section 424(e) of the Code. (v) "Plan" means this 1996 Stock Option Plan. (w) "Service Provider" means an Employee, Director or Consultant. (x) "Share" means a share of the Common Stock, as adjusted in accordance with Section 11 below. (y) "Subsidiary" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares which may be subject to option and sold under the Plan is 14,898,900 Shares (after giving effect to the three-for-two stock split approved by the stockholders of the Company on February 29, 2000), together with an annual increase in the number of shares of Common Stock reserved for issuance hereunder on the first day of the Company's fiscal year, beginning with January 1, 2001 equal to the lesser of (i) 3,500,000 shares, (ii) 5% of the outstanding shares of the Company as of the last day of the prior fiscal year or (iii) such amount as determined by the Board of Directors. The Shares may be authorized but unissued, or reacquired Common Stock. If an Option expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); provided, however, that Shares that have actually been issued under the Plan shall not be returned to the Plan and shall not become available for future distribution under the Plan. 4. Administration of the Plan. (a) Procedure. (i) Multiple Administrative Bodies. If permitted by Rule 16b-3, the Plan may be administered by different bodies with respect to directors, non-director Officers and Employees who are neither directors nor Officers. -3- <PAGE> 4 (i) Section 162(m). To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as performance-based compensation within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more outside directors within the meaning of Section 162(m) of the Code. (iii) Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. (ii) Other Administration. Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which Committee shall be constituted to satisfy Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan and, in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value; (ii) to select the Service Providers to whom Options may from time to time be granted hereunder; (iii) to determine the number of shares of Common Stock to be covered by each such award granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions of any Option granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or the Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to determine whether and under what circumstances an Option may be settled in cash under subsection 9(f) instead of Common Stock; (vii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option has declined since the date the Option was granted; -4- <PAGE> 5 (ix) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (x) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (iiii) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by Optionees to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; and (iv) to make all other determinations deemed necessary or advisable for administering the Plan. (b) Effect of Administrator's Decision. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees. 5. Eligibility. (a) Nonstatutory Stock Options may be granted to Service Providers. Incentive Stock Options may be granted only to Employees. (b) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designations, to the extent that the aggregate Fair Market Value: (i) of Shares subject to an Optionee's Incentive Stock Options granted by the Company, any Parent or Subsidiary, which (ii) become exercisable for the first time during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (c) The Plan shall not confer upon any Optionee any right with respect to continuation of Optionee's relationship as a Service Provider with the Company, nor shall it interfere -5- <PAGE> 6 in any way with his or her right or the Company's right to terminate such relationship at any time, with or without cause. (d) Upon the Company or a successor corporation issuing any class of common equity securities required to be registered under Section 12 of the Exchange Act or upon the Plan being assumed by a corporation having a class of common equity securities required to be registered under Section 12 of the Exchange Act, the following limitations shall apply to grants of Options to Service Providers: (i) No Service Provider shall be granted, in any fiscal year of the Company, Options to purchase more than 500,000 Shares. (ii) In connection with his or her initial service relationship with the Company, a Service Provider may be granted Options to purchase up to an additional 2,500,000 Shares which shall not count against the amount set forth in subsection (i) above. (ii) The foregoing limitations shall be adjusted appropriately in connection with any change in the Company's capitalization as described in Section 11. (iii) If an Option is canceled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 11), the cancelled Option will be counted against the limit set forth in subsections (i) and (ii) above. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 6. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the shareholders of the Company, as described in Section 17 of the Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 13 of the Plan; provided, however, that in the event of an initial public offering by the Company prior to such expiration of the Plan, the term of the Plan shall be extended until the tenth anniversary of February 18,2000. 7. Term of Option. The term of each Option shall be the term stated in the Option Agreement; provided, however, that the term shall be no more than ten (10) years from the date of grant thereof. However, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. -6- <PAGE> 7 8. Option Exercise Price and Consideration. (a) The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Administrator, but shall be subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option (A) granted to a Service Provider who, at the time of the grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of the grant. (B) granted to any other Service Provider, the per Share exercise price shall be no less than 85% of the Fair Market Value per Share on the date of grant. (iii) Notwithstanding the foregoing, Options may be granted with a per share exercise price other than as required above pursuant to a merger or other corporate transaction. (b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist y of (1) cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares acquired upon exercise of an Option have been owned by the Optionee for more than six months on the date of surrender and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (5) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price, (6) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan, (7) any combination of the foregoing methods of payment or (8) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. In making its determination as to the -7- <PAGE> 8 type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 9. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when (i) written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and (ii) full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Administrator, consist of any consideration and method of payment allowable under Section 8(b) of the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 11 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Relationship as a Service Provider. If an Optionee ceases to be a Service Provider, such Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement (of at least thirty (30) days) to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of the Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. -8- <PAGE> 9 (c) Disability of Optionee. If an Optionee ceases to be a Service Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If such disability is not a "disability" as such term is defined in Section 22(e)(3) of the Code, in the case of an Incentive Stock Option such Incentive Stock Option shall automatically cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option on the day three months and one day following such termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. If an Optionee dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Option is vested on the date of death. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. The Option may be exercised by the executor or administrator of the Optionee's estate or, if none, by the person(s) entitled to exercise the Option under the Optionee's will or the laws of descent or distribution. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 10. Non-Transferability of Options. Unless determined otherwise by the Administrator, Options may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option transferable, such Option shall contain such additional terms and conditions are the Administrator deems appropriate. 11. Adjustments Upon Changes in Capitalization or Merger. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option, and the number of shares of Common Stock which have been authorized for issuance under the Plan but -9- <PAGE> 10 as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until fifteen (15) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option will terminate immediately prior to the consummation of such proposed action. (c) Merger of Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option shall be assumed or an equivalent option may be substituted by such successor corporation or a parent or subsidiary of such successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option, the Optionee shall fully vest in and have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the option confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately prior to the merger, the consideration (whether stock, cash, or other securities or property) received in the merger by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger was not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the -10- <PAGE> 11 consideration to be received upon the exercise of the Option for each Share of Optioned Stock subject to the Option to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger. 12. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date on which the Administrator makes the determination granting such Option, or such other date as is determined by the Administrator. Notice of the determination shall be given to each Employee or Consultant to whom an Option is so granted within a reasonable time after the date of such grant. 13. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan (b) Stockholder Approval. The Board shall obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. (c) Effect of Amendment or Termination. Any such amendment or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination. 14. Conditions Upon Issuance of Shares. (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares shall comply with Applicable Laws, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option, the Administrator may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. 15. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. -11- <PAGE> 12 The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 16. Shareholder Approval. Continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such shareholder approval shall be obtained in the degree and manner required under Applicable Laws. -12- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.2.1 <SEQUENCE>17 <DESCRIPTION>EX-10.2.1 <TEXT> <PAGE> 1 EXHIBIT 10.2.1 SKYSTREAM CORPORATION 1996 STOCK OPTION PLAN STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement. I. NOTICE OF STOCK OPTION GRANT [Optionee's Name and Address] You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Date of Grant _________________________ Vesting Commencement Date _________________________ Exercise Price per Share $________________________ Total Number of Shares Granted _________________________ Total Exercise Price $________________________ Type of Option: ___ Incentive Stock Option ___ Nonstatutory Stock Option Term/Expiration Date: _________________________ Vesting Schedule: This Option may be exercised, in whole or in part, in accordance with the following schedule: 25% of the Shares subject to the Option shall vest twelve months after the Vesting Commencement Date, and 1/48th of the Shares subject to the Option shall vest each month period thereafter. <PAGE> 2 Termination Period: This Option may be exercised for 45 days after termination of employment or consulting relationship, or such longer period as may be applicable upon death or disability of Optionee as provided in the Plan, but in no event later than the Term/Expiration Date as provided above. II. AGREEMENT 1. Grant of Option. SkyStream Corporation, a California corporation (the "Company"), hereby grants to the Optionee named in the Notice of Grant (the "Optionee"), an option (the "Option") to purchase the total number of shares of Common Stock (the "Shares") set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "Exercise Price") subject to the terms, definitions and provisions of the 1996 Stock Option Plan (the "Plan") adopted by the Company, which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option. If designated in the Notice of Grant as an Incentive Stock Option ("ISO"), this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code. However, if this Option is intended to be an Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a Nonstatutory Stock Option ("NSO"). 2. Exercise of Option. This Option shall be exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and with the provisions of Section 9 of the Plan as follows: (i) Right to Exercise. (a) This Option may not be exercised for a fraction of a Share. (b) In the event of Optionee's death, disability or other termination of the employment or consulting relationship, the exercisability of the Option is governed by Sections 6, 7 and 8 below, subject to the limitation contained in subsection 2(i)(c). (c) In no event may this Option be exercised after the date of expiration of the term of this Option as set forth in the Notice of Grant. (ii) Method of Exercise. This Option shall be exercisable by written notice (in the form attached as Exhibit A) which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as to the holder's investment intent with respect to such shares of Common Stock as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The written notice shall be accompanied by payment of the Exercise Price. This Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the Exercise Price. <PAGE> 3 No Shares will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock exchange upon which the Shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares. 3. Optionee's Representations. In the event the Shares purchasable pursuant to the exercise of this Option have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company his or her Investment Representation Statement in the form attached hereto as Exhibit B, and shall read the applicable rules of the Commissioner of Corporations attached to such Investment Representation Statement. 4. Method of Payment. Payment of the Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: (i) cash; or (ii) check; or (iii) surrender of other shares of Common Stock of the Company which (A) in the case of Shares acquired pursuant to the exercise of a Company option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the Exercise Price of the Shares as to which the Option is being exercised; or (iv) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the Exercise Price. 5. Restrictions on Exercise. This Option may not be exercised until such time as the Plan has been approved by the shareholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including any rule under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 6. Termination of Relationship. In the event an Optionee's Continuous Status as an Employee or Consultant terminates, Optionee may, to the extent otherwise so entitled at the date of such termination (the "Termination Date"), exercise this Option during the Termination Period set out in the Notice of Grant. To the extent that Optionee was not entitled to exercise this Option at the date of such termination, or if Optionee does not exercise this Option within the time specified herein, the Option shall terminate. -3- <PAGE> 4 7. Disability of Optionee. Notwithstanding the provisions of Section 6 above, in the event of termination of an Optionee's consulting relationship or Continuous Status as an Employee as a result of his or her disability, Optionee may, but only within six (6) months from the date of such termination (and in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent otherwise entitled to exercise it at the date of such termination; provided, however, that if such disability is not a "disability" as such term is defined in Section 22(e)(3) of the Code, in the case of an Incentive Stock Option such Incentive Stock Option shall automatically convert to a Nonstatutory Stock Option on the day three months and one day following such termination. To the extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. 8. Death of Optionee. In the event of termination of Optionee's Continuous Status as an Employee or Consultant as a result of the death of Optionee, the Option may be exercised at any time within six (6) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 10 below), by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent the Optionee could exercise the Option at the date of death. 9. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by Optionee. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 10. Term of Option. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option. The limitations set out in Section 7 of the Plan regarding Options designated as Incentive Stock Options and Options granted to more than ten percent (10%) shareholders shall apply to this Option. 11. Taxation Upon Exercise of Option. Optionee understands that, upon exercising a Nonstatutory Option, he or she will recognize income for tax purposes in an amount equal to the excess of the then Fair Market Value of the Shares over the exercise price. However, the timing of this income recognition may be deferred for up to six months if Optionee is subject to Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). If the Optionee is an Employee, the Company will be required to withhold from Optionee's compensation, or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income. Additionally, the Optionee may at some point be required to satisfy tax withholding obligations with respect to the disqualifying disposition of an Incentive Stock Option. The Optionee shall satisfy his or her tax withholding obligation arising upon the exercise of this Option out of Optionee's compensation or by payment to the Company. 12. Tax Consequences. Set forth below is a brief summary as of the date of this Option of some of the federal and state tax consequences of exercise of this Option and disposition of the Shares. -4- <PAGE> 5 THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (i) Exercise of ISO. If this Option qualifies as an ISO, there will be no regular federal income tax liability or state income tax liability upon the exercise of the Option, although the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject the Optionee to the alternative minimum tax in the year of exercise. (ii) Exercise of ISO Following Disability. If the Optionee's Continuous Status as an Employee or Consultant terminates as a result of disability that is not total and permanent disability as defined in Section 22(e)(3) of the Code, to the extent permitted on the date of termination, the Optionee must exercise an ISO within 90 days of such termination for the ISO to be qualified as an ISO. (iii) Exercise of Nonstatutory Stock Option. There may be a regular federal income tax liability and state income tax liability upon the exercise of a Nonstatutory Stock Option. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price. If Optionee is an Employee or a former Employee, the Company will be required to withhold from Optionee's compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. (iv) Disposition of Shares. In the case of an NSO, if Shares are held for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal and state income tax purposes. In the case of an ISO, if Shares transferred pursuant to the Option are held for at least one year after exercise and are disposed of at least two years after the Date of Grant, any gain realized on disposition of the Shares will also be treated as long-term capital gain for federal and state income tax purposes. If Shares purchased under an ISO are disposed of within such one-year period or within two years after the Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price and the lesser of (1) the Fair Market Value of the Shares on the date of exercise, or (2) the sale price of the Shares. (v) Notice of Disqualifying Disposition of ISO Shares. If the Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to the ISO on or before the later of (1) the date two years after the Date of Grant, or (2) the date one year after the date of exercise, the Optionee shall immediately notify the Company in writing of such disposition. Optionee agrees that Optionee may be subject to income tax withholding by the Company on the compensation income recognized by the Optionee. -5- <PAGE> 6 13. Entire Agreement; Governing Law. The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. This agreement is governed by California law except for that body of law pertaining to conflict of laws. SKYSTREAM CORPORATION a California corporation By: ------------------------------ OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE. Optionee acknowledges receipt of a copy of the Plan and represents that he is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Option. Optionee further agrees to notify the Company upon any change in the residence address indicated below. Dated: --------------- ---------------------------------- Optionee Residence Address: ---------------------------------- ---------------------------------- ---------------------------------- -6- <PAGE> 7 EXHIBIT A 1996 STOCK OPTION PLAN EXERCISE NOTICE SkyStream Corporation 555 Clyde Avenue, Suite B Mountain View, CA 94043 Attention: Secretary 1. Exercise of Option. Effective as of today, ___________, 19__, the undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase _________ shares of the Common Stock (the "Shares") of SkyStream Corporation (the "Company") under and pursuant to the 1996 Stock Option Plan, as amended (the "Plan") and the [XX] Incentive [ ] Nonstatutory Stock Option Agreement dated March 3, 1999 (the "Option Agreement"). 2. Representations of Optionee. Optionee acknowledges that Optionee has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 3. Rights as Shareholder. Until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 11 of the Plan. Optionee shall enjoy rights as a shareholder until such time as Optionee disposes of the Shares or the Company and/or its assignee(s) exercises the Right of First Refusal hereunder. Upon such exercise, Optionee shall have no further rights as a holder of the Shares so purchased except the right to receive payment for the Shares so purchased in accordance with the provisions of this Agreement, and Optionee shall forthwith cause the certificate(s) evidencing the Shares so purchased to be surrendered to the Company for transfer or cancellation. 4. Company's Right of First Refusal. Before any Shares held by Optionee or any transferee (either being sometimes referred to herein as the "Holder") may be sold or otherwise transferred (including transfer by gift or operation of law), the Company or its assignee(s) shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section (the "Right of First Refusal"). <PAGE> 8 (a) Notice of Proposed Transfer. The Holder of the Shares shall deliver to the Company a written notice (the "Notice") stating: (i) the Holder's bona fide intention to sell or otherwise transfer such Shares; (ii) the name of each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the number of Shares to be transferred to each Proposed Transferee; and (iv) the bona fide cash price or other consideration for which the Holder proposes to transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares at the Offered Price to the Company or its assignee(s). (b) Exercise of Right of First Refusal. At any time within thirty (30) days after receipt of the Notice, the Company and/or its assignee(s) may, by giving written notice to the Holder, elect to purchase all, but not less than all, of the Shares proposed to be transferred to any one or more of the Proposed Transferees, at the purchase price determined in accordance with subsection (c) below. (c) Purchase Price. The purchase price ("Purchase Price") for the Shares purchased by the Company or its assignee(s) under this Section shall be the Offered Price. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors of the Company in good faith. (d) Payment. Payment of the Purchase Price shall be made, at the option of the Company or its assignee(s), in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Holder to the Company (or, in the case of repurchase by an assignee, to the assignee), or by any combination thereof within 30 days after receipt of the Notice or in the manner and at the times set forth in the Notice. (e) Holder's Right to Transfer. If all of the Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Company and/or its assignee(s) as provided in this Section, then the Holder may sell or otherwise transfer such Shares to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within 120 days after the date of the Notice and provided further that any such sale or other transfer is effected in accordance with any applicable securities laws and the Proposed Transferee agrees in writing that the provisions of this Section shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares described in the Notice are not transferred to the Proposed Transferee within such period, a new Notice shall be given to the Company, and the Company and/or its assignees shall again be offered the Right of First Refusal before any Shares held by the Holder may be sold or otherwise transferred. (f) Exception for Certain Family Transfers. Anything to the contrary contained in this Section notwithstanding, the transfer of any or all of the Shares during the Optionee's lifetime or on the Optionee's death by will or intestacy to the Optionee's immediate family or a trust for the benefit of the Optionee's immediate family shall be exempt from the provisions of this Section. "Immediate Family" as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. In such case, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Section, and there shall be no further transfer of such Shares except in accordance with the terms of this Section. -2- <PAGE> 9 (g) Termination of Right of First Refusal. The Right of First Refusal shall terminate as to any Shares 90 days after the first sale of Common Stock of the Company to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended. 5. Tax Consultation. Optionee understands that Optionee may suffer adverse tax consequences as a result of Optionee's purchase or disposition of the Shares. Optionee represents that Optionee has consulted with any tax consultants Optionee deems advisable in connection with the purchase or disposition of the Shares and that Optionee is not relying on the Company for any tax advice. 6. Restrictive Legends and Stop-Transfer Orders. (a) Legends. Optionee understands and agrees that the Company shall cause the legends set forth below or legends substantially equivalent thereto, to be placed upon any certificate(s) evidencing ownership of the Shares together with any other legends that may be required by the Company or by state or federal securities laws: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND A RIGHT OF FIRST REFUSAL HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES. IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES. -3- <PAGE> 10 THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO RESTRICTIONS ON TRANSFER FOR A PERIOD OF 180 DAYS FOLLOWING THE EFFECTIVE DATE OF THE COMPANY'S INITIAL UNDERWRITTEN PUBLIC OFFERING AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF BY THE HOLDER WITHOUT THE CONSENT OF THE COMPANY OR THE MANAGING UNDERWRITER." Optionee understands that transfer of the Shares may be restricted by Section 260.141.11 of the Rules of the California Corporations Commissioner, a copy of which is attached to Exhibit B, the Investment Representation Statement. (b) Stop-Transfer Notices. Optionee agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate "stop transfer" instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. (c) Refusal to Transfer. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred. 7. Market Standoff. Optionee hereby agrees that if so requested by the Company or any representative of the underwriters in connection with any registration of the offering of the securities of the Company under the Securities Act of 1933, as amended (the "Act"), Optionee shall not sell or otherwise transfer the Shares for a period of 180 days following the effective date of a Registration filed under the Act; provided, that such restriction shall apply only to the first registration statement of the Company to become effective under the Act which include securities to be sold on behalf of the Company in an underwritten offering under the Act. The Company may impose stop-transfer instructions with respect to the Shares subject to the foregoing restrictions until the end of each such 180-day period. 8. Successors and Assigns. The Company may assign any of its rights under this Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Agreement shall be binding upon Optionee and his or her heirs, executors, administrators, successors and assigns. 9. Interpretation. Any dispute regarding the interpretation of this Agreement shall be submitted by Optionee or by the Company forthwith to the Company's Board of Directors or the committee thereof that administers the Plan, which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Board or committee shall be final and binding on the Company and on Optionee. -4- <PAGE> 11 10. Governing Law; Severability. This Agreement shall be governed by and construed in accordance with the laws of the State of California excluding that body of law pertaining to conflicts of law. Should any provision of this Agreement be determined by a court of law to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable. 11. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail by certified mail, with postage and fees prepaid, addressed to the other party at its address as shown below beneath its signature, or to such other address as such party may designate in writing from time to time to the other party. 12. Further Instruments. The parties agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this Agreement. 13. Delivery of Payment. Optionee herewith delivers to the Company the full Exercise Price for the Shares. 14. Entire Agreement. The Plan and Notice of Grant/Option Agreement are incorporated herein by reference. This Agreement, the Plan, the Option Agreement and the Investment Representation Statement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Purchaser with respect to the subject matter hereof, and may not be modified adversely to the Purchaser's interest except by means of a writing signed by the Company and Purchaser Submitted by: Accepted by: OPTIONEE: SKYSTREAM CORPORATION By: ------------------------------- Its: ------------------------------ - ---------------------------------- (Signature) Address: Address: - ---------------------------------- 55 Clyde Avenue, Suite B Mountain View, CA 94043 - ---------------------------------- -5- <PAGE> 12 EXHIBIT B INVESTMENT REPRESENTATION STATEMENT OPTIONEE : COMPANY : SKYSTREAM CORPORATION SECURITY : COMMON STOCK AMOUNT : DATE : In connection with the purchase of the above-listed Securities, the undersigned Optionee represents to the Company the following: (a) Optionee is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Optionee is acquiring these Securities for investment for Optionee's own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). (b) Optionee acknowledges and understands that the Securities constitute "restricted securities" under the Securities Act and have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of Optionee's investment intent as expressed herein. In this connection, Optionee understands that, in the view of the Securities and Exchange Commission, the statutory basis for such exemption may be unavailable if Optionee's representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. Optionee further understands that the Securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Optionee further acknowledges and understands that the Company is under no obligation to register the Securities. Optionee understands that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Company, a legend prohibiting their transfer without the consent of the Commissioner of Corporations of the State of California and any other legend required under applicable state securities laws. (c) Optionee is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of the grant of the Option to the Optionee, the exercise will be exempt from registration under the -6- <PAGE> 13 Securities Act. In the event the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter (or such longer period as any market stand-off agreement may require) the Securities exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions specified by Rule 144, including: (1) the resale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of certain public information about the Company, (3) the amount of Securities being sold during any three month period not exceeding the limitations specified in Rule 144(e), and (4) the timely filing of a Form 144, if applicable. In the event that the Company does not qualify under Rule 701 at the time of grant of the Option, then the Securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires the resale to occur not less than two years after the later of the date the Securities were sold by the Company or the date the Securities were sold by an affiliate of the Company, within the meaning of Rule 144; and, in the case of acquisition of the Securities by an affiliate, or by a non-affiliate who subsequently holds the Securities less than three years, the satisfaction of the conditions set forth in sections (1), (2), (3) and (4) of the paragraph immediately above. (d) Optionee hereby agrees that if so requested by the Company or any representative of the underwriters in connection with any registration of the offering of any securities of the Company under the Securities Act, Optionee shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period following the effective date of a registration statement of the Company filed under the Securities Act; provided, however, that such restriction shall only apply to the first registration statement of the Company to become effective under the Securities Act which include securities to be sold on behalf of the Company to the public in an underwritten public offering under the Securities Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such 180-day period. (e) Optionee further understands that in the event all of the applicable requirements of Rule 701 or 144 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rules 144 and 701 are not exclusive, the Staff of the Securities and Exchange Commission has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rules 144 or 701 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Optionee understands that no assurances can be given that any such other registration exemption will be available in such event. Signature of Optionee: --------------------------- Date: , 19 --------------- --- -7- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.2.2 <SEQUENCE>18 <DESCRIPTION>EX-10.2.2 <TEXT> <PAGE> 1 EXHIBIT 10.2.2 SKYSTREAM CORPORATION 1996 STOCK OPTION PLAN EXERCISE NOTICE AND RESTRICTED STOCK PURCHASE AGREEMENT SkyStream Corporation 555 Clyde Avenue, Suite B Mountain View, CA 94043 Attention: Secretary 1. EXERCISE OF OPTION. Effective as of today, ______________, 2000, _____________ ("Purchaser") hereby elects to exercise Purchaser's option to purchase an aggregate of __________ shares of the Common Stock (the "Shares") of SkyStream Corporation (the "Company") under and pursuant to the 1996 Stock Option Plan, as amended (the "Plan") and the Incentive Stock Option Agreement dated __________________, 2000 (the "Option Agreement"), of which none of the shares have become vested under the vesting schedule set forth in the Option Agreement. (Shares which at any time have vested under such vesting schedule shall be then referred to as "Vested Shares" and shares which at any time have not yet vested shall be then referred to as "Unvested Shares." The Vested Shares and the Unvested Shares are sometimes collectively referred to herein as the "Shares"). As set forth in the Plan and the Option Agreement, in the event of Purchaser's election to exercise the Option as to Unvested Shares, this Agreement gives the Company the right, in the event of termination of the Purchaser's employment with the Company to repurchase at the Option Price (as defined herein) any or all of the Shares that are Unvested Shares as of the date of termination. Subject to the terms and conditions of this Agreement, the Company hereby agrees to sell the Shares to Purchaser and Purchaser agrees to purchase the Shares from the Company on the Closing Date (as herein defined), at a price of $____ per share (the "Option Price"), for an aggregate purchase price of $__________. The Shares are being purchased and sold in accordance with and subject to the provisions of the Plan and the Option Agreement, each of which is incorporated by reference. The purchase and sale of the Shares shall occur at a closing to be held at such time and place (the "Closing Date"), as designated by the Company no less than two business days prior to the Closing Date. The closing will take place at the principal office of the Company or at such other place as shall be designated by the Company. At the closing, Purchaser shall deliver to the Company cash, a check payable to the order of the Company in the amount of the purchase price of the Shares, or a duly executed full recourse promissory Note, together a with Security Agreement, in the form attached hereto as Exhibit 1 (the "Note"). As security for the payment of the Note and any renewal or modification thereof, the Purchaser hereby grants to the Company a security interest in, and pledges with and delivers -1- <PAGE> 2 to the Company the Shares, to be held pursuant to the escrow referred to in Section 9 hereof, and a duly executed Security Agreement in the form attached hereto as Exhibit 2 (the "Security Agreement"). Upon the occurrence of a default in the payment of the Note when due, the Company shall be entitled to immediate possession of the Shares and all rights and remedies of a secured party under the Commercial Code of the State of California. 2. COMPANY'S UNVESTED SHARE REPURCHASE OPTION. (a) The Company shall have the right to repurchase the Unvested Shares at the Option Price in the event of a termination of the Purchaser's employment with the Company prior to the date on which they become Vested Shares pursuant to the vesting schedule set forth in the Option Agreement (the "Unvested Share Repurchase Option"). (b) Within 30 days following a termination of the Purchaser's employment with the Company, the Company shall notify the Purchaser by written notice delivered or mailed as provided in Section 10, as to whether it wishes to purchase the Unvested Shares pursuant to exercise of the Unvested Share Repurchase Option. If the Company (or its assignee) elects to purchase the Unvested Shares hereunder, it shall set a date for the closing of the transaction at a place specified by the Company not later than 10 days from the date of such notice. At such closing, the Company (or its assignee) shall tender payment for the Unvested Shares and the certificates representing the Unvested Shares so purchased shall be canceled. Purchaser hereby authorizes and directs the Secretary or Transfer Agent of the Company to transfer the Unvested Shares as to which the Unvested Share Repurchase Option has been exercised from the Purchaser to the Company. The Option Price may be payable, at the option of the Company, in cancellation of all or a portion of any outstanding indebtedness of the Purchaser to the Company or in cash (by check), or both. (c) Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Corporation, or a parent or subsidiary of the Corporation, to terminate Purchaser's employment, for any reason, with or without cause. 3. LEGALITY OF CORPORATE DISTRIBUTIONS. Notwithstanding any other provision in this Agreement, the Corporation shall not be required to purchase or pay for any Stock purchasable or purchased by it hereunder, if such purchase or such payment of all or any part of the purchase price shall be or constitute, in the good faith determination of the President or Board of Directors of the Corporation, an unlawful corporate distribution in contravention of the laws of any state having jurisdiction with respect to the transactions contemplated hereby. In the event of such determination and due notice thereof to Purchaser, any transferee of the Stock or their respective estates, as the case may be, each date of making any such purchase or making any such payment hereunder by the Corporation, respectively, may be extended from time to time at the option of the Corporation for up to two (2) years. If any such purchase is not made and fully paid for within three (3) years after such purchase was to have been made pursuant -2- <PAGE> 3 to the terms of this Agreement, however, Purchaser or any transferee of the Stock or their respective estates, as the case may be, shall have the option to have the transaction rescinded. 4. STOCK SPLITS, ETC. If, from time to time during the term of this Agreement: (a) There is any stock dividend or liquidating dividend of cash and/or property, stock split or other change in the character or amount of any of the outstanding securities of the Corporation; or (b) There is any consolidation, merger or sale of all, or substantially all, of the assets of the Corporation; then, in such event, any and all new, substituted or additional securities or other property to which Purchaser is entitled by reason of Purchaser's ownership of Stock shall be immediately subject to this Agreement and be included in the word "Stock" for all purposes with the same force and effect as the shares of Stock presently subject to the terms of this Agreement. 5. RESTRICTION ON TRANSFER. Purchaser shall not sell, transfer, pledge, hypothecate or otherwise dispose of any shares of the Stock except in accordance with the terms of this Agreement. Unless prior written consent is obtained from the Corporation, any transfer, sale, assignment, hypothecation, pledge, encumbrance, alienation, or other disposition of any of the Stock, or any interest therein other than according to the terms of this Agreement, shall be void and shall transfer no right, title, or interest in or to any or all of the Stock to the purported transferee, buyer, assignee, pledgee, or encumbrance holder. The Corporation shall not be required (i) to transfer on its books any shares of Stock which shall have been disposed of in violation of any of the provisions set forth in this Agreement, or (ii) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares shall have been so transferred. 6. LEGENDS. All certificates representing the shares of Stock of the Corporation subject to the provisions of this Agreement shall have endorsed thereon the following legends: (a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED." (b) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RIGHTS OF FIRST REFUSAL CONTAINED IN THE BYLAWS OF THIS CORPORATION AND -3- <PAGE> 4 IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, COPIES OF WHICH MAY BE OBTAINED FROM THE SECRETARY OF THE CORPORATION." (c) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AS SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION." (d) "THE SECURITIES REPRESENTED HEREBY MAY BE SUBJECT TO RESTRICTIONS ON TRANSFER FOR A PERIOD OF NOT MORE THAN 180 DAYS FOLLOWING THE EFFECTIVE DATE OF A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR AN OFFERING OF THE CORPORATION'S SECURITIES PURSUANT TO THE TERMS SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION." (e) Any legend required to be placed thereon by the California Commissioner of Corporations or under other applicable state Blue Sky laws. 7. MARKET STANDOFF. Purchaser hereby agrees that Purchaser shall not, to the extent requested by the Corporation or the underwriters managing any underwritten public offering of common stock (or other securities) of the Corporation, offer, sell, contract to sell, make any short sale of, loan or grant any option to purchase or otherwise dispose of any of the Stock during a period not to exceed one hundred eighty (180) days following the effective date of a registration statement, or such longer period as may be agreed to by the holders of a majority of the outstanding Registrable Securities (as such term is defined in the Rights Agreement between the Corporation and the holders of Series A Preferred Stock dated February 7, 1997) of the Corporation filed under the Securities Act; provided, however, that such agreement shall be applicable only to the first two (2) such registration statements of the Corporation which cover shares (or other securities) to be sold on behalf of the Corporation to the public in an underwritten public offering. In order to enforce the foregoing covenant, the Corporation may impose stop-transfer instructions with respect to the Stock of Purchaser (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. 8. PURCHASER'S REPRESENTATIONS. In connection with the purchase of the Stock, Purchaser hereby represents and warrants to the Corporation as follows: (a) INVESTMENT INTENT; CAPACITY TO PROTECT INTERESTS. Purchaser is purchasing the Stock solely for Purchaser's own account for investment and not with a view to or for sale in connection with any distribution of the Stock or any portion thereof and not with any present intention of selling, -4- <PAGE> 5 offering to sell or otherwise disposing of or distributing the Stock or any portion thereof in any transaction other than a transaction exempt from registration under the Securities Act. Purchaser also represents that the entire legal and beneficial interest of the Stock is being purchased, and will be held, for Purchaser's account only, and neither in whole or in part for any other person. Purchaser either has a pre-existing business or personal relationship with the Corporation (including a parent, affiliate or subsidiary of the Corporation) or any of its officers, directors or controlling persons or by reason of Purchaser's business or financial experience or the business or financial experience of Purchaser's professional advisors who are unaffiliated with and who are not compensated by the Corporation (including a parent, affiliate or subsidiary of the Corporation) or any affiliate or selling agent of the Corporation, directly or indirectly, could be reasonably assumed to have the capacity to evaluate the merits and risks of an investment in the Corporation and to protect Purchaser's own interests in connection with this transaction. (b) RESIDENCE. Purchaser's principal residence is located at the address indicated beneath Purchaser's signature below. (c) INFORMATION CONCERNING CORPORATION. Purchaser has heretofore discussed the Corporation and its plans, operations and financial position with the Corporation's officers and has heretofore received all such information as Purchaser has deemed necessary and appropriate to enable Purchaser to evaluate the financial risk inherent in making an investment in the Stock, and Purchaser has received satisfactory and complete information concerning the business and financial condition of the Corporation in response to all inquiries in respect thereof. (d) ECONOMIC RISK. Purchaser realizes that the purchase of the Stock will be a highly speculative investment and involves a high degree of risk, and Purchaser is able, without significantly impairing Purchaser's financial position, to hold the Stock for an indefinite period of time and to suffer a complete loss on Purchaser's investment. (e) RESTRICTED SECURITIES. Purchaser understands and acknowledges that: (i) the sale of the Stock has not been registered under the Securities Act, and the Stock must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available and the Corporation is under no obligation to register the Stock; (ii) the share certificate representing the Stock will be stamped with the legends specified in Section 7 hereof; and (iii) the Corporation will make a notation in its records of the aforementioned restrictions on transfer and legends. -5- <PAGE> 6 (f) DISPOSITION UNDER RULES 144 AND 701. Purchaser understands that the shares of Stock are restricted securities within the meaning of Rule 144 promulgated under the Securities Act; that the exemption from registration under Rule 144 will not be available in any event for at least one year from the date of purchase and payment (the "Holding Period") of the Stock, and even then will not be available unless (i) a public trading market then exists for the Common Stock of the Corporation, (ii) adequate information concerning the Corporation is then available to the public, and (iii) other terms and conditions of Rule 144 are complied with; and that any sale of the Stock may be made only in limited amounts in accordance with such terms and conditions. Purchaser understands that the resale provisions of Rule 701, if available, will not apply until 90 days after the Corporation becomes subject to the reporting obligation under the Securities Exchange Act of 1934 (the "Exchange Act"). There can be no assurance that the requirements of Rule 144 or Rule 701 will be met, or that the Stock will ever be saleable. (g) FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting Purchaser's representations set forth above, or the restrictions set forth in Section 5 and elsewhere herein, Purchaser further agrees that Purchaser shall in no event make any disposition of all or any portion of the Stock unless and until: (i) There is then in effect a Registration Statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with said Registration Statement; or, (ii)(1) Purchaser shall have notified the Corporation of the proposed disposition and shall have furnished the Corporation with a detailed statement of the circumstances surrounding the proposed disposition, (2) Purchaser shall have furnished the Corporation with an opinion of Purchaser's counsel to the effect that such disposition will not require registration of such shares under the Securities Act, and (3) such opinion of Purchaser's counsel shall have been concurred in by counsel for the Corporation and the Corporation shall have advised Purchaser of such concurrence. (h) VALUATION OF COMMON STOCK. Purchaser understands that the Stock has been valued by the Board of Directors and that the Corporation believes this valuation represents a fair attempt at reaching an accurate appraisal of its worth; Purchaser understands, however, that the Corporation can give no assurances that such price is in fact the fair market value of the Stock and that it is possible that, with the benefit of hindsight, the Internal Revenue Service could successfully assert that the value of the common stock on the date of purchase is substantially greater than so determined. If the Internal Revenue Service were to succeed in a tax determination that the Stock received had value greater than that upon which the transaction was based, the additional value would constitute ordinary income as of the date of its receipt. The additional taxes (and interest) due would be payable by Purchaser, and there is no provision for the Corporation to reimburse Purchaser for that tax liability, and Purchaser assumes all responsibility for such potential tax liability. Under current law, in the event such additional value would represent more than 25 percent of Purchaser's gross -6- <PAGE> 7 income for the year in which the value of the shares were taxable, the Internal Revenue Service would have six years from the due date for filing the return (or the actual filing date of the return if filed thereafter) within which to assess Purchaser the additional tax and interest which would then be due. The Corporation would have the benefit, in any such transaction, if a determination was made prior to the three year statute of limitations period affecting the Corporation, of an increase in its deduction for compensation paid, which would offset its operating profits, or, if not profitable, would create net operating loss carry forward arising from operations in that year. (i) SECTION 83(B) ELECTION. Purchaser understands that Section 83 of the Internal Revenue Code of 1986, as amended (the "Code") taxes as ordinary income the difference between the amount paid for the Stock and the fair market value of the Stock as of the date any restrictions on the Stock lapse. In this context, "restriction" means the right of the Corporation to buy back the stock pursuant to this Agreement (the "Purchase Option"). In the event the Corporation has registered under the Exchange Act, "restriction" with respect to officers, directors and 10% shareholders also means the six (6) month period after the Closing during which such officers, directors and 10% shareholders are subject to suit under Section 16(b) of the Exchange Act. Purchaser understands that he may elect to be taxed at the time the Stock is purchased rather than when and as the Purchase Option or six (6) month Section 16(b) period expires by filing an election under Section 83(b) of the Code with the I.R.S. within thirty (30) days from the date of purchase. Even if the fair market value of the Stock equals the amount paid for the Stock, the election must be made to avoid adverse tax consequences in the future. The form for making this election is attached as Exhibit 3 hereto. Purchaser understands that failure to make this filing timely will result in the recognition of ordinary income by Purchaser, as the Purchase Option lapses, or after the lapse of the six (6) month Section 16(b) period, on the difference between the purchase price and the fair market value of the Stock at the time such restrictions lapse. PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE RESPONSIBILITY AND NOT THE CORPORATION'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(B), EVEN IF PURCHASER REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON PURCHASER'S BEHALF. 9. ESCROW. As security for the faithful performance of the terms of this Agreement and the Note and to ensure the availability for delivery of the Stock upon exercise of the Corporation's option to purchase the Stock as set forth in Section 3 hereof, the Purchaser agrees to deliver to and deposit with the Secretary of the Corporation, or such other person designated by the Corporation, as escrow agent in this transaction ("Escrow Agent"), two Stock Assignments duly endorsed (with date and number of shares blank) in the form attached hereto as Exhibit 4, together with the certificate or certificates evidencing the Stock (the "Collateral"); said documents are to be held by the Escrow Agent and delivered by said Escrow Agent pursuant to the Joint Escrow Instructions of the Corporation and the Purchaser set forth in Exhibit 5 attached hereto and incorporated by this reference, which instructions shall also be delivered to the Escrow Agent at the closing hereunder. -7- <PAGE> 8 10. MISCELLANEOUS. (a) Subject to the provisions and limitations hereof, Purchaser may, during the term of this Agreement, exercise all rights and privileges of a stockholder of the Corporation with respect to the Stock. (b) The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. (c) Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to Purchaser at the address shown on the Corporation's employment records and to the Corporation at the address of its principal corporate offices (attention: President) or at such other address as such party may designate by ten (10) days' advance written notice to the other party hereto. (d) Purchaser hereby authorizes and directs the Secretary or Transfer Agent of the Corporation to transfer the Stock as to which the option to buy pursuant to Section 2 has been exercised from Purchaser to the Corporation. (e) Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Corporation, or a parent or subsidiary of the Corporation, to terminate Purchaser's employment, for any reason, with or without cause. (f) No supplement, modification or amendment of any term, provision or condition of this Agreement shall be binding or enforceable unless executed in writing by the parties hereto. (g) Should any part, term or provision of this Agreement or any document required herein to be executed be declared invalid, void or unenforceable, all remaining parts, terms and provisions hereof shall remain in full force and effect and shall in no way be invalidated, impaired or affected thereby. (h) This Agreement shall be governed by and construed and enforced in accordance with and subject to the laws of the State of California. 11. ARBITRATION. At the option of either party, any and all disputes or controversies whether of law or fact and of any nature whatsoever arising from or respecting this Agreement, except for the obligation of Purchaser to make payment for the Stock, shall be decided by arbitration by the American Arbitration Association in accordance with the rules and regulations of that Association. -8- <PAGE> 9 The arbitrators shall be selected as follows: In the event the Corporation and Purchaser agree on one arbitrator, the arbitration shall be conducted by such arbitrator. In the event the Corporation and Purchaser do not so agree, the Corporation and Purchaser shall each select one independent, qualified arbitrator and the two arbitrators so selected shall select the third arbitrator. The Corporation reserves the right to object to any individual arbitrator who shall be employed by or affiliated with a competing organization. Arbitration shall take place at San Francisco, California, or any other location mutually agreeable to the parties. At the request of either party, arbitration proceedings will be conducted in the utmost secrecy; in such case all documents, testimony and records shall be received, heard and maintained by the arbitrators in secrecy under seal, available for the inspection only of the Corporation or Purchaser and their respective attorneys and their respective experts who shall agree in advance and in writing to receive all such information confidentially and to maintain such information in secrecy until such information shall become generally known. The arbitrator, who shall act by majority vote, shall be able to decree any and all relief of an equitable nature, including but not limited to such relief as a temporary restraining order, a temporary and/or a permanent injunction, and shall also be able to award damages, with or without an accounting and costs. The decree or judgment of an award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Reasonable notice of the time and place of arbitration shall be given to all persons, other than the parties, as shall be required by law, in which case such persons or those authorized representatives shall have the right to attend and/or participate in all the arbitration hearings in such manner as the law shall require. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. PURCHASER SKYSTREAM CORPORATION a California Corporation - ------------------------------- By: ----------------------------- Title: --------------------------- Address: --------------------------- --------------------------- THIS AGREEMENT DOES NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED EMPLOYMENT FOR THE VESTING PERIOD OR ANY OTHER PERIOD. PURCHASER UNDERSTANDS THAT PURCHASER'S EMPLOYMENT WITH THE CORPORATION IS ON AN "AT WILL" BASIS, UNLESS OTHERWISE SPECIFICALLY AGREED TO BY THE CORPORATION IN WRITING. -9- <PAGE> 10 CONSENT OF SPOUSE The undersigned spouse of Purchaser has read and hereby approves the foregoing Agreement. In consideration of the Corporation's granting my spouse the right to purchase the Stock as set forth in the Agreement, the undersigned hereby agrees to be irrevocably bound by the Agreement and further agrees that any community property interest shall be similarly bound by the Agreement. I hereby appoint my spouse as my attorney-in-fact with respect to any amendment or exercise of any rights under the Agreement. -------------------------------------- -10- <PAGE> 11 EXHIBIT 1 Promissory Note Mountain View, California _____________, 2000 $ ------------- FOR VALUE RECEIVED, _________________ ("Holder") promises to pay to SkyStream Corporation, a California corporation (the "Company"), or order, the principal sum of ______________ Dollars ($___________), together with interest at the minimum rate allowable to avoid imputation of interest, compounded annually, based on a 365-day year. Principal and interest shall be due and payable upon the earlier of (i) five years from the date of this Note, or (ii) 90 days after the termination of Holder's employment with the Company. Payments of principal and interest shall be made in lawful money of the United States of America. The undersigned may at any time prepay all or any portion of the principal or interest owing hereunder. This Note is subject to the terms of the Exercise Notice and Restricted Stock Purchase Agreement dated as of ________________, 2000. This Note is secured in part by a pledge of the Company's Common Stock under the terms of such Exercise Notice and Restricted Stock Purchase Agreement. The Holder of this Note shall have full recourse against the undersigned, and shall not be required to proceed against the collateral securing this Note in the event of default. In the event the undersigned shall cease to be an employee or consultant of the Company for any reason, this Note shall, at the option of the Company, be accelerated, and the whole unpaid balance of principal and accrued interest on this Note shall be due and payable 90 days after such cessation of employment or consulting arrangement. Should any action be instituted for the collection of this Note, the reasonable costs and attorneys' fees therein of the Holder shall be paid by the undersigned. -------------------------------------- <PAGE> 12 EXHIBIT 2 SECURITY AGREEMENT This Security Agreement is made as of _____________, 2000 between SkyStream Corporation, a California corporation ("Pledgee"), and _____________ ("Pledgor"). Recitals Pursuant to Pledgor's election to purchase shares of Common Stock of Pledgee under the Exercise Notice and Restricted Stock Purchase Agreement dated _________, 2000 (the "Agreement"), and Pledgor's election under the terms of the Agreement to pay for such shares with his promissory note (the "Note"), Pledgor has purchased __________ shares of Pledgee's Common Stock (the "Shares") at a price of $_______ per share, for a total purchase price of $______________. The Note and the obligations thereunder are as set forth in Exhibit 1 to the Agreement. NOW, THEREFORE, it is agreed as follows: 1. Creation and Description of Security Interest. In consideration of the transfer of the Shares to Pledgor under the Agreement, Pledgor, pursuant to the Commercial Code of the State of California, hereby pledges all of such Shares (herein sometimes referred to as the "Collateral") represented by certificate number ______, duly endorsed in blank or with executed stock powers, and herewith delivers said certificate to the Secretary of Pledgee ("Pledgeholder"), who shall hold said certificate subject to the terms and conditions of this Security Agreement. The pledged stock (together with an executed blank stock assignment for use in transferring all or a portion of the Shares to Pledgee if, as and when required pursuant to this Security Agreement) shall be held by the Pledgeholder as security for the repayment of the Note, and any extensions or renewals thereof, to be executed by Pledgor pursuant to the terms of the Agreement, and the Pledgeholder shall not encumber or dispose of such Shares except in accordance with the provisions of this Security Agreement. 2. Pledgor's Representations and Covenants. To induce Pledgee to enter into this Security Agreement, Pledgor represents and covenants to Pledgee, its successors and assigns, as follows: (a) Payment of Indebtedness. Pledgor will pay the principal sum of the Note secured hereby, together with interest thereon, at the time and in the manner provided in the Note. (b) Encumbrances. The Shares are free of all other encumbrances, defenses and liens, and Pledgor will not further encumber the Shares without the prior written consent of Pledgee. <PAGE> 13 (c) Margin Regulations. In the event that Pledgee's Common Stock is now or later becomes margin-listed by the Federal Reserve Board and Pledgee is classified as a "lender" within the meaning of the regulations under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees to cooperate with Pledgee in making any amendments to the Note or providing any additional collateral as may be necessary to comply with such regulations. 3. Voting Rights. During the term of this pledge and so long as all payments of principal and interest are made as they become due under the terms of the Note, Pledgor shall have the right to vote all of the Shares pledged hereunder. 4. Stock Adjustments. In the event that during the term of the pledge any stock dividend, reclassification, readjustment or other changes are declared or made in the capital structure of Pledgee, all new, substituted and additional shares or other securities issued by reason of any such change shall be delivered to and held by the Pledgee under the terms of this Security Agreement in the same manner as the Shares originally pledged hereunder. In the event of substitution of such securities, Pledgor, Pledgee and Pledgeholder shall cooperate and execute such documents as are reasonable so as to provide for the substitution of such Collateral and, upon such substitution, references to "Shares" in this Security Agreement shall include the substituted shares of capital stock of Pledgor as a result thereof. 5. Options and Rights. In the event that, during the term of this pledge, subscription options or other rights or options shall be issued in connection with the pledged Shares, such rights, or options shall be the property of Pledgor and, if exercised by Pledgor, all new stock or other securities so acquired by Pledgor as it relates to the pledged Shares then held by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under the terms of this Security Agreement in the same manner as the Shares pledged. 6. Default. Pledgor shall be deemed to be in default of the Note and of this Security Agreement in the event: (a) Payment of principal or interest on the Note shall be delinquent for a period of 10 days or more; or (b) Pledgor fails to perform any of the covenants set forth in the Option or contained in this Security Agreement for a period of 10 days after written notice thereof from Pledgee. In the case of an event of Default, as set forth above, Pledgee shall have the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee shall thereafter be entitled to pursue its remedies under the California Commercial Code. 7. Release of Collateral. Subject to any applicable contrary rules under Regulation G, there shall be released from this pledge a portion of the pledged Shares held by Pledgeholder hereunder upon <PAGE> 14 payments of the principal of the Note. The number of the pledged Shares which shall be released shall be that number of full Shares which bears the same proportion to the initial number of Shares pledged hereunder as the payment of principal bears to the initial full principal amount of the Note. 8. Withdrawal or Substitution of Collateral. Pledgor shall not sell, withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee. 9. Term. The within pledge of Shares shall continue until the payment of all indebtedness secured hereby, at which time the remaining pledged stock shall be promptly delivered to Pledgor, subject to the provisions for prior release of a portion of the Collateral as provided in paragraph 7 above. 10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency proceeding is instituted by or against it, or if a receiver is appointed for the property of Pledgor, or if Pledgor makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable, and Pledgee may proceed as provided in the case of default. 11. Pledgeholder Liability. In the absence of willful or gross negligence, Pledgeholder shall not be liable to any party for any of his acts, or omissions to act, as Pledgeholder. 12. Invalidity of Particular Provisions. Pledgor and Pledgee agree that the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein contained unenforceable or invalid. 13. Successors or Assigns. Pledgor and Pledgee agree that all of the terms of this Security Agreement shall be binding on their respective successors and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall be deemed to include, for all purposes, the respective designees, successors, assigns, heirs, executors and administrators. 14. Governing Law. This Security Agreement shall be interpreted and governed under the internal substantive laws, but not the choice of law rules, of California. -3- <PAGE> 15 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "PLEDGOR" --------------------------------------- Signature Print Name Address: --------------------------------------- --------------------------------------- "PLEDGEE" SkyStream Corporation a California corporation By ------------------------------------ Title ---------------------------------- -4- <PAGE> 16 EXHIBIT 3 ELECTION UNDER SECTION 83(B) OF THE INTERNAL REVENUE CODE OF 1986 The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the Internal Revenue Code of 1986 to include in Purchaser's gross income for the current taxable year, the amount of any compensation taxable to him in connection with Purchaser's receipt of the property described below: 1. The name, address, taxpayer identification number and taxable year of the undersigned are as follows: NAME OF TAXPAYER: ________________________ SPOUSE: __________________ ADDRESS: ______________________________________________________________ IDENTIFICATION NO. OF TAXPAYER: _____________ SPOUSE: ________________ TAXABLE YEAR: 2000 2. The property with respect to which the election is made is described as follows: 3. The date on which the property was transferred is: 4. The property is subject to the following restrictions: The right of the Company to repurchase the shares, or a portion thereof, upon termination of employment at a formula price. The right lapses upon the occurrence of certain events related to the purpose of the transfer. 5. The value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: 6. The amount (if any) paid for such property: The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned's receipt of the above-described property. The transferee of such property is the person performing the services in connection with the transfer of said property. The undersigned understands that the foregoing election may not be revoked except with the consent of the Commissioner. Dated: _______________ _________________________________ Taxpayer, _____________ The undersigned spouse of taxpayer joins in this election. Dated: _______________ _________________________________ Spouse of Taxpayer <PAGE> 17 EXHIBIT 4 ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Exercise Notice and Restricted Stock Purchase Agreement dated as of _______________, 2000 (the "Agreement"), ____________ ("Purchaser") hereby sells, assigns and transfers unto SkyStream Corporation _______________________________ (______) shares of the Common Stock of SkyStream Corporation, a California corporation, standing in the undersigned's name on the books of said corporation represented by certificate No. ____________ herewith, and does hereby irrevocably constitute and appoint _______ ________________ attorney to transfer the said stock on the books of the said corporation with full power of substitution in the premises. THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT AND THE EXHIBITS THERETO. Dated:____________________ PURCHASER Signature _______________________________ INSTRUCTION: PLEASE DO NOT FILL IN ANY BLANKS OTHER THAN THE SIGNATURE LINE. The purpose of this assignment is to enable the Corporation to exercise its "Unvested Share Repurchase Option" set forth in the Agreement without requiring additional signatures on the part of the Purchaser. <PAGE> 18 EXHIBIT 5 JOINT ESCROW INSTRUCTIONS ____________, 2000 Secretary SkyStream Corporation 555 Clyde Avenue, Suite B Mountain View, CA 94043 Dear Sir: As Escrow Agent for both SkyStream Corporation, a California corporation ("Corporation"), and the undersigned purchaser of stock of the Corporation ("Purchaser"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Exercise Notice and Restricted Stock Purchase Agreement ("Agreement") between the Corporation and the undersigned, to which a copy of these Joint Escrow Instructions is attached as Exhibit 5, in accordance with the following instructions: 1. In the event the Corporation and/or any assignee of the Corporation (referred to collectively for convenience herein as the "Corporation") exercises the option set forth in Section 3 of the Agreement, the Corporation shall give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Corporation. Purchaser and the Corporation hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 2. At the closing, you are directed (a) to date the stock assignments necessary for the transfer in question, (b) to fill in the number of shares of stock being transferred, and (c) to deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Corporation against the simultaneous delivery to you of the purchase price (by check) for the number of shares of stock being purchased pursuant to the exercise of the Corporation's Unvested Share Repurchase Option. 3. Purchaser irrevocably authorizes the Corporation to deposit with you any certificates evidencing shares of stock (as that term is defined in the Agreement) to be held by you hereunder pursuant to Section 10 of the Agreement. Purchaser does hereby irrevocably constitute and appoint you as his attorney-in-fact and agent for the term of this escrow to execute all documents necessary or appropriate to make such securities negotiable or other property transferable, as the case may be, and to complete any transaction herein contemplated. Subject to the provisions of this paragraph 3, <PAGE> 19 Purchaser shall exercise all rights and privileges of a shareholder of the Corporation while the stock is held by you. 4. None of the certificates representing the shares of stock deposited under these escrow instructions shall be released to the Purchaser if such shares of stock are subject to the Unvested Share Repurchase Option. Notwithstanding the foregoing, none of the certificates representing the Shares deposited under these escrow instructions shall be released to the Purchaser if the Purchaser's Note given in payment for such shares has not been paid in full. So long as the Note is outstanding, the shares shall be held by you as collateral for the obligation under the Note. Subject to the provisions of this paragraph 4, upon payment of the Note in full the certificates representing the shares may be released and delivered to the Purchaser. In the event Purchaser defaults in payment of the Note when due, you shall, upon written request of the Company, deliver the certificate evidencing the shares and the stock assignments to the Company to enable the Company to exercise its rights as a secured party under the Commercial Code of the State of California. 5. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Purchaser, you shall deliver all of same to Purchaser and all be discharged of all further obligations hereunder. 6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law and of the arbitrator provided for in Section 11 of the Agreement, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court and of the arbitrator provided for in Section 11 of the Agreement. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. <PAGE> 20 10. You shall not be liable for the outlawing of any rights under the Statute of Limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. You shall be entitled to employ such legal counsel and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. 12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be Secretary of the Corporation or if you shall resign by written notice to each party. In the event of any such termination, the Corporation shall appoint a successor Escrow Agent. 13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of the arbitrator provided for in Section 11 of the Agreement or of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 15. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties thereunto entitled at the following addresses, or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto. CORPORATION: SkyStream Corporation 555 Clyde Avenue, Suite B Mountain View, CA 94043 PURCHASER: _______________________ _______________________ ESCROW AGENT: Secretary SkyStream Corporation 555 Clyde Avenue, Suite B Mountain View, CA 94043 -3- <PAGE> 21 16. By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. Very truly yours, SKYSTREAM CORPORATION, a California corporation By: ------------------------------ PURCHASER: --------------------------------- ESCROW AGENT: - ------------------------------ Secretary -4- <PAGE> 22 EXHIBIT A INVESTMENT REPRESENTATION STATEMENT PURCHASER : SELLER : SKYSTREAM CORPORATION COMPANY : SKYSTREAM CORPORATION SECURITY : COMMON STOCK AMOUNT: __________ shares DATE: __________, 2000 In connection with the purchase of the above-listed Securities, I, the Purchaser, represent to the Seller and to the Company the following: 1. I am aware of the Company's business affairs and financial condition, and have acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. I am purchasing these Securities for my own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Securities Act of 1933 ("Securities Act"). 2. I understand that the Securities have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of my investment intent as expressed herein. In this connection, I understand that, in the view of the Securities and Exchange Commission ("SEC"), the statutory basis for such exemption may be unavailable if my representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. 3. I further understand that the Securities must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from registration is otherwise available. Moreover, I understand that the Company is under no obligation to register the Securities. In addition, I understand that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel for the Company. 4. I am familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof in a non-public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of issuance of the Securities, such issuance will be exempt from registration under the Securities Act. In the event the Company later becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter the securities exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions specified by Rule 144, including, among other things: (1) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly <PAGE> 23 with a market maker (as said term is defined under the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of certain public information about the Company and the amount of securities being sold during any three month period not exceeding the limitations specified in Rule 144(e), if applicable. Notwithstanding this paragraph (d), I acknowledge and agree to the restrictions set forth in paragraph (c) hereof. In the event that the Company does not qualify under Rule 701 at the time of issuance of the Securities, then the Securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires among other things: (1) the availability of certain public information about the Company, (2) the resale occurring not less than one year after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and, in the case of an affiliate, or of a non-affiliate who has held the securities less than two years, (3) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934) and the amount of securities being sold during any three month period not exceeding the specified limitations stated therein, if applicable. 5. I AGREE, TO THE EXTENT REQUESTED BY THE CORPORATION OR THE UNDERWRITERS MANAGING ANY UNDERWRITTEN PUBLIC OFFERING OF COMMON STOCK (OR OTHER SECURITIES) OF THE CORPORATION, NOT TO OFFER, SELL, CONTRACT TO SELL, MAKE ANY SHORT SALE OF, LOAN OR GRANT ANY OPTION TO PURCHASE OR OTHERWISE DISPOSE OF ANY OF THE STOCK DURING A PERIOD NOT TO EXCEED ONE HUNDRED EIGHTY (180) DAYS FOLLOWING THE EFFECTIVE DATE OF A REGISTRATION STATEMENT, OR SUCH LONGER PERIOD AS MAY BE AGREED TO BY THE HOLDERS OF A MAJORITY OF THE OUTSTANDING REGISTRABLE SECURITIES (AS SUCH TERM IS DEFINED IN THE RIGHTS AGREEMENT BETWEEN THE CORPORATION AND THE HOLDERS OF SERIES A PREFERRED STOCK DATED FEBRUARY 7, 1997) OF THE CORPORATION FILED UNDER THE SECURITIES ACT; PROVIDED, HOWEVER, THAT SUCH AGREEMENT SHALL BE APPLICABLE ONLY TO THE FIRST TWO (2) SUCH REGISTRATION STATEMENTS OF THE CORPORATION WHICH COVER SHARES (OR OTHER SECURITIES) TO BE SOLD ON BEHALF OF THE CORPORATION TO THE PUBLIC IN AN UNDERWRITTEN PUBLIC OFFERING. 6. I further understand that in the event all of the applicable requirements of Rule 144 or Rule 701 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rule 144 and Rule 701 are not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Signature of Purchaser: -------------------------------- Date: , 2000 ---------------- -2- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.3 <SEQUENCE>19 <DESCRIPTION>EX-10.3 <TEXT> <PAGE> 1 EXHIBIT 10.3 SKYSTREAM NETWORKS INC 2000 EMPLOYEE STOCK PURCHASE PLAN The following constitute the provisions of the 2000 Employee Stock Purchase Plan of SkyStream Networks Inc. 1. Purpose. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. (a) "Board" shall mean the Board of Directors of the Company or any committee thereof designated by the Board of Directors of the Company in accordance with Section 14 of the Plan. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. (c) "Common Stock" shall mean the common stock of the Company. (d) "Company" shall mean SkyStream Networks Inc. and any Designated Subsidiary of the Company. (e) "Compensation" shall mean all compensation reportable on Form W-2, including without limitation base straight time gross earnings, sales commissions, payments for overtime, shift premiums, incentive compensation, incentive payments, bonuses and other compensation. (f) "Designated Subsidiary" shall mean any Subsidiary that has been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (g) "Employee" shall mean any individual who is an Employee of the Company for tax purposes whose customary employment with the Company is at least twenty (20) hours per week and more than five (5) months in any calendar year. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. Where the period of leave exceeds 90 days and the individual's right to reemployment is not guaranteed either by statute or by contract, the employment relationship shall be deemed to have terminated on the 91st day of such leave. (h) "Enrollment Date" shall mean the first Trading Day of each Offering Period. (i) "Exercise Date" shall mean the last Trading Day of each Purchase Period. <PAGE> 2 (j) "Fair Market Value" shall mean, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the date of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean of the closing bid and asked prices for the Common Stock prior to the date of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable; (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board; or (iv) For purposes of the Enrollment Date of the first Offering Period under the Plan, the Fair Market Value shall be the initial price to the public as set forth in the final prospectus included within the registration statement in Form S-1 filed with the Securities and Exchange Commission for the initial public offering of the Company's Common Stock (the "Registration Statement"). (k) "Offering Periods" shall mean the periods of approximately twenty-four (24) months during which an option granted pursuant to the Plan may be exercised, commencing on the first Trading Day on or after May 1 and November 1 of each year and terminating on the last Trading Day in the periods ending twenty-four months later; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or before April 30, 2002. The duration and timing of Offering Periods may be changed pursuant to Section 4 of this Plan. (l) "Plan" shall mean this 2000 Employee Stock Purchase Plan. (m) "Purchase Period" shall mean the approximately six month period commencing after one Exercise Date and ending with the next Exercise Date, except that the first Purchase Period of any Offering Period shall commence on the Enrollment Date and end with the next Exercise Date. (n) "Purchase Price" shall mean 85% of the Fair Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower; provided however, that the Purchase Price may be adjusted by the Board pursuant to Section 20. (o) "Reserves" shall mean the number of shares of Common Stock covered by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option. -2- <PAGE> 3 (p) "Subsidiary" shall mean a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. (q) "Trading Day" shall mean a day on which national stock exchanges and the Nasdaq System are open for trading. 3. Eligibility. (a) Any Employee (as defined in Section 2(g)) who shall be employed by the Company on a given Enrollment Date shall be eligible to participate in the Plan. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) to the extent that, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the capital stock of the Company or of any Subsidiary, or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall be implemented by consecutive, overlapping Offering Periods with a new Offering Period commencing on the first Trading Day on or after May 1 and November 1 each year, or on such other date as the Board shall determine, and continuing thereafter until terminated in accordance with Section 20 hereof; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or before April 30, 2002. The Board shall have the power to change the duration of Offering Periods (including the commencement dates thereof) with respect to future offerings without shareholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected thereafter. 5. Participation. (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions in the form of Exhibit A to this Plan and filing it with the Company's payroll office prior to the applicable Enrollment Date. (b) Payroll deductions for a participant shall commence on the first payroll following the Enrollment Date and shall end on the last payroll in the Offering Period to which such authorization is applicable, unless sooner terminated by the participant as provided in Section 10 hereof. -3- <PAGE> 4 6. Payroll Deductions. (a) At the time a participant files his or her subscription agreement, he or she shall elect to have payroll deductions made on each pay day during the Offering Period in an amount not exceeding fifteen percent (15%) of the Compensation which he or she receives on each pay day during the Offering Period. (b) All payroll deductions made for a participant shall be credited to his or her account under the Plan and shall be withheld in whole percentages only. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in Section 10 hereof, or may increase or decrease the rate of his or her payroll deductions during the Offering Period by completing or filing with the Company a new subscription agreement authorizing a change in payroll deduction rate. The Board may, in its discretion, limit the number of participation rate changes during any Offering Period, including allowing such changes only at the beginning of each Purchase Period. The change in rate shall be effective with the first full payroll period following five (5) business days after the Company's receipt of the new subscription agreement unless the Company elects to process a given change in participation more quickly. A participant's subscription agreement shall remain in effect for successive Offering Periods unless terminated as provided in Section 10 hereof. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's payroll deductions may be decreased to zero percent (0%) at any time during a Purchase Period. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the first Purchase Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10 hereof. (e) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but shall not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by the Employee. 7. Grant of Option. On the Enrollment Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on each Exercise Date during such Offering Period (at the applicable Purchase Price) up to a number of shares of the Company's Common Stock determined by dividing such Employee's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by the applicable Purchase Price; provided that in no event shall an Employee be permitted to purchase during each Purchase Period more than a number of shares determined by dividing $12,500 by the Fair Market Value of a share of the Company's Common Stock (subject to any adjustment pursuant to Section 19) on the Enrollment Date, and provided further that such purchase shall be -4- <PAGE> 5 subject to the limitations set forth in Sections 3(b) and 12 hereof. The Board may, for future Offering Periods, increase or decrease, in its absolute discretion, the maximum number of shares of the Company's Common Stock an Employee may purchase during each Purchase Period of such Offering Period. Exercise of the option shall occur as provided in Section 8 hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The option shall expire on the last day of the Offering Period. 8. Exercise of Option. (a) Unless a participant withdraws from the Plan as provided in Section 10 hereof, his or her option for the purchase of shares shall be exercised automatically on the Exercise Date, and the maximum number of full shares subject to option shall be purchased for such participant at the applicable Purchase Price with the accumulated payroll deductions in his or her account. No fractional shares shall be purchased; any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full share shall be retained in the participant's account for the subsequent Purchase Period or Offering Period, subject to earlier withdrawal by the participant as provided in Section 10 hereof. Any other monies left over in a participant's account after the Exercise Date shall be returned to the participant. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. (b) If the Board determines that, on a given Exercise Date, the number of shares with respect to which options are to be exercised may exceed (i) the number of shares of Common Stock that were available for sale under the Plan on the Enrollment Date of the applicable Offering Period, or (ii) the number of shares available for sale under the Plan on such Exercise Date, the Board may in its sole discretion (x) provide that the Company shall make a pro rata allocation of the shares of Common Stock available for purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Exercise Date, and continue all Offering Periods then in effect, or (y) provide that the Company shall make a pro rata allocation of the shares available for purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Exercise Date, and terminate any or all Offering Periods then in effect pursuant to Section 20 hereof. The Company may make pro rata allocation of the shares available on the Enrollment Date of any applicable Offering Period pursuant to the preceding sentence, notwithstanding any authorization of additional shares for issuance under the Plan by the Company's shareholders subsequent to such Enrollment Date. 9. Delivery. As promptly as practicable after each Exercise Date on which a purchase of shares occurs, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon exercise of his or her option. 10. Withdrawal. (a) A participant may withdraw all but not less than all the payroll deductions credited to his or her account and not yet used to exercise his or her option under the Plan at any -5- <PAGE> 6 time by giving written notice to the Company in the form of Exhibit B to this Plan. All of the participant's payroll deductions credited to his or her account shall be paid to such participant promptly after receipt of notice of withdrawal and such participant's option for the Offering Period shall be automatically terminated, and no further payroll deductions for the purchase of shares shall be made for such Offering Period. If a participant withdraws from an Offering Period, payroll deductions shall not resume at the beginning of the succeeding Offering Period unless the participant delivers to the Company a new subscription agreement. (b) A participant's withdrawal from an Offering Period shall not have any effect upon his or her eligibility to participate in any similar plan which may hereafter be adopted by the Company or in succeeding Offering Periods which commence after the termination of the Offering Period from which the participant withdraws. 11. Termination of Employment. Upon a participant's ceasing to be an Employee, for any reason, he or she shall be deemed to have elected to withdraw from the Plan and the payroll deductions credited to such participant's account during the Offering Period but not yet used to exercise the option shall be returned to such participant or, in the case of his or her death, to the person or persons entitled thereto under Section 15 hereof, and such participant's option shall be automatically terminated. The preceding sentence notwithstanding, a participant who receives payment in lieu of notice of termination of employment shall be treated as continuing to be an Employee for the participant's customary number of hours per week of employment during the period in which the participant is subject to such payment in lieu of notice. 12. Interest. No interest shall accrue on the payroll deductions of a participant in the Plan. 13. Stock. (a) Subject to adjustment upon changes in capitalization of the Company as provided in Section 19 hereof, the maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be 500,000 shares (after giving effect to the three-for-two stock split approved by the stockholders of the Company on February 29, 2000) together with an annual increase to the number of shares reserved for issuance thereunder on the first day of the Company's fiscal year beginning in January 1, 2001, equal to the lesser of (i) 1,500,000 shares, (ii) 3% of the outstanding shares of the Company on the last day of the prior fiscal year or (iii) such amount as determined by the Board. (b) The participant shall have no interest or voting right in shares covered by his option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan shall be registered in the name of the participant or in the name of the participant and his or her spouse. -6- <PAGE> 7 14. Administration. The Plan shall be administered by the Board or a committee of members of the Board appointed by the Board. The Board or its committee shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Board or its committee shall, to the full extent permitted by law, be final and binding upon all parties. 15. Designation of Beneficiary. (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to exercise of the option. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 16. Transferability. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 15 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with Section 10 hereof. 17. Use of Funds. All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 18. Reports. Individual accounts shall be maintained for each participant in the Plan. Statements of account shall be given to participating Employees at least annually, which statements shall set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any. -7- <PAGE> 8 19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the Reserves, the maximum number of shares each participant may purchase each Purchase Period (pursuant to Section 7), as well as the price per share and the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and shall terminate immediately prior to the consummation of such proposed dissolution or liquidation, unless provided otherwise by the Board. The New Exercise Date shall be before the date of the Company's proposed dissolution or liquidation. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. (c) Merger or Asset Sale. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the option, any Purchase Periods then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date") and any Offering Periods then in progress shall end on the New Exercise Date. The New Exercise Date shall be before the date of the Company's proposed sale or merger. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. 20. Amendment or Termination. (a) The Board of Directors of the Company may at any time and for any reason terminate or amend the Plan. Except as provided in Section 19 hereof, no such termination can affect options previously granted, provided that an Offering Period may be terminated by the Board -8- <PAGE> 9 of Directors on any Exercise Date if the Board determines that the termination of the Offering Period or the Plan is in the best interests of the Company and its shareholders. Except as provided in Section 19 and this Section 20 hereof, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. To the extent necessary to comply with Section 423 of the Code (or any successor rule or provision or any other applicable law, regulation or stock exchange rule), the Company shall obtain shareholder approval in such a manner and to such a degree as required. (b) Without shareholder consent and without regard to whether any participant rights may be considered to have been "adversely affected," the Board (or its committee) shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. (c) In the event the Board determines that the ongoing operation of the Plan may result in unfavorable financial accounting consequences, the Board may, in its discretion and, to the extent necessary or desirable, modify or amend the Plan to reduce or eliminate such accounting consequence including, but not limited to: (i) altering the Purchase Price for any Offering Period including an Offering Period underway at the time of the change in Purchase Price; (ii) shortening any Offering Period so that Offering Period ends on a new Exercise Date, including an Offering Period underway at the time of the Board action; and (iii) allocating shares. Such modifications or amendments shall not require stockholder approval or the consent of any Plan participants. 21. Notices. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 22. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. -9- <PAGE> 10 As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 23. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the shareholders of the Company; provided, however, the Plan shall not become effective until the effective date of the Company's initial public offering pursuant to a registration statement filed with the Securities and Exchange Commission. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 20 hereof. 24. Automatic Transfer to Low Price Offering Period. To the extent permitted by any applicable laws, regulations, or stock exchange rules, if the Fair Market Value of the Common Stock on any Exercise Date in an Offering Period is lower than the Fair Market Value of the Common Stock on the Enrollment Date of such Offering Period, then all participants in such Offering Period shall be automatically withdrawn from such Offering Period immediately after the exercise of their option on such Exercise Date and automatically re-enrolled in the immediately following Offering Period as of the first day thereof. -10- <PAGE> 11 EXHIBIT A SKYSTREAM NETWORKS INC. 2000 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT _____ Original Application Enrollment Date: ___________ _____ Change in Payroll Deduction Rate _____ Change of Beneficiary(ies) 1. ____________________ hereby elects to participate in the SkyStream Networks Inc. Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and subscribes to purchase shares of the Company's Common Stock in accordance with this Subscription Agreement and the Employee Stock Purchase Plan. 2. I hereby authorize payroll deductions from each paycheck in the amount of ____% of my Compensation on each payday during the Offering Period in accordance with the Employee Stock Purchase Plan. (Please note that the percentage withholding must be between 1% and 15% and that no fractional percentages are permitted.) 3. I understand that said payroll deductions shall be accumulated for the purchase of shares of Common Stock at the applicable Purchase Price determined in accordance with the Employee Stock Purchase Plan. I understand that if I do not withdraw from an Offering Period, any accumulated payroll deductions will be used to automatically exercise my option. 4. I have received a copy of the complete Employee Stock Purchase Plan. I understand that my participation in the Employee Stock Purchase Plan is in all respects subject to the terms of the Plan. I understand that my ability to exercise the option under this Subscription Agreement is subject to shareholder approval of the Employee Stock Purchase Plan. 5. Shares purchased for me under the Employee Stock Purchase Plan should be issued in the name(s) of (Employee or Employee and Spouse only): _________ __________________________. 6. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Enrollment Date (the first day of the Offering Period during which I purchased such shares) or one year after the Exercise Date, I will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were purchased by me over the price which I paid for the shares. I hereby agree to notify the Company in writing within 30 days after the date of any disposition of my shares and I will make adequate provision for Federal, state or other tax withholding obligations, if any, which arise upon the <PAGE> 12 disposition of the Common Stock. The Company may, but will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by me. If I dispose of such shares at any time after the expiration of the 2-year and 1-year holding periods, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares, or (2) 15% of the fair market value of the shares on the first day of the Offering Period. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gain. 7. I hereby agree to be bound by the terms of the Employee Stock Purchase Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Employee Stock Purchase Plan. 8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due me under the Employee Stock Purchase Plan: NAME: (Please print) ----------------------------------------------------- (First) (Middle) (Last) --------------------------- --------------------------------------- Relationship --------------------------------------- (Address) Employee's Social Security Number: --------------------------------------- Employee's Address: --------------------------------------- --------------------------------------- --------------------------------------- I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME. Dated: ------------------------- --------------------------------------- Signature of Employee --------------------------------------- Spouse's Signature (If beneficiary other than spouse) -2- <PAGE> 13 EXHIBIT B SKYSTREAM NETWORKS INC. 2000 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL The undersigned participant in the Offering Period of the SkyStream Networks Inc. Employee Stock Purchase Plan which began on ____________, ______ (the "Enrollment Date") hereby notifies the Company that he or she hereby withdraws from the Offering Period. He or she hereby directs the Company to pay to the undersigned as promptly as practicable all the payroll deductions credited to his or her account with respect to such Offering Period. The undersigned understands and agrees that his or her option for such Offering Period will be automatically terminated. The undersigned understands further that no further payroll deductions will be made for the purchase of shares in the current Offering Period and the undersigned shall be eligible to participate in succeeding Offering Periods only by delivering to the Company a new Subscription Agreement. Name and Address of Participant: -------------------------------------- -------------------------------------- -------------------------------------- Signature: -------------------------------------- Date: --------------------------------- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.4 <SEQUENCE>20 <DESCRIPTION>EX-10.4 <TEXT> <PAGE> 1 EXHIBIT 10.4 SKYSTREAM NETWORKS INC. 2000 DIRECTOR STOCK OPTION PLAN 1. Purposes of the Plan. The purposes of this 2000 Director Stock Option Plan are to attract and retain the best available personnel for service as Outside Directors (as defined herein) of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board. All options granted hereunder shall be nonstatutory stock options. 2. Definitions. As used herein, the following definitions shall apply: (a) "Board" shall mean the Board of Directors of the Company. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. (c) "Common Stock" shall mean the common stock of the Company. (d) "Company" shall mean SkyStream Networks Inc. (e) "Director" shall mean a member of the Board. (f) "Disability" shall mean total and permanent disability as defined in section 22(e)(3) of the Code. (g) "Employee" shall mean any person, including officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a Director's fee by the Company shall not be sufficient in and of itself to constitute "employment" by the Company. (h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (i) "Fair Market Value" shall mean, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock for the last market <PAGE> 2 trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board. (j) "Inside Director" shall mean a Director who is an Employee. (k) "Option" shall mean a stock option granted pursuant to the Plan. (l) "Optioned Stock" shall mean the Common Stock subject to an Option. (m) "Optionee" shall mean a Director who holds an Option. (n) "Outside Director" shall mean a Director who is not an Employee. (o) "Parent" shall mean a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (p) "Plan" shall mean this 2000 Director Stock Option Plan. (q) "Share" shall mean a share of the Common Stock, as adjusted in accordance with Section 10 of the Plan. (r) "Subsidiary" shall mean a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of 1986. 3. Stock Subject to the Plan. Subject to the provisions of Section 10 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 400,000 Shares (after giving effect to the three-for-two stock split approved by the stockholders of the Company on February 29, 2000) (the "Pool") (the Shares may be authorized, but unissued, or reacquired Common Stock), together with an annual increase to the number of Shares reserved thereunder on the first day of the Company's fiscal year, beginning with January 1, 2001, equal to the lesser of (i) 100,000 Shares, (ii) 0.25% of the outstanding Shares of Common Stock on the last day of each prior fiscal year or (iii) such amount as determined by the Board. If an Option expires or becomes unexercisable without having been exercised in full, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). Shares that have actually been issued under the Plan shall not be returned to the Plan and shall not become available for future distribution under the Plan. 4. Administration and Grants of Options under the Plan. (a) Procedure for Grants. All grants of Options to Outside Directors under this Plan shall be automatic and nondiscretionary and shall be made strictly in accordance with the following provisions: -2- <PAGE> 3 (i) No person shall have any discretion to select which Outside Directors shall be granted Options or to determine the number of Shares to be covered by Options. (ii) Each Outside Director shall be automatically granted an Option to purchase Shares (the "First Option") on the date on which the later of the following events occurs: (A) the effective date of this Plan, as determined in accordance with Section 6 hereof; or (B) the date on which such person first becomes an Outside Director, whether through election by the shareholders of the Company or appointment by the Board to fill a vacancy; provided, however, that an Inside Director who ceases to be an Inside Director but who remains a Director shall not receive a First Option. The First Option for an Outside Director who has not previously received a stock option grant from the Company shall be for 30,000 Shares; provided, however, it shall be increased by 2,000 Shares for service as Chairman of the Board of Directors, 2,000 Shares for service on the Board's Audit Committee and 2,000 Shares for service on the Board's Compensation Committee. The First Option, if any, for an Outside Director who has previously received a stock option grant from the Company shall consist only of 2,000 Shares for service as Chairman of the Board of Directors, 2,000 Shares for service on the Board's Audit Committee and 2,000 Shares for service on the Board's Compensation Committee. (iii) Each Outside Director shall subsequently be automatically granted an Option to purchase Shares (a "Subsequent Option") on the date of the next meeting of the Board following the Annual Meeting of Shareholders in each year commencing with the 2001 Annual Meeting of Shareholders provided he or she is then an Outside Director and if as of such date, he or she shall have served on the Board for at least the preceding six (6) months. The Subsequent Option Shall be for 10,000 Shares; provided, however, it shall be increased by 2,000 Shares for service as Chairman of the Board of Directors, 2,000 Shares for service on the Board's Audit Committee and 2,000 Shares for service on the Board's Compensation Committee. (iv) Notwithstanding the provisions of subsections (ii) and (iii) hereof, any exercise of an Option granted before the Company has obtained shareholder approval of the Plan in accordance with Section 16 hereof shall be conditioned upon obtaining such shareholder approval of the Plan in accordance with Section 16 hereof. (v) The terms of a First Option granted hereunder shall be as follows: (A) the term of the First Option shall be ten (10) years. (B) the First Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Sections 8 and 10 hereof. (C) the exercise price per Share shall be 100% of the Fair Market Value per Share on the date of grant of the First Option provided, however, that in the case of a First Option granted on the effective date of the Company's initial public offering pursuant to a registration statement filed with the Securities and Exchange Commission, the exercise price per share shall be the initial public offering price per share. -3- <PAGE> 4 (D) subject to Section 10 hereof, the First Option shall become exercisable as to 1/4 of the Shares subject to the First Option on the anniversary of the date of grant, and as to 1/48 of the First Option at the end of each month thereafter, so that the First Option shall be fully exercisable four years after its date of grant, provided that the Optionee continues to serve as a Director on such dates. (vi) The terms of a Subsequent Option granted hereunder shall be as follows: (A) the term of the Subsequent Option shall be ten (10) years. (B) the Subsequent Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Sections 8 and 10 hereof. (C) the exercise price per Share shall be 100% of the Fair Market Value per Share on the date of grant of the Subsequent Option. (D) subject to Section 10 hereof, the Subsequent Option shall become exercisable cumulatively with respect to 1/48th of the Subsequent Option at the end of each month after the date of grant, so that the Subsequent Option shall be fully exercisable four years after its date of grant, provided that the Optionee continues to serve as a Director on such dates. (vii) In the event that any Option granted under the Plan would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased under Options to exceed the Pool, then the remaining Shares available for Option grant shall be granted under Options to the Outside Directors on a pro rata basis. No further grants shall be made until such time, if any, as additional Shares become available for grant under the Plan through action of the Board or the shareholders to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Options previously granted hereunder. 5. Eligibility. Options may be granted only to Outside Directors. All Options shall be automatically granted in accordance with the terms set forth in Section 4 hereof. The Plan shall not confer upon any Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate the Director's relationship with the Company at any time. 6. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the shareholders of the Company as described in Section 16 of the Plan; provided, however, the Plan shall not become effective until the effective date of the Company's initial public offering pursuant to a registration statement filed with the Securities and Exchange Commission. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 11 of the Plan. -4- <PAGE> 5 7. Form of Consideration. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (iv) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan, or (v) any combination of the foregoing methods of payment. 8. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable at such times as are set forth in Section 4 hereof; provided, however, that no Options shall be exercisable until shareholder approval of the Plan in accordance with Section 16 hereof has been obtained. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may consist of any consideration and method of payment allowable under Section 7 of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. A share certificate for the number of Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 10 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Continuous Status as a Director. Subject to Section 10 hereof, in the event an Optionee's status as a Director terminates (other than upon the Optionee's death or Disability), the Optionee may exercise his or her Option, but only within three (3) months following the date of such termination, and only to the extent that the Optionee was entitled to exercise it on the date of such termination (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of such termination, and to the extent that the Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. -5- <PAGE> 6 (c) Disability of Optionee. In the event Optionee's status as a Director terminates as a result of Disability, the Optionee may exercise his or her Option, but only within twelve (12) months following the date of such termination, and only to the extent that the Optionee was entitled to exercise it on the date of such termination (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of termination, or if he or she does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. (d) Death of Optionee. In the event of an Optionee's death, the Optionee's estate or a person who acquired the right to exercise the Option by bequest or inheritance may exercise the Option, but only within twelve (12) months following the date of death, and only to the extent that the Optionee was entitled to exercise it on the date of death (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of death, and to the extent that the Optionee's estate or a person who acquired the right to exercise such Option does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. 9. Non-Transferability of Options. The Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 10. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of Shares covered by each outstanding Option, the number of Shares which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per Share covered by each such outstanding Option, and the number of Shares issuable pursuant to the automatic grant provisions of Section 4 hereof shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, to the extent that an Option has not been previously exercised, it shall terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation or the sale of substantially all of the assets of the Company, outstanding Options may be assumed or equivalent options may be substituted by the successor corporation or a Parent or -6- <PAGE> 7 Subsidiary thereof (the "Successor Corporation"). If an Option is assumed or substituted for, the Option or equivalent option shall continue to be exercisable as provided in Section 4 hereof for so long as the Optionee serves as a Director or a director of the Successor Corporation. Following such assumption or substitution, if the Optionee's status as a Director or director of the Successor Corporation, as applicable, is terminated other than upon a voluntary resignation by the Optionee, the Option or option shall become fully exercisable, including as to Shares for which it would not otherwise be exercisable. Thereafter, the Option or option shall remain exercisable in accordance with Sections 8(b) through (d) above. If the Successor Corporation does not assume an outstanding Option or substitute for it an equivalent option, the Option shall become fully vested and exercisable, including as to Shares for which it would not otherwise be exercisable. In such event the Board shall notify the Optionee that the Option shall be fully exercisable for a period of thirty (30) days from the date of such notice, and upon the expiration of such period the Option shall terminate. For the purposes of this Section 10(c), an Option shall be considered assumed if, following the merger or sale of assets, the Option confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares). If such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 11. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend, or discontinue the Plan, but no amendment, alteration, suspension, or discontinuation shall be made which would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with any applicable law, regulation or stock exchange rule, the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as required. (b) Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated. 12. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date determined in accordance with Section 4 hereof. -7- <PAGE> 8 13. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, state securities laws, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares, if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 14. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 15. Option Agreement. Options shall be evidenced by written option agreements in such form as the Board shall approve. 16. Shareholder Approval. The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the degree and manner required under applicable state and federal law and any stock exchange rules. -8- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.4.1 <SEQUENCE>21 <DESCRIPTION>EX-10.4.1 <TEXT> <PAGE> 1 EXHIBIT 10.4.1 SKYSTREAM NETWORKS INC. DIRECTOR OPTION AGREEMENT SkyStream Networks Inc., (the "Company"), has granted to _________________ (the "Optionee"), an option to purchase a total of [__________ (____)] shares of the Company's Common Stock (the "Optioned Stock"), at the price determined as provided herein, and in all respects subject to the terms, definitions and provisions of the Company's 2000 Director Option Plan (the "Plan") adopted by the Company which is incorporated herein by reference. The terms defined in the Plan shall have the same defined meanings herein. 1. Nature of the Option. This Option is a nonstatutory option and is not intended to qualify for any special tax benefits to the Optionee. 2. Exercise Price. The exercise price is $_______ for each share of Common Stock. 3. Exercise of Option. This Option shall be exercisable during its term in accordance with the provisions of Section 8 of the Plan as follows: (i) Right to Exercise. (a) This Option shall become exercisable in installments cumulatively with respect to ____________ of the Optioned Stock ___________________ the date of grant, and as to an additional 1/48 of the Optioned Stock each month thereafter, so that one hundred percent (100%) of the Optioned Stock shall be exercisable four years after the date of grant; provided, however, that in no event shall any Option be exercisable prior to the date the stockholders of the Company approve the Plan. (b) This Option may not be exercised for a fraction of a share. (c) In the event of Optionee's death, disability or other termination of service as a Director, the exercisability of the Option is governed by Section 8 of the Plan. (ii) Method of Exercise. This Option shall be exercisable by written notice which shall state the election to exercise the Option and the number of Shares in respect of which the Option is being exercised. Such written notice, in the form attached hereto as Exhibit A, shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The written notice shall be accompanied by payment of the exercise price. 4. Method of Payment. Payment of the exercise price shall be by any of the following, or a combination thereof, at the election of the Optionee: (i) cash; (ii) check; or <PAGE> 2 (iii) surrender of other shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; or (iv) delivery of a properly executed exercise notice together with such other documentation as the Company and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price. 5. Restrictions on Exercise. This Option may not be exercised if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulations, or if such issuance would not comply with the requirements of any stock exchange upon which the Shares may then be listed. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 6. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 7. Term of Option. This Option may not be exercised more than ten (10) years from the date of grant of this Option, and may be exercised during such period only in accordance with the Plan and the terms of this Option. 8. Taxation Upon Exercise of Option. Optionee understands that, upon exercise of this Option, he or she will recognize income for tax purposes in an amount equal to the excess of the then Fair Market Value of the Shares purchased over the exercise price paid for such Shares. Since the Optionee is subject to Section 16(b) of the Securities Exchange Act of 1934, as amended, under certain limited circumstances the measurement and timing of such income (and the commencement of any capital gain holding period) may be deferred, and the Optionee is advised to contact a tax advisor concerning the application of Section 83 in general and the availability a Section 83(b) election in particular in connection with the exercise of the Option. Upon a resale of such Shares by the Optionee, any difference between the sale price and the Fair Market Value of the Shares on the -2- <PAGE> 3 date of exercise of the Option, to the extent not included in income as described above, will be treated as capital gain or loss. DATE OF GRANT: -------------- SkyStream Networks Inc., a Delaware corporation By: ---------------------------------- Optionee acknowledges receipt of a copy of the Plan, a copy of which is attached hereto, and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under the Plan. Dated: --------------------- ------------------------------------- Optionee -3- <PAGE> 4 EXHIBIT A DIRECTOR OPTION EXERCISE NOTICE SkyStream Networks Inc. _______________ _______________ Attention: Corporate Secretary 1. Exercise of Option. The undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase ______ shares of the Common Stock (the "Shares") of SkyStream Networks Inc. (the "Company") under and pursuant to the Company's 2000 Director Option Plan and the Director Option Agreement dated _______________ (the "Agreement"). 2. Representations of Optionee. Optionee acknowledges that Optionee has received, read and understood the Agreement. 3. Federal Restrictions on Transfer. Optionee understands that the Shares must be held indefinitely unless they are registered under the Securities Act of 1933, as amended (the "1933 Act"), or unless an exemption from such registration is available, and that the certificate(s) representing the Shares may bear a legend to that effect. Optionee understands that the Company is under no obligation to register the Shares and that an exemption may not be available or may not permit Optionee to transfer Shares in the amounts or at the times proposed by Optionee. 4. Tax Consequences. Optionee understands that Optionee may suffer adverse tax consequences as a result of Optionee's purchase or disposition of the Shares. Optionee represents that Optionee has consulted with any tax consultant(s) Optionee deems advisable in connection with the purchase or disposition of the Shares and that Optionee is not relying on the Company for any tax advice. 5. Delivery of Payment. Optionee herewith delivers to the Company the aggregate purchase price for the Shares that Optionee has elected to purchase and has made provision for the payment of any federal or state withholding taxes required to be paid or withheld by the Company. 6. Entire Agreement. The Agreement is incorporated herein by reference. This Exercise Notice and the Agreement constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the <PAGE> 5 subject matter hereof. This Exercise Notice and the Agreement are governed by California law except for that body of law pertaining to conflict of laws. Submitted by: Accepted by: OPTIONEE: SkyStream Networks Inc. By: By: -------------------------------- -------------------------------- Its: ------------------------------- Address: Dated: Dated: ----------------------------- ----------------------------- -2- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.5 <SEQUENCE>22 <DESCRIPTION>EX-10.5 <TEXT> <PAGE> 1 EXHIBIT 10.5 [SKYSTREAM CORPORATION LETTERHEAD] June 12, 1997 Mr. James D. Olson 9 Ashdown Place Half Moon Bay, CA 94019 Dear Jim: On behalf of the Board of Directors of SkyStream Corp. (the "Company"), I am pleased to offer you the position of President, Chief Executive Officer and Member of the Board of Directors, commencing on or before July 10, 1997. Your base salary will be $14,583.33 per month ($175,000.00 on an annualized basis), which will be paid in accordance with the Company's normal payroll procedures. You will also receive an annual bonus based on meeting objectives defined by you and agreed upon by the Company's Board of Directors. Your targeted bonus for meeting these objectives will be $100,000.00. We expect that your objectives will include, but will not be limited to, revenue and profit targets. Your base salary and bonus will be reviewed annually by the Board of Directors or compensation committee. As an employee of the Company you will be eligible to participate in benefits generally provided by the Company to its employees. At its next meeting, the Company's Board of Directors will grant you the right to purchase 1,092,500 shares of Common Stock at the fair market value ($0.10 per share) for such shares pursuant to the Company's Stock Option Plan, including the standard vesting provision thereunder. At your option, you may select to exercise your stock options subject to a company Repurchase Right (the "Repurchase Right"), that would lapse on the same schedule that the stock options would normally vest. If you elect to exercise your options subject to the Repurchase Right the purchase price of the Common Stock may be financed with a full recourse promissory note (the "Note") payable to the Company. The Note shall bear interest at the minimum rate allowable to avoid imputation of interest (currently 6.8 percent) compounded annually. Interest shall be forgiven annually as long as you remain employed by the Company, with the amount of such forgiveness grossed up for federal and state income tax purposes. The Note shall be due and payable upon the earlier of (i) five years from the date of the Note, or (ii) 90 days after the termination of your employment with the Company. In addition, the proceeds from any sale by you of any shares of Common Stock of the Company shall be applied to repay the Note. <PAGE> 2 MR. JAMES D. OLSON JUNE 12, 1997 Your employment with the Company is "at will" and may be terminated by you or by the Company at any time, with or without cause (as defined below). If, however, the Company decides to terminate your employment for reasons other than cause, the Company shall pay you all compensation (including base salary and bonus) due to you at the date of termination and continue to pay you in equal installments, an amount equal to the sum of your then current base salary for a period of six (6) months from the date of termination. During such period, you shall continue to vest your stock options and be entitled to participate in the Company's employee health, medical, and other benefits on the same basis as if you were an employee. If in the first year of your employment, the Company is acquired or sold, and, as a result of such acquisition you are involuntarily or constructively terminated without cause, you will nonetheless vest an aggregate of 25 percent of your stock options, or, in the case of a Repurchase Right, an aggregate of 25 percent of the Company's Repurchase Right will lapse. In the event your employment is terminated for cause, you will be entitled to any unpaid salary and bonus (if any) due to you pursuant to this agreement through the date of termination and you will be entitled to no other compensation from the Company. "Cause" shall mean (i) willful and repeated failure to comply with the lawful written directions of the Company's Board of Directors, (ii) gross negligence or willful misconduct in the performance of duties for the Company, (iii) commission of any act of fraud, or (iv) conviction of a felony involving morale turpitude causing material harm to the reputation of the Company, in each case as determined in good faith by the Company's Board of Directors. For the purpose of compliance with federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. This documentation must be provided to the Company within three business days of your hire date or your employment relationship may be terminated. In addition, as a condition of your employment, you will be required to sign our standard Proprietary Information Agreement. To indicate your acceptance of the Company's offer, please sign and date this letter below and return it to me; a duplicate original is enclosed for your records. This letter and the Proprietary Information Agreement set forth the terms of your employment with the Company and supersede any prior representation or agreement, whether written or oral. This letter may not be modified or amended except by a written agreement signed by a representative of the Company and by you. Jim, we are all very excited about your joining SkyStream Corp. We believe that with your background and accomplishments you are the right person to lead our team to high levels of success. The video networking and distribution market <PAGE> 3 MR. JAMES D. OLSON JUNE 12, 1997 will explode in the coming decade and we look forward to exploiting that opportunity with you at SkyStream. Very truly yours, SKYSTREAM CORP. /s/ GEOFFREY Y. YANG - ----------------------------- Geoffrey Y. Yang For the Board of Directors Accepted and agreed to by: /s/ JAMES D. OLSON ----------------------------- Mr. James D. Olson June 13, 1997 ----------------------------- Date ajr Enclosure: Duplicate Original Letter </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.6 <SEQUENCE>23 <DESCRIPTION>EX-10.6 <TEXT> <PAGE> 1 EXHIBIT 10.6 [SKYSTREAM CORPORATION LETTERHEAD] Monday, September 8, 1997 Susan Ketcham 735 Nevada Avenue San Mateo, CA 94402 (650) 343-0489 Dear Susan: I am pleased to offer you the position of Director of Finance, reporting to myself, Jim Olson, President and Chief Executive Officer at SkyStream Corporation. In this position, you will be responsible for all aspects of SkyStream's accounting and finance activities. You will also be responsible for all aspects of our Human Resources function. As Director of Finance you will receive a starting base salary of ninety thousand dollars ($90,000) per year. You will also receive an annual bonus based on meeting mutually agreed objectives. Your targeted bonus for meeting these objectives will be $20,000. Your salary shall be paid twice per month and is subject to withholding for federal, state and other applicable taxes. Further, we will recommend to SkyStream's Board of Directors that you be granted incentive stock options to purchase, 55,000 shares of SkyStream common stock which will vest over a four year vesting schedule from the date of your employment. Vesting will be annual for the first year and monthly the following three years. As an employee of SkyStream, you and your dependents will be entitled to SkyStream medical, dental, life/AD&D, and 401k benefits as made available to all SkyStream employees. Information on the details of our plans will be delivered to you separately. When you report to work, you will be expected to execute our standard company agreement relative to patents, inventions and confidential information. This is an offer for "at will" employment, and does not constitute an offer or guarantee of employment for any period of time. Your employment and compensation can be terminated at any time for any reason or for no reason, subject to the terms hereof and your rights to compensation hereunder. If in the first year of your employment, the company is acquired or sold, and, as a result of such acquisition you are involuntarily or constructively terminated without cause, you will nonetheless vest an aggregate of 25% of your stock options. This letter constitutes the full and entire understanding and agreement between the parties with respect to the subject of employment, and supersedes any prior discussions. This offer is effective through September 12, 1997. It will expire if not accepted in writing by that date. I anticipate your start date to be October 1, 1997, or earlier. I look forward to your acceptance. Please sign and return one of these letters upon acceptance and retain the other for your records. Susan, we are all very excited about you joining SkyStream. We believe that your background and accomplishments are ideal for what we need. I am confident that you are the right person to lead our finance function and become a valuable member of my executive team. The video networking and distribution market is poised to explode and we excitedly look forward to exploiting that opportunity with you at SkyStream. Sincerely, James D. Olson Chief Executive Officer ACCEPTED: /s/ SUSAN KETCHAM DATED: 9/8/97 --------------------------------- ---------------------------- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.7 <SEQUENCE>24 <DESCRIPTION>EX-10.7 <TEXT> <PAGE> 1 EXHIBIT 10.7 [SKYSTREAM CORPORATION LETTERHEAD] Friday, January 30, 1998 Chandy Nilakantan 11746 Ridge Creek Court Cupertino, CA 95014 (408) 253-6011 Dear Chandy: I am pleased to offer you the position of Vice President of Engineering at SkyStream Corporation. You will report to myself, Jim Olson, President and Chief Executive Officer. In this position, you will be responsible for all aspects of SkyStream's engineering activities. These include R & D engineering, technical support, and quality assurance. As Vice President of engineering you will receive a starting base salary of one hundred sixty five thousand dollars ($165,000) per year. You will receive an annual bonus payment of $30,000 for meeting mutually agreed objectives. You and I will set these objectives within the first 60 days of your employment at SkyStream. Your salary shall be paid twice per month and is subject to withholding for federal, state and other applicable taxes. Further, we will recommend to SkyStream's Board of Directors that you be granted incentive stock options to purchase 285,000 shares of SkyStream common stock which will vest over a four year vesting schedule from the date of your employment. Vesting will be annual vesting for the first year and monthly vesting the following three years. At your option, you may elect to exercise your stock options subject to a company Repurchase Right (the "Repurchase Right"), that would lapse on the same schedule that the stock options would normally vest. As an employee of SkyStream, you and your dependents will be entitled to SkyStream medical, dental, vision, EAP, 401(k), LTD and Life Insurance benefits as made available to all SkyStream employees. Information on the details of our plans will be delivered to you separately. When you report to work, you will be expected to execute our standard company agreement relative to patents, inventions and confidential information. This is an offer for "at will" employment, and does not constitute an offer or guarantee of employment for any period of time. Your employment and compensation can be terminated at any time for any reason or for no reason, subject to the terms hereof and your rights to compensation hereunder. This letter constitutes the full and entire understanding and agreement between the parties with respect to the subject of employment, and supersedes any prior discussions. This offer is effective through Monday, February 2, 1998. It will expire if not accepted in writing by that date. I anticipate your start date to be Monday, February 23, 1998, or earlier. I look forward to your acceptance. Please sign and return one of these letters upon acceptance, and retain the other letter for your records. Chandy, we are all excited about you joining SkyStream. We believe that your background and accomplishments are ideal for what we need. I am confident that you are the right person to lead our engineering function and become a valuable member of my executive team. The video networking and distribution market is poised to explode and we excitedly look forward to exploiting that opportunity with you at SkyStream. Sincerely, /s/ JAMES D. OLSON James D. Olson - ---------------------- President and Chief Executive Officer ACCEPTED: /s/ CHANDY NILAKANTAN DATED: Feb 2, 1998 ------------------------------ ------------------------------- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.8 <SEQUENCE>25 <DESCRIPTION>EX-10.8 <TEXT> <PAGE> 1 EXHIBIT 10.8 [SKYSTREAM CORPORATION LETTERHEAD] Friday, April 17, 1998 Clint Chao 590 Hermosa Way Menlo Park, CA 94025 (650) 328-6535 Dear Clint: I am pleased to offer you the position of Vice President of Marketing at SkyStream Corporation. You will report to myself, Jim Olson, President and Chief Executive Officer. In this position, you will be responsible for all aspects of SkyStream's marketing activities. As Vice President of marketing you will receive a starting base salary of one hundred sixty thousand dollars ($160,000) per year. You will receive an annual bonus payment of $20,000 for meeting mutually agreed objectives. You and I will set these objectives within the first 60 days of your employment at SkyStream. Your salary shall be paid twice per month and is subject to withholding for federal, state and other applicable taxes. Further, we will recommend to SkyStream's Board of Directors that you be granted incentive stock options to purchase 250,000 shares of SkyStream common stock which will vest over a four year vesting schedule from the date of your employment. Vesting will be annual vesting for the first year and monthly vesting the following three years. At your option, you may elect to exercise your stock options subject to a company Repurchase Right (the "Repurchase Right"), that would lapse on the same schedule that the stock options would normally vest. As an employee of SkyStream, you and your dependents will be entitled to SkyStream medical, dental, vision, EAP, 401(k), LTD and Life Insurance benefits as made available to all SkyStream employees. Information on the details of our plans will be delivered to you separately. When you report to work, you will be expected to execute our standard company agreement relative to patents, inventions and confidential information. This is an offer for "at will" employment, and does not constitute an offer or guarantee of employment for any period of time. Your employment and compensation can be terminated at any time for any reason or for no reason, subject to the terms hereof and your rights to compensation hereunder. This letter constitutes the full and entire understanding and agreement between the parties with respect to the subject of employment, and supersedes any prior discussions. This offer is effective through Tuesday, April 21, 1998. It will expire if not accepted in writing by that date. I anticipate your start date to be Monday, May 4, 1998, or earlier. I look forward to your acceptance. Please sign and return one of these letters upon acceptance, and retain the other letter for your records. Clint, we are all excited about you joining SkyStream. We believe that your background and accomplishments are ideal for what we need. I am confident that you are the right person to lead our marketing function and become a valuable member of my executive team. The video networking and distribution market is poised to explode and we excitedly look forward to exploring that opportunity with you at SkyStream. Sincerely, /s/ JAMES D. OLSON James D. Olson - ---------------------------- President and Chief Executive Officer ACCEPTED: /s/ CLINT CHAO DATED: 4/20/98 ------------------------------ ------------------------------- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.9 <SEQUENCE>26 <DESCRIPTION>EX-10.9 <TEXT> <PAGE> 1 EXHIBIT 10.9 [SKYSTREAM LETTERHEAD] November 1, 1998 Dan Riordan 2556 Wilde Ave. Pleasanton, CA 94588 (925) 462-1647 Dear Dan: I am pleased to offer you the position of Vice President of Worldwide Sales at SkyStream Corporation. You will report to myself, Jim Olson, President and Chief Executive Officer. In this position, you will be responsible for all aspects of SkyStream's direct and indirect channel sales activities around the world. You will receive a starting base salary of one hundred fifty thousand dollars ($150,000) per year. In addition, you will receive up to $110,000 of incentive compensation per year provided that SkyStream meets its targeted revenue objectives beginning in the second quarter of 1999. In the event SkyStream exceeds its targeted revenue objectives beginning in the second quarter of 1999, you will receive additional incentive compensation. The formula to determine the additional incentive compensation will be determined jointly by you and me no later than December 16, 1998. For the fourth quarter of 1998, and through the first quarter of 1999, you will receive a non-recoverable draw to cover your incentive compensation independent of SkyStream's revenue performance during that period. Assuming your start date is December 1, 1998, your incentive compensation will be $110,000/4=$27,500 for 1998, and your incentive compensation will be $110,000/4=$27,500 for the first quarter of 1999. Half of your incentive compensation will be paid to you when revenue is recognized and half when customer payment has been received. Your base salary will be paid twice per month and is subject to withholding for federal, state, and other applicable taxes, as is your incentive compensation. Further, I will recommend to SkyStream's Board of Directors that you be granted incentive stock options to purchase 210,000 shares of SkyStream common stock which will vest over a four year vesting schedule from the date of your employment. Vesting will be annual vesting for the first year and monthly vesting the following three years. At your option, you may elect to exercise your stock options subject to a company Repurchase right that would lapse on the same schedule that the stock options would normally vest. As an employee of SkyStream, you and your dependents will be entitled to SkyStream medical, dental, vision, EAP, 401(k), LTD and Life/AD&D insurance, and Section 125 benefits as made available to all SkyStream employees. Information on the details of our plans will be delivered to you separately. When you report to work, you will be expected to execute our standard company agreement relative to patents, inventions, and confidential information. This is an offer for "at will" employment, and does not constitute an offer or guarantee of employment for any period of time. Your employment and compensation can be terminated at any time for any reason or for no reason, subject to the terms hereof and your rights to compensation hereunder. This letter constitutes the full and entire understanding and agreement between the parties with respect to the subject of employment, and supersedes any prior discussions. <PAGE> 2 This offer is effective through Friday, November 6, 1998. It will expire if not accepted in writing by that date. I anticipate your start date to be Tuesday, December 1, 1998 or earlier. I look forward to your acceptance. This e-mail offer letter will be replaced by a hard copy offer letter on Friday, November 6, 1998. Please sign and return the hard copy upon acceptance. Dan, we are all excited about you joining SkyStream. We believe that your background and accomplishments are ideal for what we need. I am confident that you are the right person to lead our sales function and become a valuable member of my executive team. The video networking and distribution market is poised to explode and we excitedly look forward to exploring that opportunity with you at SkyStream. Sincerely, /s/ JAMES D. OLSON James D. Olson President and Chief Executive Officer SkyStream Corporation ACCEPTED: /s/ DAN RIORDAN DATED: 11/6/98 ------------------------------ ------------------------------- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.10 <SEQUENCE>27 <DESCRIPTION>EX-10.10 <TEXT> <PAGE> 1 EXHIBIT 10.10 October 17, 1999 David Olson Dear David: I am pleased to offer you the position of Vice President of Operations at SkyStream Corporation. You will report to myself, Jim Olson, President and Chief Executive Officer. In this position, you will be responsible for all aspects of Information Systems, HR, Manufacturing, Customer Support, and Integration Services activities. You will receive a starting base salary of one hundred seventy five thousand dollars ($175,000) per year. Your base salary shall be paid twice per month and is subject to withholding for federal, state and other applicable taxes as is your incentive compensation. Further, we will recommend to SkyStream's Board of Directors that you be granted incentive stock options to purchase 175,000 shares of SkyStream common stock which will vest over a four year vesting schedule from the date of your employment. Vesting will be annual vesting for the first year and monthly vesting the following three years. At your option, you may elect to exercise your stock options subject to a company Repurchase right that would lapse on the same schedule that the stock options would normally vest. As an employee of SkyStream, you and your dependents will be entitled to SkyStream medical, dental, vision, EAP, 401k, LTD, Life/AD&D insurance, and Section 125 benefits as made available to all SkyStream employees. Information on the details of our plans will be delivered to you separately. When you report to work, you will be expected to execute our standard company agreement relative to patents, inventions, and confidential information. This is an offer for "at will" employment, and does not constitute an offer or guarantee of employment for any period of time. Your employment and compensation can be terminated at any time for any reason or for no reason, subject to the terms hereof and your rights to compensation hereunder. This letter constitutes the full and entire understanding and agreement between the parties with respect to the subject of employment, and supersedes any prior discussions. This offer is effective through Wednesday, October 20, 1999. It will expire if not accepted in writing by that date. I anticipate your start date to be Friday, November 12, 1999. I look forward to your acceptance. This e-mail offer letter will be replaced by a hard copy offer letter on Friday, October 29, 1999. Please sign and return the hard copy upon acceptance. David, we are all excited about you joining SkyStream. We believe that your background and accomplishments are ideal for what we need. I am confident that you are the right person to lead our Manufacturing, IS, Support, Integration, and HR functions and become a valuable member of my executive team. The broadcast networking market is poised to explode and we excitedly look forward to exploiting that opportunity with you at SkyStream. Sincerely, James Olson President and Chief Executive Officer SkyStream Corporation <PAGE> 2 Accepted /s/ DAVID OLSON Date 10-19-99 ---------------------------- ------------------------------ </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.11 <SEQUENCE>28 <DESCRIPTION>EX-10.11 <TEXT> <PAGE> 1 EXHIBIT 10.11 January 28, 2000 Roger E. George 2424 Villa Nueva Way Mountain View, CA 94040 650 962-1656 Dear Roger: I am pleased to offer you the position of Vice President of Legal Affairs and General Counsel at SkyStream Networks. You will report to myself, Jim Olson, President and Chief Executive Officer. In this position, you will be responsible for all aspects of legal compliance, corporate development including M&A, corporate governance, and general corporate law including contracts, real estate, and employment law. You will receive a starting base salary of one hundred thirty-five thousand dollars ($135,000) per year. In addition, you will be eligible to receive up to 20% of your base salary in the form of bonus payments based on company performance and on meeting annual objectives defined by you and me. Your base salary will be paid twice per month and is subject to withholding for federal, state, and other applicable taxes, as is your incentive compensation. Further, I will recommend to SkyStream's Board of Directors that you be granted the right to purchase 100,000 shares of SkyStream common stock which will vest over a four year vesting schedule from the start date of your employment. Vesting will be annual vesting for the first year and monthly vesting the following three years. At your option, you may elect to exercise your stock options subject to a company Repurchase Right that would lapse on the same schedule that the stock options would normally vest. If you elect to exercise your options subject to the Repurchase Right the purchase price of the Common Stock may be financed with a full recourse promissory note payable to the Company. The Note shall bear interest at the minimum rate allowable to avoid imputation of interest compounded annually. Interest shall be forgiven annually as long as you remain employed by the Company. The Note shall be due and payable upon the earlier of (i) five years from the date of the Note, or (ii) 90 days after the termination of your employment with the Company. In addition, the proceeds from any sale by you of any shares of Common Stock of the Company shall be applied to repay the Note. As an employee of SkyStream, you and your dependents will be entitled to SkyStream medical, dental, vision, EAP, 401K, LTD, <PAGE> 2 Life/AD&D Insurance, and Section 125 benefits as made available to all SkyStream employees. Information on the details of our plans will be delivered to you separately. When you report to work, you will be expected to execute our standard company agreement relative to patents, inventions, and confidential information. This is an offer for "at will" employment, and does not constitute an offer or guarantee of employment for any period of time. Your employment and compensation can be terminated at any time for any reason or for no reason, subject to the terms hereof and your rights to compensation hereunder. If in the first year of your employment, the Company is acquired or sold, and, as a result of such acquisition you are involuntarily or constructively terminated without cause, you will nonetheless vest an aggregate of 50% of your stock options, or in the case of a Repurchase Right, an aggregate of 50% of the Company's Repurchase Right will lapse. This letter constitutes the full and entire understanding and agreement between the parties with respect to the subject of employment, and supersedes any prior discussions. Roger, we are all excited about you joining SkyStream. We believe that your background and accomplishments are ideal for what we need. I am confident that you are the right person to lead SkyStream's legal function and become a valuable member of my executive team. The Broadcast Internet market is now exploding and we look forward to your participation in this extraordinary opportunity. Sincerely, James Olson President and Chief Executive Officer SkyStream Networks Accepted /s/ ROGER E. GEORGE -------------------------------- Date 28 Jan. 2000 ----------------------------------- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.12 <SEQUENCE>29 <DESCRIPTION>EX-10.12 <TEXT> <PAGE> 1 EXHIBIT 10.12 SUBLEASE AGREEMENT SUBLEASE AGREEMENT 1. PARTIES: The parties to this Sublease Agreement are ARCADIS GERAGHY & MILLER, INC., (FORMERLY ACUREX ENVIRONMENTAL CORPORATION), A DELAWARE CORPORATION, hereinafter called "Sublessor", and SKYSTREAM CORPORATION hereinafter called "Sublessee". 2. PREMISES: The premises covered in by this Sublease Agreement are portions of the building known as 555 Clyde Avenue, Mountain View, located in Santa Clara County, California, comprising the following: A. Approximately 21,531 rentable square feet on the first and second floors of the building. The leased space is illustrated on the attached Exhibit A and B. B. Use of the second floor conference rooms designated on Exhibit A. Sublessor at Sublessor's sole discretion can terminate this privilege at any time during the Sublease by giving Sublessee written notice. C. Maintenance of heating, ventilating and air conditioning (HVAC) equipment, plumbing, electrical power, roof, building exterior, landscaping and parking lot provided by Sublessor. 3. TERM: The Sublease of the above premises by Sublessee shall commence on January 1, 2000 and shall end on December 31, 2000. 4. RENT: Sublessee shall pay to Sublessor as rent for the Premises equal monthly payments of $46,291.65, in advance, on the first (1st) day of each month of the term hereof. Sublessee shall pay Sublessor upon the execution hereof as rent for first month's rent of $46,291.65. Rent for any period during the term hereof which is for less than one month shall be a prorated portion of the monthly installment. Rent shall be payable in lawful money of the United States to Sublessor at the address stated herein or to such other persons or at such other places as Sublessor may designate in writing. 5. UTILITIES: Utilities, including gas, electricity, water, sewer, janitorial and garbage removal shall be provided to Sublessee by Sublessor. 6. TAXES: Real Property taxes are the responsibility of the Sublessor. 7. INSURANCE: Sublessee at Sublessee's expense shall provide and keep in force during the term of this Sublease Agreement a general liability insurance policy with a recognized casualty insurance company qualified to do business in California, <PAGE> 2 protecting Sublessor, Master Lessor and Sublessee against any and all liability occasioned by occurrence in amounts not less than $1,000,000.00 and satisfactory to Sublessor. Sublessee shall furnish a Certificate of Insurance to Sublessor and Master Lessor naming Sublessor and Master Lessor as Additional Insured. Sublessor agrees during the Sublease term to carry fire and extended coverage insurance insuring Sublessee's interest in the premises in such amounts and covering such perils as Sublessor shall determine, but Sublessor shall have no obligation to insure against loss by Sublessee to Sublessee's property of any kind in or about the premises occurring from any cause whatsoever, and Sublessee shall have no interest in the proceeds of any insurance carried by Sublessor. If Sublessor's insurance rates for the premises are increased at any time during the term of the Sublease as a result of the Sublessee's use and occupancy of the premises, Sublessee agrees to reimburse Sublessor for the full amount of such increase immediately upon receipt of demand from Sublessor. 8. USE: The Premises shall be used and occupied only for general office and for no other purpose. 9. COMPLIANCE WITH LAW: A. Sublessor warrants to Sublessee that the Premises in its existing state, but without regard to the use for which Sublessee will use the Premises, does not violate any applicable building code regulation or ordinance at the time that this Sublease is executed. In the event that it is determined that this warranty has been violated, then it shall be the obligation of the Sublessor, after written notice from Sublessee, to promptly, at Sublessor's sole cost and expense, rectify any such violation. In the event that Sublessee does not give to Sublessor written notice of the violation of this warranty within one (1) year from the commencement of the term of this Sublease, it shall be conclusively deemed that such violation did not exist and the correction of the same shall be the obligation of the Sublessee. B. Except as provided in paragraph 9A, Sublessee shall, at Sublessee's expense, comply promptly with all applicable statutes, ordinances, rules, regulations, orders, restrictions of record, and requirements in effect during the term or any part of the term hereof regulating the use by Sublessee of the Premises. Sublessee shall not use or permit the use of the Premises in any manner that will tend to create waste or a nuisance or, if there shall be more than one tenant of the building containing Premises, which shall tend to disturb such other tenants. 10. CONDITION OF PREMISES: Except as provided in paragraph 9A, Sublessee hereby accepts the Premises in their condition existing as of the date of the execution hereof, subject to all applicable zoning, municipal, county and state laws, ordinances, and regulations governing and regulating the use of the Premises, and accepts this Sublease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Sublessee acknowledges that neither Sublessor nor Sublessor's agents have made any representation or warranty as to the suitability of the Premises for the conduct of Sublessee's business. <PAGE> 3 11. COMPUTER EQUIPMENT/INSTALLATION: Any internal wiring installed other than within Sublessee's space shall be installed by the Sublessor's contractors or a contractor approved by the Sublessor. 12. MASTER LEASE: This sublease is subject to all the applicable terms and conditions of the Master Lease, initially dated OCTOBER 23, 1976, with Amendments, between Sublessor, and the Master Lessor: RICHARD N. MOSEMAN, BONNIE MOSEMAN MILLER, and PROPERTIES INTERNATIONAL, ALLRENT, INC., A CALIFORNIA CORPORATION. The Master Lease is hereby incorporated into this Sublease Agreement, and Sublessee shall assume and perform the obligations of the Lessee under this Master Lease to the extent that said terms and conditions are applicable to the premises subleased pursuant to this Sublease. Sublessee shall not permit or permit to be committed on the premises any act or omission which shall violate any term or condition of the Master Lease. In the event of termination of Sublessor's interest as Lessee under the Master Lease for any reason, then this Sublease shall terminate coincidentally therewith without any liability of Sublessor to Sublessee. 13. ASSIGNMENT: Sublessee shall not assign this Sublease or any interest therein nor sublet the premises or any part thereof or any right or privilege appurtenant thereto nor permit the occupancy of use of any part thereof by any person without the prior written consent of Sublessor. Any such assignment or subletting without proper prior written consent shall be void and, at the option of the Sublessor, may terminate this Sublease. 14. SIGNAGE: Sublessee shall not place any signs anywhere on the exterior of the building or on the land within the property boundaries or inside the building in or visible from the common areas without the prior written consent of Sublessor. 15. DEFAULT: Sublessor may terminate this lease for default for violation of any term or condition of the Master Lease or this Sublease. 16. HAZARDOUS MATERIALS: During the term of this Sublease, Sublessee shall comply with all federal, state, and local laws, ordinances, and regulations relating to the use, storage, sale, transportation or disposal to, from, or on the premises of any Hazardous Materials. Upon execution of this Sublease and on an ongoing basis, Sublessee shall provide Sublessor with a list, no less frequently than quarterly, of Hazardous Materials that Sublessee uses or maintains on the premises. Sublessee shall not be responsible for any adverse environmental conditions relating to Hazardous Materials that are not caused by Sublessee, its agents, employees, contractors, or invitees. Sublessee shall indemnify, defend (by counsel reasonably acceptable to Master Lessor and Sublessor), protect and hold Master Lessor and Sublessor and each of their employees, agents, successors, and assigns, free and harmless from and against all claims, liabilities, penalties, forfeitures, losses, or expenses (including attorneys' <PAGE> 4 fees (arising from or caused by (a) the discharge by Sublessee in or from the premises of any Hazardous Materials, or Sublessee's use, storage, transportation, discharge, or generation of Hazardous Materials to, in, on, under, about or from the premises, or (b) Sublessee's failure to comply with any Hazardous Materials Law. In the event that Sublessee becomes liable under this section the Sublessee's obligations hereunder shall include, without limitation, all costs of any required repair, clean-up, or decontamination of the premises, and the preparation and implementation of any closure, remedial action, or other required procedures in connection therewith. The foregoing indemnity shall survive the expiration or the earlier termination of this Sublease. "Hazardous Materials" shall mean any hazardous or toxic substances, material, or wastes including, but not limited to, those substances, materials, and wastes regulated now or in the future by any federal, state, or local regulatory body. 17. NOTICE TO VACATE: Prior to the expiration of the Sublease, Sublessee must give Sublessor not less than six (6) months notice in writing of its intent to vacate the premises. If Sublessee does not give Sublessor notice on or before July 1, 2000 of its intent to vacate, the sublease will not terminate on December 31, 2000 but on the sixth (6) month anniversary of the actual notice given. By example, if Sublessee gives written notice on September 1, 2000, the Sublease will not expire until February 28, 2001. Sublessee will be obligated to pay all rents and other charges due up to and including the actual date of vacation of the premises. 18. KEYS: Sublessee shall be provided with two (2) keys to the front door of the 555 Clyde building. Sublessee has the option to have locks installed on the office door, but must bear the burden of this cost. All locksmith work must be performed and coordinated through Sublessor's vendor. Additional keys may be purchased for a fee of $5.00 each. 19. ENTIRE AGREEMENT: The foregoing constitutes the entire agreement between the parties and may be modified only by a written amendment signed by both parties. 20. ATTORNEY'S FEES: If any party or the Broker named herein brings an action to enforce the terms hereof or to declare rights hereunder, the prevailing party in any such action, on trial and appeal, shall be entitled to his reasonable attorney's fees to be paid by the losing party as fixed by the Court the provision of this paragraph shall inure to the benefit of the Broker named herein who seeks to enforce a right hereunder. THE SUBLEASE HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS SUBLEASE OR THE TRANSACTION RELATING THERETO. <PAGE> 5 Sublessor: Sublessee: ARCADIS Geraghty & Miller, Inc. Skystream Corporation /s/ [SIGNATURE ILLEGIBLE] /s/ SUSAN KETCHAM - -------------------------- ------------------------- ARCADIS Geraghty & Miller, Inc. VP Finance 555 Clyde Avenue Mountain View, CA 94043 Date: 12/31/99 Date: 12/29/99 ------------- ------------ CONSENT TO SUBLEASE: Without releasing Lessee in the Master Lease from the obligations hereunder, the undersigned hereby consents to the foregoing Sublease Agreement between ARCADIS Geraghty & Miller, Inc., Lessee under the Master Lease, and SkyStream Corporation, Sublessee, provided that this consent shall no be construed as a consent to any further subletting. Dated: ----------------- ----------------------- ----------------------- ----------------------- Richard N. Moseman, Bonnie Moseman Miller and Properties International, Allrent, Inc., Lessor under the Master Lease <PAGE> 6 BUILDING 6 -- 555 CLYDE AVENUE DOWNSTAIRS EXHIBIT A NOT TO SCALE [FLOOR DIAGRAM OMITTED] <PAGE> 7 BUILDING 6 -- 555 CLYDE AVENUE UPSTAIRS EXHIBIT B NOT TO SCALE [FLOOR DIAGRAM OMITTED] </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.13 <SEQUENCE>30 <DESCRIPTION>EX-10.13 <TEXT> <PAGE> 1 EXHIBIT 10.13 PARTIES This Lease, executed in duplicate at Mountain View, California, this day of October 23, 1976, by and between RICHARD N. MOSEMAN, BONNIE MOSEMAN MILLER, and PROPERTIES INTERNATIONAL, allrent, INC., a California corporation, and ACUREX CORPORATION, a California corporation, hereinafter called respectively Lessor and Lessee, without regard to number or gender. USE WITNESSETH: That Lessor hereby leases to Lessee, and Lessee hires from Lessor, for the purpose of conducting therein machinery and electronics manufacturing, research and development, related administrative activities and executive offices, and for no other purpose, those certain premises with the appurtenances, situated in City of Mountain View, County of Santa Clara, State of California, and more particularly described as follows, to-wit: PREMISES That certain parcel of real property referred to as Assessor's parcel #159-43-005, commonly known as 555 Clyde Avenue, consisting of approximately 2.963 acres of land, more or less, more particularly described in Exhibit "A" attached hereto and made a part hereof, together with a two-story building to be constructed thereon by Lessor consisting of approximately 51,200 square feet of floor space, and related side improvements, hereinafter referred to as "the premises." TERM The term shall be for two hundred forty (240) calendar months commencing on the 1st day of June, 1977, and ending on the 31st day of May, 1997, at the rent hereafter provided, payable in lawful money of the United States of America, which Lessee agrees to pay to Lessor, without deduction or offset, at such place or places as may be designated from time to time by Lessor, in installments as follows: RENTAL Initial rental of Fifteen Thousand Six Hundred Sixteen Dollars ($15,616) per month. Rent for the month of June 1977 in the amount of Fifteen thousand Six Hundred Sixteen Dollars ($15,616) shall be payable upon the execution of this lease. Thereafter, rent shall be payable monthly, in advance, on the first day of each calendar month of the lease term, commencing with the first day of July 1977 and continuing on the first day of each calendar month thereafter during the lease term, subject to adjustment in the rental as provided in Paragraph 30 hereof. Provided Lessee faithfully performs its obligations hereunder, and is not then in default hereunder, Lessor hereby grants to Lessee the option to extend the lease term for sixty (60) months upon the expiration of the initial lease term. The option to extend shall be exercised by Lessee giving written notice of exercise to Lessor not less than one hundred eighty (180) days prior to the expiration of the initial lease term. Such extended term shall be upon all of the terms and provisions of this Lease, except for the rental which shall be determined by negotiations of the parties. In the event that the parties are unable to agree upon the rental within ninety (90) days after the exercise of the option by Lessee, then such option shall be null and void and of no force of effect, and the lease term shall expire and terminate upon the expiration of the initial lease term, if not sooner terminated pursuant to the provisions hereof. SECURITY The Lessee has deposited with the Lessor $15,000 as security for the DEPOSIT full and faithful performance of each and every term, provision, covenant, and condition of this lease. In the event the Lessee defaults on any of the terms, provisions, covenants or conditions of this lease, including, but not limited to the payment of rent, the Lessor may use, apply or retain the whole or any part of such security for the payment of any rent in default or for any other sum which the lessor may spend or be required to spend by reason of the Lessee's default. Should the Lessee faithfully and fully comply with all of the terms, provisions, covenants and conditions of this lease, the security, or any balance thereof, shall be returned to the Lessee, or at the option of the Lessor, to the last assignee of the Lessee's interest in this lease at the expiration of the term hereof, at the termination of any extension of the term or at the termination of the Lessee's occupancy of the premises, whichever is later. CONSTRUC- TION OF IMPROVE- MENTS; POSSESSION <PAGE> 2 ACCEPTANCE 2. By entry hereunder, upon commencement of the lease term Lessee OF accepts the premises as being in good sanitary order, condition and PREMISES repair, and accepts the building and other improvements in their AND condition. The Lessee agrees on the last day of the term hereof, or COVENANT TO on sooner termination of this lease, to surrender the premises, SURRENDER together with all alterations, additions, and improvements which may have been made in, to, or on the premises by Lessor or Lessee, unto Lessor in good and sanitary order, condition and repair, excepting for such wear and tear as would be normal for the period of the Lessee's occupancy. The Lessee, on or before the end of the term or sooner termination of this Lease, shall remove all his or its personal property and trade fixtures from the premises and all property not so removed shall be deemed to be abandoned by the Lessee. If the premises be not surrendered at the end of the term or sooner termination of this lease, the Lessee shall indemnify the Lessor against loss or liability resulting from delay by the Lessee in so surrendering the premises including, without limitation, any claims made by any succeeding tenant founded on such delay. See Amendment 2. USES 3. Lessee shall not commit, or suffer to be committed, any waste PROHIBITED upon the said premises, or any nuisance, or other act or thing which may disturb the quiet enjoyment of any other tenant in or around the buildings in which the demised premises may be located, or allow any sale by auction upon the premises, or allow the premises to be used for any improper, immoral, unlawful or objectionable purpose, or place any loads upon the floor, walls, or ceiling which endanger the structure, or place any harmful liquids in the drainage system of the building. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the leased premises outside of the building proper. No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature shall be stored upon or permitted to remain on any portion of the leased premises outside of the buildings proper. ALTERATIONS 4. The Lessee shall not make, or suffer to be made, any AND alterations or additions to the said premises, or any part thereof, ADDITIONS without the written consent of the Lessor first had and obtained by the Lessee; any addition or alteration to the said premises, except movable furniture and trade fixtures, shall become at once a part of the realty and belong to the Lessor. Alterations and additions which are not to be deemed as trade fixtures shall include heating, lighting, electrical systems, air-conditioning, partitioning, carpeting, or any other installation which has become an integral part of the leased premises. The Lessee will at all times permit notices of non-responsibility to be posted and to remain posted until the completion of alterations or additions which have been approved by the Lessor. MAINTENANCE 5. Lessee shall, at its sole cost, keep and maintain said OF PREMISES premises and appurtenances and every part thereof, including, but not limited to, glazing, sidewalks, parking areas, plumbing, electrical systems, heating and air conditioning installations, any store front, and the interior of the premises in good and sanitary order, condition, and repair. The Lessee agrees to water, maintain and replace, when necessary, any shrubbery and landscaping provided by Lessor on the leased premises. The Lessee hereby waives all right to make repairs at the expense of Lessor as provided in Section 1942 of the Civil Code of the State of California, and all rights provided for by Section 1941 of said Civil Code. FIRE AND 6. Lessee shall not use, or permit said premises, or any part EXTENDED thereof, to be used, for any purpose other than that for which the COVERAGE said premises are hereby leased; and no use, shall be made or INSURANCE permitted to be made of the said premises, nor acts done, which will cause a cancellation of any insurance policy covering said building, or any part thereof, nor shall Lessee sell or permit to be kept, used or sold, in or about said premises, any article which may be prohibited by the standard form of fire insurance policies. Lessee shall, at his sole cost and expense, comply with any and all requirements, pertaining to said premises, of any insurance organization or company, necessary for the maintenance of reasonable fire and public liability insurance, covering said building and appurtenances. The Lessor agrees to purchase and keep in force fire, and extended coverage insurance covering the leased premises in amounts not to exceed the actual insurable value of said premises. The Lessee agrees to pay to the Lessor as additional rent, on demand, the full cost of said insurance as evidenced by insurance billings to the Lessor. It is understood and agreed that Lessee's obligation under this paragraph will be pro-rated to reflect the commencement and termination dates of this lease. See Amendment 6. ABANDON- 7. Lessee shall not vacate or abandon the premises at any time MENT during the term; and if Lessee shall abandon, vacate or surrender said premises, or be dispossessed by process of law, or otherwise, any personal property belonging to Lessee and left on the premises shall be deemed to be abandoned, at the option of Lessor, except such property as may be mortgaged to Lessor. FREE FROM 8. Lessee shall keep the demised premises and the property in LIENS which the demised premises are situated, free from any liens arising out of any work performed, materials furnished, or obligations incurred by Lessee. COMPLIANCE 9. Lessee shall, at his sole cost and expense, comply with all WITH of the requirements of all Municipal, State and Federal authorities GOVERN- now in force, or which may hereafter be in force, pertaining to the MENTAL said premises, and shall faithfully observe in the use of the REGULA- premises all Municipal ordinances and State and Federal statutes now TIONS in force or which may hereafter be in force. The judgment of any court of competent jurisdiction, or the admission of Lessee in any action or proceeding against Lessee, whether Lessor be a party thereto or not, that Lessee has violated any such ordinance or statute in the use of the premises, shall be conclusive of that fact as between Lessor and Lessee. INDEMNIFI- 10. The Lessee, as a material part of the consideration to be CATION OF rendered to the Lessor, hereby waives all claims against the Lessor LESSOR AND for damages to goods, wares and merchandise, and all other personal LESSEE'S property in, upon, or about said premises and for injuries to LIABILITY persons in or about said premises, from any cause arising at INSURANCE anytime, excepting claims arising from the Lessor's negligence, and the Lessee will hold the Lessor exempt and harmless from any damage or injury to any person, or to the goods, wares and merchandise and all other personal property of any person, arising from the use of the premises by the Lessee, or from the failure of the Lessee to keep the premises in good condition and repair, as herein provided. The Lessee shall secure and keep in force a bodily injury and property damage policy covering the leased premises, including parking areas, insuring the Lessee and naming the Lessor as an additional insured. A copy of said policy shall be delivered to the Lessor and the minimum limits of coverage thereof shall be $1,000,000 for any single or multiple injuries and $100,000 property damage, and the Lessee shall obtain a written obligation on the part of the insurer to give the Lessor written notification before any cancellation thereof. ADVERTISE- 11. Lessee will not place or permit to be placed, in, upon or MENTS AND about the said premises any unusual or extraordinary signs, or any SIGNS signs not approved by the city or other governing authority. The Lessee will not place, or permit to be placed, upon the premises, any signs, advertisements or notices without the written consent of the Lessor first had and obtained. Any sign so placed on the premises shall be so placed upon the understanding and agreement that Lessee will remove same at the termination of the tenancy herein created and repair any damage or injury to the premises caused thereby, and if not so re- [REST OF SENTENCE ILLEGIBLE] <PAGE> 3 UTILITIES 12. Lessee shall for water, gas, heat, light, power, telephone service and all other services supplied to the said premises. ATTORNEY'S 13. In case suit should be brought for the possession of the FEES premises, for the recovery of any sum due hereunder, or because of the breach of nay other covenant herein, the losing party shall pay to the prevailing party a reasonable attorney's fee, which shall be deemed to have accrued on the commencement of such action and shall be enforceable whether or not such action is prosecuted to judgement. INSOL- 14. Either (a) the appointment of a receiver to take possession VENCY or of all or substantially all of the assets of Lessee, or (b) a BANK- general assignment by Lessee for the benefit of creditors, or (c) RUPTCY any action taken or suffered by Lessee under any insolvency or bankruptcy act shall constitute a breach of this lease by Lessee. See Amendment 14. DEFAULT 15. In the event of any breach of this lease by the Lessee, or an abandonment of the premises by the Lessee, the Lessor has the option of 1) removing all persons and property from the premises and repossessing the premies in which case any of the Lessee's property which the Lessor removes from the premises may be stored in a public warehouse or elsewhere at the cost of, and for the account of Lessee, or 2) allowing the Lessee to remain in full possession and control of the premises. If the Lessor chooses to repossess the premises, the lease will automatically terminate in accordance with provisions of the California Civil Code, Section 1951.2. In the event of such termination of the lease, the Lessor may recover from the Lessee: 1) the worth at the time of award of the unpaid rent which had been earned at the time of termination including interest at 10% per annum; 2) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided including interest at 10% per annum; 3) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and 4) any other amount necessary to compensate the Lessor for all the detriment proximately caused by the Lessee's failure to perform his obligations under the lease or which in the ordinary course of things would be likely to result therefrom. If the Lessor chooses not to repossess the premises, but allows the Lessee to remain in full possession and control of the premises, then in accordance with provisions of the California Civil Code, Section 1951.4, the Lessor may treat the lease as being in full force and effect, and may collect from the Lessee all rents as they become due through the termination date of the lease as specified in the lease. For the purposes of this paragraph, the following do not constitute a termination of Lessee's right to possession: a) Acts of maintenance or preservation or efforts to relet the property. b) The appointment of a receiver on the initiative of the Lessor to protect his interest under this lease. SURRENDER 16. The voluntary or other surrender of this lease by Lessee, or OF LEASE a mutual cancellation thereof, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subleases or subtenancies, or may, at the option of Lessor, operate as an assignment to him of any or all such subleases or subtenancies. TAXES 17. The Lessee shall be liable for all taxes levied against personal property and trade or business fixtures, and agrees to pay, as additional rental, during the term of this lease and any extension thereof, all real estate taxes and the yearly installments of any special assessments levied against the leased premises after the commencement date of this lease. It is understood and agreed that the Lessee's obligation under this paragraph will be pro-rated to reflect the commencement and termination dates of this lease. NOTICES 18. See Amendment 18. ENTRY BY 19. Lessee shall permit Lessor and his agents to enter into and LESSOR upon said premises at all reasonable times for the purpose of inspecting the same or for the purpose of maintaining the building in which said premises are situated, or for the purpose of making repairs, alterations or additions to any other portion of said building, including the erection and maintenance of such scaffolding, canopies, fences and props as may be required without any rebate of rent and without any liability to Lessee for any loss of occupation or quiet enjoyment of the premises thereby occasioned; and shall permit Lessor and his agents, at any time within 180 days prior to the expiration of this lease, to place upon said premises any usual or ordinary "For Sale" or "to lease" signs and exhibit the premises to prospective tenants at reasonable hours. DESTRUC- 20. See Amendment 20. TION OF PREMISES ASSIGN- 21. Lessee shall not assign this lease, or any interest therein, MENT and shall not subject the said premises or any part thereof, or any AND right or privilege appurtenant thereto, or suffer any other person SUBLET- (the agents and servants of Lessee excepted) to occupy or use the TING said premises, or any portion thereof, without the written consent of Lessor first had and obtained, and a consent to one assignment, subletting, occupation or use by any other person, shall not be deemed to be a consent to any subsequent assignment, subletting, occupation or use by another person. Any such assignment or subletting without such consent shall be void, and shall, at the option of the Lessor, terminate this lease. This lease shall not, nor shall any interest therein, be assignable, as to the interest of Lessee, by operation of law, without the written consent of Lessor. The Lessor, however, cannot unreasonably withhold consent to sublet, assign, or both. <PAGE> 4 CONDEMNA- 22. See Amendment 22. TION EFFECT OF 23. The term "Lessor" as used in this lease, means only the owner CONVEYANCE for the time being of the land and building containing the premises, so that, in the event of any sale of said land or building, or in the event of a lease of said building, the Lessor shall be and hereby is entirely freed and relieved of all covenants and obligations of the Lessor hereunder, and it shall be deemed and construed, without further agreement between the parties and the purchaser at any such sale, or the Lessee of the building, that the purchaser or Lessee of the building has assumed and agreed to carry out any and all covenants and obligations of the Lessor hereunder. If any security be given by the Lessee to secure the faithful performance of all or any of the covenants of this lease on the part of Lessee, the Lessor may transfer and deliver the security, as such, to the purchaser at any such sale or the Lessee of the building, and thereupon the Lessor shall be discharged from any further liability in reference thereto. See Amendment 23. SUBORDINA- 24. Lessee agrees that this lease may, at the option of Lessor, TION be subject and subordinate to any mortgage, deed of trust or other instrument of security which has been or shall be placed on the land and building or land or building of which the premises form a part, and this subordination is hereby made effective without any further act of Lessee. The Lessee shall, at any time hereinafter, on demand, execute any instruments, releases, or other documents that may be required by any mortgagee, mortgagor, or trustor or beneficiary under any deed of trust for the purpose of subjecting and subordinating this lease to the lien of any such mortgage, deed of trust or other instrument of security, provided the holder of such encumbrance agrees to recognize Lessee's interest hereunder if Lessee is not then in default. WAIVER 25. The waiver by Lessor of any breach of any term, covenant or condition, herein contained shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition therein contained. The subsequent acceptance of rent hereunder by Lessor shall not be deemed to be a waiver of any preceding breach by Lessee of any term, covenant or condition of this lease, other than the failure of Lessee to pay the particular rental so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. HOLDING 26. Any holding over after the expiration of the said term, OVER with the consent of Lessor, shall be construed to be a tenancy from month to month, at a rental to be negotiated by Lessor and Lessee prior to the expiration of said term, and shall otherwise be on the terms and conditions herein specified, so far as applicable. SUCCESSORS 27. The covenants and conditions herein contained shall, subject AND to the provisions as to assignment, apply to and bind the heirs, ASSIGNS successors, executors, administrators and assigns of all of the parties hereto; and all of the parties hereto shall be jointly and severally liable hereunder. TIME 28. Time is of the essence of this lease. MARGINAL 29. The marginal headings or titles to the paragraphs of this CAPTIONS lease are not a part of this lease and shall have no effect upon the construction or interpretation of any part thereof. This instrument contains all of the agreements and conditions made between the parties hereto and may not be modified orally or in any other manner than by an agreement in writing signed by all of the parties hereto or their respective successors in interest. Amendment Nos. 1, 2, 6, 11, 14, 18, 20, 22, and 23 and the additional Paragraphs 30, 31, 32, 33, 34, 35, and 36 attached hereto are incorporated herein and hereby made a part of this lease. IN WITNESS WHEREOF, Lessor and Lessee have executed these presents, the day and year first above written. LESSOR LESSEE /s/ RICHARD N. MOSEMAN ACUREX CORPORATION - ---------------------------------- ----------------------------------- RICHARD N. MOSEMAN /s/ BONNIE MOSEMAN MILLER By - ---------------------------------- ----------------------------------- BONNIE MOSEMAN MILLER PROPERTIES INTERNATIONAL, allrent, By /s/ TIMOTHY P. CARLSON INC., a California corporation ----------------------------------- - ---------------------------------- By /s/ SALLY MOSEMAN, President - ---------------------------------- SALLY MOSEMAN, President <PAGE> 5 10/23/76 ADDENDUM TO LEASE DATED OCTOBER 23, 1976 BETWEEN RICHARD N. MOSEMAN, BONNIE MOSEMAN MILLER, AND PROPERTIES INTERNATIONAL, ALLRENT, INC., A CALIFORNIA CORPORATION, HEREAFTER REFERRED TO AS "LESSOR," AND ACUREX CORPORATION, A CALIFORNIA CORPORATION, HEREAFTER REFERRED TO AS "LESSEE." Lessor and Lessee further agree as follows: Amendment 1 - Construction of Improvements; Possession (a) Lessor shall construct the building and shell substantially in accordance with the site plan attached hereto as Exhibit "B" and the sheet entitled "Project Items - Shell" attached hereto as a part of Exhibit "C." Said building shell shall also be constructed substantially in accordance with working drawings, plans and specifications (herein called the "plans") to be prepared by Lessor's architect and to be received by Lessee prior to its signing of this Lease. Lessee's signing of this Lease shall be deemed to constitute Lessee's approval of the plans, subject only to Lessee's right, subject to Lessor's prior written approval, which will not be unreasonably withheld, to request certain minor adjustments in the plans regarding the location of exterior doors to allow for balanced door access for future uses. Approval of plans by Lessee does not relieve Lessor of responsibility of providing a building meeting requirements of all bodies having jurisdiction. Lessor shall give Lessee at least thirty (30) days' notice prior to the anticipated completion date and permit Lessee to enter upon the premises to install Lessee's fixtures and equipment. (b) Lessor shall contribute the maximum amount of Five Hundred Thousand Dollars ($500,000) to defray the cost of construction and installation by Lessor's contractor of the interior improvements after completion of the building shell. Any additional cost of interior improvements in excess of Five Hundred Thousand Dollars ($500,000) shall be paid by Lessee. The interior improvements to be constructed for the Five Hundred Thousand Dollar ($500,000) contribution thereto by Lessor are referred to in the sheet entitled "Project Items in $500,000 Interior" which is a part of Exhibit "C" attached hereto. Said sum of Five Hundred Thousand Dollars ($500,000) to be contributed by Lessor for the interior improvements shall be used for the construction and installation of typical, multipurpose interior improvements usable by normal occupants of industrial buildings. Said sum of Five Hundred Thousand Dollars ($500,000) shall not be used to defray the cost of any specialized or extraordinary type interior improvements. None of the items referred to in the sheet entitled "Project Items in $500,000 Interior" which is a part of Exhibit "C" attached hereto shall be deleted without Lessor's prior written consent, which consent shall not be unreasonably withheld. Plans for the interior improvements shall be supplied by Lessee to Lessor as follows: (i) plans for the sewage and other plumbing facilities for the restrooms and cafeteria and for all <PAGE> 6 underground electric boxes prior to the commencement of construction of the building shell, and (ii) all other interior plans no later than thirty (30) days after the commencement of construction of the shell. (c) Lessor and Lessee shall cooperate in the construction of the building and interior improvements, and they shall each use their best efforts to prosecute the work to completion in a prompt and diligent manner in order that said building and improvements may be substantially completed on the premises on or before May 1, 1977 (the "Completion Date"). If, by the Completion Date, the premises are not substantially completed because of delays for causes beyond Lessor's control (such as, without limitation, strikes, lockouts, labor troubles, inability to procure materials, failure of power or other utilities or services, restrictive governmental laws or regulations, riots, insurrection, wars, inclement weather, acts of God, or breach of this lease by Lessee), then (i) Lessor shall not have any liability to Lessee for any consequential loss or damage, nor shall this Lease be void or voidable, but this Lease shall remain valid and continue in full force and effect, and (ii) the time for completion of the premises shall be extended for a period of time which equals the aggregate period of any delay or delays in prosecution of Lessor's work. Amendment 2 - Acceptance of Premises and Covenant to Surrender Lessee shall have ninety (90) days following the date of occupancy of the premises within which to notify Lessor in writing of any material defects in the premises, which defects Lessor shall correct as promptly as possible. Amendment 6 - Fire and Extended Coverage Insurance If at any time during the term of this Lease, or any extensions thereof, Lessee obtains a firm written bid from a responsible broker representing a responsible insurance company qualified to do business in California and satisfactory to Lessor for the same fire and extended coverage insurance which is then in effect on the premises at a lower premium, then Lessor will at Lessor's option either purchase the insurance from Lessee's broker, commencing with the next premium term, cause Lessor's insurance broker to meet the lower price, or credit the Lessee with the price difference. Lessor shall have no obligation to insure against loss by Lessee to any leasehold improvements, fixtures, furniture or other personal property installed by Lessee at Lessee's expense in or about the premises occurring from any cause whatsoever and Lessee shall have no interest in the proceeds of any insurance carried by Lessor, except as provided in Amendment 20 hereof. Amendment 11 - Advertisements and Signs Lessor will not unreasonably withhold Lessor's consent to the installation on the premises by Lessee, at Lessee's expense, of 2. <PAGE> 7 normal business signs, provided that the location and design thereof have been approved in advance by Lessor's architect. Amendment 14 -- Insolvency or Bankruptcy Lessee shall have thirty (30) days following the happening of any such event referred to in (a), (b), or (c) of Paragraph 14 hereof within which to cure any such breach. If Lease fails to cure any such breach within said thirty (30) day period, then Lessor, at Lessor's option, may terminate this lease upon giving ten (10) days prior written notice of termination to Lessee. Amendment 18 -- Notices All notices to be given to Lessor or Lessee shall be given in writing and delivered personally to Lessor or to an officer of Lessee, or by depositing the same in the United States mail, postage prepaid, and addressed to the parties as follows: To Lessor: c/o Miss Sally Moseman c/o Properties International 1631 Filbert Street San Francisco, California 94123 To Lessee: Acurex Corporation 485 Clyde Avenue Mountain View, California 94040 Either party may designate a different address for notice by giving written notice thereof to the other party in the manner referred to above. Amendment 20 -- Destruction of Premises In the event of a partial destruction of the said premises during the said term for any cause other than uninsured damages by earthquake, or by any other uninsured casualty, Lessor shall forthwith repair the same, provided such repairs can be made within ninety (90) days under the laws and regulations of State, Federal, County or Municipal authorities, but such partial destruction shall in no way annul or void this lease, except that Lessee shall be entitled to a proportionate reduction of rent while such repairs are being made, such proportionate reduction to be based upon the extent to which the making of such repairs shall interfere with the business carried on by Lessee in the said premises. If such partial destruction is caused by earthquake or by any other uninsured casualty, or if such repairs cannot be made within ninety (90) days, Lessor may, at Lessor's option, make same within a reasonable time, but not to exceed one hundred eighty (180) days, and this lease shall continue in full force and effect and the rent shall be proportionately reduced as aforesaid in this paragraph provided. In the event that Lessor does not so elect to repair the damage caused by an uninsured casualty, or in the event that Lessor does not so elect to make such 3. <PAGE> 8 repairs which cannot be made within ninety (90) days, or such repairs cannot be made under such laws and regulations, this lease may be terminated at the option of either party, provided that such option to terminate is exercised by giving written notice to the other party within fifteen (15) days after the date of notice by Lessor to Lessee of Lessor's intention not to make repairs. In respect to any partial destruction which Lessor is obligated to repair or may elect to repair under the terms of this paragraph, the provisions of Section 1932, Subdivision 2, and of Section 1933, Subdivision 4, of the Civil Code of the State of California are waived by Lessee. A total destruction of the building in which the said premises may be situated shall terminate this lease. In the event of any dispute between Lessor and Lessee relative to the provisions of this paragraph, they shall each select an arbitrator, the two arbitrators so selected shall select a third arbitrator and the three arbitrators so selected shall hear and determine the controversy and their decision thereon shall be final and binding upon both Lessor and Lessee, who shall bear the cost of such arbitration equally between them. In the event that Lessor is obligated to repair damage, or elects to repair damage, in accordance with this paragraph, Lessor's obligation shall be limited to the construction of the building, interior improvements, and site work initially constructed by Lessor, at Lessor's expense, and Lessee shall construct and install, at Lessee's expense, all other leasehold improvements, fixtures, and equipment originally installed by Lessee. If Lessor is obligated or elects to repair damage to interior improvements which Lessor originally financed pursuant to Amendment 1(b) Lessor will allow Lessee to make such repairs to complete the interior as previously constructed. If Lessee so requests Lessor shall make available to Lessee that portion of any insurance proceeds Lessor receives as a result of the damage to the premises which are allocated by Lessor's insurance company for repair of interior improvements originally installed by Lessor pursuant to Amendment 1(b) hereof. Lessee's obligation to repair the interior improvements shall be limited to the insurance proceeds made available to Lessee for such purposes. Amendment 22 -- Condemnation If any part of the premises shall be taken for any public or quasi-public use, under any statute or by right of eminent domain or private purchase in lieu thereof, and a part thereof remains which is susceptible, of occupation hereunder, this lease shall, as to the part so taken, terminate as of the date title shall vest in the condemnor or purchaser, and the rent payable hereunder shall be adjusted so that the Lessee shall be required to pay for the remainder of the term only such portion of such rent as the value of the part remaining after such taking bears to the value of the entire premises prior to such taking. If all of the premises, or such part thereof be taken so that there does not remain a portion reasonably suitable for the continued use and occupancy by Lessee for the purposes specified in the use clause above, this lease shall thereupon terminate. If a part or all of the premises be taken, all 4. <PAGE> 9 compensation awarded upon such taking shall go to the Lessor and the Lessee shall have no claim thereto; provided, however, that Lessee shall be entitled to remove any trade fixtures supplied by Lessee from that portion or all of the premises condemned, or alternatively, if a separate allocation is made in the condemnation award for Lessee's trade fixtures, Lessee shall be entitled to receive that part of the condemnation award specifically designated as compensation for the taking of any trade fixtures supplied and paid for by Lessee. Amendment 23 - Effect of Conveyance In the event of the sale or transfer by Lessor of the premises prior to the completion of the building and improvements to be constructed on the property by Lessor, Lessor shall not be freed and relieved of Lessor's covenants and obligations hereunder until delivery to Lessee of the completion notice as provided for in Paragraph 35 hereof. Paragraph 30 - Rental Adjustments (a) The initial monthly rental of Fifteen Thousand Six Hundred Sixteen Dollars ($15,616) is based upon the building to be constructed on the premises consisting of 51,200 square feet, with the rental computed at the rate of $0.305 per square foot; and is further based upon Lessor contributing the maximum amount of Five Hundred Thousand Dollars ($500,000) for interior improvements after completion of the building shell. Any additional cost of interior improvements in excess of Five Hundred Thousand Dollars ($500,000), shall be paid by Lessee. If the total cost of the interior improvements is less than Five Hundred Thousand Dollars ($500,000) but not less than Four Hundred Fifty Thousand Dollars ($450,000), the initial monthly rental shall be reduced by an amount equal to one percent (1%) per month of the amount by which the cost of said interior improvements is less than Five Hundred Thousand Dollars ($500,000). No reduction in the initial monthly rental shall be given in the event the total cost of the interior improvements is less than Four Hundred Fifty Thousand Dollars ($450,000). There is attached hereto as a part of Exhibit "C" a description of the project items and interior improvements which the parties hereby agree represent a full and complete list of said items. The parties agree to execute an amendment to this lease reflecting the adjustment in the monthly rental, if applicable, upon completion of construction. (b) The initial monthly rental, as adjusted pursuant to sub-paragraph (a) above of this Amendment 30, shall be adjusted as of June 1, 1982, June 1, 1987, and June 1, 1992, each of which is hereafter referred to as a "rent adjustment date," to reflect changes in the cost of living from the commencement date of the lease term to each rent adjustment date. The adjustments, if any, in the monthly rental shall be calculated on the basis of changes in the United States Department of Labor, Bureau of Labor Statistics Consumer Price Index, Subgroup "all items," for San Francisco-Oakland (1967=100), hereafter referred to as the "CPI." The CPI for May 1977 is hereafter referred to as the "base CPI." The monthly rental for the five (5) year period commencing June 1, 1982, and for each five (5) year 5. <PAGE> 10 period commencing June 1, 1982, and for each five (5) year period after each successive rent adjustment date thereafter, of the lease term shall be adjusted by the percentage increase or decrease, if any , in the CPI as of the month of May immediately prior to the rent adjustment date over the base CPI; provided, however, that for the period June 1, 1982 through May 31, 1987 the monthly rental shall not exceed one hundred twenty percent (120%) of the initial monthly rental; for the period June 1, 1987 through May 31, 1992 the monthly rental shall not exceed one hundred forty percent (140%) of the initial monthly rental; and for the period June 1, 1992 through May 31, 1997 the monthly rental shall not exceed one hundred sixty percent (160%) of the initial monthly rental; and provided further that the amount of the monthly rental increase for any of the five (5) year periods over the preceding five (5) year period shall not exceed twenty percent (20%) of the initial monthly rental. Notwithstanding the foregoing, the monthly rental at all times during the lease term shall not be less than the initial monthly rental of Fifteen Thousand Six Hundred Sixteen Dollars ($15,616), adjusted by the provisions of subparagraph (a) above of this Amendment 30. When the monthly rental for each five (5) year period commencing with a rent adjustment date is determined, Lessor shall give Lessee written notice to that effect indicating how the new monthly rental figure was computed. If at any rental adjustment date there shall not exist a Consumer Price Index in the same format as referred to in this paragraph, the parties shall substitute any official index published by the Bureau of Labor Statistics or successor or similar governmental agency, as may then be in existence which shall be most nearly comparable thereto. If the parties are unable to agree upon a successor index, the parties shall refer their choice of a successor index to arbitration to be conducted by three arbitrators, one to be selected by Lessor, one to be selected by Lessee, and the third to be selected by said first two chosen arbitrators. Said arbitrators shall make a report in writing signed by each of them within twenty (20) days after their selection. The expenses of the arbitration shall be borne equally by the parties hereto and the report of the majority of the arbitrators shall be binding upon both Lessor and Lessee. Paragraph 31 - Memorandum of Lease This lease shall not be recorded; provided that if either party requests the other party to do so, the parties shall execute a Memorandum of Lease in recordable form which shall refer to the parties, the premises, and the terms of the lease. Paragraph 32 - Waiver of Subrogation The parties release each other, and their respective authorized representatives, from any claims for damage to any person or to the premises and to the fixtures, personal property, Lessee's improvements, and alterations of either Lessor or Lessee in or on the premises that are caused by or result from risks insured against under any insurance policies carried by the parties and in force at the time of any such damage. Each party shall cause each insurance policy obtained by it to provide that the insurance company waives all right of recovery by way of subrogation against either party in connection with any damage covered by any policy. Neither party shall be liable to the other for any damage caused by fire or any of the risks insured against under any insurance policy required by this lease. If any insurance policy cannot be obtained with a waiver of subrogation, or is obtainable only by the payment of an additional premium charge above that charged by insurance companies issuing policies without 6. <PAGE> 11 waiver of subrogation, the party undertaking to obtain the insurance shall notify the other party of this fact. The other party shall have a period of ten (10) days after receiving the notice either to place the insurance with a company that is reasonably satisfactory to the other party and that will carry the insurance with a waiver of subrogation, or to agree to pay the additional premium if such a policy is obtainable at additional cost. If the insurance cannot be obtained or the party in whose favor a waiver of subrogation is desired refuses to pay the additional premium charged, the other party is relieved of the obligation to obtain a waiver of subrogation rights with respect to the particular insurance involved. Paragraph 33 - Tennis Court - --------------------------- Lessee shall give Lessor written notice of the first to occur of the following events: (a) The lease rights or the right to use the adjoining Hetch Hetchy area has terminated or is no longer in effect for any reason, or (b) Three (3) months prior to the expiration of the lease term or any renewal thereof. Upon giving such written notice, Lessee shall, if requested to do so by Lessor, remove that portion of the tennis court which is situated on the premises and replace that area with landscaping which is consistent with the original landscaping of the area, subject to Lessor's approval. Paragraph 34 - Financing - ------------------------ This lease and Lessor's obligations hereunder are conditional upon Lessor obtaining a commitment for a construction loan and permanent financing for construction of the building and improvements to be erected on the premises, upon terms and conditions reasonably acceptable to Lessor, within thirty (30) days after approval by the parties of the final plans and specifications for the building and improvements. Lessor agrees to exercise all reasonable efforts to obtain said financing. If Lessor is unable to obtain said financing within said thirty (30) day period, Lessor shall promptly give written notice thereof to Lessee. Lessee shall have forty-five (45) days following, the receipt of said notice from Lessor within which to obtain financing through Lessee's own agents. Lessor shall accept financing for the project with a loan obtained by Lessee, provided that the loan amount is between $1,250,000 and $1,350,000 for a loan term of from twenty-five (25) years to thirty (30) years, at an interest rate of not to exceed nine and three-fourths percent (9-3/4%) per annum, and a maximum loan fee of not more than one (1) point. If Lessee is unable to obtain said financing for Lessor within said forty-five (45) day period, Lessor may then terminate this lease by giving written notice of termination to Lessee. 7. <PAGE> 12 Paragraph 35 - Occupancy In the event the premises are not completed and available for occupancy on the commencement date of this lease as set forth in the paragraph entitled "Term" on page 1, the term of this lease shall commence on that date which Lessee commences operations in the premises which shall not be more than thirty (30) days after delivery by Lessor to Lessee of notice of completion of the construction contemplated by Amendment 1(a) hereto. Promptly upon commencement of the lease term, Lessee agrees to execute and deliver to Lessor a letter confirming the commencement date and termination date of this lease. Paragraph 36 - FAA Approval This lease and Lessor's obligations hereunder are conditioned upon Lessee delivering to Lessor prior to commencement of construction described in Amendment 1(a) hereto of a copy of a current approval by the Federal Aviation Administration as well as the Commanding Officer, Naval Air Station, Moffett Field, of the construction of the premises which are the subject of this lease. /s/ RICHARD N. MOSEMAN -------------------------------------- RICHARD N. MOSEMAN /s/ BONNIE MOSEMAN MILLER -------------------------------------- BONNIE MOSEMAN MILLER PROPERTIES INTERNATIONAL, allrent, INC By /s/ SALLY MOSEMAN ------------------------------------ SALLY MOSEMAN, President "Lessor" ACUREX CORPORATION By ------------------------------------ By /s/ [Signature Illegible] ------------------------------------ V.P. "Lessee" 8. <PAGE> 13 APPLICATION NO. SJ-379416 SCHEDULE C - -------------------------------------------------------------------------------- The land referred to herein is described as follows: ALL THAT CERTAIN REAL PROPERTY IN THE CITY OF MOUNTAIN VIEW, COUNTY OF SANTA CLARA, STATE OF CALIFORNIA, DESCRIBED AS FOLLOWS: ALL OF LOT 3 AS SHOWN UPON THAT CERTAIN MAP ENTITLED, "TRACT NO. 3813", WHICH MAP WAS FILED FOR RECORD DECEMBER 28, 1964 IN BOOK 189 OF MAPS, PAGE 32, IN THE OFFICE OF THE RECORDER OF THE COUNTY OF SANTA CLARA, STATE OF CALIFORNIA. Exhibit "A" <PAGE> 14 [MAP OF TRACT 3813] Exhibit "A" <PAGE> 15 [SITE PLAN OF PROPOSED BUILDING #5] Exhibit "B" <PAGE> 16 PROJECT ITEMS - SHELL Included Excluded - ------------------------------------------------------------------------------- 2-story concrete tilt-up natural change charges concrete overhang approximately 25,600 sq ft each floor tennis court, incremental cost above basis by lessee bronze glass with anodized frames sky lights one 3000-pound elevator natural convection two interior stair wells primary fire sprinklers roof insulation excavating/grading/paving landscaping irrigation/drainage utilities to building with/2000 AMPS, 480 volts Exhibit "C" <PAGE> 17 EXHIBIT "C" PROJECT ITEMS IN $500,000 INTERIOR <TABLE> <CAPTION> Included in $500,000 Excluded in $500,000 - ------------------------------------ ---------------------------------------- <S> <C> Architectural fee budgeted Architectural budget beyond of $15,000 $15,000 Heat/vent/air conditioning Change charges with economizer Window coverings Complete electrical All other improvements to Finished restroom cores and/or equipment for cafeteria Ceilings Telephone equipment Flooring Items which could be termed special purpose items or Drop fire sprinklers unusual items not consistent with normal R&D buildings Roof screens in the area, to be approved by lessor and/or lender Entrance lobby Partitioning and doors based on Acurex May 3 drawing Cafeteria with: asbestos flooring (vinyl) drop ceiling heating/air conditioning sprinklers All other items not included in shell items Exhibit "C" </TABLE> <PAGE> 18 October 23, 1976 Acruex Corporation 485 Clyde Avenue Mountain View, California 94040 Re: Lease for 555 Clyde Avenue, Mountain View Gentlemen: Reference is hereby made to the Lease dated October 23, 1976 between Richard N. Moseman, Bonnie Moseman Miller, and Properties International, allrent, Inc., as lessor, and Acurex Corporation, as lessee, covering premises at 555 Clyde Avenue, Mountain View, California. Commencement of construction of the building and improvements has been delayed because of the protracted lease negotiations between the parties. Lessor is now uncertain that the completion date of May 1, 1977 referred to in Amendment 1(c) of the Lease can be achieved on a normal construction schedule, even without delays beyond lessor's control. Therefore, the parties agree that so long as lessor exercises due diligence in prosecuting the work of construction to completion, lessor shall not be liable to lessee for any damages, and lessee shall not have any right to terminate the Lease, in the event construction is not completed by lessor on or before May 1, 1977. The rental adjustment dates under Paragraph 30(b) shall be adjusted accordingly. Notwithstanding the provisions of Paragraph 36 of the Lease, regarding FAA approval, if lessee does not deliver to lessor on or before November 8, 1976 the approval in writing by the Federal Aviation Administration, as well as the Commanding Officer, Naval Air Station, Moffett Field, of the construction of the premises which are the subject of the Lease, either lessor or lessee may terminate this Lease upon delivering written notice of termination to the other on or before 5:00 P.M. on November 10, 1976. In the event this Lease is so terminated, Acurex shall pay lessor $3,000 for preconstruction costs incurred by lessor through the date of termination. If the provisions of this letter are acceptable, please sign at the space below indicating your approval and acceptance hereof. Very truly yours, PROPERTIES INTERNATIONAL, allrent, INC The foregoing is accepted /s/ SALLY MOSEMAN and approved. By ___________________________________ Sally Moseman, President ACUREX CORPORATION /s/ [Signature Illegible] By ___________________________________ Dated: October 23, 1976 <PAGE> 19 AGREEMENT Reference is made to Paragraph 30 - Rental Adjustments - of that certain Lease, as amended, dated October 23, 1976 between Richard N. Moseman, Bonnie Moseman Miller, and Properties International, allrent, Inc., a California corporation, Lessor, and Acurex Corporation, a California corporation, Lessee, demising the property commonly referred to as 555 Clyde Avenue, Mountain View, California 94043. It is hereby understood and agreed that any additional costs of interior improvements in excess of $500,000.00 will be paid by Lessee in a timely manner upon presentation of appropriate bills by the Contractor. All parties hereunder are aware that a take-out commitment for a long term loan has been issued by The Penn Mutual Life Insurance Company and expires on October 2, 1977. As a result, interior improvements are to be made and paid for in a timely manner so that the construction lender hereunder will have ample time to refinance its loan according to the abovementioned take-out commitment. Dated: February 1, 1977 Construction Lender: Lessor: UNITED CALIFORNIA BANK ---------------------------------- Richard N. Moseman /s/ Bonnie Moseman Miller by Sally Moseman as attorney-in-fact By /s/ R. B. DEWITT --------------------------- ---------------------------------- R. B DeWitt, Vice President Bonnie Moseman Miller Lessee: Acurex Corporation, a Properties-International, allrent, Inc. California corporation California corporation By /s/ [Signature Illegible] By /s/ SALLY MOSEMAN -------------------------- ------------------------------- Sally Moseman, President <PAGE> 20 SECOND LEASE MODIFICATION AGREEMENT THIS AGREEMENT is made and entered into as of October 14, 1992, by and among RICHARD N. MOSEMAN, BONNIE MOSEMAN MILLER and PAULINE NYE MOSEMAN, as Trustee of the Pauline Nye Moseman Trust dated October 3, 1983 (collectively "Lessor"), ACUREX ENVIRONMENTAL CORPORATION, a California corporation ("Lessee") and ACUREX CORPORATION, a California corporation ("Acurex"). W I T N E S S E T H WHEREAS, Acurex and Richard N. Moseman, Bonnie Moseman Miller and Properties International, Allrent, Inc., as lessor, entered into a lease, dated October 23, 1976, for certain real property and improvements thereon located at and commonly known as 555 Clyde Avenue, in the City of Mountain View, County of Santa Clara, State of California (the "Real Property"), which lease has been amended by a Letter Agreement dated October 23, 1976, an Agreement dated February 1, 1977, an Agreement dated April 21, 1977 and a First Lease Modification Agreement, dated August 11, 1977 (collectively, the "Lease"); WHEREAS, Acurex is transferring, effective as of December 28, 1991, all of the assets of its Environmental <PAGE> 21 Systems Division ("ESD") to Lessee, in exchange for (i) 100 shares of the common stock of Lessee (being all of the issued and outstanding shares of Lessee), and (ii) the assumption by Lessee of ESD's obligations and liabilities (the "ESD Transactions"); WHEREAS, as a part of the ESD Transactions, Lessee has agreed pursuant to the Contribution, Assignment and Assumption Agreement dated as of December 28, 1991 (the "Assignment and Assumption Agreement") to assume the liabilities and obligations of Acurex as to the Lease; WHEREAS, Acurex continues to remain liable under the Lease for the performance of any and all covenants and obligations of the lessee therein; WHEREAS, in July 1992, Pauline Nye Moseman, as Trustee of The Pauline Nye Moseman Trust dated October 3, 1983 succeeded to the interest of Properties International, Allrent, Inc. with regard to the Real Property; and WHEREAS, Lessor has agreed to consent to the assignment and assumption of the Lease by Acurex to AEC provided, inter alia, Lessee and Acurex agree to the following modification and amendment to the Lease. -2- <PAGE> 22 AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants herein contained and for other good and valuable consideration, the parties hereto hereby agree as follows: 1. The following four (4) sentences of the section of the Lease titled "Term" are hereby deleted from the Lease in their entirety: "Provided Lessee faithfully performs its obligations hereunder, and is not then in default hereunder, Lessor hereby grants to Lessee the option to extend the lease term for sixty (60) months upon the expiration of the initial lease term. The option to extend shall be exercised by Lessee giving written notice of exercise to Lessor not less than one hundred eighty (180) days prior to the expiration of the initial lease term. Such extended term shall be upon all except for the rental which shall be determined by negotiations of the parties. In the event that the parties are unable to agree upon the rental within ninety (90) days after the exercise of the option by Lessee, then such option shall be null and void and of no force of effect, and the lease term shall expire and terminate upon the expiration of the initial lease term, if not sooner terminated pursuant to the provisions hereof." 2. Except as modified and amended herein, the Lease shall remain in full force and effect. -3- <PAGE> 23 3. This Agreement is effective as of the date set forth above. IN WITNESS WHEREOF, the parties have executed this Agreement. /s/ RICHARD N. MOSEMAN ----------------------------------- Richard N. Moseman /s/ BONNIE MOSEMAN MILLER ------------------------------------ Bonnie Moseman Miller /s/ PAULINE NYE MOSEMAN ------------------------------------ Pauline Nye Moseman, as Trustee of the Pauline Nye Moseman Trust dated October 3, 1983 ACUREX ENVIRONMENTAL CORPORATION, a California corporation By /s/ [Signature Illegible] V.P. & CFO ------------------------------------ ACUREX CORPORATION, a California corporation By /s/ [Signature Illegible] V.P. & CFO ------------------------------------ -4- <PAGE> 24 PARKING AGREEMENT THIS AGREEMENT is made and entered into on August 8, 1977, by and between RICHARD N. MOSEMAN, BONNIE MOSEMAN MILLER, and PROPERTIES INTERNATIONAL, allrent, INC., a California corporation, hereafter collectively referred to as "Moseman," and ACUREX CORPORATION, a California corporation, hereafter referred to as "Acurex." RECITALS: A. Moseman, as lessor, and Acurex, as lessee, entered into a Lease dated October 23, 1976, as amended August 8, 1977, hereafter referred to as the "Lease," covering certain real property commonly known as 555 Clyde Avenue, Mountain View, Santa Clara County, California, being Lot 3 as shown upon that certain Map entitled "Tract No. 3813," which Map was filed for record December 28, 1964 in Book 189 of Maps, Page 32, in the Office of the Recorder of the County of Santa Clara, State of California, hereafter referred to as the "premises." B. Acurex is constructing a tennis court and handball court on the premises as part of the building improvements currently under construction on the premises. The construction of the tennis court and handball court, plus certain landscaping to be installed by Moseman, has resulted in the development on the premises of twenty-five (25) parking spaces and one (1) loading zone less than required by the zoning ordinance of the City <PAGE> 25 of Mountain View. C. Acurex has the use of certain Hetch-Hetchy property, hereafter referred to as the "Hetch-Hetchy property," consisting of an eighty (80) foot wide parcel extending four hundred (400) feet, more or less, easterly of Clyde Avenue and located immediately to the south of the premises and contiguous thereto, pursuant to a Land Use Permit dated march 14, 1973 granted to Acurex by the San Francisco Water Department. D. Moseman and Acurex now wish by this Agreement to provide for certain parking rights over a portion of the Hetch-Hetchy property for the benefit of the premises, upon the terms and conditions contained herein. NOW THEREFORE, in consideration of the payment of the sum of Ten Dollars ($10.00) by Moseman to Acurex, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows: 1. Except as otherwise provided herein, so long as the lease is in full force and effect, and so long as Acurex has the right to use the Hetch-Hetchy property for parking pursuant to the Land Use Permit with the San Francisco Water Department, the equivalent of twenty-five (25) parking spaces and one (1) loading space on the Hetch-Hetchy area will be allocated and set aside for use as parking area by the occupant or occupants of the premises, without cost or expense to the owner of the premises, or the occupant of the premises if other than Acurex. 2. Upon expiration or sooner termination of the -2- <PAGE> 26 Lease, so long as Acurex continues to have the right to use the Hetch-Hetchy area for parking purposes pursuant to the Land Use Permit, the equivalent of twenty-five (25) parking spaces and one (1) loading space on the Hetch-Hetchy area will be allocated and set aside by Acurex for use as parking area by the occupant or occupants of the premises, upon the payment to Acurex monthly in advance on the first day of each calendar month of an amount equal to thirty-eight percent (38%) of the monthly amount payable by Acurex to the San Francisco Water Department pursuant to the Land Use Permit, as such amount may be adjusted by the San Francisco Water Department from time to time. The owner of the premises may discontinue such use of the Hetch-Hetchy property at any time upon giving thirty (30) days prior written notice to Acurex, and thereafter the owner of the premises shall be relieved from the obligation to make such payments to Acurex and Acurex shall have no further obligations under this Agreement. 3. Moseman acknowledges receipt of a copy of the Land Use Permit. The rights of Moseman and the occupants of the premises hereunder shall be subject to the terms and conditions of said Land Use Permit, including, but not limited to, the right of the San Francisco Water Department to revoke such right to use the Hetch-Hetchy area for parking at any time. 4. (a) Acurex shall use all reasonable effort to renew the Land Use Permit when it expires, and to maintain said Permit in effect during the term of the Lease; provided, however, that Acurex shall no longer be required to provide the owner of the premises with parking spaces on the Hetch-Hetchy property, -3- <PAGE> 27 if at any time additional on-site parking area is placed on the premises in an amount sufficient to satisfy the requirements of the City of Mountain View. (b) Following the expiration or sooner termination of the Lease, Acurex may surrender voluntarily its right to use the Hetch-Hetchy property for parking at any time and thereupon the parties shall be relieved of their obligations hereunder, provided that Acurex gives Moseman, or the then owner of the premises, at least ninety (90) days prior written notice of its intention to do so, in order that Moseman, or the then owner of the premises, may seek to acquire the parking rights on the Hetch-Hetchy property from the San Francisco Water Department. 5. Acurex shall be responsible for obtaining the approval of the City of Mountain View to the necessary variance and site plan and architectural approval to permit the installation of the tennis court and handball court on the portion of the premises to be devoted to such uses in lieu of parking area. Moseman shall have no liability to Acurex if the City of Mountain View fails to grant such approval, or, if after such approval is granted, the tennis court or handball court or both must be removed in the event the City of Mountain View requires additional on-site parking and loading spaces on the premises in accordance with the plans previously approved by the City of Mountain View's site plan and architectural review (Application 354-76AA). 6. Nothing contained herein shall be deemed to modify -4- <PAGE> 28 or amend the Lease. 7. This Agreement shall inure to the benefit of and shall be binding upon the respective heirs, personal representatives, successors, and assigns of the parties hereto. IN WITNESS WHEREOF, this Agreement has been entered into by the parties as of the date set forth above. ---------------------------------------- Richard N. Moseman /s/ BONNIE MOSEMAN MILLER ---------------------------------------- Bonnie Moseman Miller PROPERTIES INTERNATIONAL, allrent, INC., a California corporation By /s/ [Signature Illegible] ------------------------------------ ACUREX CORPORATION, a California corporation By /s/ TIMOTHY P. CARLSON ------------------------------------ -5- <PAGE> 29 LESSEE'S STATEMENT The undersigned lessee of premises situated at 555 Clyde Avenue, City of Mountain View, State of California acknowledges receipt of notice that lessor has assigned or is about to assign all existing leases on said premises or any part thereof as additional collateral security for the payment of a certain promissory note of even date herewith payable to the order of _____________, (said assignment being subject however, to lessor's rights to collect the rents until default in the performance of the obligations in said note and deed of trust securing the same, said deed of trust as recorded or about to be recorded being hereby referred to for all details). The undersigned hereby certifies and represents to and covenants with the said payee and the holder of said note from time to time as follows: 1. The undersigned, as lessee under a certain lease entered into with Richard N. Moseman, Bonnie Moseman Miller, Properties International, allrent, Inc., as lessor, and dated October 23, 1976. See Addendum to Lessee's Statement attached hereto. 2. The initial term of the lease commenced on October __, 1977 and will end two hundred and forty months later. 3. There have been no modifications or changes in the lease except as follows: First Lease Modification Amendment dated August 11, 1977. 4. No rent or other sum payable under said lease has been paid in advance except as follows: First month's rent $15,616. Security Deposit $15,000. 5. The undersigned has accepted the leased premises and has no defense, set-off or counter-claim against the lessor under the lease or otherwise except as follows: See Addendum to Lessee's Statement attached hereto. 6. The undersigned has received no notice of any assignment of the lease to any person other than the payee of said note except as follows: None 7. The undersigned acknowledges notice that no prepayment or reduction of rent, or modification or cancellation of said lease, will be valid as to the holder of said note without consent of such holder. Yes 8. The undersigned certify and represent that the above statements, including any exceptions which have been added thereto, are full and complete and that the payee and the holder of said note may rely and act upon them. Dated as of November 11, 1977. Witness: /s/ TIMOTHY P. CARLSON [SEAL] - ----------------------------------- ---------------------------------------- Acurex Corporation [SEAL] - ----------------------------------- ---------------------------------------- <PAGE> 30 THIRD RENEWAL AMENDMENT TO LEASE This Renewal Amendment to the Lease Agreement dated October 23, 1976 (the "Lease") is made and entered into as of this 23rd day of November, 1997, by and between Richard N. Moseman, Bonnie Moseman, Miller, Pauline Nye Moseman, as Trustee of Pauline Nye Moseman Trust ("Lessor"), and Acurex Environmental Corporation ("Lessee"), collectively referred to as the "Parties." RECITALS: 1. WHEREAS, Lessor and Lessee have entered into a Lease dated as of October 23, 1976 have, by amendment, renewed such Lease continuously through and including November 22, 1997 with respect to certain premises located at 555 Clyde Avenue, Mountain View, California, and 2. WHEREAS the Parties wish to renew and amend the Sublease in terms of basic rent, and 3. WHEREAS the Lessee continues to perform its obligations of the lease, the Lessor shall grant to extend the lease term for sixty (60) months upon the expiration of this amendment lease term. 4. WHEREAS the option to extend has been exercised by Lessee giving written notice of exercise to Lessor six (6) months prior to the expiration of the terms of this agreement and the terms of the rent have been duly negotiated and agreed upon the parties NOW THEREFORE, in consideration of the mutual promises and covenants, and other good and valuable consideration contained herein, the Parties agree as follows: AGREEMENT: 1. TERM is renewed so as to extend the Lease for sixty (60) calendar months commencing on the 23rd day of November, 1997 and ending on the 22nd day of November, 2002. 2. RENTAL is amended so as to require payment of base rent at the rate $38,400.00 per month during the Lease term. 3. Except as amended hereby, the Parties ratify and affirm that each and all of the terms, covenants and conditions of the Lease Agreement dated October 23, 1976, as amended, shall remain in full force and effect. IN WITNESS WHEREOF, the Lessor and Lessee execute this Amendment as of the day and year first above written. /s/ RICHARD N. MOSEMAN ---------------------------------------- Richard N. Moseman /s/ BONNIE MOSEMAN MILLER ---------------------------------------- Bonnie Moseman Miller /s/ KENNA S. HELMS ---------------------------------------- Vice President & Senior Trust Officer /s/ PAULINE NYE MOSEMAN ---------------------------------------- Pauline Nye Moseman as Trustee of the Pauline Nye Moseman Trust dated October 3, 1983 ACUREX ENVIRONMENTAL CORPORATION, a California Corporation /s/ HOWARD L. MORSE ---------------------------------------- Howard L. Morse </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.14 <SEQUENCE>31 <DESCRIPTION>EX-10.14 <TEXT> <PAGE> 1 EXHIBIT 10.14 NNN LEASE - GENERAL FORM PLEASE READ THIS CAREFULLY; LANDLORD IT'S AGENTS OR EMPLOYEES, IS NOT AUTHORIZED TO GIVE LEGAL, TAX OR ACCOUNTING ADVICE. IF YOU DESIRE SUCH ADVICE, CONSULT YOUR ATTORNEY AND/OR ACCOUNTANT BEFORE SIGNING. PARTIES: This Lease executed in duplicate this 8th day of February, 2000 between De Guigne Ventures, A California Limited Liability Corporation, hereinafter called Landlord, and SkyStream Networks, Inc. a California Corporation, hereinafter called Tenant, PREMISES WITNESSETH: The Landlord does hereby lease unto Tenant and Tenant does hereby hire and take from Landlord those certain premises situated in the City of Sunnyvale, County of Santa Clara, State of California, and described as follows, to wit: An approximately 46,104 square feet two-story R&D/Office building commonly known as 455 De Guigne, Sunnyvale, Ca. USE: To be used solely for office, sales, research, development, shipping, receiving, storage and for no other purposes whatsoever without Landlord's prior written consent which shall not be unreasonably withheld. TERM: The term shall be for ten (10) years, commencing on the 15th day of July, 2000 and ending on the 14th day of July, 2010 at a rental payable in lawful money of the United States of America, which Tenant agrees to pay without deduction, setoff, or demand at 306 Lorton Avenue, Burlingame, California 94010 or such place or places as may be designated in writing from time to time by Landlord, in advance, in monthly installments as follows: BASE RENTAL: The sum of One Hundred Twenty-six Thousand Seven Hundred and Eighty-six and 00/100ths Dollars ($126,786.00) is hereby received representing the first month's base rental due. Commencing August 1, 2000 the sum of Sixty-nine Thousand Five Hundred and Twenty-seven and 81/100ths Dollars ($69,527.81) will be due for the pro rata share of July's base rental. The sum of One Hundred Twenty-six Thousand Seven Hundred Eighty-six and 00/100ths Dollars ($126,786.00) shall be due each and every month thereafter for the balance of the first year of this lease. Commencing July 15, 2001 and each succeeding July the base monthly rental shall increase by 3%. ADDITIONAL RENTAL: Commencing on the Lease Commencement Date and continuing throughout the Lease Term, in addition to the Base Monthly Rent, Tenant shall pay to Landlord as additional rent tenant's proportionate share of all Building Operating Expenses including Taxes, Insurance, Maintenance, and Common Area Costs. Payment shall be made by one of the following methods: Landlord may bill to Tenant, on a periodic basis not more frequently than monthly, Tenant's proportionate share of such expenses as paid or incurred by Landlord, and Tenant shall pay such share of such expenses within thirty days after receipt of a written bill from Landlord; and/or Landlord may budget the annual projected expenses and bill to tenant on a monthly basis, one-twelfth of the annual amount. If landlord elects the latter of the alternatives, Landlord shall reconcile the budgeted amounts with the <PAGE> 2 actual amounts on an annual basis during the first quarter of the subsequent year and bill tenant for any additional amounts or credit tenant any overpayments against future rental amounts. The failure to pay any additional rent as required by this lease when due shall be treated the same as a failure by Tenant to pay base monthly rent when due and Landlord shall have the same rights and remedies against Tenant as Landlord would have if Tenant failed to pay the base monthly rent when due. OPTION TO EXTEND: Subject to the terms and conditions set forth below, Tenant may at its option extend the Terms of this Lease for (1) period of five (5) years. Such period is called the "Renewal Term." The Renewal Term shall be upon the same terms contained in this Lease, except that (i) Landlord shall have no obligation to provide Tenant with any Tenant Improvement Allowance in connection with the Renewal Term, (ii) the Base Rental during the Renewal Term shall be calculated as set forth below, and (iii) any reference in the Lease to the "Term" of the Lease shall be deemed to include the Renewal Term and apply thereto, unless it is expressly provided otherwise. Tenant shall have no additional extension options. A. The Base Rent during the Renewal Term shall be at ninety-five percent (95%) of the then fair market rate (defined hereinafter) for such space for a term commencing of the first day of the Renewal Term. "Market Rate" shall mean the then prevailing market rate for a comparable term commencing on the first day of the Renewal Term for tenants of comparable size and creditworthiness for comparable space in the Building and other first class R&D/Office buildings in the vicinity of the Building. In no event shall the rent be less than the rent paid during the last year of the initial term. B. To exercise any option, Tenant must deliver a binding written notice to Landlord not sooner than ten (10) months nor later than six (6) months prior to the expiration of the initial Term of this Lease. Thereafter, the Market Rate for the Renewal Term shall be calculated pursuant to Subsection A above and Landlord shall inform Tenant of the Market Rate. If Tenant fails to timely give its notice of exercise, Tenant will be deemed to have waived its option to extend. LATE PAYMENT DISHONORED CHECK: In the event that rent is not paid by the 5th business day after Landlord's written notice of the delinquency, or in the event of a dishonored bank check from Tenant to Landlord, because actual damages for said late payments and all dishonored bank checks are extremely difficult to ascertain. Tenant agrees to pay 10% of the base monthly rental as liquidated damages for late payment and additionally shall pay to Landlord interest at the maximum rate of interest not prohibited by law until paid. SECURITY DEPOSIT: Landlord acknowledges receipt of an additional amount of Seven Hundred and Fifty Thousand and 00/100ths Dollars ($750,000.00), as a security deposit for the full and faithful performance of each and every term, covenant and condition of this lease. Such Security Deposit shall be paid as follows: The sum of Two Hundred Fifty Thousand and 00/100ths Dollars ($250,000.00) is hereby received representing the cash Security Deposit. Upon the Initial Public Offering or no later than June 15, 2000, Tenant shall deliver to Landlord an unconditional irrevocable letter of credit in the amount of 2 <PAGE> 3 Five Hundred Thousand and 00/100ths Dollars ($500,000.00) issued by a bank which shall be reasonably acceptable to Landlord and naming Landlord as beneficiary thereunder, as security for the faithful performance by Tenant of all of Tenant's obligations under this Lease. This letter of credit may be reduced in half upon Tenant becoming a public company. This letter of credit will be terminated upon tenant achieving one entire quarter (3 straight months) of profitability. So long as no default by tenant then exists hereunder, upon Tenant vacating the premises said security deposit shall be returned to Tenant after first deducting any sums owing to Landlord. If this lease be sooner terminated for reason other than default by Tenant, said sum shall likewise be returned. Landlord shall not be required to keep the security deposit separate from its general funds, and Tenant shall not be entitled to any interest on such deposit. Landlord may use or apply or retain the whole or any part of the security deposit as may be necessary to (a) to remedy Tenant's default in the payment of any rent, (b) to repair damage to the Premises caused by Tenant, (c) to clean the premises upon termination of this Lease, (d) to reimburse Landlord for the payment of any amount which Landlord may reasonably spend or be required to spend by reason of Tenant's default, or (e) to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. TENANT IMPROVEMENTS: Landlord shall provide to Tenant a turn-key interior improvement as described by the plans and specifications attached hereto as "Exhibit A". Any additional improvements not included in Exhibit A shall be at the sole cost and expense of the Tenant. POSSESSION: Tenant agrees that in the event of the inability of Landlord to deliver to Tenant Possession of said premises at the commencement of said term, Landlord shall not be liable for any damage caused thereby, nor shall this lease be void or voidable, but Tenant shall not be liable for rent until such time as Landlord offers to deliver possession of said premises to Tenant. The expiration date of the term shall be extended by the same number of days that the Tenant's possession of the premises was delayed. If Tenant with Landlord's consent takes possession prior to the commencement of the said term, Tenant shall do so subject to all the covenants and conditions hereof, except the obligation to pay rent. HOLDING OVER: If Tenant holds possession hereunder after the expiration of the term of this lease with consent of Landlord, Tenant shall become a tenant from month-to-month upon all of the terms and conditions herein specified, at a rental of one hundred and fifty percent (150%) of the last paid base monthly rent due in this lease. ENTRY BY LANDLORD: Landlord and the agents and employees of Landlord shall have the right to enter upon said premises at all reasonable times to inspect the same to see that no damage has been or is done and to protect any and all rights of Landlord and to post such reasonable notices as Landlord may desire to protect the rights of the Landlord. Landlord may for a period commencing ninety (90) days prior to the end of the lease term, or any extension hereof, have reasonable access to the premises for the purpose of exhibiting the same to prospective tenants and may place upon said premises any usual or ordinary "for sale" or "to lease" signs. 3 <PAGE> 4 CONDITION AND REPAIRS: Landlord represents and warrants to Tenant that, to the best of Landlord's knowledge, as of the date that Landlord delivers possession of the Premises to Tenant, all structural portions of the Premises, including, without limitation, the roof, the foundation, exterior walls and interior load-bearing walls; all paved surfaces; the roof membrane; and all sewer, plumbing and HVAC systems currently serving the Premises will be in good operating condition, order and repair. Subject to the foregoing representation and warranty, by taking possession of the Premises, Tenant shall be deemed to have accepted the Premises in its then current condition, "as is", subject to all applicable laws. Landlord agrees to correct all items reasonably set forth in Tenant's written punchlist which must be submitted to Landlord within thirty days of Landlord turning over possession to Tenant. Tenant shall at Tenant's sole cost and expense, maintain, repair and keep the interior of the premises and each and every part thereof and all appurtenances thereto (including without limitation, wiring including lamps and ballast's, ceiling grids and acoustical tiles, plumbing, hot water system, sewage system, heating and air condition installations, glass, storefront, window frames, doors (interior and exterior), carpeting, interior walls (including drywall, wallpaper and paint) and skylights, in or bordering the premises), in good condition and repair during the term of this lease. This obligation by Tenant to maintain and to repair the premises shall be binding upon Tenant whether said repair is caused by normal wear and tear, sudden breakage, misuse, or any insured or uninsured loss. Tenant shall procure and maintain at Tenant's expense a heating and air conditioning maintenance contract. Landlord reserves the right to procure and maintain the heating and air conditioning maintenance contract, and Tenant shall reimburse Landlord, upon demand for the cost thereof. Tenant shall furnish and install all expendables including light bulbs used in premises. In the event that any alterations, repairs or acts of any kind shall be required to be done by reason of Tenant's occupancy in connection with the premises or any part thereof (including remodeling) under the provisions of any law, ordinance or rule now in force of hereafter enacted by municipal, state or national authority, the same shall be made at the cost and expense of Tenant. All repairs, alterations and improvements that may be required under this lease (except as stated in Exhibit A) shall be done at the cost and expense of Tenant and only with the written consent of Landlord first obtained by Tenant and not unreasonably withheld. All work shall be done using a licensed contractor and in compliance with all laws and in a good and workmanlike manner using new materials of good quality. Tenant agrees that if Tenant shall make any repairs, alterations or improvements, excepting emergency repairs, Tenant will not take such action until two (2) days after receipt by it of the written consent of Landlord required by this paragraph. Tenant will at all times permit any notices to be posted and to be remain posted until the completion and acceptance of such work. Tenant shall reimburse Landlord all costs and expenses paid or incurred by Landlord in protecting, operating, maintaining, managing, repairing and preserving the project and all parts thereof. Landlord shall maintain and repair the structural roof elements, exterior wall, foundations, other structural portions of the premises, and the electrical and plumbing systems located outside of the leased premises without the right to recapture such cost from Tenant. 4 <PAGE> 5 In the event Tenant should fail (after applicable notice and cure periods) to make the repairs required of Tenant forthwith upon notice by Landlord, Landlord, in addition to all other remedies available hereunder or by law, and without waiving any alternative remedies, may make the same; and Tenant agrees to repay Landlord as additional rent the cost as part of the rental payable on the next day upon which rent becomes due. Tenant expressly waives the benefits of the provisions of subsection 1 of Section 1932 and Sections 1941 and 1942 of the Civil Code of California and all right to make repairs at the expense of Landlord as provided in Section 1942 of that Code, and agrees upon the expiration of the term of this lease or sooner termination to surrender the premises in the same condition as received. Landlord, after written notice by Tenant of the necessity thereof, and should the same not be caused by reason of any negligent act or omission of the Tenant or its agents, servants or employees, shall make necessary repairs to the roof, exterior walls (excluding repair of glazing), foundations and other structural portions of the premises within a reasonable time. Landlord shall not be liable to Tenant for injury to Tenant, its employees, agents, invitees, damage to tenant's property or loss of Tenant's business or profits nor shall Tenant be entitled to terminate this lease or to any reduction in or abatement of rent by reason of Landlord's failure to perform any maintenance or repairs to the project until tenant shall have first notified Landlord, in writing, of the need for such maintenance or repairs and then only after Landlord shall have had a reasonable period of time following its receipt of such notice within which to perform such maintenance or repairs. WASTE AND ALTERATIONS: Tenant shall not do, or permit anything to be done in or about the leased premises, the building, the common areas or the project which does or could (i) interfere with the rights of any other tenants or occupants of the building or complex, (ii) jeopardize the structural integrity of the building, or (iii) cause damage to any part of the building or project. Tenant shall not operate any equipment within the leased premises which does or could (i) injure, vibrate or shake the premises or the building, (ii) damage, overload, corrode, or impair the efficient operation of any electrical, plumbing, sewer, heating and ventilating or air conditioning systems within or servicing the premises or the building, or (iii) damage or impair the efficient operation of the sprinkler system (if any) within or servicing the leased premises or the building. Tenant shall not install any equipment or antennas on or make any penetrations of the exterior walls or roof of the building. Tenant shall not place any loads upon the floors, walls, ceiling or roof systems which could endanger the structural integrity of the building or damage its floors, foundations or supporting structural components. Tenant shall not place any explosive, flammable or harmful fluids, including Hazardous Materials, or other waste materials in the drainage systems of the building or the project. Tenant shall not drain or discharge any fluids in the landscape areas or across the paved areas of the project. Tenant shall not use any area located outside of the leased premises for the storage of its materials, supplies, inventory or equipment and all such materials, supplies, inventory and equipment in the building or complex in which the demised premises shall at all times be stored within the leased premises. 5 <PAGE> 6 Tenant shall not make or permit to be made any alterations of, charges in or additions to the premises without the prior written consent of Landlord. All alterations, additions and improvements, including fixtures, made to or on the premises, except unattached movable business fixtures, shall be made at the sole cost and expense of Tenant and, upon installation, shall be the property of Landlord and shall become part of the premises and be surrendered to Landlord. Tenant shall notify Landlord within thirty (30) days before the end of the term to determine if Landlord desires to have Tenant remove all or any part of the alterations or improvements and to restore the premises to the condition existing prior to the alterations and improvements and to restore the premises to the condition existing prior to the alterations and improvements, at Tenant's sole cost and expense, reasonable wear and tear expected. NOISE AND EMISSIONS: All noise generated by tenant in its use of the premises shall be confined or muffled so that it does not interfere with the businesses of or annoy other tenants of the building or the project. All dust, fumes, odors and other emissions generated by Tenant's use of the premises shall be sufficiently dissipated in accordance with sound environmental practices and exhausted from the premises in such a manner so as not to interfere with the businesses of or annoy other tenants of the project, or cause damage to the premises or the project or component part thereof or the property of other tenants of the building or project. ABANDONMENT: Tenant shall not abandon the premises at any time during the term; and if Tenant shall abandon, said premises, or be dispossessed by process of law, or otherwise, any personal property belonging to Tenant and left on the premises shall be deemed to be abandoned, at the option of Landlord, except such property as may be mortgaged to Landlord. ASSIGNMENT AND SUBLETTING: Tenant shall not assign this lease, nor any right hereunder, nor sublet the premises, nor any part thereof, without the prior written consent of Landlord. In exercising its reasonable discretion Landlord may consider all commercially relevant factors involved in the leasing of the premises including but not limited to the a) the creditworthiness and financial stability of the prospective assignee or subtenant; b) references of prior landlords; c) the past history of such subtenant, with respect to involvement in litigation and bankruptcy proceedings; d) the impact of said subtenant or assignee and proposed use of the premises on pedestrian and vehicular traffic, other tenants, and parking; e) the use, generation or disposal of hazardous materials. If tenant is a corporation, any dissolution, merger, consolidation or other reorganization of tenant, or the sale or other transfer in the aggregate over the lease term of a controlling percentage of the capital stock of tenant, shall be deemed a voluntary assignment of tenant's interest in this lease. The phrase "controlling percentage" means the ownership of and the right to vote stock possessing more than fifty percent of the total combined voting power of all classes of tenant's capital stock issued and outstanding and entitled to vote for the election of directors. If tenant is a partnership, a withdrawal or change, whether voluntary, involuntary or by operation of law, of any general partner, or the dissolution of the partnership, shall be deemed a voluntary assignment of Tenant's interest in this lease unless said fifty percent (50%) is purchased by an entity which has a net worth greater than tenant's or guarantor's. 6 <PAGE> 7 No consent to any assignment of this lease, or any subletting of said premises, shall constitute a waiver or discharge of the provisions of this paragraph, except as to the specific instance covered thereby; nor shall this lease nor any interest therein be assignable by action of law including bankruptcy, both involuntary and voluntary, and to Trustee, Sheriff, Creditor or Purchaser at any judicial sale, or any officer of any court or receiver except if appointed as herein specifically provided shall acquire any right under this lease or to the possession or use of the premises or any part thereto without the prior written consent of Landlord. The acceptance of rent by landlord from any person or entity other than tenant or the acceptance of rent by landlord from tenant with knowledge of a violation of the provisions of this article, shall not be deemed to be a waiver by Landlord of any provision of this article or this lease or to be a consent to any subletting by tenant or any assignment or encumbrance of tenant's interest in this lease. CONDITIONS TO LANDLORD'S CONSENT: If Landlord elects to consent, or shall have been ordered to so consent by a court of competent jurisdiction, to such requested assignment, subletting or encumbrance, such consent shall be expressly conditioned upon the occurrence of each of the conditions below set forth. A. Landlord having approved in form and substance the assignment or sublease agreement, which approval shall not be unreasonably withheld by Landlord if the requirements of this lease are otherwise complied with. B. No default by Tenant (after applicable notice and cure period) shall then exist. Tenant having reimbursed to Landlord all reasonable costs and attorneys fees incurred by Landlord in conjunction with the processing and documentation of any such requested subletting, assignment or encumbrance not to exceed ($1,000) per transaction. C. Tenant having delivered to Landlord a complete and fully-executed duplicate original of such sublease agreement, or assignment agreement, and all related agreements. D. Tenant having paid, or having agreed in writing to pay as future payments, to Landlord fifty (50%) percent of all Assignment Consideration or Excess Rentals to be paid to Tenant or to any other on Tenant's behalf or for Tenant's benefit for such assignment or subletting as follows: If Tenant assigns its interest under the Lease and if all or a portion of the consideration for such assignment is to be paid by the assignee at the time of the assignment, that Tenant shall have paid to Landlord and Landlord shall have received an amount equal to Fifty (50%) percent of the Assignment Consideration or Excess Rentals so paid or to be paid whichever is the greater) at the time of the assignment by the assignee; or if Tenant assigns its interest under this Lease and if Tenant is to receive all or a portion of the consideration for such assignment in future installments, that Tenant and Tenant's assignee shall have entered into a written agreement with and for the benefit of Landlord reasonably satisfactory to Landlord and its counsel whereby Tenant and Tenant's assignee jointly agree to pay to 7 <PAGE> 8 Landlord an amount equal to Fifty (50%) percent of all such future Assignment Consideration installments to be paid by such assignee as and when such Assignment Consideration is so paid. If Tenant subleases the Leased Premises, that Tenant and Tenant's subtenant shall have entered into a written agreement with and for the benefit of Landlord reasonably satisfactory to Landlord and its counsel whereby Tenant and Tenant's subtenant jointly agree to pay to Landlord Fifty (50%) percent of all Excess Rentals to be paid by such subtenant as when such Excess Rentals are so paid. The consent by Landlord to any subletting or assignment shall not release Tenant from its primary obligations or alter the primary liability of Tenant to pay the rent and perform and comply with all of the obligations of Tenant to be performed under this lease. INDEMNIFICATION OF LANDLORD: Tenant, shall, during the term of this lease, indemnify and save harmless Landlord and any agents of Landlord from any and all loss, damage, claims of damage, obligations, cause or causes of action, or liabilities of any kind or nature (including reasonable costs of attorney's fees if Landlord is made a party to any action which Tenant's indemnity runs hereunder) by reason of injury or death of any person or persons or damage to any property of any kind and to whomsoever belonging, including injury or death to the person or damage to the property of Tenant, Tenant's officers, directors, employees, agents, guests, subtenants and assignees, concessionaires and licensees, and any other person, firm or corporation selling or manufacturing merchandise or services upon or from the demised premises, or any part thereof, from any cause or causes whatsoever which result from Tenant's use or from any other activity done, permitted or suffered by Tenant. As a material part of the consideration to Landlord, Tenant hereby assumes all risk of damage to property or injury to persons in or about the Premises from any cause whatsoever (except that which is caused by the sole active negligence or willful misconduct by Landlord or its Agents or by the failure of Landlord or its agents to observe any of the terms and conditions of this lease, if such failure has persisted for an unreasonable period after written notice of such failure, against which landlord shall indemnify, defend, and hold harmless tenant). Except as otherwise provided in this lease, Landlord shall not be liable for injury or damage which may be sustained by Tenant, or its employees, invitees or customers, goods, wares, merchandise or property of tenant, its employees, invitees or customers or any other person in or about the premises caused by or resulting from fire, earthquake, steam, electricity, gas, water or rain, which may leak or flow from or into any part of the premises, or from the breakage, leakage, obstruction or other defects of the pipes, sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures of the same, whether the said damage or injury results from conditions arising upon the premises or upon other portions of the building, or from other sources. Landlord shall not be liable for any damage arising from any act or neglect of any other tenant of the project. Tenant's obligations under this paragraph shall survive the termination of this lease. 8 <PAGE> 9 INSOLVENCY BANKRUPTCY: Either (a) the appointment of a receiver (except a receiver mentioned in paragraph 11 or hereof) to take possession of all or substantially all of the assets of Tenant, or (b) a general assignment by Tenant for the benefit of creditors, or (c) any action taken or suffered by Tenant under any insolvency or bankruptcy act shall constitute a breach of this lease by Tenant. Upon the happening of any such event this lease shall terminate days after written notice of termination from Landlord to Tenant. DEFAULT: In the event of any breach of this Lease by Tenant, then Landlord besides other rights or remedies Landlord may have, shall have the immediate right of re-entry and may remove all persons and property from the premises; such property may be removed and stored in a public warehouse or elsewhere at cost of, and for the account of Tenant. Should Landlord elect to re-enter, as herein provided, or should Landlord take possession pursuant to legal proceedings or pursuant to any notice provided for by the law, Landlord may terminate this lease. No such re-entry or taking possession of said premises by Landlord shall be construed as an election on its part to terminate this lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. Landlord may at any time thereafter elect to terminate this lease for such previous breach. Should Landlord at any time terminate this lease for any breach, in addition to other remedies Landlord may have, Landlord may recover from Tenant all damages, including reasonable attorney's fees, which Landlord may incur by reason of such breach, including costs of recovering the premises and any attorney's fees incurred therein. Landlord may also recover from Tenant the worth at the time of award of the amount, if any, by which the unpaid rent and charges equivalent to rent for the balance of the term after the time of the award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided, in accordance with California Civil Code Section 1951.2 or other statute of similar effect. The foregoing remedies of Landlord shall not be exclusive, but shall be cumulative and in addition to all remedies now or hereafter allowed by law or elsewhere provided for. In addition to other remedies Landlord may, if Tenant breaches this Lease and abandons the premises before the end of the term, or if Tenant's rights to possession are terminated by Landlord because of the breach of this Lease, then in either case, Landlord may recover from the aggregate of all amounts Landlord is permitted to recover from Tenant under Section 1951.2 of the California Civil Code and any other applicable law, including: (a) The worth at the time of award of the unpaid rent which had been earned at the time of termination. (b) The worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Tenant proves could have been reasonably avoided. (c) The worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Tenant proves could be reasonably avoided. 9 <PAGE> 10 (d)Any other amount necessary to compensate the Landlord for all the detriment proximately caused by the Tenant's failure to perform its obligations under the Lease, or which in the ordinary course of things would be likely to result therefrom. The "worth at the time of award" of the amounts referred to in the foregoing subparagraphs (a) and (b) shall be computed by allowing interest at the rate of Ten Percent (10%) per annum, but not more that the maximum rate permitted by law on each rental installment from the date the same was due hereunder, to the time of award. The "worth at the time of award" of the amount referred to in the foregoing subparagraph (c) shall be computed in accordance with Subdivision (b) or Section 1951.2 of the California Civil Code. As used herein, the term "time of award" shall mean either the date upon which the Tenant pays to the Landlord the amount recoverable by Landlord as herein above set forth, or the date of entry of any determination, order of judgment of any court, other legally constituted body, or any arbitrators determining the amount recoverable, whichever first occurs. Any claim for damages pursuant to the foregoing provisions, shall be immediately enforceable by Landlord against Tenant by suit, and shall be provable in any bankruptcy or insolvency proceedings involving Tenant. In addition to the other rights and remedies set forth herein, Landlord shall have the right to continue this Lease in effect, as permitted by Section 1951.4 of the California Civil Code, to enforce, by suit or otherwise, all covenants and conditions hereof to be performed or complied by Tenant and exercise of all of Landlord's rights and remedies under this Lease, including the right to recover rent from Tenant as it becomes due under this Lease, even though Tenant has breached this Lease and abandoned the premises. If as above provided, a receiver is appointed for the account of Tenant, or Landlord takes any other actions, whether accepting the keys to the premises, or otherwise, no such actions shall constitute or be construed as an election by Landlord to terminate this Lease or Tenant's right to possession of the premises, unless a written notice of such intention be given to Tenant. RECEIVERSHIP: Neither the application for the appointment of a receiver nor the appointment of a receiver shall be construed as an election by Landlord to terminate this Lease or Tenant's right to possession of the premises, unless a written notice of such intention is given to Tenant. SURRENDER OF LEASE: The voluntary or other surrender of this lease by Tenant, or a mutual cancellation thereof, shall not work a merger, and shall, at the option of Landlord, terminate all or any existing subleases or subtenancies, or may, at the option of Landlord, operate as an assignment to Landlord of any or all such subleases or subtenancies. Immediately prior to the expiration or sooner termination of this Lease, Tenant shall remove all of Tenant's signs from the exterior of the Building and shall remove all of Tenant's equipment, trade fixtures, furniture, supplies, wall decorations and other personal property from the Leased Premises, and shall vacate and surrender the Leased Premises to Landlord in the same condition, broom clean freshly repainted, as existed at the Lease Commencement Date. 10 <PAGE> 11 Landlord, at Tenant's expense shall retain a mechanical contractor to service all heating, ventilation and air conditioning equipment, and Tenant shall pay the cost to restore (or replace as required), said equipment to good working order. Tenant shall repair all damage to the Leased Premises caused by Tenant or by Tenant's removal of Tenant's property and all damage to the exterior of the Building caused by Tenant's removal of Tenant's signs. Tenant shall patch and refinish, to Landlord's reasonable satisfaction, all penetrations made by Tenant or its employees to the floor, walls or ceiling of the Leased Premises, whether such penetrations were made with Landlord's approval or not. Tenant shall replace all stained or damaged ceiling tiles and shall repair or replace, as necessary, all wall coverings and clean or replace, as may be required, floor coverings to the reasonable satisfaction of Landlord. Tenant shall replace all burned out light bulbs and damaged or stained light lenses, and shall repaint all painted walls. Tenant shall repair all damage caused by Tenant to the exterior surface of the Building and the paved surfaces of the outside areas adjoining the Leased Premises and, where necessary, replace or resurface the same. Additionally, Tenant shall, prior to the expiration or sooner termination of this Lease, remove any improvements, constructed or installed by Tenant which Landlord requests to be so removed by Tenant and repair all damage caused by such removal. If the Leased Premises are not surrendered to Landlord in the condition required by this Article at the expiration or sooner termination of this Lease, Landlord may, at Tenant's expense, so remove Tenant's signs, property and/or improvements not so removed and make such repairs and replacements not so made or hire, at Tenant's expenses, independent contractors to perform such work. Tenant shall be liable to Landlord for all costs reasonably incurred by Landlord in returning the Leased Premises to the required condition. LITIGATION EXPENSES: If either party shall bring an action against the other by reason of breach of any covenant, warranty or condition hereof, or otherwise arising out of this lease, whether for declaratory or other relief, the prevailing party in such suit shall be entitled to its costs of suit and reasonable attorney fees, which shall be payable whether or not such action is prosecuted to judgment. Prevailing party within the meaning of this paragraph shall include, without limitation, a party who brings an action against the other after the other's default, if such action is dismissed upon the other's payment of the sums allegedly due or performance of the covenants allegedly breached, or if the plaintiff or cross-complainant obtains substantially the relief sought by it in the action. UTILITIES: Tenant shall pay for all the fuel, gas, oil, heat, electricity, water, trash, telephone, janitorial and all other materials and services which may be furnished to or used in or about said premises during the term of the lease. Landlord reserves the right to procure and maintain a common garbage container, and/or common utilities; and Tenant shall reimburse Landlord, upon demand for Tenant's pro-rata share of the cost thereof. Landlord shall not be liable to Tenant for injury, damage to Tenant's property, loss of Tenant's business or profits from any failure, interruption, rationing or other curtailment in the supply of electric, gas, water or other utilities from whatever cause. 11 <PAGE> 12 LIENS: Tenant shall keep the premises and building of which the premises are a part free and clear of any liens and shall indemnify, hold harmless and defend Landlord from any liens and encumbrances arising out of any work performed or materials furnished by or at the direction of Tenant. In the event any lien is filed, Tenant shall do all acts necessary to discharge any lien within ten (10) days of filing, or if Tenant desires to contest any lien, then Tenant shall deposit with Landlord one and one-half times the amount of said lien as security for the payment of said lien claim. In the event Tenant shall fail to pay any lien claim when due or shall fail to deposit the security with Landlord, then Landlord shall have the right to expand all sums necessary to discharge the lien claim, and Tenant shall pay as additional rental, when the next rental payment is due, all sums expended by Landlord in discharging any lien, including attorney fees and costs. TAXATION: As additional rental Tenant agrees to pay to Landlord an amount equal to the total real property taxes, assessments, levies and other charges of any kind or nature whatsoever, general and special (including all installments of principal and interest required to pay any general or special assessments for public improvements) and any increases resulting from any reassessments, now or hereafter imposed by any government, quasi-government, or special district having the direct or indirect power to tax or levy assessments, which are levied or assessed for whatever reason against the project or any portion thereof including the land upon which said project is located and appurtenances thereto, or landlord's interest therein, or the fixtures, equipment, and other property of landlord that is an integral part of the project and located thereon. In the event the leased premises shall be assessed with other property of Landlord, Landlord shall use its best efforts to have the leased premises separately assessed, but if Landlord cannot obtain such separate assessment, the Tenant shall pay the total taxes assessed against all real property within such assessment that the square footage of real property within the leased premises bears to the total square footage of all rentable real property excluding common areas within the assessment. A like calculation shall be made if the improvements contained within the leased premises are assessed with other improvements; however, Tenant shall be solely responsible for any increase in taxes or assessments caused by their own construction or improvements to the leased premises. If, during the term of this lease, any special tax or assessment shall be levied solely against Landlord's individual parking spaces adjacent to the building of which the leased premises are a part, Landlord shall pay such special tax or assessment and Tenant shall reimburse Landlord upon receipt of a copy of Landlord's tax or assessment bill its proportionate share thereof in the ratio set forth above. USER PROHIBITED: Tenant shall not use, or permit said premises, or any part thereof, to the used, for any purpose of purposes other than the purpose or purposes for which the said premises are hereby leased; and no use shall be made or permitted to be made of the said premises, nor acts done, which will increase the existing rate of insurance upon the building in which said premises may be located, or cause a cancellation of any insurance policy covering said building, or any part thereof, not shall Tenant sell, or permit to be kept, used, or sold, in or about said premises, any article which may be prohibited by the standard form of fire insurance policies. Tenant shall, at Tenant's sole cost and 12 <PAGE> 13 expense, comply with any and all requirements, pertaining to said premises, of an insurance organization or company, necessary for the maintenance of reasonable fire and public liability insurance, covering said building and appurtenances. INSURANCE: Tenant shall at all times maintain commercial general liability, plate glass, worker's compensation and property damage insurance to protect against any liability to the public, or to any employee, agent or invitee of Tenant or Landlord, incident to the use of or resulting from any accident occurring in or about the premises, with limits of liability of not less than $3,000,000.00 per occurrence/$5,000,000.00 aggregate. All policies of insurance provided for herein shall: (a) Be written in companies authorized to do business in the State of California, and rated "A" or better in Best's Insurance Reports, or as specifically otherwise accepted by Landlord by written consent; (b) Be written as primary policies of insurance and not contributing with or in excess of any coverage which Landlord may carry, and cover, insurance and name Landlord as an additional assured; (c) Contain an endorsement requiring thirty (30) days written notice to Landlord prior to cancellation or any change in coverage. All public liability insurance and property damage insurance shall insure performance by Tenant of the indemnity provisions of this lease and the policies shall contain cross-liability endorsements and a waiver of all rights of subrogation against landlord. In no event shall the limits of said policies be considered as limiting the liability of tenant under this lease. Landlord shall purchase and keep in force insurance covering the building and common areas. Said insurance shall include, if available, fire, public liability, earthquake, flood, property damage, extended coverage perils, loss of rents and similar coverage and in amounts as may be deemed necessary by Landlord or as may be required by any mortgage lender. Landlord will not carry insurance on Tenant's possessions or business operations. The provisions of this paragraph shall in no way limit the right of Landlord to charge to tenants of the project as additional rent the pro-rata costs incurred by Landlord, including deductibles incurred by Landlord as a result of any insured and uninsured loss, in providing such property insurance. MUTUAL WAIVER OF SUBROGATION: Landlord hereby releases Tenant, and Tenant hereby release Landlord and its respective partners and officers, agents, employees and servants, from any and all liability for loss, damage or injury to the property of the other in or about the Leased Premises which is caused by or results from a peril or event or happening which would be covered by insurance required to be carried under the terms of this Lease, or is covered by insurance actually carried and in force at the time of the loss, by the party sustaining such loss; provided, however, that such waiver shall be effective only to the extent permitted by the insurance covering such loss and to the extent such insurance is not prejudiced thereby. COMPLIANCE WITH GOVERNMENTAL REGULATIONS: Tenant shall, at his sole cost and expense, comply with all of the requirements of all Municipal, State and Federal authorities now in force, or which may hereafter be in force, pertaining to the said premises, and shall faithfully observe in the use of the premises all Municipal ordinances and State and Federal statutes now in force or which may hereafter be in force. The judgment 13 <PAGE> 14 of any court of competent jurisdiction, or the admission of Tenant in any action or proceeding against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such ordinance or statute in the use of the premises, shall be conclusive of that fact as between Landlord and Tenant. EFFECTS OF CONVEYANCE: The term "Landlord" as used in this lease, means only the owner for the time being of the land and building containing the premises. In the event of any sale of said land or building, the Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations as the Landlord hereunder accruing after the date of said transfer, and it shall be deemed and construed, without further agreement between the parties that the purchaser of said property shall assume and agree to carry out any and all covenants of this lease on the part of the Landlord. The Landlord shall transfer and deliver the security, as such, to the purchaser of said property, and thereupon the Landlord shall be discharged from any further liability in reference thereto. ADVERTISEMENTS AND SIGNS: Landlord reserves the right to the use of the exterior walls and the roof of the premises and of the building of which the premises are a part. Tenant shall not inscribe, paint or affix any signs, advertisements, place card or awnings on the exterior or roof of the premises or upon the entrance doors, window, or the sidewalk on or adjacent to the premises without the prior written consent of Landlord. Any signs so placed on the premises shall be so placed upon the understanding and agreement that Tenant will remove same at the termination of this lease and will repair any damage or injury to the premises caused thereby, and if not so removed by Tenant, then Landlord may remove it at Tenant's expense. DESTRUCTION OF PREMISES: If the building in which the herein demised premises is situated shall be damaged or destroyed by fire, earthquake, act of God, or the elements, Tenant shall give immediate notice thereof to Landlord and Landlord shall forthwith repair the same, provided that there are sufficient proceeds from said insurance to cover the cost of restoration (assuming Landlord is carrying the insurance required to be carried by landlord by this lease), and provided such repairs can be made under the laws and regulations of State, County or Municipal authorities, but such destruction or damage shall in no event annul or void this lease. Tenant shall be entitled to a proportionate deduction of rent while such repairs are being made, such proportionate deduction to be based upon the extent to which the making of such repairs shall interfere with the business carried on by the Tenant in the said premises. If such repairs can not be made in said manner in sixty (60) days, the Landlord may, at its option, make same within a reasonable time, this lease continuing in full force and effect, but the Tenant shall be entitled to a proportionate deduction of rent while such repairs are being made as herein above provided. In the event that the Landlord does not so elect to make such repairs, this lease may be terminated at the option of either party. In the event that the Landlord within sixty (60) days of the date of the destruction does not notify Tenant in writing of Landlord's intent to elect to make such repairs, this lease may be terminated at the option of either party. In respect to any damage or destruction which Landlord is obligated to repair or may elect to repair under the terms of this paragraph, the provision of Section 1932, Subdivision 2, and of Section 1933, 14 <PAGE> 15 Subdivision 4, of the Civil Code of the State of California are waived by Tenant. CONDEMNATION: The word "condemnation" or "condemned" as used in this lease shall mean the exercise of, or intent to exercise the power of eminent domain expressed by the condemn in any writing as well as by the filing of any action or proceeding for such purpose, by any entity having the right of power of eminent domain, and shall include a voluntary sale by Landlord to any such entity, either under threat of condemnation or while condemnation proceedings are pending, and "condemnation" shall occur upon the actual physical taking of possession by the condemnor. In the event the demised premises are condemned, this lease shall terminate, and Landlord shall be entitled to and shall receive the total amount of any award made with respect thereto, regardless of whether the award is based on a single award or a separate award as between Landlord and Tenant, and, if and to the extent that any such award or awards shall be made to Tenant or to any person, firm, or corporation claiming through or under Tenant. Tenant hereby irrevocably assigns to Landlord all of its right, title and interest in and to any and all such awards. The foregoing notwithstanding, Landlord shall turn over to Tenant that portion of any such award received by Landlord hereunder which is attributable to Tenant's fixtures and equipment which are condemned as part of the real property but which Tenant would otherwise be entitled to remove, and the appraisal of the court, or the condemning entity if the condemnation is not determined by a court, of the amount of any such award allocatable to such items shall be conclusive. If total award be fixed by negotiation and be greater than the condemning entity's appraisal, the portion attributable to Tenant's fixtures and equipment aforesaid shall be the same proportion of the actual award as said fixtures and equipment were of the entity's appraisal. WAIVER: No waiver by Landlord of any provision of this lease shall be deemed to be a waiver of any other provisions hereof or of any subsequent breach by Tenant of the same or any other provisions. Landlord's consent to or approval of any act by Tenant requiring Landlord's consent or approval shall not be deemed to render unnecessary the obtaining of Landlord's consent to or approval of any subsequent act by tenant, whether or not similar to the act so consented to or approved. SUBORDINATION: Tenant agrees that this lease is and shall be subject and subordinate to any mortgage, deed of trust or other instrument of security which has been or shall be placed on the land and building or land or building of which the premises form a part, and this subordination is hereby made effective without any further act of Tenant. The Tenant shall, at any time hereafter, within ten days, execute any commercially reasonable instruments, releases or other documents that may be required by any mortgagee, mortgagor or trustor or beneficiary under any deed of trust for the purpose of subjecting and subordinating this lease to the lien of any such mortgagee, deed of trust or other instrument of security, and the failure of the Tenant to execute any such instruments, release or documents, shall constitute a default hereunder. NOTICES: It is agreed between the parties hereto that any notice required hereunder or by law to be served upon either of the parties shall be in 15 <PAGE> 16 writing and shall be delivered personally upon the other or sent by registered or certified mail, postage prepaid, addressed to the demised premises, in the instance of Tenant, and to the place where rental is paid, in the instance of Landlord, or to such other address as may be from time to time furnished in writing by Landlord to Tenant or by Tenant to Landlord, each of the parties hereto waiving personal or any other service than as herein provided. Notice by registered or certified mail shall be deemed to be communicated forty-eight (48) hours from the time of mailing. SUCCESSORS AND ASSIGNS: The covenants and agreements contained in this lease shall be binding upon the parties hereto and upon their respective heirs, executors, administrators, successors and assigns; and all of the parties hereto shall be jointly and severally liable hereunder. REMEDIES CUMULATIVE: The remedies available to Landlord under the terms of this agreement and in law or equity shall be cumulative and the exercise of one remedy shall not constitute an election of remedies. SEVERABILITY: Any provision of this lease which shall prove to be invalid, void or illegal shall in no way affect, impair or invalidate any other provision hereof, and such remaining provisions shall remain in full force and effect. TIME: Time is of the essence of this lease. MARGINAL CAPTIONS: The captions in the margins of this lease are for convenience only and are not a part of this lease and do not in any way limit or amplify the terms and provisions of this lease. TRASH: All trash containers belonging to Tenant are to be stored in the supplied trash enclosure or within the Tenant's rented space. LEASED PREMISES: The leasable area is measured to the outside edge of the outside walls and drip lines to the centerline of any demising walls (if there are any), including a pro rata share of the electrical room and other common spaces and for purposes of this lease, agreed between Landlord and Tenant to contain said number of square feet. COMMON AREAS: Tenant shall have the exclusive right to use the common areas solely for the purposes which they were intended and for no other purposes whatsoever. Tenant and its employees and invitees shall have the exclusive right to use all parking spaces. Tenant hereby authorizes Landlord at Tenants sole expense to tow away from the project and store until redeemed by its owner any vehicle belonging to Tenant, or Tenant's employees parked in violation of these provisions. Tenant shall not, at any time, park or permit to be parked any recreational vehicles, inoperative vehicles or equipment on any portion of the property. Landlord shall at all times have exclusive control of the common areas including without limitation the right to prohibit mobile food and beverages or other vendors from entering the property. HAZARDOUS & TOXIC SUBSTANCES: Tenant shall comply with all statutes, laws, ordinances, rules regulations and precautions mandated or advised by any federal, state or local or governmental agency with respect to the use, generation, storage or disposal of hazardous, toxic or 16 <PAGE> 17 radioactive materials (collectively, "Hazardous Materials"). As herein used, Hazardous Materials shall include, but not limited to, those materials, identified in Sections 66680 through 66685 of Title 22 of the California Administration Code, Division 4, Chapter 30, as amended from time to time, and those substances defined as "hazardous substances", "hazardous material", "hazardous wastes", or other similar designations in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 6901 et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq., the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801 et seq. And any other governmental statutes, laws, ordinances, rules, regulations and precautions concerning the environment. Tenant shall not cause or allow anyone else to cause, any Hazardous Materials to be used, generated, stored or disposed or on or about the premises, the building or the project without the prior written consent of Landlord. Landlord shall not unreasonably withhold approval. Any willful withholding from landlord of information relating to hazardous materials used or stored by tenant shall constitute a default under the terms of the lease and shall be cause for lease termination at Landlord's option. Tenant's prior indemnity shall extend to all liability, including all foreseeable and unforeseeable consequential damages, directly or indirectly arising out of the use, generation, storage or disposal of Hazardous Materials by Tenant or any person claiming under Tenant, including without limitation, the cost of any required or necessary repairs, cleanup or detoxification and the preparation of any closure or other required plans, whether such action is required or necessary prior to or following the termination of this lease, to the full extent that such action is attributable, directly or indirectly, to the use, generation, storage or disposal of Hazardous Materials by Tenant or any person claiming under Tenant in violation of environmental laws. Neither the written consent by Landlord to the use, generation, storage or disposal of Hazardous Materials nor the strict compliance by Tenant with all statutes, laws, ordinances, rules, regulations and precautions pertaining to Hazardous Materials shall excuse Tenant from Tenant's obligation of indemnification pursuant to this subsection. LIMITATION OF LIABILITY: Tenant agrees that in the event of any default or breach by Landlord with respect to any of the terms of the Lease to be observed and performed by Landlord (a) Tenant shall look solely to the estate and property (which is the subject of this lease) of Landlord or any successor in interest in the property and the Building, for the satisfaction of Tenant's remedies for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord; (b) no other property or assets of Landlord, its partners, shareholders, officers or any successor in interest shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies; (c) no personal liability shall at any time be asserted or enforceable against Landlord, it's partner's or successors in interest (except to the extent permitted in (a) above), and no judgment will be taken against any partner, shareholder, officer or director of Landlord. The provisions of this section shall apply only to the Landlord and the parties herein described, and shall not be for the benefit of any insurer nor any other third party. SECURITY MEASURES: Tenant hereby acknowledges that Landlord shall have no obligation whatsoever to provide guard service or any other security 17 <PAGE> 18 measures for the benefit of the Premises or the complex in which it is located. Tenant assumes all responsibility for the protection of Tenant, its agents, and invitees and the property of Tenant and of Tenant's agents and invitees from acts of third parties. ESTOPPEL CERTIFICATES. Upon written request of Landlord, Tenant shall within ten (10) days execute, acknowledge and deliver to Landlord or its designee, a written certificate stating (a) the date this Lease was executed, the Commencement and Expiration Date of the Term; (b) the amount of Rent and Security Deposit and the date to which such rent has been paid; (c) that this Lease is in full force and effect and has not been assigned, modified, supplemented or amended in any way (or if modified stating the nature of such modification and certifying that this lease as so modified is in full force and effect); (d) that this lease represents the entire agreement between the parties and that all obligations, including Tenant Improvements, under this lease have been performed by Landlord; (e) that on such date there exist no defenses or offsets that Tenant has against the enforcement of this Lease by Landlord; (f) or any other matters evidencing the status of this lease that may be required either by a lender making a loan on the premises or by a purchaser of the premises. If Tenant shall fail to provide such certificate within ten (10) days of receipt by Tenant of a written request by Landlord as herein provided and a second consecutive written request with five (5) days, such failure shall, at Landlord's election, constitute a default under this lease, and Tenant shall be deemed to have given such certificate as above provided without modification and shall be deemed to have admitted the accuracy of any information supplied by Landlord to a prospective purchaser or mortgagee. AUTHORITY: If tenant is a corporation, tenant represents and warrants that each individual executing this lease on behalf of said corporation is duly authorized to execute and deliver this lease on behalf of tenant in accordance with the bylaws and/or board of director's resolution of tenant that Tenant is validly formed and duly authorized and existing, that Tenant is qualified to do business in California, that Tenant has the full right and legal authority to enter into this Lease, and that this lease is binding upon tenant in accordance with its terms. LANDLORD WARRANTIES: Tenant acknowledges that neither landlord nor any of its agents made any representations or warranties respecting the project, the buildings, or the leased premises, upon which tenant relied in entering into this lease, which are not expressly set forth in this lease. Tenant further acknowledges that neither Landlord nor any of its agents made any representations as to (i) whether the leased premises may be used for tenant's intended use under existing law or; (ii) the suitability of the leased premises for the conduct of tenant's business or; (iii) the exact square footage of the leased premises; that tenant relied solely upon its own investigations respecting said matters and that upon its execution of this lease, accepts the leaseable area as specified herein. Tenant expressly waives any and all claims for damage by reason of any statement, representation, warranty, promise or other agreement of landlord or landlord's agent(s), if any, not contained in this lease or in any addenda hereto. 18 <PAGE> 19 IN WITNESS WHEREOF the parties hereto have executed this lease agreement the day and year first above written. PLEASE READ THIS LEASE CAREFULLY: LANDLORD OR ITS AGENTS OR EMPLOYEES, ARE NOT AUTHORIZED TO GIVE LEGAL, TAX OR ACCOUNTING ADVICE. IF YOU DESIRE SUCH ADVICE, CONSULT YOUR ATTORNEY AND/OR ACCOUNTANT BEFORE SIGNING. LANDLORD De Guigne Ventures, A California LLC By: David Dollinger Living Trust Its: Managing Member By: /s/ DAVID DOLLINGER --------------------------------- David Dollinger Trustee TENANT Skystream Corporation, Inc. By: /s/ JAMES OLSON -------------------------------- James Olson President & CEO By: /s/ DAVID OLSON -------------------------------- David Olson VP Operations 19 <PAGE> 20 FIRST ADDENDUM TO LEASE ----------------------- THIS FIRST ADDENDUM TO LEASE (this "Addendum") is made by and between DE GUIGNE VENTURES, a California limited liability company ("Landlord"), and SKYSTREAM CORPORATION, a California corporation ("Tenant"), to be a part of that certain Lease of even date herewith between Landlord and Tenant (the "Lease") concerning approximately 46,104 rentable square feet of space (the "Premises") of the building located at 455 De Guigne, Sunnyvale, California. All terms with initial capital Letters used herein as defined terms shall have the meanings ascribed to them in the Lease unless specifically defined herein. Landlord and Tenant agree that, notwithstanding anything to the contrary in the Lease, the Lease is hereby modified and supplemented as follows: 1. Commencement Date. The Lease shall commence on the date (the "Commencement Date") that is the later of July 15, 2000, or (unless waived by Tenant in writing) the date by which all of the following have occurred: (a) Landlord has substantially completed the Tenant Improvements in accordance with the Lease and this Addendum; (b) Landlord has delivered possession of the Premises to Tenant; and (c) Landlord has obtained all approvals and permits from the appropriate governmental authorities required for the legal occupancy of the Premises (unless such approvals and permits are delayed because of work being done by Tenant or the installation of Tenant's equipment). If the Commencement Date has not occurred for any reason whatsoever on or before September 30, 2000, then, in addition to Tenant's other rights or remedies, Tenant may terminate the Lease by written notice to Landlord, whereupon any monies previously paid by Tenant to Landlord shall be reimbursed to Tenant. In the event the Commencement Date occurs on any date other than July 15, 2000, the expiration date rent adjustment dates and similar dates shall be adjusted to reflect the actual Commencement Date. 2. Premise; Conditions. Tenant shall also have the exclusive right to use the entire parcel of land on which the Premises are situated, together with all appurtenances thereto and improvements thereon (collectively, the "Project"), including without limitation all parking spaces currently located thereon. Landlord warrants and represents that, as of the Commencement Date, (i) the Premises and the Project will comply with all applicable laws, rules, regulations, codes, ordinances, underwriters' requirements, covenants, conditions and restrictions ("Laws"), (ii) the Premises will be in good and clean operating condition and repair, (iii) the electrical, mechanical, HVAC, plumbing, sewer, elevator and other systems serving the Premises will be in good operating condition and repair, and (iv) the roof of the Premises will be in good condition and water tight. Landlord shall, promptly after receipt of notice from Tenant, remedy any non-compliance with such warranty at Landlord's sole cost and expense. 3. Building Operating Expenses. "Building Operating Expenses" shall not include and Tenant shall in no event have any obligation to perform or to pay directly, or to reimburse Landlord for, all or any portion of the following repairs, maintenance, improvements, replacements, premiums, claims, losses, fees, charges costs and expenses (collectively "Costs"): (a) Costs occasioned by the act, omission or violation of any Law by Landlord or its agents, employees or contractors; (b) Costs occasioned by fire, acts of God, or other casualties or by the exercise of the power of eminent domain (except for the deductibles as limited in (f) below; (c) Costs to correct any construction defect in the Premises or the Project or to comply with any covenant, condition, restriction, underwriter's requirement or law applicable to the Premises or the Project on the Commencement Date; (d) Costs incurred in connection with the violation by Landlord of the terms and conditions of any lease or other agreement; (e) Costs for insurance deductibles for all risk in excess of $10,000 and for earthquake in excess of $300,000 and co-insurance payments; (f) Costs incurred in connection with the presence of any Hazardous Material, except to the extent caused by the release or emission of the Hazardous Material in question by Tenant; (h) Costs in the nature of depreciation, amortization or other expense reserves; (i) Costs to repair, replace, restore or maintain the structural portions of the Premises (including roof); (j) lease payments and Costs for machinery and equipment, such as air conditioners, elevators and the like in lieu of purchasing same and (k) compensation for any employee of Landlord or any compensation retained by landlord or its affiliates for management and administration of the <PAGE> 21 Premises or the Project in excess of the reasonable management fee which would be charged by an unaffiliated professional management service for operation of comparable projects in the vicinity. Tenant shall have the right to audit Building Operating Expenses one time per year. If the results of such audit disclose that Tenant has overpaid Building Operating Expenses by more than five percent (5%) of the accurate amount of Building Operating Expenses payable by Tenant, then Landlord shall pay the cost of such audit, which cost shall not exceed $1,000 in each instance. 4. Taxes. "Taxes" shall not include and Tenant shall not be required to pay any tax or assessment expense or any increase therein (i) levied on Landlord's rental income, unless such tax or assessment expense is imposed in lieu of real property taxes; (ii) in excess of the amount which would be payable if such tax or assessment expense were paid in installments over the longest possible term; (iii); (iv) attributable to Landlord's net income, inheritance, gift, estate or state taxes; or (v) resulting from the change of ownership or transfer of any interest in the Premises or the Project in excess of one time every five (5) years or from the improvement of any of the Premises or the Project for the sole use of other occupants. 5. Renewal Option. If Landlord and Tenant are unable to reach agreement as to the Market Rate within thirty (30) days after Landlord's receipt of Tenant's notice of exercise of Tenant's Renewal Option, then either party may demand an appraisal by giving written notice to the other party, which demand must state the name, address and qualifications of an appraiser selected by the party demanding an appraisal (the "Notifying Party"). The Market Rate shall then be determined as follows: (a) Within ten (10) business days following the Notifying Party's appraisal demand, the other party (the "Non-Notifying Party") shall either approve the appraiser selected by the Notifying Party or select a second properly qualified appraiser by giving written notice of the name, address and qualifications of such other appraiser to the Notifying Party. If the Non-Notifying Party fails to select an appraiser within such ten (10) business day period, then the Notifying Party's appraiser shall be deemed selected by both parties and no other appraiser shall be selected. If two appraisers are selected, such two appraisers shall select a third qualified appraiser within ten (10) business days following selection of the second appraiser. If the two appraisers fail to select a third qualified appraiser, then the third appraiser shall be appointed by the then presiding judge of the Superior Court of Santa Clara County upon application by either party. (b) If only one appraiser is selected, then that appraiser shall notify the parties in simple letter form of its determination of the Market Rate within fifteen (15) business days following his/her selection, which appraisal shall be conclusive and binding on the parties as the Market Rate. If multiple appraisers are selected, the appraisers shall meet not later than fifteen (15) business days following the selection of the last appraiser. At such meeting, the appraisers shall attempt to determine the Market Rate as of the termination date of the Lease by agreement of at least two (2) of the appraisers. If two (2) or more of the appraisers agree on the Market Rate at the initial meeting, such agreement shall be determinative and binding upon the parties and the agreeing appraisers shall, in simple letter form executed by the agreeing appraisers, forthwith notify both Lessor and Lessee of the amount set by such agreement. If multiple appraisers are selected and two (2) appraisers are unable to agree on the Market Rate, then all appraisers shall submit to Lessor and Lessee an independent appraisal of the Market Rate within twenty (20) business days following appointment of the final appraiser. The parties shall then determine the Market Rate by averaging the appraisals, provided that any high or low appraisal, differing from the middle appraisal by more than ten percent (10%) of the middle appraisal, shall be disregarded. (c) All appraisers shall be members of the American Institute of Real Estate Appraisers and shall have at least five (5) years experience appraising properties comparable to, and in the vicinity of, the Premises. If only one appraiser is selected, then each party shall pay one-half (1/2) of the fees of that appraiser. If three appraisers are selected, each party shall bear the fees of the appraiser that it selected and one-half (1/2) of the fees of the third appraiser. -2- <PAGE> 22 (d) Notwithstanding the foregoing, in no event shall the Market Rate be less than eighty-five percent (85%) of the Base Rent for the last year of the Term and the Market Rate shall be increased three percent (3%) per year during the Option Term. 6. Tenant Improvements. (a) Landlord shall cause proposed final plans for the Tenant Improvements to be prepared as quickly as possible, all of which shall conform to and represent logical evolutions of or developments from Exhibit A to the Lease. The plans shall be delivered to Tenant immediately upon completion. Within ten (10) working days after receipt thereof, Tenant may, at its election (i) approve the plans, or (ii) deliver to Landlord specific written changes to such plans as are necessary, in Tenant's opinion, to conform such plans to such Exhibit A. If Tenant desires to make changes to such plans, Landlord shall not unreasonably withhold its approval of such changes and the parties shall confer and negotiate in good faith to reach agreement on modifications to the plans as a consequence of such changes. As soon as approved by Landlord and Tenant, Landlord shall submit the approved plans to all appropriate governmental agencies and thereafter Landlord shall use its best efforts to obtain all required governmental approvals as soon as possible. No changes may be made in the approved plans without Landlord's and Tenant's approval (not to be unreasonably withheld). Notwithstanding the foregoing, if Tenant makes any changes to the plans after the execution date of the Lease, Tenant shall pay for the costs, if any, of these changes. Any changes that increase the cost of the Tenant Improvements shall be referred to as Extras. (b) Landlord shall select the general contractor to construct the Tenant Improvements (the "General Contractor"). The General Contractor is the contractor of Landlord only, and Tenant shall have no liability to the General Contractor under the construction contract. Notwithstanding the foregoing, Tenant shall have the right to select its own general contractor for performing any Extras. (c) Landlord shall pay all costs associated with the Tenant Improvements, subject to the specifications and plans attached hereto as Exhibit A. In addition, Landlord shall pay and Tenant shall have no responsibility for, the following costs associated with any improvements made by Tenant: (i) costs attributable to improvements installed outside the demising walls of the Premises unless such improvements are requested by Tenant; (ii) costs incurred to remove Hazardous Materials from the Premises or the Project; (iii) costs incurred as a consequence of delay (unless the delay is caused by Tenant), construction defects or defaults by any contractor; (iv) costs recoverable by Landlord on account of warranties or insurance; (v) restoration costs in excess of insurance proceeds as a consequence of casualties; (vii) penalties and late charges attributable to Landlord's failure to pay construction costs; (vii) costs to bring the Premises or the Project into compliance with applicable Laws, including, without limitation, the Americans with Disabilities Act and Hazardous Materials Laws; and (viii) Landlord's construction supervision costs or other general overhead costs. (d) Effective upon delivery of the Premises to Tenant, Landlord warrants that (i) construction of the Tenant Improvements was performed in accordance with all Laws and the final approved plans and in a good and workmanlike manner, and (ii) all material and equipment installed in the Premises conformed to such approved plans and was new and otherwise of good quality. (e) So long as such occupancy does not interfere with Landlord's construction of the Tenant Improvements, Tenant shall have the right to occupy the Premises prior to substantial completion of the Tenant Improvements for the purpose of installing Tenant's equipment, data and telecommunications systems, and trade fixtures. Any such occupancy shall be subject to all of the terms of the Lease except the obligation to pay rent. -3- <PAGE> 23 7. Repairs and Maintenance. Landlord shall perform and construct, and Tenant shall have no responsibility to perform or construct, any repair, maintenance or improvements (a) necessitated by the acts or omissions of Landlord, or its respective agents, employees, contractors or invitees, (b) occasioned by fire, acts of God or other casualty or by the exercise of the power of eminent domain, (c) required as a consequence of any violation of any Laws or construction defects in the Premises or the Project as of the Commencement Date and (d) for which Landlord has a right of reimbursement from others. In performing all repair and maintenance, Landlord shall use its best efforts to minimize any disruption to Tenant. Tenant shall not be required to comply with or cause the Premises or the Project to comply with any Laws unless such compliance is necessitated solely due to Tenant's alterations. Tenant shall not be required to comply with any rule or regulation unless the same does not unreasonably interfere with Tenant's use of, access to, or parking at the Premises, and does not materially increase the obligations or decrease the rights of Tenant under the Lease. 8. Capital Improvements. If a capital improvement to the Premises or Building is required pursuant to this Lease for any reason, except as a result of Tenant's alterations or improvements (but not the Tenant Improvements), then within fifteen (15) business days after Tenant delivers evidence reasonably satisfactory to Landlord substantiating Tenant's payment of such capital improvement, Landlord shall reimburse Tenant for the cost of the improvement less that portion of the cost equal to the product of such total cost multiplied by a fraction, the numerator of which is the number of years remaining in the Term, the denominator of which is the useful life (in years) of the capital improvement as reasonably determined by Landlord in accordance with generally accepted accounting principles. If the above referenced capital improvement is made during the initial Term, Tenant's share shall initially be based on the initial Term and if Tenant thereafter exercises its Renewal Option, then upon the commencement of the Option Term, after deducting amounts previously paid by Tenant on account of such capital improvements, an adjustment shall be made so that during the Option Term Tenant shall pay the balance of its share determined by multiplying the cost of the capital improvement by a fraction, the numerator of which is the number of years remaining in the Lease Term including the Option Term and the denominator of which is the useful life of the capital improvement. Notwithstanding the foregoing, Landlord shall have the right to reasonably approve such capital improvement and to perform such capital improvement instead of Tenant. 9. Alterations; Tenant's Property. Tenant may construct non-structural alterations, additions and improvements ("Alterations") in the Premises without Landlord's prior approval, if the cost of any such project does not exceed Twenty-Five Thousand Dollars ($25,000). Alterations and Tenant's trade fixtures, furniture, equipment and other personal property installed in the Premises ("Tenant's Property") shall at all times be and remain Tenant's property. Except for Alterations which cannot be removed without structural injury to the Premises, at any time Tenant may remove Tenant's Property from the Premises, provided that Tenant repairs all damage caused by such removal. Landlord shall have no right to require Tenant to remove any Alterations unless it notifies Tenant at the time it consents to such Alteration that it shall require such Alteration to be removed. Landlord shall have no security interest or lien on any item of Tenant's Property. Within ten (10) days following Tenant's request, Landlord shall execute documents reasonably acceptable to Tenant to evidence Landlord's waiver of any right, title, lien or interest in Tenant's Property and giving any lenders holding a security interest or lien on Tenant's Property reasonable rights of access to the Premises to remove such Tenant's Property, provided that such lenders repair any damage caused by such removal. 10. Utilities; Services. If there is any interruption, failure, stoppage or interference of the utilities, services or access to be furnished by Landlord to the Premises under the Lease due to the presence of any Hazardous Materials in, on or about the Building or the Project (except to the extent released by Tenant), and such interruption continues for seven (7) consecutive calendar days, then Tenant shall be entitled to an equitable abatement of rent to the extent of the interference with Tenant's use of the Premises occasioned -4- <PAGE> 24 thereby. If the interference persists for more than thirty (30) consecutive calendar days, then Tenant shall have the right to terminate the Lease. 11. Assignment and Subletting. Tenant may, without Landlord's prior written consent and without payment of any amount to Landlord, sublet the Premises or assign the Lease to (a) a subsidiary, affiliate, division or corporation controlling, controlled by or under common control with Tenant, (b) a successor corporation related to Tenant by merger, consolidation, nonbankruptcy reorganization, or government action, or (c) a purchaser of substantially all of Tenant's assets, provided that in each instance the entity has a net worth that is greater than or equal to that of Tenant at the time of the event. Neither the sale or transfer of Tenant's capital stock, including, without limitation, a transfer in connection with the merger, consolidation or nonbankruptcy reorganization of Tenant and any sale through any private or public offering, nor the pledge of or grant of a security interest in any of the Tenant's capital stock, shall be deemed an assignment, subletting or other transfer of the Lease or the Premises. Assignment Consideration and Excess Rental shall be determined by deducting from the gross amounts thereof all brokerage commissions and other marketing expenses paid or payable by Tenant in connection with such assignment or sublease, all costs of alterations and improvements to the Premises in connection with such sublease or assignment. 12. Default. Tenant shall not be deemed to be in default, nor shall any late charge be imposed, on account of Tenant's failure (a) to pay rent to Landlord, unless such failure to pay continues for five (5) days after Tenant's actual receipt of written notice of the delinquency or (b) to perform any other covenant of the Lease, unless such failure continues after Tenant's actual receipt of written notice for a period of thirty (30) days or such longer time as may reasonably be required to cure the default. No default by Tenant shall be deemed to occur as a result of any involuntary appointment of a receiver or the institution of any involuntary bankruptcy or similar actions of creditors unless the same has not been vacated or dismissed within sixty (60) days. 13. Surrender. Tenant's obligations with respect to the surrender of the Premises shall be fulfilled if Tenant surrenders possession of the Premises in the condition existing at the Commencement Date, excepting ordinary wear and tear, acts of God, casualties, condemnation, Hazardous Materials (other than those released by Tenant), and Alterations or other interior improvements which Tenant is not required to remove at the termination of the Lease. Under no circumstance shall Tenant be required to remove any of Tenant's initial improvements constructed at the Premises. 14. Landlord's Insurance; Waiver of Subrogation. Landlord shall maintain "all risk" property insurance insuring against risk of loss of damage to the Project and the Premises for the full replacement cost thereof. Notwithstanding anything in the Lease to the contrary, Landlord and Tenant hereby release each other and their respective agents, employees, successors, assignees and sublessees from all liability for injury to any person or damage to any property that is caused by or results from a risk which is actually insured against, which is required to be insured against under the Lease, or which would normally be covered by "all risk" property insurance, without regard to the negligence or willful misconduct of the person or entity so released. All of Landlord's and Tenant's repair and indemnity obligations under the Lease shall be subject to the waiver and release contained in this paragraph. Each party shall cause each insurance policy it obtains to provide that the insurer thereunder waives all recovery by way of subrogation as required herein in connection with any injury or damage covered by such policy. 15. Damage; Condemnation. Landlord shall not have the right to terminate the Lease and shall repair and restore the Premises and the Project if the damage to the Premises or the Project is (a) due to a risk required to be insured against by Landlord under the Lease to the extent of the proceeds available to Landlord from such insurance or (b) relatively minor (e.g., repair or restoration would cost less than ten percent (10%) of the replacement cost of the Premises). If the Premises are damaged by any peril, then Tenant shall have the option to terminate the Lease if the Premises and the Project cannot be, or are not in fact, fully restored by -5- <PAGE> 25 Landlord to their prior condition within nine (9) months after the damage. Whenever Base Rent is to be abated under the Lease, all Base Rent and Additional Rent shall be equitably abated based upon the extent to which Tenant's use of the Premises is diminished. Additionally, if there is a taking of 25% or more of the Building or 20% or more of the land, then Tenant Base Rent and Additional Rent shall be equitably abated based upon the extent to which Tenant's use of the Premises is diminished. Notwithstanding the foregoing, Landlord shall not be required to repair or restore the Premises during the last two years of the Term unless Tenant exercises its Renewal Option or during the last two years of the Option Term. 16. Subordination. The subordination of Tenant's rights and interest under the Lease to any mortgage or deed of trust shall be contingent upon Tenant's having received from any such mortgagee or beneficiary of any deed of trust a written recognition agreement in form reasonably satisfactory to Tenant providing that Tenant's rights and interest shall not be disturbed in the event of any foreclosure of any such mortgage or deed of trust and confirming that Tenant shall receive all of the rights and services provided for under the Lease. Prior to the Commencement Date, Landlord shall deliver to Tenant such a written recognition agreement from any mortgagee or beneficiary of any deed of trust currently encumbering the Premises. 17. Hazardous Materials. To the best knowledge of Landlord, (a) no Hazardous Material is present in the Premises or at the Project or the soil, surface water thereof, (b) no underground storage tanks are present on the Premises or the Project, and (c) no action, proceeding or claim is pending or threatened regarding the Project or the Premises concerning any Hazardous Material or pursuant to any environmental Law. Under no circumstance shall Tenant be liable for, and Landlord shall indemnify, defend, protect and hold harmless Tenant, its agents, contractors, stockholders, directors, successors, representatives, and assigns from and against, all losses, costs, claims, liabilities and damages (including attorneys' and consultants' fees) of every type and nature, directly or indirectly arising out of or in connection with any Hazardous Material present at any time in, on or about the Project, the Premises, or the soil, air, improvements, groundwater or surface water thereof, or the violation of any environmental Law, except to the extent that any of the foregoing actually results from the release or emission of Hazardous Material by Tenant or Tenant's Agents in violation of applicable environmental Laws. Tenant shall have the right to use and store at the Premises reasonable quantities of Hazardous Materials used by Tenant as cleaning and office supplies. 18. Approvals. Whenever the Lease requires an approval, consent, designation, determination, selection or judgment by either Landlord or Tenant, such approval, consent, designation, determination, selection or judgment and any conditions imposed thereby shall be reasonable and shall not be unreasonably withheld or delayed and, in exercising any right or remedy hereunder, each party shall at all times act reasonably and in good faith. 19. Reasonable Expenditures. Any expenditure by a party permitted or required under the Lease, for which such party is entitled to demand and does demand reimbursement from the other party, shall be limited to the fair market value of the goods and services involved, shall be reasonably incurred, and shall be substantiated by documentary evidence available for inspection and review by the other party or its representative during normal business hours. -6- <PAGE> 26 IN WITNESS WHEREOF, the parties have executed this Addendum. LANDLORD: TENANT: DE GUIGNE VENTURES, SKYSTREAM CORPORATION, a California limited liability company a California corporation By: /s/ D. Dollinger By: /s/ James D. Olson ------------------------------------ ---------------------------- Name: D. Dollinger Name: James D. Olson ---------------------------------- --------------------------- Title: Managing Member Title: President & CEO ---------------------------------- -------------------------- -7- <PAGE> 27 EXHIBIT "A" TENANT IMPROVEMENT SPECIFICATIONS SKYSTREAM CORPORATION 455 DE GUIGNE ST. SUNNYVALE, CALIFORNIA The landlord shall provide a generic turnkey office improvement as per the attached plan. The following are some specific specifications to amplify the plans where not stated otherwise: WALLS 1. All interior walls shall be built as shown on the plan and have steel studs covered in 5/8" sheetrock, taped, topped and textured. 2. All exterior walls will be insulated per energy requirements and furred out. 3. All columns will be furred out. 4. All walls will be spray textured and painted Kelly Moore bone white unless otherwise specified in advance by tenant. 5. All walls will extend above the adjoining ceiling grids. 6. If tenant chooses to install wallpaper on certain walls then landlord will only tape and sand those walls. 7. The wall of the demo room facing the lobby to be as much glass as possible. 8. The wall of the classroom to have a window as shown. 1 <PAGE> 28 9. The low wall on the second floor balcony shall be sheetrock open above except on the sides where an office is adjacent is located it shall have glass above the low wall to the ceiling. 10. Any strange shaped walls, any soffit structures, any strange ceiling configurations shall be paid for by tenant. 11. Any multiple paint configurations, murals shall be paid for by tenant, except that Tenant shall be permitted to have some accent walls (provided the wall has one accent color) and rooms of different colors (provided the room is one color). CEILINGS 1. All ceilings, except the restrooms and warehouse, are to be new white metal t-bar suspension system with 2'x4' acoustical grid. 2. Tiles shall be white Armstrong acoustical 24" by 48" lay-in tiles second look II. 3. Restroom, and shower ceilings to be new water resistant sheetrock, taped and finished. 4. All ceilings to have new bracing and seismic ties. 5. Ceiling shall be level and in a flat plane and at their current height (10 feet on the first floor and 9 feet on the second Floor). PAINTING 1. All paint to cover regardless of how many coats may be necessary. 2. All offices to be painted Kelly Moore bone white flat. Doors 1. All doors to be 9' prefinished hollow core birch with all the necessary building hardware required to complete the job. 2 <PAGE> 29 2. All doors to have three butts by Stanley or equivalent. 3. All locks by Schlage. (lever locks-26d finish) 4. All miscellaneous door hardware by Schlage. 5. All doors to have proper signage per applicable codes. 6. All conference rooms, training rooms to have 4 foot glass sidelights where possible (as shown on plan) with aluminum frames. 7. All exterior doors will have door closures (surface mounted Norton or equal). 8. All outside doors will be keyed with one master key. 9. All doorframes to be in aluminum. 10. Doors to labs and warehouse to be double doors as shown. PLUMBING 1. Existing restrooms and showers to remain and made to be ADA compliant (if needed). Any changes to the existing restroom cores will be split 50/50 between the tenant and the landlord. 2. Landlord to install lockers in the shower areas, new sheetrock ceilings and new doors. 3. Landlord will create a lunchroom. This room will have approximately 35 feet of cabinets both top and bottom cabinets (with adjustable height shelves with doors) with a double sink that has hot water Top surface will be laminated plastic with backsplash. Colors to be selected by tenant. 4. Landlord will also create a small coffee bar on both floors as shown on the plan. This coffee bar will consist of a small Cabinet (nine feet) with upper and lower cabinets with adjustable height shelves with doors and a single sink with instahot water. 3 <PAGE> 30 5. Tenant will provide and install all appliances and catering equipment and their related hoods. 6. Landlord will create a very slightly curved 15 foot counter with a laminated top for the second floor coffee bar 7. Landlord will create a very slightly curved counter with a laminate top as shown on the plan for the second floor copy room HVAC 1. Landlord will provide approximately 1 ton of HVAC per 400 sq. ft. of space or as determined by Landlords engineer for tenant's office environment. These will be prepackaged gas/electric units in roughly 20 ton increments made by Trane, Carrier or their equivalent. Landlord will provide additional tonnage to cool the main lobby if the mechanical engineer determines it is needed. Landlord to provide all interior soft ducting so as to make a completely operational system with proper circulation and zoning. Landlord to make sure that tenant's lab area and server room is separately zoned. Any additional HVAC loads or hard ducting will be paid for by tenant. 2. Each unit to have separate thermostats for zoning. Thermostat to switch from hot to cool automatically. Thermostats to be Robertshaw or equivalent with blind-locking covers. 3. All grilles to be white and flush with ceiling. 4. All systems will be started, tested and balanced. ELECTRICAL 1. The building will have a J-Box for the exterior on building sign. Tenant shall provide and install their own sign. 2. All room walls will have an outlet six feet from the door and spaced 12' thereafter. Tenant to be providing voice and data cabling and face plates. 4 <PAGE> 31 3. in the open areas Landlord to provide extra J-Boxes above the ceiling grid for tenant to connect their cubicle systems and provide outlets every 12 feet around the perimeter walls. All plugs shall be wall mounted at code required heights. 4. All trim shall be ivory. 5. All subpanels shall be recessed in the walls. Landlord will provide a blank panel on the first and second floors for up to 25 circuits (G.E. or equal) 6. All distribution shall be overhead. 7. All parking lot lights, soffit lights, decorative lights and bollards are to be provided, wired and installed. 8. Landlord to provide 20 20 amp circuits dropped from the ceiling or in floor outlets (provided Tenant specifies floor outlets prior to Landlord's pouring of the second floor concrete) per future tenant plans per each of the five lab areas. 9. Tenant to connect and install their own equipment including all partitions. 10. Landlord to install extra plugs in the lunch room for a possible refrigerator, microwaves (4) and vending machines (which will require 20 or 30 amp circuits). 11. Landlord to install extra plugs at the coffee stations, copy stations and reception areas. 12. The Board room will have two extra J-Boxes in the ceiling and a twenty amp circuit with five outlets in the floor. Landlord will install a J-Box for an electronic projection screen 13. The customer training room will have one J-Box in the ceiling and 3 20amp circuits each with 3 outlets. Landlord will install a J-Box for an electronic projection screen 14. The fitness room will have one J-Box in the ceiling. Three walls will have outlets every 6 feet on the walls. 15. The theater room will have an outlet every 6 feet. 5 <PAGE> 32 16. The server room will have 4 30 amp circuits 17. Storage room on second floor near the QA lab to have a J-box in the ceiling and two twenty amp circuits. 18. All lights, except restrooms, warehouse and open work areas, to be Lithonia 2PM or Columbia P4 3 tube, 2x4 drop in fluorescent fixtures, F32, SP35s with T8 energy saving ballasts with parabolic lenses. 19. All lights in the open areas shall be indirect lighting by Dona Fineline Series Five controlled by a sensor at the front and rear doors. 20. Lights will be installed in the office area to provide 1.5 watts per square foot. 21. Lights in the warehouse to be 8' fluorescent chain hung with wire guards 22. Landlord will provide 3-4' conduits between the server room and the IDF 23. The Lobby will have 2 20 amp circuits and 4 outlets 24. First floor central copy area will have 1 30amp circuit and 3 20amp circuits 25. IDF will have 2-30amp circuits 26. Second floor copy room will have 3 20amp circuits 27. Demo room to have 2 20 amp circuits GLASS 1. Doors-Manufacturers standard hardware and mailslots, narrow stile, cylinder lock outside, thumbturn inside, concealed overhead closures, push/pull bar inside, pull handle outside. Weather-stripped all four sides, thresholds. 2. Center glaze, full height tempered glass as required. 6 <PAGE> 33 3. The main lobby shall have clear glass with blue tint. All other glass will be blue reflective. 4. All colored metal to be factory finish. MISCELLANEOUS 1. Landlord to provide all fire extinguishers required. 2 Landlord to provide all handicap signs. 3. Landlord to provide all other signs required by City such as "meter room", "doors to remain unlocked", "door numbering front and back". Tenant names not included. 4. Landlord to provide generic concrete monument sign as designed. Tenant to provide and install their own logo or sign on this monument sign subject to city codes. 5. Landlord to provide standard horizontal white mini-blinds at all windows. 6. Any roof mounted equipment must be located within the roof screen provided by landlord. Any additional roof screen needed due to specialized tenant improvements will be at tenant's sole cost. 7. All alterations or equipment installations shall be performed by Tenant to code and will be a tenant's sole cost and expense. 8. All telephone, computer, networking, satellite, audio visual or security equipment shall be provided and installed at tenant's sole cost and expense. 9. Any drapes, or special wall coverings to be provided by tenant. 10. Any specialized cabinets except those outlined specifically in these specs shall be paid for by tenant. These include the A/V cabinets in the boardroom, the round shape seating structures by, the coffee bars and lobby and the main reception structure. 7 <PAGE> 34 FIRE PROTECTION 1. The entire building will be sprinkled for fire in accordance with City or County fire codes. Include all items necessary for a complete working system and including, piping, switches, valves, permit fees, inspection fees, detector check valve, post indicator valve, tamper switches, water flow switches, bells, gauges, separate shut off valves, flow valves, UL central station monitoring equipment, temper switches, risers, etc. as required by the appropriate Fire Department. 2. All visible sprinkler drops shall have semi-recessed heads unless specified differently by the Fire Department. 3. Landlord will include everything for a complete system that may be required by the fire department and obtain final fire department approval. 4. Landlord will conceal all piping as close to the roof as possible. 5. Landlord will include installation of fire sprinkler supervisory system, monthly maintenance fee to be paid by Tenant. 6. All bells to be screened from view as much as possible. 7. Any area needing specialized needs (such as the server room) attention such as a dry system will be paid for by tenant. FLOORING 1. Landlord to provide and install all flooring. 2. The entire building except as specified shall be glued down nylon carpet (30 ounce Designweave or equivalent) with a 4" topset rubber base. 3. All lab areas and lunch room to have VCT flooring with 4" topset rubber base. 8 <PAGE> 35 4. The entry lobby shall be limestone, or equivalent only (not to exceed $10 per foot for materials) where the ceiling is two stories, the balance to be carpet. Landlord shall provide a matching walk-off mat 5. Bathroom floor tile to remain. 6. Warehouse floor to be sealed concrete. 7. Tenant shall pay the increased cost for any specialized or raised computer floors including any anti-static or coved needs on any other floors. 8. All rooms to have one color carpet at the same height. Tenant shall pay the increased cost for any interwoven multiple color schemes, borders, accents, or height variations. SITE WORK 1. Landlord to install all walkways, ramps, curbs etc on plans. 2. Landlord to provide new trash enclosure. 3. Landlord will re-strip and reseal the lot and provide evacuation circles for the tenant. LANDSCAPING 1. New landscaping around perimeter of building. All plants shall be healthy and with all trees properly double staked. CORE 1. Landlord to create a new dramatic lobby. This lobby will be open to the second floor as shown on the plan. 2. Landlord will install a new AIDA compliant (dover marquis plan #1 or equivalent) elevator in the lobby as shown. 3. Freight elevator in rear to remain. 4. Landlord will install a new standard staircase behind the lobby as shown. 9 <PAGE> 36 5. Landlord will install a third standard staircase as shown an the plan in the right rear corner. 6. Landlord will install three twenty amp outlets and three (3) phone outlet along the back wall of lobby where receptionist will be located. Any changes to the plans will be billed to the tenant at developer's cost as charged by the General Contractor, if any. As landlord is allowing tenant to choose all color combinations, except the restrooms and outside building elevations, a strict time schedule must be maintained as will be outlined by the General Contractor. If a decision is not made in a timely manner after 48 hour written notice has been given to tenant, then the Landlord's decision will be final. Any upgrades in materials from those specified will be paid for by tenant directly with the General Contractor. Landlord shall keep tenant apprised of the construction progress. Landlord shall give tenant 30 days written notice of the anticipated delivery of the space. At the end of the 30 day period, and upon the space being substantially completed, the tenant shall commence paying rent. At this time the Tenant is to provide to the General Contractor, with a copy to the landlord, of a punchlist of any item needed to be corrected. All punchlist items will be corrected as quickly as possible. Landlord shall warrant that upon Tenant taking possession, that all building systems and Tenant Improvements shall be in good, working condition and shall warrant them for a period of one year. 10 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.15 <SEQUENCE>32 <DESCRIPTION>EX-10.15 <TEXT> <PAGE> 1 EXHIBIT 10.15 SKYSTREAM CORPORATION NONEXCLUSIVE INTERNATIONAL VALUE ADDED RESELLER ("VAR") AGREEMENT This Agreement, dated May 16, 1999, is made between SkyStream Corporation ("SKYSTREAM"), a California corporation doing business at 555 Clyde Avenue, Suite B, Mountain View, California 94043 and Miralite Communications, a California corporation ("Reseller"), doing business at 4041 MacArthur Blvd., suite 490 Newport Beach CA 92660. RECITALS A. SKYSTREAM sells those certain digital broadcast networking products known as the Integrator product family, as defined in Exhibit C ("Products" as further defined below). B. Reseller wishes to have certain non-exclusive rights to market and distribute such Products worldwide in combination with Reseller's products. THEREFORE, SKYSTREAM and Reseller agree as follows: 1. DEFINITIONS. 1.1 Dollars. "Dollars" means United States Dollars. 1.2 End User. "End User" means a customer of Reseller, who is authorized by an end user software license agreement to use the Software on the purchased Products for the End User's internal business purposes. 1.3 Effective Date. "Effective Date" means the date first written above. 1.4 Intellectual Property Rights. "Intellectual Property Rights" means patent rights (including but not limited to rights in patent applications or disclosures and rights of priority), copyright (including but not limited to rights in audiovisual works and moral rights), trade secret rights, and any other intellectual property rights recognized by the law of each applicable jurisdiction. -1- <PAGE> 2 1.5 Marks. "Marks" means SKYSTREAM's trademarks, trade names, service marks, and/or service names. 1.6 Reseller Products. "Reseller Products" means the computer software and/or hardware and related documentation that are distributed by Reseller in combination with the Products. 1.7 Products. "Products" means SKYSTREAM Integrators, as listed in Exhibit C, including accompanying Software and any additions and enhancements provided for use with the units. 1.8 Software. "Software" means SKYSTREAM Integrator software as listed in Exhibit C. 1.9 Source Code. "Source Code" means software in human-readable form, including programmers' comments, data files and structures, header and includes files, macros, object libraries, programming tools not commercially available, technical specifications, flowcharts and logic diagrams, schematics, annotations and documentation reasonably required or necessary to enable an independent third party programmer with reasonable programming skills to create, operate, maintain, modify and improve the software without the help of any other person. 2. DISTRIBUTION OF PRODUCTS 2.1 Reseller Appointment. SKYSTREAM hereby appoints Reseller as a nonexclusive reseller of the Products to End-Users for End User's internal use in conjunction with Reseller Products. 2.2 Added Value. In the exercise of Reseller's rights under this Agreement, Reseller will sell the Products to the End User singularly or in combination with Reseller Products. 2.3 Relabeling. Subject to prior approval by SKYSTREAM, Reseller may relabel the Products with Reseller's name and logo. 2.4 Documentation. Subject to the terms of this Agreement, SKYSTREAM grants Reseller a nonexclusive license during the term of this Agreement to use, modify, create derivative works of and distribute SKYSTREAM's documentation for the Products to the End User. SKYSTREAM will make available SKYSTREAM's End User documentation to Reseller, as it is updated and modified from time to time, without additional charge. Reseller will provide copies of such modifications to SKYSTREAM upon SKYSTREAM's request. -2- <PAGE> 3 2.5 Marketing Collateral. SKYSTREAM agrees to sell, subject to availability, copies of its marketing literature to reseller on an at-cost basis. SKYSTREAM reserves all rights associated with such marketing literature. Reseller agrees to obtain prior written approval of SKYSTREAM's Vice President of Marketing for all marketing literature it shall prepare that pertain to the Products. 2.6 Grant of License. Subject to the terms of this Agreement, SKYSTREAM grants Reseller a limited license to use the Software in connection with the demonstration of the products and in connection with the configuration and support of the Products for End Users. All such use shall be subject to the terms of the End User Software License attached hereto as Exhibit A. 2.7 No Sale of Services. Reseller will not use the Products in any manner to provide service bureau, time sharing, or other computer services to third parties. 2.8 No Reverse Engineering. Reseller will not disassemble, decompile, or reverse engineer the Products. 2.9 Limited Rights. Reseller's rights in the Products will be limited to those expressly granted in this Agreement. 2.10 Terms and Conditions of Sale. Except as modified herein, all sales to Reseller are subject to SKYSTREAM's Terms and Conditions of Sale, a copy of which is attached hereto as Exhibit B, and which is made a part of this Agreement as if set forth herein. 2.11 Pricing to Reseller. The price paid by Reseller to SKYSTREAM shall be established at the time of acceptance of Reseller's purchase order. A list of SKYSTREAM's current prices for sales to Reseller is attached hereto as Exhibit D. SKYSTREAM reserves the right to adjust the prices paid by Reseller at SKYSTREAM's discretion. Nothing in this Agreement will be construed to restrict Reseller's ability to set prices to its customers. 3. SOFTWARE 3.1 Limited Distribution. Reseller is permitted to market and distribute SKYSTREAM Software only in connection with the sale of the Products to the End User. 3.2 End User Software License. (a) Reseller agrees: (i) to include the following language in all sales quotations and offers to -3- <PAGE> 4 sell the Products; "The [name of Product] is sold subject to the terms on an End User Software License. The use of the [name of Product] is contingent upon the acceptance by the purchaser of the terms of the End User Software License." (ii) to provide a copy of the End User Software License, in the form attached hereto as Exhibit A, to any potential purchaser who shall request a copy prior to sale; (iii) to package and to install the Products in such a manner that Reseller's customer is provided with a meaningful opportunity to review and agree to the End User Software License before installing or using any of the Products; and (iv) to agree to accept for return and refund any unused Products in the event that Reseller's customer does not agree to accept any of the terms of the End User Software License or of the terms of any other software license required to use the Products. (b) In connection of SkyStream's not requiring a written End-User Software License signed by Reseller's customer as a precondition to the sale or transfer of the Products, Reseller agrees to indemnify SkyStream for any and all damages that may arise as a result of (i) Reseller's breach of Section 3.2(a) or (ii) the failure for any reason of a customer of Reseller to be bound by the terms of the End User Software License. 3.3 License Only. Notwithstanding the use herein of the word "sell" and variants thereof, all Software is licensed to the Reseller and the End User and is not sold. SKYSTREAM, or the licensors through which SKYSTREAM obtained the rights to distribute Software, retain title to the Software, whether the Software is separate or combined with any other products, including Reseller Products, and Reseller shall transfer Software only to the extent that such transfer is incidental to the resale or lease of the Products. The End User is licensed by SKYSTREAM directly to use the Software solely in conjunction with the use of the Products and further subject to the terms of the End User Software License. 3.4 Proprietary Software. The Software is proprietary to SKYSTREAM and/or its suppliers and is copyrighted. Without SKYSTREAM's prior written approval, Reseller shall not separate the Software from the Products as shipped by SKYSTREAM, nor shall Reseller disassemble, de-compile, reverse-engineer, copy, modify, or otherwise change any of the Software or its form. Reseller shall protect -4- <PAGE> 5 the Software from any disclosure or use in violation of this Agreement. Reseller shall not be entitled to receive Source Code. 3.5 Software Revisions. In the event SKYSTREAM, at its sole discretion, provides Reseller with revised copies of the Software, Reseller shall, according to SKYSTREAM's instructions, replace copies of the Software from the Products with the revised Software. Reseller shall dispose of the replaced Software in accordance with SKYSTREAM's instructions. SKYSTREAM shall have the right to inspect Reseller's inventory of Software and replaced Software at any time on reasonable notice. 4. MAINTENANCE, SUPPORT, AND TRAINING. 4.1 By Reseller. Reseller will be responsible for providing the following support to the End User: installing the Products as needed; training the End User; and providing all direct first level technical support to the End User, including problem analysis and using its reasonable efforts to provide solutions and error correction for the products consistent with Reseller's standard service and support policies and procedures. Reseller agrees to provide a substantially similar level of support to that SkyStream provides to its direct customers, which must include, at a minimum, 24x7 telephone support, and at least 2 hours of on-site training to the End User. A copy of SkyStream's direct SkySupport service agreement is attached in Exhibit E. Reseller agrees to use best efforts to ensure that training of Reseller's personnel occurs within the first 90 days of the execution of this Agreement. Reseller agrees to maintain a minimum of 2 fully trained service personnel at all times, which personnel must attend training, to be paid for by Reseller, at least once every 6 months. 4.2 By SKYSTREAM. SKYSTREAM will not be responsible for providing support to the End User. SKYSTREAM will provide Reseller with: (i) commercially reasonable efforts to correct any non-conformity with the Software Feature Specification Documents for the applicable version of the Software; (ii) technical training, to consist of one training class given over one and one-half (1 1/2) eight-hour days and which may be attended by up to three Reseller personnel onsite at SKYSTREAM's Mountain View, California office, provided that Reseller pays the travel and living expenses of such personnel designated to receive the training, or at Reseller's headquarters, provided that Reseller pays the travel and living expenses of SKYSTREAM's training personnel; training class for additional personnel will be quoted by SKYSTREAM separately; -5- <PAGE> 6 (iii) upon continued payment of an annual Maintenance Fee (the "Maintenance Fee") in the amount currently set forth on Exhibit D, as SKYSTREAM may change from time to time, payable in full with each sale to Reseller and thereafter on the nearest of February 15, May 15, August 15 and November 15 following the one year anniversary of the date of each sale to Reseller, SKYSTREAM agrees to provide reasonable access to SKYSTREAM's technical personnel for inquiries from Reseller relating to the Products during standard SKYSTREAM business hours, generally Monday through Friday from nine a.m. to five p.m. Pacific Standard Time, and access to SKYSTREAM's technical call center 24 hours a day, 7 days a week, where SKYSTREAM agrees to respond to any Reseller inquiry within four business hours of initial call placement. In the case of upgrades to a previously purchased Product, the Maintenance Fee shall be payable on the upgrade at the time of sale to Reseller and thereafter at the time the Maintenance Fee is payable on the Product for which the upgrade was purchased. Payment of this recurring Maintenance Fee does not entitle Reseller or End User to, and shall not be construed as either full or partial payment for, software upgrades with new functionality as defined by SKYSTREAM; (iv) upon fourteen days notice, technical consulting services at a location to be designated by Reseller, at SKYSTREAM's current hourly rate for such services as may be adjusted by SKYSTREAM from time to time, provided that Reseller shall also reimburse SKYSTREAM for all associated travel and living expenses in connection with such services. SKYSTREAM's current technical consulting hourly rate is included on SKYSTREAM's price list for sales to Resellers, a copy of which is attached hereto as Exhibit D; 5. CONFIDENTIALITY. 5.1 Obligations. Each party agrees that it will not disclose to any third party or use any Products or other Confidential Information disclosed to it by the other party, except to carry out its rights and obligations under this Agreement, and that it will take all reasonable measures to maintain the confidentiality of all Confidential Information in its possession or control, which will in no event be less than the measures it uses to maintain the confidentiality of its own information of similar importance. Confidential Information includes all information designated by a party as confidential or proprietary within a reasonable time of its disclosure or which a reasonable person would expect to be treated as confidential. 5.2 Exceptions. "Confidential Information" will not include information that: (i) is in or enters public domain without breach of this Agreement; -6- <PAGE> 7 (ii) is lawfully obtained by the receiving party without breach of a nondisclosure obligation; (iii) is independently developed or already in the possession of the receiving party as shown by the receiving party's contemporaneous records; or, (iv) is required by law to be disclosed, provided that the receiving party gives prompt written notice of such requirement prior to disclosure. 5.3 Injunctive Relief. Each party acknowledges that the improper disclosure of the other's confidential information could cause substantial harm to the other party that could not be remedied by the payment of damages alone. Accordingly, either party will be entitled to preliminary and permanent injunctive relief and other equitable relief for any breach of this Agreement or misuse of Confidential Information by SKYSTREAM, Reseller or the End User, as applicable. 6. INTELLECTUAL PROPERTY RIGHTS. 6.1 Notices. Reseller will not delete or in any manner alter the Intellectual Property Rights notices of SKYSTREAM and its suppliers, if any, appearing on the Products as delivered to Reseller. 6.2 Reseller's Duties. Reseller will take customary measures in the marketing and distribution of the Products to protect SKYSTREAM's Intellectual Property Rights in the Products, no less than the extent to which Reseller protects its Intellectual Property Rights in Reseller's Products, and will, to the extent lawful, report promptly to SKYSTREAM any confirmed infringement of such rights of which Reseller becomes aware. 6.3 Trademarks. Subject to the terms and conditions of this Agreement, SKYSTREAM grants Reseller a nonexclusive license for the term of this Agreement to use the Marks in Reseller's marketing of the Products, providing that such use is in accordance with SKYSTREAM's trademark usage guidelines then in effect. Such use must reference the Marks as being owned by SKYSTREAM. Nothing in this Agreement grants Reseller ownership or any rights in or to use the Marks, except in accordance with this license, and Reseller's use of the Marks will inure to the benefit of SKYSTREAM. The rights granted to Reseller in this license will terminate upon any termination or expiration of this Agreement. Upon such termination or expiration, Reseller will no longer make any use of any Marks. SKYSTREAM will have the exclusive right to own, use, hold, apply for registration for, and register the Marks during the term of, and after the expiration or termination of, this Agreement; Reseller will neither take nor authorize any activity inconsistent with such exclusive right. -7- <PAGE> 8 7. INFRINGEMENT INDEMNITY 7.1 Reseller Warranty. (a) Reseller warrants that it owns all the rights to the Confidential Information provided to SKYSTREAM, and that such items are free of any restrictions, settlements, judgments, or adverse claims. Reseller warrants that it has the full power and authority to supply and to disclose such information to SKYSTREAM. (b) Reseller warrants that it has not improperly or unlawfully acquired the information and processes submitted to SKYSTREAM. 7.2 Reseller Indemnification. Reseller agrees to indemnify SKYSTREAM against, and to hold SKYSTREAM harmless of and from, any loss, cost, damage, liability, suit, judgment, or expense, including legal fees (collectively, "Harm") arising out of any breach of the warranties set forth in Section 7.1. 7.3 SKYSTREAM Indemnification and Defense. Subject to the limitations hereinafter set forth, Reseller agrees that SKYSTREAM has the right to defend, or at its option to settle, and SKYSTREAM agrees, at its own expense, to defend or at its option to settle, any claim, suit or proceeding (collectively, "Action") brought against Reseller alleging that the use or distribution of the Products infringes or misappropriates any copyright or trade secret. SKYSTREAM shall have sole control of any such Action or settlement negotiations, and SKYSTREAM agrees to pay, subject to the limitations set forth in Sections 7 and 8, any settlement costs or final judgment entered against Reseller as a result of such infringement. Reseller agrees that SKYSTREAM at its sole option shall be relieved of the foregoing obligations unless Reseller notifies SKYSTREAM promptly in writing of such Action and gives SKYSTREAM authority to proceed as contemplated herein, and, at SKYSTREAM's expense, gives SKYSTREAM proper and full information and assistance to settle and/or defend any such Action. If the Products, or any part thereof, are, or in the opinion of SKYSTREAM may become, the subject of any Action for infringement of any intellectual property right, or if a judicial or other governmental authority enjoins the use or distribution of Products as a result of an Action defended by SKYSTREAM, then SKYSTREAM may, at its option and expense: (i) procure for Reseller the right to distribute or use, as appropriate, the Products; (ii) replace the Products with other suitable Products; (iii) suitably modify the Products; or (iv) if the foregoing alternatives cannot be accomplished on a commercially reasonable basis as determined in SKYSTREAM's sole discretion, require Reseller to return such Products and refund the aggregate payments paid therefor by Reseller, less a reasonable sum for use and damage. Reseller shall indemnify and hold harmless SKYSTREAM from and against any and all third party claims arising out of the -8- <PAGE> 9 distribution of Products after SKYSTREAM has required Reseller to return such Products or arising out of any exclusions to SKYSTREAM's indemnification obligations set forth in Section 7.4. SKYSTREAM shall not be liable for any costs or expenses incurred without its prior written authorization. 7.4 SKYSTREAM limitations. (a) Notwithstanding the provisions of Section 7.3 above, SKYSTREAM assumes no liability for (i) any infringement claims (including without limitation combination or process patents) arising out of the combination of a Product or use with other hardware, software or other items not provided by SKYSTREAM to the extent such infringement would not have occurred absent such combination or use; (ii) the modification of the Products, or any part thereof, unless such modification was made by SKYSTREAM; or (iii) any infringement claims arising out of SKYSTREAM's compliance with Reseller's specifications or designs. (b) SKYSTREAM's obligation to indemnify Reseller does not extend to any Action arising from a claim of infringement by the manufacture, use or sale of Products that conform to any technical standard adopted by an international organization such as the International Organization for Standardization, the International Electrotechnical Commission, and the CCITT/ITU, including, without limitation, the MPEG, JPEG and H.261 standards. 7.5 Entire Liability. THE FOREGOING PROVISION OF THIS SECTION 7 STATE THE ENTIRE LIABILITY AND OBLIGATION OF SKYSTREAM AND THE EXCLUSIVE REMEDY OF RESELLER AND ITS CUSTOMERS WITH RESPECT TO ANY ALLEGED INFRINGEMENT OF COPYRIGHTS, TRADEMARKS, PATENTS OR OTHER INTELLECTUAL PROPERTY RIGHTS BY THE PRODUCTS. 8. LIMITATIONS OF LIABILITY. 8.1 Total Liability. Except as set forth in Section 7 each party's liability for a breach of this Agreement under this Agreement will be limited to the Payments received or due from Reseller under this Agreement. 8.2 Exclusion of Damages. Except as set forth in Section 7 neither party will be liable to the other for any special, incidental, or consequential damages, whether based on breach of contract, tort (including negligence), product liability, or otherwise, and whether or not such party has been advised of the possibility of such damage. -9- <PAGE> 10 8.3 No Warranty. Except as set forth in Section 7 and except as set forth in Section 13 of the Terms and Conditions of Sale, attached as Exhibit B, SkyStream makes no warranty, express or implied, in connection with the Products, including the results and performance thereof, including without limitation any implied warranties of merchantability or fitness for a particular purpose or noninfringement. 9. TERMINATION. 9.1 Term. The term of this Agreement will begin on the Effective Date and will continue for a period designated in Exhibit D, unless it is terminated earlier in accordance with the provisions hereof. This Agreement may be renewed for additional periods upon the mutual written agreement of the parties, although each party acknowledges that the other is under no obligation to do so. 9.2 Events of Termination. Either party will have the right to terminate this Agreement (i) for convenience and without cause, upon thirty (30) days written notice to the other party, or (ii) if the other party breaches any material term or condition of this Agreement and fails to cure such breach within thirty (30) days after written notice. 9.3 Effect of Termination. (a) Upon termination or expiration of this Agreement, Reseller will (except as specified in subsection (b) below) immediately return to SKYSTREAM or (at SKYSTREAM's request) destroy all Source Code, Software (except for Software residing on a SKYSTREAM Product) and other Confidential Information in its possession or control, and an officer of Reseller will certify to SKYSTREAM in writing that Reseller has done so. (b) Upon termination or expiration of this Agreement, SKYSTREAM will have the option, in its sole discretion, of: (i) electing, at any time, to offer maintenance and support for the Products directly to End Users in accordance with SKYSTREAM's then applicable terms and conditions for such services; or (ii) permitting Reseller to continue to provide maintenance and support for the Products to its End Users upon the terms and conditions of Section 4. 9.4 Nonexclusive Remedy. The exercise by either party of any remedy under this Agreement will be without prejudice to its other remedies under this Agreement or otherwise. -10- <PAGE> 11 9.5 Survival. The rights and obligations of the parties contained in Sections 5, (Confidentiality), 6 (Intellectual Property Rights), 7 (Infringement Indemnity), 8 (Limitations of Liability), 9 (Termination) and 10 (General) will survive the termination or expiration of this Agreement. 10. GENERAL. 10.1 Publicity. Reseller agrees to use best efforts in the preparation of a press release announcing the execution of this Agreement. 10.2 Binding Effect. This Agreement will bind and inure to the benefit of each party's permitted successors and assigns. 10.3 Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of California applicable to agreements between California residents entered into and to be performed entirely within California, without reference to conflict of law principles. Any dispute or claim arising out of this Agreement will be resolved by binding arbitration in the county of Santa Clara in accordance with the complex commercial litigation rules of the American Arbitration Association. The arbitrator will have the power to grant any form of relief, including preliminary and permanent injunctive relief, which a judge in California with jurisdiction could fashion, and judgment on any award may be entered in any court in California with jurisdiction. Nonetheless, the parties may seek temporary or permanent injunctive relief from any court in California with jurisdiction without breaching this Section 10.3 or otherwise abridging the authority of the arbitrator. 10.4 Severability. If any provision of this Agreement is found invalid or unenforceable, that provision will be enforced to the maximum extent permissible and the other provisions of this Agreement will remain in force. 10.5 Force Majeure. Except for payments due under this Agreement, neither party will be responsible for any failure to perform due to causes beyond its reasonable control (each a "Force Majeure"), including, but not limited to, acts of God, war, riot, embargoes, acts of civil or military authorities, denial of or delays in processing of export license applications, fire, floods, earthquakes, accidents, strikes, or fuel crises, provided that such party gives prompt written notice thereof to the other party. The time for performance will be extended for a period equal to the duration of the Force Majeure, but in no event longer than sixty days. 10.6 Notices. All notices under this Agreement will be deemed given when delivered personally, sent by confirmed facsimile transmission, or sent by certified or registered U.S. mail or recognized express courier, return receipt requested, to the address as -11- <PAGE> 12 first shown on this Agreement or as may otherwise be specified by either party to the other in accordance with this section. 10.7 Independent Contractors. The parties to this Agreement are independent contractors. There is no relationship of partnership, joint venture, employment, franchise, or agency between the parties. Neither party will have the power to bind the other or incur obligations on the other's behalf without the other's prior written consent. 10.8 Waiver. No failure of either party to exercise or enforce any of its rights under this Agreement will act as a waiver of such rights. 10.9 Entire Agreement. This Agreement and its exhibits (A, B and C) are the complete and exclusive agreement between the parties with respect to the subject matter hereof, superseding and replacing any and all prior agreements, communications, and understandings (both written and oral) regarding such subject matter. This Agreement may only be modified, or any rights under it waived, by a written document executed by both parties. [Remainder of Page Intentionally Left Blank] -12- <PAGE> 13 The parties have caused this Agreement to be executed by their duly authorized representatives as of the Effective Date. RESELLER SKYSTREAM CORPORATION Signature: /s/ KEVIN KNICKERBECKER Signature: /s/ DAN RIORDAN ------------------------- ------------------------- Name: Kevin Knickerbecker Name: Dan Riordan ------------------------------ ------------------------------ Title: V.P. Sales Title: VP Sales ----------------------------- ----------------------------- Date: 5/13/99 Date: 5/26/99 ------------------------------ ------------------------------ Facsimile: Facsimile: ------------------------- ------------------------- [Signature Page to Nonexclusive VAR Agreement] -13- <PAGE> 14 EXHIBIT A SKYSTREAM CORPORATION END USER SOFTWARE LICENSE SOFTWARE LICENSE AND WARRANTY ATTENTION! Use of the software program on the enclosed disks and/or installed on the computer is subject to the terms of the License Agreement printed on the license card, in the license booklet, or in the user documentation. You should not use this software until you have read the License Agreement. By using the software, you signify that you have read the License Agreement and accept its terms. LICENSE SkyStream hereby grants to the Customer a limited, non-exclusive license to use the Software provided solely on the terms and conditions contained herein. "Software" means each software program provided by SkyStream in machine readable, object, printed or interpreted form. LIMITATIONS ON USE The Software is licensed to the Customer solely for Customer's internal use on the purchased SkyStream equipment and may not be used for any other purpose or application. The customer is licensed to use the Software only on the designated SkyStream equipment. The Software may not be used by Customer on any other computer, on any other SkyStream or similar equipment, or at any other location, except as agreed by SkyStream in writing. Customer will not: -- Copy all or any part of the Software, except that Customer may make one copy of the Software solely for backup purposes for its own exclusive use, provided that customer shall reproduce and include on such backup copy SkyStream's proprietary rights notice. -- Use, print, copy, modify or display the software, in whole or in part, except as specifically authorized by this Agreement. -- Sublicense, assign, resell, or otherwise transfer the Software to any third party. Any attempted such sublicense, sale, assignment or transfer shall be void and shall be deemed a material breach of this agreement. -- Reverse engineer, duplicate or otherwise reproduce the Software. <PAGE> 15 Customer acknowledges that this Agreement does not grant to Customer, and Customer will not acquire hereby, any rights to patents, copyrights, trade secrets, trade names, trademarks (whether registered or unregistered), or any other proprietary rights in or to the Software, all of which are expressly retained by SkyStream. Customer acknowledges that the laws and regulations of the United States may restrict the export and re-export of the Software or media in any form without appropriate United States and foreign government approval. If Customer is a unit or agency of the United States Government or is acquiring the Software and Documentation for any such unit or agency, the following apply: o If the unit or agency is the Department of Defense (DOD), the Software and its accompanying documentation are classified as "commercial computer software" and "commercial computer software documentation," respectively, and, pursuant to DFAR Section 227.7202, the Government is acquiring the Software and such documentation with terms of the Agreement. o If the unit or agency is other than DOD, the Software and its accompanying documentation are classified as "commercial computer software" and "commercial computer software documentation," respectively, and pursuant to FAR Section 12.212, the Government is acquiring the Software and such documentation in accordance with the terms of this Agreement. WARRANTY SkyStream makes no warranty, express or implied, in connection with the Software, including the results and performance thereof, including without limitation any implied warranties of merchantability or fitness for a particular purpose or non-infringement. LIMITATION OF LIABILITY The maximum liability of SkyStream to Customer for damages relating to this agreement for any and all causes whatsoever, and Customer's maximum remedy, regardless of the form of action, whether in contract, tort or otherwise, shall be limited to the total fees paid by Customer to SkyStream hereunder. In no event shall SkyStream be liable for any lost data or content, lost profits, or business interruption, or for any indirect, incidental, special, consequential, exemplary or punitive damages arising out of or relating to the Software provided hereunder, even if SkyStream has been advised of the possibility of such damages. TECHNICAL SUPPORT For technical support, contact SkyStream Customer Support through the World Wide Web (www.skystream.com) or via e-mail (support@skystream.com). <PAGE> 16 EXHIBIT B SKYSTREAM CORPORATION TERMS AND CONDITIONS OF SALE 1. Applicability of Terms and Conditions of Sale THE FOLLOWING TERMS AND CONDITIONS OF SALE ("AGREEMENT") APPLY TO ALL QUOTATIONS FOR PRODUCTS ("PRODUCTS") ISSUED BY SKYSTREAM CORPORATION ("SKYSTREAM") TO BUYER. SKYSTREAM'S ACCEPTANCE OF ANY BUYER PURCHASE ORDER IS EXPRESSLY CONDITIONED ON BUYER'S ASSENT TO THIS AGREEMENT. NO TERMS OR CONDITIONS SET FORTH IN BUYER'S PURCHASE ORDER, TO WHICH NOTICE OF OBJECTION IS HEREBY GIVEN, OR IN ANY FUTURE CORRESPONDENCE BETWEEN BUYER AND SKYSTREAM SHALL ALTER OR SUPPLEMENT THIS AGREEMENT UNLESS BOTH PARTIES HAVE AGREED IN WRITING TO MODIFY THIS AGREEMENT. Neither SKYSTREAM's commencement of performance nor delivery shall be deemed or construed as acceptance of Buyer's additional or different terms and conditions. 2. Price 2.1 Unless otherwise stated in writing by SKYSTREAM, all prices quoted are in U.S. Dollars and expire 30 days after the date of a quotation. 2.2 Unless otherwise stated in writing by SKYSTREAM, all prices quoted shall be exclusive of transportation, insurance, federal, state, local, use, sales, property (ad valorem) and similar taxes or duties now in force or hereafter enacted. Buyer agrees to pay all taxes, fees or charge of any nature whatsoever imposed by any governmental authority on, or measured by, the transaction between Buyer and SKYSTREAM, in addition to the prices quoted or invoiced. In the event that SKYSTREAM is required to collect the foregoing, such amounts will appear as separate items on SKYSTREAM's invoice. Buyer agrees to provide SKYSTREAM with a valid resale certificate for the Products purchased for resale. 2.3 Notwithstanding anything to the contrary herein, in the event a quotation is issued pursuant to a current written purchase agreement between SKYSTREAM and Buyer, the quotation shall remain valid for the period specified or until the expiration date of the ordering period of any such purchase agreement, whichever occurs first. 3. Payment Terms <PAGE> 17 3.1 All invoices are payable thirty (30) days from date of invoice. No discounts are authorized. Interest on late payments shall accrue at the rate of one and one half percent (1.5%) per month or the highest legal rate, whichever is lower. SKYSTREAM may at any time require that shipments be made on a C.O.D. or cash-with-order basis. 3.2 Until the purchase price and all other charges payable to SKYSTREAM hereunder have been received in full, SKYSTREAM hereby retains, and Buyer hereby grants to SKYSTREAM, a security interest in the Products delivered to Buyer and any proceeds therefrom. Buyer agrees to promptly execute all documents reasonably requested by SKYSTREAM to perfect and protect such security interest. In the event Buyer fails promptly to execute such documents, Buyer hereby appoints SKYSTREAM its attorney-in-fact for the sole purpose of executing such documents, which appointment shall be a power coupled with an interest and shall be irrevocable. 3.3 Should Buyer become delinquent in the payment of any sum due hereunder, SKYSTREAM shall not be obligated to continue performance hereunder, including without limitation shipment of any previously accepted orders. 3.4 Buyer warrants to SKYSTREAM that it is financially solvent on the date on which it places an order and expects to be solvent on the date of receipt of shipment. SKYSTREAM reserves the right to change the credit terms provided herein, when in SKYSTREAM's opinion the financial condition or previous payment record of Buyer so warrants. 4. Delivery Dates 4.1 All shipments are subject to SKYSTREAM's availability schedule. SKYSTREAM will use commercially reasonable efforts to meet any delivery date(s) requested in Buyer's order; provided however, that SKYSTREAM will not be liable under any circumstances for its failure to meet such delivery date(s). Any delivery dates provided by SKYSTREAM to Buyer are best estimates only. 4.2 SKYSTREAM shall have the right to make partial shipments and payment therefore shall be made in the manner described in Section 3.1 above. 4.3 SKYSTREAM shall have the right to make shipments at any time before or after the requested delivery date and payment therefore shall be made in the manner described in Section 3.1 above. 5. Packing All Products shall be packed, if appropriate, for shipment and storage in accordance with standard commercial practices. All packing will conform to requirements of carrier's <PAGE> 18 tariffs. When special or export packaging is requested or, in the opinion of SKYSTREAM, required under the circumstances, the cost of such special import packaging, if not set forth on the invoice, will be separately invoiced. 6. Shipment & Acceptance 6.1 F.O.B. Point. All prices are F.O.B. (as defined in the Uniform Commercial Code as implemented by the state of California, U.S.A.) SKYSTREAM's Mountain View location unless otherwise agreed to in writing. Buyer will pay all transportation and insurance charges after delivery to the F.O.B. point. Unless otherwise indicated by SKYSTREAM, Buyer is obligated to obtain insurance covering damage to the goods being shipped. 6.2 Method of Shipment. Subject to this Section 6.2, SKYSTREAM will ship in accordance with Buyer's shipping instructions. In the absence of specific instructions or if Buyer's instructions are deemed unsuitable, SKYSTREAM reserves the right to ship by the most appropriate method. 6.3 Title and Risk of Loss. Title to the Products and risk of loss and damage shall pass to Buyer upon delivery to the F.O.B. point. 6.4 Acceptance. Products shall be deemed to have been accepted by Buyer unless Buyer provides written notice to SKYSTREAM to the contrary within thirty (30) days from the date of delivery to the F.O.B. point. Such written notice shall request a Return Material Authorization ("RMA") number and the terms and conditions that apply to warranty returns under Section 13.2 shall apply to returns under this Section 6.4. 7. Changes and Cancellations 7.1 Subject to the additional charges set forth below and to Section 7.2, standard Product orders may be canceled per the following schedule: <TABLE> <CAPTION> DAYS PRIOR TO SCHEDULED PERCENTAGE OF ORDER WHICH SHIPMENT DATE TO F.O.B. POINT MAY BE CANCELED <S> <C> 0-30 Days 0% 31-60 days 25% 61-90 days 50% 91+ days 100% </TABLE> In the event that Buyer cancels any order more than thirty (30) days but fewer than ninety (90) days prior to the scheduled delivery date (to the F.O.B. point) for such order, Buyer <PAGE> 19 shall promptly pay to SKYSTREAM a restocking/cancellation fee equal to fifteen percent (15%) of the purchase price for the Product subject to such order. 7.2 Standard Product orders may be rescheduled per the following schedule: <TABLE> <CAPTION> DAYS PRIOR TO SCHEDULED PERCENTAGE OF ORDER WHICH SHIPMENT DATE TO F.O.B. POINT MAY BE RESCHEDULED ----------------------------- -------------------------- <S> <C> 0-30 days may not be rescheduled 31-60 days 25% may be rescheduled up to four weeks out 61-90 days 50% may be rescheduled up to four weeks out 91+ days 100% may be rescheduled </TABLE> 7.3 Non-standard Products (customer special and certain designated Products) may have different cancellation and reschedule terms, and require advance payment. 7.4 If Buyer terminates individual orders in whole or in part because of SKYSTREAM's failure to timely deliver, Buyer's sole remedy shall be entitlement to cancel the undelivered quantity of any individual order. 7.5 No cancellation of any purchase order for default shall be effective unless SKYSTREAM has failed to correct such alleged default within thirty (30) days after receipt by SKYSTREAM of a written notice by Buyer of such default. 8. Software "Software" shall mean each software program provided by SKYSTREAM in machine-readable, object, printed, or interpreted form. SKYSTREAM shall retain all right, title and ownership of any Software provided to Buyer or its end users. SKYSTREAM sells its products to Buyer only to the extent that such products consist of non-software items on the terms specified herein. Use of the terms "sell," "purchase," "purchase price" and similar terms are to be interpreted in accordance with this Section. Use of Software is governed by the provisions of the Software License, a copy of which Buyer has received and executed. 9. Confidential Information 9.1 It is understood that during the term of this Agreement, parties may receive Confidential Information belonging to the other party. If any Confidential Disclosure Agreements have been executed, such Agreements are incorporated herein by reference. <PAGE> 20 9.2 Confidential Information shall include information submitted in writing, and covers, but is not limited to, Software, designs, performance data, system bugs, and test programs. 9.3 The parties shall protect the disclosed Confidential Information, by using the same degree of care, but not less than a reasonable degree of care, to prevent the unauthorized use, dissemination or publication of the Confidential Information, as the recipient party uses to protect its own Confidential Information of a like nature. Both SKYSTREAM and Buyer shall restrict the dissemination of such Confidential Information only to those personnel of each who require access thereto, in order to perform this Agreement. 9.4 The obligation to protect the Confidential Information shall survive for three (3) years following the expiration or termination of this Agreement. 9.5 The obligation to protect the Confidential Information shall not extend to information which: (a) Was already lawfully known or acquired by the receiving party prior to the receipt from the disclosing party; (b) Is or becomes generally known to the public through no wrongful act of the receiving party; (c) Is received from a third party without similar restriction and without breach of these or similar conditions; or (d) Is independently developed by the receiving party by personnel without access to the Confidential Information. 10. Intellectual Property Warranty and Indemnity 10.1 Buyer warrants that it owns all the rights to the information and processes including specifications, designs, instructions and Confidential Information provided to SKYSTREAM, and that such items are free of any restrictions, settlements, judgments, or adverse claims. Buyer warrants that it has the full power and authority to supply and to disclose such information to SKYSTREAM. 10.2 Buyer warrants that it has not improperly or unlawfully acquired the information and processes submitted to SKYSTREAM. 10.3 Buyer agrees to indemnify SKYSTREAM against, and to hold SKYSTREAM harmless of and from, any loss, cost, damage, liability, suit, judgment, or expense, <PAGE> 21 including legal fees (collectively, "Harm") arising out of any breach of the warranties set forth in Section 10.1 or Section 10.2. 10.4 Subject to the limitations hereinafter set forth, Buyer agrees that SKYSTREAM has the right to defend, or at its option to settle, and SKYSTREAM agrees, at its own expense, to defend or at its option to settle, any claim, suit or proceeding (collectively, "Action") brought against Buyer alleging that the use or distribution of the Products in the United States infringes or misappropriates any copyright or trade secret. Notwithstanding the above, SKYSTREAM's obligations with respect to any claims to the object code within Products are subject to the Software License. SKYSTREAM shall have sole control of any such Action or settlement negotiations, and SKYSTREAM agrees to pay, subject to the limitations set forth in Section 14, any final judgment entered against Buyer as a result of such infringement in any such Action defended by SKYSTREAM. Buyer agrees that SKYSTREAM at its sole option shall be relieved of the foregoing obligations unless Buyer notifies SKYSTREAM promptly in writing of such Action and gives SKYSTREAM authority to proceed as contemplated herein, and, at SKYSTREAM's expense, gives SKYSTREAM proper and full information and assistance to settle and/or defend any such Action. If the Products, or any part thereof, are, or in the opinion of SKYSTREAM may become, the subject of any Action for infringement of any intellectual property right, or if a judicial or other governmental authority enjoins the use or distribution of Products as a result of an Action defended by SKYSTREAM, then SKYSTREAM may, at its option and expense: (i) procure for Buyer the right to distribute or use, as appropriate, the Products; (ii) replace the Products with other suitable Products; (iii) suitably modify the Products; or (iv) if the foregoing alternatives cannot be accomplished on a commercially reasonable basis as determined in SKYSTREAM's sole discretion, require Buyer to return such Products and refund the aggregate payments paid therefor by Buyer, less a reasonable sum for use and damage. Buyer shall indemnify and hold harmless SKYSTREAM from and against any and all third party claims arising out of the distribution of Products after SKYSTREAM has required Buyer to return such Products or arising out of any exclusions to SKYSTREAM's indemnification obligations set forth in Section 10.5. SKYSTREAM shall not be liable for any costs or expenses incurred without its prior written authorization. 10.5 Notwithstanding the provisions of Section 10.4 above, SKYSTREAM assumes no liability for (i) any infringement claims (including without limitation combination or process patents) arising out of the combination of a Product or use with other hardware, software or other items not provided by SKYSTREAM to the extent such infringement would not have occurred absent such combination or use; (ii) the modification of the Products, or any part thereof, unless such modification was made by SKYSTREAM; or (iii) any infringement claims arising out of SKYSTREAM's compliance with Buyer's specifications or designs. <PAGE> 22 10.6 SKYSTREAM's obligation to indemnify Buyer does not extend to any Action arising from a claim of infringement by the manufacture, use or sale of Products that conform to any technical standard adopted by an international organization such as the International Organization for Standardization, the International Electrotechnical Commission, and the CCITT/ITU, including, without limitation, the MPEG, JPEG and H.261 standards. 10.7 THE FOREGOING PROVISIONS OF THIS SECTION 10 STATE THE ENTIRE LIABILITY AND OBLIGATION OF SKYSTREAM AND THE EXCLUSIVE REMEDY OF BUYER AND ITS CUSTOMERS WITH RESPECT TO ANY ALLEGED INFRINGEMENT OF COPYRIGHTS, TRADEMARKS, PATENTS OR OTHER INTELLECTUAL PROPERTY RIGHTS BY THE PRODUCTS. 10.8 SKYSTREAM shall have the right but, except as provided by Section 10.4, not the obligation, to exclusively settle any claim, suit or proceeding brought against Buyer so far as it is based on an allegation that any Product or service furnished hereunder infringes a patent, copyright or other intellectual property right of any country. Buyer shall provide SKYSTREAM with prompt notice of any such claim, suit or proceeding. 11. Intellectual Property Rights 11.1 Buyer hereby grants SKYSTREAM a license under any patent required to enable SKYSTREAM to perform its obligations pursuant to this Agreement. This license shall extend for the duration of this Agreement. 11.2 No provision in this Agreement shall be interpreted as a grant by SKYSTREAM to Buyer of a license to use SKYSTREAM's service marks or trade marks. 11.3 The Products are offered for sale and are sold by SKYSTREAM subject in every case to the condition that such sale does not convey any license expressly or by implication, to manufacture, reverse engineer, duplicate or otherwise copy or reproduce any of the Products or any part thereof. 12. Termination by SKYSTREAM 12.1 In the event of any proceedings, voluntary or involuntary, in bankruptcy or insolvency by or against Buyer, or in the event of the appointment, with or without Buyer's consent, of an assignee for the benefit of creditors, or of a receiver, SKYSTREAM may elect to immediately cancel any purchase order previously accepted by SKYSTREAM. 12.2 In the event Buyer has materially breached this Agreement, including but not limited to failure to comply with credit terms, and has not cured such breach <PAGE> 23 within 30 days after receiving notice thereby by SKYSTREAM, SKYSTREAM may immediately cancel any purchase order previously accepted by SKYSTREAM. 13. Limited Warranty 13.1 The Products are warranted against defects in material and workmanship for a period of ninety (90) days from the date of shipment to the F.O.B. point provided that the foregoing warranty shall not apply to defects that reasonably could have been discovered by Buyer during the 30 day period following delivery to the F.O.B. point. This limited warranty does not cover the results of accident, abuse, neglect, improper testing, vandalism, acts of God, use contrary to specifications or instructions, or repair or modification by anyone other than SKYSTREAM or SKYSTREAM's authorized agents. SKYSTREAM SHALL HAVE NO OBLIGATION UNDER THIS WARRANTY, AND MAKES NO REPRESENTATIONS AS TO PRODUCTS THAT HAVE BEEN MODIFIED BY BUYER OR ITS CUSTOMERS. The foregoing warranty extends only to Buyers who are SKYSTREAM customers, and not Buyer's customers or other users of Buyers' Products. The foregoing warranty does not apply to any used or modified Products, or software within the Products, which is subject to the Software License. 13.2 If the Product does not conform to the foregoing warranties, Buyer may, at its own risk and expense, return the allegedly defective Product directly to SKYSTREAM during the Warranty Period. In order to do so, Buyer must first notify SKYSTREAM in writing of the alleged defect and request a return material authorization ("RMA") number. Within five (5) days of its receipt of the RMA number, Buyer shall ship to SKYSTREAM the allegedly defective Product, freight prepaid, to SKYSTREAM, and shall include a notation of the RMA number. Any Products returned to SKYSTREAM without an authorized RMA number may be returned to Buyer, freight collect. Upon receipt of the Product, SKYSTREAM, at its option, will repair or replace the Product and ship the repaired or replaced Product to Buyer at SKYSTREAM's expense and risk, or refund the purchase price. If SKYSTREAM determines that any returned Product conformed to the warranties, SKYSTREAM will return the Product to Buyer at Buyer's expense and risk, along with a written statement setting forth the basis for SKYSTREAM's conclusion that the returned Product was not defective, and Buyer agrees to pay SKYSTREAM's reasonable costs of handling and testing. 13.3 THE REMEDIES PROVIDED HEREIN ARE BUYERS' SOLE AND EXCLUSIVE REMEDIES FOR BREACH OF WARRANTY BY SKYSTREAM. SKYSTREAM SPECIFICALLY DISCLAIMS ALL OTHER EXPRESS, IMPLIED OR STATUTORY WARRANTIES, INCLUDING ANY IMPLIED WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE, IMPLIED WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE, MERCHANTABILITY OR NONINFRINGEMENT. NO PERSON IS <PAGE> 24 AUTHORIZED TO MAKE ANY OTHER WARRANTY OR REPRESENTATION CONCERNING THE PERFORMANCE OF THE PRODUCTS OTHER THAN AS PROVIDED IN THIS SECTION 14. Limitation of Liability NEITHER SKYSTREAM NOR ITS SUPPLIERS SHALL BE LIABLE TO BUYER FOR ANY DAMAGES WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY (i) FOR ANY INCIDENTAL, CONSEQUENTIAL, SPECIAL OR INDIRECT DAMAGES OF ANY SORT EVEN IF SKYSTREAM OR ITS SUPPLIERS HAVE BEEN INFORMED OF THE POSSIBILITY OF SUCH DAMAGES; (ii) FOR COST OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY OR SERVICES; OR (iii) FOR LOSS OR CORRUPTION OF DATA OR INTERRUPTION OF USE. SKYSTREAM SHALL NOT BE LIABLE FOR ANY AMOUNTS IN EXCESS OF THE TOTAL AMOUNT ACTUALLY PAID TO SKYSTREAM HEREUNDER FOR THE PARTICULAR PRODUCTS THAT ARE SUBJECT TO A CLAIM. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. THE LIMITATION OF LIABILITY SET FORTH IN THIS SECTION SHALL NOT APPLY TO LIABILITY FOR DEATH OR PERSONAL INJURY TO THE EXTENT APPLICATION LAW PROHIBITS SUCH LIMITATION. 15. Import/Export Buyer agrees that it will not in any form export, re-export, resell, ship or divert directly or indirectly any Product or technical data or Software furnished hereunder to any country for which the United States Government or any government agency requires an export license or other governmental approval without first obtaining such license or approval. 16. Restricted Use SKYSTREAM's Products may produce a reduction and loss of data and therefore are not sold for use in medical equipment, avionics, nuclear applications, or other high risk applications where malfunctions or loss of data could result directly in personal injury to human beings. Buyer agrees to not to use, to contractually bind its customers not to use, and to forbid all third parties from using the Products in such applications, and Buyer agrees to indemnify SKYSTREAM and to hold SKYSTREAM harmless from and against any liability arising out of Buyer's failure to contractually bind its customers in the manner previously described. 17. Term. This Agreement will govern in perpetuity all of Buyer's purchases of Products. 18. Publicity <PAGE> 25 Buyer consents to the use of Buyer's name and purchase order data for use by SKYSTREAM at SKYSTREAM's discretion for the purpose of preparing press releases and promotional materials. Buyer agrees to use best efforts in assisting in the preparation of any such press releases or promotional materials. 19. Miscellaneous 19.1 Any notice required to be given hereunder shall be given in writing at the address of each part set forth in an attached quotation or purchase agreement, or to such other address as either party may substitute by written notice to the other. 19.2 Any attempt by Buyer to assign or transfer any of the rights, duties, or obligations herein shall render such attempted assignment or transfer null and avoid. 19.3 SKYSTREAM's failure to exercise any of its rights hereunder shall not constitute or be deemed a waiver or forfeiture of such rights. 19.4 No U.S. Government Procurement Regulations shall be binding on either party unless specifically agreed to in writing prior to incorporation herein. 19.5 Stenographic, typographical and clerical errors are subject to correction. 19.6 Governing Law and Jurisdiction. This Agreement will be governed by and construed in accordance with the laws of the State of California applicable to agreements entered into, and to be performed entirely, within California between California residents, without reference to conflict of law principles. Any dispute or claim arising out of this Agreement will be resolved by binding arbitration in the city and county of Santa Clara in accordance with the complex commercial litigation rules of the American Arbitration Association. The arbitrator will have the power to grant any form of relief, including preliminary and permanent injunctive relief, which a judge in California with jurisdiction could fashion, and judgment on any award may be entered in any court in California with jurisdiction. Nonetheless, the parties may seek temporary or permanent injunctive relief from any court in California with jurisdiction without breaching this Section 19.6 or otherwise abridging the authority of the arbitrator. 19.7 In the event any proceeding or lawsuit is brought by either party to enforce its rights hereunder, the prevailing party shall be entitled to recover its costs, including expert witness fees and reasonable attorneys' fees. 19.8 All disputes between the parties of any kind arising out of or related to this Agreement shall be brought within one (1) year after the accrual of the dispute. <PAGE> 26 19.9 THE TERMS AND CONDITIONS SET FORTH HEREIN REPRESENT THE ENTIRE AGREEMENT BETWEEN SKYSTREAM AND BUYER WITH RESPECT TO THE SUBJECT MATTER AND BUYER AGREES THAT ALL PRIOR QUOTATIONS, INVOICES, NEGOTIATIONS, UNDERSTANDINGS, REPRESENTATIONS AND/OR AGREEMENTS OF THE PARTIES RELATING TO THE SUBJECT MATTER HEREOF, EXCLUDING THE SOFTWARE LICENSE, WHETHER ORAL OR WRITTEN, ARE MERGED HEREIN AND SUPERSEDED IN THEIR ENTIRETY. BUYER ACKNOWLEDGES THAT IT HAS NOT ENTERED INTO THIS AGREEMENT IN RELIANCE ON ANY WARRANTY OR REPRESENTATION BY ANY PERSON OR ENTITY EXCEPT FOR THE WARRANTIES AND REPRESENTATIONS SPECIFICALLY SET FORTH HEREIN. No change or modification of any of the terms or conditions herein shall be valid or binding on either party unless in writing and signed by an authorized representative of each party. 19.10 Neither party shall be liable to the other for its failure to perform any of its obligations hereunder during any period in which such performance is delayed by circumstances beyond its reasonable control including, but not limited to, fire, flood, earthquake, war, embargo, strike, riot, inability to secure materials and transportation facilities, or the intervention of any governmental authority. <PAGE> 27 EXHIBIT C PRODUCTS TO BE COVERED UNDER THIS AGREEMENT: PRODUCT DESCRIPTION DBN-xx To be determined SOFTWARE RELEASES TO BE COVERED UNDER THIS AGREEMENT: Release x, y and successor versions thereof <PAGE> 28 EXHIBIT D PRODUCT PRICING MATRIX PRODUCTS AND UPGRADE PRICING WITH INITIAL INTEGRATOR PURCHASE [Insert price list] UPGRADE PRICING AFTER INITIAL INTEGRATOR HAS BEEN PURCHASED [Insert upgrade price list] ANNUAL MAINTENANCE FEES [*]% of the invoiced price to the Reseller on a per unit, per year basis. SkySupport service is renewed automatically every 12 months, unless otherwise noted by the Reseller. HOURLY CONSULTING RATE FOR CHARGEABLE SERVICES $[*] per hour, not including travel or lodging expenses RESELLER'S TERM Term. The term of this Agreement will begin on the Effective Date and will continue for a period of [specify time] unless it is terminated earlier in accordance with the provisions hereof. This Agreement may be renewed for additional periods upon the mutual written agreement of the parties, although each party acknowledges that the other is under no obligation to do so. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. <PAGE> 29 EXHIBIT E [ATTACH SKYSUPPORT DOCUMENT HERE] </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.16 <SEQUENCE>33 <DESCRIPTION>EX-10.16 <TEXT> <PAGE> 1 EXHIBIT 10.16 SKYSTREAM CORPORATION AND HARRIS CORPORATION INTERNATIONAL MARKETING, DISTRIBUTION AND SUPPORT AGREEMENT <PAGE> 2 TABLE OF CONTENTS <TABLE> <CAPTION> Page <S> <C> <C> 1. DEFINITIONS......................................................... 1 1.1 Acceptance................................................. 1 1.2 Data Broadcast Solution.................................... 1 1.3 Dollars.................................................... 1 1.4 End-User................................................... 1 1.5 Effective Date............................................. 1 1.6 Exclusive Market........................................... 2 1.7 Exclusive Products......................................... 2 1.8 Intellectual Property Rights............................... 2 1.9 Marketing Collateral....................................... 2 1.10 Marks...................................................... 2 1.11 Non-Exclusive Products..................................... 2 1.12 Parties.................................................... 2 1.13 Performance Criteria....................................... 2 1.14 Products................................................... 2 1.15 Purchase Order............................................. 2 1.16 Reseller Products.......................................... 2 1.17 Software................................................... 2 1.18 Source Code................................................ 3 2. DISTRIBUTION OF PRODUCTS............................................ 3 2.1 Reseller Appointment....................................... 3 2.2 Grant of Exclusivity by SKYSTREAM.......................... 3 2.3 Grant of Exclusivity by HARRIS............................. 3 2.4 Relabeling................................................. 3 2.5 Documentation.............................................. 4 2.6 Marketing Collateral....................................... 4 2.7 Quarterly Meetings......................................... 4 2.8 Grant of License........................................... 4 2.9 Limited Rights............................................. 4 2.10 Future Products............................................ 5 3. SOFTWARE............................................................ 5 3.1 Authorization.............................................. 5 3.2 Limited Distribution....................................... 5 3.3 End User Software License.................................. 5 </TABLE> -ii- <PAGE> 3 TABLE OF CONTENTS (continued) <TABLE> <CAPTION> Page <S> <C> <C> 3.4 License Only............................................... 6 3.5 Proprietary Software....................................... 6 4. TERMS AND CONDITIONS OF SALE........................................ 6 4.1 Applicability of Terms and Conditions of Sale.............. 6 4.2 Price...................................................... 7 4.3 [*]........................................................ 7 4.4 Payment Terms.............................................. 7 4.5 Forecast and Delivery Dates................................ 8 4.6 Packing.................................................... 9 4.7 Shipment & Acceptance...................................... 9 4.8 Changes and Cancellations.................................. 10 4.9 Limited Warranty........................................... 11 4.10 Import/Export.............................................. 12 4.11 Restricted Use............................................. 12 4.12 Spares available for 7 Years............................... 12 4.13 Product Changes............................................ 13 4.14 Price Protection........................................... 13 4.15 Service Agreements......................................... 14 5. MAINTENANCE, SUPPORT, AND TRAINING.................................. 14 5.1 By HARRIS.................................................. 14 5.2 By SKYSTREAM............................................... 14 6. CONFIDENTIALITY..................................................... 15 6.1 Obligations................................................ 15 6.2 Exceptions................................................. 15 6.3 Injunctive Relief.......................................... 16 6.4 Disclosure Warranty........................................ 16 6.5 Disclosure indemnification................................. 16 7. INTELLECTUAL PROPERTY RIGHTS........................................ 16 7.1 Ownership.................................................. 16 7.2 Limited Use................................................ 17 7.3 Notices.................................................... 17 7.4 HARRIS' Duties............................................. 17 7.5 Trademarks................................................. 17 8. INFRINGEMENT INDEMNITY.............................................. 17 8.1 SKYSTREAM Indemnification and Defense...................... 17 8.2 SKYSTREAM limitations...................................... 18 </TABLE> * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -iii- <PAGE> 4 TABLE OF CONTENTS (continued) <TABLE> <CAPTION> Page <S> <C> <C> 8.3 Entire Liability........................................... 18 9. YEAR 2000 COMPLIANCE................................................ 18 10. LIMITATIONS OF LIABILITY............................................ 19 10.1 Total Liability............................................ 19 10.2 Exclusion Of Damages....................................... 19 10.3 No Warranty................................................ 19 11. TERMINATION......................................................... 20 11.1 Term....................................................... 20 11.2 Events of Termination...................................... 20 11.3 Review of Exclusivity...................................... 20 11.4 Effect of Termination...................................... 20 11.5 Nonexclusive Remedy........................................ 21 11.6 Survival................................................... 21 12. GENERAL............................................................. 21 12.1 Publicity.................................................. 21 12.2 Assignment................................................. 21 12.3 Governing Law.............................................. 21 12.4 Severability............................................... 22 12.5 Force Majeure.............................................. 22 12.6 Notices.................................................... 22 12.7 Independent Contractors.................................... 22 12.8 Waiver..................................................... 22 12.9 Counterparts............................................... 22 12.10 Entire Agreement........................................... 22 EXHIBIT A - END USER SOFTWARE LICENSE................................... 24 EXHIBIT B - PRODUCTS.................................................... 26 EXHIBIT C - PERFORMANCE CRITERIA........................................ 27 EXHIBIT D - SKYSUPPORT PLAN AND PRODUCT/SERVICE PRICING................. 28 EXHIBIT E - SPARE PARTS................................................. 35 EXHIBIT F - NON-EXCLUSIVE PRODUCTS...................................... 36 </TABLE> -iv- <PAGE> 5 SKYSTREAM CORPORATION and HARRIS CORPORATION INTERNATIONAL MARKETING, DISTRIBUTION AND SUPPORT AGREEMENT This Agreement, dated __________ __ 1999, is made between SKYSTREAM Corporation ("SKYSTREAM"), a California corporation doing business at 555 Clyde Avenue, Suite B, Mountain View, California 94043 and HARRIS Corporation, a Delaware Corporation, acting through its Broadcast System Division, doing business at 4770 Duke Drive, Suite 200, Cincinnati, OH 45040 (hereinafter referred to as "HARRIS"). RECITALS A. WHEREAS, SKYSTREAM sells those certain digital broadcast networking products listed in Exhibit B ("Products" as further defined below). B. WHEREAS, HARRIS is a major supplier of radio and television products, systems and services, and desires to distribute the SKYSTREAM Products. THEREFORE, SKYSTREAM and HARRIS agree as follows: 1. DEFINITIONS. 1.1 Acceptance. "Acceptance" shall mean SKYSTREAM's document that acknowledges SKYSTREAM's acceptance of HARRIS' Purchase Order. 1.2 Data Broadcast Solution. "Data Broadcast Solution" shall mean any product or system that injects, encapsulates, or encrypts data into an MPEG-2 transport stream. 1.3 Dollars. "Dollars" means United States Dollars. 1.4 End-User. "End-User" means a customer of HARRIS, who is authorized by an end user software license agreement to use the Software on the purchased Products for the End User's internal business purposes. 1.5 Effective Date. "Effective Date" means the date first written above. <PAGE> 6 1.6 Exclusive Market. "Exclusive Market" shall mean End-Users that are television stations that broadcast a terrestrial ATSC (Advanced Television Systems Committee) television signal. 1.7 Exclusive-Products. "Exclusive Products" means all Products that have been affixed with HARRIS trademarks or logos. 1.8 Intellectual Property Rights. "Intellectual Property Rights" means patent rights (including but not limited to rights in patent applications or disclosures and rights of priority), copyright (including but not limited to rights in audiovisual works and moral rights), trade secret rights, and any other intellectual property rights recognized by the law of each applicable jurisdiction. 1.9 Marketing Collateral. "Marketing Collateral" includes brochures, sales literature, advertising, trade shows, trade support, public relations and promotions. 1.10 Marks. "Marks" means SKYSTREAM's trademarks, trade names, service marks, and/or service names. 1.11 Non-Exclusive Products. "Non-Exclusive Products" means those products, listed on Exhibit F, which may not become Exclusive Products. 1.12 Parties. The "Parties" shall mean HARRIS and SKYSTREAM. 1.13 Performance Criteria. "Performance Criteria" shall mean the specific objectives listed in Exhibit C that HARRIS commits to achieving for sustaining any exclusive arrangement with SKYSTREAM. 1.14 Products. "Products" means the SKYSTREAM products listed in Exhibit B, the Exclusive Products, and the Non-Exclusive Products listed in Exhibit F, including accompanying Software and any additions and enhancements provided for use with the units. 1.15 Purchase Order. "Purchase Order" shall mean a HARRIS purchase order that is submitted for acceptance by SKYSTREAM. 1.16 Reseller Products. "Reseller Products" means the computer software and/or hardware and related documentation that are distributed by HARRIS in combination with the Products 1.17 Software. "Software" shall mean each software program provided by SKYSTREAM (including vendor software) in machine-readable, object, printed, or interpreted form, including upgrades and documentation. -2- <PAGE> 7 1.18 Source Code. "Source Code" means software in human-readable form, including programmers' comments, data files and structures, header and includes files, macros, object libraries, programming tools not commercially available, technical specifications, flowcharts and logic diagrams, schematics, annotations and documentation reasonably required or necessary to enable an independent third party programmer with reasonable programming skills to create, operate, maintain, modify and improve the software without the help of any other person. 2. DISTRIBUTION OF PRODUCTS 2.1 Reseller Appointment. SKYSTREAM hereby appoints HARRIS as a nonexclusive reseller of the Products to End-Users for End User's internal use, provided, however, that the Non-Exclusive Products may not be resold as Exclusive Products. 2.2 Grant of Exclusivity by SKYSTREAM. SKYSTREAM further grants HARRIS worldwide exclusive distribution rights of the Exclusive Products to End-Users inside the Exclusive Market, subject, however, to SKYSTREAM's right to sell during the term of this Agreement up to [*] Products per [*] period (the "SKYSTREAM Exception"), beginning upon the effective date of this Agreement, through other distribution channels, [*] to the Exclusive Market. This SKYSTREAM Exception may be increased by a written consent, signed by HARRIS, which consent HARRIS agrees shall not be unreasonably withheld. In the event of a failure by HARRIS to consent to an increase in the SKYSTREAM Exception, SKYSTREAM may, at its sole discretion, immediately terminate the Agreement. SKYSTREAM shall not market or solicit sales of Products to End-Users in the Exclusive Market. On a quarterly basis, SKYSTREAM shall notify HARRIS of the total number of Products sold by SKYSTREAM to parties other than HARRIS pursuant to the SKYSTREAM Exception. 2.3 Grant of Exclusivity by HARRIS. HARRIS agrees not to sell products other than the Products as HARRIS' Data Broadcast Solution to End-Users in the Exclusive Market, subject, however, to HARRIS' right to sell during the term of this Agreement up to [*] products in lieu of the Products per [*] period (the "HARRIS Exception"), beginning upon the effective date of this Agreement, as a Data Broadcast Solution to End-Users in the Exclusive Market. This HARRIS Exception may be increased by a written consent, signed by SKYSTREAM, which consent SKYSTREAM agrees shall not be unreasonably withheld. In the event of a failure by SKYSTREAM to consent to an increase in the HARRIS Exception, HARRIS may, at its sole discretion, immediately terminate the Agreement. HARRIS agrees to market only the Products for Data Broadcast Solution uses to End-Users in the Exclusive Market. On a quarterly basis, HARRIS shall notify SKYSTREAM of the total number of products sold by HARRIS in lieu of the Products pursuant to the HARRIS Exception. 2.4 Relabeling. Except for those Products designated Non-Exclusive Products, SKYSTREAM shall allow HARRIS to brand the Products with HARRIS' logo and trademarks. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -3- <PAGE> 8 SKYSTREAM will be responsible for affixing the HARRIS logo and trademark during the manufacturing process pursuant to HARRIS guidelines and instructions and may pass on any additional costs, if any, associated with adhering to Harris' guidelines. SKYSTREAM shall also label such Product packages with HARRIS' logo and markings and may pass on any additional costs, if any, associated with adhering to Harris' guidelines. 2.5 Documentation. SKYSTREAM will make available SKYSTREAM's End User documentation to HARRIS, as it is updated and modified from time to time, without additional charge. SKYSTREAM grants HARRIS a nonexclusive license during the term of this Agreement to use, modify, reproduce, make derivative works of and distribute SKYSTREAM's documentation for the Products to the End-User. HARRIS will provide copies of such modifications to SKYSTREAM upon SKYSTREAM's request. 2.6 Marketing Collateral. (a) HARRIS agrees to develop and pay for all Marketing Collateral associated with the Exclusive Products. SKYSTREAM grants HARRIS a nonexclusive license during the term of this Agreement to use, modify, reproduce, make derivative works of and distribute SKYSTREAM's Marketing Collateral for the Products; provided, however, that HARRIS will obtain prior written approval from SKYSTREAM before use of any Marketing Collateral concerning the Products. SKYSTREAM reserves all rights associated with such Marketing Collateral subject to the license granted herein. SKYSTREAM will provide commercially reasonable efforts to support HARRIS in the development of Marketing Collateral supporting the Exclusive Products. (b) SKYSTREAM agrees to provide, at no additional charge, sufficient Marketing Collateral, as requested, to HARRIS to support HARRIS' non-exclusive reseller appointment pursuant to Section 2.1. 2.7 Quarterly Meetings. SKYSTREAM and HARRIS agree to hold quarterly meetings (i) to discuss product features and product development, (ii) set development timelines for next generation product(s), and (iii) to review the current market conditions, competitive climate, pricing strategies, and other marketing programs. 2.8 Grant of License. Subject to the terms of this Agreement, SKYSTREAM grants HARRIS a limited license to use the Software in connection with the demonstration of the Products and in connection with the configuration and support of the Products for End Users. All such use shall be subject to the terms of the End User Software License attached hereto as Exhibit A. 2.9 Limited Rights. HARRIS' rights in the Products will be limited to those expressly granted in this Agreement. -4- <PAGE> 9 2.10 Future Products. SKYSTREAM agrees to use commercially reasonable efforts to develop a conditional access scrambling product for ATSC transmission. The specifications for such product are to be established by mutually agreement of the Parties by August 31, 1999. HARRIS shall have the right to include such product, as an Exclusive Product under the terms of this Agreement at a mutually agreed upon price and such product shall become a Product hereunder. 3. SOFTWARE 3.1 Authorization. SKYSTREAM warrants and represents that, as of the date of this Agreement and as of the date of delivery of any Products hereunder, SKYSTREAM has the authority to sell the Products and distribute all the software accompanying the Products to HARRIS and End-User customers of HARRIS, subject only to the acceptance of the terms of such end-user software licenses as may accompany the Products by the End User. 3.2 Limited Distribution. HARRIS is permitted to market and distribute SKYSTREAM Software, and any other software accompanying the Products, only in connection with the sale of the Products to the End User. 3.3 End User Software License. (a) HARRIS agrees: (i) to include the following language in all sales quotations and offers to sell the Products: "THE [NAME OF PRODUCT] IS SOLD SUBJECT TO THE TERMS OF ONE OR MORE END USER SOFTWARE LICENSES. THE USE OF THE [NAME OF PRODUCT] IS CONTINGENT UPON THE ACCEPTANCE BY THE PURCHASER OF THE TERMS OF SUCH END USER SOFTWARE LICENSES." (ii) to provide a copy of the "End User Software License", in the form attached hereto as Exhibit A, and such other end user software licenses required for use of the Products, as may be provided by SKYSTREAM from time to time, to any potential purchaser who shall request a copy prior to sale; (iii) to package and to install the Products in such a manner that HARRIS' customer is provided with a meaningful opportunity to review and agree to the End User Software License and other end user software licenses accompanying the Products before installing or using any of the Products; and -5- <PAGE> 10 (iv) to accept for return and refund any unused Products in the event that HARRIS' customer does not agree to accept any of the terms of the End User Software License or the terms of any other software license required to use the Products. SKYSTREAM shall accept the return such unused Product and refund the Price to HARRIS. (b) In consideration of SKYSTREAM's not requiring a written End-User Software License signed by HARRIS' customer as a precondition to the sale or transfer of the Products, HARRIS agrees to indemnify SKYSTREAM for any and all damages that may arise as a result of HARRIS' breach of Section 3.3(a). 3.4 License Only. Notwithstanding the use herein of the word "sell" and variants thereof, all Software is licensed to HARRIS and the End User and is not sold. SKYSTREAM, or the licensors through which SKYSTREAM obtained the rights to distribute Software, retain title to the Software, whether the Software is separate or combined with any other products, including HARRIS' products, and HARRIS shall transfer Software only to the extent that such transfer is incidental to the resale or lease of the Products. The End User is licensed by SKYSTREAM directly to use the Software solely in conjunction with the use of the Products and further subject to the terms of the End User Software License. 3.5 Proprietary Software. The Software is proprietary to SKYSTREAM and/or its suppliers and is copyrighted. Without SKYSTREAM's prior written approval, HARRIS shall not separate the Software from the Products as shipped by SKYSTREAM, nor shall HARRIS disassemble, de-compile, reverse-engineer, copy, modify, or otherwise change any of the Software or its form. HARRIS shall protect the Software from any disclosure or use in violation of this Agreement in accordance with Exhibit A. HARRIS shall not be entitled to receive Source Code. 4. TERMS AND CONDITIONS OF SALE 4.1 Applicability of Terms and Conditions of Sale. (a) SKYSTREAM agrees to sell Products to HARRIS in accordance with the terms and conditions of this Agreement. Specific quantities of the Products shall be ordered by HARRIS for purchase by the placement of a Purchase Order. In the event HARRIS requests a cancellation of a Purchase Order prior to SKYSTREAM's acceptance, SKYSTREAM shall accept HARRIS' cancellation with no cancellation fees accessed. (b) Within five (5) business days after the receipt of the Purchase Order, SKYSTREAM shall by facsimile either accept or reject the Purchase Order. Unless otherwise specified in this Agreement, any Purchase Order accepted by SKYSTREAM ("Order"), shall be binding upon the Parties and (except as permitted herein) may not be altered, amended, modified or canceled without the prior written consent of HARRIS and SKYSTREAM. In the event SKYSTREAM rejects a Purchase Order, the Parties agree to discuss mutually acceptable conditions -6- <PAGE> 11 for the Purchase Order and Acceptance. In the event HARRIS requests a cancellation of an accepted Purchase Order, the Parties agree to discuss a mutually equitable settlement as a result of said cancellation. (c) No terms or conditions set forth in the Purchase Order, to which notice of objection is hereby given, or is stated in any future correspondence between HARRIS and SKYSTREAM shall alter or supplement this agreement unless both Parties have agreed in writing to modify this Agreement, which requirement may be satisfied by acceptance of a term contrary to this Agreement in a Purchase Order by confirmatory memorandum from SKYSTREAM. Neither SKYSTREAM's commencement of performance or delivery shall be deemed or construed as acceptance of additional or different terms and conditions contained in a Purchase Order. 4.2 Price. (a) Unless otherwise stated in writing by SKYSTREAM, all prices quoted shall be exclusive of transportation, insurance, federal, state, local, use, sales, property (ad valorem) and similar taxes or duties now in force or hereafter enacted. HARRIS agrees to pay all taxes, fees or charge of any nature whatsoever imposed by any governmental authority on, or measured by, the transaction between HARRIS and SKYSTREAM, in addition to the prices quoted or invoiced. In the event that SKYSTREAM is required to collect the foregoing, such amounts will appear as separate items on SKYSTREAM's invoice. HARRIS agrees to provide SKYSTREAM with a valid resale certificate for the Products purchased for resale. The initial pricing paid by HARRIS to SkyStream for Products is listed in Exhibit D. Nothing in this Agreement will be construed to restrict HARRIS' ability to set prices to its customers. 4.3 [*] [*] 4.4 Payment Terms (a) SKYSTREAM shall invoice HARRIS upon shipment of the Order to HARRIS. All invoices are payable by draft or wire transfer in Dollars thirty (30) days from date of invoice. No discounts are authorized. Interest on late payments may, at SkyStream's discretion, accrue at the rate of [*] per month or the highest legal rate, whichever is lower, provided, however that no interest shall accrue on amounts resulting from an invoice or other errors by SKYSTREAM. (b) For payments by wire transfer, SKYSTREAM'S bank information is: [*] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -7- <PAGE> 12 [*] HARRIS should supply the sending Bank Information, ABA & Account # to show where the money is coming from. (c) Until the purchase price and all other charges payable to SKYSTREAM hereunder have been received in full, SKYSTREAM hereby retains, and HARRIS hereby grants to SKYSTREAM, a security interest in the Products delivered to HARRIS and any proceeds therefrom. HARRIS agrees to promptly execute all documents reasonably requested by SKYSTREAM to perfect and protect such security interest. (d) Should HARRIS become delinquent in the payment of any undisputed sum due hereunder, SKYSTREAM shall not be obligated to continue performance hereunder, including without limitation shipment of any previous Orders. (e) HARRIS warrants to SKYSTREAM that it is financially solvent on the date on which it places a Purchase Order and expects to be solvent on the date of receipt of shipment. SKYSTREAM reserves the right to change the credit terms provided herein, when in SKYSTREAM's opinion the financial condition or previous payment record of HARRIS so warrants. 4.5 Forecast and Delivery Dates. (a) Standard lead times for Purchase Orders placed by HARRIS shall be [*] for Products included in the purchase forecast provided to SKYSTREAM pursuant to Section 4.4(c), and [*] for all other Purchase Orders. (b) Within fifteen (15) days from the effective date of this Agreement, HARRIS agrees to place a Purchase Order covering requested shipments for delivery by June 30, 1999. (c) In order for SKYSTREAM to maintain a continuous flow of long lead-time material, HARRIS agrees to provide a purchase forecast to SKYSTREAM, broken out by month, Product, and the probability being converted to a sale, at the end of each month that covers * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -8- <PAGE> 13 an additional ninety (90) day period beyond the date of open Purchase Orders that exist at any given time. (d) Subject to Section 4. 1 (c), all shipments are subject to SKYSTREAM's availability schedule. SKYSTREAM will use commercially reasonable efforts to meet any delivery date(s) requested in Purchase Order; provided however, that SKYSTREAM will not be liable under any circumstances for its failure to meet such delivery date(s). Any delivery dates provided by SKYSTREAM to HARRIS pursuant to a Purchase Order are best estimates only, however delivery date in an Order which has been confirmed in writing by SKYSTREAM shall be firm. SKYSTREAM shall have the right to make partial shipments and payment therefore shall be made in the manner described in Section 4.3 above. (e) In the event HARRIS requests an acceleration in the delivery of the Products SKYSTREAM will make reasonable efforts to accommodate accelerations impacted by materials constraints; which may include without limitation: material availability, capacity, and personnel resources. SKYSTREAM and HARRIS will mutually agree on the applicable price adjustments if accelerations result in increased costs due to procurement of material from distribution and express handling. 4.6 Packing. All Products shall be packed, if appropriate, for shipment and storage in accordance with standard commercial practices. All packing will conform to requirements of carrier's tariffs. When special or export packaging is requested or, in the opinion of SKYSTREAM, required under the circumstances, the cost of such special export packaging, if not set forth on the invoice, will be separately invoiced. SKYSTREAM shall label such packages with HARRIS' logo and markings including the number of Purchase Order, shipment weight, name of Products, handling and loading instructions and an itemized packing list specifying the number of units, Purchase Order, serial numbers with each shipment by pallet. SKYSTREAM will provide test date of bulk packaging for evaluation and approval. The units shall be individually packed in HARRIS labeled boxes. 4.7 Shipment & Acceptance. (a) F.O.B. Point. All prices are F.O.B. (as defined in the Uniform Commercial Code as implemented by the state of California, U.S.A.) SKYSTREAM's Mountain View location unless otherwise agreed to in writing. HARRIS will pay all transportation and insurance charges after delivery to the F.O.B. point. Unless otherwise indicated by SKYSTREAM HARRIS is obligated to obtain insurance covering damage to the goods while in transit. (b) Method of Shipment. Subject to this Section 4.6, SKYSTREAM will ship in accordance with HARRIS' shipping instructions. In the absence of specific instructions or if -9- <PAGE> 14 HARRIS' instructions are deemed unsuitable, SKYSTREAM reserves the right to ship by the most appropriate method. (c) Title and Risk of Loss. Title to the Products and risk of loss and damage shall pass to HARRIS upon delivery to the F.O.B. point. (d) Acceptance. Products shall be deemed to have been accepted by HARRIS unless HARRIS provides written notice to SKYSTREAM to the contrary within thirty (30) days from the date of delivery to the F.O.B. point. Such written notice shall request a Return Material Authorization ("RMA") number and the terms and conditions that apply to warranty returns under Section 4.8 shall apply to returns under this Section 4.6. 4.8 Changes and Cancellations. (a) Subject to the additional charges set forth below and to Section 4.7(b), Orders may be canceled per the following schedule: <TABLE> <CAPTION> DAYS PRIOR TO SCHEDULED PERCENTAGE OF ORDER WHICH MAY BE CANCELED SHIPMENT DATE TO F.O.B. POINT <S> <C> 0-30 days [*] 31-60 days [*] 61+ days [*] </TABLE> In the event that HARRIS cancels any Order more than thirty (30) days but fewer than sixty (60) days prior to the scheduled delivery date (to the F.O.B. point) for such order, HARRIS shall promptly pay to SKYSTREAM a restocking/cancellation fee equal to fifteen percent (15%) of the purchase price for the Products subject to such Order. (b) Orders may be rescheduled per the following schedule: <TABLE> <CAPTION> DAYS PRIOR TO SCHEDULED PERCENTAGE OF ORDER WHICH MAY BE RESCHEDULED SHIPMENT DATE TO F.O.B. POINT <S> <C> 0-30 days [*] 31-60 days [*] 61+ days [*] </TABLE> Orders may only be rescheduled once. Rescheduled orders may not be later canceled. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -10- <PAGE> 15 (c) If HARRIS terminates Orders in whole or in part because of SKYSTREAM's failure to timely deliver, HARRIS' sole remedy shall be entitlement to cancel the undelivered quantity of any Order. (d) No cancellation of any Order for default shall be effective unless SKYSTREAM has failed to correct such alleged default within thirty (30) days after receipt by SKYSTREAM of a written notice by HARRIS of such default and no cancellation fee shall be accessed against HARRIS. 4.9 Limited Warranty (a) The Products are warranted against defects in material, design and workmanship for a period of fourteen months from the date of delivery to FOB point. This limited warranty does not cover the results of accident, abuse, neglect, improper testing, vandalism, acts of God, use contrary to specifications or instructions, or repair or modification by anyone other than SKYSTREAM, HARRIS or SKYSTREAM's authorized agents. SKYSTREAM SHALL HAVE NO OBLIGATION UNDER THIS WARRANTY, AND MAKES NO REPRESENTATION AS TO PRODUCTS THAT HAVE BEEN MODIFIED CONTRARY TO PRODUCT SPECIFICATIONS ("MODIFIED") BY HARRIS OR ITS END USERS. The foregoing warranty extends only to HARRIS and End Users purchasing Products through an authorized sales channel of HARRIS, and not other End Users. The foregoing warranty does not apply to any used or Modified Products, or software within the Products, which is subject to the end user software licenses. (b) If the Product does not conform to the foregoing warranties, HARRIS or HARRIS' End User may, at its own risk and expense, return the allegedly defective Product directly to SKYSTREAM during the Warranty Period. In order to do so, HARRIS or HARRIS' End User must first notify SKYSTREAM in writing of the alleged defect and request a return material authorization ("RMA") number. Within five (5) days of its receipt of the RMA number, HARRIS or HARRIS' End User shall ship to SKYSTREAM the allegedly defective Product, freight prepaid, to SKYSTREAM, and shall include a notation of the RMA number. Any Products returned to SKYSTREAM without an authorized RMA number may be returned to HARRIS or HARRIS' End User, freight collect. Upon receipt of the Product, SKYSTREAM, at its option, will repair or replace the Product and ship the repaired or replaced Product to HARRIS at SKYSTREAM's expense and risk, or refund the purchase price. If SKYSTREAM determines that any returned Product conformed to the warranties, SKYSTREAM will return the Product to HARRIS or HARRIS' End User, at their expense and risk, along with a written statement setting forth the basis for SKYSTREAM's conclusion that the returned Product was not defective, and HARRIS or HARRIS' End User agrees to pay SKYSTREAM's reasonable costs of handling and testing. (c) THE REMEDIES PROVIDED HEREIN ARE HARRIS' AND HARRIS' END USERS' SOLE AND EXCLUSIVE REMEDIES FOR BREACH OF WARRANTY BY -11- <PAGE> 16 SKYSTREAM. SKYSTREAM SPECIFICALLY DISCLAIMS ALL OTHER EXPRESS, IMPLIED OR STATUTORY WARRANTIES, INCLUDING ANY IMPLIED WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE, MERCHANTABILITY OR NONINFRINGEMENT. NO PERSON IS AUTHORIZED TO MAKE ANY OTHER WARRANTY OR REPRESENTATION CONCERNING THE PERFORMANCE OF THE PRODUCTS OTHER THAN AS PROVIDED IN THIS SECTION. 4.10 Import/Export. HARRIS agrees that it will not in any form export, re-export, resell, ship or divert directly or indirectly any Product or technical data or Software furnished hereunder to any country for which the United States Government or any government agency requires an export license or other governmental approval without first obtaining such license or approval. 4.11 Restricted Use. SKYSTREAM's Products may produce a reduction and loss of data and therefore are not sold for use in medical equipment, avionics, nuclear applications, or other high-risk applications where malfunctions or loss of data could result directly in personal injury to human beings. HARRIS agrees not to use, to contractually bind its customers not to use, the Products in such applications, and HARRIS agrees to indemnify SKYSTREAM and to hold SKYSTREAM harmless from and against any liability arising out of HARRIS' failure to contractually bind its customers in the manner previously described. 4.12 Spares available for 7 Years. (a) SKYSTREAM shall continue to make available to HARRIS Spare Parts identified in Exhibit E, for a period of seven (7) years after the discontinuance of manufacturing of the Product by SKYSTREAM, at SKYSTREAMs current prices for such Spare Parts as SKYSTREAM may change from time to time (current prices as of the Effective Date are listed on Exhibit E), and HARRIS may order such Spare Parts for delivery during such period. If after expiration of this seven (7) year period, SKYSTREAM decides to discontinue manufacture of any Spare Parts manufactured directly by it, SKYSTREAM shall immediately provide written notice to HARRIS of its intention. Upon receipt of SKYSTREAM's written notice, HARRIS shall have sixty (60) days in which to order additional quantities of any such Spare Parts for delivery by SKYSTREAM not later than six (6) months after receipt of the notice. (b) Within 90 days of such notice and if HARRIS desires to have Spare Parts manufactured after SKYSTREAM has discontinued manufacture of the parts, SKYSTREAM shall either manufacture them for HARRIS at a reasonable Cost Plus Fee basis or SKYSTREAM shall provide HARRIS with appropriate documentation, tooling and the rights to use the documentation and tooling to have the parts manufactured by HARRIS and/or it's contractor. -12- <PAGE> 17 4.13 Product Changes. (a) SKYSTREAM may, at any time prior to shipment, make changes in NonExclusive Products. SKYSTREAM may modify the Non-Exclusive Product drawings and specifications, as they may be set forth in the relevant product specification sheet (the "Specifications"), or substitute products of later design. SKYSTREAM guarantees that such modifications or substitutions will not impact upon form, fit, or function under normal and proper use of the ordered Product as provided in the Specifications. With respect to changes, modifications, and substitutions that do impact the form, fit, or function of Non-Exclusive products, SKYSTREAM shall notify HARRIS in writing thirty (30) days prior to the date the changes become effective and HARRIS shall notify SKYSTREAM of any objections thereto before the effective date of the change; if HARRIS fails to notify SKYSTREAM of any such objections, HARRIS shall be deemed to have consented to such change. (b) SKYSTREAM shall inform HARRIS on a periodic basis of any planned changes to the form, fit or function of Exclusive Products. Any changes, modifications, and substitutions that impact the form, fit, or function of Exclusive Products shall be mutually agreed upon by the Parties. HARRIS reserves within its sole discretion, the right to accept or reject any such proposed changes and to require SKYSTREAM to deliver the Exclusive Products in accordance with the original Specifications of this Agreement. (c) Notice of any technical change to the Products shall be provided to: HARRIS Corporation Director of Customer Service 3200 Wismann Lane Quincy, Illinois 62301 (217) 222-8200 SkyStream Product Marketing Manager 555 Clyde Avenue Mountain View, California 94043 (650) 390-8800 4.14 Price Protection. (a) The Parties shall have established commercially viable pricing for the purchase of the Products by HARRIS for resale. Commercial viability shall be based on the competitiveness of the price paid by HARRIS to SKYSTREAM and based on such purchase price, the ability of HARRIS to resell the Products in the market place at a reasonable margin to HARRIS. In the event that HARRIS believes that the purchase price no longer is commercially viable, -13- <PAGE> 18 HARRIS shall notify SKYSTREAM in writing, and the Parties shall engage in good faith negotiations to restructure the purchase price between them in order to meet the goal of the commercial viability of the purchase price. The intent of such good faith negotiations is the reduction of the purchase price between the Parties which will enable HARRIS to meet resale market forces. At no time shall such discussions or agreements allow SKYSTREAM to affect in any way, the HARRIS resale price or other factors of the resale. Once SKYSTREAM accepts the Purchase Order in Writing, at the quoted price, this price shall remain fixed as defined in the Order unless the parties mutually agree to reduce the price. (b) Any adjustment in the price of the Products shall be effective on Products not yet delivered to HARRIS by SKYSTREAM under outstanding Orders. SKYSTREAM agrees to amend the Order accordingly. 4.15 Service Agreements. HARRIS shall have the opportunity to purchase, for resale to End Users, the first year of SkySupport Service customer service, as listed in Exhibit D under SkySupport Plan, at the time of each sale by Harris to an End User. Such SkySupport may then be renewed on the nearest of February 15, May 15, August 15 and November 15 following the one yew anniversary of the date of each sale by Harris to End User. In the case of upgrades to a previously purchased Product, in order for SkySupport to extend to the upgrade, the End User must have purchased SkySupport on the Product, and must pay for SkySupport on the upgrade. Where SkySupport is ordered on an upgrade, the first year of SkySupport shall be assessed on the upgrade at the time of order by Harris and invoiced with the upgrade, and thereafter collected at the time the SkySupport renewal is payable on the Product for which the upgrade was purchased. 5. MAINTENANCE, SUPPORT, AND TRAINING. 5.1 By HARRIS. HARRIS agrees to offer all End-Users one of two maintenance and support plans to technically support the Products sold to the End-Users as follows: (a) a service plan that is substantially similar to the SkySupport customer service program that is offered by SKYSTREAM to its direct customers. A copy of the plan, as well as the fee structure is listed in Exhibit D under SKYSUPPORT PLAN. (b) a standard 12-month warranty period, of which the services available to the End-Users as well as the fee structure are listed in Exhibit D under STANDARD WARRANTY. 5.2 By SKYSTREAM. -14- <PAGE> 19 SKYSTREAM will not be responsible for providing support to the End User. SKYSTREAM will provide HARRIS with: (a) commercially reasonable efforts to correct any non-conformity with the software Feature Specification Documents for the applicable versions of the software; (b) every six (6) months, at a mutually agreeable location at no cost to HARRIS: factory and field service training, to consist of a minimum of two business days of training, and sales and product line staff training, to consist of at least one, four-hour session. Factory and field service training sessions given pursuant to this section may be attended by up to 5 HARRIS personnel. Sales and product line staff training shall be attended by a reasonable number of HARRIS personnel or HARRIS distributors. Each Party agrees to pay the travel and living expenses of such Party's own personnel associated with the training; (c) SKYSTREAM agrees to provide reasonable access to SKYSTREAM's technical personnel for inquiries from HARRIS relating to the Products during standard SKYSTREAM business hours, generally Monday through Friday from 9:00 am. to 5:00 p.m. Pacific Standard Time, and SKYSTREAM agrees to respond to any HARRIS inquiry within eight business hours; (d) additional training and support services as the Parties shall negotiate in good faith and mutually agree upon. 6. CONFIDENTIALITY. 6.1 Obligations. Each party agrees that it will not disclose to any third party or use any Products or other Confidential Information disclosed to it by the other party, except to carry out its rights and obligations under this Agreement, and that it will take all reasonable measures to maintain the confidentiality of all Confidential Information in its possession or control, which will in no event be less than the measures it uses to maintain the confidentiality of its own information of similar importance. "Confidential Information" includes (i) all written information labeled confidential or proprietary and (ii) oral information that is designated by a party as confidential or proprietary in writing within a reasonable time of its disclosure. 6.2 Exceptions. "Confidential Information" will not include information that: (i) is in or enters the public domain without breach of this Agreement; (ii) is lawfully obtained by the receiving party without breach of a nondisclosure obligation; -15- <PAGE> 20 (iii) is independently developed or already in the possession of the receiving party as shown by the receiving party's contemporaneous records; or, (iv) is required by law to be disclosed, provided that the receiving party gives prompt written notice of such requirement prior to disclosure: or (v) was known to the receiving party at the time it was submitted; The obligations and restriction contained in this Section 6.1 shall expire 10 years after the Effective Date or 3 years after expiration or termination of this Agreement, which ever is later. 6.3 Injunctive Relief. Each party acknowledges that the improper disclosure of the other's Confidential Information could cause substantial harm to the other party that could not be remedied by the payment of damages alone. Accordingly, either party will be entitled to preliminary and permanent injunctive relief and other equitable relief for any breach of this Agreement or misuse of Confidential Information by SKYSTREAM, HARRIS or the End User, as applicable. 6.4 Disclosure Warranty. Each party warrants that it has the full power and authority to supply and to disclose Confidential Information to the other party, and that such Confidential Information has not been improperly or unlawfully acquired. 6.5 Disclosure Indemnification. Each party agrees to indemnify the other party against, and to hold the other party harmless of and from, any loss, cost, damage, liability, suit, judgment, or expense, including legal fees (collectively, "Harm") arising out of any breach of the warranties set forth in Section 6.4. 7. INTELLECTUAL PROPERTY RIGHTS 7.1 Ownership. SKYSTREAM and/or its vendors shall own all right, title, and interest in the Software and documentation, all Intellectual Property Rights therein, and all Intellectual Property Rights in the Products, including all changes and improvements requested or suggested by HARRIS in the support and maintenance of the Products. SKYSTREAM acknowledges that HARRIS shall own all right, title, interest and Intellectual Property Rights in all products or inventions developed entirely by HARRIS except those which are based upon or derived from the Products, Software, documentation, Confidential Information or trade secret information of SKYSTREAM, or those developed by Harris personnel who have used the Products and/or Software that are based upon or derived from the Products and/or Software at the time of conception or reduction to practice of the invention to the Products, or from research or development of SKYSTREAM that has been a subject of public disclosure or disclosure to Harris pursuant to this Agreement. -16- <PAGE> 21 7.2 Limited Use. The Products are offered for sale and are sold by SKYSTREAM subject in every case to the condition that such sale does not convey any license expressly or by implication, to manufacture, reverse engineer, duplicate or otherwise copy or reproduce any of the Products or any part thereof. 7.3 Notices. HARRIS will not delete or in any manner alter the Intellectual Property Rights notices of SKYSTREAM and its suppliers, if any, appearing on the Products as delivered to HARRIS. 7.4 HARRIS' Duties. HARRIS will take customary measures in the marketing and distribution of the Products to provide notices of SKYSTREAM's copyrights and trademarks in the Products, no less than the extent to which HARRIS protects its copyrights and trademarks in HARRIS' Products, and will, to the extent lawful, report promptly to SKYSTREAM any infringement of such rights of which HARRIS becomes aware. 7.5 Trademarks. Subject to the terms and conditions of this Agreement, SKYSTREAM grants HARRIS a nonexclusive license for the term of this Agreement to use the Marks in HARRIS' marketing of the Products, provided that such use is in accordance with SKYSTREAM's trademark usage guidelines then in effect. Such use must reference the Marks as being owned by SKYSTREAM. Nothing in this Agreement grants HARRIS ownership or any rights in or to use the Marks, except in accordance with this license, and HARRIS' use of the Marks will inure to the benefit of SKYSTREAM. The rights granted to HARRIS in this license will terminate upon any termination or expiration of this Agreement. Upon such termination or expiration, HARRIS will no longer make any use of any Marks. SKYSTREAM will have the exclusive right to own, use, hold, apply for registration for, and register the Marks during the term of, and after the expiration or termination of, this Agreement; HARRIS will neither take nor authorize any activity inconsistent with such exclusive right. 8. INFRINGEMENT INDEMNITY 8.1 SKYSTREAM Indemnification and Defense. Subject to the limitations hereinafter set forth, HARRIS agrees that SKYSTREAM has the right to defend, or at its option to settle, and SKYSTREAM agrees, at its own expense, to defend or at its option to settle, any claim, suit or proceeding (collectively, "Action") brought against HARRIS, its customers or its End Users alleging that the use or distribution of the Products infringes or misappropriates any United States patent, copyright or trade secret. SKYSTREAM shall have sole control of any such Action or settlement negotiations shall, and SKYSTREAM agrees to pay, subject to the limitations set forth in Sections 7 and 8, all related costs, expenses and attorney fees and any settlement costs or final judgment entered against HARRIS or its End Users as a result of such infringement. HARRIS agrees that SKYSTREAM at its sole option shall be relieved of the foregoing obligations unless HARRIS notifies SKYSTREAM promptly in writing of such Action and gives SKYSTREAM -17- <PAGE> 22 authority to proceed as contemplated herein, and, at SKYSTREAM's expense, gives SKYSTREAM proper and reasonable information and assistance to settle and/or defend any such Action. If the Products, or any part thereof, are, or in the opinion of SKYSTREAM may become, the subject of any Action for infringement of any United States patent, copyright or trade secret, or if a judicial or other governmental authority enjoins the use or distribution of Products as a result of an Action defended by SKYSTREAM, then SKYSTREAM may, at its option and expense: (i) procure for HARRIS, its customers and End Users the right to distribute or use, as appropriate, the Products; (ii) replace the Products with other equivalent non-infringing Products; (iii) suitably modify the Products to render such non-infringing; yet equivalent or (iv) if the foregoing alternatives cannot be accomplished on a commercially reasonable basis as determined in SKYSTREAM's sole discretion, require HARRIS to return such Products and refund the aggregate payments paid therefor by HARRIS, less a reasonable sum for use and damage. HARRIS shall indemnify and hold harmless SKYSTREAM from and against any and all third party claims arising out of the distribution of Products after SKYSTREAM has required HARRIS to return such Products or arising out of any exclusions to SKYSTREAM's indemnification obligations set forth in Section 8.2. SKYSTREAM shall not be liable for any costs or expenses incurred without its prior written authorization. 8.2 SKYSTREAM limitations. Notwithstanding the provisions of Section 8.1 above, SKYSTREAM assumes no liability for (i) any infringement claim (including without limitation combination or process patents) arising out of the combination of a Product or use with other hardware, software or other items not provided by SKYSTREAM to the extent such infringement would not have occurred absent such combination or use; (ii) any infringement claims arising out of the modification of the Products, or any part thereof, unless such modification was made by SKYSTREAM; or (iii) any infringement claims arising out of SKYSTREAM's compliance with HARRIS' specifications or designs. 8.3 Entire Liability. THE FOREGOING PROVISIONS OF THIS SECTION 8 STATE THE ENTIRE LIABILITY AND OBLIGATION OF SKYSTREAM AND THE EXCLUSIVE REMEDY OF HARRIS, ITS CUSTOMERS AND END USERS WITH RESPECT TO ANY ALLEGED INFRINGEMENT OF COPYRIGHTS, TRADEMARKS, PATENTS OR OTHER INTELLECTUAL PROPERTY RIGHTS BY THE PRODUCTS. 9. YEAR 2000 COMPLIANCE (a) SKYSTREAM warrants to HARRIS that each of the Products including (software, firmware or documentation) furnished with the Products purchased by HARRIS, shall be "Year 2000 Compliant", meaning that it will, at all times before, during and after calendar year 2000, perform all functions (including, without limitation, input, processing, calculating, comparing, sequencing and output) related to or including dates (including the year 2000 and dates before and after the year 2000) without interruption. For purposes of the foregoing, "without interruption" means, among other things, without modification, loss of performance, loss of use, or work or -18- <PAGE> 23 expense on the part of HARRIS or the End User, without changes in inputs, output, data or other information in relation to dates arising in the Y2K and beyond. Furthermore, when used in combination with other information technology, each of the Products shall accurately process date/time data. (b) SKYSTREAM warrants to HARRIS that internal information technology systems are Year 2000 Compliant so as to prevent interruption or delay respecting the continuous and timely supply of products to HARRIS. (c) SKYSTREAM shall indemnify and hold harmless, HARRIS, its employees, agents and third parties claiming under them from any and all actions, claims, demands, suits, losses, damages, fines and penalties (except where prohibited by law), judgments, expenses (including reasonable attorney's fees), and causes of action of every character, whether in tort, contract or otherwise which results from the failure or the alleged failure of SKYSTREAM to furnish "Year 2000 Compliant" software as stated herein. HARRIS shall notify SKYSTREAM in writing immediately upon being given notice of any such action or claim and HARRIS shall be afforded the opportunity of participating in any legal defense undertaken by SKYSTREAM. 10. LIMITATIONS OF LIABILITY. 10.1 Total Liability. EXCEPT AS SET FORTH IN SECTION 8 AND EXCEPT FOR BREACHES OF SECTION 6, SKYSTREAM'S AND HARRIS' LIABILITY FOR A BREACH OF THIS AGREEMENT WILL BE LIMITED TO THE TOTAL VALUE OF ORDERS RECEIVED OR DUE FROM HARRIS UNDER THIS AGREEMENT. 10.2 Exclusion Of Damages. EXCEPT AS SET FORTH IN SECTION 8 AND EXCEPT FOR BREACHES OF SECTION 6, SKYSTREAM WILL NOT BE LIABLE TO HARRIS OR HARRIS' CUSTOMERS OR END USERS, NOR SHALL HARRIS BE LIABLE TO SKYSTREAM, FOR ANY SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES, WHETHER BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), PRODUCT LIABILITY, OR OTHERWISE, AND WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. 10.3 No Warranty. EXCEPT AS SET FORTH IN SECTIONS 4.9, 8 AND 9, SKYSTREAM MAKES NO WARRANTY, EXPRESS OR IMPLIED, IN CONNECTION WITH THE PRODUCTS, INCLUDING THE RESULTS AND PERFORMANCE THEREOF, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR NONINFRINGEMENT. -19- <PAGE> 24 11. TERMINATION. 11.1 Term. The term of this Agreement will begin on the Effective Date and will continue until the third anniversary of the Effective Date ("Termination Date"), unless it is terminated earlier in accordance with the provisions hereof. Thereafter, this Agreement may be renewed for any number of additional one-year periods upon the mutual written agreement of the Parties, although each party acknowledges that the other is under no obligation to do so. 11.2 Events of Termination. Either party will have the right to terminate this Agreement (i) for convenience and without cause, upon ninety (90) days written notice to the other party, (ii) if the other party breaches any material term or condition of this Agreement and fails to cure such breach within thirty (30) days after written notice, or (iii) upon thirty (30) days notice, if the other party becomes the subject of a voluntary or involuntary petition in bankruptcy or proceeding relating to insolvency, receivership, liquidation or composition for the benefit of creditors. 11.3 Review of Exclusivity. No more than fifteen days after December 31, 1999, both Parties agree to meet to reconsider the exclusivity provisions of this Agreement. HARRIS shall present to SKYSTREAM a product review including: competition, experience to date, lost orders, orders to date, proposals, product feedback and future implementation plans. During HARRIS' product review presentation SKYSTREAM shall provide HARRIS with feedback on HARRIS' presentation and SKYSTREAM's view of the marketplace. If HARRIS meets the Performance Criteria, listed in Exhibit C, this Agreement shall automatically continue in full force and effect. Otherwise, for thirty (30) days after the meeting, or if such meeting fails to timely occur, for thirty (30) days following January 15, 2000, SKYSTREAM may terminate the provisions of Sections 2.2 and 2.3 of this Agreement by written notice to HARRIS, in which event, the remainder of this Agreement shall continue in full force and effect. 11.4 Effect of Termination. (a) Upon termination or expiration of this Agreement, HARRIS will (except as specified in subsection (b) below) immediately return to SKYSTREAM or (at SKYSTREAM's request) destroy all Source Code, if any, Software (except for Software residing on a SKYSTREAM Product) and other Confidential Information in its possession or control, and an authorized representative of HARRIS will certify to SKYSTREAM in writing that HARRIS has done so. (b) Upon termination or expiration of this Agreement, HARRIS will have the option, in its sole discretion, of: (i) electing, at any time, to allow SKYSTREAM to offer maintenance and support for the Products directly to End Users in accordance with SKYSTREAM's then applicable terms and conditions for such services; or -20- <PAGE> 25 (ii) continuing to provide maintenance and support for the Products to its End Users upon the terms and conditions of Section 5 and SKYSTREAM's obligations under Section 4.11. (c) Upon the termination or expiration of this Agreement, SKYSTREAM shall continue to fill any Orders previously accepted by SKYSTREAM and all outstanding Harris quotation(s) to End User(s) for a period of ninety (90) days. 11.5 Nonexclusive Remedy. The exercise by either party of any remedy under this Agreement will be without prejudice to its other remedies under this Agreement or otherwise. 11.6 Survival. The rights and obligations of the Parties contained in Section 4.12 (Spares), Sections 6, (Confidentiality), 7 (Intellectual Property Rights), 8 (Infringement Indemnity), 10 (Limitations of Liability), 11 (Termination) and 12 (General) will survive the termination or expiration of this Agreement. 12. GENERAL 12.1 Publicity. HARRIS and SKYSTREAM agree to use reasonable efforts in the preparation of a press release, mutually acceptable to both Parties, announcing the execution of this Agreement. From and after the date hereof, neither party shall issue any press releases with respect to the subject matter hereof without the express approval of the other party. 12.2 Assignment. The rights and liabilities of the Parties hereto shall bind and inure to the benefit of their respective successors, executors and administrators, as the case may be provided that no Party may assign or delegate its obligations under this Agreement either in whole or in part, without the prior written consent of the other Party. Notwithstanding the foregoing, nothing herein shall preclude an Assignment by any Party to a Party's affiliated subsidiary or parent company. 12.3 Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of California applicable to agreements between California residents entered into and to be performed entirely within California, without reference to conflict of law principles. Any dispute or claim arising out of this Agreement will be resolved by binding arbitration in the city and state of Denver, Colorado in accordance with the complex commercial litigation rules of the American Arbitration Association. The arbitrator shall not limit, expand or modify the terms of the Agreement nor award damages in excess of compensatory damages, and each Party waives any claim to such excess damages. Notwithstanding the arbitrator will have the power to grant any form of relief, including preliminary and permanent injunctive relief, which a judge in California with jurisdiction could fashion, and judgment on any award may be entered in any court in California with jurisdiction. Nonetheless, the Parties may seek temporary or permanent -21- <PAGE> 26 injunctive relief from any court in California with jurisdiction without breaching this Section 12.3 or otherwise abridging the authority of the arbitrator. 12.4 Severability. If any provision of this Agreement is found invalid or unenforceable, that provision will be enforced to the maximum extent permissible and the other provisions of this Agreement will remain in force. 12.5 Force Majeure. Except for payments due under this Agreement, neither party will be responsible for any failure to perform due to causes beyond its reasonable control (each a "Force Majeure"), including, but not limited to, acts of God, war, riot, embargoes, acts of civil or military authorities, denial of or delays in processing of export license applications, fire, floods, earthquakes, accidents, strikes, or fuel crises, provided that such party gives prompt written notice thereof to the other party. The time for performance will be extended for a period equal to the duration of the Force Majeure, but in no event longer than sixty days. 12.6 Notices. All notices under this Agreement will be deemed given when delivered personally, or sent by confirmed facsimile transmission, or sent by certified or registered U.S. mail or recognized express courier, return receipt requested, to the address as first shown on this Agreement or as may otherwise be specified by either party to the other in accordance with this section. 12.7 Independent Contractors. The Parties to this Agreement are independent contractors. There is no relationship of partnership, joint venture, employment, franchise, or agency between the Parties. Neither party will have the power to bind the other or incur obligations on the other's behalf without the other's prior written consent. 12.8 Waiver. No failure of either party to exercise or enforce any of its rights under this Agreement will act as a waiver of such rights. 12.9 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be enforceable against the party executing such counterpart, and all of which together shall constitute one instrument. 12.10 Entire Agreement This Agreement and its exhibits are the complete and exclusive agreement between the Parties with respect to the subject matter hereof, superseding and replacing any and all prior agreements, communications, and understandings (both written and oral) regarding such subject matter. This Agreement may only be modified, or any rights under it waived, by a written document executed by both Parties. -22- <PAGE> 27 The Parties have caused this Agreement to be executed by their duly authorized representatives as of the Effective Date. HARRIS CORPORATION SKYSTREAM CORPORATION Signature: /s/ JAY C. ADRICK Signature: /s/ CLINT CHAO --------------------------------- ----------------------- Name: Jay Adrick Name: Clint Chao -------------------------------------- ---------------------------- Title: Vice President of Systems Integration Title: Vice President of Marketing ------------------------------------- --------------------------- Date: 4/18/99 Date: 4-18-99 ------------------------------------- --------------------------- Facsimile: (513) 459-3890 Facsimile: (650) 390-8990 ------------------------------------- --------------------------- -23- <PAGE> 28 EXHIBIT A - END USER SOFTWARE LICENSE SKYSTREAM CORPORATION END USER SOFTWARE LICENSE SOFTWARE LICENSE AND WARRANTY ATTENTION! Use of the software program on the enclosed disks and/or installed on the computer is subject to the terms of the License Agreement printed on the license card, in the license booklet, or in the user documentation. You should not use this software until you have read the License Agreement. By using the software, you signify that you have read the License Agreement and accept its terms. LICENSE SKYSTREAM hereby grants to the Customer a limited, non-exclusive license to use the Software provided solely on the terms and conditions contained herein. "Software" means each software program provided by SKYSTREAM in machine readable, object, printed or interpreted form. LIMITATIONS ON USE The Software is licensed to the Customer solely for Customer's internal use on the purchased SKYSTREAM equipment and may not be used for any other purpose or application. The customer is licensed to use the Software only on the designated SKYSTREAM equipment. The Software may not be used by Customer on any other computer, on any other SKYSTREAM or similar equipment, or at any other location, except as agreed by SKYSTREAM in writing. Customer will not: - - Copy all or any part of the Software, except that Customer may make one copy of the Software solely for backup purposes for its own exclusive use, provided that customer shall reproduce and include on such backup copy SKYSTREAM's proprietary rights notices. - - Use, print, copy, modify or display the software, in whole or in part, except as specifically authorized by this Agreement. - - Sublicense, assign, resell, or otherwise transfer the Software to any third party except in connection with the permanent transfer of the SKYSTREAM equipment with which the Software was shipped or for which the Software upgrade was purchased. In the case of such a permanent transfer, Customer must not retain any copies of the Software, must transfer all the Software, including any upgrades or prior versions of the Software, and the recipient must agree to the terms of this Software license. - - Reverse engineer, duplicate or otherwise reproduce the Software. 24 <PAGE> 29 EXHIBIT A (CONTINUED) Customer acknowledges that this Agreement does not grant to Customer, and Customer will not acquire hereby, any rights to patents, copyrights, trade secrets, trade names, trademarks (whether registered or unregistered), or any other proprietary rights in or to the Software, all of which are expressly retained by SKYSTREAM. Customer acknowledges that the laws and regulations of the United States may restrict the export and re-export of the Software or media in any form without appropriate United States and foreign government approval. If Customer is a unit or agency of the United States Government or is acquiring the Software and Documentation for any such unit or agency, the following apply: o If the unit or agency is the Department of Defense (DOD), the Software and its accompanying documentation are classified as "commercial computer software" and "commercial computer software documentation," respectively, and, pursuant to DFAR Section 227.7202, the Government is acquiring the Software and such documentation with terms of the Agreement. o If the unit or agency is other than DOD, the Software and its accompanying documentation are classified as "commercial computer software" and "commercial computer software documentation," respectively, and pursuant to FAR Section 12.212, the Government is acquiring the Software and such documentation in accordance with the terms of this Agreement. WARRANTY SKYSTREAM makes no warranty, express or implied, in connection with the Software, including the results and performance thereof, including without limitation any implied warranties of merchantability or fitness for a particular purpose or non-infringement. LIMITATION OF LIABILITY The maximum liability of SKYSTREAM to Customer for damages relating to this agreement for any and all causes whatsoever, and Customer's maximum remedy, regardless of the form of action, whether in contract, tort or otherwise, shall be limited to the total fees paid by Customer to SKYSTREAM hereunder. In no event shall SKYSTREAM be liable for any lost data or content, lost profits, or business interruption, or for any indirect, incidental, special, consequential, exemplary or punitive damages arising out of or relating to the Software provided hereunder, even if SKYSTREAM has been advised of the possibility of such damages. TECHNICAL SUPPORT For technical support, contact SKYSTREAM Customer Support through the World Wide Web (www.SKYSTREAM.com) or via e-mail (support@SKYSTREAM.com). 25 <PAGE> 30 EXHIBIT B - PRODUCTS PRODUCTS PRODUCTS TO BE COVERED UNDER THIS AGREEMENT: PRODUCT DESCRIPTION DBN-35 ATSC Data Broadcast Injector DBN-35J ATSC Data Broadcast Injector System with JetStream Express Data Broadcasting Software All Level 1, 2, and 3 upgrades as defined in the SkySupport agreement listed in Exhibit D. SOFTWARE RELEASES TO BE COVERED UNDER THIS AGREEMENT: SkyStream software release 1.3 and successor versions thereof All JetStream Express Server software modules. Note: There is a JetStream Client software module that is to be licensed to the manufacturer of the DTV receiver, which is not a part of this Agreement. This agreement covers the JetStream Express Server software only. HARRIS or HARRIS' End user are responsible for supplying a computer system on which the licensed software will execute The specification of the computer must meet the following minimum requirements: Pentium 200MHz, 4GB HD, 64MB RAM, Windows NT 4.0, TCP/IP connection to the Internet 26 <PAGE> 31 EXHIBIT C - PERFORMANCE CRITERIA PERFORMANCE CRITERIA FOR PERIOD BETWEEN EFFECTIVE DATE AND DECEMBER 31, 1999: HARRIS MARKET SHARE REQUIREMENT By December 31, 1999, HARRIS must have achieved a [*]% market share of the U.S. ATSC call letter stations that have purchased a Data Broadcast Solution. This will be measured by a report that will be generated by both Parties that lists the number of television stations broadcasting digitally, their status on data broadcast, and the HARRIS wins in that set. HARRIS' market share shall be calculated as a fraction, the numerator of which is the number of HARRIS wins and the denominator of which is the number of U.S. ATSC call letter stations that have adopted a Data Broadcast Solution. HARRIS MARKETING REQUIREMENT By December 31, 1999, Harris must have placed at least [*] ads for Products in national trade magazines (e.g., TV Technology, Broadcast Engineering, Digital Television), and one direct mailing campaign to key decision makers in the Exclusive Market. MINIMUM PURCHASE REQUIREMENT Under no circumstances will the total purchases from Harris be for less than [*] units from the Effective Date to December 31, 1999. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 27 <PAGE> 32 EXHIBIT D - SKYSUPPORT PLAN AND PRODUCT/SERVICE PRICING SKYSUPPORT PLAN SKYSUPPORT SERVICE PLAN FOR DIRECT CUSTOMERS PROVIDING WORLD-CLASS CUSTOMER SERVICE AND SUPPORT FOR THE SKYSTREAM INTEGRATOR FAMILY OF PRODUCTS VERSION 2.2 FEBRUARY 1999 SKYSUPPORT 28 <PAGE> 33 EXHIBIT D (CONTINUED) CUSTOMER SERVICE PLAN FOR DIRECT CUSTOMERS SkySupport is a customer service plan that offers world-class support to SkyStream customers domestically and internationally. SkyStream offers a program whereby the greatest effort is placed in fast response time to any issues that emerge, 24 hours a day, and 7 days a week. SkyStream also employs proactive efforts to keep SkySupport customers abreast of any new product developments or code changes. Because of the evolutionary architecture of the SkyStream Integrator series, customers may find it useful to gradually add hardware or software features to the base product. Customers can also purchase feature additions or an add-on card for additional functionality. SkyStream offers all SkySupport customers the opportunity to upgrade their products, even after the units are installed in the field. The SkySupport customer service plan is available to all direct customers of SkyStream. The plan is supported on a per-unit basis, and is renewed annually. SkySupport customers are also eligible to purchase product upgrades or training for additional charges. This renewable 1-year plan (after ship date) shall include the following three categories of support: 1. ULTRA-FAST RESPONSE TIME 2. PRODUCT UPGRADES 3. SKYSTREAM'S PRODUCT TRAINING PROGRAM The SkySupport Service Plan is initially ordered at same time that the equipment is purchased. SkySupport service is renewed automatically, unless otherwise noted by the customer, every 12 months at the standard service rate (per the most recent price list). 29 <PAGE> 34 SkyStream, HARRIS CONFIDENTIAL printed on 04/17/99 EXHIBIT D (CONTINUED) SKYSUPPORT 3-POINT CUSTOMER SERVICE PLAN 1. ULTRA-FAST RESPONSE TIME - - GUARANTEED ADVANCED PARTS REPLACEMENT, SHIPPED OVERNIGHT ON THE NEXT BUSINESS DAY SKYSTREAM WILL SHIP ADVANCE REPLACEMENT PARTS THE NEXT BUSINESS DAY. - - TELEPHONE SUPPORT, 24 HOURS PER DAY, 7 DAYS PER WEEK (24x7) Access to SkyStream Customer Service technical support personnel with a guaranteed response time of within 4 hours of initial call. - - ELECTRONIC MAIL INQUIRIES AND RESPONSES - - REMOTE DIAGNOSTIC SERVICE (RDS) SkyStream customer service can observe and analyze the configuration and traffic pattern at the client's site and provide feedback to resolve problems. Customer needs to provide SkyStream support personnel with authorization to access the SkyStream products over a remote network for monitoring and troubleshooting purposes. - - DOCUMENTATION Access to product manuals, user's guides, application notes, FAQ's and web-based troubleshooting guide on SkyStream's website via secure SkySupport password. 30 <PAGE> 35 SkyStream, HARRIS CONFIDENTIAL printed on 04/17/99 EXHIBIT D (CONTINUED) 2. PRODUCT UPGRADES SkyStream's products have a unique architecture that allows them to receive hardware or software upgrades while installed in the field. Upgrades can range from simple software patches to significant feature upgrades, all of which are best treated under the SkySupport plan. Product Upgrades come in three different categories, and will be clearly marked in all price lists: LEVEL 1 UPGRADE: BUG FIXES All software bug fixes will be documented and made accessible to all SkyStream customers. Bug fixes are software patches that repair a known problem in the current released code. Level 1 upgrades will be available [*], as long as customers are using supported software releases. Typically, SkyStream will provide support for the 2 most recent releases of its software. Customers using unsupported versions of software will need to upgrade to the latest version to receive code fixes, and non-SkySupport customers may need to pay [*] to upgrade. Registered SkySupport customers will be pro-actively notified via email of any upgrade within 30 days of production release date. LEVEL 2 UPGRADE: FEATURE IMPROVEMENTS Level 2 upgrades include all software improvements. Software improvements are released on an ongoing basis to improve on an existing set of functions. See the SkyStream price list to determine which features fall into this category. These upgrades will be provided to SkySupport customers for [*] as long as customers are using supported software releases. LEVEL 3 UPGRADE: FEATURE ADDITIONS AND HARDWARE UPGRADES Feature additions and hardware add-on card upgrades will be sold via SkyStream's upgrade price list. Feature additions include software code upgrades that add significant functionality to the existing product specification. See the SkyStream price list to determine which features fall into this category. Only authorized SkySupport personnel will administer Level 3 upgrades. Registered SkySupport customers will be pro-actively notified via email of any upgrade within 30 days of production release date. SkyStream's Integrator family uses a flexible architecture that allows customers to purchase a base system for immediate requirements, with an interest to upgrade its functionality to a new platform in the future. For example, if a customer purchases a DBN-35 ATSC IP Data Injector, and later wishes to upgrade the product to support CAS Injection, he can do so by paying only an upgrade fee as opposed to buying a new system (see upgrade price list for upgrade prices). Customers interested in * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 31 <PAGE> 36 SkyStream, HARRIS CONFIDENTIAL printed 04/17/99 upgrading their unit must provide SkyStream with 90 days advance notice. Only SkySupport customers will have access to any Level 3 upgrades. NOTE: Level 3 Upgrades are only available on same-family products (i.e. DBN 2X is a family of products, where X can be 4, 5, 6, or other future product). 3. SKYSTREAM'S PRODUCT TRAINING PROGRAM SkyStream offers all customers basic system operations training to the SkyStream Integrator product family. This session will accompany any new product installation when an authorized SkyStream field support engineer performs the installation. For more detailed product training, SkyStream offers an additional system maintenance training session for customer engineering or operations personnel who require more technical knowledge and hands-on skills to work directly with the SkyStream equipment. There are two training modules available. MODULE 1: SKYSTREAM SYSTEM OPERATIONS TRAINING SkyStream provides comprehensive on-site training on the new system at the time of system installation. Customer operations and production staff receive training on o System Overview/Setup o System Operations o Routine maintenance of the system MODULE 2: SKYSTREAM SYSTEM MAINTENANCE TRAINING SkyStream offers advanced training to customers that support and maintain their SkyStream system. This training provides customers with the technical knowledge and hands-on skills needed to use, configure, support and troubleshoot the SkyStream system. This training is delivered at SkyStream's Corporate Training Facility in Mt. View, CA. 32 <PAGE> 37 SkyStream, HARRIS CONFIDENTIAL printed on 04/17/99 EXHIBIT D (CONTINUED) ADDITIONAL TERMS: 1. SkySupport must be purchased at time of order placement, and must cover the full amount of the order (i.e. if customer buys 2 DNB-xx units, he must also buy 2 units of SkySupport). 2. SkySupport must also be purchased for any upgrades when they are ordered, and will be added to the basic SkySupport agreement when it is to be renewed. 3. SkyStream will register all units by serial number. Customer service calls must be verified by actual serial number of affected unit. 4. All existing SkySupport customers' terms will be honored until expiration of the current annual service plan. Renewals will be assessed at the rate established in this document. 5. All returns will be handled by RMA process. SkyStream will issue an RMA number that must accompany any product repair or return unit. STANDARD WARRANTY SkyStream highly recommends that all customers obtain full customer service with the SkySupport plan. Should customers opt not to select SkySupport, SkyStream offers a standard warranty to all direct customers. This 14-month, non-renewable warranty (after ship date) shall include the following: Replacement by standard delivery, FOB Mountain View, CA USA. Product or parts repair and/or diagnosis within 30 days after receipt of defective unit. Customer pays for shipment to SkyStream, and SkyStream pays for shipment back to customer. Customers are eligible to receive Level 1 and Level 2 upgrades during the Warranty Period. Level 3 Upgrades are only available to SkySupport customers. 33 <PAGE> 38 EXHIBIT D (continued) PRODUCT AND SKYSUPPORT PRICING PRICE LIST 1: TRANSFER PRICES FROM SKYSTREAM TO HARRIS <TABLE> <CAPTION> Support Fees - Year Number ----------------------------------------------------------- Description Order Price 1 2 3 4 5+ Notes Number -------------------------------------------------- [*] [*] [*] [*] [*] - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> DBN-35 with standard warranty S141001 $[*] $[*] $[*] $[*] $[*] $[*] Preferred Option: DBN-36 with SkySupport Coverage S141001+ $[*] $[*] $[*] $[*] $[*] $[*] S901001 pick one DBN-35J with standard warranty S151001 $[*] $[*] $[*] $[*] $[*] $[*] Preferred Option: DBN-36J with S151001+ SkySupport Coverage S901001 $[*] $[*] $[*] $[*] $[*] $[*] Network system config. application $[*] $[*] $[*] $[*] $[*] Remote access application $[*] $[*] $[*] $[*] $[*] standard System monitor/alarm application $[*] $[*] $[*] $[*] $[*] DBN- ATSC Addressable Sections packetization 35/35J software default [*] . $[*] $[*] $[*] $[*] $[*] features Dual Power Supplies $[*] $[*] $[*] $[*] $[*] SMPTE-310 Transport Stream Input/ Output card $[*] $[*] $[*] $[*] $[*] One 10/100 Ethernet card $[*] $[*] $[*] $[*] $[*] Extra 10/100 Ethernet card S301402 $[*] $[*] $[*] $[*] $[*] $[*] Watchdog/Alarm "Relay" card S304001 $[*] $[*] $[*] $[*] $[*] $[*] Rack-Mount Assembly Kit (Rails) S804001 $[*] $[*] $[*] $[*] $[*] $[*] RS-232 "Com" data input card (4 ports/ card) (max: 4 cards) S301004 $[*] $[*] $[*] $[*] $[*] $[*] RS-422 "Sync" data input card (2 ports/card) (max: 1 card) S301102 $[*] $[*] $[*] $[*] $[*] $[*] Level 3 ATM (fiber) data input card (max: 1 card) S301201 $[*] $[*] $[*] $[*] $[*] $[*] features Standard data ports: 8 TCP. 8 UDP. 16 File default [*] $[*] $[*] $[*] $[*] $[*] (HW and Any changes to standard data port (TCP, SW) UDP, File) configuration pick one 16 TCP S502102 32 TCP S502103 $[*] $[*] $[*] $[*] $[*] $[*] 16 UDP S502201 32 UDP S502202 SkySupport Coverage Standard Warranty 12 months, renewable every year 12 months, non-renewable telephone support, 7x24 telephone support, 5x8 access to Level 1 Features (Bug Fixes) access to Level 1 Features (Bug Fixes) access to Level 2 Features (Feature Improvements) access to Level 2 Features (Feature Improvements) access to Level 3 Features (Feature Upgrades) No access to Level 3 Features (Feature Upgrades) Next day replacement parts No replacement parts, 30-day RMA only </TABLE> * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 34 <PAGE> 39 EXHIBIT E - SPARE PARTS DBN-35 ATSC Data Broadcast Injector DBN-35J ATSC Data Broadcast Injector System with JetStream Express Data Broadcast Software 35 <PAGE> 40 EXHIBIT F -- NON-EXCLUSIVE PRODUCTS 36 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.17 <SEQUENCE>34 <DESCRIPTION>EX-10.17 <TEXT> <PAGE> 1 EXHIBIT 10.17 SKYSTREAM CORPORATION NONEXCLUSIVE INTERNATIONAL VALUE ADDED RESELLER ("VAR") AGREEMENT This Agreement, dated December 1, 1999, is made between SkyStream Corporation ("SKYSTREAM"), a California corporation doing business at 555 Clyde Avenue, Suite B, Mountain View, California 94043 and International Datacasting Corporation, a corporation organized under the laws of Canada ("Reseller"), doing business at 2680 Queensview Drive, Ottawa, Ontario, Canada, K2B 8H6. RECITALS A. SKYSTREAM sells those certain digital broadcast networking products known as the Integrator product family, as defined in Exhibit C ("Products" as further defined below). B. Reseller wishes to have certain non-exclusive rights to market and distribute such Products worldwide in combination with Reseller's products. THEREFORE, SKYSTREAM and Reseller agree as follows: 1. DEFINITIONS. 1.1 Dollars. "Dollars" means United States Dollars. 1.2 End User. "End User" means a customer of Reseller, who is authorized by an end user software license agreement to use the Software on the purchased Products for the End User's internal business purposes. 1.3 Effective Date. "Effective Date" means the date first written above. 1.4 Intellectual Property Rights. "Intellectual Property Rights" means patent rights (including but not limited to rights in patent applications or disclosures and rights of priority), copyright (including but not limited to rights in audiovisual works and moral rights), trade secret rights, and any other intellectual property rights recognized by the law of each applicable jurisdiction. -1- <PAGE> 2 1.5 Marks. "Marks" means SKYSTREAM's trademarks, trade names, service marks, and/or service names. 1.6 Reseller Products. "Reseller Products" means the computer software and/or hardware and related documentation that are distributed by Reseller in combination with the Products. 1.7 Products. "Products" means SKYSTREAM Integrators, as listed in Exhibit C, including accompanying Software and any additions and enhancements provided for use with the units. 1.8 Software. "Software" means SKYSTREAM Integrator software as listed in Exhibit C. 1.9 Source Code. "Source Code" means software in human-readable form, including programmers' comments, data files and structures, header and includes files, macros, object libraries, programming tools not commercially available, technical specifications, flowcharts and logic diagrams, schematics, annotations and documentation reasonably required or necessary to enable an independent third party programmer with reasonable programming skills to create, operate, maintain, modify and improve the software without the help of any other person. 2. DISTRIBUTION OF PRODUCTS 2.1 Reseller Appointment. SKYSTREAM hereby appoints Reseller as a nonexclusive reseller of the Products to End-Users for End User's internal use in conjunction with Reseller Products. 2.2 Added Value. In the exercise of Reseller's rights under this Agreement, Reseller will sell the Products to the End User usually in combination with Reseller Products. 2.3 Relabeling. Subject to prior approval SKYSTREAM, Reseller may relabel the Products with Reseller's name and logo. 2.4 Documentation. Subject to the terms of this Agreement, SKYSTREAM grants Reseller a nonexclusive license during the term of this Agreement to use, modify, create derivative works of and distribute SKYSTREAM's documentation for the Products to the End User. SKYSTREAM will make available SKYSTREAM's End User documentation to Reseller, as it is updated and modified from time to time, without additional charge. Reseller will provide copies of such modifications to SKYSTREAM upon SKYSTREAM's request. -2- <PAGE> 3 2.5 Marketing Collateral. SKYSTREAM agrees to sell, subject to availability, copies of its marketing literature to Reseller on an at-cost basis. SKYSTREAM reserves all rights associated with such marketing literature. Reseller agrees to obtain prior written approval of SKYSTREAM's Vice President of Marketing for all marketing literature it shall prepare that pertain to the Products. 2.6 Grant of License. Subject to the terms of this Agreement, SKYSTREAM grants Reseller a limited license to use the Software in connection with the demonstration of the products and in connection with the configuration and support of the Products for End Users. All such use shall be subject to the terms of the End User Software License attached hereto as Exhibit A. 2.7 No Sale of Services. Reseller will not use the Products in any manner to provide service bureau, time sharing, or other computer services to third parties. 2.8 No Reverse Engineering. Reseller will not disassemble, decompile, or reverse engineer the Products. 2.9 Limited Rights. Reseller's rights in the Products will be limited to those expressly granted in this Agreement. 2.10 Terms and Conditions of Sale. Except as modified herein, all sales to Reseller are subject to SKYSTREAM's Terms and Conditions of Sale, a copy of which is attached hereto as Exhibit B, and which is made a part of this Agreement as if set forth herein. 2.11 Pricing to Reseller. The price paid by Reseller to SKYSTREAM shall be established at the time of acceptance of Reseller's purchase order. [*]. SKYSTREAM reserves the right to adjust the prices paid by Reseller at SKYSTREAM's discretion with 60 days notice. Nothing in this Agreement will be construed to restrict Reseller's ability to set prices to its customers. 3. SOFTWARE 3.1 Limited Distribution. Reseller is permitted to market and distribute SKYSTREAM Software only in connection with the sale of the Products to the End User. 3.2 End User Software License. (a) Reseller agrees: (i) to include the following language in all sales quotations and offers to sell the Products: * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -3- <PAGE> 4 "The [name of Product] is sold subject to the terms on an End User Software License. The use of the [name of Product] is contingent upon the acceptance by the purchaser of the terms of the End User Software License." (ii) to provide a copy of the End User Software License, in the form attached hereto as Exhibit A, to any potential purchaser who shall request a copy prior to sale; (iii) to package and to install the Products in such a manner that Reseller's customer is provided with a meaningful opportunity to review and agree to the End User Software License before installing or using any of the Products; and (iv) to agree to accept for return and refund any unused Products in the event that Reseller's customer does not agree to accept any of the terms of the End User Software License or of the terms of any other software license required to use the Products. In consideration of SkyStream's not requiring a written End-User Software License signed by Reseller's customer as a precondition to the sale or transfer of the Products, Reseller agrees to indemnify SkyStream for any and all damages that may arise as a result of (i) Reseller's breach of Section 3.2(a). 3.3 License Only. Notwithstanding the use herein of the word "sell" and variants thereof, all Software is licensed to the Reseller and the End User and is not sold. SKYSTREAM, or the licensors through which SKYSTREAM obtained the rights to distribute Software, retain title to the Software, whether the Software is separate or combined with any other products, including Reseller Products, and Reseller shall transfer Software only to the extent that such transfer is incidental to the resale or lease of the Products. The End User is licensed by SKYSTREAM directly to use the Software solely in conjunction with the use of the Products and further subject to the terms of the End User Software License. 3.4 Proprietary Software. The Software is proprietary to SKYSTREAM and/or its suppliers and is copyrighted. Without SKYSTREAM's prior written approval, Reseller shall not separate the Software from the Products as shipped by SKYSTREAM, nor shall Reseller disassemble, de-compile, reverse-engineer, copy, modify, or otherwise change any of the Software or its form. Reseller shall protect the Software from any disclosure or use in violation of this Agreement. Reseller shall not be entitled to receive Source Code. -4- <PAGE> 5 3.5 Software Revisions. In the event SKYSTREAM, at its sole discretion, provides Reseller with revised copies of the Software, Reseller shall, according to SKYSTREAM's instructions, replace copies of the Software from the Products with the revised Software. Reseller shall dispose of the replaced Software in accordance with SKYSTREAM's instructions. SKYSTREAM shall have the right to inspect Reseller's inventory of Software and replaced Software at any time on reasonable notice. 4. MAINTENANCE, SUPPORT, AND TRAINING. 4.1 By Reseller. Reseller will be responsible for providing the following support to the End User: installing the Products as needed; training the End User; and providing all direct first level technical support to the End User, including problem analysis and using its reasonable efforts to provide solutions and error correction for the products consistent with Reseller's standard service and support policies and procedures. Reseller agrees to provide a substantially similar level of support to that SkyStream provides to its direct customers, which must include, at a minimum, 24x7 telephone support, and at least 2 hours of on-site training to the End User. A copy of SkyStream's direct SkySupport service agreement is attached in Exhibit E. Reseller agrees to use best efforts to ensure that training of Reseller's personnel occurs within the first 90 days of the execution of this Agreement. Reseller agrees to maintain a minimum of 2 fully trained service personnel at all times, which personnel must attend training, to be paid for by Reseller, at least once every 12 months. 4.2 By SKYSTREAM. SKYSTREAM will not be responsible for providing support to the End User. SKYSTREAM will provide Reseller with: (i) commercially reasonable efforts to correct any non-conformity with the Software Feature Specification Document for the applicable version of the Software: (ii) technical training, to consist of one training class given over one and one-half (1 1/2) eight-hour days and which may be attended by up to three Reseller personnel onsite at SKYSTREAM's Mountain View, California office, provided that Reseller pays the travel and living expenses of such personnel designated to receive the training, or at Reseller's headquarters, provided that Reseller pays the travel and living expenses of SKYSTREAM's training personnel; training class for additional personnel will be quoted by SKYSTREAM separately; (iii) upon continued payment of an annual Maintenance Fee (the "Maintenance Fee") in the amount currently set forth on Exhibit D, as SKYSTREAM may change from time to time, payable in full with each sale to Reseller and -5- <PAGE> 6 thereafter on the nearest of February 15, May 15, August 15 and November 15 following the one year anniversary of the date of each sale to Reseller, SKYSTREAM agrees to provide reasonable access to SKYSTREAM's technical personnel for inquiries from Reseller relating to the Products during standard SKYSTREAM business hours, generally Monday through Friday from nine a.m. to five p.m. Pacific Standard Time, and access to SKYSTREAM's technical call center 24 hours a day, 7 days a week, where SKYSTREAM agrees to respond to any Reseller inquiry within four business hours of initial call placement. In the case of upgrades to a previously purchased Product, the Maintenance Fee shall be payable on the upgrade at the time of sale to Reseller and thereafter at the time the Maintenance Fee is payable on the Product for which the upgrade was purchased. Payment of this recurring Maintenance Fee does not entitle Reseller or End User to, and shall not be construed as either full or partial payment for, software upgrades with new functionality as defined by SKYSTREAM; (iv) upon fourteen days notice, technical consulting services at a location to be designated by Reseller, at SKYSTREAM's current hourly rate for such services as may be adjusted by SKYSTREAM from time to time, provided that Reseller shall also reimburse SKYSTREAM for all associated travel and living expenses in connection with such services. SKYSTREAM's current technical consulting hourly rate is included on SKYSTREAM's price list for sales to Resellers, a copy of which is attached hereto as Exhibit D. 4.3 Repairs Support. SKYSTREAM shall provide repair or replacement support for all equipment provided, at SKYSTREAM's then-current prices, pursuant to this Agreement for a period of at least five (5) years from delivery of a purchased unit, provided, however, that such replacement support may consist of equipment with comparable functionality as determined at SKYSTREAM's sole discretion. 4.4 Quality Control System. Upon reasonable notice, SkyStream agrees to provide Reseller reasonable access to the manufacturing areas of SkyStream's facility for purposes of observing SkyStream's quality control procedures. 5. CONFIDENTIALITY. 5.1 Obligations. Each party agrees that it will not disclose to any third party or use any Products or other Confidential Information disclosed to it by the other party, except to carry out its rights and obligations under this Agreement, and that it will take all reasonable measures to maintain the confidentiality of all Confidential Information in its possession or control, which will in no event be less than the measures it uses to maintain the confidentiality of its own information of similar importance. Confidential Information includes all information designated by a party as -6- <PAGE> 7 confidential or proprietary within a reasonable time of its disclosure or which a reasonable person would expect to treat as confidential. 5.2 Exceptions. "Confidential Information" will not include information that: (i) is in or enters the public domain without breach of this Agreement; (ii) is lawfully obtained by the receiving party without breach of a nondisclosure obligation; (iii) is independently developed or already in the possession of the receiving party as shown by the receiving party's contemporaneous records; or, (iv) is required by law to be disclosed, provided that the receiving party gives prompt written notice of such requirement prior to disclosure. 5.3 Injunctive Relief. Each party acknowledges that the improper disclosure of the other's confidential information could cause substantial harm to the other party that could not be remedied by the payment of damages alone. Accordingly, either party will be entitled to preliminary and permanent injunctive relief and other equitable relief for any breach of this Agreement or misuse of Confidential Information by SKYSTREAM, Reseller or the End User, as applicable. 6. INTELLECTUAL PROPERTY RIGHTS. 6.1 Notices. Reseller will not delete or in any manner alter the Intellectual Property Rights notices of SKYSTREAM and its suppliers, if any, appearing on the Products as delivered to Reseller. 6.2 Reseller's Duties. Reseller will take customary measures in the marketing and distribution of the Products to protect SKYSTREAM's Intellectual Property Rights in the Products, no less than the extent to which Reseller protects its Intellectual Property Rights in Reseller's Products, and will, to the extent lawful, report promptly to SKYSTREAM any confirmed infringement of such rights of which Reseller becomes aware. 6.3 Trademarks. Subject to the terms and conditions of this Agreement, SKYSTREAM grants Reseller a nonexclusive license for the term of this Agreement to use the Marks in Reseller's marketing of the Products, provided that such use is in accordance with SKYSTREAM's trademark usage guidelines then in effect. Such use must reference the Marks as being owned by SKYSTREAM. Nothing in this Agreement grants Reseller ownership or any rights in or to use the Marks, except in accordance with this license, and Reseller's use of the Marks will inure to the benefit of SKYSTREAM. The rights granted to Reseller in this license will terminate upon any -7- <PAGE> 8 termination or expiration of this Agreement. upon such termination or expiration, Reseller will no longer make any use of any Marks. SKYSTREAM will have the exclusive right to own, use, hold, apply for registration for, and register the Marks during the term of, and after the expiration or termination of, this Agreement; Reseller will neither take nor authorize any activity inconsistent with such exclusive right. 7. INFRINGEMENT INDEMNITY 7.1 Reseller Warranty. (a) Reseller warrants that it owns all the rights to the Confidential Information provided to SKYSTREAM, and that such items are free of any restrictions, settlements, judgments, or adverse claims. Reseller warrants that it has the full power and authority to supply and to disclose such information to SKYSTREAM. (b) Reseller warrants that it has not improperly or unlawfully acquired the information and processes submitted to SKYSTREAM. 7.2 Reseller Indemnification. Reseller agrees to indemnify SKYSTREAM against, and to hold SKYSTREAM harmless of and from, any loss, cost, damage, liability, suit, judgment, or expense, including legal fees (collectively, "Harm") arising out of any breach of the warranties set forth in Section 7.1. 7.3 SKYSTREAM Indemnification and Defense. Subject to the limitations hereinafter set forth, Reseller agrees that SKYSTREAM has the right to defend, or at its option to settle, and SKYSTREAM agrees, at its own expense, to defend or at its option to settle, any claim, suit or proceeding (collectively, "Action") brought against Reseller alleging that the use or distribution of the Products infringes or misappropriates any copyright or trade secret. SKYSTREAM shall have sole control of any such Action or settlement negotiations, and SKYSTREAM agrees to pay, subject to the limitations set forth in Sections 7 and 8, any settlement costs or final judgment entered against Reseller as a result of such infringement. Reseller agrees that SKYSTREAM at its sole option shall be relieved of the foregoing obligations unless Reseller notifies SKYSTREAM promptly in writing of such Action and gives SKYSTREAM authority to proceed as contemplated herein, and, at SKYSTREAM's expense, gives SKYSTREAM proper and full information and assistance to settle and/or defend any such Action. If the Products, or any part thereof, are, or in the opinion of SKYSTREAM may become, the subject of any Action for infringement of any intellectual property right, or if a judicial or other governmental authority enjoins the use or distribution of Products as a result of an Action defended by SKYSTREAM, then SKYSTREAM may, at its option and expense; (i) procure for Reseller the right to distribute or use, as appropriate, the Products; (ii) replace the Products with other suitable Products; (iii) suitably modify the Products; or (iv) if the foregoing -8- <PAGE> 9 alternatives cannot be accomplished on a commercially reasonable basis as determined in SKYSTREAM's sole discretion, require Reseller to return such Products and refund the aggregate payments paid therefor by Reseller, less a reasonable sum for use and damage. Reseller shall indemnify and hold harmless SKYSTREAM from and against any and all third party claims arising out of the distribution of Products after SKYSTREAM has required Reseller to return such Products or arising out of any exclusions to SKYSTREAM's indemnification obligations set forth in Section 7.4. SKYSTREAM shall not be liable for any costs or expenses incurred without its prior written authorization. 7.4 SKYSTREAM limitations. (a) Notwithstanding the provisions of Section 7.3 above, SKYSTREAM assumes no liability for (i) any infringement claims (including without limitation combination or process patents) arising out of the combination of a Product or use with any other hardware, software or other items not provided by SKYSTREAM to the extent such infringement would not have occurred absent such combination or use; (ii) the modification of the Products, or any part thereof, unless such modification was made by SKYSTREAM; or (iii) any infringement claims arising out of SKYSTREAM's compliance with Reseller's specifications or designs. (b) SKYSTREAM's obligation to indemnify Reseller does not extend to any Action arising from a claim of infringement by the manufacture, use or sale of Products that conform to any technical standard adopted by an international organization such as the International Organization for Standardization, the International Electrotechnical Commission, and the CCITT/ITU, including, without limitation, the MPEG, JPEG and H.261 standards. 7.5 Entire Liability. THE FOREGOING PROVISIONS OF THIS SECTION 7 STATE THE ENTIRE LIABILITY AND OBLIGATION OF SKYSTREAM AND THE EXCLUSIVE REMEDY OF RESELLER AND ITS CUSTOMERS WITH RESPECT TO ANY ALLEGED INFRINGEMENT OF COPYRIGHTS, TRADEMARKS, PATENTS OR OTHER INTELLECTUAL PROPERTY RIGHTS BY THE PRODUCTS. 8. LIMITATIONS OF LIABILITY. 8.1 Total Liability. Except as set forth in Section 7 each party's liability for a breach of this Agreement under this Agreement will be limited to the Payments received or due from Reseller under this Agreement. 8.2 Exclusion of Damages. Except as set forth in Section 7 neither party will be liable to the other for any special, incidental, or consequential damages, whether based on -9- <PAGE> 10 breach of contract, tort (including negligence), product liability, or otherwise, and whether or not such party has been advised of the possibility of such damage. 8.3 No Warranty. Except as set forth in Section 7 and except as set forth in Section 13 of the Terms and Conditions of Sale, attached as Exhibit B, SkyStream makes no warranty, express or implied, in connection with the Products, including the results and performance thereof, including without limitation any implied warranties of merchantability or fitness for a particular purpose or noninfringement. 9. TERMINATION. 9.1 Term. The term of this Agreement will begin on the Effective Date and will continue for a period designated in Exhibit D, unless it is terminated earlier in accordance with the provisions hereof. This Agreement may be renewed for additional periods upon the mutual written agreement of the parties, although each party acknowledges that the other is under no obligation to do so. 9.2 Events of Termination. Either party will have the right to terminate this Agreement (i) for convenience and without cause, upon thirty (30) days written notice to the other party, or (ii) if the other party breaches any material term or condition of this Agreement and fails to cure such breach within thirty (30) days after written notice. 9.3 Effect of Termination. (a) Upon termination or expiration of this Agreement, Reseller will (except as specified in subsection (b) below) immediately return to SKYSTREAM or (at SKYSTREAM's request) destroy all Source Code, Software (except for Software residing on a SKYSTREAM Product) and other Confidential Information in its possession or control, and an officer of Reseller will certify to SKYSTREAM in writing that Reseller has done so. (b) Upon termination or expiration of this Agreement, SKYSTREAM will have the option, in its sole discretion, of: (i) electing, at any time, to offer maintenance and support for the Products directly to End Users in accordance with SKYSTREAM's then applicable terms and conditions for such services; or (ii) permitting Reseller to continue to provide maintenance and support for the Products to its End Users upon the terms and conditions of Section 4. -10- <PAGE> 11 9.4 Nonexclusive Remedy. The exercise by either party of any remedy under this Agreement will be without prejudice to its other remedies under this Agreement or otherwise. 9.5 Survival. The rights and obligations of the parties contained in Sections 5, (Confidentiality), 6 (Intellectual Property Rights), 7 (Infringement Indemnity), 8 (Limitations of Liability), 9 (Termination) and 10 (General) will survive the termination or expiration of this Agreement. 10. GENERAL 10.1 Publicity. Reseller agrees to use best efforts in the preparation of a press release announcing the execution of this Agreement, [*] 10.2 Binding Effect. This Agreement will bind and inure to the benefit of each party's permitted successors and assigns. 10.3 Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of California applicable to agreements between California residents entered into and to be performed entirely within California, without reference to conflict of law principles. Any dispute or claim arising out of this Agreement will be resolved by binding arbitration in the county of Santa Clara in accordance with the complex commercial litigation rules of the American Arbitration Association. The arbitrator will have the power to grant any form of relief, including preliminary and permanent injunctive relief, which a judge in California with jurisdiction could fashion, and judgment on any award may be entered in any court in California with jurisdiction. Nonetheless, the parties may seek temporary or permanent injunctive relief from any court in California with jurisdiction without breaching this Section 10.3 or otherwise abridging the authority of the arbitrator. 10.4 Severability. If any provision of this Agreement is found invalid or unenforceable, that provision will be enforced to the maximum extent permissible and the other provisions of this Agreement will remain in force. 10.5 Force Majeure. Except for payments due under this Agreement, neither party will be responsible for any failure to perform due to causes beyond its reasonable control (each a "Force Majeure"), including, but not limited to, acts of God, war, riot, embargoes, acts of civil or military authorities, denial of or delays in processing of export license applications, fire, floods, earthquakes, accidents, strikes, or fuel crises, provided that such party gives prompt written notice thereof to the other party. The * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -11- <PAGE> 12 time for performance will be extended for a period equal to the duration of the Force Majeure, but in no event longer than sixty days. 10.6 Notices. All notices under this Agreement will be deemed given when delivered personally, sent by confirmed facsimile transmission, or sent by certified or registered U.S. mail or recognized express courier, return receipt requested, to the address as first shown on this Agreement or as may otherwise be specified by either party to the other in accordance with this section. 10.7 Independent Contractors. The parties to this Agreement are independent contractors. There is no relationship of partnership, joint venture, employment, franchise or agency between the parties. Neither party will have the power to bind the other or incur obligations on the other's behalf without the other's prior written consent. 10.8 Waiver. No failure of either party to exercise or enforce any of its rights under this Agreement will act as a waiver of such rights. 10.9 Entire Agreement. This Agreement and its exhibits (A, B and C) are the complete and exclusive agreement between the parties with respect to the subject matter hereof, superseding and replacing any and all prior agreements, communications, and understandings (both written and oral) regarding such subject matter. This Agreement may only be modified, or any rights under it waived, by a written document executed by both parties. [Remainder of page Intentionally Left Blank] -12- <PAGE> 13 The parties have caused this Agreement to be executed by their duly authorized representatives as of the Effective Date. RESELLER SKYSTREAM CORPORATION Signature: /s/ PHIL BOLGE Signature: /s/ JAMES D. OLSON --------------------------------- ----------------------- Name: Phil Bolge Name: James D. Olson -------------------------------------- ---------------------------- Title: CFO Title: President & CEO ------------------------------------- --------------------------- Date: Jan 11/2000 Date: 12/22/99 ------------------------------------- --------------------------- Facsimile: Facsimile: ------------------------------------- --------------------------- [Signature Page to Nonexclusive VAR Agreement] -13- <PAGE> 14 EXHIBIT A SkyStream CORPORATION END USER SOFTWARE LICENSE SOFTWARE LICENSE AND WARRANTY ATTENTION! Use of the software program on the enclosed disks and/or installed on the computer is subject to the terms of the License Agreement printed on the license card, in the license booklet, or in the user documentation. You should not use this software until you have read the License Agreement. By using the software, you signify that you have read the License Agreement and accept its terms. LICENSE SkyStream hereby grants to the Customer a limited, non-exclusive to use the Software provided solely on the terms and conditions contained herein. "Software" means each software program provided by SkyStream in machine readable, object, printed or interpreted form. LIMITATIONS ON USE The Software is licensed to the Customer solely for Customer's internal use on the purchased SkyStream equipment and may not be used for any other purpose or application. The customer is licensed to use the Software only on the designated SkyStream equipment. The Software may not be used by Customer on any other computer, on any other SkyStream or similar equipment, or at any other location, except as agreed by SkyStream in writing. Customer will not: - - Copy all or any part of the Software, except that Customer may make one copy of the Software solely for backup purposes for its own exclusive use, provided that customer shall reproduce and include on such backup copy SkyStream's proprietary rights notices. - - Use, print, copy, modify or display the software, in whole or in part, except as specifically authorized by this Agreement. - - Sublicense, assign, resell, or otherwise transfer the Software to any third party. Any attempted such sublicense, sale, assignment or transfer shall be void and shall be deemed a material breach of this agreement. - - Reverse engineer, duplicate or otherwise reproduce the Software. <PAGE> 15 Customer acknowledge that this Agreement does not grant to Customer, and Customer will not acquire hereby, any rights to patents, copyrights, trade secrets, trade names, trademarks (whether registered or unregistered), or any other proprietary rights in or to the Software, all of which are expressly retained by SkyStream. Customer acknowledges that the laws and regulations of the United States may restrict the export and re-export of the Software or media in any form without appropriate United States and foreign government approval. If Customer is a unit or agency of the United States Government or is acquiring the Software and Documentation for any such unit or agency, the following apply: o If the unit or agency is the Department of Defense (DOD), the Software and its accompanying documentation are classified as "commercial computer software" and "commercial computer software documentation," respectively, and, pursuant to DFAR Section 227.7202, the Government is acquiring the Software and such documentation with terms of this Agreement. o If the unit or agency is other than DOD, the Software and its accompanying documentation are classified as "commercial computer software" and "commercial computer software documentation," respectively, and, pursuant to FAR Section 12.212, the Government is acquiring the Software and such documentation in accordance with terms of this Agreement. WARRANTY SkyStream makes no warranty, express or implied, in connection with the Software, including the results and performance thereof, including without limitation any implied warranties of merchantability or fitness for a particular purpose or non-infringement. LIMITATION OF LIABILITY The maximum liability of SkyStream to Customer for damages relating to this agreement for any and all causes whatsoever, and Customer's maximum remedy, regardless of the form of action, whether in contract, tort or otherwise, shall be limited to the total fees paid by Customer to SkyStream hereunder. In no event shall SkyStream be liable for any lost data or content, lost profits, or business interruption or for any indirect, incidental, special, consequential, exemplary or punitive damages arising out of or relating to the Software provided hereunder, even if SkyStream has been advised of the possibility of such damages. TECHNICAL SUPPORT For technical support, contact SkyStream Customer Support through the World Wide Web (www.skystream.com) or via e-mail (support@skystream.com). 2 <PAGE> 16 EXHIBIT B SKYSTREAM CORPORATION TERMS AND CONDITIONS OF SALE 1. Applicability of Terms and Conditions of Sale THE FOLLOWING TERMS AND CONDITIONS OF SALE ("AGREEMENT") APPLY TO ALL QUOTATIONS FOR PRODUCTS ("PRODUCTS") ISSUED BY SKYSTREAM CORPORATION ("SKYSTREAM") TO BUYER, SKYSTREAM'S ACCEPTANCE OF ANY BUYER PURCHASE ORDER IS EXPRESSLY CONDITIONED ON BUYER'S ASSENT TO THIS AGREEMENT. NO TERMS OR CONDITIONS SET FORTH IN BUYER'S PURCHASE ORDER, TO WHICH NOTICE OF OBJECTION IS HEREBY GIVEN, OR IN ANY FUTURE CORRESPONDENCE BETWEEN BUYER AND SKYSTREAM SHALL ALTER OR SUPPLEMENT THIS AGREEMENT UNLESS BOTH PARTIES HAVE AGREED IN WRITING TO MODIFY THIS AGREEMENT. Neither SKYSTREAM's commencement of performance nor delivery shall be deemed or construed as acceptance of Buyer's additional or different terms and conditions. 2. Price 2.1 Unless otherwise stated in writing by SKYSTREAM, all prices quoted are in U.S. Dollars and expire 30 days after the date of a quotation. 2.2 Unless otherwise stated in writing by SKYSTREAM, all prices quoted shall be exclusive of transportation, insurance, federal, state, local, use, sales, property (ad valorem) and similar taxes or duties now in force or hereafter enacted. Buyer agrees to pay all taxes, fees or charge of any nature whatsoever imposed by any governmental authority on, or measured by, the transaction between Buyer and SKYSTREAM, in addition to the prices quoted or invoiced. In the event that SKYSTREAM is required to collect the foregoing, such amounts will appear as separate items on SKYSTREAM's invoice. Buyer agrees to provide SKYSTREAM with a valid resale certificate for the Products purchased for resale. 2.3 Notwithstanding anything to the contrary herein, in the event a quotation is issued pursuant to a current written purchase agreement between SKYSTREAM and Buyer, the quotation shall remain valid for the period specified or until the expiration date of the ordering period of any such purchase agreement, whichever occurs first. 3 <PAGE> 17 3. Payment Terms 3.1 All invoices are payable thirty (30) days from date of invoice. No discounts are authorized. Interest on late payments shall accrue at the rate of one and one half percent (1.5%) per month or the highest legal rate, whichever is lower. SKYSTREAM may at any time require that shipments be made on a C.O.D. or cash-with-order basis. 3.2 Until the purchase price and all other charges payable to SKYSTREAM hereunder have been received in full, SKYSTREAM hereby retains, and Buyer hereby grants to SKYSTREAM, a security interest in the Products delivered to Buyer and any proceeds therefrom. Buyer agrees to promptly execute all documents reasonably requested by SKYSTREAM to perfect and protect such security interest. In the event Buyer fails promptly to execute such documents, Buyer hereby appoints SKYSTREAM its attorney-in-fact for the sole purpose of executing such documents, which appointment shall be a power coupled with an interest and shall be irrevocable. 3.3 Should Buyer become delinquent in the payment of any sum due hereunder, SKYSTREAM shall not be obligated to continue performance hereunder, including without limitation shipment of any previously accepted orders. 3.4 Buyer warrants to SKYSTREAM that it is financially solvent on the date on which it places an order and expects to be solvent on the date of receipt of shipment. SKYSTREAM reserves the right to change the credit terms provided herein, when in SKYSTREAM's opinion the financial condition or previous payment record of Buyer so warrants. 4. Delivery Dates 4.1 All shipments are subject to SKYSTREAM's availability schedule. SKYSTREAM will use commercially reasonable efforts to meet any delivery date(s) requested in Buyer's order; provided however, that SKYSTREAM will not be liable under any circumstances for its failure to meet such delivery date(s). Any delivery dates provided by SKYSTREAM to Buyer are best estimates only. 4.2 SKYSTREAM shall have the right to make partial shipments and payment therefore shall be made in the manner described in Section 3.1 above. 4.3 SKYSTREAM shall have the right to make shipments at any time before or after the requested delivery date and payment therefore shall be made in the manner described in Section 3.1 above. 4 <PAGE> 18 5. Packing All Products shall be packed, if appropriate, for shipment and storage in accordance with standard commercial practices. All packing will conform to requirements of carrier's tariffs. When special or export packaging is requested or, in the opinion of SKYSTREAM, required under the circumstances, the cost of such special import packaging, if not set forth on the invoice, will be separately invoiced. 6. Shipment & Acceptance 6.1 F.O.B. Point. All prices are F.O.B. (as defined in the Uniform Commercial Code as implemented by the state of California, U.S.A.) SKYSTREAM's Mountain View location unless otherwise agreed to in writing. Buyer will pay all transportation and insurance charges after delivery to the F.O.B. point. Unless otherwise indicated by SKYSTREAM, Buyer is obligated to obtain insurance covering damage to the goods being shipped. 6.2 Method of Shipment. Subject to this Section 6.2, SKYSTREAM will ship in accordance with Buyer's shipping instructions. In the absence of specific instructions or if Buyer's instructions are deemed unsuitable, SKYSTREAM reserves the right to ship by the most appropriate method. 6.3 Title and Risk of Loss. Title to the Products and risk of loss and damage shall pass to Buyer upon delivery to the F.O.B. point. 6.4 Acceptance. Products shall be deemed to have been accepted by Buyer unless Buyer provides written notice to SKYSTREAM to the contrary within thirty (30) days from the date of delivery to the F.O.B. point. Such written notice shall request a Return Material Authorization ("RMA") number and the terms and conditions that apply to warranty returns under Section 13.2 shall apply to returns under this Section 6.4. 7. Changes and Cancellations 7.1 Subject to the additional charges set forth below and to Section 7.2, standard Product orders may be canceled per the following schedule: <TABLE> <CAPTION> DAYS PRIOR TO SCHEDULED PERCENTAGE OF ORDER SHIPMENT DATE TO F.O.B. POINT WHICH MAY BE CANCELED <S> <C> 0-30 days 0% 31-60 days 25% 61-90 days 50% 91+ days 100% </TABLE> 5 <PAGE> 19 In the event that Buyer cancels any order more than thirty (30) days but fewer than ninety (90) days prior to the scheduled delivery date (to the F.O.B. point) for such order, Buyer shall promptly pay to SKYSTREAM a restocking/cancellation fee equal to fifteen percent (15%) of the purchase price for the Products subject to such order. 7.2 Standard Product orders may be rescheduled per the following schedule: <TABLE> <CAPTION> - ----------------------------- ---------------------------------- DAYS PRIOR TO SCHEDULED PERCENTAGE OF ORDER WHICH MAY BE SHIPMENT DATE TO F.O.B. POINT RESCHEDULED <S> <C> 0-30 days may not be rescheduled 31-60 days 25% may be rescheduled up to four weeks out 61-90 days 50% may be rescheduled up to four weeks out 91+ days 100% may be rescheduled </TABLE> Orders may only be rescheduled once. Rescheduled orders may not be later canceled. 7.3 Non-standard Products (customer special and certain designated Products) may have different cancellation and reschedule terms, and require advance payment. 7.4 If Buyer terminates individual orders in whole or in part because of SKYSTREAM's failure to timely deliver, Buyer's sole remedy shall be entitlement to cancel the undelivered quantity of any individual order. 7.5 No cancellation of any purchase order for default shall be effective unless SKYSTREAM has failed to correct such alleged default within thirty (30) days after receipt by SKYSTREAM of a written notice by Buyer of such default. 8. Software "Software" shall mean each software program provided by SKYSTREAM in machine-readable, object, printed, or interpreted form. SKYSTREAM shall retain all right, title and ownership of any Software provided to Buyer or its end users. SKYSTREAM sells its products to Buyer only to the extent that such products consist of non-software items on the terms specified herein. Use of the terms "sell," "purchase," "purchase price" and similar terms are to be interpreted in accordance with this Section. Use of Software is governed by the provisions of the Software License, a copy of which Buyer has received and executed. 6 <PAGE> 20 9. Confidential Information 9.1 It is understood that during the term of this Agreement, parties may receive Confidential Information belonging to the other party. If any Confidential Disclosure Agreements have been executed, such Agreements are incorporated herein by reference. 9.2 Confidential Information shall include information submitted in writing, and covers, but is not limited to, Software, designs, performance data, system bugs, and test programs. 9.3 The parties shall protect the disclosed Confidential Information, by using the same degree of care, but not less than a reasonable degree of care, to prevent the unauthorized use, dissemination or publication of the Confidential Information, as the recipient party uses to protect its own Confidential Information of a like nature. Both SKYSTREAM and Buyer shall restrict the dissemination of such Confidential Information only to those personnel of each who require access thereto, in order to perform this Agreement. 9.4 The obligation to protect the Confidential Information shall survive for three (3) years following the expiration or termination of this Agreement. 9.5 The obligation to protect the Confidential Information shall not extend to information which: (a) Was already lawfully known or acquired by the receiving party prior to the receipt from the disclosing party; (b) Is or becomes generally known to the public through no wrongful act of the receiving party; (c) Is received from a third party without similar restriction and without breach of these or similar conditions; or (d) Is independently developed by the receiving party by personnel without access to the Confidential Information. 10. Intellectual Property Warranty and Indemnity 10.1 Buyer warrants that it owns all the rights to the information and processes including specifications, designs, instructions and Confidential Information provided to SKYSTREAM, and that such items are free of any restrictions, settlements, judgments, or adverse claims. Buyer warrants that it has the full power and authority to supply and to disclose such information to SKYSTREAM. 7 <PAGE> 21 10.2 Buyer warrants that it has not improperly or unlawfully acquired the information and processes submitted to SKYSTREAM. 10.3 Buyer agrees to indemnify SKYSTREAM against, and to hold SKYSTREAM harmless of and from, any loss, cost, damage, liability, suit, judgment, or expense, including legal fees (collectively, "Harm") arising out of any breach of the warranties set forth in Section 10.1 or Section 10.2. 10.4 Subject to the limitations hereinafter set forth, Buyer agrees that SKYSTREAM has the right to defend, or at its option to settle, and SKYSTREAM agrees, at its own expense, to defend or at its option to settle, any claim, suit or proceeding (collectively, "Action") brought against Buyer alleging that the use or distribution of the Products in the United States infringes or misappropriates any copyright or trade secret. Notwithstanding the above, SKYSTREAM's obligations with respect to any claims to the object code within Products are subject to the Software License. SKYSTREAM shall have sole control of any such Action or settlement negotiations, and SKYSTREAM agrees to pay, subject to the limitations set forth in Section 14, any final judgment entered against Buyer as a result of such infringement in any such Action defended by SKYSTREAM. Buyer agrees that SKYSTREAM at its sole option shall be relieved of the foregoing obligations unless Buyer notifies SKYSTREAM promptly in writing of such Action and gives SKYSTREAM authority to proceed as contemplated herein, and, at SKYSTREAM's expense, gives SKYSTREAM proper and full information and assistance to settle and/or defend any such Action. If the Products, or any part thereof, are, or in the opinion of SKYSTREAM may become, the subject of any Action for infringement of any intellectual property right, or if a judicial or other governmental authority enjoins the use or distribution of Products as a result of an Action defended by SKYSTREAM, then SKYSTREAM may, at its option and expense: (i) procure for Buyer the right to distribute or use, as appropriate, the Products; (ii) replace the Products with other suitable Products; (iii) suitably modify the Products; of (iv) if the foregoing alternatives cannot be accomplished on a commercially reasonable basis as determined in SKYSTREAM's sole discretion, require Buyer to return such Products and refund the aggregate payments paid therefor by Buyer, less a reasonable sum for use and damage. Buyer shall indemnify and hold harmless SKYSTREAM from and against any and all third party claims arising out of the distribution of Products after SKYSTREAM has required Buyer to return such Products or arising out of any exclusions to SKYSTREAM's indemnification obligations set forth in Section 10.5. SKYSTREAM shall not be liable for any costs or expenses incurred without its prior written authorization. 8 <PAGE> 22 10.5 Notwithstanding the provisions of Section 10.4 above, SKYSTREAM assumes no liability for (i) any infringement claims (including without limitation combination or process patents) arising out of the combination of a Product or use with other hardware, software or other items not provided by SKYSTREAM to the extent such infringement would not have occurred absent such combination or use; (ii) the modification of the Product, or any part thereof, unless such modification was made by SKYSTREAM; or (iii) any infringement claims arising out of SKYSTREAM's compliance with Buyer's specifications or designs. 10.6 SKYSTREAM's obligation to indemnify Buyer does not extend to any Action arising from a claim of infringement by the manufacture, use or sale of Products that conform to any technical standard adopted by an international organization such as the International Organization for Standardization, the International Electrotechnical Commission, and the CCITT/ITU, including, without limitation, the MPEG, JPEG and H.261 standards. 10.7 THE FOREGOING PROVISIONS OF THIS SECTION 10 STATE THE ENTIRE LIABILITY AND OBLIGATION OF SKYSTREAM AND THE EXCLUSIVE REMEDY OF BUYER AND ITS CUSTOMERS WITH RESPECT TO ANY ALLEGED INFRINGEMENT OF COPYRIGHTS, TRADEMARKS, PATENTS OR OTHER INTELLECTUAL PROPERTY RIGHTS BY THE PRODUCTS. 10.8 SKYSTREAM shall have the right but, except as provided by Section 10.4, not the obligation, to exclusively settle any claim, suit or proceeding brought against Buyer so far as it is based on an allegation that any Product or service furnished hereunder infringes a patent, copyright or other intellectual property right of any country. Buyer shall provide SKYSTREAM with prompt notice of any such claim, suit or proceeding. 11. Intellectual Property Rights 11.1 Buyer hereby grants SKYSTREAM a license under any patent required to enable SKYSTREAM to perform its obligations pursuant to this Agreement. This license shall extend for the duration of this Agreement. 11.2 No provision in this Agreement shall be interpreted as a grant by SKYSTREAM to Buyer of a license to use SKYSTREAM's service-marks or trade marks. 11.3 The Products are offered for sale and are sold by SKYSTREAM subject in every case to the condition that such sale does not convey any license expressly or by implication, to manufacture, reverse engineer, duplicate or otherwise copy or reproduce any of the Products or any part thereof. 9 <PAGE> 23 12. Termination by SKYSTREAM 12.1 In the event of any proceedings, voluntary or involuntary, in bankruptcy or insolvency by or against Buyer, or in the event of the appointment, with or without Buyer's consent, of an assignee for the benefit of creditors, or of a receiver, SKYSTREAM may elect to immediately cancel any purchase order previously accepted by SKYSTREAM. 12.2 In the event Buyer has materially breached this Agreement, including but not limited to failure to comply with credit terms, and has not cured such breach within 30 days after receiving notice thereof by SKYSTREAM, SKYSTREAM may immediately cancel any purchase order previously accepted by SKYSTREAM. 13. Limited Warranty 13.1 The Products are warranted against defects in material and workmanship for a period of ninety (90) days from the date of shipment to the F.O.B. point provided that the foregoing warranty shall not apply to defects that reasonably could have been discovered by Buyer during the 30 day period following delivery to the F.O.B. point. This limited warranty does not cover the results of accident, abuse, neglect, improper testing, vandalism, acts of God, use contrary to specifications or instructions, or repair or modification by anyone other than SKYSTREAM or SKYSTREAM's authorized agents. SKYSTREAM SHALL HAVE NO OBLIGATION UNDER THIS WARRANTY, AND MAKES NO REPRESENTATION AS TO PRODUCTS WHICH HAVE BEEN MODIFIED BY BUYER OR ITS CUSTOMERS. The foregoing warranty extends only to Buyers who are SKYSTREAM customers, and not Buyer's customers or other users of Buyers' Products. The foregoing warranty does not apply to any used or modified Products, or software within the Products, which is subject to the Software License. 13.2 If the Product does not conform to the foregoing warranties, Buyer may, at its own risk and expense, return the allegedly defective Product directly to SKYSTREAM during the Warranty Period. In order to do so, Buyer must first notify SKYSTREAM in writing of the alleged defect and request a return material authorization ("RMA") number. Within five (5) days of its receipt of the RMA number, Buyer shall ship to SKYSTREAM the allegedly defective Product, freight prepaid, to SKYSTREAM, and shall include a notation of the RMA number. Any Products returned to SKYSTREAM without an authorized RMA number may be returned to Buyer, freight collect. Upon receipt of the Product, SKYSTREAM, at its option, will repair or replace the Product and ship the repaired or replaced Product to Buyer at 10 <PAGE> 24 SKYSTREAM's expense and risk, or refund the purchase price. If SKYSTREAM determines that any returned Product conformed to the warranties, SKYSTREAM will return the Product to Buyer at Buyer's expense and risk, along with a written statement setting forth the basis for SKYSTREAM's conclusion that the returned Product was not defective, and Buyer agrees to pay SKYSTREAM's reasonable costs of handling and testing. 13.3 THE REMEDIES PROVIDED HEREIN ARE BUYERS' SOLE AND EXCLUSIVE REMEDIES FOR BREACH OF WARRANTY BY SKYSTREAM. SKYSTREAM SPECIFICALLY DISCLAIMS ALL OTHER EXPRESS, IMPLIED OR STATUTORY WARRANTIES, INCLUDING ANY IMPLIED WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE, MERCHANTABILITY OR NONINFRINGEMENT. NO PERSON IS AUTHORIZED TO MAKE ANY OTHER WARRANTY OR REPRESENTATION CONCERNING THE PERFORMANCE OF THE PRODUCTS OTHER THAN AS PROVIDED IN THIS SECTION. 14. Limitation of Liability NEITHER SKYSTREAM NOR ITS SUPPLIERS SHALL BE LIABLE TO BUYER FOR ANY DAMAGES WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY (i) FOR ANY INCIDENTAL, CONSEQUENTIAL, SPECIAL OR INDIRECT DAMAGES OF ANY SORT EVEN IF SKYSTREAM OR ITS SUPPLIERS HAVE BEEN INFORMED OF THE POSSIBILITY OF SUCH DAMAGES; (ii) FOR COST OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY OR SERVICES; OR (iii) FOR LOSS OR CORRUPTION OF DATA OR INTERRUPTION OF USE. SKYSTREAM SHALL NOT BE LIABLE FOR ANY AMOUNTS IN EXCESS OF THE TOTAL AMOUNT ACTUALLY PAID TO SKYSTREAM HEREUNDER FOR THE PARTICULAR PRODUCTS THAT ARE SUBJECT TO A CLAIM. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. THE LIMITATION OF LIABILITY SET FORTH IN THIS SECTION SHALL NOT APPLY TO LIABILITY FOR DEATH OR PERSONAL INJURY TO THE EXTENT APPLICABLE LAW PROHIBITS SUCH LIMITATION. 15. Import/Export Buyer agrees that it will not in any form export, re-export, resell, ship or divert directly or indirectly any Product or technical data or Software furnished hereunder to any country for which the United States Government or any government agency 11 <PAGE> 25 requires an export license or other governmental approval without first obtaining such license or approval. 16. Restricted Use SKYSTREAM's Products may produce a reduction and loss of data and therefore are not sold for use in medical equipment, avionics, nuclear applications, or other high risk applications where malfunctions or loss of data could result directly in personal injury to human beings. Buyer agrees to not to use, to contractually bind its customers not to use, and to forbid all third parties from using the Products in such applications, and Buyer agrees to indemnify SKYSTREAM and to hold SKYSTREAM harmless from and against any liability arising out of Buyer's failure to contractually bind its customers in the manner previously described. 17. Term This Agreement will govern in perpetuity all of Buyer's purchases of Products. 18. Publicity Buyer consents to the use of Buyer's name and purchase order data for use by SKYSTREAM at SKYSTREAM's discretion for the purpose of preparing press releases and promotional materials. Buyer agrees to use best efforts in assisting in the preparation of any such press releases or promotional materials. 19. Miscellaneous 19.1 Any notice required to be given hereunder shall be given in writing at the address of each party set forth in an attached quotation or purchase agreement, or to such other address as either party may substitute by written notice to the other. 19.2 Any attempt by Buyer to assign or transfer any of the rights, duties, or obligations herein shall render such attempted assignment or transfer null and void. 19.3 SKYSTREAM's failure to exercise any of its rights hereunder shall not constitute or be deemed a waiver or forfeiture of such rights. 19.4 No U.S. Government Procurement Regulations shall be binding on either party unless specifically agreed to in writing prior to incorporation herein. 19.5 Stenographic, typographical and clerical errors are subject to correction. 19.6 Governing Law and Jurisdiction. This Agreement will be governed by and construed in accordance with the laws of the State of California applicable to agreements entered into, and to be performed entirely, within California 12 <PAGE> 26 between California residents, without reference to conflict of law principles. Any dispute or claim arising out of this Agreement will be resolved by binding arbitration in the city and county of Santa Clara in accordance with the complex commercial litigation rules of the American Arbitration Association. The arbitrator will have the power to grant any form of relief, including preliminary and permanent injunctive relief, which a judge in California with jurisdiction could fashion, and judgment on any award may be entered in any court in California with jurisdiction. Nonetheless, the parties may seek temporary or permanent injunctive relief from any court in California with jurisdiction without breaching this Section 19.6 or otherwise abridging the authority of the arbitrator. 19.7 In the event any proceeding or lawsuit is brought by either party to enforce its rights hereunder, the prevailing party shall be entitled to recover its costs, including expert witness fees and reasonable attorneys' fees. 19.8 All disputes between the parties of any kind arising out of or related to this Agreement shall be brought within one (1) year after the accrual of the dispute. 19.9 THE TERMS AND CONDITIONS SET FORTH HEREIN REPRESENT THE ENTIRE AGREEMENT BETWEEN SKYSTREAM AND BUYER WITH RESPECT TO THE SUBJECT MATTER AND BUYER AGREES THAT ALL PRIOR QUOTATIONS, INVOICES, NEGOTIATIONS, UNDERSTANDINGS, REPRESENTATIONS AND/OR AGREEMENTS OF THE PARTIES RELATING TO THE SUBJECT MATTER HEREOF, EXCLUDING THE SOFTWARE LICENSE, WHETHER ORAL OR WRITTEN, ARE MERGED HEREIN AND SUPERSEDED IN THEIR ENTIRETY. BUYER ACKNOWLEDGES THAT IT HAS NOT ENTERED INTO THIS AGREEMENT IN RELIANCE ON ANY WARRANTY OR REPRESENTATION BY ANY PERSON OR ENTITY EXCEPT FOR THE WARRANTIES AND REPRESENTATIONS SPECIFICALLY SET FORTH HEREIN. No change or modification of any of the terms or conditions herein shall be valid or binding on either party unless in writing and signed by an authorized representative of each party. 19.10 Neither party shall be liable to the other for its failure to perform any of its obligations hereunder during any period in which such performance is delayed by circumstances beyond its reasonable control including, but not limited to, fire, flood, earthquake, war, embargo, strike, riot, inability to secure materials and transportation facilities, or the intervention of any governmental authority. 13 <PAGE> 27 EXHIBIT C PRODUCTS TO BE COVERED UNDER THIS AGREEMENT: PRODUCT DESCRIPTION DBN-24 DBN-25 DBN-26 JetStream Server JetStream Client SOFTWARE RELEASES TO BE COVERED UNDER THIS AGREEMENT: V1.3 V3.0 V3.1 V3.2 EXHIBIT D PRODUCT PRICING MATRIX PRODUCTS AND UPGRADE PRICING WITH INITIAL INTEGRATOR PURCHASE [Insert price list] UPGRADE PRICING AFTER INITIAL INTEGRATOR HAS BEEN PURCHASED [Insert upgrade price list] 14 <PAGE> 28 ANNUAL MAINTENANCE FEES [*]% of the invoiced price to the Reseller on a per unit, per year basis. SkySupport service is renewed automatically every 21 months, unless otherwise noted by the Reseller. HOURLY CONSULTING RATE FOR CHARGEABLE SERVICES $[*] per hour, not including travel or lodging expenses RESELLER'S TERM Term. The term of this Agreement will begin on the Effective Date and will continue for a period of one year unless it is terminated earlier in accordance with the provisions hereof. This Agreement may be renewed for additional periods upon the mutual written agreement of the parties, although each party acknowledges that the other is under no obligation to do so. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 15 <PAGE> 29 [SKYSTREAM LOGO] EXHIBIT E SKYSUPPORT(TM) SERVICE PLAN -------------- For DIRECT Customers Providing World-Class Customer Service and Support for the SkyStream Integrator Family of Products This document overrides any and all previous documents in circulation. SkyStream reserves the right to change information contained in this document without notice to any non-SkySupport customers <PAGE> 30 Version 2.2 February 1999 <PAGE> 31 SKYSUPPORT CUSTOMER SERVICE PLAN FOR DIRECT CUSTOMERS SkySupport is a customer service plan that offers world-class support to SkyStream customers domestically and internationally. SkyStream offers a program whereby the greatest effort is placed in fast response time to any issues that emerge, 24 hours a day, and 7 days a week. SkyStream also employs proactive efforts to keep SkySupport customers abreast of any new product developments or code changes. Because of the evolutionary architecture of the SkyStream Integrator series, customers may find it useful to gradually add hardware or software features to the base product, such as upgrading a data encapsulator (DBN-24) to a data injection (DBN-25) or DUB-Simulcrypt conditional access product (DBN-26). Customers can also purchase feature additions or an add-on card for additional functionality. SkyStream offers all SkySupport customers the opportunity to upgrade their products, even after the units are installed in the field. The SkySupport customer service plan is available to all direct customers of SkyStream. The plan is supported on a per-unit basis, and is renewed annually. SkySupport customers are also eligible to purchase product upgrades or training for additional charges. This renewable 1-year plan (after ship date) shall include the following three categories of support: 1. ULTRA-FAST RESPONSE TIME 2. PRODUCT UPGRADES 3. SKYSTREAM'S PRODUCT TRAINING PROGRAM The SkySupport Service Plan is initially ordered at same time that the equipment is purchased. SkySupport service is renewed automatically, unless otherwise noted by the customer, every 12 months at the standard service rate (per the most recent price list). <PAGE> 32 SKYSUPPORT 3-POINT CUSTOMER SERVICE PLAN 1. ULTRA-FAST RESPONSE TIME - - GUARANTEED ADVANCED PARTS REPLACEMENT, SHIPPED OVERNIGHT ON THE NEXT BUSINESS DAY SkyStream will ship advance replacement parts the next business day. - - TELEPHONE SUPPORT, 24 HOURS PER DAY, 7 DAYS PER WEEK (24x7) Access to SkyStream Customer Service technical support personnel with a guaranteed response time of within 4 hours of initial call. - - ELECTRONIC MAIL INQUIRIES AND RESPONSES - - REMOTE DIAGNOSTIC SERVICE (RDS) SkyStream customer service can observe and analyze the configuration and traffic pattern at the client's site and provide feedback to resolve problems. Customer needs to provide SkyStream support personnel with authorization to access the SkyStream products over a remote network for monitoring and troubleshooting purposes. - - DOCUMENTATION Access to product manuals, user's guides, application notes, FAQ's and web-based troubleshooting guide on SkyStream's website via secure SkySupport password. <PAGE> 33 2. PRODUCT UPGRADES SkyStream's products have a unique architecture that allows them to receive hardware or software upgrades while installed in the field. Upgrades can range from simple software patches to significant feature upgrades, all of which are best treated under the SkySupport plan. Product Upgrades come in three different categories, and will be clearly marked in all price lists: LEVEL 1 UPGRADE: BUG FIXES All software bug fixes will be documented and made accessible to all SkyStream customers. Bug fixes are software patches that repair a known problem in the current released code. Level 1 upgrades will be available at [*], as long as customers are using supported software releases. Typically, SkyStream will provide support for the 2 most recent releases of its software. Customers using unsupported versions of software will need to upgrade to the latest version to receive code fixes, and non-SkySupport customers may need to pay [*] to upgrade. Registered SkySupport customers will be pro-actively notified via email of any upgrade within 30 days of production release date. LEVEL 2 UPGRADE: FEATURE IMPROVEMENTS Level 2 upgrades include all software improvements. Software improvements are released on an ongoing basis to improve on an existing set of functions. See the SkyStream price list to determine which features fall into this category. These upgrades will be provided to SkySupport customers for [*] as long as customers are using supported software releases. LEVEL 3 UPGRADE: FEATURE ADDITIONS AND HARDWARE UPGRADES Feature additions and hardware add-on card upgrades will be sold via SkyStream's upgrade price list. Feature additions include software code upgrades that add significant functionality to the existing product specification. See the SkyStream price list to determine which features fall into this category. Only authorized SkySupport personnel will administer Level 3 upgrades. Registered SkySupport customers will be pro-actively notified via email of any upgrade within 30 days of production release date. SkyStream's Integrator family uses a flexible architecture that allows customers to purchase a base system for immediate requirements, with an interest to upgrade its functionality to a new platform in the future. For example, if a customer purchases a DBN-35 ATSC IP Data Injector, and later wishes to upgrade the product to support CAS Injection, he can do so by paying only an upgrade fee as opposed to buying a new system (see upgrade price list for upgrade prices). Customers interested in upgrading their unit must provide SkyStream with 90 days advance notice. ONLY SKYSUPPORT CUSTOMERS WILL HAVE ACCESS TO ANY LEVEL 3 UPGRADES. NOTE: Level 3 Upgrades are only available on same-family products (i.e. DBN 2X is a family of products, where 4, 5, 6, or other future product). * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. <PAGE> 34 <TABLE> <CAPTION> Product Upgrades SkySupport Customers ------------------------------------------------------------- <S> <C> LEVEL 1: BUG FIXES Software Patches [ * ] Hardware Fixes [ * ] LEVEL 2: FEATURE IMPROVEMENTS Software - feature improvements [ * ] LEVEL 3: FEATURE ADDITIONS/HARDWARE UPGRADES Software - new feature additions Available for additional charge-see price list Hardware - new feature additions Available for additional charge - see price list DBN-24 to DBN-25 Available for additional charge - see price list DBN-25 to DBN-26 Available for additional charge - see price list </TABLE> * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. <PAGE> 35 3. SKYSTREAM'S PRODUCT TRAINING PROGRAM SkyStream offers all customers basic system operations training to the SkyStream Integrator product family. This session will accompany any new product installation when an authorized SkyStream field support engineer performs the installation. For more detailed product training, SkyStream offers an additional system maintenance training session for customer engineering or operations personnel who require more technical knowledge and hands-on skills to work directly with the SkyStream equipment. There are two training modules available: MODULE 1: SKYSTREAM SYSTEM OPERATIONS TRAINING SkyStream provides comprehensive on-site training on the new system at the time of system installation. Customer operations and production staff receive training on - - System Overview/Setup - - System Operations - - Routine maintenance of the system MODULE 2: SKYSTREAM SYSTEM MAINTENANCE TRAINING SkyStream offers advanced training to customers that support and maintain their SkyStream system. This training provides customers with the technical knowledge and hands-on skills needed to use, configure, support and troubleshoot the SkyStream system. This training is delivered at SkyStream's Corporate Training Facility in Mt. View, CA. <PAGE> 36 SKYSUPPORT PRICING - FEBRUARY 1999 <TABLE> <CAPTION> SERVICE ORDER NUMBER COST - ------- ------------ ---- <S> <C> <C> 1-year SkySupport S901001 [ * ] price per unit On-Site Installation S901004 [ * ] (N.A.), [ * ] per day (Int'l) LEVEL 1 PRODUCT UPGRADES - ------------------------ Bug fixes [ * ] [ * ] LEVEL 2 PRODUCT UPGRADES - ------------------------ Hardware Add-on cards refer to upgrade price list refer to upgrade price list Software feature additions refer to upgrade price list refer to upgrade price list LEVEL 3 PRODUCT UPGRADES - ------------------------ DBN-24 to DBN-25 S101002 refer to upgrade price list DBN-25 to DBN-26 S111003 refer to upgrade price list DBN-24 to DBN-26 S101003 refer to upgrade price list Other Feature Additions refer to upgrade price list refer to upgrade price list SKYSTREAM PRODUCT TRAINING - -------------------------- System Operations Training [ * ] [ * ] (SkySupport only) System Maintenance Training S901101 [ * ] per person </TABLE> ADDITIONAL TERMS: 1. SkySupport must be purchased at time of order placement, and must cover the full amount of the order (i.e. if customer buys 2 DBN-xx units, he must also buy 2 units of SkySupport). 2. SkySupport must also be purchased for any upgrades when they are ordered, and will be added to the basic SkySupport agreement when it is to be renewed. 3. SkyStream will register all units by serial number. Customer service calls must be verified by actual serial number of affected unit. 4. All existing SkySupport customers' terms will be honored until expiration of the current annual service plan. Renewals will be assessed at the new rate, listed above. 5. All returns will be handled by RMA process. SkyStream will issue an RMA number that must accompany any product repair or return unit. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.18 <SEQUENCE>35 <DESCRIPTION>EX-10.18 <TEXT> <PAGE> 1 EXHIBIT 10.18 LOAN AND SECURITY AGREEMENT Agreement No. 19101 Dated as of August 31, 1998 by and between LIGHTHOUSE CAPITAL PARTNERS II, L.P., as lender and SKYSTREAM CORPORATION a California corporation 555 Clyde Avenue, Suite B, Mountain View, California 94043, as borrower TOTAL COMMITMENT: $2,000,000 Repayment Period: 24 months Principal Repayment Factor: 4.167% Stock Purchase Agreement: Number of shares: 75,410 Class of stock: Common Price per share: $0.225 The terms and information set forth on this cover page are a part of the attached Loan and Security Agreement, dated as of the date first written above (this "Agreement"), entered into by and between Lighthouse Capital Partners II, L.P. ("Lender") and the borrower ("Borrower") set forth above. The terms and conditions of the Loan Agreement agreed to between Lender and Borrower are as follows: <PAGE> 2 THIS LOAN AND SECURITY AGREEMENT is entered into as of August 31, 1998, by and between LIGHTHOUSE CAPITAL PARTNERS II, L.P. ("Lender"), as lender and SKYSTREAM CORPORATION, a California corporation ("Borrower"). RECITALS Borrower wishes to borrow money from time to time from Lender and Lender desires to lend money to Borrower. This Agreement sets forth the terms on which Lender will lend to Borrower and Borrower will repay the loan to Lender. AGREEMENT The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION 1.1 DEFINITIONS. As used in this Agreement, the following terms shall have the following definitions: "Affiliate" means any Person that owns or controls directly or indirectly five percent or more of the stock of another entity, any Person that controls or is controlled by or is under common control with such Persons or any Affiliate of such Persons or each of such Person's officers, directors, joint venturers or partners. "Basic Rate" means a per annum variable rate of interest (based on a year of 360 days and actual days elapsed) equal to the Prime Rate as quoted in the western edition of the Wall Street Journal on the date of determination plus 450 basis points, which rate shall vary concurrently with any change in the Prime Rate. "Borrower's Books" means all of Borrower's books and records including: ledgers; records concerning Borrower's assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information. "Business Day" means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close. "Code" means the Uniform Commercial Code as adopted and in effect in the State of California, as amended from time to time. "Collateral" means the Property described on EXHIBIT A attached hereto. "Commitment" means $2,000,000. "Commitment Termination Date" means December 31, 1998. "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to any indebtedness, lease, dividend, letter of credit or other obligation of another, including any such obligation directly or indirectly guaranteed, endorsed (otherwise than for collection or deposit in the ordinary course of business), co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported. "Default" means any event which with the passing of time or the giving of notice or both would become an Event of Default hereunder. 1 <PAGE> 3 "Default Rate" means the per annum rate of interest equal to the Basic Rate plus 3%, but such rate shall in no event be more than the highest rate permitted by applicable law to be charged on commercial loans. "Event of Default" has the meaning given to such term in SECTION 8. "Facility Fee" has the meaning given to such term in SECTION 2.5(a). "Funding Date" means any date on which a Loan is made to or on account of Borrower under this Agreement. "Government Authority" means (a) any federal, state, county, municipal or foreign government, or political subdivision thereof, (b) any governmental or quasi-governmental agency, authority, board, bureau, commission, department, instrumentality or public body, (c) any court or administrative tribunal or (d) with respect to any Person, any arbitration tribunal or other non-governmental authority to whose jurisdiction that Person has consented. "Indebtedness" means (a) all indebtedness for borrowed money or the deferred purchase price of Property or services, including reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations, and (d) all Contingent Obligations. "Interim Payment" has the meaning given to such term in SECTION 2.4(b). "Landlord Consent" means a consent in the form of EXHIBIT C or such other form as Lender may agree to accept. "Lender's Expenses" means all reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; and Lender's reasonable attorneys' fees and expenses incurred in amending, modifying, enforcing or defending the Loan Documents, including in the exercise of any rights or remedies afforded hereunder or under applicable law, whether or not suit is brought. "Lien" means any pledge, bailment, lease, mortgage, hypothecation, conditional sales and title retention agreement, charge, claim, encumbrance or other lien in favor of any Person. "Liquidation Event" means any of the following: (i) a merger of Borrower with another entity; or (ii) the sale of all or substantially all of Borrower's assets; or (iii) a transaction in which the shareholders immediately prior to such transaction own less than 50% of the equity securities of Borrower immediately after such transaction; or (iv) the initial public offering of any of Borrower's equity securities. "Loan" means each advance of credit by Lender to Borrower under this Agreement. "Loan Agreement Supplement" means a supplement to this Agreement in substantially the form of EXHIBIT D. "Loan Commencement Date" means October 1, 1999. "Loan Documents" means, collectively, this Agreement, the Stock Purchase Agreement, the Landlord Consent(s) and all other documents, instruments and agreements entered into between Borrower and Lender in connection with this Agreement, all as amended or extended from time to time. "Maturity Date" means, with respect to each Loan, the last day of the Repayment Period for such Loan, or if earlier, the date of acceleration of such Loan by Lender following an Event of Default. 2 <PAGE> 4 "Minimum Funding Amount" means $500,000. "Obligations" means all debt, principal, interest, fees, charges, expenses and attorneys' fees and costs and other amounts, obligations, covenants, and duties owing by Borrower to Lender of any kind and description (whether pursuant to or evidenced by the Loan Documents, or by any other agreement between Lender and Borrower, and whether or not for the payment of money), whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, including the principal and interest due with respect to the Loans, and including any debt, liability, or obligation owing from Borrower to others that Lender may have obtained by assignment or otherwise, and further including all interest not paid when due and all Lender's Expenses that Borrower is required to pay or reimburse by the Loan Documents, by law, or otherwise. "Payment Date" has the meaning given to that term in SECTION 2.4(a). "Permitted Indebtedness" means the following: (a) any loans made from time to time by Lender; (b) Indebtedness secured by the Permitted Lien in clause (d) of the definition of Permitted Liens; (c) Indebtedness, provided said Indebtedness is junior in priority to the loans made by Lender under this Agreement and further provided said other lender(s) shall have entered into a subordination agreement with Lender reasonably acceptable to Lender; (d) Indebtedness up to $750,000 in favor of Silicon Valley Bank or another lender reasonably acceptable to Lender, provided Silicon Valley Bank or the other lender has executed an intercreditor agreement reasonably acceptable to Lender; (e) Other senior Indebtedness not to exceed $1,000,000; and (f) Other Indebtedness secured solely by Borrower's accounts receivable. "Permitted Liens" means the following: (a) The Lien created by this Agreement; (b) Any Liens existing as of the date hereof and disclosed in SCHEDULE I; (c) Liens securing indebtedness permitted pursuant to clause (d) of the definition of Permitted Indebtedness provided Silicon Valley Bank or the other lender has entered into an intercreditor agreement with Lender reasonably acceptable to Lender; (d) Liens and security interests (a) upon or in any equipment acquired or held by Borrower to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition of such equipment and in an amount not greater than the purchase price thereof or (b) existing on such equipment at the time of its acquisition, provided that the Lien and security interest is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment; (e) Liens securing indebtedness permitted pursuant to clause (c) of the definition of Permitted Indebtedness provided the liens are junior to that of Lender and the other lenders have entered into a subordination agreement with Lender reasonably acceptable to Lender; 3 <PAGE> 5 (f) Liens securing indebtedness permitted pursuant to clause (e) of the definition of Permitted Indebtedness provided that the other lender(s) have entered into an intercreditor agreement with Lender reasonably acceptable to Lender; (g) Liens securing indebtedness permitted pursuant to clause (f) of the definition of Permitted Indebtedness provided the Lien is limited solely to Borrower's accounts receivable in favor of a commercial bank or other financial institution upon commercially reasonable terms (reasonably satisfactory to Lender) including, without limitation, an advance rate that does not exceed eighty percent (80%) of eligible accounts (using a definition that is consistent with prudent lending practices). Lender will execute a subordination agreement reasonably acceptable to Lender subordinating solely Lender's security interest in Borrower's accounts receivable; (h) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings, provided the same have no superior priority over Lender's Lien in the Collateral; (i) Liens to secure payment of worker's compensation, employment insurance, old age pensions or other social security obligations of Borrower in the ordinary course of business of Borrower; (j) Liens on equipment leased by Borrower pursuant to an operating lease in the ordinary course of business (including proceeds thereof and accessions thereto) incurred solely for the purpose of financing the lease of such equipment; (k) Leases or subleases and licenses or sublicenses granted in the ordinary course of Borrower's business and any interest or title of a lessor or licensor under any lease or license; (l) Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default under SECTION 8.5; (m) Easements, reservations, rights-of-ways, restrictions, minor defects or irregularities in title and other similar charges or encumbrances affecting real property that could not reasonably be expected to have a material adverse effect; (n) Liens in favor of customs and revenue authorities arising as a matter of law to secure payments of customs duties in connection with the importation of goods; (o) Liens that are not prior to the Lien of Lender which constitute rights of set-off of a customary nature or banker's Liens with respect to amount on deposit, whether arising by operation of law or by contract, in connection with arrangements entered into with banks in the ordinary course of business; (p) Liens of materialmen, mechanics, warehousemen, carriers, or other similar Liens arising in the ordinary course of business or by operation of law or regulation and securing obligations not yet due; and (q) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (b) and (d) above, provided that any extension, renewal or replacement Lien shall be limited to the Property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase. "Person" means and includes any individual, any partnership, any corporation, any business trust, any joint stock company, any limited liability company, any unincorporated association or any other entity and any domestic or foreign national, state or local government, any political subdivision thereof, and any department, agency, authority or bureau of any of the foregoing. 4 <PAGE> 6 "Prepayment Fee" means an amount equal to one and one-half percent (1.5%) of the principal amount prepaid prior to December 31, 2000 and one percent (1.0%) of the principal amount prepaid on or after December 31, 2000 but prior to September 30, 2001. "Principal Repayment Factor" means an amount equal to 4.167%. "Property" means any interest in any kind of property or asset, whether real, personal or mixed, whether tangible or intangible. "Repayment Period" means the period beginning on the first Payment Date and continuing for the number of calendar months set forth following such term on the cover page of this Agreement. "Responsible Officer" means each of the Chief Executive Officer and the Vice President of Finance and Administration of Borrower. "Scheduled Payments" has the meaning given to such term in SECTION 2.4(a). "Stock Purchase Agreement" means the stock purchase agreement in favor of Lender to purchase securities of Borrower substantially in the form of EXHIBIT B. "Subsidiary" means any corporation of which a majority of the outstanding capital stock entitled to vote for the election of directors (otherwise than as the result of a default) is owned by Borrower directly or indirectly through Subsidiaries. "Term" means the period from and after the date hereof until the payment in full of all amounts and liabilities payable under this Agreement and the other Loan Documents, including principal and interest on the Loans. 1.2 OTHER PAYMENT PROVISIONS. References in this Agreement to "Articles," "Sections," "Exhibits," "Schedules" and "Annexes" are to recitals, articles, sections, exhibits, schedules and annexes herein and hereto unless otherwise indicated. References in this Agreement and each of the other Loan Documents to any document, instrument or agreement shall include (a) all exhibits, schedules, annexes and other attachments thereto, (b) all documents, instruments or agreement issued or executed in replacement thereof, and (c) such document, instrument or agreement, or replacement or predecessor thereto, as amended, modified and supplemented from time to time and in effect at any given time. The words "hereof, "herein" and "hereunder" and words of similar import when used in this Agreement or any other Loan Document shall refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Agreement or such other Loan Document, as the case may be. The words "include" and "including" and words or similar import when used in this Agreement or any other Loan Document shall not be construed to be limiting or exclusive. Unless otherwise indicated in this Agreement or any other Loan Document, all accounting terms used in this Agreement or any other Loan Document shall be construed, and all accounting and financial computations hereunder or thereunder shall be computed, in accordance with generally accepted accounting principles as in effect in the United States of America from time to time. 2. LOAN AND TERMS OF PAYMENT 2.1 COMMITMENTS. Subject to the terms and conditions of this Agreement and relying upon the representations and warranties herein set forth as and when made or deemed to be made, Lender agrees to lend to Borrower, from time to time prior to the Commitment Termination Date, the Loans; provided that the aggregate principal amount of the Loans shall not exceed the Commitment at such time. If prepaid, the principal of the Loans may not be re-borrowed. 2.2 USE OF PROCEEDS; THE LOAN. 5 <PAGE> 7 (a) USE OR PROCEEDS. The proceeds of the Loan shall be used solely for general corporate requirements and working capital purposes. (b) THE LOANS. The Loans shall be repayable in consecutive monthly installments in accordance with the terms of SECTION 2.4. Lender may, and is hereby authorized by Borrower to, endorse in its books and records appropriate notations regarding Lender's interest in the Loans; provided, however, that the failure to make, or an error in making, any such notation shall not limit or otherwise affect the Obligations of Borrower hereunder. 2.3 PROCEDURE FOR MAKING LOAN. (a) NOTICE. Whenever Borrower desires that Lender make a Loan, Borrower shall so notify Lender in writing (or by telephone with prompt confirmation in writing) at least five Business Days in advance of the desired Funding Date, which notice shall be irrevocable. Lender's obligation to make Loans shall be expressly subject to the satisfaction of the conditions set forth in SECTIONS 3.1 and 3.2. Lender shall have the right, exercisable at any time, to request that Borrower furnish Lender with such additional information with respect to the Loans as Lender shall reasonably request. (b) LOAN INTEREST RATE. Borrower shall pay interest on the unpaid principal amount of each Loan from the Funding Date until such Loan has been paid in full, at a per annum rate of interest equal to the Basic Rate. All computations of interest on each Loan shall be based on a year of 360 days for actual days elapsed. Notwithstanding any other provision hereof, the amount of interest payable hereunder shall not in any event exceed the maximum amount permitted by the law applicable to interest charged on commercial loans. (c) DISBURSEMENT. Subject to the satisfaction of the conditions set forth in SECTIONS 3.1 and 3.2 with respect to the initial Loan and the satisfaction of the conditions set forth in SECTION 3.2 with respect to each subsequent Loan, Lender shall disburse the Loans. (d) TERMINATION OF COMMITMENT TO LEND. Notwithstanding anything in the Loan Documents, Lender's obligation to lend the undisbursed portion of the Commitment to Borrower hereunder shall terminate on the earlier of (i) at the Lender's sole election, the occurrence and continuance of any Default or Event of Default hereunder, and (ii) the Commitment Termination Date. Notwithstanding the foregoing, Lender's obligation to lend the undisbursed portion of the Commitment to Borrower shall terminate if, in Lender's sole judgment, there has been a material adverse change in the general affairs, management, results of operations, condition (financial or otherwise) or prospects of Borrower, whether or not arising from transactions in the ordinary course of business, or there has been any material adverse deviation by Borrower from the business plan of Borrower presented to and not disapproved by Lender, since the date of this Agreement. 2.4 AMORTIZATION OF PRINCIPAL AND INTEREST; INTERIM PAYMENT. (a) PRINCIPAL AND INTEREST PAYMENTS ON PAYMENT DATES. Borrower shall make payments of principal in advance, when due, and accrued interest monthly in arrears for the aggregate amount of the Loans hereunder (collectively, "Scheduled Payments"), commencing on the Loan Commencement Date with respect to such Loans and continuing thereafter during the Repayment Period on the first Business Day of each month (each a "Payment Date"), in an amount equal to the sum of (a) the Principal Repayment Factor multiplied by the aggregate amount of the Loans as of the Loan Commencement Date, and (b) accrued interest on the outstanding principal amount of the Loans calculated at the Basic Rate. In any event, all unpaid principal and accrued interest shall be due and payable in full on the last Payment Date with respect to such Loan. (b) INTERIM PAYMENT. In addition to the Scheduled Payments, Borrower shall pay to Lender, monthly in arrears, an amount (the "Interim Payment") equal to accrued interest on the original principal amount of the Loans calculated at the Basic Rate from the Funding Date until the first Payment Date with respect to each Loan. 6 <PAGE> 8 (c) FINAL PAYMENT. Unless a Loan is prepaid in full, on the Maturity Date with respect to such Loan, Borrower shall pay the unpaid principal and accrued interest and all other amounts due on such date with respect to such Loan. 2.5 FEES. Borrower shall pay to Lender the following: (a) FACILITY FEE. A Facility Fee equal to Twenty Thousand Dollars ($20,000), which fee shall be due and payable upon execution of this Agreement and shall be fully earned and non-refundable; (b) COMMITMENT FEE. Borrower has paid to Lender a commitment fee ("Commitment Fee") equal to Fifteen Thousand Dollars ($15,000). Such fee shall be applied first as payment of amounts due under SECTION 3.1(h), then to any other amounts due hereunder as and when such amounts become due; (c) LATE FEE. A late charge on any Scheduled Payments or other sums due hereunder which are a payment default as determined under SECTION 8.1, in an amount equal to 2% of the past due amount, payable on demand. 2.6 PREPAYMENTS. (a) MANDATORY PREPAYMENT UPON AN ACCELERATION. If the Loans are accelerated following the occurrence of an Event of Default or otherwise, then Borrower shall immediately pay to Lender (i) all unpaid Interim Payments and/or Scheduled Payments with respect to the Loans due prior to the date of prepayment, (ii) the outstanding principal amount of the Loans, (iii) the Prepayment Fee, and (iv) all other sums, if any, that shall have become due and payable hereunder with respect to the Loans. (b) MANDATORY PREPAYMENT UPON A LIQUIDATION EVENT. If a Liquidation Event shall occur, then Borrower shall within sixty (60) days of such Liquidation Event pay to Lender (i) all unpaid Interim Payment and/or Scheduled Payments with respect to the Loans due prior to the date of prepayment, (ii) the outstanding principal amount of the Loans and any unpaid accrued interest, and (iii) all other sums, if any, that shall have become due and payable hereunder with respect to the Loans. (c) VOLUNTARY PREPAYMENT. Borrower may voluntarily prepay a Loan, provided that each of the following conditions is satisfied: Borrower pays to Lender (i) all unpaid Interim Payments and/or Scheduled Payments with respect to such Loan due prior to the date of prepayment, (ii) the outstanding principal amount of the Loans and any unpaid accrued interest, (iii) the Prepayment Fee, and (iv) all other sums, if any, that shall have become due and payable hereunder with respect to such Loan. (d) NO OTHER PREPAYMENT. Borrower may not prepay any Loan except upon the occurrence of an event described in SECTIONS 2.6(a), (b) or (c) above in which event the prepayment shall be made as described in such section. 2.7 OTHER PAYMENT TERMS. (a) PLACE AND MANNER. Borrower shall make all payments due to Lender by payments to Lender at the address specified in SECTION 11, in lawful money of the United States and in same day or immediately available funds. (b) DATE. Whenever any payment due hereunder shall fall due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall be included in the computation of interest or fees, as the case may be. (c) DEFAULT RATE. If either (i) any amounts required to be paid by Borrower under this Agreement or the other Loan Documents (including principal, interest, and any fees or other amounts) remain 7 <PAGE> 9 unpaid after such amounts are due, provided however that Borrower will not be charged a late fee in addition to the Default Rate on such amounts, or (ii) an Event of Default has occurred and is continuing, Borrower shall pay interest on the aggregate, outstanding balance hereunder from the date due or from the date of the Event of Default, as applicable, until such past due amounts are paid in full or until all Events of Defaults are cured, as applicable, at a per annum rate equal to the Default Rate. All computations of such interest shall be based on a year of 360 days for actual days elapsed. 2.8 MINIMUM FUNDING AMOUNT. Except with the prior consent of Lender, in Lender's sole discretion, the amount of the requested Loan shall not be less than the Minimum Funding Amount. 2.9 CREDITING PAYMENTS. The receipt by Lender of any wire transfer of funds, check, or other item of payment shall be immediately applied conditionally to reduce Obligations, but shall not be considered a payment on account unless such wire transfer is of immediately available federal funds and is made to the appropriate deposit account of Lender or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Lender after 1:00 p.m. California time shall be deemed to have been received by Lender as of the opening of business on the immediately following Business Day. 2.10 TERM. This Agreement shall become effective upon acceptance by Lender and shall continue in full force and effect for a term ending on the Maturity Date for the last Loan made hereunder. Notwithstanding the foregoing, Lender shall have the right to terminate this Agreement immediately and without notice upon the occurrence of an Event of Default. 3. CONDITIONS OF LOANS 3.1 CONDITIONS PRECEDENT TO INITIAL LOAN. The obligation of Lender to make the initial Loan is subject to the condition precedent that Lender shall have received, in form and substance satisfactory to Lender, all of the following: (a) This Agreement duly executed by Borrower. (b) The Negative Pledge Agreement duly executed by Borrower, in the form of EXHIBIT E. (c) The Stock Purchase Agreement to be issued to Lender duly executed by Borrower. (d) Use its best efforts to obtain a Landlord Consent from the owner of the building in which Collateral is to be located, substantially in the form of EXHIBIT C. (e) A certificate of the secretary or assistant secretary of Borrower with copies of the following documents attached: (i) the articles of incorporation and bylaws of Borrower certified by Borrower as being in full force and effect on the Funding Date, (ii) incumbency and representative signatures, and (iii) resolutions authorizing the execution and delivery of this Agreement and each of the other Loan Documents. (f) A good standing certificate from Borrower's state of incorporation and the state in which Borrower's principal place of business is located, together with certificates of the applicable governmental authorities stating that Borrower is in compliance with the franchise tax laws of each such state, each dated as of a recent date. (g) Evidence of the insurance coverage required by SECTION 6.8 of this Agreement. (h) Payment of any unreimbursed Lender's Expenses for which Borrower has received invoices at least two business days in advance, limited to $5,000. 8 <PAGE> 10 (i) All necessary consents of shareholders and other third parties with respect to the execution, delivery and performance of this Agreement, the Stock Purchase Agreement and the other Loan Documents. (j) Such other documents, and completion of such other matters, as Lender may deem necessary or appropriate. 3.2 CONDITIONS PRECEDENT TO ALL LOANS. The obligation of Lender to make each Loan, including the initial Loan, is further subject to the following conditions: (a) A certificate from a Responsible Officer to the effect that no Default or Event of Default has occurred and is continuing. (b) Borrower and Lender shall have executed a Loan Agreement Supplement with respect to the proposed Loan. (c) Lender shall have received such documents, instruments and agreements, including UCC financing statements or amendments to UCC financing statements, as Lender shall reasonably request to evidence the perfection and priority of the security interests granted to Lender pursuant to Section 4. (d) Borrower shall have delivered to Lender an intercreditor agreement, release, or estoppel letter, as appropriate, from any Person having an existing Lien superior to the Lien of Lender on any item of Collateral. (e) Such other documents, and completion of such other matters, as Lender may deem necessary or appropriate. 3.3 COVENANT TO DELIVER. Borrower agrees (not as a condition but as a covenant) to deliver to Lender each item required to be delivered to Lender as a condition to the Loan, if such Loan is advanced. Borrower expressly agrees that the extension of such Loan prior to the receipt by Lender of any such item shall not constitute a waiver by Lender of Borrower's obligation to deliver such item. 4. CREATION OF SECURITY INTEREST 4.1 GRANT OF SECURITY INTEREST. Borrower grants to Lender a valid, continuing security interest in all presently existing and hereafter acquired or arising Collateral, subject only to the Permitted Liens, in order to secure prompt, full and complete payment of any and all Obligations and in order to secure prompt, full and complete performance by Borrower of each of its covenants and duties under each of the Loan Documents. 4.2 DURATION OF SECURITY INTEREST. Lender's security interest in the Collateral shall continue until the payment in full and the satisfaction of all Obligations, whereupon such security interest shall terminate. Lender shall, at Borrower's sole cost and expense, execute such further documents and take such further actions as may be necessary to effect the release contemplated by this SECTION 4.2, including duly executing and delivering termination statements for filing in all relevant jurisdictions under the Code. 4.3 POSSESSION OF COLLATERAL. So long as no Event of Default has occurred and is continuing, Borrower shall remain in full possession, enjoyment and control of the Collateral (except only as may be otherwise required by Lender for perfection of its security interest therein) and shall be entitled to manage, operate and use the same and each part thereof with the rights and franchises appertaining thereto; provided, however, that the possession, enjoyment, control and use of the Collateral shall at all times be subject to the observance and performance of the terms of this Agreement. 4.4 MARKINGS ON THE COLLATERAL. At Lender's request at any time during the Term of the Loan (including any extension thereof), Borrower shall place in a conspicuous location on each item of equipment that constitutes Collateral, a plaque or other marking to be supplied by Lender which reads substantially as follows: 9 <PAGE> 11 Lighthouse Capital Partners II, L.P. has a security interest in this item of equipment. Such plaque or other marking shall not be removed (or if removed or damaged such plaque or other marking shall be replaced) until the security interest in favor of Lender in such item of Collateral is terminated pursuant to this Agreement. 4.5 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower shall from time to time execute and deliver to Lender, all financing statements and other documents such Lender may reasonably request, in form satisfactory to Lender, to perfect and continue Lender's perfected security interests in the Collateral, subject only to Permitted Liens, and in order to consummate fully all of the transactions contemplated under the Loan Documents. 4.6 RIGHT TO INSPECT. Lender (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Borrower's usual business hours, to inspect Borrower's Books and to make copies thereof and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, condition of, or any other matter relating to, the Collateral. 5. REPRESENTATIONS AND WARRANTIES Borrower represents, warrants and covenants as follows: 5.1 DUE ORGANIZATION AND QUALIFICATION. Borrower is a corporation duly existing and in good standing under the laws of its state of incorporation and qualified and licensed to do business in, and is in good standing in, any state in which the conduct of its business or its ownership of Property requires that it be so qualified or in which the Collateral is located, except for such states as to which any failure so to qualify would not reasonably be expected to have a material adverse effect on Borrower's ability to perform its obligations under this Agreement (a "Material Adverse Effect"). 5.2 AUTHORITY. Borrower has all necessary power and authority to execute, deliver, and perform in accordance with the terms thereof, the Loan Documents to which it is a party. Borrower has all requisite power and authority to own and operate its properties and to carry on its businesses as now conducted. 5.3 SUBSIDIARIES. Borrower has no Subsidiaries, except those listed in Schedule 2 hereto. 5.4 CONFLICT WITH OTHER INSTRUMENTS, ETC. Neither the execution and delivery of any Loan Document to which Borrower is a party nor the consummation of the transactions therein contemplated nor compliance with the terms, conditions and provisions thereof will conflict with or result in a breach of (a) any of the terms, conditions or provisions of the articles of incorporation and the by-laws, or other organizational documents of Borrower or (b) any law or any regulation, order, writ, injunction or decree of any court or governmental instrumentality or (c) any material agreement or instrument to which Borrower is a party or by which it or any of its properties is bound or to which it or any of its properties is subject, or constitute a default thereunder or result in the creation or imposition of any Lien, other than Permitted Liens, except to the extent such conflict or breach could not reasonably be expected to have a Material Adverse Effect. 5.5 AUTHORIZATION; ENFORCEABILITY. The execution and delivery of this Agreement, the granting of the security interest in the Collateral, the incurring of the Loans, the execution and delivery of the other Loan Documents to which Borrower is a party and the consummation of the transactions herein and therein contemplated have each been duly authorized by all necessary action on the part of Borrower. The Loan Documents have been duly executed and delivered and constitute legal, valid and binding obligations of Borrower, enforceable in accordance with their respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency or other similar laws of general application relating to or affecting the enforcement of creditors' rights or by general principles of equity. 10 <PAGE> 12 5.6 NO PRIOR ENCUMBRANCES. Borrower has good and indefeasible title to the Collateral, free and clear of liens, claims, security interests, or encumbrances, except for the lien held by the Lender and except for other Permitted Liens. Except as disclosed in SCHEDULE I, Borrower has not acquired any part of the Collateral from an assignor outside the ordinary course of such assignor's business. 5.7 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE, PRINCIPAL PLACE OF BUSINESS AND COLLATERAL. Borrower has not done business under any name other than that specified on the signature page hereof. The chief executive office, principal place of business, and the place where Borrower maintains its records concerning the Collateral are presently located at the address set forth on the cover page. The Collateral is presently located at the addresses set forth on the cover page. 5.8 LITIGATION. There are no actions or proceedings pending by or against Borrower before any court or administrative agency in which an adverse decision could reasonably be expected to have a material adverse effect on Borrower or the aggregate value of the Collateral. Borrower does not have knowledge of any such pending or threatened actions or proceedings. Borrower will promptly notify Lender in writing if any action, proceeding or governmental investigation involving Borrower is commenced that may result in damages or costs to Borrower of Fifty Thousand Dollars ($50,000) or more. 5.9 FINANCIAL STATEMENTS. All financial statements relating to Borrower or any Affiliate that have been or may hereafter be delivered by Borrower to Lender present fairly in all material respects Borrower's financial condition as of the date thereof and Borrower's results of operations for the period then ended. 5.10 SOLVENCY. Borrower is solvent and able to pay its debts (including trade debts) as they mature. 5.11 TAXES. Borrower has filed or caused to be filed all tax returns required to be filed, and has paid, or has made adequate provision for the payment of, all taxes that are due and payable. 5.12 CONSENTS AND APPROVALS. No approval, authorization or consent of any trustee or holder of any indebtedness or obligation of Borrower or of any other Person under any such material agreement, contract, lease or license or similar document or instrument to which Borrower is a party or by which Borrower is bound, is required to be obtained by Borrower in order to make or consummate the transactions contemplated under the Loan Documents. All consents and approvals of, filings and registrations with, and other actions in respect of, all Governmental Authorities required to be obtained by Borrower in order to make or consummate the transactions contemplated under the Loan Documents have been, or prior to the time when required will have been, obtained, given, filed or taken and are or will be in full force and effect. 5.13 TRADEMARKS, PATENTS, COPYRIGHTS, FRANCHISES AND LICENSES. Borrower possesses and owns all necessary trademarks, trade names, copyrights, patents, patent rights, franchises and licenses which are material to the conduct of its business as now operated. 5.14 MATERIAL CONTRACTS. Borrower has disclosed to Lender in writing all currently effective material contracts and agreements (whether written or oral) to which Borrower is a party. There are no material defaults under any such contract or agreement by Borrower that could reasonably be expected to have a Material Adverse Effect. Borrower has delivered to Lender true and correct copies of all such contracts or agreements (or, with respect to oral contracts or agreements, written descriptions of the material terms thereof). 5.15 FULL DISCLOSURE. No representation, warranty or other statement made by Borrower in any Loan Document, certificate or written statement furnished to Lender contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading. 6. AFFIRMATIVE COVENANTS 11 <PAGE> 13 Borrower covenants and agrees that, until the full and complete payment of the Obligations and the termination of the Commitments, Borrower shall do all of the following: 6.1 GOOD STANDING. Borrower shall maintain its corporate existence and its good standing in its jurisdiction of incorporation and maintain qualification in such jurisdiction in which the failure to so qualify could reasonably be expected to have a material adverse effect on the financial condition, operations or business of Borrower. Borrower shall maintain in force all licenses, approvals and agreements, the loss of which could reasonably be expected to have a material adverse effect on its financial condition, operations or business. 6.2 GOVERNMENT COMPLIANCE. Borrower shall comply with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which could reasonably be expected to materially adversely affect the financial condition, operations or business of Borrower. 6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Borrower shall deliver to Lender: (a) as soon as available, but in any event within thirty (30) days after the end of each month, a company prepared balance sheet, income statement and cash flow statement covering Borrower's operations during such period, certified by a Responsible Officer; (b) as soon as available, but in any event within one hundred twenty (120) days after the end of Borrower's fiscal year, audited financial statements of Borrower prepared in accordance with generally accepted accounting principles, consistently applied, together with an unqualified opinion on such financial statements of a nationally recognized or other independent public accounting firm reasonably acceptable to Lender; (c) promptly upon becoming available, copies of all statements, reports and notices sent or made available generally by Borrower to its security holders; (d) immediately upon receipt of notice thereof, a report of any material legal actions pending or threatened against Borrower; and (e) such other financial information as Lender may reasonably request from time to time. 6.4 CERTIFICATES OF COMPLIANCE. Each time financial statements are furnished pursuant to SECTION 6.3 above, there shall be delivered to Lender a certificate signed by a Responsible Officer (each an "Officer's Certificate") with respect to such financial reports to the effect that: (i) no Event of Default or Default has occurred and is continuing hereunder since the date of this Agreement or, if later, since the date of the prior Officer's Certificate or, if such an event or condition has occurred and is continuing, the nature and extent thereof and the action Borrower proposes to take with respect thereto, and (ii) Borrower is in compliance with the provisions of SECTIONS 6 and 7. 6.5 NOTICE OF DEFAULTS. As soon as possible, and in any event within five (5) days after the discovery of a Default or an Event of Default provide Lender with an Officer's Certificate of Borrower setting forth the facts relating to or giving rise to such Default or Event of Default and the action which Borrower proposes to take with respect thereto. 6.6 TAXES. Borrower shall make due and timely payment or deposit of all federal, state, and local taxes, assessments, or contributions required of it by law or imposed upon any properties belonging to it, and will execute and deliver to Lender, on demand, appropriate certificates attesting to the payment or deposit thereof; and Borrower will make timely payment or deposit of all tax payments and withholding taxes required of it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Lender with proof satisfactory to Lender indicating that Borrower has made such payments or deposits; provided that Borrower need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is adequately reserved against Borrower. 6.7 USE; MAINTENANCE. (a) Borrower, at its expense, shall make all necessary site preparations and cause the Collateral to be operated in accordance with any applicable manufacturer's manuals or instructions. So long as no Default or Event of Default has occurred and is continuing, Borrower shall have the right to quietly possess and use the Collateral as provided herein without interference by Lender. 12 <PAGE> 14 (b) Borrower, at its expense, shall maintain the Collateral in good condition, reasonable wear and tear excepted, and will comply in all material respects with all laws, rules and regulations to which the use and operation of the Collateral may be or become subject. Such obligation shall extend to repair and replacement of any partial loss or damage to the Collateral, regardless of the cause. If maintenance is mandated by manufacturer, Borrower shall obtain and keep in effect, at all times during the Term maintenance service contracts with suppliers approved by Lender, such approval not to be unreasonably withheld. All parts furnished in connection with such maintenance or repair shall immediately become part of the Collateral. All such maintenance, repair and replacement services shall be immediately paid for and discharged by Borrower with the result that no Lien will attach to the Collateral. 6.8 INSURANCE. (a) Borrower shall obtain and maintain for the Term, at its own expense, (a) "all risk" insurance against loss or damage to the Collateral, and (b) commercial general liability insurance (including contractual liability, products liability and completed operations coverage's), reasonably satisfactory to Lender and such other insurance against such other risks of loss and with such terms, as shall in each case be reasonably satisfactory to or reasonably required by Lender (as to carriers, amounts, deductibles and otherwise). The amount of the "all risk" insurance shall be the greater of (i) the replacement value of the Collateral (as new) or (ii) the outstanding principal amount of the Loans and all other then outstanding amounts payable under the Loan Documents. Such amounts shall be determined to Lender's reasonable satisfaction as of each anniversary date of this Agreement and the appropriate amount of coverage shall be put in effect on the next succeeding renewal or inception date of such insurance. (b) The amount of such commercial general public liability insurance (other than products liability coverage and completed operations insurance) shall be at least $1,000,000 per occurrence. The amount of such products liability and completed operations insurance shall be at least $1,000,000 per occurrence. The deductible with respect to the "all-risk" and product liability insurance shall not exceed $25,000; otherwise there shall be no deductible with respect to any insurance required to be maintained hereunder without the prior written approval of Lender. Such "all risk" insurance shall: (a) name Lender as loss payee as it interests may appear with respect to the Collateral, (b) provide each insurer's waiver of its right of subrogation against Lender and Borrower, and (c) provide that such insurance (i) shall not be invalidated by any action of, or breach of warranty by, Borrower of a provision of any of its insurance policies, and (ii) shall waive set-off, counterclaim or offset against Lender. Each liability policy shall (A) name Lender as an additional insured and (B) provide that such insurance shall have cross-liability and severability of interest endorsements (which shall not increase the aggregate policy limits of Borrower's insurance). All insurance policies (C) shall provide that Borrower's insurance shall be primary without a right of contribution of Lender's insurance, if any, or any obligation on the part of Lender to pay premiums of Borrower, and (D) shall contain a clause requiring the insurer to give Lender at least thirty (30) days prior written notice of its cancellation (other than cancellation for non-payment for which ten (10) days notice shall be sufficient). Borrower shall, on or prior to the date of and prior to each policy renewal, furnish to Lender certificates of insurance or other evidence satisfactory to Lender that such insurance coverage is in effect. 6.9 LOSS; DAMAGE; DESTRUCTION AND SEIZURE. (a) Borrower shall bear the risk of the Collateral being lost, stolen, destroyed, damaged beyond repair, rendered permanently unfit for use, or seized by a governmental authority for any reason whatsoever at any time until the expiration or termination of the Term. (b) So long as no Event of Default has occurred and is continuing, any proceeds of insurance maintained pursuant to Section 6.8 received by Lender or Borrower with respect to an item of Collateral, the repair of which is practicable, shall, at the election of Borrower, be applied either to the repair or replacement of such Collateral or, upon Lender's receipt of evidence of the repair or replacement of the Collateral reasonably satisfactory to Lender, to the reimbursement of Borrower for the cost of such repair or replacement. All replacement parts and equipment acquired by Borrower in replacement of Collateral pursuant to this Section 6.9(b) shall immediately become part of the Collateral upon acquisition by Borrower. Borrower shall take such actions 13 <PAGE> 15 and provide such documentation as may be reasonably requested by Lender to protect and preserve its security interest and otherwise to avoid any impairment of Lender's rights under the Loan Documents in connection with such repair or replacement. 6.10 FURTHER ASSURANCES. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Lender to effect the purposes of this Agreement. 7. NEGATIVE COVENANTS Borrower covenants and agrees that until the full and complete payment of the Obligations and termination of the Commitments, Borrower will not do any of the following: 7.1 CHIEF EXECUTIVE OFFICER; LOCATION OF COLLATERAL. During the continuance of this Agreement, change the chief executive officer or principal place of business or remove or cause to be removed, except in the ordinary course of Borrower's business, the Collateral or the records concerning the Collateral from the premises listed on the coverage page without thirty (30 days prior written notice to Lender. 7.2 EXTRAORDINARY TRANSACTIONS AND DISPOSAL OF ASSETS. Enter into any transaction not in the ordinary and usual course of Borrower's business, including the sale, lease, license or other disposition of, moving, relocation, or transfer, whether by sale or otherwise, of Borrower's assets, other than (i) sales of inventory in the ordinary and usual course of Borrower's business as presently conducted and (ii) sales or other dispositions in the ordinary course of business of assets, other than Collateral, that have become worn out or obsolete or that are promptly being replaced. Notwithstanding anything contained in this SECTION 7.2, Borrower may do any of the following: (i) grant non-exclusive licenses and similar arrangements for use of the intellectual property of the Borrower in the ordinary course of business, (ii) declare and make any dividend payment or other distribution payable on its equity securities, (iii) convert any of its convertible securities existing as of the date hereof into other securities pursuant to the terms of such convertible securities or otherwise in exchange therefor, (iv) repurchase stock from former contractors or employees of Borrower in accordance with the terms of repurchase, vesting or similar agreements between Borrower and such employees, (v) repurchase equity securities with the proceeds from the issuance of equity securities, and (vi) make investments in the ordinary course of business. 7.3 RESTRUCTURE. Change Borrower's name without thirty (30) days prior written notice to Lender; make any material change in Borrower's financial structure or business operations; cause, permit, or suspend operation of Borrower's business. 7.4 LIENS. Create, incur assume or suffer to exist any Lien or any other encumbrance of any kind with respect to any of its Property, whether now owned or hereafter acquired, except for Permitted Liens. 7.5 INDEBTEDNESS. Create, incur, assume or suffer to exist any Indebtedness other than Permitted Indebtedness. 8. EVENTS OF DEFAULT Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement: 8.1 PAYMENT DEFAULT. If Borrower fails to pay when due and payable or when declared due and payable in accordance with the Loan Documents, any portion of the Obligations, and such failure continues for a period of five (5) business days after written notice from Lender. 8.2 CERTAIN COVENANT DEFAULTS. If Borrower fails to perform any obligation under SECTIONS 6.8, 6.9, or 6.10, or violates any of the covenants contained in SECTION 7 of this Agreement. 14 <PAGE> 16 8.3 OTHER COVENANT DEFAULTS. If Borrower fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant or agreement contained in this Agreement, in any of the other Loan Documents, or in any other present or future agreement between Borrower and Lender and as to any default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within fifteen (15) business days after the occurrence of such default. 8.4 MATERIAL ADVERSE CHANGE. If there occurs an event that could reasonably be expected to (a) have a material adverse effect on the ability of the Borrower to perform its obligations under this Agreement or (b) materially impair the value or priority of Lender's security interests in the Collateral. 8.5 ATTACHMENT. If any material portion of Borrower's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or Person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within thirty (30) days, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of Borrower's assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, country, municipal, or governmental agency, and the same is not paid within thirty (30) days after Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contesting by Borrower. 8.6 Other agreements. If there is a default in any agreement to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in a principal amount of at least One Hundred Thousand Dollars ($100,000). 8.7 JUDGMENTS. If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least One Hundred Thousand Dollars ($100,000) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of thirty (30) days. 8.8 REDEMPTION OR REPURCHASE. Borrower shall, after the date of this Agreement, redeem or repurchase (a) any shares of any class or series of its preferred stock or (b) more than Fifty Thousand Dollars ($50,000) in the aggregate of common stock, in each case whether pursuant to a mandatory redemption or otherwise. 8.9 MISREPRESENTATIONS. If any material misrepresentation or material misstatement exists now or hereafter in any warranty, representation, statement, or report made to Lender by Borrower or any officer or director of Borrower. 8.10 BREACH OF STOCK PURCHASE AGREEMENT. If Borrower shall breach the terms of the Stock Purchase Agreement. 8.11 ENFORCEABILITY. If any Loan Document shall in any material respect cease to be, or Borrower shall assert that any Loan Document is not, a legal, valid and binding obligation of Borrower enforceable in accordance with its terms. 8.12 INVOLUNTARY BANKRUPTCY OR INSOLVENCY. If a proceeding shall have been instituted in a court having jurisdiction in the premises seeking a decree or order for relief in respect of Borrower in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or for the appointment of a receiver, liquidator, assignee, custodian, trustee (or similar official) of Borrower or for any substantial part of its property, or for the winding-up or liquidation of its affairs, and such proceeding shall remain undismissed or unstayed and in effect for a period of forty-five (45) consecutive days or such court shall enter a decree or order granting the relief sought in such proceeding. 15 <PAGE> 17 8.13 VOLUNTARY BANKRUPTCY OR INSOLVENCY. If Borrower shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian (or other similar official) of Borrower or for any substantial part of its property, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action in furtherance of any of the foregoing. 9. LENDER'S RIGHT AND REMEDIES 9.1 RIGHTS AND REMEDIES. Upon the occurrence and continuance of any Default or Event of Default, Lender shall have no further obligation to advance money or extend credit to or for the benefit of Borrower. In addition, upon the occurrence and during the continuance of an Event of Default, Lender shall have the rights, options, duties and remedies of a secured party as permitted by law and, in addition to and without limitation of the foregoing, Lender may, at its election, without notice of election and without demand, do any one or more of the following, all of which are authorized by Borrower. (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, including the outstanding principal amount of each Loan, immediately due and payable (provided that upon the occurrence of an Event of Default described in Sections 8.12 or 8.13 all Obligations shall become immediately due and payable without any action by Lender); (b) Without notice to or demand upon Borrower, make such payments and do such acts as Lender consider necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Lender so requires, and to make the Collateral available to Lender as Lender may designate. Borrower authorizes Lender to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Lender's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower's owned premises, Borrower hereby grants Lender a license to enter into possession of such premises and to occupy the same, without charge, for up to one hundred twenty (120) days in order to exercise any of Lender's rights or remedies provided herein, at law, in equity, or otherwise; (c) Without notice to Borrower, set off and apply to the Obligations any and all indebtedness at any time owing to or for the credit or the account of Borrower; (d) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Lender is hereby granted a license or other right, solely pursuant to the provisions of this Section 9.1, to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks and advertising matter, or any Property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Lender's exercise of its rights under this Section 9.1, Borrower's rights under all licenses and all franchise agreements shall inure to Lender's benefit: (e) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions for cash or on terms, in such manner and at such places (including Borrower's premises) as Lender determines are commercially reasonable; (f) Lender may credit bid and purchase at any public sale; and (g) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower. 9.2 WAIVER BY BORROWER. Upon the occurrence of an Event of Default, to the extent permitted by law, Borrower covenants that it will not at any time insist upon or plead, or in any manner whatever 16 <PAGE> 18 claim or take any benefit or advantage of, any stay or extension law now or at any time hereafter in force, nor claim, take nor insist upon any benefit or advantage of or from any law now or hereafter in force providing for the valuation or appraisement of the Collateral or any part thereof prior to any sale or sales thereof to be made pursuant to any provision herein contained, or to the decree, judgment or order of any court of competent jurisdiction; nor, after such sale or sales, claim or exercise any right under any statute now or hereafter made or enacted by any state or otherwise to redeem the Property so sold or any part thereof, and, to the full extent legally permitted, except as to rights expressly provided herein, hereby expressly waives for itself and on behalf of each and every Person, except decree or judgment creditors of Borrower acquiring any interest in or title to the Collateral or any part thereof subsequent to the date of this Agreement, all benefit and advantage of any such law or laws, and covenants that it will not invoke or utilize any such law or laws or otherwise hinder, delay or impede the execution of any power herein granted and delegated to Lender, but will suffer and permit the execution of every such power as though no such power, law or laws had been made or enacted. 9.3 EFFECT OF SALE. Any sale, whether under any power of sale hereby given or by virtue of judicial proceedings, shall operate to divest all right, title, interest, claim and demand whatsoever, either at law or in equity, of Borrower in and to the Property sold, and shall be a perpetual bar, both at law and in equity, against Borrower, its successors and assigns, and against any and all Persons claiming the Property sold or any part thereof under, by or through Borrower, its successors or assigns. 9.4 POWER OF ATTORNEY IN RESPECT OF THE COLLATERAL. Borrower does hereby irrevocably appoint Lender (which appointment is coupled with an interest) on the occurrence and continuance of a Default or an Event of Default, the true and lawful attorney in fact of Borrower with full power of substitution, for it and in its name: (a) to ask, demand, collect, receive, receipt for, sue for, compound and give acquittance for any and all rents, issues, profits, avails, distributions, income, payment draws and other sums in which a security interest is granted under Section 4 with full power to settle, adjust or compromise any claim thereunder as fully as if Lender were a Borrower itself, (b) to receive payment of and to endorse the name of Borrower to any items of Collateral (including checks, drafts and other orders for the payment of money) that come into Lender's possession or under Lender's control, (c) to make all demands, consents and waivers, or take any other action with respect to, the Collateral, (d) in Lender's discretion to file any claim or take any other action or proceedings, either in its own name or in the name of Borrower or otherwise, which Lender may reasonably deem necessary or appropriate to protect and preserve the right, title and interest of Lender in and to the Collateral, or (e) to otherwise act with respect thereto as though Lender were the outright owner of the Collateral. 9.5 LENDER'S EXPENSES. If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Lender may do any or all of the following: (a) make payment of the same or any part thereof; (b) set up such reserves in Borrower's loan account as Lender deem necessary to protect Lender from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in SECTION 6.8 of this Agreement, and take any action with respect to such policies as Lender deem prudent. Any amounts paid or deposited by Lender shall constitute Lender's Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Lender shall not constitute an agreement by Lender to make similar payments in the future or a waiver by Lender of any Event of Default under this Agreement. 9.6 REMEDIES CUMULATIVE. Lender's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Lender shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Lender of one right or remedy shall be deemed an election, and no waiver by Lender of any Event of Default on Borrower's part shall be deemed a continuing waiver. No delay by Lender shall constitute a waiver, election, or acquiescence by it. 9.7 APPLICATION OF COLLATERAL PROCEEDS. The proceeds and/or avails of the Collateral, or any part thereof, and the proceeds and the avails of any remedy hereunder (as well as any other amounts of any kind held by Lender at the time of or received by Lender after, the occurrence of an Event of Default hereunder) shall be paid to and applied as follows: 17 <PAGE> 19 (a) First, to the payment of reasonable out-of-pocket costs and expenses, including all amounts expended to preserve the value of the Collateral, of foreclosure or suit, if any, and of such sale and the exercise of any other rights or remedies, and of all proper fees, expenses, liability and advances, including reasonable legal expenses and attorneys' fees, incurred or made hereunder by Lender; (b) Second, to the payment to Lender of the amount then owing or unpaid on the Loans for Scheduled Payments, the unpaid principal amount of the Loans, and all other Obligations with respect to all Loans, and in case such proceeds shall be insufficient to pay the whole amount so due, owing or unpaid upon the Loans, then to the unpaid interest thereon, then to the unpaid principal amount of the Loans, and then to the payment of other amounts then payable to Lender under any of the Loan Documents; and (c) Third, to the payment of the surplus, if any, to Borrower, its successors and assigns, or to whomsoever may be lawfully entitled to receive the same. 9.8 REINSTATEMENT OF RIGHTS. If Lender shall have proceeded to enforce any right under this Agreement or any other Loan Document by foreclosure, sale, entry or otherwise, and such proceedings shall have been discontinued or abandoned for any reason or shall have been determined adversely, then and in every such case (unless otherwise ordered by a court of competent jurisdiction), Lender shall be restored to its former position and rights hereunder with respect to the Property subject to the security interest created under this Agreement. 10. WAIVERS; INDEMNIFICATION 10.1 DEMAND; PROTEST. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Lender on which Borrower may in any way be liable. 10.2 LENDER'S LIABILITY FOR COLLATERAL. So long as Lender complies with its obligations, if any, under Section 9207 of the Code, Lender shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person whomsoever. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower. 10.3 INDEMNIFICATION. Whether or not the transactions contemplated hereby shall be consummated: (a) GENERAL INDEMNITY. Borrower shall pay, indemnify, and hold Lender and each of its officers, directors, employees, counsel, partners, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any and all reasonable liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses or disbursements (including Lender's Expenses and reasonable attorney's fees and the allocated cost of in-house counsel) of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement and other Loan Documents, or the transactions contemplated hereby and thereby, and with respect to any investigation, litigation or proceeding (including any case, action or proceeding before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, dissolution or relief of debtors or any appellate proceeding) related to this Agreement or the Loans or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided, that Borrower shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities arising from the gross negligence or willful misconduct of such Indemnified Person. (b) SURVIVAL; DEFENSE. The obligations in this SECTION 10.3 shall survive payment of all other Obligations. At the election of any Indemnified Person, Borrower shall defend such Indemnified Person using 18 <PAGE> 20 legal counsel satisfactory to such Indemnified Person in such Person's sole reasonable discretion, at the sole cost and expense of Borrower. All amounts owing under this SECTION 10.3 shall be paid within thirty (30) days after written demand. 11. NOTICES Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by certified mail, postage prepaid, return receipt requested, or by prepaid facsimile to Borrower or to Lender, as the case may be, at their respective addresses set forth below: If to Borrower: Skystream Corporation 555 Clyde Avenue, Suite B Mountain View, California 94043 FAX: (650) 390-8990 If to Lender: Lighthouse Capital Partners II, LP 100 Drake's Landing Road, Suite 260 Greenbrae, California 94904-3121 Attention: Contract Administrator FAX: (415) 925-3387 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. 12. GENERAL PROVISIONS 12.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Lender's prior written consent, which consent may be granted or withheld in Lender's sole discretion. Lender shall have the right with the consent of Borrower (which consent shall not be unreasonably withheld) to sell, transfer, negotiate, or grant participations in all or any part of, or any interest in such Lender's rights and benefits hereunder, provided that consent of Borrower shall not be required in the case of sales, transfers or negotiations, or grant of participations, to affiliates of Lender that do not compete, directly or indirectly, with Borrower. 12.2 TIME OF ESSENCE. Time is of the essence for the performance of all obligations set forth in this Agreement. 12.3 SEVERABILITY OF PROVISIONS. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 12.4 ENTIRE AGREEMENT; CONSTRUCTION; AMENDMENTS AND WAIVERS. (a) This Agreement and each of the other Loan Documents dated as of the date hereof, taken together, constitute and contain the entire agreement between Borrower and Lender and supersede any and all prior agreements, negotiations, correspondence, understandings and communications between the parties, whether written or oral, respecting the subject matter hereof. (b) This Agreement is the result of negotiations between and has been reviewed by each of Borrower and Lender executing this Agreement as of the date hereof and their respective counsel; accordingly, this Agreement shall be deemed to be the product of the parties hereto, and no ambiguity shall be construed in favor of 19 <PAGE> 21 or against Borrower or Lender. Borrower and Lender agree that they intend the literal words of this Agreement and the other Loan Documents and that no parol evidence shall be necessary or appropriate to establish Borrower's or Lender's actual intentions. (c) Any and all amendments, modifications, discharges or waivers of, or consents to any departures from any provision of this Agreement or of any of the other Loan Documents shall not be effective without the written consent of Lender and Borrower. Any waiver or consent with respect to any provision of the Loan Documents shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on Borrower in any case shall entitle Borrower to any other or further notice or demand in similar or other circumstances. Any amendment, modification, waiver or consent effected in accordance with this SECTION 12.4 shall be binding upon Lender and on Borrower. 12.5 RELIANCE BY LENDER. All covenants, agreements, representations and warranties made herein by Borrower shall, notwithstanding any investigation by Lender, be deemed to be material to and to have been relied upon by Lender. 12.6 NO SET-OFFS BY BORROWER. All sums payable by Borrower pursuant to this Agreement or any of the other Loan Documents shall be payable without notice or demand and shall be payable in United States Dollars without set-off or reduction of any manner whatsoever. 12.7 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. 12.8 SURVIVAL. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding. The obligations of Borrower to indemnify Lender with respect to the expenses, damages, losses, costs and liabilities described in SECTION 10.3 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Lender have run. 13. RELATIONSHIP OF PARTIES. Borrower and Lender acknowledge, understand and agree that the relationship by virtue of this Agreement between the Borrower, on the one hand, and Lender, on the other, is, and at all time shall remain solely that of a borrower and lender. Lender shall not under any circumstances be construed to be a partner or joint venturer of Borrower or any of its Affiliates; nor shall the Lender under any circumstances be deemed to be in a relationship of confidence or trust or a fiduciary relationship with Borrower or any of its Affiliates, or to owe any fiduciary duty to Borrower or any of its Affiliates. Lender does not undertake or assume any responsibility or duty to Borrower or any of its Affiliates to select, review, inspect, supervise, pass judgment upon or otherwise inform the Borrower or any of its Affiliates of any matter in connection with its or their Property, any Collateral held by Lender or the operations of Borrower or any of its Affiliates. Borrower and each of its Affiliates shall rely entirely on their own judgment with respect to such matters, and any review, inspection, supervision, exercise of judgment or supply of information undertaken or assumed by Lender in connection with such matters is solely for the protection of Lender and neither Borrower nor any Affiliate is entitled to rely thereon. THIS SECTION INTENTIONALLY LEFT BLANK. 20 <PAGE> 22 14. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF BORROWER AND LENDER HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF SANTA CLARA, STATE OF CALIFORNIA. BORROWER AND LENDER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. BORROWER: LENDER: SKYSTREAM CORPORATION LIGHTHOUSE CAPITAL PARTNERS II, L.P. By: /s/ JAMES D. OLSON By: LIGHTHOUSE MANAGEMENT --------------------------- PARTNERS II, L.P., its general partner Name: James D. Olson By: LIGHTHOUSE CAPITAL PARTNERS, INC., ------------------------ as general partner Title: Chief Executive Officer By: /s/ RICHARD D. STUBBLEFIELD ------------------------ -------------------------------- Name: Richard D. Stubblefield ------------------------------ Title: Managing Director ----------------------------- Exhibit A - Collateral Exhibit B - Form of Common Stock Purchase Agreement Exhibit C - Landlord Consent Exhibit D - Form of Loan Agreement Supplement Exhibit E - Negative Pledge Agreement Schedule 1 - Existing Liens Schedule 2 - Subsidiaries 21 <PAGE> 23 EXHIBIT A DEBTOR/BORROWER: SKYSTREAM CORPORATION SECURED PARTY/LENDER: LIGHTHOUSE CAPITAL PARTNERS II, L.P. COLLATERAL The Collateral shall consist of all right, title and interest of Debtor in, to and under all of the following wherever located and whether now owned or hereafter owned or acquired (collectively, the "Collateral"): 1. All Accounts of Debtor; 2. All Chattel Paper of Debtor; 3. All Contracts of Debtor; 4. All Documents of Debtor; 5. All Equipment of Debtor; 6. All Fixtures of Debtor; 7. All General Intangibles of Debtor; not including Intellectual Property; 8. All Proceeds of Intellectual Property; 9. All Instruments of Debtor; 10. All Inventory of Debtor; 11. All Investment Property of Debtor; 12. All property of Debtor held by Secured Party or any other party for whom Secured Party is acting as agent hereunder, including, without limitation, all property of every description now or hereafter in the possession or custody of or in transit to Secured Party or such other party for any purpose, including, without limitation, safekeeping, collection or pledge, for the account of Debtor, or as to which Debtor may have any right or power; 13. All other goods and personal property of Debtor whether tangible or intangible and whether now or hereafter owned or existing, leased, consigned by or to, or acquired by Debtor and wherever located; and 14. To the extent not otherwise included, all Proceeds of each of the foregoing and all accessions to, substitutions and replacements for, and rents, profits and products of each of the foregoing. --------------------- --------------------- Debtor Initial Secured Party Initial 1 <PAGE> 24 DEFINED TERMS. Unless otherwise defined herein, the following terms shall have the following meanings (such meanings being equally applicable to both the singular and plural forms of the terms defined): "ACCOUNTS" means any "account," as such term is defined in Section 9106 of the UCC, now owned or hereafter acquired by Debtor and, in any event, shall include, without limitation, all accounts receivable, book debts and other forms of obligations (other than forms of obligations evidenced by Chattel Paper, Documents or Instruments) now owned or hereafter received or acquired by or belonging or owing to Debtor (including, without limitation, under any trade name, style or division thereof) whether arising out of goods sold or services rendered by Debtor or from any other transaction, whether or not the same involves the sale of goods or services by Debtor (including, without limitation, any such obligation which may be characterized as an account or contract right under the UCC) and all of Debtor's rights in, to and under all purchase orders or receipts now owned or hereafter acquired by it for goods or services, and all of Debtor's rights to any goods represented by any of the foregoing (including, without limitation, unpaid seller's rights of rescission, replevin, reclamation and stoppage in transit and rights to returned, reclaimed or repossessed goods), and all monies due or to become due to Debtor under all purchase orders and contracts for the sale of goods or the performance of services or both by Debtor (whether or not yet earned by performance on the part of Debtor or in connection with any other transaction), now in existence or hereafter occurring, including, without limitation, the right to receive the proceeds of said purchase orders and contracts, and all collateral security and guarantees of any kind given by any Person with respect to any of the foregoing. "CHATTEL PAPER" means any "chattel paper," as such term is defined in SECTION 9105(1)(b) of the UCC, now owned or hereafter acquired by Debtor. "CONTRACTS" means all contracts, undertakings, franchise agreements or other agreements (other than rights evidenced by Chattel Paper, Documents or Instruments) in or under which Debtor may now or hereafter have any right, title or interest, including, without limitation, with respect to an Account, any agreement relating to the terms of payment or the terms of performance thereof. "COPYRIGHT LICENSE" means all of the following now owned or hereafter acquired by Debtor: any agreement granting any right in or to any Copyright or Copyright registration (whether Debtor is the licensee or the licensor thereunder) including, without limitation, licenses pursuant to which Debtor has obtained the exclusive right to use a copyright owned by a third party. "COPYRIGHTS" means all of the following in which Debtor now holds or hereafter acquires any interest: (i) all copyrights, whether registered or unregistered, held pursuant to the laws of the United States, any State thereof or of any other country; (ii) registrations, applications and recordings in the United States Copyright Office or in any similar office or agency of the United States, any state thereof or any other country or political subdivision thereof; (iii) any continuations, renewals or extensions thereof; (iv) any registrations to be issued in any pending applications; (v) prior versions of works covered by copyright and all works based upon, derived from, or incorporating such works; (vi) income, royalties, damages, claims, and payments now and hereafter due and payable with respect to copyrights including, without limitation, damages and payments for past, present or future infringement; (vii) rights to sue for past, present and future infringements of copyright; and (viii) any other rights corresponding to any of the foregoing rights throughout the world. "DOCUMENTS" means any "documents," as such term is defined in Section 9105(1)(f) of the UCC, now owned or hereafter acquired by Debtor. "EQUIPMENT" means any "equipment," as such term is defined in Section 9109(2) of the UCC, now or hereafter owned or acquired by Debtor and, in any event, shall include, without limitation, all machinery, equipment, furnishings, vehicle, computers and other electronic data-processing and any other office equipment of any nature whatsoever, any and all additions, substitutions and replacements of any of the foregoing, wherever located, together with all attachments, components, parts, equipment and accessories installed thereon or affixed thereto. - ----------------------- ----------------------- Debtor Initial Security Party Initial 2 <PAGE> 25 "FIXTURES" means "fixtures," such term is defined in Section 9313(1)(a) of the UCC, now or hereafter owned or acquired by Debtor and, in any event, shall include, without limitation, regardless of where located, all of the fixtures, systems, machinery, apparatus, equipment and fittings of every kind and nature whatsoever and all appurtenances and additions thereto and substitutions or replacements thereof, now or hereafter attached or affixed to or constituting a part of, or located in or upon, real property wherever located, including, without limitation, all heating, electrical, mechanical, lighting, lifting, plumbing, ventilating, air-conditioning and air cooling, refrigerating, food preparation, incinerating and power, loading and unloading, signs, escalators, elevators, boilers, communication, switchboards, sprinkler and other fire prevention and extinguishing fixtures, systems, machinery, apparatus and equipment, and all engines, motors, dynamos, machinery, pipes, pumps, tanks, conduits and ducts constituting a part of any of the foregoing, together with all right, title and interest of Debtor in and to all extensions, improvements, betterments, renewals, substitutes, and replacements of, and all additions and appurtenances to any of the foregoing property, and all conversions of the security constituted thereby, immediately upon any acquisition or release thereof or any such conversion, as the case may be. "GENERAL INTANGIBLES" means any "general intangibles," as such term is defined in SECTION 9106 of the UCC, now owned or hereafter acquired by Debtor and, in any event, shall include, without limitation, all right, title and interest which Debtor may now or hereafter have in or under any Contract, all customer lists, interests in partnerships, joint ventures and other business associations, permits, trade secrets, proprietary or confidential information, technical information, procedures, designs, knowledge, know-how, software, data bases, data, skill, expertise, recipes, experience, processes, models, drawings, materials and records, goodwill, claims in or under insurance policies, including unearned premiums, uncertificated securities, deposit accounts, rights to receive tax refunds and other payments and rights of indemnification. "INSTRUMENTS" means any "instrument," as such term is defined in SECTION 9105(1)(i) of the UCC now owned or hereafter acquired by Debtor, including, without limitation, all notes, certificated securities, and other evidences of indebtedness, other than instruments that constitute, or are a part of a group of writings that constitute, Chattel Paper. "INTELLECTUAL PROPERTY" means all Copyrights, Patents, Trademarks, trade secrets, customer lists, proprietary or confidential information, inventions (whether or not patented or patentable), technical information, procedures, designs, knowledge, know-how, software, data bases, data, skill, expertise, recipes, experience, processes, models, drawings, materials and records, and all Licenses related to the foregoing in which Debtor is the licensee. "INVENTORY" means any "inventory," as such term is defined in Section 9109(4) of the UCC, wherever located, now or hereafter owned or acquired by, Debtor and, in any event, shall include, without limitation, all inventory, merchandise, goods and other personal property which are held by or on behalf of Debtor for sale or lease or are furnished or are to be furnished under a contract of service or which constitute raw materials, work in process or materials used or consumed or to be used or consumed in Debtor's business, or the processing, packaging, promotion, delivery or shipping of the same, and all furnished goods whether or not such inventory is listed on any schedules, assignments or reports furnished to Secured Party from time to time and whether or not the same is in transit or in the constructive, actual or exclusive occupancy or possession of Debtor or is held by Debtor or by others for Debtor's account, including, without limitation, all goods covered by purchase orders and contracts with suppliers and all goods billed and held by suppliers and all inventory which may be located on premises of Debtor or of any carriers, forwarding agents, truckers, warehousemen, vendors, selling agents or other persons. "INVESTMENT PROPERTY" means any "investment property," as such term is defined in Section 9115(1)(f) of the UCC, now owned or hereafter acquired by Debtor, including, without limitation, a security, whether certificated or uncertificated, a security entitlement, a securities account, a commodity contract or a commodity account. ____________________ ____________________ Debtor Initial Secured Party Initial 3 <PAGE> 26 "LICENSE" means any Copyright License, Patent License, Trademark License or other license of rights or interests now held or hereafter acquired by Debtor. "PATENT LICENSE" means any of the following now owned or hereafter acquired by Debtor; any written agreement granting any right with respect to any invention on which a Patent is in existence. "PATENTS" means all of the following in which Debtor now holds or hereafter acquires any interest: (a) letters patent of the United States or any other county, all registrations and recordings thereof, and all applications for letters patent of the United States or any other county, including, without limitation, registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof; (b) all reissues, continuations, continuations-in-part or extensions thereof; (c) all petty patents, divisionals, and patents of addition; and (d) all patents to issue in any such applications. "PROCEEDS" means "proceeds," as such term is defined in SECTION 9-306(1) of the UCC and, in any event, shall include, without limitation, (a) any and all Accounts, Chattel Paper, Instruments, cash or other proceeds payable to Debtor from time to time in respect of the Collateral, (b) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to Debtor from time to time with respect to any of the Collateral, (c) any and all payments (in any form whatsoever) made or due and payable to Debtor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral above by any governmental body, authority, bureau or agency (or any person acting under color of governmental authority), and (d) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral or any Contract. "TRADEMARK LICENSE" means any written agreement granting any right in and to any Trademark or Trademark registration (whether Debtor is the licensee or the licensor thereunder). "TRADEMARKS" means any of the following now owned or hereafter acquired by Debtor: (a) any and all trademarks, trade names, corporate names, company names, business names, trade styles, service marks, logos, other source or business identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and general intangibles of like nature, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and any applications in connection therewith, including, without limitation, registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof (the "Marks"), (b) any reissues, extensions or renewals thereof, (c) the goodwill of the business symbolized by or associated with Marks, (d) income, royalties, damages and payments now and hereafter due and/or payable with respect to Marks, including, without limitation, damages, claims and recoveries for past, present or future infringement, misappropriation, or dilution, and (e) rights to sue for past, present and future infringements of Marks. "UCC" means the Uniform Commercial Code as the same may, from time to time, be in effect in the State of California; provided, however, in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of Secured Party's security interest in any collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of California, the term "UCC" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection of priority and for purposes of definitions related to such provisions. -------------- --------------------- Debtor Initial Secured Party Initial 4 <PAGE> 27 EXHIBIT B SKYSTREAM CORPORATION COMMON STOCK PURCHASE AGREEMENT THIS AGREEMENT is made as of this 31st day of August, 1998, by and between SKYSTREAM CORPORATION, a California corporation (the "Corporation"), and LIGHTHOUSE CAPITAL PARTNERS II, L.P. (the "Purchaser"). All capitalized terms in this Agreement shall have the meaning assigned to them in this Agreement or in the attached Appendix. 1. ACQUISITION OF SHARES (a) SALE AND PURCHASE. On the terms and conditions set forth in this Agreement, the Corporation agrees to sell to the Purchaser, and Purchaser agrees to purchase 75,410 shares of Common Stock (the "Shares") of the Corporation. The sale and purchase shall occur at the offices of the Corporation on the date set forth above or at such other place and time as the parties may agree. Attached hereto as Exhibit A is a current capitalization table for the Corporation. (b) CONSIDERATION. The Purchaser agrees to pay $0.225 for each Share (the "Purchase Price"). The Corporation represents and warrants that the Purchase Price is at least 100% of the Fair Market Value of the Shares. Payment shall be made on the transfer date in cash or cash equivalents. Upon receipt by the Corporation of the Purchase Price with respect to the Shares, the Corporation shall issue a duly executed certificate representing the Shares (the "Closing"). The Corporation further covenants that the Shares will, upon issuance, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof. (c) STOCKHOLDER RIGHTS. Purchaser (or any successor in interest) shall have all the rights of a stockholder (including voting, dividend and liquidation rights) with respect to the Shares, subject, however, to the transfer restrictions of Section 2 below. 2. SECURITIES LAW COMPLIANCE/TRANSFER RESTRICTIONS (a) RESTRICTED SECURITIES. The Shares have not been registered under the 1933 Act. (b) PURCHASER REPRESENTATIONS. In connection with the issuance and acquisition of Shares under this Agreement, Purchaser hereby represents and warrants to the Corporation as follows: (i) Purchaser is acquiring the Shares for investment for its account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the 1933 Act. (ii) Purchaser understands that the Shares have not been registered under the 1933 Act by reason of a specific exemption therefrom and that the Shares must be held indefinitely, unless they are subsequently registered under the 1933 Act or Purchaser determines that such registration is not required. (iii) Purchaser will not sell, transfer or otherwise dispose of the Shares in violation of the 1933 Act, the Securities Exchange Act of 1934, or the rules promulgated thereunder, including Rule 144 under the 1933 Act. Purchaser agrees that it will not dispose of the Shares unless and until it has complied with all requirements of this Agreement applicable to the disposition of Shares, and only if (i) the proposed disposition does not require registration of the Shares under the 1933 Act or all appropriate action necessary for compliance with the registration requirements of the 1933 Act or with any exemption from registration available under the 1933 Act (including Rule 144) has been taken and (ii) the proposed disposition will not result in the contravention of any transfer restrictions applicable to the Shares under the Rules of the California Corporations Commissioner. 1 <PAGE> 28 (iv) Notwithstanding anything to the contrary contained herein, Purchase may grant a security interest in its rights hereunder and the Shares to third parties. (c) CORPORATION REPRESENTATIONS. The Corporation hereby represents and warrants to Purchaser as follows: (1) The execution and delivery of this Agreement do not, and the issuance of the Shares in accordance with the terms hereof will not, with or without the passage of time or giving of notice, (i) violate or contravene the Corporation's Articles of Incorporation or Bylaws, or any law, statute, regulation, rule, judgment or order applicable to the Corporation, (ii) violate, contravene or result in a breach or default under any contract, agreement or instrument to which the Corporation is a party or by which the Corporation or any of its assets are bound, (iii) result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Corporation or the suspension, revocation, impairment, forfeiture or nonrenewal of any permit license, authorization or approval applicable to the Corporation, its business or operations or any of its assets or properties, or (iv) require the consent or approval of or the filing of any notice or registration with any person or entity. (2) The Corporation is a corporation duly organized, validly existing and in good standing under the laws of the State of California. The Corporation has all requisite corporate power and authority to own and operate its properties and assets, to execute and deliver this Agreement, to issue and sell the Shares, to carry out the provisions of this Agreement, and to carry on its business as presently conducted and as presently proposed to be conducted. (3) The authorized capital stock of the Corporation, immediately prior to the Closing, will consist of 20,000,000 shares of Common Stock (par value $0.01 per share), of which (i) 4,349,367 shares are issued and outstanding, (ii) 6,704,831 shares are reserved for the conversion of the Preferred Stock and (iii) 2,175,633 shares are reserved for future issuance to key employees pursuant to the Corporation's stock option plan. In addition, 4,425,000 shares of Series A Preferred Stock are authorized, of which 4,425,000 shares are issued and outstanding and 35,385 are reserved for issuance upon the exercise of certain Warrants. All issued and outstanding shares of the Corporation's Common Stock (i) have been duly authorized and validly issued, (ii) are fully paid and nonassessable, and (iii) were issued in compliance with all applicable state and federal laws concerning the issuance of securities. (4) All corporate action on the part of the Corporation, its officers, directors and shareholders necessary for the authorization of this Agreement, the performance of all obligations of the Corporation hereunder and thereunder at the Closing and the authorization, sale, issuance and delivery of the Shares pursuant hereto has been taken or will be taken prior to the Closing. The Agreement, when executed and delivered, will be a valid and binding obligation of the Corporation enforceable in accordance with its terms, except as limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, and (ii) general principles of equity that restrict the availability of equitable remedies. (5) The Corporation has good and marketable title to its properties and assets, including the properties and assets reflected in the most recent balance sheet included in the financial statements of the Corporation delivered to the Purchaser, and good title to its leasehold estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than (i) those resulting from taxes which have not yet become delinquent, (ii) minor liens and encumbrances which do not materially detract from the value of the property subject thereto or materially impair the operations of the Corporation, and (iii) those that have otherwise arisen in the ordinary course of business. (6) The Corporation owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, information and other proprietary rights and processes necessary for its business as now conducted and as proposed to be conducted, without any known infringement of the rights of others. 2 <PAGE> 29 (7) The Corporation is not in violation or default of any term of its Articles of Incorporation or Bylaws, or of any provision of any mortgage, indenture, contract, agreement, instrument or contract to which it is party or by which it is bound or of any judgment, decree, order, writ or, to its knowledge, any law, statute, regulation, rule, judgment or order applicable to the Corporation which would materially and adversely affect the business, assets, liabilities, financial condition, operations or prospects of the Corporation. (8) There is no action, suit, proceeding or investigation pending or to the Corporation's knowledge currently threatened against the Corporation that questions the validity of this Agreement or the consummation of the transactions contemplated hereby, or which might result, either individually or in the aggregate, in any material adverse change in the assets, condition, affairs or prospects of the Corporation, financially or otherwise, or any change in the current equity ownership of the Corporation, nor is the Corporation aware that there is any basis for the foregoing. The foregoing includes, without limitation, actions pending or threatened (or any basis therefor know to the Corporation) involving the prior employment of any of the Corporation's employees, their use in connection with the Corporation's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. The Corporation is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Corporation currently pending or which the Corporation intends to initiate. (d) RIGHTS OF THE CORPORATION. The Corporation shall not be required to (i) transfer on its books any Shares that have been sold or transferred in contravention of this Agreement or (ii) treat as the owner of Shares, or otherwise to accord voting, dividend or liquidation rights to, any transferee to whom Shares have been transferred in contravention of this Agreement. 3. NOTICES OF RECORD DATE, ETC. IN THE EVENT OF: (a) any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase, sell or otherwise acquire or dispose of any shares of stock of any class or any other securities or property, or to receive any other right; (b) any reclassification of the capital stock of the Corporation, capital reorganization of the Corporation, consolidation or merger involving the Corporation, or sale or conveyance of all or substantially all of its assets; or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Corporation; then in each such event the Corporation will provide or cause to be provided to the Purchaser a written notice thereof. Such notice shall be provided at least twenty (20) business days prior to the date specified in such notice on which any such action is to be taken. 4. RIGHTS OF PARTICIPATION. The Corporation hereby grants the Purchaser the right of participation as set forth on Exhibit B, which is incorporated herein by reference. 5. WAIVER OF RIGHT OF FIRST REFUSAL. The Corporation hereby waives any "first-refusal rights" of the Corporation with respect to the Shares, including, without limitation, the right of first refusal provided for in Article 8.6 of the bylaws of the Corporation. 6. GENERAL PROVISIONS (a) NOTICES. Any notice required to be given under this Agreement shall be in writing and shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, registered or certified, postage prepaid and properly addressed to the party entitled to such notice at the address indicated below such party's signature line on this Agreement or at such other address as such party may designate by ten (10) days advance written notice under this paragraph to all other parties to this Agreement. 3 <PAGE> 30 7. MISCELLANEOUS PROVISIONS (a) ADDITIONAL UNDERTAKINGS. Purchaser and Corporation hereby agree to take whatever additional action and execute whatever additional documents the other party may deem reasonably necessary or advisable in order to carry out or effect the provisions of this Agreement. (b) AGREEMENT IS ENTIRE CONTRACT. This Agreement constitutes the entire contract between the parties hereto with regard to the subject matter hereof. (c) GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California without resort to the State's conflict-of-laws rules. (d) COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. (e) SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and upon Purchaser and its successors and assigns, whether or not any such person shall have become a party to this Agreement and have agreed in writing to join herein and be bound by the terms hereof. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first indicated above. SKYSTREAM CORPORATION By: EXHIBIT ONLY ----------------------------------------- Name: James D. Olson --------------------------------------- Title: Chief Executive Officer -------------------------------------- Address: 555 Clyde Avenue Mountain View, CA 94043 PURCHASER LIGHTHOUSE CAPITAL PARTNERS II, L.P. By: LIGHTHOUSE MANAGEMENT PARTNERS II, L.P., ITS GENERAL PARTNER By: LIGHTHOUSE CAPITAL PARTNERS, INC., ITS GENERAL PARTNER By: ----------------------------------------- Name: Richard D. Stubblefield --------------------------------------- Title: Managing Director -------------------------------------- Address: 100 Drake's Landing Road, Suite 260 Greenbrae, CA 94904 4 <PAGE> 31 APPENDIX The following definitions shall be in effect under the Agreement: A. "Agreement" shall mean this Common Stock Purchase Agreement. B. "Board" shall mean the Corporation's Board of Directors. C. "Common Stock" shall mean the Corporation's common stock. D. "Corporation" shall mean SkyStream Corporation, a California corporation. E. "Fair Market Value" shall mean the fair market value of a Share, as determined by the Board of Directors in good faith. Such determination shall be conclusive and binding on all persons. F. "1933 Act" shall mean the Securities Act of 1933, as amended. G. "Purchaser" shall mean the person to whom the Shares are issued. H. "Shares" shall have the meaning assigned to such term in Section 1.(a). 5 <PAGE> 32 EXHIBIT A CAPITALIZATION TABLE SEE ATTACHED PAGES. 1 <PAGE> 33 EXHIBIT B RIGHT OF PARTICIPATION SEE ATTACHED PAGES. 1 <PAGE> 34 EXHIBIT B RIGHT OF PARTICIPATION (a) Right of Participation. Subject to the terms and conditions contained in this Exhibit B, the Company hereby grants to Purchaser, the right of participation to purchase its Pro Rata Portion of any New Securities (as defined in Section (b)) which the Company may, from time to time, propose to sell and issue. A Holder's "Pro Rata Portion" for purposes of this Section (a) is the ratio that (x) the sum of the number of shares of the Company's Common Stock then held by such Purchaser and the number of shares of the Company's Common Stock issuable upon conversion of any Preferred Stock then held by Purchaser, bears to (y) the sum of the total number of shares of the Company's Common Stock then outstanding and the number of shares of the Company's Common Stock issuable upon conversion of the then outstanding Preferred Stock. (b) Definition of New Securities. Except as set forth below, "New Securities" shall mean any shares of capital stock of the Company, including Common Stock and Preferred Stock, whether authorized or not, and rights, options or warrants to purchase said shares of Common Stock or Preferred Stock, and securities of any type whatsoever that are, or may become, convertible into said shares of Common Stock or Preferred Stock. Notwithstanding the foregoing, "New Securities" does not include (i) Common Stock issued or issuable upon conversion of any Preferred Stock, (ii) securities offered to the public generally pursuant to a registration statement under the Securities Act, (iii) securities issued pursuant to the acquisition of another corporation by the Company by merger, purchase of substantially all of the assets or shares or other reorganization whereby the Company or its shareholders own not less than a majority of the voting power of the surviving or successor corporation, (iv) shares of the Company's Common Stock or related options or warrants convertible into or exercisable for such Common Stock issued to employees, officers and directors of, and consultants to, the Company, pursuant to any arrangement approved by the Board of Directors of the Company, (v) shares of the Company's Common Stock or related options convertible into or exercisable for such Common Stock issued to banks, commercial lenders, lessors and other financial institutions in connection with the borrowing of money or the leasing of equipment by the Company approved by the Board of Directors of the Company, (vi) stock issued pursuant to any rights or agreements, including, without limitation, convertible securities, options and warrants, provided that the Company shall have complied with the rights of participation established by this Exhibit B with respect to the initial sale or grant by the Company of such rights or agreements, or (vii) stock issued in connection with any stock split, stock dividend or recapitalization by the Company. (c) Notice of Right. In the event the Company proposes to undertake an issuance of New Securities, it shall give each Purchaser written notice of its intention, describing the type of New Securities and the price and terms upon which the Company proposes to issue the same. Each Purchaser shall have twenty (20) days from the date of receipt of any such notice to agree to purchase shares of such New Securities (up to the amount referred to in Section (a)), for the price <PAGE> 35 and upon the terms specified in the notice, by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. (d) Exercise of Right. If any Purchaser exercises its right of participation under this Agreement, the closing of the purchase of the New Securities with respect to which such right has been exercised shall take place within ninety (90) calendar days after the Purchaser gives notice of such exercise, which period of time shall be extended in order to comply with applicable laws and regulations. Upon exercise of such right of participation, the Company and the Purchaser shall be legally obligated to consummate the purchase contemplated thereby and shall use their best efforts to secure any approvals required in connection therewith. (e) Lapse and Reinstatement of Right. In the event a Purchaser fails to exercise the right of participation provided in this Exhibit B within said twenty (20) day period, the Company shall have ninety (90) days thereafter to sell or enter into an agreement (pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within sixty (60) days from the date of said agreement) to sell the New Securities not elected to be purchased by such Purchaser at the price and upon the terms no more favorable to the purchasers of such securities than specified in the Company's notice. In the event the Company has not sold the New Securities or entered into an agreement to sell the New Securities within said ninety (90) day period (or sold and issued New Securities in accordance with the foregoing within sixty (60) days from the date of said agreement), the Company shall not thereafter issue or sell any New Securities without first offering such securities to the Purchasers in the manner provided above. (f) No Assignment. The right of Purchaser to purchase any part of the New Securities may not be assigned or transferred. (g) Termination of Participation Right. The rights of participation granted under this Exhibit B shall terminate on and be of no further force or effect upon the consummation of the Company's sale of its Common Stock in an underwritten public offering pursuant to an effective registration statement filed under the Securities Act immediately subsequent to which the Company shall be obligated to file annual and quarterly reports with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. 2 <PAGE> 36 EXHIBIT C RECORDING REQUESTED BY AND WHEN RECORDED RETURN TO: Lighthouse Capital Partners II, L.P. 100 Drake's Landing Road, Suite 260 Greenbrae, CA 94904-3121 Attn.: Contract Administration ________________________________________________________________________________ CONSENT TO REMOVAL OF PERSONAL PROPERTY KNOW ALL PERSONS BY THESE PRESENTS: (a) The undersigned has an interest as owner and landlord in that certain real property (the "Real Property") in the County of Santa Clara, State of California, described as: SEE EXHIBIT 1 ATTACHED HERETO FOR FULL LEGAL DESCRIPTION, and commonly known as 555 Clyde Avenue, Suite B, Mountain View, California 94043 (Parcel No. _______________). (b) SKYSTREAM CORPORATION, a California corporation ("Borrower"), has entered into or will enter into a Loan and Security Agreement with LIGHTHOUSE CAPITAL PARTNERS II, L.P. ("Lender") (as amended and supplemented from time to time, the "Agreement"). (c) Lender, as a condition to entering into the Agreement, requires that the undersigned consent to the removal by Lender of the equipment and other assets covered by the Agreement (hereinafter the "Equipment") from the Real Property, no matter how it is affixed thereto, and to the other matters set forth below. NOW, THEREFORE, for good and sufficient consideration, receipt of which is hereby acknowledged, the undersigned consents to the placing of the Equipment on the Real Property, and agrees with Lender as follows: 1. The undersigned waives and releases each and every right which undersigned now has, under the laws of the State of California or by virtue of the lease from the Real Property now in effect, to levy or distrain upon for rent, in arrears, in advance or both, or to claim or assert title to the Equipment that is already on said Real Property, or may hereafter be delivered or installed thereon. 2. The Equipment shall be considered to be personal property and shall not be considered part of the Real Property regardless of whether or by what means it is or may become attached or affixed to the Real Property. 3. The undersigned will permit Lender, or its agent or representative, to enter upon the Real Property for the purpose of exercising any right it may have under the terms of the Agreement or otherwise, including, without limitation, the right to remove the Equipment; provided, however, that if Lender, in removing the Equipment damages any improvements of the undersigned on the Real Property, Lender will, at its expense, cause same to be repaired, normal wear and tear excepted. The right of Lender to enter the Real Property shall not terminate until thirty (30) days after Lender receives written notice from the undersigned of the termination of the Lease. 4. This agreement shall be binding upon the heirs, successors and assigns of the undersigned and shall inure to the benefit of Lender and its successors and assigns. 1 <PAGE> 37 IN WITNESS WHEREOF, the undersigned has executed this instrument this ___ day of ________________, 1998 LANDLORD Notarial Acknowledgment required. By: EXHIBIT ONLY Name: --------------------------- Title: -------------------------- ATTACH LEGAL DESCRIPTION OF THE REAL PROPERTY 2 <PAGE> 38 EXHIBIT D FORM OF LOAN AGREEMENT SUPPLEMENT LOAN AGREEMENT SUPPLEMENT NO. 01 LOAN AGREEMENT SUPPLEMENT NO. 01, dated October 6, 1998 ("Supplement"), to the Loan and Security Agreement dated as of October 6, 1998 (the "Loan Agreement") by and between SKYSTREAM CORPORATION, a California corporation ("Borrower"), and LIGHTHOUSE CAPITAL PARTNERS II, L.P. (the "Lender"). Capitalized terms used herein but not otherwise defined herein are used with the respective meanings given to such terms in the Loan Agreement. The amount being advanced under this Loan Agreement Supplement No. 01 is $________. Borrower hereby certifies that (a) the foregoing information is true and correct and authorizes Lender to endorse in its books and records, the Basic Rate applicable to the Funding Date of the Loan contemplated in this Loan Agreement Supplement and the principal amount set forth above; (b) the representations and warranties made by Borrower in SECTION 5 of the Loan Agreement and in the other Loan Documents are true and correct on the date hereof and will be true and correct on the Funding Date; (c) Borrower has met or will by the Funding Date meet all conditions set forth in SECTION 3 of the Loan Agreement; (d) Borrower is now, and on the Funding Date will be, in compliance with the covenants and the requirements contained in SECTIONS 6 AND 7 of the Loan Agreement; and (e) no Default or Event of Default has occurred and is continuing under the Loan Agreement. This Supplement is being delivered in the State of California. This Supplement may be executed by Borrower and Lender in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, Borrower and Lender have caused this Supplement to be duly executed and delivered as of this day and year first above written. SKYSTREAM CORPORATION LIGHTHOUSE CAPITAL PARTNERS II, L.P. By: EXHIBIT ONLY By: LIGHTHOUSE MANAGEMENT PARTNERS, II L.P., its general partner Name: James D. Olson By: LIGHTHOUSE CAPITAL PARTNERS, INC., Title: Chief Executive Officer its general partner By: -------------------------------- Name: Thomas Conneely Title: Vice President, Operations 1 <PAGE> 39 EXHIBIT E NEGATIVE PLEDGE AGREEMENT THIS NEGATIVE PLEDGE AGREEMENT is made as of August 31, 1998 by and between SKYSTREAM CORPORATION ("Borrower") and LIGHTHOUSE CAPITAL PARTNERS II, L.P. ("Lender"). In connection with the Loan Documents being concurrently executed between Borrower and Lender, Borrower agrees as follows: Except as otherwise permitted in the Loan Documents, Borrower shall not sell, transfer, assign, mortgage, pledge, lease, grant a security interest in, or encumber any of Borrower's intellectual property, including, without limitation, the following: (a) Any and all copyright rights, copyright applications, copyright registration and like protection in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held (collectively, the "Copyrights"); (b) Any and all trade secrets, and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held; (c) Any and all design rights which may be available to Borrower now or hereafter existing, created, acquired or held; (d) All patents, patent applications and like protections, including, without limitation, improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same, including, without limitation, the patents and patent applications (collectively, the "Patents"); (e) Any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks (collectively, the "Trademarks"); (f) Any and all claims for damages by way of past, present and future infringements of any of the rights included above, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the intellectual property rights identified above; (g) All licenses or other rights to use any of the Copyrights, Patents or Trademarks and all license fees and royalties arising from such use to the extent permitted by such license or rights; (h) All amendments, extensions, renewals and extensions of any of the Copyrights, Patents or Trademarks; and (i) All proceeds and products of the foregoing, including, without limitation, all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing. It shall be an Event of Default under the Loan Documents between Borrower and Lender if there is a breach of any term of this Negative Pledge Agreement. Notwithstanding anything in this Agreement, Borrower may grant non-exclusive licenses with respect to its intellectual property in the ordinary course of business. 1 <PAGE> 40 Capitalized items used herein without definition shall have the same meanings as set forth in the Loan and Security Agreement of even date herewith. SKYSTREAM CORPORATION By: EXHIBIT ONLY ------------------------------- Name: James D. Olson ------------------------------ Title: Chief Executive Officer ---------------------------- LIGHTHOUSE CAPITAL PARTNERS II, L.P. BY: LIGHTHOUSE MANAGEMENT PARTNERS II, L.P. its general partner BY: LIGHTHOUSE CAPITAL PARTNERS, INC. its general partner By: ------------------------------- Name: Richard D. Stubblefield ------------------------------ Title: Managing Director ---------------------------- 2 <PAGE> 41 SCHEDULE 1 EXISTING LIENS <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------ FILE STATE SECURED PARTY NUMBER DATE FILED FILED DESCRIPTION - ------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Silicon Valley Bank 9700360589 12/31/96 CA Blanket Lien - ------------------------------------------------------------------------------------------------ William Kirsch Lease Funding 9731060643 11/5/97 CA Equipment Schedule 01 - ------------------------------------------------------------------------------------------------ Venture Leasing Associates 9731860528 11/10/97 CA Equipment Schedule 02 - ------------------------------------------------------------------------------------------------ David Campbell 9800960544 1/5/98 CA Equipment Schedule 03 - ------------------------------------------------------------------------------------------------ William Kirsch Lease Funding 9802260250 1/21/98 CA Equipment Schedule 04 - ------------------------------------------------------------------------------------------------ Venture Leasing Associates 9806960108 3/5/98 CA Equipment Schedule 06 - ------------------------------------------------------------------------------------------------ William Kirsch Lease Funding 9816360660 6/11/98 CA Equipment Schedule 08 - ------------------------------------------------------------------------------------------------ Venture Leasing Associates 9817060759 6/17/98 CA Equipment Schedule 07 - ------------------------------------------------------------------------------------------------ Venture Leasing Associates Pending Pending CA Equipment Schedule 09 - ------------------------------------------------------------------------------------------------ William Kirsch Lease Funding Pending Pending CA Equipment Schedule 05 - ------------------------------------------------------------------------------------------------ </TABLE> 1 <PAGE> 42 SCHEDULE 2 SUBSIDIARIES NONE 1 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-21.1 <SEQUENCE>36 <DESCRIPTION>EX-21.1 <TEXT> <PAGE> 1 EXHIBIT 21.1 SUBSIDIARIES OF SKYSTREAM NETWORKS INC. <TABLE> <CAPTION> <S> <C> Name of Subsidiary Jurisdiction of Incorporation ------------------ ----------------------------- SkyStream Networks Limited Hong Kong SkyDBN U.K. Limited United Kingdom </TABLE> [S] [C] </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-23.1 <SEQUENCE>37 <DESCRIPTION>EX-23.1 <TEXT> <PAGE> 1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement of Form S-1 of our reports dated February 18, 2000, except as to Note 12 which is as of March 7, 2000, relating to the financial statements and financial statement schedules of Skystream Networks Inc., which appear in such Registration Statement. We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Registration Statement. PricewaterhouseCoopers LLP San Jose, California March 7, 2000 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27.1 <SEQUENCE>38 <DESCRIPTION>EX-27.1 <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <MULTIPLIER> 1,000 <S> <C> <PERIOD-TYPE> YEAR <FISCAL-YEAR-END> DEC-31-1999 <PERIOD-START> JAN-01-1999 <PERIOD-END> DEC-31-1999 <CASH> 14,443 <SECURITIES> 0 <RECEIVABLES> 3,012 <ALLOWANCES> 183 <INVENTORY> 126 <CURRENT-ASSETS> 17,844 <PP&E> 1,363 <DEPRECIATION> 1,029 <TOTAL-ASSETS> 19,399 <CURRENT-LIABILITIES> 3,848 <BONDS> 1,667 <PREFERRED-MANDATORY> 0 <PREFERRED> 26,603 <COMMON> 8 <OTHER-SE> (11,997) <TOTAL-LIABILITY-AND-EQUITY> 19,399 <SALES> 8,518 <TOTAL-REVENUES> 8,518 <CGS> 2,646 <TOTAL-COSTS> 2,646 <OTHER-EXPENSES> 12,701 <LOSS-PROVISION> 164 <INTEREST-EXPENSE> 348 <INCOME-PRETAX> (6,621) <INCOME-TAX> 0 <INCOME-CONTINUING> (6,621) <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> (6,621) <EPS-BASIC> (1.37) <EPS-DILUTED> (1.37) </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company, the common stock being sold in this offering and our financial statements and the related notes appearing elsewhere in this prospectus. We obtained statistical information in this prospectus regarding the HR self-service applications market from published reports and other sources. We have not independently verified this information. WORKSCAPE, INC. We are a leading provider of Web-enabled human resources, or HR, self-service solutions to large organizations. We offer a suite of software solutions that enable employers to improve service to employees, enhance employee communications and increase overall organizational effectiveness, thereby freeing management to focus on strategic HR initiatives. Our solutions leverage technology to increase productivity by streamlining traditionally paper-based processes while enhancing employer-employee relationships and creating administrative savings. Our "employee self-service" solutions interface directly with employees, providing interactive access to HR information and services. We also offer "manager self-service" solutions which enable managers to manage their workforce more effectively by automating many tasks and providing up-to-date HR-related information. Our solutions are highly flexible and can be deployed in a variety of ways depending on a client's preferences. We deliver our solutions by hosting our proprietary software for our clients at our data center, licensing our software applications to employers for use on their premises or creating a hybrid of hosted/on-premise solutions. Our applications can be integrated with legacy enterprise resource planning and other technology systems. Our self-service solutions can provide employees with "anytime, anywhere" access via the Internet and employer Intranets, interactive voice response, or IVR, kiosk, e-mail and fax. Our solutions replace traditional communications channels and processes with convenient, low-cost, personalized interactions, performing such diverse functions as benefits enrollment and administration, compensation planning, training registration, time tracking and stock option administration and trading. According to The Forrester Report, approximately 79% of large employers intend to offer some form of Web-based HR self-service application by 2001, up from 35% in 1998. According to a survey by The Hunter Group of their clients, HR self-service applications can provide per-task cost savings of approximately 50% to 100% as compared to traditional paper-based processes. In addition, according to a survey by Deloitte & Touche, deploying Internet-based solutions is among the highest priorities for employee benefits specialists in 2000. We believe organizations are also increasingly looking to third parties to host applications that would previously have resided at the enterprise. This allows organizations to pay only for the functionality that they need, cut deployment time, and shift the burden of installing, maintaining, securing, and managing the necessary applications and infrastructure to another party. Our objective is to enhance our position as a leading provider of HR self-service solutions. Although our solutions can be used by organizations of any size, we primarily target large organizations with more than 2,500 employees because our solutions are designed with the flexibility and functionality to address the complexity of their human resource needs. The primary components of our strategy include: o targeting new clients; o expanding our suite of applications and cross-selling to existing clients; o aggressively marketing hosted solutions; o completing development of a new platform; o pursuing strategic acquisitions and alliances; and o enabling eCommerce opportunities. Our applications have been purchased by clients in a variety of industries, including high technology, manufacturing, telecommunications, financial services and pharmaceuticals. Our clients include Applied Materials, Chase Manhattan Bank, CIGNA, Home Depot, NSI, PricewaterhouseCoopers, 3Com, Tyco International Ltd. and the U.S. Postal Service. We currently have over 145 clients, with an aggregate of approximately 4.0 million employees, including clients with an aggregate of approximately 3.0 million employees which have implemented Web-based applications. Our principal executive offices are located at 11911 Freedom Drive, Suite 220, Reston, Virginia 20190, and our telephone number is (888) 605-9620. Our Web site address is www.workscape.com. The information on our Web site is not incorporated by reference into this prospectus. Workscape(R) is our registered trademark. This prospectus also contains trademarks and trade names of other companies. THE OFFERING <TABLE> <S> <C> Common stock offered.................................. shares Common stock to be outstanding after this offering.... shares Use of proceeds....................................... To redeem all outstanding shares of our Series C preferred stock, to make cash payments required upon conversion of our Series D preferred stock into common stock upon completion of this offering, to repay outstanding term bank loans, and to fund working capital and other general corporate purposes. For more detailed information, see "Use of Proceeds" on page 20. Proposed Nasdaq National Market symbol................ WSCP </TABLE> The number of shares of common stock to be outstanding after this offering includes: o 11,879,000 shares of our common stock outstanding as of March 21, 2000; o shares of our common stock to be sold in this offering; and o 37,566,666 shares of our common stock issuable upon automatic conversion of all outstanding shares of our Series A, Series B and Series D preferred stock upon completion of this offering. The number of shares of common stock to be outstanding after this offering excludes: o 4,368,000 shares of common stock issuable upon exercise of options that have been granted under our equity participation plans; o 5,201,330 additional shares of common stock reserved for issuance under our equity participation plans; and o 9,783,333 shares of our common stock issuable upon exercise of warrants that will remain outstanding after this offering. For a more detailed description of our capitalization, please see "Capitalization" on page 21. See "Description of Capital Stock" on page 66 for a more complete description of the terms of our common and preferred stock. ------------------------ Unless we indicate otherwise, all information in this prospectus reflects the following: o conversion of all outstanding shares of Class A and Class B common stock into shares of a single undesignated class of common stock upon completion of this offering; o conversion of our outstanding Series A, Series B and Series D preferred stock on a one-for-one basis into common stock, and the redemption of our outstanding Series C preferred stock upon completion of this offering; and o no exercise by the underwriters of their over-allotment option to purchase up to additional shares of common stock. SUMMARY FINANCIAL DATA (In thousands, except share and per share data) You should read the following summary financial data together with "Selected Financial Data," "Unaudited Pro Forma Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited financial statements and related notes included in this prospectus. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ PRO FORMA 1995 1996 1997 1998 1999 1999(1) ----------- ----------- ------- ------- ---------- ----------- <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Hosted services................. $ 2,487 $ 3,432 $ 4,416 $ 7,418 $ 11,087 $ 11,087 Software licensing and maintenance................... -- -- -- -- 2,306 4,626 Professional services........... -- -- -- -- 3,001 9,167 --------- ------- ------- ------- ---------- --------- Total net revenues............ 2,487 3,432 4,416 7,418 16,394 24,880 Cost of revenues: Hosted services................. 1,418 1,591 1,987 3,085 7,819 7,819 Software licensing and maintenance................... -- -- -- -- 695 1,284 Professional services........... -- -- -- -- 3,880 7,358 Amortization of software acquired and software license rights(2)..................... -- -- -- -- 1,656 3,280 --------- ------- ------- ------- ---------- --------- Total cost of revenues........ 1,418 1,591 1,987 3,085 14,050 19,741 --------- ------- ------- ------- ---------- --------- Gross profit...................... 1,069 1,841 2,429 4,333 2,344 5,139 Other operating costs (exclusive of non-cash compensation expense shown below).................... 1,398 1,568 2,189 3,853 21,510 27,986 Non-cash compensation expense..... -- -- -- -- 502 502 Acquisition-related amortization(3)................. -- -- -- -- 3,098 6,753 --------- ------- ------- ------- ---------- --------- Income (loss) from operations..... (329) 273 240 480 (22,766) (30,102) Other income (expense), net....... (34) (25) (39) (49) (256) (333) --------- ------- ------- ------- ---------- --------- Net income (loss)................. $ (363) $ 248 $ 201 $ 431 $ (23,022) $ (30,435) --------- ------- ------- ------- ---------- --------- --------- ------- ------- ------- ---------- --------- Basic and diluted net income (loss) per share, after giving effect to pro forma income tax provision (benefit)(4).......... $ (726.89)(5) $223.20(5) $169.56(5) $404.37(5) $ (88.94) --------- ------- ------- ------- ---------- --------- ------- ------- ------- ---------- Pro forma basic and diluted net income (loss) per share(4)...... $ (1.18) $ (29.73)(1) ---------- --------- ---------- --------- Shares used in calculation of net income (loss) per share: Basic and diluted(4)........ 500 500 500 500 312,626 --------- ------- ------- ------- ---------- --------- ------- ------- ------- ---------- Pro forma basic and diluted(4)................ 20,273,927 1,184,648(1) ---------- --------- ---------- --------- </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ---------------------------------------- PRO FORMA AS ACTUAL PRO FORMA(6) ADJUSTED(7) -------- ------------ ------------ <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.............................................. $ 13,352 $ 13,352 $ Working capital (deficit).............................................. 6,378 (1,542) Total assets........................................................... 47,150 47,150 Total debt, including current portion.................................. 4,321 4,321 Redeemable convertible Series A, B and D preferred stock............... 39,250 -- Redeemable Series C preferred stock.................................... 15,398 15,398 Total stockholders' equity (deficit)................................... (22,953) 8,378 </TABLE> (1) The pro forma statement of operations data for the year ended December 31, 1999 gives effect to our acquisitions of assets of the employee self-service business of Edify Corporation and assets of NOAH Software, Incorporated as if these acquisitions had occurred on January 1, 1999. The historical financial information included in the pro forma information for the employee self-service business of Edify Corporation includes only revenues and direct operating expenses. Since Edify Corporation did not maintain separate accounting records for its employee self-service business, there is no reasonable basis to allocate corporate overhead costs, interest expense and income taxes to the financial information of the acquired business. Therefore, the results of operations included in the pro forma financial information may not be representative of the acquired business had the corporate overhead expense information been available. (2) Amortization of software acquired and software license rights is calculated on a straight-line basis generally over a two- to three-year period. See our audited financial statements beginning on page F-1 of this prospectus. (3) Acquisition-related amortization expense is calculated on a straight-line basis generally over a two- to three-year period. See our audited financial statements beginning on page F-1 of this prospectus. (4) Net income (loss) per share and pro forma net income (loss) per share are calculated on the basis described in note 3 to our audited financial statements beginning on page F-1 of this prospectus. (5) The pro forma income tax provision (benefit) assumes that we were taxed as a C corporation during the years ended December 31, 1995, 1996, 1997 and 1998, although we had elected to be a Subchapter S corporation for tax reporting purposes during those periods. Effective January 1, 1999, we became a C corporation for tax reporting purposes. (6) Pro forma balance sheet data gives effect to the conversion of the outstanding Series A, Series B and Series D preferred stock into 37,191,666 shares of common stock. (7) Pro forma as adjusted balance sheet data gives effect to (A) the sale of shares of common stock in this offering at an assumed offering price of $ per share after deducting underwriting discounts and estimated offering expenses, (B) the redemption of the Series C preferred stock upon completion of this offering with a portion of the net offering proceeds, (C) the payment of $7,920,000 in cash associated with the conversion of Series D preferred stock into common stock, and (D) the repayment of all outstanding bank term loans.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001107128_interpacke_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001107128_interpacke_prospectus_summary.txt
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+PROSPECTUS SUMMARY YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS, CAREFULLY BEFORE MAKING AN INVESTMENT DECISION. INTERPACKET NETWORKS, INC. OVERVIEW We operate a satellite-based, high performance Internet network that delivers Internet services to international Internet service providers, or ISPs, and other businesses in more than 90 countries. Our proprietary network design integrates the broadcast capabilities of satellites with Internet networking technologies to offer our customers an expandable, or scalable, solution to the constraints of the public Internet infrastructure. Our global network's open technical architecture enables us to provide multiple categories of Internet services, including global high bandwidth, or broadband, connectivity to the Internet backbone, enhanced Internet services, such as Internet telephony, and Internet content distribution, such as newsfeeds and streaming media. From December 31, 1998 to December 31, 1999, we increased the number of our customers from 69 to 343, and as of March 27, 2000 we had over 500 customers worldwide. Strain on the worldwide Internet infrastructure is increasing, especially outside the U.S., as the number of Internet users grows and as their bandwidth needs expand. International Data Corporation estimates that the number of active Internet users worldwide will grow from approximately 261 million in 1999, of which approximately 59% resided outside of the U.S., to approximately 623 million by the end of 2003, of which approximately 68% will reside outside of the U.S. Despite an anticipated expansion in the number of Internet users worldwide, advances in the global telecommunications infrastructure and the public Internet have failed to keep pace with user demand. When connecting to and navigating the Internet, international ISPs and their subscribers suffer numerous problems caused by limited access to the Internet backbone, poor telecommunications infrastructure and low bandwidth availability. These difficulties are likely to increase as demand grows for rich Internet content, such as streaming audio and video. THE INTERPACKET SOLUTION Our satellite-based Internet network overlays the public Internet around the world and offers solutions to the limitations of the current global Internet infrastructure. Our network currently incorporates nine geostationary satellites, uplinked from six strategically located earth-based satellite transmission stations, or teleports, and allows for the rapid delivery of Internet connectivity services worldwide. ESPRESSO and ESPRESSO BIZKIT, our branded satellite-based Internet connectivity services, supplement or bypass local and international telecommunications connections, enabling our ISP customers to deliver a more reliable, higher quality of Internet service to their subscribers. Our enhanced Internet services, including ESPRESSO VOICE, our Internet telephony service, are complementary to the broadband access we provide to our international ISP customers and create additional revenue opportunities. The broadcast capabilities of our satellite network create an efficient, reliable means for Internet content distributors to transmit bandwidth-intensive forms of rich, Web-based content simultaneously to multiple locations, known as multicasting, around the world. We currently broadcast ESPRESSO NEWS, our aggregated newsfeed, and we recently entered into agreements with iBEAM Broadcasting Corporation and RealNetworks, Inc., leading Internet broadcast networks, to deliver streaming content around the world. Our satellite-based Internet network and services feature: - Scalable, proprietary and global network design - High quality, branded service - Rapid provisioning - Enhanced Internet services - Multicasting content delivery - Customer-focused network management and support OUR STRATEGY Our goal is to become the leading provider of global satellite Internet connectivity and services by building the world's largest, premier quality and cost-efficient satellite-based Internet network. We also intend to capitalize on our proprietary network design, our network's broadcast capabilities and the global reach of our satellite coverage to offer content delivery to Internet content distributors. To achieve this goal we intend to: - Increase our global customer base - Capitalize on our early entrant status - Broaden our Internet service offerings - Provide turnkey solutions to the emerging Internet content industry - Expand our network infrastructure - Develop our strategic and business relationships ------------------- Our headquarters are located at 1901 Main Street, 2nd Floor, Santa Monica, CA 90405, and our telephone number is (310) 382-3300. ------------------- THE OFFERING <TABLE> <S> <C> Common stock offered by InterPacket Networks, Inc........................................ 6,500,000 shares Common stock to be outstanding after the offering................................... 40,400,333 shares Use of proceeds.............................. Primarily to acquire satellite and fiber optic capacity, increase sales and marketing personnel and activities, increase working capital and for other general corporate purposes. Proposed Nasdaq National Market symbol....... IPKT </TABLE> The number of shares outstanding is based on shares outstanding as of March 27, 2000. This number reflects the conversion of our 3,000,000 shares of preferred stock into common stock upon completion of the offering and takes into account our 2.2 for 1 stock split but excludes 6,963,163 shares of common stock issuable upon exercise of options outstanding, at a weighted average exercise price of $2.50, and 3,854,941 shares of common stock reserved for future option grants under our stock option plans. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) Please see Note 2 of notes to our consolidated financial statements appearing at the end of this prospectus for an explanation of the determination of the number of shares used in computing per share data. The Actual column reflects balance sheet data on a historical basis, without any adjustments to reflect subsequent events or anticipated events and gives effect to our 2.2 for 1 stock split. The Pro Forma column reflects the issuance of 6,600,000 shares of common stock upon conversion of our outstanding preferred stock on completion of the offering. The Pro Forma As Adjusted column reflects the issuance of 6,600,000 shares upon this conversion and the receipt of the estimated proceeds from our sale of 6,500,000 shares of common stock at an assumed initial public offering price of $11 per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. In 1998, 64% of our total revenue and in 1999, 20% of our total revenue was derived from the sale of traditional telecom services to one company, STAR Telecommunications, Inc. We do not expect to generate any meaningful revenues in 2000 from traditional telecom services. Due to the costs associated with the development and expansion of our network and the Internet services we now offer, we experienced net losses of approximately $1.3 million in 1998 and $10.9 million in 1999. As of December 31, 1999 we had a deficit of $12.1 million. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------ 1997 1998 1999 -------- -------- -------- <S> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue: Network services.......................................... $ 583 $ 4,115 $ 10,789 Traditional telecom services.............................. 1,176 7,295 2,685 ------ ------- -------- Total revenue........................................... 1,759 11,410 13,474 Income (loss) from operations............................... 158 (1,416) (10,057) ------ ------- -------- Net income (loss)........................................... $ 89 $(1,328) $(10,890) ====== ======= ======== Basic and diluted income (loss) per common share............ $ 0.01 $ (0.07) $ (0.48) ====== ======= ======== Weighted average number of common shares (basic and diluted).................................................. 15,950 18,506 22,862 ====== ======= ======== Pro forma basic and diluted loss per common share (unaudited)............................................... $ (0.46) ======== Weighted average number of common shares used to compute pro forma loss per common share (unaudited)................... 23,767 ======== </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 -------------------------------- PRO FORMA AS ACTUAL PRO FORMA ADJUSTED -------- --------- --------- (UNAUDITED) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash........................................................ $15,948 $15,948 $81,443 Total assets................................................ 64,291 64,291 129,786 Capital leases of satellite transponders, net of current portion................................................... 38,669 38,669 38,669 Mandatorily redeemable preferred stock...................... 14,824 -- -- Deficit..................................................... (12,126) (12,126) (12,126) Stockholders' equity........................................ 2,392 17,216 82,711 </TABLE> Unless otherwise indicated, all information in this prospectus - reflects our 2.2 for 1 stock split which will occur prior to the completion of this offering; - reflects the conversion of our preferred stock into common stock upon completion of the offering; and - assumes that the underwriters' over-allotment option is not exercised.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001107194_centillium_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001107194_centillium_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary highlights basic information about us and this offering contained more fully elsewhere in this prospectus. You should read this entire prospectus carefully, including the section entitled "Risk Factors" and the financial statements and the related notes to those statements included in this prospectus. This prospectus contains forward-looking statements that involve risks and uncertainties. Centillium Communications, Inc. Centillium delivers products that enable broadband communications to the home and business. We currently sell DSL products and we are leveraging our DSL technology and expertise to develop products for the emerging voice over data networks and home networking markets. Digital subscriber line or DSL technology provides high-speed data transmission using the local telephone company's existing copper wire infrastructure. DSL equipment is installed at both ends of the copper wire--at the telephone company's central office facility and at the end-user's home or business. Each of our DSL products consists of a set of two semiconductors and related software that form the core of the DSL equipment used at each end of the copper wire. As telephone companies and other network access providers have begun to deploy DSL services, demand is emerging for complementary technologies such as voice over data networks and home networking. Voice over data networks technology enables the transmission of voice conversations over communications networks originally designed for data transmission only. Voice over data networks technology also enables the transmission of multiple voice channels as well as data over a single copper line previously capable of transmitting only one voice channel. Home networking enables users to share information technology resources throughout the home. Broadband equipment manufacturers that seek to serve the DSL, voice over data networks and home networking markets must develop solutions to meet constantly evolving technology and networking standards, size and power constraints, and short product life- cycles. We believe that our products help equipment manufacturers compete in these markets by providing flexibility due to our programmable architecture, efficient design, low power consumption and fast time to market. We outsource the manufacturing of our products, which allows us to focus our resources on design, development and marketing efforts within our target markets. To date, we have shipped our products to 13 customers. Our largest customers, based on revenue earned in the three months ended March 31, 2000, are Sumitomo Electric Industries, Lucent Technologies, Copper Mountain Networks, and NEC, which represented 39.1%, 26.9%, 12.3% and 7.5% of our revenues for such period, respectively. We were incorporated in February 1997. We have a limited operating history and we have not reported an operating profit for any year since our incorporation. We expect to continue to incur net losses for the foreseeable future. Our principal executive offices are located at 47211 Lakeview Boulevard, Fremont, CA 94538 and our telephone number is (510) 771-3700. ---------------- Centillium, CopperLite, CopperFlite and Optimizer are our common law trademarks. This prospectus also makes reference to trademarks of other companies. The Offering <TABLE> <C> <S> Common stock offered in this offering............. 4,000,000 shares Common stock offered in the private placement..... 700,000 shares to three investors as follows: 500,000 to Creative Technology Ltd., 100,000 to NEC and 100,000 to the Sterling Group. Common stock to be outstanding after this offering and the private placement........................ 32,137,747 shares Use of proceeds................................... For general corporate purposes and working capital, including expected operating expenses. See "Use of Proceeds." Nasdaq National Market symbol..................... CTLM </TABLE> The total number of outstanding shares of our common stock above is based on: . 11,987,511 shares of our common stock outstanding as of March 31, 2000; and . the automatic conversion of all outstanding shares of preferred stock upon completion of this offering into 15,450,236 additional shares of common stock. The total number of outstanding shares of our common stock above does not include: . 2,831,840 shares of common stock issuable upon the exercise of outstanding stock options as of March 31, 2000 at a weighted average exercise price of $3.44 per share; . 26,750 shares of common stock issuable upon the exercise of outstanding warrants as of March 31, 2000 at a weighted average exercise price of $4.00 per share; . 5,814,042 shares of common stock available for issuance under our 1997 Stock Plan following this offering; and . 500,000 additional shares of common stock available for issuance under our 2000 Employee Stock Purchase Plan immediately following this offering. Unless otherwise specifically stated, information throughout this prospectus: . reflects the conversion of all outstanding shares of preferred stock into shares of common stock automatically upon completion of this offering; and . assumes no exercise of the underwriter's over-allotment option. Summary Consolidated Financial Information <TABLE> <CAPTION> Period from Fiscal Year Three Months February 21, 1997 Ending December 31, Ended March 31, (inception) to --------------------- ----------------- December 31, 1997 1998 1999 1999 2000 ----------------- --------- ---------- ------- -------- (in thousands except per share data) (unaudited) <S> <C> <C> <C> <C> <C> Consolidated Statement of Operations Data: Total revenues.......... $ 300 $ 752 $ 3,744 $ 50 $ 4,723 Operating loss.......... $(2,102) $ (9,722) $ (20,781) $(3,452) $(10,312) Net loss................ $(1,937) $ (9,256) $ (19,749) $(3,427) $(10,058) Deemed dividend on Series B convertible preferred stock........ $(2,800) $ -- $ -- $ -- $ -- ------- --------- ---------- ------- -------- Net loss applicable to common stockholders.... $(4,737) $ (9,256) $ (19,749) (3,427) $(10,058) Historical basic and diluted net loss per share applicable to common stockholders.... $ (0.59) $ (1.15) $ (2.23) $ (0.42) $ (1.03) Shares used to compute basic and diluted net loss per share applicable to common stockholders........... 8,000 8,056 8,842 8,227 9,808 Pro forma basic and diluted net loss per share applicable to common stockholders.... $ (0.91) $ (0.40) ========== ======== Shares used to compute pro forma basic and diluted net loss per share applicable to common stockholders.... 21,755 25,258 ========== ======== </TABLE> <TABLE> <CAPTION> March 31, 2000 ----------------------------- Pro Forma Actual Pro Forma As Adjusted ------- --------- ----------- (unaudited, in thousands) <S> <C> <C> <C> Consolidated Balance Sheet Data: Cash and cash equivalents and short-term investments.................................... $23,358 $23,358 $106,088 Working capital................................. $21,350 $21,350 $104,080 Total assets.................................... $33,724 $33,724 $116,454 Long-term debt and capital lease obligations, less current portion........................... $ 417 $ 417 $ 417 Total stockholders' equity...................... $26,250 $26,250 $108,980 </TABLE> See note 1 of notes to consolidated financial statements for an explanation of the determination of the number of shares used in computing per share data. The pro forma amounts above reflect the conversion of 15,450,236 shares of preferred stock into the same number of shares of common stock upon the completion of this offering. The pro forma as adjusted amounts above give effect to the sale of 4,000,000 shares of common stock in this offering and the sale of 700,000 shares of common stock in the private placement, in each case at an assumed offering price of $19.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses. In our discussion throughout this prospectus, references to the year ended December 31, 1997 refer to the period from February 21, 1997 (inception) through December 31, 1997.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001107403_link2gov_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001107403_link2gov_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should carefully read the entire prospectus, including "Risk Factors" and the Financial Statements, before making an investment decision. OUR BUSINESS We provide Internet and interactive voice response (IVR) solutions that enable convenient and inexpensive processing of government-to-citizen (G2C) and government-to-business (G2B) transactions. We partner with state and local government entities to deploy easily accessible e-government applications that allow citizens and businesses to transact directly with government agencies without the inconvenience and hassle ordinarily faced in routine transactions with government. Our applications benefit users by facilitating automobile-related transactions, such as renewing or obtaining driver's licenses, vehicle registrations and vanity plates and paying fines for traffic violations and parking citations; outdoor-related transactions, such as purchasing hunting and fishing licenses; and business-related transactions, such as renewing professional and occupational licenses and other corporate licenses. For governments, we provide the benefits of technologically advanced solutions that offer user-friendly interaction, while minimizing the overhead costs associated with maintaining the facilities and personnel needed to manually process routine G2C and G2B transactions. By offering both Internet and IVR solutions, we seek to provide access to e-government applications to the greatest number of potential users, including those without Internet access and those who prefer to use the telephone to complete their government transactions. Because our applications are widely accessible, we believe governments will be more willing to adopt our solutions than solutions that are solely Internet-based. Currently, we are operating Internet and/or IVR applications under 11 contracts with state or local agencies in six states, including Alabama, Arizona, Florida, Georgia, Indiana and Texas, as well as the District of Columbia. Additionally, we have Internet and/or IVR applications under development pursuant to nine contracts with five state agencies and four counties. We believe our applications are suitable for deployment in all 50 states, 3,000 counties, 36,000 municipalities and by the federal government. For the year ended December 31, 1999, we processed approximately 261,000 transactions. Our goal is to become the leading provider of Internet and IVR solutions for G2C and G2B transactions. We have adopted two principal strategies to achieve this goal: - First, we strive to develop business by securing long-term, exclusive contractual relationships with state and local governments. - Second, we have developed a comprehensive user acquisition strategy to encourage citizens and businesses to conduct their government transactions using our applications and destination sites. Our destination sites will be designed to encourage usage of our applications by providing users with relevant content, community and e-commerce opportunities. Our revenues are derived from fees we receive on each transaction completed through our Internet and IVR applications. Our transaction fees typically range from $2.00 to $6.50 and are paid to us by the user or the government. In addition to our fee-based revenues, we anticipate deriving revenues from the sale of advertising and sponsorships on our government applications and our destination sites. Our applications and destination sites will each focus on a particular subject or vertical industry, which we believe will be attractive as potential venues for targeted advertising and promotions. THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES NOR DOES IT SEEK OFFERS TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. Subject to Completion, Dated March 22, 2000 LINK2GOV CORP. - -------------------------------------------------------------------------------- 5,000,0000 SHARES COMMON STOCK - -------------------------------------------------------------------------------- This is the initial public offering of LINK2GOV Corp. We are offering 5,000,000 shares of our common stock. We anticipate that the initial public offering price will be between $ and $ per share. We will apply to list our common stock on the Nasdaq National Market under the symbol "LNKG." INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS PUBLIC COMMISSIONS TO LINK2GOV <S> <C> <C> <C> Per Share $ $ $ Total $ $ $ </TABLE> We have granted the underwriters the right to purchase up to 750,000 additional shares to cover over-allotments. DEUTSCHE BANC ALEX. BROWN PRUDENTIAL VOLPE TECHNOLOGY A UNIT OF PRUDENTIAL SECURITIES THE ROBINSON-HUMPHREY COMPANY J.C. BRADFORD & CO. THE DATE OF THIS PROSPECTUS IS , 2000 We were incorporated in Florida in 1995 and reincorporated in Tennessee in 1999. In February 2000, we completed our acquisition of Link2Gov.com, Inc., formerly the "Permit.com" division of iXL Enterprises, Inc., and in March 2000 we changed our name to LINK2GOV Corp. Our executive offices are located at One Burton Hills Boulevard, Suite 300, Nashville, Tennessee 37215, and our telephone number is (615) 297-2770. The names of our three destination sites, Link2Gov.com, Link2Auto.com and Link2Outdoors.com, as well as our logo are names and service marks that belong to us. We claim rights in other names and marks, including G2C and G2B Services(TM). We have registrations for other names and marks used in this prospectus. This prospectus also contains the trademarks and trade names of other entities which are the property of their respective owners. ------------------------ Unless otherwise indicated, all information in this prospectus assumes: - that the underwriters have not exercised their option to purchase additional shares; - the conversion of all outstanding shares of the Series A Convertible Preferred Stock into a total of 1,466,194 shares of common stock upon completion of this offering; and - all share and per share amounts reflect the ten-for-one stock split effected as a stock dividend to shareholders of record on October 4, 1999. THE OFFERING Shares offered by LINK2GOV......... 5,000,000 shares Common stock to be outstanding after this offering................ 26,088,905 shares(1) Estimated net proceeds to LINK2GOV........................... $ Use of proceeds.................... General corporate purposes, including working capital, funds for operations, capital expenditures, and potential acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol............................. LNKG Risk factors....................... See "Risk Factors" for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock. (1) The number of shares of our common stock that will be outstanding after this offering is based on 19,622,711 shares of common stock and 1,466,194 shares of the Series A Convertible Preferred Stock (which will convert into a total of 1,466,194 shares of common stock at the closing of this offering) outstanding as of March 21, 2000. It excludes: - any shares of common stock to be issued upon exercise of the overallotment option granted to the underwriters; - 3,463,378 shares of common stock issuable upon exercise of stock options outstanding as of March 21, 2000 at a weighted average exercise price of $2.10 per share; - 2,636,622 shares of common stock available for future grant under our employee stock option plan as of March 21, 2000; and - 986,851 shares of common stock issuable upon exercise of warrants outstanding as of March 21, 2000 at a weighted average exercise price of $2.32 per share. SUMMARY FINANCIAL DATA The following summary historical financial data for each of the years in the three-year period ended December 31, 1999 have been derived from our audited financial statements included elsewhere in this prospectus. The following summary pro forma financial data for the year ended December 31, 1999 have been derived from our pro forma financial information included elsewhere in this prospectus and present the statements of operations data as if the acquisition of Link2Gov.com, Inc. had occurred on January 1, 1999, and the balance sheet data as if the acquisition of Link2Gov.com, Inc. and the issuance of the Company's Series A Convertible Preferred Stock had occurred on December 31, 1999. The information set forth below should be read along with the audited financial statements and related notes, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the pro forma financial information, all as included elsewhere in this prospectus. <TABLE> <CAPTION> HISTORICAL PRO FORMA --------------------------- --------- 1997 1998 1999 1999(1) ------- ------- ------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Net Revenues.................................... $ 542 $ 819 $ 979 $ 996 Operating Expenses.............................. 377 558 780 1,222 Selling, General and Administrative Expenses.... 129 262 1,148 3,183 Depreciation and Amortization................... 1 2 4 2,077 Noncash Compensation Expense.................... 59 57 287 747 ------- ------- ------- ------- 566 879 2,219 7,229 ------- ------- ------- ------- Operating Loss.................................. (24) (60) (1,240) (6,233) Other Income (Expense), Net..................... (39) (43) (33) 126 ------- ------- ------- ------- Net Loss........................................ $ (63) $ (103) $(1,273) $(6,107) ======= ======= ======= ======= Basic and Diluted Net Loss Per Share............ $ (0.01) $ (0.01) $ (0.13) $ (0.38) ======= ======= ======= ======= Weighted Average Shares Outstanding............. 10,000 10,000 9,937 15,983 ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ------------------------------------ PRO FORMA AS ACTUAL PRO FORMA(1) ADJUSTED(2) ------ ------------ ------------ <S> <C> <C> <C> BALANCE SHEET DATA: Cash and Cash Equivalents............................. $ 704 $6,790 $ Working Capital (Deficit)............................. (447) 5,158 Total Assets.......................................... 1,250 17,759 Total Borrowings...................................... 698 698 Stockholders' Equity (Deficit)........................ (387) 15,613 </TABLE> - ------------------------- (1) Reflects the acquisition of Link2Gov.com, Inc. and related issuance of 6,045,773 shares of common stock and the sale of 1,466,194 shares of our Series A Convertible Preferred Stock effective January 25, 2000, as if each had occurred on January 1, 1999 for statements of operations data, and on December 31, 1999 for balance sheet data. (2) Reflects the sale of 5,000,000 shares of common stock offered by us in this offering at a public offering price of $ per share, after deducting the estimated underwriting discounts and commissions and our estimated offering expenses of $ , and the conversion of all outstanding shares of Series A Convertible Preferred Stock into 1,466,194 shares of common stock upon the closing of this offering.
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+SUMMARY To more fully understand the offering, you should read this entire document carefully, including the consolidated financial statements and the notes to the consolidated financial statements. The table of contents appears on the back cover. In this offering, certain current and former depositors of Mutual Savings Bank, and other members of the public, may purchase shares of common stock of Bank Mutual Corporation, a new corporation which will be a mid-tier holding company for Mutual Savings and First Northern Savings Bank. This prospectus gives you information about Bank Mutual, including related information about Mutual Savings, First Northern and the First Northern merger. It also gives you information about Mutual's regulatory restructuring, which includes the formation of a mutual holding company. In this prospectus, we also give you information about the terms of Bank Mutual's stock offering, including purchase limitations, means of subscribing, priorities in the offering and similar issues. OUR RESTRUCTURING, STOCK OFFERING AND FIRST NORTHERN MERGER Mutual Savings is restructuring into the mutual holding company form of organization. As part of the restructuring, we formed Bank Mutual, a mid-tier stock holding company, and Mutual Savings Bancorp, MHC, a mutual holding company which we call the MHC. As part of the transaction, Mutual Savings will convert from a mutual to a stock savings bank. At the conclusion of the restructuring, Bank Mutual will own all of the stock of Mutual Savings and, in turn, will be partially owned by the MHC. Simultaneously with the restructuring, we will complete two other transactions -- a merger transaction and a stock offering. As a result of the merger transaction, Bank Mutual will own First Northern Savings, which will continue to operate under that name. In significant part, the restructuring is being undertaken to accommodate the First Northern merger. In the stock offering, Bank Mutual is hereby offering for sale to the public a substantial portion of the shares of common stock not to be issued to the MHC in the restructuring. The following charts show our current structure, and new structure, which is commonly referred to as a mutual holding company structure with a mid-tier holding company. The new structure reflects completion of the restructuring, the offering and the First Northern merger. [FLOWCHART] -------------------------------------------------------------------------------- THE OFFERING -- QUESTIONS AND ANSWERS -------------------------------------------------------------------------------- THE OFFERING INCLUDES A SUBSCRIPTION OFFERING AND A COMMUNITY OFFERING. Q. HOW MUCH COMMON STOCK IS BEING ISSUED? A. Bank Mutual is offering for sale between 4,692,782 and 7,237,682 shares of common stock, subject to an increase to 8,701,000 shares, at a price of $10.00 per share. The offering range is based on an independent appraisal of the pro forma market value of the common stock, assuming completion of the offering and the First Northern merger. In addition to shares issued in the offering, shares will be issued in connection with the First Northern merger. Together, the amount of shares sold in the stock offering and issued to First Northern shareholders will represent 49.9% of the outstanding stock of Bank Mutual. The remaining 50.1% of the outstanding stock will be owned by Mutual Savings Bancorp, MHC. Q. WHO MAY PURCHASE BANK MUTUAL COMMON STOCK IN THE OFFERING? A. No one is obligated to buy stock, but eligible depositors of Mutual Savings have priority subscription rights to subscribe for Bank Mutual common stock during the subscription offering. Subscription rights have been granted, in order of priority, to: (1) depositors of Mutual Savings with aggregate deposits of $50 or more on January 31, 1999; (2) Bank Mutual's Employee Stock Ownership Plan; (3) depositors with aggregate deposits of $50 or more on June 30, 2000; (4) depositors on August 31, 2000; and (5) directors, officers and employees of Mutual Savings who are not eligible in one of the previous categories. If any shares remain unsubscribed in the subscription offering, Bank Mutual may sell shares to the public, with a preference to residents of the counties in which Mutual Savings or First Northern Savings maintains branch offices. The counties are listed on pages 127 and 128. The community offering may be conducted during or after the subscription offering. Ryan, Beck & Co., Inc. will use its best efforts to assist us in selling our stock. Ryan, Beck is not obligated to take or purchase any shares of common stock in the offering. See "The Restructuring and the Offering -- the Offering." Q. AS AN ELIGIBLE DEPOSITOR OF MUTUAL SAVINGS AT JANUARY 31, 1999, JUNE 30, 2000 OR AUGUST 31, 2000, MAY I REGISTER STOCK SHARES IN SOMEONE ELSE'S NAME? A. No. On your Stock Order Form, you must register in the name or names of deposit account holders at the applicable date. You may not add names of non-account holders or depositors eligible only at a later date. Q. ARE MY SUBSCRIPTION RIGHTS AS AN ELIGIBLE DEPOSITOR TRANSFERABLE? A. No. If you order stock in the subscription offering, you will be required to state that you are purchasing the stock for yourself and that you have no agreement or understanding to sell or transfer your rights. Federal law prohibits you from selling or giving away your subscription rights. We intend to take legal action against anyone who sells or gives away their subscription rights. We will not accept your order if we have reason to believe that you sold or transferred your subscription rights. If anyone offers to give you money to buy stock in your name, in exchange for later transferring the stock, or if someone requests to share in proceeds upon your future sale of Bank Mutual stock, please inform our Stock Information Center at (800) 580-0029. Q. WHAT IS THE PRICE PER SHARE IN THE OFFERING? A. The stock is offered at $10.00 per share. All purchasers, including Mutual Savings' directors, officers and employees, will pay the same price per share. NO COMMISSION WILL BE CHARGED TO THOSE WHO PURCHASE STOCK IN THE OFFERING. Q. WILL MANAGEMENT OF MUTUAL SAVINGS PURCHASE SHARES? A. Yes. Reflecting their commitment to our future, Mutual Savings' 11 executive officers and directors, and their associates, expect to purchase an aggregate of 253,000 shares in the offering. Q. HOW DO I PURCHASE COMMON STOCK IN THE OFFERING? A. Complete the Stock Order Form and submit it, with payment, so that it is received by 10:00 a.m. central time, on October 16, 2000. Orders may not be changed and are not cancelable. Payment may be made by personal check, bank check, money order or by authorization of withdrawal from your savings or certificate of deposit accounts at Mutual Savings. (If you wish to use IRA funds, see the discussion below). ANY APPLICABLE PENALTY FOR EARLY WITHDRAWAL FROM A CERTIFICATE OF DEPOSIT TO PURCHASE STOCK IN THE OFFERING WILL BE WAIVED. Authorized withdrawals will not be made until the completion of the offering, but the designated funds will not be available to you for withdrawal in the interim. Q. MAY I USE MY IRA TO PURCHASE THE COMMON STOCK? A. Yes. However, stock shares purchased with retirement (or "tax-qualified") funds must be held in self-directed retirement accounts. By regulation, Mutual Savings' IRAs are not self-directed. In order to purchase shares using funds in a Mutual Savings IRA, you will need to transfer the IRA (or the portion necessary to pay for the shares) to an independent trustee, such as a brokerage firm, that offers self-directed retirement accounts. BECAUSE INDIVIDUAL SITUATIONS VARY AND PROCESSING TAKES TIME, WE RECOMMEND THAT YOU CONTACT THE STOCK INFORMATION CENTER BY OCTOBER 6, 2000 FOR ASSISTANCE WITH PURCHASES USING YOUR MUTUAL SAVINGS IRA OR ANOTHER RETIREMENT ACCOUNT THAT YOU MAY HAVE. Whether you may use such funds for the purchase of shares in the offering may depend on timing constraints and, possibly, the institution where the funds are currently held. Q. HOW MAY I DELIVER MY STOCK ORDER FORM? A. Delivery may be made by (1) mailing the Stock Order Form in the Stock Order Reply Envelope provided in your stock offering materials, (2) overnight delivery of the Stock Order Form to the address indicated on the back of the Stock Order Form or (3) hand-delivery to our Stock Information Center, located at our corporate headquarters, 4949 West Brown Deer Road, Brown Deer, Wisconsin. Please do not deliver Stock Order Forms to our branches. Q. WHAT ARE THE MINIMUM AND MAXIMUM NUMBER OF SHARES THAT I MAY ORDER IN THE OFFERING? A. The minimum purchase is 25 shares. No one may purchase more than $800,000 (80,000 shares) of common stock in the subscription offering or in the community offering. Further, no one, together with associates or persons acting in concert, may purchase more than $1,000,000 of common stock in all categories of the offering, combined. We may increase or decrease either of the maximum purchase limitations at our discretion. If we receive orders for a greater number of shares than we are offering, we will allocate the shares that we issue; this may result in your receiving a smaller number of shares than you ordered. For additional information on these purchase limitations, see "The Restructuring and The Offering -- Limitations on Common Stock Purchases." Q. WHEN DOES THE OFFERING PERIOD END? A. The deadline for receipt of completed Stock Order Forms is 10:00 a.m. central time, on October 16, 2000. We may extend the offering, without notice to you and without resoliciting your order, until November 30, 2000. Office of Thrift Supervision regulations require that the offering be completed by February 21, 2002. Q. WILL I RECEIVE INTEREST ON STOCK PURCHASE FUNDS? A. Yes. Funds that you submit by check or money order will be immediately cashed and will earn interest at Mutual Savings' passbook savings rate from the date received until the completion of the offering. At that time, a check will be mailed to you reflecting interest earned. With respect to an account withdrawal for the purchase of stock, interest will continue to accrue in the account at its contractual rate until the funds are withdrawn, at the completion of the stock offering. Q. CAN MY LOCAL MUTUAL SAVINGS BRANCH ASSIST ME WITH PURCHASING SHARES OR COMPLETING MY STOCK ORDER FORM? A. No. Our branch personnel may not, by law, assist with investment-related questions about the offering. We have established a Stock Information Center that is staffed by registered representatives able to assist you. The Stock Information Center can be reached at the number shown below. Q. MAY I OBTAIN A LOAN OR LINE OF CREDIT FROM MUTUAL SAVINGS TO PAY FOR MY STOCK? A. No. Regulations do not allow Mutual Savings to make loans for this purpose, but other financial institutions may be willing to make such a loan. Q. WILL THE COMMON STOCK BE INSURED BY THE FDIC? A. No. Bank Mutual common stock is not a deposit and cannot be insured or guaranteed by the FDIC or any other government agency. The trading price of common stock may fluctuate, so common stock is subject to investment risk, including total loss of principal invested. Q. WHEN WILL I RECEIVE MY STOCK CERTIFICATE? A. The stock will commence trading, and stock certificates will be mailed to investors, as soon as practicable after the offering is completed. Please be aware that you may not be able to sell the shares that you purchased until you have received a stock certificate. Q. WILL DIVIDENDS BE PAID ON BANK MUTUAL STOCK? A. We anticipate that Bank Mutual will pay an annual cash dividend of $0.28 per share, payable quarterly at $0.07 per share, starting for the first quarter after the completion of the offering. There can be no assurance that dividends will be paid or that they will not subsequently be reduced or eliminated. The Bank Mutual board of directors will make a decision quarterly concerning whether to pay dividends and, if so, the dividend amount. Q. HOW MAY I PURCHASE OR SELL BANK MUTUAL STOCK SHARES IN THE FUTURE? A. You may purchase or sell shares through your stockbroker or a discount brokerage firm. The stock will trade on the Nasdaq National Market, under symbol "BKMU". We cannot assure, however, that an active and liquid market for the common stock will develop, and we cannot assure that you will be able to sell shares at or above the $10.00 per share purchase price paid in the offering. ADDITIONAL QUESTIONS? PLEASE CALL OUR STOCK INFORMATION CENTER (800)580-0029 FROM 9:00 A.M. TO 4:00 P.M., CENTRAL TIME, MONDAY THROUGH FRIDAY MUTUAL SAVINGS AND RELATED ENTITIES Mutual Savings Bank Mutual Savings is a community-oriented savings bank which emphasizes traditional financial services to individuals and businesses within its market areas. Our principal business is attracting retail deposits from the general public and investing those deposits, together with funds generated from other operations, in residential mortgage loans, consumer loans, multi-family and commercial real estate loans, and commercial business loans. We also invest in various mortgage-related securities and investment securities. We seek to differentiate ourselves from our competitors by: - creating financial security for our customers in ways that continually emphasize quality, high value and uncompromising integrity; - providing our employees with an environment that encourages and recognizes professional development, creativity and ambition; and - supporting our communities in activities that improve the quality of life for all of their residents. Mutual Savings has 50 branches located in Wisconsin, primarily in the southern and northwestern parts of the state, and one office in eastern Minnesota. It serves over 80,000 households. At June 30, 2000, it had assets of $1.8 billion, deposits of $1.3 billion and equity of $167.6 million. By asset size, it is the largest mutual savings institution headquartered in Wisconsin, and one of the largest mutual savings institutions in the country. Mutual Savings has grown both through acquisitions and internal growth. Its most recent acquisition was of the $730.7 million asset First Federal Bancshares of Eau Claire in March 1997. As part of this transaction, Mutual Savings is converting from a Wisconsin-chartered mutual savings bank into a federal stock savings bank. When we refer to Mutual Savings, we also include the federal savings bank after that conversion. Bank Mutual Corporation Bank Mutual will become a holding company by owning all of the common stock of Mutual Savings and of First Northern Savings after the restructuring. Bank Mutual has not engaged in any business to date. The primary office of Bank Mutual is located at 4949 West Brown Deer Road, Brown Deer, Wisconsin 53223. Brown Deer is a suburb of Milwaukee, Wisconsin. After the restructuring, the stock offering and the First Northern merger, we expect Bank Mutual to be the fifth largest financial institution headquartered in the state of Wisconsin, based on pro forma total assets of $2.7 billion at June 30, 2000. Mutual Savings Bancorp, MHC The MHC will own more than half of the outstanding common stock of Bank Mutual after the restructuring. We do not expect that the MHC will engage in any business activity other than owning a majority of the common stock of Bank Mutual and managing dividends, if any, it receives from Bank Mutual. We expect that the MHC initially will waive the receipt of dividends declared by Bank Mutual. REASONS FOR THE RESTRUCTURING By implementing the plan of restructuring, we will be organized in the stock form, a corporate structure used by most businesses, including many savings banks. This structure will increase our operating flexibility, allowing us to better compete with other financial institutions and more easily take advantage of business opportunities. The restructuring is necessary in order to provide Bank Mutual stock to be sold in the offering and to be used as part of the consideration in the First Northern merger. The opportunity for the First Northern merger is the reason we are proposing the restructuring at this time. In effecting the restructuring, we will preserve our ability to remain independent and community-oriented, because a majority of Bank Mutual's stock will be controlled by the MHC, rather than being held by public shareholders. HOW WE DETERMINED THE OFFERING RANGE AND THE $10.00 PRICE PER SHARE The offering range is based on an independent appraisal of Mutual Savings' pro forma market value prepared by RP Financial, LC, an appraisal firm experienced in appraisals of savings institutions. The appraisal incorporated an analysis of a peer group of publicly-traded mutual holding company institutions that RP Financial considered to be comparable to Mutual Savings, including an evaluation of the average and median price-to-earnings, price-to-core earnings, price-to-book value, price-to-tangible book value and price-to-assets ratios indicated by the market prices of the peer group companies, with such ratios adjusted to their fully converted equivalent basis. RP Financial applied the peer group's fully converted pricing ratios, as adjusted for certain qualitative valuation adjustments to account for differences between Mutual Savings and the peer group, to Mutual Savings' pro forma earnings, core earnings, book value, tangible book value and assets to derive the estimated pro forma market value of Mutual Savings. RP Financial has estimated that in its opinion as of August 28, 2000 the estimated pro forma market value of Bank Mutual was between $144.5 million and $195.5 million, with a midpoint of $170.0 million. The appraisal placed the greatest weight on the price-to-earnings approaches to valuation, but also considered the price-to-book value approaches and price-to-assets approach. Compared to the average fully converted pricing ratios of the peer group, Mutual Savings' pro forma fully converted ratios at the estimated pro forma market value indicated a discount of 5% based on the price-to-core earnings approach, a discount of 22% based on the price-to-book value approach, a discount of 7% based on the price-to-tangible book value approach, and a discount of 45% based on the price-to-assets approach. The estimated appraised value and the resulting discounts relative to the peer group's fully converted pricing ratios took into consideration the potential benefits of the restructuring and the merger. The appraisal also noted Mutual Savings' fully converted pro forma price-to-book value and price-to-tangible book value ratios reflected premiums relative to the issuance pricing of recent conversion and mutual holding company transactions. Compared to most of the recent conversion and mutual holding company transactions, Mutual Savings has more assets, greater market value and anticipated liquidity in the shares, and a more leveraged balance sheet (resulting in a lower tangible equity-to-assets ratio), which all contributed to the premium price-to-book value and price-to-tangible book value ratios indicated relative to the recent conversions and mutual holding companies. The board of directors of Mutual Savings has determined to sell shares in the stock offering at $10.00 share. Based on that price, assuming the issuance of 5,025,485 shares to former shareholders of First Northern, the pro forma market value of Mutual Savings ranged between $194.8 million and $245.8 million, with a midpoint pro forma market value of $220.2 million. This is the "estimated valuation range." The stock issuance plan provides that total outstanding shares must reflect the estimated valuation range and that public ownership will equal 49.9% of outstanding shares, while the MHC's ownership will equal 50.1%. Given the 5,025,485 shares to be issued to the former shareholders of First Northern, this results in an offering range of between 4,692,782 and 7,237,682 shares, with a midpoint of 5,965,232 shares. Following the stock offering and First Northern merger, shares outstanding to the public will therefore range between 9,718,267 and 12,263,167, with a midpoint of 10,990,717 shares. Total outstanding shares, held by the MHC and public owners, will range between 19,475,485 and 24,575,485. The appraisal was based in part upon Mutual Savings' financial condition and operations, the financial condition and operations of First Northern, the effect of the First Northern merger and the effect of the additional capital Bank Mutual will raise from the sale of common stock. RP Financial's independent appraisal will be updated at the end of the offering process before we complete our restructuring. At that time, the estimated pro forma market value may change, but there will be no resolicitation of subscribers if it is neither less than the minimum nor greater than the adjusted maximum of the estimated valuation range. The $10.00 price per share was chosen by Mutual Savings' board of directors because it is the price per share most commonly used in stock offerings involving conversions and reorganizations of savings institutions. OUR DIRECTORS, OFFICERS AND EMPLOYEES WILL HAVE ADDITIONAL COMPENSATION AND BENEFIT PROGRAMS AFTER THE RESTRUCTURING We are adding a new benefit plan for our officers and employees at no cost to them, and will enter into new employment agreements. - Employee Stock Ownership Plan. This plan will cover most of Mutual Savings' employees, and may be extended to First Northern Savings' and other employees. We will lend it money to buy up to 8% of the shares we sell in the offering and issue in the First Northern merger, combined. The ESOP will buy the shares either in the offering or in the open market. The plan will allocate the stock to employees over a ten-year period as additional compensation for their services. - Employment Agreements. Mutual Savings has employment agreements with Michael T. Crowley, Sr. and Michael T. Crowley, Jr., which will continue after the restructuring. If Mutual Savings discharges either of them without cause, or if either of them resigns because Mutual Savings does not meet its obligations under these agreements, it must make a termination payment. Mutual Savings is also entering into new employment agreements with four other executive officers. The new employment agreements will provide these officers with rights they do not currently have to receive severance benefits in the event of their actual or constructive discharge without cause. - First Northern Employment Agreements. In connection with the First Northern merger, we will assume the employment agreement of First Northern's chief executive officer and offer to replace existing employment agreements for the other executive officers of First Northern. These agreements will have provisions similar to those of the Mutual Savings employment agreements, except that Mr. Meeuwsen's agreement is for a period of five years and the others are for three years. We also plan to add the following stock-based benefit plans for our directors, officers and employees in the near future: - Stock Option Plan. Under this plan, Bank Mutual may grant officers, directors and employees options to purchase Bank Mutual stock at a price that is set on the date we grant the option. The price that we set will not be less than our stock's current trading price when we grant the options, so the options will have realizable value only if our stock price increases. Recipients of options will have up to ten years to exercise their options. If we implement the stock option plan more than one year after restructuring, it may also include provisions allowing payment upon a change in control or retirement. The OTS has proposed regulations which would allow such a provision earlier. - Management Recognition Plan. This plan will allow selected officers, directors and employees to receive shares of our stock, without making any payment, if they work for us until the end of a specified service period or attain other performance goals. If we implement the management recognition plan more than one year after restructuring, it may also include provisions allowing payment upon a change in control or retirement. The OTS has proposed regulations which would allow such a provision earlier. Assuming we sell 5,965,232 shares in the offering and issue 5,025,485 shares in the First Northern merger, we expect to ask our shareholders for approval to grant options to purchase up to 1,099,071 of our shares and make stock grants under a management recognition plan of up to 367,895 shares under the plans described above. We will not implement a stock option plan or management recognition plan unless shareholders approve them. We do not expect to ask Bank Mutual shareholders to approve these plans until at least six months after we complete the offering. We expect to obtain the shares we would need for these plans in the stock offering and/or through stock repurchases on the open market afterward. The following table presents the dollar value of the shares that we expect to grant under the employee stock ownership plan and the contemplated management recognition plan and of those underlying options to be granted under the stock option plan, and the percentage of Bank Mutual's outstanding common stock that will be represented by these shares, all assuming the issuances discussed above. We based the value of the shares for the employee stock ownership plan and management recognition plan on a price of $10.00 per share in this offering. <TABLE> <CAPTION> PERCENTAGE OF TOTAL COMMON STOCK ISSUED VALUE OF IN THE OFFERING AND BENEFIT PLAN SHARES TO BE GRANTED FIRST NORTHERN MERGER ------------ -------------------- --------------------- (IN MILLIONS) <S> <C> <C> Employee stock ownership plan..................... $ 8.8 8% Management recognition plan....................... 3.3 3 Stock option plan................................. --* 10 ----- -- $12.1 21% </TABLE> ------------------------- * We expect that options will be granted at then-current market prices. The fair value of the options will depend upon whether there is subsequent appreciation in Bank Mutual's stock price, the amount of that appreciation and other factors. HOW WE INTEND TO USE THE PROCEEDS WE RAISE FROM THE OFFERING Assuming we sell 5,965,232 shares in the offering and that we issue 5,025,485 shares to First Northern shareholders, we intend to use the net proceeds from the offering as follows: - $27.0 million will be used as part of the cash consideration to First Northern shareholders in the First Northern merger, reflecting that 60% of the consideration is paid in cash; - $8.8 million will be loaned to the employee stock ownership plan to fund its purchase of common stock; - $20.2 million will be retained by Bank Mutual. The amount of cash needed for the First Northern merger will vary between 30% and 60% of the total merger consideration. Assuming that 60% of the total consideration is paid in cash, the total cash payment will be approximately $75.4 million. If a higher percentage is paid in stock, the cash needs will decrease. For example, if 50% of the total consideration is paid in cash and 50% in stock, the total cash payment will be approximately $62.8 million. See "The Parties -- First Northern Savings; The First Northern Merger". Bank Mutual will obtain the additional funds to pay the balance of the purchase price, together with the costs of the merger and required cash-out of First Northern stock options, from Mutual Savings' and First Northern Savings' existing capital and earnings. Bank Mutual may use some of the net proceeds of the offering as a possible source of funds to pay dividends to shareholders, to repurchase common stock, to finance the possible acquisition of other financial institutions and other businesses that are related to banking, or for other general corporate purposes. TERMINATION Mutual Savings' Board of Directors may terminate the restructuring at any time. For example, it could terminate the plan of restructuring if we do not receive regulatory approval, if conditions for the First Northern merger are not met, or if any other condition for the restructuring is not met. If we terminate the restructuring, any subscription funds sent to us will be returned together with interest at Mutual Savings' passbook rate of interest promptly after the termination. If you elected to have your subscription paid by a withdrawal from a Mutual Savings account, the "hold" placed on your account will be released. NO CHANGES TO DEPOSIT AND LOAN RELATIONSHIPS The transactions we describe in this prospectus will not affect your deposit or loan relationships with Mutual Savings or the FDIC insurance on your accounts. The federally-chartered stock bank that will be a successor to the state-chartered Mutual Savings will continue all Mutual Savings' accounts, loans and similar business relationships without a change in terms. POSSIBLE CONVERSION OF THE MHC TO STOCK FORM In the future, the MHC may convert from mutual to capital stock form, in a transaction commonly known as a "full conversion." If MHC were to undertake a full conversion, we expect that Bank Mutual's public shareholders would own the same percentage of the resulting entity as they owned prior to the full conversion. Any full conversion would need to be conducted under laws and regulations then in effect, which could affect what Bank Mutual shareholders would actually receive. The board of directors has no current plan to undertake a full conversion transaction, and we cannot assure that one will occur. For a description of this possible full conversion, see "The Restructuring and The Offering -- Possible Conversion of the MHC to Stock Form." HOW YOU MAY OBTAIN ADDITIONAL INFORMATION REGARDING THE OFFERING If you have any questions regarding the offering or the restructuring, please call the Stock Information Center at (800) 580-0029, Monday through Friday, between 9 a.m. and 4 p.m. central time. FIRST NORTHERN First Northern Savings Bank, S.A. is a Wisconsin-chartered stock savings and loan association, with 19 branches located in northeastern Wisconsin. First Northern Capital Corp. wholly owns First Northern Savings. At June 30, 2000, First Northern had assets of $904.9 million, deposits of $568.6 million and shareholders' equity of $75.6 million. The primary office of First Northern is located at 201 North Monroe Avenue, Green Bay, Wisconsin 54305. As part of the transactions which Mutual contemplates, Bank Mutual will acquire First Northern Capital Corp. simultaneously with completion of this offering. Mutual Savings and First Northern have signed a merger agreement for that acquisition. As part of this transaction, First Northern Savings will convert into a federally-chartered savings bank; when we refer to First Northern Savings, we also include the federal savings bank after that conversion. After the transaction, First Northern Savings will be wholly-owned by Bank Mutual. Mutual Savings does not expect to complete the restructuring and stock offering if it does not believe that it will be able to complete the First Northern merger. We also do not expect to complete the First Northern merger if it does not believe that it will be able to complete the restructuring and stock offering. For further information about First Northern and the merger, see "The Parties" and "Index to Financial Statements -- First Northern Data." THE FIRST NORTHERN MERGER Bank Mutual will acquire First Northern Savings in a merger transaction. The consideration payable to First Northern shareholders will be paid partly in cash and partly in Bank Mutual common stock. Before the merger closes, Mutual will determine the relative proportion between cash and stock, but the stock portion must be between 40% and 70% of the total consideration paid. The stock percentage will be at least 40%. If shares of Bank Mutual common stock are available after all orders have been filled in the subscription offering, Bank Mutual may issue any amount of such available shares to former First Northern shareholders, in lieu of cash. Under no circumstances, however, will more than 70% of the consideration in the First Northern merger be paid in shares of common stock. In this prospectus, unless we say otherwise, we assume that 40% of the consideration will be Bank Mutual stock; in that case, Bank Mutual will issue approximately 5,025,485 shares and pay approximately $75.4 million in cash. We also assume in all calculations relating to the First Northern merger that the number of First Northern shares outstanding is the number outstanding as of June 30, 2000. This number would change if Mutual Savings elects a higher percentage to be paid in stock. Mutual Savings may vary the stock percentage between 40% and 70% at its discretion. For example, it may increase the stock percentage above 40% if shareholders of First Northern request to receive more than 40% of the consideration in stock. For example, if the stock percentage is 50%, Bank Mutual will issue 6,281,856 shares and pay approximately $62.8 million in cash in the merger. The total number of shares that Bank Mutual may issue in its stock offering and the First Northern merger combined is limited. The limits arise out of OTS regulatory requirements. - Bank Mutual may not issue shares beyond the maximum of the appraisal, as adjusted. - The MHC must own at least a majority of the shares of Bank Mutual. Both the number of shares to be sold by Bank Mutual in the stock offering and the number of shares to be issued in the First Northern merger can vary within those limits. Thus, in some circumstances, if Bank Mutual issues more shares in one transaction, it may be limited to issuing fewer shares in the other. From a financial perspective, it will not make a difference to Bank Mutual whether a share is issued in the First Northern merger or sold in the stock offering, since the issuance of additional shares in the First Northern merger will result in a corresponding decrease in Bank Mutual's cash requirements in the merger. From Bank Mutual's perspective, the result is the same whether Bank Mutual sells a share for $10.00, and then pays that $10.00 to a First Northern shareholder, or if it issues a First Northern shareholder a share of common stock but does not have to pay the $10.00 in cash. The Mutual Savings' board of directors believes that the First Northern merger is attractive for various reasons. From Mutual Savings' perspective, the First Northern merger would: - combine two financial institutions of complementary business focuses. - significantly expand our presence in northeastern Wisconsin, allowing us to enter attractive new markets through an established and attractive operation. - permit us to acquire this presence for fair consideration. - allow elimination of certain duplicative costs and achievement of potential economies of scale over time by increasing size. - complement the restructuring by providing a productive use for some of the offering's cash proceeds. - obtain additional experienced and well-qualified employees. The merger will be accounted for as a purchase. Initially after the restructuring, Bank Mutual expects to maintain First Northern Savings as a subsidiary separate from Mutual Savings. See "The Parties -- First Northern Savings; The First Northern Merger." MUTUAL SAVINGS SELECTED FINANCIAL AND OTHER DATA In the following table, Mutual Savings provides selected financial data for its past five fiscal years. Mutual Savings derived this information from its audited financial statements, although the table itself is not audited. The table also includes information at June 30, 2000 and for the six months ended June 30, 2000 and 1999, derived from Mutual Savings' unaudited financial statements. Operating results for the interim periods do not necessarily indicate the results of Mutual Savings that you may expect for the entire year. The following data should be read together with Mutual Savings' consolidated financial statements and related notes and "Management's Discussion and Analysis" which appear in this prospectus beginning at pages F-1 and 51, respectively. We are presenting information for Mutual Savings rather than Bank Mutual because Bank Mutual has not had any operations or material assets prior to this time. In the restructuring, Bank Mutual will become the sole shareholder of Mutual Savings immediately prior to the First Northern merger. In 1999, non-interest expense includes a special write-off of intangible assets of $15.6 million which Mutual deemed to be impaired. The intangible assets resulted from the 1997 acquisition of First Federal. The effect on results for the year was a decrease of $13.6 million. See footnote 2 to Mutual Savings' consolidated financial statements. Also, in 1996, non-interest expense includes a one-time FDIC Savings Association Insurance Fund ("SAIF") assessment of $6.4 million. All SAIF insured savings associations were specially assessed in this quarter. The effect on net income of the assessment in 1996 was a decrease of $3.9 million. <TABLE> <CAPTION> AT DECEMBER 31, AT JUNE 30, -------------------------------------------------------------- 2000 1999 1998 1997 1996 1995 ----------- ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> SELECTED FINANCIAL CONDITION DATA: Total assets............... $1,759,170 $1,769,506 $1,872,862 $1,826,080 $1,169,271 $1,205,092 Loans receivable, net...... 1,127,987 1,082,795 1,037,589 1,255,082 825,131 790,713 Loans available for sale... 1,632 541 27,723 13,397 4,357 2,479 Investment securities available for sale....... 57,461 57,763 116,534 159,208 159,513 120,081 Mortgage-related securities available for sale....... 461,377 374,100 270,897 225,906 90,452 196,902 Total cash and cash equivalents.............. 31,817 178,959 330,248 79,064 37,151 55,234 Federal Home Loan Bank stock.................... 14,585 13,537 13,537 20,237 8,001 7,841 Intangible assets.......... 11,027 11,496 29,786 32,589 -- -- Foreclosed real estate, net...................... 2,977 3,018 3,505 159 258 333 Total deposits............. 1,300,613 1,343,007 1,398,858 1,362,330 994,283 1,004,559 Total borrowings........... 264,667 242,699 270,822 270,867 -- 25,000 Total equity............... 167,588 163,820 175,743 163,052 151,294 147,031 </TABLE> <TABLE> <CAPTION> FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31, ----------------- -------------------------------------------------- 2000 1999 1999 1998 1997 1996 1995 ------- ------- -------- -------- -------- ------- ------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> SELECTED OPERATING DATA: Total interest income....... $60,482 $58,653 $118,302 $125,470 $115,993 $81,674 $81,793 Total interest expense...... 37,061 38,128 75,337 80,017 72,194 49,595 50,390 ------- ------- -------- -------- -------- ------- ------- Net interest income....... 23,421 20,525 42,965 45,453 43,799 32,079 31,403 Provision for loan losses... 236 203 350 637 1,065 672 597 ------- ------- -------- -------- -------- ------- ------- Net interest income after provision for loan losses................. 23,185 20,322 42,615 44,816 42,734 31,407 30,806 ------- ------- -------- -------- -------- ------- ------- Non-interest income: Fees and service charges................ 3,109 2,937 6,100 6,097 4,758 2,816 2,840 Gain on sale of loans, mortgage-related securities and investment securities.. 43 328 655 1,025 474 333 563 Other non-interest income................. 864 634 1,229 1,318 927 520 406 ------- ------- -------- -------- -------- ------- ------- Total non-interest income.......... 4,016 3,899 7,984 8,440 6,159 3,669 3,809 Non-interest expense: Amortization of intangible assets................. 469 1,355 18,290 2,738 1,941 -- -- Other non-interest expense................ 16,217 16,590 32,989 32,783 30,145 29,904 22,790 ------- ------- -------- -------- -------- ------- ------- Total non-interest expense......... 16,686 17,945 51,279 35,521 32,086 29,904 22,790 ------- ------- -------- -------- -------- ------- ------- Income before income taxes.................. 10,515 6,276 (680) 17,735 16,807 5,172 11,825 Income tax expense.......... 4,001 2,386 3,803 6,584 6,622 1,671 4,181 ------- ------- -------- -------- -------- ------- ------- Net income (loss)......... $ 6,514 $ 3,890 $ (4,483) $ 11,151 $ 10,185 $ 3,501 $ 7,644 ======= ======= ======== ======== ======== ======= ======= </TABLE> <TABLE> <CAPTION> AT OR FOR THE SIX MONTHS ENDED JUNE 30, AT OR FOR THE YEARS ENDED DECEMBER 31, ----------------- ----------------------------------------- 2000 1999 1999 1998 1997 1996 1995 ------- ------- ------ ------ ----- ------ ------ <S> <C> <C> <C> <C> <C> <C> <C> SELECTED FINANCIAL RATIOS AND OTHER DATA: PERFORMANCE RATIOS: Return on average assets............ 0.74% 0.42% (0.24)% 0.60% 0.62% 0.29% 0.64% Return on average assets excluding amortization of intangible assets............................ 0.79 0.54 0.63 0.73 0.72 0.29 0.64 Return on average equity............ 7.95 4.41 (2.55) 6.57 6.52 2.34 5.42 Return on average equity excluding amortization of intangible assets............................ 8.46 5.69 6.63 7.95 7.59 2.34 5.42 Net interest rate spread(a)......... 2.31 1.94 2.03 2.16 2.31 2.09 2.07 Net interest margin(b).............. 2.78 2.33 2.44 2.58 2.76 2.77 2.69 Non-interest income to average assets............................ 0.46 0.42 0.43 0.46 0.37 0.31 0.32 Non-interest expense (excluding amortization of intangible assets) as a percent of average assets.... 1.85 1.79 1.79 1.77 1.82 1.97 1.90 Efficiency ratio(c)................. 59.11 67.92 64.75 60.83 60.34 83.65 64.72 Average interest-earning assets to average interest-bearing liabilities....................... 1.11x 1.09x 1.10x 1.09x 1.10x 1.16x 1.14x CAPITAL RATIOS: Average equity to average assets.... 9.37% 9.51% 9.56% 9.17% 9.44% 12.54% 11.72% Equity to assets.................... 9.53 9.44 9.26 9.38 8.93 12.94 12.20 Leverage capital.................... 9.37 8.04 8.66 7.78 7.40 12.69 12.26 Total risk-based capital............ 18.69 17.60 18.51 17.02 14.80 24.58 24.04 ASSET QUALITY RATIOS: Non-performing loans to total loans............................. 0.20% 0.53% 0.44% 0.65% 0.84% 0.29% 0.10% Non-performing assets to total assets............................ 0.30 0.48 0.44 0.55 0.58 0.23 0.09 Allowance for loan losses to non- performing loans.................. 319.14 123.21 144.54 101.86 68.65 163.31 433.21 Allowance for loan losses to non- performing assets................. 136.33 77.62 88.79 66.98 67.62 147.46 303.94 Allowance for loan losses to total loans............................. 0.63 0.65 0.64 0.66 0.57 0.48 0.43 OTHER DATA: Offices............................. 51 51 51 52 53 33 33 </TABLE> ------------------------- (a) "Net interest rate spread" means the difference between the average yield on the average balance of interest-earning assets and the average cost of the average balance of interest-bearing liabilities. (b) "Net interest margin" means the net interest income divided by the average balance of interest-earning assets. (c) Computed using net interest income plus non-interest income as the denominator and non-interest expense (excluding amortization of intangible assets) as the numerator. FIRST NORTHERN SELECTED FINANCIAL AND OTHER DATA In the following table, we provide selected financial data for First Northern for its past five fiscal years. First Northern derived this information from its audited financial statements, although the table itself is not audited. The table also includes information at June 30, 2000 and for the six months ended June 30, 2000 and 1999, derived from First Northern's unaudited financial statements. Operating results for the interim periods do not necessarily indicate the results of First Northern that you may expect for the entire year. The following data should be read together with First Northern's consolidated financial statements and related notes and First Northern "Management's Discussion and Analysis of Financial Condition and Results of Operations" which appear beginning on page FN-1 of this prospectus. In 1996, non-interest expense includes a one-time SAIF assessment of $2.9 million. The effect on net income of this assessment in 1996 was a decrease of $1.7 million. Earnings per share in 1996 were decreased by $0.19. <TABLE> <CAPTION> AT AT DECEMBER 31, JUNE 30, ---------------------------------------------------- 2000 1999 1998 1997 1996 1995 --------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> SELECTED FINANCIAL CONDITION DATA: Total assets................... $904,875 $839,623 $719,713 $667,696 $615,503 $553,467 Loans receivable, net.......... 795,094 736,880 631,739 593,529 553,995 500,535 Loans held for sale............ 2,083 1,085 3,075 2,119 2,532 2,989 Securities held to maturity.... 36,435 36,263 35,263 31,906 25,908 23,388 Investment securities available for sale..................... 10,941 8,444 9,205 6,799 5,635 2,978 Mortgage-related securities available for sale........... 5,304 5,554 996 932 1,837 2,013 Total cash and cash equivalents.................. 11,234 12,372 7,211 964 3,563 1,274 Federal Home Loan Bank stock... 12,500 9,250 5,250 5,250 3,773 3,768 Foreclosed real estate, net.... 456 382 106 153 189 136 Total deposits................. 568,625 566,908 542,372 481,788 458,323 449,954 Total borrowings............... 247,353 185,899 91,977 103,277 77,272 21,000 Total shareholders' equity..... 75,604 76,795 76,093 73,817 70,224 72,579 Book value per share........... $ 9.03 $ 8.98 $ 8.68 $ 8.34 $ 8.00 $ 7.97 Shares outstanding, net of treasury shares.............. 8,376 8,549 8,765 8,846 8,775 9,110 </TABLE> <TABLE> <CAPTION> FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31, ----------------- ----------------------------------------------- 2000 1999 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> SELECTED OPERATING DATA: Total interest income....... $30,051 $25,218 $52,770 $49,690 $46,596 $41,876 $39,025 Total interest expense...... 19,186 14,335 30,686 29,003 26,491 23,203 22,036 ------- ------- ------- ------- ------- ------- ------- Net interest income....... 10,865 10,883 22,084 20,687 20,105 18,673 16,989 Provision for loan losses... 330 174 472 420 320 370 240 ------- ------- ------- ------- ------- ------- ------- Net interest income after provision for loan losses................. 10,535 10,709 21,612 20,267 19,785 18,303 16,749 ------- ------- ------- ------- ------- ------- ------- Non-interest income: Fees and service charges................ 1,028 850 1,829 1,735 1,791 1,548 1,403 Gain on sale of loans, mortgage-related securities and investment securities.. 64 308 380 1,051 359 259 970 Other non-interest income................. 1,012 795 1,645 1,453 1,126 879 837 ------- ------- ------- ------- ------- ------- ------- Total non-interest income.......... 2,104 1,953 3,854 4,239 3,276 2,686 3,210 Non-interest expense........ 7,694 7,156 14,564 14,071 13,374 15,939 12,651 ------- ------- ------- ------- ------- ------- ------- Income before income taxes.................. 4,945 5,506 10,902 10,435 9,687 5,050 7,308 Income tax expense.......... 1,569 1,840 3,525 3,606 3,651 1,767 2,718 ------- ------- ------- ------- ------- ------- ------- Net income................ $ 3,376 $ 3,666 $ 7,377 $ 6,829 $ 6,036 $ 3,283 $ 4,590 ======= ======= ======= ======= ======= ======= ======= Diluted net income per share..................... $ 0.39 $ 0.41 $ 0.83 $ 0.75 $ 0.66 $ 0.36 $ 0.49 ======= ======= ======= ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> AT OR FOR THE SIX MONTHS ENDED JUNE 30, AT OR FOR THE YEARS ENDED DECEMBER 31, ----------------- ---------------------------------------------- 2000 1999 1999 1998 1997 1996 1995 -------- ------ -------- -------- ------ ------ ------ <S> <C> <C> <C> <C> <C> <C> <C> SELECTED FINANCIAL RATIOS AND OTHER DATA: PERFORMANCE RATIOS: Return on average assets...... 0.78% 1.00% 0.96% 0.98% 0.94% 0.56% 0.83% Return on average equity...... 8.80 9.57 9.60 9.08 8.38 4.61 6.43 Net interest rate spread...... 2.12 2.71 2.69 2.73 2.83 2.86 2.69 Net interest margin........... 2.61 3.10 3.00 3.11 3.26 3.31 3.17 Non-interest income to average assets...................... 0.49 0.53 0.50 0.61 0.51 0.46 0.58 Non-interest expense as a percent of average assets... 1.77 1.95 1.89 2.03 2.09 2.72 2.27 Efficiency ratio.............. 59.33 55.75 56.15 56.45 57.20 74.62 62.63 Cash dividend payout ratio.... 55.00 47.60 47.10 46.80 47.10 81.10 54.90 Average interest-earning assets to average interest-bearing liabilities................. 106.30 108.10 107.56 108.71 109.87 110.90 111.60 CAPITAL RATIOS: Average equity to average assets...................... 8.85% 10.42% 9.99% 10.83% 11.24% 12.14% 12.82% Equity to assets.............. 8.36 9.15 9.15 10.57 11.06 11.41 13.11 Leverage capital.............. 7.80 9.29 8.60 9.60 10.20 10.50 12.90 Total risk-based capital...... 12.60 15.01 14.00 15.70 16.70 17.80 21.90 ASSET QUALITY RATIOS: Non-performing loans to total loans....................... 0.03% 0.10% 0.04% 0.05% 0.08% 0.13% 0.08% Non-performing assets to total assets...................... 0.08 0.09 0.08 0.06 0.09 0.15 0.10 Allowance for loan losses to non-performing loans........ 1,654.12 569.63 1,381.63 1,020.52 722.05 394.76 623.92 Allowance for loan losses to non-performing assets....... 593.25 526.95 588.86 781.19 535.75 314.79 470.76 Allowance for loan losses to total loans................. 0.53 0.55 0.53 0.56 0.53 0.53 0.52 OTHER DATA: Offices....................... 19 19 19 19 19 20 20 </TABLE>
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE FINANCIAL DATA AND THE NOTES THERETO, AND THE RISKS OF INVESTING IN OUR SHARES DISCUSSED UNDER THE "RISK FACTORS" SECTION BEFORE MAKING AN INVESTMENT DECISION. EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT 4,000,000 SHARES, IN THE FORM OF AMERICAN DEPOSITARY SHARES, WILL BE SOLD IN THIS OFFERING AND THAT THE UNDERWRITERS HAVE NOT EXERCISED THEIR RIGHT TO PURCHASE AN ADDITIONAL 600,000 SHARES FOR SALE TO THE PUBLIC. IN THIS PROSPECTUS, UNLESS THE CONTEXT INDICATES OTHERWISE, THE TERMS "ACTIVCARD," THE "COMPANY," "WE" OR "US" REFER TO ACTIVCARD S.A., A CORPORATION ORGANIZED UNDER THE LAWS OF THE REPUBLIC OF FRANCE, TOGETHER WITH ITS SUBSIDIARIES. OVERVIEW We provide solutions for authenticating and managing the digital identities of employees, suppliers, partners and customers accessing e-business resources. Our secure user identification solutions allow companies to control access to their information networks at the level appropriate for each particular user and are designed to provide the authentication necessary to prevent online fraud and other computer related crimes. Our products and technologies are designed to manage digital identities by addressing the administrative, security and usability concerns inherent in network computing. Our range of products includes end-user authentication products, back-end server software for digital identity administration and software development kits. Our principal products include: - ACTIVCARD GOLD, a smart card-based authentication and credential management package, - ACTIVREADER, a multi-purpose, secure smart card reader, - ACTIVCARD ONE AND ACTIVCARD PLUS, token-based authentication products, and - ACTIVPACK, integrated back-end server and management solutions for Microsoft, Novell and IBM network systems. Our products manage static passwords, generate one-time use passwords for secure log-in, remote and Internet access, and enable digital signatures. Authentication, which proves the identity of users and systems on the network, is a critical component in network security solutions. Both our end-user and server products are designed to ensure that users are properly authenticated and cannot repudiate their transactions while allowing network managers to securely administer the multiple systems that comprise their networks. Our software development kits allow other software vendors to integrate our end-user products and server software into their network applications. Through our strategic relationships with companies such as AXENT Technologies, Hewlett-Packard, Lucent Technologies, Novell, Schlumberger, SCM Microsystems, Sun Microsystems and Visa International, our digital identity framework has been embedded in several leading systems and components. In addition, our digital identity framework is fully compatible with products and technologies produced by companies such as Baltimore Technologies, Entrust, Microsoft, Mondex International (a division of MasterCard), SCM Microsystems, Sun Microsystems and VeriSign. We sell our products principally through distribution partners, such as original equipment manufacturers (OEMs), value-added resellers (VARs), system integrators and distributors. Historically, our principal customers have been European banking and financial services companies. We also market our products to companies in the telecommunications, healthcare, networking technologies and manufacturing sectors. We believe that there are more than one million people using our products for secure banking, web access and remote access to corporate networks. INDUSTRY Individuals and corporations increasingly rely upon computer networks, including the Internet, to communicate, access information and conduct commerce. The number of Internet users worldwide is expected to grow from 142 million in 1998 to 399 million in 2002, with electronic commerce growing from $50 billion to $774 billion over offered to 100 or more of such investors, provide certification as to their personal association, of a professional or personal nature, with a member of the management of the issuer. Our ADSs and ordinary shares may not be offered or sold prior to the expiry of six months from the date of the offer of the ADSs and ordinary shares to any person in the United Kingdom except to persons whose ordinary activities involve then in acquiring, holding, managing or disposing of investments, as principal or agent, for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995. No document issued in connection with the public offering may be or passed on to any person in the United Kingdom unless that person is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemption) Order 1996, as amended, or is a person to whom the document may otherwise by lawfully issued or passed on. The offering of the ADSs and ordinary shares in the Republic of Italy has not been registered with the COMMIZIONE NAZIONALE PER LE SOCIETA E LA BORSA pursuant to Italian securities legislation. The distribution of this prospectus in the Republic of Italy is restricted to persons who qualify as professional investors under applicable Italian securities regulation. ------------------------ ACTIVCARD-REGISTERED TRADEMARK- IS A REGISTERED TRADEMARK OF THE COMPANY AND ACTIVCARD ACTIVATED-TM-, ACTIVATED-TM-, ACTIVCOUPLER-TM-, ACTIVPACK-TM-, ACTIVREADER-TM-, CORPORATE WALLET-TM-, DIGITAL IDENTITY-TM-, DIGITAL IDENTITY FRAMEWORK-TM-, AND SMARTREADER-TM- ARE TRADEMARKS OF THE COMPANY. THIS PROSPECTUS ALSO CONTAINS TRADEMARKS OF OTHER COMPANIES. the same period. The recent and dramatic development of electronic commerce, coupled with the proliferation of extranet and intranet applications and network-connected devices, has substantially increased network complexity for all businesses. The risks of network fraud and the challenges of maintaining online confidentiality have increased correspondingly. Transaction security is a fundamental concern for companies migrating more of their business to the Internet. Network administrators and participants are increasingly turning to smart cards as a means to provide secure network access without sacrificing ease-of-use. It is estimated that 800,000 network access smart cards were deployed worldwide in 1999, and by 2003 that number is projected to grow to 125 million. THE ACTIVCARD SOLUTION We employ a combination of patented authentication methods, smart card and token technology and management tools to provide companies and individual users with an administratively efficient, easy to use, cost-effective and secure framework for managing digital identity. Our digital identity framework: - ENABLES PERSONALIZED SERVICES FROM ANY NETWORK-CONNECTED DEVICE; - PROVIDES A COMBINATION OF HIGH LEVEL SECURITY AND EASE-OF-USE; - SUPPORTS MULTIPLE CREDENTIALS (E.G., DIGITAL CERTIFICATES, DYNAMIC AND STATIC PASSWORDS); AND - OFFERS A UNIQUE, MODULAR AND HIGHLY SCALABLE DESIGN. Our digital identity framework ensures that users are properly authenticated while allowing network managers to securely administer the diverse systems that comprise their network environment. Our solutions also provide non-repudiation of online transactions. For example, we provide the authentication technology necessary to enable ATM transactions to occur over the Internet, downloading electronic cash directly onto a card, through a variety of terminals, such as PCs, televisions and mobile telephones. Our recently introduced ActivGold product incorporates multi-application smart cards to provide a platform to consolidate various independent credentials, such as a corporate picture ID, building access, network login, online digital signature and credit card, thereby enabling a personalized online experience. These digital credentials collectively define the digital identity of a user or system. OUR BUSINESS STRATEGY Our objective is to become the leading supplier of products and technologies that enable information technology managers, product manufacturers, system integrators and network service providers to integrate managed digital identity services quickly and efficiently into their applications. Our strategy to achieve this objective includes the following key elements: - BUILD UPON OUR EXISTING CUSTOMER BASE - EXPAND OUR BASE OF STRATEGIC PARTNERS, OEMS AND DISTRIBUTORS - CUSTOMIZE FLEXIBLE PRICING MODELS TO ADDRESS OUR CUSTOMERS NEEDS - INCREASE SALES THROUGH OUR STRATEGIC PARTNERSHIPS - DEVELOP KEY TECHNOLOGY COMPONENTS FOCUSED ON THE CREATION, DISTRIBUTION, PROTECTION AND CONTROL OF MULTIPLE CREDENTIALS - MAKE DIGITAL IDENTITY THE ESSENTIAL COMPONENT ENABLING NEXT GENERATION INTERNET-BASED BUSINESS RECENT DEVELOPMENTS As a result of our continuing efforts to develop relationships with business partners, Schlumberger Systems, Business Brain Showa-Ota Inc., Sun Microsystems, Inc. and SCM Microsystems, Inc. have subscribed to a total of 990,675 of our ordinary shares at a subscription price of $17.16 per share. The subscription price was determined at a board of directors meeting held on December 16, 1999 and is based on the average closing price of our shares between November 25 and December 8, 1999. The sales of these shares were approved by our stockholders on February 9, 2000 and closed on February 16, 2000. We received net proceeds of approximately $16.5 million from the sale of these shares. ENFORCEABILITY OF CIVIL LIABILITIES We are a SOCIETE ANONYME, a corporation organized under the laws of France. A substantial portion of our assets are located outside the United States and certain experts named in this prospectus are residents of France. As a result, it may not be possible for investors to effect service of process within the United States upon our company or upon such persons with respect to matters arising under the U.S. federal securities laws. It also may not be possible to enforce against them in U.S. courts judgments predicated upon the civil liability provisions of the U.S. federal securities laws. We have been advised by Shearman & Sterling, Paris, our French counsel, that strict conditions apply to, and therefore there is doubt as to whether French courts would apply, the civil liability provisions of the U.S. federal securities laws in original actions in French courts. We have also been advised that there is doubt as to whether French courts would enforce a judgment of a U.S. court predicated solely upon the civil liability provisions of the U.S. federal securities laws. EXCHANGE RATES We publish our financial statements in U.S. dollars. References to "dollars" or "$" are to U.S. dollars and references to "francs" or "FF" are to French francs. In 1998 and 1999, we recorded a majority of our revenue in U.S. dollars. Going forward, we anticipate that an increasing proportion of our revenues will be generated in U.S. dollars. Historically we recorded a significant portion of our expenses in French francs and we expect that a significant portion of our expenses will continue to be incurred in French francs. Fluctuations in the value of the French franc and other currencies relative to the U.S. dollar have caused and will continue to cause dollar-translated amounts to vary from one period to another. Due to the constantly changing currency exposures and the substantial volatility of currency exchange rates, we cannot predict the effect of exchange rate fluctuations upon our future operating results. On December 31, 1999, the Banque de France rate was FF6.53 per U.S. $1.00 (on the basis of 1 Euro per U.S. $1.005). The table below sets forth, for the periods indicated, the high, low, average and end of period rates expressed in French francs per U.S. $1.00 issued by the Banque de France used by us in the preparation of our consolidated financial statements. See Note 1.3 of the Notes to our Consolidated Financial Statements included elsewhere in this prospectus. <TABLE> <CAPTION> ----------------------------------------- AVERAGE END OF YEAR ENDED DECEMBER 31, HIGH LOW RATE PERIOD - --------------------------------------------- -------- -------- -------- -------- <S> <C> <C> <C> <C> 1994......................................... 5.98 5.11 5.55 5.35 1995......................................... 5.39 4.78 5.00 4.90 1996......................................... 5.29 4.90 5.18 5.24 1997......................................... 6.35 5.19 5.84 5.99 1998......................................... 6.21 5.39 5.92 5.60 1999......................................... 6.53 5.61 6.03 6.53 </TABLE> As of January 1999, the French franc has been fixed at a conversion rate of euro 1.00=FF6.55957. The following table sets forth, for the dates and periods indicated, certain information regarding the Noon Buying Rate for the euro expressed in euro per U.S. $1.00. <TABLE> <CAPTION> ----------------------------------------- AVERAGE END OF YEAR ENDED DECEMBER 31, HIGH LOW RATE PERIOD - --------------------------------------------- -------- -------- -------- -------- <S> <C> <C> <C> <C> 1999......................................... 1.1693 1.0045 1.0878 1.0045 2000 (January 4 through March 13)............ 1.0460 0.9657 1.0309 1.0365 </TABLE> The terms of our $6.0 million aggregate principal amount of bonds issued in October 1999 require us to call them for redemption upon consummation of the subscriptions referred to above. Upon call for redemption, the holders may elect to convert all or a portion of the bonds into shares, for an aggregate of 300,000 shares if all are converted. If none of these bonds are converted, we would be required to use approximately $6.2 million of the proceeds of the sale of the subscribed shares to redeem the bonds. OUR ADDRESS Our principal European office is located at 24-28, Avenue du General de Gaulle, 92156 Suresnes Cedex, France. Our principal U.S. office is located at 6531 Dumbarton Circle, Fremont, California 94555, our telephone number is (510) 574-0100 and our website is www.activcard.com. Information contained in our website is not a part of this prospectus. THE OFFERING <TABLE> <S> <C> SECURITIES WE ARE OFFERING................ 4,000,000 shares are being offered, in the form of ADSs, to the public in the United States and to institutional investors outside the United States. ORDINARY SHARES TO BE OUTSTANDING FOLLOWING THE OFFERING.................. 37,380,701 shares (including 990,675 shares issued pursuant to the private placements that closed on February 16, 2000 and assuming 300,000 shares to be issued upon conversion of our $6.0 million non- interest-bearing convertible bonds issued in October 1999), excluding: - 5,748,751 shares issuable upon exercise of outstanding options, warrants and complementary (share purchase) rights, - 760,550 shares issuable upon conversion of our convertible bonds issued in July and October 1997, and - 142,790 shares reserved for future issuance under our stock option plans. This information assumes no exercise of the underwriter's over-allotment option. OFFERING PRICE............................ $ per ADS. AMERICAN DEPOSITARY SHARES................ Each ADS represents the right to receive one ordinary share. UNDERWRITERS' OVER-ALLOTMENT OPTION....... The underwriters have the option to purchase 600,000 additional shares, in the form of ADSs, from certain selling shareholders solely to cover over-allotments. USE OF PROCEEDS........................... We intend to use the net proceeds to fund anticipated operating losses, working capital, acquisitions and other general corporate purposes. NASDAQ NATIONAL MARKET SYMBOL............. "ACTI" EASDAQ SYMBOL............................. "ACTV" PAYMENT AND SETTLEMENT.................... We expect that the ADSs will be ready for delivery through the facilities of The Depository Trust Company, Euroclear and Clearstream, Luxembourg on or about , 2000. The Underwriters may elect to take delivery of a portion of the offering as ordinary shares. We expect to use the facilities of SICOVAM to facilitate transfers between ADSs and ordinary shares. LOCK-UPS.................................. We, our executive officers and directors, and certain of our shareholders, have agreed not to sell or agree to sell, directly or indirectly, additional ADSs or shares or securities convertible or exchangeable for shares for a period of 150 days from the date hereof, except with the prior written consent of J.P. Morgan Securities Inc. See "Underwriting" for a more complete description of these arrangements. </TABLE> SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA You should read the following information for each of the three years in the period ended December 31, 1999 together with our consolidated financial statements, including their notes, that are contained elsewhere in this prospectus. These financial statements and their notes were prepared in accordance with US GAAP and audited by Ernst & Young Audit, independent auditors. <TABLE> <CAPTION> ------------------------------------------ YEARS ENDED DECEMBER 31, ------------------------------------------ 1997 1998 1999 ------------ ------------ ------------ IN THOUSANDS, EXCEPT PER SHARE DATA <S> <C> <C> <C> STATEMENTS OF OPERATIONS DATA Revenue: Products............................................ $ 6,210 $ 7,624 $ 9,976 Engineering services................................ 1,357 642 286 ------------ ------------ ------------ Total revenues........................................ $ 7,567 $ 8,266 $ 10,262 ============ ============ ============ Gross profit.......................................... $ 2,741 $ 3,043 $ 4,925 Income (loss) from operations......................... (10,067) (10,391) (15,740) Interest and other financial income (expenses), net... (181) (360) (187) Income tax benefit.................................... 714 452 15 Minority interest..................................... 32 1 - Net loss.............................................. (9,502) (10,298) (15,912) Basic and diluted net loss per share.................. $ (0.61) $ (0.55) $ (0.55) ============ ============ ============ Number of shares used in computing basic and diluted net loss per share.................................. 15,460,178 18,618,463 29,114,715 </TABLE> <TABLE> <CAPTION> ----------------------------------------------- DECEMBER 31, ----------------------------------------------- 1999 1997 1998 1999 AS ADJUSTED(1) -------- -------- -------- -------------- IN THOUSANDS <S> <C> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................. $ 5,291 $ 4,150 $ 8,790 $337,527 Total current assets.................................. 10,356 9,302 14,398 342,506 Total assets.......................................... 13,051 12,375 16,434 344,542 Total current liabilities............................. 5,263 5,902 5,953 5,324 Total long-term liabilities........................... 2,749 1,448 230 230 Convertible loan...................................... 8,030 8,030 9,259 3,500 Shareholders' equity (deficit)........................ (2,991) (3,005) 992 335,488 </TABLE> - ------------------------ (1) Adjusted to reflect: (i) consummation of this offering assuming net proceeds of $312,340,000 based on an assumed public offering price of $84.50 per ADS the closing price for our ordinary shares on Easdaq on March 13, 2000; (ii) consummation of the sale of 990,675 shares in February 2000 to four strategic investors for net proceeds of approximately $16.5 million; and (iii) the conversion of all of our $6.0 million non-interest bearing convertible bonds issued in October 1999 into 300,000 shares. These bonds are required to be redeemed by us with the proceeds of our private placements to strategic investors which closed on February 16, 2000 unless, upon notice of redemption, holders elect to convert all or a portion of such bonds into shares. If none of the holders of these bonds elect to convert the bonds to shares, our cash and cash equivalents, total current assets, total assets and shareholders' equity would be reduced by $6.2 million. See "Description of Share Capital--Convertible Bonds."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001107733_paytrust_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001107733_paytrust_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4ef0d69fcc8d8a3cf0794ca90b8b51e0a5ce69bf
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001107733_paytrust_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, especially the discussion regarding the risks of investing in our common stock discussed under "Risk Factors," before investing in our common stock. PAYTRU$T, INC. We provide a convenient and secure Internet service that enables our members to receive, review, pay and organize all of their bills through paytrust.com. Unlike the limited online payment services typically offered by banks, we offer a comprehensive bill management solution. Using our proprietary technology, we can deliver 100% of a member's bills online. We can also issue payments directly from any check writing account designated by a member, provide information that enables a member to balance her checkbook and provide data that a member can download into her personal financial management software. We believe our service represents a meaningful development in the use of the Internet for consumer convenience and that our service substantially reduces the time, effort and frustration involved in paper-based bill management. We offer our service directly on our web site, and will be offering our service on a co-branded basis through the web sites of our business development partners. We have recently launched a co-branded service with one of these partners and anticipate that, during 2000, we will launch our service through the web sites of our other current partners. Our partners include large consumer billers, financial institutions, and online financial sites and portals. We have recently entered into business development partnerships with American Express Travel Related Service Company, Inc., GE Financial Assurance Holdings, Inc. and NextCard, Inc., and are also seeking to enter into additional business development partnerships. We believe that business development partnerships with consumer-based companies are important to our success because they provide us access to large numbers of potential members at an acquisition cost per member that is substantially less than is available through direct marketing. We believe that our partners can benefit from the ability to introduce our co-branded service to their customers without the expenditure of the time and resources necessary to develop an in-house service. Paper-based bill delivery and payment can be a cumbersome, time-consuming process. Traditional online bill delivery and payment services are inconvenient and incomplete. We believe that the limitations of existing paper-based methods and traditional online bill delivery services, combined with the large and recurring nature of bill payment demand, offer a substantial opportunity for our consumer-focused service. In addition, while a significant number of Internet users are conducting financial transactions online, the number of users engaged in online bill delivery and payment is still quite small. As a result, we believe there is a significant potential market for our service. Our service enables members to: - receive, review, pay and organize 100% of their bills online through a single web site; - receive e-mail notifications when bills have arrived, are about to become overdue, or are not received as expected; - view or print an image of their actual bills; - pay their bills from any existing check writing account; - instruct us to pay automatically recurring monthly bills, such as utility bills, without requiring approval each time, or requiring approval only if the bills exceed a preset dollar limit; - balance their checkbooks through the use of our SmartBalance feature, which automatically combines members' statement activity of their bank or other financial institution accounts with members' activity on our web site; and - download their billing data into personal financial management software. CORPORATE INFORMATION We are the successor to LM Holdings, Inc., which was incorporated in September 1998 in New Jersey. In January 1999, we completed a merger of LM Holdings with Secure Commerce Services, Inc., a newly-formed Delaware corporation, in which Secure Commerce Services was the surviving corporation. In February 2000, we changed our name to Paytru$t, Inc. Our executive offices are located at 29 Emmons Drive, Building B, Princeton, New Jersey 08540. Our telephone number is (609) 720-1818 and our Internet address is www.paytrust.com. THE INFORMATION ON OUR WEB SITE IS NOT A PART OF THIS PROSPECTUS. Paytrust, Paytrust.com, SmartBalance, "Pay Your Bills in Nanoseconds" and our floating check design are our trademarks. This prospectus also includes other trademarks, trade names and service marks of Paytrust and of other parties, which are the property of their respective owners. THE OFFERING <TABLE> <S> <C> Common stock offered by us........................... shares Common stock to be outstanding after the offering.... shares Use of proceeds...................................... For working capital and general corporate purposes, including sales and marketing activities, expansion of our operations and further technological development. See "Use of Proceeds." Proposed Nasdaq National Market symbol............... PAYT </TABLE> In addition to the shares of common stock to be outstanding after the offering, as of March 3, 2000 we may issue additional shares of common stock under the following plans and arrangements: - 7,127,523 shares issuable under our employee benefit plans, consisting of: - 2,059,657 shares underlying outstanding options under our equity compensation plan at a weighted average exercise price of $1.76 per share, of which options to purchase 57,800 shares were exercisable; - 4,567,866 shares available for future grant under our equity compensation plan; and - 500,000 shares available for issuance under our employee stock purchase plan; - 1,500,000 shares issuable upon the exercise of warrants outstanding at a weighted average exercise price of $1.74 per share; - 2,500,000 shares of Series D preferred stock issuable to Citicorp Electronic Commerce, Inc. at a purchase price of $4.00 per share, subject to approval by the Office of the Comptroller of the Currency or other applicable regulatory authority; if issued, these shares will convert into 2,500,000 shares of common stock upon the closing of this offering; and - 100,000 shares issuable upon the exercise of warrants that we may issue in connection with a patent license at an exercise price of $5.00 per share. Unless otherwise specifically stated, all information contained in this prospectus: - reflects the automatic conversion of all of our outstanding preferred stock into common stock upon the closing of this offering; - assumes no exercise of the underwriters' over-allotment option; and - reflects the filing of an amendment to our certificate of incorporation upon the closing of this offering to authorize 5,000,000 shares of preferred stock that may be issued from time to time with such designations, rights and preferences as may be determined by our board of directors. SUMMARY CONSOLIDATED FINANCIAL DATA The following tables summarize the consolidated financial information for our business. You should read the following summary consolidated financial data together with "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus. <TABLE> <CAPTION> INCEPTION (SEPTEMBER 16, 1998) TO YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1999 ----------------------- ----------------- <S> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues................................................ $ -- $ 10,269 Total cost and expenses................................. 124,126 9,633,167 --------- ----------- Operating loss........................................ (124,126) (9,622,898) Net loss................................................ $(122,951) $(9,479,669) ========= =========== Basic and diluted net loss per share.................... $ (0.01) $ (1.02) ========= =========== Unaudited pro forma basic and diluted net loss per share................................................. $ (0.01) $ (0.59) ========= =========== Weighted average shares outstanding used in basic and diluted per share calculation......................... 9,000,000 9,290,626 ========= =========== Weighted average shares outstanding used in unaudited pro forma basic and diluted per share calculation..... 9,000,000 16,180,278 ========= =========== </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ----------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents........................... $29,235,014 $29,235,014 $ Working capital..................................... 26,672,434 26,672,434 Total assets........................................ 30,232,811 30,232,811 Total redeemable convertible preferred stock........ 36,668,233 -- Total stockholders' equity (deficit)................ (9,080,936) 27,587,297 OPERATING DATA (UNAUDITED): Number of members at December 31, 1999.............. 9,157 Number of bills received through December 31, 1999.............................................. 73,543 Number of payments made through December 31, 1999... 130,876 </TABLE> ------------------------ When reading this summary consolidated financial data, you should be aware that: - potentially dilutive shares of common stock have been excluded from the shares used to compute historical and unaudited pro forma net loss per share in each period because their inclusion would be antidilutive; - the unaudited pro forma basic and diluted net loss per share during the periods presented is computed by dividing the net loss by the sum of the weighted average shares outstanding plus the weighted average number of shares that will be outstanding upon the automatic conversion of all shares of outstanding preferred stock, excluding the Series D preferred stock, into common stock; - the assumed conversion of the preferred stock has an antidilutive effect on the unaudited pro forma basic and diluted net loss per share; - the unaudited pro forma consolidated balance sheet data reflect the automatic conversion of all outstanding preferred stock, excluding the Series D preferred stock, into common stock upon the closing of this offering; - the unaudited pro forma as adjusted consolidated balance sheet data reflect the issuance of shares of common stock in this offering at an assumed initial public offering price of $ per share and after deduction of the underwriting discount and the estimated expenses of this offering; - the sale of the Series D preferred stock will result in a charge to net loss applicable to common stockholders of approximately $5,000,000 based upon the difference between the purchase price of the Series D preferred stock and the fair market value of the Series D preferred stock at the date of the commitment; - the issuance of warrants to purchase 500,000 shares of our common stock at a weighted average exercise price of $3.22 per share to two business development partners will result in a charge of approximately $2,300,000 over the period to be benefited; and - the number of members includes all persons who have enrolled in our service, most of whom were in the period of free service.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001107734_rivals_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001107734_rivals_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0433fe57b3a0ceeedd87e7c13aab0095b208666e
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001107734_rivals_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights information described more fully elsewhere in this prospectus. This summary is not complete and does not contain all the information you should consider before investing in our common stock. You should read the entire prospectus, including the Financial Statements and related Notes, before making an investment decision. RIVALNETWORKS, INC. We are a leading developer and operator of affinity-channel networks. Affinity-channels are content or e-commerce websites owned by individuals or organizations that provide in-depth, original content or specialized merchandise relevant to highly specific topics, or affinities. We aggregate and organize selected affinity-channels by general subject matter, or vertical categories, onto networks that share common infrastructure services. Our infrastructure services are designed to enable entrepreneurs to develop and deliver, as part of our integrated network, their proprietary content or e-commerce offerings efficiently and profitably. Our first network, Rivals.com, is focused on sports and as of February 15, 2000, included more than 500 affinity-channels. By participating in our networks our affinity-channels, or affiliates, can benefit from increased traffic, enhanced performance and features, greater revenues and reduced operating and technology costs. In addition, our affinity-channel networks enable advertisers to more effectively and efficiently target specific demographic groups. We help our content and e-commerce affiliates and our advertisers realize these benefits by providing infrastructure services that include: TECHNOLOGY SERVICES. Our goal is to remove all the technical challenges and costs that our affiliates encounter in operating an affinity-channel to allow them to focus on producing in-depth, quality content and selling specialized merchandise. We have built a scalable and reliable technology platform that includes proprietary, easy to use tools that enable our affiliates to efficiently create and maintain their affinity-channels. ADVERTISING AND SPONSORSHIP SERVICES. We have an advertising sales force that sells advertising on behalf of our affiliates. This provides economies of scale allowing our sales force to offer advertisers a single efficient channel to reach large numbers of targeted consumers. By enabling the buyers and sellers of advertising to transact in this mutually beneficial way, we help our affiliates receive more advertising revenues, and give advertisers a more effective forum for advertising. CONTENT SERVICES. We provide knowledgeable and experienced channel producers to assist, train and maintain regular contact with our affiliates. We also provide experts within specific categories who deliver commentary and breaking news to relevant affinity-channels within the network. In addition, we provide our affiliates with access to multi-media content and databases of general content, such as photos and statistics. E-COMMERCE SERVICES. We match e-commerce affiliates with their related content affiliates which enables our affinity-channels to deliver integrated content and e-commerce offerings. We offer our e-commerce affiliates a comprehensive package of services, including managerial support, marketing services, customer service, digital photography and transaction processing. NETWORK DEVELOPMENT SERVICES. Our network development services include recruiting new content and e-commerce affiliates to further develop our existing network and assist in launching new networks. We invite affiliates to join our networks after completing an extensive process to identify the leading content creators and premier retailers focused on our targeted affinities. We generate revenues from advertising and e-commerce. We collect all online advertising and e-commerce revenues generated by our networks and distribute to each affiliate a share of the revenues related to its affinity-channel. Our solution provides us with significant leverage and economies of scale. Each new affiliate brings additional revenue opportunities without significant incremental cost to us. In addition, our revenue sharing model enables us to share in the growth and success of our affinity-channels. All affinity-channels are hosted on our proprietary, content-neutral technology platform, which currently supports our sports network and is designed to be replicated to support additional affinity-channel networks. Our application tier consists of software that manages the website user interface, runs applications like data feeds, message boards, chat and e-commerce, and retrieves content from the database tier. Our database tier consists of a main content database, as well as member registration, message board, player profile/ recruiting and sports statistics databases. During January 2000, Rivals.com was the fourth stickiest web property on the Internet with an average of approximately 67 minutes spent on our network per user per month, and was first in stickiness among websites focused on sports content, according to data by Nielsen//Net Ratings. In addition, during January 2000, Rivals.com had more than 5.4 million unique users, according to AdForce. The Rivals.com network includes affinity-channels for fans and athletes that focus on college, high school and professional sports, a wide range of participatory and leisure sports and other sports-related topics, such as recruiting. Our objective is to be the leading developer and operator of affinity-channel networks that enable our entrepreneurial affiliates to deliver the highest level of in-depth content and relevant e-commerce offerings efficiently and profitably. To achieve this objective, we intend to rapidly create new networks of affinity-channels and enhance our existing networks and infrastructure services. OTHER INFORMATION We were incorporated in Washington on March 11, 1998 as Rival Media, Inc. Our principal executive offices are located at 71 Columbia Street, Suite 550, Seattle, Washington 98104 and our telephone number is (206) 381-6900. Our website is located at "www.rivals.com." Information contained on our web site does not constitute a part of this prospectus. "RivalNetworks.com" and "Rivals.com" are our principal unregistered trademarks, trade names or service marks. This prospectus contains other names, trademarks, trade names and service marks which are the properties of their respective owners. THE OFFERING Common stock offered by RivalNetworks....... shares Common stock to be outstanding after the offering.................................... shares Use of proceeds............................. For general corporate purposes, including working capital. Proposed Nasdaq National Market symbol...... RIVL Unless otherwise noted, the total number of outstanding shares of our common stock and the pro forma data in this prospectus assume: - 1,901,349 shares of our common stock outstanding as of February 15, 2000; - the automatic conversion of all shares of preferred stock outstanding as of February 15, 2000 into 21,344,125 shares of common stock upon completion of the offering; and - no exercise of the underwriters' over-allotment option. The above information excludes: - 7,179,980 shares of common stock issuable upon exercise of options outstanding as of February 15, 2000, at a weighted average exercise price of $1.0483 per share; - 5,847,831 shares of common stock available for issuance under our 1998 Stock Option Plan, as amended and 1999 Network Affiliate Stock Option Plan; - 400,000 shares of common stock available for issuance under our 2000 Employee Stock Purchase Plan; - 516,881 shares of common stock issuable upon exercise of warrants outstanding as of February 15, 2000 at a weighted average exercise price of $3.11 per share; and - 9,128,784 shares of common stock issuable upon exercise of warrants outstanding as of February 15, 2000 at a weighted average exercise price of $13.72 per share and which may only be exercised within 180 days of the date of this offering and after which they expire. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> MARCH 11, 1998 (INCEPTION) TO YEAR ENDED DECEMBER 31, DECEMBER 31, 1998 1999 -------------- ------------ <S> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues.................................................. $ 368 $ 1,168 Cost of revenues.......................................... 396 827 Gross margin.............................................. (28) 341 Loss from operations...................................... (1,264) (21,594) Net loss.................................................. (1,271) (21,416) Basic and diluted net loss per share...................... $ (118.13) $ (31.93) ========= =========== Weighted-average common shares -- basic and diluted....... 10,759 670,653 Unaudited pro forma basic and diluted net loss per share.................................................. $ (1.69) =========== Unaudited weighted-average common shares used in computing pro forma basic and diluted net loss per share......... 12,688,382 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 --------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............................. $ 9,661 $ 9,661 $ Working capital....................................... 11,154 11,154 Total assets.......................................... 26,505 26,505 Convertible preferred stock........................... 33,279 -- Total shareholders' equity............................ 20,574 20,574 </TABLE> See Note 1 of Notes to Financial Statements for an explanation of the determination of the number of shares used in computing per share data. The pro forma amounts above give effect to the automatic conversion of all shares of preferred stock outstanding as of February 15, 2000 into 21,344,125 shares of common stock upon completion of the offering. The pro forma as adjusted amounts above give effect to the sale of the shares of common stock offered hereby at an assumed public offering price of $ per share (less estimated underwriting discounts and commissions and estimated offering expenses). See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001107738_rcl-trust_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001107738_rcl-trust_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..33f99381d99b57737de4d219b55e34ea5e6e9a98
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001107738_rcl-trust_prospectus_summary.txt
@@ -0,0 +1,1286 @@
+Prospectus
+
+ Merrill Lynch Co.
+
+ 
+
+ 
+
+You should rely only the information contained in this
+prospectus. We have not authorized anyone to provide you with
+different information.
+
+We are not offering the senior notes in any state where the
+offer is not permitted.
+
+Dealer Prospectus Delivery Requirements
+
+For 90 days after the date of this prospectus, all dealers
+making transactions in the senior notes, whether or not
+participating in this offering, may be required to deliver a
+prospectus. In addition, all dealers will deliver a prospectus
+when acting as underwriters of the senior notes and with respect
+to their unsold allotments or subscriptions.
+
+Table of Contents
+
+PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
+
+Item 13. Other Expenses of Issuance and
+Distribution.
+
+ 
+The following table sets forth the estimated expenses in
+connection with the offering described in this Registration
+Statement.
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Securities and Exchange Commission
+
+ 
+ 
+ $
+ *
+ 
+
+ 
+ 
+ Rating agency fees
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Printing
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Legal fees and expenses
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Accountants fees
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Fees and expenses of the RCL Trustee
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Fees and expenses of the Lease Trustee
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Fees and expenses of the Indenture Trustee
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Miscellaneous expenses
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Total
+
+ 
+ 
+ $
+ *
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ * 
+ 
+ To be supplied by amendment
+
+Item 14. Indemnification of Directors and
+Officers.
+
+ 
+Section 3803 of the Delaware Business Trust Statute
+provides as follows:
+
+3803. Liability of Beneficial Owners and
+Trustees.
+
+ 
+ 
+
+ 
+ 
+ (a) Except to the extent otherwise provided in the
+ governing instrument of the business trust, the beneficial
+ owners shall be entitled to the same limitation of personal
+ liability extended to stockholders of private corporations for
+ profit organized under the general corporation law of the State.
+
+ 
+
+ 
+ 
+ (b) Except to the extent otherwise provided in the
+ governing instrument of a business trust, a trustee, when acting
+ in such capacity, shall not be personally liable to any person
+ other than the business trust or a beneficial owner for any act,
+ omission or obligation of the business trust or any trustee
+ thereof.
+
+ 
+
+ 
+ 
+ (c) Except to the extent otherwise provided in the
+ governing instrument of a business trust, an officer, employee,
+ manager or other person acting pursuant to
+ Section 3806(b)(7), when acting in such capacity, shall not
+ be personally liable to any person other than the business trust
+ or a beneficial owner for any act, omission or obligation of the
+ business trust or any trustee thereof.
+
+ 
+Section 3817 of the Delaware Business Trust Statute
+provides as follows:
+
+3817. Indemnification.
+
+ 
+ 
+
+ 
+ 
+ (a) Subject to such standards and restrictions, if any, as
+ are set forth in the governing instrument of a business trust, a
+ business trust shall have the power to indemnify and hold
+ harmless any trustee or beneficial owner or other person from
+ and against any and all claims and demands whatsoever.
+
+ 
+
+ 
+ 
+ (b) The absence of a provision for indemnity in the
+ governing instrument of a business trust shall not be construed
+ to deprive any trustee or beneficial owner or other
+
+II-1
+
+Table of Contents
+
+ 
+ 
+
+ 
+ 
+ person of any right to indemnity which is otherwise available to
+ such person under the laws of this State.
+
+ 
+Section 2.7 of the Amended and Restated Trust Agreement of
+RCL Trust 2000-1 provides as follows:
+
+ 
+Section 2.7. Liability and Indemnification.
+The RCL Beneficiary shall indemnify, defend and hold harmless
+the RCL Trustee, including its successors, assigns, officers,
+directors, shareholders, employees and agents for all losses,
+claims, damages, liabilities and expenses (collectively,
+ Liabilities ), penalties and taxes (other than
+income taxes relating to the fees paid to it hereunder) incurred
+by it in connection with the administration of RCL (including
+attorneys fees) and the performance of its duties
+hereunder; provided, however, that in no event shall the
+RCL Trustee be indemnified or held harmless for any Liabilities
+to the extent (i) incurred by reason of the RCL
+Trustee s willful misconduct, bad faith or negligence or
+(ii) incurred by reason of the RCL Trustee s breach of
+its representations and warranties set forth in
+Section 6.6. The RCL Trustee shall notify the RCL
+Beneficiary promptly of any claim for which the RCL Trustee may
+seek indemnity. Failure by the RCL Trustee to so notify the RCL
+Beneficiary shall not relieve the RCL Beneficiary of its
+obligations hereunder. If necessary, to the extent not otherwise
+reimbursed, the RCL Trustee shall be entitled to indemnification
+from amounts on deposit in the RCL Account for any claims
+against the RCL Trustee the indemnification for which is
+provided pursuant to this Section 2.7. Any claim
+against the RCL Trustee shall be defended by the RCL Beneficiary
+and the RCL Trustee shall be entitled to separate counsel, the
+fees and expenses of which shall be paid by the RCL Beneficiary.
+The indemnities contained in this Section 2.7 shall
+survive the resignation, removal or termination of the RCL
+Trustee or the termination of this Agreement. Any amounts paid
+to the RCL Trustee pursuant to this Section 2.7
+shall be deemed not to be RCL Assets immediately after such
+payment. The RCL Trustee acknowledges that funds may be
+deposited in the RCL Account only as specifically provided in
+the Basic Documents, and that some funds paid to RCL in respect
+of the Series 2000-1 Certificates and funds paid to RCL as
+holder of the Subordinated Notes and deposited in the Cash
+Collateral Account have been pledged to the Lease Trustee on
+behalf of the Lease Trust and the Indenture Trustee on behalf of
+the Senior Noteholder in accordance with the terms of the Basic
+Documents.
+
+ 
+Section 145 of the General Corporation Law of Delaware
+provides as follows:
+
+145. Indemnification of officers, directors,
+employees and agents; insurance.
+
+ 
+ 
+
+ 
+ 
+ (a) A corporation may indemnify any person who was or is a
+ party or is threatened to be made a party to any threatened,
+ pending or completed action, suit or proceeding, whether civil,
+ criminal, administrative or investigative (other than an action
+ by or in the right of the corporation) by reason of the fact
+ that he is or was a director, officer, employee or agent of the
+ corporation, or is or was serving at the request of the
+ corporation as a director, officer, employee or agent of another
+ corporation, partnership, joint venture, trust or other
+ enterprise, against expenses (including attorneys fees),
+ judgments, fines and amounts paid in settlement actually and
+ reasonably incurred by him in connection with such action, suit
+ or proceeding if he acted in good faith and in a manner he
+ reasonably believed to be in or not opposed to the best
+ interests of the corporation, and, with respect to any criminal
+ action or proceeding, had no reasonable cause to believe his
+ conduct was unlawful. The termination of any action, suit or
+ proceeding by judgment, order, settlement, conviction, or upon a
+ plea of nolo contendere or its equivalent, shall not, of itself,
+ create a presumption that the person did not act in good faith
+ and in a manner which he reasonably believed to be in or not
+ opposed to the best interests of the corporation, and, with
+ respect to any criminal action or proceeding, had reasonable
+ cause to believe that his conduct was unlawful.
+
+II-2
+
+Table of Contents
+
+ 
+ 
+
+ 
+ 
+ (b) A corporation may indemnify any person who was or is a
+ party or is threatened to be made a party to any threatened,
+ pending or completed action or suit by or in the right of the
+ corporation to procure a judgment in its favor by reason of the
+ fact that he is or was a director, officer, employee or agent of
+ the corporation, or is or was serving at the request of the
+ corporation as a director, officer, employee or agent of another
+ corporation, partnership, joint venture, trust or other
+ enterprise against expenses (including attorneys fees)
+ actually and reasonably incurred by him in connection with the
+ defense or settlement of such action or suit if he acted in good
+ faith and in a manner he reasonably believed to be in or not
+ opposed to the best interests of the corporation and except that
+ no indemnification shall be made in respect of any claim, issue
+ or matter as to which such person shall have been adjudged to be
+ liable to the corporation unless and only to the extent that the
+ Court of Chancery or the court in which such action or suit was
+ brought shall determine upon application that, despite the
+ adjudication of liability but in view of all the circumstances
+ of the case, such person is fairly and reasonably entitled to
+ indemnity for such expenses which the Court of Chancery or such
+ other court shall deem proper.
+
+ 
+
+ 
+ 
+ (c) To the extent that a director, officer, employee or
+ agent of a corporation has been successful on the merits or
+ otherwise in defense of any action, suit or proceeding referred
+ to in subsections (a) and (b) of this section, or in
+ defense of any claim, issue or matter therein, he shall be
+ indemnified against expenses (including attorneys fees)
+ actually and reasonably incurred by him in connection therewith.
+
+ 
+
+ 
+ 
+ (d) Any indemnification under subsections (a)
+ and (b) of this section (unless ordered by a court) shall
+ be made by the corporation only as authorized in the specific
+ case upon a determination that indemnification of the director,
+ officer, employee or agent is proper in the circumstances
+ because he has met the applicable standard of conduct set forth
+ in subsections (a) and (b) of this section. Such
+ determination shall be made (1) by a majority vote of the
+ directors who are not parties to such action, suit or
+ proceeding, even though less than a quorum, or (2) if there
+ are no such directors, or if such directors so direct, by
+ independent legal counsel in a written opinion, or (3) by
+ the stockholders.
+
+ 
+
+ 
+ 
+ (e) Expenses (including attorneys fees) incurred by
+ an officer or director in defending a civil, criminal,
+ administrative or investigative action, suit or proceeding may
+ be paid by the corporation in advance of the final disposition
+ of such action, suit or proceeding upon receipt of an
+ undertaking by or on behalf of such director or officer to repay
+ such amount if it shall ultimately be determined that he is not
+ entitled to be indemnified by the corporation as authorized in
+ this section. Such expenses (including attorneys fees)
+ incurred by other employees and agents may be so paid upon such
+ terms and conditions, if any, as the board of directors deems
+ appropriate.
+
+ 
+
+ 
+ 
+ (f) The indemnification and advancement of expenses
+ provided by, or granted pursuant to, the other subsections of
+ this section shall not be deemed exclusive of any other rights
+ to which those seeking indemnification or advancement of
+ expenses may be entitled under any bylaw, agreement, vote of
+ stockholders or disinterested directors or otherwise, both as to
+ action in his official capacity and as to action in another
+ capacity while holding such office.
+
+ 
+
+ 
+ 
+ (g) A corporation shall have power to purchase and
+ maintain insurance on behalf of any person who is or was a
+ director, officer, employee or agent of the corporation, or is
+ or was serving at the request of the corporation as a director,
+ officer, employee or agent of another corporation, partnership,
+ joint venture, trust or other enterprise against any liability
+ asserted against him and incurred by him in any such capacity,
+ or arising out of his status as such, whether or not the
+ corporation would have the power to indemnify him against such
+ liability under this section.
+
+II-3
+
+Table of Contents
+
+ 
+ 
+
+ 
+ 
+ (h) For purposes of this section, references to
+ the corporation shall include, in addition to
+ the resulting corporation, any constituent corporation
+ (including any constituent of a constituent) absorbed in a
+ consolidation or merger which, if its separate existence had
+ continued, would have had power and authority to indemnify its
+ directors, officers, and employees or agents, so that any person
+ who is or was a director, officer, employee or agent of such
+ constituent corporation, or is or was serving at the request of
+ such constituent corporation as a director, officer, employee or
+ agent of another corporation, partnership, joint venture, trust
+ or other enterprise, shall stand in the same position under this
+ section with respect to the resulting or surviving corporation
+ as he would have with respect to such constituent corporation if
+ its separate existence had continued.
+
+ 
+
+ 
+ 
+ (i) For purposes of this section, references to
+ other enterprises shall include employee
+ benefit plans; references to fines shall
+ include any excise taxes assessed on a person with respect to
+ any employee benefit plan; and references to serving at
+ the request of the corporation shall include any
+ service as a director, officer, employee, or agent of the
+ corporation which imposes duties on, or involves services by,
+ such director, officer, employee, or agent with respect to an
+ employee benefit plan, its participants or beneficiaries; and a
+ person who acted in good faith and in a manner he reasonably
+ believed to be in the interest of the participants and
+ beneficiaries of an employee benefit plan shall be deemed to
+ have acted in a manner not opposed to the best
+ interests of the corporation as referred to in this
+ section.
+
+ 
+
+ 
+ 
+ (j) The indemnification and advancement of expenses
+ provided by, or granted pursuant to, this section shall, unless
+ otherwise provided when authorized or ratified, continue as to a
+ person who has ceased to be a director, officer, employee or
+ agent and shall inure to the benefit of the heirs, executors and
+ administrators of such a person.
+
+ 
+
+ 
+ 
+ (k) The Court of Chancery is hereby vested with exclusive
+ jurisdiction to hear and determine all actions for advancement
+ of expenses or indemnification brought under this section or
+ under any bylaw, agreement, vote of stockholders or
+ disinterested directors, or otherwise. The Court of Chancery may
+ summarily determine a corporation s obligation to advance
+ expenses (including attorneys fees).
+
+ 
+Article Ninth, Section 5 of the Certificate of
+Incorporation of Ford Motor Credit Company provides as follows:
+
+SECTION 5.
+
+Indemnification
+
+ 
+5.1. Directors, Officers and Employees of the
+Corporation. Every person now or hereafter serving as a
+director, officer or employee of the corporation shall be
+indemnified and held harmless by the corporation from and
+against any and all loss, cost, liability and expense that may
+be imposed upon or incurred by him in connection with or
+resulting from any claim, action, suit, or proceeding, civil or
+criminal, in which he may become involved, as a party or
+otherwise, by reason of his being or having been a director,
+officer or employee of the corporation, whether or not he
+continues to be such at the time such loss, cost, liability or
+expense shall have been imposed or incurred. As used herein, the
+term loss, cost, liability and expense shall
+include, but shall not be limited to, counsel fees and
+disbursements and amounts of judgments, fines or penalties
+against, and amounts paid in settlement by, any such director,
+officer or employee; provided, however, that no such
+director, officer or employee shall be entitled to claim such
+indemnity: (1) with respect to any matter as to which there
+shall have been a final adjudication that he has committed or
+allowed some act or omission, (a) otherwise than in good
+faith in what he considered to be the best interests of the
+corporation, and (b) without reasonable cause to believe
+that such act or omission was proper and legal; or (2) in
+the event of a settlement of such claim, action, suit, or
+proceeding unless (a) the court having jurisdiction thereof
+shall have
+
+II-4
+
+Table of Contents
+
+approved of such settlement with knowledge of the indemnity
+provided herein, or (b) a written opinion of independent
+legal counsel, selected by or in manner determined by the Board
+of Directors, shall have been rendered substantially
+concurrently with such settlement, to the effect that it was not
+probable that the matter as to which indemnification is being
+made would have resulted in a final adjudication as specified in
+clause (1) above, and that the said loss, cost, liability
+or expense may properly be borne by the corporation. A
+conviction or judgment (whether based on a plea of guilty or
+nolo contendere or its equivalent, or after trial) in a criminal
+action, suit or proceeding shall not be deemed an adjudication
+that such director, officer or employee has committed or allowed
+some act or omission as hereinabove provided if independent
+legal counsel, selected as hereinabove set forth, shall
+substantially concurrently with such conviction or judgment give
+to the corporation a written opinion that such director, officer
+or employee was acting in good faith in what he considered to be
+the best interests of the corporation or was not without
+reasonable cause to believe that such act or omission was proper
+and legal.
+
+ 
+5.2. Directors, Officers and Employees of
+Subsidiaries. Every person (including a director, officer or
+employee of the corporation) who at the request of the
+corporation acts as a director, officer or employee of any other
+corporation in which the corporation owns shares of stock or of
+which it is a creditor shall be indemnified to the same extent
+and subject to the same conditions that the directors, officers
+and employees of the corporation are indemnified under the
+preceding paragraph, except that the amounts of such loss, cost,
+liability or expense paid to any such director, officer or
+employee shall be reduced by and to the extent of any amounts
+which may be collected by him from such other corporation.
+
+ 
+5.3. Miscellaneous. The provisions of this
+Section 5 of Article NINTH shall cover claims,
+actions, suits and proceedings, civil or criminal, whether now
+pending or hereafter commenced and shall be retroactive to cover
+acts or omissions or alleged acts or omissions which heretofore
+have taken place. In the event of death of any person having a
+right of indemnification under the provisions of this
+Section 5 of Article NINTH, such right shall inure to
+the benefit of his heirs, executors, administrators and personal
+representatives. If any part of this Section 5 of
+Article NINTH should be found to be invalid or ineffective
+in any proceeding, the validity and effect of the remaining
+provisions shall not be affected.
+
+ 
+5.4. Indemnification Not Exclusive. The foregoing
+right of indemnification shall not be deemed exclusive of any
+other right to which those indemnified may be entitled, and the
+corporation may provide additional indemnity and rights to its
+directors, officers or employees.
+
+Item 15. Recent Sales of Unregistered
+Securities.
+
+ 
+Not Applicable
+
+Item 16. Exhibits and Financial
+Statements.
+
+ 
+(a) Exhibits:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 1.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Underwriting Agreement.***
+
+ 
+ 3.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Amended and Restated Trust Agreement of RCL Trust 
+ 2000-1, between Ford Credit and the RCL Trustee.**
+
+ 
+ 3.2
+ 
+ 
+ 
+ 
+ 
+ 
+ Restated Certificate of Incorporation of Ford Motor Credit
+ Company.*
+
+ 
+ 3.3
+ 
+ 
+ 
+ 
+ 
+ 
+ By-Laws of Ford Motor Credit Company.*
+
+ 
+ 4.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Trust Agreement of the Issuer, between the RCL Trustee
+ and the Lease Trustee.**
+
+ 
+ 4.2
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Indenture, between the Lease Trustee and the Indenture
+ Trustee.**
+
+ 
+ 4.3
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-1 Senior Note (included as part of
+ Exhibit 4.2).**
+
+ 
+ 4.4
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-2 Senior Note (included as part of
+ Exhibit 4.2).**
+
+II-5
+
+Table of Contents
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 4.5
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-3 Senior Note (included as part of
+ Exhibit 4.2).**
+
+ 
+ 4.6
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-4 Senior Note (included as part of
+ Exhibit 4.2).**
+
+ 
+ 4.7
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-5 Senior Note (included as part of
+ Exhibit 4.2).**
+
+ 
+ 5.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Opinion of H.D. Smith, Esq., Secretary-Corporate Counsel of Ford
+ Motor Credit Company with respect to legality.**
+
+ 
+ 8.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Opinion of Skadden, Arps, Slate, Meagher Flom LLP with
+ respect to tax matters.**
+
+ 
+ 8.2
+ 
+ 
+ 
+ 
+ 
+ 
+ Opinion of Hurley D. Smith, Esq., Secretary and Corporate
+ Counsel of Ford Motor Credit Company with respect to Michigan
+ income tax matters.**
+
+ 
+ 10.1
+ 
+ 
+ 
+ 
+ 
+ 
+ FCTT Trust Agreement, between Ford Credit and U.S. Bank National
+ Association.***
+
+ 
+ 10.2
+ 
+ 
+ 
+ 
+ 
+ 
+ FCMTT Agreement, among Ford Credit, U.S. Bank National
+ Association and Wilmington Trust Company.***
+
+ 
+ 10.3
+ 
+ 
+ 
+ 
+ 
+ 
+ FCAL Agreement, between FCAL and U.S. Bank National
+ Association.***
+
+ 
+ 10.4
+ 
+ 
+ 
+ 
+ 
+ 
+ FCALM Agreement, between FCALM and U.S. Bank National
+ Association.***
+
+ 
+ 10.5
+ 
+ 
+ 
+ 
+ 
+ 
+ Administrative Agency Agreement, among the Titling Companies,
+ Ford Credit and U.S. Bank National Association.***
+
+ 
+ 10.6
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Series 2000-1 Supplement, among the Titling
+ Companies, Ford Credit and U.S. Bank National Association.**
+
+ 
+ 10.7
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Asset Contribution Agreement, between Ford Credit and
+ the RCL Trustee.**
+
+ 
+ 10.8
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Transfer Agreement, between the RCL Trustee and the
+ Lease Trustee.**
+
+ 
+ 10.9
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Program Operating Lease, between the RCL Trustee and the
+ Lease Trustee.**
+
+ 
+ 10.10
+ 
+ 
+ 
+ 
+ 
+ 
+ Appendix I Definitions.***
+
+ 
+ 10.11
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Appendix A Definitions.**
+
+ 
+ 23.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Consent of H.D. Smith, Esq., Secretary-Corporate Counsel of Ford
+ Motor Credit Company (included as part of Exhibit 5.1).**
+
+ 
+ 23.2
+ 
+ 
+ 
+ 
+ 
+ 
+ Consent of Skadden, Arps, Slate, Meagher Flom LLP
+ (included as part of Exhibit 8.1).**
+
+ 
+ 23.3
+ 
+ 
+ 
+ 
+ 
+ 
+ Consent of PricewaterhouseCoopers LLP.***
+
+ 
+ 24.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Powers of Attorney of officers and directors of Ford Motor
+ Credit Company.**
+
+ 
+ 25.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Form T-1 of The Chase Manhattan Bank.***
+
+ 
+ 
+
+ * 
+ 
+ Incorporated by reference to Exhibits 3.1 (Restated
+ Certificate of Incorporation) and 3.2 (By-Laws) to Ford Motor
+ Credit Company s Registration Statement on Form S-1
+ (Registration No. 33-25082).
+
+ 
+
+ ** 
+ 
+ Previously filed.
+
+ 
+
+ *** 
+ 
+ To be filed by amendment.
+
+ (b) Financial
+Statements:
+
+Not Applicable
+
+Item 17. Undertakings.
+
+ 
+(a) To provide to the Underwriter at the closing specified
+in the Underwriting Agreement certificates in such denominations
+and registered in such names as required by the Underwriter to
+permit prompt delivery to each purchaser.
+
+II-6
+
+Table of Contents
+
+ 
+(b) Insofar as indemnification for liabilities arising
+under the Securities Act of 1933 may be permitted to directors,
+officers and controlling persons of the registrant pursuant to
+the provisions described under Item 14 above, or otherwise,
+the registrant has been advised that in the opinion of the
+Securities and Exchange Commission such indemnification is
+against public policy as expressed in the Act and is, therefore,
+unenforceable. In the event that a claim for indemnification
+against such liabilities (other than the payment by the
+registrant of expenses incurred or paid by a director, officer
+or controlling person of the registrant in the successful
+defense of any action, suit or proceeding) is asserted by such
+director, officer or controlling person in connection with the
+securities being registered, the registrant will, unless in the
+opinion of its counsel the matter has been settled by
+controlling precedent, submit to a court of appropriate
+jurisdiction the question whether such indemnification by it is
+against public policy as expressed in the Act and will be
+governed by the final adjudication of such issue.
+
+ 
+The undersigned registrant hereby undertakes that:
+
+ 
+ 
+
+ 
+ 
+ (1) For purposes of determining any liability under the
+ Securities Act of 1933, the information omitted from the form of
+ prospectus filed as part of this registration statement in
+ reliance upon Rule 430A and contained in a form of
+ prospectus filed by the registrant pursuant to
+ Rule 424(b)(1) or (4) or 497(b) under the Securities Act
+ shall be deemed to be part of this registration statement as of
+ the time it was declared effective.
+
+ 
+
+ 
+ 
+ (2) For the purpose of determining any liability under the
+ Securities Act of 1933 each post-effective amendment that
+ contains a form of prospectus shall be deemed to be a new
+ registration statement relating to the securities offered
+ therein, and the offering of such securities at that time shall
+ be deemed to be the initial bona fide offering thereof.
+
+II-7
+
+Table of Contents
+
+SIGNATURES
+
+ 
+Pursuant to the requirements of the Securities Act of 1933, the
+registrant has duly caused this Amendment No. 3 to the
+Registration Statement to be signed on its behalf by the
+undersigned, thereunto duly authorized, in the City of Detroit
+and the State of Michigan on the 18th day of December, 2000.
+
+ 
+ 
+
+ 
+ 
+ RCL TRUST 2000-1
+
+ 
+ 
+ 
+
+ 
+ By 
+ 
+ FORD MOTOR CREDIT COMPANY,
+
+ 
+ 
+
+ 
+ 
+ Depositor and Beneficiary of RCL Trust 2000-1
+
+ 
+ 
+ 
+
+ 
+ By 
+ 
+ /s/ DONALD A. WINKLER*
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (Donald A. Winkler)
+
+ 
+ 
+ Chairman of the Board of Directors of
+
+ 
+ 
+ Ford Motor Credit Company
+
+ 
+Under the requirements of the Securities Act of 1933, this
+Amendment No. 3 to the Registration Statement has been
+signed below by the following officers and directors of FORD
+MOTOR CREDIT COMPANY, in the capacities and on the date
+indicated.
+
+ 
+ 
+ 
+ 
+ 
+
+ Signature
+ 
+ Title
+ 
+ Date
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ /s/ DONALD A. WINKLER*
+
+ (Donald A. Winkler)
+ 
+ 
+ 
+ Chairman of the Board of Directors and Director (principal
+ executive officer)
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ BIBIANA BOERIO*
+
+ (Bibiana Boerio)
+ 
+ 
+ 
+ Executive Vice President, Chief Financial Officer and Treasurer
+ (principal financial and accounting officer)
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ BARRETT BURNS*
+
+ (Barrett Burns)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ GREGORY C. SMITH*
+
+ (Gregory C. Smith)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ MALCOLM S. MACDONALD*
+
+ (Malcolm S. Macdonald)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ DAVID C. FLANIGAN*
+
+ (David C. Flanigan)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ TERRY D. CHENAULT*
+
+ (Terry D. Chenault)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ DALE R. WALKER*
+
+ (Dale R. Walker)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ HENRY D. WALLACE*
+
+ (Henry D. Wallace)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ 
+
+ *By: 
+ 
+ /s/ HURLEY D. SMITH
+
+(Hurley D. Smith)
+
+Attorney-in-fact
+
+II-8
+
+Table of Contents
+
+ 
+Pursuant to the requirements of the Securities Act of 1933, the
+registrant has duly caused this Amendment No. 3 to the
+Registration Statement to be signed on its behalf by the
+undersigned, thereunto duly authorized, in the City of Detroit
+and the State of Michigan on the 18th day of December, 2000.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001107774_supplierma_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001107774_supplierma_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..99a7f4c60e69c8d9918c2c16044f5c928e94a4be
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001107774_supplierma_prospectus_summary.txt
@@ -0,0 +1,2526 @@
+PROSPECTUS SUMMARY
+
+ 
+
+ This
+ summary highlights information contained elsewhere in this prospectus. You
+ should read the entire prospectus carefully before investing in our common
+ stock.
+
+ 
+
+ SupplierMarket.com
+
+ 
+
+ 
+ SupplierMarket.com is a leading business-to-business Internet-based
+ marketplace serving the large and fragmented market for direct materials.
+ Direct materials are used in the manufacture of finished goods and include a
+ wide variety of components and materials, from bolts, nuts and fasteners to
+ rubber and glass products to corrugated packaging to injection and
+ blow-molded plastic components. The direct materials market includes
+ numerous industrial segments, and we estimate that the annual market for
+ direct materials in the United States is approximately $1.5 trillion. As of
+ March 31, 2000, we had registered approximately 5,000 buyers and 9,000
+ suppliers. Our marketplace enables participants to efficiently and cost
+ effectively buy and sell direct materials in an open, neutral exchange that
+ requires no up-front fees, no software installation and no consulting
+ services.
+
+ 
+
+ The U.S.
+ market for direct materials is highly fragmented and inefficient. Based on
+ industry data, we believe that approximately 190,000 suppliers currently
+ serve this market, with over 90% of these companies generating less than $10
+ million in annual revenue. This high degree of fragmentation, combined with
+ the lack of a centralized marketplace, makes it difficult for buyers and
+ suppliers to find qualified trading partners, resulting in high search costs
+ and limited competition. Additionally, the traditional request for quotation
+ process through which buyers solicit bids from suppliers, is inefficient and
+ time-consuming, involving multiple and repetitive steps.
+
+ 
+
+ The
+ SupplierMarket.com solution provides a secure Internet-based marketplace
+ that aggregates buyers and suppliers, matches them with multiple qualified
+ trading partners and promotes a competitive pricing environment. Our
+ solution eliminates many of the inefficiencies in the traditional direct
+ materials purchasing process, thus providing benefits for both buyers and
+ suppliers. It benefits buyers by reducing the cost of direct materials,
+ providing access to an increased base of new and qualified suppliers,
+ shortening cycle times for purchasing and employing a standardized data
+ format. Suppliers benefit through increased access to new business
+ opportunities, reduced sales and marketing costs, shortened sales cycle
+ times and the opportunity to be evaluated and rewarded based on expertise
+ and efficiency.
+
+ 
+
+ There are
+ several key differences between our marketplace and alternatives offered by
+ other business-to-business e-commerce companies. First, any registered buyer
+ or supplier of direct materials can immediately access our entirely
+ Internet-based marketplace with a standard browser connection; there is no
+ required installation of software. Second, use of our marketplace is
+ completely free to the buyer, and a supplier is only required to pay us a
+ transaction fee after it has been selected by a buyer as a result of a
+ competitive bidding event to fulfill the request for quotation. Third, our
+ technology-based solution does not require the use of consultants for
+ implementation or ongoing support.
+
+ 
+
+ We have
+ developed several key proprietary technologies that underlie the advanced
+ functionality of our scalable Internet-based marketplace. First, our RFQ
+ Builder enables buyers to create and submit requests for quotation quickly
+ in a standardized format. Second, our SmartMatch technology automatically
+ matches buyers and suppliers with qualified trading partners. Finally, our
+ bidding technology creates a competitive pricing environment.
+
+ 
+
+ We have
+ conducted bidding events in various industrial segments for direct materials
+ such as extruded plastic film and sheet, injection and blow-molded plastic
+ components, metal stampings, bolts, nuts and fasteners, machine tooling,
+ molded rubber and wire and cord products.
+
+ 
+
+ The
+ Simmons Company submitted requests for quotation which resulted in 100% of
+ our revenue in 1999 and 91% of our revenue in the three months ended March
+ 31, 2000. Other buyers that have posted requests for quotation on our
+ marketplace and held competitive bidding events since our inception
+ include:
+
+ 
+
+ 
+ 
+ 
+ Affordable Interior Systems
+
+ Becker
+ Group
+
+ J.L.
+ French
+
+ 
+ 
+ 
+ Masco
+
+ 
+ Quality Farm & Country
+
+ U.S.
+ Filter
+
+ 
+ 
+ 
+
+ 
+ 
+
+ We expect
+ the requests for quotation and competitive bidding events generated by these
+ buyers will result in additional revenue in the second quarter of
+ 2000.
+
+ 
+
+ Some of
+ the suppliers that have participated in bidding events through our
+ marketplace and that buyers have selected to fulfill requests for quotation
+ include:
+
+ 
+
+ 
+ 
+ 
+ 
+ Shamrock Industrial Fasteners
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ Western
+ Nonwovens
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ Schott
+ International
+
+ 
+ 
+
+ 
+ 
+
+ 
+ SupplierMarket.com, Inc. was formed in February 1999, and we began
+ offering commercial access to our marketplace in October 1999. Our
+ headquarters is located at 10 Mall Road, Burlington, Massachusetts 01803 and
+ our telephone number is (781) 273-6700. Our web site address is
+ www.suppliermarket.com. The information on our web site is not incorporated
+ as a part of this prospectus.
+
+ 
+
+ 
+ SupplierMarket.com , RFQ Builder ,
+ SMC , SmartMatch , RFQ Bid ,
+ SmartBid , SupplierMarketplace , People buy
+ parts. People sell parts. This is where they meet. and Buying
+ and selling just doesn t get any easier than this. are service
+ marks of SupplierMarket.com. All other trademarks or service marks appearing
+ in this prospectus are trademarks or service marks of the respective
+ companies that use them.
+
+ 
+
+ 
+
+ The
+ Offering
+
+ 
+
+ 
+ 
+ Shares of common
+ stock offered by
+ 
+
+ SupplierMarket.com
+ 
+ 10,000,000
+ shares
+ 
+
+ 
+ 
+ 
+ 
+ Total shares of
+ common stock to be outstanding
+ 
+
+ after the offering
+ 
+ 41,196,283
+ shares
+ 
+
+ 
+ 
+ 
+ 
+ Use of
+ proceeds
+ 
+ For working
+ capital, other general corporate purposes
+ 
+
+ and potential acquisitions.
+ 
+
+ 
+ 
+ 
+ 
+ Proposed Nasdaq
+ National Market symbol
+ 
+ SMKT
+ 
+
+ 
+ 
+
+ The
+ number of shares of common stock to be outstanding after this offering is
+ based on the number of shares outstanding as of March 31, 2000. This
+ number does not include the following:
+
+ 
+
+ 
+ 
+ 
+
+ 
+ 3,894,760 shares
+ of common stock issuable upon the exercise of stock options and
+ warrants outstanding as of March 31, 2000 and 1,265,891 additional
+ shares of common stock reserved for issuance under our stock plans;
+ and
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 2,181,416 shares
+ of common stock reserved for issuance under our strategic warrant plan
+ and issuable upon exercise of warrants issuable under that
+ plan.
+
+ 
+ 
+
+ 
+ 
+
+ Except
+ as otherwise indicated, all information in this prospectus
+ assumes:
+
+ 
+
+ 
+ 
+ 
+
+ 
+ the conversion
+ of each outstanding share of our Series A preferred stock into two
+ shares of common stock and the conversion of each outstanding share of
+ our Series B preferred stock into one half of one share of common
+ stock, both of which will occur simultaneously with the closing of this
+ offering;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ the filing of an
+ amended and restated certificate of incorporation effective upon the
+ closing of this offering; and
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ no exercise of
+ the underwriters over-allotment option.
+
+ 
+ 
+
+ 
+ 
+
+ Summary
+ Financial Information
+
+ 
+
+ The
+ following tables summarize the financial information for our business.
+ You should read this information along with Selected Financial
+ Data , Management s Discussion and Analysis of Financial
+ Condition and Results of Operations and our financial statements
+ and related notes. Net loss per share data includes accretion of offering
+ costs and other charges incurred in connection with our preferred stock
+ issuances. Unaudited pro forma loss per share data reflect the conversion
+ of all preferred stock outstanding as of the end of each respective
+ period into common stock as if the shares had converted immediately upon
+ issuance, even though the effect of the conversion is antidilutive.
+ Unaudited pro forma loss per share data do not reflect potential shares
+ of common stock issuable upon exercise of outstanding options and
+ warrants because the effect would be antidilutive. Pro forma balance
+ sheet data reflect the conversion of all outstanding preferred stock into
+ common stock upon the closing of this offering. Pro forma as adjusted
+ balance sheet data reflect the preceding pro forma adjustment and the
+ issuance of 10,000,000 shares in this offering at an assumed initial
+ public offering price of $10.00 per share after deducting underwriting
+ discounts and commissions and estimated offering expenses.
+
+ 
+
+ 
+ 
+ 
+ 
+ Period From
+ 
+
+ Inception
+ 
+
+ (February 12, 1999)
+ 
+
+ Through
+ 
+
+ December 31, 1999
+ 
+ Three Months Ended
+ 
+
+ March 31, 2000
+ 
+
+ 
+ Statement of
+ Operations Data:
+ 
+
+ 
+ Revenue
+ 
+ $ 
+ 51,541
+ 
+ 
+ $ 216,791
+ 
+ 
+
+ 
+ Operating
+ expenses:
+ 
+
+ 
+ 
+ Costs of revenue
+ 
+ 107,605
+ 
+ 
+ 205,615
+ 
+ 
+
+ 
+ 
+ Sales and marketing
+ 
+ 2,397,405
+ 
+ 
+ 10,576,301
+ 
+ 
+
+ 
+ 
+ Research and development
+ 
+ 515,993
+ 
+ 
+ 681,116
+ 
+ 
+
+ 
+ 
+ General and administrative
+ 
+ 636,171
+ 
+ 
+ 1,577,297
+ 
+ 
+
+ 
+ 
+ Stock-based compensation
+ 
+ 2,731,515
+ 
+ 
+ 1,395,093
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Total
+ operating expenses
+ 
+ 6,388,689
+ 
+ 
+ 14,435,422
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Operating
+ loss
+ 
+ (6,337,148
+ )
+ 
+ (14,218,631
+ )
+ 
+
+ 
+ Interest
+ income
+ 
+ 280,109
+ 
+ 
+ 403,978
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Net
+ loss
+ 
+ $ (6,057,039
+ )
+ 
+ $(13,814,653
+ )
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Net loss per
+ share, basic and diluted
+ 
+ $ 
+ (2.66
+ )
+ 
+ $ 
+ (2.24
+ )
+ 
+
+ 
+ Weighted average
+ common shares outstanding, basic and diluted
+ 
+ 2,344,874
+ 
+ 
+ 6,223,990
+ 
+ 
+
+ 
+ Unaudited pro
+ forma net loss per share, basic and diluted
+ 
+ $ 
+ (0.58
+ )
+ 
+ $ 
+ (0.51
+ )
+ 
+
+ 
+ Unaudited pro
+ forma weighted average common shares outstanding,
+ 
+
+ basic and diluted
+ 
+ 10,446,037
+ 
+ 
+ 27,210,518
+ 
+ 
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ March 31,
+ 2000
+ 
+
+ 
+ 
+ 
+ Actual
+ 
+ Pro
+ Forma
+ 
+ Pro Forma
+ 
+
+ As Adjusted
+ 
+
+ 
+ Balance Sheet
+ Data:
+ 
+
+ 
+ Cash and cash
+ equivalents
+ 
+ $23,420,956
+ 
+ 
+ $23,420,956
+ 
+ $115,470,956
+ 
+
+ 
+ Working
+ capital
+ 
+ 24,167,200
+ 
+ 
+ 24,167,200
+ 
+ 116,217,200
+ 
+
+ 
+ Total
+ assets
+ 
+ 30,496,670
+ 
+ 
+ 30,496,670
+ 
+ 122,546,670
+ 
+
+ 
+ Redeemable
+ convertible preferred stock
+ 
+ 40,558,840
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ Total
+ stockholders (deficit) equity 
+ 
+ (12,873,685
+ )
+ 
+ 27,685,155
+ 
+ 119,735,155
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ RISK FACTORS
+
+ 
+
+ 
+ This offering involves a high degree of risk. You should
+ carefully consider the following risk factors, in addition to the other
+ information in this prospectus, before making a decision to invest in
+ shares of our common stock. Any of these risk factors could materially
+ adversely affect our business, financial condition and results of
+ operations. If this occurs, the trading price of our common stock could
+ decline, and you may lose all or part of your investment.
+
+ 
+
+ We only began
+ operating our marketplace in the fourth quarter of 1999. Our limited
+ operating history makes it difficult for you to evaluate our past
+ performance and future prospects.
+
+ 
+
+ We
+ were founded in February 1999 and only began operating our Internet-based
+ marketplace in October 1999. Our extremely limited operating history
+ makes it difficult to evaluate our business and prospects. We will
+ encounter risks, costs and difficulties frequently encountered by
+ companies in an early stage of development in new and rapidly evolving
+ markets. Many of these risks are unknown, but include those associated
+ with managing our growth and the uncertainty about the widespread
+ acceptance of the Internet as a means of purchasing and selling direct
+ materials. Our failure to identify and successfully address these risks
+ would harm our business.
+
+ 
+
+ In
+ addition, we have estimated that the annual market for direct materials
+ in the U.S. is approximately $1.5 trillion. Due to our extremely limited
+ operating history, however, we have yet to penetrate this market in a
+ significant manner.
+
+ 
+
+ We have not
+ achieved profitability to date and anticipate continued losses, and we
+ may be unable to achieve profitability, which could cause the market
+ price of our common stock to decline.
+
+ 
+
+ We
+ have never been profitable, and, if we become profitable, we may be
+ unable to sustain profitability. We have incurred substantial losses
+ since we were founded, and we expect to continue to incur net losses on
+ both a quarterly and annual basis for at least the foreseeable future. We
+ had a cumulative net loss of approximately $19.9 million for the period
+ since inception through March 31, 2000. We expect to continue to make
+ significant expenditures for our infrastructure, sales and marketing,
+ research and development and general and administrative functions. As a
+ result, we will need to generate significant revenue to achieve
+ profitability. We cannot assure you that our revenue will grow in the
+ future or that we will achieve profitability. If our revenue grows more
+ slowly than we anticipate, or if operating expenses exceed our
+ expectations, we will not be a profitable business.
+
+ 
+
+ Our
+ Internet-based marketplace business model is new and the demand for our
+ service may decrease if it is not successful.
+
+ 
+
+ To
+ date we have conducted only a limited number of bidding events. We earn
+ transaction fees from successfully completed bidding events. We depend on
+ our ability to grow our buyer and supplier base and expand into new
+ markets and industrial segments as the primary source of bidding events
+ in our marketplace. Our ability to generate revenue or profits is
+ unproven. If the assumptions underlying our business model are not valid
+ or we are unable to implement our business plan, our business may not
+ succeed. For the period since inception through March 31, 2000, all of
+ our revenue was generated from transaction fees paid by suppliers using
+ our marketplace. We may not be able to increase our revenue, and if we
+ fail to do so, our business will fail.
+
+ 
+
+ If we fail to
+ attract and retain a large number of buyers and suppliers, we may not be
+ able to grow our revenue.
+
+ 
+
+ The
+ effectiveness of our Internet-based marketplace and the revenue we derive
+ from business conducted there depend on our ability to attract and retain
+ a large number of buyers and suppliers. If we do not add and retain a
+ substantial number of buyers and suppliers, our business could be
+ severely harmed.
+
+ 
+
+ 
+ Buyers may be unwilling to register or conduct significant business in
+ our marketplace. In order to accept our method of direct materials
+ purchasing, buyers must adopt new purchasing practices different from
+ their traditional practices. Traditionally, buyers have frequently
+ directed business to suppliers based on factors other than price or
+ quality, including personal relationships. Our marketplace and method of
+ purchasing may be disruptive to long-standing relationships between a
+ buyer and its incumbent suppliers.
+
+ 
+
+ 
+ Suppliers may also be unwilling to register or conduct significant
+ business in our marketplace. Our marketplace is based on an open bidding
+ process that allows buyers to compare the business practices,
+ capabilities and prices of multiple prospective suppliers more
+ effectively. This heightened scrutiny and increased competition may
+ discourage some suppliers from participating in our marketplace.
+ Suppliers choosing not to participate may discourage other suppliers or
+ buyers from participating as well.
+
+ 
+
+ Buyers may not
+ use our marketplace or may discontinue using our marketplace if we are
+ unable to deliver significant savings. As a result, buyers may not post
+ sufficient numbers of requests for quotation on our
+ marketplace.
+
+ 
+
+ 
+ Factors beyond our control may limit our ability to deliver savings
+ to registered buyers. For example, a buyer s incumbent suppliers may
+ refuse to bid on an on-line request for quotation. In addition, the
+ direct materials specified by some requests for quotation may be too
+ unusual or may otherwise be supplied by too few companies to allow for a
+ competitive bidding event and the attendant potential savings. Similarly,
+ some industrial segments may be characterized by rigid price structures
+ that allow for little or no variation in price among different suppliers.
+ Despite the fact that competition may be possible on the basis of quality
+ and other factors, it may not be possible to deliver strict price savings
+ in those segments. If our marketplace increases the efficiency of any
+ particular industrial segment, the future likelihood of significant
+ savings to buyers in that segment may decrease. If we are unable to
+ deliver significant savings in particular segments or the magnitude of
+ savings in particular segments decreases, we may have difficulty
+ attracting buyers in those segments, or attracting willing participants
+ in other segments, either of which may limit the number of requests for
+ quotation posted on our marketplace.
+
+ 
+
+ Suppliers may
+ not use our marketplace or may discontinue using our marketplace if we
+ are unable to deliver new business opportunities. As a result, our
+ revenue growth could be limited.
+
+ 
+
+ Our
+ marketplace depends on the participation of large numbers of willing
+ suppliers in bidding events to generate efficient outcomes for buyers.
+ Because suppliers may in some cases be discouraged from using our
+ marketplace due to the increased competition it seeks to promote, we
+ depend on our ability to provide new business opportunities to suppliers
+ as the primary means of attracting suppliers to our marketplace. Factors
+ beyond our control may limit our ability to provide these new
+ opportunities in sufficient numbers. For example, buyers may continue to
+ select from among a small group of incumbent suppliers to fill their
+ requests for quotation despite the existence of competitive bids
+ submitted by other suppliers. If we are unable to provide new business
+ opportunities in sufficient numbers to suppliers, our current suppliers
+ may reduce or discontinue their use of the marketplace and we may have
+ difficulty attracting new suppliers, either of which will harm our
+ business.
+
+ 
+
+ We have
+ depended and expect to depend on a small group of buyers for the
+ purchasing transactions they conduct on our marketplace; a substantial
+ reduction in their level of activity could harm our business and slow our
+ growth. In addition, our accounts receivable have been concentrated with
+ a small number of suppliers.
+
+ 
+
+ To
+ date, we have substantially relied on a small number of buyers to post a
+ significant majority of the requests for quotation on our marketplace.
+ Some of these buyers are portfolio companies, or companies owned by
+ investment funds that are our principal stockholders or affiliates of our
+ principal stockholders or of our directors. All revenue that we earned in
+ 1999 resulted from requests for quotation posted on our marketplace by
+
+ one portfolio company buyer. For the three months ended March 31, 2000,
+ requests for quotation posted by the same portfolio company buyer
+ generated 91% of our revenue. In addition, this buyer and other portfolio
+ company buyers have posted 57% of the dollar value of requests for
+ quotation that have resulted in bidding events. We expect to continue to
+ depend on these portfolio companies as buyers, particularly if other
+ buyers are slow to adopt or to conduct significant business on our
+ marketplace. If any of these buyers discontinue use of our marketplace,
+ or reduce the aggregate dollar value of requests for quotation they post,
+ our business could be severely harmed.
+
+ 
+
+ We
+ have depended and expect to depend substantially on several strategic
+ buyers who have the ability to place a large amount of requests for
+ quotation on our marketplace. We intend to issue strategic warrants to
+ purchase our common stock to these strategic buyers. We expect that these
+ warrants will vest during the remaining calendar quarters of 2000 and
+ each quarter of 2001 based on the total quarterly dollar volume of each
+ strategic buyer s requests for quotation posted on our marketplace
+ which result in an executed purchase order between the strategic buyer
+ and the supplier for the direct materials associated with the request for
+ quotation. For a more detailed discussion of the proposed vesting
+ schedules for these strategic warrants, see Management s
+ Discussion and Analysis of Financial Condition and Results of
+ Operations. Through March 31, 2000 requests for quotation posted by
+ these strategic buyers have not generated any of our revenue. However,
+ these strategic buyers have posted requests for quotation constituting
+ 28% of the dollar value of all requests for quotation that have resulted
+ in bidding events. We have obtained no commitments from these strategic
+ buyers or any other buyers to post requests for quotations or conduct any
+ other activities on our marketplace. Our strategy to expand our
+ marketplace and grow our business depends, in part, on the continued and
+ increasing use of our marketplace by these buyers. The loss or partial
+ loss of one or more of these buyers could be harmful to our business and
+ could curtail our growth.
+
+ 
+
+ As of
+ December 31, 1999, two suppliers accounted for 100% of our accounts
+ receivable and as of March 31, 2000, two suppliers accounted for 92% of
+ our accounts receivable. If we are unable to collect our receivables from
+ any of these suppliers, our operating cash flows may be significantly
+ reduced.
+
+ 
+
+ We face intense
+ competition in the business-to-business e-commerce market, including from
+ groups of companies in related industrial segments that have announced
+ plans to, or may, establish on-line exchanges. If we are unable to
+ compete successfully, we may not be able to attract buyers and
+ suppliers.
+
+ 
+
+ The
+ business-to-business e-commerce market in which we operate is new,
+ rapidly evolving and intensely competitive. As one of a number of
+ companies providing services or products to this market, and with minimal
+ barriers to entry by potential competitors, we face the risk that
+ existing and potential buyers and suppliers in our marketplace may seek
+ our competitors services and products. We also face the risk that
+ large individual buyers or suppliers or groups of companies in one or
+ more related industrial segments may develop in-house or specialized
+ on-line marketplaces. For example, in February and March 2000, groups of
+ companies in the automotive, aerospace and defense and plastics
+ industries announced their intentions to establish on-line consolidated
+ exchanges for buyers and suppliers in their respective
+ industries.
+
+ 
+
+ Our
+ marketplace is one of many alternative approaches to purchasing that
+ buyers and suppliers are considering. Many of our current and potential
+ competitors are larger and more established and have significantly
+ greater resources than we do. As a result, some of our current or
+ potential competitors may be able to commit more resources to marketing
+ and promotional campaigns, adopt more aggressive pricing policies and
+ devote more resources to technology development. In order to respond to
+ changes within this competitive environment, we may from time to time
+ make pricing, service, marketing or other strategic decisions that could
+ adversely affect our operating results. In addition, competitors may now
+ provide or later introduce products or services that appear to be the
+ same as ours, despite actual differences. In such an environment, we face
+ the risk that buyers and suppliers will confuse our marketplace with the
+ services of our competitors or choose the services of a competitor with
+ greater resources. We also face the risk that buyers and suppliers may
+ attain poor results with other products or services and lose interest in
+ trying ours. We may not be able to retain current marketplace
+ participants or secure new ones in light of these issues. Our revenue
+ growth could be limited if buyers or suppliers seek our competitors 
+ services or products or establish their own marketplaces.
+
+ 
+
+ For a
+ more detailed discussion of the competition we face, see
+ Business Competition. 
+
+ 
+
+ Our revenue
+ growth will slow if we do not develop and maintain strategic
+ relationships.
+
+ 
+
+ We
+ have established and plan to continue to establish strategic
+ relationships with sales and marketing partners, significant buyers and
+ other organizations. We depend or expect to depend on these relationships
+ to grow our buyer and supplier base and the volume of transactions
+ conducted in our marketplace. We will also depend on these relationships
+ to generate sufficient opportunities to implement our strategies of
+ expanding into new markets and of providing additional services and
+ products. These relationships may not yield any new buyers or suppliers
+ or generate increased revenues. We have obtained no commitments of any
+ kind from any buyers to submit requests for quotation or to conduct any
+ other activities in our marketplace. Additionally, we may not be able to
+ enter into new relationships or renew existing relationships. We may not
+ be able to recover our costs and expenses associated with these efforts,
+ which could harm our business.
+
+ 
+
+ Most
+ of our current strategic relationships, including all of those with
+ significant buyers, are based on non-binding letters of intent. Although
+ we plan to consummate definitive agreements, we cannot assure you that we
+ will be able to do so within the relatively short expiration periods
+ provided for in these letters of intent.
+
+ 
+
+ If we fail to
+ continue to develop and improve our financial and managerial controls and
+ reporting systems and procedures, and if we do not effectively expand,
+ train and manage our workforce, our business will suffer dramatically and
+ we may not be able to implement our business plan.
+
+ 
+
+ 
+ Successful implementation of our business plan requires effective
+ management processes. We have recently experienced a period of
+ significant expansion of our operations. Our growth has placed, and our
+ anticipated future growth in our operations will continue to place, a
+ significant strain on our management systems and resources. Our ability
+ to compete effectively and to manage future expansion of our operations
+ will require us to continue to develop and improve our financial and
+ management controls, reporting systems and procedures on a timely basis,
+ and to continue to expand, train and manage our workforce. We continue to
+ increase the scope of our operations domestically and plan to expand
+ internationally. We have grown our workforce substantially from 13
+ employees in July 1999 to 125 as of March 31, 2000, and we plan to
+ continue to add to our sales and marketing, customer support, product
+ development and other administrative personnel. Our failure to manage our
+ growth effectively could cause our revenues to decline and our operating
+ expenses to increase at a higher than expected rate.
+
+ 
+
+ In some
+ instances, our transaction fees may be subject to downward adjustment.
+ Also, we may have difficulty collecting transaction fees from suppliers
+ for our services, and we may incur legal expenses to pursue collection of
+ receivables from some suppliers.
+
+ 
+
+ We
+ charge suppliers a transaction fee based on a percentage of the final
+ dollar value of their successful bids. Our invoiced transaction fees are
+ subject to future reduction if we receive confirmation from a buyer and
+ supplier that they have cancelled or reduced the price or volume of their
+ original purchase order. A substantial number of cancellations or price
+ or volume reductions would harm our revenue. For further discussion of
+ cancellations or price or volume reductions, see Management s
+ Discussion and Analysis of Financial Condition and Results of
+ Operations. In addition, we may not be successful in collecting all
+ of our receivables, and we may incur legal expenses to pursue
+ collection.
+
+ 
+
+ If we fail to
+ continuously improve our technology and enhance our marketplace and
+ related services, we may lose buyers and suppliers, thus limiting our
+ revenue growth.
+
+ 
+
+ Our
+ future success will depend on our ability to enhance the technological
+ capabilities of our Internet-based marketplace, and to continue to
+ develop and introduce new services that keep pace with competitive
+ introductions and technological developments, satisfy diverse and
+ evolving requirements of buyers and suppliers and otherwise achieve
+ market acceptance. Our success will depend, in part, on the availability
+ of, and our ability to obtain on commercially reasonable terms, licenses
+ to technologies used in the development and maintenance of our
+ marketplace. Any failure by us to anticipate or respond adequately to
+ changes in technology and user preferences, or any significant delays in
+ our development or licensing efforts, could make our services
+ unmarketable or obsolete. In particular, we believe that our future success
+ will depend, in part, upon market acceptance of the latest version of our
+ Internet-based marketplace, which has only recently been released. We may
+ not be successful in developing and marketing quickly and effectively
+ future versions or upgrades of our technology or in offering new services
+ that respond to technological advances or new market requirements. As a
+ result, our revenue may decline.
+
+ 
+
+ Our success is
+ dependent on our key personnel, including software engineers and sales
+ and marketing professionals, whom we may not be able to retain or hire in
+ sufficient numbers to meet our needs.
+
+ 
+
+ We
+ believe that our success will depend on the continued employment of our
+ senior management team and key technical and sales personnel. If one or
+ more members of our senior management team were unable or unwilling to
+ continue in their present positions, we would have great difficulty
+ finding or may be unable to find suitable replacements, and our operating
+ costs could increase. Most of our senior management do not have
+ employment agreements, and we do not have key person life
+ insurance policies on any members of our senior management. In addition,
+ if any of these key employees joins a competitor or forms a competing
+ company, some of our buyers and suppliers might choose to use the
+ services of that competitor or new company instead of our
+ own.
+
+ 
+
+ We
+ plan to hire additional members of senior management and we plan to
+ expand our employee base to manage our anticipated growth. Competition
+ for personnel in our industry, particularly for senior management
+ personnel and employees with technical and sales expertise, is intense.
+ The success of our business is dependent upon hiring and retaining
+ suitable personnel. To maintain our position as a provider of an
+ Internet-based business-to-business e-commerce solutions, we must make
+ sure our employees maintain their technical expertise and business
+ skills. We cannot assure you that we will be able to attract a sufficient
+ number of qualified employees or that we will successfully train and
+ manage the employees that we hire. In addition, the employees that we
+ hire, including key technical personnel, may leave us to join a
+ competitor or to start a new business which may compete with
+ us.
+
+ 
+
+ Our senior
+ management team has limited tenure with us and has limited experience
+ working together, and our founders have limited management experience,
+ which may make it difficult to conduct and grow our
+ business.
+
+ 
+
+ Some
+ of the key members of our senior management team, including our chief
+ operating officer, chief financial officer, executive vice president of
+ strategic development, vice president of corporate development and vice
+ president of human resources, joined us this year. Other members of our
+ senior management team have been in place no longer than nine months,
+ since shortly before we first began operating our Internet-based
+ marketplace. As a result, there has been little or no opportunity to
+ evaluate the effectiveness of our senior management team as a combined
+ unit or their ability to execute our business plan. Our chief executive
+ officer and our president, the founders of our company, have not
+ previously managed a large business and have no experience managing a
+ public company. The failure of our founders and senior management to
+ function effectively as a team or to execute our business plan, or to
+ design and refine our business plan and provide necessary leadership, may
+ inhibit our ability to operate our marketplace, maintain a cohesive
+ culture, compete effectively and grow our business.
+
+ 
+
+ If we are
+ unable to maintain our reputation and expand recognition of the
+ SupplierMarket.com brand, we may have difficulty attracting new business
+ and retaining current buyers and suppliers and employees, and our
+ business may suffer.
+
+ 
+
+ We
+ believe that establishing and maintaining a good reputation and name
+ recognition are critical for attracting and retaining buyers and
+ suppliers and employees. We also believe that the importance of
+ reputation and name recognition is increasing and will continue to
+ increase due to the growing number of entrants into the
+ business-to-business e-commerce market. If our reputation is damaged or
+ if potential buyers and suppliers are
+ not familiar with us or the services we provide, we may be unable to
+ attract new, or retain existing, buyers and suppliers and employees.
+ Promotion and enhancement of our name will depend largely on our success
+ in continuing to provide effective services. If buyers and suppliers do
+ not perceive our services to be effective or of high quality, our brand
+ name and reputation will suffer. In addition, if the services we provide
+ have defects, we could suffer adverse publicity as well as economic
+ liability.
+
+ 
+
+ We may need to
+ acquire new businesses, products and technologies that complement or
+ augment our existing Internet-based marketplace and related technologies
+ in order to remain competitive in our market.
+
+ 
+
+ In
+ order to remain competitive, we may find it necessary to acquire
+ additional businesses, products or technologies. If we identify an
+ appropriate acquisition candidate, we may not be able to negotiate the
+ terms of the acquisition successfully, finance the acquisition or
+ integrate the acquired business, products or technologies into our
+ existing business and operations. The inability to integrate any newly
+ acquired entities or technologies effectively could harm our operating
+ results, business and growth. Members of our senior management may be
+ required to devote considerable amounts of their time to this integration
+ process, which will decrease the time they will have to service current
+ buyers and suppliers, attract new suppliers and develop new products and
+ services. Integrating any newly acquired businesses or technologies may
+ be expensive and time consuming. At present, we have no commitments or
+ agreements and are not currently engaged in discussions for any material
+ acquisitions or investments. If we consummate one or more significant
+ acquisitions in which the consideration consists of stock or other
+ securities, your equity could be significantly diluted. If we were to
+ proceed with one or more significant acquisitions in which the
+ consideration included cash, we could be required to use a substantial
+ portion of our available cash, including proceeds of this offering, to
+ consummate any acquisition. Acquisition financing may not be available on
+ favorable terms, or at all. In addition, we may be required to amortize
+ significant amounts of goodwill and other intangible assets in connection
+ with future acquisitions, which would seriously harm our net income. We
+ may not be able to operate any acquired businesses profitably or
+ otherwise implement our business strategy successfully. Unsuccessful
+ acquisitions could harm our operating results, business and
+ growth.
+
+ 
+
+ In order to
+ grow our business, we may need to raise additional capital in the future,
+ which would dilute your ownership in us. We may be unable to raise
+ additional capital, which may inhibit our ability to develop or enhance
+ our services, take advantage of business opportunities or respond to
+ competitive pressures.
+
+ 
+
+ In the
+ future, we may need to raise additional funds through public or private
+ debt or equity financing to take advantage of expansion or acquisition
+ opportunities, develop new services, compete effectively in the market or
+ fund operating losses. For the period from inception to March 31, 2000,
+ we used $13.9 million of cash for operating activities and we expect to
+ use cash for operating activities for the foreseeable future. Any
+ additional capital raised through the sale of equity or equity-related
+ securities would dilute your ownership percentage in us. These securities
+ could also have rights, preferences or privileges senior to those of your
+ common stock. We currently have no bank credit facility under which we
+ can borrow short-term funds. We may not be able to obtain additional
+ financing through securities issuances or commercial lending sources when
+ needed or on terms favorable to us or our stockholders. If additional
+ financing is not available on favorable terms or at all, this may inhibit
+ our ability to develop or enhance our services, take advantage of
+ business opportunities or respond to competitive pressures.
+
+ 
+
+ We expect to
+ recognize significant stock-based expense in the foreseeable future,
+ which will significantly increase our losses or adversely affect our
+ operating results during that time.
+
+ 
+
+ We
+ expect to recognize significant stock-based expense during the
+ foreseeable future in connection with our grants of stock options and our
+ proposed issuances of strategic warrants. The amount of this stock-based
+ expense will significantly increase our operating loss or minimize our
+ operating income, if any, during that time. We amortize stock-based
+ compensation for employee and director stock options over the vesting of
+ each individual option award. The options granted to employees generally
+ vest over four years, and the options granted to directors generally vest
+ over 12 months. As of March 31, 2000, we have recorded $16.1 million of
+ net deferred stock-based compensation related to employee and director
+ stock options which we currently expect will result in additional
+ non-cash compensation expense of $3.6 million in the remainder of 2000,
+ $4.2 million in 2001, $4.1 million in 2002, $3.9 million in 2003 and
+ $394,000 in 2004.
+
+ 
+
+ We
+ account for non-employee option grants as variable awards, and we cannot
+ estimate with certainty the related expense we will recognize in future
+ periods, as it will depend upon a number of factors including our stock
+ price. As of March 31, 2000, based on the estimated value of our stock on
+ that date, we have recorded $2.1 million of net deferred stock-based
+ compensation related to these option grants. The amount of this net
+ deferred stock-based compensation will increase in future periods if our
+ stock price increases.
+
+ 
+
+ We
+ also expect to recognize a significant amount of stock-based expense in
+ connection with our proposed issuance of strategic warrants to several
+ strategic buyers. We expect that these warrants will vest during the
+ remaining calendar quarters of 2000 and each quarter of 2001 based on the
+ total quarterly dollar volume of each strategic buyer s requests for
+ quotation posted on our marketplace which result in an executed purchase
+ order between the strategic buyer and the supplier for the direct
+ materials associated with the request for quotation. We will record a
+ charge to cost of revenue each quarter equal to the product obtained by
+ multiplying the number of shares subject to the warrants that have vested
+ during the quarter by the difference between the fair value of the vested
+ portion of the warrants determined using the Black-Scholes valuation
+ model and the exercise price of the warrants. We cannot estimate with
+ certainty the charge we will recognize in future periods because the fair
+ value of these warrants will fluctuate based upon the trading price and
+ volatility of our stock.
+
+ 
+
+ Changes in the
+ generally accepted accounting principles which we apply when determining
+ how much revenue to recognize in each accounting period may require us to
+ substantially alter the timing of our revenue recognition in the
+ future.
+
+ 
+
+ In
+ December 1999, the Securities and Exchange Commission issued Staff
+ Accounting Bulletin No. 101 Revenue Recognition in Financial
+ Statements, which summarizes the staff s views in applying generally
+ accepted accounting principles to revenue recognition in financial
+ statements. In addition, the Emerging Issues Task Force of the FASB may
+ prepare new guidance in this area. Future guidance from these
+ standards-making bodies may limit our ability to recognize revenue
+ according to our current policy. We cannot predict at this time whether
+ these standard-making bodies will issue guidance which would require us
+ to change our method of recognizing revenue for financial accounting
+ purposes. If we are required to change our revenue recognition policy, in
+ the future we may alter the timing of our revenue recognition, which
+ could cause the market price of our common stock to fall
+ significantly.
+
+ 
+
+ In recent
+ months, the trading market for securities of technology companies,
+ particularly business-to-business Internet companies, has suffered a
+ sharp decline and remains highly volatile; this makes an investment in
+ our common stock at this time particularly risky.
+
+ 
+
+ The
+ public market for technology stocks has recently experienced a
+ significant downturn, with many such stocks suffering price declines of
+ 50 to 75 percent or more. Trading in these stocks has remained extremely
+ volatile. Among technology stocks, the stocks of Internet
+ business-to-business marketplace companies have suffered some of the
+ sharpest declines and greatest volatility. Following this offering, the
+ price of our stock may experience similar volatility or suffer similar
+ sharp declines, particularly if current market conditions continue. Our
+ limited operating history, absence of profitability and expectation of
+ continued losses may increase the risk of price volatility and
+ decline.
+
+ 
+
+ As we expand
+ our marketplace services to international buyers and additional
+ international suppliers, our business will be exposed to the numerous
+ risks associated with international operations.
+
+ 
+
+ We
+ intend to offer our marketplace services to international buyers and
+ additional international suppliers. To date, we have limited experience
+ adapting our Internet-based marketplace for international buyers and
+ suppliers. International operations are subject to many risks,
+ including:
+
+ 
+
+ 
+ 
+ 
+
+ 
+ political,
+ regulatory and economic instability;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ reduced
+ protection for intellectual property rights in some
+ countries;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ potentially
+ adverse tax consequences, including restrictions on repatriation of
+ earnings;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ greater
+ difficulties in collecting accounts receivable;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ the existence of
+ protectionist laws and business practices favoring local
+ competition;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ difficulties and
+ costs of staffing and managing international operations, as a result
+ of, among other things, distance, language, cultural and regulatory
+ differences; and
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ fluctuations in
+ currency exchange rates.
+
+ 
+ 
+
+ 
+ 
+
+ Our
+ Internet-based marketplace depends on the continued growth of the
+ Internet as a means of commerce. If this growth slows, our revenue growth
+ may be limited.
+
+ 
+
+ Our
+ Internet-based marketplace depends on increased and sustained acceptance
+ and use of the Internet as a medium of commerce. Rapid growth in
+ electronic commerce is a recent phenomenon. This growth may not continue
+ at recent rates and a sufficiently broad base of business customers may
+ not adopt or continue to use the Internet as a medium of commerce. Demand
+ for services and products recently introduced over the Internet are
+ subject to a high level of uncertainty.
+
+ 
+
+ A
+ number of factors could inhibit such demand, including the
+ following:
+
+ 
+
+ 
+ 
+ 
+
+ 
+ the necessary
+ infrastructure for substantial growth in usage of the Internet may not
+ develop adequately;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ buyers and
+ suppliers using traditional means for bidding and purchasing may be
+ unwilling or unable to shift to an on-line forum;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ buyers and
+ suppliers may have security and confidentiality concerns;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ use of the
+ Internet and other on-line services may not continue to increase or may
+ increase more slowly than expected; and
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ new and
+ burdensome governmental regulations or taxation may affect the
+ viability of electronic commerce.
+
+ 
+ 
+
+ 
+ 
+
+ Our marketplace
+ depends on the integrity of the Internet, which is uncertain and is
+ beyond our control.
+
+ 
+
+ If
+ Internet usage grows, the Internet infrastructure may not be able to
+ support the demands placed on it or its performance or reliability may
+ decline. In addition, our ability to offer our services is limited, in
+ part, by the speed and reliability of networks operated by third parties.
+ Internet sites may also experience interruptions in service from time to
+ time as a result of outages and other delays occurring throughout the
+ Internet network infrastructure. If these outages or delays frequently
+ occur in the future, Internet usage, as well as usage of our marketplace,
+ could be adversely affected.
+
+ 
+
+ Security risks
+ and concerns about use of the Internet may deter potential buyers and
+ suppliers from using our Internet-based marketplace.
+
+ 
+
+ 
+ Concern about the security of the transmission of confidential
+ information over public networks is a significant barrier to electronic
+ commerce and communication. Advances in computer capabilities, new
+ discoveries in the field of cryptography or other events or developments
+ could result in compromises or breaches of Internet security systems that
+ protect proprietary information. If any well-publicized compromises of
+ security were to occur, they could substantially reduce the use of the
+ Internet for commerce and communications.
+
+ 
+
+ Anyone
+ who circumvents our security measures could misappropriate proprietary or
+ confidential information, place false requests for quotation or cause
+ interruptions in our services or operations. Our activities involve the
+ storage and transmission of proprietary information, such as confidential
+ buyer and supplier specifications. The Internet is a public network, and
+ data is sent over this network from many sources. Recently, some Internet
+ service providers and e-commerce web sites have been targeted by
+ denial of service and other attacks that overloaded these web
+ sites and forced them to shut down temporarily. Computer viruses have
+ also been distributed, and have rapidly spread, over the Internet.
+ Computer viruses could be introduced into our systems or those of our
+ buyers and suppliers, which could disrupt or make inaccessible our
+ Internet-based bidding technology. We may be required to expend
+ significant capital and other resources to protect against the threat of,
+ or to alleviate problems caused by, security breaches and the
+ introduction of computer viruses. Our security measures may be inadequate
+ to prevent security breaches or combat the introduction of computer
+ viruses, either of which may result in loss of data, increased operating
+ costs, litigation and other possible liability.
+
+ 
+
+ Failure to
+ maintain our buyer and supplier databases could seriously harm our
+ business and reputation.
+
+ 
+
+ We
+ maintain extensive databases of buyers, suppliers, products and
+ transactions. Database capacity constraints may result in data
+ maintenance and accuracy problems, which could cause a disruption in our
+ service and affect our ability to provide accurate information to our
+ buyers and suppliers. Such disruptions may result in a loss of buyers and
+ suppliers, which could severely harm our business.
+
+ 
+
+ If we encounter
+ system failure, our Internet-based marketplace services could be delayed
+ or interrupted, which could severely harm our business and result in a
+ loss of buyers and suppliers.
+
+ 
+
+ Our
+ ability to successfully maintain our Internet-based marketplace and
+ provide acceptable levels of customer service largely depends on the
+ efficient and uninterrupted operation of our computer and communications
+ hardware and software systems. Any interruptions could severely harm our
+ business and result in a loss of buyers and suppliers. Our computer and
+ communications systems are hosted by a third party, on whom we rely to
+ manage the security and maintenance procedures at its site. Although we
+ periodically back up our databases on tape and store the backup tapes
+ offsite, we do not maintain a redundant site. Our systems and operations
+ are vulnerable to damage or interruption from human error, sabotage,
+ fire, flood, earthquake, power loss, telecommunications failure, related
+ equipment failure and similar events. Although we have taken steps to
+ prevent a system failure, we cannot assure you that our measures will be
+ successful and that we will not experience system failures in the future.
+ Moreover, we have experienced delays and interruptions in our telephone
+ and Internet access which have prevented buyers and suppliers from
+ accessing our marketplace and our customer service department.
+ Furthermore, we do not have a formal disaster recovery plan and do not
+ carry sufficient business interruption insurance to compensate us for
+ losses that may occur as a result of any system failure. The occurrence
+ of any system failure or similar event could harm our business
+ dramatically.
+
+ 
+
+ Capacity
+ limits on our marketplace may be difficult to project and we may not be
+ able to expand and upgrade our systems to meet increased use. As a
+ result, we may not be able to grow our revenue.
+
+ 
+
+ As
+ traffic in our Internet-based marketplace continues to increase, we must
+ expand and upgrade our transaction processing systems and network
+ hardware and software. We may not be able to accurately project the rate
+ of increased usage of our marketplace. In addition, we may not be able to
+ expand and upgrade our systems and network hardware and software
+ capabilities to accommodate increased usage. If we do not appropriately
+ upgrade our systems and network hardware and software, the quality of our
+ service may decline, which could damage our reputation and relationships
+ with our buyers and suppliers.
+
+ 
+
+ If our
+ intellectual property protection is inadequate, competitors may gain
+ access to our technology and undermine our competitive position, causing
+ us to lose business from buyers and suppliers.
+
+ 
+
+ We
+ regard our copyrights, service marks, trade secrets and other
+ intellectual property as important to our success, and rely or expect to
+ rely on patent, trademark, service mark and copyright law, trade secret
+ protection and confidentiality and/or license agreements with our
+ employees, buyers and suppliers and business partners to protect our
+ proprietary rights. Despite our precautions, unauthorized parties may
+ copy certain portions of our Internet-based marketplace or reverse
+ engineer or obtain and use information that we regard as proprietary.
+ End-user license provisions protecting against unauthorized use, copying,
+ transfer and disclosure may be unenforceable under the laws of certain
+ jurisdictions and foreign countries. The status of United States patent
+ protection in the software industry is not well defined and will evolve
+ as the U.S. Patent and Trademark Office grants additional patents. We may
+ seek patents on aspects of our technology and processes. We do not know
+ whether any patents will be issued, and even if some or all of these
+ patents are issued, we cannot assure you that they will not be
+ successfully challenged or invalidated, that they will adequately protect
+ our technology and processes or that they will result in commercial
+ advantages to us. We have also applied for registration of several of our
+ brand names and other service marks, but these protections may not be
+ adequate. In addition, the laws of some foreign countries do not protect
+ proprietary rights to the same extent as do the laws of the United
+ States. Our means of protecting our proprietary rights in the United
+ States or abroad may not be adequate and competitors may independently
+ develop similar technology, duplicate our products or design around
+ patents that may be issued to us.
+
+ 
+
+ Others may
+ assert that our technology infringes their intellectual property
+ rights.
+
+ 
+
+ We do
+ not believe that we infringe the proprietary rights of others, but we may
+ be subject to infringement claims. In particular, because a United States
+ patent application is not publicly disclosed until the patent is issued,
+ we cannot be certain that there are no pending applications that, if
+ issued, would restrict our ability to use or provide our existing or
+ planned technology or services. The defense of any claims of infringement
+ made against us by third parties could involve significant legal costs
+ and require our management to divert time and attention from our business
+ operations. Either of these consequences of an infringement claim could
+ have a material adverse effect on our operating results. If we are
+ unsuccessful in defending against any claims of infringement, we may be
+ forced to obtain licenses or to pay royalties to continue to use our
+ technology. We may not be able to obtain any necessary licenses on
+ commercially reasonable terms or at all. If we fail to obtain necessary
+ licenses or other rights, or if these licenses are too costly, our
+ operating results may suffer either from reductions in revenues through
+ our inability to serve our buyers and suppliers or from increases in
+ costs to license third-party technology.
+
+ 
+
+ Future
+ government regulation of the Internet and of services offered through our
+ marketplace could limit the number of buyers and suppliers using our
+ services.
+
+ 
+
+ As
+ with many Internet companies, we operate in an environment of great
+ uncertainty as to potential government regulation. We believe that we are
+ not currently subject to direct regulation applicable to e-commerce,
+ other than regulations applicable to businesses generally. However, the
+ Internet has rapidly emerged
+ as a commerce medium, and governmental agencies have not yet adapted many
+ existing regulations to its use. Future laws, regulations and court
+ decisions may affect the Internet or other electronic services, covering
+ issues such as user pricing, user privacy, freedom of expression, access
+ charges, taxation, content and quality of products and services,
+ advertising, antitrust, intellectual property rights and user
+ authentication and information security. In addition, because our
+ Internet-based marketplace is available worldwide, foreign jurisdictions
+ may claim that we are required to comply with their laws. Any future law,
+ regulation or court decision may have a negative impact on our
+ business.
+
+ 
+
+ 
+ Because we are an Internet company, it is unclear in which
+ jurisdictions we are actually conducting business. Our failure to qualify
+ to do business in a jurisdiction that requires us to so qualify could
+ subject us to fines and penalties and could result in our inability to
+ enforce agreements.
+
+ 
+
+ 
+ Numerous states have laws and regulations regarding the conduct of
+ auctions and the liability of auctioneers. We do not believe that these
+ laws and regulations, which in most cases were enacted for consumer
+ protection many years ago, apply to our marketplace. However, one or more
+ jurisdictions may attempt to impose these or new laws and regulations on
+ our operations in the future.
+
+ 
+
+ We may be
+ exposed to product liability claims and claims based on information
+ provided by buyers or suppliers.
+
+ 
+
+ We
+ face potential liability for claims based on the type, adequacy and
+ accuracy of the information and data that we obtain from and make
+ available to buyers and suppliers. This includes claims for breach of
+ warranty, product or environmental liability, misrepresentation,
+ intellectual property infringement, violation of governmental regulations
+ and other commercial claims. We rely on buyers and suppliers to be
+ truthful when registering to use our marketplace and to update their
+ registration information as changes occur. Although we typically make
+ some inquiries about the creditworthiness or other characteristics of
+ registering buyers and verify some information about registering
+ suppliers, we do not and cannot practically perform extensive background
+ checks or audits of buyers and suppliers. Similarly, we do not screen
+ requests for quotation for accuracy, content or clarity. Although we
+ maintain commercial general liability insurance, including products
+ liability and completed operations liability, our insurance may not cover
+ some claims. Our insurance is also subject to policy limits and
+ exclusions, and may not fully indemnify us or our employees for any
+ civil, governmental or criminal liability that may be imposed.
+ Furthermore, this insurance may not be available at commercially
+ reasonable rates in the future. Any liability not covered by our
+ insurance or in excess of our insurance coverage could harm our business,
+ results of operations and financial condition. Our attempts to limit our
+ liability to and to obtain warranties and indemnification from buyers and
+ suppliers in our contracts may not absolve us of liability or may not be
+ enforceable.
+
+ 
+
+ We may be sued
+ for information and content contained in our Internet-based
+ marketplace.
+
+ 
+
+ As a
+ publisher and distributor of on-line content, we face potential liability
+ for defamation, negligence, copyright, patent or trademark infringement
+ and other claims based on the nature and content of the materials that we
+ publish or distribute. These claims have been brought, sometimes
+ successfully, against on-line content providers. We do not and cannot
+ practically screen all of the content generated by our users and content
+ partners, including buyer and supplier registration information, requests
+ for quotation, entries posted by buyers and suppliers to the on-line
+ bulletin board within our marketplace, supplier bids, any satisfaction
+ ratings submitted by buyers and suppliers and articles and other content
+ provided by our content partners. We could be exposed to liability with
+ respect to any or all of this content. We could also be subjected to
+ claims based upon the content that is accessible from our marketplace
+ through links to other Internet sites or through content and materials
+ that users may post in on-line bulletin boards. Although we carry general
+ liability insurance, our insurance may not cover claims of these types or
+ may not be adequate to indemnify us for all liability that may be
+ imposed. Any imposition of liability, particularly liability that is not
+ covered by insurance or is in excess of insurance coverage, could
+ severely harm our reputation and our business, operating results and
+ financial condition.
+
+ 
+
+ Our quarterly
+ results are subject to significant fluctuations, and our stock price may
+ decline if we do not meet expectations of investors and
+ analysts.
+
+ 
+
+ We
+ expect that our quarterly operating results will fluctuate significantly
+ due to many factors, many of which are outside our control,
+ including:
+
+ 
+
+ 
+ 
+ 
+
+ 
+ inconsistent
+ growth, if any, of our buyer and supplier base;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ loss of
+ strategic partners;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ variations in
+ the timing and dollar volume of transactions completed in our
+ Internet-based marketplace;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ timing of the
+ selection of suppliers by buyers following the completion of bidding
+ events in our marketplace;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ increased
+ competition from new on-line marketplaces;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ introduction of
+ new services or enhancements by our competitors;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ changes in
+ pricing policies by us or our competitors;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ our ability to
+ control operating costs during the establishment and growth of our
+ business; and
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ fluctuations in
+ stock-based compensation expense related to grants of options to
+ non-employees and warrants to strategic partners.
+
+ 
+ 
+
+ 
+ 
+
+ 
+ Because a high percentage of our expenses is fixed, such as
+ compensation and rent, any of the factors listed above that could cause
+ significant variations in revenues may harm our financial results in any
+ given quarter. Any decline in revenues or earnings or a greater than
+ expected loss for any quarter could lower the market price of our common
+ stock, even if not reflective of any long-term problems with our
+ business.
+
+ 
+
+ Our common
+ stock has not traded publicly; the initial public offering price may not
+ be indicative of the market price of our common stock after this
+ offering, and the market price of our common stock, like the market
+ prices of the stocks of other Internet companies, may fluctuate widely
+ and rapidly.
+
+ 
+
+ There
+ is currently no public market for our common stock, and we cannot assure
+ you that an active trading market will develop or be sustained after this
+ offering. The initial public offering price will be determined through
+ negotiation between us and representatives of the underwriters and may
+ not be indicative of the market price for our common stock after this
+ offering.
+
+ 
+
+ The
+ market price of our common stock could fluctuate significantly as a
+ result of:
+
+ 
+
+ 
+ 
+ 
+
+ 
+ quarter-to-quarter variations in our operating results, which
+ may cause us to fail to meet analysts or investors 
+ expectations;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ economic and
+ stock market conditions specific to Internet companies;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ changes in
+ financial estimates by securities analysts following our
+ stock;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ earnings and
+ other announcements by, and changes in market evaluations of, Internet
+ companies;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ changes in
+ business or regulatory conditions affecting Internet
+ companies;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ announcements or
+ implementation by us or our competitors of technological innovations or
+ new products or services; or
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ trading volume
+ of our common stock.
+
+ 
+ 
+
+ 
+ 
+
+ The
+ securities of many companies have experienced extreme price and trading
+ volume fluctuations in recent years, often unrelated to the
+ companies operating performance. Specifically, market prices for
+ securities of Internet-related and technology companies have frequently
+ reached elevated levels, often following their initial public offerings.
+ These levels may not be sustainable and may not bear any relationship to
+ these companies operating performances. We cannot assure you that
+ the market price of our common stock will reach an elevated level
+ following this offering or that, if it does, it will not substantially
+ and rapidly decline. In the past, following periods of volatility in the
+ market price of a company s securities, stockholders have often
+ instituted securities class action litigation against the company. If we
+ were involved in a class action suit, it could divert the attention of
+ senior management, and, if adversely determined, could have a negative
+ impact on our financial condition.
+
+ 
+
+ Substantial
+ sales of our common stock after the offering could cause our stock price
+ to fall.
+
+ 
+
+ All of
+ our outstanding shares are currently restricted from resale, but some may
+ be sold into the market in the near future. Sales of these shares into
+ the market could cause the market price of our common stock to drop
+ significantly, even if our business is doing well.
+
+ 
+
+ 
+ Immediately following this offering, we will have outstanding
+ 41,196,283 shares of common stock. This includes the 10,000,000 shares we
+ are selling in this offering. Assuming that we sell all shares reserved
+ under our directed share program to the entities or persons for whom
+ these shares have been reserved, we expect that investors may resell all
+ shares in the public market immediately. The remaining 75.7%, or
+ 31,196,283 shares, of our total outstanding shares will become available
+ for resale in the public market as shown in the chart below:
+
+ 
+
+ 
+ 
+ Number of
+ shares / % of total outstanding
+ 
+ Date of
+ availability for resale into public market
+ 
+
+ 
+ 29,809,457 /
+ 72.4%
+ 
+ 180 days after
+ the date of this prospectus due to an
+ 
+
+ agreement many of our stockholders have with the
+ 
+
+ underwriters. However, the underwriters may waive
+ 
+
+ this restriction and allow these stockholders to sell
+ 
+
+ their shares at any time.
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 1,386,826 /
+ 3.3%
+ 
+ January,
+ 2001 or later.
+ 
+
+ 
+ 
+
+ As
+ restrictions on resale end, the market price of our stock could drop
+ significantly if the holders of these restricted shares sell them or the
+ market perceives that they intend to sell them. For a more detailed
+ description, please see Shares Eligible for Future
+ Sale. 
+
+ 
+
+ You will
+ experience immediate and substantial dilution.
+
+ 
+
+ If you
+ purchase common stock in this offering, you will pay more for your shares
+ than the amounts paid by existing stockholders for their shares. As a
+ result, you will experience immediate and substantial dilution of
+ approximately $7.09 per share, representing the difference between our
+ net tangible book value per share after giving effect to this offering
+ and the initial public offering price. For more information, see
+ Dilution. 
+
+ 
+
+ Other companies
+ may have difficulty acquiring us, even if doing so would benefit our
+ stockholders, due to provisions of our certificate of incorporation and
+ by-laws and Delaware law.
+
+ 
+
+ 
+ Provisions in our certificate of incorporation, in our by-laws and
+ under Delaware law could make it more difficult for other companies to
+ acquire us, even if doing so would benefit our stockholders. Our
+ certificate of incorporation and by-laws contain the following
+ provisions, among others, which may inhibit an acquisition of our company
+ by a third party:
+
+ 
+
+ 
+ 
+ 
+
+ 
+ advance
+ notification procedures for matters to be brought before stockholder
+ meetings;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ a limitation on
+ who may call stockholder meetings;
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ a prohibition on
+ stockholder action by written consent; and
+
+ 
+ 
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ an authorization
+ of 1,000,000 shares of undesignated preferred stock that we may issue
+ with special rights, preferences and privileges and that we could use,
+ for example, to implement a rights plan or poison pill.
+
+ 
+ 
+
+ 
+ 
+
+ We are
+ also subject to provisions of Delaware law that prohibit us from engaging
+ in any business combination with any interested stockholder ,
+ meaning generally a stockholder who beneficially owns more than 15% of
+ our stock, for a period of three years from the date this person became
+ an interested stockholder, unless various conditions are met, such as
+ approval of the transaction by our Board. These provisions could have the
+ effect of delaying or preventing a change in control. For a more complete
+ discussion of these provisions of Delaware law, please see
+ Description of Capital Stock Anti-Takeover
+ Provisions Delaware Law. 
+
+ 
+
+ Our affiliates
+ can control matters requiring stockholder approval because they own a
+ large percentage of our common stock, and they may vote this common stock
+ in a way with which you do not agree.
+
+ 
+
+ After
+ this offering, our officers, directors and 5% stockholders will own
+ approximately 52.7% of the outstanding shares of our stock. As a result,
+ if these persons act together, they will have the ability to exercise
+ substantial control over our affairs and corporate actions requiring
+ stockholder approval, including the election of directors, a sale of
+ substantially all our assets, a merger with another entity or an
+ amendment to our certificate of incorporation. The ownership position of
+ these stockholders could delay, deter or prevent a change in control and
+ could adversely affect the price that investors might be willing to pay
+ in the future for shares of our common stock.
+
+ 
+
+ 
+ 
+ NOTE REGARDING FORWARD-LOOKING STATEMENTS
+
+ 
+
+ Some
+ of the statements under Prospectus Summary , Risk
+ Factors , Management s Discussion and Analysis of
+ Financial Condition and Results of Operations , Business 
+ and elsewhere in this prospectus constitute forward-looking statements.
+ These statements involve known and unknown risks, uncertainties and other
+ factors that may cause our or our industry s actual results, levels
+ of activity, performance or achievements to be materially different than
+ any expressed or implied by these statements. In some cases, you can
+ identify these statements by terminology such as may ,
+ will , should , expects ,
+ plans , anticipates , believes ,
+ estimates , predicts , potential ,
+ continue or the negative of these terms or other comparable
+ terminology.
+
+ 
+
+ 
+ Although we believe that the expectations reflected in these
+ statements are reasonable, we cannot guarantee future results, levels of
+ activity, performance or achievements. Except as otherwise required by
+ federal securities laws, we are under no duty to update any of the
+ statements after the date of this prospectus to conform these statements
+ to actual results.
+
+ 
+
+ 
+ 
+ USE OF PROCEEDS
+
+ 
+
+ We
+ estimate that we will receive net proceeds from this offering of
+ approximately $92.1 million, at an assumed initial public offering price
+ of $10.00 per share, net of estimated underwriting discounts and
+ commissions and offering expenses payable by us. If the underwriters
+ exercise their over-allotment option in full, we estimate our net
+ proceeds will be $106.0 million.
+
+ 
+
+ We
+ expect to use these proceeds for working capital, other general corporate
+ purposes and potential acquisitions. Other general corporate purposes
+ include funding anticipated operating losses, advertising campaigns,
+ brand-name promotions and other marketing efforts, research and
+ development and capital expenditures. We also may use a portion of the
+ net proceeds to acquire or invest in complementary businesses,
+ technologies, products or services, although no specific acquisitions are
+ currently planned. As of the date of this prospectus, we cannot specify
+ with certainty all of the particular uses for the remaining net proceeds
+ we will have upon completion of the offering. Accordingly, our management
+ will have broad discretion in the application of the net
+ proceeds.
+
+ 
+
+ 
+ Pending these uses, we intend to invest the net proceeds in
+ interest-bearing, investment-grade instruments, certificates of deposit,
+ or direct or guaranteed obligations of the United States.
+
+ 
+
+ 
+ 
+ DIVIDEND POLICY
+
+ 
+
+ We
+ have never declared or paid dividends on our capital stock and do not
+ anticipate declaring or paying any dividends in the foreseeable future.
+ We currently intend to retain any future earnings for the expansion of
+ our business.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001107926_dynacs-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001107926_dynacs-inc_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1609c5a92f4bf696133d418d80a71f3d28a6fc0a
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+++ b/parsed_sections/prospectus_summary/2000/CIK0001107926_dynacs-inc_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information and Dynacs' financial statements and the notes to those statements appearing elsewhere in this prospectus. In this prospectus,"Dynacs," the "Company," "we," "us" and "our" refer to Dynacs Inc. and its subsidiaries, and the Securities Act of 1933, as amended, is referred to as the "Securities Act." References in this prospectus to backlog include funded and unfunded backlog. Funded backlog consists of the dollar amount of contracts in our information systems and aerospace/satellite systems and operations business that is currently appropriated by the customer and allocated to the contract or otherwise authorized for payment upon completion of a particular portion of the work. Unfunded backlog consists of the full contract award value of these contracts and includes renewals or extensions that have been priced but as to which the customer retains funding discretion. References in this prospectus to the term of any contract include the basic term and the term of any option periods, whether or not the relevant options have been exercised. OUR BUSINESS We develop, apply and provide services utilizing advanced technologies in the areas of information systems and aerospace/satellite systems and operations for U.S. Government agencies and private sector clients. More recently, we have begun providing information technology and digital content development and production services to the media and entertainment industry through our Digital Media and Entertainment Division. Our business strategy is to develop commercial applications for the technologies and know-how developed by us in our information and aerospace businesses to create and grow new businesses with strong profit potential. To date, the most significant commercial application of our proprietary technologies has been our use of these technologies to convert and reformat black-and-white film footage, including full length feature films and television series, and shorter length media, including cartoons, television commercials, music videos and short films and videos, into digital color material. We utilize these technologies to provide digital conversion and reformatting services to others as well as to enhance or modify other content, which was originally created for other purposes, for which we can then obtain a copyright. We believe that the digital distribution of visual media content utilizing internet technologies presents another significant commercial application of our know-how. To further our business strategy, we have: - spent over $4.0 million in the twelve-month period ended December 31, 1999 to build the infrastructure to grow our digital media and entertainment business, including the development of specialized software and computer hardware systems used for digital conversion, cataloguing and archiving of digital media content, and to convert full and short length media into digital color material, as well as for upgrading existing facilities, and - pursued an acquisition strategy aimed at acquiring media assets to which we can apply our technologies to enhance their earnings potential and create new, copyrighted visual media. We believe that we are the only provider of cost-effective processes to convert black-and-white full length films into digital color material. We believe that we are also the leading provider of converting the combined group of full length films and shorter length media, including cartoons, television commercials, music videos and short films and videos, into digital color material. Our past and current clients for these services include, among others, The Walt Disney Company (which generated 0.1% of our revenues for the nine-month period ended September 30, 1998 and 0.0% of our revenues for the six-month period ended March 31, 2000) and Columbia Pictures Television Group, a division of Sony Corporation (which generated 0.6% of our revenues for the nine-month period ended September 30, 1998 and 1.9% of our revenues for the six-month period ended March 31, 2000). We intend to use our information and digital technologies to develop Internet-based TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Prospectus Summary.......................................... 4 Risk Factors................................................ 12 Use of Proceeds............................................. 19 Dividend Policy............................................. 21 Capitalization.............................................. 21 Dilution.................................................... 23 Selected Consolidated Financial Data........................ 24 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 25 Business.................................................... 39 Management.................................................. 59 Principal and Selling Stockholders.......................... 66 Certain Transactions........................................ 68 Description of Securities................................... 72 Shares Eligible for Future Sale............................. 75 Underwriting................................................ 79 Legal Matters............................................... 82 Experts..................................................... 82 Available Information....................................... 82 Index to Financial Statements............................... F-1 </TABLE> distribution and business-to-business and business-to-consumer delivery of both our own and third-party owned digital media products and services through our MarketYourMedia.com web site. In 1998, as part of our media and entertainment business expansion, we began to acquire for our own account, directly and through joint projects, media products for colorization, while continuing to provide work-for-hire colorization services. We have entered into a non-binding letter of intent to acquire the Sherman Grinberg Film Libraries, Inc., one of the earliest and largest commercial newsreel film collections in the world. The libraries contain approximately 15.0 million feet of film footage and include, among other footage, the Pathe and Paramount Newsreels, as well as series such as "The Greatest Headlines of the Century." As a result of the acquisition of the Sherman Grinberg Film Libraries, Inc., if completed, Dynacs will acquire a 50.0% interest in, and the perpetual exclusive license to operate, the Pathe film collection consisting of 7.0 million feet of 35mm film dating from 1896 to 1957. We intend to pursue a digital production and distribution strategy utilizing our proprietary technologies, including colorization technologies, and our MarketYourMedia.com website to enhance the earnings potential and value of this asset. For the twelve-month period ended December 31, 1999, our gross revenues exceeded $72.9 million, of which $71.3 million, or 97.8%, were attributable to information systems and aerospace/satellite systems and operations contracts and $1.6 million, or 2.2%, were attributable to digital media and entertainment contracts. For the nine months ended September 30, 1999, total revenues were $55.3 million, of which $53.9 million, or 97.5%, were attributable to information systems and aerospace/satellite systems and operations contracts, and $1.4 million, or 2.5%, were attributable to digital media and entertainment contracts. For the six-month period ended March 31, 2000, total revenues were $36.6 million, of which $35.7 million, or 97.5% were attributable to information systems and aerospace/satellite systems and operations contracts, and $0.9 million, or 2.5%, were attributable to digital/media and entertainment contracts. OUR CORE TECHNOLOGIES Our Information and Applied Technology Division and Digital Media and Entertainment Division each utilizes one or more of our core technologies. Our core technologies include: - 3-D VISUALIZATION AND ANIMATION TECHNOLOGIES, USED TO REPRESENT STILL AND MOVING OBJECTS FOR THE AEROSPACE AND MEDIA INDUSTRIES. For example, under our $173.6 million, five-year contract with NASA's Kennedy Space Center ending September 30, 2002, our services include multimedia development and training, computer graphics and animation, and web site development and implementation services. - DIGITAL IMAGE PROCESSING AND IMAGE MANIPULATION TECHNOLOGIES USED TO CREATE AND ENHANCE IMAGES. For example, under our $2.9 million, 63-month contract with the U.S. Air Force Phillips Laboratory ending December 31, 2001, we have developed techniques to improve laser imaging of objects in space. - DESIGN, SIMULATION AND MODELING OF THREE-DIMENSIONAL OBJECTS IN MOTION, INCLUDING SATELLITES AND OTHER SPACECRAFT, MOTOR VEHICLES AND SAILBOATS. For example, under our five-year, $3.5 million contract with NASA ending September 30, 2000, we are developing spacecraft computer models for the Johnson Space Center. - INTERNET ENABLING AND COMPUTER TECHNOLOGIES USED IN THE MANAGEMENT OF INFORMATION SYSTEMS AND PROCESSES. For example, under our seven-year, $64.6 million subcontract with The Boeing Company ending September 30, 2001, we are integrating information systems for NASA's International Space Station. - SATELLITE OPERATING SOFTWARE. For example, under our 54-month, $5.3 million contract with TRW Inc. ending March 31, 2001, we develop software to operate satellite systems. DIGITAL MEDIA AND ENTERTAINMENT We developed our digital media and entertainment business based on the same information management, visualization technologies and know-how initially developed by us for the aerospace industry. Through the use of our advanced proprietary technologies and our low cost overseas production facilities, we believe that we are able to provide clients with a realistic and aesthetically pleasing product on a faster production schedule and a more cost-effective basis than other currently available methods. We have also developed technologies for converting visual media into material for high definition television and theatrical projection. To date, we have completed film and television projects for The Walt Disney Company (0.1% of our revenues for the nine-month period ended September 30, 1998 and 0.0% of our revenues for the six-month period ended March 31, 2000) and Columbia Picture Television Group, a division of Sony Corporation (0.6% of our revenues for the nine-month period ended September 30, 1998 and 1.9% of our revenues for the six-month period ended March 31, 2000), and others, and have also created special color effects for commercials, music videos and documentaries. We seek to leverage our information management, visualization technologies and know-how initially developed by us for the aerospace industry to complete the development of our web site, "MarketYourMedia.com," and to enable us to establish ourselves as a leader in the visual content industry. Through MarketYourMedia.com, we intend to position Dynacs as a seller and distributor of visual media assets over the Internet. Once our web site is in operation, we plan to use this web site as an on-line media library and marketplace where we and other owners of digitized visual media can sell material to prospective licensees and consumers. We anticipate receiving fees from media owners for scanning, digitizing, colorizing, cataloging and archiving their materials. Prospective licensees will be able to search an on-line catalog of available materials and down-load selected materials for viewing. For third party owners of visual media, we will act as an intermediary and receive fees for properties licensed through the MarketYourMedia.com web-site. MARKETS According to International Data Corporation (IDC), a leading provider of information technology industry analysis and market data, the commercial market for the type of services that we provide in the area of information systems management and development is projected to sustain annual double-digit growth through 2004, with the U.S. remaining the largest regional market for information technology services. We believe that this substantial growth will result from the increasing dependency of businesses and governmental agencies on information technologies and the trend toward outsourcing of these services, which is particularly acute for companies whose information technology personnel lack the requisite skills and abilities to implement new technologies. The commercial markets for the type of services that we can provide in the area of aerospace/satellite systems and operations are expected to grow to $81.1 billion worldwide between 2000 and 2009, according to the Teal Group Corporation. The anticipated market demand reflects the dramatic growth projected in the global communications and information industry and the availability of new supporting technologies. Currently, the primary focus of our media and entertainment business is the world-wide market for digitally reformatted black-and-white television programming with an initial emphasis on family, children's and documentary programming. This market constitutes only a portion of the commercial markets for all television programming. GROWTH STRATEGY We intend to grow our business by: - expanding our work in the field of digital media and entertainment by acquiring, colorizing, developing and distributing libraries of black-and-white television series, feature films and stock footage to network and cable television and for broad-band Internet presentation; - developing an on-line digital library and marketplace, under the name "MarketYourMedia.com," for the distribution of visual digital and other media content; - expanding our work in digital conversion and cataloguing, archiving of visual media content and digital film restoration, animation, and colorization; - identifying and pursuing further commercial applications of technologies and know-how which we have developed in our work, which may include joint ventures with or acquisitions of companies in related businesses; and - continuing to provide services to U.S. Government agencies on projects with high visibility as a means of developing new technologies and enhancing our reputation. THE OFFERING <TABLE> <S> <C> Shares offered by Dynacs............... 3,000,000 shares Shares to be outstanding after this offering............................. 13,347,765 shares Use of proceeds........................ - Acquisition and development of rights in media assets - Expand and upgrade U.S. and overseas facilities and equipment and build new U.S. and overseas facilities - Repayment of line of credit - Hire additional marketing, technical and production personnel - Research and development - Repayment of related party debt - Marketing - Loan to related party - Working capital and general corporate purposes See "Use of Proceeds." NASDAQ National Market symbol.......... DNAC </TABLE> The information throughout this prospectus gives effect to a 1,750-to-one stock split of our common stock on August 11, 1999, a 1.12299-to-one stock split on March 28, 2000 and a 1.3-to-one stock split on July 14, 2000. Unless otherwise specifically stated, information throughout this prospectus assumes: - an initial public offering price of $10.00 per share; - no exercise of the underwriters' over-allotment option, the representatives' warrants or other outstanding options and warrants other than the Mezzanine Warrants (as defined below); - the automatic conversion, at the effective date of this offering, of the equity interest of certain parties in our subsidiary, Cerulean FXs, Inc., into 912,064 shares of our common stock; - the acquisition of the issued and outstanding capital stock of Sherman Grinberg Film Libraries, Inc. in exchange for 1,085,000 shares of our common stock; - the issuance of 5,000 shares of our common stock to Film Archive Finance Company, Inc., the parent company of Sherman Grinberg Film Libraries, Inc., in consideration for a covenant not to compete; - the issuance of 10,000 shares of our common stock to an executive officer of Film Archive Finance Company, Inc. in consideration for entering into a non-competition agreement with us; - that the holders of unsecured promissory notes ("Mezzanine Notes") issued in connection with our November 1999 and January 2000 and February and March 2000 mezzanine financings (collectively, the "Mezzanine Financings") have elected to convert their Mezzanine Notes into an aggregate of 483,334 shares of our common stock; - that the warrants ("Mezzanine Warrants") issued in connection with the Mezzanine Financings to the holders of the Mezzanine Notes have been exercised for an aggregate of 635,050 shares of our common stock; - that the warrants granted to H.C. Wainwright & Co., Inc., a representative of the underwriters in this offering, in consideration for services rendered as placement agent of the Mezzanine Financings for 62,834 shares of our common stock have been canceled; - 255,480 shares of common stock issuable upon the exercise of options at $.02 per share; and - no additional issuance of securities under our 1999 Long-Term Incentive Plan. We have excluded the following shares in calculating the number of shares of common stock that will be outstanding after the completion of this offering, - 470,088 shares of common stock that will be issuable upon the exercise of options we intend to issue upon the consummation of this offering to our employees under our 1999 Long-Term Incentive Plan at an exercise price equal to the initial public offering price of the common stock per share; - 255,480 shares of common stock that will be issuable upon the exercise of options we intend to issue upon the consummation of this offering to particular parties under our 1999 Long-Term Incentive Plan at an exercise price equal to the initial public offering price of the common stock per share in connection with our acquisition in August 1999 of Cerulean Colorization L.L.C.; - 51,097 shares of common stock that will be issuable upon the exercise of options we intend to issue upon the consummation of this offering to a director-nominee under our 1999 Long-Term Incentive Plan at an exercise price equal to the initial public offering price of the common stock per share in connection with our acquisition of Cerulean Colorization L.L.C., subject to Dynacs meeting specific performance targets; - 82,727 shares of common stock issuable to director-nominees and consultants upon the exercise of options we intend to issue pursuant to our 1999 Long-Term Incentive Plan at an exercise price equal to the initial public offering price of the common stock per share; - 300,000 shares of common stock that will be issuable upon the exercise of warrants we intend to grant to a representative of the underwriters of this offering in consideration for services rendered; and - 450,000 shares of common stock issuable upon the exercise of an option we and the selling stockholders intend to grant to the underwriters upon the consummation of this offering to cover over-allotments, if any, in this offering. SUMMARY CONDENSED CONSOLIDATED FINANCIAL INFORMATION The following table presents summary condensed consolidated financial information with respect to Dynacs and has been derived from (1) the audited financial statements of Dynacs for the nine-month period ended September 30, 1999, and for the fiscal years ended December 31, 1998 and 1997, included elsewhere in this prospectus, and (2) the unaudited financial statements of Dynacs for the nine-month period ended September 30, 1998 and the six-month periods ended March 31, 2000 and 1999. You should note that in 1999, we changed our fiscal year from a calendar year to a year ending September 30, with the result that our 1999 fiscal year consists of nine months. The information set forth below should be read in conjunction with "Selected Consolidated Financial Data," "Pro Forma Consolidated Financial Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Dynacs consolidated financial statements and the notes thereto, included elsewhere in this prospectus. <TABLE> <CAPTION> YEAR ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------- --------------------------------------- PRO FORMA 1997 1998 1998 1999 1999(1) ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total Revenues....... $26,960,839 $60,946,686 $42,791,452 $55,295,085 $57,157,827 Operating Income (Loss)............. 491,822 277,505 745,801 (2,447,265) (1,741,859) Net Income (Loss).... 263,533 41,016 342,107 (1,606,411) (2,917,177) Diluted Net Income (Loss) per share... 0.03 0.00 0.03 (0.23) (0.29) Diluted Weighted Average Common and Common Equivalent Shares............. 10,219,209 10,219,209 10,219,209 6,859,644(2) 10,238,231 <CAPTION> SIX MONTHS ENDED MARCH 31, --------------------------------------- PRO FORMA 1999 2000 2000(1) ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total Revenues....... $35,928,887 $36,611,442 $36,815,654 Operating Income (Loss)............. (502,610) 37,274 (372,507) Net Income (Loss).... (377,664) (343,310) (669,732) Diluted Net Income (Loss) per share... (0.06) (0.05) (0.06) Diluted Weighted Average Common and Common Equivalent Shares............. 6,804,290 6,961,837 10,497,765 </TABLE> <TABLE> <CAPTION> MARCH 31, 2000 --------------------------------------------- PRO FORMA ACTUAL PRO FORMA(1) AS ADJUSTED(3) ----------- ------------ -------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> BALANCE SHEET DATA: Working Capital............................................. $(3,869,234) $(2,734,397) $24,115,603 Total Assets................................................ 14,450,153 24,803,660 51,653,660 Long-Term Debt (including current portion).................. 3,866,114 365,114 365,114 Total Stockholders' Equity.................................. 1,862,450 15,262,012 42,112,012 </TABLE> ------------------------- (1) Pro forma gives effect to certain pro forma adjustments including (i) the proposed acquisition of Sherman Grinberg Film Libraries, Inc., (ii) the use of certain net proceeds of this offering, (iii) the issuance of common stock to the sellers of Cerulean Colorization, L.L.C., (iv) the exercise of options by the Company's President, and (v) the revaluation of the Mezzanine Notes issued prior to March 31, 2000 upon the consummation of this offering. See the Pro Forma Consolidated Financial Statements and the notes thereto for a description of the pro forma adjustments. (2) Reflects the voluntary surrendering of 3,576,724 options by Ramendra P. Singh, the President and Chief Executive Officer of Dynacs. (3) Adjusted to reflect the consummation of the offering and the application of the estimated net proceeds by Dynacs therefrom. See "Use of Proceeds" for a further description of the application of the net proceeds from this offering. THE COMPANY We were organized in the State of Florida in April 1985 and reincorporated in the State of Delaware in February 2000. Our principal executive offices are located at 35111 U.S. Highway 19 North, Suite 300, Palm Harbor, FL 34684, and our telephone number is (727) 787-1245. We maintain World Wide Web sites at www.dynacs.com and at www.MarketYourMedia.com.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001107954_blaxxun_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001107954_blaxxun_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding blaxxun and the financial statements and notes appearing elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully. Unless otherwise noted, information in this prospectus assumes that the underwriters will not exercise their over-allotment option. Also, unless otherwise noted, information in this prospectus takes into account a 2:1 stock split which will occur simultaneously with the closing of this offering. Information in this prospectus, unless otherwise noted, assumes the conversion of all outstanding shares of preferred stock into shares of common stock simultaneously with the closing of this offer. Our fiscal year ends July 31 and references to a particular fiscal year are references to the fiscal year ending July 31 of the relevant year. The Company: blaxxun is a provider of innovative software and services that allow organizations to develop and operate Virtual Worlds for commerce, community and collaboration over the Internet. Virtual Worlds are feature rich online environments where people can come together and, by navigating through the website: - engage in commerce by going shopping and accessing customer service; - engage in community by interacting with others, attending events and being entertained; and - engage in collaboration by participating in cooperation scenarios. To address the needs of advanced Virtual Worlds applications, we have developed a set of products and technologies that we license to our customers directly and through third party resellers. We believe that our focus on innovative technology, open technology standards, scalability and extensibility (ability to easily add features and accommodate additional volume), support of multiple hardware and software platforms and business relationships has established us as a leader in the technology behind the Internet Virtual Worlds market. During fiscal 1999, our revenues were approximately $1,846,000 and our net loss was approximately $6,831,000. Our accumulated deficit as of July 31, 1999 was approximately $18,475,000. At April 30, 2000 our accumulated deficit had increased to approximately $25,638,000. As of July 31, 1999, goodwill and other intangible assets amounted to approximately $7,455,000, or 62%, of our total assets. Expected amortization expense of this goodwill and other intangible assets of the fiscal years 2000, 2001 and 2003 is approximately $3,660,000, $3,658,000 and $173,000, respectively. Our business consists of selling Virtual Worlds technology products, like the blaxxun Community Platform, providing professional services based on our Virtual Worlds technology, as well as operating selected Internet communities, like Cybertown.com, learnetix.de and soccercity.de, that use our technology to create leading Virtual Worlds. The blaxxun Community Platform is our most feature rich product intended for use by organizations which require the most sophisticated Virtual Worlds technology. Our other products have been derived from the technology behind the blaxxun Community Platform and are designed for users, including businesses, other organizations and individuals, who do not require the full range of features or volume capacity available with the blaxxun Community Platform. A number of global companies already use our technology for a variety of applications. Our strategy is to aggressively expand this customer base and to deepen and extend relationships with existing customers, third party resellers EXPLANATORY NOTE This Registration Statement contains two forms of prospectus: one prospectus will be used in connection with the registration of the offering with the United States Securities and Exchange Commission and the other prospectus will be used in connection with the offering in Germany. The German prospectus will be produced in English and in German. The U.S. prospectus and the German prospectus are identical in all respects except for the front cover page and the back cover page of the German prospectus, which are different. The German versions of the front cover page and the back cover page are attached to this prospectus as pages A-1, A-2, A-3 and A-4 and are labeled "Alternate Pages for the German Prospectus." Final forms of each prospectus will be filed with the U.S. Securities and Exchange Commission under Rule 424(b). and technology collaborators. We also intend to leverage our technology leadership position by targeting smaller business customers and individuals with new products incorporating our technology, such as blaxxun3D, the blaxxun Avatar Studio and the blaxxun Instant Community. Other Information: blaxxun was incorporated under the laws of the State of Delaware in July of 1995. Our principal executive office and the offices of our wholly owned subsidiary, Cybertown, Inc., are located at 1550 Bryant Street, Suite 770, San Francisco, California 94103. U.S.A. The principal executive office of our wholly owned subsidiary blaxxun interactive AG is located at Elsenheimerstrasse 61, Munich, Germany. Our web site is located at http://www.blaxxun.com. Information contained on our web site does not constitute part of this prospectus. blaxxun(TM), Cybertown(TM), blaxxun Instant Community(TM), blaxxun3D(TM), blaxxunContact(TM), the blaxxun logo and The Virtual Worlds Company(TM) are registered and unregistered trademarks, service marks and trade names of blaxxun. This prospectus also contains brand names, trademarks or service marks of companies other than blaxxun interactive, Inc., and these brand names, trademarks and service marks are the property of their respective holders. THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION. DATED AUGUST 9, 2000. [ ] Shares of Common Stock blaxxun interactive, Inc. [blaxxun interactive, Inc. LOGO] This is an initial public offering of shares of common stock of blaxxun interactive, Inc. A total of 5,750,000 shares of common stock are being offered by blaxxun. The shares of common stock will be offered to the public in the Federal Republic of Germany. Additionally, shares of common stock will be offered to a limited number of our directors, officers, employees or other persons who have business relationships with us, and to persons or entities related to them, who are not located in the United States. It is currently estimated that the initial public offering price will be between $8.00 and $10.00 per share (between E 8.42 and E 10.53 per share at an assumed exchange rate of $.95 per euro). For factors considered in determining the initial public offering price, see "Underwriting." We intend to apply to list our common stock on the Neuer Markt of the Frankfurt Stock Exchange. We expect that this listing will become effective and that trading of the shares of common stock will begin promptly after the initial public offering price is determined through negotiations between blaxxun and the underwriters. Our trading symbol on the Neuer Markt will be BXX. ------------------------ THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8 TO READ ABOUT FACTORS THAT YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK. <TABLE> <S> <C> <C> <C> ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS BLAXXUN <S> <C> <C> <C> ------------------------------------------------------------------------------------------------------------- Per Share......................... E[ ] E[ ] E[ ] ------------------------------------------------------------------------------------------------------------- Total............................. E[ ] E[ ] E[ ] ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- </TABLE> Selling stockholders listed on page 58 of this prospectus have granted to the Underwriters a 45-day option to purchase 750,000 additional shares of Common Stock, solely to cover over-allotments, if any. In addition, certain existing shareholders have agreed to lend the underwriters up to 750,000 shares of common stock for 45 days following this offering. To the extent that the option is exercised, the Underwriters will offer the additional shares to the public at the Price to the Public shown above. The Company will not receive any proceeds from the sale of Common Stock by the selling stockholders. If the option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, proceeds to Company and proceeds to selling stockholders will be approximately $58,500,000, $2,632,500, $51,750,000, and $6,750,000, respectively based on an estimated $9.00 per share. See "Principal and Selling Stockholders" and "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001108051_imx_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001108051_imx_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should carefully read the entire prospectus, including "Risk Factors" and the financial statements, before making an investment decision. IMX Exchange IMX Exchange offers a business-to-business e-commerce solution that enables mortgage brokers and lenders to communicate and conduct business quickly and efficiently. Our transaction-based exchange, or the Exchange, provides an online alternative to traditional phone- and fax-based methods for searching, comparing, pricing and locking of mortgage loans. As the Exchange attracts increasing numbers of brokers and lenders, it will provide us with a growing audience of users to which we can offer additional value-added features and services. We believe that such features and services will create additional incentives for mortgage professionals to transact business on the Exchange and will generate additional sources of revenue for us. The existing mortgage origination market is fragmented and inefficient. It is characterized by slow, paper-based processes conducted point-to-point between participants, without a centralized market for brokers and lenders. Our solution enables dynamic matching of supply and demand as well as the liquidity, information flow and product offerings required for efficient origination of mortgage loans. The Exchange enhances brokers' and lenders' reach and capabilities by providing access to a broad, low-cost origination channel, allowing brokers to effortlessly post their loans during the application process through seamless integration into their existing systems, and allowing lenders to bid on loans using program trading methods for better control over loan procurement. Additionally, the Exchange allows us to collect, consolidate, and categorize real-time and historical market and industry data from the increasing flow of transactions that pass through the Exchange. We also offer the MyIMX portal, which provides access to business-critical information, products and services for mortgage industry professionals. We believe that our Exchange, our MyIMX portal and our ability to aggregate and provide market information combine to form an electronic hub, or eHub, where mortgage industry professionals can conduct their daily business in a convenient, centralized work environment. The Gartner Group estimates that nearly $7.3 trillion will be transacted in business-to-business e-commerce, with $2.7 trillion being captured by exchanges and other electronic marketplaces by 2004. We believe that e-commerce is well- suited to financial services industries, especially mortgage origination, which is characterized by inefficient business processes, fragmentation of buyers and sellers and frequent price movement and does not require the transportation or storage of physical goods. According to the Mortgage Bankers Association of America, the residential mortgage market was $1.3 trillion in 1999, and the most recent Wholesale Access report states that approximately 70% of mortgage originations were transacted through brokers in 1998, up from 50% in 1992. We believe these conditions present a significant market opportunity for an eHub that combines the financial liquidity of an Internet-based transaction marketplace with critical value-added services necessary for full functionality in the complex mortgage industry. We believe that the IMX Exchange solution is particularly compelling in the wholesale mortgage origination market because it: . provides critical mass, geographic breadth and product depth for liquidity in the mortgage origination process, leading to improved price discovery; . replaces time-consuming phone- and fax-based interactions with a streamlined Internet-based marketplace for originating and locking mortgage loans; . functions as a neutral resource that centralizes lender and broker interactions and serves the full range of industry-specific information, collaboration and transaction needs of mortgage professionals; and . collects the valuable industry and market specific data associated with centralized transaction aggregation in the mortgage industry. To accumulate the critical mass of transaction volume necessary for market efficiency on the Exchange, we have undertaken two primary initiatives designed to attract new members and increase utilization of the Exchange by existing members. On the brokers' side, we have developed an interface to be integrated with the loan origination software systems used by approximately 70% of brokers to collect, organize and store borrowers' loan application data. This interface enables brokers to automatically post loans on the Exchange and receive bids from lenders, with no disruption or delay in the loan origination process. On the lenders' side, we work closely with large, strategic lenders to integrate our solution with their existing processes, and continually train and educate their employees to assist them in transitioning to new, electronic methods of conducting their daily business. We believe that these initiatives will accelerate changes in behavior and workflow processes on the part of mortgage professionals and drive rapid adoption of the Exchange. We believe that a key measure of our success as the emergent business-to- business mortgage eHub is the expansion of our broker network, because it makes a higher volume of loans available for lenders bidding on the Exchange. The number of our broker members has increased from 565 on January 1, 1999, to 723 on June 1, 1999, and 1,403 on February 29, 2000. We were incorporated in Delaware in November 1996 as IMX, Inc. In November 1999 we changed our name to IMX Exchange, Inc. Our principal executive offices are located at 2305 Camino Ramon, Suite 200, San Ramon, California 94583, our telephone number is (925) 983-2000, and our web site is located at www.imxexchange.com. Information on our web site is not a part of this prospectus. ---------------- As used in this prospectus "IMX Exchange" refers to our company, and "the Exchange" or "our Exchange" is the online transaction platform through which brokers and lenders interact. Unless stated otherwise, the information presented in this prospectus assumes that the underwriters do not exercise their option to purchase additional shares in this offering and that all outstanding shares of preferred stock are converted to common stock upon the closing of this offering. The Offering <TABLE> <C> <S> Common stock offered by IMX Exchange, Inc........... shares Common stock to be outstanding after this offering.. shares Use of proceeds..................................... For general corporate purposes, principally working capital and capital expenditures. See "Use of Proceeds." Proposed Nasdaq National Market symbol.............. IMXX </TABLE> These share numbers are based on shares outstanding as of December 31, 1999 and include 3,925,961 shares of common stock issued in financing transactions that occurred in February and March 2000, but exclude: . 4,754,035 shares of common stock issuable upon exercise of options outstanding at December 31, 1999 under our 1996 Stock Plan, with a weighted average exercise price of $0.336 per share, and 1,608,839 shares issuable upon exercise of options granted subsequent to December 31, 1999 at a weighted-average exercise price of $0.449 per share; . shares of common stock reserved for issuance under our 2000 Employee Stock Purchase Plan; and . 136,806 shares of common stock issuable upon exercise of warrants at a weighted average exercise price of $1.52 per share. Summary Financial Data <TABLE> <CAPTION> November 6, 1996 Year Ended December 31, (inception) through --------------------------- December 31, 1996 1997 1998 1999 ------------------- ------- -------- -------- (in thousands, except per share data) <S> <C> <C> <C> <C> Statement of Operations Data: Revenue....................... $ -- $ 44 $ 598 $ 319 Total operating expenses...... 578 6,061 8,837 13,924 ------ ------- -------- -------- Loss from operations.......... (578) (6,017) (8,239) (13,605) Net interest income (expense).................... -- (27) 74 381 ------ ------- -------- -------- Loss from continuing operations................... (578) (6,044) (8,165) (13,224) Loss from discontinued operations................... -- -- (5,742) -- ------ ------- -------- -------- Net loss...................... $ (578) $(6,044) $(13,907) $(13,224) ====== ======= ======== ======== Basic and diluted loss per common share from continuing operations................... $(0.29) $ (2.79) $ (3.12) $ (3.98) ====== ======= ======== ======== Basic and diluted net loss per common share................. $(0.29) $ (2.79) $ (5.31) $ (3.98) ====== ======= ======== ======== Weighted average common shares used in basic and diluted loss per common share from continuing operations and net loss per share calculations.. 1,959 2,164 2,617 3,322 ====== ======= ======== ======== Pro forma basic and diluted net loss per common share (unaudited, see Notes 2 and 11).......................... $ (0.48) ======== Weighted average common shares used in basic and diluted net loss per common share calculations (unaudited, see Notes 2 and 11).............. 27,566 ======== </TABLE> <TABLE> <CAPTION> At December 31, 1999 ------------------------------------- Pro Forma Actual Pro Forma(1) As Adjusted(2) -------- ------------ -------------- (in thousands) <S> <C> <C> <C> Balance Sheet Data: Cash, cash equivalents and short-term investments............................ $ 6,766 $22,366 Working capital......................... 4,356 19,956 Total assets............................ 10,089 25,689 Long-term obligations, less current portions............................... 702 702 Redeemable convertible preferred stock.. 39,090 -- Total stockholders' equity (deficit).... (32,808) 21,882 </TABLE> - -------- (1) The pro forma column gives effect to our receipt of approximately $15.6 million in net proceeds from the issuance of 3,925,961 shares of our Series E redeemable convertible preferred stock on February 18, 2000 and March 7, 2000 and to the conversion of our redeemable convertible preferred stock into our common stock upon the completion of this offering. See Note 7 of Notes to Financial Statements. (2) The pro forma as adjusted column assumes the sale of shares of our common stock in this offering at an initial public offering price of $ per share and the application of the resulting net proceeds, after deducting estimated underwriting discounts, commissions and offering expenses.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001108052_2bridge_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001108052_2bridge_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..da1c8abe9be77c7d731b7a900b04a00f262e082c
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering and our historical financial statements and notes to those statements included elsewhere in this prospectus. You should carefully read the entire prospectus, including "Risk Factors" and the financial statements, before making an investment decision. Our Business We provide comprehensive Internet-based solutions to create many-to-many communication, commerce and collaboration eHubs for businesses. An eHub is an Internet-based workspace where customers, partners, suppliers and employees can simultaneously interact, access real-time business information, integrate business processes and conduct eCommerce transactions. We believe our solutions represent a new paradigm for eBusiness, and are designed to deliver secure, real-time content and eCommerce capabilities from virtually any source to any user, at any time. Our solutions represent a new category of business-to-business platforms designed to deliver dial-tone-like reliability and functionality, which we refer to as Web-tone. We believe our Web-tone business model is better aligned with our customers' needs because it is based on recurring fees for solutions, services and transaction capabilities, instead of a large one-time capital investment usually associated with software license purchases. Our business model provides our customers the flexibility to adjust the type of services they receive from us in response to their changing business needs, and provides us with the incentive to innovate and serve them since we share in their long- term success. The impact of the Internet on traditional commerce models extends far beyond the dollar value of commerce activity conducted over the Internet and has led to the emergence of entirely new business models. To remain competitive, companies are beginning to leverage the Internet as a primary business platform to collaborate, interact, and conduct business. Gartner Group estimates that business-to-business eCommerce using the Internet will grow from $145 billion in 1999 to $7.3 trillion in 2004. Moreover, Forrester Research also estimates that business-to-business eCommerce will account for more than 93% of U.S. eCommerce transactions by 2004. Our objective is to become the leading provider of comprehensive Internet- based solutions to create many-to-many communication, commerce and collaboration eHubs for businesses. Key elements of this strategy include leveraging our Web-tone business model, establishing 2Bridge as a leading global brand enabling eHub solutions, broadening adoption of 2Share throughout our existing customer base, targeting strategic markets, and building strategic alliances to strengthen our market position and offering. 2Share is designed to empower our customers, who are highly dependent on real-time information exchange, to rapidly and seamlessly develop customized eHubs. We believe our solutions create value by enabling firms to strengthen business and employee relationships, improve time to market, increase revenue and new market opportunities, and improve return on investment of existing corporate assets. Since the introduction of 2Share in 1998, we have delivered our solutions to customers in a number of strategic industries, including J.P. Morgan & Co. Incorporated, The McGraw-Hill Companies, SAP AG, Schroders & Company, and Visa USA. We were funded to develop our solution in January 1997 and will be reincorporated in Delaware as 2Bridge, Inc. prior to the completion of this offering. Our principal executive offices are located at 221 Main Street, Suite 800, San Francisco, CA 94105. Our telephone number at that location is (415) 543-4600. Our Web site is located at www.2Bridge.com. The information contained on our Web site does not constitute part of this prospectus. ---------------- Unless otherwise indicated, all information in this prospectus: . assumes that the underwriters do not exercise their over-allotment option to purchase additional shares in this offering; . gives effect to the Delaware reincorporation that will occur prior to the completion of this offering; . gives effect to the conversion of all our preferred stock into common stock which will occur prior to the completion of this offering; and . gives effect to the two-for-three reverse stock split of our preferred stock and common stock which will occur prior to the completion of this offering. The Offering <TABLE> <S> <C> Common stock offered by shares 2Bridge...................... Common stock to be outstanding after the offering................. shares Use of proceeds............... For working capital and other general corporate purposes, including expansion of services and operations personnel, technology research and development and sales and marketing. Proposed Nasdaq National Market symbol................ TOBE </TABLE> The number of shares of our common stock that will be outstanding after this offering is based on the number outstanding on March 10, 2000. This number assumes the conversion into common stock of all of our preferred stock outstanding on that date and excludes: . 620,925 shares of common stock issuable upon the exercise of outstanding warrants as of December 31, 1999, at a weighted-average exercise price per share of $2.96; . 1,698,907 shares of common stock issuable upon the exercise of outstanding stock options as of December 31, 1999, at a weighted-average exercise price per share of $1.13; . 1,106,284 shares of common stock available for future grant under our 1997 Stock Option Plan as of December 31, 1999; and . 4,150,000 shares to be authorized for issuance under our 2000 Stock Plan, 2000 Employee Stock Purchase Plan and 2000 Director Option Plan. Summary Financial Information (in thousands, except per share data) <TABLE> <CAPTION> Year Ended December 31, ------------------------------- 1997 1998 1999 -------- --------- ----------- <S> <C> <C> <C> Statement of Operations Data: Revenues...................................... $ -- $ 717 $ 3,637 Total costs and operating expenses............ 3,309 8,002 20,563 Net loss...................................... (2,989) (7,256) (17,302) Basic and diluted net loss per share.......... $ (0.35) $ (0.84) $ (1.98) Shares used in computing basic and diluted net loss per share............................... 8,500 8,587 8,756 Pro forma basic and diluted net loss per share........................................ $ -- $ -- $ (0.77) Shares used in computing pro forma basic and diluted net loss per share................... -- -- 22,379 <CAPTION> December 31, 1999 ------------------------------- Pro Forma Actual Pro Forma As Adjusted -------- --------- ----------- <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents..................... $ 8,817 $17,565 $ Working capital............................... 5,002 13,750 Total assets.................................. 15,108 23,856 Long-term debt................................ 515 515 Redeemable convertible preferred stock........ 34,170 -- Total stockholders' equity (deficit).......... (26,367) 16,551 </TABLE> - -------- See Note 2 of notes to financial statements for an explanation of the determination of the number of shares used in computing per share data. The unaudited pro forma balance sheet data summarized above gives effect to the conversion of all our outstanding preferred stock into common stock upon the closing of this offering and our capital stock sales in March 2000. See Note 13 to notes to financial statements. The unaudited pro forma as adjusted balance sheet data above reflects our capital stock sales in March 2000 and the receipt of the net proceeds from the sale of the shares of common stock offered by 2Bridge at an assumed initial public offering price of $ per share after deducting the underwriting discounts and commissions and estimated offering expenses.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001108279_ocen_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001108279_ocen_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information about us. It may not contain all of the information that you find important. You should carefully read this entire document, including the "Risk Factors" section beginning on page 5 and the consolidated financial statements and their related notes beginning on page F-1. Some technical terms not explained in this summary are more fully described in "Business--Our Company," and "-- Industry and Market Background." Our Company We are an Asia-focused provider of high quality Internet Protocol, or IP, communications services. We began offering international calling services in March 1998. Since then we have continuously upgraded our communications network and expanded our geographic coverage, primarily by entering into lease agreements to obtain additional transmission capacity. In December 1999, we substantially upgraded our network to increase its capacity and to provide high quality service for carriers. We believe we have built one of the largest managed IP networks that is dedicated to Internet telephone services connecting Asia and the United States. We believe that our managed IP network provides our customers with the cost savings of a data network and quality comparable to the traditional telephone network. The number of minutes transmitted over our network increased from approximately 18.5 million for the three months ended December 31, 1999 to approximately 32.3 million for the three months ended March 31, 2000. Approximately 96.4% of our revenue was generated from the sale of U.S. originated minutes for the six months ended March 31, 2000. For that same period, approximately 88% of the minutes carried over our network was terminated in Asia. The majority of our facilities in Asia are currently located in Hong Kong and Taiwan. In the future, we intend to rapidly expand our geographic coverage to build a pan-Asian network that is able to meet the growing communications needs of our customers. We develop and market our innovative IP communications services to three sets of customers: consumers, carriers, and corporations. We offer reliable, low- cost, IP international long distance services to consumers. Our Internet telephone services enable consumers to place a call or send a fax inexpensively from any telephone or fax machine to anywhere in the world. Through December 31, 1999, all of our revenues were generated from the sale of consumer long distance services. In December 1999, to expand into new markets and to maximize the use of our network, we began to offer wholesale carrier transmission services. Our revenues from the sale of wholesale carrier transmission services were approximately $247,000, or 4.3% of total revenue, for the six months ended March 31, 2000. These services include providing high quality voice and fax services to traditional telecommunications providers, other IP carriers, and Internet-based voice and data services providers. As of April 30, 2000, we had 17 carrier agreements with providers such as AT&T Global Clearinghouse, Capcom International, New World Telephone, and Telia. In addition, Dialpad.com, one of the largest Internet-based voice and service providers, has signed a non- binding memorandum of understanding with us to purchase wholesale capacity on our managed IP network to carry its PC-originated traffic. We believe IP technologies can fully meet the integrated communications services needs of corporations by providing voice, data, and enhanced services over one network. In March 2000, we began trialing basic Internet telephone services to five corporate customers in Taiwan through our voice and fax product, oPhone. We are also developing our CommPortal product, an integrated Internet-based suite of communications services that we expect to include instant messaging, PC-based text and voice chat, conferencing services over the Internet, and unified messaging, which provides a single location for accessing voice, fax, and email messages. CommPortal, which we believe will be available for testing by the end of 2000, together with oPhone, represents our full enhanced business communications services product. We believe this product will allow our corporate customers to reduce communications costs while improving productivity. To date, we have not yet generated any revenues from sales of long distance or enhanced communications services to corporate customers. Our goal is to become the leading Asia-focused Internet communications services provider for consumers, carriers, and corporations. We intend to achieve this goal by pursuing the following strategies: . Leverage our first-mover advantage in Asia; . Rapidly expand our IP network throughout Asia; . Leverage our strategic relationships throughout Asia; . Continue to grow our existing consumer and carrier Internet telephone services businesses; . Capture pan-Asian corporate customers with business long distance and enhanced communications services; and . Develop and provide a broad offering of enhanced IP communications services. Information contained on our website does not constitute part of this prospectus. "oCen" is a trademark of oCen Communications, Inc. All brand names and trademarks appearing in this prospectus are the property of their respective holders. Our Principal Executive Offices We incorporated in California in October 1997 under the name Pacific Telekey Network, Inc. In October 1999, we changed our name to oCen Communications, Inc. In 2000, we reincorporated in Delaware. Our principal executive offices are located at 4900 Rivergrade Road, C110, Irwindale, CA 91706, and our telephone number at that location is (626) 338-6611. The Offering <TABLE> <CAPTION> Total common stock offered by oCen.................... 3,800,000 shares <C> <S> Offering in the United States and Canada........... shares Offering outside the United States and Canada...... shares Common stock to be outstanding after this offering ... 18,497,885 shares Use of proceeds....................................... We estimate that our net proceeds from this offering will be approximately $44.9 million. We intend to use approximately $22.0 million of our net proceeds for network development, sales and marketing activities, capital expenditures, and technology acquisition and development. We expect to use approximately $22.9 million of our net proceeds for other general corporate purposes, including working capital. We may also use a portion of our net proceeds to acquire or invest in complementary businesses or products. We have no current plans, agreements, or commitments for any acquisitions. Pending these uses, we will invest the net proceeds of this offering in interest-bearing, investment grade securities. Proposed Nasdaq National Market Symbol................ OCOM </TABLE> The figures above are based on 14,697,885 shares of common stock outstanding as of March 31, 2000 on a pro forma basis and assume no exercise of outstanding options or warrants. As of March 31, 2000, we had reserved 340,185 shares of common stock for future issuance under our stock option plan and 2,098,815 shares of our common stock for issuance upon exercise of outstanding options at a weighted average exercise price of $4.11 per share. In addition, as of March 31, 2000, we had 85,333 warrants outstanding at a weighted average exercise price of $1.62. Except as otherwise noted, all information in this prospectus assumes: . our reincorporation from California to Delaware prior to the consummation of this offering, . the conversion of the convertible notes into shares of preferred stock, . the conversion of all outstanding shares of our preferred stock into common stock upon the completion of this offering, and . no exercise of the underwriters' over-allotment option. Except as otherwise noted, all references in this prospectus to "$" or to "dollars" are to U.S. dollars. You should rely only on information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock. Summary Consolidated Financial Data The following table sets forth summary consolidated financial data for our company. You should read this information together with the consolidated financial statements and the notes to those statements and the information under "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus. <TABLE> <CAPTION> Period from October 14, 1997 Six Months Ended (Inception) to Year Ended March 31, September 30, September 30, ----------------- 1998 1999 1999 2000 ---------------- ------------- ------- -------- (unaudited) (in thousands, except per share data) <S> <C> <C> <C> <C> Statement of Operations Data: Revenues..................... $ 99 $ 2,327 $ 163 $ 5,817 Operating expenses........... 818 6,462 1,295 17,122 Loss from operations......... (719) (4,135) (1,132) (11,305) Net loss..................... (722) (4,109) (1,117) (11,337) Net loss applicable to common stockholders................ (722) (4,109) (1,117) (15,817) Net loss per share applicable to common stockholders: Basic and diluted.......... $(0.16) $ (0.75) $ (0.21) $ (2.80) Weighted average shares outstanding used in per share calculations........ 4,629 5,493 5,433 5,655 Pro forma net loss per share applicable to common stockholders: Basic and diluted.......... $ (0.54) $ (0.85) Weighted average shares outstanding used in pro forma per share calculations.............. 7,582 13,283 </TABLE> <TABLE> <CAPTION> As of March 31, 2000 ----------------------------- Pro Actual Forma As Adjusted ------- ------- ----------- (unaudited) (in thousands) <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents....................... $12,001 $12,001 $56,870 Working capital................................. 5,266 5,266 50,135 Total assets.................................... 23,857 23,857 68,726 Long-term debt and capital lease obligations, excluding current portion...................... 8,628 5,628 5,628 Deferred stock compensation..................... (6,732) (6,732) (6,732) Stockholders' equity............................ 4,617 7,617 52,486 </TABLE> - -------- . See note 13 of the notes to the consolidated financial statements for a determination of the number of shares used in computing basic and diluted net loss and pro forma net loss per share amounts. . Pro forma balance sheet data reflects the conversion of all issued and outstanding shares of convertible preferred stock into common stock upon the closing of this offering and the portion of the convertible notes issued in January 2000 for $10.0 million that will convert into 230,769 shares of common stock. . Pro forma as adjusted balance sheet data reflects our receipt of the estimated net proceeds from the sale of the shares of common stock we are selling in this offering at an assumed initial public offering price of $13.00 per share, after deducting the underwriting discount and estimated offering expenses payable by us.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001108487_ubiquitel_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001108487_ubiquitel_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION THAT WE BELIEVE IS ESPECIALLY IMPORTANT CONCERNING OUR BUSINESS AND THIS OFFERING OF WARRANTS AND COMMON STOCK. IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO YOUR INVESTMENT DECISION. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS AND RELATED NOTES, BEFORE DECIDING TO INVEST IN EITHER THE WARRANTS OR COMMON STOCK. SUMMARY OF THE TERMS OF THE WARRANTS We issued 300,000 of the warrants as part of units in a transaction exempt from the registration requirements of the Securities Act of 1933. Each unit consisted of $1,000 principal amount at maturity of 14.0% senior subordinated discount notes due 2010 of our operating subsidiary, UbiquiTel Operating Company, and one warrant to purchase, after giving effect to our two-for-one stock split effected on June 1, 2000, 11.93 shares of our common stock. The 300,000 warrants are hereinafter referred to as the "unit warrants." We issued 86,183 of the warrants to Donaldson, Lufkin & Jenrette Securities Corporation in exchange for 54,971 unit warrants that we had originally issued to Donaldson, Lufkin & Jenrette in connection with the units offering. The 86,183 warrants are hereinafter collectively referred to as the "DLJ warrants." UNIT WARRANTS <TABLE> <S> <C> Warrants Offered............. 300,000 warrants which will entitle the holders to purchase an aggregate of 3,579,000 shares of our common stock, currently representing an aggregate of approximately 5% of our issued and outstanding common stock on a fully diluted basis, assuming exercise of all currently issued and outstanding options and warrants to purchase our common stock. Exercise Price............... Each warrant will entitle the holder to purchase 11.93 shares of our common stock at an exercise price of $11.37 per share, subject to adjustments as provided in the warrant agreement. Exercise..................... The warrants may be exercised at any time on or after April 15, 2001 and prior to April 15, 2010. Warrants that are not exercised by April 15, 2010 will expire. The exercise price and number of shares of our common stock issuable upon exercise of the warrants are subject to adjustment from time to time upon the occurrence of any of the events described under the heading "Description of the Warrants--The Unit Warrants-- Adjustments," including: - particular distributions of shares of our common stock; - issuances of options or convertible securities; - dividends and distributions; and - particular changes in our options and convertible securities. A unit warrant does not entitle its holder to receive any dividends paid on shares of our common stock. </TABLE> DLJ WARRANTS <TABLE> <S> <C> Warrants Offered................. 86,183 warrants which will entitle the holders to purchase an aggregate of 86,183 shares of our common stock. Exercise Price................... Each warrant will entitle the holder to purchase one share of our common stock at an exercise price of $8.00 per share, subject to adjustments as provided in the warrant agreement. Exercise......................... The warrants may be exercised at any time on or after June 12, 2001 and prior to June 12, 2005. Warrants that are not exercised by June 12, 2005 will expire. The exercise price and number of shares of our common stock issuable upon exercise of the warrants are subject to adjustment from time to time upon the occurrence of any of the events described under the heading "Description of the Warrants--The DLJ Warrants-- Adjustments," including: - particular distributions of shares of our common stock; - issuances of options or convertible securities; - dividends and distributions; and - particular changes in our options and convertible securities. A DLJ warrant does not entitle its holder to receive any dividends paid on shares of our common stock. </TABLE> WHO WE ARE OVERVIEW We are the exclusive provider of Sprint PCS digital wireless personal communications services, generally known as PCS, to four midsize and smaller markets in the western and midwestern United States. Through our management agreement with Sprint PCS, we have the exclusive right to provide 100% digital, 100% PCS products and services under the Sprint and Sprint PCS brand names in our markets which include a total population of approximately 7.7 million residents. We are among 18 companies, which we believe are unrelated to each other and to Sprint PCS, that have entered into management agreements with Sprint PCS to provide Sprint PCS products and services in markets throughout the United States. Sprint PCS, together with its affiliates including us, operates the largest all-digital, all-PCS nationwide wireless network in the United States, already covering more than 190 million residents in more than 330 metropolitan markets. However, Sprint PCS does not currently offer PCS services in every state in the United States. The majority of our network will cover portions of California, Nevada, Washington, Idaho, Montana, Utah, Indiana and Kentucky. We have commenced limited operations in one of our markets, which together with our recent acquisition of the Spokane, Washington market from Sprint PCS, cover approximately 500,000 residents. We currently have approximately 9,000 subscribers. We expect to cover approximately 55% of the resident population in our markets by the end of 2001 and expect to cover approximately 63% upon completion of our build-out. We are a development stage company with very limited operations and revenues, significant losses and substantial future capital requirements. From our inception on September 29, 1999 through December 31, 1999, we incurred losses of approximately $2.0 million. On a pro forma basis, after giving effect to various transactions described in "Unaudited Pro Forma Condensed Consolidated Financial Data," loss available to common stockholders from our inception through December 31, 1999 would have been approximately $45.5 million and loss available to common stockholders would have been approximately $20.4 million for the three months ended March 31, 2000. We expect to continue to incur significant operating losses and to generate significant negative cash flow from operating activities until at least 2003 while we develop and construct our PCS network and build our customer base. BUSINESS STRATEGY Our business strategy includes the following elements: - Capitalize on affiliation with Sprint PCS; - Capitalize on experienced management team; - Execute optimal network build-out plan; - Utilize strategic third party relationships in our network build-out; - Implement effective operating structure with a focus on customer service; and - Focus on midsize and smaller markets. BACKGROUND We were organized on September 29, 1999 as a corporation under the laws of Delaware. Our address and telephone number are 1 Bala Plaza, Suite 402, Cynwyd, Pennsylvania 19004, (610) 660-9510. SUMMARY FINANCIAL DATA (In thousands) UBIQUITEL INC. The selected summary financial data presented below for the period from September 29, 1999 (inception) through December 31, 1999, are derived from the audited consolidated financial statements of UbiquiTel Inc. and subsidiaries. The selected summary financial data presented below as of and for the three-month period ended March 31, 2000 have been derived from unaudited consolidated financial statements of UbiquiTel Inc. and its subsidiaries, which have been prepared on the same basis as UbiquiTel Inc. and subsidiaries audited financial statements and, in the opinion of UbiquiTel, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for these periods. The results of operations for the three months ended March 31, 2000 are not necessarily indicative of the results for the full year. The data set forth below should be read in conjunction with UbiquiTel Inc.'s consolidated financial statements and accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. <TABLE> <CAPTION> FROM SEPTEMBER 29, THREE MONTHS 1999 (INCEPTION) ENDED TO DECEMBER 31, 1999 MARCH 31, 2000 -------------------- ---------------- (UNAUDITED) <S> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenues...................................................... $ -- $ 69 Expenses: General and administrative expenses excluding non-cash compensation charges............................................ 554 907 Non-cash compensation expense for general and administrative matters......................................................... 1,395 -- Amortization of deferred stock compensation expense granted to employees for general and administrative matters................ -- 119 Interest expense (income)......................................... 29 (35) -------------------- ---------------- Loss before extraordinary item...................................... $ (1,978) $ (922) ==================== ================ </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, 2000 -------------------- (UNAUDITED) <S> <C> BALANCE SHEET DATA: Cash and cash equivalents..................................................... $33,729 Total assets.................................................................. 52,363 Long-term debt................................................................ 5,812 Total stockholders' equity.................................................... 37,487 </TABLE> SPOKANE DISTRICT The selected summary financial data presented below for each of the three years in the period ended December 31, 1999 are derived from the audited financial statements of the Spokane District (wholly owned by Sprint Spectrum L.P. through April 15, 2000), the predecessor of UbiquiTel Inc. and subsidiaries. The selected summary financial data presented below as of March 31, 2000 and for the three-month periods ended March 31, 1999 and March 31, 2000 have been derived from unaudited financial statements of the Spokane District, which have been prepared on the same basis as the Spokane District's audited financial statements and, in the opinion of Sprint Spectrum L.P.'s management, include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the financial position and results of operations for these periods. The results of operations for the three months ended March 31, 2000 are not necessarily indicative of the results that may be expected for the full year. The data set forth below should be read in conjunction with the Spokane District's financial statements and accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------------- -------------------- 1997 1998 1999 1999 2000 --------- -------- -------- -------- -------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenues........................................ $ 1,246 $ 3,280 $ 5,625 $ 1,136 $ 1,574 Expenses: Costs of services and equipment.................. 2,903 3,970 5,046 747 779 Selling, general and administrative expense...... 8,168 4,470 5,419 997 1,214 Depreciation..................................... 2,968 3,112 3,471 828 931 --------- -------- -------- -------- -------- Expenses in excess of net revenues.................. $ 12,793 $ 8,272 $ 8,311 $ 1,436 $ 1,350 ========= ======== ======== ======== ======== </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, 2000 -------------------- (UNAUDITED) (IN THOUSANDS) <S> <C> BALANCE SHEET DATA: Total assets purchased........................................................... $19,025 </TABLE> UBIQUITEL INC. ON A PRO FORMA BASIS The unaudited selected summary pro forma financial data presented below for the period ended December 31, 1999 and the three months ended March 31, 2000, and as of March 31, 2000, gives effect to various transactions described in "Unaudited Pro Forma Condensed Consolidated Financial Data." The data set forth below should be read in conjunction with UbiquiTel Inc.'s and the Spokane District's financial statements and accompanying notes, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Unaudited Pro Forma Condensed Consolidated Financial Data" included elsewhere in this prospectus. <TABLE> <CAPTION> THREE MONTHS YEAR ENDED ENDED DECEMBER 31, 1999 MARCH 31, 2000 ----------------- -------------- (UNAUDITED) <S> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenues.................................................... $ 5,625 $ 1,643 Operating loss.................................................. (11,059) (2,507) Loss available to common stockholders........................... (45,451) (20,401) </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, 2000 --------------- (UNAUDITED) <S> <C> BALANCE SHEET DATA: Cash and cash equivalents....................................... $ 295,736 Total assets.................................................... 363,340 Total liabilities and stockholders' equity...................... 363,340 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001108505_tradeout_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001108505_tradeout_prospectus_summary.txt
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION AND OUR FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. TRADEOUT.COM TradeOut.com is a leading business-to-business Internet marketplace for buyers and sellers of excess inventory and idle assets, known as business surplus. Our solution creates a more efficient way to buy and sell business surplus by centralizing the fragmented market and streamlining the traditionally cumbersome fax- and paper-based sales and procurement process. Our Internet-based solution enables businesses to buy and sell business surplus globally, across a variety of industries, 24 hours a day, seven days a week. Through December 31, 1999, 230 companies had sold more than $15 million worth of excess inventory and idle assets to 359 businesses through our marketplace. As of December 31, 1999, approximately $979 million of business surplus was posted for sale on our Web site. Business users from 43 different countries posted more than 8,400 items for sale on our marketplace between April 1999, when we launched our Web site, and December 31, 1999. Today, our marketplace contains business surplus in more than 100 different product categories. OUR MARKET OPPORTUNITY Most companies create business surplus in the ordinary course of business as a result of many events, including the discontinuation of products, customer returns, equipment upgrades and the expiration of leases. We estimate that the worldwide market for business surplus in 1999 totaled more than $400 billion. Businesses incur costs associated with storing, tracking and maintaining this business surplus and therefore seek efficient means of disposing of it. However, the traditional methods of selling business surplus can be difficult, time consuming and expensive, deterring many businesses from undertaking the selling process. The Internet enables the creation of centralized marketplaces that allow widely dispersed buyers and sellers to interact and facilitate the efficient exchange of product and pricing information. OUR SOLUTION TradeOut.com harnesses the power of the Internet to reduce the inefficiencies inherent in the traditional process of buying and selling business surplus. TradeOut.com provides a centralized marketplace that brings together buyers and sellers of business surplus. We allow sellers to quickly and easily disseminate information about their business surplus over the Internet directly to prospective buyers. We centralize relevant industry, product and pricing information on our marketplace and allow it to be easily updated, organized and searched. The auction formats we offer provide a competitive environment for establishing optimal pricing for sellers. Our marketplace streamlines the buying process and reduces transaction costs associated with traditional purchasing methods. We focus exclusively on the business surplus market across a variety of targeted industries. We have developed in-depth expertise within each of our targeted industries in order to better serve the complex needs of buyers and sellers in these industries. Although we intend to continually expand into new industries, we currently focus on eight specific industry classifications: <TABLE> <S> <C> - Apparel / Footwear / Accessories - Computer Products - Food and Beverage - Health and Beauty Care - Housewares / Household Products - Automotive - Metalworking Machinery - Power and Utility Equipment </TABLE> Our sales personnel focus on key decision makers in our targeted industries to create compelling listings of business surplus assets. We also focus resources on bringing a broad range of buyers to our marketplace and making it easier for them to find the assets they seek. Finally, our trade facilitation personnel work to bring transactions to closure, by ensuring proper merchandising of items, identifying potential buyers and facilitating communication between parties. OUR STRATEGY Our objective is to be the world's leading business-to-business Internet marketplace for buyers and sellers of business surplus. To achieve our objective, we intend to: - build a critical mass of buyers and sellers; - leverage our first-mover advantage and expand our brand awareness; - create alliances with strategic partners that can help bring more buyers and sellers to our marketplace, broaden our service offerings and enhance the depth and breadth of our targeted industries; - offer a broad range of value-added services to our customers; - expand the number of our targeted industries and the depth of our industry expertise; and - integrate our marketplace into our customers' internal information systems. OUR STRATEGIC ALLIANCES We are entering into strategic alliances with four major types of organizations to increase the activity in our marketplace. These include: - targeted industry anchors such as General Electric Capital Corporation; - traditional liquidators and brokers such as Quality King Distributors; - traffic drivers such as PurchasePro.com and the National Association of Wholesaler-Distributors; and - ancillary service providers such as i-Escrow and Emery Worldwide. RECENT DEVELOPMENTS In March 2000, we entered into a strategic alliance agreement with General Electric Capital Corporation under which we expect GE Capital to encourage its business units and affiliates to post assets on our marketplace, promote these assets to their customers and provide remarketing services to their customers. In addition, we sold approximately $15.0 million of Series D preferred stock and warrants to purchase up to 2,392,500 shares of our common stock to GE Capital Equity Investments, Inc., an affiliate of GE Capital. CORPORATE INFORMATION We were incorporated in Delaware on December 11, 1998. Our principal executive offices are located at 410 Saw Mill River Road, Suite 2065, Ardsley, New York 10502 and our telephone number is (914) 479-0611. Our Web site is WWW.TRADEOUT.COM. The information on our Web site is not a part of this prospectus. TradeOut, TradeOut.com and the TradeOut.com logo are trademarks of TradeOut.com, Inc. All other trademarks and service marks used in this prospectus are the property of their respective owners. THE OFFERING <TABLE> <S> <C> Common stock offered by TradeOut.com......... shares Common stock to be outstanding after this offering................................... shares Proposed Nasdaq National Market symbol....... TOUT Use of proceeds.............................. To expand operations and for general corporate purposes, including working capital. We may also use a portion of the proceeds for strategic investments or acquisitions. </TABLE> This information is based on our shares of common stock outstanding as of March 14, 2000. This information excludes: - 1,579,135 shares subject to options outstanding as of March 14, 2000, at a weighted average exercise price of $1.79 per share; - 275,923 additional shares that could be issued under our stock option plans; - 11,142,945 shares subject to warrants to purchase our common stock at a weighted average exercise price of $8.60 per share; - up to 3,409,934 shares subject to warrants to purchase our common stock at an exercise price of $2.00 per share, exercisable if certain target sales levels are achieved pursuant to strategic alliance agreements; and - warrants issued to the holders of our Series E preferred stock to purchase a number of shares of common stock to be determined upon the closing of this offering based upon the fully diluted capitalization of TradeOut.com on that date, at an exercise price equal to the initial public offering price. Except as set forth in the financial statements and related notes or as otherwise indicated, all information in this prospectus assumes: - no exercise of the underwriters' over-allotment option; - the conversion of all outstanding shares of our preferred stock into shares of common stock immediately prior to the closing of the offering; and - a one-for-two reverse split of our common stock to be effected prior to completion of this offering. SUMMARY FINANCIAL DATA The following tables summarize the financial data for our business. You should read this information with the discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and notes to those statements included elsewhere in this prospectus. <TABLE> <CAPTION> PERIOD FROM DECEMBER 11, 1998 (INCEPTION) TO YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1999 ----------------- ----------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................................................ $ -- $ 828 Gross profit............................................ -- 299 Operating loss.......................................... (50) (19,124) Net loss................................................ (50) (18,744) Pro forma net loss per share............................ $ (0.68) Pro forma weighted average shares outstanding........... 27,600 </TABLE> The following table is a summary of our balance sheet at December 31, 1999. The pro forma data give effect to the sale of 5,577,825 shares of our Series D preferred stock and 2,455,588 shares of our Series E preferred stock and the automatic conversion into common stock of all outstanding Series A, Series B, Series C and Series E preferred stock upon the closing of this offering. The pro forma as adjusted data reflect the sale of shares of common stock at an assumed initial public offering price of $ per share, after deducting underwriting discounts and estimated offering expenses. <TABLE> <CAPTION> DECEMBER 31, 1999 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $18,977 $58,977 $ Working capital............................................. 16,377 56,377 Total assets................................................ 21,238 61,238 Capital leases, excluding current installments.............. 22 22 Redeemable preferred stock.................................. -- 15,000 Total stockholders' equity.................................. 18,164 43,164 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001108514_paperexcha_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001108514_paperexcha_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..36587b10d346d845f8159b3a5e48205859cb4923
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY HIGHLIGHTS SOME OF THE IMPORTANT INFORMATION IN THE PROSPECTUS. IT MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD READ THIS SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION ABOUT US AND OUR FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. PAPEREXCHANGE.COM, INC. PaperExchange is a leading business-to-business marketplace for the pulp and paper industry that enables buyers and sellers in the industry to transact business on the Internet. Our marketplace includes a real time exchange that enables participants to list offers to sell or requests to purchase products and services in a secure and neutral environment. Using our proprietary technology, our members can review pulp and paper products offered online, negotiate pricing, and complete transactions. This technology enables buyers and sellers to customize the use of our marketplace in a manner that allows members to preserve existing business relationships. We also offer several fulfillment services, such as logistics and credit clearing, as well as quality inspection through a third party provider. In addition, we offer industry specific content, such as real time industry news, information on upcoming expositions and conferences, feature articles and a career center that allows members to post and explore job opportunities. Our marketplace has attracted and registered more than 4,100 corporate members from over 80 countries. To date, our members have completed in excess of 140 transactions representing a total of approximately 9,800 tons of pulp and paper. We have recently signed strategic agreements with producers such as International Paper, Asia Pulp & Paper and Bowater, which are designed to promote the listing of products for sale through our marketplace. We have also entered into strategic agreements with buyers, such as Staples, for commitments to purchase products. The pulp and paper industry represents an estimated $500 billion of sales globally and over an estimated $182 billion in North America. The industry is extremely fragmented, with approximately 2,000 producer mills and approximately 300,000 converting and printing plants worldwide. Traditional marketing and procurement methods in the industry are inefficient, costly, and time consuming for both buyers and sellers. The lack of widely available pricing and other market information, the capital intensive nature of the industry, the complexity of the paper production process, and poor technology adoption further limit the efficiency of the industry. These factors create the opportunity for a business-to-business e-commerce marketplace that streamlines industry participants' procurement methods, reduces inefficiencies in production and the supply chain, and broadens sales and marketing channels. We intend to be the leading provider of an Internet-based e-commerce solution across all pulp and paper product categories, and are led by a management team with extensive experience in the pulp and paper industry and in technology. We intend to leverage and expand our strategic relationships while maintaining a neutral marketplace. Our strategy is to concentrate on attracting new members to our marketplace through a focused sales and marketing effort, and to continue to enhance the functionality and performance of our technology platform. As we add more suppliers and purchasers to our marketplace, we intend to create a network effect, whereby the addition of each new member increases the overall value of the marketplace to all members. CORPORATION INFORMATION We were formed in Delaware in April 1998 as a limited liability company under the name "PaperExchange.com, LLC". We converted to a Delaware corporation in February 2000 under the name "PaperExchange.com, Inc.". Our principal executive offices are located at 31 St. James Avenue, 3(rd) Floor, Massachusetts 02116, and our telephone number at that address is (617) 536-4310. Our address on the World Wide Web is http://www.paperexchange.com. References to our Web site do not incorporate by reference the information contained at our Web site into this prospectus. This prospectus assumes no exercise of the underwriters' over-allotment option. THE OFFERING <TABLE> <S> <C> Common Stock offered by PaperExchange....... shares Common Stock to be outstanding after this offering.................................. shares Proposed Nasdaq National Market symbol...... "PPEX" Use of proceeds............................. For working capital and general corporate purposes. See "Use of Proceeds". </TABLE> The number of shares to be outstanding excludes 3,248,748 shares of common stock issuable upon exercise of options outstanding as of March 31, 2000 under our 2000 Equity Incentive Plan at a weighted average exercise price of $2.43 per share, 5,000,001 shares of common stock issuable upon exercise of warrants at a weighted average exercise price of $2.00 per share, options to purchase 1,767,020 shares of common stock at an exercise price of $2.38 per share, options to purchase 450,000 shares of common stock at an exercise price of $9.74 per share and 519,149 shares of common stock issuable upon exercise of warrants at an exercise price of $10.00 per share. SUMMARY FINANCIAL DATA The following summary financial data are derived from our financial statements. You should read this summary financial information in conjunction with our financial statements and the related notes. Potentially dilutive common shares have been excluded from the shares used to compute earnings per share in each loss year because their inclusion would be antidilutive. The as adjusted balance sheet data give effect to our sale of the shares in this offering at an assumed initial public offering price of $ per share and after deducting the estimated underwriting discounts and commissions and our estimated offering expenses. <TABLE> <CAPTION> APRIL 10, 1998 THREE MONTHS ENDED (INCEPTION) THROUGH YEAR ENDED --------------------------------- DECEMBER 31, 1998 DECEMBER 31, 1999 MARCH 31, 1999 MARCH 31, 2000 ------------------- ------------------- --------------- --------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenues........................ $ 2 $ 114 $ 1 $ 3,445 Cost of revenues.................... -- 92 -- 3,342 ---------- ---------- ---------- ---------- Gross profit........................ 2 22 1 103 Operating costs: Sales and marketing............... 541 3,376 406 7,747 Technology........................ 141 3,104 266 2,712 General and administrative........ 207 2,116 194 2,768 Write-off of capitalized software........................ -- 209 -- -- ---------- ---------- ---------- ---------- Operating loss...................... (887) (8,783) (865) (13,124) ---------- ---------- ---------- ---------- Net loss............................ $ (860) $ (9,051) $ (861) $ (14,585) ========== ========== ========== ========== Basic and diluted loss per share.... $ (0.03) $ (0.26) $ (0.03) $ (0.36) ========== ========== ========== ========== Weighted average shares used to compute basic and diluted loss per share............................. 30,000,000 34,881,564 30,000,000 40,319,260 </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, 2000 ------------------------- AS ACTUAL ADJUSTED ----------- ----------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $18,093 Working capital............................................. 17,276 Total assets................................................ 23,909 Long-term debt.............................................. 256 Total liabilities........................................... 4,198 Total stockholders' equity.................................. 19,711 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001108623_duke_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001108623_duke_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including the historical and pro forma financial statements and related notes, before making an investment decision. Duke Energy Field Services Corporation is a new company that holds the combined North American midstream natural gas gathering, processing, marketing and natural gas liquids businesses of Duke Energy Corporation and Phillips Petroleum Company. The transaction in which those businesses were combined is referred to in this prospectus as the "Combination." Our certificate of incorporation limits the scope of our business to the midstream natural gas industry in the United States and Canada, the marketing of natural gas liquids in Mexico and the transportation, marketing and storage of other petroleum products, unless otherwise approved by our Board of Directors and Duke Energy (so long as it owns a majority of our outstanding common stock). Unless the context otherwise requires, descriptions of assets, operations and results in this prospectus give effect to the Combination and related transactions, the transfer to us of additional midstream natural gas assets acquired by Duke Energy or Phillips prior to the Combination and the transfer to us of the general partner of TEPPCO Partners, L.P., all of which are described in more detail under "Management's Discussion and Analysis of Financial Condition and Results of Operations -- The Combination." In this prospectus, the terms "we," "us" and "our" refer to Duke Energy Field Services Corporation and our subsidiaries, including our principal subsidiary, Duke Energy Field Services, LLC (which we refer to as "Field Services LLC"), giving effect to the Combination and the other transactions described above. OUR COMPANY The midstream natural gas industry is the link between the exploration and production of raw natural gas and the delivery of its components to end-use markets. We operate in the two principal segments of the midstream natural gas industry: - natural gas gathering, processing, transportation, marketing and storage; and - natural gas liquids ("NGLs") fractionation, transportation, marketing and trading. We believe that we are one of the largest gatherers of raw natural gas, based on wellhead volume, in North America. We are the largest producer, and we believe that we are one of the largest marketers, of NGLs in North America. In 1999: - we gathered and/or transported an average of approximately 7.3 billion cubic feet per day of raw natural gas; - we produced an average of approximately 400,000 barrels per day of NGLs; and - we marketed and traded an average of approximately 486,000 barrels per day of NGLs. During 1999, our natural gas gathering, processing, transportation, marketing and storage segment produced $981.5 million of gross margin and $583.1 million of earnings before interest, taxes and depreciation and amortization ("EBITDA"), excluding general and administrative expenses, and our NGL fractionation, transportation, marketing and trading segment produced $38.3 million of gross margin and $38.1 million of EBITDA, excluding general and administrative expenses. We gather raw natural gas through gathering systems located in seven major natural gas producing regions: Permian Basin, Mid-Continent, East Texas-Austin Chalk-North Louisiana, Onshore Gulf of Mexico, Rocky Mountains, Offshore Gulf of Mexico and Western Canada. Our gathering systems consist of approximately 57,000 miles of gathering pipe, with approximately 38,000 connections to active producing wells. Our natural gas processing operations involve the separation of raw natural gas gathered both by our gathering systems and by third-party systems into NGLs and residue gas. We process the raw natural gas at our 70 owned and operated plants and at 13 third-party operated facilities in which we hold an equity interest. The NGLs separated from the raw natural gas by our processing operations are either sold and transported as "NGL raw mix" or further separated through a process known as fractionation into their individual components (ethane, propane, butanes and natural gasoline) and then sold as components. We fractionate NGL raw mix at our 12 owned and operated processing facilities and at two third-party operated fractionators located on the Gulf Coast in which we hold an equity interest. We sell NGLs to a variety of customers ranging from large, multi-national petrochemical and refining companies to small regional retail propane distributors. Substantially all of our NGL sales are made at market-based prices, including approximately 40% of our NGL production that is committed to Phillips under an existing 15-year contract. We market approximately 370,000 barrels per day of our NGLs processed at our owned and operated facilities and approximately 40,000 barrels per day of NGLs processed at third-party operated facilities and trade approximately 75,000 barrels per day of NGLs at market centers. The residue gas that results from our processing is sold at market-based prices to marketers or end-users, including large industrial customers and natural gas and electric utilities serving individual consumers. We market residue gas through our wholly owned gas marketing company. We also store residue gas at our 8.5 billion cubic foot natural gas storage facility. On March 31, 2000, we obtained by transfer from Duke Energy the general partner of TEPPCO Partners, L.P., a publicly traded limited partnership which owns and operates a network of pipelines for refined products and crude oil. The general partner is responsible for the management and operations of TEPPCO. We believe that our ownership of the general partner of TEPPCO improves our business position in the transportation sector of the midstream natural gas industry and provides additional flexibility in pursuing our disciplined acquisition strategy by providing an alternative acquisition vehicle. It also provides us with an opportunity to sell appropriate assets currently held by our company to TEPPCO. Through our ownership of the general partner of TEPPCO we have the right to receive from TEPPCO incentive cash distributions in addition to a 2% share of distributions based on our general partner interest. At TEPPCO's 1999 per unit distribution level, the general partner: - receives approximately 14% of the cash distributed by TEPPCO to its partners, which consists of 12% from the incentive cash distribution and 2% from the general partner interest; and - under the incentive cash distribution provisions, receives 50% of any increase in TEPPCO's per unit cash distributions. TEPPCO has agreed to acquire from Atlantic Richfield Company, for $318.5 million, its ownership interests in a 500-mile crude oil pipeline that extends from a marine terminal at Freeport, Texas to Cushing, Oklahoma, a 416-mile crude oil pipeline that extends from Jal, New Mexico to Cushing, a 400-mile crude oil pipeline that extends from West Texas to Houston, crude oil terminal facilities in Midland, Cushing and the Houston area and receipt and delivery pipelines centered around Midland. The transaction is contingent upon satisfaction of regulatory requirements. OUR BUSINESS STRATEGY We believe that we are one of the largest gatherers of raw natural gas in North America. We are the largest producer, and we believe that we are one of the largest marketers, of NGLs in North America. We have significant midstream natural gas operations in five of the largest natural gas producing regions in North America. Our certificate of incorporation limits the scope of our business to the midstream natural gas industry in the United States and Canada, the marketing of NGLs in Mexico and the transportation, marketing and storage of other petroleum products, unless otherwise approved by our Board of Directors and Duke Energy (so long as it owns a majority of our outstanding common stock). To take advantage of the anticipated growth in natural gas demand in North America, we are pursuing the following strategies: - Capitalize on the size and focus of our existing operations. We intend to use the size, scope and concentration of our assets in our regions of operation to take advantage of growth opportunities and to acquire additional supplies of raw natural gas. Our significant market presence and asset base generally provide us a competitive advantage in capturing new supplies of raw natural gas because of our resulting lower costs of connection to new wells and of processing additional raw natural gas. In addition, we believe our size and geographic diversity allow us to benefit from the growth of natural gas production in multiple regions while mitigating the adverse effects from a downturn in any one region. - Increase our presence in each aspect of the midstream business. We are active in each significant aspect of the midstream natural gas value chain, including raw natural gas gathering, processing and transportation, NGL fractionation and NGL and residue gas transportation and marketing. Each link in the value chain provides us with an opportunity to earn incremental income from the raw natural gas that we gather and from the NGLs and residue gas that we produce. We intend to grow our significant NGL market presence by investing in additional NGL infrastructure, including pipelines, fractionators and terminals. - Increase our presence in high growth production areas. According to the Energy Information Administration's report "Annual Energy Outlook 2000" (the "EIA Report") production from areas such as Western Canada, Onshore Gulf of Mexico, Rocky Mountains and Offshore Gulf of Mexico is expected to increase significantly to meet anticipated increases in demand for natural gas in North America. We intend to use our strategic asset base in these growth areas and our leading position in the midstream natural gas industry as a platform for future growth in these areas. We plan to increase our operations in these areas by following a disciplined acquisition strategy, expanding existing infrastructure and constructing new gathering lines and processing facilities. - Capitalize on proven acquisition skills in a consolidating industry. In addition to pursuing internal growth by attracting new raw natural gas supplies, we intend to use our substantial acquisition and integration skills to continue to participate selectively in the consolidation of the midstream natural gas industry. We have pursued a disciplined acquisition strategy focused on acquiring complementary assets during periods of relatively low commodity prices and integrating the acquired assets into our operations. Since 1996, we have completed over 20 acquisitions, increasing our raw natural gas processing capacity by over 275%. These acquisitions demonstrate our ability to successfully identify, acquire and integrate attractive midstream natural gas operations. - Further streamline our low-cost structure. Our economies of scale, operating efficiency and resulting low cost structure enhance our ability to attract new raw natural gas supplies and generate current income. The low-cost provider in any region can more readily attract new raw natural gas volumes by offering more competitive terms to producers. We believe the Combination provides us with a complementary base of assets from which to further extract operating efficiencies and cost reductions, while continuing to provide superior customer service. --------------------- We were incorporated in the State of Delaware on December 8, 1999. Our principal executive offices are located at 370 17th Street, Suite 900, Denver, Colorado 80202, and our telephone number is (303) 595-3331. THE OFFERING The following information does not include approximately 958,000 shares of common stock issuable upon the exercise of employee stock options expected to be granted concurrently with the offering but does include approximately 110,500 shares of our common stock to be issued under restricted stock awards expected to be granted to our officers and employees concurrently with the offering. Common stock offered....... 26,300,000 shares Common stock to be outstanding after the offering................. 140,752,211 shares Over-allotment option...... 3,945,000 shares. Unless the context otherwise requires, the information in this prospectus assumes that the underwriters do not exercise the over-allotment option. Use of proceeds............ We expect the net proceeds to us from the offering to be approximately $521 million. We intend to use the net proceeds from the offering to repay a portion of the indebtedness incurred in connection with the Combination. Dividend policy............ We intend to declare and pay quarterly cash dividends of $.06 per share, depending on our financial results and action of our Board of Directors. We expect the first dividend to be payable with respect to the third quarter of 2000. NYSE symbol................ "DEF"
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001108629_metlife_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001108629_metlife_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. As a result, it does not contain all of the information that you should consider before investing in the units. You should read the entire prospectus carefully, including the "Risk Factors" section and the consolidated financial statements and the notes to those statements. Unless otherwise stated or the context otherwise requires, references in this prospectus to "we", "our", "us" or "MetLife" refer to MetLife, Inc., together with Metropolitan Life Insurance Company, and their respective direct and indirect subsidiaries. All financial information contained in this prospectus, unless otherwise indicated, has been derived from the consolidated financial statements of Metropolitan Life Insurance Company and its subsidiaries and is presented in conformity with generally accepted accounting principles ("GAAP"). The Glossary beginning on page G-1 of this prospectus includes definitions of certain insurance terms. Each term defined in the Glossary is printed in boldface the first time it appears in this prospectus. Information regarding the number of shares of MetLife, Inc. common stock to be outstanding after this offering of units, the private placements and the concurrent initial public offering does not include shares of common stock issuable upon the settlement of the purchase contracts that are a part of the units offered by this prospectus. METLIFE, INC. We are a leading provider of insurance and financial services to a broad spectrum of individual and institutional customers. We currently provide individual insurance, ANNUITIES and investment products to approximately nine million households, or one of every eleven households in the U.S. We also provide group insurance and retirement and savings products and services to approximately 64,000 corporations and other institutions, including 86 of the FORTUNE 100 largest companies. Our institutional clients have approximately 33 million employees and members. We are a leader in each of our major U.S. businesses. We are: - the largest life insurer, with approximately $1.7 trillion of life insurance IN FORCE at December 31, 1999; - the largest individual life insurer, with $11.5 billion in individual life insurance and annuity PREMIUMS and deposits in 1999; - the largest group life insurer, with $5.3 billion of premiums in 1999; - a leading group non-medical health insurer, including the second largest group disability insurer, the second largest commercial dental insurer and the largest group long-term care insurer; - a leading issuer of individual variable life insurance and variable annuities; and - a leading asset manager, with $373.6 billion of total assets under management at December 31, 1999. We believe that our unparalleled franchises and brand names uniquely position us to be the preeminent provider of insurance and financial services in the U.S. businesses in which we compete. We are one of the largest and best capitalized insurance and financial services companies in the U.S. Our revenues for 1999 were $25.4 billion and our net income was $617 million. We had total consolidated assets of $225.2 billion and equity of $13.7 billion at December 31, 1999. We are organized into five major business segments: Individual Business, Institutional Business, Asset Management, Auto & Home and International. INDIVIDUAL BUSINESS. Individual Business offers a wide variety of protection and asset accumulation products for individuals, including life insurance and annuities. Individual Business also distributes products provided by our other business segments, including mutual funds and auto and homeowners insurance. Reflecting overall trends in the insurance industry, sales of our traditional life insurance products have declined in recent years, while FIRST-YEAR PREMIUMS AND DEPOSITS from variable life insurance products have grown at a compound annual rate of 33.1% for the five years ended 1999 and represented 67.4% of our total life insurance sales for Individual Business in 1999. Our principal distribution channels are the MetLife career agency and the New England Financial general agency distribution systems and, after our recent acquisition of GenAmerica Corporation, GenAmerica's independent general agency system. We also have dedicated sales forces that market to non-profit organizations and banks and their customers. In total, we had approximately 11,000 active sales representatives in 1999. In addition to these distribution channels, we are increasing the distribution of our products through independent insurance agents and registered representatives. We believe our ability to effectively manage these multiple distribution channels represents a significant competitive advantage. Individual Business had $11.1 billion of revenues, or 43.5% of our total revenues, and $565 million of operating income in 1999. INSTITUTIONAL BUSINESS. Institutional Business offers a broad range of group insurance and retirement and savings products and services. Our group insurance products and services include group life insurance and non-medical health insurance such as short- and long-term disability, long-term care and dental insurance, as well as other related products and services. Our group insurance premiums, fees and other income, which totaled $5.9 billion in 1999, have grown at a compound annual rate of 10.0% for the three years ended 1999. Our retirement and savings products and services include administrative services sold to sponsors of 401(k) and other defined contribution plans, guaranteed interest products and separate account products. We distribute our Institutional Business products through a sales force of approximately 300 MetLife employees that is organized by both customer size and product. In total, we have approximately 64,000 institutional customers, including 86 of the FORTUNE 100 largest companies. Institutional Business had $10.4 billion of revenues, or 40.8% of our total revenues, and $585 million of operating income in 1999. ASSET MANAGEMENT. Through our wholly-owned subsidiary, State Street Research & Management Company, and our controlling interest in Nvest Companies, L.P. and its affiliates, Asset Management provides a broad variety of asset management products and services primarily to third-party institutions and individuals. Our Asset Management segment managed $189.8 billion of our total assets under management at December 31, 1999, including $54.9 billion of assets in mutual funds and in SEPARATE ACCOUNTS supporting individual variable life and annuity products. For the five years ended 1999, this segment's assets under management grew at a compound annual rate of 14.2%. We distribute our asset management products through several distribution channels, including State Street Research's and Nvest's dedicated sales forces, and also through our Individual Business and Institutional Business distribution channels. Asset Management had $0.9 billion of revenues, or 3.5% of our total revenues, and $51 million of operating income in 1999. AUTO & HOME. Auto & Home offers auto insurance, homeowners insurance and other personal property and casualty insurance products. We sell these products directly to employees through employer-sponsored programs, as well as through a variety of retail distribution channels. These channels include the MetLife career agency system, approximately 6,000 independent agents and brokers, which includes those of The St. Paul Companies acquired in 1999, and approximately 385 Auto & Home specialists. We are the leading provider of personal auto and homeowners insurance through employer-sponsored programs in the U.S. Net premiums earned from products sold through employer-sponsored programs have grown at a 14.3% compound annual rate for the five years ended 1999. On September 30, 1999, our Auto & Home segment acquired the standard personal lines property and casualty insurance operations of The St. Paul Companies, which had in-force premiums of approximately $1.1 billion, substantially increasing the size of this segment's business, making us the eleventh largest personal property and casualty insurer in the U.S. based on 1998 net premiums written. See "Business -- Auto & Home". Auto & Home had $1.9 billion of revenues, or 7.4% of our total revenues, and $54 million of operating income in 1999. INTERNATIONAL. We have international insurance operations in ten countries, with a focus on the Asia/Pacific region, Latin America and selected European countries. Our International segment offers life insurance, accident and health insurance, annuities and retirement and savings products and services to both individuals and groups, and auto and homeowners coverage to individuals. Assets of our International segment, as adjusted for the recent divestitures of a substantial portion of our U.K. and Canadian operations, have grown at a compound annual rate of 21.4% for the five years ended 1999. International had $0.8 billion of revenues, or 3.1% of our total revenues, and $18 million of operating income in 1999. On January 6, 2000, we acquired GenAmerica Corporation for $1.2 billion in cash. GenAmerica is a leading provider of life insurance, life reinsurance and other financial services to affluent individuals, businesses, insurers and financial institutions. GenAmerica's products and services include individual life insurance and annuities, life reinsurance, institutional asset management, group life and health insurance and administration, pension benefits administration and software products and technology services for the life insurance industry. GenAmerica distributes its products through approximately 625 agents in its independent general agency system and approximately 1,575 active independent insurance agents and brokers. GenAmerica is a holding company which owns General American Life Insurance Company. GenAmerica's subsidiaries also include Reinsurance Group of America, Inc., one of the largest life reinsurers in the United States, and Conning Corporation, a manager of investments for General American Life and other insurance company and pension clients. Upon completion of the acquisition of GenAmerica, we owned approximately 58% and 61% of the outstanding common stock of Reinsurance Group of America (also known as RGA) and Conning, respectively. Both RGA and Conning are publicly-traded. On March 9, 2000, we announced that we had agreed to acquire all of the outstanding shares of Conning common stock not already owned by us for $12.50 per share in cash, or approximately $65 million. The Conning acquisition is subject to customary terms and conditions, including regulatory approvals. Subsequent to January 6, 2000, the date on which we acquired GenAmerica, GenAmerica's businesses will be incorporated into our business segments as applicable, except for RGA, which will be separately designated as our Reinsurance segment. STRATEGY As we become a public company, we are committed to providing superior stockholder value through the following growth strategies: - - INCREASING OUR REVENUES AND ASSETS UNDER MANAGEMENT BY: Building on widely recognized brand names. We believe that the MetLife name is one of the most well-known brand names in the U.S. and one of our most valuable assets. We have also been successful in utilizing additional brand names, such as New England Financial, Security First Group and State Street Research, for specific market segments. We believe our recent acquisition of GenAmerica and RGA further strengthens our brand portfolio. Capitalizing on large customer base. We intend to enhance our relationships with our existing individual customers by offering a broad array of products, improving the training of our agents and developing direct marketing programs in partnership with our agency sales force and increasing sales to our institutional customers by expanding the offering of voluntary, or employee-paid, products. Expanding multiple distribution channels. We believe that our development and successful management of multiple distribution channels represent a significant competitive advantage. We intend to both grow our core distribution channels and to continue to build complementary distribution channels for sales of our products. Continuing to introduce innovative and competitive products. We intend to be at the forefront of the insurance and financial services industries in offering innovative and competitive products to our customers. Recent initiatives include new or revised products covering a substantial portion of our individual product offerings and new voluntary institutional products. Increasing focus on asset accumulation products. We intend to expand our assets under management in both our insurance operations and our Asset Management segment by increasing our focus on sales of asset accumulation products, such as variable life and annuity products, mutual funds and 401(k) products. Focusing international operations on growing markets. We have established insurance operations in selected international markets that are experiencing significant growth in demand for insurance products and where we believe we can gain significant market share. - - GROWING OUR EARNINGS AND OPERATING RETURN ON EQUITY BY: Reducing operating expenses. We are committed to improving profitability by reducing operating expenses through employee reductions, increased integration of operations and enhanced use of technology. Strengthening performance-oriented culture. We have implemented a number of initiatives to significantly enhance the performance of our employees, including establishing a new compensation program, selectively hiring experienced new employees, expanding our training efforts and implementing a new performance measurement and review program. Continuing to optimize returns from investment portfolio. The return on our invested assets has contributed significantly to our earnings growth. We believe that the expertise of our investment department will enable us to continue to optimize the operating returns on our invested assets in the future. Enhancing capital efficiency of our operations. We seek to maximize our operating return on equity by enhancing the capital efficiency of our operations. We have recently implemented a new internal capital allocation system and, consistent with a more disciplined approach to capital allocation, have divested operations that did not meet targeted rates of return or growth. THE DEMUTUALIZATION We are conducting the offerings in connection with the reorganization of Metropolitan Life Insurance Company from a mutual life insurance company to a stock life insurance company in a process commonly known as a demutualization. On the date the plan of reorganization becomes effective, which will be the date of the closing of the initial public offering, the private placements and the offering of units described below, Metropolitan Life Insurance Company will become a wholly-owned subsidiary of MetLife, Inc. In the demutualization, in exchange for their membership interests, policyholders who are eligible to receive consideration under the plan of reorganization will be entitled to receive consideration in the form of shares of our common stock or, in some cases, cash or an adjustment to their policy values, referred to as "policy credits". The shares of our common stock allocated to policyholders who do not receive cash or policy credits under the plan will be held through the MetLife Policyholder Trust on behalf of these policyholders. We are establishing the trust to help us efficiently manage the administration of accounts and the costs associated with the approximately nine million eligible policyholders that we estimate will become beneficiaries of the trust. Subject to certain limitations, trust beneficiaries will be permitted, after specified periods, to instruct the trustee to withdraw their allocated shares of our common stock from the trust for sale or to purchase additional shares commission-free through a purchase and sale program established and administered by a program agent. Trust beneficiaries allocated more than 25,000 shares of our common stock may be limited in their ability to sell shares under the purchase and sale program for the first 300 days after the plan effective date. Beginning on the first anniversary of the closing of the initial public offering, trust beneficiaries may also withdraw all, but not less than all, their allocated shares of our common stock held in the trust in order to hold or sell such shares of our common stock on their own. Concurrently with this offering, we are making an initial public offering of 179,000,000 shares of our common stock by means of a separate prospectus. In addition, affiliates of Banco Santander Central Hispano, S.A. and Credit Suisse Group have agreed that they or their respective affiliates will purchase from us, at a price per share equal to the initial public offering price, in the aggregate not less than 14,900,000 shares nor more than 73,000,000 shares of our common stock in private placements that will close concurrently with the initial public offering and the offering of equity security units described below. We will determine at the time of the pricing of the initial public offering whether to sell any shares to these purchasers in excess of the minimum amount. Any shares in excess of the minimum amount that we determine not to sell to these investors may increase the number of shares available for sale to the general public under this prospectus. The maximum number of shares that each investor, individually, and the investors, in the aggregate, could be obligated to purchase in the private placements represents approximately 4.9% and 9.8%, respectively, of the total number of shares of our common stock to be outstanding upon consummation of the initial public offering and the private placements. Each of these purchasers has entered into an agreement with us that provides that any shares purchased by it will be restricted from sale or transfer for a period of one year after the initial public offering except for sales to affiliates or pursuant to a tender or exchange offer recommended by a board of directors. In addition, each purchaser has agreed that it will not, without our consent, increase its ownership of voting securities beyond 4.9% (or 5.0% with the New York Superintendent of Insurance's approval) of the outstanding shares, except for any increase resulting from transactions in the ordinary course of the business of purchaser as underwriter, broker/dealer, investment manager or investment adviser or from ordinary trading activities, unless such transactions were made with the purpose of changing or influencing the control of MetLife, seek to obtain board representation, solicit proxies in opposition to management or take certain other actions for five years. Although these investors will receive common stock which has not been registered under the Securities Act, they will also receive registration rights with respect to such stock, which rights are not exercisable until one year after the closing of the initial public offering. Pursuant to these registration rights, the purchasers will be able to have their shares of common stock registered for resale under the Securities Act, beginning after the first anniversary of the closing, on not more than one occasion for each purchaser each year, or not more than five occasions for each purchaser in total (known as a "demand" registration right). In addition, we have agreed to use our reasonable efforts to register the shares for resale on a shelf registration statement on Form S-3 as soon as practicable after the first anniversary of the closing. If the shares are registered on a Form S-3, each purchaser will be allowed to make not more than two offerings under the registration statement each year, subject to a minimum offering size of $50,000,000 per offering, although underwritten offerings will be subject to the limitations on the number of demand registrations described above. The purchasers will be able to participate, subject to specified limitations, in registrations effected by us for our own account or others. The closings of the initial public offering, the private placements and the offering of the equity security units are each conditioned on the concurrent closings of the others. We will account for the demutualization using the historical carrying values of our assets and liabilities. The board of directors of Metropolitan Life Insurance Company adopted the plan of reorganization on September 28, 1999, and subsequently adopted amendments to the plan. As required by law, the plan was approved by more than two-thirds of the eligible policyholders who voted in voting completed on February 7, 2000. On April , 2000, the New York Superintendent of Insurance approved the Plan after a public hearing. At the public hearing, which was held on January 24, 2000, some policyholders and others raised objections to certain aspects of the plan. Six lawsuits have been filed challenging the fairness of the plan of reorganization and the adequacy and accuracy of Metropolitan Life Insurance Company's disclosures to policyholders regarding the plan. The first of these lawsuits was filed in the Supreme Court of the State of New York for Kings County on January 14, 2000. It was brought on behalf of a putative class consisting of all policyholders of Metropolitan Life Insurance Company who should have membership benefits in Metropolitan Life Insurance Company and were and are eligible to receive notice, vote and receive consideration in the demutualization. The complaint seeks to enjoin or rescind the plan, as well as other relief. The defendants named in the complaint are Metropolitan Life Insurance Company, the individual members of its board of directors and MetLife, Inc. Discovery is underway in this case. The five other lawsuits were filed between March 10, 2000 and March 29, 2000 in the Supreme Court of the State of New York for New York County. The same defendants are named in these five cases as in the Kings County case, with the addition of the New York Superintendent. All five of the New York County cases are brought on behalf of a putative class consisting of the eligible policyholders of Metropolitan Life Insurance Company as of September 28, 1999, the adoption date of the plan. The claims in these five additional cases are substantially similar to those in the Kings County case, as is the relief sought. Metropolitan Life Insurance Company has entered into a stipulation with the plaintiffs in the five New York County cases in which it does not oppose consolidation of the cases, agrees that the plaintiffs have until April 30, 2000 to file a consolidated amended complaint, and agrees that the defendants' time to answer, move or otherwise respond to the consolidated amended complaint will be thirty days after service of the consolidated amended complaint. Metropolitan Life Insurance Company has agreed to provide certain information to the plaintiffs in three of the New York County cases. Metropolitan Life Insurance Company, MetLife, Inc. and the individual defendants believe they have meritorious defenses to the plaintiffs' claims and intend vigorously to contest all of the plaintiffs' claims in these six lawsuits. See "Risk Factors -- A challenge to the New York Superintendent of Insurance's approval may adversely affect the terms of the demutualization and the market price of our common stock". METLIFE CAPITAL TRUST I MetLife Capital Trust I is a statutory business trust created under Delaware law. The trust will issue two classes of trust securities: capital securities, which are offered by this prospectus, and common securities, which will be issued to MetLife, Inc. The trust securities represent undivided beneficial ownership interests in the assets of the trust. These assets consist solely of debentures issued by MetLife, Inc. to the trust. Although upon issuance of the capital securities a holder of units will initially be the beneficial owner of the related capital securities, those capital securities will be pledged with the collateral agent to secure the obligations of the unit holder under the related purchase contracts. The trust's common securities rank on a parity with the capital securities, and payments upon redemption, liquidation or otherwise will be made on a proportionate basis between the two classes. However, upon the occurrence and during the continuance of an event of default under the debenture indenture, the rights of the holders of the common securities to receive payment of periodic distributions and payments upon liquidation, redemption and otherwise will be subordinated to the rights of the holders of the capital securities. The aggregate stated liquidation amount of the common securities will equal at least 3% of the total capital of the trust. We are issuing the debentures through the trust in order to comply with requirements in our plan of reorganization regarding the type of securities that may be offered at the effective date of the demutualization. MetLife, Inc. will, on a senior and unsecured basis, irrevocably guarantee payments on the capital securities to the extent of available trust funds. The financial statements of the trust will be consolidated in our consolidated financial statements, with the capital securities shown on our consolidated balance sheets under the caption "Company-obligated mandatorily redeemable securities of subsidiary trust holding solely debentures of Parent". The notes to our consolidated financial statements will disclose that the sole asset of the trust will be the debentures issued by MetLife, Inc. to the trust. Distributions on the capital securities will be reported as a charge to minority interest in our consolidated statements of income, whether paid or accrued. Before the issuance of shares of our common stock upon settlement of the purchase contracts, the units will be reflected in our diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of our common stock used in calculating earnings per share for any period is deemed to be increased by the excess, if any, of the number of shares issuable upon settlement of the purchase contracts over the number of shares that could be purchased by us in the market, at the average market price during that period, using the proceeds receivable upon settlement. Consequently, there will be no dilutive effect on our earnings per share, except during periods when the average market price of our common stock is above $ per share. ------------------------- MetLife's Inc.'s principal executive offices are located at MetLife, Inc., One Madison Avenue, New York, New York 10010-3690. Our telephone number is (212) 578-2211. The principal offices of the trust will be c/o The Bank of New York (Delaware), White Clay Center, Route 273, Newark, Delaware 19711 and its telephone number will be (302) 451-2500. THE OFFERING WHAT ARE THE UNITS? Each unit will initially consist of: - a purchase contract under which you agree to purchase, for $50, shares of common stock of MetLife, Inc. on May 15, 2003. We will determine the number of shares you will receive by the settlement rate described below, based on the average trading price of the common stock at that time; and - a capital security of MetLife Capital Trust I, with a stated liquidation amount of $50. The capital securities will initially be pledged to secure your obligations under the purchase contract. We refer in this prospectus to the purchase contracts, together with the pledged capital securities or, after the remarketing described below, together with the specified pledged treasury securities, as "normal units". Each holder of normal units may elect to withdraw the pledged capital securities or treasury securities underlying the normal units, creating "stripped units". A holder might consider it beneficial to either hold the capital securities directly or to realize income from their sale. These investment choices are facilitated by creating stripped units. To create stripped units, the holder must substitute, as pledged securities, specifically identified treasury securities that will pay $50 on May 15, 2003, the amount due on such date under the purchase contract, and the pledged capital securities or treasury securities will be released from the pledge agreement and delivered to the holder. The stripped units will not generate cash payments to the holder, although holders continuing to hold capital securities separately will receive cash distributions as described below. We will not initially list either the stripped units or the capital securities on any national securities exchange. In the event that either of these securities are separately traded to a sufficient extent that applicable exchange listing requirements are met, we will attempt to list these securities on the exchange on which the normal units are then listed. Holders of stripped units may recreate normal units by re-substituting the capital securities or applicable treasury securities for the treasury securities underlying the stripped units. WHAT ARE THE CAPITAL SECURITIES? The capital securities, and the common securities issued to MetLife, Inc., represent undivided beneficial ownership interests in the assets of MetLife Capital Trust I. These assets consist solely of the debentures issued by MetLife, Inc. to the trust. As a result, holders of capital securities will hold, through the trust, an interest in the debentures, although the trustee of the trust will hold legal title over the debentures. Because each holder has an "undivided" beneficial interest in the trust's assets, the holder has a proportional interest in the collective assets of the trust, rather than in any specific debentures. The debentures will have an interest rate and principal amount that are the same as the distribution rate and stated liquidation amount of the trust securities. WHAT ARE THE PURCHASE CONTRACTS? The purchase contract underlying a unit obligates you to purchase, and us to sell, for $50, on May 15, 2003, a number of newly issued shares of our common stock equal to the settlement rate described below. We will base the settlement rate on the average trading price of the common stock at that time. WHAT PAYMENTS WILL BE MADE TO HOLDERS OF THE UNITS AND THE CAPITAL SECURITIES? If you hold normal units, you will receive payments, consisting of quarterly cumulative cash distributions on the capital securities, at the annual rate of % of the stated liquidation amount of $50 per capital security through and including February 15, 2003. These payments are subject to the deferral provisions described below. On May 15, 2003 you will receive a quarterly payment, consisting of a cash payment on the specified pledged treasury securities, at the same annual rate. If you hold stripped units, you will not receive distributions on the units. If you hold capital securities separately from the units, you will receive distributions on the capital securities. The capital securities, whether held separately from or as part of units, will initially pay distributions at the annual rate of % of the stated liquidation amount of $50 per capital security for the quarterly payments payable on and before February 15, 2003, and the capital securities will pay distributions at the reset rate from that date. If the reset agent cannot establish a reset rate meeting the requirements described in this prospectus, the reset agent will not reset the distribution rate and the reset rate will continue to be the initial annual rate of % until the reset agent can establish such a reset rate meeting the requirements described in this prospectus on a later remarketing date prior to May 15, 2003. The distributions on the capital securities are subject to the deferral provisions described below. The trust must pay distributions on the capital securities on the dates payable to the extent that it has funds available for the payment of those distributions. The trust's funds available for distribution to you as a holder of the capital securities will be limited to payments received from MetLife, Inc. on the debentures. MetLife, Inc. will guarantee the payment of distributions on the capital securities out of moneys held by the trust to the extent of available trust funds. WHAT ARE THE PAYMENT DATES? Subject to the deferral provisions described below, distributions will be paid quarterly in arrears on each February 15, May 15, August 15, and November 15, commencing August 15, 2000. WHAT IS THE RESET RATE? In order to facilitate the remarketing of the capital securities at the remarketing price described below, the reset agent will reset the rate of distribution on the capital securities for the quarterly payments payable on and after May 15, 2003. The reset rate is the interest rate on the debentures, and therefore the distribution rate on the capital securities, after February 15, 2003. The reset rate will be the rate sufficient to cause the then current aggregate market value of all the outstanding capital securities to be equal to 100.5% of the remarketing value described below. The reset agent will assume for this purpose, even if not true, that all of the capital securities continue to be components of normal units and will be remarketed. Re-setting the distribution rate of the capital securities at this rate should enable the remarketing agent to sell the capital securities in the remarketing and purchase the necessary treasury securities, the proceeds of which will be applied in settlement of the purchase contracts and to payment of the quarterly payment on the normal units due on May 15, 2003. The reset rate will be determined by the reset agent on the third business day prior to February 15, 2003. If the reset agent cannot establish a reset rate on the remarketing date meeting these requirements, and as a result the capital securities cannot be sold as described below, the distribution rate will not be reset and will continue to be the initial rate of the capital securities. However, the reset agent may thereafter attempt to establish a reset rate meeting these requirements, and the remarketing agent may attempt to remarket the capital securities, on one or more subsequent remarketing dates after the initial remarketing date until May 15, 2003. If a reset rate cannot be established on a given date, the remarketing will not occur on that date. A nationally recognized investment banking firm will act as reset agent. The reset of the distribution rate on the capital securities will not change the rate of distributions received by holders of the normal units, which, as described above, will remain at the initial rate of % of $50 for the quarterly payment payable on May 15, 2003. WHEN CAN WE DEFER DISTRIBUTION PAYMENTS? We can, on one or more occasions, defer the interest payments due on the debentures for up to five years, unless an event of default under the debentures has occurred and is continuing. However, we cannot defer interest payments beyond the maturity date of the debentures, which is May 15, 2005, and any deferred period must end on an interest payment date. If we defer interest payments on the debentures, the trust will also defer distributions on the capital securities. The trust will be able to pay distributions on the capital securities only if and to the extent it receives interest payments from us on the debentures. During any deferral period, distributions on the capital securities will continue to accumulate quarterly at the initial annual rate of % of the stated liquidation amount of $50 per capital security through and including February 15, 2003, and at the reset rate from that date to May 15, 2005. Also, the deferred distributions will themselves accumulate additional distributions at the deferred rate, to the extent permitted by law. Distribution payments may be deferred if we do not have funds available to make the interest payments on the debentures or for any other reason. However, during any period in which we defer interest payments on the debentures, in general we cannot: - declare or pay any dividend or distribution on our capital stock; - redeem, purchase, acquire or make a liquidation payment on any of our capital stock; - make any interest, principal or premium payment on, or repurchase or redeem, any of our debt securities that rank equally with or junior to the debentures; or - make any payment on any guarantee of the debt securities of any of our subsidiaries if the guarantee ranks equal or junior to the debentures. If a payment deferral occurs, you will continue to recognize interest income for United States federal income tax purposes in advance of your receipt of any corresponding cash distribution. For more extensive U.S. federal income tax disclosure, see "U.S. Federal Income Tax Consequences". WHAT IS REMARKETING? In order to provide holders of normal units with the necessary collateral to be applied in the settlement of their purchase contracts, the remarketing agent will sell the capital securities of holders of normal units, other than those electing not to participate in the remarketing, and the remarketing agent will use the proceeds to purchase U.S. treasury securities, which the participating normal unitholders will pledge to secure obligations under the related purchase contracts. This will be one way for holders to satisfy their obligations to purchase shares of common stock of MetLife, Inc. under the related purchase contracts. The cash that the pledged treasury securities underlying the normal units of such holders pay will be used to satisfy such holders' obligations to purchase our common stock on May 15, 2003, the stock purchase date. Unless a holder elects not to participate in the remarketing, the remarketing agent will remarket the capital securities that are included in the normal units on the remarketing date, which will be the third business day immediately preceding February 15, 2003, unless the remarketing agent delays the remarketing to a later date as described below. We will enter into a remarketing agreement with a nationally recognized investment banking firm, pursuant to which that firm will agree to use its commercially reasonable best efforts to sell the capital securities which are included in normal units and which are participating in the remarketing on February 15, 2003 at a price equal to 100.5% of the remarketing value. The "remarketing value" will be equal to the sum of: (a) the value at the remarketing date of such amount of U.S. treasury securities that will pay, on or prior to the quarterly payment date falling on the stock purchase date, an amount of cash equal to the aggregate distributions that are scheduled to be payable on that quarterly payment date on each capital security which is included in a normal unit and which is participating in the remarketing, assuming for this purpose, even if not true, that (i) no distribution payment will then have been deferred and (ii) the distribution rate on the capital securities remains at the initial rate; (b) the value at the remarketing date of such amount of U.S. treasury securities that will pay, on or prior to the stock purchase date, an amount of cash equal to $50 for each capital security which is included in a normal unit and which is participating in the remarketing; and (c) if distribution payments are being deferred at the remarketing date, an amount of cash equal to the aggregate unpaid deferred payments on each capital security which is included in a normal unit and which is participating in the remarketing, accrued to February 15, 2003. The remarketing agent will use the proceeds from the sale of these capital securities in a successful remarketing described in this section to purchase, in the discretion of the remarketing agent, in open market transactions or at treasury auction, the amount and the types of treasury securities described in (a) and (b) above, which it will deliver through the purchase contract agent to the collateral agent to secure the obligations under the related purchase contracts of the normal unitholders whose capital securities participated in the remarketing. The remarketing agent will deduct as a remarketing fee an amount not exceeding 25 basis points (.25%) of the total proceeds from such remarketing. The remarketing agent will remit the remaining portion of the proceeds, if any, for the benefit of the holders of the normal units participating in the remarketing. Alternatively, a holder of normal units may elect not to participate in the remarketing and retain the capital securities underlying those units by delivering the treasury securities described in (a) and (b) above, in the amount and types specified by the remarketing agent, applicable to the holder's capital securities, to the purchase contract agent prior to the remarketing date. WHAT HAPPENS IF THE REMARKETING AGENT DOES NOT SELL THE CAPITAL SECURITIES? If, as described above, the reset agent cannot establish a reset rate on the remarketing date that will be sufficient to cause the then current aggregate market value of all the outstanding capital securities to be equal to 100.5% of the remarketing value (assuming, even if not true, that all of the capital securities are held as components of normal units and will be remarketed), and the remarketing agent cannot sell the capital securities offered for remarketing on the remarketing date at a price equal to 100.5% of the remarketing value, determined on the basis of the capital securities being remarketed, the reset agent may thereafter attempt to establish a new reset rate, and the remarketing agent may attempt to remarket the capital securities, on one or more occasions after that date until May 15, 2003. Any such remarketing will be at a price equal to 100.5% of the remarketing value, determined on the basis of the capital securities being remarketed. A holder of normal units may elect not to participate in any such remarketing and retain the capital securities underlying those units by delivering the treasury securities described above to the purchase contract agent prior to the subsequent remarketing date. If the remarketing agent fails to remarket the capital securities underlying the normal units at that price by the business day immediately preceding to the stock purchase date, we will be entitled to exercise our rights as a secured party on that date and, subject to applicable law, retain the securities pledged as collateral or sell them in one or more private sales. IF I AM NOT A PARTY TO A PURCHASE CONTRACT, MAY I STILL PARTICIPATE IN A REMARKETING OF MY CAPITAL SECURITIES? Holders of capital securities that are not included as part of normal units may elect to have their capital securities included in the remarketing in the manner described in "Description of the Units -- Description of the Purchase Contracts -- Settlement -- Optional Remarketing". The remarketing agent will use its commercially reasonable best efforts to remarket the separately held capital securities included in the remarketing on the remarketing date at a price equal to 100.5% of the remarketing value, determined on the basis of the separately held capital securities being remarketed. After deducting such remarketing fee an amount not exceeding 25 basis points (.25%) of the total proceeds from the remarketing, the remaining portion of the proceeds will be remitted to the holders whose separate capital securities were sold in the remarketing. If a holder of capital securities elects to have its capital securities remarketed but the remarketing agent fails to sell the capital securities on any remarketing date, the capital securities will be promptly returned to the holder. WHAT IS THE SETTLEMENT RATE? The settlement rate is the number of newly issued shares of MetLife, Inc. common stock that MetLife, Inc. is obligated to sell and you are obligated to buy upon settlement of a purchase contract on May 15, 2003. The settlement rate for each purchase contract will be as follows, subject to adjustment under specified circumstances: - if the applicable market value of our common stock is equal to or greater than $ , the settlement rate will be shares of our common stock per purchase contract; - if the applicable market value of our common stock is less than $ but greater than $ , the settlement rate will be equal to $50 divided by the applicable market value of our common stock per purchase contract; and - if the applicable market value of our common stock is less than or equal to $ , the settlement rate will be shares of our common stock per purchase contract. BESIDES PARTICIPATING IN A REMARKETING, HOW ELSE WILL MY OBLIGATIONS UNDER THE PURCHASE CONTRACT BE SATISFIED? Your obligations under the purchase contract may also be satisfied: - if you have created stripped units or elected not to participate in the remarketing by delivering specified treasury securities in substitution for the capital securities, through the application of the cash payments received on the pledged treasury securities; - through the early delivery of cash to the purchase contract agent in the manner described in "Description of the Units -- Description of the Purchase Contracts -- Settlement -- Early Settlement"; and - if we are involved in a merger or consolidation prior to the stock purchase date in which at least 30% of the consideration for our common stock consists of cash or cash equivalents, through an early settlement of the purchase contract as described in "Description of the Units -- Description of the Purchase Contracts -- Settlement -- Early Settlement upon Merger". In addition, the purchase contracts, our related rights and obligations and those of the holders of the units, including their obligations to purchase common stock, will automatically terminate upon the occurrence of particular events of our bankruptcy, insolvency or reorganization. Upon such a termination of the purchase contracts, the pledged capital securities or treasury securities will be released and distributed to you. WHAT IS THE MATURITY OF THE CAPITAL SECURITIES? The capital securities do not have a stated maturity. However, the debentures issued by MetLife, Inc. to the trust will mature on May 15, 2005. Upon redemption of the debentures on that date, the trust will redeem the capital securities at their aggregate stated liquidation amount plus any accrued and unpaid distributions. WHEN MAY METLIFE, INC. DISSOLVE METLIFE CAPITAL TRUST I? We, as the holder of all the common securities of the trust, have the right at any time to dissolve the trust. If we dissolve the trust, holders of the capital securities will receive, after satisfaction of liabilities of creditors of the trust, debentures of MetLife, Inc. having a principal amount equal to the stated liquidation amount of the capital securities they hold. In such event, the capital securities will no longer be deemed to be outstanding, and a normal unit that had included capital securities would thereafter include a debenture with a $50 principal amount, which will be pledged to secure the normal unitholder's obligations under the related purchase contract. Following dissolution, the distributed debentures would be subject to the remarketing, settlement and other provisions of the normal units. In addition, if at such time you hold capital securities separately from the units, you will receive the debentures in exchange for your capital securities. WHAT IS THE EXTENT OF METLIFE, INC.'S GUARANTEE? MetLife, Inc. will irrevocably guarantee, on a senior and unsecured basis, the payment in full of the following: - distributions on the capital securities to the extent of available trust funds; and - the stated liquidation amount of the capital securities to the extent of available trust funds. The guarantee will be unsecured and rank equally in right of payment to all of our other senior unsecured debt. In addition, we are a holding company and our assets will consist primarily of the common stock of our subsidiaries. Accordingly, we will depend on dividends and other distributions from our subsidiaries in order to make the principal and interest payments on the debentures. See "Risk Factors -- Dividends and payments on our indebtedness may be affected by limitations imposed on Metropolitan Life Insurance Company and our other subsidiaries". Our guarantee is effectively junior to the debt and other liabilities of our subsidiaries. The capital securities, the guarantee and the debentures do not limit MetLife, Inc.'s ability or the ability of its subsidiaries to incur additional indebtedness, including indebtedness that ranks equally with the debentures and the guarantee. MetLife, Inc. will have no senior debt other than the debentures upon completion of this offering of units, but it may incur such indebtedness in the future. The companies that will become subsidiaries of MetLife, Inc. after the demutualization had $6.7 billion of total debt at December 31, 1999. The guarantee, when taken together with our obligations under the debentures and the indenture and our obligations under the declaration of trust for MetLife Capital Trust I, including our obligations to pay costs, expenses, debts and liabilities of the trust, other than with respect to the trust securities, has the effect of providing a full and unconditional guarantee of amounts due on the capital securities. WHAT ARE THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES RELATED TO THE UNITS AND CAPITAL SECURITIES? If you purchase units in the offering, you will be treated for United States federal income tax purposes as having acquired the capital securities and purchase contracts constituting those units. You must allocate the purchase price of the units between those capital securities and purchase contracts in proportion to their respective fair market values, which will establish your initial tax basis. We expect to report the fair market value of each capital security as $ and the fair market value of each purchase contract as $ . The capital securities will be treated as representing undivided beneficial ownership interests in the debentures. The United States federal income tax treatment of the situation where the fair market value of a capital security exceeds the purchase price of each unit at the time of purchase is unclear. We expect to report the fair market value of each capital security at the time of purchase as $ , which exceeds the $50 purchase price of each unit by $ . To the extent we are required to file information returns, we expect to treat this $ excess amount as taxable income to each U.S. holder and to treat each capital security as having an "issue price" of $ (which would result in a U.S. holder having an initial tax basis of $ in the capital security and zero in the purchase contract). U.S. holders should consult their own tax advisors regarding the foregoing. For United States federal income tax purposes, the debentures will be classified as contingent payment debt instruments subject to the "noncontingent bond method" of accruing original issue discount. As discussed more fully under "U.S. Federal Income Tax Consequences -- Capital Securities -- Interest Income and Original Issue Discount", the effects of this method will be (1) to require you, regardless of your usual method of tax accounting, to use the accrual method with respect to the debentures, (2) for all accrual periods through , 2003, and possibly thereafter, the accrual of interest income by you in excess of distributions actually received by you and (3) generally to result in ordinary rather than capital treatment of any gain or loss on the sale, exchange or disposition of the units to the extent attributable to the capital securities. See "U.S. Federal Income Tax Consequences". WILL THE UNITS BE LISTED ON A STOCK EXCHANGE? The normal units have been approved for listing subject to official notice of issuance on the New York Stock Exchange under the symbol "MIU". Neither the stripped units nor the capital securities will initially be listed; however, in the event that either of these securities are separately traded to a sufficient extent that applicable exchange listing requirements are met, we will endeavor to cause those securities to be listed on the exchange on which the normal units are then listed. WHAT ARE YOUR EXPECTED USES OF PROCEEDS FROM THE OFFERING? We estimate that we will receive net proceeds from the offering of units of $960 million, or $1,104 million if the underwriters' options to purchase additional units as described under "Underwriting" are exercised in full. As required by the plan of reorganization, we will use the net proceeds from this offering, together with an estimated $2,381 million of net proceeds from the initial public offering of common stock, or $2,738 million if the underwriters' options to purchase additional shares are exercised in full, and $1,022 million of proceeds from the private placements (assuming a purchase of 73,000,000 shares at $14.00 per share) as follows: - an estimated $397 million to reimburse Metropolitan Life Insurance Company for the crediting of policy credits to certain policyholders in the demutualization; - an estimated $2,494 million to reimburse Metropolitan Life Insurance Company for the payment of cash to certain policyholders in the demutualization; - an estimated $315 million to reimburse Metropolitan Life Insurance Company for cash payments to be made by its Canadian branch to certain holders of policies included in its Canadian business sold to Clarica Life Insurance Company in 1998; - an estimated $361 million to reimburse Metropolitan Life Insurance Company for the payment of the fees and expenses incurred in connection with the demutualization; and - up to $340 million (unless the New York Superintendent of Insurance approves a larger amount) to be retained by MetLife, Inc. and used for working capital, payment of dividends and other general corporate purposes, including payments on the debentures issued by MetLife, Inc. to MetLife Capital Trust I in connection with the offering of the units, and to pay the fees and expenses of the trustee and custodian of the MetLife Policyholder Trust. We will contribute any remaining proceeds to Metropolitan Life Insurance Company for its general corporate purposes and to repay up to $450 million of short-term debt that Metropolitan Life Insurance Company incurred in connection with the acquisition of GenAmerica Corporation. The plan of reorganization requires that the aggregate net proceeds from the offerings and the private placements be at least equal to specified amounts. See "The Demutualization -- Summary of the Plan of Reorganization". If the actual proceeds raised in the initial public offering, the private placements or the offerings of the units are different from the amount estimated in this prospectus, we will be required to change the sizes of the other transactions, subject to limits set forth in the plan. The amount of proceeds from the offerings and the private placements and the final terms of the units will depend on market conditions and on our capital needs at the time of issuance. THE OFFERING -- EXPLANATORY DIAGRAMS The following diagrams demonstrate some of the key features of the purchase contracts, normal units, stripped units and the capital securities, and the transformation of normal units into stripped units and capital securities. The hypothetical prices and percentages below are for illustration only. There can be no assurance that the actual prices and percentages will be limited by the range of hypothetical prices and percentages shown. PURCHASE CONTRACTS - Normal units and stripped units both include a purchase contract under which the holder agrees to purchase shares of MetLife, Inc. common stock on the stock purchase date. [GRAPHIC] - --------------- (1) For each of the percentage categories shown, the percentage of shares to be delivered at maturity to a holder of normal units or stripped units is determined by dividing (a) the related number of shares to be delivered, as indicated in the footnote for each such category, by (b) an amount equal to $50, the stated amount of the unit, divided by the reference price. (2) If the applicable market value of our common stock is less than or equal to $ , the number of shares to be delivered will be calculated by dividing the stated amount by the reference price. The "applicable market value" means the average of the closing price per share of our common stock on each of the twenty consecutive trading days ending on the third trading day immediately preceding May 15, 2003. (3) If the applicable market value of our common stock is between $ and $ , the number of shares to be delivered will be calculated by dividing the stated amount by the applicable market value. (4) If the applicable market value of our common stock is greater than $ , the number of shares to be delivered will be calculated by dividing the stated amount by the threshold appreciation price. (5) The "reference price" is $ , which is the initial public offering price of our common stock. (6) The "threshold appreciation price" is equal to $ , which is % of the reference price. NORMAL UNITS - A normal unit consists of two components as described below: [GRAPHIC] - The capital securities represent undivided beneficial ownership interests in MetLife, Inc.'s debentures, interest on which is subject to deferral. After remarketing, the normal units will include specified U.S. treasury securities in lieu of the capital securities. - The holder owns the capital securities and, after remarketing, the U.S. treasury securities, but will pledge them to us to secure its obligations under the purchase contract. STRIPPED UNITS - A stripped unit consists of two components as described below: [GRAPHIC] - The holder owns the U.S. treasury security but will pledge it to us to secure its obligations under the purchase contract. The treasury security is a zero-coupon U.S. treasury security (CUSIP No. 912833FS4) that matures on May 15, 2003. CAPITAL SECURITIES - Capital securities have the terms described below: [FLOW CHART] - The capital securities represent undivided beneficial ownership interests in MetLife, Inc.'s debentures. - The holder of a capital security that is a component of a normal unit has the option to either: - allow the capital security to be included in the remarketing process, the proceeds of which will be used to purchase U.S. treasury securities, which will be applied to settle the purchase contract; or - elect not to participate in the remarketing by delivering treasury securities in substitution for the capital security, the proceeds of which will be applied to settle the purchase contract. - The holder of a capital security that is separate and not a component of a normal unit has the option to either: - continue to hold the capital security whose rate has been reset for the quarterly payments payable on and after May 15, 2003; or - deliver the capital security to the remarketing agent to be included in the remarketing. TRANSFORMING NORMAL UNITS INTO STRIPPED UNITS AND CAPITAL SECURITIES - To create a stripped unit, the holder combines the purchase contract with the specified zero-coupon U.S. treasury security that matures on May 15, 2003. - The holder owns the zero coupon U.S. treasury security but will pledge it to us to secure the holder's obligations under the purchase contract. - The zero-coupon U.S. treasury security together with the purchase contract constitutes a stripped unit. The capital security (or, after remarketing, U.S. treasury securities), which was previously a component of the normal unit, is tradeable as a separate security. [FLOW CHART] - After remarketing, the normal units will include specified U.S. treasury securities in lieu of capital securities. - The holder can also transform stripped units and capital securities (or, after remarketing, U.S. treasury securities) into normal units. Following that transformation, the specified zero coupon U.S. treasury security, which was previously a component of the stripped units, is tradeable as a separate security. - The transformation of normal units into stripped units and capital securities (or, after remarketing, U.S. treasury securities) and the transformation of stripped units and capital securities (or, after remarketing, U.S. treasury securities) into normal units requires certain minimum amounts of securities, as more fully provided in this prospectus. SUMMARY FINANCIAL INFORMATION The following table sets forth summary consolidated financial information for MetLife. We have derived the consolidated financial information for the years ended December 31, 1999, 1998 and 1997 and at December 31, 1999 and 1998 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the consolidated financial information for the years ended December 31, 1996 and 1995 and at December 31, 1997, 1996 and 1995 from our audited consolidated financial statements not included elsewhere in this prospectus. We have prepared the following consolidated statements of income and consolidated balance sheet data, other than the statutory data, in conformity with generally accepted accounting principles. We have derived the statutory data from Metropolitan Life Insurance Company's ANNUAL STATEMENTS filed with insurance regulatory authorities and we have prepared the statutory data in accordance with STATUTORY ACCOUNTING PRACTICES. You should read the following information in conjunction with the information and consolidated financial statements appearing elsewhere in this prospectus. <TABLE> <CAPTION> FOR THE YEARS ENDED DECEMBER 31, --------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> <C> STATEMENTS OF INCOME DATA Revenues: Premiums(1)................................................ $12,088 $11,503 $11,278 $11,345 $11,178 Universal life and investment-type product policy fees..... 1,438 1,360 1,418 1,243 1,177 Net investment income(1)(2)(3)............................. 9,816 10,228 9,491 8,978 8,837 Other revenues(1).......................................... 2,154 1,994 1,491 1,246 834 Net realized investment gains (losses)(4).................. (70) 2,021 787 231 (157) ------- ------- ------- ------- ------- 25,426 27,106 24,465 23,043 21,869 Total expenses(1)(3)(5).................................... 23,991 25,019 22,794 21,637 21,125 ------- ------- ------- ------- ------- Income before provision for income taxes, discontinued operations and extraordinary item........................ 1,435 2,087 1,671 1,406 744 Provision for income taxes(6).............................. 593 740 468 482 407 ------- ------- ------- ------- ------- Income before discontinued operations and extraordinary item..................................................... 842 1,347 1,203 924 337 (Loss) gain from discontinued operations(7)................ -- -- -- (71) 362 ------- ------- ------- ------- ------- Income before extraordinary item........................... 842 1,347 1,203 853 699 Extraordinary item -- demutualization expense, net of income tax of $35 and $2, respectively................... 225 4 -- -- -- ------- ------- ------- ------- ------- Net income................................................. $ 617 $ 1,343 $ 1,203 $ 853 $ 699 ======= ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> AT OR FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA General account assets(3)................................ $160,291 $157,278 $154,444 $145,877 $144,277 Separate account assets.................................. 64,941 58,068 48,338 43,399 38,861 -------- -------- -------- -------- -------- Total assets............................................. $225,232 $215,346 $202,782 $189,276 $183,138 Policyholder liabilities(8).............................. $124,955 $124,203 $127,358 $122,895 $122,220 Long-term debt........................................... $ 2,514 $ 2,903 $ 2,884 $ 1,946 $ 2,345 Retained earnings........................................ $ 14,100 $ 13,483 $ 12,140 $ 10,937 $ 10,084 Accumulated other comprehensive income (loss)............ (410) 1,384 1,867 1,046 1,670 -------- -------- -------- -------- -------- Total equity............................................. $ 13,690 $ 14,867 $ 14,007 $ 11,983 $ 11,754 OTHER DATA Operating income(4)(9)................................... $ 990 $ 23 $ 617 $ 818 $ 504 Adjusted operating income(4)(10)......................... $ 1,307 $ 1,226 $ 807 $ 921 $ 613 Operating return on equity(11)........................... 7.2% 0.2% 5.3% 7.8% 5.2% Adjusted operating return on equity(12).................. 9.5% 9.6% 7.0% 8.8% 6.3% Return on equity(13)..................................... 4.5% 10.5% 10.4% 8.1% 7.2% Operating cash flows..................................... $ 3,865 $ 842 $ 2,872 $ 3,688 $ 4,823 Total assets under management(14)........................ $373,646 $360,703 $338,731 $297,570 $288,000 STATUTORY DATA(15) Premiums and deposits.................................... $ 24,643 $ 22,722 $ 20,569 $ 20,611 $ 21,651 Net income (loss)........................................ $ 790 $ 875 $ 589 $ 460 $ (672) Policyholder surplus..................................... $ 7,630 $ 7,388 $ 7,378 $ 7,151 $ 6,785 Asset valuation reserve.................................. $ 3,109 $ 3,323 $ 3,814 $ 2,635 $ 2,038 </TABLE> - --------------- (1) Includes the following combined financial statement data of MetLife Capital Holdings, Inc., which we sold in 1998, and our Canadian operations and U.K. insurance operations, substantially all of which we sold in 1998 and 1997, respectively: <TABLE> <CAPTION> FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 1995 ---- ---- ---- ---- (DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> Revenues: Premiums................................................ $204 $ 463 $ 456 $ 439 Net investment income................................... 495 914 877 637 Other revenues.......................................... 33 225 164 192 ---- ------ ------ ------ $732 $1,602 $1,497 $1,268 ==== ====== ====== ====== Expenses: Policyholder benefits and claims........................ $240 $ 495 $ 459 $ 492 Other expenses.......................................... 418 861 606 831 ---- ------ ------ ------ $658 $1,356 $1,065 $1,323 ==== ====== ====== ====== </TABLE> As a result of these sales, we recorded net realized investment gains of $520 million and $139 million for the years ended December 31, 1998 and 1997, respectively. In July 1998, Metropolitan Life Insurance Company sold a substantial portion of its Canadian operations to Clarica Life Insurance Company. As part of that sale, we transferred a large block of policies in effect with Metropolitan Life Insurance Company in Canada to Clarica Life, and the holders of the transferred Canadian policies became policyholders of Clarica Life. Those transferred policyholders are no longer policyholders of Metropolitan Life Insurance Company and, therefore, are not entitled to compensation under the plan of reorganization. However, as a result of a commitment made in connection with obtaining Canadian regulatory approval of that sale, if Metropolitan Life Insurance Company demutualizes, its Canadian branch will make cash payments to those who are, or are deemed to be, holders of these transferred Canadian policies. The payments, which will be recorded in other expenses in the same period as the effective date of the plan, will be determined in a manner that is consistent with the treatment of, and fair and equitable to, eligible policyholders of Metropolitan Life Insurance Company. The aggregate amount of the payment is dependent upon the initial public offering price of common stock to be issued at the effective date of the plan. Assuming an initial public offering price of $14.00 per share, and based on actuarial calculations we have made regarding these payments, we estimate that the aggregate payments will be $315 million. (2) During 1997, we changed to the retrospective interest method of accounting for investment income on structured notes in accordance with Emerging Issues Task Force Consensus 96-12, Recognition of Interest Income and Balance Sheet Classification of Structured Notes. As a result, net investment income increased by $175 million. The cumulative effect of this accounting change on prior years' income was immaterial. (3) In 1998, we adopted the provisions of Statement of Financial Accounting Standards 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to our securities lending program. Adoption of the provisions had the effect of increasing assets and liabilities by $3,769 million at December 31, 1998 and increasing revenues and expenses by $266 million for the year ended December 31, 1998. (4) Realized investment gains and losses are presented net of related policyholder amounts. The amounts netted against realized investment gains and losses are the following: <TABLE> <CAPTION> FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------- 1999 1998 1997 1996 1995 ------ ------ ------ ----- ----- (DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> <C> Gross realized investment gains (losses).................... $ (137) $2,629 $1,018 $ 458 $ 73 ------ ------ ------ ----- ----- Less amounts allocable to: Future policy benefit loss recognition.................... -- (272) (126) (203) (152) Deferred policy acquisition costs......................... 46 (240) (70) (4) (78) Participating pension contracts........................... 21 (96) (35) (20) -- ------ ------ ------ ----- ----- Total..................................................... 67 (608) (231) (227) (230) ------ ------ ------ ----- ----- Net realized investment gains (losses)...................... $ (70) $2,021 $ 787 $ 231 $(157) ====== ====== ====== ===== ===== </TABLE> Realized investment gains (losses) have been reduced by (1) deferred policy acquisition amortization to the extent that such amortization results from realized investment gains and losses, (2) additions to future policy benefits resulting from the need to establish additional liabilities due to the recognition of investment gains, and (3) additions to participating contractholder accounts when amounts equal to such investment gains and losses are credited to the contractholders' accounts. This presentation may not be comparable to presentations made by other insurers. This presentation affected operating income and adjusted operating income. See note 9 below. (5) Total expenses exclude $(67) million, $608 million, $231 million, $227 million and $230 million for the years ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively, of deferred policy acquisition costs, future policy benefit loss recognition and credits to participating pension contracts that have been charged against realized investment gains and losses as these amounts are directly related to the realized investment gains and losses. This presentation may not be comparable to presentations made by other insurers. (6) Includes $125 million, $18 million, $(40) million, $38 million and $67 million for surplus tax paid (received) by Metropolitan Life Insurance Company for the years ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively. As a stock life insurance company, we will no longer be subject to the surplus tax after the effective date of the demutualization. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". (7) The gain (loss) from discontinued operations was primarily attributable to the disposition of our group medical insurance business. (8) Policyholder liabilities include future policy benefits, policyholder account balances, other policyholder funds and policyholder dividends. (9) The following provides a reconciliation of net income to operating income: <TABLE> <CAPTION> FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------- 1999 1998 1997 1996 1995 ---- ------- ------- ----- ----- (DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> <C> Net income.................................................. $617 $ 1,343 $ 1,203 $ 853 $ 699 ---- ------- ------- ----- ----- Adjustments to reconcile net income to operating income: Gross realized investment (gains) losses.................. 137 (2,629) (1,018) (458) (73) Income tax on gross realized investment gains and losses.................................................. (92) 883 312 173 26 ---- ------- ------- ----- ----- Realized investment (gains) losses, net of income tax... 45 (1,746) (706) (285) (47) ---- ------- ------- ----- ----- Amounts allocated to investment gains and losses (see note 4)................................................. (67) 608 231 227 230 Income tax on amounts allocated to investment gains and losses.................................................. 45 (204) (71) (86) (83) ---- ------- ------- ----- ----- Amounts allocated to investment gains and losses, net of income tax (benefit) expense.......................... (22) 404 160 141 147 ---- ------- ------- ----- ----- Loss (gain) from discontinued operations.................. -- -- -- 71 (362) ---- ------- ------- ----- ----- Surplus tax............................................... 125 18 (40) 38 67 ---- ------- ------- ----- ----- Extraordinary item -- demutualization expense, net of income tax of $35 and $2, respectively.................. 225 4 -- -- -- ---- ------- ------- ----- ----- Operating income............................................ $990 $ 23 $ 617 $ 818 $ 504 ==== ======= ======= ===== ===== </TABLE> We believe the supplemental operating information presented above allows for a more complete analysis of results of operations. We have excluded realized investment gains and losses due to their volatility between periods and because such data are often excluded when evaluating the overall financial performance of insurers. You should not consider operating income as a substitute for any GAAP measure of performance. Our method of calculating operating income may be different from the method used by other companies and therefore comparability may be limited. (10) The following provides a reconciliation of operating income to adjusted operating income: <TABLE> <CAPTION> FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------- 1999 1998 1997 1996 1995 ------ ------- ------ ----- ---- (DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> <C> Operating income............................................ $ 990 $ 23 $ 617 $ 818 $504 Adjustment for charges for sales practices claims and for personal injuries caused by exposure to asbestos-containing products, net of income tax........... 317 1,203 190 103 109 ------ ------- ------ ----- ---- Adjusted operating income................................... $1,307 $ 1,226 $ 807 $ 921 $613 ====== ======= ====== ===== ==== </TABLE> The charge for the year ended December 31, 1999 was principally related to the settlement of a multidistrict litigation proceeding involving alleged improper sales practices, accruals for sales practices claims not covered by the settlement and other legal costs. The amount reported for the year ended December 31, 1998 includes charges for sales practices claims and claims for personal injuries caused by exposure to asbestos or asbestos-containing products. See Note 9 of Notes to Consolidated Financial Statements. We believe that supplemental adjusted operating income data provide information useful in measuring operating trends by excluding the unusual amounts of expenses associated with sales practices and asbestos-related claims. These expenses are not related to our ongoing operations. Adjusted operating income should not be considered as a substitute for any GAAP measure of performance. (11) Operating return on equity is defined as operating income divided by average total equity, excluding accumulated other comprehensive income (loss). We believe the operating return on equity information presented supplementally allows for a more complete analysis of results of operations. Accumulated other comprehensive income (loss) has been excluded due to its volatility between periods and because such data are often excluded when evaluating the overall financial performance of insurers. Operating return on equity should not be considered as a substitute for any GAAP measure of performance or liquidity. Our method of calculation of operating return on equity may be different from the calculation used by other companies and, therefore, comparability may be limited. Operating return on equity is only presented for annual periods. (12) Adjusted operating return on equity is defined as adjusted operating income divided by average total equity, excluding accumulated other comprehensive income (loss). We believe that supplemental adjusted operating return on equity data provide information useful in measuring operating trends by excluding the unusual amounts of expenses associated with sales practices and asbestos-related claims. Adjusted operating return on equity should not be considered as a substitute for any GAAP measure of performance. Adjusted operating return on equity is only presented for annual periods. (13) Return on equity is defined as net income divided by average total equity, excluding accumulated other comprehensive income (loss). (14) Includes MetLife's general account and separate account assets and assets managed on behalf of third parties. (15) Metropolitan Life Insurance Company statutory data only. SUMMARY PRO FORMA FINANCIAL INFORMATION The following summary pro forma financial information is derived from the pro forma financial information and the notes thereto included elsewhere in this prospectus. This information gives effect to the demutualization, the establishment of the closed block, the offering of 20,000,000 units at $50.00 per unit, the sale of 179,000,000 shares of common stock in the initial public offering at $14.00 per share, and the planned concurrent private placements of 73,000,000 shares at $14.00 per share, as if they each had occurred at December 31, 1999 for purposes of the consolidated balance sheet information and at January 1, 1999 for purposes of the consolidated statement of income information for the year ended December 31, 1999. This information has been prepared based on the terms of the plan of reorganization and the assumptions described in "Pro Forma Consolidated Financial Information". This information assumes, among other things, (a) a total of 699,974,077 shares of common stock is allocated to eligible policyholders under the plan of reorganization and (b) the underwriters' options to purchase additional shares of common stock and units in the offerings are not exercised. We have based the pro forma information on available information and on assumptions management believes are reasonable and that reflect the effects of these transactions. We have provided this information for informational purposes only. The number of shares and units actually sold in the offerings and the private placements and their respective prices may vary from the amounts assumed. The plan of reorganization requires that the aggregate net proceeds from the offerings and the private placements be at least equal to specified amounts. See "The Demutualization -- Summary of the Plan of Reorganization". If the actual proceeds raised in the initial public offering, the private placements or the offering of equity security units are different from the amount estimated in this prospectus, we will be required to change the sizes of the other transactions, subject to the limit in the plan that the proceeds of this offering may not exceed one-third of the combined proceeds of this offering, the initial public offering of MetLife, Inc.'s common stock and the private placements. The amount of proceeds from the offerings and the private placements and the final terms of the units will depend on market conditions and our capital needs at the time of issuance. This information does not necessarily indicate our consolidated financial position or results of operations had the demutualization, the establishment of the closed block, the offering of units, the initial public offering and the private placements been consummated on the dates assumed. It also does not project or forecast our consolidated financial position or results of operations for any future date or period. The data set forth below give effect to gross proceeds of $2,506 million from the issuance of common stock in the initial public offering less an assumed underwriting discount and estimated initial public offering expenses aggregating $125 million, or net proceeds from the initial public offering of $2,381 million, assuming an initial public offering price of $14.00 per share. The data also gives effect to proceeds of $1,022 million from the private placements, assuming a purchase of 73,000,000 shares at an initial public offering price of $14.00 per share, and gross proceeds of $1,000 million from the issuance of the units, less an assumed underwriting discount and offering expenses aggregating $40 million, or net proceeds from the offering of $960 million. Under the plan of reorganization, policyholders eligible to receive consideration in the demutualization will receive interests in the MetLife Policyholder Trust, cash or policy credits. The trust will hold the shares of common stock allocated under the plan to those eligible policyholders receiving trust interests. The information in the table below assumes that an estimated $397 million of the net proceeds will be used to reimburse Metropolitan Life Insurance Company for policy credits made in lieu of 28,331,484 allocated shares, an estimated $2,494 million of the net proceeds will be used to reimburse Metropolitan Life Insurance Company for cash payments made in lieu of 178,166,475 allocated shares and an estimated $315 million will be used to reimburse Metropolitan Life Insurance Company for cash payments to be made by its Canadian branch to certain holders of policies included in its Canadian business sold to Clarica Life Insurance Company in 1998. We will account for the payments to the transferred Canadian policyholders in other expenses in the same period as the effective date of the plan. The consideration an eligible policyholder receives under the plan of reorganization will be based on the number of shares of common stock allocated to the eligible policyholder pursuant to the terms of the plan. For those policyholders receiving policy credits or for those non-electing eligible policyholders who must receive cash in the demutualization, we will translate the share allocations into dollar amounts based on the initial public offering price per share. The pro forma information reflects $397 million of policy credits and $164 million of cash payments that will be distributed to non-electing eligible policyholders that must receive cash in the demutualization, assuming an initial public offering price of $14.00 per share. The pro forma information also reflects elections to receive cash made by eligible policyholders holding approximately 23.8% of the total number of shares allocated to eligible policyholders, representing estimated cash payments of $2,330 million, assuming an initial public offering price of $14.00 per share. See "The Demutualization -- Payment of Consideration to Eligible Policyholders".
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. To understand this offering fully, you should read the entire prospectus carefully, including the risk factors and the financial statements and related notes, before you decide whether to invest in our common stock. STRATAGENE Stratagene develops and manufactures biological products and instruments designed to improve the speed and accuracy of molecular biology and genomics research. We market our products to researchers at academic and government institutions and pharmaceutical, biotechnology and industrial companies, in the U.S. and internationally. These researchers use our products to identify genes, study how cells are regulated by genes, determine the molecular mechanisms of health and disease, search for new drug therapies and test the safety of compounds used in food and pharmaceuticals. Our 1999 revenues were approximately $51 million. We have been serving the molecular biology research market since 1984 and are a leader in the area of genetic technologies described below. We have a reputation for developing and manufacturing quality products and providing superior service to researchers. Our growth has been built primarily on innovative product development by our internal research and development organization. Our customers include almost all of the top academic, pharmaceutical and biotechnology research laboratories, such as the National Institutes of Health, Merck and Genentech. Our products incorporate a diverse range of molecular biology technologies, such as gene transfer, gene expression, gene cloning, gene libraries, functional genomics, nucleic acid purification and analysis, microarrays, DNA replication and DNA sequencing. We provide a summary description of these and other technologies in the "Business -- Scientific Overview" section of this prospectus. We offer a broad portfolio of products in each of the following three market categories: - Genetic Technologies: Our genetic technologies products help researchers isolate and analyze genes and the proteins that they produce. These products include reagents, kits, cells and cell-derived products, and gene sequences. - Nucleic Acid Purification and Analysis: Our nucleic acid purification and analysis products help researchers purify and analyze DNA and RNA from a variety of human and non-human sources. - Genomics and Bioinformatics: Our products in this category include proprietary and non-proprietary gene sequences, spotted as miniaturized arrays on glass slides. This permits faster and more complex analysis of the control of gene expression as required by high throughput screening efforts. We have integrated unique Stratagene software tools, including web-based gene analysis, with our microarrays and gene clones to permit researchers to correlate information about the functions of genes. Overall sales of molecular biology and genomics research products, which include products in these three market categories, totaled approximately $2.5 billion in 1999. The established genetic technologies market is estimated to be growing at almost 10% per year, with the nucleic acid purification and analysis market and the genomics and bioinformatics market, though relatively smaller in size, growing at almost 15% and approximately 25% to 50% per year, respectively. We believe that the overall market for molecular biology and genomics research products will continue to expand due to several factors, including: - intensifying competition to discover new drugs; - large amounts of new information generated by genome sequencing projects; - increasing levels of government spending for life sciences research; and - proliferation of new research initiatives made possible by rapidly changing molecular biology and genomics research techniques. EXPLANATORY NOTE This Registration Statement contains two forms of prospectus: one to be used in connection with a U.S. and Canadian offering of the registrant's common stock and one to be used in a concurrent international offering of the common stock. The international prospectus will be identical to the U.S. prospectus except that it will have a different front cover page, underwriting section and back cover page. The U.S. prospectus is included herein and is followed by the alternate front cover page, underwriting section and back cover page to be used in the international prospectus, which each have been labeled "Alternative Page for International Prospectus." We believe that our competitive strengths position us to compete effectively within the molecular biology and genomics research products market. These strengths include innovative product research and development, a diverse intellectual property portfolio, a dedication to quality and customer service, effective sales and marketing, and an experienced management team. Our strategy is to continue to develop leadership positions in existing and emerging categories of the molecular biology and genomics research products market by developing and marketing novel, innovative products that deliver superior value to our customers. In executing our strategy, we will continue to focus on our expertise in genetic technologies, such as chemical manipulation of genes, while aggressively seeking to build on our expertise in nucleic acid purification and analysis and genomics and bioinformatics. As part of our strategy, we are also increasing our investments in research and development, expanding our sales and marketing capabilities and introducing new products in existing and newer target markets. Our increased investments in research and development have been primarily focused on the development of nucleic acid purification and analysis and genomics and bioinformatics products. This has already resulted in a significant increase in new product introductions over the last several months. Recent product introductions include: - Genetic Technologies: New product lines covering five technologies used in the manipulation of genes. - Nucleic Acid Purification and Analysis: Eleven new products that are designed to improve the amplification, quantification and purification of nucleic acids. - Genomics and Bioinformatics: New microarrays and gene clones, including over 10,000 gene sequences, which our customers can search and purchase through our GeneConnection web site. Our principal offices are located at 11011 North Torrey Pines Road, La Jolla, California 92037. Our telephone number is (858) 535-5400. Our web site address is www.stratagene.com. The information contained on our web site is not part of this prospectus. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED MARCH 10, 2000 PROSPECTUS - ---------------- SHARES [STRATAGENE HOLDING LOGO] COMMON STOCK ---------------------- This is Stratagene Holding Corporation's initial public offering of common stock. Stratagene is selling shares and Stratagene stockholders are selling shares. The U.S. underwriters are offering shares in the U.S. and Canada and the international managers are offering shares outside of the U.S. and Canada. We expect the public offering price to be between $ and $ per share. Currently, no public market exists for the shares. After pricing of the offering, we expect that the shares will be quoted on the Nasdaq National Market under the symbol "STGN." INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 7 OF THIS PROSPECTUS. ---------------------- <TABLE> <CAPTION> PER SHARE TOTAL --------- ----- <S> <C> <C> Public offering price....................................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to Stratagene.................... $ $ Proceeds, before expenses, to the selling stockholders...... $ $ </TABLE> The U.S. underwriters may also purchase up to an additional shares from Stratagene, and up to an additional shares from the selling stockholders, at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. The international managers may similarly purchase up to an additional shares from Stratagene and up to an additional shares from the selling stockholders. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The shares will be ready for delivery on or about , 2000. ---------------------- MERRILL LYNCH & CO. SALOMON SMITH BARNEY DAIN RAUSCHER WESSELS PRUDENTIAL VECTOR HEALTHCARE A UNIT OF PRUDENTIAL SECURITIES ---------------------- The date of this prospectus is , 2000. THE OFFERING Common stock offered: By Stratagene U.S. offering............ shares International offering... shares ------------------------------------------------------- Total.................. shares By the selling stockholders U.S. offering............ shares International offering... shares ------------------------------------------------------- Total.................. shares Shares outstanding after the offering...................... shares Use of proceeds............... We estimate that our net proceeds from this offering without exercise of the underwriters' over-allotment options will be approximately million. We intend to use these net proceeds for: - research and development; - expansion of our sales and marketing organization; - repayment of debt; - payments in connection with the termination of phantom stock rights; - the acquisition of BioCrest Holdings, LLC; and - general working capital and other corporate purposes. We will not receive any proceeds from the sale of shares by the selling stockholders. Risk factors.................. See "Risk Factors" and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock. Proposed Nasdaq National Market symbol................. STGN The number of shares that will be outstanding after the offering is based on the number of shares outstanding as of March 9, 2000 and excludes (1)1,468,000 shares of common stock issuable upon exercise of options outstanding at March 9, 2000 and (2) 462,648 shares of common stock issuable upon exercise of options to be issued contingent upon the closing of the offering in connection with the termination of phantom stock rights and phantom stock option rights under our phantom stock plan. INSIDE FRONT COVER: STRATEGENE LOGO AND STATEMENT: SERVING THE MOLECULAR BIOLOGY RESEARCH MARKET SINCE 1984. ARTWORK SHOWING THE THREE AREAS OF THE MARKETS THAT WE SERVE: GENETIC TECHNOLOGIES, NUCLEIC ACID PURIFICATION AND ANALYSIS, AND GENOMICS AND BIOINFORMATICS. INSIDE BACK COVER: TIMELINE SHOWING NEW PRODUCT INTRODUCTIONS AND PLANNED INTRODUCTIONS. Unless stated otherwise, all financial information and share and per share data in this prospectus: - gives effect to the merger of BioCrest Holdings, LLC with and into Stratagene Holding Corporation which will occur upon the closing of this offering; - gives effect to the conversion as of January 1, 1999 of convertible subordinated notes due December 1, 2002 into 9,600,000 shares of common stock to be issued upon the closing of the offering; - gives effect to the conversion of our class B common stock into class A common stock and the reclassification of our class A common stock into common stock contingent upon the closing of the offering; - does not include shares reserved for issuance under our stock option plan; - assumes that the underwriters do not exercise their over-allotment options; and - reflects a 4 for 1 stock split which occurred in March 2000. SUMMARY COMBINED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) You should read this summary financial data together with our financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The financial statements of Stratagene Holding Corporation and BioCrest Holdings, LLC are presented on a combined basis because the companies are under common management and control. BioCrest Holdings will be merged with and into Stratagene Holding Corporation upon the closing of the offering. <TABLE> <CAPTION> YEARS ENDED DECEMBER 31 ------------------------------------------------------------------- 1995 1996 1997 1998 1999 ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> COMBINED STATEMENT OF OPERATIONS DATA: Total revenue......................... $ 39,933 $ 44,326 $ 49,387 $ 53,179 $ 51,318 Costs and expenses: Cost of products sold (excludes $906 included in stock compensation charges in 1999).................. 11,927 12,976 14,549 15,017 14,767 Contracts and government grants and research.......................... 634 277 573 463 465 Proprietary research and development (excludes $3,097 included in stock compensation charges in 1999)..... 4,415 4,578 4,406 7,756 11,378 Selling and marketing (excludes $724 included in stock compensation charges in 1999).................. 8,928 10,108 11,772 14,003 12,961 General and administrative (excludes $808 included in stock compensation charges in 1999)..... 5,241 5,432 5,662 7,514 8,434 Stock compensation charges(1)....... -- -- -- -- 5,535 Restructuring costs(2).............. -- -- 325 270 425 ----------- ----------- ----------- ----------- ----------- Total costs and expenses..... $ 31,145 $ 33,371 $ 37,287 $ 45,023 $ 53,965 ----------- ----------- ----------- ----------- ----------- Earnings (loss) from operations................. $ 8,788 $ 10,955 $ 12,100 $ 8,156 $ (2,647) ----------- ----------- ----------- ----------- ----------- Total other expense, net..... (3,348) (1,888) (3,688) (3,063) (1,622) ----------- ----------- ----------- ----------- ----------- Earnings (loss) before income taxes...................... $ 5,440 $ 9,067 $ 8,412 $ 5,093 $ (4,269) ----------- ----------- ----------- ----------- ----------- Income tax (expense) benefit.................... (2,308) (3,279) (3,733) (2,368) 1,794 ----------- ----------- ----------- ----------- ----------- Net earnings (loss)................... $ 3,132 $ 5,788 $ 4,679 $ 2,725 $ (2,475) =========== =========== =========== =========== =========== Net earnings (loss) per share: Basic............................... $ 0.10 $ 0.19 $ 0.15 $ 0.09 $ (0.08) =========== =========== =========== =========== =========== Diluted............................. $ 0.10 $ 0.17 $ 0.14 $ 0.09 $ (0.08) =========== =========== =========== =========== =========== Weighted average shares: Basic............................... 30,400,000 30,520,000 30,610,000 30,765,000 31,067,416 =========== =========== =========== =========== =========== Diluted............................. 30,400,000 40,703,253 40,786,853 31,641,033 31,067,416 =========== =========== =========== =========== =========== OTHER DATA: Adjusted earnings from operations(3)..................... $ 5,004 $ 2,995 $ 3,485 =========== =========== =========== </TABLE> <TABLE> <CAPTION> YEARS ENDED DECEMBER 31 ----------------------------------------- 1997 1998 1999 ----------- ----------- ----------- <S> <C> <C> <C> PRO FORMA INFORMATION (UNAUDITED)(4): Pro forma net earnings (loss)............................... $ 4,890 $ 2,925 $ (1,924) =========== =========== =========== Pro forma net earnings (loss) per share: Basic..................................................... $ 0.16 $ 0.10 $ (.05) =========== =========== =========== Diluted................................................... $ 0.12 $ 0.09 $ (.05) =========== =========== =========== Pro forma weighted average shares: Basic..................................................... 30,610,000 30,765,000 40,667,416 =========== =========== =========== Diluted................................................... 40,786,853 31,641,033 40,667,416 =========== =========== =========== </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ----------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- <S> <C> <C> <C> COMBINED BALANCE SHEET DATA(5): Cash and cash equivalents................................... $ 3,101 $ 3,101 Working capital............................................. 7,811 7,811 Total assets................................................ 36,476 36,476 Total debt.................................................. 36,559 18,682 Total stockholders' equity (deficit)........................ (7,102) 10,775 </TABLE> - --------------- (1) We recognized these stock compensation charges in connection with phantom stock rights and phantom stock option rights due to the substantial increase in our valuation in connection with this offering. (2) Restructuring costs in 1997 are primarily related to consolidation of European distribution activities. Restructuring costs for 1998 and 1999 are primarily related to severance payments to former employees in connection with the relocation of facilities to Texas and related organizational changes. See Note 15 to our combined financial statements. (3) Adjusted earnings from operations is defined as earnings from operations adjusted for the exclusion of stock compensation charges and restructuring costs from operating expenses. We present adjusted earnings from operations, which is a non-GAAP measure, to enhance the understanding of our operating results. We believe adjusted earnings from operations is an indicator of our operating profitability since it excludes certain items which are not directly attributable to our ongoing business operations. However, adjusted earnings from operations relies upon management's judgement to determine which items are directly attributable to our ongoing business operations and is subjective in nature. Adjusted earnings from operations should not be construed as an alternative to net income as an indicator of our operating performance or as an alternative to cash flow from operations as a measure of our liquidity. (4) Pro forma net earnings (loss) gives effect to: (1) the conversion of our convertible subordinated notes as of January 1, 1999 into shares of our common stock which will occur upon the closing of the offering and the after-tax interest expense reduction of $1.0 million; and (2) adjustments for federal income taxes which we would have recorded if BioCrest Holdings and its subsidiaries had been taxed as a "C" corporation in 1997, 1998 and 1999. Pro forma weighted average shares for the year ended December 31, 1999 gives effect to the issuance contingent upon the closing of the offering of 9,600,000 shares of our common stock upon the conversion of our convertible subordinated notes. See Notes 5 and 16 to our combined financial statements. (5) Pro forma balance sheet data give effect to the conversion of our convertible subordinated notes into shares of our common stock upon the closing of the offering. Pro forma as adjusted balance sheet data give effect to the sale by us of shares of common stock in the offering and the application of the net proceeds of the offering.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001108691_arbinet_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001108691_arbinet_prospectus_summary.txt
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+PROSPECTUS SUMMARY.................. 1 RISK FACTORS........................ 6 FORWARD-LOOKING STATEMENTS.......... 16 USE OF PROCEEDS..................... 17 DIVIDEND POLICY..................... 17 CAPITALIZATION...................... 18 DILUTION............................ 19 SELECTED CONSOLIDATED FINANCIAL DATA.............................. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... 23 BUSINESS............................ 30 </TABLE> <TABLE> <CAPTION> PAGE -------- <S> <C> MANAGEMENT.......................... 38 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS........ 46 PRINCIPAL STOCKHOLDERS.............. 48 DESCRIPTION OF CAPITAL STOCK........ 51 SHARES ELIGIBLE FOR FUTURE SALE..... 55 UNDERWRITING........................ 57 NOTICE TO CANADIAN RESIDENTS........ 59 LEGAL MATTERS....................... 60 EXPERTS............................. 60 ADDITIONAL INFORMATION.............. 60 INDEX TO FINANCIAL STATEMENTS....... F-1 </TABLE> ------------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS PROSPECTUS MAY ONLY BE ACCURATE ON THE DATE OF THIS PROSPECTUS. ------------------------ This prospectus includes statistical data regarding the telecommunications industry throughout the world as well as commerce between business users of the Internet. We have obtained these statistics from publicly available sources, including: - the U.S. Federal Communications Commission; - the International Telecommunication Union, a leading international telecommunications standards-setting organization; - Gartner Group, an independent information technology research firm; and - TeleGeography, Inc., an independent telecommunications industry research firm. ALTHOUGH WE BELIEVE THAT THE DATA CITED IN THIS PROSPECTUS IS GENERALLY CORRECT, STATISTICAL INFORMATION IS INHERENTLY IMPRECISE, AND YOU SHOULD NOT PLACE UNDUE RELIANCE ON IT. ------------------------ DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. revenues from minutes traded on our exchange and exchange fees. We commenced trading on our exchange in October 1999. From October 1999 through February 2000, 17.2 million minutes were traded on our exchange. Our exchange serves the growing market for international and domestic long distance voice and fax calls. In 1998, calls in the international market aggregated 93 billion minutes, generating $69 billion in total revenues. The number of minutes in this market is expected to grow at a rate of approximately 12% annually, and total revenue is expected to grow at a rate of approximately 1.5% annually. We estimate that the service providers in this market include over 1,000 international long distance carriers, over 500 competitive local exchange carriers and over 250 voice over Internet protocol service providers worldwide. BENEFITS OF ARBINET--THEXCHANGE The benefits of our exchange to buyers include: - lower operating costs; - access to multiple sellers; - automatic least-cost traffic routing; - availability of network quality ratings; and - convenience and confidentiality. The benefits of our exchange to sellers include: - lower operating costs; - access to multiple buyers; - anonymity; - increased revenues; - reduced financial exposure; and - convenience and confidentiality. OUR STRATEGY We intend to be the primary centralized market for the purchase, sale and delivery of telecommunications capacity. Key elements of our strategy include: - increasing participation on our exchange; - expanding our geographic presence; - expanding the services offered through our exchange; and - enhancing our technology offerings. RECENT DEVELOPMENTS On March 7, 2000, we completed the private placement of 2,120,228 shares of our Series D preferred stock for a total purchase price of approximately $41.0 million. Purchasers of the Series D preferred stock included investors affiliated with Van Wagoner Capital Management, Breakaway Capital, Amerindo Investment Advisors, Inc., Communications Ventures III, L.P., Bedrock Capital Partners I, L.P., Internet Capital Group, Inc., J.P. Morgan Investment Corporation, Chase Capital Partners and BancBoston Ventures Inc. WHERE YOU CAN FIND US We were incorporated in Delaware in November 1996. Our principal offices are located at 33 Whitehall Street, New York, NY 10004 and our telephone number is (212) 797-9060. Our website address is WWW.ARBINET.COM. The information found on our website is not part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock we are offering: shares Common stock to be outstanding shares (1) after this offering: Use of proceeds............... Approximately $15.5 million of the net proceeds of this offering will be used to redeem our outstanding Series B preferred stock, which was issued in November 1999. We intend to use the balance of the net proceeds for general corporate purposes, including working capital, capital expenditures, geographic expansion of our operations and possible future acquisitions of or investments in complementary businesses, assets or technologies. Proposed Nasdaq National Market symbol............... </TABLE> - ------------------------ (1) The common stock to be outstanding after this offering is based on the number of shares outstanding as of March 1, 2000, and excludes: - shares that the underwriters have an option to purchase to cover over-allotments; - 3,327,659 shares issuable upon exercise of stock options outstanding as of March 1, 2000 under our stock option plan at a weighted average exercise price of $1.03 per share; - 2,036,538 shares available for future issuance under our stock option plan; - 19,225,775 shares issuable upon conversion of our Series A-1, Series C and Series D preferred stock (excluding the conversion of accrued preferred dividends); and - 184,924 shares issuable upon the exercise of warrants outstanding as of March 1, 2000 at a weighted average price of $0.05 per share. SUMMARY CONSOLIDATED FINANCIAL INFORMATION <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ---------------------------------------- 1997 1998 1999 ----------- ----------- ------------ <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues.............................................. $ -- $ -- $ 649,393 Cost of revenues...................................... -- -- 2,925,012 ----------- ----------- ------------ Gross profit (loss)................................... -- -- (2,275,619) Development expenses.................................. 243,295 253,898 1,481,357 Sales and marketing expenses.......................... 327,881 531,235 1,264,133 General and administrative expenses................... 970,153 1,476,877 5,159,580 Non-cash compensation and consulting services......... 20,751 40,384 1,794,270 Depreciation and amortization......................... -- 36,996 279,794 ----------- ----------- ------------ Loss from operations.................................. (1,562,080) (2,339,390) (12,254,753) Interest and other income (expense), net.............. (3,094) (121,771) 49,994 ----------- ----------- ------------ Net loss (1).......................................... $(1,565,174) $(2,461,161) $(12,204,759) =========== =========== ============ Net loss attributable to common stockholders (1)...... $(1,565,174) $(2,461,161) $(12,848,801) =========== =========== ============ Basic and diluted net loss per share (1).............. $ (0.42) $ (0.66) $ (2.37) =========== =========== ============ Weighted average common shares outstanding, basic and diluted......................................... 3,725,400 3,725,400 5,422,278 Pro forma basic and diluted net loss per share (1).... Pro forma weighted average common shares outstanding, basic and diluted...................... </TABLE> - ------------------------ (1) Does not include income (loss) of ($221,352), $2,061,330 and ($2,699,086) in 1997, 1998 and 1999, respectively, related to discontinued operations. <TABLE> <CAPTION> DECEMBER 31, 1999 --------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ----------- ----------- ----------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................... $25,768,227 $51,398,763 $ Working capital......................................... 19,678,842 45,309,378 Total assets............................................ 31,095,845 56,726,381 Capital lease obligations, less current portion......... 813,232 813,232 Series A-1 convertible preferred stock--redeemable..................................... 6,150,810 -- Series B cumulative redeemable senior preferred stock................................ 15,182,365 -- Series C cumulative convertible senior preferred stock--redeemable........................... 15,182,366 -- Series D convertible preferred stock.................... -- Total common stockholders' equity (deficiency).......... (13,654,166) 48,491,911 </TABLE> The pro forma financial information gives effect to: - the private placement of 2,120,228 shares of our Series D preferred stock on March 7, 2000 for proceeds of approximately $41.0 million; - the redemption of all 11,980,561 shares of our Series B preferred stock for approximately $15.5 million upon the closing of this offering; and - the conversion of all of our Series A-1, C and D preferred stock into an aggregate of 19,225,775 shares of our common stock upon the closing of this offering (excluding the conversion of accrued preferred dividends). The pro forma as adjusted financial information gives effect to our sale of shares of our common stock in this offering at an assumed initial public offering price of $ per share and our receipt of the net proceeds of that sale, after deducting our estimated offering expenses, including underwriting discounts and commissions.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001108782_carescienc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001108782_carescienc_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..a8947ee122896623b360a3dda50c3b866a05f145
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD CAREFULLY READ THE ENTIRE PROSPECTUS, INCLUDING THE RISK FACTORS SECTION STARTING ON PAGE 6 AND THE FINANCIAL STATEMENTS, BEFORE MAKING AN INVESTMENT DECISION. OUR BUSINESS CareScience provides Internet-based tools designed to improve the quality and efficiency of health care. Our products apply our proprietary mathematical and rules-based procedures, which we refer to collectively as clinical algorithms, to clinical data. We use these clinical algorithms, along with our data collection and storage technologies, to perform complex clinical analyses. Our customers use our products to identify clinical inefficiencies and medical errors and monitor the results of implemented solutions. Additionally, we facilitate the sharing of clinical information over the Internet among local health care constituents. We believe our solutions improve our customers' business performance by: - improving clinical processes; - lowering the cost of management oversight; and - improving the way health care constituents interact. We currently sell our products to hospitals, health care systems, health plans and pharmaceutical manufacturers. According to the Health Care Financing Administration, annual health care spending in the United States exceeds $1.2 trillion and is expected to grow to $2.2 trillion by 2008. Current on-line efforts are primarily seeking to change administrative and financial processes, but do not address the significant majority of health care spending that arises from the process of medical decision-making, treatment choice and therapeutic efficacy. Moreover, in addition to being the eighth-leading cause of mortality in the United States, medical errors add substantial costs to and drive consumer dissatisfaction with the delivery of care. We estimate that hospitals, health plans and pharmaceutical companies spend more than $35 billion annually to manage treatment decisions and attempt to control clinical costs. As inefficiencies within the health care system consume enormous resources, as well as pose medical risks to consumers, constituents are seeking to gain control of and measure clinical processes in order to increase quality and enhance efficiency. OUR SOLUTION AND PRODUCTS We provide an integrated suite of Internet-based products to gather, store, analyze and disseminate clinical information. We believe our products provide health care constituents with the most comprehensive, robust and clinically credible tools for clinical-process management. Our proprietary clinical algorithms, which we license pursuant to a 30-year exclusive agreement, were developed at the University of Pennsylvania School of Medicine and The Wharton School with over $30 million in grants. Our products are described below: - CADUCIS.COM enables hospitals, health systems and health plans to understand how to improve clinical efficiency and reduce medical errors. As an application service provider, we offer our customers cost-effective access to remotely hosted data supported by our sophisticated processing technology and analysis methods. - CARESTANDARD.COM is designed to allow local health care constituents to securely share clinical data over the Internet using more than 60 applications from third-party vendors. We are creating our pilot Care Exchange to enable health care constituents in Santa Barbara County, California to securely share clinical information. - CARESCRIPT.COM uses our proprietary databases and analytic tools to enable pharmaceutical and biotechnology companies to optimize the drug development process. - CARELEADER.COM, which we expect to introduce in 2001, will support physicians at the point of care by allowing them to access their patients' clinical data, see the types of treatment that are typically provided to comparable patients, identify physicians or hospitals with particular experience or outcomes and review their performance relative to peers. - CARESENSE.COM, which we also expect to introduce in 2001, will allow consumers to access information to guide their self-care decisions and to support their relationship with their physicians. OUR STRATEGY Our objective is to become the leading provider of Internet-based products to facilitate improvements in health care quality and efficiency. The primary components of our strategy include: - offer community-based solutions; - develop new products based on our proprietary knowledge and data assets; - cross-sell products; - leverage our technology platform; and - pursue targeted strategic relationships and acquisitions. Our headquarters are located at 3600 Market Street, 6th Floor, Philadelphia, PA 19104 and our telephone number is 215/387-9401. Our Web site can be found at www.CareScience.com. The information contained on our Web site does not constitute part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered by CareScience, Inc..................................... 4,000,000 shares Common stock to be outstanding after this offering................................ 12,717,962 shares Use of proceeds........................... For redemption of mandatorily redeemable preferred stock, payment of dividends declared on the series C, D and E convertible preferred stock and general corporate purposes, including working capital and expenditures for our new product lines and, potentially, for acquisitions if such opportunities arise in the future. See the section entitled Use of Proceeds for more information. Proposed Nasdaq National Market symbol.... CARE </TABLE> The number of shares to be outstanding upon completion of this offering is based on 8,717,962 shares outstanding as of March 31, 2000. The number of shares outstanding assumes the redemption for, or conversion into, common stock of all of our convertible preferred stock outstanding on that date, and excludes 2,548,632 shares of common stock that will be reserved for issuance under our stock option plans upon completion of this offering, of which 1,727,110 shares were subject to outstanding options. Our convertible preferred stock will convert or be redeemed immediately prior to the consummation of this offering into common stock, resulting in 5,330,062 shares of common stock to be issued upon conversion of or redemption for all preferred stock. Our officers, directors and affiliates will receive 5,218,204 of these shares at an effective per share price of $3.08, on a weighted-average basis. These numbers include the issuance of 311,111 shares of our common stock, assuming a price per share of $13.50, in lieu of a payment of $4.2 million for the redemption of our series F preferred stock. The series F preferred stock will not be issued and no shares of common stock will be issued in redemption of series F preferred stock if the price per share in this offering is greater than $18.27. Please see the section of this prospectus entitled Capitalization for a more complete discussion regarding the outstanding shares of our common stock and options to purchase our common stock and other related matters. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) You should read the data set forth below together with our Management's Discussion and Analysis of Financial Condition and Results of Operations and our financial statements and related notes included elsewhere in this prospectus. <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------------------------------- --------------------- 1995 1996 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- --------- --------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues.......................... $ 585 $ 1,116 $ 1,041 $ 2,552 $ 4,351 $ 718 $ 1,629 Gross profit (loss)(1)............ 384 230 (453) 648 1,842 207 603 Operating loss(2)................. (109) (2,010) (4,249) (4,190) (3,748) (1,088) (1,900) Net loss(3)....................... (89) (1,933) (4,296) (4,608) (3,670) (1,061) (1,879) Net loss applicable to common shareholders.................... (89) (1,933) (4,296) (4,617) (4,071) (1,155) (1,994) Net loss per common share: Basic and diluted............... $(0.02) $ (0.54) $ (1.27) $ (1.36) $ (1.20) $ (0.34) $ (0.59) Weighted average shares outstanding: Basic and diluted............... 3,628 3,558 3,388 3,388 3,388 3,388 3,388 </TABLE> <TABLE> <CAPTION> MARCH 31, 2000 --------------------------------------- PRO PRO FORMA ACTUAL FORMA(4) AS ADJUSTED(5) -------- ----------- -------------- (UNAUDITED) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................... $ 2,003 $ 2,003 $44,709 Working capital......................................... (1,560) (3,015) 41,466 Total assets............................................ 4,512 4,512 46,865 Capital lease obligations, less current portion......... 481 481 481 Mandatorily redeemable preferred stock.................. 4,797 4,892 -- Total shareholders' equity.............................. (5,299) (6,849) 42,171 </TABLE> ------------------------------ (1) Excludes stock-based compensation of $121,000 and $170,000 for the year ended December 31, 1999 and the three months ended March 31, 2000, respectively. (2) Includes stock-based compensation of $233,000 and $339,000 for the year ended December 31, 1999 and the three months ended March 31, 2000, respectively. (3) Before accretion of redemption premium on preferred stock. (4) Pro forma gives effect to: - the conversion of series C, D and E convertible preferred stock into 5,018,951 shares of common stock; - the issuance, upon the conversion of the series C convertible preferred stock, of series F redeemable preferred stock, with a redemption value of $4.2 million, and the simultaneous redemption of the series F redeemable preferred stock for 311,111 shares of common stock, assuming an offering price of $13.50 per share; - the accretion of the redemption value of the series G preferred stock through June 2000; and - the declaration of a dividend of $1.5 million (calculated at 8% per annum through June 2000) payable to the series C, D and E convertible preferred shareholders from the proceeds of this offering. (5) As adjusted for the issuance of 4,000,000 shares of common stock at an assumed offering price of $13.50 per share, the redemption of all the mandatorily redeemable series G preferred stock and the dividend paid on the series C, D and E convertible preferred stock upon consummation of this offering. We have applied for the following United States trademarks: CareScience.com; eCare. Better Care.; CaduCIS Manager; CaduCIS Alliance; CaduCIS Net; CaduCIS Query; CaduCIS.com; and Care Management Science. Other trademarks and tradenames appearing in this prospectus are the property of their respective owners. ------------------------ UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES: - THE UNDERWRITERS HAVE NOT EXERCISED THEIR OPTION TO PURCHASE ADDITIONAL SHARES; - THE REDEMPTION OF OUR MANDATORILY REDEEMABLE PREFERRED STOCK FOR CASH AND COMMON STOCK AND THE CONVERSION OF ALL SHARES OF OUR CONVERTIBLE PREFERRED STOCK INTO SHARES OF OUR COMMON STOCK UPON COMPLETION OF THIS OFFERING; AND - THE FILING OF AN AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO INCREASE OUR AUTHORIZED COMMON STOCK AND DECREASE OUR AUTHORIZED PREFERRED STOCK.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001108820_doubletwis_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001108820_doubletwis_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL THE INFORMATION YOU SHOULD CONSIDER BEFORE BUYING SHARES IN THE OFFERING. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY. DOUBLETWIST, INC. We provide the life sciences industry with a powerful and secure research environment that integrates genomic information and bioinformatics analysis tools. We enable the life scientist to perform sophisticated genomic analysis without requiring bioinformatics expertise. Genomic information includes data pertaining to the structure and function of DNA, the molecule that contains the basic set of inherited instructions for the development and functioning of humans and other organisms. Bioinformatics, the application of information technology to the life sciences industry, is crucial to managing and analyzing genomic information and accelerating the drug discovery process. Our mission is to empower life scientists by simplifying and accelerating genomic research. Our customers include pharmaceutical and biotechnology companies and research institutions, such as Bristol-Myers Squibb Company, Merck & Co., Inc., Chiron Corporation, Genaissance Pharmaceuticals, Inc., Affymetrix, Inc., Hitachi, Ltd., E.I. du Pont de Nemours and Company, Monsanto Company, Grupo Estudios Multicentricos en Argentina (GEMA) and R.W. Johnson Pharmaceutical Research Institute. Each of the named customers has purchased more than $100,000 worth of our products since January 1998. INDUSTRY BACKGROUND Advances in understanding the role of genes in human health and new technologies for interpreting genomic information are expected to improve medical treatment by facilitating the development of drugs that target the biological roots of disease. As a first step in determining the role of genes in health and disease, several public and private organizations are engaged in generating large amounts of genomic information by decoding the sequence of nucleotides, chemical subunits of genetic material, in the genomes of a number of organisms, including the human genome. One of the most prominent endeavors in genomic research is the Human Genome Project, an international research effort designed to determine the complete sequence of the human genome and discover all human genes. The sequencing process and associated research have generated an enormous amount of raw data. Identifying and predicting the function of genes within this raw sequence data is critical to discovering potential new drugs and developing technologies for identifying diseases and other conditions. INDUSTRY CHALLENGES The life sciences industry faces significant challenges before it can capitalize on the enormous amounts of data generated by the Human Genome Project and similar efforts. These challenges include: - a rapidly growing amount of genomic information, which often contains errors, is often unorganized, incomplete and poorly annotated, and has no single point of access; - difficulty integrating the growing amount of public data with proprietary or licensed data in a secure environment; and - scarce bioinformatics specialists and the lack of easy-to-use analysis tools for the life scientist. We believe there is a significant market need for an advanced, cost-effective research environment that integrates multiple sources of genomic and other scientific data and analysis tools, and which life scientists can securely access and easily use. OUR PRODUCTS Our research environment is accessible by subscription through our secure Web site, and we also license components of this research environment for use on a customer's internal computer network. We currently offer the following products: - DOUBLETWIST.COM. Launched in January 2000, DoubleTwist.com is our powerful and secure research environment that integrates more than 25 disparate genomic and other scientific databases and enables users to analyze genomic information and store analysis results using Web-based tools. Subscribers to DoubleTwist.com receive access to integrated proprietary and public data, bioinformatics tools, laboratory procedures, automated recommendations for relevant laboratory supplies, comprehensive patent information and industry news and research reports. - PROPHECY. Launched in June 2000, Prophecy is our proprietary Annotated Human Genome Database and associated software for data interpretation and visualization, designed for use on a customer's internal computer network. Prophecy provides customers with a comprehensive database of the available human genomic DNA sequences with additional information on the location of genes on the genome, the structure of genes and their predicted functions. - GENEFOREST. Launched in August 2000, GeneForest is our proprietary Annotated Human Gene Index and associated software for data interpretation and visualization, designed for use on a customer's internal computer network. GeneForest contains a concise, annotated database of expressed gene sequences, which are sequences that have been experimentally determined to be activated, or "turned on," in specific cells under specific conditions. GeneForest allows users to discover potential full-length genes from gene fragments and to identify gene variations. GeneForest can be purchased on its own or for use with Prophecy, for customers wishing to add this experimental evidence to the Prophecy visualization and analysis tools. - CLUSTERING AND ALIGNMENT TOOLS (CAT). Launched in October 1998, CAT is our proprietary software product for processing and analyzing large genetic sequence databases. CAT is designed to enable customers to rapidly assemble gene fragments into full-length sequences and to identify gene variants. CAT is used in the development of our gene index databases, which are available through DoubleTwist.com and GeneForest. In the nine months ending September 30, 2000, 72% of our revenues was derived from licensing fees for CAT. Each of our products is designed to cost-effectively improve life science research productivity and capability within pharmaceutical and biotechnology companies and academic institutions. OUR STRATEGY Our goal is to provide the preferred site for conducting genomic research and bioinformatics analysis on the Web. Key elements of our strategy include: - creating a comprehensive research environment that empowers life scientists by simplifying and accelerating genomic research; - enhancing the functionality of our products by adding more tools and resources; - enhancing the value of our products by aggregating third-party data and allowing for the integration of customer data; - remaining a neutral source for genomic information and analysis by not developing drugs or securing rights to drug targets; - continuing to computationally generate proprietary genomic data; - rapidly building our customer base by marketing subscriptions to DoubleTwist.com and licensing components of our research environment; and - expanding our product line into new markets by expanding our sales and marketing efforts. We have incurred substantial operating losses and used substantial cash to support our operations in each year since our inception. As of September 30, 2000, we had an accumulated deficit of $53.5 million. Our business model is new and unproven, and we cannot be sure that it will be successful or that we will ever be able to generate any profits. THE OFFERING Unless otherwise indicated, the information in this prospectus assumes the sale of our Series E convertible preferred stock in July 2000, a four-to-one reverse stock split of our capital stock effected in October 2000, the conversion of each outstanding share of our preferred stock into one share of our common stock upon the closing of this offering and no exercise of the underwriters' over-allotment option. <TABLE> <S> <C> Common stock offered by us................... 5,000,000 shares Common stock to be outstanding after the offering................................... 24,211,625 shares Proposed Nasdaq National Market symbol....... DBLT Use of proceeds.............................. For research and development, sales and marketing activities and general corporate purposes, including working capital, possible joint ventures and acquisitions of companies, technologies or products that complement our business. </TABLE> ------------------------ The outstanding share information is based on 19,211,625 shares outstanding as of September 30, 2000 and excludes the following: - 3,172,163 shares of common stock issuable upon exercise of stock options at a weighted average exercise price of $2.16 per share; - 569,577 shares of common stock issuable upon exercise of warrants at a weighted average exercise price of $1.95 per share; - 214,906 shares of common stock available for issuance under our 1996 Equity Incentive Plan; - 1,000,000 shares of common stock available for issuance under our 2000 Stock Plan, subject to the effectiveness of the registration statement of which this prospectus is a part; and - 400,000 shares of common stock available for issuance under our 2000 Employee Stock Purchase Plan, subject to the effectiveness of the registration statement of which this prospectus is a part. ------------------------ We were incorporated in California in January 1993 as Pangea Systems, Inc. In December 1999, we changed our name to DoubleTwist, Inc. In June 2000, we reincorporated in Delaware. Our principal executive offices are located at 2001 Broadway, Oakland, California 94612, and our telephone number at that location is (510) 628-0100. Our Web site is located at WWW.DOUBLETWIST.COM. The information contained on our Web site is not part of this prospectus. DoubleTwist and DoubleTwist.com are our trademarks, and we have filed trademark applications for Prophecy and GeneForest. Other trademarks, servicemarks, and trade names appearing in this prospectus are the property of their respective holders. SUMMARY FINANCIAL INFORMATION <TABLE> <CAPTION> NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------ --------------------- 1997 1998 1999 1999 2000 -------- -------- -------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues............................. $ 1,276 $ 4,252 $ 3,584 $ 2,623 $ 4,761 Total expenses............................. 9,516 12,505 15,156 9,887 27,510 Loss from operations....................... (8,240) (8,253) (11,572) (7,264) (22,749) Net loss available to common stockholders............................. (8,115) (8,781) (13,230) (8,507) (46,416) Net loss per share available to common stockholders, basic and diluted.......... $(37.40) $(13.61) $ (19.12) $ (12.38) $ (38.17) Shares used in computing net loss per share available to common stockholders, basic and diluted.............................. 217 645 692 687 1,216 Pro forma net loss per share available to common stockholders, basic and diluted (unaudited).............................. $ (1.11) $ (1.54) Shares used in computing pro forma net loss per share available to common stockholders, basic and diluted (unaudited).............................. 10,332 16,355 </TABLE> The pro forma balance sheet reflects the conversion of all of our outstanding preferred stock into common stock, on a one-for-one basis, upon the closing of this offering. The pro forma as adjusted balance sheet reflects the sale of 5,000,000 shares of common stock offered by us at an assumed initial public offering price of $14.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses. <TABLE> <CAPTION> SEPTEMBER 30, 2000 ------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- ----------- ----------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents and marketable securities........ $24,120 $24,120 $ 87,720 Working capital............................................ 19,593 19,593 83,193 Total assets............................................... 41,992 41,992 105,592 Long-term obligations, net of current portion.............. 3,907 3,907 3,907 Redeemable convertible preferred stock..................... 74,105 -- -- Stockholders' equity (deficit)............................. (44,678) 29,427 93,027 </TABLE> See Note 2 of Notes to Consolidated Financial Statements for a description of the method that we used to compute our basic and diluted net loss per share available to common stockholders and for a description of the method we used to compute pro forma basic and diluted net loss per share available to common stockholders.
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider before investing in our common shares. You should read this entire prospectus carefully, including our financial statements and the notes to those statements. Except as otherwise indicated, all information in this prospectus assumes a _______-for-1 stock split, which will be implemented immediately before this offering, resulting in _________ common shares outstanding before the sale of shares offered by this prospectus. National Media Technologies We are a rapidly growing business-to-business Internet professional services company. We use a combination of software and services to create, design and deliver secure business-critical communications to the financial, business and legal communities. We incorporate text, sophisticated graphics, audio and/or video into an integrated, interactive, searchable and easy-to-use format. Our communications are delivered over Web-based channels, such as the World Wide Web, intranets, extranets and wireless networks as well as CD-ROMs. We enable our customers to deliver time-sensitive, business-critical information to their target audiences securely and in an effective, consistent and cost-efficient manner. Our services include securities compliance filings, Web site development, preparation of electronic brochures, interactive multimedia presentations and virtual tours. As the leading independent securities compliance filing service, we prepare and file compliance documents, such as registration statements and proxy materials. These documents are filed with the Securities and Exchange Commission via our secure, dedicated, proprietary, 10-channel frame-relay system. We have also developed a proprietary communications model -- SOLID(SM) - -- to securely deliver investment and offering documents over the Internet. We currently market this service primarily to real estate investment banks in connection with commercial real estate transactions and to investment banks in connection with public offerings and private placements. We have entered into exclusive term contracts with Cushman & Wakefield, Sonnenblick-Goldman and Eastdil Realty to develop and coordinate their online property offerings. The emergence of the Web as a global communications medium has enabled companies to gather information, communicate and conduct business electronically over Web-based channels. The ability to communicate effectively represents an important competitive advantage for business enterprises under increasing pressure to operate more efficiently and to better serve the needs of their customers. However, there are a number of technical and economic challenges that have prevented business enterprises, particularly smaller ones, from taking full advantage of the opportunities presented by the Web. We believe we have developed a highly effective and cost-efficient means for creating, designing and delivering time-sensitive, business-critical communications securely and in an integrated, interactive, searchable and easy-to-use format. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- We believe that we provide our customers with many benefits, including: o Comprehensive service offerings. We offer our customers a broad range of services for the creation, design and delivery of their business communications. o Enhanced communication. We deliver time-sensitive, business-critical communications in a consistent, visually rich and interactive manner. o Reduced cost. Our services eliminate many of the costs and expenses typically associated with traditional communication methods. o Increased speed and flexibility. Our services enable businesses to publish and distribute information faster and with more flexibility than traditional business communication methods. o Secure and reliable service. We offer our customers a highly secure and reliable computing environment. Our objective is to become a leading business-to-business Internet professional services company. Key elements of our strategy include: o expanding our presence in the markets we currently serve; o leveraging our reputation to expand into new markets; o expanding and enhancing our service offerings; o increasing our marketing and promotional activities; and o pursuing strategic relationships and acquisitions. Our History We were organized in 1995 under the name National Filing Services, Inc. to capitalize on the escalating demand for securities compliance filing services. In June 1999 we changed our name to National Media Technologies, Inc. to more accurately reflect our expanded service offerings. Our executive offices are located at 59 John Street, New York, New York 10038 and our telephone number is (800) 795-7490. We maintain a site on the World Wide Web at www.natlmedia.com; however, the information found on our Web site is not a part of this prospectus. We also maintain sales and production offices in Boston, Massachusetts, Chicago, Illinois and Ft. Lauderdale, Florida. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The Offering Common shares offered.............. ________________ Common shares to be outstanding after the offering........................ ____________, or ____________ if the underwriters exercise their over-allotment option in full. Use of proceeds.................... Repayment of debt, general corporate purposes, which may include strategic acquisitions or investments, upgrades of internal systems and working capital requirements. Proposed NASDAQ symbol............. NATL Risk factors....................... Investment in our common shares involves significant risk and you could lose your entire investment. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Summary Financial Information The following table presents a summary of our financial information. Since our inception we have been an S corporation for Federal and state income tax purposes. Immediately before this offering is consummated we will terminate our S election. Pro forma statement of operations data reflects an adjustment to show assumed Federal and state income taxes for the year ended December 31, 1999 as if we were a C corporation for income tax purposes. Pro forma balance sheet data gives effect to the following transactions occurring after December 31, 1999 and before the date of this prospectus: o the receipt of an aggregate of $1.0 million of loan proceeds; o the payment of $50,000 for software licenses acquired as part of a litigation settlement; o a distribution of $650,000 to our sole shareholder; and o a capital contribution of $650,000 by our sole shareholder. Pro forma balance sheet data as adjusted for this offering also takes into account the following: o the receipt of the estimated net proceeds of this offering of $_________ assuming an initial public offering price per share of $_________, less underwriting discounts and commissions and estimated offering expenses payable by us; o the repayment of a $950,000 subordinated note out of the offering proceeds; o the repayment of a $357,000 loan from our sole shareholder out of the offering proceeds; and o the conversion of a $50,000 convertible subordinated note into a number of common shares having a value of $1.0 million based on the initial public offering price per share. The following information should be read together with the sections of this prospectus entitled "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited balance sheets as of December 31, 1998 and 1999 and the related statements of operations, shareholder's equity/deficiency and cash flows for each of the three years in the period ended December 31, 1999 and the related notes, included elsewhere in this prospectus. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Year ended December 31, ----------------------------- 1997 1998 1999 ------ ------ ------ (in thousands, except share and per share data) Statement of operations data: Revenues.................................... $3,419 $3,332 $5,024 Gross profit................................ 2,192 2,045 3,179 Selling, general and administrative expenses.................................. 1,231 1,926 2,667 Non-cash stock compensation................. -- 246 -- Litigation settlement....................... -- 700 -- Income (loss) before provision (benefit) for income taxes................ 1,012 (857) 448 Provision (benefit) for income taxes........ 85 (19) 50 Net income (loss)........................... $ 927 $ (838) $ 398 ====== ====== ====== Basic net income (loss) per share........... $ $ $ ====== ====== ====== Diluted net income (loss) per share......... $ $ $ ====== ====== ====== Basic weighted average number of common shares outstanding........................ ====== ====== ====== Diluted weighted average number of common shares outstanding................. ====== ====== ====== Pro forma statement of operations data (unaudited): Income before provision for income taxes..................................... $ 448 Pro forma income tax expense................ 206 ------ Pro forma net income........................ $ 242 ====== Pro forma basic net income per share..................................... $ ====== Pro forma diluted net income per share..................................... $ ====== Number of shares used in computing pro forma basic net income per share..................................... ====== Number of shares used in computing pro forma diluted net income per share..................................... ====== As of December 31, 1999 ------------------------------------------ Pro forma, as adjusted for the Actual Pro forma offering -------------- ------------ ------------ (in thousands) Balance sheet data: Current assets.................... $ 941 $ 1,241 $ Working capital (deficiency)...... (930) (930) Total assets...................... 1,411 1,711 Total liabilities................. 1,903 2,203 Shareholder's equity (deficit).... (492) (492) - --------------------------------------------------------------------------------
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001108925_nextron_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001108925_nextron_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read the entire prospectus, including "Risk Factors" and the consolidated financial statements and the related notes before making an investment decision. Unless the context requires otherwise, references in this prospectus to "we," "us," "our," "the Company" and "Nextron" refer to Nextron Communications, Inc. NEXTRON COMMUNICATIONS, INC. We develop, market and sell a software platform, applications and services that enable our customers such as Internet service providers, telecommunication companies, and other major corporations to provide web content management products and services for their small and medium enterprise, or SME, subscribers. Web content management gives companies a structured process for developing, deploying and updating web and wireless applications. We deliver our Nextron Phase 4 software platform and applications on a turnkey basis. Our customers integrate our web content management solutions into their portfolio of products and services. Our products are designed to help our customers create, administer and manage large numbers of websites for their SME subscribers on a cost-effective basis. In addition, our Nextron Phase 4 software utilizes an open architecture which facilitates integration with legacy systems and applications of other vendors. Our web content management solution allows our customers to penetrate new markets and realize additional revenue opportunities by delivering integrated applications to their SME subscribers. In addition, SMEs can benefit from our products and services as we provide tools that enable their implementation of wired and wireless Internet business applications such as customer relationship management. We seek to establish our Nextron Phase 4 software and related applications as leading industry standards for providing wired and wireless web content management to the SME market. The SME market consists of more than 30 million enterprises worldwide and because of its diversity, it lacks a common Internet delivery platform. According to a recent survey of Andersen Consulting Market Research, 50% of the SME respondents plan to use the Internet as a means for growth in the next 12 months. To serve the fragmented SME market, our customers must be prepared to offer a simple, low-cost and reliable solution that helps them create websites and manage web content for thousands of their SME subscribers. Because many major corporations are already providing services to the SME market, we believe that they will become the predominant service providers in assisting SMEs establish and expand their Internet presence. We are targeting entities with significant SME penetration for the distribution of our products. Our customers include corporations such as Verizon and Pages Jaunes, a wholly owned subsidiary of France Telecom, in the telecommunications industry, Verio in the Internet service provider industry and Principal Life Insurance Company in the financial services industry. As of September 30, 2000, we licensed our products to our customers for use to over 46,000 SME subscribers and have built over 20,000 websites for SME subscribers across industry sectors. We are headquartered in San Jose, California and have international sales offices in Switzerland, Belgium, the United Kingdom and Argentina. ------------------------- We were incorporated in California in December 1994. We intend to reincorporate in Delaware prior to the completion of this offering. Our principal executive offices are located at 6830 Via Del Oro, Suite 240, San Jose, California 95119. Our telephone number at that location is (408) 574-0200. ------------------------- Nextron, Nextron Communications, Nextron Phase 4, Nextron StoreFront, Nextron ePromote, Nextron eOps, Nextron Mobilize, ImpulseSale and our logo are trademarks of Nextron Communications, Inc. Trade names and trademarks of other companies appearing in this prospective are the property of the respective holders. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED DECEMBER 20, 2000 SHARES [NEXTRON LOGO] NEXTRON COMMUNICATIONS, INC. COMMON STOCK ------------------------- Nextron Communications, Inc. is offering shares of its common stock. This is our initial public offering. We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol "NXTR." The initial public offering price will be between $ and $ per share. As part of this offering, we are offering shares of our common stock at the public offering price to stockholders of Safeguard Scientifics, Inc., one of our principal stockholders, that owned at least 100 shares of common stock of Safeguard as of , 2001. Safeguard or its designees will purchase the shares of our common stock that are not purchased by Safeguard stockholders under the Safeguard Subscription Program. See "Plan of Distribution -- Safeguard Subscription Program." After this offering, Safeguard will have the power to vote approximately % of our outstanding voting stock. SAFEGUARD IS AN UNDERWRITER WITH RESPECT TO THE SHARES OF COMMON STOCK OFFERED TO THE STOCKHOLDERS OF SAFEGUARD. SAFEGUARD IS NOT AN UNDERWRITER WITH RESPECT TO ANY OTHER SHARES OFFERED AND IS NOT INCLUDED IN THE TERM UNDERWRITER AS USED ELSEWHERE IN THIS PROSPECTUS. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ------------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <S> <C> <C> ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- UNDERWRITTEN PUBLIC OFFERING: PER SHARE TOTAL ------------------------------------------------------------------------------------------------------- Public Offering Price..................................... $ $ Underwriting Discounts and Commissions.................... $ $ Proceeds to Nextron....................................... $ $ ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- SAFEGUARD SUBSCRIPTION PROGRAM: PER SHARE TOTAL ------------------------------------------------------------------------------------------------------- Public Offering Price..................................... $ $ Management Fee............................................ $ $ Proceeds to Nextron....................................... $ $ ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- AGGREGATE OFFERING PROCEEDS: TOTAL ------------------------------------------------------------------------------------------------------- Proceeds to Nextron (before expenses) from Underwritten Public Offering and Safeguard Subscription Program...... $ ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- </TABLE> The underwriters have an option to purchase up to an additional shares of our common stock from us to cover over-allotments. The underwriters expect to deliver the shares to purchasers on or about , 2001. ING BARINGS The date of this prospectus is , 2001. THE OFFERING Common stock offered by us...... shares Common stock to be outstanding after this offering............. shares Use of proceeds................. For repayment of debt, working capital and general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol... NXTR The number of shares of our common stock to be outstanding upon completion of this offering is based on 2,828,118 shares outstanding as of September 30, 2000 and assumes that the underwriters' over-allotment option is not exercised. The outstanding share information also includes: - the issuance of 500,000 shares of series D preferred stock issued to Safeguard in October 2000 upon conversion of a promissory note; - the issuance of 500,000 shares of series D preferred stock issued to Safeguard in October 2000; - the assumed issuance of 666,667 shares of series B preferred stock issuable upon exercise of a warrant that expires if not exercised before this offering is completed; and - the assumed conversion of all outstanding shares of preferred stock into shares of common stock upon completion of this offering. This table excludes: - 2,755,001 shares of common stock issuable upon the exercise of options outstanding at September 30, 2000 at a weighted average exercise price of $1.76 per share; - 1,526,672 additional shares of common stock reserved for future issuance under our stock plans as of September 30, 2000; and - 2,355,000 shares of our common stock issuable on the exercise of warrants outstanding at September 30, 2000 at a weighted average exercise price of $5.76 per share. ------------------------- Except as otherwise indicated, information in this prospectus assumes: - the automatic conversion of all outstanding shares of preferred stock into 8,381,183 shares of common stock upon completion of this offering; - no exercise of the underwriters' over-allotment option; and - our reincorporation in Delaware prior to completion of this offering. SAFEGUARD SUBSCRIPTION PROGRAM As part of this offering, we are offering shares of our common stock to stockholders of Safeguard that owned at least 100 common shares of Safeguard on , 2001 in the Safeguard Subscription Program. The program is described in greater detail in "Plan of Distribution -- Safeguard Subscription Program." The references to Safeguard in this prospectus refer to Safeguard Scientifics, Inc. and its affiliates, collectively. The information throughout this prospectus assumes that all of the shares offered in the Safeguard Subscription Program are purchased by Safeguard stockholders. Safeguard will purchase the shares of our common stock that are not purchased by Safeguard stockholders under the Safeguard Subscription Program. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> PRO FORMA ---------------------------- NINE NINE MONTHS YEAR ENDED MONTHS YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30, DECEMBER 31, ENDED ----------------------------------------------- --------------------- ------------ SEPTEMBER 30, 1995 1996 1997 1998 1999 1999 2000 1999 2000 ------- ------- ------- ------- ------- ----------- ------- ------------ ------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue: License and maintenance....... $ -- $ -- $ -- $ 295 $ 1,685 $1,025 $ 2,960 $ 1,685 $ 2,960 Service............. 22 115 65 787 1,776 1,170 1,454 1,776 1,454 ------- ------- ------- ------- ------- ------ ------- ------- -------- Total revenue..... 22 115 65 1,082 3,461 2,195 4,414 3,461 4,414 Gross profit (loss)... 22 (756) (109) 62 1,044 656 2,613 1,044 2,613 Total operating expenses............ 1,221 2,366 2,699 3,720 7,960 3,536 14,729 8,206 15,313 Loss from continuing operations.......... (1,199) (3,471) (3,430) (4,577) (8,185) (3,868) (12,389) (8,431) (12,973) Net loss.............. (1,199) (4,462) (3,440) (4,017) (8,185) (3,868) (12,389) (8,431) (12,973) Basic and diluted net loss per share...... $ (0.82) $ (3.04) $ (2.34) $ (2.68) $ (5.05) $(2.52) $ (5.42) $ (4.29) $ (4.93) ------- ------- ------- ------- ------- ------ ------- ------- -------- Shares used in computing basic and diluted net loss per share............... 1,467 1,467 1,472 1,498 1,620 1,535 2,286 1,965 2,632 ------- ------- ------- ------- ------- ------ ------- ------- -------- </TABLE> The unaudited pro forma combined statement of operations data give effect to our acquisition of ImpulseSale in August 2000 as if the acquisition had occurred on October 18, 1999, ImpulseSale's inception, and do not give effect to (a) the issuance of 500,000 shares of series D preferred stock to Safeguard in October 2000 upon conversion of a promissory note; (b) the issuance of 500,000 shares of series D preferred stock to Safeguard in October 2000; (c) the assumed issuance of 666,667 shares of series B preferred stock issuable upon exercise of a warrant that expires if not exercised before this offering is completed; and (d) the automatic conversion of all outstanding shares of preferred stock into 8,381,183 shares of common stock upon the closing of this offering and changes to our authorized capital stock upon completion of this offering. The following table presents the consolidated balance sheet data as of September 30, 2000: - on an actual basis; - on a pro forma basis, after giving effect to (a) the issuance of 500,000 shares of series D preferred stock to Safeguard in October 2000 upon conversion of a promissory note; (b) the issuance of 500,000 shares of series D preferred stock to Safeguard in October 2000; (c) the assumed issuance of 666,667 shares of series B preferred stock issuable upon exercise of a warrant that expires if not exercised before this offering is completed; and (d) the automatic conversion of all outstanding shares of preferred stock into 8,381,183 shares of common stock upon the closing of this offering and changes to our authorized capital stock upon completion of this offering; and - on the same pro forma basis as adjusted to give effect to our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses. This table excludes: - 2,755,001 shares of common stock issuable upon the exercise of options outstanding at September 30, 2000 at a weighted average exercise price of $1.76 per share; - 1,526,672 additional shares of common stock reserved for future issuance under our stock plans as of September 30, 2000; and - 2,355,000 shares of our common stock issuable on the exercise of warrants outstanding at September 30, 2000 at a weighted average exercise price of $5.76 per share. <TABLE> <CAPTION> AT SEPTEMBER 30, 2000 -------------------------------------- PRO PRO FORMA ACTUAL FORMA AS ADJUSTED ----------- -------- ----------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................. $ 4,146 11,813 Total assets.............................................. 15,246 22,913 Long term obligations..................................... 5 5 Total liabilities......................................... 13,598 8,598 Total stockholders' equity................................ 1,648 14,315 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001109637_rts_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001109637_rts_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. TO UNDERSTAND THIS OFFERING FULLY, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES. EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (1) ASSUMES THAT THE UNDERWRITERS DO NOT EXERCISE THE OPTION GRANTED BY US TO PURCHASE ADDITIONAL SHARES IN THIS OFFERING, (2) GIVES EFFECT TO CERTAIN ACTIONS REGARDING OUR CONVERSION FROM AN S CORPORATION TO A C CORPORATION AND (3) GIVES EFFECT TO A -FOR- SPLIT OF OUR COMMON STOCK, WHICH WILL TAKE PLACE PRIOR TO THE CONSUMMATION OF THIS OFFERING. RTS WIRELESS, INC. OUR COMPANY We are a leading developer of adaptable software systems that connect the Internet to a wide array of evolving wireless devices, including virtually all cell phones, pagers and hand-held computers. Our product, the Advantage-Registered Trademark- system, can be specially configured to meet the particular needs of each customer, including wireless network operators, wireless infrastructure and device manufacturers, Internet service providers, providers of information such as news, sports and weather, and corporate data networks. Using our system, our customers can provide their wireless subscribers and clientele with e-mail, news, shopping, stock, weather, travel and other information content and services. Our Advantage system also permits companies to provide their employees with services such as wireless access to e-mail, personal calendars and contact lists through private corporate networks, commonly referred to as intranets. As businesses and consumers become more reliant on the content provided via the Internet and corporate intranets, systems that enable wireless access to such information become increasingly useful and demanded tools. The Advantage system is a software engine for wireless data that runs our portfolio of standard applications as well as custom applications that we design to meet specific customer requirements. Our software also enables our customers to design their own applications. Our Advantage system has several key benefits for our customers and wireless users because it is: - ADAPTABLE. Our Advantage system is easily connected to the Internet and a wide variety of corporate intranets and wireless networks. We can customize the Advantage system if we encounter a network that is not compatible with our standard configuration. - EFFICIENT. The Advantage system architecture is designed to handle a large quantity of wireless data traffic quickly without any degradation in capability or features. - FLEXIBLE. The modular design of our system allows configuration by customers to incorporate a wide variety of desired applications. Additionally, consumers do not need specialized technology within their wireless devices to obtain network services through our Advantage system. - SCALABLE. The Advantage system design allows us to add additional capacity without disrupting service as a customer's requirements grow. - RELIABLE. The Advantage system virtually eliminates service interruptions by routing information around hardware failures, application or capacity upgrades or repairs. In addition, the Advantage system can be remotely diagnosed and monitored by our service or maintenance personnel. - PRICED BASED ON CAPACITY. Our pricing model is based on the data processing capacity of the delivered Advantage system, rather than the number of users or subscribers to our customers' networks. This pricing model makes the cost of ownership of our systems more attractive to our customers. We believe that the use of wireless devices in conjunction with the Internet reflects a growing consumer demand for mobile and convenient access to data. The Yankee Group, a technology consulting firm, estimates that there were approximately 530 million wireless subscribers worldwide as of the end of 1999. Additionally, The Yankee Group forecasts that the number of wireless telephone users in the United States who obtain Internet-based and other network-based services will grow at a compound annual rate of 47%, from 3.4 million at the end of 1999 to 15.8 million in 2003. During the same period, the number of users of dedicated wireless messaging devices, including pagers and wireless-enabled personal digital assistants, or PDAs, is expected to grow from 61.7 million to 91.5 million. International Data Corporation, or IDC, another technology consulting firm, estimates that the number of wireless telephones capable of accessing the Internet will grow from 5.7 million in 1999 to over one billion in 2003. To meet this demand, new wireless technologies are constantly being developed. One of these new technologies is the Wireless Application Protocol, or WAP, which we expect will increase demand for wireless Internet access. We believe that our Advantage system offers Internet access through the broadest array of wireless devices, including WAP-enabled and other cellular telephones, pagers, PDAs, notebook computers and on-board computers in automobiles. As of December 31, 1999, over 50 companies had purchased our Advantage system and had begun commercial service or market or laboratory trials. Our customers include many of the world's largest wireless network operators, such as Vodafone AirTouch, GTE Wireless, U S WEST Wireless, PageNet and Arch Communications, as well as America Online, the world's largest Internet service provider, or ISP. We also sell our Advantage system to manufacturers of wireless infrastructure, who bundle our system with their equipment. For example, Motorola typically includes a version of our Advantage system with each of the cellular telephone networks it installs worldwide. Early adoption by these recognized companies has helped to establish our Advantage system as one of the leading technologies in the wireless data industry. We have been a leader in the development and evolution of wireless industry technology for over 11 years. Our goal is to remain at the forefront of wireless Internet applications and services across the broadest possible array of devices. We believe that our experience enables us to configure our Advantage system to perform effectively with each customer's network and to incorporate new technologies into our system as they become available. We were incorporated in New York under the name Real Time Strategies, Inc. on March 23, 1988 and have done business as RTS Wireless for the past two years. We reincorporated in Delaware as RTS Wireless, Inc. on March 16, 2000. Our principal executive offices are located at 51 East Bethpage Road, Plainview, New York 11803, and our telephone number is (516) 939-6655. The address of our Web site is WWW.RTSWIRELESS.COM. Information contained on our Web site is not a part of this prospectus. RECENT DEVELOPMENTS On March 28, 2000, we issued to America Online, or AOL, 5,000 shares of our series A convertible preferred stock for $5,000,000. The series A convertible preferred stock does not accrue or pay any dividends. At the closing of this offering, these shares of series A convertible preferred stock will convert into 425,775 shares of our common stock. In connection with this investment by AOL, we and some of our principal stockholders granted to AOL the rights described in "Recent Investments in Our Equity." THE OFFERING <TABLE> <S> <C> Common stock offered......................... shares Common stock outstanding after the shares offering................................... Use of proceeds.............................. We will use the proceeds from this sale of our common stock to fund the following: - increased sales and marketing expenditures; - increased research and development expenditures; - expansion of our facilities; - potential future acquisitions; and - working capital and other general corporate purposes. See "Use of Proceeds" for more detailed information. Nasdaq National Market Symbol................ "RTSW" Dividend policy.............................. We do not intend to pay cash dividends on our common stock in the foreseeable future. See "Dividend Policy" for more information. </TABLE> The table above includes: - 425,775 shares of common stock to be issued in connection with the conversion of the AOL series A convertible preferred stock into common stock at the consummation of this offering; and - 189,392 shares of common stock issued upon conversion of a $5,000,000 investment made in January 2000 by Monsoon Ventures LLC, or Monsoon, in our 8% convertible promissory notes, which notes were converted upon the consummation of the AOL series A convertible preferred stock investment. The AOL investment and the Monsoon investment are described in "Recent Investments in Our Equity." The table above excludes: - up to shares that may be issued to the underwriters to cover over-allotments. See "Underwriting"; - 732,385 shares of common stock subject to options outstanding as of February 29, 2000 under our Incentive Stock Option Plan exercisable at a weighted average price per share of $2.40; - 37,500 shares of common stock issuable upon the exercise of an outstanding warrant held by an affiliate of Chase Securities Inc. at an exercise price of $0.30 per share; and - an aggregate of 17,615 shares of common stock available for future issuance under our Incentive Stock Option Plan as of February 29, 2000. SUMMARY CONSOLIDATED FINANCIAL DATA The following tables contain our summary consolidated financial data which you should read together with our audited consolidated financial statements and related notes included elsewhere herein, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other information found in this prospectus. Financial data for the years ended December 31, 1995 and 1996 have been derived from unaudited financial statements which, in the opinion of our management, reflect all adjustments necessary to present fairly our financial position and results of operations for the periods presented. <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ---------------------------------------------------- 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues: License fees................................... $1,565 $2,856 $4,141 $5,341 $ 7,553 Maintenance and support services............... 14 71 47 218 788 ------ ------ ------ ------ ------- Total revenues............................... 1,579 2,927 4,188 5,559 8,341 Gross profit..................................... 1,284 2,519 3,500 4,893 7,328 Operating income (loss).......................... 8 854 678 (428) (3,455) Net income (loss)................................ $ 12 $ 861 $ 681 $ (425) $(4,044) ====== ====== ====== ====== ======= Pro forma net income (loss)(1)................... $ 5 $ 514 $ 355 $ (258) $(3,964) ====== ====== ====== ====== ======= PER SHARE DATA: Basic and diluted net income (loss) per share.... $ .00 $ .10 $ .08 $ (.05) $ (.47) ====== ====== ====== ====== ======= Pro forma basic and diluted net income (loss) per share(1)................................... $ .00 $ .06 $ .04 $ (.03) $ (.46) ====== ====== ====== ====== ======= Weighted average shares used in computing basic and diluted net income (loss) per share and pro forma basic and diluted net income (loss) per share.......................................... 8,500 8,500 8,500 8,500 8,638 ====== ====== ====== ====== ======= </TABLE> - ------------------------ (1) For all periods presented, we were treated as an S corporation and were not subject to federal and state income taxes. Pro forma net income (loss) reflects federal and state income taxes as if we had not elected S corporation status for income tax purposes. In March 2000, our S corporation status was terminated. See "Termination of S Corporation Status." <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ---------------------------------------- PRO FORMA ACTUAL PRO FORMA(1) AS ADJUSTED(2) -------- ------------ -------------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................ $ 345 $10,345 $ Working capital (deficit)................................ (217) 9,723 Total assets............................................. 2,951 12,951 Total liabilities........................................ 2,784 2,844 Total stockholders' equity............................... 167 10,107 </TABLE> - ------------------------ (1) The pro forma amounts shown in the table give effect to the application of net proceeds from the investments by Monsoon and AOL. The Monsoon investment was converted into 189,392 shares of our common stock upon consummation of the AOL investment. The pro forma amounts also include a charge to earnings of $60,000, representing the tax liability owed by us on the termination of our S corporation status. (2) The pro forma as adjusted amounts shown in the table give effect to the application of net proceeds of this offering, based upon an assumed initial public offering price of $ per share, the midpoint of the range shown on the cover of this prospectus, and the conversion to common stock of the AOL investment as if this offering and the conversion had occurred at December 31, 1999. See "Capitalization" and "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001109639_webhelp_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001109639_webhelp_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..bd4986c2c8a7cd24eccd3cc556f01a375f3cc4bc
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS THE INFORMATION CONTAINED IN OTHER PARTS OF THIS PROSPECTUS. BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE SHARES. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY. WEBHELP We provide live, human-assisted customer, sales and technical support over the Internet. Our support services are provided 24 hours a day, seven days a week using our Internet-based technology platform. Our platform routes text-based chat engagements with customers to one of our more than 500 trained agents, known as "Web Wizard professionals." These Web Wizard professionals, who are generally outsourced, help the customers of our clients by answering their questions on topics such as how to navigate our clients' Web sites, how to locate products and services and how to complete online purchases. We sell our support services, marketed to our corporate clients under the name Webhelp Direct, through our direct sales force of 32 individuals. We target organizations that sell to or service a large online customer base. We currently have 14 clients including Microsoft, Norelco, Money.net, Auctionworks, Community Connect and LessonLink. We believe that the human assistance provided by our trained Web Wizard professionals combined with our support services platform provide our clients with a number of benefits, including: - the ability to increase e-commerce revenue by using our services to facilitate the buying process and increase the likelihood of a completed purchase; - improved online consumer satisfaction, customer retention and brand loyalty for our clients; and - implementation without the need for clients to purchase hardware or software or train personnel. In addition to our Webhelp Direct service, we operate a consumer portal located at WWW.WEBHELP.COM. On our Webhelp portal, our Web Wizard professionals provide individual users with live, human-assisted search services to locate products, services and content on the Internet. We use our Webhelp portal primarily as a training tool for new Web Wizard professionals, as a way to test new technology applications, as a marketing tool for prospective clients, and as a source of advertising revenue. The inability of online businesses to assist consumers in navigating through complex product offerings and purchase procedures can frustrate consumers and cause them to abandon purchases. In addition, to remain competitive, many companies are outsourcing their customer services in order to reduce costs, increase efficiencies and refocus critical resources. As a result, we believe that a significant opportunity exists for live, person-to-person support services over the Internet. COMPANY We were incorporated on May 27, 1999 and launched our Webhelp portal on November 30, 1999. From May 27, 1999 through March 31, 2000, we earned substantially all of our revenue from advertising on our Webhelp portal. In March 2000, we launched our Webhelp Direct service and began earning revenue from corporate clients. In the future, we expect to earn revenue from other services including e-commerce transaction fees, Internet-based educational services, license and service fees from international joint ventures to provide our live, human-assisted customer support and search services in foreign languages and subscription services. Our principal executive offices are located at 175 Bloor Street East, North Tower, Suite 400, Toronto, Ontario MRW 3R8, Canada. Our telephone number is (416) 932-2345. Our Web site is located at http://www.webhelp.com.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001109661_homestead_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001109661_homestead_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..89a9b24174935a9e61e1ac3da21f0308bf74cc06
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE ENTIRE PROSPECTUS, INCLUDING THE MORE DETAILED INFORMATION IN OUR FINANCIAL STATEMENTS AND ACCOMPANYING NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD CAREFULLY CONSIDER, AMONG OTHER THINGS, THE MATTERS SET FORTH IN "RISK FACTORS." We empower individuals and small businesses to become active participants on the Internet by enabling them to build their own web sites using third-party content, services and technology as building blocks. We derive our revenue primarily from business partners that provide these building blocks in order to distribute their content, services and technology. In doing so, they seek to acquire new customers, to generate repeat sales, to build brand loyalty and to drive traffic to their web sites. We believe this approach is creating an important new distribution channel for businesses trying to reach individuals and small businesses on the Internet. We pioneered the first online drag and drop technology for building web sites. We provide a proprietary platform that enables individuals and small businesses, or Homestead "members," to easily build a feature-rich web site by integrating and customizing building blocks, called "elements," containing content and services provided by our business partners. We currently have over 150 elements, including stock tickers, guest books for visitor registration, chat rooms, headline news, commerce links and audio and video capabilities. As we introduce new and innovative third party elements, we enhance the functionality and reputation of the Homestead service, which attracts more members to build web sites. Additional Homestead web sites attract more visitors to our service, which further accelerates the growth of our member base and in turn increases the value of our distribution channel to new and existing business partners. We believe this self-reinforcing cycle reduces the expenditures otherwise required for customer acquisition, content generation and new technology development, while accelerating the growth of the Homestead platform and creating additional revenue opportunities. Since launching our web site service, we have been one of the fastest growing sites on the Internet in terms of registered members and unique visitors. The total number of registered Homestead members has grown from 300,000 in March 1999 to 4.2 million in March 2000. During March 2000, an average of over 20,000 new members registered each day with our service compared to an average of under 3,000 in March 1999. According to PC Data, in March 2000, we had 7.4 million unique visitors to www.homestead.com compared to 894,000 in March 1999. Our site was ranked by PC Data as the 42nd most visited site on the Internet in March 2000, as compared to 321st in March 1999. Our objective is to build a major distribution channel for the Internet's best content, services and technology and to enable active Internet participation by the mass market. The key elements to our strategy are as follows: - capitalize and expand on multiple revenue opportunities; - increase our technology and usability advantages; - support continued viral growth of our member base; - establish new business partnerships with high-quality element, service and co-brand partners; - build brand loyalty; and - extend the Homestead platform to new market opportunities. We were incorporated in Kansas in September 1994 and reincorporated in Delaware in May 1998. Our principal executive offices are located at 3375 Edison Way, Menlo Park, California 94025 and our telephone number is (650) 549-3100. Our Internet address is www.homestead.com. The information on our web site is not part of, or incorporated by reference into, this prospectus. Homestead, the Homestead logos and MoneyMaker are our trademarks. Other trademarks used in this prospectus are the property of their respective owners. THE OFFERING <TABLE> <S> <C> Common stock offered....................................... shares Common stock to be outstanding after this offering......... shares Use of proceeds............................................ We intend to use the net proceeds from this offering for general corporate purposes, including capital expenditures and working capital. See "Use of Proceeds." Proposed Nasdaq National Market symbol..................... HMST </TABLE> The number of shares of common stock to be outstanding immediately after the offering is based on the number of shares outstanding as of March 31, 2000. This number does not take into account: - 5,171,094 shares of common stock issuable upon exercise of outstanding options; and - 747,343 shares of common stock issuable upon exercise of outstanding warrants. Unless otherwise indicated, all information in this prospectus assumes no exercise of the underwriters' over-allotment option and gives effect to the conversion of all outstanding shares of preferred stock into common stock upon the closing of this offering. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------ ------------------- 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenues: Web site.................................... $ -- $ -- $ 504 $ 4 $ 1,142 Consulting.................................. 3,068 974 -- -- -- ------- ------- -------- ------- -------- Total net revenues........................ 3,068 974 504 4 1,142 ------- ------- -------- ------- -------- Gross profit (loss)........................... 2,304 365 (1,410) (153) 7 Operating income (loss)....................... 139 (3,206) (14,106) (1,702) (14,913) Net income (loss)............................. 207 (3,082) (13,705) (1,693) (14,602) Basic and diluted net income (loss) per share available to common stockholders............ .02 (.23) (1.01) (.13) (2.11) Shares used in computing basic and diluted net income (loss) per share available to common stockholders................................ 13,200 13,256 13,541 13,326 14,502 Pro forma basic and diluted net loss per share....................................... $ (.56) $ (1.01) Shares used in computing pro forma basic and diluted net loss per share.................. 24,596 30,206 </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, 2000 ----------------------- PRO FORMA ACTUAL AS ADJUSTED --------- ----------- <S> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $33,395 $ Working capital............................................. 30,145 Total assets................................................ 42,341 Long-term debt, less current portion........................ 1,951 Convertible preferred stock and warrants.................... 58,144 Total stockholders' equity (deficit)........................ (22,398) </TABLE> The pro forma as adjusted column of the balance sheet data reflects the conversion of our preferred stock into common stock and the sale of shares of our common stock in the public offering at an assumed initial public offering price of $ per share, after deducting the estimated underwriting discounts and commissions and offering expenses.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001109696_burst_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001109696_burst_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6dace43fd7bab05d6d1d0da140bf82e6681331b9
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+++ b/parsed_sections/prospectus_summary/2000/CIK0001109696_burst_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY Because this is only a summary, it does not contain all of the information that may be important to you. You should carefully read the more detailed information contained in this prospectus, including our financial statements and related notes. Our business involves significant risks. You should carefully consider the information under the heading "Risk Factors." BURST! Media We are a leading provider of comprehensive Internet advertising solutions focused on supporting the interests of specialty content web publishers. Specialty content web publishers develop and maintain web sites dedicated principally to specific topics of interest. Our integrated sales and marketing tools are designed to generate advertising revenue for our web publishers, allowing them to develop their content and grow their web sites. We provide our web publishers with outsourced ad sales representation and the technology necessary to deliver and manage advertisements. We also work closely with advertisers to capitalize on the unique advertising opportunities presented by our specialty content web sites. We operate the BURST! network, a collection of over 2,900 specialty content web sites, including 865 international web sites. Our network offers advertisers access to a broad audience across a wide range of content. By organizing the web sites that make up our network into 475 content categories, we are able to offer advertisers targeted ad campaigns designed to reach consumers with specific interests in a contextually relevant environment. We believe that when advertising is delivered in an environment relevant to the advertised product or service, audiences are more receptive to the message. By placing advertisements on a selected group of specialty content web sites, advertisers are able to target specific demographic audiences without the use of controversial or intrusive monitoring techniques such as user profiling. We have developed MediaDesktop, a proprietary suite of technology products that supports the advertising sales and marketing interests of our web publishers. We provide web publishers with the technology necessary to help manage and control their ad space inventory, track ad revenue and measure campaign results. In addition, MediaDesktop provides us the ability to manage all aspects of Internet ad campaigns including, ad delivery and tracking, measurement and reporting, as well as campaign optimization. MediaDesktop enables us to rapidly deploy advertising campaigns across our entire network or to a targeted selection of web sites. In addition, MediaDesktop allows us to manage opt-in email programs for our web publishers and provide other services to help web publishers actively engage their viewing audience. In December 1999, our network delivered an aggregate of approximately 555 million impressions, and according to the Media Metrix December 1999 Ad Sales Network Report, reached approximately 24% of all U.S. Internet users at home and at work. Our Opportunity The Internet is becoming an increasingly important tool for advertisers due to its rapidly growing audience, its interactive nature and global reach, and the increasing volume of online commerce. Forrester Research estimates that in 1999, approximately $3.3 billion was spent on Internet advertising worldwide and projects that this amount will grow to approximately $33.1 billion by 2004. Historically, advertisers have placed the majority of their Internet advertising on highly trafficked, brand name, general content portals with the intent of maximizing the number of users reached. We believe advertisers are beginning to increase their advertising spending on specialty content web sites in order to reach consumers with specific interests in a relevant environment. Forrester estimates that in 2000, 61% of Internet advertising dollars were directed to large, general content portals and 39% to highly focused vertical portals and niche sites that make up the rest of web. Forrester predicts that by 2004, these allocations will shift, with 57% of Internet advertising being directed to highly focused vertical portals and niche sites and 43% to the large, general interest portals. Our Strategy Our goal is to be the leading provider of comprehensive Internet advertising solutions for specialty content web publishers. Key components of our strategy to achieve our goal are to: . Expand our sales and marketing organization; . Selectively expand our network of web publishers; . Provide superior customer service; . Enhance our MediaDesktop technology platform; . Develop additional relationship products and services to support web publishers; and . Pursue selective strategic acquisitions and joint ventures. Other Information Our business began in the fall of 1995 as a proprietorship of two of our founders, G. Jarvis Coffin III and Robert C. Hanna. In January 1996, we organized the business as a New York limited liability company, and in connection with the closing of this offering will reorganize as a Delaware corporation. Our principal executive offices are located at 8 New England Executive Park, Burlington, Massachusetts 01803. Our telephone number at that location is (781) 272-5544. Our web address is www.burstmedia.com. Information contained on our web site does not constitute part of this prospectus. References in this prospectus to "BURST!," "we," "our" and "us" refer to BURST! Media, Inc. and its predecessors. ---------------- Unless otherwise indicated, all information in this prospectus: . reflects our reorganization from a limited liability company into a corporation upon completion of this offering, including the conversion of all 8,600,000 Series A limited liability company interests, 1,400,000 Series B limited liability company interest and 2,519,560 Series C limited liability company interests into shares of common stock upon completion of this offering; . excludes options to purchase shares of common stock with a weighted average exercise price of $ per share outstanding or expected to be granted in connection with the closing of this offering; and . assumes no exercise of the underwriters' over-allotment option. The Offering <TABLE> <CAPTION> <C> <S> Common stock offered by BURST!...................... shares Common stock to be outstanding after this offering.. shares Use of proceeds..................................... We intend to use the net proceeds of this offering for general corporate purposes. We may be required to use a portion of the net proceeds to make a special distribution to one of our existing stockholders and its affiliates in connection with the closing of this offering. Please see "Use of Proceeds" for more information on the use of proceeds. Proposed Nasdaq National Market symbol.............. "BRSM" </TABLE> Summary Financial Data The following summary financial data is derived from and qualified in its entirety by our financial statements. You should read this summary financial data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes appearing elsewhere in this prospectus. The balance sheet data, on a pro forma as adjusted basis, reflects the conversion upon the completion of this offering of all outstanding limited liability company interests into 10,000,000 shares on a one-for-one basis, of common stock and the sale in this offering of shares of our common stock at an assumed initial public offering price of $ per share, less the underwriting discounts and commissions and estimated offering expenses. <TABLE> <CAPTION> Period From Inception (January 8, 1996) For the Year Ended December Through 31, December 31, ------------------------------- 1996 1997 1998 1999 ------------ --------- --------- --------- (in thousands except per unit data) <S> <C> <C> <C> <C> Statement of Operations Data: Revenue.......................... $ 224 $ 687 $ 2,405 $ 8,743 Gross profit..................... 77 230 844 3,266 Loss from operations............. (5) (228) (84) (353) Net loss......................... $ (5) $ (195) $ (49) $ (232) ========= ========= ========= ========= Net loss per unit -- Basic and diluted............... $ (0.01) $ (0.02) $ (0.01) $ ( 0.02) ========= ========= ========= ========= Weighted average units outstanding -- Basic and diluted............... 7,153,422 8,057,899 8,600,000 9,846,575 ========= ========= ========= ========= </TABLE> <TABLE> <CAPTION> As of December 31, 1999 ---------------------------- Pro Forma Actual As Adjusted ------------- -------------- (in thousands) <S> <C> <C> Balance Sheet Data: Cash and cash equivalents.......................... $2,366 Working capital.................................... 3,149 Total assets....................................... 6,085 Long-term debt..................................... -- Total members'/stockholders' equity................ 3,485 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001109880_youcentric_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001109880_youcentric_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..c01f8123d7cae19801a9183b07ba6f6a2fe01c03
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+PROSPECTUS SUMMARY The following summary is qualified by the more detailed information, including our financial statements and the related notes, appearing elsewhere in this prospectus. YOUCENTRIC We provide software that allows our clients to engage in marketing, sales and service with their prospects, customers, partners and suppliers. Our product, YOUrelate, is engineered using advanced Web-based technologies including Enterprise Java, which provide a foundation capable of supporting thousands of users on a single system and allow our product to operate on a wide variety of networks, databases, operating systems and Web-enabled devices. Our software is component-based, which allows it to be mass-customized to match the way each client conducts business and to be easily adapted as their business evolves. We believe the component-based nature of our product allows us to implement our software more efficiently than is typical for our industry. In today's highly competitive global marketplace, it is critical for businesses to focus on attracting and retaining customers to maximize the value of customer relationships. Businesses have invested in customer relationship management software as a critical element of these initiatives. Traditional customer relationship management vendors typically provide software that is internally focused, rigid in its structure and time-consuming to install. With the growth of the Web, businesses have begun changing the way that they initiate, manage and develop relationships. As a result of these changes, a new generation of electronic business, or e-business, relationship management software vendors has emerged to target single, specific aspects of the customer relationship, such as Internet content management and personalization offerings. We developed YOUrelate in response to the shortcomings of traditional software applications and the narrow functionality of first-generation Web-based e-business products. AMR Research, an independent market research firm, predicts the worldwide market for customer relationship management software in which we compete, will grow at a compound annual rate of 49% from $2.3 billion in 1998 to $16.8 billion in 2003. We believe that e-business relationship management software will constitute a large portion of this market growth. YOUcentric is a next-generation software provider that helps clients attract new customers, enhance the loyalty of existing customers and increase revenues by managing their business relationships, both inside and outside the organization. Among other things, our software is designed to allow our clients to: - communicate and collaborate with customers, partners and suppliers; - access, update and manage a common body of information through almost any device that has a Web browser; - manage sales across multiple channels; - automate marketing programs; - manage partner relationships; - offer customer self service; and - automate contact center management. -------------------------------------------------------------------------------- The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED OCTOBER 10, 2000 5,000,000 SHARES <TABLE> <S> <C> YOUCENTRIC, INC. (YOUCENTRIC LOGO) </TABLE> COMMON STOCK $ PER SHARE -------------------------------------------------------------------------------- - YOUcentric, Inc. is offering 5,000,000 shares of its common stock. - We anticipate that the initial public offering price will be between $11.00 and $13.00 per share. - This is our initial public offering and no public market currently exists for our shares. - Approved trading symbol: Nasdaq National Market -- YOUC --------------------------------------------- THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5. <TABLE> <CAPTION> ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- PER SHARE TOTAL --------- ----- <S> <C> <C> Public offering price....................................... $ $ Underwriting discount....................................... $ $ Proceeds to YOUcentric...................................... $ $ ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- </TABLE> The underwriters have a 30-day option to purchase up to 750,000 additional shares of common stock from us to cover over-allotments, if any. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OF ANYONE'S INVESTMENT IN THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. U.S. BANCORP PIPER JAFFRAY ROBERTSON STEPHENS DAIN RAUSCHER WESSELS LEGG MASON WOOD WALKER INCORPORATED THE DATE OF THIS PROSPECTUS IS , 2000. -------------------------------------------------------------------------------- Our goal is to be the leading provider of e-business relationship management software solutions. Our strategy is to: - exploit our emerging leadership in Web-based, mass-customized relationship management software; - continue to expand our direct sales force and our indirect distribution channels; - penetrate currently targeted vertical markets and pursue additional vertical markets; - continue to expand functionality to support a wide variety of wireless, Web-enabled devices; - expand market share by pursuing relationships with application service providers; and - expand our international presence. We were incorporated in North Carolina as Sales Vision, Inc. in October 1994 and changed our name to YOUcentric, Inc. in October 1999. Our principal executive offices are located at 14045 Ballantyne Corporate Place, Suite 101, Charlotte, NC 28277 and our telephone number is (704) 401-1300 or (800) 275-4314. Our website address is www.youcentric.com. Information on our website does not constitute part of this prospectus. -------------------------------------------------------------------------------- [Artwork for Inside Front Cover] [Diagram of a circle broken into three pieces, which are labeled "Enterprise," "Sales Partners" and "Customers," brought together at the center by a smaller, unbroken circle labeled "YOUrelate." Each of the three pieces of the broken circle contain the following sample computer screens, which are being accessed via a Web browser, such as Internet Explorer or Netscape: - In the "Enterprise" piece, the display depicts the computer screen that one of our client's employees might use to review projected customer orders in the sales pipeline; - In the "Sales Partners" piece, the display depicts the computer screen that one of our client's sales partners might see in the course of reviewing a customer service incident; and - In the "Customers" piece, the display depicts the computer screen that one of our client's customers might see while making an inquiry about the status of an order.] We provide mass-customized software that enables businesses to manage and optimize their complex and rapidly evolving relationships with customers, sales partners, suppliers and employees. -------------------------------------------------------------------------------- THE OFFERING <TABLE> <S> <C> Common stock offered by YOUcentric............. 5,000,000 shares Common stock to be outstanding after this offering..................................... 32,101,711 shares Offering price................................. $ per share Use of proceeds................................ We intend to use a portion of the net proceeds of this offering to make required payments to the holders of our Series A preferred stock upon its conversion and the remainder for sales and marketing, research and development, international expansion, and for working capital and other general corporate purposes. Nasdaq National Market symbol.................. YOUC </TABLE> ------------------ Except as otherwise indicated, information in this prospectus: - gives effect to common and preferred stock splits effected in 1999 and 2000; - gives effect to the conversion of all outstanding shares of our preferred stock into 11,065,385 shares of our common stock, which will occur automatically upon the closing of this offering; and - assumes that the initial public offering price per share in this offering will be $12.00. If the initial public offering price is more than $12.81 per share, the total number of shares of common stock that will be outstanding after this offering would be less than the number used in the share calculations throughout this prospectus. More information about the number of shares that would be outstanding at various initial public offering prices is presented under the caption "Capitalization." The number of shares to be outstanding after this offering is based on shares outstanding at August 31, 2000 and excludes: - 7,794,143 shares of common stock subject to outstanding options and warrants at a weighted average exercise price of $1.50 per share; and - 7,025,651 additional shares of common stock reserved for issuance under our equity plans. In addition, prior to the closing of this offering, we may grant additional options to purchase up to approximately 716,000 shares of our common stock at a weighted average exercise price of approximately $8.00 per share. -------------------------------------------------------------------------------- TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Prospectus Summary.......................................... 1 Risk Factors................................................ 5 Special Notice Regarding Forward-Looking Statements......... 15 Use of Proceeds............................................. 16 Dividend Policy............................................. 16 Capitalization.............................................. 17 Dilution.................................................... 19 Selected Financial Data..................................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 22 Business.................................................... 31 Management.................................................. 42 Related Party Transactions.................................. 49 Principal Shareholders...................................... 52 Description of Capital Stock................................ 54 Shares Eligible for Future Sale............................. 57 Underwriting................................................ 59 Legal Matters............................................... 62 Experts..................................................... 62 Where You Can Find More Information......................... 62 Index to Financial Statements............................... F-1 </TABLE> ---------------------- You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of time of delivery of this prospectus or of any sale of our common stock. In this prospectus, "YOUcentric," "we," "us" and "our" refer to YOUcentric, Inc. YOUcentric, the YOUcentric logo, YOUrelate, Jsales and Assembly Line are trademarks of YOUcentric. All other trademarks and trade names used in this prospectus are the property of their owners. -------------------------------------------------------------------------------- SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table is a summary of the financial data for our business. You should read this information together with the financial statements and the related notes appearing later in this prospectus and the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations." The statement of operations data for the years ended December 31, 1997, 1998 and 1999, are derived from, and are qualified by reference to, our audited financial statements included in this prospectus. The statement of operations data for the six month periods ended June 30, 1999 and 2000 and the balance sheet data as of June 30, 2000 are derived from, and are qualified by reference to, our unaudited financial statements included in this prospectus. The statement of operations data for the years ended December 31, 1995 and 1996 are derived from our unaudited financial statements that are not included in this prospectus. The pro forma balance sheet data gives effect to the automatic conversion of all outstanding convertible preferred stock into common stock on the closing of this offering and our recognition of stock-based compensation expense for stock options outstanding at June 30, 2000 that vest upon the closing of this offering. The pro forma as adjusted balance sheet data also reflects the sale of the shares of common stock offered by us in this offering and our receipt and application of the estimated net proceeds, after deducting the estimated underwriting discounts and commissions and the estimated expenses that we expect to pay in connection with this offering. See Note 1 to our financial statements appearing elsewhere in this prospectus for information regarding shares used in computing basic and diluted net loss per share attributable to common shareholders. <TABLE> <CAPTION> SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 ------ ----- ------ ------ -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues.......................... $ 193 $ 653 $1,352 $2,790 $ 4,113 $ 2,076 $ 5,406 Net income (loss)....................... (45) 5 (181) (846) (7,022) (2,143) (21,639) Accretion for preferred stock redemption feature and dividends................. -- -- -- -- (11,398) (8,476) (6,196) Net income (loss) attributable to common shareholders.......................... (45) 5 (181) (846) (18,420) (10,619) (27,835) Basic and diluted loss per share attributable to common shareholders... $(0.00) $0.00 $(0.01) $(0.05) $ (1.15) $ (0.66) $ (1.74) Pro forma basic and diluted net loss per share attributable to common shareholders.......................... $ (1.11) $ (1.43) </TABLE> <TABLE> <CAPTION> JUNE 30, 2000 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 10,025 $ 10,025 $ 55,789 Working capital............................................. 17,859 9,223 63,623 Stock redemption and dividends payable...................... -- 8,636 -- Capital lease obligations................................... 201 201 201 Redeemable convertible preferred stock...................... 53,756 -- -- Shareholders' equity (deficiency)........................... (34,940) 10,180 64,580 </TABLE> --------------------------------------------------------------------------------
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+PROSPECTUS SUMMARY This summary highlights some of the information found in greater detail elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk Factors" and the financial statements and accompanying notes before you decide to buy our common stock. OUR COMPANY Petroleum Place is a leading energy Internet marketplace serving the upstream petroleum industry. Through PetroleumPlace.com, which was launched in 1995, we seek to bring price and process efficiencies to each stage of the oil and gas property transaction lifecycle, streamlining the discovery, evaluation, acquisition, divestiture and processing of petroleum properties. Our marketplace and solutions include the following key components: - floor and Internet oil and gas property auctions conducted through the leading oil and gas property auction exchange in North America; - electronic catalogs of our auction properties, sophisticated electronic data rooms and a members-only listing service for properties, all accessible through our web site; - enterprise resource planning software, including accounting, billing and land and production management software systems for the upstream petroleum industry; - geotechnical data and analysis tools delivered over the Internet; and - content, community and e-commerce solutions for the worldwide petroleum industry. We currently operate the largest oil and gas property auction exchange in North America. The value of properties sold annually at our auctions has grown from approximately $3.0 million in 1993 to approximately $162.9 million in fiscal 1999. For the first eight months of fiscal 2000, we handled property transactions with a value of approximately $138.5 million and have current commitments to sell an additional estimated $135.0 million in oil and gas properties by the end of fiscal 2000. To increase the sales of our products and services and become the leading Internet marketplace for the petroleum industry, we intend to build upon our existing relationships with the integrated and large independent petroleum companies that currently use our services, some of which have made equity investments in us. The proven reserves reported by our petroleum industry equity investors had an estimated aggregate value of $25.2 billion as of December 31, 1999. We also intend to cross-sell our services to the 41,300 unique monthly visitors to our Internet marketplace, our qualified prospect base of 16,600 industry professionals and our paying subscriber base of 135 energy companies. Each stage of the transaction lifecycle has traditionally been costly, cumbersome and time-consuming, burdened by data-intensive, paper-based processes. The lack of a central marketplace to efficiently execute property transactions and the lack of back office interconnectivity to process them results in poor market liquidity and long transaction cycles. We intend to streamline the oil and gas property transaction lifecycle by pursuing the following strategies: - Leverage our Established Auction Exchange into the Leading Internet Marketplace for the Petroleum Industry. Through the credibility we have established during our eight years in the auction business, we believe we can drive rapid adoption of our Internet-based auction format for petroleum properties, which will attract a larger pool of buyers and sellers, thereby increasing the volume and size of properties sold through auctions. - Become the Leading ASP for Geotechnical Data and Applications. We intend to aggregate and provide both property-related geotechnical data and the relevant analytical software, which will provide substantial workflow efficiencies in the property discovery and evaluation process. WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE PERMITTED BY US FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING THIS PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR LEGAL. SUBJECT TO COMPLETION -- MAY 19, 2000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTUS , 2000 [LOGO] SHARES OF COMMON STOCK - -------------------------------------------------------------------------------- THE PETROLEUM PLACE, INC.: - - We are a leading energy Internet marketplace serving the upstream petroleum industry. Our services enable the online discovery, evaluation, acquisition, divestiture and processing of petroleum properties. - - The Petroleum Place, Inc. 5299 DTC Parkway, Suite 815 Englewood, CO 80111 (303) 694-5350 www.PetroleumPlace.com PROPOSED SYMBOL & MARKET: - - PPLC/Nasdaq National Market THE OFFERING: - - The underwriters have an option to purchase an additional shares of common stock from us to cover over-allotments. - - This is our initial public offering, and no public market currently exists for our shares. - - We anticipate that the initial public offering price will be between $ and $ per share. - - We plan to use the proceeds from this offering for working capital, potential acquisitions, repayment of outstanding borrowings and other general corporate purposes. - - Closing: , 2000. - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Per Share Total ---------------------------------------------------------------------------- <S> <C> <C> Public offering price: $ $ Underwriting fees: Proceeds to The Petroleum Place, Inc.: ---------------------------------------------------------------------------- </TABLE> THIS INVESTMENT INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. - -------------------------------------------------------------------------------- Neither the SEC nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Nor have they made, nor will they make, a determination whether anyone should buy these securities. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- DONALDSON, LUFKIN & JENRETTE SALOMON SMITH BARNEY BANC OF AMERICA SECURITIES LLC DLJDIRECT INC. - Create Broad Interconnectivity Among Upstream Trading Partners. We plan to offer XML-enabled software solutions to link the back office systems of our installed base of 150 independent petroleum companies with their respective trading partners through the Internet. - Establish an Internet Marketplace for New and Used Oilfield Equipment. We intend to capitalize on our database of over 8,500 items of pre-owned oilfield equipment to establish a central marketplace for new and used oilfield equipment. - Drive Adoption of Our Solutions Internationally. We intend to leverage our existing Canadian customer base to expand the distribution and use of our products and services to the Canadian market. We believe that properties in the North Sea are similarly suited for our marketplace. THE OFFERING Common stock offered by us......................... shares Common stock outstanding after this offering........ shares Use of proceeds............ For working capital, potential acquisitions, repayment of outstanding borrowings and other general corporate purposes. Please see "Use of Proceeds" for more information regarding our planned use of the proceeds from this offering. Proposed Nasdaq National Market Symbol.............. PPLC The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of March 31, 2000. It also reflects: - the issuance of 16,856 shares of common stock in connection with our acquisition of all the assets of Strata Web Systems Ltd. in April 2000; - the issuance of 164,916 shares of Series C preferred stock in April and May 2000; - the pending acquisition of Paradigm Technologies, Inc. for aggregate consideration of $28.4 million, consisting of $12.0 million in cash and 151,216 shares of Series D preferred stock with an estimated value of $16.4 million, assuming the price per share of this offering exceeds a specified minimum; and - the automatic conversion of all outstanding series of preferred stock into common stock on a one-for-one basis upon completion of this offering assuming the price per share of this offering exceeds a specified minimum. In addition to the shares of common stock to be outstanding after this offering, there are: - 345,892 shares that could be issued upon the exercise of options outstanding as of March 31, 2000 at a weighted average exercise price of $0.75 per share; and - 28,522 shares that could be issued upon the exercise of warrants outstanding as of March 31, 2000 at a weighted average exercise price of $38.66 per share. TABLE OF CONTENTS <TABLE> <CAPTION> PAGE <S> <C> Prospectus Summary.................... 1 Risk Factors.......................... 5 Forward-Looking Statements............ 15 Corporate Information................. 16 Use of Proceeds....................... 17 Dividend Policy....................... 17 Dilution.............................. 18 Capitalization........................ 19 Unaudited Pro Forma Consolidated Financial Statements................ 20 Selected Consolidated Financial Data................................ 26 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 27 </TABLE> <TABLE> <CAPTION> PAGE <S> <C> Business.............................. 33 Management............................ 45 Certain Relationships and Related Transactions........................ 54 Principal Stockholders................ 55 Description of Capital Stock.......... 57 Shares Eligible for Future Sale....... 61 Underwriting.......................... 63 Legal Matters......................... 66 Experts............................... 66 Where You Can Find Additional Information......................... 66 Index to Financial Statements......... F-1 </TABLE> --------------------- You should rely only on the information contained in this prospectus or to which we have referred you. Neither we nor any underwriter has authorized anyone to provide you with information that is different. This prospectus is not an offer to sell nor is it seeking an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is correct only as of the date of this prospectus, even if this prospectus is delivered to you after the prospectus date, or you buy our common stock after the prospectus date. SUMMARY CONSOLIDATED FINANCIAL DATA The following tables summarize the consolidated financial data for our business. You should read this data together with "Unaudited Pro Forma Consolidated Financial Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations," our consolidated financial statements and accompanying notes, including the unaudited interim and pro forma financial information which appear later in this prospectus and other financial statements and notes in this prospectus. The historical financial information for the periods ended on or prior to May 31, 1999 reflects the financial information of the Clearinghouse, our Predecessor Company, in which we acquired a controlling interest in June 1999. The accompanying financial information of the Predecessor Company for periods ending on or prior to May 31, 1999 is not comparable in all material respects with our financial information subsequent to May 31, 1999, since that financial information reports financial position and results of operations on a different basis of accounting. The pro forma statements of operations data reflect the following as if the transactions had occurred on October 1, 1998, the beginning of our last full fiscal year: - the acquisition of all the outstanding shares of capital stock of the Clearinghouse in June 1999 and August 1999; - the acquisition of all the outstanding shares of capital stock of TradeBank in September 1999; - the acquisition of specified assets, including PetroleumPlace.com, from World Web Technologies in September 1999; - the acquisition of all the assets of Strata Web; and - the pending acquisition of Paradigm for aggregate consideration of $28.4 million, consisting of $12.0 million in cash and 151,216 shares of Series D preferred stock with an estimated value of $16.4 million, assuming the price per share of this offering exceeds a specified minimum. The pro forma balance sheet data gives effect to: - the acquisition of all the assets of Strata Web; - the issuance of 164,916 shares of Series C preferred stock, at a price of $59.12 per share, in April and May 2000 for aggregate consideration of $9.8 million; and - the pending acquisition of Paradigm for aggregate consideration of $28.4 million, consisting of $12.0 million in cash and 151,216 shares of Series D preferred stock with an estimated value of $16.4 million, assuming the price per share of this offering exceeds a specified minimum. The pro forma as adjusted balance sheet data gives effect to: - the automatic conversion of all outstanding series of preferred stock into common stock on a one-for-one basis upon completion of this offering assuming the price per share of this offering exceeds a specified minimum; and - our receipt of the estimated net proceeds from the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and offering expenses. <TABLE> <CAPTION> PREDECESSOR COMPANY PETROLEUM PLACE --------------------------------------------- ------------------------------------------------------- PRO FORMA JAN. 28, 1999 -------------------------- FISCAL YEAR ENDED SIX MONTHS EIGHT MONTHS (INCEPTION) SIX MONTHS FISCAL SEPTEMBER 30, ENDED ENDED THROUGH ENDED YEAR ENDED SIX MONTHS ----------------- MARCH 31, MAY 31, SEPT. 30, MARCH 31, SEPTEMBER 30, ENDED 1997 1998 1999 1999 1999 2000 1999 MARCH 31, (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 2000 <S> <C> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue Net commission revenue... $ 5,270 $ 6,323 $ 4,776 $ 5,547 $ 2,069 $ 4,108 $ 7,616 $ 4,108 Software, maintenance and integration............ -- -- -- -- -- -- 11,352 6,352 Other revenue............ 270 362 277 316 104 303 1,078 708 ------- ------- ------- ------- ------- -------- ------- -------- Total revenue........ 5,540 6,685 5,053 5,863 2,173 4,411 20,046 11,168 Cost of revenue............ 1,979 2,763 1,759 2,290 961 1,848 8,754 5,179 ------- ------- ------- ------- ------- -------- ------- -------- Gross profit....... 3,561 3,922 3,294 3,573 1,212 2,563 11,292 5,989 ------- ------- ------- ------- ------- -------- ------- -------- Operating expenses Sales, marketing, development, general and administrative..... 1,403 1,497 1,207 1,566 1,505 4,019 8,695 7,185 Depreciation and amortization........... 51 96 35 47 1,179 3,262 9,409 6,053 ------- ------- ------- ------- ------- -------- ------- -------- Total operating expense............ 1,454 1,593 1,242 1,613 2,684 7,281 18,104 13,238 ------- ------- ------- ------- ------- -------- ------- -------- Income (loss) from operations....... 2,107 2,329 2,052 1,960 (1,472) (4,718) (6,812) (7,249) Other income (expense), net...................... (1) (2) -- -- (113) 203 (343) 245 ------- ------- ------- ------- ------- -------- ------- -------- Income (loss) before minority interest and taxes............ 2,106 2,327 2,052 1,960 (1,585) (4,515) (7,155) (7,004) Income taxes............... -- -- -- -- (37) -- (37) -- Minority interest.......... -- -- -- -- (4,549) -- -- -- ------- ------- ------- ------- ------- -------- ------- -------- Net income (loss)........... $ 2,106 $ 2,327 $ 2,052 $ 1,960 $(6,171) $ (4,515) $(7,192) $ (7,004) ======= ======= ======= ======= ======= ======== ======= ======== Earnings (loss) per share-- basic and diluted........ $210.64 $232.70 $205.22 $196.00 $(12.34) $ (9.03) $(13.92) $ (13.55) Weighted average common shares outstanding....... 10,000 10,000 10,000 10,000 500,000 500,000 516,856 516,856 </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, 2000 --------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED (IN THOUSANDS) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $53,108 $ 51,355 Current assets.............................................. 53,509 53,880 Total assets................................................ 73,639 102,873 Current liabilities......................................... 4,486 6,669 Long-term debt, excluding current portion................... 6,811 6,811 Total stockholders' equity.................................. 62,341 89,192 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001109935_webex_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001109935_webex_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights material information described more fully elsewhere in this prospectus. This summary does not contain all the information you should consider before investing in our common stock. You should read the entire prospectus, including the financial statements and related notes, before making an investment decision. WEBEX We provide real-time, interactive multimedia communications services for websites. These services allow end-users to conduct meetings and share software applications, documents, presentations and other content on the Internet using a standard web browser. Telephone calls, and web-based audio and video services can also be controlled within a WebEx meeting using standard devices such as telephones, computer web-cameras and microphones. Our WebEx Meeting Center service allows an organization to "meeting-enable" its website, enabling end-users to participate in meetings through that organization's website. To attend a WebEx Meeting Center and experience the full benefits of the WebEx Meeting Center, an end-user only needs to have a personal computer with a standard web browser and an Internet connection, a telephone and a video camera, if video is desired. We deliver our services, over the Internet, using servers running our communications platform and a global network of leased communications lines. Our platform is based on software designed to provide high reliability, accommodate increasing usage levels and offer comprehensive functionality. To date we have delivered five services on our platform -- WebEx Meeting Center, WebEx Business Exchange, WebEx OnCall, WebEx Shopping-Together and WebEx OnStage. We began offering WebEx Meeting Center, the first of our services, in February 1999. Prior to that time, we primarily provided contract development services which consisted of assignments focused on developing interactive communications capabilities. For the six months ended June 30, 2000, we derived over 90% of our revenue from sales of WebEx Meeting Center and the remainder of our revenue was derived from sales of our other four services, each of which accounted for less than 2% of our revenue for that period. THE WEBEX MEETING CENTER integrates data, audio and video to provide an on-line meeting environment where end-users can communicate, share applications, documents, presentations and other content in real-time as if they were physically in the same meeting. THE WEBEX BUSINESS EXCHANGE allows business professionals to establish their own office homepage and conduct on-line meetings using the WebEx Meeting Center. WEBEX ONCALL enables our customers to enhance the effectiveness of traditional telephone-based customer support using a web browser with no preinstalled software on either computer. The service incorporates a customer user interface to simplify support interactions. WEBEX SHOPPING-TOGETHER is designed for retailing websites to enable on-line shoppers to co-browse and shop together. WEBEX ONSTAGE offers business managers and executives a professionally-managed web conferencing solution for events such as press briefings and marketing events. The service combines WebEx's interactive meeting capabilities with planning, logistics management and real-time support services to minimize the effort involved in hosting a web seminar. We sell our services directly to our customers and indirectly through our distribution partners. In 1999 and the six months ended June 30, 2000, we derived more than 90% of our revenue from direct sales to customers. We consider distribution partners to be entities who distribute our services with their own offerings to their end customers. We offer our services on a monthly subscription basis to our customers and on a revenue sharing or pay-per-use basis through our distribution partners. Gatefold In center of Gatefold: Picture of the a globe depicting WebEx Interactive Network. First circle around the globe WebEx Interactive Platform Real-time Data Sharing/Integrated Teleconferencing/Videoconferencing Second circle around the globe WebEx Interactive Services Meeting Center/Business Exchange/OnCall/Shopping Together/OnStage Surrounding the globe - Starting in the upper right hand corner and moving clockwise around the globe are five pictures of WebEx customers using WebEx service. Pictures have lines connecting with the globe Left side of Gatefold Left side of the page. Powering Interactive Online Meetings For corporate web sites, portals, online marketplaces and communication service providers. Lower right hand side of page. Key Service Features Application Sharing Document Sharing Presentation Sharing Web Co-Browsing Desktop Remote Control Integrated Teleconferencing Live Video Lower Right side of Gatefold Picture of a computer with image of customer using our services. Next to computer "All meeting participants view the same document and live video in their browsers in real-time. Revenue from subscription services consists of monthly usage fees and initial set-up fees. Subscriptions typically are for an initial term of 90 days and then renewed monthly unless terminated by either party. RECENT HISTORY OF LOSSES, ACCUMULATED DEFICIT AND ANTICIPATION OF FUTURE LOSSES We incurred net losses of $2.3 million in 1998, $14.4 million in 1999 and $35.1 million for the six months ended June 30, 2000. As of June 30, 2000, we had an accumulated deficit of $52.2 million. We anticipate incurring operating losses and negative operating cash flow in the foreseeable future. COMPETITION The market for our services is highly competitive. Many of our competitors have longer operating histories, significantly greater financial, technical and other resources and greater name recognition than we do. Competitive pressures could reduce our market share or require us to reduce the price of our services, either of which could harm our business and operating results. ADDITIONAL INFORMATION We were incorporated in California in February 1995 under the name Silver Computing, Inc. We changed our name to Stellar Computing Corporation in June 1997, to ActiveTouch Systems, Inc. in December 1997, to ActiveTouch, Inc. in May 1998 and to WebEx, Inc. in December 1999. We were reincorporated in Delaware and changed our name to WebEx Communications, Inc. in July 2000. Our principal executive offices are located at 110 Rose Orchard Way, San Jose, California 95134, and our telephone number is (408) 435-7000. The address of our website is www.webex.com. Information contained on our website is not part of this prospectus. ActiveTouch, WebEx, WebEx.com and Meeting-Enable Your Web Site are trademarks of WebEx Communications, Inc. This prospectus also contains brand names, trademarks or service marks of companies other than WebEx Communications, Inc., and these brand names, trademarks and service marks are the property of their respective holders. THE OFFERING Shares offered by WebEx............... 3,500,000 shares Shares to be outstanding after this offering.............................. 36,125,075 shares Use of proceeds....................... For general corporate purposes and working capital. Nasdaq National Market symbol......... WEBX The above information is based on the shares outstanding as of June 30, 2000, and excludes: - 4,023,383 shares issuable upon exercise of options outstanding at a weighted average exercise price of $4.697 per share as of June 30, 2000; - 339,915 shares issuable upon exercise of a warrant at an exercise price of $12.50 per share; and - 11,670,819 shares available for future issuance under our 1998 Stock Plan, 2000 Stock Incentive Plan and 2000 Employee Stock Purchase Plan. Unless otherwise indicated, this prospectus assumes: - the automatic conversion of our outstanding preferred stock into common stock upon completion of this offering; - the filing of our amended and restated certificate of incorporation, authorizing a class of 5,000,000 shares of undesignated preferred stock upon closing of this offering; and - no exercise by the underwriters of their option to purchase additional shares of stock in this offering. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table sets forth a summary of our statements of operations data for the periods presented. See notes 1(d) and 1(p) of the notes to our financial statements for an explanation of the method used to determine the number of shares used in computing the per share data below. <TABLE> <CAPTION> SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, --------------------------- ------------------------- 1997 1998 1999 1999 2000 ------ ------- -------- ----------- ----------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue............................ $1,289 $ 1,987 $ 2,607 $ 1,020 $ 6,747 Gross profit....................... 1,097 1,503 1,919 854 4,320 Operating income (loss)............ 26 (2,437) (14,498) (3,795) (35,636) Net income (loss).................. $ 28 $(2,335) $(14,371) $(3,709) $(35,099) Net income (loss) per share: Basic and diluted................ $ 0.00 $ (0.23) $ (1.34) $ (0.35) $ (2.88) Shares used in computing net income (loss) per share: Basic and diluted................ 7,192 10,103 10,700 10,563 12,207 Pro forma net loss per share: Basic and diluted................ $ (0.83) $ (1.30) Shares used in computing pro forma net loss per share: Basic and diluted................ 17,246 27,058 </TABLE> The following table sets forth a summary of our balance sheet at June 30, 2000: - on an actual basis; - on a pro forma basis to give effect to the automatic conversion of all outstanding shares of our preferred stock into common stock upon the closing of this offering; and - on the same pro forma basis as adjusted to reflect our receipt of the estimated net proceeds from the sale of 3,500,000 shares of common stock in this offering. <TABLE> <CAPTION> JUNE 30, 2000 ----------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.............................. $18,452 $18,452 $58,817 Working capital........................................ 8,492 8,492 48,857 Total assets........................................... 41,248 41,248 81,613 Long-term obligations.................................. 1,659 1,659 1,659 Total stockholders' equity............................. 22,726 22,726 63,091 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001110009_genaissanc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001110009_genaissanc_prospectus_summary.txt
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+PROSPECTUS SUMMARY ALTHOUGH THIS SUMMARY HIGHLIGHTS INFORMATION WE BELIEVE IS IMPORTANT ABOUT THIS OFFERING AND OUR BUSINESS, YOU SHOULD CAREFULLY READ THE ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS, FOR A COMPLETE UNDERSTANDING OF THIS OFFERING AND OUR BUSINESS. Our Business We are a leader in developing technology for applying population genomics and informatics to improve the development, marketing and prescribing of drugs. Population genomics is the analysis of inherited differences within diverse groups of people; informatics is storing, manipulating, analyzing, and visualizing information on a computer. We apply population genomics to discover inherited differences, or genomic markers, that are predictive of which patients will respond effectively to a drug. We are marketing our technology to the pharmaceutical industry as a complete solution for developing "smarter" clinical trials and for improving the sales of approved drugs. Our solution combines informatics, our genomic markers and an efficient procedure for analyzing clinical samples to correlate drug response with patients' inherited differences. In the future, we believe that our technology should allow physicians and patients to select specific treatments based on a patient's genomic markers. Inherited, or genomic, differences clearly influence how an individual responds to a drug. However, because there has been no practical method to correlate drug response with genomic variability, pharmaceutical companies have not taken genomic differences into account in planning and implementing clinical trials or in marketing approved drugs. As a result, pharmaceutical companies may unnecessarily discontinue further development of a drug, fail to obtain regulatory approval for a promising drug candidate or be unable to market an approved drug effectively. Scientists can now measure genomic differences at the DNA level. Some companies are seeking to discover individual sites of genomic variation, each commonly referred to as a SNP, as predictive markers for correlating drug response with genomic variability. A company that seeks to identify these correlations using the individual SNP approach, however, must examine blood samples of thousands of patients and perform a complex statistical analysis to detect possible predictive markers, a large number of which, when the company performs subsequent testing, may not correlate with a drug response. Geneticists have historically studied inherited variation by analyzing the inheritance of traits within an extended family in terms of organized genetic units called haplotypes. At the molecular level, a haplotype consists of multiple individual SNPs that are organized into one of the limited number of combinations that actually exist as units of inheritance in humans. Each haplotype contains significantly more information than individual, unorganized SNPs. As a result, these haplotypes contain the information needed to correlate drug response with genomic variation in a patient population of fewer than 200, which is comparable to the size of many phase II clinical trials. Subsequent testing of this information will reveal relatively few haplotypes that do not correlate with a drug response. We base our technology on the discovery and application of haplotype markers. Our approach, which we call HAP Technology, combines our proprietary haplotype markers, known as HAP Markers, with a sophisticated software tool, our DECOGEN informatics system, and a procedure, HAP Typing, for measuring which of our HAP Markers are present in a patient's clinical blood sample. We designed our HAP Technology for companies to use in clinical trials to predict or explain a patient's response to a particular drug. We expect to provide our HAP Technology to pharmaceutical and biotechnology companies through our HAP2000 program. Through projects we call our Mednostics program, we also expect to apply our HAP Technology internally to develop predictive markers for selected approved drugs which pharmaceutical companies currently sell in highly competitive markets. Utilizing our HAP Technology, we have discovered HAP Markers for 1,309 genes and differentiated patient drug response in an asthma clinical study. In our first Mednostics program, we have identified HAP Markers from multiple genes that differentiate how patients have responded to different statins, a class of approved drugs for lowering cholesterol levels. We are currently capable of discovering HAP Markers for approximately 50 genes per week and intend to increase this number to approximately 160 genes per week by the fourth quarter of 2000. Our objective is to make our HAP Technology the industry standard for using genomic variation information throughout the pharmaceutical process of developing, marketing and prescribing drugs. The key elements of our strategy include: - obtaining pharmaceutical partners through our HAP2000 program; - discovering and marketing HAP Markers for selected approved drugs currently sold in highly competitive markets through our Mednostics program; - discovering and patenting HAP Markers for all of the pharmaceutically relevant genes, which are the genes scientists believe are likely to be involved in how a patient responds to a drug; - improving and expanding our DECOGEN informatics system; - seeking strategic alliances with leading equipment and information technology providers; and - increasing awareness of the impact of genomic variation on the practice of medicine. We organized as a Delaware corporation on February 22, 1992 as BIOS Laboratories, Inc. and changed our name to Genaissance Pharmaceuticals, Inc. on March 18, 1997. Our principal executive offices are located at Five Science Park, New Haven, Connecticut 06511. Our telephone number is (203) 773-1450. Our website is located at http://www.genaissance.com. We are sponsoring a website, http://www.hapcentral.com, to disseminate information on the benefits of using genomic variation information in healthcare. We do not intend for any of the information on these websites to be part of this prospectus. This prospectus contains our trademarks, Genaissance-Registered Trademark-, HAP-TM- Marker, HAP-TM- Typing, HAP2000-TM- partnership program, HAP-TM- Technology, DECOGEN-TM- informatics system, ISOGENOMICS-TM- Database, and Mednostics-TM- program. Each trademark, trade name or service mark of any other company appearing in this prospectus belongs to its holder. The Offering <TABLE> <S> <C> Common stock offered by Genaissance......................... 6,000,000 shares Common stock outstanding after this offering................ 21,582,173 shares Use of proceeds............................................. To purchase consumables for discovery of our HAP Markers; hire additional informatics personnel; fund internal Mednostics programs; file additional patent applications; and for general corporate purposes. You should read our discussion under "Use of Proceeds." Proposed Nasdaq National Market symbol...................... GNSC </TABLE> The number of shares to be outstanding upon completion of this offering is based on shares outstanding as of March 31, 2000. This number assumes the conversion into common stock of all our preferred stock outstanding on that date, assumes the cashless exercise of warrants into 60,427 shares of common stock upon the completion of this offering and excludes: - 1,050,475 shares of common stock subject to options outstanding as of March 31, 2000, with a weighted average exercise price of $2.52 per share which includes 14,555 shares of common stock from options exercised after March 31, 2000; - 607,013 shares of common stock subject to warrants outstanding as of March 31, 2000, with a weighted average exercise price of $5.16 per share; and - Options to purchase 1,175,780 shares of common stock which we granted in April and June 2000 at a weighted average exercise price of $11.42 per share. ------------------------ UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES: - THAT THE UNDERWRITERS HAVE NOT EXERCISED THEIR OPTION TO PURCHASE ADDITIONAL SHARES; - CONVERSION OF ALL SHARES OF PREFERRED STOCK, INCLUDING SHARES OF NON-VOTING PREFERRED STOCK, INTO SHARES OF COMMON STOCK UPON COMPLETION OF THIS OFFERING; AND - THE FILING OF AN AMENDED AND RESTATED CERTIFICATE OF INCORPORATION UPON COMPLETION OF THIS OFFERING TO, AMONG OTHER THINGS, INCREASE OUR AUTHORIZED COMMON STOCK AND DECREASE OUR AUTHORIZED PREFERRED STOCK. Summary Financial Data (in thousands, except per share data) <TABLE> <CAPTION> Three Months Year Ended December 31, Ended March 31, ------------------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 ----------- -------- -------- -------- -------- -------- -------- (unaudited) (unaudited) <S> <C> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Revenue........................................... $ 1,152 $ 1,141 $ 1,505 $ 1,343 $ 680 $ 284 $ 63 Operating expenses: Sublicense royalty obligations.................. -- 93 19 68 20 -- 514 Research and development(1)..................... 1,433 1,010 1,643 3,017 6,259 1,107 2,991 Selling, general and administrative(1).......... 411 304 415 894 2,714 467 1,346 Stock based compensation........................ -- 685 106 473 766 57 3,632 ----------- -------- -------- -------- -------- -------- -------- Loss from operations.............................. (692) (951) (678) (3,109) (9,079) (1,347) (8,420) Net loss.......................................... (784) (1,029) (803) (2,879) (9,449) (1,309) (8,649) Preferred stock dividends and accretion........... -- -- -- (742) (2,082) (428) (1,609) Beneficial conversion feature of Series B, KBH and C preferred stock............................... -- -- -- -- -- -- 50,180 ----------- -------- -------- -------- -------- -------- -------- Net loss attributable to common shareholders...... $ (784) $ (1,029) $ (803) $ (3,621) $(11,531) $ (1,737) $(60,438) =========== ======== ======== ======== ======== ======== ======== Net loss per common share, basic and diluted...... $ (0.38) $ (0.47) $ (0.40) $ (1.67) $ (4.24) $ (0.67) $ (21.49) Weighted average shares used in computing net loss per common share................................ 2,052 2,207 1,983 2,165 2,719 2,599 2,812 Pro forma net loss per common share, basic and diluted......................................... $ (1.79) $ (6.37) Pro forma weighted average shares used in computing net loss per common share, basic and diluted......................................... 5,202 9,191 </TABLE> ------------ <TABLE> <S> <C> <C> <C> <C> <C> <C> <C> (1) Excludes non-cash, stock based compensation expense as follows: Research and development...................... $ -- $ 219 $ 64 $ 427 $ 499 $ 51 $ 1,575 Selling, general and administrative........... -- 466 42 46 267 6 2,057 ----------- -------- -------- -------- -------- -------- -------- $ -- $ 685 $ 106 $ 473 $ 766 $ 57 $ 3,632 =========== ======== ======== ======== ======== ======== ======== </TABLE> <TABLE> <CAPTION> As of March 31, 2000 ------------------------------------------ Pro Forma Actual Pro Forma(1) As Adjusted(1) -------- ------------- --------------- (unaudited) <S> <C> <C> <C> Balance Sheet Data: Cash, cash equivalents and investments...................... $ 54,909 $ 54,909 $120,929 Total assets................................................ 67,355 67,355 133,375 Long-term liabilities....................................... 13,583 13,044 13,044 Redeemable convertible preferred stock...................... 66,830 -- -- Accumulated deficit......................................... (80,091) (80,091) (80,091) Total stockholders' equity (deficit)........................ (18,428) 49,350 115,370 </TABLE> ------------ (1) The pro forma column gives effect to both the conversion of our preferred stock outstanding as of March 31, 2000 into common stock and the cashless exercise of certain warrants upon the closing of this offering. The pro forma as adjusted column reflects the receipt of the net proceeds from the sale of 6,000,000 shares of common stock offered by us at the midpoint of the range of initial public offering prices listed on the cover page of this prospectus, and the application of the net proceeds from this offering, after deducting underwriting discounts and commissions and estimated offering expenses. The pro forma information is unaudited and reflects adjustments which are necessary, in our management's opinion, for a fair presentation of our financial condition and results of operations on a pro forma basis.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001110171_bvbc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001110171_bvbc_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..cc7b67fc3dfc20068ebe8dabe95a7534d83ea79a
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the trust preferred securities being sold in this offering and other consolidated financial statements and related notes appearing elsewhere in this prospectus. Unless we indicate otherwise, all information in this prospectus (1) reflects the four-for-one stock split of our common stock effective as of January 20, 2000, and (2) assumes no exercise of the underwriters' over-allotment option to purchase up to an additional 187,500 trust preferred securities from BVBC Capital Trust I. BLUE VALLEY We organized Blue Valley and our wholly-owned subsidiary, Bank of Blue Valley, in 1989 to provide banking services to closely-held businesses, their owners, professionals and individuals in Johnson County, Kansas, a high growth, demographically attractive area within the Kansas City, Missouri -- Kansas Metropolitan Statistical Area. Our focus has been to take advantage of the current and anticipated growth in our market area as well as to serve the needs of small and mid-sized commercial borrowers -- customers that we believe currently are underserved as a result of banking consolidation in the industry generally and within our market specifically. We have experienced significant internal growth since our inception. In addition, in 1994, we acquired the deposits of a branch of a failed savings and loan institution to augment our internal growth and expand into an additional market which management believed was attractive. In 1994, we also completed the construction of our current headquarters in Overland Park, Kansas. We currently have three banking locations in Johnson County, Kansas, including our main office in Overland Park, a full-service office in Olathe, Kansas, and a supermarket banking facility in Shawnee, Kansas. We plan to open an additional full-service office in Shawnee, Kansas in the third quarter of 2000. FINANCIAL SUMMARY <TABLE> <CAPTION> COMPOUND GROWTH OR AVERAGE FOR THE FIVE YEARS THREE MONTHS ENDED ENDED MARCH 31, DECEMBER 31, YEAR ENDED DECEMBER 31, ------------------- --------------- ---------------------------------------------------- 2000 1999 1999(1) 1999 1998 1997 1996 1995 -------- -------- --------------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> Net income........................ $ 833 $ 655 39.91% $ 3,083 $ 2,816 $ 2,286 $ 1,622 $ 1,049 Earnings per share (diluted)...... 0.38 0.30 27.59% 1.42 1.35 1.22 0.85 0.70 Total assets...................... 333,662 261,351 26.82% 332,613 253,724 201,644 162,739 132,794 Total loans....................... 254,325 186,038 36.65% 250,410 161,444 127,308 101,323 71,791 Total deposits.................... 278,861 218,383 25.70% 268,145 209,824 170,792 139,929 112,614 Total stockholders' equity........ 19,627 17,476 30.08% 18,869 17,016 13,464 10,100 8,761 Return on average total assets.... 1.03% 1.03% 1.14% 1.08% 1.28% 1.30% 1.13% 0.89% Return on average total stockholders' equity............ 17.54% 15.43% 18.46% 17.43% 18.98% 20.62% 17.79% 17.46% </TABLE> --------------- (1) For the period indicated, these figures represent compound annual growth rate of net income, earnings per share (diluted), total assets, total loans, total deposits and total stockholders' equity, and average annual return on average total assets and average total stockholders' equity. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. Subject To Completion, Dated July 5, 2000 PROSPECTUS [BLUE VALLEY BAN CORP LOGO] 1,250,000 TRUST PREFERRED SECURITIES BVBC CAPITAL TRUST I 10.375% CUMULATIVE TRUST PREFERRED SECURITIES (LIQUIDATION AMOUNT $8 PER TRUST PREFERRED SECURITY) FULLY, IRREVOCABLY AND UNCONDITIONALLY GUARANTEED ON A SUBORDINATED BASIS, AS DESCRIBED IN THIS PROSPECTUS, BY BLUE VALLEY BAN CORP ------------------------ BVBC Capital Trust I is offering 1,250,000 trust preferred securities. No public market currently exists for the trust preferred securities. The trust preferred securities generally consist of an indirect beneficial interest in our 10.375% junior subordinated debentures. The junior subordinated debentures have the same payment terms as the trust preferred securities and will be purchased and held by BVBC Capital Trust I using the proceeds of this offering. A brief description of the trust preferred securities can be found under "Prospectus Summary -- The Offering" in this prospectus. The trust preferred securities have been approved for listing on the American Stock Exchange under the symbol "BLV.Pr". Trading is expected to commence on or prior to delivery of the trust preferred securities. ------------------------ YOU SHOULD CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE 6 BEFORE INVESTING IN THE TRUST PREFERRED SECURITIES. ------------------------ THE TRUST PREFERRED SECURITIES ARE NOT SAVINGS ACCOUNTS, DEPOSITS, OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE BANK INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY. <TABLE> <CAPTION> PER TRUST PREFERRED SECURITY TOTAL ------------------ ----------- <S> <C> <C> Public Offering Price....................................... $8.00 $10,000,000 Proceeds to BVBC Capital Trust I............................ $8.00 $10,000,000 </TABLE> This is a firm commitment underwriting. We will pay underwriting commissions of $0.40 per trust preferred security, or a total of $500,000, for arranging the investment in our junior subordinated debentures. We have granted the underwriters the right to purchase up to an additional 187,500 trust preferred securities to cover over-allotments, if any. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. STIFEL, NICOLAUS & COMPANY INCORPORATED , 2000 BUSINESS STRATEGY Since our founding, we have strived to increase stockholder value by executing a community banking strategy tailored to provide our customers with competitive financial products and services, our employees with the opportunity to share in our financial success and our community with a stable, growth oriented employer. To further our primary business objectives, we have identified the following business strategies: - We intend to grow and diversify our loan portfolio by aggressively marketing new customers, cross-marketing our existing customers and expanding our loan product offerings. - We intend to grow our residential mortgage loan origination, investment brokerage, trust services and other lines of business and to develop additional sources of non-interest income. - We intend to continue to emphasize controlling the expenses necessary to facilitate our growth as a community bank with diversified and developing lines of business. - We intend to expand our presence within our market area, primarily by considering opening new branches and establishing new ATMs and, to the extent that opportunities present themselves, by considering acquisition opportunities within our market area and in contiguous areas. We believe that our primary strengths are our: - high level of customer service standards, - growth opportunities in our primary market area, - market perception as an independent community bank focused on serving the needs of our market, as compared to a regional or national bank, and - experienced senior management team. BVBC TRUST BVBC Trust is a newly created Delaware business trust. We created BVBC Trust to offer the trust preferred securities and to purchase our junior subordinated debentures. BVBC Trust has a term of 35 years, but may dissolve earlier as provided in its trust agreement. The principal executive offices of Blue Valley and BVBC Trust are located at 11935 Riley, Overland Park, Kansas 66225-6128. The main telephone number for both Blue Valley and BVBC Trust is (913) 338-1000. Our Internet address is http://www.bankbv.com. [BLUE VALLEY MAP] THE OFFERING Securities offered......... BVBC Trust is offering 1,250,000 of its trust preferred securities to the public, and will sell its common securities to Blue Valley. Together, the trust preferred securities and the common securities are referred to as trust securities. BVBC Trust will use the proceeds from the sale of trust securities to buy from Blue Valley a series of 10.375% junior subordinated debentures due September 30, 2030, which will have the same payment terms as the trust preferred securities. Quarterly distributions are payable to you on the trust preferred securities............... The distributions payable on each preferred security will: - be fixed at a rate per year of 10.375%; - accrue from the date of issuance of the trust preferred securities; and - be payable quarterly on March 31, June 30, September 30 and December 31 of each year that the trust preferred securities are outstanding, beginning on September 30, 2000, subject to our right to defer distributions on the trust preferred securities. Blue Valley and BVBC Trust have rights to defer distributions to you on the trust preferred securities............... BVBC Trust will defer distributions on the trust preferred securities if Blue Valley defers interest payments on the junior subordinated debentures. Blue Valley generally has the right to defer interest payments on the junior subordinated debentures for up to 20 consecutive quarters. During any deferral period, you will still accumulate the right to receive distributions when subsequently made at the annual rate of 10.375%, plus you will earn interest at the annual rate of 10.375%, compounded quarterly, on any unpaid distributions. You will still be taxed, even if distributions on the trust preferred securities are deferred................. If distributions on the trust preferred securities are deferred, you will be required to accrue interest income in the form of original issue discount and include it in your gross income for United States federal income tax purposes. See "Risk Factors -- If we elect to defer interest payments on the junior subordinated debentures, you may have to include interest in your taxable income before you receive cash," "Description of the Junior Subordinated Debentures -- Option to Extend Interest Payment Period" and "Material Federal Income Tax Consequences -- Interest Income and Original Issue Discount." Your trust preferred securities will be redeemed by BVBC Trust when the junior subordinated debentures mature........ The junior subordinated debentures will mature on September 30, 2030. BVBC Trust will redeem your trust preferred securities upon the stated maturity date of the junior subordinated debentures or earlier if they are prepaid. If the junior subordinated debentures are prepaid, your trust preferred securities will be redeemed................. Blue Valley may prepay the junior subordinated debentures prior to maturity: - on or after September 30, 2005; or - at any time upon events occurring that may have a significant adverse effect on the benefits to Blue Valley of having the trust preferred securities outstanding. Upon any prepayment of the junior subordinated debentures, your trust preferred securities will be redeemed at the liquidation amount of $8 per preferred security plus any accrued and unpaid distributions to the date of redemption. See "Description of the Trust Preferred Securities -- Redemption -- Mandatory and Optional Rights of Blue Valley" and "Description of the Junior Subordinated Debentures -- Redemption." At its option, Blue Valley may require you to exchange your trust preferred securities for its junior subordinated debentures.. Blue Valley has the right at any time to dissolve BVBC Trust. Upon a dissolution of BVBC Trust, after satisfaction of liabilities to creditors, if any, of BVBC Trust, you will receive junior subordinated debentures in exchange for the principal amount of your holdings in trust preferred securities, plus accrued and unpaid interest equal to the accrued and unpaid distributions on the trust preferred securities. See "Description of the Trust Preferred Securities -- Distribution of Junior Subordinated Debentures." Your trust preferred securities are fully and unconditionally guaranteed by Blue Valley on a subordinated basis.................... Blue Valley will fully, irrevocably and unconditionally guarantee the trust preferred securities on a subordinated basis. However, if Blue Valley does not make a payment on the junior subordinated debentures, BVBC Trust will not have sufficient funds to make payments on the trust preferred securities and the guarantee will not apply. See "Description of the Trust Preferred Securities Guarantee." Your trust preferred securities rank lower in payment priority compared to other obligations of Blue Valley.............. Blue Valley's obligations under its trust preferred securities guarantee, the junior subordinated debentures and other governing documents described in this prospectus are unsecured and rank junior in right of payment to all current and future senior and subordinated debt of Blue Valley. In addition, because Blue Valley is a holding company, all existing and future liabilities of any Blue Valley subsidiary will rank prior to all obligations of Blue Valley relating to the trust preferred securities and the junior subordinated debentures. There is no limit on the amount of these liabilities or the amount of other trust preferred securities or other junior subordinated debentures of Blue Valley or its subsidiaries that may be issued in the future. You will have limited voting rights.............. As a holder of trust preferred securities, you have only limited voting rights. See "Description of the Trust Preferred Securities -- Voting Rights; Amendment of the Trust Agreement." There is no established market for the trust preferred securities..... Prior to this offering, there has been no public trading market for the trust preferred securities. The trust preferred securities have been approved for listing on the American Stock Exchange under the trading symbol "BLV.Pr." See "Market for the Trust Preferred Securities."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001110206_kosan_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001110206_kosan_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS THAT WE BELIEVE MOST IMPORTANT ABOUT THIS OFFERING AND OUR BUSINESS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY FOR A COMPLETE UNDERSTANDING OF THIS OFFERING AND OUR BUSINESS. OUR BUSINESS We are a biotechnology company using our proprietary technologies to develop drug candidates from an important class of natural product compounds known as polyketides. Polyketides are naturally made in very small amounts in microorganisms and are structurally complex and difficult to make or modify by chemical means. We have developed technologies to manipulate the natural process by which polyketides are made. These technologies give us the ability to create novel polyketides thereby providing a pipeline of potential drug candidates. Polyketides have been a source of many different pharmaceuticals including antibiotics, anticancer drugs, cholesterol-lowering drugs, immunosuppressants, and other therapeutics, as well as animal health and agricultural products. Natural or semi-synthetic polyketide pharmaceuticals represent over 20 products, with sales of approximately $10 billion per year. Using our technologies, we are able to modify and produce polyketides in ways chemists cannot. Our approach mimics, accelerates and expands the evolutionary process that gave rise to this important class of molecules. We use our technologies to: - create improved versions of currently marketed pharmaceuticals that address large markets; - modify an existing polyketide used in one therapeutic area to create a new polyketide to be used in another; - transfer the ability to make a polyketide from one organism to another to enable large-scale production; and - generate large numbers of new polyketides to provide a source of new drug candidates. OUR TECHNOLOGIES Our technology platform has five components which allow us to modify, create and produce new polyketides: - polyketide gene alteration--the creation of new polyketides using our technology to manipulate the genetic instructions by which polyketides are made; - chemobiosynthesis--the creation of new polyketides by incorporating synthetic starting materials into the biological processes by which polyketides are made; - heterologous over-expression--the over-production of polyketides by transferring the genes to better hosts; - combinatorial biosynthesis--the rapid and efficient production of many different polyketides with related structures; and - screening libraries--large collections of many different polyketides that can be readily tested for biological activities of interest. OUR STRATEGY Our strategy is to apply our technologies to create new polyketides for development as pharmaceutical products and to advance these drug candidates into clinical trials. We aim to: - maximize the value and minimize the risk associated with new drug development by focusing on new compounds with structures related to existing polyketides that have known utility, safety and significant market potential; - establish collaborative relationships with large pharmaceutical companies to advance our most complex programs through clinical trials and into the market, as well as to prepare and test our screening libraries; - expand and enhance our technologies and increase our capabilities for making new and useful polyketides; and - acquire or license complementary technologies or drug candidates from third parties. OUR PRODUCT DEVELOPMENT OPPORTUNITIES We have six primary programs for the discovery and development of new polyketides that are directed at infectious disease, gastrointestinal motility disorders, mucus hypersecretion, cancer, immunosuppression and nerve regeneration. These programs were selected because they represent opportunities where our technologies could improve existing products or fill unmet needs, and address large markets. Since September 1998, we have identified several polyketide antibiotic drug candidates that kill organisms that are resistant to existing products. We have developed these drug candidates in collaboration with The R.W. Johnson Pharmaceutical Research Institute, a Johnson & Johnson company. In August 2000, we signed a collaboration and license agreement with the Sloan-Kettering Institute for Cancer Research relating to potential anti-cancer compounds known as epothilones. THE OFFERING <TABLE> <S> <C> Common stock offered by us................ 5,000,000 shares Common stock to be outstanding after this offering................................ 23,844,539 shares(1) Proposed Nasdaq National Market symbol.... KOSN Use of proceeds........................... We intend to use the net proceeds from this offering for advancing our drug candidates through preclinical and later-stage development, discovering or acquiring new drug candidates, expanding our technology platform, capital expenditures, working capital, general corporate purposes and possible future acquisitions. See "Use of Proceeds." </TABLE> Unless otherwise indicated, information in this prospectus assumes: - the automatic conversion of all outstanding shares of our convertible preferred stock into 12,220,719 shares of common stock upon the closing of this offering; - no exercise of the underwriters' over-allotment option to purchase up to 750,000 shares; and - an increase in the authorized shares of our common stock and preferred stock to 200,000,000 shares and 10,000,000 shares, respectively, at the closing of this offering. ------------------------ (1) The number of shares of common stock to be outstanding after this offering excludes: - 2,902,107 shares of common stock reserved for issuance under our 1996 stock option plan, of which 1,141,800 shares are subject to outstanding options at June 30, 2000 with a weighted average exercise price of $1.35 per share; - 300,000 shares of common stock reserved for issuance under our 2000 employee stock purchase plan approved by our board of directors in March 2000; and - 300,000 shares of common stock reserved for issuance under our 2000 non-employee director stock option plan approved by our board of directors in March 2000. Our principal executive offices are located at 3832 Bay Center Place, Hayward, California, 94545. Our phone number is (510) 732-8400. Our website is http://www.kosan.com. We do not intend for the information found on our website to be incorporated into or be a part of this prospectus. SUMMARY FINANCIAL DATA The following tables summarize our financial data, and should be read together with our financial statements and the related notes, the "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The pro forma information contained in the statement of operations data gives effect to the automatic conversion of all convertible preferred stock upon the completion of this offering. The pro forma balance sheet data reflects the automatic conversion of our preferred stock into common stock on a three-for-one basis and the sale of 5,000,000 shares of our common stock at an assumed price to the public of $15.00 per share, after deducting the underwriting discounts, commissions and estimated offering expenses payable by us. <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------ ---------------------------- 1997 1998 1999 1999 2000 STATEMENT OF OPERATIONS DATA: ---------- ---------- ---------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> Total revenue......................... $ 287 $ 1,236 $ 5,346 $ 3,107 $ 2,224 Total operating expenses.............. 2,379 5,021 10,400 4,650 9,414 Loss from operations.................. (2,092) (3,785) (5,054) (1,543) (7,190) Net loss.............................. $(1,994) $(3,267) $(4,401) $(1,280) $ (6,679) Deemed dividend upon issuance of Series C convertible preferred stock............................... -- -- -- -- (11,267) ------- ------- ------- ------- -------- Net loss attributable to common stockholders........................ $(1,994) $(3,267) $(4,401) $(1,280) $(17,946) Basic and diluted net loss per share............................... $ (0.49) $ (0.77) $ (0.98) $ (0.29) $ (3.57) Shares used in computing basic and diluted net loss per share.......... 4,094 4,270 4,509 4,430 5,029 Pro forma basic and diluted net loss per share (unaudited)............... $ (0.31) $ (1.12) Shares used in computing pro forma basic and diluted net loss per share (unaudited)......................... 14,318 16,056 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 2000 ----------------------- ACTUAL PRO FORMA BALANCE SHEET DATA: -------- --------- (IN THOUSANDS) <S> <C> <C> Cash, cash equivalents and short-term investments........... $ 25,027 $ 93,527 Working capital............................................. 22,370 90,870 Long-term investments....................................... 7,235 7,235 Total assets................................................ 36,898 105,398 Capital lease and debt obligations, less current portion.... 2,099 2,099 Accumulated deficit......................................... (18,272) (18,272) Stockholders' equity........................................ 31,777 100,277 </TABLE>
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that is important to you. You should read the entire prospectus, including risk factors and our consolidated financial statements and related notes, before making an investment decision. OUR COMPANY We are a global provider of value-added electronics manufacturing services, or EMS, to original equipment manufacturers and their suppliers. We offer our customers integrated, cost-effective solutions that are responsive to their outsourcing needs and provide a broad range of services, including design and engineering; materials management; manufacturing and assembly; testing and qualification; delivery and distribution of products; and after-sales support. Through our 12 manufacturing facilities in the United States, Mexico and the Philippines, we provide our customers a full range of manufacturing capabilities, from the low quantity production of a variety of complex products, or low-volume/high-mix manufacturing, to the high quantity production of less complex products, or high-volume/low-mix manufacturing. Our facilities are generally located in regions that offer proximity to our customers or lower our manufacturing costs. We provide our services to customers primarily in the automotive, communications, computer and military end markets. Our customers include industry leaders such as DaimlerChrysler, Ford, General Dynamics, Hewlett-Packard, IBM and Motorola. We also seek to identify and nurture strategic alliances with emerging companies that we believe have the potential to develop products offering technological advances over existing products. We provide our design, engineering and other value-added services to these emerging companies in exchange for exclusive manufacturing rights. The EMS industry has experienced rapid growth over the last several years and is expected to continue growing rapidly. Technology Forecasters, Inc. predicts that overall EMS industry revenue will grow 20% annually from 2000 through 2003, to approximately $149 billion. As the electronics content in commercial and consumer goods has increased and grown more complex, original equipment manufacturers have been increasingly outsourcing their internal manufacturing capacity and related services to EMS providers, to focus on their core competencies. Technology Forecasters predicts that original equipment manufacturers will increasingly outsource more complex services and products, with the communications and computer markets representing the largest growth opportunities. These markets are characterized by rapidly evolving product technologies and shortening product lifecycles. We believe that these trends will favor large EMS providers that have a global presence, broad service offerings and advanced technological capabilities. In order to strengthen our competitive position in the midst of this industry growth, we have pursued selective strategic acquisitions and alliances. In August 1999, we acquired Smartflex Systems, or Smartflex, an EMS provider that designed high technology products and offered high precision manufacturing capabilities, based in Tustin, California. Through this acquisition, we gained access to full-service electronics capabilities, significantly increased the size of our operations, expanded our customer base to the communications and computer end markets, and enhanced our geographic presence. More recently, in March 2000, we entered into an agreement with Motorola by which we became a preferred EMS provider to its Integrated Electronics Systems Sector. As a preferred EMS provider, we have the opportunity to participate in requests for quotations, bids and other opportunities to provide manufacturing and related services to Motorola's Integrated Electronics Systems Sector, subject to our being competitive in price and quality. Based on our capabilities, we believe that we are well positioned to obtain considerable additional business opportunities over the next few years from this strategic outsourcing alliance. To better target customers and serve the needs of different end markets, we have strategically aligned our business into three segments: electronics, electromechanical and electrical. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED AUGUST 10, 2000 7,200,000 Shares [SATURN ELECTRONICS & ENGINEERING, INC. LOGO] Common Stock ------------------ We are selling 7,200,000 shares of common stock. Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $8.00 and $10.00 per share. We have been approved to have our common stock traded on the New York Stock Exchange, under the symbol "SN." The underwriters have an option to purchase a maximum of 1,080,000 additional shares from the selling shareholders to cover over-allotments of shares. We will not receive any proceeds from the shares of common stock sold by the selling shareholders. INVESTING IN OUR COMMON STOCK INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5. <TABLE> <CAPTION> UNDERWRITING PROCEEDS TO PROCEEDS TO PRICE TO DISCOUNTS AND SATURN ELECTRONICS & SELLING PUBLIC COMMISSIONS ENGINEERING, INC. SHAREHOLDERS -------- ------------- -------------------- ------------ <S> <C> <C> <C> <C> Per Share............................ $ $ $ $ Total................................ $ $ $ $ </TABLE> Delivery of the shares of common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON MERRILL LYNCH & CO. NEEDHAM & COMPANY, INC. The date of this prospectus is , 2000. - Our electronics segment provides services in connection with the assembly of electronic components within precise parameters onto flexible printed circuit boards, or flex circuit assembly, printed circuit board assembly and the incorporation of electronic assemblies into subassemblies and the assembly of final systems packages, or box-build. We obtained most of our capabilities in this segment with our acquisition of Smartflex. - Our electromechanical segment provides services in connection with power distribution centers, electrical switches, devices which transform electrical power into motion, and devices which perform complete electronic transmission control. - Our electrical segment provides services in connection with battery cables, wire harnesses and power distribution systems. This segment is comprised of a limited liability company, of which we own 53%. We intend to continue to strengthen and expand our position in the rapidly growing EMS industry by: - building strategic relationships with both leading and emerging original equipment manufacturers; - targeting an increasingly diverse customer base in high-growth end markets, such as communications; - leveraging our design and engineering capabilities; - expanding our global presence; - pursuing selective acquisitions; and - seeking additional minority business enterprise opportunities. We were incorporated in Michigan on October 1, 1985. Our principal executive offices are located at 255 Rex Boulevard, Auburn Hills, Michigan 48326, and our telephone number is (248) 853-5724. Our web site is located at www.saturnee.com. Information contained on, or linked to, our web site does not constitute part of this prospectus. "Global Innovator of Smart Products" and the Saturn logo are our trademarks and service marks. [Artwork showing a graphic description of a collage of the Detroit skyline and various types of products in which our services and products manufactured by us are incorporated, as well as our logo.] Saturn Electronics & Engineering, Inc. is a global supplier of electronic manufacturing services to original equipment manufacturers and their suppliers. These services are provided to customers primarily in the automotive, communications, computer and military end markets. [SATURN LOGO] THE OFFERING <TABLE> <S> <C> Common stock offered by Saturn Electronics & Engineering, Inc........................... 7,200,000 shares Common stock to be outstanding after the offering................................... 36,941,280 shares Use of proceeds.............................. We intend to use our entire net proceeds of approximately $59.1 million to reduce indebtedness under our credit facility. Reserved New York Stock Exchange symbol...... SN </TABLE> The number of shares of our common stock to be outstanding after this offering is based on the number of shares outstanding as of June 30, 2000 and excludes: - 2,718,150 shares of common stock issuable upon exercise of outstanding stock options with a weighted average exercise price of $2.74 per share; - 2,500,000 shares of common stock available for future grant under our 2000 Stock Option Plan; and - 1,565,331 shares of common stock issuable upon the exercise of a warrant held by Motorola with an exercise price equal to 90% of the initial public offering price per share. Unless otherwise indicated, all information in this prospectus assumes no exercise of the underwriters' over-allotment option and reflects a recapitalization of our capital stock, which we will effect immediately prior to this offering, as follows: - each outstanding share of our Class A Voting Common Stock will be converted into 3.25 shares of our common stock, no par value; - each outstanding share of our Class B Nonvoting Common Stock will be converted into 2.75 shares of common stock, no par value; - each option to purchase a share of our common stock will be converted into an option to purchase 3.00 shares of common stock, no par value; and - each warrant to purchase a share of Class B Nonvoting Common Stock will be converted into a warrant to purchase 3.00 shares of common stock, no par value. ------------------ TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> PROSPECTUS SUMMARY.................... 1 RISK FACTORS.......................... 5 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS.......... 16 USE OF PROCEEDS....................... 17 DIVIDEND POLICY....................... 17 CAPITALIZATION........................ 18 DILUTION.............................. 19 SELECTED CONSOLIDATED FINANCIAL DATA................................ 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 22 BUSINESS.............................. 29 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> MANAGEMENT............................ 43 RELATED PARTY TRANSACTIONS............ 49 PRINCIPAL AND SELLING SHAREHOLDERS.... 50 DESCRIPTION OF CAPITAL STOCK.......... 51 SHARES ELIGIBLE FOR FUTURE SALE....... 53 UNDERWRITING.......................... 56 NOTICE TO CANADIAN RESIDENTS.......... 59 EXPERTS............................... 60 WHERE YOU CAN FIND MORE INFORMATION... 60 LEGAL MATTERS......................... 60 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.......................... F-1 </TABLE> ------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. DEALER PROSPECTUS DELIVERY OBLIGATIONS UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. SUMMARY CONSOLIDATED FINANCIAL DATA The following tables set forth summary consolidated financial data and certain pro forma financial data for our business during the periods and as of the date indicated. The 1999 pro forma consolidated statement of operations data give effect to our acquisition of Smartflex Systems, Inc. as if this acquisition had been completed on January 1, 1999. This acquisition was accounted for under the purchase method of accounting, and, accordingly, Smartflex has been included in our financial results since August 26, 1999. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, -------------------------------------------------- SIX MONTHS ENDED JUNE 30, PRO FORMA ------------------------- 1997 1998 1999 1999 1999 2000 ---------- ----------- ---------- ---------- ----------- ----------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenue............... $ 161,048 $ 188,464 $ 257,107 $ 325,579 $ 98,309 $ 250,788 Cost of revenue........... 133,568 147,661 205,341 268,975 73,836 203,996 ---------- ----------- ---------- ---------- ---------- ---------- Gross profit.............. 27,480 40,803 51,766 56,604 24,473 46,792 Development expense....... 3,563 4,861 7,741 8,465 3,289 11,563 Selling, general and administrative expense................. 8,039 12,777 19,146 29,998 7,697 14,752 Amortization expense...... 1,650 1,649 2,582 4,772 824 2,113 Restructuring expense..... -- -- -- 3,833 -- -- Charge for warrant issued below fair value........ -- -- -- -- -- 7,909 ---------- ----------- ---------- ---------- ---------- ---------- Operating income (loss)... 14,228 21,516 22,297 9,536 12,663 10,455 Net income (loss)......... $ 8,059 $ 11,954 $ 9,905 $ (2,682) $ 7,039 $ 305 ========== =========== ========== ========== ========== ========== Basic earnings (loss) per share................... $ 0.22 $ 0.32 $ 0.31 $ (0.08) $ 0.20 $ 0.01 Diluted earnings (loss) per share............... $ 0.22 $ 0.32 $ 0.31 $ (0.08) $ 0.20 $ 0.01 Basic weighted average number of common shares outstanding............. 37,176,600 37,176,600 32,145,026 32,145,026 34,588,616 29,741,280 Diluted weighted average number of common shares outstanding............. 37,176,600 37,176,600 32,145,026 32,145,026 34,588,616 29,834,168 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 2000 -------------------------- ACTUAL AS ADJUSTED ----------- ----------- (IN THOUSANDS) (UNAUDITED) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash........................................................ $ 4,116 $ 4,116 Working capital............................................. 53,228 53,228 Total assets................................................ 269,773 269,773 Long-term debt.............................................. 108,745 49,681 Total shareholders' equity.................................. 60,072 119,136 </TABLE> The as adjusted balance sheet data reflect: - our receipt of the estimated net proceeds from our sale of 7,200,000 shares of our common stock in this offering at an assumed initial public offering price of $9.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us; and - the assumed repayment of $59.1 million of long-term debt outstanding under our credit facility using the estimated proceeds from this offering.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001110521_diveo_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001110521_diveo_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information that you will find elsewhere in this prospectus. This summary does not contain all of the information you should consider before buying shares in this offering. You should carefully read the entire prospectus and the risk factors beginning on page 7. In this prospectus, the "company," "Diveo," "we," "us" and "our" refer to Diveo Broadband Networks, Inc. and its subsidiaries. All share and per share data has been adjusted to reflect a proposed 7 to 1 reverse stock split expected to occur prior to the closing of this offering. Diveo Overview We seek to become a leading facilities-based provider of high capacity, high speed Internet, data and voice services in the major urban markets throughout Latin America. Through local fixed wireless access networks which we own and operate, we currently provide broadband (i.e., high capacity, high speed) data transport and dedicated Internet access to large and medium-sized businesses, telecommunications carriers, Internet service providers, Internet content providers, e-commerce providers and systems integrators. We currently offer Web hosting services and are investing substantially in Internet infrastructure to enable us to provide advanced Web hosting, co-location, facilities-based Internet transport services and other enhanced Internet services on a large scale. We also intend to complement our broadband Internet and data offerings with voice services. We have obtained substantial regional and national grants of spectrum as well as telecommunications operating licenses in Argentina, Brazil, Colombia, Panama, Peru and Uruguay, covering a total population of more than 135 million people. In addition, we have obtained voice operating licenses in Argentina and Peru. We are currently in various stages of designing, building and operating local fixed wireless broadband access networks in 16 major urban markets in those six countries. We have launched commercial service in Buenos Aires, Argentina, Sao Paulo, Brazil, and Bogota, Colombia. At December 31, 1999, we had 309 employees, 219 buildings on our networks and 102 customers with 1,516 dedicated data and Internet circuit equivalents in service. We count circuit equivalents on the basis of 64 kilobits per second per circuit. The 102 customers in December 1999 represented an increase of 89 from 13 customers in March 1999. In addition, for the year ended December 31, 1999 we had revenues of $1,143,000, an increase of $1,119,000 from $24,000 for the year ended December 31, 1998. Market Opportunities in Latin America We intend to capitalize on the increasing demand for broadband data and Internet services in the major urban markets in Latin America. An industry report, commissioned by us and dated April 1999, estimates that in Buenos Aires, Sao Paulo and Bogota, revenues for dedicated Internet access and dedicated broadband access will grow in the aggregate compounded annual rates of 77% and 73%, respectively from 1999 to 2004. Another industry report dated August 1999 estimates that Web hosting and co-location services related revenue in Argentina, Brazil and Colombia in the aggregate will grow at a compounded annual rate of 58% from 1999 to 2004. Our Competitive Strengths We believe that we distinguish ourselves through several competitive strengths, including: . Pan regional presence and holdings. We have secured one of the largest holdings of broadband wireless spectrum and regional and national operating licenses in Latin America. We also have established an early presence in major urban markets in Latin America, particularly in Brazil and Argentina. . Fixed wireless broadband access technology. We primarily use fixed wireless broadband access technology to enable us to quickly deploy our local networks on a cost-effective basis. We are also building and leasing fiber optic cable to increase the backbone capacity of our local networks in certain markets. . Flexible owned and operated networks. As a facilities-based provider, we are able to control the quality, capacity and availability of our broadband data, dedicated Internet access and enhanced Internet services. . Focused sales, marketing and customer service. We have built and continue to develop a targeted sales and marketing approach as well as proactive customer service groups in each market. . Proven management. We effectively combine the substantial experience that our corporate management team has obtained in the competitive U.S. telecommunications and data industries with the local knowledge, contacts and expertise of our in-country management and sales forces. . Strong investor and strategic vendor relationships. We have strong equity investors, including Goldman Sachs Capital Partners, Alta Communications, Norwest Equity Capital, Texas Pacific Group/Newbridge Latin America and Rothschild, as well as strong strategic and financing relationships with Ericsson and Lucent. Business Strategy Our objective is to be a leading facilities-based provider of broadband Internet, data and voice services in the major urban markets throughout Latin America. Our strategy consists of the following key initiatives: . Accelerate the development of current markets and the roll-out of additional markets by leveraging our substantial spectrum holdings, significant operating rights and experience in entering new markets. . Lead with dedicated Internet and broadband data services and complement with staged introduction of voice services. . Expand our large and medium-sized business customer base through a focused direct sales force, third-party alliances and proactive customer service. . Invest substantially in Internet infrastructure to provide enhanced Internet services. . Pursue strategic acquisitions, partnerships and joint ventures to accelerate growth and complement our service offerings. . Continue to attract, retain and motivate skilled Latin American and U.S. personnel by granting stock options to all employees. Local Fixed Wireless Broadband Access Networks We are currently in various stages of designing, building and operating local fixed wireless broadband access networks in 16 major urban markets throughout Latin America. We have built out local networks and launched operations in Buenos Aires, Sao Paulo and Bogota and plan to launch operations in Rio de Janeiro, Brazil, Belo Horizonte, Brazil, Lima, Peru and Panama City, Panama by the end of 2000. We primarily use fixed wireless broadband access technology as a high quality alternative to copper and fiber-based systems because it enables us to quickly deploy our local networks on a cost-effective basis. We believe that our costs to launch service in a market and to connect each customer are lower than for providers using copper or fiber-based networks. Fixed wireless technology enables our start-up costs for each new market to be only approximately 25% of our expected total costs for that market and our subsequent capital expenditures to be success-based, meaning that we do not incur significant capital expenditures until we have identified sufficient customer demand. As demand for service grows in each market, we will increase the backbone capacity of our local networks by adding fixed wireless links or building or leasing fiber optic cable. Internet Infrastructure We are investing substantially in Internet infrastructure to enable us to offer Web hosting, co-location, facilities-based Internet transport services and other enhanced Internet services on a large scale. Our planned investment includes constructing Internet data centers, securing high quality national and international Internet connections and hiring additional skilled personnel. Recent Developments On March 29, 2000, we raised $127 million in private equity financing. The investors in this financing included a new investor to the company, Texas Pacific Group/Newbridge Latin America, as well as several of our existing investors including Goldman Sachs Capital Partners, Booth American, Columbia Management, Meritage Private Equity Fund, Norwest Equity Capital and Rothschild. The completion of this financing brought our total funded equity capital raised since inception to over $273 million. On February 25, 2000, we entered into an agreement to acquire INEA Internet, S.A., a company that offers Internet access and related services to businesses in Buenos Aires. The total purchase price is approximately $8 million, consisting of cash, notes and stock. INEA had revenues of $2.2 million for the year ended December 31, 1999. We expect that this transaction will close in April 2000. On March 31, 2000, we entered into an agreement to acquire two companies that hold certain spectrum and operating rights in Colombia and Peru from VeloCom, Inc. for $8.25 million in cash. We expect that this transaction will close in April 2000. On March 23, 2000, we entered into an agreement with Thomson-CSF Systems Argentina S.A. to acquire certain assets consisting of ongoing contracts to provide primarily broadband access services in Buenos Aires to large and medium-sized businesses for a purchase price of up to approximately $3 million in cash. We expect that this transaction will close in May 2000. --------------- We were incorporated as a Delaware corporation in October 1996 under the name Diginet Americas, Inc, and in March 2000, we changed our name to Diveo Broadband Networks, Inc. Our principal executive offices are located at 3201 New Mexico Avenue, N.W., Suite 320, Washington, D.C. 20016 and our telephone number is (202) 274-0040. The Offering <TABLE> <C> <S> Common stock offered................................ shares Common stock to be outstanding after this offering.. shares (assuming no exercise of over- allotment option granted to the underwriters) Proposed Nasdaq National Market symbol.............. Over-allotment option............................... shares Voting rights....................................... One vote per share We intend to use the net Use of proceeds..................................... proceeds: . to make capital expenditures relating to the build out of our local fixed wireless broadband access networks and our investment in Internet infrastructure; . for potential acquisitions; and . for working capital and general corporate purposes, including to fund losses. Dividend policy..................................... We do not intend to pay dividends on our common stock. We plan to retain earnings, if any, for use in the operation of our business and to fund future growth. In addition, our vendor financing agreements severely restrict our ability to pay dividends. See "Description of Our Financing Arrangements." </TABLE> Common stock to be outstanding after this offering is based on shares outstanding as of March 31, 2000, as adjusted to give effect to: <TABLE> <S> <C> . the conversion of all shares of preferred stock outstanding immediately prior to the offering into 47,953,475 shares of common stock upon the closing of this offering; and . the issuance of shares of common stock in this offering. </TABLE> The number of shares of common stock to be outstanding after this offering does not include (1) 4,042,449 shares of common stock that may be issued upon the exercise of outstanding options, (2) 576,355 shares of common stock that may be issued upon the exercise of certain warrants outstanding after consummation of this offering, or (3) 368,723 shares of common stock that may be issued should holders of certain preferred stock warrants elect to exercise their warrants prior to the consummation of this offering. Summary Consolidated Financial and Operating Data You should read the following summary consolidated financial and operating data together with "Selected Consolidated Financial and Operating Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited consolidated financial statements and related footnotes included elsewhere in this prospectus. Our pro forma net loss per share gives effect to the conversion of the shares of preferred stock outstanding immediately prior to this offering into shares of common stock as if the conversion had occurred at the beginning of the periods presented. <TABLE> <CAPTION> Period from October 1, 1996 (inception) through Year Ended December 31, December 31, --------------------------------- 1996 1997 1998 1999 --------------- --------- --------- ----------- (in thousands, except share and per share data) <S> <C> <C> <C> <C> Statement Of Operations Data: Revenues Digital Dedicated Access services................ $ -- $ -- $ 24 $ 927 Dedicated Internet services ............... -- -- -- 216 --------- --------- --------- ----------- Total revenues........... -- -- 24 1,143 Costs and expenses Technical and operating.. -- -- 692 3,276 Sales and marketing...... -- -- 260 2,403 General and administrative.......... 90 922 3,134 6,535 Salaries and benefits.... -- 415 4,503 13,032 Depreciation and amortization............ -- 3 376 2,511 --------- --------- --------- ----------- Total costs and expenses... 90 1,340 8,965 27,757 --------- --------- --------- ----------- Loss from operations....... (90) (1,340) (8,941) (26,614) Other income (expense), net....................... (1) (240) 110 1,781 Provision for income taxes..................... -- -- -- (105) --------- --------- --------- ----------- Net loss................... $ (91) $ (1,580) $ (8,831) $ (24,938) ========= ========= ========= =========== Net loss per share, basic and diluted(1)............ $ (0.05) $ (0.85) $ (4.66) $ (12.23) ========= ========= ========= =========== Pro forma net loss per share, basic and diluted(1)................ $ (0.94) =========== Shares used in calculation of net loss per share: Basic and diluted(1)..... 1,857,142 1,867,296 1,894,598 2,039,097 ========= ========= ========= =========== Pro forma basic and diluted(1).............. 26,451,334 =========== Other Financial Data: EBITDA(2).................. $ (90) $ (1,337) $ (8,595) $ (24,350) Cash flow provided by (used in): Operating activities...... (121) (572) (8,549) (18,628) Investing activities...... (78) (3,833) (4,429) (100,734) Financing activities...... 201 4,659 25,676 123,945 Capital expenditures...... -- (114) (2,807) (28,682) </TABLE> <TABLE> <CAPTION> As of December 31, 1999 ---------------------------- Pro Forma Pro As Actual Forma(3) Adjusted(4) ------- -------- ----------- <S> <C> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents and short-term investments............................... $82,288 $207,988 Total current assets....................... 88,298 213,998 Property and equipment, net................ 34,339 34,339 Total assets............................... 137,733 263,433 Total current liabilities.................. 14,819 14,819 Total long-term debt....................... 14,806 14,806 Total stockholders' equity................. 108,108 233,808 <CAPTION> As of December 31, ---------------------------------- 1996 1997 1998 1999 ------- -------- ----------- ----- <S> <C> <C> <C> <C> Operating Data: Digital Dedicated Access customers......... -- -- 7 52 Dedicated Internet service customers....... -- -- -- 50 Digital Dedicated Access circuits.......... -- -- 13 186 Dedicated Internet circuits................ -- -- -- 50 64 kilobit circuit equivalents............. -- -- 50 1,516 Customer buildings......................... -- -- 12 173 Hub sites.................................. -- -- 4 24 Gateway sites.............................. -- -- 9 22 ------- -------- --- ----- Total on-net buildings................... -- -- 25 219 ======= ======== === ===== </TABLE> - ------- (1) Net loss per share and pro forma net loss per share are calculated on the basis described in note 2 to our audited consolidated financial statements included elsewhere in this prospectus. (2) EBITDA consists of net loss before depreciation and amortization, net interest income or expense and income taxes. EBITDA is a measure commonly used in the telecommunications industry. It is presented to enhance an understanding of our operating results and is not intended to represent cash flow or results of operations for the periods presented. EBITDA is not a measurement under U.S. GAAP or financial performance and may not be similar to EBITDA measures of other companies. (3) Pro forma balance sheet data gives effect to the issuance of $127 million in private equity capital in March 2000 net of equity issuance costs of $1.3 million and the automatic conversion of all shares of preferred stock outstanding immediately prior to this offering. (4) Pro forma as adjusted balance sheet data gives effect to the sale of shares of common stock in this offering at an assumed offering price of $ per share after deducting underwriting discounts and estimated offering expenses.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001110669_oculex_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001110669_oculex_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, especially the risks of investing in our common stock that we discuss under "Risk factors." Our principal executive offices are located at 639 N. Pastoria Avenue, Sunnyvale, California, 94086. Our telephone number is (408) 481-0424. Our web site is http://www.oculex.com. We do not intend the information found on our web site to be a part of this prospectus. OUR BUSINESS We are a leading ophthalmic drug delivery company that has created a novel technology platform to enable the treatment of major diseases and conditions that occur inside the eye. Our proprietary drug delivery system, DDS, is the first biodegradable, sustained release system designed to deliver drugs directly into the interior of the eye. We are applying our DDS technology to develop our own proprietary brand name products, using existing generic and third-party compounds. We are focused on developing products for the treatment of major sight-threatening eye diseases and conditions where effective treatment is currently unavailable. In addition, we target eye conditions where we believe our DDS technology offers superior treatment to existing drug delivery methods such as eye drops or injections, which are inefficient and cumbersome. Our two lead products, Surodex and Posurdex, target the treatment of post-surgical inflammatory conditions within the eye. These products contain the very potent generic steroid, dexamethasone. - - Surodex is indicated for the treatment of inflammation following cataract surgery, the most frequently performed surgery in the United States. Inflammation in the front of the eye occurs after every cataract surgery. Standard therapy currently consists of eye drops that need to be taken four to six times per day for approximately one month. We have demonstrated that a single dose of Surodex can reduce inflammation over a period of seven days. We have completed Phase III trials in the United States and are currently preparing a new drug application, or NDA, filing. We have entered into a marketing alliance with Bausch & Lomb for the commercialization of Surodex in the United States and Europe following regulatory approvals. - - Posurdex, our lead back of the eye product, is designed to treat inflammation that typically occurs after vitreal and retinal surgeries. It is estimated that there are over 500,000 such surgical procedures in the United States each year. Currently, there is no effective treatment for this condition. Our early stage clinical trials have demonstrated that Posurdex is effective at treating inflammation in the back of the eye. In addition, we believe that Posurdex may provide therapeutic value in treating certain major back of the eye diseases and conditions that may be induced or exacerbated by the presence of inflammation. These diseases and conditions, namely uveitis, age-related macular degeneration, or AMD, and macular edema are chronic and degenerative eye conditions that, in the aggregate, afflict over 4 million people in the United States alone. We have obtained Phase I safety data through compassionate use applications and are currently designing our Phase II clinical trials in the United States. We intend to market Posurdex directly to a specialized group of approximately 2,000 ophthalmologists in the United States. We have four additional product candidates in early-stage clinical development that provide treatments for: glaucoma surgery, corneal transplant rejection, cataract and glaucoma post-surgical infections and back of the eye infections. In addition to the development of our own products, we are pursuing research collaborations with several of the world's leading ophthalmic companies. Recently, we entered into a strategic research alliance with Allergan Sales, Inc. to formulate up to five of Allergan's proprietary compounds with our DDS technology. THE NEED FOR EFFECTIVE INTRAOCULAR DRUG DELIVERY Today, drug delivery to the inside of the eye is problematic and continues to be one of the greatest challenges for ophthalmic drug manufacturers. The standard therapy for treating virtually all eye diseases and conditions is to deliver drugs through eye drops. Eye drops currently account for approximately 95% of the worldwide sales of ophthalmic pharmaceuticals. Eye drop therapy is generally characterized by inefficient penetration into the front of the eye and virtually no penetration into the back of the eye. Other existing drug delivery systems such as systemic therapy and injections provide limited value due to inefficiency and potential toxicity, leaving many serious back of the eye diseases and conditions ineffectively treated. We believe this unmet medical need can be illustrated by the fact that, while 40% of all eye diseases and conditions occur in back of the eye, only 5% of ophthalmic pharmaceutical sales come from drugs designed to treat such diseases and conditions. OUR DDS TECHNOLOGY Our DDS technology is a micro-size polymer system that enables the encapsulation of a drug to be implanted within the eye. This allows our DDS products to discharge the therapeutic agents directly to the area needing medication over a predetermined period of time. Unlike any other ocular implant system that has been developed, this technology has the unique characteristic of being completely biodegradable. We believe that our DDS technology will provide the basis for the next generation of treatment of diseases and conditions affecting the inside of the eye. The DDS platform is versatile and can be applied to a broad universe of compounds. Products developed with our DDS technology offer the following unique features: - - programmable drug delivery that provides a release of the appropriate dose of a drug to the affected area over a predetermined period of time; - - complete biodegradability, eliminating the need for surgical removal; - - ease of insertion, either at the time of surgery or through a minimally invasive surgical opening; - - ensured patient compliance, a problem inherent with eye drops; and - - a low cost manufacturing process utilizing readily available ingredients. OUR GROWTH STRATEGY Our goal is to utilize our DDS technology to become the leader in developing and commercializing a portfolio of products to treat the broad spectrum of diseases and conditions affecting the interior of the eye. To this end, we intend to: - - focus our initial product development on DDS formulations of existing generic compounds; - - aggressively pursue the clinical development of our lead back of the eye product, Posurdex; - - retain marketing and distribution rights for our back of the eye products; - - expand existing and develop new collaborative relationships; and - - identify and in-license compounds with unique properties for treating back of the eye diseases.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001110691_intira_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001110691_intira_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding Intira appearing elsewhere in this prospectus. You should carefully consider, among other things, the matters set forth in "Risk Factors" beginning on page 5 of this prospectus. Intira Corporation We provide netsourcing solutions for mission-critical network-based applications, also referred to as e-business applications. Netsourcing is the outsourcing of the information technology, or IT, and network infrastructure necessary to support these applications. We engineer, deploy and manage comprehensive solutions through our technologically advanced netsourcing platform, which consists of our data centers, our nationwide broadband network and our service management centers. We have designed our netsourcing platform for the sole purpose of meeting our customers' high performance and availability requirements for their e-business applications. We believe that our netsourcing solutions provide the following benefits to our customers: OneSource--OneCall. We provide our customers with a single point of contact and accountability for all of the IT and network infrastructure required to support their mission-critical e-business applications. Guaranteed Availability. Because we are responsible for and control all of the IT and network infrastructure of our netsourcing solutions, we are able to offer each customer a comprehensive service level agreement covering the entire netsourcing platform that guarantees up to 99.95% application availability. We believe this is among the highest guarantees in the industry. Tailored Solutions. We build tailored solutions that meet our customers' specific application requirements from our standard set of netsourcing services. This enables us to efficiently implement a customer's netsourcing solution without the delays or costs associated with designing new services for each customer. Time-to-Market Advantage. Our netsourcing solutions enable our customers to reduce their time to market and compete effectively by allowing them to rapidly deploy their e-business applications and to focus on their core businesses. Scalability. Both the netsourcing solutions we build for our customers and our netsourcing platform are designed to scale quickly as the requirements of our customers' mission-critical e-business applications evolve. Cost-Efficient Solution. Our netsourcing solutions enable our customers to leverage our leading netsourcing technologies as well as benefit from our wide range of technical expertise. Our data centers, located in Pleasanton, California, St. Louis, Missouri and New York City, are "lights-out" facilities which means that they are highly automated, requiring minimal human intervention. Our data centers are connected by our nationwide broadband network that extends to 35 major cities throughout the United States and Canada. Our service management centers integrate all components of our netsourcing platform and proactively manage, monitor and troubleshoot each customers' netsourcing solutions 24-hours-a-day, seven-days- a-week. We target Fortune 1000 companies and Internet-based businesses that depend on the performance and availability of their mission-critical e-business applications. Our customers use our netsourcing solutions to facilitate the operation and management of a wide variety of e-business applications, including online marketing and sales, customer service, fulfillment, software, document and multimedia distribution and online training. As of March 28, 2000, we had 20 netsourcing customers who have contracted with us for an average of $650,000 in annual netsourcing services over an average contract length of 32 months. Our netsourcing customers include Emerson Electric, FTD.com, Hewlett- Packard, Intelisys, New Balance Athletic Shoe and Telstra. We were incorporated in Missouri in January 1998 and reincorporated in Delaware in January 2000. Our principal executive offices are located at 5667 Gibraltar Drive, Pleasanton, California 94588, and our telephone number is (925) 924-8000. ---------------- We have filed a trademark application for the mark "Intira." The mark "OneSource--OneCall" and our logo are unregistered trademarks. Each trademark, trade name or service mark of any other company appearing in this prospectus belongs to its holder. The Offering <TABLE> <S> <C> Shares offered.................. shares Shares to be outstanding after this offering.................. shares Proposed Nasdaq National Market symbol......................... "NTRA" Use of proceeds................. For general corporate purposes, including working capital, capital expenditures, funding our losses and potential acquisitions of, or investments in, complementary businesses, technologies and products. </TABLE> The shares of common stock to be outstanding after this offering is based on 39,842,179 shares outstanding as of December 31, 1999 after giving effect to the automatic conversion of all of our preferred stock into 16,033,886 shares of common stock upon the completion of this offering and the issuance of 1,897,346 shares of common stock to Viatel Corporation after December 31, 1999 in connection with a commercial relationship we have established with Viatel. The number of shares to be outstanding after this offering excludes: . 13,600,527 shares of common stock available for future issuance under our currently effective equity incentive plans of which options to purchase 7,624,902 shares were outstanding at December 31, 1999, with exercise prices ranging from $0.27 to $3.20 per share, and options to purchase 4,565,816 shares granted since December 31, 1999, with exercise prices ranging from $5.87 to $6.67 per share; . 5,238,912 shares of common stock issuable upon exercise of outstanding warrants, 567,672 of which have an exercise price of $0.001 per share and the remainder of which have an exercise price of $0.007 per share; . 78,128 shares of common stock issued after December 31, 1999, other than in connection with exercises under outstanding options; and . 4,875,000 shares available for future issuance under equity incentive plans that will be effective upon the completion of this offering. All of the information in this prospectus reflects a 5-for-2 stock split effected in January 2000 in connection with our reincorporation into Delaware and a 3-for-2 stock split to be effected prior to the completion of this offering. In addition, all of the information in this prospectus assumes that the underwriters will not exercise their option to purchase additional shares. Summary Financial Information (in thousands, except for per share information) <TABLE> <CAPTION> Period from Inception (January 20, 1998) Year Ended to December 31, 1998 December 31, 1999 -------------------- ----------------- <S> <C> <C> Statement of Operations Data: Revenue................................. $ 62 $ 4,048 Operating expenses...................... 7,159 63,091 Operating loss.......................... (7,097) (59,043) Net loss................................ (7,574) (62,533) Basic and diluted net loss per share.... $ (0.47) $ (3.13) Shares used in computing basic and diluted net loss per share............. 16,280 20,008 </TABLE> <TABLE> <CAPTION> December 31, 1999 ------------------------------- Pro Pro Forma Actual Forma As Adjusted -------- -------- ----------- <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents...................... $ 11,195 $107,395 $ Total assets................................... 83,690 204,961 Revolving credit facility...................... 19,324 19,324 Current portion of capital lease obligations... 17,736 17,736 Long-term debt, less current portion........... 2,122 46,485 Capital lease obligations, less current portion....................................... 23,887 23,887 Accumulated deficit............................ (70,107) (70,107) Total stockholders' equity..................... 1,414 78,322 </TABLE> The balance sheet data displayed in the "Pro Forma" column above reflects: . the February 2000 sale of 13% senior discount notes with $188.5 million aggregate principal amount at maturity due in February 2010 and warrants to purchase 4,671,240 shares of common stock, from which we received net proceeds of $96.2 million; and . the issuance of 1,897,346 shares of common stock to Viatel after December 31, 1999. The balance sheet data displayed in the "Pro Forma As Adjusted" column above also reflects: . the automatic conversion of our outstanding preferred stock into 16,033,886 shares of common stock upon the completion of this offering; and . the sale of shares of common stock offered by this prospectus at an assumed initial public offering price of $ per share, after deducting the underwriting discounts and estimated offering expenses payable by us, as described in "Use of Proceeds" on page 20 of this prospectus.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001110807_kinzan-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001110807_kinzan-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS, BEFORE MAKING AN INVESTMENT DECISION. KINZAN We provide a technology platform that serves as the foundation for developing and deploying distributed web services that enable organizations to extend their network of relationships online. A business relationship network consists of a central organization and its many affiliated vendors, partners, members, representatives and other entities. By utilizing our hosted platform for developing and deploying distributed web services, with its content management and electronic commerce applications, a central organization is able to maintain its brand integrity, efficiently distribute time-sensitive product and service information to affiliates, control company-specific guidelines and streamline administrative functions. Our platform also enables affiliates within the network to leverage their relationships with the central organization and easily and cost-effectively transition their businesses onto the internet. By bringing their relationship network online through our distributed web services platform, both the central organization and its affiliates can enhance their business relationships, reduce costs and create incremental revenue. The rapid expansion in the number of internet users combined with the efficiencies gained by conducting business online will continue to facilitate substantial growth in electronic commerce. International Data Corporation, in a report dated May 2000, estimated that there were 1.7 billion addresses on the World Wide Web, referred to as Universal Resource Locators or URLs, as of December 1999 and that this number will grow to 13 billion by 2003. Large, traditional organizations have recognized the importance of establishing an online presence. Initially, central organizations focused their efforts on creating a website to be used as a simple marketing vehicle, or online brochure, that communicated basic information about the organization and its products or services. Websites have quickly evolved to include the ability to sell, take immediate payment, arrange for delivery of goods and services online and personalize the user experience. To effectively use the power of the internet, many central organizations now realize that they must go beyond simply expanding the capabilities of their central websites. They must integrate their affiliates into their overall internet strategy. Our distributed web services platform is designed to integrate central organizations and their affiliates online. It includes our brandable suite of applications for content management, commerce and communications, configurable hardware, scalable hosting services, development and deployment capabilities and customer care programs. We maintain an open-standards platform that allows third-party service providers to utilize our platform and rapidly deploy our solution. In addition, our flexible platform allows the central organization to easily integrate value-added applications and services. We target large, traditional offline customers including manufacturers of retail products, major franchisors, automobile manufacturers, media companies, professional associations and other central organizations that depend on a network of affiliates to conduct business. We also provide products and services to newly formed online companies that are aggregating affiliates to consolidate content and conduct business over the internet. Because we market our distributed web services platform to large, central organizations that manage business relationship networks with many affiliates, we believe we can capitalize on the marketing efforts of our customers to accelerate deployment of our applications with their affiliates. In addition, we intend to expand our relationships with systems integrators and internet consultants to increase adoption of our platform. We generate substantially all of our revenues from two sources: (1) hosting fees charged to customers who use our web applications to deploy websites and conduct electronic commerce and (2) service fees for the implementation of our customers' branded versions of our hosted applications. Our customers include AutoTrader.com, Avon, BioLab, Inc., Carlson Wagonlit Travel, Chase Merchant Services, KnightRidder.com, LoanCity.com, Maytag, USA Gymnastics, Vital Processing and the YMCA. We were formed in November 1998 to acquire a business unit of iXL Enterprises, Inc. and commenced operations in January 1999. Our operating history and revenues derived from operations are therefore limited. We have incurred net losses since we began operations. THE OFFERING <TABLE> <S> <C> Common stock offered by Kinzan............... 3,300,000 shares Common stock to be outstanding after this 20,989,883 shares offering................................... Use of proceeds.............................. General corporate purposes. Proposed Nasdaq National Market Symbol....... KNZN </TABLE> The number of shares to be outstanding after the offering does not include 4,839,814 shares of our common stock issuable upon exercise of stock options or warrants or reserved for future grant under our stock option and stock purchase plans. Unless otherwise noted, all information in this prospectus: - is based on our shares outstanding as of September 15, 2000; - assumes the conversion of all our outstanding redeemable convertible preferred stock into common stock on a one-for-one basis upon completion of this offering; - assumes the exercise of warrants to purchase 8,250 shares of our common stock upon completion of this offering; and - assumes no exercise by the underwriters of their option to purchase additional shares of our common stock to cover over-allotments, if any. SUMMARY FINANCIAL DATA THE FOLLOWING TABLES SET FORTH SUMMARY FINANCIAL DATA FOR THE PERIODS INDICATED. YOU SHOULD READ THIS INFORMATION TOGETHER WITH THE FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS AND THE INFORMATION UNDER "SELECTED FINANCIAL DATA" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OPERATING RESULTS." <TABLE> <CAPTION> PREDECESSOR COMPANY --------------------------- --------------------------------- SIX MONTHS YEAR ENDED JANUARY 1 TO JANUARY 29 ENDED DECEMBER 31, JANUARY 28, (INCEPTION) TO JUNE 30, 2000 1998 1999 DECEMBER 31, 1999 (UNAUDITED) ------------ ------------ ----------------- ------------- <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues............................. $ 1,566,149 $ 123,207 $ 1,222,564 $ 1,331,639 Revenue from related party........... -- -- 750,000 600,000 ----------- --------- ----------- ----------- Total revenues....................... 1,566,149 123,207 1,972,564 1,931,639 Cost of revenues..................... 1,122,035 155,838 2,183,636 2,099,252 ----------- --------- ----------- ----------- Gross profit......................... 444,114 (32,631) (211,072) (167,613) Total operating expenses............. 1,900,802 101,886 4,103,876 6,279,213 ----------- --------- ----------- ----------- Operating loss....................... (1,456,688) (134,517) (4,314,948) (6,446,826) Net loss............................. $(1,459,934) $(135,058) $(4,331,898) $(5,900,765) =========== ========= =========== =========== </TABLE> <TABLE> <CAPTION> COMPANY --------------------------------------- AS OF JUNE 30, 2000 --------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short-term investments...... $27,524,649 $27,557,649 $72,742,649 Working capital........................................ 25,649,501 25,682,501 70,867,501 Total assets........................................... 33,264,819 33,297,819 78,482,819 Total redeemable convertible preferred stock........... 38,078,270 -- -- Total stockholders' equity (deficit)................... (9,307,463) 28,803,807 73,988,807 </TABLE> Included in predecessor revenues were $354,000 for 1998 and $42,000 for the period from January 1 to January 28, 1999 derived from a two-year hosting agreement with WebMD not assumed by us as part of our asset purchase agreement with iXL Enterprises, Inc. The pro forma data assumes the conversion of all of the shares of our outstanding redeemable convertible preferred stock and the issuance of 8,250 shares of our common stock upon exercise of warrants upon completion of this offering. The pro forma as adjusted data gives effect to the foregoing and to the sale of 3,300,000 shares of our common stock that we are offering under this prospectus at an assumed initial offering price of $15.00 per share and after deducting the underwriting discount and estimated offering expenses payable by us.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001111001_corio-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001111001_corio-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information appearing elsewhere in this prospectus, especially "Risk Factors" and the financial statements and notes thereto. CORIO, INC. We are a leading enterprise application service provider, or ASP, based on our number of customers and customer contracts. We provide to our customers application implementation, integration, management and various upgrade services and related hardware and network infrastructure. We implement, integrate and manage the Corio Intelligent Enterprise, a suite of enterprise software applications from leading vendors. Following the rapid implementation of software applications, usually performed for a fixed fee, our customers pay a predictable monthly service fee based largely on the number of applications used and total users. This approach enables our customers to: - gain access to integrated applications that automate their internal processes and their exchanges with suppliers, partners and customers; - minimize the considerable up-front costs of licensing enterprise software applications, of implementing them on their existing systems and of integrating them with other applications, as well as the unpredictable follow-on costs typically associated with managing customized, integrated application suites; - reduce the time it takes to implement software applications; and - outsource their IT needs, receive customer support and maintain focus on their core business competencies. We offer software applications from PeopleSoft and SAP for enterprise resource planning -- the management of various functions within a company, including human resources, finance, manufacturing and sales; Siebel Systems for customer relationship management -- the management of a company's relationship with its customers; BroadVision, Commerce One, Moai and Requisite for e-commerce; and Changepoint, Cognos, E.piphany and Portal Software for decision support and other business intelligence capabilities as well as industry-specific solutions. We leverage the capabilities of companies such as Concentric Network to provide our customers leading data center and network infrastructure technologies. Our objective is to be the leading enterprise ASP worldwide. Key elements of our strategy to achieve this objective include: - offering a compelling value proposition to our customers by providing them with reduced and more predictable IT costs and by reducing the time it takes for our customers to benefit from software applications; - leveraging our business model by providing standardized services to numerous customers; - maintaining our technology leadership position by continuing to invest in research and development; - working with leading network and data center providers to provide our customers with state-of-the-art and secure network infrastructure; - leveraging our strategic relationships to help build our customer base and scale our services; - broadening our service offerings; and - continuing our commitment to customer satisfaction. We were incorporated in Delaware in September 1998. Our principal executive offices are located at 959 Skyway Road, Suite 100, San Carlos, California 94070, and our telephone number at that location is (650) 232-3000. Our website is located at www.corio.com. The information contained on our website does not constitute part of this prospectus. The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. Subject to Completion. Dated June 30, 2000. 10,000,000 Shares [CORIO LOGO] CORIO, INC. Common Stock ---------------------- This is an initial public offering of shares of common stock of Corio, Inc. All of the shares of common stock are being sold by Corio. Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $11.00 and $13.00. Corio has applied for quotation of its common stock on the Nasdaq National Market under the symbol "CRIO." See "Risk Factors" beginning on page 4 to read about factors you should consider before buying shares of the common stock. ---------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------------- <TABLE> <CAPTION> Per Share Total --------- ----- <S> <C> <C> Initial public offering price............................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to Corio......................... $ $ </TABLE> To the extent that the underwriters sell more than 10,000,000 shares of common stock, the underwriters have the option to purchase up to an additional 1,500,000 shares from Corio at the initial public offering price less the underwriting discount. ---------------------- The underwriters expect to deliver the shares against payment on , 2000. GOLDMAN, SACHS & CO. MERRILL LYNCH & CO. ROBERTSON STEPHENS EPOCH PARTNERS ---------------------- Prospectus dated , 2000. THE OFFERING Common stock offered by Corio.... 10,000,000 shares Common stock to be outstanding after this offering.............. 49,030,587 shares Use of proceeds.................. For repayment of indebtedness, working capital and general corporate purposes and, potentially, for acquisition opportunities that may arise. Proposed Nasdaq National Market symbol........................... CRIO The number of shares to be outstanding upon completion of this offering is based on 39,030,587 shares outstanding as of May 31, 2000. This number assumes the conversion into common stock of all of our preferred stock including our senior series E mandatorily redeemable preferred stock into common stock upon completion of this offering at a price of $8.76 per share, representing a 27% discount to an assumed per share public offering price of $12.00. The senior series E preferred stock is convertible at a fixed 27% discount to the public offering price. As a result, the number of common shares outstanding will be more or less than 49,030,587, to the extent the per share offering price is more or less than $12.00 per share. The number of shares to be outstanding after this offering excludes: - 9,279,937 shares of common stock subject to outstanding options as of May 31, 2000; - 7,433,450 additional shares of common stock available for grant under our 1998 Stock Plan as of May 31, 2000; - 1,000,000 shares of common stock reserved for issuance under our Employee Stock Purchase Plan 2000; and - up to 5,779,445 shares of common stock subject to outstanding warrants at a weighted average exercise price of $5.89 per share. DESCRIPTION OF GRAPHICS FOR FRONT INSIDE COVER At the top right-hand margin of the page appears the Corio logo and, to the right of the logo, the name "Corio." Below the Corio logo and name appears the phrase, "The Next Generation ASP." Below this phrase is a graphic of a globe transposed on a series of concentric circles traversed by spokes radiating from the center of the inner circle. Extending from the bottom left-hand corner of the page and extending halfway up and across the page is a rectangular graphic depicting the first five characters of an URL address. Along the right side of this rectangular graphic are ten rows of faint images of the Corio logo and name. DESCRIPTION OF GRAPHICS FOR FRONT GATEFOLD Below the top of the front gatefold, beginning near the left margin of the front gatefold and extending across to the right margin, is a thin black line. Above this line and at the left margin of the front gatefold is the phrase, "Corio is . . .". Below the thin black line and under the phrase "Corio is . . . " is the following text: "A leading Application Service Provider (ASP) providing hosted enterprise and e-business solutions." Below this phrase is box entitled Corio Intelligent Enterprise, and contains the sentence "The Corio Intelligent Enterprise is a suite of integrated software applications for enterprise resource planning, customer relationship management and e-commerce." To the right of the box is a graphic, entitled the "Corio Intelligent Enterprise", of a man sitting at a desk before a large computer console on which appears an enlarged graphical representation of the Corio Intelligent Enterprise. A cable extends from the right side of the computer console and up the center of the front gatefold to connect to the left side of another graphic entitled "Application Management Center." This graphic depicts four people sitting at a desk in front of a large computer console on which appears a globe, a pie chart, a bar chart and indecipherable text. From the right side of this graphic extends a cable that connects to a graphic entitled "Data Centers." Above the cable between Application Management Center and Data Centers is the text "Secure Network." This graphic depicts a man standing in front of four rectangular structures. Below the "Application Management Center" and "Data Centers" graphics is a box entitled "Application Management Center", and contains the following text: Our Application Management Center manages and supports the software applications, security, infrastructure, networks, hardware and data centers 24 hours a day, seven days week." DESCRIPTION OF GRAPHICS FOR BACK INSIDE COVER Centered on the page is the Corio name and logo. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) In the tables below: - the 1998 statement of operations data represents the period from the date of our acquisition of DSCI, or September 4, 1998, to December 31, 1998; - pro forma net loss per share for the three months ended March 31, 2000 is computed using the weighted-average number of shares of common stock outstanding, including the pro forma effect of the automatic conversion of our preferred stock into shares of our common stock. The weighted average number of shares of common stock outstanding is determined as if the preferred stock was converted on January 1, 2000, except for the senior series E mandatorily redeemable preferred stock which was sold on April 20, 2000 and is assumed to convert on March 31, 2000, assuming an initial public offering price of $12.00. Pro forma common equivalents, consisting of incremental common stock issuance upon the exercise of stock options and warrants, as well as shares subject to repurchase agreements, are not included in pro forma diluted net loss per share because they would be antidilutive; - the pro forma balance sheet data gives effect to the gross proceeds from the sale of our senior series E mandatorily redeemable preferred stock in April 2000 on an as if converted basis. Assuming an initial offering price of $12.00, all outstanding shares of our preferred stock will convert into 36,186,256 shares of common stock upon the closing of this offering; and - the pro forma as adjusted balance sheet data gives effect to the sale of 10,000,000 shares of common stock offered by us at an assumed initial public offering price of $12.00 per share and the application of the net proceeds from the offering, after deducting underwriting discounts and commissions and estimated offering expenses. <TABLE> <CAPTION> DECEMBER 31, THREE MONTHS ENDED ------------------- MARCH 31, 1998 1999 2000 ------- -------- ------------------ <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Application management services.................. $ -- $ 746 $ 1,137 Professional services and other.................. 1,292 5,036 4,143 ------- -------- -------- Total revenues................................ 1,292 5,782 5,280 Loss from operations............................... (3,130) (44,522) (28,566) Net loss........................................... $(3,201) $(45,000) $(28,519) ======= ======== ======== Basic and diluted net loss per share............... $ (3.89) $ (38.96) $ (16.75) ======= ======== ======== Weighted-average shares............................ 823 1,155 1,703 ======= ======== ======== Pro forma net loss and net loss per share (unaudited): Net loss as reported............................... $(28,519) Series E beneficial conversion charge.............. (20,158) -------- Pro forma net loss attributable to common stockholders..................................... $(48,677) ======== Basic and diluted net loss per share............... $ (1.54) ======== Weighted-average shares............................ 31,668 ======== </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, 2000 ------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................... $ 16,234 $ 70,734 $180,634 Working capital......................................... (3,680) 50,820 160,720 Total assets............................................ 50,038 104,538 214,438 Notes payable and capital lease obligations, less current portion....................................... 7,471 7,471 7,471 Accumulated deficit..................................... (76,720) (76,720) (76,720) Total stockholders' equity.............................. 15,192 69,692 179,592 </TABLE>
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. THRUPOINT, INC. We are a leading technology consulting firm that provides advanced internetworking solutions and services to help our clients design, deploy and manage their computer networks. Our clients are primarily large, global companies that are sophisticated, early adopters of new technology and that view their networks as a critical part of their overall business strategy. We currently offer our clients comprehensive network technology consulting expertise and services that address all aspects of business communications. In addition, we have used our accumulated experience and industry-specific knowledge to develop packaged internetworking solutions that address common network problems facing many of our clients. We have formed two important strategic relationships with Cisco Systems, Inc. and KPMG Consulting, LLC, which we believe will provide us with a significant competitive advantage and allow us to expand our business and increase our revenue growth. - CISCO SYSTEMS. Our strategic relationship with Cisco Systems involves our participation as one of three network consultants in its inner circle. As part of the inner circle, we have early access to Cisco Systems' newest products and advanced technologies, affording us the opportunity to develop and market solutions based on these products and technologies prior to their general availability in the market. In addition, we have a preferred status in Cisco Systems' services referral network. - KPMG CONSULTING. Through our recently formed alliance with KPMG Consulting, we intend to work with KPMG Consulting to design and deploy the networks which will support the revenue generating e-commerce applications provided by KPMG Consulting to its clients. We also believe that this relationship will provide us with opportunities for new client referrals. KPMG Consulting also has a strategic relationship with Cisco Systems and we believe that our unique relationship with both Cisco Systems and KPMG Consulting will allow our three organizations to work effectively together to provide comprehensive e-commerce solutions to a broad customer base. Cisco Systems and KPMG Consulting are significant investors in ThruPoint. During 1999, we provided consulting services to over 50 clients across several industries. Our clients include Morgan Stanley Dean Witter and Deutsche Bank in financial services, Enron Broadband Services in communication services and Celera Genomics in pharmaceuticals/biotechnology. As of March 31, 2000, we employed 246 engineers. Our corporate headquarters are in New York City and we have 14 additional U.S. offices and an office in London. OUR MARKET OPPORTUNITY Networks today represent a competitive necessity as companies increasingly transact business, communicate and operate electronically. To remain competitive, companies need to make their networks available to their customers, suppliers and employees virtually anytime and anywhere. We believe that the importance of network infrastructure and the demand for network availability will continue to increase, primarily as the result of the growth in both business-to-business and business-to-consumer e-commerce as well as increased worker mobility. As the importance of networks and the demands placed on them have increased, network infrastructures have also become increasingly complex. This complexity has resulted from the use of a wide variety of platforms, devices and protocols, the demand for new technologies and the need to integrate these new technologies with existing legacy networks. Companies have typically relied on internal technology teams to address their network infrastructure needs. However, as both the technical complexity and the number of alternative technology solutions increase, companies are finding that it is more cost-effective to utilize outside network consultants to assess, design, implement and manage their networks. We believe there is a significant market opportunity for network consulting providers that combine a thorough understanding of network technology with industry-specific expertise to design and manage the deployment of high-quality internetworking solutions for businesses whose networks serve as key components of their business and operational strategies. OUR SOLUTION We provide our clients with network technology consulting services to help design, build and operate their increasingly complex networks. The following are the key elements of the ThruPoint solution: NETWORK TECHNOLOGY LEADERSHIP. We offer our clients the best and most advanced technology available, and deliver services and proven and reliable solutions to address complex internetworking problems. We believe that we maintain our technological expertise primarily by successfully servicing technologically sophisticated customers and by using our inner circle alliance with Cisco Systems to gain early access to new products and technologies. INDUSTRY EXPERTISE. We believe that our industry expertise is critical to our ability to help our clients reach their overall business objectives. We provide services to clients in several industries that have been early adopters and sophisticated users of network technology, including the financial services, communication services and pharmaceuticals industries. DISCIPLINED DELIVERY METHODOLOGY. We apply a highly disciplined, repeatable methodology to all of our client engagements. Through our proprietary OptiPoint methodology, we consistently deliver high-quality, reliable solutions on a cost-effective basis across all our engagements. COMPREHENSIVE PACKAGED SOLUTIONS. We develop and offer packaged solutions that address specific internetworking problems commonly found among our clients in particular industries or that involve particular technologies. We believe our packaged solutions provide our clients with a proven answer to a specific problem at a predictable cost while allowing us to provide a consistently high quality of service efficiently and effectively. END-TO-END ENGAGEMENTS. We are able to provide our clients with end-to-end network consulting services, from the initiation of a project to the on-going management of the network, and any intermediate services our clients require. In addition, during our engagements we often identify opportunities to provide services beyond those for which we were initially engaged. OUR STRATEGY Our objective is to be the leading provider of network technology consulting services to large, global companies that view their network as a key enabler of their business and operational strategies. Our strategy for achieving this objective is as follows: - continuously develop new internetworking solutions; - continue to attract and retain high-caliber employees; - leverage position in Cisco Systems' inner circle and enter into additional strategic relationships; - focus on large global companies and penetrate new industries; and - enter new geographic markets. THE OFFERING <TABLE> <S> <C> Common stock offered in this offering...................... shares Common stock to be outstanding after this offering: Common stock............................................. shares Non-voting common stock.................................. shares Total.................................................. shares Use of proceeds............................................ For general corporate purposes, including working capital and capital expenditures relating to the expansion of our operations. Proposed Nasdaq National Market symbol..................... THRU </TABLE> The number of shares of our common stock outstanding after this offering is based on shares of our common stock outstanding as of , 2000 and gives effect to: - the redemption of all outstanding shares of Series A senior redeemable preferred stock for shares of our non-voting common stock on the closing of this offering, based upon an assumed price per common share of $ , the midpoint of the range set forth on the cover of this prospectus; - the conversion of all outstanding shares of Series C convertible preferred stock into 2,483,442 shares of our non-voting common stock on the closing of this offering; - the conversion of all outstanding shares of Series D convertible preferred stock into 5,106,384 shares of our common stock on the closing of this offering; and - the exchange of shares of common stock owned by investment funds affiliated with Morgan Stanley Dean Witter for the same number of shares of non-voting common stock prior to this offering. This information does not include: - 12,201,282 shares of common stock issuable upon the conversion of convertible notes held by Cisco Systems; - 18,747,598 shares of common stock issuable upon the exercise of stock options outstanding as of March 31, 2000 at a weighted average exercise price of $.89 per share; - 35,482,794 additional shares of common stock reserved for issuance under our stock option plan; and - additional shares of common stock available for issuance under our employee stock purchase plan. ------------------------ We were formed in 1993 and commenced offering network consulting services in 1996. Our principal executive offices are located at 1372 Broadway, New York, New York 10018 and our telephone number is (917) 542-5300. Our World Wide Web address is www.thrupoint.net. The information in the Web site is not incorporated by reference into this prospectus. Unless otherwise indicated, all information contained in this prospectus: - assumes that the underwriters do not exercise their over-allotment option; - assumes the conversion or redemption of the shares of preferred stock described above; - assumes the exchange of the shares of common stock described above into shares of non-voting common stock; and - does not assume the conversion of convertible notes held by Cisco Systems. SUMMARY CONSOLIDATED FINANCIAL DATA The following tables summarize the consolidated financial data for our business and should be read in conjunction with the discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------------- 1997 1998 1999 ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................................................. $4,498 $10,315 $26,716 Cost of revenues......................................... 2,115 6,047 15,778 Gross profit............................................. 2,383 4,268 10,938 Operating income (loss).................................. 556 95 (7,462) Net income (loss)........................................ 238 47 (6,818) Net income (loss) applicable to common stockholders...... 238 (56) (7,684) Net income (loss) per share Basic and diluted...................................... $ 0.00 $ (0.00) $ (0.11) Weighted average common shares outstanding Basic and diluted...................................... 53,998,920 58,521,420 72,511,404 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 -------------------------------- PRO FORMA AS ACTUAL PRO FORMA ADJUSTED -------- --------- --------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $11,056 $26,056 $ Working capital............................................. 14,663 29,663 Total assets................................................ 21,182 36,182 Series A preferred stock.................................... 7,468 7,468 Total stockholders' equity (deficit)........................ (6,219) 16,249 </TABLE> The pro forma column in the balance sheet data gives effect to the following transactions occurring after December 31, 1999 as if they occurred on this date: - the sale of 248,344 shares of our Series C convertible preferred stock in February 2000 for $3.0 million; - the sale of 851,064 shares of our Series D convertible preferred stock in February 2000 for $12.0 million; - the redemption of 99,804 shares of our Series A preferred stock for shares of non-voting common stock on the closing of this offering, based upon an assumed price per common share of $ , the midpoint of the range set forth on the cover of this prospectus; - the conversion of 413,907 shares of our Series C convertible preferred stock into 2,483,442 shares of non-voting common stock on the closing of this offering; - the conversion of 851,064 shares of our Series D convertible preferred stock into 5,106,384 shares of common stock on the closing of this offering; and - the exchange of shares of common stock owned by investment funds affiliated with Morgan Stanley Dean Witter for the same number of shares of non-voting common stock prior to this offering. The pro forma as adjusted column also gives effect to the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001111148_nen-life_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001111148_nen-life_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary highlights information we present more fully elsewhere in this prospectus. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors described under the heading "Risk Factors" and elsewhere in this prospectus. Unless the context requires otherwise, references in this prospectus to NEN Life Sciences, NEN, we, us, our or other similar terms are to NEN Life Sciences, Inc. and its consolidated subsidiaries. NEN LIFE SCIENCES NEN Life Sciences is a leading global provider of value-added research products, proprietary technologies and services for the life science industry. We develop, manufacture and market consumable research products that enable scientists to conduct many of the most fundamental and widely performed experiments in the key areas of functional genomics, high throughput screening and pharmacogenomics, which we collectively call "biomolecular genomics." We believe that our extensive patent portfolio, established manufacturing, sales, marketing and distribution infrastructure, and globally recognized brand uniquely position us to participate in and facilitate the growth of these markets. NEN is one of the most recognized brand names in the life science research markets, representing over 40 years of developing and marketing innovative research products. We sell many of our products as comprehensive reagent systems that consist of the specialized research chemicals, or reagents, necessary for a particular type of experiment, together with pre-tested instructions for their use. Our comprehensive reagent systems and other products enable rapid, reliable, and sensitive experimentation by researchers and provide a technological foundation for the products and services of our strategic partners. We sell over 1,500 products, which are supported by a portfolio of 70 issued U.S. patents, 214 foreign counterparts, 46 patents pending, and over 60 active technology licenses from third parties. In 1999, we generated net sales of $103.9 million and introduced 62 new products to the biomolecular genomics markets. We leverage our established infrastructure, highly experienced sales force and international distribution network to effectively market our new products and increase penetration of our target markets. THE OPPORTUNITY IN BIOMOLECULAR GENOMICS As the sequencing of the human genome nears completion, life science researchers are expected to intensify their search for a better understanding of the molecular basis of disease and begin to develop the diagnostic tools and therapeutics to discover and treat the symptoms and causes of illness. This focus is expected to generate dramatic growth in biomolecular genomics research. To conduct the billions of experiments associated with this growth, researchers will need easy-to-use technologies and comprehensive reagent systems that enable robust, miniaturized and rapid experimentation. We believe that, as a result of this dramatic growth, the market for consumable research products in biomolecular genomics will grow to over $5 billion during the next six years. Because biomolecular genomics research has traditionally used methods that are labor intensive and require multi-step, lengthy procedures, researchers will require novel tools and technologies to enhance the quality and productivity of their research efforts. THE NEN SOLUTION We believe our new generation of easy-to-use technologies and comprehensive reagent systems, which include all of the consumable tools that are needed to conduct key biomolecular genomic experiments, meet the needs of our customers for robust, miniaturized, and rapid experimentation. We offer a complete system approach that allows researchers to carry out experiments without the need, in most cases, to obtain supplemental products or intellectual property rights. We believe that many of our technologies and products represent the next step in the evolution of consumable products aimed at enabling the advances of researchers and participants in biomolecular genomics. TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> PROSPECTUS SUMMARY.................... 3 RISK FACTORS.......................... 7 FORWARD-LOOKING STATEMENTS............ 17 USE OF PROCEEDS....................... 17 DIVIDEND POLICY....................... 17 CAPITALIZATION........................ 18 DILUTION.............................. 19 SELECTED FINANCIAL DATA............... 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 22 BUSINESS.............................. 29 MANAGEMENT............................ 42 TRANSACTIONS WITH OFFICERS, DIRECTORS AND 5% STOCKHOLDERS................. 48 PRINCIPAL STOCKHOLDERS................ 49 DESCRIPTION OF CAPITAL STOCK.......... 51 SHARES ELIGIBLE FOR FUTURE SALE....... 53 UNDERWRITING.......................... 55 NOTICE TO CANADIAN RESIDENTS.......... 57 LEGAL MATTERS......................... 58 EXPERTS............................... 58 ADDITIONAL INFORMATION................ 58 INDEX TO FINANCIAL STATEMENTS......... F-1 </TABLE> ------------------ We own or have rights to trademarks that we use in conjunction with the sale of our products, including FlashPlate, GeneScreen PLUS, NEN, NEN.com, Renaissance, AcycloTerminator, Advanced Bioconcept, Fluo-peptides, [FP](2), MICROMAX, Receptor Biology, TSA and our logo. This prospectus also makes references to trademarks of other companies. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. DEALER PROSPECTUS DELIVERY OBLIGATIONS UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. OUR STRATEGY Our objective is to be the leading provider of comprehensive reagent systems, proprietary reagent-related technology and supporting services to the functional genomics, high throughput screening, and pharmacogenomics markets. In addition, we seek to become a leading provider of critical components to makers of various radiotherapeutic cancer treatments. Our strategy for achieving this objective includes the following elements: Employ "NEN-Enabled" Commercialization Strategy. We plan to expand the number of experiments that are enabled by NEN products and technologies by selling directly to end users and by partnering with other industry leaders. Expand Our Leadership Position in the High Throughput Screening Market. We intend to expand our leadership position in the high throughput screening market by selectively investing in new platforms and by acquiring and partnering with other market participants that have complementary technologies. Introduce New Products through our Existing User Base. We intend to use our existing user base, which we estimate to be over 100,000 researchers, to drive the growth of our next generation of products. Leverage Existing Infrastructure. We intend to continue to leverage our demonstrated capabilities in manufacturing, sales and marketing, and distribution to rapidly and cost-effectively bring new products to market. Capitalize on our Strong Position in the Radiolabeled Chemicals Business. We intend to build on our strong position in the radiolabeled chemicals business to become a leading provider of Yttrium-90 as a critical component to the cancer radiotherapy market. Drive Innovation through Technological Leadership. We plan to continue to drive innovation in our markets by investing aggressively in new technologies and research and development. ------------------------ We were incorporated in Delaware in 1997 as NEN Holding, Inc. and we changed our name to NEN Life Sciences, Inc. in April 2000. The address of our principal executive office is 549 Albany Street, Boston, Massachusetts 02118, and our telephone number is (617) 482-9595. Our Web site can be found at www.nen.com; however, the contents of our Web site are not part of this prospectus. (This page is intentionally left blank.) THE OFFERING Common stock offered by NEN Life Sciences............................ shares Common stock to be outstanding after this offering....................... shares Use of proceeds..................... To repay debt, and for working capital, capital expenditures, including technology licenses and acquisitions, and other general corporate purposes. Proposed Nasdaq National Market symbol.............................. NENL The number of shares of our common stock to be outstanding after this offering is based on 16,066,111 shares of common stock outstanding as of March 31, 2000. It does not include: - 81,183 shares subject to outstanding warrants as of March 31, 2000; - 2,344,947 shares subject to outstanding stock options as of March 31, 2000; and - 355,053 shares available for future grant or issuance under our stock option plans as of March 31, 2000. Unless otherwise indicated, information in this prospectus assumes no exercise of the underwriters' over-allotment option. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> NEN LIFE SCIENCE PRODUCTS BUSINESS OF DUPONT(1) NEN LIFE SCIENCES, INC. --------------------------------------- --------------------------------------- PERIOD PERIOD JANUARY 1, JULY 1, 1997 YEAR ENDED DECEMBER 31, 1997 THROUGH THROUGH YEAR ENDED DECEMBER 31, ----------------------- JUNE 30, DECEMBER 31, ----------------------- 1995 1996 1997 1997 1998 1999 ---------- --------- ------------ ------------ --------- ---------- <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales............... $101,600 $95,100 $46,800 $45,415 $94,784 $103,854 Gross profit............ 59,200 56,800 27,700 23,799 53,636 59,046 Operating profit (loss)................ 15,400 19,700 7,800 (5,560) 6,992 13,148 Net income (loss)....... 4,600 7,800 4,300 (8,669) 898 16,969 Net income (loss) per share: Basic................. -- -- -- $ (0.57) $ 0.06 $ 1.06 Diluted............... -- -- -- $ (0.57) $ 0.06 $ 1.02 Weighted average shares used in per share calculations: Basic................. -- -- -- 15,280 15,979 15,961 Diluted............... -- -- -- 15,280 15,993 16,586 </TABLE> <TABLE> <CAPTION> NEN LIFE SCIENCES, INC. ------------------------- DECEMBER 31, 1999 ------------------------- ACTUAL AS ADJUSTED(2) ------- -------------- <S> <C> <C> BALANCE SHEET DATA: Current assets.............................................. $33,555 $ Total assets................................................ 99,442 Current liabilities......................................... 26,317 Long-term obligations, net of current portion............... 48,007 Total stockholders' equity.................................. 25,118 </TABLE> - --------------- (1) Prior to July 1, 1997, the NEN Life Science Products business was operated as part of the Medical Products Division of E.I. du Pont de Nemours and Company, and not as a stand-alone company. As a result, we do not believe that the results of operations of the NEN business for periods subsequent to July 1, 1997 are comparable to results of operations for periods prior to that time, or that the results of operations for periods prior to July 1, 1997 are indicative of results that may be anticipated in the future. (2) The as adjusted balance sheet data reflects the receipt of the net proceeds from the sale of shares of common stock by NEN Life Sciences in this offering at an assumed initial public offering price of $ per share, after deducting underwriting discounts and commissions and estimated offering expenses.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001111288_cruel_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001111288_cruel_prospectus_summary.txt
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING OUR COMPANY AND THE COMMON STOCK BEING SOLD IN THIS OFFERING AND OUR FINANCIAL STATEMENTS AND ACCOMPANYING NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. IN THIS PROSPECTUS, UNLESS THE CONTEXT INDICATES OTHERWISE, "CRUEL WORLD," "WE," "US" AND "OUR" REFER TO CRUEL WORLD, INC. AND ITS PREDECESSOR CAREER CENTRAL CORPORATION. OUR COMPANY We are a leading Internet-based recruiting service that uses database and email marketing techniques to rapidly and cost-effectively match our clients' career opportunities with qualified and interested candidates from our large membership of professionals. Our proprietary JobCast-Registered Trademark- technology matches candidates with each career opportunity and contacts a targeted group of potentially interested members using permission-based email. Within five business days, we begin delivering to our clients a pre-specified number of candidate resumes, providing a compelling recruiting solution compared to Internet job boards and traditional executive search firms. Our service is free for our members and is also designed to protect the confidentiality of our members and clients. As of March 31, 2000, we had over 200,000 registered member profiles, organized into seven vertical categories in which members share common characteristics, such as a particular degree or industry expertise. We have conducted search transactions for approximately 1,000 clients, including Charles Schwab & Co., Chemdex, eBay and Gateway. Our solution provides numerous benefits to our members: - The ease and convenience of our service, which is specifically designed for passive job seekers. Most of our members are passive job seekers, which we define as individuals who are employed, open to exploring alternative career opportunities, but not actively seeking a new job; - Highly targeted career opportunities that match members' qualifications and indicated areas of interest. Relevant opportunities are delivered via email and allow our members to minimize the time spent sifting through inappropriate and unwanted job listings; and - Confidentiality features that provide potential employers with a member's resume only after the member responds affirmatively to the career opportunity presented in an email message. Clients using our service receive an efficient recruiting solution, including the following benefits: - Access to our large and desirable database of member profiles, comprised mainly of passive job seekers. Our typical member is a mid-level professional with over seven years of work experience and an annual income of over $70,000. In addition, over 50% of our profiled members hold graduate degrees; - Qualified and interested candidates with minimal client effort; - An outsourced recruiting solution that saves internal client resources from handling the screening and initial selection process; - A highly cost-effective recruiting solution; and - Confidentiality features designed to ensure that our clients' career opportunities are only viewed by a select number of pre-qualified members. Our objective is to strengthen our position as a leading Internet-based recruiting service. To achieve this objective, we will continue to acquire and retain members for our database of professionals and attract new clients. By establishing a long term, trusted relationship with our members we will continue to monetize their profiles over the span of their mid-career years by selling highly targeted search transactions to our clients. The key elements of our strategy include: - Utilizing strategic alliances with leading universities, print publications, applicant tracking systems and the Cruel World Affiliate Program; - Increasing awareness of our brand through traditional and Internet media channels; - Introducing additional vertical employment categories; - Continuing to enhance the efficiency and functionality of our proprietary JobCast technology; - Introducing additional career-related products and services; and - Expanding internationally through internal growth, strategic alliances, investments or licensing arrangements. CORPORATE INFORMATION We were incorporated in California on May 23, 1996 as Career Central Corporation. In April 2000, we intend to merge with and into our wholly owned subsidiary Cruel World, Inc., a Delaware corporation. Our principal executive offices are located at 3500 W. Bayshore Road, Palo Alto, CA 94303. Our telephone number at that location is (650) 847-3500. Our Web site address is WWW.CRUELWORLD.COM. Information contained on our Web site does not constitute part of this prospectus. Our trademarks and service marks include Cruel World, Career Central and JobCast. This prospectus also includes tradenames, trademarks and service marks of other companies and organizations. THE OFFERING <TABLE> <S> <C> Common stock offered by us................ shares Common stock to be outstanding after the offering................................ shares Use of proceeds........................... We intend to use the net proceeds of this offering for general corporate purposes, including sales and marketing efforts, developing our infrastructure, products and services and hiring additional personnel. See "Use of Proceeds." Proposed Nasdaq National Market symbol.... CRLW </TABLE> The number of shares of our common stock to be outstanding immediately after the offering is based on the number of shares outstanding at December 31, 1999 and excludes: - 2,092,120 shares of common stock issuable on exercise of options outstanding as of March 31, 2000 with a weighted average exercise price of $1.19 per share; - Warrants to purchase 871,860 shares of common stock at a weighted average exercise price of $8.65; - 1,047,205 shares of common stock available for future grant under our stock option plans as of March 31, 2000; - 100,000 shares of common stock available for future grant under our 2000 director option plan; and - 300,000 shares of common stock available for future issuance under our 2000 employee stock purchase plan. Unless otherwise indicated, the information in this prospectus assumes: - the conversion of all outstanding shares of preferred stock into common stock upon the closing of this offering; - our reincorporation into Delaware in April 2000, including the two-for-one stock split of all series of our preferred stock; - the filing of our amended and restated certificate of incorporation; - the effectiveness of our 2000 stock plan, 2000 director option plan and 2000 employee stock purchase plan; and - no exercise of the underwriters' over-allotment option. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) You should read the following summary financial data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the accompanying financial statements and related notes which are included in this prospectus. <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, -------------------------------------------- 1997 1998 1999 -------- ---------- -------------------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue................................................... $ 454 $ 2,053 $ 4,446 Gross profit.............................................. 179 1,152 3,287 Loss from operations...................................... (2,097) (6,931) (10,688) Net loss.................................................. (2,090) (6,762) (10,366) Net loss per common share: Basic and diluted....................................... $ (6.75) $ (6.56) $ (6.90) ======== ========== ==================== Weighted average shares outstanding..................... 309,682 1,031,302 1,502,104 ======== ========== ==================== Unaudited pro forma net loss per common share: Basic and diluted....................................... $ (1.17) ==================== Weighted average shares outstanding..................... 8,870,680 ==================== </TABLE> The unaudited pro forma net loss information gives effect to the conversion into common stock of all series of preferred stock outstanding as of December 31, 1999. <TABLE> <CAPTION> DECEMBER 31, 1999 ------------------------------- ACTUAL AS ADJUSTED -------------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $16,903 Working capital............................................. 15,132 Total assets................................................ 18,857 Long term liabilities....................................... 186 Stockholders' equity........................................ 15,945 </TABLE> The as adjusted information gives effect to: - the automatic conversion of all outstanding series of preferred stock into common stock upon completion of this offering; and - the receipt of the estimated net proceeds of $ million from the sale of shares of common stock in this offering at an assumed public offering price of $ per share after deducting underwriting discounts and commissions and offering expenses. See "Use of Proceeds" and "Capitalization."
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+PROSPECTUS SUMMARY This is only a summary and does not contain all of the information that may be important to you. You should read the entire prospectus, including the risk factors and our financial statements, before deciding to invest in our Class A common stock. OUR COMPANY We are a leading provider of Web-based learning, or e-learning, designed to address the strategic objectives of businesses and government organizations by helping them build knowledge, expand competencies and improve productivity. Our e-learning course and reference libraries can be conveniently accessed through standard Web browsers. We enhance our e-learning environment through the use of multimedia content, simulations, searchable databases, message boards, e-mail and chat rooms. Our solution includes a learning management system that allows our customers to track and evaluate participation and performance. We believe that our e-learning offerings enable our customers to improve productivity and generate greater returns on their e-learning investments than those that are typically achieved through traditional classroom or other forms of technology-based training. We believe that our early entry into the e-learning market in 1997 has enabled us to become a leader in revenues, customers and the number of courses offered. We market and deliver approximately 550 high-quality online courses, which comprise more than 4,400 hours of training, covering a broad array of information technology, or IT, topics as well as a growing library of business and professional courses. We are translating several of these courses into foreign languages and currently have more than 125 translated versions representing approximately 650 hours of training. We market our e-learning offerings through multiple direct sales channels and through indirect sales channels that include domestic and international resale and licensing arrangements. Our current customers include American Express, BP, IBM, Intel, Prudential, the State of Texas, Toyota and the U.S. Navy. Our corporate and government customers generally purchase annual subscriptions that give individual employees unlimited access to one or more of our libraries of online courses. As of June 30, 2000, we had approximately 240,000 active subscriptions that were sold directly by us to businesses and government organizations. Our resale and licensing arrangements include our strategic relationships with ExecuTrain, Gateway, Macromedia, Micron and ZDNet. In 1999, our revenues totaled $10.5 million, a 114% increase over 1998 revenues. Net cash used in operating activities for 1999 was $4.5 million and our net loss for 1999 was $8.2 million. On a pro forma basis, our 1999 revenues were $17.0 million, net cash used in operating activities was $1.3 million and our net loss was $33.7 million. On a pro forma basis, our revenues for the six months ended June 30, 2000 were $15.3 million, net cash used in operating activities was $13.9 million and our net loss was $33.9 million. According to TRAINING Magazine, domestic corporations with more than 100 employees budgeted $62.5 billion for training in 1999, including $15 billion budgeted for outside training services. Although corporate learning has historically consisted primarily of classroom-based training programs, we believe that this traditional methodology has a number of limitations, including travel and opportunity costs, inability to update content in a timely manner, difficulty in tailoring courses to a student's needs, facility and instructor costs and poor tracking and assessment capabilities. In response to these limitations, many businesses and government organizations are seeking more effective learning solutions, and an increasing number are adopting e-learning to meet their training needs. A study published in January 2000 by International Data Corporation, or IDC, estimated that the U.S. market for e-learning was about $1.1 billion in 1999 and projected that this market would grow to $11.4 billion in 2003, representing a compound annual growth rate of 79%. The largest segment of the U.S. e-learning market currently is IT training, which the IDC study estimated to be $870 million in 1999 and projected to grow to $5.3 billion in 2003. We believe e-learning providers that offer a fully-hosted, integrated solution -- comprising an extensive array of high-quality content, an enhanced learning experience and a robust learning management system -- are uniquely positioned to take advantage of this growing market opportunity. [ALTERNATE PAGE FOR THE MARKET MAKING PROSPECTUS] ------------------ TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> PROSPECTUS SUMMARY.................... 1 RISK FACTORS.......................... 10 SPECIAL NOTE REGARDING FORWARD- LOOKING STATEMENTS AND INDUSTRY DATA................................ 19 USE OF PROCEEDS....................... 20 DIVIDEND POLICY....................... 20 DILUTION.............................. 21 CORPORATE HISTORY AND ORGANIZATION.... 22 CAPITALIZATION........................ 26 UNAUDITED PRO FORMA FINANCIAL STATEMENTS.......................... 27 SELECTED HISTORICAL FINANCIAL DATA.... 40 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 42 BUSINESS.............................. 51 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> MANAGEMENT............................ 64 RELATED PARTY TRANSACTIONS............ 71 PRINCIPAL STOCKHOLDERS................ 74 DESCRIPTION OF CAPITAL STOCK AND MEMBERSHIP UNITS.................... 77 SHARES ELIGIBLE FOR FUTURE SALE....... 83 IMPORTANT UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-U.S. HOLDERS OF OUR CLASS A COMMON STOCK............ 85 PLAN OF DISTRIBUTION.................. 87 LEGAL MATTERS......................... 91 EXPERTS............................... 91 WHERE YOU CAN FIND MORE INFORMATION... 91 INDEX TO FINANCIAL STATEMENTS......... F-1 </TABLE> ------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT, AS THIS DOCUMENT MAY BE AMENDED OR SUPPLEMENTED AFTER THAT DATE IN THE EVENT OF ANY SUBSEQUENT MATERIAL CHANGES. FOR ADDITIONAL INFORMATION ABOUT ELEMENT K REQUIRED TO BE FILED UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, YOU SHOULD VISIT THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT www.sec.gov. EXPLANATORY NOTE This Amendment No. 3 to Registration Statement No. 333-36574 contains (1) a form of prospectus relating to the initial public offering of Class A common stock of Element K Corporation and (2) the form of the alternate pages required to create the prospectus that may be used by any broker-dealer subsidiary of Wasserstein Perella Group, Inc. in connection with offers and sales in market making transactions of the previously issued shares of Class A common stock. The alternate pages appear after the initial public offering prospectus and replace the prospectus cover page, the table of contents page and the sections titled "Use of Proceeds," "Dividend Policy," "Legal Matters," "Experts" and "Where You Can Find More Information" of the initial public offering prospectus. In addition, the "Underwriting" and "Notice to Canadian Residents" sections will be removed from the market making prospectus and replaced by the "Plan of Distribution" section. We provide a complete e-learning solution. Our solution features anytime, anywhere accessibility and extensive libraries of high-quality course and reference materials. Our enhanced learning experience offers several online learning modalities, including instructor-led courses, self-paced tutorials and reference sources. Our solution also includes a robust learning management system that allows our customers to easily deploy our service throughout their organizations and to track its use and effectiveness. Because we provide a fully-hosted solution, our customers avoid the expense of designing, building and maintaining infrastructure and content themselves. We intend to build on our expertise in e-learning to take advantage of the growing market opportunity and become the leading provider of high-quality e-learning solutions for businesses and government organizations. We are pursuing a strategy consisting of the following key elements: - creating diverse revenue streams by selling subscriptions to our elementk.com Web site, developing co-branded sites for resellers and licensing our content and e-learning courses; - expanding our sales and distribution channels by substantially increasing the size of our enterprise sales team and telesales force and by further developing our relationships with resellers; - broadening our course libraries to include approximately 550 IT and 125 business and professional courses by December 2000; - enhancing our learning management system by upgrading our learner assessment capabilities and by introducing authoring tools that will enable our customers to create their own proprietary content; and - continually improving our users' learning experience by providing greater functionality and a more engaging experience. CORPORATE HISTORY AND ORGANIZATION Since the introduction of our e-learning offerings in 1997, our business operated within the ZD Education division of Ziff-Davis Inc. In February 2000, Ziff-Davis sold the businesses comprising its ZD Education division for $172 million to an investment group composed of U.S. Equity Partners, L.P. and U.S. Equity Partners (Offshore) L.P., two private equity funds managed by an affiliate of Wasserstein Perella Group, Inc., or "Wasserstein Perella," which we refer to collectively as "USEP," and several other U.S. and offshore co-investors. The other co-investors include TMCT Ventures, funds managed by Highfields Capital Management, BancAmerica Capital Investors, BancBoston Capital, officers of Wasserstein Perella and several executive officers of Element K. The e-learning business of ZD Education was acquired for $57 million by Element K Holdings LLC, which we refer to as "Element K," a limited liability company formed for the purpose of completing the acquisition. Wasserstein Perella also formed Element K Corporation, which is the company whose shares of Class A common stock you will be purchasing if you decide to invest in the initial public offering. Element K Corporation's sole asset is its controlling interest in Element K. Wasserstein Perella currently controls Element K Corporation through its ownership of 100% of Element K Corporation's Class B common stock, which it acquired at the time it initially capitalized the company. By virtue of its ownership of our Class B common stock, Wasserstein Perella will control a majority of the voting power in Element K Corporation so long as USEP and/or the other co-investors own a majority of the membership units in Element K. To the extent that USEP and/or the other co-investors convert their membership units in Element K into shares of Element K Corporation Class A common stock, the number of votes to which the Class B common stock will be entitled will decrease proportionately. See "Description of Capital Stock and Membership Units." In July and August 2000, Element K Corporation issued an aggregate of 1,096,491 shares of Series A preferred stock to some of the existing investors in Element K, and received a total of approximately $10 million, or $9.12 per share, in these transactions. The price per share was arrived at through arms- length negotiations with a group of our non-employee investors who are not affiliated with Wasserstein THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED AUGUST 15, 2000 5,500,000 Shares [elementk LOGO] Class A Common Stock ------------------ Prior to this offering, there has been no public market for our Class A common stock. The initial public offering price of the Class A common stock is expected to be between $10.00 and $12.00 per share. We have applied to list our Class A common stock on The Nasdaq Stock Market's National Market under the symbol "LMNK." The underwriters have an option to purchase a maximum of 825,000 additional shares of our Class A common stock to cover over-allotments of shares. INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 10. <TABLE> <CAPTION> UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND ELEMENT K PUBLIC COMMISSIONS CORPORATION -------- ------------- ----------- <S> <C> <C> <C> Per Share............................................ $ $ $ Total................................................ $ $ $ </TABLE> Delivery of the shares of our Class A common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON CHASE H&Q THOMAS WEISEL PARTNERS LLC The date of this prospectus is , 2000. Perella. Element K Corporation used the proceeds from these transactions to purchase membership units in Element K. The ownership interests of USEP and the co-investors in Element K are currently represented directly by membership units in Element K and indirectly by their preferred stock in Element K Corporation. Immediately prior to the completion of the initial public offering, the offshore co-investors' ownership interests in Element K and all shares of Element K Corporation Series A preferred stock will be converted into shares of Element K Corporation's Class A common stock on a one-for-one basis. Each share of Class A common stock of Element K Corporation is economically equivalent to a membership unit in Element K, including those owned by USEP and the co-investors, except for differences arising from the different tax treatment of a limited liability company member compared to a corporate stockholder. For further details, see "Description of Capital Stock and Membership Units." The following chart summarizes our corporate structure immediately following the completion of the initial public offering: [CORPORATE STRUCTURE FLOWCHART] In connection with our acquisition of the e-learning business of ZD Education, USEP and the co-investors also formed Element K Press LLC, which we refer to as "Press," to acquire the IT courseware and journal publishing and IT training center businesses of ZD Education from Ziff-Davis for $90 million. At the time of the acquisition, Press and Element K jointly formed Element K Content LLC, which we refer to as "Content," to purchase the content development operations of ZD Education from Ziff-Davis for $25 million. Immediately upon completion of the initial public offering, Element K will purchase for $25 million the remaining interests in Content it does not already own from Press, which interests Press initially purchased for $20.3 million. For more information regarding our corporate history and organization, see "Corporate History and Organization." ------------------------ [INSIDE FRONT COVER] [ARTWORK] We have recently adopted the corporate identity and brand name "Element K," which is the subject of a pending federal trademark application, and we have obtained the Internet domain names "elementk.com," "elementk.net," "elementk.org," "lmnk.com," "lmnk.net," "lmnk.org" and"training.com." This prospectus contains other product names, trade names, trademarks and service marks, all of which are the property of their respective owners. ------------------------ We were incorporated in Delaware on January 18, 2000. Our principal executive offices are located at 500 Canal View Boulevard, Rochester, New York 14623 and our telephone number is (716) 240-7500. Our Web site is located at www.elementk.com. The information on our Web site is not part of this prospectus. THE OFFERING Class A common stock offered:....... 5,500,000 shares Common stock to be outstanding after the offering: Class A common stock(1)........... 10,817,500 shares Class B common stock.............. One share, which is convertible at any time into 250 shares of Class A common stock. Membership units in Element K to be outstanding after the offering, excluding units held by Element K Corporation(2):................... 16,667,821 units. The membership units are exchangeable at any time for one share of our Class A common stock and are economically equivalent to shares of Class A common stock, except for differences arising from the different tax treatment of a limited liability company member compared to a corporate stockholder. Total Class A common stock equivalents to be outstanding after the offering(3):...................... 27,485,571 Estimated net proceeds from the offering............................ $53,265,000 Use of proceeds: by Element K Corporation ......... To acquire 5,500,000 membership units in Element K, representing an approximate 20.0% additional equity interest in Element K, or 6,325,000 membership units representing an approximate 22.3% equity interest if the underwriters exercise their over-allotment option in full. After giving effect to the purchase of additional membership units with the proceeds of the initial public offering, Element K Corporation will have an approximate 39.4% equity interest in Element K, or 41.1% if the underwriters exercise their over-allotment option in full. by Element K...................... To purchase the equity interests in Content not already owned by us, expand our online course library, complete our acquisition of ExecuTrain's content library, increase our sales and marketing efforts, build brand awareness, improve technical capabilities, complete our investment in Isopia Interactive Networks, or "Isopia," with whom we are developing a new learning management system that we will license as a component of our e-learning platform, and fund other general corporate activities, including working capital and possible future acquisitions. Voting rights....................... Holders of Class A common stock are entitled to one vote per share. The holder of Class B common stock is entitled to a number of votes per share equal to 250 plus the number of membership units held by all members of Element K other than Element K Corporation. Proposed Nasdaq National Market symbol.............................. LMNK --------------- (1) Excludes 1,107,500 shares of Class A common stock subject to options outstanding as of June 30, 2000 under the 2000 Stock Option Plan, including 1,057,550 shares of Class A common stock subject to outstanding options granted at $4.00 per share and 49,950 shares of Class A common stock subject to outstanding options granted at the initial public offering price of the Class A common stock. (2) Excludes 1,050,000 underfunded membership units outstanding as of June 30, 2000 and held by some of our executive officers, which are subject to vesting requirements and are exchangeable for shares of Class A common stock on a one-for-one basis after payment of $4.00 per unit with respect to 850,000 underfunded membership units and after payment of an amount equal to the initial public offering price per unit with respect to 200,000 underfunded membership units. For additional information, see "Management -- Underfunded Membership Units in Element K." (3) Assumes conversion into Class A common stock of the sole share of Class B common stock and all outstanding membership units in Element K, excluding membership units held by Element K Corporation and excluding 2,157,500 shares of Class A common stock subject to options outstanding as of June 30, 2000 or issuable upon exchange of underfunded membership units. SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION The table below sets forth the summary historical financial data for our predecessor business, which we refer to as Element K Corporation Predecessor Business, for the periods indicated, Element K for the period from February 10, 2000 (the date Element K acquired the Element K Corporation Predecessor Business from Ziff-Davis) through June 30, 2000 and as of June 30, 2000, the pro forma financial data for Element K Corporation for the year ended December 31, 1999 and for the six months ended June 30, 2000 and the pro forma as adjusted financial data as of June 30, 2000. For a description of the pro forma adjustments, see "Unaudited Pro Forma Financial Statements." The historical statement of operations data for the years ended December 31, 1997, 1998 and 1999 have been derived from financial statements audited by Arthur Andersen LLP, and are based on the accounting records of Ziff-Davis, which, in the opinion of management, include all adjustments necessary for the presentation of the results of operations for such periods. The Element K Corporation Predecessor Business historical statement of operations data for the six months ended June 30, 1999 is unaudited and is based on the accounting records of Ziff-Davis, which, in the opinion of management, include all adjustments necessary for the presentation of the results of operations for this period. During the periods prior to February 10, 2000, we operated as part of a division of Ziff-Davis, and therefore the data presented is provided on a carve-out basis, which assumes this division operated as an independent reporting entity for the periods presented. The financial information included here may not necessarily reflect our results of operations and financial position in the future or what our results of operations and financial position would have been had we been a separate, stand-alone company during the periods and on the dates presented. The Element K historical statement of operations data for the period from February 10, 2000 through June 30, 2000 and the historical balance sheet data as of June 30, 2000 are unaudited and, in the opinion of management, include all adjustments necessary for the presentation of the results of operations for such period and the financial position at such date. You should read the following data in conjunction with the financial statements, the pro forma financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. <TABLE> <CAPTION> ELEMENT K CORPORATION ELEMENT K CORPORATION PREDECESSOR BUSINESS ELEMENT K ELEMENT K PRO FORMA ------------------------------------------ ------------------- CORPORATION FOR THE SIX FOR THE SIX FOR THE PERIOD FROM PRO FORMA MONTHS YEAR ENDED DECEMBER 31, MONTHS ENDED FEBRUARY 10, 2000 YEAR ENDED ENDED -------------------------- JUNE 30, THROUGH JUNE 30, DECEMBER 31, JUNE 30, 1997 1998 1999 1999 2000 1999 2000 ------ ------- ------- ------------- ------------------- ------------ ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenues: Subscription revenues......... $ 225 $ 1,737 $ 4,946 $ 1,794 $ 4,946 $ 4,946 $ 6,021 Royalty revenues.............. 2,874 2,999 4,955 2,075 4,255 11,414 8,260 Other revenues................ -- 194 640 314 918 640 1,026 ------ ------- ------- -------- -------- ----------- ----------- Total net revenues.............. 3,099 4,930 10,541 4,183 10,119 17,000 15,307 Cost of net revenues............ 230 1,336 3,894 1,865 3,358 3,894 3,408 ------ ------- ------- -------- -------- ----------- ----------- Gross profit.................... 2,869 3,594 6,647 2,318 6,761 13,106 11,899 Operating expenses: Research and development...... 1,354 3,527 7,199 2,694 7,810 8,232 13,490 Selling and marketing......... 898 2,199 4,018 1,637 9,404 3,332 10,363 General and administrative.... 637 1,843 3,283 1,642 2,523 6,602 4,369 Depreciation and amortization................ 108 107 362 101 9,531 28,673 17,594 ------ ------- ------- -------- -------- ----------- ----------- Total operating expenses........ 2,997 7,676 14,862 6,074 29,268 46,838 45,816 ------ ------- ------- -------- -------- ----------- ----------- Loss from operations.......... (128) (4,082) (8,215) (3,756) (22,507) (33,732) (33,917) Equity in loss of affiliate..... -- -- -- -- (6,139) -- -- Provision for income taxes...... -- -- -- -- -- -- -- ------ ------- ------- -------- -------- ----------- ----------- Net loss...................... $ (128) $(4,082) $(8,215) $ (3,756) $(28,646) $ (33,732) $ (33,917) ====== ======= ======= ======== ======== =========== =========== Basic net loss per share(a)... -- -- -- -- -- $ (1.23) $ (1.23) Shares used in determining net loss per share(a)........... -- -- -- -- -- 27,485,571 27,485,571 CASH FLOW DATA: EBITDA(b)....................... $ (20) $(3,975) $(7,853) $ (3,655) $(12,976) $ (5,059) $ (16,323) Net cash from (used in) operating activities.......... 579 (3,128) (4,451) (3,229) (11,597) (1,320) (13,930) Net cash used in investing activities.................... (541) (97) (1,796) (620) (67,833) (28,097) (117,499) Net cash from (used in) financing activities.......... (38) 3,225 6,247 3,849 82,972 90,302 173,538 </TABLE> --------------- (a) Basic net loss per share was determined by dividing net loss by 27,485,571 Class A common stock equivalents outstanding after giving effect to the initial public offering, including 16,667,821 membership units in Element K held by members other than Element K Corporation. (b) EBITDA, or earnings before interest, taxes, depreciation and amortization, is calculated above by adding loss from operations and depreciation and amortization. EBITDA does not represent net income or cash flows from operations, as these terms are defined under generally accepted accounting principles, and should not be considered as an alternative to net income as an indicator of the company's operating performance or as a measure of liquidity. Although EBITDA is not a measure recognized under generally accepted accounting principles, we have included information concerning EBITDA because we believe this information is used by some investors as one measure of an issuer's operations and because it is used by management as a measure of our business' performance. <TABLE> <CAPTION> ELEMENT K CORPORATION PRO FORMA ELEMENT K AS AS OF ADJUSTED JUNE 30, AS OF 2000 JUNE 30, ACTUAL 2000 ----------- ----------- (UNAUDITED) (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 3,542 $ 42,109 Working capital............................................. (5,191) 29,811 Goodwill and identifiable intangibles(a).................... 53,878 72,506 Total assets................................................ 76,027 137,679 Total liabilities........................................... 21,701 24,783 Minority interest........................................... -- 43,702 Members' equity............................................. 54,326 -- Stockholders' equity........................................ -- 69,194 </TABLE> --------------- (a) Goodwill and identifiable intangibles are expected to be amortized over a period of one to ten years.
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+PROSPECTUS SUMMARY This summary highlights information contained in other parts of this prospectus. Because it is a summary, it does not contain all of the information that you should consider before investing in the shares. You should read the entire prospectus carefully. OVERVIEW We work in the emerging field of directed evolution, a process for optimizing genes and proteins for specific commercial purposes. Since our inception, our principal focus has been on applying our technology to human biotherapeutics, the largest and most profitable target market for directed evolution. Biotherapeutics, or biopharmaceuticals, are protein pharmaceuticals such as antibodies, hormones and enzymes. We use our directed evolution technology to develop improved versions of currently marketed, FDA-approved drugs as well as novel human therapeutics. DIRECTED EVOLUTION The goal of directed evolution is to optimize proteins for commercial purposes. By "optimize" we mean to systematically and substantially enhance a protein's function. Protein optimization involves improving the functional characteristics of a particular protein by changing its amino acid sequence. The sequence of amino acids in a protein determines the protein's structure and function, and the sequence of amino acids is specified in a gene. Therefore, a protein can be optimized by altering the gene that produces it. We perform all three of the fundamental steps in the process of directed evolution. The first step involves modifying the original gene, which produces the protein of interest, to create a diverse collection, or library, of genes. The second step involves producing proteins from all the different genes produced in step one. The third step entails evaluating, or screening, the collection of proteins generated in step two to identify improved versions of the original protein. This process can be repeated until a protein with the desired characteristics is produced. OUR APPROACH Our AMEsystem(TM) directed evolution technology has been developed specifically for application to human therapeutic proteins. We start by replacing one amino acid at a time in a selected region of the target protein. We replace each amino acid in the region of interest with each of the 19 other possible amino acids, and evaluate the resulting proteins for improved characteristics. We then repeat this process, combining positive changes until an optimized protein is produced. Our proprietary approach differs from those of our competitors because we precisely control the locations where we introduce change as well as the amount of change we introduce. We also test the complete set of possible changes for each amino acid of interest, thereby minimizing the risk of entirely missing a possible improvement. Because it is precise and systematic, our approach is efficient and cost-effective, and generally avoids the need to produce and test millions of different proteins. We have also developed proprietary methods for applying our technology to proteins that cannot be produced in bacteria, which include many important classes of human therapeutic proteins. We believe that we have a strong intellectual property position in directed evolution based on our portfolio of fundamental patents, consisting of 16 issued U.S. patents including the exclusive license to the Kauffman patents, which we believe cover many directed evolution technologies. We believe that we have validated our AMEsystem technology by optimizing product candidates for corporate collaborators, including leading companies such as MedImmune and Bristol-Myers Squibb. We have applied our directed evolution technology to achieve the following successes: - For MedImmune: we created several new monoclonal antibodies to potentially treat a serious lung infection caused by the Respiratory Syncytial Virus, or RSV. Monoclonal antibodies are proteins that selectively neutralize disease-causing targets. By applying our AMEsystem technology, we created new monoclonal antibodies that have been shown in animal models to be at least [INSIDE FRONT COVER OF PROSPECTUS] [ARTWORK] [Graphic depicting the directed evolution technology of AME. The graphic depicts the basic steps in our AMEsystem directed evolution process. The left side of the graphic shows the original gene being modified by application of our DirectAME technology to generate a collection of genes. The middle of the graphic depicts the next step in the process in which our ExpressAME technology is used to produce a collection of proteins from the genes produced in the first step. The final step is displayed on the right side of the page and shows the improved protein being identified by applying our SelectAME screening technology.] 10 times more potent than Synagis, MedImmune's current antibody for treating RSV infection. MedImmune plans to develop one of these candidates through clinical trials, and if successful, plans to market it as Numax, a potential next generation product candidate for treating RSV. We also increased by 90-fold in laboratory tests the affinity of Vitaxin, a monoclonal antibody that attacks tumors by cutting off their blood supply, a process known as anti-angiogenesis, and increased its manufacturing yield by 300%. This second generation Vitaxin is scheduled to enter at least one clinical trial with MedImmune later this year. - For Bristol-Myers Squibb: we believe that we significantly reduced the risk that their anti-CD40 antibody, a monoclonal antibody to treat potential complications caused by organ transplant rejection, would cause serious side effects in patients, and we increased the affinity of this antibody for its target by 500-fold, in laboratory tests. Bristol-Myers Squibb is expected to enter Phase I clinical trials with anti-CD40 in 2001. We also increased by over 30-fold in laboratory tests the affinity for its target of BR96, a monoclonal antibody that targets solid tumors, and expanded the range of tumors that it recognizes. Bristol-Myers Squibb has licensed the improved version, hBR96, to Seattle Genetics for further development. Seattle Genetics is now in preclinical development with the improved version, hBR96. OUR STRATEGY Our goal is to be the leader in applying directed evolution to the development and commercialization of novel human biotherapeutics. We have selected biotherapeutics as our primary target market because it is the largest and highest margin market for directed evolution. Protein pharmaceutical products represent some of the world's highest revenue pharmaceutical products, with worldwide sales projected to approach $20.0 billion by 2004. Our business strategy includes five basic elements: - We are seeking to optimize currently marketed, FDA-approved biopharmaceuticals to create improved versions of these drugs with broader patent protection. - We plan to access and develop novel human biotherapeutics derived from a wide variety of sources, including targets from our corporate collaborators and from academic institutions. We also expect the sequencing of the human genome to result in many new potential gene targets. - We plan to continue to leverage strategic collaborations to expand our product pipeline. We believe that we can add the greatest value to a project by applying our AMEsystem technology early in the development process while relying on our collaborators to further develop and commercialize product candidates. - We plan to internally develop a select number of promising projects which address large market opportunities. - We plan to further develop our AMEsystem technology by continuing to invest significantly in research and development while simultaneously protecting and expanding our strong intellectual property portfolio. OUR DEVELOPMENT PROJECTS - Corporate Collaborations. We are currently optimizing antibodies for MedImmune and Cell Matrix. Our collaboration with MedImmune covers four antibodies, one of which is expected to be developed and marketed as Numax and another of which is our improved, second generation version of Vitaxin. Our collaboration with Cell Matrix also covers four antibodies. We have optimized antibodies for Bristol-Myers Squibb, including a product candidate they recently licensed to Seattle Genetics. These relationships include research and development reimbursement (all of which has been paid in the case of Bristol-Myers Squibb), milestone payments and potential royalties on product sales. - Internal projects. We currently have several internal development projects. The majority of these relate to improving currently marketed, FDA-approved drugs. THE OFFERING Common stock offered...................... 3,750,000 shares Common stock to be outstanding after the offering.................................. 21,202,002 shares Use of proceeds........................... For expansion and enhancement of our AMEsystem technology, internal development projects, additional research and development, and general corporate purposes. Proposed Nasdaq National Market symbol.... AMEV The number of shares of common stock to be outstanding after the offering in the table above is based on the number of shares outstanding as of June 16, 2000. The number excludes: - 1,797,140 shares of common stock issuable upon exercise of options outstanding as of June 16, 2000, at a weighted average exercise price of $0.51 per share - 66,667 shares of common stock issuable upon the exercise of warrants to purchase our preferred stock at a weighted average exercise price of $5.62 per share Unless otherwise stated, all information contained in this prospectus assumes: - no exercise of the over-allotment option granted to the underwriters - conversion, on a one-for-one basis, of all outstanding shares of our preferred stock into an aggregate of 13,884,568 shares of common stock OTHER CORPORATE INFORMATION We were incorporated in Delaware in August 1989 under the name Ixsys, Inc. In February 2000, we changed our name to Applied Molecular Evolution, Inc. Our executive offices are located at 3520 Dunhill Street, San Diego, California, 92121, and our telephone number is (858) 597-4990. Our website is located at AMEvolution.com. We do not consider information contained in our website to be a part of this prospectus. Applied Molecular Evolution, AME, AMEsystem, DirectAME, ExpressAME, SelectAME, AMEvolution, Phase IV Pharmaceuticals and The Power of Protein Engineering are our trademarks. All other product names, trade names and trademarks included in this prospectus are the property of their respective owners. SUMMARY FINANCIAL INFORMATION (in thousands, except per share data) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, --------------------------- ---------------------- 1997 1998 1999 1999 2000 ------- ------- ------- ------- ------------ <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue............................... $ 3,329 $ 2,590 $ 2,592 $ 147 $ 831 Operating expenses: Research and development............ 2,992 2,583 4,421 928 671 General and administrative.......... 2,637 1,975 1,344 227 381 Amortization of deferred compensation..................... -- -- 435 37 1,180 ------- ------- ------- ------- ------- Total operating expenses.............. 5,629 4,558 6,200 1,192 2,232 ------- ------- ------- ------- ------- Loss from operations.................. (2,300) (1,968) (3,608) (1,045) (1,401) Minority interest..................... -- -- 45 -- 43 Interest income, net.................. 79 101 213 31 38 ------- ------- ------- ------- ------- Net loss.............................. $(2,221) $(1,867) $(3,350) $(1,014) $(1,320) ======= ======= ======= ======= ======= Historical net loss per share......... $ (1.43) $ (1.13) $ (1.38) $ (0.42) $ (0.51) ======= ======= ======= ======= ======= Pro forma net loss per share.......... $ (0.24) $ (0.09) ======= ======= Pro forma weighted average shares outstanding......................... 14,070 14,217 </TABLE> <TABLE> <CAPTION> MARCH 31, 2000 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------ --------- ----------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short-term investments... $2,325 $12,394 $66,994 Working capital..................................... 2,900 12,969 67,569 Total assets........................................ 5,502 15,571 70,171 Stockholders' equity................................ 2,810 12,879 67,479 </TABLE> The pro forma balance sheet data above reflect: - the sale of our Series F preferred stock in May and June 2000, for net proceeds of $10.0 million, and the conversion of our preferred stock into common stock - the exercise of options to purchase 976,603 shares of our common stock between April 1, 2000 and June 16, 2000, for cash of $39,341 and notes receivable of $724,100 The pro forma as adjusted balance sheet data above give effect to the pro forma adjustments above and our sale of 3,750,000 shares in the offering at an assumed initial public offering price of $16.00 per share, less underwriter discounts and assumed offering expenses.
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+SUMMARY This summary does not contain all of the information that may be important to you. You should read the entire prospectus before making an investment decision. PRECISE SOFTWARE SOLUTIONS LTD. We are a provider of Information Technology infrastructure performance management software. This infrastructure consists of networks, operating systems, servers, applications, databases and storage devices that must proactively support traditional and electronic business activities. Our software optimizes the performance of an organization's infrastructure, which is fundamental to its ability to generate revenues, attract and retain customers and maintain its competitive position. For example, an online merchant must ensure that a user shopping on its Web site is experiencing quality performance or else the merchant risks losing that customer to a competitor. Using our software, an organization can easily and rapidly detect performance slowdowns, isolate the root cause, determine the impact on its business and suggest remedial action before users are impacted. Global competitive pressures are driving organizations to continuously seek new and improved ways to better serve their customers. To enhance their competitiveness, organizations are implementing e-business initiatives that rely on the Internet. For example, enterprise resource planning, or ERP, applications, the means through which an organization controls, manages and expands its business operations, are now being extended over the Internet to include external users to effect data exchange and e-commerce transactions. In addition, there are new categories of companies that are emerging to take advantage of the Internet, including application service providers and management service providers. To enable and support e-business initiatives, a complex, layered infrastructure of technologies and services has evolved. The complexity is driven by a number of factors, including heterogeneous technologies with rapidly changing standards and protocols, an increase in the number of internal and external users and a vast increase in the volume of transactions and amount of data supported. What is vital about this Information Technology infrastructure is the level of performance it delivers to internal users, customers, partners and vendors. Poor performance or downtime can have a significant negative impact on an organization's productivity, revenues, customer satisfaction and earnings. Efficient management of the infrastructure involves addressing the needs and problems of all constituencies across the extended enterprise. Each class of user has different performance requirements and defines, and refers to, its own performance metrics and problems differently. Technology support personnel must reconcile these disparate needs and manage the infrastructure without employing techniques or technologies that consume additional database and system resources. In addition, infrastructure performance must align with business priorities so that, for example, critical revenue-generating applications, such as completing an online sale, are processed prior to non-revenue generating applications, such as posting data to an organization's accounting system. Because of these challenges, organizations are investing heavily in software to manage and optimize the Information Technology infrastructure. Dataquest estimates that organizations spent $2.4 billion in 1999 and expect to spend $4.7 billion in 2003 on availability and performance management software. Existing software solutions can assist in locating certain problems, but are often costly and time-consuming to deploy, unable to pinpoint the source of the problem and consume database resources in the process. As a result, we believe there is a need for rapidly deployable software that proactively monitors an organization's Information Technology infrastructure to optimize performance without utilizing additional database and system resources. We believe we fill this need. We sell our software directly through a sales force of over 40 professionals and indirectly through resellers and one original equipment manufacturer, or OEM. Our OEM relationship is with EMC Corporation, or EMC, a leading provider of enterprise storage systems, software and services. EMC integrates our products with similar EMC software used for improving storage system performance and sells the bundled product to its customers. Amdocs, a provider of information systems solutions to telecommunications companies and our leading reseller, offers our software as an add-on product to their current offering. Our current customers include Boeing, Carnival Cruise Lines, Chevron, Cox Communications, Deutsche Telekom, Excite@Home, Ford Motor Company, Mannesmann AG, One 2 One, Qwest Communications, Southwestern Bell, Staples and The Hartford. Revenues from these customers accounted for 13.7% and 7.9%, respectively, of our total revenues in 1999 and the nine months ended September 30, 2000. We were incorporated in Israel in 1990. Our offices in Israel are located at 1 Hashikma Street, Savyon, Israel 56518, and our telephone number is 972 (3) 635-2566. Our U.S. subsidiary is located at 690 Canton Street, Westwood, Massachusetts 02090, and our telephone number is (781) 461-0700. Our Web site is located at www.precise.com, and information contained on it does not constitute part of this prospectus. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED NOVEMBER 15, 2000 PROSPECTUS 4,350,000 SHARES [PRECISE SOFTWARE LOGO] PRECISE SOFTWARE SOLUTIONS LTD. ORDINARY SHARES ------------------------ Precise Software Solutions Ltd. is selling 2,594,085 shares and Precise shareholders are selling 1,755,915 shares. The shares are quoted on the Nasdaq National Market under the symbol "PRSE." On November 14, 2000, the last sale price of the shares as reported on the Nasdaq National Market was $25.625 per share. INVESTING IN OUR ORDINARY SHARES INVOLVES RISKS WHICH ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 4 OF THIS PROSPECTUS. ------------------------ <TABLE> <CAPTION> PER SHARE TOTAL --------- ----- <S> <C> <C> Public offering price.................................. $ $ Underwriting discount.................................. $ $ Proceeds, before expenses, to Precise.................. $ $ Proceeds to the selling shareholders................... $ $ </TABLE> The underwriters may also purchase up to an additional 652,500 shares from certain Precise shareholders and us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The shares will be ready for delivery in New York, New York on or about , 2000. ------------------------ MERRILL LYNCH & CO. CIBC WORLD MARKETS DAIN RAUSCHER WESSELS WIT SOUNDVIEW FAC/EQUITIES ------------------------ The date of this prospectus is , 2000. RECENT DEVELOPMENT On October 27, 2000, we entered into an agreement to acquire Savant Corporation for $20 million in a combination of cash and ordinary shares. Savant creates and markets a suite of real-time diagnostic and proactive management solutions. Savant's Diagnostic Center product provides users with an unattended, real-time illustrated view of database and application activity as well as the ability to predict and manage performance and availability issues. We expect to integrate Savant's software products into our own product offerings in order to provide a more comprehensive solution for our customers. In connection with the Savant transaction, we will exchange approximately 512,445 of our ordinary shares for all Savant's outstanding shares of capital stock, vested stock options and warrants. We will also pay $2.5 million in cash. If revenue from Savant's products and services exceed certain thresholds in the year ending December 31, 2001, we will issue additional ordinary shares. We intend to account for the transaction as a purchase. Completion of the acquisition is subject to regulatory approval and customary closing conditions and is expected to close in the fourth quarter of 2000. THE OFFERING Ordinary shares offered by Precise........................... 2,594,085 shares Ordinary shares offered by selling shareholders...................... 1,755,915 shares Ordinary shares outstanding after this offering..................... 24,520,463 shares Use of proceeds................... We intend to use the net proceeds of this offering to expand our sales and distribution channels, to invest in research and development activities and for working capital and general corporate purposes, including possible acquisitions of complementary technologies, products or businesses. Risk Factors...................... See "Risk Factors" for a discussion of factors you should carefully consider before deciding to invest in our ordinary shares. Nasdaq National Market symbol..... "PRSE" ------------------------ The number of ordinary shares that will be outstanding after this offering is based on the number of ordinary shares outstanding as of September 30, 2000. This information excludes: - 5,447,260 ordinary shares issuable upon exercise of options outstanding as of September 30, 2000, with a weighted average exercise price of $5.29 per share; - an additional 1,885,740 ordinary shares reserved for issuance pursuant to options issuable under our share option and incentive plans; - 667,000 ordinary shares reserved for issuance under our 2000 employee share purchase plan; and - 512,445 ordinary shares which will be issued upon the consummation of our acquisition of Savant Corporation and additional ordinary shares which may be issued based on achievement of certain post acquisition performance targets. Unless otherwise indicated, the information in this prospectus: - reflects a two-for-three reverse share split completed in April 2000; - reflects the conversion of all of our outstanding preferred shares into ordinary shares in July 2000 upon the closing of our initial public offering; and - assumes the underwriters will not exercise their over-allotment option. All references in this prospectus to "dollars" or "$" are to U.S. dollars and all references to "NIS" are to New Israeli Shekels. [INSIDE FRONT COVER] SUMMARY CONSOLIDATED FINANCIAL INFORMATION The following table summarizes our consolidated statement of operations data for the periods presented. You should read this information in conjunction with "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the related notes appearing elsewhere in this prospectus. Precise has prepared its consolidated financial statements in U.S. dollars and in accordance with U.S. generally accepted accounting principles. The pro forma basic and diluted net loss per share reflects the automatic conversion of our preferred shares into ordinary shares. <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------------------------- ----------------- 1995 1996 1997 1998 1999 1999 2000 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Software licenses........................ $ 984 $ 954 $ 2,382 $ 5,331 $ 9,770 $ 6,598 $14,875 Services................................. 163 272 406 858 1,844 1,170 3,051 ------- ------- ------- ------- ------- ------- ------- Total revenues.................... 1,147 1,226 2,788 6,189 11,614 7,768 17,926 Cost of revenues: Software licenses........................ 61 130 349 522 741 525 484 Services................................. 33 54 86 198 906 422 1,174 ------- ------- ------- ------- ------- ------- ------- Total cost of revenues............ 94 184 435 720 1,647 947 1,658 ------- ------- ------- ------- ------- ------- ------- Gross profit............................... 1,053 1,042 2,353 5,469 9,967 6,821 16,268 Operating expenses: Research and development, net............ 499 602 1,737 2,214 2,891 2,113 3,437 Sales and marketing, net................. 1,203 2,498 3,278 5,739 7,913 5,117 13,787 General and administrative............... 978 1,264 1,341 1,272 1,598 1,129 2,640 Amortization of deferred stock compensation........................... -- -- -- 300 234 95 4,953 ------- ------- ------- ------- ------- ------- ------- Total operating expenses.......... 2,680 4,364 6,356 9,525 12,636 8,454 24,817 ------- ------- ------- ------- ------- ------- ------- Operating loss........................... (1,627) (3,322) (4,003) (4,056) (2,669) (1,633) (8,549) Net loss................................. $(1,950) $(1,593) $(4,215) $(4,022) $(2,598) $(1,654) $(7,177) ======= ======= ======= ======= ======= ======= ======= Basic and diluted net loss per share..... $ (1.31) $ (0.89) $ (2.35) $ (1.31) $ (0.79) $ (0.50) $ (0.76) ======= ======= ======= ======= ======= ======= ======= Weighted average number of shares used in computing basic and diluted net loss per share.............................. 1,486 1,783 1,785 3,077 3,299 3,299 9,451 ======= ======= ======= ======= ======= ======= ======= Pro forma basic and diluted net loss per share (unaudited)...................... $ (0.22) $ (0.41) ======= ======= Weighted average number of shares used in computing pro forma basic and diluted net loss per share (unaudited)......... 11,637 17,403 ======= ======= </TABLE> The following table indicates a summary of our balance sheet at September 30, 2000: - on an actual basis; and - on an as adjusted basis to give effect to the issuance and sale of the 2,594,085 ordinary shares offered by us in this offering, at an estimated public offering price of $27.00 per share after deducting the estimated underwriting discount and offering expenses, and our anticipated application of the net proceeds. <TABLE> <CAPTION> SEPTEMBER 30, 2000 ---------------------- ACTUAL AS ADJUSTED ------- ----------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $25,447 $ 90,485 Marketable securities....................................... 29,149 29,149 Working capital............................................. 54,034 119,072 Total assets................................................ 90,554 155,592 Total shareholders' equity.................................. 82,479 147,517 </TABLE> TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Summary..................................................... 1 Risk Factors................................................ 4 Forward-Looking Statements.................................. 16 Use of Proceeds............................................. 17 Dividend Policy............................................. 17 Price Range of Our Ordinary Shares.......................... 18 Capitalization.............................................. 19 Dilution.................................................... 20 Selected Consolidated Financial Data........................ 21 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 22 Business.................................................... 31 Management.................................................. 44 Principal and Selling Shareholders.......................... 51 Description of Share Capital................................ 55 Related Party Transactions.................................. 58 Shares Eligible for Future Sale............................. 59 United States Federal Income Tax Considerations............. 61 Israeli Taxation and Investment Programs.................... 65 Conditions in Israel........................................ 70 Enforceability of Civil Liabilities......................... 72 Underwriting................................................ 73 Legal Matters............................................... 75 Experts..................................................... 75 Where You Can Find More Information......................... 76 Index to Consolidated Financial Statements.................. F-1 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001111556_environmax_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001111556_environmax_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained in other parts of this prospectus. You should read this summary information with the more detailed information in this prospectus, including the risk factors and the financial statements and notes to those statements appearing elsewhere in this prospectus. OUR BUSINESS We provide environmental and waste tracking and reporting management solutions to governmental and commercial entities. Our computer software and hardware systems allow our clients to comply with Environmental Protection Agency, or EPA, regulations and reduce their hazardous materials and waste stream costs by closely tracking the movement and use of hazardous materials from purchase through disposal. As a subcontractor to our parent, Enmax Corporation, we provide development, support and maintenance services related to the Hazardous Material Management System, or HMMS, a client-server based software system that is used by governmental agencies to monitor and track hazardous material and waste. Our support services include the development of upgrades to HMMS software, system support and maintenance. We currently provide our HMMS services to twenty-five Department of Defense facilities, including Warner-Robins Air Logistics Center, Tobyhanna Army Depot, and the Marine Corps Logistics Base in Albany, Georgia and the Naval base at Cherry Point. In addition, we are developing EnvironMax Millenial Edition, or EnvironMax ME, a web-based software application that is designed to replace HMMS and better meet commercial reporting and tracking requirements. We are currently testing EnvironMax ME. We expect EnvironMax ME to replace HMMS and be the primary focus of our operations. Much like HMMS, the EnvironMax ME system will use a combination of computer software and hardware and business processes to manage and monitor the procurement, use and disposal of hazardous materials and waste. We expect to make the EnvironMax ME system available to commercial and governmental entities in early 2001. We anticipate that some of our initial EnvironMax ME clients will be our existing HMMS governmental customers. OUR MARKET OPPORTUNITIES We believe there is a significant and growing market need for an easy-to-use, effective, web-based system for tracking and reporting the acquisition, production, handling, storage and disposal of environmentally hazardous materials and waste. In 1994, governmental agencies and commercial enterprises in the United States spent approximately $100 billion on pollution abatement and control. We believe that approximately $5 billion of this amount was allocated directly to hazardous materials and waste reporting and tracking. According to the EPA, there are approximately 350,000 active commercial and governmental entities in the United States that are required to report on environmental issues. Of these, more than 100,000 are required to report on environmental issues for which the EnvironMax ME could provide reporting and tracking management solutions. We believe the world-wide market for the Environmax ME is in excess of $40 billion. If, as we anticipate, we upgrade the capabilities of the Environmax ME to also address air, water and soil reporting and tracking requirements, we believe the domestic market for the Environmax ME would be approximately $17.5 billion, and that the world-wide market could be approximately $140 billion. Historically, business and governmental agencies reported and tracked their hazardous materials and waste using either internally developed hand-entry systems or stand-alone, client-server based computer systems. These systems were generally difficult to use, inefficient and relatively expensive, particularly in the case of systems that used stand-alone computers and servers. The Internet has accelerated the introduction of processes for more effectively and efficiently managing information and providing services. It also has changed the way software applications are developed and deployed. We believe one of the fundamental changes in software development and deployment the Internet has accelerated is the use of software applications. Software applications accessed in such a manner are less expensive and more efficient to obtain and use than traditional [INSIDE FRONT COVER] [GRAPHICS DEPICTING THE COMPANY'S PRODUCTS.] WE INTEND TO DISTRIBUTE TO SHAREHOLDERS ANNUAL REPORTS CONTAINING AUDITED FINANCIAL STATEMENTS EXAMINED BY AN INDEPENDENT PUBLIC ACCOUNTING FIRM AND QUARTERLY REPORTS FOR THE FIRST THREE QUARTERS OF EACH CALENDAR YEAR CONTAINING UNAUDITED FINANCIAL INFORMATION. As used in this prospectus, the terms "we," "our," "us," "EnvironMax.com," and "the Company" refer to EnvironMax.com, Inc. We have filed trademark and servicemark applications for the "EnvironMax.com," and "EnvironMax" names and logo. All other trademarks or tradenames referred to in this prospectus are the property of their respective owners. We are not related to or affiliated with Enmax Corporation, located in Alberta, Canada. internally installed software systems. The Gartner Group has estimated that, by 2003, hosting applications will be the dominant application medium for small and medium-sized businesses. It also forecasts that the market for application service providers - firms that host and rent clients software applications using the Internet as the delivery platform instead of installing those applications internally -- will exceed $25 billion by 2004, up from $1.1 billion in 1999. We intend to take advantage of the growth in the use of web-based applications by enabling our EnvironMax ME software to be web-based and delivered via the Internet using an application service provider, or ASP. Our EnvironMax ME software will operate separately or as an integrated part of an enterprise-wide software solution and provide a comprehensive suite of interoperable tools for the management of hazardous materials and waste. OUR STRATEGY Our goal is to become a leading provider of environmental and waste tracking and reporting management solutions for commercial and governmental enterprises. The elements of our strategy to achieve this goal are to: - service our current HMMS customers; - develop awareness of our HMMS and EnvironMax ME systems among potential customers;continue our research and development of environmental reporting and tracking applications in the areas of air, water and soil pollution prevention; - integrate our products with major company-wide enterprise resource planning, or ERP, products such as Oracle, SAP and PeopleSoft; and - expand our operations internationally. CORPORATE INFORMATION Enmax formed our company as a separate entity in February 2000, for the purposes of supporting HMMS and developing, supporting and marketing the EnvironMax ME System. Our principal executive offices are located at 4190 S. Highland Drive Suite 210, Salt Lake City, Utah 84124 and our telephone number is (801) 424-0200. Our Internet address is www.environmax.com. Information contained in our web-sites is not part of this prospectus. THE OFFERING <TABLE> <S> <C> Maximum number of Shares Offered...................................... 7,000,000 shares Common Shares to be outstanding after this offering................... 20,910,710 shares Use of proceeds....................................................... To fund continued development of our products, to fund marketing and sales, to advance our infrastructure and operations, to repay debt to Enmax and to fund general corporate purposes. Proposed American Stock Exchange Symbol............................... EVX </TABLE> The outstanding share information above is based on the sale of all 7 million shares we are offering and the 13,910,710 shares that were outstanding as of September 30, 2000. The information excludes 1,075,650 common shares issuable upon the exercise of options outstanding as of September 30, 2000 with a weighted average exercise price of $10 per share and an additional 1,134,350 common shares reserved for future issuance under the terms of our equity incentive plan as of September 30, 2000. SUMMARY FINANCIAL DATA <TABLE> <CAPTION> EIGHT MONTHS ENDED SEPTEMBER 30, 2000 ------------------ (unaudited) <S> <C> STATEMENT OF OPERATIONS DATA: Revenues from parent ........................ $ 2,055,096 Cost of revenues ............................ 1,171,663 ----------- Gross profit ................................ 883,433 Operating costs and expenses: Selling, general and administrative ..... 1,266,936 Compensation expense-founders stock .................................. 694,080 Research and development ................ 527,084 Interest expense, net ....................... (26,585) ----------- Loss before income taxes ................... (1,631,252) Income taxes ................................ -- ----------- Net loss .................................... $(1,631,252) ----------- Net loss per share - basic and diluted ...... $(.0.12) =========== </TABLE> <TABLE> <CAPTION> SEPTEMBER 30,2000 --------------------------------- ACTUAL PRO FORMA ------------ ------------ <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents ............................. $ 1,866 $107,701,866 Total assets .......................................... 481,929 108,181,929 Long-term obligations, including current portion ...... 151,146 151,146 Stockholders' equity (deficit) ........................ (827,719) 106,872,281 </TABLE> The information above summarizes our financial data since our date of inception on February 1, 2000. Because we did not exist prior to that date, we have not disclosed in this summary the financial data related to our "carve-out" operations based on the actual operations of Enmax, our predecessor. The financial statements prior to February 1, 2000 included in this prospectus do not reflect separate business activities and are based on certain assumptions by our management that may not have been applicable if we had operated separately and the financial statements are not necessarily indicative of what would have actually occurred had we existed as a separate legal entity. Historical results are not necessarily indicative of results that may be expected for any future period. The summary of financial data set forth below should be read in conjunction with our financial statements and the related notes included elsewhere in this prospectus and in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus. For purposes of presenting our financial statements, we have segregated or "carved-out" our operations related to our servicing of the HMMS product from the historical financial statements of Enmax for the period September 1, 1998 (date operations commenced) to December 31, 1998, for the year ended December 31, 1999, for the nine months ended September 30, 1999, and for the one month ended January 31, 2000 (included in the successor information for the nine months ended September 30, 2000). Accordingly, our financial statements in this prospectus and the selected financial data are intended to present our financial condition and results of operations as if we had existed as a separate legal entity for all periods presented. The statement of operations data for the eight months ended September 30, 2000 and the balance sheet data as of September 30, 2000 are derived from unaudited financial information. The pro forma balance sheet data reflects the sale of 7 million common shares in this offering at an assumed initial public offering price of $15.50 per share, after deducting our estimated offering expenses.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001111557_protocol_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001111557_protocol_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider before buying shares in this offering. You should read the entire prospectus carefully. In this prospectus, unless the context requires a different meaning, all references to "Protocol," "our company," "we," "our" and "us" refer to Protocol Communications, Inc. and its subsidiaries. PROTOCOL COMMUNICATIONS, INC. Protocol is a leading provider of electronic customer relationship management (eCRM) services that enable our clients to identify, acquire and retain their customers. We design and implement comprehensive solutions which utilize the Internet and other communication channels to provide integrated end-to-end, high value-added solutions to address all the eCRM needs of our clients. We categorize these solutions broadly into three groups including assisting in the development of sales, marketing and customer contact strategies, implementing customer contact and fulfillment services to meet our clients' sales and marketing needs, and providing continued real-time feedback and analysis. We are increasingly providing our suite of Internet-enabled customer management capabilities, such as click to chat, click to call, automated and live e-mail response management and other similar tools to provide customized solutions to address client needs. We believe our broad range of services allows our clients to expand their customer bases, increase the frequency and quality of customer interactions and enhance opportunities to sell their products or services. Our ability to provide integrated, end-to-end solutions enables our clients to manage their customer relationships through a single service provider and concentrate on developing their core businesses. We believe we are uniquely positioned to continue to build upon our leadership position in the rapidly emerging eCRM industry through our extensive network of customer contact facilities, our ability to quickly develop and execute large projects for clients, our integrated end-to-end solution capability and our consultative approach to implementing solutions for our clients. As of March 31, 2000, we had contracts with over 200 clients, including Bigwords.com, Cable & Wireless, IBM, Intuit, Shell Energy Services and ShopTalk.com. We target clients leveraging the Internet as part of their business strategy, including companies in the Fortune 2000 who have or are developing a presence on the Internet while maintaining their traditional businesses as well as select businesses operating exclusively on the Internet. We currently service clients through our network of over 4,300 employees and 19 customer contact centers in the United States and Canada. Our non-proprietary, open architecture technology systems allow us to extend our capabilities and to implement new client solutions in a short timeframe. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED , 2000 Shares PROTOCOL LOGO Common Stock ------------------ Protocol Communications, Inc. is selling shares of its common stock. Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $ and $ per share. We intend to apply to list our common stock on The Nasdaq National Market under the symbol "PTCL." The underwriters have an option to purchase a maximum of additional shares to cover over-allotments of shares. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE . <TABLE> <CAPTION> UNDERWRITING DISCOUNTS AND PRICE TO PUBLIC COMMISSIONS PROCEEDS TO PROTOCOL --------------- ------------- -------------------- <S> <C> <C> <C> Per Share............................................ $ $ $ Total................................................ $ $ $ </TABLE> Delivery of the shares of common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON DONALDSON, LUFKIN & JENRETTE FIRST UNION SECURITIES, INC. THE ROBINSON-HUMPHREY COMPANY The date of this prospectus is , 2000. OUR OPPORTUNITY While commerce conducted over the Internet, or e-commerce, has grown significantly, studies have shown that there is generally a low level of satisfaction with the e-commerce experience. As e-commerce evolves, we believe companies will need to focus on acquiring customers more efficiently and converting Website visits into lasting and profitable customer relationships. To do so, and as part of developing successful e-commerce strategies, we believe that companies must establish eCRM capabilities. By outsourcing this mission-critical business function to us, our clients can establish their e-commerce presence with reduced upfront expenses, gain considerable time to market and access to marketing, customer contact and fulfillment services capable of expanding as their businesses grow, all while maintaining a high level of customer service. We believe that a substantial market opportunity exists for eCRM service providers who can offer scaleable, end-to-end services which combine technological infrastructure, an in-depth understanding of their clients' businesses, management expertise and training resources to effectively and efficiently serve their clients' long-term needs. We believe we possess many industry-leading attributes which can be leveraged to the benefit of our clients and which are unique in the eCRM market today. These include: - our proven track record of quality scaleable client eCRM services; - our integrated end-to-end approach; and - our consultative approach tailored to the needs of our clients. OUR STRATEGY Our mission is to be the leading provider of eCRM solutions to businesses leveraging the Internet as part of their business strategy. To achieve this objective, we plan to: - leverage our ability to provide consultative, integrated end-to-end eCRM solutions; - capitalize on our "early mover" advantage in the eCRM market; - further penetrate existing client accounts by providing additional high-quality, value-added eCRM services; - access new geographic markets and develop new products and services; and - pursue strategic acquisitions and partnerships. COMPANY INFORMATION We commenced operations as a Delaware corporation in June 1998. As of June 1, 2000, our headquarters will be located at The Tower at Northwoods, 222 Rosewood Drive, Danvers, Massachusetts 01923, and our telephone number is 617-880-2000. Our primary Internet address is www.protocolusa.com. We can also be reached through www.protocolcanada.com, www.protocoleur.com, www.protocolec.com, www.protocolasia.com and others. The information on our Websites are not part of this prospectus. [Artwork to be provided] THE OFFERING Common Stock offered.......... shares Common Stock to be outstanding after this offering........... shares Use of proceeds............... We intend to use approximately $62 million of the net proceeds to repay our existing credit facility and approximately $4.2 million to pay accumulated dividends on our Series B convertible preferred stock. We expect to use the remaining net proceeds to finance the continued growth of our business, including possible future acquisitions, and for other general corporate purposes, including payment of contingent obligations of up to $5.6 million relating to certain of our previous acquisitions. Proposed Nasdaq National Market symbol................. PTCL Unless otherwise indicated, the information in this prospectus: - assumes no exercise of the underwriters' over-allotment option; - reflects the for stock split of our common stock effected on , 2000; - assumes the automatic conversion of all outstanding shares of Series A preferred stock and Series B convertible preferred stock into 10,899,388 shares of common stock upon consummation of this offering; - assumes no exercise of options outstanding as of March 31, 2000 to purchase 1,199,500 shares of our common stock at a weighted average exercise price of $6.05 per share; and - assumes no issuance of the up to 500,000 shares of common stock that we may be required to issue in 2001 in connection with certain of our previous acquisitions. SUMMARY CONSOLIDATED FINANCIAL DATA The following summary historical and unaudited pro forma consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Unaudited Pro Forma Consolidated Financial Statements" and our consolidated financial statements and related notes included elsewhere in this prospectus. The summary unaudited pro forma consolidated financial information does not purport to represent what our results would have been if the events below had occurred at the dates indicated. The summary unaudited pro forma consolidated statement of operations data for the year ended December 31, 1999 gives effect to (1) the acquisitions of Cross-Industry Communications and MBS Communications in February 1999, of Blue Line Promotions in April 1999 and of 3223574 Canada Inc., which we refer to in this prospectus as Media Express in May 1999 (the "1999 Acquired Companies"), and of Canicom, Carroll Ventures and Saligent in March 2000 (the "2000 Acquired Companies"), and (2) pro forma adjustments to the historical consolidated financial statements as if the acquisitions of the 1999 Acquired Companies and the 2000 Acquired Companies had occurred on January 1, 1999. The unaudited pro forma as adjusted statement of operations reflects the issuance of shares of common stock in this offering, assuming an initial public offering price of $ , and the application of the estimated net proceeds to repay the existing credit facility, to pay accumulated dividends on the Series B convertible preferred stock and increase cash. The summary unaudited pro forma consolidated balance sheet data as of December 31, 1999 gives effect to the acquisitions of the 2000 Acquired Companies as if they had occurred on December 31, 1999. The summary unaudited pro forma as adjusted consolidated balance sheet data as of December 31, 1999 gives effect to the automatic conversion of all outstanding shares of Series A preferred stock and Series B convertible preferred stock into 10,899,388 shares of common stock upon the consummation of this offering and the sale of shares of our common stock in this offering, after deducting the underwriting discount and estimated offering expenses, and our anticipated application of the net proceeds of the offering, including $62 million to repay our existing credit facility and approximately $4.2 million to pay accumulated dividends on our Series B convertible preferred stock. <TABLE> <CAPTION> PERIOD FROM YEAR ENDED DECEMBER 31, 1999 JUNE 5, 1998 ----------------------------------- (INCEPTION) TO PRO FORMA DECEMBER 31, 1998 ACTUAL PRO FORMA AS ADJUSTED ----------------- --------- --------- ----------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue....................................... $ 14,138 $ 80,689 $ 112,424 Cost of services.............................. 8,222 42,428 58,318 ---------- --------- --------- --------- Gross profit............................. 5,916 38,261 54,106 Operating expenses: Selling, general and administrative........... 4,078 24,317 36,799 Depreciation and amortization................. 3,500 16,251 21,481 Stock-based compensation expense.............. 1,110 1,742 1,742 ---------- --------- --------- --------- Operating loss........................... (2,772) (4,049) (5,916) ---------- --------- --------- Net loss................................. $ (2,750) $ (12,682) $ (16,962) ========== ========= ========= Net loss attributable to common stockholders................................ $ (2,949) $ (52,163) $ (56,433) ========== ========= ========= ========= Basic and diluted net loss per share.......... $ (1.26) $ (14.74) $ (15.09) ========== ========= ========= ========= Weighted average shares of common stock outstanding used in computing basic and diluted net loss per share.................. 2,345,952 3,539,781 3,739,781 ========== ========= ========= OTHER DATA: Adjusted EBITDA(1)............................ $ 1,838 $ 13,944 $ 17,307 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ------------------------------------- PRO FORMA AS ACTUAL PRO FORMA ADJUSTED -------- --------- ------------ (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................ $ 9,444 $ 9,592 Working capital.......................................... 8,736 11,436 Total assets............................................. 94,836 116,125 Long-term debt, including current portion................ 65,752 80,856 Series A preferred stock and Series B convertible preferred stock............................ 73,944 73,944 Total stockholders' equity (deficit)..................... (61,822) (60,308) </TABLE> - --------------- (1) Adjusted EBITDA represents earnings before interest and financial charges, income taxes, depreciation and amortization and stock-based compensation expense which is a non-cash item. We have included information concerning adjusted EBITDA, which is not a measure of financial performance under generally accepted accounting principles, because we believe that it is used by certain investors as one measure of financial performance. Adjusted EBITDA should not be construed as an alternative to operating income, as determined in accordance with generally accepted accounting principles, or as a measure of liquidity. Adjusted EBITDA as measured by us may not be comparable to similarly titled measures reported by other companies.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001111560_duro_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001111560_duro_prospectus_summary.txt
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+SUMMARY THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION. OUR COMPANY We are a full service, facilities-based provider of Internet data and broadband communications solutions to small and medium-sized businesses in tier II and tier III markets in the southeastern United States. We offer a full suite of Internet data and broadband communications solutions, including high-speed digital subscriber lines, or DSL, Internet access, Internet hosting, web development and network integration services. We are deploying a dedicated enhanced broadband network, enabling us to expand our service offerings throughout our markets. We believe that, by combining the regional scale of our facilities-based network with our local market presence, we are well-positioned to address the needs of small and medium-sized businesses. We have utilized a "smart buy and build" strategy to gain Internet data services market share, to establish local brands in our targeted region and to finance the build-out of our broadband network. Beginning in March 1999, we implemented this strategy by rapidly aggregating a substantial client base in the southeastern United States through the acquisition of 44 Internet data service providers and competitive local exchange carriers. We reinvested the cash flow from this installed client base to deploy our enhanced broadband network infrastructure. With this enhanced network largely in place, we have rolled out broadband access and other enhanced Internet data solutions such as DSL and Internet hosting. To date, large businesses have moved most aggressively to take advantage of Internet efficiencies. These businesses typically have the financial resources and internal technical competencies required to deploy and support emerging Internet technologies and applications. As a result, most providers of Internet data and broadband services have targeted large businesses concentrated in tier I markets, or metropolitan areas having populations in excess of two million. These service providers have not focused on tier II and tier III markets, which have populations less than two million and lower concentrations of large business clients. Small and medium-sized businesses increasingly require broadband Internet access and enhanced services, but they frequently lack the internal technical staff and capabilities necessary to implement and support the broadband Internet data services used by large businesses. In recent years, new technologies such as DSL and regulatory changes effected by the Telecommunications Act of 1996 have enabled affordable broadband data transmission over existing telephone copper wires. Our solution capitalizes on these technological and regulatory changes and helps small and medium-sized businesses to compete in today's broadband economy. Key elements of our solution include providing: - affordable broadband access; - a full range of Internet data and broadband communications services; - dependable service over our dedicated network; - rapid deployment of new services; and - superior client services. Our goal is to be the leading full service provider of Internet and broadband communications solutions to small and medium-sized businesses in tier II and III markets in the southeastern United States. We believe we will establish a differentiated market position based upon our ability to aggressively expand broadband services to historically underserved markets, along with our ability to migrate many of our existing business clients to DSL and related services as our dedicated, broadband network becomes increasingly available. We intend to continue to take advantage of our local presence, while exploiting the scalability and cost efficiencies of our regional enhanced network. Finally, we plan to selectively pursue strategic acquisitions that serve a significant business client base or that deliver complementary products, services, facilities or network infrastructure. DURO Communications, Inc. was incorporated in Delaware in December 1999. Our predecessor wholly-owned subsidiary, DURO Communication Corporation, was incorporated in Delaware in February 1999. The address of our principal executive offices is 1211 Semoran Blvd., Suite 217, Casselberry, Florida 32707 and our telephone number is (407) 673-8500. Our website address is WWW.DUROCOM.COM. The information on our website is not a part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered by DURO............................... shares Common stock to be outstanding after the offering.......... shares Use of proceeds............................................ For capital expenditures and general corporate purposes, including working capital and potential acquisitions. Proposed Nasdaq National Market symbol..................... DURO </TABLE> The number of shares of our common stock that will be outstanding after this offering is based on shares of common stock outstanding as of March 31, 2000. This number excludes: - up to 1,757,382 shares of common stock to be issued in connection with pending acquisitions; - 1,606,700 shares of common stock issuable upon exercise of stock options outstanding at March 31, 2000 at a weighted average exercise price of $3.90 per share; and - shares reserved for future grant under our stock option plan. ------------------------ EXCEPT WHERE WE STATE OTHERWISE, THE INFORMATION WE PRESENT IN THIS PROSPECTUS REFLECTS: - SHARES OF COMMON STOCK TO BE ISSUED UPON COMPLETION OF THIS OFFERING IN EXCHANGE FOR ALL OF OUR OUTSTANDING PREFERRED STOCK AND RELATED CUMULATIVE DIVIDENDS; - THE AUTOMATIC CONVERSION OF ALL OF OUR OUTSTANDING CLASS B NON-VOTING COMMON STOCK INTO COMMON STOCK UPON COMPLETION OF THIS OFFERING; - AMENDMENTS TO OUR CERTIFICATE OF INCORPORATION AND BY-LAWS EFFECTIVE UPON COMPLETION OF THIS OFFERING; AND - NO EXERCISE OF THE UNDERWRITERS' OPTION TO PURCHASE ADDITIONAL SHARES IN THIS OFFERING. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) You should read the following summary consolidated financial data along with the sections entitled "Use of Proceeds," "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes included elsewhere in the prospectus. The data in the pro forma columns reflect our completed and anticipated acquisitions of 54 entities. We closed 30 of these acquisitions prior to December 31, 1999. We have acquired an additional 14 entities since that date and have signed letters of intent to acquire an additional ten entities. The data in these columns are derived from the unaudited pro forma condensed combined financial statements and related notes included elsewhere in this prospectus. The consolidated balance sheet data in the pro forma as adjusted column also reflect: - the exchange of all outstanding preferred stock and related cumulative dividends for a total of shares of common stock; and - our sale of shares of common stock at an assumed public offering price of $ per share and after deducting the estimated underwriting discounts and commissions and the estimated offering expenses that we will pay, and the application of the net proceeds as described under "Use of Proceeds." EBITDA in the other financial data represents earnings before interest, taxes, depreciation, amortization, non-recurring and non-cash compensation charges. EBITDA is provided because it is a measure commonly used by investors to analyze and compare companies on the basis of operating performance. EBITDA is not a measurement of financial performance under generally accepted accounting principles and should not be construed as a substitute for operating income, net income or cash flows from operating activities for purposes of analyzing our operating performance, financial position and cash flows. EBITDA, as presented below is not necessarily comparable with similarly titled measures for other companies. <TABLE> <CAPTION> PERIOD FROM FEBRUARY 19, 1999 (INCEPTION) TO DECEMBER 31, 1999 ---------------------- ACTUAL PRO FORMA --------- ---------- <S> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Internet services revenue................................... $ 22,545 $ 64,597 Operating expenses, excluding depreciation and amortization.............................................. 19,236 58,390 Depreciation and amortization............................... 9,058 26,296 Net loss.................................................... (9,201) (27,102) Net loss applicable to common stockholders.................. (11,879) (29,780) Basic and diluted net loss per share applicable to common stockholders.............................................. $ (0.37) $ (0.88) Weighted average common shares outstanding.................. 32,089 33,932 OTHER FINANCIAL DATA: EBITDA (as defined)......................................... $ 3,499 $ 6,398 Cash flow provided by operating activities.................. 3,664 5,666 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 34,188 $ 1,739 Working capital............................................. 24,077 (12,031) Total assets................................................ 135,978 215,390 Long-term obligations, including current portion............ 33,848 77,848 Manditorily redeemable preferred stock...................... 45,835 45,835 Total stockholders' equity.................................. 45,347 72,236 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001111652_internetco_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001111652_internetco_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information in this prospectus, but it may not contain all of the information that is important to you. To better understand this offering, and for a more complete description of the offering, you should read this entire prospectus carefully, including the "Risk Factors" section and the financial statements and the notes to those statements, which are included elsewhere in this prospectus. INTERNETCONNECT InternetConnect is a leading provider of broadband networking solutions to small and medium-sized businesses. We also provide a range of network access solutions to remote users and branch locations of larger enterprises. We believe that our services enable our customers to communicate, transact and manage their businesses more efficiently. We own, manage and control a nationwide data communications network that allows us to offer high-quality integrated turnkey solutions. Our services combine the speed and efficiency of digital subscriber line, or DSL, technologies with the reliability and security of our advanced private network. Our suite of services includes wide-area private networking, high-speed DSL Internet access, applications hosting, Web hosting and dial-up and remote access to the Internet and private computer networks. By the end of 2000, we plan to roll out additional value-added services, including video conferencing and voice services over our data network. The InternetConnect solution consists of five key elements: - Integrated solutions for high-speed connectivity, private networking and applications hosting services from a single provider; - Robust wide-area networking capabilities at substantially lower prices than available from traditional sources; - High-speed dedicated connections to our network and the Internet, primarily through DSL technology; - Owned and managed nationwide ATM backbone that provides high-speed, secure and reliable networking solutions; and - Superior customer service 24 hours-a-day, seven days-a-week. High-speed connectivity has become important to small and medium-sized businesses because of the dramatic increase in Internet usage and the rapid growth of the Internet as a commercial medium. According to the International Data Corporation, or IDC, there were approximately 200 million Internet users worldwide in 1999, which is forecasted to grow to approximately one billion by 2005. Small and medium-sized businesses are experiencing an increasing need for high-speed Internet connections to enable them to maintain complex Websites, access critical business information and communicate efficiently with employees, customers and business partners. We currently operate in 34 major metropolitan markets, including New York, Los Angeles, Chicago, San Francisco and Washington, D.C. We began offering DSL connectivity in August 1998. At the end of 1999, we had approximately 3,150 lines in service. As of March 31, 2000, we had more than doubled the number of DSL lines in service to greater than 6,400 and had a backlog of 3,500 DSL lines that were in the process of being installed. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (Subject to Completion) Issued April 27, 2000 Shares [InternetConnect Logo] COMMON STOCK ------------------------- WE ARE OFFERING SHARES OF OUR COMMON STOCK. THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND $ PER SHARE. ------------------------- WE INTEND TO APPLY FOR THE QUOTATION OF OUR COMMON STOCK ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "INCN." ------------------------- INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4. ------------------------- PRICE $ A SHARE ------------------------- <TABLE> <CAPTION> UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS INTERNETCONNECT -------- ------------- --------------- <S> <C> <C> <C> Per Share............................. $ $ $ Total................................. $ $ $ </TABLE> We have granted the underwriters the right to purchase up to an additional shares to cover over-allotments. The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on , 2000. ------------------------- MORGAN STANLEY DEAN WITTER BEAR, STEARNS & CO. INC. DONALDSON, LUFKIN & JENRETTE , 2000 THE OFFERING Common stock offered................. shares Common stock to be outstanding after the offering......................... shares Use of proceeds...................... Sales and marketing, working capital and general corporate purposes. See "Use of Proceeds" on page 12. Proposed Nasdaq National Market symbol............................... INCN The number of shares of our common stock that will be outstanding after this offering is based on the number of shares of common stock outstanding on April 26, 2000. The number of shares that will be outstanding after this offering excludes: - 6,041,174 shares of common stock issuable upon exercise of stock options outstanding as of April 17, 2000 at a weighted average price of $.63 per share; - 600,341 shares of common stock issuable upon exercise of warrants outstanding as of April 26, 2000 at a weighted average price of $6.25 per share; - 2,780,824 shares of common stock available as of April 17, 2000 for future issuance under our 1999 Stock Plan; - 178,002 shares of common stock available as of April 17, 2000 for future issuances under our 1999 Executive Stock Plan; - shares of common stock issuable upon exercise of warrants to be granted on the effective date of this offering at an assumed initial public offering price of $ per share; and - 3,000,000 shares of common stock to be reserved for issuance under our employee stock purchase plan, which will become effective upon the completion of this offering. ADDITIONAL INFORMATION Unless otherwise indicated, this prospectus assumes that the underwriters have not exercised their option to purchase additional shares, and also assumes that all shares of convertible preferred stock and convertible notes have been automatically converted into shares of common stock. In this prospectus, the terms "company," "InternetConnect," "we," "us," and "our" refer to InternetConnect, Inc., a Nevada corporation, and, unless the context otherwise requires, "common stock" refers to the common stock, par value $.001 per share, of InternetConnect, Inc. We own the registration for the trademark INTERNETCONNECT, which we use in conjunction with the sale of our products and services, and we intend to apply for the registration of other trademarks. All other trade names and trademarks used in this prospectus are the property of their respective owners. ------------------------ We were organized in California as InternetConnect, LLC in June 1996. We merged into ICNT, Inc., a California Corporation, in May 1999, and reincorporated in Nevada in April 2000 under the name InternetConnect, Inc. We intend to reincorporate in Delaware prior to the effective date of this offering. Our principal executive offices are located at 4499 Glencoe Avenue, Marina del Rey, California 90292, and our telephone number is (800) 896-7467. Our Website address is www.internetconnect.net. The information on our Website is not incorporated by reference into this prospectus. INSIDE FRONT COVER [ARTWORK TO BE INSERTED] Our artwork will consist of diagrams displaying our network and services and how our customers interact with our solutions. Descriptive captions will be used to describe the diagrams. In addition, we plan to use our corporate logo which contains the word "InternetConnect." SUMMARY FINANCIAL DATA The following table sets forth summary financial data for InternetConnect. This information should be read in conjunction with the financial statements and the notes to those financial statements appearing elsewhere in this prospectus. The pro forma balance sheet data reflect: (1) the conversion of a $7.5 million promissory note into 2,761,210 shares of Series C Preferred Stock in March 2000; (2) the conversion of $250,000 of notes payable into 116,279 shares of common stock in March 2000; (3) the sale of approximately $52.6 million of Series D Preferred Stock in April 2000; (4) the conversion of all outstanding shares of preferred stock and remaining convertible notes into an aggregate of 32,444,157 shares of common stock upon completion of this offering; and (5) the issuance of 6,500 shares of common stock. The pro forma as adjusted balance sheet data reflect the sale of shares of our common stock in this offering, at an assumed initial public offering price of $ per share, after deducting underwriting discounts and commissions and our estimated offering expenses. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------- 1997 1998 1999 ------ ------- -------- (IN THOUSANDS, EXCEPT PER SHARE INFORMATION) <S> <C> <C> <C> SUMMARY STATEMENT OF OPERATIONS DATA: Net revenue................................................. $ 173 $ 434 $ 2,265 Gross profit (loss)(a)...................................... 54 114 (3,819) Stock-based charges......................................... -- -- 12,711 Total operating expenses.................................... 240 550 21,427 Loss from operations........................................ (186) (436) (25,246) Net loss.................................................... (199) (477) (25,344) Net loss attributable to common stockholders(b)............. (199) (477) (35,713) Basic and diluted net loss per share attributable to common stockholders(c)........................................... $ (.02) $ (.05) $ (3.98) Weighted-average shares outstanding used to computing basic and diluted net loss per share attributable to common stockholders(c)........................................... 9,148 10,492 8,984 Pro forma basic and diluted net loss per common share (unaudited)(c)............................................ $ (1.62) Weighted-average shares outstanding used to compute pro forma basic and diluted net loss per share (unaudited)(c)............................................ 15,626 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 -------------------------------- PRO PRO FORMA ACTUAL FORMA AS ADJUSTED -------- ------- ----------- (IN THOUSANDS) <S> <C> <C> <C> SUMMARY BALANCE SHEET DATA: Cash and cash equivalents................................... $ 10,755 Working capital............................................. 7,375 Total assets................................................ 22,652 Long-term obligations, excluding current portion............ 1,924 Mandatorily redeemable convertible preferred stock.......... 20,369 Total stockholders' equity (deficit)........................ (11,359) </TABLE> - ------------- (a) Includes $142,000 of stock-based charges in 1999. (b) Includes $10.4 million of non-cash charges in 1999, relating to mandatorily redeemable convertible preferred stock. (c) See Note 11 of Notes to Financial Statements for determination of shares used in computing basic and diluted net loss per share and unaudited pro forma net loss per share. Pro forma to give effect to the automatic conversion of convertible preferred stock and convertible notes payable.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001111665_telecommun_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001111665_telecommun_prospectus_summary.txt
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@@ -0,0 +1 @@
+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001111693_moredirect_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001111693_moredirect_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..2c801ecb543aa15020481506dc04116cbb3172e0
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+PROSPECTUS SUMMARY This summary highlights selected information that we present more fully elsewhere in this prospectus. This summary does not contain all of the information that you should consider before buying shares in this offering. You should read the entire prospectus carefully. MOREDIRECT.COM MoreDirect.com, or MoreDirect, is a leading business-to-business, or B2B, electronic marketplace providing a "one-stop" online solution for the procurement of information technology products. Our Internet-based system enables corporate and government customers to efficiently source, evaluate, purchase and track a wide variety of information technology, or IT, products. Our electronic marketplace, or emarketplace, serves as an intermediary, providing current inventory information, including comparative pricing, available quantity and detailed product specifications directly from the largest wholesale distributors in the United States. MoreDirect is unique to the IT procurement marketplace in that our web-based system enables IT buyers to view the inventories of multiple wholesale distributors at a single source and provides valuable IT asset management solutions. OUR COMPANY While we began providing B2B electronic IT procurement services in 1994, we converted our procurement technology to our current Internet-based solution in June 1999. Since our transition to the Internet, our business has grown dramatically. Our business model utilizes commission-based sales representatives who introduce large corporate and government customers to our emarketplace. During the twelve months ended December 31, 1999, 552 customers purchased IT products using our e-procurement system, as compared to 286 customers that purchased IT products during the twelve months ended December 31, 1998. We currently have over 630 customers utilizing our emarketplace. Our revenues increased by 24% to $33.1 million for the year ended December 31, 1999, compared to $26.8 million for the year ended December 31, 1998. Our revenues have increased by 162% to $18.6 million for the three months ended March 31, 2000, compared to $7.1 million for three months ended March 31, 1999. OUR MARKET Corporations are rapidly increasing the use of the Internet to transact business with their suppliers and vendors. Forrester Research Inc. estimates that businesses bought $109 billion in goods over the Internet in 1999, as compared with $20 billion in goods bought by consumers. In addition, Forrester Research predicts that B2B e-commerce in the United States will grow to $2.7 trillion by 2004, representing more than 90% of the projected total e-commerce market. Forrester Research also reports that the IT products market is the fastest growing segment of the projected B2B e-commerce market and is highly fragmented, providing an attractive opportunity for an Internet-based solution. The IT products supply chain has historically been a multi-tiered and highly fragmented distribution channel. Traditionally, products are sold through a supply chain which includes manufacturers, wholesale distributors, resellers, dealers and end-users. In addition, large corporate and government entities have typically purchased their IT products from several dealer or reseller sources, each of which carries limited inventories. This multi-tiered channel and multiple vendor approach causes inefficiencies in the IT procurement process resulting in increased transaction costs. According to Forrester Research, companies spend approximately $130 to process each paper-based purchase order, whereas the cost to process each electronic purchase order is estimated to be less than $10. OUR SOLUTION MoreDirect's emarketplace provides IT product buyers with direct access to what we believe is the largest selection of IT products available at a single source. Our Internet-based solution eliminates supply-chain inefficiencies by providing IT buyers with the current inventory and pricing information of leading IT wholesale distributors, including Ingram Micro, Inc., Tech Data Corporation, Merisel, Inc. and Pinacor, Inc., the four largest wholesale distributors in the United States. Our emarketplace aggregates approximately 290,000 SKUs, or stock-keeping units, available through wholesale distributors. Available inventory includes products from over 1,500 manufacturers, including popular brand names, such as IBM, Compaq, Hewlett-Packard, Toshiba, Cisco and Microsoft. By displaying the comparative prices of the current inventories of multiple wholesale distributors, we create a price competitive online marketplace. We believe our system is highly scalable, which allows us the flexibility to add additional suppliers and products to our emarketplace. Our e-procurement solution creates purchasing efficiencies that we believe provide significant cost and time savings for IT buyers. Our primary target customers are large corporations and government entities that are interested in making their IT procurement process more efficient and cost effective. Our system provides our customers with flexible online product search capabilities and important procurement information, such as product price comparisons, inventory availability, order status, and shipping, billing and payment information. We customize each customer's website access and web pages to incorporate that entity's purchasing authorities, approval process, work flow and business rules. We also provide IT asset management information and reports such as complete order histories, product serial numbers, shipped to locations, tracking and other account information, enabling customers to better manage the IT products they have ordered. OUR STRATEGY MoreDirect's objective is to become the premier B2B emarketplace for the procurement of IT products by large corporate and government entities. The key elements in our business strategy include: - building brand awareness through increased marketing efforts; - expanding our sales force; - pursuing strategic alliances; - establishing relationships with additional suppliers; - enhancing the services and functionality of our e-procurement solution; and - expanding our service to offer complementary products. We were incorporated as Corporate Buying Service Inc. in October 1994. We changed our name to MoreDirect.com, Inc. in March 2000. We are a Florida corporation, and our principal executive offices are located at 3401 N. Federal Highway, Suite 216, Boca Raton, Florida 33431. Our telephone number is (561) 367-1188. Our website is located at http://www.moredirect.com. Any information that is contained on or linked to any of our websites is not part of this prospectus. THE OFFERING Shares offered by MoreDirect.............. shares Shares to be outstanding after this offering.................................. shares Use of proceeds........................... For (1) working capital and general corporate purposes, including expanding our sales and marketing activities, expanding our corporate infrastructure, further developing our emarketplace and our e-procurement services, and expanding our corporate facilities, (2) to repay amounts outstanding under our line of credit and (3) to make a distribution to our founder of undistributed S corporation tax basis earnings in connection with the termination of our S corporation status. Proposed Nasdaq National Market symbol.... MDIR The number of shares of common stock to be outstanding after this offering is based on shares outstanding on March 31, 2000, which excludes: - 475,500 shares issuable upon the exercise of options outstanding as of March 31, 2000 under our stock option plan, at a weighted average exercise price of $3.71 per share, of which options to purchase 33,000 shares were exercisable; - 165,000 shares of common stock issuable upon the conversion of warrants held by a consultant to our company; - 524,500 shares available for grant under our stock option plan as of March 31, 2000; and - up to shares that the underwriters may purchase if they exercise their over-allotment option.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001111721_stratos_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001111721_stratos_prospectus_summary.txt
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING OUR COMPANY AND THE COMMON STOCK BEING SOLD IN THIS OFFERING AND OUR COMBINED FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS DO NOT EXERCISE THEIR OVER-ALLOTMENT OPTION. OUR COMPANY We develop, manufacture and sell optical subsystems and components for high data rate networking, data storage and telecommunication applications. Our optical subsystems convert electronic signals into optical signals and back into electronic signals, thereby facilitating the transmission of information over optical communication networks. These optical subsystems are designed for use in local area networks, storage area networks, metropolitan area networks, wide area networks and central office networking in telecommunication markets. Our optical subsystems are compatible with the transmission protocols used in these networks, including Gigabit Ethernet, Fast Ethernet, Fibre Channel and asynchronous transfer mode (ATM). We also design, manufacture, and sell a full line of optical components and cable assemblies for use in these networks. Our net sales increased to $71.8 million in the fiscal year ended April 30, 2000 from $46.5 million in the fiscal year ended April 30, 1999. Over the last several years, the number of communication networks and the amount of data transmitted over networks has increased substantially due to the rapid growth of data intensive applications. In addition, the expansion of data and storage networks over a geographically dispersed user base has increased the amount of data transmitted over communication networks. This rapid growth has exposed the transmission speed and physical space limitations of existing networks which traditionally have relied primarily on the transmission of electronic signals. To address the expanding bandwidth and transmission distance requirements, new communication equipment has been developed using optical technology for high data rate networking, data storage and telecommunication applications. Optical communication original equipment manufacturers increasingly rely on highly integrated subsystem suppliers to rapidly develop major elements of their systems. These suppliers allow OEMs to better focus on their core competencies in overall product systems, specific differentiating product benefits, marketing and distribution. In order to meet the rapidly evolving needs of OEMs, subsystem suppliers must address a number of significant technical challenges, including the following: - Attaining higher data rates over extended distances while complying with Federal Communication Commission standards requires advanced optoelectronic technologies and more precise packaging and connections; - Delivering products that address the demand for increasingly higher port density and smaller packages requires greater component miniaturization, more precise packaging and optical alignment; - Responding to demands for shorter lead times requires that manufacturers design products and scale production more rapidly; - Producing increasingly integrated products requires a broad expertise in optical technologies to achieve component compatibility; and - Supporting a wide range of data rates, transmission distance requirements, network protocols, optical interfaces and packaging options requires that suppliers to original equipment manufacturers offer a broad range of products. We believe our company possesses the following key competitive advantages: - HIGH PERFORMANCE. We design, manufacture and test our products to provide industry leading optical line transmission performance with special attention to standards compliance and interoperability. We believe that we are uniquely positioned with our advanced engineering and manufacturing capabilities and optical expertise to provide high performance optical subsystems and components. - INTEGRATED DESIGN AND MANUFACTURING. Our diverse in-house capabilities in electronics, optical systems and electro-mechanical packaging enable us to produce optical subsystems and components with faster times to market and the latest in miniaturization technology. In addition, our integrated design and manufacturing capabilities enable us to increase production efficiencies and rapidly scale our production to deliver high volumes in a cost effective manner. - BROAD SUBSYSTEM AND COMPONENT PRODUCT LINE. Our broad line of optical subsystems and components are available in a variety of fiber optic interfaces, or form factors, support a wide range of data rates, protocols, wavelengths, modes and transmission distances, and have applications in the enterprise, metropolitan area network, wide area network and telecommunication markets. - RELIABILITY. We design, manufacture and test in-house and take a multi-tiered approach to assure the reliability of our optical subsystems. During the design phase, our optical subsystems undergo rigorous verification and qualification testing before designs are released to production. We believe our control over testing throughout the design and manufacturing process results in greater reliability and higher performance in our products. Our objective is to be a leading developer, manufacturer and seller of high-performance optical subsystems and components to optical communication original equipment manufacturers. Key elements of our strategy include the following: - Invest in the development of new technologies that lead to new products with increased bandwidth capabilities, higher port density and greater reliability; - Target high-growth optical communication markets such as the enterprise, metropolitan area network, wide area network and telecommunication markets; - Continue to expand our product offerings of optical transceivers to encompass a broader spectrum of data rates and form factors; - Continue to design and build increasingly integrated subsystems and components; - Utilize our extensive customer service and technical support throughout the qualification and sale process to respond quickly to our customers and align our product development efforts with our customers' evolving needs; and - Pursue acquisitions or investments which complement our current products, enhance our technical capabilities, lower our manufacturing costs, expand the breadth of our market, or otherwise offer growth opportunities. OUR RELATIONSHIP WITH METHODE ELECTRONICS Prior to this offering, we were a wholly-owned subsidiary of Methode Electronics. After the completion of this offering, Methode will own approximately 86.1% of the outstanding shares of our common stock, or approximately 84.3% if the underwriters exercise their over-allotment option in full. Methode has announced that it currently plans to divest its remaining equity interest in us by means of a distribution to its stockholders in a transaction intended to be tax-free to Methode and those stockholders. This transaction is sometimes referred to in this prospectus as the spin-off. While Methode expects the spin-off to occur six to twelve months after this offering, Methode is not obligated to complete the divestiture of its remaining equity interest in us, and the spin-off may not occur by the contemplated time or at all. Methode will determine the timing, structure and all of the terms of its distribution of our common stock. Methode and our company will enter into various agreements which provide for the separation of our business from Methode and govern our interim and ongoing relationships. For a description of these agreements, see "Arrangements Between Methode Electronics and Stratos Lightwave." CORPORATE INFORMATION Our principal executive offices are located at 7444 West Wilson Avenue, Chicago, Illinois 60706. Our telephone number is (708) 867-9600. As part of our separation from Methode Electronics, we were incorporated in Delaware in April 2000. THE OFFERING <TABLE> <S> <C> Common stock offered by Stratos Lightwave....... 8,750,000 shares Common stock to be outstanding after the offering...................................... 62,779,807 shares, or 64,092,307 shares if the underwriters' over-allotment option is exercised in full. Common stock to be held by Methode immediately after the offering............................ 54,029,807 shares Use of proceeds................................. We estimate that our net proceeds from this offering will be approximately $136.8 million based on an assumed initial public offering price of $17.00 per share. We intend to use these net proceeds for general corporate purposes, to repay an estimated $2.0 million in advances from a Methode subsidiary, to pay $3.0 million of additional purchase price in connection with our previously completed Polycore Technologies acquisition and to pay $1.2 million of capital to our MP Optical China subsidiary. See "Use of Proceeds." Proposed Nasdaq National Market symbol.......... "STLW" </TABLE> The number of shares of our common stock to be outstanding after this offering does not include 4,500,000 shares of our common stock reserved for issuance under our 2000 Stock Plan. We have granted options to purchase 3,793,850 shares of our common stock effective as of the date of this offering with an exercise price equal to the public offering price. See "Management--Employee Benefit Plans--Stratos Lightwave 2000 Stock Plan." SUMMARY COMBINED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> FISCAL YEAR ENDED APRIL 30, -------------------------------------------------------- 1996 1997 1998 1999 2000 ----------- -------- -------- -------- --------- (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales....................................... $14,485 $20,966 $24,158 $46,458 $71,785 License fees and royalties...................... -- -- 188 50 1,459 Income (loss) before income taxes............... 293 (882) (1,428) 5,632 6,050 Net income (loss)............................... $ 176 $ (507) $ (858) $ 3,502 $ 3,790 Net income (loss) per share, basic and diluted....................................... $ 0.00 $ (0.01) $ (0.02) $ 0.06 $ 0.07 ======= ======= ======= ======= ======= Shares outstanding, basic and diluted........... 54,030 54,030 54,030 54,030 54,030 ======= ======= ======= ======= ======= </TABLE> Methode transferred and contributed our business to us as of May 28, 2000. As a result of this transaction, our issued and outstanding capital stock was increased to 54,029,807. Shares outstanding and net income (loss) per share amounts have been adjusted for all prior periods. <TABLE> <CAPTION> AS OF APRIL 30, AS OF APRIL 30, 2000 -------------------------------------------- ---------------------- 1996 1997 1998 1999 ACTUAL AS ADJUSTED ----------- -------- -------- -------- -------- ----------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............... $ -- $ -- $ -- $ 550 $ 537 $132,373 Working capital......................... 5,544 4,444 5,749 11,994 17,747 151,083 Total assets............................ 11,761 14,619 17,110 31,523 61,137 197,973 Long-term obligations, less current portion............................... -- -- -- -- -- -- Stockholders' equity.................... 10,886 12,939 14,596 26,169 52,962 189,798 </TABLE> The as adjusted column gives effect to the receipt of the net proceeds from the sale of shares of common stock offered by us at an assumed offering price of $17.00 per share, after deducting the underwriting discount and estimated offering expenses payable by us, the repayment of an estimated $2.0 million in advances from a Methode subsidiary, $1.5 million of which was used to fund working capital, and the payment of $3.0 million as additional purchase price with respect to our previous acquisition of Polycore Technologies. The $1.2 million of capital being paid from the proceeds of this offering to our MP Optical China subsidiary does not require any adjustment since its financial statements are consolidated with our financial statements. OTHER INFORMATION Our financial records have been maintained on the basis of a fiscal year ending on the Saturday closest to April 30, with fiscal quarters ending on the Saturday closest to the end of each thirteen week period. For ease of comparison, all references to period end dates in this prospectus have been presented as though the period ended on the last day of the calendar month. In this prospectus, "Stratos Lightwave," "Stratos," the "company," "we," "us" and "our" each refers to Stratos Lightwave, Inc., and "Methode Electronics" and "Methode" refers to Methode Electronics, Inc. We have filed U.S. trademark applications for "Stratos," "Stratos Lightwave" and our Stratos logo. All other product names, trade names and trademarks appearing in this prospectus are the property of their holders.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001111789_viasource_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001111789_viasource_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..e736a90f00f61a8bebaaac4e27a0e17e443628f2
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+PROSPECTUS SUMMARY This summary highlights information presented in more detail elsewhere in this prospectus. You should read the entire prospectus, including the "Risk Factors" and the financial statements and the related notes. VIASOURCE We are a leading, nationwide enabler of broadband technologies to residential and commercial consumers. We offer comprehensive network integration services to enable technologies offered by providers in the cable, telecommunications, and satellite and wireless industries. Our services include installation, integration, fulfillment, and long-term maintenance and support services for broadband video, voice and data technologies. These broadband service providers use us to make the critical connections between their network infrastructures and equipment located at the premises of residential and commercial end-users. We also design, install and maintain local area networks and wide area networks, or LANs/WANs, and other network applications on a residential and commercial basis. The market for our services has grown rapidly as a result of increased demand on both a residential and commercial basis for broadband video, voice and data services, including high-speed Internet access. To satisfy this growth in demand, many broadband service providers increasingly rely on independent companies like us to deploy their technologies. We believe we provide nationwide services that are of a higher quality and more cost efficient than the services provided by smaller, local competitors or the existing in-house infrastructures of service providers. We believe that the following competitive advantages favorably position us to capitalize on the rapidly growing demand for our services: - our ability to provide high-quality, comprehensive technology solutions on a nationwide basis, - our technical knowledge, operational expertise, and ability to offer higher value-added services, - our investments in sophisticated and centralized systems infrastructure, - our highly trained, experienced and quality-focused work-force, - our exceptional recruiting and training programs, and - our experienced management team. Our principal clients are full-spectrum broadband service providers in the cable, telecommunications, and satellite and wireless industries. To serve the end-user, our clients rely on our knowledge and expertise to rapidly deploy the latest technologies to support advanced cable services, cable telephony and high-speed data services, digital subscriber lines, and satellite and wireless broadband services. We have a long history of providing leading-edge technology solutions. We have been successful in developing long-term relationships with many of our clients, including many of the leaders in the industries we serve, who frequently engage us to deliver a full suite of services over multiple geographic regions. WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE PERMITTED BY U.S. FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING THIS PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR LEGAL. SUBJECT TO COMPLETION - AUGUST 18, 2000 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PROSPECTUS , 2000 (VIASOURCE LOGO) 5,000,000 SHARES OF COMMON STOCK -------------------------------------------------------------------------------- VIASOURCE COMMUNICATIONS, INC.: - We are a leading, nationwide provider of installation, integration, fulfillment, long-term maintenance and support and premise networking services to broadband communications providers. - Viasource Communications, Inc. 200 East Broward Boulevard Suite 2100 Fort Lauderdale, Florida 33301 (800) 683-0253 SYMBOL AND MARKET: - VVVV/Nasdaq National Market THE OFFERING: - We are offering 5,000,000 shares of our common stock. - We and one of our shareholders have granted to the underwriters an option to purchase up to an additional 750,000 shares solely to cover over-allotments. - This is the initial public offering of our common stock. Prior to the offering, there has been no market for our common stock. - Closing: August 23, 2000. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------ Per Share Total ------------------------------------------------------------------------------------------ <S> <C> <C> Public offering price: $8.00 $40,000,000 Underwriting fees: 0.56 2,800,000 Proceeds to Viasource: 7.44 37,200,000 ------------------------------------------------------------------------------------------ </TABLE> THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 9. -------------------------------------------------------------------------------- Neither the SEC nor any state securities commission has determined whether this prospectus is truthful or complete. Nor have they made, nor will they make, any determination as to whether anyone should buy these securities. Any representation to the contrary is a criminal offense. -------------------------------------------------------------------------------- DONALDSON, LUFKIN & JENRETTE PRUDENTIAL VOLPE TECHNOLOGY A UNIT OF PRUDENTIAL SECURITIES CHASE H&Q FIRST UNION SECURITIES, INC. DLJDIRECT INC. We believe that we are the largest independent provider of installation, integration, fulfillment, and long-term maintenance and support services to the cable, digital subscriber line, or DSL, and direct broadcast satellite, or DBS, industries: - Our cable clients include: Adelphia Communications Corporation, AT&T Broadband, Cablevision Systems Corporation, Comcast Corporation, Cox Communications, Inc., MediaOne Group Inc. and Time Warner Cable. As of July 1, 2000, we served our cable clients in approximately 120 systems in 33 states. - Our DSL clients include: Covad Communications Group, Inc., DSL.net, Inc., JATO Communications Corp., Network Access Solutions Corporation, NorthPoint Communications Group, Inc., Qwest Communications International, Inc., SBC Communications, Inc. and U S WEST, Inc. As of July 1, 2000, we deployed DSL enabling services, primarily to small- and medium-sized businesses, in 42 major markets in 23 states. - We provide these services to DIRECTV/Hughes Electronics, the largest DBS provider in the United States, with approximately 8.4 million DBS subscribers at March 31, 2000. As of July 1, 2000, we served DIRECTV in 27 states. - We provide services, including network design, installation and maintenance, to Universal Studios, The Walt Disney Company and Home Director, Inc., a leading provider of advanced network systems that allow flexible distribution of video, voice and data technology throughout the home. BUSINESS STRATEGY Our business strategy is to be the leading provider of comprehensive installation, integration, fulfillment, long-term maintenance and support services to broadband service providers serving residential and commercial end-users. Key elements of our growth and operating strategies are to: - provide broad-based, leading-edge technological expertise, - broaden our geographic reach and expand our presence in existing markets, - develop and deploy a broad range of higher value-added network integration and support services, - expand and strengthen our client relationships, - build upon our relationships with leading manufacturers of broadband communications equipment, - enhance our brand recognition and customer service, - maintain our technological expertise through the recruitment, retention and continued training of qualified technicians, and - pursue selective, strategic acquisitions. INSIDE FRONT COVER - DESCRIPTION OF ARTWORK A caption at the top center of the page reads: "The Right Connections." Below the caption is a graphic made up of four circles linked together by a cable representing the four business segments Viasource operates in, labeled "Telephony & Internet," "Cable," "Premise Networking" and "Satellite & Wireless." The circle labeled "Cable" is centered at the top of the graphic and it contains a picture of a bundle of brightly lit fiber optic cables. The circle labeled "Satellite & Wireless" contains a picture of a satellite dish and it is located at the bottom of the graphic. On the left side of the graphic is the circle labeled "Telephony & Internet," which contains picture of a telephone cable and a telephone keypad. The circle labeled "Premise Networking" is located on the right side of the graphic and it contains a picture of a computer chip. The Viasource logo is positioned in the bottom right-hand corner of the page, below the graphic. INSIDE COVER GATEFOLD - DESCRIPTION OF ARTWORK The Viasource logo is centered at the top of the page. Beneath the Viasource logo is a map of the United States of America indicating the location of Viasource "Corporate offices," "Division Headquarters," "Training Centers" and "Offices." The map legend is located in the bottom left-hand corner of the page. To the left of the map there are three circles linked by a cable. The top circle, labeled "Branded Service," contains a picture of a Viasource company van. The middle circle, labeled "Nationwide Office Locations," contains a picture of a Viasource office building. The bottom circle, labeled "Trained Service Technicians," contains a picture of a human eye superimposed over a circuit board. To the right of the map there are three circles linked by a cable. The top circle, labeled "Integrated Service," contains a picture of a robotic hand typing on a computer keyboard. The middle circle, labeled "Regional Training Facilities," contains a picture of a human head overlaid with a circuit board. The bottom circle, labeled "Strategic Relationships," contains a picture of a human hand overlaid with a circuit board. Below the map are located four circles, side by side. These circles are identical to those found in the artwork located on the inside front cover page. THE OFFERING Common stock offered............ 5,000,000 shares Common stock to be outstanding after this offering........... 41,990,590 shares Use of proceeds................. We estimate we will receive net proceeds of approximately $33.2 million from this offering. We will use the net proceeds from this offering to repay indebtedness and for working capital and other general corporate purposes. Over-allotment option........... We and one of our shareholders have granted to the underwriters an option to purchase up to an additional 750,000 shares solely to cover over-allotments. We will not receive any of the proceeds of any shares sold by the selling shareholder upon any exercise of the underwriters' over-allotment option. Dividend Policy................. We do not anticipate declaring or paying cash dividends for the foreseeable future. Nasdaq symbol................... VVVV Unless otherwise indicated, all information in this prospectus: - assumes no exercise of the underwriters' over-allotment option, - assumes that 4,113,745 shares of common stock are issued simultaneously with this offering upon the mandatory exercise of outstanding warrants and automatic conversion of all outstanding shares of our preferred stock, - excludes 3,423,545 shares of common stock issuable upon exercise of outstanding options at a weighted average exercise price of $3.91 per share, and 2,235,294 shares of common stock reserved for future grants under our 2000 Stock Option Plan, and - reflects a 0.588 for 1 reverse stock split of our capital stock that will become effective prior to this offering. EXECUTIVE OFFICES We are a New Jersey corporation. Our principal executive offices are located at 200 East Broward Boulevard, Suite 2100, Fort Lauderdale, Florida 33301. Our telephone number is (800) 683-0253. Our Web site can be found at www.viasource.net. Information contained on our Web site is not intended to be a prospectus and is not incorporated into this prospectus. You should rely only on the information contained in this prospectus. The information contained in this prospectus is accurate only as of the date of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date. We will update any material changes to the information in this prospectus in accordance with the rules and regulations of the Securities and Exchange Commission. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. TABLE OF CONTENTS <TABLE> <CAPTION> Page <S> <C> Prospectus Summary............... 1 Risk Factors..................... 9 Use of Proceeds.................. 17 Dividend Policy.................. 17 Capitalization................... 18 Dilution......................... 19 Selected Unaudited Pro Forma Financial Data................. 20 Selected Historical Financial Data........................... 23 Management's Discussion and Analysis of Financial Condition and Results of Operations...... 25 </TABLE> <TABLE> <CAPTION> Page <S> <C> Industry......................... 40 Business......................... 45 Management....................... 59 Certain Transactions............. 68 Principal and Selling Shareholders................... 72 Description of Capital Stock..... 74 Shares Eligible for Future Sale........................... 78 Underwriters..................... 80 Legal Matters.................... 83 Experts.......................... 83 Additional Information........... 84 Index to Financial Statements.... F-1 </TABLE> SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA The following table presents our summary unaudited pro forma consolidated financial data. The summary unaudited pro forma financial data have been derived from the pro forma consolidated financial statements included elsewhere in this prospectus. Our unaudited pro forma statement of operations data for the fiscal year ended January 1, 2000 and for the six months ended July 3, 1999 and July 1, 2000 gives effect to the following transactions as if they had occurred on January 3, 1999: - our acquisition of Communication Resources Incorporated on July 23, 1999, - our acquisition of Telecrafter Services Corporation on September 7, 1999, - our acquisition of D.S. Cable TV Contractor, Inc. on April 21, 2000, - our acquisition of Service Cable Electric, Inc. on May 4, 2000, - our acquisition of Excalibur Cable Communications, Ltd on June 1, 2000, and - our acquisition of TeleCore, Inc. on June 1, 2000. Our unaudited pro forma statement of operations data also gives effect to the following adjustments arising from these acquisitions: - goodwill and other intangibles, - interest expense due to the incremental indebtedness, and - income taxes. Our unaudited pro forma balance sheet data as of July 1, 2000 gives effect to the mandatory exercise of warrants to purchase common stock and conversion of our preferred stock into common stock upon this offering. Our unaudited pro forma, as adjusted, balance sheet data as of July 1, 2000 gives effect to the above pro forma balance sheet adjustments and the following adjustments: - the issuance of common stock in this offering, and - the repayment of indebtedness as described in "Use of Proceeds." We have included EBITDA in our Summary Unaudited Pro Forma Financial Data. We have presented EBITDA to enhance your understanding of our operating results. EBITDA consists of net income (loss), excluding net interest, taxes, depreciation and amortization. EBITDA is provided because it is an important measure of financial performance commonly used in the telecommunications industry to determine the value of companies within the industry and to define standards for borrowing from institutional lenders. You should not construe EBITDA as an alternative to operating income as an indicator of our operating performance, or as an alternative to cash flows from operating activities as a measure of our liquidity, determined in accordance with generally accepted accounting principles. We may calculate EBITDA differently than other companies. Included in EBITDA are non-cash operating charges in fiscal 1999 of $1.2 million of special compensation charges associated with certain stock option grants and $1.1 million of recapitalization costs. Included in EBITDA for the six months ended July 1, 2000 are non-cash operating charges of $6.6 million of special compensation charges associated with certain stock and stock option grants. You should read our Summary Unaudited Pro Forma Financial Data in conjunction with our consolidated financial statements and notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Selected Unaudited Pro Forma Financial Data," "Selected Historical Financial Data" and our pro forma consolidated financial statements and notes thereto included elsewhere in this prospectus. SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> FISCAL YEAR SIX MONTHS ENDED ENDED ----------------------------- JANUARY 1, 2000 JULY 3, 1999 JULY 1, 2000 <S> <C> <C> <C> OPERATING DATA: Revenues................................ $130,526 $ 58,300 $109,200 -------- -------- -------- Operating Expenses: Cost of revenues..................... 104,432 43,023 99,406 Selling, general and administrative.................... 22,096 9,875 20,899(1) Depreciation and amortization........ 18,560 9,393 9,737 Special compensation charges......... 1,229 315 6,620 Recapitalization costs............... 1,109 1,023 -- -------- -------- -------- Total operating expenses.......... 147,426 63,629 136,662 -------- -------- -------- Loss from operations.................... (16,900) (5,329) (27,462) Interest income......................... 218 66 126 Interest expense........................ 5,690 2,562 4,020 -------- -------- -------- Loss before income taxes................ (22,372) (7,825) (31,356) Income tax provision (benefit).......... (1,238) (360) -- -------- -------- -------- Net loss................................ $(21,134) $ (7,465) $(31,356) ======== ======== ======== Pro forma basic and diluted net loss per share................................ $ (0.52) $ (0.17) $ (0.85) ======== ======== ======== Shares used in computation of pro forma basic and diluted net loss per share................................ 40,506 44,500 36,991 ======== ======== ======== OTHER FINANCIAL DATA: EBITDA.................................. $ 1,660 $ 4,064 $(17,725) Capital expenditures.................... 6,380 1,809 6,466 Cash flows provided by (used in) operating activities................. 1,991 8,062 (3,981) Cash flows used in investing activities........................... (18,404) (14,035) (5,300) Cash flows provided by financing activities........................... 21,581 7,804 12,157 </TABLE> <TABLE> <CAPTION> AS OF JULY 1, 2000 ----------------------- PRO PRO FORMA FORMA AS ADJUSTED <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.............................. $ 7,732 $ 30,532 Working capital........................................ 218 30,518 Goodwill and other intangibles......................... 155,645 155,645 Total assets........................................... 231,802 254,602 Long-term debt, net of current portion................. 55,186 52,286 Total shareholders' equity............................. 117,310 150,510 </TABLE> --------------- (1) Includes (i) bonus expense of $1.9 million incurred under a bonus plan of Excalibur prior to its acquisition, and (ii) merger and other transaction expenses of $1.3 million and information system selection and development expenses of $1.1 million incurred by TeleCore prior to its acquisition. SUMMARY HISTORICAL FINANCIAL DATA The following table presents our summary historical financial data. The summary historical financial data as of January 2, 1999 and January 1, 2000 and for the fiscal years ended January 3, 1998, January 2, 1999 and January 1, 2000 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary historical financial data as of June 2, 1995, June 1, 1996, January 4, 1997 and January 3, 1998 and for the fiscal years ended June 2, 1995, June 1, 1996 and for the period from June 2, 1996 through January 4, 1997 have been derived from unaudited financial statements not included in this prospectus, which have been prepared on the same basis as the audited financial statements. The summary historical financial data as of July 1, 2000 and for the six month periods ended July 3, 1999 and July 1, 2000 are derived from unaudited consolidated financial statements included elsewhere in this prospectus which have been prepared on the same basis as the audited financial statements. In 1996, we changed our fiscal year from a 52/53 week year ending in May to a 52/53 week calendar year. Our historical results include the results of Communication Resources from July 23, 1999, Telecrafter from September 7, 1999, D.S. Cable from April 21, 2000, Service Cable from May 4, 2000, Excalibur from June 1, 2000 and TeleCore from June 1, 2000, their respective acquisition dates. These acquisitions are all accounted for under the purchase method of accounting. See note 3 of the notes to our consolidated financial statements included elsewhere in this prospectus. You should read our Summary Historical Financial Data in conjunction with our consolidated financial statements and notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Selected Historical Financial Data," "Selected Unaudited Pro Forma Financial Data" and our pro forma consolidated financial statements and notes thereto included elsewhere in this prospectus. We explain the EBITDA measure presented in this table in the discussion preceding our "Summary Unaudited Pro Forma Financial Data." SUMMARY HISTORICAL FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> PERIOD FROM JUNE 2, FISCAL YEAR ENDED 1996 FISCAL YEAR ENDED SIX MONTHS ENDED ------------------- THROUGH ------------------------------------ ------------------- JUNE 2, JUNE 1, JANUARY 4, JANUARY 3, JANUARY 2, JANUARY 1, JULY 3, JULY 1, 1995 1996 1997 1998 1999 2000 1999 2000 <S> <C> <C> <C> <C> <C> <C> <C> <C> OPERATING DATA: Revenues....................... $ 21,887 $ 20,039 $ 11,787 $ 25,707 $ 33,816 $ 61,396 $ 17,384 $ 74,390 -------- -------- -------- -------- -------- -------- -------- -------- Operating Expenses: Cost of revenues............. 17,945 16,926 10,232 20,971 26,866 51,009 13,771 65,992 Selling, general and administrative............. 1,876 2,124 1,189 2,443 3,230 7,362 1,665 9,201 Depreciation and amortization............... 660 660 350 780 980 2,814 668 4,030 Special compensation charges.................... -- -- -- -- -- 1,164 315 2,014 Recapitalization costs....... -- -- -- -- -- 1,108 1,023 -- -------- -------- -------- -------- -------- -------- -------- -------- Total operating expenses... 20,481 19,710 11,771 24,194 31,076 63,457 17,442 81,237 -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) from operations................... 1,406 329 16 1,513 2,740 (2,061) (58) (6,847) Interest income................ -- -- -- -- -- 76 -- 48 Interest expense............... 205 146 79 177 122 1,419 78 1,814 -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes........................ 1,201 183 (63) 1,336 2,618 (3,404) (136) (8,613) Income tax provision (benefit).................... 550 105 42 747 1,203 (555) 460 -- -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss).............. $ 651 $ 78 $ (105) $ 589 $ 1,415 $ (2,849) $ (596) $ (8,613) ======== ======== ======== ======== ======== ======== ======== ======== Basic and diluted net income (loss) per share............. $ 0.03 $ -- $ -- $ 0.03 $ 0.07 $ (0.13) $ (0.03) $ (0.31) ======== ======== ======== ======== ======== ======== ======== ======== Shares used in computation of basic and diluted net income (loss) per share............. 20,233 20,233 20,233 20,233 20,233 21,493 19,215 27,748 ======== ======== ======== ======== ======== ======== ======== ======== OTHER FINANCIAL DATA: EBITDA......................... $ 2,066 $ 989 $ 366 $ 2,293 $ 3,720 $ 753 $ 610 $ (2,817) Capital expenditures........... 630 978 400 1,030 2,231 4,383 1,317 3,827 Cash flows provided by (used in) operating activities..... 1,361 835 334 1,660 2,236 1,903 1,611 (793) Cash flows used in investing activities................... (409) (710) (667) (1,030) (2,231) (13,641) (1,317) (5,403) Cash flows provided by (used in) financing activities..... (973) (308) 515 104 (315) 17,668 1,441 8,124 </TABLE> <TABLE> <CAPTION> AS OF -------------------------------------------------------------------------------- JUNE 2, JUNE 1, JANUARY 4, JANUARY 3, JANUARY 2, JANUARY 1, JULY 1, 1995 1996 1997 1998 1999 2000 2000 <S> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................... $ 454 $ 270 $ 453 $ 1,187 $ 877 $ 6,257 $ 7,715 Working capital............................. 1,021 1,532 1,716 1,899 1,926 11,949 201 Goodwill and other intangibles.............. -- -- -- -- -- 32,618 155,645 Total assets................................ 6,768 6,448 7,065 8,241 9,784 67,182 231,785 Long-term debt, net of current portion...... 419 996 1,411 1,249 661 20,927 55,186 Redeemable common stock and warrants........ -- -- -- -- -- 5,827 1,480 Total shareholders' equity.................. 2,686 2,753 2,915 3,428 4,818 26,649 115,813 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001112006_iconixx_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001112006_iconixx_prospectus_summary.txt
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+PROSPECTUS SUMMARY The information below is only a summary of more detailed information included in other sections of this prospectus. This summary may not contain all the information that is important to you or that you should consider before buying shares in this offering. The other information is important, so please read this entire prospectus carefully. Iconixx Corporation We are a leading end-to-end e-business solutions provider focused on leveraging broadband, wireless and other emerging technologies to enhance our clients' businesses. We deliver comprehensive, high-quality e-business solutions that capitalize on the interdependency of user experience, mission- critical business applications and robust network infrastructure to enhance value in online business. Our services include e-business strategy and planning, user experience, business functionality and network infrastructure. These services, combined with our deep expertise in wireless and broadband technologies, enable us to create dynamic, media-rich and scalable e-business solutions for our clients that allow them to increase speed to market and e-commerce activity. We enjoy long-standing relationships with our clients, which range from the Global 1000 to emerging growth companies. Because organizations generally find it more efficient for one firm to serve as the single source providing all of these services, we believe that our end- to-end services provide us with a competitive advantage in the marketplace. As a part of our e-business strategy and planning services, we assist our clients in developing e-business models, web channels and Internet strategies, and designing business processes and network architectures. Our user experience services include branding and web design to create an engaging experience for our client's customers. To provide each client with an e-business solution that supports its Internet strategy and provides a compelling user experience, our business functionality services include the development and integration of custom-designed applications, commercially available software packages and legacy applications that allow users to access data and execute transactions over the Internet. Our network infrastructure services include the planning, designing and implementing of server and network architectures that support transaction-intensive applications, integrate a client's e-business solutions with its existing network and deliver wireless and broadband content. The broad adoption of the Internet as a new channel of communication and commerce is redefining and fundamentally changing the economics of business. The recent evolution of the communications and Internet infrastructure has heightened the level of sophistication demanded of Internet applications. The growth in wireless communications solutions has allowed anytime, anywhere access to the Internet, which has significantly increased traffic to an organization's website and affected how data and processes are designed and delivered to users. At the same time, the growing demand for increased transmission frequency and volume, coupled with the need to support applications with media-rich content and increased traffic and transaction activity, has driven the demand for increased bandwidth and broadband capabilities. The emergence of wireless and broadband technologies is producing a fundamental change in the types of e-business solutions organizations require. As a result, today's e-business solutions are becoming increasingly complex and need to be more flexible and scalable to take advantage of new market opportunities. We manage the delivery of these services using a collaborative approach within our cross-functional teams that is designed to create business value by: . implementing a state-of-the-art solution that is aligned with the client's business strategy; . accelerating the deployment of the solution; . integrating the solution with the client's existing business practices and processes; . offering the client a secure, reliable and scalable solution; and . preserving the flexibility to modify the solution to allow the client to deploy emerging technologies faster than its competitors. We were organized in Delaware in September 1995 under the name "Business Solutions Group, LLC." In November 1999, following our acquisition of IconixGroup, Inc., we changed our name to Iconixx Corporation. Our principal executive offices are located at 8300 Boone Boulevard, Vienna, VA 22182 and our telephone number is (703) 790-9008. Our website can be found at www.iconixx.com. Information contained on our website is not intended to be a prospectus and is not incorporated into this prospectus. The Offering <TABLE> <S> <C> Common stock offered ............... shares Common stock to be outstanding after this offering...................... shares Use of proceeds..................... To repay indebtedness and for general corporate purposes, including funding our operations, working capital and possible acquisitions of complementary businesses. Proposed Nasdaq National Market Symbol............................. ICXX </TABLE> The shares of common stock to be outstanding after this offering is based on the shares outstanding as of , 2000 and includes shares of common stock being sold by us in this offering. The number of shares of common stock that will be outstanding after this offering excludes shares of common stock underlying options granted under our 1999 stock option plan and outstanding as of April 30, 2000 at a weighted average exercise price of $ per share. Assumptions That Apply To This Prospectus Unless we indicate otherwise, all share amounts and financial information in this prospectus assume the following: . an increase in the number of our authorized shares of common stock to be effected on completion of this offering; . no exercise by the underwriters of their over-allotment option; . the conversion of all currently outstanding shares of our convertible preferred stock into shares of our common stock; . the conversion of our currently outstanding convertible promissory notes into shares of our common stock; and . a -for- stock split to be effected before completion of this offering. Summary Actual and Pro Forma Financial Data (in thousands, except per share data) The following summary actual and pro forma financial data have been derived from: . our audited consolidated financial statements for each of the three years in the period ended December 31, 1999; . our unaudited consolidated financial statements for the three months ended March 31, 2000; and . our unaudited pro forma condensed combined financial data included elsewhere in this prospectus. You should read the information below with our consolidated financial statements and the related notes, "Use of Proceeds," "Capitalization," "Pro Forma Condensed Combined Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. <TABLE> <CAPTION> Three Months Ended Year Ended December 31, March 31, 2000 ------------------------------------ ----------------------- Actual Pro Forma Actual Pro Forma ----------------------- 1999 1997 1998 1999 (unaudited) (unaudited) (unaudited) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Revenues................ $18,568 $49,898 $48,978 $78,957 $ 14,026 $ 20,533 Gross profit............ 3,636 9,373 9,678 26,971 4,491 8,219 Income (loss) from operations............. 2,923 6,175 2,152 (23,465) (3,908) (6,444) Net income (loss) attributable to common stockholders........... 2,953 6,300 (199) (33,033) (10,089) (14,267) Basic and diluted net income (loss) per common share........... $ 0.16 $ 0.34 $ (0.01) $ (0.85) $ (0.22) $ (0.26) <CAPTION> As of March 31, 2000 ----------------------- Actual As Adjusted <S> <C> <C> Balance Sheet Data: Cash and cash equivalents............ $ 4,639 Working capital......... 5,095 Total assets............ 102,986 Total debt and other long-term obligations.. 17,500 Class A convertible preferred stock........ 92,846 Stockholders' (deficit) equity................. (20,774) </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001112319_phase2medi_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001112319_phase2medi_prospectus_summary.txt
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+SUMMARY The information below is only a summary of more detailed information included in other sections of this prospectus. The other information is important, so please read this entire prospectus carefully. Our Company Phase2Media is a leading Internet advertising sales and marketing organization that sells advertising inventory on the Web sites of branded Web publishers. We provide a comprehensive sales solution to Web publishers which includes the sale of ad inventory, as well as a full complement of strategic, marketing and consulting services. Our exclusive sales relationships with branded Web sites enable us to offer their most desirable advertising space to advertisers. We identify branded Web publishers on the basis of a number of criteria, including name recognition, high visitor traffic, desirable consumer demographics, compelling content, a visible market position and an experienced management team. We currently have agreements to sell the ad inventory of over 60 branded sites, including Prodigy Communications and all of Hachette Filipacchi's online properties, such as Elle, George and Road&Track. Branded Web sites typically generate significantly higher advertising rates than industry averages. We enhance the unique capabilities of these Web sites with our experienced sales organization of over 70 professionals to maximize the value of their ad inventory. We work closely with our clients to understand their core audience and develop marketing materials that highlight attractive advertising and sponsorship opportunities to advertisers. Our Market Opportunity The Internet has created an advertising medium capable of offering levels of targeting and measurement not possible with traditional media. As branded Web publishers attempt to maximize revenue from their advertising inventory they must decide whether to bear the costs of building an in-house ad sales force or to outsource those functions. These Web publishers also face the challenges of maintaining their brand value, managing their ad inventory, accessing the most appropriate ad serving and tracking technologies and realizing value from user information. Advertisers that seek to enhance the effectiveness of their campaigns are challenged by the complexities of this new medium, by a lack of strategic online expertise and by the inefficiencies of current online campaign refinement tools. These obstacles to branded Web publishers and Web advertisers present a compelling opportunity for providers of online advertising services. Our Solution We address the needs of both Web publishers and advertisers by focusing on the sale of the advertising inventory of branded Web sites to advertisers seeking to target a particular audience. Our solution offers Web publishers access to an experienced sales organization with expertise in both online and traditional media. Our team of professionals develops customized advertising and marketing strategies that emphasize brand name and specific user demographics. We give advertisers the strategic sales advice they need to help them reach their desired audience through strategic online ad placement. We develop integrated advertising solutions such as sponsorships that allow advertisers to place their advertisements in a more relevant and targeted context. Our professional staff collects and analyzes data on campaign effectiveness and recommends refinements in ad placement. Our Strategy Our objective is to become the premier sales and marketing organization selling the advertising inventory of branded Web publishers. The following are the key elements of our strategy to achieve this objective: . expand our branded client base; . grow our sales and marketing organization; . further develop our direct marketing business; and . expand our international operations. Corporate Information We were incorporated in Delaware on March 30, 1999 and changed our name to Phase2Media, Inc. on December 14, 1999. Our principal executive offices are located at 420 Lexington Avenue, New York, New York 10170 and our telephone number at that address is (212) 883-4700. Our Web site is located at www.phase2media.com. Information contained on our Web site is not part of this prospectus. The Offering Common stock offered by Phase2Media... shares Common stock to be outstanding after this offering.. shares Use of proceeds....................... We intend to use the net proceeds from this offering to expand our sales force and for general corporate purposes, including working capital. See "Use of Proceeds." Proposed Nasdaq National Market PTWO Symbol................................ This information is based on the number of shares outstanding at March 31, 2000. This information excludes: . 11,741,391 shares subject to options outstanding at a weighted average exercise price of $0.52 per share; . 4,287,609 shares available for future grant or issuance under our stock option plans; . 995,000 shares subject to warrants to purchase our common stock at a weighted average exercise price of $1.77 per share; and . up to 450,000 shares subject to warrants to purchase our common stock, which warrants may be issued if either revenue or operating targets are achieved. The exercise price of these warrants will be equal to 85% of the fair market value of our common stock on the date the warrants are issued. -------------------- Except as otherwise stated, all information in this prospectus assumes: . the conversion of all shares of our class A common stock, series A preferred stock, series B preferred stock, series C preferred stock and series D preferred stock into an aggregate of shares of common stock immediately prior to the completion of this offering, assuming an initial public offering price of $ per share; and . no exercise of the underwriters' over-allotment option. Summary Financial Data (in thousands, except per share data) The following summary financial information is derived from and should be read together with our financial statements and the related notes included elsewhere in this prospectus. Please also read "Use of Proceeds," "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> Period from March 30, 1999 (inception) to Three Months Ended December 31, 1999 March 31, 2000 ----------------- ------------------ <S> <C> <C> Operating Data: System revenue............................ $ 9,576 $11,730 Statement of Operations Data: Revenue................................... $ 4,452 $ 5,253 Gross profit.............................. 2,344 3,344 Loss from operations...................... (5,841) (3,486) Net loss applicable to common stockholders............................. (6,136) (3,676) Basic and diluted net loss per share applicable to common stockholders........ $ (0.58) $ (0.54) Shares used in calculating basic and diluted net loss per share applicable to common stockholders...................... 10,587 6,862 </TABLE> <TABLE> <CAPTION> March 31, 2000 ----------------------------- Pro Forma Actual Pro Forma As Adjusted ------- --------- ----------- <S> <C> <C> <C> Balance Sheet Data: Cash, cash equivalents and short-term investments.................................... $17,693 $ $ Working capital................................. 18,466 Total assets.................................... 35,324 Redeemable convertible preferred stock.......... 2,090 Total stockholders' equity...................... 18,713 </TABLE> The pro forma balance sheet data summarized above reflect the conversion of all our outstanding shares of preferred stock into common stock. The pro forma as adjusted balance sheet data reflect the conversion of all of our outstanding shares of preferred stock into common stock and the application of the estimated net proceeds from the sale of the shares of common stock offered by us at an assumed initial public offering price of $ per share after deducting the underwriting discounts and commissions and the estimated offering expenses payable by us. System revenue represents the full value of gross billings for ads sold under either commission-based contracts or service fee-based contracts and related consulting revenue. Although system revenue is not recognized under generally accepted accounting principles, we believe that system revenue is a standard measure of advertising volume for the Internet advertising industry that enables a meaningful comparison of activity from period to period and from one company to another.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001112437_flashcom_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001112437_flashcom_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..d3b022d90a3960442279dce9e4b2f1f648f64a4f
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before buying shares in this offering. To understand this offering fully, we urge you to read the entire prospectus carefully. FLASHCOM We provide high-speed, or broadband, communications services to small and medium-sized enterprises and residential customers nationwide. We began offering these services in June 1998. As of March 31, 2000, we had more than 30,000 lines in service in 82 metropolitan statistical areas, and had orders for more than 14,000 additional lines. We intend to aggressively expand our presence within our current markets and into new markets, and we expect to offer service in a total of approximately 130 metropolitan statistical areas by the end of 2000 and over 200 metropolitan statistical areas by the end of 2001. We currently deliver broadband services to our customers using digital subscriber line, or DSL, technology and have designed our network to accommodate additional broadband technologies. We seek to "own" the relationship with our customers by being the primary point of contact for all of their broadband communications needs. We believe that building strong customer relationships and brand awareness will best position us to benefit from the migration from dial-up Internet access and secure our position as a market leader in the emerging age of broadband communications. We employ a capital efficient "smart-build" strategy in designing and deploying our network. This means we currently own and operate key network elements, including our service delivery points and our integrated operations support system, and lease other readily available network elements, such as copper loops and the equipment that connect our customers' telephone lines to our network. Our suppliers are a diverse group of local exchange carriers including Covad Communications Group, Inc., NorthPoint Communications Group, Inc., Rhythms NetConnections, Inc., Bell Atlantic Corporation, BellSouth Corporation, GTE Corporation and SBC Communications, Inc. We believe our smart-build strategy enables us to accelerate our entry into new markets, lowers our initial capital costs and allows us to focus resources on customer acquisition and retention while preserving our ability to control the applications and services we offer through our service delivery points. Our service delivery points enable us to deliver broadband applications and content from the edge of our network directly to our customers and ensure a high level of service. In the future, we expect to own and install additional network elements to better control our network and generate stronger operating results. We believe that the demand for broadband Internet access and related services from small and medium-sized enterprises and residential customers will continue to increase. The advent of new broadband technologies allows us to offer our customers affordable alternatives to slow, inexpensive dial-up access and high-cost broadband access. We believe that as affordable broadband solutions proliferate, the market for broadband access and related value-added services will grow rapidly. BUSINESS STRATEGY In pursuing our goal of being a leading nationwide provider of broadband communications services for small and medium-sized enterprises and residential customers, we plan to: - EXPLOIT OUR EARLY MOVER ADVANTAGE AND NATIONWIDE PRESENCE -- We will continue to grow our nationwide presence by expanding our coverage and customer base in existing markets and penetrating new markets that show a significant demand for cost-effective, broadband communications services. We believe that our nationwide presence better positions us to partner with content providers, applications developers and others to deliver broadband content and value-added services. - "OWN" THE CUSTOMER RELATIONSHIP -- We seek to establish ourselves as the primary point of contact for our customers through all aspects of the customer relationship, thereby building our THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED MAY 12, 2000 PROSPECTUS [FLASHCOM LOGO] SHARES FLASHCOM, INC. COMMON STOCK $ PER SHARE ------------------ We are selling shares of our common stock. The underwriters named in this prospectus may purchase up to additional shares of common stock from us under certain circumstances. This is our initial public offering and no public market currently exists for our common stock. We anticipate that the initial public offering price will be between $ and $ per share. We have applied to have our common stock included for quotation on the Nasdaq Stock Market's National Market under the symbol "FLCM." ------------------ INVESTING IN OUR COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 6. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------ <TABLE> <CAPTION> PER SHARE TOTAL --------- ------ <S> <C> <C> Public offering price....................................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds to Flashcom (before expenses)...................... $ $ </TABLE> The underwriters are offering the shares subject to various conditions. The underwriters expect to deliver the shares to purchasers on or about , 2000. ------------------ SALOMON SMITH BARNEY THOMAS WEISEL PARTNERS LLC ING BARINGS , 2000. brand identity and establishing ourselves as a single source for the provision of additional broadband content and value-added services. - EXPAND DELIVERY OF BROADBAND APPLICATIONS AND CONTENT ACROSS OUR PLATFORM -- We have developed a network platform that utilizes service delivery points to deliver content, applications and services to our customers from the edge of our network. In addition, we will continue to partner with a variety of independent developers to deliver an attractive suite of value-added services to our customers. - PURSUE CAPITAL EFFICIENT NETWORK STRATEGY -- We will continue to employ a "smart-build" network strategy in which we own and operate key network elements and lease certain other readily available network elements, enabling us to focus resources on acquiring and retaining customers and expanding our nationwide presence. - PROVIDE SUPERIOR CUSTOMER SERVICE -- We will continue to devote significant resources to improving our provisioning and installation processes, our state-of-the-art operations support systems and other areas of ongoing technical support and customer service. - CONTINUE AGGRESSIVE SALES AND MARKETING EFFORTS -- We will continue our customer acquisition efforts through aggressive marketing and branding campaigns. We will expand our marketing, sales and distribution channels as we build our brand awareness. CORPORATE INFORMATION We were incorporated in Nevada in May 1998 and reincorporated in Delaware in January 1999. Our executive offices are located at 5312 Bolsa Avenue, Huntington Beach, California 92649. Our telephone number is (714) 799-2300. Our web site address is www.flashcom.com. Information contained in our web site does not constitute part of this prospectus. Flashcom, Solosurfer(TM), Multisurfer(TM), HomeSurfer(TM) and BizSurfer(TM) and our logo are trademarks of Flashcom. This prospectus also contains product names, trade names and trademarks that belong to other companies. [INSIDE FRONT COVER OF PROSPECTUS] [ARTWORK TO BE INSERTED] The artwork will consist of a map depicting our current geographic coverage and our proposed network expansion, together with our "Flashcom" logo. THE OFFERING COMMON STOCK OFFERED BY FLASHCOM.... shares COMMON STOCK TO BE OUTSTANDING AFTER THIS OFFERING....................... shares USE OF PROCEEDS..................... We intend to use the net proceeds from this offering to: - expand our sales and marketing activities and our network and systems infrastructure; and - fund working capital needs and for general corporate purposes. NASDAQ STOCK MARKET'S NATIONAL MARKET SYMBOL............................ FLCM RISK FACTORS........................ Investing in shares of our common stock involves risks. See "Risk Factors" for a discussion of matters you should consider before investing in shares of our common stock. The total number of shares of common stock to be outstanding after this offering is based on the actual number of shares of common stock outstanding as of March 31, 2000 and reflects the issuance of 30,139,388 shares of common stock upon the automatic conversion of all outstanding shares of redeemable convertible preferred stock upon the closing of this offering. The total number of shares to be outstanding after this offering excludes the following securities: - 4,531,000 shares of common stock issuable upon exercise of stock options outstanding as of March 31, 2000, at a weighted average exercise price of $1.65 per share, under our stock option plan; - 4,243,367 shares of common stock issuable upon exercise of outstanding warrants to purchase common stock at a weighted average exercise price of $0.90 per share as of March 31, 2000; - 169,827 shares of common stock issuable upon exercise of an outstanding warrant to purchase Series B Preferred Stock at an exercise price of $6.57 per share, which will automatically convert into a warrant to purchase common stock upon the closing of this offering; - up to 2,138,477 shares of common stock issuable under certain circumstances upon exercise of outstanding warrants to purchase common stock at an exercise price equal to the initial public offering price; - 4,026,428 additional shares of common stock reserved for future issuance under our stock option plan; and - 1,500,000 shares of common stock reserved for issuance under our employee stock purchase plan. Unless otherwise specifically stated, all information in this prospectus: - reflects the automatic conversion of all outstanding shares of redeemable convertible preferred stock into 30,139,388 shares of common stock; - assumes outstanding options and warrants to purchase shares of common stock have not been exercised; and - assumes the underwriters have not exercised their over-allotment option. SUMMARY FINANCIAL AND OPERATING DATA The following summary statement of operations data for the periods ended December 31, 1998 and 1999 and the balance sheet data at December 31, 1999 are derived from our financial statements, which have been audited by Ernst & Young LLP, independent auditors, and are included in this prospectus. The following table summarizes our financial results and should be read in conjunction with "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our Financial Statements and Notes. For an explanation of the determination of the number of shares used in computing per share data, refer to Note 2 of Notes to Financial Statements. <TABLE> <CAPTION> PERIOD FROM MAY 18, 1998 (INCEPTION) TO YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1999 STATEMENT OF OPERATIONS DATA: ----------------- ----------------- <S> <C> <C> Revenue................................................... $ 299,000 $ 8,402,000 Total operating expenses.................................. 964,000 38,357,000 ----------- ------------ Operating loss............................................ (665,000) (29,555,000) Interest and other, net................................... -- (2,817,000) Net loss.................................................. (666,000) (32,773,000) Basic and diluted net loss per share...................... $ (0.03) $ (1.21) Shares used in computing net loss per share............... 22,821,000 27,018,000 Pro forma basic and diluted net loss per share (unaudited)............................................. $ (0.89) Shares used in computing pro forma net loss per share (unaudited)............................................. 36,829,000 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, ------------------------------------- 1998 1999 OPERATING DATA: ----------------- ----------------- <S> <C> <C> Lines in service.......................................... 405 17,453 Lines ordered, not in service............................. 144 17,014 Metropolitan statistical areas served..................... 12 52 Service delivery points................................... 6 22 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ------------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED BALANCE SHEET DATA: ------------ ------------ ----------- <S> <C> <C> <C> Cash and cash equivalents......................... $ 2,419,000 $ 74,803,000 $ Working capital (deficiency)...................... (27,843,000) 44,541,000 Property and equipment, net....................... 14,834,000 14,834,000 Total assets...................................... 28,640,000 101,024,000 Capital lease obligations, net of current portion......................................... 3,558,000 3,558,000 Redeemable convertible preferred stock............ 16,335,000 -- Total stockholders' equity (deficit).............. (25,491,000) 60,342,000 </TABLE> The above table summarizes our balance sheet data as of December 31, 1999: - on an actual basis; - on a pro forma basis to reflect: - the receipt of net proceeds of $81,370,000 from the sale of 12,824,351 shares of Series B Preferred Stock subsequent to December 31, 1999; - the retirement of 1,612,903 shares of common stock repurchased by us in February 2000 for $9,000,000; - the issuance of 3,276,129 shares of common stock issued subsequent to December 31, 1999 under our stock option plan, which shares are subject to repurchase by us upon certain events. This includes $5,506,000 of deferred compensation representing the difference between the purchase price and the estimated fair market value of our common stock on the date of purchase; - the issuance of 30,000 shares of common stock in January 2000 to a former employee for $13,300; - the automatic conversion of all outstanding shares of redeemable convertible preferred stock into 30,139,388 shares of common stock upon the closing of this offering; and - on a pro forma as adjusted basis to reflect the sale of shares of our common stock in this offering at an assumed initial public offering price of $ per share, less underwriting discounts and commissions and estimated offering expenses payable by us.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001112479_lineo-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001112479_lineo-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY HIGHLIGHTS INFORMATION THAT WE PRESENT MORE FULLY ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY. LINEO, INC. We provide a broad range of operating system products and services for use in devices and systems containing embedded, or hidden, microprocessors. We do so through a combination of our experience with embedded operating systems, expertise in Linux operating systems and involvement in the open source community. An operating system provides the main control program of a computer or electronic device, and microprocessors are small electronic circuits that control the functions of the computer or electronic device. Products and systems containing embedded microprocessors, ranging from small industrial components to handheld consumer devices to large networking infrastructure equipment, require customized operating systems to communicate operating instructions between the microprocessor and related hardware and software components. These operating systems must be stable and adaptable to performance, memory and storage capacity limitations. We develop embedded Linux operating systems that are reliable, easy to use and able to perform complex functions for use by microprocessor companies and original equipment manufacturers in their products and systems. We also provide software tools and services to enable our customers to quickly and cost-effectively design, develop and integrate their own embedded Linux operating systems. Customers of our Linux products and services consist of original equipment manufacturers such as Analog Devices, Inc., Bast, Inc., CIS Technology, Inc., DaiShin Information & Communications Co., MiTAC International Corp, Samsung Electronics Co., Ltd. and Samsung Electro-Mechanics Co., Ltd. We also have entered into strategic relationships with microprocessor companies such as Hitachi, Ltd. and Metrowerks Corp., a subsidiary of Motorola, Inc., to modify and adapt our products for use with their microprocessors and to further promote our offerings with their customers. Rapid advancements in microprocessor technology have dramatically increased the type and capabilities of products and systems that enable organizations and individuals to collaborate, access information and conduct business more effectively. These advancements have created demand for robust, reliable and powerful embedded operating systems. Historically, most companies that require embedded operating systems for their products and systems have either used internal resources to develop their own or have purchased or licensed operating systems that are owned by, or proprietary to, third parties. Open source operating systems have emerged as an alternative to internally developed and third-party proprietary operating systems. The term open source generally applies to software that is freely accessible by the public and can be copied, modified and distributed with few restrictions. Popular open source software is continuously maintained and improved by worldwide communities of developers who share information, code and suggestions, primarily over the Internet. Linux has emerged as the leading open source operating system, enjoying acceptance by both commercial and academic communities due to its high performance and stability, low cost and broad developer support. Until recently, the growth in the use of Linux operating systems has primarily been in the server and desktop computer markets. Microprocessor companies are now promoting, and original equipment manufacturers are now adopting, Linux in the embedded systems market. However, many of these companies and manufacturers have limited experience working with Linux and may lack developers with the specialized skills and relationships in the open source community necessary to identify and take advantage of the many enhancements to Linux that are continuously under development. We have enhanced and extended open source Linux with new technologies and advancements to enable embedded systems developers to use Linux in a wide range of highly customized embedded products and systems. Our products include Embedix Linux, Embedix RealTime, Embedix Software Development Kit, Embedix UI, Embedix mClinux, Lineo High Availability Clustering and NETtel. Embedix Linux, a combination of open source Linux and internally developed technologies, is a Linux-based operating system that is designed specifically for embedded products and systems. Embedix RealTime is software designed to provide Embedix Linux with predetermined response time, or real time, capabilities. Embedix Software Development Kit is a package of our proprietary software and open source development tools designed to help systems developers accelerate the design, development, error detection and correction, and maintenance of embedded Linux operating systems in their products and systems. Embedix UI is our compact, Linux-based Web browser designed for products and systems that interact with the Internet and contain embedded microprocessors. Embedix mClinux is a version of Embedix Linux designed specifically for the requirements of very small microprocessors, commonly referred to as microcontrollers. Lineo High Availability Clustering is software and hardware that provides continuous operation, or high availability, capabilities. These features enable Linux to perform in environments where failure rates and associated downtime must be very low, such as high speed telephone switches. NETtel is our integrated hardware/software system that provides secure communications over the Internet for small offices and homes. In addition, we provide comprehensive professional Embedix Services to our embedded systems customers, including customized engineering, education and technical support services. Our objective is to become the leading provider of embedded operating system products and services. We intend to enhance our technology leadership by developing additional technologies internally and by acquiring proprietary technologies or other companies. We are currently implementing this strategy and have acquired six companies with technologies complementary to our own. We intend to continue developing strategic relationships with microprocessor companies and original equipment manufacturers to promote our offerings and plan our future product development. We plan to continue expanding sales efforts internationally by growing our internal sales force and through additional strategic acquisitions. We will also continue to enhance our operating system products by incorporating additional software products of independent software vendors. We began operations as a part of Caldera, Inc. in July 1996. We were incorporated as a separate entity in the State of Utah in August 1998 as Caldera Thin Clients, Inc., changed our name to Lineo, Inc. in July 1999 and reincorporated in the State of Delaware in January 2000. Our principal executive offices are located at 390 South 400 West, Lindon, Utah 84042, and our telephone number is (801) 426-5001. Our World Wide Web address is www.lineo.com. Information on our Web site does not constitute a part of this prospectus. -------------- LINEO-TM-, LINEO PARTNER CONNECT-TM-, the Lineo logo, EMBEDIX-TM-, mCLINUX-TM- and TARGET WIZARD-TM- are our trademarks. We will continue to pursue registration of these and other marks. This prospectus also contains trademarks and trade names of other companies. THE OFFERING <TABLE> <S> <C> Common stock offered...................... shares Common stock to be outstanding after this offering................................ shares Use of proceeds........................... For general corporate purposes. See "Use of Proceeds" on page 18 for a more complete description of our planned use of the proceeds from this offering. Proposed Nasdaq National Market Symbol.... LNEO </TABLE> The outstanding share information is based on our shares outstanding as of July 31, 2000. This information excludes: - 3,705,034 shares of our common stock issuable upon the exercise of stock options outstanding as of July 31, 2000, at a weighted average exercise price of $2.88 per share; - 1,266,110 shares of our common stock issuable upon exercise of stock options granted subsequent to July 31, 2000 through October 10, 2000, net of forfeitures, at a weighted average exercise price of $5.60 per share; - 2,000,000 shares of our common stock issuable upon exercise of a stock warrant issued on October 2, 2000, at an exercise price of $6.00 per share; - 1,358,545 shares of our common stock reserved for future issuance under our stock option plan as of October 10, 2000; and - 2,000,000 shares of our common stock reserved for future issuance under our employee stock purchase plan. -------------- Unless otherwise indicated, all information contained in this prospectus: - assumes conversion of all outstanding shares of our convertible preferred stock into 16,763,813 shares of our common stock upon completion of this offering; and - assumes the underwriters' over-allotment option is not exercised. SUMMARY ACTUAL AND PRO FORMA FINANCIAL DATA The following financial data should be read in conjunction with "Selected Actual and Pro Forma Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Unaudited Pro Forma Condensed Consolidated Financial Statements and related Notes and our Consolidated Financial Statements and related Notes included elsewhere in this prospectus. Our actual operating results for the nine months ended July 31, 2000 include, for the period from their respective acquisition dates through July 31, 2000, the operating results of Zentropic Computing, LLC, which we acquired on April 3, 2000; United System Engineers, Inc., Fireplug Computers, Inc., Inup, S.A. and Moreton Bay Ventures Pty, Ltd., each of which we acquired effective May 1, 2000; and RT-Control Inc., which we acquired on May 12, 2000. The pro forma statement of operations data for the fiscal year ended October 31, 1999 and the nine months ended July 31, 2000: - give effect to our acquisitions of Zentropic, United System, Fireplug, Inup, Moreton Bay and RT-Control as if they had occurred on November 1, 1998; and - reflect the amortization of goodwill and other intangibles related to the acquisitions, as well as adjustments for acquired in-process research and development in connection with the acquisitions and the elimination of intercompany transactions. The pro forma balance sheet data as of July 31, 2000 give effect to the conversion of all outstanding shares of our convertible preferred stock into 16,763,813 shares of our common stock upon completion of this offering. The pro forma as adjusted balance sheet data as of July 31, 2000 give effect to the pro forma adjustment, as well as to the receipt of the proceeds from this offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses. The pro forma financial data are presented for illustrative purposes only and are not necessarily indicative of the operating results or financial position that would have resulted if these acquisitions had been in effect during the periods presented or of future operating results. <TABLE> <CAPTION> FISCAL YEAR ENDED OCTOBER 31, PERIOD FROM -------------------------------------------- JULY 23, 1996 1999 (INCEPTION) TO ---------------------- OCTOBER 31, 1996 1997 1998 ACTUAL PRO FORMA ----------------- -------- -------- -------- ----------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenue....................... $ 62 $ 945 $ 1,376 $ 2,801 $ 4,640 Cost of revenue............... 67 247 361 185 1,380 Gross margin.................. (5) 698 1,015 2,616 3,260 Loss from operations.......... (49) (827) (2,005) (891) (9,849) Net loss...................... (61) (877) (2,186) (1,054) (10,068) Basic and diluted net loss per common share................ $(0.00) $(0.05) $ (0.12) $ (0.06) $ (0.48) Basic and diluted weighted average common shares outstanding................. 18,000 18,000 18,000 18,000 21,079 Basic and diluted supplemental pro forma net loss per common share................ $ (0.45) Basic and diluted supplemental pro forma weighted average common shares outstanding... 22,592 <CAPTION> NINE MONTHS ENDED JULY 31, --------------------------------------- 2000 ------------------------- 1999 ACTUAL PRO FORMA ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenue....................... $ 1,373 $ 3,878 $ 4,941 Cost of revenue............... 143 844 1,597 Gross margin.................. 1,230 3,034 3,344 Loss from operations.......... (1,282) (14,508) (16,906) Net loss...................... (1,365) (14,055) (16,429) Basic and diluted net loss per common share................ $ (0.08) $ (0.69) $ (0.74) Basic and diluted weighted average common shares outstanding................. 18,000 20,268 22,146 Basic and diluted supplemental pro forma net loss per common share................ $ (0.52) Basic and diluted supplemental pro forma weighted average common shares outstanding... 31,611 </TABLE> <TABLE> <CAPTION> JULY 31, 2000 ----------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ----------- ------------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents................................... $25,121 $25,121 $ Working capital............................................. 23,875 23,875 Total assets................................................ 54,815 54,815 Long-term liabilities....................................... 556 556 Total stockholders' equity.................................. 50,468 50,468 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001112822_adesso_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001112822_adesso_prospectus_summary.txt
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+Prospectus summary This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, especially the risks of investing in our common stock which we discuss under "Risk factors." We were incorporated in California in May 1995. We intend to reincorporate in Delaware prior to the completion of this offering. Our principal executive offices are located at 2835 Zanker Road, San Jose, California 95134. Our telephone number is (408) 894-7700. Our website is http://www.adessohts.com. We do not intend the information found on our website to be a part of this prospectus and our website may not contain all of the information that is important to you. OUR BUSINESS We provide proprietary applications designed to address problems facing healthcare payors by improving physician reimbursement systems and enabling more efficient management of healthcare resources. Our applications combine information technology, actuarial science and Internet-based data delivery tools to create compensation systems designed to align the incentives of health plans and specialty physicians, restore physician autonomy and ultimately improve the efficiency of the healthcare delivery system. We host payment applications that employ scientific methodologies and severity-adjusted patient data to determine appropriate physician reimbursement on what is commonly referred to as a case rate method. Additionally, we use our unique database to generate profiling reports on physicians and pharmaceutical treatment patterns and outcomes. We currently sell our payment applications, Internet-based information and data evaluation products to managed care plans, health plans and physician groups. We market our profiling applications to these customers as well as pharmaceutical manufacturers. Our major customers are Aetna US Healthcare, Highmark Blue Cross Blue Shield, Humana, Novartis, UnitedHealthCare and Prudential HealthCare. We also provide our services to multiple managed care organizations. To date, we are generating revenues from contracts with nine health plans and one hospital group. The cornerstone of our solution is the Adesso Severity-Adjusted Case Rate Application, or ASAC. This application uses a sophisticated payment algorithm to generate a case rate that reflects the complexity and critical nature of the patient's condition as determined by the variables of a patient's age, sex, diagnosis, type of medical facility, procedural frequency and other demographic and medical information. This severity-adjusted case rate is applied throughout the duration of that patient's treatment. ASAC allocates limited medical resources to patients with the most critical medical conditions. As a result, specialty physicians are paid appropriately for their caseload and are empowered to make all medical decisions based on their patient's medical condition without intrusive and expensive third-party administrative interference. We believe that ASAC allows our healthcare payor customers to: - predict, measure and control healthcare delivery costs in medical specialties more effectively; - contain specialty costs and lower facility spending in the 14 specialties that we believe drive over 80% of medical, professional, hospital and pharmacy costs; - eliminate the need for utilization management and restore physician autonomy, while lowering health plan administrative costs; - compensate physicians for providing appropriate patient care, while removing incentives for inefficient and unnecessary treatment; and - outsource physician compensation systems for a monthly fee and avoid high up-front costs and the extensive use of internal information technology resources. We have built and are continuing to expand what we believe is one of the most extensive profiling databases that contains detailed information on patient condition, including diagnosis, severity, age, sex and location, as well as medical treatment and outcome data. We believe this database allows us to create unique profiling reports on physician practices and pharmaceutical efficacy. Our eClinician Profiler and ePrescription Profiler give specialty physicians monthly feedback on key measures of performance relative to their specialty colleagues and demonstrate to our health plan customers the advantages of reimbursing physicians with ASAC. eClinician Profiler and ePrescription Profiler can be accessed through our 14 specialty-specific Internet portals and provide tools that our customers can use to promote physician behavior change. We believe our Internet websites will become important destinations for specialty physicians to retrieve current economic and medical practice pattern information generated by our applications. INDUSTRY BACKGROUND The healthcare sector is one of the largest industries in the United States. Each year the United States allocates significant resources for healthcare services. The US Health Care Finance Administration, or HCFA, estimates that healthcare expenditures are expected to increase from approximately $1.3 trillion, or 15% of the estimated US gross domestic product in 2000, to approximately $2.2 trillion in 2008. Population growth, increased access to healthcare, technological advances and an aging population have fueled the growth in healthcare expenditures. The government and other healthcare consumers are placing increasing pressure on the industry to improve the quality and cost-effectiveness of healthcare. To achieve this goal, health plans have primarily focused on gaining price concessions from providers and suppliers and limiting access to healthcare products and services. Recently, consumers, providers and policymakers have begun to question the effectiveness of this managed care approach. Patients and their employers have expressed dissatisfaction with escalating health plan premiums and restrictive processes designed to limit physician choice and access to healthcare services. Physicians and patients have expressed concern that managed care has led to a decline in the quality of patient care and has increased administrative inefficiencies. We believe that antiquated, nonscientific physician compensation systems and inadequate use of information technology are among the major causes of the current inefficiencies in the healthcare industry. COMPENSATION MODELS Fee-for-service Currently, the vast majority of specialty physicians are reimbursed under a fee-for-service compensation model. Under fee-for-service, a physician is paid a predetermined fee for providing a service. For example, if the reimbursement for one x-ray is $50, the reimbursement for ten x-rays would be $500. Under this compensation model, physicians are reimbursed based upon the quantity of services performed. In order to increase their compensation under this model, physicians must increase the quantity of services performed. These increases in procedures under quantity-based fee-for-service compensation models are often unnecessary based on the patient's diagnosis and may lead to wasted medical, professional, hospital and pharmacy resources. Furthermore, unnecessary procedures often put patients under greater risk of complications related to the additional procedures. To control fee-for-service medical expenses, healthcare payors have used the following cost containment programs: - gatekeeping, a process requiring the patient to consult with a primary care physician prior to receiving care from a specialty physician; - prior authorization, a process requiring the patient or physician to seek prior approval from the health plan or physician group for a prescribed course of treatment; - utilization management, a process of introducing a third-party clinician, designed to direct or manage the treatment prescribed by the physician; and - limited physician networks, a method of restricting a patient's choice of physician for medical services. In attempting to reduce costs, these programs create barriers, limit patient choice, reduce physician autonomy and significantly increase administrative expenses. Case rates In response to the inherent inefficiencies in the fee-for-service model, and in an attempt to encourage physicians to practice more efficiently, healthcare payors developed case rate compensation systems. Under the case rate compensation method, the payor makes a predetermined lump-sum payment to the physician for all services that the physician is likely to deliver over the course of treatment for a particular diagnosis. To date, case rate compensation has been limited to certain diagnoses such as normal pregnancy, where the range and extent of medical treatment is highly predictable due to the uniform patient population. OUR SOLUTION Our solution enables the widespread use of case rates to determine physician reimbursement in the 14 medical specialties that we believe drive over 80% of healthcare spending. Our ASAC application uses information technology, innovative actuarial algorithms and our unique database of patient information to create customized, severity-adjusted case rates. Our profiling applications provide healthcare administrators and physicians with the critical information they need to understand clinical utilization, resource usage, financial payments and to make sound management decisions. Additionally, we facilitate the sharing of clinical information among healthcare constituents on a community-by- community basis. We believe our solutions improve our customers' business performance by simplifying medical cost structures and the sharing of information among healthcare industry constituents. OUR STRATEGY Our objective is to make ASAC the standard reimbursement tool for health plans throughout the United States and to use our unique database to provide profiling applications used for the measurement of physician performance and pharmaceutical treatment patterns and outcomes. The key elements to our strategy include the following: - expand sales of our payment application to existing customers; - target new customers for our payment applications; - promote our profiling applications; - continue development and enhancement of our products; and - pursue strategic relationships and acquisitions. Adesso-Registered Trademark- and SSO-Registered Trademark- are registered service marks, and the Adesso logo, ASAC-TM-, eClinician Profiler-TM- and ePrescription Profiler-TM- are trademarks of Adesso Healthcare Technology Services, Inc. This prospectus also contains brand names, trademarks, trade names and service marks of companies other than Adesso, and these brand names, trademarks, trade names and service marks are the property of their respective holders.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001112828_fort_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001112828_fort_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should carefully read this entire prospectus, including "Risk Factors" and the financial statements and notes thereto, before you decide to buy our common stock. FORT POINT PARTNERS INC. Fort Point Partners was formed specifically to provide eSelling solutions, which we define as Internet services that enable companies to sell more effectively. We are an Internet consulting firm that specializes in providing strategy, technology and program management services to help companies combine their existing capabilities with Web-based technologies to launch or expand an e-business designed to maximize revenues and gain competitive advantage. Our past and present clients include companies that are engaging in e-business, in both business-to-business and business-to-consumer selling environments, such as BlueLight.com, Elizabeth Arden, J.Crew and Kaplan. We provide our services primarily on a fixed-price, fixed-timeframe basis. Companies are increasingly launching e-businesses in response to the rapid growth in the commercial use of the Internet. To do so, many companies require the expertise of Internet services firms to better understand the Internet opportunity and how to build e-businesses. International Data Corporation, or IDC, estimates that the worldwide market for Internet services will grow from $16.2 billion in 1999 to $99.1 billion in 2004. We believe that the marketplace is entering the next phase of e-business, characterized by a focus on maximizing profitable sales. To date, companies have focused on developing a Web presence and Web-enabling enterprise applications. However, as the number of e-businesses has grown, buyers have been empowered by increased variety in product and service offerings, greater access to information and real-time price and transaction capability. As buyers become empowered, companies are seeking better ways to differentiate their products and services to create competitive advantages and drive increased revenue and profitability. Companies also face a growing number of options in the selection of business plans, solution models and technologies. We believe that we are well positioned to benefit from this next phase of e-business because our eSelling solutions specifically focus on helping companies maximize revenue. We distinguish ourselves by: - working with our clients to design eSelling strategies built around understanding every point of contact between our clients and their customers such as sales, supply, fulfillment and customer service. We then employ processes and technologies to remove barriers to buying and to create additional revenue opportunities at each of these contact points; - our deep technology expertise and experience, which enables us to architect and build scalable and flexible applications capable of handling high transaction rates and large volumes of data and that can be adapted to our clients' and their customers' changing needs, technological innovation and business trends; - employing a differentiated First-Stop Shop approach, which means that clients engage us early in the strategic planning process to define and assume responsibility for the entire eSelling solution. Our ecosystem of relationships allows us to provide our clients with leading expertise in all relevant areas necessary to implement high-quality eSelling solutions as well as the flexibility to take advantage of the latest technologies; - utilizing knowledge merchandising to identify, capture and reuse valuable frameworks, tools and processes to achieve rapid time to market when delivering our eSelling solutions; and - having a disciplined methodology that ensures consistent delivery of high quality eSelling solutions in a timely, cost-effective manner across all client engagements. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED MAY 3, 2000 Shares [FORT POINT PARTNERS LOGO] Common Stock ------------------ Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $ and $ per share. We will apply to have our common stock approved for listing on The Nasdaq Stock Market's National Market under the symbol "FTPT". The underwriters have an option to purchase a maximum of additional shares to cover over-allotments of shares. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 4. <TABLE> <CAPTION> UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO FORT PUBLIC COMMISSIONS POINT PARTNERS -------- ------------- ---------------- <S> <C> <C> <C> Per Share.......................................... $ $ $ Total.............................................. $ $ $ </TABLE> Delivery of the shares of common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON DEUTSCHE BANC ALEX. BROWN WR HAMBRECHT + CO The date of this prospectus is , 2000 Our objective is to become the leading provider of eSelling solutions. Our strategy for accomplishing this objective includes: - continuing to develop new and innovative eSelling solutions to increase the value of our client engagements and target large companies in the manufacturing, retail, financial services and telecommunications industries; - targeting strategic eSelling initiatives for established enterprises to help those companies use the Internet to leverage their substantial existing corporate advantages across multiple channels; - cultivating a culture that attracts and retains skilled, multidisciplinary professionals; - building long-term relationships, which lead to additional business opportunities, large-scale client engagements, recurring revenue streams and a strong base of referenceable clients; - leveraging the relationships in our ecosystem to provide high-quality eSelling solutions; - fostering an effective selling organization to scale our business, obtain large engagements and develop long-term client relationships; and - expanding our geographic presence throughout the United States and internationally to meet clients' eSelling needs. We were incorporated in California in October 1996 and will reincorporate as a Delaware corporation prior to the completion of this offering. As of March 31, 2000, we had 84 billable professionals. Our principal executive offices are located at 111 Sutter Street, San Francisco, California 94104, and our telephone number is (415) 395-4400. We also have an office in New York and are establishing offices in Chicago and Germany. THE OFFERING <TABLE> <S> <C> Common stock offered by Fort Point Partners............. shares Common stock to be outstanding after this offering...... shares Use of proceeds......................................... We intend to use the net proceeds of this offering for working capital and general corporate purposes. Proposed Nasdaq symbol.................................. FTPT </TABLE> The common stock to be outstanding upon completion of this offering is based on the number of shares outstanding as of March 31, 2000. The common stock outstanding after this offering assumes the conversion into common stock of all of our outstanding preferred stock and excludes 3,754,350 shares of common stock that are reserved for issuance under our 1996 Stock Option/Stock Issuance Plan, of which 1,396,244 shares were subject to outstanding options as of March 31, 2000 with a weighted average exercise price of $0.18. See "Capitalization," "Management -- Employee Benefit Plans" and "Description of Capital Stock." Except as otherwise indicated, we have presented all information in this prospectus assuming that: - the underwriters will not exercise their over-allotment option; - all outstanding shares of our preferred stock will be converted into common stock upon completion of this offering (see "Description of Capital Stock"); and - we have reorganized Fort Point Partners Inc. into a Delaware corporation (see "Certain Transactions -- Reorganization of Fort Point Partners"). [DESCRIPTION OF INSIDE FRONT COVER] Within the borders of a black box is a beige and white background depicting a section of the Golden Gate Bridge. In black typeset centered over the background is text stating, "Some of our past and present clients include: BlueLight.com, Inc., Elizabeth Arden Company, a Unilever company, eve.com, Inc., J.Crew Group, Inc., Kaplan, Inc., Lids Corp., The North Face, Inc., Petstore.com Inc., Smith and Hawken, Ltd. and Tavolo, Inc." Centered below that text is the Fort Point Partners blue and gold logo and the bolded text, "Fort Point Partners." SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The following table summarizes the results of our operations. The consolidated statement of operations data set forth below for the years ended December 31, 1997, 1998 and 1999 are derived from our audited consolidated financial statements. The consolidated statement of operations data for the quarters ended March 31, 1999 and 2000 are derived from our unaudited interim consolidated financial statements. The pro forma net loss per common share data reflect the sale in April 2000 of 3,426,411 shares of our Series E convertible preferred stock for aggregate proceeds of approximately $30.0 million and the automatic conversion of all outstanding shares of our convertible preferred stock into shares of our common stock upon completion of this offering. <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, QUARTERS ENDED MARCH 31, ----------------------------------- ------------------------ 1997 1998 1999 1999 2000 --------- --------- --------- --------- ----------- (UNAUDITED) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue................................... $ 2,045 $ 2,489 $ 8,325 $ 1,224 $ 5,003 Operating expenses: Professional services................... 620 1,037 4,875 584 2,527 Sales and marketing..................... 62 425 2,451 214 4,041 General and administrative.............. 1,021 1,768 6,150 500 4,386 Amortization of deferred stock-based compensation.......................... 1 67 882 51 3,453 --------- --------- --------- --------- ----------- Total operating expenses.................. 1,704 3,297 14,358 1,349 14,407 --------- --------- --------- --------- ----------- Operating income (loss)................... 341 (808) (6,033) (125) (9,404) Interest income (expense), net............ 8 (1) 144 (3) 75 Income tax (expense) benefit.............. (139) 83 (1) -- (1) --------- --------- --------- --------- ----------- Net income (loss)......................... $ 210 $ (726) $ (5,890) $ (128) $ (9,330) ========= ========= ========= ========= =========== Net income (loss) per common share: Basic................................... $ 0.05 $ (0.17) $ (1.26) $ (0.03) $ (1.90) ========= ========= ========= ========= =========== Diluted................................. $ 0.04 $ (0.17) $ (1.26) $ (0.03) $ (1.90) ========= ========= ========= ========= =========== Weighted average shares used in computing net income (loss) per common share: Basic................................... 4,160,000 4,162,181 4,693,086 4,642,790 4,905,134 Diluted................................. 5,461,682 4,162,181 4,693,086 4,642,790 4,905,134 Pro forma basic and diluted net loss per common share (unaudited)................ $ (0.67) =========== Weighted average shares used in computing pro forma net loss per common share.......................... 14,003,870 </TABLE> The following table is a summary of our consolidated balance sheet data. The actual column is derived from our unaudited consolidated financial statements. The pro forma column gives effect to the sale in April 2000 of 3,426,411 shares of Series E convertible preferred stock for aggregate proceeds of approximately $30.0 million. The pro forma as adjusted column reflects the sale in April 2000 of our Series E convertible preferred stock and the receipt of the net proceeds from the sale of shares of common stock offered by us at assumed initial public offering price of per share and the application of the net proceeds from the offering, after deducting underwriting discounts and commissions and estimated offering expenses. <TABLE> <CAPTION> MARCH 31, 2000 ----------------------------------------- (UNAUDITED) PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- ------------ -------------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents.............................. $ 5,709 $35,707 $ Working capital........................................ (809) 29,189 Total assets........................................... 14,371 44,369 Total long-term liabilities, including current portion.............................................. 630 630 630 Total stockholders' equity............................. 4,658 34,656 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001112880_argonaut_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001112880_argonaut_prospectus_summary.txt
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+Prospectus summary This summary highlights information contained in other parts of this prospectus. Because it is a summary, it does not contain all of the information you should consider before investing in our common stock. You should read the entire prospectus carefully including "Risk factors" and the financial statements and related notes before making an investment decision. OUR BUSINESS We are a pioneer in the development, manufacturing and marketing of innovative products that enable chemists to use high speed parallel synthesis for the development of new drugs. The process of high speed parallel synthesis allows chemists to rapidly create many compounds simultaneously. Our products include a variety of parallel chemical synthesizers, which act as instruments that carry out parallel synthesis, and reagents, or chemicals that are consumed in synthesis. Our products enable chemists to increase their productivity, accelerate the drug development process and reduce costs. Currently, chemists in the pharmaceutical, biotechnology, life sciences and chemical research fields worldwide use our products for chemistry development. Advances in the drug discovery process have resulted in a significant increase in the number of new tools and targets for the development of new drugs, or drug targets. However, unlike drug discovery, drug development lacks the technological advances and automation that would allow efficient utilization of new targets. As a result, many companies are seeking innovative and cost-effective tools and technologies for exploring the increasing number of targets for the development of new drugs. Our instruments enable parallel synthesis and automate many of the most labor-intensive steps of chemistry development. Through automation, chemists are able to perform multiple experiments under a variety of conditions in a fraction of the time it would take to perform the same experiments using traditional chemistry development methods. We believe that our products will enable companies to develop new drugs in a faster and more productive and cost-effective manner than by using traditional chemistry development methods. Companies may capitalize on the wealth of potential new drug targets being generated by the drug discovery process through the use of our products. We began marketing our first product in 1996. We have a limited operating history and have incurred significant losses since inception. Currently, we market eight instruments and more than 40 reagents. Through March 31, 2000, we have sold our products to more than 545 customers in the pharmaceutical, biotechnology, life sciences and chemical research industries and have placed more than 600 instruments worldwide. In addition, we have a track record of quickly and effectively developing solutions to our customers' problems. In order to ensure that our products meet the specific needs of chemists throughout the research community, we have formed formal consortia and informal relationships with teams of industry leaders and academic institutions for each of our instruments released to date. Through this process we have developed innovative products that have extensive customer input, validation and testing prior to commercial introduction. OUR MARKET OPPORTUNITY The life sciences research industry is undergoing fundamental change, resulting principally from the explosive growth in gene discovery and the increasing demand for greater efficiency in the drug discovery and development process. Battelle Memorial Institute in Columbus, Ohio estimates that in the year 2000 the life sciences research industry will spend more than $47 billion in the United States on drug discovery research and development. Advances in genomics, combinatorial chemistry and high throughput screening have significantly enhanced the discovery process. Genomics is the mapping of the human DNA sequence and the study of the role genes play in disease. Genomics is creating an unprecedented wealth of information concerning potential drug targets. Combinatorial chemistry is the rapid synthesis of large collections -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Through and including , 2000 (the 25th day after commencement of this offering), federal securities law may require all dealers selling shares of our common stock, whether or not participating in this offering, to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. TABLE OF CONTENTS -------------------------------------------------------------------------------- <TABLE> <S> <C> Prospectus summary.................... 3 The offering.......................... 6 Summary financial data................ 7 Risk factors.......................... 8 Forward-looking information........... 15 Use of proceeds....................... 16 Dividend policy....................... 16 Capitalization........................ 17 Dilution.............................. 18 Selected financial data............... 19 Management's discussion and analysis of financial condition and results of operations.......................... 21 Business.............................. 27 Management............................ 42 Related party transactions............ 51 Principal stockholders................ 53 Description of capital stock.......... 55 Shares eligible for future sale....... 59 Underwriting.......................... 60 Legal matters......................... 62 Experts............................... 62 Where you can find more information... 62 Index to financial statements......... F-1 </TABLE> -------------------------------------------------------------------------------- of potential drug candidates. High throughput screening is the process whereby large numbers of compounds are rapidly screened against a drug target. The magazine Science estimated that sequencing of the human genome will provide an estimated 5,000 to 10,000 relevant new drug targets over the next ten years, compared to the approximately 500 targets that have been explored thus far. Through combinatorial chemistry, chemists can generate chemical collections, or libraries, consisting of millions of compounds. Researchers can screen such compounds against drug targets through the use of high throughput screening technologies. Chemists have been able to make these advances in drug discovery by using new tools that simplify, automate and accelerate the drug discovery process. Chemists are discovering a large number of new drug candidates that are ready for the drug development process through widespread use of these tools. However, the pharmaceutical industry does not have sufficient tools and resources to fully exploit the opportunities presented by advances in drug discovery due to the technological limitations of traditional drug development, or chemistry development. Traditional chemistry development methods have the following limitations: + traditional methods are time consuming and inefficient, due to the labor-intensive nature of this process; + traditional methods require chemists to synthesize compounds one at a time. This results in long drug development timelines, which delay product commercialization and reduce the exclusivity period provided by patent protection; + traditional methods are expensive due to the time and labor required of a chemist to produce a single compound; + traditional methods limit the number of compounds synthesized, which can lead to the selection of sub-optimal drug candidates, often resulting in drug candidate failures; + chemists lack flexible tools and systems necessary to easily perform the wide variety of complex experiments required for chemistry development; and + traditional methods are often difficult to employ and require skilled, scientific personnel. THE ARGONAUT SOLUTION We design, manufacture and market instruments and reagents that increase the productivity of chemists, thereby accelerating the drug development process. Our products enable chemists to rapidly synthesize a wide range of compounds at a reduced cost. We intend to promote our products as the laboratory standard for chemists and the industry standard for companies seeking more efficient methods of addressing their increasing drug development needs. We believe our technology provides the following key benefits compared to traditional chemistry development methods: + increased productivity; + reduced drug development timelines; + reduced cost; + improved intellectual property positions; + flexibility; and + ease of use. -------------------------------------------------------------------------------- Our strategy is to become the leading provider of productivity and quality enhancing tools for all stages of the drug development process. In order to achieve this goal, we have implemented the following strategy: + focus initially on industry leaders within the pharmaceutical market; + expand our high-value reagent business; + continue to establish product development consortia and collaborations; + leverage global customer relationships through direct sales; + acquire complementary businesses; and + expand into new markets. EXECUTIVE OFFICES Our principal executive offices are located at 887 Industrial Road, Suite G, San Carlos, California 94070, and our telephone number is (650) 598-1350. Our corporate website is www.argotech.com. We do not intend the information contained on our website to be part of this prospectus. We were incorporated in Delaware in November 1994. --------------------------------------------------------------------------------
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001113049_golden_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001113049_golden_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. It does not contain all the information that is important to you. We encourage you to read this prospectus in its entirety. ABOUT GOLDEN BOOKS We are the largest publisher of children's books in the North American retail market and we have published our flagship product line, "Little Golden Books," for over 50 years. We have two business segments, which we operate primarily through our principal operating subsidiary, Golden Books Publishing: - Consumer Products, which operates as our Children's Publishing division, and - Entertainment, which operates as the Golden Books Entertainment Group division. Our Children's Publishing division produces: - storybooks; - coloring/activity books; - puzzles; - educational workbooks; - reference books; - novelty books; and - chapter books. The products of the Children's Publishing division use both partially and wholly owned characters, including Pat the Bunny, The Poky Little Puppy and Lassie, and characters licensed by us from third parties, including: - Pokemon, from Nintendo; - Scooby-Doo and Powerpuff Girls, from Warner Brothers; - Between the Lions, from Sirius Thinking, Ltd. and WGBH Education Foundation; - Barbie, from Mattel; - Little Critters, from Mercer Mayer; and - Tarzan and Toy Story 2, from Disney. We also publish under the Road to Reading trademark, a level reading series, education and reference books, which consist of workbooks, flashcards and other reference books. We first began publishing our Road to Reading series in 1998 using our existing characters and titles, as well as licensed characters -- Barbie, for example. Our Children's Publishing division's products have traditionally been designed primarily for children up to age eight and have been distributed primarily through mass-market channels, which include national discount store chains, including Wal-Mart, K-Mart, Target and Toys "R" Us. We also sell children's products through bookstores, children's educational specialty retailers, toy stores, supermarkets, drugstores and warehouse clubs and special markets, including school book clubs, school book fairs, paperback jobbers, catalogues and educational institutions. In addition, we sell through international channels. Our Entertainment division sells our video products, licenses properties from our film library to third parties, both domestically and internationally, for use on television, home video and other media, and licenses properties from our library to third parties for character-based merchandise. Our film library is made up of: - copyrights; - distribution rights; - trademarks and licenses relating to characters; - television programs; and - animated and live action motion pictures. Among the film library characters are: - Rudolph the Red-Nosed Reindeer; - Frosty the Snowman; - Santa Claus; - Lassie; - Underdog; - The Lone Ranger; - Tennessee Tuxedo; - Shari Lewis' Lambchop; and - Hush Puppy. The film library has, among other properties, over 3,000 half-hour individual and multiple episode television programs, including 26 episodes of Felix the Cat and 52 episodes of Abbott and Costello. We are continuing to pursue a strategy that we began in 1998. We are changing our mix of products to emphasize our most profitable products, while phasing out unprofitable products. Our strategy has enabled us to pursue the broader strategy of building a leading family entertainment company that creates, publishes and licenses children's books and family related entertainment products. We intend to build on our position as a leader in the children's publishing market, using the strength of our brand to provide family-oriented content through many media. While we are confident that our strategy will be successful, we cannot assure you that it will be. Our corporate offices, publishing and principal sales offices are located at 888 Seventh Avenue, New York, New York 10106 and our telephone number is (212) 547-6700. Our principal administrative offices are located in Sturtevant, Wisconsin and our principal warehousing and distribution facilities are located in Crawfordsville, Indiana. THE AMENDED JOINT PLAN OF REORGANIZATION In February 1999, we reached an agreement with our major creditors under which our then existing long-term debt would be significantly reduced and our existing trade obligations would be paid in full. Under that agreement, Golden Books, Golden Books Publishing and Golden Books Home Video, Inc. filed a petition for reorganization under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York on February 26, 1999. Under an order dated September 24, 1999, the Bankruptcy Court confirmed our amended joint plan of reorganization. Significant components of the amended joint plan of reorganization were approved by the Bankruptcy Court on December 22, 1999. On January 27, 2000, we completed the amended joint plan of reorganization and emerged from bankruptcy. The following is a summary of the amended joint plan of reorganization: - The senior notes of $150.0 million existing prior to our bankruptcy were converted into: (1) new senior secured notes in the principal amount of $87.0 million due 2004, with interest at the rate of 10.75%, if paid in cash, or, at our option for the first two years, 14.25% payable in additional senior secured notes, and (2) 4,250,000 shares of Golden Books' new common stock. The senior secured notes are secured by the collateral which had already been granted to the holders of the senior notes existing prior to bankruptcy and additional collateral. - The Trust Originated Preferred Securities indebtedness of $109.8 million was converted into 5,000,000 shares of Golden Books' new common stock. - The Golden Press Holdings, L.L.C. loan facility in the amount of $10.0 million was converted into 500,000 shares of Golden Books' new common stock. - The old employment agreement with Richard E. Snyder, Golden Books' Chairman of the Board and Chief Executive Officer before and after the reorganization, was terminated and Mr. Snyder received for his executing a new employment agreement and surrendering claims and rights under his old employment agreement, 250,000 shares of Golden Books' new common stock in the form of restricted stock, among other things. - Shares of preferred and common stock of Golden Books existing prior to our bankruptcy proceeding and outstanding at January 27, 2000 were cancelled. Holders of those preferred and common stock received warrants to purchase 525,000 shares of the Golden Books' new common stock at an exercise price of $23.03 per share, allocated two-thirds to the preferred and one-third to the common shareholders. Upon the completion of our amended joint plan of reorganization, we entered into a revolving credit and term loan agreement consisting of a $50.0 million revolving credit facility and a $10.0 million term loan facility. We used part of the proceeds from the revolving credit and term loan agreement to repay all of the outstanding amounts under a debtor-in-possession loan. The remaining proceeds are available for our working capital and general corporate purposes. We are in the process of paying all our pre-petition trade creditors with undisputed claims the amounts due to them with accrued interest at 4.25%. We also are working to resolve all disputed claims of pre-petition trade creditors in the Bankruptcy Court. As significant components of the amended joint plan of reorganization were approved by the Bankruptcy Court on December 22, 1999 and in accordance with the Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Law" ("SOP 90-7"), we have applied reorganization and fresh-start accounting adjustments to our consolidated balance sheet as of December 25, 1999. Under fresh-start accounting, a new reporting entity is considered to be created and the recorded amounts of assets and liabilities are adjusted to reflect their estimated fair values at the date fresh-start accounting is applied. To avoid confusion, we may refer in this prospectus to Golden Books and its subsidiaries after applying the fresh-start accounting as the Successor Company and we may refer to Golden Books and its subsidiaries prior to applying the fresh-start accounting as the Predecessor Company. ----------------------- SUMMARY OF THE OFFERING The selling security holders are offering to sell up to $34,011,200 principal amount of the notes and 3,477,832 shares of common stock. We will not receive any proceeds from the sale of the notes or the common stock. You should read the discussions under the headings "Description of the Notes" and "Description of the Capital Stock" for further information regarding the notes and the common stock. Summary of the Notes <TABLE> <S> <C> Securities offered ....................................... 10.75% Senior Secured Notes due 2004 Issuer ................................................... Golden Books Publishing Maturity Date............................................. December 31, 2004 Interest Rate and Payment Dates........................... Annual rate: 10.75%. Payment frequency: every six months on June 30 and December 31. Interest payments in lieu of cash: at the option of Golden Books Publishing, semiannual interest payments due on or prior to December 31, 2002 may be paid in the form of additional notes at the annual rate of 14.25%. Guarantees................................................ Payment on each note is guaranteed on a senior secured basis, jointly and severally, by Golden Books and certain subsidiaries of Golden Books. Ranking................................................... The notes and the guarantees constitute senior debts. They rank equally with all of Golden Books Publishing's and each guarantor's current and future indebtedness. Collateral................................................ The notes are secured by a first priority lien or a second priority lien on all assets and property owned by Golden Books Publishing and each guarantor. Optional Redemption....................................... Golden Books Publishing may redeem some or all of the notes at any time at the redemption prices listed in the section "Description of the Notes" under the heading "Redemption." </TABLE> <TABLE> <S> <C> Mandatory Redemption...................................... Golden Books Publishing must redeem the notes, in part in a principal amount equal to $8,333,000, on each of June 30, 2003, December 31, 2003 and June 30, 2004, at a redemption price equal to 100% of the principal amount plus accrued interest. Mandatory Offer to Repurchase............................. If Golden Books Publishing sells certain assets or experiences specific kinds of changes of control, Golden Books Publishing must offer to repurchase the notes, subject to certain limitations in the case of assets sales, at the price listed in the section "Description of the Notes." Basic Covenants of the Indenture.......................... Golden Books Publishing issued the notes under an indenture with HSBC Bank USA. The indenture, among other things, requires Golden Books to comply with certain financial covenants, restricts Golden Books Publishing's ability and the ability of Golden Books and Golden Books Publishing's and Golden Books' subsidiaries to: - borrow money; - pay dividends on stock or purchase stock; - sell assets or merge with or into other companies; - - make investments; - transact business with affiliates; - sell stock in subsidiaries; - engage in any new line of business; and - use assets as security in other transactions. For more details, see the "Description of the Notes" section under the heading "Certain Covenants." </TABLE> The Common Stock Golden Books is authorized to issue a total of 30,000,000 shares of common stock, par value $.01 per share. As of May 4, 2000, there were 10,233,889 shares of Golden Books common stock outstanding. SUMMARY CONSOLIDATED FINANCIAL DATA We are providing the following information to aid in your analysis of the financial aspects of our company. We derived the financial information presented below from the audited consolidated financial statements of the Predecessor Company, except for the December 25, 1999 consolidated balance sheet information which represents the Successor Company. This information is only a summary and should be read in conjunction with the Selected Financial Data, our Consolidated Financial Statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. In 1996, we changed our fiscal year end so as to end on the last Saturday of December in each year. As a result, the fiscal 1996 results from operations are not necessarily comparable to other periods as presented. <TABLE> <CAPTION> PREDECESSOR COMPANY ------------------------------------------------------------------------------ 11 Months Year Ended Ended Year Ended --------------------------------------------- ---------------------------- Dec. 25, Dec. 26, Dec. 27, Dec. 28, Feb. 3, 1999 1998 1997 1996 1996 --------- --------- --------- --------- ---------- INCOME STATEMENT DATA: (In thousands, except per share data) <S> <C> <C> <C> <C> <C> Revenue Net sales ...................................... $ 165,259 $ 193,573 $ 242,481 $ 254,046 $ 369,572 Royalties and other income ..................... 512 653 1,080 959 1,722 --------- --------- --------- --------- ---------- Total revenue ............................... 165,771 194,226 243,561 255,005 371,294 --------- --------- --------- --------- ---------- Costs and expenses: Cost of sales .................................. 111,421 181,141 176,238 231,792 281,392 Selling, general and administrative ............ 79,041 98,293 111,307 142,721 129,020 Restructuring, (gains) losses on sales of assets, write-off of assets and gain on streamlining plan .......................... (7,300) 17,071 (10,786) 65,741 6,701 --------- --------- --------- --------- ---------- Total costs and expenses .................... 183,162 296,505 276,759 440,254 417,113 --------- --------- --------- --------- ---------- Loss before reorganization items, fresh-start valuation, distributions on Guaranteed Preferred Beneficial Interests in Golden Books' and Golden Books Publishing's Convertible Debentures, interest expense, net, (benefit) provision for income taxes and extraordinary item ......................................... (17,391) (102,279) (33,198) (185,249) (45,819) Reorganization items .............................. (21,329) -- -- -- -- Fresh-start valuation ............................. 77,007 -- -- -- -- Distributions on Guaranteed Preferred Beneficial Interests in Golden Books' and Golden Books Publishing's Convertible Debentures (Contractual distributions of $9,667 for the year ended December 25, 1999) ................ 1,628 10,282 10,282 3,597 -- Interest expense, net of interest income (Contractual interest expense of $14,646 for the year ended December 25, 1999) .................................... 3,366 16,704 6,163 6,764 9,896 --------- --------- --------- --------- ---------- Income (loss) before (benefit) provision for income taxes and extraordinary item .......... 33,293 (129,265) (49,643) (195,610) (55,715) (Benefit) provision for income taxes .............. (590) (666) 37 1,893 11,332 --------- --------- --------- --------- ---------- Income (loss) before extraordinary item ........... 33,883 (128,599) (49,680) (197,503) $ (67,047) Extraordinary item-early extinguishment of debt ... 151,956 -- -- -- -- --------- --------- --------- --------- ---------- Net income (loss) ................................. $ 185,839 $(128,599) $ (49,680) $(197,503) $ (67,047) ========= ========= ========= ========= ========== Net income (loss) per basic and diluted common share before extraordinary item ............. $ 1.15 $ (4.89) $ (2.18) $ (8.73) $ (3.23) Net income per basic and diluted common share- extraordinary item .......................... 5.38 -- -- -- -- --------- --------- --------- --------- ---------- Net income (loss) per basic and diluted common share ....................................... $ 6.53 $ (4.89) $ (2.18) $ (8.73) $ (3.23) ========= ========= ========= ========= ========== Weighted average basic and diluted common shares outstanding .......................... 28,266 27,433 26,357 23,317 21,047 ========= ========= ========= ========= ========== </TABLE> <TABLE> <CAPTION> PREDECESSOR COMPANY ------------------------------------------------------------------------------ Year Ended 11 Months --------------------------------------------- Ended Year Ended Dec. 25, Dec. 26, Dec. 27, Dec. 28, Feb. 3, 1999 1998 1997 1996 1996 --------- --------- --------- --------- ---------- <S> <C> <C> <C> <C> <C> OTHER OPERATING DATA: EBITDA (1) ........................................ $ (3,491) $ (77,479) $ (10,598) $(171,249) $ (29,824) Cash flow provided by (used in): Operating activities ........................ $ (23,177) $ (64,217) $ (79,218) $ (19,420) $ 855 Investing activities ........................ 13,734 (10,612) (7,519) (73,564) (8,753) Financing activities ........................ 497 32,365 4,556 187,354 (32,251) Ratio of earnings to combined fixed charges and preferred stock dividends (deficiency in the coverage of combined fixed charges and preferred stock dividends to earnings before combined fixed charges and preferred stock dividends) (2) ...... 4.81x (134,756) (57,492) (201,746) (56,563) </TABLE> The consolidated balance sheet information at December 25, 1999 reflects our amended joint plan of reorganization and the application of the principles of fresh-start accounting. Accordingly, the financial information at December 25, 1999 is not comparable to our historical financial information prior to December 25, 1999. <TABLE> <CAPTION> Successor | Predecessor Company Company | --------------------------------------------------------------- Dec. 25, | Dec. 26, Dec. 27, Dec. 28, Feb. 3, 1999 | 1998 1997 1996 1996 --------- | --------- --------- --------- --------- <S> <C> | <C> <C> <C> <C> BALANCE SHEET DATA (at period end): | Working capital (deficiency) ............... $ (4,641) | $(267,997) $ 95,780 $ 168,210 $ 165,309 Total assets ............................... 289,998 | 254,951 323,164 367,235 321,965 Long-term debt (including amount shown as | current for Predecessor Company) ..... 93,750 | 150,000 149,897 149,862 149,845 Guaranteed preferred beneficial interests in | Golden Books' and Golden Books | Publishing's Convertible Debentures .. -- | 115,000 110,707 110,488 -- Convertible Preferred Stock - Series A ..... -- | -- -- -- 9,985 Common stockholders' equity (deficit) ...... 49,750 | (189,081) (61,309) (19,637) 74,368 </TABLE> - ----------------------- (1) "EBITDA" is defined as earnings before interest, taxes, depreciation and amortization, transition costs, reorganization items, fresh-start valuation and extraordinary item. Although EBITDA is not a measure of performance calculated in accordance with generally accepted accounting principles, we believe that the industry accepts EBITDA as a generally recognized measure of performance and that analysts who report publicly use EBITDA as a measure of performance. Nevertheless, you should not consider this measure in isolation or as a substitute for operating income (loss), net income (loss), net cash provided by (used in) operating activities or any other measure for determining the operating performance or liquidity that is calculated in accordance with generally accepted accounting principles. EBITDA, as we calculate it, may not be comparable to calculations of similarly titled measures presented by other companies. (2) For purposes of the ratio of earnings to combined fixed charges and preferred stock dividends, earnings were calculated by adding pretax income before extraordinary item, interest expense, the portion of rnts representative of an interest factor and distributions on guaranteed preferred beneficial interests in Golden Books' and Golden Books Publishing's Convertible Debentures. Combined fixed charges and preferred stock dividends consist of interest expense, the portion of rents representative of an interest factor, distributions on guaranteed preferred beneficial interests in Golden Books' and Golden Books Publishing's Convertible Debentures and preferred stock dividend requirements of Golden Books and its subsidiaries. For the period in which earnings were insufficient to cover combined fixed charges and preferred stock dividends, the dollar amount of the coverage deficiency, instead of the ratio, is disclosed. FORWARD-LOOKING STATEMENTS This document includes forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We intend for the words "believes," "anticipates," "expects," "intends," "interested in," "plans," "continues," "projects" and similar expressions to identify forward-looking statements. The forward-looking statements contained in this prospectus are generally discussed under the captions "Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" but may be found in other locations as well. These forward-looking statements generally relate to our plans and objectives for future operations and are based upon our management's reasonable estimates of future results or trends. Consequently, actual results could differ materially from these forward-looking statements. The factors that may affect our expectations of our operations include, among others, the following: - our success at maintaining lower operating costs; - our success in returning to profitability and generating sufficient cash flow to meet our operational and financing requirements including servicing our reduced indebtedness; - loss of key licenses; - adverse changes in relationships with key customers; - demographics and general economic and business conditions; - the degree of acceptance of new product introduction; - changes in consumer preferences, such as the growth of computer-based products and consumer spending habits, competition from existing and potential competitors; pricing pressures, costs of labor and other costs and expenses; and - level of product returns.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001113051_shari_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001113051_shari_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. It does not contain all the information that is important to you. We encourage you to read this prospectus in its entirety. ABOUT GOLDEN BOOKS We are the largest publisher of children's books in the North American retail market and we have published our flagship product line, "Little Golden Books," for over 50 years. We have two business segments, which we operate primarily through our principal operating subsidiary, Golden Books Publishing: - Consumer Products, which operates as our Children's Publishing division, and - Entertainment, which operates as the Golden Books Entertainment Group division. Our Children's Publishing division produces: - storybooks; - coloring/activity books; - puzzles; - educational workbooks; - reference books; - novelty books; and - chapter books. The products of the Children's Publishing division use both partially and wholly owned characters, including Pat the Bunny, The Poky Little Puppy and Lassie, and characters licensed by us from third parties, including: - Pokemon, from Nintendo; - Scooby-Doo and Powerpuff Girls, from Warner Brothers; - Between the Lions, from Sirius Thinking, Ltd. and WGBH Education Foundation; - Barbie, from Mattel; - Little Critters, from Mercer Mayer; and - Tarzan and Toy Story 2, from Disney. We also publish under the Road to Reading trademark, a level reading series, education and reference books, which consist of workbooks, flashcards and other reference books. We first began publishing our Road to Reading series in 1998 using our existing characters and titles, as well as licensed characters -- Barbie, for example. Our Children's Publishing division's products have traditionally been designed primarily for children up to age eight and have been distributed primarily through mass-market channels, which include national discount store chains, including Wal-Mart, K-Mart, Target and Toys "R" Us. We also sell children's products through bookstores, children's educational specialty retailers, toy stores, supermarkets, drugstores and warehouse clubs and special markets, including school book clubs, school book fairs, paperback jobbers, catalogues and educational institutions. In addition, we sell through international channels. Our Entertainment division sells our video products, licenses properties from our film library to third parties, both domestically and internationally, for use on television, home video and other media, and licenses properties from our library to third parties for character-based merchandise. Our film library is made up of: - copyrights; - distribution rights; - trademarks and licenses relating to characters; - television programs; and - animated and live action motion pictures. Among the film library characters are: - Rudolph the Red-Nosed Reindeer; - Frosty the Snowman; - Santa Claus; - Lassie; - Underdog; - The Lone Ranger; - Tennessee Tuxedo; - Shari Lewis' Lambchop; and - Hush Puppy. The film library has, among other properties, over 3,000 half-hour individual and multiple episode television programs, including 26 episodes of Felix the Cat and 52 episodes of Abbott and Costello. We are continuing to pursue a strategy that we began in 1998. We are changing our mix of products to emphasize our most profitable products, while phasing out unprofitable products. Our strategy has enabled us to pursue the broader strategy of building a leading family entertainment company that creates, publishes and licenses children's books and family related entertainment products. We intend to build on our position as a leader in the children's publishing market, using the strength of our brand to provide family-oriented content through many media. While we are confident that our strategy will be successful, we cannot assure you that it will be. Our corporate offices, publishing and principal sales offices are located at 888 Seventh Avenue, New York, New York 10106 and our telephone number is (212) 547-6700. Our principal administrative offices are located in Sturtevant, Wisconsin and our principal warehousing and distribution facilities are located in Crawfordsville, Indiana. THE AMENDED JOINT PLAN OF REORGANIZATION In February 1999, we reached an agreement with our major creditors under which our then existing long-term debt would be significantly reduced and our existing trade obligations would be paid in full. Under that agreement, Golden Books, Golden Books Publishing and Golden Books Home Video, Inc. filed a petition for reorganization under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York on February 26, 1999. Under an order dated September 24, 1999, the Bankruptcy Court confirmed our amended joint plan of reorganization. Significant components of the amended joint plan of reorganization were approved by the Bankruptcy Court on December 22, 1999. On January 27, 2000, we completed the amended joint plan of reorganization and emerged from bankruptcy. The following is a summary of the amended joint plan of reorganization: - The senior notes of $150.0 million existing prior to our bankruptcy were converted into: (1) new senior secured notes in the principal amount of $87.0 million due 2004, with interest at the rate of 10.75%, if paid in cash, or, at our option for the first two years, 14.25% payable in additional senior secured notes, and (2) 4,250,000 shares of Golden Books' new common stock. The senior secured notes are secured by the collateral which had already been granted to the holders of the senior notes existing prior to bankruptcy and additional collateral. - The Trust Originated Preferred Securities indebtedness of $109.8 million was converted into 5,000,000 shares of Golden Books' new common stock. - The Golden Press Holdings, L.L.C. loan facility in the amount of $10.0 million was converted into 500,000 shares of Golden Books' new common stock. - The old employment agreement with Richard E. Snyder, Golden Books' Chairman of the Board and Chief Executive Officer before and after the reorganization, was terminated and Mr. Snyder received for his executing a new employment agreement and surrendering claims and rights under his old employment agreement, 250,000 shares of Golden Books' new common stock in the form of restricted stock, among other things. - Shares of preferred and common stock of Golden Books existing prior to our bankruptcy proceeding and outstanding at January 27, 2000 were cancelled. Holders of those preferred and common stock received warrants to purchase 525,000 shares of the Golden Books' new common stock at an exercise price of $23.03 per share, allocated two-thirds to the preferred and one-third to the common shareholders. Upon the completion of our amended joint plan of reorganization, we entered into a revolving credit and term loan agreement consisting of a $50.0 million revolving credit facility and a $10.0 million term loan facility. We used part of the proceeds from the revolving credit and term loan agreement to repay all of the outstanding amounts under a debtor-in-possession loan. The remaining proceeds are available for our working capital and general corporate purposes. We are in the process of paying all our pre-petition trade creditors with undisputed claims the amounts due to them with accrued interest at 4.25%. We also are working to resolve all disputed claims of pre-petition trade creditors in the Bankruptcy Court. As significant components of the amended joint plan of reorganization were approved by the Bankruptcy Court on December 22, 1999 and in accordance with the Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Law" ("SOP 90-7"), we have applied reorganization and fresh-start accounting adjustments to our consolidated balance sheet as of December 25, 1999. Under fresh-start accounting, a new reporting entity is considered to be created and the recorded amounts of assets and liabilities are adjusted to reflect their estimated fair values at the date fresh-start accounting is applied. To avoid confusion, we may refer in this prospectus to Golden Books and its subsidiaries after applying the fresh-start accounting as the Successor Company and we may refer to Golden Books and its subsidiaries prior to applying the fresh-start accounting as the Predecessor Company. ----------------------- SUMMARY OF THE OFFERING The selling security holders are offering to sell up to $34,011,200 principal amount of the notes and 3,477,832 shares of common stock. We will not receive any proceeds from the sale of the notes or the common stock. You should read the discussions under the headings "Description of the Notes" and "Description of the Capital Stock" for further information regarding the notes and the common stock. Summary of the Notes <TABLE> <S> <C> Securities offered ....................................... 10.75% Senior Secured Notes due 2004 Issuer ................................................... Golden Books Publishing Maturity Date............................................. December 31, 2004 Interest Rate and Payment Dates........................... Annual rate: 10.75%. Payment frequency: every six months on June 30 and December 31. Interest payments in lieu of cash: at the option of Golden Books Publishing, semiannual interest payments due on or prior to December 31, 2002 may be paid in the form of additional notes at the annual rate of 14.25%. Guarantees................................................ Payment on each note is guaranteed on a senior secured basis, jointly and severally, by Golden Books and certain subsidiaries of Golden Books. Ranking................................................... The notes and the guarantees constitute senior debts. They rank equally with all of Golden Books Publishing's and each guarantor's current and future indebtedness. Collateral................................................ The notes are secured by a first priority lien or a second priority lien on all assets and property owned by Golden Books Publishing and each guarantor. Optional Redemption....................................... Golden Books Publishing may redeem some or all of the notes at any time at the redemption prices listed in the section "Description of the Notes" under the heading "Redemption." </TABLE> <TABLE> <S> <C> Mandatory Redemption...................................... Golden Books Publishing must redeem the notes, in part in a principal amount equal to $8,333,000, on each of June 30, 2003, December 31, 2003 and June 30, 2004, at a redemption price equal to 100% of the principal amount plus accrued interest. Mandatory Offer to Repurchase............................. If Golden Books Publishing sells certain assets or experiences specific kinds of changes of control, Golden Books Publishing must offer to repurchase the notes, subject to certain limitations in the case of assets sales, at the price listed in the section "Description of the Notes." Basic Covenants of the Indenture.......................... Golden Books Publishing issued the notes under an indenture with HSBC Bank USA. The indenture, among other things, requires Golden Books to comply with certain financial covenants, restricts Golden Books Publishing's ability and the ability of Golden Books and Golden Books Publishing's and Golden Books' subsidiaries to: - borrow money; - pay dividends on stock or purchase stock; - sell assets or merge with or into other companies; - - make investments; - transact business with affiliates; - sell stock in subsidiaries; - engage in any new line of business; and - use assets as security in other transactions. For more details, see the "Description of the Notes" section under the heading "Certain Covenants." </TABLE> The Common Stock Golden Books is authorized to issue a total of 30,000,000 shares of common stock, par value $.01 per share. As of May 4, 2000, there were 10,233,889 shares of Golden Books common stock outstanding. SUMMARY CONSOLIDATED FINANCIAL DATA We are providing the following information to aid in your analysis of the financial aspects of our company. We derived the financial information presented below from the audited consolidated financial statements of the Predecessor Company, except for the December 25, 1999 consolidated balance sheet information which represents the Successor Company. This information is only a summary and should be read in conjunction with the Selected Financial Data, our Consolidated Financial Statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. In 1996, we changed our fiscal year end so as to end on the last Saturday of December in each year. As a result, the fiscal 1996 results from operations are not necessarily comparable to other periods as presented. <TABLE> <CAPTION> PREDECESSOR COMPANY ------------------------------------------------------------------------------ 11 Months Year Ended Ended Year Ended --------------------------------------------- ---------------------------- Dec. 25, Dec. 26, Dec. 27, Dec. 28, Feb. 3, 1999 1998 1997 1996 1996 --------- --------- --------- --------- ---------- INCOME STATEMENT DATA: (In thousands, except per share data) <S> <C> <C> <C> <C> <C> Revenue Net sales ...................................... $ 165,259 $ 193,573 $ 242,481 $ 254,046 $ 369,572 Royalties and other income ..................... 512 653 1,080 959 1,722 --------- --------- --------- --------- ---------- Total revenue ............................... 165,771 194,226 243,561 255,005 371,294 --------- --------- --------- --------- ---------- Costs and expenses: Cost of sales .................................. 111,421 181,141 176,238 231,792 281,392 Selling, general and administrative ............ 79,041 98,293 111,307 142,721 129,020 Restructuring, (gains) losses on sales of assets, write-off of assets and gain on streamlining plan .......................... (7,300) 17,071 (10,786) 65,741 6,701 --------- --------- --------- --------- ---------- Total costs and expenses .................... 183,162 296,505 276,759 440,254 417,113 --------- --------- --------- --------- ---------- Loss before reorganization items, fresh-start valuation, distributions on Guaranteed Preferred Beneficial Interests in Golden Books' and Golden Books Publishing's Convertible Debentures, interest expense, net, (benefit) provision for income taxes and extraordinary item ......................................... (17,391) (102,279) (33,198) (185,249) (45,819) Reorganization items .............................. (21,329) -- -- -- -- Fresh-start valuation ............................. 77,007 -- -- -- -- Distributions on Guaranteed Preferred Beneficial Interests in Golden Books' and Golden Books Publishing's Convertible Debentures (Contractual distributions of $9,667 for the year ended December 25, 1999) ................ 1,628 10,282 10,282 3,597 -- Interest expense, net of interest income (Contractual interest expense of $14,646 for the year ended December 25, 1999) .................................... 3,366 16,704 6,163 6,764 9,896 --------- --------- --------- --------- ---------- Income (loss) before (benefit) provision for income taxes and extraordinary item .......... 33,293 (129,265) (49,643) (195,610) (55,715) (Benefit) provision for income taxes .............. (590) (666) 37 1,893 11,332 --------- --------- --------- --------- ---------- Income (loss) before extraordinary item ........... 33,883 (128,599) (49,680) (197,503) $ (67,047) Extraordinary item-early extinguishment of debt ... 151,956 -- -- -- -- --------- --------- --------- --------- ---------- Net income (loss) ................................. $ 185,839 $(128,599) $ (49,680) $(197,503) $ (67,047) ========= ========= ========= ========= ========== Net income (loss) per basic and diluted common share before extraordinary item ............. $ 1.15 $ (4.89) $ (2.18) $ (8.73) $ (3.23) Net income per basic and diluted common share- extraordinary item .......................... 5.38 -- -- -- -- --------- --------- --------- --------- ---------- Net income (loss) per basic and diluted common share ....................................... $ 6.53 $ (4.89) $ (2.18) $ (8.73) $ (3.23) ========= ========= ========= ========= ========== Weighted average basic and diluted common shares outstanding .......................... 28,266 27,433 26,357 23,317 21,047 ========= ========= ========= ========= ========== </TABLE> <TABLE> <CAPTION> PREDECESSOR COMPANY ------------------------------------------------------------------------------ Year Ended 11 Months --------------------------------------------- Ended Year Ended Dec. 25, Dec. 26, Dec. 27, Dec. 28, Feb. 3, 1999 1998 1997 1996 1996 --------- --------- --------- --------- ---------- <S> <C> <C> <C> <C> <C> OTHER OPERATING DATA: EBITDA (1) ........................................ $ (3,491) $ (77,479) $ (10,598) $(171,249) $ (29,824) Cash flow provided by (used in): Operating activities ........................ $ (23,177) $ (64,217) $ (79,218) $ (19,420) $ 855 Investing activities ........................ 13,734 (10,612) (7,519) (73,564) (8,753) Financing activities ........................ 497 32,365 4,556 187,354 (32,251) Ratio of earnings to combined fixed charges and preferred stock dividends (deficiency in the coverage of combined fixed charges and preferred stock dividends to earnings before combined fixed charges and preferred stock dividends) (2) ...... 4.81x (134,756) (57,492) (201,746) (56,563) </TABLE> The consolidated balance sheet information at December 25, 1999 reflects our amended joint plan of reorganization and the application of the principles of fresh-start accounting. Accordingly, the financial information at December 25, 1999 is not comparable to our historical financial information prior to December 25, 1999. <TABLE> <CAPTION> Successor | Predecessor Company Company | --------------------------------------------------------------- Dec. 25, | Dec. 26, Dec. 27, Dec. 28, Feb. 3, 1999 | 1998 1997 1996 1996 --------- | --------- --------- --------- --------- <S> <C> | <C> <C> <C> <C> BALANCE SHEET DATA (at period end): | Working capital (deficiency) ............... $ (4,641) | $(267,997) $ 95,780 $ 168,210 $ 165,309 Total assets ............................... 289,998 | 254,951 323,164 367,235 321,965 Long-term debt (including amount shown as | current for Predecessor Company) ..... 93,750 | 150,000 149,897 149,862 149,845 Guaranteed preferred beneficial interests in | Golden Books' and Golden Books | Publishing's Convertible Debentures .. -- | 115,000 110,707 110,488 -- Convertible Preferred Stock - Series A ..... -- | -- -- -- 9,985 Common stockholders' equity (deficit) ...... 49,750 | (189,081) (61,309) (19,637) 74,368 </TABLE> - ----------------------- (1) "EBITDA" is defined as earnings before interest, taxes, depreciation and amortization, transition costs, reorganization items, fresh-start valuation and extraordinary item. Although EBITDA is not a measure of performance calculated in accordance with generally accepted accounting principles, we believe that the industry accepts EBITDA as a generally recognized measure of performance and that analysts who report publicly use EBITDA as a measure of performance. Nevertheless, you should not consider this measure in isolation or as a substitute for operating income (loss), net income (loss), net cash provided by (used in) operating activities or any other measure for determining the operating performance or liquidity that is calculated in accordance with generally accepted accounting principles. EBITDA, as we calculate it, may not be comparable to calculations of similarly titled measures presented by other companies. (2) For purposes of the ratio of earnings to combined fixed charges and preferred stock dividends, earnings were calculated by adding pretax income before extraordinary item, interest expense, the portion of rnts representative of an interest factor and distributions on guaranteed preferred beneficial interests in Golden Books' and Golden Books Publishing's Convertible Debentures. Combined fixed charges and preferred stock dividends consist of interest expense, the portion of rents representative of an interest factor, distributions on guaranteed preferred beneficial interests in Golden Books' and Golden Books Publishing's Convertible Debentures and preferred stock dividend requirements of Golden Books and its subsidiaries. For the period in which earnings were insufficient to cover combined fixed charges and preferred stock dividends, the dollar amount of the coverage deficiency, instead of the ratio, is disclosed. FORWARD-LOOKING STATEMENTS This document includes forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We intend for the words "believes," "anticipates," "expects," "intends," "interested in," "plans," "continues," "projects" and similar expressions to identify forward-looking statements. The forward-looking statements contained in this prospectus are generally discussed under the captions "Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" but may be found in other locations as well. These forward-looking statements generally relate to our plans and objectives for future operations and are based upon our management's reasonable estimates of future results or trends. Consequently, actual results could differ materially from these forward-looking statements. The factors that may affect our expectations of our operations include, among others, the following: - our success at maintaining lower operating costs; - our success in returning to profitability and generating sufficient cash flow to meet our operational and financing requirements including servicing our reduced indebtedness; - loss of key licenses; - adverse changes in relationships with key customers; - demographics and general economic and business conditions; - the degree of acceptance of new product introduction; - changes in consumer preferences, such as the growth of computer-based products and consumer spending habits, competition from existing and potential competitors; pricing pressures, costs of labor and other costs and expenses; and - level of product returns.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001113054_lrm_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001113054_lrm_prospectus_summary.txt
new file mode 100644
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. It does not contain all the information that is important to you. We encourage you to read this prospectus in its entirety. ABOUT GOLDEN BOOKS We are the largest publisher of children's books in the North American retail market and we have published our flagship product line, "Little Golden Books," for over 50 years. We have two business segments, which we operate primarily through our principal operating subsidiary, Golden Books Publishing: - Consumer Products, which operates as our Children's Publishing division, and - Entertainment, which operates as the Golden Books Entertainment Group division. Our Children's Publishing division produces: - storybooks; - coloring/activity books; - puzzles; - educational workbooks; - reference books; - novelty books; and - chapter books. The products of the Children's Publishing division use both partially and wholly owned characters, including Pat the Bunny, The Poky Little Puppy and Lassie, and characters licensed by us from third parties, including: - Pokemon, from Nintendo; - Scooby-Doo and Powerpuff Girls, from Warner Brothers; - Between the Lions, from Sirius Thinking, Ltd. and WGBH Education Foundation; - Barbie, from Mattel; - Little Critters, from Mercer Mayer; and - Tarzan and Toy Story 2, from Disney. We also publish under the Road to Reading trademark, a level reading series, education and reference books, which consist of workbooks, flashcards and other reference books. We first began publishing our Road to Reading series in 1998 using our existing characters and titles, as well as licensed characters -- Barbie, for example. Our Children's Publishing division's products have traditionally been designed primarily for children up to age eight and have been distributed primarily through mass-market channels, which include national discount store chains, including Wal-Mart, K-Mart, Target and Toys "R" Us. We also sell children's products through bookstores, children's educational specialty retailers, toy stores, supermarkets, drugstores and warehouse clubs and special markets, including school book clubs, school book fairs, paperback jobbers, catalogues and educational institutions. In addition, we sell through international channels. Our Entertainment division sells our video products, licenses properties from our film library to third parties, both domestically and internationally, for use on television, home video and other media, and licenses properties from our library to third parties for character-based merchandise. Our film library is made up of: - copyrights; - distribution rights; - trademarks and licenses relating to characters; - television programs; and - animated and live action motion pictures. Among the film library characters are: - Rudolph the Red-Nosed Reindeer; - Frosty the Snowman; - Santa Claus; - Lassie; - Underdog; - The Lone Ranger; - Tennessee Tuxedo; - Shari Lewis' Lambchop; and - Hush Puppy. The film library has, among other properties, over 3,000 half-hour individual and multiple episode television programs, including 26 episodes of Felix the Cat and 52 episodes of Abbott and Costello. We are continuing to pursue a strategy that we began in 1998. We are changing our mix of products to emphasize our most profitable products, while phasing out unprofitable products. Our strategy has enabled us to pursue the broader strategy of building a leading family entertainment company that creates, publishes and licenses children's books and family related entertainment products. We intend to build on our position as a leader in the children's publishing market, using the strength of our brand to provide family-oriented content through many media. While we are confident that our strategy will be successful, we cannot assure you that it will be. Our corporate offices, publishing and principal sales offices are located at 888 Seventh Avenue, New York, New York 10106 and our telephone number is (212) 547-6700. Our principal administrative offices are located in Sturtevant, Wisconsin and our principal warehousing and distribution facilities are located in Crawfordsville, Indiana. THE AMENDED JOINT PLAN OF REORGANIZATION In February 1999, we reached an agreement with our major creditors under which our then existing long-term debt would be significantly reduced and our existing trade obligations would be paid in full. Under that agreement, Golden Books, Golden Books Publishing and Golden Books Home Video, Inc. filed a petition for reorganization under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York on February 26, 1999. Under an order dated September 24, 1999, the Bankruptcy Court confirmed our amended joint plan of reorganization. Significant components of the amended joint plan of reorganization were approved by the Bankruptcy Court on December 22, 1999. On January 27, 2000, we completed the amended joint plan of reorganization and emerged from bankruptcy. The following is a summary of the amended joint plan of reorganization: - The senior notes of $150.0 million existing prior to our bankruptcy were converted into: (1) new senior secured notes in the principal amount of $87.0 million due 2004, with interest at the rate of 10.75%, if paid in cash, or, at our option for the first two years, 14.25% payable in additional senior secured notes, and (2) 4,250,000 shares of Golden Books' new common stock. The senior secured notes are secured by the collateral which had already been granted to the holders of the senior notes existing prior to bankruptcy and additional collateral. - The Trust Originated Preferred Securities indebtedness of $109.8 million was converted into 5,000,000 shares of Golden Books' new common stock. - The Golden Press Holdings, L.L.C. loan facility in the amount of $10.0 million was converted into 500,000 shares of Golden Books' new common stock. - The old employment agreement with Richard E. Snyder, Golden Books' Chairman of the Board and Chief Executive Officer before and after the reorganization, was terminated and Mr. Snyder received for his executing a new employment agreement and surrendering claims and rights under his old employment agreement, 250,000 shares of Golden Books' new common stock in the form of restricted stock, among other things. - Shares of preferred and common stock of Golden Books existing prior to our bankruptcy proceeding and outstanding at January 27, 2000 were cancelled. Holders of those preferred and common stock received warrants to purchase 525,000 shares of the Golden Books' new common stock at an exercise price of $23.03 per share, allocated two-thirds to the preferred and one-third to the common shareholders. Upon the completion of our amended joint plan of reorganization, we entered into a revolving credit and term loan agreement consisting of a $50.0 million revolving credit facility and a $10.0 million term loan facility. We used part of the proceeds from the revolving credit and term loan agreement to repay all of the outstanding amounts under a debtor-in-possession loan. The remaining proceeds are available for our working capital and general corporate purposes. We are in the process of paying all our pre-petition trade creditors with undisputed claims the amounts due to them with accrued interest at 4.25%. We also are working to resolve all disputed claims of pre-petition trade creditors in the Bankruptcy Court. As significant components of the amended joint plan of reorganization were approved by the Bankruptcy Court on December 22, 1999 and in accordance with the Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Law" ("SOP 90-7"), we have applied reorganization and fresh-start accounting adjustments to our consolidated balance sheet as of December 25, 1999. Under fresh-start accounting, a new reporting entity is considered to be created and the recorded amounts of assets and liabilities are adjusted to reflect their estimated fair values at the date fresh-start accounting is applied. To avoid confusion, we may refer in this prospectus to Golden Books and its subsidiaries after applying the fresh-start accounting as the Successor Company and we may refer to Golden Books and its subsidiaries prior to applying the fresh-start accounting as the Predecessor Company. ----------------------- SUMMARY OF THE OFFERING The selling security holders are offering to sell up to $34,011,200 principal amount of the notes and 3,477,832 shares of common stock. We will not receive any proceeds from the sale of the notes or the common stock. You should read the discussions under the headings "Description of the Notes" and "Description of the Capital Stock" for further information regarding the notes and the common stock. Summary of the Notes <TABLE> <S> <C> Securities offered ....................................... 10.75% Senior Secured Notes due 2004 Issuer ................................................... Golden Books Publishing Maturity Date............................................. December 31, 2004 Interest Rate and Payment Dates........................... Annual rate: 10.75%. Payment frequency: every six months on June 30 and December 31. Interest payments in lieu of cash: at the option of Golden Books Publishing, semiannual interest payments due on or prior to December 31, 2002 may be paid in the form of additional notes at the annual rate of 14.25%. Guarantees................................................ Payment on each note is guaranteed on a senior secured basis, jointly and severally, by Golden Books and certain subsidiaries of Golden Books. Ranking................................................... The notes and the guarantees constitute senior debts. They rank equally with all of Golden Books Publishing's and each guarantor's current and future indebtedness. Collateral................................................ The notes are secured by a first priority lien or a second priority lien on all assets and property owned by Golden Books Publishing and each guarantor. Optional Redemption....................................... Golden Books Publishing may redeem some or all of the notes at any time at the redemption prices listed in the section "Description of the Notes" under the heading "Redemption." </TABLE> <TABLE> <S> <C> Mandatory Redemption...................................... Golden Books Publishing must redeem the notes, in part in a principal amount equal to $8,333,000, on each of June 30, 2003, December 31, 2003 and June 30, 2004, at a redemption price equal to 100% of the principal amount plus accrued interest. Mandatory Offer to Repurchase............................. If Golden Books Publishing sells certain assets or experiences specific kinds of changes of control, Golden Books Publishing must offer to repurchase the notes, subject to certain limitations in the case of assets sales, at the price listed in the section "Description of the Notes." Basic Covenants of the Indenture.......................... Golden Books Publishing issued the notes under an indenture with HSBC Bank USA. The indenture, among other things, requires Golden Books to comply with certain financial covenants, restricts Golden Books Publishing's ability and the ability of Golden Books and Golden Books Publishing's and Golden Books' subsidiaries to: - borrow money; - pay dividends on stock or purchase stock; - sell assets or merge with or into other companies; - - make investments; - transact business with affiliates; - sell stock in subsidiaries; - engage in any new line of business; and - use assets as security in other transactions. For more details, see the "Description of the Notes" section under the heading "Certain Covenants." </TABLE> The Common Stock Golden Books is authorized to issue a total of 30,000,000 shares of common stock, par value $.01 per share. As of May 4, 2000, there were 10,233,889 shares of Golden Books common stock outstanding. SUMMARY CONSOLIDATED FINANCIAL DATA We are providing the following information to aid in your analysis of the financial aspects of our company. We derived the financial information presented below from the audited consolidated financial statements of the Predecessor Company, except for the December 25, 1999 consolidated balance sheet information which represents the Successor Company. This information is only a summary and should be read in conjunction with the Selected Financial Data, our Consolidated Financial Statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. In 1996, we changed our fiscal year end so as to end on the last Saturday of December in each year. As a result, the fiscal 1996 results from operations are not necessarily comparable to other periods as presented. <TABLE> <CAPTION> PREDECESSOR COMPANY ------------------------------------------------------------------------------ 11 Months Year Ended Ended Year Ended --------------------------------------------- ---------------------------- Dec. 25, Dec. 26, Dec. 27, Dec. 28, Feb. 3, 1999 1998 1997 1996 1996 --------- --------- --------- --------- ---------- INCOME STATEMENT DATA: (In thousands, except per share data) <S> <C> <C> <C> <C> <C> Revenue Net sales ...................................... $ 165,259 $ 193,573 $ 242,481 $ 254,046 $ 369,572 Royalties and other income ..................... 512 653 1,080 959 1,722 --------- --------- --------- --------- ---------- Total revenue ............................... 165,771 194,226 243,561 255,005 371,294 --------- --------- --------- --------- ---------- Costs and expenses: Cost of sales .................................. 111,421 181,141 176,238 231,792 281,392 Selling, general and administrative ............ 79,041 98,293 111,307 142,721 129,020 Restructuring, (gains) losses on sales of assets, write-off of assets and gain on streamlining plan .......................... (7,300) 17,071 (10,786) 65,741 6,701 --------- --------- --------- --------- ---------- Total costs and expenses .................... 183,162 296,505 276,759 440,254 417,113 --------- --------- --------- --------- ---------- Loss before reorganization items, fresh-start valuation, distributions on Guaranteed Preferred Beneficial Interests in Golden Books' and Golden Books Publishing's Convertible Debentures, interest expense, net, (benefit) provision for income taxes and extraordinary item ......................................... (17,391) (102,279) (33,198) (185,249) (45,819) Reorganization items .............................. (21,329) -- -- -- -- Fresh-start valuation ............................. 77,007 -- -- -- -- Distributions on Guaranteed Preferred Beneficial Interests in Golden Books' and Golden Books Publishing's Convertible Debentures (Contractual distributions of $9,667 for the year ended December 25, 1999) ................ 1,628 10,282 10,282 3,597 -- Interest expense, net of interest income (Contractual interest expense of $14,646 for the year ended December 25, 1999) .................................... 3,366 16,704 6,163 6,764 9,896 --------- --------- --------- --------- ---------- Income (loss) before (benefit) provision for income taxes and extraordinary item .......... 33,293 (129,265) (49,643) (195,610) (55,715) (Benefit) provision for income taxes .............. (590) (666) 37 1,893 11,332 --------- --------- --------- --------- ---------- Income (loss) before extraordinary item ........... 33,883 (128,599) (49,680) (197,503) $ (67,047) Extraordinary item-early extinguishment of debt ... 151,956 -- -- -- -- --------- --------- --------- --------- ---------- Net income (loss) ................................. $ 185,839 $(128,599) $ (49,680) $(197,503) $ (67,047) ========= ========= ========= ========= ========== Net income (loss) per basic and diluted common share before extraordinary item ............. $ 1.15 $ (4.89) $ (2.18) $ (8.73) $ (3.23) Net income per basic and diluted common share- extraordinary item .......................... 5.38 -- -- -- -- --------- --------- --------- --------- ---------- Net income (loss) per basic and diluted common share ....................................... $ 6.53 $ (4.89) $ (2.18) $ (8.73) $ (3.23) ========= ========= ========= ========= ========== Weighted average basic and diluted common shares outstanding .......................... 28,266 27,433 26,357 23,317 21,047 ========= ========= ========= ========= ========== </TABLE> <TABLE> <CAPTION> PREDECESSOR COMPANY ------------------------------------------------------------------------------ Year Ended 11 Months --------------------------------------------- Ended Year Ended Dec. 25, Dec. 26, Dec. 27, Dec. 28, Feb. 3, 1999 1998 1997 1996 1996 --------- --------- --------- --------- ---------- <S> <C> <C> <C> <C> <C> OTHER OPERATING DATA: EBITDA (1) ........................................ $ (3,491) $ (77,479) $ (10,598) $(171,249) $ (29,824) Cash flow provided by (used in): Operating activities ........................ $ (23,177) $ (64,217) $ (79,218) $ (19,420) $ 855 Investing activities ........................ 13,734 (10,612) (7,519) (73,564) (8,753) Financing activities ........................ 497 32,365 4,556 187,354 (32,251) Ratio of earnings to combined fixed charges and preferred stock dividends (deficiency in the coverage of combined fixed charges and preferred stock dividends to earnings before combined fixed charges and preferred stock dividends) (2) ...... 4.81x (134,756) (57,492) (201,746) (56,563) </TABLE> The consolidated balance sheet information at December 25, 1999 reflects our amended joint plan of reorganization and the application of the principles of fresh-start accounting. Accordingly, the financial information at December 25, 1999 is not comparable to our historical financial information prior to December 25, 1999. <TABLE> <CAPTION> Successor | Predecessor Company Company | --------------------------------------------------------------- Dec. 25, | Dec. 26, Dec. 27, Dec. 28, Feb. 3, 1999 | 1998 1997 1996 1996 --------- | --------- --------- --------- --------- <S> <C> | <C> <C> <C> <C> BALANCE SHEET DATA (at period end): | Working capital (deficiency) ............... $ (4,641) | $(267,997) $ 95,780 $ 168,210 $ 165,309 Total assets ............................... 289,998 | 254,951 323,164 367,235 321,965 Long-term debt (including amount shown as | current for Predecessor Company) ..... 93,750 | 150,000 149,897 149,862 149,845 Guaranteed preferred beneficial interests in | Golden Books' and Golden Books | Publishing's Convertible Debentures .. -- | 115,000 110,707 110,488 -- Convertible Preferred Stock - Series A ..... -- | -- -- -- 9,985 Common stockholders' equity (deficit) ...... 49,750 | (189,081) (61,309) (19,637) 74,368 </TABLE> - ----------------------- (1) "EBITDA" is defined as earnings before interest, taxes, depreciation and amortization, transition costs, reorganization items, fresh-start valuation and extraordinary item. Although EBITDA is not a measure of performance calculated in accordance with generally accepted accounting principles, we believe that the industry accepts EBITDA as a generally recognized measure of performance and that analysts who report publicly use EBITDA as a measure of performance. Nevertheless, you should not consider this measure in isolation or as a substitute for operating income (loss), net income (loss), net cash provided by (used in) operating activities or any other measure for determining the operating performance or liquidity that is calculated in accordance with generally accepted accounting principles. EBITDA, as we calculate it, may not be comparable to calculations of similarly titled measures presented by other companies. (2) For purposes of the ratio of earnings to combined fixed charges and preferred stock dividends, earnings were calculated by adding pretax income before extraordinary item, interest expense, the portion of rnts representative of an interest factor and distributions on guaranteed preferred beneficial interests in Golden Books' and Golden Books Publishing's Convertible Debentures. Combined fixed charges and preferred stock dividends consist of interest expense, the portion of rents representative of an interest factor, distributions on guaranteed preferred beneficial interests in Golden Books' and Golden Books Publishing's Convertible Debentures and preferred stock dividend requirements of Golden Books and its subsidiaries. For the period in which earnings were insufficient to cover combined fixed charges and preferred stock dividends, the dollar amount of the coverage deficiency, instead of the ratio, is disclosed. FORWARD-LOOKING STATEMENTS This document includes forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We intend for the words "believes," "anticipates," "expects," "intends," "interested in," "plans," "continues," "projects" and similar expressions to identify forward-looking statements. The forward-looking statements contained in this prospectus are generally discussed under the captions "Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" but may be found in other locations as well. These forward-looking statements generally relate to our plans and objectives for future operations and are based upon our management's reasonable estimates of future results or trends. Consequently, actual results could differ materially from these forward-looking statements. The factors that may affect our expectations of our operations include, among others, the following: - our success at maintaining lower operating costs; - our success in returning to profitability and generating sufficient cash flow to meet our operational and financing requirements including servicing our reduced indebtedness; - loss of key licenses; - adverse changes in relationships with key customers; - demographics and general economic and business conditions; - the degree of acceptance of new product introduction; - changes in consumer preferences, such as the growth of computer-based products and consumer spending habits, competition from existing and potential competitors; pricing pressures, costs of labor and other costs and expenses; and - level of product returns.
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. To understand this offering fully, you should read the entire prospectus carefully, including the risk factors and the financial statements and related notes, before you decide whether to invest in our common stock. GENENCOR OVERVIEW We are a global leader in the development of genetically based biotechnology products using our group of technologies, which we refer to as our technology platforms. These platforms include gene discovery and functional genomics, which enables the discovery of genes and the determination of gene function, molecular evolution and design, and human immunology. Over our 18-year operating history, we have built an intellectual property portfolio of approximately 3,000 owned and licensed patents and patent applications. We deliver over 250 products to customers in over 80 countries and generated over $300 million in 1999 revenues. We currently market enzymes, a type of protein, whose performance we have enhanced for use in the industrial chemical and agriculture markets. We refer to the process of enhancing proteins as optimization. We intend to capitalize on our proven and proprietary technology platforms to take advantage of large opportunities in the health care and agriculture markets. As an example, we believe that we may utilize our technologies to design and develop vaccines, protein-based pharmaceuticals and foods with enhanced nutritional value. A key part of our strategy has been and will continue to be forming strategic alliances with industry leaders in our target markets. We have long-standing relationships with strategic partners such as The Procter & Gamble Company, E.I. du Pont de Nemours and Company and Eastman Chemical Company. We are currently working on programs with these partners for the creation of novel bio-engineered products with broad market potential. OUR i-BIOTECH APPROACH The discovery and commercialization of novel biologically derived materials, or biomaterials, is a complex and lengthy process. We have developed an approach to address this complexity and to exploit new opportunities in the health care, agriculture and industrial chemicals markets. We refer to this approach as our i-biotech approach. Our approach integrates several related technology platforms that we apply to the discovery, optimization, production and delivery of biomaterials. Using our i-biotech approach, we have taken an enzyme derived from an organism living in an extreme environment from gene discovery to commercial production in less than 12 months. We believe this is an example of how our integrated approach results in fast, efficient and successful discovery and production of biomaterials. We are also using our i-biotech approach to develop a proprietary agent for the topical treatment of viral infections associated with skin diseases and cervical cancer, and a more cost-effective process for converting agricultural waste, referred to as biomass, to fuel ethanol. OUR STRATEGY Our strategy is to strengthen our position in the markets we currently serve and employ our i-biotech approach to address new opportunities in health care, agriculture and industrial chemicals. We plan to capitalize on our proven track record for innovating, developing and delivering products to market through our global manufacturing, sales and distribution infrastructure to capture new opportunities in our target markets. We intend to increase our investment in research and development to enhance our existing technology platforms and build new competencies. We expect to structure strategic alliances with industry leaders in our target markets with a combination of research and development funding and royalties. In these alliances, we intend to continue to retain a proprietary interest in the products and technology that THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED JULY 27, 2000 PROSPECTUS 7,000,000 SHARES GENENCOR INTERNATIONAL, INC. LOGO COMMON STOCK ---------------------- This is Genencor International, Inc.'s initial public offering of common stock. Genencor is selling all of the shares. We estimate the public offering price to be between $16.00 and $18.00 per share. Currently, no public market exists for the shares. After pricing of the offering, we expect that the shares will be quoted on the Nasdaq National Market under the symbol "GCOR." INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 7 OF THIS PROSPECTUS. ---------------------- <TABLE> <CAPTION> PER SHARE TOTAL --------- ----- <S> <C> <C> Public offering price....................................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to Genencor...................... $ $ </TABLE> The underwriters may also purchase up to an additional 1,050,000 shares from Genencor at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. The shares will be ready for delivery on or about , 2000. ---------------------- MERRILL LYNCH & CO. CHASE H&Q CREDIT SUISSE FIRST BOSTON SALOMON SMITH BARNEY ---------------------- The date of this prospectus is , 2000. we develop with our partners, as well as the related manufacturing rights. Additionally, we will explore acquisitions of strategic businesses and technologies. OUR TECHNOLOGY PLATFORMS Using our i-biotech approach, we discover genes whose encoded proteins we can produce in organisms that we have adapted for the production of proteins, which we refer to as host production organisms. We then modify the genes to produce an optimized protein and reduce the protein's potential to cause a human allergic response. Our i-biotech approach includes the following technology platforms: - Gene Discovery and Functional Genomics. We use a network of internationally respected scientists to gather and preserve materials from ecosystems as extreme and diverse as Antarctica and the high mountain, soda lakes of Kenya. We use state-of-the-art screening techniques to identify genes from organisms living in these diverse environments whose genes are compatible with our proven host production organisms. Through our process we eliminate leads that we cannot produce in our host production organisms. Our gene discovery and functional genomics platform has yielded sizeable collections of genes from which we can develop products. - Biomaterial Production Systems. We use our fungal or bacterial host production organisms to produce the proteins encoded by the genes we have discovered. We grow, or ferment, our host organisms under controlled conditions, allowing them to grow, divide and efficiently produce these proteins. - Molecular Evolution and Design. When the desired biomaterial is a protein, we use molecular evolution techniques to accelerate the natural evolutionary process in order to engineer, or optimize, gene products for an identified customer need. When the desired biomaterial is a small molecule or chemical, we use our MutatorTechnology to simultaneously modify hundreds of genes in a host production organism. - Human Immunology. We use an automated assay or test that is predictive of human immune response to identify and modify proteins that may cause an immune response. We are also developing a model of the human immune system in mice to test products for their human allergenic potential. This platform, a direct outgrowth of our development of enzymes for cleaning applications in the industrial chemicals markets, has enabled us to begin developing enzymes for the consumer health care and agriculture markets. - Metabolic Pathway Engineering. Metabolic pathway engineering is a process we use to modify our host production organisms to produce small molecules and chemicals such as amino acids and vitamins. - Formulation Delivery Systems. We formulate our biomaterials in a manner customized for the intended use. These formulations can protect biomaterials against harsh chemical and environmental conditions. OUR PRODUCTS We currently sell products in a broad range of markets. Some examples of our products include: - Puradax, Purafect and Purastar for the removal of stains from laundry and dishware; - Optimax and Spezyme for the production of sweeteners; and - Multifect and Optidex for baking and brewing processes. [COVER ARTWORK AND GRAPHICS] [Inside front cover: Genencor logo followed by a header reading "Genencor International discovers, develops and delivers biotechnology products for the health care, agriculture and industrial chemicals markets.", followed by photos which depict (1) laundry detergents; (2) pills; (3) a woman applying face cream; (4) wheat; (5) a computer-generated, space-filling model of a protein; and (6) a computer-generated, back-bone model of a protein. Additional text reading "Innovative by Nature(TM)" and text identifying the industries in which Genencor operates: "Health Care Agriculture Industrial Chemicals."] PRODUCT DEVELOPMENT We are developing products for the health care, agriculture and industrial chemicals markets. While we have product development programs underway in each of our target markets, to date, we have not produced any products for the health care market or segments of the agriculture market in which we do not compete and therefore have not realized any product revenues from these targeted markets. Our ability to develop products for these markets may be limited by our resources, our ability to develop and maintain strategic alliances, and the licensing and development of necessary technology. To date, we have financed operations and product development from the sale of products, research and development funding from our strategic partners, government grants and short-term and long-term borrowings. CORPORATE INFORMATION Our principal offices are located at 925 Page Mill Road, Palo Alto, California 94304. Our telephone number is (650) 846-7500. THE OFFERING Genencor's common stock offering........ 7,000,000 shares Shares outstanding after the offering... 58,856,500 shares Use of proceeds......................... We estimate that our net proceeds from this offering without exercise of the underwriters' over-allotment options will be approximately $109 million. We intend to use the net proceeds of this offering for research and development activities, for capital expenditures, to finance possible acquisitions and for working capital and other general corporate purposes. Proposed Nasdaq National Market symbol.................................. GCOR The number of shares of common stock that will be outstanding after the offering is based on the number of shares of common stock outstanding as of July 26, 2000, and excludes shares of common stock issuable upon exercise of outstanding employee stock options and shares reserved for issuance under our stock option plan. Unless we indicate otherwise, all information in this prospectus reflects the following: - a one-for-two reverse stock split which occurred on July 25, 2000; and - no exercise by the underwriters of their over-allotment option to purchase up to 1,050,000 additional shares of common stock. DesignPath, Enzoguard, Fermenzyme, Genencor, i-biotech, i-mune, Indiage, Multifect, MutatorTechnology, Optidex, Optimax, Properase, Puradax, Purafect, Purastar, Spezyme and our logo are pending or registered trademarks of Genencor. All other trademarks or trade names referred to in this prospectus are the property of their respective owners. SUMMARY FINANCIAL INFORMATION The following table presents our summary consolidated financial data. You should read this information together with our consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus and the information under "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------------------------------------- ------------------------- 1995 1996 1997 1998 1999 1999 2000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues................ $ 215,113 $ 259,992 $ 310,342 $ 289,111 $ 316,602 $ 74,866 $ 79,699 Gross profit.................. 64,846 70,601 114,531 111,888 128,881 29,102 31,642 Operating income.............. 16,024 12,795 40,544 24,756 31,656 9,033 12,297 Net income.................... 2,515 (1,149) 23,151 13,739 16,625 5,075 16,543 Net income available to holders of common stock..... (4,760) (8,424) 15,876 6,464 9,350 3,256 14,724 Earnings per common share: Basic....................... $ (0.10) $ (0.17) $ 0.32 $ 0.13 $ 0.19 $ 0.07 $ 0.29 =========== =========== =========== =========== =========== =========== =========== Diluted..................... $ (0.10) $ (0.17) $ 0.32 $ 0.13 $ 0.19 $ 0.07 $ 0.28 =========== =========== =========== =========== =========== =========== =========== Weighted average shares outstanding: Basic....................... 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 =========== =========== =========== =========== =========== =========== =========== Diluted..................... 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 51,816,735 =========== =========== =========== =========== =========== =========== =========== </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, 2000 ------------------------ AS ADJUSTED ACTUAL FOR OFFERING -------- ------------ (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 53,863 $163,331 Working capital............................................. 98,959 208,927 Total assets................................................ 496,281 605,749 Total long-term debt and capital leases..................... 147,060 147,060 Total liabilities........................................... 236,297 236,297 Redeemable preferred stock.................................. 149,744 149,744 Total shareholders' equity.................................. 110,240 219,708 </TABLE> A number of items impact the comparability of the summary financial information: - In 1995, we acquired the outstanding shares of common stock of Royal Gist-Brocades Bio-Specialties, the detergent, starch and textile business of Royal Gist-Brocades. We accounted for this transaction by the purchase method of accounting. - In 1996, we acquired from Solvay S.A. the outstanding shares of common stock of Solvay Enzymes Inc., Solvay Enzymes Verwaltungs GmbH, Solvay Enzimas S.A., and fifty percent of the outstanding shares of Kyowa Solzyme K.K. We accounted for this transaction by the purchase method of accounting. - In 1996, we extinguished certain long-term debt. - In 1999, we implemented a plan to restructure our manufacturing facility in Belgium. - In 1999, we acquired an 80% ownership interest in Genencor (Wuxi) Bio-Products Company, Ltd. We accounted for this transaction by the purchase method of accounting. - In 1999, our board of directors and stockholders approved a 25,000-for-1 stock split of our common stock. All references to share and per share amounts have been restated retroactively to reflect the split. - On July 25, 2000, we effected a one-for-two reverse stock split of our common stock. All references to share and per share amounts have been restated retroactively to reflect the split. - During the three months ended March 31, 2000, we realized a gain on the sale of marketable securities of $15.0 million, $9.2 million tax-effected, and recognized back royalties in connection with a settlement of patent infringement claims of $3.5 million, $2.1 million tax-effected. - In 2000, we retroactively revised our consolidated financial statements to reflect a change in the life used to amortize the excess of cost over net assets of a business acquired in 1990 from 40 years to 20 years. This resulted in a decrease in total shareholders' equity of $6.4 million at January 1, 1995, an increase in amortization expense and a decrease in net income of $1.3 million in each of the years ended December 31, 1995, 1996, 1997, 1998, and 1999 and $0.3 million in the quarters ended March 31, 1999 and 2000. This also resulted in a decrease in basic and diluted earnings per common share of $0.03 in 1995 and 1996 and $0.02 in 1997, 1998, and 1999; no change in the quarter ended March 31, 1999, and a reduction of $0.01 in the quarter ended March 31, 2000.
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+PROSPECTUS SUMMARY This summary does not contain all of the information you should consider before investing in our common stock. You should read the entire prospectus carefully, including "Risk Factors" on page 5 and our consolidated financial statements and notes to those consolidated financial statements on page F-1, before making an investment decision. We sell a broad range of products and services to pharmaceutical and biotechnology companies to make the drug discovery process for our customers faster, less expensive and more effective at generating chemical compounds which could lead to marketable drugs, or drug candidates. Our products and services focus on the portion of the drug discovery process that follows the identification of a biological area which a drug would affect in order to treat or prevent an illness, or a drug target, through the point when a drug candidate is ready for clinical trials. Our product and service offerings include: - Collections, or libraries, of chemical compounds with chemical and physical properties similar to known drugs; - Proprietary instruments and consumables for automating the process of making libraries of chemical compounds; - Software and algorithms to generate libraries of chemical compounds, and to leverage and integrate the various areas of drug discovery; and - Contract services for the testing, screening and optimizing of drug candidates. We intend to continue to aggressively grow our company through internal development and acquisition of other companies to expand our range of offerings and implement leading-edge technologies. We recently acquired three businesses: Axys Advanced Technologies, Discovery Technologies and Structural Proteomics. Since inception in 1995, we have sold products to and conducted projects for over 100 customers, including Aventis, Bayer, Bristol-Myers Squibb, SmithKline Beecham and Warner-Lambert. The pharmaceutical industry is under intense pressure to develop new drugs. According to data published by Pharmaceutical Research and Manufacturers of America, the pharmaceutical industry has increased research and development expenditures over five-fold since 1985. Recent advances in genomics and proteomics, the studies of genes and the proteins they encode, have dramatically increased the number of potential drug targets that researchers can advance into drug discovery. We believe there is a lack of resources and a need for better tools and technologies to generate drug candidates from these targets. Additionally, the pharmaceutical industry needs better information earlier in the drug discovery process to avoid large expenditures on compounds that ultimately fail in later testing. Despite recent advances, the drug discovery process remains lengthy, expensive and often unsuccessful. The broad array of products and technologies that we have assembled allows our pharmaceutical and biotechnology customers to augment their internal capabilities and accelerate the discovery of drug candidates. For example, in our chemistry offering, our technology allows our customers to generate with efficiency and speed large libraries of discrete compounds, with large amounts of each compound. Our patented instruments enable our customers to generate these compound libraries. One of these systems, the NanoKan System(TM), is currently under development and is designed to generate up to one million discrete compounds per year. In addition, we generate and sell chemically-diverse libraries of discrete, drug-like compounds that have well- validated chemistry protocols, which make them easy to re-supply and reproduce. In our assay development and screening services group, we design and conduct tests that generate information about the activity of compounds against a drug target. We have performed THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED JULY 27, 2000 PROSPECTUS 5,000,000 SHARES [DISCOVERY PARTNERS LOGO] COMMON STOCK This is an initial public offering of common stock by Discovery Partners International, Inc. We are selling 5,000,000 shares of common stock. The estimated initial public offering price is between $15.00 and $17.00 per share. ------------------ We have applied for listing of our common stock on the Nasdaq National Market under the symbol DPII. ------------------ <TABLE> <CAPTION> PER SHARE TOTAL --------- -------- <S> <C> <C> Initial public offering price............................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds to Discovery Partners International, Inc., before expenses.................................................. $ $ </TABLE> Discovery Partners International, Inc. has granted the underwriters an option for a period of 30 days to purchase up to 750,000 additional shares of common stock. ------------------ INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. CHASE H&Q LEHMAN BROTHERS UBS WARBURG LLC , 2000 approximately 60 assay, or test, development and screening projects. Once an assay is developed, it is used for testing compound libraries. After compounds are screened, our medicinal chemists can synthesize variations of promising compounds to improve or optimize their properties and to generate drug candidates. In addition, we use software tools to assist in the design of compound libraries and are developing other tools to provide predictive information earlier in the drug discovery process to reduce time and cost. Our objective is to create and commercialize a complete, integrated and highly efficient collection of drug discovery technologies to overcome many limitations of the current drug discovery process. To implement this objective, we intend to: - offer an integrated and complete drug discovery solution - broaden and deepen our technology through internal invention and acquisition - target the pharmaceutical and biotechnology industries - expand customer relationships through integration of products and services - generate multiple revenue streams - expand our knowledge base We maintain Web sites at www.discoverypartners.com, www.axystech.com, www.chemrx.com, www.discovery-tech.com and www.irori.com. Information contained in our Web sites does not constitute a part of this prospectus. Our principal executive offices are located at 9640 Towne Centre Drive, San Diego, California 92121, and our telephone number is (858) 455-8600. We own a registered trademark and service mark in IRORI(R). We have filed an application for federal registration and claim rights in HTS-FACTORY(TM). We also own the following trademarks and servicemarks: Structural Proteomics(TM), AutoSort(TM), NanoKan(TM), ChemRx(TM), ChemRx AT(TM) and Directed Sorting(TM). This prospectus also includes trademarks owned by other parties. [INSIDE FRONT COVER:] [DISCOVERY PARTNERS INTERNATIONAL TITLE AND LOGO] [The words "Offering a Broad Range of Integrated Drug Discovery Products and Services"] [FRONT GATEFOLD:] [Depiction of our integrated products and services. The centerpiece of this page is our title and logo, below which are the words "Offering a Broad Range of Integrated Drug Discovery Products and Services." There are an aggregate of six photographs and one graphic that are equally spaced surrounding the logo. The graphic bears the caption "Structural Proteomics(TM) Computational Software and Services," and the photographs bear the captions "HTS-Factory(TM)", "Collections of Chemical Compounds," "Medicinal Chemistry Services," "Nanokan(TM) System," "AutoSort(TM) System" and "Biological Test Development Services."] THE OFFERING Common stock we are offering..... 5,000,000 shares Common stock to be outstanding after this offering.............. 22,437,204 shares Use of proceeds.................. To fund our operations, including continued development and manufacturing of existing products as well as research and development of additional products and services. We also may use a portion of the net proceeds to acquire new businesses or technologies, hire additional personnel and expand our facilities to be able to meet the growing needs of our business. Proposed Nasdaq National Market symbol......................... DPII ------------------------- The share amounts in this table are based on shares outstanding as of May 5, 2000. This table excludes: - 1,893,870 shares of common stock issuable upon the exercise of options outstanding at a weighted average exercise price of $2.51 per share; - 905,294 shares of common stock issuable upon the exercise of warrants at a weighted average exercise price of $3.60 per share, of which warrants to purchase 670,209 shares will expire if not exercised at the time of this offering; and - 1,406,130 additional shares of common stock available for future grant under our 2000 Stock Incentive Plan to become effective at the close of this offering. ------------------------- Unless otherwise noted, the information in this prospectus: - assumes that the underwriters' over-allotment option will not be exercised; - gives effect to the conversion, at the closing of this offering, of all 7,954,781 outstanding shares of preferred stock into 8,016,412 shares of common stock; and - reflects our reincorporation into Delaware before the completion of this offering. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table sets forth summary financial data for our company. You should read this information together with the financial statements and the notes to those statements appearing elsewhere in this prospectus and the information under "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, --------------------------------------- --------------------------- 1997 1998 1999 1999 1999 2000 2000 ------- ------- ------- --------- ------ ------- -------- PRO PRO ACTUAL FORMA(1) ACTUAL FORMA(1) ------- --------- ------- -------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA Revenue................................. $ 3,150 $ 6,214 $13,076 $27,050 $2,896 $ 5,173 $10,513 Gross margin (exclusive of $7, $0 and $4 in 1999, and for the three months ended March 31, 1999 and 2000, respectively, of stock-based compensation)......................... 1,838 3,428 4,841 15,093 1,133 2,120 6,268 Costs and expenses Research and development (exclusive of $66, $7 and $88 in 1999, and for the three months ended March 31, 1999 and 2000, respectively, of stock-based compensation).......... 4,143 5,058 3,539 8,959 969 619 2,183 Selling, general and administrative (exclusive of $238, $63 and $172 in 1999, and for the three months ended March 31, 1999 and 2000, respectively, of stock-based compensation)...................... 2,528 4,984 4,439 6,418 1,093 1,519 2,169 Amortization of deferred compensation....................... -- -- 311 311 70 264 264 Amortization of goodwill.............. -- -- -- 3,596 -- 155 1,054 Total operating expenses......... 6,671 10,042 8,288 19,284 2,132 2,557 5,670 Income (loss) from operations........... (4,833) (6,614) (3,447) (4,191) (999) (437) 598 Net loss.............................. $(4,822) $(6,278) $(3,370) $(4,170) $ (973) $(1,630) $(1,062) ======= ======= ======= ======= ====== ======= ======= Net loss per share, basic and diluted............................ $ (8.85) $ (8.20) $ (3.00) $(0.96) $ (1.23) ======= ======= ======= ====== ======= Shares used in calculating net loss per share, basic and diluted.............. 545 765 1,125 1,014 1,324 Pro forma net loss per share, basic and diluted........................ $ (0.44) $ (0.28) $ (0.21) $ (0.07) ======= ======= ======= ======= Shares used in calculating pro forma net loss per share, basic and diluted............................ 7,729 15,158 7,939 15,368 </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, 2000 --------------------------------------- PRO FORMA AS ADJUSTED ACTUAL PRO FORMA(2) (3) -------- ------------ ----------- (UNAUDITED) <S> <C> <C> <C> SELECTED CONSOLIDATED BALANCE SHEET DATA Cash and cash equivalents................................. $ 984 $ 6,017 $ 79,217 Working capital (deficit)................................. (3,950) 16,337 89,537 Total assets.............................................. 21,750 79,542 152,742 Long term debt............................................ 2,504 2,504 2,504 Redeemable convertible preferred stock.................... 27,907 -- -- Total stockholders' equity (deficit)...................... (19,561) 70,255 143,455 </TABLE> ------------------------------ (1) The Pro Forma consolidated statement of operations for the year ended December 31, 1999 and the three months ended March 31, 2000 assumes that we purchased Axys Advanced Technologies, Inc. as of the beginning of each of those periods and is based on our historical operating results and those of AAT for the periods presented, giving effect to the amortization of intangible assets related to the acquisition. (2) The Pro Forma consolidated balance sheet data gives effect to the sale of 1,392,503 shares of Series E Preferred Stock in April, 2000, the issuance of 7,429,641 shares of common stock, and promissory note for $550,000 and $50,000 cash for the purchase of AAT in April, 2000, and the conversion of all of our outstanding shares of redeemable preferred stock into common stock upon the closing of this offering. (3) The Pro Forma As Adjusted consolidated balance sheet gives effect to the sale of 5,000,000 shares of common stock at an assumed initial public offering price of $16 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses that we will pay. Please see Note 2 to our financial statements for an explanation of the method used to calculate the net loss per share and the number of shares used in the computation of per share amounts.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001113222_account4_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001113222_account4_prospectus_summary.txt
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+SUMMARY THIS SECTION SUMMARIZES INFORMATION CONTAINED IN OTHER PARTS OF THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY IN DECIDING WHETHER TO INVEST IN OUR COMMON STOCK. UNLESS WE STATE OTHERWISE, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED AND THAT THE INITIAL PUBLIC OFFERING PRICE IS $13.00 PER SHARE, THE MIDPOINT OF THE RANGE OF ANTICIPATED INITIAL PUBLIC OFFERING PRICES. ACCOUNT4.COM, INC. OUR BUSINESS We provide Internet-based software products and services that enable professional services organizations and corporate information technology departments to manage projects and to increase the utilization, productivity, effectiveness and retention of their workforces. Our customers purchase our Account4 product because it is a single product that incorporates a range of features normally only available across multiple products and its technical architecture allows users to access Account4 using only a Web browser and an Internet connection. These features help our customers minimize both their total cost of ownership and their need to change their business processes to accommodate a professional services automation software solution. Account4 is installed on a single server, making installation, personalization, modification and updates easy and quick to implement. We believe that installation on a central server and Account4's technical architecture will also allow us to modify Account4 to incorporate emerging technologies and be fully functional with hand-held or other wireless computing devices as demand for these features increases. During the year ended December 31, 1999, we had total revenues of approximately $8.1 million and net income of approximately $145,000. During the quarter ended March 31, 2000 we had total revenues of approximately $1.9 million and a net loss of approximately $390,000. We have developed Account4 based on our 13 years of experience in providing project and work management solutions and began commercial sales of Account4 in the third quarter of 1998. We have provided these solutions, including Account4, to a customer base of over 150 companies representing over 267,000 licensed users. We believe we have established a reputation for developing and providing innovative enterprise software solutions that has positioned Account4 as a leading product in the rapidly emerging professional services automation market. To date, 60 customers, representing over 32,000 users, have licensed Account4. Account4's features provide our customers with: - increased revenue and profit opportunities and accelerated billing processes by providing real-time collection of, and access to, information; - improved employee utilization and retention by providing continuous access to personnel scheduling and availability, and project distribution; - increased efficiency of operations through the distribution, sharing and reuse of critical knowledge, data and information across an enterprise; and - improved client satisfaction resulting from efficient resource utilization and project management. Benefits of Account4's flexible architecture include: - rapid deployment and immediate availability to all users, regardless of the number; - ease of personalization and modification provided by installation on a central server and the use of HTML, a standard language for creating web pages; - ability to extend Account4 to meet additional requirements or modify Account4 to accommodate existing business processes; and - consolidation of data into a central database. We believe these business and technology benefits collectively provide a professional services automation solution that minimizes our customers' total cost of ownership, creating a compelling competitive advantage for Account4. OUR INDUSTRY Aberdeen Group estimates that the worldwide market potential for professional services automation software solutions was approximately $1.6 billion in 1998 and should increase 20% annually to approximately $4.0 billion in 2003. The served portion of this market is expected to increase by over 90% annually, from $106 million in 1999 to $1.6 billion in 2003, creating a large unserved market opportunity. The vast majority of professional services automation software solutions are directed toward professional services organizations and corporate information technology organizations, as the information technology services sector represents one of the largest and fastest-growing segments of the professional services industry. Dataquest estimates that worldwide spending on information technology services will grow by 13.9% per year to nearly $800 billion in 2003, and Gartner Group estimates that by 2003, 30% of all e-business projects will be suspended or cancelled due in part to the unavailability of information technology resources. We believe that the strain on information technology service providers caused by the shortage of information technology workers will force information technology service providers to automate the management and delivery of their services in order to maximize their utilization of resources and profitability. OUR BUSINESS STRATEGY Our objective is to be the leading global supplier of professional services automation solutions to professional services organizations and corporate information technology departments. We intend to leverage our 13 years of experience in providing project and workforce management solutions to develop and provide innovative, comprehensive, functional and cost-effective products. Our strategy to accomplish these goals includes: - capitalizing on the rapidly growing market for professional services automation software solutions; - investing in sales and marketing programs to generate significant brand awareness for Account4; - advancing our technology leadership position by continuing to focus significant resources on innovative product development; - expanding our sales, marketing, administrative and technology infrastructure as well as our facilities and services to further develop our international operations, which currently comprise less than 10% of our revenue; and - developing additional complementary business and technology partnerships with third parties to augment our existing distribution channels, provide access to additional customers and enhance the features of our professional services automation solution. HOW TO REACH US Our principal executive offices are located at 75 Wells Avenue, Newton, Massachusetts 02459, and our telephone number is (617) 964-1633. Our website is located at www.account4.com. Information on our website is not, however, intended to be part of this prospectus, and you should rely only on the information contained in this prospectus before deciding to invest in our common stock. THE OFFERING <TABLE> <S> <C> Common stock we are offering................................ 4,000,000 shares(1) Common stock to be outstanding immediately after this offering.................................................. 15,384,521 shares(2) Use of proceeds............................................. Approximately $1.1 million for repayment of debt, approximately $16 million for expansion of sales and marketing activities, approximately $5 million for enhancement of our products and technology, approximately $7 million for expansion of our business infrastructure including our customer service and operating capabilities, approximately $7.3 million for working capital, approximately $1.4 million for capital expenditures and the remainder for general corporate purposes, including possible acquisitions. Proposed Nasdaq National Market symbol...................... AFOR </TABLE> ------------------------ (1) We expect to sell up to % of the shares in this offering (we are not yet able to estimate this percentage) to investors in the United Kingdom, Germany and the Netherlands. (2) The number of shares of common stock to be outstanding excludes 1,458,421 shares that we may issue upon the exercise of stock options outstanding as of June 1, 2000 and 942,958 shares of common stock available for issuance under our 1997 Stock Plan as of June 1, 2000. SUMMARY FINANCIAL DATA You should read the following summary historical and as adjusted financial and operating information in conjunction with "Use of Proceeds," our financial statements and related notes, including the unaudited interim financial information, and other financial information, which appears later in this prospectus. <TABLE> <CAPTION> QUARTER ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------ ------------------- 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenues: Account4 revenue............................... $ 40 $ 296 $ 2,938 $ 877 $1,364 Other revenue.................................. 4,273 5,723 5,123 1,433 510 ------ ------- ------- ------- ------ Total revenues............................... 4,313 6,019 8,061 2,310 1,874 Income (loss) from operations.................... 641 507 335 465 (629) Net income (loss)................................ 534 389 145 265 (390) Net income (loss) per share: Basic.......................................... $ 0.07 $ 0.05 $ 0.02 $ 0.03 $(0.05) ====== ======= ======= ======= ====== Diluted........................................ $ 0.05 $ 0.03 $ 0.01 $ 0.02 $(0.05) ====== ======= ======= ======= ====== Weighted average shares used in computing net income (loss) per share: Basic.......................................... 7,767 8,541 8,541 8,541 8,541 ====== ======= ======= ======= ====== Diluted........................................ 9,840 12,244 12,330 12,229 8,541 ====== ======= ======= ======= ====== OTHER OPERATING DATA: New Account4 licenses............................ 1 8 20 2 14 Cumulative Account4 licenses at end of period.... 1 9 29 11 43 </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, 2000 -------------------------- ACTUAL AS ADJUSTED (1) -------- --------------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 477 $47,041 Working capital............................................. 868 47,433 Total assets................................................ 2,533 49,097 Total debt and capital lease obligations, including current portion................................................... 1,110 14 Total stockholders' equity (deficit)........................ (55) 47,605 </TABLE> ------------------------ (1) Reflects the receipt of the net proceeds from the sale of 4,000,000 shares of common stock offered by us at the assumed public offering price of $13.00 per share, the midpoint of the range of anticipated initial public offering prices, and the application of the net proceeds from the offering including repayment of approximately $1.1 million of indebtedness, after deducting underwriting discounts and commissions and estimated offering expenses. Account4-Registered Trademark- and the Account4.com logo are trademarks of Account4.com, Inc. All other trade names and trademarks referred to in this prospectus are the property of their respective owners.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001113527_at-t_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001113527_at-t_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the Class A common stock being sold in this offering and our financial statements and notes thereto appearing elsewhere in this prospectus. Unless otherwise indicated, the information set forth in this prospectus assumes that our merger with FirstCom Corporation has been completed. AT&T LATIN AMERICA We provide broadband communications services to major metropolitan business markets in Argentina, Brazil, Chile, Colombia and Peru. Broadband communications services are delivered over high speed, high capacity transmission systems. Our objective is to be a leading provider of broadband communications services to business customers in the countries in South America and the Caribbean, plus Panama, but excluding Venezuela and Cuba. Our communications services integrate data, Internet, local and long distance voice, video and electronic commerce services. We focus on business customers with growing and diverse broadband communications needs, including multinational corporations, financial services companies, media and content providers, technology companies, government entities, Internet service providers and communications carriers, as well as small and medium size businesses. We deliver our services through our own technologically advanced networks, which interconnect with existing networks owned by third parties. Our business had the following operating characteristics as of March 31, 2000: -- 2,684 network route kilometers; -- 86,436 total fiber kilometers; -- 2,241 buildings connected to our networks; -- 70,786 voice grade equivalent circuits, a measure of transmission capacity; and -- 4,902 permanent virtual circuits sold. COMPETITIVE STRENGTHS We believe that we distinguish ourselves from our competition through several competitive strengths, including: -- We own and control our own high speed fiber optic networks, which are able to carry a variety of data, Internet, voice, video conferencing and electronic commerce traffic over a common Internet protocol- based platform. High-speed fiber optic networks use laser-generated light pulses to transmit information digitally through glass fiber cables. -- We market our services under the well-known AT&T brand. -- Our relationship with AT&T Corp. and its affiliates allows us: - access to AT&T Corp.'s worldwide customer base; - access to the cross-border transport facilities of Concert, the joint venture between AT&T Corp. and British Telecommunications plc; and - access to the products and services of AT&T Global Network Services and other AT&T entities. -- We have local presence in multiple high-growth South American communications markets. -- Our strong management team has significant experience in the communications industry in Latin America and proven entrepreneurial skills. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (Subject to Completion) Issued [ ], 2000 35,000,000 Shares [AT&T LATIN AMERICA LOGO] AT&T LATIN AMERICA CORP. CLASS A COMMON STOCK ------------------------ AT&T LATIN AMERICA CORP. IS OFFERING 35,000,000 SHARES OF CLASS A COMMON STOCK. AT&T CORP. OWNS ALL OF THE OUTSTANDING SHARES OF OUR CLASS B COMMON STOCK. CLASS B COMMON STOCK IS ENTITLED TO TEN VOTES PER SHARE. THE CLASS A COMMON STOCK IS ENTITLED TO ONE VOTE PER SHARE. CLASS A COMMON SHARES AND CLASS B COMMON SHARES HAVE IDENTICAL ECONOMIC RIGHTS. AFTER THIS OFFERING, AT&T CORP.'S OWNERSHIP INTEREST WILL REPRESENT APPROXIMATELY [ ]% OF THE VOTING POWER AND [ ]% OF THE ECONOMIC POWER IN OUR COMPANY. AT&T CORP. WILL BE ABLE TO ELECT A MAJORITY OF OUR BOARD OF DIRECTORS AND CONTROL THE OUTCOME OF SUBSTANTIALLY ALL MATTERS SUBMITTED TO A VOTE OF OUR STOCKHOLDERS. ------------------------ AT&T LATIN AMERICA'S CLASS A COMMON STOCK HAS BEEN APPROVED FOR LISTING ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "ATTL". ON [ ], 2000, THE REPORTED LAST SALE PRICE OF THE CLASS A COMMON STOCK ON THE NASDAQ NATIONAL MARKET WAS $[ ] PER SHARE. ------------------------ INVESTING IN THE CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 13. ------------------------ <TABLE> <CAPTION> UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS COMPANY -------- ------------- ----------- <S> <C> <C> <C> Per Share................................ $ $ $ Total.................................... $ $ $ </TABLE> AT&T Latin America has granted the underwriters the right to purchase up to an additional 5,225,000 shares of Class A common stock to cover overallotments. The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Morgan Stanley & Co. Incorporated expects to deliver the shares of Class A common stock to investors on [ ], 2000. ------------------------ Morgan Stanley Dean Witter Credit Suisse First Boston Merrill Lynch & Co. J.P. Morgan & Co. Salomon Smith Barney , 2000 GROWTH STRATEGY Our objective is to be a leading provider of broadband communications services to business customers in the countries in South America and the Caribbean, plus Panama, but excluding Venezuela and Cuba. To achieve this objective, we intend to: -- Focus on high-demand business customers in major Latin American metropolitan areas. -- Offer advanced data and Internet services through our networks and facilities. -- Offer a portfolio of advanced business communications services to deepen customer relationships, increase revenues and enhance customer loyalty. -- Capitalize on our relationships with AT&T Corp. and its affiliates, including Concert and AT&T Global Network Services. -- Provide consistent and superior service levels under the AT&T brand. -- Pursue rapid growth through continued network construction, as well as strategic alliances and acquisitions. HISTORY OF AT&T LATIN AMERICA We were incorporated in October 1999 as an indirect subsidiary of AT&T Corp. We began our operations in Brazil by acquiring Netstream Telecom Ltda., a facilities-based communications carrier, in December 1999. In Brazil we own and operate high-speed fiber optic networks in Sao Paulo, Rio de Janeiro, Belo Horizonte and Barueri/Alphaville, an industrial suburb of Sao Paulo. We continue to expand our existing networks in Brazil and have plans to begin building additional networks in the Brazilian cities of Brasilia, Campinas, Curitiba, Porto Alegre and Salvador during 2000. Our merger with FirstCom was completed in [ ] 2000. Prior to the merger, FirstCom provided broadband communications services primarily to business customers in four major metropolitan business centers: Santiago, Chile; Lima/Callao, Peru; and Bogota and Cali, Colombia. Until November 1996, FirstCom was a development stage company whose activities primarily consisted of the acquisition of licenses, concessions and rights-of-way in selected Latin American communications markets. Since that time it has focused on the development and operation of high-capacity fiber optic networks in Latin American business centers. Following our acquisition of AT&T Argentina S.A. (formerly named Keytech LD S.A.), in June 2000 we began limited operations in Argentina. AT&T Argentina is a development stage broadband communications company with a limited amount of assets, consisting mainly of signal transmission switching equipment. It currently serves a small number of customers by reselling services from other communications providers. It has licenses that authorize it or will authorize it by November 2000, to provide domestic and international long distance services, local telephone services, value-added services and a range of data services. AT&T Argentina also has rights to use the 1910-1930 MHz wireless spectrum for fixed links beginning in November 2000 in nine of Argentina's largest cities. Because we have a limited operating history, we have a limited competitive standing in the countries in which we operate. These markets are generally dominated by established incumbent communications service providers. Our principal executive offices are located at 2333 Ponce de Leon Blvd., Coral Gables, Florida 33134. Our telephone number is (305) 774-1770. TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Prospectus Summary.................... 1 Risk Factors.......................... 13 Special Note Regarding Forward-Looking Statements.......................... 20 Class A Common Stock Price Range...... 21 Dividend Policy....................... 22 Use of Proceeds....................... 23 Capitalization........................ 24 Dilution.............................. 26 Selected Financial Data............... 27 Unaudited Pro Forma Combined Financial Information......................... 31 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 45 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> Industry Overview..................... 56 Business.............................. 60 Management............................ 71 Certain Relationships and Related Transactions........................ 79 Principal Stockholders................ 87 Description of Certain Indebtedness... 88 Description of Capital Stock.......... 89 Shares Eligible for Future Sale....... 94 Underwriters.......................... 95 Legal Matters......................... 96 Experts............................... 96 Where You Can Find More Information... 97 Index to Financial Statements......... F-1 </TABLE> ------------------------ You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell shares of Class A common stock and seeking offers to buy shares of Class A common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the Class A common stock. In this prospectus, the "Company," "we," "us" and "our" refer to AT&T Latin America Corp. Unless otherwise indicated, the information set forth in this prospectus assumes that our merger with FirstCom Corporation has been completed. WE HAVE NOT TAKEN ANY ACTION TO PERMIT A PUBLIC OFFERING OF THE SHARES OF CLASS A COMMON STOCK OUTSIDE THE UNITED STATES OR TO PERMIT THE POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS OUTSIDE THE UNITED STATES. PERSONS OUTSIDE THE UNITED STATES WHO COME INTO POSSESSION OF THIS PROSPECTUS MUST INFORM THEMSELVES ABOUT AND OBSERVE ANY RESTRICTIONS RELATING TO THE OFFERING OF THE SHARES OF COMMON STOCK AND DISTRIBUTION OF THIS PROSPECTUS OUTSIDE OF THE UNITED STATES. UNTIL [ ], 2000, ALL DEALERS THAT BUY, SELL OR TRADE SHARES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. THE OFFERING Class A common stock offered....................... 35,000,000 shares Common stock to be outstanding after the offering: Class A common stock........ [ ] shares Class B common stock........ [ ] shares Total............... [ ] shares Use of proceeds............... We anticipate that we will use the net proceeds we receive from this offering to expand our communications networks, to repay $[ ] outstanding under our $100 million credit facility with an affiliate of AT&T Corp. and for working capital and other general corporate purposes. Voting rights................. Each share of Class A common stock is entitled to one vote. AT&T Corp., as holder of Class B common stock, is entitled to ten votes per share. Shares of Class A common stock and Class B common stock have identical economic rights. After this offering, AT&T Corp.'s ownership interest will represent approximately [ ]% of the voting power, or [ ]% if the underwriters' overallotment option is exercised in full, and [ ]% of the economic interest, or [ ]% if the underwriters' overallotment option is exercised in full, in our company. Dividend policy............... We have not paid any cash dividends on our common stock, and we do not expect to do so in the foreseeable future. Nasdaq National Market symbol........................ ATTL If the underwriters exercise their over-allotment option in full, the total number of shares of Class A common stock offered will be [ ], and the total number of shares of Class A common stock outstanding after this offering will be [ ]. The information in the table above excludes 1,417,500 shares that may be issued upon the exercise of options that we had agreed to grant as of July 31, 2000. It also excludes 9,051,166 former FirstCom stock options and warrants, which had a weighted average exercise price of $6.25 per share, and 1,448,885 shares of FirstCom convertible preferred stock that were outstanding as of June 30, 2000. The FirstCom warrants, options and preferred stock became warrants, options and preferred stock of AT&T Latin America as a result of our merger with FirstCom. SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA We have set forth below certain summary historical financial information relating to AT&T Latin America, Netstream and FirstCom. You should also refer to the financial information included in this prospectus in "Unaudited Pro Forma Combined Financial Information," our historical financial statements, including the notes thereto, and those of Netstream and FirstCom included in this prospectus and the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations". Our financial information has been derived from: -- our audited consolidated financial statements as of December 31, 1999 and for the period from inception (October 13, 1999) through December 31, 1999; and -- our unaudited interim consolidated financial statements as of and for the three months ended March 31, 2000. The financial information regarding Netstream has been derived from: -- Netstream's audited financial statements as of and for the eleven months ended December 31, 1998; and -- Netstream's audited financial statements as of and for the nine months ended September 30, 1999. The financial information regarding FirstCom has been derived from: -- FirstCom's audited annual consolidated financial statements as of and for the years ended December 31, 1995, 1996, 1997, 1998 and 1999; and -- FirstCom's unaudited interim consolidated financial statements as of and for the three months ended March 31, 1999 and 2000. AT&T LATIN AMERICA <TABLE> <CAPTION> AS OF AND FOR THE AS OF AND FOR THE PERIOD FROM INCEPTION THREE MONTHS ENDED (OCTOBER 13, 1999) THROUGH MARCH 31, 2000 DECEMBER 31, 1999 (UNAUDITED) -------------------------- ------------------ (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> STATEMENT OF OPERATIONS DATA Net revenue............................................... $ 802 $ 4,364 Gross profit (loss)....................................... (63) (2,557) Operating loss............................................ (3,934) (12,949) Net loss.................................................. (4,124) (11,217) Net loss per share........................................ (103.10) (280.43) Weighted average shares outstanding....................... 40,000 40,000 Depreciation.............................................. $ 512 $ 2,705 Amortization.............................................. 1,195 3,455 BALANCE SHEET DATA Cash and cash equivalents................................. $ 24,223 $ 279 Property, plant & equipment, net.......................... 68,269 86,051 Total assets.............................................. 384,428 384,238 Long term debt (including capital leases)................. 383 411 Total liabilities......................................... 10,634 22,438 Shareholders' equity...................................... 373,794 361,800 OTHER FINANCIAL DATA EBITDA(A)................................................. (2,227) (6,789) Capital expenditures...................................... 9,276 19,903 CASH FLOW DATA Net cash flow provided by operating activities............ 17 155 Net cash flow (used in) investing activities.............. (353,787) (25,869) Net cash flow provided by financing activities............ 377,490 1,770 </TABLE> ------------ (A) EBITDA as used in this prospectus is operating profit (loss) plus the sum of depreciation and amortization and is presented because we believe that EBITDA provides useful information regarding our ability to service our debt. EBITDA should not be considered in isolation or as a substitute for the consolidated income statements or the consolidated statements of changes in financial position prepared in accordance with U.S. GAAP or as a measure of profitability or liquidity. EBITDA is not a measure determined under U.S. GAAP, an alternative to U.S. GAAP operating income (loss) and net income (loss), or a measure of liquidity or cash flows as determined under U.S. GAAP. EBITDA does not represent discretionary funds. As a result, EBITDA, as calculated by us, may not be comparable to similarly titled measures reported by other companies. NETSTREAM <TABLE> <CAPTION> AS OF AND FOR THE AS OF AND FOR THE ELEVEN MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, 1998 SEPTEMBER 30, 1999 --------------------- -------------------- (IN THOUSANDS, EXCEPT QUOTA AND PER QUOTA DATA) <S> <C> <C> STATEMENT OF OPERATIONS DATA Net revenue............................................... $ -- $ 395 Gross profit (loss)....................................... -- (1,373) Operating loss............................................ (3,848) (12,575) Net loss.................................................. (3,442) (12,001) Net loss per quota(A)..................................... (2.72) (5.13) Weighted average quotas outstanding(A).................... 1,264,127 2,339,183 Depreciation.............................................. $ -- $ 1,511 Amortization.............................................. -- -- BALANCE SHEET DATA Cash and cash equivalents................................. $ 2 $ 29 Property, plant & equipment, net.......................... 12,212 47,484 Total assets.............................................. 12,980 49,793 Long term debt (including capital leases)................. 457 375 Total liabilities......................................... 14,475 33,814 Quotaholders' equity interest(A).......................... (1,495) 15,979 OTHER FINANCIAL DATA EBITDA(B)................................................. (3,848) (11,064) Capital expenditures...................................... 12,212 36,783 CASH FLOW DATA Net cash flow (used in) provided by operating activities.............................................. (7) 27 Net cash flow provided by investing activities............ 9 -- Net cash flow provided by financing activities............ -- -- </TABLE> ------------ (A) As a Brazilian limited liability company (sociedade de responsabilidade limitada), Netstream's capital is represented by quotas rather than shares of capital stock. (B) EBITDA as used in this prospectus is operating profit (loss) plus the sum of depreciation and amortization and is presented because we believe that EBITDA provides useful information regarding Netstream's ability to service its debt. EBITDA should not be considered in isolation or as a substitute for the consolidated income statements or the consolidated statements of changes in financial position prepared in accordance with U.S. GAAP or as a measure of profitability or liquidity. EBITDA is not a measure determined under U.S. GAAP, an alternative to U.S. GAAP operating income (loss) and net income (loss), or a measure of liquidity or cash flows as determined under U.S. GAAP. EBITDA does not represent discretionary funds. As a result, EBITDA, as calculated by us with respect to Netstream, may not be comparable to similarly titled measures reported by other companies. FIRSTCOM <TABLE> <CAPTION> AS OF AND FOR THE THREE AS OF AND FOR THE YEAR ENDED DECEMBER 31, MONTHS ENDED MARCH 31, ------------------------------------------------------------------ ------------------------- 1995 1996 1997 1998 1999 1999 2000 ---------- ----------- ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA Net revenue.................. $ 224 $ 652 $ 1,130 $ 18,142 $ 38,356 $ 8,281 $ 11,750 Gross profit (loss).......... (580) (306) (73) 4,063 16,351 2,253 6,441 Operating loss(A)............ (2,498) (4,493) (10,592) (10,642) (20,919) (3,067) (12,745) Net loss(A).................. (2,873) (4,762) (15,866) (25,322) (41,472) (7,149) (17,954) Net loss per share........... (.31) (.32) (.95) (1.33) (1.94) (.37) (.61) Weighted average shares outstanding................ 9,407,000 14,795,660 16,667,719 19,084,300 21,354,012 19,115,555 29,660,707 Depreciation & amortization............... $ 396 $ 842 $ 1,201 $ 2,237 $ 10,211 $ 893 $ 2,936 BALANCE SHEET DATA Cash and cash equivalents.... $ 57 $ 723 $ 14,936 $ 8,892 $ 12,896 $ 3,174 $ 26,891 Property, plant & equipment, net........................ 2,885 3,956 9,348 45,901 92,469 78,454 99,143 Total assets................. 4,347 14,893 176,936 154,844 172,110 169,432 193,495 Long term debt (including capital leases) and redeemable preferred stock...................... 210 248 131,982 133,913 149,109 134,304 151,158 Total liabilities............ 3,677 2,074 145,009 148,670 166,078 168,375 175,373 Shareholders' equity (deficit).................. 670 12,819 31,927 6,174 (8,700) (789) 2,966 OTHER FINANCIAL DATA EBITDA(A)(B)................. (2,102) (3,651) (9,391) (8,405) (10,708) (2,174) (9,809) Capital expenditures......... 720 1,453 2,763 34,674 33,124 12,072 9,346 CASH FLOW DATA Net cash flow (used in) operating activities....... (2,150) (3,934) (5,472) (28,389) (31,941) (3,442) (6,927) Net cash flow (used in) provided investing activities................. (1,170) (2,968) (69,590) 2,227 (15,948) (2,436) (8,807) Net cash flow provided by financing activities....... 3,263 7,570 89,275 20,118 51,983 160 29,639 </TABLE> ------------ (A) These amounts reflect a non-recurring expense of $6,137 for the three months ended March 31, 2000 and $1,008 for the year ended December 31, 1999 for merger expenses relating to the merger with AT&T Latin America. (B) EBITDA as used in this prospectus is operating profit (loss) plus the sum of depreciation and amortization and is presented because we believe that EBITDA provides useful information regarding FirstCom's ability to service its debt. EBITDA should not be considered in isolation or as a substitute for the consolidated income statements or the consolidated statements of changes in financial position prepared in accordance with U.S. GAAP or as a measure of profitability or liquidity. EBITDA is not a measure determined under U.S. GAAP, an alternative to U.S. GAAP operating income (loss) and net income (loss), or a measure of liquidity or cash flows as determined under U.S. GAAP. EBITDA does not represent discretionary funds. As a result, EBITDA, as calculated by us with respect to FirstCom, may not be comparable to similarly titled measures reported by other companies. SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL AND OPERATING INFORMATION The following summary unaudited pro forma combined financial information is derived from the unaudited pro forma combined financial information and the notes thereto included elsewhere in this prospectus. This information gives effect to: -- our merger with FirstCom as if it had occurred on January 1, 1999 for statement of operations purposes and as of March 31, 2000 for balance sheet purposes, and our acquisition of Netstream as if it had occurred on January 1, 1999 for statement of operations purposes; -- a cash equity contribution of $70 million received from affiliates of AT&T Corp. and Promon Ltda., the prior owner of our Brazilian business and a shareholder of AT&T Latin America, as required by the FirstCom merger agreement; -- the issuance and sale of 35,000,000 shares of our Class A common stock in this offering, assuming a price per share of $13.50 (the closing price of the FirstCom common shares on August 2, 2000), for estimated net proceeds of $[ ] million, and the application of those proceeds as described under "Use of Proceeds"; and -- FirstCom's tender offer and consent solicitation for its 14% senior notes due 2007 and our issuance to AT&T Corp. of [ ] shares of non-voting, non-convertible and non-participating 15% Series B redeemable preferred stock to finance the tender offer, as if they had been completed as of January 1, 1999 for statement of operations purposes and as of March 31, 2000 for balance sheet purposes. The summary unaudited pro forma combined financial information does not purport to present our results of operations had the FirstCom merger and the AT&T Argentina acquisition occurred on the date, or at the beginning of the periods, for which the transactions are being given pro forma effect. Nor is the unaudited summary pro forma combined financial information necessarily indicative of the results of operations that may be achieved in the future. Our actual financial position and results of operations will differ, perhaps significantly, from the pro forma amounts reflected herein because of a variety of factors, including access to additional information, changes in value not currently identified and changes in operating results between the dates of the pro forma financial information and the date on which the merger took place. The price per share of our Class A common stock assumed for purposes of the summary unaudited pro forma combined financial information is not necessarily indicative of our share price following the FirstCom merger or this offering. AT&T LATIN AMERICA UNAUDITED PRO FORMA <TABLE> <CAPTION> AS OF AND FOR THE THREE MONTHS ENDED YEAR ENDED MARCH 31, 2000 DECEMBER 31, 1999 (UNAUDITED) ----------------- ------------------ (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> STATEMENT OF OPERATIONS DATA Net revenue................................................. $ 40,349 $ 16,114 Gross profit................................................ 12,303 3,884 Operating loss.............................................. (86,735) (32,981) Net loss attributable to common stockholders................ (112,092) (38,273) Net loss per share.......................................... (.99) (.34) Weighted average shares outstanding......................... 113,469,672 113,469,672 Depreciation................................................ $ 12,526 $ 5,377 Amortization................................................ 49,279 10,756 BALANCE SHEET DATA Cash and cash equivalents................................. 47,170 Property, plant & equipment, net.......................... 165,251 Goodwill and other intangible assets...................... 768,138 Total assets.............................................. 1,045,857 Long term debt (including capital leases) and redeemable preferred stock........................................ 212,908 Total liabilities......................................... 55,419 Shareholders' equity...................................... 780,505 OTHER FINANCIAL DATA EBITDA(A)................................................. (24,930) (16,848) Capital expenditures...................................... 94,341 31,165 </TABLE> ------------ (A) EBITDA as used in this prospectus is operating profit (loss) plus the sum of depreciation and amortization and is presented because we believe that EBITDA provides useful information regarding AT&T Latin America's ability to service its debt. EBITDA should not be considered in isolation or as a substitute for the consolidated income statements or the consolidated statements of changes in financial position prepared in accordance with U.S. GAAP or as a measure of profitability or liquidity. EBITDA is not a measure determined under U.S. GAAP, an alternative to U.S. GAAP operating income (loss) and net income (loss), or a measure of liquidity or cash flows as determined under U.S. GAAP. EBITDA does not represent discretionary funds. As a result, EBITDA, as calculated, may not be comparable to similarly titled measures reported by other companies. SUMMARY SELECTED OPERATING INFORMATION The following table sets forth selected operating statistics on a historical and on a pro forma combined basis as of March 31, 2000. No statistics are provided for Argentina, because we did not have material operations in Argentina as of this date. <TABLE> <CAPTION> AS OF MARCH 31, 2000 --------------------------------------------------- AT&T LATIN AMERICA PRO FORMA BRAZIL CHILE COLOMBIA PERU COMBINED ------ ------ -------- ------ --------- <S> <C> <C> <C> <C> <C> Network route kilometers Metropolitan.......................... 335 306 815 1,228 2,684 Domestic (long-haul).................. 0 0 0 0 0 ------ ------ ------ ------ ------ Total............................ 335 306 815 1,228 2,684 Total fiber kilometers.................. 32,461 4,743 17,996 31,236 86,436 Number of buildings connected........... 601 225 734 681 2,241 Number of voice grade equivalent circuits.............................. 14,218 35,115 10,770 10,683 70,786 Number of permanent virtual circuits sold.................................. 1,652 1,089 1,314 847 4,902 Number of dedicated data and Internet customers............................. 623 699 181 582 -- Number of employees..................... 193 276 164 284 917 </TABLE> Network route kilometers. Network route kilometers are the total number of kilometers of fiber optic cable installed in a network. Network route kilometers include cable laid as a backbone for the network, cable from the backbone to a building and cable within a building to reach the customer's hardware at its premises. A measurement in route kilometers does not take into account the number of fibers in the cables that make up the network. Total fiber kilometers. Total fiber kilometers are network route kilometers multiplied by the number of strands of fiber in each of the cables that make up the network. By counting strands of fiber, a measurement in fiber kilometers indicates the maximum capacity of a network. For example, one route kilometer of 144-strand fiber optic backbone cable would count as 144 fiber kilometers, while one kilometer of 12-strand building access cable would count as only 12 fiber kilometers. Buildings connected. Buildings connected refers to the number of buildings, each identified by a unique street address, that are connected to our network. Voice grade equivalent circuits. The number of voice grade equivalent circuits relates to the transmission capacity of lines. These circuits are measured in terms of their ability to transmit the equivalent of 64 kilobits of information per second, the capacity needed for one voice call. A bit is the smallest unit of information a computer can process and is the basic measurement unit of data communications. If two sites are connected with a 256 kilobit link, there would be four voice grade equivalent circuits. Permanent virtual circuits sold. A permanent virtual circuit represents a data connection, typically between two locations such as a customer's headquarters and an off-site branch or other entity. We connect customers to our network by deploying a port connection within or near to the customer's premises. Each port can accommodate several permanent virtual circuits. As a customer increases its usage of services, the customer will obtain additional available transmission capacity on the same installed port. Number of dedicated data and Internet customers. The number of customers represents the number of billable customer accounts for data or Internet services. Employees. The number of employees excludes third-party contractor employees and agents.
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including "Risk Factors" beginning on page 6 and the financial statements beginning on page F-1, before making an investment decision. O2WIRELESS SOLUTIONS We provide a full range of network services to all sectors of the global wireless telecommunications industry. Our services range from business planning and design through deployment and maintenance services for telecommunications networks. We believe that our ability to offer a full range of network services enables our customers to rapidly deploy their wireless networks and to address new, emerging technologies. Because we are technology and vendor independent, we can provide unbiased evaluations and recommendations for our customers. Our proprietary processes and technologies include Virtual Project Manager, a Web-based project management tool, and E-Site, our project tracking software. These tools enable us to capitalize on prior project experience and deliver high-quality network services. We have expertise in both wireless and wireline segments of the telecommunications industry, which enables us to address our customers' current and emerging network requirements and to strengthen our customer relationships. In 1999, we completed projects for more than 125 customers and were involved in the development of over 11,000 communications facilities. To date, we have been involved in the design and implementation of over 47,000 communications facilities. We provide services to a range of participants in the telecommunications industry, including wireless and broadband carriers, equipment vendors and wireless tower companies. In 1999, we received approximately 36% of our revenues from our three largest customers -- Nortel Networks, Sprint and Carolina PCS. In 1999, we received approximately 15% of our revenues from Nortel Networks, 11% of our revenues from Sprint and 10% of our revenues from Carolina PCS. None of our other customers represented more than 10% of our revenues for 1999. Some of these customers included Nextel, Adelphia Business Solutions, Crown Castle, Motorola, SpectraSite, Ericsson and Knology. We have completed projects in all 50 U.S. states and 26 countries including Brazil, China, Germany, Honduras, Israel, Japan, Jordan, Mexico, Puerto Rico and Russia. For the year ended December 31, 1999, we had revenues of $48.6 million and a net loss of $317,000. For the six months ended June 30, 2000, we had revenues of $57.2 million and a net loss of $12.8 million, which was attributable to a non-cash expense charge of $13.7 million resulting from the increase in the fair value of the common stock put warrants outstanding. OUR MARKET OPPORTUNITY According to Forrester Research, wireless communications has been the fastest growing segment of the telecommunications sector over the past seven years. We believe that this growth is driven in part by: - global deregulation and privatization of the telecommunications industry; - dramatic advances in wireless and wireline technologies; - increased availability and usage of wireless technologies; - increased demand for broadband wireless applications, including wireless Internet and mobile commerce; - structural changes in the industry driving service providers to offer comprehensive telecommunications services; and - a trend towards replacing fixed line telecommunications services with wireless services. According to Forrester Research, the U.S. wireless subscriber base will grow to over 110 million by 2003 from 77 million in 1999, generating industry revenues in excess of $46.1 billion. The INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED AUGUST 9, 2000 PROSPECTUS 6,100,000 SHARES (O2WIRELESS SOLUTIONS, INC. LOGO) COMMON STOCK This is the initial public offering of common stock by o2wireless Solutions, Inc. We are offering 5,798,623 shares of our common stock and some of our shareholders are offering 301,377 shares of our common stock. We estimate that the initial public offering price will be between $12.00 and $14.00 per share. We will not receive any of the proceeds from the sale of common stock by the selling shareholders. ------------------ There is currently no public market for the common stock. Our common stock has been approved for listing on the Nasdaq National Market under the symbol "OTWO." ------------------ <TABLE> <CAPTION> PER SHARE TOTAL --------- ------ <S> <C> <C> Initial public offering price............................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds to o2wireless Solutions, before offering expenses.................................................. $ $ Proceeds to selling shareholders............................ $ $ </TABLE> Some of our shareholders have granted the underwriters an option for a period of 30 days to purchase up to 915,000 shares of common stock. ------------------ INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6. ------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. CHASE H&Q CREDIT SUISSE FIRST BOSTON THOMAS WEISEL PARTNERS LLC , 2000 number of subscribers is expected to further increase to 143 million by 2005. International Data Corporation further estimates that the international wireless subscriber base will grow to approximately 1.1 billion by 2003 from 303 million in 1998. A new wave of telecommunications service providers is beginning to offer high speed fiber optic networks packaged with broadband wireless technologies to deliver enhanced telecommunications services and features to new customers and markets. According to Forrester Research, total spending for wireless data services in the U.S. alone is expected to generate $4.2 billion in revenue by 2003 and $8.4 billion by 2005. This projected growth in subscribers and applications is expected to generate significant infrastructure demands and require significant expertise and resources. INTEGRATED SERVICE OFFERING We provide a comprehensive range of services for our customers from pre-deployment planning through network installation, maintenance and optimization. We customize our services to meet the individual needs of our customers by offering bundled and unbundled packages of our core services. Through our program management services, we help our customers effectively manage the process of planning, designing, deploying and maintaining their wireless networks. Because we offer network services in both the wireless and wireline industry segments, our customers benefit by obtaining the services they need from a single provider as opposed to multiple providers. Our services include: - Planning Services. We provide pre-deployment planning services for all the steps involved in developing or refining a network or deployment strategy. Our business consultants analyze the financial, engineering, competitive market and technology issues applicable to a proposed network project. Our services include defining subscriber profiles and target markets, usage forecasting, market planning and competition, and regulatory, geographical and network configuration analysis. - Design Services. We provide a full range of services for the design of wireless telecommunications networks, including the related wireline components. Based on analyses of traffic patterns, population density, topography and propagation environment, we provide radio frequency engineering and network design services tailored to the customer's individual market. These design services include determining the optimal placement of network equipment and use of radio frequencies. We also provide fixed network engineering services, including specialized design services for packet-switched and IP router-based network elements. - Deployment Services. We provide our customers with comprehensive site development and site audit services, including site feasibility and zoning studies, lease negotiations, civil and structural engineering and third party vendor management. We install all major types of wireless and wireline telecommunications equipment, including base station electronics, antennas and ancillary equipment. We also assist our customers in moving incumbent users of their licensed spectrum to new frequencies by providing point-to-point and point-to-multipoint line-of-sight microwave engineering and support services. - Maintenance Services. After a network has been deployed, it often requires updating, recalibrating and tuning. Our network maintenance services are comprised of post-deployment radio frequency optimization services, network operations and maintenance services, and network monitoring. We also perform radio frequency testing relating to employee safety in the vicinity of radiowave emitting devices, as increasingly mandated for certain of our customers by federal regulatory authorities such as OSHA and the FCC. We can also assume responsibility for the day-to-day operation, management and maintenance of our customers' telecommunications networks. Graphics depicting o2wireless Solutions' service offerings and integrated network solution divided into four categories (plan, design, deploy, maintain) followed by the following language: o2wireless Solutions, Inc. is a leading provider of integrated network services to the global wireless telecommunications industry. We plan, design, deploy and maintain wireless networks that address the changing technological landscape. Each of the categories is followed by a sentence describing the various service offerings as follows: PLAN. We work with customers to create a pre-deployment plan that addresses all the issues that affect their network. DESIGN. We offer a suite of services for the design of wireless telecommunications networks. DEPLOY. We handle all aspects of network deployment, from site selection to engineering and installations. MAINTAIN. Our services enable customers to keep their networks running smoothly. OUR GROWTH STRATEGY Our goal is to be the leading independent provider of integrated network services to the global wireless telecommunications industry. Our growth strategy includes the following: - Pursue internal growth through new customer development and cross-marketing complementary services to existing customers; - Remain current in emerging telecommunications technologies; - Attract, retain and develop high-quality employees; - Take advantage of our prior experience and proprietary tools such as Virtual Project Manager and E-Site to attract new customers; and - Pursue targeted acquisitions to supplement our technical expertise, acquire additional human resources and strategic customer relationships, and expand our presence in geographic markets. OUR HISTORY We were incorporated in 1991 under the name American Communications Construction, Inc. In November 1997, we changed our name to Clear Communications Group, Inc., and in July 1998 we reorganized our corporate structure by creating a holding company, Clear Holdings, Inc. In May 2000, we changed our name from Clear Holdings to o2wireless Solutions, Inc. Our principal executive offices are located at 440 Interstate Parkway North, Atlanta, Georgia 30339, and our telephone number is (770)763-5620. THE OFFERING <TABLE> <S> <C> Common stock offered by o2wireless Solutions......... 5,798,623 shares Common stock offered by selling shareholders......... 301,377 shares Common stock to be outstanding after the offering.... 22,176,297 shares Use of proceeds...................................... - to repay indebtedness under our credit agreement of approximately $24 million; - to redeem our senior subordinated notes for approximately $13 million; - to redeem our Series D Preferred Stock for approximately $7.9 million; and - to use the balance of the proceeds for general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol............... OTWO </TABLE> The number of shares of common stock to be outstanding after the offering is based on the number of shares outstanding as of June 30, 2000 and does not include the following: - 1,337,086 shares subject to options outstanding, at a weighted average exercise price of $1.80 per share; - 914,214 shares of common stock available for future issuance under our 1998 Stock Option Plan; and - warrants to purchase 7,091,275 shares of common stock at an exercise price of $0.0038 per share. --------------------- Unless otherwise noted, the information in this prospectus assumes no exercise of the underwriters' option to purchase additional shares in the offering. TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Prospectus Summary.......................................... 1 Risk Factors................................................ 6 Forward-Looking Statements.................................. 13 Use of Proceeds............................................. 14 Dividend Policy............................................. 14 Capitalization.............................................. 15 Dilution.................................................... 17 Selected Consolidated and Pro Forma Financial Data.......... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 20 Business.................................................... 28 Management.................................................. 37 Related Party Transactions.................................. 44 Principal and Selling Shareholders.......................... 47 Description of Capital Stock................................ 50 Shares Eligible for Future Sale............................. 54 Underwriting................................................ 56 Legal Matters............................................... 58 Experts..................................................... 58 Where You Can Find More Information......................... 59 Index to Financial Statements............................... F-1 </TABLE> SUMMARY CONSOLIDATED AND PRO FORMA FINANCIAL INFORMATION (IN THOUSANDS) The following table presents summary consolidated and pro forma financial data about our business. You should read this information together with the consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus and the information under "Selected Consolidated and Pro Forma Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this prospectus. The information provided below and elsewhere in this prospectus reflects, unless otherwise noted, a 2.65-for-one stock split that occurred on June 29, 2000. The Consolidated Statements of Operations pro forma columns give effect to the acquisitions of TWR Telecom, Inc. and its subsidiaries, Specialty Drilling Inc., McKenzie Telecommunications Group, Inc., and Communication Consulting Services, Inc. and subsidiary ("CCS"), as if those transactions had occurred on January 1, 1999. The pro forma columns also assume the automatic conversion of all outstanding shares of our Class A Preferred Stock and our Series C Preferred Stock outstanding as of June 30, 2000 into shares of common stock, as of the later of January 1, 1999 or the date of issuance of the related preferred stock. The Consolidated Balance Sheet pro forma column assumes the automatic conversion of all outstanding shares of our Class A Preferred Stock and our Series C Preferred Stock into shares of common stock and the expiration of the put provisions of the common stock put warrants as of June 30, 2000. The Consolidated Balance Sheet pro forma as adjusted column reflects the receipt by us of the net proceeds of approximately $68.4 million from the sale of 5,798,623 shares of common stock in this offering at an initial public offering price of $13.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses and the application of the estimated net proceeds from the offering. See "Capitalization" and "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001113617_hydrogen_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001113617_hydrogen_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. BEFORE DECIDING TO INVEST IN OUR COMMON SHARES, YOU SHOULD CAREFULLY READ THIS ENTIRE PROSPECTUS, INCLUDING THE SECTION ENTITLED "RISK FACTORS." HYDROGEN BURNER TECHNOLOGY We design and develop hydrogen fuel processors for fuel cell systems and industrial hydrogen generators. The efficient and cost-effective production of hydrogen is critical to the commercial introduction of fuel cell systems into the mass transportation and stationary markets. In the transportation market, we are developing on-board hydrogen processors for fuel cell vehicles and other transportation market applications. In the stationary fuel cell market, we are designing our initial products for residential and small commercial market applications. In addition, we are developing hydrogen generation systems that can be used at hydrogen refueling stations to fuel municipal bus systems and other fleet vehicles. For example, as a participant in a California Fuel Cell Project program, we have installed a large-scale hydrogen generation system at the SunLine Transit Agency to fuel buses powered by XCELLSIS The Fuel Cell Engine Company, an alliance among DaimlerChrysler Corp., Ford Motor Company and Ballard Power Systems Inc. Our goal is to become the leading provider of hydrogen fuel processors by capitalizing on our patented Under-Oxidized Burner (UOB-TM-) technology for hydrogen production. Since 1993, we have completed substantial field tests of our hydrogen generators with industrial gas companies such as Gaz de France and Air Liquide Canada, Inc. and have demonstrated our hydrogen processors for fuel cell systems to leading fuel cell manufacturers such as Ballard Power Systems, Plug Power Inc., H Power Corp. and EnAble-TM- Fuel Cell Corporation, a subsidiary of DCH Technology, Inc. We delivered our first commercial industrial hydrogen generation systems in 1997 for field testing purposes and expect to deliver our first commercial fuel processors for fuel cell systems by the end of 2000 for field testing purposes. OUR PRODUCTS AND OUR TECHNOLOGY Our fuel processors and hydrogen generators are used to "reform" hydrocarbon-based fuels, such as gasoline or natural gas, to produce hydrogen. Reforming is a process by which hydrocarbon-based fuels are converted into hydrogen gas. Our products can utilize a broad range of readily available fuels, including natural gas, propane, gasoline and diesel. We believe that we are one of the few companies to offer such a fuel-flexible solution, thereby allowing our technology to be used in a greater variety of applications than that of our competitors. When compared to other currently available methods of producing hydrogen, we believe that our technology is more efficient, lower in emissions and lower in capital costs. MARKET OPPORTUNITIES FOR OUR PRODUCTS IMPORTANCE OF HYDROGEN FUEL PROCESSORS TO FUEL CELL SYSTEMS. A fuel cell is an electrochemical device that produces electricity from hydrogen without combustion, with water and heat as the only by-products. Fuel cell systems have several advantages over conventional power generation systems, including lower emissions, higher fuel efficiency, quieter operation, lower vibration and potentially lower maintenance and capital costs. These advantages enable fuel cells to offer cleaner and more efficient alternatives to existing power sources. There are three major components to a fuel cell system: the fuel processor, the fuel cell stack and the power conditioning equipment. We produce fuel processors that are designed to generate hydrogen efficiently and in a scaled-down fashion suitable for broad commercial market applications. The cost of the fuel processor represents approximately 40% of the cost of all of the components of an entire fuel cell system. Accordingly, any significant cost reductions that are achieved by manufacturers of fuel processors could provide meaningful cost reductions in the completed fuel cell system. Such overall price reductions should greatly assist a fuel cell manufacturer's ability to achieve significant market penetration. We believe our products address these efficiency and cost issues. FUEL CELL MARKETS. Automotive companies, fuel cell developers, component suppliers and power suppliers are investing large amounts of capital in the development of fuel cell systems, many of which incorporate fuel processors. Trends that will influence the penetration of fuel cells into broad commercial markets include: - Increasing demand for power, particularly for continuous and reliable power; - Deregulation in the energy industry, which is opening markets for fuel cells; - Advantages of fuel cells over traditional power technologies; and - Environmental concerns regarding conventional power technologies. INDUSTRIAL HYDROGEN GENERATION MARKETS. Our hydrogen generators are completely integrated units that we believe offer an attractive on-site hydrogen generation alternative to bulk-delivered hydrogen by providing: - Cost advantages due to eliminating delivery, transfer and storage expenses; - Increased safety by reducing the amount of potentially hazardous hydrogen stored at an end-user's location; and - More consistent hydrogen purity with the flexibility to adjust purity to the user's desired level. OUR STRATEGIC RELATIONSHIPS We have entered into strategic relationships with several corporations to expand our research and development efforts, increase marketing and distribution channels for our products and enhance our production and manufacturing capabilities. RELATIONSHIP WITH VISTEON CORPORATION. We have created a strategic alliance with Visteon Corporation to obtain engineering support services, contract manufacturing and a technology sharing and development program with respect to the development and manufacture of our hydrogen fuel processors for proton exchange membrane fuel cell applications. RELATIONSHIP WITH GAZ DE FRANCE. Gaz de France has become the exclusive distributor of our industrial hydrogen generating systems for industrial use and refueling stations in the European Union, Norway and Switzerland. RELATIONSHIP WITH ENGELHARD CORPORATION. We have entered into an agreement with Engelhard Corporation to jointly develop hydrogen fuel processing systems using our shared technologies. OUR STRATEGY Our goal is to be the world's leading developer and producer of hydrogen fuel processors used in fuel cell systems and on-site hydrogen generators used in industrial applications. To achieve our objectives, we have implemented the following strategies: DESIGN AND DEVELOP SUPERIOR PRODUCTS FOR FUEL CELL MARKETS. We are designing and developing proprietary hydrogen processors for proton exchange membrane fuel cell systems that will be used to power vehicles, residences, industrial and commercial facilities, devices at remote locations and certain military applications. In addition, we are also developing a fuel processor for solid oxide fuel cells to be used in stationary market applications. CAPITALIZE ON IMMEDIATE COMMERCIAL MARKETS FOR ON-SITE HYDROGEN GENERATION SYSTEMS. We believe that our hydrogen generation systems significantly reduce the cost, logistical, safety and regulatory problems associated with bulk-delivered hydrogen and have immediate commercial applications in numerous industrial manufacturing markets. BUILD ON RELATIONSHIPS WITH FUEL CELL MANUFACTURERS. We have existing commercial relationships with Ballard Power Systems, Plug Power, H Power and EnAble-TM-. We intend to be the provider of choice of hydrogen processors to all of the leading fuel cell system manufacturers. BENEFIT FROM STRATEGIC ALLIANCES AND SEEK NEW PARTNERS. We have strategic alliances with Visteon, Gaz de France and Engelhard. We believe that these relationships and other potential alliances will aid us in achieving our goal of becoming the world's leading producer of hydrogen processors for fuel cell systems and on-site hydrogen generation systems. CONTINUE TO REDUCE COSTS. We plan to continue to focus on reducing costs by efficiently combining our patented technology with existing commercial technologies. We plan to improve product performance and reduce production costs through the implementation of new technologies, such as microprocessor controllers, advanced catalysts and miniaturized components. We also expect to attain significant cost efficiencies as economies of scale in production are achieved. CONTINUE TECHNOLOGICAL ADVANCEMENTS. We are continuing our research and development of hydrogen processing technology to achieve technological advancements and establish our technological leadership in our target markets, improve our existing products and position us to develop technologies and products for additional market applications. ACQUIRE AND LICENSE COMPLEMENTARY TECHNOLOGIES. We intend to evaluate the acquisition and licensing of complementary technologies that can potentially accelerate the development and market penetration of our products. CONTINUE TO DEVELOP STRONG RELATIONSHIPS WITH GOVERNMENT AND OTHER NON-PROFIT ORGANIZATIONS. We have relationships with various state and federal governmental agencies and are also involved in several hydrogen and environmentally conscious organizations. -------------- Our executive offices are located at 19300 Susana Road, Rancho Dominguez, California 90221, and our telephone number is (310) 900-0400. We were incorporated as a California corporation in November 1992 but we expect to reincorporate as a Delaware corporation immediately prior to the completion of this offering. THE OFFERING <TABLE> <S> <C> Common stock offered.............................. 8,000,000 shares Common stock to be outstanding after this offering........................................ 33,894,396 shares Use of proceeds................................... For capital expenditures, research and development, sales and marketing expenses, working capital, potential acquisitions and investments and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol............ HBTI </TABLE> The number of shares of our common stock to be outstanding after this offering: - is based on 12,377,352 shares of common stock outstanding as of October 31, 2000; - reflects the issuance of 4,862,158 shares of common stock in connection with the reorganization of our subsidiaries to consolidate our assets that will occur immediately prior to the closing of this offering. See "Certain Relationships and Related Transactions;" - includes 5,476,886 shares of common stock issuable upon exercise of warrants to be issued to Visteon prior to the closing of this offering, at an exercise price of $.0001 per share. See "Certain Relationships and Related Transactions;" - reflects the issuance immediately prior to the closing of this offering of 1,000,000 shares of common stock upon exercise of all outstanding and vested warrants at an exercise price of $4.00 per share; - reflects the sale of 2,178,000 shares of our common stock in connection with the reorganization of our subsidiaries to consolidate our assets that will occur immediately prior to the closing of this offering. See "Certain Relationships and Related Transactions;" - excludes 3,698,401 shares of common stock issuable upon exercise of options outstanding as of October 31, 2000 at a weighted average exercise price of $3.61 per share; and - excludes 504,599 shares of common stock available for grant under our 2000 Stock Incentive Plan as of October 31, 2000. Except as otherwise indicated, the information in this prospectus: - assumes our common stock will be sold in this offering at an initial public offering price of $12.00 per share, the mid-point of the estimated range of the initial offering price; - assumes no exercise of the underwriters' option to purchase 1,200,000 additional shares of common stock to cover over-allotments; and - assumes our reincorporation in Delaware and the filing of our new certificate of incorporation, which will occur prior to the closing of this offering. SUMMARY CONSOLIDATED FINANCIAL DATA The following tables set forth our summary consolidated financial data. You should read this information together with our consolidated financial statements and the notes to those statements beginning on page F-1 of this prospectus, the information under "Selected Consolidated Financial Data," "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The pro forma net loss per share, basic and diluted gives effect to the issuance of 4,862,158 shares of common stock in connection with the reorganization of our subsidiaries to consolidate our assets. No adjustments have been made to reflect federal income taxes because the pro forma income tax provision would be zero. <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------ ------------------- 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues............................................. $ 278 $ 145 $ 1,238 $ 516 $ 76 Gross profit (loss).................................. 99 (47) 132 9 76 Loss from operations................................. (2,629) (3,128) (3,394) (1,841) (2,370) Net loss............................................. $(1,846) $(2,244) $(2,937) $(1,511) $(2,140) ======= ======= ======= ======= ======= Net loss per share, basic and diluted................ $ (0.31) $ (0.20) ======= ======= Shares used in computing net loss per share, basic and diluted........................................ 9,554 10,698 ======= ======= Pro forma net loss per share, basic and diluted(1)... $ (0.20) $ (0.14) ======= ======= Shares used in computing pro forma net loss per share, basic and diluted(1)........................ 14,416 15,560 ======= ======= </TABLE> The balance sheet data on a pro forma basis assumes the issuance of 4,862,158 shares of common stock in connection with the reorganization of our subsidiaries to consolidate our assets. The balance sheet data on a pro forma as adjusted basis assumes the consolidation transaction described above and the sale of 8,000,000 shares of common stock in this offering at an assumed initial public offering price of $12.00 per share, the mid-point of the estimated range, after deducting the estimated underwriting discounts and commissions and our estimated offering expenses. <TABLE> <CAPTION> AS OF JUNE 30, 2000 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $2,040 $2,040 $89,840 Working capital............................................. 1,115 1,115 88,915 Total assets................................................ 3,662 3,662 91,462 Net shareholders' (deficiency) equity....................... (2,733) 969 88,769 </TABLE> ---------------- (1) Shares used in computing pro forma net loss per share, basic and diluted, excludes the issuance immediately prior to the closing of this offering of 1,000,000 shares of common stock upon the exercise of all outstanding, vested warrants at an exercise price of $4.00 per share; the issuance of 5,476,886 shares of common stock upon the exercise of warrants during a one-year vesting period following the closing of this offering; and the sale of 2,178,000 shares of our common stock in connection with the reorganization of our subsidiaries immediately prior to the closing of this offering. See "Certain Relationships and Related Transactions."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001113647_nextvenue_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001113647_nextvenue_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS THE INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THIS PROSPECTUS SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. NEXTVENUE INC. BUSINESS We are a global provider of comprehensive services for the streaming of audio and video content and communications over the Internet. Our turnkey service offering integrates seamlessly into the Internet strategies of businesses, including financial services, media and corporate clients, and incorporates the capture, production, publishing, hosting and distribution of multimedia content. Our suite of services and scalable network infrastructure enable our customers to focus on creating content, while outsourcing the streaming media process to us. We are one of the first companies to focus on providing comprehensive streaming media services. Our initial focus has been to provide leading financial services companies such as Charles Schwab, Goldman Sachs, Merrill Lynch, Morgan Stanley and Salomon Smith Barney with the ability to communicate business-critical information in a timely, cost-effective manner over the Internet. We provide these clients with streaming media services in connection with research analyst presentations, debt and equity roadshows and investor conferences. In other industries, we provide media and corporate clients with live and on-demand streaming media solutions for enhanced advertising, entertainment, news, product information, promotional presentations, education, training and corporate announcements to investors and employees. Media and corporate clients currently using our services include CNBC/Dow Jones Business Video, General Electric, Merck, MTVi, PRIMEDIA and Trans World Entertainment. MARKET OPPORTUNITY Streaming media technology enables the continuous transmission and playback of multimedia audio and video over the Internet. Applications for streaming media include broadcasting entertainment programming over the Internet as well as facilitating corporate communications with customers, business partners and employees through the use of the Internet and corporate intranets. As a new technology, the applications of and the market for streaming media are still in their early stages. However, we believe the growth in broadband Internet access, the demand for media-rich business and entertainment applications, and the significant commitment by large technology companies such as Microsoft, Intel and Cisco Systems to the development and distribution of streaming media technology will drive expansion of applications for streaming media and the market for our services. Paul Kagan Associates has estimated that streaming media revenues from all sources will grow from approximately $40.0 million in 1998 to approximately $7.3 billion in 2004. NEXTVENUE SOLUTION Presenting content in a streaming media format is a technology intensive process outside our customers' core business focus. By using our services our customers are able to: - Achieve operating and cost efficiencies by outsourcing to us; - Promote their brands exclusively because we do not promote our brand on their Web sites; - Benefit from our advanced media hosting capabilities; and - Use all of the industry-leading streaming media formats across the full range of transmission speeds. TURNKEY SERVICE OFFERING Our services are designed to provide a comprehensive, end-to-end solution for our clients. The services we provide to our clients around the world include: CONTENT CAPTURE. We can capture multimedia content from virtually every source including satellite, telephony, video conferencing and various audio and video tape formats. We can also record live events. PRODUCTION. We convert our customers' content from virtually any commercially available input format into all of the industry-leading streaming media formats across the full range of transmission speeds. Our other production services include editing, media integration, indexing and digital watermarking. PUBLISHING. We use our proprietary automated technology to publish our clients' content simultaneously to multiple Internet and intranet server sites. ADVANCED MEDIA HOSTING. We provide a complete network infrastructure to host multimedia content for distribution over the Internet. Services include media storage, subscriber management, reporting and alerting and audio and video search capabilities. DISTRIBUTION. We distribute streaming media through multiple Internet backbones including Cable and Wireless, Enron, GlobalCenter, iBEAM, Level 3, MCI Worldcom, Sprint and UUNET. STRATEGY Our goal is to be the leading global provider of integrated streaming media solutions for businesses that desire to take advantage of Internet-based audio and video communications. We intend to: - Focus on our industry-specific direct sales approach; - Expand existing client relationships, domestically and internationally; - Penetrate new geographic markets; - Enhance our operational efficiency and scalability through automation; and - Create new services and expand our capabilities. COMPANY HISTORY We are a successor to the production services business of CNBC/Dow Jones Business Video, a joint venture between MSNBC and Dow Jones, which commenced operations in January 1998. We were incorporated in November 1998 and acquired the assets of the production services business on January 15, 1999. As part of the transaction, MSNBC and Dow Jones, through their joint venture, maintained an equity ownership in our company. Since taking over the business, we have brought in a new management team, redefined the mission and objectives of the business, built a sales organization, developed new service offerings, undertaken new software development initiatives and expanded internationally. Since our inception, we have raised $40.9 million in private funding, and our investors include Citigroup, Deutsche Bank Securities, Goldman Sachs, Merrill Lynch, Microsoft, Morgan Stanley, NBC, PRIMEDIA and Trans World Entertainment. Our principal executive offices are located at 100 William Street, 8th Floor, New York, New York 10038, and our telephone number is (212) 909-2900. The address of our Web site is www.nextvenue.com. The information on our Web site is not part of this prospectus. "NextVenue," the NextVenue logo and several other trade names we use in our business are trademarks of NextVenue Inc. NextVenue is our registered trademark and we have filed applications with the U.S. Patent and Trademark Office to register our other trademarks. All other trademarks, service marks or trade names referred to in this prospectus are the property of their respective owners. THE OFFERING <TABLE> <S> <C> Common stock offered by NextVenue Inc........ shares Common stock to be outstanding after this offering........................ shares Use of proceeds.............................. We estimate that our net proceeds from this offering without the exercise of the over-allotment option will be approximately $55 million. We intend to use the offering proceeds for expanding our international operations, sales and marketing activities, research and development efforts and general corporate purposes, including working capital. Proposed Nasdaq National Market Symbol....... NXVN </TABLE> ------------------------ The number of shares of common stock to be outstanding after this offering is based on our shares outstanding as of March 31, 2000. This information excludes: - 1,018,207 shares of common stock issuable upon the exercise of outstanding stock options issued under our 1999 stock option plan at a weighted average exercise price of $4.82 per share; - 1,981,793 shares of common stock available for issuance under our 1999 stock option plan for options not yet granted; - 40,540 shares of common stock issuable upon the exercise of outstanding warrants at an exercise price of $2.96 per share; and - 181,738 shares of common stock issuable upon the exercise of outstanding warrants at an exercise price of $8.75 per share. EXCEPT AS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THE FOLLOWING: - THE AUTOMATIC CONVERSION OF ALL OUTSTANDING SHARES OF OUR CONVERTIBLE PREFERRED STOCK ON A ONE-FOR-ONE BASIS INTO 6,893,790 SHARES OF COMMON STOCK, WHICH WILL OCCUR UPON COMPLETION OF THIS OFFERING; AND - NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001113669_dean_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001113669_dean_prospectus_summary.txt
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+SUMMARY THIS SUMMARY ONLY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE INFORMATION UNDER THE SECTION ENTITLED "RISK FACTORS" AND THE FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED IN THIS PROSPECTUS, BEFORE MAKING A DECISION TO INVEST IN OUR COMMON STOCK. WHEN WE REFER TO FISCAL YEARS IN THIS PROSPECTUS, FISCAL 1999 MEANS THE ELEVEN-MONTH PERIOD ENDED JANUARY 30, 2000, FISCAL 1998 MEANS THE YEAR ENDED FEBRUARY 28, 1999, FISCAL 1997 MEANS THE YEAR ENDED MARCH 1, 1998, FISCAL 1996 MEANS THE YEAR ENDED MARCH 2, 1997 AND FISCAL 1995 MEANS THE YEAR ENDED MARCH 3, 1996. OUR COMPANY Dean & DeLuca, founded in 1977, is an established multi-channel retailer of gourmet and specialty foods, high premium wines and upscale kitchenware. We believe that we are recognized internationally for having enhanced consumers' access to and appreciation of American and international specialty products. We also believe that our brand awareness and appeal, which are larger than our physical presence, create a franchise with significant growth potential. Our merchandising and design are distinctive and elegant, and are based on the minimalist design principle of form following function. Our stores are designed to re-create a European marketplace environment, featuring displays of abundant and overflowing specialty foods and other premium products. Our staff of trained experts carefully select our gourmet and specialty foods and wines based on taste, quality and uniqueness, and they screen all of our kitchenware for performance and style. Our premium specialty products are sold through multiple distribution channels consisting of our: - retail operations--comprised of five specialty markets, one wine store and eight cafes in selected markets throughout the United States; - Internet/Direct operations--comprised of our Web site at WWW.DEANDELUCA.COM and our mail-order catalogues; and - business-to-business sales--comprised of sales through selected premium retailers and sales to corporate customers. We compete on the basis of offering "best-in-class" and "hard-to-find" products, rather than on price, which has enabled us to realize high gross margins on our products. Our operating model is strengthened by our ability to realize economies of scale in purchasing inventories and by distribution efficiencies. Furthermore, we believe that the combination of our traditional retailing operations with our Internet/Direct operations has allowed us to cross-promote our brand nationally with lower customer acquisition costs. We also believe that the selective and strategic locations of our stores have allowed us to realize incremental sales through our Internet/Direct operations without significantly reducing store sales. MARKET OVERVIEW The gourmet and specialty foods, premium wines and upscale kitchenware markets in which we compete had aggregate U.S. sales of approximately $65.8 billion in 1997, the most recent year for which multiple market sales data is available. We believe that these premium and luxury sectors have experienced higher rates of growth than the broader general markets for each of these types of products because consumers have increasingly moved towards products of higher quality and sophistication. We also believe that current demographic trends, which indicate an overlap between our target consumer audience and Internet users, represent a growing opportunity for the sale of our premium products. According to SIMMONS MARKET RESEARCH BUREAU, approximately 40% of gourmet and specialty foods shoppers in the U.S. during 1997 were between the ages of 35 and 49. Additionally, MEDIA METRIX estimates that individuals in this age category represent 35% of all Internet users in the United States. Despite the existence of a significant market opportunity in these sectors, we believe that no dominant multi-channel specialty retailer has emerged. We believe that the combination of the size of the markets for our products, projected growth of these markets, industry fragmentation, favorable demographic trends and the emergence of the Internet as a distribution channel presents us with the opportunity to enhance our position as an established multi-channel retailer of gourmet and specialty foods, high premium wines and upscale kitchenware. OUR COMPETITIVE STRENGTHS We intend to enhance our position as an established multi-channel retailer of gourmet and specialty foods, high premium wines and upscale kitchenware by continuing to capitalize on our competitive strengths, which we believe include: - the internationally-recognized Dean & DeLuca brand; - the enjoyable and memorable Dean & DeLuca customer shopping experience; - the advantages of being an integrated multi-channel retailer; - our established call, distribution and fulfillment infrastructure; and - our strong operating model, which provides a foundation for continued growth. OUR STRATEGY We intend to leverage our brand across our multiple distribution channels to grow our business. The key elements of our strategy are: PURSUING MULTI-CHANNEL GROWTH INITIATIVES. - RETAIL STORES. We plan to open one or two specialty markets during calendar 2001 and three or four specialty markets in each of the five calendar years thereafter. The new specialty markets will be located in strategically-selected affluent, densely populated urban markets. We will also consider opening three or four cafes near each of our new specialty markets. - INTERNET/DIRECT OPERATIONS. We expect to dedicate a substantial portion of our financial and management resources to grow our Internet/Direct operations. Specifically, we intend to attract customers to our Web site by mailing approximately 13 million catalogues this calendar year, engaging in significant online and traditional advertising efforts, cross-marketing our Internet/ Direct operations at our retail stores and continuing to develop strategic alliances. - BUSINESS-TO-BUSINESS SALES. We actively promote our business-to-business sales through our Web site and business-to-business sales catalogues. In order to expand these sales, we intend to increase the sale of our branded products domestically and internationally through selected premium traditional and online retailers, expand our dedicated business-to-business sales and customer service organization, and develop direct links to our Web site from our business customers' Intranet networks. ENHANCING THE WEB SITE EXPERIENCE. We are currently making significant improvements to our Web site to make its design more attractive, increase the number of products offered, continue to provide meaningful content and increase the speed and improve the navigability of our Web site. EXPANDING OUR INFRASTRUCTURE. We are currently constructing a 58,000 square-foot expansion of our existing 32,100 square-foot distribution and fulfillment facility and have leased an additional 15,000 square feet of space for our new call center, each of which is located in Wichita, Kansas. Once the construction of the new warehouse and the build-out of our new call center are complete, our total call, distribution and fulfillment capacity will be approximately 105,100 square feet. We have also leased a separate 55,000 square foot warehouse facility through the end of calendar year 2000, with options to renew in our favor. We are also in the process of developing an enterprise-wide operating system that link and centrally monitor each of our distribution channels. CORPORATE INFORMATION Dean & DeLuca, Inc. was incorporated in Delaware in July 1999. Our principal executive offices are located at 560 Broadway, New York, New York 10012, and our telephone number is (212) 226-6800. Our Web site address is WWW.DEANDELUCA.COM. Information contained on our Web site and in our catalogues should not be considered a part of, nor incorporated into, this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered........................................ shares Common stock to be outstanding after this offering.......... shares Use of proceeds............................................. To fund the build-out of new stores, market and advertise our Internet/Direct operations, further develop our technology, expand our call, distribution and fulfillment facilities, expand human resources and for general corporate purposes. Proposed Nasdaq National Market symbol...................... "DEAN" </TABLE> ------------------------ The above information is based on the shares outstanding as of the date of this prospectus. The total number of shares of common stock that we assume will be outstanding after the offering excludes: - 1,159,887 shares of common stock issuable upon exercise of outstanding options, at a weighted average exercise price of $3.50 per share; - 473,602 additional shares of common stock issuable upon exercise of options that we could issue under our 1999 stock option plan; - 200,000 additional shares of common stock issuable upon exercise of options that we could issue under our 2000 non-employee directors' stock option plan; and - 1,377,223 shares of common stock issuable upon exercise of outstanding warrants, each with an exercise price of $2.94 per share. Except as otherwise noted, all information in this prospectus is based on the following assumptions: - all of our outstanding shares of series A convertible preferred stock are converted into an aggregate of 3,669,760 shares of our common stock upon the consummation of this offering; - a for stock split of our outstanding shares of common stock, which will be effected before the consummation of this offering; - the underwriters' over-allotment option will not be exercised; and - the filing of our second restated certificate of incorporation and the approval and adoption of our restated bylaws, immediately before the consummation of this offering. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) Listed below is a summary of our statement of operations data for fiscal 1997, fiscal 1998 and fiscal 1999. Commencing with the period beginning March 1, 1999, our fiscal year ends on the Sunday nearest to January 31. Previously, our fiscal year ended on the Sunday nearest to February 28. Accordingly, fiscal 1999 is an eleven-month period. You will also find our consolidated balance sheet as of January 30, 2000 both on an actual basis and pro forma as adjusted basis, assuming completion of this offering. To calculate the "pro forma as adjusted" data, we have assumed the following: - all of our outstanding shares of series A convertible preferred stock are converted into an aggregate of 3,669,760 shares of our common stock upon the consummation of this offering; and - the sale by us of shares of common stock at an assumed initial public offering price of $ per share, after deducting underwriting discounts and estimated offering expenses payable by us, and the application of the net proceeds from this offering. <TABLE> <CAPTION> FISCAL ------------------------------ 1997 1998 1999 -------- -------- -------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue Retail.................................................. $32,338 $45,285 $50,845 Internet/Direct......................................... 2,070 4,018 8,771 ------- ------- ------- Total revenue......................................... 34,408 49,303 59,616 Gross profit................................................ 14,137 21,193 25,463 Operating income (loss)..................................... (7,901) (4,289) (10,298) Net income (loss)........................................... (9,349) (5,719) (8,993) Basic and diluted net income (loss) per share--pro forma to reflect income taxes(1)................................... $ (2.42) $ (1.48) $ (1.73) Shares used in computing basic and diluted net income (loss) per share--pro forma to reflect income taxes(1)........... 3,862 3,862 5,195 Pro forma net income (loss) per share--basic and diluted(2)................................................ $ (1.05) Shares used in computing pro forma net income (loss) per share--basic and diluted(2)............................... 11,212 </TABLE> - ------------------------ (1) See note 2(o) to our financial statements for an explanation of the net loss per share information on a pro forma basis to reflect income taxes and the determination of the number of shares used in computing per share data. (2) Reflects our reorganization, which occurred on November 30, 1999, as if it had occurred as of March 1, 1999, and the conversion of our series A convertible preferred stock into our common stock as if the conversion had occurred as of the respective dates of issuance. See notes 2(o) and 3 to our financial statements. <TABLE> <CAPTION> AS OF JANUARY 30, 2000 ----------------------- PRO FORMA ACTUAL AS ADJUSTED --------- ----------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $17,117 $ Working capital............................................. 12,242 Total assets................................................ 43,413 Total debt (including current maturities)................... 3,200 Total stockholders' equity.................................. 27,533 </TABLE>
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+PROSPECTUS SUMMARY This section contains a general summary of the information contained in this prospectus. It may not include all the information that is important to you. You should read the entire prospectus, including "Risk Factors" and the financial statements and notes to those statements included in this prospectus, before making an investment decision. The information in this prospectus assumes: - the completion, concurrently with this offering, of the transactions described under "Concurrent Transactions" on page 76; and - the reallocation of our founding shareholders' percentage interests in us as described under "Principal Shareholders -- Our Beneficial Ownership" on page 73. ASIA GLOBAL CROSSING We intend to be a leading pan-Asian telecommunications carrier that provides Internet, data and voice services to wholesale and business customers. We intend to offer data center services in Asia through a joint venture with Exodus Communications, Inc. We have a limited operating history, substantial indebtedness and substantial future capital requirements. Significant elements of our network are already operational, including: - a trans-Pacific subsea cable; - a key segment of our national network in Japan; - a GlobalCenter data center in Tokyo; and - the largest fully-fiber optic network in Hong Kong. Directly and through joint ventures, we are currently constructing other key elements of our network, including the following: - an East Asian subsea cable; - additional segments of our national networks in Japan and Hong Kong; - city fiber networks in Tokyo and Osaka; and - additional data centers in Tokyo and Hong Kong. By the end of 2001, we expect our network to connect the principal commercial and financial centers across Asia. In addition, we will offer our customers worldwide Internet services and data services through seamless connectivity within the Global Crossing network which, inclusive of our network, is expected to span approximately 162,544 route kilometers, serving five continents, 27 countries and more than 200 major cities. In November 1999, we were formed as a joint venture among Global Crossing Ltd., Microsoft Corporation and Softbank Corp. We intend to capitalize on the anticipated significant growth in Asian Internet and telecommunications traffic and the increasingly favorable regulatory environment. Our strategy is to form strategic alliances or joint ventures in key markets in order to gain a first-mover advantage, more readily penetrate local markets, overcome regulatory barriers and develop exclusive relationships with leading telecommunications providers in the Asian markets we intend to serve. We currently offer the following services: - managed bandwidth services to telecommunications carriers and Internet companies; - Internet transit services, including dedicated Internet access; - domestic and international private line services; and - Web-hosting and Internet infrastructure services. We intend to offer the following additional services: - advanced Internet services, including e-mail hosting, unified messaging and storage; - data transport services; and - integrated voice and data services, including multimedia services such as video conferencing and e-commerce services. We intend to replicate these network and service capabilities in each market to which we extend our network. We also expect to benefit from Global Crossing's telecommunications, sales and marketing expertise. We have significant indebtedness, which we describe in the second risk factor on page 11. We also need to obtain significant additional financing to complete our network and implement our business plan. Until January 2000, we had no revenues and minimal operating costs. OUR CORPORATE INFORMATION We are incorporated in Bermuda, and the address of our principal executive offices is Wessex House, 45 Reid Street, Hamilton HM12, Bermuda. Our telephone number is 441-296-8600. The address of our principal location in the United States is 360 North Crescent Drive, Beverly Hills, California 90210. We also have offices in Hong Kong and Tokyo. All of our outstanding shares of common stock are currently held by Asia Global Crossing Holdings Ltd. Upon consummation of this offering, we anticipate that Asia Global Crossing Holdings will distribute to each of its shareholders, other than Softbank, that shareholder's proportionate share of the total number of shares of common stock we issue to Asia Global Crossing Holdings. Asia Global Crossing Holdings will remain a wholly owned subsidiary of Softbank under a different name. See "Principal Shareholders" beginning on page 73. THE OFFERING Class A common stock offered....................... 53.0 million shares Class A common stock offered to the public................. 39.2 million shares Class A common stock offered to strategic investors........ 13.8 million shares Common stock to be outstanding after this offering......... 53.0 million shares of Class A common stock 486.6 million shares of Class B common stock 539.6 million aggregate shares Voting rights................. Holders of our Class A common stock have one vote per share, while holders of our Class B common stock have 10 votes per share. After this offering, the holders of our Class B common stock will have approximately 98.9% of the aggregate voting power of our capital stock. Our founding shareholders, through their ownership of our Class B common stock, will have the power to elect all of our directors and control shareholder decisions immediately following this offering. Conversion.................... Each share of Class B common stock will be converted into one share of Class A common stock upon the sale to a non-affiliate of our founders. Shareholders of our Class A common stock may not convert their shares into any other class of our common stock. Other common stock provisions.................... With the exception of voting rights and conversion rights, shares of our Class A common stock and our Class B common stock are identical. Use of proceeds............... We intend to use the net proceeds of this offering, together with the proceeds of our anticipated concurrent debt offering, as follows: - to build our network; - to make investments in telecommunications and Internet companies and related businesses; - to repay outstanding indebtedness under shareholder loans; - to purchase from Global Crossing shareholder loans and future commitments it made to Hutchison Global Crossing and Global Access Limited; and - for general corporate purposes. Dividend policy............... We do not intend to pay dividends on our shares of common stock in the foreseeable future. Nasdaq National Market symbol........................ AGCX The information above assumes the issuance of: - 36.6 million additional shares of our Class B common stock to Global Crossing at an assumed initial public offering price of $10.00 per share, in connection with its contribution to us of its 49% interest in Global Access Limited; and - 450.0 million shares of our Class B common stock to Asia Global Crossing Holdings for distribution to its shareholders in the amounts indicated in "Principal Shareholders" beginning on page 73. In addition, the information above does not include: - 32.1 million shares of Class A common stock issuable upon the exercise of outstanding stock options, 5.5 million of which will then be exercisable; - 80.9 million shares of Class A common stock authorized and reserved for issuance under our stock incentive plan; - 7.95 million additional shares of Class A common stock that the underwriters have the option to purchase from us; and - 486.6 million shares of Class A common stock into which the shares of Class B common stock may be converted. CONCURRENT DEBT OFFERING Concurrently with this offering, we are also offering % senior notes due 2010. We expect that this concurrent debt offering will be completed at the same time as or after this offering of shares of our Class A common stock and that the aggregate gross proceeds of our debt offering will be approximately $400 million. Our offering of shares of Class A common stock is not conditioned on our debt offering. We cannot assure you that we will be able to complete our debt offering. At the time of sale, our notes will not be and have not been registered under the Securities Act of 1933. The notes may not be offered or sold in the United States absent subsequent registration or an applicable exemption from registration requirements. OUR CORPORATE STRUCTURE The following diagram illustrates our corporate structure, simplified to eliminate certain entities which act as holding companies. LOGO [Corporate structure chart showing Asia Global Crossing Ltd. owned 57.5% by Global Crossing Ltd., 15.8% by each of Microsoft Corporation and Softbank Corp. and 10.9% by the Public and Others. These ownership percentages are determined based on an assumed initial public offering price per share of our Class A common stock of $15.00. The corporate structure chart also shows Asia Global Crossings Ltd. owning 100% of GCT Pacific Holdings, Ltd., 49% of Global Access Limited, 50% of Hutchison Global Crossing Holdings Limited, 89% of Global Center Japan Corporation, 100% of Global Crossing Japan Corporation and 100% of Asia Global Crossing Development Co. The corporate structure chart also shows GCT Pacific Holdings, Ltd. owning 50% of Pacific Crossing Ltd. and 100% of SCS (Bermuda) Ltd., which in turn owns 14.5% of Pacific Crossing Ltd. The corporate structure chart also shows GCT Pacific Holdings, Ltd. owning 100% of East Asia Crossing Ltd. The corporate structure chart also shows Hutchison Global Crossing Holdings Limited owning a 100% of Hutchison Global Crossing Limited.] --------------- * Ownership percentages are determined based on an assumed initial public offering price per share of our Class A common stock of $10.00. ** We expect that Softbank will also become a shareholder in GlobalCenter Japan. We expect that Softbank will have an approximate 38% interest in GlobalCenter Japan. We intend to contribute our remaining interest in GlobalCenter Japan to our joint venture with Exodus described on page 80. In that case, we will have an indirect interest in GlobalCenter Japan of approximately 16.8%. SUMMARY HISTORICAL FINANCIAL INFORMATION The table below shows our selected historical financial information prepared in accordance with United States GAAP. This information has been prepared using our consolidated financial statements as of the dates indicated and for the year ended December 31, 1999, for the period from April 1, 1998, date of inception, to December 31, 1998 and for the six months ended June 30, 2000 and 1999. The consolidated financial information as of December 31, 1999 and 1998 and for the year ended December 31, 1999 and for the period from April 1, 1998, date of inception, to December 31, 1998 has been derived from financial statements audited by Arthur Andersen, independent public accountants. These financial statements are included in this prospectus beginning on page F-1. We derived the remaining data from unaudited consolidated financial statements. In reading the following selected historical financial information, please note the following: - On September 24, 1999, we were formed as an indirect wholly owned subsidiary of Global Crossing. On November 24, 1999, we became a wholly owned subsidiary of a joint venture among Global Crossing, Softbank and Microsoft, known as Asia Global Crossing Holdings Ltd. - On November 24, 1999, Global Crossing contributed to us GCT Pacific Holdings Ltd., a wholly owned subsidiary of Global Crossing which we refer to as GCT Pacific. GCT Pacific owns our interest in Pacific Crossing Ltd. Since we and GCT Pacific are entities under common control, our consolidated financial statements include information relating to GCT Pacific as if we were in existence on April 1, 1998, the date of inception of GCT Pacific, in a method similar to a pooling of interest. - On November 24, 1999, Global Crossing contributed all its rights in East Asia Crossing to us. - At December 31, 1999, we beneficially owned 57.75% of Pacific Crossing Ltd. Before January 1, 2000, our investment in Pacific Crossing Ltd. was accounted for under the equity method because we were not able to exercise effective control over Pacific Crossing Ltd. In March 2000, we increased our interest in Pacific Crossing Ltd. to 64.5%, and the Pacific Crossing Ltd. shareholders agreement was amended to give us effective control over Pacific Crossing Ltd. As a result, we have consolidated Pacific Crossing Ltd. as of January 1, 2000. - The first segment of Pacific Crossing-1 commenced service in December 1999, and we anticipate that the full system will be completed by year end 2000. - The financial information as of June 30, 2000 and for the six months ended June 30, 2000 and 1999 are derived from our unaudited consolidated financial statements. We have made adjustments, consisting of normal recurring adjustments to present the consolidated financial position, which in the opinion of our management are necessary for a fair presentation. Results of operations for the six months ended June 30, 2000 are not necessarily indicative of the results that may be expected for the full year or for any future period. - Cash revenue is defined as revenue plus incremental cash deferred revenue, which is the incremental change in deferred revenue relating to cash receipts. We present cash revenue because it is a financial indicator used by investors and analysts to compare companies on the basis of cash receipts from sales of capacity and services. You should not consider this information as an alternative to any measure of performance as promulgated under GAAP. - Adjusted EBITDA is defined as operating income (loss), plus goodwill amortization, depreciation and amortization, non-cash cost of capacity sold, stock related expenses and incremental cash deferred revenue. We anticipate that this definition will be consistent with financial covenants to be contained in our significant financing agreements. We present Adjusted EBITDA because it is a financial indicator used by investors and analysts to analyze and compare companies on the basis of operating performance and because we believe that Adjusted EBITDA is an additional, meaningful measure of performance and liquidity. We expect to use Adjusted EBITDA to monitor our compliance with our financial covenants and to understand the financial indicators investors and analysts are using to measure our performance. You should not consider this information as an alternative to any measure of performance as promulgated under GAAP. Our calculation of Adjusted EBITDA may be different from the calculation used by other companies and, therefore, comparability may be limited. ASIA GLOBAL CROSSING LTD. AND SUBSIDIARIES (IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION) <TABLE> <CAPTION> PERIOD FROM APRIL 1, 1998 (DATE OF SIX MONTHS ENDED JUNE 30, YEAR ENDED INCEPTION) TO -------------------------- DECEMBER 31, DECEMBER 31, 2000 1999 1999 1998 ------------ ----------- ------------ ------------- (UNAUDITED) <S> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue................................... $ 108,680 $ -- $ -- $ -- Expenses.................................. 134,850 -- 1,201 -- ---------- --------- ----------- ---------- Operating income (loss)................... (26,170) -- (1,201) -- Equity in income (loss) of affiliates..... -- (2,395) 9,893 (2,507) Minority interest......................... (12,118) -- -- -- Other income, net......................... 6,797 5,440 11,598 5,374 ---------- --------- ----------- ---------- Income (loss) before provision for income taxes....................... (31,491) 3,045 20,290 2,867 Provision for income taxes................ -- -- -- -- ---------- --------- ----------- ---------- Net income (loss)....................... $ (31,491) $ 3,045 $ 20,290 $ 2,867 ========== ========= =========== ========== Net income (loss) per common share: Basic and diluted net income (loss) per common share......................... $ (26.24) $ 2.54 $ 16.91 $ 2.39 ========== ========= =========== ========== Shares used in computing basic and diluted net income (loss) per common share...... 1,200,000 1,200,000 1,200,000 1,200,000 ========== ========= =========== ========== Pro forma basic and diluted net income (loss) per common share................. $ (0.07) $ 0.05 ========== =========== Shares used in computing pro forma basic and diluted net income (loss) per common share................................... 450,000,000 450,000,000 ========== =========== OTHER DATA: Cash revenue.............................. $ 174,793 $ -- $ -- $ -- Adjusted EBITDA........................... 132,819 -- (1,201) -- Cash from operating activities............ 59,404 5,415 22,045 5,366 Cash used for investing activities........ (226,114) -- (90,652) (231,006) Cash from financing activities............ $ 353,224 $ -- $ 73,013 $ 231,018 </TABLE> <TABLE> <CAPTION> DECEMBER 31, JUNE 30, -------------------- 2000 1999 1998 ----------- -------- -------- (UNAUDITED) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents.............................. $ 196,732 $ 9,784 $ 5,378 Restricted cash and cash equivalents................... 94,337 138,118 231,000 Property and equipment, net............................ 1,431,888 101,598 -- Total assets........................................... 1,914,063 603,843 397,037 Long-term debt......................................... 750,000 -- -- Total liabilities...................................... 1,022,524 102,533 -- Minority interest...................................... 141,254 -- -- Shareholder's equity................................... $ 750,285 $501,310 $397,037 </TABLE>
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+Prospectus Summary.......................................... 1 Risk Factors................................................ 5 Information Regarding Forward-Looking Statements............ 20 Use of Proceeds............................................. 21 Our Policy Regarding Dividends.............................. 21 Capitalization.............................................. 22 Dilution.................................................... 23 Selected Consolidated Financial Data........................ 24 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 25 Business.................................................... 31 Management.................................................. 57 Relationships and Related Party Transactions................ 65 Principal Stockholders...................................... 68 Description of Capital Stock................................ 70 Shares Eligible for Future Sale............................. 74 U.S. Tax Consequences to Non-U.S. Holders................... 76 Underwriting................................................ 78 Legal Matters............................................... 80 Experts..................................................... 80 Where You Can Find More Information......................... 80 Index to Financial Statements............................... F-1 </TABLE> Until , 2001, all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED NOVEMBER 7 , 2000 PROSPECTUS SHARES GMP/COMPANIES, INC. COMMON STOCK ------------------ We are selling shares of our common stock. We have granted the underwriters an option to purchase up to additional shares of common stock to cover over-allotments. This is the initial public offering of our common stock. We currently expect that the initial public offering price will be between $ and $ per share. We have applied to have our common stock included for quotation on the Nasdaq National Market under the symbol "GMPC." ------------------ INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------ <TABLE> <CAPTION> PER SHARE TOTAL --------- -------- <S> <C> <C> Public Offering Price $ $ Underwriting Discount $ $ Proceeds to GMP/Companies, Inc. (before expenses) $ $ </TABLE> The underwriters expect to deliver the shares to purchasers on or about , 2001. ------------------ SALOMON SMITH BARNEY CREDIT SUISSE FIRST BOSTON , 2001 OUR SUBSIDIARY COMPANIES We have formed, and plan to form, additional subsidiaries for each product candidate or group of related product candidates that we develop. Once we identify a particular health care technology, we then evaluate the potential commercial value of that technology. If, after careful review, we choose to license or acquire the technology, we negotiate for its acquisition and then establish or use an existing subsidiary company to license or purchase the technology. Our subsidiary companies are structured to provide equity ownership to the institutions, inventors or collaborating scientists that are associated with each technology. We believe that this equity structure enhances our ability to acquire promising medical technologies. We own a substantial majority of the equity, and have management control of these subsidiaries. The following table summarizes the health care technologies that we are developing or commercializing: <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------ SUBSIDIARY COMPANY POTENTIAL PRODUCT APPLICATION STAGE OF DEVELOPMENT <S> <C> <C> ------------------------------------------------------------------------------------------------------ THERAPEUTICS DIVISION GMP/Endotherapeutics Drug therapy to generate new Preclinical pancreatic islet cells to treat diabetes GMP/OxyCell Treatment that improves oxygen Preclinical delivery to tissues GMP/Tissue Engineering Tissue engineered treatment for Preclinical spinal cord and other nerve injuries DIAGNOSTICS DIVISION GMP/Genetics GMP Conversion Technology that Commercially launched improves the accuracy of genetic in September 2000 analysis and testing GMP/Thromboflex Device to perform quantitative Prototype in development evaluation of blood clotting and platelet activity GMP/Diagnostic/Prognostic Markers Blood and urine analyses to detect Human tests ongoing cancer and its spread DEVICES DIVISION GMP/Wireless Medicine Multiple wireless sensor products Prototype stage for hospital and outpatient uses GMP/Vision Solutions Polymer device and surgical method Preclinical to reduce intraocular pressure related to glaucoma GMP/Cardiac Care Coronary stent and devices for heart Prototype stage disease GMP/Drug Delivery Devices to enable local tissue drug Preclinical delivery by electrical impulse catheters and patches GMP/Vascular Anti-embolism stocking that allows Prototype stage patient mobility GMP/Surgical Solutions Devices and products for use in Prototype stage operating rooms </TABLE> THE OFFERING Common stock offered........................ shares Common stock outstanding after this offering.................................... shares Use of proceeds............................. We expect to use the net proceeds of this offering to fund research and development, commercialization of our products, the acquisition of new technologies and for other general corporate purposes. Proposed Nasdaq National Market symbol...... "GMPC" Unless otherwise indicated, all information contained in this prospectus: - assumes no exercise of the underwriters' option to purchase up to additional shares of common stock to cover over-allotments; - reflects a -for-one split of our common stock to be effected immediately prior to the completion of this offering; and - reflects the automatic conversion of all of our convertible preferred stock into 10,450,000 shares of our common stock upon completion of this offering. The number of shares of common stock to be outstanding immediately after the offering: - is based upon 16,437,227 shares outstanding as of September 30, 2000, including the conversion of our convertible preferred stock; - does not take into account 2,163,000 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2000, at a weighted average exercise price of $10.41 per share; and - does not include an additional 830,968 shares of common stock reserved for future issuance under our 1999 Stock Option Plan. --------------------- We were incorporated in Georgia in May 1999 under the name Global Medical Products, Inc. In March 2000, we reincorporated in Delaware and changed our name to GMP/Companies, Inc. Our principal executive offices are located at One East Broward Boulevard, Suite 1701, Fort Lauderdale, Florida 33301, and our telephone number is (954)745-3510. We own or have rights to the trade names and trademarks that we use in conjunction with the sale of our products. This prospectus also contains trademarks, trade names and service marks of other companies, which are the property of their respective owners. GMP Conversion Technology is a trademark of ours. Any discussion in this prospectus regarding our affiliation or collaboration with a faculty member or scientist associated with an academic or other institution does not constitute or imply an endorsement by that institution of us, our products or the technologies upon which those products are based, nor does it imply endorsement by the faculty member or scientist of us or our products. PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before buying shares in this offering. Therefore, you should read this entire prospectus carefully, including the risks of purchasing our common stock discussed under the "Risk Factors" section and our consolidated financial statements and the related notes. OUR COMPANY We identify, acquire, develop and commercialize innovative medical technologies for the health care market. We acquire our technologies through operating subsidiaries which are focused on a particular product candidate or group of related product candidates. Each of our subsidiaries is a business unit that we operate and manage. Since our inception in May 1999, we have acquired rights to more than 20 different technologies and have established twelve subsidiaries to develop and commercialize these technologies. These subsidiaries are organized into three operating divisions: therapeutics, diagnostics and devices. Our business model is designed to overcome what we perceive to be the challenges facing small, single-product health care companies. We believe some of the most innovative health care technologies are found in medical schools, universities and other institutions, which lack the necessary infrastructure and resources to commercialize these innovations. In order to develop and commercialize these technologies, we have assembled an experienced management team and board of directors and have created a corporate infrastructure that provides medical, scientific, legal, business, regulatory and other management and operational functions to our three operating divisions. To date, we have licensed or acquired health care technologies from institutions such as Children's Hospital at Harvard Medical School, Eastern Virginia Medical School, Johns Hopkins University, Massachusetts Institute of Technology, Mayo Clinic, Mayo Foundation for Medical Research and Education, McGill University, and Universite Louis Pasteur. We have also licensed technologies from our strategic partner, Motorola, Inc., and have established additional strategic relationships with Myriad Genetics Laboratory, Inc. and NOVA Biomedical Corporation. We have also received equity investments from Medtronic, Inc. and Quest Diagnostics Incorporated. In September 2000, we commercially launched our first health care technology product, GMP Conversion Technology, at our molecular genetics facility in Waltham, Massachusetts. GMP Conversion Technology is a new, proprietary gene separation process that is designed to significantly improve the accuracy of genetic analysis and testing. Our technology is based on discoveries made in the laboratories of Bert Vogelstein, M.D. and Kenneth Kinzler, Ph.D. at Johns Hopkins University. We licensed this technology from Johns Hopkins University in January 2000. Subsequent to that time, both Drs. Vogelstein and Kinzler became research and scientific advisors to us. In order to maximize stockholder value, we evaluate possible means of optimizing the financial return from each of our technologies. Options that we may consider for realizing the value of our subsidiaries include: - marketing and selling the subsidiary's products with our own sales staff; - seeking a strategic partner for the development, marketing, distribution and sale of the subsidiary's products; - an initial public offering of the subsidiary's securities; or - a sale of the stock or assets of the subsidiary to a third party. SUMMARY CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> PERIOD FROM PERIOD FROM MAY 17, 1999 MAY 17, 1999 (INCEPTION) NINE MONTHS (INCEPTION) TO ENDED TO DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1999 2000 2000 ------------ ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue.................................................. $ -- $ 15 $ 15 Operating expenses: Research and development............................... 1,122 11,612 12,734 Selling, general and administrative.................... 3,474 8,262 11,736 -------- -------- -------- Total operating expenses............................ 4,596 19,874 24,470 -------- -------- -------- Loss from operations..................................... (4,596) (19,859) (24,455) Interest income, net..................................... 436 3,518 3,954 -------- -------- -------- Net loss................................................. $ (4,160) $(16,341) $(20,501) ======== ======== ======== Net loss per share -- basic and diluted.................. $ (0.87) $ (3.15) $ (4.10) ======== ======== ======== Shares used in computing net loss per share -- basic and diluted................................................ 4,762 5,191 4,996 Pro forma net loss per share -- basic and diluted........ $ (0.53) $ (1.14) $ (2.01) ======== ======== ======== Shares used in computing pro forma net loss per share -- basic and diluted............................. 7,804 14,356 10,216 </TABLE> Pro forma net loss per share -- basic and diluted has been calculated assuming the conversion of all outstanding shares of convertible preferred stock into 10,450,000 shares of common stock as if the stock had been converted immediately upon its issuance. <TABLE> <CAPTION> SEPTEMBER 30, 2000 ------------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------------ ------------- ------------ (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........ $114,557 $114,557 Working capital.......................................... 111,609 111,609 Total assets............................................. 121,072 121,072 Deficit accumulated during the development stage......... (20,501) (20,501) Total stockholders' equity............................... 115,128 115,128 </TABLE> The pro forma balance sheet data reflect the automatic conversion of outstanding shares of convertible preferred stock into 10,450,000 shares of common stock as if the stock had been converted immediately upon its issuance. The pro forma as adjusted balance sheet data further reflect this automatic conversion and the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts, commissions and offering expenses.
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information about Quantum Bridge and the common stock being sold in this offering and our financial statements and related notes included elsewhere in this prospectus. QUANTUM BRIDGE COMMUNICATIONS, INC. We are a leading provider of high-speed optical access networking solutions that enable communications service providers to offer greater bandwidth to businesses in the access segment of the public network. This segment, also known as the "last mile," spans the portion of the network between a service provider's local points-of-presence and business end users. In recent years, the extensive build out by service providers to address the growth in data traffic has largely ignored the access segment, creating a transmission bottleneck that significantly limits service providers' ability to offer new bandwidth-intensive applications and services. This bottleneck is not adequately addressed by traditional access technologies. Our comprehensive optical access hardware and software solutions alleviate this bottleneck through passive optical networking, or PON, technologies. PON technologies provide a cost-effective network access solution by eliminating the use of active optical components, such as amplifiers, lasers and modulators, in the transmission of data across fiber optic cable. Our solutions can significantly reduce the cost of building and managing fiber-based access networks, allowing service providers to leverage their existing fiber assets to cost-effectively connect businesses of all sizes to the public network via direct optical connections. Our solutions provide businesses with the network capacity to implement bandwidth-intensive applications, such as virtual private networks, e-commerce applications, video streaming and storage area networks. As a result, our customers can offer businesses a wide range of value-added voice, video and data services at much faster speeds than other access technologies. Our two commercially available products are the QB5000 Optical Access Switch and the QB100 Intelligent Optical Terminal. The QB5000 is an optical access and multi-service delivery product with integrated network management software that resides in a service provider's central office. The QB100 is a business services terminal that is located on the end user's premises. We sell our optical access networking solutions primarily through our direct sales force and we plan to use indirect channels to sell our solutions in specific markets. We augment our sales efforts with a professional services organization that assists our customers with network planning, design and implementation and fiber utilization. We market our solutions to service providers that typically have already installed or leased significant amounts of fiber optic cable, such as cable companies, also called multiple system operators, competitive local exchange carriers, incumbent local exchange carriers, Internet service providers and utility companies. Our initial customers are Comcast Business Communications and Advanced TelCom Group. Our solutions provide our customers and their end users with the following key benefits: -- Leverages Investments in Existing Fiber to Create New Revenue Opportunities. By allowing service providers to leverage their existing fiber facilities while eliminating costly active optical components, our optical access networking solutions enable them to economically extend their fiber networks and offer a wide range of new value-added services. -- Ability to Scale Fiber Networks Opportunistically. Our use of passive components and our fiber architecture enable service providers to quickly extend fiber as they sign up customers, substantially reducing the need for expensive capacity upgrades in advance of customer orders. Our solutions are designed to scale to support a number of additional wavelengths, which provides service providers with greater flexibility in delivering dedicated wavelengths to their customers. -- Cost-Effective, Flexible Provisioning. Our flexible architecture allows service providers to respond rapidly to end user requests to increase or decrease bandwidth to accommodate fluctuations in bandwidth consumption. Our software-based provisioning significantly reduces service providers' costs because it eliminates the need for labor-intensive manual upgrades. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (Subject to Completion) Issued , 2001 Shares [QUANTUM BRIDGE LOGO] COMMON STOCK ------------------------- QUANTUM BRIDGE COMMUNICATIONS, INC. IS OFFERING SHARES OF ITS COMMON STOCK. THIS IS OUR INITIAL PUBLIC OFFERING, AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND $ PER SHARE. ------------------------- WE HAVE APPLIED TO LIST OUR COMMON STOCK FOR QUOTATION ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "QBCI." ------------------------- INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ------------------------- PRICE $ A SHARE ------------------------- <TABLE> <CAPTION> Underwriting Price to Discounts and Proceeds to Public Commissions Quantum Bridge -------- ---------------------- -------------- <S> <C> <C> <C> Per Share...................................... $ $ $ Total.......................................... $ $ $ </TABLE> Quantum Bridge and selling stockholders of Quantum Bridge have granted the underwriters the right to purchase up to an additional shares to cover over-allotments. The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Morgan Stanley & Co. Incorporated expects to deliver the shares of common stock to purchasers on , 2001. ------------------------- MORGAN STANLEY DEAN WITTER J.P. MORGAN & CO. ROBERTSON STEPHENS UBS WARBURG LLC LAZARD , 2001 [INSIDE FRONT COVER PAGE OF PROSPECTUS] [The artwork on the inside front cover page of the prospectus contains a picture and a caption of the core, metro and access portions of the public network. A ring represents each of these portions of, and the end users on, the public network. The diagram contains pictures of our products between the ring representing the access portion of the public network and the end users. The products are shown connecting buildings to the core and metro networks. The words "QB5000 Optical Access Switch" and "QB100 Intelligent Optical Terminal" are located next to the pictures of our products. Our logo appears near the bottom of the diagram.] -- Interoperability with Existing Infrastructure. Our solutions interoperate with existing networking equipment, enabling service providers to offer the bandwidth and scalability of direct optical connections for voice and data services between the end user's premises and the optical networking equipment in the core and metro portions of the public network. -- Comprehensive and Simplified Network Planning and Management Capabilities. Our solutions include a comprehensive network planning and management system that enables service providers to plan network build outs, provision and monitor service and detect service interruptions and outages. -- Efficient Bundling of Voice, Data and Video Services. Our solutions support the major protocols underlying voice, data and video services, enabling service providers to offer bundled services to end users without deploying separate equipment to support each service. Our objective is to be the leading provider of optical access networking solutions. To achieve this goal, we intend to: -- extend our leadership in optical access networking technology; -- broaden our product offerings to support new markets, customers and network topologies and offer service providers a migration path to the dynamic provisioning of wavelength services; -- collaborate with service providers to help them identify, create and deploy new high-speed data services; -- target facilities-based service providers that are early adopters of new technologies and can rapidly deploy our solutions to leverage their existing fiber assets; and -- utilize multiple distribution channels to expand our customer base domestically and abroad. We are a Delaware corporation. We were incorporated on October 22, 1998 under the name Metro Web Technologies, Inc. and we changed our name to Quantum Bridge Communications, Inc. on January 14, 1999. Our principal executive offices are located at 2 Tech Drive, Andover, Massachusetts 01810 and our telephone number is (978) 688-9100. Our web site address is www.quantumbridge.com. The information contained in our web site is not incorporated by reference into this prospectus. Our web site address is included in this document as an inactive textual reference only. THE OFFERING <TABLE> <S> <C> Common stock offered........................ shares Common stock to be outstanding after this offering............................. shares Use of proceeds............................. For general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol...... QBCI </TABLE> The foregoing information is based upon the number of shares of common stock outstanding as of September 30, 2000. This information excludes 8,032,325 shares of common stock issuable upon exercise of outstanding options at a weighted average exercise price of $2.26 per share as of September 30, 2000. SUMMARY FINANCIAL DATA The unaudited pro forma basic and diluted net loss per share in the table below have been calculated assuming the conversion of all outstanding shares of preferred stock into shares of common stock, as if the shares had converted immediately upon issuance. Accordingly, accretion of dividends on preferred stock has not been included in the calculation of unaudited pro forma basic and diluted net loss per share. <TABLE> <CAPTION> PERIOD FROM INCEPTION (OCTOBER 22, 1998) NINE MONTHS ENDED THROUGH YEAR ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, ------------------------ 1998 1999 1999 2000 ------------------ ------------ ---------- ----------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue............................. $ -- $ -- $ -- $ 654 ---------- ----------- ---------- ----------- Total operating expenses............ 203 8,015 4,693 32,713 ---------- ----------- ---------- ----------- Loss from operations................ (203) (8,015) (4,693) (32,590) ---------- ----------- ---------- ----------- Net loss............................ (177) (7,605) (4,482) (29,429) ---------- ----------- ---------- ----------- Net loss attributable to common stockholders...................... $ (233) $ (8,575) $ (5,006) $ (34,623) ========== =========== ========== =========== Basic and diluted net loss per share............................. $ (0.14) $ (2.94) $ (1.80) $ (5.70) ========== =========== ========== =========== Unaudited pro forma basic and diluted net loss per share........ $ (0.31) $ (0.71) =========== =========== Shares used in computing basic and diluted net loss per share........ 1,691,366 2,920,490 2,781,646 6,078,312 ========== =========== ========== =========== Shares used in computing unaudited pro forma basic and diluted net loss per share.................... 24,903,635 41,216,152 =========== =========== </TABLE> The following table presents a summary of our balance sheet as of September 30, 2000: -- on an actual basis; -- on a pro forma basis to reflect the conversion of all outstanding shares of preferred stock into 39,287,173 shares of common stock upon the closing of this offering; and -- on a pro forma basis as adjusted to reflect our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and offering expenses, and the issuance of shares of common stock in connection with the assumed exercise of warrants upon the closing of this offering. <TABLE> <CAPTION> AS OF SEPTEMBER 30, 2000 ------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.............................. $ 34,811 $ 34,811 $ Short-term investments................................. 60,450 60,450 60,450 Working capital........................................ 90,634 90,634 Total assets........................................... 112,713 112,713 Long-term debt......................................... 5,445 5,445 5,445 Redeemable convertible preferred stock................. 131,021 -- -- Total stockholders' equity (deficit)................... (35,527) 95,494 </TABLE> ------------------------ In this prospectus, "Quantum Bridge," "we," "us" and "our" refer to Quantum Bridge Communications, Inc. and its subsidiaries and not to the underwriters. Except as set forth in our financial statements or as otherwise indicated, all information contained in this prospectus: -- assumes that the underwriters do not exercise their over-allotment option; -- gives effect to the conversion of all outstanding shares of preferred stock into 39,287,173 shares of common stock upon the closing of this offering; -- gives effect to the issuance of shares of common stock in connection with the assumed exercise of warrants upon the closing of this offering; -- gives effect to a two-for-one stock split of our common stock effected on December 21, 1999 and a three-for-two stock split of our common stock effected on September 5, 2000; and -- gives effect to the filing of our restated certificate of incorporation upon the closing of this offering. Quantum Bridge, the Quantum Bridge logo, Dynamic Wavelength Slicing, QB100, QB3000, QB5000, QBCare and QBVision are our trademarks. This prospectus also contains trademarks and trade names of other companies.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001114674_inrange_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001114674_inrange_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read this summary together with the more detailed information about our company and our Class B common stock elsewhere in this prospectus, especially the risks of investing in our Class B common stock discussed under "Risk Factors." INRANGE TECHNOLOGIES CORPORATION We design, manufacture, market and service switching and networking products for storage, data and telecommunications networks. Our products provide fast and reliable connections among networks of computers and related devices. We serve Fortune 1000 businesses and other large enterprises that operate large-scale systems where reliability and continuous availability are critical. Our products are designed to be compatible with various vendors' products and multiple communication standards and protocols. Our solutions for the three networks include: - Storage Networks. We offer a family of directors, switches, channel extenders and optical products for storage networks, which are networks used to manage the storage of information. We market these products under our IN-VSN brand name. Our storage networking products are critical to storage networks because they direct, or facilitate the transport of, data between storage devices, computers and other networks. Our products are compatible with popular storage network communication standards, including the ESCON and Fibre Channel standards. ESCON and Fibre Channel are computer communication standards that permit information to be transferred among products developed by different manufacturers. The flagship of our IN-VSN product family is our FC/9000. We believe that our FC/9000, with 64 ports, is the largest storage network switch available that operates under the Fibre Channel communication standard. - Data Networks. We offer a family of switches, control systems and management applications used in data networks, which are networks used for data transmission and processing. We market these products under our Universal Touchpoint brand name. These products provide real-time test, access and monitoring functions that are critical to maintaining a data network's high level of service. Our solutions are tailored to very large complex data networks as evidenced by our Mega-Matrix switch, which, with 24,000 ports, is the industry's largest switch. - Telecommunications Networks. We offer a family of products for monitoring telecommunications networks, which are networks used primarily for voice communication. We market these products under our 7-View brand name. Our 7-View surveillance system monitors telecommunications networks in order to permit the network operators to provide functions such as call tracing, fraud detection and billing verification and enhances carriers' ability to operate advanced billing, sales and marketing programs, fraud prevention and call routing. During 1999, we generated approximately 50% of our total revenue from the sale of storage networking products, 19% from the sale of data networking products and 14% from the sale of telecommunications networking products. In addition, in 1999, we generated approximately 17% of our total revenue from consulting services and product support. We distribute and support our products through a combination of our direct sales and service operations and indirect channels. OUR COMPETITIVE STRENGTHS We believe that the following attributes of our products and our company position us to take advantage of market opportunities: - Experience with High-End Storage, Data and Telecommunications Networks. Our focus on providing high-end, large-scale, fault-tolerant products for storage, data and telecommunications networks allows us to apply our expertise across networks and architectures. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED SEPTEMBER 19, 2000 PROSPECTUS [INRANGE LOGO] 7,700,000 SHARES INRANGE TECHNOLOGIES CORPORATION CLASS B COMMON STOCK ------------------ We are selling 7,700,000 shares of our Class B common stock. The underwriters named in this prospectus may purchase up to 1,155,000 additional shares of our Class B common stock to cover over-allotments. This is an initial public offering of our Class B common stock. We currently expect the initial public offering price to be between $14.00 and $16.00 per share. Our Class B common stock has been approved for listing on the Nasdaq National Market under the symbol INRG. INVESTING IN OUR CLASS B COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 6. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------ <TABLE> <CAPTION> PER SHARE TOTAL --------- -------- <S> <C> <C> Public Offering Price $ $ Underwriting Discount $ $ Proceeds to Inrange (before expenses) $ $ </TABLE> The underwriters expect to deliver the shares to purchasers on or about , 2000. ------------------ SALOMON SMITH BARNEY BEAR, STEARNS & CO. INC. CHASE H&Q , 2000 - Leadership in High-End Fibre Channel Products. Within the storage network industry, we are the leading provider of high-end storage network switches, commonly known as director-class switches, that are intended to provide the highest levels of reliability, availability and scalability. In April 2000, we began shipping the industry's first 64-port Fibre Channel director-class switch, our IN-VSN FC/9000. - Extensive Installed Customer Base. We have installed our products at over 2,000 sites in over 90 countries. - Research and Development Expertise. As of June 30, 2000, we employed 160 personnel in our research and development department. We believe that this investment has led to our development of hardware and software that positions us to capitalize on emerging technologies and standards, such as Fibre Channel, FICON and Infiniband, while continuing to accommodate legacy technologies, such as ESCON. - Significant Direct Sales Resources. As of June 30, 2000, we employed 165 personnel in our sales and systems engineering department. Our large direct sales force maintains close relationships with our customers and provides comprehensive pre- and post-sales support. - Service and Support Capabilities. As of June 30, 2000, we employed 163 personnel in our customer service and support department. Our service organization provides our customers with resources that help them address often complex and challenging technical issues. - Established International Presence. We use our direct sales channel, alliances and an established network of distributors and resellers to provide sales and support in over 90 countries worldwide. OUR STRATEGY We intend to capitalize on our competitive strengths by pursuing the following strategies: - leveraging our intellectual capital across storage, data and voice networks; - cross-selling to our existing customer base; - expanding our consulting business; - driving enhanced features and functions through software; and - expanding alliances and indirect channels of distribution and pursuing strategic acquisitions. OUR RELATIONSHIP WITH SPX We are currently an indirect wholly owned subsidiary of SPX Corporation. After the completion of this offering of Class B common stock, SPX will own about 90.8% of the total number of outstanding shares of our common stock. SPX will beneficially own 100% of the outstanding Class A common stock, which will represent about 98.0% of the combined voting power of all classes of our voting stock. ------------------------ Our 32-year history began in 1968 with the formation of Spectron Corp. Our current corporate entity, which traces its history to Spectron, was incorporated in Delaware in 1977 under the name Data/Switch Corporation. We changed our name to Inrange Technologies Corporation in July 1998. In October 1998 SPX acquired us and our parent, General Signal Corp. Our principal executive office is located at 13000 Midlantic Drive, Mt. Laurel, New Jersey 08054, and our telephone number is (856) 234-7900. INSIDE FRONT COVER [GRAPHIC] [THE GRAPHIC DEPICTS IMAGES AND LINES REPRESENTING STORAGE NETWORKING, DATA NETWORKING AND TELECOMMUNICATIONS NETWORKING.] THE OFFERING Class B common stock offered by us.................................. 7,700,000 shares Common stock to be outstanding after this offering: Class A common stock.............. 75,633,333 shares Class B common stock.............. 7,700,000 shares Total............................. 83,333,333 shares Use of proceeds..................... We intend to use a portion of the net proceeds of this offering to repay the amounts that we borrowed from SPX to pay for our recent acquisitions and the remaining amounts for general corporate purposes. Pending their use, we intend to invest $15 million, including our cash on hand before this offering, in investment grade securities and lend any remaining net proceeds to SPX. Voting and conversion rights........ Our Class A common stock and our Class B common stock generally have identical rights, except for voting and conversion rights. The holders of Class A common stock are entitled to five votes per share and the holders of Class B common stock are entitled to one vote per share. Holders of Class B common stock have no conversion rights. Prior to a tax-free distribution, holders of Class A common stock may convert some or all of their shares into the same number of shares of Class B common stock at any time. In addition, prior to a tax-free distribution, shares of Class A common stock will automatically convert into the same number of shares of Class B common stock if transferred to anyone other than SPX or its affiliates, except in connection with a tax-free distribution. Proposed Nasdaq National Market symbol.............................. INRG ------------------------ Unless otherwise indicated, all information contained in this prospectus: - assumes that the underwriters do not exercise their option to purchase up to 1,155,000 additional shares of our Class B common stock to cover over-allotments; - excludes 1,331,000 shares of our Class B common stock issuable upon the exercise of options granted in June 2000 at an exercise price of $13.00 per share and 7,261,700 shares issuable upon the exercise of options to be granted upon the completion of this offering at an exercise price equal to the initial public offering price; and - assumes an initial public offering price of $15.00 per share of Class B common stock, the midpoint of the range set forth on the cover page of this prospectus. ------------------------ You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information provided by this prospectus is accurate as of any date other than the date on the front cover of this prospectus. SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA The tables on the following page present our summary historical and pro forma combined financial data. The data presented in these tables are from our historical combined financial statements and the notes to those statements and from our pro forma combined financial statements and the notes to those statements included elsewhere in this prospectus. You should read those statements along with "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a further explanation of the financial data summarized below. Our combined financial statements include our own assets, liabilities, revenue and expenses as well as the assets, liabilities, revenue and expenses of various other units of SPX comprising the storage networking, data networking and telecommunications networking business of SPX. All of the operations, assets and liabilities of these units have been transferred to us. The unaudited pro forma combined statement of operations data give effect to our recent acquisitions of Computerm Corporation and Varcom Corporation as if these acquisitions were completed on January 1, 1999. The pro forma basic and diluted earnings per share also reflect the sale of 3,937,563 shares of Class B common stock at an assumed initial public offering price of $15.00 per share, net of underwriting discount, in order to repay $54.9 million of debt due to SPX. The unaudited pro forma combined balance sheet data assume that on June 30, 2000 we completed the acquisitions of Computerm and Varcom, received $105.3 million of anticipated net proceeds from this offering, used a portion of these proceeds to repay the debt due to SPX and loaned a portion of the net proceeds to SPX. Following our acquisition by SPX and beginning in the fourth quarter of 1998, we implemented several initiatives to rationalize revenue, streamline operations and improve profitability. As part of this process, we discontinued sales of non-strategic, low volume product lines and products that were at the end of their life cycles. We also closed two manufacturing facilities and consolidated all of our operations into one manufacturing location, consolidated duplicative selling and administration functions into one location, and reduced headcount in non-strategic areas. These actions were substantially completed by July 1999. In connection with these initiatives, we recorded special charges of $7.0 million in 1998 and $10.6 million in 1999. Our other income (expense) for 1999 includes a gain of $13.9 million realized upon the sale of common stock of a public company that we received upon the exercise of warrants. As used in the tables, Adjusted EBITDA represents earnings before interest, taxes, depreciation and amortization, other income (expense), special charges, and gain on sale of real estate. We believe that Adjusted EBITDA is an important indicator of the liquidity and operating performance of technology companies. You should not consider Adjusted EBITDA to be a substitute for operating income, net income, cash flow and other measures of financial performance prepared in accordance with generally accepted accounting principles. <TABLE> <CAPTION> PRO FORMA, PRO FORMA, SIX MONTHS ENDED SIX MONTHS YEAR ENDED DECEMBER 31, YEAR ENDED JUNE 30, ENDED --------------------------------------- DECEMBER 31, ------------------------- JUNE 30, 1997 1998 1999 1999 1999 2000 2000 ----------- ----------- ----------- ------------ ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> COMBINED STATEMENT OF OPERATIONS DATA: Revenue........................ $ 218,971 $ 225,669 $ 200,622 $ 223,087 $ 102,383 $ 98,428 $ 111,821 Cost of revenue................ 108,541 115,316 99,641 104,330 54,264 50,463 53,178 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Gross margin............ 110,430 110,353 100,981 118,757 48,119 47,965 58,643 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Operating expenses: Research, development and engineering................. 21,225 25,067 18,928 23,726 10,618 10,060 12,763 Selling, general and administrative.............. 56,382 62,449 48,269 57,972 24,230 24,534 29,040 Amortization of goodwill and other intangibles........... 1,277 1,068 1,068 3,885 534 534 1,944 Special charges............... -- 6,971 10,587 10,587 9,687 (190) (190) Gain on sale of real estate... -- -- (2,829) (2,829) -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total operating expenses.............. 78,884 95,555 76,023 93,341 45,069 34,938 43,557 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Operating income............... 31,546 14,798 24,958 25,416 3,050 13,027 15,086 Interest expense............... 1,509 1,391 925 1,212 497 316 294 Other income (expense)......... 18 (178) 13,726 13,960 7,757 111 255 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Income before income taxes.... 30,055 13,229 37,759 38,164 10,310 12,822 15,047 Income taxes................... 12,198 5,873 15,459 15,647 4,228 5,129 6,018 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income..................... $ 17,857 $ 7,356 $ 22,300 $ 22,517 $ 6,082 $ 7,693 $ 9,029 =========== =========== =========== =========== =========== =========== =========== Basic and diluted earnings per share......................... $ 0.24 $ 0.10 $ 0.29 $ 0.28 $ 0.08 $ 0.10 $ 0.11 =========== =========== =========== =========== =========== =========== =========== Shares used in computing basic and diluted earnings per share......................... 75,633,333 75,633,333 75,633,333 79,570,896 75,633,333 75,633,333 79,570,896 =========== =========== =========== =========== =========== =========== =========== OTHER OPERATING DATA: Depreciation and amortization.................. $ 14,528 $ 13,160 $ 10,534 $ 5,164 $ 6,111 Capital expenditures, net...... 5,565 7,394 5,469 2,742 2,663 Cash flows from operating activities.................... 40,221 17,083 13,318 8,292 8,817 Cash flows from investing activities.................... (11,195) (19,969) 3,730 (670) (15,763) Cash flows from financing activities.................... (29,026) 4,746 (18,225) (7,721) 7,774 Adjusted EBITDA................ 46,074 34,929 43,250 17,901 18,948 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 2000 ------------------------- ACTUAL PRO FORMA -------- -------------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> COMBINED BALANCE SHEET DATA: Cash........................................................ $ 2,234 $ 15,000 Demand loan due from SPX.................................... -- 38,091 Working capital............................................. 39,488 95,497 Total assets................................................ 149,255 248,042 Total debt (including short-term borrowings, current portion of long-term debt and debt due to SPX)..................... 6,136 7,715 Stockholder's investment.................................... 92,343 187,643 </TABLE>
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+Anthony J. Parkinson Rick B. Ainsworth Michael F. Benson James J. McFadden Stephen J. Royer All executive officers as a group (9 individuals) Concurrent Offering Stock Plan Prior to the consummation of this offering, TSA, as our sole stockholder, and our board of directors are expected to approve the Concurrent Offering Stock Plan under which shares of our common stock may be purchased by our executive officers and other employees and stock options may be granted to our executive officers and other employees and employees of TSA. The shares and options being offered to our executive officers and other key employees in the concurrent offering will be issued under our Concurrent Offering Stock Plan. See Concurrent Offering of Restricted Stock. Concurrently with this offering, we expect to grant options to purchase up to shares of our common stock under the Concurrent Offering Stock Plan to our executive officers and other employees and employees of TSA, in addition to the options being granted under the plan to executive officers and other employees purchasing common stock in the concurrent offering as described above under Concurrent Offering of Restricted Stock. The exercise price per share will equal the public offering price. The options being granted will become exercisable at a rate to be determined by our board of directors. The Concurrent Offering Stock Plan will be administered by our board of directors or a committee of our board of directors. The administrator will have the authority to interpret the provisions of the Concurrent Offering Stock Plan and to decide all questions of fact arising in its application. The administrator will select the participants under the Concurrent Offering Stock Plan. After termination of a participant s employment for a reason other than death or disability, he or she may exercise his or her option to the extent that the option was exercisable at the termination date for the period of 90 days after the date of his or her termination, unless our board of directors determines otherwise. If termination is due to death or disability, the option will fully vest and will remain exercisable for 12 months. However, an option may never be exercised later than the expiration of its term. If a change of control of us occurs, then any surviving or acquiring entity must, subject to the approval of our board of directors, assume any options outstanding under the Concurrent Offering Stock Plan. All outstanding options held by participants as of the completion date of the change of control will immediately and fully vest if: prior to the completion of the change of control, the surviving or acquiring entity refuses to assume those options or to substitute similar options for those outstanding under the Concurrent Offering Stock Plan; our board of directors does not approve the assumption or substitution of those options; or there is no surviving or acquiring entity upon completion of the change of control. Our board of directors may terminate or amend the Concurrent Offering Stock Plan without stockholder approval, unless stockholder approval is required under applicable laws and regulations. No amendment, termination or modification of the Concurrent Offering Stock Plan shall affect any award previously granted in any material adverse way without the consent of the participant. 2000 Incentive Plan Prior to the consummation of the offering, TSA, as our sole stockholder, and our board of directors are expected to approve the 2000 Incentive Plan. This plan provides for the grant of incentive stock options and non-qualified stock options to purchase shares of our common stock, stock appreciation rights, restricted stock awards, performance unit awards, and stock bonus awards. Individuals who are employees, directors or officers of, or key advisors or consultants to, us will be eligible to participate in the 2000 Incentive Plan. The 2000 Incentive Plan also provides for the grant of non-qualified stock options to our non-employee directors. See Compensation of Directors. We have reserved shares of common stock for issuance under the 2000 Incentive Plan, subject to adjustments for changes in capitalization. This plan provides that each participant will be limited to receiving awards of stock options, stock appreciation rights, restricted stock and stock bonus awards relating to no more than shares of common stock in any twelve month period, subject to adjustments for changes in capitalization. Participants also may not receive performance unit awards in any 12 month period of more than $ . The 2000 Incentive Plan will be administered by our board of directors or a committee of our board of directors. The administrator will have the authority to interpret the provisions of this plan and to decide all questions of fact arising in its application. The administrator will also generally have the authority to determine the exercise price of options, to determine the type of awards to be made, and to select the participants under the 2000 Incentive Plan. Options granted under this plan may also be subject to time vesting and other restrictions at the discretion of the administrator. Generally, after termination of one of our employees, directors or consultants, he or she may exercise his or her option to the extent that the option was exercisable at the termination date for 90 days after the date of his or her termination. However, if termination is due to death or disability, the option will fully vest and will remain exercisable for 12 months. However, an option may never be exercised later than the expiration of its term. Except with respect to performance unit awards, if a change of control occurs, then any surviving or acquiring entity must, subject to the approval of our board of directors, assume any awards outstanding under the 2000 Incentive Plan or substitute similar awards. All outstanding awards, other than performance unit awards, held by participants as of the completion of the change of control will be fully exercisable if: prior to the completion of the change of control, the surviving or acquiring entity refuses to assume those awards or to substitute similar awards for those outstanding under the 2000 Incentive Plan; our board of directors does not approve the assumption or substitution of those awards; or there is no surviving or acquiring entity upon completion of the change of control. If the surviving or acquiring entity does not assume the options or substitute similar options, then the awards will terminate if not exercised upon or prior to the completion of the change of control. With respect to performance unit awards, if a change of control occurs, then the administrator may pay to the participant all or any portion of any performance unit award to the extent earned under the applicable performance targets regardless of whether the applicable performance period has ended. Our board of directors may terminate or amend the 2000 Incentive Plan without stockholder approval, unless stockholder approval is required by applicable laws and regulations. No amendment, termination or modification of this plan shall affect any award previously granted in any material adverse way without the consent of the participant. OUR RELATIONSHIP WITH TSA We are currently a wholly-owned subsidiary of TSA. After the completion of this offering, TSA will own approximately 81.9% of the outstanding shares of our common stock, or approximately 80.1% if the underwriters fully exercise their over-allotment option. Until TSA holds less than 50% of the voting power of our common stock, TSA will be able to control the vote on all matters submitted to stockholders, including the election of directors and the approval of extraordinary corporate transactions, such as mergers. TSA currently intends to distribute all of the shares of our common stock owned by TSA to the holders of TSA s common stock within 12 months of this offering. However, TSA is not obligated to complete the distribution or otherwise divest its shares of our common stock, and the distribution or other divestiture may not occur by the anticipated time or at all. TSA will, in its sole discretion, determine the timing, structure and all terms of its distribution to TSA s stockholders or any other disposition of our common stock that it owns. TSA s distribution is subject to receiving a private letter ruling from the Internal Revenue Service that the distribution of its shares of our common stock to TSA stockholders will be tax-free to TSA and its stockholders for United States federal income tax purposes. TSA may elect to divest its shares of Insession common stock through means other than a distribution, whether through public or private sales or otherwise. We believe that our complete separation from TSA will enable us to achieve the following benefits: create an organizational structure through which we will have direct access to capital markets; permit us to focus on our core business strengths as an independent company; and enhance our ability to attract and retain employees by allowing us to offer incentives that are more closely linked to our market performance. Employees of TSA will be granted options to purchase shares of our common stock. See Management Treatment of Existing TSA Options and Management Concurrent Offering Stock Plan. Arrangements with TSA The terms of our separation from TSA and many of the transactions being undertaken in connection therewith will be governed by a master separation and distribution agreement and a number of additional agreements described below. These other agreements include agreements relating to this offering and the possible distribution of our shares to TSA stockholders, the registration of TSA s remaining shares of our common stock, the provision of transitional services by TSA, and the tax treatment of our possible separation from TSA. All of the agreements providing for our separation from TSA are in the context of a parent-subsidiary relationship and the terms were determined in the overall context of our separation from TSA. The terms of these agreements may be more or less favorable to us than if they had been negotiated with unaffiliated third parties. We have included below a summary description of the master separation and distribution agreement and other important agreements. This description, which summarizes the material terms of these agreements, does not purport to be complete and is qualified in its entirety by reference to the full text of these agreements. These agreements, including the master separation and distribution agreement, have been filed with the SEC as exhibits to the registration statement of which this prospectus is a part. Master Separation and Distribution Agreement The master separation and distribution agreement contains the key provisions relating to our separation from TSA, the terms of this offering and the distribution of our shares to TSA stockholders. The Separation. The master separation and distribution agreement provides for the transfer to us of assets and liabilities from TSA related to our business, effective as of the separation date. The separation will occur immediately prior to the consummation of this offering. The various ancillary agreements that are exhibits to the master separation and distribution agreement and which detail the separation and various interim and ongoing relationships between TSA and us following the separation date include: a general assignment and assumption agreement; an employee matters agreement; a tax sharing agreement; a master transitional services agreement; a real estate matters agreement; a registration rights agreement; a master confidential disclosure agreement; an indemnification and insurance matters agreement; a NET24 Sales Agency Agreement; and a finder s fee agreement. If the terms of any of these ancillary agreements conflict with the master separation and distribution agreement, the terms of these agreements will govern. These agreements are described more fully below. The Initial Public Offering. Under the terms of the master separation and distribution agreement, TSA will own at least 80.1% of our outstanding common stock following this offering. We are obligated to use our reasonable commercial efforts to satisfy the following conditions prior to the consummation of this offering, any of which may be waived by TSA: the registration statement containing this prospectus must be effective; we must be in compliance with all United States securities and blue sky laws governing this offering; our common stock must be included for quotation on the Nasdaq National Market; our obligations under the underwriting agreement must be met or waived by the underwriters; TSA must own at least 80.1% of our stock and must be satisfied that the distribution will be tax-free to its United States stockholders; no legal restraints must exist preventing the separation or this offering; the separation must have occurred; and the master separation and distribution agreement must not have been terminated. The Distribution. TSA intends to distribute the remaining shares of our common stock that TSA holds to TSA stockholders on a pro rata basis within 12 months of the consummation of this offering. We will prepare an information statement with TSA and send it to TSA stockholders before the distribution becomes effective. The information statement will inform the stockholders of the distribution and its specifics. TSA may, in its sole discretion, change the distribution date. TSA intends to consummate the distribution only if the following conditions are met, any of which may be waived by TSA: the Internal Revenue Service must issue a ruling that the distribution of our common stock will be tax-free to TSA and its stockholders for United States federal income tax purposes; all required government approvals must be in effect; no legal restraints must exist preventing the distribution; and nothing must have happened in the intervening time between this offering and the distribution that makes the distribution harmful to TSA or its stockholders. Option Grant. We have agreed to grant to TSA an option to purchase from us a number of our common shares that would be necessary to allow TSA to maintain control of Insession under applicable Internal Revenue Code requirements. We have also agreed to give notice to TSA of our intention to offer shares of our common stock (other than those offered pursuant to this offering) or of any event that could result, in the absence of a full or partial exercise of its option, in TSA not having such control. If TSA exercises its option, it will pay us the market price of our common shares as of the date of the notice of its exercise of the option. The option does not apply in connection with our issuance of common shares pursuant to any stock option or employee benefit plan so long as we have repurchased a number of shares equal to the number of common shares to be issued. The option granted to TSA terminates on the earlier to occur of the distribution date and the date on which TSA s percentage ownership of our stock decreases to less than 45% of the outstanding shares except where that decrease results from our violation of the master separation and distribution agreement. Information Exchange. Both TSA and we have agreed to share information relating to governmental, accounting, contractual and other similar requirements of our ongoing businesses, unless the sharing would be commercially detrimental or violate any law or agreement. In particular, we have agreed with TSA as follows: (1) Each party will maintain adequate internal accounting to allow the other party to satisfy its own reporting obligations and prepare its own financial statements; (2) Each party will retain records beneficial to the other party for a specified period of time. If the records are to be destroyed, the destroying party will give the other party an opportunity to retrieve all relevant information from the records, unless the records are destroyed in accordance with adopted record retention policies; and (3) Each party will use commercially reasonable efforts to provide the other party with directors, officers, employees, other personnel and agents who may be used as witnesses in, and books, records and other documents which may reasonably be required in connection with legal, administrative or other proceedings. Auditing Practices. So long as TSA is required to consolidate our results of operations and financial position, we have agreed to: (1) not select a different independent accounting firm from that used by TSA, without TSA s consent; (2) use reasonable commercial efforts to enable our auditors to date their opinion on our audited annual financial statements on the same date that TSA s auditors date their opinion on TSA s financial statements; (3) exchange all relevant information needed to prepare financial statements; and (4) grant each other s internal auditors access to each other s records. In addition, we have agreed to notify each other of any change in accounting principles, until the earlier of a change of control of the other party or two years after a distribution by TSA of all of our common stock that it owns to its stockholders. Conduct With Respect to Tax Matters. TSA and we have agreed not to take certain actions before and after the distribution that could jeopardize the tax-free nature of the distribution. Before the distribution, we may not issue shares of our common stock that would cause TSA to lose control of us for tax purposes. Additionally, for two years after the distribution, we: (1) may not enter into transactions if another person would acquire shares of our common stock that would be more than 50% of the outstanding common stock on the date of that transaction; (2) must continue the business described in this prospectus; and (3) may not liquidate, dispose of, or discontinue one or more of the portions of our businesses, that would be inconsistent with the written materials submitted to the Internal Revenue Service in connection with our request for a ruling or that would jeopardize the tax-free nature of the distribution. Dispute Resolution. If problems arise between us and TSA, we have agreed to the following procedures: The parties will make a good faith effort to first resolve the dispute through negotiation. If negotiations fail, the parties agree to attempt to resolve the dispute through non-binding mediation. If mediation fails, the parties can resort to binding arbitration. In addition, nothing prevents either party acting in good faith from initiating litigation at any time if failure to do so would cause serious and irreparable injury to one of the parties or to others. No Representations and Warranties. Neither party is making any promises to the other regarding: the value of any asset that TSA is transferring to us; whether there is a lien or encumbrance on any asset TSA is transferring to us; or whether any conveyance of title to any asset TSA is transferring to us is sufficient to transfer good and marketable title. No Solicitation for Employment. Each party has agreed not to directly solicit employees of the other party concerning job opportunities without the other party s consent for two years after the distribution date. However, this prohibition does not apply to general recruitment efforts carried out through public or general solicitation or where the employee first approaches us. Expenses. All of the costs and expenses related to this offering as well as the costs and expenses related to the separation and distribution will be allocated between us and TSA. We will bear the costs and expenses associated with this offering and TSA will bear the costs and expenses associated with the separation and distribution. We will each bear our own internal costs incurred in consummating these transactions. Termination of the Agreement. TSA in its sole discretion can terminate the master separation and distribution agreement and all ancillary agreements, as well as abandon the distribution at any time prior to the closing of this offering. After the closing of this offering and until the distribution, TSA and we must agree to terminate the master separation and distribution agreement and all ancillary agreements. General Assignment and Assumption Agreement. The general assignment and assumption agreement identifies the assets TSA will transfer to us and the liabilities we will assume from TSA in the separation. The agreement also describes when and how these transfers and assumptions will occur. Asset Transfer. Effective on the separation date, TSA will transfer assets to us that it holds related to our business. Assumption of Liabilities. Effective on the separation date, we will assume liabilities of TSA, to the extent that these liabilities are, prior to the separation date, liabilities held by TSA related to our business, except as provided in the general assignment and assumption agreement or any ancillary or other agreement. Obtaining Approvals and Consents. TSA and we agree to use all reasonable efforts to obtain any required consents, substitutions or amendments required to novate or assign all rights and obligations under any contracts that will be transferred in the separation. Nonrecurring Costs and Expenses. Any nonrecurring costs and expenses that are not allocated in the master separation and distribution agreement or any other ancillary agreements will be the responsibility of the party that incurs the costs and expenses. Employee Matters Agreement We have entered into an employee matters agreement with TSA to allocate assets, liabilities, and responsibilities relating to our current and former employees and their participation in the benefits plans, including stock plans, that TSA currently sponsors and maintains. In general, we agreed to reimburse TSA for expenses relating to our benefit plans during this period. All of our eligible employees will continue to participate in TSA benefit plans on comparable terms and conditions as they did prior to the separation date (unless we otherwise consent to a change or a change is necessary to comply with applicable law), until the distribution date or until we establish a corresponding benefit plan for our employees. We intend to establish our own benefit program no later than the distribution date. Once we establish our own benefits plans, we may amend, modify or terminate any of our plans, or any trust, insurance policy or funding vehicle related to any of our plans, in accordance with the terms of that plan or our policies. Each of our benefit plans will provide that all service, compensation and other benefit-affecting determinations that, as of the distribution date, were recognized under the corresponding TSA benefits plan will, as of the distribution date, be taken into account, except to the extent that duplication of benefits would result. Assets relating to the employee liabilities that are transferred to us will be transferred to us and/or our appropriate plans and related trusts or other funding vehicles. Tax Sharing Agreement We will enter into a tax sharing agreement with TSA that will allocate responsibilities for tax matters between us and TSA on a separate return basis. The agreement requires us to pay TSA for the tax costs of our inclusion in consolidated, combined or unitary tax returns with affiliated corporations. In determining these incremental costs, the agreement will take into account not only the group s incremental tax payments to the Internal Revenue Service or other taxing authorities, but also the incremental use of tax losses of affiliates to offset our taxable income, and the incremental use of tax credits of affiliates to offset the tax on our income. The agreement will also provide under certain circumstances for compensation or reimbursement as appropriate to reflect redeterminations of our tax liability for periods during which we joined in filing consolidated, combined or unitary tax returns. Each member of a consolidated group for United States federal income tax purposes is jointly and severally liable for the group s federal income tax liability. Accordingly, we could be required to pay a deficiency in the group s federal income tax liability for a period during which we were a member of the group even if the tax sharing agreement allocates that liability to TSA or another member. The tax sharing agreement will also assign responsibilities for administrative matters such as the filing of returns, payment of taxes due, retention of records and conduct of audits, examinations or similar proceedings. Master Transitional Services Agreement The master transitional services agreement governs the provision of transitional services by TSA to us, until one year after the separation date, unless extended for specific services or otherwise indicated in the agreement. These services include data processing and telecommunications services, such as voice telecommunications and data transmission, and information technology support services, for functions including accounting, financial management, tax, payroll, stockholder and public relations, legal, procurement, and other administrative functions. We have agreed to pay TSA a monthly fee for these services during the term of the agreement. TSA may charge a fee equal to cost plus 10% for services beyond a one-year period. The master transitional services agreement also covers the provision of additional transitional services identified from time to time after the separation date that were unintentionally omitted from the master transitional services agreement at no additional fee so long as the provision of these services would not significantly disrupt TSA s operations or significantly increase the scope of its responsibility under the master transitional services agreement. We will have to pay for any other additional services which we may request. Real Estate Matters Agreement The real estate matters agreement addresses real estate matters relating to TSA s leased properties that TSA will transfer to or share with us. The agreement describes the manner in which TSA will transfer to or share with us various leased properties, including the following types of transactions: assignments to us of TSA s leases for specified leased properties; subleases to us of portions of specified properties leased by TSA at TSA s cost; and short-term leases between TSA and us permitting short term occupancy of selected leased sites. The real estate matters agreement requires both parties to use reasonable efforts to obtain any landlord consents required for the proposed transfers of leased sites, and us to provide the security required under the applicable leases. The real estate matters agreement further provides that we will be required to accept the transfer of all sites allocated to us, even if a site has been damaged by a casualty before the separation date. The real estate matters agreement provides that all reasonable costs required to effect the transfers of leases, including landlord consent fees and landlord attorneys fees, will be paid by TSA. Master Confidential Disclosure Agreement The master confidential disclosure agreement provides that both parties will not disclose confidential information concerning the other party, except in specific circumstances. TSA and we also agree not to use this information in violation of any other written agreements between us. Indemnification and Insurance Matters Agreement General Release of Pre-Separation Claims. Effective as of the separation date, subject to specified exceptions, we will release TSA and its affiliates, agents, successors and assigns, and TSA will release us, and our affiliates, agents, successors and assigns, from any liabilities arising from events occurring on or before the separation date, including events occurring in connection with the activities to implement the separation, this offering and the distribution. This provision will not impair a party from enforcing the master separation and distribution agreement, any ancillary agreement or any arrangement specified in any of these agreements. Indemnification. In general, we have agreed to indemnify TSA and its affiliates, agents, successors and assigns from all liabilities arising from: our business, any of our liabilities or any of our contracts; and any breach by us of the master separation and distribution agreement or any ancillary agreement. TSA has agreed to indemnify us and our affiliates, agents, successors and assigns from all liabilities arising from: TSA s business other than our business; and any breach by TSA of the master separation and distribution agreement or any ancillary agreement. Liability Arising From This Prospectus. We will bear any liability arising from any untrue statement of a material fact or any omission of a material fact in this prospectus except for untrue statements or omissions based on information furnished to us by TSA about TSA for inclusion in this prospectus. Insurance Matters. The agreement also contains provisions governing our insurance coverage from the separation date until the distribution date. In general, we agree to reimburse TSA for expenses related to insurance coverage during this period. Registration Rights Agreement We have entered into a registration rights agreement with TSA to provide it with registration rights relating to the shares of our common stock which it holds if the distribution does not occur. Shares Covered. The registration rights agreement covers those shares of our common stock that are held by TSA immediately following this offering and any other shares of our common stock that TSA acquires after the offering. Demand Registrations. Under the terms of the agreement, if TSA requests registration of all or any portion of our shares that it owns under the Securities Act, which we refer to as a demand registration, we will be obligated to register these shares. TSA will designate the terms of each offering effected pursuant to a demand registration, which may take any form, including: (1) an underwritten public offering; (2) a shelf registration; (3) a registration in connection with the distribution of, or exchange of or offer to exchange, shares of our common stock to holders of debt or equity securities of TSA, any of its subsidiaries or affiliates or any other person; or (4) a distribution in connection with the registration by TSA or any of its subsidiaries or affiliates of securities convertible into, exercisable for or otherwise related to such shares of our common stock. Except for an offering described in clauses (3) and (4) above, each demand registration must meet a minimum aggregate expected offering price and timing requirements. Piggyback Registrations. The registration rights agreement also provides for piggyback registration rights for TSA. Whenever we propose to register any of our securities under the Securities Act for ourselves or others, subject to customary exceptions, we must provide prompt notice to TSA and include in such registration all shares of our stock which TSA requests to be included, each of which we refer to as a piggyback registration. Selection of Underwriters. We have the right to select our investment bankers and managers in connection with a piggyback registration. Holdbacks. The registration rights agreement contains customary holdback provisions, including covenants by us not to effect a public sale or distribution of our securities during periods prior to and following the date of any registration statement filed in connection with a demand registration or a piggyback registration. Registration Procedures and Expenses. The registration rights agreement sets forth customary registration procedures, including a covenant by us to make available our senior management for road show presentations. We will be obligated to pay all registration expenses incurred in connection with the registration rights agreement, including all filing fees, fees and expenses of compliance with securities and/or blue sky laws, financial printing expenses, fees and disbursements of custodians, transfer agents, exchange agents and/or information agents, as well as fees and disbursements of our counsel and the fees of all independent certified public accountants, underwriters, excluding discounts and commissions, and other persons retained by us. In addition, we must reimburse TSA for the fees and disbursements of its outside counsel, as well as out-of-pocket expenses incurred in connection with any such registration. Indemnification. The registration rights agreement contains customary indemnification and contribution provisions by us for the benefit of TSA and any underwriters. TSA has agreed to indemnify us and any underwriter solely with respect to information provided by TSA. Transfer. TSA may transfer shares covered by the registration rights agreement and the holders of those transferred shares will be entitled to the benefits of the registration rights agreement, provided that each transferee agrees to be bound by the terms of the registration rights agreement and that only the holder or holders of a majority of the shares covered by the registration rights agreement will be entitled to exercise these rights. Any successor of ours will be bound by the terms of the registration rights agreement. NET24 Sales Agency Agreement We will be a non-exclusive sales agent for TSA s NET24 product and will receive a commission of 35% of the license fees on contracts that we initiate. Our territory will consist of the United States but will exclude accounts with banks and retailers. Finder s Fee Agreement We will agree to pay TSA a finder s fee for any contract with a new customer that results directly from a lead referred by TSA in accordance with the requirements of the finder s fee agreement. The fee will equal 10% of license fees that we receive from the new customer for five years from the date of the contract. The finder s fee agreement will have a one-year term unless renewed by agreement of us and TSA. Other Commercial Arrangements From time to time, we may enter into agreements with TSA relating to TSA s resale of some of our products. Demand Notes Insession Inc., our wholly-owned subsidiary, has issued two promissory notes in the aggregate principal amount of $6.6 million to TSA. The loans by TSA under these promissory notes were made before its acquisition of Insession Inc. in 1999. Both promissory notes are payable upon demand and bear interest at the prime rate plus 0.25 percent, not to exceed 12 percent per annum. We intend to pay these promissory notes, together with any accrued and unpaid interest, with the net proceeds from this offering. See Use of Proceeds. PRINCIPAL STOCKHOLDER Prior to this offering, all of the outstanding shares of our common stock will be owned by TSA. After completion of this offering and the concurrent offering, TSA will own about 81.9%, or about 80.1% if the underwriters fully exercise their option to purchase additional shares of our outstanding common stock. Except for TSA, we are not aware of any person or group that will beneficially own more than 5% of the outstanding shares of our common stock following this offering and the concurrent offering. DESCRIPTION OF CAPITAL STOCK General Upon the completion of this offering we will be authorized to issue 150,000,000 shares of common stock, $0.01 par value, and 25,000,000 shares of undesignated preferred stock, $0.01 par value. Of the authorized shares of common stock, shares are being offered hereby, or shares if the underwriters exercise their over-allotment option in full. Employees purchasing shares of our common stock for cash in the concurrent offering will also receive options to purchase shares of our common stock under our Concurrent Offering Stock Plan. See Management Concurrent Offering of Restricted Stock and Management Concurrent Offering Stock Plan. The following description of our capital stock is subject to our certificate of incorporation and by-laws, which are included as exhibits to the registration statement of which this prospectus forms a part, and to the provisions of applicable Delaware law. Common Stock Prior to this offering, all of our outstanding shares of common stock were held of record by TSA. The holders of our common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of our common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by our board of directors out of funds legally available for that purpose. See Dividend Policy. In the event of our liquidation, dissolution or winding up, the holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. The holders of our common stock have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to our common stock. Preferred Stock Preferred stock is issuable from time to time in one or more series and with such designations, preferences and other rights for each series as shall be stated in the resolutions providing for the designation and issue of each such series adopted by our board of directors. The board of directors is authorized by our certificate of incorporation to determine, among other things, the voting, dividend, redemption, conversion, exchange and liquidation powers, rights and preferences and the limitations thereon pertaining to such series. The board of directors, without stockholder approval, may issue preferred stock with voting and other rights that could adversely affect the voting power of the holders of the common stock and that could have anti-takeover effects. We have no present plans to issue any shares of preferred stock. The ability of our board of directors to issue preferred stock without stockholder approval could have the effect of delaying, deferring or preventing a change in control of Insession or the removal of existing management. Anti-Takeover Effects of Certificate of Incorporation and By-law Provisions Some provisions of Delaware law and our certificate of incorporation and by-laws could make the following more difficult: acquisition of us by means of a tender offer; acquisition of us by means of a proxy contest or otherwise; or removal of our incumbent officers and directors. These provisions, summarized below, are intended to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe that the benefits of increased protection give us the potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us and outweigh the disadvantages of discouraging those proposals because negotiation of those proposals could result in an improvement of their terms. Board of Directors. Our certificate of incorporation and by-laws provide that the board of directors will be divided into three classes of directors, with the classes to be nearly equal in number as possible. One class will be elected for a term expiring at the annual meeting of stockholders to be held in 2001, another will be elected for a term expiring at the annual meeting of stockholders to be held in 2002 and another will be elected for a term expiring at the annual meeting of stockholders to be held in 2003. Each director is to hold office until his or her successor is duly elected and qualified. Commencing with the 2001 annual meeting of stockholders, directors elected to succeed directors whose terms then expire will be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director to hold office until that person s successor is duly elected and qualified. This system of electing directors may discourage a third party from making a tender offer or otherwise attempting to obtain control of us because it generally makes it more difficult for stockholders to replace a majority of the directors. Advance Notice Procedures. Our by-laws provide for an advance notice procedure for the nomination, other than by or at the direction of our board of directors, of candidates for election as directors, as well as for other stockholder proposals. In general, notice of intent to nominate a director or raise matters at annual meetings will have to be received in writing by us not less than 120 days prior to the anniversary of the previous year s annual meeting of stockholders, and must contain information concerning the person to be nominated or the matters to be brought before the meeting and concerning the stockholder submitting the proposal. Special Meetings. Under our by-laws, only our board of directors, the chairman of our board of directors, and until TSA owns less than 50% of our common stock, TSA, may call special meetings of stockholders and stockholders may not bring any matters at a special meeting. Elimination of Stockholder Action By Written Consent. Our certificate of incorporation eliminates the right of stockholders other than TSA to act by written consent without a meeting. TSA will lose this right once it owns less than 50% of our common stock. Elimination of Cumulative Voting. Our certificate of incorporation and by-laws do not provide for cumulative voting in the election of directors. Undesignated Preferred Stock. The authorization of undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of us. These and other provisions may have the effect of deferring hostile takeovers or delaying changes in control or management of us. Amendment of Charter Provisions. Amendments of a number of the foregoing provisions, including certificate of incorporation and by-law provisions with respect to stockholder action by written consent, stockholder right to call special meetings, advance notice procedures, and board classification and removal provisions, require approval by shares representing not less than 80% of all of our shares entitled to vote generally in the election of directors then outstanding. The by-laws may also be amended by action of the board of directors. Delaware Business Combination Statute Section 203 of the Delaware General Corporation Law provides that, subject to exceptions specified therein, an interested stockholder of a Delaware corporation shall not engage in any business combination, including general mergers or consolidations or acquisitions of additional shares of the corporation, with the corporation for a three-year period following the time that such stockholder becomes an interested stockholder unless: prior to such time, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85 percent of the voting stock of the corporation outstanding at the time the transaction commenced (excluding specified shares); or at or subsequent to such time, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2 /3 percent of the outstanding voting stock not owned by the interested stockholder. Under Section 203, the restrictions described above also do not apply to specified business combinations proposed by an interested stockholder following the announcement or notification of one of specified transactions involving the corporation and a person who had not been an interested stockholder during the previous three years or who became an interested stockholder with the approval of a majority of the corporation s directors, if such transaction is approved or not opposed by a majority of the directors who were directors prior to any person becoming an interested stockholder during the previous three years or were recommended for election or elected to succeed such directors by a majority of such directors. Except as otherwise specified in Section 203, an interested stockholder is defined to include: any person that is the owner of 15 percent or more of the outstanding voting stock of the corporation, or is an affiliate or associate of the corporation and was the owner of 15 percent or more of the outstanding voting stock of the corporation at any time within three years immediately prior to the date of determination and the affiliates and associates of any such person. Under some circumstances, Section 203 makes it more difficult for a person who would be an interested stockholder to effect various business combinations with a corporation for a three-year period. We have not elected to be exempt from the restrictions imposed under Section 203. Limitations on Directors Liability Our certificate of incorporation provides that none of our directors will be liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability: for any breach of the director s duty of loyalty to us or our stockholders; for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; in respect of unlawful dividend payments or stock redemptions or repurchases as provided in Section 174 of the Delaware General Corporation Law; or for any transaction from which the director derived an improper personal benefit. The effect of these provisions will be to eliminate our rights and those of our stockholders (through stockholders derivative suits on behalf of Insession) to recover monetary damages against a director for breach of fiduciary duty as a director, including breaches resulting from grossly negligent behavior, except in the situations described above. Our certificate of incorporation and by-laws provide for indemnification of directors and officers to the maximum extent permitted by Delaware law. In addition, we expect to enter into indemnification agreements with each of our directors and executive officers providing for indemnification of such directors and executive officers to the fullest extent permitted by applicable law. Listing We have applied to have our common stock included for quotation on the Nasdaq National Market under the symbol INSX. Transfer Agent and Registrar The transfer agent and registrar for our common stock is Norwest Bank Minnesota, N.A. SHARES ELIGIBLE FOR FUTURE SALE The shares of our common stock sold in the offering, or shares if the underwriters exercise their over-allotment option in full, will be freely tradable without restriction under the Securities Act, except for any such shares which may be acquired by an affiliate as that term is defined in Rule 144 promulgated under the Securities Act, which shares will remain subject to the resale limitations of Rule 144. The shares of our common stock that will continue to be held by TSA after the offering constitute restricted securities within the meaning of Rule 144, and will be eligible for sale by TSA in the open market after the offering, subject to customary contractual lockup provisions and the applicable requirements of Rule 144, both of which are described below. We have granted registration rights to TSA. See Registration Rights of TSA. Generally, Rule 144 provides that a person who has beneficially owned restricted shares for at least one year will be entitled to sell on the open market in brokers transactions within any three month period a number of shares that does not exceed the greater of: 1% of the then outstanding shares of common stock; and the average weekly trading volume in the common stock on the open market during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to post-sale notice requirements and the availability of current public information about us. In the event that any person other than TSA who is deemed to be an affiliate of us purchases shares of our common stock pursuant to the offering or acquires shares of our common stock pursuant to one of our employee benefit plans, the shares held by such person are subject to the requirements of Rule 144 other than the one-year holding period requirement. Shares properly sold in reliance upon Rule 144 to persons who are not affiliates are thereafter freely tradable without restriction. Sales of substantial amounts of our common stock in the open market, or the availability of such shares for sale, could adversely affect the price of our common stock. TSA currently plans to complete its divestiture of Insession within 12 months following this offering by distributing all of the shares of Insession common stock owned by TSA to the holders of TSA s common stock. See Our Relationship With TSA. Any shares distributed by TSA will be eligible for immediate resale in the public market without restrictions by persons other than our affiliates. We, TSA and our officers and directors have agreed that, without the prior written consent of Salomon Smith Barney Inc. on behalf of the underwriters, we will not, during the period ending 180 days after the date of this prospectus, sell or otherwise dispose of any shares of our common stock, subject to specified exceptions. The distribution of our common stock owned by TSA to the holders of TSA s common stock is specifically exempted from this agreement. Shares subject to this agreement could be available for resale immediately upon the expiration of the 180-day period if they are available for resale under Rule 144. See Underwriting. An aggregate of shares of our common stock are reserved for issuance under our stock plans. We intend to file registration statements on Form S-8 covering the issuance of shares of our common stock pursuant to the plans. Accordingly, the shares issued pursuant to the plans will be freely tradable, subject to the restrictions on resale by affiliates under Rule 144. Registration Rights of TSA Pursuant to a registration rights agreement, TSA may require us to register under the Securities Act all or any portion of our common stock that it holds. Any of TSA s shares of our common stock registered pursuant to the registration rights agreement would be eligible for immediate resale in the public market without restrictions by persons other than our affiliates. For more information regarding the registration rights agreement, see Our Relationship with TSA Arrangements with TSA Registration Rights Agreement. Any sales of substantial amounts of our common stock in the public market, whether as a result of a distribution, TSA s registration rights or otherwise, or the perception that such sales might occur, could have a material adverse effect on the market price of our common stock. See Risk Factors The price of our common stock could decline as a result of sales or distributions of substantial amounts of our common stock in the public market. MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS General The following is a general discussion of the material United States federal income and estate tax consequences of the ownership and disposition of common stock that may be relevant to you if you are a non-United States Holder. In general, a non-United States Holder is any person or entity that is, for United States federal income tax purposes, a foreign corporation, a nonresident alien individual, a foreign partnership or a foreign estate or trust. This discussion is based on current law, which is subject to change, possibly with retroactive effect, or different interpretations. This discussion is limited to non-United States Holders who hold shares of common stock as capital assets. Moreover, this discussion is for general information only and does not address all of the tax consequences that may be relevant to you in light of your personal circumstances, nor does it discuss special tax provisions which may apply to you if you relinquished United States citizenship or residence. If you are an individual, you may, in many cases, be deemed to be a resident alien, as opposed to a nonresident alien, by virtue of being present in the United States for at least 31 days in the calendar year and for an aggregate of at least 183 days during a three-year period ending in the current calendar year (counting for such purposes all of the days present in the current year, one-third of the days present in the immediately preceding year, and one-sixth of the days present in the second preceding year). Resident aliens are subject to United States federal income tax as if they were United States citizens. Each prospective purchaser of common stock is advised to consult a tax advisor with respect to current and possible future tax consequences of purchasing, owning and disposing of our common stock as well as any tax consequences that may arise under the laws of any United States state, municipality or other taxing jurisdiction. Dividends If dividends are paid, as a non-United States Holder, you will be subject to withholding of United States federal income tax at a 30% rate or a lower rate as may be specified by an applicable income tax treaty. To claim the benefit of a lower rate under an income tax treaty, you must properly file with the payor an IRS Form W-8B, or successor form, claiming an exemption from or reduction in withholding under the applicable tax treaty. If dividends are considered effectively connected with the conduct of a trade or business by you within the United States and, where a tax treaty applies, are attributable to a United States permanent establishment of yours, those dividends will not be subject to withholding tax, but instead will be subject to United States federal income tax on a net basis at applicable graduated individual or corporate rates, provided an IRS Form W-8ECI, or successor form, is filed with the payor. If you are a foreign corporation, any effectively connected dividends may, under certain circumstances, be subject to an additional branch profits tax at a rate of 30% or a lower rate as may be specified by an applicable income tax treaty. Unless the payor has knowledge to the contrary, dividends paid prior to January 1, 2001 to an address outside the United States are presumed to be paid to a resident of such country for purposes of the withholding discussed above and for purposes of determining the applicability of a tax treaty rate. However, recently finalized Treasury Regulations pertaining to United States federal withholding tax provide that you must comply with certification procedures, or, in the case of payments made outside the United States with respect to an offshore account, certain documentary evidence procedures, directly or under certain circumstances through an intermediary, to obtain the benefits of a reduced rate under an income tax treaty with respect to dividends paid after December 31, 2000. In addition, these regulations will require you, if you provide an IRS Form W-8ECI or successor form, as discussed above, to also provide your identification number. If you are eligible for a reduced rate of United States withholding tax pursuant to an income tax treaty, you may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS. Gain on Disposition of Common Stock As a non-United States Holder, you generally will not be subject to United States federal income tax on any gain recognized on the sale or other disposition of common stock unless: (1) the gain is considered effectively connected with the conduct of a trade or business by you within the United States and, where a tax treaty applies, is attributable to a United States permanent establishment of yours (and, in which case, if you are a foreign corporation, you may be subject to an additional branch profits tax equal to 30% or a lower rate as may be specified by an applicable income tax treaty); (2) you are an individual who holds the common stock as a capital asset and are present in the United States for 183 or more days in the taxable year of the sale or other disposition and other conditions are met; or (3) we are or have been a United States real property holding corporation, or a USRPHC, for United States federal income tax purposes. We believe that we are not currently, and are likely not to become, a USRPHC. If we were to become a USRPHC, then gain on the sale or other disposition of common stock by you generally would not be subject to United States federal income tax provided: the common stock was regularly traded on an established securities market; and you do not actually or constructively own more than 5% of the common stock during the shorter of the five-year period preceding the disposition or your holding period. Federal Estate Tax If you are an individual, common stock held at the time of your death will be included in your gross estate for United States federal estate tax purposes, and may be subject to United States federal estate tax, unless an applicable estate tax treaty provides otherwise. Information Reporting and Backup Withholding Tax We must report annually to the IRS and to each of you the amount of dividends paid to you and the tax withheld with respect to those dividends, regardless of whether withholding was required. Copies of the information returns reporting those dividends and withholding may also be made available to the tax authorities in the country in which you reside under the provisions of an applicable income tax treaty or other applicable agreements. Backup withholding is generally imposed at the rate of 31% on certain payments to persons that fail to furnish the necessary identifying information to the payer. Backup withholding generally will not apply to dividends paid prior to January 1, 2001 to a Non-United States Holder at an address outside the United States, unless the payor has knowledge that the payee is a United States person. In the case of dividends paid after December 31, 2000, the recently finalized Treasury Regulations provide that you generally will be subject to withholding tax at a 31% rate unless you certify your non-United States status. The payment of proceeds of a sale of common stock effected by or through a United States office of a broker is subject to both backup withholding and information reporting unless you provide the payor with your name and address and you certify your non-United States status or you otherwise establish an exemption. In general, backup withholding and information reporting will not apply to the payment of the proceeds of a sale of common stock by or through a foreign office of a broker. If, however, such broker is, for United States federal income tax purposes, a United States person, a controlled foreign corporation, or a foreign person that derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States, or, in addition, for periods after December 31, 2000, a foreign partnership that at any time during its tax year either is engaged in the conduct of a trade or business in the United States or has as partners one or more United States persons that, in the aggregate, hold more than 50% of the income or capital interest in the partnership, such payments will be subject to information reporting, but not backup withholding, unless such broker has documentary evidence in its records that you are a non-United States Holder and certain other conditions are met or you otherwise establish an exemption. Any amounts withheld under the backup withholding rules generally will be allowed as a refund or a credit against your United States federal income tax liability provided the required information is furnished in a timely manner to the IRS. UNDERWRITING Subject to the terms and conditions stated in the underwriting agreement dated the date of this prospectus, each of the underwriters named below has severally agreed to purchase, and we have agreed to sell to each underwriter, the number of shares set forth opposite the name of that underwriter. Underwriter * Filed herewith. To be filed by amendment. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE OF INSESSION TECHNOLOGIES, INC. To Insession Technologies, Inc.: We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of Insession Technologies, Inc. included in this registration statement and have issued our report thereon dated May 16, 2000. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule of Insession Technologies, Inc. listed in the index above is the responsibility of the Company s management and is presented for purposes of complying with the Securities and Exchange Commission s rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Omaha, Nebraska, May 16, 2000 SCHEDULE SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 Insession Technologies, Inc. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 7372 (Primary Standard Industrial Classification Code Number) 47-0830767 (I.R.S. Employer Identification Number) Insession Technologies, Inc. 907 North Elm Street Hinsdale, Illinois 60521 (630) 789-2881 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Tax expense at federal rate of 35% $666 $2,092 $1,369 $1,226 Effective state income tax 62 195 291 275 Amortization of intangibles 614 752 Other 4 6 9 Anthony J. Parkinson, President and Chief Executive Officer Insession Technologies, Inc. 907 North Elm Street Hinsdale, Illinois 60521 (630) 789-2881 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copy to: Daniel W. Rabun Baker & McKenzie 2300 Trammel Crow Center 2001 Ross Avenue Dallas, Texas 75201 (214) 978-3000 Raymond B. Check Cleary, Gottlieb, Steen & Hamilton One Liberty Plaza New York, New York 10006-1470 (212) 225-2000 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. CALCULATION OF REGISTRATION FEE Cash flows from financing activities: Proceeds from issuance of demand note payable 2,100 1,500 Proceeds from sale of stock and receipt of subscription receivables, net 160 12 Net cash provided by financing activities 2,260 1,512 Title of each class of securities to be registered Proposed Maximum Aggregate Offering Price (1)(2) Amount of Registration Fee Common Stock, $.01 par value $70,000,000 $18,480 Options to acquire Common Stock(3) (1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) promulgated under the Securities Act of 1933, as amended. (2) Includes shares of common stock that the underwriters have the option to purchase from Insession Technologies, Inc. to cover over-allotments, if any. (3) Insession Technologies, Inc. is offering to its employees the right to acquire shares of common stock. Under certain circumstances, employees purchasing shares of common stock will also receive options to acquire common stock under the Insession Technologies, Inc. Concurrent Offering Stock Plan. No separate filing fee is being made with respect to these options since no additional consideration is being paid for the options. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a). Income (loss) before income taxes (3,602 ) (2,908 ) Balance at June 30, 1998 97,000 240,625 1,078,064 1 6,214 (43 ) (55,746 ) (123 ) (341 ) (9,213 ) (3,504 ) Exercise of stock options 3,660 8 8 Amortization of deferred compensation 90 90 Net income 14 EXPLANATORY NOTE This registration statement contains two forms of prospectus: (1) a prospectus to be used in connection with an underwritten offering of common stock to the public and (2) a prospectus to be used in connection with a concurrent offering of common stock and options to purchase common stock to employees of Insession Technologies, Inc. The prospectus for the underwritten offering and the concurrent offering will be identical in all respects except for the front cover page, the section entitled Legal Matters, the section entitled Underwriting which in the prospectus for the concurrent offering will be replaced with a section entitled Plan of Distribution and the back cover page. In addition, a description of the concurrent offering and our Concurrent Offering Stock Plan will be added to the prospectus for the concurrent offering as an appendix. The front cover page, the sections entitled Legal Matters and Plan of Distribution, and the back cover page for the concurrent offering prospectus and the appendix to the concurrent offering prospectus included in this registration statement are labeled Alternate Concurrent Offering Page. The form of prospectus for the underwritten offering is included in this registration statement and the alternate pages for the concurrent offering prospectus follow the underwritten prospectus. SUBJECT TO COMPLETION, DATED JUNE 2, 2000 PROSPECTUS Shares Insession Technologies, Inc. Common Stock Revenues: Software license and maintenance fees $31,418 $6,106 $(5,512 )(a) $32,012 Services 8,166 Revenues: Software license and maintenance fees $16,591 $6,106 $(5,436 )(a) $17,261 Services 4,321 Insession Technologies, Inc. is selling shares of its common stock. The underwriters named in this prospectus may purchase up to additional shares of common stock from Insession to cover over-allotments. This is the initial public offering of our common stock. Insession currently expects the initial public offering price to be between $ and $ per share and will apply to have the common stock included for quotation on the Nasdaq National Market under the symbol INSX. Investing in our common stock involves risks. See Risk Factors beginning on page 7. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Internally developed software $1,706 $ 1,979 $ 1,979 Purchased software Per Share Total Initial Public Offering Price $ $ Underwriting Discount $ $ Proceeds to Insession (before expenses) $ $ The underwriters are offering the shares subject to various conditions. The underwriters expect to deliver the shares to purchasers on or about , 2000. Salomon Smith Barney William Blair & Company The Robinson-Humphrey Company , 2000 The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. [Description of Inside Cover Graphics:] The Insession logo appears in the upper left hand corner. The Insession logo is represented by a 3-dimensional gear tilted to the right. The gear is to the left of the words Insession Technologies. The following text appears in the upper right hand corner: Providing electronic infrastructure software and services for business-critical systems worldwide. A large image of a globe is in the center of the page. On top of the global image is the following diagram: The Insession logo gear is slightly off center to the right. The following text appears under the logo: Insession s Suite of Software Products and Services. Enterprise connectivity Data replication and movement Monitoring and management Business-critical middleware Business process automation Services Extending to the right of the Insession gear are 4 lines that connect to individual 3-dimensional computer icons. The heading above the icons reads: Business-Critical Systems for Banking, Telecommunications, Securities, Other Financial Services, Retail, Health Care and other industries. Above each of the icons is a caption identifying the hardware platform represented. The captions, in clockwise order, read: Mainframes, Mid-range systems, Fault-tolerant systems and PC-based systems. Extending to the left of the Insession gear is a single line. Along that line is a 3-dimensional globe with 4 arrows circling it. Above the globe the text reads: Private Networks Public Networks At the end of the line to the left of the 3-dimensional globe is a cluster of three 3-dimensional computer monitors. Under the monitors is the following text: Customers Partners Employees At the bottom of the page is the following text: Insession s infrastructure solutions facilitate communication, data movement, systems monitoring and process automation across incompatible computing systems where continuous availability is vital to our customers operations. To the left of the text is the Insession gear logo. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. TABLE OF CONTENTS Page In this prospectus, Insession, the company, we, us and our each refers to Insession Technologies, Inc. and its subsidiaries. TSA refers to Transaction Systems Architects, Inc. and its subsidiaries. ACI Worldwide refers to ACI Worldwide, Inc., which is a subsidiary of TSA. Most of TSA s business operations are conducted through ACI Worldwide. Until , 2000, all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. Insession, ENGUARD, TransFuse and WorkPoint are registered trademarks and the Insession logo is a trademark of Insession. This prospectus also includes trademarks owned by other parties. PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before deciding to invest in our common stock. We urge you to read this entire prospectus carefully, including the Risk Factors section and the consolidated financial statements and related notes included elsewhere in this prospectus. Insession Technologies, Inc. Our Business We provide electronic business infrastructure software and services for critical business applications. Electronic business, or eBusiness, refers to the movement of business data or financial information and the processing of transactions electronically over public and private networks. Our infrastructure software facilitates communication, data movement, systems monitoring and process automation across incompatible computing systems involving mainframes, distributed computing networks and, more recently, the Internet. We enable our customers to deploy new eBusiness services while preserving their investments in their legacy mainframe systems. Our focus is on business-critical systems, which are those systems required to conduct the fundamental business operations of an enterprise reliably and continuously. We began licensing our software in 1991 and currently have over 340 customers worldwide for our software products and services. Our target customers include large and medium-sized banking, telecommunications, securities, other financial services, retail and health care companies for whom the ability to process high volumes of online transactions reliably and continuously is critical. Our customers include Bank of America Corp., The Pacific Stock Exchange, SBC Communications Inc., MBNA Corp., Dayton Hudson Corporation and Kaiser Permanente. Market Opportunity The Internet and other new technologies are dramatically increasing the complexity of computing environments. These environments typically are comprised of a variety of incompatible computer systems and software applications. Many of these systems and applications cannot communicate directly with each other because they use different sets of rules for communication, operate on different computing platforms and may use different data storage formats. As companies increasingly adopt eBusiness models, they must link legacy hardware, applications and data with new technologies. In response to these challenges, the market for software that integrates new technologies with legacy systems and provides tools to manage business processes has emerged. International Data Corporation, an information technology research firm, has defined middleware and businessware software as system software that is used to share computing resources across heterogeneous technologies. International Data Corporation estimated the worldwide market for middleware and businessware software at $2.2 billion in 1998 and projects that it will grow to $11.6 billion in 2003. This represents a compound annual growth rate of 40%. Our Solution Our solution is comprised of a suite of software products and services that address the following areas: Enterprise connectivity. Our connectivity software products link incompatible computing systems involving mainframes, distributed computing networks and the Internet for business-critical applications. Data replication and movement. Our data replication software product duplicates and moves data between systems efficiently and reliably. Monitoring and management. Our monitoring and management software continuously monitors business-critical systems and applications for problems or other user-designated events, and provides utilities that assist with development, testing and database administration. Business-critical middleware. Our middleware product provides a framework for developing online business applications. Business process automation. Our business process automation software enables our customers to model, automate and manage business processes within their enterprises and with their suppliers, customers and other business partners. Services. We offer our customers an established service organization to install our software products and integrate them with existing hardware and applications. In addition, we offer a range of analysis, design, development, implementation, integration and training services focused on business-critical systems. We believe that our solutions improve the service levels of our customers and reduce the overall cost of deploying and operating business-critical applications by providing the following benefits: Preservation of legacy systems investment. Our solutions allow our customers to connect their legacy systems to new eBusiness applications without the need to replace or re-engineer their existing systems. Continuous availability. We believe our customers benefit from our extensive experience in transaction processing environments where reliability and continuous availability are vital. Scalability. Our software products are designed to support rapid growth in transaction volumes without requiring substantial modification of systems connections. High-volume operation. Our software products are designed for high-volume transaction processing environments and have been operating for many years in banks and other financial institutions where daily transaction volumes are in the millions. Our Business Strategy Our objective is to be a global leader in providing eBusiness infrastructure software and services. Key elements of our strategy to achieve this objective are to: Focus on the business-critical segment of the eBusiness infrastructure software market. We believe that the market for software and services that enable companies to integrate their systems, applications and processes electronically will grow. We will continue to focus on the business-critical segment of this market where continuous availability at high transaction volumes is vital to our customers operations. Maintain our technology leadership. We intend to use our technical expertise to develop new infrastructure software solutions and continually upgrade our existing products to maintain and enhance our competitive position. Expand our worldwide direct sales organization. We will continue to hire new personnel to increase our penetration of a variety of industry markets, and to increase sales of our products and services in markets outside the United States. Offer additional products and services to our existing customer base. Over 340 customers around the world currently use our software products and services. As we add new products and services, we intend to aggressively market these new offerings to our existing customers. Pursue strategic alliances. To broaden the market for our products, we intend to enter into strategic relationships with leading third-party systems integrators and technology providers. In addition, we intend to enter into relationships with providers whose technologies and application-specific expertise complement our products. Acquire new product technologies. In order to supplement our internal research and development efforts, we intend to obtain technologies and products through acquisitions. We will also identify technologies and products that we can license from third parties and distribute through our direct sales organization. For the six months ended March 31, 2000, revenues from products sold for third parties accounted for 11.9% of our total revenues. Other Information We are currently a wholly-owned subsidiary of TSA. Our business began in 1986 with the formation of Grapevine Systems, Inc. TSA acquired Grapevine Systems, Inc. in 1996. In 1999, TSA acquired Insession Inc., which was formed in 1991. Prior to the acquisition of Insession Inc., TSA had distributed Insession Inc. s primary product. TSA acquired WorkPoint Systems, Inc. in April 2000. We were incorporated in Delaware in March 2000. TSA will contribute the Grapevine, Insession and WorkPoint businesses and other assets to us prior to the consummation of offering. Concurrent Offering Concurrently with our underwritten public offering, we are offering directly to our employees shares of our common stock and options to purchase an additional shares of our common stock. The sales of common stock and options directly to our employees are subject to the terms and conditions of the Insession Technologies, Inc. Concurrent Offering Stock Plan and related purchase and stock option agreements. See Management Concurrent Offering of Restricted Stock. The Offerings Common stock offered by Insession in the underwritten offering to the public shares Common stock offered by Insession in the concurrent offering to our employees shares Common stock of Insession to be outstanding immediately after the offerings, assuming the concurrent offering to employees is fully subscribed shares Common stock of Insession to be held by TSA immediately after the offering shares Use of proceeds We estimate that we will receive net proceeds from the offering and the concurrent offering of approximately $ million based on an assumed initial public offering price of $ per share, the midpoint of the range described on the cover of this prospectus. We intend to use a portion of the net proceeds to repay approximately $7.2 million of indebtedness under promissory notes due to TSA and approximately $9.0 million of TSA s bank indebtedness assumed by us. We intend to use some of the net proceeds for general working capital purposes. In addition, we may use a portion of the net proceeds for acquisitions of businesses, products and technologies that are complementary to ours. See Use of Proceeds. Proposed Nasdaq National Market symbol INSX Unless we specifically state otherwise, the information in this prospectus does not take into account the issuance of up to shares of common stock which the underwriters have the option to purchase solely to cover over-allotments. If the underwriters exercise their over-allotment option in full, shares of common stock will be outstanding after the offerings. The number of shares of our common stock to be outstanding immediately after the offerings does not take into account an estimated shares of our common stock that will be issuable upon exercise by our employees and directors, and by employees of TSA, of stock options that we expect to grant concurrently with the offerings and additional shares of our common stock that will be reserved for issuance under our stock incentive plans. The actual number of options will be determined at the time of the offerings. For a discussion of these stock options, see Management. Our Relationship with TSA We are currently a wholly-owned subsidiary of TSA. After the completion of this offering and the concurrent offering, TSA will own approximately 81.9% of the outstanding shares of our common stock, or approximately 80.1% if the underwriters fully exercise their over-allotment option. Until TSA holds less than 50% of the voting power of our common stock, TSA will be able to control the vote on all matters submitted to stockholders, including the election of directors and the approval of extraordinary corporate transactions, such as mergers. TSA currently plans to complete its divestiture of Insession within 12 months following this offering by distributing all of TSA s shares of Insession to its stockholders. However, TSA is not obligated to complete the distribution or otherwise divest its shares of Insession common stock, and the distribution or other divestiture may not occur by the anticipated time or at all. TSA will, in its sole discretion, determine the timing, structure and all terms of its distribution to TSA s stockholders or any other divestiture of our common stock that it owns. TSA s distribution is subject to receiving a private letter ruling from the Internal Revenue Service that the distribution of its shares of Insession common stock to TSA stockholders will be tax-free to TSA and its stockholders for United States federal income tax purposes. TSA may elect to divest its shares of Insession common stock through means other than a distribution, whether through public or private sales, or otherwise. Prior to the completion of this offering, we will enter into agreements with TSA that provide for our separation from TSA and other provisions applicable to the distribution, if any, of TSA s shares of Insession common stock to TSA s stockholders. These agreements provide for, among other things: the transfer from TSA to us of assets and the assumption by us of liabilities relating to our business; and various interim and ongoing relationships between us and TSA. All of the agreements providing for our separation from TSA were prepared in the context of a parent-subsidiary relationship and the terms were determined in the overall context of our separation from TSA. The terms of these agreements may be more or less favorable to us than if they had been negotiated with unaffiliated third parties. See Our Relationship with TSA Arrangements with TSA and Risk Factors Risks Related to Our Separation from TSA. Our principal executive offices are located at 907 North Elm Street, Hinsdale, Illinois 60521, and our telephone number is (630) 789-2881. Summary Historical and Pro Forma Consolidated Financial Data The following summary historical and pro forma consolidated financial and operating data should be read together with Management s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes included elsewhere in this prospectus. You should also read Risk Factors Our historical financial information may not be representative of our results as a separate company. The consolidated statements of income data for each of the three years in the period ended September 30, 1999 and for the six months ended March 31, 2000, and the consolidated balance sheet data at March 31, 2000, have been derived from the consolidated financial statements and related notes audited by Arthur Andersen LLP, independent public accountants. The consolidated statements of income data for the six months ended March 31, 1999, and the consolidated other data are unaudited and are based on our and TSA s accounting records which, in management s opinion, include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of our financial data for the periods. The pro forma 1999 financial data presented represents the unaudited pro forma results of operations for fiscal 1999 and for the six months ended March 31, 1999 as if the Insession Inc. acquisition had occurred as of October 1, 1998. See note 3 to the consolidated financial statements of Insession Technologies, Inc. included elsewhere in the prospectus. The financial information presented below may not be indicative of our future performance and does not necessarily reflect what our results of operations or financial position would have been had we operated as a separate, stand-alone entity during the periods presented. Year Ended September 30, Six Months Ended March 31, Balance, beginning of period $50 $ 59 $151 $244 Additions charged to expense 9 92 270 June Sept. June Sept. June Sept. June Sept. Dec. March Dec. March Dec. March Dec. March Dec. March Dec. March (unaudited) (unaudited) (unaudited) (in thousands) Consolidated Statements of Income Data: Revenues: Software license and maintenance fees (1) $13,413 $24,973 $31,418 $32,012 $16,591 $17,261 $19,142 Services 6,521 8,027 8,166 8,182 4,321 4,337 2,705 Total revenues 19,934 33,000 39,584 40,194 20,912 21,598 21,847 Total expenses 18,030 27,022 34,893 37,207 18,598 20,912 18,170 8. Commitments and Contingencies Operating Leases Under the Plan, the Company will be assuming operating leases for office space and equipment that run through March 2005. Aggregate minimum lease payments under these agreements for the years ending September 30, 2000-2005 are as follows (in thousands): 2000 $ 634 2001 620 2002 450 2003 125 2004 116 2005 Other income (expense): Interest income 54 54 86 Interest expense to related party (308 ) (497 ) (45 ) (234 ) (260 ) Minority interest in net income (526 ) (175 ) Deferred assets (liabilities): Acquired software $ $(4,753 ) $(3,770 ) Depreciation (38 ) 71 Total other (780 ) (443 ) (220 ) (234 ) (174 ) Income before income taxes 1,904 5,978 3,911 2,544 2,094 452 3,503 Provision for income taxes (732 ) (2,293 ) (2,283 ) (2,552 ) (1,222 ) (1,121 ) (2,258 ) (unaudited) Revenue: Software license and maintenance fees $ 8,725 $ 5,303 $9,001 Services 74 50 Net income (loss) $ 1,172 $ 3,685 $ 1,628 $ (8 ) $ 872 $ (669 ) $ 1,245 Year Ended September 30, Six Months Ended March 31, Income (loss) before income taxes 2,094 107 (1,749 ) 452 Provision for income taxes (1,222 ) Consolidated Balance Sheet Data: Actual Pro Forma Pro Forma As Adjusted (in thousands) Working capital (deficit) $ (7,215 ) $(16,215 ) $ Total assets 59,921 59,921 Total debt 7,168 16,168 Total stockholders equity 35,952 26,952 Actual Pro Forma Pro Forma As Adjusted (in thousands) Debt: Due to affiliated company $ 7,168 $ 7,168 $ TSA bank indebtedness assumed by us 9,000 Total debt 7,168 16,168 Stockholders equity: Common stock, $0.01 par value, 150,000,000 shares authorized, 100 shares issued and outstanding actual; shares issued and outstanding on a pro forma as adjusted basis Preferred stock, $0.01 par value, 25,000,000 shares authorized, no shares issued and outstanding Parent company investment 35,952 Additional paid-in capital Total stockholders equity 35,952 26,952 Total capitalization $43,120 $43,120 $ This table excludes shares of common stock issuable upon the exercise of stock options available for issuance under these plans. You should read the information described above together with Management s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes included elsewhere in this prospectus. DILUTION Our net tangible book value as of March 31, 2000 was approximately $(10.8) million. Pro forma net tangible book value per share is equal to our net tangible book value after giving effect to our assumption of approximately $9.0 million of TSA s bank indebtedness, divided by the total number of shares of common stock outstanding on a fully-diluted basis. After giving effect to the sale of shares of common stock in this offering and the concurrent offering after deducting underwriting discounts and commissions and estimated offering expenses, assuming an initial public offering price of $ per share and the application of the net proceeds as described under Use of Proceeds, our pro forma as adjusted net tangible book value as of March 31, 2000 would have been approximately $ million, or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to our existing stockholder and an immediate dilution of $ per share to new investors purchasing common stock in the underwritten offering. The following table illustrates this dilution on a per share basis: Initial public offering price per share $ Pro forma net tangible book value per share at March 31, 2000 Increase in pro forma net tangible book value per share attributable to new investors Pro forma as adjusted net tangible book value per share after the offering and the concurrent offering Dilution per share to new investors in the underwritten offering $ Concurrently with this offering, we are granting stock options to our employees and employees of TSA under our Concurrent Offering Stock Plan. For further information, see Management Concurrent Offering Stock Plan. Approximately shares of common stock will be issuable upon the exercise of these options at an exercise price per share equal to the public offering price. After this offering, we may also grant options under the 2000 Incentive Plan. See Management 2000 Incentive Plan. In addition, in connection with TSA s distribution of its shares of our common stock to its stockholders, we will grant options to holders of TSA stock options under the Stock Option Plan for Conversion of TSA Options. See Management Treatment of Existing TSA Options. The exercise of these or other stock options could result in dilution to you. The information in this section and the above table assumes: no exercise of any options; no exercise of the underwriters over-allotment option; and prior to the consummation of the offering, the issuance of shares of our common stock to TSA in consideration for TSA s contribution to us of the businesses of Grapevine Systems, Inc., Insession Inc. and WorkPoint Systems, Inc. and other assets and liabilities. For more information, see Management s Discussion and Analysis of Financial Condition and Results of Operations Overview. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read together with Management s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes included elsewhere in this prospectus. You should also read
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001114973_advanced_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001114973_advanced_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE INFORMATION DISCUSSED UNDER "RISK FACTORS." THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO YOU. ADVANCED POWER TECHNOLOGY, INC. We are a leading designer, manufacturer and marketer of high-performance power semiconductors. Power semiconductors manage and regulate power by converting electricity into a form required by electrical and electronic products. Our power semiconductors increase system efficiency, permit the design of more compact end products and improve features and functionality. We are primarily focused on the high power, high frequency segment of the power semiconductor market. High power refers to the ability to handle voltages and currents above one kilowatt, and high frequency refers to the ability to switch on and off at speeds above 100 kilohertz. Kilohertz means 1,000 cycles per second. We sold our products in 1999 to over 750 customers primarily in North America and Europe, with increasing sales in Asia, through a network of independent sales representatives and distributors. The principal end-user markets for our products are communications and internet infrastructure, semiconductor capital equipment, industrial, medical, and military and aerospace. Our largest volume original equipment manufacturer, or OEM, customers include Advanced Energy Industries, Power-One and Siemens. Our leading distributor is Richardson Electronics. Our products are typically critical to the performance of our customers' products. We therefore work very closely with our customers in the design phase of their products to ensure we can meet their performance requirements. Once our products are designed into end products, they tend to be used through the lifecycle of these end products. We have secured recent design wins, in which our products were selected for inclusion in new OEM products, with industry leaders such as Ericsson and IBM. The demand for high power, high frequency semiconductors is expanding as a result of the rapid proliferation of sophisticated electronics and the increasing need for higher power and more precisely regulated power quality in electronic equipment. The primary markets we serve are characterized by rapid technological development and increasing complexity. The following are the key trends in our primary markets: - Convergence of voice, video and data transmission and proliferation of wireless systems; - Growing demand for semiconductor capital equipment; and - Emergence of new applications for high power, high frequency semiconductors. Our products, which are based on our proprietary technology, offer performance advantages directly addressing the needs arising from these market trends. Based on our own testing, which has not been independently verified, we believe our products operate more efficiently and at higher frequencies than competing products. Our goal is to be a world leader in providing leading-edge semiconductor solutions for high power, high frequency applications. To accomplish this goal, our strategy is to: - Maintain our technological leadership within the high power, high frequency market; - Build on our relationships with customers in expanding markets; - Expand our product offering for radio frequency, or RF, applications; - Optimize utilization of our external and internal manufacturing capabilities; and - Pursue external growth opportunities. We were founded in 1984 and incorporated in Delaware in 1992. Our executive offices are located at 405 SW Columbia Street, Bend, Oregon 97702, and our telephone number is (541) 382-8028. Our website is at www.advancedpower.com. The information found on our website is not a part of this prospectus. THE OFFERING The following information assumes that the underwriters do not exercise the option that we and one of the selling stockholders granted to them to purchase additional shares in the offering. <TABLE> <S> <C> Common stock offered by us................... 2,400,000 shares Common stock offered by selling stockholders............................... 1,100,000 shares Common stock to be outstanding after the offering................................... 7,851,234 shares Use of proceeds.............................. To repay debt, to fund capital improvements and for general corporate purposes, including research and development and possible acquisitions. Proposed Nasdaq National Market symbol....... APTI </TABLE> The number of shares outstanding after the offering includes 450,714 shares of common stock we expect to be issued upon exercise of warrants held by Advanced Energy Industries, based on an assumed initial public offering price of $14.00 per share. See "Principal and Selling Stockholders." As of June 30, 2000, the number of shares of common stock to be outstanding after the offering does not include 956,597 shares of common stock issuable upon exercise of stock options issued under our 1995 Stock Option Plan at a weighted average exercise price of $1.49 per share, 152,858 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $1.40 per share and 542,883 shares of common stock reserved for issuance under our 1995 Stock Option Plan. SUMMARY CONSOLIDATED FINANCIAL DATA When you read this summary consolidated financial data, it is important that you read along with it the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus. Historical results are not necessarily indicative of future results. <TABLE> <CAPTION> PREDECESSOR COMPANY(1) APT(1) ----------- ----------------------------------------- SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, --------------------------------- ------------------- 1997 1998 1999 1999 2000 ----------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues, net.............................. $25,732 $24,851 $27,461 $12,438 $19,641 Gross profit............................... 8,452 6,412 9,461 4,174 7,128 Income (loss) from operations.............. 294 (1,625) 1,256 213 2,047 Net income (loss).......................... (379) (1,656) (175) (467) 494 Net income (loss) per share (2): Basic.................................... $ (0.08) $ (0.33) $ (0.04) $ (0.09) $ 0.10 Diluted.................................. $ (0.08) $ (0.33) $ (0.04) $ (0.09) $ 0.08 Shares used in per share calculations (2): Basic.................................... 5,000 5,000 5,000 5,000 5,001 Diluted.................................. 5,000 5,000 5,000 5,000 6,324 OTHER CONSOLIDATED FINANCIAL DATA: Gross margin............................... 32.8% 25.8% 34.5% 33.6% 36.3% Adjusted EBITDA (3)........................ $ 2,233 $ 611 $ 3,075 $ 1,304 $ 2,879 Adjusted EBITDA margin (4)................. 8.7% 2.5% 11.2% 10.5% 14.7% Cash flows from (used in): Operating activities..................... $ 1,748 $ 359 $ 1,654 $ 428 $ 576 Investing activities..................... (799) (614) (594) (126) (1,409) Financing activities..................... (1,059) (7) (789) (337) 640 </TABLE> <TABLE> <CAPTION> JUNE 30, 2000 ------------------------------------------- PRO FORMA ACTUAL PRO FORMA(5) AS ADJUSTED(6) ----------- ------------ -------------- (IN THOUSANDS) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents........................... $ 117 $ 117 $22,555 Working capital..................................... (241) (241) 30,128 Total assets........................................ 17,383 17,383 39,821 Total debt.......................................... 11,946 11,946 277 Total stockholders' equity (deficit)................ (1,352) (1,352) 32,755 </TABLE> ------------------------ (1) In September 1995, our six senior officers purchased a controlling 51% interest in APT, of which approximately $3.3 million was funded with a note payable to Hamilton Sundstrand, the seller. In January 1998, these same officers purchased the remaining interest in APT, of which $3.0 million was funded with a note payable to APT. In accordance with purchase accounting and push down accounting rules, we were required to establish a new cost basis for our assets and liabilities in January 1998 based on these purchase transactions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Effects of Push Down Accounting."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001114999_radview_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001114999_radview_prospectus_summary.txt
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION IN THIS PROSPECTUS, INCLUDING RISK FACTORS, REGARDING OUR COMPANY AND THE ORDINARY SHARES BEING SOLD IN THIS OFFERING. RADVIEW SOFTWARE We provide innovative software that enables companies to verify the performance of their business-critical web applications--the software programs that enable companies to conduct e-business. Our award-winning, internet-based software is a comprehensive solution that efficiently simulates internet operating conditions and effectively analyzes, interprets and reports on the performance of web applications. Our software enables companies to ensure the development of high-performance web applications and to accelerate the deployment of applications that are essential to the success of their e-business strategies. The internet is fundamentally changing the way companies conduct business, as it is being used to sell goods and services, interact with customers, suppliers and partners, and communicate with employees. Forrester Research estimates that e-business will grow from approximately $657 billion in 2000 to approximately $6.8 trillion in 2004. As companies continue to capitalize on e-business opportunities, they become highly reliant on the performance of their web applications. If web applications perform poorly or fail, the resulting financial and business costs can be substantial, including lost revenue, customer defections, business interruptions and damaged reputation. In today's competitive e-business environment, companies must be able to rapidly deploy web applications. However, the rapid deployment of high performance applications presents many challenges including meeting time-to-market pressures, managing technological complexity, providing non-stop operation and ensuring internet scalability. We believe that the continued expansion of e-business and companies' increasing dependence on their web applications create a significant market opportunity for solutions that assure the performance of applications and facilitate their rapid deployment. Our software products, WebLoad, introduced in 1997, and WebLoad Resource Manager, introduced in February 2000, are based on internet standards and comprehensively assess the performance of web applications. Our software enables companies to quickly identify and resolve application errors and to accelerate the successful deployment of their web applications. Our products include: - WebLoad: provides an integrated solution that simultaneously verifies the scalability, efficiency and reliability of web applications by effectively simulating internet operating conditions. - WebLoad Resource Manager: facilitates web application quality by extending a comprehensive performance solution to all points within the application development lifecycle. Our objective is to be the leading provider of software solutions that enable companies to successfully implement their e-business strategies by assuring the performance of their business-critical web applications, and facilitating their accelerated deployment. We plan to extend our product leadership, expand our sales operations, develop additional strategic relationships and leverage our customer base. We also intend to target additional market opportunities, such as the increasing trend for wireless access to web applications, and partnering with additional internet hosting companies. We primarily sell our software through a direct sales force in North America and Europe and, to a lesser extent, through indirect distribution channels. We have over 500 customers worldwide, including American Express, Bowstreet, Compaq, Dell Computer, EarthLink, eBay, Fidelity Investments, Harvard University, Hewlett-Packard, Lucent Technologies, NCR, Phone.com, Reynolds & Reynolds, Sun Microsystems and Vanguard. We have experienced net losses of $2.7 million for 1999 and $1.1 million for the first quarter of 2000 and we have an accumulated deficit of approximately $14.1 million as of March 31, 2000. THE OFFERING <TABLE> <S> <C> Ordinary shares offered in this offering........... 5,000,000 shares Ordinary shares to be outstanding after this 17,366,572 shares offering......................................... Use of proceeds.................................... We expect to use the net proceeds from this offering to finance the continued growth of our business and general corporate purposes and to repay indebtedness. Proposed Nasdaq National Market symbol............. RDVW </TABLE> Unless otherwise indicated, the number of ordinary shares to be outstanding after this offering includes: - 6,239,740 ordinary shares outstanding as of July 31, 2000; - 5,265,575 ordinary shares to be issued upon the closing of this offering upon the automatic conversion of all of our outstanding preferred shares into ordinary shares; - 142,857 ordinary shares to be issued upon the exercise of an outstanding warrant at the closing of this offering; - 459,900 ordinary shares to be issued upon the exercise of outstanding options at the closing of this offering; and - 258,500 ordinary shares to be issued to certain of our shareholders upon the closing of this offering. Unless otherwise indicated, the number of ordinary shares to be outstanding after this offering excludes: - any exercise of the underwriters' over-allotment option; - 3,209,389 ordinary shares issuable as of July 31, 2000 upon the exercise of outstanding options under our share option plans at a weighted average exercise price of $1.78 per share; and - 646,833 ordinary shares reserved for future issuance under our share option plans. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table summarizes our historical financial information. This information should be read in conjunction with the financial statements and the notes thereto appearing elsewhere in this prospectus. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The pro forma basic and diluted net loss per ordinary share with respect to the consolidated statement of operations has been calculated assuming: - 5,265,575 ordinary shares to be issued upon the closing of this offering upon the automatic conversion of all of our outstanding preferred shares into ordinary shares; - 142,857 ordinary shares to be issued upon the exercise of an outstanding warrant at an exercise price of $2.10 per share at the closing of this offering; - 933,800 ordinary shares issued through the exercise of options July 2000 at an exercise price of NIS 0.01 per share by certain shareholders; - 459,900 ordinary shares to be issued upon the exercise of outstanding options at the closing of this offering at an exercise price of NIS 0.01 per share held by certain shareholders; - 656,300 ordinary shares issued through the exercise of options in June 2000; - 391,100 ordinary shares issued through the exercise of options in July 2000; and - 258,500 ordinary shares to be issued to certain shareholders upon the closing of this offering. In addition, the consolidated balance sheet data, on a pro forma as adjusted basis, has been calculated assuming all of the foregoing, as well as our sale of 5,000,000 ordinary shares in this offering at an assumed public offering price of $11.00 per share, after deducting the estimated underwriting discounts and commissions and offering expenses payable by us and giving effect to the repayment of a term loan. <TABLE> <CAPTION> THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------------ ------------------- 1997 1998 1999 1999 2000 <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues: Software licenses............................ $ 246 $ 914 $ 4,701 $ 589 $ 1,932 Services..................................... 8 52 409 39 334 ------- ------- ------- ------ ------- Total revenues............................. 254 966 5,110 628 2,266 Gross profit................................... 234 885 4,703 566 2,061 Loss from operations........................... (2,877) (2,580) (2,401) (455) (992) Net loss....................................... (3,005) (2,715) (2,741) (573) (1,050) Pro forma basic and diluted net loss per ordinary share............................... $ (0.35) $ (0.09) Weighted average number of ordinary shares used in computing pro forma basic and diluted net loss per ordinary share...................... 7,784 11,887 </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, 2000 ----------------------- PRO FORMA ACTUAL AS ADJUSTED <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments......... $ 7,001 $51,114 Working capital........................................... 5,475 49,842 Total assets.............................................. 10,097 54,210 Long-term debt, less current portion...................... 3,587 -- Related party loan, less current portion.................. 1,128 -- Total shareholders' equity................................ 2,017 51,099 </TABLE> RECENT FINANCIAL DEVELOPMENTS For the second quarter of 2000, our total revenues were $2.7 million, of which $2.3 million were software license revenues and $376,000 were service revenues, and our operating loss was $2.0 million.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001115369_propel-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001115369_propel-inc_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..84e0a823e23aaa045b1e32ae9acbe6b4f1e3f15b
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. WE URGE YOU TO READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS" SECTION AND THE FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. PROPEL We develop, operate and own interests in wireless communications businesses in targeted markets throughout the world. Over the past 15 years, our culturally diverse and multilingual team has grown our wireless communications business by adding subscribers in existing markets and extending our geographic footprint into new markets in our targeted regions. Our operating companies are concentrated in Latin America, the Middle East and Asia, providing us with a strong regional presence in which to use our strategic relationships and operational experience to position us for future expansion. Our operating companies currently offer wireless services in Mexico, Israel, Hong Kong, Egypt, Argentina, Lithuania, Jordan, Chile, the Dominican Republic, Pakistan, Uruguay and Azerbaijan. In addition to our four consolidated northern Mexico operating companies, we have ownership interests in each of our other operating companies, ranging from 18% to 50%. We believe that many of our operating companies hold leading positions in their licensed territories based on their number of subscribers. Our operating companies are located primarily in markets where we believe rapid economic development is creating significant demand for communications services and the availability of wireline telephone services is often inadequate to meet this demand. We established an early presence in each of these markets by teaming with local partners and, in many instances, international telecommunications companies, including Hutchison Whampoa, NTT DoCoMo, France Telecom, Telia, Sonera, Bezeq, Telecom Italia Mobile and BellSouth. We take an active role in the management of our operating companies and have representatives on the board of directors of each of them. We also facilitate the sharing of experience and knowledge across our operating companies through assigned operations managers. In addition, we use our engineering, marketing, human resources and finance expertise to assist our operating companies' management teams to improve current operations, develop growth initiatives, adopt new technologies and create market innovations in order to enhance their financial performance. For example, we helped implement one of the first commercial CDMA wireless systems in the world, and many of our operating companies are currently introducing wireless data services to their customers. At December 31, 1999, our operating companies operated under wireless licenses that covered over 330 million people and provided cellular services to approximately 6.7 million subscribers, an increase of 2.6 million subscribers, or 62.2%, from December 31, 1998 to December 31, 1999. At June 30, 2000, our operating companies provided cellular services to approximately 8.2 million subscribers, an increase of 1.5 million subscribers, or 23%, from December 31, 1999 to June 30, 2000. Based on our ownership percentages in our operating companies, we had approximately 3.0 million proportionate subscribers at June 30, 2000. Our proportionate share of the aggregate revenues of our operating companies was $714.8 million for the six months ended June 30, 2000. Our consolidated net loss for the six months ended June 30, 2000 was approximately $12.3 million. Except for our ownership data, which are as of September 15, 2000, the following table sets forth pertinent information for each of our operating companies as of and for the year ended December 31, 1999. <TABLE> <CAPTION> OPERATING ESTIMATED TOTAL SYSTEM COMPANY PROPEL LICENSED CELLULAR START-UP NAME OWNERSHIP POPULATION SUBSCRIBERS DATE ---- --------- ---------- ----------- ---- (%) (THOUSANDS) <S> <C> <C> <C> <C> <C> LATIN AMERICA NORTHERN MEXICO............................ Baja Celular 100.0 2,850 252 1990 Movitel 90.0 4,741 299 1990 Norcel 100.0 5,423 168 1990 Cedetel 100.0 8,162 362 1990 ARGENTINA.................................. Movicom Argentina 25.0 36,580 1,171 1989 CHILE...................................... ETP 25.0 15,010 656 1991 DOMINICAN REPUBLIC......................... Tricom 26.5 8,250 176 1992 URUGUAY.................................... Movicom Uruguay 32.0 1,529 116 1991 SOUTHERN MEXICO............................ Portatel 21.7 8,994 88 1990 EUROPE/MIDDLE EAST ISRAEL..................................... Pelephone 50.0 6,122 1,110 1986 EGYPT...................................... MobiNil 18.0 64,520 507 1995 LITHUANIA.................................. Omnitel 35.0 3,700 198 1995 JORDAN..................................... Fastlink 26.1 4,843 94 1995 AZERBAIJAN................................. Bakcell 25.0 7,620 14 1994 ASIA HONG KONG.................................. Hutchison Telephone 25.1 6,840 1,353 1985 PAKISTAN................................... Mobilink 30.0 145,750 94 1994 ------- ----- TOTAL.................................... 330,934 6,658 ======= ===== </TABLE> In addition to our operating companies that we actively manage, we have a 1.9% equity investment in Korea Telecom Freetel, a wireless operator whose stock trades on the South Korean KOSDAQ market. We also operate a handset distribution business in Israel called Wireless Distribution Services, or WDS. In addition, we own an approximately 16.8% fully diluted interest in Zephyr Telecommunications, Inc., an international Internet protocol based telecommunications, broadband Internet access and Web hosting provider. BUSINESS STRATEGY Our goal is to be a leading provider of wireless communications services in each of our operating regions. Key elements of our strategy are to: - maximize the performance of our operating companies by capitalizing on our technical and managerial knowledge; - assist our operating companies in complementing their current wireless offerings with additional services to create new revenue opportunities; - capitalize on wireless data opportunities by helping our operating companies provide wireless data services offerings, including mobile Internet access, e-mail and e-commerce applications; and - expand and strengthen our geographic footprint by selectively pursuing new licenses and business combinations in our targeted regions, particularly in Latin America, the Middle East and China. OUR RELATIONSHIP WITH MOTOROLA We are currently a wholly owned subsidiary of Motorola, Inc. After the completion of this offering, without giving effect to the issuance of restricted stock and options to our employees and directors to purchase our common stock and the exercise of the underwriters' over-allotment options, Motorola will own approximately 84.5% of the outstanding shares of our common stock. At the time of this offering, two of our four directors will be Motorola officers. Shortly after the completion of this offering, we expect to add five independent directors to our board. Motorola has informed us that it currently expects to divest its entire interest in our company, which we refer to as a divestiture. Motorola may complete a divestiture by distributing all of its shares of our common stock to its stockholders, which we refer to as a distribution. Motorola has informed us that it currently expects to complete a distribution during the twelve months following this offering, but Motorola is not obligated to complete a distribution or other form of divestiture. For more information about our separation from Motorola, see "Our Separation from Motorola" on page 36. Our ownership of our operating companies, our rights under the shareholders agreements relating to our ownership or the licenses under which these companies operate may be negatively affected by a divestiture by Motorola of our common stock. In most cases, but not all, we have received waivers or consents regarding these issues in connection with a distribution, but these waivers or consents may not cover a divestiture other than a distribution. For more information regarding these issues, see "Our Relationships with Our Operating Companies" on page 181 and "Regulation" on page 198. Prior to the completion of this offering, we will enter into agreements with Motorola that provide for the separation of our business operations and the provision of transitional services from Motorola. Some of these agreements may have the effect of limiting the conduct of our business and our ability to pursue our business objectives for a specified period of time. For more information about these agreements, see "Our Relationship with Motorola" on page 167. We believe that this offering and our separation from Motorola will enhance our ability to pursue our business strategy free of conflicting business objectives of Motorola, allow us to better incentivize our management team, improve our capital financing flexibility and simplify our internal structure. --------------------- Our principal executive offices are located at 425 North Martingale Road, 18th Floor, Schaumburg, Illinois 60173 and our telephone number is (847) 435-3700. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of common stock. THE OFFERING <TABLE> <S> <C> <C> Shares offered by Propel: U.S. offering...................................... shares International offering............................. shares ---------- Total............................................ 23,500,000 shares Over-allotment option.............................. 3,525,000 shares Shares to be outstanding after this offering...................................... 151,500,000 shares Shares to be held by Motorola after this offering...................................... 128,000,000 shares Use of proceeds...................................... We intend to use the net proceeds of the offering to fund ongoing operations, for acquisitions to expand our portfolio of assets, to invest in the expansion of our existing operating companies, to repay approximately $ million of indebtedness, including indebtedness to Motorola, and for general corporate purposes. For more information on the use of the proceeds from this offering, see "Use of Proceeds" on page 40. </TABLE> The number of shares of our common stock to be outstanding after the offering does not take into account up to 15,500,000 additional shares of our common stock that are reserved for issuance under our stock incentive plan, including an estimated 5,805,556 shares of our common stock that will be issuable upon exercise by our employees of stock options granted in connection with the offering and an estimated 900,811 shares of restricted stock that will be granted to our employees in connection with this offering. The actual number of options and shares of restricted stock will be determined at the time of the offering. For a description of these stock options and shares of restricted stock, see "Management--Incentive Plan" on page 161. All the information in this prospectus assumes that the underwriters have not exercised their over-allotment options. SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER OPERATING DATA The following table presents our summary historical and pro forma condensed combined financial and other operating data. The historical statement of operations and cash flow data for 1997, 1998 and 1999 are derived from our audited consolidated financial statements included elsewhere in this prospectus, which were audited by KPMG LLP, whose report indicated a reliance on other auditors with respect to financial statements of some of our affiliates that are accounted for in our consolidated financial statements using the equity method of accounting, as indicated in their report. The statement of operations and cash flow data for the six months ended June 30, 1999 and 2000 and the balance sheet data as of June 30, 2000 are derived from our unaudited consolidated financial statements. In the opinion of management, such unaudited financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial data for such periods and as of such dates. Results for any interim period are not necessarily indicative of the results to be expected for the entire year. In July 2000, we acquired the remaining interest we did not already own in Baja Celular, one of our operating companies in northern Mexico, which also increased our ownership interest in Baja Celular's subsidiary, Movitel, to 90%. We prepared the summary pro forma financial data presented below to illustrate the estimated effects of this acquisition and related transactions. The pro forma statement of operations data for the year ended December 31, 1999 and for the six months ended June 30, 2000 give effect to this acquisition and related transactions as if those transactions had occurred on January 1, 1999. The pro forma balance sheet data is presented as if those transactions had occurred on June 30, 2000. The pro forma data do not purport to represent what our results of operations or financial condition would actually have been if such transactions had in fact occurred on such dates or to project our results of operations or financial condition for any future period. The pro forma, as adjusted balance sheet data give effect to the transactions described above, the sale of 23,500,000 shares of our common stock in this offering at an assumed initial public offering price of $18.00 per share, the midpoint of the range set forth on the cover of this prospectus, the grant of an estimated 900,811 shares of restricted stock to Propel employees and the anticipated use of proceeds from this offering. The data in the following table primarily reflect the results of operations and financial position of Propel and its consolidated subsidiaries. The results of operations and financial condition of our nonconsolidated operating companies are reflected in our statement of operations data under "Share of earnings (losses) of affiliates" and in our balance sheet data under "Investments in and advances to affiliates." At June 30, 2000 Norcel, Cedetel and our wholly owned Israeli subsidiary that includes the WDS business were our only consolidated entities. Our operating companies in Mexico, Chile and Israel have presented their financial statements reflecting the impact of price level changes as allowed under applicable SEC rules. We have eliminated the effects of inflationary accounting when including the results of operations of these companies in the line item "Share of earnings (losses) of affiliates" of our consolidated financial statements and in the proportionate data of our operating companies. The table includes our proportionate share in the results of operations of all our operating companies, including our wholly owned subsidiaries. Our proportionate share of subscribers is the aggregate total calculated by multiplying the subscriber information of each of our operating companies by our economic ownership interest in that operating company at the end of the reporting period. Our proportionate share of our operating companies' revenues or adjusted EBITDA is the aggregate total calculated by multiplying U.S. dollar and U.S. GAAP-reconciled revenue or adjusted EBITDA information and, in the cases of Mexico, Chile and Israel, eliminating the effects of inflationary accounting, from that operating company, as the case may be, by our weighted average economic ownership interest in that operating company during the reporting period. Proportionate data is not contemplated under general accounting principles. Adjusted EBITDA is defined as net earnings (loss) before interest, taxes, depreciation and amortization, and other nonoperating income (expense) net. Adjusted EBITDA is an indicator used by management to measure our performance and ability to generate cash flow. Adjusted EBITDA does not represent cash flows for the period and is not an alternative to operating or net income as an indicator of operating performance or liquidity. You should not consider it alone or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. Our computation of adjusted EBITDA may not be comparable to the computation of similarly titled measures reported by other companies. Net earnings (loss) per share was calculated by dividing the net earnings (loss) for each period by the weighted average number of shares of our common stock to be outstanding at the time of the offering, excluding shares of restricted stock and options to purchase our common stock that will be granted at the time of the offering. Pro forma net earnings (loss) per share have been calculated in accordance with SEC rules for initial public offerings. Such rules require that the weighted average share calculation give retroactive effect to the number of shares whose proceeds will be used to pay any dividend or repay any debt owed to Motorola. For supplemental information about the performance of our operating companies on a proportionate basis, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Supplemental Information Regarding Proportionate Results of Operations" on page 66. You should read the information set forth below in conjunction with "Unaudited Pro Forma Condensed Combined Financial Statements" on page 45, "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 53 and the financial statements and related notes included elsewhere in this prospectus. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ------------------------------------------- -------------------------------- HISTORICAL HISTORICAL ------------------------------ PRO FORMA ------------------- PRO FORMA 1997 1998 1999 1999 1999 2000 2000 ---- ---- ---- ---- ---- ---- ---- (IN MILLIONS; EXCEPT SUBSCRIBERS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues...................................... $ 160.9 $ 226.3 $ 379.2 $ 566.4 $ 207.2 $ 170.4 $ 277.1 Costs of services and products................ 120.1 167.8 293.3 393.2 166.0 120.9 163.1 Selling, general, and administrative expenses.................................... 52.6 54.9 79.8 118.1 37.6 44.0 67.5 Depreciation and amortization................. 28.2 33.0 37.6 88.6 18.4 21.9 49.5 ------- -------- -------- -------- -------- -------- -------- Operating income (loss)....................... (39.9) (29.4) (31.5) (33.6) (14.9) (16.3) (3.0) Share of earnings (losses) of affiliates...... 44.2 54.0 26.0 18.0 11.6 6.9 -- Interest expense.............................. 6.6 12.9 9.8 33.5 4.9 6.7 17.9 Other (income) expense........................ (50.2) (25.4) (46.6) (48.6) (5.8) 4.2 12.0 ------- -------- -------- -------- -------- -------- -------- Earnings (loss) before income taxes........... 47.8 37.1 31.3 (0.5) (2.3) (20.4) (32.9) Income tax expense (benefit).................. 7.7 (0.3) 16.5 9.4 4.5 (8.1) (10.3) ------- -------- -------- -------- -------- -------- -------- Net earnings (loss)........................... $ 40.2 $ 37.4 $ 14.8 $ (10.0) $ (6.8) $ (12.3) $ (22.6) ======= ======== ======== ======== ======== ======== ======== Net earnings (loss) per share................. $ .31 $ .29 $ .12 $ (.08 ) $ (.05) $ (.10) $ (.18 ) Weighted average shares outstanding........... 128.0 128.0 128.0 128.0 128.0 128.0 128.0 Pro forma earnings (loss) per share........... $ $ $ Pro forma weighted average shares outstanding................................. CASH FLOW DATA: Cash provided by (used in): Operating activities........................ $ (7.3) $ (18.6) $ (11.8) N/A $ (1.6) $ 8.6 N/A Investing activities........................ (161.1) (90.9) (33.5) N/A (30.4) (29.3) N/A Financing activities........................ 175.5 106.8 42.5 N/A 18.1 26.4 N/A OTHER DATA: Adjusted EBITDA............................... $ (11.8) $ 3.6 $ 6.1 $ 55 $ 3.6 $ 5.6 $ Proportionate subscribers..................... 1,050 1,573 2,497 2,786 1,964 2,996 Proportionate revenues........................ $ 878.7 $1,057.7 $1,237.3 $1,326.5 $ 568.4 $ 714.8 $ Proportionate adjusted EBITDA................. 255.1 305.9 212.8 225.2 100.1 158.2 Proportionate net debt (at period end)........ 276.9 392.3 882.4 1,381.1 878.3 960.4 </TABLE> <TABLE> <CAPTION> AT JUNE 30, 2000 ----------------------------------- PRO FORMA, ACTUAL PRO FORMA AS ADJUSTED ------ --------- ----------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 23.8 $ 47.0 Investments in and advances to affiliates................... 635.7 588.2 Total assets................................................ 1,370.4 1,926.3 Notes payable and long-term debt, including related parties and current maturities.................................... 172.7 536.3 Stockholder's equity........................................ 909.9 909.9 </TABLE>
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. It does not contain all the information that may be important to you. You should read carefully this entire prospectus, especially the Risk Factors section and the consolidated financial statements and accompanying notes to those statements, before you decide whether to invest in the class A common shares. When we look at results for a period on a comparable basis, we look only at the results for those hotels we owned throughout the period. Orient-Express Hotels Ltd. Orient-Express Hotels Ltd. is a hotel and leisure company focused on the luxury end of the leisure market. We currently own and/or operate 26 highly individual deluxe hotels worldwide reported as 22 business units, six tourist trains, a river cruiseship and two restaurants. We acquire only very distinctive properties in areas of outstanding cultural, historic or recreational interest in order to provide luxury lifestyle experiences for the elite traveler. Orient-Express Hotels has been since its incorporation in 1987 a wholly-owned subsidiary of Sea Containers Ltd. Sea Containers' hotel and leisure operations began in the late 1970s when Orient-Express Hotels' corporate predecessor acquired the Hotel Cipriani in Venice and the legendary Venice Simplon-Orient-Express tourist trains. Since then, we have grown into an international leisure company. We were recently voted one of the top two hotel groups in Europe by Conde Nast Traveler magazine, and over the last 18 months, our 31 properties have won 67 national and international awards, 13 of which were "Number One" or "Best" in the category. Some of our most prominent properties are the Windsor Court in New Orleans, the Copacabana Palace Hotel in Rio de Janeiro, the Mount Nelson Hotel in Cape Town, South Africa, Reid's Palace Hotel in Madeira, Portugal, and the '21' Club in New York City. Hotels and restaurants represent the largest segment of our business, contributing 84% of revenue in 1999. Tourist trains and cruises accounted for the remaining 16%. Our worldwide portfolio of hotels consists of 2,563 individual guest rooms and multiple-room suites, each known as a key, which achieved an average daily room rate, or ADR, of $289 in 1999. A majority of our customers are leisure travelers, with approximately 54% of our guests in 1999 originating from the United States, 20% from Europe and the remaining 26% from elsewhere in the world. Investment Highlights Unique Portfolio of Properties in Areas Where There Are High Barriers to Entry. Our properties are all in distinctive locations throughout the world. Many of our properties are an essential part of the local history and could not be replaced or would be prohibitively expensive to replicate. Also, strict zoning regulations in a number of countries where we operate, particularly Italy, prohibit or significantly restrict new hotel development in our areas. Distinguished Brand Names. Our brand name "Orient-Express Hotels" originated with the legendary luxury train traveling between Paris and Istanbul in the late 19th and early 20th centuries. This brand name is recognized worldwide and is synonymous with sophisticated travel and refined elegance. Also, many of our individual properties, such as the Hotel Cipriani or the '21' Club, have distinctive, local brand identities. Luxury Market Focus. We focus exclusively on the luxury end of the leisure market. We serve those guests who are less price sensitive and are willing to pay a premium for services and accommodations which have a special image, style and character. Our philosophy is that "quality is luxury with personality." No. of hotel business units: Owned hotels: Europe 7 7 5 4 3 North America 4 2 2 3 2 Rest of the world 4 4 4 3 3 Hotel management interests 5 3 3 2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Pricing Power. Given their strong reputation and distinctive character, our properties tend to command a considerable rate premium over those of our competitors. Since a large proportion of hotel operating costs is fixed, we thereby can achieve an enhanced return on our investment. Successful Acquisition Strategy. In 1999 and the first quarter of 2000, we spent $85 million on acquisitions which will positively impact profits in 2000 and beyond. Acquisitions in 1999 consisted of Keswick Hall near Monticello in Charlottesville, Virginia, the Inn at Perry Cabin at St. Michael's on the eastern shore of Chesapeake Bay in Maryland, and our 50% interests in a joint venture which operates two hotels in Peru and a joint venture which operates the tourist railway up to the famous Machu Picchu ruins. In the first quarter of 2000, we acquired two Australian hotels the Observatory in Sydney, which we had previously managed for over seven years, and Lilianfels in the Blue Mountains. Sales, Marketing and Distribution Advantages. We attract guests who we believe have often made a specific decision to stay at one or more of our properties and therefore are more likely to book directly with our hotels and tours. This reduces our marketing costs and third-party sales commissions. We extensively utilize public relations as a communications tool by working with journalists and travel writers, and we enjoy exceptional media exposure because of the distinctive nature of our properties. During 1999, we hosted over 1,000 journalists at our properties, who generated over 3,000 articles in newspapers and magazines around the world. Global Presence. We operate hotels and restaurants in eleven countries across six continents. Also, our trains and cruiseship operate in the U.K., continental Europe, Southeast Asia, South America and Australia. Our geographic diversification makes our results of operations less susceptible to an economic downturn in a particular region. Positive Leisure Spending and Demographic Trends. We believe that positive travel and tourism spending trends as well as demographic shifts in both the U.S. and European populations will increase the long-term demand for our hotels and trains. Strong Management Team. Our executive management team includes nine individuals who are responsible for our global strategic direction and have an average of ten years of experience with Orient-Express Hotels and 18 years of experience in the hotel and leisure industry. Growth Strategy Strong Internal Growth. We intend to pursue increases in pricing and earnings both at our established properties and at our newer acquisitions. We believe that Orient-Express Hotels will be able to increase average daily rates, or ADRs, further, and consequently rooms revenue, at our established properties, given the prestige of our brand names and significant barriers to entry. In addition, since a number of our newer acquisitions have been from individuals and small companies with limited hotel experience, we have been able to increase revenue per available room, or REVPAR, and operating margins at these newer properties by applying our managerial experience, marketing skills, strong brand name and cost controls. Growth from Expansions. We have significant expansion opportunities at our existing properties. In our hotels and restaurants segment, we have plans over the next few years to add between 300 and 600 keys, expand existing banquet and dining facilities and develop new amenities at various properties, including spas and conference facilities. Growth from Acquisitions. We intend to continue to acquire additional distinctive, luxury properties throughout the world. We target unique properties in markets with high barriers to entry and opportunities to increase cash flow through either expansions or REVPAR increases. Internet Initiatives. We believe that there is significant potential for the internet to enhance our distribution and reduce our sales and marketing expenses. The combination of our strong local brand identities and our strong umbrella brand name is an effective way to attract those internet users who Revenue: Hotels and restaurants 82 % 80 % 80 % 80 % 78 % Tourist trains and cruises 13 15 15 18 17 Earnings from unconsolidated companies 5 4 3 2 2 Gains on sale of assets and other 1 2 AMENDMENT NO. 6 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 are looking for a travel experience with distinctive character but who still need the assurance of quality. Internet technology also permits lower transaction costs. Our Relationship with Sea Containers Sea Containers, which is a public company whose common shares are listed on the New York Stock Exchange, currently engages in three main businesses: passenger transport operations, which provide service-oriented ferry and rail transportation services, primarily in and around the United Kingdom and Scandinavia, marine container leasing operations, principally through Sea Containers' GE SeaCo SRL joint venture with General Electric Capital Corporation, offering a wide variety of standard and specialized cargo containers, and hotel and leisure operations, conducted through Orient-Express Hotels and its subsidiaries. After the completion of this offering, Sea Containers will own approximately 65% of the outstanding class A common shares of Orient-Express Hotels, or approximately 60% if the underwriters fully exercise their over-allotment option. Sea Containers will also own all of the outstanding 20,503,877 class B common shares of Orient-Express Hotels, of which 18,044,478 shares will be subject to an agreement for their purchase by subsidiaries of Orient-Express Hotels. See "Our Separation from Sea Containers Separation Agreements Share Owning Subsidiaries Restructuring Agreement" and note 9(e) to the consolidated financial statements in this prospectus. Under applicable Bermuda corporate law, these 18,044,478 shares are outstanding and may be voted by Sea Containers although for purposes of computing earnings per share, these shares are deemed to be owned by subsidiaries of Orient-Express Hotels and will be accounted for as a reduction to outstanding shares. The shares to be owned by Sea Containers after this offering will represent about 96% of the combined voting power for most matters submitted to a vote of our shareholders, or 95% if the underwriters fully exercise their over-allotment option. Sea Containers currently intends to distribute to its shareholders all of our class A and class B common shares that it owns approximately six months after this offering, if Sea Containers receives all necessary consents and approvals from its board of directors, shareholders, lenders and others, and a favorable tax opinion. Sea Containers is not obligated to make this spinoff distribution, and the distribution may not occur in six months or at all. If the distribution is delayed or is not completed at all, Sea Containers may elect to sell additional shares of Orient-Express Hotels. We believe that we will realize benefits from our separation from Sea Containers, including greater strategic focus, better incentives for employees and greater accountability, and more direct access to capital markets. Orient-Express Hotels has entered into agreements with Sea Containers providing for the separation of its business operations from those of Sea Containers, for the transfer to Orient-Express Hotels of all Sea Containers' subsidiaries that relate to Sea Containers' hotel and leisure business and that are not already owned by Orient-Express Hotels, and for various ongoing relationships between Sea Containers and Orient-Express Hotels. For more information on the proposed distribution, the benefits of our separation from Sea Containers, and these agreements, see the section entitled "Our Separation from Sea Containers" in this prospectus. * * * Orient-Express Hotels maintains its registered office at 41 Cedar Avenue, P.O. Box HM 1179, Hamilton HM EX, Bermuda, telephone 441-295-2244. Its main service subsidiary in the United Kingdom is located at Sea Containers House, 20 Upper Ground, London SE1 9PF, England, telephone 011-44-20-7805-5060, and its main United States service subsidiary Orient-Express Hotels Inc. has offices at 1155 Avenue of the Americas, New York, New York 10036, telephone 212-302-5055. Our website is www.orient-expresshotels.com. The information on this website is not a part of this prospectus. ORIENT-EXPRESS HOTELS LTD. (Exact name of registrant as specified in its charter) Bermuda 7011 98-0223493 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification No.) 41 Cedar Avenue P.O. Box HM 1179 Hamilton HM EX, Bermuda (441) 295-2244 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) JOHN T. LANDRY, JR. Orient-Express Hotels Inc. 1155 Avenue of the Americas New York, New York 10036 (212) 302-5066 (Name, address, including zip code, and telephone number, including area code, of agent for service) The Offering Class A common shares offered by Orient-Express Hotels: U.S. offering 4,000,000 shares International offering 1,000,000 shares Class A common shares offered by Sea Containers: U.S. offering 4,000,000 shares International offering 1,000,000 shares Total 10,000,000 shares Class A common shares to be held by Sea Containers immediately after this offering 18,440,601 shares Class A common shares to be outstanding immediately after this offering 28,440,601 shares Class B common shares to be outstanding immediately after this offering 2,459,399 shares Class A and class B common shares to be outstanding immediately after this offering 30,900,000 shares Use of proceeds We estimate that the net proceeds to Orient-Express Hotels from this offering will be approximately $100 million, assuming a public offering price of $21.50 per share. We intend to use these net proceeds to repay approximately $95 million of our existing indebtedness secured by five of our properties and guaranteed by Sea Containers. These properties will then be available to secure future borrowings. The balance of the proceeds to us will be used for working capital and general corporate purposes, which may include repayment of other debt. Our use of proceeds is more fully described under "Use of Proceeds." Orient-Express Hotels will not receive any of the proceeds from the sale of shares in this offering by Sea Containers. Proposed New York Stock Exchange symbol OEH
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001116201_integrated_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001116201_integrated_prospectus_summary.txt
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+PROSPECTUS SUMMARY We design, develop and market integrated circuit and software products that are incorporated into asymmetric digital subscriber line broadband access communications equipment. Manufacturers sell this equipment to service providers who in turn provide high-speed asymmetric digital subscriber line service to residential and business customers. Asymmetric digital subscriber line technology permits high speed data transmission over copper telephone lines. Our products, which include integrated circuits, software, reference designs and development tools, are designed to meet the specific challenges facing manufacturers of both customer premises and central office equipment. Our broad knowledge of integrated circuit design, computer system design and operating systems allows us to deliver widely compatible, highly-expandable solutions with low power consumption and reduced number of integrated circuit components. We currently offer two families of customer premises and central office equipment products: Apollo integrated circuits with software, and SAM integrated circuits with software. Applications for our Apollo product family include personal computer network interface cards, external modems, gateways, routers and central office equipment. Applications for our SAM product family include personal computer communication hardware, personal computer motherboards, and Internet access devices. Our products are designed to enhance the performance of asymmetric digital subscriber line equipment. Our Apollo family of products has its own microprocessor to process the asymmetric digital subscriber line signal. Our SAM family of products processes the asymmetric digital subscriber line signal using software running on a personal computer. - STANDARDS COMPLIANCE AND COMPATIBILITY. Our Apollo and SAM products are compliant with international standards. We create production designs which are complete sets of instructions describing how to build an asymmetric digital subscriber line modem with our integrated circuit and software solutions. These production designs are compatible with major equipment providers including Alcatel Bell N.V., Cisco Systems and Nokia. - EXPANDABLE AND FLEXIBLE. Our SAM products provides an optimized balance of hardware and software functions, offering efficient, low-cost and low power consumption integrated circuit and software solutions. - ENABLE RAPID TIME-TO-MARKET. Our production designs and the standards compliance and compatibility of our products facilitate integration of our products into our customers' systems thereby reducing time-to-market. - HIGH PERFORMANCE AND RELIABILITY. Our high-performance production designs enable increased transmission rates over long distances and maintain reliable connections under conditions of copper telephone line interference. - EASE OF INSTALLATION, USE AND UPGRADE. Our Apollo and SAM products are designed to facilitate installation, operation and upgrading of customer premises equipment with software that can be easily downloaded. Our objective is to be a leading provider of integrated circuit and software products for equipment manufacturers addressing the broadband access market. Key elements of our strategy for achieving this objective include leveraging our technology strengths; enabling the rapid adoption of asymmetric digital subscriber line technology; strengthening and expanding our relationships with key customers and suppliers; further penetrating worldwide markets for our products; targeting other high-growth broadband access market opportunities and building upon our core strengths and strategic investments. We have a limited operating history and we have significant losses. We will continue to have substantial future capital requirements. We expect to continue to incur significant net losses for the foreseeable future. In addition, our revenue has been and will continue to be derived from a limited number of products and from a limited number of customers. Integrated Telecom Express, Inc., or ITeX, was incorporated in California on May 26, 1995, and reincorporated in Delaware on September 9, 1999. The address of our principal executive offices is 2710 Walsh Avenue, Santa Clara, California 95051 where the telephone number is (408) 980-8689. Our Internet address on the worldwide web is HTTP://WWW.ITEXINC.COM. Information contained on our website does not constitute part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered by Integrated Telecom 5,600,000 shares Express.................................... Common stock offered in the private 166,667 shares of common stock to NEC placement.................................. Corporation (based on an assumed initial public offering price of $18.00 per share) Common stock to be outstanding after this offering and the private placement......... 41,288,803 shares Use of proceeds.............................. For working capital and general corporate purposes, including expenditures for research and development of new products and sales and marketing. Proposed Nasdaq National Market symbol....... "ITXI" </TABLE> The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of July 10, 2000, and excludes: - 10,412,120 shares of common stock issuable as of July 10, 2000 upon the exercise of outstanding stock options issued under our option plans at a weighted average exercise price of $3.36 per share; - 2,500,000 shares of common stock reserved as of July 10, 2000 for issuance under our stock option plans; - 600,000 shares of common stock initially reserved for issuance under our employee stock purchase plan; and - 1,214,286 shares of common stock issuable as of July 10, 2000 upon the exercise of outstanding warrants with a weighted average exercise price of $3.71 per share. ------------------------ EXCEPT AS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS ASSUMES: - THE CONVERSION OF ALL OUTSTANDING SHARES OF OUR CONVERTIBLE PREFERRED STOCK INTO 11,428,571 SHARES OF COMMON STOCK, AT A RATE OF ONE SHARE OF PREFERRED STOCK INTO ONE SHARE OF COMMON STOCK IMMEDIATELY PRIOR TO THE CLOSING OF THIS OFFERING; - THE FILING OF AN AMENDED AND RESTATED CERTIFICATE OF INCORPORATION; AND - THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. ------------------------ You should rely only on the information contained in this document. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. SUMMARY FINANCIAL DATA The following table summarizes the consolidated financial data for our business. You should read this information together with the financial statements and the notes to those statements appearing elsewhere in this prospectus. See "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------ ------------------- 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue...................................... $ -- $ -- $ 3,053 $ 296 $ 14,401 Cost of revenue.............................. -- -- (2,811) (716) (8,531) Operating loss from continuing operations.... (2,077) (10,152) (14,777) (7,553) (12,380) Loss from discontinued operations............ (2,638) -- -- -- -- Net loss..................................... (3,906) (9,296) (13,708) (7,257) (11,474) Basic and diluted net loss per share......... $ (0.17) $ (0.40) $ (0.59) $ (0.31) $ (0.49) Shares used in computing basic and diluted net loss per share......................... 22,753 23,058 23,148 23,098 23,488 Pro forma basic and diluted net loss per share (unaudited).......................... $ (0.51) $ (0.33) Pro forma basic and diluted weighted average shares (unaudited)......................... 26,634 34,917 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 2000 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $34,308 $34,308 $129,552 Working capital............................................. 32,913 32,913 128,157 Total assets................................................ 60,840 60,840 156,084 Long-term obligations, net of current portion............... 3,292 3,292 3,292 Mandatorily redeemable convertible preferred stock.......... 43,100 -- -- Mandatorily redeemable convertible preferred stock warrants.................................................. 1,900 -- -- Total stockholders' equity (deficit)........................ (1,097) 43,903 139,147 </TABLE> The pro forma amounts above reflect the conversion of 11,428,571 shares of convertible preferred stock into the same number of shares of common stock upon the completion of this offering and the reclassification of convertible preferred stock warrants to reflect the change in nature of the underlying equity instrument to common stock. The pro forma as adjusted numbers are adjusted to reflect the receipt of the net proceeds from the sale of the 5,600,000 shares of common stock offered hereby and the sale of 166,667 shares of common stock to NEC Corporation in the concurrent private placement, in each case at an assumed initial public offering price of $18.00 per share, after deducting the underwriting discount and estimated offering expenses payable by us. `
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001116262_x10_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001116262_x10_prospectus_summary.txt
new file mode 100644
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary contains basic information about us and this offering. Because it is a summary, it does not contain all of the information that you should consider before investing. You should read the entire prospectus carefully, including the section entitled "Risk Factors" and our financial statements and the related notes before making an investment decision. X10 WIRELESS TECHNOLOGY, INC. We offer affordable products that allow consumers to network devices, systems and appliances within homes and small offices as well as remotely via the Internet. These products are based on a variety of technologies, including high-capacity, high-speed content delivery technologies, commonly referred to as broadband, as well as other wireless, phoneline, electrical and infrared technologies. We design, develop and market broadband wireless products that enable users to receive and deliver video and audio content and to distribute broadband Internet content from a personal computer, or PC, to televisions, stereos and other electronic entertainment devices within a home or small office. In addition, we offer networking products based on other technologies that enable consumers to control security, lighting, heating and air conditioning systems. All of these products can operate together to create a home or small office network. Users can access and control these networking products directly from a PC or through remote controls, wall-mounted panels, telephones or the Internet. We sell these broadband wireless and control products primarily through our website. In addition, we have recently commenced sales of these products, indirectly through our affiliates, to sellers of customized, bundled or private-label versions of these products and to retailers, independent contractors and value-added resellers. We have incurred operating and net losses since we commenced operations in July 1997, including a net loss of $8.1 million for the nine months ended September 30, 2000, and we expect to incur additional losses in the future. We have a limited operating history, and, as of September 30, 2000, we had an accumulated deficit of $12.0 million. In recent years, the increased availability of complex multimedia content, coupled with the rapid growth in Internet use, has driven demand for broadband access at home and in the workplace. According to International Data Corporation, an independent research firm, installation of broadband access is expected to increase from 2.1 million U.S. households in 1999 to 21.2 million U.S. households in 2003. Within the home and small office environment, this increasing demand for broadband access, together with the rapid growth in use of PCs and entertainment devices, has fueled the need for home and small office networks that enable communications among electronic and electrical systems that are often centered around a PC. To address this need, a number of companies have dedicated significant financial and technical resources to developing different networking technologies. However, many currently available networking products suffer from a number of constraints related to cost, functionality and ease of use. We believe that these limitations create a significant market opportunity for providers of affordable and effective home and small office networking solutions. Our technologies include wireless applications that operate in the 2.4 GHz radio frequency band. We believe that our expertise in wireless technologies and our customer-oriented approach to product development enable us to develop cost-effective, high-quality products. We offer products as individual components, allowing consumers to create customized networks, or in kits, each of which provides an integrated hardware and software solution. We believe that our solution offers the following advantages: . We offer a broad array of products and applications that can operate together and are compatible with most widely used home and small office electronic and electrical systems, allowing consumers to network their existing devices. . The products we offer employ multiple networking technologies, enabling us to design products using the technologies best suited to achieve a specific function. . Our convenient wireless products allow consumers to network devices, systems and appliances within homes and small offices, in most cases without the need for additional telephone jacks, electrical outlets or wiring. . We offer consumers the opportunity to easily and affordably network their homes and small offices by reducing the cost and complexity typically associated with home and small office networking products and technology. Our strategy to provide affordable networking solutions for homes and small businesses includes the following key elements: . capitalize on our existing technologies to design, develop and market products that extend our broadband and remote access capabilities; . expand strategic relationships to extend our market reach; . cross-sell additional control products to customers purchasing broadband products; . provide a compelling value proposition centered around high-performance and affordability; . capitalize on our relationship with X10 Ltd. and its affiliates; . expand professional contractor relationships; and . build our international presence. Our Relationship with X10 Ltd. and its Affiliates We were operated and financed for approximately two years as a division of X-10 (USA) Inc., a wholly owned subsidiary of X10 Ltd. As a result, we have a limited operating history as an independent entity. X10 Ltd. is a Bermuda corporation based in Hong Kong which, together with its affiliates, designs and manufactures home control and entertainment and security technology products. Upon completion of this offering, X10 Ltd. and its controlling stockholders will beneficially own approximately 64.1% of the outstanding shares of our common stock and will be able to control the vote on most matters submitted to our stockholders. X-10 (USA), based in New Jersey, provides sales, marketing and product distribution services for X10 Ltd. in the U.S. Since we were incorporated as a separate company in July 1999, we have continued to maintain close business relationships with X10 Ltd. and its affiliates. We have entered into agreements with X10 Ltd. under which it provides manufacturing and product development services to us, licenses to us rights to the X10 brand and markets our products to resellers. Similarly, we have entered into agreements with X-10 (USA) under which it provides order fulfillment services and sells X10-branded products to retailers and other resellers in the western hemisphere. We seek to capitalize on these relationships with X10 Ltd. and its affiliates to expand sales, reduce product costs, speed product development, manage inventory and obtain fulfillment services. Corporate Information We were incorporated in Delaware on July 29, 1999. Our principal executive offices are located at 15200 52nd Avenue South, Seattle, Washington 98188. Our telephone number is (206) 241-3283. Information contained on our website does not constitute part of this prospectus. THE OFFERING <TABLE> <C> <S> Common stock being offered................. 5,000,000 shares Common stock outstanding after this offering.................................. 25,050,000 shares Use of proceeds............................ We plan to use the net proceeds of this offering for general corporate purposes, including sales and marketing, research and development, capital expenditures and working capital. Proposed Nasdaq National Market symbol..... XTEN </TABLE> Common stock outstanding after this offering is based on the number of shares outstanding as of September 30, 2000, excluding: . 1,450,000 shares of common stock issuable upon exercise of stock options outstanding as of September 30, 2000, at a weighted average exercise price of $0.001 per share; . 240,000 shares of common stock issuable upon exercise of stock options to be granted at an exercise price equal to 70% of the initial public offering price per share; . 2,050,000 shares of common stock available for future grant of options under our 1999 Stock Plan as of September 30, 2000, which plan will be terminated effective upon completion of this offering; and . 3,110,000 shares of common stock available for future issuance under our 2000 Equity Incentive Plan and our 2000 Employee Stock Purchase Plan. Except as otherwise noted, all information in this prospectus assumes: . no exercise of the underwriters' over-allotment option; and . no exercise of outstanding stock options. SUMMARY FINANCIAL DATA (in thousands, except per share data) <TABLE> <CAPTION> Nine Months July 1, 1997 Year Ended Ended (inception) to December 31, September 30, December 31, ---------------------- ----------------- 1997 1998 1999 1999 2000 -------------- ------- ------------- ------- -------- (As restated, see note 8) <S> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues............ $ 134 $ 2,997 $ 15,893 $ 9,941 $ 21,322 Gross profit............ 78 1,854 6,913 4,754 8,415 Total operating expenses............... 349 3,685 14,264 8,210 16,575 Net loss................ (271) (1,831) (7,349) (3,456) (8,112) Basic and diluted net loss per common share.. $ (0.40) ======== Weighted average shares used to compute basic and diluted net loss per common share....... 20,050 ======== Pro forma basic and diluted net loss per common share........... $ (0.37) ======== Weighted average shares used to compute pro forma basic and diluted net loss per common share.................. 20,050 ======== </TABLE> See note 1 of notes to the financial statements for information concerning the calculation of pro forma basic and diluted net loss per common share. The information for the year ended December 31, 1999, is presented as restated. See note 8 of notes to the financial statements. The following table presents summary balance sheet data as of September 30, 2000, on an actual basis and as adjusted to reflect the application of the estimated net proceeds of $67.8 million from the sale of 5,000,000 shares of our common stock in this offering at an assumed initial public offering price of $15.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses. <TABLE> <CAPTION> September 30, 2000 -------------------- Actual As Adjusted ------- ----------- <S> <C> <C> Balance Sheet Data: Cash and cash equivalents.................................. $ 2,323 $70,073 Working capital (deficit).................................. (9,496) 58,254 Total assets............................................... 5,226 72,976 Total stockholders' equity (net deficit)................... (7,849) 59,901 </TABLE> We were operated and financed for approximately two years as a division of X-10 (USA) Inc. We were incorporated as a separate company in July 1999. On October 1, 1999, X10 Ltd. and X-10 (USA) contributed technology and other intellectual property and net assets to us. Through September 30, 1999, our summary statement of operations and balance sheet data are derived from the historic books and records of X10 Ltd. and include cost allocations from X10 Ltd. and X-10 (USA).
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001116284_exfo-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001116284_exfo-inc_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e1ffcdf8d4bfc2ebdce4cf7e39afc44083b4af26
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001116284_exfo-inc_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The summary highlights information contained elsewhere in this prospectus. Because this is only a summary, it does not contain all the information that you should consider before buying shares in this offering. You should read the entire prospectus carefully, including our consolidated financial statements and the related notes included elsewhere in this prospectus. EXFO We are a leading designer, manufacturer and marketer of fiber-optic test, measurement and monitoring instruments for the telecommunications industry. We believe that we are the largest manufacturer of test, measurement and monitoring instruments that is exclusively dedicated to fiber optics. Unlike traditional electrical transmission systems, which transmit electrical signals along copper wires, fiber-optic transmission systems use pulses of light along glass or plastic fiber, often referred to as optical fiber. When light travels along optical fiber and through the optical equipment that link optical fibers together, it is subject to unwanted effects such as reflection, attenuation, noise and various types of dispersion, all of which degrade signal quality and reduce transmission performance. Fiber-optic test, measurement and monitoring equipment is critical for measuring these effects and for helping communications carriers and manufacturers ensure network performance and reliability. Demand for fiber-optic test, measurement and monitoring equipment has been driven by increased production and deployment of optical fiber and related equipment in order to meet the growing demand for telecommunications capacity. Ryan, Hankin & Kent, a leading telecom market research firm, forecasts that Internet traffic will increase from 350,000 terabytes, or trillions of bytes, per month at the end of 1999 to more than 15 million terabytes per month in 2003, representing a compound annual average growth rate of 156%. Our customers use fiber-optic test, measurement and monitoring equipment mainly to: - ensure the quality of networks as they are being deployed; - diagnose and repair problems within an optical network; - monitor the quality of an optical signal as it passes through a network; - analyze fiber-optic components and equipment during production and assembly as well as quality control and conformity testing; and - conduct sophisticated tests during the research and development of fiber-optic products. We believe that we have positioned ourselves as the supplier offering the most extensive range of products in the fiber-optic test, measurement and monitoring industry. Our success has been largely based on our exclusive focus on fiber-optic test, measurement and monitoring instruments. We have developed optical technologies and advanced testing algorithms that we leverage across our various product lines. Our success is primarily due to: - our development of a range of products based on a modular system design consisting of Windows-based platforms that can accommodate several data acquisition test modules; - our high degree of technological innovation, as illustrated by our leading position in our industry in the development and commercialization of a number of new fiber-optic test and measurement products; - the high quality of our products as a result of our comprehensive quality assurance program, which has been certified ISO 9001 since 1994, and our compliance with demanding industry standards; and - our highly qualified and specialized internal customer support teams that offer pre-sales evaluation, installation, channel and customer training and post-sales support. PART I INFORMATION REQUIRED TO BE DELIVERED TO OFFEREES OR PURCHASERS We develop products principally for two markets. Our Portable and Monitoring Division provides solutions primarily to telecommunications carriers, cable television companies, public utilities, private network operators, as well as third-party installers and equipment rental companies. Our Scientific Division, established in 1996, designs an extensive line of more sophisticated and higher performance instruments for manufacturers of optical fiber, optical components, value-added optical modules and optical networking systems. Our Scientific Division also designs products for research and development markets. We intend to expand our leadership position in the fiber-optic test, measurement and monitoring industry and to increase our market share through the following initiatives: - expand our technological leadership; - invest in strategic sectors; - leverage our modular design across our product lines; - expand our sales and marketing efforts; - reduce our delivery lead times; and - pursue complementary acquisitions. ------------------------------ Our head office is located at 465 Godin Avenue, Vanier, Quebec, Canada, G1M 3G7 and our telephone number is (418) 683-0211. Our e-mail address is info@exfo.com and our Web site is www.exfo.com. Information on our Web site is not incorporated by reference in this prospectus. This prospectus contains trademarks and registered trademarks of EXFO and other companies. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED JUNE 28, 2000 P R O S P E C T U S 7,000,000 SHARES EXFO LOGO EXFO ELECTRO-OPTICAL ENGINEERING INC. SUBORDINATE VOTING SHARES ------------------------------ This is the initial public offering of EXFO Electro-Optical Engineering Inc. EXFO is selling 7,000,000 subordinate voting shares. The subordinate voting shares being sold represent 1.8% of the total outstanding voting power after the offering. The underwriters named in this prospectus are selling the subordinate voting shares in the United States and in each of the provinces of Canada. We expect the public offering price to be between US$23.00 and US$25.00 per share. Currently, no public market exists for our shares. After pricing of this offering, we expect that the subordinate voting shares will be quoted on the Nasdaq National Market under the symbol "EXFO" and will be listed on The Toronto Stock Exchange under the symbol "EXF". INVESTING IN THE SUBORDINATE VOTING SHARES INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 6 OF THIS PROSPECTUS. --------------------------- <TABLE> <S> <C> <C> PER SHARE TOTAL Public offering price....................... US$ US$ Underwriting discount....................... US$ US$ Proceeds, before expenses, to EXFO.......... US$ US$ </TABLE> The public offering price for the subordinate voting shares offered in the United States is payable in U.S. dollars and the public offering price for the subordinate voting shares offered in Canada is payable in Canadian dollars. The U.S. dollar amount is the equivalent of the Canadian price of the subordinate voting shares based on the prevailing U.S. -- Canadian dollar exchange rate as of the date of this prospectus. The underwriters may also purchase up to an additional 1,050,000 subordinate voting shares from EXFO, at the public offering price, less the underwriting commission, within 30 days from the date of this prospectus to cover over-allotments. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The shares will be ready for delivery on or about , 2000. ------------------------------ MERRILL LYNCH & CO. RBC DOMINION SECURITIES WIT SOUNDVIEW CIBC WORLD MARKETS ------------------------------ The date of this prospectus is , 2000. THE OFFERING Shares offered by this prospectus...................... 7,000,000 subordinate voting shares Shares to be outstanding after this offering................... 7,707,264 subordinate voting shares 38,000,000 multiple voting shares Total......................... 45,707,264 shares Voting rights................... The subordinate voting shares will carry one vote per share and the multiple voting shares will carry ten votes per share. Subsequent to the completion of this offering, the outstanding multiple voting shares will represent 98.0% of the voting power. Conversion rights............... Each multiple voting share will be convertible at any time at the holder's option into one fully paid and non-assessable subordinate voting share. Undertaking in favor of holders of subordinate voting shares.... The holders of subordinate voting shares will benefit from protective provisions that give them specified rights in the event of a take-over bid for the multiple voting shares. See "Description of Share Capital -- Equity Shares -- Undertakings in Favor of Holders of Subordinate Voting Shares." Use of proceeds................. We intend to use the net proceeds of this offering: - to repay approximately $17.2 million outstanding under promissory notes issued to some of our existing shareholders as payment of dividends declared on June 27, 2000; - to repay approximately $9.9 million of our outstanding indebtedness; and - for working capital and other general corporate purposes, including potential strategic investments and acquisitions. Proposed Nasdaq National Market symbol.......................... EXFO Proposed Toronto Stock Exchange Symbol.......................... EXF The total number of shares to be outstanding after this offering does not include: - subordinate voting shares issuable upon the exchange of 800,000 preferred shares series 1 to be issued prior to the closing of this offering. Assuming a conversion price of $24.00 per share, the 800,000 preferred shares series 1 will be convertible into 22,485 subordinate voting shares at our option on November 30, 2000; and - 4,470,961 subordinate voting shares reserved for future issuances under our stock option plan, including 609,734 subordinate voting shares to be issued upon the exercise of options to be granted prior to the closing of this offering at an exercise price equal to the initial public offering price. Description of the artwork Inside front cover EXFO logo CAPTION: EXFO is a leading designer, manufacturer and marketer of fiber-optic test, measurement and monitoring instruments for the telecommunications industry. Picture of an engineer using test instruments in our research and development department Picture of an operating technician using test instruments in the field Picture of a test instrument CAPTION: Our success has been largely due to our exclusive focus on fiber optic test, measurement and monitoring instruments. Gatefold EXFO logo CAPTION: Fiber-optic test, measurement and monitoring equipment is mainly used by optical network carriers, manufacturers, and research and development laboratories to measure the physical characteristics of optical fiber, optical components, value-added optical modules and optical networking systems. 10 pictures of test instruments with various uses with the following captions: 1 - Test instruments for conventional network installation and maintenance 2 - Remote fiber test system for network monitoring 3 - Automated test systems for production of DWDM component 4 - Test instruments for DWDM-based network installation and maintenance 5 - Automated environmental test system for DWDM component production 6 - Test instruments for use in developing and manufacturing optical fiber 7 - Test instruments for use in developing and manufacturing optical components Unless otherwise indicated, all information in this prospectus, including pro forma capitalization figures: - assumes the underwriters have not exercised the over-allotment option granted by us to purchase up to 1,050,000 of our subordinate voting shares; - gives effect to the exchange of all outstanding Class "A" shares into an aggregate of 38,000,000 multiple voting shares, which will occur prior to the closing of this offering; - gives effect to the exchange of all outstanding Class "F" shares into an aggregate of 707,264 subordinate voting shares, which will occur prior to the closing of this offering; and - gives effect to the exchange of all outstanding Class "G" shares into an aggregate of 800,000 preferred shares series 1, which will occur prior to the closing of this offering. TABLE OF CONTENTS <TABLE> <S> <C> Prospectus Summary.......................................... 1 Risk Factors................................................ 6 Special Note Regarding Forward-Looking Statements........... 16 Enforceability of Civil Liabilities......................... 16 Exchange Rate Information................................... 16 Use of Proceeds............................................. 17 Dividend Policy............................................. 18 Capitalization.............................................. 19 Dilution.................................................... 21 Selected Consolidated Financial Information................. 22 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 24 Corporate Information....................................... 34 Business.................................................... 36 Management.................................................. 50 Transactions with Related Parties........................... 56 Principal Shareholders...................................... 59 Description of Share Capital................................ 60 Transfer Agent and Registrar................................ 64 Shares Eligible for Future Sale............................. 64 Tax Considerations.......................................... 66 Underwriting................................................ 72 Legal Matters............................................... 75 Experts..................................................... 75 Where You Can Find More Information......................... 76 Index to Our Consolidated Financial Statements.............. F-1 </TABLE> ------------------------------ You should rely only on the information contained in this prospectus. We have not and the underwriters have not, authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information provided by this prospectus is accurate as at any date other than the date of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date. ------------------------------ Our consolidated financial statements are reported in U.S. dollars and have been prepared in accordance with accounting principles generally accepted in Canada, or Canadian GAAP. To the extent applicable to our consolidated financial statements included elsewhere in this prospectus, these principles conform in all material respects with accounting principles generally accepted in the United States, or U.S. GAAP, except as described in note 21 to our consolidated financial statements. All dollar amounts in this prospectus are expressed in U.S. dollars, except where otherwise indicated. References to "$" or "US$" are to U.S. dollars and references to "C$" are to Canadian dollars. This prospectus contains a translation of some Canadian dollar amounts into U.S. dollars solely for your convenience. See "Exchange Rate Information." SUMMARY CONSOLIDATED FINANCIAL DATA You should read the following summary consolidated financial data in conjunction with the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes included elsewhere in this prospectus. The consolidated statements of earnings data for each of the three years ended August 31, 1997, 1998 and 1999 and the consolidated balance sheets data as at August 31, 1998 and 1999 are derived from our consolidated financial statements that have been audited by PricewaterhouseCoopers LLP, independent auditors, that are included elsewhere in this prospectus. The consolidated statements of earnings data for the six months ended February 28, 1999 and February 29, 2000 and the consolidated balance sheet data as of February 29, 2000 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. These unaudited financial statements include, in the opinion of our management, all adjustments, consisting only of normally recurring adjustments, necessary to present fairly this unaudited financial information. The "Pro Forma As Adjusted" numbers in the table below reflect the issuance of 483,196 Class "F" shares to employees under outstanding subscription agreements, the share capital reorganization described under "Description of Share Capital", which will be effected prior to this offering, the declaration of a $17.5 million dividend, the sale of 7,000,000 subordinate voting shares offered by EXFO at an assumed initial public offering price of $24.00 per share and the application of the estimated net proceeds from this offering. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001116309_ford_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001116309_ford_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..33f99381d99b57737de4d219b55e34ea5e6e9a98
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@@ -0,0 +1,1286 @@
+Prospectus
+
+ Merrill Lynch Co.
+
+ 
+
+ 
+
+You should rely only the information contained in this
+prospectus. We have not authorized anyone to provide you with
+different information.
+
+We are not offering the senior notes in any state where the
+offer is not permitted.
+
+Dealer Prospectus Delivery Requirements
+
+For 90 days after the date of this prospectus, all dealers
+making transactions in the senior notes, whether or not
+participating in this offering, may be required to deliver a
+prospectus. In addition, all dealers will deliver a prospectus
+when acting as underwriters of the senior notes and with respect
+to their unsold allotments or subscriptions.
+
+Table of Contents
+
+PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
+
+Item 13. Other Expenses of Issuance and
+Distribution.
+
+ 
+The following table sets forth the estimated expenses in
+connection with the offering described in this Registration
+Statement.
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Securities and Exchange Commission
+
+ 
+ 
+ $
+ *
+ 
+
+ 
+ 
+ Rating agency fees
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Printing
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Legal fees and expenses
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Accountants fees
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Fees and expenses of the RCL Trustee
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Fees and expenses of the Lease Trustee
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Fees and expenses of the Indenture Trustee
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Miscellaneous expenses
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Total
+
+ 
+ 
+ $
+ *
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ * 
+ 
+ To be supplied by amendment
+
+Item 14. Indemnification of Directors and
+Officers.
+
+ 
+Section 3803 of the Delaware Business Trust Statute
+provides as follows:
+
+3803. Liability of Beneficial Owners and
+Trustees.
+
+ 
+ 
+
+ 
+ 
+ (a) Except to the extent otherwise provided in the
+ governing instrument of the business trust, the beneficial
+ owners shall be entitled to the same limitation of personal
+ liability extended to stockholders of private corporations for
+ profit organized under the general corporation law of the State.
+
+ 
+
+ 
+ 
+ (b) Except to the extent otherwise provided in the
+ governing instrument of a business trust, a trustee, when acting
+ in such capacity, shall not be personally liable to any person
+ other than the business trust or a beneficial owner for any act,
+ omission or obligation of the business trust or any trustee
+ thereof.
+
+ 
+
+ 
+ 
+ (c) Except to the extent otherwise provided in the
+ governing instrument of a business trust, an officer, employee,
+ manager or other person acting pursuant to
+ Section 3806(b)(7), when acting in such capacity, shall not
+ be personally liable to any person other than the business trust
+ or a beneficial owner for any act, omission or obligation of the
+ business trust or any trustee thereof.
+
+ 
+Section 3817 of the Delaware Business Trust Statute
+provides as follows:
+
+3817. Indemnification.
+
+ 
+ 
+
+ 
+ 
+ (a) Subject to such standards and restrictions, if any, as
+ are set forth in the governing instrument of a business trust, a
+ business trust shall have the power to indemnify and hold
+ harmless any trustee or beneficial owner or other person from
+ and against any and all claims and demands whatsoever.
+
+ 
+
+ 
+ 
+ (b) The absence of a provision for indemnity in the
+ governing instrument of a business trust shall not be construed
+ to deprive any trustee or beneficial owner or other
+
+II-1
+
+Table of Contents
+
+ 
+ 
+
+ 
+ 
+ person of any right to indemnity which is otherwise available to
+ such person under the laws of this State.
+
+ 
+Section 2.7 of the Amended and Restated Trust Agreement of
+RCL Trust 2000-1 provides as follows:
+
+ 
+Section 2.7. Liability and Indemnification.
+The RCL Beneficiary shall indemnify, defend and hold harmless
+the RCL Trustee, including its successors, assigns, officers,
+directors, shareholders, employees and agents for all losses,
+claims, damages, liabilities and expenses (collectively,
+ Liabilities ), penalties and taxes (other than
+income taxes relating to the fees paid to it hereunder) incurred
+by it in connection with the administration of RCL (including
+attorneys fees) and the performance of its duties
+hereunder; provided, however, that in no event shall the
+RCL Trustee be indemnified or held harmless for any Liabilities
+to the extent (i) incurred by reason of the RCL
+Trustee s willful misconduct, bad faith or negligence or
+(ii) incurred by reason of the RCL Trustee s breach of
+its representations and warranties set forth in
+Section 6.6. The RCL Trustee shall notify the RCL
+Beneficiary promptly of any claim for which the RCL Trustee may
+seek indemnity. Failure by the RCL Trustee to so notify the RCL
+Beneficiary shall not relieve the RCL Beneficiary of its
+obligations hereunder. If necessary, to the extent not otherwise
+reimbursed, the RCL Trustee shall be entitled to indemnification
+from amounts on deposit in the RCL Account for any claims
+against the RCL Trustee the indemnification for which is
+provided pursuant to this Section 2.7. Any claim
+against the RCL Trustee shall be defended by the RCL Beneficiary
+and the RCL Trustee shall be entitled to separate counsel, the
+fees and expenses of which shall be paid by the RCL Beneficiary.
+The indemnities contained in this Section 2.7 shall
+survive the resignation, removal or termination of the RCL
+Trustee or the termination of this Agreement. Any amounts paid
+to the RCL Trustee pursuant to this Section 2.7
+shall be deemed not to be RCL Assets immediately after such
+payment. The RCL Trustee acknowledges that funds may be
+deposited in the RCL Account only as specifically provided in
+the Basic Documents, and that some funds paid to RCL in respect
+of the Series 2000-1 Certificates and funds paid to RCL as
+holder of the Subordinated Notes and deposited in the Cash
+Collateral Account have been pledged to the Lease Trustee on
+behalf of the Lease Trust and the Indenture Trustee on behalf of
+the Senior Noteholder in accordance with the terms of the Basic
+Documents.
+
+ 
+Section 145 of the General Corporation Law of Delaware
+provides as follows:
+
+145. Indemnification of officers, directors,
+employees and agents; insurance.
+
+ 
+ 
+
+ 
+ 
+ (a) A corporation may indemnify any person who was or is a
+ party or is threatened to be made a party to any threatened,
+ pending or completed action, suit or proceeding, whether civil,
+ criminal, administrative or investigative (other than an action
+ by or in the right of the corporation) by reason of the fact
+ that he is or was a director, officer, employee or agent of the
+ corporation, or is or was serving at the request of the
+ corporation as a director, officer, employee or agent of another
+ corporation, partnership, joint venture, trust or other
+ enterprise, against expenses (including attorneys fees),
+ judgments, fines and amounts paid in settlement actually and
+ reasonably incurred by him in connection with such action, suit
+ or proceeding if he acted in good faith and in a manner he
+ reasonably believed to be in or not opposed to the best
+ interests of the corporation, and, with respect to any criminal
+ action or proceeding, had no reasonable cause to believe his
+ conduct was unlawful. The termination of any action, suit or
+ proceeding by judgment, order, settlement, conviction, or upon a
+ plea of nolo contendere or its equivalent, shall not, of itself,
+ create a presumption that the person did not act in good faith
+ and in a manner which he reasonably believed to be in or not
+ opposed to the best interests of the corporation, and, with
+ respect to any criminal action or proceeding, had reasonable
+ cause to believe that his conduct was unlawful.
+
+II-2
+
+Table of Contents
+
+ 
+ 
+
+ 
+ 
+ (b) A corporation may indemnify any person who was or is a
+ party or is threatened to be made a party to any threatened,
+ pending or completed action or suit by or in the right of the
+ corporation to procure a judgment in its favor by reason of the
+ fact that he is or was a director, officer, employee or agent of
+ the corporation, or is or was serving at the request of the
+ corporation as a director, officer, employee or agent of another
+ corporation, partnership, joint venture, trust or other
+ enterprise against expenses (including attorneys fees)
+ actually and reasonably incurred by him in connection with the
+ defense or settlement of such action or suit if he acted in good
+ faith and in a manner he reasonably believed to be in or not
+ opposed to the best interests of the corporation and except that
+ no indemnification shall be made in respect of any claim, issue
+ or matter as to which such person shall have been adjudged to be
+ liable to the corporation unless and only to the extent that the
+ Court of Chancery or the court in which such action or suit was
+ brought shall determine upon application that, despite the
+ adjudication of liability but in view of all the circumstances
+ of the case, such person is fairly and reasonably entitled to
+ indemnity for such expenses which the Court of Chancery or such
+ other court shall deem proper.
+
+ 
+
+ 
+ 
+ (c) To the extent that a director, officer, employee or
+ agent of a corporation has been successful on the merits or
+ otherwise in defense of any action, suit or proceeding referred
+ to in subsections (a) and (b) of this section, or in
+ defense of any claim, issue or matter therein, he shall be
+ indemnified against expenses (including attorneys fees)
+ actually and reasonably incurred by him in connection therewith.
+
+ 
+
+ 
+ 
+ (d) Any indemnification under subsections (a)
+ and (b) of this section (unless ordered by a court) shall
+ be made by the corporation only as authorized in the specific
+ case upon a determination that indemnification of the director,
+ officer, employee or agent is proper in the circumstances
+ because he has met the applicable standard of conduct set forth
+ in subsections (a) and (b) of this section. Such
+ determination shall be made (1) by a majority vote of the
+ directors who are not parties to such action, suit or
+ proceeding, even though less than a quorum, or (2) if there
+ are no such directors, or if such directors so direct, by
+ independent legal counsel in a written opinion, or (3) by
+ the stockholders.
+
+ 
+
+ 
+ 
+ (e) Expenses (including attorneys fees) incurred by
+ an officer or director in defending a civil, criminal,
+ administrative or investigative action, suit or proceeding may
+ be paid by the corporation in advance of the final disposition
+ of such action, suit or proceeding upon receipt of an
+ undertaking by or on behalf of such director or officer to repay
+ such amount if it shall ultimately be determined that he is not
+ entitled to be indemnified by the corporation as authorized in
+ this section. Such expenses (including attorneys fees)
+ incurred by other employees and agents may be so paid upon such
+ terms and conditions, if any, as the board of directors deems
+ appropriate.
+
+ 
+
+ 
+ 
+ (f) The indemnification and advancement of expenses
+ provided by, or granted pursuant to, the other subsections of
+ this section shall not be deemed exclusive of any other rights
+ to which those seeking indemnification or advancement of
+ expenses may be entitled under any bylaw, agreement, vote of
+ stockholders or disinterested directors or otherwise, both as to
+ action in his official capacity and as to action in another
+ capacity while holding such office.
+
+ 
+
+ 
+ 
+ (g) A corporation shall have power to purchase and
+ maintain insurance on behalf of any person who is or was a
+ director, officer, employee or agent of the corporation, or is
+ or was serving at the request of the corporation as a director,
+ officer, employee or agent of another corporation, partnership,
+ joint venture, trust or other enterprise against any liability
+ asserted against him and incurred by him in any such capacity,
+ or arising out of his status as such, whether or not the
+ corporation would have the power to indemnify him against such
+ liability under this section.
+
+II-3
+
+Table of Contents
+
+ 
+ 
+
+ 
+ 
+ (h) For purposes of this section, references to
+ the corporation shall include, in addition to
+ the resulting corporation, any constituent corporation
+ (including any constituent of a constituent) absorbed in a
+ consolidation or merger which, if its separate existence had
+ continued, would have had power and authority to indemnify its
+ directors, officers, and employees or agents, so that any person
+ who is or was a director, officer, employee or agent of such
+ constituent corporation, or is or was serving at the request of
+ such constituent corporation as a director, officer, employee or
+ agent of another corporation, partnership, joint venture, trust
+ or other enterprise, shall stand in the same position under this
+ section with respect to the resulting or surviving corporation
+ as he would have with respect to such constituent corporation if
+ its separate existence had continued.
+
+ 
+
+ 
+ 
+ (i) For purposes of this section, references to
+ other enterprises shall include employee
+ benefit plans; references to fines shall
+ include any excise taxes assessed on a person with respect to
+ any employee benefit plan; and references to serving at
+ the request of the corporation shall include any
+ service as a director, officer, employee, or agent of the
+ corporation which imposes duties on, or involves services by,
+ such director, officer, employee, or agent with respect to an
+ employee benefit plan, its participants or beneficiaries; and a
+ person who acted in good faith and in a manner he reasonably
+ believed to be in the interest of the participants and
+ beneficiaries of an employee benefit plan shall be deemed to
+ have acted in a manner not opposed to the best
+ interests of the corporation as referred to in this
+ section.
+
+ 
+
+ 
+ 
+ (j) The indemnification and advancement of expenses
+ provided by, or granted pursuant to, this section shall, unless
+ otherwise provided when authorized or ratified, continue as to a
+ person who has ceased to be a director, officer, employee or
+ agent and shall inure to the benefit of the heirs, executors and
+ administrators of such a person.
+
+ 
+
+ 
+ 
+ (k) The Court of Chancery is hereby vested with exclusive
+ jurisdiction to hear and determine all actions for advancement
+ of expenses or indemnification brought under this section or
+ under any bylaw, agreement, vote of stockholders or
+ disinterested directors, or otherwise. The Court of Chancery may
+ summarily determine a corporation s obligation to advance
+ expenses (including attorneys fees).
+
+ 
+Article Ninth, Section 5 of the Certificate of
+Incorporation of Ford Motor Credit Company provides as follows:
+
+SECTION 5.
+
+Indemnification
+
+ 
+5.1. Directors, Officers and Employees of the
+Corporation. Every person now or hereafter serving as a
+director, officer or employee of the corporation shall be
+indemnified and held harmless by the corporation from and
+against any and all loss, cost, liability and expense that may
+be imposed upon or incurred by him in connection with or
+resulting from any claim, action, suit, or proceeding, civil or
+criminal, in which he may become involved, as a party or
+otherwise, by reason of his being or having been a director,
+officer or employee of the corporation, whether or not he
+continues to be such at the time such loss, cost, liability or
+expense shall have been imposed or incurred. As used herein, the
+term loss, cost, liability and expense shall
+include, but shall not be limited to, counsel fees and
+disbursements and amounts of judgments, fines or penalties
+against, and amounts paid in settlement by, any such director,
+officer or employee; provided, however, that no such
+director, officer or employee shall be entitled to claim such
+indemnity: (1) with respect to any matter as to which there
+shall have been a final adjudication that he has committed or
+allowed some act or omission, (a) otherwise than in good
+faith in what he considered to be the best interests of the
+corporation, and (b) without reasonable cause to believe
+that such act or omission was proper and legal; or (2) in
+the event of a settlement of such claim, action, suit, or
+proceeding unless (a) the court having jurisdiction thereof
+shall have
+
+II-4
+
+Table of Contents
+
+approved of such settlement with knowledge of the indemnity
+provided herein, or (b) a written opinion of independent
+legal counsel, selected by or in manner determined by the Board
+of Directors, shall have been rendered substantially
+concurrently with such settlement, to the effect that it was not
+probable that the matter as to which indemnification is being
+made would have resulted in a final adjudication as specified in
+clause (1) above, and that the said loss, cost, liability
+or expense may properly be borne by the corporation. A
+conviction or judgment (whether based on a plea of guilty or
+nolo contendere or its equivalent, or after trial) in a criminal
+action, suit or proceeding shall not be deemed an adjudication
+that such director, officer or employee has committed or allowed
+some act or omission as hereinabove provided if independent
+legal counsel, selected as hereinabove set forth, shall
+substantially concurrently with such conviction or judgment give
+to the corporation a written opinion that such director, officer
+or employee was acting in good faith in what he considered to be
+the best interests of the corporation or was not without
+reasonable cause to believe that such act or omission was proper
+and legal.
+
+ 
+5.2. Directors, Officers and Employees of
+Subsidiaries. Every person (including a director, officer or
+employee of the corporation) who at the request of the
+corporation acts as a director, officer or employee of any other
+corporation in which the corporation owns shares of stock or of
+which it is a creditor shall be indemnified to the same extent
+and subject to the same conditions that the directors, officers
+and employees of the corporation are indemnified under the
+preceding paragraph, except that the amounts of such loss, cost,
+liability or expense paid to any such director, officer or
+employee shall be reduced by and to the extent of any amounts
+which may be collected by him from such other corporation.
+
+ 
+5.3. Miscellaneous. The provisions of this
+Section 5 of Article NINTH shall cover claims,
+actions, suits and proceedings, civil or criminal, whether now
+pending or hereafter commenced and shall be retroactive to cover
+acts or omissions or alleged acts or omissions which heretofore
+have taken place. In the event of death of any person having a
+right of indemnification under the provisions of this
+Section 5 of Article NINTH, such right shall inure to
+the benefit of his heirs, executors, administrators and personal
+representatives. If any part of this Section 5 of
+Article NINTH should be found to be invalid or ineffective
+in any proceeding, the validity and effect of the remaining
+provisions shall not be affected.
+
+ 
+5.4. Indemnification Not Exclusive. The foregoing
+right of indemnification shall not be deemed exclusive of any
+other right to which those indemnified may be entitled, and the
+corporation may provide additional indemnity and rights to its
+directors, officers or employees.
+
+Item 15. Recent Sales of Unregistered
+Securities.
+
+ 
+Not Applicable
+
+Item 16. Exhibits and Financial
+Statements.
+
+ 
+(a) Exhibits:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 1.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Underwriting Agreement.***
+
+ 
+ 3.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Amended and Restated Trust Agreement of RCL Trust 
+ 2000-1, between Ford Credit and the RCL Trustee.**
+
+ 
+ 3.2
+ 
+ 
+ 
+ 
+ 
+ 
+ Restated Certificate of Incorporation of Ford Motor Credit
+ Company.*
+
+ 
+ 3.3
+ 
+ 
+ 
+ 
+ 
+ 
+ By-Laws of Ford Motor Credit Company.*
+
+ 
+ 4.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Trust Agreement of the Issuer, between the RCL Trustee
+ and the Lease Trustee.**
+
+ 
+ 4.2
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Indenture, between the Lease Trustee and the Indenture
+ Trustee.**
+
+ 
+ 4.3
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-1 Senior Note (included as part of
+ Exhibit 4.2).**
+
+ 
+ 4.4
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-2 Senior Note (included as part of
+ Exhibit 4.2).**
+
+II-5
+
+Table of Contents
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 4.5
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-3 Senior Note (included as part of
+ Exhibit 4.2).**
+
+ 
+ 4.6
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-4 Senior Note (included as part of
+ Exhibit 4.2).**
+
+ 
+ 4.7
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-5 Senior Note (included as part of
+ Exhibit 4.2).**
+
+ 
+ 5.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Opinion of H.D. Smith, Esq., Secretary-Corporate Counsel of Ford
+ Motor Credit Company with respect to legality.**
+
+ 
+ 8.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Opinion of Skadden, Arps, Slate, Meagher Flom LLP with
+ respect to tax matters.**
+
+ 
+ 8.2
+ 
+ 
+ 
+ 
+ 
+ 
+ Opinion of Hurley D. Smith, Esq., Secretary and Corporate
+ Counsel of Ford Motor Credit Company with respect to Michigan
+ income tax matters.**
+
+ 
+ 10.1
+ 
+ 
+ 
+ 
+ 
+ 
+ FCTT Trust Agreement, between Ford Credit and U.S. Bank National
+ Association.***
+
+ 
+ 10.2
+ 
+ 
+ 
+ 
+ 
+ 
+ FCMTT Agreement, among Ford Credit, U.S. Bank National
+ Association and Wilmington Trust Company.***
+
+ 
+ 10.3
+ 
+ 
+ 
+ 
+ 
+ 
+ FCAL Agreement, between FCAL and U.S. Bank National
+ Association.***
+
+ 
+ 10.4
+ 
+ 
+ 
+ 
+ 
+ 
+ FCALM Agreement, between FCALM and U.S. Bank National
+ Association.***
+
+ 
+ 10.5
+ 
+ 
+ 
+ 
+ 
+ 
+ Administrative Agency Agreement, among the Titling Companies,
+ Ford Credit and U.S. Bank National Association.***
+
+ 
+ 10.6
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Series 2000-1 Supplement, among the Titling
+ Companies, Ford Credit and U.S. Bank National Association.**
+
+ 
+ 10.7
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Asset Contribution Agreement, between Ford Credit and
+ the RCL Trustee.**
+
+ 
+ 10.8
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Transfer Agreement, between the RCL Trustee and the
+ Lease Trustee.**
+
+ 
+ 10.9
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Program Operating Lease, between the RCL Trustee and the
+ Lease Trustee.**
+
+ 
+ 10.10
+ 
+ 
+ 
+ 
+ 
+ 
+ Appendix I Definitions.***
+
+ 
+ 10.11
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Appendix A Definitions.**
+
+ 
+ 23.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Consent of H.D. Smith, Esq., Secretary-Corporate Counsel of Ford
+ Motor Credit Company (included as part of Exhibit 5.1).**
+
+ 
+ 23.2
+ 
+ 
+ 
+ 
+ 
+ 
+ Consent of Skadden, Arps, Slate, Meagher Flom LLP
+ (included as part of Exhibit 8.1).**
+
+ 
+ 23.3
+ 
+ 
+ 
+ 
+ 
+ 
+ Consent of PricewaterhouseCoopers LLP.***
+
+ 
+ 24.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Powers of Attorney of officers and directors of Ford Motor
+ Credit Company.**
+
+ 
+ 25.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Form T-1 of The Chase Manhattan Bank.***
+
+ 
+ 
+
+ * 
+ 
+ Incorporated by reference to Exhibits 3.1 (Restated
+ Certificate of Incorporation) and 3.2 (By-Laws) to Ford Motor
+ Credit Company s Registration Statement on Form S-1
+ (Registration No. 33-25082).
+
+ 
+
+ ** 
+ 
+ Previously filed.
+
+ 
+
+ *** 
+ 
+ To be filed by amendment.
+
+ (b) Financial
+Statements:
+
+Not Applicable
+
+Item 17. Undertakings.
+
+ 
+(a) To provide to the Underwriter at the closing specified
+in the Underwriting Agreement certificates in such denominations
+and registered in such names as required by the Underwriter to
+permit prompt delivery to each purchaser.
+
+II-6
+
+Table of Contents
+
+ 
+(b) Insofar as indemnification for liabilities arising
+under the Securities Act of 1933 may be permitted to directors,
+officers and controlling persons of the registrant pursuant to
+the provisions described under Item 14 above, or otherwise,
+the registrant has been advised that in the opinion of the
+Securities and Exchange Commission such indemnification is
+against public policy as expressed in the Act and is, therefore,
+unenforceable. In the event that a claim for indemnification
+against such liabilities (other than the payment by the
+registrant of expenses incurred or paid by a director, officer
+or controlling person of the registrant in the successful
+defense of any action, suit or proceeding) is asserted by such
+director, officer or controlling person in connection with the
+securities being registered, the registrant will, unless in the
+opinion of its counsel the matter has been settled by
+controlling precedent, submit to a court of appropriate
+jurisdiction the question whether such indemnification by it is
+against public policy as expressed in the Act and will be
+governed by the final adjudication of such issue.
+
+ 
+The undersigned registrant hereby undertakes that:
+
+ 
+ 
+
+ 
+ 
+ (1) For purposes of determining any liability under the
+ Securities Act of 1933, the information omitted from the form of
+ prospectus filed as part of this registration statement in
+ reliance upon Rule 430A and contained in a form of
+ prospectus filed by the registrant pursuant to
+ Rule 424(b)(1) or (4) or 497(b) under the Securities Act
+ shall be deemed to be part of this registration statement as of
+ the time it was declared effective.
+
+ 
+
+ 
+ 
+ (2) For the purpose of determining any liability under the
+ Securities Act of 1933 each post-effective amendment that
+ contains a form of prospectus shall be deemed to be a new
+ registration statement relating to the securities offered
+ therein, and the offering of such securities at that time shall
+ be deemed to be the initial bona fide offering thereof.
+
+II-7
+
+Table of Contents
+
+SIGNATURES
+
+ 
+Pursuant to the requirements of the Securities Act of 1933, the
+registrant has duly caused this Amendment No. 3 to the
+Registration Statement to be signed on its behalf by the
+undersigned, thereunto duly authorized, in the City of Detroit
+and the State of Michigan on the 18th day of December, 2000.
+
+ 
+ 
+
+ 
+ 
+ RCL TRUST 2000-1
+
+ 
+ 
+ 
+
+ 
+ By 
+ 
+ FORD MOTOR CREDIT COMPANY,
+
+ 
+ 
+
+ 
+ 
+ Depositor and Beneficiary of RCL Trust 2000-1
+
+ 
+ 
+ 
+
+ 
+ By 
+ 
+ /s/ DONALD A. WINKLER*
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (Donald A. Winkler)
+
+ 
+ 
+ Chairman of the Board of Directors of
+
+ 
+ 
+ Ford Motor Credit Company
+
+ 
+Under the requirements of the Securities Act of 1933, this
+Amendment No. 3 to the Registration Statement has been
+signed below by the following officers and directors of FORD
+MOTOR CREDIT COMPANY, in the capacities and on the date
+indicated.
+
+ 
+ 
+ 
+ 
+ 
+
+ Signature
+ 
+ Title
+ 
+ Date
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ /s/ DONALD A. WINKLER*
+
+ (Donald A. Winkler)
+ 
+ 
+ 
+ Chairman of the Board of Directors and Director (principal
+ executive officer)
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ BIBIANA BOERIO*
+
+ (Bibiana Boerio)
+ 
+ 
+ 
+ Executive Vice President, Chief Financial Officer and Treasurer
+ (principal financial and accounting officer)
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ BARRETT BURNS*
+
+ (Barrett Burns)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ GREGORY C. SMITH*
+
+ (Gregory C. Smith)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ MALCOLM S. MACDONALD*
+
+ (Malcolm S. Macdonald)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ DAVID C. FLANIGAN*
+
+ (David C. Flanigan)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ TERRY D. CHENAULT*
+
+ (Terry D. Chenault)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ DALE R. WALKER*
+
+ (Dale R. Walker)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ HENRY D. WALLACE*
+
+ (Henry D. Wallace)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ 
+
+ *By: 
+ 
+ /s/ HURLEY D. SMITH
+
+(Hurley D. Smith)
+
+Attorney-in-fact
+
+II-8
+
+Table of Contents
+
+ 
+Pursuant to the requirements of the Securities Act of 1933, the
+registrant has duly caused this Amendment No. 3 to the
+Registration Statement to be signed on its behalf by the
+undersigned, thereunto duly authorized, in the City of Detroit
+and the State of Michigan on the 18th day of December, 2000.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001116310_ford_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001116310_ford_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..33f99381d99b57737de4d219b55e34ea5e6e9a98
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001116310_ford_prospectus_summary.txt
@@ -0,0 +1,1286 @@
+Prospectus
+
+ Merrill Lynch Co.
+
+ 
+
+ 
+
+You should rely only the information contained in this
+prospectus. We have not authorized anyone to provide you with
+different information.
+
+We are not offering the senior notes in any state where the
+offer is not permitted.
+
+Dealer Prospectus Delivery Requirements
+
+For 90 days after the date of this prospectus, all dealers
+making transactions in the senior notes, whether or not
+participating in this offering, may be required to deliver a
+prospectus. In addition, all dealers will deliver a prospectus
+when acting as underwriters of the senior notes and with respect
+to their unsold allotments or subscriptions.
+
+Table of Contents
+
+PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
+
+Item 13. Other Expenses of Issuance and
+Distribution.
+
+ 
+The following table sets forth the estimated expenses in
+connection with the offering described in this Registration
+Statement.
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Securities and Exchange Commission
+
+ 
+ 
+ $
+ *
+ 
+
+ 
+ 
+ Rating agency fees
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Printing
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Legal fees and expenses
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Accountants fees
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Fees and expenses of the RCL Trustee
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Fees and expenses of the Lease Trustee
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Fees and expenses of the Indenture Trustee
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Miscellaneous expenses
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Total
+
+ 
+ 
+ $
+ *
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ * 
+ 
+ To be supplied by amendment
+
+Item 14. Indemnification of Directors and
+Officers.
+
+ 
+Section 3803 of the Delaware Business Trust Statute
+provides as follows:
+
+3803. Liability of Beneficial Owners and
+Trustees.
+
+ 
+ 
+
+ 
+ 
+ (a) Except to the extent otherwise provided in the
+ governing instrument of the business trust, the beneficial
+ owners shall be entitled to the same limitation of personal
+ liability extended to stockholders of private corporations for
+ profit organized under the general corporation law of the State.
+
+ 
+
+ 
+ 
+ (b) Except to the extent otherwise provided in the
+ governing instrument of a business trust, a trustee, when acting
+ in such capacity, shall not be personally liable to any person
+ other than the business trust or a beneficial owner for any act,
+ omission or obligation of the business trust or any trustee
+ thereof.
+
+ 
+
+ 
+ 
+ (c) Except to the extent otherwise provided in the
+ governing instrument of a business trust, an officer, employee,
+ manager or other person acting pursuant to
+ Section 3806(b)(7), when acting in such capacity, shall not
+ be personally liable to any person other than the business trust
+ or a beneficial owner for any act, omission or obligation of the
+ business trust or any trustee thereof.
+
+ 
+Section 3817 of the Delaware Business Trust Statute
+provides as follows:
+
+3817. Indemnification.
+
+ 
+ 
+
+ 
+ 
+ (a) Subject to such standards and restrictions, if any, as
+ are set forth in the governing instrument of a business trust, a
+ business trust shall have the power to indemnify and hold
+ harmless any trustee or beneficial owner or other person from
+ and against any and all claims and demands whatsoever.
+
+ 
+
+ 
+ 
+ (b) The absence of a provision for indemnity in the
+ governing instrument of a business trust shall not be construed
+ to deprive any trustee or beneficial owner or other
+
+II-1
+
+Table of Contents
+
+ 
+ 
+
+ 
+ 
+ person of any right to indemnity which is otherwise available to
+ such person under the laws of this State.
+
+ 
+Section 2.7 of the Amended and Restated Trust Agreement of
+RCL Trust 2000-1 provides as follows:
+
+ 
+Section 2.7. Liability and Indemnification.
+The RCL Beneficiary shall indemnify, defend and hold harmless
+the RCL Trustee, including its successors, assigns, officers,
+directors, shareholders, employees and agents for all losses,
+claims, damages, liabilities and expenses (collectively,
+ Liabilities ), penalties and taxes (other than
+income taxes relating to the fees paid to it hereunder) incurred
+by it in connection with the administration of RCL (including
+attorneys fees) and the performance of its duties
+hereunder; provided, however, that in no event shall the
+RCL Trustee be indemnified or held harmless for any Liabilities
+to the extent (i) incurred by reason of the RCL
+Trustee s willful misconduct, bad faith or negligence or
+(ii) incurred by reason of the RCL Trustee s breach of
+its representations and warranties set forth in
+Section 6.6. The RCL Trustee shall notify the RCL
+Beneficiary promptly of any claim for which the RCL Trustee may
+seek indemnity. Failure by the RCL Trustee to so notify the RCL
+Beneficiary shall not relieve the RCL Beneficiary of its
+obligations hereunder. If necessary, to the extent not otherwise
+reimbursed, the RCL Trustee shall be entitled to indemnification
+from amounts on deposit in the RCL Account for any claims
+against the RCL Trustee the indemnification for which is
+provided pursuant to this Section 2.7. Any claim
+against the RCL Trustee shall be defended by the RCL Beneficiary
+and the RCL Trustee shall be entitled to separate counsel, the
+fees and expenses of which shall be paid by the RCL Beneficiary.
+The indemnities contained in this Section 2.7 shall
+survive the resignation, removal or termination of the RCL
+Trustee or the termination of this Agreement. Any amounts paid
+to the RCL Trustee pursuant to this Section 2.7
+shall be deemed not to be RCL Assets immediately after such
+payment. The RCL Trustee acknowledges that funds may be
+deposited in the RCL Account only as specifically provided in
+the Basic Documents, and that some funds paid to RCL in respect
+of the Series 2000-1 Certificates and funds paid to RCL as
+holder of the Subordinated Notes and deposited in the Cash
+Collateral Account have been pledged to the Lease Trustee on
+behalf of the Lease Trust and the Indenture Trustee on behalf of
+the Senior Noteholder in accordance with the terms of the Basic
+Documents.
+
+ 
+Section 145 of the General Corporation Law of Delaware
+provides as follows:
+
+145. Indemnification of officers, directors,
+employees and agents; insurance.
+
+ 
+ 
+
+ 
+ 
+ (a) A corporation may indemnify any person who was or is a
+ party or is threatened to be made a party to any threatened,
+ pending or completed action, suit or proceeding, whether civil,
+ criminal, administrative or investigative (other than an action
+ by or in the right of the corporation) by reason of the fact
+ that he is or was a director, officer, employee or agent of the
+ corporation, or is or was serving at the request of the
+ corporation as a director, officer, employee or agent of another
+ corporation, partnership, joint venture, trust or other
+ enterprise, against expenses (including attorneys fees),
+ judgments, fines and amounts paid in settlement actually and
+ reasonably incurred by him in connection with such action, suit
+ or proceeding if he acted in good faith and in a manner he
+ reasonably believed to be in or not opposed to the best
+ interests of the corporation, and, with respect to any criminal
+ action or proceeding, had no reasonable cause to believe his
+ conduct was unlawful. The termination of any action, suit or
+ proceeding by judgment, order, settlement, conviction, or upon a
+ plea of nolo contendere or its equivalent, shall not, of itself,
+ create a presumption that the person did not act in good faith
+ and in a manner which he reasonably believed to be in or not
+ opposed to the best interests of the corporation, and, with
+ respect to any criminal action or proceeding, had reasonable
+ cause to believe that his conduct was unlawful.
+
+II-2
+
+Table of Contents
+
+ 
+ 
+
+ 
+ 
+ (b) A corporation may indemnify any person who was or is a
+ party or is threatened to be made a party to any threatened,
+ pending or completed action or suit by or in the right of the
+ corporation to procure a judgment in its favor by reason of the
+ fact that he is or was a director, officer, employee or agent of
+ the corporation, or is or was serving at the request of the
+ corporation as a director, officer, employee or agent of another
+ corporation, partnership, joint venture, trust or other
+ enterprise against expenses (including attorneys fees)
+ actually and reasonably incurred by him in connection with the
+ defense or settlement of such action or suit if he acted in good
+ faith and in a manner he reasonably believed to be in or not
+ opposed to the best interests of the corporation and except that
+ no indemnification shall be made in respect of any claim, issue
+ or matter as to which such person shall have been adjudged to be
+ liable to the corporation unless and only to the extent that the
+ Court of Chancery or the court in which such action or suit was
+ brought shall determine upon application that, despite the
+ adjudication of liability but in view of all the circumstances
+ of the case, such person is fairly and reasonably entitled to
+ indemnity for such expenses which the Court of Chancery or such
+ other court shall deem proper.
+
+ 
+
+ 
+ 
+ (c) To the extent that a director, officer, employee or
+ agent of a corporation has been successful on the merits or
+ otherwise in defense of any action, suit or proceeding referred
+ to in subsections (a) and (b) of this section, or in
+ defense of any claim, issue or matter therein, he shall be
+ indemnified against expenses (including attorneys fees)
+ actually and reasonably incurred by him in connection therewith.
+
+ 
+
+ 
+ 
+ (d) Any indemnification under subsections (a)
+ and (b) of this section (unless ordered by a court) shall
+ be made by the corporation only as authorized in the specific
+ case upon a determination that indemnification of the director,
+ officer, employee or agent is proper in the circumstances
+ because he has met the applicable standard of conduct set forth
+ in subsections (a) and (b) of this section. Such
+ determination shall be made (1) by a majority vote of the
+ directors who are not parties to such action, suit or
+ proceeding, even though less than a quorum, or (2) if there
+ are no such directors, or if such directors so direct, by
+ independent legal counsel in a written opinion, or (3) by
+ the stockholders.
+
+ 
+
+ 
+ 
+ (e) Expenses (including attorneys fees) incurred by
+ an officer or director in defending a civil, criminal,
+ administrative or investigative action, suit or proceeding may
+ be paid by the corporation in advance of the final disposition
+ of such action, suit or proceeding upon receipt of an
+ undertaking by or on behalf of such director or officer to repay
+ such amount if it shall ultimately be determined that he is not
+ entitled to be indemnified by the corporation as authorized in
+ this section. Such expenses (including attorneys fees)
+ incurred by other employees and agents may be so paid upon such
+ terms and conditions, if any, as the board of directors deems
+ appropriate.
+
+ 
+
+ 
+ 
+ (f) The indemnification and advancement of expenses
+ provided by, or granted pursuant to, the other subsections of
+ this section shall not be deemed exclusive of any other rights
+ to which those seeking indemnification or advancement of
+ expenses may be entitled under any bylaw, agreement, vote of
+ stockholders or disinterested directors or otherwise, both as to
+ action in his official capacity and as to action in another
+ capacity while holding such office.
+
+ 
+
+ 
+ 
+ (g) A corporation shall have power to purchase and
+ maintain insurance on behalf of any person who is or was a
+ director, officer, employee or agent of the corporation, or is
+ or was serving at the request of the corporation as a director,
+ officer, employee or agent of another corporation, partnership,
+ joint venture, trust or other enterprise against any liability
+ asserted against him and incurred by him in any such capacity,
+ or arising out of his status as such, whether or not the
+ corporation would have the power to indemnify him against such
+ liability under this section.
+
+II-3
+
+Table of Contents
+
+ 
+ 
+
+ 
+ 
+ (h) For purposes of this section, references to
+ the corporation shall include, in addition to
+ the resulting corporation, any constituent corporation
+ (including any constituent of a constituent) absorbed in a
+ consolidation or merger which, if its separate existence had
+ continued, would have had power and authority to indemnify its
+ directors, officers, and employees or agents, so that any person
+ who is or was a director, officer, employee or agent of such
+ constituent corporation, or is or was serving at the request of
+ such constituent corporation as a director, officer, employee or
+ agent of another corporation, partnership, joint venture, trust
+ or other enterprise, shall stand in the same position under this
+ section with respect to the resulting or surviving corporation
+ as he would have with respect to such constituent corporation if
+ its separate existence had continued.
+
+ 
+
+ 
+ 
+ (i) For purposes of this section, references to
+ other enterprises shall include employee
+ benefit plans; references to fines shall
+ include any excise taxes assessed on a person with respect to
+ any employee benefit plan; and references to serving at
+ the request of the corporation shall include any
+ service as a director, officer, employee, or agent of the
+ corporation which imposes duties on, or involves services by,
+ such director, officer, employee, or agent with respect to an
+ employee benefit plan, its participants or beneficiaries; and a
+ person who acted in good faith and in a manner he reasonably
+ believed to be in the interest of the participants and
+ beneficiaries of an employee benefit plan shall be deemed to
+ have acted in a manner not opposed to the best
+ interests of the corporation as referred to in this
+ section.
+
+ 
+
+ 
+ 
+ (j) The indemnification and advancement of expenses
+ provided by, or granted pursuant to, this section shall, unless
+ otherwise provided when authorized or ratified, continue as to a
+ person who has ceased to be a director, officer, employee or
+ agent and shall inure to the benefit of the heirs, executors and
+ administrators of such a person.
+
+ 
+
+ 
+ 
+ (k) The Court of Chancery is hereby vested with exclusive
+ jurisdiction to hear and determine all actions for advancement
+ of expenses or indemnification brought under this section or
+ under any bylaw, agreement, vote of stockholders or
+ disinterested directors, or otherwise. The Court of Chancery may
+ summarily determine a corporation s obligation to advance
+ expenses (including attorneys fees).
+
+ 
+Article Ninth, Section 5 of the Certificate of
+Incorporation of Ford Motor Credit Company provides as follows:
+
+SECTION 5.
+
+Indemnification
+
+ 
+5.1. Directors, Officers and Employees of the
+Corporation. Every person now or hereafter serving as a
+director, officer or employee of the corporation shall be
+indemnified and held harmless by the corporation from and
+against any and all loss, cost, liability and expense that may
+be imposed upon or incurred by him in connection with or
+resulting from any claim, action, suit, or proceeding, civil or
+criminal, in which he may become involved, as a party or
+otherwise, by reason of his being or having been a director,
+officer or employee of the corporation, whether or not he
+continues to be such at the time such loss, cost, liability or
+expense shall have been imposed or incurred. As used herein, the
+term loss, cost, liability and expense shall
+include, but shall not be limited to, counsel fees and
+disbursements and amounts of judgments, fines or penalties
+against, and amounts paid in settlement by, any such director,
+officer or employee; provided, however, that no such
+director, officer or employee shall be entitled to claim such
+indemnity: (1) with respect to any matter as to which there
+shall have been a final adjudication that he has committed or
+allowed some act or omission, (a) otherwise than in good
+faith in what he considered to be the best interests of the
+corporation, and (b) without reasonable cause to believe
+that such act or omission was proper and legal; or (2) in
+the event of a settlement of such claim, action, suit, or
+proceeding unless (a) the court having jurisdiction thereof
+shall have
+
+II-4
+
+Table of Contents
+
+approved of such settlement with knowledge of the indemnity
+provided herein, or (b) a written opinion of independent
+legal counsel, selected by or in manner determined by the Board
+of Directors, shall have been rendered substantially
+concurrently with such settlement, to the effect that it was not
+probable that the matter as to which indemnification is being
+made would have resulted in a final adjudication as specified in
+clause (1) above, and that the said loss, cost, liability
+or expense may properly be borne by the corporation. A
+conviction or judgment (whether based on a plea of guilty or
+nolo contendere or its equivalent, or after trial) in a criminal
+action, suit or proceeding shall not be deemed an adjudication
+that such director, officer or employee has committed or allowed
+some act or omission as hereinabove provided if independent
+legal counsel, selected as hereinabove set forth, shall
+substantially concurrently with such conviction or judgment give
+to the corporation a written opinion that such director, officer
+or employee was acting in good faith in what he considered to be
+the best interests of the corporation or was not without
+reasonable cause to believe that such act or omission was proper
+and legal.
+
+ 
+5.2. Directors, Officers and Employees of
+Subsidiaries. Every person (including a director, officer or
+employee of the corporation) who at the request of the
+corporation acts as a director, officer or employee of any other
+corporation in which the corporation owns shares of stock or of
+which it is a creditor shall be indemnified to the same extent
+and subject to the same conditions that the directors, officers
+and employees of the corporation are indemnified under the
+preceding paragraph, except that the amounts of such loss, cost,
+liability or expense paid to any such director, officer or
+employee shall be reduced by and to the extent of any amounts
+which may be collected by him from such other corporation.
+
+ 
+5.3. Miscellaneous. The provisions of this
+Section 5 of Article NINTH shall cover claims,
+actions, suits and proceedings, civil or criminal, whether now
+pending or hereafter commenced and shall be retroactive to cover
+acts or omissions or alleged acts or omissions which heretofore
+have taken place. In the event of death of any person having a
+right of indemnification under the provisions of this
+Section 5 of Article NINTH, such right shall inure to
+the benefit of his heirs, executors, administrators and personal
+representatives. If any part of this Section 5 of
+Article NINTH should be found to be invalid or ineffective
+in any proceeding, the validity and effect of the remaining
+provisions shall not be affected.
+
+ 
+5.4. Indemnification Not Exclusive. The foregoing
+right of indemnification shall not be deemed exclusive of any
+other right to which those indemnified may be entitled, and the
+corporation may provide additional indemnity and rights to its
+directors, officers or employees.
+
+Item 15. Recent Sales of Unregistered
+Securities.
+
+ 
+Not Applicable
+
+Item 16. Exhibits and Financial
+Statements.
+
+ 
+(a) Exhibits:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 1.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Underwriting Agreement.***
+
+ 
+ 3.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Amended and Restated Trust Agreement of RCL Trust 
+ 2000-1, between Ford Credit and the RCL Trustee.**
+
+ 
+ 3.2
+ 
+ 
+ 
+ 
+ 
+ 
+ Restated Certificate of Incorporation of Ford Motor Credit
+ Company.*
+
+ 
+ 3.3
+ 
+ 
+ 
+ 
+ 
+ 
+ By-Laws of Ford Motor Credit Company.*
+
+ 
+ 4.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Trust Agreement of the Issuer, between the RCL Trustee
+ and the Lease Trustee.**
+
+ 
+ 4.2
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Indenture, between the Lease Trustee and the Indenture
+ Trustee.**
+
+ 
+ 4.3
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-1 Senior Note (included as part of
+ Exhibit 4.2).**
+
+ 
+ 4.4
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-2 Senior Note (included as part of
+ Exhibit 4.2).**
+
+II-5
+
+Table of Contents
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 4.5
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-3 Senior Note (included as part of
+ Exhibit 4.2).**
+
+ 
+ 4.6
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-4 Senior Note (included as part of
+ Exhibit 4.2).**
+
+ 
+ 4.7
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-5 Senior Note (included as part of
+ Exhibit 4.2).**
+
+ 
+ 5.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Opinion of H.D. Smith, Esq., Secretary-Corporate Counsel of Ford
+ Motor Credit Company with respect to legality.**
+
+ 
+ 8.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Opinion of Skadden, Arps, Slate, Meagher Flom LLP with
+ respect to tax matters.**
+
+ 
+ 8.2
+ 
+ 
+ 
+ 
+ 
+ 
+ Opinion of Hurley D. Smith, Esq., Secretary and Corporate
+ Counsel of Ford Motor Credit Company with respect to Michigan
+ income tax matters.**
+
+ 
+ 10.1
+ 
+ 
+ 
+ 
+ 
+ 
+ FCTT Trust Agreement, between Ford Credit and U.S. Bank National
+ Association.***
+
+ 
+ 10.2
+ 
+ 
+ 
+ 
+ 
+ 
+ FCMTT Agreement, among Ford Credit, U.S. Bank National
+ Association and Wilmington Trust Company.***
+
+ 
+ 10.3
+ 
+ 
+ 
+ 
+ 
+ 
+ FCAL Agreement, between FCAL and U.S. Bank National
+ Association.***
+
+ 
+ 10.4
+ 
+ 
+ 
+ 
+ 
+ 
+ FCALM Agreement, between FCALM and U.S. Bank National
+ Association.***
+
+ 
+ 10.5
+ 
+ 
+ 
+ 
+ 
+ 
+ Administrative Agency Agreement, among the Titling Companies,
+ Ford Credit and U.S. Bank National Association.***
+
+ 
+ 10.6
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Series 2000-1 Supplement, among the Titling
+ Companies, Ford Credit and U.S. Bank National Association.**
+
+ 
+ 10.7
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Asset Contribution Agreement, between Ford Credit and
+ the RCL Trustee.**
+
+ 
+ 10.8
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Transfer Agreement, between the RCL Trustee and the
+ Lease Trustee.**
+
+ 
+ 10.9
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Program Operating Lease, between the RCL Trustee and the
+ Lease Trustee.**
+
+ 
+ 10.10
+ 
+ 
+ 
+ 
+ 
+ 
+ Appendix I Definitions.***
+
+ 
+ 10.11
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Appendix A Definitions.**
+
+ 
+ 23.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Consent of H.D. Smith, Esq., Secretary-Corporate Counsel of Ford
+ Motor Credit Company (included as part of Exhibit 5.1).**
+
+ 
+ 23.2
+ 
+ 
+ 
+ 
+ 
+ 
+ Consent of Skadden, Arps, Slate, Meagher Flom LLP
+ (included as part of Exhibit 8.1).**
+
+ 
+ 23.3
+ 
+ 
+ 
+ 
+ 
+ 
+ Consent of PricewaterhouseCoopers LLP.***
+
+ 
+ 24.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Powers of Attorney of officers and directors of Ford Motor
+ Credit Company.**
+
+ 
+ 25.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Form T-1 of The Chase Manhattan Bank.***
+
+ 
+ 
+
+ * 
+ 
+ Incorporated by reference to Exhibits 3.1 (Restated
+ Certificate of Incorporation) and 3.2 (By-Laws) to Ford Motor
+ Credit Company s Registration Statement on Form S-1
+ (Registration No. 33-25082).
+
+ 
+
+ ** 
+ 
+ Previously filed.
+
+ 
+
+ *** 
+ 
+ To be filed by amendment.
+
+ (b) Financial
+Statements:
+
+Not Applicable
+
+Item 17. Undertakings.
+
+ 
+(a) To provide to the Underwriter at the closing specified
+in the Underwriting Agreement certificates in such denominations
+and registered in such names as required by the Underwriter to
+permit prompt delivery to each purchaser.
+
+II-6
+
+Table of Contents
+
+ 
+(b) Insofar as indemnification for liabilities arising
+under the Securities Act of 1933 may be permitted to directors,
+officers and controlling persons of the registrant pursuant to
+the provisions described under Item 14 above, or otherwise,
+the registrant has been advised that in the opinion of the
+Securities and Exchange Commission such indemnification is
+against public policy as expressed in the Act and is, therefore,
+unenforceable. In the event that a claim for indemnification
+against such liabilities (other than the payment by the
+registrant of expenses incurred or paid by a director, officer
+or controlling person of the registrant in the successful
+defense of any action, suit or proceeding) is asserted by such
+director, officer or controlling person in connection with the
+securities being registered, the registrant will, unless in the
+opinion of its counsel the matter has been settled by
+controlling precedent, submit to a court of appropriate
+jurisdiction the question whether such indemnification by it is
+against public policy as expressed in the Act and will be
+governed by the final adjudication of such issue.
+
+ 
+The undersigned registrant hereby undertakes that:
+
+ 
+ 
+
+ 
+ 
+ (1) For purposes of determining any liability under the
+ Securities Act of 1933, the information omitted from the form of
+ prospectus filed as part of this registration statement in
+ reliance upon Rule 430A and contained in a form of
+ prospectus filed by the registrant pursuant to
+ Rule 424(b)(1) or (4) or 497(b) under the Securities Act
+ shall be deemed to be part of this registration statement as of
+ the time it was declared effective.
+
+ 
+
+ 
+ 
+ (2) For the purpose of determining any liability under the
+ Securities Act of 1933 each post-effective amendment that
+ contains a form of prospectus shall be deemed to be a new
+ registration statement relating to the securities offered
+ therein, and the offering of such securities at that time shall
+ be deemed to be the initial bona fide offering thereof.
+
+II-7
+
+Table of Contents
+
+SIGNATURES
+
+ 
+Pursuant to the requirements of the Securities Act of 1933, the
+registrant has duly caused this Amendment No. 3 to the
+Registration Statement to be signed on its behalf by the
+undersigned, thereunto duly authorized, in the City of Detroit
+and the State of Michigan on the 18th day of December, 2000.
+
+ 
+ 
+
+ 
+ 
+ RCL TRUST 2000-1
+
+ 
+ 
+ 
+
+ 
+ By 
+ 
+ FORD MOTOR CREDIT COMPANY,
+
+ 
+ 
+
+ 
+ 
+ Depositor and Beneficiary of RCL Trust 2000-1
+
+ 
+ 
+ 
+
+ 
+ By 
+ 
+ /s/ DONALD A. WINKLER*
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (Donald A. Winkler)
+
+ 
+ 
+ Chairman of the Board of Directors of
+
+ 
+ 
+ Ford Motor Credit Company
+
+ 
+Under the requirements of the Securities Act of 1933, this
+Amendment No. 3 to the Registration Statement has been
+signed below by the following officers and directors of FORD
+MOTOR CREDIT COMPANY, in the capacities and on the date
+indicated.
+
+ 
+ 
+ 
+ 
+ 
+
+ Signature
+ 
+ Title
+ 
+ Date
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ /s/ DONALD A. WINKLER*
+
+ (Donald A. Winkler)
+ 
+ 
+ 
+ Chairman of the Board of Directors and Director (principal
+ executive officer)
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ BIBIANA BOERIO*
+
+ (Bibiana Boerio)
+ 
+ 
+ 
+ Executive Vice President, Chief Financial Officer and Treasurer
+ (principal financial and accounting officer)
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ BARRETT BURNS*
+
+ (Barrett Burns)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ GREGORY C. SMITH*
+
+ (Gregory C. Smith)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ MALCOLM S. MACDONALD*
+
+ (Malcolm S. Macdonald)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ DAVID C. FLANIGAN*
+
+ (David C. Flanigan)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ TERRY D. CHENAULT*
+
+ (Terry D. Chenault)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ DALE R. WALKER*
+
+ (Dale R. Walker)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ HENRY D. WALLACE*
+
+ (Henry D. Wallace)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ 
+
+ *By: 
+ 
+ /s/ HURLEY D. SMITH
+
+(Hurley D. Smith)
+
+Attorney-in-fact
+
+II-8
+
+Table of Contents
+
+ 
+Pursuant to the requirements of the Securities Act of 1933, the
+registrant has duly caused this Amendment No. 3 to the
+Registration Statement to be signed on its behalf by the
+undersigned, thereunto duly authorized, in the City of Detroit
+and the State of Michigan on the 18th day of December, 2000.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001116311_ford_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001116311_ford_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..33f99381d99b57737de4d219b55e34ea5e6e9a98
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001116311_ford_prospectus_summary.txt
@@ -0,0 +1,1286 @@
+Prospectus
+
+ Merrill Lynch Co.
+
+ 
+
+ 
+
+You should rely only the information contained in this
+prospectus. We have not authorized anyone to provide you with
+different information.
+
+We are not offering the senior notes in any state where the
+offer is not permitted.
+
+Dealer Prospectus Delivery Requirements
+
+For 90 days after the date of this prospectus, all dealers
+making transactions in the senior notes, whether or not
+participating in this offering, may be required to deliver a
+prospectus. In addition, all dealers will deliver a prospectus
+when acting as underwriters of the senior notes and with respect
+to their unsold allotments or subscriptions.
+
+Table of Contents
+
+PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
+
+Item 13. Other Expenses of Issuance and
+Distribution.
+
+ 
+The following table sets forth the estimated expenses in
+connection with the offering described in this Registration
+Statement.
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Securities and Exchange Commission
+
+ 
+ 
+ $
+ *
+ 
+
+ 
+ 
+ Rating agency fees
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Printing
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Legal fees and expenses
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Accountants fees
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Fees and expenses of the RCL Trustee
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Fees and expenses of the Lease Trustee
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Fees and expenses of the Indenture Trustee
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Miscellaneous expenses
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Total
+
+ 
+ 
+ $
+ *
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ * 
+ 
+ To be supplied by amendment
+
+Item 14. Indemnification of Directors and
+Officers.
+
+ 
+Section 3803 of the Delaware Business Trust Statute
+provides as follows:
+
+3803. Liability of Beneficial Owners and
+Trustees.
+
+ 
+ 
+
+ 
+ 
+ (a) Except to the extent otherwise provided in the
+ governing instrument of the business trust, the beneficial
+ owners shall be entitled to the same limitation of personal
+ liability extended to stockholders of private corporations for
+ profit organized under the general corporation law of the State.
+
+ 
+
+ 
+ 
+ (b) Except to the extent otherwise provided in the
+ governing instrument of a business trust, a trustee, when acting
+ in such capacity, shall not be personally liable to any person
+ other than the business trust or a beneficial owner for any act,
+ omission or obligation of the business trust or any trustee
+ thereof.
+
+ 
+
+ 
+ 
+ (c) Except to the extent otherwise provided in the
+ governing instrument of a business trust, an officer, employee,
+ manager or other person acting pursuant to
+ Section 3806(b)(7), when acting in such capacity, shall not
+ be personally liable to any person other than the business trust
+ or a beneficial owner for any act, omission or obligation of the
+ business trust or any trustee thereof.
+
+ 
+Section 3817 of the Delaware Business Trust Statute
+provides as follows:
+
+3817. Indemnification.
+
+ 
+ 
+
+ 
+ 
+ (a) Subject to such standards and restrictions, if any, as
+ are set forth in the governing instrument of a business trust, a
+ business trust shall have the power to indemnify and hold
+ harmless any trustee or beneficial owner or other person from
+ and against any and all claims and demands whatsoever.
+
+ 
+
+ 
+ 
+ (b) The absence of a provision for indemnity in the
+ governing instrument of a business trust shall not be construed
+ to deprive any trustee or beneficial owner or other
+
+II-1
+
+Table of Contents
+
+ 
+ 
+
+ 
+ 
+ person of any right to indemnity which is otherwise available to
+ such person under the laws of this State.
+
+ 
+Section 2.7 of the Amended and Restated Trust Agreement of
+RCL Trust 2000-1 provides as follows:
+
+ 
+Section 2.7. Liability and Indemnification.
+The RCL Beneficiary shall indemnify, defend and hold harmless
+the RCL Trustee, including its successors, assigns, officers,
+directors, shareholders, employees and agents for all losses,
+claims, damages, liabilities and expenses (collectively,
+ Liabilities ), penalties and taxes (other than
+income taxes relating to the fees paid to it hereunder) incurred
+by it in connection with the administration of RCL (including
+attorneys fees) and the performance of its duties
+hereunder; provided, however, that in no event shall the
+RCL Trustee be indemnified or held harmless for any Liabilities
+to the extent (i) incurred by reason of the RCL
+Trustee s willful misconduct, bad faith or negligence or
+(ii) incurred by reason of the RCL Trustee s breach of
+its representations and warranties set forth in
+Section 6.6. The RCL Trustee shall notify the RCL
+Beneficiary promptly of any claim for which the RCL Trustee may
+seek indemnity. Failure by the RCL Trustee to so notify the RCL
+Beneficiary shall not relieve the RCL Beneficiary of its
+obligations hereunder. If necessary, to the extent not otherwise
+reimbursed, the RCL Trustee shall be entitled to indemnification
+from amounts on deposit in the RCL Account for any claims
+against the RCL Trustee the indemnification for which is
+provided pursuant to this Section 2.7. Any claim
+against the RCL Trustee shall be defended by the RCL Beneficiary
+and the RCL Trustee shall be entitled to separate counsel, the
+fees and expenses of which shall be paid by the RCL Beneficiary.
+The indemnities contained in this Section 2.7 shall
+survive the resignation, removal or termination of the RCL
+Trustee or the termination of this Agreement. Any amounts paid
+to the RCL Trustee pursuant to this Section 2.7
+shall be deemed not to be RCL Assets immediately after such
+payment. The RCL Trustee acknowledges that funds may be
+deposited in the RCL Account only as specifically provided in
+the Basic Documents, and that some funds paid to RCL in respect
+of the Series 2000-1 Certificates and funds paid to RCL as
+holder of the Subordinated Notes and deposited in the Cash
+Collateral Account have been pledged to the Lease Trustee on
+behalf of the Lease Trust and the Indenture Trustee on behalf of
+the Senior Noteholder in accordance with the terms of the Basic
+Documents.
+
+ 
+Section 145 of the General Corporation Law of Delaware
+provides as follows:
+
+145. Indemnification of officers, directors,
+employees and agents; insurance.
+
+ 
+ 
+
+ 
+ 
+ (a) A corporation may indemnify any person who was or is a
+ party or is threatened to be made a party to any threatened,
+ pending or completed action, suit or proceeding, whether civil,
+ criminal, administrative or investigative (other than an action
+ by or in the right of the corporation) by reason of the fact
+ that he is or was a director, officer, employee or agent of the
+ corporation, or is or was serving at the request of the
+ corporation as a director, officer, employee or agent of another
+ corporation, partnership, joint venture, trust or other
+ enterprise, against expenses (including attorneys fees),
+ judgments, fines and amounts paid in settlement actually and
+ reasonably incurred by him in connection with such action, suit
+ or proceeding if he acted in good faith and in a manner he
+ reasonably believed to be in or not opposed to the best
+ interests of the corporation, and, with respect to any criminal
+ action or proceeding, had no reasonable cause to believe his
+ conduct was unlawful. The termination of any action, suit or
+ proceeding by judgment, order, settlement, conviction, or upon a
+ plea of nolo contendere or its equivalent, shall not, of itself,
+ create a presumption that the person did not act in good faith
+ and in a manner which he reasonably believed to be in or not
+ opposed to the best interests of the corporation, and, with
+ respect to any criminal action or proceeding, had reasonable
+ cause to believe that his conduct was unlawful.
+
+II-2
+
+Table of Contents
+
+ 
+ 
+
+ 
+ 
+ (b) A corporation may indemnify any person who was or is a
+ party or is threatened to be made a party to any threatened,
+ pending or completed action or suit by or in the right of the
+ corporation to procure a judgment in its favor by reason of the
+ fact that he is or was a director, officer, employee or agent of
+ the corporation, or is or was serving at the request of the
+ corporation as a director, officer, employee or agent of another
+ corporation, partnership, joint venture, trust or other
+ enterprise against expenses (including attorneys fees)
+ actually and reasonably incurred by him in connection with the
+ defense or settlement of such action or suit if he acted in good
+ faith and in a manner he reasonably believed to be in or not
+ opposed to the best interests of the corporation and except that
+ no indemnification shall be made in respect of any claim, issue
+ or matter as to which such person shall have been adjudged to be
+ liable to the corporation unless and only to the extent that the
+ Court of Chancery or the court in which such action or suit was
+ brought shall determine upon application that, despite the
+ adjudication of liability but in view of all the circumstances
+ of the case, such person is fairly and reasonably entitled to
+ indemnity for such expenses which the Court of Chancery or such
+ other court shall deem proper.
+
+ 
+
+ 
+ 
+ (c) To the extent that a director, officer, employee or
+ agent of a corporation has been successful on the merits or
+ otherwise in defense of any action, suit or proceeding referred
+ to in subsections (a) and (b) of this section, or in
+ defense of any claim, issue or matter therein, he shall be
+ indemnified against expenses (including attorneys fees)
+ actually and reasonably incurred by him in connection therewith.
+
+ 
+
+ 
+ 
+ (d) Any indemnification under subsections (a)
+ and (b) of this section (unless ordered by a court) shall
+ be made by the corporation only as authorized in the specific
+ case upon a determination that indemnification of the director,
+ officer, employee or agent is proper in the circumstances
+ because he has met the applicable standard of conduct set forth
+ in subsections (a) and (b) of this section. Such
+ determination shall be made (1) by a majority vote of the
+ directors who are not parties to such action, suit or
+ proceeding, even though less than a quorum, or (2) if there
+ are no such directors, or if such directors so direct, by
+ independent legal counsel in a written opinion, or (3) by
+ the stockholders.
+
+ 
+
+ 
+ 
+ (e) Expenses (including attorneys fees) incurred by
+ an officer or director in defending a civil, criminal,
+ administrative or investigative action, suit or proceeding may
+ be paid by the corporation in advance of the final disposition
+ of such action, suit or proceeding upon receipt of an
+ undertaking by or on behalf of such director or officer to repay
+ such amount if it shall ultimately be determined that he is not
+ entitled to be indemnified by the corporation as authorized in
+ this section. Such expenses (including attorneys fees)
+ incurred by other employees and agents may be so paid upon such
+ terms and conditions, if any, as the board of directors deems
+ appropriate.
+
+ 
+
+ 
+ 
+ (f) The indemnification and advancement of expenses
+ provided by, or granted pursuant to, the other subsections of
+ this section shall not be deemed exclusive of any other rights
+ to which those seeking indemnification or advancement of
+ expenses may be entitled under any bylaw, agreement, vote of
+ stockholders or disinterested directors or otherwise, both as to
+ action in his official capacity and as to action in another
+ capacity while holding such office.
+
+ 
+
+ 
+ 
+ (g) A corporation shall have power to purchase and
+ maintain insurance on behalf of any person who is or was a
+ director, officer, employee or agent of the corporation, or is
+ or was serving at the request of the corporation as a director,
+ officer, employee or agent of another corporation, partnership,
+ joint venture, trust or other enterprise against any liability
+ asserted against him and incurred by him in any such capacity,
+ or arising out of his status as such, whether or not the
+ corporation would have the power to indemnify him against such
+ liability under this section.
+
+II-3
+
+Table of Contents
+
+ 
+ 
+
+ 
+ 
+ (h) For purposes of this section, references to
+ the corporation shall include, in addition to
+ the resulting corporation, any constituent corporation
+ (including any constituent of a constituent) absorbed in a
+ consolidation or merger which, if its separate existence had
+ continued, would have had power and authority to indemnify its
+ directors, officers, and employees or agents, so that any person
+ who is or was a director, officer, employee or agent of such
+ constituent corporation, or is or was serving at the request of
+ such constituent corporation as a director, officer, employee or
+ agent of another corporation, partnership, joint venture, trust
+ or other enterprise, shall stand in the same position under this
+ section with respect to the resulting or surviving corporation
+ as he would have with respect to such constituent corporation if
+ its separate existence had continued.
+
+ 
+
+ 
+ 
+ (i) For purposes of this section, references to
+ other enterprises shall include employee
+ benefit plans; references to fines shall
+ include any excise taxes assessed on a person with respect to
+ any employee benefit plan; and references to serving at
+ the request of the corporation shall include any
+ service as a director, officer, employee, or agent of the
+ corporation which imposes duties on, or involves services by,
+ such director, officer, employee, or agent with respect to an
+ employee benefit plan, its participants or beneficiaries; and a
+ person who acted in good faith and in a manner he reasonably
+ believed to be in the interest of the participants and
+ beneficiaries of an employee benefit plan shall be deemed to
+ have acted in a manner not opposed to the best
+ interests of the corporation as referred to in this
+ section.
+
+ 
+
+ 
+ 
+ (j) The indemnification and advancement of expenses
+ provided by, or granted pursuant to, this section shall, unless
+ otherwise provided when authorized or ratified, continue as to a
+ person who has ceased to be a director, officer, employee or
+ agent and shall inure to the benefit of the heirs, executors and
+ administrators of such a person.
+
+ 
+
+ 
+ 
+ (k) The Court of Chancery is hereby vested with exclusive
+ jurisdiction to hear and determine all actions for advancement
+ of expenses or indemnification brought under this section or
+ under any bylaw, agreement, vote of stockholders or
+ disinterested directors, or otherwise. The Court of Chancery may
+ summarily determine a corporation s obligation to advance
+ expenses (including attorneys fees).
+
+ 
+Article Ninth, Section 5 of the Certificate of
+Incorporation of Ford Motor Credit Company provides as follows:
+
+SECTION 5.
+
+Indemnification
+
+ 
+5.1. Directors, Officers and Employees of the
+Corporation. Every person now or hereafter serving as a
+director, officer or employee of the corporation shall be
+indemnified and held harmless by the corporation from and
+against any and all loss, cost, liability and expense that may
+be imposed upon or incurred by him in connection with or
+resulting from any claim, action, suit, or proceeding, civil or
+criminal, in which he may become involved, as a party or
+otherwise, by reason of his being or having been a director,
+officer or employee of the corporation, whether or not he
+continues to be such at the time such loss, cost, liability or
+expense shall have been imposed or incurred. As used herein, the
+term loss, cost, liability and expense shall
+include, but shall not be limited to, counsel fees and
+disbursements and amounts of judgments, fines or penalties
+against, and amounts paid in settlement by, any such director,
+officer or employee; provided, however, that no such
+director, officer or employee shall be entitled to claim such
+indemnity: (1) with respect to any matter as to which there
+shall have been a final adjudication that he has committed or
+allowed some act or omission, (a) otherwise than in good
+faith in what he considered to be the best interests of the
+corporation, and (b) without reasonable cause to believe
+that such act or omission was proper and legal; or (2) in
+the event of a settlement of such claim, action, suit, or
+proceeding unless (a) the court having jurisdiction thereof
+shall have
+
+II-4
+
+Table of Contents
+
+approved of such settlement with knowledge of the indemnity
+provided herein, or (b) a written opinion of independent
+legal counsel, selected by or in manner determined by the Board
+of Directors, shall have been rendered substantially
+concurrently with such settlement, to the effect that it was not
+probable that the matter as to which indemnification is being
+made would have resulted in a final adjudication as specified in
+clause (1) above, and that the said loss, cost, liability
+or expense may properly be borne by the corporation. A
+conviction or judgment (whether based on a plea of guilty or
+nolo contendere or its equivalent, or after trial) in a criminal
+action, suit or proceeding shall not be deemed an adjudication
+that such director, officer or employee has committed or allowed
+some act or omission as hereinabove provided if independent
+legal counsel, selected as hereinabove set forth, shall
+substantially concurrently with such conviction or judgment give
+to the corporation a written opinion that such director, officer
+or employee was acting in good faith in what he considered to be
+the best interests of the corporation or was not without
+reasonable cause to believe that such act or omission was proper
+and legal.
+
+ 
+5.2. Directors, Officers and Employees of
+Subsidiaries. Every person (including a director, officer or
+employee of the corporation) who at the request of the
+corporation acts as a director, officer or employee of any other
+corporation in which the corporation owns shares of stock or of
+which it is a creditor shall be indemnified to the same extent
+and subject to the same conditions that the directors, officers
+and employees of the corporation are indemnified under the
+preceding paragraph, except that the amounts of such loss, cost,
+liability or expense paid to any such director, officer or
+employee shall be reduced by and to the extent of any amounts
+which may be collected by him from such other corporation.
+
+ 
+5.3. Miscellaneous. The provisions of this
+Section 5 of Article NINTH shall cover claims,
+actions, suits and proceedings, civil or criminal, whether now
+pending or hereafter commenced and shall be retroactive to cover
+acts or omissions or alleged acts or omissions which heretofore
+have taken place. In the event of death of any person having a
+right of indemnification under the provisions of this
+Section 5 of Article NINTH, such right shall inure to
+the benefit of his heirs, executors, administrators and personal
+representatives. If any part of this Section 5 of
+Article NINTH should be found to be invalid or ineffective
+in any proceeding, the validity and effect of the remaining
+provisions shall not be affected.
+
+ 
+5.4. Indemnification Not Exclusive. The foregoing
+right of indemnification shall not be deemed exclusive of any
+other right to which those indemnified may be entitled, and the
+corporation may provide additional indemnity and rights to its
+directors, officers or employees.
+
+Item 15. Recent Sales of Unregistered
+Securities.
+
+ 
+Not Applicable
+
+Item 16. Exhibits and Financial
+Statements.
+
+ 
+(a) Exhibits:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 1.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Underwriting Agreement.***
+
+ 
+ 3.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Amended and Restated Trust Agreement of RCL Trust 
+ 2000-1, between Ford Credit and the RCL Trustee.**
+
+ 
+ 3.2
+ 
+ 
+ 
+ 
+ 
+ 
+ Restated Certificate of Incorporation of Ford Motor Credit
+ Company.*
+
+ 
+ 3.3
+ 
+ 
+ 
+ 
+ 
+ 
+ By-Laws of Ford Motor Credit Company.*
+
+ 
+ 4.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Trust Agreement of the Issuer, between the RCL Trustee
+ and the Lease Trustee.**
+
+ 
+ 4.2
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Indenture, between the Lease Trustee and the Indenture
+ Trustee.**
+
+ 
+ 4.3
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-1 Senior Note (included as part of
+ Exhibit 4.2).**
+
+ 
+ 4.4
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-2 Senior Note (included as part of
+ Exhibit 4.2).**
+
+II-5
+
+Table of Contents
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 4.5
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-3 Senior Note (included as part of
+ Exhibit 4.2).**
+
+ 
+ 4.6
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-4 Senior Note (included as part of
+ Exhibit 4.2).**
+
+ 
+ 4.7
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-5 Senior Note (included as part of
+ Exhibit 4.2).**
+
+ 
+ 5.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Opinion of H.D. Smith, Esq., Secretary-Corporate Counsel of Ford
+ Motor Credit Company with respect to legality.**
+
+ 
+ 8.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Opinion of Skadden, Arps, Slate, Meagher Flom LLP with
+ respect to tax matters.**
+
+ 
+ 8.2
+ 
+ 
+ 
+ 
+ 
+ 
+ Opinion of Hurley D. Smith, Esq., Secretary and Corporate
+ Counsel of Ford Motor Credit Company with respect to Michigan
+ income tax matters.**
+
+ 
+ 10.1
+ 
+ 
+ 
+ 
+ 
+ 
+ FCTT Trust Agreement, between Ford Credit and U.S. Bank National
+ Association.***
+
+ 
+ 10.2
+ 
+ 
+ 
+ 
+ 
+ 
+ FCMTT Agreement, among Ford Credit, U.S. Bank National
+ Association and Wilmington Trust Company.***
+
+ 
+ 10.3
+ 
+ 
+ 
+ 
+ 
+ 
+ FCAL Agreement, between FCAL and U.S. Bank National
+ Association.***
+
+ 
+ 10.4
+ 
+ 
+ 
+ 
+ 
+ 
+ FCALM Agreement, between FCALM and U.S. Bank National
+ Association.***
+
+ 
+ 10.5
+ 
+ 
+ 
+ 
+ 
+ 
+ Administrative Agency Agreement, among the Titling Companies,
+ Ford Credit and U.S. Bank National Association.***
+
+ 
+ 10.6
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Series 2000-1 Supplement, among the Titling
+ Companies, Ford Credit and U.S. Bank National Association.**
+
+ 
+ 10.7
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Asset Contribution Agreement, between Ford Credit and
+ the RCL Trustee.**
+
+ 
+ 10.8
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Transfer Agreement, between the RCL Trustee and the
+ Lease Trustee.**
+
+ 
+ 10.9
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Program Operating Lease, between the RCL Trustee and the
+ Lease Trustee.**
+
+ 
+ 10.10
+ 
+ 
+ 
+ 
+ 
+ 
+ Appendix I Definitions.***
+
+ 
+ 10.11
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Appendix A Definitions.**
+
+ 
+ 23.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Consent of H.D. Smith, Esq., Secretary-Corporate Counsel of Ford
+ Motor Credit Company (included as part of Exhibit 5.1).**
+
+ 
+ 23.2
+ 
+ 
+ 
+ 
+ 
+ 
+ Consent of Skadden, Arps, Slate, Meagher Flom LLP
+ (included as part of Exhibit 8.1).**
+
+ 
+ 23.3
+ 
+ 
+ 
+ 
+ 
+ 
+ Consent of PricewaterhouseCoopers LLP.***
+
+ 
+ 24.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Powers of Attorney of officers and directors of Ford Motor
+ Credit Company.**
+
+ 
+ 25.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Form T-1 of The Chase Manhattan Bank.***
+
+ 
+ 
+
+ * 
+ 
+ Incorporated by reference to Exhibits 3.1 (Restated
+ Certificate of Incorporation) and 3.2 (By-Laws) to Ford Motor
+ Credit Company s Registration Statement on Form S-1
+ (Registration No. 33-25082).
+
+ 
+
+ ** 
+ 
+ Previously filed.
+
+ 
+
+ *** 
+ 
+ To be filed by amendment.
+
+ (b) Financial
+Statements:
+
+Not Applicable
+
+Item 17. Undertakings.
+
+ 
+(a) To provide to the Underwriter at the closing specified
+in the Underwriting Agreement certificates in such denominations
+and registered in such names as required by the Underwriter to
+permit prompt delivery to each purchaser.
+
+II-6
+
+Table of Contents
+
+ 
+(b) Insofar as indemnification for liabilities arising
+under the Securities Act of 1933 may be permitted to directors,
+officers and controlling persons of the registrant pursuant to
+the provisions described under Item 14 above, or otherwise,
+the registrant has been advised that in the opinion of the
+Securities and Exchange Commission such indemnification is
+against public policy as expressed in the Act and is, therefore,
+unenforceable. In the event that a claim for indemnification
+against such liabilities (other than the payment by the
+registrant of expenses incurred or paid by a director, officer
+or controlling person of the registrant in the successful
+defense of any action, suit or proceeding) is asserted by such
+director, officer or controlling person in connection with the
+securities being registered, the registrant will, unless in the
+opinion of its counsel the matter has been settled by
+controlling precedent, submit to a court of appropriate
+jurisdiction the question whether such indemnification by it is
+against public policy as expressed in the Act and will be
+governed by the final adjudication of such issue.
+
+ 
+The undersigned registrant hereby undertakes that:
+
+ 
+ 
+
+ 
+ 
+ (1) For purposes of determining any liability under the
+ Securities Act of 1933, the information omitted from the form of
+ prospectus filed as part of this registration statement in
+ reliance upon Rule 430A and contained in a form of
+ prospectus filed by the registrant pursuant to
+ Rule 424(b)(1) or (4) or 497(b) under the Securities Act
+ shall be deemed to be part of this registration statement as of
+ the time it was declared effective.
+
+ 
+
+ 
+ 
+ (2) For the purpose of determining any liability under the
+ Securities Act of 1933 each post-effective amendment that
+ contains a form of prospectus shall be deemed to be a new
+ registration statement relating to the securities offered
+ therein, and the offering of such securities at that time shall
+ be deemed to be the initial bona fide offering thereof.
+
+II-7
+
+Table of Contents
+
+SIGNATURES
+
+ 
+Pursuant to the requirements of the Securities Act of 1933, the
+registrant has duly caused this Amendment No. 3 to the
+Registration Statement to be signed on its behalf by the
+undersigned, thereunto duly authorized, in the City of Detroit
+and the State of Michigan on the 18th day of December, 2000.
+
+ 
+ 
+
+ 
+ 
+ RCL TRUST 2000-1
+
+ 
+ 
+ 
+
+ 
+ By 
+ 
+ FORD MOTOR CREDIT COMPANY,
+
+ 
+ 
+
+ 
+ 
+ Depositor and Beneficiary of RCL Trust 2000-1
+
+ 
+ 
+ 
+
+ 
+ By 
+ 
+ /s/ DONALD A. WINKLER*
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (Donald A. Winkler)
+
+ 
+ 
+ Chairman of the Board of Directors of
+
+ 
+ 
+ Ford Motor Credit Company
+
+ 
+Under the requirements of the Securities Act of 1933, this
+Amendment No. 3 to the Registration Statement has been
+signed below by the following officers and directors of FORD
+MOTOR CREDIT COMPANY, in the capacities and on the date
+indicated.
+
+ 
+ 
+ 
+ 
+ 
+
+ Signature
+ 
+ Title
+ 
+ Date
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ /s/ DONALD A. WINKLER*
+
+ (Donald A. Winkler)
+ 
+ 
+ 
+ Chairman of the Board of Directors and Director (principal
+ executive officer)
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ BIBIANA BOERIO*
+
+ (Bibiana Boerio)
+ 
+ 
+ 
+ Executive Vice President, Chief Financial Officer and Treasurer
+ (principal financial and accounting officer)
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ BARRETT BURNS*
+
+ (Barrett Burns)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ GREGORY C. SMITH*
+
+ (Gregory C. Smith)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ MALCOLM S. MACDONALD*
+
+ (Malcolm S. Macdonald)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ DAVID C. FLANIGAN*
+
+ (David C. Flanigan)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ TERRY D. CHENAULT*
+
+ (Terry D. Chenault)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ DALE R. WALKER*
+
+ (Dale R. Walker)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ HENRY D. WALLACE*
+
+ (Henry D. Wallace)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ 
+
+ *By: 
+ 
+ /s/ HURLEY D. SMITH
+
+(Hurley D. Smith)
+
+Attorney-in-fact
+
+II-8
+
+Table of Contents
+
+ 
+Pursuant to the requirements of the Securities Act of 1933, the
+registrant has duly caused this Amendment No. 3 to the
+Registration Statement to be signed on its behalf by the
+undersigned, thereunto duly authorized, in the City of Detroit
+and the State of Michigan on the 18th day of December, 2000.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001116312_fcalm-llc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001116312_fcalm-llc_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..33f99381d99b57737de4d219b55e34ea5e6e9a98
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001116312_fcalm-llc_prospectus_summary.txt
@@ -0,0 +1,1286 @@
+Prospectus
+
+ Merrill Lynch Co.
+
+ 
+
+ 
+
+You should rely only the information contained in this
+prospectus. We have not authorized anyone to provide you with
+different information.
+
+We are not offering the senior notes in any state where the
+offer is not permitted.
+
+Dealer Prospectus Delivery Requirements
+
+For 90 days after the date of this prospectus, all dealers
+making transactions in the senior notes, whether or not
+participating in this offering, may be required to deliver a
+prospectus. In addition, all dealers will deliver a prospectus
+when acting as underwriters of the senior notes and with respect
+to their unsold allotments or subscriptions.
+
+Table of Contents
+
+PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
+
+Item 13. Other Expenses of Issuance and
+Distribution.
+
+ 
+The following table sets forth the estimated expenses in
+connection with the offering described in this Registration
+Statement.
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Securities and Exchange Commission
+
+ 
+ 
+ $
+ *
+ 
+
+ 
+ 
+ Rating agency fees
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Printing
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Legal fees and expenses
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Accountants fees
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Fees and expenses of the RCL Trustee
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Fees and expenses of the Lease Trustee
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Fees and expenses of the Indenture Trustee
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Miscellaneous expenses
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Total
+
+ 
+ 
+ $
+ *
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ * 
+ 
+ To be supplied by amendment
+
+Item 14. Indemnification of Directors and
+Officers.
+
+ 
+Section 3803 of the Delaware Business Trust Statute
+provides as follows:
+
+3803. Liability of Beneficial Owners and
+Trustees.
+
+ 
+ 
+
+ 
+ 
+ (a) Except to the extent otherwise provided in the
+ governing instrument of the business trust, the beneficial
+ owners shall be entitled to the same limitation of personal
+ liability extended to stockholders of private corporations for
+ profit organized under the general corporation law of the State.
+
+ 
+
+ 
+ 
+ (b) Except to the extent otherwise provided in the
+ governing instrument of a business trust, a trustee, when acting
+ in such capacity, shall not be personally liable to any person
+ other than the business trust or a beneficial owner for any act,
+ omission or obligation of the business trust or any trustee
+ thereof.
+
+ 
+
+ 
+ 
+ (c) Except to the extent otherwise provided in the
+ governing instrument of a business trust, an officer, employee,
+ manager or other person acting pursuant to
+ Section 3806(b)(7), when acting in such capacity, shall not
+ be personally liable to any person other than the business trust
+ or a beneficial owner for any act, omission or obligation of the
+ business trust or any trustee thereof.
+
+ 
+Section 3817 of the Delaware Business Trust Statute
+provides as follows:
+
+3817. Indemnification.
+
+ 
+ 
+
+ 
+ 
+ (a) Subject to such standards and restrictions, if any, as
+ are set forth in the governing instrument of a business trust, a
+ business trust shall have the power to indemnify and hold
+ harmless any trustee or beneficial owner or other person from
+ and against any and all claims and demands whatsoever.
+
+ 
+
+ 
+ 
+ (b) The absence of a provision for indemnity in the
+ governing instrument of a business trust shall not be construed
+ to deprive any trustee or beneficial owner or other
+
+II-1
+
+Table of Contents
+
+ 
+ 
+
+ 
+ 
+ person of any right to indemnity which is otherwise available to
+ such person under the laws of this State.
+
+ 
+Section 2.7 of the Amended and Restated Trust Agreement of
+RCL Trust 2000-1 provides as follows:
+
+ 
+Section 2.7. Liability and Indemnification.
+The RCL Beneficiary shall indemnify, defend and hold harmless
+the RCL Trustee, including its successors, assigns, officers,
+directors, shareholders, employees and agents for all losses,
+claims, damages, liabilities and expenses (collectively,
+ Liabilities ), penalties and taxes (other than
+income taxes relating to the fees paid to it hereunder) incurred
+by it in connection with the administration of RCL (including
+attorneys fees) and the performance of its duties
+hereunder; provided, however, that in no event shall the
+RCL Trustee be indemnified or held harmless for any Liabilities
+to the extent (i) incurred by reason of the RCL
+Trustee s willful misconduct, bad faith or negligence or
+(ii) incurred by reason of the RCL Trustee s breach of
+its representations and warranties set forth in
+Section 6.6. The RCL Trustee shall notify the RCL
+Beneficiary promptly of any claim for which the RCL Trustee may
+seek indemnity. Failure by the RCL Trustee to so notify the RCL
+Beneficiary shall not relieve the RCL Beneficiary of its
+obligations hereunder. If necessary, to the extent not otherwise
+reimbursed, the RCL Trustee shall be entitled to indemnification
+from amounts on deposit in the RCL Account for any claims
+against the RCL Trustee the indemnification for which is
+provided pursuant to this Section 2.7. Any claim
+against the RCL Trustee shall be defended by the RCL Beneficiary
+and the RCL Trustee shall be entitled to separate counsel, the
+fees and expenses of which shall be paid by the RCL Beneficiary.
+The indemnities contained in this Section 2.7 shall
+survive the resignation, removal or termination of the RCL
+Trustee or the termination of this Agreement. Any amounts paid
+to the RCL Trustee pursuant to this Section 2.7
+shall be deemed not to be RCL Assets immediately after such
+payment. The RCL Trustee acknowledges that funds may be
+deposited in the RCL Account only as specifically provided in
+the Basic Documents, and that some funds paid to RCL in respect
+of the Series 2000-1 Certificates and funds paid to RCL as
+holder of the Subordinated Notes and deposited in the Cash
+Collateral Account have been pledged to the Lease Trustee on
+behalf of the Lease Trust and the Indenture Trustee on behalf of
+the Senior Noteholder in accordance with the terms of the Basic
+Documents.
+
+ 
+Section 145 of the General Corporation Law of Delaware
+provides as follows:
+
+145. Indemnification of officers, directors,
+employees and agents; insurance.
+
+ 
+ 
+
+ 
+ 
+ (a) A corporation may indemnify any person who was or is a
+ party or is threatened to be made a party to any threatened,
+ pending or completed action, suit or proceeding, whether civil,
+ criminal, administrative or investigative (other than an action
+ by or in the right of the corporation) by reason of the fact
+ that he is or was a director, officer, employee or agent of the
+ corporation, or is or was serving at the request of the
+ corporation as a director, officer, employee or agent of another
+ corporation, partnership, joint venture, trust or other
+ enterprise, against expenses (including attorneys fees),
+ judgments, fines and amounts paid in settlement actually and
+ reasonably incurred by him in connection with such action, suit
+ or proceeding if he acted in good faith and in a manner he
+ reasonably believed to be in or not opposed to the best
+ interests of the corporation, and, with respect to any criminal
+ action or proceeding, had no reasonable cause to believe his
+ conduct was unlawful. The termination of any action, suit or
+ proceeding by judgment, order, settlement, conviction, or upon a
+ plea of nolo contendere or its equivalent, shall not, of itself,
+ create a presumption that the person did not act in good faith
+ and in a manner which he reasonably believed to be in or not
+ opposed to the best interests of the corporation, and, with
+ respect to any criminal action or proceeding, had reasonable
+ cause to believe that his conduct was unlawful.
+
+II-2
+
+Table of Contents
+
+ 
+ 
+
+ 
+ 
+ (b) A corporation may indemnify any person who was or is a
+ party or is threatened to be made a party to any threatened,
+ pending or completed action or suit by or in the right of the
+ corporation to procure a judgment in its favor by reason of the
+ fact that he is or was a director, officer, employee or agent of
+ the corporation, or is or was serving at the request of the
+ corporation as a director, officer, employee or agent of another
+ corporation, partnership, joint venture, trust or other
+ enterprise against expenses (including attorneys fees)
+ actually and reasonably incurred by him in connection with the
+ defense or settlement of such action or suit if he acted in good
+ faith and in a manner he reasonably believed to be in or not
+ opposed to the best interests of the corporation and except that
+ no indemnification shall be made in respect of any claim, issue
+ or matter as to which such person shall have been adjudged to be
+ liable to the corporation unless and only to the extent that the
+ Court of Chancery or the court in which such action or suit was
+ brought shall determine upon application that, despite the
+ adjudication of liability but in view of all the circumstances
+ of the case, such person is fairly and reasonably entitled to
+ indemnity for such expenses which the Court of Chancery or such
+ other court shall deem proper.
+
+ 
+
+ 
+ 
+ (c) To the extent that a director, officer, employee or
+ agent of a corporation has been successful on the merits or
+ otherwise in defense of any action, suit or proceeding referred
+ to in subsections (a) and (b) of this section, or in
+ defense of any claim, issue or matter therein, he shall be
+ indemnified against expenses (including attorneys fees)
+ actually and reasonably incurred by him in connection therewith.
+
+ 
+
+ 
+ 
+ (d) Any indemnification under subsections (a)
+ and (b) of this section (unless ordered by a court) shall
+ be made by the corporation only as authorized in the specific
+ case upon a determination that indemnification of the director,
+ officer, employee or agent is proper in the circumstances
+ because he has met the applicable standard of conduct set forth
+ in subsections (a) and (b) of this section. Such
+ determination shall be made (1) by a majority vote of the
+ directors who are not parties to such action, suit or
+ proceeding, even though less than a quorum, or (2) if there
+ are no such directors, or if such directors so direct, by
+ independent legal counsel in a written opinion, or (3) by
+ the stockholders.
+
+ 
+
+ 
+ 
+ (e) Expenses (including attorneys fees) incurred by
+ an officer or director in defending a civil, criminal,
+ administrative or investigative action, suit or proceeding may
+ be paid by the corporation in advance of the final disposition
+ of such action, suit or proceeding upon receipt of an
+ undertaking by or on behalf of such director or officer to repay
+ such amount if it shall ultimately be determined that he is not
+ entitled to be indemnified by the corporation as authorized in
+ this section. Such expenses (including attorneys fees)
+ incurred by other employees and agents may be so paid upon such
+ terms and conditions, if any, as the board of directors deems
+ appropriate.
+
+ 
+
+ 
+ 
+ (f) The indemnification and advancement of expenses
+ provided by, or granted pursuant to, the other subsections of
+ this section shall not be deemed exclusive of any other rights
+ to which those seeking indemnification or advancement of
+ expenses may be entitled under any bylaw, agreement, vote of
+ stockholders or disinterested directors or otherwise, both as to
+ action in his official capacity and as to action in another
+ capacity while holding such office.
+
+ 
+
+ 
+ 
+ (g) A corporation shall have power to purchase and
+ maintain insurance on behalf of any person who is or was a
+ director, officer, employee or agent of the corporation, or is
+ or was serving at the request of the corporation as a director,
+ officer, employee or agent of another corporation, partnership,
+ joint venture, trust or other enterprise against any liability
+ asserted against him and incurred by him in any such capacity,
+ or arising out of his status as such, whether or not the
+ corporation would have the power to indemnify him against such
+ liability under this section.
+
+II-3
+
+Table of Contents
+
+ 
+ 
+
+ 
+ 
+ (h) For purposes of this section, references to
+ the corporation shall include, in addition to
+ the resulting corporation, any constituent corporation
+ (including any constituent of a constituent) absorbed in a
+ consolidation or merger which, if its separate existence had
+ continued, would have had power and authority to indemnify its
+ directors, officers, and employees or agents, so that any person
+ who is or was a director, officer, employee or agent of such
+ constituent corporation, or is or was serving at the request of
+ such constituent corporation as a director, officer, employee or
+ agent of another corporation, partnership, joint venture, trust
+ or other enterprise, shall stand in the same position under this
+ section with respect to the resulting or surviving corporation
+ as he would have with respect to such constituent corporation if
+ its separate existence had continued.
+
+ 
+
+ 
+ 
+ (i) For purposes of this section, references to
+ other enterprises shall include employee
+ benefit plans; references to fines shall
+ include any excise taxes assessed on a person with respect to
+ any employee benefit plan; and references to serving at
+ the request of the corporation shall include any
+ service as a director, officer, employee, or agent of the
+ corporation which imposes duties on, or involves services by,
+ such director, officer, employee, or agent with respect to an
+ employee benefit plan, its participants or beneficiaries; and a
+ person who acted in good faith and in a manner he reasonably
+ believed to be in the interest of the participants and
+ beneficiaries of an employee benefit plan shall be deemed to
+ have acted in a manner not opposed to the best
+ interests of the corporation as referred to in this
+ section.
+
+ 
+
+ 
+ 
+ (j) The indemnification and advancement of expenses
+ provided by, or granted pursuant to, this section shall, unless
+ otherwise provided when authorized or ratified, continue as to a
+ person who has ceased to be a director, officer, employee or
+ agent and shall inure to the benefit of the heirs, executors and
+ administrators of such a person.
+
+ 
+
+ 
+ 
+ (k) The Court of Chancery is hereby vested with exclusive
+ jurisdiction to hear and determine all actions for advancement
+ of expenses or indemnification brought under this section or
+ under any bylaw, agreement, vote of stockholders or
+ disinterested directors, or otherwise. The Court of Chancery may
+ summarily determine a corporation s obligation to advance
+ expenses (including attorneys fees).
+
+ 
+Article Ninth, Section 5 of the Certificate of
+Incorporation of Ford Motor Credit Company provides as follows:
+
+SECTION 5.
+
+Indemnification
+
+ 
+5.1. Directors, Officers and Employees of the
+Corporation. Every person now or hereafter serving as a
+director, officer or employee of the corporation shall be
+indemnified and held harmless by the corporation from and
+against any and all loss, cost, liability and expense that may
+be imposed upon or incurred by him in connection with or
+resulting from any claim, action, suit, or proceeding, civil or
+criminal, in which he may become involved, as a party or
+otherwise, by reason of his being or having been a director,
+officer or employee of the corporation, whether or not he
+continues to be such at the time such loss, cost, liability or
+expense shall have been imposed or incurred. As used herein, the
+term loss, cost, liability and expense shall
+include, but shall not be limited to, counsel fees and
+disbursements and amounts of judgments, fines or penalties
+against, and amounts paid in settlement by, any such director,
+officer or employee; provided, however, that no such
+director, officer or employee shall be entitled to claim such
+indemnity: (1) with respect to any matter as to which there
+shall have been a final adjudication that he has committed or
+allowed some act or omission, (a) otherwise than in good
+faith in what he considered to be the best interests of the
+corporation, and (b) without reasonable cause to believe
+that such act or omission was proper and legal; or (2) in
+the event of a settlement of such claim, action, suit, or
+proceeding unless (a) the court having jurisdiction thereof
+shall have
+
+II-4
+
+Table of Contents
+
+approved of such settlement with knowledge of the indemnity
+provided herein, or (b) a written opinion of independent
+legal counsel, selected by or in manner determined by the Board
+of Directors, shall have been rendered substantially
+concurrently with such settlement, to the effect that it was not
+probable that the matter as to which indemnification is being
+made would have resulted in a final adjudication as specified in
+clause (1) above, and that the said loss, cost, liability
+or expense may properly be borne by the corporation. A
+conviction or judgment (whether based on a plea of guilty or
+nolo contendere or its equivalent, or after trial) in a criminal
+action, suit or proceeding shall not be deemed an adjudication
+that such director, officer or employee has committed or allowed
+some act or omission as hereinabove provided if independent
+legal counsel, selected as hereinabove set forth, shall
+substantially concurrently with such conviction or judgment give
+to the corporation a written opinion that such director, officer
+or employee was acting in good faith in what he considered to be
+the best interests of the corporation or was not without
+reasonable cause to believe that such act or omission was proper
+and legal.
+
+ 
+5.2. Directors, Officers and Employees of
+Subsidiaries. Every person (including a director, officer or
+employee of the corporation) who at the request of the
+corporation acts as a director, officer or employee of any other
+corporation in which the corporation owns shares of stock or of
+which it is a creditor shall be indemnified to the same extent
+and subject to the same conditions that the directors, officers
+and employees of the corporation are indemnified under the
+preceding paragraph, except that the amounts of such loss, cost,
+liability or expense paid to any such director, officer or
+employee shall be reduced by and to the extent of any amounts
+which may be collected by him from such other corporation.
+
+ 
+5.3. Miscellaneous. The provisions of this
+Section 5 of Article NINTH shall cover claims,
+actions, suits and proceedings, civil or criminal, whether now
+pending or hereafter commenced and shall be retroactive to cover
+acts or omissions or alleged acts or omissions which heretofore
+have taken place. In the event of death of any person having a
+right of indemnification under the provisions of this
+Section 5 of Article NINTH, such right shall inure to
+the benefit of his heirs, executors, administrators and personal
+representatives. If any part of this Section 5 of
+Article NINTH should be found to be invalid or ineffective
+in any proceeding, the validity and effect of the remaining
+provisions shall not be affected.
+
+ 
+5.4. Indemnification Not Exclusive. The foregoing
+right of indemnification shall not be deemed exclusive of any
+other right to which those indemnified may be entitled, and the
+corporation may provide additional indemnity and rights to its
+directors, officers or employees.
+
+Item 15. Recent Sales of Unregistered
+Securities.
+
+ 
+Not Applicable
+
+Item 16. Exhibits and Financial
+Statements.
+
+ 
+(a) Exhibits:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 1.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Underwriting Agreement.***
+
+ 
+ 3.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Amended and Restated Trust Agreement of RCL Trust 
+ 2000-1, between Ford Credit and the RCL Trustee.**
+
+ 
+ 3.2
+ 
+ 
+ 
+ 
+ 
+ 
+ Restated Certificate of Incorporation of Ford Motor Credit
+ Company.*
+
+ 
+ 3.3
+ 
+ 
+ 
+ 
+ 
+ 
+ By-Laws of Ford Motor Credit Company.*
+
+ 
+ 4.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Trust Agreement of the Issuer, between the RCL Trustee
+ and the Lease Trustee.**
+
+ 
+ 4.2
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Indenture, between the Lease Trustee and the Indenture
+ Trustee.**
+
+ 
+ 4.3
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-1 Senior Note (included as part of
+ Exhibit 4.2).**
+
+ 
+ 4.4
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-2 Senior Note (included as part of
+ Exhibit 4.2).**
+
+II-5
+
+Table of Contents
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 4.5
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-3 Senior Note (included as part of
+ Exhibit 4.2).**
+
+ 
+ 4.6
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-4 Senior Note (included as part of
+ Exhibit 4.2).**
+
+ 
+ 4.7
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-5 Senior Note (included as part of
+ Exhibit 4.2).**
+
+ 
+ 5.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Opinion of H.D. Smith, Esq., Secretary-Corporate Counsel of Ford
+ Motor Credit Company with respect to legality.**
+
+ 
+ 8.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Opinion of Skadden, Arps, Slate, Meagher Flom LLP with
+ respect to tax matters.**
+
+ 
+ 8.2
+ 
+ 
+ 
+ 
+ 
+ 
+ Opinion of Hurley D. Smith, Esq., Secretary and Corporate
+ Counsel of Ford Motor Credit Company with respect to Michigan
+ income tax matters.**
+
+ 
+ 10.1
+ 
+ 
+ 
+ 
+ 
+ 
+ FCTT Trust Agreement, between Ford Credit and U.S. Bank National
+ Association.***
+
+ 
+ 10.2
+ 
+ 
+ 
+ 
+ 
+ 
+ FCMTT Agreement, among Ford Credit, U.S. Bank National
+ Association and Wilmington Trust Company.***
+
+ 
+ 10.3
+ 
+ 
+ 
+ 
+ 
+ 
+ FCAL Agreement, between FCAL and U.S. Bank National
+ Association.***
+
+ 
+ 10.4
+ 
+ 
+ 
+ 
+ 
+ 
+ FCALM Agreement, between FCALM and U.S. Bank National
+ Association.***
+
+ 
+ 10.5
+ 
+ 
+ 
+ 
+ 
+ 
+ Administrative Agency Agreement, among the Titling Companies,
+ Ford Credit and U.S. Bank National Association.***
+
+ 
+ 10.6
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Series 2000-1 Supplement, among the Titling
+ Companies, Ford Credit and U.S. Bank National Association.**
+
+ 
+ 10.7
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Asset Contribution Agreement, between Ford Credit and
+ the RCL Trustee.**
+
+ 
+ 10.8
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Transfer Agreement, between the RCL Trustee and the
+ Lease Trustee.**
+
+ 
+ 10.9
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Program Operating Lease, between the RCL Trustee and the
+ Lease Trustee.**
+
+ 
+ 10.10
+ 
+ 
+ 
+ 
+ 
+ 
+ Appendix I Definitions.***
+
+ 
+ 10.11
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Appendix A Definitions.**
+
+ 
+ 23.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Consent of H.D. Smith, Esq., Secretary-Corporate Counsel of Ford
+ Motor Credit Company (included as part of Exhibit 5.1).**
+
+ 
+ 23.2
+ 
+ 
+ 
+ 
+ 
+ 
+ Consent of Skadden, Arps, Slate, Meagher Flom LLP
+ (included as part of Exhibit 8.1).**
+
+ 
+ 23.3
+ 
+ 
+ 
+ 
+ 
+ 
+ Consent of PricewaterhouseCoopers LLP.***
+
+ 
+ 24.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Powers of Attorney of officers and directors of Ford Motor
+ Credit Company.**
+
+ 
+ 25.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Form T-1 of The Chase Manhattan Bank.***
+
+ 
+ 
+
+ * 
+ 
+ Incorporated by reference to Exhibits 3.1 (Restated
+ Certificate of Incorporation) and 3.2 (By-Laws) to Ford Motor
+ Credit Company s Registration Statement on Form S-1
+ (Registration No. 33-25082).
+
+ 
+
+ ** 
+ 
+ Previously filed.
+
+ 
+
+ *** 
+ 
+ To be filed by amendment.
+
+ (b) Financial
+Statements:
+
+Not Applicable
+
+Item 17. Undertakings.
+
+ 
+(a) To provide to the Underwriter at the closing specified
+in the Underwriting Agreement certificates in such denominations
+and registered in such names as required by the Underwriter to
+permit prompt delivery to each purchaser.
+
+II-6
+
+Table of Contents
+
+ 
+(b) Insofar as indemnification for liabilities arising
+under the Securities Act of 1933 may be permitted to directors,
+officers and controlling persons of the registrant pursuant to
+the provisions described under Item 14 above, or otherwise,
+the registrant has been advised that in the opinion of the
+Securities and Exchange Commission such indemnification is
+against public policy as expressed in the Act and is, therefore,
+unenforceable. In the event that a claim for indemnification
+against such liabilities (other than the payment by the
+registrant of expenses incurred or paid by a director, officer
+or controlling person of the registrant in the successful
+defense of any action, suit or proceeding) is asserted by such
+director, officer or controlling person in connection with the
+securities being registered, the registrant will, unless in the
+opinion of its counsel the matter has been settled by
+controlling precedent, submit to a court of appropriate
+jurisdiction the question whether such indemnification by it is
+against public policy as expressed in the Act and will be
+governed by the final adjudication of such issue.
+
+ 
+The undersigned registrant hereby undertakes that:
+
+ 
+ 
+
+ 
+ 
+ (1) For purposes of determining any liability under the
+ Securities Act of 1933, the information omitted from the form of
+ prospectus filed as part of this registration statement in
+ reliance upon Rule 430A and contained in a form of
+ prospectus filed by the registrant pursuant to
+ Rule 424(b)(1) or (4) or 497(b) under the Securities Act
+ shall be deemed to be part of this registration statement as of
+ the time it was declared effective.
+
+ 
+
+ 
+ 
+ (2) For the purpose of determining any liability under the
+ Securities Act of 1933 each post-effective amendment that
+ contains a form of prospectus shall be deemed to be a new
+ registration statement relating to the securities offered
+ therein, and the offering of such securities at that time shall
+ be deemed to be the initial bona fide offering thereof.
+
+II-7
+
+Table of Contents
+
+SIGNATURES
+
+ 
+Pursuant to the requirements of the Securities Act of 1933, the
+registrant has duly caused this Amendment No. 3 to the
+Registration Statement to be signed on its behalf by the
+undersigned, thereunto duly authorized, in the City of Detroit
+and the State of Michigan on the 18th day of December, 2000.
+
+ 
+ 
+
+ 
+ 
+ RCL TRUST 2000-1
+
+ 
+ 
+ 
+
+ 
+ By 
+ 
+ FORD MOTOR CREDIT COMPANY,
+
+ 
+ 
+
+ 
+ 
+ Depositor and Beneficiary of RCL Trust 2000-1
+
+ 
+ 
+ 
+
+ 
+ By 
+ 
+ /s/ DONALD A. WINKLER*
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (Donald A. Winkler)
+
+ 
+ 
+ Chairman of the Board of Directors of
+
+ 
+ 
+ Ford Motor Credit Company
+
+ 
+Under the requirements of the Securities Act of 1933, this
+Amendment No. 3 to the Registration Statement has been
+signed below by the following officers and directors of FORD
+MOTOR CREDIT COMPANY, in the capacities and on the date
+indicated.
+
+ 
+ 
+ 
+ 
+ 
+
+ Signature
+ 
+ Title
+ 
+ Date
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ /s/ DONALD A. WINKLER*
+
+ (Donald A. Winkler)
+ 
+ 
+ 
+ Chairman of the Board of Directors and Director (principal
+ executive officer)
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ BIBIANA BOERIO*
+
+ (Bibiana Boerio)
+ 
+ 
+ 
+ Executive Vice President, Chief Financial Officer and Treasurer
+ (principal financial and accounting officer)
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ BARRETT BURNS*
+
+ (Barrett Burns)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ GREGORY C. SMITH*
+
+ (Gregory C. Smith)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ MALCOLM S. MACDONALD*
+
+ (Malcolm S. Macdonald)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ DAVID C. FLANIGAN*
+
+ (David C. Flanigan)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ TERRY D. CHENAULT*
+
+ (Terry D. Chenault)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ DALE R. WALKER*
+
+ (Dale R. Walker)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ HENRY D. WALLACE*
+
+ (Henry D. Wallace)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ 
+
+ *By: 
+ 
+ /s/ HURLEY D. SMITH
+
+(Hurley D. Smith)
+
+Attorney-in-fact
+
+II-8
+
+Table of Contents
+
+ 
+Pursuant to the requirements of the Securities Act of 1933, the
+registrant has duly caused this Amendment No. 3 to the
+Registration Statement to be signed on its behalf by the
+undersigned, thereunto duly authorized, in the City of Detroit
+and the State of Michigan on the 18th day of December, 2000.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001116313_fcal-llc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001116313_fcal-llc_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..33f99381d99b57737de4d219b55e34ea5e6e9a98
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001116313_fcal-llc_prospectus_summary.txt
@@ -0,0 +1,1286 @@
+Prospectus
+
+ Merrill Lynch Co.
+
+ 
+
+ 
+
+You should rely only the information contained in this
+prospectus. We have not authorized anyone to provide you with
+different information.
+
+We are not offering the senior notes in any state where the
+offer is not permitted.
+
+Dealer Prospectus Delivery Requirements
+
+For 90 days after the date of this prospectus, all dealers
+making transactions in the senior notes, whether or not
+participating in this offering, may be required to deliver a
+prospectus. In addition, all dealers will deliver a prospectus
+when acting as underwriters of the senior notes and with respect
+to their unsold allotments or subscriptions.
+
+Table of Contents
+
+PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
+
+Item 13. Other Expenses of Issuance and
+Distribution.
+
+ 
+The following table sets forth the estimated expenses in
+connection with the offering described in this Registration
+Statement.
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ Securities and Exchange Commission
+
+ 
+ 
+ $
+ *
+ 
+
+ 
+ 
+ Rating agency fees
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Printing
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Legal fees and expenses
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Accountants fees
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Fees and expenses of the RCL Trustee
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Fees and expenses of the Lease Trustee
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Fees and expenses of the Indenture Trustee
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ Miscellaneous expenses
+
+ 
+ 
+ 
+ *
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ Total
+
+ 
+ 
+ $
+ *
+ 
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+
+ * 
+ 
+ To be supplied by amendment
+
+Item 14. Indemnification of Directors and
+Officers.
+
+ 
+Section 3803 of the Delaware Business Trust Statute
+provides as follows:
+
+3803. Liability of Beneficial Owners and
+Trustees.
+
+ 
+ 
+
+ 
+ 
+ (a) Except to the extent otherwise provided in the
+ governing instrument of the business trust, the beneficial
+ owners shall be entitled to the same limitation of personal
+ liability extended to stockholders of private corporations for
+ profit organized under the general corporation law of the State.
+
+ 
+
+ 
+ 
+ (b) Except to the extent otherwise provided in the
+ governing instrument of a business trust, a trustee, when acting
+ in such capacity, shall not be personally liable to any person
+ other than the business trust or a beneficial owner for any act,
+ omission or obligation of the business trust or any trustee
+ thereof.
+
+ 
+
+ 
+ 
+ (c) Except to the extent otherwise provided in the
+ governing instrument of a business trust, an officer, employee,
+ manager or other person acting pursuant to
+ Section 3806(b)(7), when acting in such capacity, shall not
+ be personally liable to any person other than the business trust
+ or a beneficial owner for any act, omission or obligation of the
+ business trust or any trustee thereof.
+
+ 
+Section 3817 of the Delaware Business Trust Statute
+provides as follows:
+
+3817. Indemnification.
+
+ 
+ 
+
+ 
+ 
+ (a) Subject to such standards and restrictions, if any, as
+ are set forth in the governing instrument of a business trust, a
+ business trust shall have the power to indemnify and hold
+ harmless any trustee or beneficial owner or other person from
+ and against any and all claims and demands whatsoever.
+
+ 
+
+ 
+ 
+ (b) The absence of a provision for indemnity in the
+ governing instrument of a business trust shall not be construed
+ to deprive any trustee or beneficial owner or other
+
+II-1
+
+Table of Contents
+
+ 
+ 
+
+ 
+ 
+ person of any right to indemnity which is otherwise available to
+ such person under the laws of this State.
+
+ 
+Section 2.7 of the Amended and Restated Trust Agreement of
+RCL Trust 2000-1 provides as follows:
+
+ 
+Section 2.7. Liability and Indemnification.
+The RCL Beneficiary shall indemnify, defend and hold harmless
+the RCL Trustee, including its successors, assigns, officers,
+directors, shareholders, employees and agents for all losses,
+claims, damages, liabilities and expenses (collectively,
+ Liabilities ), penalties and taxes (other than
+income taxes relating to the fees paid to it hereunder) incurred
+by it in connection with the administration of RCL (including
+attorneys fees) and the performance of its duties
+hereunder; provided, however, that in no event shall the
+RCL Trustee be indemnified or held harmless for any Liabilities
+to the extent (i) incurred by reason of the RCL
+Trustee s willful misconduct, bad faith or negligence or
+(ii) incurred by reason of the RCL Trustee s breach of
+its representations and warranties set forth in
+Section 6.6. The RCL Trustee shall notify the RCL
+Beneficiary promptly of any claim for which the RCL Trustee may
+seek indemnity. Failure by the RCL Trustee to so notify the RCL
+Beneficiary shall not relieve the RCL Beneficiary of its
+obligations hereunder. If necessary, to the extent not otherwise
+reimbursed, the RCL Trustee shall be entitled to indemnification
+from amounts on deposit in the RCL Account for any claims
+against the RCL Trustee the indemnification for which is
+provided pursuant to this Section 2.7. Any claim
+against the RCL Trustee shall be defended by the RCL Beneficiary
+and the RCL Trustee shall be entitled to separate counsel, the
+fees and expenses of which shall be paid by the RCL Beneficiary.
+The indemnities contained in this Section 2.7 shall
+survive the resignation, removal or termination of the RCL
+Trustee or the termination of this Agreement. Any amounts paid
+to the RCL Trustee pursuant to this Section 2.7
+shall be deemed not to be RCL Assets immediately after such
+payment. The RCL Trustee acknowledges that funds may be
+deposited in the RCL Account only as specifically provided in
+the Basic Documents, and that some funds paid to RCL in respect
+of the Series 2000-1 Certificates and funds paid to RCL as
+holder of the Subordinated Notes and deposited in the Cash
+Collateral Account have been pledged to the Lease Trustee on
+behalf of the Lease Trust and the Indenture Trustee on behalf of
+the Senior Noteholder in accordance with the terms of the Basic
+Documents.
+
+ 
+Section 145 of the General Corporation Law of Delaware
+provides as follows:
+
+145. Indemnification of officers, directors,
+employees and agents; insurance.
+
+ 
+ 
+
+ 
+ 
+ (a) A corporation may indemnify any person who was or is a
+ party or is threatened to be made a party to any threatened,
+ pending or completed action, suit or proceeding, whether civil,
+ criminal, administrative or investigative (other than an action
+ by or in the right of the corporation) by reason of the fact
+ that he is or was a director, officer, employee or agent of the
+ corporation, or is or was serving at the request of the
+ corporation as a director, officer, employee or agent of another
+ corporation, partnership, joint venture, trust or other
+ enterprise, against expenses (including attorneys fees),
+ judgments, fines and amounts paid in settlement actually and
+ reasonably incurred by him in connection with such action, suit
+ or proceeding if he acted in good faith and in a manner he
+ reasonably believed to be in or not opposed to the best
+ interests of the corporation, and, with respect to any criminal
+ action or proceeding, had no reasonable cause to believe his
+ conduct was unlawful. The termination of any action, suit or
+ proceeding by judgment, order, settlement, conviction, or upon a
+ plea of nolo contendere or its equivalent, shall not, of itself,
+ create a presumption that the person did not act in good faith
+ and in a manner which he reasonably believed to be in or not
+ opposed to the best interests of the corporation, and, with
+ respect to any criminal action or proceeding, had reasonable
+ cause to believe that his conduct was unlawful.
+
+II-2
+
+Table of Contents
+
+ 
+ 
+
+ 
+ 
+ (b) A corporation may indemnify any person who was or is a
+ party or is threatened to be made a party to any threatened,
+ pending or completed action or suit by or in the right of the
+ corporation to procure a judgment in its favor by reason of the
+ fact that he is or was a director, officer, employee or agent of
+ the corporation, or is or was serving at the request of the
+ corporation as a director, officer, employee or agent of another
+ corporation, partnership, joint venture, trust or other
+ enterprise against expenses (including attorneys fees)
+ actually and reasonably incurred by him in connection with the
+ defense or settlement of such action or suit if he acted in good
+ faith and in a manner he reasonably believed to be in or not
+ opposed to the best interests of the corporation and except that
+ no indemnification shall be made in respect of any claim, issue
+ or matter as to which such person shall have been adjudged to be
+ liable to the corporation unless and only to the extent that the
+ Court of Chancery or the court in which such action or suit was
+ brought shall determine upon application that, despite the
+ adjudication of liability but in view of all the circumstances
+ of the case, such person is fairly and reasonably entitled to
+ indemnity for such expenses which the Court of Chancery or such
+ other court shall deem proper.
+
+ 
+
+ 
+ 
+ (c) To the extent that a director, officer, employee or
+ agent of a corporation has been successful on the merits or
+ otherwise in defense of any action, suit or proceeding referred
+ to in subsections (a) and (b) of this section, or in
+ defense of any claim, issue or matter therein, he shall be
+ indemnified against expenses (including attorneys fees)
+ actually and reasonably incurred by him in connection therewith.
+
+ 
+
+ 
+ 
+ (d) Any indemnification under subsections (a)
+ and (b) of this section (unless ordered by a court) shall
+ be made by the corporation only as authorized in the specific
+ case upon a determination that indemnification of the director,
+ officer, employee or agent is proper in the circumstances
+ because he has met the applicable standard of conduct set forth
+ in subsections (a) and (b) of this section. Such
+ determination shall be made (1) by a majority vote of the
+ directors who are not parties to such action, suit or
+ proceeding, even though less than a quorum, or (2) if there
+ are no such directors, or if such directors so direct, by
+ independent legal counsel in a written opinion, or (3) by
+ the stockholders.
+
+ 
+
+ 
+ 
+ (e) Expenses (including attorneys fees) incurred by
+ an officer or director in defending a civil, criminal,
+ administrative or investigative action, suit or proceeding may
+ be paid by the corporation in advance of the final disposition
+ of such action, suit or proceeding upon receipt of an
+ undertaking by or on behalf of such director or officer to repay
+ such amount if it shall ultimately be determined that he is not
+ entitled to be indemnified by the corporation as authorized in
+ this section. Such expenses (including attorneys fees)
+ incurred by other employees and agents may be so paid upon such
+ terms and conditions, if any, as the board of directors deems
+ appropriate.
+
+ 
+
+ 
+ 
+ (f) The indemnification and advancement of expenses
+ provided by, or granted pursuant to, the other subsections of
+ this section shall not be deemed exclusive of any other rights
+ to which those seeking indemnification or advancement of
+ expenses may be entitled under any bylaw, agreement, vote of
+ stockholders or disinterested directors or otherwise, both as to
+ action in his official capacity and as to action in another
+ capacity while holding such office.
+
+ 
+
+ 
+ 
+ (g) A corporation shall have power to purchase and
+ maintain insurance on behalf of any person who is or was a
+ director, officer, employee or agent of the corporation, or is
+ or was serving at the request of the corporation as a director,
+ officer, employee or agent of another corporation, partnership,
+ joint venture, trust or other enterprise against any liability
+ asserted against him and incurred by him in any such capacity,
+ or arising out of his status as such, whether or not the
+ corporation would have the power to indemnify him against such
+ liability under this section.
+
+II-3
+
+Table of Contents
+
+ 
+ 
+
+ 
+ 
+ (h) For purposes of this section, references to
+ the corporation shall include, in addition to
+ the resulting corporation, any constituent corporation
+ (including any constituent of a constituent) absorbed in a
+ consolidation or merger which, if its separate existence had
+ continued, would have had power and authority to indemnify its
+ directors, officers, and employees or agents, so that any person
+ who is or was a director, officer, employee or agent of such
+ constituent corporation, or is or was serving at the request of
+ such constituent corporation as a director, officer, employee or
+ agent of another corporation, partnership, joint venture, trust
+ or other enterprise, shall stand in the same position under this
+ section with respect to the resulting or surviving corporation
+ as he would have with respect to such constituent corporation if
+ its separate existence had continued.
+
+ 
+
+ 
+ 
+ (i) For purposes of this section, references to
+ other enterprises shall include employee
+ benefit plans; references to fines shall
+ include any excise taxes assessed on a person with respect to
+ any employee benefit plan; and references to serving at
+ the request of the corporation shall include any
+ service as a director, officer, employee, or agent of the
+ corporation which imposes duties on, or involves services by,
+ such director, officer, employee, or agent with respect to an
+ employee benefit plan, its participants or beneficiaries; and a
+ person who acted in good faith and in a manner he reasonably
+ believed to be in the interest of the participants and
+ beneficiaries of an employee benefit plan shall be deemed to
+ have acted in a manner not opposed to the best
+ interests of the corporation as referred to in this
+ section.
+
+ 
+
+ 
+ 
+ (j) The indemnification and advancement of expenses
+ provided by, or granted pursuant to, this section shall, unless
+ otherwise provided when authorized or ratified, continue as to a
+ person who has ceased to be a director, officer, employee or
+ agent and shall inure to the benefit of the heirs, executors and
+ administrators of such a person.
+
+ 
+
+ 
+ 
+ (k) The Court of Chancery is hereby vested with exclusive
+ jurisdiction to hear and determine all actions for advancement
+ of expenses or indemnification brought under this section or
+ under any bylaw, agreement, vote of stockholders or
+ disinterested directors, or otherwise. The Court of Chancery may
+ summarily determine a corporation s obligation to advance
+ expenses (including attorneys fees).
+
+ 
+Article Ninth, Section 5 of the Certificate of
+Incorporation of Ford Motor Credit Company provides as follows:
+
+SECTION 5.
+
+Indemnification
+
+ 
+5.1. Directors, Officers and Employees of the
+Corporation. Every person now or hereafter serving as a
+director, officer or employee of the corporation shall be
+indemnified and held harmless by the corporation from and
+against any and all loss, cost, liability and expense that may
+be imposed upon or incurred by him in connection with or
+resulting from any claim, action, suit, or proceeding, civil or
+criminal, in which he may become involved, as a party or
+otherwise, by reason of his being or having been a director,
+officer or employee of the corporation, whether or not he
+continues to be such at the time such loss, cost, liability or
+expense shall have been imposed or incurred. As used herein, the
+term loss, cost, liability and expense shall
+include, but shall not be limited to, counsel fees and
+disbursements and amounts of judgments, fines or penalties
+against, and amounts paid in settlement by, any such director,
+officer or employee; provided, however, that no such
+director, officer or employee shall be entitled to claim such
+indemnity: (1) with respect to any matter as to which there
+shall have been a final adjudication that he has committed or
+allowed some act or omission, (a) otherwise than in good
+faith in what he considered to be the best interests of the
+corporation, and (b) without reasonable cause to believe
+that such act or omission was proper and legal; or (2) in
+the event of a settlement of such claim, action, suit, or
+proceeding unless (a) the court having jurisdiction thereof
+shall have
+
+II-4
+
+Table of Contents
+
+approved of such settlement with knowledge of the indemnity
+provided herein, or (b) a written opinion of independent
+legal counsel, selected by or in manner determined by the Board
+of Directors, shall have been rendered substantially
+concurrently with such settlement, to the effect that it was not
+probable that the matter as to which indemnification is being
+made would have resulted in a final adjudication as specified in
+clause (1) above, and that the said loss, cost, liability
+or expense may properly be borne by the corporation. A
+conviction or judgment (whether based on a plea of guilty or
+nolo contendere or its equivalent, or after trial) in a criminal
+action, suit or proceeding shall not be deemed an adjudication
+that such director, officer or employee has committed or allowed
+some act or omission as hereinabove provided if independent
+legal counsel, selected as hereinabove set forth, shall
+substantially concurrently with such conviction or judgment give
+to the corporation a written opinion that such director, officer
+or employee was acting in good faith in what he considered to be
+the best interests of the corporation or was not without
+reasonable cause to believe that such act or omission was proper
+and legal.
+
+ 
+5.2. Directors, Officers and Employees of
+Subsidiaries. Every person (including a director, officer or
+employee of the corporation) who at the request of the
+corporation acts as a director, officer or employee of any other
+corporation in which the corporation owns shares of stock or of
+which it is a creditor shall be indemnified to the same extent
+and subject to the same conditions that the directors, officers
+and employees of the corporation are indemnified under the
+preceding paragraph, except that the amounts of such loss, cost,
+liability or expense paid to any such director, officer or
+employee shall be reduced by and to the extent of any amounts
+which may be collected by him from such other corporation.
+
+ 
+5.3. Miscellaneous. The provisions of this
+Section 5 of Article NINTH shall cover claims,
+actions, suits and proceedings, civil or criminal, whether now
+pending or hereafter commenced and shall be retroactive to cover
+acts or omissions or alleged acts or omissions which heretofore
+have taken place. In the event of death of any person having a
+right of indemnification under the provisions of this
+Section 5 of Article NINTH, such right shall inure to
+the benefit of his heirs, executors, administrators and personal
+representatives. If any part of this Section 5 of
+Article NINTH should be found to be invalid or ineffective
+in any proceeding, the validity and effect of the remaining
+provisions shall not be affected.
+
+ 
+5.4. Indemnification Not Exclusive. The foregoing
+right of indemnification shall not be deemed exclusive of any
+other right to which those indemnified may be entitled, and the
+corporation may provide additional indemnity and rights to its
+directors, officers or employees.
+
+Item 15. Recent Sales of Unregistered
+Securities.
+
+ 
+Not Applicable
+
+Item 16. Exhibits and Financial
+Statements.
+
+ 
+(a) Exhibits:
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 1.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Underwriting Agreement.***
+
+ 
+ 3.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Amended and Restated Trust Agreement of RCL Trust 
+ 2000-1, between Ford Credit and the RCL Trustee.**
+
+ 
+ 3.2
+ 
+ 
+ 
+ 
+ 
+ 
+ Restated Certificate of Incorporation of Ford Motor Credit
+ Company.*
+
+ 
+ 3.3
+ 
+ 
+ 
+ 
+ 
+ 
+ By-Laws of Ford Motor Credit Company.*
+
+ 
+ 4.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Trust Agreement of the Issuer, between the RCL Trustee
+ and the Lease Trustee.**
+
+ 
+ 4.2
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Indenture, between the Lease Trustee and the Indenture
+ Trustee.**
+
+ 
+ 4.3
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-1 Senior Note (included as part of
+ Exhibit 4.2).**
+
+ 
+ 4.4
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-2 Senior Note (included as part of
+ Exhibit 4.2).**
+
+II-5
+
+Table of Contents
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 4.5
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-3 Senior Note (included as part of
+ Exhibit 4.2).**
+
+ 
+ 4.6
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-4 Senior Note (included as part of
+ Exhibit 4.2).**
+
+ 
+ 4.7
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Class A-5 Senior Note (included as part of
+ Exhibit 4.2).**
+
+ 
+ 5.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Opinion of H.D. Smith, Esq., Secretary-Corporate Counsel of Ford
+ Motor Credit Company with respect to legality.**
+
+ 
+ 8.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Opinion of Skadden, Arps, Slate, Meagher Flom LLP with
+ respect to tax matters.**
+
+ 
+ 8.2
+ 
+ 
+ 
+ 
+ 
+ 
+ Opinion of Hurley D. Smith, Esq., Secretary and Corporate
+ Counsel of Ford Motor Credit Company with respect to Michigan
+ income tax matters.**
+
+ 
+ 10.1
+ 
+ 
+ 
+ 
+ 
+ 
+ FCTT Trust Agreement, between Ford Credit and U.S. Bank National
+ Association.***
+
+ 
+ 10.2
+ 
+ 
+ 
+ 
+ 
+ 
+ FCMTT Agreement, among Ford Credit, U.S. Bank National
+ Association and Wilmington Trust Company.***
+
+ 
+ 10.3
+ 
+ 
+ 
+ 
+ 
+ 
+ FCAL Agreement, between FCAL and U.S. Bank National
+ Association.***
+
+ 
+ 10.4
+ 
+ 
+ 
+ 
+ 
+ 
+ FCALM Agreement, between FCALM and U.S. Bank National
+ Association.***
+
+ 
+ 10.5
+ 
+ 
+ 
+ 
+ 
+ 
+ Administrative Agency Agreement, among the Titling Companies,
+ Ford Credit and U.S. Bank National Association.***
+
+ 
+ 10.6
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Series 2000-1 Supplement, among the Titling
+ Companies, Ford Credit and U.S. Bank National Association.**
+
+ 
+ 10.7
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Asset Contribution Agreement, between Ford Credit and
+ the RCL Trustee.**
+
+ 
+ 10.8
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Transfer Agreement, between the RCL Trustee and the
+ Lease Trustee.**
+
+ 
+ 10.9
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Program Operating Lease, between the RCL Trustee and the
+ Lease Trustee.**
+
+ 
+ 10.10
+ 
+ 
+ 
+ 
+ 
+ 
+ Appendix I Definitions.***
+
+ 
+ 10.11
+ 
+ 
+ 
+ 
+ 
+ 
+ Form of Appendix A Definitions.**
+
+ 
+ 23.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Consent of H.D. Smith, Esq., Secretary-Corporate Counsel of Ford
+ Motor Credit Company (included as part of Exhibit 5.1).**
+
+ 
+ 23.2
+ 
+ 
+ 
+ 
+ 
+ 
+ Consent of Skadden, Arps, Slate, Meagher Flom LLP
+ (included as part of Exhibit 8.1).**
+
+ 
+ 23.3
+ 
+ 
+ 
+ 
+ 
+ 
+ Consent of PricewaterhouseCoopers LLP.***
+
+ 
+ 24.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Powers of Attorney of officers and directors of Ford Motor
+ Credit Company.**
+
+ 
+ 25.1
+ 
+ 
+ 
+ 
+ 
+ 
+ Form T-1 of The Chase Manhattan Bank.***
+
+ 
+ 
+
+ * 
+ 
+ Incorporated by reference to Exhibits 3.1 (Restated
+ Certificate of Incorporation) and 3.2 (By-Laws) to Ford Motor
+ Credit Company s Registration Statement on Form S-1
+ (Registration No. 33-25082).
+
+ 
+
+ ** 
+ 
+ Previously filed.
+
+ 
+
+ *** 
+ 
+ To be filed by amendment.
+
+ (b) Financial
+Statements:
+
+Not Applicable
+
+Item 17. Undertakings.
+
+ 
+(a) To provide to the Underwriter at the closing specified
+in the Underwriting Agreement certificates in such denominations
+and registered in such names as required by the Underwriter to
+permit prompt delivery to each purchaser.
+
+II-6
+
+Table of Contents
+
+ 
+(b) Insofar as indemnification for liabilities arising
+under the Securities Act of 1933 may be permitted to directors,
+officers and controlling persons of the registrant pursuant to
+the provisions described under Item 14 above, or otherwise,
+the registrant has been advised that in the opinion of the
+Securities and Exchange Commission such indemnification is
+against public policy as expressed in the Act and is, therefore,
+unenforceable. In the event that a claim for indemnification
+against such liabilities (other than the payment by the
+registrant of expenses incurred or paid by a director, officer
+or controlling person of the registrant in the successful
+defense of any action, suit or proceeding) is asserted by such
+director, officer or controlling person in connection with the
+securities being registered, the registrant will, unless in the
+opinion of its counsel the matter has been settled by
+controlling precedent, submit to a court of appropriate
+jurisdiction the question whether such indemnification by it is
+against public policy as expressed in the Act and will be
+governed by the final adjudication of such issue.
+
+ 
+The undersigned registrant hereby undertakes that:
+
+ 
+ 
+
+ 
+ 
+ (1) For purposes of determining any liability under the
+ Securities Act of 1933, the information omitted from the form of
+ prospectus filed as part of this registration statement in
+ reliance upon Rule 430A and contained in a form of
+ prospectus filed by the registrant pursuant to
+ Rule 424(b)(1) or (4) or 497(b) under the Securities Act
+ shall be deemed to be part of this registration statement as of
+ the time it was declared effective.
+
+ 
+
+ 
+ 
+ (2) For the purpose of determining any liability under the
+ Securities Act of 1933 each post-effective amendment that
+ contains a form of prospectus shall be deemed to be a new
+ registration statement relating to the securities offered
+ therein, and the offering of such securities at that time shall
+ be deemed to be the initial bona fide offering thereof.
+
+II-7
+
+Table of Contents
+
+SIGNATURES
+
+ 
+Pursuant to the requirements of the Securities Act of 1933, the
+registrant has duly caused this Amendment No. 3 to the
+Registration Statement to be signed on its behalf by the
+undersigned, thereunto duly authorized, in the City of Detroit
+and the State of Michigan on the 18th day of December, 2000.
+
+ 
+ 
+
+ 
+ 
+ RCL TRUST 2000-1
+
+ 
+ 
+ 
+
+ 
+ By 
+ 
+ FORD MOTOR CREDIT COMPANY,
+
+ 
+ 
+
+ 
+ 
+ Depositor and Beneficiary of RCL Trust 2000-1
+
+ 
+ 
+ 
+
+ 
+ By 
+ 
+ /s/ DONALD A. WINKLER*
+
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+ 
+ (Donald A. Winkler)
+
+ 
+ 
+ Chairman of the Board of Directors of
+
+ 
+ 
+ Ford Motor Credit Company
+
+ 
+Under the requirements of the Securities Act of 1933, this
+Amendment No. 3 to the Registration Statement has been
+signed below by the following officers and directors of FORD
+MOTOR CREDIT COMPANY, in the capacities and on the date
+indicated.
+
+ 
+ 
+ 
+ 
+ 
+
+ Signature
+ 
+ Title
+ 
+ Date
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+ /s/ DONALD A. WINKLER*
+
+ (Donald A. Winkler)
+ 
+ 
+ 
+ Chairman of the Board of Directors and Director (principal
+ executive officer)
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ BIBIANA BOERIO*
+
+ (Bibiana Boerio)
+ 
+ 
+ 
+ Executive Vice President, Chief Financial Officer and Treasurer
+ (principal financial and accounting officer)
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ BARRETT BURNS*
+
+ (Barrett Burns)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ GREGORY C. SMITH*
+
+ (Gregory C. Smith)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ MALCOLM S. MACDONALD*
+
+ (Malcolm S. Macdonald)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ DAVID C. FLANIGAN*
+
+ (David C. Flanigan)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ TERRY D. CHENAULT*
+
+ (Terry D. Chenault)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ DALE R. WALKER*
+
+ (Dale R. Walker)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ /s/ HENRY D. WALLACE*
+
+ (Henry D. Wallace)
+ 
+ 
+ 
+ Director
+
+ 
+ 
+ 
+ December 18, 2000
+
+ 
+ 
+
+ *By: 
+ 
+ /s/ HURLEY D. SMITH
+
+(Hurley D. Smith)
+
+Attorney-in-fact
+
+II-8
+
+Table of Contents
+
+ 
+Pursuant to the requirements of the Securities Act of 1933, the
+registrant has duly caused this Amendment No. 3 to the
+Registration Statement to be signed on its behalf by the
+undersigned, thereunto duly authorized, in the City of Detroit
+and the State of Michigan on the 18th day of December, 2000.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001116377_enterra_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001116377_enterra_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..af61ab7691e54ecd5e1a6cfec1eeff0c8583058f
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2000/CIK0001116377_enterra_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY To understand this offering fully, you should carefully read the entire prospectus, including the risk factors and the consolidated financial statements. This summary highlights selected information set out elsewhere in this prospectus. BUSINESS Westlinks Resources Ltd. is engaged in the drilling and operation of oil and gas wells in western Canada, primarily in the province of Alberta. We have assembled an experienced management team which includes executive officers with oil and gas exploration experience, as well as experience in property acquisitions, petroleum engineering, oil and gas drilling operations, debt and equity financings and financial accounting. STRATEGY Our management team has developed what we consider to be a highly focused approach to the exploitation and development of oil and gas properties. This approach includes the following elements: - the concentration on low-risk, development prospects that offer higher probabilities of success, often among multiple oil and gas zones; - the consolidation of adjacent or close-proximity prospects in order to reduce drilling and operating costs; - the acquisition of oil and gas producing properties at prices which we believe are recoverable within a reasonable time frame; - the emphasis on development drilling in our currently producing core areas in order to minimize drilling risk; - the use of either seismic analysis, including three dimensional seismic, when it is cost effective, or information from adjacent wells, to further minimize drilling risk; and - the selection of producing oil and gas properties we can operate and which we believe offer us the opportunity to reduce operating costs and maximize economies of scale, thereby improving operating profitability. OPPORTUNITY The consolidation of the oil and gas industry in Canada has resulted in the emergence of larger companies which are being forced to explore and develop larger prospects in order to support their growth. We believe that this consolidation offers smaller oil and gas companies the opportunity to economically purchase producing properties which do not meet the economic requirements of larger companies. We further believe that we can leverage our management team's experience and the economies of scale generated from consolidating adjacent properties in our core areas, to improve our profitability. ACQUISITION HISTORY In the two years since our amalgamation, we have grown significantly through a series of asset acquisitions. We have made four acquisitions of oil and gas assets in our current three core areas in Alberta, acquiring our Sylvan Lake area assets in August, 1999, our Mitsue area assets in February, 2000 and our Sounding Lake area assets in May, 2000. In addition, we acquired our Bigoray area assets in August, 1999 and sold them November 15, 2000. As of October 31, 2000, we had working interests in 54 oil wells (38.2 net), producing approximately 1,240 barrels of oil equivalent per day, and held oil and gas leases on net acreage of approximately 19,350 acres, in the four core areas in which we are the operator plus a portion of the Sounding Lake, Alberta area in which we are not the operator. Our executive offices are located at Suite 700, 703 - 6th Avenue S.W., Calgary, Alberta, Canada T2P 0T9, our telephone number is (403) 261-2686 and our fax number is (403) 261-2704. Our email address for general information and correspondence is adejesus@westlinks-resources.com and our Web site address is www.westlinks-resources.com. Information contained on our Web site does not constitute part of this prospectus. THE OFFERING Except where noted otherwise, all information in this prospectus, including share and per share information, assumes an offering price of US$5.00 per share and US$0.25 per warrant, and no exercise of the underwriters' over-allotment option. SECURITIES OFFERED: 1,000,000 shares of common stock and 1,000,000 warrants. The securities are offered in units consisting of one share and one warrant. The common stock and the warrants will trade separately immediately after the offering. WARRANT ATTRIBUTES: Each warrant entitles the holder to purchase one share of common stock for US$ -- until -- , 2001. COMMON STOCK TO BE OUTSTANDING AFTER THE OFFERING: 5,595,139 shares. USE OF PROCEEDS: We estimate that we will receive net proceeds of about US$4,045,000. We expect to use the net proceeds for acquisitions and/or development of additional reserves, and for working capital. PROPOSED NASDAQ SMALLCAP MARKET SYMBOLS: Common stock: WLKS; Warrants: WLKSW CANADIAN VENTURE EXCHANGE SYMBOL: Common stock: WLX PINK SHEET SYMBOL: Common stock: WLKSF In addition to the common stock outstanding after the offering, we may issue up to 1,000,000 shares of common stock on exercise of the warrants offered hereby and up to 630,500 shares of common stock on exercise of currently outstanding options and warrants to be issued to the underwriters. Concurrent with this offering, security holders who are not officers or directors are offering to sell up to 150,000 shares of our common stock which were issued upon the exercise of warrants on September 30, 2000. We will not receive any proceeds from the sale of these shares, but we received the exercise price upon the exercise of the warrants. Each such warrant was exercised to purchase one share of common stock at US$4.00 per share. These warrants were issued in connection with a loan of US$1,500,000 made to Westlinks in connection with our Sounding Lake acquisition. SUMMARY CONSOLIDATED FINANCIAL DATA The following table presents a summary of our consolidated statement of operations derived from our financial statements, adjusted to conform with U.S. GAAP. The data should be read with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and notes included elsewhere in this prospectus. The monetary amounts in the table are expressed in Canadian dollars, except for two columns which show the U.S. dollar equivalency for the periods ended September 30, 2000 and December 31, 1999. The U.S. dollar equivalent amounts are calculated on the basis of C$1.00 equals US$0.6634. CONSOLIDATED STATEMENTS OF OPERATIONS DATA: <TABLE> <CAPTION> UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ------------------------------ ----------------------------------------- 2000 2000 1999 1999 1999 1998 1997 -------- ------- ------- -------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> Net revenue.......................... US$6,162 C$9,289 C$1,223 US$1,377 C$2,075 C$1,697 C$1,055 Gross profit......................... 4,364 6,579 600 762 1,148 848 616 Operating expenses................... 1,798 2,710 623 615 927 849 439 Exploration expenses................. 154 232 3 2 3 4 35 General and administrative expenses........................... 526 793 637 477 719 426 176 Interest............................. 448 676 76 88 132 185 74 Depreciation and depletion........... 1,799 2,712 451 559 842 805 352 Gain (loss) from operations.......... 1,437 2,166 (567) (364) (548) (572) (21) Net income (loss).................... US$1,142 C$1,721 C$ (300) US$ (86) C$ (129) C$ 311 C$ 193 ======== ======= ======= ======== ======= ======= ======= Net income (loss) per share.......... US$ 0.26 C$ 0.39 C$(0.12) US$(0.03) C$(0.05) C$ 0.15 C$ 0.20 ======== ======= ======= ======== ======= ======= ======= </TABLE> The following table indicates a summary of our consolidated balance sheets as of December 31, 1998 and 1999 and September 30, 2000. The "As Adjusted" column below reflects our receipt of estimated net proceeds of US$4,045,000 from the sale of 1,000,000 shares and warrants at an assumed public offering price of US$5.25, after deducting underwriting discounts and estimated expenses of US$1,205,000, converted to C$1,816,400 on the basis of C$1.00 = US$0.6634. The monetary amounts in the table are expressed in Canadian dollars, except for the column showing the U.S. dollar equivalency as of December 28, 2000. The U.S. dollar equivalent amounts are calculated on the basis of C$1.00 equals US$0.6634. CONSOLIDATED BALANCE SHEET DATA: <TABLE> <CAPTION> DECEMBER 31, UNAUDITED --------------------------- SEPTEMBER 30, 2000 1999 1998 1997 ---------------------------------- ------- ------- ------- ACTUAL ACTUAL AS ADJUSTED ACTUAL ACTUAL ACTUAL --------- -------- ----------- ------- ------- ------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> Cash and short term investments............... US$ 2 C$ 3 C$ 6,539 C$ 42 C$ 74 C$ 934 Accounts receivable......... 1,349 2,033 2,033 685 231 921 Capital assets.............. 13,133 19,797 19,797 7,017 3,622 5,097 Total assets................ 15,259 23,001 29,098 7,744 4,288 7,290 Total stockholders' equity.................... 4,672 7,042 13,946 3,978 2,852 2,060 </TABLE>
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2000/CIK0001116997_pya_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001116997_pya_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3ca1516ca006e3b782f767e5d6a62e6179ec153b
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING OUR COMPANY AND THE COMMON STOCK BEING SOLD IN THIS OFFERING AND OUR HISTORICAL FINANCIAL STATEMENTS AND NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. OUR BUSINESS We are a leading broadline marketer and distributor of food and related products to restaurants and other foodservice establishments in the Southeastern and Mid-Atlantic regions of the United States. We are the nation's fourth largest broadline distributor, and we believe that we are the largest broadline distributor in our core Southeastern service area, one of the fastest growing regions of the country. We have increased our net sales through internal growth and acquisitions from $1.5 billion in fiscal 1994 to over $2.7 billion in fiscal 1999, a compound annual growth rate of 12.9%, well above the industry average growth rate of 4.6%. We distribute over 38,000 products including dry, refrigerated and frozen foods, paper supplies and foodservice equipment. Our products include both PYA/Monarch proprietary brands and nationally recognized brands. We serve a diverse customer base comprised of both independent accounts, which are often referred to as street accounts, and multi-unit accounts, which are often referred to as chain accounts. Our street customers consist of independent restaurants, hotels and other foodservice businesses, while the majority of our multi-unit accounts consist of franchises or corporate-owned units of national or regional family dining and other restaurant concepts. We believe our size and scope of operations give us a competitive advantage. Our large-scale operations provide significant name recognition and operating efficiencies, and our extensive distribution network enables us to offer customers a broad array of products and value-added services across a wide service area. Our modern, large-scale distribution centers provide cost savings in branch overhead, warehouse operations and transportation. In addition, we have made substantial investments in advanced proprietary information systems, which further reduce our costs and enhance our selling efforts and customer service. FOODSERVICE DISTRIBUTION INDUSTRY The foodservice distribution industry generated sales of $154 billion in 1999, a 4.8% increase over 1998. According to industry sources, during the period from 1994 to 1999, total foodservice distribution sales grew at a compound annual growth rate of 4.6%. Growth in foodservice distribution has been driven, in part, by demographic, economic and lifestyle trends resulting in increased demand for meals prepared away from home. An industry group projects that the foodservice share of total food expenditures in the United States will increase from its current level of approximately 45% to approximately 53% by 2010. The foodservice industry is highly fragmented and is consolidating. This consolidation has primarily resulted from acquisitions of smaller, regional distributors by larger broadline distributors. We anticipate further consolidation in the industry as smaller distributors confront increasingly difficult competitive challenges. Larger broadline distributors have access to the significant capital and management resources needed to construct and equip large distribution centers, maintain a modern fleet of delivery vehicles and develop the sophisticated information systems required for cost-efficient operations. GROWTH STRATEGIES Our ongoing strategies to grow our business are: INCREASE STREET ACCOUNT SALES. We plan to improve profitability by continuing to increase street account sales, which generate higher profit margins. From fiscal 1994 to fiscal 1999, our sales to street accounts increased at a compound annual growth rate of 17.2%. During this period, our street account sales as a percentage of total sales increased from 40% to 49%. We intend to continue to grow street account sales by hiring more commissioned sales representatives, by implementing technology improvements that enable our sales representatives to spend more time providing value-added services and by expanding the value-added services that we offer. INCREASE SALES PENETRATION OF EXISTING ACCOUNTS. We intend to become the primary broadline distributor for more of our customers by leveraging our strong position in quality, service and pricing. We have undertaken a number of technology-based initiatives to increase sales to existing customers, including our web-based interactive ordering system and our data warehouse of customer purchasing history. We are also focusing on increasing sales to selected multi-unit customers to more cost effectively use our existing capacity. AGGRESSIVELY PROMOTE OUR PROPRIETARY BRANDS. We intend to increase sales of our proprietary brand products by focusing on branch marketing, promotional programs, sales incentives and sales force training. Sales of our proprietary brand products, which we primarily market to our street accounts, enhance our profitability because we avoid paying the price premiums and higher overhead costs associated with national brands. Sales of our proprietary brand products have increased from approximately 30% of street account sales in fiscal 1997 to approximately 38% of street account sales in fiscal 1999. PURSUE STRATEGIC ACQUISITIONS. To accelerate growth in both sales and profits and to expand our core service areas, we plan to selectively acquire foodservice distributors. We intend to pursue acquisitions of businesses in contiguous service areas that have a committed management and sales force and that have a high percentage of street accounts. BUILD AND EXPAND LARGE, MODERN WAREHOUSES. We are investing in large-scale, technologically advanced warehouses to provide a platform for growth and to control distribution expenses. Modern, broadline facilities enhance our ability to attract new customers by allowing us to offer a broad product selection and superior service capabilities. We are introducing a sophisticated voice-activated selection system that significantly improves accuracy. We plan to continue to focus on facility improvement and expansion as a key component of our growth strategy. OUR RELATIONSHIP WITH SARA LEE We are currently a wholly owned subsidiary of Sara Lee. After the completion of this offering, Sara Lee will own approximately % of the outstanding shares of our common stock, or approximately % if the underwriters fully exercise their option to purchase additional shares. Sara Lee currently is planning to effect an exchange or other distribution of all or a significant portion of its shares of our common stock within 18 months of this offering, although the timing of the exchange or other distribution has not been finally determined. Sara Lee is not obligated to complete any exchange or other distribution, and we cannot assure you as to whether, when or how it will occur. Before the completion of this offering, we will enter into agreements with Sara Lee related to the separation of our business operations from those of Sara Lee. These agreements provide for, among other things, various interim and ongoing relationships between us and Sara Lee. These agreements are described more fully in the section entitled "Arrangements Between Sara Lee and PYA/Monarch" included elsewhere in this prospectus. The terms of these agreements are being negotiated in the context of a parent-subsidiary relationship and may be more or less favorable to us than if they had been negotiated with unaffiliated parties. THE OFFERING <TABLE> <S> <C> Common stock offered......................... shares Common stock to be outstanding immediately after this offering........................ shares Common stock to be held by Sara Lee immediately after this offering............ shares Use of proceeds.............................. The estimated net proceeds from this offering of approximately $ million will be used to repay a portion of our indebtedness to Sara Lee. Proposed New York Stock Exchange Symbol...... PYA </TABLE> This information is based on shares outstanding immediately prior to this offering, all of which are owned by Sara Lee. Unless we specifically state otherwise, the information in this prospectus does not take into account the issuance of up to shares of common stock that the underwriters have the option to purchase from us. If the underwriters fully exercise their option to purchase additional shares, shares of common stock will be outstanding after this offering and Sara Lee will hold of those shares. The number of shares of our common stock to be outstanding immediately after the offering above does not take into account approximately shares of our common stock reserved for issuance under our stock plans. At the time of the offering, we intend to grant options to purchase approximately shares of our common stock at the offering price to some of our directors, officers and employees. In addition to the common stock reserved for issuance under our stock plans, we intend to offer to selected executive employees options to purchase up to an aggregate of shares of our common stock, subject to the surrender and cancellation of previously granted options to purchase Sara Lee common stock. ------------------------ We were originally incorporated in Delaware, and we reincorporated in Maryland in June 1998. Our executive offices are located at 80 International Drive, Greenville, South Carolina 29615. Our telephone number is (864) 676-8600, and our facsimile number is (864) 676-8701. We also maintain an Internet site at www.pyamonarch.com. The information contained on our website or connected to our website is not part of this prospectus. In this prospectus, "PYA/Monarch," "we," "us," and "our" each refers to PYA/Monarch, Inc. and not to the underwriters or Sara Lee. "Sara Lee" refers to Sara Lee Corporation and its subsidiaries, not including PYA/Monarch. Our fiscal year ends on the Saturday closest to June 30 of any given year. Fiscal year 1999 is a 53-week year, while fiscal years 1995, 1996, 1997, 1998 and 2000 are 52-week years. PYA/MONARCH-REGISTERED TRADEMARK-, MONARCH-REGISTERED TRADEMARK- and other trademarks of PYA/Monarch appearing in this prospectus are the property of PYA/Monarch. SUMMARY FINANCIAL DATA (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) The following tables present our summary financial data. The data presented in these tables are from "Selected Financial Data" and our historical financial statements and notes to those statements, which are included elsewhere in this prospectus. You should read those sections and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a further explanation of the financial data summarized here. The historical financial information may not be indicative of our future performance and does not reflect what our financial position and results of operations would have been had we operated as a separate, stand-alone entity during the periods presented. <TABLE> <CAPTION> YEARS ENDED 39 WEEKS ENDED -------------------------------------------------------------- ----------------------- JULY 1, JUNE 29, JUNE 28, JUNE 27, JULY 3, MARCH 27, APRIL 1, STATEMENTS OF INCOME DATA: 1995 1996 1997 1998 1999(1) 1999 2000 -------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> Net sales.............................. $1,983,287 $2,200,804 $2,372,694 $2,584,878 $2,742,110 $1,981,538 $2,113,021 Gross profit........................... 292,923 328,867 348,540 382,858 410,376 293,360 327,122 Selling, general and administrative expenses............................. 232,828 254,507 269,107 293,819 316,658 231,413 259,484 Loss on sale to Sara Lee of trade receivables, net of collection fees (2)............................. -- -- 14,710 41,535 44,287 31,907 34,367 Impairment of long-lived assets (3).... -- -- -- 1,336 -- -- 1,100 Interest expense (income), net (4)..... 2,410 17 (4,663) (12,116) (14,684) (10,570) (13,293) Income before income taxes............. 57,685 74,343 69,386 58,284 64,115 40,610 45,464 Net income............................. 33,923 43,617 41,044 34,262 37,912 24,001 26,637 Pro forma as adjusted net income (5)........................... Net income per share--basic and diluted.............................. Pro forma as adjusted net income per share--basic and diluted............. Shares used in computing pro forma as adjusted net income per share--basic and diluted.......................... </TABLE> <TABLE> <CAPTION> APRIL 1, 2000 ---------------------------- PRO FORMA ACTUAL AS ADJUSTED(5) ----------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital........................................... $ 62,271 Total assets.............................................. 615,043 Inventories, net.......................................... 110,876 Note receivable from Sara Lee (6)......................... 165,445 Payable to Sara Lee (7)................................... 103,637 Stockholder's equity...................................... 235,344 </TABLE> ------------------------------ (1) 1999 was a 53-week year. (2) Represents losses on the sale to Sara Lee of 100% of our third-party trade receivables. From February 1997 to June 2000, we sold our receivables to Sara Lee at a discount. As of June 2000, we no longer sell our trade receivables to Sara Lee and therefore, will no longer incur a loss on the sale of such receivables. (3) Represents write-down of three of our facilities to estimated net realizable value. (4) Represents primarily interest income from Sara Lee on the note receivable from Sara Lee received in consideration for the sale of our trade receivables to Sara Lee. As of June 2000, we no longer sell our trade receivables to Sara Lee and therefore, will no longer recognize interest income on the note receivable from Sara Lee. (5) Pro forma as adjusted amounts give effect to the following actions as though these actions had taken place as of July 4, 1999. - our dividend of a promissory note in the principal amount of $ payable to Sara Lee and the resulting reduction in stockholder's equity; - the termination of our sale to Sara Lee of trade receivables through the following transactions: - our purchase from Sara Lee of all our outstanding trade receivables at fair market value for $ ; - our payment of the receivables purchase price through the retirement on a dollar-for-dollar basis of the note receivable from Sara Lee; and - elimination of the loss on sale to Sara Lee of trade receivables and interest income from Sara Lee; - our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share and after deducting an assumed underwriting discount and estimated offering expenses payable by us; - use of the estimated offering proceeds to repay a portion of our indebtedness and reflection of interest expense on the unpaid balance of the indebtedness of $ at an assumed market interest rate of %, resulting in interest expense of $ for the 39 weeks ended April 1, 2000; and - the difference in estimated costs for the services to be provided by Sara Lee under the master transitional services agreement, at a cost of $1 million per year, from the costs historically allocated to us for these services, resulting in an incremental expense of $83 in the 39 weeks ended April 1, 2000. Upon Sara Lee's exchange or other distribution of our common stock, we will no longer be permitted to participate in Sara Lee's benefit plans, insurance plans and working capital funding arrangements. We may face increased costs for these and other items, following this offering. At this time, we cannot estimate the amount or timing of these increased costs and, accordingly, we have not included this amount in the pro forma as adjusted amounts. (6) Represents the note receivable from Sara Lee described in note 4. (7) Actual amount represents a payable to Sara Lee. Pro forma as adjusted amount represents the $ payable to Sara Lee and the $ promissory note to be issued to Sara Lee as payment of a dividend prior to the end of fiscal 2000. All of the payable and a portion of the promissory note will be repaid with the net proceeds of this offering.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001117021_westport_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001117021_westport_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information from this prospectus, but does not contain all information that may be important to you. We encourage you to read this prospectus in its entirety before making an investment decision. References to "Westport," "we," "our" or "us" refer to Westport Resources Corporation. Westport was formed in connection with the merger on April 7, 2000 of Westport Oil and Gas Company, Inc. with Equitable Production (Gulf) Company, an indirect, wholly-owned subsidiary of Equitable Resources, Inc. that held certain Gulf of Mexico assets of its parent company, Equitable Production Company. Unless expressly noted otherwise, the operating results and property descriptions presented here are those of Westport Oil and Gas Company, Inc., as adjusted to reflect the pro forma effect of its merger with Equitable Production (Gulf) Company. Westport Oil and Gas Company, Inc. is referred to in this document as "Westport Oil and Gas" and Equitable Production (Gulf) Company is referred to in this document as "EPGC." Unless otherwise indicated, the information contained in this prospectus gives effect to a three-for-two common stock split effected on October 17, 2000. Unless otherwise indicated, this prospectus assumes that the underwriters' over-allotment option is not exercised. We have provided definitions for some of the oil and natural gas industry terms used in this prospectus in the "Glossary of Oil and Natural Gas Terms" beginning on page 78. ABOUT WESTPORT Westport is an independent energy company engaged in oil and natural gas exploitation, acquisition and exploration activities primarily in the United States. We conduct operations in the Gulf of Mexico, the Rocky Mountains, West Texas/Mid-Continent and the Gulf Coast. We focus on maintaining a balanced portfolio of lower-risk, long-life onshore reserves and higher-margin offshore reserves to provide a diversified cash flow foundation for our exploitation, acquisition and exploration activities. Onshore, we have built a strong asset base and achieved steady growth through both property acquisitions and exploitation activities. We expect to further develop these properties through lower-risk recovery methods. In the Gulf of Mexico, we own interests in 65 developed blocks and 67 undeveloped blocks, within which we have realized several recent discoveries and have assembled a large number of future drilling opportunities. We have budgeted $110 million in capital expenditures for 2000 to pursue our exploitation and exploration opportunities. We believe that our exploitation and acquisition expertise and our sizable exploration inventory, together with our operating experience and efficient cost structure, provide us with substantial growth potential. As of June 30, 2000, we had proved reserves of 459.1 billion cubic feet equivalent of natural gas, or Bcfe, with a net present value, which is the pre-tax future net revenues discounted at 10%, of $958.3 million and a standardized measure value of $768.6 million based on NYMEX prices of $32.50 per barrel of oil and $4.33 per million British thermal units, or Mmbtu, of natural gas. These reserves, of which 50% were natural gas and 80% were classified as proved developed, had a reserve life index of 7.5 years. We operate over 73% of the net present value of our reserves, allowing us to better manage expenses, capital allocation and the decision-making processes related to other aspects of exploitation and exploration activities. We produced 60.8 Bcfe in 1999 and 30.5 Bcfe in the first half of 2000. The following table sets forth the volume and net present value of our proved reserves at mid-year 2000 and a summary of our second quarter 2000 production by area: <TABLE> <CAPTION> AS OF JUNE 30, 2000 SECOND QUARTER 2000 ----------------------------------------- ---------------------------- PROVED NET PRESENT % OF NET AVERAGE RESERVES VALUE (IN PRESENT PRODUCTION % OF AREA (BCFE) MILLIONS) VALUE (MMCFE/D) PRODUCTION ---- ----------- -------------- ---------- ------------- ------------ <S> <C> <C> <C> <C> <C> Gulf of Mexico................... 154.8 $426.8 45% 90.3 52% Rocky Mountains.................. 204.4 345.3 36 58.8 34 West Texas/Mid-Continent......... 62.2 117.5 12 11.2 7 Gulf Coast....................... 37.7 68.7 7 11.7 7 ----- ------ --- ----- --- Total.................. 459.1 $958.3(1) 100% 172.0 100% ===== ====== === ===== === </TABLE> The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED OCTOBER 18, 2000 8,000,000 Shares [WESTPORT LOGO] WESTPORT RESOURCES CORPORATION Common Stock ------------------ Prior to this offering, there has been no public market for our common stock. The initial public offering price of the common stock is expected to be between $15.00 and $17.00 per share. Our common stock has been approved for listing, subject to official notice of issuance, on The New York Stock Exchange, under the symbol "WRC." We are selling 6,500,000 shares of common stock and the selling stockholders are selling 1,500,000 shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. The underwriters have an option to purchase a maximum of 1,200,000 additional shares from us to cover over-allotments of shares. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 9. <TABLE> <CAPTION> UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS WESTPORT STOCKHOLDERS ---------- ------------- ----------- ------------ <S> <C> <C> <C> <C> Per Share............................ $ $ $ $ Total................................ $ $ $ $ </TABLE> Delivery of the shares of common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON DONALDSON, LUFKIN & JENRETTE LEHMAN BROTHERS BANC OF AMERICA SECURITIES LLC PETRIE PARKMAN & CO. The date of this prospectus is , 2000. --------------- (1) The net present value is the pre-tax future net revenues discounted at 10%. The corresponding standardized measure, which is the after-tax future net revenues discounted at 10%, is $768.6 million. The difference between the net present value and the standardized measure is the effect of income tax discounted at 10%. OUR STRATEGY Our strategy is to continue to grow our reserve base, diversify our risk profile and expand our investment opportunities by executing on lower-risk exploitation projects and acquisitions (65% to 75% of our capital budget), as well as drilling higher-impact exploration prospects (25% to 35% of our capital budget), thereby balancing risks while maintaining significant potential for growth. To accomplish this we will: - enhance our existing and acquired properties through exploitation to increase production and enlarge our reserve base; - pursue acquisitions with developmental upside to grow our inventory of exploitation projects and to employ our operating expertise; and - generate and drill an extensive prospect inventory in the Gulf of Mexico by applying current technology and leveraging off our significant operational capabilities in that area. We intend to implement our strategy as follows: CONTINUE AN ACTIVE EXPLOITATION PROGRAM. In 1999, we drilled 79 development wells onshore and nine development wells in the Gulf of Mexico. Additionally, we expanded two secondary recovery projects. We have identified significant prospective exploitation projects both onshore and offshore. In the Gulf of Mexico, we have recently made discoveries on 10 blocks. We have commenced production on several of these discoveries and are in the process of installing production facilities and pursuing additional exploitation opportunities on these blocks. In addition, during 2000, we intend to continue exploitation in the West Cameron 180/198 complex, our most valuable property in the Gulf of Mexico based upon net present value and our most active offshore area. Onshore, we plan to drill more than 100 development wells in 2000. As of June 30, 2000, 65 of these wells had been drilled and 60 were successful. We acquired the West Cameron 180/198 complex in 1997, and have increased production from approximately 30 Mmcfe/d at the date of acquisition to approximately 55 million cubic feet equivalent of natural gas per day, or Mmcfe/d, for the quarter ended June 30, 2000. In our most active onshore areas, Gooseberry, South Fryburg Tyler and Bonepile, we have increased gross production through exploitation from approximately 13 Mmcfe/d for the quarter ended March 31, 1997 to approximately 24 Mmcfe/d for the quarter ended June 30, 2000. PURSUE AND CAPITALIZE ON ACQUISITIONS. Through a series of acquisitions from 1995 to 1999, Westport Oil and Gas substantially increased its reserve base by investing approximately $250 million in acquiring oil and natural gas properties at an average cost of $0.90 per Mcfe. It invested an additional $58 million to exploit these acquired properties and added reserves at an average cost of $0.50 per Mcfe, thereby reducing average acquisition costs by over 13% to $0.78 per Mcfe. This has resulted in reserve additions that have fully replaced our production from the acquired properties, while generating cash flows to date sufficient to recoup more than 58% of total exploitation and acquisition capital invested. We believe that, due to a trend toward industry consolidation and asset rationalization, we will continue to have opportunities to acquire oil and natural gas properties at attractive rates of return. We have an experienced team dedicated to executing our disciplined approach to identifying and capturing these opportunities. CAPITALIZE ON EXTENSIVE EXPLORATION OPPORTUNITIES. As of June 30, 2000, we had a 67-block exploration inventory in the Gulf of Mexico, in addition to 65 developed blocks, several of which contain additional exploration opportunities. We have under license 3-D seismic data covering over 10,000 square miles (1,460 blocks) and 2-D seismic data covering over 150,000 linear miles in this area. Our strategy includes acquiring large working interests in internally generated prospects in order to control activity, and then, prior to drilling, trading a portion of our positions for prospects developed by others. This allows us to achieve multiple prospect exposure while diversifying investment risk. Onshore, we hold interests in approximately 144,000 gross (approximately 70,000 net) undeveloped acres. Our onshore exploration effort is designed to enhance reserve and production growth in our core areas by emphasizing and applying the latest geological, geophysical and drilling technologies. We seek exploration plays with geological and geophysical characteristics similar to producing properties in our core areas in order to leverage our technical and operational expertise. Recent onshore exploration activities have included horizontal drilling in North Dakota and coalbed methane drilling in the Powder River Basin of Wyoming. MAINTAIN EFFICIENT OPERATIONS WITH A LOW COST STRUCTURE. We emphasize a low overhead and operating expense structure and have historically reduced these costs on a per-unit basis. From 1997 to 1999, Westport Oil and Gas reduced lease operating expense from $0.82 per Mcfe to $0.69 per Mcfe and general and administrative costs from $0.22 per Mcfe to $0.16 per Mcfe. Giving pro forma effect to the merger between Westport Oil and Gas and EPGC, lease operating expense for the six months ended June 30, 2000 was further reduced to $0.55 per Mcfe. We believe that our focus on a low cost structure positions us to remain competitive in our exploitation, acquisition and exploration activities. OUR EXECUTIVE OFFICES Our headquarters are located at 410 Seventeenth Street, Suite 2300, Denver, Colorado 80202, and our telephone number is (303) 573-5404. THE OFFERING Common stock offered by Westport......................... 6,500,000 shares Common stock offered by the selling stockholders............. 1,500,000 shares Common stock to be outstanding after this offering(1)........... 37,384,041 shares Use of proceeds.................. We intend to use the net proceeds from the offering for repayment of a portion of the debt under our credit agreement. We will use the increased borrowing capacity under our credit agreement, along with cash flow from operations, to pursue exploitation, acquisition and exploration activities and for general corporate purposes. Proposed New York Stock Exchange symbol......................... "WRC" --------------- (1) Excludes 4,110,813 shares of common stock reserved for issuance under our stock option plan, of which options in respect of 1,527,441 shares have been granted.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001117089_gemini_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001117089_gemini_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING IS ONLY A SUMMARY. YOU SHOULD CAREFULLY READ THE MORE DETAILED INFORMATION CONTAINED IN THIS PROSPECTUS, INCLUDING OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES. AN INVESTMENT IN OUR BUSINESS INVOLVES SIGNIFICANT RISKS. YOU SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS" BEGINNING ON PAGE 7. FOR PURPOSES OF INFORMATION CONTAINED IN THIS PROSPECTUS, WE HAVE ASSUMED THAT THE UNDERWRITERS HAVE NOT EXERCISED THEIR OVER-ALLOTMENT OPTION, UNLESS WE INDICATE TO YOU OTHERWISE. GEMINI GENOMICS PLC We are a clinical genomics company which means that we identify relationships between human genes and human health and disease. We use clinical and medical information as the starting point in our search for genes relevant to diseases, or disease genes. We believe that the collection and analysis of both detailed clinical and genetic data relating to the presence or risk of disease is more effective in discovering these disease genes than analyzing genetic data alone. We expect that discoveries arising from our research will provide us with products which we can license to pharmaceutical, diagnostic, genomics and biotechnology companies for drug discovery and/or gene-based diagnostic applications. As current efforts by others to determine the identity and location of all human genes (which we refer to as mapping the human genome) nears completion, the objective of genomics is shifting from determining the order, or sequence, of genes to understanding the role of genes in human health and disease. We believe that we are well-positioned to take advantage of the opportunities created by the mapping of the human genome due to our disease gene discovery process and the clinical data and samples we have already collected, as well as the additional resources provided by our technology collaborators. Our technology collaborators include Celera Genomics (a division of PE Corporation), Qiagen Genomics, Large Scale Proteomics, CuraGen and Sequenom. We focus on identifying disease genes through a three-step process: - our network of clinical collaborators collects extensive, high quality clinical measurements and related genetic and other biological samples for us from human volunteers from a number of different groups, comprising twin populations, disease-affected populations, geographically isolated populations and patients in clinical trials. Generally, we have the exclusive right to use this clinical and biological data for commercial purposes and have proprietary rights to any genetic and other information derived from these resources. We also obtain genetic information from the growing amount available in the public domain and from our technology alliances; - we integrate this data into our databases and other biological information management and analysis, or bioinformatic, systems, as well as technologies we access through alliances, in order to identify relationships between clinical measurements that are used to define a disease and genes or proteins; and - we verify our findings by using clinical and genetic data from our different clinical populations to efficiently confirm our discoveries. We believe that the comprehensive and diverse nature of our clinical and genetic resources gives us a significant competitive advantage. Our recent acquisition of Eurona Medical AB (recently renamed Gemini Genomics AB), a Swedish genomics company, has significantly expanded our access to clinical and genetic resources. Because our clinical and genetic information would be time consuming and expensive to replicate, we believe this resource makes us an attractive collaborator for companies possessing complementary technologies which enable us to discover disease genes more rapidly. OUR BUSINESS STRATEGY Our goal is to become the leading clinical genomics company by using our comprehensive clinical and genetic resources, together with our databases and other bioinformatic systems, to discover disease genes and proteins and generate revenues from licensing our discoveries to the pharmaceutical and diagnostics industries for use in the development of drugs and diagnostics. In order to achieve this goal, we intend to: - concentrate on identifying disease genes and proteins applicable to the treatment or diagnosis of common human diseases; - expand our genetic and proprietary clinical and biological resources; - enhance our information technology and bioinformatic systems; - maximize our revenues from the commercialization of our discoveries by retaining control over our gene discovery process and realizing greater potential value offered from later-stage licensing opportunities; and - pursue additional strategic investments, acquisitions and partnerships that allow us to enhance revenues. We are a development stage company. Since inception, we have incurred significant losses and, as of March 31, 2000, we had an accumulated deficit of $38.2 million. Since inception, we have received modest amounts of revenues, comprising royalty receipts from the licensing of our first disease gene patent for use in diagnostic applications and service fees from a gene validation program. We expect that we will derive our future revenues primarily from the licensing of disease gene and protein discoveries for drug discovery and diagnostic applications and, to a lesser extent, from the provision of gene validation services. We are organized under the laws of England and Wales. Our address is 162 Science Park, Milton Road, Cambridge, CB4 0GH, England. Our telephone number is (44) (1223) 435-300. Our web site is http://www.gemini-genomics.com. The information found on our web site is not incorporated by reference into this prospectus nor do we intend it to be, and you should not treat it as, forming a part of this prospectus. We have registered the trademark "Gemini Research" together with our Gemini Research logo in the United States and the United Kingdom. The name "Eurona" is registered as a Swedish trademark. We have filed trademark registrations for "Gemini Genomics" and our Gemini Genomics logo in the United States, the United Kingdom and the European Union. All other trademarks, service marks or trade names referred to in this prospectus are the property of their respective owners. THE OFFERING <TABLE> <S> <C> Shares we are offering................. A total of 12,000,000 ordinary shares, in the form of 6,000,000 ADSs (or 13,800,000 ordinary shares, in the form of 6,900,000 ADSs, if the underwriters exercise their over-allotment option in full). Shares to be outstanding after this offering............................. 62,895,220 ordinary shares (or 64,695,220 ordinary shares if the underwriters exercise their over-allotment option in full). ADSs................................... Each ADS represents two ordinary shares. An ADS is an American Depositary Share which represents two of our ordinary shares, is quoted and pays dividends in U.S. dollars and can trade freely on the Nasdaq National Market using U.S. certificate, transfer and settlement practices. The Bank of New York will be the depositary which will issue the ADSs and will own the ordinary shares represented by the ADSs. You will have the right to surrender your ADSs and withdraw the ordinary shares they represent. Use of Proceeds........................ We expect to use the net proceeds from this offering for working capital and other general corporate purposes, which may include (1) funding our research and development; (2) entering into new clinical collaborations; (3) expanding our sales and marketing effort to license our disease gene discoveries; and (4) funding acquisitions, investments and partnerships. While we regularly evaluate investment, acquisition and partnership candidates, we have no present agreements or commitments for any investments, acquisitions or partnerships. We have not designated any of the proceeds for any specific capital expenditures or for any other specific purpose. Nasdaq National Market symbol.......... "GMNIY" </TABLE> The number of ordinary shares to be outstanding after the offering is based on 50,895,220 ordinary shares outstanding as of March 31, 2000. It does not include: - 3,561,420 ordinary shares subject to share options outstanding as of March 31, 2000, with a weighted average exercise price of L1.04 ($1.67) per ordinary share; - 40,000 ordinary shares subject to warrants outstanding as of March 31, 2000, with a weighted average exercise price of L0.05 ($0.08) per ordinary share; and - up to 2,360,000 ordinary shares subject to share options that we expect to grant to our officers, directors and other employees before the closing of this offering at an exercise price per ordinary share equal to the per share offering price. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (in thousands, except share amounts) The following table contains a summary of our consolidated statement of operations information for the years ended March 31, 1998, 1999 and 2000. We have derived our summary consolidated statement of operations information for the years ended March 31, 1998, 1999 and 2000 from our audited consolidated financial statements included in this prospectus. <TABLE> <CAPTION> YEAR ENDED MARCH 31, -------------------------------------- CONSOLIDATED STATEMENT OF 1998 1999 2000 OPERATIONS INFORMATION: ---------- ----------- ----------- <S> <C> <C> <C> Revenue................................................ $ -- $ 198 $ 164 ---------- ----------- ----------- Costs and expenses: Costs of revenue..................................... -- -- 25 Research and development............................. 6,297 9,421 9,932 Sales, general and administrative.................... 1,602 1,471 5,286 Amortization of goodwill and other intangible assets............................................. -- -- 311 ---------- ----------- ----------- Total costs and expenses............................. 7,899 10,892 15,554 ---------- ----------- ----------- Loss from operations................................... (7,899) (10,694) (15,390) Interest income........................................ 164 269 478 Interest expense....................................... (388) (320) (493) ---------- ----------- ----------- Net loss............................................... $ (8,123) $ (10,745) $ (15,405) ========== =========== =========== Net loss per share--basic and diluted.................. $ (0.41) $ (0.54) $ (0.73) Net loss per ADS--basic and diluted.................... $ (0.82) $ (1.08) $ (1.46) Shares used in calculation of net loss per share and per ADS.............................................. 20,000,000 20,000,000 21,182,195 Pro-forma net loss per share--basic and diluted (unaudited).......................................... (0.35) Pro-forma net loss per ADS--basic and diluted (unaudited).......................................... (0.70) Shares used in calculation of pro-forma net loss per share and per ADS (unaudited)........................ 45,959,745 </TABLE> The following table contains a summary of our unaudited pro-forma consolidated statement of operations information for the year ended March 31, 2000. We have derived our summary unaudited pro-forma consolidated statement of operations information for the year ended March 31, 2000 from our unaudited condensed pro-forma consolidated statements of operations information included in this prospectus. Our unaudited condensed pro-forma consolidated statement of operations information gives effect to our acquisition of Eurona (which occurred on December 17, 1999) as if it occurred on April 1, 1999. We have provided our summary unaudited pro-forma consolidated statement of operations information for your information only and it is not meant to indicate the results we would have achieved if our acquisition of Eurona occurred on April 1, 1999 or of results that we may achieve in the future. <TABLE> <CAPTION> YEAR ENDED MARCH 31, 2000 UNAUDITED PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS INFORMATION: -------------- (UNAUDITED) <S> <C> Revenue......................................................... $ 1,238 ----------- Costs and expenses: Costs of revenue.............................................. 25 Research and development...................................... 15,129 Sales, general and administrative............................. 7,732 Amortization of goodwill and other intangible assets.......... 1,126 ----------- Total costs and expenses...................................... 24,012 ----------- Loss from operations............................................ (22,774) Interest income................................................. 494 Interest expense................................................ (653) ----------- Net loss........................................................ $ (22,933) =========== Net loss per share--basic and diluted........................... $ (1.00) Net loss per ADS--basic and diluted............................. $ (2.00) Shares used in calculation of net loss per share and per ADS.... 22,932,560 </TABLE> The following table contains a summary of our consolidated balance sheet information as of March 31, 2000: - on an actual basis; and - as adjusted to give effect to the sale of 12,000,000 ordinary shares, in the form of ADSs, in this offering and the receipt of net proceeds of $69.7 million (assuming an initial public offering price of $13.00 per ADS, the mid-point of the price range on the cover page of this prospectus, and after deducting underwriting discounts and commissions and our estimated net offering expenses). We have derived our summary consolidated balance sheet information as of March 31, 2000 from our audited consolidated financial statements included in this prospectus. <TABLE> <CAPTION> AS OF MARCH 31, 2000 ---------------------- ACTUAL AS ADJUSTED CONSOLIDATED BALANCE SHEET INFORMATION: -------- ----------- <S> <C> <C> Cash and cash equivalents................................... $13,414 $83,084 Working capital............................................. 6,985 76,655 Total assets................................................ 22,236 91,906 Long-term obligations, less current portion................. 2,987 2,987 Total shareholders' equity.................................. $11,888 $81,558 </TABLE> We have prepared our consolidated financial statements in accordance with U.S. generally accepted accounting principles. You should read our consolidated financial statements, our unaudited condensed pro forma consolidated financial statements and the audited financial statements of Eurona included in this prospectus for a further explanation of the financial information summarized above.
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+PROSPECTUS SUMMARY This summary highlights information from this prospectus. The summary is not complete and does not contain all of the information that you should review. You should read the entire prospectus carefully before investing in the preferred securities. The term "Trust" refers to TBC Capital Statutory Trust, a Connecticut statutory trust organized to purchase our subordinated debentures and issue the preferred securities. We use the term "bank subsidiaries" to refer to our bank subsidiaries, The Bank, Emerald Coast Bank and C&L Bank, which were merged into one surviving entity, The Bank, on June 16, 2000. The terms "we", "our", "us' and "the Corporation" refer to The Banc Corporation and, in some cases, will include the Trust and the bank subsidiaries. THE BANC CORPORATION The Banc Corporation is a bank holding company and, effective March 13, 2000, became a financial holding company. The Banc Corporation is incorporated under the laws of Delaware and headquartered in Birmingham, Alabama. Through its banking subsidiary, The Bank, The Banc Corporation had assets of approximately $848.4 million, loans of approximately $666.5 million, deposits of approximately $681.8 million and stockholders equity of approximately $69.7 million as of March 31, 2000. The Banc Corporation was formed in April 1998 for Warrior Capital Corporation to merge into The Banc Corporation on September 24, 1998, and thereby change its name to "The Banc Corporation" and its domicile from Alabama to Delaware. Since then, The Banc Corporation has grown through a combination of internal growth, the acquisition of existing community banks and branches and the opening of new bank branches. Through The Bank, The Banc Corporation offers a broad range of banking services in 30 locations throughout Alabama and the Florida panhandle. The Banc Corporation operates under a community banking philosophy primarily focusing on individuals and owner-managed and regional businesses that prefer local bank decision making and personalized service. Each local president has the primary responsibility for day-to-day operations. We supplement this decentralized management approach with centralized policy oversight, management systems and credit quality review. Our management team has been instrumental in the expansion and growth of our banking operations since 1998. The principal executive offices of The Banc Corporation and The Bank are located at 17 North 20th Street, Birmingham, Alabama 35203, and the telephone number is (205) 326-2265. TBC CAPITAL STATUTORY TRUST TBC Capital Statutory Trust is a Connecticut statutory trust and will exist solely to issue and sell its preferred securities to the public and engage in other activities that are necessary or incidental to the offering described below. The Trust's corporate offices are located at c/o , and its telephone number is . THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS [SUBJECT TO COMPLETION: DATED JUNE 30, 2000] 800,000 PREFERRED SECURITIES TBC CAPITAL STATUTORY TRUST % CUMULATIVE TRUST PREFERRED SECURITIES (LIQUIDATION AMOUNT $25.00 PER PREFERRED SECURITY) GUARANTEED BY [THE BANC CORPORATION LOGO] THE BANC CORPORATION: The Banc Corporation is a financial holding company which offers a broad range of banking services in Alabama and Florida through its banking subsidiary, The Bank. THE TRUST: TBC Capital Statutory Trust is a Connecticut statutory trust and a subsidiary of The Banc Corporation which will: - Sell preferred securities to the public and common securities to The Banc Corporation; - Use the proceeds from these sales to buy an equal principal amount of subordinated debentures due , 2030, of The Banc Corporation; and - Distribute the cash payments it receives from The Banc Corporation on the debentures to the holders of the preferred securities and the common securities. THE OFFERING: - For each preferred security that you own, you will receive cumulative cash distributions accumulating from , 2000, at an annual rate of % of the liquidation amount of $25.00 per preferred security on March 31, June 30, September 30 and December 31 of each year, beginning , 2000. - The Banc Corporation may defer interest payments on the debentures at any time for up to 20 consecutive quarterly periods, in which case, the Trust will also defer payment of distributions on the preferred securities to you. However, deferred distributions will themselves accumulate interest at an annual rate of %. - The preferred securities mature on , 2030. - The Trust may redeem the preferred securities, at a redemption price of $25.00 per preferred security plus accrued and unpaid distributions, at any time on or after , 2005, or earlier under certain circumstances. - The Banc Corporation will fully and unconditionally guarantee payment of all distributions the Trust is obligated to make, but only to the extent the Trust has sufficient funds to satisfy these payments. We have applied to list the preferred securities on the American Stock Exchange under the trading symbol " ." --------------------- INVESTING IN THE PREFERRED SECURITIES INVOLVES CERTAIN RISKS WHICH ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE . NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. NONE OF THE SECURITIES OFFERED BY THIS PROSPECTUS ARE DEPOSITS OR ACCOUNTS OF A BANK. THEY ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY. --------------------- <TABLE> <CAPTION> PER SECURITY TOTAL ------------ ----- <S> <C> <C> Public offering price....................................... $ 25.00 $ 20,000,000 Underwriting commissions (paid by The Banc Corporation)..... $ 1.00 $ 800,000 Proceeds to the Trust....................................... $ 25.00 $ 20,000,000 </TABLE> The underwriters may also purchase up to an additional 120,000 preferred securities at the public offering price within 30 days after the date of this prospectus to cover any over-allotments. The Trust expects the preferred securities will be ready for delivery in book-entry form only through The Depository Trust Company on or about , 2000. --------------------- STERNE, AGEE & LEACH, INC. The date of this prospectus is , 2000. THE OFFERING Issuer........................ TBC Capital Statutory Trust, which was formed by us for purposes of this offering, will issue the preferred securities. Securities offered............ The Trust is offering for sale 800,000(1) preferred securities at an offering price of $25 each. The preferred securities represent an indirect interest in our subordinated debentures which will be purchased by the Trust with the proceeds of this offering. The Trust will sell its preferred securities to the public and its common securities to us. Together, the preferred securities and the common securities are referred to as "trust securities." Use of proceeds............... The Trust will use the net proceeds from the sale of trust securities to buy our % subordinated debentures which will have the same payment terms as the preferred securities. We plan to use the net proceeds of approximately $ million(2) from the issuance of the subordinated debentures for general corporate purposes, including capital investments in our bank subsidiary to fund growth. See "Use of Proceeds" and "Capitalization." Quarterly distributions are payable to you on the preferred securities.......... The distributions payable on each preferred security will: - accumulate at a fixed rate of % per year; - accrue from the date of issuance of the preferred securities; and - be payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year that the preferred securities are outstanding, beginning on , 2000. We may defer distributions to you on the preferred securities.................... The Trust may defer distributions on the preferred securities if we defer paying interest to the Trust on the subordinated debentures. We generally have the right to defer interest payments on the subordinated debentures for up to 20 consecutive quarters. During any deferral period, you will accumulate distributions at the annual rate of %, plus you will earn additional interest at the annual rate of %, compounded quarterly, on the deferred distributions. During any deferral period, we will not be permitted (with certain exceptions) to pay a dividend or make any other payment or distribution on our common stock or redeem, purchase or make a liquidation payment on our common stock. We currently have no intention of exercising our right to defer payments of interest by extending the interest payment period on the subordinated debentures. If we defer distributions, you must still include the related income in your taxable gross income for United States federal income tax purposes for as long as the subordinated debentures remain out- --------------- 1 An additional 120,000 preferred securities may be sold by the Trust upon exercise of the over-allotment option granted to the underwriters. 2 Underwriting commissions for this offering will be $ and expenses are estimated to be approximately $ , all of which will be paid by The Banc Corporation. [INSIDE FRONT COVER] [MAP OF BRANCHES OF THE BANK] standing. For further information on deferrals and their tax consequences, see "Risk Factors -- Preferred Securities Risk Factors" and "United States Federal Income Tax Consequences." You will be required to sell your preferred securities when the subordinated debentures mature........................ The subordinated debentures will mature on , 2030. You will be required to sell your preferred securities to the Trust upon the stated maturity date of the subordinated debentures. If the subordinated debentures are prepaid, your preferred securities will be redeemed... Subject to prior approval of the Federal Reserve, if then required, we may prepay the subordinated debentures prior to maturity: - in whole or in part at any time on or after , 2005; or - in whole, but not in part, if certain changes in tax or investment company laws or in federal bank regulatory capital requirements occur or may occur. Upon any prepayment of the subordinated debentures, your preferred securities will be redeemed at the liquidation amount of $25.00 each, plus any accrued and unpaid distributions to the date of redemption. For further information on redemptions, see "Description of the Preferred Securities -- Redemption" and "Description of the Subordinated Debentures -- Redemption." At our option, we may require you to exchange your preferred securities for our subordinated debentures....... We have the right at any time to dissolve or liquidate the Trust and distribute the subordinated debentures to you in exchange for your preferred securities. If that happens, you will receive subordinated debentures in exchange for the same principal amount of your holdings of preferred securities. However, we must pay the creditors of the Trust and receive prior approval of the Federal Reserve, if then required, before we dissolve or liquidate the Trust. If the subordinated debentures are distributed, we will use our best efforts to list them on a national securities exchange or comparable automated quotation system in place of the preferred securities. For further information concerning distribution of the subordinated debentures, see "Description of the Preferred Securities -- Distribution of Subordinated Debentures." We guarantee your preferred securities on a subordinated basis......................... We fully and unconditionally guarantee the payment of all distributions the Trust is obligated to make, but only to the extent the Trust has sufficient funds to satisfy those payments. If we do not make a payment on the subordinated debentures, the Trust will not have sufficient funds to make payments on the preferred securities. The guarantee does not require us to make any payments on our subordinated debentures nor does it require us to make up any shortfall in the Trust's funds needed to make a payment on the preferred securities to you. The guarantee only covers payments to the extent the Trust holds any funds. We believe that, taken together, our obligations under the Indenture, the Guarantee Agreement, the Trust Agreement and the Expense Agreement (each defined on page ) provide in the aggregate, a full, irrevocable and unconditional guarantee, on a subordinated basis, of all of the obligations of the Trust under the preferred securities. For further information concerning our guarantee of the preferred securities, see "Risk Factors -- Preferred Securities Risk Factors" and "Description of Guarantee." Your preferred securities rank lower in payment compared to our other obligations......... Our obligations under the guarantee, the subordinated debentures and the related governing documents are unsecured and have a payment priority below all of our current and future Senior and Subordinated Debt (as defined on page ). In addition, because we are a holding company that relies on dividends from our bank subsidiary for virtually all of our income, all existing and future borrowings and other liabilities of our bank subsidiary will effectively rank higher than all of our obligations relating to the preferred securities and the subordinated debentures. See "Risk Factors -- Preferred Securities Risk Factors." The terms of the preferred securities and the subordinated debentures do not limit the amount of other debt, preferred securities or other subordinated debentures that we or the Trust may issue in the future or on the amount of future liabilities of the bank subsidiary. Future issuances of securities similar to the preferred securities and the subordinated debentures will rank equally with our obligations under the subordinated debentures and our guarantee of the preferred securities described in this prospectus. Limited voting rights......... As a holder of preferred securities, you will have very limited voting rights. See "Risk Factors -- Preferred Securities Risk Factors" and "Description of the Preferred Securities -- Voting Rights; Amendment of the Trust Agreement." Book-entry issuance........... You will not receive a certificate for your preferred securities. Instead, the preferred securities will be represented by a global security that will be deposited with The Depository Trust Company or its custodian and registered in the name of The Depository Trust Company or its nominee. Trustees...................... The Trust will have trustees. of the trustees are officers of The Banc Corporation and will act as "administrative trustees" for the Trust. State Street Bank and Trust Company will act as "property trustee" for the Trust, "indenture trustee" for the subordinated debentures and "guarantee trustee" for the guarantee. Its offices are located at 2 Avenue de Lafayette, Boston, Massachusetts 02111-1724 Attention: Corporate Trust (referred to in this prospectus as the "Corporate Trust Office"). The American Stock Exchange... The Trust has applied to list the preferred securities on the American Stock Exchange (AMEX) under the trading symbol " ." See "Risk Factors -- Preferred Securities Risk Factors" and "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001117941_novient_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001117941_novient_prospectus_summary.txt
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+PROSPECTUS SUMMARY This is only a summary and may not contain all the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including the "Risk Factors" section and our financial statements and the related notes included in this prospectus. Unless otherwise indicated, this prospectus assumes that the underwriters have not exercised their option to purchase additional shares. This prospectus also assumes that all shares of preferred stock have been automatically converted into 6,844,750 shares of common stock and that all warrants to acquire shares of preferred stock have been automatically converted into warrants to acquire shares of common stock. NOVIENT, INC. We provide an Internet infrastructure solution to professional services organizations that optimizes global operations by enabling dynamic collaboration throughout an organization's services community. Our solution automates and streamlines the business processes of services organizations, including management of project opportunities, sharing of information and knowledge, allocation of professional resources and delivery of the professional services. These capabilities provide users with enterprise-wide visibility of business performance. In addition, our solution facilitates business transactions and collaboration over the Internet among a professional services organization, its clients, affiliated services organizations and independent professionals. Our customers have the choice to license our solution for a one-time fee or to access our solution through the Internet on hosted servers for a monthly subscription fee. To date, we have licensed our solution to approximately 120,000 users in 48 countries. Our customers are professional services organizations and internal services organizations within enterprises and include Andersen Consulting, Ariba, Cisco Systems, Compaq, GEAC, Proxicom, SAP AG and Sun Microsystems. Professional services organizations create information-based, time-sensitive deliverables using human capital and increasingly rely on networks of affiliated services organizations, as well as independent professionals, to provide additional capacity and expertise. The professional services market includes information technology, or IT, management consulting, engineering, financial services, law, tax and accounting. To remain competitive and satisfy clients, professional services organizations must allocate their resources more efficiently on a global basis. Currently, most organizations use non-integrated, function-specific systems that are not scalable, do not leverage the capabilities of the Internet, fail to provide uniform access to data and lack the robust functionality and capabilities of packaged software applications. These systems also lack the ability to facilitate real-time collaboration for professional services organizations. The lack of effective process automation and collaboration solutions often results in misallocation and lower utilization of resources, missed revenue opportunities and client dissatisfaction. Our Internet infrastructure solution consists of two key components to address these challenges: a patent-pending collaboration platform known as Novient iServerNet and a leading professional services automation, or PSA, application known as Novient eServices. Novient iServerNet is an XML-based, configurable, scalable platform designed to promote efficient database communications to meet the collaboration and communications requirements of professional services organizations. Novient eServices is a 100% Internet-based PSA application designed to serve the needs of the three primary participants in the services community: executives, resource managers and professionals. Our solution utilizes a scalable architecture that allows thin-server to server communication, as well as server to client communication, among multiple, distributed servers without the need for data replication. Together, the Novient iServerNet platform and the Novient eServices application provide a complete Internet infrastructure solution to the professional services community, allowing clients to create internal services portals and establish external services exchanges with affiliated services organizations and customers. Benefits to professional services organizations include: - real-time communication and collaboration; - scalability, security, and ease of implementation and maintenance; - expanded revenue opportunities; THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED JULY 14, 2000 [LOGO] NOVIENT, INC. SHARES COMMON STOCK Novient, Inc. is offering shares of its common stock. This is our initial public offering, and no public market currently exists for our shares. We have applied for approval for quotation of our common stock on the Nasdaq National Market under the symbol NVNT. We anticipate that the initial public offering price will be between $ and $ per share. ------------------------------ INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 6. ------------------------------ <TABLE> <CAPTION> PER SHARE TOTAL --------- ------------ <S> <C> <C> Public offering price....................................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds to Novient, Inc.................................... $ $ </TABLE> THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Novient has granted the underwriters a 30-day option to purchase up to an additional shares of common stock to cover over-allotments. ------------------------------ ROBERTSON STEPHENS J.P. MORGAN & CO. WIT SOUNDVIEW THE ROBINSON-HUMPHREY COMPANY THE DATE OF THIS PROSPECTUS IS , 2000. - increased speed and efficiency; - improved career management for individual professionals; and - enhanced client service. Our goal is to establish Novient as the leading provider of Internet infrastructure solutions for the professional services industry and the standard platform for the delivery and management of professional services. To achieve this goal, we intend to: - build on our experience and our existing technology leadership to expand into new markets; - utilize our development team to expand the functionality of our solution; - leverage our existing customer base to expand market share; - expand our sales force and distribution channels to target leading businesses worldwide; and - expand our application hosting business to better penetrate the market. RECENT DEVELOPMENTS Acquisition of WebProject. In April 2000, we completed the acquisition of WebProject, Incorporated, a privately held software company based in San Mateo, California. WebProject's Java-based project management and collaboration software allows users to easily capture, access and share project and enterprise information through a project portal using an Internet browser. WebProject integrates project management, document management, a project portal, an executive information system and collaborative project discussion forums. WebProject's software is included in our Novient eServices offering. Andersen Consulting Alliance. In May 2000, we entered into an alliance with Andersen Consulting, a leading global management and technology consulting firm. Under the terms of the alliance, Andersen Consulting will market Novient as its preferred PSA solution. Andersen Consulting and Novient will jointly market the Novient solution to companies within the Global 2000 and other select targeted organizations. In addition, Andersen Consulting has agreed to provide global PSA consulting services for our solution. Andersen Consulting also agreed to license Novient eServices for implementation throughout its organization. OUR ADDRESS We were incorporated under the laws of the State of Georgia as InfoWave Technologies, Inc. in November 1995. In July 1999, we changed our name to Novient, Inc. Our headquarters is located at 3525 Piedmont Road, Building 8, Suite 500, Atlanta, Georgia 30305, and our telephone number is (404) 720-3600. Our web site is located at www.novient.com. Information contained on our web site is not part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered by Novient.............. shares Common stock outstanding after this offering................................... shares Use of proceeds.............................. We intend to use the net proceeds from this offering for general corporate purposes, including funding increased research and development and sales and marketing efforts and expanding our operations. See "Use of Proceeds." Proposed Nasdaq National Market symbol....... NVNT </TABLE> ------------------------------ Except as otherwise indicated, the outstanding share information in this prospectus is based on shares outstanding as of May 31, 2000. This information excludes: - 4,957,500 shares of common stock presently reserved for issuance upon exercise of options granted under our stock option plan, of which options to purchase 2,244,250 shares were outstanding as of May 31, 2000 at a weighted-average exercise price of $1.20 per share; and - 170,281 shares of common stock reserved for issuance upon exercise of outstanding warrants as of May 31, 2000 at a weighted-average exercise price of $2.81. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following financial data is a summary of the more complete financial information provided in our financial statements and notes thereto appearing at the end of this prospectus. The pro forma statement of operations for the year ended December 31, 1999 and the three months ended March 31, 2000 reflect our acquisition of WebProject, which occurred on April 20, 2000, as if the acquisition had occurred on January 1, 1999. The pro forma net loss per share information reflects the conversion of our convertible preferred stock into common stock as if the conversion had occurred on January 1, 1999 or date of issuance if later. Our balance sheet data as of March 31, 2000 is presented: - on an unaudited actual basis; - on an unaudited pro forma basis to reflect our acquisition of WebProject and conversion of our convertible preferred stock into common stock; and - on an unaudited pro forma as adjusted basis to reflect our acquisition of WebProject and conversion of our convertible preferred stock into common stock and our receipt of the estimated net proceeds from our sale of shares of common stock at an assumed initial public offering price of $ per share and the use of the net proceeds as described in "Use of Proceeds." The information presented below should be read in conjunction with our financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------------------------- --------------------------------------- PRO FORMA PRO FORMA 1997 1998 1999 1999 1999 2000 2000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues...................... $ 185 $1,868 $ 4,584 $ 4,800 $1,002 $ 1,440 $ 1,610 Gross profit.................. 180 1,784 3,981 4,172 978 849 1,005 (Loss) income from operations.................. (62) 216 (3,532) (8,279) (14) (5,255) (6,381) Net (loss) income............. (62) 171 (3,333) (8,216) 10 (5,123) (6,298) Net (loss) income available to common shareholders......... (62) 171 (24,478) (29,361) (223) (7,486) (8,661) Net (loss) income per share: Basic and diluted net (loss) income per share.......... $ (.01) $ .03 $ (4.90) $ (4.86) $ (.04) $ (1.46) $ (1.40) Basic weighted-average common shares outstanding............... 4,920 4,994 4,995 6,040 4,995 5,130 6,174 Diluted weighted-average common shares outstanding............... 4,920 5,652 4,995 6,040 4,995 5,130 6,174 Pro forma net loss per share (unaudited): Pro forma net loss per share..................... $ (0.39) $ (0.85) $ (0.47) $ (0.53) Pro forma basic and diluted weighted-average common shares outstanding........ 8,575 9,620 10,862 11,907 </TABLE> <TABLE> <CAPTION> MARCH 31, 2000 --------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 22,085 $ 20,638 $ Working capital............................................. 22,051 20,552 Total assets................................................ 24,964 33,082 Long-term debt, less current portion........................ -- -- Convertible preferred stock................................. 52,427 -- Total shareholders' equity (deficit)........................ (29,111) 31,317 </TABLE> The discussion and table excludes: - 4,957,500 shares of common stock reserved for issuance upon exercise of options granted under our stock option plan, of which options to purchase 1,819,250 shares were outstanding as of March 31, 2000 at a weighted-average exercise price of $0.82 per share; and - 10,281 shares of common stock reserved for issuance upon exercise of warrants outstanding as of March 31, 2000 at a weighted-average exercise price of $7.66 per share.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001118148_american_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001118148_american_prospectus_summary.txt
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+PROSPECTUS SUMMARY [APCAPITAL LOGO] AN INTRODUCTION WE ARE A LEADING PROVIDER OF MEDICAL PROFESSIONAL LIABILITY INSURANCE WITH STRONG TIES TO THE MEDICAL COMMUNITY. We are primarily a medical professional liability insurance company servicing health care providers in 13 states throughout the United States, with a concentration in the Midwest. Our insurance group includes three insurance companies. MICOA and Insurance Corporation of America, or ICA, are domiciled in Michigan, and RML Insurance Company, or RML, is domiciled in Illinois. We are the number one writer of medical professional liability insurance in Michigan, Kentucky and New Mexico, with a market share of 26% in Michigan, 27% in Kentucky and 24% in New Mexico, based on 1999 direct premiums written as reported by A.M. Best Company, Inc. We also generate significant medical professional liability premium volume in Ohio, Illinois and Florida. In total, our insurance group is the 16th largest medical professional liability writer in the United States. We insured 12,701 physicians as of September 30, 2000. We maintain a close relationship with the medical community we serve. In addition to the active involvement of practicing physicians on several of its advisory committees, MICOA and the medical professional liability insurance that we offer have the endorsements of six medical associations. We believe our strong relationship with the medical community is due in part to the high quality service and claims management expertise provided to our insured physicians. Recognizing the value of our insurance products and services, 83% of our medical professional liability policyholders renewed their policies in 1999 despite an extremely price competitive marketplace. Our principal office is at 1301 North Hagadorn Road, East Lansing, Michigan 48823. Our telephone number is (517)351-1150. WE HAVE RECENTLY EXPANDED OUR PRODUCT LINES. In 1993, we recognized the need to diversify our product line and broaden our target market. We chose to enter the workers' compensation market for several reasons, including: (1) the ease of entry; (2) our expertise in underwriting insurance lines providing coverage for losses linked to an insurable event occurring during the period of coverage, or "long tail" liability lines; (3) our expertise in claims and risk management, especially for health-related liability risks; and (4) the large overall size of the workers' compensation market. For the year ended December 31, 1999, we reported $43.2 million in direct premiums written in this line. Our workers' compensation premiums in 1999 accounted for 22.8% of our total premiums for that year. OUR EFFECTIVE DISTRIBUTION SYSTEM HAS ENABLED US TO INCREASE OUR BUSINESS SUBSTANTIALLY. We have a demonstrated ability to enter new markets and generate significant internal growth through our own distribution system. Direct premiums written have increased to $189.6 million in 1999, from $129.6 million in 1997, representing a compound annual growth rate of 21.0%. Direct premiums written in our medical professional liability business have grown to $122.9 million in 1999, from $89.0 million in 1997, representing a compound annual growth rate of 17.5%. While Michigan is still our largest source of premium volume, the strongest growth in our medical professional liability business during the past three years has been in Florida, Illinois and Ohio. In our workers' compensation business, direct premiums written have increased to $43.2 million in 1999, from $26.2 million in 1997, representing a compound annual growth rate of 28.2%. We have experienced substantial growth in Minnesota, Michigan and Iowa. WE ARE AN ESTABLISHED COMPANY WITH A STRONG FINANCIAL POSITION. Established in 1975 as a mutual insurance company, we have grown substantially. Our direct premiums written and net income totaled $189.6 million and $33.7 million (approximately $4.6 million excluding a one-time tax refund) in 1999, and $150.0 million and $8.8 million for the nine months ended September 30, 2000. At September 30, 2000, we had total assets of $817.3 million and total equity of $220.2 million. MICOA's rating from A.M. Best Company, Inc. is "A-" (Excellent), its fourth highest rating category out of 15 categories. Our strong financial position and diverse premium base provide us the foundation for implementing our strategic plan. In that regard, we will continue our recent initiatives to reduce expenses, curtail less profitable underwriting and restructure our investment portfolio. OUR STRATEGY FOR THE FUTURE Our strategy is focused on three primary initiatives and is designed to provide continued growth in revenue and profitability: BUILD ON OUR POSITION AS A LEADING NATIONAL WRITER OF MEDICAL PROFESSIONAL LIABILITY INSURANCE. - Emphasize underwriting standards and pricing that focus on profitability rather than premium volume. - Execute strategic acquisitions in our industry segment. - Continue to pursue internal growth and geographic expansion. - Refocus our marketing and product initiatives to provide more cost-effective, standardized products and services. - Maintain our historically close relationship with the medical community. - Develop effective, customer-oriented business processes, including e-commerce capabilities. CONVERT FROM A MUTUAL TO A STOCK COMPANY CULTURE. - Emphasize profitable underwriting rather than access to coverage. - Restructure our investment portfolio and strategy. - Become a lower cost producer. PURSUE OTHER STRATEGIC INITIATIVES. - Continue to write workers' compensation insurance in niche classes and markets. - Market our alternative risk transfer capabilities. - Develop financial services and products for our physician customer base. SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA The following table sets forth summary historical consolidated financial data. The summary income statement data for each of the three years ended December 31, 1999 and balance sheet data as of December 31, 1999 and 1998 have been derived from our audited consolidated financial statements and notes thereto included elsewhere in this prospectus. The summary income statement data for each of the years ended December 31, 1996 and 1995 and balance sheet data as of December 31, 1997, 1996, and 1995 have been derived from our audited consolidated financial statements not included in this prospectus. The summary income statement data for the nine months ended September 30, 2000 and 1999 and balance sheet data as of September 30, 2000 and September 30, 1999 have been derived from our unaudited interim consolidated financial statements. All unaudited interim consolidated financial data presented in the tables below reflect all adjustments (consisting of normal, recurring accruals) necessary for a fair presentation of our consolidated financial position and results of operations for such periods. The results of operations for the nine months ended September 30, 2000 are not necessarily indicative of the results to be expected for the full year. The following summary historical consolidated financial data has been prepared in accordance with generally accepted accounting principles, or GAAP, except that the combined statutory data presented below has been prepared in accordance with applicable statutory accounting practices and was taken from our annual statements filed with insurance regulatory authorities. The following is a summary, and in order to fully understand our consolidated financial data, you should also read "Selected Historical Financial and Operating Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our Consolidated Financial Statements and the notes thereto included elsewhere in this prospectus. In particular, those other sections of this prospectus contain information about the adoption of GAAP accounting standards and transactions affecting comparability of results of operations between periods that are not included in this summary. SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA (CONTINUED) <TABLE> <CAPTION> AT OR FOR THE NINE MONTHS ENDED AT OR FOR THE SEPTEMBER 30, YEAR ENDED DECEMBER 31, ------------------- ---------------------------------------------------- 2000 1999 1999 1998 1997(A) 1996(A) 1995 -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> REVENUE DATA: Direct premiums written............. $149,987 $138,720 $189,647 $160,305 $129,593 $118,839 $ 91,519 Net premiums written................ 139,061 120,103 158,029 147,801 110,776 100,478 80,534 ======== ======== ======== ======== ======== ======== ======== Net premiums earned................. $132,578 $112,116 $148,656 $136,995 $106,764 $ 97,597 $ 82,029 Investment income................... 26,419 22,656 30,539 29,451 28,817 28,725 27,054 Realized gains...................... 1,004 1,608 1,849 9,540 1,687 956 846 Other income........................ 2,393 1,050 6,676 2,832 1,757 4,507 968 -------- -------- -------- -------- -------- -------- -------- Total revenues.................... 162,394 137,430 187,720 178,818 139,025 131,785 110,897 LOSSES AND EXPENSES: Losses and loss adjustment expenses(b)....................... 112,718 98,195 130,949 122,053 88,418 52,996 61,790 Underwriting expenses............... 31,344 29,679 40,037 38,455 30,798 22,503 16,815 Investment expense.................. 2,145 2,465 3,283 2,943 2,283 3,652 3,684 Interest expense.................... 676 391 565 791 343 325 -- Amortization expense................ 1,746 646 1,177 906 183 61 -- Other expense....................... 1,615 540 1,739 1,206 1,122 1,137 15 -------- -------- -------- -------- -------- -------- -------- Total expenses.................... 150,244 131,916 177,750 166,354 123,147 80,674 82,304 -------- -------- -------- -------- -------- -------- -------- Income from operations before federal income taxes........................ 12,150 5,514 9,970 12,464 15,878 51,111 28,593 Federal income taxes(c)............... 3,387 759 (23,760) 3,400 4,829 16,300 8,846 -------- -------- -------- -------- -------- -------- -------- Income before cumulative effect of change in accounting principle...... 8,763 4,755 33,730 9,064 11,049 34,811 19,747 Cumulative effect of change in accounting principle(b)............. -- -- -- -- -- (20,542) -- -------- -------- -------- -------- -------- -------- -------- Net income(c)......................... $ 8,763 $ 4,755 $ 33,730 $ 9,064 $ 11,049 $ 14,269 $ 19,747 ======== ======== ======== ======== ======== ======== ======== SELECTED BALANCE SHEET DATA: Total cash and investments.......... $600,814 $543,000 $541,894 $548,665 $521,469 $494,198 $443,791 Total assets........................ 817,271 718,303 794,390 715,596 677,529 644,052 547,354 Total liabilities................... 597,099 538,144 585,604 526,844 501,137 486,468 396,825 Total equity........................ 220,172 180,159 208,786 188,752 176,392 157,584 150,529 GAAP RATIOS: Loss ratio(b)....................... 85.0% 87.6% 88.1% 89.1% 82.8% 54.3% 75.3% Underwriting expense ratio.......... 23.6 26.5 26.9 28.1 28.8 23.1 20.5 Combined ratio...................... 108.6 114.1 115.0 117.2 111.6 77.4 95.8 Operating ratio..................... 90.4 96.0 96.7 97.8 86.8 51.7 67.3 STATUTORY DATA: Loss ratio.......................... 84.5% 86.7% 88.0% 89.4% 82.8% 85.3% 75.3% Underwriting expense ratio.......... 25.4 27.6 29.2 27.0 28.0 24.3 22.4 Combined ratio...................... 109.9 114.3 117.2 116.4 110.8 109.6 97.7 Surplus............................. $184,393 $147,517 $179,829 $144,541 $133,715 $125,883 $116,931 Ratio of net premiums written to surplus........................ 1.01x 1.09x 0.88x 1.02x 0.83x 0.80x 0.69x </TABLE> ------------------------- (a) MICOA acquired Kentucky Medical Insurance Company in 1996 in a transaction accounted for under the purchase method of accounting. MICOA's mergers with New Mexico Physicians Mutual Insurance Company and State Mutual Insurance Company in 1997 were accounted for under the pooling method of accounting. (b) Loss and loss adjustment expense for 1996 excludes discontinuation of loss reserve discounting which is reported as a cumulative effect of a change in accounting principle. (c) Operating results for the year ended December 31, 1999 include the effects of a one-time settlement with the Internal Revenue Service. Without this settlement, net income for the year ended December 31, 1999 would have been approximately $4.6 million. PLAN OF CONVERSION We are converting MICOA from a mutual insurance company to a stock insurance company through a process described in our plan of conversion and in accordance with Michigan insurance law. The plan of conversion has been approved by MICOA's board of directors and the Office of Financial and Insurance Services for the State of Michigan, or OFIS. The plan of conversion still must be approved by MICOA policyholders, who are meeting on , 2000. Once policyholders approve the plan of conversion, the conversion will be complete when we file MICOA's revised articles of incorporation with the OFIS and complete the offerings. WHY WE ARE CONVERTING We are converting MICOA to raise capital to achieve the objectives stated above, and to provide a more flexible and effective corporate structure to facilitate strategic transactions. The conversion will increase our capital to facilitate future product line and geographic expansion, enhance our operating flexibility and ability to compete, allow us to use APCapital's stock for potential acquisitions, enhance our access to the capital markets and enable us to use stock-based compensation plans to attract, motivate and retain qualified employees. SUMMARY OF THE OFFERINGS THE SUBSCRIPTION OFFERING..... We are offering APCapital common stock in the subscription offering to holders of MICOA insurance policies as of June 28, 2000 and to directors and officers of MICOA or APCapital through subscription rights. A subscription right is a right to purchase APCapital common stock. For more information, see "The Subscription, Best Efforts and Underwritten Offerings -- Eligibility to Participate in the Subscription and Best Efforts Offerings," " -- How to Purchase Common Stock in the Subscription and Best Efforts Offerings" and " -- Minimum and Maximum Purchases in the Subscription and Best Efforts Offerings." THE BEST EFFORTS OFFERING..... Concurrently with the subscription offering, we are offering the shares of stock in APCapital to select members of the general public who have a relationship with MICOA, but were not MICOA policyholders on June 28, 2000, or MICOA or APCapital officers or directors. The rights of best efforts offering participants to buy APCapital stock are subject to the prior rights of subscription offering participants and to our sole discretion to reject any offer to purchase stock. For more information see "The Subscription, Best Efforts and Underwritten Offerings -- Eligibility to Participate in the Subscription and Best Efforts Offerings." THE FIRM COMMITMENT UNDERWRITTEN OFFERING......... We are offering APCapital stock to members of the general public in a firm commitment underwritten offering. Any shares for which subscriptions are not received and accepted in the subscription and best efforts offerings may be sold in the firm commitment underwritten offering. We anticipate the offering price in the underwritten offering to be no less than $ per share and no more than $ per share. There can be no assurance that the actual range, when finally determined, will not be different than the anticipated range. For more information see "The Subscription, Best Efforts and Underwritten Offerings -- The Firm Commitment Underwritten Offering." HOW TO BUY STOCK IN THE SUBSCRIPTION AND BEST EFFORTS OFFERINGS........... To buy common stock in the subscription or best efforts offering, eligible participants in those offerings must sign and complete the enclosed stock order form and send it to us with full payment in the envelope provided by the date and time indicated on the cover of this prospectus. Payment may be made by check or money order payable to ChaseMellon Shareholder Services, L.L.C. You have no right to modify or withdraw your investment without our consent. We may reject any incomplete or late stock order. See "The Subscription, Best Efforts and Underwritten Offerings." DETERMINATION OF OFFERING PRICE......................... We determined the offering price per share and the total number of shares offered based upon a valuation of MICOA, which was prepared by RP Financial, LC, in accordance with the requirements of the Michigan Insurance Code. The same price will be paid in the subscription and best efforts offerings. If the offering price in the underwritten offering is below the offering price in the subscription and best efforts offerings, the difference will be refunded to subscribers in those offerings. If the offering price in the underwritten offering is more than the price paid in the subscription and best efforts offerings, participants in those offerings will not have to pay more for their shares and we will not adjust the number of shares issued to them. For additional details, see "The Conversion -- Stock Price and Number of Shares to be Issued in the Offerings." TERMINATION OF THE OFFERINGS..................... We have the right to terminate the offerings and not consummate the conversion. If we terminate the offerings, your money will be promptly refunded, without interest. DIVIDEND POLICY We do not currently intend to pay dividends to shareholders of APCapital. Moreover, the payment of any dividends from the insurance subsidiaries to APCapital is subject to a number of regulatory conditions intended to protect policyholders. These are described under "Business -- Insurance Regulatory Matters." USE OF PROCEEDS We will use 50% of the net proceeds from the offerings to make a capital contribution to MICOA in exchange for its stock. The remainder will be used for financing future acquisitions and for general corporate purposes which may include, without limitation, making additional contributions to our subsidiaries. For additional details, see "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001118380_sei-trust_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001118380_sei-trust_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the preferred securities being sold in this offering and our consolidated financial statements and notes thereto appearing elsewhere in this prospectus, including the "Risk Factors" section. SOUTHERN ENERGY, INC. We are a competitive provider of electricity and energy-related products and services. We have regionally based businesses in the Americas, Europe and the Asia-Pacific region. We have built and acquired a portfolio of power plants in which we have net ownership interests totaling 12,652 megawatts (MW) of generation capacity. In addition, we have projects under development or pending acquisition totaling 11,212 MW. We also market energy and energy-linked commodities and manage the risk associated with market price fluctuations of these commodities. By linking our electricity generation capabilities and our access to natural gas supplies with our energy marketing and risk management expertise, our strategy is to meet a wide range of customer requirements as well as optimize the value of our electricity generating and gas assets. In North America, we own and operate power plants with a total generation capacity of 7,389 MW. We control an additional 1,738 MW of generation capacity through management contracts. We also have projects under development or pending acquisition totaling 11,101 MW, including 5,154 MW of generation capacity that we have recently agreed to acquire from Potomac Electric Power Company. Through Southern Company Energy Marketing, L.P. (SCEM), our wholly owned indirect subsidiary, we market and trade energy and energy-linked commodities, including electricity, gas, oil, coal and emission allowances. In Europe, we own a 26% interest in Bewag AG, an electric utility serving 2.1 million customers in Berlin, Germany. We also have a 49% economic interest in, and operating control of, Western Power Distribution, which distributes electricity to approximately 1.4 million end-users in southwest England. Our European marketing and risk management business began trading power in the Nordic energy market in 1999. We expect to begin marketing power in the Dutch, German, Swiss and Italian energy markets in 2000. In the Asia-Pacific region, we have interests in 3,159 MW of generation capacity in the Philippines and China. Most of our revenues in the Asia-Pacific region are derived from contracts with government entities or regional power boards and are predominantly linked to the U.S. dollar to mitigate foreign currency exchange risks. In the Caribbean and South America, we have ownership interests in electric utilities, power plants and transmission facilities. These assets are located in the Bahamas, Trinidad and Tobago, Brazil and Chile. We are pursuing the sale of our Chilean subsidiary, and we recently sold our Argentine subsidiary. RECENT DEVELOPMENTS WPD Limited, a company indirectly owned by us and PPL Global, has offered to acquire all of the outstanding shares of Hyder plc for L565 million (approximately $847 million) plus the assumption of L2.1 billion (approximately $3.2 billion) of debt. Hyder owns and operates the electricity network in South Wales and the water distribution and waste water treatment business for all of Wales. On September 15, 2000, WPD Limited committed unconditionally to purchase any THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED SEPTEMBER 26, 2000 PROSPECTUS 6,000,000 Preferred Securities SEI TRUST I % Convertible Trust Preferred Securities, Series A (Liquidation Preference $50 per Preferred Security) Fully and unconditionally guaranteed to the extent described herein by, and convertible into common stock of, SOUTHERN ENERGY, INC. ------------------------- A brief description of the % Convertible Trust Preferred Securities, Series A can be found under "Summary -- The Offering" in this prospectus. The preferred securities have been approved for listing on the New York Stock Exchange under the symbol "SOEPrA", subject to official notice of issuance. After , 2001, subject to Southern Energy's right to elect a cash settlement in certain circumstances, the preferred securities are convertible into Southern Energy common stock in the manner described in this prospectus at an initial conversion price of $ per share of Southern Energy common stock for each preferred security, which is equivalent to a conversion rate of shares of Southern Energy common stock for each preferred security. Southern Energy common stock will trade on the New York Stock Exchange under the symbol "SOE." Concurrently with this offering, Southern Energy is offering 58,000,000 shares of its common stock in an initial public offering by means of a separate prospectus. The underwriters of the common stock offering have an option to purchase up to 8,700,000 additional shares of Southern Energy's common stock to cover over-allotments of shares. This offering is contingent on the common stock offering. SEE "RISK FACTORS" BEGINNING ON PAGE 14 TO READ ABOUT CERTAIN FACTORS YOU SHOULD CONSIDER BEFORE BUYING THE PREFERRED SECURITIES. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------------- <TABLE> <CAPTION> PER PREFERRED SECURITY TOTAL ------------- ---------- <S> <C> <C> Initial public offering price(1)............................ $ $ Underwriting commissions(2)................................. $ $ Proceeds to SEI Trust I..................................... $ $ </TABLE> ------------------------- (1) Plus accumulated distributions, if any, from the date of original issuance of the preferred securities. (2) Underwriting commissions on the preferred securities will be paid by Southern Energy. The underwriters may, under certain circumstances, purchase up to an additional 900,000 preferred securities from SEI Trust I at $ per preferred security. Southern Energy will pay underwriting commissions of $ per preferred security on each additional preferred security that is purchased by the underwriters. The underwriters expect to deliver the preferred securities in book-entry form through the facilities of The Depository Trust Company in New York, New York on , 2000. ------------------------- GOLDMAN, SACHS & CO. MORGAN STANLEY DEAN WITTER ------------------------- ABN AMRO ROTHSCHILD A DIVISION OF ABN AMRO INCORPORATED DONALDSON, LUFKIN & JENRETTE MERRILL LYNCH & CO. UBS WARBURG LLC ------------------------- Prospectus dated , 2000 shares of Hyder tendered by Hyder shareholders. As of September 18, 2000, WPD Limited had acquired approximately 68% of the shares of Hyder. In addition, WPD Limited has replaced Hyder's board of directors with our employees and employees of Western Power Distribution and PPL Global. On September 11, 2000, we closed the acquisition of an additional 40% interest in SCEM from Vastar Resources, Inc. for $250 million. The acquisition was effective as of August 10, 2000. As a result of this transaction, SCEM became our wholly owned indirect subsidiary. THE POWER INDUSTRY In the United States, the power industry had an estimated end-user market of over $215 billion of electricity sales in 1999 produced by an aggregate base of power generation facilities with a capacity of approximately 734,000 MW. Historically, the power generation industry has been characterized by electric utility monopolies selling to a franchise customer base. In response to increasing customer demand for access to low-cost electricity and enhanced services, new regulatory initiatives have been and are continuing to be adopted to increase competition in the power industry. We believe that increasing demand for electricity and the need to replace older power plants will create a need for additional power generating capacity throughout the United States. We believe that these market trends will create opportunities for efficient, low-cost power producers that are able to produce and sell energy to customers at competitive rates. Outside of the United States, we expect many governments in developed economies to privatize their utilities, having realized that their energy assets can be sold to raise capital without impairing system reliability. We expect these countries to develop regulatory structures to encourage competition in the electricity sector. In developing countries, the demand for electricity is expected to grow rapidly. In order to satisfy this anticipated increase in demand, some developing countries have adopted government programs designed to encourage private investment in power plants. We believe that these market trends will continue to create opportunities to acquire and develop power generation plants outside the United States. Industry trends and regulatory initiatives are transforming existing franchise customer markets, which are characterized by vertically integrated, price-regulated utilities, into markets in which generators compete with each other for their principal customers (wholesale power suppliers and major end-users) on the basis of price, service quality and other factors. This transformation requires that generators and their principal customers manage the risks associated with producing and delivering energy commodities, thereby creating opportunities to profitably market energy commodities and provide services to manage the risks associated with market price fluctuations of these commodities. STRATEGY Our strategy is to be a leading competitive provider of electricity and energy-related products and services in our target markets of North America, Europe and the Asia-Pacific region. We intend to acquire, develop and operate power plants and gas transportation and storage assets primarily in our target markets. We also intend to integrate power plants and gas assets with the marketing of energy commodities and the management of market risk associated with those commodities. We plan to implement our growth strategy by: - Maximizing the financial and operational performance of our current investments, - Capitalizing on opportunities generated by our regional presence, - Developing new power plants and expanding our existing plants, - Acquiring power plants and gas assets in our target markets, - Entering into contractual arrangements for the management and control of generation capacity and gas transportation and storage assets, - Integrating energy marketing and risk management with ownership and control of energy assets, and - Exploring energy information and e-commerce applications. We may suffer from some competitive disadvantages which impede our ability to implement this strategy. The need to develop the management infrastructure required for an independent company may affect our ability to compete against companies with longer histories as independent companies. We also expect that, at least initially, we will not be able to raise equity capital to fund our growth on terms as attractive as those available to our competitors. OUR RELATIONSHIP WITH SOUTHERN COMPANY We are currently a wholly owned subsidiary of Southern Company. Upon the completion of the common stock offering, Southern Company will own over 80% of the outstanding shares of our common stock. Southern Company has announced that it currently plans to complete a spin-off of us within 12 months after the completion of the common stock offering by distributing the remaining shares of our common stock to the holders of Southern Company's common stock. We have entered into agreements with Southern Company related to the separation of our business from Southern Company. These separation agreements govern our interim and ongoing relationships with Southern Company. In particular, we have entered into an agreement under which Southern Company will continue to provide various interim services to us, including financial, accounting, engineering and other services. In addition, after the common stock offering but prior to the distribution of our stock by Southern Company, we will transfer the operations and obligations of our leasing and capital funding subsidiaries to Southern Company. All of the separation agreements were negotiated in the overall context of our separation from Southern Company and the requirements of federal and state regulations. We believe that we will realize certain benefits from our complete separation from Southern Company, including the following: reduced governmental regulation, increased capital financing flexibility, a more targeted investment for stockholders, increased strategic focus, access to additional markets, increased speed and responsiveness and targeted incentives for management and employees. We were incorporated in Delaware on April 20, 1993 as a wholly owned subsidiary of Southern Company. Our executive offices are located at 900 Ashwood Parkway, Suite 500, Atlanta, Georgia 30338-4780, and our telephone number is (770) 821-7000. THE OFFERING Title............................... % Convertible Trust Preferred Securities, Series A. Securities Offered.................. 6,000,000 preferred securities by SEI Trust I. In addition, the trust has granted the underwriters an option, exercisable for 30 days, to purchase up to an additional 900,000 preferred securities at the initial public offering price. Each preferred security represents a preferred undivided beneficial interest in the assets of the trust. Issuer.............................. SEI Trust I is a Delaware business trust and a subsidiary of us. The address of its principal office is 1403 Foulk Road, Suite 102, Wilmington, Delaware 19803, and its telephone number is (302) 427-1935. Common Securities................... The trust will also issue common securities to us. The common securities represent common undivided beneficial interests in the assets of the trust. We will own all of the common securities. Debentures.......................... The trust will use the proceeds from the sale of the preferred securities and common securities to purchase from us % Junior Convertible Subordinated Debentures, Series A due 2030. The debentures will have the same financial terms as the preferred securities, including conversion rights. Distributions....................... If you purchase any preferred securities, you will be entitled to receive cash distributions at an annual rate of % of the $50 liquidation preference per preferred security. Distributions are cumulative and will begin to accumulate on the date of original issuance of the preferred securities, which we expect to be , 2000. Distributions will be payable quarterly in arrears on , , and of each year beginning , , unless we defer interest payments on the debentures. Distribution Deferral............... We can, on one or more occasions, defer interest payments on the debentures for up to 20 consecutive quarterly periods unless an event of default on the debentures has occurred and is continuing. Interest payments will not be due and payable on the debentures during a deferral period. We cannot, however, defer interest payments beyond the maturity date of the debentures, which is , 2030. If we defer interest payments on the debentures, the trust will defer distribution payments on the preferred securities and the common securities. During a deferral period, distributions will continue to accumulate on the preferred securities. Additional cash distributions will accumulate on any deferred distributions. Compounded interest will accrue on any deferred interest payments. While interest payments on the debentures are deferred, we will generally not be permitted to pay cash dividends on our common stock or pay on debt that is equal with or junior to the debentures. Because of our ability to defer interest payments, special tax rules will apply that will require you to include interest in income on an accrual basis, regardless of when such interest is paid to you. Accordingly, if we defer payments of interest on the debentures, you will be required to include accrued interest income for the deferred stated interest allocable to your preferred securities in your gross income for United States federal income tax purposes before you actually receive the related cash distributions. Different rules may apply to non-U.S. holders. Conversion into Common Stock........ Unless we have redeemed the debentures, and subject to our right to elect a cash settlement as discussed below, you will have the right to convert your preferred securities into shares of our common stock at any time after , 2001 and prior to , 2030. Preferred securities that have been called for redemption may only be converted on or before close of business on the business day prior to the applicable redemption date. The preferred securities will convert into our common stock at an initial conversion rate of shares of common stock for each preferred security. This conversion rate is equivalent to the conversion price of $ per share of our common stock. The initial conversion rate may be subject to adjustment. From , 2001 and until the next business day following the date of the distribution of our common stock held by Southern Company to its stockholders, as discussed in this prospectus, we may elect to make a cash settlement in respect of any preferred securities surrendered for conversion. The amount of cash that you will receive if we elect a cash settlement will be equal to the value of the underlying shares of common stock. Rights.............................. One right will be issued and attached to each share of our common stock issued upon conversion. Under circumstances described in "Description of Capital Stock -- Stockholder Rights Plan" in this prospectus, each right will entitle the holder to purchase one one-thousandth of a share of our Series A preferred stock. Ranking............................. The preferred securities represent preferred undivided beneficial interests in the assets of the trust, which will consist of % Junior Convertible Subordinated Debentures, Series A due 2030. Our obligations to pay the debentures are junior to our payment obligations under our senior debt. Redemption by the Trust............. The trust will redeem all of its outstanding preferred securities and common securities when the debentures are paid at maturity on , 2030. In addition, we can make the trust redeem all or some of the preferred securities at any time on or after , 2003 by redeeming the debentures at the applicable redemption price, plus any accrued and unpaid distributions; provided that we may only redeem the debentures on or after , 2003 and before if the closing price of our common stock exceeds % of the conversion price for a specified period of time before the notice of redemption is given. If that happens, the trust will use the cash it receives from our redemption of the debentures to redeem, on a pro rata basis, preferred securities and common securities of an aggregate liquidation amount equal to the aggregate principal amount of the debentures redeemed. Special Event Redemption or Distribution...................... We may redeem all outstanding debentures at the special event redemption price upon the occurrence of a tax event described below or a change in law that could require the trust to register as an investment company under the Investment Company Act of 1940 (and thus cause the redemption of the preferred securities at that price). Upon the occurrence of a tax event, we may elect to pay additional interest to the trust so that the distributions to holders of the preferred securities are not reduced because of the tax event. In addition, we have the right to dissolve the trust at any time; if a tax event or a change in law that could require the trust to register as an investment company under the Investment Company Act occurs, we may elect to redeem the preferred securities by distributing the debentures to you. A tax event generally means specified tax changes that could result in: - the trust being subject to United States federal income taxes or more than a de minimis amount of other governmental charges or - the non-deductibility of interest payments on the debentures. Conditional Right to Shorten Stated Maturity of the Debentures........ We can shorten the stated maturity of the debentures to as early as , 2015 if there are specified tax changes that could result in the non-deductibility of interest payments on the debentures. If we exercise this option, the trust will redeem all of the outstanding preferred securities when the debentures are paid on their new maturity date. Liquidation Preference.............. If the trust is liquidated and the debentures are not distributed to you, you will generally be entitled to receive $50 per preferred security plus any accumulated and unpaid distributions on each preferred security you hold. The Guarantee....................... We will guarantee the trust's payment obligations on the preferred securities to the extent described in this prospectus. Under the guarantee, we will guarantee the trust's payment obligations, but only to the extent the trust has sufficient funds to make payments on the preferred securities. If we do not make payments on the debentures, the trust will not have sufficient funds to make payments on the preferred securities, in which case you will be unable to rely on the guarantee for payment. Our obligations under the guarantee are junior to our obligations to make payments on all of our other liabilities, except as discussed elsewhere in this prospectus. Dissolution of the Trust and Distribution of the Debentures.... We have the right to dissolve the trust at any time. If we exercise this right, the trust will redeem the preferred securities by distributing the debentures to you and to us, as holder of the common securities, on a pro rata basis. If the trust distributes the debentures, we will use our best efforts to have the debentures listed on the New York Stock Exchange or on any national exchange or automated quotation system on which the preferred securities are listed. Form of Preferred Securities........ The preferred securities will initially be represented by a global certificate registered in the name of Cede & Co., as nominee for The Depository Trust Company. Use of Proceeds..................... The trust will use the proceeds from the sale of the preferred securities to purchase the debentures from us. We will use a portion of the net proceeds from the sale of the debentures to the trust and from the concurrent initial public offering of common stock to repay short-term debt of approximately $839 million. The remaining proceeds will be used for general corporate purposes. Voting Rights....................... Generally, you will not have any voting rights as a holder of preferred securities. Listing............................. The preferred securities have been approved for listing on the New York Stock Exchange under the symbol "SOE PrA", subject to official notice of issuance. You should be aware that listing of the preferred securities will not ensure that an active and liquid trading market will be available for the preferred securities. Concurrent Common Stock Offering.... Concurrently with this offering of preferred securities, we are offering by a separate prospectus 58,000,000 shares of our common stock in an initial public offering. The underwriters of the common stock offering have an option to purchase up to 8,700,000 additional shares of our common stock to cover over-allotments. This offering is contingent on the common stock offering. SUMMARY HISTORICAL FINANCIAL DATA You should read the following summary historical financial data together with our consolidated financial statements and the related notes and with "Selected Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. In addition, you should read the following summary historical financial data in light of the following: - Our operating revenues declined in 1998 due to our contribution on January 1, 1998 of our power marketing and risk management activities to Southern Company Energy Marketing, L.P. (SCEM), our marketing and risk management joint venture with Vastar formed in September 1997. When the joint venture was formed in September 1997, we contributed only our gas marketing and risk management assets to the venture. Prior to the formation of the joint venture, our marketing and risk management activities were wholly-owned and consolidated. From January 1, 1998 until August 9, 2000, the day prior to the effective date of our acquisition of Vastar's 40% interest in SCEM, we accounted for this joint venture under the equity method of accounting. For 1997, operating revenues would have been $1,768 million if we had not consolidated our marketing and risk management operations. Effective August 10, 2000, we acquired Vastar's 40% interest in SCEM for $250 million. Upon the closing of the transaction, Vastar transferred its interest in SCEM to us and SCEM became our wholly owned indirect subsidiary and will be consolidated in our financial statements on a prospective basis. - The write-down of assets for 1998 includes write-downs of our investments in our Argentine subsidiary, Hidroelectrica Alicura S.A. (Alicura), and our Chilean subsidiary, Empresa Electrica del Norte Grande S.A. (EDELNOR), to adjust for the difference between the carrying value of the assets and their fair market value. The write-down for 1999 and the six months ended June 30, 2000 includes further write-downs of our investments in Alicura and EDELNOR to maintain the carrying value at the fair market value as well as our interest in a $31 million write-down at Western Power Distribution relating to impaired metering assets. Pro forma balance sheet amounts and pro forma income statement amounts for 1999 and the six months ended June 30, 2000 give effect to the probable acquisition of Hyder by WPD Limited, a UK-based company in which we expect to own a 40% interest. As part of this acquisition, Western Power Distribution would no longer be a consolidated subsidiary but, instead, our investment would be accounted for under the equity method. The pro forma information below should be read in conjunction with the Southern Energy pro forma financial statements and Southern Energy's and Hyder's historical consolidated financial statements included elsewhere in this prospectus. Pro forma balance sheet amounts, as adjusted, give effect to the following actions as though these actions had taken place as of June 30, 2000: - the transfer of the operations of our capital funding subsidiary, Southern Company Capital Funding, Inc. (Capital Funding), to Southern Company; - the transfer of our leasing subsidiary, SE Finance Capital Corporation (SE Finance), to Southern Company. As a result of our decision on April 17, 2000 to transfer SE Finance to Southern Company, we have included the historical results of operations of the related subsidiaries as a discontinued operation; and - the payment by us on July 7, 2000 of cash dividends to Southern Company in the aggregate amount of $53 million, and short-term borrowings to fund those dividends. Pro forma balance sheet amounts, as further adjusted, give effect to our sale of 6,000,000 preferred securities in this offering at an assumed public offering price of $50.00 per preferred security and the application of the proceeds from this offering. Pro forma balance sheet amounts, as finally adjusted, give effect to our sale of 58,000,000 shares of common stock at an assumed initial public offering price of $19.00 per share in a public offering concurrent with this offering and the application of the proceeds from both offerings. <TABLE> <CAPTION> SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------- --------------------------- PRO FORMA PRO FORMA 1995 1996 1997 1998 1999 1999 1999 2000 2000 ---- ------ ------ ------ ------ --------- ------ ------ --------- (DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Operating revenues........................... $584 $1,600 $3,750 $1,819 $2,268 $1,292 $1,025 $1,194 $1,004 Write down of assets......................... -- -- -- 308 60 29 5 14 14 Operating income (loss)...................... 66 150 272 (5) 444 213 174 311 215 Other income (expense): Interest income............................ 13 16 138 146 172 166 80 81 80 Interest expense........................... (64) (133) (345) (430) (502) (410) (231) (300) (259) Gain on sales of assets.................... 11 66 24 41 313 27 9 -- -- Equity in income of affiliates............. 10 13 58 135 111 268 147 63 102 Receivables recovery....................... -- -- -- 29 64 64 12 -- -- Other, net................................. (1) 28 33 29 72 47 21 40 30 ---- ------ ------ ------ ------ ------ ------ ------ ------ Total other (expense) income............. (31) (10) (92) (50) 230 162 38 (116) (47) ---- ------ ------ ------ ------ ------ ------ ------ ------ Income (loss) from continuing operations before income taxes and minority interest................................... 35 140 180 (55) 674 375 212 195 168 Provision (benefit) for income taxes: Continuing operations...................... 8 54 27 (123) 129 (5) 34 (29) (31) Windfall profits tax(1).................... -- -- 148 -- -- -- -- -- -- Minority interest............................ 13 13 29 80 183 19 36 43 10 ---- ------ ------ ------ ------ ------ ------ ------ ------ Income (loss) from continuing operations..... 14 73 (24) (12) 362 $ 361 142 181 $ 189 ====== ====== Income from discontinued operations, net of income tax benefit of $10 in 1997, $22 in 1998, $15 in 1999, and $7 and $9 for the six months ended June 30, 1999 and 2000, respectively............................... -- -- 8 12 10 7 13 ---- ------ ------ ------ ------ ------ ------ Income (loss) before extraordinary item...... 14 73 (16) -- 372 149 194 Extraordinary gain on early extinguishment of debt, net of income tax of $2 in 1995 and $5 in 1996................................. 4 8 -- -- -- -- -- ---- ------ ------ ------ ------ ------ ------ Net income (loss)........................ $ 18 $ 81 $ (16) $ -- $ 372 $ 149 $ 194 ==== ====== ====== ====== ====== ====== ====== </TABLE> <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ---------------------------------------------------------- ---------------------------- PRO FORMA PRO FORMA 1995 1996 1997 1998 1999 1999 1999 2000 2000 ------- ------ ------- ------- ------- --------- ------- ------ --------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AND RATIO DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> EARNINGS PER SHARE INFORMATION: BASIC: From continuing operations...... $ 0.05 $ 0.27 $ (0.09) $ (0.04) $ 1.33 -- $ 0. 52 $ 0.67 -- From discontinued operations.... -- -- 0.03 0.04 0.04 -- 0.03 0.04 -- From extraordinary gain......... 0.02 0.03 -- -- -- -- -- -- -- ------- ------ ------- ------- ------- ------- ------ Net income.................... $ 0.07 $ 0.30 $ (0.06) $ -- $ 1.37 -- $ 0.55 $ 0.71 -- ======= ====== ======= ======= ======= ======= ====== PRO FORMA BASIC(2): From continuing operations...... $ 1.21 $1.21 $ 0.61 $ 0.64 ===== ====== From discontinued operations.... 0.04 0.04 ------- ------ Net income.................... $ 1.25 $ 0.65 ======= ====== PRO FORMA DILUTED(2): From continuing operations...... $ 1.21 $1.21 $ 0.61 $ 0.64 ===== ====== From discontinued operations.... 0.04 0.04 ------- ------ Net income.................... $ 1.25 $ 0.65 ======= ====== STATEMENT OF CASH FLOWS DATA: Cash flow from operating activities...................... $ 158 $ (226) $ 264 $ 402 $ 515 -- $ 153 $ 217 -- Cash flow from investing activities...................... (1,244) (136) (4,203) (1,741) (2,263) -- (1,668) (261) -- Cash flow from financing activities...................... 1,653 (193) 4,177 1,502 1,516 -- 1,329 418 -- OTHER OPERATING DATA: EBITDA(3)......................... $ 122 $ 258 $ 512 $ 351 $ 825 $ 661 $ 432 $ 529 $ 432 Ratio of combined fixed charges and preference dividends to earnings(4)..................... 3.1 1.9 1.4 0.6 2.0 1.4 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 2000 ----------------------------------------------------------- PRO FORMA, PRO FORMA, PRO FORMA, AS FURTHER AS FINALLY ACTUAL PRO FORMA AS ADJUSTED ADJUSTED ADJUSTED ------- --------- ----------- ---------- ---------- (DOLLARS IN MILLIONS) (UNAUDITED) <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents......................... $ 691 607 $ 542 $ 542 $ 990 Property, plant and equipment, net................ 5,912 3,985 3,985 3,985 3,985 Investments....................................... 1,550 1,813 1,745 1,745 1,745 Investment in leveraged leases.................... 566 566 -- -- -- Total assets.................................... 14,308 11,980 10,188 10,188 10,636 Non-recourse debt(5).............................. 6,063 5,157 4,731 4,731 4,731 Total debt...................................... 7,834 6,928 6,555 6,265 5,663 Subsidiary obligated mandatorily redeemable preferred securities(6)......................... 1,026 950 -- -- -- Minority Interest Company obligated mandatorily redeemable securities of a subsidiary holding solely parent company debentures..................... -- -- -- 300 300 Stockholder's equity.............................. 2,775 2,775 2,549 2,549 3,599 </TABLE> (1) In 1997, the United Kingdom imposed a windfall profits tax on the United Kingdom's privatized utilities. (2) Pro forma basic earnings per share information gives effect to the dividends we paid to Southern Company in 2000 as though they had been paid during the periods presented, in accordance with SEC Staff Accounting Bulletin Topic 1:B:3. Pro forma diluted earnings per share information gives effect to the conversion of the Southern Energy value creation plan standard units outstanding at December 31, 1999 and June 30, 2000, respectively, into options to purchase our common stock. (3) EBITDA represents our operating income (loss) plus depreciation and amortization and our equity in income of affiliates. EBITDA excludes the impact of minority interests. EBITDA, as defined, is presented because it is a widely accepted financial indicator used by some investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA, as defined, is not intended to represent cash flows for the period, nor is it presented as an alternative to operating income or as an indicator of operating performance. It should not be considered in isolation or as a substitute for a measure of performance prepared in accordance with generally accepted accounting principles (GAAP) in the United States and is not indicative of operating income or cash flow from operations as determined under GAAP. Our method of computation may or may not be comparable to other similarly titled measures by other companies. (4) The deficiency in reaching a 1.0 ratio during 1998 was $177 million. (5) This debt is non-recourse to us but is recourse to the applicable subsidiaries and their assets. (6) As of June 30, 2000, this total included $950 million of preferred securities and capital securities issued by special purpose financing subsidiaries held by Capital Funding, the proceeds of which were loaned to Southern Company. Southern Company pays interest on subordinated notes issued in favor of the financing subsidiaries, which payments are used to pay dividends on those preferred or capital securities. In addition, Southern Company has guaranteed payments due under the terms of those securities. These securities are non-recourse to us. In connection with our separation from Southern Company, Capital Funding will be transferred to Southern Company. The remaining $76 million of these securities were issued by a special purpose finance subsidiary of Southern Investments UK plc. They are also non-recourse to us but they are not guaranteed by Southern Company and they will remain outstanding after the offerings but have been eliminated in this pro forma presentation because Southern Investments UK would no longer be consolidated by us after the acquisition of Hyder (assuming successful completion of this acquisition).
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+PROSPECTUS SUMMARY This summary highlights information found in greater detail elsewhere in this document. In addition to this summary, we urge you to read the entire document carefully, especially the discussion of the risks of investing in our ordinary shares or ADSs under "Risk Factors," before deciding to buy our ordinary shares or ADSs. OVERVIEW We are an independent provider of a comprehensive range of semiconductor testing and assembly services. Our services include: - semiconductor testing on a diverse selection of test platforms, as well as services related to the testing process such as process support, reliability testing, thermal and electrical stress tests, laser repair, and dry pack and tape and reel; - semiconductor assembly, as well as services related to the assembly process such as package design, modeling and materials selection; - value-added services at both the design stage and the manufacturing stage, including advanced package development, process design and development, test program development, test-time reduction, yield enhancement, product engineering, and failure and reliability analysis; and - drop shipment services, including the delivery of semiconductors to our customers' end-customers in any part of the world. We commenced operations in January 1999. Our total revenue has grown from $4.1 million in the quarter ended March 31, 1999 to $18.7 million in the quarter ended June 30, 2000, representing a compound quarterly growth rate of 35.6%. Our gross profit margin in the two most recent quarters ended March 31, 2000 and June 30, 2000 was 31.4% and 37.2%, respectively. OUR CUSTOMERS We provide these test and assembly services to semiconductor companies which do not have their own manufacturing facilities, and independent semiconductor wafer foundries and semiconductor companies that have integrated design and manufacturing capabilities. For the quarter ended June 30, 2000, we derived over 90% of our revenue from such integrated semiconductor device manufacturers. Many of our customers are leaders in the semiconductor industry. Our two largest customers in 1999 accounted for over 80% of our revenue, while our two largest customers in the six months ended June 30, 2000 accounted for over 75% of our revenue. We have begun to expand our customer base. In the quarter ended June 30, 2000, our five largest customers, Broadcom, Fujitsu Microelectronics, Infineon Technologies, Nanya Technology and National Semiconductor, accounted for over 90% of our revenue. Our ten largest customers measured by revenue for the quarter ended June 30, 2000 were: <TABLE> <CAPTION> <S> <C> <C> Advanced Micro Devices Fujitsu Nanya Technology Broadcom Infineon Technologies National Semiconductor Chartered Semiconductor Medtronic Quadrant Components Enhanced Memory Systems Inc. </TABLE> For the quarter ended June 30, 2000, we estimate that the principal end use of the semiconductors we tested and assembled, as a percentage of our total net revenue, was 20.8% for communications applications, 77.0% for personal computers and 2.2% for medical and other applications. OUR SERVICES We derive the majority of our revenue from test services. The percentage of our total net revenue derived from testing services in the four most recent quarters has ranged from 71.6% to 78.9% and was 76.8% of our total net revenue in the quarter ended June 30, 2000. Since we commenced operations, our revenue derived EXPLANATORY NOTE We are making a global offering of our ordinary shares, which may be in the form of American Depositary Shares. The global offering will consist of a U.S. offering, an international offering and a Singapore offering. The attached prospectus relates to the U.S. offering only. The international offering memorandum will be the same as the prospectus for the U.S. offering except that it will have a different front and back cover page. The prospectus for the Singapore offering will be the same as the international offering memorandum except that it will have a special wrap with information required by Singapore law. from testing mixed-signal and logic semiconductors has grown from 2.0% of our total net testing revenue in the quarter ended March 31, 1999 to 30.0% in the quarter ended June 30, 2000. The balance of our total net testing revenue for these two quarters was derived from testing memory semiconductors. We possess test expertise on a broad cross-section of semiconductor products ranging from logic to mixed-signal semiconductors, and from conventional to high-performance, next-generation memory semiconductors. Our expertise allows us to be flexible and target the fast growing semiconductor market segments. We expect to benefit from the current strong recovery in the memory semiconductor market, while rapidly diversifying into the communications market segment. In addition, for the six months ending June 30, 2000, we have spent or committed to spend $91.3 million on new testing equipment, of which $66.9 million was for mixed-signal and logic test equipment compared to $24.4 million for memory test equipment. We also develop production test programs for new semiconductor devices and offer failure and reliability analysis. Our engineers work with customers to reduce test times, which may lead to lower testing costs. While our revenue was exclusively from test services when we commenced operations, we have successfully attracted customers with our testing capabilities and then expanded our relationship to include assembly services in several cases. Our package portfolio includes leadframe packages, as well as various types of laminate packages, including ball grid array packages, which enable a higher density of interconnects within a smaller surface area, packages in which one semiconductor is stacked on top of another, and very small-sized packages. We are also developing several proprietary techniques for assembling our customers' semiconductor wafers in a more cost competitive manner. In addition, we have an ongoing effort to develop new and innovative packaging materials. For example, we have started developing packaging materials for semiconductors used in fiber optic networks. The percentage of our total net revenue derived from assembly services in the quarter ended June 30, 2000 was 23.2%. OUR STRATEGY Our objective is to be a leading global supplier of test and assembly services targeted at the high performance, high growth segments of the semiconductor market. The principal components of our strategy are to: - leverage our technical expertise to enhance the testing and assembly process; - selectively offer "turnkey services," which include test, assembly and drop shipment services; - focus on test services, particularly in high growth markets; - offer advanced assembly technologies; - engage new customers and expand relationships with existing customers; and - increase capital expenditures to satisfy growing customer demand. OUR FACILITIES AND OUR BACKGROUND We provide test and assembly services at our facility in Singapore. As of June 30, 2000, we operated 40 testers and 34 wire bonders. We were incorporated in Singapore on November 26, 1997 and commenced operations in January 1999. Singapore is a politically and economically stable nation with laws that protect proprietary technology. To ensure that we work closely with our customers located in various parts of the world, we have established sales offices in Japan and San Jose, California, and representative offices in Korea and Italy. We have one subsidiary, UTAC Sales and Marketing Inc., a corporation organized under the laws of the State of California. Our principal executive and registered offices are located at 5 Serangoon North Avenue 5, Singapore 554916. Our telephone number is (65) 481-0033. Our internet address is www.utac.com.sg. INFORMATION CONTAINED ON OUR WEB SITE DOES NOT CONSTITUTE A PART OF THIS DOCUMENT. THE GLOBAL OFFERING The Global Offering........ The global offering consists of the U.S. offering, the international offering and the Singapore offering, each of which is described below. A total of [ ] ordinary shares, directly or in the form of ADSs, will be offered (plus [ ] ordinary shares subject to the underwriters' overallotment option). U.S. Offering.............. An offering in the United States and Canada of [ ] ordinary shares, directly or in the form of ADSs. International Offering..... An offering outside the United States and Canada of [ ] ordinary shares, directly or in the form of ADSs, at the same time as the U.S. offering. Singapore Offering......... A public offering in Singapore of [ ] ordinary shares at the same time as the U.S. offering. Reserved Shares............ Up to [ ] ordinary shares (including ordinary shares represented by ADSs) offered in the global offering are subject to priority allocation to our directors, officers and employees, employees of our business associates, officers and employees of our affiliates and to certain organizations in Singapore. American Depositary Shares..................... Each ADS represents ten ordinary shares. The ADSs are evidenced by American Depositary Receipts, or ADRs. The ADSs will be traded in U.S. dollars whereas the ordinary shares will be traded in Singapore dollars. Offering Price............. We currently expect the initial public offering price to be between [U.S.$ ] and [U.S.$ ] per ADS and [Singapore $ ] and [Singapore $ ] per ordinary share (the equivalent of [$ ] per ordinary share). Overallotment option....... We have granted the underwriters a 30-day option to purchase up to a total of [ ] ordinary shares (including ordinary shares represented by ADSs) in the global offering, solely to cover overallotments, if any. Unless we indicate otherwise, all information in this document assumes the underwriters have not exercised their overallotment option. Shares outstanding after the Global Offering.......... [ ] ordinary shares (including ordinary shares represented by ADSs) will be outstanding after the global offering. If the underwriters exercise their overallotment option in full, [ ] ordinary shares (including ordinary shares represented by ADSs) will be outstanding. Use of proceeds from the Global Offering................. The net proceeds of the global offering will be used to repay portions of our outstanding debt, to fund our capital expenditure requirements and to fund acquisition projects from time to time. Listing.................... We have applied to have the ADSs approved for quotation on the Nasdaq National Market under the symbol "UTAC" and to have the ordinary shares approved for listing on the Mainboard of the Singapore Exchange Securities Trading Limited, or the SGX-ST, under the symbol "UTAC." We expect that a majority of the ordinary shares will be sold in the form of ADSs and that a sufficient number of ADSs will be issued to satisfy the minimum listing requirements of the Nasdaq National Market. [Inside front cover artwork consists of a picture of our logo and our facilities] SUMMARY CONSOLIDATED FINANCIAL DATA You should read the following summary consolidated financial data in conjunction with our consolidated U.S. GAAP financial statements and the related notes, "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this document. The following table does not present financial data for any period prior to 1998 as we did not commence operations until January 1999. The results for the quarter ended June 30, 2000 or six months ended June 30, 2000 do not necessarily indicate the results that may be expected for the full year. <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------- --------------------------- 1998(1) 1999 1999 2000 ------------ ------------ ------------ ------------ (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AND PER ADS DATA) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue................................. $ -- $ 31,891 $ 11,821 $ 33,295 Gross profit............................ -- 10,989 5,100 11,544 Operating income (loss)................. (2,946) 6,432 3,262 7,565 Net income (loss)....................... (1,759) 6,443 4,067 7,873 OTHER DATA: EBITDA, as adjusted(3).................. $ (2,719) $ 14,998 $ 5,431 $ 16,347 Depreciation and amortization(4)........ 227 8,566 2,169 8,782 Capital expenditures(5)................. 41,916 104,010 37,166 101,678 Cash flows from operating activities.... (1,866) 7,650 2,685 15,314 Cash flows from investing activities.... (37,738) (64,475) (52,952) (37,202) Cash flows from financing activities.... 64,759 69,407 28,146 14,752 </TABLE> <TABLE> <CAPTION> QUARTER ENDED --------------------------------------------------------------- MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, 1999 1999 1999 1999 2000 2000 -------- -------- -------- -------- -------- -------- (UNAUDITED, IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> QUARTERLY OPERATIONS DATA: Total revenue......................... $4,079 $7,742 $9,288 $10,782 $14,612 $18,683 Quarter to quarter growth rate...... 89.8% 20.0% 16.1% 35.5% 27.9% Gross profit.......................... 2,225 2,875 2,447 3,442 4,592 6,952 Gross profit margin................. 54.6% 37.1% 26.3% 31.9% 31.4% 37.2% Net income............................ $2,957 $1,110 $1,283 $ 1,093 $ 2,626 $ 5,247 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 2000 ------------------------- ACTUAL AS ADJUSTED(6) -------- -------------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 30,601 $ [] Working capital............................................. 5,310 [] Total assets................................................ 198,398 [] Total debt.................................................. 12,427 [] Shareholders' equity........................................ 149,978 [] </TABLE> --------------- (1) Results for the year ended 1998 include $25 thousand in incorporation expenses incurred during the period from November 26, 1997 to December 1997. (2) The data set forth does not give effect to ADSs or ordinary shares issued in the global offering. The calculations for per share and per ADS information above has been rounded to two decimal places. (3) EBITDA is defined in this document as operating income, plus depreciation and amortization relating to operating activities, and is presented because it is generally accepted as providing useful information regarding a company's ability to service and/or incur debt. EBITDA should not be considered in isolation or as a substitute for operating income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with generally accepted accounting principles or as a measure of UTAC's profitability or liquidity. EBITDA, as defined in this document, may not be comparable to similarly titled measures used by other companies. (4) Depreciation and amortization as stated do not include amounts relating to depreciation of assets leased to others which are considered non-operating expenses. The depreciation amounts excluded are $0.0 and $112 thousand for the years ended December 31, 1998 and 1999, respectively, and $19 thousand and $158 thousand for the six months ended June 30, 1999 and 2000, respectively. These amounts are offset against lease income, and the net amount is included in other income. (5) Capital expenditures as stated refer only to expenditures committed during the period for which the amount is given. (6) The as adjusted data set forth is adjusted to give effect to the issuance of [ ] ordinary shares in the global offering (including ordinary shares represented by ADSs), and the application of the net proceeds from that offering at an assumed initial public offering price of [Singapore $ ] per ordinary share and [US$ ] per ADS.
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+PROSPECTUS SUMMARY This summary contains basic information about us and this offering. Because it is a summary, it does not contain all of the information that you should consider before investing. You should read this entire prospectus carefully, including the section entitled "Risk Factors" and the financial statements and notes to those statements, before you decide to buy our Class A common stock. TALITY We are a leading global provider of innovative engineering services for the design of complex electronic systems and integrated circuits, or chips. We focus our offerings primarily on the growing communications market. Our targeted segments of this market include wireline and wireless communications infrastructure, high-speed data access equipment and consumer communication products. Our engineering expertise encompasses all aspects of product design, including complete system, sub-system and advanced integrated circuit design. The breadth of this expertise extends from product conceptualization through implementation for production manufacturing. We are the world's largest independent electronics design services provider, with over 1,000 engineers located at 14 design sites in the United States, Canada, the United Kingdom and India. Since the beginning of 1998, we have completed over 500 design projects. Our clients include both leading and emerging electronic systems companies and integrated circuit manufacturers. Our top three clients by revenue for 1999 were Texas Instruments, Unisys and Philips Business Communications. In recent years, proliferation of the Internet and the increasing need for connectivity have driven growth in the worldwide demand for communications products. This demand has increased technological and business complexity, competition, resource constraints and the need to introduce products to market quickly. To address these issues, electronic products manufacturers and chip companies increasingly rely on outsourcing to provide expertise in areas that fall outside of their core competencies and areas of competitive differentiation. Examples of this trend include the expanded role of electronics contract manufacturers, integrated circuit foundries and, more recently, electronics design services and intellectual property companies. Our design solutions enable clients to address the pressures of increasing business and technological complexity, growing competition, resource constraints and the need to decrease time-to-market. Our engineering team has extensive expertise in our targeted segments of the communications market. We also have significant experience in systems design, embedded software and firmware design, printed circuit board and chip-level design and full systems integration. In addition, through our internal research and development efforts and our design projects, we have accumulated a growing portfolio of intellectual property that we may offer clients as part of our electronics design services. To every design engagement, we bring an established design infrastructure, comprised of the design automation tools, computing infrastructure and laboratory environments necessary for the development of clients' products. We also assist clients by providing project management services to address the growing complexities of the design phase of product development and offer assistance in the management of clients' supply chains through the application of our in-depth knowledge of and experience in technical and business management processes. Our goal is to be the preferred global design partner and intellectual property provider for electronic products companies and integrated circuit manufacturers in communications-related markets. To achieve this objective, we intend to: - target segments of the electronics market that we believe offer opportunities for rapid and sustainable growth; - grow our base of intellectual property to generate complementary and recurring revenue streams and to enhance operating efficiencies; THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. Subject to Completion. Dated November 9, 2000. 12,750,000 Shares [Tality Logo] Class A Common Stock ------------------------ This is an initial public offering of shares of Class A common stock of Tality Corporation. All of the 12,750,000 shares of Class A common stock are being sold by Tality Corporation. Immediately following the offering, Tality Corporation will be a holding company whose principal assets will be its 1% general partnership interest and approximately 16.7% limited partnership interest in Tality, LP. At that time, Cadence Design Systems, Inc. will own an approximately 82.3% limited partnership interest in Tality, LP and our only outstanding share of Class B common stock. Through its ownership of our Class B common stock, Cadence will have approximately 82.3% of the voting power of all outstanding shares of our voting stock and will be able to control all matters requiring stockholder approval. Prior to this offering, there has been no public market for the Class A common stock. Tality estimates that the initial public offering price per share will be between $10.00 and $12.00. The Class A common stock has been approved for quotation on the Nasdaq National Market under the symbol "TLTY". See "Risk Factors" beginning on page 9 to read about factors you should consider before buying shares of Class A common stock. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ <TABLE> <CAPTION> Per Share Total ------ ------------ <S> <C> <C> Initial public offering price............................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to Tality........................ $ $ </TABLE> To the extent that the underwriters sell more than 12,750,000 shares of Class A common stock, the underwriters have the option to purchase up to an additional 1,912,500 shares from Tality Corporation at the initial public offering price less the underwriting discount. ------------------------ The underwriters expect to deliver the shares of Class A common stock in New York, New York, on , 2000. GOLDMAN, SACHS & CO. LEHMAN BROTHERS UBS WARBURG LLC SG COWEN ------------------------ Prospectus dated , 2000. - strengthen our relationships with select clients to develop and maintain a continuous, strategic role in their product development activities and participate in their commercial success on an incentive basis; - develop an extensive supply chain network to enhance our ability to assist clients in the management of their supply chains; - grow through acquisitions of complementary businesses and technologies; and - expand our sales and marketing activities. OUR RELATIONSHIP WITH CADENCE Since 1995, we have operated as the electronics design services group of Cadence. On October 4, 2000, Cadence separated its electronics design services group into a separate company focused on providing design solutions and proprietary technology to electronic products companies and integrated circuit manufacturers. This business is now conducted by Tality, LP as an indirect subsidiary of Cadence. Tality Corporation is a holding company whose principal assets immediately after completion of this offering will be a 1% general partnership interest and an approximately 16.7% limited partnership interest in Tality, LP. At that time, Tality, LP's partners will consist of Tality Corporation and a wholly-owned subsidiary of Cadence. Immediately after completion of this offering, Cadence will own the only outstanding share of Class B common stock of Tality Corporation and an approximately 82.3% limited partnership interest in Tality, LP. Through its ownership of Class B common stock, Cadence will have voting rights equal to its percentage ownership in Tality, LP. As a result, its voting power in Tality Corporation associated with its ownership of Class B common stock will be approximately 82.3%. With the 410,000 shares of Class A common stock held by Cadence Design Systems, Inc. and the share of Class B common stock held by Cadence Holdings, Inc., Cadence will have total voting power in Tality Corporation of approximately 82.7% immediately after completion of this offering. The special voting rights associated with Cadence's share of Class B common stock are not transferable by Cadence except to its subsidiaries. Except for its special voting rights, and the right to convert into Class C common stock as described below, the Class B common stock has the same rights as our Class A common stock. The following chart describes the relationships of Cadence and Tality immediately after completion of the offering: LOGO Cadence will have the right at any time to exchange each of its limited partnership units in Tality, LP for, and convert its share of Class B common stock into, one share of Class A common Inside cover graphics to depict the stages of the electronics design process generally, and identify the participation by Tality in the steps of the design process. The steps of the design process represented will include: ELECTRONIC PRODUCT REALIZATION: Tality Corporation provides innovative engineering services that extend from product concept through manufacturing to help communications companies realize their product visions. - Concept We assist clients in refining a product concept and mapping technology options. - Specification We map our clients' product concept into technology, partition it into software and hardware, and define how each component will operate. - Implementation We physically implement specifications into advanced integrated circuits, complex printed circuit boards and complete systems. - Prototype We work with third-party manufacturers to develop and deliver product prototypes for testing to identify and resolve remaining design issues. - Manufacturing support We assist clients through the process of moving to volume manufacturing. stock. Partnership units held by Tality Corporation or any of its subsidiaries are not exchangeable into shares of Class A common stock. While Cadence currently has no plans to distribute its equity interests in Tality Corporation and Tality, LP to Cadence stockholders, the amended and restated certificate of incorporation of Tality Corporation and the limited partnership agreement of Tality, LP contain provisions intended to preserve flexibility for such a transaction in the future. If Cadence decides in the future to effect a tax-free distribution of its equity interests in Tality Corporation and Tality, LP to Cadence stockholders, Cadence will have the right to convert its share of Class B common stock into, and exchange all of its partnership units in Tality, LP for, an equal number of shares of our Class C common stock. The Class C common stock may only be issued in connection with a tax-free distribution. In general, the Class C common stock will have voting rights intended to provide Cadence, and its stockholders who receive shares of Class C common stock in the tax-free distribution, with 80% of the fully-diluted voting power of Tality Corporation. In all other respects, the Class C common stock will have the same rights as our Class A common stock. Cadence has agreed with the underwriters not to transfer its Class B common stock and limited partnership units in Tality, LP, or any Class A common stock or Class C common stock acquired by it, through the date that is 180 days after the date of this prospectus, except with the prior written consent of Goldman, Sachs & Co. After the expiration of this 180-day period, Cadence will no longer be restricted from transferring any of its common stock of Tality Corporation or limited partnership units in Tality, LP to the public or to its stockholders. In connection with the separation, we entered into agreements with Cadence providing for, among other things: - the transfer by Cadence to us of assets and liabilities relating to our business; - the allocation of intellectual property between us and Cadence; and - various ongoing relationships between us and Cadence. The agreements regarding the separation of our business operations from those of Cadence are described more fully in the section of this prospectus entitled "Arrangements Between Tality and Cadence". The terms of these agreements, which were negotiated in the context of a parent-subsidiary relationship, may be more or less favorable to us than if they had been negotiated with unaffiliated third parties. The assets and liabilities transferred to us by Cadence are described more fully in our consolidated financial statements and notes to those statements that are also included elsewhere in this prospectus. OUR CORPORATE INFORMATION Tality Corporation was incorporated on July 13, 2000 in the State of Delaware. Our principal executive offices are located at 555 River Oaks Parkway, Building 3, San Jose, California 95134, and our telephone number at that address is (408) 943-1234. TRADEMARKS We have applied for trademark registrations in the United States and several other countries for the name Tality. This prospectus contains other product names, trade names and trademarks that belong to us or to other organizations. ------------------------ Unless specified otherwise or the context otherwise requires, "Tality", "we", "us" and "our" refer to Tality Corporation and its subsidiaries, including Tality, LP. When this prospectus discusses the historical business of Tality, references to Tality include all predecessor companies that operated the business conducted by the Cadence design services group before Tality's separation from Cadence. Unless specified otherwise or the context otherwise requires, "Cadence" refers to Cadence Design Systems, Inc., a Delaware corporation, and its subsidiaries other than Tality Corporation and its subsidiaries, including Tality, LP. Unless specified otherwise, this prospectus assumes that the underwriters have not exercised their option to purchase additional shares of our Class A common stock in the offering. THE OFFERING CLASS A COMMON STOCK OFFERED.................. 12,750,000 shares COMMON STOCK TO BE OUTSTANDING AFTER THIS OFFERING: CLASS A COMMON STOCK..... 15,120,000 shares CLASS B COMMON STOCK..... 1 share CONTROL BY CADENCE......... Cadence will own the only share of Class B common stock outstanding immediately following this offering. By virtue of Cadence's ownership of our Class B common stock, Cadence will be able to control our corporate actions, such as electing our board of directors, amending our certificate of incorporation and controlling all fundamental corporate decisions. LIMITED PARTNERSHIP UNITS TO BE OUTSTANDING AFTER THIS OFFERING............ 84,367,801 units Each limited partnership unit not owned by Tality Corporation or any of its subsidiaries is exchangeable for one share of Class A common stock. The share of Class B common stock is convertible into one share of Class A common stock. Limited partnership units owned by Tality Corporation or any of its subsidiaries are not exchangeable for shares of Class A common stock. If Cadence Holdings, Inc. were to convert its share of Class B common stock into, and exchange all of its limited partnership units for, Class A common stock, it would own 70,100,001 shares of Class A common stock, or approximately 82.3% of our outstanding Class A common stock, or 80.5% if the underwriters' option to purchase additional shares of our Class A common stock is exercised in full. Together with the 410,000 shares of Class A common stock held by Cadence Design Systems, Inc., upon such conversion and exchange Cadence would own approximately 82.7% of our outstanding Class A common stock, or 80.9% if the underwriters' option to purchase additional shares of our Class A common stock is exercised in full. If all limited partnership units, other than those owned by Tality Corporation or any of its subsidiaries, were exchanged for, and the share of Class B common stock was converted into, Class A common stock, there would be 85,220,001 shares of Class A common stock outstanding immediately after this offering. USE OF PROCEEDS: BY TALITY CORPORATION.... To purchase additional partnership interests in Tality, LP, resulting in a 1% general partnership interest and an approximately 16.7% limited partnership interest. BY TALITY, LP............ For general partnership purposes, including working capital, capital expenditures, sales and marketing activities and potential acquisitions and investments. PROPOSED NASDAQ NATIONAL MARKET SYMBOL............ TLTY VOTING RIGHTS.............. Each holder of Class A common stock is entitled to one vote per share. A holder of Class B common stock is entitled to a number of votes equal to the total number of shares of Class B common stock plus the total number of limited partnership units of Tality, LP owned by such holder. Holders of our Class A and Class B common stock generally will vote together as a single class on all matters. The information set forth above: - includes approximately 1,740,000 shares of Class A common stock owned by certain Cadence employees and 220,000 shares of Class A common stock owned by Tality directors as of September 30, 2000; - includes 410,000 shares of Class A common stock owned by Cadence; and - excludes 13,492,240 shares of Class A common stock issuable upon the exercise of outstanding stock options with a weighted average exercise price of $6.25 per share and 4,462,760 shares of Class A common stock currently available for future issuance under our 2000 Equity Incentive Plan, our 2000 Broad Based Equity Incentive Plan and our Directors Stock Option Plan. SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The summary financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto appearing elsewhere in this prospectus. The following table sets forth the historical summary data for Tality, LP for the years ended December 30, 1995, December 28, 1996, January 3, 1998, January 2, 1999 and January 1, 2000 and the six months ended July 3, 1999 and July 1, 2000. Also set forth below are the pro forma statements of operations data for Tality Corporation and Tality, LP on a consolidated basis for the year ended January 1, 2000 and the six months ended July 1, 2000. The historical financial information included in this prospectus may not be indicative of our future performance and does not necessarily reflect what our financial position and results of operations would have been had we operated as a separate, stand-alone entity during the periods presented. The pro forma statements of operations data set forth the consolidated results of Tality Corporation and Tality, LP on a pro forma basis and reflect the following: - the structure of Tality Corporation and Tality, LP upon completion of this offering, the receipt by Tality Corporation of net proceeds of approximately $126.8 million from this offering and the purchase by Tality Corporation of additional partnership interests of Tality, LP, resulting in a 1% general partnership interest and an approximately 16.7% limited partnership interest; - the allocation of approximately 82.3% of the net losses of Tality, LP to Cadence; and - the net losses attributable to Tality Corporation. <TABLE> <CAPTION> TALITY, LP TALITY CORPORATION --------------------------------------------------------------------------- ------------------------------- YEAR ENDED SIX MONTHS ENDED SIX MONTHS ----------------------------------------------------- ------------------- YEAR ENDED ENDED DEC. 30, DEC. 28, JAN. 3, JAN. 2, JAN. 1, JULY 3, JULY 1, JANUARY 1, 2000 JULY 1, 2000 1995 1996 1998 1999 2000 1999 2000 PRO FORMA PRO FORMA -------- -------- -------- --------- -------- -------- -------- --------------- ------------- (restated) (restated) (restated) (restated) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenue.............. $ 47,249 $ 88,400 $ 90,690 $ 105,262 $128,873 $ 57,520 $ 90,284 $128,873 $ 90,284 Costs and expenses... 66,507 119,480 151,367 256,762 191,188 93,383 117,157 191,188 117,157 Loss from operations......... (19,258) (31,080) (60,677) (151,500) (62,315) (35,863) (26,873) (62,315) (26,873) Loss before minority interest........... (19,457) (31,609) (61,234) (152,925) (64,251) (36,740) (27,405) (64,251) (27,405) Minority interest.... -- -- -- -- -- -- -- 52,879 22,554 Net loss............. $(19,457) $(31,609) $(61,234) $(152,925) $(64,251) $(36,740) $(27,405) $(11,372) $ (4,851) Pro forma basic and diluted net loss per share.......... $ (0.75) $ (0.32) Weighted average shares used in computing pro forma basic and diluted net loss per share.............. 15,120 15,120 </TABLE> The pro forma balance sheet data for the financial position of Tality, LP below gives effect to the retention by Cadence of all of Tality, LP's working capital except the current portion of capital lease obligations and deferred revenue, as provided in the amended and restated master separation agreement. The pro forma as adjusted balance sheet data reflect, for the consolidated financial position of Tality Corporation and Tality, LP: - the reclassification of the equity interest of Cadence to minority interest; - the receipt of the estimated net proceeds of this offering based on an assumed initial public offering price of $11 per share and after deducting an assumed underwriting discount and estimated offering expenses payable by us; and - the receipt of proceeds of $1,375,000 from the purchase by three directors of 220,000 restricted shares of Class A common stock for $6.25 per share under the 2000 Equity Incentive Plan. <TABLE> <CAPTION> AT JULY 1, 2000 ------------------------------------------------------- TALITY TALITY TALITY, LP CORPORATION CORPORATION TALITY, LP PRO PRO FORMA ACTUAL ACTUAL FORMA AS ADJUSTED ----------- ----------- ---------- ----------- (restated) (restated) (IN THOUSANDS) <S> <C> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................ $ -- $ -- $ -- $128,183 Working capital.......................... -- 40,744 (6,521) 121,662 Total assets............................. -- 161,021 84,648 212,831 Long-term liabilities.................... -- 3,242 3,242 3,242 Minority interest........................ -- -- -- 167,125 Cadence's net investment................. -- 122,150 74,885 -- Total stockholders' equity............... -- -- -- 35,943 </TABLE> ---------------
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS AND MAY NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. TO LEARN MORE ABOUT THE OFFERING AND OUR BUSINESS, YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING OUR FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. OUR COMPANY We intend to become the first nationally branded provider of electricity and natural gas to residential and small commercial customers in the United States. Through our subsidiary, The New Power Company, we will offer consumers in restructured retail energy markets competitive energy prices, flexible payment and pricing choices, improved customer service, and other innovative products, services and incentives. Although our initial focus will be on providing electricity and natural gas, as we develop our business, we will offer additional products, services and customized solutions for residential and small commercial customers. We were formed by Enron Corp., the largest trader and marketer of electricity and natural gas in North America, to target the rapidly restructuring residential and small commercial markets for these products. We believe we are uniquely positioned to succeed because of: - our access to Enron's technical resources, regulatory and risk management expertise, and reliable wholesale commodity purchasing power; - our relationships with market-leading strategic partners such as America Online, Inc. and International Business Machines Corporation; and - a management team with significant consumer marketing, energy commodity risk management, and deregulation experience. We began acquiring electricity customers in select utility markets in Pennsylvania and New Jersey in August 2000. Following those efforts, we expect to enter two additional electricity markets in Pennsylvania beginning later this year. We recently acquired the residential and small commercial retail energy business of subsidiaries of Columbia Energy Group, which includes approximately 285,000 natural gas customers and 20,000 electricity customers in eight states, primarily Georgia, Ohio and Pennsylvania. The Columbia customer base, together with residential customers in California and Ohio to be transferred to us by Enron and customers we acquire in our initial target markets, will give us a significant beginning customer base of over 325,000 customers. These customers will give us an opportunity to broaden our understanding of operations and market characteristics in several geographic areas, and will also offer opportunities to begin cross-selling other products and services. We are evaluating several additional markets for entry beginning in 2001, which may include electric power markets in California, Connecticut, Massachusetts, Ohio, New Jersey, Pennsylvania and Texas, and natural gas markets in New Jersey. OUR MARKET OPPORTUNITY We estimate that the total residential and small commercial electric and natural gas marketplace in the United States exceeds $150 billion annually, making it one of the largest consumer markets to undergo competitive regulatory restructuring. As of September 2000, a significant portion of markets in nine states were open to retail electric competition, and 11 states had a significant portion of markets open to retail natural gas competition. A number of other states had also approved pilot programs to evaluate restructuring on a test basis, and laws or regulatory plans providing for future retail electric competition had been adopted in several other states. Although in many of these jurisdictions, final rules implementing market restructuring are not yet finalized and effective, we estimate that by the end of 2002, roughly 50% of the U.S. population, or approximately 55 million households, will be in markets where consumers can choose either their electricity or natural gas provider or both. As was the case in the deregulation of the long-distance telephone markets, we believe that a significant percentage of consumers will be receptive to switching from their monopoly energy providers to competitive providers. OUR STRATEGY Our success will depend upon our ability to identify and enter favorable restructured energy markets and to achieve sufficient customer scale to create a profitable operating cost structure. Specifically, we intend to: - Pursue our "first mover's" advantage to become the premier nationally branded provider of residential and small commercial energy services. - Selectively enter retail energy markets that have rate structures, market rules, consumer demographics, energy consumption patterns and risk management profiles that we believe will enable us to provide savings and flexibility to our customers at an acceptable margin. - Focus on customer profitability by directing our marketing efforts to customers who we believe will be most attracted to energy savings or who will be receptive to purchasing incremental products and services from their energy provider. - Capitalize on our risk management and commodity trading systems, resources and skills to create a competitive advantage. - Take advantage of the increasing consumer acceptance of online commerce, both directly through our website (www.newpower.com) and through our exclusive interactive marketing agreement with AOL, to reduce our customer acquisition and service costs and serve our customers more effectively. - Acquire and serve customers through traditional channels to ensure that we can reach all customers, regardless of their preferred method for doing business. - Develop strategic marketing alliances with established consumer brand partners to reach our target customers more effectively, including arrangements to offer airline miles and other incentives. - Utilize our "best in class" customer care and revenue management systems that we have developed with IBM to provide superior customer service and to maintain an attractive cost structure. - Offer customers flexible pricing and payment alternatives, and tailored product and service offerings to match their specific needs. - Cross-sell additional products and services to our customers, such as home warranties and other home services and products. OUR MANAGEMENT We have assembled an experienced senior management team led by our President and Chief Executive Officer, H. Eugene Lockhart, who was the President of AT&T Consumer Services and Chief Marketing Officer of AT&T, and prior to that, President and Chief Executive Officer of MasterCard International. In addition, we have a number of senior executives from the telecommunications and consumer financial services industries, as well as several former Enron personnel specializing in energy commodity pricing, marketing, risk management, and government affairs. We believe the experience gained by our management in other consumer and energy markets that have undergone regulatory restructuring will give us an advantage as we operate in restructured retail electric and gas markets. OUR STRATEGIC PARTNERS ENRON. Enron has contributed its retail residential energy business to us, and has entered into a number of favorable arrangements that we believe will give us competitive advantages, either through outright ownership of systems or through services agreements. These arrangements include commodity supply agreements that provide us electric and natural gas commodities at favorable wholesale prices, and agreements that give us access to proprietary software and risk management systems for managing our energy purchasing and delivery functions, and minimizing our commodity risk exposure. IBM. We have entered into a ten-year revenue management and customer care agreement with IBM Global Services, an industry leader in providing similar customer service functions in many industries. IBM is also developing and hosting our website for online commerce and billing applications. We believe these arrangements will enable us to offer superior customer service in a cost-effective, readily scalable manner. AOL. We have entered into a six-year interactive marketing agreement with AOL, which provides us exclusive rights, within limits, to market electricity and natural gas to consumers through AOL's online system and gives us access to over 23 million AOL subscribers. Our agreement gives AOL the right to receive equity and other incentives intended to encourage AOL to solicit customers to sign up for our services. We believe AOL is a premier online marketing channel, particularly for our targeted consumers. CAPITAL FUNDING Since our formation in late 1999, we have raised approximately $214 million in private equity capital from California Public Employees' Retirement System, funds managed by DLJMB Partners, GE Capital Equity Investments, Inc., IBM, Ontario Teachers' Pension Plan Board and others. RISKS RELATED TO OUR STRATEGY Our business plan will be subject to a number of significant risks. In particular, you should understand that our success will depend on the continued adoption and implementation by regulators of favorable competitive market rules in a sufficient number of markets to justify our expenditures. If favorable competitive market restructuring does not continue or is delayed, we may not be successful. We also face a number of other risks, including that we are a new company without a successful operating history, that we expect to incur substantial operating losses for a significant period of time, and a number of other operational and other risks described under "Risk Factors." You should review and consider these risks carefully before deciding whether to invest in our common stock. THE OFFERING <TABLE> <S> <C> Common stock offered by us...................... 21,000,000 shares Common stock and common stock acquirable upon exercise of Class A warrants to be outstanding after this offering............... 120,427,674 shares Use of proceeds................................. The net proceeds from this offering are estimated to be approximately $373 million. We will use the net proceeds for marketing, customer acquisitions and general corporate purposes. See "Use of Proceeds." Proposed NYSE symbol............................ NPW </TABLE> Unless otherwise indicated, the information in this prospectus: - assumes completion of a 200:1 split of our common stock effected in September 2000; - assumes the issuance of 5,161,400 shares of common stock in connection with the automatic cashless exercise upon completion of this offering of Class B warrants, assuming a $19 initial public offering price for our common stock; - assumes the issuance of 69,070,800 shares of common stock subject to issuance under Class A warrants having an exercise price of $0.05 per share, which will become exercisable on or after December 31, 2000; - assumes the issuance of $5 million of our common stock to IBM at a price per share equal to one-half the initial public offering price, assuming a $19 initial public offering price for our common stock; - does not assume the issuance of additional shares of common stock that may be issued after this offering pursuant to agreements with IBM, AOL or other strategic partners; - does not assume the issuance of 11,076,000 shares of common stock that will be subject to issuance after the consummation of this offering upon the exercise of options issued under our stock plan as of September 24, 2000; - assumes the issuance of $5 million of restricted stock to members of management under our stock plan at the initial public offering price, assuming a $19 per share initial public offering price for our common stock; and - assumes the underwriters' over-allotment option to purchase 3,150,000 additional shares is not exercised. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Enron created a subsidiary, Enron Energy Services, LLC, on May 1, 1997 to conduct retail marketing and sales of natural gas and electricity to residential, commercial and industrial customers. Historically, our business was the residential energy operating unit of Enron Energy Services. The following table presents summary financial data, since inception, related to the residential electric and natural gas business of Enron Energy Services in California and Ohio that was contributed to us in our initial private placement transaction effective January 6, 2000. Our summary financial data for the period from inception, May 1, 1997, through December 31, 1997, and as of and for the years ended December 31, 1998 and 1999 set forth below have been derived from financial statements audited by Arthur Andersen LLP, independent public accountants. Our financial data as of and for the six months ended June 30, 1999 and 2000 set forth below have been derived from unaudited financial statements which, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial data for these periods. Our summary financial information also presents summary unaudited pro forma condensed financial data as of and for the six months ended June 30, 2000 and for the year ended December 31, 1999. The pro forma condensed financial data gives effect to our acquisition of assets and customers from subsidiaries of Columbia Energy Group and a private placement of equity, each of which we closed in July 2000, as if such transactions occurred on January 1, 1999 for income statement data and as if such transactions occurred as of the balance sheet date for balance sheet data. You should read the following summary financial data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations", our financial statements and related notes and our condensed pro forma financial statements included elsewhere in this prospectus. Due to our limited operating history and our new business model, we believe that period-to-period comparisons of our revenues and results of operations are not meaningful. As a result, you should not rely on our revenues or results of operations for any period as an indication of our future performance or prospects. <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ------------------------------------ MAY 1 TO ------------------------------------ ACTUAL DECEMBER 31, ACTUAL ACTUAL PRO FORMA ---------------------- PRO FORMA 1997 1998 1999 1999 1999 2000 2000 <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Revenues................ $ 766 $ 7,024 $ 7,838 $ 114,508 $ 3,807 $ 4,758 $ 89,865 Cost of sales........... 632 4,679 5,748 115,445 2,517 4,032 81,782 -------- -------- ----------- ----------- ------- ----------- ----------- Gross profit............ 134 2,345 2,090 (937) 1,290 726 8,083 Operating expenses...... 19,503 19,686 27,117 76,702 8,016 45,558 61,237 -------- -------- ----------- ----------- ------- ----------- ----------- Operating loss.......... $(19,369) $(17,341) $ (25,027) $ (77,639) $(6,726) $ (44,832) $ (53,154) ======== ======== =========== =========== ======= =========== =========== Basic and diluted net loss per common share................. $ (125.14) $ (3.56) $ (1.97) $ (2.12) Shares used in computing net loss per common share................. 200,000 21,791,400 21,479,443 23,927,197 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 2000 ------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED(1) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 77,537 $142,637 $515,197 Working capital............................................. $ 44,929 $142,629 $515,189 Total assets................................................ $106,540 $222,340 $594,900 Total stockholders' equity.................................. $ 66,681 $182,481 $555,041 </TABLE> -------------------------- (1) Adjusted to reflect completion of this offering assuming a $19 initial public offering price, including the mandatory cashless exercise of all outstanding Class B warrants.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001119691_adexa-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001119691_adexa-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING RISK FACTORS AND THE FINANCIAL STATEMENTS, BEFORE MAKING AN INVESTMENT DECISION. ADEXA, INC. WHAT WE DO We develop and market software products that enable collaborative commerce, or c-Commerce. Our iCollaboration software provides visibility into multi-tiered supply chains and is designed to synchronize and optimize how enterprises source, make and deliver direct materials. By synchronize, we mean coordinate multiple, interdependent tasks so that they happen at the correct time and in the desired order. By optimize, we mean use the resources within an enterprise and across its supply chain to complete tasks in a highly efficient manner. Our software is also designed to: - enable companies to address the increasing volume, complexity and speed of business interactions across the supply chain, both inside and outside the enterprise; - automate selected inter- and intra-company business processes based on user-defined rules; and - allow electronic exchanges to provide enhanced services to their participants. Fundamentally, our software is designed to enable enterprises and exchange participants to make informed decisions about complex supply chain interactions on a rapid basis, resulting in enhanced supply chain efficiency, greater customer responsiveness and improved strategic planning. OUR MARKET OPPORTUNITY We believe many companies are recognizing the need for c-Commerce to synchronize and streamline their supply chain activities. c-Commerce is an Internet-based approach to sourcing, making and delivering goods that involves intelligent planning, real-time synchronization and collaboration among members of an extended supply chain. c-Commerce represents a distinct departure from e-Commerce, which is merely transactional in nature, and empowers enterprises and electronic exchanges to respond more quickly and effectively to customer demands and changing variables across the supply chain. OUR PRODUCTS We believe our software's speed, flexibility, ease of integration and open architecture differentiate it from other approaches to c-Commerce. Specifically, we believe that our software: - scales with growing numbers of supply chain members, increasing transaction volumes and expanding product complexity; - can be easily configured to support company-specific supply chain strategies and extended to meet a business's evolving needs; - synchronizes and integrates supply chain activities at different levels within and outside the enterprise; - features sophisticated optimization algorithms to rapidly solve the complex and changing supply chain problems of enterprises and exchanges; - integrates with an organization's existing technologies and those of its supply chain members, resulting in reduced implementation time and expense; and - addresses the supply chain-specific issues of a broad range of industries. OUR STRATEGY Our objective is to become a leading global provider of software that enables c-Commerce. To achieve this objective, we intend to: - continue focusing on markets where we have industry knowledge and penetrate additional markets that are characterized by complex supply chains; - take advantage of the network effect created when non-customer participants in the supply chains of our customers are exposed to, and benefit from, our software; - pursue a global, multi-channel distribution strategy; - continue to target electronic exchanges and application service providers, or ASPs, that can offer their customers our products on a hosted basis; and - continue to develop our technology to extend the features and functionality of our product offerings. OUR CUSTOMERS We target Global 2000 companies and electronic exchanges in large markets, such as the aerospace and defense, automotive, electronics, semiconductors and textiles and apparel industries. As of September 30, 2000, we had more than 50 customers in 11 countries. Our largest customers based on end-user license contract revenues, in alphabetical order, include: Advanced Micro Devices, Inc.; Conexant Systems, Inc.; Framatome Connectors International; Fujitsu Quantum Device Limited; Lucent Technologies, Inc.; Matsushita Electronics Corporation; Philips Semiconductors B.V.; Sanyo Electronics Co. Ltd.; and Sumitomo Metal Industries, Ltd., Sitix division. ADDITIONAL INFORMATION We maintain a web site at www.adexa.com. Information contained on our web site does not constitute part of this prospectus. Our principal offices are located at 5933 W. Century Blvd., 12th Floor, Los Angeles, California 90045, and our telephone number is (310) 338-8444. Adexa, iCollaboration and our logo are our trademarks. Trade names, service marks or trademarks of other companies appearing in this prospectus are the property of their holders. THE OFFERING <TABLE> <S> <C> Common stock offered by Adexa................ 4,000,000 shares Common stock to be outstanding after the offering................................... 42,146,612 shares Use of proceeds.............................. Working capital and general corporate purposes. Proposed Nasdaq National Market symbol....... ADXA </TABLE> The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of September 30, 2000 and excludes: - 10,816,336 shares of common stock issuable upon exercise of stock options outstanding as of September 30, 2000 at a weighed average exercise price of $1.22 per share; - 972,078 shares of common stock reserved for future issuance under our 1998 stock plan as of September 30, 2000; - 4,000,000 shares of common stock reserved for future issuance under our 2000 stock incentive plan; - 1,500,000 shares of common stock reserved for future issuance under our 2000 employee stock purchase plan; and - an outstanding warrant to purchase 456,024 shares of series A convertible preferred stock. ------------------------ Except as otherwise indicated, information in this prospectus is based on the following assumptions: - our reincorporation in the state of Delaware before the effectiveness of this offering and the filing of an amended certificate of incorporation providing for the authorization of 250,000,000 shares of common stock and 10,000,000 shares of undesignated preferred stock; - conversion of all outstanding shares of preferred stock into shares of common stock upon the closing of this offering; - no exercise of the underwriters' over-allotment option; and - a stock split of two for one before the effectiveness of this offering. SUMMARY FINANCIAL DATA The following table summarizes our financial data. You should read this information with the financial statements and the notes to those statements appearing elsewhere in this prospectus and the information under Selected Financial Data and Management's Discussion and Analysis of Financial Condition and Results of Operations. <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues License revenues............................... -- $ 175 $ 3,735 $ 4,841 $16,093 $10,960 $ 22,415 Service revenues............................... $ 823 1,618 2,035 2,251 5,175 4,072 9,333 Maintenance revenues........................... -- 54 416 1,020 2,393 1,452 4,177 ------ ------ ------- ------- ------- ------- -------- Total revenues......................... 823 1,847 6,186 8,112 23,661 16,484 35,925 Gross Profit..................................... 423 1,391 4,299 2,869 17,616 12,146 25,556 Operating Income (Loss).......................... 136 139 (1,093) (9,198) (2,751) (1,016) (3,909) Net Income (Loss)................................ 139 152 (847) (9,434) (5,185) (2,812) (5,975) Accretion and Deemed Dividend on Redeemable Preferred Stock................................ -- -- -- -- -- -- (8,346) Net Income (Loss) Attributible to Common Stockholders................................... $ 139 $ 152 $ (847) $(9,434) $(5,185) $(2,812) $(14,322) ====== ====== ======= ======= ======= ======= ======== Net Income (Loss) per Share: Basic and Diluted.............................. $ 0.01 $ 0.01 $ (0.04) $ (0.47) $ (0.26) $ (0.14) $ (0.67) ====== ====== ======= ======= ======= ======= ======== Weighted Average Shares of Common Stock........ 19,400 19,850 20,000 20,000 20,197 20,092 21,291 ====== ====== ======= ======= ======= ======= ======== Pro Forma Net Income (Loss) per Share: Basic and Diluted.............................. $ (0.16) $ (0.41) ======= ======== Weighted Average Shares of Common Stock........ 33,442 34,963 ======= ======== </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 2000 --------------------------------- PRO PRO FORMA ACTUAL FORMA AS ADJUSTED -------- -------- ----------- (IN THOUSANDS) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $18,990 $18,990 $65,850 Working capital............................................. 12,599 12,599 59,459 Total assets................................................ 36,599 36,599 83,459 Deferred revenues........................................... 9,451 9,451 9,451 Capital lease obligations................................... 149 149 149 Redeemable convertible preferred stock...................... 19,940 -- -- Total stockholders' equity (deficit)........................ (4,440) 15,500 62,360 </TABLE> See note 2 of notes to consolidated financial statements for an explanation of the determination of the number of shares used in computing per share data above. The balance sheet above summarizes our balance sheet at September 30, 2000: - on an actual basis; - on a pro forma basis to reflect the conversion of all series of preferred stock into shares of common stock; and - on a pro forma as adjusted basis to reflect the issuance of 4,000,000 shares of common stock at an assumed price of $13.00 per share under this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001119869_qualcomm_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001119869_qualcomm_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company, the common stock being sold in this offering and our historical combined financial statements and notes thereto appearing elsewhere in this prospectus. SPINCO OVERVIEW QUALCOMM Spinco, Inc. is the leading developer and supplier worldwide of Code Division Multiple Access (CDMA) integrated circuits and system software solutions for wireless voice and data communications products. We offer complete system solutions including software and integrated circuits for wireless handsets and infrastructure equipment. According to Dataquest's most recent analysis, we are the world's largest fabless provider of semiconductor products. Our complete system solutions approach provides our customers with advanced wireless technology, enhanced component integration and interoperability and reduced time to market. We provide integrated circuits and system software solutions to many of the world's leading wireless handset and infrastructure manufacturers, and to date, we have shipped systems for use in more than 100 million CDMA handsets worldwide. CDMA technology, used for digitally transmitting voice and data over a wireless network, has been adopted as a worldwide standard for digital cellular and other mobile and fixed-location wireless services. CDMA offers significant benefits over analog and other digital wireless technologies. We believe that our management and design teams have more experience in CDMA integrated circuits and system software solutions than any other company in the world. We introduced our first CDMA integrated circuits in 1991 and are currently developing our sixth, seventh and eighth generation products. We invest heavily in research and development to both enhance our current offerings and develop future CDMA applications and products, such as products which operate with multiple wireless technologies. These multi-mode products will enable world wide roaming and third generation, or 3G, products for high-speed data, multimedia and mobile Internet access. Wireless communications equipment and services have enjoyed tremendous growth worldwide in both the number of voice service subscribers and subscriber usage. The strong demand for wireless services is leading to increased demand for integrated circuits and system software solutions that enable more advanced mobile devices and network infrastructure equipment. Moreover, wireless service providers are increasingly focused on providing high-speed wireless data and Internet access services in addition to voice service. Equipment manufacturers, or OEMs, are accelerating their development cycles for new infrastructure and subscriber equipment. These increased time to market pressures can place a significant strain on their in-house engineering teams. As a result of the technical rigors of equipment design, the complexity of the enhanced features, decreased product life cycles and the transition to 3G technology standards, OEMs of subscriber equipment are finding it increasingly difficult to develop, supply and integrate all the required components in a timely and cost-effective manner. Accordingly, OEMs are turning to third party value-added technology providers to design integrated circuits and system software that provide superior functionality and feature sets compared to their own in-house solutions. We provide our customers full system solutions, incorporating integrated circuits, software, reference designs, features, tools, and technical support. Our comprehensive support organization significantly reduces our customers' design cycles by providing assistance in the design and testing of their products. We were the first technology provider to support full system solutions, including software, to the wireless industry. We believe we have the industry's most advanced CDMA integrated circuits and system software solutions, based on our leadership in terms of component integration, low power usage, and broad feature sets. Our product and technology roadmap addresses the emerging needs of the wireless communications industry for the delivery of high-speed wireless data and Internet access. We have an established record of delivering on-time solutions to our customers, enabling them to meet critical time to market requirements in a cost-effective manner. STRATEGY Our objective is to extend our leadership position in providing integrated circuits and system software solutions for the worldwide wireless communications market. Key elements of our strategy include the following: - EXTEND OUR LEADING POSITION AS A COMPLETE END-TO-END CDMA SYSTEM SOLUTIONS PROVIDER. We plan to invest heavily in research and development initiatives focused on extending our leadership position in the CDMA wireless market through integration of additional components and functionality. - CAPITALIZE ON THE GROWING DEMAND FOR HIGH-SPEED WIRELESS DATA AND INTERNET ACCESS. We intend to be the leader in providing integrated circuits and system software solutions for high-speed wireless data and Internet access. - EXPAND THE CAPABILITIES AND REACH OF OUR WIRELESS COMMUNICATIONS TECHNOLOGY. We intend to broaden our existing capabilities into additional wireless technologies, such as multi-mode integrated circuits supporting CDMA and other wireless technologies, and enhanced product features, including position location, multimedia capabilities, device connectivity, voice recognition, and peripheral memory devices. We intend to address new applications for our solutions, including wireless notebook computers, personal digital assistants, and remote monitoring systems. - CONTINUE TO DRIVE INDUSTRY STANDARDS FOR WIRELESS COMMUNICATIONS. We will seek to maintain our leading role in the formulation of standards for the wireless communications industry. BENEFITS OF OUR SEPARATION FROM QUALCOMM Our company comprises businesses that will be separated from QUALCOMM's other operations prior to completion of this offering. We believe that we will realize benefits from our separation from QUALCOMM, including the following: - MORE EFFECTIVE ACCESS TO THIRD PARTY TECHNOLOGY. By separating our business from QUALCOMM's other operations, we believe that we will be able to use our CDMA and other intellectual property rights to gain reasonable access to other third party technologies without compromising QUALCOMM's CDMA licensing business. - GREATER STRATEGIC FOCUS AND RECOGNITION. We expect to have a sharper focus on enhancing the competitive position of our business, a greater ability to meet the evolving needs of our customers and increased recognition within the semiconductor industry and investment community. - IMPROVED CUSTOMER RELATIONS THROUGH THE ELIMINATION OF POTENTIAL CONFLICTS. Our existing customers are also licensees of QUALCOMM. These relationships have from time to time caused a conflict with sales of integrated circuits and system software solutions to our customers. We expect that our separation from QUALCOMM may facilitate improved relations with our customers. - BETTER INCENTIVES FOR EMPLOYEES AND GREATER ACCOUNTABILITY. We expect that the motivation and accountability of our employees, the focus of our management and our ability to attract and retain qualified personnel will be strengthened by incentive compensation programs tied to the market performance of our business. OUR RELATIONSHIP WITH QUALCOMM We are currently a wholly-owned subsidiary of QUALCOMM. After the completion of this offering, QUALCOMM will own approximately % of the outstanding shares of our common stock, or approximately % if the underwriters exercise their over-allotment option in full. QUALCOMM currently anticipates that it will complete its divestiture of Spinco by August 2001 by distributing all of the shares of Spinco common stock owned by QUALCOMM to the holders of QUALCOMM's common stock. However, QUALCOMM is not required to complete the distribution, and the distribution may not occur by the contemplated time, or at all. Because QUALCOMM will own ninety percent or more of our outstanding capital stock, it may merge us into QUALCOMM at any time. QUALCOMM will determine the timing, structure and terms of its distribution of our common stock at its sole discretion. QUALCOMM has filed to obtain a private letter ruling from the Internal Revenue Service that the distribution of its shares of Spinco common stock to the holders of QUALCOMM common stock will be tax-free to QUALCOMM and its stockholders for United States federal income tax purposes. We intend to enter into agreements with QUALCOMM that will provide for the separation of our business operations from QUALCOMM and govern our various interim and ongoing relationships. These arrangements will not be conditioned on the distribution. They will provide for, among other things, the transfer from QUALCOMM to us of the assets and the assumption of the liabilities relating to our business, the assignment and license to us of selected QUALCOMM intellectual property, as well as our future licensing and transfer to QUALCOMM of intellectual property we develop or acquire. All of the agreements providing for our separation from QUALCOMM will be made in the context of the parent-subsidiary relationship and are being negotiated in the overall context of our separation from QUALCOMM. The final terms of these agreements may be more or less favorable to us than if they had been negotiated with unaffiliated third parties. For a discussion of the various risks related to our separation from QUALCOMM, see "Risk Factors--Risks Related to Our Separation from QUALCOMM." MSM, CSM, RFT, RFR, IFR, IFT, MSP, iMSM and gpsOne are our trademarks. All other trademarks or service marks appearing in this prospectus are the property of their respective holders. We were incorporated as a Delaware corporation in July 2000. Our principal executive offices are currently located at 5775 Morehouse Drive, San Diego, California 92121-1714 and our telephone number is (858) 587-1121. THE OFFERING <TABLE> <S> <C> Common stock offered by Spinco............... shares Common stock to be outstanding after this offering................................... shares Use of proceeds.............................. We will use the net proceeds of this offering for working capital and general corporate purposes, including: - product development; - selling and marketing; and - potential acquisitions of products, technologies or companies. For more information, see "Use of Proceeds." Proposed Nasdaq National Market Symbol....... " " </TABLE> The number of shares of common stock to be outstanding after the offering is based on the number of shares outstanding as of , 2000, and excludes additional shares we may issue under the following plans and arrangements: - shares of common stock available for issuance under our 2000 Equity Incentive Plan, including shares of common stock reserved for issuance to holders of options to purchase QUALCOMM common stock following QUALCOMM's distribution of our common stock; - shares available for issuance under our 2000 Non-Employee Directors' Stock Option Plan; and - shares available for issuance under our Employee Stock Purchase Plan. Except as otherwise indicated, all information in this prospectus assumes the underwriters' over-allotment option will not be exercised. SUMMARY COMBINED FINANCIAL DATA The following tables summarize our combined financial data and should be read together with the combined Spinco financial statements and related notes thereto, "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The as adjusted column reflects our receipt and use of the net proceeds from the offering (at an assumed initial public offering price of $ per share), after deducting estimated underwriting discounts and commissions and estimated offering expenses. The historical financial information presented below may not necessarily reflect the results of operations, financial position and cash flows we would have had if we had operated independently as of the dates presented. <TABLE> <CAPTION> YEARS ENDED SEPTEMBER 30,(1) NINE MONTHS ENDED --------------------------------------------------------- --------------------- JUNE 27, JUNE 25, 1995 1996 1997 1998 1999 1999 2000 --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Revenues: Third party...................... $ 26,940 $ 111,045 $ 361,502 $ 583,111 $ 900,638 $ 610,767 $ 868,385 Related party.................... -- 61,023 188,179 296,747 247,634 177,399 96,329 --------- --------- --------- --------- --------- --------- --------- Total revenues................. 26,940 172,068 549,681 879,858 1,148,272 788,166 964,714 --------- --------- --------- --------- --------- --------- --------- Expenses: Cost of revenues................. 16,021 154,538 449,579 535,384 527,884 352,381 449,880 Research and development......... 9,328 19,278 24,368 56,437 127,846 84,788 145,340 Selling, general and administrative................. 4,496 7,784 13,546 29,690 50,134 35,895 48,013 Amortization of goodwill and other acquisition-related intangible assets(2)........... -- -- -- -- -- -- 54,995 Purchased in-process technology(2).................. -- -- -- -- -- -- 60,030 --------- --------- --------- --------- --------- --------- --------- Total expenses................. 29,845 181,600 487,493 621,511 705,864 473,064 758,258 --------- --------- --------- --------- --------- --------- --------- (Loss) income before income taxes............................ (2,905) (9,532) 62,188 258,347 442,408 315,102 206,456 Income tax benefit (expense)....... 1,654 4,303 (22,406) (99,408) (167,435) (119,739) (123,874) --------- --------- --------- --------- --------- --------- --------- Net (loss) income.................. $ (1,251) $ (5,229) $ 39,782 $ 158,939 $ 274,973 $ 195,363 $ 82,582 ========= ========= ========= ========= ========= ========= ========= Unaudited pro forma net earnings per common share(3): Basic.......................... $ $ Diluted........................ $ $ Shares used in unaudited pro forma per share calculations(3): Basic.......................... Diluted........................ </TABLE> <TABLE> <CAPTION> AS OF JUNE 25, 2000 ---------------------- ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 12,550 Working capital............................................. 202,410 Total assets................................................ 936,564 Parent's investment......................................... 838,380 </TABLE> ------------------------ (1) Our fiscal year ends on the last Sunday in September. As a result, fiscal 1996 includes 53 weeks. (2) QUALCOMM completed acquisitions during the nine months ended June 25, 2000, and will transfer to us specified assets related to those acquisitions. As a result, during the nine months ended June 25, 2000 we recorded $55 million in amortization of goodwill and other acquisition-related intangible assets, and we recorded a $60 million charge related to purchased in-process technology. (3) We had no shares of common stock outstanding during fiscal 1999 and during the nine months ended June 25, 2000. Unaudited pro forma basic net earnings per common share was calculated based on the common shares outstanding on the date of our capitalization adjusted for a subsequent -for-one stock split. Unaudited pro forma diluted earnings per common share reflect the potential dilutive effect of additional common shares issuable upon exercise of outstanding stock options, which totaled shares for the year ended September 26, 1999 and shares for the nine months ended June 25, 2000. The effect of dilutive stock options was computed using the treasury stock method at the expected initial public offering price of $ per share.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001119985_hydrogenic_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001119985_hydrogenic_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. Before deciding to invest in our common shares, you should carefully read this entire prospectus, including the section entitled "Risk Factors." HYDROGENICS CORPORATION We design, develop and manufacture proton-exchange membrane, or PEM, fuel cell automated test stations. Our customers use our test stations to simulate, monitor and control the effect of power load, temperature, pressure, humidification, and potential contaminants on a fuel cell and to measure the effect of changes in these variables on fuel cell performance. The data obtained through our test stations is used to aid in the design, development and manufacture of PEM fuel cell systems. We are currently selling our test stations to automotive companies, fuel cell developers, component suppliers and government agencies. Our largest customers for test stations in these markets, based on revenues, include General Motors Corporation, Johnson Matthey plc, Minnesota Mining and Manufacturing Company (3M), W.L. Gore & Associates, Inc., and the United States Army. A PEM fuel cell system produces electricity without combustion through an electrochemical reaction of hydrogen and oxygen with the principal by-products being heat and water. A PEM fuel cell system is comprised of three major sets of components: a hydrogen fuel processor, which derives hydrogen from fuels such as propane or natural gas; a fuel cell or stack of fuel cells; and power conditioning equipment, which regulates the type and level of power transferred from the fuel cell. Through the development of our proprietary test stations, we have gained significant expertise in the development and operation of PEM fuel cell stacks and the integration of subsystems and components that control and operate PEM fuel cell systems. OUR PRODUCTS We are currently generating commercial sales from our PEM fuel cell automated test stations. We expect to continue to market and sell our test stations for the foreseeable future. OUR PRODUCTS IN DEVELOPMENT We are currently adapting the components and subsystems used in our test stations to be commercial products for use in third party fuel cell systems. We have also begun developing our own PEM fuel cell systems designed for use in situations that require reliable power regardless of the environment, such as in remote and extreme weather locations or for military applications. For example, we are developing what we believe is the first fuel cell system designed to operate at -40C. We are also developing a fuel cell system that will be used to power a military device that detects chemical and biological agents in the field. We plan to deliver demonstration units of our fuel cell systems in the second half of 2000. Over the longer term, we will be targeting our fuel cell systems toward the broad transportation, stationary and portable commercial markets. In addition, we are developing for these markets regenerative fuel cell systems that are designed both to generate electricity and produce hydrogen fuel from water and store it for later use in powering the fuel cell. We have not yet begun to manufacture commercial fuel cell systems in significant quantities. MARKET OPPORTUNITIES FOR OUR FUEL CELL PRODUCTS Automotive companies, fuel cell developers, component suppliers and others are currently spending significant amounts of capital developing their own fuel cell programs, though commercial markets for PEM fuel cell systems and products are still emerging. We believe that test stations will be essential elements of many of these development programs and that our subsystems and components will have broad applications in manufacturing processes if and when commercial markets develop. Trends that we expect will influence the penetration of PEM fuel cells into commercial markets include: - Increasing demand for higher quality and more reliable power, which is partially attributable to the proliferation of computers, the Internet, communication networks and advanced electronics devices; - Deregulation in the energy industry, which is likely to expand the market for alternative power technologies; EXPLANATORY NOTE The prospectus relating to common shares registered hereby to be offered in the United States (U.S. Prospectus) is set forth following this page. The prospectus relating to common shares registered hereby to be offered in Canada (Canadian Prospectus) will consist of certain alternate pages to pages in the U.S. Prospectus and the balance of the pages included in the U.S. Prospectus for which no alternate pages are provided. The U.S. Prospectus and the Canadian Prospectus are substantially identical except that they contain different front and back cover pages and the Canadian Prospectus contains additional sections under the captions "Eligibility for Investment," "Material Contracts," "Promoters," "Purchasers' Statutory Rights," "Certificate of the Company" and "Certificate of the Underwriters." The form of U.S. Prospectus is included herein and is followed by those pages (each marked an "Alternate Page for Canadian Prospectus") that differ from those in the U.S. Prospectus. - Operational efficiencies and other advantages of fuel cells over traditional power technologies; - Environmental concerns regarding conventional power technologies, including combustion-based power generation and lead-acid batteries; and - Rising energy costs causing consumers to seek alternative means of producing energy. We are principally targeting our products at the transportation, stationary and portable power markets: - TRANSPORTATION: We believe that the opportunities in this market include the supply of test stations, balance of plant and fuel cell systems for utility vehicles such as underground mining vehicles and forklift trucks, and retooling of machinery for vehicle production. - STATIONARY: We believe that the opportunities in this market include the supply of test stations and fuel cell systems for commercial markets, including primary power generators for buildings, factories and hospitals and backup power generators for computers, Internet service providers, communications networks and commercial facilities. - PORTABLE: We believe that the opportunities in this market include the supply of test stations and fuel cell systems for portable power generation, scientific and environmental monitoring, remote and extreme weather power generation, control instrumentation at remote sites, auxiliary power, portable electronic devices such as laptop computers and cellular telephones, and other specialty applications. OUR BUSINESS STRATEGY We have implemented the following business strategy to further our goal of becoming a leading designer and provider of commercial test stations and PEM fuel cell systems. INITIALLY TARGET NEAR TERM MARKET OPPORTUNITIES. In order to develop early commercial markets for our test stations and fuel cell system technology, we are initially focusing on customers that presently have substantial testing and diagnostic requirements, such as General Motors Corporation, or those that have a need for remote location or extreme weather power sources. EXPAND INTO BROADER MARKETS. Over the longer term, our principal strategy is to develop our proprietary fuel cell technology for the transportation, stationary and portable markets and to expand our remote location power technology into broader commercial markets. ESTABLISH KEY CUSTOMER AND STRATEGIC RELATIONSHIPS. We seek to establish customer-focused, service-oriented relationships with key customers and manufacturing, marketing and distribution alliances with potential strategic partners. DEVELOP AND EXPLOIT OUR TECHNOLOGY ACROSS OUR TARGET MARKETS. We intend to continue to develop and exploit our technology, knowledge and expertise across our three principal target markets. FOCUS ON OVERALL SYSTEM DESIGN, COMPONENT AND SUBSYSTEM INTEGRATION, FINAL ASSEMBLY AND QUALITY CONTROL. We believe that our balance of plant expertise provides us with a significant technological advantage over most of our competitors in the design, assembly and integration of PEM fuel cell systems. DEVELOP AND ACQUIRE COMPLEMENTARY TECHNOLOGIES. We believe that developing and acquiring complementary technologies can accelerate our market penetration. ------------------------ We are incorporated under the laws of Canada. Our principal executive offices are located at 5985 McLaughlin Road, Mississauga, Ontario, Canada L5R 1B8, and our telephone number is (905) 361-3660. ------------------------ THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED OCTOBER 23, 2000 P R O S P E C T U S 7,000,000 SHARES [HYDROGENICS CORPORATION LOGO] COMMON SHARES ------------------ We are selling 7,000,000 common shares. The underwriters named in this prospectus may purchase up to 1,050,000 additional common shares from us to cover over-allotments. This is the initial public offering of our common shares. We currently expect the initial public offering price to be between $10.00 and $12.00 per share. Our common shares have been approved for quotation on the Nasdaq National Market under the symbol "HYGS" and conditionally approved for listing on The Toronto Stock Exchange under the symbol "HYG." ------------------ INVESTING IN OUR COMMON SHARES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 6. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------ <TABLE> <CAPTION> PER SHARE TOTAL --------- -------- <S> <C> <C> Initial Public Offering Price $ $ Underwriting Commission $ $ Proceeds to Hydrogenics Corporation (before expenses) $ $ </TABLE> The underwriters are offering the common shares subject to various conditions. The underwriters expect to deliver the common shares to purchasers on or about , 2000. ------------------ SALOMON SMITH BARNEY CIBC WORLD MARKETS BMO NESBITT BURNS , 2000. THE OFFERING <TABLE> <S> <C> Common shares offered................................ 7,000,000 common shares Common shares to be outstanding after this offering........................................... 35,532,000 common shares Use of proceeds...................................... For research and product development, capital expenditures, potential acquisitions and investments and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol............... HYGS Proposed Toronto Stock Exchange symbol............... HYG </TABLE> The information set forth above is based on common shares outstanding as of June 30, 2000 and excludes the following: - outstanding options as of the date of this prospectus to purchase 3,815,700 common shares under our stock option plan at a weighted average exercise price of $0.548 per share; - 825,300 common shares available for future grants under our new stock option plan; and - common shares issued upon the exercise of stock options after June 30, 2000. ------------------------ Unless we state otherwise, the information in this prospectus: - assumes no exercise of the underwriters' over-allotment option; - gives effect to a 0.9375 for one share consolidation of our common shares effected on January 21, 2000; - gives effect to the conversion of 750,000 Series A preferred shares and 510,500 Series B preferred shares into an aggregate of 8,823,500 common shares, which will occur automatically upon the closing of this offering; and - gives effect to a seven-for-one share split of our common shares effected on September 29, 2000. [The front inside cover shows, clockwise from the top left corner, photos of the HyTEF Power Generator and a 2 kW Portable Power Generator captioned together as "Fuel Cell Systems in Development"; an illustration of a PEM Fuel Cell with the caption "Illustration of PEM Fuel Cell"; a FCATS Screener and an FCATS 12000 test station captioned together as "Fuel Cell Test Stations". In the center of the page there is the Hydrogenics Corporation logo with the following text below: "We make fuel cells work". The back inside cover shows, clock-wise from the top left corner, two photos of Hydrogenics fuel cell stacks under development with the caption "Fuel Cell Stacks in Development"; a photo of an AC Impedance FCATS module with the caption "Fuel Cell Stack Performance Monitor"; a large active area fuel cell on a test bench with the caption "Large Area Fuel Cell Stack in Development"; and a FCATS 85 kW test station with the caption "Fuel Cell Test Station". There is a Hydrogenics logo and the following text in the middle of the page: "Since 1995, Hydrogenics has been building a technology platform to exploit transportation, stationary and portable fuel cell markets worldwide. - Vehicular markets - Stationary power generation - Portable power"] SUMMARY FINANCIAL DATA Our financial statements are prepared in accordance with Canadian generally accepted accounting principles. These principles conform in all material respects with U.S. generally accepted accounting principles except as disclosed in note 16 of our financial statements for the years ended December 31, 1999 and 1998 and note 7 of our unaudited interim financial statements for the six month periods ended June 30, 2000 and 1999. You should read the following summary financial data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and notes appearing elsewhere in this prospectus. <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------------- ------------------------- 1997 1998 1999 1999 2000 ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Canadian GAAP: Revenues........................ $ 97 $ 665 $ 2,674 $ 774 $ 4,459 Gross profit.................... 25 250 569 196 1,537 Income (loss) from operations... 3 113 (145) (136) 459 Net income (loss)............... $ (1) $ 99 $ (209) $ (148) $ 83 =========== =========== =========== =========== =========== Basic and fully diluted earnings (loss) per share.............. $ (0.00) $ 0.01 $ (0.01) $ (0.01) $ 0.00 =========== =========== =========== =========== =========== Shares used in computing basic and fully diluted earnings (loss) per share.............. 19,687,500 19,687,500 19,687,500 19,687,500 19,689,243 Pro forma earnings (loss) per share......................... $ (0.01) $ 0.00 =========== =========== U.S. GAAP: Revenues........................ $ 647 $ 2,598 $ 749 $ 4,459 =========== =========== =========== =========== Net income (loss)............... $ 96 $ (165) $ (108) $ (1,718) =========== =========== =========== =========== Basic and fully diluted earnings (loss) per share.............. $ 0.00 $ (0.01) $ (0.01) $ (0.09) =========== =========== =========== =========== Pro forma earnings (loss) per share......................... $ (0.01) $ (0.06) =========== =========== </TABLE> Pro forma earnings (loss) per share has been computed assuming the conversion of 750,000 Series A preferred shares and 510,500 Series B preferred shares, as of the beginning of the periods presented or at the date of issuance if later, into an aggregate of 8,823,500 common shares, which will occur automatically upon the closing of this offering. Although the Canadian dollar is our functional currency, we have adopted the U.S. dollar as our reporting currency. See note 2 of our financial statements for the years ended December 31, 1999 and 1998 and note 2 of our unaudited interim financial statements for the six month periods ended June 30, 2000 and 1999. <TABLE> <CAPTION> AS OF JUNE 30, 2000 ----------------------------------- PRO FORMA AS ACTUAL PRO FORMA ADJUSTED ------ --------- ------------ (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Canadian GAAP: Cash and cash equivalents.................................. $2,192 $2,037 $72,038 Working capital............................................ 4,192 4,192 74,193 Total assets............................................... 6,808 6,653 76,654 Total shareholders' equity................................. 561 4,616 74,617 U.S. GAAP: Total assets............................................... 6,808 6,653 76,654 Total shareholders' equity (deficiency).................... 70 4,616 74,617 </TABLE> The pro forma financial information in the table above gives effect as of June 30, 2000 to the conversion of 750,000 Series A preferred shares and 510,500 Series B preferred shares into 8,823,500 common shares and payment of accrued dividends, which will occur automatically upon the closing of this offering. The pro forma as adjusted numbers in the table above are adjusted to give effect to the conversion of preferred shares into common shares as described in the previous sentence and in addition, to give effect to our receipt of the net proceeds from the sale of 7,000,000 common shares offered by us in this offering at the estimated initial public offering price of $11.00 per share after deducting the underwriting commissions and estimated offering expenses of $1.6 million payable by us. See "Use of Proceeds," "Capitalization" and "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001120122_brience_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001120122_brience_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the securities being sold in this offering, as well as the consolidated financial statements, pro forma financial information and related notes appearing elsewhere in this prospectus. BRIENCE, INC. We provide a software platform that enables the delivery of web-based content and the extension of business software applications to wireless mobile devices. Our software is designed to rapidly integrate with existing web infrastructures to wireless enable enterprise companies' business applications. By enterprise companies, we mean Global 1000 companies and other large organizations with 500 or more employees running multiple business applications with diverse computing environments in different locations around the world. Using our software platform, enterprise companies can deliver web-based content and applications to their mobile employees, customers, suppliers and business affiliates who use multiple types of mobile devices, including personal digital assistants, smart pagers and cellular phones with Internet access. Our product, Brience 2.0 Framework, consists of three components: Experience Delivery Server, Development Environment and Wireless Edge Server. Our Experience Delivery Server manages the complexities of multiple devices, connection speeds, formats and applications. It identifies the type of device being used, the bandwidth or speed of the connection and the preferences of the user requesting content and then delivers web-based content and applications based on those specifications. Our Development Environment can be used to develop, deliver and maintain all web-enabled content and applications for an enterprise company. Our Wireless Edge Server minimizes the time required for accessing web-based content and applications, which optimizes the utilization of network resources. We believe that our Brience 2.0 Framework software provides the following key business benefits to enterprise companies: - opportunity to attract and retain customers and reduce the costs of doing business; - low total cost of ownership of a single software platform solution; - rapid deployment and easy implementation; and - ability to leverage existing web infrastructure investment. The Internet and wireless telecommunications are converging because users conducting business and sharing information through the Internet are increasingly looking to access web-based content and applications while away from their desktop computers. Wireless access to the Internet is in an early stage of development and growing rapidly as web-enabled mobile devices become more accessible and affordable. Cahners In-Stat Group, in an industry report dated August 2000, predicts that the number of worldwide wireless Internet subscribers will increase from 3.8 million as of 1999 to more than 742 million by the end of 2004. In addition to managing the complexities of Internet-enabling their existing network and systems infrastructures, enterprise companies are seeking to provide wireless access to Internet users. Delivering wireless access to users is particularly challenging because of the variety of web-enabled mobile devices utilized by them. These devices differ in screen size, screen navigation functionality and in their ability to support varying levels of graphics, color and audio. These devices access content and conduct transactions using a number of different software browsers which deliver information in a variety of different display languages or markup languages. Users connect to networks at different speeds and different interval but expect to receive a consistent user experience. Users also expect access to applications and data synchronization capabilities while disconnected from their network. THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED SEPTEMBER 29, 2000 Shares BRIENCE, INC. [BRIENCE LOGO] Common Stock ------------------------- Prior to this offering, there has been no public market for our common stock. We will apply to list our common stock on The Nasdaq Stock Market's National Market under the symbol "BRIE." The underwriters have an option to purchase a maximum of additional shares to cover over-allotments of shares. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 5. <TABLE> <CAPTION> UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS BRIENCE ----------------- ----------------- ----------------- <S> <C> <C> <C> Per Share................................. $ $ $ Total..................................... $ $ $ </TABLE> Delivery of the shares of common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON ROBERTSON STEPHENS The date of this prospectus is , 2000. We seek to become a leading provider of software that enables the delivery of web-based content and applications to wireless mobile devices. Our business strategy consists of the following elements: - establish our Brience 2.0 Framework software as a leading software platform solution; - target prominent enterprise companies that we believe are early adopters of technology; - increase market penetration by rapidly expanding our direct and indirect sales channels; - develop a competitive sales presence in Western Europe; and - increase the role of third-party systems integrators to implement our software products. We commenced operations on March 8, 2000, and our revenues for the period from inception to August 31, 2000 were $933,000 and our net loss was $17.1 million. As of September 29, 2000, we had licensed our Brience 2.0 Framework software to four companies: BarPoint.com, Hyperion Solutions, Ingram Micro and Xircom. RECENT DEVELOPMENTS At the time of our incorporation, Brience, LLC, a Delaware limited liability company, was formed and has provided substantially all of the funding for our initial operations. In connection with this offering, Brience, LLC will exchange its assets, including its shares of our preferred stock and its interests in two investments for a total of shares of our common stock and distribute all shares of common stock it holds to the Brience, LLC investors. The exchange ratio will be determined based upon the initial public offering price of common stock. All commitments for future funding by the Brience, LLC investors will terminate and Brience, LLC will be dissolved in connection with this offering. Our consolidated financial statements for the period from inception to August 31, 2000 have been presented to reflect the results of operations of Brience, Inc. and, as a result of the exchange with Brience, LLC, the equity method investment held by Brience, LLC. On May 31, 2000, we acquired Data on Air, Inc. for approximately $17.9 million, including approximately $9.6 million in cash and $8.3 million in shares of our common stock. Data on Air provides wireless carriers with wireless Internet infrastructure services. Through this acquisition, we acquired additional wireless industry expertise and carrier relationships. ------------------ We were incorporated in Delaware in March 2000. Our principal executive offices are located at 128 Spear Street, San Francisco, California. Our telephone number is (415) 974-5300. Our web site is located at http://www.brience.com. Information contained on our web site does not constitute part of this prospectus. ------------------------- TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> PROSPECTUS SUMMARY.................... 1 RISK FACTORS.......................... 5 FORWARD-LOOKING STATEMENTS............ 18 USE OF PROCEEDS....................... 19 DIVIDEND POLICY....................... 19 CAPITALIZATION........................ 20 DILUTION.............................. 21 SELECTED CONSOLIDATED FINANCIAL DATA................................ 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 24 BUSINESS.............................. 30 MANAGEMENT............................ 41 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................ 52 PRINCIPAL STOCKHOLDERS................ 53 DESCRIPTION OF CAPITAL STOCK.......... 54 SHARES ELIGIBLE FOR FUTURE SALE....... 56 UNDERWRITING.......................... 58 NOTICE TO CANADIAN RESIDENTS.......... 61 LEGAL MATTERS......................... 62 EXPERTS............................... 62 WHERE YOU CAN FIND MORE INFORMATION... 63 INDEX TO FINANCIAL STATEMENTS......... F-1 </TABLE> ------------------------- YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. THE OFFERING Common stock offered.................. shares Common stock to be outstanding after this offering......................... shares Use of proceeds....................... We intend to use the net proceeds of this offering for general corporate purposes, including expansion of sales, marketing and alliance activities, general and administrative activities, product development, strategic investments or acquisitions, working capital and capital expenditures. Proposed Nasdaq National Market Symbol................................ BRIE Common stock to be outstanding after this offering is based on shares of common stock outstanding as of , 2000 as adjusted to give effect to: - the issuance of shares of common stock in exchange for all of our outstanding preferred stock and other assets held by Brience, LLC, a Delaware limited liability company that was formed at the same time that we were incorporated to provide funding for our initial operations; and - the issuance of shares of common stock in this offering. The number of shares of common stock outstanding after this offering does not include: - shares of common stock that may be issued upon the exercise of outstanding options; or - shares of common stock that may be issued upon the exercise of certain common stock warrants outstanding after consummation of this offering. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) You should read the following summary of consolidated financial and operating data together with "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related footnotes included elsewhere in this prospectus. <TABLE> <CAPTION> PERIOD FROM INCEPTION (MARCH 8, 2000) TO AUGUST 31, 2000 ------------------ ACTUAL ------------------ <S> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenue............................................... $ 933 Gross loss.................................................. (1,239) Total operating expenses.................................... 15,418 Loss from operations........................................ (16,657) Net loss.................................................... (17,064) Basic and diluted net loss per share........................ $ (0.17) ------------ Weighted average common shares outstanding: Basic and diluted......................................... 102,674,128 </TABLE> <TABLE> <CAPTION> AUGUST 31, 2000 ----------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents.................................. $ 2,947 $ 3,244 $-- Working capital............................................ 305 448 -- Total assets............................................... 25,588 26,851 -- Redeemable preferred stock................................. 26,507 -- -- Total stockholders' equity (deficit)....................... (4,834) 22,816 -- </TABLE> The pro forma consolidated balance sheet data gives effect to the issuance of shares of our common stock in exchange for all of our outstanding preferred stock and other assets held by Brience, LLC. The exchange ratio will be determined based upon the initial public offering price of our common stock. The pro forma as adjusted consolidated balance sheet data gives effect to the net proceeds from the sale of the shares of common stock offered in this offering by us after deducting the estimated underwriting discounts and commissions and estimated offering expenses and shares issued to one of our founders upon consummation of this offering.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001120295_ixia_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001120295_ixia_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including "Risk Factors" beginning on page 8 and the financial statements, related notes and other financial data, included elsewhere in this prospectus before making an investment decision. IXIA We are a provider of high-speed, multi-port network performance analysis systems. These systems allow our customers to measure the performance of their data communications equipment and networks by simulating a large-scale network environment. Each of our systems consists of a chassis and one or more of a variety of interface cards that reside within the chassis and connect to the equipment or network being tested. These interface cards simulate the information that networks carry by generating, receiving and analyzing different types of data traffic, including Internet Protocol, or IP, traffic. Our systems analyze different types of networks, including advanced optical networks that carry data traffic over optical fiber, as well as electrical networks that carry data traffic over electrical cable. These networks include: - Packet Over SONET networks, which transmit units of information, called packets, over high-speed optical networks; and - Gigabit Ethernet networks, which are high-speed local area networks used typically within a single building or a group of buildings. Our systems are designed to meet the needs of network equipment manufacturers, Internet and network service providers, communications chip manufacturers and network users such as large corporations. Since our inception, we have sold our systems to over 170 customers. Based on revenues for the 12 months ended June 30, 2000, our largest customers by category include: - Leading network equipment manufacturers such as Cisco Systems, Extreme Networks and Nortel Networks; - Internet and network service providers such as AT&T and UUNET Technologies; - Communications chip manufacturers such as Broadcom and Level One Communications, which is now part of Intel; and - Network users such as Lockheed Martin and Bank of America. We generated net revenues of $4.9 million in 1998, $24.5 million in 1999 and $28.3 million in the six months ended June 30, 2000. To date, we have sold our systems primarily to network equipment manufacturers. The popularity of the Internet and the number of Internet-based applications and services have fueled dramatic growth in the volume of data traffic. According to Ryan Hankin Kent, Inc., a leading communications market research firm, Internet traffic is expected to increase from 350,000 terabytes, or trillions of bytes, per month at the end of 1999 to more than 15 million terabytes per month in 2003, representing a compound annual average growth rate of over 150%. To accommodate the growth in traffic, investments in network equipment and systems have accelerated and increasingly complex network configurations have emerged. Consequently, performance analysis has become more difficult. In addition, due to the demand of network users for consistent and high levels of performance from their Internet and network service providers, these service providers must ensure that the equipment they deploy can deliver the required performance. As a result, network equipment manufacturers, Internet and network service providers, communications chip manufacturers and network users are each demanding increasingly sophisticated network performance analysis systems. arrow. There are four 90 degree angle two-way arrows between the top of the box and the left of the chassis, with the text "Electrical Interface" immediately to their left. The lower left quadrant has a horizontal black rectangle in the lower left corner containing the yellow text "Performance Verification of a Single Router". In this quadrant, there is a diagram with a chassis in the upper left corner. Above the upper right corner of the chassis is a black oval with the white text "IXIA 1600". To the lower right of the chassis is a vertical orange box illustration with the text "Router" immediately below it. There is a 90 degree angle two-way arrow between the right side of the chassis and the top of the box with the text "Optical Interface" immediately above the arrow. There is a 90 degree angle two-way arrow between the bottom of the chassis and the left of the box. The lower right quadrant has a horizontal black rectangle in the lower right corner containing the yellow text "Performance Verification of a Cable Modem Network". In this quadrant, there is a diagram with a chassis in the upper right corner. Above the upper right corner of the chassis is a black oval with the white text "IXIA 1600". To the lower left of the chassis is a horizontal orange box illustration with the text "Cable Modem Termination System" immediately below it. There is a 90 degree angle two-way arrow between the left side of the chassis and the top of the box with the text "Electrical Interface" immediately above the arrow. Extending from the right side of the box there is a horizontal two-way arrow which extends below the chassis and ends with five dots in a row. Between the two-way arrow and the chassis there are three small horizontal orange box illustrations in a row, and each with a vertical two-way arrow between it and the chassis and a vertical two-way arrow between it and the horizontal two-way arrow. Below the row of three boxes, and below the two-way arrow, there is the text "Cable Modems". In the lower left corner there is a horizontal two-way arrow and immediately to the right of the arrow, there is the text "represents data traffic". The cloud background middle section has a diagram with three rows of box illustrations. In the middle of the diagram, between the second and third rows, is the text "Internet". The top row is in the upper right corner of the section and has four vertical box illustrations in a row which slopes downward to the right, with the text "Web Servers" above the row. The second row has (from left to right) two vertical box illustrations and one horizontal box illustration connected together by a line. Each of the boxes in the top row is connected by a line to the horizontal box illustration in the second row, which has the text "Server Load Balancer" immediately above it. The first box in the second row has the text "Router" immediately to its left. Between, and to the left of, the second and the third rows is a vertical box illustration with the text "Router" immediately to its left and this box is connected to the first box in the second and third rows by lines. The third row has six box illustrations, from left to right, two vertical box illustrations, one horizontal box illustration and three small horizontal box illustrations. The first three boxes are connected by a line. The first box has the text "Router" below it and the first and second boxes are connected to the second box of the second row by lines. The third box has the text "Cable Modem Termination System" below it, and to the right of the third box there is a line which extends right and ends with a row of five dots. Above the line are the three smaller boxes, which are connected to the line and which have the text "Multiple Cable Modems" below the line below them. Between the second and third of these smaller boxes, there is a break in the line with forward tilting slashes on each side of the break. Below the cloud background middle section, there is the following block of text which overlaps the two lower quadrants: "This diagram shows some of the equipment that comprises the Internet. The equipment includes: - routers that distribute data traffic, - Web servers that host and transmit Web site information and content, - server load balancers that distribute traffic among multiple Web servers, - cable modems that connect users to the Internet, and - cable modem termination systems that aggregate cable modem traffic. Our systems connect through our interface cards to networks or network equipment using either optical interfaces, which use optical fiber, or electrical interfaces, which use electrical cable". To address our customers' increasing demands, our systems provide the following key benefits: - High Performance. Our systems generate and receive data traffic at wire speed, which is the maximum rate that data traffic can be transmitted over the network. Our systems analyze the performance of the network in real-time, that is, as the transmission is actually occurring. By analyzing each discrete packet of information on a packet-by-packet basis, our systems allow our customers to precisely measure the performance of their networks. - Highly Scalable. Each of our interface cards provides one or more ports through which our systems generate and receive data traffic. Our customers can easily increase port density, which is the number of ports in an individual chassis, by inserting additional interface cards. By connecting multiple chassis and synchronizing up to thousands of ports to operate simultaneously, our customers can simulate large scale networks. We believe that our systems offer our customers the highest port density and therefore the most scalable systems available. - Highly Modular. Our modular systems allow our customers to quickly and easily create complex and custom test configurations. The modularity of our systems also allows our customers to integrate new technologies into our existing systems by inserting new interface cards as we release them. - Flexibility. Our customers can easily reconfigure our systems through software changes to address different protocols and applications without changing hardware or replacing interface cards. - Ease of Use. Our systems can be installed easily and operated with minimal training and set-up. Our customers configure and control our systems through a graphical user interface that features a familiar Microsoft Windows point-and-click environment and allows users to interact easily and intuitively with our systems. Through this interface, our customers can conduct a wide range of tests and analyses by accessing the pre-designed test configurations included in our systems. They can also design customized tests using industry standard programming languages. Our goal is to be the industry leader in multi-port traffic generation and performance analysis systems for the high-speed data communications market. To pursue our goal, we plan to: - Continue to expand into high-growth markets such as advanced optical networks that route data traffic throughout the Internet and emerging networks that allow high-speed access to the Internet, known as broadband access networks; - Maintain our focus on technology leadership by developing new systems and system applications that address the needs of evolving technology and industry requirements; - Expand and further penetrate our customer base by developing and offering systems that meet customers' needs and by providing superior customer support; and - Expand our domestic and international sales and marketing efforts and promote our brand name. CORPORATE INFORMATION Ixia was incorporated in California in May 1997. Our principal executive offices are located at 26601 W. Agoura Road, Calabasas, California 91302, and our telephone number is (818) 871-1800. Our Web site is located at www.ixiacom.com. Information contained on our Web site does not constitute part of this prospectus. TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Prospectus Summary.......................................... 3 Risk Factors................................................ 8 Forward-Looking Statements.................................. 19 Use of Proceeds............................................. 20 Dividend Policy............................................. 20 Capitalization.............................................. 21 Dilution.................................................... 22 Selected Consolidated Financial Data........................ 24 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 26 Business.................................................... 34 Management.................................................. 47 Principal Shareholders...................................... 56 Related Party Transactions.................................. 58 Description of Capital Stock................................ 61 Shares Eligible for Future Sale............................. 63 Underwriting................................................ 65 Legal Matters............................................... 68 Experts..................................................... 68 Where You Can Find More Information......................... 68 Index to Consolidated Financial Statements.................. F-1 </TABLE> ---------------------- You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or any sales of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date. "Ixia," "we," "us" and "our" refer to Ixia and its subsidiaries and not to the underwriters. IXIA(TM) is a trademark and the Ixia logo is a registered trademark of Ixia. All other trade names, trademarks and product names used in this prospectus are the property of their respective holders. THE OFFERING Common stock offered by Ixia..... 5,500,000 shares Common stock to be outstanding after this offering.............. 52,912,293 shares Use of proceeds.................. For general corporate purposes. For additional information, see "Use of Proceeds" on page 20. Nasdaq National Market symbol.... XXIA Unless we specifically state otherwise, the information in this prospectus does not take into account the sale of up to 825,000 shares of common stock which the underwriters have the option to purchase solely to cover over-allotments. If the underwriters exercise their over-allotment option in full, 53,737,293 shares of common stock will be outstanding after the offering. The number of shares of common stock that will be outstanding after the offering is based on the number of shares outstanding as of September 30, 2000 and excludes: - 10,617,707 shares of common stock issuable upon exercise of options outstanding as of September 30, 2000 under our 1997 stock option plan with a weighted average exercise price of $2.25 per share; - an additional 3,820,000 shares of common stock reserved for issuance under our 1997 stock option plan as of September 30, 2000; - 80,000 shares of common stock issuable upon exercise of warrants with an exercise price of $7.00 per share; - 300,000 shares of common stock reserved for issuance under our employee stock purchase plan, subject to annual automatic increases; and - 200,000 shares of common stock reserved for issuance under our director stock option plan. All share and per share information in this prospectus reflects our March 1998 five-for-one stock split and our March 2000 three-for-one stock split. SUMMARY CONSOLIDATED FINANCIAL DATA The following summary consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 26 and our consolidated financial statements and the notes to those consolidated financial statements beginning on page F-1 in this prospectus. The statement of operations data set forth below for the period from May 27, 1997, our inception, through December 31, 1997 and for the years ended December 31, 1998 and 1999 are derived from, and are qualified by reference to, our audited consolidated financial statements included elsewhere in this prospectus. The statement of operations data set forth below for the six months ended June 30, 1999 and 2000 and the balance sheet data as of June 30, 2000 are derived from, and are qualified by reference to, our unaudited condensed consolidated financial statements included elsewhere in this prospectus. <TABLE> <CAPTION> YEAR ENDED SIX MONTHS MAY 27, 1997 DECEMBER 31, ENDED JUNE 30, (INCEPTION) THROUGH ----------------- ----------------- DECEMBER 31, 1997 1998 1999 1999 2000 ------------------- ------- ------- ------- ------- (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA (IN THOUSANDS, EXCEPT PER SHARE DATA): Net revenues....................... $ -- $ 4,916 $24,499 $ 8,214 $28,268 Cost of revenues(1)................ -- 1,309 4,944 1,412 5,626 ------- ------- ------- ------- ------- Gross profit.................... -- 3,607 19,555 6,802 22,642 ------- ------- ------- ------- ------- Operating expenses: Research and development........ 513 1,580 2,780 1,182 2,744 Sales and marketing............. -- 940 4,443 1,531 4,372 General and administrative...... 110 509 1,660 588 1,733 Stock-based compensation(2)..... -- 154 1,847 407 6,250 ------- ------- ------- ------- ------- Total operating expenses... 623 3,183 10,730 3,708 15,099 ------- ------- ------- ------- ------- Income (loss) from operations................. (623) 424 8,825 3,094 7,543 Interest income, net............... 7 14 88 18 221 ------- ------- ------- ------- ------- Income (loss) before income taxes...................... (616) 438 8,913 3,112 7,764 Income tax expense (benefit)....... (294) 118 4,103 1,362 5,477 ------- ------- ------- ------- ------- Net income(loss).............. $ (322) $ 320 $ 4,810 $ 1,750 $ 2,287 ======= ======= ======= ======= ======= Earnings (loss) per share: Basic........................... $ (0.01) $ 0.01 $ 0.11 $ 0.04 $ 0.05 Diluted......................... $ (0.01) $ 0.01 $ 0.10 $ 0.04 $ 0.04 Weighted average number of shares outstanding: Basic........................... 43,041 43,200 43,574 43,218 45,236 Diluted......................... 43,041 45,619 48,896 46,340 52,989 ------------ (1) Stock-based compensation included in cost of revenues.............. $ -- $ 8 $ 38 $ 10 $ 386 ======= ======= ======= ======= ======= (2) Stock-based compensation: Research and development...... $ -- $ 92 $ 669 $ 94 $ 2,597 Sales and marketing........... -- 62 449 124 1,771 General and administrative.... -- -- 729 189 1,882 ------- ------- ------- ------- ------- $ -- $ 154 $ 1,847 $ 407 $ 6,250 ======= ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> JUNE 30, 2000 ------------------------- ACTUAL AS ADJUSTED(1) ------- -------------- (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA): Cash and cash equivalents................................. $ 8,952 $63,917 Working capital........................................... 15,072 70,037 Total assets.............................................. 25,119 80,084 Total shareholders' equity................................ 17,647 72,612 </TABLE> ------------ (1) As adjusted to reflect the sale of 5,500,000 shares of common stock offered hereby at the assumed initial public offering price of $11.00 per share after deducting the underwriting discount and estimated offering expenses payable by us.
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY "RISK FACTORS" BEGINNING ON PAGE 7 AND OUR FINANCIAL STATEMENTS AND RELATED NOTES. PROCURENET, INC. OUR COMPANY We are a leading provider of electronic commerce solutions for the procurement of specialty and non-specialty goods by agencies and departments of the federal government. We also provide our solutions to state and local government agencies and to small-to-medium sized companies. We believe we currently offer the only end-to-end electronic procurement solutions tailored to meet the particular needs of government organizations. We are able to serve as a single electronic procurement source for our customers, enabling them to more efficiently procure a broad array of goods. We can automate and manage the entire procurement process, from initial requisition through logistics and fulfillment to final payment. Our suite of products and services, which we call OneSource-TM-, is designed to create a paperless procurement process for our customers. OneSource-TM- allows our customers to efficiently access multiple vendors and significantly reduce their procurement lead times and associated administrative and inventory costs. OneSource-TM- enables Internet-based requisitioning, order approval workflow, order status checking, purchase order generation, invoice matching and consolidation and accounts payable management. Our OneSource-TM- solution is flexible, as it can be integrated with our customers' legacy systems in various configurations. OneSource-TM- is cost-effective for our government customers, since it requires a minimal investment of time and capital to install, maintain and use. Using our suite of products and services, our customers can access multiple vendors through a seamless three-tiered catalog architecture composed of: - OrderPlace-TM-, a customer-specific electronic catalog of goods; - PurchasePlace-TM-, an Internet-based portal that offers a broader electronic catalog of goods accessible to all of our customers; and - ServicePlace-TM-, an Internet-accessible spot-buying capability that enables the purchase of goods not available through our electronic catalogs. Customers use our electronic catalogs to purchase a wide variety of goods ranging from common maintenance, repair and operating products, such as electrical, plumbing and hardware supplies, to specialized items, such as parts for military and commercial vehicles. We have an established history of providing our OneSource-TM- products and services to agencies and departments of the federal government. Our largest customers are agencies within the Department of Defense. Since 1996, we have been awarded 12 contracts to provide electronic commerce solutions to agencies within the Department, and we have a strong record of performance under these government contracts, achieving a 100% renewal rate (covering 40 renewal option periods). In May 2000, following a competitive bidding process, the Department awarded us all three multi-year contracts awarded to date designating a primary electronic commerce provider of parts and supplies for wheeled and tracked vehicles operated by the Department in the south, southeast and southwest regions of the United States. The Department of Defense is a leader in the federal government in developing electronic commerce initiatives for accelerating the supply of goods and services to end-users. We have been and continue to be a key participant in these initiatives. In 1997, we implemented an Internet-based buying portal for the purchase of maintenance, repair and operating goods by the Department, and several of our current contracts with the Department require us to assist in its transition from a legacy requisitioning system to Internet-based procurement. Under these contracts, we accept orders through the Department's legacy requisitioning system, and then work with the Department to transition to Internet-based systems. We have recently begun selling our products and services to non-defense government agencies, including the Department of Agriculture, the Department of the Interior, the Department of State, the Department of Transportation and the U.S. Postal Service. We have also begun providing our products and services to small-to-medium sized companies. We believe that these companies face challenges similar to those faced by government agencies in managing their procurement processes, including limited enterprise resource planning systems, disparate legacy systems and capital investment constraints. We believe that our products and services, particularly our adaptable technology platform, are well-suited to meet the needs of these companies. THE BUSINESS-TO-GOVERNMENT MARKET We call the primary market we serve the business-to-government market. According to the U.S. Office of Management and Budget, in fiscal year 1999, federal, state and local governments spent approximately $2.5 trillion on discretionary and non-discretionary goods and services. Of this $2.5 trillion, approximately $1.7 trillion was spent by the federal government, and the remaining $850 billion was spent by state and local government organizations. We focus on the discretionary maintenance and repair budget, which we believe totaled approximately $54 billion at the federal level in fiscal year 1999, with the Department of Defense accounting for approximately $41 billion of that amount. According to the U.S. Bureau of Economic Analysis, state and local government organizations spent approximately $115 billion for durable and non-durable goods in fiscal year 1999. Historically, the procurement processes of government agencies have been inefficient, reflecting a high degree of fragmentation, significant documentation, certification and approval requirements and a reliance on paper-based methods. Recently, however, federal, state and local governments have established initiatives to promote electronic commerce for procurement, including the National Defense Authorization Act, 1998, which requires the use of electronic commerce by federal agencies, where practicable and cost-effective, and the Defense Reform Initiative of 1997, which emphasizes prime vendor contracting. Prime vendor contracting is a mechanism developed by the Department of Defense to improve procurement efficiency by taking advantage of private sector electronic commerce and fulfillment capabilities. We believe that the utilization of electronic commerce procurement by government agencies is in an early stage, and that federal, state and local government organizations will increasingly seek to adopt electronic procurement solutions with end-to-end capabilities. OUR STRATEGY Our objective is to enhance our leadership position in providing electronic commerce procurement solutions to the federal government and to penetrate the state and local government and small-to-medium sized enterprise markets. Key elements of our strategy include: - EXPAND OUR LEADERSHIP POSITION WITH THE DEPARTMENT OF DEFENSE. We continue to aggressively pursue new contract opportunities with the Department of Defense. In addition, we continue to market our solutions to the Department's end-users to increase utilization of our solutions under existing contracts. - BUILD ON OUR EXPERIENCE SERVING THE DEPARTMENT OF DEFENSE TO ESTABLISH A LEADERSHIP POSITION WITH OTHER FEDERAL AGENCIES AND DEPARTMENTS. We believe that our expertise and track record serving the Department of Defense provide us with a competitive advantage in securing additional business with other federal agencies and departments. - LEVERAGE OUR GOVERNMENT PROCUREMENT EXPERTISE TO PENETRATE THE STATE AND LOCAL GOVERNMENT MARKET. We are expanding our direct sales, marketing and business development efforts to build our customer base among state and local government entities. - PENETRATE THE SMALL-TO-MEDIUM SIZED ENTERPRISE MARKET. We believe that our suite of products and services, particularly our adaptable technology platform, is well-suited to address many of the challenges facing small-to-medium sized companies in managing their procurement processes. - ENHANCE THE FUNCTIONALITY OF OUR SOLUTIONS. We continue to enhance our technology, including our software, Internet portal and catalog search capabilities, to increase the value of our solutions to our customers. COMPANY INFORMATION We are a Delaware corporation. We were formed in January 1999 when Fisher Scientific International Inc. consolidated certain of its divisions and subsidiaries to form an integrated procurement solutions business. In April 1999, we were spun off from Fisher and became a stand-alone company. Our principal executive offices are located at Long Island Technology Center, 3500 Sunrise Highway, Great River, New York 11739 and our telephone number is (631) 859-6000. We maintain an Internet site at WWW.PROCURENET.COM. The information contained in our Internet site is not incorporated by reference in this prospectus. ------------------------ THE OFFERING <TABLE> <S> <C> Common stock offered......................... shares Common stock outstanding after the shares offering................................... Use of proceeds.............................. We intend to use the net proceeds from the offering to expand our sales and marketing activities, fund our research and development initiatives, fund working capital requirements, finance potential acquisitions and for general corporate purposes. Nasdaq National Market symbol................ PRNT </TABLE> Information in this prospectus regarding the number of shares offered in this offering or outstanding after this offering excludes: - any issuance of shares upon the exercise by the underwriters of their over-allotment option, which gives them the option to purchase up to an additional shares of our common stock (at the initial offering price less the underwriting discount) to cover over-allotments; - 28,000,000 shares of common stock authorized for issuance under our stock option plans and employee stock purchase plan, of which 8,024,951 shares were subject to outstanding options as of March 31, 2000 at a weighted average exercise price of $1.05 per share; - 2,583,315 shares of common stock issuable upon the exercise of warrants outstanding as of the date of this prospectus at an exercise price of $0.15 per share; and - 9,000,000 shares of common stock issuable upon the exercise of a warrant held by Latona Associates Inc. at an exercise price of $0.20 per share. Except as otherwise noted, the information regarding our capital structure in this prospectus reflects a for reverse split of our common stock on 2000. In addition, this information assumes the following transactions, which are expected to take place upon the completion of this offering: (1) the conversion of all of our Series A Redeemable Convertible 7% Preferred Stock due 2009 and Series B Redeemable Convertible 7% Preferred Stock due 2010 into shares of our common stock; and (2) the acquisition by Fisher of shares of our common stock upon the exercise of its warrant.
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+SUMMARY The following is only a summary of the terms of the notes. It does not contain all the information that may be important to you. You should read this entire prospectus. In addition, you may wish to read the documents governing the transfer of the contracts, the formation of the trust and the issuance of notes. Those documents have been filed as exhibits to the registration statement of which this prospectus is a part. There are material risks associated with an investment in the notes. See "Risk Factors" beginning on page 10 for a discussion of factors you should consider before making an investment in the notes. OBJECTIVE..................... The trust will issue notes to investors. The notes will be secured by commercial finance contracts acquired by the trust depositor from the originator. THE TRUST..................... ORIX Credit Alliance Receivables Trust 2000-B, a Delaware business trust, was established pursuant to the trust agreement dated as of August 17, 2000. The Trust's offices will be in care of The Bank of New York (Delaware), as owner trustee, at 502 White Clay Center, Newark, Delaware 19714-6973, telephone number (302) 283-8079. THE ORIGINATOR................ The contracts are originated by ORIX Credit Alliance, Inc. either directly from end-users of financed equipment or indirectly from vendors, that is manufacturers or dealers in the financed equipment who assign their contracts with end-users to ORIX Credit Alliance, Inc. ORIX Credit Alliance, Inc.'s principal executive offices are located at 300 Lighting Way, Secaucus, New Jersey 07096-1525, telephone (201) 601-9000. THE TRUST DEPOSITOR........... ORIX Credit Alliance Receivables 2000-B Corporation. The trust depositor is a wholly owned, limited purpose subsidiary of ORIX Credit Alliance, Inc. The trust depositor's principal executive offices are located at 300 Lighting Way, Secaucus, New Jersey 07096-1525, telephone (201) 601-0220. THE SERVICER.................. ORIX Credit Alliance, Inc. THE INDENTURE TRUSTEE......... The Bank of New York, a New York state banking corporation. THE TRUST'S ASSETS A. THE CONTRACTS............ The trust's assets will primarily consist of the contracts. The contracts consist of installment loan and installment sale contracts, finance leases and title retention and other security agreements with companies. The contracts have financed equipment purchased for commercial purposes. The equipment is typically "low-obsolescence," "multiple-use" capital equipment. It is used in industries and businesses such as trucking and transportation, construction and road building, wood and pulp, machine shop, crane and crane rental and printing, publishing and photoengraving, among others. Most of the contracts provide for a series of scheduled payment installments calculated to amortize fully the principal balance of the contract over its term at the contract rate. The principal balance of a contract is the sum of the total scheduled remaining THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED AUGUST 18, 2000 PRELIMINARY PROSPECTUS ORIX CREDIT ALLIANCE RECEIVABLES TRUST 2000-B RECEIVABLE-BACKED NOTES, SERIES 2000-B <TABLE> <S> <C> ORIX CREDIT ALLIANCE ORIX CREDIT ALLIANCE, INC., RECEIVABLES 2000-B CORPORATION, AS SERVICER AS TRUST DEPOSITOR </TABLE> $315,458,950 (approximate) ------------------------ We are offering the following six classes of Receivable-Backed Notes, Series 2000-B: <TABLE> <CAPTION> INITIAL AGGREGATE FIRST UNDERWRITING CLASS OF PRINCIPAL AMOUNT PAYMENT STATED MATURITY PRICE TO PUBLIC DISCOUNT NOTES (APPROXIMATE) COUPON RATE DATE DATE PER NOTE PER NOTE -------- ----------------- ----------- ------------------ ------------------ --------------- ------------ <S> <C> <C> <C> <C> <C> <C> A-1 $ 96,381,428 % September 15, 2000 September 15, 2001 % % A-2 $ 48,507,758 % September 15, 2000 October 15, 2002 % % A-3 $112,075,114 % September 15, 2000 July 15, 2004 % % A-4 $ 44,227,662 % September 15, 2000 September 15, 2007 % % B $ 9,511,325 % September 15, 2000 May 15, 2008 % % C $ 4,755,663 % September 15, 2000 August 15, 2008 % % <CAPTION> NET PROCEEDS TO THE TRUST DEPOSITOR CLASS OF (BEFORE NOTES EXPENSES) -------- ------------ <S> <C> A-1 $ A-2 $ A-3 $ A-4 $ B $ C $ </TABLE> The total price to the public is $ . The total underwriting discount is $ . The total proceeds to the trust is $ . YOU SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS" BEGINNING ON PAGE 10 OF THIS PROSPECTUS. The notes are not obligations of and will not represent interests in, and are not guaranteed or insured by, the trust depositor, the owner trustee, the indenture trustee, ORIX Credit Alliance, Inc. or any of their respective affiliates, or any governmental agency. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ FIRST UNION SECURITIES, INC. The date of this prospectus is , 2000. amounts of principal payable to the originator by an obligor under a contract, exclusive of finance charges. The initial principal amount is typically the amount advanced to fund the equipment purchased and is in most instances less than the cost to the obligor of the financed equipment. As of August 1, 2000, approximately 12.50% by aggregate outstanding principal balance of the contracts had customized payment schedules and balloon payments. Customized payment contracts are obligations of obligors who have seasonal downtimes or variations in cash flow typically arising from weather conditions or industry characteristics. During such downtimes, the contract payment schedules may omit or reduce required payments for generally up to three months per year. The scheduled payments are at higher amounts to assure that the contract does not extend beyond a term appropriate for the creditworthiness of the obligor and to meet the originator's yield requirements. Balloon contracts provide for a series of scheduled payments over the term of the contract and a larger amount, generally up to 30% of the original principal balance, at the end of the contract. The monthly payment includes the amount necessary to amortize the non-balloon payment portion of the contracts over the term of the contract plus interest on the balloon portion of the contract. On the closing date ORIX Credit Alliance, Inc. will transfer the contracts and security interests in the related equipment to the trust depositor. The trust depositor will then transfer them to the trust on the same date. The contracts have been selected on a random basis from ORIX Credit Alliance, Inc.'s portfolio of contracts that meet the eligibility criteria specified in the transfer and servicing agreement. None of the obligors on the contracts are located outside of the United States and its territories. As of August 1, 2000, contracts of any single obligor or commonly controlled group of obligors do not constitute more than approximately 1.0% of the aggregate outstanding principal balance of the contracts, and no more than 9.31% of the aggregate outstanding principal balance of the contracts relates to obligors located in the same state. As of August 1, 2000, no contract has any scheduled payments that are more than 60 days delinquent. A contract is considered delinquent if anything less than each full payment is received by its contractual due date. See "The Transfer and Servicing Agreement -- Representations and Warranties; Definition of Eligible Contracts" and "The Contracts" and "Composition of the Contracts". TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Important Notice about Information Presented in this Prospectus............. i Summary.................................... 1 Risk Factors............................... 10 The Absence of Existing Markets for the Notes May Limit Your Ability to Resell the Notes.............................. 10 Prepayments on the Contracts May Cause an Earlier Repayment of the Notes than You Expect and You May Not Be Able To Find Investments with the Same Yield as the Notes at the Time of the Repayment..... 10 The Price at Which You Can Resell Your Notes May Decrease if the Ratings of Your Notes Change...................... 10 The Subordination of the Class B Notes and the Class C Notes is a Limited Form of Credit Enhancement.................. 10 Limited Assets Secure the Notes; Noteholders Will Have No Recourse to the Originator, Servicer or their Affiliates in the Event Delinquencies and Losses Deplete the Trust's Assets................................. 11 Because Disproportionate Amounts of Contracts Relate to Four States, Adverse Conditions in Those States and Surrounding Regions May Cause Increased Defaults and Delinquencies............. 11 Because Disproportionate Amounts of Contracts Relate to Equipment Used in Particular Industries, Adverse Economic Conditions in Those Industries Have Caused and May Continue to Cause Increased Defaults and Delinquencies... 11 Even if We Repossess and Sell the Equipment Relating to a Contract After an Obligor Defaults, Shortfalls in Amounts Available To Pay the Notes May Occur if the Market Value of the Equipment Has Declined................. 12 Servicer's Retention of Contract Files May Hinder Our Ability to Realize the Value of Equipment Securing the Contracts.............................. 12 Failure to Record Assignment of Perfected Security Interest May Hinder Our Ability to Realize the Value of Equipment Securing the Contracts....... 12 Repurchase Obligation of Trust Depositor and Originator Provides You Only Limited Protection Against Liens on the Contracts.............................. 12 If a Bankruptcy Court Rules that the Transfer of Contracts from the Originator to the Trust Depositor was not a True Sale then Payments on the Contracts Could Be Reduced or Delayed................................ 13 Insolvency of the Trust Depositor or the Trust Could Delay or Reduce Payments to You.................................... 13 Proceeds From Required Sale of the Contracts Following Trust Depositor Bankruptcy May Not Be Sufficient to Repay the Notes in Full................ 14 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> End-User Bankruptcy May Reduce or Delay Collections on the Contracts........... 14 Transfer of Servicing May Delay Payments to Noteholders Due to Contract Processing Delays...................... 14 Book-Entry Registration Will Result in Your Inability to Exercise Directly Your Rights as a Noteholder............ 14 Use of Proceeds............................ 14 Calculation of Contract Principal Balance.................................. 14 Composition of the Contracts............... 15 Distribution of the Contracts by Contract Interest Rate.......................... 16 Distribution of the Contracts by Payment Frequency.............................. 17 Distribution of the Contracts by State in Which Obligors Are Located............. 18 Distribution of the Contracts by Obligor Industry............................... 19 Distribution of the Contracts by Original Principal Balance...................... 19 Distribution of the Contracts by Current Principal Balance...................... 19 Distribution of the Contracts by Original Contract Term.......................... 20 Distribution of the Contracts by Remaining Months to Stated Maturity.... 20 Distribution of the Contracts by New/Used Equipment Financed..................... 20 Delinquency and Loss Information........... 21 Contract Portfolio Delinquency Experience............................. 21 Contract Portfolio Credit/Loss Repossession Experience................ 22 Definition of Delinquency for the Contracts Transferred to the Trust................. 23 The Contracts.............................. 24 End-User Contracts....................... 24 Conditional Sale Agreements.............. 24 Leases................................... 25 Secured Promissory Notes................. 26 Equipment................................ 26 Contract Files........................... 26 How Collections on the Contracts are Treated................................ 27 Prepayment and Yield Considerations........ 27 Percentage of the Initial Class A-1 Notes Principal Amount at the Annual Constant Prepayment Rates Set Forth Below......... 28 Percentage of the Initial Class A-2 Notes Principal Amount at the Annual Constant Prepayment Rates Set Forth Below......... 29 Percentage of the Initial Class A-3 Notes Principal Amount at the Annual Constant Prepayment Rates Set Forth Below......... 30 Percentage of the Initial Class A-4 Notes Principal Amount at the Annual Constant Prepayment Rates Set Forth Below......... 31 </TABLE> As of August 1, 2000, the contracts had the following characteristics: <TABLE> <S> <C> Number of contracts........................ 4,683 Aggregate contract outstanding principal balance.................................. $317,044,171 Average contract outstanding principal balance.................................. $67,701 Weighted average contract rate............. 10.23% Weighted average original term............. 50.94 months Range...................................... 9-84 months Weighted average remaining term............ 42.42 months Range...................................... 5-84 months </TABLE> Changes in characteristics of the contracts between August 1, 2000 and the closing date will not affect more than 5.00% of the aggregate outstanding principal balance of the contracts. For further information regarding the contracts, see "Composition of the Contracts" and "The Contracts", as well as "The Transfer and Servicing Agreement -- Representations and Warranties; Definition of Eligible Contracts" and "-- Concentration Amounts; Definition of Excess Contract". The trust depositor may replace a contract that is part of the trust's assets with a substitute contract or contracts: - if the trust depositor subsequently determines that a contract was not eligible to be sold to the trust at the time of its sale to the trust; - if the terms of such contract are to be subsequently amended in a manner not permitted by the transfer and servicing agreement; - if such contract is subject to a casualty loss; - if the trust depositor did not remove and replace that contract, the obligor or equipment concentrations of contracts would exceed the limits described in "The Transfer and Servicing Agreement -- Concentration Amounts; Definition of Excess Contract"; - if such contract is prepaid; or - if such contract becomes a defaulted contract. See "The Transfer and Servicing Agreement -- Substitute Contracts". The substitute contracts will have been originated under the same credit criteria and policies as the contracts they replace. B. RESERVE FUND............. On the closing date the trust depositor will establish in bank accounts in the name of the indenture trustee a reserve fund. This fund provides you with limited protection in the event collections from obligors on the contracts are insufficient to make payments on the notes. We cannot assure you, however, that this protection will be adequate to prevent shortfalls in amounts <TABLE> <CAPTION> PAGE ---- <S> <C> Percentage of the Initial Class B Notes Principal Amount at the Annual Constant Prepayment Rates Set Forth Below......... 32 Percentage of the Initial Class C Notes Principal Amount at the Annual Constant Prepayment Rates Set Forth Below......... 33 Weighted Average Life...................... 34 ORIX Credit Alliance, Inc. ................ 36 Equipment Finance Business............... 36 Ancillary Businesses..................... 36 Summary Financial Data................... 37 Management............................... 37 Credit Approval, Collection and Review Process......................... 39 Terms of Contracts..................... 40 Recourse Provisions.................... 40 Extension/Revision Procedures.......... 41 Pre-Litigation Workout/Judgment Recovery............................ 41 Legal Proceedings...................... 41 The Trust.................................. 42 General.................................. 42 Termination of Trust..................... 42 Other Information........................ 42 The Trust Depositor........................ 43 Description of the Notes and Indenture..... 43 General.................................. 44 Interest and Principal................... 44 Amounts Available for Payments on the Notes.................................. 44 Allocations.............................. 46 Prior to an Event of Default........... 46 Following an Event of Default.......... 47 Reserve Fund............................. 51 Spread Fund.............................. 51 Collection Account and Collection Period................................. 52 Events of Default........................ 54 Remedies After Events of Default......... 55 The Indenture Trustee.................... 55 Governing Law............................ 56 Amendments............................... 56 Servicing Compensation and Payment of Expenses............................... 57 Optional Redemption...................... 58 Mandatory Redemption..................... 58 Reports.................................. 58 List of Noteholders...................... 59 Administration Agreement................. 59 Book-Entry Registration.................. 60 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> Issuance of Certificated Notes at a Later Date................................... 63 The Certificates........................... 63 The Transfer and Servicing Agreement....... 64 Conveyance of the Contracts.............. 64 Representations and Warranties; Definition of Eligible Contracts....... 64 Remedies for Breaches of Representations and Warranties; Definition of Ineligible Contracts................... 67 Concentration Amounts; Definition of Excess Contract........................ 68 Material Modifications to Contracts...... 69 Substitute Contracts..................... 70 Definition of Defaulted Contracts........ 70 Indemnification.......................... 70 Servicing Standard and Servicer Advances............................... 71 Servicer Resignation..................... 71 Servicer Default......................... 72 Evidence as to Compliance................ 73 Amendments............................... 73 The Owner Trustee........................ 74 Material Federal Income Tax Considerations........................... 75 General.................................. 75 Classification of the Notes and the Trust.................................. 75 General Tax Treatment of Noteholders..... 76 United States Holders.................. 76 Payments of Interest................... 76 Purchase, Sale and Retirement of the Notes............................... 76 Backup Withholding and Information Reporting........................... 76 United States Alien Holders............ 77 Backup Withholding and Information Reporting........................... 78 State and Local Tax Considerations......... 78 New Jersey Tax Considerations............ 78 Other States............................. 78 Legal Investment........................... 78 ERISA Considerations....................... 79 Prohibited Transactions.................. 79 Plan of Distribution....................... 80 General.................................. 80 Rating of the Notes........................ 81 Legal Matters.............................. 82 Experts.................................... 82 Index of Terms............................. 83 Report of Independent Public Accountants... F-1 Balance Sheet.............................. F-2 </TABLE> available to make payment on the notes. The initial balance of the reserve fund will be approximately $4,731,885, which will equal 1.5% of the original principal balance of the notes. Additional deposits will be required to be made in subsequent months out of available collections on the contracts to this fund (a) to increase the reserve fund to an amount equal to the greater of (i) 3% of the outstanding principal of the notes and (ii) the lesser of (A) 1% of the initial principal of the notes and (B) the outstanding principal of the notes and (b) in subsequent months thereafter, if necessary, to maintain the required amount in the fund. If, on any payment date, the amounts available for distribution exceed the amounts needed to pay amounts owed to the servicer and to the indenture trustee and to pay interest and principal on the notes, the excess will be deposited into this fund. However, the amount deposited in the reserve fund shall not exceed the amount required above. Investment earnings on amounts held in the reserve fund will be available for distribution to you. If on any payment date, collections on the contracts and amounts, if any, on deposit in the spread fund are less than the amount needed to pay interest on or principal of the notes then due, the indenture trustee will withdraw funds from the reserve fund to pay the interest and principal due. The conditions under which we will withdraw amounts from the reserve fund are more specifically described in "Description of the Notes and Indenture -- Allocations" and "-- Reserve Fund". C. SPREAD FUND................ On the closing date the trust depositor will establish an additional bank account, the spread fund, in the name of the indenture trustee to hold available funds whenever a spread event exists. A spread event will exist if any of the following occurs and is continuing: (a) ORIX Credit Alliance, Inc. is no longer the servicer, (b) the average monthly rate of delinquencies on contracts in excess of 90 days over any three consecutive months exceeds 5% of the aggregate outstanding principal balance of the contracts or (c) the cumulative net loss percentage with respect to the contracts exceeds a specified "loss trigger percentage" (initially 1.00%) that will be increased over time. Notwithstanding the foregoing: (i) the spread event referred to in clause (b) above may be cured on any distribution date if the three-month delinquency percentage for the preceding two collection periods is less than or equal to 5% for each of such periods and (ii) the spread event referenced in clause (c) may be cured if the cumulative net loss percentage is less than the associated loss trigger percentage for that period. Amounts that may be held in this fund provide you with additional limited protection in the event collections from obligors on the contracts are insufficient to make payments on the notes. We cannot assure you, however, that this additional protection will be adequate to prevent shortfalls in amounts available to make payment on the notes. If on any payment date, a spread event exists and the amounts available for distribution exceed the amounts needed to pay amounts owed to the servicer (including amounts due to the indenture trustee) to pay interest and principal on the notes and to make any required deposits to the reserve fund, the excess will be deposited into the spread fund. Investment earnings on amounts held in the spread fund will be available for distribution to you. If on any payment date, collections on the contracts are less than the amount needed to pay interest and principal due on the notes and make all required deposits to the reserve fund, the indenture trustee will withdraw funds from the spread fund to pay the interest and principal and make such deposits. If on any subsequent payment date, no spread event continues to exist, amounts in the spread fund will be distributed in the same order of priority as are amounts in the collection account. The calculations related to a spread event and the conditions under which we will withdraw amounts from the spread fund are more specifically described in the "Description of the Notes and Indenture -- Allocations" and "-- Spread Fund". TERMS OF THE NOTES............ The basic terms of the notes will be as described below. See "Description of the Notes and Indenture". We will pay principal and interest due on the notes using: - collections of payments due under the contracts held by the trust; - earnings on amounts held in the collection account; - late charges relating to a contract if the late charges were included in the contract's terms as of the date the contract was purchased by the trust; - amounts earned on amounts held in the reserve fund and the spread fund (if any); - amounts received upon the prepayment or purchase of contracts or liquidation of the contracts and disposition of the related equipment upon defaults under contracts; - amounts received from vendor recourse, if any; - amounts in the reserve fund more specifically described in "Description of the Notes and Indenture -- Reserve Fund"; and - amounts in the spread fund more specifically described in "Description of the Notes and Indenture -- Spread Fund". See "Description of the Notes and Indenture -- Amounts Available for Payments on the Notes". You may purchase the notes in minimum denominations of $1,000, and in integral multiples of $1,000 in excess of the minimum denominations; provided, however, that one note of each class will be available for purchase in an incremental denomination of less than $1,000. We will offer the notes only in book-entry form. A. EVENTS OF DEFAULT........ Events of default with respect to the notes include: - failure to pay accrued interest on any payment date, - failure to pay outstanding principal on the maturity date, - breach of representations and warranties with respect to the contracts which are materially incorrect and which have a material adverse effect on the noteholders and continues unremedied for a period of sixty days, and - the occurrence of insolvency events with respect to the trust depositor or the trust. See "Description of the Notes and Indenture -- Events of Default". B. INTEREST................. On a payment date, we will first repay any outstanding servicer advances. Second, if a successor servicer is being appointed, we will pay the indenture trustee's costs and expenses associated with that appointment (which will not in the aggregate exceed $100,000). Third, we will pay the servicer's monthly servicing fee (which includes therein amounts due to the indenture trustee and the owner trustee). Fourth, we will pay interest on the notes at the rates specified on the cover of this prospectus in the following order: <TABLE> <CAPTION> CLASS OF NOTES RECEIVING INTEREST PAYMENT NOTES PRIOR TO SPECIFIED CLASS -------- ------------------------------------- <S> <C> A-1, A-2, A-3, A-4........... None B.................. Class A-1 Notes, Class A-2 Notes, Class A-3 Notes, Class A-4 Notes C.................. Class A-1 Notes, Class A-2 Notes, Class A-3 Notes, Class A-4 Notes, Class B Notes </TABLE> See "Description of the Notes and Indenture -- Allocations". We will calculate interest on the Class A-1 Notes on the basis of actual days elapsed over a year of 360 days. We will calculate interest on all other notes on the basis of a year of 360 days consisting of twelve 30-day months. C. PRINCIPAL................ On a payment date, after we pay interest on the notes, we will pay principal on the notes in the following order: <TABLE> <CAPTION> CLASS OF NOTES RECEIVING PRINCIPAL PAYMENT NOTES PRIOR TO SPECIFIED CLASS -------- ----------------------------------------------- <S> <C> A-1 None A-2 Class A-l Notes </TABLE> <TABLE> <CAPTION> CLASS OF NOTES RECEIVING PRINCIPAL PAYMENT NOTES PRIOR TO SPECIFIED CLASS -------- ----------------------------------------------- <S> <C> A-3 Class A-1 Notes, Class A-2 Notes Class B Notes and Class C Notes will receive principal payments prior to Class A-3 Notes on any payment date on which the outstanding principal amount of the Class A-2 Notes is greater than $0. A-4 Class A-1 Notes, Class A-2 Notes, Class A-3 Notes Class B Notes and Class C Notes will receive principal payments prior to Class A-4 Notes on any payment date on which the outstanding principal amount of the Class A-3 Notes is greater than $0. B Class A-1 Notes, Class A-2 Notes Class A-3 Notes will receive principal payments prior to Class B Notes after the outstanding principal amount of the Class A-1 Notes and Class A-2 Notes is reduced to $0. Class A-4 Notes will receive principal payments prior to Class B Notes only after the outstanding principal amount of the Class A-1 Notes, Class A-2 Notes and Class A-3 Notes is reduced to $0. C Class A-l Notes, Class A-2 Notes, Class B Notes Class A-3 Notes will receive principal payments prior to Class C Notes only after the outstanding principal amount of the Class A-1 Notes and Class A-2 Notes is reduced to $0. Class A-4 Notes will receive principal payments prior to Class C Notes only after the outstanding principal amount of the Class A-1 Notes, Class A-2 Notes and Class A-3 Notes is reduced to $0. </TABLE> See "Description of the Notes and Indenture -- Allocations". The amount of principal paid on a Class A-1 Note prior to its stated maturity date will be based on the amount that the aggregate principal balance of the contracts has declined during the most recent full collection period. Each collection period is approximately a month. After the Class A-1 Notes have been paid in full, the amount of principal paid on any other class of notes will be the amount necessary to reduce the outstanding principal of that class of notes to an amount equal to a specified percentage of the aggregate principal balance of the contracts as of the related determination date. The percentage used is the ratio of the initial principal amount of such class of notes to the original pool balance of the contracts minus the initial principal amount of the Class A-1 Notes. Following an event of default, we will not make principal payments in the order described above. Instead, we will pay principal on the notes in the following order: - outstanding principal of Class A-l Notes - pro rata, to the outstanding principal of Class A-2 Notes, Class A-3 Notes and Class A-4 Notes - outstanding principal of Class B Notes - outstanding principal of Class C Notes See "Description of the Notes and Indenture -- Allocations" and "-- Events of Default". D. PAYMENT DATES............ You will receive distributions of interest and principal on the 15th day of each month, or if that day is not a business day, the next business day. E. STATED MATURITY DATE..... The notes will mature on the date shown on the cover of this prospectus, except that if the day is not a business day, then the stated maturity date will be the next business day. F. OPTIONAL REDEMPTION...... If the aggregate outstanding principal balance of the contracts at the time is less than or equal to 15% of the initial aggregate principal balance of the contracts as of August 1, 2000, the trust may redeem all, but not less than all, of the outstanding notes. If the trust does redeem all of the outstanding notes, the redemption price will be equal to the unpaid principal amount of the notes plus accrued and unpaid interest through the date of redemption and the amount of any servicer advances made and not reimbursed. G. MANDATORY REDEMPTION....... If on any payment date, the aggregate amounts on deposit in the collection account, the reserve fund and the spread fund are greater than or equal to the sum of (i) the entire outstanding note principal balance, (ii) the interest accrued thereon, (iii) any accrued and unpaid servicing fee (including therein amounts owed to the indenture trustee) and (iv) unreimbursed servicer advances, the amounts on deposit in the reserve fund and the spread fund will be deposited in the collection account and used to redeem the notes in full. The redemption price will be equal to the unpaid principal amount of the notes plus accrued and unpaid interest through the date of redemption. SERVICING; SERVICING FEE...... The servicer will be responsible for servicing, managing and administering the contracts and related interests, and enforcing and making collections on the contracts. See "The Transfer and Servicing Agreement -- Servicing Standard and Servicer Advances". The servicer will be entitled to receive a monthly fee equal to the product of: (1) one-twelfth of 1.00% and (2) the aggregate outstanding principal balance of the contracts in the trust as of the beginning of the related collection period. The fee is payable out of amounts we receive on the contracts. Amounts payable to the indenture trustee and owner trustee are included in such fee. See "Description of the Notes and Indenture -- Servicing Compensation and Payment of Expenses" and "The Transfer and Servicing Agreement". MATERIAL FEDERAL INCOME TAX CONSIDERATIONS.............. In the opinion of Sullivan & Cromwell, federal tax counsel to the trust depositor, for federal income tax purposes, the notes will be characterized as debt, and the trust will not be characterized as an association or a publicly traded partnership taxable as a corporation. You, by accepting a note, agree to treat the note as indebtedness. See "Material Federal Income Tax Considerations". ERISA CONSIDERATIONS.......... Subject to the considerations discussed under "ERISA Considerations", the notes will be eligible for purchase by some employee benefit plans. Any benefit plan fiduciary considering purchase of the notes should, however, consult with its counsel regarding the consequences of its purchase under ERISA and the Internal Revenue Code. See "ERISA Considerations". RATING........................ We will not issue the notes unless they receive ratings from the following rating agencies as set forth below: <TABLE> <CAPTION> CLASS MOODY'S STANDARD & OF INVESTORS POOR'S NOTE SERVICE RATINGS GROUP FITCH, INC. ----- --------- ------------- ----------- <S> <C> <C> <C> A-1 P-1 A-1+ F1+/AAA A-2 Aaa AAA AAA A-3 Aaa AAA AAA A-4 Aaa AAA AAA B A2 A A C Baa2 BBB BBB </TABLE> A rating is not a recommendation to purchase, hold or sell notes since a rating does not address market price or suitability for a particular investor. A rating may be subject to revision or withdrawal at any time by the assigning rating agency. See "Rating of the Notes".
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001122062_telect-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001122062_telect-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that investors should consider before investing in our common stock. Investors should carefully read the entire prospectus, including "Risk Factors" and our financial statements, before making an investment decision. OUR BUSINESS We manufacture and supply telecommunications network connectivity and power distribution products and services for the telecommunications industry. Our products are used primarily in telecommunications network facilities that contain network equipment. We sell our products and services in the United States primarily to telecommunications service providers, including traditional telephone companies; new entrants in the telecommunications market; original equipment manufacturers, which bundle our products with their products for resale; equipment installers; equipment distributors and private network operators. Internationally, we sell our products to original equipment manufacturers and telecommunications service providers in the public and private telecommunications network markets. We offer a range of telecommunications network connectivity and power distribution products and services. Our connectivity products interconnect copper, coaxial cable and fiber optic telecommunications networks and are key elements of telecommunications network facilities. Our connectivity products are designed to be compact but allow for maximum circuit capacity, which is called density. These products are also designed to be configurable and modular, to facilitate easy integration into existing telecommunications networks. Our power distribution products provide power management throughout telecommunications network facilities. We also offer engineering, configuration and installation services to assist our customers in configuring telecommunications solutions using our products and integrating these solutions into a telecommunications network. We operate manufacturing facilities in the United States and abroad and also outsource a portion of our manufacturing. Our objective is to become the leading provider of telecommunications network connectivity and power products and services. We plan to achieve this objective by leveraging our technology expertise to continue to develop high-density network connectivity and power distribution equipment for worldwide use. We also plan to increase our manufacturing capacity by expanding our manufacturing facilities and hiring additional operations personnel, and intend to broaden our offerings and are working to develop new products, such as optical components, and expand our global engineering, configuration and installation services. We also intend to expand our global presence by designing and developing localized versions of our products for use in specific global regions and enhancing our relationships with original equipment manufacturers to develop our product offerings. We sell our products and services worldwide through our direct sales force and domestic and international distributors, as well as through original equipment manufacturers which incorporate our equipment into the network products and services they offer. We were incorporated in Washington on October 14, 1982. Our principal executive offices are located at 2111 N. Molter Road, P.O. Box 665, Liberty Lake, WA 99019-0665. Our telephone number is (509) 926-6000. Our web site is www.telect.com. The information contained on, or linked to, our web site does not constitute part of this prospectus. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED NOVEMBER 14, 2000 [TELECT LOGO] -------------------------------------------------------------------------------- 12,000,000 Shares Common Stock -------------------------------------------------------------------------------- This is the initial public offering of Telect, Inc. and we are offering 12,000,000 shares of our common stock. No public market currently exists for our common stock. We anticipate the initial public offering price will be between $9.00 and $11.00 per share. We have applied to list our common stock on the Nasdaq National Market under the symbol "TLEC." INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS TELECT <S> <C> <C> <C> Per share $ $ $ Total $ $ $ </TABLE> We have granted the underwriters the right to purchase up to 1,800,000 additional shares to cover over-allotments. DEUTSCHE BANC ALEX. BROWN CHASE H&Q U.S. BANCORP PIPER JAFFRAY THE DATE OF THIS PROSPECTUS IS , 2000
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001122147_orix_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001122147_orix_prospectus_summary.txt
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+SUMMARY The following is only a summary of the terms of the notes. It does not contain all the information that may be important to you. You should read this entire prospectus. In addition, you may wish to read the documents governing the transfer of the contracts, the formation of the trust and the issuance of notes. Those documents have been filed as exhibits to the registration statement of which this prospectus is a part. There are material risks associated with an investment in the notes. See "Risk Factors" beginning on page 10 for a discussion of factors you should consider before making an investment in the notes. OBJECTIVE..................... The trust will issue notes to investors. The notes will be secured by commercial finance contracts acquired by the trust depositor from the originator. THE TRUST..................... ORIX Credit Alliance Receivables Trust 2000-B, a Delaware business trust, was established pursuant to the trust agreement dated as of August 17, 2000. The Trust's offices will be in care of The Bank of New York (Delaware), as owner trustee, at 502 White Clay Center, Newark, Delaware 19714-6973, telephone number (302) 283-8079. THE ORIGINATOR................ The contracts are originated by ORIX Credit Alliance, Inc. either directly from end-users of financed equipment or indirectly from vendors, that is manufacturers or dealers in the financed equipment who assign their contracts with end-users to ORIX Credit Alliance, Inc. ORIX Credit Alliance, Inc.'s principal executive offices are located at 300 Lighting Way, Secaucus, New Jersey 07096-1525, telephone (201) 601-9000. THE TRUST DEPOSITOR........... ORIX Credit Alliance Receivables 2000-B Corporation. The trust depositor is a wholly owned, limited purpose subsidiary of ORIX Credit Alliance, Inc. The trust depositor's principal executive offices are located at 300 Lighting Way, Secaucus, New Jersey 07096-1525, telephone (201) 601-0220. THE SERVICER.................. ORIX Credit Alliance, Inc. THE INDENTURE TRUSTEE......... The Bank of New York, a New York state banking corporation. THE TRUST'S ASSETS A. THE CONTRACTS............ The trust's assets will primarily consist of the contracts. The contracts consist of installment loan and installment sale contracts, finance leases and title retention and other security agreements with companies. The contracts have financed equipment purchased for commercial purposes. The equipment is typically "low-obsolescence," "multiple-use" capital equipment. It is used in industries and businesses such as trucking and transportation, construction and road building, wood and pulp, machine shop, crane and crane rental and printing, publishing and photoengraving, among others. Most of the contracts provide for a series of scheduled payment installments calculated to amortize fully the principal balance of the contract over its term at the contract rate. The principal balance of a contract is the sum of the total scheduled remaining THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED AUGUST 18, 2000 PRELIMINARY PROSPECTUS ORIX CREDIT ALLIANCE RECEIVABLES TRUST 2000-B RECEIVABLE-BACKED NOTES, SERIES 2000-B <TABLE> <S> <C> ORIX CREDIT ALLIANCE ORIX CREDIT ALLIANCE, INC., RECEIVABLES 2000-B CORPORATION, AS SERVICER AS TRUST DEPOSITOR </TABLE> $315,458,950 (approximate) ------------------------ We are offering the following six classes of Receivable-Backed Notes, Series 2000-B: <TABLE> <CAPTION> INITIAL AGGREGATE FIRST UNDERWRITING CLASS OF PRINCIPAL AMOUNT PAYMENT STATED MATURITY PRICE TO PUBLIC DISCOUNT NOTES (APPROXIMATE) COUPON RATE DATE DATE PER NOTE PER NOTE -------- ----------------- ----------- ------------------ ------------------ --------------- ------------ <S> <C> <C> <C> <C> <C> <C> A-1 $ 96,381,428 % September 15, 2000 September 15, 2001 % % A-2 $ 48,507,758 % September 15, 2000 October 15, 2002 % % A-3 $112,075,114 % September 15, 2000 July 15, 2004 % % A-4 $ 44,227,662 % September 15, 2000 September 15, 2007 % % B $ 9,511,325 % September 15, 2000 May 15, 2008 % % C $ 4,755,663 % September 15, 2000 August 15, 2008 % % <CAPTION> NET PROCEEDS TO THE TRUST DEPOSITOR CLASS OF (BEFORE NOTES EXPENSES) -------- ------------ <S> <C> A-1 $ A-2 $ A-3 $ A-4 $ B $ C $ </TABLE> The total price to the public is $ . The total underwriting discount is $ . The total proceeds to the trust is $ . YOU SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS" BEGINNING ON PAGE 10 OF THIS PROSPECTUS. The notes are not obligations of and will not represent interests in, and are not guaranteed or insured by, the trust depositor, the owner trustee, the indenture trustee, ORIX Credit Alliance, Inc. or any of their respective affiliates, or any governmental agency. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ FIRST UNION SECURITIES, INC. The date of this prospectus is , 2000. amounts of principal payable to the originator by an obligor under a contract, exclusive of finance charges. The initial principal amount is typically the amount advanced to fund the equipment purchased and is in most instances less than the cost to the obligor of the financed equipment. As of August 1, 2000, approximately 12.50% by aggregate outstanding principal balance of the contracts had customized payment schedules and balloon payments. Customized payment contracts are obligations of obligors who have seasonal downtimes or variations in cash flow typically arising from weather conditions or industry characteristics. During such downtimes, the contract payment schedules may omit or reduce required payments for generally up to three months per year. The scheduled payments are at higher amounts to assure that the contract does not extend beyond a term appropriate for the creditworthiness of the obligor and to meet the originator's yield requirements. Balloon contracts provide for a series of scheduled payments over the term of the contract and a larger amount, generally up to 30% of the original principal balance, at the end of the contract. The monthly payment includes the amount necessary to amortize the non-balloon payment portion of the contracts over the term of the contract plus interest on the balloon portion of the contract. On the closing date ORIX Credit Alliance, Inc. will transfer the contracts and security interests in the related equipment to the trust depositor. The trust depositor will then transfer them to the trust on the same date. The contracts have been selected on a random basis from ORIX Credit Alliance, Inc.'s portfolio of contracts that meet the eligibility criteria specified in the transfer and servicing agreement. None of the obligors on the contracts are located outside of the United States and its territories. As of August 1, 2000, contracts of any single obligor or commonly controlled group of obligors do not constitute more than approximately 1.0% of the aggregate outstanding principal balance of the contracts, and no more than 9.31% of the aggregate outstanding principal balance of the contracts relates to obligors located in the same state. As of August 1, 2000, no contract has any scheduled payments that are more than 60 days delinquent. A contract is considered delinquent if anything less than each full payment is received by its contractual due date. See "The Transfer and Servicing Agreement -- Representations and Warranties; Definition of Eligible Contracts" and "The Contracts" and "Composition of the Contracts". TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Important Notice about Information Presented in this Prospectus............. i Summary.................................... 1 Risk Factors............................... 10 The Absence of Existing Markets for the Notes May Limit Your Ability to Resell the Notes.............................. 10 Prepayments on the Contracts May Cause an Earlier Repayment of the Notes than You Expect and You May Not Be Able To Find Investments with the Same Yield as the Notes at the Time of the Repayment..... 10 The Price at Which You Can Resell Your Notes May Decrease if the Ratings of Your Notes Change...................... 10 The Subordination of the Class B Notes and the Class C Notes is a Limited Form of Credit Enhancement.................. 10 Limited Assets Secure the Notes; Noteholders Will Have No Recourse to the Originator, Servicer or their Affiliates in the Event Delinquencies and Losses Deplete the Trust's Assets................................. 11 Because Disproportionate Amounts of Contracts Relate to Four States, Adverse Conditions in Those States and Surrounding Regions May Cause Increased Defaults and Delinquencies............. 11 Because Disproportionate Amounts of Contracts Relate to Equipment Used in Particular Industries, Adverse Economic Conditions in Those Industries Have Caused and May Continue to Cause Increased Defaults and Delinquencies... 11 Even if We Repossess and Sell the Equipment Relating to a Contract After an Obligor Defaults, Shortfalls in Amounts Available To Pay the Notes May Occur if the Market Value of the Equipment Has Declined................. 12 Servicer's Retention of Contract Files May Hinder Our Ability to Realize the Value of Equipment Securing the Contracts.............................. 12 Failure to Record Assignment of Perfected Security Interest May Hinder Our Ability to Realize the Value of Equipment Securing the Contracts....... 12 Repurchase Obligation of Trust Depositor and Originator Provides You Only Limited Protection Against Liens on the Contracts.............................. 12 If a Bankruptcy Court Rules that the Transfer of Contracts from the Originator to the Trust Depositor was not a True Sale then Payments on the Contracts Could Be Reduced or Delayed................................ 13 Insolvency of the Trust Depositor or the Trust Could Delay or Reduce Payments to You.................................... 13 Proceeds From Required Sale of the Contracts Following Trust Depositor Bankruptcy May Not Be Sufficient to Repay the Notes in Full................ 14 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> End-User Bankruptcy May Reduce or Delay Collections on the Contracts........... 14 Transfer of Servicing May Delay Payments to Noteholders Due to Contract Processing Delays...................... 14 Book-Entry Registration Will Result in Your Inability to Exercise Directly Your Rights as a Noteholder............ 14 Use of Proceeds............................ 14 Calculation of Contract Principal Balance.................................. 14 Composition of the Contracts............... 15 Distribution of the Contracts by Contract Interest Rate.......................... 16 Distribution of the Contracts by Payment Frequency.............................. 17 Distribution of the Contracts by State in Which Obligors Are Located............. 18 Distribution of the Contracts by Obligor Industry............................... 19 Distribution of the Contracts by Original Principal Balance...................... 19 Distribution of the Contracts by Current Principal Balance...................... 19 Distribution of the Contracts by Original Contract Term.......................... 20 Distribution of the Contracts by Remaining Months to Stated Maturity.... 20 Distribution of the Contracts by New/Used Equipment Financed..................... 20 Delinquency and Loss Information........... 21 Contract Portfolio Delinquency Experience............................. 21 Contract Portfolio Credit/Loss Repossession Experience................ 22 Definition of Delinquency for the Contracts Transferred to the Trust................. 23 The Contracts.............................. 24 End-User Contracts....................... 24 Conditional Sale Agreements.............. 24 Leases................................... 25 Secured Promissory Notes................. 26 Equipment................................ 26 Contract Files........................... 26 How Collections on the Contracts are Treated................................ 27 Prepayment and Yield Considerations........ 27 Percentage of the Initial Class A-1 Notes Principal Amount at the Annual Constant Prepayment Rates Set Forth Below......... 28 Percentage of the Initial Class A-2 Notes Principal Amount at the Annual Constant Prepayment Rates Set Forth Below......... 29 Percentage of the Initial Class A-3 Notes Principal Amount at the Annual Constant Prepayment Rates Set Forth Below......... 30 Percentage of the Initial Class A-4 Notes Principal Amount at the Annual Constant Prepayment Rates Set Forth Below......... 31 </TABLE> As of August 1, 2000, the contracts had the following characteristics: <TABLE> <S> <C> Number of contracts........................ 4,683 Aggregate contract outstanding principal balance.................................. $317,044,171 Average contract outstanding principal balance.................................. $67,701 Weighted average contract rate............. 10.23% Weighted average original term............. 50.94 months Range...................................... 9-84 months Weighted average remaining term............ 42.42 months Range...................................... 5-84 months </TABLE> Changes in characteristics of the contracts between August 1, 2000 and the closing date will not affect more than 5.00% of the aggregate outstanding principal balance of the contracts. For further information regarding the contracts, see "Composition of the Contracts" and "The Contracts", as well as "The Transfer and Servicing Agreement -- Representations and Warranties; Definition of Eligible Contracts" and "-- Concentration Amounts; Definition of Excess Contract". The trust depositor may replace a contract that is part of the trust's assets with a substitute contract or contracts: - if the trust depositor subsequently determines that a contract was not eligible to be sold to the trust at the time of its sale to the trust; - if the terms of such contract are to be subsequently amended in a manner not permitted by the transfer and servicing agreement; - if such contract is subject to a casualty loss; - if the trust depositor did not remove and replace that contract, the obligor or equipment concentrations of contracts would exceed the limits described in "The Transfer and Servicing Agreement -- Concentration Amounts; Definition of Excess Contract"; - if such contract is prepaid; or - if such contract becomes a defaulted contract. See "The Transfer and Servicing Agreement -- Substitute Contracts". The substitute contracts will have been originated under the same credit criteria and policies as the contracts they replace. B. RESERVE FUND............. On the closing date the trust depositor will establish in bank accounts in the name of the indenture trustee a reserve fund. This fund provides you with limited protection in the event collections from obligors on the contracts are insufficient to make payments on the notes. We cannot assure you, however, that this protection will be adequate to prevent shortfalls in amounts <TABLE> <CAPTION> PAGE ---- <S> <C> Percentage of the Initial Class B Notes Principal Amount at the Annual Constant Prepayment Rates Set Forth Below......... 32 Percentage of the Initial Class C Notes Principal Amount at the Annual Constant Prepayment Rates Set Forth Below......... 33 Weighted Average Life...................... 34 ORIX Credit Alliance, Inc. ................ 36 Equipment Finance Business............... 36 Ancillary Businesses..................... 36 Summary Financial Data................... 37 Management............................... 37 Credit Approval, Collection and Review Process......................... 39 Terms of Contracts..................... 40 Recourse Provisions.................... 40 Extension/Revision Procedures.......... 41 Pre-Litigation Workout/Judgment Recovery............................ 41 Legal Proceedings...................... 41 The Trust.................................. 42 General.................................. 42 Termination of Trust..................... 42 Other Information........................ 42 The Trust Depositor........................ 43 Description of the Notes and Indenture..... 43 General.................................. 44 Interest and Principal................... 44 Amounts Available for Payments on the Notes.................................. 44 Allocations.............................. 46 Prior to an Event of Default........... 46 Following an Event of Default.......... 47 Reserve Fund............................. 51 Spread Fund.............................. 51 Collection Account and Collection Period................................. 52 Events of Default........................ 54 Remedies After Events of Default......... 55 The Indenture Trustee.................... 55 Governing Law............................ 56 Amendments............................... 56 Servicing Compensation and Payment of Expenses............................... 57 Optional Redemption...................... 58 Mandatory Redemption..................... 58 Reports.................................. 58 List of Noteholders...................... 59 Administration Agreement................. 59 Book-Entry Registration.................. 60 </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> Issuance of Certificated Notes at a Later Date................................... 63 The Certificates........................... 63 The Transfer and Servicing Agreement....... 64 Conveyance of the Contracts.............. 64 Representations and Warranties; Definition of Eligible Contracts....... 64 Remedies for Breaches of Representations and Warranties; Definition of Ineligible Contracts................... 67 Concentration Amounts; Definition of Excess Contract........................ 68 Material Modifications to Contracts...... 69 Substitute Contracts..................... 70 Definition of Defaulted Contracts........ 70 Indemnification.......................... 70 Servicing Standard and Servicer Advances............................... 71 Servicer Resignation..................... 71 Servicer Default......................... 72 Evidence as to Compliance................ 73 Amendments............................... 73 The Owner Trustee........................ 74 Material Federal Income Tax Considerations........................... 75 General.................................. 75 Classification of the Notes and the Trust.................................. 75 General Tax Treatment of Noteholders..... 76 United States Holders.................. 76 Payments of Interest................... 76 Purchase, Sale and Retirement of the Notes............................... 76 Backup Withholding and Information Reporting........................... 76 United States Alien Holders............ 77 Backup Withholding and Information Reporting........................... 78 State and Local Tax Considerations......... 78 New Jersey Tax Considerations............ 78 Other States............................. 78 Legal Investment........................... 78 ERISA Considerations....................... 79 Prohibited Transactions.................. 79 Plan of Distribution....................... 80 General.................................. 80 Rating of the Notes........................ 81 Legal Matters.............................. 82 Experts.................................... 82 Index of Terms............................. 83 Report of Independent Public Accountants... F-1 Balance Sheet.............................. F-2 </TABLE> available to make payment on the notes. The initial balance of the reserve fund will be approximately $4,731,885, which will equal 1.5% of the original principal balance of the notes. Additional deposits will be required to be made in subsequent months out of available collections on the contracts to this fund (a) to increase the reserve fund to an amount equal to the greater of (i) 3% of the outstanding principal of the notes and (ii) the lesser of (A) 1% of the initial principal of the notes and (B) the outstanding principal of the notes and (b) in subsequent months thereafter, if necessary, to maintain the required amount in the fund. If, on any payment date, the amounts available for distribution exceed the amounts needed to pay amounts owed to the servicer and to the indenture trustee and to pay interest and principal on the notes, the excess will be deposited into this fund. However, the amount deposited in the reserve fund shall not exceed the amount required above. Investment earnings on amounts held in the reserve fund will be available for distribution to you. If on any payment date, collections on the contracts and amounts, if any, on deposit in the spread fund are less than the amount needed to pay interest on or principal of the notes then due, the indenture trustee will withdraw funds from the reserve fund to pay the interest and principal due. The conditions under which we will withdraw amounts from the reserve fund are more specifically described in "Description of the Notes and Indenture -- Allocations" and "-- Reserve Fund". C. SPREAD FUND................ On the closing date the trust depositor will establish an additional bank account, the spread fund, in the name of the indenture trustee to hold available funds whenever a spread event exists. A spread event will exist if any of the following occurs and is continuing: (a) ORIX Credit Alliance, Inc. is no longer the servicer, (b) the average monthly rate of delinquencies on contracts in excess of 90 days over any three consecutive months exceeds 5% of the aggregate outstanding principal balance of the contracts or (c) the cumulative net loss percentage with respect to the contracts exceeds a specified "loss trigger percentage" (initially 1.00%) that will be increased over time. Notwithstanding the foregoing: (i) the spread event referred to in clause (b) above may be cured on any distribution date if the three-month delinquency percentage for the preceding two collection periods is less than or equal to 5% for each of such periods and (ii) the spread event referenced in clause (c) may be cured if the cumulative net loss percentage is less than the associated loss trigger percentage for that period. Amounts that may be held in this fund provide you with additional limited protection in the event collections from obligors on the contracts are insufficient to make payments on the notes. We cannot assure you, however, that this additional protection will be adequate to prevent shortfalls in amounts available to make payment on the notes. If on any payment date, a spread event exists and the amounts available for distribution exceed the amounts needed to pay amounts owed to the servicer (including amounts due to the indenture trustee) to pay interest and principal on the notes and to make any required deposits to the reserve fund, the excess will be deposited into the spread fund. Investment earnings on amounts held in the spread fund will be available for distribution to you. If on any payment date, collections on the contracts are less than the amount needed to pay interest and principal due on the notes and make all required deposits to the reserve fund, the indenture trustee will withdraw funds from the spread fund to pay the interest and principal and make such deposits. If on any subsequent payment date, no spread event continues to exist, amounts in the spread fund will be distributed in the same order of priority as are amounts in the collection account. The calculations related to a spread event and the conditions under which we will withdraw amounts from the spread fund are more specifically described in the "Description of the Notes and Indenture -- Allocations" and "-- Spread Fund". TERMS OF THE NOTES............ The basic terms of the notes will be as described below. See "Description of the Notes and Indenture". We will pay principal and interest due on the notes using: - collections of payments due under the contracts held by the trust; - earnings on amounts held in the collection account; - late charges relating to a contract if the late charges were included in the contract's terms as of the date the contract was purchased by the trust; - amounts earned on amounts held in the reserve fund and the spread fund (if any); - amounts received upon the prepayment or purchase of contracts or liquidation of the contracts and disposition of the related equipment upon defaults under contracts; - amounts received from vendor recourse, if any; - amounts in the reserve fund more specifically described in "Description of the Notes and Indenture -- Reserve Fund"; and - amounts in the spread fund more specifically described in "Description of the Notes and Indenture -- Spread Fund". See "Description of the Notes and Indenture -- Amounts Available for Payments on the Notes". You may purchase the notes in minimum denominations of $1,000, and in integral multiples of $1,000 in excess of the minimum denominations; provided, however, that one note of each class will be available for purchase in an incremental denomination of less than $1,000. We will offer the notes only in book-entry form. A. EVENTS OF DEFAULT........ Events of default with respect to the notes include: - failure to pay accrued interest on any payment date, - failure to pay outstanding principal on the maturity date, - breach of representations and warranties with respect to the contracts which are materially incorrect and which have a material adverse effect on the noteholders and continues unremedied for a period of sixty days, and - the occurrence of insolvency events with respect to the trust depositor or the trust. See "Description of the Notes and Indenture -- Events of Default". B. INTEREST................. On a payment date, we will first repay any outstanding servicer advances. Second, if a successor servicer is being appointed, we will pay the indenture trustee's costs and expenses associated with that appointment (which will not in the aggregate exceed $100,000). Third, we will pay the servicer's monthly servicing fee (which includes therein amounts due to the indenture trustee and the owner trustee). Fourth, we will pay interest on the notes at the rates specified on the cover of this prospectus in the following order: <TABLE> <CAPTION> CLASS OF NOTES RECEIVING INTEREST PAYMENT NOTES PRIOR TO SPECIFIED CLASS -------- ------------------------------------- <S> <C> A-1, A-2, A-3, A-4........... None B.................. Class A-1 Notes, Class A-2 Notes, Class A-3 Notes, Class A-4 Notes C.................. Class A-1 Notes, Class A-2 Notes, Class A-3 Notes, Class A-4 Notes, Class B Notes </TABLE> See "Description of the Notes and Indenture -- Allocations". We will calculate interest on the Class A-1 Notes on the basis of actual days elapsed over a year of 360 days. We will calculate interest on all other notes on the basis of a year of 360 days consisting of twelve 30-day months. C. PRINCIPAL................ On a payment date, after we pay interest on the notes, we will pay principal on the notes in the following order: <TABLE> <CAPTION> CLASS OF NOTES RECEIVING PRINCIPAL PAYMENT NOTES PRIOR TO SPECIFIED CLASS -------- ----------------------------------------------- <S> <C> A-1 None A-2 Class A-l Notes </TABLE> <TABLE> <CAPTION> CLASS OF NOTES RECEIVING PRINCIPAL PAYMENT NOTES PRIOR TO SPECIFIED CLASS -------- ----------------------------------------------- <S> <C> A-3 Class A-1 Notes, Class A-2 Notes Class B Notes and Class C Notes will receive principal payments prior to Class A-3 Notes on any payment date on which the outstanding principal amount of the Class A-2 Notes is greater than $0. A-4 Class A-1 Notes, Class A-2 Notes, Class A-3 Notes Class B Notes and Class C Notes will receive principal payments prior to Class A-4 Notes on any payment date on which the outstanding principal amount of the Class A-3 Notes is greater than $0. B Class A-1 Notes, Class A-2 Notes Class A-3 Notes will receive principal payments prior to Class B Notes after the outstanding principal amount of the Class A-1 Notes and Class A-2 Notes is reduced to $0. Class A-4 Notes will receive principal payments prior to Class B Notes only after the outstanding principal amount of the Class A-1 Notes, Class A-2 Notes and Class A-3 Notes is reduced to $0. C Class A-l Notes, Class A-2 Notes, Class B Notes Class A-3 Notes will receive principal payments prior to Class C Notes only after the outstanding principal amount of the Class A-1 Notes and Class A-2 Notes is reduced to $0. Class A-4 Notes will receive principal payments prior to Class C Notes only after the outstanding principal amount of the Class A-1 Notes, Class A-2 Notes and Class A-3 Notes is reduced to $0. </TABLE> See "Description of the Notes and Indenture -- Allocations". The amount of principal paid on a Class A-1 Note prior to its stated maturity date will be based on the amount that the aggregate principal balance of the contracts has declined during the most recent full collection period. Each collection period is approximately a month. After the Class A-1 Notes have been paid in full, the amount of principal paid on any other class of notes will be the amount necessary to reduce the outstanding principal of that class of notes to an amount equal to a specified percentage of the aggregate principal balance of the contracts as of the related determination date. The percentage used is the ratio of the initial principal amount of such class of notes to the original pool balance of the contracts minus the initial principal amount of the Class A-1 Notes. Following an event of default, we will not make principal payments in the order described above. Instead, we will pay principal on the notes in the following order: - outstanding principal of Class A-l Notes - pro rata, to the outstanding principal of Class A-2 Notes, Class A-3 Notes and Class A-4 Notes - outstanding principal of Class B Notes - outstanding principal of Class C Notes See "Description of the Notes and Indenture -- Allocations" and "-- Events of Default". D. PAYMENT DATES............ You will receive distributions of interest and principal on the 15th day of each month, or if that day is not a business day, the next business day. E. STATED MATURITY DATE..... The notes will mature on the date shown on the cover of this prospectus, except that if the day is not a business day, then the stated maturity date will be the next business day. F. OPTIONAL REDEMPTION...... If the aggregate outstanding principal balance of the contracts at the time is less than or equal to 15% of the initial aggregate principal balance of the contracts as of August 1, 2000, the trust may redeem all, but not less than all, of the outstanding notes. If the trust does redeem all of the outstanding notes, the redemption price will be equal to the unpaid principal amount of the notes plus accrued and unpaid interest through the date of redemption and the amount of any servicer advances made and not reimbursed. G. MANDATORY REDEMPTION....... If on any payment date, the aggregate amounts on deposit in the collection account, the reserve fund and the spread fund are greater than or equal to the sum of (i) the entire outstanding note principal balance, (ii) the interest accrued thereon, (iii) any accrued and unpaid servicing fee (including therein amounts owed to the indenture trustee) and (iv) unreimbursed servicer advances, the amounts on deposit in the reserve fund and the spread fund will be deposited in the collection account and used to redeem the notes in full. The redemption price will be equal to the unpaid principal amount of the notes plus accrued and unpaid interest through the date of redemption. SERVICING; SERVICING FEE...... The servicer will be responsible for servicing, managing and administering the contracts and related interests, and enforcing and making collections on the contracts. See "The Transfer and Servicing Agreement -- Servicing Standard and Servicer Advances". The servicer will be entitled to receive a monthly fee equal to the product of: (1) one-twelfth of 1.00% and (2) the aggregate outstanding principal balance of the contracts in the trust as of the beginning of the related collection period. The fee is payable out of amounts we receive on the contracts. Amounts payable to the indenture trustee and owner trustee are included in such fee. See "Description of the Notes and Indenture -- Servicing Compensation and Payment of Expenses" and "The Transfer and Servicing Agreement". MATERIAL FEDERAL INCOME TAX CONSIDERATIONS.............. In the opinion of Sullivan & Cromwell, federal tax counsel to the trust depositor, for federal income tax purposes, the notes will be characterized as debt, and the trust will not be characterized as an association or a publicly traded partnership taxable as a corporation. You, by accepting a note, agree to treat the note as indebtedness. See "Material Federal Income Tax Considerations". ERISA CONSIDERATIONS.......... Subject to the considerations discussed under "ERISA Considerations", the notes will be eligible for purchase by some employee benefit plans. Any benefit plan fiduciary considering purchase of the notes should, however, consult with its counsel regarding the consequences of its purchase under ERISA and the Internal Revenue Code. See "ERISA Considerations". RATING........................ We will not issue the notes unless they receive ratings from the following rating agencies as set forth below: <TABLE> <CAPTION> CLASS MOODY'S STANDARD & OF INVESTORS POOR'S NOTE SERVICE RATINGS GROUP FITCH, INC. ----- --------- ------------- ----------- <S> <C> <C> <C> A-1 P-1 A-1+ F1+/AAA A-2 Aaa AAA AAA A-3 Aaa AAA AAA A-4 Aaa AAA AAA B A2 A A C Baa2 BBB BBB </TABLE> A rating is not a recommendation to purchase, hold or sell notes since a rating does not address market price or suitability for a particular investor. A rating may be subject to revision or withdrawal at any time by the assigning rating agency. See "Rating of the Notes".
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus and provides an overview of the key aspects of the offering. Because this is a summary, it does not contain all of the information that you should consider before making an investment decision. You should read the entire prospectus carefully, including the "Risk Factors" section and the Consolidated Financial Statements and related notes before making an investment decision. Unless otherwise indicated, all information in this prospectus assumes that the underwriters will not exercise their over-allotment option. The terms "Cupertino Electric," "we," "us" and "our" as used in this prospectus refer to Cupertino Electric, Inc., a Delaware corporation, originally formed in California in 1954, incorporated in California in 1958 and reincorporated in Delaware in 2000, or its predecessor entities. OUR BUSINESS OVERVIEW We are a leading provider of sophisticated electrical infrastructure solutions that provide high-quality, reliable power and speed to market for critical-use facilities and applications. We engineer, install, commission, upgrade and maintain complex electrical power and data infrastructure systems across a variety of market sectors, often on a turnkey basis. We also develop and provide communications systems integration and data cabling services, as well as proprietary software-based instrumentation and control systems, that position us to cross-sell additional services to our customers. We recently implemented an initiative to offer the engineering, installation and commissioning of power generation and distribution systems to customers that require supplemental power at their facilities or do not wish to rely solely on local utility grids as their primary source of electric power. We have developed long-standing relationships with many companies in, and general contractors serving, the computer, internet, semiconductor, software, telecommunications, biotechnology and other technology-dependent industries and institutions. Representative facility owners who have been among our ten largest customers for any year since 1997 include: AboveNet Communications Inc.; Exodus Communications, Inc.; Colo.com; Microsoft Corporation; Applied Materials, Inc.; Stanford University; Silicon Graphics, Inc.; Chiron Corporation; and 3Com Corporation. Industries and institutions that rely on computers, the internet, networks or sensitive electronics in their mission-critical facilities and applications increasingly require electrical power that is free of voltage sags and surges and is delivered with at least 99.9999% reliability (approximately 30 seconds or less downtime per year). The public utility grid, in normal times, is only capable of delivering power with 99.9% reliability (approximately nine hours of downtime per year) and is even less reliable in times of system-wide generation and transmission capacity shortages. As the demand for high-quality, reliable power has increased dramatically, we have experienced rapid growth. From 1997 to 1999, our total revenue increased from $153.0 million to $325.3 million, representing a compound annual growth rate of 45.8%. For the nine months ended September 30, 2000, our total revenue was $482.7 million, representing an internal growth rate of 109.8% over the nine months ended September 30, 1999. THE CUPERTINO ADVANTAGE We believe the following strengths provide a competitive advantage that cannot be easily duplicated by any one of our competitors: - Turnkey Solutions. Our integrated offering of engineering, installation, commissioning, upgrade and maintenance services allows our customers to engage a single provider to be responsible for their electrical infrastructure solutions. - Experience and Reputation. Since our founding in 1954, we have focused on providing sophisticated electrical infrastructure solutions for critical-use facilities and applications. The information in this prospectus is not complete and may be changed without notice. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Prospectus (Not Complete) Issued , 2001 SHARES [CUPERTINO LOGO] CUPERTINO ELECTRIC, INC. COMMON STOCK ------------------------- Cupertino Electric, Inc. is offering shares of its common stock in a firmly underwritten offering. This is our initial public offering, and no public market currently exists for our shares. We anticipate that the initial public offering price for our shares will be between $ and $ per share. After the offering, the market price of our shares may be outside of this range. ------------------------- We have applied to have our common stock quoted on the Nasdaq National Market under the symbol "CUPE." ------------------------- INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7. ------------------------- <TABLE> <CAPTION> Per Share Total --------- ----- <S> <C> <C> Offering Price............................................. $ $ Discounts and Commissions to Underwriters.................. $ $ Offering Proceeds to Cupertino Electric, Inc. ............. $ $ </TABLE> Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Cupertino Electric, Inc. and some of its existing stockholders have granted the underwriters the right to purchase up to an additional shares of its common stock to cover any over-allotments. The underwriters can exercise this right at any time within thirty days after the offering. To the extent the over-allotment option is exercised in full, the Offering Price, Discounts and Commissions to Underwriters, Offering Proceeds to Cupertino Electric, Inc. and offering proceeds to those stockholders will be $ , $ , $ and $ , respectively. Cupertino Electric, Inc. will not receive any of the proceeds from the sale of any shares by those stockholders. Banc of America Securities LLC expects to deliver shares of our common stock to investors on , 2001. BANC OF AMERICA SECURITIES LLC DEUTSCHE BANC ALEX. BROWN CHASE H&Q ------------------------- , 2001 - Proven Methodology. During our 46 years of experience, we have developed a set of processes, information systems and other proprietary tools that allow us to reduce time to market for infrastructure projects without compromising quality. - Focus on Projects and Customers Requiring Highly Engineered Solutions. Throughout our history, we have focused on providing infrastructure solutions to companies at the forefront of their respective technology sectors. - Depth and Scale. Our large and experienced workforce, including engineering staff, project managers, and union electricians, is skilled at all levels of project design, development, management, installation and commissioning. THE MARKET OPPORTUNITY The need for high-quality, reliable power has been growing rapidly in recent years as a result of: - The Power Quality and Reliability Opportunity. Voltage instability, low voltage and power outages in the existing power delivery network are significant problems for technology-dependent businesses and institutions. According to a 1999 Electric Power Research Institute report, the annual cost of power disruptions in the United States is approximately $34 billion. - The Internet and Networking Facilities Opportunity. Much of our recent growth has been driven by increased numbers of data centers, co-location facilities, network-attached data storage facilities, and other internet and networking facilities. The owners of these facilities are focused on power quality and reliability, speed to market and optimization of facility use. Based on published reports, we believe that growth in the application server and web hosting markets will drive total floor area for global internet data center space to approximately 65 million square feet by the end of 2002, up from the estimated 35 million square feet to be in operation by the end of 2000. This represents a compound annual growth rate of 36%. - The Retrofit and Upgrade Opportunity. Continuing technological advancements and innovations create a need for our customers to retrofit and upgrade their facilities in order to stay competitive and provide an opportunity for us to develop recurring sources of revenue. - The Distributed Power Generation Opportunity. The distributed generation of electric power through systems such as microturbines is expected to provide superior reliability and quality, flexibility in locating critical-use facilities, lower capital risk, reduced emissions and potentially superior financial returns through sales of excess power to the electric power grid. The use of distributed power generation expected to accelerate as performance improves and costs decline through continued technological advancement. OUR STRATEGY Our objective is to grow our revenue and profits by capitalizing on our position as a leading electrical infrastructure service provider for technically demanding projects. Key elements of our strategy include: - Identify and Capitalize on New Markets. We intend to capitalize on our expertise in designing and installing high-quality, reliable, power supply, distribution and control systems to serve emerging markets, such as distributed power generation. - Capitalize on Our Technological Expertise. Our large, experienced in-house engineering staff, extensive in-house training programs, strategic customer and vendor relationships and expertise in engineering, installing, and commissioning complex electrical systems position us to participate in emerging trends in power technology. - Pursue Customer-Driven Growth. We intend to grow with our customers and their general contractors as they develop new facilities and expand their businesses by serving them in new regions and by cross-selling additional and value-added services. - Attract, Motivate and Retain a Highly Specialized Workforce. We intend to continue to attract, motivate and retain highly skilled and experienced professionals and union field electricians. Our principal executive offices are located at 1132 North Seventh Street, San Jose, California 95112, and our telephone number is (408) 808-8000. Our website address is www.cupelectric.com. Our website and the information contained in it are not a part of this prospectus. THE OFFERING Common stock offered............ shares Common stock to be outstanding after this offering............. shares Use of proceeds................. The net proceeds we will receive from the sale of shares of our common stock offered by us at an assumed initial public offering price of $ per share are estimated to be approximately $ million, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares by the selling stockholders if that portion of the underwriters' over-allotment option is exercised. We intend to use the net proceeds from this offering: - to reduce our senior term loan indebtedness and then-outstanding borrowings, if any, under our revolving credit facility by $ million, or 50% of net proceeds of this offering, pursuant to our credit facility; - to repay $35.0 million of subordinated notes; and - for working capital and general corporate purposes. Proposed Nasdaq National Market symbol.......................... "CUPE" Risk factors.................... See "Risk Factors" and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock. The number of shares of our common stock to be outstanding after this offering is based on the number of shares outstanding as of December 15, 2000, and excludes: - 1,112,583 shares issuable as of December 15, 2000 upon the exercise of all outstanding stock options under our 2000 Incentive Stock Plan at an exercise price of $7.50 per share; and - 1,757,450 shares issuable upon the exercise of outstanding common stock put warrants as of December 15, 2000, at a price of $0.0004 per share. ------------------------- Unless otherwise specifically stated, all information in this prospectus assumes: - no exercise of the underwriters' over-allotment option; and - the conversion on a one-for-one basis of our Class A and Class B common stock into a single class of common stock prior to the completion of this offering. SUMMARY CONSOLIDATED FINANCIAL DATA The following tables set forth our summary consolidated financial data. You should read this information together with the more detailed information contained in "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes appearing elsewhere in this prospectus. <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue: Services and materials........... $115,716 $123,416 $152,990 $235,345 $325,294 $230,057 $402,081 Equipment........................ - - - - - - 80,638 -------- -------- -------- -------- -------- -------- -------- Total revenue.................. 115,716 123,416 152,990 235,345 325,294 230,057 482,719 Cost of services and materials revenue.......................... 93,937 95,626 122,099 185,954 259,976 184,078 326,643 Cost of equipment revenue.......... - - - - - - 77,209 Selling, general and administrative expense.......................... 17,486 21,170 24,069 35,293 41,529 29,865 43,301 Depreciation and amortization...... 1,380 1,154 1,137 1,414 1,965 1,344 3,316 Stock-based expenses (1)........... - - - - - - 17,702 -------- -------- -------- -------- -------- -------- -------- Operating income................... 2,913 5,466 5,685 12,684 21,824 14,770 14,548 Interest expense................... 1,307 1,133 1,182 1,694 2,265 1,603 4,736 Increase in fair value of common stock put warrants (2)........... - - - - - - 5,368 -------- -------- -------- -------- -------- -------- -------- Income before income taxes......... 1,606 4,333 4,503 10,990 19,559 13,167 4,444 Income taxes....................... 832 1,895 2,106 4,590 8,641 5,817 11,269 Minority interest.................. 155 366 537 1,174 2,082 1,470 1,802 -------- -------- -------- -------- -------- -------- -------- Net income (loss) (3).............. $ 619 $ 2,072 $ 1,860 $ 5,226 $ 8,836 $ 5,880 $ (8,627) ======== ======== ======== ======== ======== ======== ======== Net income (loss) per share (3): Basic............................ $ 0.02 $ 0.08 $ 0.07 $ 0.20 $ 0.33 $ 0.22 $ (0.33) ======== ======== ======== ======== ======== ======== ======== Diluted.......................... $ 0.02 $ 0.08 $ 0.07 $ 0.20 $ 0.33 $ 0.22 $ (0.33) ======== ======== ======== ======== ======== ======== ======== Weighted average shares outstanding: Basic............................ 26,400 26,400 26,400 26,400 26,400 26,400 26,314 ======== ======== ======== ======== ======== ======== ======== Diluted.......................... 26,400 26,400 26,400 26,400 26,400 26,400 26,314 ======== ======== ======== ======== ======== ======== ======== </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 2000 -------------------------------------------- PRO FORMA ACTUAL PRO FORMA (4) AS ADJUSTED (5) -------- ------------- --------------- (IN THOUSANDS) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and equivalents........................................ $ 1,826 $ 1,826 Working capital............................................. 78,679 78,679 Total assets................................................ 254,772 254,772 Long-term debt, net of current portion...................... 84,887 84,887 Stockholders' equity (deficit).............................. (28,789) 40,184 </TABLE> (1) Stock-based expenses for the nine months ended September 30, 2000 represent a non-cash charge of $13.4 million for shares of our common stock purchased by several of our employees and two consultants in May 2000 and a non- recurring charge of $4.3 million for the excess of the cost over the fair value of the shares of our common stock that we redeemed from several of our existing stockholders as part of our recapitalization in June 2000. (2) Increase in fair value of common stock put warrants for the nine months ended September 30, 2000 represents a non-cash charge to mark to market the common stock put warrants that we issued in connection with our recapitalization in June 2000. The put feature of the common stock put warrants will automatically terminate upon the completion of this offering. Accordingly, we expect to incur a non-cash charge to mark to market the common stock put warrants in the fourth quarter of 2000 and in the first quarter of 2001. After the completion of this offering, there will be no such expense in future periods. (3) Net loss and net loss per share for the nine months ended September 30, 2000 include the charge for stock-based expenses of $17,702 and a charge of $5,368 for the increase in fair value of our common stock put warrants. Excluding these charges, net income and basic and diluted net income per share for the nine months ended September 30, 2000 would have been $14,444, $0.54 per share and $0.55 per share, respectively. (4) The pro forma column gives effect to the termination of the put feature of the putable common stock and common stock put warrants upon completion of this offering. (5) Pro forma as adjusted reflects our receipt of estimated net proceeds of approximately $ million from the sale of shares of our common stock offered by us at an assumed initial public offering price of $ per share, net of estimated underwriting discounts and offering expenses, for the repayment of approximately $ million of debt and for working capital and general corporate purposes, as well as the termination of the put feature of the putable common stock and the common stock put warrants.
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING OUR COMPANY, THE COMMON STOCK BEING SOLD IN THIS OFFERING AND OUR FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. We are a leading provider of digital content management software solutions that enable individuals to personalize and store music, photos, video and data onto recordable compact discs, or CDs. Our principal products are our Easy CD Creator and Toast families of CD recording software and our GoBack system recovery software. We sell our products to a wide range of customers, including leading personal computer, or PC, and CD recordable drive manufacturers such as Dell, Hewlett-Packard, Philips and Yamaha and to retailers through distributors such as Computer 2000, Ingram Micro, Softbank and Tech Data. We are the industry leader in providing software that enables individuals to record digital content to CDs. Our software was bundled with approximately 20 million CD recorders from January 1, 1999 through June 30, 2000. In an effort to increase market awareness and upgrade sales of our full-featured CD recording software, we have established strategic relationships with Microsoft and RealNetworks under which CD recording software with limited functionality is included with Microsoft Windows Media Player 7 and RealNetworks RealJukebox. The Internet is becoming widely used as a platform for digital content delivery due to the adoption of high speed Internet connections and the popularity of web sites that distribute music and other content. Individuals are also increasingly creating content with devices such as digital cameras and digital camcorders and uploading it to their PCs. This growth in digital content has driven consumer demand for applications that allow content to be personalized, stored and played back in a large installed base of electronic devices such as portable CD players, DVD players, car stereos and home audio systems. With the advent of CD recorders and CD recording software, individuals can now store digital content using a high-capacity medium which is inexpensive, reliable and portable. Industry research firm Santa Clara Consulting Group estimates that the installed base of CD recorders will grow to over 90 million by the end of 2001. They also estimate that over five billion recordable CDs will be sold in 2001. Our products are used for personalizing and recording digital content to CDs and for PC system recovery. We have also recently introduced a product for recording digital content to digital versatile discs, or DVDs. We focus on delivering software solutions which are reliable, easy to use and compatible across a broad range of PC operating systems. Our leading product, Easy CD Creator, allows users to record music downloaded from the Internet, store digital photos and share large data files, such as PowerPoint presentations. We devote extensive resources to testing our CD recording software to ensure that it is compatible with different CD recorders, works with popular operating systems and supports an extensive array of technical standards for audio, data, enhanced music and video on CD or DVD. Based on industry data, we estimate that our CD recording software was included with approximately 66% of the CD recorders shipped during 1999. Our GoBack system recovery software enables PC users to more quickly recover data and software applications in the event of a system crash, virus attack or human error. This recovery is accomplished by restoring a PC's hard drive to its state as of a previous point in time. We believe that as users in both the home and office spend more time on PCs connected to the Internet, costs associated with the loss of data and productivity will grow, increasing the need for data protection and system recovery solutions for PCs. By working continuously and transparently, we believe GoBack represents a new approach to providing system recovery for individual PCs. Our objective is to become the leading provider of digital content management solutions. We plan to broaden the deployment of our CD recording technology and system recovery solutions by expanding our product offerings through internal development. We also intend to pursue acquisitions and additional partnerships and introduce new marketing approaches. We believe we are well positioned to expand our role in the delivery of content over the Internet, participate in initiatives for the protection of copyrighted material and continue to develop DVD recording software. RELATIONSHIP WITH ADAPTEC We are currently a wholly-owned subsidiary of Adaptec. On June 8, 2000, Adaptec announced its plan to make substantially all of its software products group, subsequently incorporated as Roxio, Inc., into an independent, publicly-traded company focused on providing digital content management solutions. After the completion of this offering, Adaptec will own approximately % of the outstanding shares of our common stock, or approximately % if the underwriters exercise their over-allotment option in full. Adaptec intends to complete its divestiture of us approximately six months after this offering by distributing all of the shares of Roxio common stock owned by it to the holders of its common stock. We have entered into agreements with Adaptec that provide for the separation of our business operations from Adaptec. These agreements are not conditioned on the distribution of our shares by Adaptec. In general, they provide for the transfer from Adaptec to us of assets comprising our business and the assumption by us of liabilities relating to our business. Substantially all of these transfers have been or will be completed prior to the completion of this offering. The agreements between Adaptec and us also govern our various interim and ongoing relationships. All of the agreements providing for our separation from Adaptec were made in the context of a parent-subsidiary relationship and were negotiated in the overall context of our separation from Adaptec. The terms of these agreements may be more or less favorable to us than if they had been negotiated with unaffiliated third parties. See "Risk Factors--Risks Relating to Separating Roxio from Adaptec" and "Certain Transactions." Adaptec will determine the timing, structure and terms of its distribution of our common stock in its sole discretion. We have agreed to cooperate with Adaptec in all respects to complete the distribution because we believe that our complete separation from Adaptec will enhance our ability to pursue our business strategy. Adaptec is seeking a private letter ruling from the Internal Revenue Service to ensure that the distribution of its shares of Roxio common stock to the holders of its common stock will be tax-free to Adaptec and its stockholders for United States federal income tax purposes. However, Adaptec is not obligated to complete the distribution, and the distribution may not occur in the contemplated time frame or at all. For a discussion of the risks associated with Adaptec not completing the distribution, see "Risk Factors--Risks Relating to Separating Roxio from Adaptec--Our stock price may decline and our business may suffer if Adaptec does not complete its distribution of our common stock." BENEFITS OF THE SEPARATION We believe that we will realize benefits from our complete separation from Adaptec, including the following: - GREATER FOCUS. The separation will allow us to have our own board of directors, management team and employees focused specifically on our business and strategic opportunities. We will also have greater ability to modify our business processes and organization to better fit the needs of our business, customers and employees. - ALIGNED EMPLOYEE INCENTIVES AND GREATER ACCOUNTABILITY. We expect the motivation of our employees and the focus of our management will be strengthened by incentive compensation programs tied to the market performance of our common stock and linked to the performance of the Roxio business. We also expect that our ability to attract and retain qualified personnel will be enhanced. - DIRECT ACCESS TO CAPITAL MARKETS. As a separate company, we will have direct access to the capital markets to fund operations and acquire businesses, key products and technologies. THE OFFERING <TABLE> <S> <C> Common stock offered................................. _________ shares Common stock to be outstanding immediately after this offering........................................... _________ shares Common stock to be held by Adaptec immediately after this offering...................................... _________ shares Use of proceeds...................................... We intend to use the net proceeds of this offering for general corporate purposes, including capital expenditures and working capital and to repay the principal and pay accrued interest on a $30 million promissory note issued by us to Adaptec. We may also use a portion of the net proceeds of this offering to acquire key products and technologies. See "Use of Proceeds." Proposed Nasdaq National Market symbol............... ROXI </TABLE> The foregoing information is based on shares outstanding as of September 20, 2000, all of which are owned by Adaptec. Unless we specifically state otherwise, the information in this prospectus does not take into account the issuance of up to shares of common stock which the underwriters have the option to purchase solely to cover over-allotments or shares of our common stock reserved for issuance under our stock plans. See "Management--Employee and Director Benefit Plans." We were incorporated in Delaware in August 2000 as a wholly-owned subsidiary of Adaptec. Our principal executive offices are located at 461 South Milpitas Boulevard, Milpitas, California, and our telephone number is (408) 945-8600. Our fiscal year ends on March 31. Our fiscal quarters end on a Friday and are 13 weeks in length. However, for presentation purposes, we have presented our fiscal quarters as ending on June 30, September 30 and December 31. SUMMARY CONSOLIDATED FINANCIAL DATA The following tables present our summary consolidated financial data. The data presented in these tables are derived from our historical consolidated financial statements and notes to those statements included elsewhere in this prospectus. The consolidated statement of operations data presented below include the results of operations of CeQuadrat GmbH from July 1, 1999 and Wild File, Inc. from March 11, 2000, both of which we acquired and accounted for as purchases. See our unaudited pro forma combined financial information included elsewhere in this prospectus for pro forma information related to these acquisitions. You should read those sections along with "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a further explanation of the financial data summarized here. The historical financial information may not be indicative of our future performance and does not reflect what our financial position and results of operations would have been had we operated as a separate, stand-alone entity during the periods presented. <TABLE> <CAPTION> THREE MONTHS YEAR ENDED MARCH 31, ENDED JUNE 30, ------------------------------ ------------------- 1998 1999 2000 1999 2000 -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenues............................................ $38,654 $43,129 $77,791 $ 9,869 $29,276 Gross profit............................................ 29,779 34,129 62,139 7,840 23,275 Income (loss) from operations before provision for income taxes and cumulative effect of a change in accounting principle.................................. 8,261 2,523 9,458 (1,286) 5,018 Net income (loss)....................................... $ 6,094 $ 2,110 $ 5,170 $(1,007) $ 3,114 Unaudited pro forma basic and diluted net income (loss) per share............................................. Weighted average shares used in computing unaudited pro forma basic and diluted net income (loss) per share... </TABLE> The unaudited pro forma consolidated balance sheet data presented below assumes our separation from Adaptec occurred on June 30, 2000 and reflects our receipt of cash from our issuance of a $30 million promissory note to Adaptec on the date of separation, as well as the retention by Adaptec of most of our accounts receivable, inventory and accounts payable. Adaptec intends to retain these balances as of the date of separation for administrative convenience, and as such, certain accounts receivable, inventory and accounts payable are excluded from our pro forma balance sheet data as of June 30, 2000. See "Certain Transactions" for more information regarding assets to be transferred to and liabilities to be assumed by us on the date of separation. The unaudited pro forma as adjusted consolidated balance sheet data further reflect our receipt of the estimated net proceeds of this offering and our subsequent payment to Adaptec of the principal and accrued interest on our promissory note to Adaptec. Net proceeds of this offering are estimated based on the sale of shares of common stock at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. <TABLE> <CAPTION> AS OF JUNE 30, 2000 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (IN THOUSANDS) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ -- $ 34,617 $ Working capital............................................. 10,103 273 Total assets................................................ 57,825 74,908 Promissory note issued to Adaptec........................... -- 30,000 Total owner's net investment/stockholders' equity........... 45,576 35,742 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001122795_kroll_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001122795_kroll_prospectus_summary.txt
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+PROSPECTUS SUMMARY As used in this prospectus, unless the context otherwise requires, "we", "us", "our" and "KRCS" refer to Kroll Risk Consulting Services, Inc. and its subsidiaries. This summary highlights information relating to our company and our common stock being distributed in the split-up of The Kroll-O'Gara Company. It may not contain all the information that is important to you. See "Where You Can Find More Information". You should read the entire prospectus carefully, including the risk factors and the historical and pro forma consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus. THE COMPANY Governments, businesses and individuals worldwide are increasingly recognizing the need for services that mitigate the growing risks associated with uninformed decisions based upon incomplete or inaccurate information, as well as services designed to reduce risks associated with white-collar crime, fraud and physical threats. Through our network of 53 offices in 18 countries, we help our customers solve their risk problems and take advantage of opportunities through information, analysis, planning and support. KRCS has its origins in Kroll Associates, Inc., which was founded in 1972 by Jules B. Kroll to provide internal fraud investigative services. During the late 1970s, Kroll Associates expanded the scope of its operations to include other services such as business intelligence, due diligence for financial transactions and intelligence gathering in connection with hostile takeovers and crisis management. We have continued to expand our service offering to include the following: - business investigations and intelligence services, including nonfinancial due diligence, litigation support, fraud investigations, monitoring services and special inquiries and intellectual property infringement investigations; - corporate services, including pre-employment background checking, drug testing, surveillance and vendor integrity programs; - financial services, including forensic accounting, recovery and restructuring, asset tracing and analysis services and pre-acquisition financial due diligence; - security services, including risk and crisis management, security architecture and design, corporate security planning and executive protection, and electronic countermeasures; and - technology services, including computer forensics, data recovery and litigation and systems support services. This array of complementary services allows us to provide solutions for a wide range of issues. In the past five years, we have handled a variety of matters worldwide for our clients, including more than: - 11,000 investigative matters; - 4 million drug tests; - 740,000 background checks; and - 2,000 forensic accounting engagements. We consistently handle high profile cases such as monitoring of the International Brotherhood of Teamsters' elections at the request of the U.S. Department of Justice; security consulting for the Port Authority of New York following the World Trade Center bombing regarding future risk mitigation and prevention; and searching for Saddam Hussein's assets on behalf of the Kingdom of Kuwait. For the twelve months ended December 31, 1999, we had pro forma net sales of $203.4 million; for the six months ended June 30, 2000, we achieved pro forma net sales of $109.7 million. In late 1997, a subsidiary of The O'Gara Company merged into Kroll Holdings, Inc., the parent of Kroll Associates, Inc., and The O'Gara Company changed its name to The Kroll-O'Gara Company. In April 2000, Kroll-O'Gara's board of directors decided to reorganize the company in order to resolve internal management conflicts by splitting it into two new public companies which will continue the principal historical Kroll and O'Gara businesses. KRCS is the new corporation organized to become the public holding company for, and to continue to operate and manage, Kroll-O'Gara's investigations and intelligence services business. COMPETITIVE STRENGTHS Global Brand Name. We are one of the leading global providers of investigations, intelligence and risk mitigation consulting services. The Kroll brand name has been associated with high quality, performance and reliability since the 1970's. We believe that the strength of this brand name recognition enables us to obtain many investigative engagements around the world. Strong Global Platform. With 53 offices and more than 2,000 employees in 18 countries, we are able to provide risk mitigation consulting services to governments and multinational corporations. Our global platform allows us to address those issues with skilled investigators and consultants who have first hand knowledge of local customs, business practices and information. This competitive advantage has allowed us to develop our global client base, build stronger relationships with existing multinational clients for future business and market our services all over the world. For the six months ended June 30, 2000, approximately 39% of our revenues were derived from services provided outside the U.S. Broad Service Offering. We believe that our broad service offering and our strong global platform have positioned us as one of the leading worldwide providers of risk mitigation consulting services. We have a wide range of skills and experience which enables us to provide many different risk mitigation solutions ranging from preventive measures through responsive actions intended to minimize damage. As multinational corporations continue to expand into new locations, we believe that our broad service offering and global platform position us strongly for the future. Experienced Management Team. We are led by a strong group of senior executives experienced in the security and crime enforcement industry. Our Chairman, Jules B. Kroll, has been a recognized leader in the private security consulting business since the 1970's. Michael G. Cherkasky, our President and Chief Executive Officer, who has been with us since 1994, is a former Assistant District Attorney and was Chief of the District Attorney's Investigation Division in New York County. Michael D. Shmerling, our Chief Operating Officer, has been involved in the criminal justice system for more than 13 years, having formed businesses dealing with prison transportation and correctional facility management prior to his service at KRCS. Michael J. Slattery, Jr., our Executive Vice President, has served as a Special Agent of the Federal Bureau of Investigations for 11 years. Michael A. Beber, Executive Vice President, Strategic Development, has practiced exclusively in the area of forensic accounting for more than 15 years and has advised corporations on due diligence strategies for more than eight years. Stable, Diversified Client Base. We serve a diverse customer base, including large multinational corporations, medium and small businesses, individuals, law firms, investment and commercial banks, U.S. governmental agencies and foreign governments. We believe that we have a stable client base because of the fact that approximately 75% of our clients have used our services within the past 24 months. BUSINESS STRATEGY We plan to increase our profitability and revenues by developing our competitive strengths and taking advantage of favorable industry conditions, including projected industry growth, a consolidating market and international corporate expansion, as well as the following strategies: Expand Existing Customer Base. We are able to offer our client base a single source for global risk mitigation consulting services. In order to take advantage of marketing opportunities, we utilize a global account manager program. This program ensures that the full range of our services within each operating group around the world is effectively marketed to our clients. Our global account managers are compensated based upon the total relationship with a client. This program improves communication and client knowledge about our organization and services and broadens our relationship with our clients. Capitalize on Growing International Opportunities. With the continued growth of cross-border business transactions, companies are exposed to greater economic and political uncertainty. We intend to capitalize on this trend by using our respected brand name and business platform to attract new business opportunities. Additionally, we will continue to expand our physical presence into areas that are of strategic interest to our clients. For example, in the first half of 2000, we have opened offices in South Africa, Chile, India and Italy. Continue to Pursue Acquisition Opportunities. Our acquisition strategy is to pursue opportunities that will broaden our service offerings, provide complementary services and expand our geographic presence within the risk mitigation consulting services industry. We believe that our brand name and business platform are advantages in attracting acquisition opportunities. Our disciplined approach in evaluating acquisition opportunities leads us to pursue only those that fit our profile for quality, reliability, superior customer service and profitability. In many instances we know these candidates from previous business relationships. The efficient transfer and integration of acquired businesses and systems into our existing infrastructure remain one of our top priorities throughout our strategic growth. Our ability to use KRCS stock as consideration in potential acquisitions will be limited for two years following the split-up in order to preserve the split-up's tax free status. See "Relationship with the O'Gara Company -- Tax Sharing Agreement." Increase Stability of Revenue Base. We intend to increase revenue stability through: - the acquisition of businesses which have recurring revenue streams, such as our previous acquisitions in the areas of background checking and drug testing; - the continued expansion of our service line capabilities in existing businesses, such as forensic accounting and business valuation; - the continued expansion of our counter-cyclical businesses, such as financial recovery, restructuring, fraud investigation, insolvency and turnaround services; and - increased geographic diversity. Maximize Operating Efficiency. We seek to increase our efficiency by using cost effective methods to minimize response times, improve the quality of services and reduce costs. We intend to continue implementing systems to help us improve the organization of workflow, increase employee utilization, minimize administrative costs and facilitate the integration of acquired companies. Our principal executive offices are located at 900 Third Avenue, New York, New York 10022, and our telephone number is (212) 593-1000. SUMMARY FINANCIAL AND OPERATING DATA The following pages contain tables which present unaudited selected pro forma financial information for KRCS and historical selected financial information for Kroll-O'Gara. The selected unaudited pro forma financial information, except as discussed below, is derived from the unaudited pro forma financial statements and notes set forth elsewhere in this prospectus. You should read the selected unaudited pro forma financial information for KRCS together with the full unaudited pro forma financial statements and their notes, which are disclosed in "Selected Financial and Operating Data" and "Unaudited Pro Forma Combining Condensed Financial Statements." The historical selected financial information, except as discussed below, is derived from the audited financial statements and notes set forth elsewhere in this prospectus. You should read the selected historical financial information for Kroll-O'Gara together with its full historical financial statements and their notes. For financial reporting purposes, Kroll-O'Gara will be deemed to be the predecessor to KRCS. Accordingly, the unaudited pro forma financial information for KRCS is based upon the historical financial statements of Kroll-O'Gara. The unaudited pro forma financial information for KRCS also reflects the financial position and results of operations of The O'Gara Company as discontinued operations, which are not reflected in a pro forma presentation, as well as other aspects of the reorganization and split-up as more fully explained in "Unaudited Pro Forma Combining Condensed Financial Statements." Upon receipt of shareholder approval of the split-up, the historical financial statements of KRCS, which are the historical financial statements of Kroll-O'Gara, will be restated to eliminate the financial results of The O'Gara Company and reflect them as discontinued operations. Some of the KRCS unaudited pro forma financial information presented in the following tables is derived from unaudited pro forma financial statements that are not included in this prospectus. Specifically, the selected unaudited pro forma financial information as of December 31, 1995 through 1999 and as of June 30, 1999 and for the years ended December 31, 1995 and 1996 and for the six months ended June 30, 1999 are derived from the KRCS unaudited pro forma financial statements, which are not included in this prospectus. You also should read KRCS's pro forma financial information together with its "Management's Discussion and Analysis of Pro Forma Financial Condition and Pro Forma Results of Operations" which is included elsewhere in this prospectus. Some of the historical financial information presented in the following tables is derived from financial statements that are not included in this prospectus. Specifically, the selected historical financial information for Kroll-O'Gara as of December 31, 1997 and for the year ended December 31, 1996 is derived from Kroll-O'Gara's audited financial statements. The selected historical financial information for Kroll-O'Gara as of December 31, 1995 and 1996 and for the year ended December 31, 1995 is derived from Kroll-O'Gara's unaudited financial statements. The unaudited pro forma combining condensed financial statements are presented for illustrative purposes only and are not necessarily indicative of the operating results or financial position that would have been achieved if the split-up had been consummated as of the beginning of the periods indicated, nor are they indicative of future financial position or results of operations. KROLL RISK CONSULTING SERVICES, INC. SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION(1) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales........................... $ 64,226 $ 91,686 $109,585 $140,505 $203,431 $ 95,079 $109,714 Cost of sales....................... 43,185 63,057 70,830 83,131 119,837 55,119 64,365 -------- -------- -------- -------- -------- -------- -------- Gross profit...................... 21,041 28,629 38,755 57,374 83,594 39,960 45,349 Selling and marketing expenses...... 6,461 6,143 9,008 14,689 18,617 9,206 10,233 General and administrative expenses.......................... 18,642 21,639 24,148 29,740 54,278 22,557 29,268 Asset impairment.................... -- 125 -- -- -- -- -- Restructuring expenses.............. -- -- -- -- 4,072 4,072 -- Separation expenses................. -- -- -- -- -- -- 396 Merger related expenses............. -- -- 4,272 4,590 3,924 3,058 438 Failed merger related costs......... -- -- -- -- 858 -- 1,170 -------- -------- -------- -------- -------- -------- -------- Operating income (loss)........... (4,062) 723 1,327 8,355 1,845 1,067 3,844 Interest expense.................... (2,118) (2,230) (2,276) (2,255) (2,971) (1,076) (1,705) Earnings (losses) of equity investment........................ -- -- -- (825) (719) 67 (1,881) Other income, net................... 96 444 136 876 255 44 44 -------- -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations before provision for income taxes, extraordinary item and cumulative effect of change in accounting principle......... (6,084) (1,063) (813) 6,151 (1,590) 102 302 Provision (benefit) for income taxes............................. (824) (152) 483 2,176 (162) 346 1,054 -------- -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations...................... $ (5,260) $ (911) $ (1,296) $ 3,975 $ (1,428) $ (244) $ (752) ======== ======== ======== ======== ======== ======== ======== Basic earnings (loss) per share from continuing operations............. $ (0.48) $ (0.08) $ (0.09) $ 0.21 $ (0.06) $ (0.01) $ (0.03) ======== ======== ======== ======== ======== ======== ======== Basic weighted average shares outstanding....................... 11,019 12,112 14,751 19,337 22,006 21,815 22,267 ======== ======== ======== ======== ======== ======== ======== Diluted earnings (loss) per share from continuing operations........ $ (0.48) $ (0.07) $ (0.08) $ 0.20 $ (0.06) $ (0.01) $ (0.03) ======== ======== ======== ======== ======== ======== ======== Diluted weighted average shares outstanding....................... 11,019 12,670 15,560 19,908 22,596 22,548 22,267 ======== ======== ======== ======== ======== ======== ======== </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, AS OF JUNE 30, ---------------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital..................... $ 5,021 $ 2,372 $ 18,815 $ 35,306 $ 25,585 $ 27,580 $ 25,696 Net property, plant and equipment... 5,154 6,181 7,898 11,323 19,748 16,217 20,004 Total assets........................ 50,401 51,867 77,896 135,398 182,795 174,347 179,976 Long-term debt, including line-of-credit and current portion........................... 20,456 19,008 31,734 24,191 38,957 35,443 41,794 Stockholders' equity................ 10,313 10,032 16,161 75,061 97,226 94,455 99,053 </TABLE> ---------------- (1) See the unaudited pro forma combining condensed financial statements beginning on page 22 for information regarding the basis of presentation for the unaudited pro forma financial data as well as for a discussion of applicable pro forma entries. THE KROLL-O'GARA COMPANY SELECTED CONSOLIDATED FINANCIAL INFORMATION <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales................................ $ 94,999 $166,694 $210,324 $272,196 $321,938 $152,041 $163,049 Cost of sales............................ 66,764 118,922 143,213 178,421 203,457 93,553 104,711 -------- -------- -------- -------- -------- -------- -------- Gross profit........................... 28,235 47,772 67,110 93,774 118,481 58,488 58,338 Selling, general and administrative expenses, including amortization....... 31,886 38,949 49,824 65,167 102,332 42,881 55,541 Asset impairment......................... -- 125 -- -- -- -- -- Restructuring expenses................... -- -- -- -- 4,364 4,364 -- Separation expenses...................... -- -- -- -- -- -- 676 Failed merger related costs.............. -- -- -- -- 1,562 -- 2,000 Merger related expenses.................. -- -- 7,205 5,727 4,069 3,094 438 -------- -------- -------- -------- -------- -------- -------- Operating income (loss)................ (3,651) 8,698 10,081 22,880 6,153 8,149 (317) Interest expense......................... (2,897) (3,307) (5,244) (4,670) (4,966) (1,875) (2,872) Other income (expense), net.............. 18 388 (112) 929 98 70 (91) -------- -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations before minority interest, provision (benefit) for income taxes, extraordinary item and cumulative effect of change in accounting principle............................ (6,530) 5,779 4,725 19,139 1,286 6,344 (3,280) Minority interest........................ -- -- (156) -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations before provision (benefit) for income taxes, extraordinary item and cumulative effect of change in accounting principle................. (6,530) 5,779 4,569 19,139 1,286 6,344 (3,280) Provision (benefit) for income taxes..... (824) 366 3,305 7,353 2,429 2,773 1,380 -------- -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations before extraordinary item and cumulative effect of change in accounting principle................. (5,706) 5,413 1,264 11,786 (1,144) 3,571 (4,660) Loss from operations and disposal of discontinued clinical business, net of tax.................................... -- (1,274) -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Income (loss) before extraordinary item and cumulative effect of change in accounting principle................. (5,706) 4,139 1,264 11,786 (1,144) 3,571 (4,660) Extraordinary item, net of tax benefit... -- -- (194) -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Income (loss) before cumulative effect of change in accounting principle.... (5,706) 4,139 1,070 11,786 (1,144) 3,571 (4,660) Cumulative effect of change in accounting principle.............................. -- -- (360) -- (778) (778) -- -------- -------- -------- -------- -------- -------- -------- Net income (loss)........................ $ (5,706) $ 4,139 $ 710 $ 11,786 $ (1,922) $ 2,793 $ (4,660) ======== ======== ======== ======== ======== ======== ======== Basic earnings (loss) per share from continuing operations.................. $ (0.52) $ 0.45 $ 0.09 $ 0.61 $ (0.05) $ 0.16 $ (0.21) ======== ======== ======== ======== ======== ======== ======== Basic weighted average shares outstanding............................ 11,019 12,112 14,751 19,337 22,006 21,815 22,267 ======== ======== ======== ======== ======== ======== ======== Diluted earnings (loss) per share from continuing operations.................. $ (0.52) $ 0.43 $ 0.08 $ 0.59 $ (0.05) $ 0.16 $ (0.21) ======== ======== ======== ======== ======== ======== ======== Diluted weighted average shares outstanding............................ 11,019 12,670 15,560 19,908 22,006 22,548 22,267 ======== ======== ======== ======== ======== ======== ======== </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, AS OF JUNE 30, ---------------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital.......................... $ 5,044 $ 10,626 $ 38,329 $ 84,890 $ 62,042 $ 70,289 $ 53,994 Net property, plant and equipment........ 8,325 11,106 18,189 24,640 38,908 32,681 39,822 Total assets............................. 75,500 93,739 155,687 253,744 299,393 289,513 290,671 Long-term debt, including line-of-credit and current portion.................... 31,729 31,249 54,239 41,347 66,584 63,594 75,808 Shareholders' equity..................... 11,404 22,874 42,861 144,496 155,868 154,531 147,234 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001122832_combimatri_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001122832_combimatri_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before buying shares in this offering. Therefore, you should read this entire prospectus carefully, including the risks of purchasing our common stock discussed under the "Risk Factors" section and our financial statements and the related notes. COMBIMATRIX We are developing a technology to allow us to rapidly produce customizable biological array processors, which are semiconductor-based tools for use in identifying and determining the roles of genes, gene mutations and proteins. We believe these processors will facilitate the analysis of raw genomic data for use in the discovery and development of pharmaceutical products. We intend to market our products to the biotechnology, pharmaceutical and academic communities. Our biological array processor is a semiconductor coated with a three-dimensional layer of porous material in which deoxyribonucleic acid, ribonucleic acid, peptides or small molecules can be synthesized or immobilized within discrete test sites. Our system integrates a semiconductor, proprietary software and chemistry and the Internet. This system should enable researchers to conduct rapid, iterative experiments to analyze large amounts of genomic data, thereby reducing the time and costs associated with these efforts. OUR OPPORTUNITY The pharmaceutical and biotechnology industries are faced with increasing costs and substantial risks of failure in the drug discovery, development and commercialization process. These industries are turning to new technologies to help identify deficiencies in drug candidates as early as possible in order to make the drug discovery and development process more efficient and cost-effective. As vast amounts of genomic data are being generated by the Human Genome Project and other genomic research efforts, biotechnology and pharmaceutical companies are searching for ways to expedite the analysis of this data in order to be the first to bring new therapeutics and diagnostic tests to market. OUR APPROACH We believe that our system will enable us to design, customize and ship custom biological array processors to potential customers' specifications, typically in less than a day. Scientists using our system should be able to design and order custom biological array processors, conduct their tests, analyze the results and reorder additional processors incorporating modified test parameters, all within a few days. The following three scientific features are key components of our system: - our proprietary software, which directs the individually controlled electrodes at the test sites on the surface of our semiconductors and allows us to synthesize or immobilize different sequences of deoxyribonucleic acid, or DNA, or ribonucleic acid, or RNA, peptides or small molecules; - our virtual flask technology, which uses the chemistry of carefully engineered liquid solutions instead of physical walls around each test site and permits us to avoid the problem of chemical contamination between test sites; and - our porous reaction layer, which coats one surface of the semiconductor and functions as a three-dimensional environment for the synthesis or immobilization of relatively large quantities of DNA, RNA, peptides or small molecules so that a strong test signal is generated at each test site. As a result of these scientific features, we believe that the system we are designing will be rapidly customizable, accurate and cost-effective. We also believe that our system will be more versatile than currently available competing products because we are able to design and synthesize or immobilize sequences of DNA or RNA, peptides or small molecules in the test sites on our biological array processors. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION. DATED NOVEMBER 22, 2000. PROSPECTUS SHARES [LOGO] COMBIMATRIX CORPORATION COMMON STOCK $ PER SHARE ------------------ We are selling shares of our common stock. We have granted the underwriters an option to purchase up to additional shares of common stock to cover over-allotments. This is the initial public offering of our common stock. We currently expect the initial public offering price will be between $ and $ per share. We have applied to have our common stock included for quotation on the Nasdaq National Market under the symbol "CBMX." ------------------ INVESTING IN OUR COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 6. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------ <TABLE> <CAPTION> PER SHARE TOTAL --------- --------- <S> <C> <C> Public Offering Price $ $ Underwriting Discount $ $ Proceeds to CombiMatrix Corporation (before expenses) $ $ </TABLE> The underwriters expect to deliver the shares to purchasers on or about , 2001. ------------------ SALOMON SMITH BARNEY J.P. MORGAN & CO. , 2001 OUR STRATEGY Our goal is to provide the biotechnology, pharmaceutical and academic communities with the industry standard solution for rapid evaluation of genetic variation and function and for proteomic research. We intend to grow our business by: - RAPIDLY COMMERCIALIZING OUR INITIAL PRODUCTS. Our initial application for determining genetic variation is currently undergoing third-party, or beta, testing, and we expect to offer this product for commercial sale by the end of 2001. We expect to commence beta testing of our application for determining genetic function by the end of 2001 and offer this product for commercial sale by the end of 2002. - DEVELOPING PRODUCT APPLICATIONS IN PROTEOMICS. We have developed chemical processes for the rapid synthesis or immobilization of peptides and small molecules within the test sites on our biological array processors. We have produced in our laboratory customized test devices with peptides and small molecules for possible use in proteomic research. - EXPANDING OUR PROPOSED PRODUCT OFFERINGS. We are engaged in several research and development initiatives to expand our product offerings by increasing the number of test sites on our biological array processors and by developing additional applications of our technology for drug discovery and development. We believe that our biological array processor system may have potential applications in several additional fields. - ACCELERATING THE DEVELOPMENT OF PRODUCTS THROUGH ARRANGEMENTS WITH OTHER COMPANIES. We plan to explore the use of strategic alliances, partnerships, and collaborations to exploit market opportunities and to gain access to complementary technologies, distribution channels and information content. We have recently entered into agreements with Acacia Research Corporation, our majority stockholder, relating to the exploitation of our biological array processor technology within the fields of toxicology and material science. - PROTECTING AND STRENGTHENING OUR INTELLECTUAL PROPERTY. We have established a patent position for our products, and we intend to build on this position through internal research efforts, collaborations with others, strategic licensing, and possibly opportunistic acquisitions. We have generated no revenue from product sales to date. Our accumulated deficit through September 30, 2000 was approximately $12.8 million, and we expect to have increasing net losses and negative cash flow for the foreseeable future. We have not completed the testing of any of our proposed initial products, and we have not yet fully evaluated our technology for its applicability as a commercial product for proteomic research.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001122945_amr_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001122945_amr_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The information below is only a summary of more detailed information included in other sections of this prospectus. You should read the entire prospectus including the "Risk Factors" and the financial statements and related notes. Unless otherwise specified, all industry statistical data and projections in this prospectus are estimates from reports published by AMR Research. AMR RESEARCH OUR BUSINESS We are a leading provider of research and analysis on e-business strategies and technologies. Our research offers a comprehensive view of the rapidly evolving business processes fundamental to success in the new economy. We focus on industry-specific coverage of supply chain management, customer management, enterprise management, business-to-business e-commerce and all underlying enabling technologies. Clients use our in-depth analysis to develop and implement end-to-end e-business strategies consistent with their overall business goals. We target our services to senior management, technology and marketing professionals and business strategists at large enterprises and technology and service vendors. Our core research and analysis offering, the E-Business Advisory Service, is provided through annual and multi-year subscription contracts. We offer clients an integrated set of services, including monthly qualitative and quantitative reports, daily and weekly news analysis, research analyst access and participation at our executive conferences. Our interactive web site facilitates personalized access to our research as well as proprietary supporting data. We believe our research is distinguished by the extensive industry experience of our research analysts. As of August 31, 2000, our research analysts averaged over 15 years of experience in a variety of industries, including manufacturing, retail, software and technology, financial services and management consulting. Our client services team focuses on creating long-term, interactive client relationships, which we believe has contributed to our high renewal rates. During the twelve months ended June 30, 2000, approximately 80% of our client contracts, as measured in units, and 102%, as measured by dollar value, were renewed. As of June 30, 2000, we had 887 client contracts for our E-Business Advisory Service, a 35% increase from June 30, 1999. Our revenues were $25.4 million in 1999. Revenues increased 64% to $17.4 million for the six months ended June 30, 2000, from $10.6 million for the six months ended June 30, 1999. Our net income was $2.7 million in 1999 and $2.3 million for the six months ended June 30, 2000. MARKET OPPORTUNITY We believe that the rapid growth of e-commerce and the related increase in new technology-led business models have created significant opportunities and challenges for traditional and emerging businesses. Domestic business-to-business e-commerce transactions totaled approximately $215 billion in 1999, representing less than 2% of the approximately $16.0 trillion of total domestic commerce in 1999. We estimate that these transactions will grow to approximately $5.7 trillion by 2004. To capitalize on this growth, traditional and emerging businesses are making significant capital investments to implement business process strategies and technology solutions critical to achieving their core business goals, including supply chain management, customer relationship management and e-commerce applications. We believe that the development and implementation of these technology-led business strategies require a close collaboration of senior business executives, sales and marketing executives and technology professionals. These efforts are complicated by the acceleration in the rate of technology change and by the rapid growth in the number and complexity of new technology platforms and applications. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION -- SEPTEMBER 22, 2000 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PROSPECTUS , 2000 LOGO SHARES OF COMMON STOCK AMR RESEARCH, INC.: - We are a leading provider of research and analysis on e-business strategies and technologies. - We focus on industry-specific coverage of supply chain management, customer management, enterprise management, business-to-business e-commerce and all underlying enabling technologies. PROPOSED SYMBOL AND MARKET: - AMRR/Nasdaq National Market THE OFFERING: - We are offering shares of our common stock. - The underwriters have an option to purchase an additional shares from us to cover over-allotments. - This is our initial public offering, and no public market currently exists for our shares. - We currently estimate that the initial public offering price of the shares will be between $ and $ per share. - Closing: , 2000. <TABLE> <CAPTION> ----------------------------------------------------------------------------------- Per Share Total <S> <C> <C> ----------------------------------------------------------------------------------- Public offering price: $ $ Underwriting fees: Proceeds to AMR Research: ----------------------------------------------------------------------------------- </TABLE> THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6. -------------------------------------------------------------------------------- NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS DETERMINED WHETHER THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. NOR HAVE THEY MADE, NOR WILL THEY MAKE, ANY DETERMINATION AS TO WHETHER ANYONE SHOULD BUY THESE SECURITIES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -------------------------------------------------------------------------------- DONALDSON, LUFKIN & JENRETTE THOMAS WEISEL PARTNERS LLC ADAMS, HARKNESS & HILL, INC. WILLIAM BLAIR & COMPANY DLJDIRECT INC. As a result of these trends, we believe there is a large and rapidly growing demand for credible, independent and industry-specific advice in all critical areas of e-business strategy, technology and applications. In particular, we believe that a substantial market opportunity for providers of this independent expertise exists among large, traditional companies that are just beginning to embrace e-business opportunities, emerging new economy businesses and technology and service vendors that are increasingly challenged to maintain or gain competitive advantages. We expect demand will also increase as e-business impacts new industries and expands into other geographic areas. OUR STRATEGY Our objective is to be recognized as the leading provider of e-business research and analysis. Key elements of our strategy include: - Expand our client base; - Increase sales to existing clients; - Introduce new research practices; - Expand our international presence; - Enhance the AMR Research brand; and - Pursue selective acquisitions and strategic partnerships. HISTORY We were founded in 1986 and initially focused on providing in-depth research and analysis on technology-led business processes, such as supply chain management, customer management and enterprise management, primarily in manufacturing environments. We were incorporated on December 22, 1986 in the Commonwealth of Massachusetts and reincorporated in Delaware on July 31, 1996. Since December 22, 1986, we have elected to be taxed under subchapter S of the Internal Revenue Code of 1986, as amended. Prior to the completion of this offering, our stockholders will terminate this election and we will be subject to corporate-level federal and state income taxes at prevailing corporate rates. We maintain executive offices at Two Oliver Street, Boston, Massachusetts, 02109, with regional offices in London, England and Irvine, California. Our main telephone number is (617) 542-6600. Our web site can be found at www.amrresearch.com. Information contained on our web site is not intended to be part of this prospectus and is not incorporated into this prospectus. References to "we," "us" or "AMR Research" refer to AMR Research, Inc., its subsidiary and all predecessor entities. We have applied for and received service mark registrations for, among others, "AMR Research". Any other trademark, trade name or service mark appearing in this prospectus belongs to its holder. INSIDE FRONT COVER OF PROSPECTUS: [Graphic depicting a company research model appears here, consisting of a series of concentric circles labeled "Business Strategy", "E-Business Strategy", "B2B Marketplace Strategies", "Supply Chain Management", "Enabling Technologies", and "Industry-Specific Implementation."] THE OFFERING Common stock offered.......... shares Common stock to be outstanding after the offering............ shares Use of proceeds............... We estimate that we will receive net proceeds of approximately $ million from this offering, assuming an initial public offering price of $ per share. We plan to use the net proceeds from this offering for expansion of our research, sales and marketing staffs, development of new research practices, international expansion, technology and leasehold improvements, potential acquisitions and general corporate purposes. Over-allotment option......... We have granted to the underwriters an option to purchase up to an additional shares solely to cover over-allotments. Dividend policy............... We do not anticipate paying cash dividends in the foreseeable future. Proposed Nasdaq symbol........ AMRR The outstanding share information is based on our shares outstanding as of , 2000. This information excludes 5,777,869 shares of common stock issuable upon the exercise of stock options outstanding under our option plan as of August 31, 2000, with a weighted average exercise price of $1.33 per share. In addition, this information excludes shares of common stock reserved for future issuance under our stock option plans as of , 2000. Except as otherwise noted, all information in this prospectus assumes: - no exercise of the underwriters' over-allotment option; - a merger of our Class A common stock and Class B common stock into one class of common stock, effected prior to this offering; and - a five-for-two stock split, effected prior to this offering. SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) The following tables present our summary financial and operating data. This summary consolidated financial and operating data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus. These results, including the pro forma data, are not necessarily indicative of results for any future period. <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------------------- ----------------- 1995 1996 1997 1998 1999 1999 2000 (UNAUDITED) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Research services.......... $ 3,656 $ 6,577 $10,451 $15,101 $22,097 $ 9,440 $15,383 Other...................... 860 630 1,229 2,831 3,287 1,151 2,024 ------- ------- ------- ------- ------- ------- ------- Total revenues.......... 4,516 7,207 11,680 17,932 25,384 10,591 17,407 Operating expenses: Cost of services........... 2,029 3,096 4,471 7,212 11,492 5,296 6,905 Sales and marketing........ 1,173 1,549 2,745 4,541 6,565 2,904 4,827 General and administrative.......... 946 1,346 2,643 3,404 4,773 2,169 3,386 ------- ------- ------- ------- ------- ------- ------- Total operating expenses.............. 4,148 5,991 9,859 15,157 22,830 10,369 15,118 ------- ------- ------- ------- ------- ------- ------- Operating income............. 368 1,216 1,821 2,775 2,554 222 2,289 Other income, net............ 73 123 167 235 242 122 139 ------- ------- ------- ------- ------- ------- ------- Income before income tax provision.................. 441 1,339 1,988 3,010 2,796 344 2,428 Income tax provision......... 7 42 92 160 121 15 106 ------- ------- ------- ------- ------- ------- ------- Net income.............. $ 434 $ 1,297 $ 1,896 $ 2,850 $ 2,675 $ 329 $ 2,322 ======= ======= ======= ======= ======= ======= ======= PRO FORMA DATA (UNAUDITED): Historical income before income tax provision....... $ 441 $ 1,339 $ 1,988 $ 3,010 $ 2,796 $ 344 $ 2,428 Pro forma income tax provision (1).............. 187 566 841 1,266 1,203 148 1,003 ------- ------- ------- ------- ------- ------- ------- Pro forma net income.... $ 254 $ 773 $ 1,147 $ 1,744 $ 1,593 $ 196 $ 1,425 ======= ======= ======= ======= ======= ======= ======= Pro forma earnings per common share (2): Basic...................... $ 0.02 $ 0.07 $ 0.10 $ 0.15 $ 0.13 $ 0.02 $ 0.13 ======= ======= ======= ======= ======= ======= ======= Diluted.................... $ 0.02 $ 0.07 $ 0.09 $ 0.13 $ 0.11 $ 0.01 $ 0.10 ======= ======= ======= ======= ======= ======= ======= Weighted average common shares outstanding: Basic...................... 11,875 11,875 11,875 11,875 11,936 11,902 10,936 ======= ======= ======= ======= ======= ======= ======= Diluted.................... 11,875 11,875 12,554 13,702 14,270 14,235 13,789 ======= ======= ======= ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, AS OF JUNE 30, --------------------------------------------- ----------------- 1995 1996 1997 1998 1999 1999 2000 <S> <C> <C> <C> <C> <C> <C> <C> SELECTED OPERATING DATA (UNAUDITED): Number of client contracts........ 238 368 501 582 758 655 887 Annual contract value (in thousands)...................... $4,210 $7,600 $12,000 $16,900 $27,400 $21,900 $35,600 Total contract value (in thousands)...................... $4,200 $8,100 $13,100 $20,500 $37,400 $26,600 $48,800 Number of employees............... 28 47 58 94 144 126 152 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 2000 --------------------------------------- PRO FORMA ACTUAL PRO FORMA(3) AS ADJUSTED(4) (UNAUDITED) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.................................. $ 9,460 $ 9,460 Deferred revenue........................................... 17,461 17,461 Working capital(5)......................................... (4,563) (7,798) Total assets............................................... 20,413 20,413 Total stockholders' equity (deficit)(6).................... (2,365) (5,600) </TABLE> ------------------------------ (1) We have elected to be taxed, since December 22, 1986, under subchapter S of the Internal Revenue Code of 1986, as amended, whereby individual stockholders are liable for individual federal and certain state income taxes on our taxable income. Prior to the completion of this offering, our stockholders will terminate our S corporation election and we will be subject to corporate-level federal and state income taxes at prevailing corporate rates. Accordingly, the pro forma income tax adjustments represent the income taxes that would have been recorded if we had been a C corporation for the periods presented. See note 2 of notes to consolidated financial statements. (2) Pro forma basic and diluted earnings per common share are computed by dividing pro forma net income by the weighted average number of shares of common stock and, in the case of diluted earnings per common share, common equivalent shares, outstanding during the period. See note 3 of notes to consolidated financial statements. (3) Pro forma to give effect to the (i) distributions of a portion of previously undistributed S corporation earnings taxed or taxable to our stockholders of approximately $2.6 million based on earnings through the termination of our S corporation election; and (ii) termination of our S corporation election and the recognition of a net deferred income tax liability of approximately $600,000 as of June 30, 2000. See notes 2 and 12 of notes to consolidated financial statements. (4) Adjusted to reflect the sale of shares of common stock offered hereby, at an assumed initial public offering price of $ per share, after deducting the underwriting discount and estimated offering expenses payable by us. (5) Our working capital balances are generally negative because of the timing of cash collections from our clients. Our client contracts are typically annual and paid in advance. Accordingly, a substantial portion of our billings is initially recorded as deferred revenue and amortized into revenue during the term of the contact to which such billings relate. (6) The stockholders' deficit at June 30, 2000 reflects our repurchase of approximately 1.2 million shares for approximately $5.0 million during the six months ended June 30, 2000. Additionally, the pro forma stockholders' deficit as of June 30, 2000 reflects the distribution of $2.6 million and the recognition of a net deferred income tax liability of approximately $600,000 described in footnote (3) above.
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+PROSPECTUS SUMMARY YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE SUMMARY, TOGETHER WITH THE FINANCIAL DATA AND RELATED NOTES BEFORE MAKING AN INVESTMENT DECISION. THE TERMS "SPECIALTY," "SPECIALTY LABORATORIES," "WE," "US" AND "OUR" AS USED IN THIS PROSPECTUS REFER TO SPECIALTY LABORATORIES, INC. AND ITS SUBSIDIARIES AS A COMBINED ENTITY, EXCEPT WHERE IT IS MADE CLEAR THAT SUCH TERM MEANS ONLY THE PARENT COMPANY. SPECIALTY LABORATORIES OUR COMPANY We are a leading research-based clinical laboratory focused predominantly on developing and performing esoteric clinical laboratory tests, which we refer to as assays. Esoteric assays are complex, comprehensive or unique tests used to diagnose, evaluate and monitor patients. These assays are often performed on sophisticated instruments by highly skilled personnel and are therefore offered by a limited number of clinical laboratories. We believe we offer one of the industry's most comprehensive menus of esoteric assays, many of which have been developed through our internal research and development efforts. Our primary customers are hospitals, independent clinical laboratories and physicians. We educate physicians on the clinical value of our assays through our information-oriented marketing campaigns. We strengthen our customer relationships by offering all of our customers information technology solutions that accelerate and automate assay ordering and results reporting. Approximately 85% of our transactions with our customers are conducted electronically, with 50% of these transactions occurring over the Internet. Our development of 600 new or improved assays in the past five years has enhanced our reputation as a prolific developer of first-to-market assays. In particular, we have leveraged our expertise in gene-based diagnostics to produce novel assays in many high growth segments of esoteric testing, including fields of medicine such as infectious disease, gastroenterology, oncology and cardiology. We market and sell many of our esoteric assays under trademarks such as GenotypR-TM-, our assays for predicting resistance of the HIV virus to medication, and ANAlyzer-Registered Trademark-, our assays used to help diagnose complex autoimmune disorders. For the nine months ended September 30, 2000, approximately 43% of our net revenue was derived from branded esoteric assays. We have increased profitability from continuing operations, exclusive of write-downs for unused facilities and stock-based compensation charges, in each of the last seven quarters. This increase in operating profitability has resulted from refocusing our sales and marketing efforts, investing in information technology and aggressively improving our operating efficiency. For the nine months ended September 30, 2000, we had net revenue of $113.7 million and net income of $6.6 million. According to Lab Industry Strategic Outlook 2000, published by Washington G-2 Reports, the esoteric clinical laboratory testing market accounts for approximately $2.0 billion in annual revenue. We believe that the size of the esoteric assay market will increase as a result of trends such as the growing incidence of chronic disease, scientific advances driving development of more sophisticated and specialized clinical assays, increased attention to cost-effective disease detection and prevention, and increased life expectancy. COMPETITIVE ADVANTAGES We believe we are uniquely positioned in the esoteric assay market due to the following competitive advantages: - our comprehensive menu of over 3,500 esoteric assays, designed to meet the specific needs of physician specialists; - our research and development expertise in developing novel assays, such as our GenotypR-TM- line of assays that predict HIV resistance; - alignment of our interests with those of our hospital customers by complementing, rather than competing with, their outreach laboratory business; - customer-focused information technology platforms that accelerate and automate assay ordering and results reporting; and - operating efficiency highlighted by a specimen management system that we expect to reduce the potential for human error, increase productivity of laboratory staff and improve turn-around time. STRATEGY We expect to grow our business by leveraging our reputation as a leading provider of esoteric assays through implementation of the following strategies: - continue introductions of first-to-market assays by leveraging our internal research and development capabilities, and licensing technologies from preferred strategic partners; - educate the physician specialists responsible for ordering our assays through information-oriented marketing campaigns; - increase penetration of the hospital customer base, which represents our largest growth opportunity; - leverage proprietary information technology applications; and - pursue complementary markets by expanding our menu of assays for broader applications and targeting additional customer segments. ------------------ We were incorporated in 1975 under the name Clinical Immunologies, Inc. We changed our name in 1985 to Specialty Laboratories, Inc. Our headquarters are located at 2211 Michigan Avenue, Santa Monica, California 90404 and our telephone number is (310) 828-6543. Our web site address is www.specialtylabs.com. The information on our web site is not a part of this prospectus. ------------------ Specialty Laboratories-Registered Trademark-, DataPassport-Registered Trademark- and ANAlyzer-Registered Trademark- are registered trademarks of Specialty Laboratories, Inc. DataPassportMD-TM-, DataPassport Clinical Trials-TM-, DataPassport II-TM-, TARO-TM-, Outreach Express-TM-, GenotypR-TM-, UltraQuant-TM-, "We help doctors help patients-Registered Trademark-" and DPMD-TM- are trademarks of Specialty Laboratories, Inc. All other trademarks and service marks used herein are the property of their respective owners. THE OFFERING <TABLE> <S> <C> Common stock offered by Specialty Laboratories............................ 5,000,000 shares Common stock outstanding after the offering................................ 20,187,507 shares Use of proceeds........................... We estimate that our net proceeds from this offering will be approximately $68.0 million. We intend to use these proceeds for: - repayment of the $12.1 million outstanding under our credit facilities; - expansion of sales and marketing capabilities, research and development and other general corporate purposes, including working capital; and - potential acquisition of complementary businesses, products or technologies. See "Use of Proceeds" for more information concerning our intended use of proceeds from this offering. Risk factors.............................. See "Risk Factors" and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock. Proposed New York Stock Exchange symbol... SP </TABLE> The number of shares to be outstanding after the offering includes all shares outstanding as of September 30, 2000, but excludes: - 4,020,280 shares of common stock reserved for issuance under our 2000 Stock Incentive Plan, of which 1,871,971 shares are subject to outstanding options as of September 30, 2000, at a weighted average exercise price of $2.03 per share; and - 330,000 shares of common stock reserved for issuance under our 2000 Employee Stock Purchase Plan. Unless otherwise indicated, the information in this prospectus assumes that the underwriters have not exercised their over-allotment option and reflects a 2.2-for-1 stock split on October 30, 2000. SUMMARY CONSOLIDATED FINANCIAL DATA The following table presents our summary consolidated financial data. You should read the summary financial information set forth below in conjunction with "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes appearing elsewhere in this prospectus. As adjusted information has been presented to give effect to the sale of 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $15.00 per share, after deducting the underwriting discounts and estimated offering expenses, and repayment of all of our debt outstanding under our credit facilities. See "Use of Proceeds" and "Capitalization." <TABLE> <CAPTION> NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------ ------------------- 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenue........................................ $106,357 $113,843 $130,142 $96,676 $113,714 Costs and expenses: Costs of services................................ 60,157 65,098 74,784 56,161 64,111 Selling, general and administrative (exclusive of stock-based compensation charges).............. 39,813 42,084 46,903 34,769 36,258 Stock-based compensation charges (1)............. -- -- 2,818 2,693 706 Write-down of unused facilities (2).............. -- -- 2,209 2,209 369 -------- -------- -------- ------- -------- Total costs and expenses........................... 99,970 107,182 126,714 95,832 101,444 -------- -------- -------- ------- -------- Operating income................................... 6,387 6,661 3,428 844 12,270 Interest expense, net.............................. 883 1,159 1,639 1,139 1,016 -------- -------- -------- ------- -------- Income (loss) from continuing operations before provision (benefit) for income taxes............. 5,504 5,502 1,789 (295) 11,254 Provision for income taxes......................... 2,506 2,273 930 77 4,644 -------- -------- -------- ------- -------- Income (loss) from continuing operations........... 2,998 3,229 859 (372) 6,610 Loss from discontinued operations (3).............. (936) (3,060) (2,001) (2,001) -- -------- -------- -------- ------- -------- Net income (loss).................................. $ 2,062 $ 169 $ (1,142) $(2,373) $ 6,610 ======== ======== ======== ======= ======== Income (loss) per share (4): Basic: Continuing operations............................ $ 0.19 $ 0.21 $ 0.05 $ (0.02) $ 0.42 Discontinued operations.......................... (0.06) (0.20) (0.12) (0.13) -- -------- -------- -------- ------- -------- $ 0.13 $ 0.01 $ (0.07) $ (0.15) $ 0.42 ======== ======== ======== ======= ======== Diluted: Continuing operations............................ $ 0.19 $ 0.21 $ 0.05 $ (0.02) $ 0.38 Discontinued operations.......................... (0.06) (0.20) (0.12) (0.13) -- -------- -------- -------- ------- -------- $ 0.13 $ 0.01 $ (0.07) $ (0.15) $ 0.38 ======== ======== ======== ======= ======== Weighted-average shares outstanding (4): Basic............................................ 15,457 15,459 16,045 16,037 15,904 Diluted.......................................... 15,477 15,505 17,004 16,037 17,426 OTHER DATA: Adjusted EBITDA (5)................................ $ 9,942 $ 10,844 $ 13,864 $ 9,664 $ 17,733 Adjusted EBITDA as a % of net revenue.............. 9.3% 9.5% 10.7% 10.0% 15.6% Cash flow provided by continuing operating activities....................................... $ 5,994 $ 7,353 $ 3,315 $ 2,873 $ 9,210 Cash flow used in investing activities............. (15,128) (5,158) (3,696) (2,825) (4,644) Cash flow provided by (used in) financing activities....................................... 11,047 2,942 (56) 534 (5,094) </TABLE> (CONTINUED ON FOLLOWING PAGE; FOOTNOTES APPEAR ON FOLLOWING PAGE) <TABLE> <CAPTION> AS OF SEPTEMBER 30, 2000 -------------------------- ACTUAL AS ADJUSTED ---------- ------------- (IN THOUSANDS, UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Working capital............................................. $10,035 $ 78,035 Total assets................................................ 64,615 132,615 Long-term debt, including current portion................... 12,125 -- Total shareholders' equity.................................. 26,761 94,761 </TABLE> ------------------------ (1) We recorded stock-based compensation charges of $2.8 million for the year ended December 31, 1999 in connection with the sale of our common stock to management and the grant of stock options to management and directors in 1999. We recorded stock-based compensation charges of $0.7 million for the nine months ended September 30, 2000 resulting from the amortization of deferred stock-based compensation and variable stock-based compensation charges on certain stock options. (2) During the year ended December 31, 1999, management decided to abandon our Memphis facility, resulting in a write-down of the unused facility totaling $2.2 million, which included a reserve of $0.8 million for future net lease costs. During the nine months ended September 30, 2000, a month-to-month lease with a related party was terminated on a facility resulting in a write-off of $0.4 million for the unamortized leasehold improvements related to the facility. (3) We discontinued all foreign operations in 1999. For details of the components of discontinued operations, see Note 3 of the consolidated financial statements contained elsewhere in this prospectus. Because these operations were substantially shut down in 1999, we incurred no related ongoing losses during the nine months ended September 30, 2000. (4) All periods have been adjusted for a 2.2-for-1 stock split on October 30, 2000. (5) Adjusted EBITDA is defined as EBITDA adjusted to exclude stock-based compensation charges and write-down of unused facilities. EBITDA consists of income (loss) from continuing operations before interest, income taxes, depreciation and amortization. EBITDA and adjusted EBITDA should not be considered as measures of financial performance under generally accepted accounting principles (GAAP). Items excluded from EBITDA and adjusted EBITDA are significant components in understanding and assessing financial performance. We present EBITDA and adjusted EBITDA, which are non-GAAP measures, to enhance the understanding of our operating results. EBITDA and adjusted EBITDA should not be considered in isolation or as alternatives to net income, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because EBITDA and adjusted EBITDA are not measurements determined in accordance with GAAP and are thus susceptible to varying calculations, EBITDA and adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies. For reconciliation of income (loss) from continuing operations to adjusted EBITDA and adjusted net income, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview."
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001123453_o-gara-co_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001123453_o-gara-co_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information from this prospectus. It may not contain all the information that is important to you. You should read this entire prospectus carefully, including the financial statements and related notes. For additional information, see "Where You Can Find More Information" on page 57. THE COMPANY The O'Gara Company is a leading provider of armored products, including ballistic and blast protected armoring systems for commercial and military vehicles, aircraft and missile components, and security services. Our O'Gara-Hess & Eisenhardt Armoring Company subsidiary has a long and distinguished history dating back to 1876 as a horse-drawn carriage builder. In the 1940s, OHE designed and built one of the earliest armored presidential limousines, which was used by President Harry S Truman. Since then, OHE's armored commercial vehicles have been used by U.S. Presidents, other heads of state, business executives and VIPs worldwide. OHE also has been the sole source provider of armoring systems for the U.S. Military's Up-Armored High Mobility Multi-Purpose Wheeled Vehicles, commonly known as HMMWVs, since their introduction in 1994. Additionally, through ITI, our International Training, Incorporated subsidiary, The O'Gara Company offers driver training, firearms training, threat recognition and avoidance training and other security related services. In 1996 our predecessor, also then named The O'Gara Company, completed an initial public offering and embarked on a strategy of rapid growth, primarily through acquisitions. In late 1997, a subsidiary of that company merged into Kroll Holdings, Inc. and the parent company's name was changed to The Kroll-O'Gara Company. Kroll-O'Gara continued the strategy of rapid growth; however, early in 1999, management disagreements arose over the appropriate method of managing Kroll-O'Gara and the strategic directions in which the company should proceed. When it became evident that these disagreements could not be eliminated, Kroll-O'Gara's Board of Directors directed management to explore alternatives for the company to improve operations and thereby enhance shareholder value. Ultimately this led to the decision by Kroll-O'Gara's Board to reorganize the company and to split it into two new public companies which will continue separately the principal historical Kroll and O'Gara businesses. The O'Gara Company is the new corporation organized to become the public holding company for, and to continue, Kroll-O'Gara's security products and services business. BUSINESS STRATEGY The key elements of The O'Gara Company's business strategy will be to: Continue to expand armored passenger vehicle sales in the U.S. and foreign markets. We intend to increase sales in countries where we already have manufacturing locations by expanding our product offering, growing our dealer networks, expanding our relationships and armoring agreements with original vehicle manufacturers, expanding our involvement in the market for used armored vehicles and offering alternative financing arrangements for our vehicles. Also, we intend to continue to review opportunities to acquire or establish manufacturing operations in additional countries. Expand our cash-in-transit vehicle sales. The money transport industry has been consolidating and increasingly is served by a few large and global companies. We believe that our ability to produce armored commercial vehicles in several countries around the world will appeal to the major companies involved in the money transport industry as they seek operating efficiencies through fleet standardization and volume purchasing on a global, rather than a local, basis. Additionally, we are exploring the feasibility of high technology non-armor security solutions as an addition or a replacement to traditional means of protecting cash shipments. Expand our services to armored vehicle customers in each of our geographic locations. The installed base of our armored commercial and passenger vehicles continues to increase. As this trend continues, we intend to expand our after-sale service offerings. Additionally, we intend to offer our customers other services such as vehicle tracking, incident response and, for our commercial customers, logistics and information system supports as they pertain to fleet management. Grow our training and security services. Through ITI we offer driver training, firearms training, threat recognition and avoidance training and various other security related services. We intend to increase our sales in this area to the U.S. Government, capitalizing on its practice of increasingly outsourcing services to proven suppliers, and aggressively to expand our offering of these services in foreign markets where we have a presence as well as in countries in which personal safety concerns are the highest. Expand military sales. We are working with AM General, the manufacturer of the HMMWV, and with manufacturers of other tactical wheeled vehicles to market a variety of armored tactical wheeled vehicles to the U.S. Government as well as foreign governments. We also are expanding our efforts to work with the U.S. Government and with other government contractors to develop armoring solutions for vehicles that traditionally have been unprotected. Additionally, as the fleet of fielded Up-Armored HMMWVs grows, the requirements for spare parts and technical support will continue to expand. Finally, we are developing and implementing sophisticated integrations of hardware and electronic components for the HMMWV as well as other vehicles. Improve efficiencies. As we increase our sales around the world, we intend continually to increase our efficiencies by leveraging our global purchasing capabilities, standardizing our production and engineering efforts and taking advantage of economies of scale. Pursue strategic acquisition opportunities. The fragmented nature of the global security industry provides ample opportunities for strategic acquisitions. We believe that we are well positioned to consolidate companies in the armoring and security training sectors of the industry as well as to broaden the scope of our business through acquisitions. The O'Gara Company's principal executive offices are located at 9113 LeSaint Drive, Fairfield, Ohio 45014. Our telephone number is (513) 881-9800. SUMMARY FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) You should read the following summary data in conjunction with our combined financial statements and related notes, including the unaudited interim and pro forma combined financial information, and other financial information which appear later in this prospectus. The pro forma information gives effect to the split-up of Kroll-O'Gara. THE O'GARA COMPANY SELECTED COMBINED FINANCIAL INFORMATION(1) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 ------- ------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales............................. $30,773 $75,008 $100,739 $131,690 $118,507 $ 56,962 $ 53,335 Cost of sales......................... 23,579 55,865 72,383 95,290 83,620 38,434 40,347 ------- ------- -------- -------- -------- -------- -------- Gross profit........................ 7,194 19,143 28,356 36,400 34,887 18,528 12,988 Selling, general and administrative expenses, including amortization.... 6,783 11,167 16,668 20,738 29,438 11,119 16,039 Restructuring expenses................ -- -- -- -- 292 292 -- Failed merger related costs........... -- -- -- -- 704 -- 830 Separation expenses................... -- -- -- -- -- -- 280 Merger related expenses............... -- -- 2,933 1,137 145 36 -- ------- ------- -------- -------- -------- -------- -------- Operating income (loss)............. 411 7,976 8,755 14,525 4,309 7,081 (4,161) Interest expense...................... (779) (1,077) (2,967) (2,415) (1,995) (799) (1,167) Other income (expense), net........... (78) (56) (249) 53 (158) 28 (134) ------- ------- -------- -------- -------- -------- -------- Income (loss) before minority interest, provision for income taxes, extraordinary item and cumulative effect of change in accounting principle.............. (446) 6,843 5,538 12,163 2,156 6,310 (5,462) Minority interest..................... -- -- (156) -- -- -- -- ------- ------- -------- -------- -------- -------- -------- Income (loss) before provision for income taxes, extraordinary item and cumulative effect of change in accounting principle.............. (446) 6,843 5,382 12,163 2,156 6,310 (5,462) Provision for income taxes............ -- 518 2,822 5,016 2,303 2,454 327 ------- ------- -------- -------- -------- -------- -------- Income (loss) before extraordinary item and cumulative effect of change in accounting principle.... (446) 6,325 2,560 7,147 (147) 3,856 (5,789) Extraordinary item, net of tax benefit............................. -- -- (194) -- -- -- -- ------- ------- -------- -------- -------- -------- -------- Income (loss) before cumulative effect of change in accounting principle......................... (446) 6,325 2,366 7,147 (147) 3,856 (5,789) Cumulative effect of change in accounting principle................ -- -- -- -- (778) (778) -- ------- ------- -------- -------- -------- -------- -------- Net income (loss)..................... $ (446) $ 6,325 $ 2,366 $ 7,147 $ (925) $ 3,078 $ (5,789) ======= ======= ======== ======== ======== ======== ======== Basic and diluted earnings (loss) per share............................... $ (0.07) $ 1.05 $ 0.39 $ 1.19 $ (0.15) $ 0.51 $ (0.96) ======= ======= ======== ======== ======== ======== ======== Basic and diluted weighted average shares outstanding.................. 6,000 6,000 6,000 6,000 6,000 6,000 6,000 ======= ======= ======== ======== ======== ======== ======== </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, AS OF JUNE 30, ---------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 ------- ------ ------- ------- ------- -------- -------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital (deficit)................. $(2,036) $6,266 $19,102 $49,685 $36,443 $ 42,049 $ 26,496 Net property, plant and equipment......... 3,171 4,925 10,292 13,318 19,159 16,464 19,818 Total assets.............................. 24,674 41,872 77,743 120,802 118,272 119,101 111,028 Long-term debt, including line-of-credit and current portion..................... 10,529 12,241 26,202 17,155 27,628 28,151 34,014 Shareholder's equity...................... 665 12,749 23,171 68,771 58,098 60,076 46,712 </TABLE> --------------- (1) See Note 1 to our combined financial statements for discussion regarding the basis of presentation. THE O'GARA COMPANY SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION(1) <TABLE> <CAPTION> YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1999 JUNE 30, 2000 ----------------- ---------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales................................................ $118,507 $ 53,335 Cost of sales............................................ 83,620 40,347 -------- -------- Gross profit........................................... 34,887 12,988 Selling and marketing expenses........................... 8,854 4,390 General and administrative expenses...................... 20,584 11,649 Restructuring expenses................................... 292 -- Separation expenses...................................... -- 280 Merger related expenses.................................. 145 -- Failed merger related costs.............................. 704 830 -------- -------- Operating income (loss)................................ 4,308 (4,161) Interest expense......................................... (1,995) (1,167) Other income (expense)................................... (157) (134) -------- -------- Income (loss) from continuing operations before minority interest, provision for income taxes, extraordinary item and cumulative effect of change in accounting principle............................. 2,156 (5,462) Minority interest........................................ 719 1,881 -------- -------- Income (loss) from continuing operations before provision for income taxes, extraordinary item and cumulative effect of change in accounting principle........................................... 2,875 (3,581) Provision for income taxes............................... 2,591 327 -------- -------- Income (loss) from continuing operations............... $ 284 $ (3,908) ======== ======== Basic and diluted earnings (loss) per share from continuing operations.................................. $ 0.05 $ (0.65) ======== ======== Basic and diluted weighted average shares outstanding.... 6,000 6,000 ======== ======== </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 2000 ---------------- <S> <C> <C> BALANCE SHEET DATA: Working capital............................................................. $ 25,727 Net property, plant and equipment........................................... 19,818 Total assets................................................................ 109,997 Long-term debt, including line-of-credit and current portion................ 34,014 Shareholders' equity........................................................ 44,202 </TABLE> ---------------- (1) See the unaudited pro forma combining condensed financial statements beginning on page F-44 for information regarding basis of presentation for our unaudited pro forma financial data as well as for a discussion of applicable pro forma entries.
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+PROSPECTUS SUMMARY This summary highlights information we present in greater detail elsewhere in this prospectus. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements as a result of factors described under "Risk Factors" and elsewhere in this prospectus. MCMS, INC. We are a global leading provider of advanced electronics manufacturing services to original equipment manufacturers who primarily serve the data communications, telecommunications, and computer/memory module industries. Original equipment manufacturers design, build, market and sell new products to end users of these products. These manufacturers may outsource one or more of these functions to electronics manufacturing services providers. We target customers that are technology leaders in rapidly growing markets, such as Internet infrastructure, wireless communications and optical networking, that have complex manufacturing services requirements and that seek to form long-term relationships with their electronics manufacturing services providers. We offer a broad array of electronics manufacturing services ranging from pre-production engineering to manufacturing, end-order fulfillment and after-sales product support. We deliver this broad range of services through six strategically located facilities in the United States, Mexico, Asia and Europe. We have long-standing relationships with networking and telecommunications industry leaders such as Cisco Systems, Inc., Extreme Networks, Inc., Alcatel Internetworking, Inc. and Nokia Corp. and have recently established relationships with several companies in the emerging areas of wireless communications and optical networking, including AT&T Wireless Services, Inc., JDS Uniphase Corporation, Alidian Networks, Inc., Digital Lightwave, Inc. and Tachion Networks, Inc. According to Technology Forecasters, Inc., a market research and consulting firm, we are among the 20 largest electronics manufacturing services companies worldwide. We believe that our competitive advantages in the areas of engineering, advanced manufacturing capabilities and operational flexibility position us to capitalize on the accelerating trend among original equipment manufacturers to outsource a broad range of manufacturing and related services for technologically advanced products. The electronics manufacturing services industry is expected to continue its strong growth as original equipment manufacturers, particularly those in the Internet infrastructure, wireless communications and optical networking markets, continue to expand rapidly and further utilize the value-added offerings delivered by electronics manufacturing services providers such as MCMS. According to Technology Forecasters, the global electronics manufacturing services industry is expected to grow at a compounded annual growth rate of 27%, from $78 billion in revenues in 1999 to $260 billion in 2004. Technology Forecasters estimates that the percentage of the total cost of goods sold that is outsourced for manufacture by original equipment manufacturers in the electronics industry will increase from 11% in 1999 to 26% in 2004. In its global report, Technology Forecasters projected that the larger electronics manufacturing services providers, those with annual revenues in excess of $500 million, will grow at a compounded annual growth rate of 35% from 1998 to 2003. The TFI monitored actual rate of growth for those companies were 42% between 1998 and 1999. In addition, we believe that electronics manufacturing services companies who focus on the Internet infrastructure, wireless communications and optical networking markets will experience a higher rate of growth than the industry average. Established original equipment manufacturers in these markets are increasingly outsourcing a broadening array of complex design and manufacturing functions to electronics manufacturing service providers. In addition, emerging companies in these markets typically maintain little or no internal manufacturing capability, relying instead from their inception on the manufacturing resources of their sophisticated electronics manufacturing services providers. THE MCMS SOLUTION The strength of our customer relationships has been built by our ability to consistently provide our customers with: Advanced Engineering Capabilities. We have developed advanced technical capabilities that enable us to support the complex manufacturing requirements of our existing customer base and to attract new customers. We support and develop these advanced technical capabilities with our staff of over 360 engineers and technicians and a patent portfolio consisting of 43 patents and 22 patent applications. Expertise in Internet Infrastructure, Wireless Communications and Optical Networking Markets. We believe that our experience and our early entry into the Internet infrastructure, wireless communications and optical networking markets makes us one of the few electronics manufacturing services providers capable of offering original equipment manufacturers advanced wireless and optical design and manufacturing services. Memory Module Expertise. We have been a leading provider of memory modules since 1984 and we are one of a limited number of electronics manufacturing services providers with significant memory module design, assembly and test capabilities. A Broad Range of Advanced Manufacturing and Fulfillment Services. Our ability to deliver a comprehensive manufacturing solution from design through end-order fulfillment and after-sales support reduces our customers' time to market and time to volume. Global Scale and Infrastructure. Our global presence allows us to shift manufacturing resources to the areas where our customers and their end-markets are located, reduce the time and cost required to bring our customers' products to market and simultaneously introduce our customers' products in major global markets. All of our locations utilize the same or functionally similar assembly and test equipment, information systems and quality procedures, which allow for a smooth transfer of production from one facility to another. OUR STRATEGY Our objective is to be a leading global provider of advanced electronics manufacturing services to a diverse group of leading and emerging original equipment manufacturers operating in the data communications, telecommunications and computer/memory module industries. To achieve this objective, we intend to continue to pursue the following strategies: - target long-term relationships with original equipment manufacturers in high growth markets; - provide a comprehensive set of advanced flexible manufacturing services; - maintain our position as a manufacturing technology leader; - provide advanced supply chain management; and - expand our global presence. ------------------------ Until September 2000, our company was incorporated in Idaho. In September 2000, we merged with a wholly-owned Delaware subsidiary, effectively becoming a Delaware corporation as further discussed in the section entitled "The Reclassification." We maintain our principal executive offices at 83 Great Oaks Boulevard, San Jose, California 95119. Our telephone number is (408) 284-3500. Our web site is www.mcms.com. This reference to our website is not an active hyperlink. The information contained in our website is not incorporated by reference into this prospectus and does not constitute part of this prospectus. THE OFFERING Class A common stock offered by MCMS.................................. shares Common stock to be outstanding after this offering......................... shares Class A common stock 1,480,588 shares Class B common stock* Use of proceeds....................... We intend to use substantially all of the net proceeds from this offering to redeem our outstanding redeemable preferred stock and pay down our senior credit facility. Proposed Nasdaq National Market symbol................................ "MCMS" ------------ * Holders of our Class B common stock are entitled to the same rights, privileges, benefits and notices as the holders of Class A common stock, except that they are not entitled to vote, other than as required by law. ------------------------ The number of shares of Class A common stock that will be outstanding after the offering is based on the number of shares outstanding as of October 31, 2000. This number excludes: - 2,486,625 shares of Class A common stock issuable upon exercise of stock options outstanding as of October 31, 2000, with a weighted average exercise price of $3.68 per share; - 451,562 additional shares of Class A common stock reserved for issuance under our option plans; and - 500,000 shares of common stock issuable upon exercise of warrants at an exercise price of $.001. ------------------------ Please also note that, except where otherwise indicated: - MCMS' fiscal year ends on the Thursday closest to August 31 and fiscal years are identified in this prospectus according to the calendar year in which they end; - the information in this prospectus assumes no exercise of the underwriters' over-allotment option; and - the information in this prospectus gives effect to our reincorporation in Delaware and the reclassification of all classes and series of our capital stock into two classes of common stock, which is discussed in greater detail elsewhere in this prospectus. SUMMARY FINANCIAL DATA You should read the following summary financial data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and notes thereto included elsewhere in this prospectus. As adjusted information is provided for the balance sheet data as of August 31, 2000 to reflect the application of the net proceeds from the sale of the shares of Class A common stock offered by MCMS after deducting estimated offering expenses, underwriting discounts and commissions. <TABLE> <CAPTION> FISCAL YEARS ENDED ------------------------------------------ SEPTEMBER 3, SEPTEMBER 2, AUGUST 31, 1998 1999 2000 ------------- ------------- ---------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales................................................... $ 333,920 $ 432,715 $472,448 Cost of goods sold.......................................... 303,251 407,354 449,957 --------- --------- -------- Gross profit................................................ 30,669 25,361 22,491 Selling, general and administrative expenses................ 15,798 22,491 23,940 --------- --------- -------- Income (loss) from operations............................... 14,871 2,870 (1,449) Interest expense (income), net.............................. 9,212 19,652 22,038 Income tax provision (benefit).............................. (930) (3,497) 163 --------- --------- -------- Net loss.................................................... (1,809) (13,947) (23,650) ========= ========= ======== Net loss to common stockholders(1).......................... $ (3,459) $ (17,539) $(27,679) ========= ========= ======== Net loss to common stockholders per share before extraordinary item -- basic and diluted(1)................ $ (1.36) $ (3.38) $ (5.49) ========= ========= ======== Weighted average common shares outstanding -- basic and diluted................................................... 2,534,183 5,008,598 5,041,001 OTHER FINANCIAL DATA: EBITDA(2)................................................... $ 27,263 $ 17,943 $ 15,522 Adjusted EBITDA(2).......................................... 27,463 19,420 17,410 Cash flow provided by (used in) Operating activities...................................... 1,363 (11,004) (822) Investing activities...................................... (19,752) (17,085) (7,900) Financing activities...................................... 12,508 20,502 8,630 Capital expenditures........................................ 20,111 17,111 7,973 Depreciation and amortization(3)............................ 12,392 15,073 16,971 </TABLE> <TABLE> <CAPTION> THREE MONTHS ENDED ------------------------------------------------- DECEMBER 2, MARCH 2, JUNE 1, AUGUST 31, 1999 2000 2000 2000 TOTAL ----------- -------- -------- ---------- -------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> QUARTERLY FINANCIAL DATA: Net sales................................... $100,016 $99,055 $113,474 $159,903 $472,448 Gross profit................................ 6,104 3,062 5,379 7,946 22,491 EBITDA(2)................................... 4,485 640 4,010 6,387 15,522 Adjusted EBITDA(2).......................... $ 5,064 $ 985 $ 4,245 $ 7,116 $ 17,410 </TABLE> <TABLE> <CAPTION> AS OF AUGUST 31, 2000 --------------------------- PRO FORMA ACTUAL AS ADJUSTED(4) --------- -------------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ -- Working capital............................................. 30,085 Total assets................................................ 217,502 Long term debt, net of current portion...................... 217,176 Redeemable preferred stock.................................. 33,295 Total stockholders' deficit................................. (158,114) </TABLE> ------------ (1)After giving pro forma effect to the sale of shares of Class A common stock in this offering and the receipt and use of proceeds as if they had occurred on August 31, 2000, our fiscal 2000 interest expense and net loss would have decreased by and our net loss per share to common stockholders would have reduced by . (2) EBITDA is defined as earnings before interest, taxes, depreciation and amortization. EBITDA is presented because we believe it is frequently used by investors in the evaluation of companies. Adjusted EBITDA is defined as EBITDA adjusted for management fees and other charges described in the following table. Neither EBITDA nor adjusted EBITDA should be considered as an alternative to cash flow from operating activities, as a measure of liquidity or as an alternative to net income as a measure of operating results in accordance with United States GAAP. Our definition of adjusted EBITDA may differ from definitions of adjusted EBITDA used by other companies. <TABLE> <CAPTION> FISCAL YEARS ENDED --------------------------------------------- SEPTEMBER 3, SEPTEMBER 2, AUGUST 31, 1998 1999 2000 -------------- ------------- ----------- (IN THOUSANDS) <S> <C> <C> <C> EBITDA............................................... $ 27,263 $ 17,943 $ 15,522 Infrequent management expenses(a).................... 231 395 510 Consulting/management fees(b)........................ 125 263 393 Non-capitalized ERP expenses(c)...................... -- 272 113 Non-cash foreign exchange (gain)/loss................ (156) 547 365 Non-recurring charge(d).............................. -- -- 507 -------- -------- -------- Total adjustments.................................. 200 1,477 1,888 -------- -------- -------- Adjusted EBITDA...................................... $ 27,463 $ 19,420 $ 17,410 ======== ======== ======== </TABLE> <TABLE> <CAPTION> QUARTER ENDED ------------------------------------------------ DECEMBER 2, MARCH 2, JUNE 1, AUGUST 31, 1999 2000 2000 2000 TOTAL ----------- -------- ------- ---------- ------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> EBITDA................................. $4,485 $ 640 $4,010 $6,387 $15,522 Infrequent management expenses(a)...... 290 109 92 19 510 Consulting/management fees(b).......... 123 146 62 62 393 Non-capitalized ERP expenses(c)........ 76 25 12 -- 113 Non-cash foreign exchange loss......... 90 65 69 141 365 Non-recurring charge(d)................ -- -- -- 507 507 ------ ------ ------ ------ ------- Total adjustments.................... 579 345 235 729 1,888 ------ ------ ------ ------ ------- Adjusted EBITDA........................ $5,064 $ 985 $4,245 7,116 $17,410 ====== ====== ====== ====== ======= </TABLE> -------------------- (a) Includes recruiting fees and severance costs incurred for several of our senior managers. (b) Includes fees incurred for the use of outside consultants as well as the management fees paid to Cornerstone Equity Investors. (c) Represents the costs related to the implementation of our enterprise resource planning system. (d)Non-recurring charge incurred in connection with our disengagement with Fore Systems. (3) In the fiscal years ended September 3, 1998, September 2, 1999, and August 31, 2000 depreciation and amortization excludes $526,000, $943,000 and $954,000, respectively, of deferred loan cost amortization that was included in interest expense. (4) As adjusted data reflects the sale of the shares of Class A common stock in this offering and the receipt and use of the proceeds, after deducting underwriting fees and estimated offering expenses.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001124133_viasat_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001124133_viasat_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read this summary together with the more detailed information regarding us and the common stock being sold in this offering and our historical consolidated financial statements and notes to the historical consolidated financial statements appearing elsewhere in this prospectus, especially the risks of investing in our common stock discussed under "Risk Factors," before you decide to buy our common stock. WILDBLUE COMMUNICATIONS, INC. OVERVIEW We are developing the first Ka-band geostationary, or GEO, satellite system capable of providing two-way, "always on," high-speed, or broadband, Internet access directly to residential and small office/home office, or SOHO, consumers. We expect to launch our first satellite, WildBlue I, in the first quarter of 2002. Shortly thereafter, we will be able to offer our WildBlue(TM) service throughout the contiguous United States as well as to portions of Canada. Subsequent satellites will augment our capacity in the United States and Canada and allow us to offer our WildBlue service in most Latin American countries. We expect to offer our residential customers affordable Internet access at speeds of up to 1.5 megabits per second, or Mbps, which is over 25 times faster than a 56 kilobits per second, or Kbps, dial-up Internet access connection. We expect to generate revenue primarily from subscription fees for our WildBlue service at rates competitive with existing terrestrial and proposed satellite-based broadband services. Our primary target market will be the approximately 32 million U.S. households that, according to the Yankee Group, will not have access to terrestrial broadband services, such as digital subscriber line, or DSL, and cable modem services, when we commence our WildBlue service. We also believe that our WildBlue service will provide a competitive alternative to terrestrial broadband services where those services are available. Our strategic orbital locations should allow U.S. consumers to receive over a single WildBlue dish both our WildBlue service and a satellite-based television service, known as DBS, from either of the two U.S. DBS service providers. We have entered into an agreement with EchoStar Communications Corporation, or EchoStar, that allows each of us to market and distribute bundled WildBlue and DISH Network(TM) services. MARKET OPPORTUNITY International Data Corporation, or IDC, projects that the number of Internet users in the United States will grow from approximately 123 million at the end of 2000 to approximately 197 million by the end of 2003, a compound annual growth rate of 17%. According to the Yankee Group, the number of U.S. broadband subscribers will grow from 1.8 million at the end of 1999 to over 20 million by the end of 2004, a compound annual growth rate of 62%. The Yankee Group also forecasts that there will be 4.1 million U.S. residential satellite broadband customers by the end of 2004. Existing terrestrial broadband Internet access solutions, such as DSL and cable modem services, are not widely available to residential and SOHO consumers in non-urban and many urban areas due to economic and technological constraints, and many of these consumers may not have access to either of these broadband options for the foreseeable future, if ever. We believe the success of U.S.-based DBS service providers demonstrates mass market acceptance of satellite-delivered communications services. DBS service providers currently serve approximately 13 million U.S. households, and this number is expected to grow to over 26 million households by the end of 2004, according to Paul Kagan Associates, Inc. WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE PERMITTED BY U.S. FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING THIS PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR LEGAL. SUBJECT TO COMPLETION -- OCTOBER 6, 2000 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PROSPECTUS , 2000 [WILDBLUE COMMUNICATIONS, INC. LOGO] WILDBLUE COMMUNICATIONS, INC. SHARES OF COMMON STOCK -------------------------------------------------------------------------------- WILDBLUE COMMUNICATIONS, INC.: - We are developing the first Ka-band geostationary satellite system capable of providing two-way, "always on," high-speed, or broadband, Internet access directly to residential and small office/home office consumers. - Wildblue Communications, Inc. 4600 South Syracuse Street, Suite 500 Denver, Colorado 80237 (720) 554-7400 PROPOSED SYMBOL & MARKET: - WBLU/Nasdaq National Market THE OFFERING: - We are offering shares of our common stock. - The underwriters have an option to purchase an additional shares from us to cover over-allotments. - This is our initial public offering, and no public market currently exists for our shares. - We anticipate that the initial public offering price for our shares will be between $ and $ per share. - Closing: , 2000. <TABLE> <CAPTION> ---------------------------------------------------------------------------------- Per Share Total ---------------------------------------------------------------------------------- <S> <C> <C> Public offering price: $ $ Underwriting fees: Proceeds, before expenses, to WildBlue: ---------------------------------------------------------------------------------- </TABLE> THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6. -------------------------------------------------------------------------------- Neither the SEC nor any state securities commission has determined whether this prospectus is truthful or complete. Nor have they made, nor will they make, any determination as to whether anyone should buy these securities. Any representation to the contrary is a criminal offense. -------------------------------------------------------------------------------- DONALDSON, LUFKIN & JENRETTE OUR STRATEGY Our objective is to become the leading provider of satellite broadband Internet access to residential and SOHO consumers in the United States, Canada and Latin America. Our strategy to achieve this objective includes the following key elements: - Construct a low-cost, high capacity satellite broadband system using proven technology. Our Ka-band GEO satellite system architecture is designed to minimize cost and technological risk, and maximize capacity through frequency reuse. Our consumer premises equipment, or CPE, design is based on low-cost, standardized components widely used in terrestrial broadband and DBS systems today. - Aggressively target the large and growing DBS customer base. We will aggressively target DBS subscribers, who have demonstrated their willingness to purchase satellite-delivered communications services. Our strategic orbital locations should allow U.S. consumers to receive both our WildBlue service and either of the DBS services over a single WildBlue dish. - Utilize established distribution channels. We intend to distribute our WildBlue service through channels similar to those used by DBS service providers, such as local satellite television dealers and national electronics and department store retail chains. - Capitalize on relationships with our strategic investors. Our financing strategy to date has focused on attracting investors who are strategic to our business. To that end, we have assembled a strong and diverse shareholder base, which includes affiliates of EchoStar, Gemstar-TV Guide International, Inc., Kleiner Perkins Caufield & Byers, Liberty Media Corporation, Telesat Canada and TRW Inc. - Offer a nationwide, branded broadband solution. Unlike terrestrial broadband alternatives, such as DSL and cable modem services, our WildBlue system is designed to offer broadband Internet access throughout the contiguous United States at the time we launch our WildBlue service. This will provide significant economies of scale in our branding and advertising initiatives. - Leverage our orbital slots to penetrate broadband markets in Canada and Latin America. Following the launch of WildBlue II, which currently is planned for late 2002, we intend to market our WildBlue service throughout Canada. WildBlue II is a Ka-band payload on the Anik F2 satellite which will be owned and operated by Telesat Canada, an affiliate of BCE, Inc., or Telesat, and on which we will have an exclusive license to use 90% of the Ka-band capacity. We plan to procure a third satellite, WildBlue III, and anticipate launching it in late 2003. After the launch of WildBlue III, we expect to offer our service to selected regions in Latin America through local and pan-regional communications service providers, who we expect will market and distribute our service. BENEFITS TO CONSUMERS Our solution is designed to offer consumers the following benefits: - High-speed access. Our system is designed to provide Internet access to residential customers at speeds of up to 1.5 Mbps. This rate is approximately four times faster than the 400 Kbps connection speed expected to be offered by Ku-band satellite broadband providers, and equivalent to the speeds currently provided by most DSL and cable modem services. - Dedicated, "always on" connection to the Internet. Unlike many dial-up services today, our WildBlue service is designed to provide a continuous connection to the Internet, obviating the need for customers to use a phone line for any aspect of their Internet connection and avoiding slow log-on routines and potential busy signals. Description of artwork to be provided. - Tiered service packages. Our WildBlue service is designed to allow consumers to choose between different speed and price packages based on their individual preferences. - Complete Internet access solution. Unlike many DSL packages, our WildBlue service is designed to include important Internet service provider, or ISP, features, such as e-mail accounts and web-page hosting capabilities, eliminating the cost and inconvenience of acquiring these features separately. We also plan to offer our customers compelling broadband portals that will take full advantage of our high-speed WildBlue service through graphic-rich and streaming content, and will facilitate access to other broadband content on the Internet. PROGRESS TO DATE We have achieved a number of important milestones toward commencing our WildBlue service. We have obtained licenses from the U.S. Federal Communications Commission, or FCC, to construct, launch and operate Ka-band GEO satellites from orbital locations, which locations we believe will enable us to provide satellite broadband Internet access to consumers located throughout the contiguous United States and most of Canada and Latin America. Space Systems/Loral, Inc., or Loral, is constructing, and we have contracted with Arianespace to launch, WildBlue I. Hughes Space and Communications, Inc., or Hughes, is constructing, and Telesat has contracted with Arianespace to launch, WildBlue II. We have completed the preliminary design of our CPE and gateways. In addition, we have entered into an agreement with EchoStar that allows each of us to market and distribute bundled WildBlue and DISH Network services. The agreement also provides that we will work together to develop a single set-top box that will serve as both a satellite modem for our WildBlue service and a set-top box for the DISH Network. In addition, we have raised approximately $239 million from private sales of our equity securities, including equity issued for services rendered, and have secured approximately $146 million of vendor financing for the development of our system. THE OFFERING Common stock offered....... shares Common stock to be outstanding after this offering................. shares (1) Use of proceeds............ We intend to use the net proceeds from the offering for the following purposes: (1) capital expenditures, including satellites and ground infrastructure, (2) development of our CPE and (3) working capital and other general corporate purposes. See "Use of Proceeds." Dividend policy............ We currently intend to retain any future earnings to fund the development of our business. Therefore, we do not currently anticipate paying cash dividends in the foreseeable future. Risk Factors............... See "Risk Factors" and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock. Proposed Nasdaq National Market Symbol............ WBLU ------------------------------ (1) Based on the number of shares outstanding on September 1, 2000. Includes 38,689,447 shares of common stock to be issued upon conversion of our preferred stock and 3,394,327 shares of common stock to be issued upon the cash exercise of outstanding warrants at an exercise price of $17.00 per share upon the closing of this offering. Excludes 4,963,896 shares of common stock issuable upon the exercise of stock options outstanding as of September 1, 2000, with a weighted average exercise price of $7.15 per share, 2,770,908 of which are exercisable, a portion of which are subject to repurchase, and warrants to purchase 2,709,090 shares of common stock that will be outstanding after the offering, with a weighted average exercise price of $18.68 per share, that become exercisable upon the achievement of certain milestones. See "Capitalization." --------------------- OTHER INFORMATION We were incorporated in Colorado in April 1995 under the name KaSTAR Satellite Communications Corp. In May 1999 we reincorporated in Delaware. We recently changed our name from iSKY, Inc. to Wildblue Communications, Inc. Our principal executive office is located at 4600 South Syracuse Street, Suite 500, Denver, Colorado 80237 and our telephone number is (720) 554-7400. Our website address is on the world wide web at "wildblue.com." We do not incorporate the information on our website into this prospectus, and you should not consider it part of this prospectus. We own applications for federal registration and claim rights in the following service marks and trademarks: WILDBLUE COMMUNICATIONS and WILDBLUE. We also claim rights in the following service marks and trademarks: a stylized W and the phrase BROADBAND. WITHIN YOUR REACH. This prospectus also refers to trade names and trademarks of other companies. --------------------- Except as otherwise indicated, all information in this prospectus: - gives effect to a one for four reverse stock split to become effective prior to the closing of the offering; - assumes the exercise of outstanding warrants for 3,394,327 shares of preferred stock at an exercise price of $17.00 per share, which will expire if not exercised prior to the closing of this offering; - gives effect to the automatic conversion of all outstanding shares of preferred stock into common stock upon the closing of the offering; and - assumes no exercise of the underwriters' over-allotment option. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) In considering the following selected consolidated financial data, you should also read our consolidated financial statements and notes and the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations." The consolidated statements of operations data for the three-year period ended December 31, 1999 and the consolidated balance sheets data as of December 31, 1999 and 1998, are derived from our consolidated financial statements. These statements have been audited by KPMG LLP, independent certified public accountants. The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of our management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information. You should not assume that our results of operations for the six months ended June 30, 2000 and 1999 indicate what our results will be for the full year. <TABLE> <CAPTION> SIX-MONTH PERIODS APRIL 21, 1995 ENDED JUNE 30, YEARS ENDED DECEMBER 31, (INCEPTION) TO ---------------------- ------------------------------------- JUNE 30, 2000 1999 1999 1998 1997 2000(C) -------- ----------- ----------- ---------- ---------- -------------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue (a)........... $ -- $ -- $ -- $ -- $ -- $ -- Operating expenses.... 3,693 3,006 4,604 949 594 10,019 Interest expense (income), net....... (1,312) 95 402 270 72 (568) Net loss.............. $ (2,540) $ (3,090) $ (4,859) $ (1,219) $ (666) $ (9,462) ======== =========== =========== ========== ========== ======== Net loss per share(b)............ $(141.26) $(16,438.44) $(51,694.91) $(4,876.52) $(2,662.62) ======== =========== =========== ========== ========== Unaudited pro forma net loss per share(b)............ (.08) (.40) BALANCE SHEET DATA (AT END OF PERIOD): Cash, cash equivalents and marketable securities.......... $103,988 $ 7,198 $ 27,947 $ 1,534 $ -- $103,988 Working capital (deficit)........... 103,833 7,104 (1,955) (3,732) (953) 103,833 Property, equipment and assets under construction, net... 120,263 735 9,598 460 -- 120,263 Total assets.......... 251,358 8,621 38,614 2,952 341 251,358 Vendor financing...... 20,000 -- -- -- -- 20,000 Total stockholders' equity (deficit).... 231,125 8,455 8,635 (2,393) (612) 231,125 </TABLE> ------------------------------ (a) WildBlue is a development stage enterprise and has not generated any revenue. (b) See Note 1 of the Notes to Consolidated Financial Statements for an explanation of the determination of the number of shares used in per share calculations. (c) Business activity for the period from April 21, 1995, our inception, through December 31, 1996 was insignificant.
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+Prospectus summary THE FOLLOWING SUMMARY DOES NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS BEFORE MAKING AN INVESTMENT DECISION. YOU SHOULD PAY SPECIAL ATTENTION TO THE "RISK FACTORS" SECTION TO DETERMINE WHETHER AN INVESTMENT IN THE TRUST PREFERRED SECURITIES IS APPROPRIATE FOR YOU. INTRODUCTION The trust preferred securities will provide you with rights to distributions and redemption and liquidation payments that are similar to those to which you would be entitled if you had purchased the most senior ranking noncumulative perpetual preferred shares issued directly by UBS AG that have financial terms equivalent to those of the company preferred securities. The diagram to the right outlines the relationship among investors in the trust preferred securities, UBS Preferred Funding Trust, UBS Preferred Funding Company and UBS AG following the completion of the offering. UBS Preferred Funding Trust will pass through to you any dividends, redemption payments or liquidation payments that it receives from UBS Preferred Funding Company on the company preferred securities. UBS AG will guarantee, on a subordinated basis, dividend, redemption and liquidation payment obligations under the company preferred securities. UBS Preferred Funding Company will receive payments under the subordinated notes issued by the Cayman Islands branch of UBS AG and will pay dividends on the company preferred securities that are similar to dividends that would be paid on the most senior ranking noncumulative perpetual preferred shares issued directly by UBS AG that have equivalent financial terms. The capital raised in this offering will qualify as consolidated Tier 1 capital for UBS under the relevant regulatory capital guidelines of the Swiss Federal Banking Commission. LOGO Parties to the offering For a more complete description of UBS AG, UBS Preferred Funding Trust and UBS Preferred Funding Company, see "UBS," "UBS Preferred Funding Trust I," "UBS Preferred Funding Company LLC I," "Use of Proceeds," "Capitalization of UBS AG" and "Capital Ratios and Distributable Profits of UBS." UBS AG UBS AG is a global, integrated investment services firm and the leading bank in Switzerland. UBS's business is managed through three main business groups and its Corporate Center. The business groups are: UBS Switzerland, UBS Warburg and UBS Asset Management. UBS's clients include international corporations, small and medium sized businesses in Switzerland, governments and other public bodies, financial institutions, market participants and individuals. UBS AG's ordinary shares are listed on the New York Stock Exchange under the symbol "UBS.N," on the Zurich Stock Exchange under the symbol "UBSNZn.S" and on the Tokyo Stock Exchange under the symbol "UBS.T". On 12 July 2000, UBS announced that it had entered into a definitive merger agreement with Paine Webber Group Inc., one of the largest full-service securities and commodities firms in the United States. UBS will purchase all outstanding shares of PaineWebber stock for a combination of cash and stock representing a total purchase price of $10.8 billion (based on the UBS share price on 12 July 2000). The transaction is subject to shareholder and regulatory approvals and other conditions and is expected to be completed in the fourth quarter of 2000. The principal executive offices of UBS AG are located at Bahnhofstrasse 45, Zurich, Switzerland and Aeschenvorstadt I, Basel, Switzerland. Its telephone numbers are 011-41-1-234-11-11 and 011-41-61-288-20-20. UBS PREFERRED FUNDING TRUST I UBS Preferred Funding Trust I is a Delaware statutory business trust. UBS Preferred Funding Trust exists for the purpose of issuing the trust preferred securities representing a corresponding amount of the company preferred securities, together with related rights under the UBS AG subordinated guarantee. UBS Preferred Funding Trust will pass the dividends it receives on the company preferred securities through to you as distributions on the trust preferred securities. UBS Preferred Funding Trust cannot engage in other activities. The company preferred securities and the related rights under the UBS AG subordinated guarantee will be the only assets of UBS Preferred Funding Trust. UBS AG, Stamford branch, will pay directly all expenses and liabilities of UBS Preferred Funding Trust. UBS Preferred Funding Trust will be treated as a grantor trust for United States federal income tax purposes. As a result, you will be treated as a beneficial owner of interests in the company preferred securities and the related rights under the UBS AG subordinated guarantee for United States federal income tax purposes. The principal executive offices of UBS Preferred Funding Trust are located at c/o Wilmington Trust Company, 1100 North Market Street, Wilmington, Delaware 19890. Its telephone number is 302-651-1118. UBS PREFERRED FUNDING COMPANY LLC I UBS Preferred Funding Company LLC I is a Delaware limited liability company. UBS Preferred Funding Company exists for the purposes of acquiring and holding the subordinated notes issued by the Cayman Islands branch of UBS AG, or other eligible investments, and issuing the company common securities and the company preferred securities. UBS AG is purchasing all of the company common securities, which represent 100% of the voting rights in UBS Preferred Funding Company, subject to your limited right to elect additional directors as described below. UBS Preferred Funding Company will apply the cash generated by the subordinated notes and other eligible investments, if any, to pay dividends to UBS Preferred Funding Trust, as holder of the company preferred securities, and UBS AG, as holder of the company common securities. UBS Preferred Funding Company will be treated as a partnership for United States federal income tax purposes. UBS Preferred Funding Company will be managed by a board of directors having not less than three and not more than five members. If the aggregate of unpaid dividends equals or exceeds an amount equal to three semi-annual dividend payments, you and the other holders of trust preferred securities will have the right to elect two additional directors. The principal executive offices of UBS Preferred Funding Company are located at The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801. Its telephone number is 302-658-7581. The offering For a more complete description of the trust preferred securities, the company preferred securities, the UBS AG subordinated guarantee and the subordinated notes, see "Description of Trust Preferred Securities," "Description of Company Preferred Securities," "Book-Entry Issuance of Trust Preferred Securities," "Description of UBS AG Subordinated Guarantee" and "Description of Subordinated Notes of UBS AG." SECURITIES OFFERED Each trust preferred security represents a corresponding amount of the company preferred securities and related rights under the UBS AG subordinated guarantee. The trust preferred securities will be issued in denominations of $1,000 liquidation amount and whole-number multiples of $1,000, and the company preferred securities will be issued in denominations of $1,000 liquidation preference and whole-number multiples of $1,000. The aggregate liquidation amount of the trust preferred securities is $1,500,000,000 and the aggregate liquidation preference of the company preferred securities is $1,500,000,000. DIVIDENDS UBS Preferred Funding Trust will pass through the dividends it receives on the company preferred securities as distributions on the trust preferred securities. UBS Preferred Funding Company will pay dividends on the company preferred securities from the date of their initial issuance on a noncumulative basis. These dividends will be payable on the liquidation preference of the company preferred securities: - semi-annually in arrears on the first business day on or after April -- and October -- of each year at a fixed rate per annum equal to --%, beginning -- April 2001 and ending -- October 2010, calculated on the basis of a 360-day year consisting of twelve 30-day months, and - thereafter quarterly in arrears on the first business day on or after January --, April --, July -- and October -- of each year at a variable rate per annum equal to --% above three-month LIBOR, calculated on the basis of the actual number of days elapsed in a 360-day year. UBS Preferred Funding Company's obligation to pay dividends is subject to provisions that generally require UBS Preferred Funding Company to pay full or proportional dividends on the company preferred securities when UBS AG pays dividends on UBS AG ordinary shares or on other securities of UBS AG that rank equally with or junior to the UBS AG subordinated guarantee of the company preferred securities. As described below, UBS Preferred Funding Company will be required to pay dividends on the company preferred securities in some circumstances, will be prohibited from paying dividends on the company preferred securities in other circumstances, and, when not required to pay or prohibited from paying dividends, will have discretion as to whether to pay dividends on the company preferred securities. Because UBS AG paid dividends on its ordinary shares in 26 April 2000, dividends on the company preferred securities will be mandatory (as described below) through the dividend payment date in April, 2001. The following text outlines the criteria for determining whether and the extent to which UBS Preferred Funding Company will be required to pay dividends on the company preferred securities or will be prohibited from paying dividends on the company preferred securities: Is there a capital limitation on UBS AG? Unless the Swiss Federal Banking Commission expressly permits otherwise, if on a dividend payment date UBS AG is not in compliance with the Swiss Federal Banking Commission's minimum capital adequacy requirements applicable to UBS AG, or would not be in compliance because of a payment of dividends on the company preferred securities, UBS Preferred Funding Company will not pay dividends on the company preferred securities under any circumstances. For a discussion of UBS's capital resources relative to applicable guidelines, see "UBS -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital Resources." We refer to this restriction as a capital limitation. Are dividends mandatory? Unless there is a capital limitation, the payment of full dividends by UBS Preferred Funding Company on the company preferred securities will be mandatory during the one-year period beginning on and including each date on which: - UBS AG declares or pays a dividend or makes any other payment or distribution on any shares or other securities that, in a liquidation of UBS AG, rank junior to the UBS AG subordinated guarantee of the company preferred securities; or - UBS AG or any of its subsidiaries redeems, repurchases (except for its trading account) or otherwise acquires any shares or other securities that, in a liquidation of UBS AG, rank equally with or junior to the UBS AG subordinated guarantee of the company preferred securities. The payment of proportional dividends by UBS Preferred Funding Company on the company preferred securities will be mandatory on any date, whether or not a regularly scheduled dividend payment date, on which UBS AG or any of its subsidiaries pays a dividend or makes any other payment or distribution on any shares or other securities that, in a liquidation of UBS AG, rank equally with the UBS AG subordinated guarantee of the company preferred securities if, on the dividend payment dates leading up to the payment or distribution on the equally ranking securities, dividends were paid on the company preferred securities in a lower percentage than are being paid on the equally ranking securities. Unless there is a capital limitation, UBS Preferred Funding Company will be required to pay dividends that are mandatory whether or not: - UBS AG delivers a notice limiting dividends, - UBS AG has available distributable profits, or - interest is paid on the subordinated notes or other eligible investments. Does UBS AG have available distributable profits? Available distributable profits are the pro rata proportion (from among all shares and other securities issued by UBS AG that rank equally with the UBS AG subordinated guarantee of the company preferred securities) of profits that may be distributed in accordance with Swiss law. Currently, distributable profits include the total of current profit, profit brought forward and freely available reserves as reflected in the most recent audited unconsolidated balance sheet and statement of appropriation of retained earnings of UBS AG. Unless required to pay mandatory dividends, UBS Preferred Funding Company will not pay dividends on the company preferred securities in excess of UBS AG's available distributable profits. When are dividends discretionary? The payment of dividends by UBS Preferred Funding Company on the company preferred securities is discretionary if the capital limitation does not apply, dividends are not mandatory as described above, and UBS AG has sufficient available distributable profits. In that case, UBS Preferred Funding Company will pay dividends on the company preferred securities at the specified rate unless, on or before the tenth business day immediately preceding a dividend payment date, UBS AG gives notice to UBS Preferred Funding Company that UBS Preferred Funding Company must pay no dividends or less than full dividends, in which case dividends will be due and payable only in the amount specified in the notice. UBS AG may deliver such a notice in its sole discretion and for any reason, except that such a notice shall have no effect where dividends are mandatory as described above. When does the dividend preference shift from the company preferred securities to the company common securities? The company preferred securities ordinarily will rank senior to the company common securities as to the payment of dividends. However, the dividend preference of the company preferred securities may, at UBS AG's option, shift to the company common securities on dividend payment dates to the extent that no mandatory dividend payment amount is then required to be paid on the company preferred securities. If UBS AG does this, the corresponding interest payments or other income received by UBS Preferred Funding Company on the subordinated notes or its other eligible investments may be returned as dividends to UBS AG as holder of the company common securities before any dividends are paid on the company preferred securities. WITHHOLDING TAXES Generally, UBS Preferred Funding Company will pay additional amounts on full or proportional mandatory dividends otherwise due and payable so that the net amount received by you will not be reduced by the withholding of certain taxes or other government charges. However, UBS Preferred Funding Company will not pay any additional amounts if the taxes or governmental charges are withheld because you: - are connected, other than as a holder of trust preferred securities, to Switzerland or the Cayman Islands if it is the jurisdiction that requires the withholding of the taxes or charges, or - have not filed an appropriate declaration stating that you are not a resident of and do not have a connection with Switzerland or the Cayman Islands if it is the jurisdiction that requires the withholding of the taxes or charges, or a similar claim for exemption, if we have given you the opportunity to do so. REDEMPTION UBS Preferred Funding Company may redeem the company preferred securities, in whole or in part, on any dividend payment date on or after the dividend payment date regularly scheduled to occur in October 2010. In that case, you will receive a redemption price equal to unpaid mandatory dividends, other unpaid definitive dividends (for example, discretionary dividends that became due and payable because UBS AG did not deliver a notice to pay no dividends), current accrued dividends (whether or not declared) and the liquidation preference of your company preferred securities. UBS Preferred Funding Company may not redeem the company preferred securities before the dividend payment date regularly scheduled to occur in October 2010, unless an event occurs that results in an adverse consequence for the tax or capital treatment of the company preferred securities, or for the investment company status of UBS Preferred Funding Company or UBS Preferred Funding Trust. If the circumstance giving rise to redemption arises out of a change in tax law that results in the imposition of tax on UBS Preferred Funding Trust or UBS Preferred Funding Company or the imposition of withholding tax on payment of dividends on the company preferred securities, distributions on the trust preferred securities or interest on the subordinated notes, then you will receive a redemption price as described above. If the redemption arises from the other special events, including adverse tax consequences not arising out of a change in tax law, you will receive a redemption price equal to unpaid mandatory dividends, other unpaid definitive dividends, current accrued dividends (whether or not declared) and a make whole amount equal to the greater of the liquidation preference and the sum of the net present value of scheduled dividends and the liquidation preference through October 2010. UBS Preferred Funding Trust will pass through the redemption payments it receives on the company preferred securities to redeem a corresponding amount of the trust preferred securities. Any redemption of the company preferred securities must comply with applicable regulatory requirements, including the prior approval of the Swiss Federal Banking Commission if then required under applicable guidelines or policies of the Swiss Federal Banking Commission. The Swiss Federal Banking Commission in its discretion may impose conditions on its approval of any proposed redemption of the company preferred securities. You may not require redemption of the company preferred securities at any time. LIQUIDATION If UBS AG is liquidated, UBS Preferred Funding Company will be liquidated. So long as the company preferred securities are outstanding, UBS AG will not cause UBS Preferred Funding Company to liquidate unless UBS AG is also liquidating. If UBS Preferred Funding Company is liquidated, you will be entitled to receive an amount equal to unpaid mandatory dividends, other unpaid definitive dividends, current accrued dividends (whether or not declared) and the liquidation preference of your company preferred securities. However, any liquidating distributions that you receive will be substantially the same as, but not greater than, those to which you would be entitled if you had purchased the most senior ranking noncumulative perpetual preferred shares issued directly by UBS AG that have financial terms equivalent to those of the company preferred securities. BOOK-ENTRY ISSUANCE OF THE TRUST PREFERRED SECURITIES UBS Preferred Funding Trust will initially issue the trust preferred securities only in book-entry form through The Depository Trust Company. You may withdraw the company preferred securities represented by your trust preferred securities from UBS Preferred Funding Trust and hold the company preferred securities directly. If you hold the company preferred securities directly, you must hold the company preferred securities in certificated form. If you hold the company preferred securities directly, then you may exercise directly the associated rights under the UBS AG subordinated guarantee, and any rights under the limited liability company agreement of UBS Preferred Funding Company in respect of the company preferred securities, including any rights to elect additional directors of UBS Preferred Funding Company. THE UBS AG SUBORDINATED GUARANTEE UBS AG will unconditionally guarantee, on a subordinated basis, the payment by UBS Preferred Funding Company of any mandatory dividends on the company preferred securities or dividends that have become definitive because UBS AG has sufficient available distributable profits to pay out dividends and has not delivered to UBS Preferred Funding Company an instruction not to pay dividends. UBS AG will also unconditionally guarantee, on a subordinated basis, the redemption price payable with respect to any company preferred securities called for redemption by UBS Preferred Funding Company and the payment by UBS Preferred Funding Company on its liquidation of an amount sufficient to provide you with the distributions described under "Liquidation" above. THE SUBORDINATED NOTES The subordinated notes are undated and will have an aggregate principal amount of $1,500,000,000. The subordinated notes are general unsecured debt obligations of UBS AG and the Cayman Islands branch of UBS AG and, in liquidation of UBS AG, will rank subordinate and junior to all indebtedness of UBS AG except for indebtedness that by its terms expressly ranks equally with the subordinated notes. Interest payable under the subordinated notes will be calculated at the same rate and payable on the same dates as dividends payable under the company preferred securities. UBS AG will not pay interest on the subordinated notes if UBS AG is not solvent. USE OF PROCEEDS - UBS Preferred Funding Trust will use the proceeds from the offering of the trust preferred securities to purchase the company preferred securities from UBS Preferred Funding Company. - UBS Preferred Funding Company will use the proceeds from the offering of the company preferred securities to purchase the subordinated notes issued by the Cayman Islands branch of UBS AG. - UBS AG will use the proceeds from the issuance of the subordinated notes for general corporate purposes, including paying certain expenses relating to the offering, and possibly funding a portion of the purchase price of PaineWebber.
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the risk factors and consolidated financial statements and related notes appearing elsewhere in this prospectus. CENTURION WIRELESS TECHNOLOGIES We are a leading global supplier of custom-designed and manufactured antenna and power products for wireless handsets, wireless data devices and wireless networks. We have extensive experience in the research, design and development of products for the global wireless communications industry and have been profitable since our inception in 1978. Our customers include leading multinational wireless equipment manufacturers such as Cisco, Ericsson, Kyocera/Qualcomm, Lucent, Motorola, Philips and Samsung, as well as a wide range of providers of emerging wireless data products and applications. We provide custom-designed antenna and power products for a broad range of applications including: - wireless handsets, including analog and digital cellular phones; - wireless data devices; - portable two-way radios; - devices that incorporate Bluetooth, a wireless protocol that enables short-range wireless communication among electronic devices; - telemetry and telematics, a technology that is currently being incorporated into automobiles and various consumer electronics and integrates global positioning system, in-vehicle computing and wireless technologies; - wireless local area networks based on IEEE 802.11 and other wireless protocols; and - wireless local loop and in-building wireless systems. Our core technology includes radio frequency design and proprietary manufacturing processes related to antenna and power products. We own 30 issued patents and have another 17 patent applications pending, which cover our antenna and power product technology as well as our design and manufacturing processes. Our proprietary technology enables us to provide end-users with benefits including enhanced signal integrity and longer battery life and our wireless equipment manufacturer customers with benefits including faster time-to-market and lower cost. We maintain vertically integrated global manufacturing operations that incorporate our customer-driven design solutions and supply chain management systems. Our global manufacturing network includes facilities in Nebraska, China, Malaysia, Mexico and the United Kingdom. Our domestic manufacturing operations have obtained ISO 9001 quality management registration, while our facilities in China and the United Kingdom have received ISO 9002 design registration. Our global manufacturing expertise allows us to work closely with our customers to rapidly deliver custom-designed products. The combination of our technology, global manufacturing capabilities and close working relationships with our customers has enabled us to provide products to many leading wireless handset and device manufacturers and wireless networking companies. In the wireless handset market, we currently provide products to Ericsson, Kyocera/Qualcomm, Motorola and Philips and are currently developing products for Nokia. In the wireless device and networking markets, we currently provide products to companies such as Cisco, Intermec Technologies, Lucent and Proxim. In addition, we are jointly developing technology with companies such as 3Com, Dell and Intel. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED WITHOUT NOTICE. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. Prospectus (Subject to Completion) Issued September 22, 2000 SHARES [LOGO] CENTURION WIRELESS TECHNOLOGIES, INC. COMMON STOCK ------------------------------ We are offering shares of common stock in an initial public offering. No public market currently exists for our common stock. We anticipate that the initial public offering price for our shares will be between $ and $ per share. ------------------------------ We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol "CNTN." ------------------------------ INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ------------------------------ <TABLE> <CAPTION> Per Share Total --------- ----- <S> <C> <C> Offering Price.............................................. $ $ Underwriting Discounts and Commissions...................... $ $ Offering Proceeds to Centurion, before expenses............. $ $ </TABLE> Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. We have granted the underwriters the right to purchase up to an additional shares of common stock to cover any over-allotments. The underwriters can exercise this right at any time within 30 days after the offering. Banc of America Securities LLC expects to deliver the shares of common stock to investors on , 2000. BANC OF AMERICA SECURITIES LLC CHASE H&Q U.S. BANCORP PIPER JAFFRAY C.E. UNTERBERG, TOWBIN ------------------------------ The date of this prospectus is , 2000 The markets for our products are large and growing rapidly. Gartner Group estimates that sales of wireless handsets will grow from approximately 284 million units in 1999 to approximately 852 million units in 2003, representing a compound annual growth rate of approximately 32%. International Data Corporation estimates that the market for wireless data devices, which include smart phones, handheld companions and vertical application devices such as pen tablets, pen notepads and keypads, will increase from approximately 7.4 million units in 1999 to approximately 29.9 million units in 2003, representing a compound annual growth rate of approximately 42%. International Data Corporation further estimates that the market for Bluetooth-enabled devices will increase from approximately 25 million units in 2000 to approximately 341 million units in 2003, representing a compound annual growth rate of approximately 139%. The Yankee Group estimates that the telemetry market will grow from approximately 6.4 million units in 1999 to approximately 37.5 million units in 2003, representing a compound annual growth rate of approximately 55%. Our goal is to be the leading worldwide provider of antenna and power products for a broad range of wireless devices. To meet this goal, we intend to pursue the following strategy: - continue to focus on leading wireless equipment manufacturers by market segment; - extend our technological leadership to capitalize on growth in emerging wireless markets; - leverage our global design and manufacturing capability; - provide a broad array of products; and - selectively pursue strategic acquisitions. We were founded as a sole proprietorship in 1978. We were originally incorporated in Nebraska in 1981 and in September 2000, we re-incorporated in Delaware. Our principal executive offices are located at 3425 North 44th Street, Lincoln, Nebraska 68504 and our telephone number is (402) 467-4491. RECENT DEVELOPMENTS In September 2000, we completed the acquisition of Xertex Technologies. Xertex, based in Broomfield, Colorado, is primarily engaged in the design and manufacture of internal and embedded antennas for Bluetooth, IEEE 802.11, telemetry and telematics and in-building systems applications. The purchase price for Xertex was $750,000 plus 216,607 shares of our common stock. THE OFFERING Common stock offered by Centurion................... shares Common stock to be outstanding after this offering......... shares Use of proceeds............... Of the net proceeds from this offering, $8.5 million will be used to redeem all of our outstanding shares of Series B redeemable preferred stock, approximately $1.7 million will be used to pay accrued dividends on the Series B redeemable preferred stock as of June 30, 2000, and $800,000 will be used to pay accrued dividends on our Series A convertible preferred stock as of June 30, 2000. The remainder will be used for general corporate purposes, including research and product development, expansion of our manufacturing facilities and equipment, potential acquisitions and strategic alliances and working capital. Proposed Nasdaq National Market symbol............... CNTN Unless otherwise indicated, all information in this prospectus assumes that the underwriters will not exercise their over-allotment option to purchase shares of our common stock at the price set forth on the cover page of this prospectus. In addition, unless otherwise indicated, all information in this prospectus, including the outstanding share information above, is based upon 11,858,099 shares outstanding as of June 30, 2000, which gives effect to a 10-for-1 stock split of our common stock which was effected on September 6, 2000 and the following transactions which will be effected immediately prior to, or contemporaneously with, the consummation of this offering: - the conversion of all of our outstanding shares of Series A convertible preferred stock into a total of 2,000,000 shares of common stock; - the payment of accrued dividends of $800,000 on our Series A convertible preferred stock; - the redemption of all of our outstanding shares of Series B redeemable preferred stock for $8.5 million plus approximately $1.7 million of accrued dividends as of June 30, 2000; - the issuance of 1,444,042 shares of Series C convertible preferred stock and the conversion of all of our outstanding shares of Series C convertible preferred stock into a total of 1,444,042 shares of common stock; and - the issuance of 216,607 shares of common stock in connection with the acquisition of Xertex Technologies. The common stock to be outstanding after this offering excludes: - 445,000 shares of common stock issuable upon the exercise of stock options outstanding as of June 30, 2000, under our 1997 Stock Option Plan at a weighted average exercise price of $1.00 per share; - 75,000 shares of common stock issuable upon the exercise of stock options outstanding as of June 30, 2000, under our 2000 Non-Employee Director Option Plan at a weighted average exercise price of $2.00 per share; and - 930,000 additional shares of common stock reserved for issuance under our 1997 Stock Option Plan and 2000 Non-Employee Director Option Plan. SUMMARY CONSOLIDATED FINANCIAL DATA You should read the following summary consolidated financial data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and notes thereto included elsewhere in this prospectus. Our pro forma information gives effect to: - the issuance of 1,444,042 shares of our Series C convertible preferred stock on September 6, 2000 for approximately $20.0 million and application of the proceeds therefrom; - the issuance of 216,607 shares of common stock and payment of $750,000 in cash in connection with the acquisition of Xertex Technologies; - the redemption of 2,500 shares of Series B redeemable preferred stock for $250,000 plus approximately $33,000 of accrued dividends; and - the conversion of all of our outstanding shares of Series A and Series C convertible preferred stock into a total of 3,444,042 shares of common stock which will be effected immediately prior to the consummation of this offering. The pro forma as adjusted information is provided for balance sheet data as of June 30, 2000 to further reflect the application of the net proceeds from the sale of the shares of common stock offered by us at an assumed initial public offering price of $ per share, and after deducting estimated offering expenses and underwriting discounts and commissions. <TABLE> <CAPTION> SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, -------------------------------------------------- ----------------- 1995 1996 1997 1998 1999 1999 2000 ------- ------- -------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales.............................. $62,197 $69,246 $105,211 $112,034 $109,644 $46,399 $62,462 Cost of sales.......................... 50,619 57,795 85,310 87,142 91,965 39,369 50,578 Income from operations................. 5,119 4,468 10,331 13,058 4,280 1,244 4,913 Net income............................. 5,171 3,741 4,568 6,065 1,767 -- 2,988 Dividends on preferred stock........... -- -- 1,504 2,640 987 476 1,546 Net income (loss) available for common stock................................ 5,171 3,741 3,064 3,425 780 (476) 1,442 Earnings per share: Basic................................ $ 0.65 $ 0.47 $ 0.38 $ 0.43 $ 0.10 $ (0.06) $ 0.18 Diluted.............................. $ 0.65 $ 0.47 $ 0.38 $ 0.42 $ 0.07 $ (0.06) $ 0.17 Weighted average shares used in earnings per share calculation: Basic................................ 8,000 8,000 8,000 8,000 8,097 8,000 8,197 Diluted.............................. 8,000 8,000 8,112 8,232 10,405 8,000 8,585 Pro forma net income per share available for common shares:(1) Basic......................................................................... $ 0.12 $ (0.01) $ 0.24 Diluted....................................................................... $ 0.12 $ (0.01) $ 0.23 Pro forma weighted average shares used in calculation: Basic......................................................................... 11,758 11,661 11,858 Diluted....................................................................... 12,066 11,661 12,246 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 2000 ------------------------------------ PRO FORMA AS ACTUAL PRO FORMA ADJUSTED ------- --------- ------------ (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 2,387 $ 3,554 $ Working capital............................................. 1,892 15,892 Total assets................................................ 56,708 60,725 Long-term debt, less current maturities..................... 14,259 9,259 Total stockholders' equity (deficit)........................ (6,704) 15,529 </TABLE> --------------- (1) Pro forma basic and diluted net income per share have been computed to give effect to common equivalent shares from convertible preferred stock and to include Series C convertible preferred stock issued in September 2000, that will convert upon the closing of this offering (using the as-if-converted method) for the year ended December 31, 1999, and the unaudited six months ended June 30, 1999 and 2000. The computation also includes the pro forma effect of the redemption of the Series B redeemable preferred stock.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001124136_ubs_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001124136_ubs_prospectus_summary.txt
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+Prospectus summary THE FOLLOWING SUMMARY DOES NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS BEFORE MAKING AN INVESTMENT DECISION. YOU SHOULD PAY SPECIAL ATTENTION TO THE "RISK FACTORS" SECTION TO DETERMINE WHETHER AN INVESTMENT IN THE TRUST PREFERRED SECURITIES IS APPROPRIATE FOR YOU. INTRODUCTION The trust preferred securities will provide you with rights to distributions and redemption and liquidation payments that are similar to those to which you would be entitled if you had purchased the most senior ranking noncumulative perpetual preferred shares issued directly by UBS AG that have financial terms equivalent to those of the company preferred securities. The diagram to the right outlines the relationship among investors in the trust preferred securities, UBS Preferred Funding Trust, UBS Preferred Funding Company and UBS AG following the completion of the offering. UBS Preferred Funding Trust will pass through to you any dividends, redemption payments or liquidation payments that it receives from UBS Preferred Funding Company on the company preferred securities. UBS AG will guarantee, on a subordinated basis, dividend, redemption and liquidation payment obligations under the company preferred securities. UBS Preferred Funding Company will receive payments under the subordinated notes issued by the Cayman Islands branch of UBS AG and will pay dividends on the company preferred securities that are similar to dividends that would be paid on the most senior ranking noncumulative perpetual preferred shares issued directly by UBS AG that have equivalent financial terms. The capital raised in this offering will qualify as consolidated Tier 1 capital for UBS under the relevant regulatory capital guidelines of the Swiss Federal Banking Commission. LOGO Parties to the offering For a more complete description of UBS AG, UBS Preferred Funding Trust and UBS Preferred Funding Company, see "UBS," "UBS Preferred Funding Trust I," "UBS Preferred Funding Company LLC I," "Use of Proceeds," "Capitalization of UBS AG" and "Capital Ratios and Distributable Profits of UBS." UBS AG UBS AG is a global, integrated investment services firm and the leading bank in Switzerland. UBS's business is managed through three main business groups and its Corporate Center. The business groups are: UBS Switzerland, UBS Warburg and UBS Asset Management. UBS's clients include international corporations, small and medium sized businesses in Switzerland, governments and other public bodies, financial institutions, market participants and individuals. UBS AG's ordinary shares are listed on the New York Stock Exchange under the symbol "UBS.N," on the Zurich Stock Exchange under the symbol "UBSNZn.S" and on the Tokyo Stock Exchange under the symbol "UBS.T". On 12 July 2000, UBS announced that it had entered into a definitive merger agreement with Paine Webber Group Inc., one of the largest full-service securities and commodities firms in the United States. UBS will purchase all outstanding shares of PaineWebber stock for a combination of cash and stock representing a total purchase price of $10.8 billion (based on the UBS share price on 12 July 2000). The transaction is subject to shareholder and regulatory approvals and other conditions and is expected to be completed in the fourth quarter of 2000. The principal executive offices of UBS AG are located at Bahnhofstrasse 45, Zurich, Switzerland and Aeschenvorstadt I, Basel, Switzerland. Its telephone numbers are 011-41-1-234-11-11 and 011-41-61-288-20-20. UBS PREFERRED FUNDING TRUST I UBS Preferred Funding Trust I is a Delaware statutory business trust. UBS Preferred Funding Trust exists for the purpose of issuing the trust preferred securities representing a corresponding amount of the company preferred securities, together with related rights under the UBS AG subordinated guarantee. UBS Preferred Funding Trust will pass the dividends it receives on the company preferred securities through to you as distributions on the trust preferred securities. UBS Preferred Funding Trust cannot engage in other activities. The company preferred securities and the related rights under the UBS AG subordinated guarantee will be the only assets of UBS Preferred Funding Trust. UBS AG, Stamford branch, will pay directly all expenses and liabilities of UBS Preferred Funding Trust. UBS Preferred Funding Trust will be treated as a grantor trust for United States federal income tax purposes. As a result, you will be treated as a beneficial owner of interests in the company preferred securities and the related rights under the UBS AG subordinated guarantee for United States federal income tax purposes. The principal executive offices of UBS Preferred Funding Trust are located at c/o Wilmington Trust Company, 1100 North Market Street, Wilmington, Delaware 19890. Its telephone number is 302-651-1118. UBS PREFERRED FUNDING COMPANY LLC I UBS Preferred Funding Company LLC I is a Delaware limited liability company. UBS Preferred Funding Company exists for the purposes of acquiring and holding the subordinated notes issued by the Cayman Islands branch of UBS AG, or other eligible investments, and issuing the company common securities and the company preferred securities. UBS AG is purchasing all of the company common securities, which represent 100% of the voting rights in UBS Preferred Funding Company, subject to your limited right to elect additional directors as described below. UBS Preferred Funding Company will apply the cash generated by the subordinated notes and other eligible investments, if any, to pay dividends to UBS Preferred Funding Trust, as holder of the company preferred securities, and UBS AG, as holder of the company common securities. UBS Preferred Funding Company will be treated as a partnership for United States federal income tax purposes. UBS Preferred Funding Company will be managed by a board of directors having not less than three and not more than five members. If the aggregate of unpaid dividends equals or exceeds an amount equal to three semi-annual dividend payments, you and the other holders of trust preferred securities will have the right to elect two additional directors. The principal executive offices of UBS Preferred Funding Company are located at The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801. Its telephone number is 302-658-7581. The offering For a more complete description of the trust preferred securities, the company preferred securities, the UBS AG subordinated guarantee and the subordinated notes, see "Description of Trust Preferred Securities," "Description of Company Preferred Securities," "Book-Entry Issuance of Trust Preferred Securities," "Description of UBS AG Subordinated Guarantee" and "Description of Subordinated Notes of UBS AG." SECURITIES OFFERED Each trust preferred security represents a corresponding amount of the company preferred securities and related rights under the UBS AG subordinated guarantee. The trust preferred securities will be issued in denominations of $1,000 liquidation amount and whole-number multiples of $1,000, and the company preferred securities will be issued in denominations of $1,000 liquidation preference and whole-number multiples of $1,000. The aggregate liquidation amount of the trust preferred securities is $1,500,000,000 and the aggregate liquidation preference of the company preferred securities is $1,500,000,000. DIVIDENDS UBS Preferred Funding Trust will pass through the dividends it receives on the company preferred securities as distributions on the trust preferred securities. UBS Preferred Funding Company will pay dividends on the company preferred securities from the date of their initial issuance on a noncumulative basis. These dividends will be payable on the liquidation preference of the company preferred securities: - semi-annually in arrears on the first business day on or after April -- and October -- of each year at a fixed rate per annum equal to --%, beginning -- April 2001 and ending -- October 2010, calculated on the basis of a 360-day year consisting of twelve 30-day months, and - thereafter quarterly in arrears on the first business day on or after January --, April --, July -- and October -- of each year at a variable rate per annum equal to --% above three-month LIBOR, calculated on the basis of the actual number of days elapsed in a 360-day year. UBS Preferred Funding Company's obligation to pay dividends is subject to provisions that generally require UBS Preferred Funding Company to pay full or proportional dividends on the company preferred securities when UBS AG pays dividends on UBS AG ordinary shares or on other securities of UBS AG that rank equally with or junior to the UBS AG subordinated guarantee of the company preferred securities. As described below, UBS Preferred Funding Company will be required to pay dividends on the company preferred securities in some circumstances, will be prohibited from paying dividends on the company preferred securities in other circumstances, and, when not required to pay or prohibited from paying dividends, will have discretion as to whether to pay dividends on the company preferred securities. Because UBS AG paid dividends on its ordinary shares in 26 April 2000, dividends on the company preferred securities will be mandatory (as described below) through the dividend payment date in April, 2001. The following text outlines the criteria for determining whether and the extent to which UBS Preferred Funding Company will be required to pay dividends on the company preferred securities or will be prohibited from paying dividends on the company preferred securities: Is there a capital limitation on UBS AG? Unless the Swiss Federal Banking Commission expressly permits otherwise, if on a dividend payment date UBS AG is not in compliance with the Swiss Federal Banking Commission's minimum capital adequacy requirements applicable to UBS AG, or would not be in compliance because of a payment of dividends on the company preferred securities, UBS Preferred Funding Company will not pay dividends on the company preferred securities under any circumstances. For a discussion of UBS's capital resources relative to applicable guidelines, see "UBS -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital Resources." We refer to this restriction as a capital limitation. Are dividends mandatory? Unless there is a capital limitation, the payment of full dividends by UBS Preferred Funding Company on the company preferred securities will be mandatory during the one-year period beginning on and including each date on which: - UBS AG declares or pays a dividend or makes any other payment or distribution on any shares or other securities that, in a liquidation of UBS AG, rank junior to the UBS AG subordinated guarantee of the company preferred securities; or - UBS AG or any of its subsidiaries redeems, repurchases (except for its trading account) or otherwise acquires any shares or other securities that, in a liquidation of UBS AG, rank equally with or junior to the UBS AG subordinated guarantee of the company preferred securities. The payment of proportional dividends by UBS Preferred Funding Company on the company preferred securities will be mandatory on any date, whether or not a regularly scheduled dividend payment date, on which UBS AG or any of its subsidiaries pays a dividend or makes any other payment or distribution on any shares or other securities that, in a liquidation of UBS AG, rank equally with the UBS AG subordinated guarantee of the company preferred securities if, on the dividend payment dates leading up to the payment or distribution on the equally ranking securities, dividends were paid on the company preferred securities in a lower percentage than are being paid on the equally ranking securities. Unless there is a capital limitation, UBS Preferred Funding Company will be required to pay dividends that are mandatory whether or not: - UBS AG delivers a notice limiting dividends, - UBS AG has available distributable profits, or - interest is paid on the subordinated notes or other eligible investments. Does UBS AG have available distributable profits? Available distributable profits are the pro rata proportion (from among all shares and other securities issued by UBS AG that rank equally with the UBS AG subordinated guarantee of the company preferred securities) of profits that may be distributed in accordance with Swiss law. Currently, distributable profits include the total of current profit, profit brought forward and freely available reserves as reflected in the most recent audited unconsolidated balance sheet and statement of appropriation of retained earnings of UBS AG. Unless required to pay mandatory dividends, UBS Preferred Funding Company will not pay dividends on the company preferred securities in excess of UBS AG's available distributable profits. When are dividends discretionary? The payment of dividends by UBS Preferred Funding Company on the company preferred securities is discretionary if the capital limitation does not apply, dividends are not mandatory as described above, and UBS AG has sufficient available distributable profits. In that case, UBS Preferred Funding Company will pay dividends on the company preferred securities at the specified rate unless, on or before the tenth business day immediately preceding a dividend payment date, UBS AG gives notice to UBS Preferred Funding Company that UBS Preferred Funding Company must pay no dividends or less than full dividends, in which case dividends will be due and payable only in the amount specified in the notice. UBS AG may deliver such a notice in its sole discretion and for any reason, except that such a notice shall have no effect where dividends are mandatory as described above. When does the dividend preference shift from the company preferred securities to the company common securities? The company preferred securities ordinarily will rank senior to the company common securities as to the payment of dividends. However, the dividend preference of the company preferred securities may, at UBS AG's option, shift to the company common securities on dividend payment dates to the extent that no mandatory dividend payment amount is then required to be paid on the company preferred securities. If UBS AG does this, the corresponding interest payments or other income received by UBS Preferred Funding Company on the subordinated notes or its other eligible investments may be returned as dividends to UBS AG as holder of the company common securities before any dividends are paid on the company preferred securities. WITHHOLDING TAXES Generally, UBS Preferred Funding Company will pay additional amounts on full or proportional mandatory dividends otherwise due and payable so that the net amount received by you will not be reduced by the withholding of certain taxes or other government charges. However, UBS Preferred Funding Company will not pay any additional amounts if the taxes or governmental charges are withheld because you: - are connected, other than as a holder of trust preferred securities, to Switzerland or the Cayman Islands if it is the jurisdiction that requires the withholding of the taxes or charges, or - have not filed an appropriate declaration stating that you are not a resident of and do not have a connection with Switzerland or the Cayman Islands if it is the jurisdiction that requires the withholding of the taxes or charges, or a similar claim for exemption, if we have given you the opportunity to do so. REDEMPTION UBS Preferred Funding Company may redeem the company preferred securities, in whole or in part, on any dividend payment date on or after the dividend payment date regularly scheduled to occur in October 2010. In that case, you will receive a redemption price equal to unpaid mandatory dividends, other unpaid definitive dividends (for example, discretionary dividends that became due and payable because UBS AG did not deliver a notice to pay no dividends), current accrued dividends (whether or not declared) and the liquidation preference of your company preferred securities. UBS Preferred Funding Company may not redeem the company preferred securities before the dividend payment date regularly scheduled to occur in October 2010, unless an event occurs that results in an adverse consequence for the tax or capital treatment of the company preferred securities, or for the investment company status of UBS Preferred Funding Company or UBS Preferred Funding Trust. If the circumstance giving rise to redemption arises out of a change in tax law that results in the imposition of tax on UBS Preferred Funding Trust or UBS Preferred Funding Company or the imposition of withholding tax on payment of dividends on the company preferred securities, distributions on the trust preferred securities or interest on the subordinated notes, then you will receive a redemption price as described above. If the redemption arises from the other special events, including adverse tax consequences not arising out of a change in tax law, you will receive a redemption price equal to unpaid mandatory dividends, other unpaid definitive dividends, current accrued dividends (whether or not declared) and a make whole amount equal to the greater of the liquidation preference and the sum of the net present value of scheduled dividends and the liquidation preference through October 2010. UBS Preferred Funding Trust will pass through the redemption payments it receives on the company preferred securities to redeem a corresponding amount of the trust preferred securities. Any redemption of the company preferred securities must comply with applicable regulatory requirements, including the prior approval of the Swiss Federal Banking Commission if then required under applicable guidelines or policies of the Swiss Federal Banking Commission. The Swiss Federal Banking Commission in its discretion may impose conditions on its approval of any proposed redemption of the company preferred securities. You may not require redemption of the company preferred securities at any time. LIQUIDATION If UBS AG is liquidated, UBS Preferred Funding Company will be liquidated. So long as the company preferred securities are outstanding, UBS AG will not cause UBS Preferred Funding Company to liquidate unless UBS AG is also liquidating. If UBS Preferred Funding Company is liquidated, you will be entitled to receive an amount equal to unpaid mandatory dividends, other unpaid definitive dividends, current accrued dividends (whether or not declared) and the liquidation preference of your company preferred securities. However, any liquidating distributions that you receive will be substantially the same as, but not greater than, those to which you would be entitled if you had purchased the most senior ranking noncumulative perpetual preferred shares issued directly by UBS AG that have financial terms equivalent to those of the company preferred securities. BOOK-ENTRY ISSUANCE OF THE TRUST PREFERRED SECURITIES UBS Preferred Funding Trust will initially issue the trust preferred securities only in book-entry form through The Depository Trust Company. You may withdraw the company preferred securities represented by your trust preferred securities from UBS Preferred Funding Trust and hold the company preferred securities directly. If you hold the company preferred securities directly, you must hold the company preferred securities in certificated form. If you hold the company preferred securities directly, then you may exercise directly the associated rights under the UBS AG subordinated guarantee, and any rights under the limited liability company agreement of UBS Preferred Funding Company in respect of the company preferred securities, including any rights to elect additional directors of UBS Preferred Funding Company. THE UBS AG SUBORDINATED GUARANTEE UBS AG will unconditionally guarantee, on a subordinated basis, the payment by UBS Preferred Funding Company of any mandatory dividends on the company preferred securities or dividends that have become definitive because UBS AG has sufficient available distributable profits to pay out dividends and has not delivered to UBS Preferred Funding Company an instruction not to pay dividends. UBS AG will also unconditionally guarantee, on a subordinated basis, the redemption price payable with respect to any company preferred securities called for redemption by UBS Preferred Funding Company and the payment by UBS Preferred Funding Company on its liquidation of an amount sufficient to provide you with the distributions described under "Liquidation" above. THE SUBORDINATED NOTES The subordinated notes are undated and will have an aggregate principal amount of $1,500,000,000. The subordinated notes are general unsecured debt obligations of UBS AG and the Cayman Islands branch of UBS AG and, in liquidation of UBS AG, will rank subordinate and junior to all indebtedness of UBS AG except for indebtedness that by its terms expressly ranks equally with the subordinated notes. Interest payable under the subordinated notes will be calculated at the same rate and payable on the same dates as dividends payable under the company preferred securities. UBS AG will not pay interest on the subordinated notes if UBS AG is not solvent. USE OF PROCEEDS - UBS Preferred Funding Trust will use the proceeds from the offering of the trust preferred securities to purchase the company preferred securities from UBS Preferred Funding Company. - UBS Preferred Funding Company will use the proceeds from the offering of the company preferred securities to purchase the subordinated notes issued by the Cayman Islands branch of UBS AG. - UBS AG will use the proceeds from the issuance of the subordinated notes for general corporate purposes, including paying certain expenses relating to the offering, and possibly funding a portion of the purchase price of PaineWebber.
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our Company and the sale of our common shares, and our financial statements and notes to those financial statements that appear elsewhere in this prospectus. OUR COMPANY We provide advanced broadband communications services and software application services in Brazil. Our target customers are multinational corporations, government entities and small and medium-size businesses with growing and diverse communications and business automation needs. We deliver broadband communications services over our high-speed, high-capacity network using fixed wireless access technology and leased fiber optic cable. Our software application services offer business process improvements, database management programs and electronic commerce services to our customers. We market our services under the brand iB2B. OUR SERVICES We offer an integrated package of communications services that we have organized across two business platforms: network services and software application services. Our network services include: - Basic Broadband Connectivity -- We connect our customers to our network through last-mile wireless access and leased fiber optic cable; - Virtual Private Networks, or VPNs -- We construct private networks that allow a customer to communicate securely among its multiple locations over the Internet. This service is sometimes referred to as an Intranet service. We also build Extranets, which are VPNs, that allow third party access to a customer's data; - Web Hosting -- We place a customer's Website on our Internet Web servers using the customer's registered domain name; and - Voice-over-Internet Protocol -- We offer the transmission of voice over an internetworking standard that enables communication across the Internet. We provide this service to our business and government customers through the installation of VPNs since Brazilian communications regulation only allows this service to be provided over private networks. Our software application services include Web-based and client/server based software solutions tailored to the customer's business automation needs. We currently offer vertical software solutions directed at specific industries and applications, including: - Healthcare -- The components of this solution include customer invoicing, purchasing, insurance claim management and patient enrollment; - Government Administration -- The components of this solution include taxation tracking, budget and financial management, human resource management and fleet control; and - Education and Distance Learning -- This solution is comprised of three core applications: school census and enrollment planning; school management; and distance learning. Our software application services are designed to take advantage of broadband communications technology to improve the administrative and business processes of our customers. These services, which require minimal customization, help customers manage the flow of data among departments and customer locations as well as with their clients. Most of our current customers have software application services installed in a client/server configuration. However, most of our software application services are designed to be delivered in conjunction with our network services using an Application Service Provider, or ASP, business model. An ASP business model involves the delivery of software over a network, such as the Internet, rather than its installation at a customer location. THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT OF WHICH THIS PRELIMINARY PROSPECTUS FORMS A PART FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS SUBJECT TO COMPLETION. DATED OCTOBER 17, 2000. SHARES [LOGO] INTERCONTINENTAL TELECOMMUNICATIONS CORP. COMMON STOCK This is our initial public offering, and no public market currently exists for our common shares. We are offering common shares in this offering. We expect the initial public offering price for our common shares to be between $ and $ . We have applied to list our common shares on the Nasdaq National Market under the symbol "ITCN". INVESTING IN OUR COMMON SHARES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> PER SHARE TOTAL --------- -------- <S> <C> <C> Public offering price....................................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds, before expenses, to Intercontinental Telecommunications Corp................................... $ $ </TABLE> We have granted the underwriters a 30-day option to purchase up to additional common shares solely to cover over-allotments. The underwriters expect to deliver the common shares on , 2000. ------------------------ JOSEPHTHAL & CO. INC. THE DATE OF THIS PROSPECTUS IS , 2000 OUR RELATIONSHIP WITH MICROTEC SISTEMAS INDUSTRIA E COMERCIO S.A. We have a strategic relationship with Microtec, a wholly owned subsidiary of Vitech America, Inc., a Florida corporation whose shares are publicly traded on the NASDAQ National Market. Microtec is a leading manufacturer and marketer of computer products, peripherals and software to business, government and individual customers in Brazil. We have entered into a joint marketing agreement with Microtec that terminates on November 1, 2005. Although the licenses for the services we offer are currently held in the name of Microtec, under the joint marketing agreement, Microtec has agreed to transfer the licenses to us. Microtec is in the process of applying to the Brazilian National Telecommunications Agency, or ANATEL, for the transfer of the licenses to us. Microtec also granted us the exclusive right to sell our services to its customers so long as our services are bundled with its products and equipment at prices agreed to with Microtec. In these engagements and engagements requiring the provision of network services under Microtec's licenses, Microtec bills the customer for our services and collects from the customer on our behalf. Microtec has agreed to market our products and services. Microtec also has agreed to assist our sales team, by: - providing introductions to over 34,000 existing Microtec business and government customers; and - cross-selling our portfolio of Internet services in their information technology, or IT, sales proposals. We believe that our relationship with Microtec's sales force provides us with a significant advantage for rapidly capturing marketing share. OUR COMPETITIVE ADVANTAGES We believe that our competitive strengths, in addition to our relationship with Microtec, include: - our integrated solutions approach, in which we offer multiple services ranging from basic broadband connectivity to sophisticated software applications and communications solutions; - our rapidly deployable and scalable nationwide network using last-mile wireless technology that allows us to capture market share; and - our position as a low-cost provider of communications services and solutions. OUR NATIONAL AND LOCAL NETWORKS Our national network currently consists of 15 operational points-of-presence, or POPs, two network operations centers, or NOCs, and local access nodes. This network links the Brazilian cities of Belo Horizonte, Blumenau, Curitiba, Florianopolis, Goiania, Ilheus, Joinvile, Natal, Porto Alegre, Recife, Ribeirao Preto, Salvador, Santos and Sao Paulo, and includes an international connection to the United States in Miami, Florida. We have connected a total of 106 customer buildings throughout 14 cities in Brazil as of August 31, 2000. We are expanding our networks to consist of 32 operational POPs within Brazil. We expect that this expansion will be completed by the end of 2001. We are building local networks in Brazil based on fixed wireless broadband access technology using radio frequencies and asynchronous transfer mode, or ATM, switching technology. ATM technology enables us to accommodate many different information systems and permits us to assure high levels of service and quality across our national network. We own and operate our switches, lease fiber optic cable transport capacity, and connect to our customers by using fixed wireless broadband access technology. We can deploy our last-mile wireless networks based on the local needs of our customers. We therefore do not incur significant capital expenditures until we identify sufficient customer demand. OUR MARKET OPPORTUNITY We believe that a substantial business opportunity exists for us in Brazil as a result of the following factors: - Brazil is a large, growing and underserved communications market lacking an adequate communications infrastructure; - we believe there is a large demand for high speed data communications in Brazil; and - our wireless broadband access technologies offer a high-quality alternative to existing copper, satellite and fiber-based systems. OUR BUSINESS STRATEGY Our objective is to become a leading broadband connectivity and communications solutions provider to our customers. To do this, we plan to: - continue to build our fixed wireless broadband network to offer dedicated broadband Internet access and other broadband services; - rapidly build a large customer base; - expand the range of services we provide to existing customers; - selectively acquire or partner with complementary technology and service providers; and - expand into other markets in Latin America. OUR CORPORATE STRUCTURE We are a holding company incorporated in Florida. We conduct our business through two operating subsidiaries incorporated in Brazil and headquartered in Sao Paulo: Intercontinental Telecom Corporation do Brasil S/C Ltda., and Viplink Provedora de Accesso a Internet S/C Ltda. We also have majority ownership interests in two recently acquired Brazilian companies, Probit Technologia Educacional Ltda. and Interactive Consultoria e Desenvolvimiento de Sistemas Ltda. We also own a 49% interest in ITC Holding Brasil S/C Ltda. Our principal executive offices are located at 2190 N.W. 89th Place, Suite 100, Miami, Florida 33172, and our telephone number is (305) 702-4300. THE OFFERING Common shares offered...... shares Common shares outstanding after the offering(1)...... shares Use of proceeds............ We intend to use the proceeds from this offering: - to fund network operations and expansion plans; - to implement our growth strategy; and - for general corporate and working capital purposes. Dividend policy............ We have not paid any cash dividends on our common shares, and we do not expect to do so in the foreseeable future. Proposed Nasdaq National Market Symbol............ "ITCN" --------------------- (1) Assumes the conversion of 4,914,005 shares of Series A Redeemable Convertible Preferred Stock into an equal number of common shares. This conversion will automatically occur if the gross proceeds to us from this offering exceed $25 million and the initial public offering price per common share is at least $8.14. If the underwriters exercise their over-allotment option in full, the total number of common shares offered will be , and the total number of common shares outstanding after the offering will be . The number of common shares outstanding after this offering is based on the number of common shares outstanding on , 2000. The offering information above excludes: - 4,000,000 common shares issuable upon exercise of stock options outstanding as of October , 2000 at a weighted average price of $0.37 per share; - 3,000,000 common shares available as of October , 2000 for future issuance under our 1998 stock option plan; and - 3,518,810 common shares issuable upon exercise of warrants outstanding as of October , 2000 at a weighted average price of $0.15 per share. Unless otherwise indicated, this prospectus assumes that the underwriters have not exercised their over-allotment option to purchase additional common shares. SUMMARY CONSOLIDATED FINANCIAL DATA The following summary of the financial data for our business should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the accompanying notes to those statements included elsewhere in this prospectus. The As Adjusted column reflects the sale of common shares in this offering at an assumed price of $ per share, after deducting the underwriting discounts and commissions, the estimated offering expenses payable by us, and the application of these proceeds. SUMMARY STATEMENT OF OPERATIONS DATA: <TABLE> <CAPTION> YEAR ENDED THREE MONTHS ENDED APRIL 30, JULY 31, ------------------------- ----------------------- 1999 2000 1999 2000 ----------- ----------- --------- ----------- (UNAUDITED) <S> <C> <C> <C> <C> Net revenues................................. $ 795,000 $ 3,545,426 $ 309,980 $ 1,488,400 Cost of revenues............................. 406,913 2,427,513 99,395 750,113 ----------- ----------- --------- ----------- Gross profit................................. 388,087 1,117,913 210,585 738,287 Selling, general and administrative expenses................................... 1,281,295 2,705,655 476,934 1,593,316 Depreciation and amortization................ 161,940 411,341 43,435 494,762 ----------- ----------- --------- ----------- Loss from operations......................... (1,055,148) (1,999,083) (309,784) (1,349,791) Other expense................................ -- (605,352) (131,607) (37,686) ----------- ----------- --------- ----------- Net loss..................................... $(1,055,148) $(2,604,435) $(441,391) $(1,387,477) =========== =========== ========= =========== Loss per common share -- basic and diluted (1)........................................ $ (0.24) $ (0.24) $ (0.05) $ (0.11) =========== =========== ========= =========== </TABLE> --------------- (1) See note 1 to our consolidated financial statements for a determination of the shares used in computing basic and diluted loss per share. SUMMARY BALANCE SHEET DATA: <TABLE> <CAPTION> JULY 31, 2000 (UNAUDITED) APRIL 30, 2000 ------------------------------------------ -------------- PROFORMA ACTUAL ACTUAL PROFORMA(1) AS ADJUSTED(2) -------------- ----------- ----------- -------------- <S> <C> <C> <C> <C> Current assets............................. $ 662,738 $18,178,552 $18,178,552 $ Working capital (deficit).................. (5,477,117) 11,831,795 11,831,795 Total assets............................... 6,101,642 29,616,825 29,616,825 Long-term liabilities, including minority interest................................. 681,439 292,074 292,074 Total liabilities and minority interest.... 6,821,294 6,638,831 6,638,831 Series A Redeemable Convertible Preferred Stock.................................... -- 19,227,008 -- Shareholders' equity (deficit)............. (719,652) 3,750,986 22,977,994 </TABLE> --------------------- (1) This assumes the conversion of the Series A Redeemable Convertible Preferred Stock, which will occur assuming that this offering generates gross proceeds to us in excess of $25 million and the initial offering price per common share is at least $8.14. (2) This gives effect to (i) the conversion of the Series A Redeemable Convertible Preferred Stock, which will occur assuming that this offering generates gross proceeds to us in excess of $25 million and the initial offering price per common share is at least $8.14 and (ii) the sale of common shares in the offering at an assumed offering price of $ per share and the application of the estimated net proceeds therefrom.
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+PROSPECTUS SUMMARY This summary highlights selected information described more fully elsewhere in this prospectus. This summary is not complete and does not contain all the information you should consider before investing in our common stock. You should read the entire prospectus carefully, including the risks set forth in Risk Factors and the financial statements and their related notes, before making an investment decision. Applied Epi, Inc. We are a leading provider of epitaxial equipment and related components used to produce compound semiconductors for the fiber optic and wireless markets, as well as for other consumer applications. Our product line includes epitaxial equipment and related components used in both high and low volume commercial production, and research and development. For 14 years, we have offered products and services designed to cost-effectively meet the increasingly demanding production requirements of the global high-performance communications infrastructure. Our customers use our equipment and components to manufacture compound semiconductors for a wide variety of communications applications, including fiber optic modules and subsystems, mobile phones, wireless networks and satellites. Other uses for compound semiconductors include several rapidly growing consumer applications, such as digital versatile disks (DVDs), low cost lighting and signage and global positioning systems. The growing demand for information and connectivity is driving the continued rapid expansion of wireless and fiber optic networks, and the products that rely on these networks. In the past, communications equipment and products relied on silicon semiconductor technology to meet performance requirements. However, fiber optic and current generations of wireless networks, and their related products, require higher performance and greater functionality than silicon semiconductors can provide. As a result, compound semiconductors have emerged as a key enabling technology to meet these higher performance requirements. Compound semiconductors are composed of two or more elemental materials usually consisting of a metal and a non-metal. The intrinsic physical properties of compound semiconductors enable electrons to move approximately five times faster than through silicon semiconductors, allowing these semiconductors to operate at significantly higher speeds. In addition, compound semiconductors have optoelectronic properties that enable them to emit light, a fundamental requirement of fiber optic applications and a function not achievable using silicon semiconductors. Other key advantages include lower power consumption and reduced signal distortion, which are critical to the performance of current generations of wireless technologies. According to Strategies Unlimited, the compound semiconductor market was approximately $11 billion in 1999 and is expected to grow 24% to $13.6 billion in 2000. Communications applications that use compound semiconductors account for approximately 50% of this market. Driven by the anticipated high demand for fiber optic and wireless communications, this segment is expected to grow faster than the overall compound semiconductor market. For the majority of compound semiconductors, epitaxy is the critical first step of the fabrication process, ultimately determining device functionality and performance. Epitaxy is the process of precisely depositing atomically thin crystal layers, or epilayers, of elemental materials onto a substrate. After the epilayers are grown on the substrate, it is known as an epiwafer. The unique performance characteristics of compound semiconductors are dependent on the chemical composition, number, and precise thickness of the epilayers. As a result, epitaxy is considered to be the highest value-added step in the production of compound semiconductors. The two most common epitaxial technologies used to form the epilayers are molecular beam epitaxy (MBE) and metal organic chemical vapor deposition (MOCVD). While some compound semiconductor applications favor either MBE or MOCVD, either technology can be used for most applications. We have been an innovator in the compound semiconductor market since our inception, and believe that we offer the broadest product selection of epitaxial equipment and related components for the compound semiconductor industry. Our GEN2000 is the world s first high volume production MBE system incorporating ultra high vacuum (UHV) cluster tool architecture, designed to provide our customers with increased productivity and lower cost of ownership. With its ability to process seven 6 wafers simultaneously, it is also currently the world s largest capacity production MBE system. We shipped our first GEN2000 in the third quarter of 2000. We also provide a full line of low volume production and research MBE systems that are capable of performing in a wide variety of environments. Our most popular system in this class, the Modular GENII, has an installed base of over 200 systems, giving us what we believe is a leading share in the market for low volume production and research MBE systems. We are also a leading supplier of key components to the MBE equipment market, including our proprietary effusion cell technology, control hardware and electronics, process control software, spare parts and consumables. We estimate that more than 70% of the world s compound semiconductor manufacturers using MBE systems use our effusion cells, the most critical component for the successful operation of an MBE system. Our goal is to become the leading supplier of integrated equipment and related process solutions to compound semiconductor manufacturers for use throughout their fabrication line. Key elements of our strategy are as follows: further penetrate the high volume MBE equipment markets; leverage our current technology and relationships to penetrate the MOCVD market; expand our product offering to offer complete fabrication line solutions; enhance our customer relationships, including opening a Process Integration Center; and extend our technology leadership. We have a diverse global customer base with no single customer accounting for more than 10% of our sales in 1998 or 1999. We sell our products to compound semiconductor manufacturers and epiwafer suppliers, as well as research and academic institutions. In 1999, our major commercial customers in the fiber optic market included Bandwidth9, Inc., JDS Uniphase Corporation, Lucent Technologies Inc., Mitsubishi Chemical Corporation and NEC Corporation, and in the wireless market included Agilent Technologies, Inc., IQE plc, Raytheon Company, RF Micro Devices, Inc. and Sanders, a Lockheed Martin Company. International sales represented approximately 32% of our sales in 1997, 35% in 1998, 40% in 1999 and 38% in the six months ended June 30, 2000. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Additional Information We were incorporated in Minnesota in 1986 under the name Effusion Products, Inc. In 1987, we changed our name to Chorus Corporation and in July 2000, we changed our name to Applied Epi, Inc. Our executive offices are located at 4900 Constellation Drive, St. Paul, MN 55127, and our telephone number is (651) 482-0800. The address of our website is www.applied-epi.com. Information contained on our website is not part of this prospectus. SUMO and Uniblock are our registered trademarks. Applied Epi , GEN2000 , GEN200 , GENII , GENIII , Molly and certain other names not included in this prospectus are our trademarks. Registrations of the Applied Epi name and logo as well as other names used in our business are pending. Each trademark, trade name or service mark of any other company appearing in this prospectus belongs to its holder. FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Unless otherwise indicated, all information in this prospectus gives effect to the four-for-one stock split to be effected prior to this offering and assumes that the underwriters will not exercise their over-allotment option. APPLIED EPI, INC. (Exact name of registrant as specified in its charter) Minnesota 3559 41-1569588 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 4900 Constellation Drive St. Paul, Minnesota 55127 (651) 482-0800 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) (1) Excludes stock-based compensation charge of $84,029 for the six months ended June 30, 2000. (2) Excludes stock-based compensation charge of $7,140,084 for the six months ended June 30, 2000. (3) Applied Epi operated as an S corporation since 1997 and will terminate such status in connection with this offering. See Note 3 to Notes to Consolidated Financial Statements for information concerning the computation of pro forma net income (loss) and pro forma net income (loss) per share. (4) Reflects adjustments to account for the deferred tax asset described in S Corporation Status. See Note 3 of Notes to Consolidated Financial Statements. David G. Reamer President and Chief Executive Officer Applied Epi, Inc. 4900 Constellation Drive St. Paul, Minnesota 55127 (651) 482-0800 (Name, address, including zip code, and telephone number, including area code, of agent for service)
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+SUMMARY This . You should read the entire prospectus and the attached appendices before you decide to invest. Business of the Partnerships (page ) Each partnership will drill, own, and operate natural gas wells in Colorado, Michigan, West Virginia, Pennsylvania, Utah and/or other states and will produce and sell gas from these wells. Of the offering proceeds available for drilling operations, we plan to utilize all proceeds in the drilling of development wells but may utilize up to 10% on one or more exploratory wells. See "Proposed Activities" (page ) . The address and telephone number of the and Petroleum Development Corporation, the Managing General Partner, are 103 East Main Street, P.O. Box 26, Bridgeport, West Virginia 26330 and (304) 842-6256. Investment Objectives (page ) This section discusses the investment objectives of the in PDC 2003 Drilling Program. For reasons we discuss later in this summary and prospectus under "Risk Factors," you may not realize some or all of the benefits discussed below. You should only invest in this if you can afford the loss of your entire investment. The provides you with an opportunity to invest in the drilling, completion, and production of natural gas wells. The objective of the investment is to produce the following benefits for investors in the Program: - Cash from the sale of natural gas - A diversified investment in ten or more wells 87-89.5% of your investment . - Accurate and timely reports, including Form K-1 tax information distributed the first week of February. The production from natural gas wells decreases as time passes, so your cash flow will also decrease over time. Natural gas prices change constantly, so your cash flow can also increase or decrease from month to month. Your cash distributions will be partially sheltered from taxes by depletion. You may not receive some or all of these investment benefits for a variety of reasons including those discussed under "Risk Factors" later in the prospectus. Terms of the Offering (page ) The Program. PDC 2003 Drilling Program is a series of up to twelve limited partnerships to be formed under the West Virginia Uniform Limited Partnership Act. In this prospectus, we refer to each as a " or in the plural as the " We will offer and sell of the various during 2001, 2002 and 2003. See "Terms of the Offering" (page ) when formed will constitute a separate business entity. A limited partnership agreement will govern the rights and obligations of the of each . We attach a form of the limited partnership agreement as Appendix A to the prospectus. See "Summary of Partnership Agreement" (page ) . The Managing General Partner. The managing general partner of each will be Petroleum Development Corporation, which we refer to in this prospectus as the "Managing General Partner See "Management" (page ) . Units of Partnership Interest. You may choose to purchase units of general partnership interest or units of limited partnership interest in the particular being offered. "Unit" means a interest of a or of an purchased by an . This interest is the right and obligation to share a proportional part of the share of income, expense, assets and liabilities. The fractional interest purchased by a one unit investment in the interest in the is the ratio of one to the total number of See "Terms of the Offering - Types of Units" (page ) . Funding of a Partnership. In order to fund a , we must sell a minimum of 75 units or $1,500,000 for each PDC designated as an -A,-B or -C Partnership, or a minimum of 125 or $2,500,000 for each PDC partnership designated as a -D Partnership. The maximum subscription for an -A, -B or -C Partnership is 750 or $15,000,000, and the maximum subscriptions for a -D Partnership is 1,250 or $25,000,000. For example, we must sell at least 75 or $1,500,000 to fund the PDC 2003-B Limited Partnership and at least 125 or $2,500,000 to fund the PDC 2003-D Limited Partnership. If you wish to see a table presenting the minimum and maximum subscriptions and the targeted offering termination and closing date for each , see "Terms of the Offering - General" (page ). Subscription and Escrow. All subscriptions are payable in cash upon subscription. We have selected Chase Manhattan Trust Company as escrow agent to hold all subscription proceeds of each in a separate interest-bearing escrow account. See "Terms of the Offering" (page ) . Conversion of Units by the Managing General Partner and by Additional General Partners. We will convert all of general partnership interest of a particular of limited partnership interest of that upon completion of drilling and completion operations of that of limited partnership interest . See "Terms of the Offering - Conversion of Units by the Managing General Partner and by Additional General Partners" (page ), "Proposed Activities - Insurance" (page ), and "Tax Considerations - Conversion of Interests" (page ) . Unit Repurchase Program. Beginning with the third anniversary of the date of the first cash distribution of the particular of that may offer their to us for repurchase. Repurchase of is subject to our financial ability to purchase the . See "Terms of the Offering - Unit Repurchase Program" (page ) and "Tax Considerations - Gain or Loss on Sale of Property or Units" (page ) . Suitability Standards - Long_Term Investment. We have instituted strict suitability standards for investment in the . You may not invest unless you satisfy the suitability requirements. See "Terms of the Offering - Investor Suitability" (page ) . Risk Factors. This offering involves numerous risks, including the risks associated with gas and oil drilling and investments in gas and oil drilling programs, unlimited liability as an , lack of a trading market in the , and significant tax considerations. See "Risk Factors" (page ) and "Tax Considerations" (page ). You should carefully consider the significant risk factors inherent in and affecting the business of the and this offering before making an investment. Compensation of the Managing General Partner (page ) We and our affiliates will receive substantial compensation upon the formation and as a result of the operation of the will receive a one-time management fee equal to 2.5% of the aggregate subscriptions upon of each , fees for drilling and operating wells, for marketing the natural gas produced by wells, and for administering the , and commissions and fees for selling the to the Managing General Partner and Affiliates" (page ) . Participation in Costs and Revenues (page ) Generally, will receive 80% and the Managing General Partner will receive 20% of profits and losses throughout the term of each . The interests of the and us could also change if we invest additional funds for tangible drilling and lease costs. See "Participation in Costs and Revenues - Revenues - Revisions to Sharing Arrangements" (page ) and " - Costs - Lease Costs, Tangible Well Costs, and Gathering Line Costs" (page ). In Application of Proceeds (page ) We estimate that we will apply the proceeds from the aggregate funding of a , after our cash contribution, as follows. See "Source of Funds and Use of Proceeds" (page ). <TABLE> <C> <C> Percentage of Total Activity Capital Contributions Drilling and Completion Costs 89.3% Organization and Offering Costs 8.6% Management Fee 2.1% Total 100.00 </TABLE> Tax Considerations; Opinion of Counsel (page ) Duane, Morris & Heckscher LLP has issued to us its opinion, concerning all material federal income tax issues applicable to an investment in the . See "Tax Considerations" (page ) . To fully understand these tax issues, you should read the tax opinion in Appendix D. Rights of the Investor Partners (page ) The limited partnership agreement, which we attach to this prospectus as Appendix A, sets forth your rights as an . For a summary of your rights, see "Summary of Limited Partnership Agreement." RISK FACTORS Investment in the involves a high degree of risk and is suitable only for investors of substantial financial means who have no need of liquidity in their investments. As a prospective investor, you should consider carefully the following factors, in addition to the other information in this prospectus, prior to making your investment decision. Special Risks of the Partnerships Drilling natural gas wells is speculative, may be unprofitable, and may result in the total loss of your investment . The drilling and completion operations to be undertaken by each of the for the development of natural gas reserves are speculative and involve the possibility of a total loss of your investment in a . Drilling activities may be unprofitable, not only from non-productive wells, but also from wells which do not produce natural gas in sufficient quantities or quality to return a profit on the amounts expended. Investment is suitable only for individuals who are financially able to withstand a total loss of their investment. See "Terms of the Offering - Investor Suitability" (page ) . The Managing General Partner has not selected any prospects for acquisition, and as a result the will be unable to evaluate any prospect before they invest in the . We have not selected any prospect for acquisition by any and will not select prospects for a particular until after the activation of that . You will not have an opportunity before purchasing to evaluate for yourself the relevant geophysical, geological, economic or other information regarding the prospects to be selected. See "Proposed Activities - Acquisition of Undeveloped Prospects" (page ) . Because of a lengthy offering period, delays in the investment of an investor's subscription are likely . Upon execution and delivery by you, your subscription will be irrevocable and cannot be withdrawn. Because the offering period for a particular can extend months, delays in the investment of proceeds from your initial subscription date are likely. See "Terms of the Offering will be individually liable for obligations and liabilities beyond the amount of their subscriptions, assets, and the assets of the Managing General Partner . Under West Virginia law, the state in which each will organize, general partners of a partnership have unlimited liability with respect to that partnership will be liable individually and as a group for all obligations and liabilities of creditors and claimants, whether arising out of contract or tort, in the conduct of operations. If you invest as an , you may be liable for amounts in excess of your subscriptions, the assets of the , including insurance coverage, and the assets of the Managing General Partner . The Managing General Partner and its will receive compensation from the upon funding of the and throughout the life of the . We will receive compensation throughout the life of the . See "Compensation to the Managing General Partner and Affiliates" (page ) wells might not produce commercial quantities of natural gas. The selection of prospects for natural gas drilling is inherently speculative and is subject to a high degree of risk. We cannot predict whether any prospect will produce natural gas or commercial quantities of natural gas. We cannot predict the life and production of any well. The actual lives could differ from those anticipated. Partnership wells may not produce sufficient gas for investors to receive a profit or even to recover their initial investment. See "Proposed Activities - Acquisition of Undeveloped Prospects" (page ) Sufficient insurance coverage may not be available for the partnership, thereby increasing the risk of loss for the investor partners insurance coverage which the has available may become unavailable or prohibitively expensive. In case, we may elect to change the insurance coverage. See "Proposed Activities - Insurance" (page ) could be exposed to additional financial risk due to the reduced insurance coverage and due to the fact that would continue to be individually liable for obligations and liabilities of the As an , you could be subject to greater risk of loss of your investment since less insurance would be available to protect your from casualty losses. A which drills fewer wells will be less diversified, thereby increasing the risk of financial loss for the investors . We intend to spread the risk of natural gas drilling by participating in wells on a number of different prospects. However, the cost of drilling wells in different geographic locations varies greatly. A subscribed at the minimum level or which drills more expensive wells would be able to participate in fewer prospects, the diversification of the investment in prospects and your risk of financial loss of that . See "Proposed Activities - Drilling and Completion Phase - Drilling and Operating Agreement" (page ) . Through their involvement in partnership and other non_ activities, the Managing General Partner and its have interests which conflict with those of the . Our continued active participation in oil and gas activities for our own account and on behalf of other partnerships organized or to be organized by us, our sale of leases to and other transactions with the , and the manner in which revenues are allocated create conflicts of interest with the . We have interests which inherently conflict with your interests. . See "Conflicts of Interest" (page ) . Unaffiliated persons might manage jointly_owned prospects; a could be financially liable for obligations of jointly_owned prospects will usually acquire less than the full working interest in prospects and, as a result, will engage in joint activities with other working interest owners. Additionally, the might purchase less than a 50% working interest in one or more prospects. As a result, someone other than the or us may control and manage prospects. A partnership could be held liable for the joint activity obligations of the other working interest owners, nonpayment of costs and liabilities arising from the actions of the working interest owners. Full development of the prospects could be jeopardized in the event of the inability of other working interest owners to pay their respective shares of drilling and completion costs. As a result, . See "Proposed Activities - Drilling and Completion Phase - Drilling and Operating Agreement" (page ) may not borrow funds, even if needed for partnership operations; as a result, the partnership might not have sufficient capital for its operations intends to utilize substantially all available capital from this offering for the drilling and completion of wells and will have only nominal funds available for partnership purposes prior to time as there is production from partnership well operations. The limited partnership agreement does not permit the partnership to borrow money as may be required for its business. Therefore, any future requirement for additional funding will have to come, if at all, from the partnership's production. There is no assurance that production will be sufficient to provide the partnership with necessary additional funding. See "Source of Funds and Use of Proceeds - Subsequent Source of Funds" (page ) and "Proposed Activities - Production Phase of Operations - Expenditure of Production Revenues" (page ) and other partnerships sponsored by the Managing General Partner may compete with each other for prospects, equipment, contractors, and personnel; as a result, the partnership may find it more difficult to operate effectively . During and , we plan to offer interests in other partnerships to be formed for substantially the same purposes as those of the partnerships . Therefore, a number of partnerships with unexpended capital funds, including those partnerships formed before and after the partnerships , may exist at the same time. Due to competition among partnerships for suitable prospects and availability of equipment, contractors, and our personnel, the fact that partnerships previously organized by us may still be purchasing prospects (when the partnership is attempting to purchase prospects) may make more difficult the completion of prospect acquisition activities by a partnership may drill exploratory wells, which involves a greater risk of financial loss than drilling development wells . Each partnership may drill one or more exploratory wells. Drilling exploratory wells involves greater risks of dry holes and loss of your investment. Drilling development wells generally involves less risk of dry holes but developmental acreage is more expensive and subject to greater royalties and other burdens on production. See "Proposed Activities" (page ) . The results of drilling previous partnerships sponsored by the Managing General Partner are not indicative of the results to be experienced by the partnerships should not consider information concerning the prior drilling experience of previous partnerships sponsored by us, presented under the caption "Prior Activities" (page ), as being indicative of the results you might expect from your investment in these partnerships In view of the cost sharing arrangements, the will bear the substantial amount of costs and risks of non_commercial wells . Under the cost and revenue sharing provisions of the limited partnership agreement, we and the investor partners may share in costs disproportionate to our respective sharing of revenues. Because the investor partners will bear the substantial amount of costs of acquiring, drilling and developing the prospects, the investor partners will bear the substantial amount of costs and risks of drilling dry holes and marginally productive wells. See "Participation in Costs and Revenues" (page ) may be personally liable the limited partnership agreement. As an investor partner , you may not participate in the management of partnership business. The limited partnership agreement forbids you as an investor partner from acting in a manner harmful to the business of the partnership If you the terms of the limited partnership agreement, you may have to pay for losses and may also have to pay other for all damages resulting from your breach of the limited partnership agreement. See "Summary of Limited Partnership Agreement" (page ) by the Managing General Partner could reduce the value of the partnership and the investment interests of the investor partners We have agreed to indemnify each of the for obligations related to casualty and business losses which exceed available insurance coverage and partnership assets. Any successful claim of indemnification reduce the value of the partnership . As a result, the value of your investment interest in the partnership would be reduced. In event , you could lose your entire investment in the partnership . See "Summary of Partnership Agreement - Indemnification" (page ) distributions could result in liability of receive a return of any part of their capital contributions to a partnership , without violation of the limited partnership agreement or the West Virginia Uniform Limited Partnership Act, will be liable to the partnership for a period of one year after return for the amount of the returned contributions. If the return is in violation of the limited partnership agreement or the Act, the will be liable to the partnership for a period of six years after return for the amount of the contribution wrongfully returned. A significant financial loss by the Managing General Partner could . As a result of our commitments as general partner of several partnerships and because of the unlimited liability of a general partner to third parties, our net worth is at risk of reduction if we suffer a significant financial loss. Because we are primarily responsible for the conduct of the partnership's affairs, a significant adverse financial reversal for us could . See "Prior Activities - Prior Partnerships" (page ) distribution if the distribution would cause a capital account deficit. The limited partnership agreement prohibits you from receiving allocations or distributions to the extent would create deficits in your capital account. The dealer manager is not independent and has not conducted an independent due diligence evaluation of the offering . PDC Securities Incorporated, the of this offering, is our affiliate and is not independent which creates a conflict of interest in its due diligence examination and evaluation of this offering. Risks Pertaining to Natural Gas Investments The drilling of gas wells is highly speculative and risky and may result in unprofitable wells . Natural gas drilling is a highly speculative activity marked by many unsuccessful efforts. You must recognize the possibility that the wells drilled may not be productive. Even completed wells may not produce enough gas to show a profit. Delays and added expenses may also be caused by poor weather conditions affecting, among other things, the ability to lay pipelines. In addition, ground water, various clays, lack of porosity, and permeability may hinder or restrict production or even make production impractical or impossible. See "Proposed Activities" (page ) . The prices for natural gas have been quite unstable; a decline in the price could . Global economic conditions, political conditions, and energy conservation have created unstable prices. Revenues of each partnership are directly related to natural gas prices which we cannot predict. The prices for domestic natural gas production have varied substantially over time and may in the future . Prices for natural gas have been and are likely to remain extremely unstable. See "Competition, Markets and Regulation" (page ) . Fluctuating market conditions and government regulations may the profitability of the partnership . The sale of any natural gas produced by the partnerships will be affected by fluctuating market conditions and regulations, including environmental standards, set by state and federal agencies. From time-to-time, a surplus of natural gas may occur in areas of the United States. The effect of a surplus may be to reduce the price the partnerships receive for their gas production, or to reduce the amount of natural gas that the Partnerships may produce and sell. As a result, the partnership may not be profitable. See "Competition, Markets and Regulation" (page ) . Environmental hazards involved in drilling gas wells may result in substantial liabilities for the partnership . There are numerous natural hazards involved in the drilling of wells, including unexpected or unusual formations, pressures, blowouts involving possible damages to property and third parties, surface damages, bodily injuries, damage to and loss of equipment, reservoir damage and loss of reserves. Uninsured liabilities would reduce the funds available to a partnership , may result in the loss of partnership properties and may create liability for may be subject to liability for pollution, abuses of the environment and other similar damages. is possible that insurance coverage may be insufficient . In that event, partnership assets would pay personal injury and property damage claims and the costs of controlling blowouts or replacing destroyed equipment rather than for drilling activities. See "Proposed Activities - Insurance" (page ) . Increases in drilling costs would profitability . The oil and gas industry historically has experienced periods of rapid cost increases. Increases in the cost of exploration and development would affect the ability of the partnerships to acquire additional leases, gas equipment, and supplies and would . A reduced availability of drilling rigs . Increased drilling operations in some areas of the United States have resulted in the decreased availability of drilling rigs and gas field tubular goods. Also, international developments and the possible improved economics of domestic oil and gas exploration may influence others to increase their domestic oil and gas exploration. These factors may reduce the availability of rigs to the partnership resulting in delays in drilling activities. The reduced availability of rigs the timing of investors' tax deductions. See "Competition, Markets and Regulation - Competition and Markets" (page ) . Failure by subcontractors to pay for materials or services could profitability . If subcontractors fail to timely pay for materials and services, the wells of the partnerships could be subject to materialmen's and workmen's liens. In that event, the partnerships could incur excess costs in discharging profitability . Drilling wells in areas remote from marketing facilities may delay production from those wells until sufficient reserves are established to justify construction of necessary pipelines and production facilities. The partnership's inability to complete wells in a timely fashion may also result in production delays. In addition, marketing demands which tend to be seasonal may reduce or delay production from wells. Wells drilled for the partnerships may have access to only one potential market. Local conditions including but not limited to closing businesses, conservation, shifting population, pipeline maximum operating pressure constraints, and development of local oversupply or deliverability problems could halt or reduce sales from partnership Tax Status and Tax Risks It is possible that the tax treatment currently available with respect to natural gas exploration and production will change on a retroactive or prospective basis as a result of additional legislative, judicial, or administrative actions. See "Tax Considerations" (page ) . Partnership classification as a publicly traded partnership would substantially alter the tax treatment of the partnership . Tax counsel has rendered its opinion that each partnership will be classified for federal income tax purposes as a partnership and not as a corporation or an association taxable as a corporation or as a "publicly traded partnership" taxable as a corporation. opinion is not binding on the Internal Revenue Service or the courts. The Service could assert that a partnership should be classified as one of these other structures. If a partnership were so classified, any income, gain, loss, deduction, or credit of the partnership would remain at the entity level, and not flow through to you, the income of the partnership would be subject to corporate tax rates at the entity level and distributions to you may be considered dividend distributions subject to federal income tax at the investor partners' level. See "Tax Considerations - General Tax Effects of Partnership Structure" (page ) may not be advisable for a person who does not anticipate having substantial current taxable income from passive activities. losses generated by the and allocable to will be subject to the passive activity rules not be subject to the passive activity rules Under the Code, a partner's tax liabilities may exceed the cash distributions received by . Federal income tax payable by you by reason of your distributive share of partnership taxable income for any year may exceed the cash distributed to you by the partnership . You must include in your own return for a taxable year your share of the items of the partnership's income, gain, profit, loss, and deductions for the year, to the extent required under the Internal Revenue Code as then in effect, whether or not cash proceeds are actually distributed to you. For example, income from the partnership's sale of gas production is taxable to you as ordinary income subject to depletion and other deductions; your distributive share of the partnership's taxable income will be taxable to you whether or not the income is actually distributed to you. If the Service audits the partnership's tax returns, an investor partner might owe more taxes . Although the partnerships will not be registered with the Service as "tax shelters," it is possible that the Service will audit each partnership's returns. If audits occur, tax adjustments might be made that would increase the amount of taxes due or increase the risk of audit of your individual tax return. In addition, costs and expenses may be incurred by a partnership in contesting adjustments. The cost of responding to audits of your tax return will be borne solely by you. See "Tax Considerations - Administrative Matters" (page ) . Partnership losses after the conversion of general partnership interests to limited partnership interests will be passive losses for tax purposes . Tax counsel to the Managing General Partner has rendered its opinion that interests in the partnerships held by the will not be subject to the passive activity rules. However, will be subject to the passive A material portion of the subscription proceeds will not be currently deductible . A material portion of the subscription proceeds of a partnership will be expended for cost and expense items which will not be currently deductible for income tax purposes. See "Tax Considerations - Transaction Fees" (page ) prepayment of drilling costs. Some drilling cost expenditures may be made as prepayments during 2001 (with respect to partnerships designated as "PDC 2001- Limited Partnership"), 2002 (with respect to partnerships designated as "PDC 2002- Limited Partnership"), and 2003 (with respect to partnerships designated as "PDC 2003- Limited Partnership") for drilling and completion operations which in large part may be performed during 2002, 2003 and 2004, respectively. All or a portion of prepayments may be then currently deductible by the applicable partnership if the well to which the prepayment relates is spudded within 90 days after December 31, 2001, 2002 or 2003, respectively; the payment is not a mere deposit; and the payment serves a business purpose or otherwise satisfies the clear reflection of income rule. A could fail to satisfy the requirements for deduction of prepaid intangible drilling and development costs. The Service may challenge the deductibility of these prepayments. If challenge were successful, prepaid expenses would be deductible in the tax year in which the services under the drilling contracts are actually performed. See "Tax Considerations - Intangible Drilling and Development Costs Deductions" (page ) . Counsel's tax opinion does not cover various tax considerations involved in one's investment in the partnership . Due to the lack of authority, or the essentially factual nature of the question, tax counsel to the partnership , Duane, Morris & Heckscher LLP, has expressed no opinion as to the following: - whether the losses of the partnership will be treated as derived from "activities not engaged in for profit," and therefore nondeductible from other gross income, - whether any of the partnership's properties will be entitled to percentage depletion, - whether any interest incurred by a with respect to any borrowings will be deductible or subject to limitations on deductibility, - whether the fees to be paid to us and to third parties will be deductible, and - the impact of an investment in the partnership on an investor's alternative minimum tax. Various of the above-referenced matters are factual in nature, and the facts are unknown at this time. Therefore, counsel is unable to render an opinion at this time with respect to these matters as to the tax consequences and burdens a taxpayer will likely experience as a result of an investment in the partnership . The facts when they become known with respect to the various matters referred to above may vary from taxpayer to taxpayer and may result in different tax consequences and burdens for individual taxpayers. You should recognize that an opinion of counsel merely represents counsel's best legal judgment under existing statutes, judicial decisions, and administrative regulations and interpretations. There can be no assurance, however, that some of the deductions claimed by a partnership will not be challenged successfully by the Service. TERMS OF THE OFFERING General - Up to twelve limited partnerships (four in 2001, four in 2002, four in 2003) - Units of general partnership interest and units of limited partnership interest being offered - investor must choose - $20,000 per - Minimum subscription - $5,000 - Minimum partnership - $1,500,000 in - Maximum partnership - $15,000,000 in - Maximum aggregate subscriptions for twelve partnerships - $150,000,000 - Subscription proceeds will be placed in escrow until partnership funded. PDC 2003 Drilling Program will offer for sale an aggregate of 7,500 Units at $20,000 per , aggregating $150,000,000, of preformation interests in a series of up to twelve limited partnerships to be formed under the laws of West Virginia. You may purchase units only if you meet the suitability standards set forth below. We will offer units for sale over a three-year period. The managing general partner of each partnership will be Petroleum Development Corporation, a publicly-owned Nevada corporation . We in our discretion may accept subscriptions for less than full units . The minimum subscription is one-quarter ($5,000). In the event you purchase units on more than one occasion during the offering period of a partnership , the minimum purchase on each occasion is $5,000 (one-quarter Unit). We will not sell units to tax-exempt investors or to foreign investors. You may elect to purchase units as an or as a . Additionally, you may purchase units of general partnership interest and units of limited partnership interest. Upon the sale of at least the minimum number of units in a partnership (75 units aggregating $1,500,000; 125 units aggregating $2,500,000 with respect to each of PDC 2001-D Limited Partnership, PDC 2002-D Limited Partnership and PDC 2003-D Limited Partnership) and upon termination of the offering of units in that partnership , we will form a limited partnership under the laws of West Virginia. At that time the units of preformation general partnership interest and preformation limited partnership interest will become units of general partnership interest and units of limited partnership interest, respectively, in the particular partnership . There is no restriction on the composition of the type of partnership interests with respect to any partnership . If we do not sell the minimum required aggregate subscription amount of $1,500,000 (or $2,500,000, as appropriate) in the offering of units of any partnership , we will not fund that partnership , and the escrow agent will promptly return all subscription proceeds with respect to that partnership to the respective subscribers in full with any interest earned on the escrowed funds and without any deduction from the escrowed funds. We may not complete a sale of units to any investor until at least five business days after the date the investor has received a final prospectus. In addition, we will send to each investor a confirmation of the purchase. The maximum subscription of any partnership will be the lesser of $15,000,000 ($25,000,000 with respect to each of PDC 2001-D Limited Partnership, PDC 2002-D Limited Partnership and PDC 2003-D Limited Partnership) or the remaining unsold units based on the $150,000,000 aggregate registration. We will designate the various partnerships as follows. The subscription period for each of the partnerships in our will be as follows, unless earlier terminated or withdrawn by us: <TABLE> <C> <C> <C> <C> Partnership Minimum Maximum Planned Name Subscription Termination PDC 2001-A $1.5 million $15 million May , 2001 PDC 2001-B $1.5 million $15 million September , 2001 PDC 2001-C $1.5 million $15 million November , 2001 PDC 2001-D $2.5 million $25 million December 31, 2001 We will offer and sell the securities of these partnerships only during 2001. PDC 2002-A $1.5 million $15 million May 13, 2002 PDC 2002-B $1.5 million $15 million September 9, 2002 PDC 2002-C $1.5 million $15 million November 11, 2002 PDC 2002-D $2.5 million $25 million December 31, 2002 We will offer and sell the securities of these partnerships only during 2002. PDC 2003-A $1.5 million $15 million May 19, 2003 PDC 2003-B $1.5 million $15 million September 8, 2003 PDC 2003-C $1.5 million $15 million November 10, 2003 PDC 2003-D $2.5 million $25 million December 31, 2003 </TABLE> We will offer and sell the securities of these partnerships only during 2003. The offering of any particular partnership may extend beyond its anticipated termination date by not more than sixty days or be terminated earlier; however, no offering of partnerships designated "PDC 2001- Limited Partnership," "PDC 2002- Limited Partnership" or "PDC 2003- Limited Partnership" may extend beyond December 31, 2001, 2002, or 2003, respectively. Although the offering of units in subsequent partnerships will not commence until the subscription of units in prior partnerships has reached the minimum subscription or that prior offering has terminated, we may choose to offer the units of PDC 2001-C Limited Partnership and PDC 2001-D Limited Partnership (and PDC 2002-C Limited Partnership and PDC 2002-D Limited partnership; and PDC 2003-C Limited Partnership and PDC 2003-D Limited Partnership, as appropriate) at the same time until the offering of units in PDC 2001-C Limited Partnership (or PDC 2002-C Limited Partnership or PDC 2003-C Limited Partnership, as appropriate) has terminated, in order that investors be allowed to diversify their investments in the two partnerships , if they so choose. Once the offering with respect to a particular partnership has closed, we will not offer or sell additional units with respect to that partnership . At or about the time of funding of a particular partnership , we anticipate that we will supplement this prospectus to reflect the results of the offering of . We will not commence operations of a particular partnership until termination of its offering period. We will fund each partnership promptly following the termination of its respective offering period, provided that has reached the minimum subscriptions. We will not fund any partnership beyond December 31, 2001, with respect to partnerships designated "PDC 2001- Limited Partnership," beyond December 31, 2002, with respect to partnerships designated "PDC 2002-Limited Partnership" and December 31, 2003, with respect to partnerships designated "PDC 2003- Limited Partnership." Subscriptions for units are payable $20,000 in cash per purchased upon subscription. We will place all subscription proceeds of each partnership in a separate interest-bearing escrow account with our escrow agent, Chase Manhattan Trust Company, located at One Oxford Centre, Suite 1100, 301 Grant Street, Pittsburgh, Pennsylvania 15219, during the offering period of that partnership . The escrow agreement requires the escrow agent to invest escrowed funds upon receipt and forbids the escrow agent from disbursing funds except upon deposit of checks representing at least the minimum subscriptions and upon written instructions from us and the dealer manager. At that time the escrow agent will disburse the escrowed subscriptions in accordance with these instructions. In the event that we fail to raise the minimum subscriptions, the escrow agent will promptly return the escrowed funds to the subscribers. The escrow agent will promptly return escrowed subscriptions of partnerships not closed by the sixtieth day following the anticipated offering termination date to the respective investor of that partnership . However, if the offering of units in PDC 2001-C Limited Partnership or PDC 2001-D Limited Partnership (or PDC 2002-C Limited Partnership or PDC 2002-D Limited Partnership; or PDC 2003-C Limited Partnership or PDC 2003-D Limited Partnership, as appropriate) has not closed on or before December 31, 2001 (or 2002 or 2003, as appropriate), the escrow agent will promptly return the escrowed funds of that particular partnership to those investors. The escrow agent will not commingle subscriptions with our funds, nor will subscriptions be subject to the claims of our creditors. The escrow agent will invest subscription proceeds during the offering period only in short-term institutional investments comprised of or secured by securities of the U.S. government. The interest rate on the escrow account is variable. We will direct the escrow agent to pay to the respective subscriber after closing any interest accrued on subscription funds prior to closing of the offering and funding of a partnership . Investors should make their checks for units payable to "Chase as Escrow Agent for PDC 2001- Limited Partnership" (or "PDC 2002- Limited Partnership" or "PDC 2003- Limited Partnership," as appropriate) and give their checks to their broker for submission to the and escrow agent. Your execution of the subscription agreement and its acceptance by us constitute your execution of the limited partnership agreement and your agreement to be bound by the terms of the limited partnership agreement as a , including your granting of a special power of attorney to us appointing us as your lawful representative to execute and file a certificate of limited partnership and any amendment of the certificate, governmental reports, certifications, contracts, and other matters. Activation of the Partnerships - Each partnership will receive funds following termination of offering period. - Each partnership is a separate business and economic entity from each other partnership . - Partnerships will organize under West Virginia law. We will organize each partnership under the Act and each partnership will receive funds promptly following the termination of its offering period. However, we will not fund a partnership with less than the requisite minimum aggregate subscriptions. A partnership will not commence any drilling operations until after its funding. Each partnership will be a separate and distinct business and economic entity from each other partnership . Thus, as an investor partner , you will be a only of that partnership in which you specifically invest and will have no interest in any of the other partnerships (unless you also invest in other partnerships . Therefore, you should consider and rely solely upon the operations and success (or lack of success) of your own partnership in assessing the quality of your investment. Upon funding of a partnership , we will deposit the subscription funds in interest-bearing accounts or invest funds in short-term highly-liquid securities where there is appropriate safety of principal, in that partnership's name until the funds are required for partnership purposes. Interest earned on amounts so deposited or invested will be the property of the respective partnership whose funds earned the interest. We anticipate that within 12 months following the formation of a partnership it will have expended or committed all subscriptions for partnership operations. We will return any unexpended and/or uncommitted subscriptions at the end of 12-month period pro rata to the investor partners and we will reimburse for organization and offering costs and the management fee allocable to the return of capital. The term "uncommitted capital" will not include amounts set aside for necessary operating capital reserves. We will file a certificate of limited partnership and any other documents required to form the partnerships with the State of West Virginia and will elect for the partnerships to be governed by the West Virginia Uniform Limited Partnership Act. We will also take all other actions necessary to qualify the partnerships to do business as limited partnerships or cause the limited partnership status of the partnerships to be recognized in any other jurisdiction where the partnerships conduct business. Types of Units - Investor may choose to be . You may purchase units in a partnership as a or as an Although investor partners will generally share income, gains, losses, deductions, and cash distributions allocable to them pro rata based upon the amount of their subscriptions, there are material differences in the federal income tax effects and the liability associated with these different types of units . Any income, gain, loss, or deduction attributable to partnership activities will generally be allocable to the partners who bear the economic risk of loss with respect to these activities. Further, generally may offset partnership losses and deductions against income from any source. Limited partners generally may offset partnership losses and deductions only against passive income. See "Tax Considerations You may transfer or assign your units of partnership interest in accordance with Section 7.03 of the limited partnership agreement. Transferees seeking to become substituted partners must meet the suitability requirements set forth in this prospectus. A substituted will have the same rights and responsibilities, including unlimited liability, in the partnership as every other . See "Risk Factors - Unlimited Liability of Additional General Partners You must indicate on the investor of the subscription agreement the number of limited partnership units or general partnership units subscribed for. If you fail to indicate on the subscription agreement a choice between investing as a limited partner or as an additional general partner , we will not accept your subscription but will promptly return the subscription agreement and the tendered subscription funds to you. Limited Partners. The limited partners will consist of the , Steven R. Williams, one of our executive officers and directors, until the admission of a limited partner to the partnership , and each investor who purchases units of limited partnership interest being offered . The liability of a limited partner of the partnership for the partnership's debts and obligations will not exceed that capital contributions, his or her share of partnership assets, and the return of any part of his or her capital contribution (a) for a period of one year for the amount of his or her returned contribution if a limited partner has received the return without violation of the limited partnership agreement or the West Act, but only to the extent necessary to discharge the limited partner's liabilities to creditors who extended credit to the partnership during the period the contribution was held by the partnership and (b) for a period of six years for the amount of the contribution wrongfully returned if a limited partner has received the return in violation of the limited partnership agreement or the Act. General Partners. The will consist of the and each investor purchasing units of general partnership interest. We refer to these persons in this prospectus as " As a general partner of a partnership will be fully liable for the debts, obligations and liabilities of the partnership individually and as a group with all other general partners as provided by the Act to the extent liabilities are not satisfied from the proceeds of insurance, from the indemnification by us, or from the sale of partnership assets. See "Risk Factors While the activities of the partnership are covered by substantial insurance policies and indemnification by us which we discuss in this prospectus, it is possible that the additional general partners will incur personal liability (not covered by insurance, partnership assets, or indemnification) as a result of the activities of the partnership. Conversion of units by the Managing General Partner and by additional general partners - We will convert all units of general partnership interest into units of limited partnership interest after drilling and completion operations are done. - If there is a material change in a partnership's insurance coverage, additional general partners may convert prior to change. - Liability for investors will be limited after conversion. We will convert all units of general partnership interest of a particular partnership into units of limited partnership interest when drilling and completion operations of that partnership convert their interests into limited partnership interests at any time within the 30 day period prior to any material change in the amount of the partnership's insurance coverage. Upon conversion they will become limited partners of that partnership . Effecting conversion is subject to the express requirements that the conversion will not cause a termination of the partnership for federal income tax purposes and that the additional general partner provides written notice to us of intent to convert. Conversion of an additional general partner in a particular partnership will be effective upon our filing an amendment to the Certificate of Limited Partnership. We are obligated to file an amendment to the Certificate at any time during the full calendar month after receipt by us of the required notice of the additional general partner , provided that the conversion will not constitute a termination of the partnership for tax purposes. A conversion made in response to a material change in that partnership's insurance coverage will be effective prior to the effective date of the change in insurance coverage. After the conversion of a general partnership interest to that of a limited partner, each converting additional general partner will continue to have unlimited liability regarding partnership liabilities arising prior to the effective date of the conversion, but will have limited liability to the same extent as limited partners after conversion to limited partner status is effected. We are not entitled to convert our interests into limited partnership interests. Limited partners do not have any right to convert their units into units of general partnership interest. In the event additional general partners desire to convert to limited partners due to a loss of insurance coverage, the partnership will cease drilling activities until all desired conversions can be made. Unit Repurchase Program - Investors may tender units for repurchase at any time beginning with the third anniversary of the first cash distribution of the particular partnership . - Investors may, at their election, sell their units to the Managing General Partner for not less than four times the most recent twelve months' cash distributions from production. - The Managing General Partner is obligated to purchase in any calendar year units which aggregate 10% of the initial subscriptions, subject to its financial ability to do so and opinions of counsel. Beginning with the third anniversary of the date of the first cash distribution of the particular partnership , you may tender your units to us for repurchase. Subject to the available borrowing capacity under our loan agreements to effect repurchases and the opinion of counsel referred to below, each year we will offer to repurchase for cash a minimum of 10% of the units originally subscribed to in the particular partnership . Our offers to purchase units will, however, be conditioned on the receipt of an opinion of our counsel that the consummation of offer will not cause the partnership to be treated as a "publicly traded partnership" for purposes of Code Section 7704 and on counsel's determination that the repurchases of a particular investor partner's will not result in the termination of the partnership for federal income tax purposes. It is possible that repurchases of units could result in being "readily tradable on a secondary market or the substantial equivalent thereof," Code Section 7704(b)(2), the result of which the partnership could be deemed to be a "publicly-traded partnership." To limit the possibility of characterization, we will require receipt of counsel's opinion. We will not favor one particular partnership over another in the repurchase of units . We will extend offer equally to all interest holders participating in an individual partnership , excluding interests held by us. Notwithstanding the preceding sentence, if investor partners tender more than 10% of the units from a partnership or more units than we are able to purchase, we will purchase units on a "first-come, first-served" basis based on date of receipt by us of a letter of acceptance of the repurchase offer from the investor partner . To the extent that we are unable to repurchase all units tendered, because of limitations imposed by the or due to insufficient borrowing capacity under any loan banking agreement(s) to which we may be a party, a tendering investor partner will be entitled to have his or her units repurchased on a "first-come, first-served" basis, regardless of partnership , provided that the repurchase of a particular investor partner's will not have the effect of causing termination of his or her partnership for tax purposes or of causing the partnership to be treated as a "publicly traded partnership." To the extent that we are unable to repurchase all units tendered at the same time by partners of any partnership , we will repurchase those particular units on a pro rata basis. In order to initiate the process we will repurchase your units , you must provide us written notification of your intention to have us purchase your units . We will provide you a written offer of a specified price for purchase of the particular units within 30 days of our receipt of the written notification. Upon receipt of the repurchase price established by us, you, if in fact you elect to accept the repurchase price, need to notify us in writing that price is acceptable. We will promptly mail you a check for the proceeds of the purchase. The minimum offer which we may make will be a cash amount equal to not less than four times cash distributions from production of that particular partnership for the twelve months prior to the month preceding the date upon which we have received the written notification referred to above. We may, in our sole and absolute discretion, increase the offer for interests tendered for sale. An offering price established by us may not represent the fair market value of the units . In setting the offering price, we wilunitl consider our available funds and our desire to acquire production as represented by the unit and will take into account what we perceive to be our own best interests as a publicly-owned company. You are free to accept or not to accept the offer from us; you are in no way obligated to accept our offer. We will provide you with detailed information as to how we calculated our offer. We will also provide each interest holder with a calculation of the valuation of his or her interest, based on the most recent reserve evaluation prepared by an independent expert in accordance with SEC Regulation S-X, Article 4, Rule 4-10. This calculation will take into account our best estimate of anticipated production declines or increases, known price increases or decreases, operating, recompletion and plugging costs, and other relevant factors. To date, approximately 1,157 units (out of approximately 6,098 eligible units) of prior programs sponsored by us have been presented under the respective unit repurchase programs (which are the same as that of the partnership for repurchase at prices ranging from 3 to 4.5 times the most recent 12 month cash distributions. The 6,098 units include all partnerships through and including PDC 1996-D Limited Partnership. More recent programs had not satisfied the three-year holding period. The figures reflect all partnerships formed by us from 1984 through 1996. Investor Suitability - Investment in the units involves a high degree of risk. - You may invest only if you are qualified to purchase units . - Investment is suitable only for investors having substantial financial resources who understand the long-term nature, tax consequences, and risk factors associated with this investment. - Minimum requirements are $225,000 net worth, or a net worth of $60,000 and taxable income of $60,000. - States with more stringent requirements are set forth below. - Transferees of units must meet the suitability requirements set forth in this section. It is the obligation of persons selling units to make every reasonable effort to assure that the units are suitable for investors, based on the investor's investment objectives and financial situation, regardless of the investor's income or net worth. We will not sell units to tax-exempt investors or to foreign investors. We will sell units, including fractional units , to you only if you satisfy the following suitability requirements. Net worth will be determined exclusive of home, home furnishings and automobiles. In addition, we will sell units to you only if you make a written representation that you are the sole and true party in interest and that you are not purchasing for the benefit of any other person (or that you are purchasing for another person who meets all of the conditions set forth in this section). The following represent footnotes to various states set forth in the two following tables. Please refer to the following footnotes as appropriate. (a) California residents generally may not transfer units without the consent of the California Commissioner of Corporations. (b) Michigan, New Mexico, Ohio, Pennsylvania, and South Dakota investors may not invest if the dollar amount of their investment is equal to or more than 10% of their net worth. (c) The Commissioner of Securities of Missouri classifies the units as being ineligible for any transactional exemption under the Missouri Uniform Securities Act (Section 409.402(b), RSMo. 1969). Therefore, unless the units are again registered, the offer for sale or resale of units by an investor partner in the State of Missouri may be subject to the sanctions of the act. Purchasers of Units of Limited Partnership Interest. If you wish to purchase units of limited partnership interest in the partnership , you must satisfy the following suitability requirements for your state of residence, as summarized in the following table and accompanying footnotes. Error! Reference source not found.State AK AL AR AZ CA CO CT DC DE FL GA HI IA ID IL IN KS KY LA MA MD ME MN MS MI Requirement 2 1 4 (a) 1 1 1 1 1 5 (b) State MO MT NC ND NE NH NJ NM NV NY OH Requirement 1 (c) 1 5 1 3 1 1 (b) 1 1 (b) State OK OR PA RI SC SD TN TX UT VA VT WA WI WV WY Requirement 1 6 (b) 1 5 (b) 1 1 1 The following footnotes relate to the corresponding numbers in the table above. (1) You must have a minimum net worth of $225,000 or a minimum net worth of $60,000 and had during the last tax year or estimate that you will have during the current tax year "taxable income" as defined in Section 63 of the Code of at least $60,000 without regard to an investment in units . (2) You must be a person whose total purchase does not exceed 5% of your net worth if the purchase of securities is at least $10,000, and have either: a minimum annual gross income of $60,000 and a minimum net worth of $60,000, exclusive of principal automobile, principal residence, and home furnishings, or a minimum net worth of $225,000, exclusive of principal automobile, principal residence, and home furnishings. (3) You must have either: a net worth of not less than $250,000 (exclusive of home, furnishings, and automobiles), or a net worth of not less than $125,000 (exclusive of home, furnishings, and automobiles), and $50,000 in taxable income. (4) You must have net worth of not less than $250,000 (exclusive of home, furnishings, and automobiles) and expect to have gross income in 2001 (with respect to investments in the PDC 2001 designated partnerships ) or in 2002 (with respect to the PDC 2002 designated partnerships ) or in 2003 (with respect to the PDC 2003 designated partnerships ) of $65,000 or more, or have net worth of not less than $500,000 (exclusive of home, furnishings, and automobiles), or have net worth of not less than $1,000,000, or expect to have gross income in 2001 (with respect to investments in the PDC 2001 designated partnerships ) or in 2002 (with respect to the PDC 2002 designated partnerships ) or in 2003 (with respect to the PDC 2003 designated partnerships ) of not less than $200,000. (5) You must have a net worth of not less than $225,000 (exclusive of home, furnishings, and automobiles), or a net worth of not less than $60,000 (exclusive of home, furnishings, and automobiles) and estimated 2001 (with respect to investments in the PDC 2001 designated partnerships or in 2002 (with respect to the PDC 2002 designated partnerships or in 2003 (with respect to the PDC 2003 designated partnerships taxable income as defined in Section 63 of the Internal Revenue Code of 1986 of $60,000 or more without regard to an investment in a partnership . (6) You must have either: a net worth of at least $225,000 (exclusive of home, furnishings, and automobiles); or a net worth of at least $60,000 (exclusive of home, furnishings, and automobiles) and taxable income of $60,000 or more in 2000 (for the PDC 2001 designated partnerships ; in 2001 for the PDC 2002 designated partnerships ; in 2002 for the PDC 2003 designated partnerships , or estimate that your 2001 (for the PDC 2001 designated partnerships ; 2002 for the PDC 2002 designated partnerships ; 2003 for the PDC 2003 designated partnerships taxable income, as defined in Section 63 of the Code, will be $60,000 or more, without regard to the investment in the or that you are purchasing in a fiduciary capacity for a person or entity who satisfies the requirements of or . Purchasers of Units of General Partnership Interest. If you wish to purchase units of general partnership interest in the partnership , you must satisfy the following suitability requirements for your state of residence, as summarized in the following table. State AK AL AR AZ CA CO CT DC FL GA HI IA ID IL IN KS KY LA MA Requirement 2 4 5 6 (a) 1 1 5 1 5 1 4 State MD ME MN MS MI MO MT NC ND NE NH NJ NM NV NY Requirement 1 4 5 (b) 5 (c) 1 4 1 3 1 5 (b) 1 State OH OK OR PA RI SC SD TN TX UT VA VT WA WI WV WY Requirement 5 (b) 5 4 (b) 1 1 (b) 4 1 5 1 The following footnotes relate to the corresponding numbers in the table above. (1) You must have a minimum net worth of $225,000 or a minimum net worth of $60,000 and had during the last tax year or estimate that you will have during the current tax year "taxable income" as defined in Section 63 of the Code of at least $60,000 without regard to an investment in units . (2) You must be a person whose total purchase does not exceed 5% of your net worth if the purchase of securities is at least $10,000, and have either: a minimum annual gross income of $60,000 and a minimum net worth of $60,000, exclusive of principal automobile, principal residence, and home furnishings, or a minimum net worth of $225,000, exclusive of principal automobile, principal residence, and home furnishings. (3) You must have either: a net worth of not less than $250,000 (exclusive of home, furnishings, and automobiles), or a net worth of not less than $125,000 (exclusive of home, furnishings, and automobiles), and $50,000 in taxable income. (4) You must have an individual or joint minimum net worth (exclusive of home, home furnishings and automobiles) with your spouse of $225,000, without regard to the investment in the and a combined minimum gross income of $100,000 or more for the current year and for the two previous years; or an individual or joint minimum net worth with your spouse in excess of $1,000,000, inclusive of home, home furnishings and automobiles; or an individual or joint minimum net worth with your spouse in excess of $500,000, exclusive of home, home furnishings and automobiles; or a combined minimum gross income in excess of $200,000 in the current year and the two previous years. (5) You must have an individual or joint minimum net worth (exclusive of home, home furnishings, and automobiles) with your spouse of $225,000, without regard to an investment in the , and an individual or combined taxable income of $60,000 or more for the previous year and an expectation of an individual or combined taxable income of $60,000 or more for each of the current year and the succeeding year; or an individual or joint minimum net worth with your spouse in excess of $1,000,000, inclusive of home, home furnishings and automobiles; or an individual or joint minimum net worth with your spouse in excess of $500,000, exclusive of home, home furnishings and automobiles; or a combined minimum gross income in excess of $200,000 in the current year and the two previous years. (6) You must have net worth of not less than $250,000 (exclusive of home, furnishings, and automobiles) and expect to have gross income in 2001 (with respect to investments in the PDC 2001 designated partnerships or in 2002 (with respect to the PDC 2002 designated partnerships or in 2003 (with respect to the PDC 2003 designated partnerships of $120,000 or more, or have net worth of not less than $500,000 (exclusive of home, furnishings, and automobiles), or (c have net worth of not less than $1,000,000, or ( expect to have gross income in 2001 (with respect to investments in the PDC 2001 designated partnerships or in 2002 (with respect to the PDC 2002 designated partnerships or in 2003 (with respect to the PDC 2003 designated partnerships of not less than $200,000. Miscellaneous. Transferees of units seeking to become substituted partners must also meet the suitability requirements discussed above, as well as the requirements imposed by the limited partnership agreement, including transfers of units by a partner to a dependent or to a trust for the benefit of a dependent or transfers by will, gift or by the laws of descent and distribution. Where you purchase units in a fiduciary capacity for any other person (or for an entity in which you are deemed to be a "purchaser" of the subject units all of the suitability standards set forth above will be applicable to other person. You are required to execute your own subscription agreements. We will not accept any subscription agreement that has been executed by someone other than you or in the case of fiduciary accounts by someone who does not have the legal power of attorney to sign on your behalf. For details regarding how to subscribe, see "Instructions to Subscribers" which we attach as Appendix C. ASSESSMENTS AND FINANCING - The units of the partnerships are not subject to assessments. - The partnership may not borrow funds on behalf of the partnership or for partnership activities. - Operations for drilling wells by the particular partnerships will be funded through subscription proceeds and capital contributed to the partnerships by the Managing General Partner. Over the term of a partnership , additional funds might be necessary to complete that partnership's activities. We intend to develop a particular partnership's interests in its prospects only with the proceeds of subscriptions and our capital contributions. However, these funds may not be sufficient to fund all costs and it may be necessary for a partnership to retain partnership revenues for the payment of these costs, or for us to advance the necessary funds to a partnership . We will not drill any wells beyond the initial wells. Additional development refers to work necessary or desirable to enhance production from existing wells. We will retain payment for development work from partnership proceeds in one of two methods: (a) We will prepare an authority for expenditures estimate for the partnership . The operator will complete the development work and will bill the partnership for the work performed; or (b) We will prepare an estimate for the partnership will retain revenues from operations until it has accumulated sufficient funds to pay for the development work, at which time the operator will commence the work, and we will pay the operator as the work progresses. The choice of which option to use will be at our discretion, based on the amount of the anticipated expenditure and the urgency of the necessary work. Generally, we will elect option (a) for emergency and expenditures of less than $10,000 and option (b) for expenditures of $10,000 and greater. The limited partnership agreement does not permit the partnership to borrow funds on behalf of the partnership or for partnership activities. See Section 6.03(a) of the limited partnership agreement. SOURCE OF FUNDS AND USE OF PROCEEDS Source of Funds Upon completion of the offering, the sole funds available to each partnership will be the contributions of the investor partners ($1,500,000 ranging to $15,000,000; $2,500,000 ranging to $25,000,000 for each of PDC 2001-D Limited Partnership, PDC 2002-D Limited Partnership and PDC 2003-D Limited Partnership) and our contribution in cash ($326,250 ranging to $3,262,500; $543,750 ranging to $5,437,500 for each of PDC 2001-D Limited Partnership, PDC 2002-D Limited Partnership and PDC 2003-D Limited Partnership) for a total amount of $1,826,250 for sale of 75 units ranging to $30,437,500 for sale of 1,250 units . Use of Proceeds The following table presents information respecting the financing of a partnership in four different circumstances: - sale of 750 units ($15,000,000), the maximum number of units for any partnership , designated as PDC 2001 [or 2002 or 2003]-A, -B, or -C Limited Partnership, - sale of 75 units ($1,500,000) the minimum for any partnership designated as PDC 2001 [or 2002 or 2003] -A, -B, or -C Limited Partnership, - sale of 1,250 units ($25,000,000), the maximum for any -D designated partnership , and - sale of 125 units ($2,500,000), the minimum for any -D designated partnership . In the table below, the percentages below are based upon total investor partners' capital contributions and our capital contribution. Each of the partnerships designated as PDC 2001-A through -C Limited Partnership, PDC 2002-A through -C Limited Partnership, and PDC 2003-A through -C Limited Partnership may sell a maximum of 750 units ($15,000,000) and must sell a minimum of 75 units ($1,500,000). Each of the partnerships designated PDC 2001-D Limited Partnership, PDC 2002-D Limited Partnership, and PDC 2003-D Limited Partnership may sell a maximum of 1,250 units ($25,000,000) and must sell a minimum of 125 units ($2,500,000). The following table reflects that PDC Securities Incorporated, our affiliate, may reallow in whole or in part up to $1,500,000 (for the sale of 750 units; a maximum of $2,500,000 for each of PDC 2001-D Limited Partnership, PDC 2002-D Limited Partnership and PDC 2003-D Limited Partnership for the sale of 1,250 units) ranging to $150,000 (for the sale of the minimum number of units; a minimum of $250,000 for each of PDC 2001-D Limited Partnership, PDC 2002-D Limited Partnership, and PDC 2003-D Limited Partnership) for sales commissions, reimbursement of due diligence expenses, marketing support fees and other compensation payable to other NASD-licensed broker-dealers in connection with the sale of the units. PDC Securities will receive and retain wholesaling fees equal to 0.5% of subscriptions; these fees will range from $7,500 for the sale of the minimum number of units ($12,500 for each of PDC 2001-D Limited Partnership, PDC 2002-D Limited Partnership, and PDC 2003-D Limited Partnership) ranging to $75,000 for the sale of the maximum number of units ($125,000 for each of PDC 2001-D Limited Partnership, PDC 2002-D Limited Partnership, and PDC 2003-D Limited Partnership). These payments will be made in cash solely on the amount of initial subscriptions. The table also reflects that we will pay organization and offering costs in excess of 10 1/2% of subscriptions, without recourse to the partnership. Included in the "Amount available for investment" line item is the cost to the partnerships of acquiring prospects, which may include prospects acquired from us. We will disburse substantially all of the funds available to the partnership for the following purposes and in the following manner : <TABLE> <C> <C> <C> <C> <C> <C> <C> <C> 750 Units 75 Units 1250 Units 125 Units Sold % Sold % Sold % Sold % Total Partnership Capital $18,262,500 100.0% $1,826,250 100.0% $30,437,500 100.0% $3,043,750 100.0% LESS: Public offering expenses Dealer Manager's fee and sales commission $ 1,575,000 8.6% $ 157,500 8.6% $ 2,625,000 8.6% $ 262,500 8.6% LESS: Management fee to managing general partner $ 375,000 2.1% $ 37,500 2.1% $ 625,000 2.1% $ 62,500 2.1% Amount available for investment $16,312,500 89.3% $1,631,250 89.3% $27,187,500 89.3% $2,718,750 89.3% </TABLE> Subsequent Source of Funds We will commit or expend substantially all of the partnership's initial capital following the offering. The limited partnership agreement does not permit the partnership to borrow any funds for its activities. Consequently, partnership production must satisfy any future requirements for additional capital. See "Risk Factors - Shortage of Working Capital PARTICIPATION IN COSTS AND REVENUES Profits and Losses; Cash Distributions The limited partnership agreement provides for the allocation of profits and losses during the production phase of a particular partnership and for the distribution of cash available for distribution between investor partners and us, as follows: Managing Investor Partners General Partner Throughout term of Partnership 80% 20% The allocations and distributions to the investor partners and to us may vary during the ten years of partnership well operations commencing six months after the close of a partnership for any partnership that fails to meet the partnership's performance standard. See "Revenues - Revision to Sharing Arrangements," immediately below. Additionally, if we must increase our capital contribution above our required cash investment of 21 3/4% of subscriptions to cover tangible drilling and lease costs, our share of profits and losses and cash available for distribution will increase to equal our percentage investment, and the investor partners' share will correspondingly decrease. See "Costs - Lease Costs, Tangible Well Costs, and Gathering Line Costs," below . Revision to Sharing Arrangements. The limited partnership agreement provides for the allocation of partnership profits and losses 80% to the investor partners and 20% to us throughout the term of each limited partnership agreement provides for the enhancement of investor cash distributions if the particular partnership does not meet the performance standard described below during the ten-year period commencing six months after the close of that partnership and ending ten years later. The performance standard is as follows: If the average annual rate of return, as defined below, to the investor partners is less than 12.8% of their subscriptions, the allocation rate of all items of profit and loss and cash available for distribution for investor partners will increase by ten percentage points above the initial sharing arrangements for investor partners and the allocation rate with respect to items for the Managing General Partner will decrease by ten percentage points below the initial sharing arrangements for the Managing General Partner, until the average annual rate of return increases to 12.8% or more, or until ten years and six months from the closing date of the partnership expire, whichever event shall occur sooner. "Average annual rate of return"` for purposes of this preferred sharing arrangement means (1) the sum of cash distributions and estimated initial tax savings of 25% of investor subscriptions, realized for a $10,000 investment in the partnership , divided by (2) $10,000 multiplied by the number of years (less six months) which have elapsed since the closing of the partnership Thus, investor partners may receive up to 90% of partnership distributions during the revision period. To the extent that the sharing arrangements change in any particular year, the allocations of revenues to the investor partners will increase accordingly and the allocation of revenues to the Managing General Partner will correspondingly decrease. The above-referenced revised sharing arrangement policy is not, and no investor should consider the policy to be, any form of guarantee or assurance of a rate of return on an investment in the partnership . The policy is the result of a contractual agreement by us as set forth in 4.02 of the limited partnership agreement. There is no guarantee or assurance whatsoever that the partnership will drill commercially successful gas wells or that the cash distributions to the partners , including any cash distributions the policy, will achieve a 12.8% rate of return. The foregoing allocation of profits and losses is an allocation of each item of income, gain, loss, and deduction which, in the aggregate, constitute a profit or a loss. Revenues Natural Gas Revenues; Sales Proceeds. The limited partnership agreement provides for the allocation of revenues from natural gas production and gain or loss from the sale or other disposition of productive wells and leases 80% to the investor partners and 20% to us. The production revenues to be allocated are subject to "Revision to Sharing Arrangements," immediately above, and to revisions due to increases in our capital contributions to cover tangible drilling and lease costs. Interest Income. We will credit to the investor partners 100% of any interest earned on the deposit of subscription funds prior to the closing of the offering and funding of the respective partnership . We will allocate and credit interest earned on the deposit of operating revenues and revenues from any other sources in the same percentages that oil and gas revenues are then being allocated to the investor partners and us. Sale of Equipment. We will allocate to us 100% of all revenues from sales of equipment. Sale of Productive Properties. In the event of the sale or other disposition of a productive well, a lease upon which well is situated, or any equipment related to lease or well, we will allocate and credit to the partners the gain from sale or disposition as oil and gas revenues are allocated. The term "proceeds" above does not include revenues from a royalty, overriding royalty, lease interest reserved, or other promotional consideration reserved by a partnership in connection with any sale or disposition. We will allocate these revenues to the investor partners and us in the same percentages as allocation of oil and gas revenues. Costs Organization and Offering Costs. We, and not the partnership , will pay organization and offering costs, net of the commissions, discounts and due diligence expenses, and wholesaling fees, of the partnerships . We will pay all legal, accounting, printing, and filing fees associated with the organization of the partnerships and the offerings of units. The investor partners will pay all commissions, discounts, and due diligence reimbursement and will be allocated 100% of these costs. However, we will allocate and charge to us 100% of organization and offering costs in excess of 10 1/2% of subscriptions. Management Fee. We will allocate the nonrecurring management fee 100% to the investor partners Lease Costs, Tangible Well Costs, and Gathering Line Costs. We will allocate the costs of leases, tangible well costs and gathering line costs 0% to the investor partners and 100% to us. We will contribute and/or pay for the partnership's share of all leases, tangible drilling and completion costs, and gathering line costs. If these costs exceed our required 21 3/4% capital contribution, we will increase our capital contribution. In that event, our share of all items of profit and loss during the production phase of operations and cash available for distribution would be modified to equal for us the percentage arrived at by dividing our capital contributions by the capital available for investment; the investor partners' allocations of these items would be changed accordingly. Intangible Drilling Costs. Intangible drilling costs are costs required to drill a well and prepare the well for production. These costs have no salvage value. Items like the cost of drilling the well, the cost of grading the surface and geological costs associated with selecting a well site are intangible well costs. The cost of production equipment, casing pipe, and other equipment are tangible costs because it may be possible to remove them from a depleted or unsuccessful well and sell them or use them somewhere else. We will allocate intangible drilling costs and recapture of intangible drilling costs in proportion to the investor partners' and our respective payment of intangible drilling costs. Recapture, if any, attributable to intangible drilling and development costs will be allocable on the same percentage basis as the allocation of intangible drilling and development costs. Recapture means that you must include the income you receive for the sale of partnership interest as part of your regular taxable income to the extent the sales price exceeds your partnership tax basis, rather than as long-term capital gains. Regular income is generally taxed at a higher rate than long-term capital gains. Investor partners' portion of capital available for investment will pay the intangible expenses. If the capital contributions of the investor partners are insufficient to pay the intangible drilling costs, we will pay the additional amount of these costs, and in these circumstances the sharing arrangements for intangible drilling costs and recapture of intangible drilling costs will be in proportion to the investor partners' and our respective payment of intangible drilling costs. Operating Costs. Operating costs are the costs at the well level associated with producing and maintaining productive wells, equipment, and maintaining access roads. We will allocate and charge operating costs of partnership wells 80% to the investor partners and 20% to us, subject to revision in the event of the preferred return and/or our increased investment, as we have discussed in this section. Direct Costs. Direct costs are partnership level costs, primarily independent auditor and reserve engineer fees and tax preparation. We will allocate and charge direct costs of the partnerships 80% to the investor partners and 20% to us, subject to revision in the event of the preferred return and/or our increased investment, as we have discussed in this section. Administrative Costs. We will allocate 100% of the administrative costs of the partnerships to us. The table below summarizes the participation of the investor partners and us, taking account of our capital contribution, in the costs and revenues of the partnerships . See "Glossary of Terms," "Participation in Costs and Revenues," and the limited partnership agreement, Exhibit A to this prospectus. With regard to the table below, we, not the partnership, will pay organization and offering costs, net of the dealer manager commissions, discounts, due diligence expenses, and wholesaling fees, of the partnerships. In addition, we, without recourse to the partnerships, will pay organization and offering costs in excess of 10 1/2% of subscriptions. The "Direct Costs" line item represents operating costs incurred after the completion of productive wells, including monthly per-well charges paid to us. We will receive monthly reimbursement from the partnerships for their direct costs incurred by us on behalf of the partnerships. <TABLE> <C> <C> <C> Managing Investor General Partners Partner Partnership Costs Broker-dealer Commissions and Expenses 100% 0% Management Fee 100% 0% Undeveloped Lease Costs 0% 100% Tangible Well Costs 0% 100% Intangible Drilling and Development Costs 100% 0% Total Drilling and Completion Costs 80% 20% Operating Costs 80% 20% Direct Costs 80% 20% Administrative Costs 0% 100% Partnership Revenues Sale of Oil and Gas Production . . 80% 20% Sale of Productive Properties . 80% 20% Sale of Equipment 0% 100% Sale of Undeveloped Leases . 80% 20% Interest Income 80% 20% </TABLE> We estimate that direct costs allocable to the investor partners for the initial 12 months of their operations will be approximately $8,000 if minimum subscriptions ($1,500,000) are received (representing 0.5% of aggregate partnership capital), and approximately $292,000 if maximum subscriptions ($150,000,000) are received (representing 0.2% of aggregate partnership capital). The following table sets forth the components of these estimated charges to the investor partners during the first year after a partnership is formed, assuming the minimum and maximum subscriptions are obtained: <TABLE> <C> <C> <C> Minimum Maximum Subscriptions Subscriptions (75 Units) (7,500 Units) Administrative Costs $ -0- $ -0- Total Administrative Costs Direct Costs: Audit and Tax Preparation $5,000 $120,000 Independent Engineering Reports 2,000 130,000 Materials, Supplies and Other 1,000 42,000 Total Direct Costs </TABLE> We will bear all administrative costs of the partnerships; however, the financial statements of the partnerships will reflect these costs, since generally accepted accounting principles require that all costs of doing business be included in the historical financial statements. The following table presents for each partnership formed by us in the last three years the dollar amount of direct costs and administrative costs incurred by the particular partnership in each year and the percentage of subscriptions raised reflected . <TABLE> <C> <C> <C> <C> <C> <C> <C> Direct Costs 1998 1999 2000 % of % of % of Partnership Name Amount Subscriptions Amount Subscriptions Amount Subscriptions PDC 1998-A 11,304 0.21% 9,287 0.18% 0 0.0% PDC 1998-B 14,921 0.21% 8,817 0.12% 0 0.0% PDC 1998-C 14,990 0.19% 9,518 0.12% 0 0.0% PDC 1998-D 17,780 0.09% 23,261 0.11% 0 0.0% PDC 1999-A - - 12,351 0.26% 0 0.0% PDC 1999-B - - 12,995 0.23% 0 0.0% PDC 1999-C - - 9,617 0.14% 0 0.0% PDC 1999-D - - 15,123 0.08% 0 0.0% PDC 2000-A - - - - 0 0.0% PDC 2000-B - - - - 0 0.0% PDC 2000-C - - - - 0 0.0% PDC 2000-D - - - - 0 0.0% Administrative Costs 1998 1999 2000 % of % of % of Partnership Name Amount Subscriptions Amount Subscriptions Amount Subscriptions PDC 1998-A 0 0.00% 0 0.00% 0 0.00% PDC 1998-B 0 0.00% 0 0.00% 0 0.00% PDC 1998-C 0 0.00% 0 0.00% 0 0.00% PDC 1998-D 0 0.00% 0 0.00% 0 0.00% PDC 1999-A - - 0 0.00% 0 0.00% PDC 1999-B - - 0 0.00% 0 0.00% PDC 1999-C - - 0 0.00% 0 0.00% PDC 1999-D - - 0 0.00% 0 0.00% PDC 2000-A - - - - 0 0.00% PDC 2000-B - - - - 0 0.00% PDC 2000-C - - - - 0 0.00% PDC 2000-D - - - - 0 0.00% </TABLE> Allocations Among Investor Partners; Deficit Capital Account Balances We will allocate revenues and costs of a partnership allocated to the investor partners among them in proportion to which the amount of each investor partner 's capital contribution bears to the aggregate of the capital contributions of all investor partners in the partnership . To avoid the requirement of restoring a deficit capital account balance, there will be no allocations of losses to an investor partner to the extent allocation would create or increase a deficit in his or her capital account (adjusted for liabilities, as provided in the limited partnership agreement). Cash Distribution Policy - Distributions of partnership cash are planned to be made on a monthly basis, but will be made no less often than quarterly, to the extent there are funds available for distribution. - We will make cash distributions of 80% to the investor partners and 20% to the Managing General Partner throughout the term of the partnership ; cash distributions may increase for investor partners and decrease for the Managing General Partner in view of the revised sharing arrangement policy and may decrease for investor partners and increase for the Managing General Partner if the Managing General Partner invests capital above its minimum capital contribution to cover additional tangible drilling and lease costs. - We cannot presently predict amounts of cash distributions from the . We intend to distribute substantially all of each partnership's available cash flow on a monthly basis; however, we will review the accounts of each partnership at least quarterly for the purpose of determining the distributable cash available for distribution. to make or sustain cash distributions will depend upon numerous factors. We can give no assurance that any level of cash distributions to the investor partners will be attained, that cash distributions will equal or approximate cash distributions made to investors in prior drilling programs sponsored by us, or that any level of cash distributions can be maintained. See "Prior Activities In general, the volume of production from producing properties declines with the passage of time. The cash flow generated by each partnership's activities and the amounts available for distribution to a partnership's respective partners will, therefore, decline in the absence of significant increases in the prices that the partnerships receive for their oil and gas production, or significant increases in the production of oil and gas from prospects resulting from the successful additional development of these prospects. In general, we will divide cash distributions 80% to the investor partners and 20% to us throughout the term of the partnership . However, we will revise partnership sharing arrangements during the ten-year revision period if the average annual rate of return does not equal established goals. See "Revenues - Revision to Sharing Arrangements," above. Our revised sharing arrangement policy is not, and no investor should consider the policy to be, any form of guarantee or assurance of a rate of return on an investment in the partnership . Cash will be distributed to the investor partners and us as a return on capital in the same proportion as their interest in the net income of the partnership . However, no investor partner will receive distributions to the extent would create or increase a deficit in that partner's capital account. For a fuller discussion of capital accounts and tax allocations, see "Tax Considerations - Partnership Allocations." Termination termination and final liquidation of a partnership , we will distribute the assets of the partnership to the partners based upon their capital account balances. If we have a deficit in our capital account, we must restore deficit; however, no investor partner will be obligated to restore his or her deficit, if any. Amendment of Partnership Allocation Provisions - The Managing General Partner may amend the limited partnership agreement without investor approval, if necessary for partnership allocations to be recognized for federal tax purposes. We are authorized to amend the limited partnership agreement, if, in our sole discretion based on advice from our legal counsel or accountants, an amendment to revise the cost and revenue allocations is required for allocations to be recognized for federal income tax purposes either because of the promulgation of Treasury Regulations or other developments in the tax law. Any new allocation provisions provided by an amendment must be made in a manner that would result in the most favorable aggregate consequences to the investor partners as nearly as possible consistent with the original allocations described . See Section 11.09 of the limited partnership agreement. COMPENSATION TO THE MANAGING GENERAL PARTNER AND AFFILIATES The following is a tabular presentation of the items of compensation discussed more fully below: <TABLE> <C> <C> Recipient Form of Compensation Amount Managing General Partnership interest 20% interest Partner Managing General Management fee 2.5% of subscriptions Partner (nonrecurring fee) Managing General Sale of leases to Partnerships fair market value Managing General Contract drilling rates Partner Managing General Operator's per-well charges Partner Managing General Direct costs Cost Partner Managing General Payment for equipment, Competitive prices Partner and supplies, gas marketing and Affiliates other services Affiliate Brokerage sales commissions; 10.5% of subscriptions - reimbursement of due $157,500 ranging to diligence and marketing $15.75 million support expenses; wholesaling fees </TABLE> For a tabular presentation of payments to us made by previous partnerships sponsored by us, see "Conflicts of Interest - Certain Transactions," below. The categories of compensation set forth above are comparable to the corresponding categories of compensation for other partnerships sponsored by us disclosed in the "Certain Transactions" table below, except with respect to the management fee which was not a feature of the 1993 partnerships sponsored by us. Following closing of a partnership and upon funding of that partnership , we will contribute to the partnership an amount in cash equal to 21 3/4% of the subscriptions of that partnership's investors. In exchange for our investment, we will receive a 20% interest in the partnership . Our interest in the partnership may vary in view of the revised sharing arrangement policy (see in Costs and Revenues - Profits and Losses; Cash Distributions - Revision to Sharing Arrangements and if we invest additional capital to fund that partnership's tangible drilling and lease costs (see in Costs and Revenues - Costs - Lease Costs, Tangible Well Costs, and Gathering Line . Upon completion of the offering with respect to each partnership and upon funding of that partnership , we will receive a one-time management fee of 2.5% of total contributions of the investor partners to the partnership , an amount equal to $37,500 for sale of the minimum number of units ranging to $3,750,000 for sale of the maximum number of units . Since we can sell a maximum of $15 million ($25 million with respect to each of PDC 2001-D Limited Partnership, PDC 2002-D Limited Partnership, and PDC 2003-D Limited Partnership) of units in any individual partnership , the maximum amount of the management fee with respect to any individual partnership would be $375,000 ($625,000 with respect each of to PDC 2001-D Limited Partnership, PDC 2002-D Limited Partnership, and PDC 2003-D Limited Partnership). The partnership will reimburse us for all documented out-of-pocket expenses incurred on behalf of the partnership ; however, there will be no reimbursement of administrative costs by a partnership . We will sell (at the lower of fair market value on the date of purchase or our cost of prospects) sufficient undeveloped prospects to the partnership to drill the partnership's wells. Fair market value for leases and prospects transferred from our inventory will be based on the cost at which similarly situated leases and prospects are available or traded from or between other unaffiliated companies operating in the same geographic area. The cost of the prospects will include a portion of our reasonable, necessary and actual expenses for geological, geophysical, engineering, interest expense, drafting, legal, and other like services allocated to the partnership's properties. We will not retain any overriding royalty for ourselves from prospects (see "Proposed Activities - Acquisition of Prospects" will enter into a drilling contract with us to drill and complete partnership wells. In those cases where the partnership acquires less than a 50% working interest in a prospect, a party other than us may drill, complete, and operate wells on prospect. We may use our own personnel and equipment during the drilling and completion phase of operations. We will bill these services at rates not to exceed those charged for similar services and equipment by other non-affiliated operators in the partnership area of operations. To the extent that the contract prices exceed our actual costs of drilling and completion, we will be deemed to have received compensation. The amount of compensation which we could earn as a result of these arrangements is dependent upon many factors, including the actual cost of wells and the number of wells drilled. We estimate that we would need to drill approximately 50-70 wells annually to absorb fully existing technical, supervisory, and management costs. The partnership will pay us, as operator, for drilling and completing the partnership's wells, based upon the depth of the well at its deepest penetration and whether the well is completed or plugged as a dry hole. Different footage rates are established for each area of operations based on drilling and completion costs for that area. See "Proposed Activities - Drilling and Completion Phase - Drilling and Operating Agreement." In addition, in each area where the partnership conducts its drilling activities, the partnership will pay the cost of the prospect, as defined, and tangible costs of drilling and completing the partnership wells. In the event these rates exceed competitive rates available from other persons in the area engaged in the business of providing comparable services or equipment, we will adjust the foregoing rates to an amount equal to that competitive rate, but not less than the cost of providing services or equipment. In the event that the competitive industry rates in the area and our costs in providing these drilling and completion services are in excess of our contract drilling and completion rates, we will be bound by contract with the partnership to furnish the contracted services at the contract rates. We review on an ongoing basis the rates of unaffiliated driller/operators to determine competitive rates in the geographic area. Rates will be comparable to those charged by other operators in the prospect area for equivalent services. We will determine comparable rates from one of the following sources: offering memoranda or prospectuses for private or public drilling programs, quoted rates, published rates or costs, or competitive bids. In utilizing outside contractors for drilling and completion operations (rather than performing these services ourselves), we will receive an overhead payment for services as defined in the Copas Accounting Procedure _ Joint Operations equal to the most recently published per well average monthly drilling overhead rate for gas wells in the area where they are located as published by Ernst & Young LLP in their 1999 - 2000 Survey of Combined Fixed Rate Overhead Charges for Oil and Gas Producers, and actual cost for any direct costs associated with drilling and completion operations. That monthly overhead rate as so published is currently $4,875 per well per month for wells in the Appalachian Basin; $7,500 per well per month for wells up to 5,000 feet in the Michigan Basin; $6,514 per well per month for wells in Colorado;$3,663 per well per month for wells up to 5,000 feet and $5,326 per well per month for wells 5,000 feet to 10,000 feet in depth in Utah; and $5,088 per well per month for wells in Wyoming. The total cost per well for wells drilled by unaffiliated operators, including direct and overhead charges, may exceed the footage rates listed in this prospectus. In the event we determine to conduct our drilling activities in other geographical areas or to other geologic zones, we will supplement the prospectus to discuss the different areas or zones and the costs involved in conducting drilling activities in those areas or zones. During the production phase of operations, the operator will receive for each producing well a monthly fee based upon competitive industry rates for operations and field supervision and $75 for partnership accounting, engineering, management, and general and administrative expenses. The operator will bill non-routine operations to the partnership at their costs. See "Proposed Activities - Drilling and Completion Phase - Drilling and Operating Agreement will reimburse us for direct costs incurred by us on behalf of the partnerships . We and our affiliates may enter into other transactions with the partnerships for services, supplies and equipment, and will be entitled to compensation at competitive prices and terms as determined by reference to charges of unaffiliated companies providing similar services, supplies and equipment. We intend to market some of the gas produced through our subsidiary Riley Natural Gas. See "Conflicts of Interest PDC Securities Incorporated, our affiliate, will receive as sales commissions, for reimbursement of due diligence and marketing support expenses and wholesaling fees $15,750,000 for sale of the maximum number of units ranging to $157,500 for sale of the minimum number of units. PDC Securities may, as dealer manager, reallow sales commissions and due diligence and marketing support expenses in whole or in part to NASD licensed broker-dealers for sale of the units, reimbursement of due diligence and marketing support expenses, and other compensation, but will retain the wholesaling fees of $7,500 ranging to $750,000. PROPOSED ACTIVITIES Introduction - The primary purpose of the partnerships will be drilling, completing, and producing natural gas from development wells. - We may conduct limited exploratory activities. - Partnerships will acquire up to 100% of the working interest of each prospect, subject to royalty interests. - Each partnership will be a separate business entity. - Investors in one partnership will have no interest in any of the other partnerships . The partnerships will drill, complete, own and operate natural gas wells. Partnership operations may include wells in Colorado, Michigan, West Virginia, Pennsylvania, Utah, and Wyoming as described in this prospectus. We may also conduct partnership operations in other formations not described in the prospectus, in the previously listed states, or in Montana, New York, South Dakota, Kentucky, Tennessee, Indiana, Kansas, North Dakota, Nebraska, Ohio and/or Oklahoma as we may deem advisable. We intend to apply at least 90% of each partnership's capital contributions available for participation in drilling and completion activities to comparatively lower risk development wells but may apply some of the remaining 10% to comparatively higher risk exploratory wells. We will spread the risks to a limited extent by having each partnership participate in drilling operations on a number of different prospects. The cost of drilling wells in different geographic locations will vary greatly. If we drill more expensive wells, the partnership will be able to drill fewer wells. As a result, the partnership will be less able to diversify its investment, and the risk associated with drilling will increase. The number of wells drilled by a partnership is determined by the amount of funds raised for that partnership and the specific prospects drilled by that partnership , and cannot be determined in advance of funding of a partnership . The provides you with an opportunity to invest in the drilling, completion, and production of natural gas wells. of the investment in the program . You should be aware that distributions will decrease over time due to the declining rate of production from wells. Changes in gas prices will decrease or increase cash distributions. Distributions will be partially sheltered by the percentage depletion allowance. See "Risk Factors - Special Risks of the Partnerships," " - Risks Pertaining to Oil and Gas Investments," and " - Tax Status and Tax Risks," "Prior Activities," and "Tax Considerations - Summary of Conclusions," " - Intangible Drilling and Development Costs," " - Depletion Deduction," " - Partnership Distributions," and " - Partnership Allocations The attainment of the partnership's business objectives will depend upon many factors, including our ability to select productive prospects, the drilling and completion of wells in an economical manner, the successful management of prospects, the level of natural gas prices in the future, the degree of governmental regulation over the production and sale of natural gas, the future economic conditions in the United States (and the world), and changes in the Internal Revenue Code. Accordingly, we can give no assurance that the partnership will achieve its business objectives. Moreover, because each partnership will constitute a separate and distinct business and economic entity from each other Partnership, the degree to which the business objectives are achieved will vary among the partnerships . Various of the activities and policies of the partnership discussed throughout this section and elsewhere in the prospectus are defined in and governed by the limited partnership agreement, including that at least 90% of the net offering proceeds will be used to drill development wells; the requirements relating to the acquisition of prospects and the payment of royalties; the amount of our capital contribution to the partnership ; the guidelines with respect to well pricing and the cost of services furnished by us; the states where the partnership's wells will be drilled; assessments and borrowing policies; voting rights of investor partners ; the term of the partnership ; and our compensation. Other policies and restrictions upon the activities of the partnership and us are not set forth in the limited partnership agreement, but instead reflect our current intention and thus are subject to change at our discretion. For these later activities, we, in making a change, will utilize our reasonable business judgment as manager of the partnership and will exercise our judgment consistent with our obligations as a fiduciary to the investor partners . Upon the successful completion of the offering, the partnership will effect the following transactions, each of which is more fully described below: (a) We will assign to the partnership up to 100% of the working interest in the prospects; and (b) The partnership will enter into a drilling and operating agreement with us or with unaffiliated persons as operator, providing - for the drilling and completion of partnership wells and - for the subsequent supervision of field operations with respect to each producing well. Drilling Policy - Most wells will be direct offsets to producing wells. Each partnership will invest in a number of prospects, either by itself or in conjunction with other parties, consistent with the objective of maintaining a meaningful interest in the wells to be drilled. The partnerships will not acquire any interest in currently or formerly producing gas wells. Most wells to be drilled by the partnerships will be adjacent producing wells and drilled to the same formation(s) as the producing wells. . Therefore, it is unlikely that a well on a prospect will have the effect of proving up any additional acreage outside of the prospect. For this reason, the partnerships are expected to acquire only spacing units on which wells are to be drilled without also acquiring any surrounding acreage. Nevertheless, if drilling on a partnership prospect proves up an adjoining spacing unit owned by us, or if there is reliable evidence that there would be material drainage of a partnership prospect by an adjoining spacing unit in which we own an interest, we will assign to the partnership a proportionate interest in spacing unit. Acquisition of Undeveloped Prospects - The Managing General Partner will select undeveloped prospects. - Selection of prospects for a partnership will occur after that partnership has been funded. - At least 90% of prospects will be development wells. - The partnerships will acquire prospects at the lesser of cost or fair market value. - Average royalty and overriding royalty burden will not exceed 20%. - The Managing General Partner will not retain overriding royalty interests. We will select undeveloped prospects sufficient to drill the partnerships' wells. We have not pre-selected any prospects. Most prospects to be selected for the partnerships are expected to be single well proved undeveloped prospects. We define a prospect generally as a contiguous oil and gas leasehold estate, or lesser interest , upon which drilling operations may be conducted. Depending on its attributes, a prospect may be characterized as an "exploratory" or "development" site. Generally speaking, exploratory drilling involves the conduct of drilling operations in search of a new and yet undiscovered pool of oil and gas (or, alternatively, drilling within a discovered pool with the hope of greatly extending the limits of pool), whereas development drilling involves drilling to a known producing formation in a previously discovered field. The partnership intends to conduct development drilling operations in one or more of the following areas: North Central West Virginia to develop Benson, Riley and other shallow Upper Devonian and Mississippian Formations; Southern West Virginia to develop Ravencliff through Gordon Formations as well as the Devonian Shale; Southern and Central Pennsylvania to develop Upper Mississippian through Upper Devonian Reservoirs; western Pennsylvania to develop the Medina and Whirlpool reservoirs; Michigan to develop the Antrim Formation; and Colorado, Utah and Wyoming to develop Cretaceous Sandstones. We reserve the right to conduct partnership operations in New York, Ohio, Montana, South Dakota, Tennessee, Kentucky, Indiana, Kansas, North Dakota, Nebraska and/or Oklahoma and/or to other formations as we may, in our sole and absolute discretion, deem advisable, provided that locations and/or formations are, in our opinion, of comparable quality and character to those described in this prospectus. Wells in the intended area of operations are usually given a fracture treatment in which fluids are pumped into the potential zone in an attempt to create additional fractures and widen present fractures. We anticipate that gas will be produced from all the subject wells. There could also be some oil and brine production. will acquire prospects under arrangements the partnership will acquire up to 100% of the working interest, subject to landowners' royalty interests and other royalty interests payable to unaffiliated third parties in varying amounts, provided that the weighted average of royalty interests for all prospects of a particular partnership will not exceed 20%. In our discretion, we may acquire less than 100% of the working interest in a prospect provided that costs are reduced proportionately. The limited partnership agreement forbids us from acquiring or retaining any overriding royalty interest in the partnership's interest in the prospects. The partnerships will generally acquire less than 100% of the working interest in each prospect in which they participate. In order to comply with conditions for the treatment of additional general partners' interests in the partnership as not passive activities (and not subjecting the additional general partners to limitation on the deduction of partnership losses attributable to to income from passive activities), we have represented that the partnerships will acquire and hold only operating mineral interests and that none of the partnership's revenues will be from non-working interests. We, for our sole benefit, may sell or otherwise dispose of prospect interests not acquired by the partnerships or may retain a working interest in prospects and participate in the drilling and development of the prospect on the same basis as the partnerships . In acquiring interests in leases, the partnerships may pay consideration and make contractual commitments and agreements as we deem fair, reasonable and appropriate. While we expect to assign to the partnerships a substantial portion of the leases to be developed by the partnerships may also purchase leases directly from unaffiliated persons. We will transfer at our cost all leases which are transferred to the partnerships , unless we have reason to believe that cost is materially more than the fair market value of property in which case the price will not exceed the fair market value of property. We will obtain an appraisal from a qualified independent expert with respect to sales of our properties to the partnerships . The actual number, identity and percentage of working interests or other interests in prospects to be acquired by the partnerships will depend upon, among other things, the total amount of capital contributions to a partnership , the latest geological and geophysical data, potential title or spacing problems, availability and price of drilling services, tubular goods and services, approvals by and state departments or agencies, agreements with other working interest owners in the prospects, farm-ins, and continuing review of other prospects that may be available. Title to Properties - The partnership will hold record title to leases in its name. We will assign the partnership interest in the lease to the partnership . Leases acquired by each partnership may initially and temporarily be held in our name, as nominee, to facilitate joint-owner operations and the acquisition of properties. The existence of the unrecorded assignments from the record owner will indicate that the leases are being held for the benefit of each particular partnership and that the leases are not subject to debts, obligations or liabilities of the record owner; however, unrecorded assignments may not fully protect the partnerships from the claims of our creditors. You must rely on us to use our best judgment to obtain appropriate title to leases. Provisions of the limited partnership agreement relieve us from any mistakes of judgment with respect to the waiver of title defects. We will take steps as we deem necessary to assure that title to leases is acceptable for purposes of the partnerships . We are free, however, to use our own judgment in waiving title requirements and will not be liable for any failure of title to leases transferred to the partnerships . Further, we will not warrant the validity or merchantability of titles to any leases to be acquired by the partnerships . PDC Prospects We anticipate that our four geologists (see "Management - Petroleum Development Corporation" will evaluate all prospects, utilizing log and geological data from our historic operations, production records from our and others' wells, and other information as may be available and useful. wells. As a result, nearly all wells drilled by the partnership will be direct offsets to existing producing wells. Where multiple zone potential exists, as it frequently does in the proposed areas of operations, the geologists attempt to optimize well locations to create wells with two or more productive horizons. As of September 30, 2000, we had acreage available as listed in the following table within the prospect area. County Acreage West Virginia 14,000 Pennsylvania 19,200 Michigan 21,900 Utah 58,800 Colorado 14,200 Total 128,100 In addition, we expect to acquire additional acreage on an ongoing basis throughout 2001 and beyond for the and future partnerships. We will not decide on the specific wells to be drilled in any partnership until the offering of units in that partnership has terminated. This means that you will not be able to evaluate the specific prospects that will be drilled by your partnership . However, by waiting as long as possible before selecting the specific prospects to be drilled by the partnership , we may have information available which helps us select better prospects for the partnership , and we may be able to include prospects which were not available when this prospectus was written or even before the partnership was closed. This section includes a general description of the characteristics we look for in prospects to be included in the as well as more detailed information on several areas where we anticipate partnership wells may be drilled. We will provide supplemental information if and when we add additional prospect areas. In selecting areas where we plan to drill partnership wells, we look for areas with most or all of the following general characteristics: - Natural gas expected to be the primary product - Onshore wells with depths of 10,000 feet or less - Expected average producing lives of 20 years or more - Existing pipeline systems which allow quick connection for sales - Adequate market capacity for increased gas production - Low dry hole risk Most of the wells drilled by the partnerships will be targeted at natural gas producing intervals. These intervals may also contain oil and/or water which are produced in conjunction with the natural gas. Some natural gas also contains hydrocarbons like propane and butane which may be separated from the natural gas and sold. Water that is produced must be disposed of by an environmentally approved method, which adds to the cost of operating the wells. Over the past 30 years, we have drilled more than 2000 wells at depths ranging to just over 10,000 feet. When we select new prospect areas, we look for places where the drilling conditions are similar to areas where we have had drilling experience and where the well depths do not exceed approximately 10,000 feet. Because we have had no offshore experience, we do not plan to include any offshore prospects in the . Since we started organizing partnerships in 1984, we have completed more than 90 percent of the wells we have drilled for our partnerships to produce natural gas. Our completion record reflects our selection of prospect areas where the probability of drilling dry holes is relatively low because producing intervals exist throughout a large area and because each well may access several intervals which are capable of producing natural gas or oil. Nevertheless, high completion rates do not guarantee economic success if the wells do not produce sufficient quantities of natural gas and oil or if the prices for natural gas and oil are at low levels. All of the areas we are currently developing fit this general description and we plan to look for similar characteristics in prospect areas we might add in the future. We also look for areas where the characteristics of the producing formations lead to relatively long producing lives, generally of 20 years or more. Production from wells typically commences at a maximum rate that diminishes over the life of the well. This means that the income stream from the wells will also tend to decline over time, depending upon other factors including the sales price for the production and operating expenses. As we evaluate the geology of a prospect area, we also determine whether there is an adequate market for natural gas and oil which may be produced by the wells. For natural gas, this includes the existence of pipelines to move the gas from the wells to natural gas markets. We look at the proximity of existing pipelines to planned drilling, the cost of moving gas to market, and prices being paid for gas in the markets which are available. Similarly, there must be both a market and suitable transportation for oil production. Current Prospect Areas Colorado. Wattenberg Field, located north and east of Denver, Colorado, is in the Denver-Julesburg (DJ) basin. The field, discovered in 1970, has produced over 600 billion cubic feet of natural gas and 2.2 million barrels of oil. The typical well production profile has an initial high production rate and relatively rapid decline, followed by years of relatively shallow decline. Natural gas is the primary hydrocarbon; however, many wells will also produce oil. The purchase price for the gas may include revenue from the recovery of propane and butane in the gas stream, as well as a premium for the high-energy content of the gas. Wells in the area may include as many as four productive formations. From shallowest to deepest, these are the Sussex, the Niobrara, the Codell and the J Sand. The primary producing sand in most wells will be the Codell; this sand produces a combination of natural gas and oil. The Piceance Basin, located near the western border of Colorado, is a second Colorado prospect area. We expect our Piceance Basin wells to produce natural gas along with very small quantities of oil and water. The producing interval Michigan. The Antrim shale of the Michigan Basin was one of the most active shallow gas development plays in the U.S. during the 1990s. The producing formation in most partnership wells is expected to be approximately 800 to 1,500 feet below the surface. The Antrim shale is initially water-charged. For us to produce natural gas, we must remove this water from the producing formation. Antrim shale wells are drilled in projects of 10 to 20 wells that are operated as a unit and share common compression, water separation, and water disposal facilities. West Virginia and Pennsylvania (Appalachian Basin). The Appalachian Basin is one of the oldest producing areas in the country. As a result, it has a well-developed pipeline gathering system for natural gas. Over 90 percent of the economic value of Appalachian Basin production is generated from the sale of natural gas, with occasional small quantities of oil. Prospects that we might include in the are less than 6,000 feet in depth. In most areas there are several potentially productive formations stacked one atop another. This multiple pay potential has historically resulted in high completion rates for wells drilled in the area. Utah. The Uinta Basin in northeastern Utah contains more than 100 oil and natural gas fields which have collectively produced over 1.3 trillion cubic feet of natural gas and over 100 million barrels of oil. This production is from four different plays: the Tertiary Uinta, Green River and Wasatch formations, and the Cretaceous Mesaverde formation. Wells may contain several pay zones. Similar to Colorado, the primary hydrocarbon produced is natural gas with some associated oil and water. Southwest of the Uinta Basin in central Utah, about a two-hour drive from Salt Lake City, is the Wasatch Plateau. The Cretaceous-aged Ferron Formation produces natural gas from both sandstone and coal reserves. Cumulative production from this play since the discovery well in 1951 exceeds 120 BCF of natural gas. Wyoming. Our drilling target in the Green River Basin in southwestern Wyoming and northwestern Colorado will be Cretaceous-aged reservoirs. Cumulative production from just two plays, the Mesaverde and the Lewis Shale, is over 2.2 trillion cubic feet of natural gas. Similar to many of the Rocky Mountain producing areas, the majority of drilling efforts in the last decade in the Green River Basin have focused on low-permeability reservoirs which have become economic through improvements in drilling and completion technology. The typical production profile for these reservoirs has a majority of reserves produced within the first few years of production life followed by many years of relatively stable, shallow decline. Summary of Prospect Areas The following table summarizes some of the key characteristics of our current prospect areas: <TABLE> <C> <C> <C> <C> <C> <C> Prospect Productive Formation Depth Range Type of Reservoir Rock Thickness of Producing Interval Anticipated Production Wattenberg Field, Colorado Sussex 3,750'- 5,250' Sandstone 10'-60' Natural gas Niobrara 6,500'- 7,500' Limestone 20'- 80' Natural gas Codell 6,750'- 7,750' Sandstone 10'-30' Natural gas, oil J Sandstone 7,500'- 8,400' Sandstone 2'-90' Natural gas Piceance Basin, Colorado Williams Fork 6,000'- 10,000' Sandstone and Coal 150'-300' total pay in a 2,000- 4,000 interval Natural gas Michigan Antrim Shale 500'- 2,500' Fractured shale 100' in two zones Natural gas West Central and Southern Pennsylvania Upper Devonian Formations 3,000'- 5,000' Several Sandstone Zones 5'-25' per zone with total pay of 40'- 100' per well Natural gas Northern West Virginia Mississippian Formations 2,000'- 3,000' Several Sandstone Zones 5'- 50' Natural gas Upper Devonian Formations 2,500- 6,000' Several Sandstone Zones 4'- 30' Natural gas Southern West Virginia Mississippian Formations 2,000'- 4,000' Sandstone, Limestone Individual zones 5'-50', may be several zones in a single well Natural gas Uinta Basin, Utah Uinta 2000' - 5000' Sandstone 15' - 50' over 1000' - 5000' interval Natural gas Green River 2300' - 7500' Sandstone & Limestone 100' - 300' over 2000' to 6000' interval Natural gas, Oil Wasatch 3000' - 10,700' Sandstone 100' - 200' over 1500' - 3000' interval Natural gas Mesaverde 4200' - 13,500' Sandstone 20' - 100' over 1200' - 2700' interval Natural gas Wasatch, Utah Ferron 5500' - 7800' Sandstone and Coral 10' - 30' Natural gas Green River Basin, Wyoming Mesaverde 2000' - 14,000' Sandstone 10' - 100' Natural gas Lewis 3100' - 10,000' Sandstone 10' - 30' Natural gas </TABLE> Drilling and Completion Phase - Most partnership wells in the Appalachian Basin will be development wells 3,000 to 5,500 feet deep. - Most partnership wells in the Michigan Basin will be development wells 800 to 1,200 feet in depth. - Partnership wells in Colorado may be exploratory or developmental with depths expected to range from approximately 7,500 to 9,500 feet. - Partnership wells in Utah and Wyoming may be exploratory or developmental with depths expected to range from 5,000 to 14,000 feet in depth. - The Managing Partner will drill partnership wells near pipelines, gathering systems, or end users. - The partnership will sell production on a competitive basis at the best available price. General: The table above shows the anticipated depths and target formations for planned areas of operations. We may drill some shallower or deeper development prospects in these areas. If we drill wells in other areas, it is likely that well depths will differ. After drilling, the operator will complete each well deemed by the operator to be capable of production of oil or gas in commercial quantities. We may drill exploratory wells to depths exceeding the proposed developmental well depths indicated above. In the event the funds allocated for exploratory wells are not used to drill exploratory wells, we will utilize these funds together with unexpended completion funds to drill additional development wells. We may substitute another operator or operators to perform the duties of the operator, on terms and conditions substantially the same as those discussed in this prospectus. Additionally, with respect to those prospects as to which the partnership owns less than a 50% working interest, it is possible that the majority owner of prospects will select the operator for the wells drilled on prospects and that the operator may not be us. In the event another company acts as operator, we will monitor the performance and activities of the operator, participate as the partnership's representative in decision-making with regard to the joint venture activities, and otherwise represent the partnership with regard to the activities of the joint venture. Where someone other than us serves as operator, the cost of drilling to the partnership will be the actual cost of third-party drilling, plus our costs of supervision, engineering, geology, accounting, and other services provided, as well as monthly overhead specified in "Compensation to the Managing General Partner and Affiliates," above. Prices of wells operated by third parties may exceed the footage based rates specified in the prospectus. We will represent each partnership in all operations matters, including the drilling, testing, completion and equipping of wells and the sale of each partnership's oil and gas production from wells of which we are the operator. We expect to be the operator of most if not all of the wells in which the partnerships own an interest. We will, in some cases, provide equipment and supplies, and will perform salt water disposal services and other services for the partnerships , provided that all these transactions will be at competitive prices and upon competitive terms. We may sell equipment to the partnerships as needed in the drilling or completion of partnership wells. All equipment will be sold at prices competitive in the area of operations. Gas Pipeline and Transmission: We will drill the partnership's wells in the vicinity of transmission pipelines, gathering systems, and/or end users. We believe that there are sufficient transmission pipelines, gathering systems, and end users for the partnership's production, subject to some seasonal curtailment. Sale of Production: Each partnership will sell the oil and gas produced from its prospects on a competitive basis at the best available terms and prices. We intend to utilize the services of our subsidiary in marketing the gas produced from partnership wells. We will not make any commitment of future production that does not primarily benefit the partnerships . Generally, purchase contracts for the sale of oil are cancelable on 30 days' notice, whereas purchase contracts for the sale of natural gas may have a term of a number of years and may require the dedication of the gas from a well for the life of its reserves. Each partnership will sell natural gas discovered by it at negotiated prices based upon a number of factors, the quality of the gas, well pressure, estimated reserves, prevailing supply conditions and any applicable price regulations promulgated by the Federal Energy Regulatory Commission. The partnership expects to sell oil discovered and sold by it at free market prices. See "Competition, Markets and Regulation Drilling and Operating Agreement. - On wells where the Managing General Partner is operator, it will have full control over the partnerships' wells. - The operator must commence drilling wells within 180 days after funding of the partnership , but not later than March 31, 2002 for partnerships designated "PDC 2001- Limited Partnership," March 31, 2003 for partnerships designated "PDC 2002- Limited Partnership" and March 31, 2004 for partnerships designated as "PDC 2003-Limited Partnership." - The costs charged for drilling and completion, dry holes, and monthly operations will be competitive with rates charged for similar services and will vary by the location of the wells. Rates for areas which are currently active are shown in the table in this section. Upon funding of each partnership the particular partnership will enter into a drilling and operating agreement with us as operator. The (filed as Exhibit 10(a) to the provides that the operator will conduct and direct and have full control of all operations on the partnership's prospects. The operator will have no liability as operator to the partnership for losses sustained or liabilities incurred, except as may result from the operator's negligence or misconduct. Under the terms of the , we may subcontract responsibilities as operator for partnership wells. We will retain responsibility for work performed by subcontractors as set forth in this prospectus. It is possible that we will not be operator on some of the partnership's prospects. Where the duties of operator are subcontracted to an independent third party, the cost of the wells to the partnership will be determined by the actual third party costs, plus our charges for supervision, engineering, geology, accounting and other services, and the fixed rate overhead charge for the area where the well is located. These charges are expected to be comparable to the rates in this prospectus. The partnership will pay a proportionate share of total lease, development, and operating costs, and will receive a proportionate share of production subject only to royalties and overriding royalties. At our discretion, the partnership may enter into joint ventures which allow a functional allocation of tangible, intangible and lease costs, where each joint venturer is responsible for its overhead costs, provided the partnership's interest in the revenues and income of joint venture is proportional to its contribution to the total cost of venture. It is anticipated that the partnerships , PDC, and other third party joint venturers will share the cost of the Michigan Antrim projects. The limited partnership agreement allocates to the partnership the well cost with the additional project costs for multiple flow lines, saltwater injection well, equipment for the central production facility and leases allocated to the other joint venture partners through the use of a tax partnership. In return for contribution of the wells costs to an Antrim project, the partnerships will acquire a 55% working interest in the project. The remaining working interests will be allocated to the parties bearing the project costs for multiple flowlines, leases, salt water injection well, and equipment for the central production facility. Michigan Antrim project leases are unitized for the purpose of payment of royalties, distribution of working interest revenue and allocation of project production expenses. Project working interest revenue and project production expenses are allocated to working interest owners based on the number of net wells drilled, completed and placed into production, expressed as a percentage of the total number of wells then producing in a project proportional to their ownership interest. To the extent that a partnership drills and pays for less than the total number of wells in a project, its overall working interest in the project will be proportionately reduced. Each partnership will be responsible only for its obligations and will be liable only for its proportionate share of the costs of developing and operating the prospects; and, in the event of the default of another party, we have agreed to indemnify the partnership and its partners for the obligations of party. If any party fails or is unable to pay its share of expense within 60 days after rendering a statement therefore by us, we will pay the unpaid amount in the proportion that the interest of each party bears to the interest of all parties. In the event not all participants in a well wish to participate in a completion attempt, the parties desiring to do so may pay all costs of the completion attempt including the cost of necessary well equipment and a gathering pipeline, and parties will receive all income and pay all operating costs from the well until they have received an amount equal to 300% of the completion and connection costs, after which time the non-consenting parties will have the right to receive their original interest in further revenues and expenses. The operator is obligated to commence drilling the wells on each prospect within 180 days of the date of the funding of the partnership , but in no case later than March 31, 2002 for partnerships designated "PDC 2001-Limited Partnership," March 31, 2003 for partnerships designated "PDC 2002-Limited Partnership," and March 31, 2004 for partnerships designated "PDC 2003- Limited Partnership." The operator's duties include testing formations during drilling, and completing the wells by installing surface and well equipment, gathering pipelines, heaters, separators, etc., as are necessary and normal in the area in which the prospect is located. We will pay the drilling and completion costs of the operator as incurred, except that we are permitted to make advance payments to the operator where necessary to secure tax benefits of prepaid drilling costs and there is a valid business reason. In order to comply with conditions to secure the tax benefits of prepaid drilling costs, the operator under the terms of the will not refund any portion of amounts paid in the event actual costs are less than amounts paid but will apply any amounts solely for payment of additional drilling services to the partnership . If the operator determines that the well is not likely to produce oil and/or gas in commercial quantities, the operator will plug and abandon the well in accordance with applicable regulations. Each partnership will bear its proportionate share of the cost of drilling and completing or drilling and abandoning wells, where we serve as operator as follows: 1) The cost of the prospect; and 2) For intangible well costs: (a) For each well completed and placed in production, an amount equal to the depth of the well in feet at its deepest penetration as recorded by the drilling contractor multiplied by the "intangible drilling and completion cost" in the following table, plus the actual extra completion cost of zones completed in excess of the cost of the first zone and actual additional costs for work required by state law in the event an intermediate or third string of surface casing is run, plus the actual costs for directional drilling services, if required; or (b) For each well which the partnership elects not to complete, an amount equal to the "intangible dry hole cost" in the following table, plus actual additional costs for work required by state law in the event an intermediate or third string of surface casing is run, plus the actual costs for directional drilling services, if required; and 3) The tangible costs of drilling and completing the partnership wells and of gathering pipelines necessary to connect the well to the nearest appropriate sales point or delivery point. To the extent that a partnership acquires less than 100% of a prospect, its drilling and completion costs of that prospect will proportionately decrease. The depth used for determining well charges will be the deepest penetration by the drilling bit. <TABLE> <C> <C> <C> <C> <C> FOOTAGE BASED RATES LOCATION TARGET FORMATIONS APPROXIMATE WELL DEPTH INTANGIBLE DRILLING AND COMPLETION COSTS INTANGIBLE DRY HOLE COST Northern West Virginia and Pennsylvania Upper Devonian and Mississippian 2,000 - 5,000' $60 per foot for first 2,200 feet plus $16 per foot for each additional foot below 2,200 feet $33 per foot for the first 2,200 feet plus $9 per foot for each additional foot below 2,200 feet Michigan Devonian Antrim Shale Richfield 800 - 4,500' $138 per foot for the first 1,000 feet plus $22 per foot for each additional foot below 1,000 feet $60 per foot for the first 1,000 feet plus $12 for each additional foot below 1,000 feet Wattenberg Field Colorado Cretaceous Codell 6,500 - 7,800' $55 per foot $18 per foot Wattenberg Field Colorado Cretaceous J Sandstone 7,000 - 8,000' $67 per foot $21 per foot Piceance Basin Colorado Cretaceous Mesaverde 7,000 - 10,000' $130 per foot $75 per foot Utah Uinta Green River Wasatch Mesaverde Ferron 5,000 - 14,000' $130 per foot $75 per foot Wyoming Mesaverde Lewis Almond 7,000 - 14,000' $130 per foot $75 per foot </TABLE> In the event the foregoing rates exceed competitive rates available from other non-affiliated persons in the area engaged in the business of rendering or providing comparable services or equipment, we will adjust the foregoing rates to an amount equal to that competitive rate. The provides that the partnership will pay the operator the prospect cost and the dry hole cost for each planned well prior to the spud date, and the balance of the completed well costs when the well is completed and ready for production, in the case of a completed well. The operator will provide all necessary labor, vehicles, supervision, management, accounting, and overhead services for normal production operations, and will deduct from partnership revenues a monthly charge based upon competitive industry rates for each producing well for operations and field supervision and a monthly charge of $75 per well for partnership accounting, engineering, management, and general and administrative expenses. Charges for areas with current operations are shown below. Michigan Basin wells will have an additional monthly charge for the operation of compression, water disposal, gas injection, and other facilities. Non-routine operations will be billed to the partnership at their cost. <TABLE> <C> <C> <C> INITIAL PER WELL OPERATING CHARGES WELL LOCATION MONTHLY PARTNERSHIP ADMINISTRATION MONTHLY WELLTENDING FEE Appalachian Basin $75 $225 Michigan Basin $75 $225 Colorado $75 $600 Utah $75 $600 Wyoming $75 $600 </TABLE> The partnership will have the right to take in kind and separately dispose of its share of all oil and gas produced from its prospects, excluding its proportionate share of production required for lease operations and production unavoidably lost. Initially the partnership will designate the operator as its agent to market production and authorize the operator to enter into and bind the partnership in agreements as it deems in the best interest of the partnership for the sale of oil and/or gas. If pipelines which have been built by us are used in the delivery of natural gas to market, the operator may charge a gathering fee not to exceed that which would be charged by a non-affiliated third party for a similar service. The production and accounting charges may be adjusted annually beginning January 1, 2004 to an amount equal to the rates initially established by the , multiplied by the ratio of the then current average weekly earnings of Crude Petroleum and Gas Production workers to the average weekly earnings of Crude Petroleum and Gas Production workers for 1999, as published by the United States Department of Labor, Bureau of Labor Statistics, provided that the charge may not exceed the rate which would be charged by the comparable operators in the area of operations. The will continue in force so long as any well or wells produce, or are capable of production, and for an additional period of 180 days from cessation of all production. Production Phase of Operations - The partnership will sell the produced gas to industrial users, gas brokers, interstate pipelines, or local utilities, subject to market sensitive contracts the price of gas sold will vary as a result of market forces. - The partnership may enter into fixed price contracts or use financial hedges to fix gas prices, which may result in greater or lower prices than market sensitive prices. - The partnership will not complete contracts for sale of gas until after drilling of the wells. General. Once the partnership's wells are "completed" (i.e., all surface equipment necessary to control the flow of, or to shut down, a well has been installed, including the gathering pipeline), production operations will commence. The partnership will not complete contracts for sale of gas until after drilling of the wells, except as noted below. The partnership will sell the produced gas to industrial users, gas marketers, including affiliated marketers, commercial end users, interstate or intrastate pipelines or local utilities, primarily under market sensitive contracts the price of gas sold will vary as a result of market forces. Some leases, and thus the gas derived from wells drilled on those leases, may be dedicated to markets at the time we acquire those leases. The partnership may enter into fixed price contracts, or utilize derivatives, including hedges, swaps or options in order to achieve price certainty for periods of time, generally for less than one year. The use of derivatives may entail fees, including the time value of money for margin requirements, which will be charged to the partnership . We may utilize our subsidiary to market gas, enter into hedges or swaps, or purchase options on behalf of the partnership will be entitled to charge reasonable fees for its services, including out-of-pocket costs. These fees, however, will be equal to or less than fees charged to non-affiliated producers for similar services. Seasonal factors, such as effects of weather on costs, may impact the partnership's results. In addition, both sales volumes and prices tend to be affected by demand factors with a significant seasonal component. Expenditure of Production Revenues. The partnership's share of production revenue from a given well will be burdened by and/or subject to royalties and overriding royalties, monthly operating charges, taxes and other operating costs. The above items of expenditure involve amounts payable solely out of, or expenses incurred solely by reason of, production operations. The partnership's only source of revenues will be from production operations, because the partnership may not borrow any funds it may require to meet operation expenditures (see "Risk Factors - Shortage of Working Capital" and "Source of Funds and Use of Proceeds - Subsequent Source of Funds" . It is our practice to deduct operating expenses from the production revenue for the corresponding period, and to defer the collection of operating expenses when revenues are insufficient to render full payment. Interests of Parties We, investor partners, and unaffiliated third parties (including landowners) share revenues from production of gas from wells in which the partnership has an interest. The following chart expresses interest of gross revenues derived from the wells. For the purpose of this chart, "gross revenues" is defined as the "Well Head Gas Price" paid by the gas purchaser. In the event the partnership acquires less than a 100% working interest, the percentages available to the partnership will decrease proportionately. Landowner and other royalty interests payable to unaffiliated third parties may vary, provided that the weighted average of royalty interests for all prospects of a partnership shall not exceed 20%. The revenues to be distributed are subject to the revised sharing arrangement policy and to revisions if we make a capital contribution greater than our 21 3/4% requirement. Program Revenue Sharing Partnership Working Interest Third Party Royalties: Entity Interest If 12.5% /If 20% Managing 20% Partnership General Interest 17.50% 16.00% Partner Investor 80% Partnership Partners Interest 70.00% 64.00% Third Landowners and Over- Parties riding Royalties 12.50% 20.00% 100.00% 100.00% Insurance - The Managing General Partner will carry public liability insurance of not less than $10 million during drilling operations and will maintain other insurance as appropriate. - The Managing General Partner has a good faith duty to provide insurance coverage, sufficient, in its judgment, to protect the Investors against the foreseeable risks of drilling. - Increasing cost of insurance could reduce partnership funds available for drilling. We, in our capacity as operator, will carry blowout, pollution, public liability and workmen's compensation insurance, but insurance may not be sufficient to cover all liabilities. Each unit held by the additional general partner represents an open-ended security for unforeseen events such as blowouts, lost circulation, stuck drillpipe, etc. which may result in unanticipated additional liability materially in excess of the per unit subscription amount. We have obtained various insurance policies, as described below, and intend to maintain these policies subject to our analysis of their premium costs, coverage and other factors. We may, in our sole discretion, increase or decrease the policy limits and types of insurance from time to time as we deem appropriate under the circumstances, which may vary materially. The following types and amounts of insurance have been obtained and are expected to be maintained. We are the beneficiary under each policy and pay the premiums for each policy, except the Managing General Partner and the partnership are co-insured and co-beneficiaries with respect to the insurance coverage referred to in #2 and #5 below. 1. Workmen's compensation insurance in full compliance with the laws for the States of West Virginia, Michigan, Pennsylvania and Colorado; this insurance will be obtained for any other jurisdictions where a partnership conducts its business; 2. Operator's bodily injury liability and property damage liability insurance, each with a limit of $1,000,000; 3. Employer's liability insurance with a limit of not less than $1,000,000; 4. Automobile public liability insurance with a limit of not less than $1,000,000 per occurrence, covering all automobile equipment; and 5. Operator's umbrella liability insurance with a limit of $49,000,000. We, as Managing General Partner and operator, have determined in good faith, in the exercise of our fiduciary duty as Managing General Partner and as operator, that adequate insurance has been obtained on behalf of the partnerships to provide the partnership with coverage as we believe is sufficient to protect the investor partners against the foreseeable risks of drilling. We will obtain and maintain public liability insurance, including umbrella liability insurance, of at least two times the Partnership's capitalization, but in no event less than $10 million during drilling operations. In the event that two partnerships are conducting drilling activities simultaneously, as provided for under "Proposed Activities - Introduction" above, and the investor capital of is in excess of $25 million in the aggregate, we will obtain additional liability insurance coverage during drilling in order to provide the above-referenced two-times insurance coverage with respect to the total capitalization of those partnerships which are conducting simultaneous drilling activities . We will maintain two-times insurance coverage during drilling activities. We will review the partnership insurance coverage prior to commencing drilling operations and periodically evaluate the sufficiency of insurance. We will obtain and maintain insurance coverage as we determine to be commensurate with the level of risk involved. In more than 30 years of operations, drilling more than 2,000 wells in Tennessee, Ohio, Pennsylvania, Michigan, Colorado, Montana and West Virginia, our largest insurance claim has been less than $80,000. The annual cost of insurance to the partnership is estimated to be approximately $625 per well in the year that it is drilled (plus blowout insurance for Colorado wells of approximately $2,000 per well) and approximately $140 per each producing well for the partnership liability and other insurance coverages. The costs of insurance are allocated based primarily upon the level of natural gas operations. Insurance premiums may increase in the future. The primary effect of increasing premiums cost is to reduce funds otherwise available for partnership drilling operations or for distribution to investors. We will notify all additional general partners at least 30 days prior to any material change in the amount of insurance coverage. Within this 30-day period and otherwise after the expiration of one year following the closing of the offering with respect to a particular partnership have the right to convert their units into units of limited partnership interest by giving written notice to us and will have limited liability for any partnership operations conducted after the conversion date as a limited partner effective upon the filing of an amendment to the certificate of limited partnership of a partnership . At any time during this 30-day period, upon receipt of the required written notice from the additional general partner of his intent to convert, we will amend the limited partnership agreement and will file amendment with the State of West Virginia prior to the effective date of the change in insurance coverage and effectuate the conversion of the interest of the former additional general partner to that of a limited partner . The Managing General Partner's Policy Regarding Roll_Up Transactions Although we have no intention of engaging the partnership in a "roll-up" transaction, it is possible at some indeterminate time in the future that the partnership will become so involved. In general, a roll-up means a transaction involving the acquisition, merger, conversion, or consolidation of the partnership with or into another partnership, corporation or other entity and the issuance of securities by the in cases where there is also a significant adverse change in the voting rights of the investor partners , the term of existence of the partnership , our compensation, or the investment objectives of the partnership . The determination of "significant adverse change" will be made solely by us in the exercise of our reasonable business judgment as manager of the partnership and consistent with our obligations as a fiduciary to the investor partners . The limited partnership agreement provides various policies in the event that a should occur in the future. These policies include: (1) An appraisal of all partnership assets will be obtained from a competent independent expert, and a summary of the appraisal will be included in a report to the investor partners in connection with a proposed ; (2) Any participant who votes "no" on the proposal will be offered a choice of: - accepting the securities of the offered in the proposed or - either (a) remaining an investor partner in the partnership and preserving his or her interests in the partnership on the same terms and conditions as existed previously, or (b) receiving cash in an amount equal to his or her pro-rata share of the appraised value of the partnership's net assets; (3) will not participate in a proposed - which would result in the diminishment of an investor partner's voting rights under the chartering agreement; - in which the investor partners' right of access to the records of the would be less than those provided by the limited partnership agreement; or - in which any of the costs of the transaction would be borne by the partnership if the proposed is not approved by the investor partners . The limited partnership agreement further provides that the partnership will not participate in a transaction unless the transaction is approved by at least 66 2/3% in interest of the investor partners . See Section 5.07(m) of the limited partnership agreement. COMPETITION, MARKETS AND REGULATION - Competition is intense in all phases of the oil and gas industry, including the acquisition of prospects and the sale of production. - Competition for equipment and services is keen and can adversely affect drilling costs and the timing of drilling. - Excess supplies and competition have depressed gas prices at times, and there is no way to predict when unfavorable conditions may exist in the future. - The partnership expects to sell its gas subject to market sensitive contracts, so the price of gas sold will vary as a result of market forces. Competition and Markets Competition is keen among persons and companies involved in the exploration for and production of oil and gas. The partnership will encounter strong competition at every phase of its business including acquiring properties suitable for exploration and development and marketing of oil and gas. It will compete with entities having financial resources and staffs substantially larger than those available to the partnership . There are thousands of oil and gas companies in the United States. The national supply of natural gas is widely diversified . As a result of this competition and Federal Energy Regulatory Commission ("FERC") and Congressional deregulation of gas prices, prices are generally determined by competitive forces. There will also be competition among operators for drilling equipment, tubular goods, and drilling crews. competition may affect the ability of each partnership to acquire leases suitable for development by the partnerships and to develop expeditiously leases once they are acquired. The marketing of any oil and gas produced by a partnership will be affected by a number of factors which are beyond the partnership's control and whose exact effect cannot be accurately predicted. These factors include the volume and prices of crude oil imports, the availability and cost of adequate pipeline and other transportation facilities, the marketing of competitive fuels, such as coal and nuclear energy , and other matters affecting the availability of a ready market, such as fluctuating supply and demand. Among other factors, the supply and demand balance of crude oil and natural gas in world markets have caused significant variations in the prices of these products over recent years. Moreover, new pipeline projects recently approved by, or presently pending before, the FERC could substantially increase the availability of gas imports to U.S. markets. these imports could have an adverse effect on both the price and volume of gas sales from Partnership wells. FERC Order No. 636, issued in 1992, requires pipelines to separate their storage, sales and transportation functions and established an industry-wide structure for "open-access" transportation service under which pipelines must provide third parties non-discriminatory access to transportation service on their systems. Order No. 636 has restructured the natural gas industry and made it more competitive. Order No. 637, issued in February 2000, further enhanced competitive initiatives, by removing price caps on short-term capacity release transactions. Order No. 637 also enacted other regulatory policies that are intended to increase the flexibility of interstate gas transportation, to maximize shippers' supply alternatives, and to encourage domestic natural gas production in order to meet projected increases in natural gas demand. these increases in demand, should they materialize, will come from a number of sources, including as boiler fuel to meet increase electric power generation needs and as an industrial fuel that is environmentally preferable to alternatives such as nuclear power and coal. The accelerating deregulation of natural gas and electricity transmission has caused, and will continue to cause, a convergence of the gas and electric industries. CNG Transmission, which has purchased partnership production in the past, is an example of this convergence, having completed its merger with Dominion Resources, Inc., a large, Virginia-based provider of electric services, in January 2000. Demand for natural gas by the electric power sector is expected to increase through the next decade according to the United States Energy Information Administration . Nearly half of the states have enacted legislation to increase competition in the electric industry, and convergent mergers of gas and electric companies typically include safeguards to prevent a gas company from exercising a marketing advantage in negotiations with an electric affiliate. Increased competition, particularly where coupled with the enforcement of stringent environmental regulations, may increase the electric industry's reliance on natural gas. Beginning in 1995, the North American Free Trade Agreement ("NAFTA") eliminated trade and investment barriers in the United States, Canada, and Mexico, increasing foreign competition for natural gas production. Legislation that Congress may consider with respect to oil and gas may increase or decrease the demand for the Partnerships' production in the future, depending on whether legislation is directed toward decreasing demand or increasing supply. Members of the Organization of Petroleum Exporting Countries establish prices and production quotas for petroleum products from time to time, with the intent of reducing the current global oversupply and maintaining or increasing price levels. We are unable to predict what effect, if any, future OPEC actions will have on the quantity of, or prices received for, oil and gas produced and sold from the partnerships' wells. Various parts of the prospect area are crossed by pipelines belonging to Hope Gas, Equitable Gas, CNG Transmission, MichCon, Equitrans, Colorado Interstate Gas, NARCO, Duke and others. These companies have all traditionally purchased substantial portions of their supply from West Virginia, Michigan, Colorado or Pennsylvania producers. In addition, all are subject to regulations enacted by state commissions or the FERC which require them to transport gas for others. Transportation on these systems requires that gas delivered meet quality standards and that a tariff be paid for quantities transported. The partnership expects to sell gas from its wells to Hope Gas, Equitable Gas, and other local distribution companies , or on the spot market via open access transportation arrangements through CNG Transmission, Hope Gas, Eastern American Energy, MichCon, Colorado Interstate Gas, Equitrans or other pipelines. As a result of FERC regulations that require interstate gas pipelines to separate their merchant activities from their transportation activities and require them to release available capacity on both a short- and a long-term basis, must take an increasingly active role in acquiring their own gas supplies. Consequently, pipelines and are buying gas directly from gas producers and marketers, and retail unbundling efforts are causing many end-users to buy their own reserves. Activity by state regulatory commissions to review procurement practices more carefully and to unbundle retail sales from transportation has caused gas purchasers to minimize their risks in acquiring and attaching gas supply and has added to competition in the natural gas marketplace. In Order No. 587 and other initiatives, FERC required pipelines to develop electronic communications in order to ensure that the gas industry is more competitive. Pipelines must provide standardized access via the Internet to information concerning capacity and prices, and standardized procedures are now available for nominating and scheduling deliveries. The industry also is developing methods to access and integrate all gas supply and transportation information on a nationwide basis, via the Internet, so as to create a national market. Furthermore, parallel developments toward an electronic marketplace for electric power, mandated by the FERC in Order Nos. 888 and 2000, are serving to create multi-national markets for energy products generally. These systems, and the development of information service companies, will allow rapid consummation of natural gas transactions. Gas purchased in West Virginia, could, for example, be used in Seattle. Although this system may initially lower prices due to increased competition, it is anticipated to expand natural gas markets and to improve the reliability of the markets. Natural Gas Pricing - The Managing General Partner anticipates that the prices of the partnerships gas will be deregulated, and that the gas will be sold at fair market value. - The partnership may enter into fixed price contracts or use financial hedges to fix gas prices, which may result in greater or lower prices than market sensitive prices. The partnership anticipates that it will sell the gas from its wells subject to market sensitive contracts, the price of which will increase or decrease with market forces beyond our control. In the past, we have sold as much as 70% of the gas produced by its wells to Hope Gas or CNG Transmission, both subsidiaries of Consolidated Natural Gas. Neither of these companies is affiliated with us. While these markets have provided above average prices and sales in the past, this substantial concentration could result in increased risk of shut-in wells and/or lower prices in the future. Sale of natural gas by the partnerships will be subject to regulation by governmental regulatory agencies. Generally, the regulatory agency in the state where a producing gas well is located supervises production activities and the transportation of gas sold into intrastate markets. The FERC regulates the rates for interstate transportation of natural gas but, the Wellhead Decontrol Act of 1989, FERC may not regulate the price of gas. Deregulated gas production may be sold at market prices determined by supply, demand, Btu content, pressure, location of wells, and other factors. Regulation - Federal and state laws and regulations have a significant impact on drilling and production operations. - Environmental protection regulations may necessitate significant capital outlays by the partnership . Federal and state regulations will affect production of partnership oil and gas. In most areas of operations the production of oil is regulated by conservation laws and regulations, which set allowable rates of production and otherwise control the conduct of oil operations. The partnership's drilling and production operations will also be subject to environmental protection regulations established by , state, and local agencies, which in turn may necessitate significant capital outlays which would materially affect the financial position and business operations of the partnership (see "Risk Factors - Environmental Hazards and Liabilities"). states control production through regulations establishing the spacing of wells, limiting the number of days in a given month during which a well can produce and otherwise limiting the rate of allowable production. Through regulations enacted to protect against waste, conserve natural resources and prevent pollution, local, state and environmental controls will also affect partnership operations. these regulations could affect partnership operations and could necessitate spending funds on environmental protection measures, rather than on drilling operations. If any penalties or prohibitions were imposed on a partnership for violating regulations, that partnership's operations could be adversely affected. In prior programs, expenses associated with compliance with environmental regulations have represented approximately 10-15% of the cost of drilling and completing wells, and it is expected that similar costs will be incurred in this program. These costs are included in the footage-based rates described at "Proposed Activities - Drilling and Operating Agreement," above. Proposed Regulation Various legislative proposals in Congress and in state legislatures could, if enacted, affect the petroleum and natural gas industries. these proposals involve, among other things, imposition of direct or indirect price limitations on natural gas production, imposition of land use controls (such as prohibiting drilling activities on and state lands in roadless wilderness areas) and other measures. At the present time, it is impossible to predict what proposals, if any, will actually be enacted by Congress or the various state legislatures and what effect, if any, proposals will have on the partnerships' operations. MANAGEMENT General Management The Managing General Partner of the partnership is Petroleum Development Corporation ("PDC"), a publicly-owned Nevada corporation organized in 1955. Since 1969, PDC has been engaged in the business of exploring for, developing and producing oil and gas primarily in the Appalachian Basin area of West Virginia, Tennessee, Pennsylvania, Ohio, Michigan and the Rocky Mountains. As of September 30, 2000, PDC had approximately 91 employees. PDC will make available to investor partners , upon request, audited financial statements of PDC for the most recent fiscal year and unaudited financial statements for interim periods. We will actively manage and conduct the business of the partnerships devoting time and talents to management as we shall deem reasonably necessary. We will have the full and complete power to do any and all things necessary and incident to the management and conduct of each partnership's business. We will be responsible for maintaining partnership bank accounts, collecting partnership revenues, making distributions to the partners , delivering reports to the partners , and supervising the drilling, completion, and operation of the partnerships In addition to managing the affairs of the partnership, the management and technical staff of PDC also manage the corporate affairs of the company, the affairs of 56 partnerships formed prior to the current program, and other joint ventures formed over the years. We own an interest in all of the older partnerships and wells in addition to the interest we will purchase in the PDC 2003 Drilling Program partnerships. Since we must divide our attention and efforts among many unrelated parties, your partnership will not receive our full attention or efforts at all times. Experience and Capabilities as Driller/Operator PDC will act as driller/operator for the wells. Since 1969 has drilled over 2,000 wells in West Virginia, Tennessee, Ohio, Michigan, Colorado and Pennsylvania. currently operates approximately 2,250 wells. employs four geologists who develop prospects for drilling by and who help oversee the drilling process. In addition, has an engineering staff of four who are responsible for well completions, pipelines, and production operations. retains drilling subcontractors, completion subcontractors, and a variety of other subcontractors in the performance of the work of drilling contract wells. In addition to technical management, may provide services, at competitive rates, from - owned service rigs, a water truck, , roustabouts, and other assorted small equipment. may lay short gathering lines, or may subcontract all or part of the work where it is more cost effective for a partnership. employs full-time welltenders and supervisors to operate its wells. In addition, the engineering staff evaluates reserves of all wells at least annually and reviews well performance against expectations. All services provided by us are provided at rates less than or equal to prevailing rates for similar services provided by unaffiliated persons in the area. Petroleum Development Corporation The executive officers, directors and key technical personnel of PDC, their principal occupations for the past five years and additional information are set forth below: <TABLE> <C> <C> <C> <C> Positions and Held Current Name Age Offices Held Position Since James N. Ryan 68 Chairman, Chief November 1983 Executive Officer and Director Steven R. Williams 49 President and March 1983 Director Dale G. Rettinger 55 Chief Financial July 1980 Officer, Executive Vice President, Treasurer and Director Roger J. Morgan 72 Secretary and November 1969 Director Vincent F. D'Annunzio 48 Director February 1989 Jeffrey C. Swoveland 44 Director March 1991 Donald B. Nestor 51 Director March 2000 Thomas Riley 47 Vice President - April 1996 Gas Marketing and Acquisitions Ersel Morgan 56 Vice President - April 1995 Production Eric Stearns 42 Vice President - April 1985 Exploration and Development Alan Smith 42 Senior Geologist April 1980 Bob Williamson 46 Geologist February 1991 Susan Foster 39 Engineer June 1997 Tom Carpenter 48 Senior Geologist December 1997 </TABLE> James N. Ryan has served as President and Director of PDC from 1969 to 1983 and was elected Chairman and Chief Executive Officer in March 1983. Steven R. Williams has served as President and Director of PDC since March 1983. Prior to joining Mr. Williams was employed by Exxon until 1979 and attended Stanford Graduate School of Business, graduating in 1981. He then worked with Texas Oil and Gas until July 1982, when he joined Exco Enterprises, an oil and gas investment company, as manager of operations. Dale G. Rettinger has served as Vice President and Treasurer of PDC since July 1980, and was appointed Chief Financial Officer in September 1997. Mr. Rettinger was elected Director in 1985. Previously, Mr. Rettinger was a partner with Main Hurdman, Certified Public Accountants, having served in that capacity since 1976. Roger J. Morgan has been a member of the law firm of Young, Morgan & Cann, Clarksburg, West Virginia since 1955, . Mr. Morgan is not active in the day-to-day business of PDC, but his law firm provides legal services to PDC. Vincent F. D'Annunzio has served as president of Beverage Distributors, Inc., located in Clarksburg, West Virginia since 1985 . Mr. D'Annunzio is a director of West Union Bank, West Union, West Virginia. Jeffrey C. Swoveland has been Director of Finance with Equitable Resources, Inc. since September 1994. Prior thereto, he was a lending officer with Mellon Bank N.A. since July 1989. Mr. Swoveland was Senior Planning Analyst with Consolidated Natural Gas in 1988 and 1989. Mr. Swoveland received an MS degree in finance from Carnegie Mellon University. Donald B. Nestor was elected as a director in March 2000, is a Certified Public Accountant and a Partner in the CPA firm of Toothman, Rice, P.L.L.C. and is in charge of the firm's Buckhannon, West Virginia office. Mr. Nestor has served in that capacity since 1975 . Thomas Riley has served as Vice President - Gas Marketing and Acquisitions of PDC since April 1996. Prior to joining PDC, Mr. Riley was president of Riley Natural Gas Company , a natural gas marketing company, from its inception in 1987. PDC acquired in April 1996. Mr. Riley continues to serve as president of PDC's wholly-owned subsidiary. Ersel Morgan was elected Vice President-Production in April 1995. He joined PDC as a landsman in 1980. Eric Stearns was elected Vice President-Exploration and Development in April 1995. Mr. Stearns joined PDC in 1985 after working as a mudlogger for Hywell, Incorporated logging wells in the Appalachian Basin between 1982 and 1985, and for Petroleum Consultants, Inc. between 1984 and 1985. Alan Smith joined PDC in April 1980 as a geologist in the Tennessee Division. He has a BS degree in geology from Tennessee Technological University. As a senior geologist he has been responsible for the development of prospects and supervision of drilling operations since 1983. Bob Williamson joined PDC on February 1, 1991, as a geologist. Mr. Williamson received a B.S. degree in geology from West Virginia University in 1980. Prior to joining PDC, he worked as a geologist for Ramco in Belpre, Ohio, for nearly nine years on projects in West Virginia, Kentucky, Kansas, and Oklahoma. Susan Foster joined PDC on June 2, 1997, as a petroleum engineer. Ms. Foster has a BS degree in petroleum engineering from Pennsylvania State University. Prior to joining PDC, Ms. Foster worked as a petroleum engineer in the Appalachian Basin with several oil and gas companies. Tom Carpenter joined PDC on December 1, 1997 as a senior geologist. Mr. Carpenter has a B.A. degree in geology from Miami University in Ohio and an M.S. degree in geology from West Virginia University as well as other post-graduate studies and seminars. Prior to joining PDC, Mr. Carpenter was employed as Manager of Exploration and Development of Alamco, Inc. from 1996-1997, and by Ashland Exploration, Inc. and Shell Oil Company. Certain Shareholders of Petroleum Development Corporation The following table sets forth information as of September 30, 2000, with respect to the common stock of PDC owned by each person who owns beneficially 5% or more of the outstanding voting common stock, by all directors individually, and by all directors and officers as a group. <TABLE> <C> <C> <C> Amount Percent Name Beneficially Owned(1) of Class Fidelity Management 1,573,800 9.9 James N. Ryan (2)(3) 986,320 6.1 Dimensional Fund Advisors 906,700 5.7 Steven R. Williams (3) 590,576 3.7 Dale G. Rettinger (3) 527,850 3.3 Roger J. Morgan (4) 82,500 * Vincent D'Annunzio (5) 43,600 * Jeffrey C. Swoveland (6) 18,094 * All Directors and Officers as a Group (6 persons) (7) 2,248,940 13.6 </TABLE> * Less than 1% (1) Includes shares over which the person currently holds or shares voting or investment power. Unless otherwise indicated in the footnotes to this table, the persons named in this table have sole voting and investment power with respect to the shares beneficially owned. (2) Includes 219,738 shares owned jointly with Mr. Ryan's wife, 379,750 shares owned by Mr. Ryan's wife and 64,258 shares owned by Mr. Ryan's wife as guardian for their minor grandchildren. The balance of the shares are owned solely by Mr. Ryan. (3) Includes options to purchase 178,000 shares that person can currently exercise or that will become exercisable within 60 days. (4) Includes options to purchase 47,500 shares that Mr. Morgan can currently exercise or that will become exercisable within 60 days. (5) Includes options to purchase 13,600 shares that Mr. D'Annunzio can currently exercise or that will become exercisable within 60 days. (6) Includes options to purchase 3,550 shares that Mr. Swoveland can currently exercise or that will become exercisable within 60 days. (7) Includes options to purchase 598,650 shares that persons can currently exercise or that will become exercisable within 60 days. Remuneration None of our officers or directors will receive any direct remuneration or other compensation from the partnerships persons will receive compensation solely from PDC. Information as to compensation paid by us to our directors and executive officers may be obtained from publicly available reports filed by us with the Securities and Exchange Commission the Securities Exchange Act of 1934. Legal Proceedings We as driller/operator are subject to minor legal proceedings arising from the normal course of business. these legal actions are not considered material to the operations of the partnership or us. CONFLICTS OF INTEREST - The Managing General Partner currently manages and in the future will sponsor and manage natural gas drilling programs similar to the partnerships . - The Managing General Partner decides which prospects each partnership will acquire. - The Managing General Partner will act as operator of the partnership wells; the terms of the drilling and operating agreement have not been negotiated by non-affiliated persons. - The Managing General Partner will provide drilling and completion services with respect to partnership wells. - The Managing General Partner is general partner of numerous other partnerships, and owes duties of good-faith dealing to other partnerships. - The Managing General Partner and affiliates engage in significant drilling, operating, and producing activities for other partnerships. The partnerships are subject to various conflicts of interest arising out of their relationship with us. These conflicts include, but are not limited to, the following: Future Programs by Managing General Partner and Affiliates. We have the right and expect to continue to organize and manage oil and gas drilling programs in the future similar to the subject partnerships , and to conduct operations now and in the future, jointly or separately, on our own behalf or for other private or public investors. Affiliates of ours also intend to conduct activities on their own behalf. Officers, directors and employees of ours have participated, and will participate in the future, at cost, in working interests in wells in which we and our partnerships participate. To the extent our affiliates invest in the partnerships or other partnerships sponsored by us, conflicts of interest will arise. Fiduciary Responsibility of the Managing General Partner. We are accountable to the partnership as a fiduciary and consequently have a duty to exercise good faith and to deal fairly with the investors in handling the affairs of the partnership . While we will endeavor to avoid conflicts of interest to the extent possible, conflicts nevertheless may occur and, in event, our actions may not be most advantageous to the partnership and could fall short of the full exercise of fiduciary duty. In the event we should breach our fiduciary responsibilities, you would be entitled to an accounting and to recover any economic losses caused by breach, only after either proving a breach in court or reaching a settlement as provided with us. Independent Representation in Indemnification Proceeding. Counsel to the partnership and to us in connection with this offering are the same. dual representation will continue in the future. However, in the event of an indemnification proceeding between the partnership and us, we will cause the partnership to retain separate and independent counsel to represent its interest in proceeding. Due Diligence Review. PDC Securities Incorporated, the of the offering, is our affiliate and its due diligence examination concerning this offering cannot be considered to be independent. See "Plan of Distribution Managing General Partner's Interest. Although we believe that our interest in partnership profits, losses, and cash distributions is equitable (see "Participation in Costs and Revenues" , our interest was not determined by arm's-length negotiation. Transactions between the Partnership and Operator. We will also act as operator. Accordingly, although we believe the terms of the drilling and operating agreement will be equitable, it will not be the subject of arm's-length negotiation. Furthermore, we may be confronted with a continuing conflict of interest with respect to the exercise and enforcement of the rights of the partnership under agreement. See "Transactions with the Managing General Partner or Affiliates ," below. Conflicting Drilling Activities. Our affiliates have engaged in significant drilling and producing activities for the accounts of affiliated partnerships related to previous drilling programs. In addition, we and our affiliates manage and operate gas properties for investors in other drilling programs. Although the limited partnership agreement attempts to minimize any potential conflicts, we will be in a position to decide whether a gas property will be retained or acquired for the account of the partnership or other drilling programs which we or our affiliates may presently operate or operate in the future. Conflicts with Other Programs. We realize that our conduct and the conduct of our affiliates in connection with the other drilling programs could give rise to a conflict of interest between the position of PDC as Managing General Partner of the partnership and the position of PDC or one of its affiliates as general partner or sponsor of additional programs. In resolving any conflicts, each partnership will be treated equitably with other partnerships on a basis consistent with the funds available to the partnerships and the time limitations on the investment of funds. However, no provision has been made for an independent review of conflicts of interest. We believe that the possibility of conflicts of interest between the partnership and prior programs is minimized by the fact that substantially all the funds available to prior drilling programs in which we or an affiliate serves as general partner have been committed to a specific drilling program. We follow a policy of developing next what we judge to be the best available prospect. Acquisition of new leases and information derived from wells already drilled result in a constant change in this assessment. We anticipate that generally only one partnership will be actively engaged in drilling at any time. However, more than one partnership has funds available for drilling, the partnerships will alternate drilling of wells based on the "best available prospect" format. The determination of the "best available prospect" is based on our assessment of the economic potential of a prospect and its suitability to a particular partnership, and considers various factors including estimated reserves, target geological formations, gas markets, geological and gas market diversification within the partnership, royalties and overrides on the prospect, estimated lease and well costs, and limitations imposed by the prospectus and/or partnership agreements. The limited partnership agreement authorizes us to cause the partnership to acquire undivided interests in natural gas properties, and to participate with other parties, including other drilling programs previously or subsequently conducted by us or our affiliates, in the conduct of exploration and drilling operations on those properties. Because we must deal fairly with the investors in all of our drilling programs, if conflicts between the interest of the partnership and other drilling programs do arise, we might not in every instance be able to resolve those conflicts to the maximum advantage of the partnership . From time to time, we may cause partnership prospects to be enlarged or contracted on the basis of geological data to define the productive limits of any pool discovered. The partnership is not required to expend additional funds for the acquisition of property unless acquisition can be made from the capital contributions. the property is not acquired by the partnership may lose a promising prospect. Except as otherwise provided by the limited partnership agreement, prospect might be acquired by us or an affiliate or other drilling programs conducted by them. In addition, subject to the restrictions set forth below, we in our sole discretion decide which prospects and what interest to transfer to the partnership . This may result in another drilling program sponsored by us acquiring property adjacent to partnership property. program could gain an advantage over the partnership by reason of the knowledge gained through the partnership's prior experience in the area or if other drilling program were the first to discover or develop a productive pool of oil or natural gas. Acquisition of Prospects. We have discretion in selecting leases to be acquired by the partnership from us or our affiliates or third parties and the location and type of operations which the partnership will conduct on leases. leases may be part of our existing inventory, although no leases have been designated for inclusion in the partnership at the present time. Neither we nor any affiliate will retain undeveloped acreage adjoining a partnership prospect in order to use partnership funds to "prove up" the acreage owned for our own account. Whenever we sell, transfer or convey an interest in a prospect to a particular partnership , we must, at the same time, sell to the partnership an equal proportionate interest in all of our leases in the same prospect (except any interests in producing wells). If we or an affiliate (except another affiliated limited partnership in which the interest of us or our affiliates is identical or less than their interest in the partnerships subsequently proposes to acquire an interest in a prospect in which a partnership possesses an interest or in a prospect abandoned by the partnership within one year preceding prospect acquisition, we or affiliate will offer an equivalent interest to the partnership ; and, if cash or financing is not available to to enable it to consummate a purchase of an equivalent interest in property, neither we nor any of our affiliates will acquire interest or property, but the term "affiliate" will not include another partnership where our or our affiliates' interest is identical to, or less than, their interest in the subject partnerships . The term "abandon" means the termination, either voluntarily or by operation of the lease or otherwise, of all of a partnership's interest in the prospect. These limitations will not apply after the lapse of five years from the date of formation of a partnership . A sale, transfer or conveyance to the partnership of less than all of our or our affiliates' interest in any prospect is prohibited unless the interest retained by us or our affiliates is a proportionate working interest, the respective obligations of the partnership and us or our affiliates are substantially the same immediately after the sale of the interest, and our or our affiliates' interest in revenues does not exceed an amount proportionate to the retained working interest. Neither we nor our affiliates will retain any overriding royalty interests or other burdens on the lease interests conveyed to the partnerships , and will not enter into any farmout arrangements with respect to our retained interest, except to non-affiliated third parties. The partnerships will acquire only those leases reasonably expected to meet the stated purposes of the partnerships will not acquire any lease for the purpose of a subsequent sale or farmout unless the acquisition is made after a well has been drilled to a depth sufficient to indicate that acquisition would be in the partnerships' best interest. We expect that the partnership will develop substantially all of its leases and will farm out few, if any, leases. The partnerships will not farm out, sell or otherwise dispose of leases unless we, exercising the standard of a prudent operator, determine that: a partnership lacks sufficient funds to drill on the lease and cannot obtain suitable alternative financing; downgrading subsequent to a partnership's acquisition has rendered drilling undesirable; drilling would concentrate excessive funds in one location creating undue risk to a partnership or the best interests of a partnership , based on the standard of a prudent operator, would be served by disposition. In the event of a farmout, we will retain for the partnerships economic interests and concessions as a reasonably prudent operator would retain under the circumstances. We will not farm out a lease for the primary purpose of avoiding payments of our partnership share of costs of drilling on that lease. However, the decision with respect to making farmouts and the terms of a farmout involve conflicts of interest because we may benefit from cost savings and reduction of risk, and in the event of a farmout to an affiliated limited partnership or other affiliate, we or our affiliates will represent both related entities. Transactions with the Managing General Partner or Affiliates. We will furnish drilling and completion services with respect to some or all of the partnership wells. A subsidiary of ours may market gas produced from partnership wells. In addition, we will act as operator for the producing wells of the partnership . The prices to be charged the partnership for supplies and services will be competitive with the prices of other unaffiliated persons in the same geographic area engaged in similar businesses. We expect to earn a profit for services. Neither we nor any affiliate will render to the partnership any gas field, equipage or other services nor sell or lease to the partnership any equipment or related supplies unless person is engaged, independently of the partnership and as an ordinary and ongoing business, in the business of rendering services or selling or leasing equipment and supplies to a substantial extent to other persons in the gas industry in addition to partnerships in which we or our affiliate has an interest, or, if person is not engaged in business then compensation, price or rental will be the cost of services, equipment or supplies to person or the competitive rate which could be obtained in the area, whichever is less. Notwithstanding any provision to the contrary, we and our affiliates may not profit by drilling in contravention of our fiduciary obligations to the investor partners . Any services not otherwise described in this prospectus for which we or any of our affiliates are to be compensated will be embodied in a written contract which precisely describes the services to be rendered and the compensation to be paid. All benefits from marketing arrangements or other relationships affecting the property of us or our affiliates and the partnerships will be fairly and equitably apportioned according to the respective interests of each. Partnership funds will not be commingled with those of any other entity. No loans may be made by the partnership to us or any affiliate. We or any affiliate, other than other programs sponsored by us or our affiliates, may not purchase the partnerships' producing properties. Conflict in Establishing Unit Repurchase Price. Under our unit (See "Terms of the Offering - Unit Repurchase Program" above , we, once we have received a request from an investor partner that we repurchase that partner's, will establish an offering price. We will determine the offering price which will not necessarily represent the fair market value of the units . In setting the price, we will consider our available funds and our desire to acquire production as represented by the units . A conflict will arise in that the price set will be that which we consider to be in our own best interest (to keep the repurchase price as low as possible) and not necessarily in the best interest of the investor partner who is presenting the units for repurchase. Certain Transactions <TABLE> <C> <C> <C> <C> <C> <C> <C> As of September 30, 2000, previous limited partnerships sponsored by us have made payments to us or our affiliates as follows: Footage and Daywork Drilling Contracts, Turnkey Services, General Non- Drilling Chemicals, and Recurring and Supplies Administrative Name of Management Sales Completion and Operators Expense Partnership Fee of Leases Contracts Equipment Charges Reimbursement Pennwest Petroleum Group 1984 $61,556 $46,250 $ -- $1,824,938 $187,119 $ -- Pennwest Petroleum Group 1985-A 58,125 43,400 -- 1,829,937 187,334 -- Petrowest Gas Group 1986-A 29,605 22,400 -- 873,847 89,624 -- Petrowest Gas Group 1987 35,395 24,850 -- 1,062,332 108,718 -- Petrowest Gas Group 1987-B 30,461 21,350 -- 913,794 93,514 -- PDC 1987 14,079 715 459,153 -- -- ----- PDC 1988 23,842 17,150 -- 708,200 72,534 -- PDC 1988-B 6,053 6,450 -- 779,587 79,604 -- PDC 1988-C 41,052 26,250 1,361,857 -- -- -- PDC 1989-P 47,171 34,230 -- 1,445,275 143,875 -- PDC 1989-A 30,250 57,137 -- 1,085,641 -- -- PDC 1989-B 92,750 175,194 3,328,695 -- -- -- PDC 1990-A 5,150 62,209 -- 1,265,680 -- -- PDC 1990-B 55,525 72,100 -- 2,025,511 -- -- PDC 1990-C 86,950 117,215 -- 3,167,563 -- -- PDC 1990-D 92,138 137,225 3,343,524 -- -- - PDC 1991-A 68,475 75,193 -- 2,511,640 -- -- PDC 1991-B 46,587 62,209 -- 1,697,764 -- -- PDC 1991-C 68,400 70,235 -- 2,513,765 -- -- PDC 1991-D 31,463 153,721 4,812,667 -- -- -- PDC 1992-A 72,717 77,319 -- 2,669,888 -- -- PDC 1992-B 74,478 58,829 -- 2,754,778 -- -- PDC 1992-C 59,722 149,657 -- 5,884,302 -- -- PDC 1993-A -- 101,335 2,840,609 -- -- -- PDC 1993-B -- 80,470 -- 2,286,886 -- -- PDC 1993-C -- 96,248 -- 2,849,439 -- -- PDC 1993-D -- 94,098 -- 2,724,096 -- - PDC 1993-E -- 272,730 6,930,264 -- -- -- PDC 1994-A 51,387 110,084 -- 2,248,204 -- -- PDC 1994-B 67,245 85,240 -- 2,921,974 -- -- PDC 1994-C 58,647 63,548 -- 2,545,795 -- -- PDC 1994-D 188,719 232,410 8,024,046 -- -- -- PDC 1995-A 36,640 36,389 -- 1,566,615 -- -- PDC 1995-B 46,441 59,044 -- 1,972,759 -- -- PDC 1995-C 52,862 35,768 -- 2,276,962 -- -- PDC 1995-D 203,927 293,036 8,628,760 -- -- - PDC 1996-A 64,405 109,573 -- 2,692,045 -- -- PDC 1996-B 67,118 106,300 -- 2,813,259 -- -- PDC 1996-C 98,662 174,509 -- 4,117,286 -- -- PDC 1996-D 382,543 565,628 16,075,000 -- -- -- PDC 1997-A 104,174 179,882 -- 4,351,672 -- -- PDC 1997-B 168,987 271,709 -- 7,079,215 -- -- PDC 1997-C 151,081 257,165 -- 6,314,878 -- -- PDC 1997-D 462,989 593,138 19,546,905 -- -- -- PDC 1998-A 131,803 178,267 -- 5,555,181 -- -- PDC 1998-B 178,628 228,938 -- 7,541,358 -- -- PDC 1998-C 195,320 221,506 -- 8,274,895 -- -- PDC 1998-D 513,631 414,444 21,906,777 -- -- -- PDC 1999-A 120,018 173,267 -- 5,047,537 -- -- PDC 1999-B 138,497 167,131 -- 5,372,762 -- -- PDC 1999-C 177,189 298,744 -- 7,408,976 -- -- PDC 1999-D 467,734 795,958 19,550,451 -- -- -- PDC 2000-A(1) 123,918 74,291 -- 5,316,140 -- -- PDC 2000-B(2) 290,070 140,250 9,951,154 -- -- -------------------- </TABLE> [FN] (1) Partnership funded in May 2000. (2) Partnership funded in September 2000 </FN> FIDUCIARY RESPONSIBILITY OF THE MANAGING GENERAL PARTNERFIDUCIARY RESPONSIBILITY OF THE MANAGING GENERAL PARTNERFIDUCIARY RESPONSIBILITY OF THE MANAGING GENERAL PARTNERFIDUCIARY RESPONSIBILITY OF THE MANAGING GENERAL PARTNERFIDUCIARY RESPONSIBILITY OF THE MANAGING GENERAL PARTNERFIDUCIARY RESPONSIBILITY OF THE MANAGING GENERAL PARTNER - The Managing General Partner is accountable to the partnerships as a fiduciary and must exercise good faith respecting the partnerships. - The limited partnership agreement includes provisions indemnifying the Managing General Partner against liability for losses suffered by the partnership resulting from actions by the Managing General Partner. We are accountable to the partnerships as a fiduciary and consequently must exercise utmost good faith and integrity in handling partnership affairs. Under West Virginia law, we will owe the investor partners a duty of utmost good faith, fairness, and loyalty. In this regard, we are required to supervise and direct the activities of the partnership prudently and with that degree of care, including acting on an informed basis, which an ordinarily prudent person in a like position would use under similar circumstances. Moreover, we must act at all times in the best interests of the partnership and the Investor Partners. Since the law in this area is rapidly developing and changing, investors who have questions concerning our responsibilities as Managing General Partner should consult their own counsel. Where the question has arisen, courts have held that a limited partner may institute legal action on behalf of himself and all other similarly situated limited partners (a class action) to recover damages for a breach by a general partner of his fiduciary duty, or on behalf of the partnership (a partnership derivative action) to recover damages from third parties. In addition, limited partners may have the right, subject to procedural and jurisdictional requirements, to bring partnership class actions in federal courts to enforce their rights under the federal securities laws. Further, limited partners who have suffered losses in connection with the purchase or sale of their interests in a partnership may be able to recover the losses from a general partner where the losses result from a violation by the general partner of the antifraud provisions of the federal securities laws. The burden of proving a breach, and all or a portion of the expense of such lawsuit, would have to be borne by the limited partner bringing such action. In the event of a lawsuit for a breach of its fiduciary duty to the partnership and/or the investor partners , we, depending upon the particular circumstances involved, might be able to avail ourselves under West Virginia law of various defenses to the lawsuit, including statute of limitations, estoppel, laches, and doctrines such as the "clean hands" doctrine. The limited partnership agreement provides for indemnification of the Managing General Partner against liability for losses arising from the action or inaction of the Managing General Partner, if the Managing General Partner, in good faith, determined that the course of conduct was in the best interests of the partnership and such course of conduct did not constitute negligence or misconduct of the Managing General Partner. We may not be indemnified for any such liability arising out of a breach of our duty to the partnership or our negligence, fraud, bad faith or misconduct in the performance of our fiduciary duty. The limited partnership agreement provides for indemnification of the Managing General Partner by the partnership for any losses, judgments, liabilities, expenses and amounts paid in settlement of any claims sustained by it in connection with the partnership , provided that the same were not the result of negligence or misconduct on the part of the Managing General Partner. Nevertheless, we shall not be indemnified for liabilities arising under federal and state securities laws unless (1) there has been a successful adjudication on the merits of each count involving securities law violations or (2) the claims have been dismissed with prejudice on the merits by a court of competent jurisdiction or (3) a court of competent jurisdiction approves a settlement of the claims against a particular indemnitee and finds that indemnification of the settlement and the related costs should be made, and the court considering the request for indemnification has been advised of the position of the Securities and Exchange Commission and of the position of any state securities regulatory authority in which securities of the partnership were offered or sold as to indemnification for violations of securities laws; provided, however, the court need only be advised of the positions of the securities regulatory authorities of those states (a) which are specifically set forth in the prospectus and (b) in which plaintiffs claim they were offered or sold partnership units. A successful claim for indemnification would deplete partnership assets by the amount paid. As a result of these indemnification provisions, a purchaser of units may have a more limited right of legal action than he would have if provision were not included in the limited partnership agreement. To the extent that the indemnification provisions purport to include indemnification for liabilities arising under the Securities Act of 1933 in the opinion of the Securities and Exchange Commission, this indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. The limited partnership agreement also provides that the partnership shall not incur the cost of the portion of any insurance which insures any party against any liability as to which the party is prohibited from being indemnified. PRIOR ACTIVITIESPRIOR ACTIVITIESPRIOR ACTIVITIESPRIOR ACTIVITIESPRIOR ACTIVITIESPRIOR ACTIVITIES Prior PartnershipsPrior PartnershipsPrior PartnershipsPrior PartnershipsPrior PartnershipsPrior Partnerships Petroleum Development Corporation ("PDC"), as general partner, has previously sponsored ten private and nine public drilling programs. PDC 2003 Drilling Program is the tenth public drilling program sponsored by PDC as general partner. The various drilling programs sponsored by PDC have raised a total of over $250 million. Each of the previous programs has had as its objective the drilling, completion, and production of oil and natural gas from development wells. The 1984 and 1985 partnerships split investment between shallow oil wells located in Pennsylvania, and gas wells located in the Appalachian Basin. All of the partnerships since and including 1986 were targeted at shallow development gas wells. All funds raised for previous partnerships were spent according to plans as described in the respective private placement memorandum or prospectus. All of the partnerships continue in operation, with monthly cash distributions to investors in all programs continuing. All of the previous programs realized the anticipated tax benefits, and to date the IRS has neither audited any partnership nor challenged any deductions or credits claimed by investors, to the best of the Managing General Partner's knowledge. For several reasons, including the unpredictability of natural gas development and pricing and differences in property locations, program size, and economic conditions, operating results obtained by these prior partnerships should not be considered as indicative of the operating results obtainable by the partnerships. You should not assume that you will experience returns, if any, comparable to those experienced by investors in prior programs. <TABLE> <C> <C> <C> <C> <C> <C> <C> The following table is presented to indicate certain sale characteristics concerning previous gas limited partnerships sponsored by the Managing General Partner and its Affiliates. Number Date of Date of of Subscrip- Previous Partnership First Revenue Units Price tions from Assess- Partnership Formation Distribution Sold Per Unit Participants ment (1) Pennwest Petroleum Group 1984 12/84 4/85 32.83 $75,000 $2,462,500 -- Pennwest Petroleum Group 1985-A 11/85 3/86 31.00 75,000 2,325,000 -- Petrowest Gas Group 1986-A 11/86 4/87 15.00 75,000 1,125,000 -- Petrowest Gas Group 1987 8/87 1/88 67.25 20,000 1,345,000 -- Petrowest Gas Group 1987-B 11/87 4/88 57.875 20,000 1,157,500 -- PDC 1987 12/87 6/88 26.75 20,000 535,000 -- PDC 1988 7/88 12/88 45.30 20,000 906,000 -- PDC 1988-B 11/88 4/89 49.50 20,000 990,000 -- PDC 1988-C 12/88 6/89 78.00 20,000 1,560,000 -- PDC 1989-P 6/89 12/89 89.625 20,000 1,792,500 -- PDC 1989-A 10/89 4/90 60.50 20,000 1,210,000 -- PDC 1989-B 12/89 6/90 185.50 20,000 3,710,000 -- PDC 1990-A 6/90 11/90 70.30 20,000 1,406,000 -- PDC 1990-B 9/90 1/91 111.05 20,000 2,221,000 -- PDC 1990-C 11/90 5/91 173.90 20,000 3,478,000 -- PDC 1990-D 12/90 6/91 184.275 20,000 3,685,500 -- PDC 1991-A 3/91 11/91 136.95 20,000 2,739,000 -- PDC 1991-B 9/91 2/92 93.175 20,000 1,863,500 -- PDC 1991-C 11/91 4/92 136.80 20,000 2,736,000 -- PDC 1991-D 12/91 6/92 262.925 20,000 5,258,500 -- PDC 1992-A 5/92 11/92 145.435 20,000 2,908,700 -- PDC 1992-B 9/92 1/93 148.955 20,000 2,979,100 -- PDC 1992-C 11/92 4/93 319.444 20,000 6,388,900 -- PDC 1993-A 12/92 6/93 151.30 20,000 3,026,000 -- PDC 1993-B 5/93 11/93 121.75 20,000 2,435,000 -- PDC 1993-C 9/93 2/94 152.34 20,000 3,046,700 -- PDC 1993-D 11/93 4/94 145.45 20,000 2,909,000 -- PDC 1993-E 12/93 7/94 367.94 20,000 7,358,800 -- PDC 1994-A 5/94 11/94 102.775 20,000 2,055,500 -- PDC 1994-B 9/94 2/95 134.49 20,000 2,689,804 -- PDC 1994-C 11/94 4/95 117.294 20,000 2,345,870 -- PDC 1994-D 12/94 6/95 377.438 20,000 7,548,761 -- PDC 1995-A 5/95 10/95 73.28 20,000 1,465,603 -- PDC 1995-B 9/95 1/96 92.88 20,000 1,857,648 -- PDC 1995-C 11/95 4/96 105.72 20,000 2,114,496 -- PDC 1995-D 12/95 6/96 407.854 20,000 8,157,071 -- PDC 1996-A 6/96 11/96 128.81 20,000 2,576,200 -- PDC 1996-B 9/96 3/97 134.24 20,000 2,684,707 -- PDC 1996-C 11/96 5/97 197.32 20,000 3,946,478 -- PDC 1996-D 12/96 6/97 765.09 20,000 15,301,726 -- PDC 1997-A 5/97 11/97 208.34 20,000 4,166,946 -- PDC 1997-B 9/97 3/98 337.97 20,000 6,759,470 -- PDC 1997-C 11/97 5/98 302.16 20,000 6,043,257 -- PDC 1997-D 12/97 6/98 925.98 20,000 18,519,579 -- PDC 1998-A 6/98 12/98 263.61 20,000 5,272,135 -- PDC 1998-B 9/98 3/99 357.25 20,000 7,145,101 -- PDC 1998-C 11/98 5/99 390.64 20,000 7,812,783 -- PDC 1998-D 12/98 7/99 1,026.26 20,000 20,525,261 -- PDC 1999-A 5/99 11/99 240.08 20,000 4,800,739 -- PDC 1999-B 9/99 3/00 278.00 20,000 5,539,893 -- PDC 1999-C 11/99 5/00 354.38 20,000 7,087,559 -- PDC 1999-D 12/99 7/00 935.47 20,000 18,709,342 -- PDC 2000-A 5/00 11/00(2) 247.84 20,000 4,956,718 -- PDC 2000-B 9/00 3/01(3) 580.14 20,000 11,602,809 -- -------------- </TABLE> [FN] (1) Cash distribution made each month since date of first distribution. (2) Partnership closed on May 22, 2000. Wells were drilled in the second and third quarters of 2000; first revenue distribution to commence in November, 2000. (3) Partnership closed on September 13, 2000. Wells were drilled in the third and fourth quarters of 2000; first revenue distribution to commence in March, 2001. </FN> You should not consider operating results obtained by these prior partnerships as indicative of the operating results obtainable by the partnerships. Previous Drilling Activities The following table reflects the drilling activity of previous limited partnerships sponsored by the Managing General Partner and its Affiliates as of September 30, 2000. All of the wells drilled were Development Wells, except as otherwise noted. Productive Well Table September 30, 2000 <TABLE> <C> <C> <C> <C> <C> <C> <C> Gross Wells(1) Net Wells(2) Partnership Oil Gas Dry Oil Gas Dry Pennwest Petroleum Group 1984 27 13 - 27 5.5 - Pennwest Petroleum Group 1985-A 14 13 1 14 7.8 .6 Petrowest Gas Group 1986-A - 8 2 - 5.4 1.0 Petrowest Gas Group 1987 - 9 1(3) - 7.1 .1(3) Petrowest Gas Group - 9 1 - 5.5 .6 PDC 1987 - 7 - - 2.6 - PDC 1988 - 5 1 - 4.1 .8 PDC 1988-B - 5 - - 4.7 - PDC 1988-C - 9 1 - 7.0 .8 PDC 1989-P - 8 1 - 7.8 .9 PDC 1989-A - 6 1 - 5.5 .9 PDC 1989-B - 19 2 - 17.0 1.8 PDC 1990-A - 7 1 - 6.0 .9 PDC 1990-B - 11 - - 10.3 - PDC 1990-C - 15 2 - 14.4 2.0 PDC 1990-D - 16 1 - 15.8 1.0 PDC 1991-A - 13 - - 12.0 - PDC 1991-B - 8 2 - 7.2 2.0 PDC 1991-C - 12 2 - 11.2 1.5 PDC 1991-D - 21 5 - 20.4 4.4 PDC 1992-A - 12 2 - 11.0 2.0 PDC 1992-B - 14 1 - 12.3 .5 PDC 1992-C - 26 3 - 24.8 2.5 PDC 1993-A - 16 1 - 14.7 1.0 PDC 1993-B - 11 4 - 10.8 4.0 PDC 1993-C - 15 2 - 13.8 2.0 PDC 1993-D - 13 2 - 12.1 2.0 PDC 1993-E - 34 2 - 33.3 2.0 PDC 1994-A - 9 1 - 8.9 1.0 PDC 1994-B - 13 1 - 12.4 1.0 PDC 1994-C - 12 1 - 11.1 1.0 PDC 1994-D - 39 4 - 35.4 4.0 PDC 1995-A - 8 1 - 7.1 1.0 PDC 1995-B - 8 3 - 7.1 3.0 PDC 1995-C - 12 1 - 9.6 1.0 PDC 1995-D - 42 2 - 37.5 2.0 PDC 1996-A - 14 2 - 11.5 2.0 PDC 1996-B - 15 - - 13.2 - PDC 1996-C - 22 2 - 17.6 1.9 PDC 1996-D - 80(4) 5 - 62.3 4.3 PDC 1997-A - 21(5) 1 - 11.1 0.1 PDC 1997-B - 34(6) 2 - 23.4 2.0 PDC 1997-C - 28 2 - 19.5 1.1 PDC 1997-D - 94 7 - 72.7 4.5 PDC 1998-A - 29 2 - 19.2 2.0 PDC 1998-B - 41 2 - 26.9 1.9 PDC 1998-C - 37 1 - 29.9 1.0 PDC 1998-D - 89(7) 8(8) - 70.8(7) 7.6(8) PDC 1999-A - 24 0 - 19.5 0 PDC 1999-B - 26 1 - 21.0 0.5 PDC 1999-C - 24 2 - 20.9 2.0 PDC 1999-D - 51 0 - 37.5 0 PDC 2000-A(9) - 13 0 - 10.28 0 PDC 2000-B(10) - 8 0 - 6.30 0 Total ...... 41 1,148 92 41 932.78 80.2 --------------------- </TABLE> [FN] (1) Gross wells include all wells in which the partnerships owned a Working Interest. (2) Net wells are the number of gross wells multiplied by the percentage Working Interest owned by the partnerships in the gross wells. (3) The dry hole indicated represents an exploratory well. (4) Ten wells in the Angel Antrim Shale Project were productive wells and subsequently plugged in third quarter of 2000. (5) Three wells in the Angel Antrim Shale Project were productive wells and subsequently plugged in the third quarter of 2000. (6) Six wells in the East 23 Antrim Shale Project were productive wells and subsequently plugged in the third quarter of 2000. (7) One of the gas wells represents an exploratory well with a net interest of .9. (8) Three of the dry holes represent exploratory wells with a net interest of 2.7. (9) Partnership funded in May 2000. Wells were drilled in the second and third quarters of 2000. (10)Partnership funded in September 2000. Wells were drilled in third and fourth quarters of 2000. </FN> You should not consider operating results obtained by these prior partnerships as indicative of the operating results obtainable by the partnerships. Payout and Net Cash Tables The following tables provide information concerning the operating results of previous limited partnerships sponsored by the Managing General Partner and its Affiliates as of September 30, 2000. <TABLE> <C> <C> <C> <C> <C> Participants' Payout Table September 30, 2000 Revenues Before Deducting Operating Costs(3) Total Expendi- tures Total During Three Investors' I ncluding As of Months Ended Funds Operating Sept 30, Sept 30, Partnership Invested(1) Costs(2) 2000 2000 Pennwest Petroleum Group 1984 $2,093,125 $3,243,979 $2,163,801 $ 8,099 Pennwest Petroleum Group 1,976,250 3,097,127 1,786,112 14,316 Petrowest Gas Group 1986-A 956,250 1,549,690 1,018,465 8,527 Petrowest Gas Group 1987 1,143,250 1,884,809 1,504,069 13,820 Petrowest Gas Group 1987-B 983,875 1,487,076 784,258 6,627 PDC 1987 454,750 730,237 529,230 4,394 PDC 1988 770,100 1,282,472 1,123,674 8,612 PDC 1988-B 841,500 1,294,575 590,711 6,577 PDC 1988-C 1,326,000 2,077,972 1,151,325 15,071 PDC 1989-P 1,523,625 2,379,810 1,756,180 17,721 PDC 1989-A 1,028,500 1,668,596 1,327,356 20,213 PDC 1989-B 3,153,500 4,646,093 2,629,879 25,749 PDC 1990-A 1,195,100 1,695,732 713,374 7,208 PDC 1990-B 1,887,850 2,795,689 1,545,021 19,249 PDC 1990-C 2,956,300 4,353,842 2,270,149 47,167 PDC 1990-D 3,132,674 4,530,775 2,278,193 35,793 PDC 1991-A 2,328,150 3,397,679 2,059,586 26,107 PDC 1991-B 1,583,975 2,248,751 1,172,142 18,239 PDC 1991-C 2,325,600 3,341,139 1,820,720 29,154 PDC 1991-D 4,469,725 6,251,223 2,499,763 47,750 PDC 1992-A 2,472,396 3,388,875 1,001,546 16,350 PDC 1992-B 2,532,246 3,622,194 2,139,856 39,422 PDC 1992-C 5,430,563 7,837,725 5,315,774 92,378 PDC 1993-A 2,647,750 4,042,524 3,955,909 46,097 PDC 1993-B 2,130,620 2,855,887 1,268,475 26,739 PDC 1993-C 2,665,865 3,587,352 1,373,735 35,228 PDC 1993-D 2,545,375 3,340,033 1,461,711 36,767 PDC 1993-E 6,438,950 7,941,170 3,559,561 81,591 PDC 1994-A 1,798,563 2,445,889 885,089 18,989 PDC 1994-B 2,353,579 3,092,479 1,366,929 38,908 PDC 1994-C 2,052,636 2,676,111 1,033,025 29,514 PDC 1994-D 6,605,166 8,541,330 3,355,374 94,874 PDC 1995-A 1,282,403 1,720,767 801,135 21,238 PDC 1995-B 1,625,442 2,030,693 566,296 15,968 PDC 1995-C 1,850,184 2,384,000 702,715 22,615 PDC 1995-D 7,137,437 8,998,268 2,881,833 101,455 PDC 1996-A 2,241,294 2,889,680 1,506,880 45,978 PDC 1996-B 2,335,695 2,935,422 1,141,600 44,730 PDC 1996-C 3,433,436 4,207,650 1,220,517 52,741 PDC 1996-D 13,312,502 16,239,367 4,377,034 264,983 PDC 1997-A 3,625,243 4,358,220 1,048,643 54,289 PDC 1997-B 5,880,739 7,043,149 1,374,571 72,489 PDC 1997-C 5,257,634 6,400,198 1,746,468 149,909 PDC 1997-D 16,112,034 19,618,816 2,936,148 268,770 PDC 1998-A 4,586,758 5,619,947 1,149,084 149,450 PDC 1998-B 6,216,237 7,559,196 1,455,863 247,245 PDC 1998-C 6,797,121 8,302,405 1,513,966 211,539 PDC 1998-D 17,856,977 21,318,008 2,446,562 397,439 PDC 1999-A 4,176,643 4,955,837 669,943 170,696 PDC 1999-B 4,819,707 5,759,272 938,884 275,520 PDC 1999-C 6,166,176 7,300,098 928,314 421,424 PDC 1999-D 16,277,127 18,915,894 1,385,050 1,154,893 PDC 2000-A(4) 4,312,345 5,001,114 330,203 PDC 2000-B(5) 10,094,444 11,602,809 - - --------------------- </TABLE> [FN] (1) Total Subscriptions, less commissions, management fee, and offering costs. (2) Includes the total of the subscriptions, assessments, funds advanced by the Managing General Partner to the general or limited partnerships, inclusive of operating costs. None of the partnerships has borrowed any funds. (3) Represents the accrued gross revenues credited to the participants from oil and gas revenues net of royalties to landowners, overriding royalty interest, and other burdens, excluding interest income. (4) Partnership funded in May 2000; wells were drilled in the second and third quarters of 2000; first revenue distribution to commence in November, 2000. (5)Partnership funded in September 2000; wells were drilled in the third and fourth quarters of 2000; first revenue distribution to commence in March, 2001. </FN> You should not consider operating results obtained by these prior partnerships as indicative of the operating results obtainable by the partnerships. <TABLE> Participants' Net Cash Table September 30, 2000 <C> <C> <C> <C> <C> <C> <C> <C> Total Revenues After Deducting Cash Operating Costs(3) Distributions(4) Total Three Three Aggregate- Investors' Expenditures- Total Months Total Months Section 29 Partnership- Funds Net of As of Ended As of Ended Tax Credits(5) Invested (1) Operating- Sept Sept 30, Sept 30, Sept 30, Costs(2) 30, 2000 2000 2000 Pennwest Petroleum Group 1984 $2,093,125 $2,462,500 $1,382,322 $ 493 $1,312,820 $ $ 493$536,186 Pennwest Petroleum Group 1985-A 1,976,250 2,325,000 1,013,985 796 970,713 796651,854 Petrowest Gas Group 1986-A 956,250 1,125,000 593,775 1,524 567,005 1,524467,451 Petrowest Gas Group 1987 1,143,250 1,345,000 964,260 2,743 921,640 2,743528,770 Petrowest Gas Group 1987-B 983,875 1,157,500 454,682 806 428,312 806368,780 PDC 1987 454,750 535,000 333,993 750 316,421 750236,910 PDC 1988 770,100 906,000 747,202 2,047 710,313 2,047482,543 PDC 1988-B 841,500 990,000 286,136 663 262,296 663265,608 PDC 1988-C 1,326,000 1,560,000 633,353 990 590,297 990504,653 PDC 1989-P 1,523,625 1,792,500 1,168,870 5,264 1,090,985 5,264792,113 PDC 1989-A 1,028,500 1,210,000 868,760 11,493 825,676 11,493549,988 PDC 1989-B 3,153,500 3,710,000 1,693,797 5,766 1,588,151 5,766780,206 PDC 1990-A 1,195,100 1,406,000 423,642 1,545 363,429 1,545143,138 PDC 1990-B 1,887,850 2,221,000 970,332 2,640 932,572 2,640634,389 PDC 1990-C 2,956,300 3,478,000 1,394,307 20,178 1,325,069 20,178651,548 PDC 1990-D 3,132,674 3,685,500 1,432,918 12,473 1,372,051 12,473837,696 PDC 1991-A 2,328,150 2,739,000 1,400,907 5,279 1,297,442 5,279860,839 PDC 1991-B 1,583,975 1,863,500 786,890 7,659 758,015 7,659502,273 PDC 1991-C 2,325,600 2,736,000 1,215,580 10,915 1,128,980 10,915765,865 PDC 1991-D 4,469,725 5,258,500 1,507,040 15,814 1,434,028 15,814986,968 PDC 1992-A 2,472,396 2,908,700 521,371 3,548 442,647 3,548383,855 PDC 1992-B 2,532,246 2,979,100 1,496,762 17,415 1,435,705 17,415909,400 PDC 1992-C 5,430,563 6,388,900 3,866,948 44,298 3,744,834 44,2981,769,675 PDC 1993-A 2,647,750 3,026,000 2,939,384 20,054 2,745,208 20,054131,415 PDC 1993-B 2,130,620 2,435,000 847,588 11,646 788,681 11,646 -- PDC 1993-C 2,665,865 3,046,700 833,083 13,710 776,697 13,710-- PDC 1993-D 2,545,375 2,909,000 1,030,678 17,716 989,440 17,716-- PDC 1993-E 6,438,950 7,358,800 2,977,192 37,282 2,828,244 37,282-- PDC 1994-A 1,798,563 2,055,500 494,700 5,757 454,730 5,757-- PDC 1994-B 2,353,579 2,689,804 964,254 18,981 908,996 18,981-- PDC 1994-C 2,052,636 2,345,870 702,784 14,070 646,347 14,070-- PDC 1994-D 6,605,166 7,548,761 2,362,806 49,606 2,175,951 49,606 -- PDC 1995-A 1,282,403 1,465,603 545,971 11,452 497,912 11,452-- PDC 1995-B 1,625,442 1,857,648 393,252 6,707 337,244 6,707 -- PDC 1995-C 1,850,184 2,114,496 433,211 6,438 376,414 6,438-- PDC 1995-D 7,137,437 8,157,071 2,040,637 49,580 1,829,941 49,580-- PDC 1996-A 2,241,294 2,576,200 1,193,400 25,355 1,058,582 25,355-- PDC 1996-B 2,335,695 2,684,707 890,885 22,524 765,969 22,524-- PDC 1996-C 3,433,436 3,946,478 977,345 25,266 860,070 25,266-- PDC 1996-D 13,312,502 15,301,726 3,439,393 234,876 3,081,303 234,876-- PDC 1997-A 3,625,243 4,166,946 857,368 31,256 763,447 31,256-- PDC 1997-B 5,880,739 6,759,470 1,090,892 36,895 941,491 36,895-- PDC 1997-C 5,257,634 6,043,257 1,389,527 159,310 1,067,616 159,310--- PDC 1997-D 16,112,034 18,519,579 1,836,911 125,731 1,453,026 125,731-- PDC 1998-A 4,586,758 5,272,135 801,273 98,538 650,246 98,538-- PDC 1998-B 6,216,237 7,145,101 1,041,768 172,509 948,370 172,509-- PDC 1998-C 6,797,121 7,812,783 1,024,345 123,700 758,688 123,700-- PDC 1998-D 17,856,977 20,525,261 1,653,815 231,479 1,192,251 231,479-- PDC 1999-A 4,176,643 4,800,739 514,844 124,777 375,255 124,777-- PDC 1999-B 4,819,707 5,539,893 719,504 208,903 532,300 208,903-- PDC 1999-C 6,166,176 7,087,559 715,775 343,855 474,453 343,855-- PDC 1999-D 16,277,127 18,709,342 1,178,498 991,195 991,195 991,195-- PDC 2000-A(6) 4,312,345 4,956,718 285,807 - - - - -- PDC 2000-B(7) 10,094,444 11,602,809 -- - -- -- -- --------------------- </TABLE> [FN] (1) Total Subscriptions, less commissions, management fee, and offering costs. (2) Includes the total of the subscriptions, assessments, funds advanced by the Managing General Partner to the general or limited partnerships, exclusive of operating costs. None of the partnerships has borrowed any funds. (3) Represents the accrued gross revenues credited from oil and gas production, excluding operating costs, landowners' royalty interests, overriding royalty interests, and other burdens. (4) Represents the net cash distributed to the partnerships. All cash distributions to the partners were made from operations and constituted ordinary income. (5) Wells drilled after December 31, 1992 do not qualify for the credit. (6) Partnership funded in May 2000; wells were drilled in the second and third quarters of 2000; first revenue distribution to commence in November, 2000. (7) Partnership funded in September 2000; wells were drilled in the third and fourth quarters of 2000; first revenue distribution to commence in March, 2001. </FN> You should not consider operating results obtained by these prior partnerships as indicative of the operating results obtainable by the partnerships. <TABLE> <C> <C> <C> <C> Managing General Partner's Payout Table September 30, 2000 Revenues Before Deducting Total Expenditures Operating Costs(2) Including Total As of During Three Months Partnership Operating Costs(1) Sept 30, 2000 Ended Sept 30, 2000 Pennwest Petroleum Group 1984 $ 161,123 $276,481 $ 1,325 Pennwest Petroleum Group 1985-A 150,942 236,297 2,340 Petrowest Gas Group 1986-A 81,557 163,002 1,454 Petrowest Gas Group 1987 99,197 232,581 2,293 Petrowest Gas Group 1987-B 78,268 121,620 1,109 PDC 1987 38,436 82,765 742 PDC 1988 67,486 182,760 1,463 PDC 1988-B 68,138 97,604 1,129 PDC 1988-C 110,367 183,377 2,519 PDC 1989-P 125,247 275,230 2,948 PDC 1989-A 225,474 329,617 5,053 PDC 1989-B 565,148 633,536 6,437 PDC 1990-A 199,060 165,011 1,802 PDC 1990-B 349,611 376,195 4,812 PDC 1990-C 530,643 532,717 11,792 PDC 1990-D 537,538 513,769 8,948 PDC 1991-A 413,278 500,074 6,527 PDC 1991-B 262,989 283,056 4,560 PDC 1991-C 400,403 440,664 7,288 PDC 1991-D 718,273 578,305 11,937 PDC 1992-A 296,250 85,543 -0- PDC 1992-B 431,376 524,545 9,856 PDC 1992-C 930,077 1,258,805 23,094 PDC 1993-A 500,950 859,684 10,119 PDC 1993-B 323,879 270,569 5,870 PDC 1993-C 397,648 259,360 7,733 PDC 1993-D 368,583 289,195 8,071 PDC 1993-E 822,685 719,471 17,910 PDC 1994-A 542,393 211,496 4,747 PDC 1994-B 685,491 332,548 9,727 PDC 1994-C 593,317 255,520 7,381 PDC 1994-D 1,888,871 812,718 23,615 PDC 1995-A 381,756 193,291 5,303 PDC 1995-B 446,002 131,145 3,985 PDC 1995-C 525,403 165,884 5,124 PDC 1995-D 1,978,086 677,008 22,338 PDC 1996-A 666,915 376,720 11,495 PDC 1996-B 695,396 285,400 11,183 PDC 1996-C 1,014,933 305,129 13,185 PDC 1996-D 3,995,186 1,094,258 66,246 PDC 1997-A 1,025,550 262,161 13,572 PDC 1997-B 1,668,584 343,641 18,122 PDC 1997-C 1,544,558 436,617 37,477 PDC 1997-D 4,414,231 734,036 67,192 PDC 1998-A 1,223,644 287,271 37,363 PDC 1998-B 1,657,585 363,965 61,811 PDC 1998-C 1,821,687 378,491 52,885 PDC 1998-D 4,662,433 611,640 99,360 PDC 1999-A 1,082,937 167,486 42,674 PDC 1999-B 1,259,773 234,721 68,880 PDC 1999-C 1,594,680 232,078 105,356 PDC 1999-D 4,120,920 346,262 288,723 PDC 2000-A(3) 1,089,185 82,551 - PDC 2000-B(4) 2,523,611 - - --------------------- </TABLE> [FN] (1) Includes Managing General Partner share of drilling costs. (2) Represents the accrued gross revenues credited to the managing general partner(s). (3) Partnership funded in May 2000; wells were drilled in the second and third quarters of 2000; first revenue distribution to commence in November, 2000. (4) Partnership funded in September 2000; wells were drilled during the third and fourth quarters of 2000; first revenue distribution to commence in March, 2001. </FN> You should not consider operating results obtained by these prior partnerships as indicative of the operating results obtainable by the partnerships. <TABLE> <C> <C> <C> <C> <C> <C> <C> Managing General Partner's Net Cash Table September 30, 2000 Total Revenues After Deducting Cash Operating Costs(2) Distributions(3) Total Expendi- Aggregate itures Three Three Section Net of Total Ended Total Months 29 Tax Operating As of Sept Sept As of Sept Ended Sept Credits Partnership Costs 30, 2000 30, 2000 30, 2000 30, 2000 (4) Pennwest Petroleum Group 1984 $ 129,605 $244,963 $ 1,125 $241,305 $ 1,125 $28,220 Pennwest Petroleum Group 1985-A 122,368 207,723 1,985 205,446 1,985 34,308 Petrowest Gas Group 1986-A 59,210 140,655 1,085 136,215 1,085 24,603 Petrowest Gas Group 1987 70,789 204,173 1,710 197,961 1,710 27,830 Petrowest Gas Group 1987-B 60,921 104,273 803 99,898 803 19,409 PDC 1987 28,158 72,488 550 69,844 550 12,469 PDC 1988 47,684 162,958 1,117 157,409 1,117 25,397 PDC 1988-B 52,105 81,571 818 76,964 818 13,979 PDC 1988-C 82,105 155,115 1,778 147,798 1,778 26,561 PDC 1989-P 94,342 244,325 2,292 230,937 2,292 41,690 PDC 1989-A 114,278 218,421 2,873 207,650 2,873 137,497 PDC 1989-B 350,389 418,777 1,441 392,368 1,441 195,051 PDC 1990-A 132,789 98,740 386 83,687 386 35,784 PDC 1990-B 209,761 236,345 660 226,905 660 158,597 PDC 1990-C 328,478 330,553 5,004 313,243 5,044 162,887 PDC 1990-D 348,075 324,306 3,118 309,089 3,118 209,424 PDC 1991-A 258,683 345,479 1,320 319,613 1,320 215,210 PDC 1991-B 175,997 196,064 1,915 190,289 1,915 125,568 PDC 1991-C 258,400 298,661 2,729 277,011 2,729 191,466 PDC 1991-D 496,639 356,670 3,953 338,417 3,953 246,742 PDC 1992-A 274,711 64,004 -0- 44,323 -0- -0- PDC 1992-B 281,361 374,530 4,354 362,319 4,354 227,350 PDC 1992-C 603,396 932,124 11,074 907,702 11,074 442,419 PDC 1993-A 294,194 652,928 4,402 610,304 4,402 29,568 PDC 1993-B 236,736 183,426 2,556 170,495 2,556 -- PDC 1993-C 296,207 157,919 3,009 145,542 3,009 -- PDC 1993-D 282,819 203,431 3,889 194,379 3,889 -- PDC 1993-E 715,438 612,224 8,184 579,528 8,184 -- PDC 1994-A 449,641 118,743 1,439 109,969 1,439 -- PDC 1994-B 588,395 235,453 4,745 221,638 4,745 -- PDC 1994-C 513,159 175,362 3,517 161,253 3,517 -- PDC 1994-D 1,651,292 575,139 12,348 528,425 12,348 -- PDC 1995-A 320,601 132,136 2,863 120,121 2,863 -- PDC 1995-B 406,361 91,504 1,677 77,502 1,677 -- PDC 1995-C 462,546 103,028 1,441 88,829 1,441 -- PDC 1995-D 1,784,359 483,281 10,913 430,607 10,913 -- PDC 1996-A 560,324 270,129 6,339 236,425 6,339 -- PDC 1996-B 583,924 173,928 5,631 142,699 5,631 -- PDC 1996-C 858,359 148,556 6,316 119,237 6,316 -- PDC 1996-D 3,328,126 427,199 (37,898)(7) 337,677 (37,898)(7)-- PDC 1997-A 906,311 142,921 7,814 119,441 7,814 -- PDC 1997-B 1,470,185 145,243 9,224 107,893 9,224 -- PDC 1997-C 1,314,409 206,467 (26,125)(7) 125,989 (26,125)(7) -- PDC 1997-D 4,028,009 347,814 31,432 251,843 31,432 -- PDC 1998-A 1,146,758 200,317 24,634 162,560 24,634 -- PDC 1998-B 1,554,059 260,440 43,127 237,091 43,127 -- PDC 1998-C 1,699,280 256,084 30,925 189,670 30,925 -- PDC 1998-D 4,464,244 413,451 57,869 298,060 57,869 -- PDC 1999-A 1,044,161 128,710 31,194 93,813 31,194 -- PDC 1999-B 1,204,927 179,875 52,225 133,074 52,225 -- PDC 1999-C 1,541,544 178,943 85,963 118,613 85,963 -- PDC 1999-D 4,069,282 294,624 247,798 247,798 247,798 -- PDC 2000-A(5) 1,078,086 71,452 - -- -- -- PDC 200-B(6) 2,523,611 -- - -- -- -- --------------------- </TABLE> [FN] (1) Includes Managing General Partner share of drilling costs, exclusive of operating costs. (2) Represents the accrued gross revenues credited from oil and gas production, excluding operating costs, landowners' royalty interests, Overriding Royalty Interests, and other burdens. (3) Represents the net cash received from the partnerships' cash distributions. All cash distributions to the managing general partner were made from operations. (4) Wells drilled after December 31, 1992 do not qualify for the credit. (5) Partnership funded in May 2000; wells were drilled in the second and third quarters of 2000; first revenue distribution to commence in November, 2000. (6) Partnership funded in September 2000; wells were drilled in the third and fourth quarters of 2000; first revenue distribution to commence in March, 2001. (7) Reflects payment for preferred cash distribution paid to investing partners. </FN> You should not consider operating results obtained by these prior partnerships as indicative of the operating results obtainable by the partnerships. Tax Deductions and Tax Credits of Participants in Previous Partnerships The following table reflects the participants' share of the previous limited partnerships' available tax deductions that were reported in the partnerships' tax returns and the share of tax deductions as a percentage of their subscriptions. The following percentages do not reflect the effect of the revenues from the partnerships' operations and are subject to audit adjustments by the Service. The table also reflects the aggregate Section 29 nonconventional fuel production credit as a percentage of the participants' initial investment over the life of each partnership through September 30, 2000, and the federal tax savings from deductions and tax credits based on the maximum marginal tax rate in each year. Wells drilled after December 31, 1992 do not qualify for the credit. The final column shows these tax shelter ratios calculated in accordance with Service regulations. Programs with anticipated tax shelter ratios of greater than 2:1 in any of the first five years must register as tax shelters. The Managing General Partner does not expect any of the prior partnerships or the partnerships in the current Program to exceed the 2:1 ratio. The following table is based on past experience and should not be considered as necessarily indicative of the results that may be expected in these partnerships. It is suggested that prospective subscribers consult with their tax advisors concerning their specific tax circumstances and the tax benefits available to them individually, which may materially vary in various circumstances. <TABLE> <C> <C> <C> <C> <C> <C> Estimated First Aggregate Aggregate Federal Tax Year Tax Deductions Section 29 Tax Shelter Deductions Thereafter Tax Credits(1) Savings(2) Ratio(3) *Pennwest Petroleum Group 1984 70.87% 27.22% 21.77% 68.39% 1.4:1 *Pennwest Petroleum Group 1985-A 69.51% 28.27% 28.04% 73.45% 1.5:1 *Petrowest Gas Group 1986-A 70.10% 28.91% 41.55% 86.69% 1.8:1 *Petrowest Gas Group 1987 63.09% 34.09% 39.31% 75.19% 2.3:1 *Petrowest Gas Group 1987-B 68.70% 26.85% 31.86% 67.40% 2.1:1 *PDC 1987 70.30% 32.67% 44.28% 82.51% 2.6:1 *PDC 1988 68.57% 33.62% 53.26% 87.37% 2.9:1 *PDC 1988-B 66.70% 32.59% 26.83% 60.08% 1.9:1 *PDC 1988-C 69.20% 30.50% 32.35% 65.75% 2.1:1 *PDC 1989-P 63.68% 31.73% 44.19% 76.31% 2.5:1 *PDC 1989-A 69.80% 35.78% 45.45% 81.22% 2.6:1 *PDC 1989-B 69.10% 28.77% 21.03% 53.92% 1.7:1 *PDC 1990-A 67.92% 19.03% 10.18% 39.29% 1.2:1 *PDC 1990-B 71.50% 23.56% 28.56% 60.58% 2.0:1 *PDC 1990-C 70.60% 26.95% 18.73% 51.81% 1.6:1 *PDC 1990-D 69.70% 29.44% 22.73% 56.45% 1.8:1 *PDC 1991-A 69.80% 22.52% 31.43% 61.45% 2.0:1 *PDC 1991-B 67.00% 27.18% 26.95% 57.50% 1.9:1 *PDC 1991-C 69.60% 27.56% 27.99% 59.81% 2.0:1 *PDC 1991-D 69.80% 23.74% 18.77% 49.29% 1.6:1 *PDC 1992-A 68.24% 18.23% 13.20% 41.40% 1.3:1 *PDC 1992-B 69.60% 29.08% 30.53% 63.43% 2.1:1 *PDC 1992-C 69.20% 31.63% 27.70% 61.46% 2.0:1 *PDC 1993-A 69.00% 40.24% 4.34% 41.43% 1.2:1 *PDC 1993-B 68.10% 25.57% -- 34.62% 0.9:1 *PDC 1993-C 68.80% 23.97% -- 34.26% 0.9:1 *PDC 1993-D 68.60% 22.11% -- 33.44% 0.9:1 *PDC 1993-E 67.60% 25.54% -- 34.44% 0.9:1 *PDC 1994-A 87.70% 5.25% -- 36.81% 0.9:1 *PDC 1994-B 89.40% 7.15% -- 38.23% 1.0:1 *PDC 1994-C 89.70% 5.97% -- 37.88% 1.0:1 *PDC 1994-D 89.90% 6.69% -- 38.25% 1.0:1 *PDC 1995-A 85.66% 12.89% -- 39.02% 1.0:1 *PDC 1995-B 89.02% 5.91% -- 37.59% 0.9:1 PDC 1995-C 89.71% 5.45% -- 37.68% 1.0:1 PDC 1995-D 89.94% 5.52% -- 37.80% 1.0:1 PDC 1996-A 89.94% 7.62% -- 38.64% 1.0:1 PDC 1996-B 86.82% 8.29% -- 37.66% 1.0:1 PDC 1996-C 89.42% 4.90% -- 37.35% 0.9:1 PDC 1996-D 89.49% 4.54% -- 37.24% 0.9:1 PDC 1997-A 89.50% 3.15% -- 36.69% 0.9:1 PDC 1997-B 89.50% 3.08% -- 36.66% 0.9:1 PDC 1997-C 89.50% 4.43% -- 37.20% 0.9:1 PDC 1997-D 89.50% 2.87% -- 36.58% 0.9:1 PDC 1998-A 89.50% 3.44% -- 36.80% 0.9:1 PDC 1998-B 89.50% 3.95% -- 37.01% 0.9:1 PDC 1998-C 89.50% 3.09% -- 36.66% 0.9:1 PDC 1998-D 89.50% 1.91% -- 36.20% 0.9:1 PDC 1999-A 89.50% 1.04% -- 35.85% 0.9:1 PDC 1999-B 89.50% 1.07% -- 35.87% 0.9:1 PDC 1999-C 89.50% 0.60% -- 35.68% 0.9:1 PDC 1999-D 89.50% 0.20% -- 35.52% 0.9:1 PDC 2000-A(4) 89.50% 0.00% -- 35.44% 0.9:1 PDC 2000-B(5) 89.50% 0.00% -- 35.44% 0.9:1 </TABLE> *Partnerships in existence for over five years. --------------------- [FN] (1) Wells drilled after December 31, 1992 do not qualify for the credit. (2) The Estimated Federal Tax Savings column reflects the percentage savings in taxes which would have been paid by an investor had he not had the use of the various deductions and credits available to a partner in the program and it assumes full use of deductions and tax credits at maximum federal tax rates of 50% in 1984-1986, 40% in 1987 and 1988, and 33% in 1989 and 1990, 31% in 1991-1992, 36% in 1993, and 39.6% in 1994 and t afterward. (3) Total deductions plus 200% of credits generated for partnerships first offered before December 31, 1986. Total deductions plus 350% of credits generated for partnerships offered after December 31, 1986. (4) Partnership funded in May 2000. (5) Partnership funded in September 2000. </FN> You should not consider operating results obtained by these prior partnerships as indicative of the operating results obtainable by the partnerships. <TABLE> Percentage of Gross Return on Subscriptions Through September 30, 2000 From Cash Distributions, Tax Savings from Deductions and Tax Credits(1) <C> <C> <C> <C> <C> <C> <C> Tax Total Cumulative Total Cash Deductions Return of Year/ Cash Section 29 and Tax Cash, Tax Months Program Distributions Credit(3) Tax Credit Effected(4) Deduction(5) Producing *Pennwest Petroleum 1984 53.28% 21.77% 75.05% 50.54% 125.59% 15/6 *Pennwest Petroleum 1985-A 41.52% 28.04% 69.56% 49.32% 118.88% 14/7 **Petrowest Gas Group 1986 50.14% 41.55% 91.70% 49.10% 140.79% 13/6 **Petrowest Gas Group 1987 68.28% 39.31% 107.60% 39.76% 147.36% 12/9 **Petrowest Gas Group 1987-B 36.92% 31.86% 68.78% 39.37% 108.15% 12/6 **PDC 1987 58.84% 44.28% 103.13% 42.35% 145.47% 12/4 **PDC 1988 77.64% 53.26% 130.91% 38.19% 169.10% 11/10 **PDC 1988-B 26.45% 26.83% 53.28% 37.23% 90.50% 11/6 **PDC 1988-C 37.74% 32.35% 70.08% 37.39% 107.47% 11/4 **PDC 1989-P 60.21% 44.19% 104.40% 35.94% 140.34% 10/10 **PDC 1989-A 67.87% 45.45% 113.33% 39.99% 153.32% 10/6 **PDC 1989-B 42.61% 21.03% 63.64% 36.80% 100.44% 10/4 **PDC 1990-A 25.85% 10.18% 36.03% 32.59% 68.62% 9/11 **PDC 1990-B 41.79% 28.56% 70.36% 35.82% 106.18% 9/9 **PDC 1990-C 37.74% 18.73% 56.47% 36.97% 93.45% 9/5 **PDC 1990-D 37.03% 22.73% 59.76% 37.69% 97.45% 9/4 **PDC 1991-A 47.22% 31.43% 78.64% 33.81% 112.45% 8/11 **PDC 1991-B 40.39% 26.95% 67.34% 34.31% 101.65% 8/8 **PDC 1991-C 40.94% 27.99% 68.93% 35.70% 104.63% 8/6 **PDC 1991-D 27.13% 18.77% 45.90% 34.26% 80.16% 8/4 **PDC 1992-A 15.22% 13.20% 28.42% 31.67% 60.08% 7/11 **PDC 1992-B 47.59% 30.53% 78.12% 36.85% 114.97% 7/9 **PDC 1992-C 57.52% 27.70% 85.22% 37.79% 123.01% 7/6 **PDC 1993-A 89.06% 4.34% 93.41% 41.45% 134.86% 7/4 **PDC 1993-B 32.12% -- 32.12% 38.36% 70.49% 6/11 **PDC 1993-C 22.29% -- 25.29% 37.97% 63.26% 6/8 **PDC 1993-D 33.41% -- 33.41% 36.06% 70.48% 6/6 **PDC 1993-E 37.74% -- 37.74% 38.16% 75.91% 6/3 **PDC 1994-A 21.49% -- 21.49% 40.53% 62.02% 5/11 **PDC 1994-B 32.63% -- 32.63% 42.10% 74.72% 5/8 **PDC 1994-C 26.96% -- 26.96% 41.71% 68.67% 5/6 **PDC 1994-D 27.80% -- 27.80% 42.11% 69.92% 5/4 **PDC 1995-A 32.81% -- 32.81% 42.97% 75.78% 5/0 **PDC 1995-B 17.56% -- 17.56% 41.39% 58.94% 4/9 **PDC 1995-C 17.23% -- 17.23% 41.49% 58.72% 4/6 **PDC 1995-D 22.17% -- 22.17% 41.62% 63.79% 4/4 **PDC 1996-A 39.75% -- 39.75% 42.54% 82.29% 3/11 **PDC 1996-B 26.81% -- 26.81% 41.47% 68.28% 3/7 **PDC 1996-C 20.080 -- 20.08% 41.12% 61.21% 3/5 **PDC 1996-D 17.96% -- 17.96% 41.00% 58.95% 3/4 **PDC 1997-A 17.13% -- 17.13% 40.40% 57.52% 2/11 **PDC 1997-B 12.63% -- 12.63% 40.37% 53.00% 2/7 **PDC 1997-C 15.98% -- 15.98% 40.96% 56.94% 2/5 **PDC 1997-D 7.40% -- 7.40% 40.27% 47.68% 2/3 **PDC 1998-A 12.26% -- 12.26% 40.52% 52.78% 1/10 **PDC 1998-B 13.13% -- 13.13% 40.75% 53.87% 1/7 **PDC 1998-C 9.59% -- 9.59% 40.37% 49.96% 1/5 **PDC 1998-D 5.76% -- 5.76% 39.86% 45.62% 1/3 **PDC 1999-A 7.82% -- 7.82% 39.47% 47.29% 0/11 *PDC 1999-B 9.61% -- 9.61% 39.49% 49.10% 0/7 *PDC 1999-C 6.69% -- 6.69% 39.28% 45.98% 0/5 *PDC 1999-D 5.30% -- 5.30% 39.11% 44.41% 0/3 *PDC 2000-A(6) 0.00% -- 0.00% 39.02% 39.02% 0/0 *PDC 2000-B(7) 0.00% -- 0.00% 39.02% 39.02% 0/0 * Program contains oil & gas production ** Program contains gas production </TABLE> --------------------- [FN] (1) This table assumes investors were able to fully utilize all tax benefits at the maximum marginal Federal rate plus an assumed state rate of 4% (2) Cash distributions to investors divided by investors' initial investment. (3) Credit earned on qualified production. Wells drilled after December 31, 1992 do not qualify for the credit. (4) Tax savings from deductions assuming investor is in the highest marginal bracket. Rates used were 54% in 1984, 1985 and 1986, 42.5% in 1987, 37% in 1988, 1989 and 1990, 35% in 1991 and 1992, 40% in 1993, and 43.6% in 1994 and afterward . (5) This column represents the sum of the percentage amounts set forth in columns 1, 2, and 4 of this table. (6) Partnership funded in May 2000; wells were drilled in the second and the third quarters of 2000; first revenue distribution to commence in November, 2000. (7) Partnership funded in September 2000; wells were drilled during the third and fourth quarters of 2000; first revenue distribution to commence in March, 2001. </FN> You should not consider operating results obtained by these prior partnerships as indicative of the operating results obtainable by the partnerships. Partnership Estimated Proved Reserves and Future Net Revenues The following table presents information regarding the public drilling programs sponsored by the Managing General Partner. The table reflects with respect to each partnership the estimated proved reserves and future net reserves as of January 1, 2000. The information presented has been derived from reports prepared by an independent petroleum consultant, Wright & Company, Inc. and by the Managing General Partner's petroleum engineers as noted below. <TABLE> <C> <C> <C> <C> <C> <C> Partnership Proved Reserves and Future Net Revenues as of January 1, 2000(1) Category ofEstimated Estimated Estimated Percent Value PartnershipProved ReservesNet OilNet GasFuture NetDiscounted BBL ReservesReserves Revenuesat 10% Annum BblMCF PDC 1989-A(2).....Proved Developed 74,289 699,530 $2,512,336 $919,538 Proved Undeveloped - - Totals 74,289 699,530 $2,512,336 $919,538 PDC 1989-B(2).....Proved Developed - 868,746 $1,088,606 $494,607 Proved Undeveloped - - - - Totals - 868,746 $1,088,606 $494,607 PDC 1990-A(2).....Proved Developed - 185,298 $166,338 $101,476 Proved Undeveloped - - - - Totals - 185,298 $166,338 $101,476 PDC 1990-B(2).....Proved Developed - 908,911 $1,527,737 $427,844 Proved Undeveloped - - - - Totals - 908,911 $1,527,737 $427,844 PDC 1990-C(2).....Proved Developed - 1,352,069 $2,138,263 $882,260 Proved Undeveloped - - - - Totals - 1,352,069 $2,138,263 $882,260 PDC 1990-D(2).....Proved Developed - 1,852, 164 $3,028,473 $941,893 Proved Undeveloped - - - - Totals - 1,852, 164 $3,028,473 $941,893 PDC 1991-A(2).....Proved Developed - 1,076,916 $1,591,994 $514,817 Proved Undeveloped - - - - Totals - 1,076, 916 $1,591,994 $514,817 PDC 1991-B(2).....Proved Developed - 808,269 $1,404,561 $583,489 Proved Undeveloped - - - - Totals - 808,269 $1,404,561 $583,489 PDC 1991-C(2).....Proved Developed - 1,261,450 $1,909,232 $657,947 Proved Undeveloped - - - - Totals - 1,261,450 $1,909,232 $657,947 PDC 1991-D(2).....Proved Developed - 1,537,323 $2,284,487 $977,741 Proved Undeveloped - - - - Totals - 1,537,323 $2,284,487 $977,741 PDC 1992-A(2).....Proved Developed 240,538 $253,254 $153,330 Proved Undeveloped - - - - Totals - 240,538 $253,254 $153,330 PDC 1992-B(2).....Proved Developed - 2,014,676 $3,225,125 $1,099,980 Proved Undeveloped - - - - Totals - 2,014,676 $3,225,125 $1,099,980 PDC 1992-C(2).....Proved Developed - 3,520,851 $5,857,807 $2,603,934 Proved Undeveloped - - - - Totals - 3,520,851 $5,857,807 $2,603,934 PDC 1993-A(2).....Proved Developed - 1,641,727 $2,576,724 $883,285 Proved Undeveloped - - - - Totals - 1,641,727 $2,576,724 $883,285 PDC 1993-B(2).....Proved Developed - 1,134,522 $1,793,194 $647,173 Proved Undeveloped - - - - Totals - 1,134,522 $1,793,194 $647,173 PDC 1993-C(2).....Proved Developed - 1,884,169 $3,326,479 $1,050,325 Proved Undeveloped - - - - Totals - 1,884,169 $3,326,479 $1,050,325 PDC 1993-D(2).....Proved Developed - 1,465,134 $2,518,505 $803,682 Proved Undeveloped - - - - Totals - 1,465,134 $2,518,505 $803,682 PDC 1993-E(2).....Proved Developed 3,097 3,973, 279 $6,955,078 $2,182,565 Proved Undeveloped - - - Totals 3,097 3,973,279 $6,955,078 $2,182,565 PDC 1994-A(2).....Proved Developed - 906,022 $1,394,953 $430,224 Proved Undeveloped - - - - Totals - 906,022 $1,394,953 $430,224 PDC 1994-B(2).....Proved Developed - 1,248,766 $2,100,211 $858,829 Proved Undeveloped - - - - Totals - 1,248,766 $2,100,211 $858,829 PDC 1994-C(2).....Proved Developed - 1,204,411 $2,015,723 $714,428 Proved Undeveloped - - - - Totals - 1,204,411 $2,015,723 $714,428 PDC 1994-D(2).....Proved Developed - 3,259,918 $5,415,330 $2,266,064 Proved Undeveloped - - - - Totals - 3,259,918 $5,415,330 $2,266,064 PDC 1995-A(2).....Proved Developed - 711,605 $975,223 $494,330 Proved Undeveloped - - - - Totals - 711,605 $975,223 $494,330 PDC 1995-B(2).....Proved Developed - 530,656 $856,146 $307,080 Proved Undeveloped - - - - Totals - 530,656 $856,146 $307,080 PDC 1995-C(2).....Proved Developed - 650,795 $783,295 $366,655 Proved Undeveloped - - - - Totals - 650,795 $783,295 $366,655 PDC 1995-D(2).....Proved Developed - 2,134,423 $2,866,463 $1,549,272 Proved Undeveloped - - - - Totals - 2,134,423 $2,866,463 $1,549,272 PDC 1996-A(2).....Proved Developed - 1,087, 960 $1,886,496 $971,911 Proved Undeveloped - - - - Totals - 1,087,960 $1,886,496 $971,911 PDC 1996-B(2).....Proved Developed - 901,311 $1,184,975 $684,284 Proved Undeveloped - - - - Totals - 901,311 $1,184,975 $684,284 PDC 1996-C(2).....Proved Developed - 1,184,745 $1,621,370 $855,348 Proved Undeveloped - - - - Totals - 1,184, 745 $1,621,370 $855,348 PDC 1996-D(2).....Proved Developed - 4,978,478 $6,681,857 $3,604,734 Proved Undeveloped - - - - Totals - 4,978,478 $6,681,857 $3,604,734 PDC 1997-A(2).....Proved Developed - 829,406 $1,188,850 $672,483 Proved Undeveloped - - - - Totals - 829,406 $1,188,850 $672,483 PDC 1997-B(2).....Proved Developed - 1,439,718 $1,909,143 $1,139,079 Proved Undeveloped - - - - Totals - 1,439,718 $1,909,143 $1,139,079 PDC 1997-C(2).....Proved Developed - 2,829,964 $4,579,592 $2,345,974 Proved Undeveloped - - - - Totals - 2,829,964 $4,579,592 $2,345,974 PDC 1997-D(3).....Proved Developed - 6,313,050 $10,799,608 $5,269,317 Proved Undeveloped - - - - Totals - 6,313,050 $10,799,608 $5,269,317 PDC 1998-A(3).....Proved Developed - 3,528,019 $5,401,068 $3,216,135 Proved Undeveloped - - - - Totals - 3,528,019 $5,401,068 $3,216,135 PDC 1998-B(3).....Proved Developed - 6,359,734 $10,329,354 $5,958,968 Proved Undeveloped - - - - Totals - 6,359,734 $10,329,354 $5,958,968 PDC 1998-C(3).....Proved Developed - 5,603,611 $8,165,363 $5,106,221 Proved Undeveloped - - - - Totals - 5,603,611 $8,165,363 $5,106,221 PDC 1998-D(3).....Proved Developed - 9,050,807 $15,674,942 $8,638,087 Proved Undeveloped - - - - Totals - 9,050,807 $15,674,942 $8,638,087 PDC 1999-A(3).....Proved Developed - 3,769,217 $7,514,392 $3,680,417 Proved Undeveloped - - - - Totals - 3,769,217 $7,514,392 $3,680,417 PDC 1999-B(3).....Proved Developed 35,916 5,056,558 10,253,444 $5,319,900 Proved Undeveloped - - - - Totals 35,916 5,056,558 10,253,444 $5,319,900 PDC 1999-C(3).....Proved Developed 36,650 3,147,846 6,925,986 $3,823,823 Proved Undeveloped - - - - Totals 36,650 3,147,846 6,925,986 $3,823,823 PDC 1999-D(4).....Proved Developed - - - - Proved Undeveloped - - - - Totals - - - - PDC 2000-A(4).....Proved Developed - - - - Proved Undeveloped - - - - Totals - - - - PDC 2000-B(4).....Proved Developed - - - - Proved Undeveloped - - - - Totals - - - - </TABLE> [FN] (1) For the partnerships PDC 1989-A through PDC 1992-C and for PDC 1994-A through PDC 1998-C, we own 20% of the reserves listed and the investor partners own 80% of the reserves listed above. In the PDC 1993-A, PDC 1993-B, PDC 1993-C, PDC 1993-D and PDC 1993-E Limited Partnerships, we own 18% of the reserves listed and the investor partners own 82% of the reserves listed above. (2) Reserve reports prepared by our petroleum engineers. (3) Reserve reports prepared by an independent petroleum consultant, Wright & Company, Inc. (4) The wells of these partnerships were drilled after December 31, 1999; therefore, reserve studies have not been conducted. </FN> You should not consider operating results obtained by these prior partnerships As indicative of the operating results obtainable by the partnerships TAX CONSIDERATIONS We attach the tax opinion of Duane, Morris & Heckscher LLP to the prospectus as Appendix D. You should review Appendix D in its entirety before investing in the . All references in this "Tax Considerations" section are to the tax opinion set forth in Appendix D. The following is a summary of the opinions of Duane, Morris & Heckscher LLP, counsel to the partnerships , which represent counsel's opinions on all material federal income tax consequences to the partnership and to you as an investor partner . There may be aspects of your particular tax situation which are not addressed in the following discussion or in Appendix D. Additionally, the resolution of tax issues depends upon future facts and circumstances not known to counsel as of the date of this prospectus; thus, no assurance as to the final resolution of these issues should be drawn from the following discussion. The following statements are based upon the provisions of the Internal Revenue Code of 1986, , existing and proposed regulations thereunder, current administrative rulings, and court decisions. It is possible that legislative or administrative changes or future court decisions may significantly modify the statements and opinions expressed could be retroactive with respect to the transactions prior to the date of changes. Moreover, uncertainty exists concerning some of the federal income tax aspects of the transactions being undertaken by the partnership . Some of the tax positions being taken by the Partnership may be challenged by the Internal Revenue Service and any challenge could be successful. Thus, there can be no assurance that all of the anticipated tax benefits of an investment in the partnership will be realized. Counsel's opinion is based upon the transactions described in this prospectus , and upon facts as they have been represented to counsel or determined by it as of the date of the opinion. Any alteration of the facts may adversely affect the opinions rendered. Because of the factual nature of the inquiry, and the lack of clear authority in the law, it is not possible to reach a judgment as to the outcome on the merits (either favorable or unfavorable) of material federal income tax issues as described more fully . Summary of Conclusions Opinions expressed: The following is a summary of the specific opinions expressed by counsel. To fully understand the tax considerations of an investment in the , you should read the discussion of these matters set forth in the tax opinion in Appendix D. 1. The material federal income tax benefits in the aggregate from an investment in the partnership will be realized. 2. The partnership will be treated as a partnership for federal income tax purposes and not as an association taxable as a corporation or as a "publicly traded partnership." See "General Tax Effects of Partnership Structure." 3. To the extent the partnership's wells are timely drilled and amounts are timely paid, the partners will be entitled to their pro rata share of the partnership's paid in 2001 with respect to the partnerships designated "PDC 2001- Limited Partnership," in 2002 with respect to the partnerships designated "PDC 2002- Limited Partnership," and in 2003 with respect to the partnerships designated "PDC 2003- Limited Partnership." See "Intangible Drilling and Development Costs Deductions." 4. Neither the at risk nor the limitations related to the adjusted basis of an investor in his or her Partnership interest will limit the deductibility of losses generated from the partnership . See "Basis and At Risk Limitations." 5. An additional general partner's interest will not be considered a passive activity within the meaning of Code Section 469 and losses generated while the general partner interest is so held will not be limited by the passive activity provisions. See "Passive Loss and Credit Limitations." 6. Limited partners interests (other than those held by additional general partners who convert their interests into limited partners' interests) will be considered a passive activity within the meaning of Code Section 469 and losses generated therefrom will be limited by the passive activity provisions. See "Passive Loss and Credit Limitations." 7. The partnership will not be terminated solely as the result of the conversion of partnership interests. See "Conversion of Interests." 8. To the extent provided in this section of the prospectus, the partners' distributive shares of partnership tax items will be determined and allocated substantially in accordance with the terms of the limited partnership agreement. See "Partnership Allocations." 9. The partnership will not be required to register with the Service as a tax shelter. See "Registration as a Tax Shelter." No opinion expressed: Due to the lack of authority, or the essentially factual nature of the question, counsel expresses no opinion on the following: 1. The impact of an investment in the partnership on an investor's alternative minimum tax, due to the factual nature of the issue. See "Alternative Minimum Tax." 2. Whether, under Code Section 183, the losses of the partnership will be treated as derived from "activities not engaged in for profit," and therefore nondeductible from other gross income, due to the inherently factual nature of a partner's interest and motive in engaging in the . See "Profit Motive." 3. Whether each partner will be entitled to percentage depletion since a determination is dependent upon the status of the partner as an independent producer and on the partner's other oil and gas production. Due to the inherently factual nature of a determination, counsel is unable to render an opinion as to the availability of percentage depletion. See "Depletion Deductions." 4. Whether any interest incurred by a partner with respect to any borrowings will be deductible or subject to limitations on deductibility, due to the factual nature of the issue. Without any assistance from us, some partners may choose to borrow the funds necessary to acquire a Unit and may incur interest expense in connection with that borrowing. Based upon the purely factual nature of any loans, counsel is unable to express an opinion with respect to the deductibility of any interest paid or incurred on loans. See "Interest Deductions." 5. Whether the fees to be paid to us and to third parties will be deductible, due to the factual nature of the issue. Due to the inherently factual nature of the proper allocation of expenses among nondeductible syndication expenses, amortizable organization expenses, amortizable "start-up" expenditures, and currently deductible items, and because the issues involve questions concerning both the nature of the services performed and to be performed and the reasonableness of amounts charged, counsel is unable to express an opinion regarding treatment. See "Transaction Fees." General Information: Certain matters contained in this Considerations section are not considered to address a material tax consequence and are for general information, including the matters contained in sections dealing with gain or loss on the sale of units or of property, partnership distributions, tax audits, penalties, and state, local, and self-employment tax. See "General Tax Effects of Partnership Structure," "Gain or Loss on Sale of Properties or Units," "Partnership Distributions," "Administrative Matters," "Accounting Methods and Periods," "Social Security Benefits; Self-Employment Tax," and "State and Local Tax." Facts and Representations: The opinions of counsel are also based upon the facts described in this prospectus and upon representations made to counsel by us for the purpose of permitting counsel to render its opinions, including the following representations with respect to the program: 1. The limited partnership agreement to be entered into by and among the investor partners and us and any amendments to the agreement will be duly executed and will be made available to you upon written request. The limited partnership agreement will be duly recorded in all places required under the West Virginia Uniform Limited Partnership Act for the due formation of the partnership and for its continuation in accordance with the terms of the limited partnership agreement. The partnership will at all times be operated in accordance with the terms of the limited partnership agreement, the prospectus, and the Act. 2. No election will be made by the partnership, or us to be excluded from the application of the provisions of Subchapter K of the Code. 3. The partnership will own an operating mineral interest, as defined in the Code and in the Regulations, in all of the drill sites and none of the partnership's revenues will be from non-working interests. 4. The amounts that will be paid to the Managing General Partner as drilling fees, operating fees, and other fees will be amounts that would not exceed amounts that would be ordinarily paid for similar transactions between persons having no affiliation and dealing with each other at arms' length. 5. We will cause the partnership to properly elect to deduct currently all intangible drilling and development costs. 6. The partnership will have a December 31 taxable year and will report its income on the accrual basis. 7. The drilling and operating agreement to be entered into by and between the partnership and us will be duly executed and will govern the drilling of the partnership's wells. All partnership wells will be spudded by not later than March 30, 2002 for partnerships designated "PDC 2001- Limited Partnership" March 30, 2003 for partnerships designated "PDC 2002- Limited Partnership" and March 30, 2004 for partnerships designated "PDC 2003- Limited Partnership." 8. The drilling and operating agreement will be duly executed and will govern the operation of the partnership's wells. 9. Based upon our review of our experience with our previous drilling programs since 1984 (see "Prior Activities - Tax Deductions and Tax Credits of Participants in Previous Partnerships," above) and upon the intended operations of the partnership , we have represented that the sum of the aggregate deductions, including depletion deductions, and 350 percent of the aggregate credits from the partnership will not, as of the close of any of the first five years ending after the date on which units are offered for sale, exceed two times the cash invested by the partners in the partnership as of dates. In that regard, we have reviewed the economics of our similar oil and gas drilling programs for the past several years, and have represented that we have determined that none of those programs has resulted in a tax shelter ratio greater than two to one. Further, we have represented that the deductions that are or will be represented as potentially allowable to an investor will not result in any partnership having a tax shelter ratio greater than two to one and believe that no person could reasonably infer from representations made, or to be made, in connection with the offering of units that sums as of dates will exceed two times the partners' cash investments as of dates. 10. We have represented that at least 90% of the gross income of the partnership will constitute income derived from the exploration, development, production, and/or marketing of oil and gas. We have represented that we do not believe that any market will ever exist for the sale of units and that we will not make a market for the units . Further, the units will not be traded on an established securities market. 11. The partnership will have the objective of carrying on business for profit and dividing the gain from its operations. 12. We will not permit the purchase of units by tax-exempt investors or foreign investors. The opinions of counsel are also subject to all the assumptions, qualifications, and limitations set forth in the following discussion and in the opinion, including the assumptions that each of the partners has full power, authority, and legal right to enter into and perform the terms of the limited partnership agreement and to take any and all actions under the agreement in connection with the transactions contemplated by the agreement. You should be aware that, unlike a ruling from the Service, an opinion of counsel represents only counsel's best judgment. There can be no assurance that the Service will not successfully assert positions which are inconsistent with the opinions of counsel set forth in this discussion and Appendix D or in the tax reporting positions taken by the partners or the partnership . You should consult your own tax advisor to determine the effect of the tax issues discussed in this section and in Appendix D on your individual tax situation. General Tax Effects of Partnership Structure Each partnership will be formed as a limited partnership the limited partnership agreement and the laws of the State of West Virginia. No tax ruling will be sought from the Service as to the status of the partnership as a partnership for federal income tax purposes. - Any tax benefits anticipated from an investment in a partnership would be adversely affected or eliminated if the partnership is treated as a corporation for federal income tax purposes. - While counsel has opined that the partnership will initially be treated as a partnership for federal tax purpose, that opinion is not binding on the Service. The applicability of the federal income tax consequences described in this section depends on the treatment of the partnerships as partnerships for federal income tax purposes and not as corporations and not as associations taxable as corporations. Any tax benefits anticipated from an investment in a partnership would be adversely affected or eliminated if the partnership is treated as a corporation for federal income tax purposes. Counsel to the partnership is of the opinion that, at the time of its formation, each of the partnerships will be treated as a partnership for federal income tax purposes. The opinion is based on the provisions of the limited partnership agreement and applicable state law and representations made by us. The opinion of counsel is not binding on the Service and is based on existing law, which is to a great extent the result of administrative and judicial interpretation. In addition, we can give no assurance that a partnership will not lose partnership status as a result of changes in the manner in which it is operated or other facts upon which the opinion of counsel is based. Under the Code, a partnership is not a taxable entity and, accordingly, incurs no federal income tax liability. Rather, a partnership is a "pass-through" entity which is required to file an information return with the Service. In general, the character of a partner's share of each item of income, gain, loss, deduction, and credit is determined at the partnership level. Each partner is allocated a distributive share of items in accordance with the partnership agreement and is required to take items into account in determining the partner's income. Each partner includes amounts in income for any taxable year of the partnership ending within or with the taxable year of the partner, without regard to whether the partner has received or will receive any cash distributions from the Partnership. Intangible Drilling and Development Costs Deductions - Provided drilling is completed in a timely manner, investors will have the option of deducting their proportionate share of designated "PDC 2001- Limited Partnership," in 2002 for partnerships designated "PDC 2002-Limited Partnership," and in 2003 for partnerships designated "PDC 2003- Limited Partnership" or capitalizing it and deducting it over a 60-month period from the date of investment. - 87% of subscriptions will be utilized for IDC, which is deductible in the year of investment against any form of income (by additional general partners or passive income (by limited partners a one unit investor in a 39.6% marginal federal income tax bracket would reduce his taxes payable by $6,890 . Congress granted to the Treasury Secretary the authority to prescribe regulations that would allow taxpayers the option of deducting, rather than capitalizing, intangible drilling and development costs . The Secretary's rules state that, in general, the option to deduct IDC applies only to expenditures for drilling and development items that do not have a salvage value. The prospectus provides that 87% of the investor partners' capital contributions (i.e, subscriptions net of commissions, discounts, due diligence expenses, and wholesaling costs and the management fee) will be utilized for IDC, which is deductible in the year of investment. As a result, additional general partners will realize a deduction of 87% of their investment against any form of income in the year in which the investment is made, provided wells are spudded within the first 90 days of the following year. The deduction by limited partners will be restricted to passive income. Based on an 87% deduction, a one unit ($20,000) investor in a 39.6% marginal tax bracket would reduce taxes payable by $6,890. The investor could also realize additional tax savings on state income taxes in many states, and self-employed investors could realize additional tax savings on self-employment taxes. A. Classification of Costs In general, IDC consists of those costs which in and of themselves have no salvage value. In previous partnerships sponsored by us from 1984 through 2000 (see "Prior Activities - Tax Deductions and Tax Credits of Participants in Previous Partnerships," above), intangible drilling costs have ranged from approximately 64.6% to 89.9% of the investor's contributions. While the planned activities of the partnership are similar in nature to those of prior partnerships, the amount of expenditures classified as IDC could be greater than or less than prior partnerships. In addition, a partnership's classification of a cost as IDC is not binding on the government, which might reclassify an item labeled as IDC as a cost which must be capitalized. To the extent not deductible, amounts will be included in the partnership's basis in mineral property. B. Timing of Deductions Although the partnership will elect to deduct IDC, each investor has an option of deducting IDC, or capitalizing all or a part of the IDC and amortizing it on a straight-line basis over a sixty-month period, beginning with the taxable month in which the expenditure is made. In addition to the effect of this change on regular taxable income, the two methods have different treatment under the (see "Alternative Minimum Tax"). In order for the IDC to qualify for deduction in 2001, 2002 and 2003, respectively, the wells for partnerships designated "PDC 2001- Limited Partnership," "PDC 2002- Limited Partnership," and "PDC 2003- Limited Partnership," respectively, must be spudded by March 30, 2002, 2003, and 2004, respectively. requirements must also be met. Although PDC will attempt to satisfy each requirement of the Service and judicial authority for deductibility of IDC in 2001, 2002, and 2003, respectively, for partnerships designated "PDC 2001- Limited Partnership," "PDC 2002- Limited Partnership," and "PDC 2003- Limited Partnership," respectively, we can give no assurance that the Service will not successfully contend that the IDC of a well which is not completed until 2001, 2002, or 2003, respectively, for partnerships designated "PDC 2001- Limited Partnership," "PDC 2002- Limited Partnership," or "PDC 2003- Limited Partnership," respectively, are not deductible in whole or in part until 2002, 2003, or 2004, respectively, for partnerships designated "PDC 2001- Limited Partnership," "PDC 2002- Limited Partnership," or "PDC 2003- Limited Partnership," respectively. Further, to the extent drilling of the partnership's wells does not commence by March 30, 2002, 2003, or 2004, respectively, for partnerships designated "PDC 2001- Limited Partnership," "PDC 2002- Limited Partnership," or "PDC 2003- Limited Partnership," respectively, the deductibility of all or a portion of the IDC may be deferred. Notwithstanding the foregoing, we can give no assurance that the Service will not challenge the current deduction of IDC because of the prepayment being made to a related party. If the Service were successful with challenge, the partners' deductions for IDC would be deferred to later years. C. Recapture of IDC IDC previously deducted that is allocable to the property directly or through the ownership of an interest in a partnership and which would have been included in the adjusted basis of the property is recaptured to the extent of any gain realized upon the disposition of the property. Treasury regulations provide that recapture is determined at the partner level (subject to anti-abuse provisions). Where only a portion of recapture property is disposed of, any IDC related to the entire property is recaptured to the extent of the gain realized on the portion of the property sold. In the case of the disposition of an undivided interest in a property (as opposed to the disposition of a portion of the property), a proportionate part of the IDC with respect to the property is treated as allocable to the transferred undivided interest to the extent of any realized gain. Depletion Deductions - Investors who are "independent producers" of oil and gas will be entitled to claim a percentage depletion deduction on their oil and gas income. For 2000, the deduction is 19% (15% for wells producing more than 90 Mcf per day or 15 barrels of oil per day) of gross income not to exceed 65% of the taxpayer's taxable income or 100% of the net income on a property by property basis. The latter limitation does not apply to "stripper wells" for tax years 1998 to 2001. After 2000, the depletion rate may change but will be within the range of 15% to 25%. The owner of an economic interest in an oil and gas property is entitled to claim the greater of percentage depletion or cost depletion with respect to oil and gas properties which qualify for depletion methods. Percentage depletion is generally available only with respect to the domestic oil and gas production of "independent producers." In order to qualify as an independent producer, the taxpayer, either directly or through related parties, may not be involved in the refining of more than 50,000 barrels of oil (or equivalent of gas) on any day during the taxable year or in the retail marketing of oil and gas products exceeding $5 million per year in the aggregate. In the case of partnerships, the depletion allowance must be computed separately by each partner and not by the partnership. For properties placed in service after 1986, depletion deductions, to the extent they reduce basis in an oil and gas property, are subject to recapture under section 1254. Cost depletion for any year is determined by multiplying the number of units (e.g., barrels of oil or Mcf of gas) sold during the year by a fraction, the numerator of which is the cost or other basis of the mineral interest and the denominator of which is total reserves available at the beginning of the period. In no event can the cost depletion exceed the adjusted basis of the property to which it relates. Percentage depletion is a statutory allowance which a deduction equal to a percentage of the taxpayer's gross income from each property is allowed in any taxable year, with the aggregate deduction limited to 65% of the taxpayer's taxable income for the year (computed without regard to percentage depletion and net operating loss and capital loss carrybacks). The allowable deduction is limited to 100% of the net income on a property by property basis, and further limited to 65% of a taxpayer's taxable income. In the case of "stripper well property," as that term is defined in Code Section 613A(c)(6)(D), the 100% of taxable income limitation has been eliminated for taxable years 1998 to 2001. Code Section 613A(c)(6)(H). It is anticipated that some of the properties of the partnerships will likely constitute "stripper well properties" for this purpose. The percentage depletion deduction rate will vary with the price of oil, but the rate will not be less than 15% nor more than 25%. Code Section 613A(c)(6)(C). For 2000, the rate is 19%. A percentage depletion deduction that is disallowed in a year due to the 65% of taxable income limitation may be carried forward and allowed as a deduction for the following year, subject to the 65% limitation in that subsequent year. Percentage depletion deductions reduce the taxpayer's adjusted basis in the property. However, unlike cost depletion, deductions under percentage depletion are not limited to the adjusted basis of the property; the percentage depletion amount continues to be allowable as a deduction after the adjusted basis has been reduced to zero. The availability of depletion, whether cost or percentage, will be determined separately by each partner Each partner must separately keep records of his share of the adjusted basis in an oil or gas property, adjust share of the adjusted basis for any depletion taken on property, and use adjusted basis each year in the computation of his cost depletion or in the computation of his gain or loss on the disposition of property. These requirements may place an administrative burden on a partner Depreciation Deductions The partnership will claim depreciation, cost recovery, and amortization deductions with respect to its basis in partnership property as permitted by the Code. cost of lease equipment and well equipment, such as casing, tubing, tanks, and pumping units, and the cost of oil or gas pipelines cannot be deducted currently but must be capitalized and recovered under . The cost recovery deduction for most equipment used in domestic oil and gas exploration and production and for most of the tangible personal property used in natural gas gathering systems is calculated using the 200% declining balance method switching to the straight-line method, a seven-year recovery period, and a half-year convention. If an accelerated depreciation method is used, a portion of the depreciation will be a preference item for AMT purposes. You will not be able to claim depreciation deductions because all tangible costs have been allocated to us. Interest Deductions In the will acquire their interests by remitting cash in the amount of $20,000 per unit to the partnership . In no event will the partnership accept notes in exchange for a partnership interest. Nevertheless, without any assistance from us, some investors may choose to borrow the funds necessary to acquire a unit and may incur interest expense in connection with those loans. Based upon the purely factual nature of loans, counsel is unable to express an opinion with respect to the deductibility of any interest paid or incurred on loans. Transaction Fees - Partnership expenditures classified as organizational expenses, and start-up expenses may be amortized over periods ranging from 60 months to the life of the property. - No deduction is permitted for syndication expenses, including sales commissions for the purchase of Units. The partnership may classify a portion of the fees to be paid to third parties and to us or to the operator and its affiliates (as described in the prospectus under "Source of Funds and Use of Proceeds") as expenses which are deductible as organizational expenses or otherwise. There is no assurance that the Service will allow the deductibility of these expenses and counsel expresses no opinion with respect to the allocation of the fees to deductible and nondeductible items. Generally, expenditures made in connection with the creation of, and with sales of interests in, a partnership will fit within one of several categories. A partnership may elect to amortize and deduct its organizational expenses ratably over a period of not less than 60 months commencing with the month the partnership begins business. Examples of organizational expenses are legal fees for services incident to the organization of the partnership, such as negotiation and preparation of a partnership agreement, accounting fees for services incident to the organization of the partnership, and filing fees. No deduction is allowable for "syndication expenses," examples of which include brokerage fees, registration fees, legal fees of the underwriter or placement agent and the issuer (general partners or the partnership) for securities advice and for advice pertaining to the adequacy of tax disclosures in the prospectus or private placement memorandum for securities law purposes, printing costs, and other selling or promotional material. These costs must be capitalized. Payments for services performed in connection with the acquisition of capital assets must be amortized over the useful life of assets. No deduction is allowable with respect to "start-up expenditures," although expenditures may be capitalized and amortized over a period of not less than 60 months. The partnership intends to make payments to us, as described in greater detail in the prospectus. To be deductible, compensation paid to a general partner must be for services rendered by the partner other than in his capacity as a partner or for compensation determined without regard to partnership income. Fees which are not deductible because they fail to meet this test may be treated as special allocations of income to the recipient partner and decrease the net loss, or increase the net income among all partners. If the Service were to successfully challenge our allocations, a partner's taxable income could be increased, resulting in increased taxes and in liability for interest and penalties. Basis and At Risk Limitations - Partners contributing cash from 'personal funds' will not be limited, to the extent of cash contributed, in their deductibility of partnership losses by the 'at risk' basis rules or the limitations related to a partner's basis in his partnership interest. A partner's share of partnership losses will be allowed only to the extent of the aggregate amount with respect to which the taxpayer is "at risk" for activity at the close of the taxable year. In general, a partner is "at risk" to the extent of the amount of cash and the adjusted basis of other property contributed to the partnership Any loss disallowed by the "at risk" limitation shall be treated as a deduction allocable to the activity in the first succeeding taxable year. The Code provides that a taxpayer must recognize taxable income to the extent that his "at risk" amount is reduced below zero. This recaptured income is limited to the sum of the loss deductions previously allowed to the taxpayer, less any amounts previously recaptured. A taxpayer may be allowed a deduction for the recaptured amounts included in his taxable income if and when he increases his amount "at risk" in a subsequent taxable year. The partners will purchase units by tendering cash to the partnership . To the extent the cash contributed constitutes the "personal funds" of the partners the partners should be considered at risk with respect to those amounts. To the extent the cash contributed constitutes "personal funds," in the opinion of counsel, neither the at risk rules nor the adjusted basis rules will limit the deductibility of losses generated from the partnership . In no event, however, may a partner utilize his distributive share of partnership loss where share exceeds the partner's basis in the partnership. Passive Loss Limitations A. Introduction The deductibility of losses generated from passive activities will be limited for certain taxpayers. The passive activity loss limitations apply to individuals, estates, trusts, and personal service corporations as well as, to a lesser extent, closely held C corporations. The definition of a "passive activity" generally encompasses all rental activities as well as all activities with respect to which the taxpayer does not "materially participate." Notwithstanding this general rule, however, the term "passive activity" does not include "any working interest in any oil or gas property which the taxpayer holds directly or through an entity which does not limit the liability of the taxpayer with respect to interest." A taxpayer will be considered as materially participating in a venture only if the taxpayer is involved in the operations of the activity on a "regular, continuous, and substantial" basis. In addition, no limited partnership interest will be treated as an interest with respect to which a taxpayer materially participates. A passive activity loss is the amount by which the aggregate losses from all passive activities for the taxable year exceed the aggregate income from all passive activities for year. Individuals and personal service corporations will be entitled to only to the extent of their passive income whereas closely held C corporations (other than personal service corporations) can offset against both passive and net active income, but not against portfolio income. In calculating passive income and loss, however, all activities of the taxpayer are aggregated. disallowed as a result of the above rules will be suspended and can be carried forward indefinitely to offset future passive (or passive and active, in the case of a closely held C corporation) income. Upon the disposition of an entire interest in a passive activity in a fully taxable transaction not involving a related party, any passive loss that was suspended by the provisions of the passive activity rules is deductible from either passive or non-passive income. The deduction must be reduced, however, by the amount of income or gain realized from the activity in previous years. B. General Partner Interests - General partner will not be considered as investments in passive activities for federal tax purposes. - Additional who convert to limited partner status after recording a tax loss from their investment in any year will continue to have income treated as non-passive, but may have some or all of their deductions treated as passive. A limited partner's interest in the partnership will be considered a passive activity and losses generated while limited partnership interest is held will be limited by the passive activity provisions. In general, an additional general partner's interest in the partnership will not be considered a passive activity, and losses generated while general partner interest is held will not be limited by the passive activity provisions. However, if an additional general partner interest is converted to a limited partner interest prior to the spudding date, but after the end of the taxable year in which IDC was incurred, IDC will be subject to the passive activity rules. In addition, that portion of partnership income for prior taxable year attributable to IDC treated as passive loss will be considered passive. The "spudding date" is the date that drilling commences. If an additional general partner converts his interest to a limited partner interest the terms of the limited partnership agreement, the character of a subsequently generated tax attribute will be dependent upon, among other things, the nature of the tax attribute and whether there arose, prior to conversion, losses to which the working interest exception applied. If a taxpayer has any loss from any taxable year from a working interest in any oil or gas property that is treated as a non-passive loss, then any net income from property for any succeeding taxable year is to be treated as income that is not from a passive activity. Consequently, assuming that a converting additional general partner has losses from working interests which are treated as non-passive, income from the partnership allocable to the partner after conversion would be treated as income that is not from a passive activity. C. Limited Partner Interests - Income and losses of limited partners will be treated as "passive" for federal tax purposes. If an investor partner invests in the partnership as a limited partner , his distributive share of the partnership's losses will be treated as , the availability of which will be limited to the partner's passive income. If the partner does not have sufficient passive income to utilize the the disallowed will be suspended and may be carried forward to be deducted against passive income arising in future years. Further, upon the disposition of the interest to an unrelated party, in a fully taxable transaction suspended losses will be available, as described above. Limited partners should generally be entitled to offset their distributive shares of passive income from the partnerships with deductions from other passive activities. Conversion of Interests The partnership , in the opinion of counsel, will not be terminated solely as a result of the conversion by additional general partner of their partnership interests into limited partnership interests. In the event a constructive termination does occur, however, there will be a deemed distribution of the partnership's assets to the partners and a recontribution by to the partnership . This constructive termination could have adverse income tax consequences, described in the opinion in Appendix D. For a discussion of the conversion feature of the , see "Terms of the Offering - Conversion of Units by Additional General Partners." Alternative Minimum Tax - Due to the potentially significant impact of a purchase of units on an investor's tax liability, investors should discuss the implications of an investment in the partnership on their regular and AMT liabilities with their tax advisors prior to acquiring units . Tax benefits associated with oil and gas exploration activities similar to that of the have been subject to the AMT in the past. Specifically, prior to January 1, 1993, intangible drilling cost ("IDC") was an AMT preference item to the extent that "excess IDC" exceeded 65% of a taxpayer's net income from oil and gas properties for the year. Excess IDC was the amount by which the taxpayer's IDC deduction exceeded the deduction that would have been allowed if the IDC had been capitalized and amortized on a straight-line basis over ten years. Percentage depletion, to the extent it exceeded a property's basis, was also an AMT preference item. For independent producers in taxable years beginning after 1992, the Energy Policy Act repealed the treatment of percentage depletion as a preference item for AMT purposes and provided a limited benefit from the preference on expensing IDC. However, their AMTI may not be reduced by more than 40% of the AMTI determined without this benefit. For corporations, other than integrated oil companies, the adjusted current earning adjustments were also repealed. Gain or Loss on Sale of Property or Units - Sale or exchange of property by the partnership or a unit by an investor could result in - Investors who fail to report a sale or exchange of a unit in the partnership could be subject to a penalty of 10% of the aggregate income not reported. the recapture of IDCs and depletion ordinary income If the the amou gain exceeds the amount of the recaptured , the investor will recognize ordinary income to the extent of the be required to recognize ordinary income . To balance the excess income, the investor would recognize a capital loss for the difference between the gain and the income. Depending on an investor's particular tax situation, some or all of this loss might be deferred to future years, resulting in a greater tax liability in the year in which the sale was made and a reduced future tax liability. Any partner who sells or exchanges interests in a partnership must generally notify the partnership in writing within 30 days of transaction in accordance with Regulations and must attach a statement to his tax return reflecting facts regarding the sale or exchange. The notice must include names, addresses, and taxpayer identification numbers (if known) of the transferor and transferee and the date of the exchange. The partnership also is required to provide copies of the information it provides to the Service to the transferor and the transferee. Any investor who is required to notify the partnership of a transfer of his partnership interest, and, who fails to do so, may be fined $50 for each failure, limited to $100,000, provided there is no intentional disregard of the filing requirement. Similarly, the partnership may be fined for failure to report the transfer. The partnership's penalty is $50 for each failure, limited to $250,000, provided there is no intentional disregard of the filing requirement. The tax consequences to an assignee purchaser of a unit from a partner are not described in this prospectus. Any assignor of a unit should advise his assignee to consult his own tax advisor regarding the tax consequences of assignment. Partnership Distributions Under the Code, any increase in a partner's share of partnership liabilities, or any increase in partner's individual liabilities by reason of an assumption by him of partnership liabilities is considered to be a contribution of money by the partner to the partnership. Similarly, any decrease in a partner's share of partnership liabilities or any decrease in the partner's individual liabilities by reason of the partnership's assumption of the individual liabilities will be considered as a distribution of money to the partner by the partnership. The partners' adjusted bases in their units will initially consist of the cash they contribute to the partnership . Their bases will be increased by their share of partnership income and additional contributions and decreased by their share of partnership losses and distributions. To the extent that the actual or constructive distributions are in excess of a partner's adjusted basis in his partnership interest (after adjustment for contributions and his share of income and losses of the partnership , that excess will generally be treated as gain from the sale of a capital asset. In addition, gain could be recognized to a distributee partner upon the disproportionate distribution to a partner of unrealized receivables or substantially appreciated inventory. The limited partnership agreement prohibits distributions to any investor partner to the extent the would create or increase a deficit in the partner's capital account. Partnership Allocations The partners' distributive shares of partnership income, gain, loss, and deduction should be determined and allocated substantially in accordance with the terms of the limited partnership agreement. The Service could contend that the allocations contained in the limited partnership agreement do not have substantial economic effect or are not in accordance with the partners' interests in the partnership and may seek to reallocate these items in a manner that will increase the income or gain or decrease the deductions allocable to a partner . Profit Motive - Investors who enter a business without economic, nontax profit motive may be denied the benefits of deductions associated with the business to the extent they exceed the income from the business. The existence of economic, nontax motives for entering into the is essential if the partners are to obtain the tax benefits associated with an investment in the partnership . Where an activity entered into by an individual is not engaged in for profit, the individual's deductions with respect to that activity are limited to those not dependent upon the nature of the activity (e.g., interest and taxes); any remaining deductions will be limited to gross income from the activity for the year. Should it be determined that a partner's activities with respect to the are "not for profit," the Service could disallow all or a portion of the deductions generated by the partnership's activities. The Code generally provides for a presumption that an activity is entered into for profit where gross income from the activity exceeds the deductions attributable to the activity for three or more of the five consecutive taxable years ending with the taxable year in question. At the taxpayer's election, the presumption can relate to three or more of the taxable years in the 5-year period beginning with the taxable year in which the taxpayer first engages in the activity. Due to the inherently factual nature of a partner's intent and motive in engaging in the , counsel does not express an opinion as to the ultimate resolution of this issue in the event of a challenge by the Service. Partners must, however, seek to make a profit from their activities with respect to the beyond any tax benefits derived from those activities or risk losing those tax benefits. Administrative Matters Returns and Audits. While no federal income tax is required to be paid by an organization classified as a partnership for federal income tax purposes, a partnership must file federal income tax information returns, which are subject to audit by the Service. Any audit may lead to adjustments, in which event you may be required to file amended personal federal income tax returns. Any audit may also lead to an audit of your individual tax return and adjustments to items unrelated to an investment in units. For purposes of reporting, audit, and assessment of additional federal income tax, the tax treatment of "partnership items" is determined at the partnership level. Partnership items will include those items that the Regulations provide are more appropriately determined at the partnership level than the partner level. The Service generally cannot initiate deficiency proceedings against an individual partner with respect to partnership items without first conducting an administrative proceeding at the partnership level as to the correctness of the partnership's treatment of the item. An individual partner may not file suit for a credit or a refund arising out of a partnership item without first filing a request for an administrative proceeding by the Service at the partnership level. Individual partners are entitled to notice of the administrative proceedings and decisions , except in the case of partners with less than 1% profits interest in a partnership having more than 100 partners. If a group of partners having an aggregate profits interest of 5% or more in a partnership so requests, however, the Service also must mail notice to a partner appointed by that group to receive notice. All partners, whether or not entitled to notice, are entitled to participate in the administrative proceedings at the partnership level, although the limited partnership agreement provides for waiver of of these rights by the investor partners, including those not entitled to notice, may be bound by a settlement reached by the partnership's representative "tax matters partner," which will be Petroleum Development Corporation. If a proposed tax deficiency is contested in any court by any partner of a partnership or by us, all partners of that partnership may be deemed parties to the litigation and bound by the result reached . Consistency Requirements. You must generally treat partnership items on your federal income tax returns consistently with the treatment of the items on the partnership information return unless you file a statement with the Service identifying the inconsistency or otherwise satisfy the requirements for waiver of the consistency requirement. Failure to satisfy this requirement will result in an adjustment to conform your treatment of the item with the treatment of the item on the partnership return. Intentional or negligent disregard of the consistency requirement may subject you to substantial penalties. Compliance Provisions. Taxpayers are subject to several penalties and other provisions that encourage compliance with the federal income tax laws, including an accuracy-related penalty in an amount equal to 20% of the portion of an underpayment of tax caused by negligence, intentional disregard of rules or regulations or any "substantial understatement" of income tax. A "substantial understatement" of tax is an understatement of income tax that exceeds the greater of (a) 10% of the tax required to be shown on the return (the correct tax), or (b) $5,000 ($10,000 in the case of a corporation other than an S corporation or personal holding corporation). Except in the case of understatements attributable to "tax shelter" items, an item of understatement may not give rise to the penalty if (a) there is or was "substantial authority" for the taxpayer's treatment of the item or (b) all facts relevant to the tax treatment of the item are disclosed on the return or on a statement attached to the return, and there is a reasonable basis for the tax treatment of the item by the taxpayer. In the case of partnerships, the disclosure is to be made on the return of the partnership. Under the applicable Regulations, however, an individual partner may make adequate disclosure with respect to partnership items if conditions are met. In the case of understatements attributable to "tax shelter" items, the substantial understatement penalty may be avoided only if the taxpayer establishes that, in addition to having substantial authority for his position, he reasonably believed the treatment claimed was more likely than not the proper treatment of the item. A "tax shelter" item is one that arises from a partnership (or other form of investment) the principal purpose of which is the avoidance or evasion of federal income tax. Under the GATT legislation, a corporation is generally held to a higher standard to avoid the substantial understatement penalty. Based on the definition of a "tax shelter" in the Regulations, performance of previous partnerships sponsored by us since 1984, and the planned activities of the Program, we have represented that the Partnerships will not qualify as "Tax Shelters" under the Code, and will not register them as . See "Prior Activities - Tax Deductions and Tax Credits of Participants in Previous Partnerships," above. Accounting Methods and Periods The partnership will use the accrual method of accounting and will select the calendar year as its taxable year. Social Security Benefits; Self_employment Tax A share of any income or loss attributable to units will constitute "net earnings from self-employment" for both social security and self-employment tax purposes, while a limited partner's share of these items will not constitute "net earnings from self-employment." Thus, no quarters of coverage or increased benefits under the Social Security Act will be earned by limited partners . State and Local Taxes The opinions expressed are limited to issues of federal income tax law and do not address issues of state or local law. We urge you to consult your tax advisors regarding the impact of state and local laws on your investment in the partnership . Individual Tax Advice Should Be Sought We have presented only a summary of the material tax considerations that may affect your decision regarding the purchase of units . The tax considerations attendant to an investment in a partnership are complex, vary with individual circumstances, and depend in some instances upon whether the investor acquires . You should review the tax consequences with your tax advisor. SUMMARY OF LIMITED PARTNERSHIP AGREEMENT The limited partnership agreement in the form attached to this prospectus as Appendix A will govern your rights and obligations. You, together with your personal advisers, should carefully study the limited partnership agreement in its entirety before submitting a subscription. The following statements concerning the limited partnership agreement are merely a summary of all the material terms of the limited partnership agreement, but do not purport to be complete and in no way amend or modify the limited partnership agreement. Responsibility of Managing General Partner The Managing General Partner shall have the exclusive management and control of all aspects of the business of the partnership . Sections 5.01 and 6.01 of the limited partnership agreement. No investor partner shall have any voice in the day-to-day business operations of the partnership . Section 7.01. The Managing General Partner is authorized to delegate and subcontract its duties under the limited partnership agreement to others, including entities related to it. Section 5.02. Liabilities of General Partners, Including Additional General Partners General partners, including additional general partners , will have unlimited liability for partnership activities. The additional general partners will be jointly and severally liable for all obligations and liabilities to creditors and claimants, whether arising out of contract or tort, in the conduct of partnership operations. Section 7.12. We, as operator, maintain general liability insurance. In addition, we have agreed to indemnify each of the additional general partners for obligations related to casualty and business losses which exceed available insurance coverage and partnership assets. Section 7.02. The additional general partner , by execution of the limited partners, grant to the Managing General Partner the exclusive authority to manage the partnership business in its sole discretion and to bind the partnership and all partners in its conduct of the partnership business. The additional general partner may not participate in the management of the partnership business; and the limited partnership agreement prohibits the additional general partner from acting in a manner harmful to the assets or the business of the partnership or to do any other act which would make it impossible to carry on the ordinary business of the partnership acts in contravention of the terms of the limited partnership agreement, losses caused by his or her actions will be borne by the may be liable to other partners for all damages resulting from his or her breach of the limited partnership agreement. Section 7.01. Additional who choose to assign their units in the future may do so only as provided in the limited partnership agreement and liability of partners who have assigned their units may continue after the assignment unless a formal assumption and release of liability is effected. Section 7.03. Liability of Limited Partners The West Virginia Uniform Limited Partnership Act will govern the partnerships , under which law a limited partner's liability for the obligations of the partnership is limited to his or her capital contribution, his or her share of partnership assets and the return of any part of his or her capital contribution for a period of one year after the return (or six years in the event the return is in violation of the limited partnership agreement). A limited partner will not otherwise be liable for the obligations of the partnership unless, in addition to the exercise of his or her rights and powers as a limited partner person takes part in the control of the business of the partnership . Section 7.01. Allocations and Distributions General: Profits and losses are to be allocated and cash is to be distributed in the manner described in the section entitled "Participation in Costs and Revenues." See Article III of the limited partnership agreement. Time of Distributions: The Managing General Partner will determine and distribute not less frequently than quarterly cash available for distribution. Section 4.01. The Managing General Partner may, at its discretion, make distributions more frequently. Notwithstanding any other provision of the limited partnership agreement to the contrary, no partner will receive any distribution to the extent the distribution will create or increase a deficit in that partner's capital account (as increased by his or her share of partnership minimum gain). Section 4.03. Liquidating Distributions: Liquidating distributions will be made in the same manner as regular distributions; however, in the event of dissolution of the partnership , distributions will be made only after due provision has been made for, among other things, payment of all partnership debts and liabilities. Section 9.03. Voting Rights Investor partners owning 10% or more of the then outstanding units entitled to vote have the right to require the Managing General Partner to call a meeting of the partners . Section 7.07. Investor partners may vote with respect to partnership matters. Each unit is entitled to one vote on all matters; each fractional unit is entitled to that fraction of one vote equal to the fractional interest in the unit . Except as otherwise provided in the limited partnership agreement, at any meeting of investor partners , approval of any matters considered at the meeting requires a vote of a majority of units represented at the meeting, in person or by proxy, at the meeting at which a quorum is present. Approval of any of the following matters requires a vote of a majority of the then outstanding units entitled to vote: - The sale of all or substantially all of the assets of the partnership ; - Removal of the Managing General Partner and election of a new managing general partner; - Dissolution of the partnership ; - Any non-ministerial amendment to the limited partnership agreement; - Cancellation of contracts for services with the Managing General Partner or affiliates; and - The appointment of a liquidating trustee in the event the partnership is to be dissolved by reason of the retirement, dissolution, liquidation, bankruptcy, death, or adjudication of insanity or incapacity of the last remaining . Additionally, the partnership is not permitted to participate in a transaction unless the has been approved by at least 66 2/3% in interest of investor partners . Sections 5.07(m) and 7.08. The Managing General Partner if it were removed by the investor partners may elect to retain its interest in the partnership as a limited partner in the successor limited partnership (assuming that the investor partners determined to continue the partnership and elected a successor managing general partner), in which case the former Managing General Partner would be entitled to vote its interest as a limited partner . Section 7.06. Investor partners may review the partnership's books and records and list of investor partners at any reasonable time and have a copy of the list of investor partners mailed to the requesting investor partner at the latter's expense. Investor partners may submit proposals to the Managing General Partner for inclusion in the voting materials for the next meeting of investor partners for consideration by the investor partners . With respect to the merger or consolidation of the partnership or the sale of all or substantially all of the partnership's assets, investor partners may exercise dissenter's rights for fair appraisal of their units in accordance with Section 31-1-123 of the West Virginia Corporation Act. Sections 7.07, 7.08, and 8.01. Retirement and Removal of the Managing General Partner In the event that the Managing General Partner desires to withdraw from the partnership for whatever reason, it may do so only upon one hundred twenty (120) days prior written notice and with the written consent of the investor partners owning a majority of the then outstanding units . Section 6.03. In the event that the investor partners desire to remove the Managing General Partner, they may do so at any time upon ninety (90) days written notice, with the consent of the investor partners owning a majority of the then outstanding units , and upon the selection of a successor managing general partner, within ninety-day period, by the investor partners owning a majority of the then outstanding units . Section 7.06. Term and Dissolution The partnership will continue for a maximum period ending December 31, 2051 unless earlier dissolved upon the occurrence of any of the following: -the written consent of the investor partners owning a majority of the then outstanding units ; -the retirement, bankruptcy, adjudication of insanity or incapacity, withdrawal, removal, or death (or, in the case of a corporate managing general partner, the retirement, withdrawal, removal, dissolution, liquidation, or bankruptcy) of a managing general partner, unless a successor managing general partner is selected by the partners the limited partnership agreement or the remaining managing general partner, if any, continues the partnership's business; -the sale, forfeiture, or abandonment of all or substantially all of the partnership's property; or -the occurrence of any event causing dissolution of the partnership under the laws of the State of West Virginia. Section 9.01. Indemnification The Managing General Partner has agreed to indemnify each of the additional general partner for obligations related to casualty losses which exceed available insurance coverage and partnership assets. Section 7.02. If obligations incurred by the partnership are the result of the negligence or misconduct of an additional general partner , or the contravention of the terms of the limited partners, then the foregoing indemnification by the Managing General Partner will be unenforceable as to will be liable to all other partners for damages and obligations resulting the. Section 7.02. The Managing General Partner will be entitled to reimbursement and indemnification for all expenditures made (including amounts paid in settlement of claims) or losses or judgments suffered by it in the ordinary and proper course of the partnership's business, provided that the Managing General Partner has determined in good faith that the course of conduct which caused the loss or liability was in the best interests of the partnership , that the Managing General Partner was acting on behalf of or performing services for the partnership and that the expenditures, losses or judgments were not the result of the negligence or misconduct on the part of the Managing General Partner. Section 6.04. The Managing General Partner will have no liability to the partnership or to any partner for any loss suffered by the partnership which arises out of any action or inaction of the Managing General Partner if the Managing General Partner, in good faith, determined that the course of conduct was in the best interest of the Partnership and the course of conduct did not constitute negligence or misconduct of the Managing General Partner. The Managing General Partner will be indemnified by the partnership to the limit of the insurance proceeds and tangible net assets of the partnership against any losses, judgments, liabilities, expenses and amounts paid in settlement of any claims sustained by it in connection with the partnership , provided that the same were not the result of negligence or misconduct on the part of the Managing General Partner. Notwithstanding the above, the Managing General Partner will not be indemnified for liabilities arising under and state securities laws unless there has been a successful adjudication on the merits of each count involving securities law violations; or the claims have been dismissed with prejudice on their merits by a court of competent jurisdiction; or a court of competent jurisdiction approves a settlement of the claims against a particular indemnitee and finds that indemnification of the settlement and the related costs should be made, and the court considering the request for indemnification has been advised of the position of the Securities and Exchange Commission and of the position of any state securities regulatory authority in which securities of the partnership were offered or sold as to indemnification for violations of securities laws; provided, however, the court need only be advised of the positions of the securities regulatory authorities of those states which are specifically set forth in the prospectus and in which plaintiffs claim they were offered or sold partnership. In any claim for indemnification for or state securities laws violations, the party seeking indemnification must place before the court the position of the Securities and Exchange Commission and the Massachusetts Securities Division or other respective state securities division with respect to the issue of indemnification for securities laws violations. The partnership will not incur the cost of the portion of any insurance which insures any party against any liability as to which the party is prohibited from being indemnified. Section 6.04. Reports to Partners The Managing General Partner will furnish to the investor partners of each partnership semi-annual and annual reports which will contain financial statements (including a balance sheet and statements of income, partners equity and cash flows), which statements at fiscal year end will be audited by an independent accounting firm and will include a reconciliation of the statements with information provided to the investor partners for income tax purposes. Financial statements furnished in a partnership's semi-annual reports will not be audited. Semi-annually, all investor partners will also receive a summary itemization of the transactions between the Managing General Partner or any affiliate and the partnership showing all items of compensation received by the Managing General Partner and its affiliates. Annually beginning with the fiscal year ended December 31, 2001 with respect to partnerships designated "PDC 2001- Limited Partnership," December 31, 2002 with respect to partnerships designated "PDC 2002- Limited Partnership," and December 31, 2003, with respect to partnerships designated "PDC 2003- Limited Partnership," oil and gas reserve estimates prepared by an independent petroleum engineer will also be furnished to the investor partners . Annual reports will be provided to the investor partners within 120 days after the close of each partnership fiscal year, and semi-annual reports will be provided within 75 days after the close of the first six months of each partnership fiscal year. In addition, the investor partners will receive on a monthly basis while the partnership is participating in the drilling and completion activities of a , reports containing a description of the partnership's acquisition of interests in prospects, including farmins and farmouts, and the drilling, completion and abandonment of wells thereon. All investor partners will receive a report containing information necessary for the preparation of their income tax returns and any required state income tax returns by March 15 of each calendar year. Investor partners will also receive in the monthly reports a summary of the status of wells drilled by the partnership , the amount of oil or gas from each well and the drilling schedule for proposed wells, if known. The Managing General Partner may provide other reports and financial statements as it deems necessary or desirable. Section 8.02. Power of Attorney Each partner will grant to the Managing General Partner a power of attorney to execute documents deemed by the Managing General Partner to be necessary or convenient to the partnership's business or required in connection with the qualification and continuance of the partnership . Section 10.01. Other Provisions Other provisions of the limited partnership agreement are summarized in this under the headings "Terms of the Offering," "Source of Funds and Use of Proceeds," "Participation in Costs and Revenues," "Management," "Fiduciary Responsibility of the Managing General Partner," and "Transferability of Units." We direct the attention of prospective investors to these sections. TRANSFERABILITY OF UNITS - Your sale of units is limited; no public market exists or will develop for the units ; you may not be able to sell your units at the price or when you want. - Purchasers of units from you must satisfy the suitability requirements of this offering and as imposed by law. No public market exists or will develop for the units . You should consider an investment in the partnerships an illiquid investment. You may not be able to sell your units when and if you want to do so and at the price you believe to be fair. In addition, as a basis of counsel's opinion that the partnerships will not be treated as "publicly traded partnerships," we have represented that the units will not be traded on an established securities market or the substantial equivalent thereof. While units of the partnership are transferable, assignability of the units is limited, requiring among other things our consent. Section 7.03. Transfers of fractional units are prohibited, unless you own a fractional unit , in which case your entire fractional interest must be transferred. You may assign units only to a person otherwise qualified to become an investor partner , including the satisfaction of any relevant suitability requirements, as imposed by law or the partnership . In no event may you make an assignment which, in the opinion of counsel to the partnership , would result in the partnership being considered to have been terminated for purposes of Section 708 of the Code, unless we consent to an assignment, or which, in the opinion of counsel to the partnership , would result in the partnership being treated as a publicly traded partnership, or which, in the opinion of counsel to the partnership , may not be effected without registration under the Securities Act of 1933, or would result in the violation of any applicable state securities laws. A substituted additional general partner will have the same rights and responsibilities, including unlimited liability, in the partnership as every other additional general partner . Upon receipt of notice of a purported transfer or assignment of a unit of general partnership interest, we, after having determined that the purported transferee satisfies the suitability standards of an additional general partner and other conditions established by the , will promptly notify the purported transferee of the partnership's consent to the transfer and will include with the notice a copy of the limited partnership agreement, together with a signature page. In the notification, we will advise the transferee that he or she will have the same rights and responsibilities, including unlimited liability, as every other additional general partner and that he or she will not become a partner of record until he or she returns the executed signature page to the partnership need not recognize any assignment until the instrument of assignment has been delivered to us. The assignee of the interests has rights of ownership but may become a substituted investor partner and thus be entitled to all of the rights of an additional general partner only upon meeting conditions, including obtaining our consent to the substitution, paying all costs and expenses incurred in connection with the substitution, making representations to us and executing appropriate documents to evidence its agreement to be bound by all of the terms and provisions of the applicable limited partnership agreement. Conversion of Units by the Managing General Partner and by Additional General Partners. Upon completion of drilling of a particular partnership , we will convert all units of general partnership interest of that partnership into units of limited partnership interest of that partnership . See "Terms of the Offering - Conversion of Units by the Managing General Partner and by Additional General Partners Unit Repurchase Program. Beginning with the third anniversary of the date of the first cash distribution of the partnership , you may tender your units to us for repurchase, subject to conditions. See "Terms of the Offering - Unit Repurchase Program PLAN OF DISTRIBUTION - An affiliate of the Managing General Partner is dealer manager of the offering. - Sales will be made on a "minimum-maximum best efforts" basis through NASD-licensed broker-dealers. - Broker-dealers will receive an amount equal to 10 1/2% of the subscription proceeds as sales commissions, expenses, and wholesaling fees. - Purchase of units by the Managing General Partner and/or affiliates may allow the offering to satisfy the minimum sales requirements and allow the offering to close and a partnership to be funded. We are offering for sale units of preformation limited and general partnership interest through PDC Securities Incorporated, the , our affiliate, as principal distributor, and through NASD-licensed broker-dealers on a "minimum-maximum best efforts" basis for each partnership , to a select group of investors who meet the suitability standards set forth under "Terms of the Offering - Investor Suitability." We will not sell units to tax-exempt investors (including IRAs and other tax-exempt plans) or to foreign investors. "Minimum-maximum best efforts" means (1) that the various broker-dealers which will sell the units (a) will not be obligated to sell or to purchase any amount of units but (b) will be obligated to make a reasonable and diligent effort (that is, their "best efforts") to sell as many units as possible and (2) that the offering will not close unless the minimum number of units (75 units aggregating $1.5 million; 125 units aggregating $2.5 million with respect to each of PDC 2001-D Limited Partnership, PDC 2002-D Limited Partnership, and PDC 2003-D Limited Partnership) is sold within the offering period. The term "maximum" refers to the maximum proceeds of $15 million ($25 million with respect to PDC 2001-D Limited Partnership, PDC 2002-D Limited Partnership, and PDC 2003-D Limited Partnership) that can be raised with respect to any partnership . The , an NASD member, will receive a sales commission equal to 8% of the investor partners' subscriptions and reimbursement of due diligence expenses, marketing support fees, and other compensation equal to 2% of the investor partners' subscriptions, and wholesaling fees equal to 0.5% of the investor partners' subscriptions, for an aggregate of $15,750,000 for the sale of the maximum number of 750 units ($157,500 for the sale of the minimum number of 75 units for a partnership ; $262,500 for the sale of the minimum number of 125 units and $2,625,000 for the sale of the maximum number of units for each of PDC 2001-D Limited Partnership, PDC 2002-D Limited Partnership and PDC 2003-D Limited Partnership). The may reallow these commissions, expenses and fees, in whole or in part, to NASD-licensed broker-dealers for sale of the units The will not reallow the wholesaling fees. In no event will the total compensation paid to NASD members exceed 10 1/2% of subscriptions (comprised of 8% in sales commissions, .5% in wholesaling fees, and 1.5% in marketing support fees and other compensation and .5% of subscriptions for reimbursement of bona fide due diligence expenses). Any commissions and other remuneration will be paid in cash solely on the amount of initial subscriptions and only as permitted under and state securities laws and applicable rules and regulations. As provided in the soliciting dealers agreements between PDC Securities Incorporated and the various soliciting dealers, we, prior to the time that we have received the minimum required subscriptions in cleared funds from subscribers that are suitable to be investor partners in the partnership in which units are then being offered, may advance to the various NASD-licensed broker-dealers from our own funds the sales commissions and due diligence expenses which would otherwise be payable in connection with the subscriptions prior to the close and funding of the partnership the minimum sale of 75 units (125 units with respect to each of PDC 2001-D Limited Partnership, PDC 2002-D Limited Partnership and PDC 2003-D Limited Partnership) has not occurred as of the time as the particular offering terminates or we determine not to organize and fund the partnership for any reason, broker-dealers which have received commissions and due diligence expenses in advance from us with respect to the sale of units in that partnership are required by the soliciting-dealers agreements to return the commissions and due diligence expenses to us promptly. No sales commissions will be paid on sales of units to officers, directors, employees, or registered representatives of a , in its discretion, has elected to waive the sales commissions. Any units so purchased will be held for investment and not for resale. We, the , and soliciting dealers have agreed to indemnify one another against civil liabilities, including liability under the Securities Act of 1933 . Members of the selling group may be deemed to be "underwriters" as defined under the Securities Act , and their commissions and other payments may be deemed to be underwriting compensation. The may offer the units and receive commissions in connection with the sale of units only in those states in which it is lawfully qualified to do so. We and our affiliates may elect to purchase units in the offering on the same terms and conditions as other investors, net of commissions. The purchase of units by us and/or our affiliates may have the effect of allowing the offering to be subscribed to the minimum, an express condition of the offering, and thus allow the offering to close. We and/or our affiliates will not purchase more than 10% of the units subscribed by the investor partners in any partnership . Additionally, not more than $50,000 of units purchased by us and affiliates are permitted to be applied to satisfying the minimum requirement. Any units purchased by us and/or our affiliates will be held for investment and not for resale. SALES LITERATURE In connection with the offering, the NASD-registered broker-dealers may utilize various sales literature which discusses aspects of the , namely, a highlight information piece which will constitute the prospectus summary ("Program Summary" in bullet format), an introduction to the ("Flip Chart/Slide Presentation"), and prospect letters ("Broker-Dealer Guide"). The may also utilize a general summary piece ("Program Summary" in text format), a sheet presenting information regarding comparative investment deductions ("Investment Deductions"), and a Web site at www.pdcgas.com. sales material will not contain any material information which is not also set forth in the prospectus. The offering of units will be made only by means of this prospectus. LEGAL OPINIONS The validity of the units offered income tax matters discussed under "Tax Considerations" and in the tax opinion set forth in Appendix D to the prospectus have been passed upon by Duane, Morris & Heckscher LLP, 1667 K Street, N.W., Washington, D.C. 20006. EXPERTS The Partnership reserve and future net revenues information presented under "Prior Activities - Partnership Proved Reserves and Future Net Revenues" has been prepared by Wright & Company, Inc., Brentwood, Tennessee, independent petroleum consultants. The consolidated balance sheets of Petroleum Development Corporation and subsidiaries as of December 31, 1999 and 1998, included and in the have been included and in the in reliance upon the reports of KPMG LLP, independent auditors, appearing elsewhere , and upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION A on Form S-1 (Reg. No. 333- with respect to the units offered has been filed on behalf of the partnerships with the Securities and Exchange Commission, Washington, D.C. 20549, under the Securities Act of 1933 . This prospectus does not contain all of the information set forth in the portions of which have been omitted the rules and regulations of the Securities and Exchange Commission. Reference is made to the, including exhibits, for further information. You may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. This , as well as all exhibits and amendments , have been filed and will be filed electronically with the Commission through the Electronic Data Gathering, Analysis, and Retrieval ("EDGAR") system. the and all exhibits and amendments thereto are publicly available through the Commission's Web site (http://www.sec.gov). We hereby make reference to the copy of documents filed as exhibits to the Registration Statement for full statements of the provisions , and we qualify each statement in this prospectus in all respects by this reference. You may obtain copies of any materials filed as a part of the from the Securities and Exchange Commission by payment of the requisite fees or you may examine these documents in the offices of the Commission without charge. The delivery of this prospectus at any time does not imply that the information contained is correct as of any time subsequent to the date . GLOSSARY OF TERMS The following terms used in this prospectus shall unless the context otherwise requires have the following respective meanings: Act: The West Virginia Uniform Limited Partnership Act. Additional General Partners: Those investor partners who purchase units as additional general partners, and their transferees and assigns. Administrative Costs: All customary and routine expenses incurred by the Managing General Partner for the conduct of program administration, including legal, finance, accounting, secretarial, travel, office rent, telephone, data processing and other items of a similar nature. Affiliate: An affiliate of a specified person means (a) any person directly or indirectly owning, controlling, or holding with power to vote 10 percent or more of the outstanding voting securities of the specified person; (b) any person 10 percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by the specified person; (c) any person directly or indirectly controlling, controlled by, or under common control with the specified person; (d) any officer, director, trustee or partner of the specified person; and (e) if the specified person is an officer, director, trustee or partner, any person for which the person acts in any capacity. Assessment: Additional amounts of capital which may be mandatorily required of or paid voluntarily by an investor partner beyond his subscription commitment. Capital Accounts: The accounts to be maintained for each partner on the books and records of the partnership Section 3.01 of the limited partnership agreement. Capital Available for Investment: The sum of (a) the subscriptions, net of the sales commissions, due diligence expenses, marketing support fees and other compensation, and wholesaling fees, which aggregate 10.5% of subscriptions, and the management fee and (b) the capital contribution of the Managing General Partner. Capital Contribution: With respect to each investor partner , the total investment, including the original investment, assessments and amounts reinvested, by the to the capital of the partnership Section 2.02 of the limited partnership agreement and, with respect to the Managing General Partner and , the total investment, including the original investment, assessments and amounts reinvested, to the capital of the partnership Section 2.01 of the limited partnership agreement. Capital Expenditures: Those costs associated with property acquisition and the drilling and completion of oil and gas wells which are generally accepted as capital expenditures the provisions of the Internal Revenue Code. Carried Interest: An equity interest in a program issued to a person without consideration, in the form of cash or tangible property, in an amount proportionately equivalent to that received from the participants. Code: The Internal Revenue Code of 1986, as amended. Cost: When used with respect to the sale of property to the partnership , means (a) the sum of the prices paid by the seller to an unaffiliated person for the property, including bonuses; (b) title insurance or examination costs, brokers' commissions, filing fees, recording costs, transfer taxes, if any, and like charges in connection with the acquisition of the property; (c) a pro rata portion of the seller's actual necessary and reasonable expenses for seismic and geophysical services; and (d) rentals and ad valorem taxes paid by the seller with respect to the property to the date of its transfer to the buyer, interest and points actually incurred on funds used to acquire or maintain the property, and the portion of the seller's reasonable, necessary and actual expenses for geological, engineering, drafting, accounting, legal and other like services allocated to the property cost in conformity with generally accepted accounting principles and industry standards, except for expenses in connection with the past drilling of wells which are not producers of sufficient quantities of oil or gas to make commercially reasonable their continued operations, and provided that the expenses enumerated in this subsection (d) hereof shall have been incurred not more than 36 months prior to the purchase by the partnership provided that the period may be extended, at the discretion of the state securities administrator, upon proper justification. When used with respect to services, "cost" means the reasonable, necessary and actual expense incurred by the seller on behalf of the partnership in providing the services, determined in accordance with generally accepted accounting principles. As used elsewhere, "cost" means the price paid by the seller in an arm's-length transaction. Dealer Manager: PDC Securities Incorporated, our affiliate. Development Well: A well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive. Direct Costs: All actual and necessary costs directly incurred for the benefit of the partnership and generally attributable to the goods and services provided to the partnership by parties other than the Managing General Partner or its affiliates. Direct costs shall not include any cost otherwise classified as organization and offering expenses, administrative costs, operating costs or property costs. Direct costs may include the cost of services provided by the Managing General Partner or its affiliates if the services are provided written contracts and in compliance with Section 5.07(e) of the limited partnership agreement. Distributable Cash: Cash remaining for distribution to the Managing General Partner and the investor partners after the payment of all partnership obligations, including debt service and the establishment of contingency reserves for anticipated future costs as determined by the Managing General Partner. Drilling and Completion Costs: All costs, excluding operating costs, of drilling, completing, testing, equipping and bringing a well into production or plugging and abandoning it, including all labor and other construction and installation costs incident thereto, location and surface damages, cementing, drilling mud and chemicals, drillstem tests and core analysis, engineering and well site geological expenses, electric logs, costs of plugging back, deepening, rework operations, repairing or performing remedial work of any type, costs of plugging and abandoning any well participated in by the Partnership, and reimbursements and compensation to well operators, including charges paid to the Managing General Partner as unit operator during the drilling and completion phase of a well, plus the cost of the gathering systems and of acquiring leasehold interests. Dry Hole: Any well abandoned without having produced oil or gas in commercial quantities. Escrow Agent: Chase Manhattan Trust Company, Pittsburgh, Pennsylvania, or its successor. Exploratory Well: A well drilled to find commercially productive hydrocarbons in an unproved area, to find a new commercially productive horizon in a field previously found to be productive of hydrocarbons at another horizon, or to significantly extend a known prospect. Farmout: An agreement the owner of a leasehold or working interest agrees to assign an interest in specific acreage to the assignees, retaining an interest such as an overriding royalty interest, an oil and gas payment, offset acreage or other type of interest, subject to the drilling of one or more specific wells or other performance as a condition of the assignment. Horizon: A zone of a particular formation; that part of a formation of sufficient porosity and permeability to form a petroleum reservoir. IDC: Intangible drilling and development costs. Independent Expert: A person with no material relationship to the Managing General Partner who is qualified and who is in the business of rendering opinions regarding the value of oil and gas properties based upon the evaluation of all pertinent economic, financial, geologic and engineering information available to the Managing General Partner. Initial Limited Partner: Steven R. Williams or any successor to his interest. Investor Partner: Any investor participating in the partnership as an Additional General Partner or a limited partner , but excluding the Managing General Partner and . Landowners' Royalty Interest: An interest in production, or the proceeds therefrom, to be received free and clear of all costs of development, operation, or maintenance, reserved by a landowner upon the creation of an oil and gas lease. Lease: Full or partial interests in: undeveloped oil and gas leases; oil and gas mineral rights; licenses; ( concessions; contracts; fee rights; or other rights authorizing the owner thereof to drill for, reduce to possession and produce oil and gas. Limited Partners: Those investor partners who purchase units, transferees or assignees who become limited partners whose interests are converted to limited partnership interests the provisions of the limited partnership agreement. Limited Partnership Agreement: The limited partnership agreement as it may be amended from time to time, the form of which is attached to the prospectus as Appendix A. Loss: The excess of the partnership's losses and deductions over the partnership's income and gains, computed in accordance with the provisions of the income tax laws. Management Fee: The fee to which the Managing General Partner is entitled Section 6.06 of the limited partnership agreement. Managing General Partner: Petroleum Development Corporation or its successors. Mcf: One thousand cubic feet of natural gas measured at the standard temperature of 60E Fahrenheit and pressure of 14.65 psi. Net Subscriptions: An amount equal to total subscriptions of the investor partners less the amount of organization and offering costs of the partnership . Net Well: The sum of fractional working interests owned and drilled by the partnership . Non_Capital Expenditures: Those expenditures associated with property acquisition and the drilling and completion of oil and gas wells that under present law are generally accepted as fully deductible currently for federal income tax purposes. Offering Termination Date: December 31, 2001 with respect to partnerships designated "PDC 2001- Limited Partnership," December 31, 2002 with respect to partnerships designated "PDC 2002- Limited Partnership," and December 31, 2003 with respect to partnerships designated "PDC 2003- Limited Partnership" or the earlier date as the Managing General Partner, in its sole and absolute discretion, shall select. Oil and Gas Interest: Any oil or gas royalty or lease, or fractional interest therein, or certificate of interest or participation or investment contract relative to the royalties, leases or fractional interests, or any other interest or right which permits the exploration of, drilling for, or production of oil and gas or other related hydrocarbons or the receipt of the production or the proceeds thereof. Operating Costs: Expenditures made and costs incurred in producing and marketing oil or gas from completed wells, including, in addition to labor, fuel, repairs, hauling, materials, supplies, utility charges and other costs incident to or therefrom, ad valorem and severance taxes, insurance and casualty loss expense, and compensation to well operators or others for services rendered in conducting the operations. Organization and Offering Costs: All costs of organizing and selling the offering including, but not limited to, total underwriting and brokerage discounts and commissions (including fees of the underwriters' attorneys), expenses for printing, engraving, mailing, salaries of employees while engaged in sales activity, charges of transfer agents, registrars, trustees, escrow holders, depositaries, engineers and other experts, expenses of qualification of the sale of the securities under federal and state law, including taxes and fees, accountants' and attorneys' fees and other frontend fees. Overriding Royalty Interest: An interest in the oil and gas produced a specified oil and gas lease or leases, or the proceeds from the sale thereof, carved out of the working interest, to be received free and clear of all costs of development, operation, or maintenance. Participant: The purchaser of a unit in the . Partners: The Managing General Partner, the additional general partner other than the Managing General Partner, and the limited partners . Reference to a " shall mean any one of the partners . Partnership or Partnerships: One or all of the limited partnerships to be formed in the PDC 2003 Drilling Program comprised of a series of up to twelve limited partnerships to be designated as the PDC 2001-A Limited Partnership, the PDC 2001-B Limited Partnership, the PDC 2001-C Limited Partnership, PDC 2001-D Limited Partnership, PDC 2002-A Limited Partnership, PDC 2002-B Limited Partnership, PDC 2002-C Limited Partnership, PDC 2002-D Limited Partnership, PDC 2003-A Limited Partnership, PDC 2003-B Limited Partnership, PDC 2003-C Limited Partnership, and PDC 2003-D Limited Partnership. The partnerships will be governed by the West Virginia Uniform Limited Partnership Act. Together the partnerships , for purposes of this offering, are referred to as the PDC 2003 Drilling Program or sometimes as the . Partnership Minimum Gain: Partnership minimum gain as defined in Treas. Reg. Section 1.704-2(d)(1). PDC: Petroleum Development Corporation. Profit: The excess of the partnership's income and gains over the partnership's losses and deductions, computed in accordance with the provisions of the income tax laws. Program: One or more limited partnerships formed, or to be formed, for the primary purpose of exploring for oil or gas. , PDC 2003 Drilling Program. Prospect: A contiguous oil and gas leasehold estate, or lesser interest therein, upon which drilling operations may be conducted. In general, a prospect is an area in which a partnership owns or intends to own one or more oil and gas interests, which is geographically defined on the basis of geological data by the Managing General Partner and which is reasonably anticipated by the Managing General Partner to contain at least one reservoir. An area covering lands which are believed by the Managing General Partner to contain subsurface structural or stratigraphic conditions making it susceptible to the accumulations of hydrocarbons in commercially productive quantities at one or more horizons. The area, which may be different for different horizons, shall be designated by the Managing General Partner in writing prior to the conduct of program operations and shall be enlarged or contracted from time to time on the basis of subsequently acquired information to define the anticipated limits of the associated hydrocarbon reserves and to include all acreage encompassed therein. A "prospect" with respect to a particular horizon may be limited to the minimum area permitted by state law or local practice, whichever is applicable, to protect against drainage from adjacent wells if the well to be drilled by the partnership is to a horizon containing proved reserves. Prospectus: The partnership's prospectus, including a preliminary prospectus, of which the limited partnership agreement is a part, which the units are being offered and sold. Proved Developed Oil and Gas Reserves. Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery should be included as "proved developed reserves" only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved. Proved Oil and Gas Reserves: Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation test. The area of a reservoir considered proved includes (A) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any, and (B) the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. Reserves which can be produced economically through application of improved recovery techniques (such as fluid injection) are included in the "proved" classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based. Estimates or proved reserves do not include the following: (A) oil that may become available from known reservoirs but is classified separately as "indicated additional reserves; (B) crude oil, natural gas, and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics, or economic factors; (C) crude oil, natural gas, and natural gas liquids, that may occur in undrilled prospects; and (D) crude oil, natural gas, and natural gas liquids, that may be recovered from oil shales, coal, gilsonite and other sources. Proved Undeveloped Reserves. Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances should estimates for proved undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless the techniques have been proved effective by actual tests in the area and in the same reservoir. Reservoir: A separate structural or stratigraphic trap containing an accumulation of oil or gas. Roll_Up: A transaction involving the acquisition, merger, conversion, or consolidation, either directly or indirectly, of the partnership and the issuance of securities of a roll-up entity. the term does not include: (a) a transaction involving securities of the partnership that have been listed for at least 12 months on a national exchange or traded through the National Association of Securities Dealers Automated Quotation National Market System; or (b)a transaction involving the conversion to corporate, trust or association form of only the partnership if, as a consequence of the transaction, there will be no significant adverse change in any of the following: (1)voting rights; (2)the term of existence of the partnership ; (3)sponsor compensation; or (4)the partnership's investment objectives. Roll_Up Entity: A partnership, trust, corporation or other entity that would be created or survive after the successful completion of a proposed roll-up transaction. Royalty: A fractional undivided interest in the production of oil and gas wells, or the proceeds therefrom to be received free and clear of all costs of development, operations or maintenance. Royalties may be reserved by landowners upon the creation of an oil and gas lease ("landowner's royalty") or subsequently carved out of a working interest ("overriding royalty"). Securities Act: Securities Act of 1933, as amended. Sponsor: Any person directly or indirectly instrumental in organizing, wholly or in part, a program or any person who will manage or is entitled to manage or participate in the management or control of a program. "Sponsor" includes the managing and controlling general partner(s) and any other person who actually controls or selects the person who controls 25% or more of the exploratory, developmental or producing activities of the partnership , or any segment thereof, even if that person has not entered into a contract at the time of formation of the partnership . "Sponsor" does not include wholly independent third parties such as attorneys, accountants, and underwriters whose only compensation is for professional services rendered in connection with the offering of units. Whenever the context of these guidelines so requires, the term "sponsor" shall be deemed to include its affiliates. Spudding Date: The date that drilling commences. Subscriptions: The subscription agreement(s) or the amount indicated on the subscriptions agreements that the additional general partner and the limited partners have agreed to pay to a partnership . Tangible Costs: Those costs which are generally accepted as capital expenditures the provisions of the Code. Treas. Reg.: A regulation promulgated by the Treasury Department under Title 26 of the United States Code. Unit: An undivided interest of an investor partner in the aggregate interest in the capital and profits of the partnership . Well Head Gas Price: The price paid by a gas purchaser for gas produced from partnership wells excluding any tax reimbursements or transportation allowances. Wholesaling Fee: A fee paid to a representative of the who helps introduce and explain the to registered representatives with firms executing a selling agreement with the for the . Working Interest: An interest in an oil and gas leasehold which is subject to some portion of the costs of development, operation, or maintenance. No dealer, salesman or other person has been authorized to give any information or make any representations other than those contained in this prospectus in connection with this offering. You should rely only upon the information contained in this prospectus. We have not authorized anyone to provide you with different information. If it is against the law in any state to make an offer to sell the units (or to solicit an offer from someone to buy the units , then this prospectus does not apply to any person in that state, and no offer or solicitation is made by this prospectus to any person and we do not authorize the use of this prospectus to any person in that state. Throughout this offering, all dealers effecting transactions in the registered securities, whether or not participating in this distribution, are required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. 7,500 Preformation Units of General and Limited Partnership Interest [PDC logo] PDC 2003 DRILLING PROGRAM $150,000,000 Aggregate Subscriptions PROSPECTUS Dated , 2001 PDC SECURITIES INCORPORATED 103 East Main Street Bridgeport, West Virginia 26330 800/624-3821 Dealer Manager A Member of the National Association of Securities Dealers, Inc. and Securities Investor Protection Corporation PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets September 30, 2000 and December 31, 1999 <TABLE> <C> <C> <C> ASSETS 2000 1999 (Unaudited) Current assets: Cash and cash equivalents $ 13,736,800 $ 29,059,200 Accounts and notes receivable 18,885,800 10,263,200 Inventories 838,600 577,600 Prepaid expenses 7,232,200 2,360,100 Total current assets 40,693,400 42,260,100 Properties and equipment 133,954,000 118,349,100 Less accumulated depreciation, depletion and amortization 36,188,800 31,207,300 97,765,200 87,141,800 Other assets 3,083,500 2,681,700 $141,542,100 $132,083,600 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 21,564,000 $ 17,599,000 Advances for future drilling contracts 11,191,700 25,137,400 Funds held for future distribution 2,794,200 2,027,600 Total current liabilities 35,549,900 44,764,000 Long-term debt, excluding current maturities 18,475,000 9,300,000 Other liabilities 3,907,200 3,160,600 Deferred income taxes 4,689,600 4,134,100 Commitments and contingencies Stockholders' equity: Common stock 162,400 157,400 Additional paid-in capital 32,931,400 32,071,000 Retained earnings 45,826,600 38,496,500 Total stockholders' equity 78,920,400 70,724,900 $141,542,100 $132,083,600 </TABLE> An investor in PDC 2003 Drilling Program does not thereby acquire any interest in the assets of Petroleum Development Corporation. PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Balance Sheets 1. Accounting Policies Reference is hereby made to the Company's audited Consolidated Balance Sheet at December 31, 1999 which contains a summary of significant accounting policies followed by the Company in preparation of its consolidated financial statements. These policies were also followed in preparing the unaudited balance sheet at September 30, 2000 included herein. 2. Basis of Presentation The Management of the Company believes that all adjustments (consisting of only normal recurring accruals) necessary to a fair statement of the financial position of the Company as of September 30, 2000 have been made. 3. Oil and Gas Properties Oil and Gas Properties are reported on the successful efforts method. 4. Contingencies and Commitments There are no material loss contingencies at September 30, 2000. There has been no change in commitments and contingencies as described in Note 8 of the Consolidated Balance Sheet at December 31, 1999. An investor in PDC 2003 Drilling Program does not thereby acquire any interest in the assets of Petroleum Development Ccorporation. Petroleum Development Corporation and Subsidiaries Consolidated Balance Sheets December 31, 1999 and 1998 (With Independent Auditor's Report Thereon) Independent Auditors' Report The Stockholders and Board of Directors Petroleum Development Corporation: We have audited the accompanying consolidated balance sheets of Petroleum Development Corporation and subsidiaries as of December 31, 1999 and 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheets are free of material misstatement. An audit of a balance sheet includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit of a balance sheet also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated balance sheets referred to above present fairly, in all material respects, the financial position of Petroleum Development Corporation and subsidiaries as of December 31, 1999 and 1998, in conformity with generally accepted accounting principles. /s/KPMG LLP Pittsburgh, Pennsylvania March 6, 2000 PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1999 and 1998 <TABLE> <C> <C> <C> 1999 1998 Assets Current assets: Cash and cash equivalents (includes restricted cash of $614,300 and $156,200, respectively) $29,059,200 34,894,600 Notes and accounts receivable 10,263,200 6,024,100 Inventories 577,600 702,400 Prepaid expenses 2,360,100 2,496,100 Total current assets 42,260,100 44,117,200 Properties and equipment: Oil and gas properties (successful efforts accounting method) 105,837,900 81,592,700 Pipelines 8,643,400 7,669,700 Transportation and other equipment 2,686,800 2,332,200 Land and buildings 1,181,000 1,152,700 118,349,100 92,747,300 Less accumulated depreciation, depletion and amortization 31,207,300 27,356,700 87,141,800 65,390,600 Other assets 2,681,700 1,901,200 $132,083,600 111,409,000 </TABLE> An investor in PDC 2003 Drilling Program does not thereby acquire any interest in the assets of Petroleum Development Corporation (Continued) PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1999 and 1998 <TABLE> <C> <C> <C> 1999 1998 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 14,678,900 11,218,900 Accrued taxes 276,400 - Other accrued expenses 2,643,700 1,959,900 Advances for future drilling contracts 25,137,400 28,320,800 Funds held for future distribution 2,027,600 984,200 Total current liabilities 44,764,000 42,483,800 Long-term debt 9,300,000 - Other liabilities 3,160,600 2,233,500 Deferred income taxes 4,134,100 3,945,000 Commitments and contingencies Stockholders' equity: Common stock, par value $.01 per share; authorized 50,000,000 shares; issued and outstanding 15,737,795 and 15,510,762 157,400 155,100 Additional paid-in capital 32,071,000 31,873,100 Warrants outstanding - 46,300 Retained earnings 38,496,500 30,672,200 Total stockholders' equity 70,724,900 62,746,700 $132,083,600 111,409,000 See accompanying notes to consolidated balance sheets. </TABLE> An investor in PDC 2003 Drilling Pprogram does not thereby acquire any interest in the assets of Petroleum Development Corporation PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Balance Sheets December 31, 1999 and 1998 (1) Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated balance sheets include the accounts of Petroleum Development Corporation and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. The Company accounts for its investment in limited partnerships under the proportionate consolidation method. Under this method, the Company's balance sheets include its prorata share of assets and liabilities of the limited partnerships in which it participates. The Company is involved in three business segments. The segments are drilling and development, natural gas sales and well operations. (See Note 14) The Company grants credit to purchasers of oil and gas and the owners of managed properties, substantially all of whom are located in West Virginia, Tennessee, Pennsylvania, Ohio, Michigan and Colorado. Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Inventories Inventories of well equipment, parts and supplies are valued at the lower of average cost or market. An inventory of natural gas is recorded when gas is purchased in excess of deliveries to customers and is recorded at the lower of cost or market. Oil and Gas Properties Exploration and development costs are accounted for by the successful efforts method. The Company assesses impairment of capitalized costs of proved oil and gas properties by comparing net capitalized costs to undiscounted future net cash flows on a field-by-field basis using expected prices. Prices utilized in each year's calculation for measurement purposes and expected costs are held constant throughout the estimated life of the properties. If net capitalized costs exceed undiscounted future net cash flow, the measurement of impairment is based on estimated fair value which would consider future discounted cash flows. (Continued) PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Balance Sheets (Continued) December 31, 1999 and 1998 Property acquisition costs are capitalized when incurred. Geological and geophysical costs and delay rentals are expensed as incurred. The costs of drilling exploratory wells are capitalized pending determination of whether the wells have discovered economically producible reserves. If reserves are not discovered, such costs are expensed as dry holes. Development costs, including equipment and intangible drilling costs related to both producing wells and developmental dry holes, are capitalized. Unproved properties are assessed on a property-by-property basis and properties considered to be impaired are charged to expense when such impairment is deemed to have occurred. Costs of proved properties, including leasehold acquisition, exploration and development costs and equipment, are depreciated or depleted by the unit-of-production method based on estimated proved developed oil and gas reserves. Upon sale or retirement of complete units of depreciable or depletable property, the net cost thereof, less proceeds or salvage value, is credited or charged to income. Upon retirement of a partial unit of property, the cost thereof is charged to accumulated depreciation and depletion. Based on the Company's experience, management believes site restor-ation, dismantlement and abandonment costs net of salvage to be immaterial in relation to operating costs. These costs are being expensed when incurred. Transportation Equipment, Pipelines and Other Equipment Transportation equipment, pipelines and other equipment are carried at cost. Depreciation is provided principally on the straight-line method over useful lives of 3 to 17 years. These assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss based on estimated fair value is recorded when the review indicates that the related expected future net cash flow (undiscounted and without interest charges) is less than the carrying amount of the asset. Maintenance and repairs are charged to expense as incurred. Major renewals and betterments are capitalized. Upon the sale or other disposition of assets, the cost and related accumulated depreciation, depletion and amortization are removed from the accounts, the proceeds applied thereto and any resulting gain or loss is reflected in income. Buildings Buildings are carried at cost and depreciated on the straight-line method over estimated useful lives of 30 years. (Continued) PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Balance Sheets (Continued) December 31, 1999 and 1998 Advances for Future Drilling Contracts Represents funds received from Partnerships and other joint ventures for drilling activities which have not been completed and accordingly have not yet been recognized as income in accordance with the Company's income recognition policies. Retirement Plans The Company has a 401-K contributory retirement plan (401-K Plan) covering full-time employees. The Company provides a discretionary matching of employee contributions to the plan. The Company also has a profit sharing plan covering full-time employees. The Company's contributions to this plan are discretionary. The Company has a deferred compensation arrangement covering executive officers of the Company as a supplemental retirement benefit. The Company has established split-dollar life insurance arrangements with certain executive officers. Under these arrangements, advances are made to these officers equal to the premiums due. The advances are collateralized by the cash surrender value of the policies. The Company records as other assets its share of the cash surrender value of the policies. Revenue Recognition Oil and gas wells are drilled primarily on a contract basis. The Company follows the percentage-of-completion method of income recognition for drilling operations in progress. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the balance sheets carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Derivatives Gains and losses related to qualifying hedges of firm commitments or anticipated transactions through the use of natural gas futures and option contracts are deferred and recognized in income or as adjustments of carrying amounts when the underlying hedged transaction occurs. In order for futures contracts to qualify as a hedge, there must be sufficient correlation to the underlying hedged transaction. The change in the fair value of derivative instruments which do not qualify for hedging are recognized into income currently. (Continued) PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Balance Sheets (Continued) December 31, 1999 and 1998 Stock Compensation The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 allows entities to continue to measure compensation cost for stock-based awards using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," and to provide pro forma net income and pro forma earnings per share disclosures as if the fair value based method defined in SFAS 123 had been applied. The Company has elected to continue to apply the provisions of APB 25 and provide the pro forma disclosure provisions of SFAS 123. See note 5 to the balance sheets. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these balance sheets in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Estimates which are particularly significant to the consolidated balance sheets include estimates of oil and gas reserves and future cash flows from oil and gas properties. Fair Value of Financial Instruments The carrying values and fair values of the Company's receivables, payables and debt obligations are estimated to be substantially the same as of December 31, 1999 and 1998. New Accounting Standards Statement of Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), was issued by the Financial Accounting Standards Board in June, 1998. SFAS No. 133 standardized the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. SFAS No. 133 is effective for years beginning after June 15, 2000; however, early adoption is permitted. On adoption, the provisions of SFAS No. 133 must be applied prospectively. At the present time, the Company cannot determine the impact that SFAS No. 133 will have on its balance sheets upon adoption, as such impact will be based on the extent of derivative instruments, such as natural gas futures and option contracts, outstanding at the date of adoption. (2) Notes and Accounts Receivable Included in other assets are noncurrent notes and accounts receivable as of December 31, 1999 and 1998, in the amounts of $494,000 and $617,900 net of the allowance for doubtful accounts of $216,900 and $129,800, respectively. The allowance for doubtful current accounts receivable as of December 31, 1999 and 1998 was $221,500 and $144,800, respectively. (Continued) PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Balance Sheets December 31, 1999 and 1998 (3) Long-Term Debt On June 22, 1999 the Company executed an Amendment to its Credit Agreement with First National Bank of Chicago. The amendment provides a $20.0 million borrowing base, subject to adequate oil and gas reserves. The Company has activated $10.0 million of such borrowing base, and has at its discretion the ability to activate the additional $10.0 million. The Company is required to pay a commitment fee of 1/4 percent on the unused portion of the activated credit facility. Interest accrues at prime, with LIBOR (London Interbank Market Rate) alternatives available at the discretion of the Company. No principal payments are required until the credit agreement expires on December 31, 2002. As of December 31, 1999 the outstanding balance was $9,300,000 of which $6,300,000 is at a prime rate of 8.5% and $3,000,000 at a LIBOR rate of 7.73%. At December 31, 1998 there was no balance outstanding. Any amounts outstanding under the credit agreement are secured by substantially all properties of the Company. The credit agreement requires, among other things, the existence of satisfactory levels of natural gas reserves, maintenance of certain working capital and tangible net worth ratios along with a restriction on the payment of dividends. The Company is in compliance with all covenants of the credit agreement. (4) Income Taxes The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1999 and 1998 are presented below: <TABLE> <C> <C> <C> 1999 1998 Deferred tax assets: Allowance for doubtful accounts $ 175,400 108,600 Drilling notes 105,700 109,200 Alternative minimum tax credit carryforwards (Section 29) 1,982,300 1,783,000 Future abandonment 273,100 - Deferred compensation 1,213,800 968,500 Other 51,600 148,300 Total gross deferred tax assets 3,801,900 3,117,600 Less valuation allowance - (375,000) Deferred tax assets 3,801,900 2,742,600 Less current deferred tax assets (included in prepaid expenses) (1,007,600) (927,400) Net non-current deferred tax assets 2,794,300 1,815,200 Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation and amortization (6,928,400) (5,760,200) Total gross deferred tax liabilities (6,928,400) (5,760,200) Net deferred tax liability $(4,134,100) (3,945,000) </TABLE> The net changes in the total valuation allowance were decreases of $375,000, $473,200 and $782,300 for the years ended December 31, 1999, 1998 and 1997, respectively. At December 31, 1999, the Company has alternative minimum tax credit carryforwards (Section 29) of approximately $1,982,300 which are available to reduce future federal regular income taxes over an indefinite period. (Continued) PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Balance Sheets (Continued) December 31, 1999 and 1998 (5) Common Stock Changes in capital during 1999 and 1998 are as follows: <TABLE> <C> <C> <C> <C> <C> <C> Common stock issued Number Additional Warrants of paid-in out- Retained shares Amount capital standing earnings Total Balance December 31, 1997 15,245,758 $152,500 31,553,100 46,300 24,014,200 55,766,100 Issuance of common stock: Exercise of employee stock options 324,333 3,200 300,800 - - 304,000 Amortization of stock award - - 12,200 - - 12,200 Repurchase and cancellation of treasury stock (59,329) (600) (303,400) - - (304,000) Income tax benefit from the exercise of stock options - - 310,400 - - 310,400 Net income - - - - 6,658,000 6,658,000 Balance December 31, 1998 15,510,762 $155,100 31,873,100 46,300 30,672,200 62,746,700 Issuance of common stock: Exercise of employee stock options 324,333 3,200 300,800 - - 304,000 Amortization of stock award - - 12,200 - - 12,200 Repurchase and cancellation of treasury stock (97,300) (900) (303,100) - - (304,000) Income tax benefit from the exercise of stock options - - 141,700 - - 141,700 Warrants expired - - 46,300 (46,300) - - Net income - - - - 7,824,300 7,824,300 Balance December 31, 1999 15,737,795 $157,400 32,071,000 - 38,496,500 70,724,900 </TABLE> Options Options amounting to 145,000 and 20,000 shares were granted during 1999 and 1998, respectively, to certain employees and directors under the Company's Stock Option Plans. These options were granted with an exercise price equal to market value as of the date of grant and vest over a six month period for the 1999 grant and a two year period for the 1998 grant. The outstanding options expire from 2000 to 2009. The estimated fair value of the options granted during 1999 and 1998 was $2.44 and $3.92 per option, respectively. The fair value was estimated using the Black-Scholes option pricing model with the following assumptions for the 1999 and 1998 grant, respectively: risk-free interest rate of 5.1% and 5.9% expected dividend yield of 0%, expected volatility of 61.3% and 58.0% and expected life of 7 years. <TABLE> <C> <C> <C> <C> Average Range of Number Exercise Exercise of Shares Price Prices Outstanding December 31, 1997 1,872,650 $2.10 .94 - 5.13 Granted 20,000 $6.13 6.13 - 6.13 Exercised (324,333) $0.94 .94 - .94 Expired - $ - . - . Outstanding December 31, 1998 1,568,317 $2.39 .94 - 6.13 Granted 145,000 $3.75 3.75 - 3.75 Exercised (324,333) $0.94 .94 - .94 Expired - $ - - Outstanding December 31, 1999 1,388,984 $2.87 .94 - 6.13 </TABLE> (Continued) PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Balance Sheets (Continued) December 31, 1999 and 1998 As of December 31, 1999, there were 723,984 options outstanding and exercisable in the $.94 to $1.62 exercise price range which have a weighted average remaining contractual life of 2.7 years and weighted average exercise price of $1.05. Also as of December 31, 1999 there were 665,000 options outstanding and exercisable at a $3.75 to $6.13 exercise price range having a weighted average remaining contractual life of 7.9 years and weighted average exercise price of $4.86. Stock Redemption Agreement The Company has stock redemption agreements with three officers of the Company. The agreements require the Company to maintain life insurance on each executive in the amount of $1,000,000. The agreements provide that the Company shall utilize the proceeds from such insurance to purchase from such executives' estates or heirs, at their option, shares of the Company's stock. The purchase price for the outstanding common stock is to be based upon the average closing asked price for the Company's stock as quoted by NASDAQ during a specified period. The Company is not required to purchase any shares in excess of the amount provided for by such insurance. (6) Employee Benefit Plans During 1999, 1998 and 1997 the Company expensed and established a liability for $90,000 each year under a deferred compensation arrangement with the executive officers of the Company. In 1995, a total of 90,000 restricted shares of the Company's common stock were granted to certain employees and available to them upon retirement. The market value of shares awarded was $101,300. This amount was recorded as unamortized stock award. The unamortized stock award is being amortized to expense over the employees' expected years to retirement and amounted to $12,200, $12,200 and $12,300 in 1999, 1998 and 1997, respectively. At December 31, 1999 and 1998, the Company has recorded as other assets $300,000 and $240,000, respectively as its share of the cash surrender value of the life insurance pledged as collateral for the payment of premiums on split-dollar life insurance policies owned by certain executive officers. (7) Transactions with Affiliates As part of its duties as well operator, the Company received $24,002,500 in 1999 and $22,997,300 in 1998 representing proceeds from the sale of oil and gas and made distributions to investor groups according to their working interests in the related oil and gas properties. The Company provided oil and gas well drilling services to affiliated partnerships, substantially all of the Company's oil and gas well drilling operations was for such partnerships. The Company also provided related services of operation of wells, reimbursement of syndication costs, management fees, tax return preparation and other services relating to the operation of the partnerships. The Company received $10,322,500 in 1999 and $9,621,700 in 1998 for those services. During 1999 and 1998, the Company paid $31,600 and $30,000, respectively to the Corporate Secretary's law firm for various legal services. (8) Commitments and Contingencies The nature of the independent oil and gas industry involves a dependence on outside investor drilling capital and involves a concentration of gas sales to a few customers. The Company sells natural gas to various public utilities and industrial customers. (Continued) PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Balance Sheets December 31, 1999 and 1998 Substantially all of the Company's drilling programs contain a repurchase provision where Investors may tender their partnership units for repurchase at any time beginning with the third anniversary of the first cash distribution. The provision provides that the Company is obligated to purchase an aggregate of 10% of the initial subscriptions per calendar year (at a minimum price of four times the most recent 12 months' cash distributions), only if such units are tendered, subject to the Company's financial ability to do so. The maximum annual 10% repurchase obligation, if tendered by the investors, is currently approximately $759,000. The Company has adequate capital to meet this obligation. The Company is not party to any legal action that would materially affect the Company's results of operations or financial condition. (9) Acquisitions On February 19, 1998, the Company offered to purchase from Investors their units of investment in the Company's Drilling Programs formed prior to 1993. The Company purchased approximately $2.3 million of producing oil and gas properties in conjunction with this offer, which expired on March 31, 1998. The Company utilized capital received from its Public Stock Offering to fund this purchase. On June 12, 1998 the Company purchased for $3.1 million a majority interest in the assets of Pemco Gas, Inc., a Pennsylvania producing company. The assets include 122 natural gas wells, 2,700 undeveloped acres, gathering systems, natural gas compressors and other facilities. The Company estimates that its interest includes 4.7 Bcf of natural gas reserves. The Company utilized capital received from its Public Stock Offering to fund this purchase. On November 16, 1998, the Company purchased all of the working interest in a 13 well Antrim Shale production unit and adjacent development locations in Montmorency County, Michigan. The Company estimates that the purchase includes approximately 4 Bcf of proved developed producing reserves and 1.5 Bcf of proved undeveloped reserves, with an acquisition cost of approximately $2.8 million. The Company utilized capital received from its Public Stock Offering to fund this purchase. On January 29, 1999, the Company offered to purchase from Investors their units of investment in the Company's Drilling Programs formed prior to 1996. The Company purchased approximately $1.8 million of producing oil and gas properties in conjunction with this offer, which expired on March 31, 1999. The Company utilized capital received from its Public Stock Offering to fund this purchase. On December 15, 1999, the Company purchased all of the working interest in 53 producing wells in the D-J Basin of Colorado. The Company estimates that the purchase includes proved developed reserves of approximately 3.6 Bcf of natural gas and 370,000 barrels of oil or approximately 5.8 Bcf equivalent (Bcfe), along with another 3.0 Bcfe of proved undeveloped reserves. Also included in the acquisition was 16.5 net development drilling locations. The total acquisition cost for the wells and locations was $5.2 million. The company utilized part of its existing line of credit to fund the transaction. The effective date of the transaction was December 1, 1999. (Continued) PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Balance Sheets December 31, 1999 and 1998 (10) Derivatives and Hedging Activities The company utilizes commodity based derivative instruments as hedges to manage a portion of its exposure to price volatility stemming from its integrated natural gas production and marketing activities. These instruments consist of natural gas futures and option contracts traded on the New York Mercantile Exchange. The futures and option contracts hedge committed and anticipated natural gas purchases and sales, generally forecasted to occur within a 12 month period. The Company does not hold or issue derivatives for trading or speculative purposes. As of December 31, 1999 and 1998, the Company had futures contracts for the purchase of $4,318,000 and $1,120,300 of natural gas, respectively. While these contracts have nominal carrying value, their fair value, represented by the estimated amount that would be received upon termination of the contracts, based on market quotes, was a net value of $350,500 at December 31, 1999 and $(105,400) at December 31, 1998. The Company is required to maintain margin deposits with brokers for outstanding futures contracts. As of December 31, 1999 and 1998, cash in the amount of $614,300 and $156,200 was on deposit. (11) Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities Costs incurred by the Company in oil and gas property acquisition, exploration and development are presented below: Years Ended December 31, 1999 1998 Property acquisition cost: Proved undeveloped properties $2,532,200 1,903,200 Producing properties 6,997,500 8,679,000 Development costs 17,168,000 14,902,500 $26,697,700 25,484,700 Property acquisition costs include costs incurred to purchase, lease or otherwise acquire a property. Development costs include costs incurred to gain access to and prepare development well locations for drilling, to drill and equip development wells and to provide facilities to extract, treat, gather and store oil and gas. (12) Oil and Gas Capitalized Costs Aggregate capitalized costs for the Company related to oil and gas exploration and production activities with applicable accumulated depreciation, depletion and amortization are presented below: December 31, 1999 1998 Proved properties: Tangible well equipment $ 62,996,900 46,722,500 Intangible drilling costs 36,270,300 28,379,200 Well equipment leased to others 4,063,600 4,063,600 Undeveloped properties 2,507,100 2,427,400 105,837,900 81,592,700 Less accumulated depreciation, depletion and amortization 23,652,000 20,395,400 $ 82,185,900 61,197,300 (Continued) PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Balance Sheets December 31, 1999 and 1998 (13) Net Proved Oil and Gas Reserves (Unaudited) The proved reserves of oil and gas of the Company have been estimated by an independent petroleum engineer, Wright & Company, Inc. at December 31, 1999 and 1998. These reserves have been prepared in compliance with the Securities and Exchange Commission rules based on year end prices. An analysis of the change in estimated quantities of oil and gas reserves, all of which are located within the United States, is shown below: Oil (BBLS) 1999 1998 Proved developed and undeveloped reserves: Beginning of year 29,000 45,000 Revisions of previous estimates 67,000 (10,000) Beginning of year as revised 96,000 35,000 New discoveries and extensions 404,000 - Dispositions - - Acquisitions 662,000 2,000 Production (8,000) (8,000) End of year 1,154,000 29,000 Proved developed reserves: Beginning of year 29,000 45,000 End of year 798,000 29,000 Gas (MCF) 1999 1998 Proved developed and undeveloped reserves: Beginning of year 80,819,000 57,243,000 Revisions of previous estimates (4,475,000) (3,517,000) Beginning of year as revised 76,344,000 53,726,000 New discoveries and extensions 24,781,000 23,552,000 Dispositions to partnerships (8,774,000) (6,009,000) Acquisitions 12,345,000 12,003,000 Production (3,451,000) (2,453,000) End of year 101,245,000 80,819,000 Proved developed reserves: Beginning of year 64,562,000 42,411,000 End of year 82,628,000 64,562,000 (14) Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Gas Reserves (Unaudited) Summarized in the following table is information for the Company with respect to the standardized measure of discounted future net cash flows relating to proved oil and gas reserves. Future cash inflows are computed by applying year-end prices of oil and gas relating to the Company's proved reserves to the year-end quantities of those reserves. Future production, development, site restoration and abandonment costs are derived based on current costs assuming continuation of existing economic conditions. Future income tax expenses are computed by applying the statutory rate in effect at the end of each year to the future pretax net cash flows, less the tax basis of the properties and gives effect to permanent differences, tax credits and allowances related to the properties. (Continued) PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Balance Sheets December 31, 1999 and 1998 <TABLE> <C> <C> <C> Years Ended December 31, 1999 1998 Future estimated cash flows $307,816,000 186,598,000 Future estimated production and development costs (129,557,000) (95,670,000) Future estimated income tax expense (39,930,000) (20,322,000) Future net cash flows 138,329,000 70,606,000 10% annual discount for estimated timing of cash flows (79,875,000) (40,412,000) Standardized measure of discounted future estimated net cash flows $ 58,454,000 30,194,000 The following table summarizes the principal sources of change in the standardized measure of discounted future estimated net cash flows: Years Ended December 31, 1999 1998 Sales of oil and gas production, net of production costs $(6,206,000) (4,605,000) Net changes in prices and production costs 29,547,000 (23,083,000) Extensions, discoveries and improved recovery, less related cost 39,653,000 18,615,000 Dispositions to partnerships (6,152,000) (5,762,000) Acquisitions 31,915,000 13,938,000 Development costs incurred during the period 17,168,000 14,903,000 Revisions of previous quantity estimates (4,944,000) (5,605,000) Changes in estimated income taxes (19,608,000) 459,000 Changes in discount (39,463,000) 1,224,000 Changes in production rates (timing) and other (13,650,000) (7,826,000) $ 28,260,000 2,258,000 </TABLE> It is necessary to emphasize that the data presented should not be viewed as representing the expected cash flow from, or current value of, existing proved reserves since the computations are based on a large number of estimates and arbitrary assumptions. Reserve quantities cannot be measured with precision and their estimation requires many judgmental determinations and frequent revisions. The required projection of production and related expenditures over time requires further estimates with respect to pipeline availability, rates of demand and governmental control. Actual future prices and costs are likely to be substantially different from the current prices and costs utilized in the computation of reported amounts. Any analysis or evaluation of the reported amounts should give specific recognition to the computational methods utilized and the limitations inherent therein. (Continued) PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES Notes to Consolidated Balance Sheets December 31, 1999 and 1998 (15) Business Segments (Thousands) PDC's operating activities can be divided into three major segments: drilling and development, natural gas sales, and well operations. The Company drills natural gas wells for Company-sponsored drilling partnerships and retains an interest in each well. The Company also engages in oil and gas sales to residential, commercial and industrial end-users. The Company charges Company-sponsored partnerships and other third parties competitive industry rates for well operations and gas gathering. Segment information for the years ended December 31, 1999 and 1998 is as follows: <TABLE> <C> <C> <C> 1999 1998 SEGMENT ASSETS Drilling and Development $23,957 27,288 Natural Gas Sales 93,073 65,256 Well Operations 7,977 7,136 Unallocated amounts Cash 1,967 7,814 Other 4,934 3,806 Total $131,908 111,300 1999 1998 EXPENDITURES FOR SEGMENT LONG-LIVED ASSETS Drilling and Development $ 1,710 1,953 Natural Gas Sales 24,613 23,645 Well Operations 1,328 947 Unallocated amounts 107 85 Total $27,758 26,630 </TABLE> APPENDIX A FORM OF LIMITED PARTNERSHIP AGREEMENT OF PDC 2001-___ LIMITED PARTNERSHIP [PDC 2002-___ LIMITED PARTNERSHIP] [PDC 2003-___ LIMITED PARTNERSHIP] TABLE OF CONTENTS Page ARTICLE I: The Partnership 1 1.01 Organization 1 1.02 Partnership Name 1 1.03 Character of Business 1 1.04 Principal Place of Business 1 1.05 Term of Partnership 2 1.06 Filings 2 1.07 Independent Activities 2 1.08 Definitions 3 ARTICLE II: Capitalization 12 2.01 Capital Contributions of the Managing General Partner and Initial Limited Partner 12 2.02 Capital Contributions of the Investor Partners 13 2.03 Additional Contributions 14 ARTICLE III: Capital Accounts and Allocations 14 3.01 Capital Accounts 14 3.02 Allocation of Profits and Losses 16 3.03 Depletion 22 3.04 Apportionment Among Partners 23 ARTICLE IV: Distributions 23 4.01 Time of Distribution 23 4.02 Distributions 23 4.03 Capital Account Deficits 24 4.04 Liability Upon Receipt of Distributions 25 ARTICLE V: Activities 25 5.01 Management 25 5.02 Conduct of Operations 25 5.03 Acquisition and Sale of Leases 27 5.04 Title to Leases 28 5.05 Farmouts 28 5.06 Release, Abandonment, and Sale or Exchange of Properties 29 5.07 Certain Transactions 29 ARTICLE VI: Managing General Partner 34 6.01 Managing General Partner 34 6.02 Authority of Managing General Partner 35 6.03 Certain Restrictions on Managing General Partner's Power and Authority 36 6.04 Indemnification of Managing General Partner 38 6.05 Withdrawal 39 6.06 Management Fee 39 6.07 Tax Matters and Financial Reporting Partner 39 ARTICLE VII: Investor Partners 40 7.01 Management 40 7.02 Indemnification of Additional General Partners 40 7.03 Assignment of Units 41 7.04 Prohibited Transfers 43 7.05 Withdrawal by Investor Partners 43 7.06 Removal of Managing General Partner 43 7.07 Calling of Meetings 44 7.08 Additional Voting Rights 44 7.09 Voting by Proxy 45 7.10 Conversion of Additional General Partner Interests into Limited Partner Interests 45 7.11 Unit Repurchase Program 46 7.12 Liability of Partners 47 ARTICLE VIII: Books and Records 47 8.01 Books and Records 47 8.02 Reports 48 8.03 Bank Accounts 50 8.04 Federal Income Tax Elections 50 ARTICLE IX: Dissolution; Winding-up 51 9.01 Dissolution 51 9.02 Liquidation 52 9.03 Winding-up 52 ARTICLE X: Power of Attorney 53 10.01 Managing General Partner as Attorney-in-Fact 53 10.02 Nature of Special Power 54 ARTICLE XI: Miscellaneous Provisions 54 11.01 Liability of Parties 54 11.02 Notices 54 11.03 Paragraph Headings 55 11.04 Severability 55 11.05 Sole Agreement 55 11.06 Applicable Law 55 11.07 Execution in Counterparts 55 11.08 Waiver of Action for Partition 55 11.09 Amendments 55 11.10 Consent to Allocations and Distributions 56 11.11 Ratification 56 11.12 Substitution of Signature Pages 56 11.13 Incorporation by Reference 56 Signature Page. . . . . . . . . . 57 FORM OF LIMITED PARTNERSHIP AGREEMENT OF PDC 2001- LIMITED PARTNERSHIP, [PDC 2002- LIMITED PARTNERSHIP,] [PDC 2003- LIMITED PARTNERSHIP,] A WEST VIRGINIA LIMITED PARTNERSHIP This LIMITED PARTNERSHIP AGREEMENT (the "Agreement") is made as of this ___ day of ___________, 2001, [2002; 2003] by and among Petroleum Development Corporation, a Nevada corporation, as managing general partner (the "Managing General Partner"), Steven R. Williams, a resident of West Virginia, as the Initial Limited Partner, and the Persons whose names are set forth on Exhibit A attached hereto, as additional general partners (the "Additional General Partners") or as limited partners (the "Limited Partners" and, collectively with Additional General Partners, the "Investor Partners"), pursuant to the provisions of the West Virginia Uniform Limited Partnership Act (the "Act"), on the following terms and conditions: ARTICLE I The Partnership 1.01 Organization. Subject to the provisions of this Agreement, the parties hereto do hereby form a limited partnership (the "Partnership") pursuant to the provisions of the Act. The Partners hereby agree to continue the Partnership as a limited partnership pursuant to the provisions of the Act and upon the terms and conditions set forth in this Agreement. 1.02 Partnership Name. The name of the Partnership shall be PDC 2001- Limited Partnership, [PDC 2002- Limited Partnership; PDC 2003- Limited Partnership,] a West Virginia limited partnership, and all business of the Partnership shall be conducted in such name. The Managing General Partner may change the name of the Partnership upon ten days notice to the Investor Partners. The Partnership shall hold all of its property in the name of the Partnership and not in the name of any Partner. 1.03 Character of Business. The principal business of the Partnership shall be to acquire Leases, drill sites, and other interests in oil and/or gas properties and to drill for oil, gas, hydrocarbons, and other minerals located in, on, or under such properties, to produce and sell oil, gas, hydrocarbons, and other minerals from such properties, and to invest and generally engage in any and all phases of the oil and gas business. Such business purpose shall include without limitation the purchase, sale, acquisition, disposition, exploration, development, operation, and production of oil and gas properties of any character. The Partnership shall not acquire property in exchange for Units. Without limiting the foregoing, Partnership activities may be undertaken as principal, agent, general partner, syndicate member, joint venturer, participant, or otherwise. 1.04 Principal Place of Business. The principal place of business of the Partnership shall be at 103 East Main Street, Bridgeport, West Virginia, 26330. The Managing General Partner may change the principal place of business of the Partnership to any other place within the State of West Virginia upon ten days notice to the Investor Partners. 1.05 Term of Partnership. The Partnership shall commence on the date the Partnership is organized, as set forth in Section 1.01, and shall continue until terminated as provided in Article IX hereof. Notwithstanding the foregoing, if Investor Partners agreeing to purchase $1,500,000 ($2,500,000 with respect to PDC 2001-D Limited Partnership, PDC 2002-D Limited Partnership and PDC 2003-D Limited Partnership) in Units have not subscribed and paid for their Units by the Offering Termination Date, then this Agreement shall be void in all respects, and all investments of the Investor Partners shall be promptly returned together with any interest earned thereon and without any deduction therefrom. The Managing General Partner and its Affiliates may purchase up to 10% (and no more) of the Units subscribed for by Investor Partners in the Partnership; however, not more than $50,000 of the Units purchased by the Managing General Partner and/or its Affiliates will be applied to satisfying the minimum. 1.06 Filings. (a) A Certificate of Limited Partnership (the "Certificate") has been filed in the office of the Secretary of State of West Virginia in accordance with the provisions of the Act. The Managing General Partner shall take any and all other actions reasonably necessary to perfect and maintain the status of the Partnership as a limited partnership under the laws of West Virginia. The Managing General Partner shall cause amendments to the Certificate to be filed whenever required by the Act. (b) The Managing General Partner shall execute and cause to be filed original or amended Certificates and shall take any and all other actions as may be reasonably necessary to perfect and maintain the status of the Partnership as a limited partnership or similar type of entity under the laws of any other states or jurisdictions in which the Partnership engages in business. (c) The agent for service of process on the Partnership shall be Steven R. Williams or any successor as appointed by the Managing General Partner. (d) Upon the dissolution of the Partnership, the Managing General Partner (or any successor managing general partner) shall promptly execute and cause to be filed certificates of dissolution in accordance with the Act and the laws of any other states or jurisdictions in which the Partnership has filed certificates. 1.07 Independent Activities. Each General Partner and each Limited Partner may, notwithstanding this Agreement, engage in whatever activities they choose, whether the same are competitive with the Partnership or otherwise, without having or incurring any obligation to offer any interest in such activities to the Partnership or any Partner. However, except as otherwise provided herein, the Managing General Partner and any of its Affiliates may pursue business opportunities that are consistent with the Partnership's investment objectives for their own account only after they have determined that such opportunity either cannot be pursued by the Partnership because of insufficient funds or because it is not appropriate for the Partnership under the existing circumstances. Neither this Agreement nor any activity undertaken pursuant hereto shall prevent the Managing General Partner from engaging in such activities, or require the Managing General Partner to permit the Partnership or any Partner to participate in any such activities, and as a material part of the consideration for the execution of this Agreement by the Managing General Partner and the admission of each Investor Partner, each Investor Partner hereby waives, relinquishes, and renounces any such right or claim of participation. Notwithstanding the foregoing, the Managing General Partner still has an overriding fiduciary obligation to the Investor Partners. 1.08 Definitions. Capitalized words and phrases used in this Agreement shall have the following meanings: (a) "Act" shall mean the Uniform Limited Partnership Act of the State of West Virginia, as set forth in 47-9-1 through 47-9-63 thereof, as amended from time to time (or any corresponding provisions of succeeding law). (b) "Additional General Partner" shall mean an Investor Partner who purchases Units as an additional general partner, and such partner's transferees and assigns. "Additional General Partners" shall mean all such Investor Partners. "Additional General Partner" shall not include, after a conversion, such Investor Partner who converts his interest into a Limited Partnership interest pursuant to Section 7.10 herein. (c) "Administrative Costs" shall mean all customary and routine expenses incurred by the Managing General Partner for the conduct of program administration, including legal, finance, accounting, secretarial, travel, office rent, telephone, data processing and other items of a similar nature. (d) "Affiliate" of a specified person shall mean (a) any person directly or indirectly owning, controlling, or holding with power to vote 10 percent or more of the outstanding voting securities of such specified person; (b) any person 10 percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by such specified person; (c) any person directly or indirectly controlling, controlled by, or under common control with such specified person; (d) any officer, director, trustee or partner of such specified person, and (e) if such specified person is an officer, director, trustee or partner, any person for which such person acts in any such capacity. (e) "Agreement" or "Partnership Agreement" shall mean this Limited Partnership Agreement, as amended from time to time. (f) "Capital Account" shall mean, with respect to any Partner, the capital account maintained for such Partner pursuant to Section 3.01 hereof. (g) "Capital Available for Investment" shall mean the sum of (a) Subscriptions, net of total underwriting and brokerage discounts, commissions, and expenses, up to an aggregate of 10.5% of Subscriptions, and the Management Fee and (b) the Capital Contribution of the Managing General Partner. (h) "Capital Contribution" shall mean the total investment, including the original investment, assessments, and amounts reinvested, by such Investor Partner to the capital of the Partnership pursuant to Section 2.02 herein, and, with respect to the Managing General Partner and the Initial Limited Partner, the total investment, including the original investment, assessments, and amounts reinvested, to the capital of the Partnership pursuant to Section 2.01 herein. (i) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time (or any corresponding provisions of succeeding law). (j) "Cost," when used with respect to the sale of property to the Partnership, shall mean (a) the sum of the prices paid by the seller to an unaffiliated person for such property, including bonuses; (b) title insurance or examination costs, brokers' commissions, filing fees, recording costs, transfer taxes, if any, and like charges in connection with the acquisition of such property; (c) a pro rata portion of the seller's actual necessary and reasonable expenses for seismic and geophysical services; and (d) rentals and ad valorem taxes paid by the seller with respect to such property to the date of its transfer to the buyer, interest and points actually incurred on funds used to acquire or maintain such property, and such portion of the seller's reasonable, necessary and actual expenses for geological, engineering, drafting, accounting, legal and other like services allocated to the property cost in conformity with generally accepted accounting principles and industry standards, except for expenses in connection with the past drilling of wells which are not producers of sufficient quantities of oil or gas to make commercially reasonable their continued operations, and provided that the expenses enumerated in this subsection (d) hereof shall have been incurred not more than 36 months prior to the purchase by the Partnership; provided that such period may be extended, at the discretion of the state securities administrator, upon proper justification, When used with respect to services, "cost" means the reasonable, necessary and actual expense incurred by the seller on behalf of the Partnership in providing such services, determined in accordance with generally accepted accounting principles. As used elsewhere, "cost" means the price paid by the seller in an arm's-length transaction. (k) "Depreciation" shall mean, for each fiscal year or other period, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization, or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Managing General Partner. (l) "Development Well" shall mean a well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive. (m) "Direct Costs" shall mean all actual and necessary costs directly incurred for the benefit of the Partnership and generally attributable to the goods and services provided to the Partnership by parties other than the Managing General Partner or its Affiliates. Direct costs shall not include any cost otherwise classified as organization and offering expenses, administrative costs, operating costs or property costs. Direct costs may include the cost of services provided by the Managing General Partner or its Affiliates if such services are provided pursuant to written contracts and in compliance with Section 5.07(e) of the Partnership Agreement. (n) "Drilling and Completion Costs" shall mean all costs, excluding Operating Costs, of drilling, completing, testing, equipping and bringing a well into production or plugging and abandoning it, including all labor and other construction and installation costs incident thereto, location and surface damages, cementing, drilling mud and chemicals, drillstem tests and core analysis, engineering and well site geological expenses, electric logs, costs of plugging back, deepening, rework operations, repairing or performing remedial work of any type, costs of plugging and abandoning any well participated in by the Partnership, and reimbursements and compensation to well operators, including charges paid to the Managing General Partner as unit operator during the drilling and completion phase of a well, plus the cost of the gathering system and of acquiring leasehold interests. (o) "Dry Hole" shall mean any well abandoned without having produced oil or gas in commercial quantities. (p) "Exploratory Well" shall mean a well drilled to find commercially productive hydrocarbons in an unproved area, to find a new commercially productive horizon in a field previously found to be productive of hydrocarbons at another horizon, or to significantly extend a known prospect. (q) "Farmout" shall mean an agreement whereby the owner of the leasehold or working interest agrees to assign his interest in certain specific acreage to the assignees, retaining some interest such as an overriding royalty interest, an oil and gas payment, offset acreage or other type of interest, subject to the drilling of one or more specific wells or other performance as a condition of the assignment. (r) "General Partners" shall mean the Additional General Partners and the Managing General Partner. (s) "Gross Asset Value" shall mean, with respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows: (1) The initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset, as determined by the contributing Partner and the Partnership; (2) The Gross Asset Values of all Partnership assets shall be adjusted to equal their respective gross fair market values, as determined by the Managing General Partner, as of the following times: (a) the acquisition of an additional interest in the Partnership by any new or existing Partner in exchange for more than a de minimis Capital Contribution; (b) the distribution by the Partnership Property as consideration for an interest in the Partnership; and (c) the liquidation of the Partnership within the meaning of Treas. Reg. 1.704-1(b)(2)(ii)(g); provided, however, that the adjustments pursuant to clauses (a) and (b) above shall be made only if the Managing General Partner reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership; (3) The Gross Asset Value of any Partnership asset distributed to any Partner shall be the gross fair market value of such asset on the date of distribution; and (4) The Gross Asset Values of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Treas. Reg. 1.704-1(b)(2)(iv)(m) and Section 3.02(g) hereof; provided, however, that Gross Asset Values shall not be adjusted pursuant to this Section (4) to the extent the Managing General Partner determines that an adjustment pursuant to Section (2) hereof is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this Section (4). If the Gross Asset Value of an asset has been determined or adjusted pursuant to Section (i), Section (ii), or (iv) hereof, such Gross Asset value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses. (t) "IDC" shall mean intangible drilling and development costs. (u) "Independent Expert" shall mean a person with no material relationship with the Managing General Partner or its Affiliates who is qualified and who is in the business of rendering opinions regarding the value of oil and gas properties based upon the evaluation of all pertinent economic, financial, geologic and engineering information available to the Managing General Partner or its Affiliates. (v) "Initial Limited Partner" shall mean Steven R. Williams or any successor to his interest. (w) "Investor Partner" shall mean any Person other than the Managing General Partner (i) whose name is set forth on Exhibit A, attached hereto, as an Additional General Partner or as a Limited Partner, or who has been admitted as an additional or Substituted Investor Partner pursuant to the terms of this Agreement, and (ii) who is the owner of a Unit. "Investor Partners" means all such Persons. All references in this Agreement to a majority in interest or a specified percentage of the Investor Partners shall mean Investor Partners holding more than 50% or such specified percentage, respectively, of the outstanding Units then held. (x) "Lease" shall mean full or partial interests in: (i) undeveloped oil and gas leases; (ii) oil and gas mineral rights; (iii) licenses; (iv) concessions; (v) contracts; (vi) fee rights; or (vii) other rights authorizing the owner thereof to drill for, reduce to possession and produce oil and gas. (y) "Limited Partner" shall mean an Investor Partner who purchases Units as a Limited Partner, such partner's transferees or assignees, and an Additional General Partner who converts his interest to a limited partnership interest pursuant to the provisions of the Agreement. "Limited Partners" shall mean all such Investor Partners. (z) "Management Fee" shall mean that fee to which the Managing General Partner is entitled pursuant to Section 6.06 hereof. (aa) "Managing General Partner" shall mean Petroleum Development Corporation or its successors, in their capacity as the Managing General Partner. (bb) "Mcf" shall mean one thousand cubic feet of natural gas. (cc) "Net Subscriptions" shall mean an amount equal to the total Subscriptions of the Investor Partners less the amount of Organization and Offering Costs of the Partnership. (dd) "Nonrecourse Deductions" shall have the meaning set forth in Treas. Reg. 1.704-2(b)(1). The amount of Nonrecourse Deductions for a Partnership fiscal year shall equal the net increase in the amount of Partnership Minimum Gain during that fiscal year reduced (but not below zero) by the aggregate distributions during that fiscal year of proceeds of a Nonrecourse Liability that are allocable to an increase in Partnership Minimum Gain, determined according to the provisions of Treas. Reg. 1.704-2(c). (ee) "Nonrecourse Liability" shall have the meaning set forth in Treas. Reg. 1.704-2(b)(3) and 1.752-1(a)(2). (ff) "Offering Termination Date" shall mean December 31, 2001 with respect to Partnerships designated "PDC 2001- Limited Partnership (December 31, 2002 with respect to Partnerships designated "PDC 2002- Limited Partnership" and December 31, 2003 with respect to Partnerships designated "PDC 2003- Limited Partnership") or such earlier date as the Managing General Partner, in its sole and absolute discretion, shall elect. (gg) "Oil and Gas Interest" shall mean any oil or gas royalty or lease, or fractional interest therein, or certificate of interest or participation or investment contract relative to such royalties, leases or fractional interests, or any other interest or right which permits the exploration of, drilling for, or production of oil and gas or other related hydrocarbons or the receipt of such production or the proceeds thereof. (hh) "Operating Costs" shall mean expenditures made and costs incurred in producing and marketing oil or gas from completed wells, including, in addition to labor, fuel, repairs, hauling, materials, supplies, utility charges and other costs incident to or therefrom, ad valorem and severance taxes, insurance and casualty loss expense, and compensation to well operators or others for services rendered in conducting such operations. (ii) "Organization and Offering Costs" shall mean all costs of organizing and selling the offering including, but not limited to, total underwriting and brokerage discounts and commissions (including fees of the underwriters' attorneys), expenses for printing, engraving, mailing, salaries of employees while engaged in sales activity, charges of transfer agents, registrars, trustees, escrow holders, depositaries, engineers and other experts, expenses of qualification of the sale of the securities under Federal and State law, including taxes and fees, accountants' and attorneys' fees and other frontend fees. (jj) "Overriding Royalty Interest" shall mean an interest in the oil and gas produced pursuant to a specified oil and gas lease or leases, or the proceeds from the sale thereof, carved out of the working interest, to be received free and clear of all costs of development, operation, or maintenance. (kk) "Partner Minimum Gain" shall mean an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Treas. Reg. 1.704-2(i). (ll) "Partner Nonrecourse Debt" shall have the meaning set forth in Treas. Reg. 1.704-2(b)(4). (mm) "Partner Nonrecourse Deductions" shall have the meaning set forth in Treas. Reg. 1.704-2(i)(2). The amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a Partnership fiscal year shall equal the net increase in the amount of Partner Minimum Gain attributable to such Partner Nonrecourse Debt during that fiscal year reduced (but not below zero) by proceeds of the liability distributed during that fiscal year to the Partner bearing the economic risk of loss for such liability that are both attributable to the liability and allocable to an increase in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Treas. Reg. 1.704-2(i)(3). (nn) "Partners" shall mean the Managing General Partner, the Initial Limited Partner, and the Investor Partners. "Partner" shall mean any one of the Partners. All references in this Agreement to a majority in interest or a specified percentage of the Partners shall mean Partners holding more than 50% or such specified percentage, respectively, of the outstanding Units then held. (oo) "Partnership" shall mean the partnership pursuant to this Agreement and the partnership continuing the business of this Partnership in the event of dissolution as herein provided. (pp) "Partnership Minimum Gain" shall have the meaning set forth in Treas. Reg. 1.704-2(b)(2) and 1.704-2(d)(1). (qq) "Permitted Transfer" shall mean any transfer of Units satisfying the provisions of Section 7.03 herein. (rr) "Person" shall mean any individual, partnership, corporation, trust, or other entity. (ss) "Profits" and "Losses" shall mean, for each fiscal year or other period, an amount equal to the Partnership's taxable income or loss for such year or period, determined in accordance with Code 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code 703(a)(1) shall be included in taxable income or loss), with the following adjustments: (1) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this Section 1.08(rr) shall be added to such taxable income or loss; (2) Any expenditures of the Partnership described in Code 705(a)(2)(B) or treated as Code 705(a)(2)(B) expenditures pursuant to Treas. Reg. 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this Section 1.08(rr) shall be subtracted from such taxable income or loss; (3) In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to Section 1.08(r)(2) or Section 1.08(r)(3) hereof, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Profits or Losses. (4) Gain or loss resulting from any disposition of Partnership Property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value; (5) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year or other period, computed in accordance with Section 1.08(r) hereof; and (6) Notwithstanding any other provisions of this Section 1.08(rr), any items which are specially allocated pursuant to this Agreement shall not be taken into account in computing Profits or Losses. (tt) "Prospect" shall mean a contiguous oil and gas leasehold estate, or lesser interest therein, upon which drilling operations may be conducted. In general, a Prospect is an area in which the Partnership owns or intends to own one or more oil and gas interests, which is geographically defined on the basis of geological data by the Managing General Partner of such Partnership and which is reasonably anticipated by the Managing General Partner to contain at least one reservoir. An area covering lands which are believed by the Managing General Partner to contain subsurface structural or stratigraphic conditions making it susceptible to the accumulations of hydrocarbons in commercially productive quantities at one or more horizons. The area, which may be different for different horizons, shall be designated by the Managing General Partner in writing prior to the conduct of program operations and shall be enlarged or contracted from time to time on the basis of subsequently acquired information to define the anticipated limits of the associated hydrocarbon reserves and to include all acreage encompassed therein. A "prospect" with respect to a particular horizon may be limited to the minimum area permitted by state law or local practice, whichever is applicable, to protect against drainage from adjacent wells if the well to be drilled by the Partnership is to a horizon containing proved reserves. (uu) "Prospectus" shall mean that Prospectus (including any preliminary prospectus), of which this Agreement is a part, pursuant to which the Units are being offered and sold. (vv) "Proved Developed Oil and Gas Reserves shall mean the reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery should be included as "proved developed reserves" only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved. (ww) "Proved Oil and Gas Reserves" shall mean the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. (1) Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation test. The area of a reservoir considered proved includes (A) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any, and (B) the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. (2) Reserves which can be produced economically through application of improved recovery techniques (such as fluid injection) are included in the "proved" classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based. (3) Estimates or proved reserves do not include the following: (A) oil that may become available from known reservoirs but is classified separately as "indicated additional reserves; (B) crude oil, natural gas, and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics, or economic factors; (C) crude oil, natural gas, and natural gas liquids, that may occur in undrilled prospects; and (D) crude oil, natural gas, and natural gas liquids, that may be recovered from oil shales, coal, gilsonite and other such sources. (xx) "Proved Undeveloped Reserves" shall mean the reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances should estimates for proved undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir. (yy) "Reservoir" shall mean a separate structural or stratigraphic trap containing an accumulation of oil or gas. (zz) "Roll-Up" shall mean a transaction involving the acquisition, merger, conversion, or consolidation, either directly or indirectly, of the Partnership and the issuance of securities of a roll-up entity. Such term does not include: (1) a transaction involving securities of the Partnership that have been listed for at least 12 months on a national exchange or traded through the National Association of Securities Dealers Automated Quotation National Market System; or (2) a transaction involving the conversion to corporate, trust or association form of only the Partnership if, as a consequence of the transaction, there will be no significant adverse change in any of the following: (i) voting rights; (ii) the term of existence of the Partnership; (iii) sponsor compensation; or (iv) the Partnership's investment objectives. (aaa) "Roll-Up Entity" shall mean a partnership, trust, corporation or other entity that would be created or survive after the successful completion of a proposed roll-up transaction. (bbb) "Sponsor" shall mean any person directly or indirectly instrumental in organizing, wholly or in part, a program or any person who will manage or is entitled to manage or participate in the management or control of a program. "Sponsor" includes the managing and controlling general partner(s) and any other person who actually controls or selects the person who controls 25% or more of the exploratory, developmental or producing activities of the Partnership, or any segment thereof, even if that person has not entered into a contract at the time of formation of the Partnership. "Sponsor" does not include wholly independent third parties such as attorneys, accountants, and underwriters whose only compensation is for professional services rendered in connection with the offering of units. Whenever the context of these guidelines so requires, the term "sponsor" shall be deemed to include its affiliates. (ccc) "Subscription" shall mean the amount indicated on the Subscription Agreement that an Investor Partner has agreed to pay to the Partnership as his Capital Contribution. (ddd) "Subscription Agreement" shall mean the Agreement, attached to the Prospectus as Appendix B, pursuant to which an Investor subscribes to Units in the Partnership. (eee) "Substituted Investor Partner" shall mean any Person admitted to the Partnership as an Investor Partner pursuant to Section 7.03(c) hereof. (fff) "Treas. Reg." or "Regulation" shall mean the income tax regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). (ggg) "Unit" shall mean an undivided interest of the Investor Partners in the aggregate interest in the capital and profits of the Partnership. Each Unit represents Capital Contributions of $20,000 to the Partnership. (hhh) "Working Interest" shall mean an interest in an oil and gas leasehold which is subject to some portion of the costs of development, operation, or maintenance. ARTICLE II Capitalization 2.01 Capital Contributions of the Managing General Partner and Initial Limited Partner. (a) On or before the Offering Termination Date, the Managing General Partner shall make a Capital Contribution in cash to the Partnership of an amount equal to not less than 21-3/4% of the aggregate Capital Contributions of the Investor Partners. The Managing General Partner shall pay all Lease and tangible drilling costs as well as all Intangible Drilling Costs in excess of such costs paid by the Investor Partners with respect to the Partnership; to the extent that such costs are greater than the Managing General Partner's Capital Contribution set forth in the previous sentence, the Managing General Partner shall make such additional contributions in cash to the Partnership equal to such additional Costs; in the event of such additional Capital Contribution, the Managing General Partner's share of profits and losses and distributions shall equal the percentage arrived at by dividing the Managing General Partner's Capital Contribution by the Capital Available for Investment of the Partnership, except that such percentage may be revised by Sections 3.02 and 4.02. In consideration of making such Capital Contribution, becoming a General Partner, subjecting its assets to the liabilities of the Partnership, and undertaking other obligations as herein set forth, the Managing General Partner shall receive the interest in the Partnership allocated in Article III hereof. (b) The Initial Limited Partner shall contribute $100 in cash to the capital of the Partnership. Upon the earlier of the conversion of an Additional General Partner's interest into a Limited Partner's interest or the admission of a Limited Partner to the Partnership, the Partnership shall redeem in full, without interest or deduction, the Initial Limited Partner's Capital Contribution, and the Initial Limited Partner shall cease to be a Partner. 2.02 Capital Contributions of the Investor Partners. (a) Upon execution of this Agreement, each Investor Partner (whose names and addresses and number of Units to which Subscribed are set forth in Exhibit A) shall contribute to the capital of the Partnership the sum of $20,000 for each Unit purchased. The minimum subscription by an Investor Partner is one-quarter Unit ($5,000). (b) The contributions of the Investor Partners pursuant to subsection 2.02(a) hereof shall be in cash or by check subject to collection. (c) Until the Offering Termination Date and until such subsequent time as the contributions of the Investor Partners are invested in accordance with the provisions of the Prospectus, all monies received from persons subscribing as Investor Partners (i) shall continue to be the property of the investor making such payment, (ii) shall be held in escrow for such investor in the manner and to the extent provided in the Prospectus, and (iii) shall not be commingled with the personal monies or become an asset of the Managing General Partner or the Partnership. (d) Upon the original sale of Units by the Partnership, subscribers shall be admitted as Partners no later than 15 days after the release from the escrow account of the Capital Contributions to the Partnership, in accordance with the terms of the Prospectus; subscriptions shall be accepted or rejected by the Partnership within 30 days of their receipt; if rejected, all subscription monies shall be returned to the subscriber forthwith. (e) Except as provided in Section 4.03 hereof, any proceeds of the offering of Units for sale pursuant to the Prospectus not used, committed for use, or reserved as operating capital in the Partnership's operations within one year after the closing of such offering shall be distributed pro rata to the Investor Partners as a return of capital and the Managing General Partner shall reimburse such Investors for selling expenses, management fees, and offering expenses allocable to the return of capital. (f) Until proceeds from the public offering are invested in the Partnership's operations, such proceeds may be temporarily invested in income producing short-term, highly liquid investments, where there is appropriate safety of principal, such as U.S. Treasury Bills. Any such income shall be allocated pro rata to the Investor Partners providing such capital contributions. 2.03 Additional Contributions. Except as otherwise provided in this Agreement, no Investor Partner shall be required or obligated (a) to contribute any capital to the Partnership other than as provided in Section 2.02 hereof, or (b) to lend any funds to the Partnership. No interest shall be paid on any capital contributed to the Partnership pursuant to this Article II and, except as otherwise provided herein, no Partner, other than the Initial Limited Partner as authorized herein, may withdraw his Capital Contribution. The Units are nonassessable; however, General Partners are liable, in addition to their Capital Contributions, for Partnership obligations and liabilities represented by their ownership of interests as general partners, in accordance with West Virginia law. ARTICLE III Capital Accounts and Allocations 3.01 Capital Accounts. (a) General. A separate Capital Account shall be established and maintained for each Partner on the books and records of the Partnership. Capital Accounts shall be maintained in accordance with Treas. Reg. 1.704-1(b) and any inconsistency between the provisions of this Section 3.01 and such regulation shall be resolved in favor of the regulation. In the event the Managing General Partner shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities that are secured by contributed or distributed property or that are assumed by the Partnership of the Partners), are computed in order to comply with such regulations, the Managing General Partner may make such modification, provided that it is not likely to have a material effect on the amounts distributable to any Partner pursuant to Section 9.03 hereof upon the dissolution of the Partnership. The Managing General Partner also shall (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Partners and the amount of Partnership capital reflected on the Partnership's balance sheet, as computed for book purposes, in accordance with Treas. Reg. 1.704-1(b)(2)(iv)(q), and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Treas. Reg. 1.704-1(b). (b) Increases to Capital Accounts. Each Partner's Capital Account shall be credited with (i) the amount of money contributed by him to the Partnership; (ii) the amount of any Partnership liabilities that are assumed by him (within the meaning of Treas. Reg. 1.704-1(b)(2)(iv)(c)), but not by increases in his share of Partnership liabilities within the meaning of Code 752(a); (iii) the Gross Asset Value of property contributed by him to the Partnership (net of liabilities securing such contributed property that the Partnership is considered to assume or take subject to under Code 752); and (iv) allocations to him of Partnership Profits (or items thereof), including income and gain exempt from tax and Income and gain described in Treas. Reg. 1.704-1(b)(2)(iv)(g) (relating to adjustments to reflect book value). (c) Decreases to Capital Accounts. Each Partner's Capital Account shall be debited with (i) the amount of money distributed to him by the Partnership; (ii) the amount of his individual liabilities that are assumed by the Partnership (other than liabilities described in Treas. Reg. 1.704-1(b)(2)(iv)(b)(2) that are assumed by the Partnership and other than decreases in his share of Partnership liabilities within the meaning of Code 752(b)); (iii) the Gross Asset Value of property distributed to him by the Partnership (net of liabilities securing such distributed property that he is considered to assume or take subject to under Code 752); (iv) allocations to him of expenditures of the Partnership not deductible in computing Partnership taxable income and not properly chargeable to Capital Account (as described in Code 705(a)(2)(B)), and (v) allocations to him of Partnership Losses (or item thereof), including loss and deduction described in Treas. Reg. 1.704-1(b)(2)(iv)(g) (relating to adjustments to reflect book value), but excluding items described in (iv) above and excluding loss or deduction described in Treas. Reg. 1.704-1(b)(4)(iii) (relating to excess percentage depletion). (d) Adjustments to Capital Accounts Related to Depletion. (i) Solely for purposes of maintaining the Capital Accounts, each year the Partnership shall compute (in accordance with Treas. Reg. 1.704-1(b)(2)(iv)(k)) a simulated depletion allowance for each oil and gas property using that method, as between the cost depletion method and the percentage depletion method (without regard to the limitations of Code 613A(c)(3) which theoretically could apply to any Partner), which results in the greatest simulated depletion allowance. The simulated depletion allowance with respect to each oil and gas property shall reduce the Partners' Capital Accounts in the same proportion as the Partners were allocated adjusted basis with respect to such oil and gas property under Section 3.03(a) hereof. In no event shall the Partnership's aggregate simulated depletion allowance with respect to an oil and gas property exceed the Partnership's adjusted basis in the oil and gas property (maintained solely for Capital Account purposes). (ii) Upon the taxable disposition of an oil and gas property by the Partnership, the Partnership shall determine the simulated (hypothetical) gain or loss with respect to such oil and gas property (solely for Capital Account purposes) by subtracting the Partnership's simulated adjusted basis for the oil and gas property (maintained solely for Capital Account purposes) from the amount realized by the Partnership upon such disposition. Simulated adjusted basis shall be determined by reducing the adjusted basis by the aggregate simulated depletion charged to the Capital Accounts of all Partners in accordance with Section 3.01(d)(i) hereof. The Capital Accounts of the Partners shall be adjusted upward by the amount of any simulated gain on such disposition in proportion to such Partners' allocable share of the portion of total amount realized from the disposition of such property that exceeds the Partnership's simulated adjusted basis in such property. The Capital Accounts of the Partners shall be adjusted downward by the amount of any simulated loss in proportion to such Partners' allocable shares of the total amount realized from the disposition of such property that represents recovery of the Partnership's simulated adjusted basis in such property. (e) Restoration of Negative Capital Accounts. Except as otherwise provided in this Agreement, neither an Investor Partner nor the Initial Limited Partner shall be obligated to the Partnership or to any other Partner to restore any negative balance in his Capital Account. The Managing General Partner shall be obligated to restore the deficit balance in its Capital Account. 3.02 Allocation of Profits and Losses. (a) General. Except as provided in this Section 3.02 or in Section 2.01(a) and Section 3.03 hereof, Profits and Losses during the production phase of the Partnership shall be allocated 80% to the Investor Partners and 20% to the Managing General Partner; provided, that if the Managing General Partner's share of cash distributions is revised pursuant to Section 4.02 the allocations of Profits and Losses of the Partnership shall be allocated to reflect such revision. Notwithstanding the above allocations, the following special allocations shall be employed: (i) IDC and recapture of IDC shall be allocated 100% to the Investor Partners and 0% to the Managing General Partner, except as otherwise provided in the following clause; however, in the event that a portion of the Capital Contribution of the Managing General Partner is utilized for IDC, then IDC and recapture of IDC shall be allocated to the Investor Partners and the Managing General Partner in a percentage equal to their respective contribution to IDC; (ii) irrespective of any revisions effected by Section 2.01(a) or Section 4.02, the following provisions shall apply: Organization and Offering Costs net of commissions, due diligence expenses and wholesaling fees payable to the dealer manager and the soliciting dealers shall be paid by the Managing General Partner; such commissions, due diligence expenses and wholesaling fees payable to the dealer manager and the soliciting dealers shall be allocated 100% to the Investor Partners and 0% to the Managing General Partner; except that Organization and Offering Costs in excess of 10 1/2% of Subscriptions shall be allocated 100% to the Managing General Partner and 0% to the Investor Partners; (iii) irrespective of any revisions effected by Section 2.01(a) or Section 4.02, the Management Fee shall be allocated 100% to the Investor Partners and 0% to the Managing General Partner; (iv) irrespective of any revisions effected by Section 2.01(a) or Section 4.02, Costs of Leases and Costs of tangible equipment, including depreciation or cost recovery benefits, and revenues from the sale of equipment shall be allocated 0% to the Investor Partners and 100% to the Managing General Partner; (v) Drilling and Completion Costs shall be allocated 80% to the Investor Partners and 20% to the Managing General Partner; (vi) Direct Costs and Operating Costs shall be allocated 80% to the Investor Partners and 20% to the Managing General Partner; and (vii) irrespective of any revisions effected by Section 2.01(a) or Section 4.02, Administrative Costs shall be borne 100% by and allocated 100% to the Managing General Partner. (b) Capital Account Deficits. Notwithstanding anything to the contrary in Section 3.02(a), no Investor Partner shall be allocated any item to the extent that such allocation would create or increase a deficit in such Investor Partner's Capital Account. (i) Obligations to Restore. For purposes of this Section 3.02(b), in determining whether an allocation would create or increase a deficit in a Partner's Capital Account, such Capital Account shall be reduced for those items described in Treas. Reg. 1.704-1(b)(2)(ii)(d)(4), (5), and (6) and shall be increased by any amounts which such Partner is obligated to restore or is deemed obligated to restore pursuant to the penultimate sentences of Treas. Reg. 1.704-2(g)(1) and 1.704-2(i)(5). Further, such Capital Accounts shall otherwise meet the requirements of Treas. Reg. 1.704-1(b)(2)(ii)(d). (ii) Reallocations. Any loss or deduction of the Partnership, the allocation of which to any Partner is prohibited by this Section 3.02(b), shall be reallocated to those Partners not having a deficit in their Capital Accounts (as adjusted in Section 3.02(b)(i)) in the proportion that the positive balance of each such Partner's adjusted Capital Account bears to the aggregate balance of all such Partners' adjusted Capital Accounts, with any remaining losses or deductions being allocated to the Managing General Partner. (iii) Qualified Income Offset. In the event any Investor Partner unexpectedly receives any adjustments, allocations, or distributions described in Treas. Reg. 1.704-1(b)(2)(ii)(d)(4), (5), or (6), items of Partnership income and gain shall be specifically allocated to such Partner in an amount and manner sufficient to eliminate (to the extent required by the Regulations) the total of the deficit balance in his Capital Account (as adjusted in Section 3.02(b)(i)) created by such adjustments, allocations, or distributions, provided that an allocation pursuant to this Section 3.02(b)(iii) shall be made if and only to the extent that such Partner would have a deficit in his Capital Account (as adjusted in Section 3.02(b)(i)) after all other allocations provided for in this Section 3 have been tentatively made as if this Section 3.02(b)(iii) were not in the Agreement. (iv) Gross Income Allocations. In the event an Investor Partner has a deficit Capital Account at the end of any Partnership fiscal year which is in excess of the sum of (i) the amount such Partner is obligated to restore pursuant to any provision of this Agreement and (ii) the amount such Partner is deemed to be obligated to restore pursuant to the penultimate sentences of Treas. Reg. 1.704-2(g)(1) and 1.704-2(i)(5), such Partner shall be specially allocated items of Partnership income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section 3.02(b)(iv) shall be made only if and to the extent that such Partner would have a deficit Capital Account in excess of such sum after all other allocations provided for in this Section 3 have been made as if Section 3.02(b)(iii) hereof and this Section 3.02(b)(iv) were not in the Agreement. (c) Minimum Gain Chargeback. Notwithstanding any other provision of this Section 3.02, if there is a net decrease in Partnership Minimum Gain during any taxable year, pursuant to Treas. Reg. 1.704-2(f)(1), all Partners shall be allocated items of partnership income and gain for that year equal to that partner's share of the net decrease in Partnership Minimum Gain (within the meaning of Treas. Reg. 1.704-2(g)(2)). Notwithstanding the preceding sentence, no such chargeback shall be made to the extent one or more of the exceptions and/or waivers provided for in Treas. Reg. 1.704-2(f)(2)-(5) applies. Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Treas. Reg. 1.704-2(f)(6). This Section 3.02(c) is intended to comply with the minimum gain chargeback requirement in such Section of the Regulations and shall be interpreted consistently therewith. To the extent permitted by such Section of the Regulations and for purposes of this Section 3.02(c) only, each Partner's Capital Account (as adjusted in Section 3.02(b)(i)) shall be determined prior to any other allocations pursuant to this Section 3 with respect to such tax year and without regard to any net decrease in Partner Minimum Gain during such fiscal year. (d) Partner Minimum Gain Chargeback. Notwithstanding any other provision of this Section 3 except Section 3.02(c), if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any Partnership fiscal year, rules similar to those contained in Section 3.02(c) shall apply in a manner consistent with Treas. Reg. 1.704-2(i)(4). This Section 3.02(d) is intended to comply with the minimum gain chargeback requirement in such Section of the Regulations and shall be interpreted consistently therewith. Solely for purposes of this Section 3.02(d), each Person's Capital Account deficit (as so adjusted) shall be determined prior to any other allocations pursuant to this Section 3 with respect to such fiscal year, other than allocations pursuant to Section 3.02(c) hereof. (e) Nonrecourse Deductions. Nonrecourse Deductions for any fiscal year or other period shall be specially allocated to the Partners (in proportion to their Units), in accordance with Treas. Reg. 1.704-2. (f) Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions for any fiscal year or other period shall be specially allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Treas. Reg. 1.704-2(i). (g) Code 754 Adjustments. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code 734(b) or 743(b) is required, pursuant to Treas. Reg. 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations. (h) Curative Allocations. (i) The "Regulatory Allocations" consist of the "Basic Regulatory Allocations," as defined in Section 3.02(h)(ii) hereof, the "Nonrecourse Regulatory Allocations," as defined in Section 3.02(h)(iii) hereof, and the "Partner Nonrecourse Regulatory Allocations," as defined in Section 3.02(h)(iv) hereof. (ii) The "Basic Regulatory Allocations" consist of allocations pursuant to Section 3.02(b)(ii), (iii), and (iv) hereof. Notwithstanding any other provision of this Agreement, other than the Regulatory Allocations, the Basic Regulatory Allocations shall be taken into account in allocating items of income, gain, loss, and deduction among the Partners so that, to the extent possible, the net amount of such allocations of other items and the Basic Regulatory Allocations to each Partner shall be equal to the net amount that would have been allocated to each such Partner if the Basic Regulatory Allocations had not occurred. For purposes of applying the foregoing sentence, allocations pursuant to this Section 3.02(h)(ii) shall only be made with respect to allocations pursuant to Section 3.02(g) hereof to the extent the Managing General Partner reasonably determines that such allocations will otherwise be inconsistent with the economic agreement among the parties to this Agreement. (iii) The "Nonrecourse Regulatory Allocations" consist of all allocations pursuant to Section 3.02(c) and 3.02(e) hereof. Notwithstanding any other provision of this Agreement, other than the Regulatory Allocations, the Nonrecourse Regulatory Allocations shall be taken into account in allocating items of income, gain, loss, and deduction among the Partners so that, to the extent possible, the net amount of such allocations of other items and the Nonrecourse Regulatory Allocations to each Partner shall be equal to the net amount that would have been allocated to each Partner if the Nonrecourse Regulatory Allocations had not occurred. For purposes of applying the foregoing sentence (i) no allocations pursuant to this Section 3.02(h)(iii) shall be made prior to the Partnership fiscal year during which there is a net decrease in Partnership Minimum Gain, and then only to the extent necessary to avoid any potential economic distortions caused by such net decrease in Partnership Minimum Gain, and (ii) allocations pursuant to this Section 3.02(h)(iii) shall be deferred with respect to allocations pursuant to Section 3.02(e) hereof to the extent the Managing General Partner reasonably determines that such allocations are likely to be offset by subsequent allocations pursuant to Section 3.02(c). (iv) The "Partner Nonrecourse Regulatory Allocations" consist of all allocations pursuant to Sections 3.02(d) and 3.02(f) hereof. Notwithstanding any other provision of this Agreement, other than the Regulatory Allocations, the Partner Nonrecourse Regulatory Allocations shall be taken into account in allocating items of income, gain, loss, and deduction among the Partners so that, to the extent possible, the net amount of such allocations of other items and the Partner Nonrecourse Regulatory Allocations to each Partner shall be equal to the net amount that would have been allocated to each such Partner if the Partner Nonrecourse Regulatory Allocations had not occurred. For purposes of applying the foregoing sentence (i) no allocations pursuant to this Section 3.02(h)(iv) shall be made with respect to allocations pursuant to Section 3.02(f) relating to a particular Partner Nonrecourse Debt prior to the Partnership fiscal year during which there is a net decrease in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, and then only to the extent necessary to avoid any potential economic distortions caused by such net decrease in Partner Minimum Gain, and (ii) allocations pursuant to this Section 3.02(h)(iv) shall be deferred with respect to allocations pursuant to Section 3.02(f) hereof relating to a particular Partner Nonrecourse Debt to the extent the Managing General Partner reasonably determines that such allocations are likely to be offset by subsequent allocations pursuant to Section 3.02(d) hereof. (v) The Managing General Partner shall have reasonable discretion with respect to each Partnership fiscal year, to apply the provisions of Sections 3.02(h)(ii), (iii), and (iv) hereof among the Partners in a manner that is likely to minimize such economic distortions. (i) Other Allocations. Except as otherwise provided in this Agreement, all items of Partnership income, loss, deduction, and any other allocations not otherwise provided for shall be divided among the Unit Holders in the same proportions as they share Profits or Losses, as the case may be, for the year. (j) Agreement to be Bound. The Partners are aware of the income tax consequences of the allocations made by this Section 3.02 and hereby agree to be bound by the provisions of this Section 3.02 in reporting their shares of Partnership income and loss for income tax purposes. (k) Excess Nonrecourse Liabilities. Solely for purposes of determining a Partner's proportionate share of the "excess nonrecourse liabilities" of the Partnership within the meaning of Treas. Reg. 1.752-3(a)(3), the Partners' interests in Partnership profits are as follows: Investor Partners, 80% (in proportion to their Units) and the Managing General Partner, 20%. (l) Allocation Variations. The Managing General Partner shall have the authority to vary allocations to preserve and protect the intention of the Partners as follows: (i) It is the intention of the Partners that each Partner's distributive share of income, gain, loss, deduction or credit (or any item thereof) shall be determined and allocated in accordance with this Article 3 to the fullest extent permitted by Code 704(b). In order to preserve and protect the allocations provided for in this Article 3, the Managing General Partner shall have the authority to allocate income, gain, loss, deduction or credit (or any item thereof) arising in any year differently than that expressly provided for in this Article 3, if and to the extent that determining and allocating income, gain, loss, deduction or credit (or any item thereof) in the manner expressly provided for in this Article 3 would cause the allocations of each Partner's distributive share of income, gain, loss, deduction or credit (or any item thereof) not to be permitted by Code 704(b) and the Regulations promulgated thereunder. Any allocation made pursuant to this Section 3.02(l) shall be deemed to be a complete substitute for any allocation otherwise expressly provided for in this Article 3, and no amendment of this Agreement or further consent of any Partner shall be required therefor. (ii) In making any such allocation (the "new allocation") under this Section 3.02(l) the Managing General Partner shall be authorized to act only after having been advised by the Partnership's accountants and/or counsel that, under Code 704(b) and the Regulations thereunder, (i) the new allocation is necessary, and (ii) the new allocation is the minimum modification of the allocations otherwise expressly provided for in this Article 3 which is necessary in order to assure that, either in the then current year or in any preceding year, each Partner's distributive share of income, gain, loss, deduction or credit (or any item thereof) is determined and allocated in accordance with this Article 3 to the fullest extent permitted by Code 704(b) and the Regulations thereunder. (iii) If the Managing General Partner is required by this Section 3.02(l) to make any new allocation in a manner less favorable to the Investor Partners than is otherwise expressly provided for in this Article 3, then the Managing General Partner shall have the authority, only after having been advised by the Partnership's accountants and/or counsel that they are permitted by Code 704(b), to allocate income, gain, loss, deduction or credit (or any item thereof) arising in later years in such a manner as will make the allocations of income, gain, loss, deduction or credit (or any item thereof) to the Investor Partners as comparable as possible to the allocations otherwise expressly provided for or contemplated by this Article 3. (iv) Any new allocation made by the Managing General Partner under this Section 3.02(l) in reliance upon the advice of the Partnership's accountants and/or counsel shall be deemed to be made pursuant to the fiduciary obligation of the Managing General Partner to the Partnership and the Investor Partners, and no such new allocation shall give rise to any claim or cause of action by any Investor Partner. (m) Tax Allocations: Code Section 704(c). In accordance with Code Section 704(c) and the Regulations thereunder, income, gain, loss, and deduction with respect to any property contributed to the capital of the Partnership shall, solely for tax purposes, be allocated among the Partners so as to take account of any variation between the adjusted basis of such property to the Partnership for federal income tax purposes and its initial Gross Asset Value (computed in accordance with Section 1.08(r)(1). In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to Section 1.08(r)(1) hereof, subsequent allocations of income, gain, loss, and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations thereunder. Any elections or other decisions relating to such allocations shall be made by the Managing General Partner in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Section 3.02(m) are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Person's Capital Account or share of Profits, Losses, other items, or distributions pursuant to any provision of this Agreement. 3.03 Depletion. (a) The depletion deduction with respect to each oil and gas property of the Partnership shall be computed separately for each Partner in accordance with Code 613A(c)(7)(D) for Federal income tax purposes. For purposes of such computation, the adjusted basis of each oil and gas property shall be allocated in accordance with the Partners' interests in the capital of the Partnership. Among the Investor Partners, such adjusted basis shall be apportioned among them in accordance with the number of Units held. (b) Upon the taxable disposition of an oil or gas property by the Partnership, the amount realized from and the adjusted basis of such property shall be allocated among the Partners (for purposes of calculating their individual gain or loss on such disposition for Federal income tax purposes) as follows: (i) The portion of the total amount realized upon the taxable disposition of such property that represents recovery of its simulated adjusted tax basis therein (as calculated pursuant to Section 3.01(d) hereof) shall be allocated to the Partners in the same proportion as the aggregate adjusted basis of such property was allocated to such Partners (or their predecessors in interest) pursuant to Section 3.03(a) hereof; and (ii) The portion of the total amount realized upon the taxable disposition of such property that represents the excess over the simulated adjusted tax basis therein shall be allocated in accordance with the provisions of Section 3.02 hereof as if such gain constituted an item of Profit. 3.04 Apportionment Among Partners: (a) Except as otherwise provided in this Agreement, all allocations and distributions to the Investor Partners shall be apportioned among them pro rata based on Units held by the Partners. (b) For purposes of Section 3.04(a) hereof, an Investor Partner's pro rata share in Units shall be calculated as of the end of the taxable year for which such allocation has been made; provided, however, that if a transferee of a Unit is admitted as an Investor Partner during the course of the taxable year, the apportionment of allocations and distributions between the transferor and transferee of such Unit shall be made in the manner provided in Section 3.04(c) hereof. (c) If, during any taxable year of the Partnership, there is a change in any Partner's interest in the Partnership, each Partner's allocation of any item of income, gain, loss, deduction, or credit of the Partnership for such taxable year, other than "allocable cash basis items" shall be determined by taking into account the varying interests of the Partners pursuant to such method as is permitted by Code 706(d) and the regulations thereunder. Each Partner's share of "allocable cash basis items" shall be determined in accordance with Code 706(d)(2) by (i) assigning the appropriate portion of each item to each day in the period to which it is attributable, and (ii) allocating the portion assigned to any such day among the Partners in proportion to their interests in the Partnership at the close of such day. "Allocable cash basis item" shall have the meaning ascribed to it by Code 706(d)(2)(B) and the regulations thereunder. ARTICLE IV Distributions 4.01 Time of Distribution. Cash available for distribution shall be determined by the Managing General Partner. The Managing General Partner shall distribute, in its discretion, such cash deemed available for distribution, but such distributions shall be made not less frequently than quarterly. 4.02 Distributions. (a) Except as otherwise provided below and in Section 2.01(a), all distributions (other than those made to wind up the Partnership in accordance with Section 9.03 hereof) shall be made 80% to the Investor Partners and 20% to the Managing General Partner. If the performance standard as defined below in subsection (b) is not fulfilled by a particular Partnership, that Partnership's sharing arrangement shall be modified, as set forth herein, for up to a ten-year period commencing six months after the closing date of that Partnership and ending ten years following such closing date. (b) The performance standard shall be as follows: (i) If the Average Annual Rate of Return, as defined below, to the Investor Partners is less than 12.8% of their Subscriptions, the allocation rate of all items of profit and loss and cash available for distribution for Investor Partners shall be increased by ten percentage points above the then-current sharing arrangements for Investor Partners and the allocation rate with respect to such items for the Managing General Partner will be decreased by ten percentage points below the then-current sharing arrangements for the Managing General Partner, until the Average Annual Rate of Return shall have increased to 12.8% or more, or until ten years and six months shall have expired from the closing date of the Partnership, whichever event shall occur sooner. (ii) Average Annual Rate of Return for purposes of this sharing arrangement shall be defined as (1) the sum of cash distributions and estimated initial tax savings of 25% of Subscriptions, realized for a $10,000 investment in the Partnership, divided by (2) $10,000 multiplied by the number of years (less six months) which have elapsed since the closing of the Partnership. (c) The Partnership shall not require that Investor Partners reinvest their share of cash available for distribution in the Partnership. In no event shall funds be advanced or borrowed for purposes of distributions, if the amount of such distributions would exceed the Partnership's accrued and received revenues for the previous four quarters, less paid and accrued operating costs with respect to such revenues. The determination of such revenues and costs shall be made in accordance with generally accepted accounting principles, consistently applied. Cash distributions from the Partnership to the Managing General Partner shall only be made in conjunction with distributions to Investor Partners and only out of funds properly allocated to the Managing General Partner's account. 4.03 Capital Account Deficits. No distributions shall be made to any Investor Partner to the extent such distribution would create or increase a deficit in such Partner's Capital Account (as adjusted in Section 3.02(b)(i)). Any distribution which is hereby prohibited shall be made to those Partners not having a deficit in their Capital Accounts (as adjusted in Section 3.02(b)(i)) in the proportion that the positive balance of each such Partner's adjusted Capital Account bears to the aggregate balance of all such Partners' adjusted Capital Accounts. Any cash available for distribution remaining after reduction of all adjusted Capital Accounts to zero shall be distributed to the Managing General Partner. 4.04 Liability Upon Receipt of Distributions. (a) If a Partner has received a return of any part of his Capital Contribution without violation of the Partnership Agreement or the Act, he is liable to the Partnership for a period of one year thereafter for the amount of such returned contribution, but only to the extent necessary to discharge the Partnership's liabilities to creditors who extended credit to the Partnership during the period the Capital Contribution was held by the Partnership. (b) If a Partner has received a return of any part of his Capital Contribution in violation of either the Partnership Agreement or the Act, he is liable to the Partnership for a period of six years thereafter for the amount of the Capital Contribution wrongfully returned. (c) A Partner receives a return of his Capital Contribution to the extent that the distribution to him reduces his share of the fair value of the net assets of the Partnership below the value, as set forth in the records required to be kept by West Virginia law, of his Capital Contribution which has not been distributed to him. ARTICLE V Activities 5.01 Management. The Managing General Partner shall conduct, direct, and exercise full and exclusive control over all activities of the Partnership. Investor Partners shall have no power over the conduct of the affairs of the Partnership or otherwise commit or bind the Partnership in any manner. The Managing General Partner shall manage the affairs of the Partnership in a prudent and businesslike fashion and shall use its best efforts to carry out the purposes and character of the business of the Partnership. 5.02 Conduct of Operations. (a)(i) The Managing General Partner shall establish a program of operations for the Partnership which shall be in conformance with the following policies: (x) no less than 90% of the Capital Contributions net of Organization and Offering Costs and the Management Fee shall be applied to drilling and completing Development Wells; (y) the Partnership shall drill all of its wells in West Virginia, Ohio, Pennsylvania, Colorado, New York, Kentucky, Michigan, Indiana, Kansas, Montana, South Dakota, Tennessee, Utah, Wyoming, and/or Oklahoma and (z) the Prospects will be acquired pursuant to an arrangement whereby the Partnership will acquire up to 100% of the Working Interest, subject to landowners' royalty interests and the royalty interests payable to unaffiliated third parties in varying amounts, provided that the weighted average of such royalty interests for all Prospects of the Partnership shall not exceed 20%. (ii) The Investor Partners agree to participate in the Partnership's program of operations as established by the Managing General Partner; provided, that no well drilled to the point of setting casing need be completed if, in the Managing General Partner's opinion, such well is unlikely to be productive of oil or gas in quantities sufficient to justify the expenditures required for well completion. The Partnership may participate with others in the drilling of wells and it may enter into joint ventures, partnerships, or other such arrangements. (b) All transactions between the Partnership and the Managing General Partner or its Affiliates shall be on terms no less favorable than those terms which could be obtained between the Partnership and independent third parties dealing at arm's-length, subject to the provisions of Section 5.07 hereof. (c) The Partnership shall not participate in any joint operations on any co-owned Lease unless there has been acquired or reserved on behalf of the Partnership the right to take in kind or separately dispose of its proportionate share of the oil and gas produced from such Lease exclusive of production which may be used in development and production operations on the Lease and production unavoidably lost, and, if the Managing General Partner is the operator of such Lease, the Managing General Partner has entered into written agreements with every other person or entity owning any working or operating interest reserving to such person or entity a similar right to take in-kind, unless, in the opinion of counsel to the Partnership, the failure to reserve such right to take in-kind will not result in the Partnership being treated as a member of an association taxable as a corporation for Federal income tax purposes. (d) The relationship of the Partnership and the Managing General Partner (or any Affiliate retaining or acquiring an interest) as co-owners in Leases, except to the extent superseded by an Operating Agreement consistent with the preceding paragraph and except to the extent inconsistent with this Partnership Agreement, shall be governed by the AAPL Form 610 Model Operating Agreement-1982, with a provision reserving the right to take production in-kind, naming the Managing General Partner as operator and the Partnership as a nonoperator, and with the accounting procedure to govern as the accounting procedures under such Operating Agreements. (e) The Managing General Partner is generally expected to act as the operator of Partnership wells, and the Managing General Partner may designate such other persons as it deems appropriate to conduct the actual drilling and producing operations of the Partnership. (f) As operator of Partnership wells, the Managing General Partner or its Affiliates shall receive per-well charges for each producing well based on the Working Interest acquired by the Partnership. These per-well charges shall be subject to annual adjustment beginning January 1, 2003 [with respect to Partnerships designated as "PDC 2001- Limited Partnership," January 1, 2004 with respect to Partnerships designated as "PDC 2002- Limited Partnership" and January 1, 2005 with respect to Partnerships designated as "PDC 2003- Limited Partnership"] as provided in the accounting procedures of the operating agreements. (g) The Managing General Partner shall drill wells pursuant to drilling contracts with the Partnership based upon competitive prices and terms in the geographic area of operations, and to the extent that such prices exceed its Costs, the Managing General Partner shall be deemed to have received compensation. (h) The Managing General Partner shall be reimbursed by the Partnership for Direct Costs. The Managing General Partner shall not be reimbursed for any Administrative Costs. All other expenses shall be borne by the Partnership. (i) The Managing General Partner and its Affiliates may enter into other transactions (embodied in a written contract) with the Partnership, such as providing services, supplies, and equipment, and shall be entitled to compensation for such services at prices and on terms that are competitive in the geographic area of operations. (j) The Partnership shall make no loans to the Managing General Partner or any Affiliate thereof. (k) Neither the Managing General Partner nor any Affiliate shall loan any funds to the Partnership. (l) The funds of the Partnership shall not be commingled with the funds of any other Person. (m) Notwithstanding any provision herein to the contrary, no creditor shall receive, as a result of making any loan, a direct or indirect interest in the profits, capital, or property of the Partnership other than as a secured creditor. (n) The Managing General Partner shall have a fiduciary responsibility for the safekeeping and use of all funds and assets of the Partnership, whether or not in the Managing General Partner's possession or control, and shall not employ or permit another to employ such funds or assets in any manner except for the exclusive benefit of the Partnership. 5.03 Acquisition and Sale of Leases. (a) To the extent the Partnership does not acquire a full interest in a Lease from the Managing General Partner, the remainder of the interest in such Lease may be held by the Managing General Partner which may either retain and exploit it for its own account or sell or otherwise dispose of all or a part of such remaining interest. Profits from such exploitation and/or disposition shall be for the benefit of the Managing General Partner to the exclusion of the Partnership. Any Leases acquired by the Partnership from the Managing General Partner shall be acquired only at the Managing General Partner's Cost, unless the Managing General Partner shall have reason to believe that Cost is in excess of the fair market value of such property, in which case the price shall not exceed the fair market value. The Managing General Partner shall obtain an appraisal from a qualified independent expert with respect to sales of properties of the Managing General Partner and its Affiliates to the Partnership. Neither the Managing General Partner nor any Affiliate shall acquire or retain any carried, reversionary, or Overriding Royalty Interest on the Lease interests acquired by the Partnership, nor shall the Managing General Partner enter into any farmout arrangements with respect to its retained interest, except as provided in Section 5.05 hereof. (b) The Partnership shall acquire only Leases reasonably expected to meet the stated purposes of the Partnership. No Leases shall be acquired for the purpose of a subsequent sale or farmout unless the acquisition is made after a well has been drilled to a depth sufficient to indicate that such an acquisition would be in the Partnership's best interest. (c) Neither the Managing General Partner nor its Affiliates, except other partnerships sponsored by them, shall purchase any productive properties from the Partnership. 5.04 Title to Leases. (a) Record title to each Lease acquired by the Partnership may be temporarily held in the name of the Managing General Partner, or in the name of any nominee designated by the Managing General Partner, as agent for the Partnership until a productive well is completed on a Lease. Thereafter, record title to Leases shall be assigned to and placed in the name of the Partnership. (b) The Managing General Partner shall take the necessary steps in its best judgment to render title to the Leases to be assigned to the Partnership acceptable for the purposes of the Partnership. No operation shall be commenced on any Prospect acquired by the Partnership unless the Managing General Partner is satisfied that the undertaking of such operation would be in the best interest of Investor Partners and the Partnership. The Managing General Partner shall be free, however, to use its own best judgment in waiving title requirements and shall not be liable to the Partnership or the Investor Partners for any mistakes of judgment unless such mistakes were made in a manner not in accordance with general industry standards in the geographic area and such mistakes were not the result of negligence by the Managing General Partner; nor shall the Managing General Partner or its Affiliates be deemed to be making any warranties or representations, express or implied, as to the validity or merchantability of the title to any Lease assigned to the Partnership or the extent of the interest covered thereby. 5.05 Farmouts. (a) No Partnership Lease shall be farmed out, sold, or otherwise disposed of unless the Managing General Partner determines that (i) the Partnership lacks sufficient funds to drill on such Lease and is unable to obtain suitable financing, (ii) the Leases have been downgraded by events occurring after assignment to the Partnership, (iii) drilling on the Leases would result in an excessive concentration, of Partnership funds creating, in the Managing General Partner's opinion, undue risk to the Partnership, or (iv) the Managing General Partner, exercising the standard of a prudent operator, determines that the farmout is in the best interests of the Partnership. (b) Farmouts between the Partnership and the Managing General Partner or its Affiliates, including any other affiliated limited partnership, shall be effected on terms deemed fair by the Managing General Partner. The Managing General Partner, exercising the standard of a prudent operator, shall determine that the farmout is in the best interest of the Partnership and the terms of the farmout are consistent with and, in any case, no less favorable to the Partnership than those utilized in the geographic area of operations for similar arrangements. The respective obligations and revenue sharing of all affiliated parties to the transactions shall be substantially the same, and the compensation arrangement or any other interest or right of either the Managing General Partner or its Affiliates shall be substantially the same in each participating partnership or, if different, shall be reduced to reflect the lower compensation arrangement. 5.06 Release, Abandonment, and Sale or Exchange of Properties. Except as provided elsewhere in this Article V and in Section 6.03, the Managing General Partner shall have full power to dispose of the production and other assets of the Partnership, including the power to determine which Leases shall be released or permitted to terminate, those wells to be abandoned, whether any Lease or well shall be sold or exchanged, and the terms therefor. In the event the Managing General Partner sells, transfers, or otherwise disposes of nonproducing property of the Partnership, the sale, transfer, or disposition shall, to the extent possible, be made at a price which is the higher of the fair market value of the property on the date of the sale, transfer, or disposition or the Cost of such property to the Partnership. 5.07 Certain Transactions. (a) Whenever the Managing General Partner or its Affiliates sell, transfer, or assign an interest in a Prospect to the Partnership, they shall assign to the Partnership an equal proportionate interest in each of the Leases comprising the Prospect. If the Managing General Partner or its Affiliates (except another affiliated partnership in which the interest of the Managing General Partner or its Affiliates is identical to or less than their interest in the Partnership) subsequently propose to acquire an interest in a Prospect in which the Partnership possesses an interest or in a Prospect abandoned by the Partnership within one year preceding such proposed acquisition, the Managing General Partner or its Affiliates shall offer an equivalent interest therein to the Partnership; and, if funds, including borrowings, are not available to the Partnership to enable it to consummate a purchase of an equivalent interest in such property and pay the development costs thereof, neither the Managing General Partner nor any of its Affiliates shall acquire such interest or property. The term "abandoned" shall mean the termination, either voluntarily or by operation of the Lease or otherwise, of all of the Partnership's interest in the Prospect. These limitations shall not apply after the lapse of five years from the date of formation of the Partnership. (b) The geological limits of a Prospect shall be enlarged or contracted on the basis of subsequently acquired geological data that further defines the productive limits of the underlying oil and/or gas reservoir and shall include all of the acreage determined by such subsequent data to be encompassed by such reservoir; further, where the Managing General Partner or Affiliate owns a separate property interest in such enlarged area, such interest shall be sold to the Partnership if the activities of the Partnership were material in establishing the existence of proved undeveloped reserves which are attributable to such separate property interest; provided, however, that the Partnership shall not be required to expend additional funds unless they are available from the initial capitalization of the Partnership or if the Managing General Partner believes it is prudent to borrow for the purpose of acquiring such additional acreage. (c) The Partnership shall not purchase properties from or sell properties to any other affiliated partnership. This prohibition, however, shall not apply to transactions among affiliated partnerships by which property is transferred from one to another in exchange for the transferee's obligation to conduct drilling activities on such property or to joint ventures among such affiliated partnerships, provided that the respective obligations and revenue sharing of all parties to the transaction are substantially the same and the compensation arrangement or any other interest or right of either the Managing General Partner or its Affiliates is the same in each affiliated partnership, or, if different, the aggregate compensation of the Managing General Partner is reduced to reflect the lower compensation arrangement. (d) During the existence of the Partnership, and before it has ceased operations, neither the Managing General Partner nor any of its Affiliates (excluding another partnership where the Managing General Partner's or its Affiliates' interest in such partnership is identical to or less than their interest in the Partnership) shall acquire, retain, or drill for their own account any oil and gas interest in any Prospect in which the Partnership possesses an interest, except for transactions whereby the Managing General Partner or such Affiliate acquires or retains a proportionate Working Interest, the respective obligations of the Managing General Partner or the Affiliate and the Partnership are substantially the same after the sale of the interest to the Partnership, and the Managing General Partner's or Affiliate's interest in revenues does not exceed the amount proportionate to its Working Interest. (e) Any services, equipment, or supplies which the Managing General Partner or an Affiliate furnishes to the Partnership shall be furnished at the lesser of the Managing General Partner's or the Affiliate's Cost or a competitive rate which could be obtained in the geographical area of operations unless the Managing General Partner or any Affiliate is engaged to a substantial extent, as an ordinary and ongoing business, in providing such services, equipment, or supplies to others in the industry, in which event, the services, supplies, or equipment may be provided by such person to the Partnership at prices competitive with those charged by others in the geographical area of operations which would be available to the Partnership. If such entity is not engaged in the business as set forth above, then such compensation, price or rental shall be the cost of such services, equipment or supplies to such entity, or the competitive rate which could be obtained in the area, whichever is less. Any drilling services provided by the Managing General Partner or its Affiliates shall be billed only on a per foot, per day, or per hour rate, or some combination thereof. No turnkey drilling contracts shall be made between the Managing General Partner or its Affiliates and the Partnership. Neither the Managing General Partner nor its Affiliates shall profit by drilling in contravention of its fiduciary obligations to the Partnership. Any such services for which the Managing General Partner or an Affiliate is to receive compensation shall be embodied in a written contract which precisely describes the services to be rendered and all compensation to be paid. (f) Advance payments by the Partnership to the Managing General Partner are prohibited, except where necessary to secure tax benefits of prepaid drilling costs. (g) Neither the Managing General Partner nor its Affiliates shall make any future commitments of the Partnership's production which do not primarily benefit the Partnership, nor shall the Managing General Partner or any Affiliate utilize Partnership funds as compensating balances for the benefit of the Managing General Partner or the Affiliate. (h) No rebates or give-ups may be received by the Managing General Partner or any of its Affiliates, nor may the Managing General Partner or any Affiliate participate in any reciprocal business arrangements which would circumvent these restrictions. (i) During a period of five years from the date of formation of the Partnership, if the Managing General Partner or any of its Affiliates proposes to acquire from an unaffiliated person an interest in a Prospect in which the Partnership possesses an interest or in a Prospect in which the Partnership's interest has been terminated without compensation within one year preceding such proposed acquisition, the following conditions shall apply: (1) If the Managing General Partner or the Affiliate does not currently own property in the Prospect separately from the Partnership, then neither the Managing General Partner nor the Affiliate shall be permitted to purchase an interest in the Prospect. (2) If the Managing General Partner or the Affiliate currently owns a proportionate interest in the Prospect separately from the Partnership, then the interest to be acquired shall be divided between the Partnership and the Managing General Partner or the Affiliate in the same proportion as is the other property in the Prospect; provided however, if cash or financing is not available to the Partnership to enable it to consummate a purchase of the additional interest to which it is entitled, then neither the Managing General Partner nor the Affiliate shall be permitted to purchase any additional interest in the Prospect. (j) If the Partnership acquires property pursuant to a farmout or joint venture from an affiliated program, the Managing General Partner's and/or its Affiliates' aggregate compensation associated with the property and any direct and indirect ownership interest in the property may not exceed the lower of the compensation and ownership interest the Managing General Partner and/or its Affiliates could receive if the property were separately owned or retained by either one of the programs. (k) Neither the Managing General Partner nor any Affiliate, including affiliated programs, may purchase or acquire any property from the Partnership, directly or indirectly, except pursuant to transactions that are fair and reasonable to the Investor Partners of the Partnership and then subject to the following conditions: (1) A sale, transfer or conveyance, including a farmout, of an undeveloped property from the Partnership to the Managing General Partner or an Affiliate, other than an affiliated program, must be made at the higher of cost or fair market value. (2) A sale, transfer or conveyance of a developed property from the Partnership to the Managing General Partner or an Affiliate, other than an affiliated program in which the interest of the Managing General Partner is substantially similar to or less than its interest in the subject Partnership, shall not be permitted except in connection with the liquidation of the Partnership and then only at fair market value. (3) Except in connection with farmouts or joint ventures made in compliance with Section 5.07(j) above, a transfer of an undeveloped property from the Partnership to an affiliated drilling program must be made at fair market value if the property has been held for more than two years. Otherwise, if the Managing General Partner deems it to be in the best interest of the Partnership, the transfer may be made at cost. (4) Except in connection with farmouts or joint ventures made in compliance with Section 5.07(j) above, a transfer of any type of property from the Partnership to an affiliated production purchase or income program must be made at fair market value if the property has been held for more than six months or there have been significant expenditures made in connection with the property. Otherwise, if the Managing General Partner deems it to be in the best interest of the Partnership, the transfer may be made at cost as adjusted for intervening operations. (l) If the Partnership participates in other partnerships or joint ventures (multi-tier arrangements), the terms of any such arrangements shall not result in the circumvention of any of the requirements or prohibitions contained in this Partnership Agreement, including the following: (1) there will be no duplication or increase in organization and offering expenses, the Managing General Partner's compensation, Partnership expenses or other fees and costs; (2) there will be no substantive alteration in the fiduciary and contractual relationship between the Managing General Partner and the Investor Partners; and (3) there will be no diminishment in the voting rights of the Investor Partners. (m) In connection with a proposed Roll-Up, the following shall apply: (1) An appraisal of all Partnership assets shall be obtained from a competent independent expert. If the appraisal will be included in a prospectus used to offer the securities of a Roll-Up Entity, the appraisal shall be filed with the Securities and Exchange Commission and the Administrator as an exhibit to the registration statement for the offering. The appraisal shall be based on all relevant information, including current reserve estimates prepared by an independent petroleum consultant, and shall indicate the value of the Partnership's assets assuming an orderly liquidation as of a date immediately prior to the announcement of the proposed Roll-Up transaction. The appraisal shall assume an orderly liquidation of Partnership assets over a 12-month period. The terms of the engagement of the independent expert shall clearly state that the engagement is for the benefit of the Partnership and the Investor Partners. A summary of the independent appraisal, indicating all material assumptions underlying the appraisal, shall be included in a report to the Investor Partners in connection with a proposed Roll-Up. (2) In connection with a proposed Roll-Up, Investor Partners who vote "no" on the proposal shall be offered the choice of: (i) accepting the securities of the Roll-Up Entity offered in the proposed Roll-Up; or (ii) (a) remaining as Investor Partners in the Partnership and preserving their interests therein on the same terms and conditions as existed previously; or (b) receiving cash in an amount equal to the Investor Partners' pro-rata share of the appraised value of the net assets of the Partnership. (3) The Partnership shall not participate in any proposed Roll-Up which, if approved, would result in the diminishment of any Investor Partner's voting rights under the Roll-Up Entity's chartering agreement. In no event shall the democracy rights of Investor Partners in the Roll-Up Entity be less than those provided for under Sections 7.07 and 7.08 of this Agreement. If the Roll-Up Entity is a corporation, the democracy rights of Investor Partners shall correspond to the democracy rights provided for in this Agreement to the greatest extent possible. (4) The Partnership shall not participate in any proposed Roll-Up transaction which includes provisions which would operate to materially impede or frustrate the accumulation of shares by any purchaser of the securities of the Roll-Up Entity (except to the minimum extent necessary to preserve the tax status of the Roll-Up Entity); nor shall the Partnership participate in any proposed Roll-Up transaction which would limit the ability of an Investor Partner to exercise the voting rights of its securities of the Roll-Up Entity on the basis of the number of Partnership Units held by that Investor Partner. (5) The Partnership shall not participate in a Roll-Up in which Investor Partners' rights of access to the records of the Roll-Up Entity will be less than those provided for under Section 8.01 of this Agreement. (6) The Partnership shall not participate in any proposed Roll-Up transaction in which any of the costs of the transaction would be borne by the Partnership if the Roll-Up is not approved by the Investor Partners. (7) The Partnership shall not participate in a Roll-Up transaction unless the Roll-Up transaction is approved by at least 66 2/3% in interest of the Investor Partners. ARTICLE VI Managing General Partner 6.01 Managing General Partner. The Managing General Partner shall have the sole and exclusive right and power to manage and control the affairs of and to operate the Partnership and to do all things necessary to carry on the business of the Partnership for the purposes described in Section 1.03 hereof and to conduct the activities of the Partnership as set forth in Article V hereof. No financial institution or any other person, firm, or corporation dealing with the Managing General Partner shall be required to ascertain whether the Managing General Partner is acting in accordance with this Agreement, but such financial institution or such other person, firm, or corporation shall be protected in relying solely upon the deed, transfer, or assurance of and the execution of such instrument or instruments by the Managing General Partner. The Managing General Partner shall devote so much of its time to the business of the Partnership as in its judgment the conduct of the Partnership's business shall reasonably require and shall not be obligated to do or perform any act or thing in connection with the business of the Partnership not expressly set forth herein. The Managing General Partner may engage in business ventures of any nature and description independently or with others and neither the Partnership nor any of its Investor Partners shall have any rights in and to such independent ventures or the income or profits derived therefrom. However, except as otherwise provided herein, the Managing General Partner and any of its Affiliates may pursue business opportunities that are consistent with the Partnership's investment objectives for their own account only after they have determined that such opportunity either cannot be pursued by the Partnership because of insufficient funds or because it is not appropriate for the Partnership under the existing circumstances. 6.02 Authority of Managing General Partner. The Managing General Partner is specifically authorized and empowered, on behalf of the Partnership, and by consent of the Investor Partners herein given, to do any act or execute any document or enter into any contract or any agreement of any nature necessary or desirable, in the opinion of the Managing General Partner, in pursuance of the purposes of the Partnership. Without limiting the generality of the foregoing, in addition to any and all other powers conferred upon the Managing General Partner pursuant to this Agreement and the Act, and except as otherwise prohibited by law or hereunder, the Managing General Partner shall have the power and authority to: (a) Acquire leases and other interests in oil and/or gas properties in furtherance of the Partnership's business; (b) Enter into and execute pooling agreements, farm out agreements, operating agreements, unitization agreements, dry and bottom hole and acreage contribution letters, construction contracts, and any and all documents or instruments customarily employed in the oil and gas industry in connection with the acquisition, sale, exploration, development, or operation of oil and gas properties, and all other instruments deemed by the Managing General Partner to be necessary or appropriate to the proper operation of oil or gas properties or to effectively and properly perform its duties or exercise its powers hereunder; (c) Make expenditures and incur any obligations it deems necessary to implement the purposes of the Partnership; employ and retain such personnel as it deems desirable for the conduct of the Partnership's activities, including employees, consultants, and attorneys; and exercise on behalf of the Partnership, in such manner as the Managing General Partner in its sole judgment deems best, of all rights, elections, and obligations granted to or imposed upon the Partnership; (d) Manage, operate, and develop any Partnership property, and enter into operating agreements with respect to properties acquired by the Partnership, including an operating agreement with the Managing General Partner as described in the Prospectus, which agreements may contain such terms, provisions, and conditions as are usual and customary within the industry and as the Managing General Partner shall approve; (e) Compromise, sue, or defend any and all claims in favor of or against the Partnership; (f) Subject to the provisions of Section 8.04 hereof, make or revoke any election permitted the Partnership by any taxing authority; (g) Perform any and all acts it deems necessary or appropriate for the protection and preservation of the Partnership assets; (h) Maintain at the expense of the Partnership such insurance coverage for public liability, fire and casualty, and any and all other insurance necessary or appropriate to the business of the Partnership in such amounts and of such types as it shall determine from time to time; (i) Buy, sell, or lease property or assets on behalf of the Partnership; (j) Enter into agreements to hire services of any kind or nature; (k) Assign interests in properties to the Partnership; (l) Enter into soliciting dealer agreements and perform all of the Partnership's obligations thereunder, to issue and sell Units pursuant to the terms and conditions of this Agreement, the Subscription Agreements, and the Prospectus, to accept and execute on behalf of the Partnership Subscription Agreements, and to admit original and substituted Partners; and (m) Perform any and all acts, and execute any and all documents it deems necessary or appropriate to carry out the purposes of the Partnership. 6.03 Certain Restrictions on Managing General Partner's Power and Authority. Notwithstanding any other provisions of this Agreement to the contrary, neither the Managing General Partner nor any Affiliate of the Managing General Partner shall have the power or authority to, and shall not, do, perform, or authorize any of the following: (a) Borrow any money in the name or on behalf of the Partnership; (b) Use any revenues from Partnership operations for the purposes of acquiring Leases in new or unrelated Prospects or paying any Organization and Offering Expenses; provided, however, that revenues from Partnership operations may be used for other Partnership operations, including without limitation for the purposes of drilling, completing, maintaining, recompleting, and operating wells on existing Partnership Prospects and acquiring and developing new Leases to the extent such Leases are considered by the Managing General Partner in its sole discretion to be a part of a Prospect in which the Partnership then owns a Lease; (c) Without having first received the prior consent of the holders of a majority of the then outstanding Units entitled to vote, (i) sell all or substantially all of the assets of the Partnership (except upon liquidation of the Partnership pursuant to Article IX hereof), unless cash funds of the Partnership are insufficient to pay the obligations and other liabilities of the Partnership; (ii) dispose of the good will of the Partnership; (iii) do any other act which would make it impossible to carry on the ordinary business of the Partnership; or (iv) agree to the termination or amendment of any operating agreement to which the Partnership is a party, or waive any rights of the Partnership thereunder, except for amendments to the operating agreement which the Managing General Partner believes are necessary or advisable to ensure that the operating agreement conforms to any changes in or modifications to the Code or that do not adversely affect the Investor Partners in any material respect; (d) Guarantee in the name or on behalf of the Partnership the payment of money or the performance of any contract or other obligation of any Person other than the Partnership; (e) Bind or obligate the Partnership with respect to any matter outside the scope of the Partnership business; (f) Use the Partnership name, credit, or property for other than Partnership purposes; (g) Take any action, or permit any other person to take any action, with respect to the assets or property of the Partnership which does not benefit the Partnership, including, among other things, utilization of funds of the Partnership as compensating balances for its own benefit or the commitment of future production; (h) Benefit from any arrangement for the marketing of oil and gas production or other relationships affecting the property of the Managing General Partner and the Partnership, unless such benefits are fairly and equitably apportioned among the Managing General Partner, its Affiliates, and the Partnership; (i) Utilize Partnership funds to invest in the securities of another person except in the following instances: (1) investments in working interests or undivided lease interests made in the ordinary course of the Partnership's business; (2) temporary investments made in compliance with Section 2.02(f) of this Agreement; (3) investments involving less than 5% of Partnership capital which are a necessary and incidental part of a property acquisition transaction; and (4) investments in entities established solely to limit the Partnership's liabilities associated with the ownership or operation of property or equipment, provided, in such instances duplicative fees and expenses shall be prohibited; or (j) Sell, transfer, or assign its interest (except for a collateral assignment which may be granted to a bank or other financial institution) in the Partnership, or any part thereof, or otherwise to withdraw as Managing General Partner of the Partnership without one hundred twenty (120) days prior written notice and the written consent of Investor Partners owning a majority of the then outstanding Units. 6.04 Indemnification of Managing General Partner. The Managing General Partner shall have no liability to the Partnership or to any Investor Partner for any loss suffered by the Partnership which arises out of any action or inaction of the Managing General Partner if the Managing General Partner, in good faith, determined that such course of conduct was in the best interest of the Partnership, that the Managing General Partner was acting on behalf of or performing services for the Partnership, and that such course of conduct did not constitute negligence or misconduct of the Managing General Partner. The Managing General Partner shall be indemnified by the Partnership against any losses, judgments, liabilities, expenses, and amounts paid in settlement of any claims sustained by it in connection with the Partnership, provided that the Managing General Partner has determined in good faith that the course of conduct which caused the loss or liability was in the best interests of the Partnership, that the Managing General Partner was acting on behalf of or performing services for the Partnership, and that the same were not the result of negligence or misconduct on the part of the Managing General Partner. Indemnification of the Managing General Partner is recoverable only from the tangible net assets of the Partnership, including the insurance proceeds from the Partnership's insurance policies and the insurance and indemnification of the Partnership's subcontractors, and is not recoverable from the Investor Partners. Notwithstanding the above, the Managing General Partner and any person acting as a broker-dealer shall not be indemnified for liabilities arising under Federal and state securities laws unless (a) there has been a successful adjudication on the merits of each count involving securities law violations, (b) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction, or (c) a court of competent jurisdiction approves a settlement of such claims against a particular indemnitee and finds that indemnification of the settlement and the related costs should be made, and the court considering the request for indemnification has been advised of the position of the Securities and Exchange Commission and of any state securities regulatory authority in which securities of the Partnership were offered or sold as to indemnification for violations of securities laws; provided however, the court need only be advised of the positions of the securities regulatory authorities of those states (i) which are specifically set forth in the program agreement and (ii) in which plaintiffs claim they were offered or sold program units. In any claim for indemnification for Federal or state securities laws violations, the party seeking indemnification shall place before the court the position of the Securities and Exchange Commission, the Massachusetts Securities Division, and the Tennessee Securities Division or respective state securities division, as the case may be, with respect to the issue of indemnification for securities law violations. The advancement of Partnership funds to a sponsor or its affiliates for legal expenses and other costs incurred as a result of any legal action for which indemnification is being sought is permissible only if the Partnership has adequate funds available and the following conditions are satisfied: (a) the legal action relates to acts or omissions with respect to the performance of duties or services on behalf of the Partnership, and (b) the legal action is initiated by a third party who is not a participant, or the legal action is initiated by a participant and a court of competent jurisdiction specifically approves such advancement, and (c) the sponsor or its affiliates undertake to repay the advanced funds to the Partnership, together with the applicable legal rate of interest thereon, in cases in which such party is found not to be entitled to indemnification. The Partnership shall not incur the cost of the portion of any insurance which insures the Managing General Partner against any liability as to which the Managing General Partner is herein prohibited from being indemnified. 6.05 Withdrawal. (a) Notwithstanding the limitations contained in Section 6.03(l) hereof, the Managing General Partner shall have the right, by giving written notice to the other Partners, to substitute in its stead as managing general partner any successor entity or any entity controlled by the Managing General Partner, provided that the successor Managing General Partner must have a tangible net worth of at least $5 million, and the Investor Partners, by execution of this Agreement, expressly consent to such a transfer, unless it would adversely affect the status of the Partnership as a partnership for federal income tax purposes. (b) The Managing General Partner may not voluntarily withdraw from the Partnership prior to the Partnership's completion of its primary drilling and/or acquisition activities, and then only after giving 120 days written notice. The Managing General Partner may not partially withdraw its property interests held by the Partnership unless such withdrawal is necessary to satisfy the bona fide request of its creditors or approved by a majority-in-interest vote of the Investor Partners. The Managing General Partner shall fully indemnify the Partnership against any additional expenses which may result from a partial withdrawal of property interests and such withdrawal may not result in a greater amount of direct costs or administrative costs being allocated to the Investor Partners. The withdrawing Managing General Partner shall pay all expenses incurred as a result of its withdrawal. 6.06 Management Fee. The Partnership shall pay the Managing General Partner, on the date the Partnership is organized (as set forth in Section 1.01), a one-time management fee equal to 2.5% of the total Subscriptions. 6.07 Tax Matters and Financial Reporting Partner. The Managing General Partner shall serve as the Tax Matters Partner for purposes of Code 6221 through 6233 and as the Financial Reporting Partner. The Partnership may engage its accountants and/or attorneys to assist the Tax Matters Partner in discharging its duties hereunder. ARTICLE VII Investor Partners 7.01 Management. No Investor Partner shall take part in the control or management of the business or transact any business for the Partnership, and no Investor Partner shall have the power to sign for or bind the Partnership. Any action or conduct of Investor Partners on behalf of the Partnership is hereby expressly prohibited. Any Investor Partner who violates this Section 7.01 shall be liable to the remaining Investor Partners, the Managing General Partner, and the Partnership for any damages, costs, or expenses any of them may incur as a result of such violation. The Investor Partners hereby grant to the Managing General Partner or its successors or assignees the exclusive authority to manage and control the Partnership business in its sole discretion and to thereby bind the Partnership and all Partners in its conduct of the Partnership business. Investor Partners shall have the right to vote only with respect to those matters specifically provided for in these Articles. No Investor Partner shall have the authority to: (a) Assign the Partnership property in trust for creditors or on the assignee's promise to pay the debts of the Partnership; (b) Dispose of the goodwill of the business; (c) Do any other act which would make it impossible to carry on the ordinary business of the Partnership; (d) Confess a judgment; (e) Submit a Partnership claim or liability to arbitration or reference; (f) Make a contract or bind the Partnership to any agreement or document; (g) Use the Partnership's name, credit, or property for any purpose; (h) Do any act which is harmful to the Partnership's assets or business or by which the interests of the Partnership shall be imperiled or prejudiced; or (i) Perform any act in violation of any applicable law or regulations thereunder, or perform any act which is inconsistent with the terms of this Agreement. 7.02 Indemnification of Additional General Partners. The Managing General Partner agrees to indemnify each of the Additional General Partners for the amounts of obligations, risks, losses, or judgments of the Partnership or the Managing General Partner which exceed the amount of applicable insurance coverage and amounts which would become available from the sale of all Partnership assets. Such indemnification applies to casualty losses and to business losses, such as losses incurred in connection with the drilling of an unproductive well, to the extent such losses exceed the Additional General Partners' interest in the undistributed net assets of the Partnership. If, on the other hand, such excess obligations are the result of the negligence or misconduct of an Additional General Partner, or the contravention of the terms of the Partnership Agreement by the Additional General Partner, then the foregoing indemnification by the Managing General Partner shall be unenforceable as to such Additional General Partner and such Additional General Partner shall be liable to all other Partners for damages and obligations resulting therefrom. 7.03 Assignment of Units. (a) An Investor Partner may transfer all or any portion of his Units and the transferee shall become a Substituted Investor Partner (subject to all duties and obligations of an Investor Partner, including those contained in Section 4.04 herein, except to the extent excepted in the Act) subject to the following conditions (any transfer of such Units satisfying such conditions being referred to herein as a "Permitted Transfer"): (i) Except in the case of a transfer of Units at death or involuntarily by operation of law, the transferor and transferee shall execute and deliver to the Partnership such documents and instruments of conveyance as may be necessary or appropriate in the opinion of counsel to the Partnership to effect such transfer and to confirm the agreement of the transferee to be bound by the provisions of this Article VII. In any case not described in the preceding sentence, the transfer shall be confirmed by presentation to the Partnership of legal evidence of such transfer, in form and substance satisfactory to counsel to the Partnership. In all cases, the Partnership shall be reimbursed by the transferor and/or transferee for all costs and expenses that it reasonably incurs in connection with such transfer; (ii) The transferor and transferee shall furnish the Partnership with the transferee's taxpayer identification number and sufficient information to determine the transferee's initial tax basis in the Units transferred; and (iii) The written consent of the Managing General Partner to such transfer shall have been obtained, the granting or denial of which shall be within the absolute discretion of the Managing General Partner. (b) A Person who acquires one or more Units but who is not admitted as a Substituted Investor Partner pursuant to Section 7.03(c) hereof shall be entitled only to allocations and distributions with respect to such Units in accordance with this Agreement, but shall have no right to any information or accounting of the affairs of the Partnership, shall not be entitled to inspect the books or records of the Partnership, and shall not have any of the rights of an Additional General Partner or a Limited Partner under the Act or the Agreement. (c) Subject to the other provisions of this Article VII, a transferee of Units may be admitted to the Partnership as a Substituted Investor Partner only upon satisfaction of the conditions set forth below in this Section 7.03(c): (i) The Managing General Partner consents to such admission, which consent can be withheld in its absolute discretion; (ii) The Units with respect to which the transferee is being admitted were acquired by means of a Permitted Transfer; (iii) The transferee becomes a party to this Agreement as a Partner and executes such documents and instruments as the Managing General Partner may reasonably request (including, without limitation, amendments to the Certificate of Limited Partnership) as may be necessary or appropriate to confirm such transferee as a Partner in the Partnership and such transferee's agreement to be bound by the terms and conditions hereof; (iv) The transferee pays or reimburses the Partnership for all reasonable legal, filing, and publication costs that the Partnership incurs in connection with the admission of the transferee as a Partner with respect to the transferred Units; and (v) If the transferee is not an individual of legal majority, the transferee provides the Partnership with evidence satisfactory to counsel for the Partnership of the authority of the transferee to become a Partner and to be bound by the terms and conditions of this Agreement. (vi) In any calendar quarter in which a Substituted Investor Partner is admitted to the Partnership, the Managing General Partner shall amend the certificate of limited partnership to effect the substitution of such Substituted Investor Partners, although the Managing General Partner may do so more frequently. In the case of assignments, where the assignee does not become a Substituted Investor Partner, the Partnership shall recognize the assignment not later than the last day of the calendar month following receipt of notice of assignment and required documentation. (d) Each Investor Partner hereby covenants and agrees with the Partnership for the benefit of the Partnership and all Partners that (i) he is not currently making a market in Units and (ii) he will not transfer any Unit on an established securities market or a secondary market (or the substantial equivalent thereof) within the meaning of Code Section 7704(b) (and any regulations, proposed regulations, revenue rulings, or other official pronouncements of the Service or Treasury Department that may be promulgated or published thereunder). Each Investor Partner further agrees that he will not transfer any Unit to any Person unless such Person agrees to be bound by this Section 7.03 and to transfer such Units only to Persons who agree to be similarly bound. 7.04 Prohibited Transfers. (a) Any purported Transfer of Units that is not a Permitted Transfer shall be null and void and of no effect whatever; provided, that, if the Partnership is required to recognize a transfer that is not a Permitted Transfer (or if the Managing General Partner, in its sole discretion, elects to recognize a transfer that is not a Permitted Transfer), the interest transferred shall be strictly limited to the transferor's rights to allocations and distributions as provided by this Agreement with respect to the transferred Units, which allocations and distributions may be applied (without limiting any other legal or equitable rights of the Partnership) to satisfy the debts, obligations, or liabilities for damages that the transferor or transferee of such Units may have to the Partnership. (b) In the case of a transfer or attempted transfer of Units that is not a Permitted Transfer, the parties engaging or attempting to engage in such transfer shall be liable to indemnify and hold harmless the Partnership and the other Partners from all cost, liability, and damage that any of such indemnified Persons may incur (including, without limitation, incremental tax liability and lawyers fees and expenses) as a result of such transfer or attempted transfer and efforts to enforce the indemnity granted hereby. 7.05 Withdrawal by Investor Partners. Neither a Limited Partner nor an Additional General Partner may withdraw from the Partnership, except as otherwise provided in this Agreement. 7.06 Removal of Managing General Partner. (a) The Managing General Partner may be removed at any time, upon ninety (90) days prior written notice, with the consent of Investor Partners owning a majority of the then outstanding Units, and upon the selection of a successor managing general partner or partners, within such ninety-day period by Investor Partners owning a majority of the then outstanding Units. (b) Any successor Managing General Partner may be removed upon the terms and conditions provided in this Section. (c) In the event a managing general partner is removed, its respective interest in the assets of the Partnership shall be determined by independent appraisal by a qualified independent petroleum engineering consultant who shall be selected by mutual agreement of the Managing General Partner and the incoming sponsor. Such appraisal will take into account an appropriate discount to reflect the risk of recovery of oil and gas reserves, and, at its election, the removed managing general partner's interest in the Partnership assets may be distributed to it or the interest of the managing general partner in the Partnership may be retained by it as a Limited Partner in the successor limited partnership; provided, however, that if immediate payment to the removed managing general partner would impose financial or operational hardship upon the Partnership, as determined by the successor managing general partner in the exercise of its fiduciary duties to the Partnership, payment (plus reasonable interest) to the removed managing general partner may be postponed to that time when, in the determination of the successor managing general partner, payment will not cause a hardship to the Partnership. The cost of such appraisal shall be borne by the Partnership. The successor managing general partner shall have the option to purchase at least 20% of the removed managing general partner's interest for the value determined by the independent appraisal. The removed managing general partner, at the time of its removal shall cause, to the extent it is legally possible, its successor to be transferred or assigned all its rights, obligations, and interests in contracts entered into by it on behalf of the Partnership. In any event, the removed managing general partner shall cause its rights, obligations, and interests in any such contract to terminate at the time of its removal. (d) Upon effectiveness of the removal of the managing general partner, the assets, books, and records of the Partnership shall be surrendered to the successor managing general partner, provided that the successor managing general partner shall have first (i) agreed to accept the responsibilities of the managing general partner, and (ii) made arrangements satisfactory to the original managing general partner to remove such managing general partner from personal liability on any Partnership borrowings or, if any Partnership creditor will not consent to such removal, agreed to indemnify the original managing general partner for any subsequent liabilities in respect to such borrowings. Immediately after the removal of the managing general partner, the successor managing general partner shall prepare, execute, file for recordation, and cause to be published, such notices or certificates as may be required by the Act. 7.07 Calling of Meetings. Investor Partners owning 10% or more of the then outstanding Units entitled to vote shall have the right to request that the Managing General Partner call a meeting of the Partners. The Managing General Partner shall call such a meeting and shall deposit in the United States mails within fifteen days after receipt of such request, written notice to all Investor Partners of the meeting and the purpose of the meeting, which shall be held on a date not less than thirty nor more than sixty days after the date of mailing of such notice, at a reasonable time and place. Investor Partners shall have the right to submit proposals to the Managing General Partner for inclusion in the voting materials for the next meeting of Investor Partners for consideration and approval by the Investor Partners. Investor Partners shall have the right to vote in person or by proxy. 7.08 Additional Voting Rights. Investor Partners shall be entitled to all voting rights granted to them by and under this Agreement and as specified by the Act. Each Unit is entitled to one vote on all matters; each fractional Unit is entitled to that fraction of one vote equal to the fractional interest in the Unit. Except as otherwise provided herein or in the Prospectus, at any meeting of Investor Partners, a vote of a majority of Units represented at such meeting, in person or by proxy, with respect to matters considered at the meeting at which a quorum is present shall be required for approval of any such matters. In addition, except as otherwise provided in this Section and in Section 5.07(m), holders of a majority of the then outstanding Units may, without the concurrence of the Managing General Partner, vote to (a) approve or disapprove the sale of all or substantially all of the assets of the Partnership, (b) dissolve the Partnership, (c) remove the Managing General Partner and elect a new managing general partner, (d) amend the Agreement, (e) elect a new managing general partner if the managing general partner elects to withdraw from the Partnership, and (f) cancel any contract for services with the Managing General Partner or any Affiliates without penalty upon sixty days' notice. The Partnership shall not participate in a Roll-Up unless the Roll-Up is approved by at least 66 2/3% in interest of the Investor Partners. A majority in interest of the then outstanding Units entitled to vote shall constitute a quorum. In determining the requisite percentage in interest of Units necessary to approve a matter on which the Managing General Partner and its Affiliates may not vote or consent, any Units owned by the Managing General Partner and its Affiliates shall not be included. With respect to the merger or consolidation of the Partnership or the sale of all or substantially all of the assets of the Partnership, Investor Partners shall have the right to exercise dissenter's rights in accordance with Section 31-1-123 of the West Virginia Corporation Law. 7.09 Voting by Proxy. The Investor Partners may vote either in person or by proxy. 7.10 Conversion of Additional General Partner Interests into Limited Partner Interests. (a) As provided herein, Additional General Partners may elect to convert, transfer, and exchange their interests for Limited Partner interests in the Partnership upon receipt by the Managing General Partner of written notice of such election. An Additional General Partner may request conversion of his interests for Limited Partner interests at any time after one year following the closing of the securities offering which relates to the Agreement and the disbursement to the Partnership of the proceeds of such securities offering. (b) The Managing General Partner shall notify all Additional General Partners at least 30 days prior to any material change in the amount of the Partnership's insurance coverage. Within this 30-day period, and notwithstanding Section 7.10(a), Additional General Partners shall have the right to immediately convert their Units into Units of limited partnership interest by giving written notice to the Managing General Partner. (c) The Managing General Partner shall convert the interests of all Additional General Partners in a particular Partnership to interests of Limited Partners in that Partnership upon completion of drilling of that Partnership. (d) The Managing General Partner shall cause the conversion to be effected as promptly as possible as prudent business judgment dictates. Conversion of an Additional General Partnership interest to a Limited Partnership interest in a particular Partnership shall be conditioned upon a finding by the Managing General Partner that such conversion will not cause a termination of the Partnership for federal income tax purposes, and will be effective upon the Managing General Partner's filing an amendment to its Certificate of Limited Partnership. The Managing General Partner is obligated to file an amendment to its Certificate at any time during the full calendar month after receipt of the required notice of the Additional General Partner and a determination of the Managing General Partner that the conversion will not constitute a termination of the Partnership for tax purposes. Effecting conversion is subject to the satisfaction of the condition that the electing Additional General Partner provide written notice to the Managing General Partner of such intent to convert. Upon such transfer and exchange, such Additional General Partners shall be Limited Partners; however, they will remain liable to the Partnership for any additional Capital Contribution(s) required for their proportionate share of any Partnership obligation or liability arising prior to the conversion. (e) Limited Partners may not convert and/or exchange their interests for Additional General Partner interests. 7.11 Unit Repurchase Program. (a) Beginning with the third anniversary of the date of the first cash distribution of the Partnership, Investor Partners may tender their Units to the Managing General Partner for repurchase, subject to the Managing General Partner's available borrowing capacity under its loan agreements to repurchase and the Managing General Partner's receipt of an opinion of counsel that the Managing General Partner's repurchase of Units pursuant to this Section will not cause the Partnership to be treated as a "publicly traded partnership" for purposes of Code 469 and 7704. Failure to receive such opinion shall preclude the Managing General Partner from making any offers to repurchase Units. Subject to such borrowing capacity and legal opinion, the Managing General Partner shall offer to annually repurchase for cash a minimum of 10% of the Units originally subscribed to in the Partnership. (b) The Unit Repurchase Program shall be subject to the following conditions: (i) The Managing General Partner must receive written notification from the particular Investor Partner of such Partner's intention to exercise the repurchase right; and (ii) The Managing General Partner shall provide the Investor Partner a written offer of a specified price for purchase of the particular Units within 30 days of the Managing General Partner's receipt of written notification; and (iii) The Managing General Partner's offer shall remain open for 30 days after the Managing General Partner's mailing of the offer to the Investor Partner. (c) The Managing General Partner shall not favor one particular Partnership of which it is a Managing General Partner over another in the repurchase of Units. Each Partnership shall stand on equal footing before the Managing General Partner. To the extent that the Managing General Partner is unable, due to limitations imposed by the Code or insufficient borrowing capacity under the Managing General Partner's loan agreement(s) with banks, to repurchase all Units tendered, each tendering Investor Partner shall be entitled to have his Units repurchased on a "first come-first served" basis, regardless of Partnership, provided that the Managing General Partner determines that the repurchase of a particular Investor Partner's Units will not result in the termination of the Partnership for federal income tax purposes and in the Partnership's being treated as a "publicly traded partnership." If more than 10% of the Units of a particular Partnership are tendered during that Partnership's taxable year, Units shall be purchased on a "first come-first served" basis with respect to that Partnership. To the extent that the Managing General Partner is unable to repurchase all Units tendered at the same time by Partners of any Partnership, the Managing General Partner shall repurchase those particular Units on a pro-rata basis. (d) The offer price which the Managing General Partner shall make shall be a cash amount equal to four times cash distributions attributable to the tendered Unit from production for the 12 months prior to the month in which the above-referenced written notification is actually received by the Managing General Partner at its corporate offices. The Managing General Partner may, in its sole and absolute discretion, increase the offer price for interests tendered for sale. (e) Upon any repurchase, the Managing General Partner shall hold such purchased Units for its own use and not for resale and it shall not create a market in the Units. 7.12 Liability of Partners. Except as otherwise provided in this Agreement or as otherwise provided by the Act, each General Partner shall be jointly and severally liable for the debts and obligations of the Partnership. In addition, each Additional General Partner shall be jointly and severally liable for any wrongful acts or omissions of the Managing General Partner and/or the misapplication of money or property of a third party by the Managing General Partner acting within the scope of its apparent authority to the extent such acts or omissions are chargeable to the Partnership. ARTICLE VIII Books and Records 8.01 Books and Records. (a) For accounting and income tax purposes, the Partnership shall operate on a calendar year. (b) The Managing General Partner shall keep just and true records and books of account with respect to the operations of the Partnership and shall maintain and preserve during the term of the Partnership and for four years thereafter all such records, books of account, and other relevant Partnership documents. The Managing General Partner shall maintain for at least six years all records necessary to substantiate the fact that Units were sold only to purchasers for whom such Units were suitable. Such books shall be maintained at the principal place of business of the Partnership and shall be kept on the accrual method of accounting. (c) The Managing General Partner shall keep or cause to be kept complete and accurate books and records with respect to the Partnership's business, which books and records shall at all times be kept at the principal office of the Partnership. Any records maintained by the Partnership in the regular course of its business, including the names and addresses of Investor Partners, books of account, and records of Partnership proceedings, may be kept on or be in the form of RAM disks, magnetic tape, photographs, micrographics, or any other information storage device, provided that the records so kept are convertible into clearly legible written form within a reasonable period of time. The books and records of the Partnership shall be made available for review by any Investor Partner or his representative at any reasonable time. (d) (i) An alphabetical list of the names, addresses and business telephone numbers of the Investor Partners of the Partnership along with the number of Units held by each of them (the "participant list") shall be maintained as a part of the books and records of the Partnership and shall be available for the inspection by any Investor Partner or its designated agent at the home office of the Partnership upon the request of the Investor Partner; (ii) The participant list shall be updated at least quarterly to reflect changes in the information contained therein; (iii) A copy of the participant list shall be mailed to any Investor Partner requesting the participant list within ten days of the request. The copy of the participant list shall be printed in alphabetical order, on white paper, and in a readily readable type size (in no event smaller than 10-point type). A reasonable charge for copy work may be charged by the Partnership. (iv) The purposes for which an Investor Partner may request a copy of the participant list include, without limitation, matters relating to voting rights under the Partnership Agreement and the exercise of Investor Partners' rights under federal proxy laws; and (v) If the Managing General Partner of the Partnership neglects or refuses to exhibit, produce, or mail a copy of the participant list as requested, the Managing General Partner shall be liable to any Investor Partner requesting the list for the costs, including attorneys fees, incurred by that Investor Partner for compelling the production of the participant list, and for actual damages suffered by any Investor Partner by reason of such refusal or neglect. It shall be a defense that the actual purpose and reason for the requests for inspection or for a copy of the participant list is to secure the list of Investor Partners or other information for the purpose of selling such list or information or copies thereof, or of using the same for a commercial purpose other than in the interest of the applicant as an Investor Partner relative to the affairs of the Partnership. The Managing General Partner may require the Investor Partner requesting the participant list to represent that the list is not requested for a commercial purpose unrelated to the Investor Partner's interest in the Partnership. The remedies provided hereunder to Investor Partners requesting copies of the participant list are in addition to, and shall not in any way limit, other remedies available to Investor Partners under federal law, or the laws of any state. 8.02 Reports. The Managing General Partner shall deliver to each Investor Partner the following financial statements and reports at the times indicated below: (a) Within 75 days after the end of the first six months of each fiscal year (for such six month period) and within 120 days after the end of each fiscal year (for such year), financial statements, including a balance sheet and statements of income, Partners' equity, and cash flows, all of which shall be prepared in accordance with generally accepted accounting principles. The annual financial statements shall be accompanied by (i) a report of an independent certified public accountant designated by the Managing General Partner stating that an audit of such financial statements has been made in accordance with generally accepted auditing standards and that in its opinion such financial statements present fairly the financial condition, results of operations, and cash flow of the Partnership in accordance with generally accepted accounting principles and (ii) a reconciliation of such financial statements with the information furnished to the Investor Partners for federal income tax reporting purposes. (b) Annually by March 15 of each year, a report containing such information as may be deemed to enable each Investor Partner to prepare and file his federal income tax return and any required state income tax return. (c) Annually within 120 days after the end of each fiscal year, (i) a summary of the computations of the total estimated proved oil and gas reserves of the Partnership as of the end of such fiscal year and the dollar value thereof at then existing prices and a computation of each Investor Partner's interest in such value, such reserve computations to be based upon engineering reports prepared by qualified independent petroleum engineers, (ii) an estimate of the time required for the extraction of such proved reserves and the present worth thereof (discounted at a rate generally accepted in the oil and gas industry and undiscounted), and (iii) a statement that because of the time period required to extract such reserves the present value of revenues to be obtained in the future is less than if such revenues were immediately receivable. Each such reported shall be prepared in accordance with customary and generally accepted standards and practices for petroleum engineers and shall be prepared by a recognized independent petroleum engineer selected from time to time by the Managing General Partner. No later than 90 days following the occurrence of an event resulting in a reduction in an amount of 10% or more of the estimated value of the proved oil and gas reserves as last reported to the Investor Partners, other than a reduction resulting from normal production, sales of reserves, or product price changes, a new summary conforming to the requirements set forth above in this Section 8.02(c) shall be delivered to the Investor Partners. (d) Within 75 days after the end of the first six months of each fiscal year and within 120 days after the end of each fiscal year, (i) a summary itemization, by type and/or classification, of any transaction of the Partnership since the date of the last such report with the Managing General Partner or any Affiliate thereof and the total fees, compensation, and reimbursement paid by the Partnership (or indirectly on behalf of the Partnership) to the Managing General Partner and its Affiliates, and (ii) a schedule reflecting (A) the total costs of the Partnership (and, where applicable, the costs pertaining to each Lease) and the costs paid by the Managing General Partner and by the Investor Partners and (B) the total revenues of the Partnership and the revenues received by or credited to the accounts of the Managing General Partner and the Investing Partners. Each semi-annual report delivered by the Managing General Partner may contain summary estimates of the information described in subdivision (i) of Section 8.02(c). (e) Monthly within 15 days after the end of each calendar month while the Partnership is participating in the drilling and completion of wells in which it has an interest until the end of such activity, and thereafter for a period of three years within 75 days after the end of the first six months of each fiscal year and within 120 days after the end of each fiscal year, (i) a description of each Prospect or field in which the Partnership owns Leases including the cost, location, number of acres under lease, and the interest owned therein by the program (provided that after the initial description of each such Prospect or field has been provided to the Investor Partners only material changes, if any, with respect to such Prospect or field need be described), (ii) a description of all farmins and farmouts of the Partnership made since the date of the last such report, including the reason therefor, the location and timing thereof, the person to whom made and the terms thereof, and (iii) a summary of the wells drilled by the Partnership, indicating whether each of such wells has been completed, a statement of the cost of each well completed or abandoned and the reason for abandoning any well after commencement of production. Each report delivered by the Managing General Partner may contain summary estimates of the information described in subsection (iii). (f) The Managing General Partner shall cause the Partnership's independent auditors to audit the financial statements of the Partnership in accordance with generally accepted auditing standards. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, which would include an assessment as to whether or not the method used to make the allocations of costs was consistent with the method described in the Prospectus. If the Managing General Partner subsequently decides to allocate expenses in a manner different from the manner described in the Prospectus, such change shall be reported by the Managing General Partner to the Investor Partners together with an explanation of why such change was made and the basis for determining the reasonableness of the new allocation method. (g) Such other reports and financial statements as the Managing General Partner shall determine from time to time. (h) Concurrently with their transmittal to Investor Partners and as required, the Managing General Partner shall file a copy of each such report with the California Commissioner of Corporations and with the securities divisions of other states. 8.03 Bank Accounts. All funds of the Partnership shall be deposited in such separate bank account or accounts, short term obligations of the U.S. Government or its agencies, or other interest-bearing investments and money market or liquid asset mutual funds as shall be determined by the Managing General Partner. All withdrawals therefrom shall be made upon checks signed by the Managing General Partner or any person authorized to do so by the Managing General Partner. 8.04 Federal Income Tax Elections. (a) Except as otherwise provided in this Section 8.04, all elections required or permitted to be made by the Partnership under the Code shall be made by the Managing General Partner in its sole discretion. Each Partner agrees to provide the Partnership with all information necessary to give effect to any election to be made by the Partnership. (b) The Partnership shall elect to currently deduct IDC as an expense for income tax purposes and shall require any partnership, joint venture, or other arrangement in which it is a party to make such an election. ARTICLE IX Dissolution; Winding-up 9.01 Dissolution. (a) Except as otherwise provided herein, the retirement, withdrawal, removal, death, insanity, incapacity, dissolution, or bankruptcy of any Investor Partner shall not dissolve the Partnership. The successor to the rights of such Investor Partner shall have all the rights of an Investor Partner for the purpose of settling or administering the estate or affairs of such Investor Partner; provided, however, that no successor shall become a substituted Investor Partner except in accordance with Article VII hereof; provided, further, that upon the withdrawal of an Additional General Partner, the Partnership shall be dissolved and wound up unless at that time there is at least one other General Partner, in which event the business of the Partnership shall continue to be carried on. Neither the expulsion of any Investor Partner nor the admission or substitution of an Investor Partner shall work a dissolution of the Partnership. The estate of a deceased, insane, incompetent, or bankrupt Investor Partner shall be liable for all his liabilities as an Investor Partner. (b) The Partnership shall be dissolved upon the earliest to occur of: (i) the written consent of the Investor Partners owning a majority of the then-outstanding Units to dissolve and wind up the affairs of the Partnership; (ii) subject to the provisions of Subsection (c) below, the retirement, withdrawal, removal, death, adjudication of insanity or incapacity, or bankruptcy (or, in the case of a corporate managing general partner, the withdrawal, removal, filing of a certificate of dissolution, liquidation, or bankruptcy) of the Managing General Partner; (iii) the sale, forfeiture, or abandonment of all or substantially all of the Partnership's property; (iv) December 31, 2050; (v) a dissolution event described in Subsection (a) above; or (vi) any event causing dissolution of the Partnership under the Act. (c) In the case of any event described in Subsection (b)(ii) above, if a successor Managing General Partner is selected by Partners owning a majority of the then outstanding Units within ninety (90) days after such 9.01(b)(ii) event, and if such Investor Partners agree, within such 90 day period to continue the business of the Partnership, or if the remaining managing general partner, if any, continues the business of the Partnership, then the Partnership shall not be dissolved. (d) If the retirement, withdrawal, removal, death, insanity, incapacity, dissolution, liquidation, or bankruptcy of any Partner, or the assignment of a Partner's interest in the Partnership, or the substitution or admission of a new Partner, shall be deemed under the Act to cause a dissolution of the Partnership, then, except as provided in Section 9.01(c), the remaining Partners may, in accordance with the Act, continue the Partnership business as a new partnership and all such remaining Partners agree to be bound by the provisions of this Agreement. 9.02 Liquidation. Upon a dissolution and final termination of the Partnership, the Managing General Partner, or in the event there is no Managing General Partner, any other person or entity selected by the Investor Partners (hereinafter referred to as a "Liquidator") shall cause the affairs of the Partnership to be wound up and shall take account of the Partnership's assets (including contributions, if any, of the Managing General Partner pursuant to Section 3.01(e) herein) and liabilities, and the assets shall, subject to the provisions of Section 9.03(b) herein, be liquidated as promptly as is consistent with obtaining the fair market value thereof, and the proceeds therefrom (which dissolution and liquidation may be accomplished over a period spanning one or more tax years in the sole discretion of the Managing General Partner or Liquidator), to the extent sufficient therefor, shall be applied and distributed in accordance with Section 9.03. 9.03 Winding-up. (a) Upon the dissolution of the Partnership and winding up of its affairs, the assets of the Partnership shall be distributed as follows: (i) all of the Partnership's debts and liabilities to persons other than the Managing General Partner shall be paid and discharged; (ii) all outstanding debts and liabilities to the Managing General Partner shall be paid and discharged; (iii) assets shall be distributed to the Partners to the extent of their positive Capital Account balances, pro rata, in accordance with such positive Capital Account balances; and (iv) any assets remaining after the Partners' Capital Accounts have been reduced to zero pursuant to Section 9.03(c) herein shall be distributed 80% to the Investor Partners and 20% to the Managing General Partner, except as otherwise revised pursuant to Section 2.01(a) and/or Section 4.02. (b) Distributions pursuant to this Section 9.03 shall be made in cash or in kind to the Partners, at the election of the Partners. Notwithstanding the provision of this Section 9.03(b), in no event shall the Partners reserve the right to take in kind and separately dispose of their share of production. (c) Any in kind property distributions to the Investor Partners shall be made to a liquidating trust or similar entity for the benefit of the Investor Partners, unless at the time of the distribution: (1) the Managing General Partner shall offer the individual Investor Partners the election of receiving in kind property distributions and the Investor Partners accept such offer after being advised of the risks associated with such direct ownership; or (2) there are alternative arrangements in place which assure the Investor Partners that they will not, at any time, be responsible for the operation or disposition of Partnership properties. The winding up of the affairs of the Partnership and the distribution of its assets shall be conducted exclusively by the Managing General Partner or the Liquidator, who is hereby authorized to do any and all acts and things authorized by law for these purposes. ARTICLE X Power of Attorney 10.01 Managing General Partner as Attorney-in-Fact. The undersigned makes, constitutes, and appoints the Managing General Partner the true and lawful attorney for the undersigned, and in the name, place, and stead of the undersigned from time to time to make, execute, sign, acknowledge, and file: (a) Any notices or certificates as may be required under the Act and under the laws of any other state or jurisdiction in which the Partnership shall engage, or seek to engage, to do business and to do such other acts as are required to constitute the Partnership as a limited partnership under such laws. (b) Any amendment to the Agreement pursuant to and which complies with Section 11.09 herein. (c) Such certificates, instruments, and documents as may be required by, or may be appropriate under the laws of any state or other jurisdiction in which the Partnership is doing or intends to do business and with the use of the name of the Partnership by the Partnership. (d) Such certificates, instruments, and documents as may be required by, or as may be appropriate for the undersigned to comply with, the laws of any state or other jurisdiction to reflect a change of name or address of the undersigned. (e) Such certificates, instruments, and documents as may be required to be filed with the Department of Interior (including any bureau, office or other unit thereof, whether in Washington, D.C. or in the field, or any officer or employee thereof), as well as with any other federal or state agencies, departments, bureaus, offices, or authorities and pertaining to (i) any and all offers to lease, leases (including amendments, modifications, supplements, renewals, and exchanges thereof) of, or with respect to, any lands under the jurisdiction of the United States or any state including without limitation lands within the public domain, and acquired lands, and provides for the leasing thereof; (ii) all statements of interest and holdings on behalf of the Partnership or the undersigned; (iii) any other statements, notices, or communications required or permitted to be filed or which may hereafter be required or permitted to be filed under any law, rule, or regulation of the United States, or any state relating to the leasing of lands for oil or gas exploration or development; (iv) any request for approval of assignments or transfers of oil and gas leases, any unitization or pooling agreements and any other documents relating to lands under the jurisdiction of the United States or any state; and (v) any other documents or instruments which said attorney-in-fact in its sole discretion shall determine should be filed. (f) Any further document, including furnishing verified copies of the Agreement and/or excerpts therefrom, which said attorney-in-fact shall consider necessary or convenient in connection with any of the foregoing, hereby giving said attorney-in-fact full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the foregoing as fully as the undersigned might and could do if personally present, and hereby ratifying and confirming all that said attorney-in-fact shall lawfully do to cause to be done by virtue hereof. 10.02 Nature of Special Power. The foregoing grant of authority: (a) is a special Power of Attorney coupled with an interest, is irrevocable, and shall survive the death of the undersigned; (b) shall survive the delivery of any assignment by the undersigned of the whole or any portion of his Units; except that where the assignee thereof has been approved by the Managing General Partner for admission to the Partnership as a substitute general or limited Partner as the case may be, the Power of Attorney shall survive the delivery of such assignment for the sole purpose of enabling said attorney-in-fact to execute, acknowledge, and file any instrument necessary to effect such substitution; and (c) may be exercised by said attorney-in-fact with full power of substitution and resubstitution and may be exercised by a listing of all of the Partners executing any instrument with a single signature of said attorney-in-fact. ARTICLE XI Miscellaneous Provisions 11.01 Liability of Parties. By entering into this Agreement, no party shall become liable for any other party's obligations relating to any activities beyond the scope of this Agreement, except as provided by the Act. If any party suffers, or is held liable for, any loss or liability of the Partnership which is in excess of that agreed upon herein, such party shall be indemnified by the other parties, to the extent of their respective interests in the Partnership, as provided herein. 11.02 Notices. Any notice, payment, demand, or communication required or permitted to be given by any provision of this Agreement shall be deemed to have been sufficiently given or served for all purposes if delivered personally to the party or to an officer of the party to whom the same is directed or sent by registered or certified mail, postage and charges prepaid, addressed as follows (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section): If to the Managing General Partner, 103 East Main Street, Bridgeport, West Virginia 26330; if to an Investor Partner, at such Investor Partner's address for purposes of notice which is set forth on Exhibit A attached hereto. Unless otherwise expressly set forth in this Agreement to the contrary, any such notice shall be deemed to be given on the date on which the same was deposited in a regularly maintained receptacle for the deposit of United States mail, addressed and sent as aforesaid. 11.03 Paragraph Headings. The headings in this Agreement are inserted for convenience and identification only and are in no way intended to describe, interpret, define, or limit the scope, extent, or intent of this Agreement or any provision hereof. 11.04 Severability. Every portion of this Agreement is intended to be severable. If any term or provision hereof is illegal or invalid by any reason whatsoever, such illegality or invalidity shall not affect the validity of the remainder of this Agreement. 11.05 Sole Agreement. This Agreement constitutes the entire understanding of the parties hereto with respect to the subject matter hereof and no amendment, modification, or alteration of the terms hereof shall be binding unless the same be in writing, dated subsequent to the date hereof and duly approved and executed by the Managing General Partner and such percentage of Investor Partners as provided in Section 11.09 of this Agreement. 11.06 Applicable Law. This Agreement, which shall be governed exclusively by its terms, is intended to comply with the Code and with the Act and shall be interpreted consistently therewith. 11.07 Execution in Counterparts. This Agreement may be executed in any number of counterparts with the same effect as if all parties hereto had all signed the same document. All counterparts shall be construed together and shall constitute one agreement. 11.08 Waiver of Action for Partition. Each of the parties irrevocably waives, during the term of the Partnership, any right that it may have to maintain any action for partition with respect to the Partnership and the property of the Partnership. 11.09 Amendments. (a) Unless otherwise specifically herein provided, this Agreement shall not be amended without the consent of the Investor Partners owning a majority of the then outstanding Units entitled to vote. (b) The Managing General Partner may, without notice to, or consent of, any Investor Partner, amend any provisions of these Articles, or consent to and execute any amendment to these Articles, to reflect: (i) A change in the name or location of the principal place of business of the Partnership; (ii) The admission of substituted or additional Investor Partners in accordance with these Articles; (iii) A reduction in, return of, or withdrawal of, all or a portion of any Investor Partner's Capital Contribution; (iv) A correction of any typographical error or omission; (v) A change which is necessary in order to qualify the Partnership as a limited partnership under the laws of any other state or which is necessary or advisable, in the opinion of the Managing General Partner, to ensure that the Partnership will be treated as a partnership and not as an association taxable as a corporation for federal income tax purposes; (vi) A change in the allocation provisions, in accordance with the provisions of Section 3.02(l) herein, in a manner that, in the sole opinion of the Managing General Partner (which opinion shall be determinative), would result in the most favorable aggregate consequences to the Investor Partners as nearly as possible consistent with the allocations contained herein, for such allocations to be recognized for federal income tax purposes due to developments in the federal income tax laws or otherwise; or (vii) Any other amendment similar to the foregoing; provided, however, that the Managing General Partner shall have no authority, right, or power under this Section to amend the voting rights of the Investor Partners. 11.10 Consent to Allocations and Distributions. The methods herein set forth by which allocations and distributions are made and apportioned are hereby expressly consented to by each Partner as an express condition to becoming a Partner. 11.11 Ratification. The Investor Partner whose signature appears at the end of this Article hereby specifically adopts and approves every provision of this Agreement to which the signature page is attached. 11.12 Substitution of Signature Pages. This Agreement has been executed in duplicate by the undersigned Investor Partners and one executed copy of the signature page is attached to the undersigned's copy of this Agreement. It is agreed that the other executed copy of such signature page may be attached to an identical copy of this Agreement together with the signature pages from counterpart Agreements which may be executed by other Investor Partners. 11.13 Incorporation by Reference. Every exhibit, schedule, and other appendix attached to this Agreement and referred to herein is hereby incorporated in this Agreement by reference. * * * * * SIGNATURE PAGE IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the day and year first written above. MANAGING GENERAL PARTNER: INITIAL LIMITED PARTNER: Petroleum Development Corporation 103 East Main Street Bridgeport, West Virginia 26330 Steven R. Williams 103 East Main Street Inc. By: Bridgeport, West Virginia 26330 Steven R. Williams President INVESTOR PARTNERS COMPLETE TO INVEST AS ADDITIONAL GENERAL PARTNER ADDITIONAL GENERAL PARTNER(S): NUMBER OF UNITS Name: PURCHASED (Print Name) (Signature) SUBSCRIPTION PRICE $ Address: By: Petroleum Development Corporation By: its Attorney-in-Fact COMPLETE TO INVEST AS LIMITED PARTNER LIMITED PARTNER(S): NUMBER OF UNITS Name: PURCHASED (Print Name) (Signature) SUBSCRIPTION PRICE $ Address: By: Petroleum Development Corporation By: its Attorney-in-Fact EXHIBIT A TO AGREEMENT OF LIMITED PARTNERSHIP OF PDC 2001-___ LIMITED PARTNERSHIP, [PDC 2002-___ LIMITED PARTNERSHIP,] [PDC 2003-___ LIMITED PARTNERSHIP,] A WEST VIRGINIA LIMITED PARTNERSHIP Number of Names and Addresses of Investors Nature of Interest Units APPENDIX B TO PROSPECTUS PDC 2003 DRILLING PROGRAM SUBSCRIPTION AGREEMENT PDC 2001- Limited Partnership [PDC 2002- Limited Partnership] [PDC 2003- Limited Partnership] I hereby agree to purchase ______ Unit(s) in the PDC 2001- Limited Partnership [PDC 2002- Limited Partnership; PDC 2003- Limited Partnership] (the "Partnership") at $20,000 per Unit. Enclosed please find my check in the amount of $________. My completion and execution of this Subscription Agreement also constitutes my execution of the Limited Partnership Agreement and the Certificate of Limited Partnership of the Partnership. If this Subscription is accepted, I agree to be bound and governed by the provisions of the Limited Partnership Agreement of the Partnership. With respect to this purchase, I am aware that a broker may sell Units to me only if I qualify according to the express suitability standards stated herein and in the Prospectus, and I represent that: (a) I have received a copy of the Prospectus for the Partnership. (b) I have a net worth of not less than $225,000 (exclusive of home, furnishings and automobiles); or I have a net worth of not less than $60,000 (exclusive of home, furnishings and automobiles) and had during my last tax year or estimate that I will have 2001 [2002; 2003] taxable income as defined in Section 63 of the Internal Revenue Code of 1986 of at least $60,000, without regard to an investment in the Partnership. (c) If a resident of Alabama, Alaska, Arizona, Arkansas, California, Indiana, Iowa, Kansas, Kentucky, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, New Hampshire, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Dakota, Tennessee, Texas, Vermont, or Washington, I am aware of and satisfy the additional suitability and other requirements stated in Appendix C to the Prospectus. (d) If a resident of California, I acknowledge and understand that the offering may not comply with all the rules set forth in Title 10 of the California Administrative Code; the following are some, but not necessarily all, of the possible deviations from the California rules: Program selling expenses may exceed the established limit; and the compensation formula varies from the California rules. Even in light of such non-compliance, I affirmatively state that I still want to invest in the Partnership. (e) Except as set forth in (f) below, I am purchasing Units for my own account. (f) If a fiduciary, I am purchasing for a person or entity having the appropriate income and/or net worth specified in (b) or (c) above. (g) I certify that the number shown as my Social Security or Taxpayer Identification Number on the signature page is correct. The above representations do not constitute a waiver of any rights that I may have under the statutes administered by the Securities and Exchange Commission or by any state regulatory agency administering statutes bearing on the sale of securities. The Managing General Partner may not complete a sale of Units to an investor until at least five business days after the date the investor receives a final Prospectus. In addition, the Managing General Partner will send each investor a confirmation of purchase. NOTICES (I) The purchase of Units as an Additional General Partner involves a risk of unlimited liability to the extent that the Partnership's liabilities exceed its insurance proceeds, the Partnership's assets, and indemnification by the Managing General Partner, as described in "Risk Factors" in the Prospectus. (ii) The NASD requires the Soliciting Dealer or registered representative to inform potential investors of all pertinent facts relating to the liquidity and marketability of the Units, including the following: (A) the risks involved in the offering, including the speculative nature of the investment and the speculative nature of drilling for oil and natural gas; (B) the financial hazards involved in the offering, including the risk of losing my entire investment; (C) the lack of a public trading market for the Units and the lack of liquidity of this investment; (D) the restrictions on transferability of the Units; and (E) the tax consequences of the investment. (iii) The investment in the Units is not liquid. Investors are required to execute their own subscription agreements. The Managing General Partner will not accept any subscription agreement that has been executed by someone other than the investor or in the case of fiduciary accounts by someone who does not have the legal power of attorney to sign on the investor's behalf. Signature and Power of Attorney I hereby appoint Petroleum Development Corporation, with full power of substitution, my true and lawful attorney to execute, file, swear to and record any Certificate(s) of Limited Partnership or amendments thereto (including but not limited to any amendments filed for the purpose of the admission of any substituted Partners) or cancellation thereof, including any other instruments which may be required by law in any jurisdiction to permit qualification of the Partnership as a limited partnership or for any other purpose necessary to implement the Limited Partnership Agreement, and as more fully described in Article X of the Limited Partnership Agreement. If a resident of California, I am aware of and satisfy the additional suitability requirements stated in Appendix C to the Prospectus and acknowledge the receipt of California Rule 260.141.11 at pages C-2, C-3, C-4 and C-5 of Appendix C to the Prospectus. Date: , 2001. Signature Signature Please Print Name Please Print Name Social Security or Tax Social Security or Tax Identification Number Identification Number I utilize the calendar year as my Federal income tax year, unless indicated otherwise as follows: . Mailing Address: Street City State Zip Code Address for Distributions and Notices, if different from above: Street City State Zip Code (Account or Reference No.) Business Telephone No. ( ) Home Telephone No. ( ) Type of Units Purchased (check box below): IF NO SELECTION IS MADE, WE CANNOT ACCEPT YOUR ? Units as an Additional General Partner SUBSCRIPTION AND WILL HAVE TO RETURN THIS SUBSCRIPTION AGREE- ? Units as a Limited Partner MENT AND YOUR MONEY TO YOU. Title to Units to be held (check box below): ? Individual Ownership ? Joint Tenants with Right of Survivorship (both persons must sign) ? Tenants in Common (both persons must sign) ? Other TO BE COMPLETED BY PETROLEUM DEVELOPMENT CORPORATION Petroleum Development Corporation, as the Managing General Partner of the Partnership, hereby accepts this Subscription and agrees to hold and invest the same pursuant to the terms and conditions of the Limited Partnership Agreement of the Partnership. ATTEST: PETROLEUM DEVELOPMENT CORPORATION By: Secretary Title: Date: TO BE COMPLETED BY REGISTERED REPRESENTATIVE (For Commission and Other Purposes) I hereby represent that I have discharged my affirmative obligations under Sections 3(b) and 4(d) of Appendix F to the NASD's Rules of Fair Practice and specifically have obtained information from the above-named subscriber concerning his/her net worth, annual income, federal income tax bracket, investment portfolio and other financial information and have determined that an investment in the Partnership is suitable for such subscriber, that such subscriber is or will be in a financial position to realize the benefits of this investment, and that such subscriber has a fair market net worth sufficient to sustain the risks for this investment. I have also informed the subscriber of all pertinent facts relating to the liquidity and marketability of an investment in the Partnership, of the risks of unlimited liability regarding an investment as an Additional General Partner, and of the passive loss limitations for tax purposes of an investment as a Limited Partner. Name of Brokerage Firm Office Number FC RR AE Number Registered Representative Office Address FC RR AE Name (Please Print) City State Zip Code FC RR AE Social Security Number , 2001 Area Code Telephone Number FC RR AE Signature Date WSH\42937.1 APPENDIX C TO PROSPECTUS PDC 2003 DRILLING PROGRAM SPECIAL SUBSCRIPTION INSTRUCTIONS Checks for Units should be made payable to "Chase as Escrow Agent for PDC 2001- Limited Partnership [PDC 2002- Limited Partnership; PDC 2003- Limited Partnership]" and should be given to the subscriber's broker for submission to the Dealer Manager and Escrow Agent. The minimum subscription is $5,000. Subscriptions are payable only in cash upon subscription. In the event that a subscriber purchases Units in a particular Partnership on more than one occasion during an offering period, the minimum purchase on each occasion is $5,000 (one-quarter Unit). Signature Requirement. ? Investors are required to execute their own subscription agreements. The Managing General Partner will not accept any subscription agreement that has been executed by someone other than the investor or in the case of fiduciary accounts someone who does not have the legal power of attorney to sign on the investor's behalf. Notice to Alaska Investors. ? An Alaska investor must be (1) a person whose total purchase does not exceed 5% of his/her net worth if the purchase of securities is at least $10,000, and must have (2) either: (a) a minimum annual gross income of $60,000 and a minimum net worth of $60,000, exclusive of principal automobile, principal residence, and home furnishings, or (b) a minimum net worth of $225,000, exclusive of principal automobile, principal residence, and home furnishings. Transfer of Units by Missouri Investors. ? The Commissioner of Securities of Missouri classifies the securities (the Units) as being ineligible for any transactional exemption under the Missouri Uniform Securities Act (Section 409.402(b), RsMo. 1969). Therefore, unless the securities are again registered, the offer for sale or resale thereof in the State of Missouri may be subject to the sanctions of the Act. Notice to New Hampshire Investors. ? If a New Hampshire resident, I have either: (1) a net worth of not less than $250,000 (exclusive of home, furnishings, and automobiles), or (2) a net worth of not less than $125,000 (exclusive of home, furnishings and automobiles), and $50,000 in taxable income. Subscribers of Limited Partnership Interests: ? If a North Carolina resident, I have either: (1) a net worth of not less than $225,000 (exclusive of home, furnishings and automobiles), or (2) a net worth of not less than $60,000 (exclusive of home, furnishings and automobiles) and estimated 2001 for Partnerships designated "PDC 2001- Limited Partnership," 2002 for Partnerships designated "PDC 2002- Limited Partnership," and 2003 for Partnerships designated "PDC 2003- Limited Partnership" taxable income as defined in Section 63 of the Internal Revenue Code of 1986 of $60,000 or more without regard to an investment in a Partnership. ? If a Pennsylvania or South Dakota resident, I have either: (1) a net worth of at least $225,000 (exclusive of home, furnishings and automobiles) or (2) a net worth of at least $60,000 (exclusive of home, furnishings and automobiles) and a taxable income in 2000 for Partnerships designated "PDC 2001- Limited Partnership," 2001 for Partnerships designated "PDC 2002- Limited Partnership" and 2002 for Partnerships designated PDC 2003- Limited Partnership of $60,000 or estimate that I will have an annual taxable income of $60,000 during my current tax year; or that I am purchasing in a fiduciary capacity for a person or entity having such net worth or such taxable income. My investment in the Partnership will not be equal to or more than 10% of my net worth. Additional General Partner Subscribers: ? Except as otherwise provided below, if a resident of Alabama, Arizona, Arkansas, Indiana, Iowa, Kansas, Kentucky, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Tennessee, Texas, Vermont, or Washington, I (1) have an individual or joint minimum net worth with my spouse of $225,000, without regard to the investment in the program, (exclusive of home, home furnishings and automobiles) and a combined minimum gross income of $100,000 ($120,000 for Arizona residents) or more for the current year and for the two previous years; notwithstanding the foregoing, an investor in Arizona, Indiana, Iowa, Kansas, Kentucky, Michigan, Missouri, New Mexico, Ohio, Oklahoma, Oregon, Vermont and Washington must represent that he has an individual or joint minimum net worth (exclusive of home, home furnishings, and automobiles) with his spouse of $225,000, without regard to an investment in the Program, and an individual or combined taxable income of $60,000 or more for the previous year and in expectation of an individual or combined taxable income of $60,000 or more for each of the current year and the succeeding year; or (2) have an individual or joint minimum net worth with my spouse in excess of $1,000,000, inclusive of home, home furnishings and automobiles; or (3) have an individual or joint minimum net worth with my spouse in excess of $500,000, exclusive of home, home furnishings and automobiles; or (4) have a combined minimum gross income of $200,000 in the current year and the two previous years. ? If resident of South Dakota, I (1) have net worth, or a joint net worth with my spouse, of not less than $1,000,000 at the time of the purchase or (2) have an individual income in excess of $200,000 in each of the two most recent years or joint income with my spouse in excess of $300,000 in each of those years and have a reasonable expectation of reaching the same income level in the current year; or (3) have an individual or joint minimum net worth (exclusive of home, home furnishings, and automobiles) with his or her spouse of $225,000, without regard to an investment in the Program, and an individual or combined taxable income of $60,000 or more for the previous year and an expectation of an individual or combined taxable income of $60,000 or more for each of the current year and the succeeding year. ? If I am a Michigan, New Mexico, Ohio, Pennsylvania, or South Dakota resident, my investment in the Partnership will not be equal to or more than 10% of my net worth. ATTENTION CALIFORNIA INVESTORS ? A resident of California who subscribes for Units of general partnership interest must represent that he (1) has a net worth of not less than $250,000 (exclusive of home, furnishings and automobiles) and had annual gross income during 2000 for Partnerships designated "PDC 2001- Limited Partnership," 2001 for Partnerships designated "PDC 2002- Limited Partnership" and 2002 for Partnerships designated "PDC 2003- Limited Partnership" of $120,000 or more, or expects to have gross income in 2001 for Partnerships designated "PDC 2001- Limited Partnership," 2002 for Partnerships designated "PDC 2002- Limited Partnership" and 2000 for Partnerships designated "PDC 2003- Limited Partnership of $120,000 or more, or (2) has a net worth of not less than $500,000 (exclusive of home, furnishings and automobiles), or (3) has a net worth of not less than $1,000,000, or (4) expects to have gross income in 2001 for Partnerships designated "PDC 2001- Limited Partnership," 2002 for Partnerships designated "PDC 2002- Limited Partnership" and 2003 for Partnerships designated "PDC 2003- Limited Partnership" of not less than $200,000. ? A resident of California who subscribes for Units of limited partnership interest must represent that he (1) has a net worth of not less than $250,000 (exclusive of home, furnishings and automobiles) and expects to have gross income in 2001 for Partnerships designated "PDC 2001- Limited Partnership," 2002 for Partnerships designated "PDC 2002- Limited Partnership" and 2003 for Partnerships designated "PDC 2003- Limited Partnership" of $65,000 or more, or (2) has net worth of not less than $500,000 (exclusive of home, furnishings and automobiles), or (3) has a net worth of not less than $1,000,000, or (4) expects to have gross income in 2001 for Partnerships designated "PDC 2001- Limited Partnership," 2002 for Partnerships designated "PDC 2002- Limited Partnership" and 2003 for Partnerships designated "PDC 2003- Limited Partnership of not less than $200,000. ? If a resident of California, I am aware that: It is unlawful to consummate a sale or transfer of this security, or any interest therein, or to receive any consideration therefor, without the prior written consent of the commissioner of corporations of the state of California, except as permitted in the commissioner's rules. As a condition of qualification of the Units for sale in the State of California, the following rule is hereby delivered to each California purchaser. California Administrative Code, Title 10, CH. 3, Rule 260.141.11. Restriction on transfer. (a) The issuer of a security upon which a restriction on transfer has been imposed pursuant to Sections 260.102.6, 260.102.141.10, and 260.534.10 shall cause a copy of this Section to be delivered to each issuee or transferee of such security at the time the certificate evidencing the security is delivered to the issuee or transferee. (b) It is unlawful for the holder of any such security to consummate a sale or transfer of such security, or any interest therein, without the prior written consent of the Commissioner (until this condition is removed pursuant to Section 260.141.12 of these rules), except: (1) to the issuer; (2) pursuant to the order or process of any court; (3) to any person described in Subdivision (i) of Section 25102 of the Code or Section 260.105.14 of these rules; (4) to the transferor's ancestors, descendants or spouse, or any custodian or trustee for the account of the transferor's ancestors, descendants, or spouse; or to a transferee by a trustee or custodian for the account of the transferee or the transferee's ancestors, descendants or spouse; (5) to the holders of securities of the same class of the same issuer; (6) by way of gift or donation intervivos or on death; (7) by or through a broker-dealer licensed under the Code (either acting as such or as a finder) to a resident of a foreign state, territory or country who is neither domiciled in this state to the knowledge of the broker-dealer, nor actually present in this state if the sale of such securities is not in violation of any securities law of the foreign state, territory or country concerned; (8) to a broker-dealer licensed under the Code in a principal transaction, or as an underwriter or member of an underwriting syndicate or selling group; (9) if the interest sold or transferred is a pledge or other lien given by the purchaser to the seller upon a sale of the security for which the Commissioner's written consent is obtained or under this rule not required; (10) by way of a sale qualified under Section 25111, 25112, 25113 or 25121 of the Code, of the securities to be transferred, provided that no order under Section 25140 or Subdivision (a) of Section 25143 is in effect with respect to such qualification; (11) by a corporation to a wholly-owned subsidiary of such corporation, or by a wholly-owned subsidiary of a corporation to such corporation; (12) by way of an exchange qualified under Section 25111, 25112 or 25113 of the Code, provided that no order under Section 25140 or Subdivision (a) of Section 25143 is in effect with respect to such qualification; (13) between residents of foreign states, territories or countries who are neither domiciled nor actually present in this state; (14) to the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state; (15) by the State Controller pursuant to the Unclaimed Property Law or by the administrator of the unclaimed property law of another state if, in either such case, such person (i) discloses to potential purchasers at the sale that transfer of the securities is restricted under this rule, (ii) delivers to each purchaser a copy of this rule, and (iii) advises the Commissioner of the name of each purchaser; or (16) by a trustee to a successor trustee when such transfer does not involve a change in the beneficial ownership of the securities; provided that any such transfer is on the condition that any certificate evidencing the security issued to such transferee shall contain the legend required by this section. (c) The certificates representing all such securities subject to such a restriction on transfer, whether upon initial issuance or upon any transfer thereof, shall bear on their face a legend, prominently stamped or printed thereon in capital letters of not less than 10-point size, reading as follows: "It is unlawful to consummate a sale or transfer of this security, or any interest therein, or to receive any consideration therefor, without the prior written consent of the commissioner of corporations of the state of california, except as permitted in the commissioner's rules." As a condition of qualification of the Units for sale in the State of California, each California subscriber through the execution of the Subscription Agreement acknowledges his understanding that the California Department of Corporations has adopted certain regulations and guidelines which apply to oil and gas interests offered to the public in the State of California. WSH\42941.1 [Comment1] APPENDIX D TO THE PROSPECTUS October 4, 2000 Petroleum Development Corporation 103 East Main Street Bridgeport, West Virginia 26330 Re: PDC 2003 Drilling Program Dear Sirs: We have acted as counsel for PDC 2003 Drilling Program, in connection with the offer and sale of securities (the "Units") in a series of limited partnerships, PDC 2001- Limited Partnerships, PDC 2002- Limited Partnerships, and PDC 2003- Limited Partnerships (the "Partnerships") to be organized as limited partnerships under the West Virginia Uniform Limited Partnership Act and in connection with the preparation and filing with the Securities and Exchange Commission of a registration statement on Form S-1 (the "Registration Statement"). Capitalized terms used herein shall have the meaning ascribed to such terms in the Registration Statement, unless otherwise provided. We have examined and are familiar with: (i) the Registration Statement, including a prospectus (the "Prospectus"), (ii) the Partnerships' form of limited partnership agreement (the "Partnership Agreement"), and (iii) such other documents and instruments as we have considered necessary for purposes of the opinions hereinafter set forth. In our examination we have assumed the authenticity of original documents, the accuracy of copies and the genuineness of signatures. We have relied upon the representations and statements of the Managing General Partner of the Partnerships and its affiliates with respect to the factual determinations underlying the legal conclusions set forth herein, including a representation of Petroleum Development Corporation as to its net worth. We have not attempted to verify independently such representations and statements. Please note that we are opining only as to the matters expressly set forth herein, and no opinion should be inferred as to any other matters. We are unable to render opinions as to a number of federal income tax issues relating to an investment in Units and the operations of the Partnerships. Finally, we are not expressing any opinion with respect to the amount of allowable losses or credits that may be generated by the Partnerships or the amount of each Investor Partner's share of allowable losses or credits from the Partnerships' activities. This Appendix D to the Prospectus constitutes our opinion as to all material tax considerations of the offering. In our opinion, each of the legal conclusions rendered in this Appendix D to the Prospectus is correct in all material respects as of the date of this opinion, under the Internal Revenue Code of 1986, as amended, the rules and regulations promulgated thereunder, and existing interpretations thereof. The following opinion and statements are based upon the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed Treasury regulations thereunder, current administrative rulings, and court decisions. The federal income tax law is uncertain as to many of the tax matters material to an investment in the Partnership, and it is not possible to predict with certainty how the law will develop or how the courts will decide various issues if they are litigated. While this opinion fairly states our views as Counsel concerning the tax aspects of an investment in the Partnership, both the Service and the courts may disagree with our position on certain issues. Moreover, uncertainty exists concerning some of the federal income tax aspects of the transactions being undertaken by the Partnership. Some of the tax positions being taken by the Partnership may be challenged by the Internal Revenue Service (the "Service") and there is no assurance that any such challenge will not be successful. Thus, there can be no assurance that all of the anticipated tax benefits of an investment in the partnership will be realized. Our opinions are based upon the transactions described in the Prospectus (the "Transaction") and upon facts as they have been represented to us or determined by us as of the date of the opinion. Any alteration of the facts may adversely affect the opinions rendered. In our opinion, the preponderance of the material tax benefits, in the aggregate, will be realized by the Investor Partners. It is possible, however, that some of the tax benefits will be eliminated or deferred to future years. Because of the factual nature of the inquiry, and in certain cases the lack of clear authority in the law, it is not possible to reach a judgment as to the outcome on the merits (either favorable or unfavorable) of certain material federal income tax issues as described more fully herein. SUMMARY OF CONCLUSIONS Opinions expressed: The following is a summary of the specific opinions expressed by us with respect to Tax Considerations discussed herein. To be fully understood, the complete discussion of these matters should be read by each prospective investor partner. 1. The material federal income tax benefits in the aggregate from an investment in the Partnership will be realized. 2. The Partnership will be treated as a partnership for federal income tax purposes and not as an association taxable as a corporation or a publicly traded partnership. 3. To the extent the Partnership's wells are timely drilled and amounts are timely paid, the Partners will be entitled to their pro rata share of the Partnership's IDC paid in 2001, with respect to Partnerships designated "PDC 2001-_ Limited Partnership," 2002 with respect to Partnerships designated "PDC 2002-_ Limited Partnership" and 2003 with respect to Partnerships designated "PDC 2003-_ Limited Partnership." 4. The deductibility of losses generated from the Partnership will not be limited by the at risk rules or the limitations related to an Investor's adjusted basis in his Partnership interest. 5. Additional General Partners' interests will not be considered a passive activity within the meaning of Code section 469 and losses generated while such general partner interest is so held will not be limited by the passive activity provisions. 6. Limited Partners' interests (other than those held by Additional General Partners who convert their interests into Limited Partners' interests) will be considered interests in a passive activity within the meaning of Code section 469 and losses generated therefrom will be limited by the passive activity provisions. 7. The Partnership will not be terminated solely as the result of the conversion of Partnership interests. 8. To the extent provided herein, the Partners' distributive shares of Partnership tax items will be determined and allocated substantially in accordance with the terms of the Partnership Agreement. 9. The Partnership will not be required to register with the Service as a tax shelter. No opinion expressed: Due to the lack of authority, or the essentially factual nature of the question, we express no opinion on the following: 1. The impact of an investment in the Partnership on an Investor's alternative minimum tax, due to the factual nature of the issue. 2. Whether, under Code section 183, the losses of the Partnership will be treated as derived from "activities not engaged in for profit," and therefore nondeductible from other gross income, due to the inherently factual nature of a Partner's interest and motive in engaging in the Transaction. 3. Whether each Partner will be entitled to percentage depletion since such a determination is dependent upon the status of the Partner as an independent producer. Due to the inherently factual nature of such a determination, counsel is unable to render an opinion as to the availability of percentage depletion. 4. Whether any interest incurred by a Partner with respect to any borrowings will be deductible or subject to limitations on deductibility, due to the factual nature of the issue. Without any assistance of the Managing General Partner or any of its affiliates, some Partners may choose to borrow the funds necessary to acquire a Unit and may incur interest expense in connection with those loans. Based upon the purely factual nature of any such loans, we are unable to express an opinion with respect to the deductibility of any interest paid or incurred thereon. 5. Whether the fees to be paid to the Managing General Partner and to third parties will be deductible, due to the factual nature of the issue. Due to the inherently factual nature of the proper allocation of expenses among nondeductible syndication expenses, amortizable organization expenses, amortizable "start-up" expenditures, and currently deductible items, and because the issues involve questions concerning both the nature of the services performed and to be performed and the reasonableness of amounts charged, we are unable to express an opinion regarding such treatment. General Information: Certain matters contained herein are not considered to address a material tax consequence and are for general information, including the matters contained in sections dealing with gain or loss on the sale of Units or of property, Partnership distributions, tax audits, penalties, and state, local, and self-employment tax. Our opinions are also based upon the facts described in this Prospectus and upon certain representations made to us by the Managing General Partner for the purpose of permitting us to render our opinions, including the following representations with respect to the Program: 1. The Partnership Agreement to be entered into by and among the Managing General Partner and Investor Partners and any amendments thereto will be duly executed and will be made available to any Investor Partner upon written request. The Partnership Agreement will be duly recorded in all places required under the West Virginia Uniform Limited Partnership Act (the "Act") for the due formation of the Partnership and for the continuation thereof in accordance with the terms of the Partnership Agreement. The Partnership will at all times be operated in accordance with the terms of the Partnership Agreement, the Prospectus, and the Act. 2. No election will be made by the Partnership, Investor Partners, or Managing General Partner to be excluded from the application of the provisions of Subchapter K of the Code. 3. The Partnership will own an operating mineral interest, as defined in the Code and in the Regulations, in all of the Drill Sites and none of the Partnership's revenues will be from non-working interests. 4. The respective amounts that will be paid to the General Partners as Drilling Fees, Operating Fees, and other fees will be amounts that would not exceed amounts that would be ordinarily paid for similar transactions between Persons having no affiliation and dealing with each other at "arms' length." 5. The Managing General Partner will cause the Partnership to properly elect to deduct currently all Intangible Drilling and Development Costs. 6. The Partnership will have a December 31 taxable year and will report its income on the accrual basis. 7. The Drilling Agreement to be entered into by and among the Managing General Partner and the Partnership will be duly executed and will govern the drilling of the Partnership's Wells. All Partnership wells will be spudded by the close of business on March 30, 2002 with respect to Partnerships designated "PDC 2001-_ Limited Partnership," March 30, 2003 with respect to Partnerships designated "PDC 2002-_ Limited Partnership," and March 30, 2004 with respect to Partnerships designated "PDC 2003-_ Limited Partnership." The entire amount to be paid to the Managing General Partner under the Operating Agreement is attributable to Intangible Drilling and Development Costs and does not include a profit for services performed or materials provided by third parties which are passed through at actual cost. 8. The Operating Agreement will be duly executed and will govern the operation of the Partnership's Wells. 9. Based upon the Managing General Partner's review of its experience with its previous drilling programs for the past several years and upon the intended operations of the Partnership, the sum of (i) the aggregate deductions, including depletion deductions, and (ii) 350 percent of the aggregate credits from the Partnership will not, as of the close of any of the first five years ending after the date on which Units are offered for sale, exceed two times the cash invested by the Partners in the Partnership as of such dates. In that regard, the Managing General Partner has reviewed the economics of its similar oil and gas drilling programs for the past several years, and has represented that it has determined that none of those programs has resulted in a tax shelter ratio greater than two to one. Further, the Managing General Partner has represented that the deductions and credits that are or will be represented as potentially allowable to an investor will not result in any Partnership having a tax shelter ratio greater than two to one and believes that no person could reasonably infer from representations made, or to be made, in connection with the offering of Units that such sums as of such dates will exceed two times the Partners' cash investments as of such dates. 10. At least 90% of the gross income of the Partnership will constitute income derived from the exploration, development, production, and/or marketing of oil and gas. The Managing General Partner does not believe that any market will ever exist for the sale of Units and the Managing General Partner will not make a market for the Units. Further, the Units will not be traded on an established securities market or the substantial equivalent thereof. 11. The Partnership will have the objective of carrying on business for profit and dividing the gain therefrom. 12. The Managing General Partner will not permit the purchase of Units by tax-exempt investors or foreign investors. Our opinions are also subject to all the assumptions, qualifications, and limitations set forth in the following discussion, including the assumptions that each of the Partners has full power, authority, and legal right to enter into and perform the terms of the Partnership Agreement and to take any and all actions thereunder in connection with the transactions contemplated thereby. Each prospective Investor should be aware that, unlike a ruling from the Service, an opinion of counsel represents only such counsel's best judgment. there can be no assurance that the service will not successfully assert positions which are inconsistent with our opinions set forth in this discussion or in the tax reporting positions taken by the partners or the partnership. Each prospective investor should consult his own tax advisor to determine the effect of the tax issues discussed herein on his individual tax situation. PARTNERSHIP STATUS The Partnership will be formed as a limited partnership pursuant to the Partnership Agreement and the laws of the State of West Virginia. The characterization of the Partnership as a partnership by state or local law, however, will not be determinative of the status of the Partnership for federal income tax purposes. The availability of any federal income tax benefits to an investor is dependent upon classification of the Partnership as a partnership rather than as a corporation or as an association taxable as a corporation for federal income tax purposes. We are of the opinion that the Partnership will be treated as a partnership for federal income tax purposes, and not as a corporation or as an association taxable as a corporation. However, there can be no assurance that the Service will not attempt to treat the Partnership as a corporation or as an association taxable as a corporation for federal income tax purposes. If the Service were to prevail on this issue, the tax benefits associated with taxation as a partnership would not be available to the Partners. Although the Partnership will be validly organized as a limited partnership under the laws of the state of West Virginia and will be subject to the Act, whether it will be treated for federal income tax purposes as a partnership or as a corporation or as an association taxable as a corporation will be determined under the Code rather than local law. As discussed below, our opinion that the Partnership will not be classified a corporation or as an association taxable as a corporation is based in part on newly promulgated entity classification regulations and in part on the fact that in our opinion the Partnership will not constitute a "publicly traded partnership." A. Association Taxable as a Corporation Our opinion that the Partnership will not be treated as an association taxable as a corporation is based on regulations issued by the Internal Revenue Service on December 17, 1996, generally effective as of January 1, 1997, regarding the tax classification of certain business organizations (the "Check the Box Regulations"). Under the Check the Box Regulations, in general, a business entity that is not otherwise required to be treated as a corporation under such regulations will be classified as a partnership if it has two or more members, unless the business entity elects to be treated as a corporation. The Partnership is not required under the Check the Box Regulations to be treated as a corporation and the Managing General Partner will not elect that the Partnership be treated as a corporation. Accordingly, in our opinion the Partnership will not be treated as an association taxable as a corporation. B. Publicly Traded Partnerships The Revenue Act of 1987 (the "1987 Act") added Code section 7704, "Certain Publicly Traded Partnerships Treated as Corporations." In treating certain "publicly traded partnerships" ("PTPs") as corporations for federal income tax purposes, Congress defined a PTP as any partnership, interests in which are either traded on an established securities market or readily tradable on a secondary market (or the substantial equivalent thereof). Code section 7704(b). Treas. Reg. section 1.7704-1(b) provides that an "established securities market" includes a national securities exchange registered under section 6 of the Securities Exchange Act of 1934 (the "1934 Act"), a national securities exchange exempt under the 1934 Act because of the limited volume of transactions, certain foreign security laws, regional or local exchanges, and an interdealer quotation system that regularly disseminates firm buy or sell quotations by identified brokers or dealers. The Managing General Partner has represented that the Units will not be traded on an established securities market. Notwithstanding the above general treatment of PTPs, Code section 7704(c) creates an exception to the treatment of PTPs as corporations for any taxable year if 90% or more of the gross income of the partnership for such taxable year consists of "qualifying income." Code section 7704(c)(2). For this purpose, qualifying income is defined to include, inter alia, "income and gains derived from the exploration, development, mining or production, processing, refining . . . or the marketing of any mineral or natural resource . . ." Code section 7704(d)(1)(E). The Managing General Partner has represented that it believes that, for all taxable years of the Partnership, 90% or more of the Partnership's gross income will consist of such qualifying income. Regarding the definition of PTPs contained in the Code, the Committee Reports to the 1987 Act provide that PTPs include entities with respect to which, inter alia, (i) "the holder of an interest has a readily available, regular and ongoing opportunity to sell or exchange his interest through a public means of obtaining or providing information of offers to buy, sell or exchange interests," (ii) "prospective buyers and sellers have the opportunity to buy, sell or exchange interests in a time frame and with the regularity and continuity that the existence of a market maker would provide," and (iii) there exists a "regular plan of redemptions or repurchases, or similar acquisitions of interests in the partnership such that holders of interests have readily available, regular and ongoing opportunities to dispose of their interests." The Service issued Treas. Reg section 1.7704-1 to clarify when partnership interests that are not traded on an established securities market will be treated as readily tradable on a secondary market or the substantial equivalent thereof. Essentially, the Regulation provides that such a situation occurs if partners are readily able to buy, sell, or exchange their partnership interests in a manner that is comparable, economically, to trading on an established securities market. It is unclear whether the limited safe harbors provided in the Regulation would result in the Units being treated as not publicly traded and we express no opinion regarding this matter. However, the Managing General Partner's obligation to offer to purchase any Units is conditioned upon the receipt by the Partnership from its counsel of an opinion that such offers or obligations to offer will not cause the Partnership to be treated as "publicly traded." Due to the presence of the opinion of counsel condition, the Partnership, in our opinion, will not be treated as a PTP prior to the time any such offers are made to Investor Partners. Accordingly, the Partnership, in our opinion, will not be treated as a corporation for federal income tax purposes under Code section 7704 in the absence of the Partnership's interests being "readily tradable on a secondary market (or the substantial equivalent thereof)." Notwithstanding the above, the Service may promulgate regulations or release announcements which take the position that interests in partnerships such as the Partnership are readily tradable on a secondary market or the substantial equivalent thereof. However, treatment of the Partnership as a PTP should not result in its treatment as a corporation for federal income tax purposes due to the exception contained in Code section 7704(c) relating to PTPs meeting the 90% of gross income test so long as such gross income test is satisfied. C. Summary In our opinion the Partnership will not be treated as an association taxable as a corporation for federal income tax purposes by reason of the Check the Box Regulations. Further, since any right of the Managing General Partner to offer to purchase Units is conditioned upon the receipt of an opinion of counsel that the Partnership will not be treated as a PTP, and assuming the Partnership satisfies the 90% gross income test of Code section 7704, the Partnership, in our opinion, will not be treated as a corporation for federal income tax purposes. Accordingly, the Partnership in our opinion will be treated as a partnership for federal income tax purposes. If challenged by the Service on this issue, the Partners should prevail on the merits, and each Partner should be required to report his proportionate share of the Partnership's items of income and deductions on his individual federal income tax return. If in any taxable year the Partnership were to be treated for federal income tax purposes as a corporation or as an association taxable as a corporation, the Partnership income, gain, loss, deductions, and credits would be reflected only on its "corporate" tax return rather than being passed though to the Partners. In such event, the Partnership would be required to pay income tax at corporate rates on its net income, thereby reducing the amount of cash available to be distributed to the Partners. Additionally, all or a portion of any distribution made to Partners would be taxable as dividends, which would not be deductible by the Partnership and which would generally be treated as ordinary portfolio income to the Partners, regardless of the source from which such distributions were generated. The discussion that follows is based on the assumption that the Partnership will be classified as a partnership for federal income tax purposes. FEDERAL TAXATION OF THE PARTNERSHIP Under the Code, a partnership is not a taxable entity and, accordingly, incurs no federal income tax liability. Rather, a partnership is a "pass-through" entity which is required to file an information return with the Service. In general, the character of a partner's share of each item of income, gain, loss, deduction, and credit is determined at the partnership level. Each partner is allocated a distributive share of such items in accordance with the partnership agreement and is required to take such items into account in determining the partner's income. Each partner includes such amounts in income for any taxable year of the partnership ending within or with the taxable year of the partner, without regard to whether the partner has received or will receive any cash distributions from the Partnership. REGISTRATION AS A TAX SHELTER The Code provides that certain investments must be registered as tax shelters with the Service. Registration numbers for such tax shelters must be supplied to investors who are required to report the numbers on their personal tax returns. Any organizer of a "potentially abusive tax shelter" and any person selling an interest in such shelter are required to maintain a list of investors in such tax shelter to whom interests were sold (together with other identifying information) and to make the list available to the Service upon request. Any tax shelter which is required to be registered and any other plan or arrangement which is of a type determined by the Regulations as having a potential for tax avoidance or evasion is considered a potentially abusive tax shelter for this purpose. The registration requirements apply only to an investment with respect to which any person could reasonably infer from the representations made, or to be made, in connection with the offering for sale of interests in the investment that the "tax shelter ratio" for any investor is greater than two to one as of the close of any of the first five years ending after the date on which such investment is offered for sale. The Managing General Partner has represented that, (i) based upon its experience with its previous drilling programs and upon the intended operations of the Partnership, it does not believe that the Partnership will have a tax shelter ratio greater than two to one, (ii) the deductions and credits that are or will be represented as potentially allowable to an investor will not result in any Partnership having a tax shelter ratio greater than two to one, and (iii) based upon a review of the economics of its similar oil and gas drilling programs for the past several years, it has determined that none of those programs has resulted in a tax shelter ratio greater than two to one. Accordingly, the Managing General Partner does not intend to cause the Partnership to register with the Service as a tax shelter. Based on the foregoing representations, we are of the opinion that the Partnership will not be required to register with the Service as a tax shelter. If it is subsequently determined that the Partnership was required to be registered with the Service as a tax shelter, the Partnership would be subject to certain penalties under IRC section 6707, including a penalty ranging from $500 to 1% of the aggregate amount invested in Units for failing to register and $100 for each failure to furnish to a Partner a tax shelter registration number, and each Partner would be liable for a $250 penalty for failure to include the tax registration number on his tax return, unless such failure was due to reasonable cause. A Partner also would be liable for a penalty of $100 for failing to furnish the tax shelter registration number to any transferee of his Partnership interest. Counsel can give no assurance that, if the Partnership is determined to be a tax shelter which must be registered with the Service, the above penalties will not apply. INTANGIBLE DRILLING AND DEVELOPMENT COSTS DEDUCTIONS Under Code section 263(a), taxpayers are denied deductions for capital expenditures, which expenditures are those that generally result in the creation of an asset having a useful life which extends substantially beyond the close of the taxable year. See also Treas. Reg. section 1.461-1(a)(2). In Indopco, Inc. v. Commissioner, 92-1 USTC paragraph 50,113 (1992) the Supreme Court seemed to further limit the capitalization criteria by stating that the costs should be capitalized when they provide benefits that extend beyond one tax year. Notwithstanding these statutory and judicial general rules, Congress has granted to the Treasury Secretary the authority to prescribe regulations that would allow taxpayers the option of deducting, rather than capitalizing, intangible drilling and development costs ("IDC"). Code section 263. The Secretary's rules are embodied in Treas. Reg. section 1.612-4 and state that, in general, the option to deduct IDC applies only to expenditures for drilling and development items that do not have a salvage value. With respect to IDC incurred by a partnership, Code section 703 and Treas. Reg. section 1.703-1(b) provide that the option to deduct such costs is to be exercised at the partnership level and in the year in which the deduction is to be taken. All partners are bound by the partnership's election. The Managing General Partner has represented that the Partnership will elect to deduct IDC in accordance with Treas. Reg. section 1.612-4. In this regard, Additional General Partners will be entitled to deduct IDC against any form of income in the year in which the investment is made, provided wells are spudded within the first ninety days of the following year; subject to the same provision, Limited Partners will be entitled to deduct IDC against passive income. A. Classification of Costs In general, IDC consists of those costs which in and of themselves have no salvage value. Treas. Reg. section 1.612-4(a) provides examples of items to which the option to deduct IDC applies, including all amounts paid for labor, fuel, repairs, hauling, and supplies, or any of them, which are used (i) in the drilling, shooting, and cleaning of wells, (ii) in such clearing of ground, draining, road making, surveying, and geological works as are necessary in the preparation for the drilling of wells, and (iii) in the construction of such derricks, tanks, pipelines, and other physical structures as are necessary for the drilling of wells and the preparation of wells for the production of oil or gas. The Service, in Rev. Rul. 70-414, 1970-2 C.B. 132, set forth further classifications of items subject to the option and those considered capital in nature. The ruling provides that the following items are not subject to the election of Treas. Reg. section 1.612-4(a): (i) oil well pumps (upon initial completion of the well), including the necessary housing structures; (ii) oil well pumps (after the well has flowed for a time), including the necessary housing structures; (iii) oil well separators, including the necessary housing structures; (iv) pipelines from the wellhead to oil storage tanks on the producing lease; (v) oil storage tanks on the producing lease; (vi) salt water disposal equipment, including any necessary pipelines; (vii) pipelines from the mouth of a gas well to the first point of control, such as a common carrier pipeline, natural gasoline plant, or carbon black plant; (viii) recycling equipment, including any necessary pipelines; and (ix) pipelines from oil storage tanks on the producing leasehold to a common carrier pipeline. A partnership's classification of a cost as IDC is not binding on the government, which might reclassify an item labeled as IDC as a cost which must be capitalized. In Bernuth v. Commissioner, 57 T.C. 225 (1971), aff'd, 470 F.2d 710 (2nd Cir. 1972), the Tax Court denied taxpayers a deduction for that portion of a turnkey drilling contract price that was in excess of a reasonable cost for drilling the wells in question under a turnkey contract, holding that the amount specified in the turnkey contract was not controlling. Similarly, the Service, in Rev. Rul. 73-211, 1973-1 C.B. 303, concluded that excessive turnkey costs are not deductible as IDC: [O]nly that portion of the amount of the taxpayer's total investment that is attributable to intangible drilling and development costs that would have been incurred in an arm's-length transaction with an unrelated drilling contractor (in accordance with the economic realities of the transaction) is deductible [as IDC]. To the extent the Partnership's prices meet the reasonable price standards imposed by Bernuth, supra, and Rev. Rul 73-211, supra, and to the extent such amounts are not allocable to tangible property, leasehold costs, and the like, the amounts paid to the Managing General Partner under the drilling contract should qualify as IDC and should be deductible at the time described below under "B. Timing of Deductions." That portion of the amount paid to the Managing General Partner that is in excess of the amount that would be charged by an independent driller under similar conditions will not qualify as IDC and will be required to be capitalized. We are unable to express an opinion regarding the reasonableness or proper characterization of the payments under the drilling agreement, since the determination of whether the amounts are reasonable or excessive is inherently factual in nature. No assurance can be given that the Service will not characterize a portion of the amount paid to the Managing General Partner as an excessive payment, to be capitalized as a leasehold cost, assignment fee, syndication fee, organization fee, or other cost, and not deductible as IDC. To the extent not deductible, such amounts will be included in the Partners' bases of their interests in the Partnership. B. Timing of Deductions As described above, Code section 263(c) and Treas. Reg. section 1.612-4 allow the Partnership to expense IDC as opposed to capitalizing such amounts. Even if the Partnership elects to expense the IDC, assuming a taxpayer is otherwise entitled to such a deduction, the taxpayer may elect to capitalize all or a part of the IDC and amortize same on a straight-line basis over a sixty month period, beginning with the taxable month in which such expenditure is made. Code section 59(e)(1) and (2)(c). For taxpayers entitled to deduct IDC, the timing of such deduction can vary, depending, in part, upon the taxpayer's method of accounting. The Managing General Partner has represented that the Partnership will use the accrual method of accounting. Under the accrual method, income is recognized when all the events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy. Treas. Reg. section 1.451-1(a). With respect to deductions, recognition results when all events which establish liability have occurred and the amount thereof can be determined with reasonable accuracy. Treas. Reg. section 1.461-1(a)(2). Regarding deductions, Code section 461(h)(1) provides that ". . . the all events test shall not be treated as met any earlier than when economic performance with respect to such item occurs." Code section 461(i)(2), provides that, in the case of a "tax shelter," economic performance with respect to the act of drilling an oil or gas well will ". . . be treated as having occurred within a taxable year if drilling of the well commences before the close of the 90th day after the close of the taxable year." "Tax shelter," for purposes of Code section 461, is defined to include the Partnership. However, with respect to a tax shelter which is a partnership, the maximum deduction that would be allowable for any prepaid expenses under this exception would be limited to the partner's "cash basis" in the partnership. Code section 461(i)(2)(B)(i). Such "cash basis" equals the partner's adjusted basis in the partnership, determined without regard to (i) any liability of the partnership and (ii) any amount borrowed by the partner with respect to the partnership which (I) was arranged by the partnership or by any person who participated in the organization, sale, or management of the partnership (or any person related to such person within the meaning of Code section 465(b)(3)(C)) or (II) was secured by any assets of the partnership. Code section 461(i)(2)(C). The Managing General Partner has represented that, as Operator, it will commence drilling operations by spudding each well on or before March 30, 2002 for Partnerships designated "PDC 2001-_ Limited Partnership," March 30, 2003 for Partnerships designated "PDC 2002-_ Limited Partnership," and March 30, 2004 for Partnerships designated "PDC 2003-_ Limited Partnership," and will complete each well, if completion is warranted, with due diligence thereafter. Further, the Managing General Partner has represented that, in any event, the Partnership will not have any such liability referred to in Code section 461(i)(2)(C), and the Partners will not so incur any such debt so as to result in application of the limiting provisions contained in Code section 461(i)(2)(B)(i). Notwithstanding the above, the deductibility of any prepaid IDC will be subject to the limitations of case law. These limitations provide that prepaid IDC is deductible when paid if (i) the expenditure constitutes a payment that is not merely a deposit, (ii) the payment is made for a business purpose, and (iii) deductions attributable to such outlay do not result in a material distortion of income. See Keller v. Commissioner, 79 T.C. 7 (1982), aff'd, 725 F.2d 1173 (8th Cir. 1984), Rev. Rul. 71-252, 1971-1 C.B. 146, Pauley v. U.S., 63-1 U.S.T.C. paragraph 9280 (S.D. Cal. 1963), Rev. Rul. 80-71, 1980-1 C.B. 106, Jolley v. Commissioner, 47 T.C.M. 1082 (1984), Dillingham v. U.S., 81-2 U.S.T.C. paragraph 9601 (W.D. Okla. 1981), and Stradlings Building Materials, Inc. v. Commissioner, 76 T.C. 84 (1981). Generally, these requirements may be met by a showing of a legally binding obligation (i.e., the payment was not merely a deposit), of a legitimate business purpose for the payment, that performance of the services was required within a reasonable time, and of an arm's-length price. Similar requirements apply to cash basis taxpayers seeking to deduct prepaid IDC. The Managing General Partner is unable to represent that all of the Wells will be completed in 2001 for Partnerships designated "PDC 2001-_ Limited Partnership," 2002 for Partnerships designated "PDC 2002-_ Limited Partnership," and 2003 for Partnerships designated "PDC 2003-_ Limited Partnership"; however, the Managing General Partner has represented that any Well that is not completed in 2001 with respect to Partnerships designated "PDC 2001-_ Limited Partnership," in 2002 with respect to Partnerships designated "PDC 2002-_ Limited Partnership," and in 2003 with respect to Partnerships designated "PDC 2003-_ Limited Partnership" will be spudded by not later than March 30, 2002 for Partnerships designated "PDC 2001-_ Limited Partnership," March 30, 2003 for Partnerships designated "PDC 2002-_ Limited Partnership," and March 30, 2004 for Partnerships designated "PDC 2003-_ Limited Partnership," respectively. The Service has challenged the timing of the deduction of IDC when the wells giving rise to such deduction have been completed in a year subsequent to the year of prepayment. The decisions noted above hold that prepayments of IDC by a cash basis taxpayer are, under certain circumstances, deductible in the year of prepayment if some work is performed in the year of prepayment even though the well is not completed that year. In Keller v. Commissioner, supra, the Eighth Circuit Court of Appeals applied a three-part test for determining the current deductibility of prepaid IDC by a cash basis taxpayer, namely whether (i) the expenditure was a payment or a mere deposit, (ii) the payment was made for a valid business purpose and (iii) the prepayment resulted in a material distortion of income. The facts in that case dealt with two different forms of drilling contracts: footage or day-work contracts and turnkey contracts. Under the turnkey contracts, the prepayments were not refundable in any event, but in the event work was stopped on one well the remaining unused amount would be applied to another well to be drilled on a turnkey basis. Contrary to the Service's argument that this substitution feature rendered the payment a mere deposit, the court in Keller concluded that the prepayments were indeed "payments" because the taxpayer could not compel a refund. The court further found that the deduction clearly reflected income because under the unique characteristics of the turnkey contract the taxpayer locked in the price and shifted the drilling risk to the contractor, for a premium, effectively getting its bargained for benefit in the year of payment. Therefore, the court concluded that the cash basis taxpayers in that case properly could deduct turnkey payments in the year of payment. With respect to the prepayments under the footage or day-work contracts, however, the court found that the payments were mere deposits on the facts of the case, because the partnership had the power to compel a refund. The court was also unconvinced as to the business purpose for prepayment under the footage or day-work contracts, primarily because the testimony indicated that the drillers would have provided the required services with or without prepayment. Under the terms of the Drilling and Operating Agreement, if amounts paid by the Partnership prior to the commencement of drilling exceed amounts due the Managing General Partner thereunder, the Managing General Partner will not refund any portion of amounts paid by the Partnership, but rather will create a credit once the actual costs incurred by the Managing General Partner are compared to the amounts paid. Further, the Managing General Partner will expend such credit for additional IDC on additional wells selected by the Managing General Partner. The Service has adopted the position that the relationship between the parties may provide evidence that the drilling contract between the parties requiring prepayment may not be a bona fide arm's-length transaction, in which case a portion of the prepayment may be disallowed as being a "non-required payment." Section 4236, Internal Revenue Service Examination Tax Shelters Handbook (6-27-85). A similar position is taken by the Service in the Tax Shelter Audit Technique Guidelines. Internal Revenue Service Examination Tax Shelter Handbook. The Service has formally adopted its position on prepayments to related parties in Revenue Ruling 80-71. 1980-1 C.B. 106. In this ruling, a subsidiary corporation, which was a general partner in an oil and gas limited partnership, prepaid the partnership's drilling and completion costs under a turnkey contract entered into with the corporate parent of the general partner. The agreement did not provide for any date for commencing drilling operations and the contractor, which did not own any drilling equipment, was to arrange for the drilling equipment for the wells through subcontractors. Revenue Ruling 71-252, supra, was factually distinguished on the grounds of the business purpose of the transaction, immediate expenditure of prepaid receipts, and completion of the wells within two and one-half months. Rev. Rul. 80-71 found that the prepayment was not made in accordance with customary business practice and held on the facts that the payment was deductible in the tax year that the related general contractor paid the independent subcontractor. However, in Tom B. Dillingham v. United States, 1981-2 USTC paragraph 9601 (D.C. Okla. 1981), the court held that, on the facts before it, a contract between related parties requiring a prepaid IDC did give rise to a deduction in the year paid. In that case, Basin Petroleum Corp. ("Basin") was the general partner of several drilling partnerships and also served as the partnership operator and general contractor. As general contractor, Basin was to conduct the drilling of the wells at a fixed price on a turnkey basis under an agreement that required payment prior to the end of the year in question. The stated reason for the prepayment was to provide Basin with working capital for the drilling of the wells and to temporarily provide funds to Basin for other operations. The agreement required drilling to commence within a reasonable period of time, and all wells were completed within the following year. Some of the wells were drilled by Basin with its own rigs and some were drilled by subcontractors. The court stated: The fact that the owner and contractor is the general partner of the partnership-owner does not change this result where, as here, the Plaintiffs have shown that prepayment was required for a legitimate business purpose and the transaction was not a sham to merely permit Plaintiff to control the timing of the deduction. IRC, Sec. 707(a). Plaintiffs were entitled to rely upon Revenue Ruling 71-252 by reason of Income Tax Regulations 26 C.F.R. section 601.601(d)(2)(v)(e) . . . Notwithstanding the foregoing, no assurance can be given that the Service will not challenge the current deduction of IDC because of the prepayment being made to a related party. If the Service were successful with such challenge, the Partners' deductions for IDC would be deferred to later years. The timing of the deductibility of prepaid IDC is inherently a factual determination which is to a large extent predicated on future events. The Managing General Partner has represented that the Drilling and Operating Agreement to be entered into with PDC by the Partnership will be duly executed by and delivered to PDC, the Partnership, and PDC as attorney-in-fact for the Partners and will govern the drilling, and, if warranted, the completion of each of the Wells. The Drilling and Operating Agreement requires PDC to commence drilling operations by spudding each Well on or before March 30, 2002 for Partnerships designated "PDC 2001-_ Limited Partnership," March 30, 2003 for Partnerships designated "PDC 2002-_ Limited Partnership," and March 30, 2004 for Partnerships designated "PDC 2003-_ Limited Partnership," and to complete each Well, if completion is warranted, with due diligence thereafter. Also, under the terms of the Drilling and Operating Agreement, PDC, as general contractor, will not refund any portion of amounts paid in the event actual costs are less than the amounts paid but will apply any such amounts solely for payment of additional drilling services to the Partners. Based upon this representation and others included within the opinion and assuming that the Drilling and Operating Agreement will be performed in accordance with its terms, we are of the opinion that the payment for IDC under the Drilling and Operating Agreement, if made in 2001 for Partnerships designated "PDC 2001-_ Limited Partnership," 2002 for Partnerships designated "PDC 2002-_ Limited Partnerships," and 2003 for Partnerships designated "PDC 2003-_ Limited Partnership" will be allowable as a deduction in 2001 for Partnerships designated "PDC 2001-_ Limited Partnership," 2002 for Partnerships designated "PDC 2002-_ Limited Partnerships," and 2003 for Partnerships designated "PDC 2003-_ Limited Partnership" subject to the other limitations discussed in this opinion. Although PDC will attempt to satisfy each requirement of the Service and judicial authority for deductibility of IDC in 2001 for Partnerships designated "PDC 2001-_ Limited Partnership," 2002 for Partnerships designated "PDC 2002-_ Limited Partnerships," and 2003 for Partnerships designated "PDC 2003-_ Limited Partnership" no assurance can be given that the Service will not successfully contend that the IDC of a well which is not completed until 2002 for Partnerships designated "PDC 2001-_ Limited Partnership," 2003 for Partnerships designated "PDC 2002-_ Limited Partnership," and 2004 for Partnerships designated "PDC 2003-_ Limited Partnership" are not deductible in whole or in part until 2002 or 2003 or 2004, respectively. Further, to the extent drilling of the Partnership's wells does not commence by March 30, 2002 for Partnerships designated "PDC 2001-_ Limited Partnership," March 30, 2003 for Partnerships designated "PDC 2002-_ Limited Partnership," and March 30, 2004 for Partnerships designated "PDC 2003-_ Limited Partnership," the deductibility of all or a portion of the IDC may be deferred under Code section 461. C. Recapture of IDC IDC which has been deducted is subject to recapture as ordinary income upon certain dispositions (other than by abandonment, gift, death, or tax-free exchange) of an interest in an oil or gas property. IDC previously deducted that is allocable to the property (directly or through the ownership of an interest in a partnership) and which would have been included in the adjusted basis of the property is recaptured to the extent of any gain realized upon the disposition of the property. Treasury regulations provide that recapture is determined at the partner level (subject to certain anti-abuse provisions). Treas. Reg. section 1.1254-5(b). Where only a portion of recapture property is disposed of, any IDC related to the entire property is recaptured to the extent of the gain realized on the portion of the property sold. In the case of the disposition of an undivided interest in a property (as opposed to the disposition of a portion of the property) a proportionate part of the IDC with respect to the property is treated as allocable to the transferred undivided interest to the extent of any realized gain. Treas. Reg. section 1.1254-1(c). DEPLETION DEDUCTIONS The owner of an economic interest in an oil and gas property is entitled to claim the greater of percentage depletion or cost depletion with respect to oil and gas properties which qualify for such depletion methods. In the case of partnerships, the depletion allowance must be computed separately by each partner and not by the partnership. Code section 613A(c)(7)(D). Notwithstanding this requirement, however, the Partnership, pursuant to Section 3.01(d)(i) of the Partnership Agreement, will compute a "simulated depletion allowance" at the Partnership level, solely for the purposes of maintaining Capital Accounts. Code sections 613A(d)(2) and 613A(d)(4). Cost depletion for any year is determined by multiplying the number of units (e.g., barrels of oil or Mcf of gas) sold during the year by a fraction, the numerator of which is the cost of the mineral interest and the denominator of which is the estimated recoverable units of reserve available as of the beginning of the depletion period. See Treas. Reg. section 1.611-2(a). In no event can the cost depletion exceed the adjusted basis of the property to which it relates. Percentage depletion is generally available only with respect to the domestic oil and gas production of certain "independent producers." In order to qualify as an independent producer, the taxpayer, either directly or through certain related parties, may not be involved in the refining of more 50,000 barrels of oil (or equivalent of gas) on any day during the taxable year or in the retail marketing of oil and gas products exceeding $5 million per year in the aggregate. In general, (i) component members of a controlled group of corporations, (ii) corporations, trusts, or estates under common control by the same or related persons and (iii) members of the same family (an individual, his spouse and minor children) are aggregated and treated as one taxpayer in determining the quantity of production (barrels of oil or cubic feet of gas per day) qualifying for percentage depletion under the independent producer's exemption. Code section 613A(c) (8). No aggregation is required among partners or between a partner and a partnership. An individual taxpayer is related to an entity engaged in refining or retail marketing if he owns 5% or more of such entity. Code section 613A(d)(3). Percentage depletion is a statutory allowance pursuant to which, under current law, a minimum deduction equal to 15% of the taxpayer's gross income from the property is allowed in any taxable year, in general not to exceed (i) 100% of the taxpayer's taxable income from the property (computed without the allowance for depletion) or (ii) 65% of the taxpayer's taxable income for the year (computed without regard to percentage depletion and net operating loss and capital loss carrybacks). Code sections 613(a) and 613A(d)(1). In the case of "stripper well property," as that term is defined in Code section 613A(c)(6)(D), the 100% of taxable income limitation has been eliminated for taxable years 1998 to 2001. Code section 613A(c)(6)(H). It is anticipated that the properties of the Partnerships will likely constitute "stripper well properties" for this purpose. The rate of the percentage depletion deduction will vary with the price of oil. In the case of production from marginal properties, the percentage depletion rate may be increased up to 25%. Code section 613A(c)(6). For purposes of computing the percentage depletion deduction, "gross income from the property" does not include any lease bonus, advance royalty, or other amount payable without regard to production from the property. Code section 613A(d)(5). Depletion deductions reduce the taxpayer's adjusted basis in the property. However, unlike cost depletion, deductions under percentage depletion are not limited to the adjusted basis of the property; the percentage depletion amount continues to be allowable as a deduction after the adjusted basis has been reduced to zero. Percentage depletion will be available, if at all, only to the extent that a taxpayer's average daily production of domestic crude oil or domestic natural gas does not exceed the taxpayer's depletable oil quantity or depletable natural gas quantity, respectively. Generally, the taxpayer's depletable oil quantity equals 1,000 barrels and depletable natural gas quantity equals 6,000,000 cubic feet. Code section 613A(c)(3) and (4). In computing his individual limitation, a Partner will be required to aggregate his share of the Partnership's oil and gas production with his share of production from all other oil and gas investments. Code section 613A(c). Taxpayers who have both oil and gas production may allocate the deduction limitation between the two types of production. The availability of depletion, whether cost or percentage, will be determined separately by each Partner. Each Partner must separately keep records of his share of the adjusted basis in an oil or gas property, adjust such share of the adjusted basis for any depletion taken on such property, and use such adjusted basis each year in the computation of his cost depletion or in the computation of his gain or loss on the disposition of such property. These requirements may place an administrative burden on a Partner. For properties placed in service after 1986, depletion deductions, to the extent they reduce the basis of an oil and gas property, are subject to recapture under Code section 1254. Since the availability of percentage depletion for a partner is dependent upon the status of the partner as an independent producer, we also are unable to express an opinion on this matter. Because of the foregoing, we are unable to render any opinion as to the availability of percentage depletion. Each prospective investor is urged to consult with his personal tax advisor to determine whether percentage depletion would be available to him. DEPRECIATION DEDUCTIONS The Partnership will claim depreciation, cost recovery, and amortization deductions with respect to its basis in Partnership Property as permitted by the Code. For most tangible personal property placed in service after December 31, 1986, the "modified accelerated cost recovery system" ("MACRS") must be used in calculating the cost recovery deductions. Thus, the cost of lease equipment and well equipment, such as casing, tubing, tanks, and pumping units, and the cost of oil or gas pipelines cannot be deducted currently but must be capitalized and recovered under "MACRS." The cost recovery deduction for most equipment used in domestic oil and gas exploration and production and for most of the tangible personal property used in natural gas gathering systems is calculated using the 200% declining balance method switching to the straight-line method, a seven-year recovery period, and a half-year convention. INTEREST DEDUCTIONS In the Transaction, the Investor Partners will acquire their interests by remitting cash in the amount of $20,000 per Unit to the Partnership. In no event will the Partnership accept notes in exchange for a Partnership interest. Nevertheless, without any assistance of the Managing General Partner or any of its affiliates, some Partners may choose to borrow the funds necessary to acquire a Unit and may incur interest expense in connection with those loans. Based upon the purely factual nature of any such loans, we are unable to express an opinion with respect to the deductibility of any interest paid or incurred thereon. TRANSACTION FEES The Partnership may classify a portion of the fees (the "Fees") to be paid to third parties and to the Managing General Partner or to the Operator and its affiliates (as described in the Prospectus under "Source of Funds and Use of Proceeds") as expenses which are deductible as organizational expenses or otherwise. There is no assurance that the Service will allow the deductibility of such expenses and counsel expresses no opinion with respect to the allocation of the Fees to deductible and nondeductible items. Generally, expenditures made in connection with the creation of, and with sales of interests in, a partnership will fit within one of several categories. A partnership may elect to amortize and deduct its organizational expenses (as defined in Code section 709(b)(2) and in Treas. Reg. section 1.709-2(a)) ratably over a period of not less than 60 months commencing with the month the partnership begins business. Organizational expenses are expenses which (i) are incident to the creation of the partnership, (ii) are chargeable to capital account, and (iii) are of a character which, if expended incident to the creation of a partnership having an ascertainable life, would (but for Code section 709(a)) be amortized over such life. Id. Examples of organizational expenses are legal fees for services incident to the organization of the partnership, such as negotiation and preparation of a partnership agreement, accounting fees for services incident to the organization of the partnership, and filing fees. Treas. Reg. section 1.709-2(a). Under Code section 709, no deduction is allowable for "syndication expenses," examples of which include brokerage fees, registration fees, legal fees of the underwriter or placement agent and the issuer (general partners or the partnership) for securities advice and for advice pertaining to the adequacy of tax disclosures in the prospectus or private placement memorandum for securities law purposes, printing costs, and other selling or promotional material. These costs must be capitalized. Treas. Reg. section 1.709-2(b). Payments for services performed in connection with the acquisition of capital assets must be amortized over the useful life of such assets. Code section 263. Under Code section 195, no deduction is allowable with respect to "start-up expenditures," although such expenditures may be capitalized and amortized over a period of not less than 60 months. Start-up expenditures are defined as amounts (i) paid or incurred in connection with (I) investigating the creation or acquisition of an active trade or business, (II) creating an active trade or business, or (III) any activity engaged in for profit and for the production of income before the day on which the active trade or business begins, in anticipation of such activity becoming an active trade or business, and (ii) which, if paid or incurred in connection with the operation of an existing active trade or business (in the same field as the trade or business referred to in (i) above), would be allowable as a deduction for the taxable year in which paid or incurred. Code section 195(c)(1). The Partnership intends to make payments to the Managing General Partner, as described in greater detail in the Prospectus. To be deductible, compensation paid to a general partner must be for services rendered by the partner other than in his capacity as a partner or for compensation determined without regard to partnership income. Fees which are not deductible because they fail to meet this test may be treated as special allocations of income to the recipient partner (see Pratt v. Commissioner, 550 F.2d 1023 (5th Cir. 1977)), and thereby decrease the net loss or increase the net income among all partners. To the extent these expenditures described in the Prospectus are considered syndication costs (such as the fees paid to brokers and broker-dealers, and the fees paid for printing the Prospectus and possibly all or a portion of the Managing General Partner's management fee), they will be nondeductible by the Partnership. To the extent attributable to organization fees (such as the amounts paid for legal services incident to the organization of the Partnership), the expenditures may be amortizable over a period of not less than 60 months, commencing with the month the Partnership begins business, if the Partnership so elects; if no election is made, no deduction is available. Finally, to the extent any portion of the expenditures would be treated as "start-up," they could be amortized over a 60 month or longer period, provided the proper election was made. Due to the inherently factual nature of the proper allocation of expenses among nondeductible syndication expenses, amortizable organization expenses, amortizable "start-up" expenditures, and currently deductible items, and because the issues involve questions concerning both the nature of the services performed and to be performed and the reasonableness of amounts charged, we are unable to express an opinion regarding such treatment. If the Service were to successfully challenge the Managing General Partner's allocations, a Partner's taxable income could be increased, thereby resulting in increased taxes and in liability for interest and penalties. BASIS AND AT RISK LIMITATIONS A Partner's share of Partnership losses will not be allowed as a deduction to the extent such share exceeds the amount of the Partner's adjusted tax basis in his Units. A Partner's initial adjusted tax basis in his Units will generally be equal to the cash he has invested to purchase his Units. Such adjusted tax basis will generally be increased by (i) additional amounts invested in the Partnership, including his share of net income, (ii) additional capital contributions, if any, and (iii) his share of Partnership borrowings, if any, based on the extent of his economic risk of loss for such borrowings. Such adjusted tax basis will generally be reduced, but not below zero by (i) his share of loss, (ii) his depletion deductions on his share of oil and gas income (until such deductions exhaust his share of the basis of property subject to depletion), (iii) distributions of cash and the adjusted basis of property other than cash made to him, and (iv) his share of reduction in the amount of indebtedness previously included in his basis. In addition, Code section 465 provides, in part, that, if an individual or a closely held C (i.e., regularly taxed) corporation engages in any activity to which Code 465 applies, any loss from that activity is allowed only to the extent of the aggregate amount with respect to which the taxpayer is "at risk" for such activity at the close of the taxable year. Code section 465(a)(1). A closely held C corporation is a corporation, more than fifty percent (50%) of the stock of which is owned, directly or indirectly, at any time during the last half of the taxable year by or for not more than five (5) individuals. Code sections 465(a)(1)(B), 542(a)(2). For purposes of Code section 465, a loss is defined as the excess of otherwise allowable deductions attributable to an activity over the income received or accrued from that activity. Code section 465(d). Any such loss disallowed by Code section 465 shall be treated as a deduction allocable to the activity in the first succeeding taxable year. Code section 465(a)(2). Code section 465(b)(1) provides that a taxpayer will be considered as being "at risk" for an activity with respect to amounts including (i) the amount of money and the adjusted basis of other property contributed by the taxpayer to the activity, and (ii) amounts borrowed with respect to such activity to the extent that the taxpayer (I) is personally liable for the repayment of such amounts, or (II) has pledged property, other than property used in the activity, as security for such borrowed amounts (to the extent of the net fair market value of the taxpayer's interest in such property). No property can be taken into account as security if such property is directly or indirectly financed by indebtedness that is secured by property used in the activity. Code section 465(b)(2). Further, amounts borrowed by the taxpayer shall not be taken into account if such amounts are borrowed (i) from any person who has an interest (other than an interest as a creditor) in such activity, or (ii) from a related person to a person (other than the taxpayer) having such an interest. Code section 465(b)(3). Related persons for purposes of Code section 465(b)(3) are defined to include related persons within the meaning of Code section 267(b) (which describes relationships between family members, corporations and shareholders, trusts and their grantors, beneficiaries and fiduciaries, and similar relationships), Code section 707(b)(1) (which describes relationships between partnerships and their partners) and Code section 52 (which describes relationships between persons engaged in businesses under common control). Code section 465(b)(3)(C). Finally, no taxpayer is considered at risk with respect to amounts for which the taxpayer is protected against loss through nonrecourse financing, guarantees, stop loss agreements, or other similar arrangements. Code section 465(b)(4). The Code provides that a taxpayer must recognize taxable income to the extent that his "at risk" amount is reduced below zero. This recaptured income is limited to the sum of the loss deductions previously allowed to the taxpayer, less any amounts previously recaptured. A taxpayer may be allowed a deduction for the recaptured amounts included in his taxable income if and when he increases his amount "at risk" in a subsequent taxable year. he Treasury has published proposed regulations relating to the at risk provisions of Code section 465. These proposed regulations provide that a taxpayer's at risk amount will include "personal funds" contributed by the taxpayer to an activity. Prop. Treas. Reg. section 1.465-22(a). "Personal funds" and "personal assets" are defined in Prop. Treas. Reg. section 1.465-9(f) as funds and assets which (i) are owned by the taxpayer, (ii) are not acquired through borrowing, and (iii) have a basis equal to their fair market value. In addition to a taxpayer's amount at risk being increased by the amount of personal funds contributed to the activity, the excess of the taxpayer's share of all items of income received or accrued from an activity during a taxable year over the taxpayer's share of allowable deductions from the activity for the year will also increase the amount at risk. Prop. Treas. Reg. section 1.465-22. A taxpayer's amount at risk will be decreased by (i) the amount of money withdrawn from the activity by or on behalf of the taxpayer, including distributions from a partnership, and (ii) the amount of loss from the activity allowed as a deduction under Code section 465(a). Id. The Partners will purchase Units by tendering cash to the Partnership. To the extent the cash contributed constitutes the "personal funds" of the Partners, the Partners should be considered at risk with respect to those amounts. To the extent the cash contributed constitutes "personal funds," in our opinion, neither the at risk rules nor the limitations related to adjusted basis will limit the deductibility of losses generated from the Partnership. PASSIVE LOSS AND CREDIT LIMITATIONS A. Introduction Code section 469 provides that the deductibility of losses generated from passive activities will be limited for certain taxpayers. The passive activity loss limitations apply to individuals, estates, trusts, and personal service corporations as well as, to a lesser extent, closely held C corporations. Code section 469(a)(2). The definition of a "passive activity" generally encompasses all rental activities as well as all activities with respect to which the taxpayer does not "materially participate." Code section 469(c). Notwithstanding this general rule, however, the term "passive activity" does not include "any working interest in any oil or gas property which the taxpayer holds directly or through an entity which does not limit the liability of the taxpayer with respect to such interest." Code section 469(c)(3),(4). A passive activity loss ("PAL") is defined as the amount (if any) by which the aggregate losses from all passive activities for the taxable year exceed the aggregate income from all passive activities for such year. Code section 469(d)(1). Classification of an activity as passive will result in the income and expenses generated therefrom being treated as "passive" except to the extent that any of the income is "portfolio" income and except as otherwise provided in regulations. Code section 469(e)(1)(A). Portfolio income is income from, inter alia, interest, dividends, and royalties not derived in the ordinary course of a trade or business. Income that is neither passive nor portfolio is "net active income." Code section 469(e)(2)(B). With respect to the deductibility of PALs, individuals and personal service corporations will be entitled to deduct such amounts only to the extent of their passive income whereas closely held C corporations (other than personal service corporations) can offset PALs against both passive and net active income, but not against portfolio income. Code section 469(a)(1), (e)(2). In calculating passive income and loss, however, all activities of the taxpayer are aggregated. Code section 469(d)(1). PALs disallowed as a result of the above rules will be suspended and can be carried forward indefinitely to offset future passive (or passive and active, in the case of a closely held C corporation) income. Code section 469(b). Upon the disposition of an entire interest in a passive activity in a fully taxable transaction not involving a related party, any passive loss that was suspended by the provisions of the Code section 469 passive activity rules is deductible from either passive or non-passive income. The deduction must be reduced, however, by the amount of income or gain realized from the activity in previous years. As noted above, a passive activity includes an activity with respect to which the taxpayer does not "materially participate." A taxpayer will be considered as materially participating in a venture only if the taxpayer is involved in the operations of the activity on a "regular, continuous, and substantial" basis. Code section 469(h)(1). With respect to the determination as to whether a taxpayer's participation in an activity is material, temporary regulations issued by the Service provide that, except for limited partners in a limited partnership, an individual will be treated as materially participating in an activity if and only if (i) the individual participates in the activity for more than 500 hours during such year, (ii) the individual's participation in the activity for the taxable year constitutes substantially all of the participation in such activity of all individuals for such year, (iii) the individual participates in the activity for more than 100 hours during the taxable year, and such individual's participation in such activity is not less than the participation in the activity of any other individual for such year, (iv) the activity is a trade or business activity of the individual, the individual participates in the activity for more than 100 hours during such year, and the individual's aggregate participation in all significant participation activities of this type during the year exceeds 500 hours, (v) the individual materially participated in the activity for 5 of the last 10 years, or (vi) the activity is a personal service activity and the individual materially participated in the activity for any 3 preceding years. Temp. Treas. Reg. section 1.469-5T(a). Notwithstanding the above, and except as may be provided in regulations, Code section 469(h)(2) provides that no limited partnership interest will be treated as an interest with respect to which a taxpayer materially participates. The temporary regulations create several exceptions to this rule and provide that a limited partner will not be treated as not materially participating in an activity of the partnership of which he is a limited partner if the limited partner would be treated as materially participating for the taxable year under paragraph (a)(1), (5), or (6) of Temp. Treas. Reg. section 1.469-5T (as described in (i), (v), and (vi) of the above paragraph) if the individual were not a limited partner for such taxable year. Temp. Treas. Reg. section 1.469-5T(e). For purposes of this rule, a partnership interest of an individual will not be treated as a limited partnership interest for the taxable year if the individual is an Additional General Partner in the partnership at all times during the partnership's taxable year ending with or within the individual's taxable year. Id. B. General Partner Interests Due to the factual nature of the applicability of the material participation factors to an Additional General Partner's participation in the activities of the Partnership, we cannot express an opinion with respect to whether such participation will be material. However, the "working interest" exception to the passive activity rules applies without regard to the level of the taxpayer's participation. Nevertheless, the presence or absence of material participation may be relevant for purposes of determining whether the investment interest expense rules of Code section 163(d) apply to limit the deductibility of interest incurred in connection with any borrowings of an Additional General Partner. As noted above, the term "passive activity" does not include any working interest in any oil or gas property which the taxpayer holds directly or through an entity which does not limit the taxpayer's liability with respect to such interest. Temp. Treas. Reg. section 1.469-1T(e)(4)(v) describes an interest in an entity that limits a taxpayer's liability with respect to the drilling or operation of a well as (i) a limited partnership interest in a partnership in which the taxpayer is not a general partner, (ii) stock in a corporation, or (iii) an interest in any other entity that, under applicable state law, limits the interest holder's potential liability. For purposes of this provision, indemnification agreements, stop loss arrangements, insurance, or any similar arrangements or combinations thereof are not taken into account in determining whether a taxpayer's liability is limited. Id. The Joint Committee on Taxation's General Explanation of the Tax Reform Act of 1986 (the "Bluebook") indicates that a "working interest" is an interest with respect to an oil and gas property that is burdened with the cost of development and operation of the property, and that generally has characteristics such as responsibility for signing authorizations for expenditures with respect to the activity, receiving periodic drilling and completion reports and reports regarding the amount of oil extracted, voting rights proportionate to the percentage of the working interest possessed by the taxpayer, the right to continue activities if the present operator decides to discontinue operations, a proportionate share of tort liability with respect to the property and some responsibility to share in further costs with respect to the property in the event a decision is made to spend more than amounts already contributed. The Regulations define a working interest as "a working or operating mineral interest in any tract or parcel of land (within the meaning of section 1.612-4(a))." Treas. Reg. section 1.469-1(e)(4)(iv). Under Treas. Reg. section 1.614-2(b), an operating mineral interest is defined as a separate mineral interest as described in section 614(a), in respect of which the costs of production are required to be taken into account by the taxpayer for purposes of computing the limitation of 50 percent of the taxable income from the property in determining the deduction for percentage depletion computed under section 613, or such costs would be so required to be taken into account if the . . . well . . . were in the production stage. The term does not include royalty interests or similar interests, such as production payments or net profits interests. For the purpose of determining whether a mineral interest is an operating mineral interest, "costs of production" do not include intangible drilling and development costs, exploration expenditures under section 615, or development expenditures under section 616. Taxes, such as production taxes, payable by holders of nonoperating interests are not considered costs of production for this purpose. A taxpayer may not aggregate operating mineral interests and nonoperating mineral interests such as royalty interests. The Managing General Partner has represented that the Partnership will acquire and hold only operating mineral interests, as defined in Code section 614(d) and the regulations thereunder, and that none of the Partnership's revenues will be from non-working interests. To the extent that the Additional General Partners (in their capacity as general partners) have working interests in the activities of the Partnership for purposes of Code section 469, we are of the opinion that an Additional General Partner's interest in the Partnership (as a general partner) generally will not be considered a passive activity within the meaning of Code section 469 and losses generated while such general partner interest is held will not be limited by the passive activity provisions. Notwithstanding this general rule, however, if an Additional General Partner interest is converted to a limited partner interest prior to the spudding date, but after the end of the taxable year in which IDC was incurred, IDC will be subject to the passive activity rules. See Treas. Reg. section 1.469-1T(e)(4). In addition, that portion of Partnership gross income for such prior taxable year attributable to IDC treated as passive loss will be considered passive income. The "spudding date" is the date that drilling commences. Notwithstanding the above, there can be no assurance that the Service will not contend that all general partner interests should be regarded as interests in a passive activity from the Partnership's inception due to the conversion feature contained in the Partnership Agreement. However, due to the exposure to unlimited liability for Partnership obligations incurred prior to such conversion, an attack by the Service with respect to the foregoing should not be successful. In addition, Temp. Treas. Reg. section 1.469-1T(e)(4)(iii), example (1), respect the nature of a general partnership interest prior to its conversion into limited partnership form: A, a calendar year individual, acquires on January 1, 1987, a general partnership interest in P, a calendar year partnership that holds a working interest in an oil or gas property. Pursuant to the partnership agreement, A is entitled to convert the general partnership interest into a limited partnership interest at any time. On December 1, 1987, pursuant to a contract with D, an independent drilling contractor, P commences drilling a single well pursuant to the working interest. Under the drilling contract, P pays D for the drilling only as the work is performed. All drilling costs are deducted by P in the year in which they are paid. At the end of 1987, A converts the general partnership interest into a limited partnership interest, effective immediately. The drilling of the well is completed on February 28, 1988. Since, in the example, A holds the working interest through an entity that does not limit A's liability throughout 1987 and through an entity that does limit A's liability in 1988, the example in the regulation concludes that A's interest in P's well is not an interest in a passive activity for 1987 but is an interest in a passive activity for 1988. If an Additional General Partner converts his interest to a Limited Partner interest pursuant to the terms of the Partnership Agreement, the character of a subsequently generated tax attribute will be dependent upon, inter alia, the nature of the tax attribute and whether there arose, prior to conversion, losses to which the working interest exception applied. Assuming the activities of a converting partner will not result in the Partner's being treated as materially participating under Temp. Treas. Reg. section 1.469-5T(a)(1), (5), or (6), as described above, the Limited Partner's activity after conversion should be treated as a passive activity. Code section 469(c)(1). Accordingly, any loss arising therefrom should be treated as a PAL under Code section 469(d), with the benefits thereof limited by Code section 469(a)(1), as described above. However, Code section 469(c)(3)(B) provides that, if a taxpayer has any loss from any taxable year from a working interest in any oil or gas property that is treated as a non-passive loss, then any net income from such property for any succeeding taxable year is to be treated as income that is not from a passive activity. Consequently, assuming that a converting Additional General Partner has losses from working interests which are treated as non-passive, income from the Partnership allocable to the Partner after conversion would be treated as income that is not from a passive activity. C. Limited Partner Interests If an Investor Partner (other than an Additional General Partner who converts his interest into that of a Limited Partner) invests in the Partnership as a Limited Partner, in the opinion of counsel, his distributive share of the Partnership's losses will be treated as PALs, the availability of which will be limited to the Partner's passive income for such year. If the Partner does not have sufficient passive income to utilize the PAL, the disallowed PAL will be suspended and may be carried forward (but not back) to be deducted against passive income arising in future years. Further, upon the complete disposition of the interest to an unrelated party, in a fully taxable transaction such suspended losses will be available, as described above. Regarding Partnership income, Limited Partners should generally be entitled to offset their distributive shares of such income with deductions from other passive activities, except to the extent such Partnership income is portfolio income. Since gross income from interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business is not passive income, a Limited Partner's share of income from royalties, income from the investment of the Partnership's working capital, and other items of portfolio income will not be treated as passive income. In addition, Code section 469(l)(3) grants the Secretary of the Treasury the authority to prescribe regulations requiring net income or gain from a limited partnership or other passive activity to be treated as not from a passive activity. D. Publicly Traded Partnerships Notwithstanding the above, Code section 469(k) treats net income from PTPs as portfolio income under the PAL rules. Further, each partner in a PTP is required to treat any losses from a PTP as separate from income and loss from any other PTP and also as separate from any income or loss from passive activities. Id. Losses attributable to an interest in a PTP that are not allowed under the passive activity rules are suspended and carried forward, as described above. Further, upon a complete taxable disposition of an interest in a PTP, any suspended losses are allowed (as described above with respect to the passive loss rules). As noted above, we have opined that the Partnership will not be a PTP. In the event the Partnership were treated as a PTP, any net income would be treated as portfolio income and each Partner's loss therefrom would be treated as separate from income and loss from any other PTP and also as separate from any income or loss from passive activities. Since the Partnership should not be treated as a PTP, the provisions of Code section 469(k), in our opinion, will not apply to the Partners in the manner outlined above prior to the time that such Partnership becomes a PTP. However, unlike the PTP rules of Code section 7704, the passive activity rules of Code section 469 do not provide an exception for partnerships that pass the 90% test of Code section 7704. Accordingly, if the Partnership were to be treated as a PTP under the passive activity rules, passive losses could be used only to offset passive income from the Partnership. CONVERSION OF INTERESTS Code section 708 provides that a partnership will be considered as terminated for federal income tax purposes if, inter alia, there is "a sale or exchange of 50 percent or more of the total interest in partnership capital and profits" within a 12 month period. If a conversion of an Additional General Partner's interest into a Limited Partner interest were treated as a "sale or exchange" for purposes of Code section 708, the Partnership would be terminated for federal income tax purposes if 50% or more of the profits and capital interests in the Partnership were sold or exchanged within a 12 month period. In Rev. Rul. 84-52, 1984-1 C.B. 157, the Service ruled that the conversion of a general partnership interest into a limited partnership interest in the same partnership will not give rise to the recognition of gain or loss under Code section 741 or section 1001. The holding of Rev. Rul. 84-52 was confirmed in Rev. Rul. 95-37, 1995-1 C.B. 130. The ruling noted that, under Code section 721, no gain or loss is recognized by a partnership or any of its partners upon the contribution of property to the partnership in exchange for an interest therein. Consequently, the partnership will not be terminated under Code section 708 since (i) the business of the partnership will continue after the conversion and (ii) pursuant to Treas. Reg. section 1.708-1(b)(1)(ii) a transaction governed by Code section 721 is not treated as a sale or exchange for purposes of Code section 708. Assuming that Rev. Rul. 84-52, supra, is not overruled, revoked, or modified, the Partnership, in our opinion, will not be terminated under Code section 708 solely as a result of the conversion of Partnership interests. Code section 752(b) treats any decrease in a partner's share of partnership liabilities as a distribution of money to the partner by the partnership. If, under the applicable regulatory or statutory provisions, a converting partner's share of liabilities is deemed to decrease, such decrease will result in gain to the partner to the extent it exceeds the partner's basis in his partnership interest. Code section 1245(a) provides that, inter alia, when Code section 1245 property is disposed of, the amount by which the lower of (i) the property's recomputed basis or (ii) the amount realized (on the sale, exchange, or involuntary conversion) of the property or the fair market value (on any other disposition) of the property exceeds the property's adjusted basis is to be treated as ordinary income. Code section 1245(b)(3) provides that, if the basis of the property in the hands of the transferee is determined by reference to its basis in the hands of the transferor by reason of, inter alia, Code section 721, then the gain taken into account for purpose of Code section 1245(a) is not to exceed the gain taken into account by the transferor of such property (without regard to Code section 1245(b)). To the extent the conversion of General Partner interests to Limited Partner interests is governed by Code section 721, the converting Partner will only be required to include in ordinary income the amount of gain he otherwise would recognize with respect to the "Section 1245" property attributable to him. Code section 1254(a) provides, in part, that when a property is disposed of, the taxpayer must recapture as ordinary income any gain on disposition in an amount equal to the aggregate of amounts deductible as IDC, in excess of the amount deductible without regard to Code section 263, and depletion. Code section 1254 (a) (1). Code section 1254(b) provides that rules similar to the rules of subsections (b) and (c) of Code section 1245 are to be applied for purposes of Code section 1254. Consequently, to the extent that a Partner could recognize ordinary income under Code section 1245 upon conversion, the Partner could also recognize ordinary income under Code section 1254. Losses arising from the holding of working interests in oil and gas properties directly or through an entity that does not limit the holder's liability are not subject to the passive loss rules. Temporary and Proposed Regulations provide that, if the form of ownership is converted from a type that does not limit liability to a type that does limit liability, the portion of any losses (including those arising from the deduction of IDC) attributable to services or materials which have not yet been provided at the time of such conversion will constitute losses from a passive activity. Thus, in our opinion, if a Partner were to convert his general partner interest to that of a limited partner prior to the time that all of the services or materials comprising the IDC of a well had been provided, at the time of the conversion such services and materials will constitute losses from a passive activity and be subject to the passive loss limitations. Similarly in such a situation, a portion of the income from the well would constitute passive income. If the conversion were to occur after the filing of the Partnership's information tax return but prior to the completion of the drilling and development of a well, an amended return might have to be filed, which might also require the Investors to file amended returns. Further, the Code provides that if a taxpayer has any loss attributable to a working interest which is treated in any taxable year as a loss which is not from a passive activity, then any net income attributable to the working interest in any succeeding taxable year is treated as income of the taxpayer which is not from a passive activity. Accordingly, if an Additional General Partner converts his interest into a Limited Partner interest, any income from that interest with respect to which he claimed deductions will be treated as nonpassive income. ALTERNATIVE MINIMUM TAX For taxable years beginning after December 31, 1992, Code section 55 imposes on noncorporate taxpayers a two-tiered, graduated rate schedule for alternative minimum tax ("AMT") equal to the sum of (i) 26% of so much of the "taxable excess" as does not exceed $175,000, plus (ii) 28% of so much of the "taxable excess" as exceeds $175,000. Code section 55(b)(1)(A)(i). "Taxable excess" is defined as so much of the alternative minimum taxable income ("AMTI") for the taxable year as exceeds the exemption amount. Code section 55(b)(1)(A)(ii). AMTI is generally defined as the taxpayer's taxable income, increased or decreased by certain adjustments and items of tax preference. Code section 55(b)(2). The exemption amount for noncorporate taxpayers is (i) $45,000 in the case of a joint return or a surviving spouse, (ii) $33,750 in the case of an individual who is not a married individual or a surviving spouse, and (iii) $22,500 in the case of a married individual who files a separate return or an estate or trust. Such amounts are phased out as a taxpayer's AMTI increases above certain levels. Code section 55(d)(1) and (3). The corporate AMT is similar to that of the individual AMT, with the corporation's regular taxable income increased or decreased by certain adjustments and items of tax preference, resulting in AMTI. The AMTI is reduced by $40,000 (which amount is phased-out as AMTI increases from $150,000 to $310,000) with the balance being taxed at twenty percent (20%). Code section 55(b), (d). The excess of this figure over the regular tax liability is the AMT. Individuals subject to the AMT are generally allowed a credit, equal to the portion of the AMT imposed by Code section 55 arising as a result of deferral preferences (or, with certain adjustments, equal to the entire AMT in the case of corporate AMT for use against the taxpayer's future regular tax liability (but not the minimum tax liability). Code section 53. Under the AMT provisions, adjustments and items of tax preference that may arise from a Partner's acquisition of an interest in the Partnership include the following: 1. Taxpayers which do not meet the definition of an integrated oil company as defined in Code section 291(b)(4) are not subject to the preference item for "excess IDC." Code section 57(a)(2)(E)(i). The benefit of the elimination of the preference is limited in any taxable year to an amount equal to 40 percent of the alternative minimum taxable income for the year computed as if the prior law "excess IDC" preference item has not been eliminated. Code section 57(a)(2)(E)(ii). Excess IDC is defined as the excess of (i) IDC paid or incurred (other than costs incurred in drilling a nonproductive well) with respect to which a deduction is allowable under Code section 263(c) for the taxable year over (ii) the amount which would have been allowable for the taxable year if such costs had been capitalized and (I) amortized over a 120 month period beginning with the month in which production from such well begins or (II) recovered through cost depletion. Code section 57(a)(2)(B). However, any portion of the IDC to which an election under Code section 59(e) applies will not be treated as an item of tax preference under Code section 57(a). Code section 59(e)(6). With respect to IDC paid or incurred, corporate and individual taxpayers are allowed to make the Code section 59(e) election and, for regular tax and AMT purposes, deduct such expenditures over the 60 month period beginning with the month in which such expenditure is paid or incurred. Code section 59(e)(1). 2. Excess depletion constitutes a preference only in the case of integrated oil companies. Code section 57(a)(1). 3. Each Partner's AMTI will be increased (or decreased) by the amount by which the depreciation deductions allowable under Code sections 167 and 168 with respect to such property exceeds (or is less than) the depreciation determined under the alternative depreciation system using the one hundred fifty percent (150%) declining balance method switching to the straight-line method, when that produces a greater deduction, in lieu of the straight-line method otherwise prescribed by the ADS. Code section 56(a)(1). No ACE depreciation adjustment is necessary with respect to a corporate Partner for property placed in service in taxable years beginning after December 31, 1993. Code section 56(g)(4)(A)(i). 4. AMTI for a corporate Partner will be increased by seventy-five percent (75%) of the excess of the taxpayer's "adjusted current earnings" ("ACE") over the AMTI amount (computed without the ACE adjustment and without the net operating loss deduction). Code section 56(g)(1). As noted above, both corporate and individual taxpayers may elect this method of amortization for regular tax purposes. For years beginning after December 31, 1992, for corporations other than integrated oil companies, the ACE adjustments for percentage depletion and IDC are repealed. Code sections 56(g)(4)(F) and (D)(i), respectively. The IDC modification applies to IDCs paid or incurred in taxable years beginning after December 31, 1992. Due to the inherently factual nature of the applicability of the AMT to a Partner, we are unable to express an opinion with respect to such issues. Due to the potentially significant impact of a purchase of Units on an Investor's tax liability, investors should discuss the implications of an investment in the Partnership on their regular and AMT liabilities with their tax advisors prior to acquiring Units. GAIN OR LOSS ON SALE OF PROPERTIES Gain from the sale or other disposition of property is realized to the extent of the excess of the amount realized therefrom over the property's adjusted basis; conversely, loss is realized in an amount equal to the excess of the property's adjusted basis over the amount realized from such a disposition. Code section 1001(a). The amount realized is defined as the sum of any money received plus the fair market value of the property (other than money) received. Code section 1001(b). Accordingly, upon the sale or other disposition of the Partnership properties, the Partners will realize gain or loss to the extent of their pro rata share of the difference between the Partnership's adjusted basis in the property at the time of disposition and the amount realized upon disposition. In the absence of nonrecognition provisions, any gain or loss realized will be recognized for federal income tax purposes. Gain or loss recognized upon the disposition of property used in a trade or business and held for more than one year will be treated as long term capital gain or as ordinary loss. Code section 1231(a). Notwithstanding the above, however, any gain realized may be taxed as ordinary income under one of several "recapture" provisions of the Code or under the characterization rules relating to "dealers" in personal property. Code section 1254 generally provides for the recapture of capital gains, arising from the sale of property which was placed in service after 1986, as ordinary income to the extent of the lesser of (i) the gain realized upon sale of the property, or (ii) the sum of (I) all IDC previously deducted and (II) all depletion deductions that reduced the property's basis. Code section 1254(a)(1). Ordinary income may also result from the recapture, pursuant to Code section 1245, of depreciation on the Partnership properties. Such recapture is the amount by which (i) the lower of (I) the recomputed basis of the property, or (II) the amount realized on the sale of the property exceeds (ii) the property's adjusted basis. Code section 1245(a)(1). Recomputed basis is generally the property's adjusted basis increased by depreciation and amortization deductions previously claimed with respect to the property. Code section 1245(a)(2). Unrecaptured section 1250 gain may result from the recapture of depreciation related to the sale of the Partnership's section 1250 property held for more than one year. Code section 1(h)(7). Currently, unrecaptured section 1250 gain is taxed at a rate of 25%. Code section 1(h)(1)(D). GAIN OR LOSS ON SALE OF UNITS If the Units are capital assets in the hands of the Partners, gain or loss realized by any such holders on the sale or other disposition of a Unit will be characterized as capital gain or capital loss. Code section 1221. Such gain or loss will be a long term capital gain or loss if the Unit is held for more than one year and short term capital gain if held one year or less. However, the portion of the amount realized by a Partner in exchange for a Unit that is attributable to the Partner's share of the Partnership's "unrealized receivables" or "inventory items" will be treated as an amount realized from the sale or exchange of property other than a capital asset. Code section 751. Unrealized receivables are defined in Code section 751(c) to include ". . . oil [or] gas . . . property . . . to the extent of the amount which would be treated as gain to which section . . . 1245(a) . . . or 1254(a) would apply if . . . such property had been sold by the partnership at its fair market value." A sale by the Partnership of the Partnership's properties could give rise to treatment of the gain thereunder as ordinary income as a result of Code sections 1245(a) or 1254(a). Accordingly, gain recognized by a Partner on the sale of a Unit would be taxed as ordinary income to the Partner to the extent of his share of the Partnership's gain on property that would be recaptured, upon sale, under those statutes. Property treated as an "inventory item" for purposes of Code section 751 includes (i) stock in trade of the partnership or other property of a kind which would properly be included in its inventory if on hand at the end of the taxable year, (ii) property held by the partnership primarily for sale to customers in the ordinary course of its trade or business, and (iii) any other partnership property which would constitute neither a capital asset nor property used in a trade or business under Code section 1231. Code sections 751(d)(2) and 1221(a)(1). Under the aforementioned provisions, a Partner would recognize ordinary income with respect to any deemed sale of assets under Code section 751; further, this ordinary income may be recognized even if the total amount realized on the sale of a Unit is equal to or less than the Partner's basis in the Unit. Any partner who sells or exchanges interests in a partnership holding unrealized receivables (which include IDC recapture and other items) or certain inventory items must notify the partnership of such transaction in accordance with Regulations under Code section 6050K and must attach a statement to his tax return reflecting certain facts regarding the sale or exchange. Regulations promulgated by the service provide that such notice to the partnership must be given in writing within 30 days of the sale or exchange (or, if earlier, by January 15 of the calendar year following the calendar year in which the exchange occurred), and must include names, addresses, and taxpayer identification numbers (if known) of the transferor and transferee and the date of the exchange. Code section 6722 provides that persons who fail to furnish this information to the partnership will be penalized $50 for each such failure, or, if such failure is due to intentional disregard to the filing requirement, the person will be penalized the greater of (i) $100 or (ii) 10% of the aggregate amount to be reported. Furthermore, a partnership is required to notify the Service of any sale or exchange of interests of which it has notice, and to report the names and addresses of the transferee and the transferor, along with all other required information. The partnership also is required to provide copies of the information it provides to the Service to the transferor and the transferee. The tax consequences to an assignee purchaser of a Unit from a Partner are not described herein. Any assignor of a Unit should advise his assignee to consult his own tax advisor regarding the tax consequences of such assignment. PARTNERSHIP DISTRIBUTIONS Under the Code, any increase in a partner's share of partnership liabilities, or any increase in such partner's individual liabilities by reason of an assumption by him of partnership liabilities is considered to be a contribution of money by the partner to the partnership. Similarly, any decrease in a partner's share of partnership liabilities or any decrease in such partner's individual liabilities by reason of the partnership's assumption of such individual liabilities will be considered as a distribution of money to the partner by the partnership. Code section 752(a), (b). The Partners' adjusted bases in their Units will initially consist of the cash they contribute to the Partnership. Their bases will be increased by their share of Partnership income and additional contributions and decreased by their share of Partnership losses and distributions. To the extent that such actual or constructive distributions are in excess of a Partner's adjusted basis in his Partnership interest (after adjustment for contributions and his share of income and losses of the Partnership), that excess will generally be treated as gain from the sale of a capital asset. In addition, gain could be recognized to a distributee partner upon the disproportionate distribution to a partner of unrealized receivables, substantially appreciated inventory or, in some cases, Code 731 (c) marketable securities, i.e., actively traded financial instruments, foreign currencies or interests in certain defined properties. Further, the Partnership Agreement prohibits distributions to any Investor Partner to the extent such would create or increase a deficit in the Partner's Capital Account. PARTNERSHIP ALLOCATIONS Allocations - General. Generally, a partner's taxable income is increased or decreased by his ratable share of partnership income or loss. Code section 701. However, the availability of these losses may be limited by the at risk rules of Code section 465, the passive activity rules of Code section 469, and the adjusted basis provisions of Code section 704(d). Code section 704(b) provides that if a partnership agreement does not provide for the allocation of each partner's distributive share of partnership income, gain, loss, deduction, or credit, or if the allocation of such items under the partnership agreement lacks "substantial economic effect," then each partner's share of those items must be allocated "in accordance with the partner's interest in the partnership." As discussed below, regulations under Code section 704(b) define substantial economic effect and prescribe the manner in which partners' capital accounts must be maintained in order for the allocations contained in the partnership agreement to be respected. Notwithstanding these provisions, special rules apply with respect to nonrecourse deductions since, under the Regulations, allocations of losses or deductions attributable to nonrecourse liabilities cannot have economic effect. The Service may contend that the allocations contained in the Partnership Agreement do not have substantial economic effect or are not in accordance with the Partners' interests in the Partnership and may seek to reallocate these items in a manner that will increase the income or gain or decrease the deductions allocable to a Partner. We are of the opinion that, to the extent provided herein, if challenged by the Service on this matter, the Partners' distributive shares of partnership income, gain, loss, deduction, or credit will be determined and allocated substantially in accordance with the terms of the Partnership Agreement to have substantial economic effect. Substantial Economic Effect. Although a partner's share of partnership income, gain, loss, deduction, and credit is generally determined in accordance with the partnership agreement, this share will be determined in accordance with the partner's interest in the partnership (determined by taking into account all facts and circumstances) and not by the partnership agreement if the partnership allocations do not have "substantial economic effect" and if the allocations are not respected under the nonrecourse deduction provisions of the regulations. Code section 704(b); Treas. Reg. sections 1.704-1(b)(2)(i), 1.704-2. Treasury regulations provide that: In order for an allocation to have economic effect, it must be consistent with the underlying economic arrangement of the partners. This means that in the event there is an economic benefit or economic burden that corresponds to an allocation, the partner to whom the allocation is made must receive such economic benefit or bear such economic burden. Treas. Reg. section 1.704-1(b)(2)(ii). The regulations further provide that an allocation will have economic effect only if, throughout the full term of the partnership, the partnership agreement provides (i) for the determination and maintenance of partner's capital accounts in accordance with specified rules contained therein, (ii) upon liquidation of the partnership or a partner's interest in the partnership, liquidating distributions are required to be made in accordance with the positive capital account balances of the partners after taking into account all capital account adjustments for the taxable year of the liquidation, and (iii) either (I) a partner with a deficit balance in his capital account following the liquidation is unconditionally obligated to restore the amount of such deficit balance to the partnership by the end of the taxable year of liquidation, or (II) the partnership agreement contains a qualified income offset ("QIO") provision as provided in Treas. Reg. section 1.704-1(b)(2)(ii)(d). Treas. Reg. sections 1.704-1(b)(2)(ii)(b) and 1.704-1(b)(2)(ii)(d). The capital account maintenance rules generally mandate that each partner's capital account be increased by (i) money contributed by the partner to the partnership, (ii) the fair market value (net of liabilities) of property contributed by the partner to the partnership, and (iii) allocations to the partner of partnership income and gain. Further, such capital account must be decreased by (i) money distributed to the partner from the partnership, (ii) the fair market value (net of liabilities) of property distributed to the partner from the partnership, and (iii) allocations to the partner of partnership losses and deductions. Treas. Reg. section 1.704-1(b)(2)(iv). Treas. Reg. section 1.704-1(b)(2)(iii) provides that an economic effect of an allocation is "substantial" if there is a reasonable possibility that the allocation will affect substantially the dollar amounts to be received by the partners from the partnership, independent of tax consequences. The economic effect of an allocation is not substantial if: at the time the allocation becomes part of the partnership agreement, (1) the after-tax economic consequences of at least one partner may, in present value terms, be enhanced compared to such consequences if the allocation (or allocations) were not contained in the partnership agreement, and (2) there is a strong likelihood that the after-tax economic consequences of no partner will, in present value terms, be substantially diminished compared to such consequences if the allocation (or allocations) were not contained in the partnership agreement. In determining the after-tax economic benefit or detriment to a partner, tax consequences that result from the interaction of the allocation with such partner's tax attributes that are unrelated to the partnership will be taken into account. Treas. Reg. section 1.704-1(b)(2)(iii)(a). While the Service stated that it will not rule on whether an allocation provision in a partnership agreement has substantial economic effect, several Technical Advice Memoranda ("TAMs") shed light on the Service's position on such matter. Notwithstanding the potential similarity between TAM and a taxpayer's particular fact pattern, it should be noted that TAMs may not be used or cited as precedent. Code section 6110(k)(3), Treas. Reg. sections 301.6110-2(a) and -7(b). Nevertheless, TAMs do serve to illustrate the Service's position on certain specific cases. The TAMs relating to substantial economic effect focus on the tax avoidance purpose of any such above-described allocations and on the partnership plan for distributions upon liquidation. Illustrative of the Service's approach is TAM 8008054, in which the Service concluded that an allocation to the partners solely of items that the partnership had elected to expense (IDC) had as its principal purpose tax avoidance. The Service suggested that, had the allocation affected the parties' liquidation rights, the allocation would have had substantial economic effect: "In general, substantial economic effect has been found where all allocations of items of income, gain, loss, deduction or credit increase or decrease the respective capital accounts of the partners and distribution of assets made upon liquidation is made in accordance with capital accounts." The ruling noted that the investors "should have been allocated their share of costs over the intangible drilling costs." Id. The question whether economic effect is "substantial" is one of fact which may depend in part on the timing of income and deductions and on consideration of the investors' tax attributes unrelated to their investment in Units, and thus is not a question upon which a legal opinion can ordinarily be expressed. However, to the extent the tax brackets of all Partners do not differ at the time the allocation becomes part of the partnership agreement, the economic effect of the allocation provisions should be considered to be substantial. Code section 613A(c)(7)(D) requires that the basis of oil and gas properties owned by a partnership be allocated to the partners in accordance with their interests in the capital or income of the partnership. Final Regulations issued under Code section 613A(c)(7)(D) indicate that such basis must be allocated in accordance with the partners' interests in the capital of the partnership if their interests in partnership income vary over the life of the partnership for any reason other than for reasons such as the admission of a new partner. Treas. Reg. section 1.613A-3(e)(2). The terms "capital" and "income" are not defined in the Code or in the Regulations under Code section 613A. The Regulations under Code section 704 indicate that if all partnership allocations of income, gain, loss, and deduction (or items thereof) have substantial economic effect, an allocation of the adjusted basis of an oil or gas property among the partners will be deemed to be made in accordance with the partners' interests in partnership capital or income and will accordingly be recognized. Pursuant to the Partnership Agreement, (i) allocations will be made as mandated by the Regulations, (ii) liquidating distributions will be made in accordance with positive capital account balances, and (iii) a "qualified income offset" provision applies. However, while capital will be owned 78.125% by the Investor Partners and 21.875% by the Managing General Partner, IDC will be allocated 100% to the Investor Partners and other tax items will be allocated 80% to the Investor Partners. Except with respect to those excess allocations, under the Partnership Agreement the basis in oil and gas properties will be allocated in proportion to each Partner's respective share of the costs which entered into the Partnership's adjusted basis for each depletable property. Such allocations of basis appear reasonable and in compliance with the Regulations under Code section 704. Nevertheless, the Service may contend that the allocation to the Investors of IDC (100%) in excess of their capital contributions (78.125%) or the allocation to the Managing General Partner of other tax items (100% ranging to 0% upon the occurrence of certain events) in excess of its capital contribution (21.875%) is invalid and may reallocate such excess IDC or other items to the other Partners. Any such reallocation could increase an Investor Partner's tax liability. However, no assurance can be given, and we are unable to express an opinion, as to whether any special allocation of an item which is dependent upon basis in an oil and gas property will be recognized by the Service. Allocation and Distribution Shifts. Section 3.02(a) of the Partnership Agreement provide that the Managing General Partner will subordinate up to 50% of its 20% share of Partnership cash distributions so that the Investor Partner might receive cash distributions equal to a minimum of 12.8% per year of their Subscriptions on a cumulative basis for the first five years of Partnership well operations. Section 4.02(b)(i) of the Partnership Agreement provides for a corresponding shift in the allocation of Partnership income. Nonrecourse Deductions. As noted above, an allocation of loss or deduction attributable to nonrecourse liabilities of a partnership cannot have economic effect because the creditor alone bears any economic burden that corresponds to such an allocation. Thus, nonrecourse deductions must be allocated in accordance with the partners' interests in the partnership. Treas. Reg. section 1.704-2(b)(1). Nonrecourse deduction allocations will be deemed to be made in accordance with partners' partnership interests if, and only if, four requirements are satisfied. First, the partners' capital accounts must be maintained properly and the distribution of liquidation proceeds must be in accordance with the partners' capital account balances. Second, beginning in the first taxable year in which there are nonrecourse deductions, and thereafter throughout the full term of the partnership, the partnership agreement must provide for allocation of nonrecourse deductions among the partners in a manner that is reasonably consistent with allocations, which have substantial economic effect, of some other significant partnership item attributable to the property securing nonrecourse liabilities of the partnership. Third, beginning in the first taxable year of the partnership in which the partnership has nonrecourse deductions or makes a distribution of proceeds of a nonrecourse liability that are allocable to an increase in minimum gain, and thereafter throughout the full term of the partnership, the partnership agreement contains a "minimum gain chargeback." A partnership agreement contains a "minimum gain chargeback" if, and only if, it provides that, subject to certain exceptions, in the event there is a net decrease in partnership minimum gain during a partnership taxable year, the partners must be allocated items of partnership income and gain for that year equal to each partner's share of the net decrease in partnership minimum gain during such year. A partner's share of the net decrease in partnership minimum gain is the amount of the total net decrease multiplied by the partner's percentage share of the partnership's minimum gain at the end of the immediately preceding taxable year. A partner's share of any decrease in partnership minimum gain resulting from a revaluation of partnership property (which would not cause a minimum gain chargeback) equals the increase in the partner's capital account attributable to the revaluation to the extent the reduction in minimum gain is caused by such revaluation. Similar rules apply with regard to partner nonrecourse liabilities and associated deductions. The fourth requirement of the nonrecourse allocation test provides that all other material allocations and capital account adjustments under the partnership agreement must be recognized under the general allocation requirements of the regulations under Code section 704(b). Under the Regulations, partners generally share nonrecourse liabilities in accordance with their interests in partnership profits. However, the Regulations generally require that nonrecourse liabilities be allocated among the partners first to reflect the partners' share of minimum gain and Code section 704(c) minimum gain. Any remaining nonrecourse liabilities are generally to be allocated in proportion to the partner's interests in partnership profits. The Partnership Agreement, at Section 3.02, contains a minimum gain chargeback. Further, the Partnership Agreement provides for the allocation of nonrecourse liabilities and deductions attributable thereto among the Partners first, in accordance with their respective shares of partnership minimum gain (within the meaning of Treas. Reg. section 1.704-2(b)(2); second, to the extent of each such Partner's gain under Code section 704(c) if the Partnership were to dispose of (in a taxable transaction) all Partnership property subject to one or more nonrecourse liabilities of the Partnership in full satisfaction of such liabilities and for no other consideration; and third, in accordance with the Partners' proportionate shares in the Partnership's excess nonrecourse liabilities of the Partnership. Treas. Reg. section 1.752-3. For this purpose, the Partnership Agreement provides for the allocation of excess nonrecourse liabilities of 80% to the Investor Partners and 20% to the Managing General Partner. Retroactive Allocations. To prevent retroactive allocations of partnership tax attributes to partners entering into a partnership late in the tax year, Code section 706(d) provides that a partner's distributive share of such attributes is to be determined by the use of methods prescribed by the Treasury Secretary which take into account the varying interests of the partners during the taxable year. The Partnership Agreement, at Section 3.04(c), provides that each Partner's allocation of tax items other than "allocable cash basis items" is to be determined under a method permitted by Code section 706(d) and the regulations thereunder. With respect to "allocable cash basis items," Section 3.04(c) requires an allocation in accordance with the requirements of Code section 706(d). Accordingly, the Partnership allocations should be considered to be in accordance with the provisions of Code section 706(d). PROFIT MOTIVE The existence of economic, nontax motives for entering into the Transaction is essential if the Partners are to obtain the tax benefits associated with an investment in the Partnership. Code section 183(a) provides that where an activity entered into by an individual is not engaged in for profit, no deduction attributable to that activity will be allowed except as provided therein. Should it be determined that a Partner's activities with respect to the Transaction fall within the "not for profit" ambit of Code section 183, the Service could disallow all or a portion of the deductions and credits generated by the Partnership's activities. Code section 183(d) generally provides for a presumption that an activity is entered into for profit within the meaning of the statute where gross income from the activity exceeds the deductions attributable to such activity for three or more of the five consecutive taxable years ending with the taxable year in question. At the taxpayer's election, such presumption can relate to three or more of the taxable years in the 5-year period beginning with the taxable year in which the taxpayer first engages in the activity. Temp. Treas. Reg. section 12.9. Whether an activity is engaged in for profit is determined under Code 162 (relating to trade or business deductions) and 212(1) and (2) (relating to income producing deductions) except insofar as the above-described presumption applies. Treas. Reg. section 1.183-1(a). To establish that he is engaged in either a trade or business or an income producing activity, a Partner must be able to prove that he is engaged in the Transaction with an "actual and honest profit objective," Fox v. Commissioner, 80 T.C. 972, 1006 (1983), aff'd sub nom., Barnard v. Commissioner, 731 F.2d 230 (4th Cir. 1984), and that his profit objective is bona fide. Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965), aff'd, 379 F.2d 252 (2d Cir. 1967), cert. denied, 389 U.S. 931 (1967). The inquiry turns on whether the primary purpose and intention of the Partner in engaging in the activity is, in fact, to make a profit apart from tax considerations. Hager v. Commissioner, 76 T.C. 759, 784. Such objective need not be reasonable, only honest, and the question of objective is to be determined from all the facts and circumstances. Sutton v. Commissioner, 84 T.C. 210 (1985), aff'd, 788 F.2d 695 (11th Cir. 1986). Among the factors that will normally be considered are: (i) the manner in which the taxpayer carries on the activity, (ii) the expertise of the taxpayer or his advisors, (iii) the time and effort expended by the taxpayer in carrying on the activity, (iv) whether an expectation exists that the assets used in the activity may appreciate in value, (v) the success of the taxpayer in carrying on similar or dissimilar activities, (vi) the taxpayer's history of income or losses with respect to the activity, (vii) the amount of occasional profits, if any, which are earned, and (viii) the financial status of the taxpayer. Treas. Reg. section 1.183-2(b). Where application of such factors to a particular activity is difficult, however, the Court will consider the totality of the circumstances instead. Estate of Baron v. Commissioner, 83 T.C. 542 (1984), aff'd, 798 F.2d 65 (2d Cir. 1986). As noted, the issue is one of fact to be resolved not on the basis of any one factor but on the basis of all the facts and circumstances. Treas. Reg. section 1.183-2(b). Greater weight is given to objective facts than the parties' mere statements of their intent. Siegel v. Commissioner, 78 T.C. 659, Engdahl v. Commissioner, 72 T.C. 659 (1979). Nevertheless, the Courts have recognized, in applying Code 183, that "a taxpayer has the right to engage in a venture which has economic substance even though his motivation in the early years of the venture may have been to obtain a deduction to offset taxable income." Lemmen v. Commissioner, 77 T.C. 1326, 1346 (1981), acq., 1983-1 C.B. 1. Due to the inherently factual nature of a Partner's intent and motive in engaging in the Transaction, we do not express an opinion as to the ultimate resolution of this issue in the event of a challenge by the Service. Partners must, however, seek to make a profit from their activities with respect to the Transaction beyond any tax benefits derived from those activities or risk losing those tax benefits. TAX AUDITS Subchapter C of Chapter 63 of the Code provides that administrative proceedings for the assessment and collection of tax deficiencies attributable to a partnership must be conducted at the partnership, rather than the partner, level. Partners will be required to treat Partnership items of income, gain, loss, deduction, and credit in a manner consistent with the treatment of each such item on the Partnership's returns unless such Partner files a statement with the Service identifying the inconsistency. If the Partnership is audited, the tax treatment of each item will be determined at the Partnership level in a unified partnership proceeding. Conforming adjustments to the Partners' own returns will then occur unless such partner can establish a basis for inconsistent treatment (subject to waiver by the Service). PDC will be designated the "tax matters partner" ("TMP") for the Partnership and will receive notice of the commencement of a Partnership proceeding and notice of any administrative adjustments of Partnership items. The TMP is entitled to invoke judicial review of administrative determinations and to extend the period of limitations for assessment of adjustments attributable to Partnership items. Each Partner will receive notice of the administrative proceedings from the TMP and will have the right to participate in the administrative proceeding pursuant to tax requirements of Treas. Reg. section 301.6223(g) unless the Partner waives such rights. The Code provides that, subject to waiver, partners will receive notice of the administrative proceedings from the Service and will have the right to participate in the administrative proceedings. However, the Code also provides that if a partnership has 100 or more partners, the partners with less than a 1% profits interest will not be entitled to receive notice from the Service or participate in the proceedings unless they are members of a "notice group" (a group of partners having in the aggregate a 5% or more profits interest in the partnership that requires the Service to send notice to the group and that designates one of their members to receive notice). Any settlement agreement entered into between the Service and one or more of the partners will be binding on such partners but will not be binding on the other partners, except that settlement by the TMP may be binding on certain partners, as described below. The Service must, on request, offer consistent settlement terms to the partners who had not entered into the earlier settlement agreement. If a partnership has more than 100 partners, the TMP is empowered under the Code to enter into binding settlement agreements on behalf of the partners with a less than 1% profits interest unless the partner is a member of a notice group or notifies the Service that the TMP does not have the authority to bind the partner in such a settlement. by executing the partnership agreement each partner respectively represents, warrants, and agrees that he will not form or exercise any right as a member of a notice group and will not file a statement notifying the service that the tmp does not have binding settlement authority. Such waiver is permitted under the partnership audit provisions of the Code and will be binding on the Partners. The costs incurred by a Partner in responding to an administrative proceeding will be borne solely by such Partner. The Taxpayer Relief Act of 1997 added new sections 771-777 to the Code providing for alternative reporting treatment for partnerships and their partners in the case of partnerships having 100 or more partners. In general these provisions provide for somewhat simplified reporting of partnership items on the forms K-1 supplied to partners. The Managing General Partner has not determined whether to make the election provided pursuant to these new Code provisions. PENALTIES Under Code section 6662, a taxpayer will be assessed a penalty equal to twenty percent (20%) of the portion of an underpayment of tax attributable to negligence, disregard of a rule or regulation or a substantial understatement of tax. "Negligence" includes any failure to make a reasonable attempt to comply with the tax laws. Code section 6662(c). The regulations further provide that a position with respect to an item is attributable to negligence if it lacks a reasonable basis. Treas. Reg. section 1.6662-3(b)(1). Negligence is strongly indicated where, for example, a partner fails to comply with the requirements of Code section 6662, which requires that a partner treat partnership items on its return in a manner that is consistent with the treatment of such items on the partnership return. Treas. Reg. section 1.6662-3(b)(1)(iii). The term "disregard" includes any careless, reckless or intentional disregard of rules or regulations. Treas. Reg. section 1.6662-3(b)(2). A taxpayer who takes a position contrary to a revenue ruling or a notice will be subject to a penalty for intentional disregard if the contrary position fails to possess a realistic possibility of being sustained on its merits. Treas. Reg. section 1.6562-3(b)(2). An "understatement" is defined as the excess of the amount of tax required to be shown on the return of the taxable year over the amount of the tax imposed that is actually shown on the return, reduced by any rebate. Code section 6662(d)(2)(A). An understatement is "substantial" if it exceeds the greater of ten percent (10%) of the tax required to be shown on the return for the taxable year or $5,000 ($10,000 in the case of certain corporations). Code section 6662(d)(1)(A) and (B). Generally, the amount of an understatement is reduced by the portion thereof attributable to (i) the tax treatment of any item by the taxpayer if there is or was substantial authority for such treatment, or (ii) any item if the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return, and there is a reasonable basis for the tax treatment of such item by the taxpayer. IRC 6662(d). Disclosure will generally be adequate if made on a properly completed Form 8275 (Disclosure Statement) or Form 8275R (Regulation Disclosure Statement) Treas. Reg. section 1.6662-4(f). However, in the case of "tax shelters," there will be a reduction of the understatement only to the extent it is attributable to the treatment of an item by the taxpayer with respect to which there is or was substantial authority for such treatment and only if the taxpayer reasonably believed that the treatment of such item by the taxpayer was more likely than not the proper treatment. Moreover, a corporation must generally satisfy a higher standard to avoid a substantial understatement penalty in the case of a tax shelter. Code section 6662(d)(2)(C)(ii). The term "tax shelter" is defined for purposes of Code section 6662 as a partnership or other entity, any investment plan or arrangement, or any other plan or arrangement, the principal purpose of which is the avoidance or evasion of federal income tax. Code section 6662(d)(2)(C)(ii). It is important to note that this definition of "tax shelter" differs from that contained in Code sections 461 and 6111, as discussed above. A tax shelter item includes an item of income, gain, loss, deduction, or credit that is directly or indirectly attributable to a partnership that is formed for the principal purpose of avoiding or evading federal income tax. The existence of substantial authority is determined as of the time the taxpayer's return is filed or on the last day of the taxable year to which the return relates and not when the investment is made. Treas. Reg. section 1.6662-4(d)(3)(iv)(C). Substantial authority exists if the weight of authorities supporting a position is substantial compared with the weight of authorities supporting contrary treatment. Treas. Reg. section 1.6662-4(d)(3)(i). Relevant authorities included statutes, Regulations, court cases, revenue rulings and procedures, and Congressional intent. However, among other things, conclusions reached in legal opinions are not considered authority. Treas. Reg. section 1.6662-4(d)(3)(iii). The Secretary may waive all or a portion of the penalty imposed under Code section 6662 upon a showing by the taxpayer that there was reasonable cause for the understatement and that the taxpayer acted in good faith. Code section 6664(d). Although not anticipated by PDC, there may not be substantial authority for one or more reporting positions that the Partnership may take in its federal income tax returns. In such event, if the Partnership does not disclose or if it fails to adequately disclose any such position, or if such disclosure is deemed adequate but it is determined that there was no reasonable basis for the tax treatment of such a partnership item, the penalty will be imposed with respect to any substantial understatement determined to have been made, unless the provisions of the Regulations pertaining to waiver of the penalty become final and the Partnership is able to show reasonable cause and good faith in making the understatement as specified in such provisions. If the Partnership makes a disclosure for the purposes of avoiding the penalty, the disclosure is likely to result in an audit of such return and a challenge by the Service of such position taken. If it were determined that a Partner had underpaid tax for any taxable year, such Partner would have to pay the amount of underpayment plus interest on the underpayment from the date the tax was originally due. The interest rate on underpayments is determined by the Service based upon the federal short term rate of interest (as defined in Code section 1274(d)) plus 3%, or 5% for large corporate underpayments, and is compounded daily. The rate of interest is adjusted monthly. A partnership, for federal income tax purposes, is required to file an annual informational tax return. The failure to properly file such a return in a timely fashion, or the failure to show on such return all information under the Code to be shown on such return, unless such failure is due to reasonable cause, subjects the partnership to civil penalties under the Code in an amount equal to $50 per month multiplied by the number of partners in the partnership, u section p to a maximum of $250 per partner per year. In addition, upon any willful failure to file a partnership information return, a fine or other criminal penalty may be imposed on the party responsible for filing the return. ACCOUNTING METHODS AND PERIODS The Partnership will use the accrual method of accounting and will select the calendar year as its taxable year. As discussed above, a taxpayer using the accrual method of accounting will recognize income when all events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy. Deductions will be recognized when all events which establish liability have occurred and the amount thereof can be determined with reasonable accuracy. However, all events which establish liability are not treated as having occurred prior to the time that economic performance occurs. Code section 461(h). All partnerships are required to conform their tax years to those of their owners; i.e., unless the partnership establishes a business purpose for a different tax year, the tax year of a partnership must be (i) the taxable year of one or more of its partners who have an aggregate interest in partnership profits and capital of greater than 50%, (ii) if there is no taxable year so described, the taxable year of all partners having interests of 5% or more in partnership profits or capital, or (iii) if there is no taxable year described in (i) or (ii), the calendar year. Code section 706. Until the taxable years of the Partners can be identified, no assurance can be given that the Service will permit the Partnership to adopt a calendar year. SOCIAL SECURITY BENEFITS; SELF-EMPLOYMENT TAX A General Partner's share of any income or loss attributable to his investment in Units will constitute "net earnings from self-employment" for either social security or self-employment tax purposes. The Social Security Act and the Code exclude from the definition of "net earnings from self-employment" a limited partner's distributive share of any item of income or loss from a partnership other than a guaranteed payment for personal services actually rendered. Therefore, a Limited Partner's share of income or loss attributable to his investment in Units will not constitute "net earnings from self-employment" for either social security or self-employment purposes. STATE AND LOCAL TAXES The opinions expressed herein are limited to issues of federal income tax law and do not address issues of state or local law. Investors are urged to consult their tax advisors regarding the impact of state and local laws on an investment in the Partnership. PROPOSED LEGISLATION AND REGULATIONS There can be no assurances that subsequent changes in the tax laws (through new legislation, court decisions, Service pronouncements, Treasury regulations, or otherwise) will or will not occur that may have an impact, adverse or positive, on the tax effect and consequences of this Transaction, as described above. We express no opinion as to any federal income tax issue or other matter except those set forth or confirmed above. We hereby consent to the filing of this opinion as Appendix D to the Prospectus and to all references to our firm in the Prospectus. Sincerely, /s/ Duane, Morris & Heckscher LLP DUANE, MORRIS & HECKSCHER LLP EXHIBIT INDEX NUMBER DESCRIPTION PAGE 10.2 Escrow Agreements with PNC Bank, N.A. 23.1. Consent of Duane, Morris & Heckscher LLP (included in Part II of Registrant Statement). 23.2 Consent of KPMG LLP (included in Part II of Registration Statement). 23.3 Consent of Wright & Company, Inc. (included in Part II of Registration Statement). [Comment1]Letterhead should be used on first page of this document ?? </TEXT> </DOCUMENT>
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+PROSPECTUS SUMMARY This summary highlights selected information in this prospectus, but it may not contain all of the information that is important to you. To better understand this offering, and for a more complete description of the offering, you should read this entire prospectus carefully, including the "Risk Factors" section and the financial statements and the notes to those statements, which are included elsewhere in this prospectus. OPTICAL ACCESS We design, manufacture and market optical wireless products that deliver high-speed communications traffic to the portion of the communications network commonly known as the last mile, which extends from the end user to the service provider's central office. We believe our products enable a fundamental shift in the design of the last mile by allowing service providers to quickly and cost-effectively bypass traditional copper-based networks and offer high-speed communication services to business users. Our target customers include existing and emerging telecommunications carriers and service providers seeking a comprehensive last-mile solution. Our newly developed optical wireless products are designed to be deployed in a switched mesh architecture, which means that our products allow transmission of data between any two points on the network and enable full re-routing of traffic around a transmission link or equipment failure. This switched mesh configuration increases the sustained connectivity of the optical wireless transmission link. The volume of high-speed traffic across communications networks has grown dramatically as the public Internet and private corporate intranets have become essential for communication and e-commerce. According to Ryan, Hankin and Kent, a market research firm, Internet and other data traffic will increase over 4000% between 1999 and 2003. Although service providers are rapidly upgrading their fiber optic network infrastructure in the portion of the network connecting large cities or regions to their central offices, upgrades to the last mile have been slow and remain cost prohibitive, resulting in a bottleneck for the transmission of data traffic. To date, attempts to address this last mile bottleneck have included copper-based alternatives and wireless radio frequency alternatives which have proved only partially successful due to inherent deficiencies of these technologies. We believe optical wireless technology is the only alternative capable of meeting the growing demand for bandwidth, or transmission capacity, in a timely and cost-effective manner to address the last mile bottleneck. Our product offerings primarily consist of our TereScope and OptiSwitch(TM) family of products. Our TereScope products provide the optical wireless links and our OptiSwitch(TM) products aggregate and direct communications traffic. Our products allow service providers to offer numerous value-added services, including the ability to immediately alter bandwidth allocations and to prioritize streams of delay-sensitive data communication, such as the transmissions of streaming video. Our wireless devices can be installed within a few hours since installation is not dependent on obtaining rights-of-way, government licenses and other permits. In addition, our products are scalable, which permits service providers to install new equipment as new subscribers are added on a pay-as-you-grow basis without sacrificing their initial investment. We currently have over 3,000 installations of our TereScope system, most of which are direct connections between two sites, otherwise known as point-to-point connections, in Europe. Since beginning operations, we have incurred significant expenses as we have developed our products and strategy. We had net losses of $3.2 million for the period from April 1, 1998, the date of our inception, through December 31, 1998, $2.3 million for the year ended December 31, 1999 and $31.3 million for the nine months ended September 30, 2000. We expect to incur increasing manufacturing, research and development, sales and marketing, administrative and other expenses. As a result, we expect to operate at a loss for the foreseeable future. Furthermore, we face intense competition from a number of competitors, including TeraBeam Networks, AirFiber and Canon with respect to our TereScope products and Cisco Systems, Extreme Networks, Foundry Networks and Nortel Networks with respect to our OptiSwitch(TM) products. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION DATED DECEMBER 18, 2000 PROSPECTUS 5,000,000 SHARES [OPTICAL ACCESS, INC. LOGO] COMMON STOCK ------------------------ This is an initial public offering of 5,000,000 shares of common stock of Optical Access, Inc. We are selling all of the shares of common stock offered under this prospectus. We anticipate that the initial public offering price will be between $11.00 and $13.00 per share. There is currently no public market for our shares. We have applied to have our common stock approved for listing on the Nasdaq National Market under the symbol "OPXS." SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT RISKS THAT YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED ON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ <TABLE> <CAPTION> PER SHARE TOTAL ----------- ----------- <S> <C> <C> Public offering price....................................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds, before expenses, to us............................ $ $ </TABLE> ------------------------ We have granted the underwriters a 30-day option to purchase up to an additional 750,000 shares of common stock from us at the initial public offering price less the underwriting discount. The underwriters are severally underwriting the shares being offered. The underwriters expect to deliver the shares in New York, New York, on . ------------------------ BEAR, STEARNS & CO. INC. CIBC WORLD MARKETS U.S. BANCORP PIPER JAFFRAY FIRST SECURITY VAN KASPER The date of this prospectus is , 2000. OUR RELATIONSHIP WITH MRV COMMUNICATIONS We are currently a wholly-owned subsidiary of MRV Communications, Inc., a Delaware corporation. After the completion of this offering, MRV Communications will own approximately 89% of the outstanding shares of our common stock or approximately 88% if the underwriters exercise their over-allotment option in full. MRV Communications has advised us that at some time after this offering it may apply for a private letter ruling from the Internal Revenue Service and permission from the Israeli tax authority in connection with a proposed distribution to its stockholders of all of our common stock held by MRV Communications. One condition to the proposed distribution is the receipt of favorable rulings from these agencies to treat the distribution as a tax-free transaction. MRV Communications has not advised us as to the timing of the distribution and we cannot assure you as to whether or when it will occur. Prior to the completion of this offering, we will enter into agreements with MRV Communications that govern the separation of our business operations from MRV Communications. The agreements between MRV Communications and us also govern our various interim and ongoing relationships. All of the agreements providing for our separation from MRV Communications were made in the context of a parent-subsidiary relationship and were negotiated in the overall context of our separation from MRV Communications. The parties believe that the terms of these agreements are consistent with market-based terms. However, the terms of these agreements may be more or less favorable to us than if they had been negotiated with unaffiliated third parties. See "Risk Factors -- Risks Related to Our Relationship with MRV Communications." RECENT ACQUISITIONS We recently benefited from two acquisitions by MRV Communications. On May 1, 2000, MRV Communications acquired all of the outstanding capital stock of Jolt Limited, an Israeli developer and manufacturer of optical wireless products, for approximately $57.7 million in MRV Communications common stock and options to purchase MRV Communications common stock. On July 12, 2000, MRV Communications acquired all of the outstanding capital stock of AstroTerra Corporation, a San Diego-based developer and manufacturer of optical wireless products, for approximately $160.3 million in MRV Communications common stock and options to purchase MRV Communications common stock. MRV Communications is contributing the capital stock of each of these acquired corporations and all of the assets of the optical access division of MRV Communications to us as part of one overall plan to effect our separation from MRV Communications. The acquisitions of Jolt Limited and AstroTerra Corporation have brought new research and development and manufacturing facilities, our TereScope line of products and significant additions to our employee base. As a result of the acquisitions, we added three facilities and over 70 employees to our operations. For further information on these acquisitions and the contribution of the acquired stock and assets to us, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview" and "Arrangements between Optical Access and MRV Communications" later in this prospectus. CORPORATE INFORMATION We were incorporated in Delaware in December 1999. Our principal executive offices are located at 20415 Nordhoff Street, Chatsworth, California, 91311. Our telephone number is (818) 407-1801. Our worldwide web site address is www.opticalaccess.com. The information in the web site is not incorporated by reference into this prospectus. OptiSwitch(TM) is our trademark. All other names or trademarks appearing herein are the property of their holders. Inside Front Cover The inside front cover page of the prospectus contains a drawing depicting six buildings networked by the Terescope products. The caption at the top of the page reads "Optical Access Sample Deployment." In the center of the diagram is a picture of a tower-like building (the center building). On the rooftop of the center building are five TereScopes, a six-sided rectangular device that has one of its long sides resting on a tripod. The short side of the rectangular box faces outwards from the building and has a round hole on it covered with glass. A line extends from each glass covering on the Terescope product on the five buildings surrounding the center building (the outside buildings). The lines represent the laser connection between the TereScopes. Each of the five outside buildings has three TereScope products on the rooftop of the building. In addition to the connections between the TereScopes on center building and the outside buildings, there are also connections (depicted by a line) between the TereScopes on the outside buildings. As a component of the TereScope on a building on the left side of the page, there is a drawing of OptiSwitch product. There is also an enlarged picture of the OptiSwitch product. A caption pointing to the product reads: "OptiSwitch in each building enable switching and other value added services." On the right side of the page there is an enlarged picture of the TereScope product. There is a caption on the right side of the page which points to the lines depicting a connection between center and outside building and a connection between two outside buildings which states: "Multiple optical wireless links enable redundancy in a mesh architecture." On the bottom right hand corner there is an enlarged picture of a computer monitor, hard drive and key board which displays the MegaVision product. A caption next to this picture states: "MegaVision provides user friendly graphical interface to manage the network from a remote location." THE OFFERING Common stock offered.......... 5,000,000 shares Common stock to be outstanding after the offering............ 46,667,000 shares Use of proceeds............... Product development, working capital and general corporate purposes. See "Use of Proceeds" on page 17. The number of shares of our common stock that will be outstanding after this offering is based on the number of shares of common stock outstanding on September 30, 2000. Unless otherwise indicated, the number of shares that will be outstanding after this offering excludes: - 4,500,000 shares of common stock available as of September 30, 2000 for future issuance under our 2000 Stock Plan; and - 750,000 shares of common stock issuable upon exercise of the underwriters' over-allotment option. All share and per share information in this prospectus gives effect to: - a 41,667-for-one stock split effective as of November 16, 2000; and - the contribution by MRV Communications to us of the capital stock of Jolt Limited and AstroTerra Corporation and all of the assets of MRV Communications' optical access division to effect our separation from MRV Communications. Except where the context indicates otherwise, information in this prospectus concerning the percentage ownership of MRV Communications upon completion of this offering assumes no exercise of outstanding options at or prior to that time. Unless otherwise indicated, this prospectus assumes that the underwriters have not exercised their over-allotment option. TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Prospectus Summary.......................................... 1 Risk Factors................................................ 5 Special Note Regarding Forward-Looking Statements........... 16 Our Relationship with MRV Communications after the Offering.................................................. 16 Use of Proceeds............................................. 18 Dividend Policy............................................. 18 Capitalization.............................................. 19 Dilution.................................................... 20 Selected Financial Data..................................... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 23 Business.................................................... 33 Management.................................................. 44 Certain Transactions........................................ 50 Arrangements between Optical Access and MRV Communications............................................ 50 Principal Stockholders...................................... 59 Description of Capital Stock................................ 60 Shares Eligible for Future Sale............................. 61 Underwriting................................................ 63 Legal Matters............................................... 66 Experts..................................................... 66 Where You Can Find More Information about Optical Access.... 66 Index to Financial Statements............................... F-1 </TABLE> ------------------------ You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell shares of common stock and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table sets forth summary financial data for Optical Access. This information should be read in conjunction with the financial statements and the notes to those financial statements appearing elsewhere in this prospectus. <TABLE> <CAPTION> PERIOD FROM APRIL 1, 1998 (DATE OF INCEPTION) YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30, THROUGH -------------------------- --------------------------------------- DECEMBER 31, PRO FORMA PRO FORMA 1998 1999 1999(1) 1999 2000 2000(1) ------------- ------------ ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales.......................... $ -- $ 8,473 $ 14,596 $ 4,518 $ 14,708 $ 17,676 Cost of sales(2)................... -- 4,555 15,607 2,584 11,800 13,770 ------- ------- -------- ------- -------- -------- Gross profit....................... -- 3,918 (1,011) 1,934 2,908 3,906 Operating costs and expenses: Selling, general and administrative(2).............. -- 1,688 18,229 902 11,255 12,667 Research and development(2)...... 3,213 4,543 27,759 3,386 14,781 13,080 Amortization of goodwill......... -- -- 28,241 -- 8,172 21,216 ------- ------- -------- ------- -------- -------- Total operating costs.............. 3,213 6,231 74,229 4,288 34,208 46,963 ------- ------- -------- ------- -------- -------- Operating loss..................... (3,213) (2,313) (75,240) (2,354) (31,300) (43,057) ------- ------- -------- ------- -------- -------- Net loss........................... $(3,213) $(2,313) $(75,405) $(2,354) $(31,346) $(43,267) ======= ======= ======== ======= ======== ======== Loss per share:(3) Basic and diluted loss per share.......................... $ (0.08) $ (0.06) $ (1.81) $ (0.06) $ (0.75) $ (1.04) Basic and diluted weighted average shares................. 41,667 41,667 41,667 41,667 41,667 41,667 ======= ======= ======== ======= ======== ======== </TABLE> <TABLE> <CAPTION> AS OF SEPTEMBER 30, 2000 -------------------------- ACTUAL AS ADJUSTED(4) -------- -------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 567 $ 54,367 Working capital............................................. 4,491 58,291 Total assets................................................ 146,601 200,401 Long-term debt, net of current portion...................... 715 715 Parent company investment/Stockholders' equity.............. 139,448 193,248 </TABLE> --------------- (1) The pro forma selected statements of operations for the year ended December 31, 1999 and nine months ended September 30, 2000 and pro forma balance sheet data at September 30, 2000 were derived from the financial statements of Optical Access, Jolt Limited and AstroTerra Corporation included later in this prospectus. The Unaudited Pro Forma Condensed Consolidated Statements of Operations assumes that the Jolt Limited and AstroTerra Corporation acquisitions occurred on January 1, 1999 and consolidates our consolidated statements of operations for the year ended December 31, 1999 and nine months ended September 30, 2000 with the statements of operations for those periods of Jolt Limited and AstroTerra Corporation. See "Unaudited Pro Forma Condensed Consolidated Financial Statements" included herein. (2) Includes amounts of deferred stock compensation relating to the acquisitions of Jolt Limited and AstroTerra Corporation of: $6.4 million, $3.5 million and $2.9 million presented in cost of sales; $13.8 million, $6.3 million and $5.4 million presented in selling, general and administrative; $22.9 million, $9.8 million and $7.0 million presented in research and development; for the pro forma presentation of the year ended December 31, 1999, the nine months ended September 30, 2000 and the pro forma presentation of the nine months ended September 30, 2000, respectively. (3) See note 2 of notes to consolidated financial statements for an explanation of how the number of shares used in calculating this per share data was determined. (4) The as adjusted amounts give effect to the sale of shares of common stock in this offering at an assumed initial public offering price of $12.00 per share, less estimated underwriting discounts and commissions, estimated offering expenses and the application of the proceeds to working capital.
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001126308_snap_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001126308_snap_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering and our financial statements and notes thereto included elsewhere in this prospectus. SNAP APPLIANCES, INC. We are the leading provider of network attached storage, or NAS, solutions for workgroups. Our Snap Server appliances enable our customers to add additional storage capacity to a network quickly, inexpensively and conveniently. Unlike general-purpose servers, which are complex and designed to be used for many types of applications, our Snap Server appliances are designed and optimized for only one use -- storage. We sell our Snap Server appliances through a multi-tier distribution strategy focused on channel partners including distributors, value-added resellers, or VARs, and catalog resellers. We also have an original equipment manufacturer, or OEM, relationship with Dell Computer Corporation. Our target end-users are workgroups within small to large organizations, application service providers and Internet service providers. We are recognized by PC Data as the leader in the workgroup NAS market, with an estimated 80% market share. As of June 30, 2000, we had sold over 25,000 Snap Server appliances. In the last decade, there has been a dramatic increase in the volume of data created, processed and accessed throughout organizations. As a result, the demand for storage capacity has grown exponentially. However, the growing demand for storage capacity has exposed several limitations in existing storage architectures, including the limited availability and accessibility of data, high scalability costs, lack of manageability and interoperability constraints. To address these limitations, network attached storage was developed. NAS appliances attach directly to a network and are designed with the sole purpose of adding storage capacity. Generally, the benefits of NAS include increased availability, scalability and manageability of data, improved performance and a low total cost of ownership as compared to existing storage architectures. Some of the NAS solutions being offered are designed for enterprise level applications and are not optimal for use at the entry and mid-range levels, including workgroups. Additionally, many of the existing NAS solutions can operate only with certain network operating systems, may be limited in the number of users they can support or have reliability constraints. Accordingly, we believe there is a considerable market opportunity for NAS appliances that offer the full complement of NAS advantages, but are optimized for use in workgroups. Our solution offers a combination of interoperability, reliability, ease of use and cost-effectiveness. Our operating system is optimized to simplify and increase the speed of file management. The integration of our operating system with our specially designed hardware architecture results in a reliable and cost-effective appliance. Installation of a Snap Server can be completed in less than five minutes, and our appliances are designed to minimize routine maintenance costs. Additionally, our Snap Servers are compatible with multiple operating systems. We believe these features and a low total cost of ownership make our products the preferred solution for workgroups. Our objective is to maintain our leadership position in the workgroup NAS market as well as to expand into other market segments. We intend to achieve this objective by continuing to offer innovative solutions that provide a compelling value to our customers, by leveraging our distribution channels to expand our market reach and by increasing the awareness of NAS solutions for workgroups and the Snap Server brand. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED , 2000 PROSPECTUS SHARES [SNAP APPLIANCES, INC. LOGO] COMMON SHARES ---------------------- This is Snap Appliances, Inc.'s initial public offering of common shares. We expect the public offering price to be between $ and $ per share. Currently, no public market exists for our shares. After pricing of this offering, we expect that the shares will trade on the Nasdaq National Market under the symbol "SNPA." INVESTING IN THE COMMON SHARES INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 5 OF THIS PROSPECTUS. ---------------------- <TABLE> <CAPTION> PER SHARE TOTAL --------- ----- <S> <C> <C> Public offering price....................................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to Snap.......................... $ $ </TABLE> The underwriters may also purchase up to an additional common shares from Snap at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The common shares will be ready for delivery on or about , 2000. ---------------------- MERRILL LYNCH & CO. SALOMON SMITH BARNEY CHASE H&Q ---------------------- The date of this prospectus is , 2000 OUR RELATIONSHIP WITH QUANTUM CORPORATION We are currently a wholly-owned subsidiary of Quantum. After the completion of this offering, Quantum will own approximately % of the outstanding shares of our common stock, or approximately % if the underwriters exercise their over-allotment option in full. In August 1999, Quantum's common stock was replaced by two classes of tracking stock, the DLT & Storage Systems, or DSS, group common stock and the Hard Disk Drive, or HDD, group common stock, which trade on the New York Stock Exchange under the symbols "DSS" and "HDD," respectively. On October 4, 2000, Quantum announced that Maxtor Corporation and Quantum had entered into a definitive agreement providing for the acquisition by Maxtor of all of Quantum's HDD common stock and that, upon consummation of its acquisition, the remaining DSS group would operate as Quantum Corporation. Quantum currently intends to complete its divestiture of Snap approximately six months after this offering by distributing all of the shares of our common stock owned by Quantum to the holders of Quantum's DSS common stock. Quantum will determine the timing, structure and all terms of its distribution of our common stock at its sole discretion, subject to, among other things, obtaining a private letter ruling from the Internal Revenue Service that the distribution will be tax free to the holders of Quantum's DSS common stock. We have entered into a Master Separation and Distribution Agreement with Quantum that provides for the separation of our business operations from Quantum. The related forms of ancillary agreements provide for, among other things, the transfer from Quantum to us of assets and the assumption by us of liabilities relating to our business and the transfer and licensing to us of intellectual property related to our business. The assets and liabilities to be transferred to us are described more fully in our financial statements and notes to those statements that are included elsewhere in this prospectus. For more information regarding our separation from Quantum, see "Risk Factors -- Risks Related to Our Separation from Quantum" and "Arrangements Between Snap and Quantum." We were incorporated in California on July 21, 1988 and merged with Meridian Data, Inc. on December 1, 1994. In April 1997, we reincorporated in Delaware. We were acquired by Quantum in September 1999. On November 24, 1999, Meridian changed its name to Quantum Snap Division Corporation. From September 1999 to the time of this offering, we have operated as a wholly-owned subsidiary of Quantum. In connection with this offering and our separation from Quantum, we changed our name to Snap Appliances, Inc. Our principal executive offices are located at 2001 Logic Drive, San Jose, CA 95124, and our telephone number is (408) 232-6831. Our website is located at www.snapserver.com. Information contained on our website is not a part of this prospectus. Inside Front Cover EDGAR DESCRIPTION OF INSIDE FRONT COVER ART The page is divided into four quadrants. Appearing in the top left hand quadrant is a picture of the Snap Server 1000. Appearing in the top right hand quadrant is a picture of the Snap Server 2000. Appearing in the lower left hand quadrant is a picture of the Snap Server 4100. In the lower right hand quadrant appears the following text: "Plug it in . . . turn it on . . . add storage in a Snap!" THE OFFERING Common shares offered by Snap........... shares Common shares outstanding after the offering................................ shares Common shares held by Quantum after the offering................................ shares Use of proceeds......................... We intend to use the net proceeds from this offering for general corporate purposes, including working capital and capital expenditures. See "Use of Proceeds." Risk factors............................ See "Risk Factors" and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common shares. Proposed Nasdaq National Market symbol.................................. SNPA The number of common shares outstanding after the offering is based on the number of shares outstanding as of June 30, 2000 and excludes common shares reserved for issuance under our stock option plans, of which options to purchase common shares at an average option price of $ had been issued as of , 2000, and common shares reserved for issuance under our employee stock purchase plan. Unless otherwise indicated, the information in this prospectus: - assumes a 526,500-for-one share split completed on October 25, 2000; - reflects the effectiveness of our amended and restated certificate of incorporation upon the consummation of this offering; and - assumes the underwriters will not exercise their over-allotment option. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) The following tables present our summary financial data. On September 9, 1999, we were acquired by Quantum. The summary historical financial data for the years ended December 31, 1997 and 1998, the period from January 1, 1999 to September 9, 1999 and the six-months ended June 30, 1999 reflect the operations of our predecessor, Meridian, prior to our acquisition. The acquisition was accounted for using the purchase method of accounting. As a result, our results of operations for periods subsequent to the acquisition are not comparable to the results of operations for periods prior to our acquisition. Subsequent to September 9, 1999, our activities were conducted as part of Quantum's overall operations. Accordingly, our financial statements contain various allocations for costs and expenses attributable to services provided by Quantum. Therefore, the statement of operations data may not be indicative of the results of operations that would have resulted if we had operated on a stand-alone basis. As adjusted amounts on the balance sheet give effect to our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share and after deducting estimated underwriting discounts and estimated offering expenses payable by us as though the sale had taken place as of June 30, 2000. <TABLE> <CAPTION> PERIOD FROM PERIOD FROM JANUARY 1, SEPTEMBER 10, YEAR ENDED THROUGH THROUGH SIX MONTHS ENDED DECEMBER 31, SEPTEMBER 9, DECEMBER 31, JUNE 30, ------------------ ------------ ------------- ------------------ 1997 1998 1999 1999 1999 2000 ------- -------- ------------ ------------- ------- -------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue: Snap Server product.................................... $ -- $ 2,662 $ 4,043 $ 4,016 $ 2,882 $ 15,422 CD-ROM product......................................... 19,968 14,879 6,943 2,982 5,063 409 ------- -------- -------- -------- ------- -------- Total revenue........................................ 19,968 17,541 10,986 6,998 7,945 15,831 ------- -------- -------- -------- ------- -------- Cost of revenue: Product sales.......................................... 9,570 10,090 6,977 4,746 5,187 12,655 Amortization of acquisition related intangibles........ -- -- -- 1,257 -- 2,114 ------- -------- -------- -------- ------- -------- Total cost of revenue................................ 9,570 10,090 6,977 6,003 5,187 14,769 ------- -------- -------- -------- ------- -------- Gross profit............................................. 10,398 7,451 4,009 995 2,758 1,062 Operating expenses: Research and development............................... 6,340 5,931 3,425 1,860 2,169 4,823 Selling, general and administrative.................... 13,830 16,039 14,707 5,936 7,178 17,408 Amortization of goodwill and other acquisition-related intangibles.......................................... -- -- -- 1,146 -- 2,136 Purchased in-process research and development.......... -- -- -- 37,000 -- -- ------- -------- -------- -------- ------- -------- Total operating expenses............................. 20,170 21,970 18,132 45,942 9,347 24,367 ------- -------- -------- -------- ------- -------- Operating income (loss).................................. (9,772) (14,519) (14,123) (44,947) (6,589) (23,305) ------- -------- -------- -------- ------- -------- Interest and other income................................ 1,994 1,358 441 153 349 40 ------- -------- -------- -------- ------- -------- Net income (loss)........................................ $(7,778) $(13,161) $(13,682) $(44,794) $(6,240) $(23,265) ======= ======== ======== ======== ======= ======== Net loss per common share Basic and diluted(1)................................... -- -- -- $ (0.85) -- $ (0.44) Weighted average common shares outstanding Basic and diluted(1)................................... -- -- -- 52,650 -- 52,650 </TABLE> <TABLE> <CAPTION> JUNE 30, 2000 ---------------------- ACTUAL AS ADJUSTED ------- ----------- (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 2,905 Working capital............................................. 7,968 Total assets................................................ 82,960 Total stockholder's equity.................................. 69,367 </TABLE> --------------- (1) Basic and diluted net loss per common share and weighted average common shares outstanding for the periods prior to the date of acquisition of September 9, 1999 is not presented for Meridian as this information is not considered to be meaningful.
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read the entire prospectus carefully, especially the risks of investing in our common stock discussed under Risk Factors beginning on page 6 and the financial statements and notes to those financial statements beginning on page F-1 before making an investment decision. YellowBrix YellowBrix is a leading provider of Internet infrastructure services in the contextual commerce and personalized content services markets. Internet infrastructure services provide the underlying technology that facilitates the ability to conduct business on the Internet. Our proprietary technology integrates content, commerce and advertising and delivers personalized information to our customers users through Web pages, e-mails and wireless devices. By using our services, Web sites can present a package of news, articles and products for sale that is targeted to the Web site s particular focus. Our customers consist of consumer and commercial Web sites and corporate intranets and extranets, collectively, Web sites. Our technology enhances Web sites through the automated distribution of more personalized content selected from a broad range of topic categories and may increase Web site revenue by providing targeted commerce opportunities. Our system has the ability to analyze data and create models for understanding and organizing the content an end-user is viewing. We also have tools that provide us with the ability to identify words and assign a numeric value to each word and the ability to understand the relationship between words and the meaning of given text. This technology enables us to understand the meaning, focus and ultimate relevancy of information to Web site users. Our services can be provided either individually, as distinct products, or can be bundled together as an integrated solution encompassing news, articles, research reports, products for sale, advertisements, targeted emails, and personal Web pages. We believe our services will facilitate the growth in electronic commerce and address the fundamental needs of Web sites to improve user experiences and increase revenue streams. Many companies have built vertical Web sites in order to attract users who have common interests and who, therefore, will be attractive to potential advertisers and merchants. Many Web sites, however, have discovered that undifferentiated non-targeted content alone is not a sufficient driver to attract, retain and motivate user interest and that traditional online advertising does not generate sufficient revenues. In addition, corporations are building intranets and extranets in order to communicate and interact more effectively and efficiently with their employees, customers and partners. As a result, Web sites and corporations are searching for a solution that will integrate personalized content and commerce opportunities in an effective manner. We believe our services offer our Web site customers the ability to deliver a more personalized, enhanced user experience and to increase revenue streams. Our services provide our customers with an outsourced information infrastructure which does not require our customers to invest in equipment or software, or use their resources to develop their own solution, eliminating the need to negotiate contracts with multiple vendors. We provide a low cost, flexible and customized solution with a quick implementation process. Our services include: Contextual commerce. Our contextual commerce services match and distribute highly targeted commerce and advertising opportunities to our customers users from a catalogue of over 1.5 million products which such users may purchase. Targeted content. Our targeted content services enable our customers to use our artificial intelligence capability to electronically define and create, almost instantaneously, highly specialized categories of information such as news headlines, articles and press releases for automatic distribution to their end users. Personalization. Our personalization services facilitate the development of custom start pages for each user and personalized e-mail newsletters. We are also developing the Table of Contents ability to create user profiles that enable us to present individually targeted information and commerce opportunities. We intend to build upon and enhance our position as a leading provider of customized commerce, content and personalization infrastructure services. To achieve this goal, we plan to: leverage the online convergence of commerce, content and personalization; provide additional value added services such as advanced personalization; develop and expand our strategic alliance relationships; further penetrate existing markets and expand into new markets; maintain and extend our technology and service leadership; and pursue global expansion through joint ventures and by applying our analysis tools to foreign languages. As of November 30, 2000, we had entered into contracts with 258 customers and implemented our services on 209 Web sites, including CNNfn, InfoUSA, Business 2.0 Online/Imagine Media, Monster.com and Network Solutions. Our sales strategy is to pursue opportunities with other major accounts through our direct sales force and to leverage our resources and penetrate other targeted market segments through our strategic alliance program. Our principal executive offices are located at 66 Canal Center Plaza, Suite 700, Alexandria, Virginia 22314. Our telephone number at that address is (703) 548-3300 and our Web address is www.yellowbrix.com. Information contained on our Web site does not constitute part of this prospectus, and you should rely only on the information contained in this prospectus when deciding whether to invest in our common stock. We have applied for trademark and service mark protection for our YellowBrix, IntelliClix, IndustryWatch, NewsReal, MultiLink and the YellowBrix logo marks. Other trademarks, tradenames and service marks referred to in this prospectus are the property of their respective owners. This prospectus refers to market research reports prepared by various organizations, which typically do not disclose their underlying limitations or assumptions. You should not rely on these market reports as being necessarily indicative of future developments. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 The above information is as of September 30, 2000 and excludes: 9,255,178 shares of our common stock issuable upon exercise of outstanding options at a weighted average exercise price of $2.93; 4,322,485 shares reserved for future grants under our amended 1998 stock option plan; 1,355,663 shares reserved for future grants under our 2000 stock option plan; 4,524,856 shares of our common stock reserved for issuance upon the exercise of outstanding warrants at a weighted average exercise price of $3.23 per share; the issuance of 30,347 warrants pursuant to anti-dilution rights of certain of our stockholders and warrant holders for no additional cash as a result of the conversion of our outstanding convertible debt upon the closing of this offering and exercise of a warrant issued to Infoseek Corporation; and the issuance of 81,806 shares of our common stock pursuant to anti-dilution rights of certain of our stockholders and warrant holders for no additional cash as a result of the exercise of a warrant issued to Infoseek Corporation. Except as otherwise indicated, all pro forma information in this prospectus: reflects the conversion of our outstanding shares of series A preferred stock into 537,634 shares of our common stock upon the closing of this offering; assumes the issuance of up to 6,659,717 shares of common stock upon conversion of our outstanding convertible debt upon the closing of this offering; assumes the issuance of 1,035,300 shares of our common stock pursuant to anti-dilution rights of certain of our stockholders and warrant holders for no additional cash as a result of the conversion of our outstanding convertible debt upon the closing of this offering; reflects the amendment and restatement of our certificate of incorporation which increases the number of our authorized common stock to 100,000,000 and the number of our preferred stock to 10,000,000, which will occur before the closing of this offering; and assumes no exercise of the underwriters over-allotment option. PRE-EFFECTIVE AMENDMENT NO. 1 To The FORM S-1 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 (in thousands) (unaudited) Balance Sheet Data: Cash and cash equivalents $ 3,221 $ 3,221 $ 58,008 Working capital (4,882 ) (2,968 ) 57,755 Total assets 12,225 12,225 67,012 Total stockholders equity (deficit) (2,634 ) 5,216 60,003 YELLOWBRIX, INC. (Exact name of Registrant as specified in its charter) Delaware 7389 54-1869419 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 66 Canal Center Plaza, Suite 700 Alexandria, Virginia 22314 (703) 548-3300 (Address, including zip code, and telephone number, including area code, of Registrant s Principal Executive Offices) David C. Hoppmann Chief Executive Officer and President YellowBrix, Inc. 66 Canal Center Plaza, Suite 700 Alexandria, Virginia 22314 (703) 548-3300 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Stephen M. Feldhaus, Esq. Gregg J. Berman, Esq. Fulbright Jaworski L.L.P. 666 Fifth Avenue New York, New York 10103 (212) 318-3000 Facsimile: (212) 318-3400 Brian J. Lynch, Esq. Sidney R. Smith, Esq. John W. Jones, Esq. Cooley Godward LLP One Freedom Square Reston, Virginia 20190 (703) 456-8000 Facsimile: (703) 456-8100 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box: If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: CALCULATION OF REGISTRATION FEE Table of Contents
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+Prospectus Summary The following summary does not contain all the information that may be important to you. You should read the entire prospectus before making an investment decision. UBS AG UBS AG is a global, integrated investment services firm and the leading bank in Switzerland. UBS's business is managed through three main business groups and its Corporate Center. The business groups are: UBS Switzerland, UBS Warburg and UBS Asset Management. UBS's clients include international corporations, small- and medium-sized businesses in Switzerland, governments and other public bodies, financial institutions, market participants and individuals. UBS AG's ordinary shares are listed on the New York Stock Exchange under the symbol "UBS.N," on the Zurich Stock Exchange under the symbol "UBSNZn.S" and on the Tokyo Stock Exchange under the symbol "UBS.T." On 3 November 2000, UBS acquired Paine Webber Group Inc., one of the largest full-service securities firms in the United States. UBS purchased all outstanding shares of PaineWebber stock for a combination of cash and stock representing a total purchase price of $11.8 billion (based on the UBS share price on 3 November 2000). The principal executive offices of UBS AG are located at Bahnhofstrasse 45, Zurich, Switzerland and Aeschenvorstadt 1, Basel, Switzerland. Its telephone numbers are 011-41-1-234-11-11 and 011-41-61-288-20-20. UBS AMERICAS UBS Americas Inc. is the successor by merger to Paine Webber Group Inc. Paine Webber Group Inc. was the holding company for the PaineWebber group of companies. UBS Americas is a direct, wholly owned subsidiary of UBS AG, and continues to act as the holding company for the U.S. onshore private banking operations of UBS. UBS Americas' principal executive offices are located at 677 Washington Boulevard, Stamford, Connecticut 06901, and its telephone number is 203-719-3000. SHAREHOLDERS' LETTER 28 NOVEMBER 2000 A PERSONAL NOTE FROM THE CHAIRMAN AS YOU MIGHT BE AWARE, I HAVE DECIDED TO STEP DOWN FROM MY FUNCTION AS CHAIRMAN OF THE BOARD OF DIRECTORS AFTER THE ANNUAL GENERAL MEETING IN APRIL 2001. I CONSIDER THIS TO BE THE RIGHT MOMENT. WE HAVE SUCCESSFULLY COMPLETED THE MERGER BETWEEN UNION BANK OF SWITZERLAND AND SWISS BANK CORPORATION. THE BUSINESS GROUPS AND THEIR RESPECTIVE RESPONSIBILITIES HAVE BEEN REDESIGNED. WE RECENTLY COMPLETED THE MERGER OF PAINEWEBBER INTO OUR GROUP. UBS IS IN GOOD FINANCIAL HEALTH. THE BOARD OF DIRECTORS WILL SUBMIT THE ELECTION OF MARCEL OSPEL, CURRENTLY GROUP CHIEF EXECUTIVE OFFICER, FOR YOUR APPROVAL AT THE AGM OF 26 APRIL 2001, AND WILL THEN APPOINT HIM AS CHAIRMAN. LUQMAN ARNOLD, CURRENTLY GROUP CHIEF FINANCIAL OFFICER, HAS BEEN ELECTED TO BECOME THE NEW PRESIDENT OF THE GROUP EXECUTIVE BOARD, ADDING THIS NEW ROLE TO HIS RESPONSIBILITY FOR THE GROUP'S FINANCE AND RISK FUNCTIONS. A NEW TOP-MANAGEMENT TEAM IS READY, AND I AM RELAXED AND CONFIDENT ABOUT HANDING OVER FULL RESPONSIBILITY TO THE YOUNGER GENERATION. PLEASE JOIN ME AND THE BOARD OF DIRECTORS IN WISHING MARCEL OSPEL AND LUQMAN ARNOLD SUCCESS AND LUCK IN THEIR NEW FUNCTIONS. ALEX KRAUER SENIOR MANAGEMENT SUCCESSION PLANS On 11 October, we announced plans for changes in the senior management of UBS which will take effect after the Annual General Meeting in April next year. Details are in the note which you will find opposite. At the Annual General Meeting in April you will also be asked to approve the election of three other new members of the Board of Directors. The British, Dutch and American candidates will help accurately reflect at Board level UBS's international culture and global reach. The three candidates are: Sir Peter Davis, CEO of J. Sainsbury plc; Johannes Antonie de Gier, former Chairman and CEO of Warburg Dillon Read; and Lawrence Allen Weinbach, Chairman and CEO of Unisys Corporation. UBS AG /s/ Alex Krauer Alex Krauer Chairman of the Board of Directors OUTLOOK We are pleased to have been able to report strong results so far this year and to have maintained this performance through the recent more mixed market conditions. The fourth quarter is normally the quietest part of the year in most of our businesses, and we expect this year to be no exception. In addition, we expect a one-off impact from PaineWebber integration and restructuring costs. Nevertheless, we are confident that we can complete 2000 in robust form and that we are excellently positioned for further success in 2001. The history of our bank has been one of forging new partnerships and learning from the cultures and skills of new colleagues. As an organization we are naturally excited about change and the PaineWebber merger makes next year one of our most eagerly anticipated. /s/ Marcel Ospel Marcel Ospel Group Chief Executive Officer Prospectus Summary The following summary does not contain all the information that may be important to you. You should read the entire prospectus before making an investment decision. UBS AG UBS AG is a global, integrated investment services firm and the leading bank in Switzerland. UBS's business is managed through three main business groups and its Corporate Center. The business groups are: UBS Switzerland, UBS Warburg and UBS Asset Management. UBS's clients include international corporations, small- and medium-sized businesses in Switzerland, governments and other public bodies, financial institutions, market participants and individuals. UBS AG's ordinary shares are listed on the New York Stock Exchange under the symbol "UBS.N," on the Zurich Stock Exchange under the symbol "USBNZn.S" and on the Tokyo Stock Exchange under the symbol "UBS.T." On 3 November 2000, UBS acquired Paine Webber Group Inc., one of the largest full-service securities and commodities firms in the United States. UBS purchased all outstanding shares of PaineWebber stock for a combination of cash and stock representing a total purchase price of $11.8 billion (based on the UBS share price on 3 November 2000). The principal executive offices of UBS AG are located at Bahnhofstrasse 45, Zurich, Switzerland and Aeschenvorstadt 1, Basel, Switzerland. Its telephone numbers are 011-41-1-234-11-11 and 011-41-61-288-20-20. UBS AMERICAS UBS Americas Inc. is the successor by merger to Paine Webber Group Inc. Paine Webber Group Inc. was the holding company for the PaineWebber group of companies. USB Americas is a direct, wholly owned subsidiary of UBS AG. THE TRUSTS Each trust is a business trust formed under the Delaware Business Trust Act under a declaration of trust among the trustees of that trust and UBS Americas. Each trust's primary governing document is its declaration of trust, which was completely amended and restated on the date its preferred trust securities were initially issued. The amended and restated declaration of trust of each trust is called the trust's "declaration." Each declaration is qualified under the Trust Indenture Act of 1939. The rights of the Holders of the trust securities, including economic rights, rights to information and voting rights, are as set forth in the applicable declaration, the Business Trust Act and the Trust Indenture Act. UBS Americas holds all the issued and outstanding common trust securities of each trust. Each trust exists solely for the purpose of: - issuing its trust securities for cash, - investing the proceeds in an equivalent amount of junior subordinated debentures, and - engaging in such other activities as are necessary, convenient or incidental to these activities. PROSPECTUS Prospectus dated 27 December 2000 -------------------------------------------------------------------------------- [UBS AG LOGO] UBS Americas Inc. Certain Debt Securities FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED IN THIS PROSPECTUS, BY UBS AG -------------------------------------------------------------------------------- This prospectus relates to outstanding debt securities of UBS Americas Inc. UBS Americas Inc. is the successor by merger to Paine Webber Group Inc. Before the merger, Paine Webber Group Inc. issued the following debt securities, of which the indicated aggregate principal amounts are outstanding: - $150,000,000 of 9 1/4% Notes Due 2001 - $100,000,000 of 7 7/8% Notes Due 2003 - $200,000,000 of 6 1/2% Notes Due 2005 - $100,000,000 of 6 3/4% Notes Due 2006 - $200,000,000 of 7 5/8% Notes Due 2014 - $125,000,000 of 8 7/8% Notes Due 2005 - $125,000,000 of 8 1/4% Notes Due 2002 - $150,000,000 of 7 5/8% Notes Due 2008 - $250,000,000 of 6.55% Notes Due 2008 - $340,000,000 of 6.45% Notes Due 2003 - $525,000,000 of 6 3/8% Notes Due 2004 - $275,000,000 of 7 5/8% Notes Due 2009 - $175,000,000 of 7 3/4% Subordinated Notes Due 2002 - Varying principal amounts and maturities of Medium-Term Senior Notes, Series C - Varying principal amounts and maturities of Medium-Term Subordinated Notes, Series D As a result of the merger of Paine Webber Group Inc. into UBS Americas Inc., UBS Americas is now the issuer of all the debt securities listed above. UBS Americas is a wholly owned subsidiary of UBS AG. Following the merger of UBS Americas and Paine Webber Group, UBS AG issued its guarantee of the payment obligations of UBS Americas under all the debt securities issued above. Under this guarantee, UBS AG has fully and unconditionally guaranteed all the obligations of UBS Americas under these securities. However, the obligations of UBS AG under its guarantee of the subordinated debt securities listed above are subordinated as well, as described in this prospectus. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The debt securities are not deposit liabilities of UBS AG and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency of the United States, Switzerland or any other jurisdiction. This prospectus is to be used by UBS AG and its affiliates, including UBS Warburg LLC and PaineWebber Incorporated, in connection with offers and sales of the debt securities when UBS AG and its affiliates engage in market-making transactions. These transactions may be executed at negotiated prices that are related to market prices at the time of purchase or sale, or at other prices. UBS AG and its affiliates may act as principal or agent in these transactions. No new debt securities are being offered. UBS WARBURG LLC PAINEWEBBER INCORPORATED THE OFFERING This prospectus relates to the outstanding debt securities of UBS Americas and the related guarantees of UBS. The specific terms of each debt security are described under "Description of the Debt Securities" below in this prospectus. The Debt Securities........... This prospectus relates to the following outstanding debt securities of UBS Americas: $150,000,000 of 9 1/4% Notes Due 2001 $100,000,000 of 7 7/8% Notes Due 2003 $200,000,000 of 6 1/2% Notes Due 2005 $100,000,000 of 6 3/4% Notes Due 2006 $200,000,000 of 7 5/8% Notes Due 2014 $125,000,000 of 8 7/8% Notes Due 2005 $125,000,000 of 8 1/4% Notes Due 2002 $150,000,000 of 7 5/8% Notes Due 2008 $250,000,000 of 6.55% Notes Due 2008 $340,000,000 of 6.45% Notes Due 2003 $525,000,000 of 6 3/8% Notes Due 2004 $275,000,000 of 7 5/8% Notes Due 2009 $175,000,000 of 7 3/4% Subordinated Notes Due 2002 Varying principal amounts and maturities of Medium-Term Senior Notes, Series C Varying principal amounts and maturities of Medium-Term Subordinated Notes, Series D. Issuer........................ UBS Americas Inc. Guarantor..................... UBS AG. Terms of the Debt Securities.................... As stated in the applicable description below. Market for the Debt Securities.................... UBS Warburg LLC and PaineWebber Incorporated currently make a market in the debt securities. However, they are not required to do so, and they can stop doing so at any time without notice. As a result, there is no assurance as to the liquidity of any market for the debt securities. Use of Proceeds............... All of the sales of debt securities under this prospectus will be market-making transactions -- that is, transactions in which UBS AG, UBS Warburg LLC, PaineWebber Incorporated, or one of UBS AG's other affiliates, resells securities that the seller, or one of its affiliates, has previously bought from another party. UBS Americas will not receive any of the proceeds from these resales of the debt securities. In general, we expect that the entity that resells any particular debt securities will retain the proceeds of its market-making resales and will not pay the proceeds to UBS Americas or, if the resales are not made by UBS AG, to UBS AG. GROUP REVIEW 28 NOVEMBER 2000 GROUP REVIEW [RoE 1 ANNUALIZED BAR CHART] [BASIC ADJUSTED EPS 2,3 (CHF) BAR CHART] [COST/INCOME RATIO 2 BAR CHART] [NET NEW MONEY, PRIVATE BANKING AND PRIVATE CLIENTS (CHF bn) BAR GRAPH] 1 Annualized, before goodwill amortization and adjusted for significant financial events. 2 Before goodwill amortization and adjusted for significant financial events. 3 1999 share figures are restated for the two-for-one share split, effective 8 May 2000. UBS GROUP PERFORMANCE AGAINST TARGETS <TABLE> <CAPTION> For the period 9M2000 6M2000 9M1999 1 -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> RoE (%, ANNUALIZED) as reported 26.9 29.5 23.0 before goodwill amortization and adjusted for significant financial events 3, 4 29.1 31.9 18.8 -------------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> For the quarter ended 30.9.00 30.6.00 30.9.99 1 -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> BASIC EPS (CHF) 2 as reported 5.15 5.24 3.07 before goodwill amortization and adjusted for significant financial events 3, 4 5.46 5.97 3.22 -------------------------------------------------------------------------------------------------------------------- COST / INCOME RATIO (%) as reported 69.5 72.8 72.3 before goodwill amortization and adjusted for significant financial events 3, 4 68.0 69.2 71.4 -------------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> ASSETS UNDER MANAGEMENT NET NEW MONEY 5 CHF billion 30.9.00 30.6.00 % change 3Q00 --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> UBS GROUP 1,746 1,711 2 --------------------------------------------------------------------------------------------- UBS SWITZERLAND Private and Corporate Clients 440 439 0 1 Private Banking 707 683 4 1 --------------------------------------------------------------------------------------------- UBS ASSET MANAGEMENT Institutional Asset Management 6 528 525 1 (9) Investment Funds / GAM 227 225 1 0 --------------------------------------------------------------------------------------------- UBS Warburg Private Clients 44 37 19 8 ============================================================================================= </TABLE> 1 The 1999 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Basis of Accounting). 2 1999 share figures are restated for the two-for-one share split, effective 8 May 2000. 3 The amortization of goodwill and other purchased intangible assets are excluded from the calculation. 4 Significant financial events are excluded from the calculation. 5 Excludes interest and dividend income. 6 Includes non-institutional assets also reported in the Investment Funds / GAM business unit. GROUP TARGETS UBS focuses on four key performance targets, designed to ensure that we deliver continually improving returns to our shareholders. Our performance against these targets has continued to be very good this quarter. Adjusted for significant financial events, our annualized pre-goodwill return on equity for the first nine months of 2000 is 29.1%, once again well above our target range of 15-20%. Pre-goodwill earnings per share grew 70% over third quarter 1999, adjusted for one-off gains, clearly beating our double-digit growth target. The cost/income ratio is also well below that of third quarter 1999 and slightly lower than second quarter 2000. Net new money in both the private banking units was positive this quarter, although the volatility in the quarter-on-quarter net new money trend in the Private Clients business unit reflects its relatively early stage of business development. SIGNIFICANT FINANCIAL EVENTS There were no significant financial events in third quarter 2000. Second quarter 2000 included an additional and final provision of CHF 200 million before tax in respect of the US Global Settlement regarding World War II related claims. Third quarter 1999 included a capital gain of CHF 26 million before tax relating to our residual holding in Long Term Capital Management. RESULTS SUMMARY Excellent third quarter results, with net profit after taxes and minority interests of CHF 2,075 million, demonstrate continued strong profitability. Group net profit after tax and minority interests has now been above CHF 2 billion for a third straight quarter and is up 73% compared to third quarter 1999, on an adjusted basis. THE OFFERING The Securities................ 7,000,000 8.30% Preferred Trust Securities of PWG Capital Trust I. 7,000,000 8.08% Preferred Trust Securities of PWG Capital Trust II. The terms of each series of preferred trust securities correspond to the terms of the junior subordinated debentures held by the relevant trust. Each trust's ability to make distributions and other payments on its preferred trust securities is solely dependent upon UBS Americas' making payments on the junior subordinated debentures held by the trust as and when required. Liquidation Amount............ The liquidation amount of the 8.30% Preferred Trust Securities of PWG Capital Trust I is $25 per security. The liquidation amount of the 8.08% Preferred Trust Securities of PWG Capital Trust II is $25 per security. Offering Price................ Negotiated prices that are related to market prices at the time of purchase or sale, or at other prices. Distributions................. Holders of the 8.30% Preferred Trust Securities of PWG Capital Trust I will be entitled to receive cumulative cash distributions at an annual rate of 8.30% of the stated liquidation amount of $25 per preferred trust security. These distributions are payable monthly, in arrears, on the first day of each month. Holders of the 8.08% Preferred Trust Securities of PWG Capital Trust II will be entitled to receive cumulative cash distributions at an annual rate of 8.08% of the stated liquidation amount of $25 per preferred trust security. These distributions are payable monthly, in arrears, on the first day of each month. Extension Periods............. UBS Americas has the right to defer payments of interest on either series of the junior subordinated debentures for a period of not more than five years. No interest will be due and payable on the junior subordinated debentures during an extension period and, as a result, distributions on the trust securities will also be deferred. At the end of the extension period, UBS Americas will be required to pay all accrued interest on the affected series of junior subordinated debentures, together with interest on that accrued interest at the rate applicable to those junior subordinated debentures to the extent permitted by applicable law, compounded monthly. UBS Americas has the right to select an extension period as many times as it wishes during the life of the junior subordinated debentures. There could be multiple extension periods of varying lengths throughout the term of either series of junior subordinated debentures. TABLE OF CONTENTS -------------------------------------------------------------------------------- <TABLE> <S> <C> Prospectus Summary.................... 3 Use of Proceeds....................... 7 Cautionary Note Regarding Forward- Looking Information................. 8 Capitalization of UBS................. 9 Recent Developments................... 10 UBS................................... 11 UBS Americas.......................... 128 Unaudited Pro Forma Condensed Consolidated Financial Information......................... 129 Description of the Debt Securities.... 155 The Guarantees........................ 181 Foreign Currency Risks................ 184 Certain United States Federal Income Tax Considerations.................. 187 Tax Considerations Under the Laws of Switzerland......................... 193 ERISA Matters......................... 194 Plan of Distribution.................. 195 Validity of the Securities............ 196 Experts............................... 196 Limitations on Enforcement of U.S. Laws Against UBS AG, Its Management and Others.......................... 196 Where You Can Find More Information... 197 Presentation of Financial Information......................... 197 Financial Statements of UBS........... F-i Third Quarter Report 2000............. A-1 </TABLE> Plan of Distribution.......... This prospectus relates to market-making transactions in the debt securities by UBS AG and its affiliates. The affiliates that may engage in these transactions include, but are not limited to, UBS AG itself, UBS Warburg LLC and PaineWebber Incorporated. These transactions may be executed at negotiated prices that are related to prevailing market prices at the time of sale, or at other prices. UBS AG and its affiliates may act as principal or agent in these transactions. No new securities are offered. GROUP REVIEW 28 NOVEMBER 2000 SIGNIFICANT FINANCIAL EVENTS <TABLE> <CAPTION> Quarter ended Year-to-date ----------------------------------------- ------------------------- <S> <C> <C> <C> <C> <C> CHF million 30.9.00 30.6.00 30.9.99 30.9.00 30.9.99 ----------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME AS REPORTED 8,545 9,200 6,534 27,102 21,636 Julius Baer registered shares divestment 110 International Global Trade Finance divestment 200 Swiss Life/Rentenanstalt divestment 1,490 LTCM gain 26 26 ADJUSTED OPERATING INCOME 8,545 9,200 6,508 27,102 19,810 ----------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES AS REPORTED 5,842 6,548 4,921 18,839 14,992 US Global Settlement provision 200 200 ADJUSTED OPERATING EXPENSES 5,842 6,348 4,921 18,639 14,992 ----------------------------------------------------------------------------------------------------------------------------------- ADJUSTED OPERATING PROFIT BEFORE TAX AND MINORITY INTERESTS 2,703 2,852 1,587 8,463 4,818 =================================================================================================================================== Tax expense 621 591 374 1,878 1,525 Tax effect of significant financial events 45 (3) 45 (348) Minority interests (7) (9) (14) (42) (35) ----------------------------------------------------------------------------------------------------------------------------------- ADJUSTED NET PROFIT 2,075 2,207 1,202 6,498 3,606 =================================================================================================================================== </TABLE> Year-to-date adjusted net profit after tax of CHF 6,498 million represents an increase of 80% over the first nine months of 1999, and already exceeds the adjusted 1999 full-year results by 39%. Net interest income before credit loss expense increased 30% over third quarter 1999 to CHF 1,831 million. Higher interest rates increased the cost of medium and long term debt, but also helped to increase net income from lending to clients and banks. Trading-related net interest income was up 24% over third quarter 1999. Net fee and commission income was CHF 3,865 million in third quarter 2000, an increase of 26% over third quarter 1999. Brokerage fees reflected higher levels of client activity in UBS Switzerland and busier markets, rising 36% from the same period last year. Underwriting fees were up 65% thanks to another strong performance in equity underwriting, and Corporate finance fees also increased 71%, with strong results worldwide. Portfolio and other management and advisory fees increased CHF 81 million compared to second quarter 2000, chiefly as a result of the performance of the new O'Connor business, and were up nearly 50% from the same quarter last year, due to O'Connor and the acquisition of GAM in fourth quarter 1999. The 34% increase in Investment fund fees since third quarter 1999 reflects the addition of GAM, increased fund assets and a greater proportion of client money invested in higher margin equity funds. Net trading income was CHF 2,368 million in third quarter 2000, 13% up on the same quarter last year, as a result of increased global market activity and the strong client-driven performance of UBS Warburg. Equity trading revenues are well ahead of this time last year, but when combined with dividend income fell in comparison to second quarter 2000, reflecting the usual seasonal reduction in market activity and trading opportunities experienced during the summer holiday season. The increase of CHF 100 million in Other income compared to third quarter 1999, is primarily due to the inclusion of income from Klinik Hirslanden, which was not consolidated in the income statement at that time. Total operating expenses increased 19% over third quarter last year to CHF 5,842 million. This is largely due to increased performance-related compensation as revenues continue to exceed levels in 1999. Personnel expenses were down 11% from last quarter, in line with slower revenues, but were 24% higher than in third quarter 1999. General and administrative expenses increased only 8% over third quarter 1999, to CHF 1,503 million, mainly due to currency movements and the impact of the consolidation of Klinik Hirslanden. The underlying figure was roughly static relative to third quarter last year, reflecting our continued efforts to control non-revenue driven costs. Depreciation and amortization increased 12% to CHF 476 million compared to third quarter 1999, with increases in goodwill amortization due to the acquisitions of Allegis and GAM. UBS Group incurred a tax expense of CHF 621 million for third quarter 2000, an effective tax rate of 23%. See "Risk Factors--Option to Extend Interest Payment Period," "--Tax Impact of Extension," "Description of Securities--Description of the Junior Subordinated Debentures--General" and "--Description of the Junior Subordinated Debentures--Option to Extend Interest Payment Period." Ranking....................... The preferred trust securities and the common trust securities of each trust rank equally with each other and have equivalent terms. However, - If an event of default (as defined below) under the declaration of trust of the issuing trust occurs and continues, the Holders of the preferred trust securities of that trust will have a priority over the Holders of the common trust securities of that trust with respect to payments on those preferred trust securities. - Holders of the common securities of each trust have the exclusive right (subject to the terms of the trust's declaration of trust) to appoint, replace or remove trustees for the issuing trust and to increase or decrease the number of trustees. Redemption.................... The preferred trust securities of each trust will be redeemed when the junior subordinated debentures of that trust mature or are redeemed. The junior subordinated debentures held by PWG Capital Trust I will mature on 1 December 2036. UBS Americas may redeem the junior subordinated debentures held by PWG Capital Trust I, either as a whole or in part, at any time after 30 November 2001. The junior subordinated debentures held by PWG Capital Trust II will mature on 1 March 2037. UBS Americas may redeem the junior subordinated debentures held by PWG Capital Trust II, either as a whole or in part, at any time after 28 February 2002. In addition, UBS Americas can redeem the junior subordinated debentures of either trust at any time if a "Tax Event," as described below, occurs. If UBS Americas redeems any junior subordinated debentures, the trust that holds those junior subordinated debentures must redeem a corresponding amount of its trust securities. The redemption price will be equal to the liquidation amount of the trust security plus any accrued and unpaid distributions to the date fixed for redemption. See "Description of Securities--Description of the Preferred Trust Securities--Redemption of Trust Securities." Distribution of Junior Subordinated Debentures..... If a trust is dissolved, the junior subordinated debentures held by that trust will be distributed to the holders of that trust's trust securities, pro rata. UBS Americas Inc. will have RATIO OF EARNINGS TO FIXED CHARGES The following table sets forth UBS AG's ratio of earnings to fixed charges, for the periods indicated. <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED 31 DECEMBER 30 JUNE 1997 1998 1999 1999 2000 CHF in millions, except ratios ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> INTERNATIONAL ACCOUNTING STANDARDS ("IAS")(1) RATIO OF EARNINGS TO FIXED CHARGES(2).............. 0.95 1.11 1.25 1.36 1.28 US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP")(1) RATIO OF EARNINGS TO FIXED CHARGES(3).............. x 0.80 1.14 x 1.16 </TABLE> ------------ (1) The ratio is provided using both IAS and US GAAP values, as the ratio is materially different between the two accounting standards. No US GAAP information is provided for 31 December 1997 and 30 June 1999 as a US GAAP reconciliation was not required for those periods. (2) The deficiency in the coverage of fixed charges by earnings before fixed charges on an IAS basis at 31 December 1997 of CHF 851 million is due to restructuring charges of CHF 7,000 million under IAS charged in that period. Without that charge, the ratio would have been 1.36. (3) The deficiency in the coverage of fixed charges by earnings before fixed charges at 31 December 1998 of CHF 5,319 million is due to restructuring charges of CHF 3,982 million under US GAAP, as well as 1,706 million of pre-tax losses from significant financial events charged for that period. See "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Introduction." Without those charges the ratio would have been 1.01. GROUP REVIEW 28 NOVEMBER 2000 RESTRUCTURING PROVISION USED <TABLE> <CAPTION> Quarter ended ------------------- CHF million Personnel IT Premises Other 30.9.00 30.6.00 ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> UBS Switzerland 38 7 0 0 45 54 Private and Corporate Clients 37 5 0 0 42 52 Private Banking 1 2 0 0 3 2 UBS Asset Management 5 0 0 0 5 1 UBS Warburg 0 0 0 0 0 0 Corporate Center 2 0 29 0 31 18 ------------------------------------------------------------------------------------------------------------------------ GROUP TOTAL 45 7 29 0 81 73 ======================================================================================================================== ------------------------------------------------------------------------------------------------------------------------ Initial restructuring provision in 1997 7,000 Additional provision in 1999 300 Used in 1998 4,027 Used in 1999 1,844 Used in 2000 272 ------------------------------------------------------------------------------------------------------------------------ Total used through 30.9.2000 6,143 ------------------------------------------------------------------------------------------------------------------------ RESTRUCTURING PROVISION REMAINING AT 30.9.2000 1,157 ======================================================================================================================== </TABLE> UBS/SBC MERGER RESTRUCTURING PROVISION Of the CHF 7,300 million restructuring provision relating to the 1998 merger between Union Bank of Switzerland and Swiss Bank Corporation, CHF 81 million was used in third quarter 2000, leaving CHF 1,157 million still to be used. As in the second quarter, the main use of the provision this quarter related to severance costs in Private and Corporate Clients and vacancy-related premises costs in Corporate Center. UBS expects that the provision will be completely utilized by the end of 2001. The sale of Solothurner Bank to Baloise Insurance in August this year represents the completion of UBS's compliance with the sale of business conditions set by the Swiss Competition Commission as a result of the merger. The sale was completed on 19 October 2000, and will be reflected in fourth quarter results. CREDIT RISK During third quarter 2000, UBS realized a write-back of credit loss expenses of CHF 142 million, compared to a write-back of CHF 208 million in the second quarter 2000. This is the result of a continued improvement in the quality of our Swiss loan portfolio and is in sharp contrast to the CHF 275 million of credit loss expenses recorded in third quarter 1999. In accordance with the trend in the previous quarter, the unprecedentedly strong rebound of the Swiss economy, combined with UBS's disciplined credit underwriting standards, enabled additional recoveries of previously established loan loss provisions in the Swiss portfolio, which by far exceeded new requirements. On the other hand, this positive scenario was partially offset by the need for additional loan loss provisions in UBS Warburg's portfolio, in line with trends in the international credit markets. The significant reduction in the international loan portfolio achieved during the past two years, coupled with the active use of credit derivatives and reluctance to engage in balance sheet-led earnings growth, positions UBS well for the less positive credit conditions expected outside Switzerland, notably in the US. In particular, in line with its commitment to risk diversification, UBS's loan exposure to the telecom sector is relatively small compared to many of our peers, representing less than 2% of gross loans outstanding at 30 September 2000. The vast majority of our telecom loan book is rated investment grade. The further improvement in UBS's credit risk portfolio is also evident in the reduction of non-performing loans by CHF 956 million, or 8%, during the quarter. UBS's loan portfolio increased by CHF 11.4 billion over the quarter, to CHF 282.4 billion. The increase of CHF 17.5 billion in the UBS Warburg portfolio, principally as a result of zero risk-weighted money market and Group treasury positions held by UBS Warburg, was partially offset by a decrease of CHF 5.3 billion in UBS Switzerland, where the write-off and repayment of impaired positions exceeded new business. The reduction in non-performing loans combined with the increase in size of the overall portfolio means that the non-performing loans to total loans ratio fell to the right to liquidate each trust if there is a "Special Event," as described below, as a result of a change in law or a change in legal interpretation. However, if the Special Event is a Tax Event, UBS Americas may have the right to redeem the junior subordinated debentures, which would result in the redemption of the trust securities as described above. If the junior subordinated debentures are distributed to the Holders of the preferred trust securities, UBS Americas will use its best efforts to have the junior subordinated debentures listed on the New York Stock Exchange, or on whatever exchange that then lists the preferred trust securities. See "Description of Securities--Description of the Preferred Trust Securities--Special Event Redemption or Distribution" and "--Description of the Junior Subordinated Debentures."
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING OUR COMPANY AND THE CLASS A COMMON STOCK BEING SOLD IN THIS OFFERING AND OUR COMBINED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. FOR YOUR CONVENIENCE, A GLOSSARY OF TECHNICAL TERMS USED IN THIS PROSPECTUS APPEARS ON PAGE 93. OUR BUSINESS We design, develop and sell semiconductor system solutions and products for some of the highest growth segments of the broadband communications market, including broadband access, multi-service access and wide area network, or WAN, transport. Our broad product portfolio allows us to provide network infrastructure original equipment manufacturers, or OEMs, with system-level semiconductor solutions including multi-service access and high-speed digital subscriber line, or DSL, products used in a variety of network access platforms. We also provide an extensive family of communications solutions and products that support the aggregation, transmission and switching of data, video and voice from the edge of the network to the optical backbone. These products are used in a variety of network equipment, including high-speed routers, asynchronous transfer mode, or ATM, switches, optical switches, add-drop multiplexers and digital cross-connect systems. Our products enable network infrastructure OEMs to design products with enhanced bandwidth, reliability and scalability, which we believe allows them to achieve lower system cost and reduce time-to-market of their products. We believe the breadth and depth of our product portfolio, combined with our rich heritage of over three decades in communications and semiconductor systems engineering, provide us with a competitive advantage in selling our products to leading network infrastructure OEMs. We have expertise in signal, packet and transmission processing, which require analog, mixed signal and digital signal processing, as well as related systems and software expertise. We use our system-level design and integration expertise to offer complete semiconductor system solutions and to integrate onto one device multiple functions previously performed by two or more semiconductor devices. As a result, we believe our customers can accelerate their design and production cycles, reduce the power consumption and size of their products and enhance the bandwidth and features of their systems. Our business is fabless, which means that we outsource all of our manufacturing needs and do not own or operate any semiconductor manufacturing facilities. We believe this allows us to focus our resources on the design, development and marketing of our products, minimize operating infrastructure and capital requirements and maintain flexibility in operations. We form strategic relationships with leading network infrastructure OEMs to define and develop new products. In the past we have successfully collaborated with leading OEMs, such as Cisco Systems, Inc., Nortel Networks Corporation, Lucent Technologies, Inc. and Alcatel Data Networks, S.A., in new product introductions and the definition of long-term product development plans. We believe our strong customer relationships with these established market leaders, as well as emerging market leaders, such as Juniper Networks, Inc., Redback Networks, Inc., Sycamore Networks, Inc. and Tellium, Inc., provide us with a foundation for successfully competing in the design of semiconductor solutions for the next generation of network infrastructure equipment. We are a wholly-owned subsidiary of Conexant Systems, Inc. We own and operate the Internet infrastructure business formerly owned and operated by Conexant as its Network Access Division. On , 2001, Conexant separated its Internet infrastructure business from its personal networking business by transferring to us substantially all of the operations, assets and liabilities relating to the Internet infrastructure business. BENEFITS OF OUR SEPARATION FROM CONEXANT We believe we will realize several benefits from our separation from Conexant, including the following: Greater Strategic Focus. We expect to have a sharper focus on the Internet infrastructure business and strategic opportunities as a result of our management team focusing only on our businesses. Increased Speed and Responsiveness. As an independent company, we believe we will be able to make decisions more quickly, deploy resources more rapidly and efficiently and operate with more agility than when we were a part of Conexant. Focused Incentives and Greater Accountability for Employees. We expect to strengthen the motivation of our employees and the focus of our management through the implementation of incentive compensation programs tied to the market performance of our Class A common stock. Direct Access to Capital Markets and Growth through Acquisitions. As a separate company, we expect to be able to issue debt or equity securities to fund our growth internally or through potential acquisitions of complementary businesses. OUR RELATIONSHIP WITH CONEXANT Upon completion of this offering, Conexant will own all outstanding shares of our Class B common stock, representing approximately % of the outstanding shares of our common stock and approximately % of the total voting power of all outstanding shares of our common stock, or approximately % and %, respectively, if the underwriters fully exercise their over-allotment option. Conexant has announced that it intends, within several months following consummation of this offering, to distribute to its shareowners all shares of our common stock owned by Conexant. The distribution by Conexant is subject to a number of conditions, including receipt of a private letter ruling from the IRS confirming that the distribution will qualify as a tax-free distribution. Conexant will, in its sole discretion, determine the timing, structure and all terms of the distribution. Conexant is not obligated to complete the distribution, and the distribution may not occur by the anticipated time or at all. We have entered into agreements with Conexant providing for the separation of our business from Conexant, including: - a separation and distribution agreement that provides, among other things, for the principal corporate transactions required to effect the separation of our business from Conexant, this offering and the proposed distribution; - an employee matters agreement that provides, among other things, for the allocation of assets, liabilities and responsibilities relating to our current and former employees and their participation in our stock and other benefit plans and Conexant's stock and other benefit plans; - a tax allocation agreement that provides, among other things, for the allocation of tax liabilities and responsibilities between Conexant and us during the period in which we are included in Conexant's consolidated tax group; - a joint technology and marketing agreement that provides, among other things, for cooperation between Conexant and us with respect to common product standards and features and joint marketing arrangements; and - a transition services agreement that provides, among other things, for Conexant to provide services to us, including the manufacture, assembly and test of our products, that Conexant provided to our business prior to the separation. The agreements relating to our separation from Conexant were made in the context of a parent-subsidiary relationship and were entered into in the overall context of our separation from Conexant. The terms of these agreements may be more or less favorable than those we could have negotiated with unaffiliated third parties. For more information about the separation agreements, see "Arrangements Between Conexant and Spinco Relating to the Separation". ------------------------ We were incorporated in Delaware in October 2000. Our executive offices are located at 4000 MacArthur Boulevard, Newport Beach, California 92660-3095. Our telephone number is (949) 483-4600, and our Internet address is http://www. .com. The information on our Internet site is not part of this prospectus. THE OFFERING Class A common stock offered....................... shares Common stock to be outstanding immediately after the offering: Class A common stock........ shares Class B common stock........ shares Voting rights: Class A common stock........ One vote per share Class B common stock........ Five votes per share Each share of our Class A common stock and Class B common stock also includes an associated preferred share purchase right. See "Description of Capital Stock -- Rights Plan". Use of proceeds............... We will use approximately $ million of the net proceeds of this offering to repay an intercompany loan from Conexant and to pay a dividend to Conexant. We expect to use the balance of the net proceeds of this offering for working capital and general corporate purposes. Proposed Nasdaq National Market symbol............... " " The number of shares of our Class A common stock to be outstanding after the offering excludes additional shares of Class A common stock we may issue under the following plans and arrangements: - an aggregate of shares reserved for issuance under our 2001 Long-Term Incentives Plan, Directors Stock Plan, Retirement Savings Plan, 2001 Employee Stock Purchase Plan and 2001 Non-Qualified Employee Stock Purchase Plan; and - shares reserved for issuance under our 2001 Stock Option Plan to holders of options to purchase Conexant common stock outstanding at the time of the distribution: - granted before January 1, 2001, which will be adjusted so that following Conexant's distribution of our common stock to its shareowners, each option holder will hold options to purchase Conexant common stock and options to purchase our Class A common stock; and - granted after December 31, 2000 to our employees, which will be converted into options to purchase our Class A common stock. As of the date of this prospectus it is not possible to determine how many shares of Class A common stock may be issuable as a result of these adjustments. The exact number of shares will be determined at the time of the distribution. As of , 2000, there were outstanding options to purchase shares of Conexant common stock with a weighted average exercise price of $ per share. SUMMARY FINANCIAL DATA The following summary financial data should be read together with our consolidated financial statements and related notes thereto, "Selected Consolidated Financial Data", "Unaudited Pro Forma Condensed Combined Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The historical financial information presented below may not be indicative of our future performance and does not reflect the results of operations and financial position we would have had if we had operated as a separate, stand-alone entity during the periods and as of the date presented. <TABLE> <CAPTION> FISCAL YEAR ENDED SEPTEMBER 30, --------------------------------------------------------- 1996(1) 1997 1998 1999 2000(1) -------- -------- -------- -------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA Net revenues....................... $107,380 $192,836 $143,270 $277,613 $ 579,206 Gross margin....................... 69,198 116,782 59,928 150,010 345,560 Research and development........... 16,076 45,700 72,639 86,546 136,237 Selling, general and administrative................... 12,927 25,158 37,243 43,613 81,997 Amortization of intangible assets........................... -- 5,252 5,252 5,255 143,171 Purchased in-process research and development...................... 87,120 -- -- -- 191,348 Special charges(2)................. -- -- 3,600 2,200 -- Operating income (loss)............ (46,925) 40,672 (58,806) 12,396 (207,193) Net income (loss).................. (59,040) 27,881 (31,627) 12,449 (232,811) Net income (loss) per share, basic and diluted...................... $ $ $ $ $ Shares used in computing net income (loss) per share, basic and diluted.......................... </TABLE> <TABLE> <CAPTION> AS OF SEPTEMBER 30, 2000 -------------------------------------------- PRO FORMA ACTUAL PRO FORMA(3) AS ADJUSTED(4) ---------- ------------ -------------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA Cash and cash equivalents........................... $ 8,079 Working capital(5).................................. 182,406 Total assets........................................ 1,739,361 Shareholder's net investment........................ 1,608,395 </TABLE> <TABLE> <CAPTION> FISCAL YEAR ENDED SEPTEMBER 30, ----------------------------------------------------- 1996 1997 1998 1999 2000 ------- ------- -------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> OTHER FINANCIAL DATA(6) Adjusted operating income (loss)....... $40,195 $45,924 $(49,954) $19,851 $127,326 Adjusted net income (loss)............. 28,080 31,111 (26,172) 17,057 87,787 Adjusted net income (loss) per share, basic and diluted.................... $ $ $ $ $ As a percentage of net revenues: Adjusted operating income (loss)..... 37.4% 23.8% (34.9)% 7.2% 22.0% Adjusted net income (loss)........... 26.2% 16.1% (18.3)% 6.1% 15.2% </TABLE> --------------- (1) In September 1996, Conexant acquired Brooktree Corporation and in fiscal 2000, Conexant completed the following acquisitions related to our business: Microcosm Communications Limited in January, Maker Communications, Inc. in March, Applied Telecom, Inc. in April, HotRail, Inc. in June, and Novanet Semiconductor Ltd. and NetPlane Systems, Inc. in September. As a result of these acquisitions, during fiscal 2000 we recorded $143.2 million in amortization of goodwill and other acquisition- related intangible assets and in fiscal 1996 and 2000 we recorded charges of $87.1 million and $191.3 million, respectively, related to purchased in-process research and development. On , 2001 in connection with our separation from Conexant, Conexant transferred to us all of the capital stock of Brooktree, Microcosm, Maker, Applied Telecom, HotRail, Novanet and NetPlane. (2) Special charges of $3.6 million in fiscal 1998 and $2.2 million in fiscal 1999 represent costs of restructuring actions taken by Conexant related to our operations, including employee severance and costs under a voluntary early retirement program. Special charges in fiscal 1998 include $1.7 million of costs associated with the disposal of property and equipment. (3) Pro forma amounts reflect our separation from Conexant as if it had occurred on September 30, 2000. On , 2001, Conexant loaned $ million to us to provide us with working capital until the completion of this offering. In the separation, Conexant retained substantially all of our accounts payable and accounts receivable. (4) Pro forma as adjusted amounts give effect to the following actions as though these actions had been taken as of September 30, 2000: - our sale of shares of Class A common stock in this offering at the initial public offering price of $ per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses; and - payment of approximately $ million to Conexant to repay an intercompany loan from Conexant and to pay a dividend to Conexant. (5) Working capital consists of current assets, including cash, less current liabilities, including short-term debt. (6) Adjusted operating income (loss), adjusted net income (loss) and adjusted net income (loss) per share exclude the amortization of intangible assets, the write-off of purchased in-process research and development and special charges. These measures of earnings are not in accordance with, or an alternative for, generally accepted accounting principles and may not be consistent with measures used by other companies. However, we believe these measures of earnings provide a better understanding of our underlying operating results and we use these measures internally to evaluate our underlying operating performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Adjusted Earnings".
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diff --git a/parsed_sections/prospectus_summary/2000/CIK0001129985_direct_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/CIK0001129985_direct_prospectus_summary.txt
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+* Reprinted from Economic Impact: U.S. Direct Interactive Marketing Today 2000 Executive Summary with permission from Direct Marketing Association, Inc. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 This information excludes 3,410,000 shares issuable upon exercise of options granted under our 2000 Long-Term Incentive Plan and 3,590,000 shares of common stock available for future grants of options under this plan, including shares subject to options which we expect to grant to our employees upon the spin-off in replacement of unvested options to acquire Insight common stock that will expire upon the spin-off. The actual number of our shares issuable under these replacement options will not be determined until the effective date of the spin-off and will be based on the relative market price of Insight and our common stock at that time. See Management Treatment of Insight Stock Options on page 52. Unless otherwise noted or clear from the context, the information in this prospectus assumes that the underwriters over-allotment option will not be exercised and is based on the number of shares outstanding as of September 30, 2000. Cash flows used in investing activities: Purchase of property and equipment (1,433 ) (3,283 ) (1,687 ) (10,696 ) Proceeds from sale of equipment 62 62 FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 DIRECT ALLIANCE CORPORATION (Exact name of Registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 7389 (Primary Standard Industrial Classification Code Number) 86-0745142 (IRS Employer Identification Number) 8123 South Hardy Tempe, Arizona 85284 (480) 902-5900 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) (1) The as adjusted balance sheet data reflect the issuance of common stock in, and the application of the proceeds from, this offering. Branson ( Tony ) M. Smith, Chief Executive Officer and President Direct Alliance Corporation 8123 South Hardy Tempe, Arizona 85284 (480) 902-5900 (Name, address, including zip code, and telephone number, including area code, of agent for service)
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diff --git a/parsed_sections/prospectus_summary/2000/GSCE_goldman_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/GSCE_goldman_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in the common stock. You should read the entire prospectus carefully, especially the risks of investing in the common stock discussed under "Risk Factors" on pages 6-14. THE GOLDMAN SACHS GROUP, INC. Goldman Sachs is a leading global investment banking and securities firm that provides a wide range of financial services worldwide to a substantial and diversified client base. Our activities are divided into two business segments: - - Global Capital Markets; and - - Asset Management and Securities Services. Our goal is to be the advisor of choice for our clients and a leading participant in global financial markets. We seek to achieve this goal by maintaining an intense commitment to our clients, focusing on our core businesses and key opportunities, and operating as an integrated franchise. For our fiscal year ended November 26, 1999, our net revenues were $13.3 billion and our net earnings were $2.7 billion. As of November 26, 1999, our total assets were $250.5 billion and our stockholders' equity was $10.1 billion. Because we believe that the needs of our clients are global and that international markets have high growth potential, we have built upon our strength in the United States to achieve leading positions in other parts of the world. Today, we have a strong global presence as evidenced by the geographic breadth of our transactions, leadership in our core products and the size of our international operations. As of November 26, 1999, we operated offices in over 20 countries and 37% of our 15,361 employees were based outside the United States. We are committed to a distinctive culture and set of core values. These values are reflected in our Business Principles, which emphasize placing our clients' interests first, integrity, commitment to excellence and innovation, and teamwork. STRATEGY AND PRINCIPAL BUSINESS LINES Our strategy is to grow our three core businesses -- Investment Banking and Trading and Principal Investments, which together comprise Global Capital Markets, and Asset Management and Securities Services -- in markets throughout the world. Our leadership position in investment banking provides us with access to governments, financial institutions and corporate clients globally. Trading and principal investing have been an important part of our culture and earnings, and we remain committed to these businesses irrespective of their volatility. Managing wealth is one of the fastest growing segments of the financial services industry and we are positioning our asset management and securities services businesses to take advantage of that growth. GLOBAL CAPITAL MARKETS INVESTMENT BANKING. Investment Banking represented 33% of fiscal 1999 net revenues. We are a market leader in both the Financial Advisory and Underwriting businesses, serving over 3,000 clients worldwide. Financial Advisory includes advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, restructurings and spin-offs. Underwriting includes public offerings and private placements of equity and debt securities. TRADING AND PRINCIPAL INVESTMENTS. Trading and Principal Investments represented 43% of fiscal 1999 net revenues. We make markets in equity and fixed income products, currencies and commodities; enter into swaps and other derivative transactions; engage in proprietary trading and arbitrage; and make principal investments. In trading, we focus on building lasting relationships with our most active clients while maintaining leadership positions in our key markets. We believe our research, market-making and proprietary activities enhance our understanding of markets and ability to serve our clients. ASSET MANAGEMENT AND SECURITIES SERVICES The Asset Management and Securities Services segment represented 24% of fiscal 1999 net revenues. We provide global investment management and advisory services; earn commissions on agency transactions; manage merchant banking funds; and provide prime brokerage, securities lending and financing services. As of November 26, 1999, we had $258.0 billion of assets under management. We manage merchant banking funds that had $17.3 billion of capital commitments as of November 26, 1999. Assets under supervision are comprised of assets under management and other client assets. Assets under management typically generate fees based on a percentage of their value. Other client assets are comprised of assets in brokerage accounts of primarily high-net-worth individuals, on which we earn commissions. OUR HEADQUARTERS Our headquarters are located at 85 Broad Street, New York, New York 10004, telephone (212) 902-1000. SUMMARY CONSOLIDATED FINANCIAL DATA The summary historical consolidated income statement and balance sheet data set forth below have been derived from our consolidated financial statements and their notes. Our consolidated financial statements have been audited by PricewaterhouseCoopers LLP, independent public accountants, as of November 26, 1999 and November 27, 1998 and for the years ended November 26, 1999, November 27, 1998 and November 28, 1997. These financial statements are included elsewhere in this prospectus, together with the reports thereon of PricewaterhouseCoopers LLP. The summary historical consolidated income statement and balance sheet data set forth below as of November 28, 1997, November 29, 1996 and November 24, 1995, and for the years ended November 29, 1996 and November 24, 1995 have been derived from our consolidated financial statements that are not included in this prospectus. The pro forma data set forth below for the year ended November 26, 1999 have been derived from the pro forma data set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Pro Forma Operating Results". The summary consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and their notes. SUMMARY CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> AS OF OR FOR YEAR ENDED NOVEMBER ------------------------------------------------------------ 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- ($ and share amounts in millions, except per share amounts) <S> <C> <C> <C> <C> <C> INCOME STATEMENT DATA Investment Banking.......................... $ 4,359 $ 3,368 $ 2,587 $ 2,113 $ 1,595 Trading and Principal Investments........... 5,773 2,379 2,926 2,693 1,744 -------- -------- -------- -------- -------- Global Capital Markets........................ 10,132 5,747 5,513 4,806 3,339 Asset Management and Securities Services...... 3,213 2,773 1,934 1,323 1,144 -------- -------- -------- -------- -------- Net revenues.................................. $ 13,345 $ 8,520 $ 7,447 $ 6,129 $ 4,483 ======== ======== ======== ======== ======== Pre-tax earnings(1)........................... 1,992(4) 2,921 3,014 2,606 1,368 BALANCE SHEET DATA Total assets(2)............................... $250,491 $217,380 $178,401 $152,046 $100,066 Long-term borrowings.......................... 20,952 19,906 15,667 12,376 13,358 Partners' capital............................. -- 6,310 6,107 5,309 4,905 Stockholders' equity.......................... 10,145 -- -- -- -- COMMON SHARE DATA Earnings per share Basic....................................... $ 5.69 -- -- -- -- Diluted..................................... 5.57 -- -- -- -- Average common shares outstanding Basic....................................... 476 -- -- -- -- Diluted..................................... 486 -- -- -- -- PRO FORMA DATA (UNAUDITED)(3) Pro forma net earnings........................ $ 2,550 -- -- -- -- Pro forma diluted earnings per share.......... 5.27 -- -- -- -- SELECTED DATA (UNAUDITED) Assets under supervision Assets under management..................... $258,045 $194,821 $135,929 $ 94,599 $ 52,358 Other client assets......................... 227,424 142,018 102,033 76,892 57,716 -------- -------- -------- -------- -------- Total assets under supervision................ $485,469 $336,839 $237,962 $171,491 $110,074 ======== ======== ======== ======== ======== </TABLE> - --------------- (1) Our pre-tax earnings in 1999 reflect payments for services rendered by managing directors who, prior to our conversion to corporate form, were profit participating limited partners. In prior years, these payments were accounted for as distributions of partners' capital rather than as compensation and benefits expense. As a result, these payments are not reflected in operating expenses in 1998, 1997, 1996 or 1995 and, therefore, the pre-tax earnings in these years are not comparable to 1999. (2) Total assets and liabilities were increased as of November 26, 1999 and November 27, 1998 as a result of certain provisions of Statement of Financial Accounting Standards No. 125. (3) Reflects such adjustments as are necessary, in the opinion of management, for a fair presentation of the results of operations and average diluted common shares outstanding of Goldman Sachs on a pro forma basis. For more detailed information concerning these adjustments, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Pro Forma Operating Results".
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diff --git a/parsed_sections/prospectus_summary/2000/HBIO_harvard_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/HBIO_harvard_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS" SECTION. OUR COMPANY We are a global developer, manufacturer and marketer of innovative, enabling tools used in drug discovery research at pharmaceutical and biotechnology companies, universities and government laboratories. We sell approximately 10,000 products to more than 5,000 customers in over 60 countries. Our proprietary products accounted for approximately 82% of our revenues for the nine months ended September 30, 2000. We have designed our tools to accelerate the speed and to reduce the cost at which our customers can discover and commercialize new drugs. By providing research tools, we participate in the revolutions in genomics, the study of genes, and proteomics, the study of proteins, without bearing the risks inherent in attempting to discover new drugs. Since our reorganization in March 1996, we have focused on developing tools to alleviate two critical bottlenecks in the drug discovery process: - PROTEIN PURIFICATION, which is the removal of contaminants such as salts, buffers, detergents and cellular debris from a protein sample, and - ADMET SCREENING, which is the testing of the absorption, distribution, metabolism, elimination and toxicology properties of drug candidates. Our proteomics products are tools that allow researchers to purify and analyze proteins contained in a sample. Our ADMET screening products are tools that enable researchers to test drug candidates to determine their absorption, distribution, metabolism, elimination and toxicology properties prior to conducting costly clinical trials. We market our products primarily through our 1,000 page catalog to approximately 100,000 researchers worldwide. Our catalog is also available on our website. We distribute most of our products directly through our operations in the United States, the United Kingdom, Germany, France and Canada. In addition to our catalog distribution channel, we have a long-standing distribution and marketing relationship with Amersham Pharmacia Biotech, or APBiotech, one of the largest companies in the life sciences industry. OUR OPPORTUNITY Drug discovery is a time-consuming and costly process. In the pre-genomics era, the compound development, primary screening and clinical trials stages were bottlenecks in this process. The recent successes of genomics, combinatorial chemistry (the automated production of large numbers of chemical compounds) and high throughput screening have alleviated the bottlenecks at the compound development and primary screening stages. However, these bottlenecks have been replaced by bottlenecks at later stages in the drug discovery process. Our opportunity lies in alleviating these bottlenecks with products that increase the productivity and reduce the cost of drug discovery. OUR PRODUCTS We have a broad array of established products for proteomics and ADMET screening. We believe our products offer drug discovery researchers the most comprehensive protein purification and ADMET screening solutions. In the past two years, we have expanded our product base by introducing the following proprietary tools: PROTEIN PURIFICATION: - specially coated pipette tips, which are small plastic tubes coated on the inside with a material that selectively extracts proteins but not contaminants, - micro spin columns, which are small plastic tubes partially filled with a material that selectively extracts proteins but not contaminants, and - micro dialyzers, which are small plastic tubes each containing a dialysis membrane which allows small molecules to pass through but retains large molecules such as proteins. ADMET SCREENING: - NaviCyte diffusion chambers, which measure drug absorption by simulating membranes in the human body, - small plastic plates with 96 wells, which each contain a dialysis membrane that allows small molecules to pass through but retains large molecules such as proteins, and - ScanTox instruments, which enable toxicology testing without the use of animals. In protein purification, these new products increase productivity and reduce cost by avoiding the cumbersome sample handling steps required by current technology and by being compatible with automated liquid-handling robots. Many of the products are available in 96 well plate formats. In ADMET screening, these new products lower cost and increase automation by using molecular, cellular, tissue and organ based assays to reduce the use of live animals. In addition to our proprietary products, we provide a broad selection of non-proprietary products that are frequently used in conjunction with our proprietary products. We seek to be a single source for our customers' product needs in protein purification and ADMET screening. OUR STRATEGY Our goal is to become the leading provider of innovative, enabling technologies and products for proteomics and ADMET research in the drug discovery process. Key elements of our strategy are to: - establish our new proteomics and ADMET screening products as industry standards, - launch a broad range of innovative new tools for drug discovery, - leverage our existing distribution and marketing channels, - provide a single source of tools for our customers' research needs in proteomics and ADMET screening, and - acquire complementary technologies. ------------------------ We organized our company as a Massachusetts corporation on March 7, 1996 in connection with our purchase of a portion of the assets of Harvard Apparatus, a business which, with its predecessors, had been in existence since 1901. The initial Harvard Apparatus catalog was published in 1901 by Dr. William T. Porter, a professor at Harvard Medical School and the founder of the Harvard Apparatus business. We will be reincorporated by merger in Delaware prior to the closing of this offering. In connection with the reincorporation, we will change our corporate name from Harvard Apparatus, Inc. to Harvard Bioscience, Inc. We have no affiliation with Harvard University. Our principal executive offices are located at 84 October Hill Road, Holliston, Massachusetts 01746. Our telephone number at that location is (508) 893-8066 and our Internet address is www.harvardbioscience.com. The information contained on our website is not part of this prospectus. We have six wholly-owned subsidiaries, Biochrom Ltd. (United Kingdom), Harvard Apparatus Limited (United Kingdom), Hugo Sachs Elektronik-Harvard Apparatus GmbH (Germany), Harvard Apparatus S.A.R.L. (France), Harvard Apparatus FSC, Inc. (United States) and Ealing Scientific Ltd. (Canada). The names Harvard Bioscience and Harvard Apparatus and our logo are names and trademarks that we believe belong to us. We have the rights to numerous trademarks and trade names including AmiKa, Biochrom, CPK, GeneQuant, GeneQuantPro, NaviCyte, NovaSpec, PrepTip, PureTip, ScanTox, Stronghold and UltroSpec. This prospectus also contains the trademarks and trade names of other entities that are the property of their respective owners. THE OFFERING <TABLE> <S> <C> Common stock offered by us................... 6,250,000 shares Common stock offered by our president as a selling stockholder........................ 172,450 shares Common stock outstanding after the offering................................... 24,782,422 shares Use of proceeds.............................. For payment of existing debt, redemption of our series A redeemable preferred stock, potential acquisitions, working capital and general corporate purposes. Nasdaq National Market symbol................ HBIO </TABLE> The above information is based on 18,532,422 shares outstanding as of October 15, 2000 and excludes: - 599,096 shares issuable upon exercise of options then outstanding at a weighted average exercise price of $1.00 per share. Unless otherwise noted, this prospectus assumes: - no exercise of the underwriters' over-allotment, - an assumed initial offering price of $9.50 per share, - a 19.71-for-1 stock split of our common stock effected in connection with this offering, - our reincorporation by merger in Delaware and our related name change prior to the closing of this offering, - the redemption of our outstanding series A redeemable preferred stock upon the closing of this offering, - the automatic conversion of our outstanding series B convertible preferred stock into 955,935 shares of our common stock upon the closing of this offering, - the issuance of 8,509,905 shares of our common stock upon exercise of all outstanding warrants at a weighted average exercise price of $0.0005 per share prior to the closing of this offering, and - the amendment and restatement of our certificate of incorporation in connection with this offering. SUMMARY FINANCIAL DATA <TABLE> <CAPTION> PREDECESSOR PREDECESSOR COMPANY FOR THE PERIOD COMPANY FOR THE PERIOD FROM INCEPTION FISCAL YEAR FROM JANUARY 1, MARCH 15, ENDED 1996 TO 1996 TO DECEMBER 31, MARCH 14, DECEMBER 31, 1995 1996 1996 ------------ --------------- -------------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues....................... $ 10,032 $ 1,989 $ 8,198 Cost of goods sold............. 5,286 1,059 4,080 Stock compensation expense..... -- -- -- ---------- ---------- ---------- Gross profit............... 4,746 930 4,118 Other operating expenses....... 4,252 810 3,141 Stock compensation expense..... -- -- -- ---------- ---------- ---------- Operating income (loss).... 494 120 977 ---------- ---------- ---------- Other (expense) income: Common stock warrant interest expense...................... -- -- -- Interest expense, net........ (472) (90) (177) Amortization of deferred financing costs.............. -- -- -- Other........................ (62) (139) 98 ---------- ---------- ---------- Other expense, net......... (534) (229) (79) ---------- ---------- ---------- (Loss) income before income taxes...................... (40) (109) 898 Income taxes................... 85 -- 362 ---------- ---------- ---------- Net (loss) income.......... $ (125) $ (109) $ 536 Preferred stock dividends...... -- -- (97) ---------- ---------- ---------- Net (loss) income available to common stockholders..... $ (125) $ (109) $ 439 ========== ========== ========== (Loss) income per share: Basic........................ $ (0.01) $ (0.01) $ 0.04 ========== ========== ========== Diluted...................... $ (0.01) $ (0.01) $ 0.02 ========== ========== ========== Weighted average common shares: Basic........................ 10,259,410 10,259,410 10,259,410 ========== ========== ========== Diluted...................... 10,259,410 10,259,410 20,241,145 ========== ========== ========== Pro forma (loss) income per share: Basic........................ Diluted...................... Pro forma weighted average common shares: Basic........................ Diluted...................... <CAPTION> NINE MONTHS ENDED FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------ ------------------------ 1997 1998 1999 1999 2000 ---------- ---------- ---------- ----------- ---------- (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues....................... $ 11,464 $ 12,154 $ 26,178 $ 18,470 $ 22,069 Cost of goods sold............. 5,128 5,351 13,547 9,359 11,462 Stock compensation expense..... -- -- -- -- 151 ---------- ---------- ---------- --------- ---------- Gross profit............... 6,336 6,803 12,631 9,111 10,456 Other operating expenses....... 4,217 4,391 8,151 5,862 7,723 Stock compensation expense..... -- -- 3,284 937 13,181 ---------- ---------- ---------- --------- ---------- Operating income (loss).... 2,119 2,412 1,196 2,312 (10,448) ---------- ---------- ---------- --------- ---------- Other (expense) income: Common stock warrant interest expense...................... (117) (1,379) (29,694) (7,403) (70,920) Interest expense, net........ (223) (210) (657) (468) (655) Amortization of deferred financing costs.............. -- -- (63) (44) (56) Other........................ 10 31 (65) 46 (428) ---------- ---------- ---------- --------- ---------- Other expense, net......... (330) (1,558) (30,479) (7,869) (72,059) ---------- ---------- ---------- --------- ---------- (Loss) income before income taxes...................... 1,789 854 (29,283) (5,557) (82,507) Income taxes................... 682 783 137 649 1,354 ---------- ---------- ---------- --------- ---------- Net (loss) income.......... $ 1,107 $ 71 $ (29,420) $ (6,206) $ (83,861) Preferred stock dividends...... (122) (122) (157) (115) (123) ---------- ---------- ---------- --------- ---------- Net (loss) income available to common stockholders..... $ 985 $ (51) $ (29,577) $ (6,321) $ (83,984) ========== ========== ========== ========= ========== (Loss) income per share: Basic........................ $ 0.13 $ (0.01) $ (5.28) $ (1.13) $ (13.11) ========== ========== ========== ========= ========== Diluted...................... $ 0.06 $ (0.01) $ (5.28) $ (1.13) $ (13.11) ========== ========== ========== ========= ========== Weighted average common shares: Basic........................ 7,406,486 5,598,626 5,598,626 5,598,626 6,407,682 ========== ========== ========== ========= ========== Diluted...................... 17,500,194 5,598,626 5,598,626 5,598,626 6,407,682 ========== ========== ========== ========= ========== Pro forma (loss) income per share: Basic........................ $ 0.01 $ (0.82) ========== ========== Diluted...................... $ 0.01 $ (0.82) ========== ========== Pro forma weighted average common shares: Basic........................ 14,902,100 15,873,527 ========== ========== Diluted...................... 17,381,677 15,873,527 ========== ========== </TABLE> Pro forma basic and diluted net (loss) income per share have been calculated assuming the conversion of all outstanding shares of convertible preferred stock into common stock and the exercise of all outstanding warrants for common stock as if they had been converted or exercised on the dates of issuance. Accordingly, common stock warrant interest expense and dividends associated with convertible preferred shares are excluded from the pro forma per share amounts. The financial data presented above for the year ended December 31, 1995 and for the period from January 1, 1996 to March 14, 1996 represents the financial data of our predecessor company without any adjustments relating to our purchase of a portion of its assets. <TABLE> <CAPTION> AS OF SEPTEMBER 30, 2000 ------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- ----------- ----------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................. $ 2,149 $ 2,154 $54,373 Working capital........................................... 1,025 1,030 53,249 Total assets.............................................. 23,236 23,241 75,460 Long-term obligations, net of current portion............. 5,730 5,730 5,730 Preferred stock........................................... 2,500 1,500 -- Common stock warrants..................................... 102,115 -- -- Stockholders' equity (deficit)............................ (97,018) 6,102 59,821 </TABLE> The preceding table presents a summary of our balance sheet data as of September 30, 2000: - on an actual basis assuming the filing of an amended and restated certificate of incorporation to increase the number of authorized shares of common stock, - on a pro forma basis to give effect to the conversion of all outstanding shares of convertible preferred stock into an aggregate of 955,935 shares of common stock, the exercise of all outstanding warrants for an aggregate of 8,509,905 shares of common stock upon the closing of this offering and the filing of our amended and restated certificate of incorporation prior to the effective date of this offering, and - on a pro forma as adjusted basis to reflect the sale of 6,250,000 shares of common stock by us in this offering at an assumed initial offering price of $9.50 per share, after deducting estimated underwriting discounts, commissions and offering expense and the redemption of all outstanding shares of redeemable preferred stock upon the closing of this offering.
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diff --git a/parsed_sections/prospectus_summary/2000/HSTM_healthstre_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/HSTM_healthstre_prospectus_summary.txt
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+SUMMARY You should read the following summary together with the more detailed information in this prospectus, including risk factors, regarding our company and the common stock being sold in this offering. The terms "we," "us," "our" and "our company" refer to HealthStream, Inc. and its subsidiaries as a combined entity, except where the context requires otherwise. OUR BUSINESS We are pioneering a Web-based solution to meet the training and education needs of the healthcare industry utilizing our proprietary system. Through strategic relationships with medical institutions and commercial organizations, including Vanderbilt University Medical Center, Duke University Medical Center, The Cleveland Clinic Foundation, Scripps Clinic and American Health Consultants, we have amassed over 3,000 hours of training and education courses. We currently distribute over 1,300 hours of these courses online to allied healthcare professionals, nurses, doctors and other healthcare workers. We will expand distribution of our courses and services to include two methods. The first method provides access to our courses and education management software on a transactional basis over the Internet on an application service provider, or ASP, basis. We have entered into a four-year agreement with Columbia/HCA Healthcare Corporation, a provider network with over 200 hospitals, to provide our courses and education management software using this ASP method. Under the second method, we deliver our courses through strategic distribution partners, which we refer to as our Web distribution network. This network currently consists of over 30 distribution partners including Healtheon/WebMD, MedicaLogic, GE Medical Systems, Pointshare, Medsite.com, HealthGate and ChannelHealth (an IDX company). We have entered into a five-year agreement with Healtheon/WebMD to be the exclusive provider of education and training for healthcare organizations, healthcare professionals and healthcare workers on Web sites owned and operated by Healtheon/WebMD. THE MARKET OPPORTUNITY We estimate that the healthcare industry spends approximately $6.0 billion annually on training and education for over an estimated 10 million healthcare workers and professionals. According to a recent study, a greater percentage of healthcare workers receive training than workers in any other industry. Approximately 88% of all healthcare workers receive some kind of formal work-related training, safety training or continuing education every year. Training includes safety training mandated by both the Occupational Safety and Health Administration, or OSHA, and the Joint Commission on Accreditation of Healthcare Organizations, or JCAHO, for all healthcare workers. Continuing education includes continuing education units, or CEU, for nurses and continuing medical education, or CME, for doctors. The training and education market in the healthcare industry is highly fragmented, with over 1,000 providers offering a limited selection of programs on specific topics. Historically healthcare workers and professionals have received training and education through offline publications such as medical journals and CD-ROMs and by attending conferences and seminars. Although these existing approaches satisfy ongoing training and continuing education requirements, they may be limited in their breadth of offerings, inconvenient and costly to purchase or attend and result in lost productivity. In addition, healthcare organization administrators find it difficult to review and assess results, track employee compliance with certification requirements and respond to the effectiveness of education and training programs. We believe that these inefficiencies, combined with the time constraints and increased cost pressures in the healthcare industry, have prompted healthcare organizations and professionals to seek alternative training methodologies. The emergence of the Internet enables the delivery of a greater breadth and depth of training and continuing education programs to healthcare professionals and other healthcare workers more cost effectively and conveniently than by historical methods. EXPLANATORY NOTE This Registration Statement contains two forms of prospectus: one to be used in connection with an underwritten public offering in the United States and Canada of common stock (the "U.S. Prospectus"), and one to be used in a concurrent underwritten public offering outside the United States and Canada of common stock (the "International Prospectus"). The two prospectuses are identical except for the front cover page and the section entitled "Underwriting". Those sections or pages that will appear only in the U.S. Prospectus are labeled "[U.S.]," and those that will appear only in the International Prospectus are labeled "[I]." Unless so indicated with a [U.S.] or [I], the language herein will appear in both Prospectuses. Final forms of each Prospectus will be filed with the Securities and Exchange Commission under Rule 424(b) under the Securities Act of 1933. An electronic version U.S. Prospectus will also be made available on E*OFFERING CORP's Web site, located at www.eoffering.com. E*OFFERING is acting as an underwriter in connection with the offering of securities registered under this Registration Statement. OUR SERVICES We believe that the combination of our high quality training and education content, coupled with the reach through our ASP method and our distribution partners, positions us to be a leading provider of Web-based solutions to meet the needs of healthcare organizations and professionals. Healthcare organizations must provide both government mandated and internally required training to their employees. Most healthcare professionals are individually responsible for meeting their ongoing training and continuing education requirements. We believe our Web-based training and education solution allows us to meet these needs by offering: - healthcare organizations the ability to administer, assess and track government and institution-mandated training and education for their potentially large and geographically dispersed employee populations on a cost-effective basis; - healthcare professionals and other healthcare workers a cost-effective, convenient, efficient and easy to use one-stop shop for meeting their training and continuing education needs; - our distribution partners one of the largest online libraries of training and education courses from premier healthcare organizations and a predictable source of online traffic due to the recurring nature of regulated training and continuing education requirements in the healthcare industry; and - our content partners one of the largest online distribution channels targeted to the healthcare industry as well as our experience in producing interactive educational materials for the healthcare industry. OUR GROWTH STRATEGY Our objective is to be the leading provider of Web-based training and education solutions for the healthcare industry. The following are the key elements of our growth strategy: - provide healthcare organizations with Web-based access to our courses and education management software on an ASP basis; - expand and enhance our online training and education library; - increase the number of partners in our Web distribution network; - expand our sales and marketing efforts that target healthcare organizations, healthcare professionals and potential content and distribution partners; and - generate additional revenue opportunities by aggregating the performance data collected by our system and offering sponsorship products based on the attractive demographics of our end users. We intend to implement our strategy through internal growth, expansion of strategic relationships with content and distribution partners and the acquisition of businesses that have complementary content, technology and/or end users. OUR HISTORY We launched our online training and continuing education services in March 1999. We were incorporated in 1990 and in 1996 we began deploying our education management system as a network and stand-alone product. Our revenues in 1999 increased 49.6% to $2.6 million from $1.7 million in 1998. In 1999, we had a pro forma as adjusted net loss of $10.1 million on pro forma as adjusted revenues of $7.2 million and an accumulated deficit on a pro forma as adjusted basis through December 31, 1999 of $8.9 million. We expect to continue to incur net losses and negative cash flow for the foreseeable future as we continue to implement our Web-based solutions. Our principal executive office is located at 209 10th Avenue South, Suite 450, Nashville, Tennessee 37203, our telephone number is (615) 301-3100, and our Web address is www.healthstream.com. The contents of our Web site are not part of this prospectus. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. [U.S.] SUBJECT TO COMPLETION, DATED APRIL 6, 2000 (HEALTHSTREAM LOGO) 5,000,000 SHARES COMMON STOCK We are offering 5,000,000 shares of our common stock. This is our initial public offering and no public market currently exists for our shares. Our common stock has been approved for listing on the Nasdaq National Market under the symbol "HSTM." We anticipate that the initial public offering price will be $9.00 per share. ------------------------------ INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ------------------------------ <TABLE> <CAPTION> PER SHARE TOTAL ---------- ---------- <S> <C> <C> Public offering price....................................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds to HealthStream, Inc............................... $ $ </TABLE> THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. We have granted the underwriters a 30-day option to purchase up to an additional 750,000 shares of common stock to cover over-allotments. ------------------------------ ROBERTSON STEPHENS CIBC WORLD MARKETS J.C. BRADFORD & CO. E*OFFERING THE DATE OF THIS PROSPECTUS IS , 2000. THE OFFERING <TABLE> <S> <C> Common stock offered......................... 5,000,000 shares Common stock to be outstanding after this offering................................... 19,483,032 shares, including an estimated 1,111,111 shares which Healtheon/WebMD has agreed to purchase directly from us in a separate private sale that will close concurrently with this offering, or 20,233,032 shares if the underwriters exercise their over-allotment option in full. This amount does not include 5,606,223 shares subject to warrants and outstanding options issued under our stock option plans or 6,029,075 shares reserved for issuance pursuant to options we may issue under our stock option and stock purchase plans. Use of proceeds.............................. The net proceeds from this offering (without exercise of the over-allotment option) and the concurrent private sale are estimated to be approximately $50.9 million and will be used for general corporate purposes, including working capital, sales and marketing expenses, payments to content and distribution partners and possible acquisitions. See "Use of Proceeds." Risk factors................................. See "Risk Factors" and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock. Nasdaq National Market symbol................ HSTM </TABLE> ------------------------------ The number of shares of common stock to be outstanding after the offering is estimated based on the number of shares outstanding as of April 5, 2000. Except as otherwise indicated, all information in this prospectus: - reflects the conversion of a $1,293,000 promissory note payable to Robert A. Frist, Jr., our chief executive officer and chairman, into 553,712 shares of our common stock upon completion of this offering; - reflects the conversion of our outstanding shares of series A, B and C preferred stock into 7,131,153 shares of our common stock upon completion of this offering; - assumes no exercise of the underwriters' over-allotment option; - reflects a 1.85 for 1 common stock split; and - assumes the issuance of an estimated 1,111,111 shares of our common stock to Healtheon/WebMD in a private sale that will close concurrently with this offering based on an assumed initial public offering price of $9.00 per share. This number will be subject to adjustment based on the actual initial public offering price. [On the top left corner appears the "HealthStream" logo. Below the logo in the center of the page appears the text "Becoming a leader in online healthcare training and education by". About one inch below the above text appears the number "1" with text to its right which reads "amassing one of the largest libraries of online training and education courses,." About one inch below this text appears the number "2" with text to its right which reads "managing them in a Web-based administration system, and" About one inch below this text appears the number "3" with text to its right which reads "distributing them through healthcare organizations and our Web-based network of strategic partners."] [Inside Front Cover] [On the left side of the page from the top of the page to the bottom are the following: "Amass.," "Content partners.," a computer screen shot of an interactive continuing education course with the caption along the bottom of "This is one of many internal medicine courses from The Cleveland Clinic Foundation offered exclusively through our distribution network.," "The Cleveland Clinic Foundation," "Vanderbilt University Medical Center," "Duke University Medical Center," "Scripps Clinic," "American Health Consultants," "GE Medical Systems," "Content Statistics." and under that "3,000 Course hours owned and under license," "1,300 Course hours currently online," and "2,500 Live seminars listed on our online catalog, cmesearch.com"] [On the middle of the page from the top of the page to the bottom are the following: "Manage.", "HealthStream's Web-based systems:," and under that "enables healthcare organizations to administer training," "attracts recurring customers with mandated courses," "distributes high quality content to a world wide audience," "collects and aggregates performance data", screen shot of online CME programs offered by CMecourses.com, logo for HealthStream.] [On the right hand of the page from the top of the page to the bottom: "Distribute.", "Through Healthcare Organizations.", Under that "800 hospitals are implementing our products to manage education for their employees.", copy of the m3 logo to the left of "450 hospitals currently use m3 electronic learning systems. Through our merger, these hospitals are primary candidates for our online learning services.", copy of the de'MEDICI logo to the left of "150 hospitals utilize the de'MEDICI learning system, a Lippincott Williams and Wilkins product based on our technology.", copy of the Columbia/HCA logo to the left of "200 hospital provider network agrees to use our online learning services." In the middle of the page "Through Our Web Distribution Network.", screen shot of Healtheon/WebMD Practice Web page and caption under the graphic of "HealthStream is the exclusive provider of online education and training services for all Web sites owned and operated by WebMD." At the bottom of a page is a list in 3 columns, from top to bottom, left to right "ChannelHealth (IDX)", "GE Medical Systems," "MedicaLogic," "Medsite," "PointShare," "and over 30 others..."] [Color Foldout] 4 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table is a summary of the financial data for our company. We derived the historical statement of operations data for the three years ended December 31, 1999 and the historical balance sheet data as of December 31, 1999 from our audited financial statements and related notes, which are included elsewhere in this prospectus. You should read this information together with the financial statements and the related notes appearing at the end of this prospectus, the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other financial information contained elsewhere in this prospectus. The pro forma as adjusted condensed statement of operations data assumes: - the acquisition of SilverPlatter Education, Inc., Multimedia Marketing, Inc. d/b/a m3 the Healthcare Learning Company, Emergency Medicine Internetwork, Inc., or EMInet, Quick Study, Inc. and KnowledgeReview, LLC; - the conversion of our series A, B and C preferred stock into our common stock; - the conversion of notes payable-related party into our common stock; - the issuance of our common stock in this offering as described in "Use of Proceeds;" and - the sale by us of an estimated 1,111,111 shares of our common stock to Healtheon/WebMD in a private sale that will close concurrently with this offering. as if each of such transactions had occurred as of January 1, 1999. The pro forma as adjusted balance sheet data assumes: - the acquisition of m3 the Healthcare Learning Company, EMInet, Quick Study and KnowledgeReview; - the conversion of our series A, B and C preferred stock into our common stock; - the issuance of our common stock in this offering as described in "Use of Proceeds;" and - the sale by us of an estimated 1,111,111 shares of our common stock to Healtheon/WebMD in a private sale that will close concurrently with this offering. as if each of such transactions had occurred as of December 31, 1999. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------ PRO FORMA AS ADJUSTED 1997 1998 1999 1999 ------ -------- -------- ----------- <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................................................ $1,268 $ 1,716 $ 2,568 $ 7,226 Loss from operations.................................... (771) (1,261) (4,560) (10,141) Net loss................................................ (960) (1,590) (4,456) (10,082) Basic and diluted loss per share........................ (0.29) (0.49) (1.19) (0.54) Weighted average shares used in the calculation of basic and diluted net loss per share........................ 3,256 3,256 3,757 18,512 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 --------------------- PRO FORMA ACTUAL AS ADJUSTED ------- ----------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $13,632 $ 62,121 Working capital............................................. 11,465 59,915 Total assets................................................ 17,455 80,527 Long-term debt and capital leases, net of current portion... 186 202 Shareholders' equity........................................ 14,190 76,223 </TABLE>
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+PROSPECTUS SUMMARY You should read the following summary with the more detailed financial information about us and our financial statements, including the notes to the financial statements, included at the end of this prospectus. In this prospectus, all references to "we", "our", "us" and "ICICI Bank" are to ICICI Bank Limited. References to "ICICI" are to ICICI Limited on an unconsolidated basis and references to the "ICICI group" and "the group" are to ICICI Limited and its consolidated subsidiaries including us. OVERVIEW We are a private sector commercial bank organized under the laws of India in 1994. We offer a wide range of banking products and services to corporate and retail customers through a variety of delivery channels. We believe our emphasis on providing value-added products and quality service which are responsive to the financial needs of our customers will allow us to continue to gain market share in our target customer markets. We are a subsidiary of ICICI Limited, one of the largest of all Indian financial institutions, banks and finance companies in terms of assets, a well-recognized brand in the Indian financial sector and the first Indian company to list its securities on the New York Stock Exchange (symbol: IC and IC.d). At December 31, 1999, we had the largest deposit base of all of the new private sector banks in India. In fiscal 1999, our net income was Rs. 503 million (US$ 12 million). At December 31, 1999, we had assets of Rs. 102.2 billion (US$ 2.3 billion) and stockholders' equity of Rs. 3.7 billion (US$ 85 million). Our net income for the nine months ended December 31, 1999 was Rs. 1.0 billion (US$ 24 million). Our organization has three key activities: corporate banking, retail banking and treasury operations. In corporate banking, our primary goal is building a strong asset portfolio consisting mainly of working capital and term loans to large, well-established Indian corporations as well as to select middle market companies in growth industries. We also seek to provide a wide variety of fee-based corporate products and services, like documentary credits, cash management services, standby letters of credit and treasury-based derivative products that help us increase our non-interest income. In building our corporate banking activities, we have capitalized on the strong relationships that our parent company, ICICI, enjoys with many of India's leading corporations. We intend to generate significant growth in revenues based on increased synergies with ICICI and its group of companies. The retail products and services we offer include payroll accounts and other retail deposit products, online bill payment and remittance facilities, credit cards, depositary share accounts, retail loans against time deposits and loans against shares for subscriptions to initial public offerings. We have built a base of demand and time deposits with 494,480 retail customer accounts at December 31, 1999. We offer our customers a choice of delivery channels including physical branches, automated teller machines or ATMs, telephone banking call centers and the Internet. In recent years, we have expanded our physical delivery channels, including bank branches and ATMs, to cover a total of 121 locations in 40 cities throughout India at December 31, 1999. Our treasury engages in domestic and foreign exchange operations. It seeks to manage our balance sheet, including by maintaining required regulatory reserves. In addition, our treasury seeks to optimize profits from our trading portfolio by taking advantage of market opportunities using funds acquired from the inter-bank markets and corporate deposits. Our trading portfolio includes our regulatory portfolio as there is no restriction on active management of our regulatory portfolio. Since our inception in 1994, we have consistently used technology to differentiate our products and services from those of our competitors. For example, we were the first bank in India to offer Internet banking. Our technology-driven products also include electronic commerce-based business-to-business and business-to-consumer banking solutions, cash management services and mobile phone banking services. To support our technology initiatives, we have set up online real time transaction processing systems. We remain focused on changes in customer needs and technological advances and seek to remain at the forefront of electronic banking in India. OUR STRATEGY Our objective is to be the leading provider of banking products through technology-driven distribution channels servicing a targeted group of corporate and retail customers. To achieve our objective, the key elements of our strategy are to: - Increase our market share in corporate banking; - Build a profitable retail franchise; - Apply Internet-related technologies to existing product offerings and create new business opportunities on the Internet; - Use technology to provide a multi-channel distribution network; - Enhance our recurring fee income; and - Emphasize conservative risk management practices to enhance our asset quality. We are also pursuing selective strategic initiatives and alliances to further our business goals. We believe the "ICICI" brand name is well established and one of the most respected names in the financial services business in India. We believe that this strength in brand identity, together with the ICICI group's strong corporate relationships and existing retail investor base, provides us with a unique opportunity to build a profitable retail franchise in India. Within India, we have a target market of 34 million households, consisting principally of professionals and high net worth individuals as well as selected wage and salary earners. RELATIONSHIP WITH THE ICICI GROUP ICICI owns 74.2% of our equity shares. After giving effect to the offering, ICICI will own -- % of our equity shares (assuming the underwriters' over-allotment option is exercised in full). Under Indian law, no person holding shares in a banking company can vote more than 10.0% of such company's outstanding equity shares. This means that while ICICI owns 122,505,800 of our equity shares, it can only vote 10.0% of our outstanding equity shares. Due to this voting restriction and the fact that no other shareholder owns 10.0% or more of our outstanding equity shares, ICICI effectively controls 28.0% of the voting power of our outstanding equity shares. After the completion of the offering, ICICI's effective voting power may decrease. Traditionally, regulation in the banking and financial services sector in India segregated the offering of various products and services between commercial banks like us and financial institutions like ICICI. In recent years, some of these restrictions have been relaxed, and there is some overlap between the product offerings of ICICI and us. However, we believe our product range and that of ICICI remain largely complementary and enable the ICICI group to attract and retain customers by providing a complete range of financial products and services. KEY RISKS You should consider carefully the information set forth in "Risk Factors" as well as the other information contained in this prospectus in evaluating us and our business before purchasing the ADSs offered in this prospectus. As more fully described in the risk factors, investors in us should consider risks relating to India, our business (especially interest rate risk, non-performing loans and our relationship with ICICI) and the ADSs (especially the non-voting nature of the ADSs). Our principal corporate office is located at ICICI Towers, Bandra Kurla Complex, Mumbai 400 051, India, our telephone number is 011-91-22-653-1414 and our website address is www.icicibank.com.
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+Prospectus Summary The following summary does not contain all the information that may be important to you. You should read the entire prospectus before making an investment decision. UBS AG UBS AG is a global, integrated investment services firm and the leading bank in Switzerland. UBS's business is managed through three main business groups and its Corporate Center. The business groups are: UBS Switzerland, UBS Warburg and UBS Asset Management. UBS's clients include international corporations, small- and medium-sized businesses in Switzerland, governments and other public bodies, financial institutions, market participants and individuals. UBS AG's ordinary shares are listed on the New York Stock Exchange under the symbol "UBS.N," on the Zurich Stock Exchange under the symbol "UBSNZn.S" and on the Tokyo Stock Exchange under the symbol "UBS.T." On 3 November 2000, UBS acquired Paine Webber Group Inc., one of the largest full-service securities firms in the United States. UBS purchased all outstanding shares of PaineWebber stock for a combination of cash and stock representing a total purchase price of $11.8 billion (based on the UBS share price on 3 November 2000). The principal executive offices of UBS AG are located at Bahnhofstrasse 45, Zurich, Switzerland and Aeschenvorstadt 1, Basel, Switzerland. Its telephone numbers are 011-41-1-234-11-11 and 011-41-61-288-20-20. UBS AMERICAS UBS Americas Inc. is the successor by merger to Paine Webber Group Inc. Paine Webber Group Inc. was the holding company for the PaineWebber group of companies. UBS Americas is a direct, wholly owned subsidiary of UBS AG, and continues to act as the holding company for the U.S. onshore private banking operations of UBS. UBS Americas' principal executive offices are located at 677 Washington Boulevard, Stamford, Connecticut 06901, and its telephone number is 203-719-3000. SHAREHOLDERS' LETTER 28 NOVEMBER 2000 A PERSONAL NOTE FROM THE CHAIRMAN AS YOU MIGHT BE AWARE, I HAVE DECIDED TO STEP DOWN FROM MY FUNCTION AS CHAIRMAN OF THE BOARD OF DIRECTORS AFTER THE ANNUAL GENERAL MEETING IN APRIL 2001. I CONSIDER THIS TO BE THE RIGHT MOMENT. WE HAVE SUCCESSFULLY COMPLETED THE MERGER BETWEEN UNION BANK OF SWITZERLAND AND SWISS BANK CORPORATION. THE BUSINESS GROUPS AND THEIR RESPECTIVE RESPONSIBILITIES HAVE BEEN REDESIGNED. WE RECENTLY COMPLETED THE MERGER OF PAINEWEBBER INTO OUR GROUP. UBS IS IN GOOD FINANCIAL HEALTH. THE BOARD OF DIRECTORS WILL SUBMIT THE ELECTION OF MARCEL OSPEL, CURRENTLY GROUP CHIEF EXECUTIVE OFFICER, FOR YOUR APPROVAL AT THE AGM OF 26 APRIL 2001, AND WILL THEN APPOINT HIM AS CHAIRMAN. LUQMAN ARNOLD, CURRENTLY GROUP CHIEF FINANCIAL OFFICER, HAS BEEN ELECTED TO BECOME THE NEW PRESIDENT OF THE GROUP EXECUTIVE BOARD, ADDING THIS NEW ROLE TO HIS RESPONSIBILITY FOR THE GROUP'S FINANCE AND RISK FUNCTIONS. A NEW TOP-MANAGEMENT TEAM IS READY, AND I AM RELAXED AND CONFIDENT ABOUT HANDING OVER FULL RESPONSIBILITY TO THE YOUNGER GENERATION. PLEASE JOIN ME AND THE BOARD OF DIRECTORS IN WISHING MARCEL OSPEL AND LUQMAN ARNOLD SUCCESS AND LUCK IN THEIR NEW FUNCTIONS. ALEX KRAUER SENIOR MANAGEMENT SUCCESSION PLANS On 11 October, we announced plans for changes in the senior management of UBS which will take effect after the Annual General Meeting in April next year. Details are in the note which you will find opposite. At the Annual General Meeting in April you will also be asked to approve the election of three other new members of the Board of Directors. The British, Dutch and American candidates will help accurately reflect at Board level UBS's international culture and global reach. The three candidates are: Sir Peter Davis, CEO of J. Sainsbury plc; Johannes Antonie de Gier, former Chairman and CEO of Warburg Dillon Read; and Lawrence Allen Weinbach, Chairman and CEO of Unisys Corporation. UBS AG /s/ Alex Krauer Alex Krauer Chairman of the Board of Directors OUTLOOK We are pleased to have been able to report strong results so far this year and to have maintained this performance through the recent more mixed market conditions. The fourth quarter is normally the quietest part of the year in most of our businesses, and we expect this year to be no exception. In addition, we expect a one-off impact from PaineWebber integration and restructuring costs. Nevertheless, we are confident that we can complete 2000 in robust form and that we are excellently positioned for further success in 2001. The history of our bank has been one of forging new partnerships and learning from the cultures and skills of new colleagues. As an organization we are naturally excited about change and the PaineWebber merger makes next year one of our most eagerly anticipated. /s/ Marcel Ospel Marcel Ospel Group Chief Executive Officer Prospectus Summary The following summary does not contain all the information that may be important to you. You should read the entire prospectus before making an investment decision. UBS AG UBS AG is a global, integrated investment services firm and the leading bank in Switzerland. UBS's business is managed through three main business groups and its Corporate Center. The business groups are: UBS Switzerland, UBS Warburg and UBS Asset Management. UBS's clients include international corporations, small- and medium-sized businesses in Switzerland, governments and other public bodies, financial institutions, market participants and individuals. UBS AG's ordinary shares are listed on the New York Stock Exchange under the symbol "UBS.N," on the Zurich Stock Exchange under the symbol "USBNZn.S" and on the Tokyo Stock Exchange under the symbol "UBS.T." On 3 November 2000, UBS acquired Paine Webber Group Inc., one of the largest full-service securities and commodities firms in the United States. UBS purchased all outstanding shares of PaineWebber stock for a combination of cash and stock representing a total purchase price of $11.8 billion (based on the UBS share price on 3 November 2000). The principal executive offices of UBS AG are located at Bahnhofstrasse 45, Zurich, Switzerland and Aeschenvorstadt 1, Basel, Switzerland. Its telephone numbers are 011-41-1-234-11-11 and 011-41-61-288-20-20. UBS AMERICAS UBS Americas Inc. is the successor by merger to Paine Webber Group Inc. Paine Webber Group Inc. was the holding company for the PaineWebber group of companies. USB Americas is a direct, wholly owned subsidiary of UBS AG. THE TRUSTS Each trust is a business trust formed under the Delaware Business Trust Act under a declaration of trust among the trustees of that trust and UBS Americas. Each trust's primary governing document is its declaration of trust, which was completely amended and restated on the date its preferred trust securities were initially issued. The amended and restated declaration of trust of each trust is called the trust's "declaration." Each declaration is qualified under the Trust Indenture Act of 1939. The rights of the Holders of the trust securities, including economic rights, rights to information and voting rights, are as set forth in the applicable declaration, the Business Trust Act and the Trust Indenture Act. UBS Americas holds all the issued and outstanding common trust securities of each trust. Each trust exists solely for the purpose of: - issuing its trust securities for cash, - investing the proceeds in an equivalent amount of junior subordinated debentures, and - engaging in such other activities as are necessary, convenient or incidental to these activities. PROSPECTUS Prospectus dated 27 December 2000 -------------------------------------------------------------------------------- [UBS AG LOGO] UBS Americas Inc. Certain Debt Securities FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED IN THIS PROSPECTUS, BY UBS AG -------------------------------------------------------------------------------- This prospectus relates to outstanding debt securities of UBS Americas Inc. UBS Americas Inc. is the successor by merger to Paine Webber Group Inc. Before the merger, Paine Webber Group Inc. issued the following debt securities, of which the indicated aggregate principal amounts are outstanding: - $150,000,000 of 9 1/4% Notes Due 2001 - $100,000,000 of 7 7/8% Notes Due 2003 - $200,000,000 of 6 1/2% Notes Due 2005 - $100,000,000 of 6 3/4% Notes Due 2006 - $200,000,000 of 7 5/8% Notes Due 2014 - $125,000,000 of 8 7/8% Notes Due 2005 - $125,000,000 of 8 1/4% Notes Due 2002 - $150,000,000 of 7 5/8% Notes Due 2008 - $250,000,000 of 6.55% Notes Due 2008 - $340,000,000 of 6.45% Notes Due 2003 - $525,000,000 of 6 3/8% Notes Due 2004 - $275,000,000 of 7 5/8% Notes Due 2009 - $175,000,000 of 7 3/4% Subordinated Notes Due 2002 - Varying principal amounts and maturities of Medium-Term Senior Notes, Series C - Varying principal amounts and maturities of Medium-Term Subordinated Notes, Series D As a result of the merger of Paine Webber Group Inc. into UBS Americas Inc., UBS Americas is now the issuer of all the debt securities listed above. UBS Americas is a wholly owned subsidiary of UBS AG. Following the merger of UBS Americas and Paine Webber Group, UBS AG issued its guarantee of the payment obligations of UBS Americas under all the debt securities issued above. Under this guarantee, UBS AG has fully and unconditionally guaranteed all the obligations of UBS Americas under these securities. However, the obligations of UBS AG under its guarantee of the subordinated debt securities listed above are subordinated as well, as described in this prospectus. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The debt securities are not deposit liabilities of UBS AG and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency of the United States, Switzerland or any other jurisdiction. This prospectus is to be used by UBS AG and its affiliates, including UBS Warburg LLC and PaineWebber Incorporated, in connection with offers and sales of the debt securities when UBS AG and its affiliates engage in market-making transactions. These transactions may be executed at negotiated prices that are related to market prices at the time of purchase or sale, or at other prices. UBS AG and its affiliates may act as principal or agent in these transactions. No new debt securities are being offered. UBS WARBURG LLC PAINEWEBBER INCORPORATED THE OFFERING This prospectus relates to the outstanding debt securities of UBS Americas and the related guarantees of UBS. The specific terms of each debt security are described under "Description of the Debt Securities" below in this prospectus. The Debt Securities........... This prospectus relates to the following outstanding debt securities of UBS Americas: $150,000,000 of 9 1/4% Notes Due 2001 $100,000,000 of 7 7/8% Notes Due 2003 $200,000,000 of 6 1/2% Notes Due 2005 $100,000,000 of 6 3/4% Notes Due 2006 $200,000,000 of 7 5/8% Notes Due 2014 $125,000,000 of 8 7/8% Notes Due 2005 $125,000,000 of 8 1/4% Notes Due 2002 $150,000,000 of 7 5/8% Notes Due 2008 $250,000,000 of 6.55% Notes Due 2008 $340,000,000 of 6.45% Notes Due 2003 $525,000,000 of 6 3/8% Notes Due 2004 $275,000,000 of 7 5/8% Notes Due 2009 $175,000,000 of 7 3/4% Subordinated Notes Due 2002 Varying principal amounts and maturities of Medium-Term Senior Notes, Series C Varying principal amounts and maturities of Medium-Term Subordinated Notes, Series D. Issuer........................ UBS Americas Inc. Guarantor..................... UBS AG. Terms of the Debt Securities.................... As stated in the applicable description below. Market for the Debt Securities.................... UBS Warburg LLC and PaineWebber Incorporated currently make a market in the debt securities. However, they are not required to do so, and they can stop doing so at any time without notice. As a result, there is no assurance as to the liquidity of any market for the debt securities. Use of Proceeds............... All of the sales of debt securities under this prospectus will be market-making transactions -- that is, transactions in which UBS AG, UBS Warburg LLC, PaineWebber Incorporated, or one of UBS AG's other affiliates, resells securities that the seller, or one of its affiliates, has previously bought from another party. UBS Americas will not receive any of the proceeds from these resales of the debt securities. In general, we expect that the entity that resells any particular debt securities will retain the proceeds of its market-making resales and will not pay the proceeds to UBS Americas or, if the resales are not made by UBS AG, to UBS AG. GROUP REVIEW 28 NOVEMBER 2000 GROUP REVIEW [RoE 1 ANNUALIZED BAR CHART] [BASIC ADJUSTED EPS 2,3 (CHF) BAR CHART] [COST/INCOME RATIO 2 BAR CHART] [NET NEW MONEY, PRIVATE BANKING AND PRIVATE CLIENTS (CHF bn) BAR GRAPH] 1 Annualized, before goodwill amortization and adjusted for significant financial events. 2 Before goodwill amortization and adjusted for significant financial events. 3 1999 share figures are restated for the two-for-one share split, effective 8 May 2000. UBS GROUP PERFORMANCE AGAINST TARGETS <TABLE> <CAPTION> For the period 9M2000 6M2000 9M1999 1 -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> RoE (%, ANNUALIZED) as reported 26.9 29.5 23.0 before goodwill amortization and adjusted for significant financial events 3, 4 29.1 31.9 18.8 -------------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> For the quarter ended 30.9.00 30.6.00 30.9.99 1 -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> BASIC EPS (CHF) 2 as reported 5.15 5.24 3.07 before goodwill amortization and adjusted for significant financial events 3, 4 5.46 5.97 3.22 -------------------------------------------------------------------------------------------------------------------- COST / INCOME RATIO (%) as reported 69.5 72.8 72.3 before goodwill amortization and adjusted for significant financial events 3, 4 68.0 69.2 71.4 -------------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> ASSETS UNDER MANAGEMENT NET NEW MONEY 5 CHF billion 30.9.00 30.6.00 % change 3Q00 --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> UBS GROUP 1,746 1,711 2 --------------------------------------------------------------------------------------------- UBS SWITZERLAND Private and Corporate Clients 440 439 0 1 Private Banking 707 683 4 1 --------------------------------------------------------------------------------------------- UBS ASSET MANAGEMENT Institutional Asset Management 6 528 525 1 (9) Investment Funds / GAM 227 225 1 0 --------------------------------------------------------------------------------------------- UBS Warburg Private Clients 44 37 19 8 ============================================================================================= </TABLE> 1 The 1999 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Basis of Accounting). 2 1999 share figures are restated for the two-for-one share split, effective 8 May 2000. 3 The amortization of goodwill and other purchased intangible assets are excluded from the calculation. 4 Significant financial events are excluded from the calculation. 5 Excludes interest and dividend income. 6 Includes non-institutional assets also reported in the Investment Funds / GAM business unit. GROUP TARGETS UBS focuses on four key performance targets, designed to ensure that we deliver continually improving returns to our shareholders. Our performance against these targets has continued to be very good this quarter. Adjusted for significant financial events, our annualized pre-goodwill return on equity for the first nine months of 2000 is 29.1%, once again well above our target range of 15-20%. Pre-goodwill earnings per share grew 70% over third quarter 1999, adjusted for one-off gains, clearly beating our double-digit growth target. The cost/income ratio is also well below that of third quarter 1999 and slightly lower than second quarter 2000. Net new money in both the private banking units was positive this quarter, although the volatility in the quarter-on-quarter net new money trend in the Private Clients business unit reflects its relatively early stage of business development. SIGNIFICANT FINANCIAL EVENTS There were no significant financial events in third quarter 2000. Second quarter 2000 included an additional and final provision of CHF 200 million before tax in respect of the US Global Settlement regarding World War II related claims. Third quarter 1999 included a capital gain of CHF 26 million before tax relating to our residual holding in Long Term Capital Management. RESULTS SUMMARY Excellent third quarter results, with net profit after taxes and minority interests of CHF 2,075 million, demonstrate continued strong profitability. Group net profit after tax and minority interests has now been above CHF 2 billion for a third straight quarter and is up 73% compared to third quarter 1999, on an adjusted basis. THE OFFERING The Securities................ 7,000,000 8.30% Preferred Trust Securities of PWG Capital Trust I. 7,000,000 8.08% Preferred Trust Securities of PWG Capital Trust II. The terms of each series of preferred trust securities correspond to the terms of the junior subordinated debentures held by the relevant trust. Each trust's ability to make distributions and other payments on its preferred trust securities is solely dependent upon UBS Americas' making payments on the junior subordinated debentures held by the trust as and when required. Liquidation Amount............ The liquidation amount of the 8.30% Preferred Trust Securities of PWG Capital Trust I is $25 per security. The liquidation amount of the 8.08% Preferred Trust Securities of PWG Capital Trust II is $25 per security. Offering Price................ Negotiated prices that are related to market prices at the time of purchase or sale, or at other prices. Distributions................. Holders of the 8.30% Preferred Trust Securities of PWG Capital Trust I will be entitled to receive cumulative cash distributions at an annual rate of 8.30% of the stated liquidation amount of $25 per preferred trust security. These distributions are payable monthly, in arrears, on the first day of each month. Holders of the 8.08% Preferred Trust Securities of PWG Capital Trust II will be entitled to receive cumulative cash distributions at an annual rate of 8.08% of the stated liquidation amount of $25 per preferred trust security. These distributions are payable monthly, in arrears, on the first day of each month. Extension Periods............. UBS Americas has the right to defer payments of interest on either series of the junior subordinated debentures for a period of not more than five years. No interest will be due and payable on the junior subordinated debentures during an extension period and, as a result, distributions on the trust securities will also be deferred. At the end of the extension period, UBS Americas will be required to pay all accrued interest on the affected series of junior subordinated debentures, together with interest on that accrued interest at the rate applicable to those junior subordinated debentures to the extent permitted by applicable law, compounded monthly. UBS Americas has the right to select an extension period as many times as it wishes during the life of the junior subordinated debentures. There could be multiple extension periods of varying lengths throughout the term of either series of junior subordinated debentures. TABLE OF CONTENTS -------------------------------------------------------------------------------- <TABLE> <S> <C> Prospectus Summary.................... 3 Use of Proceeds....................... 7 Cautionary Note Regarding Forward- Looking Information................. 8 Capitalization of UBS................. 9 Recent Developments................... 10 UBS................................... 11 UBS Americas.......................... 128 Unaudited Pro Forma Condensed Consolidated Financial Information......................... 129 Description of the Debt Securities.... 155 The Guarantees........................ 181 Foreign Currency Risks................ 184 Certain United States Federal Income Tax Considerations.................. 187 Tax Considerations Under the Laws of Switzerland......................... 193 ERISA Matters......................... 194 Plan of Distribution.................. 195 Validity of the Securities............ 196 Experts............................... 196 Limitations on Enforcement of U.S. Laws Against UBS AG, Its Management and Others.......................... 196 Where You Can Find More Information... 197 Presentation of Financial Information......................... 197 Financial Statements of UBS........... F-i Third Quarter Report 2000............. A-1 </TABLE> Plan of Distribution.......... This prospectus relates to market-making transactions in the debt securities by UBS AG and its affiliates. The affiliates that may engage in these transactions include, but are not limited to, UBS AG itself, UBS Warburg LLC and PaineWebber Incorporated. These transactions may be executed at negotiated prices that are related to prevailing market prices at the time of sale, or at other prices. UBS AG and its affiliates may act as principal or agent in these transactions. No new securities are offered. GROUP REVIEW 28 NOVEMBER 2000 SIGNIFICANT FINANCIAL EVENTS <TABLE> <CAPTION> Quarter ended Year-to-date ----------------------------------------- ------------------------- <S> <C> <C> <C> <C> <C> CHF million 30.9.00 30.6.00 30.9.99 30.9.00 30.9.99 ----------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME AS REPORTED 8,545 9,200 6,534 27,102 21,636 Julius Baer registered shares divestment 110 International Global Trade Finance divestment 200 Swiss Life/Rentenanstalt divestment 1,490 LTCM gain 26 26 ADJUSTED OPERATING INCOME 8,545 9,200 6,508 27,102 19,810 ----------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES AS REPORTED 5,842 6,548 4,921 18,839 14,992 US Global Settlement provision 200 200 ADJUSTED OPERATING EXPENSES 5,842 6,348 4,921 18,639 14,992 ----------------------------------------------------------------------------------------------------------------------------------- ADJUSTED OPERATING PROFIT BEFORE TAX AND MINORITY INTERESTS 2,703 2,852 1,587 8,463 4,818 =================================================================================================================================== Tax expense 621 591 374 1,878 1,525 Tax effect of significant financial events 45 (3) 45 (348) Minority interests (7) (9) (14) (42) (35) ----------------------------------------------------------------------------------------------------------------------------------- ADJUSTED NET PROFIT 2,075 2,207 1,202 6,498 3,606 =================================================================================================================================== </TABLE> Year-to-date adjusted net profit after tax of CHF 6,498 million represents an increase of 80% over the first nine months of 1999, and already exceeds the adjusted 1999 full-year results by 39%. Net interest income before credit loss expense increased 30% over third quarter 1999 to CHF 1,831 million. Higher interest rates increased the cost of medium and long term debt, but also helped to increase net income from lending to clients and banks. Trading-related net interest income was up 24% over third quarter 1999. Net fee and commission income was CHF 3,865 million in third quarter 2000, an increase of 26% over third quarter 1999. Brokerage fees reflected higher levels of client activity in UBS Switzerland and busier markets, rising 36% from the same period last year. Underwriting fees were up 65% thanks to another strong performance in equity underwriting, and Corporate finance fees also increased 71%, with strong results worldwide. Portfolio and other management and advisory fees increased CHF 81 million compared to second quarter 2000, chiefly as a result of the performance of the new O'Connor business, and were up nearly 50% from the same quarter last year, due to O'Connor and the acquisition of GAM in fourth quarter 1999. The 34% increase in Investment fund fees since third quarter 1999 reflects the addition of GAM, increased fund assets and a greater proportion of client money invested in higher margin equity funds. Net trading income was CHF 2,368 million in third quarter 2000, 13% up on the same quarter last year, as a result of increased global market activity and the strong client-driven performance of UBS Warburg. Equity trading revenues are well ahead of this time last year, but when combined with dividend income fell in comparison to second quarter 2000, reflecting the usual seasonal reduction in market activity and trading opportunities experienced during the summer holiday season. The increase of CHF 100 million in Other income compared to third quarter 1999, is primarily due to the inclusion of income from Klinik Hirslanden, which was not consolidated in the income statement at that time. Total operating expenses increased 19% over third quarter last year to CHF 5,842 million. This is largely due to increased performance-related compensation as revenues continue to exceed levels in 1999. Personnel expenses were down 11% from last quarter, in line with slower revenues, but were 24% higher than in third quarter 1999. General and administrative expenses increased only 8% over third quarter 1999, to CHF 1,503 million, mainly due to currency movements and the impact of the consolidation of Klinik Hirslanden. The underlying figure was roughly static relative to third quarter last year, reflecting our continued efforts to control non-revenue driven costs. Depreciation and amortization increased 12% to CHF 476 million compared to third quarter 1999, with increases in goodwill amortization due to the acquisitions of Allegis and GAM. UBS Group incurred a tax expense of CHF 621 million for third quarter 2000, an effective tax rate of 23%. See "Risk Factors--Option to Extend Interest Payment Period," "--Tax Impact of Extension," "Description of Securities--Description of the Junior Subordinated Debentures--General" and "--Description of the Junior Subordinated Debentures--Option to Extend Interest Payment Period." Ranking....................... The preferred trust securities and the common trust securities of each trust rank equally with each other and have equivalent terms. However, - If an event of default (as defined below) under the declaration of trust of the issuing trust occurs and continues, the Holders of the preferred trust securities of that trust will have a priority over the Holders of the common trust securities of that trust with respect to payments on those preferred trust securities. - Holders of the common securities of each trust have the exclusive right (subject to the terms of the trust's declaration of trust) to appoint, replace or remove trustees for the issuing trust and to increase or decrease the number of trustees. Redemption.................... The preferred trust securities of each trust will be redeemed when the junior subordinated debentures of that trust mature or are redeemed. The junior subordinated debentures held by PWG Capital Trust I will mature on 1 December 2036. UBS Americas may redeem the junior subordinated debentures held by PWG Capital Trust I, either as a whole or in part, at any time after 30 November 2001. The junior subordinated debentures held by PWG Capital Trust II will mature on 1 March 2037. UBS Americas may redeem the junior subordinated debentures held by PWG Capital Trust II, either as a whole or in part, at any time after 28 February 2002. In addition, UBS Americas can redeem the junior subordinated debentures of either trust at any time if a "Tax Event," as described below, occurs. If UBS Americas redeems any junior subordinated debentures, the trust that holds those junior subordinated debentures must redeem a corresponding amount of its trust securities. The redemption price will be equal to the liquidation amount of the trust security plus any accrued and unpaid distributions to the date fixed for redemption. See "Description of Securities--Description of the Preferred Trust Securities--Redemption of Trust Securities." Distribution of Junior Subordinated Debentures..... If a trust is dissolved, the junior subordinated debentures held by that trust will be distributed to the holders of that trust's trust securities, pro rata. UBS Americas Inc. will have RATIO OF EARNINGS TO FIXED CHARGES The following table sets forth UBS AG's ratio of earnings to fixed charges, for the periods indicated. <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED 31 DECEMBER 30 JUNE 1997 1998 1999 1999 2000 CHF in millions, except ratios ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> INTERNATIONAL ACCOUNTING STANDARDS ("IAS")(1) RATIO OF EARNINGS TO FIXED CHARGES(2).............. 0.95 1.11 1.25 1.36 1.28 US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP")(1) RATIO OF EARNINGS TO FIXED CHARGES(3).............. x 0.80 1.14 x 1.16 </TABLE> ------------ (1) The ratio is provided using both IAS and US GAAP values, as the ratio is materially different between the two accounting standards. No US GAAP information is provided for 31 December 1997 and 30 June 1999 as a US GAAP reconciliation was not required for those periods. (2) The deficiency in the coverage of fixed charges by earnings before fixed charges on an IAS basis at 31 December 1997 of CHF 851 million is due to restructuring charges of CHF 7,000 million under IAS charged in that period. Without that charge, the ratio would have been 1.36. (3) The deficiency in the coverage of fixed charges by earnings before fixed charges at 31 December 1998 of CHF 5,319 million is due to restructuring charges of CHF 3,982 million under US GAAP, as well as 1,706 million of pre-tax losses from significant financial events charged for that period. See "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Introduction." Without those charges the ratio would have been 1.01. GROUP REVIEW 28 NOVEMBER 2000 RESTRUCTURING PROVISION USED <TABLE> <CAPTION> Quarter ended ------------------- CHF million Personnel IT Premises Other 30.9.00 30.6.00 ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> UBS Switzerland 38 7 0 0 45 54 Private and Corporate Clients 37 5 0 0 42 52 Private Banking 1 2 0 0 3 2 UBS Asset Management 5 0 0 0 5 1 UBS Warburg 0 0 0 0 0 0 Corporate Center 2 0 29 0 31 18 ------------------------------------------------------------------------------------------------------------------------ GROUP TOTAL 45 7 29 0 81 73 ======================================================================================================================== ------------------------------------------------------------------------------------------------------------------------ Initial restructuring provision in 1997 7,000 Additional provision in 1999 300 Used in 1998 4,027 Used in 1999 1,844 Used in 2000 272 ------------------------------------------------------------------------------------------------------------------------ Total used through 30.9.2000 6,143 ------------------------------------------------------------------------------------------------------------------------ RESTRUCTURING PROVISION REMAINING AT 30.9.2000 1,157 ======================================================================================================================== </TABLE> UBS/SBC MERGER RESTRUCTURING PROVISION Of the CHF 7,300 million restructuring provision relating to the 1998 merger between Union Bank of Switzerland and Swiss Bank Corporation, CHF 81 million was used in third quarter 2000, leaving CHF 1,157 million still to be used. As in the second quarter, the main use of the provision this quarter related to severance costs in Private and Corporate Clients and vacancy-related premises costs in Corporate Center. UBS expects that the provision will be completely utilized by the end of 2001. The sale of Solothurner Bank to Baloise Insurance in August this year represents the completion of UBS's compliance with the sale of business conditions set by the Swiss Competition Commission as a result of the merger. The sale was completed on 19 October 2000, and will be reflected in fourth quarter results. CREDIT RISK During third quarter 2000, UBS realized a write-back of credit loss expenses of CHF 142 million, compared to a write-back of CHF 208 million in the second quarter 2000. This is the result of a continued improvement in the quality of our Swiss loan portfolio and is in sharp contrast to the CHF 275 million of credit loss expenses recorded in third quarter 1999. In accordance with the trend in the previous quarter, the unprecedentedly strong rebound of the Swiss economy, combined with UBS's disciplined credit underwriting standards, enabled additional recoveries of previously established loan loss provisions in the Swiss portfolio, which by far exceeded new requirements. On the other hand, this positive scenario was partially offset by the need for additional loan loss provisions in UBS Warburg's portfolio, in line with trends in the international credit markets. The significant reduction in the international loan portfolio achieved during the past two years, coupled with the active use of credit derivatives and reluctance to engage in balance sheet-led earnings growth, positions UBS well for the less positive credit conditions expected outside Switzerland, notably in the US. In particular, in line with its commitment to risk diversification, UBS's loan exposure to the telecom sector is relatively small compared to many of our peers, representing less than 2% of gross loans outstanding at 30 September 2000. The vast majority of our telecom loan book is rated investment grade. The further improvement in UBS's credit risk portfolio is also evident in the reduction of non-performing loans by CHF 956 million, or 8%, during the quarter. UBS's loan portfolio increased by CHF 11.4 billion over the quarter, to CHF 282.4 billion. The increase of CHF 17.5 billion in the UBS Warburg portfolio, principally as a result of zero risk-weighted money market and Group treasury positions held by UBS Warburg, was partially offset by a decrease of CHF 5.3 billion in UBS Switzerland, where the write-off and repayment of impaired positions exceeded new business. The reduction in non-performing loans combined with the increase in size of the overall portfolio means that the non-performing loans to total loans ratio fell to the right to liquidate each trust if there is a "Special Event," as described below, as a result of a change in law or a change in legal interpretation. However, if the Special Event is a Tax Event, UBS Americas may have the right to redeem the junior subordinated debentures, which would result in the redemption of the trust securities as described above. If the junior subordinated debentures are distributed to the Holders of the preferred trust securities, UBS Americas will use its best efforts to have the junior subordinated debentures listed on the New York Stock Exchange, or on whatever exchange that then lists the preferred trust securities. See "Description of Securities--Description of the Preferred Trust Securities--Special Event Redemption or Distribution" and "--Description of the Junior Subordinated Debentures."
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully. JACK HENRY & ASSOCIATES We are a leading provider of integrated computer systems to commercial banks with under $10.0 billion of total assets, which we refer to as community banks, as well as credit unions and other financial institutions in the United States. We offer a complete, integrated suite of information technology solutions to improve the management of our customers' entire back-office and customer interaction processes. We believe that our solutions enable our customers to provide better service to their customers and compete more effectively against larger banks and alternative financial institutions. Our customers either install and use our systems in-house or outsource these operations to us through our data centers located across the United States. We perform data conversion and software installation for the implementation of our systems and provide continuing maintenance and support services that foster strong customer relationships and produce recurring revenue and additional sales opportunities. Founded in 1976, we have gained a reputation in the markets we serve as a high-quality provider of value-added, productivity-enhancing products and services. Our revenues have grown from $67.2 million in fiscal 1995 to $193.5 million in fiscal 1999, a compound annual growth rate of 30.3%. Over this same period, our customer base has grown from 950 to 1,800. As of June 30, 2000, we had over 2,850 customers. We also have enjoyed strong growth in net income and expanding pre-tax margins since 1995. Income from continuing operations has grown from $9.1 million in fiscal 1995 to $32.7 million in fiscal 1999, a compound annual growth rate of 37.7%. During this same period, pre-tax margins grew from 20.6% in fiscal 1995 to 26.7% in fiscal 1999. For the three months ended March 31, 2000, income from continuing operations increased 21.1% over the comparable period in calendar 1999 to $10.2 million and pre-tax margins were 26.3%. OUR INDUSTRY As of December 31, 1999, there were approximately 8,500 community banks and 11,000 credit unions in the United States with aggregate assets of approximately $1.9 trillion and $411.4 billion, respectively. According to the Automation in Banking 1999 report, all financial institutions, including both the largest banks in the United States and our target market of community banks and credit unions, collectively increased spending on hardware, software, services and telecommunications from $19.9 billion in 1994 to $32.0 billion in 1998, a compound annual growth rate of 12.6%. An industry survey indicates that 93% of community banks and credit unions, which together we refer to as community financial institutions, believe upgrading technology is the most important issue for their continued success. In addition, the Internet is becoming a powerful and efficient medium for the delivery of financial services. Community financial institutions risk losing customers to larger or alternative financial institutions if they do not offer Internet banking services. We believe that the market opportunity for providers of information technology systems, maintenance, support and related outsourcing services targeted toward community financial institutions will continue to grow as a result of competitive pressure on financial institutions. OUR SOLUTION We are a single-source provider of a comprehensive and flexible suite of integrated products and services that address the information technology needs of community financial institutions. We offer software applications primarily for use on hardware supporting IBM OS/400 and UNIX operating systems. Our software applications provide our customers with maximum flexibility in meeting their data processing requirements within a single, integrated system. Our core proprietary software applications are the Silverlake System and the CIF 20/20 system, each of which operates on IBM AS/400 hardware; our Core Director system, which operates on UNIX-based hardware; and our Symitar Systems, which operates on the IBM RS/6000 with a UNIX operating system. Each of these core applications include the vital data processing and information management functions required by a community financial institution. Our Silverlake System offers the greater functionality and capacity required by larger community banks, while the CIF 20/20 system provides excellent functionality to smaller community banks whose needs can be met with less complexity. Our Core Director system is intended for community banks that operate UNIX-based hardware and our Symitar Systems is specifically designed for credit unions. To complement our core proprietary software applications, we provide a variety of integrated ancillary products and services, including Internet and telephone banking applications, bill payment and image processing. We provide these products and services to community financial institutions for use on an in-house or an outsourced basis. We believe that our information technology solution provides strategic advantages to our customers by enabling them to: - implement advanced technologies with full functionality; - rapidly deploy new products and services; - focus on customer relationships; and - access outsourcing solutions to improve operating efficiency. OUR STRATEGY Our objective is to grow our revenue and earnings internally, supplemented by strategic acquisitions. The key components of our business strategy are to: - provide high-quality, value-added products and services to our clients; - continue to expand our product and service offerings; - expand our existing customer relationships; - expand our customer base; - build recurring revenue; - maximize economies of scale; and - attract and retain capable employees. RECENT ACQUISITIONS In fiscal 2000, we closed four strategic acquisitions that expanded our core software offerings targeted to our community financial institution customers, added a complementary service offering and increased our focus on providing information technology solutions to credit unions. On September 8, 1999, we completed the purchase of certain assets of BancTec, Inc.'s community banking business for $50.0 million in cash and the assumption of certain liabilities. This business, which we renamed Open Systems Group, had revenue for the year ended August 31, 1999 of $40.2 million and provided us with a UNIX-based software system, one data center, five additional item processing centers and over 600 community bank customers. On April 1, 2000, we acquired the capital stock of BancData Solutions, Inc. for $5.0 million in cash, providing us with outsourcing centers and customers in the California market. On June 1, 2000, we completed our $16.0 million pooling of interests acquisition of Sys-Tech, Inc. of Kansas, a provider of uninterruptible power supply systems and consulting services pertaining to the design of computer facilities. Sys-Tech, which had revenue for its fiscal year ended September 30, 1999 of $9.9 million, had been a Jack Henry & Associates business partner since 1991. On June 7, 2000, we completed the purchase of the capital stock of Symitar Systems, Inc. for $44.0 million in cash. Symitar Systems had revenue for the year ended December 31, 1999 of $32.8 million and provided us with one of the leading software products targeting the credit union market, increasing our presence in this market with the addition of 237 credit union customers. RECENT DEVELOPMENTS On July 21, 2000, we announced unaudited financial data for our fourth fiscal quarter and for the fiscal year ended June 30, 2000. This information is preliminary and we have not finalized our consolidated financial statements for these periods. Fourth quarter revenues increased 54.2% to $69.4 million over the same period in fiscal 1999. For fiscal 2000, total revenues increased 16.4% to $225.3 million compared to $193.5 million in fiscal 1999. Software licensing and installation revenues in the fourth quarter increased 96.9% to $21.8 million and accounted for 31.4% of total revenues compared to $11.1 million or 24.6% of fourth quarter 1999 revenues. In fiscal 2000, software licensing and installation revenues grew 22.3% to $57.7 million or 25.6% of total revenues compared to $47.2 million or 24.4% of fiscal 1999 revenues. Fourth quarter maintenance, support and services revenues increased 51.5% to $27.7 million and hardware sales increased 27.2% to $19.9 million. In fiscal 2000, maintenance, support and service revenues increased 36.8% to $97.5 million and hardware sales decreased 6.6% to $70.1 million. Income from continuing operations increased 5.0% in fiscal 2000 to $34.4 million or $0.81 per diluted share, compared to $32.7 million, or $0.77 per diluted share, in fiscal 1999. Growth in software licensing and installation revenues resulted in a gross margin of 47.5% in the fourth quarter of fiscal 2000, up from 46.4% in the fourth quarter of the prior year. Gross margin for the full year was 43.5%, down from 44.6% in the comparable period of fiscal 1999. Fourth quarter gross profit grew 58.0% to $33.0 million compared to $20.9 million in the fourth quarter of fiscal 1999. Fiscal 2000 gross profit was up 13.7% to $98.1 million compared to $86.3 million a year ago. Operating expenses for the fourth quarter increased to $15.1 million or 21.8% of revenues and for fiscal 2000 to $47.1 million or 20.9% of revenues. Selling and marketing expenses increased 35.5% during fiscal 2000 to $19 million. General and administrative expenses increased 38.1% in the fourth quarter and 15.7% for the full fiscal year 2000. Fourth quarter operating income was $17.8 million compared to $12.2 million in the fourth quarter of fiscal 1999. Fiscal 2000 operating income was $51.0 million compared to $49.7 million in fiscal 1999. Fourth quarter pre-tax income totaled $17.4 million compared to $12.4 million in fiscal 1999, and pre-tax margins decreased to 25.1% in the fourth quarter of fiscal 2000 from 27.5% in the fourth quarter of fiscal 1999. Fiscal 2000 pre-tax income was $51.8 million compared to $51.6 million in fiscal 1999, and pre-tax margins decreased to 23.0% in fiscal 2000 from 26.7% in fiscal 1999. Total assets grew 83.4% to $325.1 million at the end of fiscal 2000 compared to fiscal 1999, and stockholders' equity increased 33.5% to $154.5 million. Long-term and short-term debt totaled $70.9 million at the end of fiscal 2000. ABOUT US We were incorporated in Missouri in 1977 and reincorporated in Delaware in 1985 in connection with our initial public offering. Our principal offices are located at 663 Highway 60, Monett, Missouri 65708, and our telephone number is (417) 235-6652. Our web site is located at www.jackhenry.com. Information contained on our web site should not be considered part of this prospectus. THE OFFERING <TABLE> <CAPTION> <S> <C> Shares offered by Jack Henry & Associates....... 2,000,000 shares Shares offered by the selling stockholders...... 3,000,000 shares Total shares outstanding after this offering.... 43,357,852 shares Use of proceeds by Jack Henry & Associates...... For repayment of debt, working capital, capital expenditures, other general corporate purposes and potential future acquisitions. Nasdaq National Market symbol................... JKHY </TABLE> The number of shares offered by the selling stockholders does not include up to 750,000 shares that the underwriters may purchase from the selling stockholders if the underwriters exercise their over-allotment options in full. The amount of common stock that will be outstanding after this offering does not include: - 6,580,560 shares issuable upon exercise of options outstanding as of August 1, 2000, of which 3,762,160 shares are exercisable under our stock option plans at a weighted average exercise price of $20.36 per share; and - 1,696,110 shares available as of August 1, 2000, for issuance under our stock plans pursuant to options that have not yet been granted. Unless otherwise stated, all share amounts and prices included in this prospectus have been adjusted to give effect to the 2 for 1 split of our common stock in the form of a stock dividend that took place on March 2, 2000.
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS AND THE RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION. LIVEPERSON LivePerson is a provider of technology that facilitates real-time sales and customer service for companies doing business on the Internet. We are an application service provider and we offer our proprietary real-time interaction technology as an outsourced service. Our service appears as a LivePerson-branded or custom-created icon on our clients' Web sites. When an Internet user clicks on the icon, a pop-up dialogue window appears, enabling our clients to communicate directly with Internet users via text-based chat. Our clients can respond to Internet user inquiries in real time, and can thereby enhance their online shopping experiences. Our technology requires no software or hardware installation by our clients or their Internet users. Based on feedback received from our clients, we believe that our service offers our clients the opportunity to increase sales, reduce customer service costs and increase responsiveness to Internet user needs and preferences. Because we are an application service provider and provide our clients with a service rather than an in-house technology solution, our clients can devote their information technology resources to other priorities. We offer low start-up costs, currently $1,000 per client, and reasonable ongoing monthly fees, currently $250 per operator access account, or seat. We can implement our LivePerson service immediately following a two-hour training session. Upgrades to the LivePerson service are automatic because they are installed on our servers, without requiring action by either our clients or Internet users. We also offer our clients the ability to add capacity whenever requested. We currently have more than 450 clients. Our service benefits companies of all sizes doing business on the Internet, including online retailers, online service providers and traditional offline businesses with a Web presence. Our largest clients in the first two months of 2000 were GMAC's ditech.com, Homelender.com, MyHome.com, National Discount Brokers, Neiman Marcus, ShopNow, TradeCapture.com and WhatsHotNow. Prospective investors should be aware that investing in our common stock involves many risks, which are described more fully in the section "Risk Factors" beginning on page 7. In particular, we face risks including, but not limited to, the facts that: - we have an unproven business model and will rely on revenue from the LivePerson service for substantially all of our revenue for the forseeable future; - we have a limited operating history related to the LivePerson service and a history of significant losses, including a net loss of $9.8 million in 1999; - we have an accumulated deficit of approximately $9.8 million as of December 31, 1999; - we anticipate incurring losses in the foreseeable future which may be substantial; and - we operate in an emerging and highly competitive marketplace with relatively low barriers to entry. We plan to enhance our current position as a provider of real-time sales and customer service technology for companies doing business on the Internet. The key elements of our strategy include: - strengthening our market position by significantly expanding our installed client base; - adding features and functionality to our live interaction platform to increase the value of our service to our clients and their reliance on its benefits; - continuing to build brand awareness; - continuing to develop our technological capabilities by devoting significant resources to network architecture and software design; - seeking opportunities to form strategic alliances and make acquisitions where appropriate; and - expanding our international presence. Prospective investors should also be aware of the risks related to achieving these strategic objectives which are described more fully in "Risk Factors." Our business was incorporated in the State of Delaware in November 1995 under the name Sybarite Interactive Inc. Prior to November 1998, we generated programming revenue from services primarily related to Web-based community programming and media design. In 1998, we shifted our core business focus to the development of the LivePerson service and phased out our programming and media design business, which last generated revenue in December 1999 and is not expected to generate any future revenue. Following our introduction of the LivePerson service in November 1998, we changed our name in January 1999 to Live Person, Inc., and on March 8, 2000 to LivePerson, Inc. Our principal executive offices are located at 462 Seventh Avenue, 10th Floor, New York, New York 10018-7606. Our telephone number is (212) 277-8950. The address of our Web site is www.liveperson.com. Information contained on our Web site does not constitute part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered by LivePerson........... 4,000,000 shares Common stock to be outstanding after this offering................................... 29,339,869 shares Use of proceeds.............................. Various purposes, including product development costs, sales and marketing activities, general corporate purposes and working capital, and strategic alliances and acquisitions, if any. Nasdaq National Market symbol................ LPSN </TABLE> ------------------------ The number of shares of common stock to be outstanding after the offering is based on the number of shares outstanding as of March 31, 2000 and excludes: - 10,000,000 shares of common stock reserved for issuance under our 2000 Stock Incentive Plan, of which 5,479,905 shares are issuable upon the exercise of stock options outstanding as of March 31, 2000 with a weighted average exercise price of $2.61 per share; - 94,500 shares of common stock reserved for issuance upon the exercise of stock options with an exercise price of $1.60 per share granted outside of the predecessor to our 2000 Stock Incentive Plan; - 450,000 shares of common stock reserved for issuance under our 2000 Employee Stock Purchase Plan; and - 542,968 shares of common stock issuable upon the exercise of warrants outstanding as of March 31, 2000, with a weighted average exercise price of $1.60 per share. ------------------------ Unless otherwise indicated, all information in this prospectus: - reflects the automatic conversion of all of our outstanding shares of convertible preferred stock, including the series D redeemable convertible preferred stock, at a two-for-three ratio, whereby each two shares of preferred stock are convertible into three shares of common stock, into an aggregate of 17,962,273 shares of our common stock upon the closing of this offering; - reflects a three-for-two stock split of shares of our common stock effected on March 8, 2000; - assumes the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws, each as contemplated to be in effect as of the closing of this offering; and - assumes no exercise of the underwriters' over-allotment option. SUMMARY FINANCIAL INFORMATION THE TABLE BELOW SETS FORTH SUMMARY FINANCIAL INFORMATION FOR THE PERIODS INDICATED. IT IS IMPORTANT THAT YOU READ THIS INFORMATION TOGETHER WITH THE SECTION ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND OUR FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, -------------------------------------------------- 1996 1997 1998 1999 ---------- ---------- ---------- ----------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue: Service revenue......................................... $ -- $ -- $ 1 $ 576 Programming revenue..................................... 11 245 378 39 ---------- ---------- ---------- ----------- Total revenue........................................... 11 245 379 615 ---------- ---------- ---------- ----------- Total operating expenses.................................. 42 251 399 10,865 Loss from operations...................................... (31) (6) (20) (10,250) Net loss.................................................. (30) (6) (20) (9,777) ========== ========== ========== =========== Basic and diluted net loss per share...................... $ 0.00 $ 0.00 $ 0.00 $ (1.38) ========== ========== ========== =========== Weighted average basic and diluted shares outstanding..... 7,092,000 7,092,000 7,092,000 7,092,000 ========== ========== ========== =========== Unaudited pro forma basic and diluted net loss per share................................................... $ (0.63) =========== Shares used in unaudited pro forma basic and diluted net loss per share calculation.............................. 15,465,304 =========== </TABLE> Shares used in computing pro forma basic and diluted net loss per share include the shares used in computing basic and diluted net loss per share adjusted for the conversion of our series A convertible preferred stock, series B convertible preferred stock and series C redeemable convertible preferred stock to common stock at a two-for-three ratio, whereby each two shares of preferred stock are convertible into three shares of common stock, as if the conversion occurred at the date of their original issuance. The pro forma balance sheet data summarized below give effect to: - the receipt of net proceeds of approximately $17.9 million from the sale of our series D redeemable convertible preferred stock on January 27, 2000; - the recording of a non-cash preferred stock dividend of $18.0 million, which relates to the beneficial conversion feature associated with our series D convertible preferred stock; and - the automatic conversion into common stock of all of our outstanding convertible preferred stock (including our series D redeemable convertible preferred stock) at a two-for-three ratio upon the closing of this offering. The pro forma as adjusted balance sheet data summarized below give effect to our receipt of the estimated net proceeds from the sale of the 4,000,000 shares of common stock offered hereby at an assumed initial public offering price of $10.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. <TABLE> <CAPTION> DECEMBER 31, 1999 --------------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- -------------- ----------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................. $14,944 $32,844 $68,944 Working capital........................................... 13,380 31,280 67,380 Total assets.............................................. 19,570 37,470 73,570 Redeemable convertible preferred stock.................... 18,990 -- -- Total stockholders' equity (deficit)...................... (2,046) 34,844 70,944 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/LXRX_lexicon_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/LXRX_lexicon_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before buying shares of our common stock. You should read the entire prospectus carefully. LEXICON GENETICS INCORPORATED We are using technology that we invented to define the functions of genes for drug discovery. This technology, which we refer to as gene trapping, alters the DNA of genes in a special variety of mouse cells, called embryonic stem (ES) cells, which can be cloned and used to generate mice. In these mice, the altered DNA disrupts, or "knocks out," the function of the gene, enabling the study of the function of the knocked out gene. Our gene trapping technology also enables us to obtain DNA sequences of genes from human and mouse cells. Using this technology, we are discovering thousands of genes and expanding our OmniBank library of tens of thousands of knockout mouse clones. We have established an Internet exchange, Lexgen.com, to enable researchers worldwide to access our OmniBank library and to form collaborations with us to discover pharmaceutical products based on genomics - the study of genes and their function. Through our ongoing collaborations with pharmaceutical companies, biotechnology companies and academic researchers, we receive fees and may obtain royalties and milestone payments from commercialization of pharmaceutical products developed using our genomics technologies. We believe that providing global access to our OmniBank library through the Internet will significantly accelerate genomics research and will enable us to establish a leadership position in the discovery of drug targets and proteins which can themselves be used as drugs, commonly called therapeutic proteins. Our gene trapping technology captures gene sequence information and enables us to: - obtain DNA sequences of genes that operate, or are expressed, infrequently or at very low levels; - identify genes contained within the DNA sequence of the chromosome; - obtain DNA sequence of genes throughout the human genome at a fraction of the cost of traditional approaches; and - create a library of knockout mice for the discovery of gene function. We have created three key genomics resources, which we are continuing to expand for drug discovery: - Our OmniBank database and mouse clone library, which presently contains more than 70,000 embryonic stem (ES) cell clones stored in liquid nitrogen freezers and identified by DNA sequence in a searchable database. Each OmniBank ES cell clone can be grown into a knockout mouse for functional genomics research - the study of gene function. - Our Human Gene Trap database, which presently contains DNA sequence from approximately 50,000 human genes that we have rapidly and efficiently trapped from human chromosomes and analyzed in a database. We believe that, at present, approximately 50% of the gene sequences contained in our Human Gene Trap database are not represented in public gene sequence databases. We are using this resource to obtain full-length gene sequence information for drug discovery. - Lexgen.com, a genomics Internet exchange through which researchers at pharmaceutical and biotechnology companies and academic institutions worldwide subscribe to our OmniBank database to conduct web-based, computer or bioinformatics, analysis of genes, acquire knockout mouse clones and determine the function of genes with us under our e-Biology collaboration program. We believe that collaborations are an effective way to conduct research and development of pharmaceutical product opportunities created by our genomics technologies. Our collaborations are typically non-exclusive arrangements, and we retain the ability to pursue future applications of our technologies. Since September 1999, we have established collaborations with, among others, Millennium Pharmaceuticals, Inc., the R.W. Johnson Pharmaceutical Research Institute (a subsidiary of Johnson & Johnson), G.D. Searle & Co., Boehringer Ingelheim Pharmaceuticals, Inc. and N.V. Organon. We may also pursue development of selected drug targets and therapeutic proteins on our own. GENOMICS: CHALLENGE AND OPPORTUNITY Genomics represents an opportunity for the development of drugs that address medical needs for which there are presently no effective treatments, as well as drugs that are more effective or have fewer side effects than the treatments that are currently available. Most drugs on the market today interact with a total of about 500 specific protein targets, each of which is encoded by a gene. While estimates of the total number of potential drug targets encoded within the human genome vary, many experts TABLE OF CONTENTS <TABLE> <CAPTION> PAGE <S> <C> Prospectus Summary......................... 3 Risk Factors............................... 7 Special Note Regarding Forward-Looking Statements............................... 15 Use of Proceeds............................ 16 Dividend Policy............................ 16 Capitalization............................. 17 Dilution................................... 18 Selected Financial Data.................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 20 Business................................... 23 Management................................. 34 </TABLE> <TABLE> <CAPTION> PAGE <S> <C> Transactions With Executive Officers, Directors and Five Percent Stockholders............................. 42 Principal Stockholders..................... 43 Description of Capital Stock............... 45 Material U.S. Federal Tax Considerations for Non-U.S. Holders of Common Stock......... 47 Shares Eligible for Future Sale............ 49 Underwriting............................... 50 Legal Matters.............................. 52 Experts.................................... 52 Where You Can Find More Information........ 52 Index to Financial Statements.............. F-1 </TABLE> believe that genomics research could discover between 5,000 and 10,000 new targets for pharmaceutical development. Consequently, genomics represents a significant opportunity for those companies with the key technologies that can efficiently discover the most promising genes for drug discovery. Large numbers of genes with little functional information can present a major challenge to traditional drug discovery research. We believe that the solution to this challenge requires redefining the way drug discovery is conducted by systematically determining the function of large numbers of genes in animal models to discover novel drug targets and therapeutic proteins. We believe our technologies for discovering DNA sequences and the functions of genes, together with our e-Biology collaboration program, provide significant opportunities for us and our collaborators to discover and develop drugs more successfully than those companies that utilize traditional methods. STRATEGY Our principal objective is to establish a leadership position in drug target and therapeutic protein discovery. The key elements of our strategy include the following: - discover and obtain proprietary rights to a substantial number of human genes using our gene trapping technology; - expand our library of knockout mice using our gene trapping technology and create custom knockout mice using our gene targeting technology; - use the Internet to establish gene function discovery collaborations based on knockout mice with researchers at pharmaceutical companies, biotechnology companies and academic institutions; - discover the functions of large numbers of genes that encode potential drug targets and therapeutic proteins through internal research programs using knockout mice; and - develop promising drug candidates through collaborations or with our own resources. CORPORATE INFORMATION Lexicon Genetics was incorporated in Delaware in July 1995, and commenced operations in September 1995. Our corporate headquarters are located at 4000 Research Forest Drive, The Woodlands, Texas 77381, and our telephone number is (281) 364-0100. Our Internet exchange is located at www.Lexgen.com and our corporate website is located at www.lexicon-genetics.com. We do not intend for information found on our Internet exchange and our website to be part of this prospectus. We own or have rights to various copyrights, trademarks and trade names used in our business, including the Lexicon Genetics name and logo, OmniBank(R), LexGene(TM), Lexgen.com(TM), Internet Now(TM), Internet Universal(TM), S-T-V(TM) and e-Biology(TM). THE OFFERING The following information reflects 24,781,059 shares of common stock outstanding as of March 15, 2000 and the conversion of all our outstanding convertible preferred stock into 12,733,992 shares of common stock upon the closing of this offering. The number of outstanding shares of common stock does not include: - 8,473,134 shares issuable on the exercise of stock options outstanding as of March 15, 2000 at a weighted average exercise price of $2.16 per share; - 990,000 shares that may be issued upon exercise of warrants outstanding as of March 15, 2000 at an exercise price of $2.50 per share; or - 3,032,001 additional shares that we could issue under our stock option plans. Unless otherwise indicated, information in this prospectus gives effect to the following: - a stock dividend paid on April 5, 2000 to effect a 3-for-1 stock split; - the filing of our amended and restated certificate of incorporation; - the adoption of our amended and restated bylaws immediately prior to the closing of this offering; - no exercise of the underwriters' over-allotment option; and - an estimated initial public offering price of $23.00 per share, the midpoint of the range shown on the cover of this prospectus. COMMON STOCK OFFERED................. 10,000,000 shares COMMON STOCK TO BE OUTSTANDING AFTER THIS OFFERING........................ 47,515,051 shares USE OF PROCEEDS...................... We expect to use the net proceeds to: - increase our functional genomics research efforts; - expand our Human Gene Trap database and OmniBank database and library; - generate full-length gene sequences for potential drug targets and therapeutic proteins; and - fund working capital, capital expenditures and other general corporate purposes. Please read "Use of Proceeds." NASDAQ NATIONAL MARKET SYMBOL........ "LEXG" SUMMARY FINANCIAL DATA The following table summarizes our statements of operations data for the period from our inception on July 7, 1995 through December 31, 1995 and the years ended December 31, 1996, 1997, 1998 and 1999 and our balance sheet data as of December 31, 1999. The pro forma net loss per share data and the pro forma balance sheet data reflect the conversion of our outstanding convertible preferred stock upon the closing of this offering. The pro forma as adjusted balance sheet data reflect that conversion and also reflect the sale of 10,000,000 shares of common stock in this offering at an assumed initial public offering price of $23.00 per share after deducting underwriting discounts and estimated offering expenses. The following data should be read with our financial statements, including the accompanying notes, and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. Because all of our outstanding convertible preferred stock will be converted at the closing of this offering, we will no longer recognize accretion on our redeemable convertible preferred stock. <TABLE> <CAPTION> ------------------------------------------------------------------ PERIOD FROM INCEPTION (JULY 7, 1995) THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------------------------- 1995 1996 1997 1998 1999 -------------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> In thousands, except share data STATEMENTS OF OPERATIONS DATA Revenues........................................ $ -- $ 306 $ 968 $ 2,242 $ 4,738 Operating expenses Research and development...................... 445 2,409 4,970 8,410 14,646 General and administrative.................... 236 764 1,473 2,024 2,913 --------- ---------- ---------- ---------- ---------- Total operating expenses.............. 681 3,173 6,443 10,434 17,559 --------- ---------- ---------- ---------- ---------- Loss from operations............................ (681) (2,867) (5,476) (8,192) (12,821) Interest income (expense), net.................. 9 (12) 74 711 346 --------- ---------- ---------- ---------- ---------- Net loss........................................ (672) (2,879) (5,402) (7,481) (12,475) --------- ---------- ---------- ---------- ---------- Accretion on redeemable convertible preferred stock......................................... -- -- -- (357) (535) --------- ---------- ---------- ---------- ---------- Net loss attributable to common stockholders.... $ (672) $(2,879) $(5,402) $(7,838) $(13,011) ========= ========== ========== ========== ========== Net loss per common share, basic and diluted.... $ (0.07) $ (0.17) $ (0.23) $ (0.32) $ (0.5 3) ========= ========== ========== ========== ========== Shares used in computing net loss per common share, basic and diluted...................... 9,861,297 17,346,228 23,988,969 24,445,422 24,530,427 Pro forma net loss per common share, basic and diluted....................................... $ (0.33) Shares used in computing pro forma net loss per common share, basic and diluted............... 37,264,419 </TABLE> <TABLE> <CAPTION> -------------------------------------- AS OF DECEMBER 31, 1999 -------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- ----------- ----------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> In thousands BALANCE SHEET DATA Cash, cash equivalents and marketable securities............ $ 9,156 $ 9,156 $222,056 Working capital............................................. 2,021 2,121 214,921 Total assets................................................ 22,295 22,295 235,195 Long-term obligations, net of current portion............... 3,577 3,577 3,577 Redeemable convertible preferred stock...................... 30,050 -- -- Accumulated deficit......................................... (28,909) (28,909) (28,909) Total stockholders' equity (deficit)........................ (21,936) 8,114 221,014 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/MET-PF_metlife_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/MET-PF_metlife_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. As a result, it does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including the "Risk Factors" section and the consolidated financial statements and the notes to those statements. Unless otherwise stated or the context otherwise requires, references in this prospectus to "we", "our", "us" or "MetLife" refer to MetLife, Inc., together with Metropolitan Life Insurance Company, and their respective direct and indirect subsidiaries. All financial information contained in this prospectus, unless otherwise indicated, has been derived from the consolidated financial statements of Metropolitan Life Insurance Company and its subsidiaries and is presented in conformity with generally accepted accounting principles ("GAAP"). The Glossary beginning on page G-1 of this prospectus includes definitions of certain insurance terms. Each term defined in the Glossary is printed in boldface the first time it appears in this prospectus. Information regarding the number of shares of MetLife, Inc. common stock to be outstanding after the initial public offering, the private placements and the concurrent offering of equity security units does not include shares of common stock issuable upon the settlement of the purchase contracts that are a part of the units. We are a leading provider of insurance and financial services to a broad spectrum of individual and institutional customers. We currently provide individual insurance, ANNUITIES and investment products to approximately nine million households, or one of every eleven households in the U.S. We also provide group insurance and retirement and savings products and services to approximately 64,000 corporations and other institutions, including 86 of the FORTUNE 100 largest companies. Our institutional clients have approximately 33 million employees and members. We are a leader in each of our major U.S. businesses. We are: - the largest life insurer, with approximately $1.7 trillion of life insurance IN FORCE at December 31, 1999; - the largest individual life insurer, with $11.5 billion in individual life insurance and annuity PREMIUMS and deposits in 1999; - the largest group life insurer, with $5.3 billion of premiums in 1999; - a leading group non-medical health insurer, including the second largest group disability insurer, the second largest commercial dental insurer and the largest group long-term care insurer; - a leading issuer of individual variable life insurance and variable annuities; and - a leading asset manager, with $373.6 billion of total assets under management at December 31, 1999. We believe that our unparalleled franchises and brand names uniquely position us to be the preeminent provider of insurance and financial services in the U.S. businesses in which we compete. We are one of the largest and best capitalized insurance and financial services companies in the U.S. Our revenues for 1999 were $25.4 billion and our net income was $617 million. We had total consolidated assets of $225.2 billion and equity of $13.7 billion at December 31, 1999. We are organized into five major business segments: Individual Business, Institutional Business, Asset Management, Auto & Home and International. INDIVIDUAL BUSINESS. Individual Business offers a wide variety of protection and asset accumulation products for individuals, including life insurance and annuities. Individual Business also distributes products provided by our other business segments, including mutual funds and auto and homeowners insurance. Reflecting overall trends in the insurance industry, sales of our traditional life insurance products have declined in recent years, while FIRST-YEAR PREMIUMS AND DEPOSITS from variable life insurance products have grown at a compound annual rate of 33.1% for the five years ended 1999 and represented 67.4% of our total life insurance sales for Individual Business in 1999. Our principal distribution channels are the MetLife career agency and the New England Financial general agency distribution systems and, after our recent acquisition of GenAmerica Corporation, GenAmerica's independent general agency system. We also have dedicated sales forces that market to non-profit organizations and banks and their customers. In total, we had approximately 11,000 active sales representatives in 1999. In addition to these distribution channels, we are increasing the distribution of our products through independent insurance agents and registered representatives. We believe our ability to effectively manage these multiple distribution channels represents a significant competitive advantage. Individual Business had $11.1 billion of revenues, or 43.5% of our total revenues, and $565 million of operating income in 1999. INSTITUTIONAL BUSINESS. Institutional Business offers a broad range of group insurance and retirement and savings products and services. Our group insurance products and services include group life insurance and non-medical health insurance such as short- and long-term disability, long-term care and dental insurance, as well as other related products and services. Our group insurance premiums, fees and other income, which totaled $5.9 billion in 1999, have grown at a compound annual rate of 10.0% for the three years ended 1999. Our retirement and savings products and services include administrative services sold to sponsors of 401(k) and other defined contribution plans, guaranteed interest products and separate account products. We distribute our Institutional Business products through a sales force of approximately 300 MetLife employees that is organized by both customer size and product. In total, we have approximately 64,000 institutional customers, including 86 of the FORTUNE 100 largest companies. Institutional Business had $10.4 billion of revenues, or 40.8% of our total revenues, and $585 million of operating income in 1999. ASSET MANAGEMENT. Through our wholly-owned subsidiary, State Street Research & Management Company, and our controlling interest in Nvest Companies, L.P. and its affiliates, Asset Management provides a broad variety of asset management products and services primarily to third-party institutions and individuals. Our Asset Management segment managed $189.8 billion of our total assets under management at December 31, 1999, including $54.9 billion of assets in mutual funds and in SEPARATE ACCOUNTS supporting individual variable life and annuity products. For the five years ended 1999, this segment's assets under management grew at a compound annual rate of 14.2%. We distribute our asset management products through several distribution channels, including State Street Research's and Nvest's dedicated sales forces, and also through our Individual Business and Institutional Business distribution channels. Asset Management had $0.9 billion of revenues, or 3.5% of our total revenues, and $51 million of operating income in 1999. AUTO & HOME. Auto & Home offers auto insurance, homeowners insurance and other personal property and casualty insurance products. We sell these products directly to employees through employer-sponsored programs, as well as through a variety of retail distribution channels. These channels include the MetLife career agency system, approximately 6,000 independent agents and brokers, which includes those of The St. Paul Companies acquired in 1999, and approximately 385 Auto & Home specialists. We are the leading provider of personal auto and homeowners insurance through employer-sponsored programs in the U.S. Net premiums earned from products sold through employer-sponsored programs have grown at a 14.3% compound annual rate for the five years ended 1999. On September 30, 1999, our Auto & Home segment acquired the standard personal lines property and casualty insurance operations of The St. Paul Companies, which had in-force premiums of approximately $1.1 billion, substantially increasing the size of this segment's business, making us the eleventh largest personal property and casualty insurer in the U.S. based on 1998 net premiums written. See "Business -- Auto & Home". Auto & Home had $1.9 billion of revenues, or 7.4% of our total revenues, and $54 million of operating income in 1999. INTERNATIONAL. We have international insurance operations in ten countries, with a focus on the Asia/Pacific region, Latin America and selected European countries. Our International segment offers life insurance, accident and health insurance, annuities and retirement and savings products and services to both individuals and groups, and auto and homeowners coverage to individuals. Assets of our International segment, as adjusted for the recent divestitures of a substantial portion of our U.K. and Canadian operations, have grown at a compound annual rate of 21.4% for the five years ended 1999. International had $0.8 billion of revenues, or 3.1% of our total revenues, and $18 million of operating income in 1999. On January 6, 2000, we acquired GenAmerica Corporation for $1.2 billion in cash. GenAmerica is a leading provider of life insurance, life reinsurance and other financial services to affluent individuals, businesses, insurers and financial institutions. GenAmerica's products and services include individual life insurance and annuities, life reinsurance, institutional asset management, group life and health insurance and administration, pension benefits administration and software products and technology services for the life insurance industry. GenAmerica distributes its products through approximately 625 agents in its independent general agency system and approximately 1,575 active independent insurance agents and brokers. GenAmerica is a holding company which owns General American Life Insurance Company. GenAmerica's subsidiaries also include Reinsurance Group of America, Inc., one of the largest life reinsurers in the United States, and Conning Corporation, a manager of investments for General American Life and other insurance company and pension clients. Upon completion of the acquisition of GenAmerica, we owned approximately 58% and 61% of the outstanding common stock of Reinsurance Group of America (also known as RGA) and Conning, respectively. Both RGA and Conning are publicly-traded. On March 9, 2000, we announced that we had agreed to acquire all of the outstanding shares of Conning common stock not already owned by us for $12.50 per share in cash, or approximately $65 million. The Conning acquisition is subject to customary terms and conditions, including regulatory approvals. Subsequent to January 6, 2000, the date on which we acquired GenAmerica, GenAmerica's businesses will be incorporated into our business segments as applicable, except for RGA, which will be separately designated as our Reinsurance segment. STRATEGY As we become a public company, we are committed to providing superior stockholder value through the following growth strategies: - - INCREASING OUR REVENUES AND ASSETS UNDER MANAGEMENT BY: Building on widely recognized brand names. We believe that the MetLife name is one of the most well-known brand names in the U.S. and one of our most valuable assets. We have also been successful in utilizing additional brand names, such as New England Financial, Security First Group and State Street Research, for specific market segments. We believe our recent acquisition of GenAmerica and RGA further strengthens our brand portfolio. Capitalizing on large customer base. We intend to enhance our relationships with our existing individual customers by offering a broad array of products, improving the training of our agents and developing direct marketing programs in partnership with our agency sales force and increasing sales to our institutional customers by expanding the offering of voluntary, or employee-paid, products. Expanding multiple distribution channels. We believe that our development and successful management of multiple distribution channels represent a significant competitive advantage. We intend to both grow our core distribution channels and to continue to build complementary distribution channels for sales of our products. Continuing to introduce innovative and competitive products. We intend to be at the forefront of the insurance and financial services industries in offering innovative and competitive products to our customers. Recent initiatives include new or revised products covering a substantial portion of our individual product offerings and new voluntary institutional products. Increasing focus on asset accumulation products. We intend to expand our assets under management in both our insurance operations and our Asset Management segment by increasing our focus on sales of asset accumulation products, such as variable life and annuity products, mutual funds and 401(k) products. Focusing international operations on growing markets. We have established insurance operations in selected international markets that are experiencing significant growth in demand for insurance products and where we believe we can gain significant market share. - - GROWING OUR EARNINGS AND OPERATING RETURN ON EQUITY BY: Reducing operating expenses. We are committed to improving profitability by reducing operating expenses through employee reductions, increased integration of operations and enhanced use of technology. Strengthening performance-oriented culture. We have implemented a number of initiatives to significantly enhance the performance of our employees, including establishing a new compensation program, selectively hiring experienced new employees, expanding our training efforts and implementing a new performance measurement and review program. Continuing to optimize returns from investment portfolio. The return on our invested assets has contributed significantly to our earnings growth. We believe that the expertise of our investment department will enable us to continue to optimize the operating returns on our invested assets in the future. Enhancing capital efficiency of our operations. We seek to maximize our operating return on equity by enhancing the capital efficiency of our operations. We have recently implemented a new internal capital allocation system and, consistent with a more disciplined approach to capital allocation, have divested operations that did not meet targeted rates of return or growth. THE DEMUTUALIZATION We are conducting the offerings in connection with the reorganization of Metropolitan Life Insurance Company from a mutual life insurance company to a stock life insurance company in a process commonly known as a demutualization. On the date the plan of reorganization becomes effective, which will be the date of the closing of the initial public offering, the private placements and the offering of the units described below, Metropolitan Life Insurance Company will become a wholly-owned subsidiary of MetLife, Inc. In the demutualization, in exchange for their membership interests, policyholders who are eligible to receive consideration under the plan of reorganization will be entitled to receive consideration in the form of shares of our common stock or, in some cases, cash or an adjustment to their policy values, referred to as "policy credits". The shares of our common stock allocated to policyholders who do not receive cash or policy credits under the plan will be held through the MetLife Policyholder Trust on behalf of these policyholders. We are establishing the trust to help us efficiently manage the administration of accounts and the costs associated with the approximately nine million eligible policyholders that we estimate will become beneficiaries of the trust. Subject to certain limitations, trust beneficiaries will be permitted, after specified periods, to instruct the trustee to withdraw their allocated shares of our common stock from the trust for sale or to purchase additional shares commission-free through a purchase and sale program established and administered by a program agent. Trust beneficiaries allocated more than 25,000 shares of our common stock may be limited in their ability to sell shares under the purchase and sale program for the first 300 days after the plan effective date. Beginning on the first anniversary of the closing of the initial public offering, trust beneficiaries may also withdraw all, but not less than all, their allocated shares of our common stock held in the trust in order to hold or sell such shares of our common stock on their own. We will account for the demutualization using the historical carrying values of our assets and liabilities. The board of directors of Metropolitan Life Insurance Company adopted the plan of reorganization on September 28, 1999, and subsequently adopted amendments to the plan. As required by law, the plan was approved by more than two-thirds of the eligible policyholders who voted in voting completed on February 7, 2000. On April , 2000, the New York Superintendent of Insurance approved the Plan after a public hearing. At the public hearing, which was held on January 24, 2000, some policyholders and others raised objections to certain aspects of the plan. Six lawsuits have been filed challenging the fairness of the plan of reorganization and the adequacy and accuracy of Metropolitan Life Insurance Company's disclosures to policyholders regarding the plan. The first of these lawsuits was filed in the Supreme Court of the State of New York for Kings County on January 14, 2000. It was brought on behalf of a putative class consisting of all policyholders of Metropolitan Life Insurance Company who should have membership benefits in Metropolitan Life Insurance Company and were and are eligible to receive notice, vote and receive consideration in the demutualization. The complaint seeks to enjoin or rescind the plan, as well as other relief. The defendants named in the complaint are Metropolitan Life Insurance Company, the individual members of its board of directors and MetLife, Inc. Discovery is underway in this case. The five other lawsuits were filed between March 10, 2000 and March 29, 2000 in the Supreme Court of the State of New York for New York County. The same defendants are named in these five cases as in the Kings County case, with the addition of the New York Superintendent. All five of the New York County cases are brought on behalf of a putative class consisting of the eligible policyholders of Metropolitan Life Insurance Company as of September 28, 1999, the adoption date of the plan. The claims in these five additional cases are substantially similar to those in the Kings County case, as is the relief sought. Metropolitan Life Insurance Company has entered into a stipulation with the plaintiffs in the five New York County cases in which it does not oppose consolidation of the cases, agrees that the plaintiffs have until April 30, 2000 to file a consolidated amended complaint, and agrees that the defendants' time to answer, move or otherwise respond to the consolidated amended complaint will be thirty days after service of the consolidated amended complaint. Metropolitan Life Insurance Company has agreed to provide certain information to the plaintiffs in three of the New York County cases. Metropolitan Life Insurance Company, MetLife, Inc. and the individual defendants believe they have meritorious defenses to the plaintiffs' claims and intend vigorously to contest all of the plaintiffs' claims in these six lawsuits. See "Risk Factors -- A challenge to the New York Superintendent of Insurance's approval may adversely affect the terms of the demutualization and the market price of our common stock". PRIVATE PLACEMENTS Banco Santander Central Hispano, S.A. and Credit Suisse Group have agreed that they or their respective affiliates will purchase from us, at a price per share equal to the initial public offering price, in the aggregate not less than 14,900,000 shares nor more than 73,000,000 shares of our common stock in private placements that will close concurrently with the initial public offering and the offering of equity security units described below. We will determine at the time of the pricing of the initial public offering whether to sell any shares to these purchasers in excess of the minimum amount. Any shares in excess of the minimum amount that we determine not to sell to these investors may increase the number of shares available for sale to the general public under this prospectus. The maximum number of shares that each investor, individually, and the investors, in the aggregate, could be obligated to purchase in the private placements represents approximately 4.9% and 9.8%, respectively, of the total number of shares of our common stock to be outstanding upon consummation of the initial public offering and the private placements. Each of these purchasers has entered into an agreement with us that provides that any shares purchased by it will be restricted from sale or transfer for a period of one year after the initial public offering, except for sales to affiliates or pursuant to a tender or exchange offer recommended by our board of directors. In addition, each purchaser has agreed that it will not, without our consent, increase its ownership of voting securities beyond 4.9% of the outstanding shares (or 5.0% with the New York Superintendent of Insurance's approval), except for any increase resulting from transactions in the ordinary course of the business of Purchaser as underwriter, broker/dealer, investment manager or investment adviser or from ordinary trading activities, unless such transactions were made with the purpose of changing or influencing the control of MetLife, seek to obtain board representation, solicit proxies in opposition to management or take certain other actions for five years. Although these investors will receive common stock which has not been registered under the Securities Act, they will also receive registration rights with respect to such stock, which rights are not exercisable until one year after the closing of the initial public offering. Pursuant to these registration rights, the purchasers will be able to have their shares of common stock registered for resale under the Securities Act, beginning after the first anniversary of the closing, on not more than one occasion for each purchaser each year, or not more than five occasions for each purchaser in total (known as a "demand" registration right). In addition, we have agreed to use our reasonable efforts to register the shares for resale on a shelf registration statement on Form S-3 as soon as practicable after the first anniversary of the closing. If the shares are registered on a Form S-3, each purchaser will be allowed to make not more than two offerings under the registration statement each year, subject to a minimum offering size of $50,000,000 per offering, although underwritten offerings will be subject to the limitations on the number of demand registrations described above. The purchasers will also be able to participate, subject to specified limitations, in registrations effected by us for our own account or others. OFFERING OF EQUITY SECURITY UNITS Concurrently with this offering, we and a trust we own are offering 20,000,000 equity security units for an aggregate offering of $1,000 million, plus up to an additional $150 million if the underwriters' options to purchase additional units are exercised in full, by means of a separate prospectus. Each unit initially consists of (a) a contract to purchase shares of our common stock and (b) a % capital security of MetLife Capital Trust I, a Delaware business trust wholly-owned by us. The purchase contract underlying a unit obligates holders to purchase, and us to sell, for $50, on May 15, 2003, a number of newly issued shares of our common stock equal to a settlement rate based on the average trading price of the common stock at that time. The capital securities represent undivided beneficial ownership interests in the assets of the trust, consisting solely of debentures issued by us to the trust. The debentures will have an interest rate and principal amount that are the same as the distribution rate and stated liquidation amount of the capital securities. The capital securities will initially be held as components of the units and be pledged to secure the holders' obligations under the related purchase contracts. The holders will initially receive from each unit distributions on the capital securities at the rate of % of $50 per year, paid quarterly, subject to the deferral provisions described under "Description of the Equity Security Units", below. During any period in which payments are deferred, in general we cannot declare or pay any dividend or distribution on our capital stock or take specified other actions. The distribution rate will be reset, and the capital securities remarketed, as described under "Description of the Equity Security Units". MetLife, Inc. will, on a senior and unsecured basis, irrevocably guarantee payments on the capital securities to the extent of available trust funds. The financial statements of MetLife Capital Trust I will be consolidated in our consolidated financial statements, with the capital securities shown on our consolidated balance sheets under the caption "Company-obligated mandatorily redeemable securities of subsidiary trust holding solely debentures of Parent". The notes to our consolidated financial statements will disclose that the sole asset of the trust will be the debentures issued by MetLife, Inc. to the trust. Distributions on the capital securities will be reported as a charge to minority interest in our consolidated statements of income, whether paid or accrued. Before the issuance of shares of our common stock upon settlement of the purchase contracts, the units will be reflected in our diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of our common stock used in calculating earnings per share for any period is deemed to be increased by the excess, if any, of the number of our shares issuable upon settlement of the purchase contracts over the number of shares that could be purchased by us in the market, at the average market price during that period, using the proceeds receivable upon settlement. Consequently, there will be no dilutive effect on our earnings per share, except during periods when the average market price of our common stock is above $ per share. The closings of the initial public offering, the private placements and the offering of the equity security units are each conditioned on the concurrent closings of the others. ------------------------- Our principal executive offices are located at One Madison Avenue, New York, New York 10010-3690. Our telephone number is (212) 578-2211. THE OFFERING Common stock offered.......... 179,000,000 shares, assuming an initial public offering price of $14.00 per share, which is the midpoint of the range stated on the cover page of this prospectus. Shares to be outstanding after the offering.................. 745,476,118 shares, assuming an initial public offering price of $14.00 per share, which is the midpoint of the range stated on the cover page of this prospectus. New York Stock Exchange symbol...................... MET Use of proceeds............... We estimate that we will receive net proceeds from the initial public offering of $2,381 million, or $2,738 million if the underwriters' options to purchase additional shares as described under "Underwriting" are exercised in full, assuming an initial public offering price of $14.00 per share, which is the midpoint of the range stated on the cover page of this prospectus. As required by the plan of reorganization, we will use the net proceeds from the initial public offering, together with an estimated $1,022 million of proceeds from the private placements and an estimated $960 million of net proceeds, or $1,104 million if the underwriters' options to purchase additional units are exercised in full, from the offering of equity security units, as follows: - an estimated $397 million to reimburse Metropolitan Life Insurance Company for the crediting of policy credits to certain policyholders in the demutualization; - an estimated $2,494 million to reimburse Metropolitan Life Insurance Company for the payment of cash to certain policyholders in the demutualization; - an estimated $315 million to reimburse Metropolitan Life Insurance Company for cash payments to be made by its Canadian branch to certain holders of policies included in its Canadian business sold to Clarica Life Insurance Company in 1998; - an estimated $361 million to reimburse Metropolitan Life Insurance Company for the payment of the fees and expenses incurred in connection with the demutualization; and - up to $340 million (unless the New York Superintendent of Insurance approves a larger amount) to be retained by MetLife, Inc. and used for working capital, payment of dividends and other general corporate purposes, including payments on the debentures issued by MetLife, Inc. to MetLife Capital Trust I in connection with the offering of the units, and to pay the fees and expenses of the trustee and custodian of the MetLife Policyholder Trust. We will contribute any remaining proceeds to Metropolitan Life Insurance Company for its general corporate purposes and to repay up to $450 million of short-term debt that Metropolitan Life Insurance Company incurred in connection with the acquisition of GenAmerica Corporation. In connection with the contribution of the net proceeds from the initial public offering, the private placements and the offering of equity security units to Metropolitan Life Insurance Company as described above, Metropolitan Life Insurance Company expects to issue to MetLife, Inc. its $1 billion % mandatorily convertible capital note due 2005 having the principal terms described under "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- MetLife, Inc." The plan of reorganization requires that the aggregate net proceeds from the offerings and the private placements be at least equal to specified amounts. See "The Demutualization -- Summary of the Plan of Reorganization". If the actual proceeds raised in the initial public offering, the private placements or the offering of equity security units are different from the amounts estimated in this prospectus, we will be required to change the sizes of the other transactions, subject to limits set forth in the plan. The amount of proceeds from the offerings and the private placements and the final terms of the units will depend on market conditions and on our capital needs at the time of issuance. Dividend policy............... Our board of directors intends to declare an annual dividend on our common stock of $0.20 per share. For more information on dividends and potential limitations on our ability to pay dividends, see "Dividend Policy". Risk factors.................. For a discussion of certain risks you should consider before investing in our securities, see "Risk Factors". SUMMARY FINANCIAL INFORMATION The following table sets forth summary consolidated financial information for MetLife. We have derived the consolidated financial information for the years ended December 31, 1999, 1998 and 1997 and at December 31, 1999 and 1998 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the consolidated financial information for the years ended December 31, 1996 and 1995 and at December 31, 1997, 1996 and 1995 from our audited consolidated financial statements not included elsewhere in this prospectus. We have prepared the following consolidated statements of income and consolidated balance sheet data, other than the statutory data, in conformity with generally accepted accounting principles. We have derived the statutory data from Metropolitan Life Insurance Company's ANNUAL STATEMENTS filed with insurance regulatory authorities and we have prepared the statutory data in accordance with STATUTORY ACCOUNTING PRACTICES. You should read the following information in conjunction with the information and consolidated financial statements appearing elsewhere in this prospectus. <TABLE> <CAPTION> FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> <C> STATEMENTS OF INCOME DATA Revenues: Premiums(1)................................................. $12,088 $11,503 $11,278 $11,345 $11,178 Universal life and investment-type product policy fees...... 1,438 1,360 1,418 1,243 1,177 Net investment income(1)(2)(3).............................. 9,816 10,228 9,491 8,978 8,837 Other revenues(1)........................................... 2,154 1,994 1,491 1,246 834 Net realized investment gains (losses)(4)................... (70) 2,021 787 231 (157) ------- ------- ------- ------- ------- 25,426 27,106 24,465 23,043 21,869 Total expenses(1)(3)(5)..................................... 23,991 25,019 22,794 21,637 21,125 ------- ------- ------- ------- ------- Income before provision for income taxes, discontinued operations and extraordinary item......................... 1,435 2,087 1,671 1,406 744 Provision for income taxes(6)............................... 593 740 468 482 407 ------- ------- ------- ------- ------- Income before discontinued operations and extraordinary item...................................................... 842 1,347 1,203 924 337 (Loss) gain from discontinued operations(7)................. -- -- -- (71) 362 ------- ------- ------- ------- ------- Income before extraordinary item............................ 842 1,347 1,203 853 699 Extraordinary item -- demutualization expense, net of income tax of $35 and $2, respectively........................... 225 4 -- -- -- ------- ------- ------- ------- ------- Net income.................................................. $ 617 $ 1,343 $ 1,203 $ 853 $ 699 ======= ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> AT OR FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA General account assets(3)................................. $160,291 $157,278 $154,444 $145,877 $144,277 Separate account assets................................... 64,941 58,068 48,338 43,399 38,861 -------- -------- -------- -------- -------- Total assets.............................................. $225,232 $215,346 $202,782 $189,276 $183,138 Policyholder liabilities(8)............................... $124,955 $124,203 $127,358 $122,895 $122,220 Long-term debt............................................ $ 2,514 $ 2,903 $ 2,884 $ 1,946 $ 2,345 Retained earnings......................................... $ 14,100 $ 13,483 $ 12,140 $ 10,937 $ 10,084 Accumulated other comprehensive income (loss)............. (410) 1,384 1,867 1,046 1,670 -------- -------- -------- -------- -------- Total equity.............................................. $ 13,690 $ 14,867 $ 14,007 $ 11,983 $ 11,754 OTHER DATA Operating income(4)(9).................................... $ 990 $ 23 $ 617 $ 818 $ 504 Adjusted operating income(4)(10).......................... $ 1,307 $ 1,226 $ 807 $ 921 $ 613 Operating return on equity(11)............................ 7.2% 0.2% 5.3% 7.8% 5.2% Adjusted operating return on equity(12)................... 9.5% 9.6% 7.0% 8.8% 6.3% Return on equity(13)...................................... 4.5% 10.5% 10.4% 8.1% 7.2% Operating cash flows...................................... $ 3,865 $ 842 $ 2,872 $ 3,688 $ 4,823 Total assets under management(14)......................... $373,646 $360,703 $338,731 $297,570 $288,000 STATUTORY DATA(15) Premiums and deposits..................................... $ 24,643 $ 22,722 $ 20,569 $ 20,611 $ 21,651 Net income (loss)......................................... $ 790 $ 875 $ 589 $ 460 $ (672) Policyholder surplus...................................... $ 7,630 $ 7,388 $ 7,378 $ 7,151 $ 6,785 Asset valuation reserve................................... $ 3,109 $ 3,323 $ 3,814 $ 2,635 $ 2,038 </TABLE> - --------------- (1) Includes the following combined financial statement data of MetLife Capital Holdings, Inc., which we sold in 1998, and our Canadian operations and U.K. insurance operations, substantially all of which we sold in 1998 and 1997, respectively: <TABLE> <CAPTION> FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 1995 ---- ---- ---- ---- (DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> Revenues: Premiums.................................................. $204 $ 463 $ 456 $ 439 Net investment income..................................... 495 914 877 637 Other revenues............................................ 33 225 164 192 ---- ------ ------ ------ $732 $1,602 $1,497 $1,268 ==== ====== ====== ====== Expenses: Policyholder benefits and claims.......................... $240 $ 495 $ 459 $ 492 Other expenses............................................ 418 861 606 831 ---- ------ ------ ------ $658 $1,356 $1,065 $1,323 ==== ====== ====== ====== </TABLE> As a result of these sales, we recorded net realized investment gains of $520 million and $139 million for the years ended December 31, 1998 and 1997, respectively. In July 1998, Metropolitan Life Insurance Company sold a substantial portion of its Canadian operations to Clarica Life Insurance Company. As part of that sale, we transferred a large block of policies in effect with Metropolitan Life Insurance Company in Canada to Clarica Life, and the holders of the transferred Canadian policies became policyholders of Clarica Life. Those transferred policyholders are no longer policyholders of Metropolitan Life Insurance Company and, therefore, are not entitled to compensation under the plan of reorganization. However, as a result of a commitment made in connection with obtaining Canadian regulatory approval of that sale, if Metropolitan Life Insurance Company demutualizes, its Canadian branch will make cash payments to those who are, or are deemed to be, holders of these transferred Canadian policies. The payments, which will be recorded in other expenses in the same period as the effective date of the plan, will be determined in a manner that is consistent with the treatment of, and fair and equitable to, eligible policyholders of Metropolitan Life Insurance Company. The aggregate amount of the payment is dependent upon the initial public offering price of common stock to be issued at the effective date of the plan. Assuming an initial public offering price of $14.00 per share, which is the midpoint of the range stated on the cover page of this prospectus, and based on actuarial calculations we have made regarding these payments, we estimate that the aggregate payments will be $315 million. (2) During 1997, we changed to the retrospective interest method of accounting for investment income on structured notes in accordance with Emerging Issues Task Force Consensus 96-12, Recognition of Interest Income and Balance Sheet Classification of Structured Notes. As a result, net investment income increased by $175 million. The cumulative effect of this accounting change on prior years' income was immaterial. (3) In 1998, we adopted the provisions of Statement of Financial Accounting Standards 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to our securities lending program. Adoption of the provisions had the effect of increasing assets and liabilities by $3,769 million at December 31, 1998 and increasing revenues and expenses by $266 million for the year ended December 31, 1998. (4) Realized investment gains and losses are presented net of related policyholder amounts. The amounts netted against realized investment gains and losses are the following: <TABLE> <CAPTION> FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------- 1999 1998 1997 1996 1995 ----- ------ ------ ------ ----- (DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> <C> Gross realized investment gains (losses).................... $(137) $2,629 $1,018 $ 458 $ 73 ----- ------ ------ ------ ----- Less amounts allocable to: Future policy benefit loss recognition.................... -- (272) (126) (203) (152) Deferred policy acquisition costs......................... 46 (240) (70) (4) (78) Participating pension contracts........................... 21 (96) (35) (20) -- ----- ------ ------ ------ ----- Total..................................................... 67 (608) (231) (227) (230) ----- ------ ------ ------ ----- Net realized investment gains (losses)...................... $ (70) $2,021 $ 787 $ 231 $(157) ===== ====== ====== ====== ===== </TABLE> Realized investment gains (losses) have been reduced by (1) deferred policy acquisition amortization to the extent that such amortization results from realized investment gains and losses, (2) additions to future policy benefits resulting from the need to establish additional liabilities due to the recognition of investment gains, and (3) additions to participating contractholder accounts when amounts equal to such investment gains and losses are credited to the contractholders' accounts. This presentation may not be comparable to presentations made by other insurers. This presentation affected operating income and adjusted operating income. See note 9 below. (5) Total expenses exclude $(67) million, $608 million, $231 million, $227 million and $230 million for the years ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively, of deferred policy acquisition costs, future policy benefit loss recognition and credits to participating pension contracts that have been charged against realized investment gains and losses as these amounts are directly related to the realized investment gains and losses. This presentation may not be comparable to presentations made by other insurers. (6) Includes $125 million, $18 million, $(40) million, $38 million and $67 million for surplus tax paid (received) by Metropolitan Life Insurance Company for the years ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively. As a stock life insurance company, we will no longer be subject to the surplus tax after the effective date of the demutualization. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". (7) The gain (loss) from discontinued operations was primarily attributable to the disposition of our group medical insurance business. (8) Policyholder liabilities include future policy benefits, policyholder account balances, other policyholder funds and policyholder dividends. (9) The following provides a reconciliation of net income to operating income: <TABLE> <CAPTION> FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------ 1999 1998 1997 1996 1995 ------ ------- ------- ----- ----- (DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> <C> Net income.................................................. $ 617 $ 1,343 $ 1,203 $ 853 $ 699 ------ ------- ------- ----- ----- Adjustments to reconcile net income to operating income: Gross realized investment (gains) losses.................. 137 (2,629) (1,018) (458) (73) Income tax on gross realized investment gains and losses.................................................. (92) 883 312 173 26 ------ ------- ------- ----- ----- Realized investment (gains) losses, net of income tax... 45 (1,746) (706) (285) (47) ------ ------- ------- ----- ----- Amounts allocated to investment gains and losses (see note 4)...................................................... (67) 608 231 227 230 Income tax on amounts allocated to investment gains and losses.................................................. 45 (204) (71) (86) (83) ------ ------- ------- ----- ----- Amounts allocated to investment gains and losses, net of income tax (benefit) expense.......................... (22) 404 160 141 147 ------ ------- ------- ----- ----- Loss (gain) from discontinued operations.................. -- -- -- 71 (362) ------ ------- ------- ----- ----- Surplus tax............................................... 125 18 (40) 38 67 ------ ------- ------- ----- ----- Extraordinary item -- demutualization expense, net of income tax of $35 and $2, respectively.................. 225 4 -- -- -- ------ ------- ------- ----- ----- Operating income............................................ $ 990 $ 23 $ 617 $ 818 $ 504 ====== ======= ======= ===== ===== </TABLE> We believe the supplemental operating information presented above allows for a more complete analysis of results of operations. We have excluded realized investment gains and losses due to their volatility between periods and because such data are often excluded when evaluating the overall financial performance of insurers. You should not consider operating income as a substitute for any GAAP measure of performance. Our method of calculating operating income may be different from the method used by other companies and therefore comparability may be limited. (10) The following provides a reconciliation of operating income to adjusted operating income: <TABLE> <CAPTION> FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------ 1999 1998 1997 1996 1995 ------ ------- ------- ----- ----- (DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> <C> Operating income............................................ $ 990 $ 23 $ 617 $ 818 $ 504 Adjustment for charges for sales practices claims and for personal injuries caused by exposure to asbestos-containing products, net of income tax........... 317 1,203 190 103 109 ------ ------- ------- ----- ----- Adjusted operating income................................... $1,307 $ 1,226 $ 807 $ 921 $ 613 ====== ======= ======= ===== ===== </TABLE> The charge for the year ended December 31, 1999 was principally related to the settlement of a multidistrict litigation proceeding involving alleged improper sales practices, accruals for sales practices claims not covered by the settlement and other legal costs. The amount reported for the year ended December 31, 1998 includes charges for sales practices claims and claims for personal injuries caused by exposure to asbestos or asbestos-containing products. See Note 9 of Notes to Consolidated Financial Statements. We believe that supplemental adjusted operating income data provide information useful in measuring operating trends by excluding the unusual amounts of expenses associated with sales practices and asbestos-related claims. These expenses are not related to our ongoing operations. Adjusted operating income should not be considered as a substitute for any GAAP measure of performance. (11) Operating return on equity is defined as operating income divided by average total equity, excluding accumulated other comprehensive income (loss). We believe the operating return on equity information presented supplementally allows for a more complete analysis of results of operations. Accumulated other comprehensive income (loss) has been excluded due to its volatility between periods and because such data are often excluded when evaluating the overall financial performance of insurers. Operating return on equity should not be considered as a substitute for any GAAP measure of performance or liquidity. Our method of calculation of operating return on equity may be different from the calculation used by other companies and, therefore, comparability may be limited. Operating return on equity is only presented for annual periods. (12) Adjusted operating return on equity is defined as adjusted operating income divided by average total equity, excluding accumulated other comprehensive income (loss). We believe that supplemental adjusted operating return on equity data provide information useful in measuring operating trends by excluding the unusual amounts of expenses associated with sales practices and asbestos-related claims. Adjusted operating return on equity should not be considered as a substitute for any GAAP measure of performance. Adjusted operating return on equity is only presented for annual periods. (13) Return on equity is defined as net income divided by average total equity, excluding accumulated other comprehensive income (loss). (14) Includes MetLife's general account and separate account assets and assets managed on behalf of third parties. (15) Metropolitan Life Insurance Company statutory data only. SUMMARY PRO FORMA FINANCIAL INFORMATION The following summary pro forma financial information is derived from the pro forma financial information and the notes thereto included elsewhere in this prospectus. This information gives effect to the demutualization, the establishment of the closed block, the planned concurrent private placements of 73,000,000 shares at $14.00 per share, which is the midpoint of the range stated on the cover page of this prospectus, the concurrent offering of 20,000,000 equity security units at $50.00 per unit and the sale of 179,000,000 shares of common stock in the initial public offering at $14.00 per share, which is the midpoint of the range stated on the cover page of this prospectus, as if they each had occurred at December 31, 1999 for purposes of the consolidated balance sheet information and at January 1, 1999 for purposes of the consolidated statement of income information for the year ended December 31, 1999. This information has been prepared based on the terms of the plan of reorganization and the assumptions described in "Pro Forma Consolidated Financial Information". This information assumes, among other things, (a) a total of 699,974,077 shares of common stock is allocated to eligible policyholders under the plan of reorganization and (b) the underwriters' options to purchase additional shares of common stock and units in the offerings are not exercised. We have based the pro forma information on available information and on assumptions management believes are reasonable and that reflect the effects of these transactions. We have provided this information for informational purposes only. The number of shares and units actually sold in the offerings and the private placements and their respective prices may vary from the amounts assumed. The plan of reorganization requires that the aggregate net proceeds from the offerings and the private placements be at least equal to specified amounts. See "The Demutualization -- Summary of the Plan of Reorganization". If the actual proceeds raised in the initial public offering, the private placements or the offering of equity security units are different from the amounts estimated in this prospectus, we will be required to change the sizes of the other transactions, subject to the limit in the plan that the proceeds of the units offering may not exceed one-third of the combined proceeds of that offering, the offering of MetLife, Inc.'s common stock pursuant to this prospectus and the private placements. The amount of proceeds from the offerings and the private placements and the final terms of the units will depend on market conditions and our capital needs at the time of issuance. This information does not necessarily indicate our consolidated financial position or results of operations had the demutualization, the establishment of the closed block, the offering of equity security units, the initial public offering and the private placements been consummated on the dates assumed. It also does not project or forecast our consolidated financial position or results of operations for any future date or period. The data set forth below give effect to gross proceeds of $2,506 million from the issuance of common stock in the initial public offering less an assumed underwriting discount and estimated initial public offering expenses aggregating $125 million, or net proceeds from the initial public offering of $2,381 million, assuming an initial public offering price of $14.00 per share. The data also gives effect to proceeds of $1,022 million from the private placements assuming a purchase of 73,000,000 shares at an initial public offering price of $14.00 per share and gross proceeds of $1,000 million from the issuance of the units, less an assumed underwriting discount and offering expenses aggregating $40 million, or net proceeds from the offering of $960 million. Under the plan of reorganization, policyholders eligible to receive consideration in the demutualization will receive interests in the MetLife Policyholder Trust, cash or policy credits. The trust will hold the shares of common stock allocated under the plan to those eligible policyholders receiving trust interests. The information in the table below assumes that an estimated $397 million of the net proceeds will be used to reimburse Metropolitan Life Insurance Company for policy credits made in lieu of 28,331,484 allocated shares, an estimated $2,494 million of the net proceeds will be used to reimburse Metropolitan Life Insurance Company for cash payments made in lieu of 178,166,475 allocated shares and an estimated $315 million will be used to reimburse Metropolitan Life Insurance Company for cash payments to be made by its Canadian branch to certain holders of policies included in its Canadian business sold to Clarica Life Insurance Company in 1998. We will account for the payments to the transferred Canadian policyholders in other expenses in the same period as the effective date of the plan. The consideration an eligible policyholder receives under the plan of reorganization will be based on the number of shares of common stock allocated to the eligible policyholder pursuant to the terms of the plan. For those policyholders receiving policy credits or for those non-electing eligible policyholders who must receive cash in the demutualization, we will translate the share allocations into dollar amounts based on the initial public offering price per share. The pro forma information reflects $397 million of policy credits and $164 million of cash payments that will be distributed to non-electing eligible policyholders that must receive cash in the demutualization, assuming an initial public offering price of $14.00 per share. The pro forma information also reflects elections to receive cash made by eligible policyholders holding approximately 23.8% of the total number of shares allocated to eligible policyholders, representing estimated cash payments of $2,330 million, assuming an initial public offering price of $14.00 per share. See "The Demutualization -- Payment of Consideration to Eligible Policyholders". The pro forma consolidated statement of income also reflects the elimination of the surplus tax on earnings and the inclusion of the minority interest related to the units and is presented before the extraordinary item for demutualization expense. The pro forma consolidated statement of income does not give effect to any pro forma earnings resulting from the use of the net proceeds from the offerings and the private placements or the charge related to the payments to be made to certain transferred Canadian policyholders described above. <TABLE> <S> <C> Share Data: Shares allocated to eligible policyholders................ 699,974,077 Less shares allocated to eligible policyholders who receive cash or policy credits......................... 206,497,959 ----------- Shares issued to the MetLife Policyholder Trust........... 493,476,118 Shares issued in the initial public offering.............. 179,000,000 Shares issued in the private placements................... 73,000,000 ----------- Total shares of common stock outstanding.......... 745,476,118 =========== Percentage Ownership: MetLife Policyholder Trust................................ 66.2% Purchasers in the initial public offering................. 24.0% Purchasers in the private placements...................... 9.8% </TABLE> <TABLE> <CAPTION> (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) <S> <C> For the year ended December 31, 1999 Pro forma income before extraordinary item............ $ 912 Pro forma income before extraordinary item per share -- basic and diluted......................... $ 1.22 Pro forma equity...................................... $13,768 Pro forma book value per share -- basic............... $ 18.47 Pro forma tangible book value per share -- basic(1)... $ 17.65 </TABLE> - --------------- (1) Excludes goodwill.
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering and our financial statements and notes thereto appearing elsewhere in this prospectus. Although our legal name is SCG Holding Corporation, we do business under our trade name ON Semiconductor and refer to our company as ON Semiconductor in this prospectus. ON SEMICONDUCTOR ON Semiconductor , formerly known as the Semiconductor Components Group of the Semiconductor Products Sector of Motorola, Inc., is one of the largest independent suppliers of semiconductor components in the world. Our total addressable market consists of discrete, standard analog and standard logic semiconductors. These devices are commonly referred to as semiconductor components and are the core building blocks that provide the power control, power protection and interfacing necessary for almost all electronic systems. According to World Semiconductor Trade Statistics, our total addressable market comprised approximately $19.5 billion of revenues in 1999 and is projected to grow to $25.1 billion in revenues in 2002. The principal end-user markets for our products are networking and computing, wireless communications, consumer electronics, automotive electronics and industrial. Our products are used in such high-growth applications as routers and other networking equipment, cable and other high-speed modems, cellular telephones and other portable electronic devices, digital set-top boxes, DVD players, GPS and other navigation tools and industrial automation and control systems. Our research and development team, which includes approximately 300 people, focuses on the development of new products for use in these and other high-growth applications. With a portfolio of over 16,000 products, we offer our customers a single source of supply for virtually all of their components needs, including the broadest selection of discrete semiconductor products in the industry and an extensive line of standard analog and standard logic products. Our portfolio of products is among the most stable within the semiconductor industry due to its breadth, long product market life cycles and substantial diversity. Our products market life cycles generally average 10 to 20 years, with some as long as 30 years. The longevity of these products allows us to use our manufacturing assets for longer periods of time, reducing our capital expenditure requirements relative to semiconductor companies that manufacture complex devices such as microprocessors. Our franchise is built on several specific strengths, including our: leading market position; extensive product portfolio; technology leadership; broad and diverse customer base; low-cost production; superior customer focus; and experienced management team. As a stand-alone company dedicated to the semiconductor components business, we intend to grow our business by pursuing these key strategies: focus on high-growth markets; deliver customer satisfaction; leverage our manufacturing expertise; and pursue strategic acquisitions. We sell our semiconductors to customers around the world, including original equipment manufacturers, such as Agilent, Alcatel, Ford, Hewlett-Packard, Lucent, Motorola, Nortel, Nokia and Sony, electronic manufacturing service providers, such as Celestica, SCI and Solectron, and distributors, such as Arrow, Avnet and Veba. Headquartered in Phoenix, Arizona, we employ approximately 13,400 people worldwide, consisting of approximately 10,400 people employed directly and approximately 3,000 people employed through our joint ventures, most of whom are engaged in manufacturing services. We operate manufacturing facilities in SCG HOLDING CORPORATION (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 36-3840979 (I.R.S. Employer Identification No.) 5005 E. McDowell Road Phoenix, AZ 85008 (602) 244-6600 (Address and telephone number of principal executive offices) Table of Contents Arizona, China, the Czech Republic, Japan, Malaysia, Mexico, the Philippines and Slovakia, directly or through our joint ventures. Among the challenges we face and the risks inherent in investing in our business are the cyclical nature of our industry, possible fluctuations in our quarterly operating results, the need to keep pace with technological advances, competition in our industry and our lack of independent operating history. These and
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY CONTAINS BASIC INFORMATION ABOUT PACKAGING CORPORATION OF AMERICA AND THE OFFERING. IT MAY NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THIS ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL DATA AND RELATED NOTES AND THE DOCUMENTS TO WHICH WE REFER YOU, BEFORE MAKING AN INVESTMENT DECISION. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. OUR BUSINESS OVERVIEW PCA is the sixth largest producer of containerboard in the United States and the sixth largest manufacturer of corrugated packaging products, based on 1998 production capacity and 1999 estimated production capacity. Our sales were $1.571 billion in 1998 and $1.250 billion on a pro forma basis for the nine months ended September 30, 1999. PRODUCTS PCA produces corrugated containers as well as the containerboard used to manufacture corrugated containers. Corrugated containers are the most commonly used type of paper packaging. According to the Fibre Box Handbook, over 90% of the goods shipped in most developed countries get to market using corrugated packaging. Corrugated containers, sometimes referred to as cardboard boxes, are made by combining multiple layers of heavyweight paper known as containerboard and fabricating them into finished boxes. CONTAINERBOARD The two types of containerboard are linerboard and medium. Linerboard is used for the two flat outer facings while medium is used to form the fluted inner or middle layer of the corrugated sheet. Kraft linerboard and semi-chemical medium are common types of linerboard and medium that are made from a high percentage of virgin, as opposed to recycled, fiber. Virgin fiber is produced by chemically processing wood into pulp. By industry definition, kraft linerboard must contain no less than 80% virgin fiber and semi-chemical medium no less than 75% virgin fiber. All other containerboard is referred to as recycled. The recycled fiber used to make recycled containerboard comes primarily from used corrugated containers as well as other recovered and reprocessed papers. CORRUGATED CONTAINERS Converting plants fabricate corrugated sheets and produce corrugated containers. Converting plants may be either corrugator plants or sheet plants. Corrugator plants perform both a combining operation and a boxmaking operation. In the combining operation, corrugated medium is fluted into a wavy sheet and laminated to linerboard to produce corrugated, or combined sheets. In the boxmaking operation, the combined sheet is then printed, cut, folded and joined to create the finished boxes. Sheet plants purchase already combined sheets and form them into finished boxes. OPERATIONS PCA produces kraft linerboard and semi-chemical medium at four mill locations. In 1999, our mills produced 2.2 million tons of containerboard, which accounted for 6% of U.S. capacity. PCA also operates 67 converting facilities in 25 states. Of these facilities, 39 are corrugator plants, 26 are sheet plants and two are small, specialty operations. These specialty operations include a collating and distribution packaging center, as well as a machine rebuild facility. Our corrugator plants convert approximately 80% of the containerboard we produce into finished corrugated containers. As a result, we are considered an integrated producer. By industry standards, integrated producers own their own containerboard mills and use at least 50% of the containerboard production from those mills in their converting operations. In 1999, our converting plants shipped approximately 27 billion square feet of corrugated packaging products, compared to 25 billion square feet in 1998. PCA's 1998 shipments represented 6% of all corrugated packaging products shipped in the United States. PCA currently owns approximately 390,000 acres of timberland and has the rights to cut the wood from an additional 150,000 acres through long term lease agreements. Over 95% of our owned or leased wood supply is within 100 miles of our mill sites. This close proximity minimizes handling and transportation costs and ensures us a reliable supply of wood fiber. We have recently sold 405,000 acres of our timberland, but have entered into supply agreements covering 329,000 acres of this timberland to provide a future supply of wood fiber during the terms of these agreements. The proceeds from these sales were used to pay down debt. COMPETITIVE STRENGTHS AND BUSINESS STRATEGIES LOW-COST PRODUCER Because containerboard is a commodity, containerboard producers compete primarily on price. Therefore, having a low manufacturing cost operation is an important competitive advantage. PCA's Counce and Tomahawk mills represent two-thirds of PCA's containerboard production capacity. Based on studies by Jacobs-Sirrine, an industry consulting firm, these two mills were ranked in the lowest quartile for cash manufacturing costs in the industry. One of these studies was a single-client study that we paid Jacobs-Sirrine to perform in February 1998. The other was a multi-client study issued by Jacobs-Sirrine in the fourth quarter of 1998 that was available for purchase by the general public. INTEGRATED OPERATIONS The high level of integration between our containerboard and converting operations helps to provide a stable and predictable demand for our containerboard mill production. It also helps to dampen earnings fluctuations. According to Pulp & Paper Week, from 1995 to 1998, industry containerboard prices declined by 31% and earnings from our containerboard mills were adversely affected. During the same period, our average corrugated container price fell by only 11%. We were able to maintain relatively stable margins and earnings in our converting operations since the costs for the containerboard purchased by our converting plants were lower, which offset the decline in corrugated container prices. DIVERSIFIED CUSTOMER BASE PCA's corrugated container customer base is broadly diversified across industries and geographic locations. In 1999, we sold corrugated products to over 9,000 customers, which required us to ship to over 15,000 separate customer locations. This broad customer base reduces our dependence on any single customer or market. For 1999, no customer represented more than 6% of our total sales and our top 10 customers represented only about 20% of our total sales. FOCUS ON VALUE-ADDED PRODUCTS AND SERVICES Through acquisitions and capital investments, we have broadened our ability to provide specialized printing and package design, product features and superior customer service. As a result, our corrugated container selling price per thousand square feet has consistently exceeded the industry average since 1995. RECENT DEVELOPMENTS FOURTH QUARTER FINANCIAL RESULTS We reported fourth quarter 1999 operating income of $83 million on net sales of $446 million. Operating income for the fourth quarter included a $12 million pre-tax gain on timberland sales. Operating income improved $70 million compared to fourth quarter 1998 adjusted operating income of $13 million. Fourth quarter 1998 adjusted operating income excluded a $14 million restructuring charge and a $4 million charge for factored receivables financing from Tenneco Inc. Our improved earnings are primarily the result of higher prices and sales volumes for both containerboard and corrugated products. We reported fourth quarter 1999 net income available to common stockholders of $23 million, which excludes a $7 million extraordinary loss, net of taxes, related to the early extinguishment of debt. DEBT REDUCTION Using $263 million in timberland sale proceeds and other cash generated from operations, we prepaid an additional $331 million of senior debt in the fourth quarter. From April 12, 1999, the date we became a stand-alone company, through December 31, 1999, we have prepaid $440 million of senior debt. As of December 31, 1999, we had $779 million of senior debt and $550 million of senior subordinated debt outstanding. As a result of our lower total debt level and prevailing business conditions, we reduced our $250 million of availability under our revolving credit facility to $150 million in the fourth quarter, and as of December 31, 1999, had no amounts outstanding under that facility. EQUITY SPONSOR Madison Dearborn Partners, LLC, a private equity investment firm, was the financial sponsor for the transactions by which PCA acquired its current operations. Madison Dearborn, through limited partnerships of which it is the general partner, has approximately $4 billion of assets under management. Madison Dearborn focuses on investments in several specific sectors including natural resources, communications, consumer, health care and industrial. Madison Dearborn's objective is to invest, in partnership with outstanding management teams, in companies which have the potential for significant long-term equity appreciation. Since 1980, Madison Dearborn's principals have invested approximately $2.6 billion in more than 150 management buyout and private equity transactions in which the firm acted as a leading investor. PCA is Madison Dearborn's largest equity investment to date. THE TRANSACTIONS On April 12, 1999, Pactiv Corporation, formerly known as Tenneco Packaging Inc., sold its containerboard and corrugated packaging products business to PCA, an entity formed by Madison Dearborn in January 1999, for $2.2 billion, consisting of $246.5 million in cash, the assumption of $1.76 billion of debt incurred by Pactiv immediately prior to the contribution, and a 45% common equity interest in PCA valued at $193.5 million. PCA Holdings LLC, an entity organized and controlled by Madison Dearborn, acquired the remaining 55% common equity interest in PCA for $236.5 million in cash, which was used to finance in part the transactions. The financing of the transactions consisted of (1) borrowings under a new $1.46 billion senior credit facility for which J.P. Morgan Securities Inc. and BT Alex. Brown Incorporated (the predecessor to Deutsche Banc Alex. Brown) were co-lead arrangers, (2) the offering of $550 million of 9 5/8% senior subordinated notes due 2009 and $100 million of 12 3/8% senior exchangeable preferred stock due 2010, (3) a cash equity investment of $236.5 million by PCA Holdings and (4) an equity investment by Pactiv valued at $193.5 million. The senior credit facility was entered into to finance in part the transactions and to pay related fees and expenses and to provide future borrowings to PCA for general corporate purposes, including working capital. The senior credit facility initially consisted of three term loan facilities in an original aggregate principal amount of $1.21 billion and a revolving credit facility with up to $250 million in availability. PCA's total borrowings under the senior credit facility as of September 30, 1999 consisted of $1.110 billion of term loans. No amounts were outstanding under the revolving credit facility as of that date. The following sets forth the current common stock ownership of PCA, before giving effect to the sale of common stock in the offering: [GRAPH] - -------------- (1) The other investors in PCA Holdings are Sixty Wall Street Fund, L.P., J.P. Morgan Capital Corporation, BT Capital Investors, L.P. and other investors, none of whom own more than 0.5% of the equity interests of PCA Holdings. (2) PCA has also issued options to management to purchase common stock, which, if exercised, would result in management owning in the aggregate approximately 9.6% of the common equity of PCA. (3) Pactiv was formerly known as Tenneco Packaging Inc. and was formerly a wholly owned subsidiary of Tenneco Inc. Tenneco Inc. is now known as Tenneco Automotive Inc. and is often referred to in this prospectus as Tenneco. Pactiv was spun off from Tenneco in November 1999 and is now a publicly traded company. (4) PCA was formed in January 1999 and acquired the containerboard and corrugated packaging products business of The Containerboard Group of Pactiv in April 1999 as a result of the transactions. The Containerboard Group is often referred to in this prospectus as the Group. After giving effect to the offering and assuming the exercise in full of the underwriters' over-allotment option from Pactiv, Pactiv will not own any shares of common stock of PCA, PCA Holdings will own 47.4% of the outstanding common stock and management will own 3.0% of the outstanding common stock, without giving effect to the exercise of any options issued to management in June 1999, or 8.6% of the outstanding common stock assuming the exercise in full of these options. THE OFFERING <TABLE> <S> <C> <C> Shares offered by PCA................................ 11,500,000 Shares offered by selling stockholder................ 34,750,000 ----------- Total shares offered............................. 46,250,000 =========== Shares outstanding after the offering................ 106,100,000 Proposed New York Stock Exchange symbol.............. PKG Use of proceeds...................................... PCA will use the net proceeds from the sale of its shares to redeem all of its outstanding 12 3/8% senior exchangeable preferred stock due 2010. PCA will not receive any of the proceeds from the sale of the shares being sold by the selling stockholder. </TABLE> Except as otherwise indicated, we have presented the information in this prospectus assuming that the underwriters do not exercise their option to purchase additional shares from the selling stockholder in the offering. The number of shares outstanding after the offering is based on the shares outstanding as of December 31, 1999 and does not take into account the 6,576,460 shares of common stock issuable upon the exercise by management of outstanding options, all of which will become exercisable upon completion of the offering. PRINCIPAL EXECUTIVE OFFICES Our principal executive offices are located at 1900 West Field Court, Lake Forest, Illinois 60045 and our telephone number is (847) 482-3000. SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA Set forth below are the summary historical and pro forma financial data of PCA and The Containerboard Group of Pactiv Corporation, which we refer to in this prospectus as the Group. The historical financial data as of and for the years ended December 31, 1996, 1997 and 1998 has been derived from the audited combined financial statements of the Group, which was acquired by PCA in the transactions, and the related notes thereto included elsewhere in this prospectus. The historical financial data as of and for the years ended December 31, 1994 and 1995 has been derived from the unaudited financial statements of the Group. The historical financial data for the nine months ended September 30, 1998 and the period from January 1, 1999 to April 11, 1999 has been derived from the unaudited condensed combined financial statements of the Group included elsewhere in this prospectus. The historical financial data as of September 30, 1999 and for the period from April 12, 1999 to September 30, 1999 has been derived from the unaudited consolidated financial statements of PCA included elsewhere in this prospectus. The unaudited pro forma financial data as of and for the nine months ended September 30, 1999 and for the year ended December 31, 1998 was derived from the unaudited pro forma financial information included elsewhere in this prospectus. The information in the following table should be read in conjunction with "The Transactions," "Unaudited Pro Forma Financial Information," "Selected Financial and Other Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the historical combined financial statements of the Group and the related notes, and the historical consolidated financial statements of PCA and the related notes contained elsewhere in this prospectus. <TABLE> <CAPTION> GROUP PCA GROUP ------------------------------------------------------------------- ----------- ---------- NINE PRO FORMA MONTHS YEAR ENDED DECEMBER 31, YEAR ENDED ENDED ------------------------------------------------------------------- DEC. 31, SEPT. 30, 1994 1995 1996 1997 1998 1998 1998 ----------- ----------- ----------- ----------- ----------- ----------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Net sales............. $ 1,441,673 $ 1,844,708 $ 1,582,222 $ 1,411,405 $ 1,571,019 $1,571,019 $1,184,142 Cost of sales......... (1,202,996) (1,328,838) (1,337,410) (1,242,014) (1,289,644) (1,270,184) (962,126) ----------- ----------- ----------- ----------- ----------- ----------- ---------- Gross profit........ 238,677 515,870 244,812 169,391 281,375 300,835 222,016 Selling and administrative expenses............ (71,312) (87,644) (95,283) (102,891) (108,944) (102,568) (79,670) Corporate overhead/ allocation(3)....... (34,678) (38,597) (50,461) (61,338) (63,114) (63,114) (47,530) Restructuring/ impairment charge(4)........... -- -- -- -- (14,385) (14,385) -- Other income (expense)........... (4,701) (16,915) 56,243 44,681 26,818 41,592 32,064 ----------- ----------- ----------- ----------- ----------- ----------- ---------- Income (loss) before interest, income taxes and extraordinary item.............. 127,986 372,714 155,311 49,843 121,750 162,360 126,880 Interest expense, net................. (740) (1,485) (5,129) (3,739) (2,782) (159,476) (2,148) ----------- ----------- ----------- ----------- ----------- ----------- ---------- Income (loss) before income taxes and extraordinary item................ 127,246 371,229 150,182 46,104 118,968 2,884 124,732 Income tax benefit (expense)........... (50,759) (147,108) (59,816) (18,714) (47,529) (516) (49,654) ----------- ----------- ----------- ----------- ----------- ----------- ---------- Income (loss) before extraordinary item.............. 76,487 224,121 90,366 27,390 71,439 2,368 75,078 Extraordinary item.... -- -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Net income (loss)... $ 76,487 $ 224,121 $ 90,366 $ 27,390 $ 71,439 $ 2,368 $ 75,078 =========== =========== =========== =========== =========== =========== ========== <CAPTION> GROUP PCA(2) ----------- ------------------------- JAN. 1, APRIL 12, PRO FORMA 1999 1999 NINE MONTHS THROUGH THROUGH ENDED APRIL 11, SEPT. 30, SEPT. 30, 1999 1999 1999 ----------- --------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> STATEMENT OF INCOME DATA: Net sales............. $ 433,182 $816,538 $ 1,249,720 Cost of sales......... (367,483) (640,587) (1,003,942) ----------- -------- ----------- Gross profit........ 65,699 175,951 245,778 Selling and administrative expenses............ (30,584) (53,283) (82,463) Corporate overhead/ allocation(3)....... (14,890) (13,509) (28,399) Restructuring/ impairment charge(4)........... (230,112) -- -- Other income (expense)........... (2,207) 56 218 ----------- -------- ----------- Income (loss) before interest, income taxes and extraordinary item.............. (212,094) 109,215 135,134 Interest expense, net................. (221) (73,627) (117,743) ----------- -------- ----------- Income (loss) before income taxes and extraordinary item................ (212,315) 35,588 17,391 Income tax benefit (expense)........... 83,716 (14,655) (7,569) ----------- -------- ----------- Income (loss) before extraordinary item.............. (128,599) 20,933 9,822 Extraordinary item.... (6,327) -- -- ----------- -------- ----------- Net income (loss)... $ (134,926) $ 20,933 $ 9,822 =========== ======== =========== </TABLE> <TABLE> <CAPTION> GROUP PCA GROUP ------------------------------------------------------------------- ----------- ---------- NINE PRO FORMA MONTHS YEAR ENDED DECEMBER 31, YEAR ENDED ENDED ------------------------------------------------------------------- DEC. 31, SEPT. 30, 1994 1995 1996 1997 1998 1998 1998 ----------- ----------- ----------- ----------- ----------- ----------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> Basic earnings per share(7): Income (loss) before extraordinary item.............. $ .81 $ 2.37 $ .96 $ .29 $ .76 $ .02 $ .79 Extraordinary item.............. -- -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Net income (loss) per common share............. $ .81 $ 2.37 $ .96 $ .29 $ .76 $ .02 $ .79 =========== =========== =========== =========== =========== =========== ========== Diluted earnings per share(7): Income (loss) before extraordinary item.............. $ .81 $ 2.37 $ .96 $ .29 $ .76 $ .02 $ .79 Extraordinary item.............. -- -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ---------- Net income (loss) per common share............. $ .81 $ 2.37 $ .96 $ .29 $ .76 $ .02 $ .79 =========== =========== =========== =========== =========== =========== ========== Weighted average common shares out- standing............ 94,600 94,600 94,600 94,600 94,600 106,100 94,600 OTHER DATA: EBITDA (1)............ $ 178,148 $ 435,620 $ 234,041 $ 137,595 $ 218,700 $ 310,901 $ 199,156 Rent expense on oper- ating leases bought out as part of the transac- tions(1)............ 93,600 94,900 94,700 73,900 72,500 -- 54,602 Net cash provided by operating activities.......... 107,642 336,599 55,857 107,213 195,401 170,581 133,964 Net cash used for investing activities.......... (113,119) (371,068) (74,232) (111,885) (177,733) (93,535) (81,148) Net cash (used for) provided by financ- ing activities...... 6,112 36,454 16,767 3,646 (17,668) (22,030) (52,816) Capital expenditures........ $ 110,853 $ 252,745 $ 168,642 $ 110,186 $ 103,429 $ 103,429 $ 70,966 <CAPTION> GROUP PCA(2) ----------- ------------------------- JAN. 1, APRIL 12, PRO FORMA 1999 1999 NINE MONTHS THROUGH THROUGH ENDED APRIL 11, SEPT. 30, SEPT. 30, 1999 1999 1999 ----------- --------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> Basic earnings per share(7): Income (loss) before extraordinary item.............. $ (1.36) $ .16 $ .09 Extraordinary item.............. (.07) -- -- ----------- -------- ----------- Net income (loss) per common share............. $ (1.43) $ .16 $ .09 =========== ======== =========== Diluted earnings per share(7): Income (loss) before extraordinary item.............. $ (1.36) $ .16 $ .09 Extraordinary item.............. (.07) -- -- ----------- -------- ----------- Net income (loss) per common share............. $ (1.43) $ .16 $ .09 =========== ======== =========== Weighted average common shares out- standing............ 94,600 92,451 106,100 OTHER DATA: EBITDA (1)............ $ (181,189) $181,221 $ 251,296 Rent expense on oper- ating leases bought out as part of the transac- tions(1)............ 17,746 -- -- Net cash provided by operating activities.......... 153,649 169,168 181,144 Net cash used for investing activities.......... (1,121,145) (55,229) (74,970) Net cash (used for) provided by financ- ing activities...... 967,496 (82,740) (109,382) Capital expenditures........ $ 1,128,255 $ 49,216 $ 71,938 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1999 ------------------------ PRO ACTUAL FORMA ---------- ----------- <S> <C> <C> BALANCE SHEET DATA: Working capital(5).......................................... $ 179,933 $ 186,142 Total assets................................................ 2,425,839 2,449,677 Total long-term obligations(6).............................. 1,756,905 1,660,405 Total stockholders' equity.................................. 357,720 484,267 </TABLE> NOTES TO SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA (DOLLARS IN THOUSANDS) 1) PCA calculates "EBITDA" as income (loss) before interest, income taxes and extraordinary item, as reported, plus depreciation, depletion and amortization as reported in the statement of cash flows, as presented in the following table: <TABLE> <CAPTION> GROUP PCA GROUP --------------------------------------------------------- ----------- --------- NINE PRO FORMA MONTHS YEAR ENDED DECEMBER 31, YEAR ENDED ENDED --------------------------------------------------------- DEC. 31, SEPT. 30, 1994 1995 1996 1997 1998 1998 1998 --------- --------- --------- --------- --------- ----------- --------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> Income (loss) before interest, income taxes and extraordinary item........ $127,986 $372,714 $155,311 $ 49,843 $121,750 $162,360 $126,880 Add: Depreciation, depletion and amortization.................... 50,162 62,906 78,730 87,752 96,950 148,541 72,276 -------- -------- -------- -------- -------- -------- -------- EBITDA................................ $178,148 $435,620 $234,041 $137,595 $218,700 $310,901 $199,156 ======== ======== ======== ======== ======== ======== ======== <CAPTION> GROUP PCA(2) --------- ------------------------- JAN. 1, APRIL 12, PRO FORMA 1999 1999 NINE MONTHS THROUGH THROUGH ENDED APRIL 11, SEPT. 30, SEPT. 30, 1999 1999 1999 --------- --------- ------------- (IN THOUSANDS) <S> <C> <C> <C> Income (loss) before interest, income taxes and extraordinary item........ $(212,094) $109,215 $135,134 Add: Depreciation, depletion and amortization.................... 30,905 72,006 116,162 --------- -------- -------- EBITDA................................ $(181,189) $181,221 $251,296 ========= ======== ======== </TABLE> For the historical periods, income (loss) before interest, income taxes and extraordinary item, includes charges for rent expense on operating leases bought out as part of the transactions. As a result of the lease buy out, PCA will no longer incur this rent expense, but will record non-cash charges for depreciation and depletion related to these assets, which are now owned rather than leased. This depreciation/depletion expense will be similar, but not identical, to the amount of rent expense. On a pro forma basis for 1998, the incremental depreciation/depletion was $7,200 less than the historical rent expense, resulting in a net increase of $4,284 to pro forma 1998 net income. To better understand historical EBITDA in relation to pro forma EBITDA for the periods presented, we believe it may be useful to add back this rent expense to reported EBITDA for the historical periods. PCA's EBITDA is included in this prospectus because it is a financial measure used by PCA's management to assess PCA's operating results and liquidity, and because several of the indebtedness covenants in PCA's senior credit facility and in the notes indenture are based upon a calculation that utilizes EBITDA. EBITDA should not be considered in isolation or viewed as a substitute for cash flow from operations, net income or other measures of performance as defined by generally accepted accounting principles, or as a measure of a company's overall profitability or liquidity. In addition, EBITDA does not represent the cash available to investors because capital expenditures, debt service and income taxes are not deducted when calculating EBITDA. PCA understands that EBITDA as used herein is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation. In analyzing 1998 pro forma EBITDA for liquidity purposes, PCA also believes that the following additional adjustments should be considered by investors: <TABLE> <S> <C> Pro forma EBITDA for 1998................................... $310,901 Adjustments: Other income(a)........................................... (41,592) Non-recurring restructuring charge(b)..................... 14,385 Reduction in corporate overhead(c)........................ 32,954 Cost savings from restructuring(d)........................ 10,800 -------- Adjusted pro forma EBITDA for 1998.......................... $327,448 ======== </TABLE> a) Other income for 1998 consists substantially of nonrecurring items, such as gains on the sale of non-strategic woodlands and a recycled paperboard joint venture investment, that PCA believes are not relevant in analyzing recurring EBITDA. b) During the fourth quarter of 1998, the Group adopted a restructuring plan to eliminate approximately 100 personnel and close down four facilities associated with the Group's business. As of December 31, 1998, substantially all actions specified in the plan had been completed. A charge of $14,385 was recorded for severance benefits, exit costs and asset impairments, and is reflected in the Group's 1998 operating profit. PCA believes that this non-recurring charge is not relevant in analyzing recurring EBITDA. c) As part of Tenneco, the Group was allocated $63,114 of Tenneco corporate and Pactiv overhead expenses based on a variety of allocation methods. In analyzing the carved-out business on a stand-alone basis, PCA estimates that these costs will be approximately $30,160 for the first year following the closing of the transactions. The determination of that estimate is based on detailed analyses that consider (1) compensation and benefits for Pactiv and new employees who are employed by PCA in corporate functions such as in information technology, human resources, finance and legal, and (2) non-payroll costs incurred by these departments. Where applicable, the estimates consider the terms of transition service arrangements between PCA and Pactiv. d) The restructuring referred to in Note (b) above will result in reduced cost of sales and selling and administrative expenses. This adjustment represents the Group's estimate of the cost savings that would have been achieved in 1998 if the restructuring had been in effect for all of 1998. 2) There was no activity for PCA from January 25, 1999, its date of inception, through April 11, 1999. 3) The corporate overhead allocation represents the amounts charged by Tenneco and Pactiv to the Group for its share of Tenneco's and Pactiv's corporate expenses. On a stand-alone basis, management estimates that PCA's overhead expense will be $30,160 for the first twelve months following the acquisition. 4) This line item consists of non-recurring charges recorded in the fourth quarter of 1998 and the first quarter of 1999 pertaining to a restructuring charge and an impairment charge, respectively. For further information about these charges, refer to Notes 7 and 14 to the Group's audited combined financial statements and Note 7 to PCA's unaudited consolidated financial statements. 5) Working capital represents (a) total current assets excluding cash and cash equivalents less (b) total current liabilities excluding the current maturities of long-term debt. 6) Total long-term obligations includes long-term debt, the current maturities of long-term debt, and redeemable preferred stock. 7) Earnings per share through April 11, 1999 has been calculated using the historical earnings of the Group and the number of common shares resulting from the closing of the acquisition on April 12, 1999 (94,600,000 common shares). For the PCA historical period from April 12, 1999 to September 30, 1999, earnings available to common stockholders includes a reduction for $5,809 of preferred stock dividends. For both pro forma periods, there is no reduction for preferred dividends because the preferred stock redemption to be completed using proceeds from the offering is treated as if it occurred at the beginning of 1998. For all periods presented through April 11, 1999, basic and diluted earnings per share are the same because there are no potentially dilutive other securities. For the PCA historical period from April 12, 1999 to September 30, 1999 and both pro forma periods, diluted earnings per share includes the dilutive effect of the 6,576,460 options granted in June 1999. This dilutive effect is calculated using the treasury stock method and the expected initial public offering price.
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD READ CAREFULLY THIS ENTIRE PROSPECTUS, INCLUDING THE RISK FACTORS AND THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES, BEFORE ACQUIRING ANY ORDINARY SHARES OR ADSS. IN THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO "WE", "US", "OUR" AND "PEARSON" REFER TO PEARSON PLC AND ITS SUBSIDIARIES. INTRODUCTION Pearson is a global media company with its principal operations in the education, business information, consumer publishing and television markets. We have significant operations in the United States and generate more than half our revenues from that market. On July 31, 2000, we announced an agreement to acquire National Computer Systems, or NCS, for a purchase price of approximately $2.5 billion. NCS, which trades on the NASDAQ market under the symbol "NLCS", is a leading testing and educational services company in the US. The combination of NCS and our Pearson Education division will create an integrated education company with strong market positions in curricular content, online learning, assessment, enterprise applications for US schools and professional accreditation. We intend to finance the acquisition of NCS through the rights offering to existing shareholders. We believe the rights offering to be the most efficient means for us to raise the necessary funds. PEARSON PLC We create and manage intellectual property, which we promote and sell to our customers under well-known brand names, to inform, educate and entertain. We deliver our content in a variety of forms and through a variety of channels, including books, newspapers, television programs and internet services. We use online capabilities in our back office, our supply chains, our base businesses and new businesses we create. The internet is already both an integral part of each of our businesses and a facilitator of new product and distribution opportunities. Although we seek to build businesses that are worth more together than apart because of the synergies they offer each other, our operations break down into four core areas: - PEARSON EDUCATION is a leading international publisher of textbooks, supplementary materials and electronic education programs for elementary and secondary school, higher education and business and professional markets. In the US, our Scott Foresman, Addison Wesley Longman, Prentice Hall and Allyn & Bacon brands have enabled us to capture significant shares in the kindergarten through 12th grade markets. Our higher education business has been pre-eminent in the US for many years. Our international education business is the global leader in the English language teaching materials market and has a major position in the textbook and educational materials market outside the US, including being the largest textbook and school program provider in a number of local markets. In addition, we are a leader in using technology to educate, including online assessment and digital courseware through the Computer Curriculum Corporation, as well as products such as the Waterford Early Reading Program and the KnowZone. Our education offerings also extend to business education, where FT Knowledge provides distance learning for the corporate and post-secondary markets and has entered into several agreements with major business schools and other educational institutions in the US and worldwide. We are currently developing the Learning Network, a vertically integrated, internet-delivered community linking parents, PRESENTATION OF FINANCIAL INFORMATION; EXCHANGE RATE INFORMATION We have prepared the financial information contained in this prospectus in accordance with UK GAAP, which differs in significant respects from US GAAP. We describe these differences in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Accounting Principles", and in Note 34 to our consolidated financial statements included in this prospectus. Unless we indicate otherwise, any reference in this prospectus to our consolidated financial statements is to the consolidated financial statements and the related notes, included elsewhere in this prospectus. We publish our consolidated financial statements in sterling. We have included, however, references to other currencies. In this prospectus: - references to "sterling", "pounds", "pence" or "L" are to the lawful currency of the United Kingdom, - references to "euro" or "[EURO]" are to the euro, the single currency established by the European Monetary Union, and - references to "US dollars", "cents" or "$" are to the lawful currency of the United States. For convenience and except where we specify otherwise, we have translated some sterling figures into US dollars at the rate of L1.00 = $1.51, the noon buying rate in The City of New York for cable transfers and foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes on June 30, 2000. We do not make any representation that the amounts of sterling have been, could have been or could be converted into US dollars at the rates indicated. The following table sets forth, for the periods indicated, information concerning the noon buying rate for sterling, expressed in US dollars per sterling. The average rate is calculated by using the average of the noon buying rates in The City of New York on each day during a monthly period, and on the last day of each month during an annual period. <TABLE> <CAPTION> MONTH HIGH LOW END AVERAGE RATE ----- -------- -------- -------- ------------- <S> <C> <C> <C> <C> <C> August (through August 4)........................ $1.50 $1.49 $1.50 $1.50 July 2000........................................ $1.52 $1.49 $1.50 $1.51 June 2000........................................ $1.52 $1.49 $1.51 $1.51 May 2000......................................... $1.56 $1.47 $1.50 $1.51 April 2000....................................... $1.60 $1.56 $1.56 $1.58 March 2000....................................... $1.59 $1.57 $1.59 $1.58 February 2000.................................... $1.62 $1.58 $1.58 $1.60 January 2000..................................... $1.65 $1.62 $1.62 $1.64 </TABLE> <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, 2000 HIGH LOW END AVERAGE RATE ------------------------------ -------- -------- -------- ------------- <S> <C> <C> <C> <C> <C> $1.65 $1.47 $1.51 $1.57 </TABLE> <TABLE> <CAPTION> YEAR ENDED DECEMBER 31 HIGH LOW END AVERAGE RATE ---------------------- -------- -------- -------- ------------- <S> <C> <C> <C> <C> <C> 1999............................................. $1.68 $1.55 $1.62 $1.62 1998............................................. $1.72 $1.61 $1.66 $1.66 1997............................................. $1.70 $1.58 $1.64 $1.64 1996............................................. $1.71 $1.49 $1.71 $1.57 1995............................................. $1.64 $1.53 $1.55 $1.58 </TABLE> teachers and students with educational opportunities. On June 29, 2000, we announced the purchase of an 87% interest in FamilyEducation Network, Inc., an online network for parents, teachers and students. We are working to form strategic alliances with other internet content providers, to put in place the necessary technological infrastructure and management team for the Learning Network and to develop a marketing program. We expect to launch the Learning Network in the Fall of 2000. NCS, which will become a part of Pearson Education upon completion of the acquisition, is the United States' largest commercial processor of student assessment tests for kindergarten through 12th grade. NCS offers secure internet-based electronic testing delivery and reporting capability, allowing it to participate in the professional certification market. It also provides software, services, systems applications and internet-based technologies for the collection, management and interpretation of data in education. NCS seeks to use internet-based technologies to increase its market penetration and offer additional innovative products and services to its customers in the education field. - THE FT GROUP consists of our international newspaper, print and online financial information, business magazine and professional publishing interests. Our flagship product is the FINANCIAL TIMES, known internationally for its premium editorial content and international scope. Building upon the success of the FINANCIAL TIMES, we have developed a global information portal (FT.com), an online personal finance resource (FTYourMoney.com), and a European online financial news website (FTMarketWatch.com). We have also developed a pan-European network of leading business newspapers and related online business portals, including FINANCIAL TIMES DEUTSCHLAND, LES ECHOS and EXPANSION, for the German, French and Spanish-speaking markets. We own Recoletos, a Spanish media group which, in addition to EXPANSION, publishes MARCA, the leading Spanish sports newspaper, and we hold a 50% stake in THE ECONOMIST, an international weekly current affairs and business magazine. We also own 60% of Data Broadcasting Corporation, a supplier of electronic database services to US and UK securities professionals. Data Broadcasting Corporation has a 34% ownership interest in MarketWatch.com, whose web properties, CBS.MarketWatch.com and bigcharts.com, are among the most popular destinations for financial and market news on the web. - THE PENGUIN GROUP is one of the premier English language publishers in the world, with brand imprints such as Penguin, Avery, Dutton, Putnam and Viking. We publish an extensive portfolio of fiction and non-fiction, literary and commercial works from authors such as Tom Clancy, Clive Cussler, Dick Francis, Patricia Cornwell and Nick Hornby. We are one of the pre-eminent classics publishers and own or have rights to some of the most highly prized and enduring brands in children's publishing, featuring the books of Roald Dahl and such popular characters as Spot, Peter Rabbit and Madeline. We have a strong frontlist of new books by bestselling authors, and a backlist of more than 25,000 popular titles. In 1999, titles published by Penguin Putnam, as we are known in the US, spent a record 262 weeks on THE NEW YORK TIMES bestseller list. Our recent acquisition of Dorling Kindersley, or DK, a leading international publisher of illustrated reference books, will add breadth to our portfolio. DK offers many products with illustrations and graphics that are particularly well-suited for online delivery, and DK has invested in converting its properties into a digital format. As a result, this acquisition also gives us many more opportunities for online rights exploitation. - PEARSON TELEVISION was recently merged with CLT-Ufa, the television and broadcasting business owned by Germany's Bertelsmann AG, and Belgium's Audiofina, to create the RTL Group. The combined company is an integrated pan-European company with activities in television production, online delivery and broadcasting, including the well-known RTL television stations. The RTL Group is Europe's largest radio and television broadcast company by revenue and its shares are traded on the London Stock Exchange. The terms of the merger, which closed on July 25, 2000, provide us with a 22% interest in the RTL Group and representation on its board. COMPETITIVE STRENGTHS We have achieved leading positions in our markets by capitalizing on our competitive strengths: - POWERFUL BRANDS--We have made a substantial investment to develop and promote our quality brands. Our brands create customer loyalty and facilitate the use of new distribution channels and our entry into new markets. - RICH CONTENT--Each of our businesses creates and manages informative, educational and entertaining content. The quality, depth and originality of our products reinforce the strength of our brands and attract customers, partners and talented employees. - INTERNATIONAL SCALE--We have operations around the world and publications in English, French, Spanish, German and many other languages. Our large business presence in many local markets enables us to move rapidly to capitalize on international opportunities. - ATTRACTIVE CUSTOMER BASE--Our products appeal to a range of customers--institutions, businesses and a broad group of consumers of all ages and interests. We have a highly educated customer base with a substantial discretionary spending capacity. - PROVEN MANAGEMENT TEAM--Since 1997, a new management team has transformed the company into a simpler, more integrated media enterprise focused on our core businesses. Since we started this process, we have publicly set clear financial goals and consistently met or exceeded them. OUR STRATEGIES We focus on media businesses in growing markets and categories where we have or we can attain strong, sustainable market positions. We use our content and brands in our existing businesses and to develop new ones. We have integrated the internet into each of our businesses to enhance our customers' experiences, improve our ability to reach customers and increase the value of our content. - PEARSON EDUCATION constantly seeks ways to make products more attractive to teachers, students, parents and professionals. Over 1,200 of our approximately 49,000 college textbooks have interactive companion websites with online study guides to elaborate on text concepts, and chat rooms and bulletin boards to facilitate interaction between students and faculty. We continue to invest in a range of electronic learning tools to support our programs. We are also developing the Learning Network, an interactive online community of parents, students and teachers, to further expand the distribution of our content and generate new revenue streams. In addition, we are seeking to expand our international reach to benefit from our market expertise and build scale. Our acquisition of NCS will transform Pearson Education into an integrated education company. The combined business will be well-placed to create new market opportunities through developing customized learning in which testing and curriculum work together. The combined business will connect schools and homes, enabling parents to play a more active role in the education of their children. - THE FT GROUP aims to be the leading source of strategic information, intelligence, analysis and commentary for senior managers and institutional and individual investors around the world. We are building on the strength of our flagship brand, the FINANCIAL TIMES, to create a pan-European network of national business newspapers and websites, including LES ECHOS in France, EXPANSION in Spain and FINANCIAL TIMES DEUTSCHLAND in Germany. With THE WALL STREET JOURNAL, we have also launched VEDOMOSTI, a Russian language business newspaper. We use the well recognized brand and premium content of the FINANCIAL TIMES to develop new websites with diverse revenue models. We continue to invest in FT.com, our leading global business information portal, to further enhance its content, include more international company and market information and add more sophisticated tools intended to increase the "stickiness" of the site. We have launched FTYourMoney.com, to capitalize on the rapidly growing personal finance market in the UK, and FTMarketWatch.com, to capture the expanding market of European investors who make their investment decisions online or look to the internet for quick, market-oriented news. - THE PENGUIN GROUP continues to strengthen its frontlist, working globally to extend its stable of bestselling authors and identify new talent. We are digitizing our business--all of our new titles and over half of our backlist titles have been converted to an electronic digital format to enable "printing on demand" and "e-book" delivery. We are also building online communities around authors and genres to strengthen our relationship with our readers and to create new revenue streams. We recently acquired DK, a publisher of illustrated products such as travel and children's reference books. We believe that DK's high quality illustrated publications, many of which have been converted to a digital format permitting online delivery, will provide us access to new customers and markets, expand our product offerings and enhance our online marketing efforts. - PEARSON TELEVISION'S recently completed merger to form the RTL Group offers Pearson Television the opportunity to take its quality content into new distribution channels that are offered by our new media partners. The RTL Group will continue Pearson Television's development of online versions of television shows, such as THE PRICE IS RIGHT, and the building of online communities around popular serial dramas. We are working to capture the full synergistic potential that exists among our media businesses through the sharing of content and distribution channels. For example, FT Knowledge, our online distance learning business, results from the merger of Pearson Education's higher education textbooks and professional publishing resources with the FT Group's distance learning and management education resources. Longman Penguin Readers are simplified classics for new English speakers, combining Pearson Education's English language training resources and Penguin's classics library. Content from Penguin and the FT Group will be featured on our Learning Network. STRATEGIC DEVELOPMENTS In 1997, new management undertook a comprehensive review of our business and established core financial targets for sales growth, cash flow, earnings per share and operating margins. Management has since implemented a number of strategic and operating initiatives in order to streamline and interrelate our portfolio of businesses and increase employee share ownership. As part of the initiatives undertaken by management since 1997, we have completed approximately 120 divestitures and acquisitions. We have divested businesses with a total value of over L2.0 billion. To increase the strength of our core businesses, in addition to the NCS acquisition discussed below, we have acquired businesses with a total value of over approximately L3.7 billion, including Simon & Schuster's educational, business & professional and reference publishing businesses in 1998. NCS ACQUISITION NCS is a leading testing and educational services company in the US. For its fiscal year ended January 29, 2000, NCS had revenues of $630 million, compared to $505 million for the prior fiscal year, and income from operations of $70 million, compared to $55 million for the prior fiscal year. At January 29, 2000, NCS had total assets of $450 million, total long-term debt of $2 million, total cash and cash equivalent of $27 million and total stockholders' equity of $276 million. We have agreed to acquire all of the outstanding shares of NCS common stock for approximately $2.5 billion, or $73 per share. Our merger agreement requires us to launch a cash tender offer for all of the issued and outstanding shares of NCS's common stock on or before August 7, 2000. The tender offer will remain open for 23 business days, unless extended in accordance with the merger agreement, and will be conditioned on the tender of a sufficient number of shares to give us ownership of at least a majority of the fully diluted outstanding shares of NCS. After the completion of the tender offer, NCS will merge with us, and the remaining shareholders of NCS other than us will receive the same cash consideration per share as offered in the tender offer. We intend to finance the NCS acquisition with the proceeds of the rights offering. We believe the acquisition of NCS is an important step in the development of our Pearson Education business, providing the following opportunities: - INTEGRATING EDUCATIONAL PROGRAMS. The combination of curricular content, testing and educational applications will create opportunities to provide schools, universities, colleges and professional and training organizations a comprehensive range of education solutions, encompassing curricular and training programs, assessment and testing and educational services, including student curriculum, instructional and financial management software. - CUSTOMIZING LEARNING. Combining NCS's assessment tools with our curricular content will enable us to create customized learning programs individually tailored for each student. - EXTENDING CUSTOMER REACH. Our salesforce will market NCS's instructional management software, assessment tools and school administrative software to kindergarten through 12th grade school districts to supplement NCS's own direct salesforce. - ACCELERATING THE DEVELOPMENT OF NEW ONLINE PRODUCTS. NCS's online business will complement our business by enabling us to offer electronic end-to-end learning solutions. - DEVELOPING A NEW MARKET, WITH PARENTS AS CUSTOMERS. NCS's products will enable us to reach parents with new educational content, creating new revenue opportunities for our educational publishing business. It will also extend the scale and reach of our Learning Network, enabling it to reach directly a much bigger audience of parents and students. - MOVING INTO NEW PROFESSIONAL MARKETS. Our professional publishing and corporate training business will enable NCS to market its testing and assessment skills to meet the growing demand for accreditation in a wide range of professions and disciplines. - WIDENING INTERNATIONAL SPREAD. With major educational publishing operations around the world, Pearson Education will enhance NCS's international presence. As a publicly traded company, NCS is subject to the informational requirements of the Securities Exchange Act, and files reports and other information with the SEC. The contents of these filed documents do not form a part of this prospectus. ------------------------ Our principal place of business is located at 3 Burlington Gardens, London W1X 1LE, England. Our telephone number is +44-20-7411-2000 and our registration number in England is 53723. RIGHTS OFFERING SUMMARY <TABLE> <S> <C> ORDINARY SHARES, INCLUDING ORDINARY SHARES REPRESENTED BY ADSS, OUTSTANDING ON THE RIGHTS OFFERING RECORD DATE................ 625,270,356 ORDINARY SHARES, INCLUDING ORDINARY SHARES REPRESENTED BY ADSS, OFFERED............... 170,528,278 ORDINARY SHARES, INCLUDING ORDINARY SHARES REPRESENTED BY ADSS, OUTSTANDING AFTER THE RIGHTS OFFERING, ASSUMING FULL SUBSCRIPTION............................... 795,798,634 ordinary shares, excluding approximately 15,400,000 ordinary shares to be issued pursuant to outstanding options under employee stock incentive plans. UNDERWRITING................................. Goldman Sachs International and Cazenove & Co. have agreed, severally, to act as standby underwriters for up to an aggregate of 150,000,000 ordinary shares. To the extent the underwriters are obligated to take up ordinary shares, their selling agents may sell or resell them in the United States under this prospectus. USE OF PROCEEDS.............................. We intend to use the anticipated L1.7 billion ($2.6 billion) proceeds from the rights offering to finance the NCS acquisition and pay the associated expenses. HOLDERS OF ORDINARY SHARES: Share rights............................... We will grant three transferable share rights for every 11 ordinary shares owned at the close of business in London on the share right record date. Share subscription price................... L10 Share right record date.................... July 28, 2000 Share right expiration date................ September 1, 2000 Share right subscription period............ August 10, 2000 through September 1, 2000 Share certificates......................... We will mail certificates representing new ordinary shares to the holders by October 2, 2000. Unexercised share rights................... The new ordinary shares relating to unexercised share rights may be sold on behalf of the unexercising holders through arrangements with the underwriters. If they are sold at a price in excess of the share subscription price and the expenses of sale, the aggregate premium will be paid pro rata to the unexercising holders of share rights. Listing.................................... Our ordinary shares are traded on the London Stock Exchange under the symbol "PSON". The share rights will also trade on the London Stock Exchange. </TABLE> <TABLE> <S> <C> HOLDERS OF ADSS: ADS rights................................. We will grant three transferable ADS rights for every 11 ADSs owned on the ADS right record date. ADS subscription price..................... L10, which does not include a 1.5% UK tax for which you will be responsible if you exercise your rights. The ADS subscription price must be paid in US dollars as outlined below. Estimated US dollar ADS subscription Estimated at $16.50. As described in "The US price.................................... Rights Offering", we have made arrangements with The Bank of New York, as ADS subscription agent, for you to pay the ADS subscription price at this estimated US dollar amount. To the extent the estimated US dollar price is less than the actual US dollar equivalent of the ADS subscription price as of August 31, 2000, plus the 1.5% UK tax, you will be required to pay the difference. To the extent the estimated US dollar price is higher, you will receive a refund of the excess. ADS right record date...................... July 28, 2000 ADS right expiration date.................. 12:00 noon (New York City time) on August 30, 2000 ADS subscription period.................... August 10, 2000 through August 30, 2000 ADS subscription agent..................... The Bank of New York ADR delivery............................... The Bank of New York will provide you with American Depositary Receipts, or ADRs, evidencing your new ADSs as soon as practicable after October 2, 2000. Unexercised ADS rights..................... The new ordinary shares underlying unexercised ADS rights may be sold on behalf of the unexercising holders, through arrangements with the underwriters. If they are sold at a price in excess of the share subscription price and the expenses of sale, any premium attributable to the unexercising ADS holders will be paid to the ADS depositary. The ADS depositary will pay any amounts received by it, net of expenses and commission, pro rata to the unexercising holders of ADS rights. ADS depositary............................. The Bank of New York Listing.................................... We will apply to list the ADRs representing the ADSs that you will receive in this rights offering on the New York Stock Exchange under the symbol "PSO". The ADS rights will not be listed but you may trade them in the over-the-counter market. </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA The following summary consolidated financial data of Pearson should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes appearing elsewhere in this prospectus. For convenience, we have translated the six months ended June 30, 2000 and year ended December 31, 1999 amounts into US dollars at the rate of L1.00=$1.51, the noon buying rate in The City of New York on June 30, 2000. <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30 YEAR ENDED DECEMBER 31 ------------------------------ --------------------------------------------------------------- 2000 2000 1999 1999 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- -------- -------- -------- -------- $M LM LM $M LM LM LM LM LM (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> UK GAAP INFORMATION: CONSOLIDATED PROFIT AND LOSS ACCOUNT DATA Total sales.................... 2,333 1,545 1,306 5,031 3 ,332 2,395 2,293 2,186 1,830 Total sales from continuing operations................... 2,333 1,545 1,306 5,031 3,332 2,251 2,011 1,830 1,484 Operating profit from continuing operations(1)..... (29) (19) 25 408 270 187 252 132 192 Total operating profit......... (17) (11) 46 480 318 250 328 189 267 Profit after taxation.......... 137 91 (38) 453 300 441 40 248 272 Operating profit before internet enterprises, goodwill amortization and other items(2)............... 236 156 133 888 588 389 328 289 267 Earnings per equity share(3)... 21.4 CENTS 14.2p (6.6)p 72.8 CENTS 48.2p 74.1p 6.6p 42.8p 47.1p Adjusted earnings per equity share after internet enterprises(4)............... (0.9) (0.6) 6.3 73.2 48.5 42.0 34.9 30.6 28.8 Adjusted earnings per equity share before internet enterprises(5)............... 15.1 10.0 7.1 80.5 53.3 42.0 34.9 30.6 28.8 Diluted earnings per equity share(6)..................... 20.8 13.8 (6.5) 71.7 47.5 73.3 6.4 42.5 46.4 CONSOLIDATED BALANCE SHEET DATA $M LM LM $M LM LM LM LM LM Total assets (Fixed Assets plus Current Assets).............. 9,817 6,501 5,447 8,079 5,350 5,317 2,253 2,246 2,568 Net assets..................... 2,935 1,944 1,107 2,004 1,327 1,084 156 393 856 Long-term obligations(7)....... 3,059 2,026 2,312 3,452 2,286 2,562 609 556 475 Capital Stock.................. 236 156 153 231 153 152 144 143 139 Number of equity shares outstanding (millions of ordinary shares)............. 625 625 611 613 613 610 577 571 556 </TABLE> <TABLE> <CAPTION> YEAR ENDED DECEMBER 31 ------------------------------ 1999 1999 1998 -------- -------- -------- $M LM LM <S> <C> <C> <C> US GAAP Information:(8) Profit for the financial year............................... 299 198 444 Profit from continuing operations for the financial year.... 254 168 122 Basic earnings per equity share............................. 48.9 CENTS 32.4p 75.3p Diluted earnings per equity share........................... 48.5 32.1 74.6 Basic earnings from continuing operations per equity share..................................................... 41.5 27.5 20.7 Diluted earnings from continuing operations per equity share..................................................... 41.1 27.2 20.5 $M LM LM Shareholders' funds......................................... 3,949 2,615 2,468 </TABLE> ------------------------------ (1) Continuing operations represent those operations carried on by us as at June 30, 2000. Operating profit from continuing operations consists of operating profit--Group, plus the Group's share of operating profit from continuing operations for Group associates, as disclosed on page F-3 of the consolidated profit and loss account. (2) Other items include a L100 million charge for Penguin improper accounting in 1996, Year 2000 compliance costs of L5 million in 1999 and L7 million in 1998, integration costs in connection with our acquisition of Simon & Schuster's educational, business & professional and reference publishing business of L95 million in 1999 and L120 million in 1998 and integration costs in connection with our acquisition of DK of L3 million in the first six months of 2000. (3) Earnings per equity share is based on profit for the financial period and the weighted average number of ordinary shares in issue during the period. (4) Adjusted earnings per equity share is based on adjusted earnings for the financial period and the weighted average number of ordinary shares in issue during the period. Adjusted earnings excludes profits or losses on the sale of fixed assets and investments, businesses and associates, Year 2000 compliance costs and integration costs in respect of the Simon & Schuster acquisition and the DK acquisition and, following the prospective implementation of FRS10 "Goodwill and Intangible Assets" in 1998, goodwill amortization. In 1996, the L100 million exceptional charge for improper accounting in Penguin and the loan stock redemption premium have also been excluded. In the first six months of 2000, the accelerated amortization of a financing arrangement fee has also been excluded. (5) Due to expenditures of L84 million in the first six months of 2000 and L39 million in 1999 on new internet enterprises, a second adjusted earnings per equity share in accordance with UK GAAP is presented in which the results of these internet enterprises are also excluded from earnings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--General Overview--Internet Enterprises".
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL THE INFORMATION YOU SHOULD CONSIDER BEFORE BUYING SHARES IN THE OFFERING. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY. EXCEPT AS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. OUR COMPANY QuickLogic develops, markets and supports advanced field programmable gate array semiconductors, or FPGAs, and associated software tools. In addition to our FPGAs, we have pioneered the development of embedded standard products, or ESPs. Our ESPs combine the flexibility and time-to-market advantages of our FPGAs with the predictability and high performance of standard semiconductor products, thereby enabling our customers to integrate increased amounts of functionality on a single semiconductor device. Our FPGA and ESP products target complex, high-performance systems in rapidly changing markets, including telecommunications and data communications; video/ audio, graphics and imaging; instrumentation and test; high-performance computing; and military systems. Competitive pressures are forcing manufacturers of electronic systems to rapidly bring to market products with improved functionality, higher performance and greater reliability, all at lower cost. Providers of systems requiring high-speed data transmission and processing face some of the most intense time-to-market pressures in the technology industry. These market forces have driven the evolution of logic semiconductors which are used in complex electronic systems to coordinate the functions of other semiconductors. Programmable Logic Devices, or PLDs, are logic semiconductors which provide systems designers with the flexibility to implement designs after the wafer manufacturing process is completed. FPGAs are types of PLDs used for complex functions. We believe that our FPGAs offer higher performance and greater flexibility at lower overall systems cost than competing FPGA solutions. According to inSearch Research, the projected total market size for high-complexity programmable logic devices in 2000 is approximately $3.0 billion, of which FPGAs are estimated to account for $1.8 billion. Our FPGA sales totaled approximately $39.8 million in 1999. We have leveraged our unique FPGA technology, which delivers the advantages offered by both FPGAs and application specific standard products in a single chip solution, a "system-on-a-chip." These ESPs link blocks of user-configurable standard functions with field programmable logic through a high-performance interface. We believe ESPs offer the following specific advantages over chip-set solutions: - increased performance, - decreased cost, - increased reliability, and - shorter development time. We have introduced our first two ESP product lines, the QuickRAM and QuickPCI families. We have announced a new product family, QuickDSP, which will be introduced in the second quarter of 2000. According to inSearch Research, the total ESP market size in 1999 was $8.0 million, and is projected to increase to $32.0 million in 2000. Our ESP sales totaled approximately $2.5 million in 1999. Our objective is to be the leading provider of high-speed, flexible, cost-effective FPGAs and ESPs. We believe we can achieve this objective by offering systems manufacturers the ability to accelerate design cycles to satisfy demanding time-to-market requirements. We believe we will meet our objective by: - continuing to invest in the development of FPGA and ESP technologies; - capitalizing on cross-selling opportunities between our FPGA and ESP products; - broadening our ESP product lines; - creating innovative, industry-leading customer services; and - targeting high-performance, rapidly changing markets. We were incorporated in California in April 1988 and changed our name in February 1991 to QuickLogic Corporation. We reincorporated into the State of Delaware in October 1999. The address of our corporate headquarters is 1277 Orleans Drive, Sunnyvale, California 94089. Our telephone number is (408) 990-4000. Our web site is located at http://www.quicklogic.com. Information contained on our web site and web sites linked to our web site does not constitute a part of this prospectus. ------------------------ THE OFFERING <TABLE> <S> <C> Common stock offered by QuickLogic.............................. 1,500,000 shares Common stock offered by the selling stockholders............................ 3,254,278 shares Common stock to be outstanding after the offering................................ 19,696,063 shares Use of proceeds........................... For general corporate purposes, including working capital and capital expenditures. See "Use of Proceeds." Nasdaq National Market symbol............. QUIK </TABLE> The table set forth above is based on shares of common stock outstanding as of April 5, 2000. This table excludes: - 2,757,007 shares issuable upon exercise of outstanding options under our 1989 stock option plan at a weighted average exercise price of $4.14 per share; - 533,333 shares issuable upon exercise of outstanding options under our 1999 stock option plan at a weighted average exercise price of $13.62 per share; - 8,668,184 shares reserved for issuance under our stock option plans; and - 2,000,000 shares reserved for issuance under our 1999 employee stock purchase plan. SUMMARY CONSOLIDATED FINANCIAL DATA (In thousands, except per share data) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------ 1997 1998 1999 -------- -------- -------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue..................................................... $ 28,460 $30,007 $39,785 Gross profit................................................ 11,605 15,704 22,682 Contract termination and legal............................ 28,309 -- -- Net operating income (loss)................................. (33,920) 42 2,709 Net income (loss)........................................... (33,648) 245 3,161 Net income (loss) per share: Basic..................................................... $ (10.41) $ 0.06 $ 0.42 Diluted................................................... $ (10.41) $ 0.02 $ 0.19 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ---------------------- ACTUAL AS ADJUSTED -------- ----------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $34,558 $76,603 Working capital............................................. 32,568 74,613 Total assets................................................ 50,482 92,527 Long-term obligations....................................... 128 128 Stockholders' equity........................................ 37,005 79,050 </TABLE> See note 3 of notes to financial statements for an explanation of the determination of the number of shares used in computing per share data. "As Adjusted" amounts have been adjusted to give effect to receipt of the net proceeds from the sale of the 1,500,000 shares of common stock offered by us at an assumed public offering price of $30.25 per share, after deducting the underwriting discount and estimated offering expenses. See "Use of Proceeds" and "Capitalization."
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+PROSPECTUS SUMMARY This summary highlights some of the information found in greater detail elsewhere in this prospectus. Unless otherwise indicated, information in this prospectus assumes that the underwriters do not exercise their over-allotment option, assumes the conversion of all of our preferred stock into common stock upon effectiveness of this offering. Sangamo BioSciences, Inc. is a leader in the research and development of novel transcription factors for the regulation of genes. Genes are composed of DNA and control the expression and transmission of all inherited traits. Transcription factors are proteins that turn genes on and turn genes off, or regulate gene expression, by recognizing specific DNA sequences. Our Universal Gene Recognition technology enables the engineering of a class of transcription factors known as zinc finger DNA binding proteins, or ZFPs. ZFPs are the most abundant class of transcription factors in humans and other higher organisms and naturally function to regulate gene expression. By engineering ZFPs so that they can recognize a specific gene, we have created ZFP transcription factors that can control gene expression and, consequently, cell function. We intend to establish Universal Gene Recognition as a widely used technology for commercial applications in pharmaceutical discovery, therapeutics for the treatment of human diseases, clinical diagnostics, and agricultural and industrial biotechnology. The identification of all human genes, referred to as the sequencing of the human genome, involves the dedication of enormous scientific and financial resources. The accelerating pace of genetic discovery creates significant opportunities for pharmaceutical and other life science companies. The challenge facing these companies is how to derive medically and commercially valuable knowledge from this large accumulation of new genetic information. We believe our Universal Gene Recognition technology has the potential to address these challenges and has broad applicability to the sectors below, each of which represents a significant target market with unmet needs: - Universal GeneTools for Pharmaceutical Discovery are ZFP transcription factors for the identification and evaluation of medically important genes in humans, animals and other organisms, and for improved efficiency in the screening of chemical compounds for pharmaceutical discovery; - ZFP-Therapeutics are ZFP transcription factors developed as pharmaceutical products to treat a broad spectrum of diseases through the regulation of disease-related genes; - ZFP-Diagnostics are developed to detect specific DNA sequences in clinical samples of DNA, to determine an individual's potential susceptibility to disease or probable response to drug therapy; and - ZFP Transcription Factors for Agricultural and Industrial Biotechnology are designed for use in the study of newly discovered plant genes, agrochemical discovery, the engineering of plants with improved properties and the biological production of industrial chemicals. We believe our engineered ZFP transcription factors have numerous advantages for the regulation of gene expression including: - ZFP transcription factors normally and naturally regulate gene expression in the cells of virtually all higher organisms; - ZFPs can be designed to recognize unique DNA sequences resulting in the ability to recognize a single gene within an organism's entire genome; - ZFP transcription factors can turn on or turn off a target gene, enhancing their versatility; PROSPECTUS 3,500,000 Shares [SANGAMO LOGO] SANGAMO BIOSCIENCES, INC. Common Stock - -------------------------------------------------------------------------------- This is our initial public offering of shares of common stock. We are offering 3,500,000 shares. No public market currently exists for our shares. Our common stock has been approved for quotation on the Nasdaq National Market under the symbol "SGMO." INVESTING IN THE SHARES INVOLVES RISK. "RISK FACTORS" BEGIN ON PAGE 5. <TABLE> <CAPTION> PER SHARE TOTAL ------ ----------- <S> <C> <C> Public Offering Price....................................... $15.00 $52,500,000 Underwriting discounts...................................... $ 1.05 $ 3,675,000 Proceeds to Sangamo......................................... $13.95 $48,825,000 </TABLE> We have granted the underwriters a 30-day option to purchase up to 525,000 additional shares of common stock to cover any over-allotments. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Lehman Brothers expects to deliver the shares on or about April 11, 2000. - -------------------------------------------------------------------------------- LEHMAN BROTHERS CHASE H&Q ING BARINGS WILLIAM BLAIR & COMPANY April 6, 2000 - ZFP transcription factors can be used to regulate gene expression in many different organisms including humans, animals, plants, fungi, bacteria and viruses; and - ZFP transcription factors can turn genes on and turn genes off in a reversible fashion, allowing regulation of gene expression for a defined period of time. To date, we have engineered hundreds of ZFP transcription factors and have performed experiments to test their ability to recognize their target sequences and to function in cells. We have also demonstrated the ability of ZFP transcription factors to regulate a limited number of commercially important genes. We intend to develop our Universal Gene Recognition technology for applications in pharmaceutical discovery, therapeutics for the treatment of human diseases, clinical diagnostics, and agricultural and industrial biotechnology. To establish Universal Gene Recognition as a widely used technology in life sciences industries, and to fund internal research and development activities, we have established and will continue to pursue collaborations with selected pharmaceutical and biotechnology companies. We have signed Universal GeneTools agreements, which we refer to as collaborations, with 18 pharmaceutical or biotechnology companies including the following companies or their subsidiaries: <TABLE> <S> <C> - Pfizer Inc., - F. Hoffmann-La Roche Ltd., - SmithKline Beecham plc, - Immunex Corporation, - Millennium Pharmaceuticals, Inc., - Pharmacia & Upjohn Company, - AstraZeneca PLC, - Genset SA, - Schering AG, - Warner-Lambert Company, - Bayer Corporation, - Merck KGaA, - Glaxo Wellcome plc, - Zaiya Incorporated and - DuPont Pharmaceuticals Company, - Procter & Gamble Pharmaceuticals. - Japan Tobacco Inc., </TABLE> We have also entered into a strategic partnership with Edwards LifeScience, Inc., formerly the CardioVascular Group of Baxter Healthcare Corporation, for the development and commercialization of ZFP-Therapeutics in cardiovascular and peripheral vascular diseases. Under this agreement, Baxter has purchased a $5 million convertible note which will convert into common stock upon consummation of this offering, and we have received $1 million in initial research funding from Baxter. Baxter has exercised an option by purchasing an additional $7.5 million convertible note which will convert into common stock upon consummation of this offering for a right of first refusal to negotiate a license for additional ZFP-Therapeutics in cardiovascular and peripheral vascular diseases. We expect to enter into other strategic partnerships to accelerate the development of ZFP transcription factors as potential pharmaceutical candidates. Sangamo was founded and incorporated in Delaware in 1995. Our principal offices are located at 501 Canal Boulevard, Suite A100, Richmond, CA 94804, and our telephone number is (510) 970-6000. THE OFFERING Common stock offered by Sangamo..... 3,500,000 shares Common stock to be outstanding after the offering........................ 20,854,087 shares Use of proceeds..................... For research and development, capital equipment and general corporate purposes. See "Use of Proceeds" for more information regarding our planned use of the proceeds from this offering. Nasdaq National Market symbol....... SGMO The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of December 31, 1999 adjusted to reflect the issuance of 333,333 shares of preferred stock in January 2000 which converts into 666,666 shares of common stock upon consummation of this offering and, together with accrued interest, the issuance of a $5 million note in January 2000 and a $7.5 million note in March 2000 which convert into common stock at the initial public offering price upon the consummation of the offering, and excludes: - a total of 1,872,666 shares issuable upon the exercise of outstanding options at a weighted average exercise price of $0.15 per share; - a total of 259,962 shares issuable upon the exercise of outstanding warrants at a weighted average exercise price of $1.00 per share; and - a total of 2,400,000 shares available for future issuance under our stock plans. SUMMARY FINANCIAL DATA The following table sets forth summary financial data for our company. You should read this information together with the financial statements and the notes to those statements appearing elsewhere in this prospectus and the information under "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Please see the financial statements and the notes to the statements appearing elsewhere in this prospectus for the determination of the number of shares used in computing the basic and diluted and pro forma basic and diluted net loss per share. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------------------- 1997 1998 1999 ------- --------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues............................................. $ 1,152 $ 2,038 $ 2,182 Operating expenses: Research and development................................. 1,700 4,259 4,266 General and administrative............................... 797 1,237 1,822 ------- ------- ------- Total operating expenses................................... 2,497 5,496 6,088 ------- ------- ------- Loss from operations....................................... (1,345) (3,458) (3,906) Interest income (expense), net............................. (55) 173 131 ------- ------- ------- Net loss................................................... (1,400) (3,285) (3,775) Deemed dividend upon issuance of convertible preferred stock.................................................... -- -- (4,500) ------- ------- ------- Net loss attributable to common stockholders............... $(1,400) $(3,285) $(8,275) ======= ======= ======= Basic and diluted net loss per common share................ $ (0.26) $ (0.56) $ (1.38) ======= ======= ======= Shares used in computing basic and diluted net loss per common share........................ 5,485 5,843 5,991 ======= ======= ======= Pro forma basic and diluted net loss per common share (unaudited).............................................. $ (0.63) ======= Shares used in computing pro forma basic and diluted net loss per common share (unaudited)........................ 13,102 ======= </TABLE> The following table is a summary of our balance sheet as of December 31, 1999. The pro forma column reflects the issuance in January 2000 of 333,333 shares of preferred stock for $1.5 million which converts into 666,666 shares of common stock upon consummation of this offering and a $5 million note in January 2000 and a $7.5 million note in March 2000 which convert, together with accrued interest, into common stock at the initial public offering price upon consummation of this offering. The pro forma as adjusted column also reflects our receipt of the estimated net proceeds from the sale of the shares of common stock offered in this offering at an initial public offering price of $15.00 per share after deducting the estimated underwriting discount and offering expenses payable by us. See "Use of Proceeds" and "Capitalization" and Notes 1, 4, and 7 of Notes to Financial Statements. <TABLE> <CAPTION> AS OF DECEMBER 31, 1999 ----------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents, and short-term investments....... $ 7,503 $21,503 $69,128 Working capital.......................................... 7,206 21,206 68,831 Total assets............................................. 9,162 23,162 70,787 Long-term debt........................................... 250 250 250 Accumulated deficit...................................... (8,785) (8,938) (8,938) Total stockholders' equity............................... 7,882 21,882 69,507 </TABLE>
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+SUMMARY The following summary is only a shortened version of the more detailed information, exhibits and financial statements appearing elsewhere in this prospectus. Prospective investors are urged to read this prospectus in its entirety. We are in the business of developing, manufacturing and selling skin protection products designed to control the effects of occupational hand disease, as well as to prevent contamination. We have completed the development of our basic products, but continue to research and develop potential additional products. Our principal executive offices are at 6320 S. Sandhill Road, Suite 10, Las Vegas, Nevada, 89120 (telephone no.: (702) 433-7154). On October 15, we began selling 1,450,000 shares of our common stock to investors in a private offering at $2.25 per share. Each investor who purchased shares in this offering also received a warrant to purchase one share of common stock for every two shares of common stock purchased. The exercise price of these warrants is $2.25 per share if exercised on or before October 15, 2000, and $3.00 per share if exercised after that date but before close of business on October 15, 2001. All warrants issued must be exercised on or before October 15, 2001. We eventually sold 1,450,000 shares of common stock and issued 1,087,500 warrants, including 362,500 warrants to brokers and finders for their services in selling the stock. See the section entitled "Description Of Securities To Be Registered." As part of this offering, we also signed and agreed to a registration rights agreement in which we are obligated to register all shares of common stock sold in the offering and any shares of common stock issuable upon exercise of the warrants. See the section entitled "Security Ownership of Certain Beneficial Owners and Management" - "Registration Rights" for a discussion of the registration rights agreement. The common stock offered by the selling shareholders through this prospectus is the common stock they purchased in the offering and the common stock underlying their warrants. We are filing this registration statement in order to satisfy our obligation to the selling shareholders under the registration rights agreement. Securities Being Offered: Up to 2,537,500 shares of common stock, See Section entitled "Description Of Securities To Be Registered." Securities Issued And to be Issued: As of the date of this prospectus, we have 11,670,333 shares of common stock issued and outstanding. In addition, we have warrants issued that may be converted into 1,087,500 shares of common stock. Therefore, upon conversion of these warrants, there could be as many as 12,757,833 shares of common stock issued and outstanding. Existing shareholders will sell all of the common stock sold under this prospectus. See Section entitled "Description Of Securities To Be Registered". SKINVISIBLE, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT YEAR ENDED DECEMBER 31 1999 1998 ------------------- Revenues $ 169,013 $ 12,269 Cost of Sales Beginning Inventory 47,530 - 0 - Purchases 181,642 51,531 --------- --------- Total Available 229,172 51,531 Less: Ending Inventory <149,150> <47,530> Sample Distribution - 0 - - 0 - --------- --------- Total Cost of Sales <80,022> <4,001> --------- --------- Gross Profit 88,991 8,268 Operating Expenses <2,973,642> <1,265,440> --------- --------- Loss Before Provision for Income Taxes <2,884,651> <1,273,708> Provision for Income Taxes <0> <0> --------- --------- Net Loss <2,884,651> <1,265,440> Accumulated Deficit, Beginning of Year <1,265,440> <0> ----------- --------- Accumulated Deficit, End of Year $<4,150,091>$<1,265,440> =========== ========= Net Loss per Share $ <.28>$ <.16> =========== =========== Weighted Average Shares Outstanding 10,295,917 7,891,300 =========== ========= See Notes to Consolidated Financial Statements Use of Proceeds: We will not receive any proceeds from the sale of the common stock by the selling shareholders. See "Use Of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/2000/SLAB_silicon_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/SLAB_silicon_prospectus_summary.txt
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING OUR COMPANY AND THE COMMON STOCK BEING SOLD IN THIS OFFERING, ESPECIALLY THE RISKS OF INVESTING IN OUR COMMON STOCK DISCUSSED UNDER THE CAPTION "RISK FACTORS" AND OUR FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. SILICON LABORATORIES We design and develop proprietary, analog-intensive, mixed-signal integrated circuits, or ICs, for the rapidly growing communications industry. Mixed-signal ICs are electronic components that convert real-world analog signals, such as sound and radio waves, into digital signals that electronic products can process. Mixed-signal ICs are critical components of numerous communications products, including cellular telephones, cable and satellite set-top boxes, modems and fax machines. Our ICs can dramatically reduce the cost, size and system power requirements of these communications products. To develop our business rapidly, we initially focused our efforts on developing ICs for the personal computer modem market. We are now applying our mixed-signal and communications expertise to the development of innovative ICs for other communications markets with high growth potential, such as cellular telephones and network access applications. Our five largest customers in 1999 were Intel, Motorola, PC-Tel, SmartLink and 3Com. We have no long-term purchase commitments from any of our customers. In addition, PC-Tel is qualifying a second source for the ICs that we currently sell to it and we are currently in litigation with 3Com, which could result in decreased sales of our products to either or both of these customers. Sales to PC-Tel and 3Com represented over 70% of our total sales in fiscal 1999. Within the semiconductor industry, we are known as a "fabless" company, meaning that we do not fabricate the semiconductors that we design and develop, but instead rely on third parties to manufacture our products. We design our ICs to be manufactured using standard complementary metal oxide semiconductor, or CMOS, technology, which involves less cost and complexity in the manufacturing process than competing technologies. As a result, our ICs can be reliably manufactured at a reduced cost and in high volume at semiconductor foundries around the world. Demand for communications services has increased at a rapid rate in recent years due to a number of factors, including the growth of Internet usage, development of new communications technologies, availability of improved communications services at lower costs and remote access requirements for corporate networks. This demand has fueled tremendous growth in the number of wireline and wireless communications devices used to access these services. Digital communications devices typically require mixed-signal circuits to access the communications networks to which they are connected. In order to improve their competitive position, communications device manufacturers need advanced mixed-signal ICs to create smaller products with improved price/performance characteristics. Manufacturers of communications devices must rapidly introduce new and advanced products and must adapt to evolving industry standards and new technologies to remain competitive. Because analog-intensive, mixed-signal IC design expertise is difficult to find, these manufacturers increasingly are turning to third parties, such as Silicon Laboratories with its world-class design talent, to provide advanced mixed-signal ICs. This expertise is even more important when designing within the limitations of standard CMOS manufacturing processes rather than alternative semiconductor processes, which are typically more expensive and not as widely available. Our mixed-signal ICs provide our customers with the following benefits: - DRAMATICALLY IMPROVED SIZE AND PRICE/PERFORMANCE CHARACTERISTICS. By significantly reducing the number of discrete components used in communications devices, our ICs enable our customers to offer products with smaller sizes, lower costs, reduced power consumption and with increased performance and reliability. - REDUCED TIME REQUIRED TO BRING A PRODUCT TO MARKET. We design our mixed-signal ICs to be integrated with the products of multiple manufacturers and conduct extensive research and development to ensure that they conform to our customers' evolving technical standards. As a result, our customers are able to rapidly integrate our ICs into their designs and reduce the time it takes to begin marketing their products. - ATTRACTIVE NEW PRODUCT OPPORTUNITIES. Our space-saving and cost-efficient ICs allow our customers to create smaller and more cost-effective products for use in many evolving markets for communications devices. THE OFFERING <TABLE> <S> <C> Common stock offered by: Silicon Laboratories..................................... 2,720,000 shares Selling stockholders..................................... 480,000 shares Total.................................................. 3,200,000 shares Common stock to be outstanding after this offering......... 46,578,118 shares Use of proceeds............................................ For working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol..................... SLAB </TABLE> ------------------------ The number of shares of common stock to be outstanding after this offering is based on the pro forma number of shares outstanding as of January 1, 2000 and reflects the conversion of all shares of our outstanding convertible preferred stock into common stock. This information excludes: - 2,380,226 shares subject to outstanding options with a weighted average exercise price of $2.52 per share; and - 143,182 shares subject to outstanding warrants with a weighted average exercise price of $1.17 per share. In addition, the underwriters have a 30-day option to purchase up to 480,000 additional shares from us to cover over-allotments. Some of the disclosures in this prospectus would be different if the underwriters exercise the over-allotment option. Unless we tell you otherwise, the information in this prospectus: - assumes that the underwriters will not exercise the over-allotment option; - reflects a 2-for-1 split of our common stock effected as of November 3, 1999; and - reflects the conversion of each share of our outstanding convertible preferred stock into two shares of common stock upon the closing of this offering. You should note that our fiscal year ends on the Saturday closest to December 31st. A reference to "fiscal 1997" is to our fiscal year ended January 3, 1998; a reference to "fiscal 1998" is to our fiscal year ended January 2, 1999; and a reference to "fiscal 1999" is to our fiscal year ended January 1, 2000. ------------------------ Our principal executive offices are located at 4635 Boston Lane, Austin, Texas 78735. Our telephone number is (512) 416-8500. Our Web site address is WWW.SILABS.COM. THE INFORMATION CONTAINED ON OUR WEB SITE IS NOT INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. SUMMARY CONSOLIDATED FINANCIAL INFORMATION <TABLE> <CAPTION> PERIOD FROM INCEPTION (AUGUST 19, 1996) FISCAL YEAR THROUGH ------------------------------ DECEMBER 31, 1996 1997 1998 1999 ------------------ -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Sales............................................ $ -- $ -- $ 5,609 $46,911 Cost of goods sold............................... -- -- 2,371 15,770 ------- ------- ------- ------- Gross profit..................................... -- -- 3,238 31,141 Operating expenses............................... 20 1,991 6,690 16,480 ------- ------- ------- ------- Operating income (loss).......................... (20) (1,991) (3,452) 14,661 ------- ------- ------- ------- Net income (loss)................................ $ (20) $(1,835) $(3,397) $11,040 ======= ======= ======= ======= Basic net income (loss) per share................ $ -- $ (1.04) $ (.37) $ .73 Diluted net income (loss) per share.............. $ -- $ (1.04) $ (.37) $ .25 Shares used in calculating basic net income (loss) per share............................... -- 1,760 9,129 15,152 Shares used in calculating diluted net income (loss) per share............................... -- 1,760 9,129 43,657 Pro forma basic net income per share............. $ .30 Pro forma diluted net income per share........... $ .25 Shares used in calculating pro forma basic net income per share............................... 36,461 Shares used in calculating pro forma diluted net income (loss) per share........................ 43,657 </TABLE> The following table contains a summary of our balance sheet: - on an actual basis at January 1, 2000; - on a pro forma basis to reflect the conversion of all outstanding shares of convertible preferred stock into 13,842,174 shares of common stock; and - on a pro forma as adjusted basis to additionally reflect the sale of 2,720,000 shares of common stock by us in this offering at an assumed initial public offering price of $26.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. <TABLE> <CAPTION> AS OF JANUARY 1, 2000 -------------------------------- PRO FORMA AS ACTUAL PRO FORMA ADJUSTED -------- --------- --------- (IN THOUSANDS) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $14,706 $14,706 $ 79,476 Working capital............................................. 14,281 14,281 79,051 Total assets................................................ 41,958 41,958 106,728 Long-term obligations, net of current maturities............ 6,223 6,223 6,223 Redeemable convertible preferred stock...................... 12,750 -- -- Total stockholders' equity.................................. 8,003 20,753 85,523 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2000/SRPT_sarepta_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/SRPT_sarepta_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY DOES NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU. THERE IS MORE DETAILED INFORMATION APPEARING IN OTHER SECTIONS OF THIS PROSPECTUS. PLEASE READ THE ENTIRE PROSPECTUS CAREFULLY. OUR COMPANY BUSINESS We are a biopharmaceutical company developing therapeutic products based on our two core technologies, cancer immunotherapy and NeuGene antisense. Our principal products target life-threatening diseases, with initial applications in pancreatic and colorectal cancers, cardiovascular restenosis, and infectious disease as summarized in the following table. <TABLE> <CAPTION> TECHNOLOGY PRODUCT INDICATION STAGE ---------- ---------------------------- ------------------- ------------ <S> <C> <C> <C> Cancer immunotherapy.......... Avicine therapeutic vaccine Cancer Clinical Xactin monoclonal antibodies Cancer Pre-clinical NeuGene antisense............. Resten-NG Restenosis Clinical Oncomyc-NG Cancer Pre-clinical NeuBiotics Infectious diseases Pre-clinical </TABLE> Currently approved drugs or other therapies for these diseases often prove to be ineffective in treating advanced stages of these diseases or produce numerous undesirable side effects. Our pre-clinical and clinical studies indicate that our two core technologies may produce significantly fewer side effects and offer more effective treatment options than currently approved products for these diseases. Our technologies are protected by a strong patent position including 44 issued patents and 49 applications pending. Each of our lead products, Avicine and Resten-NG, addresses a large market estimated to exceed $1 billion worldwide. CANCER IMMUNOTHERAPY We have completed three Phase I and two Phase II clinical trials with Avicine, our therapeutic cancer vaccine, which is our most advanced product. Avicine is administered to patients who already have cancer to stimulate an immune response that may be effective in fighting the existing cancer. The therapeutic benefit of a cancer vaccine depends on the existence of specific target sites, called tumor antigens, on cancer cells. The target for Avicine is a hormone called human chorionic gonadotropin, or hCG, which is responsible for stimulating fetal development during pregnancy. It is also a tumor antigen on all major types of cancer, including cancers of the colon, pancreas, prostate, lung and breast. We believe that hCG plays an important role in the spread of cancer. The effectiveness of Avicine is based on stimulating an immune response against hCG. From our clinical studies involving more than 200 patients, we believe that Avicine is a safe and essentially non-toxic therapy capable of producing a specific immune response in most patients. Further, the patients who mounted an immune response to hCG lived longer on average than patients treated with chemotherapy. We intend to investigate further the use of Avicine alone and in conjunction with chemotherapy in Phase II and Phase III clinical trials. In April 2000, we entered into an alliance with SuperGen, Inc. for shared development and marketing rights for Avicine. Under the terms of the agreement, AVI and SuperGen, Inc. will equally share in future clinical development and FDA registration costs as well as in profits from product sales in the United States. Closing of the transaction will occur prior to the effectiveness of this offering. We have an exclusive product license agreement with Abgenix, Inc. for the use of its technology to produce fully human monoclonal antibodies against hCG cancer targets, which we call Xactin antibodies. These Xactin antibodies are directed at targets identified by our Avicine clinical trials. Two Xactin antibodies are in pre-clinical development and are designed to treat cancer patients as a standalone therapy or in combination with Avicine. NEUGENE ANTISENSE We have developed gene-inactivating compounds called NeuGene antisense drugs that we believe are more stable, specific, efficacious, and safe than other antisense or gene-inactivating technologies. Our NeuGene drugs are distinguished by a novel chemical structure which differs from the earlier generation structures of competing technologies. NeuGenes are synthetic drugs that are designed to block the function of specific genetic sequences involved in the disease process. Targeting specific genetic sequences provides for greater selectivity than is available through conventional drugs. NeuGenes have the potential to provide safe and effective treatment for a wide range of human diseases. We have completed pre-clinical studies using our NeuGene compounds in the treatment of restenosis, which is the blockage of arteries following balloon angioplasty, and cancer. We finished a Phase I clinical trial of Resten-NG for restenosis in April 2000 and a Phase II clinical study is planned to begin mid-year 2000. We plan to commence Phase I/II clinical studies in cancer with Oncomyc-NG late in 2000. Finally, we intend to complete pre-clinical development of our first NeuGene-based antibiotics, called NeuBiotics, later this year. DEVELOPMENT AND COMMERCIALIZATION STRATEGY Our experience and resources enable us to initiate drug discovery and development and to move drug candidates through pre-clinical development and into Phase I and II human clinical trials. Our near-term strategy is to co-develop products with strategic partners or to license the marketing rights for our products to pharmaceutical partners after we complete one or more Phase II clinical trials. In this manner, costs associated with late-stage clinical development and marketing will be shared with, or the responsibility of, our strategic partners. With additional resources we may consider assuming greater responsibility for the late-stage clinical development and marketing opportunities of future product candidates. Our executive offices are located at One SW Columbia, Suite 1105, Portland, Oregon 97258, and we can be reached at (503) 227-0554. Our World Wide Web address is "http://www.avibio.com." Information on our web site does not constitute a part of this prospectus. THE OFFERING <TABLE> <S> <C> Common stock.............................. 3,000,000 shares Common stock to be outstanding after this offering................................ 19,711,757 shares Use of proceeds........................... To finance clinical trial costs of Avicine and clinical trial costs of our NeuGene antisense program, for research and development, including pre-clinical testing of our other product candidates, to finance manufacturing-related leasehold improvements and related manufacturing equipment, and for working capital and general corporate purposes. </TABLE> The outstanding share information above is based on the number of shares outstanding as of May 31, 2000 and excludes: - 7,875,991 shares of our common stock issuable upon the exercise of outstanding options and warrants; - 1,684,211 shares of our common stock issuable to SuperGen, Inc. upon the closing of our alliance for the shared development and marketing of Avicine and shares of our common stock issuable upon the exercise of a warrant for up to 10% of our then-outstanding common stock to be issued to SuperGen, Inc.; - up to 450,000 shares of our common stock issuable upon exercise of the over-allotment option granted to Paulson Investment Company, Inc.; and - 300,000 shares of our common stock issuable upon exercise of the representative's warrants. EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE OVER-ALLOTMENT OPTION OR THE REPRESENTATIVE'S WARRANTS. SUMMARY FINANCIAL INFORMATION The following table sets forth our summary financial information. You should read this information together with our financial statements and other related information elsewhere in this prospectus. The pro forma as adjusted balance sheet data reflect the receipt of the estimated net proceeds from the sale of 3,000,000 shares of our common stock, at an estimated price of $12.00 per share, after deducting the underwriting discount and estimated offering expenses. <TABLE> <CAPTION> THREE MONTHS JULY 22, 1980 ENDED JULY 22, 1980 YEARS ENDED DECEMBER 31, (INCEPTION) TO MARCH 31, (INCEPTION) TO ------------------------------ DECEMBER 31, ------------------- MARCH 31, 1997 1998 1999 1999 1999 2000 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA) -------- -------- -------- -------------- -------- -------- -------------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................................. $ 14 $ 120 $ 17 $ 841 $ 4 $ 1,132 $ 1,973 ------- -------- ------- -------- ------- ------- -------- Research and development................. (2,737) (6,307) (6,672) (24,728) (1,343) (1,936) (26,664) General and administrative............... (1,282) (1,621) (1,745) (9,199) (418) (436) (9,635) Acquired in-process R&D(1)............... -- (19,473) (72) (19,545) (60) -- (19,545) Other income............................. 389 547 194 1,576 77 101 1,677 ------- -------- ------- -------- ------- ------- -------- Net loss................................. $(3,616) $(26,734) $(8,278) $(51,054) $(1,739) $(1,140) $(52,194) ======= ======== ======= ======== ======= ======= ======== Net loss per share--basic & diluted...... $ (0.36) $ (2.27) $ (0.62) -- $ (0.13) $ (0.07) -- ======= ======== ======= ======== ======= ======= ======== Cash flow from operations................ $(3,006) $ (6,736) $(7,561) $(26,751) $(1,622) $(1,417) $(28,168) ======= ======== ======= ======== ======= ======= ======== </TABLE> <TABLE> <CAPTION> AT MARCH 31, 2000 ---------------------- PRO FORMA ACTUAL AS ADJUSTED -------- ----------- (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Cash and investments........................................ $14,380 $47,470 Working capital............................................. 13,662 46,752 Total assets................................................ 15,791 48,881 Shareholders' equity........................................ 15,024 48,114 </TABLE> ------------------------------ (1) Amounts relate to acquired in-process research and development expenses incurred in connection with the acquisition of ImmunoTherapy Corporation.
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diff --git a/parsed_sections/prospectus_summary/2000/TDY_teledyne_prospectus_summary.txt b/parsed_sections/prospectus_summary/2000/TDY_teledyne_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information about our company, the common stock being sold in this offering and our consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus. TELEDYNE TECHNOLOGIES We are a leading provider of sophisticated electronic and communications products, including components and subsystems for wireless and satellite systems, and data acquisition and communication equipment for airlines and business aircraft. We also provide systems engineering solutions and information technology services for space, defense and industrial applications, and manufacture general aviation and missile engines and components, as well as on-site power generation equipment. We serve niche market segments where performance, precision and reliability are critical. Our customers include major communications and other commercial companies, government agencies, aerospace prime contractors and general aviation companies. We have developed strong core competencies in engineering, software development and manufacturing that we can leverage both to sustain and grow our current niche businesses, and to become an innovator in related higher-growth markets. Our strategy is to focus on markets for commercial communications products, while we continue to expand our profitable niche market businesses by enhancing our high volume manufacturing capability and expanding strategic alliances. For example, we intend to leverage our experience in manufacturing sophisticated fiber optic transmitters and receivers for aerospace customers to enable us to manufacture similar products for commercial customers in wireless and fiber optic communications markets. We plan to continually evaluate our product lines to ensure that they are aligned with our strategy. These actions will help us to redirect capital and management focus to opportunities that will best utilize our engineering resources and technical expertise. Consistent with this strategy, we plan to divest Teledyne Cast Parts, our sand and investment castings business. Total sales in 1999 were $761.4 million, compared to $733.0 million and $707.4 million in 1998 and 1997, respectively. Our segment operating profits were $87.6 million, $85.3 million and $67.6 million in 1999, 1998 and 1997, respectively. Approximately 56% of our total sales in 1999 were to commercial customers and the balance was to the U.S. Government. Approximately 65% of these U.S. Government sales were attributable to fixed price-type contracts and the balance to cost plus fee-type contracts. International sales accounted for approximately 18% of total sales in 1999. We were incorporated in Delaware in August 1999. Until November 29, 1999, we were a wholly owned subsidiary of Allegheny Technologies Incorporated ("ATI"). Our spin-off from ATI was effected on that date. Our principal executive offices are located at 2049 Century Park East, Suite 1500, Los Angeles, California 90067-3101 and our telephone number is (310) 277-3311. Our website is www.teledyne.com. The information on this website is not part of this prospectus. THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION. DATED AUGUST 8, 2000. 4,100,000 Shares TELEDYNE TECHNOLOGIES LOGO Common Stock ---------------------- This is an offering of 4,100,000 shares of common stock of Teledyne Technologies Incorporated. All of the 4,100,000 shares of common stock are being sold by Teledyne Technologies. The common stock is listed on the New York Stock Exchange and traded under the symbol "TDY." The last reported sale price of the common stock on August 7, 2000 was $16 3/4 per share. See "Risk Factors" beginning on page 5 to read about factors you should consider before buying shares of the common stock. ---------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------------- <TABLE> <CAPTION> Per Share Total --------- ----- <S> <C> <C> Initial public offering price............................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to Teledyne Technologies......... $ $ </TABLE> To the extent that the underwriters sell more than 4,100,000 shares of the common stock, the underwriters have the option to purchase up to an additional 615,000 shares from Teledyne Technologies at the initial public offering price less the underwriting discount. ---------------------- The underwriters expect to deliver the shares in New York, New York on , 2000. GOLDMAN, SACHS & CO. BANC OF AMERICA SECURITIES LLC A.G. EDWARDS & SONS, INC. ---------------------- Prospectus dated , 2000. THE OFFERING <TABLE> <S> <C> Common stock offered.................................... 4,100,000 shares Common stock to be outstanding immediately after the offering.............................................. 30,903,225 shares Use of proceeds......................................... For general corporate purposes to further develop manufacturing capabilities and production capacity, expand marketing and research and development, and for possible acquisitions and/or joint ventures NYSE symbol............................................. TDY </TABLE> ---------------------- This information is based on 26,803,225 shares outstanding as of July 3, 2000. Unless we specifically state otherwise, the information in this prospectus does not take into account the issuance of up to 615,000 shares of common stock that the underwriters have the option to purchase. If the underwriters exercise in full their option to purchase additional shares, 31,518,225 shares of common stock will be outstanding after the offering. The number of shares of our common stock to be outstanding immediately after the offering listed above does not take into account 5,600,000 shares of our common stock reserved for issuance under our stock plans. As of July 3, 2000, 83,350 shares were allocated for issuance to participants under the ATI Performance Share Program and options to purchase 2,535,967 shares had been granted at a weighted average exercise price of $11.49 per share. The number also does not take into account 57,036 shares of restricted stock issued on July 25, 2000 to participants under our Restricted Stock Award Program. TELEDYNE TECHNOLOGIES LOGO FOLD-OUT PAGE A Continuum of Capabilities [Dispersed throughout fold-out are the following words] Systems Engineering Energy Systems Microelectronics Aerospace Engines Information Technology Fiber Optics Wireless and Satellite Communication Components Aviation Communications Environmental Solutions [Montage of photographs depicting products and end uses.] -------------------------------------------------------------------------------- INSIDE COVER PAGE [Background is original artwork consisting of a distorted image derived from a photograph of one of Teledyne Electronic Technologies' products. Additional graphics were superimposed, including grid lines and numbers.] tele-or tel-. A prefix meaning: 1. Distance: telecommunication. 2. Television: telecast. [From Greek tele, at a distance, far off.] dyne (din), n. [Fr. < Gr. dynamis, power], the amount of force that causes a mass of one gram to alter its speed by one centimeter per second for each second during which the force acts. SUMMARY CONSOLIDATED FINANCIAL DATA The following table presents our summary consolidated financial data. Effective November 29, 1999, Teledyne Technologies was spun off from ATI. Our fiscal year is determined based on a 53/52-week convention and ends on or about December 31. The historical financial information is not necessarily indicative of the results of operations or financial position that would have occurred if we had been a separate, independent company during the periods presented, nor is it indicative of future performance. This historical financial information does not include pro forma adjustments that reflect estimates of the expenses that we would have incurred had we been operated as an independent company and as capitalized at the time of its spin-off from ATI for each period presented. Our financial statements have been restated to reflect Teledyne Cast Parts as a discontinued operation. The historical financial information should be read in conjunction with the discussion under "Management's Discussion and Analysis of Results of Operations and Financial Condition." <TABLE> <CAPTION> FISCAL YEAR FIRST SIX MONTHS ------------------------------------------ ----------------- 1995 1996 1997 1998 1999 1999 2000 ------ ------ ------ ------ ------ ------- ------- (IN MILLIONS, EXCEPT PER-SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED INCOME STATEMENT DATA: Sales......................................... $657.8 $686.1 $707.4 $733.0 $761.4 $375.4 $397.7 Costs and expenses: Cost of sales............................... 478.6 487.9 511.8 532.1 552.1 275.3 287.4 Selling, general and administrative expenses.................................. 127.9 133.1 135.6 123.4 130.5 65.0 85.4 ------ ------ ------ ------ ------ ------ ------ Operating profit.............................. 51.3 65.1 60.0 77.5 78.8 35.1 24.9 Interest and debt expense, net................ -- -- -- -- 0.8 -- 3.6 Other income.................................. 1.8 1.8 1.4 1.6 1.0 0.5 0.4 ------ ------ ------ ------ ------ ------ ------ Income from continuing operations before income taxes................................ 53.1 66.9 61.4 79.1 79.0 35.6 21.7 Provision for income taxes.................... 21.7 28.0 24.1 32.7 31.8 14.7 8.6 ------ ------ ------ ------ ------ ------ ------ Income from continuing operations............. 31.4 38.9 37.3 46.4 47.2 20.9 13.1 Discontinued operations, net of tax........... (0.5) 1.8 4.3 2.3 1.8 1.2 0.2 ------ ------ ------ ------ ------ ------ ------ Net income.................................... $ 30.9 $ 40.7 $ 41.6 $ 48.7 $ 49.0 $ 22.1 $ 13.3 ====== ====== ====== ====== ====== ====== ====== Basic and diluted earnings per common share: Income from continuing operations........... $ 1.25 $ 1.42 $ 1.33 $ 1.65 $ 1.73 $ 0.76 $ 0.48 Discontinued operations..................... (0.02) 0.07 0.15 0.08 0.06 0.04 0.01 ------ ------ ------ ------ ------ ------ ------ Basic and diluted earnings per common share... $ 1.23 $ 1.49 $ 1.48 $ 1.73 $ 1.79 $ 0.80 $ 0.49 ====== ====== ====== ====== ====== ====== ====== CONSOLIDATED BALANCE SHEET DATA (AT PERIOD END): Working capital............................... $ 88.0 $ 95.6 $ 78.2 $ 72.6 $ 98.5 $ 81.6 $ 96.6 Total assets.................................. $232.3 $250.9 $250.6 $246.4 $313.4 $275.4 $342.5 Long term debt, net........................... $ -- $ -- $ -- $ -- $ 97.0 $ -- $ 91.0 Stockholders' equity.......................... $115.2 $128.0 $109.4 $106.4 $ 44.5 $116.1 $ 58.3 </TABLE> --------------- (1) The number of average outstanding shares used to compute earnings per share for periods prior to the spin-off was determined based on a distribution ratio of one share of our common stock for every seven shares of ATI common stock in the spin-off. The treasury method is used to calculate diluted earnings per share. SUMMARY PRO FORMA FINANCIAL DATA Our spin-off from ATI was effected on November 29, 1999. Our fiscal year is determined based on a 53/52-week convention and ends on or about December 31. The unaudited pro forma financial information set forth below has been presented for informational purposes only and may not reflect the results of operations that would have occurred had we operated as a separate, independent company for the periods presented. This information should not be relied upon as being indicative of future results. Pro forma adjustments reflect the estimated expenses (primarily interest expense and corporate expenses) that we would have incurred had we been operated as a separate company as of the beginning of each period presented and as capitalized at the time of the spin-off for each period presented. As part of the spin-off, we assumed $100 million in long-term debt incurred by ATI. Pro forma income includes pro forma interest expense on this long-term debt as if it had been outstanding for all periods presented. Pro forma income adjusts corporate expenses to an annual level of $15 million from the lesser amount previously allocated. Our financial statements have been restated to reflect Teledyne Cast Parts as a discontinued operation. See "Management's Discussion and Analysis of Results of Operations and Financial Condition."
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING OUR COMPANY AND THE COMMON STOCK BEING SOLD IN THIS OFFERING AND OUR HISTORICAL FINANCIAL STATEMENTS AND NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. OUR BUSINESS We are a designer, producer and marketer of high-quality, modern, American classic accessories that complement the diverse lifestyles of discerning women and men. Founded in 1941, we believe that Coach is one of the best recognized leather goods brands in the U.S. and is enjoying increased recognition in targeted international markets. We attribute the prominence of the Coach brand to the unique combination of our original American attitude and design, our heritage in fine leather products, our superior product quality and durability and our commitment to customer service. For fiscal year 2000, net sales were $548.9 million and operating income before reorganization costs was $56.0 million. Our primary product offerings include handbags, men's and women's accessories, business cases, luggage and travel accessories, personal planning products, leather outerwear, gloves and scarves. Together with our licensing partners, we also offer watches, footwear, furniture and eyewear with the Coach brand name. Our products are sold through a number of direct to consumer channels, including our: - 106 U.S. retail stores; - direct mail catalogs; - e-commerce website, COACH.COM; and - 63 U.S. factory stores. Our direct to consumer business represented approximately 64% of our total sales in fiscal year 2000. Our remaining sales were generated through a number of indirect channels, including: - approximately 1,400 department store and specialty retailer locations in the U.S.; - approximately 175 international department store, retail store and duty free shop locations in 18 countries; and - our corporate sales programs. Our net sales grew at a compound annual growth rate of approximately 32%, from $19.0 million in 1985, when we were acquired by Sara Lee Corporation, to $540.4 million in fiscal year 1997. In fiscal years 1998 and 1999, we experienced sales declines of 3.4% and 2.8%, respectively, our first year-to-year sales declines since becoming a part of Sara Lee. These declines were primarily the result of changes in consumer preferences from leather to mixed material and non-leather products, which some of our competitors offered, and diminished demand for our products due to the economic downturn in Asia. During fiscal years 1997 through 1999, we also experienced reduced profitability. During this period, we embarked on a fundamental transformation of the Coach brand. We built upon our popular core categories by introducing new products in a broader array of materials and styles and we introduced new product categories. In 1999, we began renovating Coach retail stores, select U.S. department store locations and key international locations to create a modern environment to showcase our new product assortments and reinforce a consistent brand position. Over the last three years, we also have been implementing a flexible, cost-effective sourcing and manufacturing model that allows us to bring our broader range of products to market more rapidly and efficiently. Primarily as a result of our repositioning initiatives, our sales increased 8.1% and our operating income before reorganization costs increased 110.7% in fiscal year 2000, compared with fiscal year 1999. OUR COMPETITIVE ADVANTAGES We have developed a number of strengths that we believe create significant competitive advantages. These include: - an established and growing brand franchise and a loyal consumer base, reinforced by years of investment in consistent marketing communications; - distinctive product attributes, including a reputation for product quality, durability, function, premium leather and classic styling; - comprehensive internal creative direction that defines our image, delivers a consistent message and differentiates Coach from other brands; - a well-developed multi-channel presence, allowing us to serve our customers wherever they choose to shop; and - recognition as a desirable resource for both personal and business gift-giving occasions. However, to remain competitive in our industry, we must also accurately anticipate consumer trends and tastes. For more information regarding the risks associated with our business, see "Risk Factors" beginning on page 7. OUR STRATEGIES Based on our established strengths, we are pursuing the following strategies for future growth: ACCELERATE NEW PRODUCT DEVELOPMENT. We are accelerating the development of new products, styles and product categories by: - introducing seasonal variations of successful styles in fashionable colors and fabrics; - updating our core collections; and - launching new collections, product additions, line extensions and product categories. MODERNIZE RETAIL PRESENTATION. We are modernizing our brand image by remodeling all Coach retail stores, key international locations and select U.S. department store locations to create a distinctive environment showcasing our new product assortments. Our renovated retail stores have demonstrated significantly higher comparable store sales growth relative to unrenovated stores. We expect that all of our retail stores will reflect the new store design by June 2003. INCREASE U.S. RETAIL STORE OPENINGS. We opened eight new U.S. retail stores in fiscal year 2000. Over the next three years, we plan to expand our network of 106 retail stores by opening approximately 50 new stores located primarily in high volume markets. FURTHER PENETRATE INTERNATIONAL MARKETS. We are increasing our international distribution and targeting international consumers generally, and Japanese consumers in particular, to take advantage of substantial growth opportunities for us. IMPROVE OPERATIONAL EFFICIENCIES. We intend to continue to increase efficiencies in our operations through initiatives that include: - streamlining product introduction; - implementing a new product development process and timeline; - integrating computer-assisted design into the design and development process; and - expanding our East Asian independent manufacturing capabilities. PROMOTE GIFT PURCHASES OF OUR PRODUCTS. We are further promoting Coach as an appealing resource for gift-giving occasions by developing new products well-suited for gift selection. In addition, our advertising, catalog mailings and outbound e-mails are timed to reach consumers before important holidays throughout the year. CAPITALIZE ON GROWING INTEREST IN E-COMMERCE. We believe we are well-positioned to execute our e-commerce strategy through our recently-launched on-line store, COACH.COM, given our 20 years of experience in order fulfillment and remote retailing through our direct mail catalogs. OUR RELATIONSHIP WITH SARA LEE We were founded in 1941, and have been owned by Sara Lee Corporation since 1985. After the completion of this offering, Sara Lee will own approximately 82.6% of the outstanding shares of our common stock, or approximately 80.5% if the underwriters fully exercise their option to purchase additional shares. Sara Lee plans to offer its stockholders the opportunity to exchange Sara Lee common stock for our common stock in a tax-free split-off within 12 months after this offering. Alternatively, Sara Lee may effect a distribution of our stock through some other method. Sara Lee is not obligated to complete any distribution and we cannot assure you as to whether, when or how it will occur. We have entered into agreements with Sara Lee related to the separation of our business operations from those of Sara Lee, which will occur before the completion of this offering. Under these agreements, Sara Lee will transfer to us the assets and liabilities which relate to our business, including our allocable portion of Sara Lee indebtedness in the form of a note payable to a Sara Lee subsidiary. The agreements will provide for various interim and ongoing relationships between us and Sara Lee. The agreements regarding the separation of our business operations from those of Sara Lee are described more fully in the section entitled "Certain Relationships and Related Transactions" included elsewhere in this prospectus. All of these agreements were negotiated in the context of a parent-subsidiary relationship. We believe that these agreements are on terms that, overall, are no more favorable to us than if they had been negotiated with unaffiliated third parties. The assets and liabilities to be transferred to us are described more fully in our financial statements and notes to those statements that are also included elsewhere in this prospectus. THE OFFERING <TABLE> <S> <C> Common stock offered................................. 7,380,000 shares Common stock to be outstanding immediately after this offering........................................... 42,406,333 shares Common stock to be held by Sara Lee immediately after this offering...................................... 35,026,333 shares Use of proceeds...................................... The estimated net proceeds from this offering of approximately $99 million will be used to repay a portion of the note payable to a subsidiary of Sara Lee to be assumed by us in connection with our separation from Sara Lee. Proposed New York Stock Exchange symbol.............. COH </TABLE> This information is based on 35,026,333 shares outstanding immediately prior to this offering, all of which are owned by Sara Lee. Unless we specifically state otherwise, the information in this prospectus does not take into account the issuance of up to 1,107,000 shares of common stock that the underwriters have the option to purchase from us. If the underwriters fully exercise their option to purchase additional shares, 43,513,333 shares of common stock will be outstanding after this offering. The number of shares of our common stock to be outstanding immediately after this offering does not take into account approximately 5,385,605 shares of our common stock reserved for issuance under our stock plans. At the time of the offering, we intend to grant options to purchase up to approximately 3,628,092 shares of our common stock at the offering price to some of our officers and employees and up to approximately 15,000 shares of our common stock at the offering price to our non-employee directors. In addition to the common stock reserved for issuance under our stock plans, we intend to offer (1) options to purchase up to an aggregate of 1,589,441 shares of our common stock to 59 employees, subject to the surrender and cancellation of previously granted options to purchase Sara Lee common stock, and (2) up to an aggregate of 29,500 service-based restricted stock units to seven employees, subject to the surrender and cancellation of previously granted Sara Lee service-based restricted stock units. ------------------------ We incorporated in Maryland on June 1, 2000 as Coach, Inc. Our executive offices are located at 516 West 34th Street, New York, New York 10001; our telephone number is (212) 594-1850 and our facsimile number is (212) 594-1682. We also maintain an Internet site at WWW.COACH.COM. Our website and the information contained on or connected to our website are not part of this prospectus or the registration statement of which this prospectus forms a part. In this prospectus, "Coach," "we," "us," and "our" each refers to Coach and not to the underwriters or Sara Lee. "Sara Lee" refers to Sara Lee and its subsidiaries, not including Coach. COACH, COACH AND LOZENGE design, COACH AND TAG design, "C" SIGNATURE FABRIC design and other trademarks of Coach appearing in this prospectus are the property of Coach. SUMMARY FINANCIAL DATA The following tables present our summary financial data. The data presented in these tables are from "Selected Financial Data," "Unaudited Pro Forma Financial Information," and our historical financial statements and notes to those statements that are included elsewhere in this prospectus. You should read those sections and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a further explanation of the financial data summarized here. The historical financial information may not be indicative of our future performance and may not reflect what our financial position and results of operations would have been had we operated as a separate, stand-alone entity during the periods presented. <TABLE> <CAPTION> FISCAL YEAR ENDED ------------------------------------------------------------- JUNE 29, JUNE 28, JUNE 27, JULY 3, JULY 1, 1996 1997 1998 1999 2000 ----------- ----------- --------- --------- --------- (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) <S> <C> <C> <C> <C> <C> CONSOLIDATED AND COMBINED STATEMENT OF INCOME DATA: (1) Net sales.............................................. $512,645 $540,366 $522,220 $507,781 $548,918 Gross profit........................................... 300,668 313,280 286,708 281,591 328,833 Selling, general and administrative expenses........... 238,621 269,011 261,695 255,008 272,816 Unusual items(2)....................................... -- -- -- 7,108 -- Operating income....................................... 62,047 44,269 25,013 19,475 56,017 Net income............................................. 42,860 32,037 20,663 16,715 38,603 UNAUDITED PRO FORMA STATEMENT OF INCOME DATA (3): Unaudited pro forma as adjusted net income............. $ 35,112 Unaudited pro forma as adjusted basic net income per share................................................ $ 0.83 Shares used in computing unaudited pro forma as adjusted basic net income per share.................. 42,406 Unaudited pro forma as adjusted diluted net income per share................................................ $ 0.82 Shares used in computing unaudited pro forma as adjusted diluted income per share.................... 42,583 </TABLE> <TABLE> <CAPTION> FISCAL YEAR ENDED PRO FORMA ------------------------------------------------------------- ----------- JUNE 29, JUNE 28, JUNE 27, JULY 3, JULY 1, JULY 1, 1996 1997 1998 1999 2000 2000 (3) ----------- ----------- --------- --------- --------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> CONSOLIDATED AND COMBINED BALANCE SHEET DATA: Working capital............................ $ 38,614 $ 65,709 $ 95,554 $ 51,685 $ 54,089 $ 54,110 Total assets............................... 237,234 252,929 257,710 282,088 296,653 232,870 Inventory.................................. 92,814 102,209 132,400 101,395 102,097 102,097 Receivable from Sara Lee (4)............... -- -- -- 54,150 63,783 -- Payable to Sara Lee........................ 6,541 8,300 11,088 -- -- -- Long term debt............................. 3,845 3,845 3,845 3,810 3,775 94,775 Stockholders' net investment (4)........... 131,961 165,361 186,859 203,162 212,808 58,046 </TABLE> ------------------------------ (1) Our fiscal year ends on the Saturday closest to June 30. Fiscal year 1999 was a 53-week year, while fiscal years 1996, 1997, 1998, and 2000 were 52-week years. (2) During 1999, we committed to and completed a reorganization plan involving the closure of our Carlstadt, New Jersey warehouse and distribution center, the closure of our Italian manufacturing operation, and the reorganization of our Medley, Florida manufacturing facility. These actions, intended to reduce costs, resulted in the transfer of production to lower cost third-party manufacturers and the consolidation of all of our distribution functions at the Jacksonville, Florida distribution center. (3) The unaudited pro forma consolidated and combined financial information reflects the following adjustments relating to the creation of a new legal entity, Coach, Inc., and Sara Lee's contribution of the assets and liabilities of our business: - our assumption of $190 million of indebtedness to a subsidiary of Sara Lee prior to this offering; - our sale of 7,380,000 shares of common stock in this offering at an assumed initial public offering price of $15.00 per share; - our use of the net offering proceeds to repay a portion of the assumed indebtedness; and - operating adjustments, including interest expense and other costs from the assumed indebtedness, increased fees and expenses related to our separation from Sara Lee and tax benefits related to these items. For a detailed description of the pro forma adjustments, see "Unaudited Pro Forma Financial Information."
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION IN THIS PROSPECTUS, INCLUDING RISK FACTORS, REGARDING OUR COMPANY AND THE COMMON STOCK BEING SOLD IN THIS OFFERING. UNLESS OTHERWISE INDICATED, INFORMATION STATED ON A PRO FORMA BASIS GIVES EFFECT TO OUR JULY 1999 ACQUISITION OF POWER CIRCUITS AT THE BEGINNING OF THE PERIOD IDENTIFIED. OUR COMPANY We provide time-critical, one-stop manufacturing services for highly complex printed circuit boards. Our printed circuit boards serve as the foundation of electronic products such as routers, switches, servers, computer memory modules and communications infrastructure equipment. Our customers include manufacturers of these electronic products, commonly referred to as original equipment manufacturers, and their suppliers, commonly referred to as electronic manufacturing services companies. Our customers primarily serve such rapidly growing segments of the electronics industry as networking, high-end computing, including servers, and computer peripherals. Products within these markets have high levels of complexity and short life cycles as manufacturers continually develop new and increasingly sophisticated technology. Our name, TTM, stands for "time-to-market" because our services enable our customers to shorten the time required to develop new products and introduce them to market. We provide our customers with a manufacturing solution that encompasses all stages of an electronic product's life cycle. We utilize a facility specialization strategy in which we place each order in the facility best suited for the customer's particular delivery time and volume needs. These facilities are integrated by using compatible technology and manufacturing processes. Our strategy allows us to optimize our manufacturing operations and provides for efficient movement of orders among facilities resulting in faster delivery times and enhanced product quality and consistency. Our one-stop manufacturing solution includes quick-turn and standard delivery time services: QUICK-TURN SERVICES: We refer to our rapid turn-around services as "quick-turn" because we provide custom-designed printed circuit boards to our customers in as little as 24 hours. - PROTOTYPE PRODUCTION. In the design, testing and launch phase of a new electronic product's life cycle, our customers typically require limited quantities of printed circuit boards in a very short period of time. We satisfy this need by manufacturing prototype printed circuit boards in quantities of up to 50 boards per order with delivery times ranging from as little as 24 hours to 10 days. - RAMP-TO-VOLUME PRODUCTION. After a product has successfully completed the prototype phase, our customers introduce the product to the market and require larger quantities of printed circuit boards in a short period of time. This transition stage between low-volume prototype production and volume production is known as ramp-to-volume. Our ramp-to-volume services typically include manufacturing up to several hundred printed circuit boards per order with delivery times ranging from two to 10 days. For the year ended December 31, 1999, orders with delivery requirements of 10 days or less represented 32% of our pro forma gross sales and 26% of our historical gross sales. Ten day or less orders represented a significantly higher percentage of gross sales for our Santa Ana facility which focuses on prototype production and new customer development. Pro forma gross sales at this facility increased by 71% for the first two fiscal quarters 2000, compared with the same period in the prior year. STANDARD DELIVERY TIME SERVICES: - VOLUME PRODUCTION. Following market introduction, a product proceeds to commercial production in larger quantities with typical industry delivery times of several weeks. Our volume production services include manufacturing up to several thousand printed circuit boards per order with delivery times ranging from three to eight weeks. Our quick-turn services provide us with the opportunity to develop relationships with customers using our prototype and ramp-to-volume services and to extend these relationships to include volume production services. During our involvement in the early stages of product development, we can introduce customers to our advanced manufacturing process and technology expertise, thereby increasing our ability to capture our customers' higher complexity volume production business. Key aspects of our solution include: - TIME-TO-MARKET FOCUSED SERVICES: We deliver highly complex printed circuit boards to customers in as little as 24 hours. This rapid delivery service enables original equipment manufacturers to develop sophisticated electronic products quickly and shorten the products' time-to-market introduction; - STRONG PROCESS AND TECHNOLOGY EXPERTISE: We deliver time-critical, highly complex manufacturing services through our manufacturing process and technology expertise. In 1999, 47% of our pro forma gross sales and 48% of our historical gross sales involved the manufacture of printed circuit boards with at least eight layers, an industry accepted measure of complexity. This amount increased to 52% of our gross sales for the first two fiscal quarters 2000. In addition, many of our lower layer count boards are complex as a result of the incorporation of other technologically advanced features; and - ONE-STOP MANUFACTURING SOLUTION: We provide a one-stop manufacturing solution to our customers through our specialized facilities, each of which focuses on a different stage of an electronic product's life cycle. Our diverse customer base consisted of over 400 customers as of December 31, 1999. In 1999, our top seven original equipment manufacturer customers were ATL Ultrasound, Ciena, Compaq, General Electric, Motorola, NEC and Radisys and our top five electronic manufacturing services customers were ACT Manufacturing, Celestica, ETMA, K*TEC and Solectron. OUR STRATEGY Our goal is to be the leading provider of technologically advanced, time-critical, one-stop manufacturing services for highly complex printed circuit boards. Key aspects of our strategy include: - Targeting additional customers in the high-growth markets we currently serve as well as providers of next-generation technology, including broadband technologies such as optical networking, digital subscriber lines and wireless applications, and data storage technologies such as storage area networks; - Further expanding our quick-turn manufacturing capacity to serve our customers' increasing quick-turn demands and the requirements of new customers; - Capitalizing on our quick-turn services to capture subsequent volume production opportunities; - Continuing to improve our technological capabilities and manufacturing process expertise to further reduce delivery times, improve quality, increase yields and decrease costs; and - Pursuing complementary acquisition opportunities to enhance our competitive position by strengthening our service offering and expanding our customer base. ACQUISITION OF POWER CIRCUITS In July 1999, we acquired Power Circuits, a printed circuit board manufacturer located in Santa Ana, California. In this acquisition we gained engineering and process expertise tailored specifically to manufacturing printed circuit boards for the quick-turn market and significantly diversified our customer base and end-markets. OUR ADDRESS We were incorporated in Washington in March 1978 as Pacific Circuits, Inc. and changed our name to TTM Technologies, Inc. in December 1999. Our principal executive offices are located at 17550 N.E. 67th Court, Redmond, Washington 98052, and our telephone number at that address is (425) 883-7575. THE OFFERING <TABLE> <S> <C> Common stock offered by TTM Technologies..... 5,625,000 shares Common stock offered by the selling stockholders............................... 1,875,000 shares Common stock to be outstanding after the offering................................... 35,550,000 shares Use of proceeds.............................. We intend to use the approximately $71.7 million of net proceeds we will receive from this offering to: - reduce our indebtedness under our senior credit facility; - eliminate our obligations under our retention bonus plan; - redeem all of our senior subordinated debt; - redeem all of our subordinated debt; and - pay management consulting and financial advisory fees. See "Use of Proceeds." Nasdaq National Market symbol................ TTMI </TABLE> The above information is based on 29,925,000 shares outstanding as of July 3, 2000 and excludes: - 2,610,460 shares issuable upon exercise of options outstanding under our management stock option plan at a weighted average exercise price of $2.69 per share; - 767,220 shares issuable upon exercise of warrants outstanding at a weighted average exercise price of $.000026 per share; - a total of 3,389,540 shares available for future issuance under our two stock plans, excluding the annual increases in the number of shares authorized under each plan beginning January 1, 2001. See "Management--Incentive Plans" for a description of how these annual increases are determined; and - shares, having an aggregate fair market value of $1.2 million, to be granted to our employees under our 2000 Equity Compensation Plan. Based on an assumed initial public offering price of $14.00 per share, we expect to grant an aggregate of 85,714 shares. ------------------------ Unless otherwise indicated, the information in this prospectus: - assumes the underwriters will not exercise their option to purchase 1,125,000 additional shares after the closing of this offering; and - gives effect to a 380-for-one stock split, which we will complete immediately prior to the completion of this offering. SUMMARY HISTORICAL FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table sets forth a summary of our historical consolidated financial data for the periods presented. You should read this data along with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus. We acquired Power Circuits on July 14, 1999. Our historical consolidated statement of income data includes the operating results of Power Circuits since the acquisition date. You should read our "Summary Pro Forma and Supplemental Pro Forma Financial Data" on pages 6 and 7 which is presented to give effect to the acquisition and use of proceeds from this offering. <TABLE> <CAPTION> FIRST TWO YEAR ENDED DECEMBER 31, FISCAL QUARTERS ------------------------------- ---------------------- 1997 1998 1999 1999 2000 -------- -------- --------- -------- -------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF INCOME DATA: Net sales................................................... $76,921 $ 78,526 $ 106,447 $43,774 $88,160 Cost of goods sold.......................................... 62,091 65,332 82,200 35,484 60,830 ------- -------- --------- ------- ------- Gross profit................................................ 14,830 13,194 24,247 8,290 27,330 ------- -------- --------- ------- ------- Operating expenses: Sales and marketing....................................... 2,533 2,434 3,920 1,198 4,027 General and administrative................................ 2,235 2,188 2,584 790 3,392 Amortization of intangibles............................... -- -- 2,230 -- 2,404 Amortization of deferred retention bonus(1)............... -- 77 1,849 924 924 Management fees........................................... -- 13 439 150 500 ------- -------- --------- ------- ------- Total operating expenses................................ 4,768 4,712 11,022 3,062 11,247 ------- -------- --------- ------- ------- Operating income............................................ 10,062 8,482 13,225 5,228 16,083 Interest expense............................................ (578) (848) (10,432) (3,565) (7,627) Amortization of debt issuance costs......................... (28) (134) (755) (265) (495) Interest income and other, net.............................. 557 927 54 7 209 ------- -------- --------- ------- ------- Income before income taxes and extraordinary item........... 10,013 8,427 2,092 1,405 8,170 Income taxes(2)............................................. -- -- 836 496 3,032 ------- -------- --------- ------- ------- Income before extraordinary item............................ 10,013 8,427 1,256 909 5,138 Extraordinary item net of taxes............................. -- -- (1,483) -- -- ------- -------- --------- ------- ------- Net income (loss)........................................... $10,013 $ 8,427 $ (227) $ 909 $ 5,138 ======= ======== ========= ======= ======= Earnings per common share: Basic..................................................... $ 0.64 $ 0.54 $ (0.01) $ 0.06 $ 0.17 Diluted................................................... 0.64 0.54 (0.01) 0.06 0.16 Weighted average common shares: Basic..................................................... 15,675 15,675 22,312 15,675 29,925 Diluted................................................... 15,675 15,675 22,669 15,675 32,029 OTHER FINANCIAL DATA: Depreciation................................................ $ 2,884 $ 3,014 $ 3,635 $ 1,541 $ 2,375 Noncash interest expense imputed on debt.................... -- 12 455 186 323 </TABLE> ------------ (1) Amortization of deferred retention bonus relates to a retention bonus plan that we implemented as part of our leveraged recapitalization in December 1998. In connection with this offering, we intend to pay out $10.8 million to participants in order to eliminate our obligations under this plan. (2) Prior to December 15, 1998, we had made an S corporation election for income tax purposes to include our taxable income in our stockholders' taxable income. If we had been taxed as a C corporation, assuming an effective federal statutory tax rate of 34%, our income tax expense would have been $3.4 million in 1997 and $2.9 million in 1998 and our net income would have been $6.6 million in 1997 and $5.5 million in 1998. We were not subject to state income taxes in 1997 and 1998 because we only operated in Washington state, a state that does not impose a state income tax. The following sets forth our consolidated balance sheet data as of July 3, 2000 on a historical basis and on an as adjusted basis. The as adjusted data gives effect to the offering at an assumed initial public offering price of $14.00, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, and our receipt and application of the $71.7 million of net proceeds we will receive from this offering. The as adjusted data reflects a $5.4 million increase to equity which we expect to record in net income in the fiscal quarter in which this offering is completed as a result of non-recurring items generated from the use of our net proceeds from this offering. See "Capitalization" for a description of these items. <TABLE> <CAPTION> JULY 3, 2000 ---------------------- ACTUAL AS ADJUSTED -------- ----------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Working capital............................................. $ 14,355 $ 14,355 Total assets................................................ 169,513 182,806 Long-term obligations, including current maturities......... 132,706 70,888 Stockholders' equity........................................ 21,690 96,801 </TABLE> <TABLE> <CAPTION> FIRST TWO YEAR ENDED DECEMBER 31, FISCAL QUARTERS ------------------------------- ---------------------- 1997 1998 1999 1999 2000 -------- -------- --------- -------- -------- <S> <C> <C> <C> <C> <C> SUPPLEMENTAL DATA: EBITDA(1)................................................... $13,503 $ 12,500 $ 20,993 $ 7,700 $21,995 Cash flows from operating activities........................ 11,460 7,517 (2,227) 4,399 12,087 Cash flows from investing activities........................ (9,134) 5,657 (99,906) (466) (4,824) Cash flows from financing activities........................ (3,434) (16,693) 103,253 (1,900) (8,014) </TABLE> ------------ (1) EBITDA means earnings before interest expense (including amortization of debt issuance costs), income taxes, depreciation and amortization. EBITDA is presented because we believe it is an indicator of our ability to incur and service debt and is used by our lenders in determining compliance with financial covenants. However, EBITDA should not be considered as an alternative to cash flows from operating activities, as a measure of liquidity or as an alternative to net income as a measure of operating results in accordance with accounting principles generally accepted in the United States. Our definition of EBITDA may differ from definitions used by other companies. SUMMARY PRO FORMA AND SUPPLEMENTAL PRO FORMA FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The following summary pro forma financial data for the 1999 periods gives effect to our acquisition of Power Circuits as if it had occurred on January 1, 1999. You should read this data along with the "Unaudited Pro Forma Condensed Consolidated Financial Data" and related notes included elsewhere in this prospectus. The following summary supplemental pro forma financial data reflects the pro forma financial data for the 1999 periods and the actual historical financial data for the first two fiscal quarters 2000, adjusted to give effect to the application of our estimated net proceeds of $71.7 million from this offering as described in "Use of Proceeds" as if these events had occurred at the beginning of each period. Our supplemental pro forma income statement data for each period has been adjusted to reflect: - a reduction in interest expense; - a reduction in the amortization of debt issuance costs; - the elimination of the deferred retention bonus plan expense; - the elimination of management fees; and - the income tax effect of the above adjustments. You should read the supplemental pro forma financial data along with the "Unaudited Supplemental Pro Forma Condensed Consolidated Financial Data" and related notes included elsewhere in this prospectus. Upon completion of this offering we intend to amend and restate our senior credit facility, which will result in the write-off of a significant portion of the remaining debt issuance costs related to our senior credit facility. However, this transaction has not been given pro forma effect in the following financial data. The summary pro forma and supplemental pro forma financial data is not necessarily indicative of what our results of operations would have been had such transactions occurred at the beginning of the applicable period. Also, the supplemental pro forma financial data does not include a non-recurring increase to net income of $5.4 million which is described in more detail in "Capitalization." <TABLE> <CAPTION> FIRST TWO FIRST TWO YEAR ENDED FISCAL QUARTERS FISCAL QUARTERS DECEMBER 31, 1999 1999 2000 ------------------------- ------------------------- ----------------------- SUPPLEMENTAL SUPPLEMENTAL SUPPLEMENTAL PRO FORMA PRO FORMA PRO FORMA PRO FORMA ACTUAL PRO FORMA ---------- ------------ ---------- ------------ -------- ------------ <S> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF INCOME DATA: Net sales................................... $124,315 $124,315 $60,392 $60,392 $88,160 $88,160 Cost of goods sold.......................... 91,849 91,849 44,290 44,290 60,830 60,830 -------- -------- ------- ------- ------- ------- Gross profit................................ 32,466 32,466 16,102 16,102 27,330 27,330 -------- -------- ------- ------- ------- ------- Operating expenses: Sales and marketing....................... 5,243 5,243 2,389 2,389 4,027 4,027 General and administrative................ 3,652 3,652 1,760 1,760 3,392 3,392 Amortization of intangibles............... 4,807 4,807 2,404 2,404 2,404 2,404 Amortization of deferred retention bonus(1)................................ 1,849 -- 924 -- 924 -- Management fees........................... 600 -- 300 -- 500 -- -------- -------- ------- ------- ------- ------- Total operating expenses................ 16,151 13,702 7,777 6,553 11,247 9,823 -------- -------- ------- ------- ------- ------- Operating income............................ 16,315 18,764 8,325 9,549 16,083 17,507 Interest expense............................ (14,511) (7,016) (7,335) (3,508) (7,627) (3,796) Amortization of debt issuance costs......... (887) (528) (429) (264) (495) (264) Interest income and other, net.............. 258 258 174 174 209 209 -------- -------- ------- ------- ------- ------- Income before income taxes.................. 1,175 11,478 735 5,951 8,170 13,656 Income taxes................................ 552 4,312 303 2,233 3,032 5,123 -------- -------- ------- ------- ------- ------- Net income.................................. $ 623 $ 7,166 $ 432 $ 3,718 $ 5,138 $ 8,533 ======== ======== ======= ======= ======= ======= Earnings per common share: Basic..................................... $ 0.02 $ 0.20 $ 0.01 $ 0.10 $ 0.17 $ 0.24 Diluted................................... $ 0.02 $ 0.20 $ 0.01 $ 0.10 $ 0.16 $ 0.23 Weighted average common shares: Basic..................................... 29,925 35,550 29,925 35,550 29,925 35,550 Diluted................................... 30,692 36,317 30,692 36,317 32,029 37,654 SUPPLEMENTAL DATA: EBITDA(2)................................... $ 27,371 $ 27,971 $13,812 $14,112 $21,995 $22,495 </TABLE> ------------ (1) Amortization of deferred retention bonus relates to a retention bonus plan that we implemented as part of our leveraged recapitalization in December 1998. In connection with this offering, we intend to pay out $10.8 million to participants in order to eliminate our obligations under this plan. (2) EBITDA means earnings before interest expense (including amortization of debt issuance costs), income taxes, depreciation and amortization. EBITDA is presented because we believe it is an indicator of our ability to incur and service debt and is used by our lenders in determining compliance with financial covenants. However, EBITDA should not be considered as an alternative to cash flows from operating activities, as a measure of liquidity or as an alternative to net income as a measure of operating results in accordance with accounting principles generally accepted in the United States. Because of the subjectivity inherent in the assumptions concerning the timing and nature of the uses of cash generated by the pro forma interest and other expenses, cash flows from operating, investing and financing activities are not presented for the pro forma and supplemental pro forma periods. Our definition of EBITDA may differ from definitions used by other companies.
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+PROSPECTUS SUMMARY This summary contains a general discussion of our business, this offering and summary financial information. We encourage you to read the entire prospectus for a more complete understanding of Radio One and this offering. Except where otherwise noted, all share numbers and per share data in this prospectus give effect to the capitalization transactions described in "Capitalization." Unless otherwise indicated, all information in this prospectus assumes that the underwriters' over-allotment option will not be exercised. RADIO ONE, INC. Introduction We were founded in 1980 and are the largest radio broadcasting company in the United States primarily targeting African-Americans. After we complete our pending acquisitions, we will own 27 radio stations. Twenty-six of these stations (nineteen FM and seven AM) are in nine of the top 20 African-American radio markets: Washington, D.C., Baltimore, Atlanta, Philadelphia, Detroit, Cleveland, St. Louis, Richmond and Boston. Our strategy is to expand within our existing markets and into new markets that have a significant African-American presence. We believe radio broadcasting primarily targeting African-Americans has significant growth potential. We also believe that we have a competitive advantage in the African-American market, and the radio industry in general, due to our focus on formats primarily targeting African-American audiences, our skill in programming and marketing these formats, and our turnaround expertise. The radio stations that we owned or managed as of September 30, 1999, grouped by market, were ranked in the top three in their markets in combined audience and revenue share among radio stations primarily targeting African- Americans. Due to successful implementation of our business strategy, our net broadcast revenue, broadcast cash flow and after-tax cash flow have grown significantly: . Same station net broadcast revenue increased 30.6% from year-end 1997 to year-end 1998 and 28.6% for the nine months ended September 30, 1999, compared to the same period in 1998. . Same station broadcast cash flow increased 50.4% from year-end 1997 to year-end 1998 and 36.6% for the nine months ended September 30, 1999, compared to the same period in 1998. . After-tax cash flow increased 152.6% from year-end 1997 to year-end 1998 and 75.0% for the nine months ended September 30, 1999, compared to the same period in 1998. Radio One is led by our Chairperson and co-founder, Catherine L. Hughes, and her son, Alfred C. Liggins, III, our Chief Executive Officer and President, who together have over 40 years of operating experience in radio broadcasting. Ms. Hughes, Mr. Liggins and our strong management team have successfully implemented a strategy of acquiring and turning around underperforming radio stations. We believe that we are well positioned to apply our proven operating strategy to our recently or soon to be acquired stations in Cleveland, St. Louis, Richmond, Boston and Philadelphia, and to other radio stations in existing and new markets as attractive acquisition opportunities arise. The African-American Market Opportunity We believe that operating radio stations in large African-American markets, with formats primarily targeting African-American audiences, has significant growth potential for the following reasons: . African-Americans are experiencing faster population growth than the population as a whole. . African-Americans are experiencing higher income growth than the population as a whole. . There is significant growth in advertising targeting the African- American market. . We believe there is a growing influence of African-American culture on American society. . We believe that radio formats primarily targeting African-Americans are becoming more popular with mainstream audiences. . We can reach our target audience with fewer radio stations due to the concentration of African-Americans in the top 40 African-American markets. . African-Americans exhibit stronger radio audience listenership and loyalty than the population as a whole. Station Portfolio We operate in some of the largest African-American markets. We have also acquired or agreed to acquire 14 radio stations since January 1, 1999. These acquisitions diversify our net broadcast revenue, broadcast cash flow and asset bases and increase the number of top 20 African-American markets in which we operate from five to nine. The table below outlines our station operations and information about our markets from the BIA 1999 Fourth Edition. Radio One and Our Markets <TABLE> <CAPTION> Radio One Including Pending Acquisitions Market Data ---------------------------------------------------- --------------------------------------------- Number of African-American Stations Market 1999 Entire Market 1997 MSA Population --------- ---------------- ------------------------- ---------------------- Estimated Ranking by 1999 Annual Size of Audience Summer 1999 January- Radio African- African- Share Revenue Audience December 1999 Revenue American Total American Market FM AM Rank Rank Share Revenue Share ($millions) Population (in millions) % - ------ ---- ---- -------- ------- ----------- ------------- ----------- ---------- ------------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Washington, D.C. 2 2 1 1 11.0 10.1% $289.7 3 4.3 26.5% Detroit............. 2 2 2 2 5.2 3.7 246.1 5 4.6 22.3 Philadelphia........ 2 -- 2 2 6.1 5.3 283.7 6 4.9 20.2 Atlanta............. 2 -- 2 3 6.9 5.1 280.6 7 3.7 26.0 Baltimore........... 2 2 1 1 16.1 21.4 121.1 10 2.5 27.6 St. Louis........... 1 -- n/a n/a n/a n/a 123.7 14 2.6 17.7 Cleveland........... 1 1 2 2 4.7 3.0 106.6 17 2.1 19.2 Boston.............. 1 -- n/a n/a n/a n/a 279.3 18 4.3 7.1 Richmond............ 6 1 1 1 26.1 21.5 50.1 19 0.9 30.1 ---- ---- Total............. 19 8 ==== ==== </TABLE> Business Strategy We focus on making strategic acquisitions of underperforming radio stations, improving the performance of these stations and operating them to maximize profitability. Acquisitions - Our acquisition strategy includes acquiring and turning around underperforming radio stations principally in the top 40 African- American markets. We will also make acquisitions in existing markets where expanded coverage is desirable and in new markets where we believe it is advantageous to establish a presence. For strategic reasons, or as a result of an acquisition of multiple stations in a market, we may also acquire and operate stations with formats that primarily target non-African-American segments of the population. We expect to use the net proceeds of this offering, together with available cash, amounts available under our existing credit facility and additional financings, to acquire radio broadcasting assets and businesses. The amount of our future acquisitions, if any, may exceed the net proceeds from this offering, and the magnitude of such acquisitions, both individually and in the aggregate, may significantly exceed that of our past acquisitions. Turnarounds - Historically, we have entered a market by acquiring a station or stations that have little or negative broadcast cash flow. Additional stations we have acquired in existing markets have often been, in our opinion, substantially underperforming. By implementing our operating strategy, we have succeeded in increasing ratings, net broadcast revenue and broadcast cash flow of all the FM stations we have owned and operated or managed for at least one year. We have achieved these improvements while operating against much larger competitors. Operations - In order to maximize net broadcast revenue and broadcast cash flow at our radio stations, we strive to achieve the largest audience share of African-American listeners in each market, to convert these audience share ratings to advertising revenue, and to control operating expenses. The Offering <TABLE> <C> <S> <C> Class A common stock offered(/1/)............................. 5,000,000 shares of class A common stock Common stock to be outstanding after this offering(/1/)(/2/).. 22,272,622 shares of class A common stock 2,867,463 shares of class B common stock 3,132,458 shares of class C common stock 28,272,543 shares of common stock Voting Rights................................................. Holders of class A common stock are entitled to one vote per share and are entitled to elect two independent directors. Holders of class B common stock are entitled to ten votes per share. Holders of class C common stock do not have voting rights, except as required by law. Other Rights.................................................. Except as to voting and conversion rights, each class of common stock has the same rights. Use of Proceeds............................................... We plan to use the net proceeds from this offering: . to fund future acquisitions; . for continued business development activities; and . for general corporate purposes. NASDAQ Symbol................................................. ROIA </TABLE> - -------- (1) Excludes 500,000 shares of class A common stock that may be issued to cover over-allotments of shares. (2) Excludes 207,208 shares of class A common stock issuable upon exercise of stock options outstanding at an average exercise price of $24.00. Summary Historical and Pro Forma Consolidated Financial Data The following table contains summary historical financial information derived from the audited consolidated financial statements for the years ended December 31, 1996, 1997 and 1998, and the unaudited financial statements for the nine months ended September 30, 1998 and 1999, of Radio One. The table also contains summary unaudited pro forma financial information derived from the unaudited pro forma financial information set forth under "Unaudited Pro Forma Consolidated Financial Information." The summary unaudited pro forma consolidated financial information does not purport to represent what our results of operations or financial condition would actually have been had the transactions described below occurred on the dates indicated or to project our results of operations or financial condition for any future period or date. The summary financial data set forth in the following table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Unaudited Pro Forma Consolidated Financial Information," and the unaudited financial statements and the audited consolidated financial statements of Radio One included elsewhere in this prospectus. . The pro forma amounts for the year ended December 31, 1998, and the nine months ended September 30, 1999, are adjusted to give effect to the following transactions as if they had occurred as of January 1, 1998: -- the acquisitions of: . Bell Broadcasting Company; . Allur-Detroit, Inc.; . Radio One of Atlanta, Inc.; . Dogwood Communications, Inc. (by Radio One of Atlanta, Inc.); . WENZ-FM and WERE-AM in Cleveland; . the assets of WFUN-FM in St. Louis (pro forma balance sheet only); . WKJS-FM and WARV-FM in Richmond; . WDYL-FM in Richmond; and . the assets of WBOT-FM in Boston (pro forma balance sheet only); -- the pending acquisitions of WJRV-FM, WCDX-FM, WPLZ-FM, and WGCV-AM in Richmond; -- the pending acquisition of WPLY-FM in Philadelphia; -- the repayment of debt; -- our initial public offering of class A common stock on May 5, 1999; -- our public offering of class A common stock on November 11, 1999; and -- this offering. . The pro forma balance sheet data are adjusted to give effect to the transactions described above as if they had occurred as of September 30, 1999 unless the transactions had actually occurred prior to that date. <TABLE> <CAPTION> Nine Months Ended September Fiscal Year Ended December 31, 30, -------------------------------------- ------------------------------ Historical Historical ------------------------- ----------------- 1998 Pro 1999 Pro 1996 1997 1998 Forma 1998 1999 Forma ------- ------- ------- ----------- ------- -------- ----------- (unaudited) (unaudited) (unaudited) (in thousands, except per share data) <S> <C> <C> <C> <C> <C> <C> <C> Statement of Operations Net broadcast revenue... $23,702 $32,367 $46,109 $79,882 $33,304 $ 56,975 $ 70,424 Station operating expenses............... 13,927 18,848 24,501 47,913 17,550 31,211 38,925 Corporate expenses...... 1,793 2,155 2,800 2,800 2,051 3,301 3,322 Depreciation and amortization........... 4,262 5,828 8,445 26,315 6,042 12,209 19,543 ------- ------- ------- ------- ------- -------- -------- Operating income...... 3,720 5,536 10,363 2,854 7,661 10,254 8,634 Interest expense........ 7,252 8,910 11,455 9,628 7,996 11,479 7,498 Other income (expense), net.................... (77) 415 358 543 267 199 279 Income tax expense (benefit).............. -- -- (1,575) (2,786) -- 731 1,889 ------- ------- ------- ------- ------- -------- -------- Income (loss) before extraordinary item... $(3,609) $(2,959) $ 841 $(3,445) $ (68) $ (1,757) $ (474) ======= ======= ======= ======= ======= ======== ======== Loss applicable to common stockholders before extraordinary item................... $(3,609) $(4,996) $(2,875) $(3,445) $(2,794) $ (3,233) $ (474) ======= ======= ======= ======= ======= ======== ======== Earnings per common share: Basic and diluted..... $ (0.38) $ (0.53) $ (0.31) $ (0.12) $ (0.30) $ (0.22) $ (0.02) ======= ======= ======= ======= ======= ======== ======== Weighted average common shares outstanding: Basic and diluted..... 9,392 9,392 9,392 28,273 9,392 14,547 28,273 ======= ======= ======= ======= ======= ======== ======== Other Data: Broadcast cash flow..... $ 9,775 $13,519 $21,608 $31,969 $15,754 $ 25,764 $ 31,499 Broadcast cash flow margin................. 41.2% 41.8% 46.9% 40.0% 47.3% 45.2% 44.7% EBITDA (before non-cash compensation expense).. $ 7,982 $11,364 $18,808 $29,169 $13,703 $ 22,688 $ 28,402 After-tax cash flow..... 806 2,869 7,248 21,794 5,974 10,452 18,487 Cash interest expense... 4,815 4,413 7,192 5,996 3,495 6,340 4,497 Accreted preferred stock dividends.............. -- 2,037 3,716 -- 2,726 1,476 -- Capital expenditures.... 252 2,035 2,236 4,678 1,357 2,580 3,160 Ratio of total debt to EBITDA (before non-cash compensation expense).......................... 2.8x Ratio of EBITDA (before non-cash compensation expense) to interest expense................... 3.0x 3.8x Ratio of EBITDA (before non-cash compensation expense) to cash interest expense.............. 4.9x 6.3x Balance Sheet Data (at period end): Cash and cash equivalents........................................... $ 4,428 $464,751 Intangible assets, net.............................................. 212,363 336,020 Total assets........................................................ 257,826 839,899 Total debt (including current portion and deferred interest)........ 107,585 81,585 Total stockholders' equity ......................................... 124,854 732,927 </TABLE>
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information and financial statements and related notes appearing elsewhere in this prospectus. This prospectus contains forward-looking statements. The outcome of the events described in these forward-looking statements is subject to risks, and actual results could differ materially. The sections entitled "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business" contain discussions of some of the factors that could contribute to these differences. United Therapeutics Corporation develops pharmaceuticals to treat vascular diseases, including pulmonary hypertension and peripheral vascular disease, as well as selected other chronic conditions. Both pulmonary hypertension and peripheral vascular disease are characterized by reduced production of natural prostacyclin, a highly unstable molecule that has powerful effects on blood-vessel health. United Therapeutics' lead products, UT-15 and beraprost, are stable synthetic forms of prostacyclin. UT-15 is delivered under the skin, or "subcutaneously," and is currently in two multi-center Phase III clinical trials for treating advanced pulmonary hypertension. Beraprost is delivered orally, and United Therapeutics is beginning a Phase III clinical trial program to treat early-stage peripheral vascular disease. Pulmonary hypertension is a progressive, life-threatening disease that is difficult to diagnose and treat and is currently incurable. It is characterized by high pressure in the blood vessels between the heart and lungs, but normal blood pressure in the rest of the body. The advanced form of pulmonary hypertension afflicts approximately 55,000 people in North America and Europe, and United Therapeutics believes that the potential market for UT-15 to treat these patients is approximately $2.5 billion. The FDA has approved only one drug treatment for advanced pulmonary hypertension. Flolan(R), an intravenous infusion of prostacyclin, was approved in 1995 to treat primary pulmonary hypertension, a small subset of advanced pulmonary hypertension. Flolan is marketed by Glaxo Wellcome Inc. Flolan is an effective therapy, but has numerous significant drawbacks. For example, Flolan has a short half life in the body which increases the risk of an abrupt recurrence of hypertension and death if its delivery is interrupted for even a short period of time. Additionally, Flolan must be continuously infused through a catheter surgically implanted in the patient's chest, creating a risk of life-threatening sepsis infections. United Therapeutics believes that UT-15 overcomes the safety and quality-of-life drawbacks associated with Flolan therapy and will provide patients with a safe, convenient, non-intravenous form of life-long prostacyclin therapy. In October 1998, United Therapeutics completed a 26-patient, eight-week clinical trial for UT-15 in primary pulmonary hypertension patients. Results from this trial demonstrated that UT-15 can be safely administered to severely ill patients on an outpatient basis, and also showed that continuous, subcutaneous dosing of UT-15 leads to improvements in pulmonary blood pressure and exercise ability. Patients receiving UT-15 in this study experienced improvements similar to those achieved by patients receiving Flolan therapy for 12 weeks. Each patient who finished this study elected to receive UT-15 therapy indefinitely. United Therapeutics is beginning a Phase III clinical trial program for beraprost for treating early-stage peripheral vascular disease in the United States. Peripheral vascular disease is characterized by the progressive degradation of the circulatory system in the legs and affects over six million people in the United States and a similar number in Europe. Peripheral vascular disease results in over 200,000 amputations and more than $12 billion in medical costs annually. Clinical testing outside the United States has demonstrated that peripheral vascular disease is amenable to prostacyclin therapy. Beraprost was approved for the treatment of peripheral vascular disease in Japan in 1994 and generated 1998 sales of over $225 million for Toray Industries, Inc., the developer of the compound, and its licensees. In December 1998, Hoechst Marion Roussel, Inc., the European licensee of beraprost, submitted a regulatory application for beraprost to treat peripheral vascular disease in Europe. United Therapeutics is undertaking additional clinical studies. UT-15 is in Phase II clinical trials to treat late-stage peripheral vascular disease, and United Therapeutics is beginning a Phase III clinical trial program for beraprost to treat early-stage pulmonary hypertension. United Therapeutics believes that beraprost's current oral formulation will be complementary to UT-15 because this formulation cannot provide the constant therapeutic levels of prostacyclin in the body necessary to treat advanced pulmonary hypertension and late-stage peripheral SUBJECT TO COMPLETION JANUARY __, 2000 The information in this preliminary prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. [UNITED THERAPEUTICS CORPORATION LOGO] PROSPECTUS UNITED THERAPEUTICS CORPORATION 2,500,000 Shares of Common Stock (par value, $.01 per share) The selling stockholders are offering to sell 2,500,000 shares of United Therapeutics' common stock. United Therapeutics will not receive any of the proceeds from sales of these shares by the selling stockholders. The selling stockholders acquired the offered shares directly from United Therapeutics in a private placement dated as of December 22, 1999. The selling stockholders may sell the shares at prices determined by the prevailing market price for the shares or in negotiated transactions. The selling stockholders may also sell the shares to or with the assistance of broker-dealers. United Therapeutics' common stock is traded on the Nasdaq National Market under the symbol "UTHR." On December 22, 1999, the closing bid price of the common stock as reported on the Nasdaq National Market was $36.13 per share. BEFORE BUYING ANY SHARES YOU SHOULD READ THE DISCUSSION OF MATERIAL RISKS OF INVESTING IN COMMON STOCK IN "RISK FACTORS" BEGINNING ON PAGE 4. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this prospectus is January__, 2000. vascular disease effectively. United Therapeutics is beginning a Phase II clinical trial program for UT-77, a compound for the treatment of chronic obstructive pulmonary disease. Finally, United Therapeutics is beginning a Phase II/III clinical trial program for Ketotop, a patch that delivers the FDA-approved anti-inflammatory pain reliever ketoprofen, for the treatment of osteoarthritis. United Therapeutics believes that it has assembled the preeminent group of scientists and clinicians in the field of pulmonary vascular medicine. Members of United Therapeutics' scientific advisory board have won the Nobel Prize for the discovery and characterization of prostacyclin, discovered Flolan and invented UT-15. Members of United Therapeutics' senior management led the team at Burroughs Wellcome Co. that designed the clinical trials for, obtained FDA approval of and commercialized Flolan. These executives have similarly designed UT-15's clinical trials, which have primary end points identical to those used for the studies to approve Flolan. United Therapeutics believes this expertise will be instrumental in the development and commercialization of UT-15, beraprost and its other products. United Therapeutics also maintains a streamlined corporate infrastructure that is focused on strategic business management. United Therapeutics outsources the non-core aspects of its business where cost effective to substantially reduce fixed overhead and capital investment, accelerate commercialization of its products and reduce its business risk. For example, United Therapeutics partnered with MiniMed Inc., the worldwide leader in subcutaneous continuous-flow microinfusion devices. Under the terms of this strategic alliance, in cooperation with United Therapeutics, MiniMed will market UT-15 through a dedicated sales force, provide the pager-sized infusion device to patients and train patients and care providers in its use. United Therapeutics' objective is to become a leader in the development and commercialization of drugs to treat pulmonary and vascular diseases, as well as other selected chronic conditions. To achieve this objective, United Therapeutics is pursuing the following strategies: - Capitalize on its experience and expertise in pulmonary vascular medicine; - Establish its prostacyclin products as the standard of care for pulmonary hypertension and peripheral vascular disease; - Minimize fixed costs and corporate overhead through outsourcing and partnering where cost effective; and - Obtain licenses for, develop and commercialize selected other product candidates. United Therapeutics was incorporated in Delaware in June 1996 under the name Lung Rx, Inc. Its principal office is located at 1110 Spring Street, Silver Spring, Maryland 20910, and its telephone number there is (301) 608-9292. United Therapeutics' clinical development office is located at 68 T.W. Alexander Drive, Research Triangle Park, North Carolina 27709, and its telephone number there is (919) 485-8350. Information on United Therapeutics' web sites are not a part of this prospectus. TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Prospectus Summary...........................................................1 Risk Factors.................................................................4 Use of Proceeds.............................................................12 Market Price of Common Stock................................................12 Capitalization..............................................................12 Selected Consolidated Financial Data........................................13 Management's Discussion and Analysis of Financial Condition and Results of Operations..........................14 Business....................................................................19 Management..................................................................39 Certain Transactions........................................................47 Principal Stockholders......................................................49 Selling Stockholders........................................................50 Plan of Distribution........................................................52 Description of Capital Stock................................................53 Lawyers.....................................................................55 Experts.....................................................................55 Additional Information......................................................56 Index to Consolidated Financial Statements.................................F-1 </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA The following tables summarize the financial data for United Therapeutics' business. The consolidated balance sheet data are presented as of September 30, 1999, and have been adjusted to reflect the sale of the 2,500,000 shares of common stock to the selling stockholders and the application of the estimated net proceeds of that sale to the company. See the consolidated financial statements and related notes appearing elsewhere in this prospectus and "Capitalization." <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------------------------- PERIOD FROM JUNE 26, 1996 (INCEPTION) TO YEAR ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30, ------------ ------------ ------------- 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- (UNAUDITED) CONSOLIDATED STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> Revenue...................................... $ 154 $ 116 $ 54 $ ---- $ 161 Operating expenses: Research and development.................. 100 2,027 11,015 7,009 22,783 General and administrative................ 85 1,006 2,366 1,796 3,204 ------------ ---------- ---------- -------- -------- Loss from operations........................ (31) (2,917) (13,327) (8,805) (25,826) Net loss.................................... $ (30) $ (2,901) $ (12,835) $ (8,512) $(24,685) Basic and diluted net loss per share (1).... $ (0.02) $ (0.87) $ (1.54) $ (1.10) $ (1.97) Shares used in computing basic and diluted net loss per share (1)..................... 1,667 3,339 8,322 7,771 12,512 - --------------------------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, 1999, ------------------------------------- ACTUAL AS ADJUSTED ------ ----------- CONSOLIDATED BALANCE SHEET DATA: (UNAUDITED) <S> <C> <C> Cash, cash equivalents and short-term investments.............. $ 59,649 $ 134,398 Total assets................................................... 63,529 138,278 Accumulated deficit............................................ (40,451) (40,451) Total stockholders' equity..................................... 59,428 134,177 (1) See Note 2 of Notes to Consolidated Financial Statements for a description of the computation of basic and diluted net loss per share. - --------------------------------------------------------------------------------------------------------------------------------- </TABLE> This prospectus contains trademarks owned by other companies.
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND THE FINANCIAL DATA AND RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION. UTSTARCOM, INC. We provide communications equipment for service providers that operate wireless and wireline networks in rapidly growing communications markets. To date, substantially all of our sales have been to service providers in China. Our integrated suite of network access systems, optical transmission products and subscriber terminal products allows service providers to offer efficient and expandable voice, data and Internet access services. Because our systems are based on widely adopted international communications standards, service providers can easily integrate our systems into their existing networks and deploy our systems in new broadband, Internet Protocol and wireless network rollouts. Internet Protocol, or IP, refers to a set of rules developed for communicating information over the Internet. Systems that communicate using Internet Protocol are known as IP-based systems. China has one of the fastest growing communications markets in the world. Growth in China's communications equipment and services markets is being driven by the government's commitment to developing a communications infrastructure, pent-up demand for communications services and robust economic growth. According to 1998 statistics from the International Telecommunication Union, China has only 7.0 phone lines per 100 people. In comparison, the United States has approximately 66.1 phone lines per 100 people. China's low telephone penetration rate combined with its population of 1.3 billion presents a significant market opportunity for providers of voice and data communications services and equipment. Furthermore, the number of Internet subscribers within China is expected to dramatically increase, resulting in further infrastructure development for data services and increased demand for communications equipment capable of providing these services. Service providers in China often require network solutions with a suite of integrated products that address all of their access needs, including wireline and wireless, voice and data. These comprehensive product offerings enable service providers to quickly, and with minimal incremental investment, address the changing communications demands of their subscribers. In addition, given the rapid growth in China's emerging communications market, network solutions must be efficient and expandable so that the same architecture can provide an affordable entry level solution for hundreds of subscribers yet economically extend to hundreds of thousands of subscribers. Additionally, service providers in China often require vendors to continually develop products to meet evolving market needs and to have an extensive local service, support and manufacturing presence. Our wireless and wireline access and switching systems are designed to deliver the following key benefits to service providers: INTEGRATED, COMPREHENSIVE PRODUCT OFFERING. By offering communications systems that link the backbone network, which is a communications network linking access points, the access network and the subscribers' premises, we supply service providers with solutions that enable them to quickly deploy services to subscribers. Furthermore, as subscriber needs evolve from voice to data, we offer solutions to meet these needs. FLEXIBILITY FOR VOICE AND DATA SERVICES. We have designed our systems to offer a high degree of flexibility in terms of the number of subscribers and types of traffic delivered to those subscribers. This flexibility is particularly important in China as the communications services market is undergoing rapid change and growth. Our access systems allow service providers to quickly and cost-effectively implement upgrades for new services, including high-speed data services, compared to alternative solutions which may require the purchase of an entirely new system to provide these services. LEADING PRICE AND PERFORMANCE SOLUTION. We have designed our systems so that service providers in developing markets such as China can quickly deploy multiple services in a cost-effective manner. Our systems are engineered to allow service providers to purchase only the functionality and capacity needed and to purchase additional functionality and capacity over time as subscriber demand warrants. Furthermore, as demand for communications services in China grows, our expandable systems will allow service providers to expand from a small initial subscriber base to hundreds of thousands of subscribers in a cost-effective and efficient manner. ARCHITECTURE BASED ON WIDELY-ADOPTED INTERNATIONAL COMMUNICATIONS STANDARDS. We have designed our systems to comply with widely-adopted international communication standards for multi-vendor interoperability. Our systems incorporate interfaces that allow service providers to connect our products to equipment from multiple vendors and thus integrate multiple voice and data services within one system. Our compliance with these standards lowers costs by permitting service providers to shorten evaluation times and eases integration of our products with other systems in the service providers' networks. LOCAL PRESENCE. We have established a strong local presence in China that allows us to be responsive to the needs of service providers and their subscribers. We manufacture the majority of our products at two facilities located in the cities of Huizhou in Guangdong province and Hangzhou in Zhejiang province that are owned by joint ventures between us and the affiliates of corresponding provincial Posts and Telecommunications Administrations. By using local facilities in China, we have helped create new jobs within the provinces and have strengthened our relationships with the Posts and Telecommunications Administrations in some of China's most modernized and rapidly growing provinces. We also maintain nine sales and customer support sites in China that allow us to deploy a customer support representative anywhere in China within 24 hours. Additionally, we have developed relationships at the national, provincial and local levels which provide us with a continuous flow of information on market changes and insight into unique service provider needs and related opportunities. Our objective is to be a leading provider of broadband, Internet Protocol, or IP, and wireless network equipment to high growth communications markets. The principal elements of our strategy are as follows: - leverage our installed base of wireless and wireline access systems as demand for broadband and high-speed data services grows in China; - continue to develop products and technologies for market-driven solutions and penetrate the emerging IP-based switching market; - further capitalize on China's low penetration rate and increasing demand for communications services by increasing our sales, support and development staff and delivering new products and technologies; and - leverage our success in China to address other high-growth markets. Service providers have installed over 900,000 lines of our Airstar wireless access system, which we believe is the most widely deployed wireless local access system in China. Over 1.2 million lines of our wireline AN-2000 access system have been deployed in China, including installations in the six largest regional communications markets. Our OMUX product provides optical transmission and is often bundled with our Airstar and AN-2000 systems. The OMUX is currently installed as a stand-alone or bundled product at over 5,000 locations for over 200 communications service providers. Our newest product, WACOS, is targeted at the emerging broadband, IP-based switching and wireless markets. We incorporated in Delaware as Unitech Industries Inc. in 1991. In 1994, we changed our name to Unitech Telecom, Inc. In 1995, we acquired StarCom Network Systems, Inc. and changed our name to UTStarcom, Inc. Our principal executive offices are located at 1275 Harbor Bay Parkway, Alameda, California, and our telephone number is (510) 864-8800. THE OFFERING <TABLE> <S> <C> Common stock offered by UTStarcom....... 10,000,000 shares Shares outstanding after the offering... 89,307,159 shares Use of proceeds......................... We intend to use the proceeds from this offering for general corporate purposes, including research and development, expansion of our sales and marketing organization and working capital. We may also use a portion of the proceeds from this offering to acquire or invest in complementary businesses, technologies or products. Proposed Nasdaq National Market symbol................................ UTSI </TABLE> - ------------------------ The number of shares that will be outstanding after the offering is based on the number of shares outstanding as of December 31, 1999 and excludes: - 16,831,090 shares of common stock authorized for issuance under our stock option plans, under which options to purchase 14,405,714 shares were outstanding and 172,243 shares were available for grant as of December 31, 1999; and - 532,000 shares of common stock reserved for issuance upon the exercise of warrants outstanding as of December 31, 1999 at a weighted average exercise price of $6.025 per share. SUMMARY FINANCIAL DATA The summary financial data below should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements, the unaudited pro forma combined financial information and the related notes included elsewhere in this prospectus. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales................................................... $ 10,006 $ 35,542 $ 75,597 $105,167 $187,516 Gross profit................................................ 5,717 13,220 26,802 41,025 74,825 Operating income (loss)..................................... (8,979) 1,237 (3,390) 3,013 16,719 Net income (loss) applicable to common stockholders......... (9,841) (310) 30 (300) (18,514) Earnings (loss) per share(1): Basic..................................................... $ (2.40) $ (0.04) $ 0.00 $ (0.04) $ (2.13) Diluted................................................... $ (2.40) $ (0.04) $ 0.00 $ 0.00 $ (2.13) Shares used in per share calculations(1): Basic..................................................... 4,108 8,344 7,320 7,582 8,678 Diluted................................................... 4,108 8,344 7,320 77,050 8,678 </TABLE> <TABLE> <CAPTION> PRO FORMA FOR THE YEAR ENDED DECEMBER 31, 1999(4) --------------------- <S> <C> COMBINED STATEMENT OF OPERATIONS DATA: Net sales................................................... $187,516 Gross profit................................................ 74,825 Operating income............................................ 16,103 Loss from continuing operations applicable to common stockholders.............................................. (17,474) Pro forma earnings (loss) per share: Basic..................................................... $ (0.24) Diluted................................................... $ (0.24) Shares used in pro forma per share calculations: Basic..................................................... 72,947 Diluted................................................... 72,947 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1999 ------------------------- ACTUAL AS ADJUSTED(2) -------- -------------- (IN THOUSANDS) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents(3)................................ $ 87,364 $242,584 Working capital............................................. 126,637 281,857 Total assets................................................ 271,788 427,008 Total short-term debt....................................... 43,338 43,338 Total stockholders' equity.................................. 165,720 320,940 </TABLE> - ------------- (1) Based on the number of shares outstanding as of December 31, 1999. Excludes (i) 16,831,090 shares of common stock authorized for issuance under our stock option plans, under which options to purchase 14,405,714 shares were outstanding as of December 31, 1999 with a weighted average exercise price of $3.25 per share and 172,243 shares were available for grant and (ii) 532,000 shares of common stock reserved for issuance upon the exercise of warrants outstanding as of December 31, 1999 with a weighted average exercise price of $6.025 per share. (2) Adjusted to reflect the receipt of the estimated net proceeds from the sale of 10,000,000 shares of common stock offered by this prospectus at an assumed initial public offering price of $17.00 per share, after deducting the estimated underwriting discount and estimated offering expenses. (3) Includes restricted cash of $4,550,000 as of December 31, 1999. (4) The pro forma combined statement of operations data presents our results of operations as if our acquisition of Wacos had occurred as of January 1, 1999 and the assumed conversion of all our outstanding preferred stock into shares of common stock that will be effective upon the closing of our initial public offering as if such conversion had occurred on January 1, 1999 or at the date of issuance. The pro forma information is not necessarily indicative of what would have occurred had the acquisition been made as of such period, nor is it indicative of future results of operations. Non-recurring charges related to in-process research and development are not included within the pro forma statement of operations.
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus, including "Risk Factors" beginning on page 5, carefully. JFAX.COM, Inc. We are an Internet-based messaging and communications services provider to individuals and businesses throughout the world. Our services enable the user's e-mail box to function as a single repository for all e-mail, fax and voice mail and permit convenient message retrieval through e-mail or by phone. Customers can sign-up for all of our services through our web site and can promptly receive a JFAX.COM phone number. We provide Internet-based unified messaging services with over 56,000 paid subscriptions as of December 31, 1999. Since we started offering our services on a commercial basis in June 1996, we have expanded our network to offer our services in over 90 area codes in the United States and abroad, including area codes in 22 of the 25 most populous major metropolitan areas in the United States. We have over 15 area codes outside the United States, including area codes in London, Paris, Frankfurt, Zurich, Milan, Sydney and Tokyo. We intend to continue to increase the number of area codes and target new international locations. THE OFFERING Common stock offered: By selling stockholders............ 1,724,003 shares Common stock to be outstanding after the offering................... 36,107,378 shares Use of proceeds......................... We will not be receiving any the proceeds from the offering. All of the common stock to be offered will be offered by selling stockholders. Dividend policy......................... We intend to retain all future earnings to fund the development and growth of our business. Therefore, at this time we do not anticipate paying cash dividends. Nasdaq National Market Symbol............................... JFAX The shares of common stock to be outstanding after the offering are stated as of April 15, 2000 in this prospectus and exclude: . 4,375,000 shares of common stock reserved for issuance under our stock option plan of which 3,855,548 shares are subject to outstanding options, . 850,000 shares of common stock subject to employee options which we have committed to grant, . 2,231,666 shares of common stock issuable upon exercise of outstanding warrants, and . 1,200,000 shares of common stock issuable upon conversion of outstanding Series B Convertible Preferred Stock. JFAX.COM is our service mark. This prospectus contains other product names, trade names, trademarks and service marks of JFAX.COM and of other organizations.
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+This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider before buying shares in this offering. You should read the entire prospectus carefully, especially the information under "Risk Factors." References in this prospectus to "AECOM," "the Company," "we," "us" or "our" refer to AECOM Technology Corporation and its consolidated subsidiaries, unless we indicate otherwise. Unless otherwise noted, references to years are for fiscal years. Our fiscal year consists of 52 or 53 weeks, ending on the Friday closest to September 30. Our fiscal quarters end on the Friday closest to December 31, March 31, June 30 and September 30. For clarity of presentation, we refer to all fiscal years and fiscal quarters in this prospectus as ending on September 30, December 31, March 31 or June 30, regardless of the actual date. Our Company We are a leading global provider of professional technical and management support services to government and commercial clients on all seven continents. We provide planning, consulting, architectural and engineering design, and program and construction management services for a broad range of projects, including highways, airports, bridges, mass transit systems, government and commercial buildings, water and wastewater facilities and power transmission and distribution. We also provide facilities management, training, logistics and other support services, primarily for agencies of the United States government. Through our more than 30,000 employees in over 60 countries, we provide our services to a number of end markets, with particular strength in the transportation, facilities, also referred to as general building, and environmental markets. With over 60% of our employees operating outside the United States, we believe we are well positioned to grow both in the United States and internationally. According to Engineering News-Record's (ENR) 2007 Design Survey, we are the largest general architectural and engineering design firm in the world, ranked by 2006 design revenue. In addition, we are ranked by ENR as the leading firm in a number of design end markets, including transportation and general building. We are led by an experienced management team with a proven record of delivering growth in revenue and profits. Over the last 10 fiscal years, we have grown our revenue from $0.7 billion to $3.4 billion, reflecting a compound annual growth rate, or CAGR, of 20.0%. Furthermore, over the last five fiscal years, we have doubled our revenue from $1.7 billion to $3.4 billion, reflecting a CAGR of 18.3%. In that same five year period, our net income increased from $23.1 million to $53.7 million, reflecting a CAGR of 23.5%. Our revenue for the first quarter of fiscal 2007 grew 25.7% to $938.5 million, compared to $746.8 million for the same period last year. Over the past 10 years, we have enhanced our organic growth with the successful acquisition and integration of more than 30 complementary businesses. These acquisitions have enabled us to expand our professional service offerings, end market coverage and geographic presence. As of March 31, 2007, we had a total backlog of $3.1 billion compared to $2.6 billion at March 31, 2006, a 21.1% increase. We offer our broad range of services through two business segments: Professional Technical Services and Management Support Services. Professional Technical Services (PTS). Our PTS segment delivers planning, consulting, architectural and engineering design, and program and construction management services to government, institutional and commercial clients worldwide in end markets such as transportation, facilities, environmental including water, wastewater and environmental management and energy/power. We provide services in connection with some of the largest and most complex projects in the world. Our PTS segment contributed $2.8 billion, or 81.0%, of our revenue in fiscal 2006, which represents an Equity in earnings of joint ventures: Equity in earnings of joint ventures from reportable segments $ 892 $ 2,160 $ 2,562 $ 4,754 Other equity in earnings of joint ventures 1 59 Energy/Power 4 Mutnovsky Independent Power Project NY Public Schools Coal Conversion Project Southern Provincial Rural Electrification Project Russia U.S. Laos The following two charts illustrate the diversification of our PTS revenue for the first quarter of fiscal 2007, ended December 31, 2006, by client type and geography. First Quarter Fiscal 2007 Revenue by Client Type First Quarter Fiscal 2007 Revenue by Geography Asset Allocation Information: Actual asset allocations: Domestic equity 38 % 38 % International equity 24 % 25 % Property 7 % 7 % Debt 24 % 28 % Cash 7 % UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Nevada Test Site U.S. U.S. Dept. of Energy Camp Arifjan Army Base Kuwait U.S. Dept. of Defense Fort Polk Training Center U.S. U.S. Dept. of Defense International Civilian Police (CIVPOL) Various worldwide U.S. Dept. of State Our Market Opportunity According to ENR, the top 500 design firms in the United States, ranked by revenue, generated revenue of approximately $69.6 billion in 2006, a 17.5% increase over 2005. The top five design firms, which includes us, accounted for 21% of this $69.6 billion market. Our core end markets, namely transportation, facilities, environmental, energy/power and government services, are anticipated to continue to grow, due to the following significant market trends: Expansion and upgrades of essential infrastructure worldwide; Continued growth in government spending, such as the SAFETEA-LU transportation program; Demand for cost-effective compliance with environmental regulations, such as the Clean Air Act and the Clean Water Act; Increasing urbanization; and Government outsourcing. The global market for our services is highly fragmented, with thousands of providers. While many of these providers focus on regional niche markets, we believe that clients are increasingly seeking out larger firms such as us that can meet their needs around the world by providing a diverse array of services. This is contributing to a consolidation trend in this market, particularly among mid-size firms without notable technical niche specialties. Furthermore, our client base is becoming increasingly reliant on professional technical services or management support services that are either not readily available from internal resources or are not among their core competencies, or both. With our broad service offerings, end market coverage and geographic presence, we believe we are well positioned to capitalize on these favorable trends. Furthermore, we believe the industry consolidation trend will allow us to continue to advance our market leadership positions by selectively adding successful firms that are seeking a global platform for their services. Our Competitive Strengths Leadership positions in large, growing markets. Based on ENR's rankings of firms by 2006 revenue, we are ranked number one in two of our core end markets, transportation and general building. We also have leadership positions based upon ENR's most recent available rankings by 2005 revenue in many key specialty technical areas within our core end markets, including being ranked first in mass transit, airports, highways, educational facilities, government offices and transmission and distribution. Income from operations 49 69 87 98 103 50 68 Minority interest share of earnings 3 3 3 8 14 5 5 Gain on the sale of equity investment 11 Interest expense net 12 10 8 7 10 8 Income from operations 49 69 87 98 103 50 68 Minority interest share of earnings 3 3 3 8 14 5 5 Gain on the sale of equity investment 11 Interest expense net 12 10 8 7 10 8 AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 We are also ranked number one in New Civil Engineer's 2006 global listing (by 2005 fees) in the areas of water, buildings and roads and number two in waste and rail. Diversification across service lines, end markets and geographies. We perform a broad range of services in over 60 countries for our clients. In addition, our 25 largest projects by gross profit in fiscal 2006 accounted for only 14% of our consolidated gross profit. We believe this diversification enables us, among other things, to better manage our business through market cycles. We further believe we are well-positioned in geographic areas with favorable growth prospects such as China/Hong Kong and the United Arab Emirates, where we are among the largest engineering design firms. This diversification has been a key factor in our historical growth and positions us for future growth. Global reach with local presence. We combine local market knowledge and relationships with the technical expertise, scale, experience and resources of one of the world's largest global professional technical and support services firms. Strong and long-standing client relationships. We have developed strong and long-term relationships with a number of government entities and large corporations worldwide that lead to repeat business. For example, we have provided services for over 30 years to clients such as the Illinois State Tollway Authority, U.S. Navy, Massachusetts Water Resources Authority and Port Authority of New York and New Jersey. Successful history of executing and integrating mergers and acquisitions. We believe one of our core competencies is successfully identifying, executing and integrating acquisition opportunities. We have consummated more than 30 mergers and acquisitions since 1998 that have enabled us to expand our end markets, service offerings and geographic reach. We derive acquisition synergies by "cross selling" the capabilities of our newly acquired companies to our existing clients and our global capabilities to the clients of our newly acquired companies. Experienced management team and employees. Our Chief Executive Officer and the 10 most senior members of our operating units have an average of more than 20 years of experience with us and more than 25 years in our industry. We also have a large, experienced and skilled workforce. Human capital is critical to success in our industry. Risks Affecting Our Business Our business is subject to numerous risks, as discussed more fully in the section entitled "Risk Factors" beginning on page 9 of this prospectus. In particular: As a government contractor, our revenue is subject to the risks of changing budget priorities, insufficient or deferred project funding, or outright cancellation of contracts. Budget deficits or other funding constraints of our government clients could cause or exacerbate these risks. In addition, government audits could result in adjustments to our reimbursable costs. We could be charged with violating applicable government regulations or laws, including those relating to procurement, false claims and anti-bribery, which could result in our being suspended or barred from future awards. Human capital is critical to success in our industry, and if we are unable to recruit and retain talent at sufficient levels, our future growth and profitability could be impacted. We do business in numerous countries and we are subject to legal, political and economic risks in those countries, as well as currency exchange rate fluctuation risks, that could adversely affect our business and financial results. We may be unable to continue to successfully complete or integrate on mergers and acquisitions, which could inhibit our growth. Equity in earnings of joint ventures 1 2 3 2 7 3 Asset Allocation Information: Actual asset allocations: Domestic equity 54 % 54 % International equity 15 % 15 % Debt 30 % 27 % Cash 1 % AECOM TECHNOLOGY CORPORATION (Exact name of Registrant as specified in its charter) Delaware 8711 61-1088522 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification No.) 555 South Flower Street, Suite 3700 Los Angeles, California 90071 (213) 593-8000 (Address of principal executive offices, including zip code and telephone number) John M. Dionisio President and Chief Executive Officer AECOM Technology Corporation 555 South Flower Street, Suite 3700 Los Angeles, California 90071 (213) 593-8000 (Name, address and telephone number of agent for service) Copies to: Jonathan K. Layne, Esq. Gibson, Dunn & Crutcher LLP 2029 Century Park East Los Angeles, CA 90067 (310) 552-8500 Eric Chen, Esq. David Y. Gan, Esq. AECOM Technology Corporation 555 South Flower Street, Suite 3700 Los Angeles, CA 90071 (213) 593-8000 J. Scott Hodgkins, Esq. Steven B. Stokdyk, Esq. Latham & Watkins LLP 633 West 5th Street, Suite 4000 Los Angeles, CA 90071 (213) 485-1234 The foregoing factors, as well as others described in "Risk Factors," could adversely affect the value of your investment in our common stock. Our Growth Strategy We intend to grow our business by leveraging our competitive strengths and leadership positions in our core markets while opportunistically entering new markets and geographies. Key elements of our growth strategy include: Expand our long-standing client relationships and provide our clients with a broad range of services. We have long-standing relationships with a number of governmental agencies, large corporations and public and private institutions worldwide. We will continue to focus on client satisfaction along with opportunities to sell a greater range of services to clients and deliver full-service solutions for their needs. For example, as we have grown our environmental business, we have provided environmental services for transportation and other infrastructure projects in which such services have in the past been subcontracted to third parties. Capitalize on growth opportunities in our core markets. Our core end markets, including transportation, facilities and environmental, are expected to continue to grow. We intend to build on our leading positions in these markets to increase our market share. With our track record and our global resources, we believe we are well positioned to win projects in these core markets. We believe that the need for infrastructure upgrades, environmental management and increased government spending and outsourcing of support services, among other things, will result in continued growth opportunities in our core markets. Continue to pursue our merger and acquisition strategy. We intend to continue to attract other successful companies whose growth can be enhanced by joining us. This approach has served us well as we have strengthened and diversified our leadership positions both geographically, technically and across end markets. We believe that the trend towards consolidation in our industry will continue to produce attractive candidates that align with our merger and acquisition strategy. For example, we significantly strengthened our presence in the fast-growing market in the United Arab Emirates with the addition of Cansult Limited in September 2006. Strengthen and support human capital. Our experienced employees and management are our most valued resources. Attracting and retaining key personnel have been and will remain critical to our success. We will continue to focus on providing our personnel with training and other personal and professional growth opportunities, performance-based incentives, opportunities for stock ownership and other competitive benefits in order to strengthen and support our human capital base. During fiscal 2006, we expanded our multi-year employee engagement initiative to focus more intensely on this critical objective. Corporate Information We were formed in 1980 as Ashland Technology Corporation, a Delaware corporation and a wholly owned subsidiary of Ashland Inc., an oil and gas refining and distribution company. Since becoming independent of Ashland Inc. in 1990, we have grown by combination of organic growth and strategic mergers and acquisitions from approximately 3,300 employees and $387 million in revenue in fiscal 1991, the first full fiscal year of operations, to approximately 30,200 employees at March 31, 2007 and $3.4 billion in revenue for fiscal 2006. Several of the operating companies within AECOM have histories going back more than 50 years. Our principal executive offices are located at 555 South Flower Street, 37th Floor, Los Angeles, California 90071 and our telephone number is (213) 593-8000. Our website is located at www.aecom.com. The information contained on our website is not a part of this prospectus. Approximate date of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. The Offering Common stock offered By AECOM 19,888,797 shares By the selling stockholders 15,261,203 shares Total 35,150,000 shares Common stock to be outstanding after this offering 92,335,201 shares Over-allotment option 5,272,500 shares Net Proceeds We expect the net proceeds to us from this offering to be $355.2 million ($449.4 million if the underwriters exercise their over-allotment option), after deducting underwriting discounts and commissions payable to the underwriters and our estimated offering expenses, based upon an assumed initial public offering price of $19.00 per share, which is the mid-point of the offering range indicated on the cover of this prospectus, and an assumed $1.14 per share in underwriting discounts and commissions. We will not receive any proceeds from the sale of shares by the selling stockholders. Use of proceeds To repay borrowings under our credit facilities and our outstanding 83/8% senior notes due 2012, allow employees under our stock purchase plan to diversify their holdings and use the remaining proceeds for general corporate purposes, including possible future acquisitions. We will not receive any of the proceeds from the sale of shares by the selling stockholders. See "Use of Proceeds" for additional information. Dividends We do not anticipate paying any cash dividends in the foreseeable future. New York Stock Exchange symbol ACM Common Stock to be outstanding after this offering does not include: 8,409,191 shares of common stock issuable upon the exercise of options outstanding under our stock incentive plans, with a weighted average exercise price of $8.90 per share, of which 7,813,571 are exercisable; 299,329 shares of common stock issuable upon conversion of our convertible preferred stock; 20,452 shares of common stock issuable upon conversion of our convertible preferred stock units; 6,900,505 shares of common stock available for issuance under our 2006 Stock Incentive Plan; and 1,689,557 shares of common stock available for issuance under our Equity Incentive Plan. Except as otherwise indicated, all of the information in this prospectus assumes: the underwriters do not exercise their over-allotment option; the conversion to common stock upon the closing of this offering of all of our outstanding Class F and Class G convertible preferred stock; and a 2-for-1 split of our common stock effected by a dividend of one share of common stock for every outstanding share of common stock. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. Earnings per share available for common stockholders: Basic $ 0.45 $ 0.67 $ 0.86 $ 0.93 $ 0.94 $ 0.43 $ 0.82 Diluted $ 0.43 $ 0.65 $ 0.78 $ 0.84 $ 0.74 $ 0.37 $ 0.60 Weighted average shares outstanding (in thousands): Basic 51,630 52,858 52,600 51,880 54,856 53,482 56,965 Diluted 54,002 57,178 64,254 63,978 72,658 67,765 78,500 (1)Assumes that the ratio of current and long-term stock purchase plan balances are proportionate with those at March 31, 2007. (2)Included in depreciation and amortization above.
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements and related notes appearing in this prospectus. This summary may not contain all of the information that may be important to you. Before investing in our ordinary shares, you should read this entire prospectus carefully for a more complete understanding of our business and this offering, including our consolidated financial statements and related notes and the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". In this prospectus, the "Company", "we", "us" and "our" refer to AerCap Holdings N.V., its consolidated subsidiaries, its predecessors, AerCap Holdings C.V. and AerCap B.V. (formerly known as debis AirFinance B.V.) and their consolidated subsidiaries and, unless the context otherwise requires, AeroTurbine, Inc. Our Company We are an integrated global aviation company with a leading market position in aircraft and engine leasing, trading and parts sales. We possess extensive aviation expertise that permits us to extract value from every stage of an aircraft's lifecycle across a broad range of aircraft and engine types. We also provide aircraft management services and perform aircraft and engine maintenance, repair and overhaul, or MRO, services and aircraft disassemblies through our certified repair stations. We believe that by applying our expertise through an integrated business model, we will be able to identify and execute on a broad range of market opportunities that we expect will generate attractive returns for our shareholders. We operate our business on a global basis, providing aircraft, engines and parts to customers in every major geographical region. As of March 31, 2007, we owned 140 aircraft and 65 engines, managed 98 aircraft, had 95 new aircraft and three new engines on order, had entered into purchase contracts for two new aircraft and had executed letters of intent to purchase an additional six aircraft. In addition, on May 11, 2007, we signed an agreement with Airbus for the purchase of an additional ten A330-200 aircraft, bringing our total firm order of A330-200 aircraft to 30 and the total number of new aircraft on order to 105. As of March 2007, we had the fourth largest aircraft leasing portfolio in the world and the third largest new aircraft order book among operating lessors, according to Simat Helliesen & Eichner, Inc., or SH&E, in each case by number of aircraft. We lease most of our aircraft to airlines under operating leases. Under an operating lease, the lessee is responsible for the maintenance and servicing of the equipment during the lease term and the lessor receives the benefit, and assumes the risk, of the residual value of the equipment at the end of the lease. As of March 31, 2007, our owned and managed aircraft and engines were leased to 105 commercial airline and cargo operator customers in 46 countries and are managed from our offices in The Netherlands, Ireland and the United States. We expect to expand our leasing activity in Asia and in China in particular through our AerDragon joint venture with China Aviation Supplies Import & Export Group Corporation, which commenced operations in October 2006. We have the infrastructure, expertise and resources to execute a large number of diverse aircraft and engine transactions in a variety of market conditions. Our teams of dedicated marketing and asset trading professionals have been successful in leasing and trading our aircraft and engine portfolios. From January 1, 2003 to March 31, 2007, we executed over 1,100 aircraft and engine transactions, including 283 aircraft leases, 275 engine leases, 158 aircraft purchase or sale transactions, 204 engine purchase or sale transactions and the disassembly of 54 aircraft and 139 engines. Between January 1, 2003 and March 31, 2007, our weighted average owned aircraft utilization rate was 98.6%. In 2006, we generated total revenues of $814.4 million and net income of $109.0 million, which included charges for share-based compensation of $68.3 million, net of taxes, resulting in basic and fully-diluted earnings per share of $1.38. In the three months ended March 31, 2007, we generated total Asia-Pacific 35 % 43 % 44 % 43 % 33 % Europe 36 33 33 35 37 North America/Caribbean 21 18 18 15 21 Latin America 7 6 5 7 9 Africa/Middle East 2007(2) 5.2 % 11 2008 15.3 34 2009 22.7 34 2010 9.8 16 2011 11.4 15 2012 10.7 16 2013 5.0 5 2014 0.0 0 2015 1.6 1 2016 0.0 Europe 36 % 33 % 33 % 35 % Asia/Pacific 35 % 43 % 44 % 43 % Latin America 7 % 6 % 5 % 7 % North America and Caribbean 21 % 18 % 18 % 15 % Africa/Middle East revenues of $309.5 million and net income of $60.6 million, resulting in basic and fully-diluted earnings per share of $0.71. On September 8, 2006, the Financial Accounting Standards Board issued FSP No. AUG AIR-1 "Accounting for Planned Major Maintenance Activities" (the "FSP"). The FSP amends certain provisions in the AICPA Industry Audit Guide, "Audit of Airlines," and is applicable for our financial year beginning January 1, 2007. As a result of our adoption of the FSP, we have adjusted our method of accounting for certain maintenance obligations and adjusted our historical results as more fully explained in our audited financial statements included in this prospectus. Our Business Strategy We intend to pursue the following business strategies. See "Business Our Business Strategy" beginning on page 114 of this prospectus for a more detailed discussion of our business strategies. Leverage Our Ability to Manage Aircraft and Engines Profitably throughout their Lifecycle. We intend to continue to leverage our integrated business model by selectively: purchasing aircraft and engines directly from manufacturers; taking advantage of price incentives offered by sellers for the purchase of entire portfolios of aircraft and engines of varying ages and types; using our global customer relationships to obtain favorable lease terms and reduce time off-lease; selling select aircraft and engines; disassembling older airframes and engines for sale of their component parts; and providing management services to securitization vehicles, our joint ventures and other aircraft owners at limited incremental cost to us. Our ability to profitably manage aircraft throughout their lifecycle depends in part on our ability to successfully lease aircraft and engines at profitable rates and our ability to source acquisition opportunities of new and used aircraft at favorable prices. Expand Our Aircraft and Engine Portfolio. We intend to grow our portfolio of aircraft and engines through portfolio purchases, new aircraft purchases, airline refleetings, and other opportunistic aircraft and engine purchases. Focus on High Growth Markets. Although we maintain a geographically diverse portfolio, we focus on high growth airline markets such as the Asia-Pacific market. Enter into Joint Ventures to Obtain Economies of Scale. We intend to continue to enter into joint ventures that increase our purchasing power and our ability to obtain price discounts on large aircraft orders. Obtain Maintenance Cost Savings. We intend to lower our aircraft and engine maintenance costs by using aircraft and engine parts we obtain from the selective disassembly of acquired airframes and engines. Acquire Complementary Businesses. We intend to selectively pursue acquisitions that we believe will enhance our ability to manage aircraft and engines profitably throughout their lifecycle. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Our Competitive Strengths We believe the following competitive strengths will allow us to capitalize on growth opportunities in the global commercial aviation market. See "Business Our Competitive Strengths" beginning on page 112 of this prospectus for a more detailed discussion of our competitive strengths. Our integrated business model allows us to manage aircraft and engines profitably throughout their lifecycle, from initial purchase through leasing, sale or eventual disassembly for the sale of parts. We have a modern and fuel-efficient aircraft and engine portfolio, focused on the widely-used Airbus A320 family aircraft and CFM56 family engines. Our global remarketing capability and diversified customer base enables us to maintain a high utilization rate for our assets and reduce our exposure to customer concentration and fluctuations in regional economic conditions. We have an active aircraft and engine trading business, led by our asset trading team of 19 dedicated professionals as of March 31, 2007. Our substantial size and breadth of operations allow us to diversify our customer base and offer our customers a broad range of flexible aircraft and engine leasing options. We have $1.2 billion of revolving credit facilities that provide us with efficient access to capital, and we have raised over $19 billion globally since 1996. We have an attractive aircraft management business and managed 98 aircraft as of March 31, 2007. Our management team has an average of 17 years of experience in the aviation industry and extensive expertise in aircraft and engine leasing, trading, financing and risk management. Risks An investment in our ordinary shares involves a high degree of risk. You should carefully consider the risks described in "Risk Factors" before making an investment decision. Our business, financial condition and results of operations could be materially and adversely affected by any of those risks. The trading price of our ordinary shares could decline due to any of those risks or other factors, and you may lose all or part of your investment. Below is a summary of the principal risks we face. Our business model depends on the continual re-leasing of our aircraft and engines when current leases expire, and we may not be able to do so on favorable terms, if at all. Interest rates have a significant impact on our financial results, and changes in interest rates may adversely affect our financial results and growth prospects. The leasing, financing and sales of aircraft, engines and parts has historically experienced prolonged periods of oversupply during which lease rates and aircraft values have declined, and any future oversupply could materially and adversely affect our financial results and growth prospects. Our financial condition is dependent, in part, on the financial strength of our lessees; lessee defaults and other credit problems could adversely affect our financial results and growth prospects. The concentration of some aircraft and engine models in our aircraft and engine portfolios could adversely affect our business and financial results should any problems specific to these particular models occur. Amendment No. 1 to FORM F-1 REGISTRATION STATEMENT Under The Securities Act of 1933 We are indirectly subject to many of the economic and political risks associated with emerging markets, which could adversely affect our financial results and growth prospects. Our substantial indebtedness incurred to acquire our aircraft and engines requires significant debt service payments. As of March 31, 2007, our consolidated indebtedness was $2.7 billion and our interest expense (including the impact of hedging activities) was $166.2 million in 2006 and $50.5 million in the three months ended March 31, 2007. As of May 31, 2007, we had 74 new Airbus A320 family aircraft and 30 new A330-200 widebody aircraft on order from Airbus. If we acquire all 104 of the Airbus aircraft, over the next five years, we would expect to incur in excess of $4.5 billion of indebtedness to finance the purchase price of the aircraft. If the effects of terrorist attacks and geopolitical conditions adversely affect the financial condition of airlines, our lessees might not be able to meet their lease payment obligations, which would adversely affect our financial results and growth prospects. Volatility in our sales revenue due to the fact that during any particular fiscal quarter or other reporting period we may complete significantly more or fewer sale transactions than in other reporting periods, which could adversely impact the trading price of our ordinary shares. If the ownership of our ordinary shares continues to be concentrated, it may prevent you and other minority shareholders from influencing significant corporate decisions and may result in conflicts of interest. After giving effect to this offering, assuming that the underwriters' overallotment option is not exercised, companies controlled by funds and accounts affiliated with Cerberus Capital Management, L.P., or Cerberus, will own 45.8% of our ordinary shares. Industry Trends We believe that trends in the aviation industry identified by SH&E, a recognized expert in the aviation industry, and described in "Aircraft, Engine and Aviation Parts Industry" create a favorable environment for us to leverage our competitive strengths and grow our business. We believe that our operating capabilities and aircraft and engine portfolios will provide us with a competitive advantage in the expanding aviation market. The trends identified by SH&E include: Growing Demand for Air Travel. Globalization and the rapid economic growth in major emerging markets such as India and China have fueled significant growth in global demand for air travel. The Airline Monitor, a commercial aviation data analysis publication, forecasts that passenger traffic will grow at an average rate of 5.2% per year for the next 10 years. The Airbus 2006 Global Market Forecast predicts that air travel demand will continue to grow an average of 4.8% per year through 2025 and the Boeing 2006 Commercial Market Outlook projects 4.9% annual growth in air travel for the next 20 years. According to SH&E, air cargo demand globally is expected to grow even faster than passenger demand. For the next 20 years Airbus and Boeing forecast air cargo demand growth of 6.0% and 6.1% annually, respectively. Fundamental Imbalance between Supply and Demand for Aircraft, Engines and Aircraft Equipment. In recent years, the increased demand for aircraft, engines and parts, combined with a decreased supply, has resulted in a supply and demand imbalance for certain aircraft, engines and parts. The primary factors affecting aircraft demand include rapid airline passenger growth in emerging markets, increased liberalization of air travel, higher fuel prices, continued emergence of low cost carriers and industry restructuring in developed markets which have increased replacement demand for more fuel efficient and technologically advanced aircraft. The primary factors affecting aircraft supply include the aging world aircraft fleet, the significant backlog of aircraft production, the limited ability of airframe manufacturers to increase production and the relative shortage of efficient used aircraft in the secondary market. Greater Reliance on Operating Leases. In recent years, airlines have increasingly turned to operating leases to meet their aircraft financing needs. Operating leases permit airlines to reduce their capital commitments, improve their balance sheets, increase fleet planning flexibility and reduce residual value risk. According to SH&E, approximately 30% of the global aircraft fleet was operated under operating leases in 2006 and SH&E forecasts that 40% of the global aircraft fleet will be operated under operating leases within the next ten years. Despite these positive recent trends, the business of leasing, financing and sales of aircraft, engine and parts has, in the past, experienced periods of aircraft and engine oversupply. The oversupply of a specific type of aircraft or engine is likely to depress the lease rates for, and the value of, that type of aircraft or engine. The supply and demand for aircraft and engines is affected by various cyclical and non-cyclical factors that are outside of our control. Recent Developments On May 8, 2007, Aircraft Lease Securitisation, a lease securitization special purpose entity that we consolidate in our financial statements, completed a refinancing of its securitized notes with the issuance of $1.66 billion of AAA-rated class G-3 floating rate notes. The proceeds from the issuance of these notes were used to redeem all of the outstanding Aircraft Lease Securitisation debt, other than the most junior class of notes, to refinance the indebtedness that had been incurred to purchase 24 previously acquired aircraft, and to finance the purchase of four additional new aircraft, increasing Aircraft Lease Securitisation's aircraft portfolio size to 70 aircraft. The class G-3 notes bear an interest rate of one-month LIBOR plus 26 basis points. Concurrently with the Aircraft Lease Securitisation refinancing, our revolving credit facility was amended and restated, resulting in a reduced interest rate spread and a two-year extension of the revolving period to May 2010. The size of our revolving credit facility remains $1.0 billion. As a result of the Aircraft Lease Securitisation refinancing and the amendment to our revolving credit facility, we expect to report a non-recurring expense in the second quarter of 2007 of approximately $27 million for the write-off of unamortized debt issuance costs related to the refinanced debt, costs related to the prepayment of the prior Aircraft Lease Securitisation notes and other related fees. During the three months ended June 30, 2007, in addition to sales of parts inventory and one aircraft by our subsidiary, AeroTurbine, we sold one Airbus A321 aircraft and one Boeing 737-400 aircraft, both of which were previously classified as flight equipment held for operating leases. Sales revenue resulting from the sale of these two aircraft totaled $57.4 million. The cost of goods sold related to the sale of these two aircraft totaled $37.8 million. During the three months ended June 30, 2007, we took delivery of one Airbus A320-200 aircraft, one A319-100 aircraft and one Boeing 737-800, each of which we had contracted to purchase in prior periods. In addition, AeroTurbine, our subsidiary, purchased two Airbus A320-200 aircraft, two Boeing 757 aircraft, three Bombardier aircraft and one McDonnell Douglas MD-83 aircraft in the three months ending June 30, 2007. At June 30, 2007, the gross book value of flight equipment we expect to take delivery of during the full year 2007, based on contracted purchase agreements and signed letters of intent was $791.9 million. Of that amount, approximately $458.6 million was delivered to us during the first six months of 2007, including the aircraft discussed above delivered during the three months ended June 30, 2007. During the three months ended June 30, 2007, we reached an agreement on the value of a damages claim we had filed with a previous lessee which had filed for bankruptcy protection. We had previously sold our claim to a third party subject to final valuation of the claim. We recognized a gain of $9.0 million upon signing the settlement agreement with the airline which will be recorded as other income in our consolidated income statement for the three months ended June 30, 2007. During the three months ended June 30, 2007, we executed sale agreements for the sale of three Airbus A330-300 aircraft subject to leases, which we delivered in July 2007. In addition, we executed Evert van de Beekstraat 312 1118 CX Schiphol Airport The Netherlands +31 20 655 9655 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) CT Corporation System, 111 Eighth Avenue, 13th Floor, New York, NY 10011, (212) 894 8641 (Name, address, including zip code, and telephone number, including area code, of agent for service of process) agreements for the sale of two A300 freighter aircraft subject to leases, of which one is expected to be delivered in September 2007 and the other is expected to be delivered in September 2008. The aggregate sales price for the four aircraft to be delivered in the three months ending September 30, 2007 was approximately $170 million. Our Corporate History and Shareholding Structure We were formed as a Netherlands public limited liability company ("naamloze vennootschap") on July 10, 2006 to acquire all of the assets and liabilities of AerCap Holdings C.V. a Netherlands limited partnership. AerCap Holdings C.V. was formed on June 27, 2005 for the purpose of acquiring all of the shares and certain liabilities of AerCap B.V. (formerly known as debis AirFinance B.V.). On June 30, 2005, AerCap Holdings C.V. acquired all of AerCap B.V.'s shares and liabilities owed by AerCap B.V. to its prior shareholders, the 2005 Acquisition, for total consideration of $1.4 billion, $370.0 million of which was funded with equity contributions by the selling shareholders. Substantially all of the equity funding for the 2005 Acquisition was provided by funds and accounts affiliated with Cerberus, who will retain control of us after this offering. Certain members of our senior management and of our Board of Directors are also indirect shareholders of the selling shareholders. On April 26, 2006, we acquired all of the existing share capital of AeroTurbine, Inc. an engine leasing, trading and parts sales company, the AeroTurbine Acquisition. On October 27, 2006, AerCap Holdings N.V. acquired all of the assets and liabilities of AerCap Holdings C.V. and on November 27, 2006, we completed an initial public offering on the New York Stock Exchange, in which we issued and sold an additional 6.8 million of our ordinary shares and Cerberus sold 19.3 million of our ordinary shares. Based on an assumed public offering price of $31.00 per ordinary share, the last reported sale price of our ordinary shares on the NYSE on July 19, 2007, funds and accounts affiliated with Cerberus and certain members of our senior management and of our Board of Directors will receive $490.8 million and $96.1 million, respectively, from the proceeds of this offering if the underwriters do not exercise their overallotment option and $567.6 million and $108.1 million, respectively, from the proceeds of this offering if the underwriters exercise their overallotment option. See "Use of Proceeds" and "Principal and Selling Shareholders" for more information regarding the proceeds that funds and accounts affiliated with Cerberus as well as certain members of our senior management and of our Board of Directors will receive from this offering. Copies to: Douglas A. Tanner, Esq. Milbank, Tweed, Hadley & McCloy LLP 1 Chase Manhattan Plaza New York, NY 10005 Tel: (212) 530 5000 Fax: (212) 822 5219 Erwin den Dikken Chief Legal Officer Evert van de Beekstraat 312 1118 CX Schiphol Airport The Netherlands Tel: +31 20 655 9655 Fax: +31 20 655 9100 Richard J. Sandler, Esq. Davis Polk & Wardwell 450 Lexington Ave. New York, NY 10017 Tel: (212) 450 4224 Fax: (212) 450 3224 (1)Cerberus beneficially owns 86.0% of the Bermuda Parents' common shares. The Bermuda Parents' and the Selling Shareholders are holding companies that were formed by Cerberus for the purpose of acquiring us and do not own any other assets or conduct activities outside of their indirect investment in us. (2)As of the date of this prospectus, Cerberus beneficially owned 86.0% of the Bermuda Parents' common shares and certain members of our senior management and an employee of Cerberus owned the remaining 14.0%. In addition, certain members of our senior management and of our Board of Directors also own vested options to purchase common shares of the Bermuda Parents which are currently exercisable upon or within 60 days of the closing of this offering. If all such options were exercised, Cerberus would beneficially own 82.8% of the common shares of the Bermuda Parents and certain members of our senior management and of our Board of Directors and an employee of Cerberus would own the remaining 17.2%. Our principal executive offices are located at Evert van de Beekstraat 312, 1118 CX Schiphol Airport, The Netherlands, and our general telephone number is +31 20 655-9655. Our website address is www.aercap.com. Information contained on our website does not constitute a part of this prospectus. * * * Approximate date of commencement of proposed sale to the public. As soon as practicable after the Registration Statement becomes effective. If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission acting pursuant to said Section 8(a) may determine. Explanatory Note Regarding Our Aircraft Portfolio Unless otherwise noted or the context requires, all references in this prospectus to: "owned aircraft" refers to aircraft to which we hold legal title, aircraft to which we are the primary economic beneficiary, such as the aircraft legally owned by Aircraft Lease Securitisation Limited and other financing structures established by us, and aircraft owned by our consolidated joint ventures, all of which are reflected on our balance sheets; and "managed aircraft" refers to the aircraft owned by third parties and our non-consolidated financing structures and joint ventures. Managed aircraft also include the aircraft which we leased-in pursuant to operating leases from the owners of the aircraft and in turn subleased to commercial airlines. These aircraft are not reflected on our balance sheets. In this prospectus, unless otherwise specified, when we discuss our aircraft portfolio, we describe our owned and managed portfolio as of March 31, 2007. References to lease revenues from our aircraft portfolio are to our owned portfolio for the year ended December 31, 2006, the three months ended March 31, 2007 or other periods where indicated. The definitions above are intended to include, where the context requires, all relevant aircraft in the same categories in the future. References to the number of aircraft and engines we lease, buy, sell and have on order in this prospectus include our owned and managed aircraft and engines. Also, unless the context otherwise requires, all weighted average age percentages and weighted average lease terms of owned aircraft in this prospectus have been calculated using net book value. THE OFFERING Ordinary shares offered by the selling shareholders 20,000,000 shares Overallotment option 3,000,000 shares Total ordinary shares outstanding after the offering 85,036,957 shares Selling shareholders Four Luxembourg limited liability companies indirectly owned by funds and accounts affiliated with Cerberus and certain members of our senior management and of our Board of Directors. Use of proceeds We will not receive any of the proceeds from the sale of ordinary shares by the selling shareholders. Funds and accounts affiliated with Cerberus and certain members of our senior management and of our Board of Directors and an employee of Cerberus will receive all of the net proceeds from the sale of the ordinary shares being offered by the selling shareholders. See "Use of Proceeds". An affiliate of Lehman Brothers Inc. has a 2.7% participation interest in certain funds affiliated with Cerberus and will receive 2.7% of the proceeds received by such funds in this offering. See "Underwriting". Dividend Policy To date, we have not declared or paid any dividends on our ordinary shares. We intend to retain our future earnings to fund working capital and our growth and do not expect to pay dividends in the foreseeable future. See "Dividend Policy".
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in the ADSs discussed under Risk Factors before deciding whether to purchase the ADSs. Overview We are a leading independent insurance agency and brokerage company operating in China. With approximately 11,000 sales professionals and approximately 170 sales and service outlets operating in eight provinces as of September 30, 2007, our distribution network reaches some of China s most economically developed regions and some of the most affluent cities in China, such as Beijing, Shanghai, Guangzhou and Shenzhen. We began our insurance intermediary business in 1999 by distributing automobile insurance products and expanded our product offerings to other property and casualty insurance products in 2002. Our experience in the life insurance segment is more limited as we only began distributing individual life insurance products in January 2006. We intend to further broaden our service offerings by providing insurance claims adjusting services, such as assessment, survey, authentication and loss estimation, beginning in the fourth quarter of 2007. As an insurance agency and brokerage company, we do not assume underwriting risks. Instead, we distribute insurance products underwritten by domestic and foreign insurance companies operating in China, and provide certain insurance-related services, such as 24-hour emergency services in select cities, damage assessment and assistance with claim settlement, to our customers individuals and institutions that purchase insurance products through us. In addition, we also introduce customers to insurance companies, which then sell insurance products to them, either directly or through our affiliated insurance intermediaries. We are compensated for our services primarily by commissions and fees paid by insurance companies, typically based on a percentage of the premium paid by the insured. Commission and fee rates generally depend on the type of insurance products, the particular insurance company and the region in which the products are sold. As of the date of this prospectus, we have 21 affiliated insurance intermediaries in the PRC. Seventeen of them are insurance agencies, which act as agents of insurance companies when distributing insurance products to our customers, and the other four are insurance brokerages, which act on behalf of our customers in seeking insurance coverage from insurance companies. According to the Insurance Intermediary Market Development Reports published periodically by the CIRC, four of our affiliated insurance agencies ranked Nos. 3, 11, 14 and 20, respectively, among China s top 20 insurance agencies in terms of revenue, together accounting for 4.87% of the total revenue of all insurance agencies in China in the first half of 2007, while one of our affiliated insurance brokerages ranked No. 17 among China s top 20 insurance brokerages in terms of revenue, with 1.12% of the total revenue of all insurance brokerages in China for the same period. The independent insurance agency and brokerage sector in China is at an early stage of development and highly fragmented. We believe this offers substantial opportunities for further growth and consolidation. We intend to take advantage of these opportunities to increase our market share by aggressively expanding our distribution network through selective acquisitions, recruitment of experienced and entrepreneurial sales agents and franchising. In particular, we intend to devote significant resources to distributing life insurance products in order to benefit from the recurring fee income they generate and to better capture the significant opportunities presented by China s rapidly growing life insurance market. Our business has grown substantially in recent years. Our net revenues increased from RMB 34.0 million in 2004 to RMB 143.7 million in 2005 and to RMB 246.5 million (US$32.4 million) in 2006, representing a compounded annual growth rate, or CAGR, of 169.4% in the three-year period. Our net loss decreased from RMB92.7 million in 2004 to RMB6.7 million in 2005, and we achieved profitability in 2006 with a net income of RMB57.4 million (US$7.5 million). For the six months ended June 30, 2007, our net revenues and net income were RMB172.6 million (US$22.7 million) and RMB58.7 million (US$7.7 million), respectively, representing increases of 61.6% and 142.8%, respectively, from the net revenues and net income for the same period in 2006. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents Industry Background The Chinese insurance industry was the third largest in Asia and the 9th largest in the world by premium in 2006. The industry has grown substantially in recent years, with industry-wide insurance premiums increasing from RMB160.9 billion in 2000 to RMB492.8 billion (US$64.7 billion) in 2005, according to data published by the China Insurance Regulatory Commission, or the CIRC. Despite this substantial growth and scale, China s insurance penetration rates, which measure industry-wide insurance premiums as a percentage of GDP, were only 1.7% for life insurance and 1.0% for non-life insurance in 2006, compared to 4.0% and 4.8%, respectively, for the United States. These low penetration rates relative to those of developed economies suggest that China s insurance market has significant growth potential. We believe that continued economic growth and the aging of the Chinese population, among other factors, will drive the future growth of China s insurance industry. In particular, we expect that changing demographics will generate substantial demand for life insurance products. Within China s insurance industry, independent insurance agencies and brokerages are referred to as professional insurance intermediaries, to differentiate them from entities that distribute insurance products as an ancillary business, such as commercial banks, postal offices and automobile dealerships. The professional insurance intermediary sector in China has also grown significantly in recent years. According to data released by the CIRC, total insurance premiums generated by independent insurance agencies and brokerages increased 91.0% and 36.0%, respectively, from 2004 to 2005; 22.0% and 6.0%, respectively, from 2005 to 2006; and 44.1% and 21.4%, respectively, from the first half of 2006 to the first half of 2007. We believe that there will continue to be substantial growth opportunities in the professional insurance intermediary sector for the following reasons: China s insurance industry as a whole has significant growth potential; as competition among insurance companies intensifies, insurance companies will focus more on their core competencies and increasingly outsource part of the distribution of their products; an increasing number of international insurance companies are entering the Chinese market and they tend to outsource the distribution of their products because they seek to quickly penetrate the market but lack a distribution network and sales force of their own; as Chinese consumers become more sophisticated, they will increasingly seek a greater selection of insurance products and services from different insurance companies with the benefit of independent professional advice; and the favorable regulatory environment will benefit professional insurance intermediaries with potential to grow into nation-wide service providers. Despite rapid growth in recent years, the professional insurance intermediary sector in the PRC is still at an early stage of development and highly fragmented. According to the Insurance Intermediary Market Development Report for the first half of 2007 released by the CIRC, as of June 30, 2007 there were 1,688 insurance agencies and 318 insurance brokerages in the PRC. Our Strengths We believe the following competitive strengths contribute to our success and differentiate us from our competitors: leading position among professional insurance intermediaries in China; scalable unified operating platform; extensive customer reach through distribution network and customer database; attractive and differentiated performance-based entrepreneurial agent program; Income (loss) from operations (93,299 ) (6,459 ) 50,066 6,577 22,389 55,175 7,249 Other income (expense), net: Interest income 49 445 5,364 705 1,596 1,980 260 Interest expense (15 ) (19 ) (34 ) (5 ) (28 ) (66 ) (9 ) Others, net 158 (15 ) 5 1 10 15 Income (loss) from operations 3,741 5,500 (93,299 ) (6,459 ) 50,066 6,577 22,389 55,175 7,249 Other income (expense), net: Interest income 11 36 49 445 5,364 705 1,596 1,980 260 Interest expense (99 ) (5 ) (15 ) (19 ) (34 ) (5 ) (28 ) (66 ) (9 ) Others, net 8 0 158 (15 ) 5 1 10 15 Income (loss) from operations (93,299 ) (93.1 ) (6,459 ) * 50,066 6,577 22,389 146.4 55,175 7,249 Other income (expenses), net: Interest income 49 808.2 445 1,105.4 5,364 705 1,596 24.1 1,980 260 Interest expense (15 ) 26.7 (19 ) 78.9 (34 ) (5 ) (28 ) 135.7 (66 ) (9 ) Others, net 158 (109.5 ) (15 ) * 5 1 10 50.0 15 Income (loss) from operations (93,299 ) (6,459 ) 50,066 6,577 22,389 55,175 7,249 Other income (expense), net: Interest income 49 445 5,364 705 1,596 1,980 260 Interest expense (15 ) (19 ) (34 ) (5 ) (28 ) (66 ) (9 ) Others, net 158 (15 ) 5 1 10 15 AMENDMENT NO. 4 TO FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents dynamic product offerings; firm commitment to rigorous training and development; and experienced management team. Our Strategy Our goal is to become the largest independent insurance agency and brokerage company in China and further develop our nationwide distribution network while delivering superior long-term returns to our shareholders. To achieve this goal, we intend to capitalize on the growth potential of China s insurance industry and insurance intermediary sector, leverage our competitive strengths and pursue the following elements of our strategy: further expand into the fast-growing life-insurance sector while continuing to grow our property and casualty business; further expand our distribution network through selective acquisitions, recruitment of entrepreneurial agents and franchising; further improve our unified operating platform to support future growth; continue to strengthen our relationships with leading insurance companies; expand our product and service offerings to meet customer needs; and increase the use of new distribution channels. Our Challenges The successful execution of our strategies is subject to certain risks and uncertainties, including those relating to: our limited operating history, especially our limited experience in selling life insurance products; our ability to attract and retain productive agents, especially entrepreneurial agents; our ability to maintain existing and develop new business relationships with insurance companies; our ability to execute our growth strategy by successfully acquiring and integrating insurance agencies and brokerages; our ability to adapt to the evolving regulatory environment in the Chinese insurance industry; and our ability to compete effectively against insurance companies, professional insurance intermediaries and other entities that distribute insurance products. In addition to the above risks and uncertainties, you should also consider the risks discussed in Risk Factors and elsewhere in this prospectus. Our Corporate History and Structure Our founders, Mr. Yinan Hu and Mr. Qiuping Lai, formed two PRC companies, Guangzhou Nanyun Car Rental Services Co., Ltd. and Guangdong Nanfeng Automobile Association Co., Ltd., initially to provide automobile-related services, such as car rental and emergency services. In 1999, we began distributing automobile insurance products on an ancillary basis. In 2001, our founders transferred their interests in the two PRC companies to China United Financial Services Holdings Ltd, or China United Financial Services, then known as China Automobile Association Holdings Limited, a newly established British Virgin Islands company, CNINSURE INC. (Exact name of registrant as specified in its charter) Not Applicable (Translation of Registrant s name into English) Table of Contents as part of a series of transactions in which Cathay Capital Group, a private equity group, made an investment by subscribing for 40% of the equity interests in China United Financial Services. As part of its corporate restructuring to facilitate international fundraising, China United Financial Services incorporated CISG Holdings Ltd., or CISG, a British Virgin Islands company, in June 2004 as the holding company for its insurance agency and brokerage businesses and transferred to CISG all of its rights and interests in four PRC insurance intermediary companies it then controlled. In September 2004, Cathay Capital Group subscribed for approximately 27.8% of the equity interests in CISG. In December 2005, an entity affiliated with CDH, a private equity firm, subscribed for approximately 26.4% of the equity interests in CISG. In connection with this investment, the shareholders of CISG entered into a shareholder agreement that provided for, among other things, the management of the affairs of CISG. In anticipation of this offering, we incorporated CNinsure Inc. in the Cayman Islands in April 2007. In July 2007, CNinsure Inc., on a 10,000-for-one basis, issued its ordinary shares to then the existing shareholders of CISG in exchange for all of the outstanding CISG shares. After this restructuring transaction, CNinsure became our ultimate holding company. PRC laws and regulations place certain restrictions on foreign investment in and ownership of insurance agencies and brokerages. Accordingly, we conduct our operations in China principally through contractual arrangements among our PRC subsidiaries, the shareholders of two PRC affiliated entities, Guangdong Meidiya Investment Co., Ltd., or Meidiya Investment, and Sichuan Yihe Investment Co., Ltd., or Yihe Investment, and the subsidiaries of Meidiya Investment and Yihe Investment. Meidiya Investment and Yihe Investment together, directly or indirectly, hold equity interests ranging from 51% to 100% in 17 insurance agencies and four insurance brokerages. With the exception of the sole minority shareholder of Shenzhen Nanfeng Insurance Agency Co., Ltd., who is an executive officer of our company holding shares on our behalf, the other minority shareholders of the insurance agencies and brokerages majority-owned by Meidiya Investment and Yihe Investment are either founders of such company or entrepreneurial agents with whom we jointly set up such company. Most of those minority shareholders have been employed as managers and are in charge of the day-to-day operations of the insurance agencies and brokerages in which they hold minority interests. These subsidiaries of Meidiya Investment and Yihe Investment hold the licenses and permits necessary to conduct our insurance intermediary business in China. We have no equity interests in Meidiya Investment, Yihe Investment or any of their subsidiaries and rely entirely on contractual arrangements to control and derive economic benefit from these companies. Our contractual arrangements with the shareholders of Meidiya Investment and Yihe Investment and their subsidiaries enable us to: exercise effective control over Meidiya Investment, Yihe Investment and their subsidiaries; receive a substantial portion of the economic benefits of the subsidiaries of Meidiya Investment and Yihe Investment in consideration for the services provided by our subsidiaries in China; and have an exclusive option to purchase all or part of the equity interests in each of Meidiya Investment and Yihe Investment when and to the extent permitted by PRC law. As a result of these contractual arrangements, we are deemed the primary beneficiary of Meidiya Investment and Yihe Investment and hence treat them and their subsidiaries as our consolidated affiliated entities. Revenues generated by the insurance agency and brokerage subsidiaries of Meidiya Investment and Yihe Investment altogether accounted for 56.4% of our total net revenues in 2006 and 51.0% of our total net revenues for the first half of 2007. The remainder of our total net revenues in those periods came from two of our subsidiaries, which run our operating platform, maintain our customer database and provide information about potential customers to insurance companies. Those insurance companies pay fees to these subsidiaries if those customers actually purchase insurance. Total operating costs and expenses (29,561 ) (41,241 ) (38,816 ) (45,586 ) (47,873 ) (64,208 ) (46,515 ) (70,871 ) Income from operations 13,824 16,057 2,513 19,876 4,132 23,545 24,200 30,975 Other income (expenses), net: Interest income 20 384 898 698 1,964 1,804 1,027 953 Interest expense (6 ) (4 ) (26 ) (2 ) (2 ) (4 ) (22 ) (44 ) Others, net 2 (19 ) 8 2 (5 ) 11 Brand name Indefinite 1,427 Customer relationship 9.8 303 Non-compete agreement 3.8 230 Agency agreement 9.8 Cayman Islands 6411 Not Applicable (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 19/F, Yinhai Building No. 299 Yanjiang Zhong Road Guangzhou, Guangdong 510110 People s Republic of China (8620) 6122-2777 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Table of Contents See Corporate Structure for further information on our contractual arrangements with the shareholders of Meidiya Investment and Yihe Investment and their subsidiaries. The following diagram illustrates our corporate structure as of the date of this prospectus: CT Corporation System 111 Eighth Avenue New York, New York 10011 (212) 664-1666 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents Our Offices Our principal executive offices are located at 19/F, Yinhai Building, No. 299 Yanjiang Zhong Road, Guangzhou, Guangdong 510110, People s Republic of China. Our telephone number at this address is +86-20-6122-2777 and our fax number is +86-20-6122-2329. Our registered office in the Cayman Islands is c/o M&C Corporate Services Limited, P.O. Box 309 GT, Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands. Our telephone number at this address is +1-345-949-8066. Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website address is www.cninsure.net. The information contained on our website is not part of this prospectus. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011. Copies to: David T. Zhang, Esq. Latham & Watkins LLP 41st Floor, One Exchange Square 8 Connaught Place, Central Hong Kong (852) 2912-2503 Leiming Chen Simpson Thacher & Bartlett LLP 35th Floor, ICBC Tower 3 Garden Road, Central Hong Kong (852) 2514-7600 Table of Contents THE OFFERING American depositary shares offered: By us 9,650,000 ADSs By the selling shareholders 2,112,413 ADSs Total 11,762,413 ADSs Price per ADS We currently estimate that the initial public offering price will be between US$13.00 and US$15.00 per ADS. Over-allotment option We have granted a 30-day option (commencing from the date of this prospectus) to the underwriters to purchase up to an additional 1,764,360 ADSs to cover over-allotments. ADSs outstanding immediately after this offering 11,762,413 ADSs Ordinary shares outstanding immediately after this offering 877,210,526 shares The ADSs Each ADS represents 20 ordinary shares, par value US$0.001 per share. The depositary will hold the shares underlying your ADSs and you will have rights as provided in the deposit agreement. We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs, you agree to be bound by the deposit agreement as amended. To better understand the terms of the ADSs, you should carefully read the Description of American Depositary Shares section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus. Depositary JPMorgan Chase Bank, N.A. Dividend policy We have no plan to pay dividends on our ordinary shares. We plan to retain any earnings for use in the operation of our business and to fund future growth. Use of proceeds We intend to use the net proceeds from this offering as follows: up to US$60 million to fund acquisitions and establishment of joint ventures; up to US$40 million to fund enhancement of our service systems; and the balance to fund our working capital requirements. Approximate date of commencement of proposed sale to the public: If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Table of Contents See Use of Proceeds for more information. We will not receive any of the proceeds from the sale of ADSs by the selling shareholders. Nasdaq Global Market symbol CISG Lockup We, our directors and executive officers and all of our existing shareholders have agreed with the underwriters not to sell, transfer or dispose of any ADSs, ordinary shares or similar securities for a period of 180 days after the date of this prospectus. See Shares Eligible for Future Sale and Underwriters for more information.
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+Prospectus Summary 1 Risk Factors 7 Special Note Regarding Forward-Looking Statements 27 Use of Proceeds 28 Dividend Policy 28 Capitalization 29 Dilution 31 Selected Consolidated Financial Data 33 Management s Discussion and Analysis of Financial Condition and Results of Operations 35 Business 50 Government Contracting Process 66 Management 69 Certain Relationships and Related Party Transactions 80 Principal and Selling Stockholders 82 Description of Capital Stock 85 Shares Eligible for Future Sale 88 Underwriting 91 Legal Matters 96 Experts 96 Additional Information 96 Index to Financial Statements F-1 EXHIBIT 3.1 EXHIBIT 3.3 EXHIBIT 5.1 EXHIBIT 23.1 Table of Contents PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our financial statements and the related notes included in this prospectus and the information set forth under the headings Risk Factors and Management s Discussion and Analysis of Financial Condition and Results of Operations. In this prospectus, all references to AeroVironment, we, us and our refer to AeroVironment, Inc. and its subsidiaries, unless the context otherwise requires or where indicated. AEROVIRONMENT, INC. Overview We design, develop, produce and support a technologically-advanced portfolio of small unmanned aircraft systems that we supply primarily to organizations within the U.S. Department of Defense, and fast charge systems for electric industrial vehicle batteries that we supply to commercial customers. We derive the majority of our revenue from these two business areas, and we believe that both the small unmanned aircraft systems, or UAS, and fast charge markets are in the early stages of development and have significant growth potential. Additionally, we believe that some of the innovative potential products in our research and development pipeline will emerge as new growth platforms in the future, creating market opportunities. The success we have achieved with our current products stems from our ability to invent and deliver advanced solutions, utilizing our proprietary technologies, that help our government and commercial customers operate more effectively and efficiently. Our core technological capabilities, developed through 35 years of innovation, include lightweight aerostructures and electric propulsion systems, efficient electric energy systems and storage, high-density energy packaging, miniaturization, controls integration and systems engineering optimization. We helped to pioneer and are now a leader in the markets for small UAS and fast charge systems, and we have experienced annual revenue growth rates of 121% and 33% for the fiscal years ended April 30, 2005 and 2006, respectively, and a compound annual revenue growth rate of 71% for the three-year period ended April 30, 2006. Our small UAS are well positioned to support the transformational strategy of the U.S. Department of Defense, or DoD, the purpose of which is to convert the military into a smaller, more agile force that operates through a network of observation, communication and precision targeting technologies, and its efforts to prosecute the global war on terror, which have increased the need for real-time, visual information in new operational environments. Our small UAS, including Raven, Dragon Eye, Swift, Wasp and Puma, are designed to provide valuable intelligence, surveillance and reconnaissance, or ISR, directly to the small tactical unit, or individual warfighter level, thereby increasing flexibility in mission planning and execution. Our small unmanned aircraft wirelessly transmit critical live video and other information generated by their payload of electro-optical or infrared sensors, enabling the operator to view and capture images, during the day or at night, on a hand-held ground control unit. We also provide training by our highly-skilled instructors, who typically have extensive military experience, and continuous refurbishment and repair services for our products. We designed all of our small UAS to be man-portable, launchable by one person and operated through a hand-held control unit. Our small UAS are electrically powered, configured to carry electro-optical or infrared sensors, provide real-time situational awareness and intelligence, fly quietly at speeds reaching 50 miles per hour and travel up to 20 miles from their launch location on a modular, replaceable battery pack. These characteristics make them well suited for reconnaissance, surveillance, target acquisition and battle damage assessment operations. We believe that our small UAS capabilities, combined with our high level of service, logistical support and training, have enabled us to win both competitively bid U.S. military small UAS programs of record as of October 28, 2006. Table of Contents The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. Subject to Completion. Dated January 18, 2007. 6,700,000 Shares AeroVironment, Inc. Common Stock This is an initial public offering of shares of common stock of AeroVironment, Inc. AeroVironment, Inc. is offering 4,536,306 of the shares to be sold in the offering. The selling stockholders identified in this prospectus are offering an additional 2,163,694 shares. AeroVironment will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders. Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $14.00 and $16.00. AeroVironment has applied to have the common stock approved for listing on the Nasdaq Global Market under the symbol AVAV. See Risk Factors on page 7 to read about factors you should consider before buying shares of the common stock. Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. Per Share Total Initial public offering price $ $ Underwriting discount $ $ Proceeds, before expenses, to AeroVironment, Inc. $ $ Proceeds, before expenses, to the selling stockholders $ $ To the extent that the underwriters sell more than 6,700,000 shares of common stock, the underwriters have the option to purchase up to an additional 1,005,000 shares from the selling stockholders and AeroVironment, Inc. at the initial public offering price less the underwriting discount. The underwriters expect to deliver the shares against payment in New York, New York on , 2007. Goldman, Sachs Co. Friedman Billings Ramsey Jefferies Quarterdeck Raymond James Stifel Nicolaus Thomas Weisel Partners LLC Prospectus dated , 2007. Table of Contents Our PosiCharge products and services are designed to improve productivity and safety for operators of electric industrial vehicles, such as forklifts and airport ground support equipment, by improving battery and fleet management. In multi-shift fleet operations, traditional charging systems require users to exchange vehicle batteries throughout the day because these batteries discharge their energy through vehicle usage and there is insufficient vehicle downtime to recharge them during a shift. Changing these batteries, which can weigh as much as 3,500 pounds, requires labor time and dedicated battery changing rooms that consume valuable floor space. PosiCharge utilizes our proprietary technology in energy and battery management to recharge electric industrial vehicle batteries rapidly during regularly scheduled breaks or other times the vehicle is not in service, eliminating the costly and time-consuming process of removing and replacing the battery. PosiCharge is able to recharge a typical electric industrial vehicle battery up to six times faster than a conventional charger. Utilizing its current, voltage and temperature management capabilities, PosiCharge eliminates the need to cool batteries after normal charging, which can take up to eight hours, thereby allowing the vehicles to quickly return to operation after the charging process. These capabilities can also serve to enhance battery performance and lifespan. To date, PosiCharge fast charge systems have been purchased and installed by a diverse group of customers that includes Ford Motor Company, SYSCO Corporation, Southwest Airlines and IKEA. As of October 28, 2006, our PosiCharge fast charge systems serviced over 5,000 electric industrial vehicles. We estimate that approximately 1.0 million electric industrial vehicles currently operate in North America, including over 100,000 new vehicles that we estimate were shipped in 2005. Research and development activities are integral to our business, and we follow a disciplined approach to investing our resources to create new technologies and solutions. These activities are funded both externally by customers and internally. A fundamental part of this approach is a well-defined screening process that helps business managers identify commercial opportunities that support current or desired technological capabilities. Our UAS research and development activities focus specifically on creating capabilities that support our existing small UAS product portfolio as well as new UAS platforms. Our Energy Technology Center also engages in research and development in support of our existing product lines as well as to develop solutions for other markets such as renewable energy. For the fiscal year ended April 30, 2006, we generated revenue of $139.4 million, income from operations of $15.9 million and net income of $11.2 million. For the six months ended October 28, 2006, we generated revenue of $76.7 million, income from operations of $9.9 million and net income of $6.3 million. As of October 28, 2006, we had funded backlog of $69.5 million and estimated unfunded backlog of $491.5 million. Funded backlog consists of unfilled firm orders for which funding currently is appropriated to us under the contract by the customer, and unfunded backlog consists of the remaining potential order amounts under indefinite delivery indefinite quantity contracts. IDIQ contracts do not obligate the U.S. government to purchase goods or services. Our Strategy We intend to grow our business by maintaining leadership in the growing markets for small UAS and fast charge systems and by creating new products that enable us to enter and lead new markets. Key components of this strategy include the following: Expand our current solutions to existing and new customers. Our small UAS and PosiCharge products and services are leaders in their respective North American markets. We intend to increase the penetration of our small UAS products within the U.S. military, the militaries of allied nations and non-military U.S. customers. We believe that the increased use of our small UAS in the U.S. military will be a catalyst for increased demand by allied countries, and that our efforts to pursue new applications will help to create non-military opportunities. We similarly intend to increase the penetration of PosiCharge to existing and new customers in North America and globally. Early adopters of PosiCharge are now deploying it in additional Table of Contents Table of Contents facilities throughout their enterprises while its adoption is increasing among new customers and new industry segments, such as food and logistics. Deliver innovative solutions. Innovation is the primary driver of our growth. We plan to continue research and development efforts to enable us to satisfy our customers through better, more capable products and services, both in response to and in anticipation of their needs. We believe that by continuing to invest in research and development, we will continue to deliver innovative, new products that address market needs within and outside of our current target markets, enabling us to create new opportunities for growth. Foster our entrepreneurial culture and continue to attract, develop and retain highly-skilled personnel. We have created a corporate culture that encourages innovation and an entrepreneurial spirit, which helps to attract highly-skilled professionals. We intend to nurture this culture to encourage the development of the innovative, highly technical solutions that give us our competitive advantage. A core component of our culture is the demonstration of trust and integrity in all of our interactions, contributing to a positive work environment and engendering trust among our customers. Preserve our agility and flexibility. We are able to respond rapidly to evolving markets and deliver new products and system capabilities quickly, efficiently and affordably. We believe that this ability helps us to strengthen our relationships with customers. We intend to maintain our agility and flexibility, which we believe to be important sources of differentiation when we compete against larger and better-funded competitors. Our History Our company was founded by Dr. Paul B. MacCready, the Chairman of our board of directors and an internationally renowned innovator who was instrumental in creating our culture. For over 35 years, this culture has enabled us to attract and retain highly-motivated, talented employees and has established our reputation as an innovator. This reputation for innovation has been acknowledged through a variety of awards and special citations, including Oak Ridge National Laboratory s Small Business Innovator award in 2002, a Cool Companies award from Fortune Magazine in 2004, the World Technology Award for Energy in 2004, a Sustained Excellence by a Performer award in 2005 from the Defense Advanced Research Projects Agency, or DARPA, and Automotive News s PACE award in 2006. Corporate Information We were incorporated in California in July 1971 and reincorporated in Delaware in December 2006 in connection with this offering. Our principal executive offices are located at 181 W. Huntington Drive, Suite 202, Monrovia, California 91016, and our telephone number is (626) 357-9983. Our website address is http://www.avinc.com. The information on, or accessible through, our website is not part of this prospectus and should not be relied upon in determining whether to make an investment in our common stock. AeroVironment and PosiCharge are registered trademarks of AeroVironment, Inc. This prospectus also includes other registered and unregistered trademarks of AeroVironment, Inc. and other persons. You should carefully consider the information contained in the Risk Factors section of this prospectus beginning on page 7 before you decide to purchase our common stock. Table of Contents THE OFFERING Common stock offered by AeroVironment 4,536,306 shares Common stock offered by the selling stockholders 2,163,694 shares Common stock to be outstanding after this offering 18,156,483 shares Use of proceeds We intend to use the net proceeds from this offering for working capital and other general corporate purposes, including to finance research and development of new products, sales and marketing activities, opportunistic acquisitions and other capital expenditures. We will not receive any proceeds from the sale of shares by the selling stockholders. See Use of Proceeds for more information. Dividend policy We currently intend to retain all future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Proposed Nasdaq Global Market symbol AVAV The number of shares of common stock to be outstanding after this offering is based on shares outstanding as of October 28, 2006 and excludes the following: 3,515,029 shares of common stock issuable upon the exercise of options outstanding as of October 28, 2006 at a weighted average exercise price of $1.16 per share; and 3,684,157 shares of common stock reserved for future issuance under our 2006 equity incentive plan, which will become effective on the day prior to the day on which we become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, which we refer to herein as the Exchange Act. Except as otherwise indicated, all information in this prospectus assumes the following: no exercise by the underwriters of their option to purchase up to an additional 1,005,000 shares of common stock to cover over-allotments; no exercise of outstanding options after October 28, 2006; the filing of our amended and restated certificate of incorporation and amended and restated bylaws upon completion of this offering; and a 7.0378-for-one stock split of our common stock effected on January 18, 2007. Table of Contents SUMMARY CONSOLIDATED FINANCIAL DATA The following table provides a summary of our consolidated financial data for the periods indicated. The summary historical consolidated financial data for each of the fiscal years ended April 30, 2004, 2005 and 2006 have been derived from our audited consolidated financial statements. The summary historical consolidated financial data for the six months ended October 29, 2005 and October 28, 2006 have been derived from our unaudited consolidated financial statements. You should read this information together with our consolidated financial statements and related notes, Selected Consolidated Financial Data and Management s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this prospectus. Six Months Ended Fiscal Year Ended April 30, Oct. 29, Oct. 28, 2004 2005 2006 2005 2006 (Unaudited) (In thousands, except share and per share data) Consolidated Income Statement Data: Revenue $ 47,680 $ 105,155 $ 139,357 $ 73,301 $ 76,746 Cost of sales 33,122 58,549 82,598 44,484 46,990 Gross margin 14,558 46,606 56,759 28,817 29,756 Research and development 1,715 9,799 16,098 7,081 7,021 Selling, general and administrative 9,725 16,733 24,810 11,250 12,867 Income from operations 3,118 20,074 15,851 10,486 9,868 Interest income 2 61 333 63 353 Interest expense (90 ) (110 ) (127 ) (59 ) (6 ) Income before income taxes 3,030 20,025 16,057 10,490 10,215 Income tax expense 859 5,455 4,849 3,143 3,956 Net income $ 2,171 $ 14,570 $ 11,208 $ 7,347 $ 6,259 Earnings per common share(1): Basic $ 0.19 $ 1.15 $ 0.86 $ 0.57 $ 0.46 Diluted $ 0.18 $ 1.05 $ 0.75 $ 0.49 $ 0.40 Weighted average common shares outstanding(1): Basic 11,538,776 12,674,585 13,011,639 12,937,862 13,564,438 Diluted 12,094,178 13,847,223 14,873,651 14,865,776 15,528,435 Pro forma earnings per common share(1)(2): Basic $ 0.64 $ 0.35 Diluted $ 0.58 $ 0.31 Pro forma weighted average common shares outstanding(1)(2): Basic 17,547,945 18,100,744 Diluted 19,409,957 20,064,741 Table of Contents As of October 28, 2006 Actual As Adjusted(3) Consolidated Balance Sheet Data: (Unaudited, in thousands) Cash and cash equivalents $ 13,178 $ 75,459 Restricted cash(4) 389 389 Working capital 35,391 97,672 Total assets 63,875 126,156 Total liabilities 22,891 22,891 Total stockholders equity 40,984 103,265 (1) Earnings per common share and weighted average common shares outstanding give effect to a 7.0378-for-one split of our common stock effected on January 18, 2007. (2) Pro forma earnings per common share and pro forma weighted average common shares outstanding give effect to our sale of 4,536,306 shares of our common stock in connection with this offering, as if such transaction was completed on May 1, 2005. (3) The as adjusted consolidated balance sheet data reflect our receipt of estimated net proceeds from our sale of 4,536,306 shares of common stock that we are offering at an assumed public offering price of $15.00 per share (the midpoint of the range set forth on the cover page of this prospectus), after deducting estimated discounts and commissions and estimated offering expenses payable by us. (4) Restricted cash represents deposits with a bank to secure standby letters of credit established for the benefit of our customers. As of October 28, 2006, there were no claims against these letters of credit. Table of Contents RISK FACTORS Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in our common stock. If any of the following risks actually materializes, then our business, financial condition and results of operations would suffer. The trading price of our common stock could decline as a result of any of these risks, and you might lose all or part of your investment in our common stock. You should read the section entitled Special Note Regarding Forward-Looking Statements immediately following these risk factors for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this prospectus. Risks Related to Our Business We rely heavily on sales to the U.S. government, particularly to agencies of the Department of Defense. Historically, a significant portion of our total sales and substantially all of our small UAS sales have been to the U.S. government and its agencies. Sales to the U.S. government, either as a prime contractor or subcontractor, represented approximately 82% of our revenue for the fiscal year ended April 30, 2006. The U.S. Department of Defense, or DoD, our principal U.S. government customer, accounted for approximately 77% of our revenue for the fiscal year ended April 30, 2006. We believe that the success and growth of our business for the foreseeable future will continue to depend on our ability to win government contracts, in particular from the DoD. Many of our government customers are subject to budgetary constraints and our continued performance under these contracts, or award of additional contracts from these agencies, could be jeopardized by spending reductions or budget cutbacks at these agencies. The funding of U.S. government programs is uncertain and dependent on continued congressional appropriations and administrative allotment of funds based on an annual budgeting process. We cannot assure you that current levels of congressional funding for our products and services will continue. Furthermore, all of our contracts with the U.S. government are terminable by the U.S. government at will. A significant decline in government expenditures generally, or with respect to programs for which we provide products, could adversely affect our business and prospects. Our operating results may also be negatively impacted by other developments that affect these government programs generally, including the following: changes in government programs that are related to our products and services; adoption of new laws or regulations relating to government contracting or changes to existing laws or regulations; changes in political or public support for security and defense programs; delays or changes in the government appropriations process; uncertainties associated with the war on terror and other geo-political matters; and delays in the payment of our invoices by government payment offices. These developments and other factors could cause governmental agencies to reduce their purchases under existing contracts, to exercise their rights to terminate contracts at-will or to abstain from renewing contracts, any of which would cause our revenue to decline and could otherwise harm our business, financial condition and results of operations. Table of Contents Military transformation and operational levels in Afghanistan and Iraq may affect future procurement priorities and existing programs, which could limit demand for our unmanned aircraft systems. Following the end of the Cold War, the U.S. military began a transformation of its operational concepts, organizational structure and technologies in an effort to improve warfighting capabilities. The resulting shift in procurement priorities toward achieving these capabilities, together with the current high level of operational activity in Afghanistan and Iraq, have led to an increase in demand for our small UAS. We cannot predict whether current or future changes in priorities due to defense transformation or continuation of the current nature and magnitude of operations in Afghanistan and Iraq will afford new opportunities for our small UAS business in terms of existing, additional or replacement programs. Furthermore, we cannot predict whether or to what extent this defense transformation or current operational levels in Afghanistan or Iraq will continue. If defense transformation or operations in Afghanistan and Iraq cease or slow down, then our business, financial condition and results of operations could be harmed. We operate in evolving markets, which makes it difficult to evaluate our business and future prospects. Unmanned aircraft systems, fast charge systems and other energy technologies that we offer are sold in new and rapidly evolving markets. Accordingly, our business and future prospects are difficult to evaluate. We cannot accurately predict the extent to which demand for our products will increase, if at all. Prior to investing, you should consider the challenges, risks and uncertainties frequently encountered by companies in rapidly evolving markets. These challenges include our ability to do the following: generate sufficient revenue to maintain profitability; acquire and maintain market share; manage growth in our operations; develop and renew contracts; attract and retain additional engineers and other highly-qualified personnel; successfully develop and commercially market new products; adapt to new or changing policies and spending priorities of governments and government agencies; and access additional capital when required and on reasonable terms. If we fail to address these and other challenges, risks and uncertainties successfully, our business, results of operations and financial condition would be materially harmed. We face competition from other firms, many of which have substantially greater resources. The defense industry is highly competitive and generally characterized by intense competition to win contracts. Our current principal small UAS competitors include Advanced Ceramics Research, Inc., Applied Research Associates, Inc., Elbit Systems Ltd., L-3 Communications Holdings Inc. and Lockheed Martin Corporation. We do not view large UAS such as Northrop Grumman Corporation s Global Hawk, General Atomics, Inc. s Predator, The Boeing Company s ScanEagle and AAI Corporation s Shadow as direct competitors because they perform different missions and are not hand launched and controlled, although we cannot be certain that these platforms will not become direct competitors in the future. Some of these firms have substantially greater financial, management, research and marketing resources than we have. The primary direct competitors to our PosiCharge business are other fast charge suppliers, including Aker Wade Power Technologies LLC, Minit-Charger, a subsidiary of Edison International, and PowerDesigners, LLC, as well as industrial battery Table of Contents manufacturers who distribute fast charge systems from these suppliers. Our competitors may be able to provide customers with different or greater capabilities or benefits than we can provide in areas such as technical qualifications, past contract performance, geographic presence, price and the availability of key professional personnel, including those with security clearances. Furthermore, many of our competitors may be able to utilize their substantially greater resources and economies of scale to develop competing products and technologies, divert sales away from us by winning broader contracts or hire away our employees by offering more lucrative compensation packages. In the event that the market for unmanned aircraft systems, or UAS, expands, we expect that competition will intensify as additional competitors enter the market and current competitors expand their product lines. In order to secure contracts successfully when competing with larger, well-financed companies, we may be forced to agree to contractual terms that provide for lower aggregate payments to us over the life of the contract, which could adversely affect our margins. In addition, larger diversified competitors serving as prime contractors may be able to supply underlying products and services from affiliated entities, which would prevent us from competing for subcontracting opportunities on these contracts. Our failure to compete effectively with respect to any of these or other factors could have a material adverse effect on our business, prospects, financial condition or operating results. If the unmanned aircraft systems and fast charge systems markets do not experience significant growth, if we cannot expand our customer base or if our products do not achieve broad acceptance, then we will not be able to achieve our anticipated level of growth. For the fiscal year ended April 30, 2006, unmanned aircraft systems and fast charge systems accounted for 80% and 14% of our total revenue, respectively. We cannot accurately predict the future growth rates or sizes of these markets. Demand for these types of systems may not increase, or may decrease, either generally or in specific markets, for particular types of products or during particular time periods. Moreover, there are only a limited number of major programs under which the U.S. military, our primary customer, is currently funding the development or purchase of unmanned aircraft systems. Although we are seeking to expand our customer base to include foreign governments, domestic non-military agencies and commercial customers, we cannot assure you that our efforts will be successful. The expansion of the unmanned aircraft systems and fast charge systems markets in general, and the market for our products in particular, depends on a number of factors, including the following: customer satisfaction with these types of systems as solutions; the cost, performance and reliability of our products and products offered by our competitors; customer perceptions regarding the effectiveness and value of these types of systems; limitations on our ability to market our small UAS products outside the United States due to U.S. government regulations; obtaining timely regulatory approvals, including, with respect to our small UAS business, access to airspace and wireless spectrum; and marketing efforts and publicity regarding these types of systems. Even if unmanned aircraft systems and fast charge systems gain wide market acceptance, our products may not adequately address market requirements and may not continue to gain market acceptance. If these types of systems generally, or our products specifically, do not gain wide market acceptance, then we may not be able to achieve our anticipated level of growth and our revenue and results of operations would suffer. Table of Contents If critical components of our products that we currently purchase from a small number of suppliers or raw materials used to manufacture our products become scarce or unavailable, then we may incur delays in manufacturing and delivery of our products, which could damage our business. We obtain hardware components and various subsystems from a limited group of suppliers. We do not have long-term agreements with any of these suppliers that obligate them to continue to sell components or products to us. For example, L-3 Communications Holdings Inc., which is one of our competitors, and Rockwell Collins are currently the sole suppliers of our downlink transmitters/receivers and GPS modules, respectively, for several of our small UAS products, including Raven. In addition, Miller Electric is the sole supplier of the power sources for the PosiCharge ELT product line, and Bruno Bassi is the sole supplier of the PosiCharge SVS product line. We also have several sole suppliers of PosiCharge components and subsystems, such as Accurate Electronics, which supplies multiple items, including display panels and power stages. Our reliance on these suppliers involves significant risks and uncertainties, including whether our suppliers will provide an adequate supply of required components of sufficient quality, will increase prices for the components and will perform their obligations on a timely basis. In addition, certain raw materials and components used in the manufacture of our products are periodically subject to supply shortages, and our business is subject to the risk of price increases and periodic delays in delivery. For example, the airframes for our small UAS are made from certain nylon composites, which experienced restrictions in available supply in 2005 due to increased worldwide demand. Similarly, the market for electronic components is subject to cyclical reductions in supply. If we are unable to obtain components from third-party suppliers in the quantities and of the quality that we require, on a timely basis and at acceptable prices, then we may not be able to deliver our products on a timely or cost-effective basis to our customers, which could cause customers to terminate their contracts with us, increase our costs and seriously harm our business, results of operations and financial condition. Moreover, if any of our suppliers become financially unstable, then we may have to find new suppliers. It may take several months to locate alternative suppliers, if required, or to redesign our products to accommodate components from different suppliers. We may experience significant delays in manufacturing and shipping our products to customers and incur additional development, manufacturing and other costs to establish alternative sources of supply if we lose any of these sources or are required to redesign our products. We cannot predict if we will be able to obtain replacement components within the time frames that we require at an affordable cost, if at all. Any efforts to expand our product offerings beyond our current markets may not succeed, which could negatively impact our operating results. We have focused on selling our small unmanned aircraft systems to the U.S. military and our fast charge systems to large industrial electric vehicle fleet operators primarily in North America. We plan, however, to seek to expand our unmanned aircraft systems sales into other government and commercial markets and our fast charge systems sales into international markets. Efforts to expand our product offerings beyond the markets that we currently serve may divert management resources from existing operations and require us to commit significant financial resources to unproven businesses that may not generate additional sales, either of which could significantly impair our operating results. Our failure to obtain necessary regulatory approvals from the Federal Aviation Administration may prevent us from expanding the sales of our small UAS to non-military customers in the United States and require us to incur additional costs in the testing of our products. Regulations of the Federal Aviation Administration, or FAA, currently require that small UAS comply with the rules for radio-controlled hobby aircraft. These rules require small UAS to maintain flight altitude within 400 feet above the ground, and operators to maintain line of sight with the aircraft Table of Contents EXHIBIT INDEX Exhibit Number Description 1 .1* Form of Underwriting Agreement 3 .1 Certificate of Incorporation of AeroVironment, Inc., as currently in effect 3 .2* Form of Amended and Restated Certificate of Incorporation of AeroVironment, Inc., to be in effect upon completion of the offering 3 .3 Bylaws of AeroVironment, Inc., as currently in effect 3 .4* Form of Amended and Restated Bylaws of AeroVironment, Inc., to be in effect upon completion of the offering 4 .1* Form of AeroVironment, Inc. s Common Stock Certificate 4 .2* Voting Agreement, dated July 29, 2004, among AeroVironment, Inc., P. and J. MacCready Living Trust (Restated), Parker MacCready, Tyler MacCready, Marshall MacCready, the Whiting Family Limited Partnership and Timothy E. Conver 4 .3* Irrevocable Proxy, dated October 30, 2000, between W. Ray Morgan and AeroVironment, Inc. 4 .4* Proxy for Common Stock of AeroVironment, Inc., dated January 8, 1993, between Marshall MacCready and Paul B. MacCready 4 .5* Proxy for Common Stock of AeroVironment, Inc., dated January 14, 1993, between Tyler MacCready and Paul B. MacCready 4 .6* Proxy for Common Stock of AeroVironment, Inc., dated January 14, 1993, between Parker MacCready and Paul B. MacCready 5 .1 Opinion of Latham Watkins LLP 10 .1*# Form of Director and Executive Officer Indemnification Agreement 10 .2*# AeroVironment, Inc. Nonqualified Stock Option Plan 10 .3*# Form of Nonqualified Stock Option Agreement pursuant to the AeroVironment, Inc. Nonqualified Stock Option Plan 10 .4*# AeroVironment, Inc. Directors Nonqualified Stock Option Plan 10 .5*# Form of Directors Nonqualified Stock Option Agreement pursuant to the AeroVironment, Inc. Directors Nonqualified Stock Option Plan 10 .6*# AeroVironment, Inc. 2002 Equity Incentive Plan 10 .7*# Form of AeroVironment, Inc. 2002 Equity Incentive Plan Stock Option Agreement 10 .8*# AeroVironment, Inc. 2006 Equity Incentive Plan 10 .9*# Form of Stock Option Agreement pursuant to the AeroVironment, Inc. 2006 Equity Incentive Plan 10 .10*# Form of Performance Based Bonus Award pursuant to the AeroVironment, Inc. 2006 Equity Incentive Plan 10 .11*# AeroVironment, Inc. Supplemental Executive Retirement Plan, dated May 19, 2005 10 .12* Sublease Agreement, dated February 17, 2005, among AeroVironment, Inc., L-3 Communications Corporation and Thermotrex Corporation, for the property located at 900 Enchanted Way, Simi Valley, California 93065 10 .13* Standard Industrial/Commercial Single-Tenant Lease, dated August 8, 2005, between AeroVironment, Inc. and FKT Associates, for the property located at 1960 Walker Ave., Monrovia, California 91016 10 .14* Business Loan Agreement, dated June 16, 2005, between AeroVironment, Inc. and California Bank Trust 10 .15* AV Direct Project Request, dated July 7, 2005, between AeroVironment, Inc. and Marine Corps System Command 10 .16* Award Contract, dated December 22, 2005, between AeroVironment, Inc. and Marine Corps System Command 10 .17* Award Contract, dated August 15, 2005, between AeroVironment, Inc. and U.S. Army Aviation Missile Command 10 .18* Award Contract, dated September 21, 2004, between AeroVironment, Inc. and Natick Contracting Division Table of Contents at all times it is in flight. These regulations prevent or inhibit the use of our small UAS in certain civil and commercial applications. The FAA is in the process of drafting updated regulations specifically for small UAS operations, but we cannot assure you that these regulations will allow the use of our small UAS by potential civilian and commercial customers. If the FAA does not modify its regulations to enable the civilian and commercial use of small UAS, we may not be able to expand our sales of UAS beyond our military customers, which could harm our business prospects. Recently, the Defense Contract Management Agency, or DCMA, informed us that, under the terms of our DoD contracts, the government parties with whom we are contracting are required to obtain a certificate of authorization for flight tests of our small UAS outside of military installations. If our DoD customers are unable to obtain such a certificate, we may not be able to perform our flight tests without incurring the additional costs of transporting our small UAS products to military installations, which could impair our operating results. The markets in which we compete are characterized by rapid technological change, which requires us to develop new products and product enhancements, and could render our existing products obsolete. Continuing technological changes in the market for our products could make our products less competitive or obsolete, either generally or for particular applications. Our future success will depend upon our ability to develop and introduce a variety of new capabilities and enhancements to our existing product offerings, as well as introduce a variety of new product offerings, to address the changing needs of the markets in which we offer our products. Delays in introducing new products and enhancements, the failure to choose correctly among technical alternatives or the failure to offer innovative products or enhancements at competitive prices may cause existing and potential customers to purchase our competitors products. If we are unable to devote adequate resources to develop new products or cannot otherwise successfully develop new products or enhancements that meet customer requirements on a timely basis, our products could lose market share, our revenue and profits could decline, and we could experience operating losses. We expect to incur substantial research and development costs and devote significant resources to identifying and commercializing new products, which could significantly reduce our profitability and may never result in revenue to us. Our future growth depends on penetrating new markets, adapting existing products to new applications, and introducing new products that achieve market acceptance. We plan to incur substantial research and development costs as part of our efforts to design, develop and commercialize new products and enhance existing products. We spent $16.1 million, or 12% of our revenue, in fiscal year 2006 on research and development activities and expect to continue to spend significant funds on research and development in the future. We expect to utilize a portion of the proceeds of this offering and cash flow from operations to fund our research and development, although we may also utilize borrowings or other external funding in the future. Because we account for research and development as an operating expense, these expenditures will adversely affect our earnings in the future. Further, our research and development program may not produce successful results, and our new products may not achieve market acceptance, create additional revenue or become profitable, which could materially harm our business, prospects, financial results and liquidity. If we are unable to manage our growth, our business could be adversely affected. Our headcount and operations have grown rapidly. This rapid growth has placed, and will continue to place, a significant strain on our management and our administrative, operational and financial infrastructure. From January 2004 through October 2006, we nearly doubled the number of our employees. We anticipate further growth of headcount and facilities will be required to address Table of Contents increases in our product offerings and the geographic scope of our customer base. Our success will depend in part upon the ability of our senior management to manage this growth effectively. To do so, we must continue to hire, train, manage and integrate a significant number of qualified managers and engineers. If our new employees perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or retaining these or our existing employees, then our business may suffer. For us to continue our growth, we must continue to improve our operational, financial and management information systems. If we are unable to manage our growth while maintaining our quality of service, or if new systems that we implement to assist in managing our growth do not produce the expected benefits, then our business, prospects, financial condition or operating results could be adversely affected. Our earnings and profit margins may decrease based on the mix of our contracts and programs and other factors related to our contracts. In general, we perform our production work under fixed-price contracts and our repair and customer-funded research and development work under cost-plus-fee contracts. Under fixed-price contracts, we perform services under a contract at a stipulated price. Under cost-plus-fee contracts, which are subject to a contract ceiling amount, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance based. We typically experience lower profit margins under cost-plus-fee contracts than under fixed-price contracts, though fixed-price contracts have higher risks. In general, if the volume of services we perform under cost-plus-fee contracts increases relative to the volume of services we perform under fixed-price contracts, we expect that our operating margin will suffer. In addition, our earnings and margins may decrease depending on the costs we incur in contract performance, our achievement of other contract performance objectives and the stage of our performance at which our right to receive fees, particularly under incentive and award fee contracts, is finally determined. Our senior management and key employees are important to our customer relationships and overall business. We believe that our success depends in part on the continued contributions of our senior management and key employees. We rely on our executive officers, senior management and key employees to generate business and execute programs successfully. In addition, the relationships and reputation that members of our management team and key employees have established and maintain with government defense personnel contribute to our ability to maintain good customer relations and to identify new business opportunities. We do not have employment agreements with any of our executive officers or key employees, and these individuals could terminate their employment with us at any time. The loss of any of our executive officers, members of our senior management team or key employees could significantly delay or prevent the achievement of our business objectives and could materially harm our business and customer relationships and impair our ability to identify and secure new contracts and otherwise manage our business. We must recruit and retain highly-skilled employees to succeed in our competitive business. We depend on our ability to recruit and retain employees who have advanced engineering and technical services skills and who work well with our customers. These employees are in great demand and are likely to remain a limited resource in the foreseeable future. If we are unable to recruit and retain a sufficient number of these employees, then our ability to maintain our competitiveness and grow our business could be negatively affected. In addition, because of the highly technical nature of our products, the loss of any significant number of our existing engineering personnel could have a material adverse effect on our business and operating results. Moreover, some of our U.S. government contracts contain provisions requiring us to staff a program with certain personnel the customer Table of Contents considers key to our successful performance under the contract. In the event we are unable to provide these key personnel or acceptable substitutes, the customer may terminate the contract. Our business may be dependent upon our employees obtaining and maintaining required security clearances. Certain of our U.S. government contracts require our employees to maintain various levels of security clearances, and we are required to maintain certain facility security clearances complying with DoD requirements. The DoD has strict security clearance requirements for personnel who work on classified programs. Obtaining and maintaining security clearances for employees involves a lengthy process, and it is difficult to identify, recruit and retain employees who already hold security clearances. If our employees are unable to obtain security clearances in a timely manner, or at all, or if our employees who hold security clearances are unable to maintain the clearances or terminate employment with us, then a customer requiring classified work could terminate the contract or decide not to renew it upon its expiration. In addition, we expect that many of the contracts on which we will bid will require us to demonstrate our ability to obtain facility security clearances and employ personnel with specified types of security clearances. To the extent we are not able to obtain facility security clearances or engage employees with the required security clearances for a particular contract, we may not be able to bid on or win new contracts, or effectively rebid on expiring contracts. Cost overruns on our contracts could subject us to losses, decrease our operating margins and adversely affect our future business. Fixed-price contracts represented approximately 69% of our revenue for the fiscal year ended April 30, 2006. If we fail to anticipate technical problems, estimate costs accurately or control costs during our performance of fixed-price contracts, then we may incur losses on these contracts because we absorb any costs in excess of the fixed price. Under cost-plus-fee contracts, if costs exceed the contract ceiling or are not allowable under the provisions of the contract or applicable regulations, then we may not be able to obtain reimbursement for all such costs. Under time and materials contracts, we are paid for labor at negotiated hourly billing rates and for certain expenses. Under each type of contract, if we are unable to control the costs we incur in performing under the contract, then our financial condition and results of operations could be materially adversely affected. Cost overruns also may adversely affect our ability to sustain existing programs and obtain future contract awards. Our products are complex and could have unknown defects or errors, which may give rise to claims against us, diminish our brand or divert our resources from other purposes. Our unmanned aircraft systems rely on complex avionics, sensors, user-friendly interfaces and tightly-integrated, electromechanical designs to accomplish their missions, and our fast charge systems and energy systems often rely upon the application of intellectual property for which there may have been little or no prior commercial application. Despite testing, our products have contained defects and errors and may in the future contain defects, errors or performance problems when first introduced, when new versions or enhancements are released, or even after these products have been used by our customers for a period of time. These problems could result in expensive and time-consuming design modifications or warranty charges, delays in the introduction of new products or enhancements, significant increases in our service and maintenance costs, exposure to liability for damages, damaged customer relationships and harm to our reputation, any of which could materially harm our results of operations and ability to achieve market acceptance. In addition, increased development and warranty costs could be substantial and could reduce our operating margins. The existence of any defects, errors, or failures in our products or the misuse of our products could also lead to product liability claims or lawsuits against us. A defect, error or failure in one of our unmanned aircraft systems could result in injury, death or property damage and significantly damage our reputation and support for unmanned aircraft systems in general. While our fast charge systems include certain safety mechanisms, these systems can deliver up to 600 amps of current in their Table of Contents application, and the failure, malfunction or misuse of these systems could result in injury or death. Although we maintain insurance policies, we cannot assure you that this insurance will be adequate to protect us from all material judgments and expenses related to potential future claims or that these levels of insurance will be available in the future at economical prices or at all. A successful product liability claim could result in substantial cost to us. Even if we are fully insured as it relates to a claim, the claim could nevertheless diminish our brand and divert management s attention and resources, which could have a negative impact on our business, financial condition and results of operations. The operation of unmanned aircraft systems in urban environments may be subject to risks, such as accidental collisions and transmission interference, which may limit demand for our unmanned aircraft systems in such environments and harm our business and operating results. Urban environments may present certain challenges to the operators of unmanned aircraft systems. Unmanned aircraft systems may accidentally collide with other aircraft, persons or property, which could result in injury, death or property damage and significantly damage the reputation of and support for unmanned aircraft systems in general. While we are aware of only one instance of an accidental collision involving an unmanned aircraft system to date, as the usage of unmanned aircraft systems has increased, particularly by military customers in urban areas of Afghanistan and Iraq, the danger of such collisions has increased. Furthermore, the number of unmanned aircraft systems that can operate simultaneously in a given geographic area is limited by the allocated frequency spectrum available. In addition, obstructions to effective transmissions in urban environments, such as large buildings, may limit the ability of the operator to utilize the aircraft for its intended purpose. The risks or limitations of operating unmanned aircraft systems in urban environments may limit their value in such environments, which may limit demand for our unmanned aircraft systems and consequently materially harm our business and operating results. Our quarterly operating results may vary widely. Our quarterly revenue, cash flow and operating results have and may continue to fluctuate significantly in the future due to a number of factors, including the following: fluctuations in revenue derived from government contracts, including cost-plus-fee contracts and contracts with a performance-based fee structure; the size and timing of orders from military and other governmental agencies, including increased purchase requests from government customers for equipment and materials in connection with the U.S. government s fiscal year end, which may affect our second quarter operating results; the mix of products that we sell in the period; seasonal fluctuations in customer demand for some of our products or services; unanticipated costs incurred in the introduction of new products; fluctuations in the adoption of our products in new markets; changes in the level of tax credits available for research and development spending; cancellations, delays or contract amendments by our governmental agency customers; and changes in policy or budgetary measures that adversely affect our governmental agency customers. Changes in the volume of products and services provided under existing contracts and the number of contracts commenced, completed or terminated during any quarter may cause significant Table of Contents variations in our cash flow from operations because a relatively large amount of our expenses are fixed. We incur significant operating expenses during the start-up and early stages of large contracts and typically do not receive corresponding payments in that same quarter. We may also incur significant or unanticipated expenses when contracts expire or are terminated or are not renewed. In addition, payments due to us from government agencies may be delayed due to billing cycles or as a result of failures of governmental budgets to gain congressional and presidential administration approval in a timely manner. Shortfalls in available external research and development funding could adversely affect us. We depend on our research and development activities to develop the core technologies used in our small UAS and PosiCharge products and for the development of our future products. A portion of our research and development activities depends on funding by commercial companies and the U.S. government. U.S. government and commercial spending levels can be impacted by a number of variables, including general economic conditions, specific companies financial performance and competition for U.S. government funding with other U.S. government-sponsored programs in the budget formulation and appropriation processes. Moreover, the U.S., state and local governments provide energy rebates and incentives to commercial companies, which directly impact the amount of research and development that companies appropriate for energy systems. To the extent that these energy rebates and incentives are reduced or eliminated, company funding for research and development could be reduced. Any reductions in available research and development funding could harm our business, financial condition and operating results. Volatility and cyclicality in the market for electric industrial vehicles could adversely affect us. Our PosiCharge fast charge systems, which accounted for 14% of our revenue during the fiscal year ended April 30, 2006, are purchased primarily by operators of fleets of electric industrial vehicles, such as forklift trucks and airport ground support equipment. Consequently, our ability to remain profitable depends in part on the varying conditions in the market for electric industrial vehicles. This market is subject to volatility as it moves in response to cycles in the overall business environment and is also particularly sensitive to the industrial, food and beverage, retail and air travel sectors, which generate a significant portion of the demand for such vehicles. Sales of electric industrial vehicles have historically been cyclical, with demand affected by such economic factors as industrial production, construction levels, demand for consumer and durable goods, interest rates and fuel costs. A significant decline in demand for electric industrial vehicles could adversely affect our revenue and prospects, which would harm our business, financial condition and operating results. Our fast charge business is dependent upon our relationships with battery dealers and other third parties with whom we do not have exclusive arrangements. To remain competitive in the market for fast charge systems, we must maintain our access to potential customers and ensure that the service needs of our customers are met adequately. In many cases, we rely on battery dealers for access to potential PosiCharge customers. Currently, one of our fast charge system competitors is working with a battery manufacturer to sell fast charge systems and batteries together. Cooperative agreements between our competitors and battery manufacturers could restrict our access to battery dealers and potential PosiCharge customers, adversely affecting our revenue and prospects. Additionally, we rely on outside service providers to perform post-sale services for our PosiCharge customers. If these service providers fail to perform these services as required or discontinue their business with us, then we could lose customers to competitors, which would harm our business, financial condition and operating results. Table of Contents We work in international locations where there are high security risks, which could result in harm to our employees and contractors or substantial costs. Some of our services are performed in high-risk locations, such as Iraq and Afghanistan, where the country or location is suffering from political, social or economic issues, or war or civil unrest. For example, we currently maintain a forward operating depot in Iraq, located in a U.S. government installation and typically staffed by two or three of our employees. In addition, we have occasionally had one trainer stationed in Kuwait and are obligated, pursuant to one of our contracts, to provide overseas support personnel as needed. Last year, pursuant to this contract, we had three trainers stationed overseas for a period of 30 days. In those locations where we have employees or operations, we may incur substantial costs to maintain the safety of our personnel. Despite these precautions, the safety of our personnel in these locations may continue to be at risk, and we may in the future suffer the loss of employees and contractors, which could harm our business and operating results. We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders. We operate in emerging and rapidly evolving markets, which makes our prospects difficult to evaluate. It is possible that we may not generate sufficient cash flow from operations or otherwise have the capital resources to meet our future capital needs. If this occurs, then we may need additional financing to pursue our business strategies, including to: hire additional engineers and other personnel; develop new or enhance existing products; enhance our operating infrastructure; fund working capital requirements; acquire complementary businesses or technologies; or otherwise respond to competitive pressures. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders, including those acquiring shares in this offering. We cannot assure you that additional financing will be available on terms favorable to us, or at all. Our existing line of credit contains, and future debt financing may contain, covenants or other provisions that limit our operational or financial flexibility. In addition, certain of our customers require that we obtain letters of credit to support our obligations under some of our contracts. Our existing letter-of-credit provider requires that we hold cash in an amount equal to the amount of our outstanding letters of credit as collateral. Continued access to letters of credit may be important to our ability to regain and win contracts in the future. If adequate funds are not available or are not available on acceptable terms, if and when needed, then our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our products, or otherwise respond to competitive pressures would be significantly limited. Our international business poses potentially greater risks than our domestic business. We derived an average of 3.7% of our revenue from international sales during the three fiscal years ended April 30, 2006, and in the six months ended October 28, 2006, we derived 7.6% of our revenue from international sales. We expect to derive an increasing portion of our revenue from international sales. Our international revenue and operations are subject to a number of material risks, including the following: the unavailability of, or difficulties in obtaining any, necessary governmental authorizations for the export of our UAS products to certain foreign jurisdictions; Table of Contents changes in regulatory requirements that may adversely affect our ability to sell certain products or repatriate profits to the United States; the complexity and necessity of using foreign representatives and consultants; difficulties in enforcing agreements and collecting receivables through foreign legal systems and other relevant legal issues, including fewer legal protections for intellectual property; potential fluctuations in foreign economies and in the value of foreign currencies and interest rates; potential preferences by prospective customers to purchase from local (non-U.S.) sources; general economic and political conditions in the markets in which we operate; laws or regulations relating to non-U.S. military contracts that favor purchases from non-U.S. manufacturers over U.S. manufacturers; the imposition of tariffs, embargoes, export controls and other trade restrictions; and different and changing legal and regulatory requirements in the jurisdictions in which we currently operate or may operate in the future. Negative developments in any of these areas in one or more countries could result in a reduction in demand for our products, the cancellation or delay of orders already placed, threats to our intellectual property, difficulty in collecting receivables and a higher cost of doing business, any of which could negatively impact our business, financial condition or results of operations. Moreover, our sales, including sales to customers outside the United States, are denominated in dollars, and downward fluctuations in the value of foreign currencies relative to the U.S. dollar may make our products more expensive than other products, which could harm our business. Potential future acquisitions could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and impair our financial results. We intend to consider strategic acquisitions that would add to our customer base, technological capabilities or system offerings. Acquisitions involve numerous risks, any of which could harm our business, including the following: difficulties in integrating the operations, technologies, products, existing contracts, accounting and personnel of the target company and realizing the anticipated synergies of the combined businesses; difficulties in supporting and transitioning customers, if any, of the target company; diversion of financial and management resources from existing operations; the price we pay or other resources that we devote may exceed the value we realize, or the value we could have realized if we had allocated the purchase price or other resources to another opportunity; risks of entering new markets in which we have limited or no experience; potential loss of key employees, customers and strategic alliances from either our current business or the target company s business; assumption of unanticipated problems or latent liabilities, such as problems with the quality of the target company s products; and inability to generate sufficient revenue to offset acquisition costs. Acquisitions also frequently result in the recording of goodwill and other intangible assets which are subject to potential impairments in the future that could harm our financial results. In addition, if Table of Contents we finance acquisitions by issuing equity, or securities convertible into equity, then our existing stockholders may be diluted, which could lower the market price of our common stock. If we finance acquisitions through debt, then such future debt financing may contain covenants or other provisions that limit our operational or financial flexibility. As a result, if we fail to properly evaluate acquisitions or investments, then we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in excess of what we anticipate. The failure to successfully evaluate and execute acquisitions or investments or otherwise adequately address these risks could materially harm our business and financial results. Environmental laws and regulations and unforeseen costs could impact our future earnings. The manufacture and sale of our products in certain states and countries may subject us to environmental and other regulations. For example, we obtain a significant number of our electronics components from companies located in East Asia, where environmental rules may be less stringent than in the United States. Over time, the countries where these companies are located may adopt more stringent environmental regulations, resulting in an increase in our manufacturing costs. Furthermore, certain environmental laws, including the U.S. Comprehensive, Environmental Response, Compensation and Liability Act of 1980, impose strict, joint and several liability on current and previous owners or operators of real property for the cost of removal or remediation of hazardous substances and impose liability for damages to natural resources. These laws often impose liability even if the owner or operator did not know of, or was not responsible for, the release of such hazardous substances. These environmental laws also assess liability on persons who arrange for hazardous substances to be sent to disposal or treatment facilities when such facilities are found to be contaminated. Such persons can be responsible for cleanup costs even if they never owned or operated the contaminated facility. Although we have not yet been named a responsible party at a contaminated site, we could be named a potentially responsible party in the future. We cannot assure you that such existing laws or future laws will not have a material adverse effect on our future earnings or results of operations. Our business and operations are subject to the risks of earthquakes and other natural catastrophic events. Our corporate headquarters, research and development and manufacturing operations are located in Southern California, a region known for seismic activity and wild fires. A significant natural disaster, such as an earthquake, fire or other catastrophic event, could severely affect our ability to conduct normal business operations, and as a result, our future operating results could be materially and adversely affected. Risks Related to Our U.S. Government Contracts We are subject to extensive government regulation, and our failure to comply with applicable regulations could subject us to penalties that may restrict our ability to conduct our business. As a contractor to the U.S. government, we are subject to and must comply with various government regulations that impact our revenue, operating costs, profit margins and the internal organization and operation of our business. The most significant regulations and regulatory authorities affecting our business include the following: the Federal Acquisition Regulations and supplemental agency regulations, which comprehensively regulate the formation and administration of, and performance under, U.S. government contracts; the Truth in Negotiations Act, which requires certification and disclosure of all factual cost and pricing data in connection with contract negotiations; Table of Contents the Foreign Corrupt Practices Act, which prohibits U.S. companies from providing anything of value to a foreign official to help obtain, retain or direct business, or obtain any unfair advantage; the False Claims Act and the False Statements Act, which impose penalties for payments made on the basis of false facts provided to the government and on the basis of false statements made to the government, respectively; the National Telecommunications and Information Administration and the Federal Communications Commission, which regulate the wireless spectrum allocations upon which UAS depend for operation and data transmission in the United States; the Federal Aviation Administration, which is in the process of drafting regulations specifically for small UAS operation in the United States; the International Traffic in Arms Regulations, which regulate the export of controlled technical data, defense articles and defense services and restrict from which countries we may purchase materials and services used in the production of certain of our products; and laws, regulations and executive orders restricting the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data. Also, we need special security clearances and regulatory approvals to continue working on certain of our projects with the U.S. government. Classified programs generally will require that we comply with various executive orders, federal laws and regulations and customer security requirements that may include restrictions on how we develop, store, protect and share information, and may require our employees to obtain government security clearances. Our failure to comply with applicable regulations, rules and approvals or misconduct by any of our employees could result in the imposition of fines and penalties, the loss of security clearances, the loss of our government contracts or our suspension or debarment from contracting with the U.S. government generally, any of which would harm our business, financial condition and results of operations. We are also subject to certain regulations of comparable government agencies in other countries, and our failure to comply with these non-U.S. regulations could also harm our business, financial condition or results of operations. Our business could be adversely affected by a negative audit by the U.S. government. U.S. government agencies, primarily the Defense Contract Audit Agency and the Defense Contract Management Agency, routinely audit and investigate government contractors. These agencies review a contractor s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. These agencies also may review the adequacy of, and a contractor s compliance with, its internal control systems and policies, including the contractor s purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed, while such costs already reimbursed must be refunded. If an audit of our business were to uncover improper or illegal activities, then we could be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. government. In addition, we could suffer serious harm to our reputation if allegations of impropriety or illegal acts were made against us, even if the allegations were inaccurate. If any of the foregoing were to occur, our financial condition and operating results could be materially adversely affected. We were recently audited by the DCMA with respect to our system for the care, control and accountability of government property. The DCMA identified certain corrective actions to be taken with respect to our system, which we have implemented. Although we successfully implemented these corrective actions, we cannot assure you that the DCMA will not require additional corrective actions in the future. The failure to comply with requirements for government contractors in the future would Table of Contents adversely affect our ability to do business with the U.S. government and could harm our business and operating results. Some of our contracts with the U.S. government allow it to use inventions developed under the contracts and to disclose technical data to third parties, which could harm our ability to compete. Some of our contracts allow the U.S. government to use, royalty-free, or have others use, inventions developed under those contracts on behalf of the government. Some of the contracts allow the federal government to disclose technical data without constraining the recipient on how those data are used. The ability of third parties to use patents and technical data for government purposes creates the possibility that the government could attempt to establish alternative suppliers or to negotiate with us to reduce our prices. The potential that the government may release some of the technical data without constraint creates the possibility that third parties may be able to use this data to compete with us, which could have a material adverse effect on our business, results of operations or financial condition. U.S. government contracts are generally not fully funded at inception and contain certain provisions that may be unfavorable to us, which could prevent us from realizing our contract backlog and materially harm our business and results of operations. DoD contracts typically involve long lead times for design and development, and are subject to significant changes in contract scheduling. Congress generally appropriates funds on a fiscal year basis even though a program may continue for several years. Consequently, programs are often only partially funded initially, and additional funds are committed only as Congress makes further appropriations. The termination or reduction of funding for a government program would result in a loss of anticipated future revenue attributable to that program. As of October 28, 2006, we had funded U.S. government contract backlog of $64.0 million and estimated unfunded U.S. government contract backlog of $491.5 million. The actual receipt of revenue on awards included in backlog may never occur or may change because a program schedule could change or the program could be canceled, or a contract could be reduced, modified or terminated early. In addition, U.S. government contracts generally contain provisions permitting termination, in whole or in part, at the government s convenience or for contractor default. Since a substantial majority of our revenue is dependent on the procurement, performance and payment under our U.S. government contracts, the termination of one or more critical government contracts could have a negative impact on our results of operations and financial condition. Termination arising out of our default could expose us to liability and have a material adverse effect on our ability to re-compete for future contracts and orders. Moreover, several of our contracts with the U.S. government do not contain a limitation of liability provision, creating a risk of responsibility for indirect, incidental damages and consequential damages. These provisions could cause substantial liability for us, especially given the use to which our products may be put. U.S. government contracts are subject to a competitive bidding process that can consume significant resources without generating any revenue. U.S. government contracts are frequently awarded only after formal, protracted competitive bidding processes and, in many cases, unsuccessful bidders for U.S. government contracts are provided the opportunity to protest contract awards through various agency, administrative and judicial channels. We derive significant revenue from U.S. government contracts that were awarded through a competitive bidding process. Much of the UAS business that we expect to seek in the foreseeable Table of Contents future likely will be awarded through competitive bidding. Competitive bidding presents a number of risks, including the following: the need to bid on programs in advance of the completion of their design, which may result in unforeseen technological difficulties and cost overruns; the substantial cost and managerial time and effort that must be spent to prepare bids and proposals for contracts that may not be awarded to us; the need to estimate accurately the resources and cost structure that will be required to service any contract we are awarded; and the expense and delay that may arise if our competitors protest or challenge contract awards made to us pursuant to competitive bidding, and the risk that any such protest or challenge could result in the delay of our contract performance, the distraction of management, the resubmission of bids on modified specifications, or in termination, reduction or modification of the awarded contract. We may not be provided the opportunity to bid on contracts that are held by other companies and are scheduled to expire if the government extends the existing contract. If we are unable to win particular contracts that are awarded through a competitive bidding process, then we may not be able to operate in the market for goods and services that are provided under those contracts for a number of years. If we are unable to win new contract awards over any extended period consistently, then our business and prospects will be adversely affected. Risks Related to Our Intellectual Property If we fail to protect, or incur significant costs in defending, our intellectual property and other proprietary rights, our business and results of operations could be materially harmed. Our success depends, in large part, on our ability to protect our intellectual property and other proprietary rights. We rely primarily on patents, trademarks, copyrights, trade secrets and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. However, a significant portion of our technology is not patented, and we may be unable or may not seek to obtain patent protection for this technology. Moreover, existing U.S. legal standards relating to the validity, enforceability and scope of protection of intellectual property rights offer only limited protection, may not provide us with any competitive advantages, and may be challenged by third parties. The laws of countries other than the United States may be even less protective of intellectual property rights. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property or otherwise gaining access to our technology. Unauthorized third parties may try to copy or reverse engineer our products or portions of our products or otherwise obtain and use our intellectual property. Moreover, many of our employees have access to our trade secrets and other intellectual property. If one or more of these employees leave us to work for one of our competitors, then they may disseminate this proprietary information, which may as a result damage our competitive position. If we fail to protect our intellectual property and other proprietary rights, then our business, results of operations or financial condition could be materially harmed. In addition, affirmatively defending our intellectual property rights and investigating whether we are pursuing a product or service development that may violate the rights of others may entail significant expense. We have not found it necessary to resort to legal proceedings to protect our intellectual property, but may find it necessary to do so in the future. Any of our intellectual property rights may be challenged by others or invalidated through administrative processes or litigation. If we resort to legal proceedings to enforce our intellectual property rights or to determine the validity and scope of the intellectual property or other proprietary rights of others, then the proceedings could result in significant expense to us and divert the attention and efforts of our management and technical employees, even if we prevail. Table of Contents We may be sued by third parties for alleged infringement of their proprietary rights, which could be costly, time-consuming and limit our ability to use certain technologies in the future. We may become subject to claims that our technologies infringe upon the intellectual property or other proprietary rights of third parties. Any claims, with or without merit, could be time-consuming and expensive, and could divert our management s attention away from the execution of our business plan. Moreover, any settlement or adverse judgment resulting from these claims could require us to pay substantial amounts or obtain a license to continue to use the disputed technology, or otherwise restrict or prohibit our use of the technology. We cannot assure you that we would be able to obtain a license from the third party asserting the claim on commercially reasonable terms, if at all, that we would be able to develop alternative technology on a timely basis, if at all, or that we would be able to obtain a license to use a suitable alternative technology to permit us to continue offering, and our customers to continue using, our affected product. An adverse determination also could prevent us from offering our products to others. Infringement claims asserted against us may have a material adverse effect on our business, results of operations or financial condition. Risks Relating to Securities Markets and Investment in Our Stock There may not be a viable public market for our common stock. Prior to this offering, there has been no public market for our common stock, and there can be no assurance that a regular trading market will develop and continue after this offering or that the market price of our common stock will not decline below the initial public offering price. If no trading market develops, then securities analysts may not initiate or maintain research coverage of us which could further depress the market for our common stock. As a result, investors may not be able to sell their common stock at or above the initial public offering price or at the time that they would like to sell. The initial public offering price will be determined through negotiations between us and the representatives of the underwriters and may not be indicative of the market price of our common stock following this offering. Our management, whose interests may not be aligned with yours, is able to control the vote on all matters requiring stockholder approval. As of October 28, 2006, our directors, executive officers and their affiliates collectively beneficially owned 11,505,676 shares, or 84.5%, of our total outstanding shares of common stock. Upon consummation of this offering, our directors, executive officers and their affiliates will collectively beneficially own 10,326,654 shares, or 56.9%, of our total outstanding shares of common stock. Accordingly, both prior and subsequent to consummation of this offering our directors and executive officers as a group may control the vote on all matters requiring stockholder approval, including the election of directors. The interests of our directors and executive officers may not be fully aligned with yours. Although there is no agreement among our directors and executive officers with respect to the voting of their shares, this concentration of ownership may delay, defer or even prevent a change in control of our company, and make transactions more difficult or impossible without the support of all or some of our directors and executive officers. These transactions might include proxy contests, tender offers, mergers or other purchases of common stock that could give you the opportunity to realize a premium over the then-prevailing market price for shares of our common stock. Market volatility may affect our stock price and the value of your investment. Following this offering, the market price for our common stock is likely to be volatile, in part because our shares have not been traded publicly. The market prices for securities of emerging technology companies have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. The market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including the following: U.S. government spending levels, both generally and by our particular customers; the volume of operational activity by the U.S. military; Table of Contents delays in the payment of our invoices by government payment offices, resulting in potentially reduced earnings during a particular fiscal quarter; announcements of new products or technologies, commercial relationships or other events relating to us or our industry or our competitors; failure of any of our key products to gain market acceptance; variations in our quarterly operating results; perceptions of the prospects for the markets in which we compete; changes in general economic conditions; changes in securities analysts estimates of our financial performance; regulatory developments in the United States and foreign countries; fluctuations in stock market prices and trading volumes of similar companies; news about the markets in which we compete or regarding our competitors; terrorist acts or military action related to international conflicts, wars or otherwise; sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders; and additions or departures of key personnel. In addition, the equity markets in general, and Nasdaq in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, the market prices of securities of emerging technology companies have been particularly volatile. These broad market and industry factors may affect the market price of our common stock adversely, regardless of our operating performance. In the past, following periods of volatility in the market price of a company s securities, securities class action litigation often has been instituted against that company. This type of litigation, if instituted against us, could result in substantial costs and a diversion of management s attention and resources. Future sales of our common stock may depress our stock price. After completion of this offering, we will have 18,156,483 shares of common stock outstanding. The 6,700,000 shares sold in this offering, or 7,705,000 shares if the underwriters over-allotment is exercised in full, will be freely tradable without restriction or further registration under federal securities laws unless purchased by our affiliates as such term is used in Rule 144 of the Securities Act of 1933, as amended, or Securities Act. After the lock-up agreements pertaining to this offering expire, up to an additional 11,435,370 shares of our common stock will be eligible for sale in the public market, 10,291,734 of which are held by executive officers, directors and other affiliates and will be subject to volume limitations under Rule 144 of the Securities Act. The above information assumes the effectiveness of the lock-up agreements under which current holders of our common stock and all of our officers and directors have agreed not to sell or otherwise dispose of their shares of common stock. Goldman, Sachs Co., on behalf of the underwriters, may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. In considering any request to release shares subject to a lock-up agreement, Goldman, Sachs Co. will consider the facts and circumstances relating to a request at the time of that request. Table of Contents If our existing common stockholders sell substantial amounts of common stock in the public market, or if the market perceives that these sales may occur, then the market price of our common stock may decline, including below the initial public offering price. In addition, as soon as practicable after the completion of this offering, we intend to file a registration statement under the Securities Act covering 1,941,729 shares of common stock issuable upon exercise of outstanding options under our Nonqualified Stock Option Plan, 35,189 shares of common stock issuable upon exercise of outstanding options under our Directors Nonqualified Stock Option Plan, 1,538,111 shares of common stock issuable upon exercise of outstanding options under our 2002 Equity Incentive Plan and 3,684,157 shares of common stock reserved for future issuance under our 2006 Equity Incentive Plan. The shares registered under such registration statement will be available for sale in the open market, subject to vesting restrictions with us, the contractual lock-up agreements described above and the contractual lock-up agreements and market stand-off provisions contained in the agreements pursuant to which these options were issued. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, then the trading price of our common stock could decline. See Shares Eligible for Future Sale. You will experience immediate and substantial dilution as a result of this offering and may experience additional dilution in the future. We expect the initial public offering price of our common stock in this offering to be substantially higher than the net tangible book value per share of our outstanding common stock. Accordingly, investors purchasing shares of common stock in this offering will pay a price that substantially exceeds the value of our tangible assets after subtracting our liabilities. As a result, investors will: incur immediate dilution of $9.32 per share, based on an assumed initial public offering price of $15.00 per share, the midpoint of our expected public offering price range; and contribute 96.8% of the total amount invested to date to fund our company based on the initial offering price to the public of $15.00 per share, but will own only 25.0% of the shares of common stock outstanding upon completion of this offering. You will experience additional dilution upon the exercise of options to purchase common stock under our equity incentive plans, if we issue restricted stock to our employees under these plans or if we otherwise issue additional shares of our common stock. See Dilution. The provisions in our charter documents, as amended and restated, and under Delaware law could delay or discourage a takeover that stockholders may consider favorable. Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, to be effective upon completion of this offering, may have the effect of delaying or preventing a change of control or changes in our management. Some of these provisions include: a board of directors divided into three classes serving staggered three-year terms; a prohibition on stockholder action through written consent; a requirement that special meetings of stockholders be called only by the chairman of our board of directors, the chief executive officer, the president or by a majority of the total number of authorized directors; advance notice requirements for stockholder proposals and nominations; a requirement of approval of not less than 662/3% of all outstanding shares of our capital stock entitled to vote to amend any bylaws by stockholder action, or to amend specific provisions of our certificate of incorporation; and the authority of our board of directors to issue preferred stock on terms determined by our board of directors without stockholder approval. Table of Contents In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors, including to delay or impede a merger, tender offer, or proxy contest involving our company. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline. We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as the related rules and regulations enacted by the Securities and Exchange Commission, or SEC, and the Nasdaq Global Market, have required changes in corporate governance practices of public companies. We expect these rules and regulations to increase our legal and financial compliance costs. In addition, we will incur additional costs associated with our public company reporting requirements. We also expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. We currently are evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. We can provide no assurance regarding our conclusions as of April 30, 2008 with respect to the effectiveness of our internal control over financial reporting. Beginning with our Annual Report on Form 10-K for the fiscal year ending April 30, 2008, pursuant to Section 404 of the Sarbanes-Oxley Act, our management will be required to deliver an annual report that assesses the effectiveness of our internal control over financial reporting, and we will be required to have our independent registered public accounting firm deliver an attestation report on management s assessment. If our management or our independent registered public accounting firm were to conclude in their reports that our internal control over financial reporting was not effective, then investors could lose confidence in our reported financial information and the trading price of our stock could drop significantly. We will be required to devote significant resources to complete the assessment and documentation of our internal control system and financial processes, including an assessment of the design of our information systems. We also may incur significant costs to remediate any control deficiencies we identify through these efforts. We cannot assure you that we will be able to complete the required management assessment by our Section 404 reporting deadline. An inability to complete and document this assessment would cause our auditors to conclude that our internal control over financial reporting was not effective. In addition, if a material weakness were identified with respect to our internal control over financial reporting, then neither we nor our auditors would be able to conclude that our internal control over financial reporting was effective. Ineffective internal control over financial reporting also could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock. Table of Contents We may allocate the net proceeds from this offering in ways in which you and other stockholders may not agree or which may not yield a return. We intend to use the net proceeds from this offering to increase our working capital, fund general corporate purposes, fund research and development, general marketing activities, general and administrative matters and finance opportunistic acquisitions and other capital expenditures. Our management will, however, have broad discretion in the application of the net proceeds from this offering and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not necessarily improve our operating results or enhance the market value of our common stock. Until the net proceeds are used, they may be placed in investments that do not produce significant income or that lose value. Table of Contents SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as may, will, should, expects, plans, anticipates, could, intends, target, projects, contemplates, believes, estimates, predicts, potential or continue or the negative of these terms or other similar words. These statements are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. We discuss many of the risks in greater detail under the heading
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+PROSPECTUS SUMMARY This summary highlights information contained in other parts of our prospectus. Because it is a summary, it does not contain all information that you should consider before investing in our shares. You should read the entire prospectus carefully, including Risk Factors, our financial statements and the notes thereto. We have included definitions of technical terms important to an understanding of our business under Glossary of Oil and Natural Gas Terms. Unless the context otherwise requires, all references in this prospectus to RAM Energy Resources, our, us, and we refer to RAM Energy Resources, Inc. (formerly known as Tremisis Energy Acquisition Corporation) and its subsidiaries, as a combined entity. All references in this prospectus to RAM Energy refer to RAM Energy, Inc., our wholly owned subsidiary. Unless the context otherwise requires, the information contained in this prospectus gives effect to the May 8, 2006 consummation of the merger of RAM Energy Acquisition, Inc., our wholly owned subsidiary, with and into RAM Energy, and the change of our name from Tremisis Energy Acquisition Corporation to RAM Energy Resources, Inc., which transactions are collectively called the merger. See Prospectus Summary Recent Events for a discussion of the merger. As used in this prospectus, EBITDA refers to net income before interest expense, amortization, depreciation, accretion, income taxes, gain on early extinguishment of debt, gain on sale of oil and natural gas properties, share-based compensation, extraordinary gains or losses, the cumulative effects of changes in accounting principles and unrealized gains or losses on derivatives. RAM Energy Resources, Inc. We are an independent oil and natural gas company engaged in the acquisition, development, exploitation, exploration and production of oil and natural gas properties, primarily in Texas, Louisiana and Oklahoma. Our producing properties are located in highly prolific basins with long histories of oil and natural gas operations. We have been active in these core areas since our inception in 1987 and have grown through a balanced strategy of acquisitions and development and exploratory drilling. We have completed over 20 acquisitions of producing oil and natural gas properties and related assets for an aggregate purchase price approximating $400 million. Through December 31, 2006, we have drilled or participated in the drilling of 561 oil and natural gas wells, 93% of which were successfully completed and produced hydrocarbons in commercial quantities. Our management team has extensive technical and operating expertise in all areas of our geographic focus. Our oil and natural gas assets are characterized by a combination of conventional and unconventional reserves and prospects. We have conventional reserves and production in four main onshore locations: Electra/Burkburnett, Wichita and Wilbarger Counties, Texas; Boonsville, Jack and Wise Counties, Texas; Vinegarone, Val Verde County, Texas; and Egan, Acadia Parish, Louisiana. We have unconventional reserves and production in our Barnett Shale play located in Jack and Wise Counties, Texas, where we own interests in approximately 27,700 gross (6,800 net) acres. In addition, we have positioned ourselves for participation in two emerging resource plays in southwest Texas. We have an exploratory play targeting the Barnett and Woodford Shale formations where we own interests in approximately 84,000 gross (6,600 net) acres. We also have an exploratory play targeting the Wolfcamp formation where we are actively acquiring acreage and have accumulated leases and options covering over 15,000 gross and net acres. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Table of Contents At December 31, 2005, our estimated net proved reserves were 18.8 MMBoe, of which approximately 60% were crude oil, 30% were natural gas, and 10% were natural gas liquids, or NGLs. The PV-10 Value of our proved reserves was approximately $345.5 million based on prices we were receiving as of December 31, 2005, which were $58.63 per Bbl of oil, $35.89 per Bbl of NGLs and $9.14 per Mcf of natural gas. At December 31, 2005, our proved developed reserves comprised 70% of our total proved reserves, and the estimated reserve life for our total proved reserves was approximately 15 years. We own interests in approximately 2,900 wells and are the operator of leases upon which approximately 1,900 of these wells are located. The PV-10 Value attributable to our interests in the properties we operate represented approximately 86% of our aggregate PV-10 Value as of December 31, 2005. We also own a drilling rig, various gathering systems, a natural gas processing plant, service rigs and a supply company that service our properties. From January 1, 1997 through December 31, 2005, our reserve replacement percentage, through discoveries, extensions, revisions and acquisitions, but excluding divestitures, was 344%. Since January 1, 1997, our historical average finding cost from all sources, exclusive of divestitures, has been $6.27 per Boe. During the twelve months ended December 31, 2006, we drilled or participated in the drilling of 92 wells on our oil and natural gas properties, 80 of which were successfully completed as producing wells, four of which were dry holes and eight of which were either drilling or waiting to be completed at the end of that period. For the twelve months ended September 30, 2006 we generated EBITDA of $33.8 million from production averaging 3,740 Boe per day. For more information regarding our EBITDA, including a reconciliation to our net income (loss), see Selected Consolidated Financial Data. Our Business Strategy and Strengths Our primary objective is to enhance stockholder value by increasing our net asset value, net reserves and cash flow per share through acquisitions, development, exploitation, exploration and divestiture of oil and natural gas properties. We intend to follow a balanced risk strategy by allocating capital expenditures in a combination of lower risk development and exploitation activities and higher potential exploration prospects. We intend to pursue acquisitions during periods of attractive acquisition values and emphasize development of our reserves during periods of higher acquisition values. Key elements of our business strategy include the following: Concentrate on Our Existing Core Areas. We intend to focus a significant portion of our growth efforts in our existing core areas. Our oil and natural gas properties in our core areas are characterized by long reserve lives and production histories in multiple oil and natural gas horizons. We believe our focus on and experience in our core areas may expose us to acquisition opportunities which may not be available to the entire industry. Accelerate Our North Texas Barnett Shale Development. Due to the high degree of commercial success in the north Texas Barnett Shale by the oil and natural gas industry, we plan to use proceeds of this offering to significantly accelerate drilling in our north Texas Barnett Shale properties. We have over 325 potential horizontal well locations on our properties. We have drilled nine gross (3.4 net) wells to date with a 100% success rate on our north Texas Barnett Shale properties and plan on drilling a minimum of four gross (2.1 net) wells to a maximum of seven gross (2.8 net) wells during 2007. Complete Selective Acquisitions and Divestitures. We seek to acquire producing oil and natural gas properties, primarily in our core areas. Our experienced senior management team has developed our acquisition criteria designed to increase reserves, production and cash flow per share on an accretive basis. We will seek acquisitions of producing properties that will provide us with opportunities for AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents reserve additions and increased cash flow through operating improvements, production enhancement and additional development and exploratory prospect generation opportunities. In addition, from time to time, we may engage in strategic divestitures when we believe our capital may be redeployed to higher return projects. Develop and Exploit Existing Oil and Natural Gas Properties. We have historically increased stockholder value by fully developing or exploiting our acquired and discovered properties until we determine that it is no longer economically attractive to do so. As of December 31, 2006, we have identified 161 proved development and extension drilling projects and 166 recompletion/workover projects on our existing properties and wells. Increase Emphasis on Exploration Activity. We are committed to increasing our emphasis on exploration activities within the context of our balanced risk objectives. We will continue to acquire, review and analyze 3-D seismic data to generate exploratory prospects. Our exploration efforts utilize available geological and geophysical technologies to reduce our exploration and drilling risks and, therefore, maximize our probability of success. We believe that the following strengths complement our business strategy: Inventory of Growth Opportunities in the North Texas Barnett Shale. We believe we have a significant inventory of growth opportunities beyond our proved reserve base. We have over 325 potential drilling locations within the north Texas Barnett Shale. We believe that our inventory of potential drilling locations should provide us the opportunity to grow organically for the foreseeable future without having to depend upon acquisitions of properties. Based on current cost estimates, we have approximately $250 million of potential future capital expenditures for the full development of our north Texas Barnett Shale acreage. Management Experience and Technical Expertise. Our key management and technical staff possess an average of 26 years of experience in the oil and natural gas industry, a substantial portion of which has been focused on operations in our core areas. We believe that the knowledge, experience and expertise of our staff will continue to support our efforts to enhance stockholder value. Balanced Oil and Natural Gas Production. At year-end 2005, approximately 60% of our estimated proved reserves were oil, 30% were natural gas and 10% were NGLs. We believe this balanced commodity mix, combined with our prudent use of derivative contracts, will provide sufficient diversification of sources of cash flow and will lessen the risk of significant and sudden decreases in revenue from localized or short-term commodity price movements. Operating Efficiency and Control. We currently operate wells that represent 86% of our aggregate PV-10 Value at December 31, 2005. Our high degree of operating control allows us to control capital allocation and expenses and the timing of additional development and exploitation of our producing properties. Drilling Expertise and Success. Our management and technical staff have a long history of successfully drilling oil and natural gas wells. Through December 31, 2006, we have drilled or participated in the drilling of 561 oil and natural gas wells with a 93% success rate. We expect to continue to grow by utilizing our drilling expertise and developing and finding additional reserves, although our success rate may decline as we drill more exploratory wells. Ownership and Control of Service and Supply Assets. We own and control service and supply assets, including a drilling rig, service rigs, a supply company, gathering systems and other related assets. We believe that ownership and use of these assets for our own account provides us with a significant RAM ENERGY RESOURCES, INC. (Exact name of registrant as specified in its charter) Table of Contents competitive advantage with respect to availability, lead-time and cost of these services. For calendar year 2007, approximately 75% of our projected capital expenditures will be in areas serviced by these assets. Insider Ownership. After giving effect to the completion of this offering, our directors, executive officers and our two principal stockholders will own approximately 63% of our outstanding shares, providing a strong alignment of interest between management, the board of directors and our outside stockholders. Balance Sheet Flexibility. After giving effect to the completion of this offering and application of the net proceeds as described in this prospectus, we will have significant liquidity for pursuing acquisitions, accelerating our development and exploratory activities and taking advantage of opportunities as they arise. Delaware 1311 20-700684 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 5100 East Skelly Drive, Suite 650 Tulsa, Oklahoma 74135 (918) 663-2800 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) John M. Longmire Senior Vice President and Chief Financial Officer 5100 East Skelly Drive, Suite 650 Tulsa, Oklahoma 74135 (918) 663-2800 (Name, address, including zip code, and telephone number, including area code, of agent for service) (1) The PV-10 Value of our proved reserves as of December 31, 2005 was calculated using unescalated prices of $58.63 per Bbl of oil, $35.89 per Bbl of NGLs, and $9.14 per Mcf of natural gas, which were the prices we were receiving as of December 31, 2005. The prices at which we sell natural gas are determined on the first day of each month for the entire month. Principal Exploration Projects The following is a summary of our principal exploration projects as of December 31, 2006, both of which are located in southwest Texas: Name Objective Net Acres Wolfcamp Shale Gas 15,000 Canyon Sands Barnett/Woodford Shale Gas 6,600 COPIES TO: Theodore M. Elam, Esq. Charles L. Strauss, Esq. McAfee & Taft A Professional Corporation 211 North Robinson, Suite 1000 Oklahoma City, Oklahoma 73102 (405) 235-9621 Fulbright & Jaworski L.L.P. Fulbright Tower 1301 McKinney Street, Suite 5100 Houston, Texas 77010 (713) 651-5151 Table of Contents Recent Events Tremisis Merger. Prior to May 8, 2006, our corporate name was Tremisis Energy Acquisition Corporation, or Tremisis. On May 8, 2006, Tremisis acquired RAM Energy, Inc. through the merger of its recently formed, wholly owned subsidiary into RAM Energy, Inc. The merger was accomplished pursuant to the terms of an Agreement and Plan of Merger dated October 20, 2005, as amended, which is referred to as the merger agreement, among Tremisis, its acquisition subsidiary, RAM Energy, Inc. and the stockholders of RAM Energy, Inc. Upon completion of the merger, RAM Energy, Inc. became Tremisis wholly owned subsidiary and Tremisis changed its name from Tremisis Energy Acquisition Corporation to RAM Energy Resources, Inc. Upon consummation of the merger, the stockholders of RAM Energy, Inc. received an aggregate of 25,600,000 shares of Tremisis common stock and $30.0 million of cash. Prior to consummation of the merger, and as permitted by the merger agreement, on April 6, 2006, RAM Energy, Inc. redeemed a portion of its outstanding stock for an aggregate consideration of $10.0 million. The merger was accounted for as a reverse acquisition. RAM Energy, Inc. has been treated as the acquiring company and the continuing reporting entity for accounting purposes. Upon completion of the merger, the assets and liabilities of Tremisis were recorded at their fair value, which is considered to approximate historical cost, and added to those of RAM Energy, Inc. Because Tremisis had no active business operations prior to consummation of the merger, the merger was accounted for as a recapitalization of RAM Energy, Inc. Acquisition of Properties. Effective September 1, 2006, we acquired 447,000 Boe of proved reserves and associated gathering assets in a field located in close proximity to our existing north Texas properties. Current production from the acquired properties is from the Bend Conglomerate. The acquired properties also included undeveloped deep rights, including the Barnett Shale formation. The purchase price was $4.6 million, or $9.84 per Boe of estimated proved reserves. The proved reserve mix in the acquired properties is 72% natural gas and 28% oil. Stock Transactions. On September 22, 2006, we repurchased 739,175 shares of our common stock from an unaffiliated party in a negotiated transaction at a purchase price of $4.295 per share. On November 10, 2006, we approved the grant of restricted stock awards under our 2006 Long-Term Incentive Plan for an aggregate of 646,805 shares of our common stock to 22 of our employees, including two of our vice presidents, one of whom received an award of 75,100 shares, and the other who received an award of 69,170 shares. We will incur compensation expense of approximately $3.3 million, which will be recognized ratably through 2011, in connection with our November 10, 2006 restricted stock issuances. Fourth Quarter Operations. During the quarter ended December 31, 2006, we drilled or participated in the drilling of 23 gross (22 net) development wells of which 22 gross (21.8 net) were completed as commercial wells. Also during the fourth quarter of 2006, we participated in the drilling of four gross (2.2 net) exploratory wells, two gross (2.0 net) of which were in our Wolfcamp prospect. All four exploratory wells were in various stages of completion at year end. At December 31, 2006, we owned interests in 2,205 gross (1,484 net) producing wells, of which 1,938 gross (1,362 net) wells were oil wells, and 267 gross (122 net) wells were natural gas wells. At that date, we owned, or held options to acquire, developed acreage consisting of 104,199 gross (38,248 net) leasehold acres and undeveloped acreage of 131,883 gross (32,228 net) leasehold acres. Our non-acquisition related capital expenditures during the fourth quarter of 2006 aggregated $5.7 million, of which $4.3 million was allocated to development and exploitation activities, and Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable on or after the effective date of this Registration Statement. Table of Contents $1.4 million was allocated to exploration activities. Our total non-acquisition capital expenditures for 2006, were approximately $23.4 million, compared to our 2006 capital expenditure budget of $24.3 million. In addition, we expended $4.6 million in our acquisition of 447,000 Boe of proved reserves in the third quarter of 2006. Barnett Shale Activities. During the first quarter of 2007, we proposed to EOG Resources, Inc. the drilling of two horizontal Barnett Shale wells on our jointly-owned acreage in North Texas. EOG has elected to participate in and operate the first proposed well. Under the terms of our April 2004 agreement, EOG has until early March to make a participation election with respect to the second well. Our share of the estimated cost of drilling and completing each well is approximately $700,000. In addition, Devon Energy Corporation recently proposed the drilling of the seventh Barnett Shale well under our Participation Agreement with Devon. We intend to participate in the proposed well. Our share of the estimated cost of the Devon well is expected to be approximately $1.0 million. For further information regarding our agreements with EOG and Devon, see Business and Properties Principal Properties. Risks Related to Our Strategy Prospective investors should carefully consider the matters we discuss under the caption Risk Factors, as well as the other information in this prospectus, including that the market for attractive opportunities to acquire properties with proved undeveloped reserves may not be available; our reserve estimates may not be accurate; our results will be affected by the volatile nature of oil and natural gas prices and we may experience delays in obtaining drilling rigs and shortages of equipment. One or more of these matters could negatively affect our ability to successfully implement our business strategy. Our Executive Offices Our principal executive offices are located at 5100 East Skelly Drive, Suite 650, Tulsa, Oklahoma 74135. Our telephone number is (918) 663-2800. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. (1) Danish Knights is a family limited partnership formed by Dr. William W. Talley II, a founder and former chairman of RAM Energy, Inc. Dr. Talley passed away in 2005. No partner of Danish Knights is a director or officer of RAM Energy Resources, Inc. (2) The shares of common stock outstanding after this offering do not include approximately 12,650,000 shares issuable upon the exercise of outstanding warrants at an exercise price of $5.00 per share and 825,000 shares of our common stock issuable upon the exercise of currently exercisable options to purchase 275,000 units at an exercise price of $9.90 per unit, each unit consisting of one share of our common stock and two warrants, each warrant to purchase one share of our common stock at an exercise price of $6.25 per share. Such warrants, when issued, will be immediately exercisable. The shares of common stock to be outstanding after this offering do not include shares of our common stock that we will issue upon the exercise of options or other awards that may be granted under our 2006 Long-Term Incentive Plan. We have remaining a maximum of 1,423,195 shares of common stock reserved for issuance upon the exercise of options that may be granted and pursuant to awards that may be made under our 2006 Long-Term Incentive Plan. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Table of Contents SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA We are providing the following summary consolidated financial information and other data to assist you in your analysis of our financial condition and results of operations. We acquired RAM Energy effective May 8, 2006, by the merger of our recently formed, wholly owned subsidiary with and into RAM Energy, which transaction we refer to as the merger. See Prospectus Summary Recent Events for a discussion of the merger. For accounting and financial reporting purposes, the merger was accounted for under the purchase method of accounting as a reverse acquisition and, in substance, as a capital transaction, because Tremisis had no active business operations prior to consummation of the merger. Accordingly, for accounting and financial reporting purposes, the merger was treated as the equivalent of RAM Energy issuing stock for the net monetary assets of Tremisis, accompanied by a recapitalization. The net monetary assets of Tremisis have been stated at their fair value, essentially equivalent to historical costs, with no goodwill or other intangible assets recorded. The accumulated deficit of RAM Energy has been carried forward. Operations prior to the merger are those of RAM Energy. The consolidated balance sheet data as of December 31, 2004 and 2005 and the consolidated statement of operations data for the years ended December 31, 2003, 2004 and 2005 are derived from RAM Energy s consolidated financial statements audited by UHY Mann Frankfort Stein & Lipp CPAs, LLP, independent registered public accountants, and are included elsewhere in this prospectus. The consolidated balance sheet data as of December 31, 2003 and the consolidated statement of operations data for the year ended December 31, 2002 are derived from RAM Energy s consolidated financial statements audited by UHY Mann Frankfort Stein & Lipp CPAs, LLP, independent registered public accountants, which are not included in this prospectus. The consolidated balance sheet data of RAM Energy as of December 31, 2001 and 2002 and the consolidated statement of operations data for the year ended December 31, 2001 are derived from RAM Energy s unaudited consolidated financial statements, which are not included in this prospectus. The summary consolidated financial information and other data presented below is only a summary and should be read in conjunction with the historical consolidated financial statements of each of RAM Energy and Tremisis, and the related notes, Management s Discussion and Analysis of Financial Condition and Results of Operations and Business and Properties. The historical results included below and elsewhere in this prospectus may not be indicative of our future performance. RAM Energy s financial position and results of operations for 2003, 2004 and 2005 may not be comparative to other periods as a result of certain divestitures and acquisitions, as more fully described in RAM Energy s financial statements included elsewhere in this prospectus. (1) We acquired WG Energy Holdings, Inc. in December 2004. (2) Includes costs of acquisitions. (3) EBITDA for the twelve months ended September 30, 2006 was $33.8 million. For more information regarding our EBITDA, including a reconciliation to our net income (loss), see Selected Consolidated Financial Data. Table of Contents EXPLANATORY NOTE The shares covered by this registration statement include a maximum of 1,050,000 shares that may be sold by Danish Knights, A Limited Partnership, if and to the extent that the underwriters exercise their over-allotment option. Table of Contents Summary Reserve Data As of December 31, 2003 2004 2005 Proved reserves: Oil (MBbls) 2,322 10,667 11,199 Natural gas (MMcf) 34,567 38,195 34,234 Natural gas liquids (MBbls) 2,087 1,891 Total (MBoe) 8,083 19,120 18,796 Percent proved developed 80.7 % 67.9 % 70.2 % Percent oil 28.7 % 55.8 % 59.6 % Estimated future net revenues before income taxes (in thousands) $ 160,456 $ 434,028 $ 601,111 PV-10 Value (in thousands) $ 104,570 $ 236,201 $ 345,501 Prices used to calculate PV-10 Value: Oil (per Bbl) $ 29.25 $ 40.25 $ 58.63 Natural gas (per Mcf) 6.17 6.02 9.14 Natural gas liquids (per Bbl) 27.56 35.89 Summary Operating Data The following tables present certain information with respect to oil and natural gas production, prices and costs attributable to our oil and natural gas properties for the three years ended December 31, 2005 and the nine months ended September 30, 2006. We acquired WG Energy in December 2004. Our operating data for 2004 includes operations of WG Energy from the date of acquisition. Year ended December 31, Nine months Ended September 30, 2006 2003 2004 2005 Production volumes: Oil (MBbls) 277 178 787 592 Natural gas liquids (MBbls) 5 12 170 103 Natural gas (MMcf) 2,334 1,928 2,681 1,761 Total (MBoe) 671 511 1,405 989 Average realized prices (after effect of derivative contracts): Oil (per Bbl) $ 29.47 $ 33.15 $ 52.35 $ 57.46 Natural gas liquids (per Bbl) 16.94 26.41 36.33 41.89 Natural gas (Per Mcf) 5.06 5.73 5.57 6.12 Per Boe 29.89 33.77 44.38 49.68 Expenses (per Boe): Oil and natural gas production taxes $ 2.10 $ 2.47 $ 2.36 $ 2.56 Oil and natural gas production expenses 5.26 7.04 11.46 13.38 Amortization of full cost pool 5.64 5.89 8.93 9.63 General and administrative 9.44 12.90 6.13 6.42 Table of Contents The information contained in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer, solicitation or sale is not permitted. Subject to completion, dated February 5, 2007 PROSPECTUS 7,000,000 Shares RAM Energy Resources, Inc. Common Stock Table of Contents
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+PROSPECTUS SUMMARY This prospectus does not contain all of the information set forth in the registration statement, certain parts of which are omitted in accordance with the rules and regulations of the SEC. Accordingly, you should refer to the registration statement and its exhibits for further information about us and our ordinary shares. Copies of the registration statement and its exhibits are on file with the SEC. Statements contained in this prospectus concerning the documents we have filed with the SEC are not intended to be comprehensive, and in each instance we refer you to a copy of the actual document filed as an exhibit to the registration statement or otherwise filed with the SEC. We have not authorized anyone to provide you with information different from that contained or incorporated by reference in this prospectus. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our rights or our ordinary shares. Unless the context otherwise requires, all references in this prospectus to BOS, we, our, our company, us and the Company refer to B.O.S Better Online Solutions Ltd. and its consolidated subsidiaries. All references in this prospectus to ordinary shares refer to our ordinary shares, nominal value NIS 4.00 per share. All references in this prospectus to dollars or $ are to United States dollars. All references in this prospectus to shekels or NIS are to New Israeli Shekels.
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+This summary highlights information contained elsewhere in this prospectus and does not contain all the information you should consider before investing in our common units. You should read this entire prospectus carefully, including the section entitled "Risk Factors" and the financial statements and the related notes before you decide to invest in our common units.
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+S-1/A Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Table of Contents Summary This summary highlights selected information contained elsewhere or incorporated by reference in this prospectus and does not contain all of the information you need to consider in making your investment decision. You should read carefully this entire prospectus and the documents incorporated by reference in this prospectus, including the section titled Risk Factors beginning on page 6 of this prospectus, and our consolidated financial statements and the notes thereto, before making an investment decision. Additional information regarding our company is contained in our filings with the Securities and Exchange Commission. For information on how you can obtain copies of our filings, please see the section of this prospectus titled Where you can find more information. Overview CACI founded its business in 1962 in simulation technology, and has strategically diversified primarily within the information technology (IT) and communications industries. We serve clients in the government and commercial markets, primarily throughout North America and internationally on behalf of U.S. customers, as well as in the United Kingdom. Our primary customers both domestic and international are agencies of the U.S. government and major corporations. The demand for our services, in large measure, is created by the increasingly complex network, systems and information environments in which governments and businesses operate, and by the need to stay current with emerging technology while increasing productivity and, ultimately, performance. Domestic Operations. We provide IT and communications solutions, along with other professional services, to our domestic clients through our four major service offerings: systems integration, managed network services, knowledge management and engineering services. Our systems integration offerings combine current systems with new technologies or integrate hardware and software from multiple sources to enhance operations and save time and money. Systems integration services include planning, designing, implementing and managing solutions that resolve specific technical or business needs; extracting core business logic from existing systems and preserving it for migration to more modern environments; helping clients visualize possible changes in processes and systems before implementation; and web-enabling systems and applications, bringing the power of the Internet to clients and system users. Our managed network services offerings include a complete suite of solutions for total life cycle support of global communication networks, including planning and building voice, video and data networks, managing network communication infrastructures, operating network systems, and assuring that information is secure from unauthorized interception and intrusion. Our knowledge management offerings encompass a range of information management tools and enabling technologies, including Internet-based user interfaces, commercial off-the-shelf software, and workflow management systems. Our engineering services offerings enable clients to standardize and improve the way they manage the logistical life cycles of systems, products, and material assets. They also provide acquisition support, prototype development and integration, software design and integration, systems life extension and training in the use of analytical and collaboration tools for the U.S. intelligence community. International Operations. Our international systems integration offerings focus primarily on planning, designing, implementing and managing solutions that resolve specific technical or business needs for commercial and government clients in the telecommunications, financial services, healthcare services and transportation sectors. Our international operations also concentrate on combining data and technology in software products and services that provide strategic information on customers, buying patterns and market trends for clients who are engaged in retail sales of consumer products, direct marketing campaigns, franchise or branch site location projects, and similar endeavors. Through these service offerings, we provide comprehensive, practical IT and communications solutions by adapting emerging technologies and continually evolving legacy strengths in such areas as information assurance and security, reengineering, logistics and engineering support, automated debt management systems and services, litigation support systems and services, product data management, software development and reuse, voice, data and video communications, simulation and planning, financial and human resource systems and geo-demographic and customer data analysis. Competition We operate in a highly competitive industry that includes many firms, some of which are larger in size and have greater financial resources than we have. We obtain much of our business on the basis of proposals submitted in response to requests UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents from potential and current customers, who may also receive proposals from other firms. Additionally, we face indirect competition from certain government agencies that perform services for themselves similar to those we market. We know of no single, dominant competitor in our fields of technology. We have a relatively small share of the available worldwide market for our products and services, and we intend to achieve growth and increase market share in part by organic growth, and in part through strategic acquisitions. Strengths and strategy Our high quality service has enabled us to win repeat business and sustain long-term client relationships and also to compete effectively for new clients and new contracts. We have structured our business development organization to respond to the competitive marketplace, particularly within the federal government, and support that activity with full-time marketing, sales, communications, and proposal development specialists. We seek competitive business opportunities and have designed our operations to support major programs through centralized business development and business alliances. We offer substantially our entire range of information systems, technical and communications services and proprietary products to defense intelligence and civilian agencies of the U.S. Government. Our work for U.S. Government agencies may combine a wide range of skills drawn from our major service offerings. We have the capability to combine comprehensive knowledge of client challenges with significant expertise in the design, integration, development and implementation of advanced information technology and communications solutions. Our commercial client base consists primarily of large corporations in the United Kingdom (U.K.). This market is the primary target of our proprietary marketing systems software and database products. Virtually all of our officers and managers, including our Chief Executive Officer, conduct marketing and new business development activities. We employ marketing professionals who identify and qualify major contract opportunities, primarily in the federal government market. Our proprietary software and marketing systems are sold primarily by full time sales people. We also have established agreements for the resale of certain third party software and data products. We have formed strategic business relationships with a number of companies associated with the information technology industry. These strategic partners have business objectives compatible with ours, and offer products and services that complement ours. We intend to continue to develop these kinds of relationships wherever they support our growth objectives. Corporate information We currently operate from our headquarters at Three Ballston Plaza, 1100 North Glebe Road in Arlington, Virginia. We have operating offices and facilities in over 100 other locations throughout the United States, Europe, and Asia. Our telephone number is (703) 841-7800. Our website is located at www.caci.com. We do not intend to provide an active link to our website by providing you with our website address, and information on our website is not part of this prospectus. The notes The following summary describes the principal terms of the notes. Certain of the terms and conditions described below are subject to important limitations and exceptions. The Description of notes section of this prospectus contains a more detailed description of the terms and conditions of the notes. As used in the following summary, we, our, us, and CACI refer to CACI International Inc and not to its consolidated subsidiaries. Issuer: CACI International Inc, a Delaware corporation. Selling Securityholders: The securities to be offered and sold using this prospectus will be offered and sold by the selling securityholders named in this prospectus or in any supplement to this prospectus. See Selling securityholders. Securities: $300,000,000 principal amount of 2.125% Convertible Senior Subordinated Notes due 2014. Maturity: May 1, 2014, unless earlier repurchased or converted. Interest: 2.125% per year. Interest began accruing on May 16, 2007 and will be payable semiannually in arrears on May 1 and November 1 of each year, beginning November 1, 2007. We will pay additional interest, if any, under the circumstances described under Description of notes Registration rights. AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents Conversion rights: Holders may convert their notes prior to the close of business on the business day immediately preceding February 19, 2014, in multiples of $1,000 principal amount, at the option of the holder only under the following circumstances: during any fiscal quarter commencing after May 31, 2007, if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day; during the five business day period after any measurement period in which the trading price (as defined under Description of the notes Conversion rights Conversion upon satisfaction of trading price condition ) per $1,000 principal amount of notes for each day of such measurement period was less than 97% of the product of the last reported sale price of our common stock and the applicable conversion rate on each such day; or upon the occurrence of specified corporate transactions described under Description of notes Conversion rights Conversion upon specified corporate transactions. On and after February 19, 2014 to (and including) the close of business on the third business day immediately preceding the maturity date, holders may convert their notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances. The conversion rate for the notes is currently 18.2989 shares per $1,000 principal amount of notes (equal to a conversion price of approximately $54.65 per share of common stock) and is subject to adjustment as described in this prospectus. Upon conversion, we will deliver cash up to the aggregate principal amount of the notes to be converted and shares of our common stock in respect of the remainder, if any, of our conversion obligation in excess of the aggregate principal amount of the notes being converted. See Description of notes Conversion rights Payment upon conversion. In addition, following certain corporate transactions that occur prior to maturity, we will increase the conversion rate for a holder who elects to convert its notes in connection with such a corporate transaction upon conversion in the circumstances described under Description of notes Conversion rights Adjustment to shares delivered upon conversion upon certain fundamental changes. You will not receive any additional cash payment or additional shares representing accrued and unpaid interest and additional interest, if any, upon conversion of a note, except in limited circumstances. Instead, interest will be deemed paid by the cash and shares, if any, of our common stock, together with any cash payment for any fractional share, into which a note is convertible. Fundamental change: If we undergo a fundamental change (as defined in this prospectus under Description of notes Fundamental change permits holders to require us to purchase notes ), subject to certain conditions, holders of the notes will have the option to require us to purchase all or any portion of your notes for cash. The fundamental change purchase price is 100% of the principal amount of the notes to be purchased plus any accrued and unpaid interest, including any additional interest, to but excluding the fundamental change purchase date. Ranking: The notes are our direct, senior subordinated, unsecured obligations and rank, or will rank: senior in right of payment to our existing and future indebtedness that provides for its subordination to the notes; equal in right of payment to our existing and future indebtedness providing for equal ranking with the notes; junior in right of payment to all of our other existing and future indebtedness; and structurally junior to all existing and future liabilities, including trade payables, incurred by our subsidiaries. We have agreed not to have any layer of indebtedness that is junior in right of payment to our senior indebtedness, unless the indebtedness ranks equal or junior in right of payment to the notes. See Description of notes Subordination of the notes and No layering of indebtedness. As of June 30, 2007, our total long-term debt, excluding the notes, was $343.4 million, all of which ranks senior to the notes. CACI International Inc (Exact name of registrant as specified in its charter) Delaware 7373 54-1345888 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 1100 North Glebe Road Arlington, Virginia 22201 (703) 841-7800 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Table of Contents Registration rights: Pursuant to a registration rights agreement that we entered into with the initial purchasers of the notes, to whom we refer throughout this prospectus as the initial purchasers, we have filed a shelf registration statement under the Securities Act, of which this prospectus is a part, relating to the resale of the notes and the common stock issuable upon conversion thereof. No proceeds: We will not receive any proceeds from the sale by any selling securityholder of the notes or our common stock issuable upon conversion of the notes. Book-entry form: The notes have been issued in book-entry form and are represented by permanent global certificates deposited on behalf of The Depository Trust Company, or DTC, and registered in the name of a nominee of DTC. Beneficial interests in any of the notes are shown on, and transfers are effected only through, records maintained by DTC or its nominee and any such interest may not be exchanged for certificated securities, except in limited circumstances. Trading: We do not intend to apply for a listing of the notes on any securities exchange or any automated dealer quotation system, and we cannot assure you as to the development or liquidity of any market for the notes. The notes are eligible for trading in the PORTAL market. However, notes sold using this prospectus will no longer be eligible for trading in the PORTAL market. U.S. federal income tax consequences: For the U.S. federal income tax consequences of the holding, disposition and conversion of the notes, and the holding and disposition of shares of our common stock, see Certain U.S. federal income tax considerations. Convertible note hedge and warrant transactions: We have entered into convertible note hedge transactions with Morgan Stanley & Co. International plc, J.P. Morgan Chase Bank, National Association, and Bank of America, N.A., to whom we refer as the note hedge counterparties, which are expected to reduce the potential dilution upon conversion of the notes. We have also entered into warrant transactions with the note hedge counterparties. One or more of the note hedge counterparties or their affiliates may in the future enter into, or may unwind, various derivatives and/or purchase or sell our common stock in secondary market transactions (including during any observation period in respect of any conversion of notes). These activities could have the effect of increasing, or preventing a decline in, the price of our common stock. In addition, the note hedge counterparties or their affiliates may unwind various derivatives and/or purchase or sell our common stock in secondary market transactions prior to maturity of the notes (and are likely to do so during any observation period in respect of any conversion of notes), which could adversely impact the price of our common stock or the settlement amount payable upon conversion. For a discussion of the impact of any market or other activity by the note hedge counterparties or their affiliates in connection with these convertible note hedge and warrant transactions, see Risk factors Risks related to the notes The convertible note hedge and warrant transactions may affect the value of the notes and our common stock. New York Stock Exchange symbol for our common stock: Our common stock is quoted on the New York Stock Exchange under the symbol CAI. Trustee, paying agent and conversion agent: The Bank of New York Paul M. Cofoni 1100 North Glebe Road Arlington, Virginia 22201 (703) 841-7800 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents Summary consolidated financial data (in thousands, except per share amounts) The following summary consolidated financial data should be read together with, and are qualified by reference to, Management s Discussion and Analysis of Financial Condition & Results of Operations and our consolidated financial statements, including the accompanying notes, appearing in our Annual Report on Form 10-K for the fiscal year ended June 30, 2007, which is incorporated by reference into this prospectus. Year Ended June 30, 2005 2006 2007 Consolidated Statements of Income Data Revenue $ 1,623,062 $ 1,755,324 $ 1,937,972 Costs of revenue: Direct costs 1,019,474 1,134,951 1,267,677 Indirect costs and selling expenses 429,434 436,656 485,359 Depreciation and amortization 32,022 33,437 39,083 Total costs of revenue 1,480,930 1,605,044 1,792,119 Income from operations 142,132 150,280 145,853 Interest expense and other, net 14,765 17,279 20,585 Income before income taxes 127,367 133,001 125,268 Income taxes 47,642 48,161 46,736 Net income $ 79,725 $ 84,840 $ 78,532 Basic earnings per share $ 2.69 $ 2.81 $ 2.56 Diluted earnings per share $ 2.61 $ 2.72 $ 2.51 Weighted average basic shares outstanding 29,675 30,242 30,643 Weighted average diluted shares outstanding 30,568 31,161 31,256 As of June 30, 2007 Consolidated Balance Sheet Data: Cash and cash equivalents $ 285,682 Working capital 413,982 Total assets 1,791,947 Long-term debt 643,415 Total liabilities 978,100 Total shareholders equity 813,847 Copies to: Dean F. Hanley, Esq. Foley Hoag LLP Seaport World Trade Center West 155 Seaport Boulevard Boston, Massachusetts 02210 Telephone: (617) 832-1000 Telecopy: (617) 832-7000 Table of Contents
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+This summary highlights information contained elsewhere in this prospectus. Unless we otherwise specify, all references to information and data in this prospectus about our business and fleet refer to the business and fleet that will be contributed to us on the closing of this offering and the seven newbuildings scheduled for delivery during the remainder of 2007 and in 2008. You should read the entire prospectus carefully, including the historical financial statements and the notes to those financial statements. The information presented in this prospectus assumes (a) an initial public offering price of $20.00 per unit and (b) unless otherwise noted, that the underwriters' overallotment option is not exercised. You should read "Risk Factors" for more information about important risks that you should consider carefully before buying our common units. We include a glossary of some of the terms used in this prospectus in Appendix B. Unless otherwise indicated, all references to "dollars" and "$" in this prospectus are to, and amounts are presented in, U.S. Dollars. References in this prospectus to "Capital Product Partners L.P.," "we," "our," "us" or similar terms when used in a historical context refer to the assets of Capital Maritime & Trading Corp. and its vessel-owning subsidiaries that are being contributed to Capital Product Partners L.P. in connection with this offering. When used in the present tense or prospectively, those terms refer, depending on the context, to Capital Product Partners L.P. or any one or more of its subsidiaries, or to all of such entities. References in this prospectus to "Capital Maritime" refer, depending on the context, to Capital Maritime & Trading Corp. or any one or more of its subsidiaries, including Capital Ship Management or to Capital Maritime & Trading Corp. and any one or more of its subsidiaries, including Capital Ship Management Corp. Capital Ship Management Corp. (an affiliate of our general partner) will manage the commercial and technical operation of our fleet pursuant to a management agreement that it will enter into with us in connection with the closing of this offering and will provide administrative services to us pursuant to an administrative services agreement that it will enter into with us in connection with the closing of this offering and references in this prospectus to "Capital Ship Management" are to Capital Ship Management Corp.
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+PROSPECTUS SUMMARY This summary highlights some information from this prospectus, and it may not contain all of the information that is important to you. You should read the following summary together with the entire prospectus, including the more detailed information in our consolidated financial statements and related notes appearing elsewhere in this prospectus. You should carefully consider, among
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+PROSPECTUS SUMMARY
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+PROSPECTUS SUMMARY 1 RISK FACTORS 7 FORWARD-LOOKING STATEMENTS 17 WHERE YOU CAN FIND MORE INFORMATION 18 USE OF PROCEEDS 18 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 19 CAPITALIZATION 21 BUSINESS AND PROPERTIES 22 SELECTED HISTORICAL FINANCIAL DATA 39 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 40 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS 57 LEGAL PROCEEDINGS 58 MANAGEMENT 60 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 82 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 83 DESCRIPTION OF CAPITAL STOCK 86 SELLING STOCKHOLDERS 89 PLAN OF DISTRIBUTION 91 REGISTRATION RIGHTS AGREEMENTS 92 MATERIAL UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS 93 LEGAL MATTERS 96 EXPERTS 96 GLOSSARY OF SELECTED OIL AND NATURAL GAS TERMS 96 Employment Agreement - Michael FitzGerald Employment Agreement - Douglas Weir Form of 2007 Outside Director Restricted Stock Award Agreement Consent of Grant Thornton LLP Consent of LaRoche Petroleum Consultants, Ltd. Table of Contents PROSPECTUS SUMMARY The following summary highlights selected information contained in this prospectus. This summary does not contain all the information you should consider before investing in the securities. Before making an investment decision, you should read the entire prospectus carefully, including the Risk Factors section, the financial statements and the notes to the financial statements. As used throughout this prospectus, the terms Toreador, we, us, and our refer to Toreador Resources Corporation and its direct and indirect subsidiaries. We have provided definitions for some of the oil and natural gas industry terms used in this prospectus in the Glossary of Selected Oil and Natural Gas Terms on page 96 of this prospectus. Crude oil and natural gas equivalents are determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids. Toreador Resources Corporation Introduction Toreador Resources Corporation is an independent international energy company engaged in oil and natural gas exploration, development, production, leasing and acquisition activities. Our strategy is to increase our reserves through a balanced combination of exploratory drilling, development and exploitation projects and acquisitions. We primarily focus on international exploration activities in countries where we can establish large acreage positions. We also focus on prospects where we do not have to compete directly with major integrated or large independent oil and natural gas producers and where extensive geophysical and geological data is available. Our international operations are all located in European Union or European Union candidate countries that we believe have stable governments, have existing transportation infrastructure, have attractive fiscal policies and are net importers of oil and natural gas. We currently hold interests in permits granting us the right to explore and develop oil and natural gas properties in offshore and onshore Turkey, Hungary, Romania and France. We also own various non-operating working interest properties primarily in Texas, Kansas, New Mexico, Louisiana and Oklahoma. At December 31, 2006, we held interests in approximately 5.5 million gross acres and approximately 4.2 million net acres, of which 94.4% is undeveloped. At December 31, 2006, our estimated net proved reserves were 16 million barrels of oil equivalent (MMBOE). Historically, our operations have been concentrated in the Paris Basin in France and in south central onshore Turkey and offshore Turkey in the Black Sea. These two regions accounted for 86.9% of our total proved reserves as of December 31, 2006 and approximately 69% of our total production for the year ended December 31, 2006. We were organized under the laws of the State of Delaware in 1951. We were formerly known as Toreador Royalty Corporation. As used in this prospectus, the term currently means July 23, 2007. Our Properties Turkey We established our initial position in Turkey at the end of 2001 through the acquisition of Madison Oil Company. In Turkey, we currently hold interests in 31 exploration and three exploitation permits covering approximately 2.5 million net acres. Our exploration and development program focuses on the following areas: Western Black Sea Permits. We currently are the operator and hold a 36.75% working interest in the Western Black Sea permits, which cover approximately 962,000 gross acres. South Akcakoca Sub-Basin. The South Akcakoca sub-basin is an area of approximately 50,000 acres located in the Western Black Sea, offshore Turkey. We discovered gas in September 2004 with the Ayazli-1 well and since that time have drilled twelve additional successful delineation wells. The Cayagzi-1 and Kuzey Akkaya-1 delineation wells were drilled to total depth and did not encounter hydrocarbons, and were plugged and abandoned. During 2006, we drilled seven development wells, Dogu Table of Contents The information in the prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. PRELIMINARY PROSPECTUS, SUBJECT TO COMPLETION DATED JULY 23, 2007 3,036,947 Shares of Common Stock This prospectus relates to the public offering of an aggregate of 3,036,947 currently outstanding shares of common stock, par value $.15625 per share, which may be offered and sold from time to time by the selling stockholders of Toreador Resources Corporation named in this prospectus. The selling stockholders acquired an aggregate of 2,710,843 of the shares of common stock offered in this prospectus in a private equity purchase on March 23, 2007 and acquired an aggregate of 326,104 shares on April 23, 2007 by exercise of warrants. We are registering the offer and sale of the shares of common stock to satisfy registration rights we have granted. The shares of common stock are being registered to permit the selling stockholders to sell the shares from time to time in the public market. The stockholders may sell the shares through ordinary brokerage transactions, directly to market makers of our shares or through any other means described in the section entitled Plan of Distribution beginning on page 91 of this prospectus. We cannot assure you that the selling stockholders will sell all or any portion of the shares offered in this prospectus. We are not selling any shares of common stock under this prospectus and will not receive any of the proceeds from the sale of shares of common stock offered pursuant to this prospectus. We have paid the expenses of preparing this prospectus and the related registration expenses. Our common stock is traded on the Nasdaq Global Market (previously known as the Nasdaq National Market) under the symbol TRGL . The closing sales price for our common stock on July 20, 2007 was $13.87 per share. Our principal office is located at 4809 Cole Avenue, Suite 108, Dallas, Texas 75205, and our telephone number is (214) 559-3933. The common stock offered hereby involves a high degree of risk See Risk Factors beginning on page 7. We may amend or supplement this prospectus from time to time by filing amendments or supplements as required. You should read the entire prospectus and any amendments or supplements carefully before you make your investment decision. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this prospectus is , 2007. Table of Contents Ayazl -1, Akkaya-2, Dogu Ayazl -2, Akkaya-3, Bayhanl -1, Akcakoca-3 and Akcakoca-4, three of which required a floating rig, and completed the first phase of pipeline and facility construction with first production commencing in May 2007. The first phase of infrastructure development included: setting up three production platforms; laying a sub-sea pipeline; constructing the onshore processing facility for the entire sub-basin development; and constructing the onshore pipeline to tie into the national pipeline operated by the Turkish national gas utility. Eregli Sub-Basin. The Eregli sub-basin is an area of approximately 75,000 acres located in the Western Black Sea, offshore Turkey. We acquired approximately 325 km. high resolution 2D marine seismic survey on the permit in preparation for an exploration program. Thrace Black Sea Permits. The Thrace Black Sea permits are located offshore Turkey in the Black Sea between Bulgarian waters and the Bosporus Straits. We are the operator and hold a 50% working interest in the permit covering 422,000 net acres. In June 2005, HEMA Endustri A.S., a Turkish-based conglomerate, agreed to pay 100% of the first $1.5 million of the geophysical and exploration costs on this acreage in exchange for an option for a 50% interest in this permit. In 2006, we completed approximately 1500 km. 2D marine seismic program and we are currently evaluating the seismic to pick the first drilling location. The first wells on the Thrace Black Sea permits will be drilled in 2007. Central Black Sea Permit. In January 2005, the Turkish government awarded us two additional Black Sea permits located in shallow waters offshore central Turkey comprising approximately 233,000 acres. We intend to acquire 240 km. of 2D marine seismic survey in 2007, and we will then conduct a full analysis of existing technical data on these two permits in which we hold a 100% working interest. Eastern Black Sea Permit. We have an exploration permit on three blocks in the Black Sea offshore Turkey in the coastal waters to the west northwest of the city of Trabzon. The three blocks total approximately 357,062 acres. We are the operator of and hold 100% working interest in this permit. In early 2007, we completed approximately 90 km. of total 230 km. 2D marine seismic program in 2006. The rest of the program will be completed in mid-2007. Buyukdag Permits. The Buyukdag permits cover approximately 39,450 acres located in Eastern Turkey in which we hold 100% working interest. We have already initiated re-processing of existing 2D seismic data in the permit area and plan to acquire approximately 300 km. 2D onshore seismic survey in 2007. Southeast Turkey Permits. Bakuk Onshore in southeast Turkey, at the Syrian border, we were recently granted an exploration permit on one block of approximately 95,897 acres. The block is west of some existing oil and gas fields. We are operator of and hold 100% working interest in this permit. We are reprocessing all 2D seismic data which were acquired by the previous operator prior to drilling an exploration well in the permit area. Van The Van permit area is surrounded by other prolific oil fields in southeast Turkey and it covers approximately 965,000 acres. We are currently gathering geological and geophysical data to define prospective structures. We are the operator of and hold a 100% working interest in this permit. Hungary We established our initial position in Hungary in June 2005 through the acquisition of Pogo Hungary Ltd. from Pogo Producing Company for $9 million. We currently hold an interest in one exploration permit covering two blocks aggregating approximately 764,000 net acres. Szolnok Block. Two gas wells were drilled by the previous operator in the Szolnok Block, each of which initially tested at over 4 Mmcf per day. We expect to construct a gas processing facility and tie-in pipeline for such wells in 2007, once a gas contract has been concluded. A review of the extensive 2D and 3D seismic surveys, conducted by the prior owner, delineated multiple prospects of which one was drilled in June of 2006. This well was a geophysical and geological success however the inert content exceeded the economic threshold and, therefore, the well was subsequently plugged and abandoned. The necessary permits and Table of Contents drilling applications are currently being prepared which should enable the drilling of several additional prospects, each of which is testing a variety of features and concepts stratigraphic and structural in nature. Tompa Block. Three exploratory wells and two re-entries were undertaken in the southern Tompa Block prospect. The exploration wells failed to encounter commercial hydrocarbons; however, the data and knowledge gained in the exploration process have escalated several leads to the prospect category. The necessary applications are also being prepared which should enable these prospects to be drilled in the late 2007 or early 2008 timeframe. Plans to tie-in the two completed re-entry wells are progressing and first production from the Tompa Block is expected in early 2008. Negotiations for the oil and gas sale contract are well advanced. Romania We established our initial position in Romania in early 2003 through the award of an exploration permit in the Viperesti block. We hold a 100% interest in one rehabilitation and two exploration permits covering approximately 625,000 acres. Viperesti Permit. We currently are the operator and hold 100% of this exploration permit, covering approximately 324,000 acres. In December 2006, we spudded the first exploratory well on this prospect the Naeni #2 bis and in January the well was plugged and abandoned. In February 2007, we spudded the second well, the Naeni #6 well, which was drilled to a total depth of 1,657 meters and was plugged and abandoned as a dry hole after logging. The third well in a multi-well exploration program planned for 2007 and 2008, the Lapos-2, was spudded in the Company s Viperesti block in April and was plugged and abandoned as a dry hole. Moinesti Permit. We are the operator and hold 100% of this exploration permit, covering approximately 300,000 acres. Fauresti Rehabilitation Permit. We are the operator and hold 100% of this rehabilitation permit. During 2006 we completed the production facility and are currently producing approximately 2.1 Mmcfd of natural gas and 36 Bbls of condensate per day. France We established our initial position in France at the end of 2001 through the acquisition of Madison Oil Company. We hold interests in permits covering five producing oil fields in the Paris Basin on approximately 24,200 net acres as well as three exploration permits covering approximately 232,200 net acres. Charmottes Field. We hold a 100% working interest and operate the permit covering the Charmottes Field, which currently has 9 producing oil wells. The field is produced from two separate reservoirs, one at 1500 meters (4,500 feet) in the fractured limestone of the Dogger and the second one from the Triassic sandstones at 2500 meters (7,500 feet) in the Donnemarie formation. Production is approximately 200 BOPD from both reservoirs. Neocomian Complex. Pursuant to two exploitation permits, we operate and hold a 100% working interest in the permits covering the Neocomian Fields, that is comprised of a group of four oil fields. The complex currently has 86 producing oil wells and production is approximately 920 BOPD. Courtenay Permit. We hold a 100% working interest and are the operator of this permit covering approximately 183,000 net acres which surrounds the Neocomian Fields. An exploration well was drilled in February 2007 and was plugged and abandoned. Nemours Permit. We hold a 331/2% working interest in this permit covering approximately 15,700 net acres which is operated by Lundin Petroleum AB. Aufferville Permit. We hold a 100% working interest and operate this permit covering approximately 33,100 acres. An exploration well was drilled in April 2007 that did not encounter commercial hydrocargon and was declared a dry hole. Table of Contents United States We hold non-operating working interests in 977 gross wells (51 net wells) primarily in Texas, Oklahoma, New Mexico, Kansas and Louisiana. On June 14, 2007, our board of directors authorized management to sell our United States working interests by December 31, 2007. Our Strategy Our business strategy is to grow our oil and natural gas reserves, production volumes and cash flows through drilling internally generated prospects, primarily in the international arena. We also seek complementary acquisitions of new interests in our core geographic areas of operation. We seek to: Target under-explored basins in international regions. Our international operations are all located in European Union or European Union candidate countries that we believe have stable governments, have existing transportation infrastructure, have attractive fiscal policies and are net importers of oil and natural gas. We focus on countries where we can establish large acreage positions that we believe offer multi-year investment opportunities and concentrate on prospects where extensive geophysical and geological data is available. Currently, we have operations in Turkey, Hungary, Romania and France. We believe our concentrated and extensive acreage positions have allowed us to develop the regional expertise needed to interpret specific geological trends and develop economies of scale. Maintain a deep inventory of drilling prospects. Our South Akcakoca sub-basin gas project is located on approximately 50,000 acres within our approximately 962,000 acre Western Black Sea permits. It is the only area we have explored within these permits and we believe there are significant additional drilling opportunities within and outside of the South Akcakoca sub-basin. Similarly, we believe our Hungarian and Romanian positions offer multi-year drilling opportunities. Pursue new permits and selective property acquisitions. We target incremental acquisitions in our existing core areas through the pursuit of new permits. Our additional growth initiatives include identifying acquisitions of (i) producing properties that will enable us to increase our production and (ii) reserve and acreage positions on favorable economic terms. Generally, we seek properties and acquisition candidates where we can apply our existing technical knowledge base. Manage our risk exposure. Because exploration projects have a higher degree of risk than development projects, we generally plan to limit our exploratory expenditures to approximately one-half of the total annual capital expenditure budget per year. We have balanced our exploration and development activities to support our overall goal of growing and maintaining a long-lived reserve base. We also expect to make significant investments in seismic data. By equipping our geologists and geophysicists with state-of-the-art seismic information, we intend to increase the number of higher potential prospects we drill. As deemed appropriate, we may enter into joint ventures in order to reduce our risk exposure in exchange for a portion of our interests. Maintain operational flexibility. Given the volatility of commodity prices and the risks involved in drilling, we remain flexible and may adjust our drilling program and capital expenditure budget. We may defer capital projects in order to seize attractive acquisition opportunities. If certain areas generate higher-than-anticipated returns, we may accelerate drilling in those areas and decrease capital expenditures elsewhere. Leverage experienced management, local expertise and technical knowledge. We have assembled a management team with considerable technical expertise and industry experience. The members of our management team average more than 25 years of exploration and development experience in over 40 countries. Additionally, we have an extensive team of technical experts and many of these experts are nationals in the countries in which we operate. We believe this provides us with local expertise in our countries of operations. Table of Contents INDEX TO EXHIBITS Exhibit Number Description 2 .1 Agreement and Plan of Merger, dated as of October 3, 2001, between Toreador Resources Corporation and Madison Oil Company (previously filed as Exhibit 2.1 to Toreador Resources Corporation Registration Statement on Form S-4, No. 333-72314, filed on October 26, 2001, and incorporated herein by reference). 2 .2 Agreement for Purchase and Sale, dated December 17, 2003, by and among Toreador Resources Corporation and Tormin, Inc., as Sellers, and Black Stone Acquisitions Partners I, L.P., as Buyer (previously filed as Exhibit 2.1 to Toreador Resources Corporation Current Report on Form 8-K filed on January 15, 2004, File No. 0-2517, and incorporated herein by reference). 2 .3 Quota Purchase Agreement between Pogo Overseas Production BV, as Seller, and Toreador Resources Corporation, as Purchaser, dated as of June 7, 2005 (previously filed as Exhibit 2.1 to Toreador Resources Corporation Current Report on Form 8-K filed with the Securities and Exchange Commission on June 13, 2005, File No. 0-2517, and incorporated herein by reference). 3 .1 Restated Certificate of Incorporation, of Toreador Resources Corporation (previously filed as Exhibit 3.1 to Toreador Resources Corporation Current Report on Form 8-K filed with the Securities and Exchange Commission on March 29, 2005, File No. 0-2517, and incorporated herein by reference). 3 .2 Third Amended and Restated Bylaws of Toreador Resources Corporation (previously filed as Exhibit 3.2 to Toreador Resources Corporation Current Report on Form 8-K filed with the Securities and Exchange Commission on March 29, 2005, File No. 0-2517, and incorporated herein by reference). 4 .1 Settlement Agreement, dated June 25, 1998, among the Gralee Persons, the Dane Falb Persons and Toreador Royalty Corporation (previously filed as Exhibit 4.1 to Toreador Resources Corporation Annual Report on Form 10-K for the year ended December 31, 2004, File No. 0-2517, and incorporated herein by reference). 4 .2 Warrant, dated July 22, 2004, issued by Toreador Resources Corporation to Nigel Lovett (previously filed as Exhibit 4.14 to Toreador Resources Corporation Registration Statement on Form S-3 filed with the Securities and Exchange Commission on August 20, 2004, File No. 0-2517, and incorporated herein by reference). 4 .3 Warrant No. 30, issued by Toreador Resources Corporation to Rich Brand amending and replacing Warrant dated July 22, 2004 (previously filed as Exhibit 4.3 to Toreador Resources Corporation Annual Report on Form 10-K for the year ended December 31, 2005, File No. 0-2517, and incorporated herein by reference). 4 .4 Registration Rights Agreement, effective November 1, 2002, among Toreador Resources Corporation and persons party thereto (previously filed as Exhibit 4.5 to Toreador Resources Corporation Annual Report on Form 10-K for the year ended December 31, 2002, File No. 0-2517, and incorporated herein by reference). 4 .5 Registration Rights Agreement, dated October 20, 2003, between Toreador Resources Corporation and William I. Lee and Wilco Properties, Inc. (previously filed as Exhibit 4.9 to Toreador Resources Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, File No. 0-2517, and incorporated herein by reference). 4 .6 Registration Rights Agreement, dated December 22, 2003, between Toreador Resources Corporation and Wilco Properties Inc (previously filed as Exhibit 4.11 to Toreador Resources Corporation Annual Report on Form 10-K for the year ended December 31, 2003, File No. 0-2517, and incorporated herein by reference). 4 .7 Registration Rights Agreement, dated July 22, 2004, between Toreador Resources Corporation and the Investors party thereto (previously filed as Exhibit 4.9 to Toreador Resources Corporation Registration Statement on Form S-3 filed with the Securities and Exchange Commission on August 20, 2004, File No. 0-2517, and incorporated herein by reference). Table of Contents Recent Developments Resignation of Chief Financial Officer Our Chief Financial Officer, Douglas W. Weir, resigned effective June 1, 2007 to pursue other interests. His duties were assumed by Nigel J. Lovett, our President and Chief Executive Officer, with regard to the relationships with commercial and investment banks, and Charles J. Campise, our Vice President-Finance Accounting and Chief Accounting Officer who is our principal financial officer. 2007 Private Placement On March 23, 2007, we issued an aggregate of 2,710,843 shares of our common stock to six institutional investors for an aggregate purchase price of $45 million. On April 23, 2007, two of the six institutional investors exercised warrants to acquire an additional 326,104 shares of our common stock for an aggregate purchase price of $5,413,326. Update on current operations Turkey Two new gas discoveries, the Guluc-1 well, flowed approximately 17 million cubic feet of gas per day through a 48/64-inch choke at a flowing pressure of approximately 1,180 psi. and the Alapli-1 well tested approximately 6.8 million cubic feet of gas per day through a 32/64-inch choke at a flowing pressure of 1,064 psi. The first two production platforms in the first phase of development of the South Akcakoca Sub-basin are in place and gas from the Akkaya platform has been delivered ashore with first gas sales occurring from the onshore production facility beginning on May 21, 2007. The Alapli-1 well, which lies just outside the South Akcakoca Sub-basin but within the Toreador-TPAO-Stratic joint venture area, yielded a final test result of approximately 7 million cubic feet of gas per day from 15 meters of perforations. The three zones were between 1,068 and 1,242 meters true vertical depth in the Eocene-age Kusuri formation. The final test was a commingled flow from all three zones through a 32/64-inch choke with a flowing pressure of approximately 1,080 psi. France The St. Loup D Ordon-1 exploration well was drilled to test a Neocomian channel sand to the northeast of Toreador s Neocomian Field Complex in the Paris Basin. The well did not encounter commercial hydrocarbons and has been plugged and abandoned. Romania The Naeni-6 and Naeni-2 Bis wells were declared dry holes. The Lapos-2 exploration well was spudded in April and was plugged and abandoned as a dry hole. Our principal executive offices are located at 4809 Cole Avenue, Suite 108, Dallas, Texas 75205, and our telephone number is (214) 559-3933. Our website is located at http://www.toreador.net. The Offering Common stock outstanding before the offering 19,387,126 shares. (1), (2) Common stock offered by selling stockholders 3,036,947 shares. Common stock to be outstanding after the offering 19,387,126 shares. (1), (2) Use of proceeds We will not receive any proceeds from sales made by the selling stockholders. Nasdaq Global Market Symbol TRGL Forward-Looking Statements This prospectus contains forward-looking statements that address, among other things, our strategy to develop our business, projected capital expenditures, liquidity, and our development of additional revenue sources. The forward-looking statements are based on our Table of Contents current expectations and are subject to risks, uncertainties and assumptions. We base these forward-looking statements on information currently available to us, and we assume no obligation to update them. Our actual results may differ materially from the results anticipated in these forward-looking statements, due to various factors.
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+SUMMARY Business NYFIX, Inc., a pioneer in electronic trading solutions, continues to transform trading through innovation. The NYFIX Marketplace is a global community of trading counterparties utilizing innovative services that optimize the business of trading, including trading workstations, middle office trade automation technologies and trade messaging services. NYFIX Millennium L.L.C. ( NYFIX Millennium ) provides the NYFIX Marketplace with enhanced methods of accessing liquidity through anonymous matching under Regulation ATS and order routing for US equity securities. NYFIX also provides value-added informational and analytic services and powerful tools for measuring execution quality. As a trusted business partner and service provider to investment managers, mutual fund, pension fund and hedge fund managers (the Buy-Side ) and brokerage firms and banks (the Sell-Side ), NYFIX enables ultra-low touch, low impact market access and end-to-end transaction processing. We refer to ourselves as a trusted business partner because our clients depend on our products and services for mission critical business functions, including order management, order routing and trade execution. And since we act only as agent for our clients and never engage in proprietary trading for the firm s account, we are viewed as a neutral intermediary and impartial by Buy-Side and Sell-Side alike. Our products and services are strategically organized in three operating divisions: the FIX Division, the Transaction Services Division (including NYFIX Millennium) and the Order Management Systems ( OMS ) Division. We design, produce and sell technology based products and services to professional financial services organizations, including hedge funds, which are engaged in traditional asset management activities (including the trading of those assets), proprietary trading, and/or the handling of client orders in the U.S. and international securities markets. Many of our products and services utilize the Financial Information eXchange ( FIX ) Protocol, which is a messaging standard developed specifically for real-time electronic exchange of securities trading information. NYFIX has been a pioneer in the commercial marketplace for FIX software and services. We believe our innovative NYFIX products and services deliver value-added improvements in speed, quality of execution and cost efficiency by automating both the work flows at the user work station level and the interactive process of transmitting and executing orders between the Buy-Side institutional investors and the Sell-Side broker-dealers, and through exchanges (e.g., New York Stock Exchange ( NYSE ), American Stock Exchange ( AMEX ), the NASDAQ Stock Market ( Nasdaq ) and other exchanges), the over-the-counter ( OTC ) market, alternative trading systems ( ATSs ) and electronic communication networks ( ECNs ). The Transaction This prospectus may be used by the selling stockholders for the offer and sale of up to 4,640,604 shares of our common stock. The shares of our common stock offered hereby may be sold from time to time by one or more of the selling stockholders. No selling stockholder is required to offer or sell any shares of our common stock pursuant to this prospectus. We will not receive any proceeds from the offer and sale of any shares of our common stock by the selling stockholders pursuant to this prospectus. All proceeds from sales of shares of our common stock pursuant to this prospectus will be paid directly to the selling stockholders and will not be deposited in an escrow, trust or other similar arrangement. Our Principal Executive Offices Our principal executive offices are located at 100 Wall Street, New York, New York 10005, and our telephone number is (646) 525-3000. RISK FACTORS An investment in our securities involves a high degree of risk. The risks described below are not the only ones facing us. Additional risks not presently known to us, or that we currently deem immaterial, may also have a material adverse effect on us. If any of the following risks actually occur, our financial condition, results of operations, cash flows or business could be harmed. In that case, the market price of our securities could decline, and you could lose part or all of your investment. RISKS RELATED TO OUR BUSINESS We have been unprofitable in the past and we may not be profitable in the future. If we are required to record an impairment charge relating to our goodwill because we are not profitable, and such charge is sufficiently large, the impact on our consolidated financial statements could be material. Over the past four years we have made many acquisitions that have negatively impacted our costs. Although we have seen growth in our revenues and have restructured certain office operating leases, we have not been able to generate consistent quarterly profits. If we are not profitable in the future, we may be required to record an impairment charge relating to our goodwill. If the impairment charge is sufficiently large, the impact on our consolidated financial statements could be material. In addition, costs incurred for professional fees for outside accountants and lawyers to restate and re-audit financial results, to produce and analyze document requests and to address related litigation have been significant and are expected to be significant until these matters are resolved. We are highly reliant upon our computer and other electronic systems. A significant power or telecommunications failure, computer virus, increased order volume, software defects, or human error could cause us and our clients to lose revenue and subject us to liability for client losses. A slowdown in the operations of such services could also materially adversely affect our business and our clients. Our services depend on our ability to store, retrieve, process and manage significant amounts of data and to receive and process trade orders electronically. Our business is based upon our ability to perform such functions rapidly. Our systems and data centers could fail or slow down significantly due to a number of factors, including the volume of orders entered and executed, human error, software defects and power failures, caused by a variety of factors, or outages, caused by high demand placed on the infrastructures of the utilities we use in the Metro New York area. Since it is fairly common for multiple carriers to share the same physical infrastructure such as central offices, telephone poles and below-ground conduit, instances like major cable cuts or regional natural disasters could also cause such power or telecommunications failures. Due to the complexity of these electrical systems, errors or failures could occur which render an entire site to be unusable. We constantly monitor system loads and performances and upgrade our systems to the extent we determine to be appropriate to handle estimated increases in power consumption. However, we may not be able to accurately predict future demand. To mitigate the impact of power failures, we maintain critical data center facilities at two separate locations in the Metro New York area. Although these data centers are located in the same geographical area, they are serviced via different power companies (i.e. ConEdison and Public Service Electric & Gas). In the event of a power outage at any of our data centers, we use uninterruptible power supplies ( UPS ) to provide limited battery backup for critical systems. We also use diesel-powered generators to backup the UPSs. In the event of loss of power or telecommunications services at either of these locations, we believe there are sufficient backup facilities in place to give us reasonable time to access, or switch over to, our redundant data center. It is possible that multiple telecommunications vendors could be impacted so severely that the multi-vendor and multi-site strategy would not ensure communications services to our clients. A computer virus infiltrating our systems through connections to client systems, emails received by us or connectivity to the Internet could also negatively impact the functioning of our computer systems. Although to date, we have not had any incidence of a virus fully penetrating our protective layers and infiltrating our production systems, we continue to review our protective layers and safeguards as our systems are susceptible to the growing number of potential viruses. Any significant degradation or failure of one or more of our networks could cause our clients to suffer delays in transaction processing, which could damage our reputation, increase our service costs, result in error positions and settlement breaks (potentially causing losses) or cause us to lose clients and revenues. We depend on a limited number of network equipment and telecommunications suppliers and do not have supply contracts. Our inability to obtain necessary network equipment, technical support or other telecommunications services or being forced to pay higher prices for such equipment, support or services could materially adversely affect our business. Some key components we use in our networks are available only from a limited number of suppliers. The services required for operation of our networks are also provided to us by a limited number of telecommunication services providers. We do not have long-term supply contracts with the suppliers of the key components of our networks or any other limited source vendors, and we purchase data network equipment on a purchase order basis. We also have no control over the operation, quality or maintenance of the services required to maintain such networks or even the continued performance of such services. If we are unable to obtain sufficient quantities of equipment, required technical support or services, or to develop alternate sources as required in the future, our ability to deploy equipment in and operate our networks could be delayed or reduced, or we may be forced to pay higher prices for our network components or related services. Delays or reductions in supplies or services could lead to slowdowns or failures of our networks. We are subject to rapid changes in technology which could impact our profitability and our ability to compete effectively. Due to the high demand for technology-based services in the securities industry, we are subject to rapid technological change and evolving industry standards. Also, customer demands become greater and more sophisticated as the dissemination of information to clients increases. If we are unable to anticipate and respond to the demand for new services, products and technologies in a timely and cost-effective manner and to adapt to the technological advancements and changing standards, we will be less able to compete effectively, which could have a material adverse effect on our business. Many of our competitors have significantly greater resources than we do to fund such technological advancements. Similarly, the development of technology-based services is a complex and time-consuming process which may not always yield marketable products and services. New products and enhancements to existing products can require long development and testing periods. Significant delays in new product releases or significant problems in creating new products could negatively impact our revenues. Approximate Date of Commencement of Proposed Sale to the Public: From time to time after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o Our clients may develop in-house networks or use network providers other than NYFIX and divert part or all of their data communications from our networks to their networks, which could have a material adverse effect on our business. We sell a service (the NYFIX Marketplace Service ) that allows clients to communicate with their trading counterparties as members of the NYFIX Marketplace and access value-added services available on our platform. Our clients may develop in-house networks or use other network providers because such clients want to connect to destinations not part of our NYFIX Marketplace Service or to only certain, but not all, destinations covered by our NYFIX Marketplace Service. As a result of any of these events, we could experience lower revenues or lost revenues from delays in connecting clients to our NYFIX Marketplace Service indirectly through third party providers rather than directly by us. A decline in subscription and maintenance revenue, our largest source of revenue, or transaction revenue, could have a material adverse effect on our business. Subscription and maintenance revenue is our most significant source of revenue. Subscription and maintenance revenue rates are fixed based on a contractual period of time, typically one to three years, and is not affected by trading volumes. However, trading volumes do affect the revenues of our clients and this could affect their future purchases of our technology and services. Pricing pressures due to competition, failure to sign new agreements with clients because of reductions in their new technology spending, and observed consolidation in the financial sector could affect our revenues and profitability. Our costs associated with supporting the subscription and maintenance agreements are generally fixed and thus a loss of revenue would impact profitability. Transaction revenue has been a growing component of our revenue. There is no assurance, however, that we can continue to grow transaction revenue. As our costs to support transaction revenue are generally fixed, a decline in revenue would directly impact our profitability. Several risk factors apply to the analysis of the potential growth of transaction revenue: Competitive pressure created by a proliferation of electronic execution competitors, including New York Stock Exchange-Archipelago ( NYSE Archipelago ); Potential changes in the U.S. market structure, e.g., the NYSE could establish limits on electronic access or create its own electronic matching order engine; there could be a consolidation of broker-dealers or a decline in the number of hedge funds; and Increased client demands for bandwidth and speed, requiring reinvestment in hardware and software. We have no current plans to transition from the subscription and maintenance or transaction-based revenue model due to general acceptance of it in the marketplace and the current trend of recurring, predictable revenue recognition and cash flows. We are exposed to clearance, settlement and credit risk that could materially adversely affect our business. Our NYFIX Clearing Corporation subsidiary ( NYFIX Clearing ) settles and clears transactions on behalf of NYFIX Millennium and NTS. It also operates a matched book stock borrow/stock loan business. NYFIX Clearing may have to finance our clients unsettled positions and we could be held responsible for the defaults of our clients. Although we regularly review credit exposure, default risk may arise from events or circumstances that may be difficult to detect or foresee. In addition, concerns about, or a default by, one institution could lead to significant liquidity problems, losses or defaults by other institutions, which in turn could adversely affect NYFIX. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. NYFIX Clearing is a member of the Depository Trust and Clearing Corporation ( DTCC ) in order to self-clear securities transactions and is restricted to a maximum limit imposed by DTCC. In addition, to be able to clear trades, NYFIX Clearing may require added commitments from unaffiliated institutions to provide funding during a settlement day ( intra-day funding ). An inability to maintain or raise its maximum limits or to obtain and maintain third-party commitments to support intra-day funding could have an adverse impact on NYFIX Clearing s ability to maintain or expand its business. We are exposed to credit risk from third parties that owe us money, securities, or other obligations, including our customers and trading counterparties. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. Volatile securities markets, credit markets and regulatory changes increase our exposure to credit risk, which could adversely affect our financial condition and operating results. Our ability to maintain or expand our brokerage business could be adversely impacted if we do not continue to have third-party assistance to access exchanges and other important trading venues. Our Transaction Services Division provides execution services with the assistance of third parties who provide us access to exchanges and other important trading venues in the execution business such as ECNs and ATSs. If such third parties, exchanges or regulators determine that our Transaction Services Division must discontinue such indirect access, this could have an adverse impact on our ability to maintain or expand this business. Our clients may not approve our broker-dealer subsidiaries as counterparties if we are unable to maintain certain levels of capital, fail to file our periodic reports in a timely fashion, fail to obtain Nasdaq relisting, or are the subject of charges resulting from the SEC and Department of Justice ( DOJ ) investigations, and we may not be able to expand into other securities businesses without increased capital. Certain clients have stringent counterparty credit requirements that we may not satisfy if our capital falls below certain levels. If we are unable to satisfy these requirements, the result may be that clients limit the amount of transactions they enter into with us, which in turn would reduce our revenues. In addition, our ability to expand our Transaction Services business into new products and services may be limited by the amount of capital we have on hand. Failure to become and remain current with our periodic filing requirements, as well as the continued delisting of our stock by Nasdaq, might deter clients of our Transaction Services Division from continuing to do business with us. In addition, our clients may limit the amount of transactions they enter into with us if we are charged by the SEC and/or U.S. Attorney in the investigation into our historical stock option grants. Our broker-dealer subsidiaries are at risk if their clients default on their trading obligations. Under applicable regulatory requirements, our broker-dealers are required to cover for their clients if their clients default on their trading obligations by improperly failing to deliver cash or securities on the date when a trade settles. The broker-dealer can pursue its client for losses the broker-dealer sustains by delivering the required cash or securities. Our broker-dealers attempt to manage the risks associated with client trading defaults by conducting a number of background checks on their clients, including financial history, credit, regulatory and legal checks. The broker-dealer decides which background checks to undertake based on the relationship with the client and the nature and extent of the business that the client has with the broker-dealer. In addition, our broker-dealers monitor trades to check that counterparties know and confirm trades before settlement date to minimize market risk to which our broker-dealers can be exposed between trade date and settlement date. Our membership in the stock loan program of the Options Clearing Corporation (OCC ) mitigates our risk with respect to our matched-book stock borrow/stock loan business. The OCC guarantees the required mark-to-market payments related to the fluctuation in market value of the collateral underlying stock borrow/stock loan transactions processed by its members and is considered the principal counterparty to each transaction. At December 31, 2006, approximately 44% of our stock borrow/stock loan transactions outstanding were processed through the OCC. Despite these measures to reduce the risk to our broker-dealers from trading defaults by their clients, there can be no assurance that our broker-dealers will avoid such risks entirely or that if losses do occur they will not have a material impact on the financial condition or reputation of the affected broker-dealer. The cost structure of our Order Management Systems business could negatively impact our profitability if large clients discontinue using our services. There is a significant cost associated with maintaining and enhancing our order management systems that offer broker-dealers a variety of workstation solutions to enable trading in various market types (including the NYSE, AMEX, Nasdaq, and others). If a significant share of these clients were to discontinue use of our systems, we will continue to incur the costs associated with supporting our remaining clients, having a negative impact on our profitability. We might not be able to accommodate increased levels of trading activity and keep current with market data requirements. There could be an increase in transaction levels driven by market volumes, regulatory changes and industry changes. This increase could jeopardize the ability of our hardware and software to accommodate the increase in the total number of trades, the number of items handled during a given period of time and latency, the time required to deal with a single order. The inability to accommodate these increased transaction levels could result in significant error positions and settlement breaks potentially causing losses. Live market data is an integral part of certain product offerings of our Transaction Services Division and our OMS Division. The increase in market volumes could impact our ability to keep current with market data requirements which could, in-turn, impact the functionality of certain products causing us to lose clients and revenues. Regulation NMS and MiFID could significantly alter the market structure and the volume of trading of equities in the U.S. and in the European Union which would adversely affect us if we are unable to provide competitive performance, functionality, and capacity. As a result of the implementation of Regulation NMS, the order flow of our Transaction Services Division might migrate to competitive trading platforms as traders seek to exploit changes in market microstructure with a resulting decline in revenue. Additionally, trading volumes and market data volumes might substantially increase at the NYSE and other markets and, unless our Transaction Services and OMS Divisions are able to implement sufficient systems upgrades and product enhancements, we might be unable to keep up with the increased market volumes and compliance obligations, in which case clients would trade elsewhere. In addition, unless our OMS Division is able to implement product enhancements to provide a Regulation NMS compliant solution to our clients, they may cancel subscriptions to our OMS products. In the European Union (the EU ), the Markets in Financial Instruments Directive ( MiFID ) is required to become national law in all EU countries by November 2007. MiFID is intended to create a unified European market, with common regulation regarding investments and trading in EU countries. Although the impact of these regulations on NYFIX is uncertain, they could result in increased competition, increased administrative costs and exposure to enforcement actions. Our business could be adversely affected by our inability to attract and retain talented employees, including senior management professionals and software developers. Our business operations require highly specialized knowledge of the financial industry and of technological innovation as it applies to the financial industry. If we were unable to hire or retain the services of talented financial and software professionals, we would be at a competitive disadvantage. If Warburg Pincus converts the Series B Preferred Stock and exercises the Warrant held by it, it could potentially acquire effective voting control of us. Its interests may or may not be aligned with those of our other stockholders. If Warburg Pincus Private Equity IX, L.P. ( Warburg Pincus ) converts the 1.5 million shares of our Series B Voting Convertible Preferred Stock (the Series B Preferred Stock ) and exercises the warrant to purchase 2.25 million shares of our common stock (the Warrant ) held by it, Warburg Pincus would own approximately 35% of our then outstanding common stock (which includes 1,207,400 shares of common stock, representing approximately 3.4% of the outstanding common stock, purchased by Warburg Pincus on May 9, 2007). Warburg Pincus is permitted under the Securities Purchase Agreement pursuant to which it purchased the Series B Preferred Stock and Warrant (the Preferred Stock SPA ) to acquire up to 40% of our outstanding common stock, on an as-if-converted basis through September 2011, after which it may acquire up to 45%. Such conversion and exercise in full may enable Warburg Pincus to effectively acquire the ability to elect all of our directors and determine the outcome of other matters submitted to a vote of stockholders. This ability may enable Warburg Pincus to influence management and may discourage a third party from making a significant equity investment in us or seeking to acquire us. Warburg Pincus interests may differ from those of our other stockholders in material respects. Additionally, Warburg Pincus may determine that the disposition of some or all of its interests in us would be beneficial to it at a time when such disposition could be detrimental to us or our other stockholders. RISKS RELATING TO RESTATEMENTS AND RELATED PENDING LEGAL PROCEEDINGS Our internal review of our historical financial statements, the restatement of our consolidated financial statements, investigations by the SEC and related events have had, and will continue to have, a material adverse effect on us. By letter dated October 28, 2004, the Division of Enforcement of the SEC informed us that it was conducting an informal investigation related to our stock options granted. On February 25, 2005, we filed a current report on Form 8-K, which indicated that we believed that the matter was a formal inquiry. We are cooperating with the SEC with respect to this matter. We believe we are substantially complete with regard to producing all documents responsive to document requests and subpoenas. The SEC staff has taken testimony from current and/or former officers and/or directors, as well as from third parties, including our former independent registered public accounting firm. We could be subject to substantial penalties, fines or regulatory sanctions or claims by our former officers, directors or employees for indemnification of costs they may incur in connection with the SEC investigation into our historical stock option granting practices and other related matters described below, which could adversely affect our business and operating results. We are unable to predict the outcome of the SEC investigation into our historical stock option granting practices and whether or not the other restatement items will lead to additional investigations or inquiries. In connection with the restatement of our 1999 through 2002 consolidated financial statements relating to our accounting for the losses incurred by NYFIX Millennium filed in May 2004, the Division of Enforcement of the SEC informed us by letter dated July 14, 2004 that it was conducting an informal inquiry. On January 25, 2005, we filed a current report on Form 8-K, which indicated that we believed that the matter was a formal inquiry. We have cooperated with the SEC, producing documents in response to document requests and subpoenas and making employees available for interviews and testimony. The SEC staff has taken testimony from current and/or former officers and/or directors, as well as from third parties, including our former independent registered public accounting firm. In March 2006, we announced that the SEC Enforcement Staff had advised that it is recommending that the SEC close its inquiry into this matter without any action being taken against the Company or any individual. As a result of the Staff s recommendation, which is subject to a formal approval process within the SEC, we have not been required to produce any more documents or provide additional witnesses for testimony in connection with this inquiry. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Subject to Completion, dated October 9, 2007 PRELIMINARY PROSPECTUS NYFIX, INC. Common Stock This prospectus may be used by selling stockholders (which term shall include for purposes of this prospectus their subsequent transferees, pledgees, donees or other successors in interest selling shares of common stock or interests in shares of common stock received after the date of this prospectus from a selling stockholder as a gift, pledge, partnership distribution or other transfer) (collectively called the selling stockholders ) for the offer and sale of up to 4,640,604 shares of our common stock. The shares of our common stock offered hereby may be sold from time to time by one or more of the selling stockholders. No selling stockholder is required to offer or sell any shares of our common stock pursuant to this prospectus. The selling stockholders anticipate that, if and when offered and sold, the shares of our common stock will be offered and sold in transactions effected on the National Quotation Bureau pink sheet service (the Pink Sheets ) at then prevailing market prices. The selling stockholders have the right, however, to offer and sell shares of our common stock on any other market, at then prevailing market prices, or in privately negotiated transactions at a price then to be negotiated. Each selling stockholder has advised us that each offer and sale made on the Pink Sheets or any other market by him or her or his or her transferees, pledgees, donees and successors will be made through or to licensed or registered brokers and dealers. We will not receive any proceeds from the offer and sale of any shares of our common stock by the selling stockholders pursuant to this prospectus. All proceeds from sales of shares of our common stock pursuant to this prospectus will be paid directly to the selling stockholders and will not be deposited in an escrow, trust or other similar arrangement. We will bear all of the expenses in connection with the registration of the shares of our common stock offered hereby, including legal and accounting fees. No discounts, commissions or other compensation will be allowed or paid by us in connection with sales of the shares of our common stock offered hereby. Each selling stockholder has advised us that no discounts, commissions or other compensation will be allowed or paid by him or her or his or her transferees, pledgees, donees and successors in connection with sales of the shares of our common stock offered hereby, except that usual and customary brokers commissions or dealers discounts may be paid or allowed by the selling stockholders. Our common stock is traded on the Pink Sheets under the trading symbol NYFX. On October 3, 2007, the last reported sale price of our common stock on the Pink Sheets was $4.60 per share. The consolidated financial statements included in our annual report on Form 10-K for 2005 restated the results of operations for fiscal years 2004 and 2003 and, in Note 19 to that report, the results for interim periods in 2004 and the quarter ended March 31, 2005 to reflect changes in our accounting for stock options granted, acquisitions and investments, revenue recognition, income taxes and treasury stock issuances (the 2005 Restatement ). Costs incurred for professional fees for outside accountants and lawyers to restate and re-audit our financial results and to produce and analyze document requests and to address related litigation have been significant and are expected to be significant until these matters are resolved. We are the subject of several legal and administrative proceedings relating to our granting of stock options to certain of our employees, officers and directors. We are unable to predict the outcome of these proceedings and can give no assurances that the outcome of these proceedings will not have a material impact on us or that other proceedings will not be initiated. In May 2006, we received a grand jury subpoena from the U.S. Attorney for the Southern District of New York. The subpoena sought documents relating to our granting of stock options. With the agreement of the Assistant U.S. Attorney, we are responding to the subpoena by producing the documents we produce to the staff of the Division of Enforcement of the SEC. The U.S. Attorney has also conducted interviews with at least one of our current employees and two of our former employees (one of whom is a former officer) and with at least one employee of our former independent registered public accounting firm. Since June 2006, we have been served as a nominal defendant in several shareholder derivative actions against us and several of our current and former officers and directors, asserting, among other things, claims under the federal securities laws, corporate waste, fraud and breach of fiduciary duty against all the individual defendants based on claimed backdating of stock option grants to these individuals between 1997 and 2003. In addition, certain stockholders have made formal inquiries regarding alleged violations of Section 16(b) of the Exchange Act based on the same facts alleged in these actions. In 2006 and 2007, we have had communications with the United States Internal Revenue Service and the United Kingdom HM Revenue & Customs relating to our potential liability for income and payroll tax withholdings on certain historical stock option grants and exercises. We are unable to predict the outcome of any of these matters at this time and can give no assurances that the outcome of any of these proceedings will not have a material impact on us or that there will not be other proceedings arising from the 2005 Restatement or the matters described in the 2006 Form 10-K. Investment
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+PROSPECTUS SUMMARY This summary is not complete. It highlights selected information contained elsewhere in this prospectus. You should read this entire prospectus carefully, including the information under the heading Risk Factors, our financial statements and the notes to those financial statements. Unless the context requires otherwise, references in this prospectus to Geokinetics, we, us, our or ours refer to Geokinetics Inc., together with its subsidiaries. References in this prospectus to Grant or Trace refer to Grant Geophysical, Inc. and its subsidiaries and to Geokinetics Exploration Inc. (formerly known as Trace Energy Services Ltd.) and its subsidiaries, respectively. When we refer to the Trace acquisition, we mean our acquisition of Trace and the related financing of that acquisition which closed in December 2005. When we refer to the Grant acquisition, we mean our acquisition of Grant and the related senior loan and subordinated loan used to finance that acquisition which closed in September 2006. When we refer to the Refinancing, we mean the repayment of the financing related to the Grant acquisition with the proceeds from the issuance of our second priority senior secured floating rate notes due 2012 (the Floating Rate Notes ) and the issuance of our Series B Senior Convertible Preferred Stock (the Series B Preferred Stock ) in December 2006. In this prospectus, we present pro forma financial information giving effect to the Grant acquisition, the Refinancing and this offering. The results of operations for Trace are reflected for a full year in our results of operations for the year ended December 31, 2006. Our Company We are a full-service, global provider of seismic data acquisition and seismic data processing and interpretation services. We believe we are the fourth-largest provider of seismic data acquisition services in land, marsh and swamp ( transition zone ) and shallow water environments based on total worldwide crew count. Our services are used by oil and natural gas exploration and production ( E&P ) companies to identify and analyze drilling prospects, maximize drilling success, optimize field development and enhance production economics. We seek to differentiate ourselves from our competitors through our focus on harsh environments, difficult to shoot locations and the innovative application of our specialized equipment and processes. We primarily perform three-dimensional ( 3D ) seismic data surveys for E&P customers, which include many national oil and gas companies, major international oil and gas companies and public and private independent operators. In addition, we perform a significant amount of work for seismic data library companies that acquire seismic data to license to E&P companies rather than for their own use. On a pro forma basis, for the year ended December 31, 2006, we generated revenues of $329.5 million and Adjusted EBITDA of $38.1 million. See Summary Historical Consolidated and Unaudited Pro Forma Combined Financial Information beginning on page 9. Of our $329.5 million in pro forma revenue, seismic data acquisition services and seismic data processing and interpretation accounted for 98% and 2%, respectively. Seismic data acquisition services. We provide our seismic data acquisition services in the Gulf Coast, Mid-Continent, California, Appalachian and Rocky Mountain regions of the United States, Western Canada, Canadian Arctic, Central and South America, Africa, the Middle East, Australia/New Zealand and the Far East. We engage in seismic data acquisition services in land, transition zone and shallow water environments on a contract basis for our customers. Our equipment is capable of collecting two-dimensional ( 2D ), 3D and multi-component seismic data. We have a combined recording capacity in excess of 82,000 channels that can be configured to operate up to 22 crews worldwide. During the first quarter of 2007, we operated on average thirteen crews in North America (including on average four crews in Canada) and nine internationally. The number of AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 individuals on each crew is dependent upon the size and nature of the seismic survey requested by the customer. Seismic data acquisition services contracts, whether bid or negotiated, provide for payment on either a turnkey or term basis, or on a combination of both methods. Our contracts currently provide that the seismic data acquired by us is the exclusive property of our customer. On a pro forma basis, for the year ended December 31, 2006, seismic data acquisition services generated revenues of $322.3 million, with North America and international operations accounting for approximately 56% and 44%, respectively, and approximately 52% and 48%, respectively, of operating income. Seismic data processing and interpretation services. We also provide onshore and offshore proprietary seismic data processing services and a full suite of seismic interpretation products and services. Seismic data is processed to produce an image of the earth s subsurface using proprietary computer software and internally developed techniques. Our seismic data processing and interpretation centers in the United States and the United Kingdom process 2D and 3D seismic data acquired by our own crews as well as data acquired by other seismic crews. A majority of our seismic data processing and interpretation services are performed on 3D seismic data. We also re-process older seismic data using new techniques designed to enhance the quality of the data. Substantially all of our seismic data processing service contracts are on a turnkey basis. On a pro forma basis, for the year ended December 31, 2006, seismic data processing and interpretation services generated revenues of $7.2 million. Industry Overview Seismic surveys enable oil and natural gas companies to determine whether subsurface conditions are favorable for finding oil and natural gas accumulations and to determine the size and structure of previously identified oil and natural gas fields. Seismic surveys consist of the acquisition and processing of 2D and 3D seismic data, which is used to produce computer-generated, graphic cross-sections, maps and 3D images of the subsurface. These resulting images are then analyzed and interpreted by geophysicists and are used by oil and natural gas companies to acquire prospective oil and natural gas drilling rights, select drilling locations on exploratory prospects and manage and develop producing reservoirs. Seismic data is acquired by crews operating in land, transition zone and marine environments. Seismic data is generated by the propagation of sound waves near the earth s surface by controlled sources, such as dynamite or vibration equipment. The waves radiate into the earth and are reflected back to the surface and collected by strategically positioned data collection devices known in the industry as geophones. This data is then input into a specialized data processing system that enhances the recorded signal by reducing noise and distortion, improving resolution and arranging the input data to produce an image of the subsurface. 3D seismic surveys collect far more information and generate significantly greater detail of the underlying reservoirs than historically used seismic methods, in particular 2D surveys. The overall demand for seismic data and related seismic services is dependent upon spending by oil and natural gas companies for exploration, production, development and field management activities, which, in turn, is driven largely by present and expected future prices for crude oil and natural gas and the need to replenish drilling prospects and reserves. This is impacted by demand and supply, global and local events, as well as political, economic and environmental considerations. In recent years, higher demand for oil and natural gas coupled with constrained global supply has resulted in higher commodity prices and increased exploration and development activity by our customers. Primarily driven by robust global economic growth expectations, particularly in China and GEOKINETICS INC. (Exact name of registrant as specified in its charter) Delaware 1311 94-1690082 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number) One Riverway, Suite 2100 Houston, Texas 77056 (713) 850-7600 (Address, including zip code and telephone number, including area code, of Registrant s principal executive offices) Scott A. McCurdy Vice President and Chief Financial Officer 14521 Old Katy Road, Suite 100 Houston, Texas 77079 (281) 398-9503 (Name, address, including zip code and telephone number, including area code, of agent for service) Copies to: James J. Spring, III Bruce Czachor Chamberlain, Hrdlicka, White, Williams & Martin Shearman & Sterling LLP 1200 Smith Street, Suite 1400 599 Lexington Avenue Houston, Texas 77002-4310 New York, New York 10022 (713) 658-1818 (212) 848-4000 India, the International Energy Agency estimates in its 2006 World Energy Outlook that global energy demand will grow approximately 50% from 2006 to 2030. Despite increased capital spending by oil and natural gas companies to locate additional drilling prospects and reserves, we believe the increase in demand for oil and natural gas will continue to outpace the increase in supply. In response to this trend, along with associated commodity pricing and exploration activity, we believe that the following long term fundamentals will benefit our operations: E&P capital spending. The need to replace depleting reserves, particularly in a period of moderate to robust commodity prices, should encourage capital expenditures by our customers, which we expect will benefit the seismic services industry. E&P companies, including the national oil and gas companies in certain countries, are under pressure to increase or replenish reserves and are looking to unconventional resource plays, transition zones, international locations and the optimization of current reserves with new technology. Seismic data acquisition services are a key component of E&P companies capital expenditure programs. Recent increases in E&P capital spending has resulted in increased seismic crew activity and related services. According to the International Energy Agency, global E&P capital spending is expected to increase approximately 17% between 2006 and 2010. We expect this trend to continue. Technological development. The application and utilization of seismic services have considerably increased over the last several years as a result of significant technological advancements, such as the move from 2D to 3D and single-component to multi-component seismic data recording and processing. Seismic services can now be applied to the entire sequence of exploration, development and production, as opposed to exploration only, allowing for a greater range of use for our services. Increased exploration activity in harsh and remote environments. The combination of sustained higher oil and natural gas prices and constrained reserve replenishment prospects has increased the demand for seismic data as operators seek to re-evaluate and review prospective fields or other geological environments that were previously uneconomical to evaluate and develop. Our Strengths Leading provider with a global footprint and balanced market presence. We believe we are the fourth-largest global provider of seismic data acquisition services in land, transition zone and shallow water environments based on total worldwide crew count, with current operations and/or office locations in 15 countries. Our global diversity and exposure to both oil and natural gas price-driven opportunities provide us with a balanced market presence, which increases new contract opportunities while reducing our sensitivity to individual markets and commodity price volatility. We have the equipment and trained personnel to deploy up to 22 seismic crews throughout the world. Our size and operating capability allow for improved crew and equipment utilization and the ability to service our customers across the globe. Our long operating history and reputation for quality service encourages customers to continue to select us as their provider of seismic data acquisition services. Specialized expertise in difficult environments and key high-growth markets. We specialize in seismic data acquisition services in transition zones and other difficult land environments, which we believe to be underserved and one of the fastest growing segments of the overall seismic services industry. Our extensive experience operating in such complex and challenging areas, including our expertise in designing and utilizing special equipment customized for these environments, provides us a significant competitive advantage. We also have experience operating in local markets within key high growth regions around the world, such as Central and South America, the Middle East and the Far East, where we have been operating longer than many of our competitors. In addition, the Approximate date of commencement of proposed sale to the public: As soon as practicable following the effectiveness of this registration statement. expertise required to operate in these areas and the difficult nature of the work positions us to potentially realize higher operating margins than on more traditional land seismic projects. Strong relationships with a globally diversified customer base. We have strong, long-standing relationships with major and independent oil and natural gas producers in over 20 countries, as well as with many national oil and gas companies throughout the world. We have been providing seismic data acquisition services to many of our largest customers for over five years. Our global operating capability and sizable crew count allow us to leverage relationships with our customers and increase revenues by providing them services throughout the world and tailoring crew sizes to meet their requirements. Our customer base is diversified and we are not dependent on any one customer. On a pro forma basis, our top ten customers collectively represented approximately 36% of total pro forma revenues for the year ended December 31, 2006, with no single customer accounting for more than ten percent of our total revenues. Strong backlog that provides significant revenue visibility. Given current robust fundamentals in the industry and our strong revenue backlog of firm commitments for seismic data acquisition services, we believe we have significant revenue visibility. We estimate our total seismic data acquisition and seismic data processing and interpretation services revenue backlog to be $282.8 million as of March 31, 2007, of which $126.7 million are North American projects and $156.1 million are international projects. We believe that the size, number and duration of seismic data acquisition contracts are increasing, which we expect will continue to improve revenue visibility and crew utilization. Highly experienced management team and board of directors. We draw on the global experience of our management team to maintain our leading market position and strong customer relationships. Our senior executive management team has an average of 21 years of relevant industry experience in the seismic services sector as well as in oil and gas exploration, with a demonstrated track record. Our board of directors includes members recognized individually for their accomplishments in the fields of energy, international law, investment banking and private equity, and who we believe afford us a valuable strategic resource. Our Strategy Maintain focus and specialization in profitable, high-potential markets. To maximize profitability, we will continue to target our growth in areas in which we believe we have a competitive advantage, such as transition zones and other difficult land environments. We believe these areas continue to be underserved and represent one of the fastest growing segments of the overall seismic services market. We also plan to further expand our presence, both geographically and in the types of services offered, in existing and new high-potential markets throughout the world to diversify our customer base and capitalize on opportunities in our areas of operations. Prudently invest in new and technologically-advanced equipment. We believe growth in demand for seismic services will continue to be enhanced by the development and application of new technologies, particularly for use in transition zones and other difficult land environments. We will continue to acquire and develop expertise in utilizing technologically-advanced equipment to perform our services. In addition, we have and will continue to upgrade our existing equipment, primarily in North America, to improve operating efficiency and to equip us for larger crew sizes, which we expect to lead to increased operating margins. We make our capital investment decisions expecting to receive, on average, a full return on investment within less than three years on an EBITDA basis. From January 1, 2002 through March 31, 2007, on a pro forma basis, we spent approximately $138.3 million purchasing state-of-the-art equipment (including $40.0 million between July 1, 2006 If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: o If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o CALCULATION OF REGISTRATION FEE Title of each class of securities to be registered Amount to be registered(1) Proposed maximum offering price per unit(2) Proposed maximum aggregate offering price(2) Amount of registration fee Common Stock $0.01 par value per share 5,175,000 shares $28.80 $149,040,000 $10,104 (3) (1) Includes 675,000 shares that the underwriters will have the right to purchase to cover over-allotments, if any. (2) Calculated pursuant to Rule 457(c) of the rules and regulations under the Securities Act of 1933, as amended, with respect to the common stock to be sold by us, based on $28.80 per share, which was the average of the high and low over-the-counter prices of the Registrant s common stock on April 26, 2007. (3) $7,752 previously paid. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. and December 31, 2006 and $21.5 million in the first quarter of 2007), working closely with our vendors to develop products that improve both the quality and efficiency of our services. Our 82,000 channels of recording equipment includes 12,500 channels of additional recording capacity acquired in the second half of 2006 and 7,000 acquired in the first quarter of 2007. Provide a broad range of services. We believe there are significant global opportunities in providing customers a broad range of seismic data services, from acquisition and processing to interpretation and management. Customers are increasingly seeking integrated solutions to better evaluate known reserves and improve the yield of recoverable hydrocarbons. Given our size and technological capabilities, we believe we have the infrastructure to significantly expand these multiple service offerings that add value and efficiency for our customers. Enhance asset utilization and operating efficiency. Through greater customer and geographic diversification, upgraded equipment and improved crew capabilities, we seek to enhance the continuity of our seismic crews, the utilization of our equipment and our operating efficiency, which we expect will generate increased revenues and higher margins. Additionally, expanding our customer base and presence internationally will allow us to better manage our resources and minimize the reliance on certain customers, downtime between projects and the effects of seasonality and cyclicality in our business. Actively pursue strategic acquisitions. We intend to pursue growth through strategic acquisitions. We seek to identify and complete acquisitions that will enhance our cash flow, complement our products and services, improve our operating efficiency, expand our geographic footprint and presence in key high-growth markets and further diversify our customer base. Recent Acquisitions Grant Acquisition On September 8, 2006, we completed the acquisition of all of the issued and outstanding capital stock of Grant, which added international seismic data acquisition services to our business, for $125.0 million in cash, subject to adjustments for net debt and working capital. At the time of the Grant acquisition, Grant had the capacity to operate eleven crews and had 35,000 channels of recording equipment. We believe that the addition of Grant provides us with a platform for continued growth through access to new international markets, transition zone expertise and highly-skilled management. Grant performs 2D and 3D seismic surveys in the land, transition zone and shallow water environments in the United States, Western Canada, Central and South America, Africa, the Middle East, Australia/New Zealand and the Far East, using both analog and digital seismic equipment for a wide range of customers exploring for oil and natural gas reserves. Through the Grant acquisition, we also added equipment that complemented and expanded our operational capabilities. As a result of the Grant acquisition, a substantial portion of our revenues from seismic data acquisition services are now sourced from international operations. Grant has long-standing relationships with its customers, which include national oil and gas companies, major international oil and gas companies and public and private independent operators around the world. Additionally, Grant has a very experienced senior management team with vast international experience working in land, transition zone and shallow water environments. The Grant acquisition was funded from the proceeds of a $55.0 million subordinated loan from Avista Capital Partners, L.P. ( Avista ), an affiliate of Avista and one other institutional investor and Subject to completion, dated April 27, 2007 The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. PRELIMINARY PROSPECTUS 4,500,000 Shares GEOKINETICS INC. Common Stock We are offering 4,500,000 shares of common stock. We plan to use the net proceeds of this offering to redeem all of our outstanding second priority senior secured floating rate notes due 2012, including principal, premium and accrued interest, and use any remaining net proceeds to repay a portion or, if funds allow, all of our revolving credit facility and any remainder for general corporate purposes. Our common stock is quoted on the OTC Bulletin Board under the symbol GKNT.OB. On April 26, 2007, the last reported sale price of our common stock was $28.80 per share. We intend to list our shares of common stock on the American Stock Exchange concurrent with this offering under the symbol GOK. Investing in our common stock involves risks. See Risk Factors beginning on page 12. Per Share Total Public offering price $ $ Underwriting discounts and commissions $ $ Proceeds to us before expenses $ $ We and one of our stockholders have granted the underwriters a 30 day option to purchase up to 675,000 additional shares to cover any over-allotments. We will not receive any of the net proceeds from the selling stockholder. We expect that delivery of the shares of common stock will be made on or about May , 2007. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. RBC CAPITAL MARKETS UBS INVESTMENT BANK a $100.0 million senior loan from Royal Bank of Canada, as administrative agent and lender, and Avista. We used the proceeds from these loans to pay approximately $125.0 million for the purchase price of Grant, $11.6 million to pay existing indebtedness, approximately $4.0 million for the payment of fees and expenses incurred in connection with such loans and the acquisition of Grant and the remainder for working capital. Trace Acquisition On December 1, 2005, we completed the acquisition of all of the issued and outstanding common shares of stock of Trace for Canadian $35.0 million, subject to certain adjustments, which we paid in cash and common stock. At the time of the Trace acquisition, Trace had the capacity to operate six crews and had 18,000 channels of recording equipment. Headquartered in Alberta, Canada, Trace provides seismic services to exploration and production companies in the oil and natural gas industry, and it specializes in the acquisition of land-based seismic surveys in North America. Through this acquisition, we expanded our business into the Canadian Arctic, California and the Appalachian Mountain regions and increased our use of next generation full-wave (multi-component) seismic technology. These areas provide us with new business opportunities as well as the potential for long-term growth within each respective market. On November 27, 2006, Trace changed its registered name to Geokinetics Exploration Inc. We financed a significant portion of the cash portion of the purchase price through the sale of our common stock and warrants to purchase our common stock in a Private Investment in Public Equity ( PIPE ) offering for aggregate net proceeds of $30.8 million. Recent Developments Amendment to Credit Facility Our existing credit facility consists of a $14.5 million revolving credit facility and a $6.5 million capital expenditures facility. See Description of Certain Indebtedness beginning on page 97. Shortly after the closing of this offering, we expect to amend our existing credit facility to among other things, increase this facility up to $60 million, with $25 million expected to be available as a revolving credit line, which is expected to be available for general corporate purposes, including capital expenditures, and $35 million expected to be available specifically for capital expenditures. Initially, up to $30 million will be available upon closing the credit facility and the remaining $30 million will be available once the Floating Rate Notes are redeemed. In addition, the amended credit facility includes a $10 million accordion feature under which, at our request, the $35 million available specifically for capital expenditures can be increased to an aggregate of $45 million, which will increase the total amended credit facility limit up to $70 million. Planned Increases in 2007 Capital Expenditure Budget Subject to the amendment of our credit facility and this offering, we plan to increase our 2007 capital expenditure budget from $34.6 million to $81.7 million. This increase will allow us to add channels, expand our crew capacity and, upgrade and expand our existing equipment, which should improve our efficiency and quality of awards. These expenditures should also allow us to meet the requirements of recently awarded contracts and expected contracts. First Quarter 2007 Results Revenues for the first quarter 2007 rose 129% to $111.0 million compared to $48.5 million for the first quarter of 2006. The solid growth in revenues was primarily due to the impact of the Grant acquisition, a strong Canadian winter season, increased demand for seismic data acquisition services, investments in capital RAYMOND JAMES HOWARD WEIL INCORPORATED , 2007 We are a Delaware corporation, incorporated on January 31, 1980. Our principal executive offices are located at One Riverway, Suite 2100, Houston, Texas 77056, and our telephone number at this address is (713) 850-7600. Our website address is www.geokinetics.com. However, information contained on our website is not incorporated by reference into this prospectus, and you should not consider the information contained on our website to be part of this prospectus. The Offering Set forth below is a brief summary of some of the principal terms of this offering. Purchasers of our common stock should also read the information under the caption Description of Capital Stock later in this prospectus for a more detailed description and understanding of the terms of our common stock. Common stock offered by Geokinetics 4,500,000 shares. Common stock to be outstanding after this offering 10,311,060 shares. Underwriters over-allotment option We and one of our stockholders named in this prospectus have granted to the underwriters an option to purchase, within 30 days of this prospectus, up to 577,207 and 97,793 shares, respectively, to cover over-allotments. We will not receive any of the net proceeds from the selling stockholder. Use of proceeds We estimate that the net proceeds to us from this offering will be approximately $121.3 million. We plan to use the net proceeds from this offering to redeem all of our outstanding Floating Rate Notes, including principal, premiums and accrued interest, and use any remaining net proceeds to repay a portion or, if funds allow, all of our revolving credit facility and any remainder for general corporate purposes. Listing Our common stock is quoted on the OTC Bulletin Board under the symbol GKNT.OB. We intend to list our shares of common stock on the American Stock Exchange concurrent with this offering under the symbol GOK.
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+S-1/A 1 file1.htm AMENDMENT NO.1 TO FORM S-1 Table of Contents As filed with the Securities and Exchange Commission on November 2, 2007 Registration No. 333-146704 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 AFP Imaging Corporation (Exact name of registrant as specified in its charter) New York (State or other jurisdiction of incorporation or organization) 3861 (Primary Standard Industrial Classification Code Number) 13-2956272 (IRS Employer Identification Number) 250 Clearbrook Road Elmsford, New York 10523-1315 (914) 592-6100 (Address, including zip code, and telephone number, including area code, registrant s principal executive offices) Donald Rabinovitch, President AFP Imaging Corporation 250 Clearbrook Road Elmsford, New York 10523-1315 (914) 592-6100 – with copy to – Jack Becker, Esq. David R. Fishkin, Esq. Snow Becker Krauss P.C. 605 Third Avenue – 25th Floor New York, New York 10158-0125 (Name, address, including zip code, and telephone number, including area code of agent for service) Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Table of Contents The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Table of Contents We have developed proprietary software for each application. DR systems can be either , ' ': , ' ': postage stamp size, larger for equine applications or in the largest format to be installed in x-ray tables for companion animal whole body examinations. The primary benefit for the professional is the improved display of diagnostic information, clinical efficiency and the flexibility of electronic radiographs for referrals and storage. Dental X-Ray Systems We distribute digital and analog dental x-ray machines manufactured by others. We have the exclusive distribution rights in the North American markets for a well-established, European-designed, intraoral dental x-ray and a panoramic/cephalometric dental x-ray unit. The latter provides, all in one view, a full format image for the diagnosis of the entire upper and lower dental arches and jaws. These dental products can be supplied to the market with a digital, filmless x-ray sensor that is compatible with our software. Panoramic units are typically used by dentists, orthodontists, oral surgeons, and endodontists for specific patient treatment plans where three-dimensional imaging is not required. In such instances, installed equipment utilizes analog x-ray film that can be developed in our well-established line of processors. Veterinary Imaging and Radiographic Table Systems We manufacture and distribute a line of x-ray tables and related equipment specifically designed for the veterinary marketplace. They include x-ray systems for film or digital dental radiography, a portable digital imaging system for the diagnosis of equine extremities and a large size filmless, x-ray sensor used in conjunction with general radiographic equipment. We distribute general-purpose x-ray systems and related imaging components specifically designed for veterinary applications. They are marketed under our trademark , ' ': , ' ': VetTek. These systems are designed to offer the user either digital or film-based image capture systems and allow the veterinarian to perform either dental or general radiography. X-Ray Processors & Accessories We manufacture and distribute a line of medical, dental and industrial x-ray film processors. These are commonly referred to as analog film-based systems. The machines automatically process or develop x-ray films. The exposed film is inserted into the equipment and returned to the operator developed, fixed, washed and dried. The equipment can be located either in a dark room site or adapted to a daylight loading system. These analog units are used for diagnostic x-ray imaging and industrial, non-destructive testing applications. These processor products are distributed worldwide through an unaffiliated dealer network to doctors, dentists, veterinarians, hospitals, medical clinics and the U.S. government. Our Offices and Website Our principal executive offices are located at 250 Clearbrook Road, Elmsford, New York 10523-1315. Our telephone number is 914-592-6100. We maintain web sites at www.afpimaging.com and www.dent-x.com. Information contained on our web sites is not considered to be a part of, nor incorporated by reference in, this prospectus. Table of Contents The information contained in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is declared effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED NOVEMBER 2, 2007 8,409,705 Shares AFP Imaging Corporation Common Stock This prospectus relates to an aggregate of 8,409,705 shares of our common stock. The shares consist of 5,500,000 shares of our common stock that are currently issued and outstanding, 800,000 shares of our common stock issuable upon exercise of warrants that are currently outstanding and 2,109,705 shares issuable upon conversion of an outstanding convertible term note. All such outstanding shares were issued in a private placement consummated on April 12, 2007 and the warrants and convertible term note were issued in connection with a loan agreement executed on April 13, 2007. The holders of such outstanding shares and the holder of the warrants and convertible term note are referred to as the , ' ': , ' ': selling securityholders in this prospectus. The shares subject to this prospectus may be offered and sold from time to time by the selling securityholders, and/or any pledgees, donees, transferees or other successors-in-interest of the shares, through public or private transactions at prevailing market prices, prices related to prevailing market prices or at privately negotiated prices. Information regarding the identities of the selling securityholders, the manner in which they acquired or will acquire their shares and the manner in which the shares are being offered and sold is provided in the , ' ': , ' ': Selling Securityholders and , ' ': , ' ': Plan of Distribution sections of this prospectus. We will not receive any of the proceeds from the sale of the shares. We will, however, receive the exercise price, if any, upon exercise of the warrants. We have agreed to bear all of the expenses in connection with the registration and sale of the shares, except for sales commissions. We estimate these expenses to be $73,400.18. Our common stock currently is traded on the Over-the-Counter Bulletin Board maintained by FINRA under the symbol , ' ': , ' ': AFPC.OB. On October 10, 2007, the closing sale price of our common stock, as reported by the OTCBB, was $1.50 per share. You are urged to obtain current market quotations for our common stock before purchasing any of the shares being offered for sale pursuant to this prospectus. Investment in the shares being offered pursuant to this prospectus involves a high degree of risk. You should carefully read and consider the information set forth in the section of this prospectus entitled , ' ': , ' ': Risk Factors, commencing on page 6, when determining whether to purchase any of these shares. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. The date of this prospectus is , 2007 Table of Contents The Offering Common stock offered by us None Common stock offered by the selling securityholders 8,409,705 shares. These shares consist of: 5,500,000 shares currently outstanding and held of record by certain selling securityholders issued in connection with our private placement on April 12, 2007; 800,000 shares issuable upon exercise of warrants held of record by a selling securityholder issued in connection with a loan agreement with the selling securityholder on April 13, 2007; and 2,109,705 shares issuable upon conversion of the initial principal amount of a convertible term note held by a selling securityholder issued in connection with a loan agreement with the selling securityholder on April 13, 2007. Common stock outstanding as of the date of this prospectus 17,928,800 shares. Common stock to be outstanding assuming exercise of all of the warrants and the initial principal amount of the convertible term note and no other issuances of our common stock 20,838,505 shares. Use of proceeds We will not receive any of the proceeds from the sale of the shares being offered pursuant to this prospectus. We will, however, receive the exercise price, if any, upon exercise of the warrants held by the selling securityholders. We intend to use any proceeds from the exercise of the warrants for: general corporate purposes and working capital; and possible future acquisitions. Over-the-Counter Bulletin Board trading symbol AFPC.OB Table of Contents Selected Financial Data Years Ended June 30, 2007(c),(d) 2006 2005 2004 2003 2002 Statement of Operations Net Sales $ 28,719,693 $ 24,998,272 $ 23,135,063 $ 19,832,910 $ 18,043,668 $ 20,086,888 Operating Income (Loss) (4,692,921 ) 1,036,324 1,354,617 1,453,628 (545 ) 391,408 Net Income (Loss) (4,672,824 ) 1,005,348 1,899,930 1,345,467 (1,515,407 )(a) 84,002 Net Income (Loss) per Share – Basic $ (.34 ) .10 .20 .15 (.16 ) .01 Diluted (.34 ) .10 .19 .14 (.16 ) .01 Weighted Average Number of Shares of Common Stock Outstanding – Basic 13,635,688 10,009,958 9,380,855 9,270,617 9,270,617 9,271,054 Diluted 13,635,688 10,513,239 9,885,662 9,632,188 9,270,617 9,271,429 June 30, 2007(d) 2006 2005 2004 2003 2002 Balance Sheet Total Assets $ 27,170,826 $ 14,340,564 $ 8,153,396 $ 6,244,895 $ 6,043,855 $ 7,849,510 Long-term Debt 5,822,347 0 0 222,223 630,556 1,180,556 Total Liabilities 12,295,393 3,671,495 3,490,765 3,579,499 4,723,926 5,026,793 Shareholders Equity 14,875,433 5,924,746 (b) 4,662,631 2,665,396 1,319,929 2,822,717 Number of Shares of Common Stock Outstanding 17,928,800 12,345,994 9,407,717 9,270,617 9,270,617 9,270,617 (a) Upon adoption of SFAS 142 in the first quarter of Fiscal Year 2003, we recorded a one-time, non-cash charge of $1,297,069 to reduce the carrying value of goodwill. Such charge was non-operational in nature and was reflected as a cumulative effect of an accounting change. (b) On May 2, 2006, we issued 2,777,777 shares of our common stock in a private placement to selected institutional and other accredited investors. The offering price was at $1.80 per share. In conjunction with the private placement, we had granted the investors certain registration rights with respect to the resale of the shares acquired. We filed a registration statement which was declared effective on July 14, 2006. If this registration statement is subsequently suspended for a specified period of time, we could be required to pay a penalty of 1% of the financing per month to the investors. Additionally, we are required to file amendments to the registration statement as necessary to keep the registration effective for 24 months from the closing date. In accordance with the provisions of FSP EITF 00-19-2, we have classified this private placement in the shareholders equity on the accompanying consolidated balance sheets as of June 30, 2007. At June 30, 2006, the net proceeds were classified as temporary equity in accordance with the provisions of EITF Topic D-98. We have maintained this registration statement since it was declared effective and believe that the likelihood of any future penalty payments related to this registration statement are remote. (c) Includes the operating results of QR srl from April 19, 2007 to June 30, 2007. On April 19, 2007, we completed the acquisition of QR by acquiring all of the outstanding share capital of QR from the shareholders. QR is a global supplier of state-of-the-art, in-office three-dimensional dental computed tomography. QR uses an imaging technology that features a cone shaped beam of x-rays. Prior to April 19, 2007, we had acted as QR s exclusive distributor in North and South America, excluding Brazil. Table of Contents PROSPECTUS SUMMARY The following is a brief summary of certain information contained elsewhere in this prospectus or incorporated in this prospectus by reference. This summary is not intended to be a complete description of the matters covered in this prospectus and is qualified in its entirety by reference to the more detailed information contained or incorporated by reference in this prospectus. You are urged to read this prospectus in its entirety, including all materials incorporated herein by reference, especially the risks of investing in our common stock, when considering making an investment in our common stock. This prospectus contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in the forward-looking statements as a result of certain factors. We refer you to the section of this prospectus entitled , ' ': , ' ': Forward-Looking Statements for a more complete discussion of the forward-looking statements used in this prospectus.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0000350557_sten-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0000350557_sten-corp_prospectus_summary.txt
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+PROSPECTUS SUMMARY This section is a summary of certain information selected from this prospectus, including information incorporated by reference. This summary is an overview and does not contain all of the information you should consider. Therefore, you should also read the more detailed information set out in the prospectus supplement, this prospectus, our financial statements and other information incorporated by reference into this prospectus and the prospectus supplement, including the discussion of risks relating to an investment in the notes we are offering under Risk Factors beginning on page 9 and any discussion in the prospectus supplement for the purposes of updating these risks. Except when we are discussing repayment obligations under the notes, which are solely obligations of STEN Corporation, the terms we, our, and us refer to STEN Corporation and our consolidated subsidiaries.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0000716101_hydrogen_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0000716101_hydrogen_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights certain information found in greater detail elsewhere in this prospectus. This summary may not contain all of the information that may be important to you. We urge you to read this entire prospectus carefully, including the risks of investing in our common stock discussed under
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0000718007_delsite_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0000718007_delsite_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary does not contain all of the information that may be important to purchasers of our common stock. Prospective purchasers of common stock should carefully review the detailed information and financial statements, including the notes thereto, appearing elsewhere in or incorporated by reference into this prospectus. The Company Incorporated in Texas in 1973, we are a research-based biopharmaceutical, medical device, raw materials and nutraceutical company engaged in the development, manufacturing and marketing of naturally-derived complex carbohydrates and other natural product therapeutics for the treatment of major illnesses, the dressing and management of wounds and nutritional supplements. Our research and proprietary product portfolios are based primarily on complex carbohydrates isolated from the Aloe vera L. plant. Our operations are comprised of three business segments: our Medical Services Division, our Consumer Services Division and DelSite Biotechnologies Inc., or DelSite. We sell prescription and nonprescription medical products through our Medical Services Division and provide manufacturing services to customers in medical markets. Through our Consumer Services Division, we sell consumer and bulk raw material products and also provide product development and manufacturing services to customers in the cosmetic and nutraceutical markets. DelSite, our wholly-owned subsidiary, operates independently from our research and development program and is responsible for the research, development and marketing of our proprietary GelSite technology for controlled release and delivery of bioactive pharmaceutical ingredients. We maintain our principal executive offices at 2001 Walnut Hill Lane, Irving, Texas 75038. Our telephone number is (972) 518-1300. Our website is located at www.carringtonlabs.com. The information contained on our website does not constitute part of this prospectus. Through our website, we make available free of charge our annual reports on Form 10-K, our proxy statements, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act. These reports are available as soon as reasonably practicable after we electronically file those materials with the Securities and Exchange Commission, or SEC. We also post on our website the charters of our Audit, Compensation and Stock Option, Board Governance and Nominating and Executive Committees; and our Code of Business Conduct and Ethics, and any amendments or waivers thereto; and any other corporate governance materials contemplated by SEC regulations. The documents are also available in print by contacting our corporate secretary at our executive offices. Our Strategy Our strategy is to continue to grow as a research-based biopharmaceutical company focused on offering quality products to our customers and potential partners. Key aspects of our strategy are to: increase revenues by offering innovative new products, growing existing product lines and continuing to offer exceptional customer service; increase profitability by continuing to improve operational efficiency, working capital management and modernization of equipment; enlarge and diversify our customer base to reduce dependence on a limited number of significant customers; develop and market our proprietary GelSite polymer technology for delivery of vaccines and therapeutics; enter into strategic partnerships and collaboration arrangements related to our GelSite technology; and continue to develop our knowledge of polymers and their relationship to vaccines and bioactive protein and peptide therapeutics. The information in this prospectus is not complete and may be changed. The selling shareholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This document is not an offer to sell these securities and neither we nor the selling shareholders are soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Subject to Completion dated November 21, 2007 PROSPECTUS 2,926,922 Shares of Common Stock CARRINGTON LABORATORIES, INC. This prospectus covers a total of up to 2,926,922 shares of our common stock, par value $0.01 per share, that may be offered from time to time by the selling shareholders named in this prospectus. The shares being offered by this prospectus consist of 2,926,922 shares issuable upon conversion of 10% Convertible Debentures due April 26, 2010 and as payment of principal and interest pursuant to the terms of the debentures and the exercise of Series D-1, D-2 and D-3 and Series E-1 and E-2 warrants. This prospectus also covers any additional shares of common stock that may become issuable upon any anti-dilution adjustment pursuant to the terms of the above-described debentures and warrants by reason of stock splits, stock dividends, or similar events. The foregoing debentures and warrants were acquired by the selling shareholders in private placements by us that closed on April 27, 2007 and August 27, 2007. We are registering these shares of our common stock for resale by the selling shareholders named in this prospectus, or their transferees, pledges, donees or successors. We will not receive any proceeds from the sale of these shares by the selling shareholders. These shares are being registered to permit the selling shareholders to sell shares from time to time, in amounts, at prices and on terms determined at the time of the sale. Securities laws and Securities and Exchange Commission regulations may require the selling shareholders to deliver this prospectus to purchasers when they resell their shares of common stock. Our common stock is quoted on the OTC Bulletin Board under the symbol CARN.OB. On November 16, 2007, the last reported sale price of our common stock was $0.22 per share. See Risk Factors, on page 3, for a discussion of certain risk factors that should be considered by prospective purchasers of our common stock offered under this prospectus. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. The date of this prospectus is , 2007. The Offering Common stock offered by the selling shareholders to be issued upon conversion of 10% Convertible Debentures due April 26, 2010 and as payment of principal and interest pursuant to the terms of the debentures and the exercise of Series D-1, D-2 and D-3 and Series E-1 and E-2 warrants. 2,926,922 shares Use of proceeds. We will not receive any of the proceeds of sales of common stock by the selling shareholders. OTC Bulletin Board symbol. CARN.OB offering. Sales of these debentures and warrants were made only to investors that represented that they were accredited investors and were purchasing the securities for their own account, and not with a view towards, or for resale in connection with, public sale or distribution thereof. No general solicitation or general advertising was conducted in connection with the sale of any of the securities sold in this offering. On December 20, 2005, we, Swiss-American and G. Scott Vogel agreed to resolve all claims among them regarding a lawsuit styled Swiss-American Products, Inc. v. G. Scott Vogel and Carrington Laboratories Inc., and entered into a settlement agreement that provided for, among other things: (i) the cash payment by us to Swiss-American of $400,000, (ii) the issuance by us of a promissory note in favor of Swiss-American with an original principal balance of $400,000 and (iii) the issuance by us to Swiss-American of a Series C Common Stock Purchase Warrant to purchase a total of 200,000 shares of common stock. The sale of the note and issuance of the Series C Common Stock Purchase Warrant were made pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 504 promulgated thereunder as transactions not involving a public offering. Sales of this note and warrant was made only to Swiss-American, which represented that it was acquiring the securities for its own account for investment, and not with a view to the distribution or resale of all or any part thereof. No general solicitation or general advertising was conducted in connection with the sale of the securities sold in this offering. On November 18, 2005, we entered into a Note and Warrant Purchase Agreement with John L. Strauss, The Fitzgerald Trust dated March 8, 1994, Joe Menefee, Billcor Investment, Ltd., Diane Wilson, Joan Jones, Don Nelson, Bobby Cheney, Sam N. Wilson, Sam N. Wilson Jr., Jim Beightol and Dolores Beightol, Pat Healy, Ray Nixon, The Baron and Darlene Cass Family Foundation, Prime Petroleum Profit Sharing Trust and Sands Money Purchase Pension Plan (collectively, the Investors ). Under the Purchase Agreement, the Investors loaned us a total of $5 million in exchange for (i) promissory notes in favor of the Investors with a total principal balance of $5 million, (ii) Series A Common Stock Purchase Warrants to purchase a total of 2,500,000 shares of our common with an exercise price per share equal to $5.00 and (iii) Series B Common Stock Purchase Warrants to purchase a total of 2,500,000 shares of our common stock, with an exercise price of $10.00 per share. The sale of the notes and issuance of the Series A and B Common Stock Purchase Warrants were made pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder as transactions not involving a public offering. Sales of these notes and warrants were made only to investors that represented that they were accredited investors and were purchasing the securities for their own account, and not with a view towards, or for resale in connection with, public sale or distribution thereof. No general solicitation or general advertising was conducted in connection with the sale of any of the securities sold in this offering. Item 16. Exhibits and Financial Statement Schedules. The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this Registration Statement. Item 17. Undertakings. The undersigned registrant hereby undertakes: (a) (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0000732834_continenta_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0000732834_continenta_prospectus_summary.txt
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+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0000743884_macrochem_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0000743884_macrochem_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..acd54225ae596adefa35d57aeb04299876476956
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+SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY "RISK FACTORS" BEGINNING ON PAGE 5 AND OUR FINANCIAL STATEMENTS AND RELATED NOTES, BEFORE DECIDING TO INVEST IN OUR COMMON STOCK. MACROCHEM CORPORATION We are a specialty pharmaceutical company that develops and seeks to commercialize pharmaceutical products. Currently, our portfolio of patented product candidates is based on our drug delivery technologies: SEPA(R), MacroDerm(TM) and DermaPass(TM). Our SEPA topical drug delivery technology (SEPA is an acronym for "Soft Enhancement of Percutaneous Absorption," where "soft" refers to the reversibility of the skin effect of the technology, and "percutaneous" means "through the skin") enhances the efficiency and rate of diffusion of drugs into and through the skin. Our composition of matter patent on the SEPA family of compounds expired in November 2006. We own five composition of matter and use patents, with expiration dates ranging from 2015 to 2019, for the combination of SEPA with numerous existing classes of drugs, including antifungals and human sex hormones. Our patented MacroDerm drug delivery technology encompasses a family of low to moderate molecular weight polymers that impede dermal drug or chemical penetration, which may be usable, for example, to prevent chemicals in insect repellant from penetrating the skin. We own three patents covering the composition of matter and methods of use of our MacroDerm polymers that expire in 2015. We have also filed a patent application for our DermaPass family of transdermal absorption enhancers that have a different drug delivery profile than SEPA, which we believe could be used with a wider range of active pharmaceutical ingredients. One of our lead product candidate is EcoNail, a topically applied SEPA-based econazole lacquer for the treatment of onychomycosis, a condition commonly known as nail fungus. Econazole, a commercially available topical antifungal agent most commonly used to treat fungal skin infections, inhibits in vitro growth of the fungi most commonly implicated in onychomycosis. When used in EcoNail, SEPA works by allowing more rapid and complete release of econazole from the lacquer into and through the nail plate. In a pre-clinical study using human cadaver nails, EcoNail delivered through the nail more than 14,000 times the minimum concentration of econazole needed to inhibit the fungi most commonly associated with onychomycosis. Following our laboratory studies, we conducted a randomized, double blind controlled Phase 1 tolerance/human exposure trial of EcoNail in nineteen patients with onychomycosis of the toenails. In this study, EcoNail was well tolerated, and investigators reported no serious drug-related adverse events. Serum assays used to determine the level of drug in the bloodstream showed no detectable levels of econazole, further supporting EcoNail's systemic safety profile. Full data from the 18-week trial were presented in May 2005 at the annual meeting of the Society for Investigative Dermatology. We have a composition of matter and use patent covering EcoNail that will expire in 2019. We commenced a 48 week, blinded open label Phase 2 efficacy study of EcoNail in the third quarter of 2006. This study is being conducted through a contract research organization with significant experience in onychomycosis trials. The study protocol allows for an interim review of the data after all patients have completed 24 weeks of treatment. On November 6, 2007, the Company announced that clinical photographs of 37 patients were assessed by an external expert panel, and 20 (54%) showed evidence of clinical improvement, defined as an increase in uninvolved nail of onychomycosis. All week 24 cultures were negative for dermatophyte growth, and the panel observed no signs of local irritation related to the once-daily EcoNail treatment. In a consensus clinical judgment by the external panel, 13 of 37 (32%) of patients demonstrated greater than or equal to 25% clinical improvement. In October 2007, we acquired the exclusive worldwide license rights for drug uses of pexiganan, a novel, small peptide anti-infective for treatment of patients with mild diabetic foot infection (DFI), from Genaera Corporation. Pexiganan is formulated as a cream and has a novel mechanism of action based on its ability to disrupt the integrity of bacterial cell membranes that cause DFI and has antimicrobial activity against organisms that commonly infect skin and soft tissue. Pexiganan has a low potential for induction of resistance and no cross-resistance with existing therapeutic antibiotics as a consequence of its mechanism of action. In clinical trials previously conducted by Genaera Corporation, over 1000 human subjects were exposed to pexiganan without safety concerns, including 418 patients who received pexiganan in two Phase 3 clinical trials submitted in a new drug application to the U.S. Food and Drug Administration (FDA) in 1998. The primary clinical endpoint of one of the two Phase 3 trials was judged by the FDA to have been achieved. The other Phase 3 clinical trial, which did not meet its specified endpoint, provided strong supportive data indicative of the clinical benefit of pexiganan. At that time, difficulties with Chemistry Manufacturing & Controls (CMC) and an FDA request for one additional controlled trial precluded approval. We believe that since that time, significant improvements have been made in peptide manufacturing processes as well as in clinical trial design and execution. We plan to implement a program to address the previously identified CMC issues and resume formal dialogue with the FDA to determine the appropriate clinical development path. Our other clinical stage product candidate, Opterone, is a topically applied SEPA-based testosterone cream designed to treat male hypogonadism. Male hypogonadism is a condition in which men have levels of circulating testosterone below the normal range and may exhibit one or more associated symptoms, including low energy levels, decreased sexual performance, loss of sex drive, increased body fat or loss of muscle mass. We believe Opterone has significant advantages over other testosterone delivery methods and that its formulation as a cream should avoid an oily feel as well as application and cosmetic concerns reported by some users of gel formulations. To the best of our knowledge, Opterone is the first and only clinical development stage testosterone cream in the U.S. In August 2004, we announced the completion of a pharmacokinetics study of Opterone in hypogonadal males. In May 2005, we announced results from a bioavailability study of Opterone. In that study, patients using a 2.5 gram dose of Opterone applied to the upper arms and shoulders reached the natural physiologic range of testosterone levels over a 24-hour period. In December 2005, we received a letter from the Division of Reproductive and Urologic Products of the U.S. Food and Drug Administration, or FDA, in response to questions posed by us regarding a proposed Phase 3 clinical program for Opterone. In the letter, the FDA requested that we conduct additional investigation into multiple dose safety and pharmacokinetics before beginning any eventual Phase 3 protocol. The additional investigation and Phase 3 revisions will increase the time and expense associated with the development of Opterone. The next step in the development process for Opterone is a Phase 2 trial. We are seeking a partner to advance development of this product candidate. We may elect not to develop Opterone further if we cannot find a partner. We have a composition of matter and use patent covering Opterone that will expire in 2017. In addition to EcoNail, pexiganan and Opterone, we are evaluating several earlier stage product candidates. We have developed and tested SEPA-based formulations to deliver other active pharmaceutical ingredients including topical anesthetic and topical non-steroidal anti-inflammatory drugs (NSAIDs). We have also tested application of our MacroDerm polymers for use with cosmetics, pharmaceuticals and consumer products like insect repellants and sunscreens to decrease skin penetration and/or improve persistence on the skin. For example, our laboratory data demonstrated that, when formulated with the insect repellant DEET, increasing concentrations of MacroDerm reduces the amount of DEET that is absorbed through human skin. We have performed initial laboratory experiments to test the ability of DermaPass to improve transdermal delivery of various active pharmaceutical ingredients. Since inception, our primary source of funding for our operations has been the private and public sale of our securities. Our ability to continue operations after our current capital resources are exhausted depends on our ability to secure additional financing and to become profitable, which we cannot guarantee. Our Strategy Our strategy is to become a leading provider of specialty pharmaceuticals by innovating, developing and commercializing a portfolio of proprietary products through the use of our drug delivery technologies, strategic partnering, or in-licensing other products or technologies. Key elements of our strategy include: o CONTINUE CLINICAL DEVELOPMENT OF OUR LEAD PRODUCT CANDIDATES, ECONAIL AND PEXIGANAN. In the near-term, we intend to focus most of our resources on conducting and completing clinical trials of our EcoNail product candidate and development of pexiganan. o CREATE VALUE THROUGH STRATEGIC PARTNERSHIPS. Where appropriate, we intend to seek partners to facilitate the development and commercialization of our product candidates. o IN-LICENSE SELECTED PRODUCTS AND TECHNOLOGIES. We intend to identify and in license products and technologies to complement and expand our portfolio of product candidates. o LEVERAGE AND EXPAND OUR EXISTING TECHNOLOGIES TO DEVELOP NEW PRODUCTS. We believe pharmaceuticals and certain other commercial products used on the skin may be formulated using our drug delivery technologies and could have applications in the treatment of other diseases and conditions. We will seek to identify new product candidates by selecting and developing additional pharmaceuticals and skin products that can be combined effectively with our technologies. RISKS AFFECTING OUR BUSINESS Our business is subject to a number of risks that we highlight in the section entitled "Risk Factors" immediately following this prospectus summary. As of the date of this prospectus, we have not generated any meaningful revenues from operations and we have sustained significant operating losses. As of September 30, 2007, we had an accumulated deficit of approximately $86,829,366. We anticipate that we will continue to incur significant losses for the foreseeable future. Our technologies are in discovery or developmental stages and must undergo a rigorous regulatory approval process, which includes extensive pre-clinical and clinical testing, to demonstrate safety and efficacy before we can market any resulting product. To date, neither the FDA nor any of its international equivalents has approved any of our product candidates for marketing. OUR CORPORATE INFORMATION We were organized and commenced operations as a Massachusetts corporation in 1981, and we were reincorporated as a Delaware corporation on May 26, 1992. Our principal executive offices are located at 40 Washington Street, Suite 220, Wellesley Hills, Massachusetts 02481 and our phone number is (781) 489-7310. We maintain a website on the Internet at WWW.MACROCHEM.COM. Our website, and the information contained therein, is not a part of this prospectus. THE OFFERING Common stock being offered: 41,338,712 shares comprised of: 12,905,181 shares of common stock acquired upon the conversion of our Series C Cumulative Convertible Preferred Stock originally issued in our private placement completed in two closings on December 23, 2005 and February 13, 2006 (the "2006 Private Placement"); 16,510,012 shares of common stock issuable upon the exercise of warrants issued with the Series C Cumulative Convertible Preferred Stock; 1,375,829 shares of common stock issuable upon exercise of warrants issued to the placement agent in connection with the 2006 Private Placement; 2,299,358 shares of common stock issued as dividend payments on our Series C Cumulative Convertible Preferred Stock; and 5,891,666 shares of common stock and 1,767,500 shares of common stock issuable upon the exercise of warrants issued in our private placement on October 10, 2007 (the "2007 Private Placement") and 589,166 shares of common stock issuable upon exercise of warrants issued to the placement agent in connection with the 2007 Private Placement. Shares of common stock outstanding 42,704,511 shares of common stock, after this offering: assuming that warrants issued to the purchasers and the placement agent the 2007 Private Placement and 2006 Private Placement are exercised in full for cash, in each case, without regard to any beneficial ownership restrictions on the exercise thereof. Use of proceeds: We will not receive any proceeds from the sale of shares of common stock by the selling security holders. To the extent all of the outstanding warrants held by the selling security holders are exercised at their current exercise prices, we would receive approximately $12,145,505 in cash proceeds, unless such warrants are exercised on a cashless basis pursuant to their terms. The proceeds, if any, we receive upon the exercise of the warrants will be used for working capital requirements and other general corporate purposes. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0000759153_particle_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0000759153_particle_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a1f3e47c2af3f5be6bc3401dbc822f6821adba63
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0000759153_particle_prospectus_summary.txt
@@ -0,0 +1 @@
+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0000786623_advanced_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0000786623_advanced_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..82ddc1181be375ea1012ce7ba16218869abaf3cc
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before buying shares of our common stock. You should read the entire prospectus carefully, especially the risks of investing in shares of our common stock that we describe under Risk Factors, and our consolidated financial statements and the related notes included at the end of this prospectus, before deciding to invest in shares of our common stock. Unless the context requires otherwise, references to Advanced Viral, we, our, us, and the Company in this prospectus refer to Advanced Viral Research Corp. and our subsidiaries. OUR COMPANY Advanced Viral Research Corp. was incorporated in Delaware in July 1985 to engage in the development, production, marketing, promotion and sale of a pharmaceutical drug known by the trademark Reticulose . This drug was the forerunner of our current drug, AVR118. AVR118 is a complex mixture of peptides, amino acids, nucleosides, nucleotides and nucleic acid bases. We currently believe it may be employed in the treatment of conditions such as: systemic symptoms such as cachexia (body wasting), loss of appetite and lethargy experienced by patients with cancer, AIDS and other diseases; wound healing; as an anti-inflammatory; and as a palliative agent to minimize certain toxicities associated with chemo or immunotherapies. Since our incorporation in July 1985, we have been engaged primarily in research and development activities. We have never generated material operating revenue, and as of March 31, 2007, we had incurred a cumulative net loss of approximately $73,136,000. Our ability to generate operating revenue depends upon our success in gaining approval for the commercial use and distribution of AVR118 from the Food and Drug Administration (FDA). Phase II Dermatological Study In April 2006, we commenced a study at the University of Miami to preliminarily test the efficacy of topically applying AVR118 to wounds in animal models (e.g. pigs). A report received from the University of Miami in August 2006 analyzing the data from the three pig study indicated that the topical application of AVR118 accelerates the rate at which wounds heal. Although preliminary, we believed that further study was merited. Based on the results from the August 2006 report from the University of Miami, we filed an amendment with the FDA to our existing IND to expand the use of AVR118 to include a Phase II dermatological study involving topical therapy. Our management believed these applications could potentially be used to treat a wide variety of common dermatologic conditions, such as micro-dermabrasion. In January 2007, we began the Phase II dermatological study using a topically applied spray formulation of AVR118 as a wound healing agent. The Phase II dermatological study will involve patients with common skin problems ranging from acne scars to surgical wounds, and will study how AVR118 s ability to promote tissue repair and regeneration can be put to use in the clinical setting, and analyze the efficacy of AVR118 as a topical therapy. The protocol for the dermatological study provides for 12-20 patients to be treated with AVR118. Phase II Cancer Study In February 2005, we entered into an agreement with the Biomedical Research Alliance (BRANY), as agent for a network of hospitals, pursuant to which the hospitals would conduct a Phase II clinical study to evaluate the effect of a 4.0 ml dose of AVR118 administered to patients with systemic symptoms related to advanced cancer who are not receiving chemotherapy. We experienced difficulty accruing patients for the Phase II Study and in December 2005, amended the protocol to permit patients undergoing third-line chemotherapy treatment to become participants in the Phase II Study, in order to facilitate patient accrual. Only eleven patients have been enrolled in the Phase II cancer study. There has not been any activity in this study since the third quarter of 2006, when we commenced discussions with several teaching centers to expand the study to include patients in the earlier stages of disease to determine the efficacy of AVR118 on such patients. We believe transitioning the study to such centers would enable us to accelerate enrollment in an expanded program where higher patient accrual rates can be achieved. January 2007 Private Placement On January 1, 2007, we entered into a securities purchase agreement with Cornell Capital Partners, L.P. ( Cornell ), to sell $1,500,000 principal amount of our 9% secured convertible debentures, due January 1, 2010 (the CALCULATION OF REGISTRATION FEE Proposed Maximum Proposed Maximum Title of Each Class of Amount to be Offering Price Aggregate Amount Amount of Securities to be Registered Registered Per Unit (1) of Offering Price (1) Registration Fee Common stock, $0.001 par value per share 214,928,846 (2) $0.038 $8,167,296 $874.00 (3) (1) Estimated solely for the purpose of calculating the registration fee for the shares registered hereunder and calculated pursuant to Rule 457(c) under the Securities Act of 1933. For purposes of this table, we have used the average of the closing bid and asked prices of the Registrant s common stock on May 18, 2007, as reported by the OTC Bulletin Board. (2) Represents shares of our common stock being registered for resale that either have been issued or are issuable to the selling stockholders named in the registration statement upon the conversion of convertible debentures and exercise of warrants. (3) $831 of which was previously paid. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine. Debentures ), along with warrants ( Warrants ) to purchase an aggregate of 48,076,923 shares of our common stock, which are exercisable through January 1, 2012 at an exercise price equal to $0.0312 or as may be adjusted from time to time pursuant to the terms thereof (the Cornell Agreement ). The Debentures have a term of three years, accrue interest at 9% and are convertible into our common stock at a price per share equal to the lesser of (a) $0.0312 per share, or (b) an amount equal to 95% of the lowest volume weighted average price of our common stock for the 30 trading days immediately preceding the conversion date, as quoted by Bloomberg, LP. In accordance with the terms of our registration rights agreement with Cornell, this prospectus covers the resale by Cornell of up to 96,153,846 shares of our common stock issuable upon conversion of the Debentures (86,153,846) and Warrants (10,000,000). Cornell acquired $1,000,000 principal amount of the Debentures upon the first closing under the Cornell Agreement on January 5, 2007, and the remaining $500,000 principal amount of the Debentures on February 16, 2007. In addition, Cornell has agreed to purchase up to an additional $750,000 of Debentures upon the satisfaction of certain conditions, including (i) our enrollment of the first patient in our Phase II dermatological study, (ii) the registration statement, of which this prospectus forms a part, being declared effective by the SEC, and the execution of similar transaction documents on terms mutually agreed upon by the parties. Our obligations under the Cornell Agreement, the Debentures and the ancillary documents entered into in connection therewith are secured by a first priority security interest in all of our assets. For more information regarding this transaction, see Selling Stockholders Cornell Capital Partners, LP. Going Concern The independent registered public accounting firm s report on our consolidated financial statements for the fiscal year ended December 31, 2006 includes an explanatory paragraph regarding our ability to continue as a going concern. Note 2 to the consolidated financial statements states that our cash position is inadequate to pay all the costs associated with the full range of testing and clinical trials of AVR118 required by the FDA for commercial approval, and, unless and until AVR118 is approved for sale in the United States or another industrially developed country, we will be dependent upon the continued sale of our securities, debt or equity financing for funds to meet our cash requirements, which raises substantial doubt about our ability to continue as a going concern. Further, the independent registered public accounting firm s report states that the consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. No assurance can be given that debt or equity financing will be available. Whether we will be able to proceed with studies and trials discussed above is dependent upon our ability to secure sufficient funds. If sufficient funds do not become available, we will have to materially limit our operations by, among other things, limiting our clinical trials for AVR118. We may not be able to raise the funds we currently need to continue or complete the clinical trials for AVR118. While we continue to attempt to secure funds through the sale of our securities, there is no assurance that such funds will be raised on favorable terms, if at all. Conducting the clinical trials of AVR118 will require significant cash expenditures. AVR118 may never be approved for commercial distribution by any country. Because our research and development expenses and clinical trial expenses will be charged against earnings for financial reporting purposes, we expect that losses from operations will continue to be incurred for the foreseeable future. Our offices are located at 200 Corporate Boulevard South, Yonkers, New York 10701. Our telephone number is (914) 376-7383. We have also established a website: www.adviral.com. Information contained on our website is not a part of this prospectus. The information in this prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and the selling stockholders are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED MAY 23, 2007 Prospectus 214,928,846 SHARES ADVANCED VIRAL RESEARCH CORP. COMMON STOCK This prospectus relates to the resale of up to 214,928,846 shares of common stock for sale on behalf of the existing holder of our convertible debentures and warrants to purchase our common stock, and certain other holders of our common stock as more particularly described under the heading Selling Stockholders. We will not receive any proceeds from this offering; however, we may receive proceeds from the exercise of warrants. We will bear all costs associated with this registration other than certain of the selling stockholders legal or accounting costs or commissions. Our common stock is traded in the over-the-counter market and prices are reported on the OTC Bulletin Board under the symbol ADVR. On May 18, 2007, the closing bid price of our common stock was $0.036 per share. No underwriter or person has been engaged to facilitate the sale of shares of common stock in this offering. None of the proceeds from the sale of stock by the Selling Stockholders will be placed in escrow, trust or any similar account. SEE RISK FACTORS BEGINNING ON PAGE 4 FOR RISKS OF AN INVESTMENT IN THE SECURITIES OFFERED BY THIS PROSPECTUS, WHICH YOU SHOULD CONSIDER BEFORE YOU PURCHASE ANY SHARES. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this prospectus is May __, 2007. THE OFFERING Common stock offered by selling stockholders (1) 214,928,846 shares of common stock, which includes (i) 118,775,000 shares of common stock; and (ii) up to 96,153,846 shares of common stock issuable upon conversion of the Debentures and exercise of the Warrants. See Selling Stockholders. Offering price Determined at the time of sale by the selling stockholders. Common stock outstanding after this offering (2) Up to 799,609,712 shares. Use of proceeds We will not receive any proceeds from the sale of the shares of common stock by the selling stockholders. Any proceeds we receive from the sale of common stock under the Warrants will be used for general working capital purposes. See Use of Proceeds.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0000790715_sigma_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0000790715_sigma_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b73955e92d4018b7b6fac224486ad3575ec19a96
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0000790715_sigma_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY You should read the following summary together with the entire prospectus and our consolidated financial statements and the related notes
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0000799097_san_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0000799097_san_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ab8cf3637e9461cef1bfd0be5209c65870ee52a8
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0000799097_san_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary highlights certain information contained throughout this prospectus. It is not complete and may not contain all of the information that you should consider before investing in the securities offered by this prospectus. To understand this offering fully, you should read this entire prospectus
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0000808011_winner_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0000808011_winner_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2dfd9a983891522e2ad5c30c6facd0a755c4f1ad
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0000808011_winner_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0000817516_simtek_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0000817516_simtek_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..836c84a13215c518d36819f717fe22b2a2ab3542
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0000817516_simtek_prospectus_summary.txt
@@ -0,0 +1 @@
+SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS AND THE DOCUMENTS INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO YOU. PLEASE CAREFULLY READ THE ENTIRE PROSPECTUS AND THE DOCUMENTS INCORPORATED BY REFERENCE. Our Company We develop, market and subcontract the production of nonvolatile semiconductor memories. Nonvolatility prevents loss of programs and data when electrical power is removed from the semiconductor. Our memory products feature fast data access and programming speeds. Our products are targeted for use in commercial or military electronic equipment markets. These markets are industrial control systems, office automation, medical instrumentation, telecommunication systems, cable television, and numerous military systems, including communications, radar, sonar and smart weapons. Our principal executive office is located at 4250 Buckingham Dr. #100; Colorado Springs, Colorado 80907. Our telephone number is 719-531-9444. Reincorporation and Reverse Stock Split Effective on October 5, 2006, we completed a one-for-ten reverse stock split of all of our issued and outstanding common stock as part of our reincorporation into a Delaware corporation. Except as specifically indicated, all of the share numbers and per share prices in this prospectus reflect the reverse stock split. In addition, incident to the reverse stock split and also effective on October 5, 2006, the registrant completed a reincorporation from Colorado to Delaware by converting Simtek Corporation, a Colorado corporation ("Simtek-Colorado"), into Simtek Corporation, a Delaware corporation ("Simtek-Delaware" or "Simtek"). Upon the reincorporation, each ten shares of common stock of Simtek-Colorado issued and outstanding were automatically converted into one share of common stock of Simtek-Delaware (thus accomplishing the reverse split). As a result of the reincorporation, Simtek-Colorado and any of its previously issued and outstanding shares of common stock ceased to exist. Simtek-Delaware is the same entity as Simtek-Colorado: it has continued with all of the assets, properties and liabilities of Simtek-Colorado. The reincorporation did not result in any change in headquarters, business, jobs, management, location of any of Simtek's offices or facilities. The Offering This offering relates to a total of 2,351,155 shares of our common stock that may be resold by the selling security holders. Of the shares offered by this prospectus 1,153,171 shares are currently issued and outstanding and 1,197,984 shares are issuable upon exercise of outstanding stock purchase warrants with exercise prices ranging from $3.30 to $7.50 per share. The shares offered include 103,356 shares held by (or issuable to) various of our officers and 58,230 shares held by (or issuable to) affiliates of one of our directors. See "Selling Security Holders."
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0000817785_orchestra_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0000817785_orchestra_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f3e1e897b25b8d6baa8e34b43053073686726ec2
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0000817785_orchestra_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights selected information appearing elsewhere in this prospectus. While this summary highlights what we consider to be the most important information about us, you should carefully read this prospectus and the registration statement of which this prospectus is a part in their entirety before investing in our common stock, especially the risks of investing in our common stock, which we discuss in Risk Factors and our financial statements and related notes. Unless the context requires otherwise, the words we, Company, us and our refer to Orchestra Therapeutics, Inc. ABOUT ORCHESTRA THERAPEUTICS, INC. On April 16, 2007 the Company changed its name from The Immune Response Corporation to Orchestra Therapeutics, Inc. Orchestra Therapeutics, Inc. (OTCBB: OCHT) is an immuno-pharmaceutical company focused on developing products to treat autoimmune and infectious diseases. Our lead immune-based therapeutic product candidate is NeuroVax for the treatment of multiple sclerosis (MS). In addition we have two product candidates, REMUNE and IR103, for the treatment of Human Immunodeficiency Virus (HIV). These therapies are in Phase II clinical development and are designed to stimulate pathogen-specific immune responses aimed at slowing or halting the rate of disease progression. Over the past five years we have increased our focus on our autoimmune disease program, and in particular NeuroVax and MS; at the beginning of the period our focus was almost exclusively on HIV. In March 2007, we decided to terminate the HIV clinical trials, to cease manufacturing at our King of Prussia, Pennsylvania HIV antigen manufacturing facility, and to consider all strategic alternatives for our HIV program. This decision was taken in order to focus our financial resources on the MS and other autoimmune programs. The 52-week data from the first large cohort of HIV clinical-trial participants have already been gathered, and analysis of the data will be completed and disclosed at the end of the second quarter of 2007. In the near-term we expect to maintain our capability to re-establish manufacturing at our King of Prussia facility. NeuroVax , which is based on our patented T-cell receptor (TCR) peptide vaccine technology, has shown potential clinical value in the treatment of relapsing forms of MS. NeuroVax has been shown to stimulate strong disease specific cell mediated immunity in nearly all patients treated by enhancing levels of FOXP3 T Regulatory (Treg) cells that are able to down regulate the activity of pathogenic T-cells that cause MS. Increasing scientific findings have associated diminished levels of FOXP3 Treg cell responses with the pathogenesis and progression of MS and other autoimmune diseases such as rheumatoid arthritis (RA), psoriasis and Crohn s disease. In addition to MS, we have proprietary technology and prior clinical experience for evaluation of peptide-based immune therapies for RA and psoriasis. We are in final discussions with various prestigious academic institutions about conducting pre-clinical work with human samples toward the development of several therapeutic vaccines to treat other autoimmune diseases including RA and psoriasis. Based on findings from these programs we anticipate initiating Phase I clinical trials of a TCR peptide vaccine in at least one of these new autoimmune diseases in 2008. REMUNE and IR103 are based on our patented whole-inactivated virus technology, co-invented by Dr. Jonas Salk and indicated to be safe and immunogenic in extensive clinical studies of REMUNE , our first-generation HIV product candidate. IR103 is a second-generation formulation that combines its whole-inactivated antigen with a synthetic Toll-like receptor (TLR-9) agonist designed to create enhanced HIV-specific immune responses. We are currently analyzing data from two Phase II clinical studies involving REMUNE and IR103 as a first-line treatment for drug-na ve HIV-infected individuals not yet eligible for antiretroviral therapy according to current medical guidelines. All of our products are still in the development stage. We have never had revenues from the sale of products. We were founded in 1986. Our existing cash will only provide us with liquidity through the second quarter of 2007. Because we do not anticipate generating any revenue from our products until at least 2012, if at all, we will continue to have negative cash flow. If we cannot raise enough capital to support all our current intended clinical programs, we will be required to prioritize the programs based on information we then have on hand. Table of Contents DATED JUNE 15, 2007 PROSPECTUS ORCHESTRA THERAPEUTICS, INC. 800,439 Shares of Common Stock Issued as Inducement for Exercise of Previously Outstanding Warrants 2,217,018 Shares of Common Stock Issuable upon Exercise of Warrants This prospectus may be used only in connection with the resale, from time to time, of up to 3,017,457 shares of our common stock, $0.0025 par value, that were or may be acquired by the selling security holders upon exercise of warrants for the purchase of shares of common stock. Information on the selling security holders, and the times and manner in which they may offer and sell shares of our common stock under this prospectus, is provided under Selling Security Holders and Plan of Distribution in this prospectus. We will not receive any of the proceeds from the resale of the shares offered by this prospectus. We will receive proceeds from selling security holders who exercise their warrants and pay the applicable cash exercise price in connection with those exercises. 2,110,293 warrants have an exercise price of $2.00 per share and 106,725 warrants have an exercise price of $0.80 per share. Our address is 5931 Darwin Court, Carlsbad, California 92008, and our telephone number is (760) 431-7080. In this prospectus, Orchestra Therapeutics, Inc., the Company, the Registrant, we, us and our refer to Orchestra Therapeutics, Inc.. Our common stock trades on the Over-the-Counter Bulletin Board (the OTCBB ) under the symbol OCHT. On June 11, 2007, the closing sale price of our common stock, as reported by the OTCBB, was $0.49 per share. Investing in our common stock involves certain risks. See Risk Factors beginning on page 5 for the risks that you should consider. You should read this entire prospectus carefully before you make your investment decision. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this prospectus is June 15, 2007 Table of Contents On December 19, 2006 we filed an amendment to our Restated Certificate of Incorporation to effect a one-for-100 reverse split of our common stock. The reverse stock split became effective on December 20, 2006. All references in this report to numbers of shares, options and warrants, stock prices and exercise and conversion prices have been adjusted to reflect the reverse stock split. Our annual meeting of stockholders is scheduled to occur on July 10, 2007, at which time we intend to seek stockholder approval of an amendment to our Certificate of Incorporation authorizing an increase in the number of authorized shares of our common stock from 35,000,000 shares to 235,000,000 shares. SUMMARY OF THE OFFERING This prospectus relates to the resale of up to 3,017,457 shares of our common stock, $0.0025 par value, including 800,439 of which were issued as inducement for exercise of previously outstanding warrants and up to 2,217,018 of which may be acquired by the selling security holders upon exercise of warrants. The 800,439 shares of common stock were issued to certain warrant holders of the 2006 Private Placement. 2,217,018 of the warrants were issued to our placement agent (Spencer Trask Ventures Inc. ( STVI )) in connection with the close and subsequent investor warrant exercises from the 2006 Private Placement and to Spencer Trask Intellectual Capital Company LLC ( STIC ) as inducement to provide a limited recourse interest on $6,000,000 of the notes sold in our 2006 private placement. Both STVI and STIC are affiliates of our director and major stockholder Kevin Kimberlin. 2006 Private Placement and Inducement Shares We conducted a 2006 Private Placement of secured convertible notes and warrants to accredited investors, raising gross proceeds of $8,000,000. We issued notes with an aggregate principal amount of $8,000,000, convertible into an aggregate of 4,000,000 shares of common stock at $2.00 per share. The notes mature on January 1, 2008, bear interest at 8% per annum, and share (with Cheshire Associates LLC ( Cheshire ) for its previously secured note, and with Qubit Holdings, LLC ( Qubit ) for its $250,000 note) a first priority security interest in substantially all of our assets. The shares underlying the convertible notes were previously registered for resale and therefore have not been registered for resale under the registration statement to which this prospectus relates. In addition, we issued to all of the note holders a total of 12,000,000 warrants to purchase our common stock at $2.00 per share. These warrants were divided into two 6,000,000 share tranches. The 6,000,000 first tranche warrants became exercisable on June 23,2007. A total of 4,830,521 warrants from the first tranche of the 2006 Private Placement were exercised, with the aggregate gross proceeds totaling $9,661,000 (net proceeds to us were $8,695,000 after $966,000 of cash commissions paid to the placement agent). The remaining 1,169,479 first tranche warrants expired on August 7, 2006. The shares underlying the first tranche investor warrants were previously registered for resale and therefore have not been registered for resale under the registration statement to which this prospectus relates. The 6,000,000 second tranche warrants became exercisable on October 16, 2006. In March 2007, we entered into a Warrant Exercise and Price Protection arrangement with certain warrant holders of the 2006 Private Placement. This arrangement included a special warrant exercise inducement whereby (i) the warrant holder would receive 2.5 shares of our common stock for each $2.00 of second tranche warrant exercise price paid to us (this equates to an effective price of $0.80 per share) and (ii) the warrant holder would receive short-term ratchet-style price protection (through September 30, 2007) on March 2007 warrant exercises. A total of 552,375 warrants from the second tranche of the 2006 Private Placement were exercised for 1,352,814 shares of our common stock, with the aggregate gross proceeds totaling $1,104,750 (net proceeds to us were $994,275 after $110,475 of cash commissions paid to the placement agent). Of the 552,375 warrants exercised, 533,625 were exercised under the special Warrant Exercise and Price Protection arrangement. Of the 1,352,814 shares issued upon exercise of the 552,375 second tranche warrants, 552,375 shares were previously registered for resale and therefore have not been registered for resale under the registration statement to which this prospectus relates and 800,439 have been registered for resale under the registration statement to which this prospectus relates. The remaining 5,447,625 unexercised warrants from the second tranche expired on March 30, 2007. Table of Contents A designated $6,000,000 of the notes sold are further supported by a recourse interest limited to the value of the proceeds of certain shares of private-company preferred stock owned by STIC, an affiliate of Mr. Kimberlin. We agreed, in order to induce STIC to provide a limited recourse interest, to issue to STIC, for every month that the limited recourse interest remains in place, a number of seven-year warrants to purchase our common stock at $2.00 per share equal to 1% of the common stock then underlying a designated $6,000,000 of the notes, to the extent the notes are then outstanding. As of April 30, 2007, STIC had earned 340,439 warrants to purchase our common stock at $2.00 per share. The shares of common stock underlying STIC s warrants have been registered for resale under the registration statement to which this prospectus relates. We engaged STVI, a registered broker-dealer, to act as placement agent in connection with the 2006 Private Placement. STVI, which is an affiliate of Mr. Kimberlin and at the time was also an affiliate of our director David Hochman, received $800,000 in cash and seven-year placement agent warrants to purchase 800,000 shares of common stock at $2.00 per share. STVI then allocated a portion of the warrants to various brokers and employees and its parent company. In addition, when the 2006 Private Placement warrants were exercised, STVI received a commission equal to 10% of the warrant exercise proceeds in cash plus seven-year placement agent warrants to purchase a number of shares of our common stock equal to 20% of the number of exercised warrants, which will also be allocated in a similar manner. In conjunction with the exercise of the first tranche warrants, STVI received $966,104 cash and seven-year placement agent warrants to purchase 966,104 shares of common stock at $2.00 per share. As a result of the exercise of 552,375 second tranche warrants (of which 533,625 were exercised under the Warrant Exercise and Price Protection arrangement described above), STVI became entitled to $110,475 in cash and 110,475 additional placement agent warrants. The exercise price per share of 106,725 of the additional placement agent warrants will be at $0.80 instead of $2.00, as a result of an amendment related to the Warrant Exercise and Price Protection arrangement. We also reimbursed STVI s expenses and provided it with certain tail and first refusal rights. These shares of common stock underlying the placement agent warrants have been registered for resale under the registration statement to which this prospectus relates. Following the Warrant Exercise and Price Protection exercises in March 2007 and the expiration of the remaining 5,447,625 unexercised second tranche warrants, certain warrants held by Cheshire experienced antidilution adjustments and are now exercisable for an aggregate of 931,182 shares of common stock at a blended exercise price of $11.18 per share. In addition 226,000 warrants held by Cornell Capital Partners L.P. experienced ratchet antidilution adjustments which resulted in them overlying approximately 553,000 shares of common stock with an adjusted exercise price of $0.80 per share. None of the shares of common stock underlying such Cheshire and Cornell Capital warrants are registered for resale under the registration statement to which this prospectus relates. The selling security holders may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of common stock or interests in shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale or at negotiated prices. The selling security holders may sell the shares directly or may sell them through underwriters, brokers or dealers. STVI has indicated to us its willingness to act as selling agent on behalf of the selling security holders. All shares sold, if any, on behalf of the selling security holders by STVI would be in transactions executed by STVI on an agency basis and commissions charged to its customers in connection with each transaction will not exceed a maximum of 5% of the gross proceeds. See the section of this prospectus entitled Plan of Distribution for a complete description of the manner in which the shares registered hereby may be distributed. We will not receive any of the proceeds from the resale of the shares offered by this prospectus. We have received proceeds in the past from the sale of units in the 2006 Private Placement and the exercise of certain 2006 Private Placement investor warrants and will receive proceeds from selling security holders who exercise their warrants and pay the applicable cash exercise price in connection with those exercises. Table of Contents Common Stock Offered 800,439 shares of common stock issued as inducement for exercise of previously outstanding warrants 2,217,018 shares of common stock issuable upon exercise of warrants Offering Price Market Price Common Stock Outstanding Before the Offering 10,527,675 shares as of June 11, 2007 Use of Proceeds We will not receive any of the proceeds from the resale of the shares offered by this prospectus. We have received proceeds in the past from the sale of units in the 2006 Private Placement and the exercise of certain 2006 Private Placement investor warrants and will receive proceeds from selling security holders who exercise their warrants and pay the applicable cash exercise price in connection with those exercises. Any proceeds we receive from selling security holders who exercise their warrants and pay the applicable cash exercise price in connection with those exercises will be used for general working capital purposes. See Use of Proceeds. Risk Factors The securities offered hereby involve a high degree of risk and immediate substantial dilution. See Risk Factors . Over-the-Counter Bulletin Board symbol OCHT.OB
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+Table of Contents establishing a policy for considering stockholder nominees for election to our Board of Directors; and evaluating and recommending candidates for election to our Board of Directors. Our Nominating and Corporate Governance Committee is comprised of Messrs. Ney and Williamson. Mr. Ney serves as chairman of our Nominating and Corporate Governance Committee. Code of Ethics We have adopted a Code of Business Conduct and Ethics that applies to all officers, directors, employees and consultants. The code is intended to comply with Item 406 of Regulation S-B and Item 406 of Regulation S-K of the Securities Exchange Act of 1934. Our Code of Business Conduct and Ethics is posted on our Internet website under the Investor Relations tab of our Corporate page. Our internet website address is http://www.wilsonfamilycommunities.com. Table of Contents COMPENSATION DISCUSSION AND ANALYSIS Executive Compensation General Philosophy We began expanding our operations in 2005 after the merger of WFC and Athena and have ten employees and two independent contractors as of April 5, 2007. Our overall strategy is to attract talented individuals by compensating them with a mix of cash compensation in the form of base salary and equity compensation in the form of stock options. Currently we do not have an incentive based compensation plan, however in 2007 we intend to implement a formal incentive based compensation plan which integrates our salary, bonus and equity incentive compensation components. Overall Compensation Our Compensation Committee provides oversight on our overall compensation strategy. The Compensation Committee reviews and approves compensation for executive officers annually. We perform an annual review of compensation for employees and submits recommendations to the Compensation Committee for their review and approval. Some of the factors addressed during the annual review include: our performance, individual performance, compensations prevalent in our industry and geographical markets. For compensation relating to our Chief Executive Officer, we considered the following factors: Anticipated level of difficulty of replacing our Chief Executive Officer with someone of comparable experience and skill. Our performance since he has held his position. Compensation of chief executive officers at five comparable companies. These comparables included three direct competitors and two companies with market capitalizations similar to us. Based on our analysis, we established the targeted overall compensation of our Chief Executive Officer for 2006 at $240,000. This amount was lower than the targeted compensation for chief executive officers of other comparable companies, mainly because of the significant equity ownership interest in our company currently held by our Chief Executive Officer. We followed a similar, albeit slightly less elaborate, process with respect to establishing targeted overall compensation for our Chief Financial Officer. Based upon our analysis, we set the overall targeted compensation for our Chief Financial Officer at $225,000 for 2006. Allocation among Components: Under our current compensation structure, the mix of base salary and equity compensation varies depending upon level: Table of Contents Typical Base Salary Typical Incentive Target Typical Equity Target Chief Executive Officer 100% Chief Financial Officer 70% 30% Vice Presidents 70% 30% In allocating compensation among these elements, we believe that the compensation of our senior most levels of management should be predominately performance based and tied to our success (i.e. equity based). We did not have an incentive compensation plan during 2006 and expect to introduce a formal incentive compensation plan in 2007. Base Salaries We want to provide our senior management with a level of assured cash compensation in the form of base salary that facilitates what we believe is appropriate compensation given their professional status and accomplishments. For our Chief Executive Officer, for 2006 we concluded that a base salary of $240,000 was appropriate in this regard. Similarly for 2006, we concluded that a base salary of $225,000 was appropriate for our Chief Financial Officer. These ranges were not objectively determined, but instead reflect levels that we concluded were appropriate based upon our general experience. We performed a similar analysis with respect to other senior management. Given the competition for employees of similar experience within the central Texas area, we provide a slightly larger portion of the compensation to our Vice Presidents in the form of base salary. Equity Compensation The primary form of equity compensation that we have awarded consists of non-qualified and incentive stock options. We selected this form because of the favorable accounting and tax treatments and the expectation by employees in emerging growth companies in our region that they would receive stock options. Our practice is to determine the total dollar amount of equity compensation that we want to provide and to then grant employees a certain number of stock options. These grants are typically made once a year. The awards also are made as early as practicable in the year in order to maximize the time-period for the incentives associated with the awards. The Compensation Committee schedule is determined several months in advance, and the proximity of any awards to earnings announcements or other market events is coincidental. We are in the process of engaging a compensation consultant to assist the Compensation Committee in determining appropriate equity incentive grants for our executive officers and directors for 2007. In February 2007 our compensation committee approved stock option grants for each of our employees, other than our Chief Executive Officer and Chief Financial Officer. In establishing award levels, we generally do not consider the equity ownership levels of the recipients or prior awards that are fully vested, except in the case of our Chief Executive Officer. It is our belief that competitors who might try to hire away our employees would not give credit for equity ownership in our company, and accordingly, to remain competitive we typically cannot afford to give credit for that factor either. However, we recognize that our Chief Executive Officer s equity ownership in our company is so substantial that it would make it difficult for a competitor to recruit him. As a result, we subjectively considered his equity ownership in our establishment of his overall targeted compensation discussed above. For our Chief Executive Officer and our Chief Financial Officer, the cash value of the of the option awards totaled $0 and $157,500, respectively, in 2006. Severance Benefits We believe that companies should provide reasonable severance benefits to employees. With respect to senior management, these severance benefits should reflect the fact that it may be difficult for employees to find comparable employment within a short period of time. They should also disentangle us from a former employee as soon as practicable. Table of Contents We have employment agreements for our Chief Executive Officer and Chief Financial Officer. Our severance benefits typically consist of 12 months salary. During 2006, we entered into an employment agreement with Mr. Daniel Allen, our former Chief Financial Officer. The employment agreement provided for payment of severance benefits to Mr. Allen in certain circumstances. The benefits included payment of one year of base salary; continuation of health benefits for a period of twelve months, and acceleration of vesting of stock options issued to Mr. Allen. Mr. Allen resigned effective November 9, 2006 and we have continued to pay for Mr. Allen s salary and health benefits per the employment agreement. On February 14, 2007, we entered into an employment agreement with Clark N. Wilson, our President and Chief Executive Officer. In the event of the involuntary termination of Mr. Wilson s service with us, the agreement provides for monthly payments equal to Mr. Wilson s monthly salary payments to continue for 12 months. The agreement contains a provision whereby Mr. Wilson is not permitted to be employed in any position in Texas or within 200 miles of any area in which we engage in land development or homebuilding activities in which his duties and responsibilities comprise residential land development and homebuilding for a period of one year from the termination of his employment, if such termination is voluntary or for cause, or involuntary and in connection with a corporate transaction. On February 14, 2007, we entered into an employment agreement with Arun Khurana, our Chief Financial Officer. Pursuant to the agreement, Mr. Khurana will receive a base salary in the amount of $225,000 and a bonus in an amount up to $150,000. The agreement contains a provision whereby Mr. Khurana is not permitted to be employed in any position in Texas or within 200 miles of any area in which we engage in land development or homebuilding activities in which his duties and responsibilities comprise residential land development and homebuilding for a period of one year from the termination of his employment, if such termination is voluntary or for cause, or involuntary and in connection with a corporate transaction. Mr. Khurana s employment is not restricted as to the provision of financial and accounting services. In the event of the involuntary termination of Mr. Khurana s service with us, the agreement provides for monthly payments equal to Mr. Khurana s monthly salary payments to continue for twelve months, the continuation of his benefits (including health insurance) for twelve months, and the immediate vesting of Mr. Khurana s options to purchase our common stock. Retirement Plans In 2006, we instituted a defined contribution plan under section 401(k) of the Internal Revenue Code. The plan allows all employees who are over 21 years old to defer a predetermined portion of their compensation for federal income tax purposes. We will contribute up to fifty percent of an employees' contribution to the plan. During 2006, we contributed an aggregate of approximately $13,350 to the employee defined contribution plan. Change in Control Our senior management and other employees continue to successfully build our Company and we believe that it is important to protect them in the event of a change in control. Further, it is our belief that the interests of the stockholders will be best served if the interests of our senior management are aligned with them, and providing change in control benefits should eliminate, or at least reduce, the reluctance of senior management to pursue potential change in control transactions that may be in the best interests of the stockholders. In the event of a change in control in which members of our senior management are terminated, we would accelerate the vesting of all equity compensation. Based upon a hypothetical termination date of December 31, 2006 the change in control termination benefits for our Chief Executive Officer and Chief Financial Officer would be $94,265 and $63,000, respectively. For purposes of these benefits, a change in control is deemed to occur, in general, if (a) a stockholder or group of stockholders acquires 50% or more of our common stock, or (b) 25% or more of the directors in office were not nominated for initial election to the Board of Directors who were in office at the time of their nomination. Perquisites and Other Benefits Effective February 2007, we do not provide perquisites or other benefits to any of our employees. During 2006, our Chief Executive Officer was reimbursed up to a maximum of $1,000 per month for Table of Contents reimbursement of golf and social club dues. We paid $637.50 in 2006 and $637.50 in January 2007 for reimbursement of golf and social club dues. During 2006, we began providing transportation allowances of $1,000 per month to our Chief Executive Officer and $500 per month to our vice president of land development. During 2006, we paid $3,000 and $6,000 of transportation allowance to our Chief Executive Officer and Vice President of land development, respectively. Board Process The Compensation Committee of the Board of Directors approves all compensation and awards to executive officers, which include our Chief Executive Officer and Chief Operating Officer and other vice presidents. Generally on its own initiative the Compensation Committee reviews the performance and compensation of the Chief Executive and Chief Financial Officer. For the remaining executive officers, the Chief Executive Officer and Chief Operating Officer makes recommendations to the Compensation Committee that generally, with minor adjustments are approved. Summary Compensation Table Name & Principal Position Year Salary ($) Bonus ($) Stock Awards ($) Option Awards ($) Non-Equity Incentive Plan Compensation ($) Nonqualified Deferred Compensation Earnings ($) All Other Compensation ($) Total ($) Clark N. Wilson, Chairman & 2006 240,000 4,275 244,275 CEO(1) 2005 100,000 27,590 127,590 Arun Khurana, 2006 75,000 94,500 96,000(2) 265,500 COO & CFO(2) 2005 Daniel Allen, 2006 149,965 29,166 179,131 CFO(3) 2005 54,687 135,051 189,738 David Goodrum, Director of Land 2006 102,500 5,250 6,000 113,750 Development 2005 39,280 28,029 67,309 Bob Antle, VP of Homebuilding & Homebuilding 2006 146,667 23,250 169,917 Svs(4) 2005 Mark Gram Senior VP of 2006 80,000 16,459 96,459 Marketing 2005 46,666 27,814 74,480 Donald Turner, 2006 144,000(2) 144,000 VP of Finance(2) 2005 (1) Clark Wilson served as our President and Chief Executive Officer beginning in October 2005 following our merger with Wilson Family Communities, Inc. (2) Mr. Khurana and Mr. Turner are both partners in Izon Consulting LLC. Prior to joining Wilson as an employee, Mr. Khurana performed services as a consultant to us. The amounts reflect the total amount paid by us prior to Mr. Khurana joining Wilson as an employee. Mr. Turner continues to perform services as a contractor and partner of Izon Consulting LLC. (3) Amounts paid under severance agreement. (4) Mr. Antle served as our non-executive Vice President of Homebuilding and Homebuilding Services in 2006. Table of Contents Stock Option Grants In Last Fiscal Year We issued the following options to our executive officers and other key employees in 2006: On July 13, 2006, we granted an option to purchase 125,000 shares to Arun Khurana at an exercise price of $2.26 per share, such option to expire ten years from the date of grant. On July 13, 2006, we granted an option to purchase 50,000 shares to Daniel Allen at an exercise price of $2.26 per share, such option to expire ten years from the date of grant. On July 13, 2006, we granted an option to purchase 50,000 shares to David Goodrum at an exercise price of $2.26 per share, such option to expire ten years from the date of grant. On March 28, 2006, we granted an option to purchase 100,000 shares to Bob Antle at an exercise price of $2.00 per share, such option to expire ten years from the date of grant. On July 13, 2006, we granted an option to purchase 50,000 shares to Bob Antle at an exercise price of $2.26 per share, such option to expire ten years from the date of grant. Option Exercises and Stock Vested No options were exercised during 2005 or 2006. 2005 Stock Option/Stock Issuance Plan In connection with our acquisition of Wilson Family Communities, Inc., we assumed the 2005 Stock Option/Stock Issuance Plan that had previously been adopted by the Board of Directors and stockholders of Wilson Family Communities, Inc., a Delaware corporation, pursuant to the merger of WFC into our company. The Plan permits grants of options or restricted stock to employees, board members, officers or consultants. The Plan is administered by the Compensation Committee of our Board of Directors. The Compensation Committee has the authority to determine the persons to whom awards are to be granted, the time at which awards will be granted, the number of shares to be represented by each award, and the consideration to be received, if any. The Compensation Committee also has the power to interpret the Plan and to create or amend its rules. In February 2007, our Board approved a 819,522 share increase in the number of shares issuable pursuant to our option plan for a total of 2.5 million shares issuable pursuant to the plan. In April 2007 our shareholders approved this increase. Table of Contents Outstanding Equity Awards at 2006 Fiscal Year-End Option Awards Stock Awards Name Number of Securities Underlying Options(#) Exercisable Number of Securities Underlying Unexercised Options(#) Unexercisable Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options(#) Option Exercise Price ($) Option Expiration Date Number of Shares or Units of Stock That Have Not Vested (#) Market Value of Shares or Units of Stock That Have Not Vested ($) Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) Clark N. Wilson(1) 100,000 $2.00 5/28/2015 Arun Khurana(2) 125,000 $2.26 7/10/2016 Daniel Allen(3) 100,000 $2.00 2/9/2007 David Goodrum(4) 100,000 $2.00 8/29/2015 50,000 $2.26 7/12/2016 Bob Antle(5) 100,000 $2.00 3/27/2006 50,000 $2.26 7/12/2016 Mark Gram(6) 100,000 $2.00 5/30/2015 Donald Turner (1) All outstanding options can be exercised. 26,667 options were vested as of December 31, 2006. (2) All outstanding options can be exercised. 75,000 options were vested as of December 31, 2006. (3) 100,000 shares granted August 30, 2005, all of which were vested at December 31, 2006, and expired in February, 2007. (4) All outstanding options can be exercised. 100,000 shares granted August 30, 2005, 26,667 shares were vested as of December 31, 2006. 50,000 shares granted July 13, 2006, none of which were vested as of December 31, 2006. (5) All outstanding options can be exercised. 100,000 shares were granted March 28, 2006, 26,667 shares of which were vested as of December 31, 2006. 50,000 shares were granted July 13, 2006, none of which were vested as of December 31, 2006. (6) All outstanding options can be exercised. 100,000 shares were granted August 30, 2005, 26,667 of which were vested as of December 31, 2006. Inapplicability of ERISA Based upon current law and published interpretations, we do not believe the Plan is subject to any of the provisions of the Employee Retirement Income Security Act of 1974. Table of Contents Director Compensation As the only director on our Board of Directors who also is an employee of our company, Mr. Clark Wilson does not receive any additional compensation for his service as a member of our Board of Directors. We reimburse our directors for travel and lodging expenses in connection with their attendance at Board and committee meetings. Our non-employee directors each received an option to purchase 20,000 shares of common stock upon joining our Board. To the extent that options were granted to our Board members by Wilson Family Communities, Inc., we assumed all of those options in connection with our acquisition of WFC. In addition, in 2006 our non-employee directors received an annual retainer of $25,000. Mark Dotzour joined us as an advisor to our Board of Directors in December 2006. His annual compensation is comprised of an annual retainer of $15,000 and an option to purchase 5,000 shares of common stock. Director Compensation -2006 Name Fees Earned or Paid in Cash ($) Stock Awards ($) Option Awards ($) Non-Equity Incentive Plan Compensation ($) Nonqualified Deferred Compensation Earnings ($) All Other Compensation ($) Total ($) (a) (b) (c) (d) (e) (f) (g) (h) Clark N. Wilson - - - - - - - Jay Gouline 23,884 - 24,000 - - - 47,884 Michael Luigs(1) 30,750 - 26,357 - - - 57,107 Sidney Christopher Ney 37,000 - 26,357 - - - 63,357 Barry A. Williamson 37,000 - 26,357 - - - 63,357 (1) Mr. Luigs served on our board until November 2, 2006. All stock options granted to Mr. Luigs expired unexercised following his resignation. Compensation Committee Interlocks and Insider Participation None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more of its executive officers serving as a member of our Board of Directors or Compensation Committee. No member of the Compensation Committee of our Board of Directors serves or has served as an officer or employee of Wilson Holdings. Table of Contents PRINCIPAL STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of our common stock as of May 8, 2007, and as adjusted to reflect the sale of the common stock offered by this prospectus (assuming no purchase of such offered common stock by an existing stockholders, directors or officers), by: each person known to us to be the beneficial owner of more than 5% of our outstanding shares of common stock; each of our current executive officers and directors; and all of our directors and executive officers as a group. For purposes of this table, beneficial ownership is determined in accordance with Rule 13d-3 promulgated under the Securities Exchange Act of 1934. Ownership percentages reflected are calculated based on 18,055,538 shares of common stock issued and outstanding as of the date hereof and include securities exercisable to purchase shares of common stock or convertible into shares of common stock only for the holder of such derivative securities. We also currently have outstanding options to purchase 925,000 shares of common stock, warrants to purchase 1,157,187 shares of our common stock at an exercise price of $2.00 per share, and convertible promissory notes which can be converted into 8,375,000 shares of our common stock. Except as indicated below, the security holders listed possess sole voting and investment power with respect to the shares beneficially owned by that person. Name of Beneficial Owner Amount and Nature of Beneficial Ownership Percentage of Class Directors and Executive Officers: Clark N. Wilson (1) 13,699,888 74.9% Jay Gouline (2) 30,000 * Sidney Christopher Ney (2) 40,000 * Barry A. Williamson (2) 40,000 * Arun Khurana (2) 125,000 * David Goodrum (2) 150,000 * All Directors and Executive Officers (7 persons) 13,985,888 74.8% Other 5% Stockholders: Tejas Securities Group, Inc. 401(k) Plan & Trust FBO John J. Gorman, John J. Gorman TTEE (3) 4,145,213 21.8% Grandview LLC (4) 1,946,875 9.7% LC Capital Master Fund (5) 1,983,904 9.9% * Indicates ownership of less than 1%. _____________ (1) Includes 12,460,826 shares held directly by Mr. Wilson, 100,000 shares issuable upon exercise of stock options, 125,000 shares issuable upon the conversion of convertible promissory notes, and 14,062 shares issuable upon the exercise of warrants. Also includes 1,000,000 shares held by certain trusts for the benefit of Mr. Wilson s minor children. Mr. Wilson does not have voting or dispositive power over the shares held by such trusts and Mr. Wilson disclaims beneficial ownership of such shares. (2) All shares listed as owned are issuable upon exercise of stock options. (3) Includes 900,000 shares issuable upon conversion of convertible promissory notes and 101,250 shares issuable upon the exercise of warrants. (4) Share ownership pursuant to Schedule 13D/A filed October 3, 2006. All shares listed as owned are issuable upon conversion of convertible promissory notes and the exercise of warrants. (5) Shares ownership pursuant to Schedule 13D filed November 14, 2006. All shares listed as owned are issuable upon conversion of convertible promissory notes and the exercise of warrants. Pursuant to certain contractual agreements between LC Capital Master Fund and us, LC Capital Master Fund may only elect to convert that number of shares issuable upon conversion of its convertible promissory notes or exercise that number of shares issuable upon exercise of its warrants equal to 9.9% of our outstanding common stock. Absent such contractual agreements, LC Capital Master Fund would be deemed to beneficially own 4,171,875 shares of common stock, all of which would be issuable upon conversion of convertible promissory notes or exercise of warrants. Table of Contents CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In 2004, Clark N. Wilson became the sole remaining partner of Athena, a predecessor entity to Wilson Family Communities, Inc., or WFC. On May 31, 2005, Athena merged with WFC and the remaining Athena assets and partnership interests were exchanged for 857,142.86 shares of WFC common stock. Also at the time of the merger, trusts belonging to various members of Mr. Wilson s family purchased 1,000,000 shares of common stock of WFC for $60,000. In March 2005, three trusts for the benefit of Clark Wilson s minor children, but for which Mr. Wilson has no voting or dispositive power, purchased a promissory note for $279,800 from an unrelated third party. The land that underlies the promissory note was sold to Athena by the unrelated third party that sold the promissory notes to the three trusts. The notes are secured by approximately 15 acres of land originally purchased by Athena. The terms of the notes payable to the trusts remained the same as the prior note issuer with interest at 8% per annum, but the maturity date was changed from October 7, 2008 to April 4, 2006, and then further extended to April 4, 2008 when the entire principal and interest will be due and payable. In June 2005, Clark N. Wilson, our President and CEO and a director, purchased 2,200,000 shares of Series A Convertible Preferred Stock from WFC for $1.00 per share. These shares were converted into 2,200,000 shares of our common stock at the time of the merger of WFC into our company. In September 2006, Mr. Wilson purchased $250,000 in principal amount of convertible promissory notes in a financing which raised gross proceeds to us of $6.75 million. In December 2005, John Gorman, one of our 5% stockholders, purchased $800,000 in principal amount of convertible promissory notes in a financing which raised gross proceeds to us of $10 million. In September 2006, Mr. Gorman purchased $1 million in principal amount of convertible promissory notes in a financing which raised gross proceeds to us of $6.75 million. In August 2005, WFC repaid $121,000 that Mr. Wilson had advanced to Athena prior to its merger with WFC for working capital. In October 2005, WFC repaid the remaining $140,000 advanced by Mr. Wilson to Athena. During 2005, Mr. Wilson s brother provided services to us of approximately $36,000. During 2006, Mr. Wilson s brother provided services to us for which he was paid approximately $20,000. These services were primarily related to the development of information systems for us. Management believes that these services were provided at fair market value. Prior to becoming CFO, Arun Khurana provided his services and the services of other professionals to us through the consulting firm of Izon Consulting LLC (aka Khurana LLC). Izon Consulting LLC received payments of approximately $66,000 and $264,000 for the years ended 2005 and 2006, respectively. The services provided included SEC and financial statement document preparation, and various accounting and consulting projects. Donald Turner, a partner in Izon Consulting LLC, also provided services during the same periods and was compensated out of the amounts paid to Izon Consulting LLC. Real Property Purchase SGL Development, Ltd. and SGL Investments, Ltd., referred to together as SGL, were owners of approximately 736 acres of undivided land in Hays County, Texas. Clark N. Wilson directly and beneficially (through Steamboat Joint Venture) owned 13.59% of the property and John O. Gorman indirectly owned 12.33% of the property. In June 2005, SGL distributed to Mr. Wilson and Mr. Gorman their beneficial ownership in the property which they sold to WFC in exchange for 1,260,826 and 1,143,963, respectively, of the 2,404,789 preferred shares issued by WFC in the transaction. SGL then sold the remaining property, approximately 74.08%, to WFC in exchange for notes payable of approximately $6.9 million. We believe that WFC purchased the property at fair market value due to the price paid for the preferred stock by the other parties involved in the transaction. The notes payable issued had principal and interest due at maturity on June 30, 2006, with interest at the prime rate as reported in The Wall Street Journal adjusted for changes, for the first six months, prime rate plus 2.00% for the second six months and prime rate plus 2.25% thereafter with an exercise of an extension period of 90 days on the notes if the notes are not in default. The interest rate on the notes increased to 9.75% as of March 31, 2006. The notes are secured by the entire property acquired. There is a provision for partial releases of the land, lots, and tracts, with assignments ranging from 100% to 140% of the par value per acre as a condition of the releases. Table of Contents As of June 2006, we had repaid approximately $700,000 in principal through the sale of acreage lots and during June 2006, we refinanced the loan balance of $6.2 million with a financial institution. Agreements with Tejas Securities Group, Inc. In connection with the placement of $10.0 million of our convertible promissory notes in December 2005, we entered into an agreement with Tejas Securities Group, Inc., or Tejas, pursuant to which Tejas served as our placement agent in connection with the offering. Pursuant to this agreement, we paid Tejas $450,000 in cash and granted a warrant to Tejas to purchase 750,000 shares of our common stock. In connection with the placement of an additional $6.75 million of our convertible promissory notes in September 2006, we entered into an additional agreement with Tejas pursuant to which Tejas served as our placement agent in connection with the offering. Pursuant to this agreement, we paid Tejas commissions of $70,000 and have reimbursed Tejas for its expenses. John J. Gorman is the Chairman of the Board of Tejas Securities Group, Inc. and of Tejas Incorporated, the parent company of Tejas Securities Group, Inc. Mr. Gorman is the beneficial owner of 4,043,963 shares of our common stock. In December 2006, Tejas exercised the warrant we issued to them in connection with the December 2005 private placement pursuant to the net-exercise provision of the warrant. We issued 348,913 shares of common stock to them in connection with their complete exercise of this warrant. Clark N. Wilson, who serves as our President and Chief Executive Officer and is a director, has served on the board of directors of Tejas Incorporated, since October 1999, and is compensated for such service. Mr. Wilson owns 1,000 shares of Tejas Incorporated common stock and options to purchase an additional 10,000 shares of common stock. Barry A. Williamson is a member of our Board of Directors and, until January 31, 2006, was a member of the board of directors of Tejas Incorporated, the parent company of our placement agent for the sale of our convertible notes. Mr. Williamson was re-appointed to the Board of Tejas Incorporated in November 2006. Employment Agreements with Executive Officers On February 14, 2007, we entered into an employment agreement with Clark N. Wilson, our President and Chief Executive Officer. In the event of the involuntary termination of Mr. Wilson s service with us, the agreement provides for monthly payments equal to Mr. Wilson s monthly salary payments to continue for 12 months. The agreement contains a provision whereby Mr. Wilson is not permitted to be employed in any position in which his duties and responsibilities comprise residential land development and homebuilding in Texas or in areas within 200 miles of any city in which we are conducting land development or homebuilding operations at the time of such termination of employment for a period of one year from the termination of his employment, if such termination is voluntary or for cause, or involuntary and in connection with a corporate transaction. On February 14, 2007, we entered into an employment agreement with Arun Khurana, our Chief Financial Officer. The agreement contains a provision whereby Mr. Khurana is not permitted to be employed in any position in which his duties and responsibilities comprise residential land development and homebuilding in Texas or in areas within 200 miles of any city in which we are conducting land development or homebuilding operations at the time of such termination of employment for a period of one year from the termination of his employment, if such termination is voluntary or for cause, or involuntary and in connection with a corporate transaction. Mr. Khurana s employment is not restricted as to the provision of financial and accounting services. In the event of the involuntary termination of Mr. Khurana s service with us, the agreement provides for monthly payments equal to Mr. Khurana s monthly salary payments to continue for twelve months, the continuation of his benefits (including health insurance) for twelve months, and the immediate vesting of Mr. Khurana s options to purchase our common stock. Consulting Agreement with Audrey Wilson In March 2007 we entered into a consulting agreement with Audrey Wilson, the wife of Clark N. Wilson, our President and Chief Executive Officer. Pursuant to the consulting agreement, we have agreed to pay Ms. Wilson 10,000 per month for a maximum of 6 months. Ms. Wilson has agreed to devote at least twenty-five hours per week assisting us with the following activities: (i) the establishment of back-office processes for homebuilding activities, including procurement, sales and marketing and other related activities, and (ii) developing our marketing strategy for marketing and sale of land to homebuilders. We can end our consulting relationship with Ms. Wilson at any time by giving Ms. Wilson 30 days notice. We believe that the services Ms. Wilson is providing to us are being provided at fair market value. We do not anticipate extending our consulting relationship with Ms. Wilson beyond the six month period provided in the consulting agreement. Table of Contents DESCRIPTION OF SECURITIES Common Stock We are authorized to issue 100,000,000 shares of common stock, par value $0.001 per share. As of the date of this prospectus, 18,055,538 shares of our common stock are issued and outstanding. Each share of common stock is entitled to one vote per share in the election of directors and on all other matters submitted to a vote of our stockholders. There are no cumulative voting rights. Common stockholders do not have preemptive rights or other rights to subscribe for additional shares of our capital stock, and the common stock is not subject to conversion or redemption. In the event of liquidation, the holders of common stock will share equally in any balance of corporate assets available for distribution to them. Subject to the rights of holders of any other securities subsequently issued, holders of the common stock are entitled to receive dividends when and as declared by our Board of Directors out of funds legally available. We have not paid any dividends since our inception and we have no intention of paying any dividends in the foreseeable future. Any future dividends will be subject to the discretion of our Board of Directors and will depend, among other things, on our earnings, our operating results and financial condition, our anticipated capital requirements, and general business conditions. Table of Contents Preferred Stock Our board of directors will have the authority, without further action by the shareholders, to issue up to 10,000,000 shares of preferred stock in one or more series, to fix the rights, preferences, privileges and restrictions of the authorized preferred stock and to issue shares of each such series. The issuance of preferred stock could have the effect of restricting dividends on the common stock, diluting the voting power for the common stock, impairing the liquidation rights of the common stock or delaying or preventing our change in control without further action by the shareholders. At present, we have no plans to issue any shares of preferred stock. Warrants and Options In connection with our acquisition of WFC, we adopted the Wilson Family Communities, Inc. 2005 Stock Option/Stock Issuance Plan, or the Plan, pursuant to which we may issue to our officers, directors, employees and consultants incentive stock options, non-qualified stock options and shares of restricted stock. The Plan provides for the issuance of up to 1,680,478 shares of our common stock pursuant to awards made under the Plan. As of the date of this prospectus, we had options outstanding under the Plan to purchase a total of 735,000 shares of our common stock. In April 2007, we increased the number of shares issuable under the plan to a total of 2,500,000 shares. All of our outstanding options expire ten years after the date of grant. The Plan is designed to qualify under the Internal Revenue Code as an incentive stock option plan. We may issue incentive awards covering up to an additional 2,500,000 shares of our common stock under the Plan. In connection with our sale of convertible notes in December 2005, we issued warrants to purchase an aggregate of 750,000 shares of common stock to the purchasers of the convertible notes. 187,500 of the shares under such warrants will never vest and 562,500 shares have vested and are currently exercisable. In connection with our sale of convertible notes in September 2006, we issued warrants to purchase an aggregate of 506,250 shares of common stock to the purchasers of the convertible notes. Of these warrants, 126,563 shares will not vest and the remaining warrants to purchase 379,687 shares have vested and are currently exercisable. Table of Contents The convertible notes that we sold in December 2005 and September 2006 were placed by Tejas Securities Group, Inc., a wholly-owned broker-dealer subsidiary of Tejas Incorporated, a public company. In connection with these placements and as a portion of the placement agent fees in connection with the placements, we have issued to Tejas Securities Group, Inc. a warrant to purchase 750,000 shares of our common stock. The warrant has an exercise price of $2.00 per share and may be exercised on a net exercise, cashless basis. In December 2006, Tejas exercised the warrant we issued to them in connection with the December 2005 private placement pursuant to the net exercise provision of the warrant. We issued 348,913 shares of common stock to them in connection with their complete exercise of this warrant. Anti-Takeover Provisions
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0000837038_ahpc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0000837038_ahpc_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary provides an overview of the material information contained elsewhere or incorporated by reference in this prospectus. You should read this summary together with the more detailed information in this prospectus or incorporated by reference in this prospectus, especially the risk factors section and our financial statements, before deciding to invest in shares of our common stock. Our Business AHPC Holdings, Inc., formerly known as WRP Corporation, through our wholly owned subsidiary, American Health Products Corporation (AHPC), is a leading marketer of foodservice and medical examination gloves and complimentary products in the United States. Prior to April 30, 2004, we were also a manufacturer of disposable latex examination and food service gloves through a formerly 70% owned Indonesian manufacturing facility, PT WRP Buana Multicorpora (PT Buana), which we sold in April 2004. We were reincorporated in Maryland in December 1995 and have been involved in several business operations. From March 1998 until April 30, 2004, WRP Asia Pacific Sdn Bhd (WRP Asia) owned a majority of our outstanding common stock. As of April 30, 2004, WRP Asia owned 53.2% of our outstanding securities, which consisted of 833,333 shares of common stock and 417,513 Class A shares of common stock (the latter of which was convertible into our common stock and entitled WRP Asia to elect a majority of our directors). WRP Asia is one of the world s leading manufacturers of disposable gloves, primarily for use by healthcare professionals in the acute care, alternative care and foodservice markets, and for critical environments in the electronics industries, scientific laboratories, pharmaceutical industries and other related industries. AHPC had been purchasing the majority of its powder-free latex exam gloves from WRP Asia for several years. Table of Contents The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. Prospectus Preliminary Prospectus Subject to Completion-dated February 2, 2007 AHPC Holdings, Inc. 4,380,464 Shares of Common Stock This prospectus may be used only by the stockholders listed under the section entitled Selling Stockholders in the prospectus for their resale of up to 4,380,464 shares of our common stock. The prices at which such selling stockholders may sell their shares will be determined by the selling stockholders or their transferees. We will not receive any proceeds from the sale of the shares by the selling stockholders. Our common stock is quoted on the Nasdaq Stock Market under the symbol GLOV. On January 23, 2007, the closing sale price of the common stock was $0.638 per share. You should consider the risk factors beginning on page 4 before purchasing our common stock. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. February 2, 2007 TABLE OF CONTENTS Page About the Prospectus 1 Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0000857073_hq_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0000857073_hq_prospectus_summary.txt
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+PROSPECTUS SUMMARY 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0000864683_cyberonics_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0000864683_cyberonics_prospectus_summary.txt
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+S-1 1 h45874sv1.htm FORM S-1 - REGISTRATION STATEMENT sv1 Table of Contents As filed with the Securities and Exchange Commission on April 27, 2007 Registration No. 333- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Cyberonics, Inc. (Exact name of registrant as specified in its charter) Delaware 76-02364655 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) Cyberonics Building 100 Cyberonics Blvd. Houston, Texas 77058-2072 (281) 228-7200 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) David S. Wise Cyberonics Building 100 Cyberonics Blvd. Houston, Texas 77058-2072 (281) 228-7200 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copy to: Michael C. Blaney Vinson Elkins L.L.P. First City Tower 1001 Fannin Street, Suite 2300 Houston, Texas 77002-6760 (713) 758-3481 Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this registration statement as determined by market conditions and other factors. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. o If any of the securities being registered on this form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, please check the following box. If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o CALCULATION OF REGISTRATION FEE Proposed Maximum Proposed Maximum Amount of Title of Each Class of Amount to be Offering Aggregate Registration Securities to be Registered Registered Price per Share (1) Offering Price (1) Fee 3.0% Senior Subordinated Convertible Notes due 2012 $125,000,000(1) 100% (2)(3) $125,000,000(3) $3,837.50 Common Stock, par value $.01 per share(4) 3,012,050(5) N/A N/A N/A (1) Represents the aggregate principal amount of 3.0% Contingent Convertible Senior Notes due 2012 that we sold in a private placement on September 27, 2005. (2) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933, as amended. (3) Exclusive of accrued interest, if any. (4) The registrant will receive no consideration upon conversion of the notes. Therefore, pursuant to Rule 457(i), no filing fee is required with respect to the shares of common stock registered hereby. (5) Represents the maximum number of shares of common stock which may be issued upon conversion of the notes registered hereby. In addition to the shares of common stock set forth in the table above, pursuant to Rule 416 under the Securities Act, we are registering an indeterminate number of shares of common stock issuable upon conversion of the notes by means of an antidilution adjustment of the conversion price pursuant to the terms of the notes. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. Table of Contents SUMMARY This summary contains basic information about our company and the sale of the notes and underlying common stock pursuant to this prospectus and may not contain all of the information that is important to you. You should read the entire prospectus, especially the risks set forth under the heading Risk Factors, as well as the information to which we refer you, before making an investment decision. Unless we have indicated otherwise, or the context otherwise requires, references in this prospectus to Cyberonics, we, us and our or similar terms are to Cyberonics, Inc. Business Overview Cyberonics, Inc. is a neuromodulation company founded to design, develop and bring to market medical devices that provide a unique therapy, Vagus Nerve Stimulation ( VNS ) Therapy ( VNS Therapy ), for the treatment of epilepsy, treatment-resistant depression ( TRD ) and other debilitating neurological or psychiatric diseases and other disorders. VNS Therapy involves the electrical stimulation of the vagus nerve with an implantable device. The United States Food and Drug Administration ( FDA ) approved the VNS Therapy Systemtm (the VNS Therapy System ) in July 1997 for use as an adjunctive therapy in patients over 12 years of age in reducing the frequency of partial onset seizures that are refractory or resistant to antiepileptic drugs. Regulatory bodies in Canada, Europe, India, Australia, and certain countries in South America, Africa, and Eastern Asia have approved VNS Therapy for the treatment of epilepsy without age restrictions or seizure-type limitations. In July 2005, FDA also approved the VNS Therapy System for the adjunctive long-term treatment of chronic or recurrent depression for patients 18 years of age or older who are experiencing a major depressive episode and have not had an adequate response to four or more adequate anti-depressant treatments. Regulatory bodies in the European Union countries and Canada approved the VNS Therapy System for the treatment of chronic or recurrent depression in patients who are in a treatment-resistant or treatment-intolerant depressive episode without age restrictions. Our clinical development program has included pilot and pivotal studies in using VNS Therapy (1) as an adjunctive therapy for reducing the frequency of seizures in patients over 12 years of age with partial onset seizures that are refractory to antiepileptic drugs and (2) as an adjunctive treatment for patients 18 years of age and older with chronic or recurrent TRD in a major depressive episode. We have also conducted or provided support for small pilot studies for the treatment of Alzheimer s disease, anxiety disorders, chronic headache, bulimia and other disorders. These studies have been conducted to determine the safety and effectiveness of VNS Therapy and to determine new indications that might be considered for pivotal studies (an important component of our clinical research activities). Strategy Our plan is to become the market leader in neuromodulation. Our plan includes the following objectives: Satisfy the urgent unmet medical need in TRD and develop and expand our intellectual property, regulatory and market franchise in the global TRD market; Reposition VNS Therapy in a unique, defensible market position in epilepsy to rejuvenate growth and accelerate penetration of the global epilepsy market; and Focus our financial resources to develop and expand future revenue growth. VNS Therapy System VNS Therapy is the first treatment approved by the FDA for both medically refractory epilepsy and TRD. The safety profiles for VNS Therapy and the VNS Therapy System, including the implant procedure, Table of Contents The information in this prospectus is not complete and may be changed. The Selling Security Holders may not sell these Securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these Securities and it is not soliciting an offer to buy these Securities in any state where the offer or sale is not permitted. Subject To Completion, Dated April 27, 2007 PROSPECTUS $125,000,000 Cyberonics, Inc. 3.0% Senior Subordinated Convertible Notes due 2012 and Up to 3,012,050 Shares of Common Stock Issuable Upon Conversion of the Notes The securities to be offered and sold using this prospectus are our 3.0% Senior Subordinated Convertible Notes due 2012 and shares of our common stock issuable upon conversion of the notes. These securities will be offered and sold by the selling security holders named in this prospectus or in any supplement to this prospectus. See Selling Security Holders beginning on page 66. The notes bear interest at the rate of 3.0% per year, accruing from September 27, 2005. We pay interest on the notes on March 27 and September 27 of each year. The notes will mature on September 27, 2012. Holders may convert their notes at their option at any time prior to close of business on the maturity date. The initial conversion rate is 24.0964 shares of our common stock per note, equal to an initial conversion price of approximately $41.50 per share of common stock. The conversion rate is subject to adjustment in some events but will not be adjusted for accrued interest. In addition, if we experience certain fundamental changes prior to the maturity date, we will pay an additional make-whole premium upon the conversion of the notes in connection with any such change by increasing the conversion rate on such notes. Holders may require us to purchase all or a portion of their notes if we experience specified types of fundamental changes. We may, at our option, elect to pay the purchase price in cash, shares of our common stock, or in any combination of cash and shares of our common stock. The notes are and will be unsecured and rank subordinated to our existing and future senior debt, equally with our existing and future senior subordinated debt and senior to our existing and future subordinated debt. The notes are not guaranteed by our existing subsidiary or any future subsidiaries and, accordingly, the notes are effectively subordinated to the existing and future indebtedness and other liabilities of our subsidiaries. We have entered into a registration rights agreement with the initial purchaser, pursuant to which we agreed to file a registration statement, of which this prospectus is part, with the U.S. Securities and Exchange Commission covering resales of the notes and the common stock issuable upon conversion of the notes. If we fail to comply with certain of our obligations under the registration rights agreement, additional interest will be payable on the notes and the common stock issuable upon conversion of the notes. There is no established market for the notes. The selling security holders may sell the securities offered by this prospectus from time to time on any exchange on which the securities are listed on terms to be negotiated with buyers. They may also sell the securities in private sales or through dealers or agents. The selling security holders may sell the securities at prevailing market prices or at prices negotiated with buyers. The selling security holders will be responsible for any commissions due to brokers, dealers or agents. We will be responsible for all other offering expenses. We will not receive any of the proceeds from the sale by the selling security holders of the securities offered by this prospectus. Our common stock is listed on the NASDAQ Global Market under the symbol CYBX. Investing in our securities involves risks. See
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0000869498_ronco-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0000869498_ronco-corp_prospectus_summary.txt
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+PROSPECTUS SUMMARY This is only a summary and does not contain all of the information that may be important to you. You should read the more detailed information contained in this prospectus, including the financial statements and notes. The Company Overview We are a developer, marketer and distributor of branded consumer products for the kitchen and home. Our products are primarily sold through direct response television marketing by broadcasting 30-minute long advertisements commonly referred to as infomercials. Ronald M. Popeil, our principal consultant and founder of our operating business, started selling products under the Ronco brand over forty years ago. Over the last six years, Ronco branded products have been sold to over five million customers. We were incorporated under the name Fi-Tek VII, Inc. under the laws of the State of Delaware on July 12, 1990. Before June 30, 2005, we were a blank check company. During this time, we engaged in no significant operations other than the search for, and identification and evaluation of, possible acquisition candidates. The address of our principal executive offices is 61 Moreland Road, Simi Valley, California 93065 and our telephone number is (805) 433-1030. Our corporate web site is www.ronco.com . The information on our web site is not a part of this prospectus. In June 2005, we (at the time operating under the name Fi-Tek VII, Inc.) completed a series of related transactions including the merger of our wholly-owned subsidiary, Ronco Acquisition Corporation, with and into Ronco Marketing Corporation and the acquisition of assets comprising the Ronco business from Ronco Inventions, LLC, Popeil Inventions, Inc., RP Productions, Inc., which we refer to collectively as the predecessor entities, and Mr. Popeil. On June 30, 2005, in connection with these transactions, we changed our name to Ronco Corporation. The following diagram summarizes these transactions and our corporate structure: UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 10 TO FORM SB-2 ON FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 RONCO CORPORATION (Exact name of Registrant as specified in its charter) Delaware 5960 84-1148206 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.) 61 Moreland Road Simi Valley, California 93065 (805) 433-1030 (Address, including zip code, and telephone number, including area code, of Registrant s principal executive offices) Paul Kabashima Chief Executive Officer Ronco Corporation 61 Moreland Road Simi Valley, California 93065 (805) 433-1030 (Name, address, including zip code, and telephone number, including area code, of Registrant s principal executive offices and agent for service) Copies of communications to: Albert P. Asatoorian Leslie Ravestein Stubbs Alderton & Markiles, LLP 15260 Ventura Blvd., 20 th Floor Sherman Oaks, California 91403 Telephone: (818) 444-4500 Telecopier: (818) 474-8606 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box: x If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o Our Products We currently offer two product categories: kitchen products and household products. All of our products carry the Ronco or Popeil brand names. Showtime and Six-Star+ are our unregistered trademarks. All other trademarks, servicemarks or trade names referred to in this prospectus are the property of their respective owners. Kitchen Products We manufacture or source, market and distribute products for use in kitchens. Our products include the following: Showtime Rotisserie & BBQ Popeil's Pasta Maker Six Star+ Cutlery Set Solid Flavor Injector Electric Food Dehydrator Since 2002, the Showtime family of products and the Six Star+ Cutlery family of products have accounted for in excess of 92% of our revenues. Revenues from these products, however, have been in decline. For example, our direct response sales of our rotisserie ovens and our cutlery product line declined by approximately $12.7 million and $24.2 million, respectively, during the year ended June 30, 2006 compared with the year ended June 30, 2005. The decline is primarily due to the fact that our infomercial for our rotisserie line is more than two and a half years old and the infomercial for our cutlery line is more than two years old. Historically, our infomercials generate the highest sales in the first six to twelve months then decline as the infomercial loses its freshness. We intend to increase revenue by producing new infomercials for our existing products and for new products that we intend to introduce, increasing wholesale distribution of our existing products and by expanding into international markets. If our revenues continue to decline from our Showtime family of products and the Six Star+ family of products and if we fail to increase revenues by introducing new products then we may suffer a material adverse impact to our earnings and financial health. Household Products We also manufacture or source, market and distribute the Pocket Fisherman and the GLH Formula Number 9 Hair System. We may re-introduce other Ronco brand household products to the market over time. Financing of the Asset Purchase Series A Convertible Preferred Stock and Related Transactions In order to finance the cash portion of the purchase price for the Ronco business, we issued and sold 13,262,600 shares of our Series A Convertible Preferred Stock, not including four shares for which we received payment but which were not issued as of the date of this prospectus, for an aggregate of $50 million on June 30, 2005. We offered and sold these shares in a private transaction that closed contemporaneously with the closing of our purchase of the Ronco business. In connection with the sale of our Series A Convertible Preferred Stock, we agreed to file a registration statement with respect to the common stock into which the Series A Convertible Preferred Stock may be converted, and to cause such registration statement to be declared effective on or before October 28, 2005. Although we filed the registration statement on a timely basis, because the registration statement was not effective by October 28, 2005, under the terms of the original registration rights agreement we signed, we were obligated to pay a penalty (pro rated for periods less than a month) equal to $500,000 (1% of the aggregate offering price of the preferred stock) for each month that the registration statement, of which this prospectus is a part, was not effective. In addition, under the terms of the Series A Convertible Preferred Stock, we were required to pay dividends to holders of the Series A Convertible Preferred Stock at a per share rate of $0.1885 per annum on the day following the end of each fiscal quarter following June 30, 2005. We were required to make these dividends in cash because we failed to make the initial dividend payment by the date required under the terms of the Series A Convertible Preferred Stock and failed to satisfy certain other conditions. On June 28, 2006, holders of our Series A Convertible Preferred Stock agreed to settle the penalty payable under the registration rights agreement for 1,530,418 shares of Series A Convertible Preferred Stock and agreed to accept 510,136 shares of Series A Convertible Preferred Stock (or 0.038464 shares of Series A Convertible Preferred Stock for each share of Series A Convertible Preferred Stock) as full payment of the dividends payable on October 1, 2005, January 1, 2006 and April 1, 2006. On July 21, 2006, the Board of Directors declared a dividend payable in these shares to the holders of the Series A Convertible Preferred Stock. Under the terms of our agreement with the holders of the Series A Convertible Preferred Stock, on July 21, 2006, the Board of Directors also declared a dividend payable in 277,778 shares of Series A Convertible Preferred Stock to holders of the Series A Convertible Preferred Stock in satisfaction of the dividend due on July 1, 2006. Pursuant to this dividend payment, each holder of Series A Convertible Preferred Stock became entitled to receive 0.020933 shares of Series A Convertible Preferred Stock for each share of Series A Convertible Preferred Stock held by the stockholder on the record date of the dividend payment. On October 9, 2006, the Board of Directors declared a dividend payable in 676,847 shares of Series A Convertible Preferred Stock to the holders of the Series A Convertible Preferred Stock in satisfaction of the dividend due on October 1, 2006. In October 2006, we closed a debt financing transaction with Laurus Master Fund Ltd., and completed various other transactions in connection with this financing transaction. In connection with these transactions, we issued to Laurus Master Fund Ltd. a warrant to purchase up to 1,750,000 shares of our common stock at an exercise price of $0.00001 per share. This prospectus covers shares of common stock issuable upon conversion of all outstanding shares of Series A Convertible Preferred Stock. See Business-The Ronco Acquisition and Description of Securities-Preferred Stock. (b) FINANCIAL STATEMENT SCHEDULES RONCO CORPORATION Schedule II - Valuation and Qualifying Accounts Description Balance at beginning of period Additions Charged to costs and expenses Deductions Balance at end of period Allowance for doubtful accounts and sales returns Successor: Three months ended September 30, 2006 (unaudited) $ 363,517 $ 1,054,022 $ $ 1,417,539 Year ended June 30, 2006 (a) $ (b) $ 4,868,944 (c) $ (4,505,427 )(d) $ 363,517 Predecessor: Nine months ended June 29, 2005 $ 1,480,000 $ $ (1,180,000 )(d) $ 300,000 Nine months ended September 30, 2004 $ 5,526,430 $ 1,474,147 $ (5,520,577 )(d) $ 1,480,000 Year ended December 31, 2003 $ 1,835,421 $ 3,691,009 $ $ 5,526,430 Year ended December 31, 2002 $ 1,075,385 $ 760,036 $ $ 1,835,421 Notes: (a) Prior to June 30, 2005, the Predecessor did not track allowance for bad debt and sales returns separately. Since June 30, 2005, the Successor has tracked bad debt and sales returns separately. (b) In accordance with purchase accounting, accounts receivable have been recorded at fair value at June 30, 2005 and accordingly no allowance for doubtful accounts and sales returns have been provided. (c) Includes $502,517 of bad debt expenses and $4,366,427 of sales returns. (d) Accounts written-off against the allowance net of recoveries. ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. CALCULATION OF REGISTRATION FEE Title of Each Class of Securities to be Registered Amount to be Registered Proposed Maximum Offering Price per Share Proposed Maximum Aggregate Offering Price Amount of Registration Fee Common Stock, $.00001 par value per share 17,677,958_ $ 1.60 (1 ) $ 28,284,733 $ 3,026(2 ) (1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457 under the Securities Act. (2) $6,047.02 was previously paid as a registration fee. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. Promissory Notes In connection with our purchase of the Ronco business, Ronco Marketing Corporation issued promissory notes in the aggregate principal amount of $16.3 million. The promissory notes bear simple interest at a rate of 9.5% per year. The principal amount issued is based on the estimated net value of the acquired assets, and is subject to adjustment based on the actual net value of these assets. Based on our computations, the actual net value of the assets comprising the Ronco business is lower than the estimated value specified in the purchase agreement. In October 2006, we entered into an agreement with Mr. Popeil and the predecessor entities, pursuant to which Mr. Popeil and the predecessor entities agreed and confirmed that the original principal amount of the notes was approximately $13.158 million. See Business-The Ronco Acquisition. Recent Financing Transactions On October 18, 2006, we secured a $4.0 million term loan and a revolving credit line of up to $11 million from Laurus Master Fund Ltd. ( Laurus ). In connection with this transaction, we amended the terms of prior agreements with Sanders Morris Harris and Ronald M. Popeil. Under the terms of our amended loan agreement with Sanders Morris Harris, we borrowed $1.5 million in additional funds from Sanders Morris Harris and entered into certain other agreements with Sanders Morris Harris. Under our agreement with Mr. Popeil and related agreements between Mr. Popeil, Laurus and our other lenders, Mr. Popeil agreed to subordinated his rights under his agreements with us to those of Laurus and our other lenders. As partial consideration to Mr. Popeil under this agreement, we agreed to issue to him a warrant to purchase up to 200,000 shares of our common stock. This warrant has a term of five years and is exercisable at an exercise price per share equal to the average bid price for our common stock for the 30 trading days immediately before October 18, 2006, which is $0.848333. We also issued to Laurus a warrant to purchase up to 1,750,000 share of our common stock as partial consideration for amounts made available to us under the Laurus term loan and credit facility. This warrant expires on October 18, 2036 and is exercisable at an exercise price of $0.00001 per share. All shares underlying these warrants issued to Mr. Popeil and Laurus are included in the shares offered under this prospectus. The issuance of shares upon exercise of the warrant to Laurus will result in significant economic dilution to our stockholders because the warrant is exercisable at a nominal exercise price that is significantly below the current and expected future fair market value of our common stock. This risk is exacerbated due to the long term of the warrant, which makes it more likely that the warrant will be exercised. The issuance of this warrant also is expected to materially and adversely impact our operating results. The warrants issued to Laurus in connection with our debt financing will be valued using the Black-Scholes model and the value will be amortized as additional interest expense over the life of the loan. Due to the nominal exercise price, we expect to record a relatively high amount as the fair value of the warrant, which we expect will cause a material reduction in our earnings for the quarterly period ended December 31, 2006 and subsequent periods. In addition, the Laurus warrant has a cashless exercise feature, as a result of which we will account for it as a derivative. The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. If the warrant is recorded as a liability, the change in fair value is recorded in the statement of operations impacting the net gain/loss on derivatives which is classified as other income or expense. As a result, net income/loss attributable to common stockholders is also impacted. Certain Risks Our business and our ability to execute on our business strategy are subject to a number of risks that you should be aware of before you decide to buy our common stock. In particular, you should consider the following risks, which are described more fully in
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0000885280_mri_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0000885280_mri_prospectus_summary.txt
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+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0000886328_e-digital_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0000886328_e-digital_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..bea41339c62234cfebee1153d38e18a3086929e2
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering, especially the risks of investing in our common stock discussed under the caption Risk Factors and our financial statements and notes thereto appearing elsewhere in this prospectus. The Company The following discussion contains certain forward-looking statements. Actual results could differ materially. See Risk Factors - Important Factors Related to
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0000888504_layne_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0000888504_layne_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3f216b0eeabcc17a46288aaa893d43917e33887d
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+S-1/A (in thousands) Balance, beginning of year $ 29,949 $ 79,611 Sales of gas produced, net of production costs (7,608 ) (11,687 ) Net changes in prices and production costs 31,461 (16,568 ) Extensions and discoveries, less related costs 45,683 37,431 Revisions of quantity estimates (13,110 ) (14,420 ) Purchases of reserves in place 15,202 3,729 Change in future development (16,504 ) (34,038 ) Accretion of discount 5,392 12,998 Net change in income taxes (25,099 ) 3,075 Development costs incurred 14,244 28,881 Asset retirement obligation and other Equity securities 68 % 63 % Debt securities 32 35 Cash and cash equivalents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Amendment No. 1 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 LAYNE CHRISTENSEN COMPANY (Exact name of registrant as specified in its charter) Delaware 1700 48-0920712 (State or other jurisdiction of incorporation) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification No.) 1900 Shawnee Mission Parkway Mission Woods, Kansas 66205 (913) 362-0510 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Steven F. Crooke, Esq. Senior Vice President, Secretary and General Counsel Layne Christensen Company 1900 Shawnee Mission Parkway Mission Woods, Kansas 66205 (913) 362-0510 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Patrick J. Respeliers, Esq. Stinson Morrison Hecker LLP 1201 Walnut Street, Suite 2900 Kansas City, Missouri 64106 (816) 842-8600 Christopher D. Lueking, Esq. Latham & Watkins LLP Sears Tower, Suite 5800 233 South Wacker Drive Chicago, Illinois 60606 (312) 876-7700 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted. PRELIMINARY PROSPECTUS Subject to Completion October 2, 2007 2,700,000 Shares Common Stock (unaudited) (in thousands) Working capital, excluding current maturities of debt $ 54,455 $ 69,996 $ 66,989 $ 84,031 $ 78,141 Total assets 245,380 449,335 547,164 504,379 599,813 Total debt 60,000 128,900 151,600 152,000 164,400 Total stockholders' equity 104,697 171,626 205,034 186,819 228,217 We are offering 2,700,000 shares of our common stock to be sold in this offering. Our common stock is quoted on the NASDAQ Global Select Market under the symbol "LAYN." On September 27, 2007, the reported sale price of our common stock was $55.37 per share. Investing in our common stock involves a high degree of risk. Before buying any shares, you should read the discussion of material risks of investing in our common stock in
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0000890923_zoltek_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0000890923_zoltek_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1c7cec91ff01900d7b4ad0bcd98e55903167b544
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights information contained in other parts of this prospectus, and because it is only a summary, it does not contain all of the information that you should consider before buying shares. You should read the entire prospectus carefully, including our financial statements incorporated by reference from our Annual Report on Form 10-K and the "Risk Factors" section for more information about important risks that you should consider before investing in our common stock . ZOLTEK COMPANIES, INC. ABOUT US We are an applied technology and advanced materials company. Our primary focus and mission are to lead the commercialization of carbon fibers as a price-competitive high performance reinforcement for composites used as the primary building material in everyday commercial products. In addition to carbon fibers, we manufacture and market an intermediate product, stabilized and oxidized acrylic fiber, which is used in flame and heat resistant applications. We sell our carbon fibers under the PANEX(R) trade name and our heat resistant fibers under the PYRON(R) trade name. We also provide composite design and engineering for development of applications for carbon fiber reinforced composites. We have manufacturing plants in Abilene, Texas, Nyergesujfalu, Hungary and St. Charles, Missouri. Our Abilene, Texas facility is our U.S. major carbon fiber manufacturing facility with five installed continuous carbonization lines and auxiliary processing capabilities. Our plant in Hungary is our major carbon fiber manufacturing facility with eight continuous carbonization lines and produces intermediate oxidized fibers, carbon fiber textile products and acrylic fiber precursor. Our St. Charles, Missouri facility is primarily dedicated to production of technical fibers for aircraft brake and other friction applications, but also houses a continuous carbonization line. We also have a facility in Salt Lake City, Utah where we produce resin pre-impregnated carbon fibers (prepegs). In addition, our subsidiary, Entec Composite Machines, designs and builds composite manufacturing equipment and markets the equipment along with manufacturing technology and materials. We have announced and are undertaking an ambitious capacity expansion program to meet demand for carbon fibers. BUSINESS STRATEGY Our business strategy can be summarized as follows: CONTINUE REDUCING PRODUCTION COSTS. We believe our proprietary process and equipment design technology enable us to produce carbon fibers at costs substantially lower than those generally prevailing in the industry and to supply carbon fibers for applications which are not economically viable for higher cost competitors. We seek to reduce our total production costs through various means, including enhancement of our acrylic fiber precursor manufacturing capability and upgrades to our carbon fiber production equipment and process designed to achieve increased efficiencies. SUSTAINABLE PRICE LEADERSHIP. Our pricing strategy is to market carbon fibers for use as a base reinforcement material in composites at sustainable price levels resulting in predictable composite costs per unit of strength or stiffness which compete favorably with alternative base construction materials such as glass fiber composites, steel and aluminum. In the past there have been cycles of carbon fiber shortages accompanied by price increases that stifled the development of new applications. With our targeted cost structure, we believe that we can maintain sustainable but competitive pricing. Although from time to time in the past, certain aerospace producers have sold carbon fibers for commercial applications at prices below their production costs, management of the Company believes that their current production now is allocated to large aerospace programs and we do not expect they will compete in the commercial markets for the foreseeable future. LEVERAGE CAPACITY LEADERSHIP. We believe that our decision to build and maintain significant available capacity has directly resulted in long-term supply arrangements with high volume customers. We pursued an aggressive capacity expansion program and believe that we currently have the largest rated capacity for commercial carbon fibers production in the world. We have developed, and are continually seeking to improve, a standardized continuous carbonization line design in order to increase efficiency and shorten lead-time from the decision to add lines to the time when the lines become operational. The ability to increase capacity at a level that matches the growth of the commercial markets is essential to encourage development of large volume applications. We believe we are uniquely positioned to expand capacity rapidly to keep pace with commercial market demand. - 1 - <PAGE> <PAGE> SUPPORT NEW COMMERCIAL MARKET AND APPLICATIONS DEVELOPMENT. To accelerate the commercialization of carbon fibers and carbon fiber composites across a broad range of mass-market applications, we have pursued various initiatives, including significant partnerships with potential users of carbon fibers to act as catalysts in the development of new low-cost, high volume products. We believe that our supply relationships with customers for wind energy and automotive applications are the direct result of these development efforts. We believe that our business strategy has positioned us as the leader in developing commercial markets for carbon fibers and carbon fiber reinforced composites for a diverse range of applications based upon carbon fibers' distinctive combination of physical and chemical properties, principally high-strength, high-stiffness, low-weight and corrosion and fatigue resistance. Our strategy and business model for commercialization of carbon fibers consist of offering low but sustainable pricing, achieving low production costs, maintaining rapidly scalable capacity and offering various value-added product and process enhancements. CORPORATE INFORMATION We are incorporated in Missouri, and our principal executive offices are located at 3101 McKelvey Road, St. Louis, Missouri 63044. Our telephone number is (314) 291-5110 and our website address is www.zoltek.com. Information contained in, or accessible through, our website does not constitute part of this prospectus. THE OFFERING Common stock offered by the selling shareholders An aggregate of up to 2,027,951 shares of common stock held by or issuable to the selling shareholders described under "Principal and Selling Shareholders - Selling Shareholders," including their transferees, pledgees, donees or other successors, of which: o up to 678,792 shares that may be issued upon the conversion of the senior convertible notes; and o up to 1,349,159 shares that may be issued upon the exercise of the warrants. Common stock to be outstanding after the offering 31,703,150 shares(1) Use of proceeds The selling shareholders will receive all of the net proceeds from the sale of shares of our common stock offered by this prospectus. We will not receive any of the proceeds from the sale of shares of common stock offered by this prospectus. To the extent all of the outstanding warrants held by the selling shareholders are exercised at their current exercise prices, we would receive approximately $27,390,232 in cash proceeds (unless such warrants to purchase 1,286,659 shares are exercised on a cashless basis pursuant to their terms), which would be used for general working capital purposes. The exercise price of warrants to purchase 1,286,659 shares is $28.06 per share and the exercise price of warrants to purchase 62,500 shares is $5.00 per share. <FN> --------- (1) Based on 27,025,480 shares of common stock issued and outstanding as of February 23, 2007 and assuming that all convertible securities and warrants held by the selling shareholders are converted into, or exercised for, common stock in accordance with their terms. - 2 - <PAGE> <PAGE> Plan of Distribution The shares of common stock offered for resale may be sold by the selling shareholders pursuant to this prospectus in the manner described under "Plan of Distribution." Risk Factors You should read the "Risk Factors" section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock. Nasdaq National Market Symbol ZOLT SELLING SHAREHOLDERS AS UNDERWRITERS The selling shareholders and any underwriters, agents, broker or dealers that participate with the selling shareholders in the distribution of any of the shares may be deemed to be "underwriters" within the meaning of the Securities Act, and any commissions received by them and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. See "Plan of Distribution" and "Principal and Selling Shareholders." - 3 - <PAGE> <PAGE>
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0000892449_venture_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0000892449_venture_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..2c646c05b8b3ec1468fa9118723a51277d58006e
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+PROSPECTUS SUMMARY This is only a summary and does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus, including
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+S-1/A 1 c15484a2sv1za.htm AMENDMENT NO.2 TO REGISTRATION STATEMENT sv1za Table of Contents As filed with the Securities and Exchange Commission on June 14, 2007 Registration No. 333-143306 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amendment No. 2 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 First Mercury Financial Corporation (Exact Name of Registrant as Specified in its Charter) Delaware 6331 38-3164336 (State or Other Jurisdiction of Incorporation or Organization) (Primary Standard Industrial Classification Code Number) (IRS Employer Identification No.) 29110 Inkster Road, Suite 100 Southfield, Michigan 48034 (800) 762-6837 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Richard H. Smith Chairman, President and Chief Executive Officer First Mercury Financial Corporation 29110 Inkster Road, Suite 100 Southfield, Michigan 48034 (800) 762-6837 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies To: Scott M. Williams Heidi J. Steele McDermott Will Emery LLP 227 West Monroe Street Chicago, Illinois 60606 (312) 372-2000 Edward S. Best Mayer, Brown, Rowe Maw LLP 71 South Wacker Drive Chicago, Illinois 60606 (312) 782-0600 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. CALCULATION OF REGISTRATION FEE Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Amount of Securities to be Registered Registered(1) Offering Price Per Share(2) Aggregate Offering Price(2) Registration Fee Common Stock, par value $0.01 per share 3,796,449 shares $ 19.18 $ 72,815,892 $ 2,236(3 ) (1) Including 495,189 shares of common stock, which may be purchased by the underwriters to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended. The proposed maximum offering price per share, the proposed maximum aggregate offering price and the amount of the registration fee have been computed on the basis of the average of the high and low prices per share of common stock on the New York Stock Exchange on June 13, 2007. (3) $2,277 previously paid in connection with the filings of this registration statement. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Securities and Exchange Commission acting pursuant to said Section 8(a), may determine. Table of Contents SUMMARY This summary highlights information about this offering and our company, which includes First Mercury Financial Corporation, which we refer to as FMFC, its subsidiaries and First Mercury Holdings, Inc., formerly our sole stockholder, which we refer to as Holdings. Holdings was formed in connection with the notes offering and repurchase of shares of minority stockholders that occurred in August 2005 as described in The Company, which we refer to as the Holdings Transaction. Holdings was merged with and into FMFC on October 16, 2006, immediately prior to the completion of our initial public offering. In this prospectus, unless the context otherwise indicates, we, us, and our refer to FMFC and its subsidiaries and, subsequent to the Holdings Transaction but prior to such merger, Holdings and its subsidiaries. Because this is a summary, it may not contain all the information you should consider before investing in our common stock. You should carefully read this entire prospectus. Certain insurance terms used in this prospectus are defined in the Glossary of Selected Insurance Terms included herein. Overview We are a provider of insurance products and services to the specialty commercial insurance markets, primarily focusing on niche and underserved segments where we believe that we have underwriting expertise and other competitive advantages. During our 34 years of underwriting security risks, we have established CoverX as a recognized brand among insurance agents and brokers and developed significant underwriting expertise and a cost-efficient infrastructure. Over the last seven years, we have leveraged our brand, expertise and infrastructure to expand into other specialty classes of business, particularly focusing on smaller accounts that receive less attention from competitors. As part of this extension of our business, we have increased our underwriting staff and opened offices in Chicago, Dallas, Naples, Florida, Boston and Irvine, California. As primarily an excess and surplus, or E S, lines underwriter, our business philosophy is to generate an underwriting profit by identifying, evaluating and appropriately pricing and accepting risk using customized forms tailored for each risk. Our combined ratio, a customary measure of underwriting profitability, has averaged 67.1% over the past three years. A combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss. As an E S lines underwriter, we have more flexibility than standard property and casualty insurance companies to set and adjust premium rates and customize policy forms to reflect the risks being insured. We believe this flexibility has a beneficial impact on our underwriting profitability and our combined ratio. In addition, through our insurance services business, which provides underwriting, claims and other insurance services to third parties, we are able to generate significant fee income that is not dependent upon our underwriting results. For our entire business, we generated an average annual return on stockholders equity of 25.8% over the past three calendar years. Our CoverX subsidiary is a licensed wholesale insurance broker that produces and underwrites all of the insurance policies for which we retain risk and receive premiums. As a wholesale insurance broker, CoverX markets our insurance policies through a nationwide network of wholesale and retail insurance brokers who then distribute these policies through retail insurance brokers. CoverX also provides underwriting services with respect to the insurance policies it markets in that it reviews the applications submitted for insurance coverage, decides whether to accept all or part of the coverage requested and determines applicable premiums. We participate in the risk on insurance policies sold through CoverX, which we refer to as policies produced by CoverX, generally by directly writing the policies through our insurance subsidiaries and then retaining all or a portion of the risk. The portion of the risk that we decide not to retain is ceded to, or assumed by, reinsurers in exchange for paying the reinsurers a proportionate amount of the premium received by us for issuing the policy. This cession is commonly referred to as reinsurance. Depending on market conditions, we can retain a higher or lower amount of premiums produced by CoverX. Prior to June 2004, when the rating of our insurance subsidiary, First Mercury Insurance Company, or FMIC, was upgraded by A.M. Best Company, Inc., or A.M. Best, to A , we did not directly write a significant amount of insurance policies produced by CoverX, but instead utilized fronting arrangements under Table of Contents which we contracted with third party insurers, or fronting insurers, to directly write the policies produced by CoverX. Under these fronting arrangements, we then controlled the cession of the insurance from the fronting insurer and either assumed most of the risk under these policies as a reinsurer or arranged for it to be ceded directly to other reinsurers. In connection with our insurance subsidiary s rating upgrade, we were able to eliminate most of our fronting relationships by May 2005 and become the direct writer of substantially all of the policies produced by CoverX. Effective January 1, 2007, FMIC and our other insurance subsidiary, All Nation Insurance Company, or ANIC, entered into an intercompany pooling reinsurance agreement wherein all premiums, losses and expenses of FMIC and ANIC are combined and apportioned between FMIC and ANIC in accordance with fixed percentages. On May 4, 2007, A.M. Best assigned the financial strength rating A to the First Mercury Group pool and its members, FMIC and ANIC. ANIC s A.M. Best rating was upgraded to A as a result. Our direct and assumed written premiums grew from $92.1 million in 2004 to $218.2 million in 2006. These amounts do not include $54.8 million and $11.9 million of premiums in 2004 and 2006, respectively, that were produced and underwritten by CoverX and directly written by our fronting insurers. A discussion of how the shift from relying on fronting relationships to directly writing insurance has impacted our financial presentation and our direct and assumed written premiums is set forth in Management s Discussion and Analysis of Financial Condition and Results of Operations Overview. We have written general liability insurance for the security industry, which includes security guards and detectives, alarm installation and service businesses, and safety equipment installation and service businesses, for 34 years. We focus on small and mid-size accounts that are often underserved by other insurance companies. For 2006 and the three months ended March 31, 2007, our direct and assumed written premiums from security classes represented 31.2% and 26.8%, respectively, of our total direct and assumed written premiums. Our loss and allocated loss adjustment expense ratio on a weighted average basis for security classes has been 61.2% over the past 20 accident years and 39.8% over the past three accident years. A loss and allocated loss adjustment expense ratio consists of the total net incurred losses and allocated loss adjustment expenses related to a specified class or classes of business divided by the total net earned premium related to a specified class or classes of business over the same time period. We believe that this calculation is useful in providing information on the historical long term underwriting performance of our business from security classes and is an indicator of how an insurance company has managed its risk exposure. We have leveraged our nationally recognized CoverX brand, our broad distribution channels through CoverX, and our underwriting and claims expertise to expand our business into other specialty classes. For example, we have leveraged our experience in insuring the security risks of the contractors that install safety and fire suppression equipment, which often involves significant plumbing work and exposure, into the underwriting of other classes of risks for plumbing contractors. We write general liability insurance for other specialty classes primarily consisting of contractor classes of business, including roofing contractors, plumbing contractors, electrical contractors, energy contractors, and other artisan and service contractors, legal professional liability, and, most recently, hospitality and employer general liability coverage. As part of this extension of our business, we have increased our underwriting staff and opened regional offices in Chicago, Dallas, Naples, Florida, Boston and Irvine, California. For 2006 and the three months ended March 31, 2007, our direct and assumed written premiums from other specialty classes represented 68.8% and 73.2%, respectively, of our total direct and assumed written premiums. Our loss and allocated loss adjustment expense ratio on a weighted average basis for other specialty classes has been 42.7% over the past three accident years and 47.2% over the past seven accident years, which represents the period in which we have expanded our business in other specialty classes. We believe this calculation is useful in providing information on the underwriting performance of business from other specialty classes for the seven-year period. Because we have limited experience in these classes compared to security classes, loss and allocated loss adjustment expense ratio may not be indicative of the long term underwriting performance of our business from other specialty classes. Our insurance services business provides underwriting, claims and other insurance services to third parties, including insurance carriers and customers, and generated $10.9 million in commission and fee income in 2006. Most of this revenue is generated by American Risk Pooling Consultants, Inc. and its subsidiaries, Table of Contents which we refer to as ARPCO, through which we provide third party administration services for risk sharing pools of governmental entity risks, including underwriting, claims, loss control and reinsurance services. For the year ended December 31, 2006, our operating income was $50.2 million, a 24% increase over the prior year, and our net income was $21.9 million, a 4% decrease over the prior year. For the three months ended March 31, 2007, our operating income was $16.3 million, a 53% increase over the three months ended March 31, 2006, and our net income was $10.0 million, an 85% increase from the same period in 2006. As of March 31, 2007, we had total assets of $566.7 million and stockholders equity of $182.8 million. The changes in net income from 2005 to 2006 and from the three months ended March 31, 2006 compared to the corresponding period in 2007 were not comparable to the respective changes in operating income due to interest expense incurred after August 17, 2005 on the $65.0 million in senior notes issued in August 2005 and repaid in October 2006. Competitive Strengths The following competitive strengths drive our ability to execute our business plan and growth strategy: Recognized Brand and Nationwide Distribution Platform. Our CoverX brand has been well-known among insurance brokers and agents for over 30 years. Brokers and agents have depended upon us to provide a consistent insurance market since 1973 for security guards and detectives, alarm installation and service businesses and safety equipment installation and service businesses. We have developed relationships with numerous brokers nationwide, and produced business from approximately 1,000 different brokers in 2006. Throughout our history, we have successfully leveraged our brand and broker distribution network to enter into other specialty classes of business. Proprietary Data and Underwriting Expertise. Recognizing the importance of the collection of claims and loss information, we have developed and maintained an extensive database of underwriting and claims information that we believe is unmatched by our competitors and which includes over 20 years of loss information. We believe our database and underwriting expertise allow us to price the risks that we insure more appropriately than our competitors. We also enhance our historical risk database by using our knowledge to draft extensively customized forms which precisely define the exposures that we insure. Opportunistic Business Model. Because CoverX controls a broad policy distribution network through its relationships with brokers and possesses significant underwriting expertise, we have the ability to selectively increase or decrease the underwriting exposure we retain based upon the pricing environment and how the exposure fits with our underwriting and capital management criteria. We have the ability to offset lower net written premiums by generating higher fee income by either underwriting through CoverX on behalf of third party insurance carriers or ceding more risk to reinsurers. Cost-Efficient Operating Structure. We believe that our cost-efficient operating structure allows us to focus on underserved, small accounts more profitably than our competitors. We streamlined our underwriting and claims processes to create a paperless interactive process that requires significantly less administration. While the premiums generated from insurance policies produced by CoverX increased from $28.1 million in 2000 to $230.1 million in 2006, our total employees over that same period only increased from 110 to 142. Significant Commission and Fee Income Earnings. We have demonstrated the ability to generate non-risk bearing commissions and fees that provide a significant recurring source of income, and as a result, our revenue and net income are not solely dependent upon our underwriting results. Proven Leadership and Highly Experienced Employees. Our management team, led by our Chairman, President and Chief Executive Officer, Richard H. Smith, has an average of over 25 years of insurance experience. Additionally, both our underwriters and our senior claims personnel average over 20 years of experience in the insurance industry. Table of Contents Business Challenges We face the following challenges in conducting our business: Our Continued Success is Dependent Upon Our Ability to Maintain Our Third Party Ratings to Continue to Engage in Direct Insurance Writing. Any downgrade in the rating that FMIC receives from A.M. Best could prevent us from engaging in direct insurance writing or being able to obtain adequate reinsurance on competitive terms, which could lead to decreased revenue and earnings. We Need to Maintain Adequate Reserves. Our actual incurred losses may exceed the loss and loss adjustment expense reserves we maintain, which could have a material adverse effect on our results of operations and financial condition. We Bear Credit Risk With Respect to Our Reinsurers. We continue to have primary liability on risks we cede to reinsurers. If any of these reinsurers fails to pay us on a timely basis or at all, we could experience losses. Our Continued Success is Dependent Upon Our Ability to Obtain Reinsurance on Favorable Terms. We use significant amounts of reinsurance to manage our exposure to market and insurance risks and to enable us to write policies in excess of the level that our capital supports. Without adequate levels of appropriately priced reinsurance, the level of premiums we can underwrite could be materially reduced. A Substantial Portion of Our Business is Concentrated in the Security Industry. Our direct and assumed written premiums from security classes represented 31.2% and 26.8% of our total premiums produced in 2006 and the three months ended March 31, 2007, respectively. As a result, any adverse changes in the security insurance market could reduce our underwriting profitability. We Operate in a Highly Competitive Market. It is difficult to attract and retain business in the highly competitive market in which we operate. As a result of this intense competition, prevailing conditions relating to price, coverage and capacity can change very rapidly and we might not be able to effectively compete. Strategy We intend to grow our business while enhancing underwriting profitability and maximizing capital efficiency by executing the following strategies: Profitably Underwrite. We will continue to focus on generating an underwriting profit in each of our classes, regardless of market conditions. Our average combined ratio for the last three years was 67.1%, comprised of an average loss ratio of 50.3% and an average expense ratio of 16.8%. Our ability to achieve similar underwriting results in the future depends on numerous factors discussed in the
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+included in this prospectus. Because this is only a summary, you should read the rest of this prospectus before you invest in our common stock. Read this entire prospectus carefully, especially information contained in the Risk Factors section. As used in this prospectus, the terms we, our or us refer to Everlast Worldwide Inc., and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates. Everlast Worldwide Inc. We are a leading designer, manufacturer and marketer of boxing and fitness related sporting goods equipment under the well-recognized Everlast brand name and a worldwide licensor of the Everlast brand for apparel, footwear, sporting goods equipment and other complementary active lifestyle products and accessories. Since 1910, Everlast has been the preeminent brand in the world of boxing and among the most recognized brands in the overall sporting goods and apparel industries. Over the past 97 years, our products have been used for training and in professional fights by many of the biggest names in boxing, including Jack Dempsey, Joe Louis, Rocky Marciano, Muhammad Ali, Joe Frazier, George Foreman, Sugar Ray Leonard, Evander Holyfield, Mike Tyson, Sugar Shane Mosley and Jermain Taylor and our products established a reputation for quality, durability and performance. In order to capitalize on the rich heritage and authenticity of the Everlast brand, we extended the Everlast brand outside of the boxing ring into complementary product categories, including apparel, footwear, eyewear, nutritional products, fragrances and other active lifestyle products. We accomplished this through 86 licensing arrangements in over 100 countries with licensees who have expertise in these product categories and territories. Our strategy is to continue to leverage the unique qualities represented by the Everlast brand Strength, Dedication, Individuality and Authenticity to become a leading global athletic brand and a necessary part of the lives of consumers who train, compete and live an active lifestyle. In our sporting goods equipment business, we design, manufacture, source and market sporting goods equipment primarily related to the sport of boxing and fitness, including boxing gloves, heavy bags, speed bags, boxing trunks, mixed martial arts gear and other related gym equipment and accessories. We currently sell our sporting goods equipment in over 5,000 U.S. retail locations representing a broad range of distribution channels including sporting goods stores, mass merchants, mid-tier department stores, specialty stores and fitness clubs. We also sell our products directly to consumers through the internet and the Everlast catalog. We maintain strong relationships with our retail customers as a result of the strength and relevance of our brand and the quality of our products and customer service. We believe we are the market leader in nearly all boxing equipment product categories and continually strive to enhance the durability, performance and protective features of our products through the use of the most advanced designs and materials available to maintain our authentic image and leading position in this market. In 2006, our net sales from sporting goods equipment increased 26.7% to $39.6 million that represented 76.4% of our total net revenues. Over the last several years we focused on extending our brand into new, complementary product categories and expanding our presence in international markets through the use of qualified licensees with expertise in these product categories and territories. We currently manage 26 domestic licensing arrangements with licensees who design, source and market a range of products in the U.S. under the Everlast brand including apparel, footwear, sporting goods equipment, eyewear, nutritional products and other active lifestyle products. We believe these product categories complement our brand and reinforce its active lifestyle positioning, and we intend to continue to selectively explore additional Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Subject to completion, dated May 1, 2007 Shares EVERLAST WORLDWIDE INC. Common Stock $ per share Everlast Worldwide Inc. is offering shares and selling stockholders are offering 100,000 shares. We will not receive any proceeds from the sale of our shares by selling stockholders. The last reported sale price of our common stock on April 30, 2007 was $20.75 per share Trading symbol: Nasdaq Global Market EVST This investment involves risk. See Risk Factors beginning on page 8. Per Share Total Public offering price $ $ Underwriting discount $ $ Proceeds, before expenses, to Everlast Worldwide Inc. $ $ Proceeds, before expenses, to selling stockholders $ $ We granted the underwriters the right to purchase up to an additional shares to cover over-allotments. Neither the Securities and Exchange Commission nor any state securities commission has approved of anyone s investment in these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Piper Jaffray Lazard Capital Markets ThinkEquity Partners LLC The date of this prospectus is , 2007. Table of Contents product categories that we believe are consistent with our brand positioning. In addition, to capitalize on the worldwide recognition of the Everlast brand, we expanded our presence in international markets through a global network of licensee partners. We currently maintain 60 international licensing arrangements in over 100 countries worldwide with licensees who design, manufacture, source and market a range of products under the Everlast brand. In 2006, our license segment generated $12.3 million in net license revenues that represented 23.6% of our total net revenues. Background On October 24, 2000, our predecessor, Active Apparel Group, Inc., formerly the men s and women s apparel licensee of the Everlast brand since 1994, completed a merger with Everlast Holding Corp., creating Everlast Worldwide Inc. We have since undertaken a number of strategic initiatives designed to expand and integrate the Everlast brand globally while increasing our sales and improving our margins. Specifically, we: expanded our brand into new and complementary product categories and additional geographic territories through licensee partners; transitioned our women s and men s wholesale apparel business in the U.S. and Canada to a license model; rationalized our U.S. manufacturing and distribution facilities and implemented several cost saving initiatives in our supply chain; and reorganized and strengthened our executive management team. As a result of these initiatives, we significantly increased our net sales of sporting goods, license revenues and profitability while expanding and strengthening our brand globally. We increased our total net revenues from continuing operations to $51.9 million in 2006, from $33.4 million in 2002. We have increased our net sales of sporting goods equipment to $39.6 million in 2006 from $27.9 million in 2002 and our net license revenues to $12.3 million in 2006 from $5.5 million in 2002. Over the same period, we also improved our gross margins and increased our operating profitability. Our operating profit increased to $8.1 million, or 15.6% of total net revenues, in 2006, from $594,000, or 1.8% of total net revenues, in 2002. Global Brand Integration In 2006, to further coordinate our brand efforts and reinforce our active lifestyle positioning through a clear, consistent and cohesive worldwide brand and product strategy, we completed a comprehensive review of the Everlast brand. Based on these results, we plan to launch a coordinated product and marketing strategy that integrates the unique qualities of our brand Strength, Dedication, Individuality and Authenticity and is designed to meet the needs of consumers who train, compete and live an active lifestyle. Our sporting goods and licensed product strategy will revolve around our core consumers and can be categorized as follows: Train designed for those who view fitness as a core activity. Our products in this segment will incorporate functional fashion design with the most current high-tech fabrics and finishes for core training; Compete designed for professional and amateur athletes who actively train for a range of competitive activities. Our products in this segment will incorporate extreme designs combined with the latest in high-tech fabrics and finishes for competition and cross training; and Live designed for consumers who live an active lifestyle. Our products in this segment will incorporate fashion athletic inspired design with the most comfortable fabrics for casual and leisure activities. Table of Contents PRODUCT PHOTOGRAPHS AND LOGO TO BE PROVIDED. Table of Contents In conjunction with this product launch, we will begin a coordinated marketing campaign designed to complement our product strategy and connect emotionally with our consumers. This campaign will center around the tagline Greatness is Within representing the greatness that is within our products and our consumers, as well as our company and our licensees. This integrated product and marketing launch will enable us to present a clear, concise and consistent brand message to consumers, which we believe will increase consumer demand for Everlast products and reinforce our position as a leading active lifestyle brand. We also believe our product strategy will expand our target market to include not only competitive athletes, but also consumers who live an active lifestyle. Competitive Strengths We believe the following competitive strengths enable our success in the marketplace: Authentic and powerful brand identity. We believe that our rich heritage and 97 year history providing innovative, high quality equipment to the best boxers in the world established Everlast as the most powerful brand in boxing and a widely-recognized brand worldwide. We believe the authenticity of the Everlast brand allows us to continue to expand our market position and assert our relevance as a broader active lifestyle brand. Commitment to product innovation. Over the last 97 years, we have continued to be a leading innovator in the sport of boxing. We strive to enhance the quality, durability and performance features of our products through the use of the most advanced designs, materials and technology available. Our commitment to product innovation has allowed us to maintain our leading market position in boxing and reinforces the authenticity of our brand at retail. Strong relationships with retailers in multiple distribution channels. The strength and relevance of our brand and the quality of our products and service allows us to maintain strong relationships with retailers in multiple distribution channels. We believe the quality of our relationships enables us to continue to expand shelf space dedicated to our products, improve the positioning of our products in stores and allows us and our licensees to introduce a broader range of products into our retailers stores. Demonstrated ability to increase brand value through a broad network of licensees. We believe we have a demonstrated track record of building brand awareness and increasing brand value by extending the Everlast brand into complementary product categories and expanding our presence in international markets through careful selection of licensee partners. Our direction and implementation of a creative marketing and innovative product development strategy enables our licensee partners to leverage the strength of the Everlast brand for their product categories and territories. We believe marketing Everlast products in complementary categories enhances our brand image and reinforces our relevance as an active lifestyle brand. Integrated global sourcing network. We and our licensees source our products through an integrated global network of third party manufacturers. We believe utilizing an integrated network of third party vendors ensures brand consistency and product quality, allows us and our licensees to leverage economies of scale for lower unit costs and increases the availability of product inventory to fill in-season demand on shorter lead times. Experienced management team. Our senior management team possesses substantial experience in the sporting goods, apparel and consumer product industries. We believe the strength of our current management team plays an important role in our continued success in the marketplace. Table of Contents Growth Strategy Key elements of our growth strategy include: Expand domestic retail presence of our licensed product. We manage a strong, diverse base of 26 domestic licensing arrangements with licensees who offer a range of active lifestyle products under the Everlast brand, such as apparel, footwear, sporting goods equipment, eyewear and nutritional products. We plan to launch a coordinated product and marketing strategy that we believe will expand our target market and domestic retail distribution of our licensed products and increase demand for the Everlast brand. We also believe that the success of our sporting goods equipment at retail will provide an opportunity for much broader retail distribution and penetration of our licensed products. We also intend to actively grow our direct-to-consumer offering through enhanced e-commerce and catalog offerings. Expand our international retail penetration. We currently manage 60 international licensing arrangements with licensees who sell a range of Everlast branded products in over 100 countries worldwide. We intend to expand our presence in markets where the Everlast brand is strong yet not well distributed, such as France and Germany, as well as continue to support our licensees in markets that experienced strong recent growth. We also believe there is a significant opportunity to expand the Everlast brand into large potential new markets, such as China and India, where we believe the qualities of our brand will resonate with consumers. Broaden our core sporting goods equipment offering. We intend to continue to improve the performance of our current sporting goods equipment through innovation, as well as expand our product offering to include products used for general fitness, in order to capitalize on current trends and long-term shifts in the fitness category. Increase domestic distribution of our sporting goods equipment. We intend to expand domestic distribution of our sporting goods equipment through continued penetration of our current retail partners, as well as adding new retailers to our customer base. We believe that the strength of our relationships, quality of our products and service and new, innovative product introductions will allow us to leverage the growth of our current retail customers, increase floor space dedicated to our products and improve the placement of our products in our retailers stores. Risks Affecting Us See Risk Factors and other information included in this prospectus for a discussion of factors you should carefully consider before investing in our common stock. Our Corporate Information We are a Delaware corporation. Our headquarters is located at 1350 Broadway, Suite 2300, New York, New York 10018 and our telephone number is (212) 239-0990. Our corporate website address is www.everlast.com. We do not incorporate the information on our website into this prospectus and you should not consider any information on, or that can be accessed through, our website as part of this prospectus. Table of Contents The Offering Common stock offered: By Everlast Worldwide Inc. shares By the selling stockholders 100,000 shares Total shares Common stock to be outstanding after the offering shares Use of proceeds We intend to use the proceeds we receive from this offering to (a) repay $21.0 million under our $25.0 million four-year senior term facility, or the term facility; (b) repay $2.3 million outstanding on the mortgage on our manufacturing facility in Moberly, Missouri and (c) repay approximately $7.0 million outstanding under our factoring agreement with Wells Fargo Century, Inc. By repaying amounts under our factoring agreement, we will have availability under this lending arrangement to help fund our global brand integration, product development, marketing and direct-to-consumer business initiatives, including expanded e-commerce capabilities and catalog offerings. We will not receive any proceeds from the sale of common stock by the selling stockholders. See Use of Proceeds. Nasdaq Global Market symbol EVST The information in this prospectus is based on the number of shares outstanding as of March 31, 2007 and, unless otherwise indicated, excludes: 772,036 shares of common stock issuable upon exercise of options outstanding under our 1993 stock option plan, 1995 non-employee director stock option plan, 2000 stock option plan and 2005 non-employee director stock option plan, at a weighted average exercise price of $8.39 per share, 197,846 shares of which were exercisable at a weighted average exercise price of $4.04 per share as of March 31, 2007; 1,097,803 shares of common stock reserved for future grants under our 2000 stock option plan and our 2005 non-employee director stock option plan; 100,000 shares of common stock issuable upon exercise of outstanding warrants at an exercise price of $7.42 per share, which are currently exercisable and expire on January 1, 2016; warrants to purchase up to 4.95% of our currently outstanding common stock issuable, contingent upon the initial network order of the third season of The Contender reality television series at an exercise price equal to 75.0% of the lesser of (a) the market price of our common stock on the date of issuance or (b) the 365-day average market price of our common stock for the year prior to the date of issuance; and exercise of the underwriters over-allotment option to purchase up to additional shares of common stock in this offering. Table of Contents Summary Consolidated Financial Data The summary financial data presented below is derived from our audited consolidated financial statements, except for the interim periods. Historical results are not necessarily indicative of the results of operations to be expected for future periods. You should read the summary consolidated financial data in conjunction with Management s Discussion and Analysis of Financial Condition and Results of Operations and with our consolidated financial statements and related notes included in this prospectus. As of January 1, 2005, we licensed our U.S. women s apparel category to Jacques Moret, Inc. On December 14, 2005, we announced that effective January 1, 2006, we expanded our relationship with Jacques Moret, signing a four-year license agreement, granting a license for our men s activewear, sportswear, outerwear and swimwear in the U.S. We report our results of operations on a generally accepted accounting principles, or GAAP, basis, which includes the application of Financial Accounting Standards Board No. 144, Accounting for the Disposal of Long-Lived Assets. FASB No. 144 requires us to report our results of operations from our men s and women s apparel businesses as discontinued components for all current and prior periods presented. For the Year Ended December 31, For the 3 Months Ended March 31, 2002(a) 2003(b) 2004 2005 2006(e) 2006(e) 2007 (unaudited) (unaudited) (in thousands, except per share data) Consolidated Statement of Operations Data Net sales $ 27,922 $ 25,126 $ 24,438 $ 31,271 $ 39,630 $ 6,967 $ 9,049 Net license revenues 5,501 6,669 9,059 11,982 12,257 3,003 3,327 Net revenues 33,423 31,795 33,497 43,253 51,887 9,970 12,376 Cost of goods sold 20,069 18,999 18,553 24,807 29,887 5,529 6,293 Gross profit 13,354 12,796 14,944 18,446 22,000 4,441 6,083 Selling, general and administrative expenses 12,760 14,954 13,881 13,220 13,916 2,987 3,865 Operating income (loss) from continuing operations 594 (2,158 ) 1,063 5,226 8,084 1,454 2,218 Interest expense and financing costs 249 503 1,087 2,238 3,342 668 917 Other expense (income) (96 ) (48 ) (17 ) 17 (2,053 ) (2,041 ) (5 ) Income (loss) before provision for income taxes from continuing operations 441 (2,613 ) (7 ) 2,971 6,795 2,827 1,306 Provision (benefit) for income taxes from continuing operations 281 (640 ) 47 1,145 2,071 343 572 Net income (loss) from continuing operations 160 (1,973 ) (54 ) 1,826 4,724 (Loss) income from discontinued components, net of tax 2,288 1,018 (973 ) (2,774 ) Net income (loss) $ 2,448 $ (955 ) $ (1,027 ) $ (948 ) $ 4,724 $ 2,484 $ 734 Dividends on redeemable preferred stock 1,451 Basic per share data:(c) Net income (loss) from continuing operations $ 0.05 $ (0.63 ) $ (0.02 ) $ 0.55 $ 1.22 $ 0.69 $ 0.18 Net income (loss) from discontinued components $ 0.74 $ 0.32 $ (0.31 ) $ (0.83 ) Net income (loss) $ 0.79 $ (0.31 ) $ (0.33 ) $ (0.28 ) $ 1.22 $ 0.69 $ 0.18 Diluted per share data:(c) Net income (loss) from continuing operations $ 0.04 $ (0.63 ) $ (0.02 ) $ 0.47 $ 1.14 $ 0.64 $ 0.17 Net income (loss) from discontinued components $ 0.55 $ 0.32 $ (0.31 ) $ (0.71 ) Net income (loss) $ 0.59 $ (0.31 ) $ (0.33 ) $ (0.24 ) $ 1.14 $ 0.64 $ 0.17 Weighted average common shares:(d) Basic 3,101 3,108 3,132 3,326 3,865 3,619 4,067 Diluted 4,139 3,108 3,132 3,894 4,136 3,909 4,431 Table of Contents As of December 31, As of March 31, 2002 2003 2004 2005 2006 2006 2007 (unaudited) (in thousands) Consolidated Balance Sheet Data Cash and cash equivalents $ 2,530 $ 1,937 $ 649 $ 58 $ 216 $ 232 $ 128 Total assets 63,847 64,257 64,756 61,441 65,276 54,269 59,492 Long-term obligations: Redeemable preferred stock 35,000 30,000 25,000 Long-term debt, net of current maturities 3,227 4,866 6,643 26,531 19,161 24,839 18,420 (a) The summary financial data presented above under the heading Consolidated Statement of Operations Data for 2002 is unaudited and is derived from our audited consolidated financial statements which are not included in this prospectus. This 2002 Consolidated Statement of Operations Data is presented on a pro forma basis as if the discontinuance of the men s and women s apparel components occurred as of January 1, 2002 in order to show all periods on a comparable basis. (b) During 2003, we incurred restructuring and non-recurring duplicative manufacturing costs aggregating $3.3 million, pretax, related to the relocation and consolidation of our Bronx, New York manufacturing facility which closed in December 2003. These costs are included in the operating income (loss) from continuing operations. (c) Excludes the effect of the preferred stock dividends impact on earnings per share for 2002 as follows: Basic $0.47; Diluted $0.35. (d) As a result of the net losses from continuing operations in 2003 and 2004, the dilutive effect of options and contingent considerations (1,091,000 and 1,434,000 shares, respectively) are not shown as the results would be anti-dilutive. (e) In February 2006, we recorded a $2.0 million tax-free gain from the early redemption of our preferred stock in the aggregate principal amount of $20.0 million and the prepayment of our outstanding $6.0 million in notes payable to one of the holders of the preferred stock by entering into a term facility. Table of Contents RISK FACTORS An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this prospectus, before making an investment decision. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. Risks Related to Our Company If our marketing efforts do not effectively maintain and expand our brand recognition, we may not be able to achieve our growth strategy. We believe that broader recognition and favorable perception of our brand by consumers in our target markets are essential to our future success. To increase brand recognition, we believe we must continue to devote significant amounts of time and resources to advertising and promotions. These expenditures, however, may not result in a favorable increase in recognition of our brand or a sufficient increase in revenues to cover the advertising and promotional expenses. In addition, even if our brand recognition increases, our consumer base and our revenues may not increase, and may in fact decline, either of which would harm our business. Expanding our brand into new categories or territories may be difficult and expensive, and if we are unable to successfully expand into these categories or territories as expected, our brand may be adversely affected, and we may not achieve our planned sales growth. Our boxing-related sporting goods equipment business is the most established and best recognized portion of our business. Our growth strategy is founded substantially on the expansion of our brand into new categories or territories for, among other items, sporting goods equipment, apparel, footwear, eyewear, nutritional products, fragrances and other active lifestyle products. Products that we or our licensees introduce in these new markets may not be successful with the consumers we target. Our brand may also fall out of favor with our current sporting goods equipment customer base as we expand our products into new markets. In addition, if we or our licensees are unable to anticipate, identify or react appropriately to evolving consumer preferences, our sporting goods equipment sales and license revenues may not grow as fast as we plan or may decline and our brand image may suffer. Achieving market acceptance for new products will likely require us to exert substantial product development and marketing efforts, which could result in a material increase in selling, general and administrative expenses, both in absolute dollars and as a percentage of revenue. There can be no assurance that we will have the resources necessary to undertake these efforts or that these efforts will sufficiently increase our sporting goods equipment sales and license revenues. Material increases in our selling, general and administrative expenses could adversely impact our results of operations. Furthermore, we or our licensees may encounter difficulties in producing or finding manufacturers and retailers for new products, especially those with technical applications. Our development schedules for new products are difficult to predict and are subject to change as a result of shifting priorities in response to consumer preferences and competing products. If we or our licensees are not able to efficiently ensure the manufacture of newly-developed products in quantities sufficient to support retail distribution, or if we or our licensees are unable to identify retailers who are able to effectively sell our products to consumers, we may not be able to recoup our investment in the development of new products or meet expectations for increased sales and license revenue. We also currently license technology necessary for the production of certain new products we plan to launch. Our ability to Table of Contents successfully develop and launch these products depends upon our maintenance of a satisfactory relationship with our technology providers. Even if we and our licensees develop and launch new products that consumers find appealing, the ultimate success of a new product may depend on the price charged for the product. Failure to gain market acceptance for new products that we or our licensees introduce could impede our growth, reduce our profits, adversely affect the image of our brand, erode our competitive position and result in long-term harm to our business. We currently have an informal business arrangement with Title Boxing, L.L.C. to administer the Everlast catalog sales business our products and provide all order fulfillment of our catalog and e-commerce business, and any alteration to these arrangements could impact our sales and growth strategy. In 2006, Title Boxing sold $7.2 million in sales at retail of our products that were purchased by consumers through catalog and e-commerce orders. We believe catalog and e-commerce orders could be a source of significant sales and profitability growth in the future. We currently work with Title Boxing to distribute catalogs and manage our e-commerce orders, advertise our products and fulfill catalog and e-commerce orders for our products. Title Boxing also controls the mailing list of consumers who receive catalogs advertising our products and supports the maintenance and upgrade of our everlastboxing.com website. We do not currently have a formal written agreement with Title Boxing for the services it performs. Any alteration to our relationship with Title Boxing or Title Boxing s ability to continue performing services for us could affect our sales and growth strategy due to Title Boxing s control of the Everlast catalog mailing list and other services it performs for us and our inability to find a suitable replacement to perform the administrative and fulfillment functions for catalog and e-commerce orders of our products. We may be unable to sustain our past growth or manage our future growth, which may have a material adverse effect on our future operating results. We experienced rapid growth since our merger, and increased our net revenues from $33.4 million in 2002 to $51.9 million in 2006. We anticipate our rate of growth in the future will depend upon, among other things, the success of our growth strategies, which we cannot assure you will be successful. In addition, we may have more difficulty maintaining our prior rate of growth of revenues and profitability. Our future success will depend upon various factors, including the strength of our brand, the market success of our and our licensees current and future products, competitive conditions and our ability to manage increased revenues, if any, and implement our growth strategy. In addition, we anticipate expanding our infrastructure and adding personnel in connection with our anticipated growth, which we expect will cause our selling, general and administrative expenses to increase in absolute dollars and may cause our selling, general and administrative expenses to increase as a percentage of revenue. Because these expenses are generally fixed, particularly in the short-term, operating results may be adversely impacted if we do not achieve our anticipated growth. Future growth may place a significant strain on our management and operations. If we continue to experience growth in our operations, our operational, administrative, financial and legal procedures and controls may need to be expanded. As a result, we may need to train and manage an increasing number of employees, which could distract our management team from our business plan. Our future success will depend substantially on the ability of our management team to manage our anticipated growth. If we are unable to anticipate or manage our growth effectively, our operating results could be adversely affected. Table of Contents Failure to adapt to changes in consumer market trends may materially affect our business and results of operations. The market trends and consumer demands for sporting goods equipment and licensed products quickly change primarily due to the influence of fashion trends and developments of raw materials technology. Our sporting goods equipment business and our licensees ability to anticipate, gauge and respond adequately and timely to rapid changes in consumer demand and market trends materially affects our business and results of operations. If we or our licensees do not effectively adapt to the quick changes in customer demands and market trends, our operating results could be adversely affected. The failure to successfully protect our intellectual property rights could have a material adverse effect on our licensing business. Our success is dependent upon the continued protection of our trademarks and other intellectual property rights. Accordingly, we devote resources to the establishment and protection of our trademarks on a worldwide basis. We may be forced to incur substantial costs to protect our intellectual property and if we are unable to protect our intellectual property, our brand image may suffer. We are also susceptible to brand dilution from the counterfeiting of our products, which could harm our reputation for producing high-quality products or force us to incur expense in enforcing our rights. It is difficult and expensive to detect and prevent counterfeiting. Despite our efforts to protect our intellectual property, counterfeiters may continue to violate our intellectual property rights by using our trademarks and imitating our products, which could potentially harm our brand, reputation, business, results of operation and financial condition. Our registered and common law trademarks have significant value and some of our trademarks are instrumental to our ability to create and sustain demand for and a market of our products. We cannot assure you that third parties, particularly in other countries, will not assert claims to our trademarks and other intellectual property or that we will be able to successfully resolve those claims. While we seek international protection of our intellectual property, the laws of some foreign countries may not allow us to protect our intellectual property to the same extent as the laws of the U.S., if at all. In addition, we could be forced to defend legal actions taken against us relating to our use of trademarks, which, if our defense is unsuccessful, could render some of our trademarks or other intellectual property rights unenforceable and, regardless of the success of our defense, cause us to incur substantial costs and divert the efforts of our management. The need to defend against legal actions relating to our trademarks and intellectual property could have a material adverse effect on our business, results of operations and financial condition. We registered Everlast as a trademark in Albania, Argentina, Armenia, Aruba, Australia, Austria, Belarus, Benelux, Brazil, Bulgaria, Cambodia, Canada, Chile, China, Colombia, Croatia, Cuba, Czech Republic, Denmark, Dominican Republic, European Union, Finland, France, Gaza District, Georgia, Germany, Greece, Guatemala, Honduras, Hong Kong, Hungary, Iceland, India, Ireland, Israel, Italy, Japan, Kuwait, Lebanon, Macao, Mexico, New Zealand, Norway, Pakistan, Panama, Paraguay, Peru, Philippines, Poland, Portugal, Romania, Russian Federation, Saudi Arabia, Serbia and Montenegro, Singapore, Slovak Republic, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand, Trinidad and Tobago, Turkey, Ukraine, United Arab Emirates, United Kingdom, United States, Uruguay, Uzbekistan, Venezuela and West Bank. As of April 27, 2007, we applied to register Everlast as a trademark in an additional 71 jurisdictions. There is a possibility that we have not applied to register the Everlast mark, our company logo or our marketing slogans in countries where we will do business in the future. If we fail to timely file a trademark application in any country, we will likely be precluded from doing so at a later date. Failure to adequately protect our trademark rights could damage or destroy our brand, expose us to trademark liability and impair our ability to compete effectively. Table of Contents We believe our success may be enhanced by our ability to obtain and enforce patent protection for our products, and therefore elected to pursue patent protection for our products in the U.S. and other countries. Currently, we have been issued one U.S. patent. We do not know whether any of our pending or future patent applications will result in the issuance of patents, and competitors may challenge the validity or scope of our issued patents, or our registered designs or patent applications that proceed to issuance. We cannot predict how the patent claims in our issued patents, or any patents issued from any pending or future patent application will be construed, and these patents may not provide us with the ability to prevent the development, manufacturing, and marketing of competing products, or may be challenged by third parties on the basis of validity and enforceability. The failure of our licensing partners to preserve the value of our licenses could have a material adverse effect on our business. The risks associated with our own products also apply to our licensed products in addition to any number of possible risks specific to a licensing partner s business, including, for example, risks associated with a particular licensing partner s ability to: obtain capital; manage its labor relations; maintain relationships with its suppliers; maintain the quality and marketability of products bearing our trademarks; manage its credit risk effectively; meet its financial obligations to us; and maintain relationships with its customers. Although some of our license agreements prohibit licensing partners from entering into licensing arrangements with our competitors, our licensing partners generally are not precluded from offering, under other brands, the types of products covered by their license agreements with us. A significant portion of sales of our products by our domestic licensing partners are also made to our largest customers. While we have significant control over our licensing partners products and advertising, we rely on our licensing partners for, among other things, operational and financial control over their businesses. The failure of our licensing partners to successfully operate their businesses or to perform in a manner consistent with our desired business practices could result in a decrease in our revenues generated from sales of our licensed products and the loss of goodwill which could impact our financial results and cause a material adverse effect on our business. Failure to maintain and integrate licensing partners could harm our business. We depend on licensing partners for an increasingly significant part of our business. In 2005 and 2006, we added 45 new licensees to increase our total number of licensing arrangements to 88 as of December 31, 2006. Our license revenues, which have significant profit margins, organically grew 17.2% in 2006 and accounted for 23.6% of our total revenue. Our growth and revenues from our expanding licensing business are subject to all of the risks inherent in working with new partners, including our lack of an established working relationship with these new licensing partners and the uncertainty of our new partners abilities to develop and sell our products. Our agreements with certain licensing partners are important to the success and prospects of our business. In 2006, Jacques Moret, our domestic apparel licensee, represented 23.3% of our gross license Table of Contents revenue for the period. Although we believe in many circumstances we could replace existing licensing partners if necessary, if any of our significant licensing partners do not meet their financial obligations to us or if any of these licensees decides not to renew or extend its existing agreement with us, our revenue and cash flows could be reduced substantially. Moreover, our inability to replace any of our existing licensing partners for any period of time could adversely affect our revenues, both directly from reduced license revenue received and indirectly from reduced sales of our other products. Our women s apparel license with Jacques Moret contains a 99-year exclusive renewal option which, if exercised, would provide us with a one-time royalty of $24.0 million, which may be less than the future discounted royalty cash flows over this 99-year term. Our U.S. women s apparel license with Jacques Moret terminates on December 31, 2009 and, subject to certain conditions, may be renewed for two additional five-year terms for a minimum of $13.5 million in guarantees per term. In addition, subject to certain conditions, Jacques Moret has the option as of December 31, 2009 to convert the license agreement to a fully paid 99-year exclusive license for $24.0 million. Jacques Moret could execute this option at a time when the future discounted royalty cash flow stream exceeds this one time 99-year exclusive option, which could have a material adverse affect on our operations and profitability in years beyond 2010. We depend on certain key employees, the loss and replacement of whom could have a material adverse effect on our business. We are dependent on the services of Seth A. Horowitz, our chairman of our board, president and chief executive officer, as well as other key members of our management team. We entered into an employment agreement with Mr. Horowitz effective November 28, 2005 until December 31, 2010 pursuant to which he agreed not to compete with us for 12 months following termination of his employment. The failure of our executives or any other members of our management team to effectively work together could prevent efficient decision-making, affecting product development and sales and marketing efforts which would negatively impact our ability to manage our business and operations. In addition, the loss of the services of Mr. Horowitz or other key managers would have a material adverse effect on our business, financial condition, results of operations and prospects. Our future growth may largely depend on our ability to retain the services of Mr. Horowitz and the other members of our executive management team, as well as our ability to attract and retain other qualified personnel in the future. We cannot assure you that these individuals can be attracted and retained because of the intense competition in our industry. While we take measures to protect our confidential information, if we were to lose a key employee, we cannot assure you that we would be able to prevent the unauthorized disclosure or use of our procedures, practices, new product development or client lists. The issuance of additional warrants to purchase shares of our common stock could adversely affect our financial results and the trading price of shares of our common stock. Pursuant to our agreement with Contender Partners LLC, we are required to issue warrants to purchase up to 4.95% of our currently outstanding common stock upon the initial network order of the third season of The Contender reality television series. The exercise price of the warrants shall be equal to 75.0% of the lesser of (a) the market price of our common stock on the date of issuance or (b) the 365-day average stock price of our common stock for the year prior to the date of issuance. If the third season of The Contender is initiated, we will be subject to a significant non-cash accounting expense related to the issuance that could adversely affect our statement of operations. Table of Contents Our financial success may be limited to the strength of our relationships with our retail customers and to the success of these retail customers. Our financial success is significantly related to the willingness of our retail customers to continue to carry our products and to the success of these customers. We do not have long-term contracts with any of our retail customers, and sales to our retail customers are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling by the customer. If we cannot fill our retail customers orders in a timely manner, the sales of our products and our relationships with those customers may suffer, and this could have a material adverse effect on our product sales and ability to grow our product line. For 2006, The Sports Authority, Inc., Dick s Sporting Goods, Inc., Wal-Mart Stores, Inc. and Wal-Mart s affiliate, Sam s Club, accounted for approximately 14.2%, 11.7%, 6.7% and 5.0%, respectively, of our gross sporting goods equipment sales. We have no long-term contracts with these companies. Although we believe that our business relationships with these companies are satisfactory, we cannot assure you that these business relationships will continue to generate satisfactory sales in the future. We are also trying to expand our network of retailers carrying our products. We plan to focus on sporting goods stores, mass merchandisers, mid-tier retailers, fitness clubs and martial arts studios for our sporting goods equipment. If any of our major retail customers experiences a significant downturn in their business or fails to remain committed to our products or brand, then these customers may reduce or discontinue purchases from us. In addition, we extend credit to our customers based on an evaluation of each customer s financial condition. If a significant customer to whom we extended credit experiences financial difficulties, our bad debt expense may increase relative to revenues in the future. Any significant increase in our bad debt expense relative to revenues would adversely impact our net income and cash flow and could affect our ability to pay our own obligations as they become due. Furthermore, many of our retail customers compete with each other, and if they perceive that we are offering their competitors better pricing and support, they may reduce purchases of our products. In addition, we compete directly with our retail customers by selling our products to consumers via our mail order catalog and the internet. If our retail customers believe that our direct sales to consumers divert sales from their stores, this may weaken our relationships with the customers and cause them to reduce purchases of our products. If we or our licensees do not accurately forecast consumer demand, we or our licensees may have excess inventory to liquidate or have greater difficulty filling our customers orders, either of which could adversely affect our business. The market for our products is subject to cyclical variations and declines in performance, as well as fashion risks and rapid changes in consumer preferences, the effects of weather, general economic conditions and other factors affecting demand. These factors make it difficult to forecast consumer demand, and if we or our licensees overestimate demand for our products, we or our licensees may be forced to liquidate excess inventories at a discount to customers, resulting in markdowns and lower gross margins and potentially devaluing our brand. Conversely, if we or our licensees underestimate consumer demand, we or our licensees could have inventory shortages, which can result in lost potential sales, delays in shipments to customers, strains on relationships with customers and diminished brand loyalty. Moreover, because our product line is limited, we may be disproportionately affected by cyclical downturns in the sporting goods industry, changes in consumer preferences and other factors affecting demand, which may make it more difficult for us to accurately forecast our production needs, exacerbating these risks. A decline in demand for our products, or any failure on our part or by our licensees to satisfy increased demand for our products, could adversely affect our business and results of operations. Table of Contents Third parties may claim that we are infringing their intellectual property rights, and these claims may be costly to defend, may require us to pay licensing fees, damages, or other amounts, and may prevent, or otherwise impose limitations on the manufacture, distribution or sale of our products. From time to time, third parties may claim that we are infringing on their intellectual property rights, and we may be found to infringe those intellectual property rights. While we do not believe that any of our products infringe the valid intellectual property rights of third parties, we may be unaware of the intellectual property rights of others that may cover some of our current or planned new products. If we are forced to defend against third party claims, whether or not the claims are resolved in our favor, we could encounter expensive and time consuming litigation which could divert our management and key personnel from business operations. If we are found to be infringing on the intellectual property rights of others, we may be required to pay damages or ongoing royalty payments, or comply with other unfavorable terms. Additionally, if we are found to be infringing on the intellectual property rights of others, we may not be able to obtain license agreements on terms acceptable to us, and this may prevent us from manufacturing, marketing or selling our products. Thus, these third party claims may significantly reduce the sales of our products or increase our cost of goods sold. Any reductions in sales or cost increases could be significant, and could have a material and adverse effect on our business. The failure to comply with our quality control standards may have a material adverse effect on our business. We require our licensees to submit samples of products that are to be sold under exclusive license agreements and licensees who are not in compliance with our quality control standards are in breach of their license agreements. These sample licensed products are inspected by our management for quality and proper placement of our Everlast trademark. Licensees that do not comply with our quality or trademark standards are notified that they are in breach of their license agreement. No assurance may be made, however, that non-compliant licensees will be discovered by us and notified of the breach of their license agreement. There is also no assurance that we will be successful in enforcing the quality or trademark usage provisions of our license agreements. We have quality control procedures in effect at our manufacturing facility in Moberly, Missouri and at our third party manufacturers. Manufacturing supervisors inspect our sporting goods equipment for defects throughout both the manufacturing process and the finishing stages. No assurance may be made, however, that these quality control procedures will prevent all defects of manufacturing and finishing. Products introduced into the marketplace that do not meet our quality control standards may harm our brand image which could have a material adverse effect on our business. Our business is subject to intense competition and could be adversely affected by the failure to effectively compete. Aggressive competition is found in the licensing and manufacturing of sporting goods brands. Some of our competitors are offering products that are substantially similar, in design and materials, to our products. Our competitors include most major athletic and sporting good companies, branded apparel companies and retailers with their own private labels. A number of competitors have: significantly greater financial resources than we have; more comprehensive product lines than we have; longer-standing relationships with suppliers, manufacturers and retailers than we have; greater distribution capabilities than we have; and Table of Contents stronger brand recognition and loyalty than we have, and spend substantially more on product advertising and sales than we do. Our competitors greater capabilities in these areas may enable them to better differentiate their products from ours, gain stronger brand loyalty than we can achieve, withstand periodic downturns in the apparel and sporting goods industries, compete more effectively on the basis of price and production and more quickly develop new products. In addition, access to offshore manufacturing is making it easier for new companies to enter the markets in which we compete. If we fail to compete successfully in the future, our sales and profits may decline, our financial condition may deteriorate and the market price of our common stock is likely to fall. Returns and chargebacks may have a material adverse effect on our business. Consistent with industry practice, we accept returns of products within a reasonable amount of time. Returns are allowed due to poor quality, defects in materials or workmanship. In addition to returns, customers deduct chargebacks from the purchase price for sales allowances, new store opening discounts and other marketing development funds, which in the opinion of management promotes brand awareness. Chargebacks have a dilutive effect on our business and results of operations since they reduce overall gross profit margins on sales. Due to low barriers to entry in our industry, the market is becoming more competitive and we cannot assure you that we will continue to experience the same level of returns or industry norm chargebacks in the future. Significant levels of returns or chargebacks could reduce our profitability resulting in a material adverse effect on our business. Potential liability exposure in our sporting goods equipment business may have a material adverse effect on the consumer demand for our products. Our sporting goods equipment is exposed to an inherent risk of potential product liability claims as boxing is a high-risk activity that involves physical contact. A judgment against us due to an alleged failure or defects of our sporting goods equipment could lead to substantial damage awards. We currently maintain product liability and excess liability umbrella insurance with maximum coverage of $2.0 million and $20.0 million, respectively, for each occurrence. If a successful claim is brought against us in excess of, or outside of, our insurance coverage, it could have a material adverse effect on our business, results of operations and financial condition. Although we invest resources in research and development and every attempt is made to ensure the safety of our products, claims against us may arise and, regardless of their merit or eventual outcome, these claims may have a material adverse effect on the consumer demand for our products. Our business is subject to the general economic cycle, a downturn in which could cause a material adverse effect on our business, financial condition and results of operations. Historically, our industry experienced substantial changes in its business cycle. Recessions, the states of the global, national and local economies and uncertainties regarding future economic prospects affect consumer spending habits and adversely affect our business, financial condition and results of operations. In addition, we, as well as our competitors, sell to retailers who experienced financial difficulties during the past several years. If these financial patterns continue or worsen, we cannot assure you that our business, financial condition and results of operations will not be materially adversely affected. We believe that the sales of both sporting goods equipment and licensed products are slightly seasonal towards the third and fourth quarters of the year. Our products, taken as a whole, are sold year-round. Table of Contents While our results of operations may vary quarterly, we do not believe that these variations are material to our business. Consequently, our results of operations in any one quarter are not representative of the results of operations we expect for other quarters or for the full fiscal year. Fluctuations in the price, availability and quality of raw materials could cause delays and increase costs which may have a material adverse effect on our business. Fluctuations in the price, availability and quality of the fabrics, leather or other raw materials used by us in our manufactured products and in the price of materials used to manufacture our sporting goods equipment could have a material adverse effect on our cost of sales and our ability to meet our customers demands. The price and availability of these raw materials may fluctuate significantly, depending on many factors, including natural resources (such as oil and electricity), increased freight costs, increased labor costs and weather conditions. If we are not be able to pass all or a portion of these higher raw materials prices on to our customers, or if demand decreases due to the higher costs or delays, our financial performance may suffer causing a material adverse effect on our business. If the U.S. continues to impose tariffs and import quota restrictions on products manufactured in China and we are unable to meet our manufacturing needs from countries other than China or from domestic sources, it could materially affect our gross margin and financial performance. The U.S. and the countries in which our products are produced or sold internationally imposed and may impose additional quotas, duties, tariffs, or other restrictions or regulations, or may adversely adjust prevailing quota, duty or tariff levels. Under the provisions of the World Trade Organization, or WTO, Agreement on Textiles and Clothing, effective as of January 1, 2005, the U.S. and other WTO member countries eliminated quotas on textiles and apparel-related products from WTO member countries. As a result of the eliminated quotas, we experienced lower costs on our imports of finished goods that benefited our margins and operating profitability in the second half of 2005. The U.S. recently imposed new quotas on certain categories of products that we import from China, including certain shirts and certain sportswear. If we are unable to meet our product needs from countries not affected by the U.S. restrictions or tariffs or from domestic sources, it could materially affect our gross margin and financial performance. Failure to control the costs for the products that we manufacture could adversely affect our sales and results of operations. We manufacture approximately 30.0% of our products at our facility in Moberly, Missouri. There can be no assurance that the costs of products that we continue to manufacture in Moberly, Missouri can remain competitive with products sourced from third parties. We will also be required to absorb the costs of manufacturing and disposing of products that do not meet our quality standards. These costs are primarily incurred in connection with the initial production of new products, although we may also experience increases in training costs when we initiate production of new products. Additionally, we may incur increased costs as a result of the introduction of new manufacturing equipment. Any increases in our manufacturing costs could adversely impact our margins. Furthermore, our manufacturing capabilities are subject to risks and challenges, including our ability to scale our production capabilities to meet the needs of our customers. Our inability to control the costs associated with our manufacturing operations could have a material adverse effect on our business. Table of Contents Because we depend on third party manufacturers, we may face challenges in maintaining a sufficient supply of goods to meet sales demand, and we may experience interruptions in our supply chain. Any shortfall in the supply of our products may decrease our sales and have an adverse impact on our customer relationships. We utilize third party manufacturers, primarily in Asia, to produce approximately 70.0% of our products as measured by gross sales of sporting goods equipment. We depend on these manufacturers ability to finance the production of goods ordered and to maintain adequate manufacturing capacity. We do not exert direct control over the third party manufacturers, so we may be unable to obtain timely delivery of acceptable products. In addition, we do not have long-term supply contracts with most of these third party manufacturers, and any of them may unilaterally terminate their relationship with us at any time or seek to increase the prices they charge us. As a result, we are not assured of an uninterrupted supply of products of an acceptable quality and price from our third party manufacturers. We may not be able to offset any interruption or decrease in supply of our products by increasing production in our company-operated manufacturing facilities due to capacity constraints, and we may not be able to substitute suitable alternative third party manufacturers in a timely manner or at acceptable prices. Any disruption in the supply of products from our third party manufacturers may harm our business and could result in a loss of sales and an increase in production costs, which would adversely affect our results of operations. Our business could suffer if our third party manufacturers violate labor laws or fail to conform to generally accepted ethical standards. We generally require our third party manufacturers to meet our standards for working conditions and other matters before we are willing to place business with them. As a result, we may not always obtain the lowest cost production. Moreover, we do not control our third party manufacturers or their respective labor practices. If one of our third party manufacturers violates generally accepted labor standards by, for example, using forced or indentured labor or child labor, failing to pay compensation in accordance with local law, failing to operate its factories in compliance with local safety regulations, or diverging from other labor practices generally accepted as ethical, we likely would cease dealing with that manufacturer, and we could suffer an interruption in our product supply. In addition, such a manufacturer s actions could result in negative publicity and may damage our reputation and the value of our brand and discourage retail customers and consumers from buying our products. We depend on a limited number of suppliers for key production materials, and any disruption in the supply of these materials could interrupt product manufacturing and increase product costs. We depend on a limited number of sources for the primary materials used to make our products. If the suppliers we rely on for key production materials were to cease production of these materials, we may not be able to obtain suitable substitute materials in time to avoid interruption of our production cycle, if at all. We may also have to pay materially higher prices in the future for these materials or any substitute materials we use, which would increase our production costs and could have a material adverse impact on our margins and results of operations. An interruption of the services of our manufacturing and distribution facility in Moberly, Missouri could negatively impact our sporting goods equipment business. We believe that our manufacturing and distribution facility in Moberly, Missouri will be adequate to meet our needs for the foreseeable future. We further believe that additional manufacturing and Table of Contents distribution space will be available at our Moberly, Missouri plant in the event that we require additional capacity. If a situation arises that would cause the Missouri plant to close down or reduce our production, our business, results of operations and financial condition could be materially and adversely affected. These situations may include fire, floods, power loss, power shortages, telecommunications failures, break-ins and similar events. Furthermore, certain actions, occurring domestically or abroad, could lead to business disruptions, cancellations of customer orders or a general decrease in consumer spending. Failure to comply with environmental laws and regulations may have a material adverse effect on our business. Our manufacturing facility is subject to various federal, state and local environmental laws and regulations limiting the discharge, storage, handling and disposal of a variety of substances, particularly the federal Water Pollution Control Act, the Clean Air Act of 1970, the Resource Conservation and Recovery Act and the federal Superfund program. We also are subject to federal, state and local laws and regulations relating to workplace safety and worker health, including those promulgated under the Occupational Safety and Health Act. As part of our compliance efforts, we require all personnel working in high noise areas and those working in certain areas with high concentrations of dust to wear protective equipment. To the best of our knowledge, our manufacturing facility is currently in compliance in all material respects with existing environmental, workplace safety and worker health laws and regulations. We currently have no capital expenditures relating to satisfying environmental, workplace safety and worker health laws and regulations. However, we cannot assure you that we will continue to be in compliance with environmental, workplace safety and worker health laws and regulations. Failure to comply with environmental, workplace safety and worker health laws and regulations could result in significant expenses due to fines or compliance costs that could have a material adverse effect on our results of operations and our business. We will incur significant time and expense in documenting, testing and certifying our internal control over financial reporting, and any deficiencies in our financial reporting or internal controls could adversely affect our business and the price of our common stock. The Securities and Exchange Commission rules require that our chief executive officer and chief financial officer periodically certify the existence and effectiveness of our internal control over financial reporting. Under existing issued rules and regulations, our independent auditors will be required, beginning with our Annual Report on Form 10-K for 2008, to attest to our officers assessment of our internal controls. This process generally requires significant documentation of policies, procedures and systems, review of that documentation by our internal accounting staff and our outside auditors and testing of our internal control over financial reporting by our internal accounting staff and our outside auditors. Documentation and testing of our internal controls, which we have only undertaken to a limited extent in the past, will involve considerable time and expense, and may strain our internal resources and have an adverse impact on our costs. During the course of our testing, we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by the Securities and Exchange Commission rules for certification of our internal control over financial reporting. As a consequence, we may have to disclose in periodic reports we file with the Securities and Exchange Commission any significant deficiencies or material weaknesses in our system of internal controls. The existence of any material weaknesses would preclude management from concluding that our internal control over financial reporting is effective and would Table of Contents preclude our independent auditors from issuing an unqualified opinion that internal controls are effective. In addition, disclosures of this type in our Securities and Exchange Commission reports could cause investors to lose confidence in our financial reporting and may negatively affect the price of our common stock. Moreover, effective internal controls are necessary to produce reliable financial reports and to prevent fraud. If we have deficiencies in our internal control over financial reporting, it may negatively impact our business, results of operations and reputation. We may fail to successfully expand our distribution network or introduce our products both domestically and internationally, and this may cause our results of operations to fall short of expectations. As part of our growth strategy, we plan to expand our distribution network and expand the sales of our products into new locations internationally. Successfully executing this strategy will depend on many factors, including: the strength of the Everlast brand and competitive conditions in new markets that we attempt to enter; our ability to attract and retain qualified licensees, distributors or agents or to develop direct sales channels; our ability to use and protect the Everlast brand, and our other intellectual property, in these new markets and territories; and our ability to successfully enter and compete in markets and territories, especially internationally, where we have little distribution experience and where our Everlast brand is not as well known. If we are unable to successfully expand our distribution channels and sell our Everlast branded products internationally, our business may fail to grow, our brand may suffer and our results of operations may be adversely impacted. We conduct a significant portion of our activities outside the U.S., and therefore we are subject to the risks of international commerce. We use third party manufacturers located in foreign countries to produce approximately 70.0% of our sporting goods equipment and we and our licensees sell our products outside of the U.S. Foreign manufacturing and sales activities are subject to numerous risks, including the following: trade restrictions, tariffs, import and export controls and other non-tariff barriers such as quotas and local content rules; increased transportation costs due to distance, energy prices or other factors; delays in the transportation and delivery of goods due to increased security concerns; restrictions on the transfer of funds; longer payment cycles for, and greater difficulty collecting, accounts receivable and royalty payments; unexpected changes in regulatory requirements, royalties and withholding taxes that restrict the repatriation of earnings; changing economic conditions; restrictions, due to privacy laws, on the handling and transfer of consumer and other personal information; Table of Contents changes in governmental policies and regulations; political and economic instability, including wars, terrorism, political unrest, boycotts, curtailment of trade and other business restrictions; expropriation and nationalization; natural disasters; difficulties encountered by our international licensees or us in staffing and managing foreign operations or international sales; difficulties in managing foreign operations effectively and efficiently from the U.S.; and difficulties in understanding and complying with local laws, regulations and customs in foreign jurisdictions. Furthermore, our manufacturing activity outside of the U.S., including the production of our products by third party manufacturers, is subject to risks of poor infrastructure, shortages of equipment and labor unrest, in addition to those risks noted above. Once our products are manufactured, we may also suffer delays in distributing our products due to work stoppages, strikes or lockouts at the ports where our products arrive. Labor disruptions could result in product shortages and delays in distributing our products to retailers. These factors and the failure to properly respond to them could make it difficult to obtain adequate supplies of quality products when we need them, resulting in reduced sales and harm to our business. In addition, during 2006, we generated approximately $7.7 million, or 14.8% of our revenues outside of the U.S., and we expect to expand our international sales and marketing operations in the future. Our ability to capitalize on growth in new international markets and to maintain the current level of operations in our existing international markets is subject to risks associated with international sales operations, as noted above, as well as the difficulties associated with promoting products in unfamiliar cultures. We can issue shares of preferred stock without stockholder approval, which could adversely affect the rights of common stock stockholders. Our certificate of incorporation permits us to establish the rights, privileges, preferences and restrictions, including voting rights, of future series of our preferred stock and to issue this stock without approval from our stockholders. The rights of holders of our common stock may suffer as a result of the rights granted to holders of preferred stock that we may issue in the future. In addition, we could issue preferred stock to prevent a change in control of our company, depriving common stockholders of an opportunity to sell their stock at a price in excess of the prevailing market price. Our certificate of incorporation, our bylaws and Delaware law contain provisions that could discourage a third party from acquiring us and consequently decrease the market value of an investment in our stock. Our certificate of incorporation and bylaws, as well as Delaware corporate law, contain provisions that could delay, defer or prevent a change in control of our company or changes in our management. Among other things, these provisions: authorize us to issue preferred stock that can be created and issued by the board of directors without prior stockholder approval, with rights senior to those of common stock; Table of Contents do not permit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates; classify our board of directors so that only some of our directors are elected each year; and allow the authorized number of directors to be changed only by resolution of the board of directors. These provisions could discourage proxy contests and make it more difficult for our stockholders to elect directors and take other corporate actions, which may prevent a change of control or changes in our management that a stockholder might consider favorable. In addition, Section 203 of the Delaware General Corporation Law may discourage, delay, or prevent a change in control of us. Any delay or prevention of a change of control or change in management that stockholders might otherwise consider to be favorable could cause the market price of our common stock to decline. Risks Related to this Offering The market price of our common stock is volatile, leading to the possibility of its value being depressed at a time when you want to sell your holdings. The market price of our common stock is volatile, and this volatility may continue. For instance, between January 1, 2004 and April 30, 2007, the bid price of our common stock, as reported on the Nasdaq Global Market, ranged between $2.20 and $21.82. Numerous factors, many of which are beyond our control, may cause the market price of our common stock to fluctuate significantly. These factors include: expiration of lock-up agreements; our earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating results or our failure to meet the expectations of financial market analysts and investors; changes in financial estimates by us or by any securities analysts who might cover our stock; speculation about our business in the press or the investment community; significant developments relating to our licensing, manufacturing or distribution relationships; stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in the sports apparel and sporting good industries; customer orders of new products from us, our licensees and our competitors; investor perceptions of the sporting goods and apparel industries in general and our company in particular; the operating and stock performance of comparable companies; general economic conditions and trends; major catastrophic events; announcements by us or our competitors of new products, significant acquisitions, strategic partnerships or divestitures; changes in accounting standards, policies, guidance, interpretation or principles; Table of Contents loss of external funding sources; sales of our common stock, including sales by our directors, officers or significant stockholders; and additions or departures of key personnel. In addition, the timing of orders by our customers or our licensees customers and timing of shipments to our customers or our licensees customers may cause quarterly fluctuations of our results of operations that may, in turn, affect the market price of our common stock. In the past, securities class action litigation was often instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs to us and divert our management s attention and resources. Moreover, the stock market in recent years experienced significant price and volume fluctuations for reasons unrelated to operating performance. These market fluctuations may adversely affect the price of our common stock and other interests in our company at a time when you want to sell your interest in us. Future sales of our common stock could depress our stock price. All of our executive officers and directors, who hold 936,249 shares of our common stock, have agreed not to sell shares of our common stock for a period of 90 days following this offering, subject to an extension of up to 34 days under specified circumstances at the option of Piper Jaffray Co. See Underwriting. Shares of common stock subject to these lock-up agreements will become eligible for sale in the public market upon expiration of these lock-up agreements, subject to limitations imposed by Rule 144 under the Securities Act of 1933. 2,125,206 shares, including those shares subject to lock-up agreements, will be restricted securities under Rule 144, of which 1,188,957 shares are currently eligible for resale and 936,249 shares will be eligible for resale immediately upon expiration of the lock-up agreements. See Shares Eligible for Future Sale. In addition, at March 31, 2007, we had outstanding exercisable options to purchase an aggregate of 197,846 shares of common stock at an average exercise price of $4.04 per share. Further, we may be required to issue warrants to Contender Partners at an exercise price below market value if the third season of The Contender is ordered by the network. If the holders of these shares, options or warrants were to attempt to sell a substantial amount of their holdings at once, the market price of our common stock would likely decline. Moreover, the perceived risk of this potential dilution could cause stockholders to attempt to sell their shares and investors to short the stock, a practice in which an investor sells shares that he or she does not own at prevailing market prices, hoping to purchase shares later at a lower price to cover the sale. As each of these events would cause the number of shares of our common stock being offered for sale to increase, our common stock s market price would likely further decline. All of these events could combine to make it very difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. We do not intend to pay dividends on shares of our common stock for the foreseeable future. We have never declared or paid any cash dividends on shares of our common stock. We intend to retain any future earnings to fund the operation and expansion of our business and, therefore, we do not anticipate paying cash dividends on shares of our common stock in the foreseeable future. Table of Contents A SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements. The forward-looking statements are contained principally in the
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed under Risk Factors beginning on page 11, and the consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision with respect to our common stock. Unless the context otherwise requires, we use the terms CompBenefits, the Company, we, us and our to refer to CompBenefits Corporation and its subsidiaries. Overview We believe we are the largest company in the United States focused exclusively on offering dental and vision benefit plans. Founded in 1978, we deliver dental and vision benefit plans to approximately 14,000 employer groups and more than 4.8 million members, primarily in the South and Midwest. We have developed a broad suite of products, extensive provider networks and effective distribution channels to reach large employers, mid- and small-sized employers, government programs and individuals. Our dental benefit plans cover procedures such as examinations, cleanings, cavity fillings and crowns. Our vision benefit plans cover comprehensive eye examinations and glasses or contact lenses. We offer both dental and vision benefit plans because they are sold through the same distribution channels, have a common operating platform and exhibit similar financial characteristics, such as low underwriting volatility, absence of catastrophic losses and short periods between the submission and resolution of claims. Due to the rising costs of healthcare, employees are being required to pay more of their dental and vision benefit plan premiums. Although employers continue to function as gatekeepers, employees are demanding a broader range of products that are differentiated by affordability, benefits offered and provider network size. We believe that we favorably differentiate ourselves from our competitors by designing, marketing and distributing a broader product offering with a wider range of premium levels. We believe the most significant factors in serving our existing members and attracting new members are the size and accessibility of our networks of dental and vision providers. Our dental provider networks currently include over 21,400 dental locations and our national vision network currently includes over 19,300 independent optometrist and ophthalmologist locations. We believe that the depth of our provider networks allows us to attract new members and gives us a competitive advantage relative to our peers in our markets. We utilize a multi-channel distribution strategy consisting of our internal sales force, independent agents, telemarketing and internet sales, and third party relationships to reach as many potential customers as possible in our target markets, irrespective of employer size. After establishing a relationship with an employer group, we also market directly to employees to maximize enrollment. We recorded total revenue of $323.8 million and $345.3 million for the years ended December 31, 2005 and December 31, 2006, respectively. We had net income available to common stockholders of $6.2 million and $5.9 million for the years ended December 31, 2005 and December 31, 2006, respectively. Dental premiums comprised 72% and 71% of total premium revenue, respectively, in those periods. Despite historically representing less than 30% of total premium revenue, vision premium revenue has become increasingly important with a compound annual growth rate of 15% from 2003 through 2006. Key measures of our profitability, which help us determine whether our premium rates are keeping pace with increases in our benefit expense, include the ratio of total benefit expense to premium revenue, or loss ratio, and the ratio of total benefit expense and selling, general and administrative expense to total revenue, which we refer to as our Table of Contents The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. Subject to completion, dated April 2, 2007 Shares Common Stock This is an initial public offering of shares of common stock of CompBenefits Corporation. All of the shares of common stock are being sold by CompBenefits. Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $ and $ . CompBenefits has applied to have its common stock approved for quotation on the Nasdaq Global Market under the symbol CBEN . See Risk Factors on page 11 to read about factors you should consider before buying shares of the common stock. Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. Per Share Total Initial public offering price $ $ Underwriting discount $ $ Proceeds, before expenses, to CompBenefits $ $ To the extent that the underwriters sell more than shares of common stock, the underwriters have the option to purchase up to an additional shares from CompBenefits at the initial public offering price less the underwriting discount. The underwriters expect to deliver the shares against payment in New York, New York on , 2007. Goldman, Sachs Co. Banc of America Securities LLC CIBC World Markets Prospectus dated , 2007. Table of Contents combined ratio. Since December 31, 2003, we have maintained our loss ratio below 70% and our combined ratio below 90% while growing membership by 525,000 members. We believe our strategy can drive further growth, as evidenced by our recently awarded federal contract to deliver dental benefits to active and retired government employees in twenty-three states and the District of Columbia. Our Industry Employers in the United States have historically offered a variety of insurance benefits in addition to salary as a means of attracting and retaining employees. Initially, these programs consisted primarily of medical benefits as basic financial protection against catastrophic medical events. Over time, employees have demanded that their benefit packages be expanded to include dental, vision and other benefits, commonly known as specialty benefits. According to the U.S. Department of Labor, dental and vision benefits are now offered to 46% and 29% of all private sector employees in the U.S., respectively. According to the Centers for Medicare and Medicaid Services, the total U.S. dental services market was $81.5 billion in 2004. The U.S. Department of Labor projects that this market will expand to $167.3 billion by 2015. The dental benefits market covering these services remains highly fragmented. We estimate that no single benefit plan company covers more than 15% of all dental plan members in the U.S., which, according to the Centers for Medicare and Medicaid Services, was a $40.5 billion market in 2004. The total U.S. vision care services and products market was $27.2 billion in 2005, according to the American Optometric Association, up from $3.0 billion in 1981, according to the National Eye Institute. We expect that this market will continue to grow as the population ages, continued computer usage increases the incidence of eye strain and consumers place greater emphasis on the fashion component of eyewear. Today, the Jobson Optical Group, an eye care industry marketing group, estimates that 175 million people in the U.S., or 59% of the population, need some form of vision correction, yet, according to the U.S. Department of Labor, only 22% of all private sector employees in the U.S. are covered by employee vision benefits. Our Competitive Strengths We believe our key competitive strengths include the following: Comprehensive and Flexible Product Suite. We understand that every customer is unique. Accordingly, we seek to design and offer dental and vision benefit packages that meet our members needs across a range of price points. Our dental members can choose a benefit plan that balances affordability, benefits coverage and network size and corresponding access to care. Our vision members can choose a benefit plan with customized premium and benefit levels without compromising access to our national network of optometrists and ophthalmologists. Our comprehensive dental benefit products and flexible vision benefit products deliver an attractive suite of benefit plans for all addressable customer segments. Strength of Dental and Vision Provider Networks. One of our core competencies is building and maintaining extensive networks of dental and vision providers. Many customers select one benefit plan over another based upon the number of providers in each plan s network. Since December 31, 2004, we have added approximately 4,400 dentists to our networks and currently manage dental provider networks with over 21,400 locations. Since December 31, 2004, we have added over 3,300 provider locations to our national vision network so that our members can access professional eye care services from more than 19,300 independent optometrist and ophthalmologist locations. Effective Dental and Vision Benefits Distribution. We employ a multi-channel distribution strategy to reach as many potential customers as possible in our target markets, irrespective of employer size or type. Through our twenty-eight years of experience, we have developed an Table of Contents understanding of how different customer segments purchase dental and vision benefits, and we have developed the following tailored distribution strategies: We deploy our internal sales force to target large employers, including companies, government entities, schools and hospitals. We work through a large group of independent agents with whom we develop and maintain relationships to target small- and mid-size employers who rely on these intermediaries to assist in carrier selection, enrollment and administration. We use our telemarketing and internet sales capabilities to access the individual market. We enter into arrangements with third parties to sell our dental and vision benefit plans in tandem with their other products. We leverage our strong reputation with government agencies to sell our dental and vision benefit plans through government programs, including Medicare supplement plans and medical plans for the economically disadvantaged. After establishing a relationship with an employer group, we distribute customized materials to employees, target them with on-site presentations and design interfaces with the employer s intranet to maximize enrollment. Effective Management of Benefit Costs. Our profitability depends on our ability to effectively manage dental and vision benefits expense relative to the fixed premiums we receive. We believe that our exclusive focus on the dental and vision benefit markets has enabled us to develop an expertise in managing these costs. In recent years, our customers have increasingly purchased our more expensive products that generate higher revenue but carry higher benefit expense. Nevertheless, by managing provider costs, we have maintained a total benefit expense to premium ratio below 70%. Scalable Operating Platform. We administer our dental and vision benefit plans through a centrally managed platform. We continue to enhance service efficiency by leveraging this platform and have decreased selling, general and administrative expense as a percentage of total revenue from 27.9% in the year ended December 31, 2003 to 26.5%, 25.2% and 24.8% in the years ended December 31, 2004, 2005 and 2006, respectively. Our entire operating platform is scalable and we do not expect that it will require significant investment or upgrades to efficiently service our anticipated growth. Experienced Management Team. Our management team, comprised of nine professionals, has over 150 years of combined experience in the dental or vision benefits markets. We believe our management team has the collective expertise to grow our business organically and through acquisition while continuing to manage costs. Our Growth Strategy Our objectives are to increase membership, revenue and profits, and to be a leading full-service dental and vision benefit plan company in selected markets. The core elements of our growth strategy include: Deepening Penetration Within Existing Markets. The five primary states in which we operate, Florida, Texas, Georgia, Illinois and Ohio, have a combined population of over 75 million people. The U.S. Census Bureau projects that together these populations will grow at 6.3% per year over the next five years, which is faster than the national average of 4.5% per year. We will employ our multi-channel distribution strategy to access this expanding base of potential customers. We believe our large, high quality networks of providers and flexible product suite make us an attractive solution for employers choosing a benefits company and employees purchasing coverage. We believe significant opportunities remain to gain additional membership in existing employer groups by increasing the percentage of employees that purchase our benefit plans and by cross-selling our Table of Contents dental or vision benefit plans into employer groups where only one of our specialty benefit plans is offered. We expect that the resulting increases in our membership base will make joining our networks more attractive to providers and thereby make our products more attractive to customers. Pursuing Third Party Distribution Arrangements. We have successfully partnered with third parties to distribute and sell our dental and vision benefit plans. Our partners include medical insurance plans and other specialty benefit companies that use our products to deliver benefits they would not otherwise offer, as well as associations that promote our dental and vision benefit plans. By offering our dental and vision benefit plans, other insurance plans and specialty benefits companies strengthen their product portfolio as they compete in their core markets. Because we exclusively offer dental and vision benefit plans, we do not compete with our partners core businesses. Associations offer access to our benefit plans to attract and retain members. Our comprehensive dental products and flexible vision products allow our partners to deliver benefits products that meet their customers particular needs. We will continue to seek out new third party distribution partners to increase membership in existing and new markets. We believe that these partnerships give us distribution channels to reach potential members we would not otherwise readily access on our own. Expanding Our Offerings to New Markets. We believe there are a number of new markets contiguous to our existing primary markets that, based on projected population growth and the current competitive landscape, present opportunities for expansion. The U.S. Office of Personnel Management recently awarded us a contract to deliver dental benefits to active and retired government employees in the District of Columbia and twenty-three states throughout the Southeast, Midwest and Mid-Atlantic regions. We intend to use the membership that we enroll through this federal contract and other large commercial employers outside our current markets to grow our networks of providers. We plan to leverage our national vision network of over 19,300 optometrist and ophthalmologist locations to increase market share in the growing vision benefits market. Completing Attractive Acquisitions. We expect to opportunistically pursue acquisitions that deliver membership and provider networks in existing or new markets. In addition, we expect to utilize our network management capabilities and administrative efficiencies to increase any acquired dental or vision benefit plan s profitability. Risk Factors Our business involves various risks which may limit the effectiveness of our competitive strengths or our ability to execute our growth strategy. For a discussion of factors you should consider before deciding to invest in our common stock, we refer you to Risk Factors and the following: If we are unable to manage dental and vision benefits expense effectively, our profitability will likely be reduced or we could cease to be profitable. If we do not design and price our products properly and competitively, or we lose employer groups or fail to attract new employer groups or gain acceptance of new product lines, our business and results of operations will be adversely affected. We have substantial debt obligations that could restrict our operations and limit our ability to compete in our industry. We derive a substantial portion of our revenue and profit from operations in Florida, and legislative actions, economic conditions or other factors that adversely affect those operations could materially reduce our revenue and profit. Corporate History and Information We were founded in 1978 to deliver dental benefit plans in Florida. During the 1980s and 1990s, we expanded into other states through acquisitions and de novo startups. In 1993, we were acquired by investment funds affiliated with TA Associates, Inc., or the TA Funds. We went public in 1995 and Table of Contents the TA Funds sold their holdings of our stock in 1997. In 1999, we were taken private in a leveraged buyout led by the TA Funds and investment funds affiliated with GTCR Golder Rauner, LLC, or the GTCR Funds. In 2000, we acquired OHS, Inc., or OHS, a dental and vision benefits company then controlled by investment funds affiliated with Nautic Partners LLC, or the Nautic Funds. We funded the OHS acquisition through senior and subordinated indebtedness plus the issuance of capital stock to new stockholders, including the Nautic Funds. The OHS acquisition expanded our dental position in Florida and resulted in our entrance into the vision benefit plan business. In April 2006, we replaced our prior senior and subordinated indebtedness with a new senior credit facility and new lower rate subordinated debt. We simultaneously redeemed shares of our nonvoting senior preferred stock that were issued in conjunction with the 1999 leveraged buyout and had carried a 10% or 12% accruing dividend. Neither the TA Funds, the GTCR Funds nor the Nautic Funds received any proceeds from the April 2006 redemption of our old subordinated notes or nonvoting senior preferred stock. Our principal executive offices are located at 100 Mansell Court East, Suite 400, Roswell, Georgia 30076. The telephone number of our principal executive offices is (770) 998-8936, and we maintain a website at www.compbenefits.com. Information contained on our website does not constitute a part of this prospectus. Table of Contents The Offering Common stock offered by us shares Common stock to be outstanding after this offering shares Use of proceeds We expect to receive net proceeds from this offering of approximately $ million, based upon an assumed initial public offering price of $ per share, the midpoint of the range set forth on the cover of this prospectus, and after deducting underwriting discounts and estimated offering expenses payable by us. We intend to use the net proceeds from this offering as follows: approximately $ million will be used to redeem the perpetual preferred stock to be issued by us immediately prior to the completion of this offering upon the automatic conversion of our series A convertible preferred stock and series B convertible preferred stock; approximately $ million will be used to repay amounts owed under the term loan portion of our senior credit facility; approximately $ million will be used to repay amounts outstanding under the revolving portion of our senior credit facility; approximately $ million will be used to repay amounts owed under our outstanding senior subordinated notes; and the balance of the net proceeds will be used for general corporate purposes, including working capital and possible acquisitions and investments. For further information, see Use of Proceeds. Nasdaq Global Market symbol CBEN
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0000944136_tc-global_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0000944136_tc-global_prospectus_summary.txt
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+PROSPECTUS SUMMARY 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0000947969_mango_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0000947969_mango_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights some of the information provided elsewhere in this prospectus. This summary is not complete and does not provide all information you should consider before deciding whether or not to exercise the rights. You should read the entire prospectus carefully, especially the risks of investing in our common stock discussed in the Risk Factors section of this prospectus and our consolidated financial statements and the related notes appearing at the end of this prospectus. References in this prospectus to MangoSoft, company, we, us and our refer to MangoSoft, Inc., unless the context specifically indicates otherwise. Our executive offices are located at 29 Riverside Street, Suite A, MS A-8, Nashua, NH 03062 and our telephone number is 603-324-0400. We also encourage you to review the financial statements and other information provided in the reports and other documents we file under the Securities Exchange Act of 1934, as described in the "Where You Can Find More Information" section in this prospectus at page 48. Securities offered Rights to purchase up to 2,400,000 shares of our common stock. To each record holder of common stock on _______ ___, 2007, MangoSoft is granting ______ of a right for each share of common stock held on that date. We expect the gross proceeds from the rights offering to be $1,200,000. Subscription price The subscription price for each share is $.50, payable in cash, which is the price at which the Company effected the Private Placement. Payment by personal check must clear payment on or before the expiration date, which may require five or more business days from the date that we receive your personal check. As a result, we recommend that stockholders pay the subscription price by certified or cashier's check drawn on a U.S. bank, U.S. postal money order or wire transfer of funds. The subscription price will be approved by Mr. Dale Vincent, the sole member of our board of directors prior to the completion of the rights offering. Record date _______ ____, 2007 Expiration date and time The rights expire at 5:00 p.m., Eastern Daylight Savings Time, on _________, 2007, unless we decide in our sole discretion to extend the rights offering until some later time. Any rights not exercised on or before that time will expire. Over-Subscription privilege Each holder who elects to exercise his/her rights in full may also oversubscribe for additional shares of common stock at the same subscription price per share in an amount up to the greater of (A) 50% of the number of full rights received or (B) 100 shares. The number of additional shares available for the over-subscription privilege will depend on how many holders exercise their rights. If there are not enough of our shares available to fully satisfy all of the over-subscription requests, the available shares will be distributed among rights holders who exercised their over-subscription privilege. The allocation will be made first to holders of less than ___ rights so that those holders may subscribe for 100 shares (or the next higher multiple of 10 shares) and thereafter pro rata among all holders exercising the over-subscription privilege. In the event you choose to exercise the over-subscription privilege, but receive a prorated amount, you will receive a refund, without interest or deduction, for the subscription price of any shares you do not receive promptly after the expiration of the rights offering. Shares of common stock outstanding prior to this offering 3,413,038 outstanding on August 14, 2007. Shares of common stock outstanding after this offering (assuming full exercise of rights) 5,813,038. Unless expressly stated to the contrary, the share information in this prospectus excludes, as of August 14, 2007: An aggregate of 75,000 shares issuable upon the exercise of outstanding options granted pursuant to our 1999 Incentive Compensation Plan. Non-Transferability of rights The rights are not transferable. Fractional shares We will not issue fractional shares. If your rights would allow you to purchase a fractional share, you may exercise your rights only by rounding down to and paying for the nearest whole share, or paying for any lesser number of whole shares. No revocation Once you submit the form of subscription certificate to exercise any rights, you will not be allowed to revoke, or change the exercise or request a refund of monies paid. Reasons for the rights offering; use of proceeds Primarily to fund certain of the Company s litigation expenses in connection with the Company enforcing its patent portfolio, and for certain working capital purposes. No board or committee recommendation Our Board of Directors will not make any recommendation to stockholders regarding the exercise of rights under this offering. You are urged to make an independent investment decision about whether to exercise your rights based on your own assessment of our business and the rights offering. Stockholders who do exercise their rights risk losing the new money they invest. We cannot assure you that the subscription price will be below the market price for the common stock, or that anyone purchasing shares at the subscription price will be able to sell those shares in the future at a higher price. See Risk Factors below. Conditions to the rights offering The obligation of the Company to consummate the rights offering is subject to certain conditions described under The Rights Offering Conditions Relating to the Rights Offering. The Company has the right to terminate the rights offering. If the rights offering is terminated, we will refund without interest to those persons who subscribed for shares in the rights offering all payments received from those subscribers. Subscription Agent Interwest Transfer Company, Inc. Procedure for exercising rights To exercise rights, you must complete the subscription certificate and deliver it to Interwest Transfer Company, Inc., our Subscription Agent for the rights offering, with full payment under the subscription privilege. You must deliver one full right for each share of common stock you would like to purchase. Interwest Transfer Company, Inc. must receive the proper forms and payments in good funds on or before the expiration date. You may deliver the documents and payments by mail or commercial courier. If regular mail is used for this purpose, we recommend using insured, registered mail, return receipt requested. You may use an alternative, the Notice of Guaranteed Delivery, if you are unable to deliver the subscription certificate before the expiration date, subject to the requirements of this procedure described under The Rights Offering--Special Procedure under Notice of Guaranteed Delivery. Payment adjustments If you send a payment that is insufficient to purchase the number of shares requested, or if the number of shares requested is not specified in the subscription certificate, the payment received will be applied to exercise the subscription privilege to the extent of the payment. If the payment exceeds the subscription price for the full exercise of the subscription privilege, the excess will be refunded to you as soon as it is practicable, without interest. Nominee accounts If you wish to purchase shares in this offering and your shares are held by a securities broker, bank, trust company or other nominee, including any shares held in the Company s Employee Stock Purchase Plan or the Company s 401(k) Plan, you should promptly contact your record holder(s) and request that they exercise rights on your behalf. You may also contact the nominee and request that the nominee send a separate subscription certificate to you. If you are a record holder who wishes an institution such as a broker or bank to exercise your rights for you, you should contact that institution promptly to arrange the method of exercise. If you are a nominee who desires subscription certificates to be re-issued in smaller denominations, you must act promptly under special procedures described under The Rights Offering Exercise of Less Than All Rights. You are responsible for the payment of any fees that brokers or other persons holding your shares may charge. You are not responsible for any fees payable to the Subscription Agent. Exercise by foreign and certain other stockholders Interwest Transfer Company, Inc. will hold subscription certificates for stockholders having addresses outside the United States. In order to exercise rights, holders with addresses outside the United States must notify Interwest Transfer Company, Inc. and timely follow other procedures on or before the expiration date of the rights. U.S. income tax consequences For United States federal income tax purposes, we believe that a stockholder will not recognize taxable income or loss as a result of the distribution or exercise of the rights. See Federal Income Tax Consequences below. Each stockholder should, and is urged to, consult their own tax adviser concerning the tax consequences of this offering under the holder s own tax situation. This prospectus does not summarize tax consequences arising under state tax laws, non-U.S. tax laws, or any tax laws relating to special tax circumstances or particular types of taxpayers. Stock certificates We will deliver stock certificates representing common stock purchased by the exercise of rights to the nominees or other record holders as soon as practicable after the expiration date of this rights offering. Amendment, extension and termination We may amend or extend the rights offering. We reserve the right to withdraw the rights offering at any time prior to the expiration date for any reason, in which event all funds received in the rights offering will be returned without interest to those persons who subscribed for shares in the rights offering. Questions Questions regarding the rights offering should be directed to Mr. Dale Vincent at 603-324-0400. Risk Factors Stockholders considering making an investment in the rights offering should consider the risk factors described in the section of this prospectus entitled Risk Factors. OTCBB Trading Symbol Shares of our common stock are currently listed for trading on the OTCBB under the symbol MGOF, and the shares to be issued to you in connection with the rights offering will be eligible for trading on the OTCBB. Risk Factors Exercising your rights and investing in our common stock involves various risks associated with your investment, including the risks described in the section of this prospectus entitled Risk Factors beginning on page 6 and the risks that we have highlighted in other sections of this prospectus and in our Annual Report on Form 10-KSB for the year ended December 31, 2006, and all other information included or incorporated by reference in this prospectus. You should carefully read and consider these risk factors together with all of the other information included and incorporated by reference in this prospectus before you decide whether to exercise your rights to purchase shares of our common stock. OUR BUSINESS We market, sell and support Internet business software and services that improve the utility and effectiveness of Internet-based business applications. Our software solutions address the networking needs of small businesses, workgroups and large enterprises. We have leveraged our patented technology known as Pooling to develop our suite of software solutions. Pooling is a peer-to-peer and clustering technology that utilizes resources on a network to deliver easy-to-use advanced software services. MangoSoft helps businesses gain a competitive advantage by improving collaboration with customers, partners and colleagues through smarter, faster Internet communications. We no longer develop new software products or services. We continue to market, sell and support our software services. Our strategy also includes seeking strategic business partnerships and distribution channels to leverage our patented technology. Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. x RISK FACTORS Investing in our securities involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before making a decision to invest in our common stock. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us. If any of the following risks occur, our business, financial conditions or results of operating may be materially and adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment. Risks
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0000949373_einstein_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0000949373_einstein_prospectus_summary.txt
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+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001003472_paincare_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001003472_paincare_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..ec345f9f9ca46db0e36e7d085e5df63e14452fba
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+PROSPECTUS SUMMARY About This Prospectus This prospectus is a part of a registration statement on Form S-1 filed by us with the Securities and Exchange Commission to register shares of our common stock for sale solely by selling stockholders. This prospectus does not contain all of the information set forth in the registration statement, certain parts of which are omitted in accordance with the rules and regulations of the SEC. Accordingly, you should refer to the registration statement and its exhibits for further information about us and our common stock. Copies of the registration statement and its exhibits are on file with the SEC. Statements contained in this prospectus concerning the documents we have filed with the SEC are not intended to be comprehensive, and in each instance we refer you to copies of the actual documents filed as exhibits to the registration statement or otherwise filed with the SEC. We have not authorized anyone to provide you with information different from that contained or incorporated by reference in this prospectus. The selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of common stock. About PainCare PainCare Holdings, Inc. ( the Company ) is a provider of pain-focused medical and surgical solutions. Through its proprietary network of acquired or managed physician practices and ambulatory surgery centers, and in partnership with independent physician practices and medical institutions throughout the United States and Canada, PainCare is committed to utilizing the most advanced science and technologies to diagnose and treat pain stemming from neurological and musculoskeletal conditions and disorders. We are a health care services company focused on the treatment of pain. We currently own or manage 24 pain-focused physician practices offering such services as: pain management, minimally invasive spine surgery and ancillary services including; orthopedic rehabilitation, electrodiagnostic medicine, intra-articular joint injections and diagnostic imaging services. Our physicians are trained in specialties such as interventional pain management, orthopedics or physiatry, and utilize the latest medical technologies, clinical practices and equipment to offer cost-effective pain relief. PainCare has defined four reportable segments: pain management, surgery, ancillary service and corporate and other. See the section Management s Discussion and Analysis of Financial Condition and Results of Operations and Note 23 of Notes to Consolidated Financial Statements in the consolidated financial statements, included herein, for financial information about these segments for the years ended December 31, 2006, 2005 and 2004. We have grown our business through a combination of organic growth and acquisitions of complementary physician practices and outpatient surgery centers. To grow our physician practice revenue, our strategy is to acquire or enter into management agreements with profitable, well-established physician practices and expand the range of services they offer. For practices we have acquired, we survey the acquired practice and determine whether to expand the scope of services provided by the practice, including adding additional specialists such as physicians certified in pain management, neurosurgery, orthopedics or physiatry. By providing these additional services within the practice, we believe each practice can improve clinical outcomes, shorten treatment time and improve its profitability. We also have relationships with physician practices that we do not own, but provide limited management services to, such as in-house physical therapy, electrodiagnostic services and intra-articular joint injection programs. With these additional resources, the physician practice itself is able to offer a broader range of services to its patient base. It is estimated that 75-150 million people in the United States have a chronic pain disorder according to a 2005 publication by the American Pain Society and, according to MarketData Enterprises, 2.9 million of those suffering seek treatment by pain specialists. Another 76.5 million Americans reported suffering from acute pain that persisted for more than 24 hours in duration according to the American Pain Foundation in 2006. These studies found that the back was the source of the most pain. As the baby boom population ages, the number of people who will require treatment for pain from back disorders, degenerative joint diseases, rheumatologic conditions, visceral diseases and cancer is expected to continue to rise. It is estimated by the National Pain Foundation that the annual cost to Americans suffering pain is $500 billion each year. The medical community s awareness of the need for pain management has increased in recent years.Both the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) and the Veterans Health Administration have adopted Pain as the 5th Vital Sign. This initiative mandates that pain be taken seriously and assessed adequately and treated in the majority of hospitals and clinics nationwide according to the National Pain Foundation. In 2001, JCAHO published standards that incorporated pain management into the standards for accredited health care providers. The JCAHO standards stress patients rights to appropriate assessment and management of pain, and require treatment of pain along with the underlying disease or disorder. As a result, we believe that pain management is growing in significance as a medical specialty as is the increased demand for pain treatment. We have relationships with 59 physician practices and ambulatory surgery center locations. Through our subsidiaries, we operate three types of practice arrangements: We employ licensed physicians in 12 practices which we own; We have acquired the non-medical assets and we provide general management services to 19 physician practices; UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents We provide limited management services to 35 physician practices in areas such as in-house physical therapy, electrodiagnostic services and intra-articular joint injection programs. In a typical wholly-owned practice, we acquire all of the assets of a physician practice from the owner physicians. We establish a wholly-owned subsidiary to own and operate this practice. We enter into employment agreements with the selling physicians, usually for a five year term, which provide for base compensation and incentive compensation based upon increases in operating earnings. These contracts are subject to earlier termination in certain circumstances. The physicians are subject to confidentiality and non-competition provisions that typically run for two years following the termination of the physician s employment agreement. In a typical managed practice, we acquire all of the non-medical assets of a physician practice from the owner physicians and then enter into a management agreement with the physicians to manage the practice for a fee. The management agreement is usually for a 40 year term and is generally only subject to termination by the physician if we breach the agreement and fail to cure the breach upon at least 30 days written notice from the physicians. In a typical limited management practice, we agree to provide a physician practice with orthopedic rehabilitation or electrodiagnostic services and equipment under a management agreement that is usually for an initial term of five years with two five year renewal options on our part. We provide the equipment, supplies and our management expertise, and the practice provides the space, personnel, billing and collection services. We receive a percentage of the practice s collections from the service being managed by us. We are now in the rollout phase of our latest business initiative centered on effecting a new industry paradigm in the delivery of state-of-the-art, pain-focused, medical care and payor administration. Through our new wholly-owned subsidiary, Integrated Pain Solutions (IPS), we plan to leverage our centralized and specialized knowledge base of advanced pain diagnostics, interventional pain management and functional restoration procedures and solutions. IPS is developing, administering and tracking the outcome of proprietary, evidence-based, clinical pathways for the management of acute or chronic pain. This clinical criteria will serve as the basis of the delivery of quality care by highly credentialed, multi-disciplined provider networks contracted and managed by IPS in select U.S. markets. Business Strategy Our objective is to become the leading provider of specialty pain care services in North America. To grow our practices, we intend to: Focus on pain treatment. All of our operations to date have been specifically focused in the area of pain treatment. We intend to continue to focus on the treatment of pain through acquisition, management, and the provision of services to practices that serve the pain treatment market. Deploy additional services to grow physician practices. We intend to enhance the capacity of our practices for organic growth by increasing the range of services offered by our practices. By deploying additional physicians and equipment, we can perform in-house those necessary procedures and services that would ordinarily be referred to other providers, which we believe can result in higher quality care and increased revenues to our practices. Utilize advanced medical technologies. Many of our physicians are thought leaders in their respective fields and employ the latest clinical techniques and medical technologies for the treatment of pain. We intend to support the use of new technology in pain treatment through the deployment of additional specialized physicians who are familiar with these techniques and technologies and by providing the latest, state-of-the- art equipment. For example, we deploy MedX rehabilitation equipment to orthopedic rehabilitation facilities, which has demonstrated the ability to improve patient outcomes. Adopt a more hands-on approach. We intend to focus on the management and organic growth of our existing national network of pain practices to provide pain management services in a cost efficient manner aimed at maximizing stockholder value. As part of our growth strategy, we intend to continue to evaluate our acquisition program to target profitable acquisitions that are parallel to our core business and have the capacity for growth through the addition of specialized physicians and ancillary services. PRE EFFECTIVE AMENDMENT NO. 2 FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents Given the current status of liquidity, acquisitions in the near term will be made on a highly selective basis and meet parameters acceptable to our lenders. While historical growth has primarily come from the acquisition of physician practices and the organic growth from those practices previously described, future growth is expected to come from Integrated Pain Solutions ( IPS ). Our objective is to become the pre-eminent utilization management service provider for patients requiring pain-related treatment. To facilitate growth we intend to: Offer a patient centered network as part of its menu. Other menu items include individualized guidance, algorithm-based case management, care coaching and evidence based and outcome driven pain management. Build programs that balance patient medical conditions with health plan parameters. These programs will include case management, care coaching, quality improvement and physician education. Benefit providers by using an algorithm based triage system and accumulate all patient provider and encounter information in a centralized data warehouse. This data will subsequently be biostatistically analyized to determine clinical efficiency leading to the most effective treatment pathways. Our Executive Offices Our principal executive offices are located at 1030 North Orange Avenue, Suite 105, Orlando, Florida 32801, and our telephone number is (407) 367-0944. Our website is located at www.paincareholdings.com. Our website address is included as an inactive textual reference only. Risks of Investing in PainCare Our business involves various risks, including, but not limited to, the acquisition of businesses or the launch of new lines of business, which could increase operating expenses and dilute operating margins; the inability to attract new patients by our owned practices, the managed practices, and the limited management practices; increased competition, which could lead to negative pressure on our pricing and the need for increased marketing; the inability to maintain, establish, or renew relationships with physician practices, whether due to competition or other factors; the inability to comply with regulatory requirements governing our owned practices, the managed practices, and the limited management practices; that projected operating efficiencies will not be achieved due to implementation difficulties or contractual spending commitments that cannot be reduced; and to the general risks associated with our businesses. You should carefully consider the risks discussed in Risk Factors before deciding to invest in our common stock. The Offering Common Stock offered by selling stockholders: 73,309,197 shares Common Stock outstanding immediately after this offering: 66,849,164 shares Use of proceeds: We will not receive any proceeds from the sale of shares in this offering, other than the exercise price payable to us upon the exercise of warrants held by certain of the selling stockholders. We intend to use any such proceeds for general working capital. American Stock Exchange symbol: PRZ The total number of shares of common stock that will be outstanding after this offering is based on 66,849,164 shares outstanding as of May 2, 2007, and excludes: 11,403,867 shares of common stock issuable upon the exercise of options and warrants outstanding at May 2, 2007 at a weighted average exercise price of $2.05 per share; and 7,081,663 shares of common stock reserved for future issuance upon conversion of convertible debentures; and 7,648,677 shares of common stock reserved for future issuance under the earn-out provisions of various acquisition agreements. Table of Contents
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001007508_affinity_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001007508_affinity_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..05c4b8bd12866503b8db4dbfa097b293b38c3572
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before deciding whether to invest in our common stock. For a more complete understanding of our Company and this offering, we encourage you to read this entire document, including "Risk Factors," beginning on page 8, the financial information included in this prospectus and any other documents to which we have referred in this prospectus. The Company Affinity Technology Group, Inc. Affinity was formed to develop and market technologies that enable financial institutions and other businesses to provide consumer financial services electronically with reduced or no human intervention. Products and services previously offered by Affinity include its DeciSys/RT loan processing system, which automated the processing and consummation of consumer financial services transactions; the Affinity Automated Loan Machine (the ALM), which allowed an applicant to apply for and, if approved, obtain a loan in as little as ten minutes; the Mortgage ALM, which allowed an applicant to apply for a mortgage loan; e-xpertLender, which permitted a financial institution to make automated lending decisions through its call centers and branches; iDEAL, which permitted automobile lenders to make automobile lending decisions for loan applications originated at automobile dealers; and rtDS, which permitted lenders to deliver credit decisions to applicants over the Internet. Due to capital constraints, we have suspended all efforts to further develop, market and operate these products and services. Our last processing contract terminated in late 2002, and we have no plans in the near term to engage in further sales or other activities related to our products or services, other than to attempt to license certain of the patents that we own. Currently, our business activities consist exclusively of attempting to enter into license agreements with third parties to license our rights under certain of our patents and in pursuing the patent litigation described below in an effort to protect our intellectual property and obtain recourse against alleged infringement of our patents. In 2006, our sole revenues from operations were generated from one outstanding license of our patents. Patents and Legal Matters In conjunction with our product development activities, we applied for and obtained three patents. We have been granted two patents covering our fully-automated loan processing systems (U.S. Patent Nos. 5,870,721 C1 and 5,940,811 C1). In August 2000, the U.S. Patent and Trademark Office ("PTO") issued to us a patent covering the fully-automated establishment of a financial account including credit accounts (U.S. Patent No. 6,105,007 C1). All of these patents have been subject to reexamination by the PTO as a result of challenges to such patents by third parties. On January 28, 2003, we received a Reexamination Certificate (U. S. Patent No. 5,870,721 C1) from the PTO which formally concluded the reexamination of U. S. Patent No. 5,870,721. On December 20, 2005, we received a Reexamination Certificate (U.S. Patent No. 5,940,811 C1) from the PTO which formally concluded the reexamination of U.S. Patent No. 5,940,811. On July 25, 2006, we received a Reexamination Certificate (U.S. Patent No. 6,105,007 C1) from the PTO which formally concluded the reexamination of U.S. Patent No. 6,105,007 and which indicated that the reexamination resulted in the full allowance of all the claims of this patent. It is possible that third parties may bring additional actions to contest all or some of our patents. We can make no assurances that we will not lose all or some of the claims covered by our existing patents. In June 2003, we filed a lawsuit against Federated Department Stores, Inc. ("Federated"), and certain of its subsidiaries alleging that Federated has infringed one of our patents (U. S. Patent No. 6,105,007). In September 2003, we filed a similar lawsuit against Ameritrade Holding Corporation and its subsidiary, Ameritrade, Inc. (collectively "Ameritrade"), alleging infringement of the same patent. Both lawsuits were filed in the United States District Court in Columbia, South Carolina (the "Columbia Federal Court"), and both seek unspecified damages. In 2004, at the request of Federated and Ameritrade, the PTO determined to reexamine U.S. Patent No. 6,105,007. As a result of the reexamination of U.S. Patent No. 6,105,007, we jointly, with Federated and Ameritrade, requested the Columbia Federal Court to stay the lawsuits against Federated and Ameritrade pending resolution of the reexamination of U. S. Patent No. 6,105,007. In March 2006, we were notified that the PTO had concluded the reexamination of U.S. Patent No. 6,105,007 and that such reexamination resulted in the full allowance of all the claims of this patent. As a result of the completion of the PTO's reexamination of U.S. Patent No. 6,105,007, the stay of these lawsuits against Federated and Ameritrade was automatically lifted, and these lawsuits are now proceeding. In November 2003, Household International, Inc. ("Household") filed a declaratory judgment action against us in the United States District Court in Wilmington, Delaware (the "Delaware Federal Court"). In its complaint Household requested the Delaware Federal Court to rule that Household was not infringing any of the claims of our patents (U.S. Patent No. 5,870,721 C1, No. 5,940,811, and No. 6,105,007) and that the patents were not valid. We filed counterclaims against Household claiming that Household infringes U. S. Patent No. 5,870,721 C1, No. 5,940,811, and No. 6,105,007. We also filed a motion with the Delaware Federal Court to transfer the case to the Columbia Federal Court. In April 2004, the Delaware Federal Court granted our motion to transfer the case to Columbia Federal Court. As a result of the reexamination of U.S. Patent No. 6,105,007, we jointly, with Household, requested and received a stay of the Household action from the Columbia Federal Court pending the resolution of the PTO's reexamination of U.S. Patent No. 6,105,007. As discussed above, the PTO has concluded the reexamination of U.S. Patent No. 6,105,007. Accordingly, the stay of this lawsuit was automatically lifted, and this lawsuit is now proceeding. In accordance with the patent infringement lawsuits with Federated, TD Ameritrade (formerly Ameritrade) and HSBC (formerly Household), as described above, a "Markman Hearing" was held in December 2006. Markman hearings are proceedings under U.S. patent law in which plaintiffs and defendants present their arguments to the court as to how they believe the patent claims - which define the scope of the patent holder's rights under the patent - should be interpreted for purposes of determining at trial whether the patents have been infringed. For purposes of the Markman hearing, the Federated, TD Ameritrade and HSBC cases were consolidated into one hearing and held by the Columbia Federal Court. As a result of the Markman proceedings the Columbia Federal Court interpreted and construed the meaning of numerous claim terms which bear on the scope of our patents. Although most claim terms were construed in a manner we believe are favorable, the trial judge interpreted and construed certain claim terms, most notably those related to the term "remote interface" as claimed in our second loan processing patent (U.S. Patent No. 5,940,811 C1) and our financial account patent (U.S. Patent No. 6,105,007 C1), in a manner unacceptable and unfavorable to us. In these patents, the Court interpreted and construed "remote interface" to mean computer equipment, including personal computer equipment, that is not owned by a consumer. The Court applied no such limitation in construing the term "remote interface" under our first loan processing patent (U.S. Patent No. 5,870,721 C1). Unless we can obtain a more favorable interpretation of certain claim terms, it is possible the scope of our patents could be significantly limited. In order to seek a reversal of these unfavorable Markman rulings, we will likely be required to appeal the rulings to the Federal Circuit Court of Appeals. Moreover, we believe that an appeal of the Markman rulings will likely delay our current patent infringement lawsuits and hinder our ability to license our patents. Further, an appeal of the Markman rulings will likely require substantial resources and an extended period of time to complete, which will in turn likely increase the already significant costs and expected time required to prosecute our existing infringement actions. No assurance can be given that we will have the resources necessary to complete our appeal of the Markman rulings or our underlying lawsuits or that we will be successful in obtaining a favorable outcome. In addition, we and our founder, Jeff Norris, are defendants in a lawsuit filed by Temple Ligon on November 30, 1996 in the Court of Common Pleas for the County of Richland in Columbia, South Carolina. Mr. Ligon claims, among other things, that Affinity and Mr. Norris breached an agreement to give him a 1% equity interest in Affinity in consideration of services Mr. Ligon claims to have performed in 1993 and 1994 in conjunction with the formation of Affinity, and seeks monetary damages of $5,463,000. This lawsuit initially resulted in a jury verdict against us of $68,000. However, Mr. Ligon subsequently requested and was granted a new trial. In January 2004, this lawsuit resulted in another jury verdict against us of $382,148. In connection with the litigation and the resulting jury verdict, we filed post-trial motions with the trial court in which, among other things, we claimed that the jury verdict should be set aside. On July 23, 2004, the trial judge granted our motions, set aside the jury verdict, and ordered entry of a judgment in favor of us. The plaintiff appealed the trial judge's ruling to the South Carolina Court of Appeals (the "Appeals Court"). On October 30, 2006, the Appeals Court reversed the trial judge's decision and reinstated the jury verdict of $382,148. Our petition to the Appeals Court for a rehearing of the case has been denied, and we intend to petition the South Carolina Supreme Court for relief from this ruling.. If we become obligated to pay more than an insignificant amount of damages in connection with this litigation, we could be forced to consider alternatives for winding down our business, which may include offering our patents for sale or filing for bankruptcy protection. To date, we have generated substantial operating losses and have been required to use a substantial amount of cash resources to fund our operations. At December 31, 2006, we had cash and cash equivalents of $1,026,978. We generally have been unable to enter into licensing agreements with potential licensees upon terms that are acceptable to us and, as discussed above, we are attempting to seek recourse through litigation with alleged infringers of our patents. To vigorously pursue our lawsuits, we anticipate that we will need to increase our operating expenses due to, among other things, increased litigation costs and related expenses. Accordingly, to remain viable through 2007, it is critical that we raise additional capital through the sale of debt and/or equity securities or from licensing our patents. No assurances can be given that we will be able to raise additional capital or generate capital from our patent licensing business. Unless we raise additional capital, we may have to consider alternatives for winding down our business, which may include offering our patents for sale or filing for bankruptcy protection. Additional Information The Company was incorporated as a Delaware corporation in 1994. Our principal executive offices are located at 1310 Lady Street, Suite 601, Columbia, South Carolina 29201, and our telephone number is (803) 758-2511. The Company maintains a web site at http://www.affi.net, although the contents of such web site are not incorporated into this prospectus. The Company has made its annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K and any amendments to these reports available through its web site free of charge through a link to the SEC's web site. These documents are available for access as soon as reasonably practicable after we electronically file these documents with the SEC. The Offering Common stock offered 4,535,714 Shares, which represents 9.11% of by selling stockholders our outstanding common stock assuming issuance of the Shares and 7.08% of our outstanding common stock on a fully diluted basis.(1) Common stock outstanding 49,803,112 shares (64,106,269 shares on a before the offering fully diluted basis). (1) Common stock outstanding 49,803,112 shares (64,106,269 shares on a after the offering fully diluted basis). (1) Proceeds to us We will not receive any proceeds from the sale of Shares by the selling stockholders. ------------------------- (1) Based on 45,267,398 actual shares outstanding, the assumed issuance of 4,535,714 shares offered by this prospectus and 64,106,269 shares on a fully diluted basis as of January 30, 2007. The calculation of fully diluted shares excludes 356,307 shares representing accrued interest on our 8% Convertible Notes as of January 30, 2007 that, at our election, is payable at maturity in either cash or shares of our common stock. (2) As of January 30, 2007. The Shares covered by this prospectus are shares of common stock issuable by us upon conversion of $1,905,000 aggregate principal amount of the Company's 8% Secured Convertible Notes (the "Notes"), discussed below. These Shares will be offered and sold by the selling stockholders named in this prospectus. We will not receive any of the proceeds from the sale by the selling stockholders of the common stock. The aggregate proceeds to the selling stockholders from the sale of the common stock will be the purchase price of the common stock less any discounts, concessions or commissions, which will be paid by the selling stockholders. You should read the section in this prospectus entitled "Risk Factors" beginning on page 8 and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock. Pursuant to an Amended and Restated Convertible Note Purchase Agreement, dated as of August 9, 2006 (the "Note Purchase Agreement"), among the Company and the investors named therein from time to time, on September 20, 2006 the Company completed the sale of certain convertible notes in the aggregate principal amount of $1,905,000. Interest and principal on the notes becomes payable in full on the second anniversary from the date of issuance. The notes bear interest at 8%, are convertible into the Company's common stock at a conversion rate of $.42 per share and are secured by the Company's equity interest in its decisioning.com, Inc. subsidiary, which owns the Company's patent portfolio. The convertible notes were issued in a private placement transaction to accredited investors pursuant to Section 4(2) of, and Regulation D promulgated under, the Securities Act of 1933, as amended (the "Securities Act"). Summary Historical Consolidated Financial Data We have derived the following summary consolidated historical financial data for the years ended December 31, 2006, 2005, 2004, 2003 and 2002 from our audited financial statements. You should read the summary consolidated historical financial data set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our historical consolidated financial statements and the related notes to those financial statements included in this prospectus, and the documents that we have previously filed with the Securities and Exchange Commission. <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> Year Ended December 31, 2006 2005 2004 2003 2002 -------------------------------------------------------------------- Statement of Operations Data: Revenues $ 33,333 $ 20,261 $ 287,298 $ 517,647 $ 185,960 -------------------------------------------------------------------- Cost and expenses: Cost of revenues 3,333 2,026 64,265 1,765 16,846 Selling, general and administrative expenses 2,606,386 486,607 732,285 996,711 1,406,841 -------------------------------------------------------------------- Total costs and expenses 2,609,719 488,633 796,550 998,476 1,423,687 -------------------------------------------------------------------- Operating loss (2,576,386) (468,372) (509,252) (480,829) (1,237,727) Interest income 17,907 182 1,967 694 1,643 Interest expense (141,043) (98,197) (95,990) (80,373) (70,334) Litigation accrual reversal - - 386,148 - - -------------------------------------------------------------------- Net loss $(2,699,522) $ (566,387) $ (217,127) $ (560,508) $(1,306,418) ==================================================================== Loss per share - basic and diluted $ (0.06) $ (0.01) $ (0.01) $ (0.01) $ (0.03) ==================================================================== Shares used in computing net loss per share 44,194,562 42,207,884 41,926,272 41,512,897 40,707,108 ==================================================================== December 31, 2006 2005 2004 2003 2002 -------------------------------------------------------------------- Balance Sheet Data: Cash and cash equivalents $1,026,978 $13,776 $62,756 $578,398 $156,780 Working capital (34,451) (1,992,056) (1,524,772) (909,356) (82,512) Total assets 1,112,246 152,311 121,240 618,002 234,848 Convertible notes and accrued interest 3,225,089 1,595,906 (3) 1,383,149 (2) 1,291,841 (1) 868,427 Stockholder's equity (deficiency) (3,279,752) (2,048,371) (1,513,523) (1,329,579) (908,230) </TABLE> ------------------------- (1) Of the amount outstanding under the convertible notes as of December 31, 2003, $756,336 was classified as a current liability and, accordingly, is included in the working capital of the Company at December 31, 2003, set forth above. (2) All amounts outstanding under the convertible notes as of December 31, 2004, were classified as a current liability and, accordingly, are included in the working capital of the Company at December 31, 2004, set forth above. (3) All amounts outstanding under the convertible notes as of December 31, 2005, were classified as a current liability and, accordingly, are included in the working capital of the Company at December 31, 2005, set forth above.
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in the notes, warrants or our common stock, you should carefully read this entire prospectus, including our financial statements and the related notes incorporated by reference in this prospectus and the information set forth under the headings Risk Factors and Management s Discussion and Analysis of Financial Condition and Results of Operations. Sipex Corporation We design, manufacture and market, high performance, analog integrated circuits or ICs that primarily are used by original equipment manufacturers, or OEMs, operating in the computing, consumer electronics, communications and networking infrastructure markets. Some of the end product applications that contain our ICs are cellular phones, base stations, computers, DVD players and digital cameras. Our products are sold either directly or through an international network of manufacturers representatives and distributors. While advances in digital technology have fueled the demand for digital ICs, they have also created a demand for more precise, faster and more power efficient analog ICs. We possess a broad portfolio of analog ICs, organized into three product families: power management, interface and optical storage. Corporate Information We were incorporated in May 1965 under the laws of the State of Massachusetts and were reincorporated in Delaware in October 2003. Our principal executive offices are located at Milpitas, California, and our telephone number is (408) 934-7500. Our web site address is www.sipex.com. The information on, or accessible through, our web site is not part of this prospectus. Unless the context requires otherwise, references in this prospectus to Sipex, we, us and our refer to Sipex Corporation and its wholly owned subsidiaries on a consolidated basis. THE OFFERING Issuer Sipex Corporation Securities Offered Pursuant to this prospectus, selling securityholders are offering for resale up to $15,000,000 aggregate principal amount of 5.5% Redeemable Convertible Senior Notes due 2026, warrants to purchase 419,776 shares of our common stock and 3,540,112 shares of our common stock, which represent 110% of the common stock issuable upon conversion of the notes and cash exercise of the warrants. In addition, we are offering the shares of common stock issuable to a subsequent holder of a note or warrant upon conversion of that note or exercise of that warrant. Use of Proceeds We will not receive any proceeds from sales of the notes, warrants or shares of common stock sold from time to time under this prospectus by the selling securityholders. Upon any exercise of the warrants by payment of cash, however, we will receive the exercise price of the warrants, which will be used for general corporate purposes. Notes Interest The notes bear interest at an annual rate of 5.5%. Interest is payable semi-annually on May 15 and November 15 of each year, beginning on November 15, 2006. Subject to the provisions of the indenture, interest on the notes is payable in either shares of common stock or cash. See Description of Notes-Interest below. Original Issue Discount The notes initially were issued together with the warrants as investment units and, accordingly, the purchase price of the investment units was required to be allocated between the notes and the warrants based on their relative fair market values. We have treated $63.35 of each Table of Contents $1,000.00 purchase price per unit as allocable to the warrants. As a result of this allocation, the principal amount of the note exceeds the adjusted issue price of the note by more than a de minimis amount, and the excess is characterized as OID for U.S. federal income tax purposes. The adjusted issue price of a note upon its acquisition by a U.S. Holder is the portion of the original issue price for the unit allocable to the note (which we have determined to be $936.65), plus the OID includible in the income of holders prior to a U.S. Holder s acquisition of the note. Subject to certain exceptions, each U.S. Holder is required to include OID as ordinary interest income on a constant yield to maturity basis, regardless of the holder s regular method of tax accounting, even though we will not pay any additional interest in cash. For additional information, see Material U.S. Federal Income Tax Considerations beginning on page 43. Maturity Date May 18, 2026. Conversion The notes are convertible at the holder s option at any time prior to maturity into shares of our common stock, initially at a conversion price of $5.36 per share, subject to adjustment upon certain events. Auto-Conversion At any time prior to maturity (subject to certain limitations), we may elect to automatically convert some or all of the notes into shares of our common stock if (a) the average price of our common stock exceeds 150% of the conversion price for 20 trading days during any 30 trading day period ending within 5 trading days of the notice of automatic conversion, (b) the average daily trading volume of our common stock is not less than $375,000 during such period, and (c) certain equity conditions shall have been satisfied as of the date of the notice of automatic conversion and, subject to certain exceptions, remain satisfied through the automatic conversion date. See Description of the Notes Conversion Rights Automatic Conversion. Adjustments to the Conversion Price The conversion price of the notes will be subject to adjustment as set forth under the section entitled Description of the Notes Conversion Rights Conversion Rate Adjustments and you should review the indenture for a description of events that cause an adjustment to the conversion price as well as the mechanics of the adjustments. Optional Redemption At any time on or after May 21, 2009, we may redeem some or all of the notes at 100% of the principal amount plus accrued and unpaid interest to, but excluding, the redemption date, provided that certain equity conditions shall have been satisfied as of the date of the redemption notice and, subject to certain exceptions, remain satisfied through the redemption date. If we elect to redeem the notes, we will provide notice of redemption to the noteholders not less than 30 days and not more than 60 days before the redemption date. Repurchase at Holder s Option A holder may require us to repurchase the holder s notes for cash on May 15, 2011, May 15, 2016 or May 15, 2021, at a price equal to 100% of the principal amount plus accrued and unpaid interest, if any, to the applicable repurchase date. Repurchase at Holder s Option upon Certain Events Upon a change of control or if our common stock is no longer authorized for quotation or listing on The New York Stock Exchange, TABLE OF CONTENTS Page Prospectus Summary 1 The Offering 1 Risk Factors 5 Special Note Regarding Forward-Looking Statements 16 Use of Proceeds 17 Ratio of Earnings to Fixed Charges 17 Dividend Policy 17 Market Price Information 17 Principal and Selling Securityholders 18 Description of the Notes 22 Description of the Warrants 35 Description of the Capital Stock 38 Plan of Distribution 41 Material U.S. Federal Income Tax Considerations 43 Legal Matters 51 Experts 51 Incorporation of Certain Information by Reference 52 Where You Can Find Additional Information 52 EXHIBIT 23.1 You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. On January 30, 2007, Sipex s stockholders at a special meeting of stockholders approved a 1-for-2 reverse stock split. Sipex completed the reverse stock split effective at 1:31 p.m. Pacific Standard Time on February 23, 2007. All references to share and per share data have been retroactively adjusted to reflect the reverse stock split in this filing. Table of Contents Inc., the American Stock Exchange, Inc. or The Nasdaq Global Market or Capital Market after the time we are relisted on any such exchange, a holder may require us to repurchase the holder s notes in cash at a price equal to 100% of the principal amount plus accrued and unpaid interest, if any, to the applicable repurchase date. Ranking The notes are our senior unsecured debt and will be structurally subordinated to any secured indebtedness (to the extent of its security), and rank on parity with all of our existing and future senior debt and be senior to all existing and future subordinated debt. As of March 31, 2007, we had $1.8 million secured indebtedness and approximately $30.6 million of senior debt, which consists of $30 million in principal indebtedness, ($15 million not on this registration statement) and approximately $0.6 million in accrued interest. The notes will also be effectively subordinated to the liabilities of our subsidiaries. As of March 31, 2007, our subsidiaries had outstanding liabilities of approximately $354,000 (excluding intercompany debt). Covenants We are subject to certain covenants with respect to our ability to incur indebtedness, to incur liens and our ability to make certain payments. See Description of Notes Certain Covenants below. Warrants Exercise The warrants registered by this registration statement are exercisable for a total of 419,776 shares of our common stock at an initial exercise price of $6.432 per share, subject to adjustment upon certain events. The warrants are exercisable (in whole or in part) at any time on or before May 18, 2011. In addition, in order to exercise the warrants, the warrant holder is required to make certain representations and warranties contained in the warrants, including representations as to the warrant holder s status as an accredited investor as defined in Rule 501 of the Securities Act and as a qualified institutional buyer as defined in Rule 144A of the Securities Act. Expiration Each of the warrants will expire at 5:00 p.m., Eastern Standard time, on May 18, 2011. Trading The notes, warrants and the underlying common stock have been registered under the Securities Act. Currently, there is no public market for the notes or warrants, and we cannot assure you that any such market will develop. The notes and warrants will not be listed on any securities exchange or included in any automated quotation system. Our common stock is currently traded on the Nasdaq Capital Market under the symbol SIPX. Treatment of Notes and Warrants in the Exar Merger In the event that our proposed merger with Exar Corporation ( Exar ) is completed, at the effective time of the merger, any outstanding notes will be guaranteed by Exar, subject to the same terms and conditions as were applicable before the merger, except that the notes will be convertible into shares of Exar common stock for an adjusted number of shares and with an adjusted conversion price based on the exchange ratio in the merger. In addition, each outstanding warrant will be converted into a warrant to purchase Exar common stock on the same terms and conditions as were applicable under the warrant to purchase Sipex common stock before the merger except for an adjusted number Table of Contents of shares and with an adjusted exercise price based on the exchange ratio in the merger. For additional information, see Description of Notes Treatment of Sipex Notes in the Exar Merger and Description of Warrants Treatment of Sipex Warrants in the Exar Merger. CUSIP Numbers The CUSIP numbers for the notes and the warrants after the registration of their resale with the SEC are 829909 AA 8 and 829909 11 8 respectively. Material U.S. Federal Income Tax Considerations For a discussion of material U.S. federal income tax consequences of purchasing, assuming and disposing of the notes, the warrants and the common stock into which they may be converted or exercised, see Material U.S. Federal Income Tax Considerations beginning on page 43. Risk Factors An investment in the notes involves a high degree of risk. See Risk Factors beginning on page 5 for a discussion of certain factors that you should consider when evaluating an investment in the notes, warrants and the underlying common stock. We are registering the notes, warrants and shares being offered under this prospectus pursuant to a registration rights agreement with the selling securityholders. See DESCRIPTION OF CAPITAL STOCK Registration Rights. We entered into the registration rights agreement in connection with a May 2006 private placement in which we offered and sold to the selling securityholders an aggregate principal amount of $30,000,000 of 5.5% Redeemable Convertible Senior Notes due 2026 together with warrants to purchase up to 839,552 shares of our common stock at an exercise price of $6.432 per share. ABOUT THIS PROSPECTUS This prospectus is part of a shelf registration statement that we have filed with the Securities and Exchange Commission, or the SEC. By using a shelf registration statement, the selling securityholders may sell, from time to time, the 5.5% Redeemable Convertible Senior Notes due 2026 that we issued on May 18, 2006, which we refer to as the notes, and the warrants to purchase common stock issued in connection with the notes, as well as the shares of common stock issuable upon exercise of the warrants or conversion of the notes. For further information about our business and the securities offered by this prospectus, you should refer to the registration statement and its exhibits. The exhibits to our registration statement contain the full text of certain contracts and other important documents we have summarized in this prospectus. Since these summaries may not contain all the information that you may find important in deciding whether to purchase the securities offered by the selling security holders, you should review the full text of these documents. The registration statement can be obtained from the SEC as indicated under the heading Where You Can Find Additional Information. This prospectus provides you with a general description of the securities the selling security holders may offer. Each time we or any selling security holders sell securities, we will provide a prospectus supplement that will contain specific information about the terms of that offering. The prospectus supplement may also add, update or change information contained in this prospectus. If there is any inconsistency between the information in this prospectus and any applicable prospectus supplement, you should rely on the information in the applicable prospectus supplement. You should read both this prospectus and any applicable prospectus supplement, together with additional information described under the heading Where You Can Find Additional Information. You should rely only on the information incorporated by reference or provided in this prospectus and any prospectus supplement. We have authorized no one to provide you with different information. This prospectus may only be used where it is legal to sell these securities. You should assume that the information in this prospectus is accurate as of the date of the prospectus. Our business, financial condition, results of operations and prospects may have changed since that date. Table of Contents RISK FACTORS Risks Related to the Business If the proposed merger with Exar does not occur, we could be materially adversely affected. On May 7, 2007, Sipex entered into a definitive merger agreement with Exar Corporation to combine the two companies. The completion of the proposed merger with Exar is subject to the satisfaction of closing conditions set forth in the merger agreement, including approval by the affirmative vote of a majority of the outstanding shares of our common stock and a majority of the outstanding shares of Exar s common stock voting at the applicable Exar special meeting and the receipt of certain regulatory approvals. The proposed merger has resulted, and will continue to result, in significant costs and expenses for us, including costs for legal and financial advisory services, and our cash position may consequently continue to decline during the pendency of the merger. In addition, the proposed merger may have negative effects on our relationships with our employees or customers and on the operation of our business, and if the proposed merger does not close, we may not be able to reverse any such negative effects and may otherwise be materially adversely affected. Our quarterly and annual operating results are volatile and difficult to predict and may cause our stock price to fluctuate. Our quarterly and annual operating results are affected by a wide variety of factors that could materially and adversely affect net sales and profitability from period-to-period, including: the cyclical nature of the semiconductor industry; the volatility of the optical device market; competitive pressures on selling prices; the mix of product sales, as our margins vary across product lines; the timing and cancellation of customer orders; the effect of the timing of sales by our resellers may have on our reported results as a result of our sell-through revenue recognition policies; our ability to maintain and expand our distributor relationships; our ability to design and manufacture products to meet customers and distributors specifications and expectations; our ability to introduce new products and technologies on a timely basis; market acceptance of our products and our customers products; the introduction of products and technologies by our competitors; the level of orders received that can be shipped in a quarter; delays in shipments from our fabrication plant to assembly houses; the availability of foundry capacity, raw materials and assembly and test capacity; our ability to manufacture and have manufactured for us, the correct mix to respond to orders on hand and new orders received in the future; fluctuations in yields; changes in product mix; the level of future product returns; the timing of investments in research and development, including tooling expenses associated with product development, process improvements and production; Table of Contents costs associated with increased regulation of corporate governance and disclosure and risks of non-compliance with such regulation; and the overall economic conditions in the United States and abroad. Due to the absence of substantial non-cancelable backlog, we typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. Our expense levels are based, in part, on expectations of future revenues and are, to a large extent, fixed in the short- term. For example, we have a minimum purchase arrangement with two of our suppliers based on requirements forecasted in advance. Our future revenues are difficult to predict and at times in the past we have failed to achieve revenue expectations. We may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. If revenue levels are below expectations for any reason, operating results are likely to be unfavorably affected. We may also take steps to adjust our strategic product families and change our cost structure, which may result in our incurring additional restructuring, reorganization and other charges. Based on forecasts, we may increase our operating expenses for personnel and new product development and for inventory in anticipation of increasing sales levels; therefore, operating results would be worsened if increased sales are not achieved. Our business depends on market demand for products using analog semiconductors. A less robust semiconductor market could negatively impact our net sales, results of operations and cash flows. As a result of the foregoing and other factors, we may experience material fluctuations in future operating results on a quarterly or annual basis, which could substantially negatively affect our business, financial condition and operating results. We may need to obtain a significant amount of additional capital in the future and may not be able to secure adequate funds on a timely basis or on terms acceptable to us. We believe that the cash, cash equivalents and investments on hand, the cash we expect to generate from operations and borrowings under our bank line of credit and unsecured promissory note facility will be sufficient to meet our liquidity and capital spending requirements for at least the next twelve months. However, it is possible that we may need to raise additional funds to fund our activities during and/or beyond that time. We could raise these funds by selling more stock to the public or to selected investors, or by borrowing money. In addition, even though we may not need additional funds, we may still elect to sell additional equity securities or obtain credit facilities for other reasons. We may not be able to obtain additional funds on favorable terms, or at all. If adequate funds are not available, we may be required to curtail our operations significantly or to obtain funds through other arrangements. If we raise additional funds by issuing additional equity or convertible debt securities, the ownership percentages of existing stockholders would be reduced. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of the holders of our common stock. It is possible that our future capital requirements may vary materially from those now planned. The amount of capital that we will need in the future will depend on many factors, including: whether we are able to reduce our recent negative cash flows; the market acceptance of our products; volume price discounts; the levels of inventory and accounts receivable that we maintain; our business, product, capital expenditure and research and development plans and product and technology roadmaps; our competitors response to our products; our relationships with suppliers and customers; Table of Contents capital expenditures for equipment to meet customer demand for our products; technological advances, and the levels of promotion and advertising that will be required to launch our products and achieve and maintain a competitive position in the marketplace. In addition, we may require additional capital to accommodate planned growth, hiring, infrastructure and facility needs or to consummate acquisitions of other businesses, products or technologies. Our management has identified certain material weaknesses in the design and operation of our internal controls, which, if not adequately addressed, could result in accounting errors, call into question the accuracy of our financial results. For the year ended January 1, 2005, our management informed the Audit Committee that they identified material weaknesses, as defined by the Public Company Accounting Oversight Board (PCAOB), in the design and operation of our internal controls. These weaknesses related to entity-level control activities, revenue accounting and controls related to the financial closing process. For the years ended December 31, 2005 and December 30, 2006, we were not an accelerated filer, and therefore we are not required to make the annual report on internal control over financial reporting required by Item 308(a) of Regulation S-K and our independent registered public accounting firm is not required to issue a separate attestation on management s assessment of our internal control over financial reporting under Item 308(b). During fiscal year 2006, our management continued efforts to improve our internal controls over financial reporting, in particular to remediate the material weaknesses reported as of January 1, 2005. Our management believes that these efforts have or are reasonably likely to have, a material improvement on the design and effectiveness of our internal controls over financial reporting and to remediate the material weaknesses. However, as we were not an accelerated filer, and therefore not subject to the requirements of Item 308(a) and Item 308(b) of Regulation S-K, as noted above, there can be no assurance that we have fully remediated the material weaknesses reported as of January 1, 2005 or that our internal control over financial reporting is effective. Our ability to implement our business plan successfully in a volatile market requires effective management systems and a system of financial processes and controls. We have identified a need to further evaluate and improve our sell-through accounting systems and procedures as well as our inventory valuation estimation procedures and tools. In addition, we have begun the process of implementing a new enterprise requirements planning system, which is expected to be completed in 2008. During the process of preparing our consolidated financial statements, we have continued to experience some delays and difficulties due to reliance on manual reconciliations and analyses. If we are unable to maintain an adequate level of processes and controls and improve our systems and procedures, we may not be able to accurately report our financial performance on a timely basis and our business and stock price would be adversely affected. If we are unable to accurately forecast demand for our products, we may be unable to efficiently manage our inventory. Due to the absence of substantial non-cancelable backlog, we typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. As a consequence of inaccuracies inherent in forecasting, inventory imbalances periodically occur that result in surplus amounts of some of our products and shortages of others. Such shortages can adversely affect customer relations and surpluses can result in larger-than-desired inventory levels, which can adversely affect our financial position. In the fourth quarter of 2006, we experienced an abrupt reduction in customer demand and internal forecast for sales of our products resulting in inventory write-down of $3.5 million and additional charges of $1.4 million related to provision for purchase commitments on excess inventories. Table of Contents We may face unforeseen complications from the transfer our manufacturing processes to Silan in China and Episil Technologies in Taiwan. We have transferred our manufacturing processes to foundries operated by Silan in China and Episil in Taiwan in conjunction with the closure of the Milpitas, California wafer fabrication facility. The transfer has been a complicated and time-consuming process that has been met with significant unforeseen complications that delayed the integration transfer and required additional allocation of our resources. There can be no guarantees that additional unforeseen integration issues will not arise in the future related to the integration that could cause additional delays which could materially adversely affect our ability to timely produce our products for distribution. In addition, the parties may be unable to achieve all or any of the expected benefits of the relationship within the anticipated time-frames. The anticipated synergies between Sipex and Silan or Episil may not be as significant as originally expected. The market for our products in China may not grow as rapidly or as large as both parties currently anticipate. The manufacturing processes and wafer testing may not be qualified by Sipex following the transfer from Sipex to Silan or Episil or the qualification process may take significantly longer than currently expected. This could result in additional operating costs, loss of customers, and business disruption. We may experience difficulties in developing and introducing new or enhanced products necessitated by technological advances. Our future success will depend, in part, upon our ability to anticipate changes in market demand and evolving technologies. To remain competitive, we must enhance our current products and develop and introduce new products that keep pace with technological advancements and address the increasingly sophisticated needs of our customers. Our products may be rendered obsolete if we fail to anticipate or react to change, and, as a result, our revenues and cash flow may be negatively impacted. Our success depends on our ability to develop new semiconductor devices for existing and new markets, to introduce these products in a timely manner and to have these products selected for design into new products of our customers. The development of these new devices is highly complex and from time to time we have experienced delays in completing the development of new products. Successful product development and introduction depends on a number of factors, including: accurate new product definition; timely completion and introduction of new product designs; availability of foundry capacity; achievement of manufacturing yields; and market acceptance of our products and our customers products. Our success also depends upon our ability to accurately specify and certify the conformance of our products to applicable standards and to develop our products in accordance with customer requirements. We may not be able to adjust to changing market conditions as quickly and cost-effectively as necessary to compete successfully. We may not be able to introduce new products in a timely and cost-effective manner or in sufficient quantities to meet customer demand. Furthermore, we cannot guarantee that these products will achieve market acceptance. The introduction of our new products may be delayed in order to test for and resolve design flaws. Our products are complex and must meet stringent quality requirements. They may contain undetected errors or defects, especially when new products are first introduced or when new versions are released. We may delay the release of our new product lines. Such delays could have an adverse effect on our market reputation and ability to generate sales. We depend on distributors who sell directly to OEMs and the loss of one or more of our significant distributors could have a material adverse effect on our business. For the fiscal years 2006, 2005 and 2004, approximately 77%, 83% and 83%,respectively, of our net sales were from shipments of our products to distributors who sell directly to OEMs. Our agreements with distributors contain Table of Contents limited provisions for return of our products, including stock rotations whereby distributors may return a percentage of their purchases from us based upon a percentage of their most recent three months of shipments. In addition, in certain circumstances upon termination of the distributor relationship, distributors may return some portion of their prior purchases. The loss of business from any of our significant distributors or the delay of significant orders from any of them, even if only temporary, could significantly reduce our income, delay recognition of revenue and impact our ability to accurately predict cash flow. We derive a substantial portion of our revenues from Future Electronics Inc., or Future, a related party, and our revenues would likely decline significantly if Future elected not to make, cancel, reduce or defer purchases of our products. Future is a related party and has historically accounted for a significant portion of our revenues. Future is our largest distributor worldwide and accounted for 43%, 44% and 39% of total net sales in fiscal 2006, 2005 and 2004, respectively. We anticipate that sales of our products to Future will continue to account for a significant portion of our revenues. The loss of Future as a distributor, or a significant reduction in orders from Future would materially and adversely affect our operating results, our business, our financial condition and our stock price. We have a distributor agreement with Future that provides for Future to act as our sole distributor for certain products within North America and Europe. If Future were to cease distributing these products, we could experience a reduction in sales as we located replacement distributors for these products. Sales to Future are made under an agreement that provides protection against price reduction for their inventory of our products. As such, we could be exposed to significant liability if the inventory value of the products held by Future declined dramatically. Our distributor agreement with Future does not contain minimum purchase commitments. As a result, Future could cease purchasing our products with short notice to us. In addition, Future may defer or cancel orders without penalty, which would likely cause our revenues, our business, our financial condition and our stock price to decline. Affiliates of Future, our largest distributor, beneficially own a significant percentage of our common stock, which will allow them to significantly influence matters requiring stockholder approval and could discourage potential acquisition of our Company. As of December 30, 2006, the affiliates of Future held approximately 8.6 million shares of our common stock, or approximately 47%, of our outstanding common stock and held 50% of our outstanding 5.5% Redeemable Convertible Senior Notes due 2026. We have also entered into a Securities Purchase Agreement with an affiliate of Future pursuant to which we may issue up to $10.0 million of 9% unsecured Junior Notes. In addition, two members of our Board of Directors, Dan Casey and Pierre Guilbault, are representatives of Future. Due to their ownership of a significant percentage of our common stock and our convertible debts, Future will be able to exert significant influence over, and effectively control, actions requiring the approval of our stockholders, including the election of directors, many types of change of control transactions and amendments to our charter documents. The significant ownership percentage of Future could have the effect of delaying or preventing a change of control of Sipex or otherwise discouraging a potential acquirer from obtaining control of Sipex. Conversely, by virtue of Future s percentage ownership of our stock and debt, Future could facilitate a takeover transaction that our board of directors did not approve. Occasionally we enter into agreements that expose us to potential damages that exceed the value of the agreement. We have given certain customers increased indemnification for product deficiencies that is in excess of the standard limited warranty indemnification and could possibly result in greater costs, in excess of the original contract value. In an attempt to limit this liability, we have also increased our errors and omission insurance policy to partially offset these potential additional costs; however, our insurance coverage could be insufficient to prevent us from suffering material losses if the indemnification amounts are large enough. Table of Contents We may face significant risks related to our international operations. We derive a significant portion of our net sales from international sales, including to Asia, which are subject to certain risks, including: unexpected changes in legal and regulatory requirements; changes in tariffs; exchange rates and other barriers; political and economic instability; difficulties in accounts receivable collection; difficulties in managing distributors or representatives; difficulties in staffing and managing international operations; difficulties in protecting our intellectual property overseas; the seasonality of sales; and potentially adverse tax consequences. Our international sales (sales to customers outside the United States) for the year ended December 30, 2006 were $62.7 million, or 80% of total net sales and $58.0 million and $60.3 million for the years ended 2005 and 2004, respectively, or 80% of total net sales for both years of 2005 and 2004. There can be no assurance that economic and geopolitical troubles in any area of the world will not have a material adverse effect on our business, results of operations and financial condition. Our inability to meet any increase in demand could reduce our market share. Demand shifts in the semiconductor industry are rapid and difficult to predict, and we may not be able to respond quickly enough to an increase in demand, if any. Our ability to increase sales of our products depends, in part, upon our ability to optimize the use of our manufacturing capacity in a timely manner and, if necessary, expand our manufacturing capacity. If we are unable to respond to rapid increases in demand, if any, for our products on a timely basis or to manage any corresponding expansion of our manufacturing capacity effectively, our customers could increase their purchases from our competitors, which would reduce our market share. If we are unable to compete effectively with existing or new competitors, we will experience fewer customer orders, reduced revenues, reduced gross margins and lost market share. We compete in markets that are intensely competitive, and which are subject to both rapid technological change and continued price erosion. Our competitors include many large domestic and foreign companies that have substantially greater financial, technical and management resources than we have. Loss of competitive position could result in price reductions, fewer customer orders, reduced revenues, reduced gross margins and loss of market share, any of which would affect our operating results and financial condition. To remain competitive, we continue to evaluate our manufacturing operations, looking for additional cost savings and technological improvements. If we are not able to successfully implement new process technologies and to achieve volume production of new products at acceptable yields, our operating results and financial condition may be affected. In addition, if competitors in Asia reduce prices on commodity products, it would adversely affect our ability to compete effectively in that region. Our future competitive performance depends on a number of factors, including our ability to: accurately identify emerging technological trends and demand for product features and performance characteristics; develop and maintain competitive products; enhance our products by adding innovative features that differentiate our products from those of our competitors; Table of Contents Exhibit Number Description 5 .1 Opinion of Wilson Sonsini Goodrich Rosati, Professional Corporation (previously filed as Exhibit 5.1 to the Company s Amendment No. 3 to the Registration Statement on Form S-1 filed on May 24, 2007, and incorporated herein by reference). 10 .1** 1996 Incentive Stock Option Plan (previously filed as Exhibit 10.5 to the Company s Registration Statement on Form S-1, File No. 333-1328, and incorporated herein by reference). 10 .2** 1996 Employee Stock Purchase Plan, as amended (previously filed as Appendix A to the Company s Definitive Notice and Proxy Statement on April 29, 2004, and incorporated herein by reference). 10 .3** 1997 Incentive Stock Option Plan (previously filed as Appendix A to the Company s definitive Proxy Statement for the Special Meeting In Lieu Of Annual Meeting Of Shareholders held May 30, 1997, and incorporated herein by reference). 10 .4** Sipex Corporation 1999 Stock Plan (previously filed as Appendix A to the Company s Definitive Proxy Statement on Schedule 14A, No. 1000-27897, and incorporated herein by reference). 10 .5** 2000 Non-Qualified Stock Option Plan (previously filed as an exhibit to the Company s Annual Report on Form 10-K for the year ended December 31, 2000, and incorporated herein by reference). 10 .6** 2006 Equity Incentive Plan (previously filed as Appendix C to the Company s Definitive Notice and Proxy Statement on October 24, 2006, and incorporated herein by reference). 10 .7 Worldwide Authorized Distributor Market Price Agreement dated July 22, 1993, by and between the Company and Future Electronics Incorporated (previously filed as an Exhibit to the Company s Annual report on Form 10-K for the year ended December 31, 2002, and incorporated herein by reference). 10 .8 Amendment dated October 1, 2002 to Worldwide Authorized Distributor Market Price Agreement dated July 22, 1993, by and between the Company and Future Electronics Inc. (previously filed as Exhibit 10.1 to the Company s Quarterly Report of Form 10-Q for the quarter ended July 1, 2006, and incorporated herein by reference). 10 .9 Addendum A dated February 7, 2003 to Worldwide Authorized Distributor Market Price Agreement dated July 22, 1993, by and between the Company and Future Electronics Incorporated (previously filed as an Exhibit to the Company s Annual report on Form 10-K for the year ended December 31, 2002, and incorporated herein by reference). 10 .10* Amendment dated August 26, 2003 to Worldwide Authorized Distributor Market Price Agreement dated July 22, 1993, by and between the Company and Future Electronics Inc. (previously filed as Exhibit 10.2 to the Company s Quarterly Report of Form 10-Q for the quarter ended July 1, 2006, and incorporated herein by reference). 10 .11 Amendment dated September 15, 2003 to Worldwide Authorized Distributor Market Price Agreement dated July 22, 1993, by and between the Company and Future Electronics Inc. (previously filed as Exhibit 10.3 to the Company s Quarterly Report of Form 10-Q for the quarter ended July 1, 2006, and incorporated herein by reference). 10 .12 Amendment dated April 25, 2006 to Worldwide Authorized Distributor Market Price Agreement dated July 22, 1993, by and between the Company and Future Electronics Inc. (previously filed as Exhibit 10.4 to the Company s Quarterly Report of Form 10-Q for the quarter ended July 1, 2006, and incorporated herein by reference). 10 .13 Amendment dated September 27, 2006 to Worldwide Authorized Distributor Market Price Agreement dated July 22, 1993, by and between the Company and Future Electronics Inc. (previously filed as Exhibit 10.1 to the Company s Current Report on Form 8-K filed on October 3, 2006, and incorporated herein by reference). 10 .14 Amendment dated November 1, 2006 to Worldwide Authorized Distributor Market Price Agreement dated July 22, 1993, by and between the Company and Future Electronics Inc. (previously filed as Exhibit 10.1 to the Company s Current Report on Form 8-K filed on November 7, 2006, and incorporated herein by reference). 10 .15** Letter agreement as of 6/7/05 concerning the terms of the newly appointed Chief Executive Officer Ralph Schmitt (previously filed as Exhibit 99.2 to the Company s Form 8-K filed on June 30, 2005, and incorporated herein by reference). Table of Contents EXHIBIT INDEX Exhibit Number Description 2 .1 Agreement and Plan of Merger, dated May 7, 2007, by and among Exar Corporation, Side Acquisition Corp. and Sipex Corporation (previously filed as Exhibit 2.1 to the Company s Current Report on Form 8-K filed on May 8, 2007, and incorporated herein by reference). 3 .1 Restated Certificate of Incorporation of Sipex Corporation dated March 20, 2007 (previously filed as an exhibit to the Company s Annual Report on Form 10-K for the year ended December 30, 2006, and incorporated herein by reference). 3 .2 Bylaws (incorporated herein by reference from the Company s Registration Statement on Form 8-A file with the Securities and Exchange Commission on October 28, 2003). 3 .3 Certificate of Amendment of Bylaws of Sipex Corporation (previously filed as Exhibit 3.2 to the Company s Current Report on Form 8-K filed on December 5, 2006 and incorporated herein by reference). 4 .2 Form of Indemnification Agreement for directors and officers (previously filed as Exhibit 4.2 to the Company s Registration Statement on Form S-1, File No. 333-1328, and incorporated herein by reference). 4 .4 Indenture dated May 16, 2006 (filed as Exhibit 4.1 to the Company s Current Report on Form 8-K filed on May 22, 2006, and incorporated herein by reference). 5 .1 Opinion of Wilson Sonsini Goodrich Rosati, Professional Corporation (previously filed as Exhibit 5.1 to the Company s Amendment No. 3 to the Registration Statement on Form S-1 filed on May 24, 2007, and incorporated herein by reference). 10 .1** 1996 Incentive Stock Option Plan (previously filed as Exhibit 10.5 to the Company s Registration Statement on Form S-1, File No. 333-1328, and incorporated herein by reference). 10 .2** 1996 Employee Stock Purchase Plan, as amended (previously filed as Appendix A to the Company s Definitive Notice and Proxy Statement on April 29, 2004, and incorporated herein by reference). 10 .3** 1997 Incentive Stock Option Plan (previously filed as Appendix A to the Company s definitive Proxy Statement for the Special Meeting In Lieu Of Annual Meeting Of Shareholders held May 30, 1997, and incorporated herein by reference). 10 .4** Sipex Corporation 1999 Stock Plan (previously filed as Appendix A to the Company s Definitive Proxy Statement on Schedule 14A, No. 1000-27897, and incorporated herein by reference). 10 .5** 2000 Non-Qualified Stock Option Plan (previously filed as an exhibit to the Company s Annual Report on Form 10-K for the year ended December 31, 2000, and incorporated herein by reference). 10 .6** 2006 Equity Incentive Plan (previously filed as Appendix C to the Company s Definitive Notice and Proxy Statement on October 24, 2006, and incorporated herein by reference). 10 .7 Worldwide Authorized Distributor Market Price Agreement dated July 22, 1993, by and between the Company and Future Electronics Incorporated (previously filed as an Exhibit to the Company s Annual report on Form 10-K for the year ended December 31, 2002, and incorporated herein by reference). 10 .8 Amendment dated October 1, 2002 to Worldwide Authorized Distributor Market Price Agreement dated July 22, 1993, by and between the Company and Future Electronics Inc. (previously filed as Exhibit 10.1 to the Company s Quarterly Report of Form 10-Q for the quarter ended July 1, 2006, and incorporated herein by reference). 10 .9 Addendum A dated February 7, 2003 to Worldwide Authorized Distributor Market Price Agreement dated July 22, 1993, by and between the Company and Future Electronics Incorporated (previously filed as an Exhibit to the Company s Annual report on Form 10-K for the year ended December 31, 2002, and incorporated herein by reference). 10 .10* Amendment dated August 26, 2003 to Worldwide Authorized Distributor Market Price Agreement dated July 22, 1993, by and between the Company and Future Electronics Inc. (previously filed as Exhibit 10.2 to the Company s Quarterly Report of Form 10-Q for the quarter ended July 1, 2006, and incorporated herein by reference). Table of Contents Exhibit Number Description 10 .12 Amendment dated April 25, 2006 to Worldwide Authorized Distributor Market Price Agreement dated July 22, 1993, by and between the Company and Future Electronics Inc. (previously filed as Exhibit 10.4 to the Company s Quarterly Report of Form 10-Q for the quarter ended July 1, 2006, and incorporated herein by reference). 10 .13 Amendment dated September 27, 2006 to Worldwide Authorized Distributor Market Price Agreement dated July 22, 1993, by and between the Company and Future Electronics Inc. (previously filed as Exhibit 10.1 to the Company s Current Report on Form 8-K filed on October 3, 2006, and incorporated herein by reference). 10 .14 Amendment dated November 1, 2006 to Worldwide Authorized Distributor Market Price Agreement dated July 22, 1993, by and between the Company and Future Electronics Inc. (previously filed as Exhibit 10.1 to the Company s Current Report on Form 8-K filed on November 7, 2006, and incorporated herein by reference). 10 .15** Letter agreement as of 6/7/05 concerning the terms of the newly appointed Chief Executive Officer Ralph Schmitt (previously filed as Exhibit 99.2 to the Company s Form 8-K filed on June 30, 2005, and incorporated herein by reference). 10 .16 Loan and Security Agreement as of 7/21/05, with Silicon Valley Bank (previously filed as Exhibit 99.1 to the Company s Form 8-K filed on 7/25/05, and incorporated herein by reference). 10 .17** Bonus plan as of August 29, 2005, for an executive bonus plan for the remainder of 2005 for certain of its officers (previously filed as Exhibit 99.1 to the Company s Form 8-K filed on September 2, 2005, and incorporated herein by reference). 10 .18** Separation Agreement and General Release as of 9/2/05 with Joseph T. Rauschmayer, Senior Vice President of Operations (previously filed as Exhibit 10.1 to the Company s Form 8-K filed on September 2, 2005, and incorporated herein by reference). 10 .19** Separation Agreement and General Release as of April 26, 2005 with Kevin Plouse (previously filed as Exhibit 10.1 to the Company s Form 8-K filed on September 15, 2005, and incorporated herein by reference). 10 .20** Letter agreement as of September 12, 2005 with Mr. Edward Lam joining Sipex as the new Senior Vice President of Marketing and Business Development (previously filed as Exhibit 10.1 to the Company s Form 8-K filed on September 23, 2005, and incorporated herein by reference). 10 .21** Letter agreement as of October 7, 2005 with Joel Camarda joining Sipex as Senior Vice President of Operations (previously filed as Exhibit 10.1 to the Company s Form 8-K filed on October 12, 2005, and incorporated herein by reference). 10 .22 Amendment No. 1 dated October 7, 2005, to the Loan and Security Agreement with Silicon Valley Bank, dated July 21, 2005 (previously filed as Exhibit 10.1 to the Company s Form 8-K filed on October 12, 2005, and incorporated herein by reference). 10 .23 Amendment No. 2 dated November 12, 2005 to the Loan and Security Agreement with Silicon Valley Bank, dated July 12, 2005 (previously filed as Exhibit 10.1 to the Company s Current Report on Form 8-K filed on 11/16/05, and incorporated herein by reference). 10 .24 Amendment No. 3 dated January 19, 2006 to the Loan and Security Agreement with Silicon Valley Bank, dated July 12, 2005 (previously filed as Exhibit 10.4 to the Company s Current Report on Form 8-K filed on 1/25/06, and incorporated herein by reference). 10 .25 Amendment No. 4 dated May 18, 2006 to the Loan and Security Agreement with Silicon Valley Bank, dated July 12, 2005, (previously filed as Exhibit 10.4 to Company s Current Report on Form 8-K filed on 5/22/06, and incorporated herein by reference). 10 .26 Amendment No. 5 dated August 1, 2006 to Loan and Security Agreement between Sipex Corporation and Silicon Valley Bank, dated July 12, 2005 (previously filed as Exhibit 10.1 to the Company s Current Report on Form 8-K filed 8/7/06, and incorporated herein by reference). 10 .27 Amendment No. 6 dated September 28, 2006 to Loan and Security Agreement between Sipex Corporation and Silicon Valley Bank, dated July 12, 2005 (previously filed as Exhibit 10.1 to the Company s Current Report on Form 8-K filed 10/4/06, and incorporated herein by reference). Table of Contents bring products to market on a timely basis at competitive prices; respond effectively to new technological changes or new product announcements by others; increase device performance and improve manufacturing yields; adapt products and processes to technological changes; and adopt or set emerging industry standards. There can be no assurance that our design, development and introduction schedules for new products or enhancements to our existing and future products will be met. In addition, there can be no assurance that these products or enhancements will achieve market acceptance, or that we will be able to sell these products at prices that are favorable. The implementation of a new management information system may disrupt our business. We have begun the process of implementing a new enterprise resource planning and financial accounting and planning system, and integrating this new system with our customer relationship management system and our product management system. Implementation of the new management information system, including the integration with other systems, is a very complex and time consuming process that requires significant financial resources and personnel time, as well as unifying operating policies and procedures to ensure that the total system operates efficiently and effectively. Delays or errors in the implementation could result in additional costs and cause disruptions to our business, which could adversely affect our ability to accurately report our financial results on a timely basis, comply with our periodic reporting requirements on a timely basis and could have a material adverse effect on our business, financial condition and operating results. A failure of our information systems would adversely impact our ability to process orders for and manufacture products. We operate a multinational business enterprise with manufacturing, administration and sales groups located in Asia, Europe and the United States. These disparate groups are connected by a virtual private network-based enterprise resource planning system, where daily manufacturing operations and order entry functions rely on maintaining a reliable network among locations. Any failure of our computer network or our enterprise resource planning system would impede our ability to schedule orders, monitor production work in process and ship and bill our finished goods to our customers. We have only limited protection for our proprietary technology. The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. Although we are not aware of any pending or threatened patent litigation that we consider material, there can be no assurance that third parties will not assert claims against us with respect to existing or future products or technologies and we have been subject to such claims in the past. To determine the validity of any third party claims, such litigation, whether or not determined in our favor could result in significant expense to us and divert the efforts of our management personnel from productive tasks. In the event of an adverse ruling in such litigation, we may be required to discontinue the use of certain processes, cease the manufacture, use and sale of infringing products, and expend significant resources to develop non-infringing technology or obtain licenses to the infringing technology. There can be no assurance that licenses will be available on acceptable terms, or at all, with respect to disputed third party technology. In the event of a successful claim against us and our failure to develop or license a substitute technology at a reasonable cost, our business, financial condition and results of operations would be materially and adversely affected. There can be no assurance that foreign intellectual property laws will protect our intellectual property rights. Furthermore, there can be no assurance that others will not independently develop similar products, duplicate our products or design around any of our patents. We may be subject to, or may initiate, interference proceedings in the U.S. patent office, which can demand significant financial and management resources. Table of Contents Our future success depends on retaining our key personnel and attracting and retaining additional highly qualified employees. Our success depends upon the continued service of our executive officers and other key management and technical personnel, and on our ability to continue to attract, retain and motivate qualified personnel, such as experienced analog circuit designers. The competition for these employees is intense. Our employee s are employed at-will, which means that they can terminate their employment at any time. There can be no assurance that we will be able to retain our design engineers, executive officers and other key personnel. The loss of the services of one or more of our design engineers, executive officers or other key personnel or our inability to recruit replacements for these personnel or to otherwise attract, retain and motivate qualified personnel could seriously impede our success. Product defects or compatibility problems with our products could damage our reputation, decrease market acceptance of our technology, cause us to replace defective or incompatible products at a substantial cost and result in potentially costly litigation. A number of factors, including design flaws, materials failures, manufacturing problems, and misapplication of our products may cause our products to contain undetected errors, defects or compatibility problems. Defects or compatibility problems with our products may: cause delays in product introductions and shipments; result in increased costs and diversion of development resources; result in increased product returns and cause us to incur costs due to unusable inventory or replacement of defective or incompatible products; or require design modifications. If any of our products contain defects, or have reliability, quality or compatibility problems, our reputation might be damaged significantly and customers might be reluctant to buy our products. This could result in the loss of existing customers and impair our ability to attract new customers in the future. In addition, we may discover defects or failures in our products after they are installed by customers. In such cases, we may incur significant costs and devote substantial management resources to correcting these problems. Our customers may also sue us for, or otherwise seek to recover from us, any losses resulting from alleged defects or errors in our products. Our manufacturing processes are very complex, which may result in manufacturing difficulties. Our manufacturing processes and the processes of our suppliers are highly complex and are continuously being modified in an effort to improve yields and product performance. Process changes can result in interruptions in production or significantly reduced yields causing product introduction or delivery delays. In addition, yields can be adversely affected by minute impurities in the environment or other problems that occur in the complex manufacturing process. Many of these problems are difficult to diagnose and are time-consuming or expensive to remedy. From time to time we have experienced unfavorable yield variances. In particular, new process technologies or new products can be subject to especially wide variations in manufacturing yields and efficiency. There can be no assurance that our foundries or the foundries of our suppliers will not experience unfavorable yield variances or other manufacturing problems that result in delayed product introduction or delivery delays. This risk is particularly significant in the near term as we transfer our manufacturing processes to Silan and Episil. We rely on outside foundries to supply certain of our wafers and those foundries may not produce at acceptable levels. Beginning in 2006, we began to increasingly rely on outside foundries to supply certain of our fully processed semiconductor wafers. This reliance on outside foundries presents the following potential risks: lack of adequate wafer supply; limited control over delivery schedules; unavailability of or delays in obtaining access to key process technologies; and limited control over quality assurance, manufacturing yields and production costs. Table of Contents Additionally, we do not have a guaranteed level of production capacity at any of these foundries with the exception of two of our foundries for whom we provide minimum purchase commitments in accordance with our supply agreements. The ability of each foundry to provide wafers to us is limited by the foundry s available capacity, and the foundry s allocation of its available capacity among multiple customers. There can be no assurance that our third party foundries will allocate sufficient capacity to satisfy our requirements. We have experienced decreased allocations of wafer supplies from our suppliers in the past, which reduced our capacity to ship products, and, thus, recognize revenues. Furthermore, any sudden reduction or elimination of any primary source or sources of fully processed wafers could result in a material delay in the shipment of our products. If any other delays or shortages occur in the future, our business and operating results will be negatively impacted. Our ability to meet current demand or any increase in demand for our products may be limited by our ability to test our semiconductor wafers. As part of our manufacturing process, we must test all of our semiconductor wafers using certain probe testing equipment. As such, our ability to meet current demand or any increase in demand for our products depends, in part, on our ability to purchase and install sufficient testing equipment. Obtaining and installing this equipment is a time and capital intensive process and depends on our ability to accurately predict future sales. In the first quarter of 2006, due to a lack of sufficient probe testing equipment, we were unable to test an adequate number of wafers, incurred delays in shipping products and were unable to meet the demand for our products. If we are unable to estimate future sales correctly or we are unable to obtain the necessary testing equipment on a timely basis, we will continue to be unable to meet the current demand or any increased demand for our products. The facilities of certain of our significant customers and third party wafer suppliers are located in areas susceptible to earthquakes and other natural disasters. The facilities of certain of our significant customers and third-party wafer suppliers are located in areas that are susceptible to earthquakes and other natural disasters. Damage caused by earthquakes or other natural disasters may result in shortages in water or electricity or transportation, which could limit the production capacity of our wafer facility or the ability of certain of our subcontractors to provide needed products. Any reduction in production capacity or the ability to obtain fully processed semiconductor wafers could cause delays or shortages in our product supply, which would negatively impact our business. If the facilities of our customers or our third party wafer suppliers are damaged by future earthquakes or other natural disasters, it could have a materially adverse effect on our business. We rely on outside suppliers to assemble, test and ship product to our customers. We rely on outside assembly houses to assemble, test and ship our product to end customers. There can be no assurance that our third party suppliers will allocate sufficient capacity to us to meet our requirements. Any sudden reduction or elimination of a primary source could result in material delay in the shipment of our product and could have a material adverse affect on our business and operating results. In addition, we may transition the testing of our products to new assembly houses. If the transition does not proceed smoothly, this could also result in delays in the shipment of our products. Because we rely on outside assembly house to assemble, test and ship our products, we have limited control over quality assurance, manufacturing yields and production costs, and we have in the past experienced yield issues and delays. We could experience delays or yield issues in the future due to the transfer of products from development to production, which could negatively impact our business and operating results. In addition, if defects in our products are undetected, we may experience higher warranty expenses than anticipated, which could negatively impact our reputation, business and operating results. We must comply with significant environmental regulations, employment tax regulations, employment practices and other governmental regulations which are difficult and expensive. We are subject to a variety of international, federal, state and local governmental regulations related to employment taxes, employment practices and other governmental regulations and regulations regarding the use, Table of Contents storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing processes or residing in our products. The failure to comply with present or future regulations could result in fines being imposed on us, suspension of production or a cessation of operations. Any failure by us to control the use of, or adequately restrict the discharge of hazardous substances, or otherwise comply with environmental regulations, could subject us to significant future liabilities. Any failure to conform to employment tax regulations, employment practices regulations and other governmental regulations, could result in remediation or other significant liabilities. Our stock price has been volatile and could continue to remain volatile. The trading price of our common stock may be subject to wide fluctuations in response to quarter-to-quarter variations in operating results, announcements of technological innovations or new products by us or our competitors, general conditions in the semiconductor manufacturing and electronic markets, changes in earnings estimates by analysts, or other events or factors. In addition, the public stock markets have experienced extreme price and trading volume volatility in recent months. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock. Risks Relating to the Notes and the Warrants The notes are structurally subordinate in right of payment to our secured debt. The notes are our general obligations and are structurally subordinate in right of payment to all of our existing secured debt and any future secured debt that we incur to the extent of the security therefor and rank on parity with all of our existing and future senior debt. In the event of our bankruptcy, liquidation or reorganization or upon acceleration of the notes due to an event of default, our assets will be available to pay obligations on the notes only after all secured debt has been paid. As a result, there may not be sufficient assets remaining to pay amounts due on any or all of the outstanding notes. In addition, we will not make any payments on the notes in the event of payment defaults on any future secured debt financing that we may incur. As of December 30, 2006, we had no secured indebtedness (as defined in the indenture) outstanding. The notes are also effectively subordinated to the liabilities of our subsidiaries, and as of December 30, 2006, our subsidiaries had approximately $180,000 in outstanding liabilities (excluding intercompany debt). We may not have sufficient funds to pay our debt and other obligations. Our cash, cash equivalents, short-term investments and operating cash flows may be inadequate to meet our obligations under the notes or our other obligations. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments on the notes, we will be in default under the notes, which could cause defaults under any other of our indebtedness then outstanding. Any such default would have a material adverse effect on our business, prospects, financial condition and operating results. In addition, we cannot be sure that we would be able to repay amounts due in respect of the notes if payment of those notes were to be accelerated following the occurrence of an event of default as described in the indenture. Because your right to require repurchase of the notes is limited, you may be unable to avoid a decline in the market price of the notes if we enter into a transaction that is not a change in control under the indenture. The term change in control is limited and may not include every event that might cause the market price of the notes to decline or change the credit risk applicable to the notes. The term change in control does not apply to transactions in which at least 90% of the consideration paid for our common stock in a merger or similar transaction is publicly traded common stock, which means that you could receive common stock of an issuer other than Sipex upon conversion of your notes. Our obligation to repurchase the notes upon a change in control may not preserve the value of the notes in the event of a highly leveraged transaction, reorganization, merger or similar transaction not involving a change in control as defined by the indenture. See Description of the Notes Repurchase of Notes at Option of Holders. Our proposed transaction with Exar would not be considered as a change in control if consummated as currently planned. Table of Contents We may not have sufficient funds to purchase the notes upon a repurchase event. We may not have the funds necessary to purchase the notes at the option of the holders upon certain repurchase events, including a change in control. If a repurchase event were to occur, we may not have sufficient funds to pay the purchase price for all tendered notes, or restrictions in our outstanding debt may not allow those purchases. We are only obligated to offer to repurchase the notes upon certain specified repurchase events. There may be other events that could hurt our financial condition that would not entitle you to have your notes repurchased by us. The notes do not require us to achieve or maintain minimum financial results, the lack of which could negatively impact holders of the notes. The notes do not require us to achieve or maintain any minimum financial results relating to our financial condition or results of operations. Our ability to recapitalize and take a number of other actions that are not limited by the terms of the indenture and the notes could have the effect of diminishing our ability to make payments on the notes when due. In addition, we are not restricted from repurchasing subordinated indebtedness or common stock by the terms of the indenture and the notes. If you hold notes or warrants, you will not be entitled to any rights as a holder of our common stock, but you will be subject to all changes made with respect to our common stock. If you hold the notes or the warrants, other than the right to adjustments in the conversion price of the notes and the exercise price of the warrants upon certain events, you will not be entitled to any rights with respect to our common stock (including, without limitation, voting rights and rights to receive any dividends or other distributions on our common stock), but you will be subject to all changes affecting the common stock. You will only be entitled to rights as a holder of common stock if and when we deliver shares of common stock to you upon conversion of your notes and exercise of your warrants. For example, in the event that an amendment is proposed to our charter or bylaws requiring stockholder approval and the record date for determining stockholders of record entitled to vote on the amendment occurs prior to conversion of your notes, you will not be entitled to vote on the amendment, although the common stock you receive upon conversion of your notes and exercise of your warrants will nevertheless be subject to any changes in the powers, preferences or special rights of our common stock or other classes of capital stock. There is no public market for the notes or warrants, which could limit their market price or your ability to sell them. There is no established trading market for the notes or the warrants. The notes are designated for trading by qualified institutional buyers in the PORTAL market. The notes sold using this prospectus, however, will no longer be eligible for trading in the PORTAL market. We do not intend to apply for listing of the notes or warrants on any securities exchange or to arrange for quotation on any automated dealer quotation system. As a result, an active trading market for the notes or warrants may not develop. If an active trading market does not develop or is not maintained, the market price and liquidity of the notes and warrants may be adversely affected. In that case, you may not be able to sell your notes or warrants at a particular time or at a favorable price. Future trading prices of the notes and warrants will depend on many factors, including: our operating performance and financial condition; our ability to continue the effectiveness of the registration statement, of which this prospectus is a part, covering the notes, the warrants and the common stock issuable upon conversion of the notes or exercise of the warrants; the interest of securities dealers in making a market; and the market for similar securities. Historically, the market for convertible debt has been subject to disruptions that have caused substantial fluctuations in the prices of the securities. Accordingly, you may be required to bear the financial risk of an investment in the notes for an indefinite period of time. Table of Contents Your warrants may be subject to resale limitations imposed by the securities laws of some states. While many states provide an exemption from state securities registration for sales of warrants or other rights to purchase listed securities, there is a risk that a particular state may not provide an applicable exemption from registration for a sale of warrants or other rights to purchasers in that state. Consequently, there is a risk that future transfers of warrants or other rights may be restricted due to the requirements of the securities law in those states. You must be able to make certain representations and warranties in order to exercise the warrants. The warrants provide that a holder must be able to make certain representations and warranties contained in the warrant, including verification of the holder s status as an accredited investor as that term is defined under Rule 501 of the Securities Act and a qualified institutional buyer as that term is defined in Rule 144A under the Securities Act. If a warrant holder is unable to make those representations, the holder may be unable to exercise the warrants for the Company s common stock. If we automatically convert the notes, you should be aware that there is a substantial risk of fluctuation in the price of our common stock from the date we elect to automatically convert to the conversion date. We may elect to automatically convert the notes on or prior to maturity if, among other things, the average price of our common stock has exceeded 150% of the conversion price for at least 20 trading days during any 30-day period ending within five trading days prior to the notice of automatic conversion. You should be aware that there is a risk of fluctuation in the price of our common stock between the time when we may first elect to automatically convert the notes and the automatic conversion date. These fluctuations may adversely affect the value of the shares of common stock into which the notes may be converted and the additional shares, if applicable, issued in satisfaction of the interest make-whole payment. The notes were issued with original issue discount. The notes initially were issued together with the warrants as investment units, and, accordingly, the purchase price of the investment units was required to be allocated between the notes and the warrants based on their relative fair market values. We have treated $63.35 of each $1,000.00 purchase price per unit as allocable to the warrant. As a result of this allocation, the principal amount of the note exceeds the adjusted issue price of the note by more than a de minimis amount, and the excess is characterized as OID for U.S. federal income tax purposes The adjusted issue price of a note upon its acquisition by a U.S. Holder is the portion of the original issue price of the unit allocable to the note (which we have determined to be $936.65), plus the OID includible in the income of holders prior to a U.S. Holder s acquisition of the note. Subject to certain exceptions, each U.S. Holder is required to include OID as ordinary interest income on a constant yield to maturity basis, regardless of the holder s regular method of tax accounting, even though we will not pay any additional interest in cash. For additional information, see Material U.S. Federal Income Tax Considerations beginning on page 43. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that involve risks and uncertainties. The statements that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, including, without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this prospectus are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results to differ materially from those implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as may, will, should, expects, plans, anticipates, believes, intends, estimates, predicts, potential, or continue or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot offer any assurance of future results, levels of activity, performance or achievements. Important factors that may cause actual results to differ from expectations include those discussed under the Table of Contents heading Risk Factors in the beginning of this document. The terms Sipex, the Company, we, us, its and our as used in this prospectus refer to Sipex Corporation and its subsidiaries and its predecessors as a combined entity, except where the context requires otherwise. USE OF PROCEEDS The selling securityholders will receive all of the proceeds from the sale of the notes, warrants and common stock offered by this prospectus. We will not receive any of the proceeds from the sale of the notes, warrants or common stock by the selling securityholders, although we may receive proceeds from the exercise of warrants by the selling securityholders, if exercised with cash. We cannot guarantee that the selling securityholders will exercise any warrants. RATIO OF EARNINGS TO FIXED CHARGES The following table sets forth our ratio of earnings to fixed charges on a historical basis for the periods indicated. Three Months Ended Year Ended March 31, 2002 2003 2004 2005 2006 2007 Ratio of earnings to fixed charges(1) N/A (2) N/A (2) N/A (2) N/A (2) N/A (2) N/A(2 ) (1) For purposes of calculating the ratio of earnings to fixed charges, earnings is the amount resulting from adding the following items: (a) Loss before income taxes and (b) fixed charges. Fixed charges means the sum of (i) interest expensed including amortization of discounts related to indebtedness and (ii) an estimate of the interest within rental expense. (2) Earnings, as defined, were insufficient to cover fixed charges by $47,542,000, $39,489,000, $22,881,000, $37,915,000 and $41,109,000 for years ended 2002, 2003, 2004, 2005 and 2006, respectively, and earnings were insufficient to cover fixed charges by $6,273,000 for the three months ended March 31, 2007. DIVIDEND POLICY We have never declared or paid any cash dividends on our capital stock and we do not currently intend to pay any cash dividends on our common stock. We currently intend to retain all of our earnings to finance future growth and, therefore, do not anticipate paying any cash dividends on our common stock in the foreseeable future. We expect to retain future earnings, if any, to fund the development and growth of our business. In addition, payment of dividends by us to holders of our common stock is restricted by a loan and security agreement that we have entered into and by a securities purchase agreement that we entered into in connection with the sale of the notes. Any future determination to pay dividends on our common stock will be at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual restrictions. MARKET PRICE INFORMATION From April 2, 1996, the date of our initial public offering, our common stock was available for quotation on the Nasdaq Global Market under the symbol SIPX. On June 23, 2005, we were delisted from the Nasdaq Global Market and our common stock was quoted on the Pink Sheets electronic quotation system until April 10, 2007. Our common stock is currently listed on the Nasdaq Capital Market under the trading symbol SIPX. Table of Contents The following table sets forth, for the period indicated, the high and low closing sale prices per share as reported on the Nasdaq Global Market or on the Pink Sheets for the periods referenced: Quarterly Stock Market Data March 31, Fiscal 2007 2007 Stock price range per share: High $ 10.50 Low $ 8.57 Dec. 30, Sept. 30, July 1, April 1, Fiscal 2006 2006 2006 2006 2006 Stock price range per share: High $ 9.62 $ 7.10 $ 6.90 $ 6.00 Low $ 6.36 $ 5.50 $ 5.36 $ 3.22 Dec. 31, Oct. 1, July 2, April 2, Fiscal 2005 2005 2005 2005 2005 Stock price range per share: High $ 3.90 $ 4.96 $ 4.28 $ 9.00 Low $ 2.58 $ 3.30 $ 2.30 $ 4.02 As of July 2, 2007, our stock price quoted on the Nasdaq Capital Market was $9.14. As of March 31, 2007, there were 63 stockholders of record. We believe that as of March 31, 2007, the number of beneficial holders of common stock was approximately 2,800. PRINCIPAL AND SELLING SECURITYHOLDERS Selling Securityholders On behalf of the selling securityholders named in the table below (including their donees, pledgees, transferees or other successors-in-interest who receive any of the notes, warrants or shares covered by this prospectus), we are registering, pursuant to the registration statement of which this prospectus is a part: an aggregate of $15,000,000 in principal amount of 5.5% Redeemable Convertible Senior Notes due 2026 warrants to purchase up to 419,776 shares of our common stock; and up to 3,540,112 shares issuable upon the exercise of the warrants or conversion of the notes. We are registering the notes, warrants and shares of common stock being offered under this prospectus pursuant to a registration rights agreement with the selling securityholders. See DESCRIPTION OF CAPITAL STOCK Registration Rights. The above-described notes, warrants, and shares were issued to the selling securityholders in a private placement by us that closed on May 18, 2006. None of the selling securityholders has had any material relationship with us within the past three years other than as a result of the ownership of shares of our capital stock. We are registering the notes, warrants and shares of common stock to permit the selling securityholders to offer these notes, warrants and shares of common stock for resale from time to time. The selling securityholders may sell all, some or none of the notes, warrants or shares covered by this prospectus. All information with respect to beneficial ownership has been furnished to us by the selling securityholders. The percentage of outstanding shares of common stock beneficially owned before
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+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001023734_bpz_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001023734_bpz_prospectus_summary.txt
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+Offices and Employees Our corporate headquarters office is in Houston, Texas, where we lease approximately 7,770 square feet of office space under a five-year lease which expires on September 30, 2010 and 2,580 square feet of adjacent office space under a two-year sublease which expires on February 28, 2009. We also maintain administrative offices in Lima, Peru of 3,700 square feet and Quito, Ecuador of 829 square feet, both under month-to-month leases. As of March 31, 2007, we employed 18 full-time employees (of which 3 are executive officers) in our Houston office and 20 full-time employees (of which 1 is an executive officer) in our Lima, Peru office. We had one full-time employee in the Quito, Ecuador office. BPZ believes that its relationship with its employees is satisfactory. None of our employees are represented by a union. Competition There is intense competition in the oil and gas industry with respect to the acquisition of producing properties, undeveloped acreage, and rights to explore for these properties. Many major and independent oil and gas companies actively pursue and bid for the mineral rights of desirable properties, and many companies have been actively engaged in acquiring oil and gas properties in Peru and Ecuador. We believe that our early efforts and knowledge of our targeted areas have given us a competitive advantage in Peru, and to a lesser extent, in Ecuador. Although there are unleased tracts within our target area, we believe that these properties may be less attractive to other companies because it will be difficult for them to obtain a significant amount of contiguous mineral acres. This results in part from our significant holdings in the vicinity of these unleased tracts. However, increased demand for license rights in surrounding areas may impact our ability to expand and grow in the future, particularly because many of our competitors have substantially greater financial and other resources, better name recognition and longer operating histories. As a result, we may not be able to acquire additional oil and gas properties in desirable locations. There is also intense competition in the oil and gas industry for access to drilling and other contract services and experienced technical and operating personnel needed to drill and complete wells. We recently experienced difficulty obtaining a drilling rig for our planned drilling operations, but now have a drilling rig under contract. Competition for drilling and contract services in our target area is increasing and may affect our plan of operation. We are adjusting our operating plans and timelines to adapt to this changing environment. Increasing future demand for drillers and contractors may limit our ability to execute in a timely manner and may negatively impact our ability to grow. SELECTED HISTORICAL FINANCIAL INFORMATION The following selected historical financial data, as it relates to each of the fiscal years 2002 through 2006, has been derived from the audited consolidated financial statements, including the consolidated balance sheets at December 31, 2006 and 2005 and the related consolidated statements of operations and of cash flows for the three years ended December 31, 2006 and the notes thereto appearing elsewhere herein. The following selected historical financial data should be read in connection with Management s Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial statements and related notes included elsewhere in this prospectus. The selected historical financial results presented here are not necessarily indicative of results to be expected in future periods. For the three months ended March 31, For the year ended December 31, 2007 2006 2006 2005 2004 2003 2002 Revenue $ $ $ $ $ $ $ Operating and administrative expenses: General and administrative 2,136,236 1,575,440 8,306,356 4,422,747 1,856,111 537,125 158,115 Stock-based compensation 959,559 542,915 3,225,508 1,382,479 7,059,081 Geological, geophysical and engineering 101,588 466,403 2,048,742 998,131 360,965 Depreciation expense 54,497 37,168 213,815 29,638 157 Total operating expenses 3,251,880 2,621,926 13,794,421 6,832,995 9,276,314 537,125 158,115 Operating loss (3,251,880 ) (2,621,926 ) (13,794,421 ) (6,832,995 ) (9,276,314 ) (537,125 ) (158,115 ) Other income (expense): Income from investment in Ecuador property, net of amortization (183,943 ) 189,655 1,403,298 468,726 147,861 Interest expense (1,178 ) (1,452 ) (15,815 ) (11,149 ) (66,959 ) Amortization of deferred financing costs (67,561 ) (360,439 ) Registration delay expense (1,031,946 ) (3,552,513 ) (515,967 ) Interest income 240,307 222,003 787,455 509,808 Merger costs (5,470,455 ) Miscellaneous income 6,661 5,000 (315,463 ) 42,149 13,129 1,445 Net loss on sale of asset (8,985 ) Total other income (expense) 52,862 (616,740 ) (1,693,038 ) 426,006 (5,736,863 ) 1,445 Loss before income taxes (3,199,018 ) (3,238,666 ) (15,487,459 ) (6,406,989 ) (15,013,177 ) (535,680 ) (158,115 ) Income taxes 6,374 Net loss $ (3,205,392 ) $ (3,238,666 ) $ (15,487,459 ) $ (6,406,989 ) $ (15,013,177 ) $ (535,680 ) $ (158,115 ) Basic and diluted net loss per share $ (0.06 ) $ (0.08 ) $ (0.35 ) $ (0.20 ) $ (0.99 ) $ (0.13 ) $ (0.04 ) Weighted average common shares outstanding 54,309,294 40,845,270 44,751,761 31,899,291 15,169,823 4,103,454 4,103,454 Balance Sheet Data: Working Capital $ 8,653,313 $ 27,565,483 $ 22,057,206 $ 29,036,304 $ 3,611,410 $ (376,312 ) $ (359,812 ) Property, equipment and construction in progress, net 50,129,809 8,738,948 38,726,910 4,365,040 5,505 Total assets 74,435,100 40,704,204 74,036,726 38,090,980 5,161,095 252,336 26,142 Total long-term debt 51,298 68,930 55,815 70,908 755,000 Stockholders equity (deficit) 61,592,532 39,589,746 63,635,905 36,731,577 4,586,155 (891,312 ) (355,632 ) Cash Flow Data: Cash flow provided by/(used in) operating activites (1,032,261 ) (3,089,181 ) (6,681,722 ) (4,461,328 ) (1,473,800 ) (528,806 ) 7,086 Cash flow used in investing activities (11,466,381 ) (4,411,076 ) (34,269,582 ) (5,745,130 ) (1,305,662 ) (240,000 ) Cash flow provided by financing activities 197,943 5,008,022 36,820,407 35,647,397 6,785,497 755,000 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Business Overview BPZ Energy, Inc., (the Company or BPZ ) a Colorado corporation, formerly named Navidec, Inc., was incorporated in 1993 and is based in Houston, Texas with offices in Lima, Peru and Quito, Ecuador. We are an exploratory stage company focused on the exploration and production of oil and natural gas and we intend to utilize part of our future natural gas production for the complementary development of gas-fired power generation. On September 10, 2004, BPZ Energy, Inc., a Texas corporation, (BPZ-Texas ) consummated a reverse merger with Navidec, Inc., a Colorado corporation ( Navidec ), whereby BPZ-Texas became a wholly owned subsidiary of Navidec (the Merger ). See Business and Properties Navidec Merger Transaction and Note 2 to the Company s Consolidated Financial Statements as of December 31, 2006, 2005 and 2004,both included in this filing, for detailed discussion regarding the Merger. that test data is not necessarily indicative of actual results. We have not drilled any other wells or recognized any revenues from operations, and we do not anticipate generating significant revenues from our properties prior to early 2008. Through our wholly owned subsidiary, SMC Ecuador Inc., a Delaware corporation, and its registered branch in Ecuador, we own a 10% non-operated working interest in an oil and gas producing property, Block 2, located in the southwest region of Ecuador (the Santa Elena Property ). The license agreement covering the property extends through May 2016. Navidec Merger Transaction On September 10, 2004, BPZ Energy, Inc., a Texas corporation, consummated a reverse merger with Navidec, whereby BPZ-Texas became a wholly owned subsidiary of Navidec (the Merger ). See Business and Properties Navidec Merger Transaction and Note 2 to the Company s Consolidated Financial Statements as of December 31, 2006, 2005 and 2004, both included in this filing for a detailed discussion regarding the Merger. As a result of the Merger, the shareholders of BPZ-Texas received the majority of the voting interest and control of the Board of Directors and management of the combined entity and on February 4, 2005, Navidec changed its name to BPZ Energy, Inc. Accordingly, for accounting purposes, BPZ-Texas was treated as the acquiring entity. All financial statements herein represent the historical financial statements of the accounting acquirer, BPZ Texas. Although the Company s name has been changed, the pre-merger company may be referred to as Navidec in this filing, as the context may require, to avoid confusion. The Merger Agreement provided for the immediate issuance by Navidec of 9,000,000 shares of its common stock to the shareholders of BPZ-Texas and the future issuance of an additional 18,000,000 shares on an earn-out basis if the Company achieves certain reserve and production goals. The first 9,000,000 earn-out shares were contingent on achieving certain reserve targets, which were achieved in December 2004. The remaining 9,000,000 earn-out shares are issuable once the Company is entitled to receive as its proportionate share from gross production from any oil and gas wells owned or operated by the Company not less than 2,000 barrels of oil per day or its equivalent (approximately 12 million cubic feet of gas per day) prior to December 28, 2007. Properties in Peru We currently have exclusive rights to four properties in northwest Peru. We have a 100% working interest in license contracts for Block Z-1 and Block XIX. The license contracts afford an initial exploration period of seven to thirteen years and, if exploration efforts are successful, provide a total contract term of up to 40 years for gas exploration and production and up to 30 years for oil exploration and production. We also are currently in negotiations to obtain license contracts for Blocks XXII and XXIII. These four blocks cover a combined area of approximately 2.4 million acres. The following table is a summary of our properties in northwest Peru. All acreage is considered undeveloped. BPZ s PROPERTY BASIN ACRES Ownership Block Z-1(a) Tumbes/Talara 739,205 100 % Block XIX(a) Tumbes/Talara 472,860 100 % Block XXII(b) Lancones/Talara 948,000 100 % Block XXIII(b) Tumbes/Talara 248,000 100 % Total 2,408,065 We maintain a registered branch office in Peru. Currently, we have exclusive rights and license agreements for oil and gas exploration and production covering a total of approximately 2.4 million acres in northwest Peru. Our license contracts cover 100% ownership of both Block Z-1 (739,205 acres) and Block XIX (472,860 acres). The Block Z-1 contract was signed in November 2001, and the Block XIX contract was signed in December 2003. Our license contracts provide for an initial exploration period of seven to thirteen years and seven to ten years, respectively, and require that we conduct specified activities on the properties during this period. If the exploration activities are successful, the total contract term can extend up to 30 years for oil exploration and production and up to 40 years for gas exploration and production. We have presented all necessary documentation requested by Perupetro in order to become the qualified operator under a license contract for Block XXII (948,000 acres, referred to as Area VI in previous filings) which we previously held under a Technical Evaluation Agreement. Subsequently, in March 2006, we were notified by Perupetro that we qualified as an operator for Block XXII. In July 2006 Perupetro officially informed us that our proposal for the 248,000 acre Block XXIII, located onshore in northwest Peru between our Blocks Z-1 and XIX, was the winning bid in their recent license tender process. We have presented all necessary documentation to become the qualified operator of this new block under an exploration and production license contract. Through our wholly owned subsidiary, SMC Ecuador Inc., a Delaware corporation, and its registered branch in Ecuador, we own a 10% non-operated working interest in an oil and gas producing property, Block 2, located in the southwest region of Ecuador (the Santa Elena Property ). The license agreement covering the property extends through May 2016. We are in the exploratory stage of our oil and natural gas business and to date our activities in Peru have been primarily limited to analysis and evaluation of technical data on the properties and preparation of the development plans for the properties, including detailed engineering and design of the power plant and gas processing facilities, refurbishment of one of our offshore platforms, procuring machinery and equipment for an extended drilling campaign, obtaining all necessary environmental and operating permits and securing the required capital and financing to complete the current plan of operation. We commenced drilling of our initial well, the CX11-21XD, in the Corvina Gas Field at the CX-11 platform in September 2006, and a total depth of 10,457 feet (9,234 feet true vertical depth) was reached in November 2006. In March 2007, after a total of six Drill Stem Tests were conducted on separate potential pay zones from the Lower and Upper Zorritos formations, the well tested positive for both gas and oil in quantities that we believe to be commercially producible. We are currently in the process of working-over the shut-in CX11-16X well, and will then begin drilling our second new well in the Corvina field, to test for additional gas reserves and further appraise the oil discovery. However, we caution readers that test data is not necessarily indicative of actual results. We have not drilled any other wells or recognized any revenues from operations, and we do not anticipate generating significant revenues from our properties prior to early 2008. Plan of Operation Corvina Oil Development and Gas-to-Power Our plan of operation is initially focused on the development and exploitation of the oil and natural gas resource opportunities in the offshore Block Z-1 in northwest Peru, in which we own a 100% working interest. In order to achieve our objectives, we must obtain significant financing from external sources. To date we have raised approximately $115 million through several private placements of our common stock. On December 20, 2006, the International Finance Corporation s ( IFC ) Board of Executive Directors approved a $100 million debt financing package related to this project. In addition, on May 8, 2007, the Company closed on an initial private placement of common stock, with an overallotment that closed on June 15, 2007, resulting in gross proceeds of $37.7 million to the Company. The proceeds from this offering will be used primarily in an effort to accelerate the Corvina oil development and otherwise will be used consistent with the Company s operating plan as described in the Company s public filings. The private placement shares will be issued under Regulation D of the Securities Act of 1933, as amended. The shares issued will be restricted shares and will not be eligible for trading until registered with the SEC. The Company committed to file a registration statement covering the shares no later than 30 days after the closing, and will use its reasonable best efforts to obtain its effectiveness no later than 60 days after filing the registration statement, or in the event of SEC review, 90 days after filing. The Company is subject to a maximum aggregate penalty of 18% of the purchase price or $6.3 million if the registration statement related to the offering is not filed or declared effective within the timelines outlined above. At the option of each investor, penalties are payable in cash or common stock of the Company. Management believes that the possibility of the Company being subject to such penalty in future periods is remote, as determined under SFAS 5, Accounting for Contingencies . See Liquidity, Capital Resources and Capital Expenditures below for further discussion. Our Corvina Oil Development project has an estimated initial capital budget of $17 million. In order to accelerate our oil production program in the Corvina field we will need to secure production equipment, as well as storage and transportation barges, to enable us to produce and then transport the oil to a nearby refinery. We are in the initial stages of this project. We are planning to complete this project for first sales of oil in late 2007, though this schedule is subject to many factors outside our control, including obtaining all necessary equipment and no assurance can be given that we can meet this schedule. Our Corvina Gas-to-Power project, with an estimated capital budget of $132.3 million, entails the refurbishment of the Corvina CX-11 platform, rehabilitation of an existing well and the drilling of two new wells, installation of a 10-mile gas pipeline from the platform to shore, construction of gas processing facilities and a 160 megawatt ( MW ) simple-cycle electric generating plant, and the construction of a 40-mile gas pipeline to supply gas to third party generators in Arenillas, Ecuador Our first priority in the Corvina Gas-to-Power project is drilling the initial gas wells in the Corvina Gas Field to develop reserves and establish deliverability at expected levels. In December 2005, we signed a drilling contract with Petrex S.A., a subsidiary of Saipem SpA of Italy. Under this contract, Petrex S.A. provided us with a platform rig capable of drilling to 16,000 feet and upgraded the rig to meet our specifications. We paid $5.5 million to upgrade and mobilize the rig. In exchange, we received a competitive fixed day rate and exclusive rights to use the rig, at our option, during the two-year period commencing with delivery of the rig in September 2006. In addition, after the guaranteed two-year period, we have the option to extend the contract for an additional year at market rates. In April 2006, we acquired and equipped a deck barge that was used to transport the drilling rig to the Corvina CX-11 platform and then act as a tender for offshore drilling operations at Corvina, and eventually at our other properties. The deck barge, officially named BPZ-01, is equipped with a 200 ton crane for loading and off-loading. BPZ-01 and related equipment, including a smaller 35 ton crane, two winches and related spare parts, were acquired for approximately $6.0 million. BPZ-01 is an important element in the Company s strategy to control drilling costs by allowing the use of existing platforms and avoiding the use of high-priced drill ships or barges. The Corvina Gas Field has two existing platforms, the CX-11, which we recently refurbished and the CX-13, which we plan to refurbish in the future. The CX-11platform was evaluated as fit for operations by the independent risk management consulting firm of ABSG Consulting, Inc. We have completed drilling our first well and we plan to drill an additional new well from the Corvina CX-11 platform which also has a shut-in gas well which we intend to recomplete and utilize for gas production. We have secured all tubular goods required to meet our expected needs for the second well and the recompletion well. We have obtained the required environmental and drilling permits in order to commence drilling operations. We commenced drilling of our initial well, the CX11-21XD, in the Corvina Gas Field at the CX-11 platform in September 2006 and a total depth of 10,457 feet (9,234 feet true vertical depth) was reached in November 2006. In March 2007, after a total of six Drill Stem Tests (DST) were conducted on separate potential pay zones from the Lower and Upper Zorritos formations, the well tested positive for both gas and oil in quantities that we believe to be commercially producible. However, we caution the reader that test results are not necessarily indicative of actual production. The gas is essentially pure methane with no impurities, making it ideal for the Company s proposed 160 MW power plant project, discussed further below, which will require 40 MMcfpd of feedstock. The drilling of this first well at Corvina fulfills our contractual exploration commitment under the current second exploration period of the Block Z-1 License Contract. We are currently working-over the shut-in CX11-16X well, and will then begin drilling our second new well in the Corvina field, to test for additional gas reserves and further appraise the oil discovery. Our initial plan of operation envisions the installation of a Company-owned 160 MW simple-cycle, gas-fired, electric generation plant at Nueva Esperanza, near the town of Caleta Cruz, in northwest Peru. In August 2005, we awarded the turnkey contract for the engineering, procurement and construction of the power plant project to BTEC Turbines LP of Houston ( BTEC ). The contract was awarded following a comprehensive six-month bidding process that included field visits by all of the bidders. The engineering portion of the contract is ongoing and nearing completion. Final terms of the procurement and construction portions of contract are currently being negotiated. BTEC is expected to supply two General Electric Frame 7EA simple-cycle gas-fired turbines. BTEC will also act as the main contractor for the design, transportation, construction, startup and commissioning of the power plant. Our plan is to own 100% of the power plant. Accordingly, our revenues from the natural gas delivered to the power plant will be derived from the sale of electricity. To transport the natural gas from the Corvina Gas Field to our planned power plant we intend to construct a 10-mile offshore pipeline. The power plant site is located adjacent to an existing substation and power transmission lines which, with certain upgrades, are expected to be capable of handling up to 360 MW of power. In order to support our proposed electric generation project, we commissioned an independent power market analysis for the region. The Peruvian electricity market is deregulated and power is transported through an interconnected national grid managed by the Committee for Economic Dispatching of Electricity. Based on this study, we believe we will be able to sell economic quantities of electricity from the initial 160 MW power plant. The market study also indicates that there may be future opportunities for us to generate and sell significantly greater volumes of power into the Peruvian and Ecuadorian power markets. In addition to the local power market targeted in our initial project in Peru, we intend to simultaneously develop a gas sales strategy for nearby Ecuador to capitalize on what we believe to be significant upside gas potential of the Corvina and Piedra Redonda Gas Fields located in Block Z-1, as well as the potentially significant natural gas resources in the adjacent onshore Block XIX. These properties are within 30 miles of the Ecuadorian border and we plan to develop them for export sales of either raw gas or power generation via connection to the transmission system of Ecuador. Our plan for eventual Ecuadorian gas sales includes the construction of a 40-mile pipeline from Caleta Cruz, the terminal point of our offshore pipeline from the Corvina Gas Field, to Arenillas, Ecuador. We intend to sell gas for the generation of electricity by third party power producers in the local market in Ecuador. We are planning to complete this pipeline for first sales of gas to Ecuador in late 2008, though this schedule is subject to many factors outside our control, including all necessary financing and no assurance can be given that we can meet this schedule. In addition to the initial Corvina Gas-to-Power and Corvina Oil development projects described above, we have exploration and development rights to other fields within Block Z-1 and Blocks XIX, XXII and XXIII. We plan to seek additional financing for these projects from industry or capital market sources, and we are not currently planning to make significant capital expenditures for seismic acquisition, excluding Block XIX as described below, or other exploration and development activities beyond our initial Corvina Gas-to-Power project as described above, until we have secured such additional financing. Below is a brief summary of some of our possible future exploration and development projects. Block Z-1 Future plans for Block Z-1 include: further development of the Corvina and Piedra Redonda Gas Fields for future industrial markets, such as petrochemicals, and for additional gas sales into Guayaquil, Ecuador, known as the industrial center of Ecuador; the development of the Albacora Oil Field for which we have completed the baseline field work towards the securing of the environmental permits required for repair of an existing platform, the workover of three shut-in wells, and the related drilling program. We have completed our internal evaluation of the Albacora oilfield s estimated reserves based on the definitions and standards adopted in 1997 by the Society of Petroleum Engineers & World Petroleum Congresses (SPE/WPC), and we are seeking an independent certification of such reserves, though no assurance can be given that any such reserves can be proven, or will be certified as proven, or that we can demonstrate our technical or financial ability to recover any such reserves. We also have begun planning for eventual exploration and development work in the deeper water sections of Block Z-1 Block XIX In April, 2007, the Company awarded a seismic contract to PGS Geophysical, to shoot 200 kilometers of 2-D seismic testing in Block XIX. The contract amount is for approximately $4 million and is scheduled to commence during the second quarter, 2007. Depending on the results of this work, we may elect to drill an exploratory well. We have secured the environmental permits and other authorizations to perform seismic testing in this block. Blocks XXII and XXIII We have initiated negotiations to obtain a license contract for exploration and development activities for Block XXII, which until December 31, 2005, we held under a Technical Evaluation Agreement. Block XXII is a large onshore block in northwest Peru which encompasses the Lancones Basin. In March 2006, we were notified by Perupetro that we qualified as an operator of Block XXII. In July 2006, Perupetro officially informed us that our proposal for the 248,000 acre Block XXIII, located onshore in northwest Peru between our Blocks Z-1 and XIX, was the winning bid in their tender process. We have presented all necessary documentation to become the qualified operator of this new block under an exploration and production license contract. Results of Operations Year Ended December 31, 2006 Compared to Year Ended December 31, 2005 For the Year Ended December 31, 2006 2005 Increase/ (Decrease) General and administrative $ 8,306,356 $ 4,422,747 $ 3,883,609 Stock-based compensation 3,225,508 1,382,479 1,843,029 Geological, geophysical and engineering 2,048,742 998,131 1,050,611 Depreciation expense 213,815 29,638 184,177 Total operating expenses $ 13,794,421 $ 6,832,995 $ 6,961,426 Our operating and administrative expenses to date have consisted principally of general and administrative costs as well as geological, geophysical and engineering costs. General and administrative costs have increased significantly from $4,422,747 during the year ended December 31, 2005 to $8,306,356 during the year ended December 31, 2006 as a result of our increased activity levels, additional personnel and costs associated with being a public company. We incurred $2,048,742 of geological, geophysical and engineering costs for the year ended December 31, 2006 compared to $998,131 for the same period ended, 2005. This was primarily related to the commencement of our Block Z-1 gas-to-power project. Stock-based compensation expense for the twelve months ended December 31, 2006 was approximately $3,225,508, compared to $1,382,479 during the same period in 2005. Stock based compensation expense is primarily related to our 2005 and 2006 restricted stock and option grants and accrued stock-based compensation under our 2005 Long-Term Incentive Compensation Plan. We received net cash distributions from our Ecuador property of $1,291,547 during the twelve months ended December 31, 2006, compared to net cash distributions of $605,278 during the same period ending 2005. Since our investment consists of an interest in a producing oil and gas property, we are amortizing the investment on a straight-line basis over the remaining term of the license agreement covering the property. Accordingly, we recorded $187,584 of amortization expense during the twelve months ended December 31, 2006, compared to $136,552 during the twelve months ended December 31, 2005. We incurred interest expense of $15,815 during the twelve months ending December 31, 2006, primarily related to other debt related to acquiring furniture and fixtures as compared with interest expense of $11,149 and amortization of deferred financing costs of $67,561 year ended December 31, 2005, principally from notes payable incurred to finance the acquisition of SMC in September 2004. For the year ended December 31, 2006, we recorded a foreign currency transaction gain of $56,000. The primary reason for the transaction difference related to the early recovery of Value Added Tax in Peru ( IGV ), which, by Peruvian law must be transacted and accounted for in the local currency. Due to the relatively low level of activity in 2005 and the relatively steady exchange rate in Peru, transaction differences were immaterial during the twelve months ended December 31, 2005. For the twelve months ended December 31, 2006, we recorded registration delay expense totaling $3,552,513, of which approximately $1,221,734 was paid in cash and $2,330,779 was settled by the issuance of 865,238 shares of common stock. In connection with the private placement of 11,466,000 common shares in July 2005, we were obligated to prepare and file with the SEC a Registration Statement on Form S-1 and to use our best efforts to cause the Registration Statement to be declared effective by the SEC no later than ninety days from closing. The Registration Statement had not been declared effective by the required date and we were liable to the investors for liquidated damages in an amount equal to 1.0% of the purchase price of the shares, approximately $343,000, for each thirty day period until the Registration Statement was declared effective by the SEC. In addition, in connection with the private placement of 4,482,000 common shares in March 2006, the Company was obligated to prepare and file with the SEC a Registration Statement on Form S-1 within ninety days, and to use its best efforts to cause the Registration Statement to be declared effective by the SEC no later than ninety days, from March 8, 2006. The Registration Statement was not filed or declared effective by the required dates and we were liable to the investors for liquidated damages in an amount equal to 1.0% of the purchase price of the shares, approximately $50,100, for each thirty day period until the Registration Statement was declared effective by the SEC. On November 8, 2006, the SEC declared effective the Registration Statement on Form S-1 covering the common shares issued in connection with the July 19, 2005, March 10, 2006, and June 30, 2006, private placements. As a result, the Company is no longer subject to the liquidated damages described above. As a result of the increased cash balance from the various private placements of our common stock during 2005 and 2006, we received interest income of $787,455 during the twelve months ended December 31, 2006, as compared to $509,808 during the same period ended December 31, 2005. We realized a net loss of $15,487,459 or $(0.35) per share for the year ended December 31, 2006, compared to a net loss of $6,406,989, or $(0.20) per share, for the same period in 2005. Year Ended December 31, 2005 Compared to Year Ended December 31, 2004 For the Year Ended December 31, 2005 2004 Increase/ (Decrease) General and administrative $ 4,422,747 $ 1,856,111 $ 2,566,636 Stock-based compensation 1,382,479 7,059,081 (5,676,602 ) Geological, geophysical and engineering 998,131 360,965 637,166 Depreciation expense 29,638 157 29,481 Total operating expenses $ 6,832,995 $ 9,276,314 $ (2,443,319 ) Our operating and administrative expenses to date have consisted principally of general and administrative costs and geological, geophysical and engineering costs. General and administrative costs have increased significantly from $1,856,111 during 2004 to $4,422,747 during 2005 as a result of our increased activity levels, additional personnel and costs associated with being a public company. We incurred $998,131 of geological, geophysical and engineering costs in 2005 primarily related to our Block Z-1 gas-to-power project, compared to $360,965 in 2004. Also, during 2005, we incurred $1,382,479, in stock-based compensation as a result of amortizing the deferred compensation expense related to (i) a grant of 150,000 shares of restricted common stock to our independent directors; (ii) a grant of 970,000 shares of restricted common stock to three of our officers; and (iii) 500,000 stock options issued to the former CEO of Navidec. During 2004, we recorded stock-based compensation expense of $7,059,081 primarily as a result of shares issued for services to employees and consultants of BPZ-Texas prior to the Merger. We received net cash distributions of $605,278 during 2005 from our Ecuador property, compared to net cash distributions of $190,621 during 2004, which included only six months from the acquisition of the property in June 2004. Our net interest in the property also increased from 6% to 10% in June 2005. Since our investment consists of an interest in a producing oil and gas property, we are amortizing the investment on a straight-line basis over the remaining term of the license agreement covering the property. Accordingly, we recorded $136,552 of amortization expense during 2005, compared to $42,760 during the six months we owned the property during 2004. We incurred interest expense of $11,149 and amortization of deferred financing costs of $67,561 in 2005, principally from notes payable incurred to finance the acquisition of SMC in June 2004. In the prior year we incurred interest expense of $66,959 related to the notes payable incurred to finance the acquisition of SMC in June 2004 and other borrowings, as well as amortization of deferred financing costs of $360,439 primarily from notes payable incurred to finance the acquisition of SMC in June 2004. As a result of our increased cash balance from the private placement of common stock, we received interest income of $509,808 during the year ended December 31, 2005. However, as a result of a delay in obtaining an effective Registration Statement we were liable to the investors for liquidated damages in an amount equal to 1.0% of the purchase price of the shares for each thirty day period until the Registration Statement is declared effective by the SEC. Accordingly, the Company recorded $515,967 of registration delay expense during the year ended December 31, 2005. We realized a net loss of $6,406,989, or $(0.20) per share, for the year ended December 31, 2005, compared to a net loss of $15,013,177, or $(0.99) per share for the same period in 2004. Capital Expenditures Our initial project in the offshore Block Z-1 in northwest Peru, totaling approximately $149.3 million including import duties and contingencies, entails the refurbishment of the Corvina CX-11 platform, rehabilitation of an existing well and the drilling of two new wells, installation of a 10-mile gas pipeline from the platform to shore, construction of gas processing facilities and a 160 MW simple-cycle electric generating plant, and the construction of a 40-mile gas pipeline to supply gas to third party generators in Arenillas, Ecuador. We have obtained cost estimates for most of the major equipment components and the related shipping, construction, installation and associated services. However, the costs of these procurement and construction activities can be difficult to accurately predict and are subject to changes and contingencies. Our budget has increased as a result of higher actual drilling costs in Block Z-1, primarily as a result of a mechanical problem caused by an unexpected gas kick and resulting pipe obstruction, as well as higher projected drilling costs and the selection of larger capacity turbines. These cost increases were partially offset by the removal of one well from our initial drilling program. This estimate of capital expenditures does not include value added tax (referred to as IGV in Peru). IGV is generally imposed on goods and services at a rate of 19%. Certain expenditures are exempt from IGV or eligible for immediate refund. IGV paid on capital expenditures is generally recoverable from our future revenue billings within Peru and is not considered part of the capitalized costs of the equipment to which it relates. We may also be able to defer payment of certain of these expenditures or obtain separate financing for the IGV. Project Capital Budget ($ in millions) Power plant and related equipment $ 50.4 Pipelines and processing facilities 55.6 Platform and wells 38.3 Contingencies 5.0 Total estimated capital budget $ 149.3 Liquidity and Capital Resources We currently have no source of revenue or positive cash flow from operations, and our primary source of cash flow has been cash proceeds from private placements of our common stock. As of May 31, 2007, our cash balance was approximately $35.1 million. On May 8, 2007 the Company completed the initial closing of a private placement, with an over-allotment purchase that closed on June 15, 2007, of 7.2 million shares of common stock, no par value, to sixteen institutional and accredited investors pursuant to a Stock Purchase Agreement dated May 4, 2007. The common stock was priced at $5.25 per share for the initial closing and $5.40 for the over-allotment purchase, resulting in gross proceeds to the Company of approximately $37.7 million. The proceeds from this offering will be used primarily in an effort to accelerate the Corvina oil development and otherwise will be used consistent with the Company s operating plan as described in the Company s public filings. The private placement shares will be issued under Regulation D of the Securities Act of 1933, as amended. The shares issued will be restricted shares and will not be eligible for trading until registered with the SEC. The Company committed to file a registration statement covering the shares no later than 30 days after the closing, and will use its reasonable best efforts to obtain its effectiveness no later than 60 days after filing the registration statement, or in the event of SEC review, 90 days after filing. The Company is subject to a maximum aggregate penalty of 18% of the purchase price or $6.3 million if the registration statement related to the offering is not filed or declared effective within the timelines outlined above. At the option of each investor, penalties are payable in cash or common stock of the Company. Management believes that the possibility of the Company being subject to such penalty in future periods is remote, as determined under SFAS 5, Accounting for Contingencies . The Company believes that, based upon the test results from the initial well CX 11-21XD, this additional equity financing will enable the Company to achieve the production goal in the Merger Agreement. The Merger Agreement provides for the issuance of an additional 9,000,000 shares of common stock to the former shareholders of BPZ-Texas once the Company is entitled to receive as its proportionate share from gross production from any oil and gas wells owned or operated by the Company of not less than 2,000 barrels of oil per day or its equivalent (approximately 12 million cubic feet of gas per day) prior to December 28, 2007. On December 20, 2006, the IFC Board of Executive Directors approved a $120 million financial package. IFC is the private sector arm of the World Bank Group based in Washington, D.C. As part of the financing, we completed a private placement of 6,500,000 shares of common stock, no par value, to the IFC pursuant to a Subscription Agreement dated December 18, 2006. The common stock was priced at $3.00 per share resulting in proceeds to us of approximately $19.5 million. The offering was placed directly by us and there were no placement fees. Subsequently, the registration statement on Form S-1 covering the shares was declared effective on April 18, 2007, and the related prospectus was filed accordingly. The remaining $100.5 million portion of IFC financing consists of $30.5 million of debt facilities for IFC s own account and $70 million of debt facilities for the account of third-party financial institutions. Syndication of the third-party debt component by IFC is expected to take place late in the second half of 2007 with disbursements expected shortly thereafter. The remaining debt portion of the financing is subject to identification of the lending syndicate members and subsequent negotiation and approval of the necessary loan documentation. During the three months ended March 31, 2007, we incurred capital expenditures of approximately $11.5 million primarily related to completion and testing of our first well and the commencement of the recompletion program on our second well in the Corvina field. In comparison, during the three months ended March 31, 2006, we incurred capital expenditures of approximately $4.4 million primarily from continued work on the refurbishment of the Corvina platform and power plant and gas processing facilities designs. In early August 2006, we incurred an operational delay of approximately three weeks resulting from a navigation incident which caused the BPZ-01 barge to be grounded on a sand bank in Talara Bay in northwest Peru during the second mobilization trip to the Corvina CX-11 platform. No injuries were sustained by any of our staff, nor to any of the tug boat operator s crew members. The BPZ-01 is a U.S. flagged vessel and as such was inspected after the incident by the U.S. Coast Guard, to its satisfaction. The barge resumed normal operations immediately thereafter. Based upon information currently available, the Company estimates that total expenditures related to this incident will be approximately $1.1 million. As of December 31, 2006, approximately $382,000 has been incurred for barge recovery and temporary repairs to the vessel. In addition, the Company expects to incur approximately $330,000 in permanent repairs to the barge and approximately $432,000 of consequential damages, primarily stand-by charges. As of the April 30, 2007, we have not presented a final claim to our insurance carrier for the barge repairs and we are negotiating a settlement agreement with a third party for recovery of any damages not covered through our insurance. We believe the majority of the costs associated with this incident will be reimbursed through insurance or through a third party. No assurances can be given, however, that any such recoveries will be sufficient to cover all costs associated with this incident or to the timing of any such recoveries. This incident did not have a material impact on our operations or business plan. As of March 31, 2007, in connection with our Peru properties, we have deposited approximately $1.2 million as restricted cash to collateralize two performance bonds which guarantee our various obligations and commitments under one of our license contracts and another agreement. The performance bonds were issued by Peruvian banks and their terms are governed by the corresponding license contract or agreement. We will be required to deposit approximately $1.0 million as restricted cash to collateralize a new performance bond in connection with the beginning of the third exploration period under our Block Z-1 license contract, which begins in June 2007. In addition, although we are still negotiating the terms of our commitments under our license contracts for Blocks XXII and XXIII, we anticipate having to deposit funds as restricted cash to collateralize performance bonds to guarantee our obligations totaling approximately $1 million in late 2007. In April, 2007, the Company awarded a seismic contract to PGS Geophysical, to shoot 200 kilometers of 2-D seismic testing in Block XIX. The contract amount is for approximately $4 million and is scheduled to commence during the second quarter, 2007. With our current cash balance, proceeds from the expected IFC debt facilities and potentially from future equity raises, we believe we will have sufficient capital resources to execute our initial gas-to-power project as we currently envision it. However, the timing and execution of our project is dependent on a variety of factors, including technical design of facilities, permitting, availability of equipment, time and costs required for delivery and construction, performance by contractors and the success of planned financing, many of which factors are outside our control and cannot be assured. Off-Balance Sheet Arrangements As of March 31, 2007, we had no transactions, agreements or other contractual arrangements with unconsolidated entities or financial partnerships, often referred to as special purpose entities, which generally are established for the purpose of facilitating off-balance sheet arrangements. (1) Capital lease for office furniture in our executive office in Houston, Texas. (2) Operating leases for our executive office in Houston, Texas, our branch office in Quito, Ecuador, and our branch office and corporate apartments in Lima, Peru. (3) Primarily consists of purchase obligations for various equipment and services related to the Company s drilling operations as well as powerplant and pipeline projects in Peru. Quantitative and Qualitative Disclosure About Market Risk The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. The term market risk refers to the risk of loss arising from adverse changes in interest rates, oil and natural gas prices and foreign currency exchange rates. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonable possible losses. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures. All of our market risk sensitive instruments were entered into for purposes other than speculative trading. Interest Rate Risk As of March 31, 2007, the Company had long-term debt of $51,298, consisting of two secured loans for the purchase of office furniture. Both loans have a term of 60 months and bear interest at fixed rates of 5.94% and 9.44%, with principal and interest payments due on a monthly basis. Significant changes in market interest rates may significantly affect the level of financing that the IFC will structure with respect to our project in Peru. Commodity Price Risk. With respect to our oil and gas business, any revenues, cash flow, profitability and future rate of growth we achieve will be greatly dependent upon prevailing prices for oil and gas. Our ability to maintain or increase our borrowing capacity and to obtain additional capital on attractive terms is also expected to be dependent on oil and gas prices. Oil and natural gas are commodities, and, therefore, their prices are subject to wide fluctuations in response to relatively minor changes in supply and demand. Historically, oil and gas prices and markets have been volatile and are likely to continue to be volatile in the future. Prices for oil and gas are subject to potentially wide fluctuations in response to relatively minor changes in supply of and demand for oil and gas, market uncertainty, and a variety of additional factors that are beyond our control. Lower oil and natural gas prices may not only decrease our revenues on a per unit basis, but may also reduce the amount of oil and natural gas we can produce economically, if any. A substantial or extended decline in oil and natural gas prices may materially affect our future business, financial condition, results of operations, liquidity and borrowing capacity, and we may require a reduction in the carrying value of our oil and gas properties. While our revenues may increase if prevailing oil and gas prices increase significantly, exploration and production costs and acquisition costs for additional properties and reserves may also increase. With respect to our planned electricity generation business, the price we can obtain for the sale of power may not rise at the same rate, or may not rise at all, to match a rise in the Company s cost to produce and transport gas reserves to our initial 160MW power plant in Caleta Cruz. Prices for both electricity and natural gas have been very volatile in the past year and have increase significantly over the past two years. The profitability of this business depends in large part on the difference between the price of power and the price of fuel used to generate power, or spark spread. Foreign Currency Exchange Rate Risk. The U.S. Dollar is the functional currency for our operations in both Peru and Ecuador. Ecuador has adopted the U.S. Dollar as its official currency. Peru, however, still uses its local currency, Nuevo Soles, in addition to the U.S. Dollar, and therefore, our financial results are subject to favorable or unfavorable fluctuations in the exchange rate and inflation of that country. Transaction differences have been nominal to-date but are expected to increase as our activities in Peru continue to escalate. Critical Accounting Policies and Recent Accounting Pronouncements The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles ( GAAP ). Management uses estimates and assumptions in preparing the consolidated financial statements in accordance with GAAP. Those estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses in the consolidated financial statements, and the disclosure of contingent assets and liabilities. We have identified the following as critical accounting policies directly related to our business and operations, and the understanding of our financial statements. Successful Efforts Method of Accounting We follow the successful efforts method of accounting for our investments in oil and gas properties. Under this method, oil and gas lease acquisition costs and intangible drilling costs associated with exploration efforts that result in the discovery of proved reserves and costs associated with development drilling, whether or not successful, are capitalized when incurred. Certain costs of exploratory wells are capitalized pending determinations that proved reserves have been found. If the determination is dependent upon the results of planned additional wells and required capital expenditures to produce the reserves found, the drilling costs will be capitalized as long as sufficient reserves have been found to justify completion of the exploratory well and additional wells are underway or firmly planned to complete the evaluation of the well. All costs related to unsuccessful exploratory wells are expensed when such wells are determined to be non-productive or at the one year anniversary of completion of the well if proved reserves have not been attributed and capital expenditures as described in the preceding sentence are not required. We assess our capitalized exploratory wells pending evaluation each quarter to determine whether costs should remain capitalized or should be charged to earnings. Other exploration costs, including geological and geophysical costs, are expensed as incurred. We will recognize gains or losses on the sale of properties, should they occur, on a field-by-field basis. The application of the successful efforts method of accounting requires management s judgment to determine the proper designation of wells as either developmental or exploratory, which will ultimately determine the proper accounting treatment of the costs incurred. The results from a drilling operation can take considerable time to analyze, and the determination that commercial reserves have been discovered requires both judgment and application of industry experience. Wells may be completed that are assumed to be productive and actually deliver oil and gas in quantities insufficient to be economic, which may result in the abandonment of the wells at a later date. The evaluations of oil and gas leasehold acquisition costs requires management s judgment to estimate the fair value of exploratory costs related to drilling activity in a given area. The successful efforts method of accounting can have a significant impact on the operational results reported when we enter a new exploratory area in hopes of finding oil and gas reserves. Seismic costs can be substantial, which will result in additional exploration expenses when incurred. The initial exploratory wells may be unsuccessful and the associated costs will then be expensed as dry hole costs, and any associated leasehold costs may be impaired. Impairment of Long-Lived Assets We periodically evaluate the recoverability of the carrying value of our long-lived assets and identifiable intangibles by monitoring and evaluating changes in circumstances that may indicate that the carrying amount of the asset may not be recoverable. Examples of events or changes in circumstances that indicate the recoverability of the carrying amount of an asset should be assessed include, but are not limited to, (a) a significant decrease in the market value of an asset, (b) a significant change in the extent or matter in which an asset is used or a significant physical change in an asset, (c) a significant adverse change in legal factors or in the business climate that could affect the value of an asset or an adverse action or assessment by a regulator, (d) an accumulation of costs significantly in excess of the amount originally expected to acquire or construct an asset, and/or (e) a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with an asset used for the purpose of producing revenue. We consider historical performance and anticipated future results in our evaluation of potential impairment. Accordingly, when indicators of impairment are present, we evaluate the carrying value of these assets in relation to the operating performance of the business and future discounted and non-discounted cash flows expected to result from the use of these assets. Impairment losses are recognized when the expected future cash flows from an asset are less than its carrying value. Future Dismantlement, Restoration, and Abandonment Costs The accounting for future development and abandonment costs changed on January 1, 2003, with the issuance of Statement of Financial Accounting Standards ( SFAS ) No. 143 Accounting for Asset Retirement Obligation ( ARO ), which requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The accrual is based on estimates of these costs for each of our properties based upon the type of production structure, reservoir characteristics, depth of the reservoir, market demand for equipment, currently available procedures and consultations with construction and engineering consultants. Because these costs typically extend many years into the future, estimating these costs is difficult and requires management to make estimates and judgments that are subject to future revisions based on numerous factors, including changing technology, the political and regulatory environment and estimates as to the proper discount rate to use and timing of abandonment. Our plan of operations includes the drilling of wells and the construction of an electric power generation plant. We may be required to plug and abandon those wells and restore the well site and power generation site upon completion of their production. However, due to the fact that we have not yet begun operations, we do not have sufficient information to determine the timing, nor calculate the present value, of the obligation. Therefore, no such provision is reflected in the accompanying consolidated financial statements. Accounting Changes and Error Corrections In June 2005, the Financial Accounting Standards Board issued SFAS No. 154, Accounting Changes and Error Corrections, which replaced Accounting Principles Board Opinion No. 20, Accounting Changes ( APB 20 ), and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 requires retrospective application to prior period financial statements of a voluntary change in accounting principle unless it is impracticable. In contrast, APB 20 previously required that most voluntary changes in accounting principle be recognized by including the cumulative effect of changing to the new accounting principle in net income in the period of change. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Earlier application is permitted for accounting changes and correction of errors made in fiscal years beginning after June 1, 2005. SFAS 154 does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of its effective date. We have elected to adopt the provisions of SFAS 154 on January 1, 2006. We do not expect adoption to have a material effect on our results of operations or financial position. Principles of Consolidation Our consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and branch offices. All intercompany balances and transactions have been eliminated. Our accounting policy regarding partnership or joint venture interests in oil and gas properties is to consolidate such interests on a pro-rata basis in accordance with accepted practice in the oil and gas industry. However, we have not been able to receive timely information to allow us to proportionately consolidate the minority non-operated working interest owned by our consolidated subsidiary, SMC Ecuador Inc. See Note 7 to the Consolidated Financial Statements as of December 31, 2006, 2005, and 2004, for further discussion regarding the investment in our Ecuador property. Accordingly, we account for this investment under the cost method. As such, we record our share of cash received or paid attributable to this investment as other income or expense. Foreign Exchange The U.S. Dollar is the functional currency for our operations in both Peru and Ecuador. Ecuador has adopted the U.S. Dollar as its official currency. Peru, however, still uses its local currency, Nuevo Soles, in addition to the U.S. Dollar and therefore our financial results are subject to favorable or unfavorable fluctuations in the exchange rate and inflation of that country. We have adopted SFAS No. 52, Foreign Currency Translation, which requires that the translation of the applicable foreign currency into U.S. dollars be performed for balance sheet monetary accounts using current exchange rates in effect at the balance sheet date, non-monetary accounts using historical exchange rates in effect at the time the transaction occurs, and for revenue and expense accounts using a weighted average exchange rate during the period reported. Accordingly, the gains or losses resulting from such translation are included in other income and expense in the consolidated statements of operations. FASB Staff Position (FSP) FAS 19-1 amends FASB statement no. 19 to provide revised guidance concerning the criteria for continued capitalization of exploratory costs when wells have found reserves that cannot yet be classified as proved. FAS 19-1 provides circumstances that would permit the continued capitalization of exploratory well costs beyond one year, other than when additional exploration wells are necessary to justify major capital expenditures and those wells are under way or firmly planned for the near future. Generally, the statement allows exploratory well costs to continue to be capitalized when the well has found a sufficient quantity of reserves to justify its completion as a producing well and the enterprise is making sufficient progress assessing the reserves and the economic and operating viability of the project. Accounting for Uncertainty in Income Taxes. In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of SFAS No. 109 ( FIN 48 ). This interpretation provides guidance for recognizing and measuring uncertain tax positions, as defined in SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a threshold condition that a tax position must meet for any of the benefit of the uncertain tax position to be recognized in the financial statements. Guidance is also provided regarding derecognition, classification and disclosure of these uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of this Interpretation is not expected to have a material impact on our consolidated financial position, results of operations, or cash flows. Guidance for Quantifying Financial Statement Misstatement. In September 2006, the Securities and Exchange Commission ( SEC ) issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements ( SAB 108 ), which establishes an approach requiring the quantification of financial statement errors based on the effect of the error on each of the company s financial statements and the related financial statement disclosures. This model is commonly referred to as a dual approach because it requires quantification of errors under both the iron curtain and roll-over methods. The roll-over method focuses primarily on the impact of a misstatement on the income statement, including the reversing effect of prior year misstatements; however, its use can lead to the accumulation of misstatements in the balance sheet. The iron curtain method focuses primarily on the effect of correcting the period end balance sheet with less emphasis on the reversing effects of prior year errors on the income statement. The Company currently uses the iron curtain method for quantifying financial statement misstatements. The Company will initially apply the provisions of SAB 108 in connection with the preparation of the Company s annual financial statements for the year ending December 31, 2006. The use of the dual approach is not expected to have a material impact on our consolidated financial position, results of operations, or cash flows. FASB Staff Position (FSP) No. EITF 00-19-2, Accounting for Registration Payment Arrangements and Financial Instruments Subject to Such Arrangements In December 2006, the FASB issued FASB Staff Position FSP EITF 00-19-2, Accounting for Registration Payment Arrangements. This FASB Staff Position, or FSP, specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies. This FSP also requires certain disclosures regarding registration payment arrangements and liabilities recorded for such purposes. This FSP is immediately effective for registration payment arrangements entered into or modified after December 21, 2006. The guidance of this FSP is effective for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years for registration payment arrangements entered into prior to December 21, 2006. This FSP requires adoption by reporting a change in accounting principle through a cumulative-effect adjustment to the opening balance of our partners capital accounts as of the first interim period of the year in which this FSP is initially applied. We do not expect our adoption of this FSP to materially affect our financial position, results of operations or cash flows. Fair Value Measurements. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements , which addresses how companies should measure fair value when companies are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles ( GAAP ). As a result of SFAS No. 157, there is now a common definition of fair value to be used throughout GAAP. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. Although the disclosure requirements may be expanded where certain assets or liabilities are fair valued such as those related to stock compensation expense and hedging activities, we do not expect the adoption of SFAS No. 157 to have a material impact on the Company s consolidated financial position, results of operations, or cash flows. LEGAL PROCEEDINGS SEC Inquiry of Navidec Navidec was advised in February 2004 that the SEC was conducting an informal inquiry to determine whether Navidec had violated federal securities laws. Based on the information made available to the Company, it believes the SEC s investigation is related, at least in part, to the restatement of Navidec s reported earnings for the first and second quarters of 2003. This restatement was reported in Navidec s Form 10-Q for the third quarter of 2003 filed on December 11, 2003. In December 2004, the Company received notice that the SEC had issued an Order Directing a Private Investigation and Designating Officers to Take Testimony and would be conducting a formal investigation. Pursuant to the Merger Agreement, the Company has been indemnified by NFS for the costs of the SEC investigation, and NFS has borne the costs incurred to date. The Company is not aware of any activity concerning this matter during the last year or of any actions the SEC may intend to take with respect to this matter. No assurance can be given, however, that the investigation has been and will be resolved without negative consequences to the Company. Transfer of Ownership in NFS On July 8, 2004, Navidec and BPZ-Texas entered into a Merger Agreement which was consummated on September 10, 2004. The Merger Agreement provided that all of the pre-merger business operations, assets and liabilities of Navidec would be transferred to a wholly-owned subsidiary, Navidec Financial Services, Inc. ( NFS ), followed by the transfer of NFS to the pre-merger shareholders of record as of September 9, 2004, the day prior to the consummation of the Merger. See Business and Properties Navidec Merger Transaction,
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+PROSPECTUS SUMMARY This summary highlights selected information contained or incorporated by reference in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the risk factors, the financial statements and the documents incorporated herein by reference before making an investment decision. Overview We are a biopharmaceutical company focused on discovering, developing and commercializing novel pharmaceutical products through the use of proprietary technologies to better diagnose, treat and manage patients. We have four internally discovered therapeutic product candidates in clinical trials. These drug candidates are targeting conditions such as depression, Alzheimer s disease, cardiovascular disease, cognitive impairment and obesity. Our blood-pool imaging agent, Vasovist is approved for marketing in more than 30 countries outside of the United States. We also have collaborations with SmithKline Beecham Corporation, or GlaxoSmithKline, Amgen Inc., Cystic Fibrosis Foundation Therapeutics Incorporated, and Bayer Schering Pharma AG, Germany (formerly known as Schering AG). The focus of our therapeutic drug discovery and development efforts is on the two classes of drug targets known as G-protein Coupled Receptors, or GPCRs, and ion channels. GPCRs and ion channels are classes of proteins embedded in the surface membrane of all cells and are responsible for mediating much of the biological signaling at the cellular level. We believe that our proprietary drug discovery technology and approach addresses many of the inefficiencies associated with traditional GPCR and ion channel-targeted drug discovery. By integrating computer-based, or in silico, technology with in-house medicinal chemistry, we believe that we can rapidly identify and optimize highly selective drug candidates. We focus on GPCR and ion channel drug targets whose role in disease has already been demonstrated in clinical trials or in preclinical studies. In each of our four clinical-stage therapeutic programs, we used our drug discovery technology and approach to optimize a lead compound into a clinical drug candidate in less than ten months, synthesizing fewer than 80 compounds per program. We moved each of these drug candidates into clinical trials in less than 18 months from lead identification. We believe our drug discovery technology and approach enables us to efficiently and cost-effectively discover and develop GPCR and ion channel-targeted drugs. Our Product Candidates Through the application of our GPCR and ion channel drug discovery expertise, over the past five years we have created a pipeline of drug candidates designed to address diseases with significant unmet medical needs and commercial potential across a range of therapeutic areas. The following chart summarizes the status of our therapeutic clinical drug development programs: Table of Contents The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and it is not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED DECEMBER 17, 2007 PROSPECTUS 5,245,468 Shares Common Stock This prospectus relates to shares of common stock that may be sold by the selling stockholders identified in this prospectus. Specifically, this prospectus relates to the resale of 5,245,468 shares of our common stock. The selling stockholders acquired the shares offered by this prospectus in a private placement of our securities. We are registering the offer and sale of the shares to satisfy registration rights we have granted. We will not receive any of the proceeds from the sale of shares by the selling stockholders. The selling stockholders may dispose of their shares of common stock or interests therein in a number of different ways and at varying prices. Please see Plan of Distribution. Our common stock is listed on the NASDAQ Global Market under the symbol EPIX. On December 14, 2007, the last reported sale price of our common stock on the NASDAQ Global Market was $2.94 per share. Investing in our common stock involves a high degree of risk. Before buying any shares, you should carefully read the discussion of material risks of investing in our common stock in
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001032067_meade_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001032067_meade_prospectus_summary.txt
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+PROSPECTUS SUMMARY 1 RISK FACTORS 3 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 8 USE OF PROCEEDS 9 PRICE RANGE OF OUR COMMON STOCK 9 DIVIDEND POLICY 9 CAPITALIZATION 10 SELECTED CONSOLIDATED FINANCIAL DATA 11 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 BUSINESS 26 MANAGEMENT 36 EXECUTIVE COMPENSATION 44 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 60 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 61 SELLING STOCKHOLDERS 63 DESCRIPTION OF CAPITAL STOCK 64 PLAN OF DISTRIBUTION 67 LEGAL MATTERS 69 EXPERTS 69 WHERE YOU CAN FIND MORE INFORMATION 69 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1 PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus or incorporated by reference herein. Investors should also carefully consider the information set forth under Risk Factors beginning on page 3. As used in this prospectus, Company, Meade, we, us and our refer to Meade Instruments Corp. The Company Meade Instruments Corp. is a multinational consumer optics company that designs, manufactures, imports and distributes telescopes, telescope accessories, binoculars, riflescopes, spotting scopes, microscopes, and other consumer optical products. We are dedicated to bringing innovative, cutting-edge, consumer-friendly products to the consumer optics marketplace. Our brands, which include Meade , Bresser , Simmons , Weaver , Redfield , and Coronado , are recognized throughout the world and are associated with innovation in the amateur astronomy, consumer optical and sporting goods markets. Products such as the recently announced mySKY , an easy to-use multi-media night sky exploration guide, the RCX400 high-end telescopes featuring an Advanced Ritchey-Chr tien ( ARC ) optical design, the LX200 R series of telescopes that combine the state-of-the-art LX200 with the precision of the ARC optics, the LX90GPS that brings GPS capabilities to a moderately priced Schmidt-Cassegrain telescope, the Deep Sky Imager series of high-performance charge-coupled device cameras that have advanced astro-imaging to near point-and-shoot simplicity, and NightView , a compact night vision monocular built on an innovative and proprietary digital imaging technology, help sustain our brand as a brand known for innovation in amateur astronomy and other consumer optical products. In 1999, Meade acquired Bresser Optik GmbH & Co. KG and Bresser Optik Geschaftsfuhrung und Verwaltungs GmbH (collectively Bresser ). The Bresser brand, active in the European market for nearly 30 years, is known for its wide range of modestly-priced products including binoculars and smaller-aperture telescopes. In addition, Bresser has provided us greater foreign distribution opportunities for our products. Moreover, Bresser s significant presence in the binocular and low-priced telescope market in Europe has strengthened our penetration into these markets. In October 2002, we acquired Simmons Outdoor Corp. ( Simmons Outdoor ) to expand our brand name offerings and extend our reach into the worldwide sporting goods marketplace. With the purchase of Simmons Outdoor, we acquired the Simmons, Weaver and Redfield brand names. The Simmons, Weaver and Redfield brand names have long histories in the sporting goods channel (the Redfield brand name will be 100 years old in 2008). In December 2004, in our continuing efforts to expand our product offerings, we purchased substantially all of the assets and assumed substantially all of the liabilities of Coronado Technology Group, LLC, a supplier of high-end hydrogen-alpha and other solar filters and high-end dedicated solar telescopes, as well as various related accessories and more modestly priced dedicated solar observation equipment. Meade offers numerous different telescope, riflescope and binocular models as well as hundreds of accessory products for amateur astronomy and sporting goods consumers. Our telescopes range in aperture from under 2 inches to 20 inches and in retail price from less than $50 to almost $50,000. Meade offers several families of binoculars and riflescopes under our various brand names at retail price points from about $10 to approximately $500. Whether a consumer is a serious amateur astronomer, an avid naturalist, a hunter or someone just looking for a good binocular, Meade offers a complete range of quality products to satisfy the consumer optics buyer. Founded in 1972, Meade has a reputation for providing the amateur astronomer with technically sophisticated products at competitive prices. Combining our manufacturing expertise with our dedication to innovation, quality and value, we have developed and produced some of the industry s most technologically advanced consumer telescopes at affordable prices. Capitalizing on our brand name recognition among serious amateur astronomers and our ability to bring advanced technology to lower price points, we have marketed our less-expensive telescopes to beginning and intermediate amateur astronomers. We are a supplier of consumer optics to such retailers as Lidl (in Europe), Wal-Mart, Costco, Dick s Sporting Goods, Sam s Club and Cabela s Inc. During our fiscal year ended February 28, 2007, we began a restructuring of our operations. We replaced a significant number of our executives, including our chief executive officer, senior officer over operations and our chief financial officer, and we embarked on a number of initiatives to resolve supply chain constraints, to reduce our cost structure, to reduce the number of SKUs and required level of inventory, and to increase investment for new product innovations and introductions. Our financial performance in our fiscal years ended February 28, 2007 and the six months ended August 31, 2007 was negatively impacted as a result of the restructuring. While we believe that we have made significant progress in restructuring the Company, we also believe that the restructuring is not complete and that the turnaround of the Company will be a continuing effort. This may result in additional costs associated with the turnaround, which may require additional investments in working capital. There can be no assurance that additional sources of capital will be available on reasonable terms, if at all, or that if necessary, such additional sources of capital will be non-dilutive to stockholders. In October 2007, we announced that the Board of Directors has formed a special committee and engaged an investment bank to assist the Company in exploring strategic alternatives. Such alternatives may involve a financial restructuring of the Company s capital structure or potentially the sale of all or a portion of the Company. At this time there can be no assurance that the Company will be able to execute on any strategic alternatives. We have consistently emphasized a business plan that is concentrated on new product development and effective targeted marketing. As an indication of our commitment to product development, we spent $1.8 million, $1.5 million and $2.0 million on research and development during fiscal 2007, 2006 and 2005, respectively, and have, over the last five fiscal years, expended $10.8 million in the aggregate on research and development. We also spent $1.0 million and $706,000 on research and development in the six months ended August 31, 2007, and 2006, respectively. These research and development Amendment No. 1 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (1) The number of shares of our common stock outstanding is based on the number of shares of our common stock outstanding as of August 31, 2007. This number does not include, as of August 31, 2007: 3,476,924 shares of our common stock issuable upon exercise of options outstanding at a weighted average exercise price of $3.42 per share; and 1,268,012 shares of our common stock reserved for issuance under our 1997 Stock Incentive Plan.
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+PROSPECTUS SUMMARY The items in the following summary are described in more detail later in this prospectus. This summary does not contain all of the information you should consider. Before investing in our common stock, you should read the entire prospectus carefully, including the Risk Factors beginning on page 11 and the financial statements and related notes included elsewhere in this prospectus. Unless the context indicates otherwise, as used in this prospectus, the terms Precision Therapeutics, we, us and our refer to Precision Therapeutics, Inc. Overview Precision Therapeutics is a life sciences company developing and commercializing tests intended to assist physicians in individualizing cancer therapy in an effort to improve treatment outcomes. We have developed and currently market our proprietary ChemoFx test. ChemoFx is a chemoresponse test, a type of test that uses a patient s live tumor cells to assess his or her likelihood of responding to various cancer drugs, or drug combinations, that the patient s physician is considering for treatment. ChemoFx measures both the responsiveness, or sensitivity, of tumor cells to particular drugs, as well as their resistance. Currently, our sales and marketing efforts target the gynecologic cancer market, which includes various types of ovarian, uterine, cervical, vaginal and vulvar cancers, although we also receive and test tumor samples from patients with non-gynecologic cancers. We believe that among gynecologic oncologists, there is established usage of earlier-generation chemoresponse tests, and we have focused our sales and marketing team on this market segment. In our clinical study published in 2006, ovarian cancer patients treated only with a drug or drug combination to which their tumor cells were classified as responsive by ChemoFx experienced a median tumor progression-free interval approximately three times the median progression-free interval for patients treated only with drugs classified as non-responsive. We also receive orders for a variety of other tumor types and we intend to leverage our clinical and sales and marketing experience in gynecologic cancers to market ChemoFx for additional indications such as breast, lung and colorectal cancers. We estimate that each year there are an aggregate of over 900,000 rounds of chemotherapy prescribed for ovarian, breast, lung and colorectal cancers in the United States for which current clinical guidelines do not specify a preferred therapeutic standard. Of these, we estimate that approximately 75,000 rounds of chemotherapy are prescribed for late-stage primary or recurrent ovarian cancer, which is within our initial target market. Our market opportunity encompasses solid tumor cancers for which the choice among chemotherapy treatments is ambiguous, either because multiple accepted alternatives exist or because no standard of care has yet been defined. In some types or stages of cancers, a single choice or a small number of treatment choices are recommended by clinical guideline standard organizations, and we do not expect to market ChemoFx for these types or stages of cancers. However, in many types and stages of cancer, especially in recurrent cases, there may be no universally accepted chemotherapeutic standard of care. The Food and Drug Administration, or FDA, has approved 56 direct-acting cancer drugs for commercial use with solid tumors, and approximately 400 additional drugs are currently in clinical development. A drug or drug combination that is clinically effective for one patient may be ineffective for another patient with a tumor of the same type. In order to minimize the side effects and costs of ineffective chemotherapy, there is increasing need for a test to assist physicians in selecting for each patient the chemotherapy that has the best chance of success. Our user-friendly ChemoFx report classifies the patient s tumor as responsive, intermediate or non-responsive to each drug or drug combination requested by a physician. With this information, we believe physicians can more effectively individualize treatment decisions for their patients. As the intrinsic cell response to a chemotherapeutic agent is the main determinant of tumor response, we have designed ChemoFx to analyze this tumor cell behavior. One advantage to this approach is our ability to generalize the test to existing as well as newly-developed agents that directly affect the tumor. We test samples of a patient s live tumor cells obtained from a biopsy or surgical procedure. ChemoFx requires a minimum sample size of 35 milligrams for solid tumors. The ordering physician can provide a list of up to UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents 12 drugs or drug combinations to be tested against the sample, regardless of its size above our minimum requirement. While ChemoFx has the technological capability to test more than 12 drugs or drug combinations, our average order size is between six and eight drugs or drug combinations and our experience has been that the vast majority of physician orders are for less than 12 drugs and drug combinations. As a result we have limited the number in our standard order form which we believe addresses physician demand while also taking into account the time required to grow a sufficient number of malignant cells for testing. The ChemoFx process is composed of four key steps: enriching and expanding the malignant tumor cells, challenging the cells with a broad concentration range of the selected chemotherapies, directly measuring the surviving cells and interpreting of the results. We then classify the tumor s responsiveness to each drug or drug combination tested and provide a report to the ordering physician. Depending on the patient s tumor, it generally takes between 14 and 35 days from the time that we receive a specimen to provide a final report to the ordering physician. We perform all ChemoFx testing at our laboratory, which is located in Pittsburgh, Pennsylvania and certified under the Clinical Laboratory Improvement Amendments of 1988. We seek to build a body of evidence demonstrating the clinical utility of ChemoFx across multiple tumor types by sponsoring and conducting clinical studies. These studies are intended to support widespread adoption of ChemoFx by physicians and favorable coverage and reimbursement policies by third-party payors. We have completed three clinical outcome studies supporting the use of ChemoFx in ovarian cancer, and we are currently participating in prospective clinical trials for ovarian and breast cancers, as well as the establishment of an observational patient registry. We offer ChemoFx at a list price of $450 per drug or drug combination tested, and since the beginning of 2006 our average invoiced price per test billed has been approximately $3,300. For patients with Medicare coverage, Medicare pays a fixed setup fee regardless of the cancer type tested, and then, for gynecologic cancers, generally pays a fixed amount for each drug or drug combination tested in accordance with a fee schedule. Claims to Medicare in non-gynecologic cancers that are not paid upon initial submission are appealed. Patients are not billed on any denied Medicare claims. There are no established drug-based limitations on our seeking reimbursement from Medicare. For claims to be submitted to other third-party payors, such as health plans, including Medicare health maintenance organizations and preferred provider organizations, we generally receive an assignment of benefits from the patient. This allows us to file claims to the patient s health plan and to pursue an appeal in the event the health plan fails to provide coverage or adequate reimbursement for ChemoFx. Patients with private insurance are also responsible for applicable co-payments, deductibles and co-insurance as required by their policies. Because we pursue multiple levels of appeal with a health plan, and because those appeals may take over a year, claims may be in active appeal for multiple reporting periods after the period in which they were originally submitted. For example, as of September 30, 2007, we have been reimbursed for 71% of our gross commercial billings for the year ended December 31, 2005 for which the appeals and patient collection processes have ended. However, for that same time period, 57% of our gross billings to commercial payors are still in active appeal or collections. In the event that we exhaust all appeals with a health plan without obtaining an acceptable level of reimbursement, where allowed, we invoice the patient for the unpaid amount, although some patients may be eligible for a full or partial discount under our compassionate care program. Our average net revenue per test billed is less than our average invoiced price because many payors currently do not provide coverage or reimburse us for ChemoFx. Those payors that cover and reimburse us for ChemoFx generally pay amounts approximating our billed charges, but in some cases we may receive substantially less. In the second quarter of 2006, Medicare began paying for all ChemoFx tests involving gynecologic cancers upon initial claim submission. We have also been fully or partially reimbursed by over 425 different private payors, including managed care organizations, on a case-by-case basis for numerous cancer types. We have achieved increased adoption of ChemoFx since the publication of our ovarian cancer study in January 2006, our receipt of prospective Medicare coverage and the establishment of our direct sales force in August 2006. In the nine months ended September 30, 2007, we billed for approximately 1,000 specimens in over 30 different types of cancer, as classified by the National Pre-Effective Amendment No. 2 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents Cancer Institute, of which approximately 75% were gynecologic in nature, with approximately 80% of those being ovarian. For further information regarding the clinical validation of ChemoFx referenced above, see Business Clinical Validation of ChemoFx. In addition, the clinical validation of ChemoFx is subject to a number of limitations. For example, the predictive ability of ChemoFx in cancer types other than ovarian cancer has not yet been demonstrated in clinical outcome studies. Furthermore, the clinical studies that we are currently conducting or in which we are participating, as well as future clinical studies that we may commence, may not be completed in a timely manner or may have uncertain or unfavorable outcomes, in each case due to factors such as patient behavior, regulatory changes, third-party clinical investigator performance or failures in study design, some of which factors may be out of our control. Our Market Opportunity The American Cancer Society currently estimates that over ten million people in the United States are living with or have a history of cancer and that in 2007, more than 1.4 million people in the United States will develop cancer and approximately 560,000 people will die from the disease. Additionally, for ovarian cancer alone, approximately 22,400 women are expected to be diagnosed with primary cancer, and 15,300 are expected to die from the disease. When a cancerous tumor may not have been completely removed by surgery or may spread to other parts of the body, patients may receive chemotherapy. Chemotherapy usually involves the use of toxic drugs in an effort to kill cancer cells or to stop or slow their growth. For late-stage and recurrent cancers, currently marketed chemotherapies often have demonstrated low response rates in clinical studies of large patient populations. For example, guidelines published by the National Comprehensive Cancer Network, or NCCN, include 19 acceptable drugs for recurrent ovarian cancer, which generally achieved clinical responses in only 3% to 56% of the patients evaluated in clinical studies. In addition, a cancer patient s response to a specific chemotherapy is often idiosyncratic and not individually predictable based on existing clinical data. Due to the low response rates of FDA-approved drugs in many cancers and increases in the number of available chemotherapies, physicians are often forced into a trial-and-error approach to select drugs to which patients tumors may respond. A round of chemotherapy, however, can cost tens of thousands of dollars or more in cancer and supportive care drug costs, as well as physician administration costs. More importantly, each round can take months to complete, during which time a patient s tumor may progress in the case of ineffective therapies, and can dramatically impact a patient s quality of life. Patients usually experience a wide range of acute toxicities, including infection, mouth and throat pain, weight loss, fatigue, hair loss, fingernail and toenail loss, rashes and injection site reactions. Moreover, it may take weeks or months to determine that a particular therapy is not working before switching to an alternative treatment, which can reduce the probability that those subsequent rounds of chemotherapy will be effective. Long-term effects of chemotherapy can include cognitive impairment, cardiac tissue damage, infertility, disease of the central nervous system, chronic fatigue, secondary malignancies and personality changes. For decades, physicians have sought to guide their choices among accepted chemotherapies by testing drugs against patients tumor cells in the laboratory. However, we believe that prior attempts have suffered from a number of limitations. For example, earlier-generation tests have generally focused only on identifying drugs to which a tumor sample shows extreme levels of resistance in the laboratory and that are, therefore, unlikely to be effective against a patient s tumor. Though extreme drug resistance tests may help doctors decide which drugs to rule out, they do not measure sensitivity to a particular drug or drug combination and therefore cannot identify which cancer drugs are most likely to be effective. In addition, these tests typically require large tumor samples, limiting their application to situations in which a large amount of tumor tissue is available, which is frequently not the case with many types and stages of cancer. PRECISION THERAPEUTICS, INC. (Exact name of registrant as specified in its charter) Table of Contents Our Solution ChemoFx ChemoFx is designed to address the problem posed by the wide range of therapeutic options, each of which may benefit only a subset of cancer patients. We believe that ChemoFx enables physicians to more effectively design an individualized treatment plan with an increased likelihood of tumor response, while potentially avoiding toxic, yet ineffective, chemotherapy regimens. ChemoFx is intended to be part of a physician s decision-making process, not to displace physician judgment or override an existing standard of care. ChemoFx delivers the following benefits to physicians, patients and third-party payors: Improved quality of treatment decisions. As demonstrated in our clinical studies in ovarian cancer, we believe that we can improve clinical outcomes by identifying drugs to which a patient s tumor is more likely to be responsive, thus enabling physicians to more effectively individualize chemotherapy treatment to a patient s tumor. Improved economics of cancer care. We believe that improving the quality of treatment decisions can also result in significant economic benefits to payors and patients by reducing the costs associated with ineffective, yet expensive, chemotherapy treatments. We believe that our solution has the following advantages: Provides physicians with actionable test results. By challenging tumor cells with a broad range of pharmacologically relevant concentrations of each drug or drug combination, ChemoFx provides physicians with information about both tumor resistance and sensitivity. The ChemoFx report graphically classifies each drug or drug combination into one of three categories of responsiveness. Enables testing of a wide range of chemotherapies and cancer types. ChemoFx is currently available for use with 26 of the most commonly used chemotherapy drugs, or combinations of these drugs. There are 56 cancer drugs currently approved for commercial use in the United States that act by targeting cancerous cells, and as part of our research and development efforts we are continually seeking to expand the number of these drugs available for testing. We generally add a chemotherapy to ChemoFx as physicians begin to request it with reasonable frequency. While ChemoFx is currently not available for testing with non-tumor-acting agents, such as anti-angiogenesis drugs, or other hormone-related therapies, we are seeking to enhance the current test to increase the number and types of drugs available for testing. ChemoFx can be applied to most types of solid cancer tumors, and while approximately 75% of our tests billed in 2007 have been on ovarian or other gynecologic tumors, to date we have tested more than 30 different types of tumors, as categorized by the National Cancer Institute, including three types of ovarian cancer and six other non-ovarian gynecologic cancers. Requires smaller sample sizes. ChemoFx requires approximately 35 milligrams of tumor tissue for solid specimens, a sample about one-third the size of a pea, which can be provided by a surgical procedure or by two to three core needle biopsies. The test can also be performed with tumor cells from fluid sample of approximately 100 milliliters. We believe that smaller sample requirements will enable ChemoFx to be used in multiple cancer indications, both at earlier stages of cancer detection and in recurrent cancers, in which only small samples may be available. Employs a direct, quantitative approach. We determine tumor responsiveness by directly measuring the number of surviving tumor cells after chemotherapy is administered to live tumor cells at different concentrations. By profiling live cells, ChemoFx integrates all of the biologic factors contributing to a tumor s cellular response. We believe that this direct measurement of a drug s effect on live cells can be more predictive of clinical effectiveness of the drug than indirect measurement techniques used to extrapolate expected cell survival. Delaware 8071 25-1762624 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 2516 Jane Street Pittsburgh, PA 15203 (412) 432-1500 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Table of Contents Delivers high quality, reliable information. Our technician-supervised, automated process includes the testing of ten separate concentrations in triplicate for each drug or drug combination ordered. This reduces the probability that the variability in chemoresponse we measure is the result of factors in the testing process and includes the testing of ten separate concentrations for each drug or drug combination ordered in triplicate. Our Business Strategy We seek to make ChemoFx a part of the standard of care for patients for whom there are a number of accepted chemotherapy alternatives or for whom no generally accepted treatment protocol exists. Key elements of our strategy include: Driving adoption of ChemoFx in gynecologic cancers; Demonstrating the value of ChemoFx through clinical studies; Achieving broad-based coverage and reimbursement from payors; Expanding the use of ChemoFx in additional cancers; and Evaluating the use of our platform for additional classes of therapies. Our current sales and marketing strategy targets the approximately 700 gynecologic oncologists in the United States who perform surgeries and administer chemotherapy to patients. Our direct sales approach emphasizes the potential clinical and economic benefits of ChemoFx and the scientific validation supporting its use. As of September 30, 2007, our selling and marketing team consisted of 31 employees. We intend to further expand our sales and marketing organization to broaden our ability to call on gynecologic oncology offices, operating rooms and pathology departments in order to educate doctors, nurses and pathologists throughout the United States on the uses and benefits of ChemoFx. Risks Associated with our Business We are a life sciences company with historical net operating losses, and our operations to date have generated substantial and increasing needs for cash. Our business and our ability to execute on our business strategy are subject to many risks of which you should be aware before you decide to buy our common stock. These risks are discussed more fully in Risk Factors beginning on page 11. For example: We have a single commercial product offering, ChemoFx, and as a result, for the foreseeable future, we expect to derive substantially all of our revenues from sales of this product. If we are unable to increase sales of ChemoFx or successfully develop and commercialize other products, our revenues and our ability to achieve profitability would be impaired, and the market price of our common stock could decline. If third-party payors do not provide reimbursement for ChemoFx, its commercial success and our revenue stream could be compromised. Physicians and patients may decide not to order ChemoFx unless managed care organizations and government payors, including Medicare, pay a substantial portion of the test s price. If the FDA subjects ChemoFx to regulation as a medical device, we could incur substantial costs, including for new clinical studies, for ChemoFx to meet requirements for premarket clearance or approval, we could be required to halt marketing of ChemoFx and we could experience significant delays in commercializing any future products. While we receive tumor samples from, and perform testing on, many cancer types, the ability of our ChemoFx test to predict tumor responsiveness to selected types of chemotherapy has not yet been demonstrated in completed clinical outcome studies in cancer types other than ovarian Sean C. McDonald Chief Executive Officer 2516 Jane Street Pittsburgh, PA 15203 (412) 432-1500 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents cancer. All of our ongoing clinical studies are in patients with ovarian or breast cancer, although those studies have not yet been completed, and to date we have not conducted any clinical studies in patients with other cancers. We may also determine that certain patient characteristics could affect tumor response rates to particular chemotherapies, which could lead to misleading or contradictory data on the usefulness of ChemoFx. We have incurred substantial net losses since our inception and we expect to incur additional losses this year and in future years. We have financed our operations primarily through private placements of our equity securities. To date, we have generated only minimal revenues, and we may never achieve revenues sufficient to offset expenses. Corporate Information We were incorporated in Pennsylvania in April 1995 and reincorporated in Delaware in November 2000. Our principal executive office is located at 2516 Jane Street, Pittsburgh, Pennsylvania 15203. Our telephone number is (412) 432-1500. Our website address is www.precisiontherapeutics.com. Information contained in, or accessible through, our website does not constitute a part of this prospectus. We use Precision Therapeutics , ChemoFx and the Precision Therapeutics logo as trademarks and service marks in the United States and other countries. All other trademarks or trade names referred to in this prospectus are the property of their respective owners. Market and Industry Data Unless otherwise indicated, information contained in this prospectus concerning our industry, including our general expectations of our market opportunity, is based on information from third-party sources and management estimates. Management estimates are derived from publicly available information released by independent industry analysts and third-party sources, as well as management s experience in the industry, and are based on assumptions made by us based on such data and our knowledge of such industry and markets, which we believe to be reasonable. Our estimates have not been verified by any independent source, and we have not independently verified any third-party information. Copies to: Darren K. DeStefano Brian F. Leaf Cooley Godward Kronish LLP One Freedom Square, Reston Town Center 11951 Freedom Drive Reston, VA 20190-5656 (703) 456-8000 Suzanne Sawochka Hooper Cooley Godward Kronish LLP Five Palo Alto Square, 3000 El Camino Real Palo Alto, CA 94306-2155 (650) 843-5000 Gregory P. Rodgers Latham & Watkins LLP 885 Third Avenue New York, NY 10022 (212) 906-1200 Charles K. Ruck Latham & Watkins LLP 650 Town Center Drive, 20th Floor Costa Mesa, CA 92626 (714) 540-1235 Table of Contents The Offering Common stock offered by us shares Common stock to be outstanding after this offering shares Over-allotment option shares Initial public offering price $ per share Use of proceeds We currently expect to use the net proceeds from this offering as follows: approximately $ million to hire additional sales and marketing personnel and to support costs associated with increased sales and marketing activities; approximately $ million to fund our research and development programs to expand the capabilities of our ChemoFx platform; approximately $ million to fund our ongoing clinical studies of ChemoFx in patients with ovarian and breast cancers: and the balance for other general corporate purposes. These estimates are subject to change. See Use of Proceeds. Proposed NASDAQ Global Market symbol PRCN The number of shares of our common stock that will be outstanding immediately after this offering is based on 42,334,393 shares of capital stock outstanding as of September 30, 2007 and shares of our common stock issuable upon the automatic conversion of convertible promissory notes in the aggregate principal amount of $9.5 million, issued in August 2007, based on an assumed initial public offering price of $ per share, the mid-point of the range reflected on the cover page of this prospectus, and excludes: 7,884,790 shares of our common stock issuable upon the exercise of all options outstanding under our 1996 Stock Option Plan and our 2000 Stock Plan, at a weighted average exercise price of $0.68 per share; 1,470,295 shares of our common stock reserved for future issuance under our 2000 Stock Plan; 2,355,661 shares of our common stock issuable upon the exercise of outstanding warrants, at a weighted-average exercise price of $0.23 per share; and an aggregate of shares of common stock reserved for future issuance under our 2007 Equity Incentive Plan, 2007 Non-Employee Directors Stock Option Plan and 2007 Employee Stock Purchase Plan, each of which will become effective immediately upon the execution of the underwriting agreement relating to this offering. Except as otherwise indicated, all information in this prospectus assumes: a -for- reverse stock split of our common stock and preferred stock on or prior to the closing of this offering, which will be reflected in an amendment to this prospectus; Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. Table of Contents the automatic conversion of all of the outstanding shares of our preferred stock into an aggregate of 38,443,420 shares of our common stock immediately prior to the closing of this offering; the automatic conversion of outstanding convertible promissory notes in the aggregate principal amount of $9.5 million, issued in August 2007, into shares of our common stock upon the closing of this offering, based on an assumed initial public offering price of $ per share, the mid-point of the range reflected on the cover page of this prospectus; the filing of an amended and restated certificate of incorporation, which will occur immediately prior to the closing of this offering; and no exercise of the underwriters over-allotment option. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. (1) During the year ended December 31, 2003, we curtailed our sales efforts with respect to an earlier version of ChemoFx. During the years ended December 31, 2004 and 2005, and much of the nine months ended September 30, 2006, we did not have an active sales force, although we continued to process specimens and invoice for tests performed. During the years ended December 31, 2004, 2005 and 2006, net revenues included revenues of $1,234, $1,666 and $332, respectively, relating to Medicare tests performed in prior periods for which payment had been originally denied, but for which we received payment upon appeal and recognized revenue on a cash basis. (2) See note 1 to our financial statements for a description of the method used to compute basic and diluted net loss per share. (3) Assumes the automatic conversion of all of the outstanding shares of our preferred stock into an aggregate of 38,443,420 shares of our common stock immediately prior to the closing of this offering, the automatic conversion of convertible promissory notes in the aggregate principal amount of $9,549, issued in August 2007, into shares of our common stock upon the closing of this offering, based on an assumed initial public offering price of $ per share, the mid-point of the range reflected on the cover page of this prospectus, and the sale of shares of our common stock at an assumed initial public offering price of $ per share, the mid-point of the range reflected on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. (1) Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share, the mid-point of the range reflected on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders equity by approximately $ million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. (2) Amount represents gross proceeds of $9,549 and includes an embedded derivative valued at $4,066. Table of Contents
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+This summary highlights information contained elsewhere in this prospectus or in the documents we have incorporated by reference in this document. You should read the entire prospectus carefully, including the section entitled Risk Factors beginning on page 10 of this prospectus, before you decide whether to exercise your rights to purchase our common stock. You also should read our consolidated financial statements and the related notes and the other information we have incorporated by reference in this prospectus, which are described under Incorporation of Certain Information by Reference. Questions and Answers Relating to the Rights Offering The following questions and answers about the terms of the rights offering and related matters are based upon selected information from this prospectus and the documents it incorporates by reference. These questions and answers do not contain all of the information that may be important to you and may not address all of the questions that you may have about the rights offering. This prospectus contains a more detailed description of the terms and conditions of the rights offering, including potential risks related to the rights offering, and the prospectus and incorporated documents provide additional information about us, our business and our common stock. What is the rights offering? We are distributing to holders of our common stock as of 5:00 p.m., Eastern Time, on December 17, 2007, which we refer to as the record date, at no charge, subscription rights to purchase shares of our common stock. We sometimes refer to these subscription rights as rights. You will receive 1.167 subscription rights for each share of common stock you owned at the close of business on the record date, subject to adjustments to eliminate fractional rights. The subscription rights will be evidenced by rights certificates. What is a right? Each whole right gives our stockholders participating in the rights offering the opportunity to purchase one share of our common stock for $3.03 per share. How many shares may I purchase if I exercise my rights? We are granting to you, as a stockholder of record on the record date, 1.167 subscription rights for each share of our common stock you owned at that time. You may purchase one share of common stock for $3.03 per share for each whole right you receive. Are all of ITC^DeltaCom s holders of common stock entitled to participate in the rights offering? No. Our majority stockholder and other affiliates and stockholders of ITC^DeltaCom and persons associated with such affiliates have contractually waived their rights to purchase shares in the rights offering. As of the record date, such stockholders not participating in the rights offering held a total of 55,466,583 shares of common stock, which represented approximately 82.6% of our outstanding common stock as of that date. Why is ITC^DeltaCom conducting the rights offering? We are conducting the rights offering pursuant to obligations we entered into in connection with the refinancing, conversion and exchange, and other transactions we completed on July 31, 2007. In these transactions, which we refer to collectively as the recapitalization, we refinanced or retired substantially all of our outstanding funded debt primarily with the proceeds of new senior secured credit facilities, eliminated all series of our previously authorized preferred stock and substantially all related stock warrants principally in exchange for common stock, and raised additional funds from sales of our capital stock. The purpose of the recapitalization was to reduce our outstanding debt, lower our cost of capital and simplify our balance sheet. For a description of the recapitalization, see Recapitalization Transactions. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Table of Contents In connection with the recapitalization, we entered into an agreement, which we refer to as the Series H purchase agreement, with H Partners, LP, Joshua Tree Capital Partners, LP and Trace Partners, LP, pursuant to which we issued and sold to these existing ITC^DeltaCom stockholders approximately $41.2 million of a new issue of our 6% Series H convertible redeemable preferred stock at a purchase price of $100 per share. We refer to this preferred stock issue as the Series H preferred stock. As a condition to the investment by these stockholders, we agreed to conduct this rights offering to our minority public stockholders, for the purpose of reducing the dilution of their ownership interest in ITC^DeltaCom resulting from the recapitalization, and to use the gross proceeds of the rights offering to redeem the outstanding shares of Series H preferred stock. What proceeds will ITC^DeltaCom receive from the rights offering? If all of the rights being offered in the rights offering are exercised, we will receive gross proceeds of approximately $41,221,500, which is the total purchase price we received from our sale of the Series H preferred stock. None of the proceeds of the rights offering will be available for investment in our business. As required by the Series H purchase agreement, we will use all of the rights offering proceeds to redeem up to all of the outstanding shares of the Series H preferred stock at a redemption price of $100 per share. If fewer than all rights are exercised, any share of Series H preferred stock that is not redeemed from the proceeds of the rights offering will mandatorily and automatically convert into 33 shares of common stock at the conclusion of the rights offering, as set forth in the certificate of designation of the Series H preferred stock. How was the subscription price of $3.03 per share determined? We determined the subscription price based upon the common stock price at which we completed some of the recapitalization transactions. In connection with the recapitalization, we explored obtaining an equity investment from several investment banks and negotiated a definitive commitment from Credit Suisse Securities (Europe) Limited to purchase shares of common stock at $3.03 per share. This arms-length negotiated price was then used as the price per share for our sale of $21 million of common stock and the exchange of most of our third lien, senior secured notes for common stock as part of the recapitalization. The $3.03 share price also was used to determine the price at which the Series H preferred stock is convertible into shares of our common stock. We terminated the foregoing common stock purchase commitment after we entered into the Series H purchase agreement. The subscription price is not necessarily related to our book value, net worth or any other criteria of value and may or may not be considered the fair value of the common stock to be offered in the rights offering. How did ITC^DeltaCom determine the subscription ratio? We determined the ratio of rights you will receive per share by dividing $41,221,500 by the subscription price of $3.03 to determine the number of shares to be issued in the rights offering, which total 13,604,455 shares of common stock. We then divided that number by the number of shares believed by us to be owned as of the record date by stockholders eligible to participate in the rights offering, which we calculated to be 11,650,989 shares. The amount of $41,221,500 we used in our calculation represents the total purchase price we received from our sale of the Series H preferred stock, which also will represent the total redemption price of the Series H preferred stock if all of the rights are exercised. How do the subscription rights work? To illustrate how the subscription rights work, if you owned 1,000 shares of our common stock on the record date and you have been granted 1.167 rights for each share of our common stock you owned at that time, Amendment No. 2 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents you have the right to purchase 1,167 shares of common stock for $3.03 per share, subject to adjustment to eliminate fractional rights. You may exercise any number of your subscription rights, or you may choose not to exercise any subscription rights. If you hold your shares in the name of a broker, dealer or other nominee who uses the services of The Depository Trust Company, or DTC, then DTC will issue 1.167 rights to the nominee for each share of our common stock you own at the record date, subject to adjustments to eliminate fractional rights. Each whole right can then be used to purchase one share of common stock for $3.03 per share. As in the example above, if you owned 1,000 shares of our common stock on the record date, you have the right to purchase 1,167 shares of common stock for $3.03 per share. How will fractional rights be handled? We will not issue fractional subscription rights or cash in lieu of fractional rights. Fractional subscription rights will be rounded to the nearest whole number, with such adjustments as may be necessary to ensure that we offer no more than 13,604,455 shares of common stock in the rights offering. In the unlikely event that we receive subscriptions for more than 13,604,455 shares of common stock, all holders subscription rights will be reduced in an equitable manner. We will return any excess subscription funds without interest as soon as reasonably practicable. Am I required to exercise all of the rights I receive in the rights offering? No. You may exercise any number of your rights, or you may choose not to exercise any rights. If you do not exercise any rights, the number of shares of our common stock you own will not change. However, because we expect that shares will be purchased by other stockholders in the rights offering and because shares of our common stock were issued in connection with the recapitalization, your percentage ownership of ITC^DeltaCom will be diluted if you choose not to exercise any rights. How soon must I act to exercise my rights? The rights may be exercised beginning on the date of this prospectus through the expiration date, which is January 23, 2008, at 5:00 p.m., Eastern Time, unless we extend this date. If you elect to exercise any rights, the subscription agent must actually receive all required documents and payments from you or your broker or nominee at or before the expiration date. Under the Series H purchase agreement, the period between the distribution of the rights and the expiration of the rights offering may not exceed 30 business days without the prior written consent of H Partners LP, one of the purchasers of the Series H preferred stock. The board of directors does not presently intend to extend the subscription period. When will I receive my subscription rights certificate? Promptly after the date of this prospectus, the subscription agent will send a subscription rights certificate to each registered holder of our common stock as of 5:00 p.m., Eastern Time, on the record date, based upon our stockholder registry maintained at the transfer agent for our common stock. If you hold your shares of common stock through a brokerage account, bank or other nominee, you will not receive an actual subscription rights certificate. Instead, as described in this prospectus, you must instruct your broker, bank or nominee whether or not to exercise rights on your behalf. If you wish to obtain a separate subscription rights certificate, you should promptly contact your broker, bank or other nominee and request a separate subscription rights certificate. It is not necessary in such cases, however, to have a physical subscription rights certificate to elect to exercise your rights. ITC^DELTACOM, INC. (Exact name of registrant as specified in its charter) Table of Contents May I transfer my rights? No. If you choose not to exercise your subscription rights, you may not sell, give away or otherwise transfer your subscription rights. Your subscription rights, however, will be transferable by operation of law (for example, upon the death of the recipient). Is ITC^DeltaCom requiring a minimum subscription to complete the rights offering? No, we have not conditioned completion of the rights offering on the exercise of any specified minimum number of rights. May ITC^DeltaCom s board of directors cancel, amend or extend the rights offering? Yes. We have agreed to conduct the rights offering pursuant to the terms of the Series H purchase agreement, and will use our commercially reasonable efforts to complete the rights offering. Subject to our existing contractual obligations, however, our board of directors may decide in some circumstances to cancel or terminate the rights offering at any time before the expiration of the rights offering. If our board of directors cancels or terminates the rights offering, we will issue a press release notifying stockholders of the cancellation or termination, and will return any payments received from subscribing stockholders, without interest or deduction, as soon as reasonably practicable. We may amend or extend the subscription period of the rights offering. The period for exercising your subscription rights may be extended by our board of directors, subject to the prior written consent of H Partners LP in the circumstances described above. The board of directors does not presently intend to extend the subscription period. Has ITC^DeltaCom s board of directors made a recommendation to our stockholders regarding the rights offering? No. Our board of directors will not make any recommendation to stockholders regarding the exercise of rights under the rights offering. You should make an independent investment decision about whether or not to exercise your rights. How do I exercise my rights? What forms and payment are required to purchase the shares of common stock? If you wish to participate in the rights offering, you must take the following steps, unless your shares are held by a broker, dealer or other nominee: deliver payment to the subscription agent using the methods outlined in this prospectus; and deliver a properly completed subscription rights certificate to the subscription agent before 5:00 p.m., Eastern Time, on January 23, 2008, unless we extend this expiration date. If you do not indicate the number of subscription rights being exercised, or if you do not forward full payment of the total subscription price payment for the number of subscription rights that you indicate are being exercised, you will be deemed to have exercised your subscription right with respect to the maximum number of subscription rights that may be exercised with the total subscription price payment you delivered to the subscription agent. If the payment received exceeds your subscription rights, we will return the excess amount to you as soon as reasonably practicable. You will not receive interest on payments refunded to you under the rights offering. When will I receive my new shares? If you purchase shares of common stock in the rights offering, you will receive your new shares as soon as reasonably practicable after the closing of the rights offering. Table of Contents After I send in my payment and rights certificate, may I change or cancel my exercise of rights? No. Unless we give you a right of cancellation as a result of a fundamental change to the terms of the rights offering, as determined by us, all exercises of rights are irrevocable, even if you later learn information that you consider to be unfavorable to the exercise of your rights. You should not exercise your rights unless you are certain that you wish to purchase additional shares of our common stock at a price of $3.03 per share. What should I do if I want to participate in the rights offering, but my shares are held in the name of my broker, dealer or other nominee? If you hold your shares of our common stock in the name of a broker, dealer or other nominee, then your broker, dealer or other nominee is the record holder of the shares you own. The record holder must exercise the rights on your behalf for the shares of common stock you wish to purchase. If you wish to participate in the rights offering and purchase shares of common stock, please promptly contact the record holder of your shares. We have asked your broker, dealer or other nominee to notify you of the rights offering. You should complete and return to your record holder the form entitled Beneficial Owner Election Form. You should receive this form from your record holder with the other rights offering materials. Are there risks in exercising my subscription rights? Yes. The exercise of your subscription rights involves risks. Exercising your subscription rights means buying additional shares of our common stock and should be considered as carefully as you would consider any other investment in ITC^DeltaCom. You should carefully read the section entitled Risk Factors beginning on page 10 of this prospectus and all other information included or incorporated by reference in this prospectus before you decide whether to exercise your rights. How many shares of common stock will be outstanding after the rights offering? As of the record date for the rights offering, we had 67,117,572 issued and outstanding shares of common stock. Based upon the maximum of 13,604,455 shares that may be issued pursuant to the rights offering, and taking into account that each share of Series H preferred stock not redeemed with the proceeds of the rights offering will convert into 33 shares of common stock, we expect to have approximately 80,725,000 shares of common stock outstanding after the closing of the rights offering. If the rights offering is not completed, will my subscription payment be refunded to me? Yes. The subscription agent will hold all funds it receives in a segregated bank account until completion of the rights offering. If the rights offering is not completed, we will immediately instruct the subscription agent to return your payment in full. If your shares are held in the name of a broker, dealer or other nominee, it may take longer for you to receive payment, because the subscription agent will send payments through the record holder of your shares. You will not be credited interest on your payment. Will the rights be listed on a stock exchange or national market? No. The rights themselves are not transferable and will not be listed on any stock exchange or national market. How do I exercise my rights if I live outside the United States? The subscription agent will hold rights certificates for stockholders having addresses outside the United States. In order to exercise rights, holders with addresses outside the United States must notify the subscription agent and follow other procedures described in The Rights Offering Foreign Stockholders on a timely basis. 7037 Old Madison Pike Huntsville, Alabama 35806 (256) 382-5900 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Table of Contents What fees or charges apply if I purchase shares of common stock? We are not charging any fee or sales commission to issue rights to you or to issue shares to you if you exercise your rights. If you exercise your rights through the record holder of your shares, you are responsible for paying any fees your record holder may charge you. What are the U.S. federal income tax consequences of exercising rights? We intend to take the position that a holder of common stock should not recognize income or loss for U.S. federal income tax purposes in connection with the receipt or exercise of rights in the rights offering. You should consult your tax adviser as to the particular consequences to you of the rights offering. For more information, see Material United States Federal Income Tax Consequences. To whom should I send my forms and payment? If your shares are held in the name of a broker, dealer or other nominee, you should send your subscription documents, rights certificate and payment to that record holder in accordance with the instructions you receive from that record holder. If you are the record holder, you should send your subscription documents, rights certificate and payment by hand delivery, first class mail or courier service to Mellon Investor Services LLC, acting on behalf of Mellon Bank, N.A., the subscription agent: By Mail: By Overnight Courier or By Hand: Mellon Bank, N.A. c/o Mellon Investor Services LLC Attn: Corporate Action Dept., P.O. Box 3301 South Hackensack, New Jersey 07606 Mellon Bank, N.A. c/o Mellon Investor Services LLC Attn: Corporate Action Dept., 27TH Floor 480 Washington Blvd Jersey City, New Jersey 07310 You are solely responsible for completing delivery to the subscription agent of your subscription documents, rights certificate, and payment before 5:00 p.m., Eastern Time, on January 23, 2008. We urge you to allow sufficient time for delivery of your subscription materials to the subscription agent. Whom should I contact if I have other questions? If you have other questions or need assistance, please contact Mellon Investor Services LLC, acting on behalf of Mellon Bank, N.A., the information agent, at telephone number (800) 777-3674. For a more complete description of the rights offering, see The Rights Offering beginning on page 35. Randall E. Curran Chief Executive Officer ITC^DeltaCom, Inc. 7037 Old Madison Pike Huntsville, Alabama 35806 (256) 382-5900 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents The Company ITC^DeltaCom is one of the largest facilities-based competitive providers of integrated communications services, primarily to businesses and governments, in a primary eight-state market, which encompasses Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina and Tennessee. We provide comprehensive voice and data communications services, including local exchange, long distance, high-speed or broadband data communications, and Internet access connectivity, and sell customer premise equipment to our end-user customers. We offer these services primarily over our owned network facilities and also use leased network facilities to extend our market coverage. In addition, we own, operate and manage an extensive fiber optic network with significant transmission capacity that we use for our own voice and data traffic and selectively sell to other communications providers on a wholesale basis. We are incorporated in Delaware. Our principal executive offices are located at 7037 Old Madison Pike, Huntsville, Alabama 35806, and our telephone number at that address is (256) 382-5900. We maintain a corporate Internet web site at www.deltacom.com. The information on our web site does not constitute part of the prospectus and you should not rely on this information in deciding whether to exercise your rights to purchase shares of our common stock. The Rights Offering Securities offered We are distributing to you, at no charge, 1.167 non-transferable subscription rights for every one share of our common stock that you owned on the record date, either as a holder of record or, in the case of shares held of record by brokers, banks or other nominees, on your behalf, as a beneficial owner of such shares, subject to adjustments to eliminate fractional rights. The gross proceeds of the rights offering will not exceed $41,221,500. Record date 5:00 p.m., Eastern Time, on December 17, 2007. Expiration date 5:00 p.m., Eastern Time, on January 23, 2008, unless extended by us, in our sole discretion. Under the Series H purchase agreement, the offering period between the distribution of the rights and the expiration date may not exceed 30 business days without the prior written consent of H Partners LP, one of the purchasers of the Series H preferred stock under that agreement. Any rights not exercised at or before that time will expire without any payment to the holders of those unexercised rights. Subscription price $3.03 per share, payable in cash. Use of proceeds If all of the rights being offered in the rights offering are exercised, we will receive gross proceeds of approximately $41,221,500, which we will use to redeem the Series H preferred stock in full. If fewer than all rights being offered are exercised, any share of Series H preferred stock that is not redeemed from the proceeds of the rights offering will mandatorily and automatically convert into 33 shares of common stock at the conclusion of the rights offering, as set forth in the certificate of designation of the Series H preferred stock. Copy to: Richard J. Parrino, Esq. Hogan & Hartson L.L.P. 8300 Greensboro Drive McLean, Virginia 22102 Telephone: (703) 610-6100 Table of Contents Non-transferability of rights The subscription rights may not be sold, transferred or assigned and will not be listed for trading on any stock exchange or market or on the OTC Bulletin Board. No board recommendation Our board of directors makes no recommendation to you about whether you should exercise any rights. You are urged to make an independent investment decision about whether to exercise your rights based upon your own assessment of our business and the rights offering. See Risk Factors beginning on page 10 for a discussion of some of the risks involved in investing in our common stock. No revocation If you exercise any of your rights, you will not be permitted to revoke or change the exercise or request a refund of monies paid. U.S. federal income tax considerations We intend to take the position that a holder of common stock should not recognize income or loss for United States federal income tax purposes in connection with the receipt or exercise of rights in the rights offering. You should consult your tax adviser as to the particular consequences to you of the rights offering. For a detailed discussion, see Material United States Federal Income Tax Consequences. Extension, cancellation and amendment The period for exercising your subscription rights may be extended by our board of directors, although the board does not presently intend to do so. The period may not exceed 30 business days without the prior written consent of H Partners LP, one of the purchasers of the Series H preferred stock. Subject to existing contractual obligations, our board of directors may cancel or terminate the rights offering in its sole discretion at any time on or before the expiration of the rights offering for any reason. If the rights offering is canceled or terminated, we will return all funds received from subscriptions by stockholders without interest. We also reserve the right to amend the terms of the rights offering. Procedure for exercising rights If you are the record holder of shares of our common stock, to exercise your rights you must complete the rights certificate and deliver it to the subscription agent, Mellon Bank, N.A., together with full payment for all the subscription rights you elect to exercise. The subscription agent must receive the proper forms and payments on or before the expiration of the rights offering. You may deliver the documents and payments by mail or commercial courier. If you use regular mail for this purpose, we recommend that you use registered mail, properly insured, with return receipt requested. If you are a beneficial owner of shares of our common stock, you should instruct your broker, custodian bank or nominee in accordance with the procedures described in the section of this prospectus entitled The Rights Offering Beneficial Owners. Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Table of Contents Subscription agent Mellon Bank, N.A. Information agent Mellon Bank, N.A. Questions Questions regarding the rights offering should be directed to Mellon Investor Services LLC, acting on behalf of Mellon Bank, N.A., the information agent, at telephone number (800) 777-3674. Shares outstanding before the rights offering 67,117,572 shares as of the record date for the rights offering. Shares outstanding after completion of the rights offering Up to approximately 80,725,000 shares of our common stock will be outstanding immediately after completion of the rights offering. Issuance of our common stock If you purchase shares of common stock through the rights offering, we will issue certificates representing those shares to you as soon as reasonably practicable after the completion of the rights offering.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001043382_solutia_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001043382_solutia_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights some of the information contained elsewhere in or incorporated by reference into this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. You should carefully read this prospectus, including the documents incorporated by reference, which are described under Incorporation by Reference of Certain Documents and Where You Can Find More Information. You should also carefully consider, among other things, the matters discussed in the section
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001044435_p10_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001044435_p10_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..1f2418af6bf97676488077442a4537f4ac9d9c18
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following is only a summary of some of the information contained or incorporated by reference in this prospectus which we believe to be important. We selected highlights of material aspects of our business to be included in this summary. We urge you to read this entire prospectus, including the information incorporated by reference
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001051251_j-crew_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001051251_j-crew_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..1e6feadc662c345879059a7a146aac6b1bbc6409
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. It does not contain all of the information that may be important to you. You should read the following summary together with the more detailed information regarding our company, the common stock offered and our consolidated financial statements, including the notes to those statements, appearing elsewhere in this prospectus. Except as the context otherwise requires, all references in this prospectus to J.Crew, we, us, our and similar terms refer to J.Crew Group, Inc. together with our consolidated subsidiaries. Our fiscal year ends on the Saturday closest to January 31. The fiscal years 2001, 2002, 2003, 2004 and 2005 ended on February 2, 2002, February 1, 2003, January 31, 2004, January 29, 2005 and January 28, 2006, respectively, and consisted of 52 weeks each. The fiscal year 2006 will end on February 3, 2007 and will consist of 53 weeks. The extra week will be reflected in the fourth quarter. Our Company J.Crew is a nationally recognized apparel and accessories brand that we believe embraces a high standard of style, craftsmanship, quality and customer service, while projecting an aspirational American lifestyle. We are a fully integrated multi-channel specialty retailer. We seek to consistently communicate our vision of J.Crew through every aspect of our business, including through the imagery in our catalogs and on our Internet website and the inviting atmosphere of our stores. In the first nine months of fiscal 2006, our revenues were $785.4 million, which represents an 18.4% increase over the first nine months of fiscal 2005. Growth in our comparable store sales for this period was 15.6%. In fiscal 2005, our revenues were $953.2 million, which represented an 18.5% increase over fiscal 2004. Growth in our comparable store sales for this period was 13.4%. Our net income for the first nine months of fiscal 2006 was $33.8 million, compared to $9.7 million for the first nine months of fiscal 2005. Our net income for fiscal 2005 was $3.8 million compared to a net loss of $100.3 million for fiscal 2004. The net loss in fiscal 2004 included a significant loss on the refinancing of debt in our fourth fiscal quarter, excluding which our net loss would have been $50.5 million in fiscal 2004. We focus on creating product lines featuring the high quality design, fabrics and craftsmanship as well as consistent fits and detailing that our customers expect of J.Crew. We offer complete assortments of women s and men s apparel and accessories, including wedding and special occasion attire, weekend clothes, swimwear, loungewear, outerwear, shoes, bags, belts, hair accessories and jewelry. J.Crew products are distributed through our retail and factory stores, our J.Crew catalog and our Internet website located at www.jcrew.com. As of December 30, 2006, we operated 176 retail stores, including two crewcuts and two Madewell stores, and 51 factory stores throughout the United States. In fiscal 2005, we distributed 20 catalog editions with a circulation of approximately 55 million copies and our www.jcrew.com website logged over 64 million visits, representing a 33% increase over fiscal 2004. In early 2003, our then newly-appointed chief executive officer and chairman of the board, Millard Drexler, and our then newly-appointed president, Jeffrey Pfeifle, initiated a program to reposition J.Crew by: improving the design, fabrics and construction of our products by strengthening our design teams and sourcing fabrics from renowned European mills and designer-level fabric houses, expanding our product assortment to reflect our customers affluent and active lifestyles by offering a range of high quality products such as our Italian cashmere collection, our wedding and party dresses and our Italian leather accessories, tightening inventory controls, SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents creating sophisticated and inviting store environments, recruiting a new management team with experience across a broad range of disciplines in the specialty retail industry, slowing the pace of new store openings and closing underperforming stores, and enhancing our customer-service oriented culture. Since our new management team began to influence our product line in late 2003 and early 2004, we have experienced twelve consecutive quarters of growth in comparable store sales. We attribute our success as a specialty retailer to the following competitive strengths: Established and differentiated lifestyle brand. The J.Crew brand is widely recognized. We believe that we differentiate ourselves from our competitors in three primary ways: our signature classic with a twist product design meaning our iconic styles refined with differentiating prints, fabrics and colors, a multi-tiered pricing strategy meaning we offer select designer-quality products at higher price points and more casual items at lower price points, and by offering one stop shopping for our customers wardrobe needs. High quality product offerings. We focus on creating complete product assortments featuring high quality apparel and accessories, which include luxury items such as European milled cashmere sweaters and jackets, suits made in Italy, and styled classics such as our broken-in chinos, cable knit sweaters and Legacy blazers. Multiple sales channels producing seamless retailing. We sell our products through multiple sales channels, including our retail and factory stores, our J.Crew catalog and our www.jcrew.com Internet website. We encourage our customers to make purchases through all of our sales channels a concept we refer to as seamless retailing to build a base of customers loyal to the J.Crew brand rather than a single sales channel. Experienced management team with a proven track record. Since Messrs. Drexler and Pfeifle were appointed in early 2003, we have assembled a management team with extensive experience across a broad range of disciplines in the specialty retail industry. Disciplined merchandise management. We focus on controlling our inventory in order to maximize full-price sales and increase inventory turns. We believe our merchandising strategy enhances our brand image while maximizing profits. Customer-service oriented culture. We hire and train qualified sales associates committed to serving our customers and compensate them based on performance measures in order to enhance the customer-service oriented culture in our stores. Our growth strategy includes the following: (1) continue to build on our core strengths, (2) leverage our multiple sales channels to further achieve seamless retailing, (3) expand our store base, and (4) expand into new apparel and accessories markets. We face risks in operating our business, including risks that may prevent us from achieving our business objectives or that may adversely affect our business, financial condition and operating results. You should consider these risks before investing in our company. Risks relating to our business include: we may not be able to compete successfully in the highly competitive specialty retail industry, we may not successfully gauge fashion trends and changing consumer preferences, Alabama 2 1 3 Arizona 4 4 California 23 5 28 Colorado 4 2 6 Connecticut 6 1 7 Delaware 1 1 Florida 7 4 11 Georgia 5 2 7 Illinois 9 1 10 Indiana 1 2 3 Iowa 1 1 Kansas 1 1 Kentucky 2 2 Louisiana 1 1 Maine 2 2 Maryland 3 1 4 Massachusetts 6 2 8 Michigan 6 2 8 Minnesota 4 4 Missouri 2 1 3 Nebraska ` 1 1 Nevada 2 1 3 New Hampshire 1 2 3 New Jersey 10 2 12 New Mexico 1 1 New York 17 4 21 North Carolina 5 5 Ohio 7 7 Oklahoma 2 2 Oregon 3 3 Pennsylvania 8 3 11 Rhode Island 1 1 South Carolina 2 2 4 Tennessee 3 1 4 Texas 11 4 15 Utah 2 2 Vermont 1 1 2 Virginia 5 2 7 Washington 3 1 4 Wisconsin 2 1 3 District of Columbia 2 AMENDMENT NO. 1 TO Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents our revenues may decline due to a reduction in consumer spending on apparel and accessories, the loss of key personnel could adversely impact our business, and we may not successfully implement our plans to expand our store base, broaden our product offerings and expand our sales channels. For a discussion of the significant risks associated with our business, our industry and investing in our common stock, you should read the section entitled
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001054303_direct_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001054303_direct_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..1f2f6eaa02336645fcb8b98b25265d4ccf7ab77c
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+PROSPECTUS SUMMARY This summary highlights key aspects of the offering and does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including Risk Factors and our consolidated financial statements and accompanying notes included elsewhere in this prospectus, before making an investment decision. Unless otherwise indicated, the information contained in this prospectus assumes that the underwriters do not exercise their over-allotment option and does not take into account the issuance of any common stock upon exercise of warrants or stock options. Rodman & Renshaw Capital Group, Inc. is a Delaware corporation and was formerly named Enthrust Financial Services, Inc. (which we refer to herein as Enthrust). Prior to July 10, 2007, Enthrust was a shell company with no business or operations. Rodman & Renshaw Holding, LLC (which we refer to herein as Holding) is a Delaware limited liability company and the holding company for Rodman & Renshaw, LLC, a registered broker-dealer, and its other affiliates. Upon completion of the Exchange, as described below under Recent Transactions, Holding became a wholly- owned subsidiary of Enthrust, and the beneficial owners of all of the equity and debt securities of Holding became stockholders of Enthrust. In August 2007, Enthrust changed its name to Rodman & Renshaw Capital Group, Inc. All references in this prospectus to us, we, and our refer to Holding and its direct and indirect subsidiaries before the Exchange and to Rodman & Renshaw Capital Group, Inc., and its direct and indirect subsidiaries after the Exchange. Overview We are a full service investment bank dedicated to providing investment banking services to companies that have significant recurring capital needs due to their growth and development strategies, along with research and sales and trading services to institutional investor clients that focus on such companies. Through AcumenBioFin , our division dedicated exclusively to the life science sector, we provide a broad range of investment banking services to biotechnology, specialty pharmaceutical, medical device and other companies operating in the life science sector. Our present business began in 2002 when we made the strategic decision to focus on the biotechnology sector and to build an integrated investment banking platform to service this sector. Our decision was based, in part, on our belief that the biotechnology sector was underserved by the investment banking community as a result of: (i) consolidation, beginning in the 1990 s, of well-established middle market and boutique investment banks with and into large financial institutions; and (ii) the significant downturn in capital market activity in the biotechnology sector beginning in 2001. As we continued to expand our capital raising efforts for biotechnology companies, we concluded that many of the typical biotechnology financing strategies and transaction structures in which we have developed an expertise could be equally effective in other sectors of the economy. Applying our financing know-how, understanding of the financing needs of capital intensive companies and appreciation of the goals and concerns of institutional investors that invest in such companies, we have begun to leverage our historical performance and reputation as a leading investment bank in the biotechnology sector to expand our product-based expertise and business reach to other sectors with similar financing needs. Since 2003, we have been a leading investment banking firm to the biotechnology sector, a capital intensive market segment, as well as a leader in the PIPE (private investment in public equity) and RD (registered direct placements) transaction markets. We were the number one investment bank in terms of the aggregate number of PIPE and RD financing transactions completed during the first six months of 2007 and in the calendar years 2006, 2005 and 2003. We were the number two investment bank in terms of the aggregate number of PIPE and RD financing transactions completed in the calendar year 2004. From January 1, 2003 through June 30, 2007, we helped raise more than 15% of the total amount generated from PIPE and RD financing transactions in the U.S. biotechnology sector. Market Opportunity Based on the factors described below, we believe a significant opportunity exists for us to grow our various lines of business, expand our service offerings, attract new clients within the biotechnology sector and expand into new sectors. We believe that the recent volatility in the U.S. capital markets presents potential opportunities for us. The recurring financing needs of our core client base generally require those clients to access the capital markets on a regular basis, not just opportunistically. Moreover, valuations and activity in the biotechnology sector, for which a large segment of our business could be seen to serve as a proxy, have been strong even through recent market volatility. Finally, we are not burdened with exposure to commercial paper or real estate risk and hold no investments in structured products or vehicles that have undergone recent revaluations. As a result, we believe that both our key market sector and our strong balance sheet leave us well positioned to drive continued growth. The Biotechnology Sector The U.S. biotechnology sector continues to experience significant growth, as evidenced by the following: total market capitalization of U.S. biotechnology companies increased from $15 billion in 1986 to over $500 billion today; currently, there are over 330 publicly-traded and 1,100 private biotechnology companies in the United States; and it is estimated that, in 2006, the U.S. biotechnology sector generated more than $60 billion in revenue. Capital origination in the biotechnology sector has been strong over the past decade. From 1996 through 2006, U.S. biotechnology companies raised $149.1 billion. From January 1, 2003 through December 31, 2006, U.S. biotechnology companies raised: $4.1 billion from initial public offerings; $15.2 billion from follow-on offerings; and $11.7 billion from PIPE and RD financing transactions. From January 1, 2003 through December 31, 2006, merger and acquisition transaction value within the U.S. biotechnology sector totaled $66.4 billion. With additional resources to devote to the biotechnology sector, we believe we can grow our corporate finance and strategic advisory businesses as the sector continues to grow. Companies in this sector require growth capital on a regular basis and regularly evaluate their strategic alternatives. Investors in companies in this sector require investment research and brokerage services, which we believe will allow us to grow our equity research and sales and trading platforms. PIPE and RD Financing Transactions Today, PIPE and RD financing transactions represent a key source of funding for publicly- traded biotechnology companies. For example, the U.S. biotechnology sector used PIPE and RD financing transactions to raise: $13.8 billion from January 1, 2003 through June 30, 2007; $3.6 billion in 2006; and $2.1 billion in the first six months of 2007. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Amendment No. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 We believe that PIPE and RD financing transactions will continue to play a significant role in financing the biotechnology sector because the efficiency of these types of transactions better meets the funding needs of biotechnology companies as compared to alternative financing methods. PIPE and RD financing transactions provide public companies across multiple sectors with effective and viable alternatives to raising capital through public follow-on offerings. The use by issuers of these financing alternatives to public follow-on offerings has grown significantly in recent years. Since 2003, when the capital markets began to recover after the Internet bubble, the number of PIPE and RD financing transactions and the amount of capital raised through such transactions have increased every year. For example, PIPE and RD financing transactions raised an aggregate of: $12.6 billion through 882 transactions in 2003; $15.6 billion through 1,270 transactions in 2004; $20.0 billion through 1,304 transactions in 2005; $28.2 billion through 1,342 transactions in 2006; and $22.4 billion through 645 transactions in the first six months of 2007. We believe there is a significant opportunity for continued growth in this space given issuers continuing desire to identify and pursue faster and less costly financing alternatives to traditional follow-on public offerings and institutional investors continuing interest in participating in these financing transactions. Consolidation in the financial services industry has created an opportunity for us to grow our business The financial services industry has experienced substantial consolidation over the past 10 to 15 years. During this period, a number of growth-focused investment banks were acquired by larger financial institutions with broader platforms. We believe that large investment banks often under-serve clients considered to be small-cap or mid-cap companies, which has created a significant market opportunity for us to serve the specialized needs of these companies. A significant majority of our investment banking revenues is earned from publicly-traded companies with a market capitalization below $500 million. In addition, we believe many large investment banks have responded to margin pressure within their equity brokerage divisions by reducing research coverage, particularly for smaller companies, consolidating sales and trading services and transitioning to a more commoditized brokerage model. We will continue to work with these small-cap and mid-cap companies and aim to provide them with high quality services tailored to meet their needs for capital origination and strategic advisory services. Competitive Strengths We expect to maintain and expand our position in our target sector by continually leveraging our principal competitive strengths, which include the following: Sector focus We believe that our focus on the biotechnology sector is a competitive advantage. This focus manifests itself in the form of an integrated platform, including investment bankers, research analysts, traders and institutional sales people, all devoted to companies operating in the biotechnology sector. The team is comprised of individuals who are all knowledgeable and, in some cases, experts in this area. We believe this specialization produces a combination of financial and technical expertise, allowing us to better understand and service the strategic and financing needs of our clients and deliver differentiated advice that our clients require and appreciate when addressing complex financing issues and making important strategic decisions. As a result, we have become a leading provider of investment banking services to companies in the biotechnology sector. RODMAN & RENSHAW CAPITAL GROUP, INC. f/k/a ENTHRUST FINANCIAL SERVICES, INC. (Exact name of Registrant as specified in its charter) Delaware 6211 84-1374481 (State or Other Jurisdiction of Incorporation or Organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification No.) Rodman & Renshaw Capital Group, Inc. 1270 Avenue of the Americas New York, New York 10020 (212) 356-0500 (212) 356-0536 Facsimile (Address, including zip code, and telephone number, including area code, of Registrant s executive offices) Within the biotechnology sector, our strengths include: Focus on financing transactions. Our investment bankers are corporate finance specialists and plan to continue to focus primarily on financing transactions, particularly PIPE and RD transactions. Development of innovative solutions. Our in-depth knowledge of the biotechnology sector enables us to develop financing strategies, transaction structures and financing instruments that simultaneously address issuers needs for capital and the investment community s need to balance risk and reward. Focused equity research. Our biotechnology research team (including eight PhDs and two medical doctors) focuses on uncovering market opportunities and on developing recommendations that will enhance our clients investment returns. Industry leading conferences. Our industry-leading investment conferences dedicated to the life science sector, with particular emphasis on biotechnology companies, bring together companies, institutional investors, business development executives and experts from the life science community. Our life science conferences are an effective marketing tool for us and provide an opportunity for us to facilitate relationship building between the participating companies and investors. Experienced professionals with deep knowledge and broad skills We have created an entrepreneurial, performance-oriented corporate culture that attracts professionals who share a reputation for sector expertise, strong execution skills and a history of successful transactions. We are led by a team of professionals with extensive track records of success in the biotechnology sector and with arranging and executing PIPE and RD financing transactions. Strong client relationships We place great emphasis on developing and nurturing long-term relationships with both issuers and investors, including hedge funds, venture capital funds and private equity funds. This has expanded our distribution and placement capabilities, enabling us to raise significant amounts of capital for our issuer clients. We strive to build long-term relationships with our issuer clients by providing services appropriate to each stage of a company s development. We provide our clients with frequent and consistent interaction with our senior professionals, who are actively involved in all stages of our client engagements. We believe that the high levels of expertise and client trust we have developed have been significant factors contributing to our growth and have enabled us to generate significant repeat business. In 2006 and 2005, over 34% and 44%, respectively, of our investment banking transactions were executed with repeat clients. In the first six months of 2007, the percentage was 29%. Established and respected brand We believe the Rodman & Renshaw brand name is well-recognized, highly-regarded and associated with knowledge leadership, especially in the biotechnology sector and the PIPE and RD transaction markets. In particular, we believe that we are known for developing creative solutions to financial and strategic challenges and for sound execution of our clients transactions. Growth Strategy Our primary business objective is to become a leading full-service investment banking firm for companies with significant and recurring capital needs across multiple sectors. We believe that, as a publicly-traded company with increased available capital, we will be better able to: (i) grow our platform by adding new products to serve our existing clients; (ii) build new teams to focus on sectors of the economy other than biotechnology that have similar financing needs; and (iii) hire professionals to supplement our existing staff. We intend to pursue this objective through the following strategies: Michael Lacovara Chief Executive Officer Rodman & Renshaw Capital Group, Inc. 1270 Avenue of the Americas New York, New York 10020 (212) 356-0500 (212) 356-0536 Facsimile (Name, address, including zip code, and telephone number, including area code, of agent for service) Expand our existing biotechnology sector platform We believe that the biotechnology sector is still a growth area for us and, with our expertise and reputation, we are well-positioned to achieve a greater share of financial and advisory engagements in this sector. First, in order to capitalize on our inherent advantages, we intend to increase our investment banking, sales and trading, and research capability in this sector by adding additional professionals to augment our existing team. Our intention is to grow our leading PIPE and RD transaction business, to pursue more follow-on offerings and initial public offerings, to expand our merger and acquisition advisory services and to increase our focus on raising capital for private companies in the biotechnology sector. Second, we intend to nurture our relationships with those companies for which we have raised capital in the past and aggressively pursue relationships with other companies in this sector. Third, we intend to continue to develop new financing products and create new transactional structures that will address the risks and rewards inherent in this sector. Finally, we intend to apply our capabilities to other areas of the life science sector in addition to biotechnology. For example, specialty pharmaceuticals, medical devices and healthcare services, represent natural areas for expansion, particularly as we broaden our product capabilities. Expand into new sectors We intend to expand opportunistically into other sectors of the economy that have particular similarities with the biotechnology sector, including significant and on-going capital needs, highly technical expertise, high risk/high return operating environment and the presence of numerous innovative small and mid-size companies among larger companies. Such sectors may include one or more of the following: mining, energy, technology and business services. During the past 18 months, we completed investment banking transactions for companies in the environmental services, business services, technology, security, oil and gas, retail and logistics sectors, in addition to continuing to grow our presence in the biotechnology sector. Expand our existing merchant banking and asset management businesses Our current merchant banking activity includes the following: (i) taking a portion of our fee in warrants in connection with finance transactions; (ii) purchasing securities in a finance transaction in which we are also acting as placement agent; and (iii) retaining equity ownership in public shell companies, i.e., reporting companies that have no active trade or business and nominal assets, which we subsequently merge with operating private companies through reverse mergers or CAPs (Collateralized Acquisition Pools ) arranged by us. We may expand our merchant banking activities in a number of ways, including: (i) making larger investments in companies for which we are acting as placement agent in connection with a financing transaction; (ii) making direct investments on a more frequent basis; (iii) making bridge loans and providing other interim capital; (iv) financing a company ourselves or with a limited number of other institutional investors; and (v) increasing the number of shell companies that we own. We may also develop our asset management business by, for example, launching a lifescience sector focused fund. These initiatives may be carried out through in-house efforts, through the recruitment of a fund manager or by acquiring an existing asset management business. Strategic acquisitions Our growth strategy also contemplates expansion through strategic acquisitions. We may acquire teams of investment bankers or institutional salesmen and traders in one or more of the sectors that we target or we may acquire an investment bank or financial advisory firm or other company in a complementary business or sector. In addition, our expansion strategy contemplates pursuing business opportunities outside of the United States. We have already raised capital for a number of foreign companies and have business contacts in Europe, Asia, Latin America and the Middle East. Please send copies of all communications to: Kenneth S. Rose, Esq. Joel J. Goldschmidt, Esq. Morse, Zelnick, Rose & Lander, LLP 405 Park Avenue, Suite 1401 New York, New York 10022 (212) 838-5030 (212) 838-9190 Facsimile Fred B. White, III, Esq. David C. Ingles, Esq. Skadden, Arps, Slate, Meagher & Flom LLP Four Times Square New York, New York 10036-6522 (212) 735-3000 (212) 735-2000 Facsimile Recent Developments The Exchange On July 10, 2007 (the Exchange Date ), pursuant to an Exchange Agreement, dated as of July 10, 2007, we completed a reorganization transaction, which we refer to as the Exchange, with Enthrust, a shell company in which we indirectly held 80% of the common equity. As a result of the Exchange, Holding became a wholly-owned subsidiary of Enthrust and the beneficial owners of our outstanding debt and equity securities became stockholders of Enthrust. The Exchange consisted of the following: (i) Paul Revere, LLC ( Revere ), a Delaware limited liability company, which owned 70% of Holding, contributed its membership interest in Holding to Enthrust in exchange for 12,711,683 shares of Enthrust s common stock; (ii) the stockholders of R&R Capital Group, Inc. ( RRCG ), a Delaware S corporation, who, through their ownership of RRCG, owned 30% of Holding and 25.5% of RRPR, LLC ( RRPR ), a Delaware limited liability company, contributed all of their RRCG shares to Enthrust in exchange for 5,967,591 shares of Enthrust s common stock; (iii) the holders of the 6% Senior Convertible Debentures in the aggregate principal amount of $20 million (the Debentures ) and warrants to purchase 714,286 shares of Holding stock at a price of $7.70 per share (the Holding Warrants ) issued by Holding in March 2007, contributed the Debentures and the Holding Warrants to Enthrust in exchange for 5,970,099 shares of Enthrust s common stock and warrants to purchase 1,355,600 shares of Enthrust s common stock at a purchase price of $7.00 per share (the Warrants ); and (iv) options held by employees to purchase up to 2,848,370 shares of Holding s stock at prices ranging from $0.409 to $8.24 per share were, by their terms, converted into options to acquire up to 5,278,071 shares of Enthrust s common stock at prices ranging from $0.22 to $4.45 per share. Immediately after the Exchange, 1,707,144 shares of Enthrust s common stock that were outstanding prior to the Exchange, including all of the shares held indirectly by Holding, were cancelled. Thus, the shares of Enthrust s common stock issued to Revere, the RRCG stockholders and the holders of the Debentures and the Holding Warrants pursuant to the Exchange Agreement represented 98.6% of Enthrust s issued and outstanding shares immediately after the Exchange. On the Exchange Date, all of Enthrust s officers resigned and its then sole director, Arnold P. Kling, appointed Edward Rubin, Holding s President and a member of Holding s board of directors, as a director of Enthrust. Messrs. Kling and Rubin then appointed the officers of Holding as Enthrust s new officers. In addition, they appointed the other members of the Holdings board of directors to Enthrust s board of directors effective as of July 22, 2007, the tenth day after Enthrust mailed an Information Statement pursuant to Rule 14f-1 of the Securities Exchange Act of 1934, as amended (the Exchange Act ) to its stockholders of record. Mr. Kling then resigned as a director of Enthrust effective as of July 22, 2007. In this prospectus, we refer to our board of directors after the Exchange as the Board of Directors. Finally, on August 31, 2007, Enthrust changed its name to Rodman & Renshaw Capital Group, Inc. Based on the fact that: (i) prior to the consummation of the Exchange, Enthrust was not engaged in any trade or business; (ii) immediately following the Exchange, the former beneficial owners of Holding s equity and debt securities owned 98.6% of Enthrust s issued and outstanding shares of common stock; (iii) Holding s officers became the officers of Enthrust and Holding s directors became, as of July 22, 2007, the directors of Enthrust; and (iv) Enthrust changed its name to reflect Holding s corporate identity; for accounting purposes: (a) Holding is treated as the acquiror; (b) the Exchange is treated as a recapitalization of Holding; and (c) Holding s historical financial statements are treated as the historical financial statements of Enthrust. Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the Securities Act ), check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. (cover continued on next page) New Chief Executive Officer In August 2007, we entered into an employment agreement with Michael Lacovara pursuant to which Mr. Lacovara became our Chief Executive Officer and a member of our Board of Directors effective September 4, 2007. Mr. Lacovara previously served as co-chief operating officer of Sandler O Neill & Partners, L.P., the representative of the several underwriters of this offering. Mr. Lacovara replaces John J. Borer III as our Chief Executive Officer. As of September 4, 2007, Mr. Borer became a Senior Managing Director and Head of Investment Banking. For a more detailed description of the terms of Mr. Lacovara s employment, see Executive Compensation Employment Arrangements. Corporate Information Our principal executive office is located at 1270 Avenue of the Americas, New York, New York 10020, and our telephone number is (212) 356-0500. Our corporate website address is www.rodmanandrenshaw.com. Information contained on our website is not incorporated by reference into this prospectus and you should not consider information contained on, or accessible through, our website as part of this prospectus. [ALTERNATIVE PAGE FOR SELLING STOCKHOLDER PROSPECTUS] New Chief Executive Officer In August 2007, we entered into an employment agreement with Michael Lacovara pursuant to which Mr. Lacovara became our Chief Executive Officer and a member of our Board of Directors effective September 4, 2007. Mr. Lacovara previously served as co-chief operating officer of Sandler O Neill & Partners, L.P., the representative of the several underwriters of our October 2007 underwritten public offering. Mr. Lacovara replaces John J. Borer III as our Chief Executive Officer. As of September 4, 2007, Mr. Borer became a Senior Managing Director and Head of Investment Banking. For a more detailed description of the terms of Mr. Lacovara s employment, see Executive Compensation Employment Arrangements. Corporate Information Our principal executive office is located at 1270 Avenue of the Americas, New York, New York 10020, and our telephone number is (212) 356-0500. Our corporate website address is www.rodmanandrenshaw.com. Information contained on our website is not incorporated by reference into this prospectus and you should not consider information contained on, or accessible through, our website as part of this prospectus. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The following table summarizes our selected historical consolidated financial data for the periods and at the dates indicated. You should read this information in conjunction with our audited and unaudited consolidated financial statements and related notes, Selected Unaudited Pro Forma Combined Financial Data, Management s Discussion and Analysis of Financial Condition and Results of Operations, and other financial information appearing elsewhere in this prospectus. We derived our selected historical consolidated financial data as of December 31, 2006, 2005 and 2004 and for the years ended December 31, 2006 and 2005 and for the nine months ended December 31, 2004, from our audited consolidated financial statements, which have been audited and reported upon by Marcum & Kliegman LLP, an independent registered public accounting firm. We derived our selected historical consolidated financial data for the years ended March 31, 2004 and 2003 from our unaudited consolidated financial statements not included in this prospectus. The selected historical consolidated financial data as of and for the six months ended June 30, 2007 and 2006 is derived from our unaudited interim consolidated financial statements, which includes, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the data for such periods. The results of operations for the six-month period ended June 30, 2007, do not necessarily indicate the results that may be expected for any future period or for the full year 2007. Consolidated Statement of Operations Data: Six Months Ended June 30, Years Ended December 31, Nine Months Ended December 31, Years Ended March 31, 2007 2006 2006 2005 2004 2004 2003 (Unaudited) (Audited) (Audited) (Unaudited) (in thousands) Revenues: Private placement, underwriting and strategic advisory fees(1) $ 39,374 $ 17,234 $ 43,081 $ 17,887 $ 16,669 $ 32,207 $ 3,046 Principal transactions, net(2) (340 ) 1,480 11,519 1,175 827 5,580 Realized gains (loss) on securities, net(3) 3,540 5,068 1,884 6,174 (75 ) Commissions(4) 3,606 2,327 5,161 2,429 2,140 673 Conference fees 719 749 2,093 1,488 1,112 Other income(5) 326 81 220 102 129 555 79 Total Revenues $ 47,225 $ 26,940 $ 63,958 $ 29,255 $ 20,877 $ 39,015 $ 3,050 Expenses: Employee compensation and benefits(6) $ 26,542 $ 9,508 $ 26,782 $ 15,345 $ 14,427 $ 33,733 $ 2,766 Conference fees 2,144 1,670 4,748 3,673 2,957 876 Professional fees 2,713 2,488 6,192 1,492 1,026 765 60 Business development 1,434 880 1,880 765 410 356 11 Communication and data processing 889 628 1,452 671 282 132 68 Other expenses 2,084 1,373 3,319 2,423 1,482 1,336 247 Total Expenses $ 35,806 $ 16,547 $ 44,373 $ 24,369 $ 20,584 $ 37,198 $ 3,152 Operating income (loss) $ 11,419 $ 10,392 $ 19,585 $ 4,886 $ 293 $ 1,817 $ (102 ) Interest expense 793 Income (loss) before income taxes and minority interests $ 10,626 $ 10,392 $ 19,585 $ 4,886 $ 293 $ 1,817 $ (102 ) Income taxes 338 349 893 395 19 392 Minority interest in (income) loss of subsidiaries (261 ) (1,718 ) (2,174 ) 18 Net income (loss) $ 10,027 $ 8,325 $ 16,518 $ 4,509 $ 274 $ 1,425 $ (102 ) Unrealized gain on investments(7) 1,002 Reclassification adjustment for realized gains on investments $ (1,002 ) Comprehensive income (loss) $ 9,025 $ 8,325 $ 17,520 $ 4,509 $ 274 $ 1,425 $ (102 ) CALCULATION OF REGISTRATION FEE Title of Each Class of Securities to be Registered Proposed Maximum Aggregate Offering Price (1) Amount of Registration Fee Common stock $ 86,250,000.00 (1) $ 2,647.88 Common stock $ 14,283,217.75 (2) $ 438.50 Common stock $ 9,828,100.00 (3) $ 301.72 Total $ 110,361,317.75 $ 3,388.10 Amount Previously Paid $ 2,647.88 Amount Due $ 740.22 (1) Estimated solely for purposes of calculating the amount of the registration fee paid pursuant to Rule 457(o) under the Securities Act. Includes: (i) shares offered for sale by the registrant, including shares covered by the underwriters over-allotment option; and (ii) 4,000,000 of the shares offered for sale by the selling stockholders under the alternative selling stockholder prospectus following completion of the underwritten offering. (2) Estimated solely for purposes of calculating the amount of the registration fee payable pursuant to Rule 457(c) promulgated under the Securities Act. Based on 1,970,099 shares to be offered for sale by the selling stockholders under the alternative selling stockholder prospectus following completion of the underwritten offering of our common stock described in this registration statement. Pursuant to Rule 457(c), the proposed maximum offering price is based on the average bid and asked price of a share of common stock as reported on the OTC Bulletin Board on October 8, 2007 of $7.25. (3) Estimated solely for purposes of calculating the amount of the registration fee payable pursuant to Rule 457(g) promulgated under the Securities Act. Based on 1,355,600 shares to be sold by the selling stockholders under the alternative selling stockholder prospectus, which shares are issuable upon the exercise of warrants having an exercise price of $7.00 per share. Pursuant to Rule 457(g), the proposed maximum offering price is based on the higher of warrant exercise price and the market price computed under Rule 457(c). The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED OCTOBER 12, 2007 PRELIMINARY PROSPECTUS 8,000,000 Shares Common Stock We are an investment banking firm headquartered in New York City. We are offering 8,000,000 shares of our common stock. We anticipate that the offering price of the shares will be in the range of $5.00 to $7.00 per share. Our common stock currently trades on the OTC Bulletin Board under the symbol RDRN.OB. We have applied to list our common stock on the NASDAQ Global Market under the symbol RODM. Investing in our common stock involves risk. Please read Risk Factors beginning on page 13 for a discussion of the factors you should consider before you make your investment decision. Per Share Total Public offering price of common stock $ $ Underwriting discounts $ $ Proceeds to us (before expense)(1) $ $ Pro Forma Combined Balance Sheet Data: As of June 30, 2007 Pro forma Pro forma, as adjusted (in thousands) Cash and cash equivalents $ 27,760 $ 71,150 Securities owned $ 9,117 $ 9,117 Total assets $ 56,630 $ 100,020 Total liabilities $ 17,245 $ 17,245 Stockholders equity $ 31,495 $ 74,885 The pro forma combined balance sheet data set forth above combines the consolidated statement of financial condition of Holding, Enthrust and RRCG as of June 30, 2007. As a result of the Exchange, Holding and RRCG became wholly owned subsidiaries of Enthrust on the Exchange Date. The pro forma combined balance sheet data reflects the following: 24,649,373 shares issued in the Exchange and cancellation of 1,707,144 shares owned by the pre-Exchange Enthrust shareholders, including 1,414,286 owned indirectly by Holding; eliminating the minority interest in Enthrust, its assets and liabilities and corresponding equity components; adjustments to reflect the contribution of the Debentures and the Holding Warrants in exchange for shares of common stock and the Warrants; adjustments to reflect the costs associated with the Exchange net of the effective tax rate of 40%; recapitalization of Holding s member equity as a result of the Exchange; and eliminating RRCG s investment in Holding and its corresponding equity components. The pro forma, as adjusted column in the table above gives effect to all of the pro forma adjustments and the receipt of the estimated net proceeds of this offering based on the sale of shares of common stock by us at a price of $6.00 per share, which is the midpoint of the range set forth on the cover of this prospectus. [ALTERNATIVE PAGE FOR SELLING STOCKHOLDER PROSPECTUS] Pro Forma Combined Balance Sheet Data: As of June 30, 2007 Pro forma Pro forma, as adjusted (in thousands) Cash and cash equivalents $ 27,760 $ Securities owned $ 9,117 $ Total assets $ 56,630 $ Total liabilities $ 17,245 $ Stockholders equity $ 31,495 $ The pro forma combined balance sheet data set forth above combines the consolidated statement of financial condition of Holding, Enthrust and RRCG as of June 30, 2007. As a result of the Exchange, Holding and RRCG became wholly owned subsidiaries of Enthrust on the Exchange Date. The pro forma combined balance sheet data reflects the following: 24,649,373 shares issued in the Exchange and cancellation of 1,707,144 shares owned by the pre-Exchange Enthrust shareholders, including 1,414,286 owned indirectly by Holding; eliminating the minority interest in Enthrust, its assets and liabilities and corresponding equity components; adjustments to reflect the contribution of the Debentures and the Holding Warrants in exchange for shares of common stock and the Warrants; adjustments to reflect the costs associated with the Exchange net of the effective tax rate of 40%; recapitalization of Holding s member equity as a result of the Exchange; and eliminating RRCG s investment in Holding and its corresponding equity components. The pro forma, as adjusted column in the table above gives effect to: (i) all of the pro forma adjustments; (ii) our receipt of the estimated net proceeds from our October 2007 underwritten public offering; and (iii) $9.5 million of proceeds from the exercise of the Warrants. (1) This amount is the total before deducting legal, accounting, printing and other offering expenses payable by us, which are estimated at $1.25 million. The underwriters may also purchase up to 1,200,000 additional shares from us at the public offering price set forth above, less the underwriting discount, within 30 days of the date of this prospectus to cover over-allotments. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of the disclosures in this prospectus. Any representation to the contrary is a criminal offense. The underwriters expect to deliver the shares against payment in New York, New York on or about , 2007, subject to customary closing conditions. RISK FACTORS An investment in us involves a high degree of risk. You should consider carefully the following information about these risks, together with the other information contained in this prospectus, before deciding to purchase any of our securities. If any of the events or developments described below actually occur, our business, results of operations and financial condition would likely suffer. In these circumstances, you may lose all or part of your investment. In addition, it is also possible that other risks and uncertainties that affect our business may arise or become material in the future. Risks Related to Our Business We derive a significant portion of our revenues from the life science sector, primarily from biotechnology companies. Adverse developments or a decline in investor interest in this sector could harm our business. In 2006 and 2005, 60% and 82%, respectively, of our revenues were derived from the life science sector. For the first six months of 2007, the percentage was 75%. Although we expect this percentage to decrease as our business grows and we execute our growth strategy, we anticipate that the life science sector (primarily biotechnology companies) will continue to account for the largest portion of our revenues in the foreseeable future. The life science sector is known for its volatility due to a number of factors including the following: many companies in this sector rely on a single product or class of products; the sector is highly regulated; a company s success and viability depends on the results of clinical trials, which are unpredictable; technological developments; disposition of patent applications; international respect of patents; product recalls; general economic conditions and political developments; global competition; and availability of insurance coverage. Unless we expand into new segments of the economy, our revenue and net profits will continue to be subject to the volatility of the life science sector, which could have a detrimental impact on the price of our securities. We expect our growth rates to decline and anticipate downward pressure on our operating margins in the future. In 2006 and 2005 our total revenues were $64.0 million and $29.3 million, respectively, an increase of 118%. Similarly, in 2006 and 2005 our net income was $16.5 million and $4.5 million, respectively, an increase of 267%. As our business grows and matures, it is unlikely that our growth rate can be sustained at those levels, if at all. We expect that in the future our revenue growth rate will decline and anticipate that there will also be downward pressure on our operating margins. We believe this decline and downward pressure could be the inevitable result of a number of factors, including the following: expenses increasing at a greater rate than revenues; increasing competition in those segments of the market in which we compete; additional costs related to being a public reporting company; our inability to execute our growth strategy; our lack of liquidity and access to capital; and SANDLER O NEILL + PARTNERS, L.P. FOX-PITT KELTON COCHRAN CARONIA WALLER PAULSON INVESTMENT COMPANY, INC. RODMAN & RENSHAW, LLC the relative amounts of revenue we earn from our different operating units, which have different profit margins. If we are unable to manage our future growth successfully, we may not be able to sustain profitability. Continued growth may place significant demands on our operational, administrative and financial resources. Our rapid growth has caused, and if it continues, will continue to cause, significant demands on our operational, administrative and financial infrastructure and increase our expenses. If we do not effectively manage our growth, the quality of our services could suffer, which would adversely affect our operating results and our reputation. To effectively manage future growth, we will have to hire, train and manage a larger work force and improve our financial and management controls and our reporting systems and procedures. These systems enhancements and improvements will require significant capital expenditures and allocation of valuable management resources. If the improvements are not implemented successfully, our ability to manage our growth will be impaired and we may incur significant additional expenditures to address these issues, further impairing our financial condition and profitability. We cannot assure you that we will be able to manage our growth effectively and any failure to do so could adversely affect our ability to generate revenues and control expenses. We depend on the services of Mr. Vasinkevich, Mr. Borer and Mr. Rubin, and the loss of their services would have a material adverse effect on us. We depend on the efforts and reputations of Michael Vasinkevich, our Vice Chairman, John J. Borer III, formerly our Chief Executive Officer and currently a Senior Managing Director and Head of Investment Banking, and Edward Rubin, our President. Their reputations and relationships with clients and potential clients are critical elements in expanding our businesses, and we believe our historical and future performance is strongly correlated to their involvement to date and their continued involvement in our operations. We entered into employment agreements with each of Messrs. Vasinkevich, Rubin and Borer, which initially expire on February 28, 2010. Each employment agreement then renews automatically for an unlimited number of one-year periods until either party gives a 90-day non-renewal notice. If the executive s employment terminates for any reason, he is subject to a covenant that prohibits him from competing with us for a period of one year from the date of termination. We cannot assure you that one or more of Messrs. Vasinkevich, Borer and Rubin will not resign, join a competitor or form a competing company or that the non-competition provisions in their employment agreements are enforceable. The loss or reduction of the services of any of Messrs. Vasinkevich, Borer or Rubin, due to death, disability, termination of employment or regulatory restriction, could have a material adverse effect on our operations, including our ability to attract new company clients and to raise capital from institutional investors. Our client base and the number of products we offer are limited. Our rate of growth will be impaired unless we expand our client base and increase our investment banking revenues. We derive most of our revenues from investment banking engagements, including placement agent and underwriting fees and strategic advisory fees, which have the highest profit margins of any of our operating units. For the first six months of 2007 and for the years 2006 and 2005, investment banking transactions accounted for 83%, 67.4% and 61.1%, respectively, of our total revenues. In addition, most of our investment banking revenue derives from publicly-traded companies in the life science sector. From January 1, 2003 through June 30, 2007, we acted as sole or lead manager in connection with 122 financing transactions, of which 93 were or are on behalf of companies in the life science sector. Most of our investment banking clients are public companies and many of them have little or no revenue. From January 1, 2003 through June 30, 2007, our corporate finance transactions ranged from $1.3 million to $163.0 million. Although our growth strategy contemplates that we will develop new sources of revenue and expand our sales and trading, strategic advisory, asset management and merchant banking capabilities, our future growth still largely depends on our ability to generate significant placement The date of this prospectus is , 2007 agent and underwriting fees. To do so, we must: (i) expand into new sectors; (ii) increase the volume of corporate finance transactions in which we act as sole or lead manager; and (iii) actively solicit engagements for larger transactions. Significant factors affecting this strategy include our relatively small size, our lack of familiarity with, and visibility in, sectors other than life science and competition from larger investment banks. We cannot assure you that we will be able to compete effectively for new investment banking engagements. If we are unable to increase our investment banking revenue, our rate of growth will be adversely affected, which may cause the price of our common stock to decline. Our future success depends on our ability to expand our investment banking services into sectors of the economy other than life science. For the six months ended June 30, 2007, and for the years 2006, 2005 and 2004, revenues from non-life science companies were 25%, 40%, 18% and 15%, respectively, of our total revenues. Since we do not have any particular expertise in sectors other than life science, we rely, in part, on our relationships with institutional investors and private equity funds to introduce us to companies that need capital and on our own ability to identify opportunities to which we can apply our corporate finance know-how. We cannot assure you that we will be able to continue to receive referrals from institutional investor sources. We may hire teams of investment bankers and other professionals with expertise in a particular sector, which would, in the short-term, increase our operating costs. If these costs are not offset with increases in revenues, our profitability will be adversely affected, which may cause the price of our common stock to decline. PIPE transactions have been subject to intense regulatory scrutiny over the last few years. To the extent the investor interest is reduced as a result, our business will be adversely affected. A significant factor in our growth to date has been our leading position as placement agent in PIPE transactions. These transactions usually can be accomplished in less time and at less cost than registered public offerings. Various regulatory and governmental agencies, including the U.S. Securities and Exchange Commission (the SEC ), have been reviewing PIPE transactions. Periodically, we receive requests for information from the SEC and other regulatory and governmental agencies regarding PIPEs in general or regarding specific transactions. In most cases, these communications include a request for copies of transaction documents. We always comply with these requests. If the SEC or any other regulatory agency promulgates regulations that make it more difficult or expensive to consummate PIPE transactions, investors and issuers may prefer other financing strategies, such as registered public offerings. Since underwriting registered public offerings has never been a significant source of revenue for us, any decline in the number of PIPE transactions could have a material adverse impact on our business, operations and financial condition, which may cause the price of our common stock to decline. Our revenue and profits are highly volatile, which may make it difficult for us to achieve steady earnings growth on a quarterly basis and may cause the price of our common stock to decline. In addition, the investment banking sector can be highly volatile, which could adversely impact our revenues and profits. We have experienced, and expect to experience in the future, significant variations from period-to-period in our revenues and results of operations. These variations may be attributed in part to the fact that our investment banking revenues, which represent the largest portion of our revenues, are typically earned when the financing or merger or acquisition transaction is consummated, the timing of which is uncertain and largely beyond our control. In most cases, we receive little or no payment for investment banking engagements that do not result in a successfully completed transaction. As a result, our business depends a great deal on market conditions as well as the decisions and actions of our clients and interested third parties. For example, a client could delay or terminate financing transactions because of a failure to agree upon final terms with the counterparty, failure to obtain necessary regulatory consents or board or stockholder approvals, adverse market conditions or because its business is experiencing unexpected operating or financial problems. In addition, many companies seeking a financing simultaneously explore a merger or sale option. Our investment banking revenues would be adversely affected if companies for which we are acting as placement agent or underwriter were sold and we were not also engaged as a strategic advisor. If a transaction fails to close, we will earn little or no revenue despite the fact that we may have devoted considerable resources to, and incurred significant out-of-pocket expenses in connection with, the transaction. This risk may be intensified by our focus on companies in the biotechnology sector, which is extremely volatile. As a result, our financial results will likely fluctuate from quarter to quarter based on the timing when fees are earned, which could, in turn, lead to increased volatility in the price of our common stock. Market conditions and valuations for companies in the life science sector, as well as general market conditions, can materially affect our financial performance. The nature of our revenue generation, including the size of transactions, the timing of transaction closings and the sectors in which those transactions occur, make our future performance difficult to predict and potentially highly variable. Revenues for many of the services we provide are earned only upon the successful completion of a transaction. Accordingly, revenues and net income in any period may not be indicative of full-year results or the results of any other period and may vary significantly from year-to-year and quarter-to-quarter depending on whether and when transactions are completed and the number, size and type of transactions completed. In particular, recent volatility in the capital markets may lead to disruptions that delay or eliminate revenue opportunities. Our corporate finance and strategic advisory engagements are singular in nature and do not generally provide for subsequent engagements. Our investment banking engagements, whether for a financing, a merger or an acquisition transaction, are usually transaction specific as opposed to long-term engagements. As such, we must continually seek new engagements even from companies that have engaged us in the past. For this reason, we believe it is important to nurture strong relationships with our clients. Although we have been successful in securing repeat engagements from clients in the past, our ability to do so on a regular basis is by no means assured. As a result, high activity levels in any period are not necessarily indicative of continued high levels of activity in any subsequent period. If we are unable to generate a substantial number of new engagements that generate fees from new or existing clients, our business, results of operations and financial condition could be adversely affected. We may invest our own principal capital in equities that have limited liquidity and that expose us to a significant risk of capital loss. We use a portion of our own capital in a variety of principal investment activities, including purchasing shell companies to be used in connection with future financing transactions and purchasing securities offered in financing transactions for which we are acting as placement agent. We also hold a portfolio of equity securities, including stock and warrants that we received as part of our compensation in connection with acting as a placement agent. Principal investing involves numerous risks, including illiquidity, loss of invested capital and revaluation. As part of our growth strategy, we intend to expand our merchant banking operating unit, which may involve purchasing securities in venture capital and other high-risk financings of early-stage, pre-public, mezzanine or turn-around companies. These securities are likely to be restricted as to resale and may, in any event, be highly illiquid. For example, in the case of investments in marketable securities, principal investments could be significant relative to the overall capitalization of the company in which we invest. Resale of a significant amount of these securities might adversely affect their market and/or sales price. Moreover, the companies in which we invest may rely on new or developing technologies or novel business models or concentrate on markets which have not yet developed and which may never develop sufficiently to support successful operations. Even if we make an appropriate investment decision based on the intrinsic value of an enterprise, we cannot assure you that general market conditions will not cause the market value of our investments to decline. For example, an increase in interest rates, currency fluctuations, a general decline in the stock markets, or other market conditions adverse to companies of the type in which You should rely only on the information contained in this prospectus. Neither we nor the underwriters have authorized any other person to provide you with information different than that contained in this prospectus. If anyone provides you with additional, different or inconsistent information, you should not rely on it. You should not assume that the information included in this prospectus is accurate as of any date other than the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock. Our business, financial condition, results of operations, cash flows and/or future prospects may have changed since that date. Information contained on, or accessible through, our website is not part of this prospectus. Neither we nor any of the underwriters are making an offer to sell these securities in any jurisdiction where such offer or sale is not permitted. Furthermore, you should not consider this prospectus to be an offer or solicitation relating to our common stock if the person making the offer or solicitation is not qualified to do so or it is unlawful for you to receive such an offer or solicitation. In this prospectus we rely on and refer to information and statistics regarding the biotechnology sector of the U.S. economy and regarding certain types of financing transactions. We obtained this market data from independent publications or other publicly available information. No action is being taken in any jurisdiction outside the United States to permit the public offering of our common stock or possession or distribution of this prospectus. Persons who come into possession or distribution of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to that jurisdiction. we may invest could result in a decline in the value of our investments or a total loss of our investment. This could materially and adversely impact our financial results and the price of our common stock. We may also commit our own capital to facilitate client sales and trading activities. The number and size of these transactions may adversely affect our results of operations. To the extent that we have long positions in any of those markets, a downturn in the value of those assets or in those markets could result in losses. Conversely, to the extent that we have short positions in any of those markets an upturn in those markets could expose us to potentially large losses as we attempt to cover our short positions by acquiring assets in a rising market. These long and short positions and the movement of the market relative to these positions could further contribute to the fluctuations in our revenues and earnings, which, in turn, could contribute to volatility in the price of our common stock. The asset management business is intensely competitive. As part of our growth strategy, we plan to expand our asset management business. The asset management business is intensely competitive, with competition based on a variety of factors, including investment performance, the quality of service provided to clients, brand recognition and business reputation. Our asset management business will compete with a number of private equity funds, specialized investment funds, hedge funds, corporate buyers, traditional asset managers, commercial banks, investment banks and other financial institutions. A number of factors serve to increase our competitive risks. Many of our existing and potential competitors have: greater financial, technical, marketing, human and other resources than we do; recently raised, or are expected to raise, significant amounts of capital, and many of them have similar investment objectives to ours, which may create additional competition for investment opportunities and may reduce the size and duration of pricing inefficiencies that many alternative investment strategies seek to exploit; a lower cost of capital and access to funding sources that are not available to us, which may create competitive disadvantages for us with respect to investment opportunities; higher risk tolerances, different risk assessments or lower return thresholds, which could allow them to consider a wider variety of investments and to bid more aggressively for investments that we want to make; and the ability to achieve synergistic cost savings in respect of an investment, providing a competitive advantage in bidding for an investment. Other factors affecting the competitive landscape of the asset management business include the following: it is relatively easy for new investment funds to enter this line of business, including a relatively low cost of entry, and the successful entry of newcomers, including major commercial and investment banks and other financial institutions, would result in increased competition; some investors may prefer to invest with an investment manager that is not publicly traded; and other asset managers may, from time to time, seek to recruit our investment professionals and other employees away from us. We may lose investment opportunities in the future if we do not match prices, structures and terms offered by competitors. On the other hand, we may experience decreased rates of return and increased risks of loss if we match prices, structures and terms offered by competitors. In addition, if interest rates were to rise or there were to be a prolonged bull market in sectors other than the ones in which we invest, the attractiveness of our investment funds relative to other investment options could decrease. This competitive pressure could adversely affect our ability to make successful investments and limit our ability to raise future investment funds, either of which would adversely impact our business, revenue, results of operations and cash flow. [THIS PAGE INTENTIONALLY LEFT BLANK] Furthermore, asset management businesses have experienced a number of highly publicized regulatory inquiries concerning market timing, late trading and other activities that focus on the mutual fund industry. These inquiries have resulted in increased scrutiny within the industry and new rules and regulations for mutual funds, investment advisers and broker-dealers. Although we do not act as an investment adviser to mutual funds, regulatory scrutiny and rulemaking initiatives may result in an increase in operational and compliance costs or the assessment of significant fines or penalties against our asset management business, and may otherwise limit our ability to engage in certain activities. In addition, the SEC has conducted studies with respect to soft dollar practices in the brokerage and asset management industries. In October 2005, the SEC proposed interpretive guidance regarding the scope of permitted brokerage and research services in connection with soft dollar practices. The SEC has indicated that it is considering additional rulemaking in this area, and we cannot predict the effect that additional rulemaking may have on our business. We face strong competition from other investment banks that serve the biotechnology sector and that specialize in PIPE and RD financing transactions. If we fail to address the challenges posed by this competition, we could lose our leading position in these areas, causing our operating results to suffer. The investment banking industry is intensely competitive, and we expect it to remain so for the foreseeable future. This is true in the case of the biotechnology sector as well as in connection with PIPE and RD financing transactions, in which we specialize. We consider our principal competitors to be Banc of America Securities, LLC, C. E. Unterberg, Towbin, Canaccord Adams, Inc., CIBC World Markets, Cowen & Company, LLC, Duetsche Bank Securities, Inc., Jeffries & Company, Inc., Lazard Ltd., Leerink Swann & Co., Lehman Brothers, Inc., Merriman Curhan Ford & Company, Oppenheimer & Co., Inc., Piper Jaffray & Co., RBC Capital Markets, Inc., Roth Capital Partners, LLC, ThinkEquity Partners, LLC and Thomas Weisel Partners, LLC. In addition, as we expand our business into new sectors and new business lines, we will face competition from other firms. We compete on the basis of a number of factors, including the scope and quality of services, price, market focus and industry knowledge, client relationships and reputation. Larger firms provide a broader range of investment banking services to their clients than we do. We have experienced intense price competition in our various businesses. Pricing and other competitive pressures in investment banking, including the trends toward multiple book runners, co- managers and multiple financial advisors handling transactions, could adversely affect our revenues, even as the size and number of our investment banking transactions may increase. If we do not address these competitive factors successfully, we may not be able to execute our growth strategy or even maintain our existing market share. In either case, our operating results would suffer as would the price of our common stock. As we grow, we will likely face competition from much larger investment banking firms. In order to compete with them, we may have to increase our operating expenses significantly and/or make larger commitments of capital in our trading and underwriting business. This increases the potential for capital loss, which could adversely impact our operating results. We are a relatively small investment bank. Primarily because of the types of transactions in which we specialize and the relatively small size of those transactions, except in rare circumstances, we have avoided competing with larger investment banks. However, we expect this to change as we pursue investment banking opportunities with larger companies and engagements for larger transactions. Larger investment banks not only offer a broader range of products and services than we do, they also have significantly greater financial and marketing resources than we do, greater name recognition, more senior professionals to serve their clients needs, greater global reach and may have more established relationships with clients than we have. Thus, they are better able to respond to changes in the investment banking industry, compete for skilled professionals, finance acquisitions, fund internal growth and compete for market share. For example, many of our larger competitors have the ability to support investment banking with commercial banking, insurance and other financial services, which has resulted, and could further result, in pricing pressure in our businesses. In addition, financial services firms have begun to make larger and more frequent commitments of capital in many of their activities. In order to win business, they are increasingly committing to purchase large blocks of stock from publicly traded issuers or significant stockholders, instead of the more traditional marketed underwriting process in which marketing is typically completed before an investment bank commits to purchase securities for resale. They are willing to provide debt financing out of internal funds, often giving them a significant competitive advantage. Because we do not have the resources to match these investment banking firms, we may be unable to compete as effectively for larger clients and larger transactions. In that case, we may not be able to execute that part of our growth strategy, which could have an adverse impact on our operations and financial condition. Our ability to retain our senior professionals and recruit additional professionals is critical to our growth strategy and our failure to do so may adversely affect our reputation, business, results of operations and financial condition. Our people are our most valuable resource. Our future success depends to a substantial degree on our ability to retain and recruit qualified personnel, particularly senior managing directors. We anticipate that it will be necessary for us to add financial professionals as we pursue our growth strategy. However, we may not be successful in our efforts to recruit and retain the required personnel as the market for qualified financial professionals is extremely competitive. We cannot assure you that our compensation arrangements and non-competition and non-solicitation agreements with our key employees are broad or effective enough to deter or prevent employees from resigning, joining or forming competitors or soliciting our clients. Further, we cannot assure you that we could successfully enforce our rights under those agreements. Our ability to obtain and successfully execute the transactions that generate a significant portion of our revenues depends upon the reputation, judgment, business generation capabilities and project execution skills of our senior professionals from investment banking, sales and trading and research. The reputations and relationships of our senior professionals with our clients are a critical element in obtaining and executing client engagements. Accordingly, retaining these particular employees is critical to our future success and growth. Turnover in the investment banking industry is high and we encounter intense competition for qualified employees from other companies in the investment banking industry as well as from businesses outside the investment banking industry, such as hedge funds and private equity funds. We have experienced departures of investment banking and other professionals in the past and losses of key employees may occur in the future. As a result of such departures, we may not be able to retain valuable relationships and some of our clients could choose to use the services of a competitor instead of our services. If we are unable to retain our senior professionals and/or recruit additional professionals, our reputation, business, results of operations and financial condition will be adversely affected. Our transition to a corporate structure may adversely affect our ability to recruit, retain and motivate our senior managing directors and other key employees, which in turn could adversely affect our ability to compete effectively and to grow our business. In connection with our transition to a corporate structure, our senior executives and managing directors may experience significant reductions in their cash compensation or even their overall compensation. Once we are listed on the NASDAQ Global Market or any other exchange, we intend to use equity, equity-based incentives and other employee benefits rather than pure cash compensation to motivate and retain our key employees, including our senior executives and managing directors. Our compensation mechanisms as a public company may not be effective, especially if the market price of our common stock declines. In addition, beginning with the current fiscal year, we have agreed to target our total compensation and benefits expense, excluding insurance premiums paid in respect of key-man life insurance policies for our benefit and equity-based compensation attributable to awards granted prior to September 30, 2007, to approximately 55% of revenues each year. Although we may increase this percentage for years subsequent to 2007, this agreement could adversely impact the overall compensation our key employees, including our senior executive officers and managing directors, may receive. Our senior executives and managing directors may receive less compensation under this formula than they otherwise would have received before it was adopted and may receive less compensation than they otherwise would receive at other firms. Such a reduction in compensation (or the belief that a reduction may occur) could make it more difficult to retain our key employees, including our senior executives and managing directors. In addition, current or potential managing directors and other employees may be more attracted to the benefits of working at a private partnership and the prospects of becoming a partner at such a firm, or at one of our larger competitors. Limitations on our access to capital could impair our ability to expand our underwriting businesses. Liquidity, or ready access to funds, is essential to financial services firms, including ours. Rodman & Remshaw, LLC ( R&R ), our broker-dealer subsidiary, is subject to the net capital requirements of the SEC, the Financial Industry Regulatory Authority, Inc. ( FINRA ), formerly known as the National Association of Securities Dealers Inc. (the NASD ), and various self-regulatory organizations of which it is a member. These requirements typically specify the minimum level of net capital a broker-dealer must maintain and also mandate that a significant part of its assets be kept in relatively liquid form. Any failure to comply with these net capital requirements could impair our ability to expand our underwriting business. Furthermore, there are laws that authorize regulatory bodies to block or reduce R&R s ability to distribute funds to us. As a result, regulatory actions could impede our access to funds that we need to make payments on obligations or dividend payments. In addition, because we hold equity interests in our subsidiaries, our rights as an equity holder to the assets of these subsidiaries may not materialize, if at all, until the claims of the creditors of these subsidiaries are satisfied. Our risk management policies and procedures may leave us exposed to unidentified or unanticipated risks. Our risk management strategies and techniques may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk. We are exposed to the risk that third parties that owe us money, securities or other assets will not perform their obligations. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure, and breach of contract or other reasons. We are also subject to the risk that our rights against third parties may not be enforceable in all circumstances, and, as a result, default risks may arise from events or circumstances that are difficult to detect, foresee or reasonably guard against. In addition, concerns about, or a default by, one institution could lead to significant liquidity problems, losses or defaults by other institutions, which in turn could adversely affect us. If any of the variety of processes and strategies we utilize to manage our exposure to various types of risk are not effective, we may incur losses. Our operations and infrastructure and those of the service providers upon which we rely may malfunction or fail. We outsource certain aspects of our technology infrastructure, including data centers, disaster recovery systems, and wide area networks, as well as some trading applications. We depend on our technology providers to manage and monitor those functions. A disruption of any of the outsourced services would be out of our control and could negatively impact our business. We have experienced disruptions on occasion, none of which has been material to our operations or results. However, we cannot guarantee that future disruptions with these providers will not occur or that their impact would not be material. We also face the risk of operational failure or termination of relations with any of the clearing agents, exchanges, clearing houses or other financial intermediaries we use to facilitate our securities transactions. Any such failure or termination could adversely affect our ability to effect transactions and to manage our exposure to risk. In addition, our ability to conduct business may be adversely impacted by a disruption in the infrastructure, including electrical, communications, transportation and other services, that support our businesses and the area in which we are located. This may affect, among other things, our financial, accounting or other data processing systems. Nearly all of our employees work in close proximity to each other. Although we have a formal disaster recovery plan in place, if a disruption occurs and our employees are unable to communicate with or travel to other locations, our ability to service and interact with our clients may suffer, and we may not be able to implement contingency plans that depend on communication or travel. Our operations also rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code and other events that could have an adverse impact on their integrity and/or viability. If one or more of such events occur, this could jeopardize our or our clients or counterparties confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, our clients , our counterparties or third parties operations. We may be required to expend significant additional resources to modify our protective measures, to investigate and remediate vulnerabilities or other exposures or to make required notifications, and we may be subject to litigation and financial losses that are either not insured or not fully covered through any insurance that we maintain. Strategic investments or acquisitions and joint ventures, or our entry into new business areas, may result in additional risks and uncertainties in our business. Our growth strategy contemplates strategic investments, acquisitions and joint ventures, which involve numerous risks and uncertainties, including the following: problems with the effective integration of operations and systems; the inability to maintain key pre-acquisition business relationships and integrate new relationships; increased operating costs; conflicts or disagreements among principals; risk of misconduct by employees not subject to our control; difficulties in realizing projected efficiencies, synergies and cost savings; and exposure to new or unknown liabilities. Any future growth of our business, such as the further expansion of our principal investment activities, may require significant resources and/or result in significant unanticipated losses, costs or liabilities. In addition, expansions, acquisitions or joint ventures may require significant managerial attention, which may be diverted from our other operations. These capital, equity and managerial commitments may impair the operation of our businesses. In addition, future acquisitions or joint ventures may involve the issuance of additional shares of our common stock, which may dilute the ownership interest of our existing stockholders. The demands of running a public company could result in additional costs and require our senior management to devote more time to regulatory and other requirements. As a public reporting company, we expect to incur an additional $1.0 million to $2.0 million in operating costs annually. These additional costs include the cost to comply with the significant regulatory and reporting requirements under the Exchange Act and other federal and state securities laws, listing and corporate governance requirements of the exchanges on which our common stock may be listed and the compliance obligations of the Sarbanes-Oxley Act of 2002 ( S-Ox ). Although we are currently listed on the OTC Bulletin Board, we have applied to list our common stock on the NASDAQ Global Market. In addition, we intend to hire additional financial reporting, internal control and compliance staff in order to develop and implement appropriate internal controls and reporting procedures. Our historical consolidated financial information does not reflect the added costs that we expect to incur as a public company or the resulting changes that will have occurred in our capital structure and operations. Under Section 404 of S-Ox, we will be required to furnish a report assessing our internal controls over financial reporting by March 31, 2008, the last date on which we can file our annual report with the SEC for the fiscal year ending December 31, 2007, and our auditors will be required to deliver a report on the effectiveness of our controls over financial reporting by March 31, 2009, the last date on which we can file our annual report with the SEC for the fiscal year ending December 31, 2008. Our assessment must include disclosure of any material weakness in our internal controls over financial reporting. We are not presently in compliance with S-Ox s internal control requirements. We are reviewing the adequacy of our financial controls and reporting systems and procedures. While we intend to make all necessary changes, it will take a substantial effort on our part to complete the documentation of our internal control and information systems and financial processes, assess their design, remediate any control deficiencies identified in these efforts and test of the design and operation of internal controls. We anticipate that we will need to hire additional accounting and finance staff to achieve appropriate segregation of duties. We cannot assure you that we will be able to complete the required assessment by our reporting deadline or that we can satisfy any applicable standards in subsequent years. An inability to complete and document this assessment or to comply in subsequent years could cause investors to lose confidence in the accuracy or completeness of our financial reports, which could adversely impact the price of our stock. Additionally, ineffective internal controls over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to delisting by any exchange on which our securities are listed. In addition, our senior managers do not have experience as officers of a publicly-traded company. Since inception, our senior management has been actively involved in the revenue generating activities of our operations. As the senior executives of a public reporting company, they will now be required to devote more of their time to compliance issues and to develop and implement the internal controls and reporting procedures required by S-Ox, which means they will have less time to devote to business and operational matters and to developing new business. If our senior management is required to devote more time to the additional requirements of managing a public company, and we are unable to successfully transition some or all of the revenue generating responsibilities of our senior management to other suitable professionals, our reputation, business, results of operations and financial condition may be harmed. Also, if we are unable to comply with S-Ox s internal controls requirements, we may not be able to obtain the independent accountant certifications that S-Ox requires publicly-traded companies to obtain. Evaluating our prospects in light of our limited operating history and fluctuations in our operating results is difficult. We have a limited operating history upon which you can evaluate our business and prospects. Also, because our business is relatively young and is still evolving, our historical operating results may not be useful in predicting our future operating results. As a relatively young enterprise, we face numerous risks and uncertainties, including those relating to our ability to attract and retain clients on a cost-effective basis, expand and enhance our service and product offerings, raise additional capital and respond to competitive market conditions. We may not be able to address these risks adequately, and our failure to do so may harm our business and the value of your investment in our common stock. In addition, our operating results may fluctuate because of a number of factors, many of which are outside our control. For this reason, comparing our results on a period-to-period basis may not be meaningful and you should not rely on our past results as an indication of future performance. Our quarterly and annual expenses as a percentage of revenues may be significantly different from our historical or projected rates. Our operating results in future quarters may fall below expectations. Any of these results could cause the price of our common stock to decline. Our short operating history and rapid growth do not accurately reflect the cyclical nature of the investment banking business. As our growth slows, we expect this cyclicality may become more apparent and may lead to further fluctuations in our performance and in the price of our common stock. Our historical and unaudited pro forma financial information may not permit you to predict our costs of operations. The historical consolidated financial information in this prospectus does not reflect the added costs that we expect to incur as a public company or the resulting changes that have occurred in our capital structure and operations as a result of the Exchange. For example, because we historically operated through partnerships and limited liability companies, our profits were only taxed at the owner level. In addition, our pro forma combined financial information does not make any adjustment to our operating expenses in light of our transition to a publicly-traded company. For example, in preparing our unaudited pro forma combined financial information, we deducted and charged to earnings estimated statutory income taxes based on a blended federal, state and local tax rate, which may be different from our actual tax rate in the future. Thus, neither our historical financial nor our unaudited pro forma combined financial information may be indicative of our actual experience as a public corporation. We may be required to make substantial payments under certain indemnification agreements. In connection with our conversion to corporate form, we entered into agreements that provide for the indemnification of our former members against certain tax liabilities relating to periods before the Exchange Date. We may be required to make substantial payments under these indemnification agreements, which could adversely affect our financial condition. Risks Related to Our Industry Difficult market conditions can adversely affect our business in many ways, which could materially reduce our revenue or income. Our business is materially affected by conditions in the global financial markets and economic conditions throughout the world. The future market and economic climate may deteriorate because of many factors beyond our control, including rising interest rates, the rate of inflation, currency exchange rates, changes in the regulatory environment, wars, acts of terrorism or political uncertainty. Difficult market and economic conditions, the level and volatility of interest rates, investor sentiment and political events have in the past adversely affected and may in the future adversely affect our business and profitability in many ways. For example, our revenues are directly related to the volume and value of investment banking transactions in which we are involved. During periods of unfavorable market or economic conditions, the volume and size of these transactions may decrease, thereby reducing the demand for our services and increasing price competition among financial services companies seeking those engagements. Our results of operations would be adversely affected by any reduction in the volume or size of corporate finance transactions. Similarly, weakness in equity markets and diminished trading volume of securities could adversely impact our sales and trading business. Finally, a general decline in the value of securities would adversely impact our investment portfolio. Our profitability may also be adversely affected by our fixed costs and the possibility that we would be unable to scale back other costs within a time frame sufficient to match any decreases in revenue relating to changes in market and economic conditions. Significantly expanded corporate governance and public disclosure requirements may result in fewer public offerings and discourage companies from engaging in capital market transactions, which may reduce the number of investment banking opportunities available for us to pursue. Highly-publicized financial scandals in recent years have led to investor concerns over the integrity of the U.S. financial markets, and have prompted the U.S. Congress, the SEC, the New York Stock Exchange ( NYSE ) and NASDAQ to significantly expand corporate governance and public disclosure requirements. To the extent that private companies, in order to avoid becoming subject to these new requirements, decide to forego public offerings or elect to be listed on foreign markets, our underwriting business may be adversely affected. In addition, provisions of S-Ox and the corporate governance rules imposed by self-regulatory organizations and stock exchanges have diverted the attention of many companies away from capital market transactions, including securities offerings and acquisition and disposition transactions. In particular, companies that either are or are planning to become public companies are incurring significant expenses in complying with the SEC reporting requirements relating to internal controls over financial reporting, and companies that disclose material weaknesses in such controls under the new standards may have greater difficulty accessing the capital markets. These factors, in addition to adopted or proposed accounting and disclosure changes, may have an adverse effect on our business. Financial services firms have been subject to increased scrutiny over the last several years, increasing the risk of financial liability and reputational harm resulting from adverse regulatory actions. The financial services industry has experienced increased scrutiny from a variety of regulators, including the SEC, the NYSE, NASDAQ, FINRA and state attorney generals. Penalties and fines sought by regulatory authorities have increased substantially over the last several years. This regulatory and enforcement environment has created uncertainty with respect to a number of transactions that had historically been entered into by financial services firms and that were generally believed to be permissible and appropriate. We may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations. Each of the regulatory bodies with jurisdiction over us has regulatory powers dealing with many aspects of financial services, including, but not limited to, the authority to fine us and to grant, cancel, restrict or otherwise impose conditions on the right to carry on particular businesses. For example, a failure to comply with the obligations imposed by the Exchange Act on broker-dealers and the Investment Advisers Act on investment advisers, including record-keeping, advertising and operating requirements, disclosure obligations and prohibitions on fraudulent activities, or by the Investment Company Act of 1940, could result in investigations, sanctions and reputational damage. We also may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other U.S. or foreign governmental regulatory authorities, FINRA or other self- regulatory organizations that supervise the financial markets. Substantial legal liability or significant regulatory action against us could have adverse financial effects on us or harm our reputation, which could harm our business prospects. Financial services firms are subject to numerous conflicts of interests or perceived conflicts. The SEC and other federal and state regulators have increased their scrutiny of potential conflicts of interest. We have adopted, and regularly review and update, various policies, controls and procedures to address or limit actual or perceived conflicts. However, appropriately addressing conflicts of interest is complex and difficult and our reputation could be damaged if we fail, or appear to fail, to appropriately address conflicts of interest. Our policies and procedures to address or limit actual or perceived conflicts may also result in increased costs and additional operational personnel. Failure to adhere to these policies and procedures may result in regulatory sanctions or litigation against us. For example, the research operations of investment banks have been and remain the subject of heightened regulatory scrutiny which has led to increased restrictions on the interaction between equity research analysts and investment banking professionals at securities firms. Several securities firms in the United States reached a global settlement in 2003 and 2004 with certain federal and state securities regulators and self-regulatory organizations to resolve investigations into the alleged conflicts of interest of research analysts, which resulted in rules that have imposed additional costs and limitations on the conduct of our business. our 2007 Stock and Incentive Plan. The issuance of these shares was exempt under Sections 4(2) and 4(6) of the Securities Act. Item 16. Exhibits Exhibits No. Description 1 (i) Form of Underwriting Agreement(3) 1 (ii) Form of Lock-up Agreement 3 (i)(a) Certificate of Incorporation(1) 3 (i)(b) Amendment to Certificate of Incorporation(3) 3 (ii) Bylaws(1) 4.1 Specimen stock certificate(3) 4.2 Form of Enthrust Common Stock Purchase Warrant(2) 4.3 Registration Rights Agreement dated July 10, 2007(2) 5 Form of opinion of Morse, Zelnick, Rose & Lander, LLP 10.1 2007 Stock and Incentive Plan(3) 10.2 Michael Vasinkevich Employment Agreement(2) 10.2 (a) Amendment to Michael Vasinkevich Employment Agreement(2) 10.3 John J. Borer III Employment Agreement, as amended(2) 10.3 (a) Amendment to John J Borer III Employment Agreement(2) 10.4 Edward Rubin Employment Agreement, as amended(2) 10.4 (a) Amendment to Edward Rubin Employment Agreement(2) 10.5 Amended and Restated Wesley Clark Employment Agreement(2) 10.6 Form of Tax Indemnification Agreement, dated as of July 10, 2007(2) 10.7 Form of Indemnification Agreement, dated as of July 10, 2007(2) 10.8 Consents of director-nominees (a) Consent of Mark L. Friedman(3) (b) Consent of Winston Churchill(3) (c) Consent of Marvin I. Haas (d) Consent of Peter F. Drake 10.9 Michael Lacovara Employment Agreement(3) 10.10 Executive Bonus Plan(3) 21 Subsidiaries(3) 23.1 Consent of Marcum & Kliegman LLP 23.2 Consent of Morse, Zelnick, Rose & Lander, LLP(3) Our exposure to legal liability is significant, and damages and other costs that we may be required to pay in connection with litigation and regulatory inquiries, and the reputational harm that could result from legal action against us, could adversely affect our businesses. We face significant legal risks in our businesses and, in recent years, the volume of claims and amount of damages sought in litigation and regulatory proceedings against financial institutions have been increasing. These risks include potential liability under securities or other laws for materially false or misleading statements made in connection with securities offerings and other transactions, employment claims, potential liability for fairness opinions and other advice we provide to participants in strategic transactions and disputes over the terms and conditions of complex trading arrangements. As an investment banking firm, we depend to a large extent on our reputation for integrity and professionalism to attract and retain clients. As a result, if a client is not satisfied with our services, it may be more damaging to our business than to other businesses. Moreover, our role as advisor to our clients on important underwriting or mergers and acquisitions transactions involves complex analysis and the exercise of professional judgment, including rendering fairness opinions in connection with mergers and acquisitions and other transactions. Therefore, our activities may subject us to the risk of significant legal liabilities to our clients and aggrieved third parties, including our clients stockholders who could bring securities class action suits against us. Our investment banking engagements typically include broad indemnities from our clients and provisions to limit our exposure to legal claims relating to our services. However, there can be no assurance that these provisions will protect us or be enforceable in all cases. As a result, we may incur significant legal and other expenses in defending against litigation and may be required to pay substantial damages for settlements and adverse judgments. Substantial legal liability or significant regulatory action against us could harm our results of operations or harm our reputation, which could adversely affect our business and prospects. Employee misconduct, which is difficult to detect and deter, could harm us by impairing our ability to attract and retain clients and subjecting us to significant legal liability and reputational harm. Recently, there have been a number of highly-publicized cases involving fraud or other misconduct by employees in the financial services industry, and there is a risk that our employees could engage in misconduct that adversely affects our business. For example, we often deal with confidential matters of great significance to our clients. If our employees were to improperly use or disclose confidential information provided by our clients, we could be subject to regulatory sanctions and suffer serious harm to our reputation, financial position, current client relationships and ability to attract future clients. We are also subject to a number of obligations and standards arising from our investment management business and our authority over the assets managed by our investment management business. The violation of these obligations and standards by any of our employees would adversely affect us and our clients. It is not always possible to deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in all cases. If our employees engage in misconduct, our business could be adversely affected. Our sales and trading business may be adversely affected by potential changes in industry practices. Historically, our clients have paid us for equity research through commissions on trades. Recently, Fidelity Investments, a large fund manager, entered into arrangements with financial institutions of which it is a client, pursuant to which Fidelity agreed to pay separately for trading and research services, a process known as unbundling. As a result, the financial institutions will reduce their commission on trades but will charge Fidelity separately for research that they provide. It is uncertain whether unbundling arrangements will become an industry trend and, if so, to what extent. Furthermore, if it does become the industry norm, we cannot predict the consequences it will have on our operations in general, or on our sales and trading and research businesses in particular.
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+detail later in this prospectus. This summary provides an overview of selected information and does not contain all of the information you should consider. Before investing in our common stock, you should carefully read this entire prospectus, including our financial statements and related notes and the information in Risk Factors. References in this prospectus to we, us and our refer to ZARS Pharma, Inc. Overview of Our Business We are a specialty pharmaceutical company focused on the development and commercialization of topically administered drugs using our proprietary drug delivery technologies, primarily in the area of pain management. We have developed a portfolio of proprietary products and product candidates based on our Controlled Heat-Assisted Drug Delivery (CHADD) technology and our cream technologies (Peel and DuraPeel) that transform, or phase-change, from an initial liquid phase to a solid phase during application. Our products and product candidates include two products that have been approved for marketing (Pliaglis, and Synera which is marketed as Rapydan in Sweden) and one product candidate for which we commenced Phase 3 clinical trials in June 2007 (ThermoProfen). We also have begun human clinical trials for two additional product candidates and plan to file two investigational new drug (IND) applications in 2007. We have not generated any revenues from commercial sales of our products and have not been profitable. Our products and product candidates are designed to address the inadequacies of current therapies, including efficacy, side effects, patient compliance and frequency of dosing. By using our proprietary drug delivery technologies in combination with approved drugs, we believe we can address many of the limitations of existing therapies while reducing the development risks, costs and timelines of new chemical entities. Our Products and Product Candidates Our current portfolio includes the following approved products and product candidates: Pliaglis. Pliaglis is a topical anesthetic cream that consists of a proprietary formulation of lidocaine and tetracaine utilizing our Peel technology. Pliaglis is approved for marketing in the United States for local dermal anesthesia prior to painful cosmetic procedures such as laser surgery and dermal filler injections. Pliaglis was approved by the Food and Drug Administration (FDA) in June 2006 and we have entered into an exclusive license agreement with Galderma Pharma S.A. (Galderma) for marketing rights in the United States and Canada. We received a $30 million license fee from Galderma, are eligible for an additional $10 million milestone payment and will receive royalties on net sales of Pliaglis. We expect Pliaglis to be launched in the United States in the second half of 2007, and we are currently seeking a commercialization partner for territories outside the United States. Synera. Synera, marketed as Rapydan in Sweden, is a topical patch that combines a proprietary formulation of lidocaine and tetracaine with our CHADD technology. Synera was approved by the FDA in June 2005 to provide local dermal analgesia for potentially painful superficial procedures, such as venous access procedures involving needles and immunization injections of children. We have licensing agreements with Endo Pharmaceuticals, Inc. (Endo) to commercialize Synera in the United States, Canada and Mexico, and EUSA Pharma (Europe) Limited (EUSA Pharma) to commercialize Rapydan in Europe. We have received $19 million in initial license fees and milestone payments from Endo, and are eligible for up to $23 million in additional milestone payments, as well as royalties based on net sales of Synera. We have received $3 million in cash and stock in initial license fees and milestone payments from EUSA Pharma, and may receive up to $18.5 million in additional milestone payments, as well as royalties on net sales of Rapydan. Synera has been launched in the United States and Rapydan has been launched in Sweden. EUSA Pharma is currently seeking regulatory approval for Rapydan in the United Kingdom, Germany, France, Spain and Italy, and, if approved, expects to begin launching in these territories in the second half of 2007. Table of Contents ThermoProfen. ThermoProfen is a transdermal patch containing ketoprofen integrated with a long-lasting CHADD unit designed to assist in the local delivery of the drug and to provide therapeutic heat. ThermoProfen is in Phase 3 clinical trials for the treatment of mild to moderate chronic pain associated with osteoarthritis (OA) of the knee, a condition which we estimate based on IMS Health data affects 6.5 million Americans. We have retained global commercialization rights to ThermoProfen. If ThermoProfen is approved, we intend to market it ourselves into specialty markets such as pain and rheumatology, and we may seek a co-promotion partner for the larger primary care market. Ketoprofen DuraPeel. Ketoprofen DuraPeel is a phase-changing cream designed to deliver ketoprofen locally for an extended period of time. The product is being developed to treat acute musculoskeletal pain resulting from soft tissue injuries such as muscle strains, ankle sprains and sports injuries. Ketoprofen DuraPeel is currently in Phase 1 clinical trials. Alprazolam Patch. The alprazolam patch is a transdermal patch containing a proprietary formulation of alprazolam that is being developed to treat panic disorder. We believe this product will deliver alprazolam across the skin at a controlled rate for up to three days, potentially offering improved patient compliance and product efficacy. The alprazolam patch is currently in Phase 1 clinical trials. Our Drug Delivery Technologies We have invented and developed two novel drug delivery technologies that have led to our two FDA approved products and product pipeline. These technologies are: Controlled Heat-Assisted Drug Delivery (CHADD) Our Controlled Heat-Assisted Drug Delivery (CHADD) unit generates heat when exposed to the air. The CHADD unit contains a heat-generating powder that consists of a proprietary mixture of several non-toxic ingredients which produce heat when exposed to the air. After an initial rise in temperature, the mild heat generated by the CHADD unit will reach and maintain a controlled temperature range for a pre-determined period of time. CHADD units can be customized to achieve the specific temperature and duration of heating required for therapy. Depending on the intended application, a CHADD unit can be designed to deliver heat for periods from 20 minutes to 12 hours. Phase-Changing Cream Technologies Peel Our Peel drug delivery technology is a drug-containing cream which, once applied to a patient s skin, forms a white pliable layer that releases drug into the skin. The Peel technology allows drug delivery to continue until the product dries, after which drug transfer from the formulation stops. Peel based products can be applied over contoured parts of the body and left on for periods from 20 to 60 minutes, depending on the desired effect. After the desired effect is achieved, the Peel product can be easily peeled from the skin. This drug delivery technology is well-suited for drugs that require a single, short-term application, such as local anesthetics applied before a painful procedure and for uneven, irregular or contoured surfaces. DuraPeel Our DuraPeel technology allows a drug to be spread as a cream onto a patient s skin where it forms a clear pliable layer that releases drug into the skin for up to 12 hours. The DuraPeel layer is not susceptible to inadvertent removal by touching or contact with clothing. Following the desired treatment time, the DuraPeel product can be easily peeled or washed from the skin. DuraPeel can be applied over contoured parts of the body and we believe it is suitable for delivering topical local anesthetics, analgesics, steroids, antivirals, antifungals and retinoids. Table of Contents Table of Contents Our Strategy Our goal is to become a leading, integrated specialty pharmaceutical company focused on the development and commercialization of innovative products primarily in the area of pain management. Our strategies to accomplish this goal include: Leverage our drug delivery technologies to develop additional products; Complete clinical development and commercialize ThermoProfen, our lead product candidate; Maximize the commercial opportunities for Pliaglis and Synera, which is marketed as Rapydan in Europe; and Develop our own sales and marketing capabilities. Risks Related to Our Business We are subject to a number of risks which could adversely affect our business, offset or eliminate any advantages of our approach or prevent us from successfully implementing our business strategy. These risks include: As of June 30, 2007, we had an accumulated deficit of approximately $44.4 million. We expect our expenses to increase as we expand our product candidate development programs, develop a manufacturing capability, build our own sales and marketing capability and add the necessary infrastructure to support operating as a public company. As a result, we expect to incur substantial and increasing net losses and negative cash flow for the foreseeable future. Our product candidates are in preclinical and clinical development and have not received regulatory approval from the FDA or any foreign regulatory authority. To obtain regulatory approval to market and sell ThermoProfen, or any other product candidate, we must satisfy the FDA, the European Medicines Agency (EMEA) and other regulatory agencies that our product candidates are both safe and effective through extensive preclinical and clinical studies. Our ability to generate profits in the future depends on the successful development and regulatory approval of our product candidates and commercialization of our products. Our longer term success depends substantially on ThermoProfen, our lead product candidate, and our other product candidates and we may not be able to successfully commercialize ThermoProfen or any other product candidate. Our success will depend, in large part, on our ability to obtain additional patents, maintain our existing patent positions and obtain and maintain adequate protection for the other intellectual property incorporated into our products. Our patents may be challenged, narrowed, invalidated, or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the term of patent protection we have for our products. These and other risks of which you should be aware before you decide to buy our common stock are discussed more fully in the
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+This summary highlights selected information in this prospectus. It may not contain all the information that may be important to you. You should review carefully the risk factors and the more detailed information and financial statements contained elsewhere in this prospectus, for a more complete understanding of our business and this offering. In this prospectus, unless the context otherwise indicates, the terms , ' ': , ' ': we, , ' ': , ' ': us and , ' ': , ' ': our (and similar terms) refer to Ultrapetrol (Bahamas) Limited and its subsidiaries. Unless otherwise indicated, all references to currency amounts in this prospectus are in U.S. Dollars. See the , ' ': , ' ': Glossary of shipping terms included in this prospectus for definitions of certain terms used in this prospectus that are commonly used in the shipping industry. OUR COMPANY We are an industrial transportation company serving the marine transportation needs of our clients in the markets on which we focus. We serve the shipping markets for grain, minerals, crude oil, petroleum, refined petroleum products and forest products, as well as the offshore oil platform supply market, and the leisure passenger cruise market through our operations in the following four segments of the marine transportation industry. Our River Business, with 502 barges, is the largest owner and operator of river barges and pushboats that transport dry bulk and liquid cargos through the Hidrovia Region of South America, a large area with growing agricultural, forest and mineral related exports. This region is crossed by navigable rivers that flow through Argentina, Bolivia, Brazil, Paraguay and Uruguay to ports serviced by ocean export vessels. Our Offshore Supply Business owns and operates vessels that provide critical logistical and transportation services for offshore petroleum exploration and production companies, in the North Sea and the coastal waters of Brazil. Our Offshore Supply Business fleet currently consists of proprietarily designed, technologically advanced platform supply vessels, or PSVs. We have four PSVs in operation and four under construction. Two PSVs are under construction in Brazil and are contracted to be delivered in the second quarter of 2007 and in 2008, respectively. We recently contracted with a shipyard in India to construct two PSVs for delivery commencing in 2009, with an option to build two more. Our Ocean Business owns and operates eight oceangoing vessels, including three Handysize/small product tankers which we intend to use in the South American coastal trade where we have preferential rights and customer relationships, three versatile Suezmax Oil-Bulk-Ore, or Suezmax OBO, vessels, one Aframax tanker and one semi-integrated tug/barge unit. Our Ocean Business fleet has an aggregate carrying capacity of approximately 651,000 deadweight tons, or dwt, and our three Suezmax OBOs are capable of carrying either dry bulk or liquid cargos, providing flexibility as dynamics change between these market sectors. Our Passenger Business fleet consists of two vessels with a total carrying capacity of approximately 1,600 passengers, and operates primarily in the European cruise market. We currently employ our largest passenger vessel under a multi-year seasonal charter with a European tour operator and the other passenger vessel in the Aegean Sea for the European summer season of 2007. In addition, we have operated one of our vessels during periods outside the European travel season for certain events. We have a diverse customer base including large and well-known petroleum, agricultural, mining and tour operating companies. Some of our significant customers over the last three years include affiliates of Archer Daniels Midland, British Gas, Cargill, Chevron, Continental Grain, Empresa Nacional de Petroleo (ENAP), the national oil company of Chile, Industrias Oleaginosas, Panocean, Petrobras, the national oil company of Brazil, Petropar, the national oil company of Paraguay, Rio Tinto, Swissmarine, Total, Trafigura, Travelplan, and Vicentin. We are focused on growing our businesses while maintaining the versatility of our fleet and the diversity of industries that we serve. We believe maintaining this versatility and diversity will maximize our ability to pursue new growth opportunities and minimize our dependence on any particular sector of the marine transportation industry. The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted. PRELIMINARY PROSPECTUS Subject to Completion April 19,2007 9,803,922 Shares We are offering 3,900,000 shares of our common stock in this offering, and the selling shareholders identified in this prospectus are offering 5,903,922 shares of our common stock. We will not receive any of the proceeds from any shares of common stock sold by the selling shareholders. Our common stock is listed on The Nasdaq Global Market under the symbol , ' ': , ' ': ULTR. On April 18, 2007, the closing price of our common stock on the Nasdaq Global Market was $19.89 per share. Investing in our common stock involves a high degree of risk. Before buying any shares, you should carefully read the discussion of material risks of investing in our common stock in , ' ': , ' ': Risk factors beginning on page 13 of this prospectus. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Per Share Total Public offering price $ $ Underwriting discounts and commissions $ $ Proceeds, before expenses, to us $ $ Proceeds, before expenses, to the selling shareholders $ $ The underwriters may purchase from one of our selling shareholders an additional 1,470,588 shares of our common stock at the public offering price, less the underwriting discounts and commissions, to cover over-allotments, if any, within 30 days from the date of this prospectus. If the underwriters exercise this option in full, the total underwriting discount and commissions will be $ and the total proceeds to the selling shareholders, before expenses, will be $ . The underwriters are offering the common stock as set forth under , ' ': , ' ': Underwriting. Delivery of the shares will be made on or about , 2007. UBS Investment Bank Bear, Stearns & Co. Inc. Jefferies & Company Raymond James DVB Capital Markets Enforceability of civil liabilities We are a Bahamian corporation. Our subsidiaries are incorporated in Argentina, The Bahamas, Brazil, Chile, Colombia, Liberia, Mexico, Panama, Paraguay, Spain, the United Kingdom, the United States of America, Uruguay and Venezuela. All of our vessels and barges are flagged in Argentina, Bolivia, Brazil, Chile, Liberia, Panama or Paraguay. Most of our and our subsidiaries offices, administrative activities and other assets, as well as those of the independent registered public accountants and the expert named herein, are located outside the United States. In addition, some of our directors and officers, and the directors and officers of our subsidiaries, are residents of jurisdictions other than the United States, and all or a substantial portion of the assets of such persons are or may be located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon us or our subsidiaries or such persons, and it may be difficult for you to enforce judgments obtained in United States courts against us or our subsidiaries, our directors and officers, the directors and officers of our subsidiaries, the independent registered public accountants or the expert named herein, or the assets of any such parties located outside the United States. Further, it may be difficult for you to enforce judgments obtained in United States courts, including those predicated upon the civil liability provision of the federal securities laws of the United States, against such parties in courts outside of the United States. Industry The discussions relating to the international shipping industry contained under the sections of this prospectus entitled , ' ': , ' ': Summary, , ' ': , ' ': The international shipping industry and , ' ': , ' ': Business have been reviewed by Doll Shipping Consultancy, or DSC, which has confirmed to us that the discussion contained in those sections accurately describes the international shipping markets subject to the reliability of the data supporting the statistical and graphical information present in this prospectus. DSC is an independent company based in the United Kingdom that provides market analysis and strategic planning services to the shipping industry, and has provided us with statistical and other data regarding the shipping industry and the particular markets in which we operate. You can find these data in this prospectus in, among other locations, the section entitled , ' ': , ' ': The international shipping industry. DSC has advised us that these data are drawn from published and private industry sources. DSC has also advised us that: some industry data they provided are based upon estimates or subjective judgments in circumstances where data for actual market transactions either do not exist or are not publicly available; the published information of other maritime data collection experts may differ from the data provided to us by DSC; and while DSC has taken reasonable care in the compilation of the data it has provided to us and believes such data to be accurate, data collection is subject to limited audit and validation procedures. Neither we nor any of our affiliates have independently verified the information supplied to us by DSC and neither we nor any of our affiliates make any representations regarding its accuracy. OUR COMPETITIVE STRENGTHS We believe that the following strengths have contributed to our success. Multiple Growth Opportunities. We believe that we have successfully identified a series of growth opportunities in the marine transportation industry and have built businesses with competitive advantages that have grown rapidly by meeting the needs of a range of multinational customers. Diversification. We believe that our diversification across multiple segments of the marine transportation industry provides significant protection against business cycles in any particular segment. Large Scale Generates Efficiencies. We are the largest provider of river transportation services in the Hidrovia Region, which gives us economies of scale and increased negotiating power. Our size has enabled us, alone among our competitors in the Hidrovia Region, to implement an operational system through which we provide our customers with a continuous stream of available barges while reducing our operating costs on a per ton basis. Advanced Technology. Our PSVs have advanced dynamic positioning systems and benefit from our proprietary design that includes oil recovery capabilities in most of our PSVs, azimuth thrusters, and greater cargo capacity and deck space than most PSVs of standard design. These capabilities enable us to better serve clients operating in challenging offshore environments. Our River Business uses a navigational system that allows around-the-clock operation on a river system that lacks the signals otherwise necessary for night navigation. Versatile Ocean Fleet. We can readily switch our Suezmax OBOs between dry bulk and liquid cargo carriage to take advantage of rate differentials in these markets. Further, because of her narrow beam, our Aframax tanker is able, despite her large Aframax dwt, to transit the Panama Canal. Our Handysize/small product tankers can transport a variety of different cargos, from heated crudes to multiple light products such as gasoline and jet fuel. Long-Term Customer Relationships. We have long-standing relationships with large, stable customers, including affiliates of major international oil and agriculture companies, including Petrobras and Cargill, which have been our customers for 13 years and nine years, respectively, as well as Archer Daniels Midland, Continental Grain and ENAP. High Standards of Performance and Safety. The quality of our vessels and the expertise of our vessel managers, crews and engineering resources help us maintain safe, reliable and consistent performance. Established History and Experienced Management Team. Our management team is led by members of the Menendez family, which has been in the shipping industry since 1876. Our senior executive officers have on average 35 years of experience in the shipping industry. Preferential Treatment in Certain Markets. Certain countries provide preferential treatment for vessels that are flagged in their jurisdiction or chartered in for operation by local ship operators. Brazilian law provides a preference for the utilization of Brazilian-flagged vessels in its cabotage trade. Through one of our Brazilian subsidiaries, we have the competitive advantage of being able to trade most of our PSVs in the Brazilian cabotage market, enabling them to obtain employment in preference to vessels without those cabotage privileges. In addition, certain of our ocean vessels enjoy special privileges in Argentina and Chile. OUR BUSINESS STRATEGY Our business strategy is to continue to operate as a diversified marine transportation company with an aim to maximize our growth and profitability while limiting our exposure to the cyclical behavior of individual sectors of the marine transportation industry. We plan to implement our business strategy by pursuing the following objectives. Capitalizing on Attractive Fundamentals in Our River Business. We plan to use our leading market position in the Hidrovia Region to grow our River Business by capitalizing on the region s growing agricultural, iron ore and other commodity exports, the cost effectiveness of river transport compared to available alternatives and our proprietary transportation infrastructure. We plan to increase the size and capacity of many of our existing barges and invest in river infrastructure in order to take advantage of this opportunity. We may also seek to add capacity by acquiring assets or companies currently operating in the Hidrovia Region. Expansion of Our Barge Construction Capability. We intend to use a portion of the proceeds of the offering to expand the capacity of our shipyard in the Hidrovia Region to facilitate the building of new barges, enabling us to design and construct barges that are best suited for the characteristics of our River Business. Certain new mining concerns have announced plans to produce and ship through the river system significant additional volumes of iron ore. This presents the challenge of creating significant new capacity in a cost-effective manner. We believe that having our own barge producing capability will enable us to meet this challenge at lower cost than purchasing the barges overseas and transporting them to South America. Expanding Our Offshore Supply Business. We have taken delivery of four proprietarily designed PSVs for our Offshore Supply Business and have four more PSVs under construction, with an option for another two PSVs, which, if exercised, would give us a total fleet of ten vessels. Growing Our Ocean Fleet. We plan on incorporating additional chemical/product tankers into our ocean fleet. We believe that these ships will fill a demand from our existing customers for vessels to service routes where both the point of origin and destination are in South America. In addition, we are studying alternative, efficient ways of expanding our ocean fleet in the current market, in which vessels generally sell at a premium by modifying or converting existing tonnage. Redeploying Vessels to the Most Attractive Markets. Under appropriate market conditions, we intend to take advantage of the versatility of some of our vessels and to alter the geographic and industry focus of our operations by redeploying vessels to the most profitable markets. In addition, we actively manage the deployment of our fleet between longer-term and shorter-term time charters. Expanding Our Passenger Fleet. We intend to further expand our Passenger Business through timely and selective acquisitions of secondhand passenger vessels in accordance with identified customer needs and to increase revenue by also employing our vessels outside of the European travel season. Generating Operational Efficiencies. We have identified opportunities and are implementing our plans to improve overall efficiency and profitability. For example, in our River Business, we plan to increase the size and capacity of many of our existing barges and invest in new engines that burn less expensive fuel for our line pushboats, which we use on our longer river voyages. We will also continue to focus on optimizing our barge and tug scheduling, maximizing loads and convoy size and minimizing empty return voyages. CHARTERING STRATEGY AND FLEET MANAGEMENT We continually monitor developments in the shipping industry and make charter-related decisions on an individual vessel and segment basis as well as our view of overall market conditions. We conduct the day-to-day management and administration of our operations in-house and through our subsidiaries. Our subsidiary, Ravenscroft, provides technical ship management for the vessels in our Offshore Supply, Ocean and Passenger Businesses while our subsidiary, UABL Limited, or UABL, manages our River Business. In addition to servicing our own vessels, Ravenscroft also manages vessels owned by third parties. IMPORTANT DEVELOPMENTS AND CURRENT INITIATIVES We believe the following developments and initiatives will have a significant impact on the operations of our various businesses. River Business New vessels. On March 7, 2007, we acquired ownership of Candies Paraguayan Ventures LLC and Compania Paraguaya de Transporte Fluvial S.A., existing competitors in our river system, or the Otto Candies Acquisition, adding to our fleet one 4,500 HP shallow drafted pushboat and twelve Jumbo 2,500 dwt barges, all of which were built in the United States in 1995. Expansion and fuel efficiency initiatives. We have begun a three year program to expand the size of approximately 130 of our barges. To date, we have expanded 12 barges, and we expect to have a total of 62 expanded by the end of 2007. We are also working on a four year program to replace the diesel engines in 16 of our line pushboats with new engines that will burn less expensive heavy fuel oil. We have to date contracted to purchase six of these new engines from MAN Diesel with expected delivery dates in July and November of 2007. Expansion of our barge construction capability. We plan to expand the capacity of our shipyard in the Hidrovia Region and adequately equip it to build new barges and grow our fleet in order to meet our expected future incremental demand in a cost effective manner. We expect that the most significant impact from these programs on our operations will occur after 2007. Offshore Supply Business Acquisition of additional 66.67% interest. On March 21, 2006, we acquired an additional 66.67% of UP Offshore, which is the holding company for our Offshore Supply Business, raising our ownership to 94.45%. Prior to this transaction, we used the equity method of accounting for our investment in UP Offshore. Since the date of the transaction, we consolidate UP Offshore into our financial results. New vessels. Our 2006 operating results reflect the partial year operations of two newly built PSVs, one that we received and placed into service in March 2006, and one that we received in August 2006 and placed into service in September 2006. We expect to take delivery of two more sister vessels currently under construction in Brazil in the second quarter of 2007 and in 2008, respectively. In addition, we have recently signed contracts with a shipyard in India for the construction of two additional vessels to be delivered in 2009, with an option to build two more. Ocean Business Vessel acquisitions and dispositions in our Ocean Business. On October 23, 2006, we purchased our Amadeo, a 39,350 mt dwt crude and product carrier. Upon delivery in December 2006, we sent this vessel to a Romanian shipyard where we have contracted for retro-fitting to double hull. We expect this vessel to commence service in South America in the second quarter of 2007. On January 5, 2007 we took delivery of our new acquisition, Alejandrina, a 9,200 metric tons dwt 2006 built double hull product carrier which will commence service in South America in late March 2007. Passenger Business Vessel deployment in our Passenger Business. We completed a refurbishment of all passenger accommodations on the New Flamenco in February 2006 and she has secured employment at increased rates for the European summer season of 2007 with an option for the 2008 summer season. We have entered into an agreement with Monarch Classic Cruises for the Grand Victoria (to be renamed Blue Monarch) to participate in their program in the Aegean Sea during the European summer season of 2007. OUR CORPORATE HISTORY We were originally formed by members of the Menendez family with a single oceangoing vessel in 1992, and were incorporated in our current form as a Bahamas corporation on December 23, 1997. Our Ocean Business has grown through the investment of capital from the operation of our fleet along with other sources of capital to acquire additional vessels. In 1998, we issued $135.0 million of 10&frac12;% First Preferred Ship Mortgage Notes due 2008, or the Prior Notes. By 2001, our fleet reached 13 oceangoing vessels with a total carrying capacity of 1.1 million dwt. During 2003, in an effort to remain ahead of changing environmental protection regulations, we began to sell all of our single hull Panamax and Aframax tankers (five vessels in total), a process that we completed in early 2004. We began our River Business in 1993 with a fleet consisting of one pushboat and four barges. In October 2000, we formed a joint venture with American Commercial Barge Lines Ltd., or ACL. From 2000 to 2004, we built UABL into the leading river barge company in the Hidrovia Region of South America. Using some of the proceeds from the sale of our single hull Panamax tankers, in 2004, we purchased from ACL their 50% equity interest in UABL. During 2000, we received a $50.0 million equity investment from an affiliate of Solimar Holdings, Ltd., or Solimar, a wholly-owned subsidiary of the AIG-GE Capital Latin American Infrastructure Fund L.P., or the Fund. The Fund was established at the end of 1996 to make equity investments in Latin America and the Caribbean countries. The Fund has also been our partner in other ventures, including UP Offshore. In December 2002, we began our relationship with International Finance Corporation, or IFC, which is the private sector arm of the World Bank Group that provides loans, equity, and other services to support the ULTRAPETROL (BAHAMAS) LIMITED SUMMARY ORGANIZATIONAL CHART 1. Our partner in Brazil, Comintra Enterprises Ltd., or Comintra, owns 5.55% of UP Offshore (Bahamas) Ltd. private sector in developing countries. In total, IFC, together with its participant banks and co-lender, KfW, has provided us with $115.0 million of credit and equity commitments to support our River and Offshore Supply Businesses. We formed our Offshore Supply Business during 2003 in a joint venture with a wholly-owned subsidiary of the Fund and Comintra. We capitalized the business with $45.0 million of common equity and $70.0 million of debt and preferred equity from IFC to construct our initial fleet of six PSVs. On March 21, 2006, we purchased 66.67% of the issued and outstanding capital stock of UP Offshore (Bahamas) Ltd., or UP Offshore, a company through which we operate our Offshore Supply Business from an affiliate of Solimar, one of the selling shareholders, for a purchase price of $48.0 million. Following this acquisition, we hold 94.45% of the issued and outstanding shares of UP Offshore. In November 2004, we issued $180.0 million of 9% First Preferred Ship Mortgage Notes due 2014, or the Notes. The proceeds of the Notes offering were used principally to prepay the Prior Notes and to buy an additional Ocean Business asset, further invest in our River Business, and to diversify into the Passenger Business with the acquisition of two passenger vessels. In October 2006, we completed our initial public offering (our , ' ': , ' ': IPO ) of 12.5 million shares of our common stock, which generated gross proceeds of $137.5 million. On November 10, 2006, the Underwriters of our IPO exercised their over-allotment option to purchase from the selling shareholders in our IPO an additional 232,712 shares of our common stock. We did not receive any of the proceeds from the sale of shares by these shareholders in the over-allotment option. CORPORATE INFORMATION We are incorporated in the Commonwealth of The Bahamas under the name Ultrapetrol (Bahamas) Limited. Our principal offices in The Bahamas are located at Ocean Centre, Montagu Foreshore, East Bay St., P.O. Box SS-19084, Nassau, Bahamas. Our telephone number there is 1 (242) 364-4755. THE OFFERING Common stock offered by us 3,900,000 shares. Common stock offered by the selling shareholders 5,903,922 shares. Underwriters over-allotment option 1,470,588 shares from one of our selling shareholders. Common stock to be outstanding immediately after this offering 32,246,952 shares. Use of proceeds We expect to use the net proceeds of this offering as follows: $13.8 million to replace cash on hand used to fund the Otto Candies Acquisition, including related expenses; $43.3 million to fund construction costs of the two new PSVs being built in India, including $8.7 million to replenish cash on hand used to fund the first advance under the construction contracts and $34.6 million to be held as working capital to fund the balance of the construction costs; $12.0 million to fund the expansion of the capacity of our shipyard in the Hidrovia Region for construction of new barges; and the remainder for general corporate purposes. We will not receive any of the proceeds from any sale of our common stock by the selling shareholders. See , ' ': , ' ': Use of proceeds. Dividend policy We anticipate retaining most of our future earnings, if any, for use in our operations and the expansion of our business. Any determination as to dividend policy will be made by our board of directors and will depend on a number of factors, including the requirements of Bahamian law, our future earnings, capital requirements, financial condition and future prospects, restrictions imposed by the terms of our indebtedness, and such other factors as our board of directors may deem relevant. See , ' ': , ' ': Dividend policy. Nasdaq Global Market listing Our common stock is listed on The Nasdaq Global Market under the symbol , ' ': , ' ': ULTR. Special Voting Rights Under our Amended and Restated Memorandum of Association, the selling shareholders are expressly entitled to seven votes per share on all shares held directly by them and all other holders of shares of our common stock are entitled to one vote per share. The special voting rights of the selling shareholders are transferable to each other but are not transferable to any other shareholders, and apply only to shares held by them on October 12, 2006, and not to any shares they subsequently purchase or repurchase. Our Amended and Restated Memorandum of Association also provides certain protections for our shareholders that do not have these special voting rights including certain tag-along rights. After giving effect to this offering, the selling shareholders will have 74.1% of the voting power of our common stock. Please see , ' ': , ' ': Description of capital stock elsewhere in this prospectus. Unless we indicate otherwise or the context otherwise requires, all information in this prospectus: assumes that the underwriters do not exercise their over-allotment option; does not give effect to the warrant in favor of Solimar representing 146,384 shares of our common stock.
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+PROSPECTUS SUMMARY The items in the following summary are described in more detail later in this prospectus. This summary provides an overview of selected information and does not contain all of the information you should consider before making an investment decision. Therefore, you should read carefully the entire prospectus, including the financial statements and the section entitled Risk Factors . References in this prospectus to DOV , the Company , we , us and our refer to DOV Pharmaceutical, Inc., a Delaware corporation. Our Company We are a biopharmaceutical company focused on the discovery, acquisition and development of novel drug candidates for central nervous system, or CNS, disorders. We have active drug development programs that are at the preclinical, Phase I and Phase II clinical stages, including DOV 21,947 (entering Phase II for depression), DOV 102,677 (Phase I for alcohol abuse) and an active preclinical discovery program in reuptake inhibitors and GABA modulators. We have entered into a sublicensing agreement with Neurocrine Biosciences, Inc., or Neurocrine, for indiplon for the treatment of insomnia and with XTL Development, Inc., or XTL, for bicifadine for the treatment of pain. We are seeking a partner for DOV diltiazem for the treatment of angina and hypertension. We operate principally in the United States but also conduct clinical studies outside the United States. DOV 21,947, our lead product candidate for depression, is a triple reuptake inhibitor (serotonin, norepinephrine and dopamine uptake inhibitor), or TRI. We initiated a Phase I clinical trial in April of 2007 and intend to initiate a 300-patient Phase II clinical trial in the fourth quarter of 2007. DOV 21,947 is related to DOV 216,303, another of our TRIs. In 2005, we announced statistically significant efficacy results from a Phase II clinical trial with DOV 216,303 for the treatment of depression. DOV 102,677 is another of our TRIs, for which the next study will be a Phase I clinical trial in normal volunteers and may be initiated once appropriate funding is available. Our reuptake inhibitor platforms, including TRIs, NEDs (norepinephrine and dopamine reuptake inhibitors), SADs (serotonin and dopamine reuptake inhibitors), and SNRIs (serotonin and norepinephrine reuptake inhibitors) can be tailored to create compounds that are able to treat a wide variety of neuropsychiatric disorders ranging from depression and attention deficit hyperactivity disorder to pain and obesity. We have molecules belonging to each of these classes in various stages of preclinical development. We intend to select a triple reuptake inhibitor development candidate from our preclinical pipeline in the second quarter of 2007, file an investigational new drug ( IND ) application for the selected compound with the FDA in early 2008 and undertake the necessary expenditures to enable initiation of a Phase I clinical study in the first half of 2008. The primary objective of our GABA modulator program is the development of a molecule producing a robust anti-anxiety action without the side effects associated with benzodiazepines such as diazepam (Valium ). Molecules fitting this profile are in various stages of preclinical development. Further, GABA modulators also have proven utility as sedative-hypnotics, anticonvulsants, and muscle relaxants, and we have discovered several unique structural platforms that may be developed for these indications. Indiplon has consistently demonstrated decreased time to sleep onset, improved measures of sleep maintenance and duration and improved sleep quality with no next day impairment in over 70 clinical trials involving nearly 8,000 patients. Neurocrine has announced that it plans to resubmit its New Drug Application (NDA) for indiplon capsules by the end of the second quarter of 2007. Bicifadine has been shown to be effective in treating pain in three placebo-controlled efficacy trials in more than 1,600 patients with acute post-surgical pain. We have also conducted three Phase III clinical trials of bicifadine in chronic low back pain (CLBP) and one Phase II trial of bicifadine in osteoarthritis. Bicifadine has demonstrated an attractive safety profile in short- and long-term safety studies involving more than 3,000 patients. Also, we have completed lifetime carcinogenicity studies in rats and mice with no meaningful signals of carcinogenicity detected after approximately two years of dosing, an outcome that we expect to be acceptable to the FDA. XTL has indicated that it intends to pursue the treatment of chronic neuropathic pain for bicifadine s further development and plans to initiate a Phase IIb clinical trial in the third quarter of 2007. Our core scientific expertise is in the cellular and molecular pharmacology underlying neurotransmission. Our senior management team has substantial experience in CNS drug discovery and development. During their careers, they have participated in the discovery and development of new drugs that have been successfully brought to market. Our Strategy Our goal is to become a leading biopharmaceutical company focused primarily on products for the treatment of CNS disorders. In October 2006, we announced a new strategic direction and strategy for the Company, the key elements of which are to: Pursue development of our lead product candidates. We have four product candidates undergoing clinical development either by us or a sub-licensee. These product candidates address four separate and substantial pharmaceutical markets: insomnia, pain, depression and alcohol abuse. We have designed the clinical programs for the product candidates we are developing in an effort to provide clear and defined paths to attain regulatory approval. We intend to continue to devote substantial amount of our resources to earlier stage clinical testing. Selectively establish corporate collaborations to assist in the development and commercialization of our products and mitigate financial risk. We intend to pursue corporate collaborations with partners to leverage their resources and their development, regulatory and commercialization expertise to advance the clinical development of our product candidates. We currently have collaborations with Neurocrine for indiplon and with XTL for bicifadine. Expand our product candidate portfolio with novel drug candidates that address unmet needs in large, established markets. We seek to identify and develop, either internally or through collaborative agreements, novel drug candidates that address unmet needs in large, established markets. We intend to continue expanding our existing product candidate portfolio by discovering and developing novel drug compounds both internally and through focused outsourced research and development. We also hope to expand our portfolio by identifying, in-licensing and developing additional compounds that are potentially superior to currently marketed products and by developing additional applications and formulations for our existing discovery and licensed compounds. Reduce clinical development and commercialization risk by building a diversified product portfolio. We have built and intend to continue to build a portfolio of diverse product candidates to address CNS disorders to reduce the risks associated with the clinical development of any one drug. We have focused our in-licensing and development resources on compounds in all stages of research and clinical development for which there exists a significant amount of informative preclinical or clinical data. We believe this reduces the risk that these compounds will have safety concerns and enhances our chances of demonstrating efficacy in clinical trials. We focus on developing compounds with diverse mechanisms of action to limit the risk of difficulties associated with a particular mechanism of action. Finally, a single mechanism of action may have multiple therapeutic uses. We intend to investigate the efficacy of our compounds for these diverse uses in order to enhance the commercial potential of our product candidates. We believe that our portfolio approach reduces undue dependence on any single compound or therapeutic application to achieve commercial success and creates multiple potential sources of revenue. Recent Developments In December 2004 and January 2005, we completed a placement of $80 million in aggregate principal amount of 2.50% convertible subordinated debentures due January 15, 2025, of which $70.0 million in aggregate principal amount remained outstanding as of December 31, 2006 and none remained outstanding as of March 31, 2007. In March 2007, we consummated an exchange offer (the Exchange Offer ) pursuant to which $67.5 million in principal amount of our convertible subordinated debentures were exchanged for 439,784 shares of series C convertible preferred stock and 100,000 shares of series D convertible preferred stock and $14.3 million in cash, which included accrued interest on the debentures of $843,000. Additionally, the $2.5 million in principal amount of debentures that remained outstanding after the consummation of the Exchange Offer was repaid for $2.6 million (an amount equal to par plus accrued interest). The Warrants On May 24, 2007, we distributed warrants to holders of record of our common stock as of the close of business on May 10, 2007 (the Record Date ). Each holder of ten (10) shares of our common stock at the close of business on the Record Date received warrants to purchase eleven (11) shares of our common stock at an exercise price of $0.523 per share. Warrants were not prorated in the event a holder holds shares in other than ten (10) share increments. The exercise price is adjustable in certain circumstances, such as if the Company (a) pays a dividend or makes a distribution on shares of its common stock payable in shares of its common stock, (b) subdivides or splits any of its outstanding shares of common stock into a greater number of shares, or (c) combines any of its outstanding shares of common stock into a smaller number of shares. The warrants will not be exercisable until the later of July 1, 2007 and the date on which this registration statement is declared effective by the SEC. Further, we will not be obligated to deliver any securities pursuant to the exercise of any warrant unless a registration statement under the Securities Act with respect to the issuance of the securities that shall have been issuable upon such exercise is effective and unless issuance of such securities is qualified or exempt from qualification under applicable securities laws of the states or other jurisdictions in which the registered holder of the warrant resides. The expiration date of the warrants is December 31, 2009. The warrants will be redeemable at our option at a redemption price of $0.01 per share after November 4, 2007 in the event our trading price exceeds $1.046 per share for twenty (20) trading days within a thirty (30) trading day period ending on the third business day before the redemption notice is given. In the event we elect to redeem the warrants, we will deliver a notice of redemption to each warrant holder at least thirty (30) days prior to the redemption date. Any transfer of a warrant by a holder of such warrant may only be effected in accordance with applicable federal or state securities laws. There has been no previous trading market for the warrants. The warrants will not be listed by us for trading on any securities exchange or authorized to be quoted in any inter-dealer quotation system of any securities association, and we do not intend to apply for any such listing or quotation. If you need additional information with respect to the warrants, including a copy of the warrant agreement that governs the warrants, please contact our Investor Relations Department by calling (732) 907-3640. For a copy of the warrant agreement between DOV and the Warrant Agent, please see the Company s Current Report on Form 8-K as filed on May 16, 2007 at the SEC s website (www.sec.gov) or at www.dovpharm.com. The information found on our website is not a part of this prospectus. Our Risks You should read carefully the matters discussed in the section entitled Risk Factors in this prospectus to better understand the risks related to us and our business. For example: If we cannot raise additional funding, we may be unable to complete development of our product candidates and may be unable to continue as a going concern; We have incurred losses since our inception and expect to incur significant losses for the foreseeable future, and we may never reach profitability; and Our common stock is currently quoted on the Pink Sheets, which will result in more limited trading opportunities for holders of our common stock, increased volatility and additional difficulty in raising capital in the future if needed. Corporate Information We were incorporated in New Jersey in May 1995 and reincorporated in Delaware in November 2000. Our executive offices are located at 150 Pierce Street, Somerset, New Jersey 08873. Our telephone number is (732) 907-3600 and our web site address is http://www.dovpharm.com. The information found on our website is not a part of this prospectus. This prospectus contains the trademarks and trade names of other entities that are the property of their respective owners. Copies to: Scott F. Duggan, Esq. Goodwin Procter LLP Exchange Place Boston, Massachusetts 02109 (617) 570-1000
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001067550_aki_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001067550_aki_prospectus_summary.txt
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+This summary highlights material information appearing elsewhere in this prospectus. You should read the entire prospectus carefully. This prospectus contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in "Risk Factors" and elsewhere in this prospectus. All references to a particular fiscal year of Visant Corporation, or Visant, are to the four fiscal quarters ended the Saturday nearest to December 31. Our Company In this document, references to the "Company," "Visant," "we," "our," or "us" refer to Visant Corporation and its consolidated subsidiaries, and references to "Visant Holding," "Holdings," "our parent" and "our parent company" refer to our indirect parent, Visant Holding Corp. Visant Corporation operates Jostens, Inc. and its subsidiaries ("Jostens"), AHC I Acquisition Corp. and its subsidiaries ("Arcade"), Dixon Direct Corp. ("Dixon") and Neff Holding Company and its subsidiary ("Neff") and, until May 16, 2007, operated Von Hoffmann Holdings Inc. and its subsidiaries Von Hoffmann Corporation and Anthology, Inc. ("Von Hoffmann"). We are a leading marketing and publishing services enterprise servicing the school affinity, direct marketing, fragrance and cosmetics and educational publishing markets. We were formed through the October 2004 consolidation of Jostens, Von Hoffmann and Arcade. On June 8, 2006, we entered into definitive agreements to sell our Jostens Photography businesses, which previously comprised a reportable segment. The transactions closed on June 30, 2006. The discontinued operations of the Jostens Photography businesses are excluded from the consolidated financial statements retrospective from the date of disposition. On June 16, 2006, we acquired, through a wholly owned subsidiary, substantially all of the assets and assumed certain liabilities of the Dixon Web operation of the Sleepeck Printing Company, a provider of innovative marketing services and products located in Dixon, Illinois. At the time of acquisition, the name of the business was changed to Dixon Direct Corp. The results of Dixon's operations have been included in the consolidated financial statements since that date. On September 8, 2006, a newly formed subsidiary of ours acquired substantially all of the assets and assumed certain liabilities of the Vertis, Inc. fragrance sampling business. The acquired business currently operates under the Arcade Marketing name. The acquisition was a strategic step to continue to expand our Marketing and Publishing Services segment, which services the fragrance, cosmetic, personal care and other consumer product market segments. The results of these acquired operations have been included in the consolidated financial statements since that date. As of December 2006, our Von Hoffmann Holdings Inc., Von Hoffmann Corporation and Anthology, Inc. businesses were held as assets for sale. On January 3, 2007, we entered into a Stock Purchase Agreement (the "Von Hoffmann Stock Purchase Agreement") with R.R. Donnelley & Sons Company providing for the sale of Von Hoffmann Holdings Inc., Von Hoffmann Corporation and Anthology, Inc., which previously comprised the Educational Textbook segment and a portion of the Marketing and Publishing Services segment. We closed the transaction on May 16, 2007. The operations of the Von Hoffmann businesses are reported as discontinued operations in the consolidated financial statements for all periods presented. On March 16, 2007, we acquired all of the outstanding capital stock of Neff Holding Company and its wholly owned subsidiary Neff Motivation, Inc. Neff is a leading single source provider of custom award programs and apparel, including chenille letters and letter jackets, to the scholastic market segment. Neff operates as a direct subsidiary of Visant under the Neff brand name and its results are KKR and related funds(2). 2,664,356 44.6 % 1 (3) 100.0 % DLJMBP III and related funds(4) 2,664,357 44.6 % David F. Burgstahler(4)(8) 2,666,438 44.6 % Alexander Navab(2)(8) 2,666,437 44.6 % 1 (3) 100.0 % Tagar C. Olson(2)(8) 2,666,437 44.6 % 1 (3) 100.0 % Charles P. Pieper(4)(8) 2,666,438 44.6 % George M.C. Fisher(2)(5)(6) 4,163 * Marc L. Reisch(7)(8)(10) 115,989 1.9 % Marie D. Hlavaty(7)(8) 15,608 * Paul B. Carousso(7)(8) 7,805 * Michael L. Bailey(7)(8) 38,004 * John Van Horn(7)(9) 5,203 * Directors and officers (12 persons) as a group(2)(4)(5)(6)(8)(9)(10) 5,538,484 90.7 % Balance January 1, 2005 Balance December 30, 2006 (In thousands) Service cost $ 6,603 $ 8,016 Interest cost 14,989 14,901 Expected return on plan assets (22,611 ) (21,255 ) Amortization of prior year service cost (478 ) 53 Amortization of net actuarial loss 3 Net cash used in investing activities (840 ) (19,006 ) (23 ) (19,869 ) Intercompany payable (receivable) 30,002 (30,003 ) WHERE YOU CAN FIND MORE INFORMATION We and our guarantor subsidiaries have filed with the Securities and Exchange Commission, or the SEC, a registration statement on Form S-1 under the Securities Act with respect to the notes being offered hereby. This prospectus, which forms a part of the registration statement, does not contain all of the information set forth in the registration statement. For further information with respect to us and the notes, reference is made to the registration statement. Statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete. We and our guarantor subsidiaries are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith, file reports and other information with the SEC. The registration statement, such reports and other information can be read and copied at the Public Reference Room of the SEC located at 100 F Street, N.E., Washington D.C. 20549. Copies of such materials, including copies of all or any portion of the registration statement, can be obtained from the Public Reference Room of the SEC at prescribed rates. You can call the SEC at 1-800-SEC-0330 to obtain information on the operation of the Public Reference Room. Such materials may also be accessed electronically by means of the SEC's home page on the Internet (http://www.sec.gov). So long as we and our guarantor subsidiaries are subject to the periodic reporting requirements of the Exchange Act, we and our guarantor subsidiaries are required to furnish the information required to be filed with the SEC to the trustee and the holders of the outstanding notes. We and our guarantor subsidiaries have agreed that, even if we and our guarantor subsidiaries are not required under the Exchange Act to furnish such information to the SEC, we will nonetheless continue to furnish information that would be required to be furnished by us and our guarantor subsidiaries by Sections 13 or 15(d) of the Exchange Act. reported from the date of acquisition together with the results of the Jostens scholastic operations as the renamed Scholastic segment. Our three reportable segments as of March 31, 2007 consisted of: Scholastic provides services related to the marketing, sale and production of class rings and an array of graduation products and other scholastic products to students and administrators primarily in high schools, colleges and other post-secondary institutions; Yearbook provides services related to the publication, marketing, sale and production of school yearbooks; and Marketing and Publishing Services produces multi-sensory and interactive advertising sampling systems, primarily for the fragrance, cosmetics and personal care market segments, and provides innovative products and services to the direct marketing sector. The group also produces book covers and other components for educational publishers. Scholastic We are a leading provider of services related to the marketing, sale and production of class rings and an array of graduation products, such as caps, gowns, diplomas and announcements and graduation-related accessories, and other scholastic products. In the Scholastic segment, we primarily serve U.S. high schools, colleges, universities and other specialty markets, marketing and selling products to students and administrators. Jostens relies on a network of independent sales representatives to sell its scholastic products. Jostens provides a high level of customer service in the marketing and sale of class rings and certain other graduation products, which often involves a high degree of customization. Jostens also provides ongoing warranty service on its class and affiliation rings. Jostens maintains product-specific tooling as well as a library of school logos and mascots that can be used repeatedly for specific school accounts over time. In addition to its class ring offerings, Jostens also designs, manufactures, markets and sells championship rings for professional sports and affinity rings for a variety of specialty markets. Since the acquisition of Neff in March 2007, a leading single source provider of custom award programs and apparel, we also market, manufacture and sell an array of additional scholastic products, including chenille letters, letter jackets, mascot mats, plaques and sports apparel. Yearbook Through our Jostens subsidiary we are a leading provider of services related to the publication, marketing, sale and production of yearbooks, primarily serving U.S. high schools, colleges, universities and middle schools. Jostens generates the majority of its revenues from high school accounts. Jostens' sales representatives and technical support employees assist students and faculty advisers with the planning and layout of yearbooks, including through the provision of on-line layout and editorial tools to assist in the publication of the yearbook. With a new class of students each year and periodic faculty advisor turnover, Jostens' independent sales representatives and customer service employees are the main point of continuity for the yearbook production process on a year-to-year basis. Marketing and Publishing Services The Marketing and Publishing Services segment produces multi-sensory and interactive advertising sampling systems, primarily for the fragrance, cosmetics and personal care market segment, and innovative, highly personalized products primarily targeted at the direct marketing sector. We are also a leading producer of supplemental materials and related components such as decorative covers and plastic transparencies for educational publishers. With over a 100-year history as Arcade Marketing, we pioneered our ScentStrip product in 1980. We also offer an extensive portfolio of proprietary, UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 patented and patent-pending technologies that can be incorporated into various marketing programs designed to reach the consumer at home or in-store, including magazine and catalog inserts, remittance envelopes, statement enclosures, blow-ins, direct mail, direct sell and point-of-sale materials and gift-with-purchase/purchase-with-purchase programs. We specialize in high-quality, in-line finished products and can accommodate large marketing projects with a wide range of dimensional products and in-line finishing production, data processing and mailing services. Our personalized imaging capabilities offer individualized messages to each recipient within a geographical area or demographic group for targeted marketing efforts. Recent Events Between May 18, 2007 and May 23, 2007, Visant made optional pre-payments in the aggregate amount of $375.0 million on its Term Loan C facility. After giving effect to these optional prepayments, Visant's remaining term borrowings under the Term Loan C facility are $341.5 million in principal amount. Company Background On October 4, 2004, an affiliate of Kohlberg Kravis Roberts & Co. L.P., or KKR, and affiliates of DLJ Merchant Banking Partners III, L.P., or DLJMBP III (together with KKR, the "Sponsors"), completed a series of transactions, which created a marketing and publishing services enterprise servicing the school affinity, direct marketing, fragrance and cosmetics and educational publishing market segments through the consolidation of Jostens, Von Hoffmann and Arcade (the "Transactions"). Prior to the Transactions, Von Hoffmann and Arcade were each controlled by affiliates of DLJ Merchant Banking Partners II, L.P., or DLJMBP II, and DLJMBP III owned approximately 82.5% of our outstanding equity, with the remainder held by other co-investors and certain members of management. Upon consummation of the Transactions, an affiliate of KKR invested $256.1 million and was issued equity interests representing approximately 49.6% of our voting interest and 45.0% of our economic interest, and affiliates of DLJMBP III held equity interests representing approximately 41.0% of Holdings' voting interest and 45.0% of Holdings' economic interest, with the remainder held by other co-investors and certain members of management. Approximately $175.6 million of the proceeds were distributed to certain stockholders, and certain treasury stock held by Von Hoffmann was redeemed. After giving effect to the issuance of equity to additional members of management, as of May 25, 2007, affiliates of KKR and DLJMBP III held approximately 49.0% and 41.0%, respectively, of Holdings' voting interest, while each continued to hold approximately 44.6% of Holdings' economic interest. As of May 25, 2007, the other co-investors held approximately 8.4% of the voting interest and 9.1% of the economic interest of Holdings, and members of management held approximately 1.6% of the voting interest and approximately 1.7% of the economic interest of Holdings. AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (1)As of May 25, 2007, affiliates of KKR and DLJMBP III held approximately 49.0% and 41.0%, respectively, of the voting interests of Visant Holding, while each continued to hold approximately 44.6% of the economic interests of Visant Holding. As of May 25, 2007, other co-investors held approximately 8.4% of the voting interests and approximately 9.1% of the economic interests of Visant Holding, while members of management held approximately 1.6% of the voting interest and approximately 1.7% of the economic interest. (2)Consists of 83/4% Senior Notes due 2013 of Visant Holding. (3)Consists of 101/4% Senior Discount Notes Due 2013 of Visant Holding. (4)Visant Secondary Holdings Corp. pledged the stock of Visant as security for the benefit of the lenders under Visant's senior secured credit facilities and is a guarantor of Visant's senior secured credit facilities. (5)Visant's senior secured credit facilities consist of a Term Loan C facility, with $716.5 million outstanding as of March 31, 2007, and a $250.0 million senior secured revolving facility. As of March 31, 2007, Visant had $233.6 million of availability under the revolving credit facility (net of $16.4 million in outstanding letters of credit). Between May 18, 2007 and May 23, 2007, Visant made optional pre-payments in the aggregate amount of $375.0 million on its Term Loan C facility. After giving effect to these optional prepayments, Visant's remaining term borrowings under the Term Loan C facility are $341.5 million in principal amount. The Term Loan C facility matures in 2011 and the revolving credit facility matures in 2009. (6)Consists of the 75/8% Senior Subordinated Notes due 2012 of Visant. (In thousands) Net loss $ (1,239 ) $ (1,136 ) Change in cumulative translation adjustment (In thousands) Net income $ 7,264 $ 1,755 Change in cumulative translation adjustment VISANT CORPORATION (Exact name of registrant as specified in its charter) (See table of additional registrants) Delaware (State or other jurisdiction of incorporation or organization) 3911 (Primary Standard Industrial Classification Code Number) 90-0207604 (I.R.S. Employer Identification Number) 357 Main Street Armonk, New York 10504 (914) 595-8200 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Marie D. Hlavaty, Esq. Visant Corporation 357 Main Street Armonk, New York 10504 (914) 595-8200 (Name, address, including zip code, and telephone number, including area code, of agent for service) Summary of Terms of the Notes Issuer Visant Corporation Notes Offered $500,000,000 aggregate principal amount of 75/8% Senior Subordinated Notes due 2012. Maturity Date October 1, 2012. Interest Payment Dates April 1 and October 1 of each year, beginning April 1, 2005. Guarantees The notes are guaranteed, jointly and severally, on a senior subordinated unsecured basis, by each of our 100% owned subsidiaries that guarantees our obligations under our senior secured credit facilities and certain of our future subsidiaries. Ranking The notes and the guarantees are our and our subsidiary guarantors' senior subordinated obligations and rank: junior to all of our and the guarantors' existing and future senior indebtedness, including any borrowings under our senior secured credit facilities; equally with any of our and the guarantors' future senior subordinated indebtedness and trade payables; senior to any of our and the guarantors' future indebtedness that is expressly subordinated in right of payment to the notes; effectively senior to the 101/4% Senior Discount Notes due 2013 and the 83/4% Senior Notes due 2013 of Visant Holding, which are not guaranteed by us; and effectively junior to all of the existing and future liabilities of our subsidiaries that do not guarantee the notes. As of March 31, 2007, the notes and the subsidiary guarantees would have ranked junior to: approximately $716.5 million of senior indebtedness; and $18.9 million of total liabilities, including trade payables but excluding intercompany obligations, of our non-guarantor subsidiaries. Copies of all communications, including communications sent to agent for service, should be sent to: Ris B. Norman, Esq. Simpson Thacher & Bartlett LLP 425 Lexington Avenue New York, New York 10017 (212) 455-2000 As of March 31, 2007, our non-guarantor subsidiaries had approximately 2.5% of our assets. Our non-guarantor subsidiaries generated approximately 4.1% of our revenues for the quarter ended March 31, 2007. Optional Redemption Prior to October 1, 2008, we may redeem the notes, in whole or in part, at a price equal to 100% of the principal amount thereof plus the make-whole premium described under "Description of the Notes Optional Redemption". We may redeem some or all of the notes at any time and from time to time on or after October 1, 2008, in whole or in part, in cash at the redemption prices described in this prospectus, plus accrued and unpaid interest to the date of redemption. In addition, until October 1, 2007, we may redeem up to 35% of the aggregate principal amount of the notes with the proceeds of certain equity offerings. Change of Control If a change of control occurs, each holder of the notes may require us to repurchase all or a portion of such holder's notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of repurchase. We may not have sufficient funds to repurchase the notes upon a change of control. Furthermore, restrictions in our senior secured credit facilities may limit our ability to repurchase the notes upon a change of control, as described under "Risk Factors Risks Related to Our Indebtedness and the Notes We may not be able to repurchase notes upon a change of control." Restrictive Covenants The terms of the notes place certain limitations on our ability and the ability of our restricted subsidiaries to, among other things: incur or guarantee additional indebtedness or issue disqualified or preferred stock; pay dividends or make other equity distributions; repurchase or redeem capital stock; make investments; sell assets or consolidate or merge with or into other companies; create limitations on the ability of our restricted subsidiaries to make dividends or distributions; engage in transactions with affiliates; and Effect of exchange rate changes on cash and cash equivalents 109 Effect of exchange rate changes on cash and cash equivalents 109 Net cash (used in) provided by financing activities 30,002 (30,003 ) 1 Effect of exchange rate changes on cash and cash equivalents 6 Approximate date of commencement of proposed sale to the public: As soon as practicable after the Registration Statement becomes effective. Our principal executive offices are located at 357 Main Street, Armonk, New York 10504 and our telephone number there is (914) 595-8200. We were incorporated in the State of Delaware on July 21, 2003. We maintain a website at www.visant.net. Information contained on our websites does not constitute a part of this prospectus and is not being incorporated by reference herein. In thousands Holdings: Interest expense $ 7,635 $ $ 7,635 100.0 % Amortization of debt discount, premium and deferred financing costs 5,638 4,815 823 17.1 % Interest income (7 ) If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. 105,325 95,647 LIFO reserve 8 139,121 105,325 LIFO reserve 8 Net periodic benefit income expense $ (738 ) $ (374 ) $ (19 ) $ CALCULATION OF REGISTRATION FEE (1)Certain selected financial data have been reclassified for all periods presented to reflect the results of discontinued operations consisting of certain Von Hoffmann businesses in December 2006, our Jostens Photography businesses in June 2006 and the exit of Jostens' Recognition business in December 2001. (2)For 2005 and 2004, transaction costs represented $1.2 million and $6.8 million, respectively, of expenses incurred in connection with the Transactions. For the successor period in 2003, transaction costs represented $0.2 million of expenses incurred in connection with the 2003 Jostens merger. For the predecessor period in 2003, transaction costs represented $31.0 million of expenses incurred in connection with the 2003 Jostens merger. (3)During the three months ended March 31, 2007, we did not record any special charges. During the three months ended April 1, 2006, we recorded $0.4 million of special charges relating to severance and related benefits costs and $2.3 million related to an impairment loss to reduce the value of the former Jostens corporate office buildings. For 2006, the Company recorded $2.3 million relating to an impairment loss to reduce the value of Jostens former corporate office buildings, which were later sold, and net $0.1 million of special charges for severance and related benefit costs. For 2005, special charges consisted of restructuring charges of $5.1 million for employee severance related to closed facilities and $0.3 million related to a withdrawal liability under a union retirement plan that arose in connection with the consolidation of certain operations. For 2004, special charges consisted of $11.8 million of restructuring charges consisting primarily of severance costs for the termination of senior executives and other employees associated with reorganization activity as a result of the Transactions. (4)For 2004, loss on redemption of debt represented a loss of $31.5 million in connection with repayment of all existing indebtedness and remaining preferred stock of Jostens and Arcade in conjunction with the Transactions and a loss of $0.4 million in connection with the repurchase of $5.0 million principal amount of Jostens' 12.75% senior subordinated notes prior to the Transactions. For the successor period in 2003, loss on redemption of debt represented a loss of $0.4 million in connection with the repurchase of $8.5 million principal amount of Jostens' 12.75% senior subordinated notes. For the predecessor period in 2003, loss on redemption of debt represented a loss of $13.9 million consisting of the write-off of unamortized deferred financing costs in connection with refinancing Jostens' senior secured credit facility. For 2002, loss on redemption of debt represented a loss of $1.8 million in connection with the repurchase of $7.5 million principal amount of Jostens' 12.75% senior subordinated notes. (5)For the purposes of calculating the ratio of earnings to fixed charges, earnings represent income (loss) from continuing operations before income taxes plus fixed charges. Fixed charges consist of interest expense (including capitalized interest) on all indebtedness plus amortization of debt issuance costs (and for any period subsequent to the adoption of SFAS 150, accretion of preferred stock dividends), and the portion of rental expense that we believe is representative of the interest component of rental expense. For the three months ended March 31, 2007, three months ended April 1, 2006, twelve months ended 2004, and the five-month successor period in 2003, earnings did not cover fixed charges by $1.4 million, $3.6 million, $78.6 million and $70.1 million, respectively. (6)Liquidation preference of redeemable preferred stock as of the end of 2003 and 2002 was $222.6 million and $86.3 million, respectively. Title of Each Class of Securities to be Registered Amount to be Registered Proposed Maximum Offering Price Per Unit Proposed Maximum Aggregate Offering Price Amount of Registration Fee
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+PROSPECTUS SUMMARY The items in the following summary are described in more detail later in this prospectus or in information incorporated by reference in this prospectus. This summary provides an overview of selected information and does not contain all of the information you should consider. Therefore, you should also read the more detailed information set out in this prospectus, including the financial statements and the related notes incorporated herein by reference and the other information incorporated herein by reference. References in this prospectus to Stamford Industrial Group the Company, we, our and us refer to Stamford Industrial Group, Inc. (formerly known as Net Perceptions, Inc. ) and, if so indicated or the context requires, includes our wholly-owned subsidiary, Concord Steel, Inc. (formerly known as SIG Acquisition Corp. and is referred to in this prospectus as Concord Steel ). Company Overview Stamford Industrial Group was initially established in 1996, under the name "Net Perceptions, Inc.", to provide marketing software solutions. In 2003, as a result of continuing losses and the decline of its software business, the Company began exploring various strategic alternatives, including sale or liquidation. On April 21, 2004, the Company announced an investment into the Company by Olden Acquisition LLC ( Olden ), an affiliate of Kanders & Company, Inc. ( Kanders & Co ), an entity owned and controlled by the Company s Non-Executive Chairman, Warren B. Kanders, for the purpose of initiating a strategy to redeploy the Company s assets and use its cash, cash equivalent assets and marketable securities to enhance stockholder value. As part of this strategy, on October 3, 2006, the Company, through its wholly-owned subsidiary, Concord Steel, acquired the assets of CRC Acquisition Co. LLC ( CRC ), a manufacturer of steel counterweights doing business as Concord Steel. With this initial acquisition, management is now focused on building a diversified global industrial manufacturing group through both organic and acquisition growth initiatives that are expected to complement and diversify existing business lines. As a result of the acquisition, the Concord Steel business is considered to be a predecessor company ( Predecessor ) for accounting purposes. Accordingly, relevant financial information regarding the Predecessor are incorporated by reference in this prospectus. Concord Steel is a leading independent manufacturer of steel counterweights and structural weldments. Concord sells its products primarily in the United States to original equipment manufacturers ( OEM ) of certain construction and industrial related equipment that employ counterweights for stability through counterweight leverage in the operation of equipment used to hoist heavy loads, such as elevators and cranes. The counterweight market we target is primarily comprised of OEMs within (i) the commercial and industrial construction equipment industry, which manufacture aerial work platforms, telehandlers, scissor lifts, cranes, and a variety of other construction related equipment and vehicles; and (ii) the elevator industry, which incorporates counterweights as part of the overall elevator operating mechanism to balance the weight of the elevator cab and load. Industry Overview Management believes that the North American counterweight industry, including captive in-house and independent operations, is worth over $300 million per year. We believe that growth of the construction equipment markets we target will be driven by increasing demand for construction equipment and by increasing government spending. By 2008, it is estimated that non-residential and infrastructure construction spending in the United States will grow from approximately $560 billion today, to more than $678 billion. We believe that these increased construction spending levels will drive higher demand for construction related equipment on which our counterweights are ultimately used. It is anticipated that as the United States highways and infrastructures continue to grow older, local, state and federal governments and agencies will be required to increase spending on repairing, maintaining and rebuilding such highways and infrastructures. The Company believes that U.S. federal government initiatives such as the renewal of the six-year federal highway-funding plan continue to provide favorable conditions for highway and infrastructure construction spending. By 2008, it is estimated that government spending on repairing and rebuilding infrastructures, will grow from approximately $55 billion today, to more than $65 billion. It is expected that increased spending in government related construction and infrastructure programs should drive increased demand for construction related equipment, which should in turn increase demand for our counterweight products. We believe that growth of the elevator industry we target will be driven by increasing demand for elevators. By 2009, it is estimated that global demand for elevator products and services will grow from approximately $50 billion today, to more than $60 billion. The increased growth in the elevator market is expected to result in increased growth in counterweights. Part of this growth is attributable to the low-rise elevator market segment (four floors or less) assessing a change in technology that may drive a switch from hydraulic elevators to traction or cable and weight. Management believes that this may increase the demand for elevator counterweights as a cost efficient substitution. This switch is primarily being driven by manufacturing and service cost considerations and environmental risk factors. Additionally, there are several other inter-related factors supporting growth within this industry, including demographic and socio-economic development, desire for efficient use of space, increasing movement of people and goods through airports and metros, and safety requirements. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. Growth Strategy Acquire Complementary Businesses. The Company is working to build a diversified global industrial manufacturer through acquisitions that complement and diversify our existing business. The Company also intends to continue its program of targeted acquisitions, subject to the availability of financing, to gain access to new sales channels, acquire new product lines, increase penetration of our existing markets, and gain entry into new market sectors. Introduce New Products and Product Enhancements and Improve Manufacturing Operations. We are working to improve our manufacturing processes in an effort to improve cycle times and production and output consistency, reduce work-in-progress inventory and lower unit production costs. We believe that new product introductions and product enhancements and operational manufacturing improvements will further enhance growth and provide an advantage over our competitors in the future. Gain Access to New Sales Channels and Leverage Customer Relationships. We are focused on expanding our customer base, offering an increasing array of products and distribution channels to improve profitability. We believe this diversification will facilitate access to a new customer base for our historical products, as well as provide the opportunity to offer new products to our existing customers. Competitive Strengths Cost Savings to Customers. Concord Steel has built its core business around being able to demonstrate manufacturing cost savings to customers that currently manufacture their counterweights in-house or purchase from less competitive external suppliers. In many cases, these manufacturers used less cost effective materials in their production than are used by Concord Steel in the production of its counterweights. Management believes that the cost savings alternatives offered by Concord Steel have led to increased outsourcing of counterweights by customers that have traditionally manufactured their counterweights in-house. Leadership Team. Our leadership team has been involved in the acquisition and integration of a substantial number of companies. Our Non-Executive Chairman of the Board of Directors, Warren B. Kanders has extensive experience building public companies through strategic acquisitions to enhance organic growth. The Company s Chief Executive Officer, Al Weggeman, has had over 20 years of strategic and operational leadership experience in multinational industrial manufacturing companies, such as General Electric, Asea Brown Boveri Ltd., and Saint Gobain. Our Chief Financial Officer, Jon LaBarre, has more than 12 years of diverse financial management and executive leadership experience in the manufacturing, aerospace, specialty manufacturing, construction equipment and professional services industries. Service and Delivery. Concord Steel has established itself as a high level service provider in terms of both service and delivery. The Company also works with its customers to develop more cost effective counterweight and weldment design options for their existing and new products. We believe that Concord Steel s manufacturing locations are also beneficial in terms of being able to provide its customers with cost effective and timely deliveries. Risks Affecting Us There are numerous risks and uncertainties that may affect our financial and operating performance and our growth. You should carefully consider all of the risks discussed in Risk Factors, which begins on page 9, before investing in our common stock. These risks include the following: we may be unable to implement our acquisition growth strategy and integrate and successfully manage any businesses that we acquire; we may be unable to continue to generate revenues at historic levels in our newly acquired operating divisions; changes in the demand for counterweights; changes in the elevator or construction industries; and we may be unable to use our net operating loss carry forward to offset future income taxes. The information in this prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Preliminary Prospectus Dated July 26, 2007 Subject To Completion STAMFORD INDUSTRIAL GROUP, INC. 17,431,712 SHARES COMMON STOCK This prospectus covers up to 17,431,712 shares of common stock, or interests therein, that may be sold or otherwise disposed of from time to time by the stockholders identified in the Selling Stockholders section of this prospectus. The shares covered by this prospectus were issued in private transactions. The prices at which the selling stockholders or their transferees may dispose of their shares will be determined by the selling stockholders at the time of sale and may be at the prevailing market price for the shares, at prices related to such market price, at varying prices determined at the time of sale, or at negotiated prices. Information regarding the selling stockholders and the times and manner in which they may offer and sell the shares under this prospectus is provided under Selling Stockholders and Plan of Distribution in this prospectus. Except with respect to the convertible note, we will not receive any of the proceeds from the sale of the shares offered under this prospectus. Certain of the shares of common stock offered in this prospectus will be issued only upon the conversion of the convertible note. When the note is converted we will be relieved of a portion (or all, if the note is converted in full) of our liability under the convertible note, at a rate equal to the conversion rate of the convertible note. We will pay all expenses (except brokerage fees and commissions and similar expenses) relating to the registration of shares with the Securities and Exchange Commission. Our common stock is traded on OTC Pink Sheets Electronic Quotation Service under the symbol NETP.PK . On July 20, 2007, the last sale price for the common stock was $2.55 per share. YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS FOR OUR SHARES, WHICH ARE LISTED ON PAGE 9 OF THIS PROSPECTUS. SEE RISK FACTORS . Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. You should rely only on the information provided in, or incorporated by reference in, this prospectus. We have not authorized anyone else to provide you with any information that is not in, or incorporated by reference in, the prospectus. This prospectus is not an offer to sell the common stock in any state where the offer is not permitted. The information in this document may only be accurate on the date of this document. Information contained on our website does not constitute part of this document. Corporation Information Our principal executive offices are located at One Landmark Square, 22nd Floor, Stamford, Connecticut 06901. Our telephone number is (203) 428-2040. Our website is located at http://www.stamfordig.com.. The information contained on our website is not a part of this prospectus. THE OFFERING On April 21, 2004, we issued and sold to Olden a 2% ten-year Convertible Subordinated Note due April 21, 2014 (the Note ), which is currently convertible at a conversion price of $0.45 per share of our common stock into approximately 5,628,300 shares of our common stock. On September 22, 2006, we entered into an Equity Compensation Agreement (the Compensation Agreement ) with Kanders & Company for prior strategic, consulting, investment banking and advisory services to us in connection with our asset redeployment strategy. As compensation for such past services, we agreed to issue to Kanders & Company 8,274,000 shares of our common stock. On October 3, 2006, pursuant to the terms of our Asset Purchase Agreement with CRC, we paid CRC $45,300,000 in cash, and CRC agreed to reinvest $3,000,000 of the proceeds received from the sale of Concord Steel to purchase 3,529,412 shares of our common stock at a price per share of $0.85. This prospectus relates to the sale or other disposition of the shares of our common stock, or interests therein, that we issued to Kanders & Company and CRC, and to the sale or other disposition of the shares of our common stock that may be issued upon conversion of the Note issued to Olden. We are not offering or selling any of our common stock in connection with this registration statement. RISK FACTORS Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below with all of the other information included in this prospectus before making an investment decision. If any of the possible adverse events described below actually occurs, our business, results of operations, financial condition or prospects would likely suffer. In such an event, the market price of our common stock could decline and you could lose all or part of your investment. RISKS RELATED TO OUR INDUSTRY Our future operating results may be affected by fluctuations in raw material costs and steel prices. Our principal raw material is non-prime (or secondary) carbon steel, which we purchase from multiple primary steel producers and steel brokers. A significant by-product of our manufacturing process is scrap steel that we resell to scrap brokers and dealers. The steel and scrap industries as a whole are very cyclical, and at times availability and pricing can be volatile due to a number of factors beyond our control. These factors include general economic conditions, domestic and worldwide demand, curtailed production at major mills due to factors such as equipment breakdowns, repairs or catastrophic events, labor costs or problems, competition, import duties, tariffs, energy costs, availability and cost of raw materials (e.g. ore, scrap, coke, energy, etc.), currency exchange rates and those other factors described under The costs of manufacturing our products and the ability to supply our customers could be negatively impacted if we experience interruptions in deliveries of needed raw materials or supplies. This volatility can significantly affect our steel costs and scrap prices. In an environment of increasing prices for steel and other raw materials, competitive conditions may impact how much of the price increases we can pass on to our customers and to the extent we are unable to pass on future price increases in our raw materials to our customers, our financial results could be adversely affected. Also, if steel prices in general decrease, competitive conditions may impact how quickly we must reduce our prices to our customers and we could be forced to use higher-priced raw materials to complete orders for which the sales prices have decreased. If scrap prices in general decrease, we may recoup less scrap revenue, which would have a negative impact on our operating results. The costs of manufacturing our products and the ability to supply our customers could be negatively impacted if we experience interruptions in deliveries of needed raw materials or supplies. If for any reason our supply of carbon steel is curtailed or we are otherwise unable to obtain the quantities we need at competitive prices, our business could suffer and our financial results could be adversely affected. Such interruptions might result from a number of factors including a shortage of capacity in the supplier base, a shortage of raw materials or energy needed to make steel or other products, financial difficulties of suppliers, significant events affecting their facilities, significant weather events, and those factors listed under Our future operating results may be affected by fluctuations in raw material costs and steel prices or other factors beyond our control. Further, the number of suppliers has decreased in recent years due to industry consolidation and the financial difficulties of certain suppliers, and consolidation may continue. Accordingly, if delivery from a major supplier is disrupted, it may be more difficult than in the past to obtain an alternative supplier. Downturns or weakness in the economy in general or in key industries, such as commercial, industrial or residential construction or government and municipal infrastructure projects, may adversely affect our customers, which may cause the demand for our products and services to decline and adversely affect our financial results. Many of our customers are in industries and businesses that are cyclical in nature and are affected by changes in general economic conditions or conditions specific to their respective markets and industries. Product demand in our customers end markets is based on numerous factors such as interest rates, general economic conditions, consumer confidence, and other factors beyond our control. Downturns in demand in the metal-consuming industries we serve, or a decrease in the margins that we can realize from sales of our products to customers in any of these industries, could adversely affect our financial results. The loss of significant volume from key customers could adversely affect us. In fiscal 2006, our three largest customers accounted for approximately 57% of our gross sales, with our top customer accounting for a significant portion of that number, and our ten largest customers accounted for approximately 83% of our gross sales. A significant loss of or decrease in business from one or more of our largest customers could have an adverse effect on our sales and financial results if we cannot obtain replacement business. Also, due to consolidation in the industries we serve, our gross sales may be increasingly sensitive to deterioration in the financial condition of, or other adverse developments with respect to, one or more of our top customers. Our business could be harmed if we fail to maintain proper inventory levels. We are required to maintain substantial inventories to accommodate the needs of our customers, including in many cases, short lead times and just-in-time delivery requirements. We purchase raw materials on a regular basis in an effort to maintain our inventory at levels that we believe are sufficient to satisfy the anticipated needs of our customers based upon orders, customers volume expectations, historic buying practices and market conditions. Inventory levels in excess of customer demand may result in the use of higher-priced inventory to fill orders reflecting lower sales prices, if steel prices have significantly decreased. These events could adversely affect our financial results. Conversely, if we underestimate demand for our products or if our suppliers fail to supply quality products in a timely manner, we may experience inventory shortages. Inventory shortages might result in unfilled orders, negatively impact customer relationships, and result in lost revenues, any of which could harm our business and adversely affect our financial results. Our business is highly competitive, and increased competition could negatively impact our financial results. The metals processing industry is very fragmented and competitive, consisting of a large number of small companies and a few relatively large companies. Competition is based principally on price, service, quality, production capabilities, inventory availability and timely delivery. Competition in the various markets in which the Company participate comes from companies of various sizes, some of which have greater financial resources than the Company and some of which have more established brand names in the local markets served by the Company. Increased competition could force the Company to lower its prices or to offer increased services at a higher cost, which could reduce the Company s profitability. The Company could incur substantial costs in order to comply with, or to address any violations under, environmental laws that could significantly increase its operating expenses and reduce its operating income. The Company s operations are subject to various environmental statutes and regulations, including laws and regulations governing materials it uses. In addition, certain of its operations are subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. Failure to maintain or achieve compliance with these laws and regulations or with the permits required for the Company's operations could result in substantial operating costs and capital expenditures, in addition to fines and civil or criminal sanctions, third party claims for property damage or personal injury, cleanup costs or temporary or permanent discontinuance of operations. Certain of its facilities are located in industrial areas, have a history of heavy industrial use and have been in operation for many years and, over time, the Company and other predecessor operators of these facilities have generated, used, handled and disposed of hazardous and other regulated wastes. Environmental liabilities could exist, including cleanup obligations at these facilities or at off-site locations where materials from Company operations were disposed of, which could result in future expenditures that cannot be currently quantified and which could have a material adverse effect on the Company's financial position, results of operations or cash flows. Disruptions to our business or the business of our customers or suppliers, could adversely impact our operations and financial results. Business disruptions, including increased costs for or interruptions in the supply of energy or raw materials, resulting from severe weather events such as hurricanes, floods, blizzards, from casualty events such as fires or equipment breakdowns, from acts of terrorism, or from other events such as required maintenance shutdowns, can cause interruptions to our businesses as well as the operations of our customers and suppliers. Such interruptions can have an adverse effect on our operations and financial results. If any of the products that the Company sells cause harm to any of its customers or others, the Company could be exposed to product liability lawsuits. If the Company were found liable under product liability claims, it could be required to pay substantial monetary damages. We currently maintain product liability insurance coverage; however, we cannot assure you that this coverage would be sufficient to cover the payment of any potential claim. In addition, we cannot assure you that this or any other insurance coverage will continue to be available or, if available, will be obtainable at a reasonable cost. Our existing product liability insurance coverage may be inadequate to protect us from any liabilities we might incur, and we will continue to be exposed to the risk that our claims may be excluded and that our insurers may become insolvent. A product liability claim or series of claims brought against us for uninsured liabilities or liabilities in excess of our insurance coverage could have a material adverse effect on the market price of our common stock and our business, financial condition and results of operations. In addition, as a result of a product liability claim, our reputation could be harmed and we may have to recall some of our products, which could result in significant costs to us and have a material adverse effect on the market price of our common stock and our business, financial condition and results of operations. RISKS RELATED TO OUR BUSINESS There are significant risks associated with our strategy of acquiring and integrating businesses. A key element of our strategy is the acquisition of businesses and assets that will enable us to build a diversified global industrial manufacturing group. We also seek acquisitions that will complement our current business, increase size, expand our geographic scope of operations, and otherwise offer growth opportunities. We may not be able to successfully identify attractive acquisition opportunities, obtain financing for acquisitions, make acquisitions on satisfactory terms, or successfully acquire and/or integrate and manage identified targets. Additionally, competition for acquisition opportunities may escalate, which would increase the costs to us of completing acquisitions or prevent us from making acquisitions. Our ability to implement our acquisition strategy is also subject to other risks and costs, including: loss of key employees, customers or suppliers of acquired businesses; diversion of management's time and attention from our core businesses; adverse effects on existing business relationships with suppliers and customers; our ability to realize operating efficiencies, synergies, or other benefits expected from an acquisition; risks associated with entering markets in which we have limited or no experience; and assumption of contingent or undisclosed liabilities of acquisition targets. The above risks could have a material adverse effect on the market price of our common stock and our business, financial condition and results of operations. We have a short operating history with respect to our current and proposed businesses, so it will be difficult for investors to predict our future success. Stamford Industrial Group had no active operations between April 11, 2004 and October 3, 2006, the date on which Stamford Industrial Group acquired assets and assumed certain liabilities of Concord Steel. As a result, we have a limited operating history for you to evaluate in assessing our future prospects. You must consider our business and prospects in light of the risks and difficulties we may encounter as a company with a limited operating history in our current business. If we are unable to successfully address these risks and difficulties, our business and operating results could be materially adversely affected. The loss of services of the Company's executive management team could harm its business. The success of the Company's business depends on the continued services of its executive management team. The Company may not be able to retain its executive management team or attract suitable replacements or additional personnel if required. The loss of the services of one or more members of its executive management team could have a material adverse effect on its business. We may not be able to adequately manage our growth. We have expanded, and are seeking to continue to expand, our business. This growth has placed significant demands on our management, administrative, operating and financial resources as well as our manufacturing capacity and capabilities. The continued growth of our customer base, the types of products offered and the geographic markets we serve can be expected to continue to place a significant strain on our resources. Personnel qualified in the production and marketing of our products are difficult to find and hire, and enhancements of information technology systems to support growth are difficult to implement. Our future performance and profitability will depend in large part on our ability to attract and retain additional management and other key personnel as well as our ability to increase and maintain our manufacturing capacity and capabilities to meet the needs of our current and future customers. Any failure to adequately manage our growth could have a material adverse effect on the market price of our common stock and our business, financial condition and results of operations. The Company s existing credit facility contains restrictions that may limit its ability to operate its business. The agreements governing the Company s credit facility contain, and any of its other future debt agreements may contain, covenant restrictions that limit its ability to operate its business, including restrictions on its ability to: incur debt (including secured debt) or issue guarantees; grant liens on its assets; make certain investments; enter into sale and leaseback transactions; enter into transactions with its affiliates; sell certain assets; repurchase capital stock or make other restricted payments; declare or pay dividends or make other distributions to stockholders; and enter into mergers or consolidations or make certain acquisitions. In addition, the Company s existing credit facility contains other affirmative and negative covenants. The Company s ability to comply with these covenants is dependent on its future performance, which will be subject to many factors, some of which are beyond its control, including prevailing economic conditions. As a result of these covenants, the Company s ability to respond to changes in business and economic conditions and to obtain additional financing, if needed, may be significantly restricted, and the Company may be prevented from engaging in transactions that might otherwise be beneficial to it. In addition, the Company s failure to comply with these covenants could result in a default under its debt agreements, which could permit the holders to accelerate such debt. If any of the Company s debt is accelerated, it may not have sufficient funds available to repay such debt. We may be unable to realize the benefits of our net operating loss ( NOL ) and tax credit carryforwards. NOL s may be carried forward to offset federal and state taxable income in future years and eliminate income taxes otherwise payable on such taxable income, subject to certain adjustments. Based on current federal corporate income tax rates, our NOL and other carryforwards could provide a benefit to us, if fully utilized, of significant future tax savings. However, our ability to use these tax benefits in future years will depend upon the amount of our otherwise taxable income. If we do not have sufficient taxable income in future years to use the tax benefits before they expire, we will lose the benefit of these NOL carryforwards permanently. Consequently, our ability to use the tax benefits associated with our substantial NOL will depend significantly on our success in integrating Concord Steel, identifying additional suitable merger partners and/or acquisition candidates, and once identified, successfully consummate a merger with and/or acquisition of these candidates. Additionally, if we undergo an ownership change, the NOL carryforward limitations would impose an annual limit on the amount of the taxable income that may be offset by our NOL generated prior to the ownership change. If an ownership change were to occur, we may be unable to use a significant portion of our NOL to offset taxable income. In general, an ownership change occurs when, as of any testing date, the aggregate of the increase in percentage points of the total amount of a corporation's stock owned by 5-percent stockholders within the meaning of the NOL carryforward limitations whose percentage ownership of the stock has increased as of such date over the lowest percentage of the stock owned by each such 5-percent stockholder at any time during the three-year period preceding such date is more than 50 percentage points. In general, persons who own 5% or more of a corporation's stock are 5-percent stockholders, and all other persons who own less than 5% of a corporation's stock are treated, together, as a single, public group 5-percent stockholder, regardless of whether they own an aggregate of 5% of a corporation's stock. The amount of NOL and tax credit carryforwards that we have claimed have not been audited or otherwise validated by the U.S. Internal Revenue Service ( IRS ). The IRS could challenge our calculation of the amount of our NOL or our determinations as to when a prior change in ownership occurred and other provisions of the Internal Revenue Code may limit our ability to carry forward our NOL to offset taxable income in future years. If the IRS were successful with respect to any such challenge, the potential tax benefit of the NOL carryforwards to us could be substantially reduced. RISKS RELATED TO OUR COMMON STOCK AND THIS OFFERING Our common stock is no longer listed on the NASDAQ Small Cap Market. On September 3, 2004, our common stock was delisted from the NASDAQ Small Cap Market. The delisting followed a determination by the NASDAQ Listing Qualifications Panel that the Company was a public shell and should be delisted due to policy concerns raised under NASDAQ Marketplace Rules 4300 and 4300(a)(3). Additional information concerning the delisting is set forth in the Company's Report on Form 8-K filed with the Securities and Exchange Commission on September 1, 2004. The Company's common stock is now quoted on the OTC Pink Sheets Electronic Quotation Service under the symbol NETP.PK. As a result of the delisting, stockholders may find it more difficult to dispose of, or to obtain accurate quotations as to the price of our common stock, making it difficult for a stockholder to buy or sell our stock at competitive market prices, or at all. We may lose support from institutional investors and/or market makers that currently buy and sell our stock, and the price of our common stock could decline. We are vulnerable to volatile market conditions. The market price of our common stock has been highly volatile. The market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. The table set forth below under the heading Price Range of Common Stock , identifies for the indicated periods, the high and low closing sales prices for our common stock as reported by the OTC Pink Sheets Electronic Quotation Service. We do not expect to pay dividends on our common stock in the foreseeable future. Although our stockholders may receive dividends if, as and when declared by our Board of Directors, we do not intend to pay dividends on our common stock in the foreseeable future. Therefore, you should not purchase our common stock if you need immediate or future income by way of dividends from your investment. The payment of dividends is restricted under our secured credit facility. Our Amended and Restated Certificate of Incorporation authorizes the issuance of shares of preferred stock. Our Amended and Restated Certificate of Incorporation (the Certificate of Incorporation ) provides that our Board of Directors is authorized to issue from time to time, without further stockholder approval, up to 5,000,000 shares of preferred stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each series, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, including sinking fund provisions, redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of any series. Such shares of preferred stock could have preferences over our common stock with respect to dividends and liquidation rights. We may issue additional preferred stock in ways which may delay, defer or prevent a change in control of the Company without further action by our stockholders. Such shares of preferred stock may be issued with voting rights that may adversely affect the voting power of the holders of our common stock by increasing the number of outstanding shares having voting rights, and by the creation of class or series voting rights. We may issue a substantial amount of equity and cash compensation and other shares of our common stock in the future which could cause dilution to old investors and otherwise adversely affect our stock price. A key element of our growth strategy is to make acquisitions. As part of our acquisition strategy, we may issue additional shares of common stock as consideration for such acquisitions. These issuances could be significant. To the extent that we make acquisitions and issue our shares of common stock as consideration or as compensation to management, your equity interest in us will be diluted. Any such issuance will also increase the number of outstanding shares of common stock that will be eligible for sale in the future. Persons receiving shares of our common stock in connection with these acquisitions may be more likely to sell off their common stock, which may influence the price of our common stock. In addition, the potential issuance of additional shares in connection with anticipated acquisitions could lessen demand for our common stock and result in a lower price than might otherwise be obtained. We may issue common stock in the future for other purposes as well, including in connection with financings, for compensation purposes, in connection with strategic transactions or for other purposes. Cash payments as compensation or otherwise can also significantly diminish cash that is available to the Company for working capital and other purposes, which could have a material adverse effect on the Company. USE OF PROCEEDS Except with respect to the Note, we will not receive any of the proceeds from the sale of the shares offered under this prospectus. Certain of the shares of common stock offered in this prospectus will be issued only upon the conversion of the Note. When the Note is converted we will be relieved of a portion (or all, if the note is converted in full) of our liability under the Note, at a rate equal to the conversion rate of the Note. PRICE RANGE OF COMMON STOCK In addition to the information set forth in Item 5 of our Annual Report on Form 10-K for the year ended December 31, 2006, under the heading "Price Range of Common Stock," we set forth below the high and low bid prices for our common stock as reported on the OTC Pink Sheets Electronic Quotation Service for the periods indicated. The quotes listed below reflect inter-dealer prices or transactions solely between market-makers, without retail mark-ups, mark-downs or commissions, and may not represent actual transactions. Period High Low Quarter ended March 31, 2007 $ 2.92 $ 1.92 Quarter ended June 30, 2007 $ 2.98 $ 2.05 Period from July 1 through July 20, 2007 $ 2.84 $ 2.46 DIVIDEND POLICY We have not declared any dividends in the past, and we do not presently anticipate declaring or paying any dividends in the future, on our common stock. We currently anticipate that we will retain our cash and all potential future earnings for use in our business and do not anticipate that we will pay any cash dividends in the foreseeable future. Our ability to pay dividends is restricted under the terms of our secured credit facility. Subject to the provisions of the credit facility, the payment of future dividends, if any, will be at the discretion of our Board of Directors and will depend upon, among other things, our results of operations, capital requirements, general business conditions, contractual restrictions on payment of dividends, if any, legal and regulatory restrictions on the payment of dividends, and other factors our Board of Directors deems relevant. SELLING STOCKHOLDERS On April 21, 2004, we issued and sold the Note to Olden, which is currently convertible at a conversion price of $0.45 per share of our common stock into approximately 5,628,300 shares of our common stock. On September 22, 2006, we issued 8,274,000 shares of our common stock to Kanders & Company pursuant to the Compensation Agreement. On October 3, 2006, pursuant to the terms of our Asset Purchase Agreement with CRC, we paid CRC $45,300,000 in cash, and CRC agreed to reinvest $3,000,000 of the proceeds to purchase 3,529,412 shares of our common stock. The following table sets forth certain information regarding the beneficial ownership of our outstanding shares of our Common Stock by each of the selling stockholders, as of July 20, 2007, and as adjusted to reflect the sale of the shares in this offering. As of July 20, 2007, approximately 41,676,245 shares of our common stock were outstanding. Our registration of the shares of our common stock covered by this prospectus does not necessarily mean that the selling stockholders will sell any of our common stock that we have registered. Except for Olden and Kanders & Company, whose sole manager, and sole stockholder, respectively, is Warren B. Kanders, our Non-Executive Chairman of the Board of Directors, none of the selling stockholders has held any position or office or had a material relationship with us or any of our affiliates within the past three years other than as a result of the ownership of our common stock. Except as indicated below, each selling stockholder has informed us that it is not a registered broker-dealer or an affiliate of a registered broker-dealer. Shares listed under the heading "Number of Shares Being Offered" represent the number of shares that may be sold by each selling stockholder pursuant to this prospectus. The information under the heading "Shares of Common Stock Beneficially Owned After Offering" assumes that each selling stockholder sells all of its shares offered pursuant to this prospectus to unaffiliated third parties, that the selling stockholders will acquire no additional shares of our common stock prior to the completion of this offering, and that they will continue to hold any other shares of our common stock which they beneficially own. Each selling stockholder may sell all, part or none of its shares and may acquire additional shares of our common stock. The information under the heading "Shares of Common Stock Beneficially Owned Prior to Offering" is determined in accordance with the rules of the Commission, and includes voting and investment power with respect to shares. Shares of common stock subject to options or warrants, or issuable upon conversion of convertible securities, which are currently exercisable or exercisable within 60 days from July 20, 2007 are deemed outstanding for purposes of computing the percentage ownership of the person holding the options, warrants or convertible securities, but are not deemed outstanding for computing the percentage of any other person. Shares of Common Stock Beneficially Owned Prior to Offering Shares of Common Stock Beneficially Owned After Offering Name of Beneficial Owner Number Percent(1) Number of Shares Being Offered Number Percent(1) Warren B. Kanders and Kanders & Company, Inc. 13,943,381 (2)(3) 33.5% 13,902,300 41,081 * Conley Group, Inc. 2,064,000 (4) 5.0% 2,064,000 0 * SW Pelham Fund, L.P. 244,235 (5) * 244,235 0 * Brendan P. VanDeventer 195,529 * 195,529 0 * Bernard V. Buonanno, Jr. 195,528 * 195,528 0 * The Dalton Trust - 1995 146,471 (6) * 146,471 0 * Management Properties and Investments, Inc. 146,471 (7) * 146,471 0 * Thomas P. Dimeo 146,471 * 146,471 0 * Joseph F. Herbert 146,471 * 146,471 0 * Hugo Mainelli 146,471 * 46,471 0 * Barbara Fazzano 97,765 * 97,765 0 * * Less than 1% (1) Applicable percentage of ownership for each selling stockholder is based on 41,676,245 shares of our Common Stock outstanding as of July 20, 2007. (2) Includes 5,628,300 shares of common stock issuable upon conversion of the Note. The Note was issued to Olden on April 21, 2004. The sole member of Olden is Kanders & Company, of which Warren B. Kanders is the sole shareholder and the President. Mr. Kanders disclaims beneficial ownership of the Note and the shares of common stock into which it is convertible. Also includes a stock grant of (i) 8,274,000 shares of common stock pursuant to the terms of the Equity Compensation Agreement; and (ii) 41,081 shares of common stock pursuant to the terms of the consulting agreement, dated September 22, 2006 by and between the Company and Kanders & Company, Inc. Mr. Kanders disclaims beneficial ownership of the shares of common stock granted pursuant to these agreements. (3) Such shares are subject to a lock-up agreement which expires on October 3, 2009. (4) John W. Conley, an executive at Conley Group, Inc., exercises voting and dispositive power over the shares listed above. (5) Pelham Capital LLC, the general partner of SW Pelham Fund, L.P., is controlled by Smith Whiley Investment Management, Inc., its managing member. Gwendolyn Smith Iloani is the President and Owner of Smith Whiley Investment Management, Inc., and through her control of SW Pelham Fund, L.P. exercises voting and dispositive power over the shares listed above. Ms. Iloani disclaims beneficial ownership of these securities except to the extent of her pecuniary interest therein. (6) David P. Mixer, the trustee and grantor of the Dalton Trust - 1995, exercises voting and dispositive power over the shares listed above. (7) Gerald E. Freeman, the treasurer of Management Properties and Investments Ventures, Inc., exercises voting and dispositive power over the shares listed above. Mr. Freeman disclaims beneficial ownership of these securities except to the extent of her pecuniary interest therein. We prepared this table based on the information supplied to us by the selling stockholders. Information about the selling stockholders may change over time. Any changed information will be set forth in prospectus supplements, post-effective amendment or by other means as required. Because each of the selling stockholders may offer all or some of its shares from time to time, the Company cannot estimate the amount of shares of common stock that will be held by the selling stockholders upon the termination of any particular offering. See Plan of Distribution. DESCRIPTION OF CAPITAL STOCK We are authorized to issue two classes of stock designated as common and preferred. As of July 20, 2007, the total number of shares that we are authorized to issue was 105,000,000 shares, of which 100,000,000 were common stock, par value $.0001 per share and 5,000,000 were preferred stock, par value $.0001 per share. The following is a summary of the material terms of our capital stock. You should refer to our Certificate of Incorporation, as amended, and bylaws and the agreements described below for more detailed information. Common Stock As of July 20, 2007, there were 41,676,245 shares of our common stock issued and outstanding. The holders of our common stock are entitled to one vote for each share on all matters voted on by our stockholders, including the election of directors. No holders of our common stock have any right to cumulative voting. Subject to any preferential rights of any outstanding series of our preferred stock created by our Board of Directors, the holders of our common stock will be entitled to such dividends as may be declared from time to time by our Board of Directors from funds available therefrom, and upon liquidation will be entitled to receive pro rata all of our assets available for distribution to such holders. We currently do not pay cash dividends on our common stock. In the event of a liquidation, dissolution or winding up, the holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference and other amounts owed to the holders of our preferred stock. Holders of our common stock have no preemptive rights. There are no redemption or sinking fund provisions applicable to our common stock. Preferred Stock Our Board of Directors is authorized, without further stockholder action, to issue up to 5,000,000 shares of our preferred stock, in one or more series. Our Board of Directors is authorized to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, and the qualifications, limitations or restrictions thereof, as are stated in the resolutions adopted by the Board of Directors and as are permitted by the Delaware General Corporation Law (the DGCL ). The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of our preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third-party to acquire a majority of our outstanding voting stock. Rights Plan In June 2001, our Board of Directors entered into a Rights Agreement (the Rights Agreement ), commonly referred to as a poison pill. Under the Rights Agreement, stockholders of record on June 14, 2001 were distributed rights (the Rights ) to acquire one one-thousandth of a share of the Company s Series A Junior Participating Preferred Stock (the Preferred Stock ), at a rate of one Right for each share of the Company s common stock held by stockholders on such date. The Rights become exercisable if a person or group acquires 15% or more of the outstanding common stock or if a person or group commences a tender offer or exchange offer that would result in such a person owning 15% or more of the common stock. In the event of certain business combinations following a stock acquisition, each Right not owned by the acquiring person and its affiliates would become exercisable for, upon payment of the exercise price of the Right, common stock of the acquiring person in an amount equal to the then current exercise price of the Right divided by one half the market price of the acquiring person s common stock. At any time until ten days following a stock acquisition, the Rights are redeemable by our Board of Directors at a price of $.01 per Right. On December 22, 2003, our Board of Directors adopted an amendment to the Rights Agreement that provides, in effect, that (i) the Rights will not be separately distributed to the Company s stockholders and become exercisable solely as a result of the commencement of a tender offer or exchange offer for all outstanding shares of the Company s common stock and (ii) the Rights will not be triggered by a subsequent merger of the Company with such a bidder in which the Company s stockholders receive the same consideration as was paid or issued in the tender offer or exchange offer. On April 21, 2004, in connection with the closing of the Olden investment and on September 22, 2006, in connection with the Company entering into the Equity Compensation Agreement with Kanders & Company, our Board of Directors adopted amendments to the Rights Agreement such that the above transactions would not trigger the Rights thereunder. The Rights have no voting privileges. The Rights will terminate upon the earlier of the date of their redemption or ten years from the date of issuance. Convertible Note On April 21, 2004 (the Issue Date ), we entered into a Convertible Note Purchase Agreement with Olden, an affiliate of Kanders & Company, pursuant to which we issued the Note to Olden, which is convertible based upon a conversion price of $.45, subject to adjustment. The Note is currently convertible into approximately 19.9% of the Company s common stock, par value $0.0001 per share, outstanding on the April 21, 2004 closing date or 5,628,300 shares of the Company s common stock. The Company may, at its option, call the Note, either in whole or in part on a pro-rata basis on 30 days prior notice, subject to the right of each holder to exercise their conversion rights within 30 days of each holder s receipt of the call notice. The Note matures on April 21, 2014 (the Maturity Date ). Proceeds to Stamford Industrial Group from the sale of the Note were approximately $2.5 million before transaction expenses. Interest on the unpaid balance of the Note from the Issue Date at the interest rate of 2% per annum, accruing semi-annually on the last day of June and December in each year, commencing on June 30, 2004, which interest shall be payable, together with the principal sum, in full on the Maturity Date, whether at the stated maturity or by acceleration or otherwise. Registration Rights In connection with the sale and issuance of the Note, the Company entered a Registration Rights Agreement, which requires us, upon Olden s request, to file a shelf Registration Statement under Rule 415 to register the shares of common stock into which the Note is convertible. In connection with our entering into an Equity Compensation Agreement and a Consulting Agreement with Kanders & Company, we granted demand and piggyback registration rights to Kanders & Company with respect to the shares of common stock that were issued pursuant to such agreements. The CRC Shares were sold pursuant to a stock purchase agreement dated as of October 3, 2006, which provides for demand and piggyback registration rights to CRC Acquisition Co., LLC. Stockholder Action; Special Meeting of Stockholders; Advance Notice Requirements for Stockholder Proposals and Director Nominations Our Certificate of Incorporation and our bylaws provide that any action required or permitted to be taken by our stockholders at an annual meeting or special meeting of stockholders may only be taken if it is properly brought before such meeting, and may not be taken by written action in lieu of a meeting. Our Certificate of Incorporation and our bylaws also provide that, except as otherwise required by law, special meetings of the stockholders can only be called by our chairman of the board, our president, any vice president, the secretary or any assistant secretary, and shall be called by any such officer at the request in writing of a majority of the Board of Directors. In addition, our bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of stockholders, including proposed nominations of candidates for election to the Board of Directors. Stockholders at an annual meeting may only consider proposals or nominations specified in the notice of meeting or brought before the meeting by a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has delivered timely written notice in proper form to our secretary of the stockholder s intention to bring such business before the meeting. These provisions could have the effect of delaying until the next stockholder meeting stockholder actions that are favored by the holders of a majority of our outstanding voting securities. Authorized But Unissued Shares The authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval, subject to any limitations imposed by the OTC Pink Sheets Electronic Quotation Service. These additional shares may be utilized for a variety of corporate acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock could make more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger, or otherwise. Super-Majority Voting The Delaware General Corporation Law ( DGCL ) provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation s certificate of incorporation or bylaws, unless a corporation s certificate of incorporation or bylaws, as the case may be, requires a greater percentage. Other than certain provisions of our Certificate of Incorporation, including our name, address and nature of our business, which may be amended or repealed by the affirmative vote of the holders of a majority of our outstanding voting stock, all other provisions, including capital structure and indemnification of directors may be amended only by the affirmative vote of the holders of at least 75% of our outstanding voting stock, voting together as a single class. Our bylaws may be amended or repealed by the affirmative vote of the holders of at least 80% of our outstanding voting stock, voting together as a single class, provided that provisions concerning certain stockholder actions, including removal and election of directors, may be amended by the affirmative vote of the holders of at least 66 2/3% of our outstanding voting stock, voting together as a single class. Anti-Takeover Effects of Certain Provisions of Delaware Law and Our Certificate of Incorporation and Bylaws Certain provisions of the Certificate of Incorporation and bylaws could have an anti-takeover effect. These provisions are intended to enhance the likelihood of continuity and stability in the composition of the Board of Directors and in the policies formulated by the Board and to discourage an unsolicited takeover of us if the Board of Directors determines that such takeover is not in the best interests of us and our stockholders. However, these provisions could have the effect of discouraging certain attempts to acquire us or remove incumbent management, even if some or a majority of stockholders deemed such an attempt to be in their best interests. The DGCL contains statutory anti-takeover provisions, including Section 203 of the DGCL which applies automatically to a Delaware corporation unless that corporation elects to opt out as provided in Section 203. We, as a Delaware corporation, have not elected to opt out of Section 203 of the DGCL. Under Section 203 of the DGCL, a stockholder acquiring more than 15% of the outstanding voting shares of a corporation (an Interested Stockholder ) but less than 85% of such shares may not engage in certain business combinations with the corporation for a period of three years subsequent to the date on which the stockholder became an Interested Stockholder unless prior to such date, the board of directors of the corporation approves either the business combination or the transaction which resulted in the stockholder becoming an Interested Stockholder, or the business combination is approved by the board of directors and by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the Interested Stockholder. Limitation of Liability and Indemnification of Officers and Directors Pursuant to provisions of the DGCL, we have adopted provisions in our Certificate of Incorporation that provide that our directors shall not be personally liable for monetary damages to us or our stockholders for a breach of fiduciary duty as a director to the full extent that the Act permits the limitation or elimination of the liability of directors. Delaware law provides that directors will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for: any breach of their duty of loyalty to the corporation or its stockholders; acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; unlawful payments of dividends or unlawful stock repurchases or redemptions; or any transaction from which the director derived an improper personal benefit. We have also entered into separate indemnification agreements with each of our directors and executive officers which provide significant additional protection to such persons. We have in effect a directors and officers liability insurance policy indemnifying our directors and officers and the directors and officers of our subsidiaries within a specific limit for certain liabilities incurred by them, including liabilities under the Securities Act. We pay the entire premium of this policy. Our Certificate of Incorporation also contains a provision for the indemnification by us of all of our directors and officers, to the fullest extent permitted by the DGCL. Transfer Agent and Registrar The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company. PLAN OF DISTRIBUTION The selling stockholders, which as used herein includes donees, pledgees, transferees or other successors-in-interest selling shares of common stock or interests in shares of common stock received after the date of this prospectus from a selling stockholder as a gift, pledge, partnership or limited liability company distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of common stock or interests in shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices. The selling stockholders may use any one or more of the following methods when disposing of shares or interests therein: ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; block trades in which the broker-dealer will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction; purchases by a broker-dealer as principal and resale by the broker-dealer for its account; an exchange distribution in accordance with the rules of the applicable exchange; privately negotiated transactions; short sales effected after the date of the registration statement of which this prospectus is a part is declared effective by the Securities and Exchange Commission; through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share; a combination of any such methods of sale; and any other method permitted pursuant to applicable law. The selling stockholders may, from time to time, pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus. In connection with the sale of our common stock or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling stockholders may also sell shares of our common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction). The aggregate proceeds to the selling stockholders from the sale of the common stock offered by them will be the purchase price of the common stock less discounts or commissions, if any. Each of the selling stockholders reserves the right to accept and, together with their agents from time to time, to reject, in whole or in part, any proposed purchase of common stock to be made directly or through agents. We will not receive any of the proceeds from the sale of the shares offered under this prospectus. However, certain of the shares of common stock covered hereby will be issued only upon the conversion of the Note. Upon conversion of the Note, we will receive the proceeds of the conversion price of such Note. The selling stockholders also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities Act of 1933, provided that they meet the criteria and conform to the requirements of that rule. The selling stockholders and any underwriters, broker-dealers or agents that participate in the sale of the common stock or interests therein may be underwriters within the meaning of Section 2(11) of the Securities Act. Any discounts, commissions, concessions or profit they earn on any resale of the shares may be underwriting discounts and commissions under the Securities Act. Selling stockholders who are underwriters within the meaning of Section 2(11) of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act. To the extent required, the shares of our common stock to be sold, the names of the selling stockholders, the respective purchase prices and public offering prices, the names of any agents, dealer or underwriter, any applicable commissions or discounts with respect to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the registration statement that includes this prospectus. In order to comply with the securities laws of some states, if applicable, the common stock may be sold in these jurisdictions only through registered or licensed brokers or dealers. In addition, in some states the common stock may not be sold unless it has been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied with. We have advised the selling stockholders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of shares in the market and to the activities of the selling stockholders and their affiliates. In addition, we will make copies of this prospectus (as it may be supplemented or amended from time to time) available to the selling stockholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act. The selling stockholders may indemnify any broker-dealer that participates in transactions involving the sale of the shares against certain liabilities, including liabilities arising under the Securities Act. We have agreed to indemnify the selling stockholders against liabilities, including liabilities under the Securities Act and state securities laws, relating to the registration of the shares offered by this prospectus. We have agreed with the selling stockholders to keep the registration statement of which this prospectus constitutes a part effective until the earlier of (1) such time as all of the shares covered by this prospectus have been disposed of pursuant to and in accordance with the registration statement or (2) the date on which the shares may be sold pursuant to Rule 144(k) of the Securities Act. LEGAL MATTERS The validity of the shares of common stock offered hereunder will be passed upon for us by Kane Kessler, P.C., 1350 Avenue of the Americas, New York, New York 10019. EXPERTS The consolidated financial statements of the Company as of and for the year ended December 31, 2006, incorporated in this prospectus by reference from the Company's Annual Report on Form 10-K for the year December 31, 2006, have been audited by McGladrey & Pullen, LLP, an independent registered public accounting firm, as stated in their report, which is incorporated herein by reference, and has been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The audited balance sheet of CRC Acquisition Co., LLC as of December 31, 2005, and the related statements of operations and cash flows for the period from January 1, 2006 to October 3, 2006, and for the years ended December 31, 2005 and 2004, incorporated in this prospectus by reference from the Company s Annual Report on Form 10-K for the year ended December 31, 2006, have been audited by McGladrey & Pullen, LLP, an independent registered public accounting firm, as stated in their report, which is incorporated herein by reference, and has been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The audited balance sheet of the Company as of December 31, 2005, and the related statements of operations and cash flows for the years ended December 31, 2005 and 2004 incorporated in this Prospectus by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2006, have been so incorporated in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in accounting and auditing. MATERIAL CHANGES There have been no material changes in our affairs since December 31, 2006 that have not been described in our Annual Report on Form 10-K for the year ended December 31, 2006, our Quarterly Reports on Form 10-Q for periods commencing after December 31, 2006, or our Current Reports on Form 8-K for periods commencing on or after December 31, 2006. * All such amounts are estimates, other than the SEC registration fee. Item 14. Indemnification of Directors and Officers We are a Delaware corporation. Subsection (a) of Section 145 of the General Corporation Law of the State of Delaware (the DGCL ) empowers a corporation to indemnify any current or former director, officer, employee or agent of the corporation, or any individual serving at the corporation's request as a director, officer, employee or agent of another organization, who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding provided that such director, officer, employee or agent acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, provided further that such director, officer, employee or agent had no reasonable cause to believe his conduct was unlawful. Subsection (b) of Section 145 of the DGCL empowers a corporation to indemnify any current or former director, officer, employee or agent who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or any individual serving at the corporation's request as a director, officer, employee or agent of another organization against expenses (including attorneys' fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit provided that such director, officer, employee or agent acted in good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of the corporation, except that no indemnification may be made in respect to any claim, issue or matter as to which such director, officer, employee or agent shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all of the circumstances of the case, such director or officer is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 145 further provides that to the extent a present or former director or officer has been successful in the defense of any action, suit or proceeding referred to in subsections (a) and (b) of Section 145 or in the defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith; that indemnification and advancement of expenses provided for by, or granted pursuant to, Section 145 shall not be deemed exclusive of any other rights to which the indemnified party may be entitled; and empowers the corporation to purchase and maintain insurance on behalf of a current or former director, officer, employee or agent of the corporation, or any individual serving at the corporation's request as a director, officer or employee of another organization, against any liability asserted against him or incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liabilities under Section 145. Our Certificate of Incorporation provides that we shall, to the fullest extent permitted by the DGCL, indemnify all persons acting as officers and directors of Stamford Industrial Group, Inc. from and against all expenses, liabilities, or other matters covered by the DGCL. As permitted by the DGCL, our Certificate of Incorporation provides that, to the fullest extent permitted by the DGCL, no director shall be personally liable to us or to our stockholders for monetary damages for breach of his fiduciary duty as a director. Delaware law does not permit the elimination of liability (a) for any breach of the director's duty of loyalty to us or our stockholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) in respect of certain unlawful dividend payments or stock redemptions or repurchases or (d) for any transaction from which the director derives an improper personal benefit. The effect of this provision in the Certificate of Incorporation is to eliminate our rights and the rights of our stockholders (through stockholders' derivative suits on behalf of us) to recover monetary damages against a director for breach of fiduciary duty as a director thereof (including breaches resulting from negligent or grossly negligent behavior) except in the situations described in clauses (a)-(d), inclusive, above. These provisions will not alter the liability of directors under federal securities laws. We have in effect a directors and officers liability insurance policy indemnifying our directors and officers and the directors and officers of our subsidiaries within a specific limit for certain liabilities incurred by them, including liabilities under the Securities Act. We pay the entire premium of this policy. We believe that our Certificate of Incorporation and bylaw provisions, and our directors and officers liability insurance policy are necessary to attract and retain qualified persons to serve as our directors and officers. Item 15. Recent Sales of Unregistered Securities. On October 3, 2006, at the closing of the acquisition of Concord Steel, we sold 3,529,412 shares (the CRC Shares ) of the Company s authorized but theretofore unissued common stock to CRC Acquisition Co. LLC, the seller of the assets acquired by the Company in the acquisition of Concord Steel, at a price of $0.85 per share. There were no underwriters, underwriting discounts or commissions payable on account of the sale. The CRC Shares were sold pursuant to a stock purchase agreement dated as of October 3, 2006, which provides for (i) one demand registration, provided that the demand may not be made within 90 days after the effectiveness of registration of an underwritten public offering by the Company or registration of shares pursuant to any other demand registration right, and the demand registration may be deferred if the Company has determined to effect an underwritten offering or there is material non-public information or a significant business opportunity which the Company s Board of Directors does not want to disclose, and (ii) unlimited piggyback registration rights, subject to underwriters' cutback rights. The shares were also subject to a lock-up agreement that expired April 3, 2007. The sale of the CRC Shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. The shares of Common Stock issued to Kanders & Company, Inc. pursuant to the Compensation Agreement (defined below) were issued pursuant to an exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (the Securities Act ) and/or Regulation D promulgated under the Securities Act. Kanders & Company represented its intention to acquire the securities for investment purposes only and not with a view to or for sale in connection with any distribution thereof and the share certificates representing such shares will bear appropriate legends to that effect. On September 22, 2006, the Company entered into an Equity Compensation Agreement (the Compensation Agreement ) with Kanders & Company, Inc. ( Kanders & Company ) pursuant to which the Company agreed to issue to Kanders & Company 8,274,000 shares of its common stock. The shares of common stock issued to Kanders & Company pursuant to the Compensation Agreement were issued pursuant to an exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended and/or Regulation D promulgated under the Securities Act. Kanders & Company represented its intention to acquire the securities for investment purposes only and not with a view to or for sale in connection with any distribution thereof and the share certificates representing such shares will bear appropriate legends to that effect. Item 16. Exhibits and Financial Schedules Exhibit Number Description 2.1 Patent Purchase Agreement, dated December 30, 2003, between Thalveg Data Flow LLC and Net Perceptions, Inc., as amended on March 31, 2004 (filed as Exhibit 2.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 1, 2004). 3.1 Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to our Registration Statement on Form S-1) (Registration No. 333-71919). 3.2 Certificate of Amendment to the Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1(b) to our Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2002 filed with the Securities and Exchange Commission on March 26, 2003). 3.3 Certificate of Amendment to the Amended and Restated Certificate of Incorporation (filed as Appendix A of the Net Perceptions, Inc. Definitive Proxy Statement filed with the Securities and Exchange Commission on May 11, 2007). 3.4 Amended and Restated Bylaws as amended through August 5, 2003 (filed as Exhibit 3.2 to our Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2003 filed with the Securities and Exchange Commission on August 14, 2003). 4.1 Amended and Restated Investor s Rights Agreement, dated December 18, 1997, among Net Perceptions, Inc. and the investors and founders named therein, as amended (filed as Exhibit 4.1 to our Registration Statement on Form S-1) (Registration No. 333-71919). 4.2 Specimen common stock certificate (filed as Exhibit 4.2 to our Registration Statement on Form S-1) (Registration No. 333-71919). 4.3 Specimen common stock certificate (including Rights Agreement Legend) (filed as Exhibit 4.4 to our Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2001 filed with the Securities and Exchange Commission on August 14, 2001). 4.4 Rights Agreement between Net Perceptions, Inc. and Wells Fargo Bank Minnesota, as Rights Agent (filed as Exhibit 1 to our Registration Statement on Form 8-A12G filed with the Securities and Exchange Commission on June 6, 2001). 4.5 Amendment No. 1 to Rights Agreement between Net Perceptions, Inc. and Wells Fargo Bank Minnesota, as Rights Agent dated as of December 22, 2003 (filed as Exhibit 2 to our Registration Statement on Form 8-A12G/A filed with the Securities and Exchange Commission on December 24, 2003). 4.6 Amendment No. 2 to Rights Agreement between Net Perceptions, Inc. and Wells Fargo Bank Minnesota, as Rights Agent dated as of April 21, 2004 (filed as Exhibit 3 to our Registration Statement on Form 8-A12G/A filed with the Securities and Exchange Commission on April 22, 2004). 4.7 Amendment No. 3 to Rights Agreement between Net Perceptions, Inc. and Wells Fargo Bank Minnesota, as Rights Agent dated as of September 22, 2006 (filed as Exhibit 4 to our Registration Statement on Form 8-A12G/A filed with the Securities and Exchange Commission on October 2, 2006). 4.8 Form of Certificate of Designation of Series A Junior Participating Preferred Stock (filed as Exhibit 1 to our Registration Statement on Form 8-A12G filed with the Securities and Exchange Commission on June 6, 2001). 4.9 Form of Rights Certificate (filed as Exhibit 1 to our Registration Statement on Form 8-A12G filed with the Securities and Exchange Commission on June 6, 2001). 5.1 Opinion of Kane Kessler, P.C.** 10.1* 1996 Stock Plan (filed as Exhibit 10.2 to our Registration Statement on Form S-1) (Registration No. 333-71919). 10.2* 1999 Equity Incentive Plan (filed as Exhibit 10.3 to our Registration Statement on Form S-1) (Registration No. 333-71919). 10.3* Amended and Restated 1999 Non-Employee Director Option Plan, as amended through April 2, 2001 (filed as Exhibit 10.4 to our Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2001 filed with the Securities and Exchange Commission on May 15, 2001). 10.4* Employee Stock Purchase Plan (filed as Exhibit 10.5 to our Registration Statement on Form S-1) (Registration No. 333-71919). 10.5* 2000 Stock Plan (filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2000 filed with the Securities and Exchange Commission on August 11, 2000). 10.6* 2% Convertible Subordinated Note Due April 21, 2014 (filed as Exhibit 4.1 to our Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2004 filed with the Securities and Exchange Commission on August 16, 2004). 10.7* Form of Net Perceptions, Inc. 1999 Equity Incentive Plan Stock Option Agreement (filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2005 filed with the Securities and Exchange Commission on November 9, 2005). 10.8* Form of Net Perceptions, Inc. 2000 Stock Plan Stock Option Agreement (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2005 filed with the Securities and Exchange Commission on November 9, 2005). 10.9* Employment Agreement dated as of May 1, 2006, between Net Perceptions, Inc. and Nigel P. Ekern, (filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2006). 10.10* Equity compensation Agreement by and between Net Perceptions, Inc. and Kanders & Company, Inc., dated as of September 22, 2006 (filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2006). 10.11* Consulting Agreement by and between Net Perceptions, Inc. and Kanders & Company Inc., dated as of September 22, 2006 (filed as Exhibit 10.2 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2006). 10.12* Employment Agreement by and between Net Perceptions, Inc. and Albert W. Weggeman, Jr., dated as of September 22, 2006 (filed as Exhibit 10.3 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2006). 10.13* Stock Option Agreement between Net Perceptions, Inc. and Albert W. Weggeman, Jr., dated as of October 3, 2006 (filed as Exhibit 10.13 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 10, 2006). 10.14* Restricted Stock Award Agreement dated as of September 22, 2006, between Net Perceptions, Inc., and Mr. David A. Jones re Restricted Stock Award under 1999 Equity Incentive Plan (filed as Exhibit 10.4 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2006). 10.15* Restricted Stock Award Agreement dated as of September 22, 2006, between Net Perceptions, Inc., and Mr. Nicholas Sokolow re Restricted Stock Award under 1999 Equity Incentive Plan (filed as Exhibit 10.5 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2006). 10.16* Credit Agreement dated October 3, 2006, between the SIG Acquisition Corp. and Lasalle Bank National Association, as agent, and the lenders named therein (filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2006). 10.17 Guaranty and Security Agreement dated October 3, 2006, among Net Perceptions, Inc., SIG Acquisition Corp., and Lasalle Bank National Association, as agent, and the lenders named therein (filed as Exhibit 10.2 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2006). 10.18 Form of Revolving Note (filed as Exhibit 10.3 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 10, 2006). 10.19 Form of Term Note (filed as Exhibit 10.4 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 10, 2006). 10.20 Form of Capital Expenditures Note (filed as Exhibit 10.5 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 10, 2006). 10.21 Form of Swing Loan Note (filed as Exhibit 10.6 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 10, 2006). 10.22* Employment Agreement dated as of October 3, 2006, between the Company and Paul Vesey (filed as Exhibit 10.7 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 10, 2006). 10.23 Asset Purchase Agreement among the Company, SIG Acquisition Corp. and CRC Acquisition Co. LLC dated as of September 22, 2006 (without exhibits) (filed as Exhibit 10.8 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 10, 2006). 10.24 Stock Purchase Agreement between the Company and CRC Acquisition Co. LLC dated as of October 3, 2006 (without exhibits) (filed as Exhibit 10.9 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 10, 2006). 10.25 Equityholder Registration Rights Agreement dated as of October 3, 2006, between Net Perceptions, Inc., and CRC Acquisition Co. LLC (filed as Exhibit 10.10 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 10, 2006). 10.26 Equityholder Lock-up Agreement dated as of October 3, 2006, between Net Perceptions, Inc., and CRC Acquisition Co. LLC (filed as Exhibit 10.11 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 10, 2006). 10.27 Escrow Agreement dated as of October 3, 2006, among CRC Acquisition Co. LLC, SIG Acquisition Corp., and The Bank of New York (filed as Exhibit 10.12 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 10, 2006). 10.28 Form of Lock-up Agreement between the Company and certain directors and officers (filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 17, 2006). 10.29* Employment Agreement dated as of December 1, 2006 between Net Perceptions, Inc. and Jonathan LaBarre (filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 5, 2006). 10.30 Lease dated as of November 30, 2006, between SIG Acquisition Corp., and Castleway Properties, LLC (filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 6, 2006). 10.31 2007 Stock Incentive Plan (incorporated herein by reference to Appendix B of the Net Perceptions, Inc. Definitive Proxy Statement filed with the Securities and Exchange Commission on May 11, 2007). 10.32 2007 Annual Incentive Plan (incorporated herein by reference to Appendix C of the Net Perceptions, Inc. Definitive Proxy Statement filed with the Securities and Exchange Commission on May 11, 2007). 21.1 Subsidiaries of the Registrant (filed as Exhibit 21.1 to our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 2, 2007). 23.1 Consent of McGladrey & Pullen, LLP, independent registered public accounting firm. 23.2 Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm. 23.3 Consent of Kane Kessler, P.C. (included in Exhibit No. 5.1 to the Registration Statement)** 24.1 Powers of Attorney (included on the signature page to the Registration Statement). * Represents a management contract or compensatory plan or arrangement. ** To be filed by amendment. Item 17. UNDERTAKINGS The undersigned registrant hereby undertakes: (a) (1) To file, during any period in which offers or sales are being made of the securities registered hereby, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of this registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the Calculation of Registration Fee table in the effective registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our Class A common stock. You should read this entire prospectus carefully, especially the risks of investing in our Class A common stock discussed under "Risk Factors" and the financial statements and related notes, before making an investment decision. In this prospectus, unless the context otherwise indicates or requires, the terms "we," "us," "our," "the Company" and "Internet Brands" refer to Internet Brands, Inc., together with our subsidiaries. Our Company We are an Internet media company that builds, acquires and enhances branded websites in categories marked by high consumer involvement, strong advertising spending, and significant fragmentation in offline sources of consumer information. We operate a rapidly growing network of websites, currently grouped into three vertical categories: automotive, travel and leisure, and home and home improvement. We currently operate 45 principal websites. Utilizing a cost-efficient, proprietary operating platform, we operate and enhance websites that attract consumers through rich content, opportunities for participation in strong online communities, and user-friendly functionality. Our websites collectively attract large audiences researching high-value or specialty products, enabling us to sell targeted advertising. We also offer certain services directly to consumers, such as new car brokering. We believe that as individuals increasingly use the Internet to pursue areas of passion, research purchases and conduct commerce, both individuals and the advertisers who seek to market to them will demand access to online media in the form of vertical websites like ours. Our websites attracted 26.7 million unique visitors in September 2007 (measured by adding the number of unique visitors to each of our websites in that month), an increase of approximately 193% from an estimated 9.1 million unique visitors in September 2006. Our network includes a major automotive e-commerce website (CarsDirect.com), a growing network of online automotive enthusiast communities, significant websites in the travel and leisure category (such as Wikitravel.org and FlyerTalk.com), and popular home and home improvement websites (including ApartmentRatings.com and DoItYourself.com). Our international audiences are rapidly expanding and accounted for approximately 22% of the monthly visitors to our websites in September 2007. In addition to our consumer Internet business, we license our content and Internet technology products and services to companies and individual website owners around the world. Our Autodata Solutions division is a supplier of licensed content and technology services to the automotive industry, serving most of the major U.S., Japanese and European automotive manufacturers. In June 2007, we purchased Jelsoft Enterprises Limited (Jelsoft), the developer of vBulletin, making us the largest licensor of proprietary community bulletin board software. We monetize visits to our e-commerce and enthusiast community websites through various advertising revenue formats, such as cost per lead, cost per thousand impressions, cost per click, cost per action, and flat fees, while our Autodata Solutions and Jelsoft divisions generate revenues in the form of licensing and service fees. In 2006, we generated revenues of $84.8 million. Our Industry We believe that the preferred medium by which consumers seek information and engage in commerce is shifting from traditional to Internet media and, within Internet media, from untargeted horizontal portals and search websites to vertical websites focused on specific categories of products and services. Horizontal portals, such as Google, Yahoo!, and AOL, are websites that provide a broad range of undifferentiated content and services. Vertical websites typically provide highly targeted, in-depth information and allow users to access online communities that provide fresh, differentiated niche content in their categories of interest. We believe that over time advertisers will heighten their focus on online media because they are increasingly demanding a measurable return on their investments across all forms of media, and the Internet enables them to track individual user responses to their advertising programs. Growth in the use of the Internet as a principal medium for consumer research and for connecting users with shared interests has created a demand for website content and community tools from businesses in highly competitive markets and those seeking to develop new Internet website communities. Our Value Proposition We have become a major provider of Internet media by building, acquiring and enhancing a network of websites that provide vertical content to consumers and help advertisers reach targeted audiences. Users of our websites enjoy research and shopping experiences supported by unique content, comprehensive databases, powerful vertical search tools, and user-friendly functionality, which enable us to attract loyal and engaged audiences. We facilitate online communities associated with our websites by providing innovative user tools, highly functional, safe, secure and moderated websites, and community governance "best practices." Our media platform enables advertisers to selectively target customers within our websites. In addition, we repackage our automotive content and technology to provide our licensee customers differentiated and reliable Internet solutions. These solutions are also scalable, permitting our customers to accommodate growing or changing workloads. Our Autodata Solutions and Jelsoft divisions provide information and technology solutions for major automotive manufacturers and individual website owners establishing and nurturing online communities, respectively. Our Operating Platform We achieve attractive operating margins in our consumer Internet business by utilizing the Internet Brands operating platform: an integrated set of operating processes, personnel expertise, and proprietary technologies that achieve strong revenue yields and operating efficiencies. We gain strong cost efficiencies by leveraging the components of our operating platform common technology, personnel, and support services across all of our websites. Our technologies are modular in design, meaning that they are comprised of components and functions that are generally interchangeable among our websites. This modularity enables us to combine selected functions to bring new websites to market rapidly and selectively apply functionalities developed for one of our websites across our network of websites. We also attempt to maximize revenue yields by deploying technology and business intelligence tools that identify and serve the revenue source projected to result, at a particular point in time, in the highest revenue to us. As a result, our platform facilitates rapid audience growth by delivering user-friendly interfaces, fast website operating speeds, appealing tools, and advanced online advertising capabilities. In addition, our platform is specifically designed to support this rapid audience growth within and across our categories of business, with minimal incremental costs. Our Strategy Our goal is to grow the number, size and profitability of our consumer Internet and licensing businesses. The principal elements of our strategy are to: expand the size of the audiences visiting our websites; grow our advertiser base and share of spend; increase our monetization of user traffic; build or continue to acquire new websites; and enhance our licensing business. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Our Websites We offer a broad selection of websites and services focused in our three vertical categories: automotive, travel and leisure, and home and home improvement. Our websites include the following: Automotive Travel and Leisure Home and Home Improvement E-Commerce and Classifieds Autos.com CarsDirect.com NewCarTestDrive.com BBOnline.com CruiseMates.com VacationHomes.com Loan.com Mortgage101.com RealEstateABC.com Enthusiast Communities AudiWorld.com CorvetteForum.com Ford-Trucks.com FlyerTalk.com TrekEarth.com Wikitravel.org ApartmentRatings.com BrokerOutpost.com DoItYourself.com Risks Related to Our Business Our business is subject to a number of risks that you should consider before deciding to invest in our Class A common stock: We have a limited operating history, and are pursuing an acquisition-based growth strategy that entails significant execution, integration and operational risks. We experienced a sequential quarterly decline in revenues in our consumer Internet segment from January 1, 2006 to March 31, 2007, and we may experience future revenue declines. In particular, our revenues from automotive dealers and manufacturers, which are an important component of our consumer Internet segment, have declined in recent periods as a result of the downturn in the automotive industry. We may be unable to compete effectively against a variety of Internet and traditional offline competitors, many of which have significantly greater financial, marketing and other resources than we do. To remain competitive, we must establish and maintain brand recognition, continue to improve the functionality and features of our websites, and develop new products and services, and we may be unsuccessful in these efforts. Many of our websites rely on the public to contribute content without compensation on a continual basis and there is no assurance that such contributions will continue. We discuss these and other risks more fully in the section entitled "Risk Factors" immediately following this prospectus summary. Company Information We were incorporated in Delaware in October 1998 as CarsDirect.com, Inc. In May 2005, we changed our name to Internet Brands, Inc. to better reflect our strategy to expand into additional Internet categories. Our principal executive offices are located at 909 North Sepulveda Blvd., 11th Floor, El Segundo, California 90245, and our telephone number is (310) 280-4000. Our corporate website is http://www.internetbrands.com. The information and other content contained on, or accessible through, our corporate website and all other websites we own and operate are not part of this prospectus. Following the consummation of this offering, we will have a dual-class capitalization structure, with Class A common stock entitled to one vote per share and Class B common stock entitled to 20 votes per share. Upon consummation of this offering, Idealab Holdings, L.L.C., through its ownership of our Class A common stock and exclusive ownership of our Class B common stock, will have control of United States Government and agency securities $ 33,135 $ 106 $ (235 ) $ 33,006 Corporate debt securities 43,677 441 (164 ) 43,954 Commercial paper 8,429 Amendment No. 6 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 approximately 68% of the votes represented by our Class A common stock, on an as-converted basis, and Class B common stock outstanding as of September 30, 2007. Thus, Idealab Holdings, L.L.C. will be able to influence or control matters requiring approval of our stockholders, including the election of directors and the approval of mergers, acquisitions and other significant corporate transactions. CarsDirect.com , CarsDirect , Autodata , CarsDirect.com Real Prices and DoItYourself.com and other trade names, trademarks or service marks of Internet Brands appearing in this prospectus are the property of Internet Brands. This prospectus contains additional trade names, trademarks and service marks of ours and of other companies. We do not intend our use or display of other companies' trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies. References to "Autodata Solutions division" in this prospectus are references to the business of our subsidiaries Autodata Solutions, Inc. and Autodata Solutions Company. Balance at December 31, 2006 22,420,232 $ 271,757 10,330,692 $ 10 3,025,000 $ 13 98,252 $ 3,565,589 $ INTERNET BRANDS, INC. (Exact name of registrant as specified in its charter) The Offering Class A common stock offered by Internet Brands 2,350,115 shares Class A common stock offered by the selling stockholders 3,649,885 shares Class A common stock to be outstanding immediately after this offering 38,742,897 shares Class B common stock to be outstanding immediately after this offering 3,025,000 shares Over-allotment option on Class A common stock granted by the selling stockholders The selling stockholders have granted the underwriters a 30-day option to purchase up to 900,000 additional shares of Class A common stock to cover over-allotments, if any. Use of proceeds We currently have no specific plans for the use of the net proceeds of this offering. The net proceeds from this offering may be used for general corporate purposes, which may include working capital and capital expenditures, or to support our general growth plan, which includes possible future acquisitions of complementary products, technologies or businesses. We will not receive any proceeds from the sale of shares of our Class A common stock by the selling stockholders. See "Use of Proceeds." Dividend policy We do not anticipate paying any dividends on our common stock in the foreseeable future. See "Dividend Policy."
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+S-1 Table of Contents TABLE OF CONTENTS SUMMARY 1
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk Factors" beginning on page 8, and the consolidated financial statements and notes to those consolidated financial statements, before making an investment decision. BIOPHAN TECHNOLOGIES, INC. Our Corporate Information We were incorporated in the State of Idaho on August 1, 1968, under the name Idaho Copper and Gold, Inc. On February 9, 1999, we changed our name to Idaho Technical, Inc. On January 24, 2000, we changed our domicile to Nevada by merging into our wholly-owned Nevada subsidiary. We began our current line of business on December 1, 2000. On December 1, 2000, we changed our name to GreatBio Technologies, Inc. and on July 19, 2001, we changed our name to Biophan Technologies, Inc. From inception through August 31, 2007, we have incurred cumulative net losses of $53,423,577. Since December 1, 2000, we have relied almost entirely on sales of our securities and loans to fund our operations. Our principal executive offices are located at 15 Schoen Place, Pittsford, New York 14534 and our telephone number is (585) 267-4800. The Offering Securities offered by the Selling Shareholders 38,102,868 shares Common stock to be outstanding after the offering 141,226,524 shares * Use of proceeds We will not receive any proceeds from the sale of shares by the selling stockholders. Risk Factors You should read the "Risk Factors" section of this prospectus for a discussion of factors that you should consider carefully before deciding to invest in shares of our common stock. OTC Bulletin Board symbol BIPH The number of shares of our common stock to be outstanding following this offering is based on 103,123,656 shares of our common stock outstanding as of October 22, 2007, and assumes the conversion of an aggregate face amount of $5,287,756 of our outstanding Senior Secured Convertible Notes due October 11, 2009 into an aggregate of 35,251,707 shares of common stock to be sold by selling stockholders in this offering and (ii) the issuance of 2,851,161 shares of common stock in payment of interest to accrue under the Notes during their term, and to be sold by the selling stockholders in this offering and excludes (i) the exercise of outstanding options under our incentive stock compensation plans, (ii) the issuance of any shares of our common stock to SBI Brightline XI, LLC pursuant to the Stock Purchase Agreement dated as of May 27, 2005 (as amended), and (iii) the exercise of any other options, warrants or other rights to acquire shares of our common stock by any person or entity (including the selling stockholders). * Includes 4,923,080 shares of our common stock held by Myotech, LLC. Because we have consolidated our financial statements with those of Myotech in accordance with FASB Interpretation No. 46 (Revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46(R)"), these shares are carried as treasury shares on our Consolidated Balance Sheets as of February 28, 2007 and August 31, 2007 and the Consolidated Statement of Stockholders' Equity as of February 28, 2007. However, because we did not have direct control over the voting or disposition of the shares held by Myotech, these shares are treated as issued and outstanding shares throughout this prospectus except (i) in the section entitled "Selected Financial Data" on page 12 and (ii) in the Financial Statements beginning on page F-1. SUMMARY CONSOLIDATED FINANCIAL DATA The tables below summarize our consolidated statements of operations for the six months ended August 31, 2007 and 2006 (Unaudited), and for the years ended February 28, 2007, 2006 and 2005 (Audited) and our consolidated balance sheet data as of February 28, 2007 and 2006 (Audited) and August 31, 2007 (Unaudited). The summary data as of and for the six months ended August 31, 2007 and 2006 (Unaudited) and the summary data as of and for the years ended February 28, 2007 and 2006 (Audited) are derived from our consolidated financial statements and related notes, which are included elsewhere in this prospectus. In the opinion of management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for the fair presentation of our financial position and results of operations for these periods. You should read the following information together with the more detailed information contained in Selected Consolidated Financial Data, Management s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus. CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Year Ended February 28, Six Months Ended August 31, 2007 2006 2005 2007 2006 Revenues: Development payments $ - $ 225,000 $ - $ - $ - License fees 562,500 479,166 - 125,000 437,500 Grant revenues - - - 75,000 - Testing services and consulting fees 427,029 340,695 - 132,351 217,521 989,529 1,044,861 - 332,351 655,021 Operating expenses: Research and development 7,190,975 6,829,142 2,629,980 2,817,784 4,529,921 General and administrative 6,824,945 8,451,886 3,337,185 3,290,423 3,659,625 14,015,920 15,281,028 5,967,165 6,108,207 8,189,546 Operating loss (13,026,391 ) (14,236,167 ) (5,967,165 ) (5,775,856 ) (7,534,525 ) Other income(expense): Interest income 82,224 70,701 11,869 20,431 11,606 Interest expense (4,303,543 ) (1,140,866 ) - (1,714,326 ) (684,407 ) Additional expense related to warrants (7,304,105 ) - - - - Change in fair value of warrant liability 5,318,064 - - 3,434,017 - Debt forgiveness - - - 197,614 - Liquidated damages - - - (652,500 ) - Loss on extinguishment of debt-related party (670,053 ) - - - - Other income 161,196 215,789 161,749 33,939 93,701 Other expense (5,442 ) - - - - (6,721,659 ) (854,376 ) 173,618 1,319,175 (579,100 ) Loss from continuing operations before minority interest in Myotech, LLC (19,748,050 ) (15,090,543 ) (5,793,547 ) (4,456,681 ) (8,113,625 ) Minority interest in Myotech, LLC 2,025,639 606,159 - 725,173 1,215,920 Net loss $ (17,722,411 ) $ (14,484,384 ) $ (5,793,547 ) $ (3,731,508 ) $ (6,897,705 ) Loss per common share - basic and diluted $ (0.23 ) $ (0.19 ) $ (0.08 ) $ (0.05 ) $ (0.09 ) Weighted average shares outstanding 77,864,738 75,787,052 69,263,893 81,167,908 77,393,718 CONSOLIDATED BALANCE SHEET DATA: As of February 28, As of August 31, 2007 2006 2007 Cash and cash equivalents $ 2,418,551 $ 1,477,716 $ 268,716 Intangible assets, net $ 24,396,805 $ 25,854,850 $ 23,660,783 Total assets $ 28,896,251 $ 27,968,066 $ 25,780,474 Total liabilities $ 18,966,774 $ 3,231,158 $ 7,970,845 Minority interest $ 13,139,882 $ 15,189,109 $ 12,367,582 Total stockholders equity (deficiency) $ (3,210,405 ) $ 9,547,799 $ 5,442,047 RISK FACTORS Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in our common stock. If any of the following risks actually materializes, our business, financial condition and results of operations would suffer. The trading price of our common stock could decline as a result of any of these risks, and you might lose all or part of your investment in our common stock. You should read the section entitled "Forward-Looking Statements" immediately following these risk factors for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this prospectus. WE MAY BE SUBJECT TO LIABILITY IN THE FORM OF A CLAIM FOR RESCISSION BY CERTAIN SHAREHOLDERS. As a result of our Forbearance Agreement with certain investors dated February 16, 2007, the Securities and Exchange Commission may take the position that the sale of the $7,250,000 of senior secured convertible notes had not been completed before we filed the registration statement of which this prospectus is a part and as such we may have issued securities without a valid exemption in violation of Section 5 of the Securities Act of 1933, as amended, for such placement. The $7,250,000 of senior secured convertible notes were convertible by the investors into 10,820,896 shares of common stock. As additional consideration for the senior secured convertible notes we issued the investors warrants to purchase 10,820,896 shares of our common stock and in connection with the execution of the Forbearance Agreement we issued the investors additional warrants to purchase an aggregate of 60,000 shares of our common stock. If the Securities and Exchange Commission takes the position that the foregoing was a violation of Section 5 of the Securities Act of 1933, as amended, the investors may be entitled to, among other penalties or fines which may be assessed against us the right to demand rescission of the offering. In that case, we would be required to pay each investor the amount we received as consideration for the securities issued under an invalid exemption, plus any interest accrued with respect to such amount at the applicable rate, and the securities would be cancelled. WE ARE A BUSINESS WITH A LIMITED OPERATING HISTORY AND ARE NOT LIKELY TO SUCCEED UNLESS WE CAN OVERCOME THE MANY OBSTACLES WE FACE. We are an early-stage research and development company with limited prior business operations and no material revenues to date. We are presently engaged in the development of certain technologies for use with medical procedures and biomedical devices. Because of our limited operating history, you may not have adequate information on which you can base an evaluation of our business and prospects. To date, our efforts have been devoted primarily to the following: organizational activities; developing a business plan; obtaining funding; conducting research and working toward the ultimate successful development of our technologies; aggressively patenting our intellectual property; licensing technology from third parties related to our business; and marketing to major biomedical device manufacturers. In order to establish ourselves in the medical device market, we are dependent upon continued funding and the successful development and marketing of our products. You should be aware of the increased risks, uncertainties, difficulties, and expenses we face as a research and development company and that an investment in our common stock may be worthless if our business fails. IF WE ARE UNABLE TO GENERATE SUFFICIENT REVENUES IN THE FUTURE, WE MAY NOT BE ABLE TO CONTINUE OUR BUSINESS. We are still in our formative and development stage. As an investor, you should be aware of the difficulties, delays, and expenses normally encountered by an enterprise in its development stage, many of which are beyond our control, including unanticipated research and developmental expenses, employment costs, and administrative expenses. We cannot assure our investors that our proposed business plans as described in this prospectus will materialize or prove successful, or that we will ever be able to finalize development of our products or operate profitably. If we cannot operate profitably, you could lose your entire investment. As a result of the start-up nature of our business, initially we expect to sustain substantial operating expenses without generating significant revenues. WE HAVE A HISTORY OF LOSSES AND A LARGE ACCUMULATED DEFICIT AND WE EXPECT FUTURE LOSSES THAT MAY CAUSE OUR STOCK PRICE TO DECLINE. For the six months ended August 31, 2007, we incurred a net loss of $3,731,508, and for the fiscal years ended February 28, 2007, 2006 and 2005, we incurred net losses of $17,722,411, $14,484,384, $5,793,547, respectively. We have incurred cumulative net losses from inception through August 31, 2007 of $53,423,577. We expect to continue to incur losses as we spend additional capital to develop and market our technologies and establish our infrastructure and organization to support anticipated operations. We cannot be certain whether we will ever earn a significant amount of revenues or profit, or, if we do, that we will be able to continue earning such revenues or profit. Also, our current financial condition may limit our ability to develop and ultimately market our technologies. Any of these factors could cause our stock price to decline and result in you losing a portion or all of your investment. THE INABILITY TO RETAIN AND ATTRACT KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS AND PLAN OF OPERATIONS. We believe that our future success will depend on the abilities and continued service of certain of our senior management and executive officers, particularly our Chief Executive Officer and those persons involved in the research and development of our products. If we are unable to retain the services of these persons, or if we are unable to attract additional qualified employees, researchers, and consultants, we may be unable to successfully finalize and eventually market our medical devices and other products being developed, which will have a material adverse effect on our business. OUR RESEARCH AND DEVELOPMENT EFFORTS MAY NOT RESULT IN COMMERCIALLY VIABLE PRODUCTS, WHICH COULD RESULT IN A DECLINE OF OUR STOCK PRICE AND A LOSS OF YOUR INVESTMENT. Our technologies are in the development stage. Further research and development efforts will be required to develop these technologies to the point where they can be incorporated into commercially viable or salable products. We have set forth in this prospectus our proposed research and development program as it is currently conceived. We cannot assure you, however, that this program will be accomplished in the order or in the time frame set forth. We reserve the right to modify the research and development program. We may not succeed in developing commercially viable products from our technologies. Also, our research and development efforts are aimed at technology that will enable certain medical procedures and biomedical devices to become safe and compatible with MRI diagnostics. If MRI diagnostics are replaced by the healthcare industry, our technology and products, if any, may become obsolete. If we are not successful in developing commercially viable products or if such products become obsolete, our ability to generate revenues from our technologies will be severely limited. This would result in the loss of all or part of your investment. WE MAY NOT BE ABLE TO DEVELOP A MARKET FOR OUR TECHNOLOGY, WHICH WILL LIKELY CAUSE OUR STOCK PRICE TO DECLINE. The demand and price for our technology and related products will be based upon the existence of markets for the technology and products and the markets for products of others, which may utilize our technology. The extent to which we may gain a share of our intended markets will depend, in part, upon the cost effectiveness and performance of our technology and products when compared to alternative technologies, which may be conventional or heretofore unknown. If the technology or products of other companies provide more cost-effective alternatives or otherwise outperform our technology or products, the demand for our technology or products may be adversely affected. Our success will be dependent upon market acceptance of our technology and related products. Failure of our technology to achieve and maintain meaningful levels of market acceptance would materially and adversely affect our business, financial condition, results of operations, and market penetration. This would likely cause our stock price to decline. IF WE ARE NOT ABLE TO COMPETE EFFECTIVELY IN THE COMPETITIVE MEDICAL DEVICE INDUSTRY, OUR FUTURE GROWTH AND OPERATING RESULTS WILL SUFFER. Our future success depends on our ability to compete effectively with manufacturers of medical devices, including major manufacturers of pacemakers and other implantable devices that may have internal development programs. We are an early-stage research and development company engaged exclusively in developing our initial technologies. Products using our technologies have not yet been commercialized and we have generated no material revenue from operations. As a result, we may have difficulty competing with larger, established medical device companies. Most of our potential competitors will be established, well-known companies that have: substantially greater financial, technical and marketing resources; larger customer bases; better name recognition; related product offerings; and larger marketing areas. Companies such as Medtronic, Inc., Guidant Corporation, St. Jude Medical, Boston Scientific Corporation, and Johnson & Johnson are major, international providers of medical devices currently with limited compatibility for MRI. Because these companies may possibly develop MRI image compatibility solutions for their own product lines, they may ultimately be in competition with us. These companies represent a wide array of medical devices and products, technologies, and approaches. All of these companies have more resources than we do and, therefore, a greater opportunity to develop comparable products and bring those products to market more efficiently than we can. If we do not compete effectively with current and future competitors, our future growth and operating results will be adversely affected. WE MAY NOT BE ABLE TO OBTAIN NECESSARY GOVERNMENT APPROVAL TO MARKET OUR TECHNOLOGY WHICH WILL LIKELY CAUSE OUR STOCK PRICE TO DECLINE AND OUR BUSINESS TO FAIL. Our marketing partners must obtain the approval of the U.S. Food and Drug Administration in order to market our MRI image compatibility technology and Myotech CSS technology. If these approvals are not obtained, or are significantly delayed, our ability to generate revenues may be adversely affected and our development and marketing efforts inhibited. This would most likely cause our stock price to decline and result in the loss of all or part of your investment. WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS AND WE MAY INFRINGE THE PROPRIETARY RIGHTS OF OTHERS. OUR INABILITY TO PROTECT OUR RIGHTS COULD IMPAIR OUR BUSINESS AND CAUSE US TO INCUR SUBSTANTIAL EXPENSE TO ENFORCE OUR RIGHTS. Proprietary rights are critically important to us. We currently have 49 issued U.S. patents and over 60 U.S. and international patents pending. Although we intend to aggressively pursue additional patent protection for our technologies as we continue to develop them, we cannot assure you that any additional patents will be issued. Although we will seek to defend our patents and to protect our other proprietary rights, our actions may be inadequate to protect our patents and other proprietary rights from infringement by others, or to prevent others from claiming infringement by us of their patents and other proprietary rights. Policing unauthorized use of our technology is difficult, and some foreign laws do not provide the same level of protection as U.S. laws. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or patents that we may obtain, or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of resources and have a material adverse effect on our future operating results. FUTURE SALES OF OUR COMMON STOCK WOULD HAVE A DILUTIVE EFFECT ON CURRENT STOCKHOLDERS AND COULD ADVERSELY IMPACT THE MARKET PRICE FOR OUR COMMON STOCK. Sales of a substantial number of shares of our common stock, or the perception that sales could occur, whether at the then current market price or below the then current market price, could adversely affect prevailing market prices for our common stock. For example, in connection with our issuance of $7,250,000 of senior secured amortizing convertible notes on October 12, 2006, of which $5,287,756 in principal is currently outstanding ,the holders of the notes may elect to convert the notes at any time into shares of our common stock at a price of $0.15 per share (the "Conversion Price"). Payments of interest and principal on the notes may be made, at our option, in cash or shares of our common stock registered for resale under the Securities Act, and if we elect to make payments on the notes in shares, those payments will be based on the lower of (i) the Conversion Price or (ii) 90% of the volume weighted trailing average price per share of our common stock for the 20 trading days ending 23 trading days prior to the date we make a payment. As additional consideration to the purchasers of the notes, we issued five-year warrants that currently permit the investors to purchase an aggregate of 18,034,830 shares of our common stock at an exercise price of $0.23 per share. As further consideration to the purchasers of the notes, we issued one-year warrants to purchase up to 10,820,896 shares of our common stock at a price of $0.23 per share. If the purchasers elect to exercise this one-year warrant, they will also receive additional five-year warrants to purchase our common stock equal to the number of shares purchased under this one-year warrant, with 50% of the additional warrants having an exercise price of $0.85 per share and the remaining 50% of the additional five-year warrants having an exercise price of $0.92 per share. In addition, if we issue additional shares of our common stock for sale in future financings, our stockholders would experience additional dilution. BECAUSE OUR CEO IS AN AFFILIATE OF OTHER ENTITIES WITH WHOM BIOPHAN HAS SIGNIFICANT BUSINESS RELATIONSHIPS, THERE MAY BE CONFLICTS OF INTEREST THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. John Lanzafame, our interim Chief Executive Officer, is on the Board of NaturalNano, Inc., the largest shareholder of which is Technology Innovations, LLC, which is a 57% equity member of Biomed Solutions LLC, a company engaged in the business of indentifying and acquiring technologies in the biomedical field for exploitation. Biomed is a beneficial owner of 5.17% of our outstanding common stock and holds an aggregate of $2,250,000 face amount of our convertible promissory note. NaturalNano has entered into a research and development agreement with us for drug eluting technology. Because of the nature of our business and the business of these other entities, the relationships of Mr. Lanzafame with these other entities may give rise to conflicts of interest with respect to certain matters affecting us. Potential conflicts may not always be resolved in a manner that is favorable to us. We believe it is impossible to predict the precise circumstances under which future potential conflicts may arise and therefore intend to address potential conflicts on a case-by-case basis. Under Nevada law, directors have a fiduciary duty to act in good faith and with a view to the best interests of the corporation. FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other similar words. These statements are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. We discuss many of the risks in greater detail under the heading "Risk Factors." Also, these forward-looking statements represent our estimates and assumptions only as of the date of this prospectus. Except as required by law, we assume no obligation to update any forward-looking statements after the date of this prospectus. This prospectus also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other industry data. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified the statistical and other industry data generated by independent parties and contained in this prospectus and, accordingly, we cannot guarantee their accuracy or completeness. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering and our consolidated financial statements and related notes appearing elsewhere in this prospectus. You should carefully consider, among other things, the matters discussed in the Risk Factors section of this prospectus. TRANSMEDICS, INC. Our Business We are a medical device company focused on developing and commercializing a proprietary system to enable transplantation of beating hearts and other functioning organs. Our Organ Care System, or OCS, is the first commercial portable warm blood perfusion system for the maintenance, transport and evaluation of an organ between donor and recipient. Under conventional preservation methods, organs are transported on ice in a non-functioning state and deprived of a blood supply, a condition called ischemia. This cold ischemic preservation results in time dependent injury to the organ and precludes evaluation of the organ s functional status and resuscitation of the organ. By maintaining organs in a functioning state, perfused with warm, oxygenated, nutrient enriched blood, we believe the OCS will lead to less organ damage, increase the time that an organ can be maintained outside of the body and enable evaluation and resuscitation in ways not possible with cold ischemic preservation. As a result, we believe the OCS potentially could improve transplant outcomes, increase the utilization of donor organs, expand the pool of potential donors and reduce overall costs associated with transplantation, and thereby become a standard of care for use in transplantation. We developed the OCS initially for use in heart transplants and obtained the CE Mark in the European Union for this use in 2006. As of November 30, 2007, a total of 47 heart transplants had been performed using the OCS, all in clinical trials or registries of this system. We began initial marketing of the OCS in the European Union in the second quarter of 2007. We obtained the regulatory approval required to market the OCS in Australia in October 2007. We are currently conducting a clinical feasibility study in the United States of the OCS for heart transplantation that provides for the enrollment of 20 patients at up to five heart transplant centers. In November 2007, we sought approval from the FDA to expand the study into a pivotal trial involving approximately 100 to 150 additional patients. Subject to satisfactory completion of the pivotal trial, we plan to submit a 510(k) premarket notification to the FDA in 2008 seeking marketing clearance for the OCS for use in heart transplantation. If our submission is cleared by the FDA, we expect to begin marketing the OCS in the United States for heart transplantation in the first quarter of 2009. We are also developing the OCS for use in lung, liver and kidney transplants. Our Market Organ transplantation is often the best alternative for the treatment of end stage organ failure of the heart, lung, liver and kidney based on quality of life, cost effectiveness and life expectancy. However, the number of available donor organs that are currently deemed suitable for transplant does not satisfy the existing demand for transplants. According to data from transplant registries, during 2005, approximately 120,000 patients were on waiting lists for heart, lung, liver or kidney transplants in the United States, and approximately 85,000 patients were on waiting lists for transplants of these organs in the European Union. However, based on data from the Organ Procurement and Transplantation Network/Scientific Registry of Transplant Recipients 2006 Annual Report, or the 2006 OPTN Report, in the United States, only approximately 35% of those patients waiting for a heart, 27% of those patients waiting for a lung and 20% of those patients waiting for a liver or kidney received an organ transplant. In addition, due to the limited number of organs and the desire to provide organs to those who would benefit most from a transplant, many other patients who could have benefited from transplantation were excluded from the waiting lists because they were deemed too old or too sick or otherwise failed to satisfy the waiting list criteria. For example, although in 2005 only 5,924 patients in the United States were on the waiting list for a heart transplant, according to the American Heart Association, more than 25,000 patients each year in the United States could benefit from a heart transplant. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents The shortfall in supply of available organs for transplant results in large part from the limitations of the current methods used to transport organs from donors to recipients. Cold ischemic preservation methods cause time dependent injury to the organ and preclude the ability to evaluate and resuscitate the organ. These shortcomings contribute to the limited availability of organ transplantation and reduce its effectiveness by: contributing to suboptimal clinical outcomes; decreasing the utilization of available organs for transplant; limiting the supply of organs by restricting the pool of potential donors; and increasing healthcare costs. Because of the specialized nature of transplantation, the organ transplant markets in the United States and Europe are highly concentrated. According to the Organ Procurement and Transplantation Network, or OPTN, surgeons at the top 25 transplant centers in the United States performed 58% of all heart and lung transplants in the United States in 2005. We estimate that surgeons at the top five transplant centers in each of Germany, Italy, France, Spain and the United Kingdom performed over 45% of all heart and lung transplants in the European Union in 2005. Our Solution We have designed the OCS to address the limitations of cold ischemic preservation by maintaining organs in a functioning state, perfused with warm, oxygenated, nutrient enriched blood between retrieval from the donor and transplant into the recipient. We believe that the OCS could result in less time dependent ischemic injury to organs than cold ischemic preservation, allow for the evaluation of the functional status of donor organs outside of the body and allow for the resuscitation of compromised organs after removal from the donor. Thus, we believe that the OCS potentially offers substantial benefits to patients, physicians, hospitals and third party payors, including: improved patient outcomes by reducing ischemic injury to donor organs and enabling surgeons to functionally assess and resuscitate donor organs; increased utilization of available organs by increasing the time an organ can be maintained between retrieval and transplant and permitting functional assessment and resuscitation of organs that would otherwise be deemed unsuitable for transplant; expansion of the pool of potential donors; and reduced total cost of care through fewer complications after transplant, faster recoveries and shorter hospital stays. The OCS is comprised of two principal components: a portable platform and an organ specific disposable set. The portable platform is designed to serve as a base for the organ specific disposable sets that hospitals will need to purchase for each organ transplant that is performed using the OCS. The portable platform is a non-sterile, reusable instrument that houses the components of the OCS, while the organ specific disposable set consists of a perfusion module, which is the single use chamber that holds the organ, a solution set and various accessories. Our Strategy Our goal is to establish the OCS as a standard of care for the maintenance, transport, evaluation and resuscitation of organs for transplantation and to sell organ specific disposable sets for each transplant on an ongoing basis. The key elements of our business strategy to achieve this goal include: demonstrating the potential benefits of warm blood perfusion and the OCS; accelerating the launch of the OCS into attractive markets; Amendment No. 2 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents focusing on leading high volume transplant centers to drive adoption; commercializing the OCS using direct sales and marketing; and leveraging our technology platform to expand into lung and other organ transplant markets. Risks Associated with Our Business Our business is subject to a number of risks of which you should be aware before making an investment decision, including the following: We have a limited operating history and have incurred substantial net losses since our inception. We expect to continue to incur substantial losses for a number of years and might never become profitable. The OCS is a novel approach to organ transport and maintenance and may not achieve market acceptance. We do not have data from clinical trials designed to establish the OCS s ability to improve patient outcomes, increase the utilization of available organs, expand the pool of potential donors or reduce the total cost of care associated with transplantation. If clinical data that we collect is not positive or not consistent with our beliefs of the potential benefits offered by the OCS, the OCS might not achieve market acceptance. We depend on the success of a single product, the OCS, which we only recently began marketing in the European Union for use in heart transplants. We might not be successful in commercializing the OCS in the European Union or any other geographic area for use in heart transplants or in developing and commercializing the OCS for other organ transplant procedures. If we are unable to renew the right to affix the CE Mark to the OCS for use in heart transplants in the European Union upon expiration of the CE Mark or if we are unable to demonstrate the right to affix the CE Mark to the OCS for other uses in the European Union, we will not be able to market and sell the OCS for these uses in the European Union. We might not obtain or maintain necessary FDA approval or clearance for the OCS in order to be able to commercialize the OCS in the United States for use in heart transplants or other organ transplant procedures. Adequate reimbursement or funding from governments or third party payors for purchases of the OCS and additional disposable sets and for the costs associated with procedures that use the OCS might not be available. We discuss these risks, as well as other risks affecting our business, more fully in the Risk Factors section of this prospectus. Corporate Information We were incorporated in Delaware in August 1998. Our principal executive offices are located at 200 Minuteman Road, Andover, MA 01810, and our telephone number is (978) 552-0900. Our website address is www.transmedics.com. We have included our website address in this prospectus as an inactive textual reference only. Information contained on, or that can be accessed through, our website is not part of this prospectus. In this prospectus, unless otherwise stated or the context otherwise requires, references to TransMedics, we, us, our and similar references refer to TransMedics, Inc. and its subsidiaries. TransMedics is a registered trademark of TransMedics. The TransMedics logo, Organ Care System and OCS are trademarks of TransMedics. Each of the other trademarks, trade names and service marks appearing in this prospectus belongs to its respective holder. TransMedics, Inc. (Exact name of registrant as specified in its charter) Table of Contents THE OFFERING Common stock offered shares Common stock to be outstanding after this offering shares Over-allotment option shares Use of proceeds We intend to use the net proceeds from this offering to fund research and development relating to the OCS, including clinical trials, the recruitment and training of additional sales and clinical support personnel and marketing initiatives, and for general corporate purposes. We may use a portion of the net proceeds to acquire, license or invest in complementary businesses, technologies or products. See Use of Proceeds for more information. Proposed NASDAQ Global Market symbol TMDX The number of shares of common stock to be outstanding after this offering is based on the number of shares of common stock outstanding as of November 15, 2007 and excludes: 7,487,630 shares of common stock issuable upon the exercise of stock options outstanding as of November 15, 2007, at a weighted average exercise price of $0.84 per share, and 1,364,170 shares of common stock underlying restricted stock units outstanding as of November 15, 2007; 1,335,934 shares of common stock available for future issuance under our 2004 stock incentive plan as of November 15, 2007; 6,000,000 shares of common stock reserved for future issuance under our 2007 stock incentive plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan; and 2,900,787 shares of common stock issuable upon the exercise of warrants outstanding as of November 15, 2007, at a weighted average exercise price of $0.08 per share. Except as otherwise noted, all information in this prospectus assumes: no exercise by the underwriters of their over-allotment option; the automatic conversion of all outstanding shares of our redeemable convertible preferred stock into 67,458,328 shares of common stock upon the closing of this offering; and the amendment and restatement of our certificate of incorporation and bylaws upon the closing of this offering. Delaware 3845 04-3432735 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 200 Minuteman Road Andover, MA 01810 (978) 552-0900 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Table of Contents SUMMARY CONSOLIDATED FINANCIAL DATA You should read the following summary consolidated financial data together with our consolidated financial statements and the related notes appearing elsewhere in this prospectus and the Selected Consolidated Financial Data and Management s Discussion and Analysis of Financial Condition and Results of Operations sections of this prospectus. We have derived the following summary of our consolidated statements of operations data for the years ended December 31, 2004 and 2005 and the fiscal year ended December 30, 2006 from our audited consolidated financial statements appearing elsewhere in this prospectus. We have derived the consolidated statements of operations data for the fiscal nine months ended September 30, 2006 and September 29, 2007 from our unaudited consolidated financial statements appearing elsewhere in this prospectus. Historical results are not necessarily indicative of results to be expected in any future period and results for any interim period are not necessarily indicative of results to be expected for a full fiscal year. Beginning for 2006, we adopted a fiscal year that ends on the last Saturday in December. Please see note 2 to our consolidated financial statements appearing elsewhere in this prospectus for an explanation of the method used to calculate the net loss per share attributable to common stockholders, the pro forma net loss per share and the number of shares used in computing per share amounts. Fiscal Year Ended Fiscal Nine Months Ended December 31, 2004 December 31, 2005 December 30, 2006 September 30, 2006 September 29, 2007 (unaudited) (unaudited) (in thousands, except per share amounts) Consolidated Statement of Operations Data: Operating expenses: Research and development $ 5,629 $ 14,380 $ 13,645 $ 10,246 $ 12,098 Selling, general and administrative 2,549 3,027 4,599 3,386 6,697 Total operating expenses 8,178 17,407 18,244 13,632 18,795 Loss from operations (8,178 ) (17,407 ) (18,244 ) (13,632 ) (18,795 ) Net interest income 282 37 690 532 540 Net loss $ (7,896 ) $ (17,370 ) $ (17,554 ) $ (13,100 ) $ (18,255 ) Net loss per share attributable to common stockholders basic and diluted $ (2.20 ) $ (4.23 ) $ (4.40 ) $ (3.34 ) $ (4.14 ) Weighted average common shares outstanding basic and diluted 4,631 4,659 4,980 4,878 5,554 Pro forma net loss per share basic and diluted (unaudited) $ (0.32 ) $ (0.27 ) Pro forma weighted average common shares outstanding basic and diluted (unaudited) 55,322 68,324 Waleed H. Hassanein, M.D. President and Chief Executive Officer TransMedics, Inc. 200 Minuteman Road Andover, MA 01810 (978) 552-0900 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents The pro forma balance sheet data give effect to the conversion of all outstanding shares of our redeemable convertible preferred stock into an aggregate of 67,458,328 shares of common stock upon the closing of this offering. The pro forma as adjusted balance sheet data in the table below give further effect to our issuance and sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, which is the midpoint of the price range listed on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and offering expenses payable by us. As of September 29, 2007 Actual Pro Forma Pro Forma As Adjusted (unaudited) (unaudited) (unaudited) (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents and short-term investments $ 15,429 $ 15,429 $ Working capital 14,450 14,450 Total assets 23,161 23,161 Long-term debt and capital lease obligations, net of current portion 607 607 Redeemable convertible preferred stock 103,233 Total stockholders equity (deficit) (88,098 ) 15,135 Copies to: David E. Redlick, Esq. Peter N. Handrinos, Esq. Wilmer Cutler Pickering Hale and Dorr LLP 60 State Street Boston, Massachusetts 02109 (617) 526-6000 Robert Sanchez, Esq. Wilson Sonsini Goodrich & Rosati Professional Corporation 1700 K Street, N.W. Washington, D.C. 20006 (202) 973-8800 Adam M. Dinow, Esq. Wilson Sonsini Goodrich & Rosati Professional Corporation 1301 Avenue of the Americas New York, New York 10019 (212) 999-5800 Table of Contents
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+S-1 1 f36561orsv1.htm FORM S-1 sv1 Table of Contents As filed with the Securities and Exchange Commission on December 18, 2007 Registration No. 333- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 FINISAR CORPORATION (Exact name of registrant as specified in its charter) Delaware 3674 77-0398779 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code number) (I.R.S. Employer Identification No.) 1389 Moffett Park Drive Sunnyvale, California 94089 (408) 548-1000 (Address, including zip code, and telephone number, including area code, of Registrant s principal executive offices) Jerry S. Rawls Chief Executive Officer Finisar Corporation 1389 Moffett Park Drive Sunnyvale, California 94089 (408) 548-1000 (Name, address, including zip code, and telephone number, including area code, of agent for service) Please send copies of all communications to: STEPHEN K. WORKMAN Senior Vice President, Finance, Chief Financial Officer and Secretary Finisar Corporation 1389 Moffett Park Drive Sunnyvale, California 94089 (408) 548-1000 DENNIS C. SULLIVAN, ESQ. JOE C. SORENSON, ESQ. DLA Piper US LLP 2000 University Avenue East Palo Alto, California 94303-2248 (650) 833-2000 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. CALCULATION OF REGISTRATION FEE Proposed Maximum Amount of Title of Each Class of Amount to be Offering Price Per Proposed Maximum Registration Securities to be Registered Registered Share(1) Aggregate Offering Price(1) Fee(2) 21/2% Convertible Senior Subordinated Notes due 2010 $100,000,000(1) 100%(2)(3) $100,000,000(2) $3,070 Common Stock, $0.001 par value 12,308,725 shares(4) (5) (1) Represents the aggregate principal amount of the notes issued by the Registrant. (2) Estimated solely for the purpose of calculating the Registration Fee pursuant to Rule 457(i) under the Securities Act of 1933, as amended. (3) Exclusive of accrued interest, if any. (4) Such number represents the number of shares of common stock as are initially issuable upon conversion of the 21/2% Convertible Senior Subordinated Notes due 2010 registered hereby. In addition, pursuant to Rule 416 under the Securities Act of 1933 as amended, the amount of common stock registered hereby also includes such indeterminate number of shares of common stock as may be issued from time to time upon conversion of the notes as a result of the antidilution provisions thereof. (5) No additional consideration will be received for the common stock and therefore, pursuant to Rule 457(i), no registration fee is required for these shares. The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine. Table of Contents SUMMARY This summary highlights selected information contained elsewhere in this prospectus. You should read the entire prospectus and the documents incorporated by reference in this prospectus carefully before investing in our notes or shares of common stock issuable upon conversion of the notes. Finisar Corporation We are a leading provider of optical subsystems and components that connect local area networks, or LANs, storage area networks, or SANs, and metropolitan area networks, or MANs. Our optical subsystems consist primarily of transceivers which provide the fundamental optical-electrical interface for connecting the equipment used in building these networks. These products rely on the use of semiconductor lasers in conjunction with integrated circuit design and novel packaging technology to provide a cost-effective means for transmitting and receiving digital signals over fiber optic cable using a wide range of network protocols, transmission speeds and physical configurations over distances of 70 meters to 200 kilometers. Our line of optical components consists primarily of packaged lasers and photodetectors used in transceivers, primarily for LAN and SAN applications. Our manufacturing operations are vertically integrated and include internal manufacturing, assembly and test capability. We sell our optical subsystem and component products to manufacturers of storage and networking equipment such as Brocade, Cisco Systems, EMC, Emulex, Hewlett-Packard Company, Huawei and Qlogic. We also provide network performance test and monitoring systems primarily to leading storage equipment manufacturers such as Brocade, EMC, Emulex, Hewlett-Packard Company, and Qlogic for testing and validating equipment designs and, to a lesser degree, to operators of networking and storage data centers for testing, monitoring and troubleshooting the performance of their installed systems. We were incorporated in California in April 1987 and reincorporated in Delaware in November 1999. Our principal executive offices are located at 1389 Moffett Park Drive, Sunnyvale, California 94089, and our telephone number at that location is (408) 548-1000. Our website is located at www.finisar.com. Information on our website is not a part of this prospectus. The Offering The following is a brief summary of certain terms of this offering. For a more complete description of the terms of the notes see Description of Notes in this prospectus. Issuer Finisar Corporation Securities Offered $100,000,000 aggregate principal amount of 21/2% convertible senior subordinated notes due 2010 and shares of common stock issuable upon conversion of the notes. Maturity of Notes October 15, 2010 Interest on Notes 21/2% per year on the principal amount, payable semiannually on April 15 and October 15. Conversion Rights The notes are convertible, at the option of the holder, on or prior to the close of business on the final maturity date into shares of our common stock upon certain specified circumstances, including (1) during any calendar quarter in which the volume weighted average price per share of our common stock exceeds 150% of the conversion price for a specified duration of time, (2) during any five trading day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of notes was less than 98% of the product of the closing price of our common stock for each day in that period and the conversion rate per $1,000 principal amount of the notes, (3) if specified distributions to holders of our common stock occur, (4) if the Table of Contents Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION, DATED DECEMBER 18, 2007 $100,000,000 Finisar Corporation 21/2% Convertible Senior Subordinated Notes due 2010 and the Common Stock Issuable Upon Conversion of the Notes We issued the 21/2% convertible senior subordinated notes due 2010, hereafter referred to as the notes or the senior notes, in a private placement in October 2006 in a series of exchange transactions pursuant to which $100 million in principal amount of our outstanding 21/2% convertible subordinated notes due 2010 were exchanged for the notes. This prospectus will be used by selling securityholders to resell their notes and the common stock issuable upon conversion of their notes. We will receive no part of the proceeds of the sale of the shares offered in this prospectus. All expenses of registration incurred in connection with this offering are being borne by us, but all selling and other expenses incurred by the selling securityholders will be borne by the selling securityholders None of the securities offered pursuant to this prospectus have been registered prior to the filing of the registration statement of which this prospectus is a part. Finisar pays interest on the notes on April 15 and October 15 of each year. The notes will mature on October 15, 2010. The notes are convertible, at the option of the holder, to the extent the conversion value of the notes is greater than the principal amount, at any time on or prior to maturity into shares of Finisar s common stock upon certain specified circumstances described in this prospectus. The notes are convertible at a conversion price of approximately $3.28 per share, which is equal to a conversion rate of 304.9055 shares per $1,000 principal amount of notes, subject to adjustment. Upon conversion, holders will receive cash for up to the principal amount of the converted notes and shares of Finisar common stock determined in the manner described in this prospectus. Holders of the notes have the right to require Finisar to repurchase the notes upon the occurrence of a change in control, as described in this prospectus, at a repurchase price equal to 100% of the principal amount of the notes being repurchased, plus accrued and unpaid interest, if any, to, but excluding, the repurchase date. Finisar may choose to pay the repurchase price of such notes in cash, shares of common stock (valued as described in this prospectus) or a combination thereof. Finisar may redeem some or all of the notes at any time at the redemption prices described in this prospectus. The notes are Finisar s general unsecured obligations and are subordinated to all of Finisar s existing and future senior indebtedness and will be effectively subordinated to all of the indebtedness and liabilities of Finisar s subsidiaries. The indenture governing the notes does not limit the incurrence by Finisar or its subsidiaries of senior indebtedness or other indebtedness. The notes will, however, rank senior in right of payment to our 51/4% convertible subordinated notes due 2008 and our 21/2% convertible subordinated notes due 2010. The notes are eligible for trading in the PORTAL Market. Our common stock is traded on the Nasdaq Global Select Market under the symbol FNSR. On December 17, 2007, the closing price of our common stock on the Nasdaq Global Select Market was $1.43 per share. THE SECURITIES OFFERED HEREBY
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+highlights specific information contained elsewhere in this prospectus. Because this is a summary, it may not contain all of the information that is important to you. Therefore, before making a decision to invest in our Series A Preferred Stock, you should read carefully the more detailed information set forth in this prospectus and our financial statements and related notes, and the Risk Factors and Management s Discussion and Analysis of Financial Condition and Results of Operations sections of this prospectus. Unless otherwise noted, all financial information, operating statistics, and ratios in this prospectus are based on accounting principles generally accepted as applied in the United States, which we also refer to as GAAP. First National Bancshares, Inc. We are a South Carolina corporation organized in 1999 to serve as the holding company for First National Bank of the South, a national banking association. We operate under a traditional community banking model, with a particular focus on commercial real estate and small business lending. We commenced banking operations in March 2000 in Spartanburg, South Carolina, where we operate three full-service branches under the name First National Bank of Spartanburg. Since 2003, we have expanded into the following four additional counties across the state of South Carolina under the name First National Bank of the South: Charleston County We have operated a full-service branch in Mount Pleasant since October 2005. We opened our second full-service branch in this market along with our new Charleston market headquarters in downtown Charleston in April 2007. We have operated a loan production office on Daniel Island since January 2006. Greenville County We opened a full service branch in Greenville County in a temporary location in October 2006 and moved to a permanent location in June 2007. This permanent location now serves as our new Greenville market headquarters. We plan to open our second full-service branch in this market in the city of Greer, located between the cities of Spartanburg and Greenville, in the summer of 2007. Richland County We have operated a loan production office in the city of Columbia since January 2006. York County We opened a loan production office in Rock Hill in February 2007. We offer trust and investment management services to our customers through our strategic alliance with Colonial Trust Company, a South Carolina private trust company established in 1913. We also operate a small business lending division based in Greenville under the name First National Business Capital that provides small business lending services under the United States Small Business Administration s ( SBA ) loan programs to customers primarily in the Carolinas and Georgia. In addition, we operate a wholesale mortgage division that offers a wide variety of conforming and non-conforming residential mortgage programs with fixed and variable rate options, as well as FHA/VA and construction/permanent mortgage products to its customers, which include other community banks and mortgage brokers who are located primarily in South Carolina. We have grown rapidly during our seven years of operation while developing the infrastructure to support our future growth and expansion objectives and implementing a strong credit culture. Specifically, from December 31, 2002 to March 31, 2007, we have: increased total assets from $139.2 million to $508.5 million, a compound annual growth rate of 35.6%; increased total loans from $93.1 million to $416.9 million, a compound annual growth rate of 42.3%; and increased total deposits from $119.7 million to $408.7 million, a compound annual growth rate of 33.5%. In addition, we have expanded our footprint from three full-service locations in Spartanburg County to six full-service locations and three loan production offices in five counties across the state of South Carolina. For the three months ended March 31, 2007, our net income was $852,000, or $0.19 per diluted share, which represents increases of 22.2% and 18.8%, respectively, over the same period in 2006. For the year ended Total charge-offs (139 ) (144 ) (54 ) (53 ) (54 ) Recoveries of loans previously charged-off 23 11 2 Deferred tax asset: Allowance for loan losses 1,221 804 Unrealized loss on securities available for sale 240 346 Other 1 Net interest income/(expense) (793 ) (375 ) (225 ) Professional fees 11 25 9 Shareholder relations 85 21 31 Data processing 13 Other UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents December 31, 2006, our net income was $4.05 million or $0.94 per diluted share. These earnings represent increases of 42.9% and 28.8%, respectively, over the same period in 2005. Our returns on average assets and shareholders equity for the year ended December 31, 2006 were 1.05% and 16.82%, respectively. In addition, our ratio of non-performing assets to total assets was 0.10% as of December 31, 2006. Growth Strategy We have developed a community banking strategy that focuses on providing responsive and personalized service to our consumer and commercial customers. We intend to grow our business, increase profitability and build shareholder value by employing the following strategies: Deliver superior community banking service. We emphasize to our employees the importance of delivering superior customer service and seeking opportunities to strengthen relationships both with customers and in the communities we serve. We retain key executives in each of our markets with local expertise and strong ties to the community. Additionally, we intend to create regional boards comprised of local business and community leaders in each of our markets. We currently have a regional board in Charleston and are in the process of forming one in Greenville. The regional boards are designed to assist the market executives so that we consistently improve and maximize our customer service and presence in the communities we serve. Maintain excellent asset quality. We consider credit quality to be of primary importance and we seek to maintain excellent asset quality through a strong credit culture, extensive underwriting procedures and comprehensive loan review. We have developed an operations infrastructure, which we believe will support our growth and expansion plans without sacrificing credit quality. Our continued focus on excellent asset quality has resulted in a consistently low level of net charge-offs with a ratio of net charge-offs to average total loans of 0.02% for the quarter ended March 31, 2007. Expand into high growth markets. We pursue growth by expanding into attractive markets based on our analysis of demographic and competitive data. Our strategy is to identify experienced bankers in each target market who share our philosophies on banking and possess significant ties to the community. We then enter the market through a loan production office. Once there is a sufficient customer base, we convert the loan production office to a full-service branch to further serve the market. We believe our expansion philosophy enables us to enter markets with less risk and operate more efficiently upon the opening of a full-service branch. In the past, we have not expanded through acquisition; however, we may consider select bank and non-bank (e.g. brokerage and insurance) acquisitions in the future. Build our core deposit base. We intend to decrease our reliance on non-core funding sources such as wholesale certificates of deposit through the conversion of loan production offices into full-service branches. While building a core deposit base takes time, we have experienced considerable success by following this model. For example, since converting our Mount Pleasant loan production office, which opened in October 2005, into a full-service branch in October 2006, we have grown deposits at that location to match the level of loans outstanding at that location. Our goal is to be in the top five institutions in deposit market share in each of our markets. Enhance current banking operations by diversifying revenue mix. We seek to provide a broad range of products to better serve our customers, while also increasing noninterest income as a percentage of our gross income (net interest income plus noninterest income). We offer trust and investment management services through a strategic alliance with Colonial Trust Company. We also operate a small business lending division based in Greenville under the name First National Business Capital which originates SBA loans and then sells the guaranteed portion of these loans in the secondary market. Additionally, in January 2007, we opened a wholesale mortgage division to originate residential real estate mortgage loans through other community banks and mortgage brokers and then sell them in the secondary market. We believe that these efforts will increase our noninterest income in the future. Balance, beginning of year $ 2,719 $ 2,258 $ 1,631 Provision charged to operations 1,192 594 679 Loans charged off (139 ) (144 ) (54 ) Recoveries on loans previously charged off 23 11 PRE-EFFECTIVE AMENDMENT No. 1 to the FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents Market Areas To better execute our strategic plan for growth and expansion, we have organized our banking operations into four geographic regions: Spartanburg Region; Eastern Region; Western Region; and Northern Region. The Spartanburg Region serves as the backbone and support center for our expanding branch network. Our corporate headquarters is located in the Spartanburg Region, along with three full-service branches. In our other regions, we conduct our banking operations in selected market areas which meet the criteria in our business plan. Although we have centralized our back office operations and support services in the Spartanburg Region, we operate a network of full-service branches and loan production offices in each market around a market headquarters facility. In addition, we regularly evaluate other high-growth market areas to further expand our asset base and branch network. Spartanburg Region Our primary market area is Spartanburg County, which is located in the upstate region of South Carolina between Atlanta and Charlotte on the I-85 business corridor. We currently serve this market through three full-service branches and have a deposit market share of 9.47% in Spartanburg County as of June 30, 2006, according to the Federal Deposit Insurance Corporation ( FDIC ). According to SNL Financial LC ( SNL ), as of July 1, 2006, Spartanburg County s estimated population totaled 271,347 residents and is expected to increase 4.89% from 2006 to 2011. According to the Spartanburg Area Chamber of Commerce, more than 90 international firms, representing 15 nations, conduct business in the Spartanburg County business community. BMW s North American assembly plant in Spartanburg began production in September 1995 and is now the sole producer of the Z4 roadster and coupe and the X5 sports activity vehicle. Spartanburg is also home to many domestic corporations, including Milliken & Co., Denny s, QS/1 and Advance America. We believe that Spartanburg has a strong economic environment that will continue to support the community and our business in the future. Eastern Region Our Eastern Region reaches from the state capital of Columbia, in Richland County, to historic Charleston, and will also encompass our future expansion into other coastal areas of South Carolina. We operate two full-service branches and a loan production office in the fast-growing Charleston market: one branch in Mount Pleasant, and a second branch in historic downtown Charleston and a loan production office on Daniel Island. The downtown location also serves as our headquarters for the Charleston market area. In January 2006, we opened a loan production office in Columbia. We anticipate identifying experienced bankers in this market area in the near future to expand our current lending capabilities into full-service banking operations. According to SNL, Charleston and Richland Counties had populations of 342,194 and 351,207, respectively, as of July 1, 2006, and are expected to grow 8.79% and 6.57%, respectively, from 2006 to 2011. As of June 30, 2006, the FDIC reports there are approximately $6.47 billion and $7.93 billion in deposits in Charleston and Richland Counties, respectively. These markets have benefited from substantial investment in recent years. The Charleston Regional Development Alliance reports that since 1995, new and expanding companies invested more than $5 billion in the region. The South Carolina Department of Commerce reports that Richland County has attracted over $442.0 million in capital investment since 2000. Western Region Our Western Region stretches from Spartanburg to the Georgia border along South Carolina s I-85 corridor. We operated a full-service branch at a temporary location in Greenville from October 2006 until June 2007. We Deferred: Federal $ (384 ) $ (68 ) $ (98 ) State 2 Jerry L. Calvert (58) President and Chief Executive Officer 33 CCB Financial Corp., Senior Vice President and Regional Manager Kitty B. Payne (36) Executive Vice President and Chief Financial Officer 14 KPMG LLP, Senior Tax Manager Robert W. Murdoch, Jr. (62) Executive Vice President and Retail Banking Manager 35 First United Bancorp, Vice President and Executive Officer David H. Zabriskie (45) Executive Vice President and Chief Lending Officer 18 OCC and OTS, Bank Examiner; CCB Financial Corp., 2nd Vice President and Commercial Lending Manager Robert L. Whittemore (48) Regional Executive Officer, Eastern Region 12 Wachovia Corporation, Senior Vice President and Senior Relationship Manager Barry D. Starling (50) Regional Executive Officer, Western Region 21 CCB Financial Corp., Senior Vice President of Commercial Lending Richard A. Manley (49) Regional Executive Officer, Northern Region 26 First Charter Corporation, Chief Banking Officer Recent Developments On June 15, 2007, we issued a press release announcing our current estimate for earnings per diluted share of $0.17 to $0.19 for the quarter ending June 30, 2007. We also reported that one of our commercial real estate loan relationships totaling approximately $1.4 million was recently placed on nonaccrual status. While this will increase our nonperforming assets to approximately $5.4 million, we expect to have resolved prior to June 30, 2007 two loans totaling $1.05 million previously reported as nonperforming assets. The resolution of these loans is anticipated to result in full collection of the outstanding principal with no loss to us. If these loans are resolved Jerry L. Calvert President and Chief Executive Officer 215 North Pine Street Spartanburg, South Carolina 29302 864-948-9001 (Name, address, and telephone number of agent for service) Table of Contents prior to the end of the quarter, as expected, then we estimate that our nonperforming assets will increase to approximately $4.4 million as of June 30, 2007 from $3.8 million as of March 31, 2007. Corporate Information Our principal executive offices are located at 215 North Pine Street, Spartanburg, South Carolina 29302. Our telephone number is (864) 948-9001. Our website is www.firstnational-online.com. Information on our website is not incorporated herein by reference and is not part of this prospectus. The Offering Preferred stock offered 800,000 shares of Series A Preferred Stock (920,000 shares if the underwriter exercises its over-allotment option in full) Price per share $25.00 Dividends % per annum, which is equivalent to $ per annum per share. Dividends are payable quarterly, when, as and if declared, on the last day of March, June, September and December of each year, commencing September 30, 2007. Dividends are noncumulative and are payable if, when and as authorized by our board of directors. Therefore, if no dividend is declared by our board of directors on the Series A Preferred Stock for a quarterly dividend period, holders will have no right to receive a dividend for that period, whether or not dividends are declared for any subsequent period. Dividends may not be paid on our common stock or any other capital security which ranks junior to the Series A Preferred Stock for any dividend period until full dividends with respect to the Series A Preferred Stock have been declared and paid or set apart for payment. Liquidation Preference $25.00 per share plus declared and unpaid dividends for the then-current dividend period, if any. Conversion Convertible at any time into shares of our common stock at an initial conversion price of $ per share of common stock, subject to adjustment. This conversion price is also subject to anti-dilution adjustments upon the occurrence of certain events. The number of shares of common stock issuable upon conversion of each share of Series A Preferred Stock will be equal to $25.00 divided by the conversion price then in effect. Cash will be paid in lieu of issuing any fractional share interest. All shares of our common stock issued upon any conversion of the Series A Preferred Stock will be freely tradeable without restriction under the Securities Act of 1933, except for shares purchased by our affiliates. Copies of all communications to: Neil E. Grayson Hamilton E. Russell, III Nelson Mullins Riley & Scarborough LLP Poinsett Plaza, Suite 900 104 South Main Street Greenville, South Carolina 29601 Telephone: (864) 250-2235 Fax: (864) 232-2359 Randolph A. Moore III Alston & Bird LLP One Atlantic Center 1201 West Peachtree Street Atlanta, Georgia 30309-3424 Telephone: (404) 881-7794 Fax: (404) 253-8340 Table of Contents Common stock outstanding(1) 3,695,822 shares as of June 8, 2007. Redemption The Series A Preferred Stock is redeemable at our option at any time, in whole or in part, on and after the third anniversary of the issue date, at $26.50 per share, plus declared and unpaid dividends, if any, with the redemption price declining in equal increments on a quarterly basis to $25.00 per share on or after the fifth anniversary of the issue date. The Series A Preferred Stock is also redeemable by us prior to that date, in whole or in part, at the redemption price of $25.00 per share if the last reported sale price of our common stock has equaled or exceeded 140% of the Series A Preferred Stock conversion price for at least 20 consecutive trading days. Ranking The Series A Preferred Stock will be, with respect to dividends and upon liquidation, dissolution or winding-up: (i) junior to all our existing and future debt obligations; (ii) junior to each class of capital stock or series of preferred stock, the terms of which expressly provide that it ranks senior to the Series A Preferred Stock; (iii) on a parity with each other class of our capital stock or series of preferred stock, the terms of which expressly provide that it ranks on a parity with the Series A Preferred Stock; and (iv) senior to all classes of our common stock or series of preferred stock, the terms of which do not expressly provide that it ranks senior to or on a parity with the Series A Preferred Stock. Voting Except as otherwise required by South Carolina law, a holder of Series A Preferred Stock will only be entitled to vote separately as a class in connection with certain corporate events or actions. Specifically, the consent of the holders of at least two-thirds of the Series A Preferred Stock, voting as a class, is required to (i) amend, alter, repeal or otherwise change any provision of our Articles of Incorporation or Certificate of Designation in a manner that would materially and adversely affect the rights, preferences, powers or privileges of the Series A Preferred stock or (ii) create, authorize, issue or increase the authorized or issued amount of any class or series of equity securities that is senior to or on parity with the Series A Preferred Stock as to dividend rights, or rights upon our liquidation, dissolution or Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. CALCULATION OF REGISTRATION FEE (1) The number of shares outstanding excludes an aggregate of 459,351 shares reserved for issuance under our 2000 Stock Incentive Plan, of which options to purchase 299,598 shares at a weighted average exercise price of $6.94 had been granted and remained outstanding as of May 18, 2007. It also excludes an aggregate of 697,533 shares reserved for issuance under warrants issued to our organizing directors to compensate them for the risks associated with the formation of our bank that are outstanding as of May 18, 2007.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001097136_senorx-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001097136_senorx-inc_prospectus_summary.txt
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+following summary are described in more detail later in this prospectus. This summary provides an overview of selected information and does not contain all of the information you should consider. Therefore, before making an investment decision, you should also read the more detailed information set out in this prospectus, including Risk Factors and our financial statements and related notes included elsewhere in this prospectus. SenoRx, Inc. Our Business We develop, manufacture and sell minimally-invasive medical devices for the diagnosis of breast cancer. Our initial product focus has been biopsy systems and breast tissue markers. We also are developing products for use in the treatment of breast cancer that we will seek to commercialize beginning in the second half of 2007, subject to receipt of required regulatory approvals, including a radiation balloon for localized radiation therapy and cutting devices for both excision of tissue and cosmetic reconstruction. With the emergence of clinicians coordinating multi-disciplinary patient care through integrated breast centers, we believe that our ability to provide a broad array of products will enhance our competitive positioning. Many of our products and products under development rely on our proprietary tissue cutting technologies, which include both mechanical and radiofrequency cutting mechanisms. Since we launched our first products in 2002, we have established over 1,000 customer accounts. Our flagship diagnostic product, the EnCor system, is a minimally-invasive, vacuum-assisted breast biopsy system. EnCor allows users to obtain multiple biopsy samples with a quick, single probe insertion. In contrast to existing competitive systems, EnCor is the only open/closed tissue collection system, providing the operator with a clear view of tissue samples through a proprietary transparent collection chamber, and the ability to either open the chamber to examine and remove one or more samples or to continue uninterrupted collection of multiple samples. Our EnCor system incorporates novel programmability, and we designed the system to be compatible with the most commonly used imaging modalities, including x-ray, ultrasound, and magnetic resonance imaging, or MRI. With its ease of use and functionality, we believe that EnCor can play an important role in the paradigm shift from invasive open surgical procedures to minimally-invasive biopsy procedures. We received clearance for the EnCor system from the U.S. Food and Drug Administration, or FDA, and conducted marketing preference testing in late 2004. We subsequently progressed with a full commercial launch in November 2005. As of December 31, 2006, we had an installed base of 317 EnCor systems and we had sold more than 50,000 EnCor disposable probes. In launching the EnCor system, we first targeted our customers using our ultrasound-guided, vacuum-assisted biopsy system launched in 2003, the SenoCor 360, because both the EnCor and SenoCor handpieces are compatible with the same modular console. More broadly, we intend to leverage our base of over 1,000 customers as potential EnCor customers. Our tissue markers, which we first introduced in 2002, are competitively differentiated given their visibility under ultrasound, bioresorbability and compatibility not only with our biopsy devices, but also with other companies devices. In breast care surgery and therapeutics, we are developing minimally-invasive products for removal of lesions, treatment of the lesion site and cosmetic reconstruction following therapy. Our Radiation Balloon, for which we expect to apply for FDA 510(k) clearance in the second half of 2007, is designed as a novel radiation therapy device that uses a vacuum to remove excess fluid and to adhere often irregularly shaped lumpectomy cavities closely to the balloon, as well as multiple radiation seed lumens to deliver precise radiation dosing. We believe that our radiation balloon can play an important role in the paradigm shift from traditional whole breast radiation therapy to localized partial breast radiation therapy. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents In 2005, we generated net revenues of $19.3 million with a net loss of $8.6 million. In 2006, we have generated net revenues of $25.5 million and a net loss of $15.4 million, including a $4.0 million fair value adjustment to the May 2006 convertible promissory notes. The sale of disposable products, including our breast biopsy probes and tissue markers, accounted for 86% of our net revenues in 2005 and 89% in 2006. Our direct sales team, consisting of 52 sales managers, field sales representatives and clinical specialists as of December 31, 2006, primarily targets integrated breast centers. We believe that the coordinated approach to breast cancer diagnosis and treatment found among these breast centers is emerging as the standard of care. The various skills, resources and preferences of these teams of surgeons, radiologists, oncologists and technicians involved in the patient s care demand flexible and technically-advanced devices as solutions to their clinical needs. We are committed to developing products designed to meet the evolving needs of this community, and we work with key opinion leaders to regularly facilitate product development. As of December 31, 2006, we held 41 issued U.S. patents and had 65 pending U.S. patent applications. Breast Care Market Opportunity Breast cancer is the second leading cause of cancer-related death of women in the United States overall, and the leading cause of cancer-related death for women ages 20 to 59. While the disease typically does not show symptoms in early stages, statistics indicate that survival rates are dramatically improved when the disease is diagnosed and treated early. If a lesion is detected, a physician will typically recommend that the patient undergo a breast biopsy, a diagnostic procedure in which breast tissue samples are acquired to determine whether a lesion is benign or malignant. Breast Biopsy In the United States, there are approximately 1.7 million breast biopsies performed annually, a significant increase from the 750,000 biopsies in 1997. Traditionally, most breast biopsies were performed as open surgical procedures, but vacuum-assisted biopsy has gained acceptance due to the reduction in patient discomfort and procedure time. During the procedure, vacuum pressure is used to draw tissue into an opening located on or at the end of the biopsy probe, and a cutter is then used to sever this tissue sample. Among the minimally-invasive biopsy options, vacuum-assisted biopsy is the only method that can obtain multiple contiguous tissue samples, which makes the procedure an attractive alternative for most lesions, including those that may be indicative of early stage cancer. Radiation Therapy When a patient s biopsy indicates a malignant lesion, the cancerous breast tumor is typically removed surgically, and many patients are subsequently treated with breast radiation therapy to destroy any cancer cells that may remain. The current standard of care is to treat patients with external beam radiation that is widely directed at the whole breast. Radiation balloon brachytherapy is an emerging treatment alternative that delivers localized radiation to a targeted surgical site. However, the difficulty of conforming the shape of the balloon to the walls of the often irregularly-shaped cavity, and the accumulation of fluid from the body around the balloon, have limited the efficacy of existing products. We believe that our Radiation Balloon will allow clinicians to expand their use of balloon therapy devices to a greater number of patients. Breast Care Market Trends The breast care market has undergone a significant evolution over recent years. Key trends in the market include: advances in imaging technology for screening; advances in imaging technology for biopsy; paradigm shift to less invasive procedures; and emergence of comprehensive breast centers. AMENDMENT NO. 6 TO FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 Table of Contents Our Solution We are developing a broad product line of minimally-invasive breast care devices to be used by breast care specialists. We believe that there is significant opportunity for a company that offers breast centers a full range of minimally-invasive diagnostic and therapeutic devices that are both compatible with multiple imaging modalities and flexible enough to be tailored to the diverse needs of the physicians on the breast care team. By focusing on the continuum of care from diagnostic to excision and therapeutic procedures, we believe that we will be an attractive and convenient supplier for integrated breast centers. Our current products and products under development include: Diagnostic. Vacuum-assisted breast biopsy systems, such as our flagship EnCor system, which can be used with a variety of imaging modalities and allows users to obtain multiple tissue samples with a single insertion; Marking. Tissue markers, which identify the biopsy site for future diagnostic and surgical reference; Excising. Cutting devices designed to facilitate the contoured removal of lesions and facilitate the use of balloons in radiation therapy; Treatment. Radiation therapy balloons, for which we expect to seek regulatory clearance in the second half of 2007, designed to provide localized, precise, radiation dosing; and Reconstruction. Breast reconstruction devices for use in various post-surgical cosmetic procedures. Our Strategy Our goal is to become the leader in providing minimally-invasive solutions across the continuum of care in the breast care market. The key elements of our business strategy to achieve this goal are to: provide differentiated, tailored solutions in the breast biopsy market; provide products across the continuum of care; target breast care centers and key opinion leaders; capitalize on cross-selling opportunities within our existing customer base; and pursue strategic acquisitions and partnerships. Risks Associated with Our Business Our business is subject to numerous risks, as discussed more fully in the section entitled Risk Factors immediately following this prospectus summary. We have a limited operating history and may be unable to accurately predict our future performance. From our inception through December 31, 2006, we generated total net revenues of $74.8 million. As of December 31, 2006, we had an accumulated deficit of $65.5 million and we may never achieve profitability. Compared to some competitors, we have less brand recognition, as well as less experience and resources in manufacturing, sales and marketing, and research and development. Additionally, we depend on the continued adoption of our vacuum-assisted breast biopsy EnCor system, and the continued design, development, regulatory approval and commercialization of future products, including our Radiation Balloon for localized breast cancer radiation treatment. Our success also depends on the growth in demand for minimally-invasive products for the diagnosis and treatment of breast cancer. SENORX, INC. (Exact name of Registrant as specified in its charter) Table of Contents Corporate Information We were incorporated in Delaware in January 1998 as BiopSolation Medical, Inc. We changed our name to SenoRx, Inc. in April 1998. Our principal executive offices are located at 11 Columbia, Suite A, Aliso Viejo, California. Our telephone number is (949) 362-4800. Our website is located at www.SenoRx.com. This URL is an inactive textual reference only and, as such, the information contained on our website is not a part of this prospectus. All trademarks, tradenames and service marks appearing in this prospectus are the property of their respective owners. Market Data This prospectus contains market data and industry forecasts that were obtained from industry publications. We have not independently verified any of this information. Delaware 3841 33-0787406 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 11 Columbia, Suite A Aliso Viejo, California 92656 (949) 362-4800 (Address, including zip code, and telephone number, including area code, of Registrant s principal executive offices) Table of Contents The Offering Common stock offered 5,500,000 shares Common stock outstanding after this offering 14,980,572 shares Use of proceeds We intend to use the net proceeds from this offering to repay interest owing on notes that will be converted into common stock upon the closing of this offering, for sales and marketing initiatives, research and development activities, and general corporate purposes. See Use of Proceeds. Proposed NASDAQ Global Market symbol SENO
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001104349_capella_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001104349_capella_prospectus_summary.txt
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+Prospectus Summary 1 Risk Factors 9 Forward-Looking Statements 31 Use of Proceeds 32 Price Range of Common Stock 33 Dividend Policy 34 Capitalization 35 Selected Consolidated Financial Data 37 Management s Discussion and Analysis of Financial Condition and Results of Operations 41 Business 61 Regulatory Environment 75 Management 88 Executive Compensation 95 Certain Relationships and Related Transactions 118 Principal and Selling Shareholders 121 Description of Capital Stock 129 Shares Eligible for Future Sale 133 U.S. Federal Tax Consequences to Non-U.S. Holders of Common Stock 136 Underwriting 138 Notice to Canadian Residents 141 Legal Matters 143 Experts 143 Where You Can Find More Information 143 Index to Consolidated Financial Statements F-1 Consent You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. Table of Contents PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary sets forth the material terms of the offering, but does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully before making an investment decision, especially the risks of investing in our common stock discussed under Risk Factors. Unless the context otherwise requires, the terms we, us, our and Capella refer to Capella Education Company and its wholly owned subsidiary, Capella University. Unless otherwise indicated, industry data is derived from publicly available sources. Certain figures in this prospectus may not total due to rounding adjustments. Overview We are an exclusively online post-secondary education services company. Through our wholly owned subsidiary, Capella University, we offer a variety of doctoral, master s and bachelor s programs in the following markets: health and human services, business management and technology, and education. Our academic offerings combine competency-based curricula with the convenience and flexibility of an online learning format. At March 31, 2007, we offered over 800 online courses and 16 academic programs with 82 specializations to approximately 19,200 learners. The majority of our learners are working adults seeking a degree to advance their careers, often with their current employer. The convenience and flexibility of our online learning environment allow learners to combine academic studies with their personal and professional responsibilities. Our courses are focused on helping working adult learners develop specific competencies that they can employ in their workplace. Our research shows that the quality of our academic offerings appeals to adults who value life-long learning. For this reason, we refer to our customers as learners, rather than students. We are committed to providing our learners with a high quality educational experience. We offer a broad array of curricula that incorporates competency-based instruction into a format specifically designed for online learning. Our faculty members bring significant academic credentials as well as teaching or practitioner experience in their particular disciplines. We offer our learners extensive support services, such as academic advising and career counseling, that are tailored to meet their specific needs in a flexible manner. In 2006, our end-of-year enrollment and revenues grew by approximately 23% and 21%, respectively, as compared to 2005. To date, our growth has resulted from a combination of: increased demand for our programs; expansion of our program and degree offerings; our ability to obtain specialized accreditations, professional licensures and endorsements for certain programs we offer; establishment of relationships with large corporate employers, the U.S. Armed Forces and other colleges and universities; and a growing acceptance of online education. We seek to achieve growth in a manner that assures continued improvement in educational quality and learner success, while maintaining compliance with regulatory standards. Additionally, we seek to enhance our operational and financial performance by tracking and analyzing quantifiable metrics that provide insight as to the effectiveness of our business and educational processes. Our exclusively online focus facilitates our ability to track a variety of metrics. Capella University participates in the federal student financial aid programs authorized by Title IV of the Higher Education Act of 1965, as amended, or Title IV, which are administered by the U.S. Department of Education. To be certified to participate in Title IV programs, a school must receive and maintain authorization by the appropriate state educational agency, be accredited by an accrediting agency recognized by the Secretary of the Department of Education, and be certified as an eligible institution by the Department of Education. Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED MAY 9, 2007 3,485,000 Shares Common Stock We are selling 299,201 shares of common stock and the selling shareholders are selling 3,185,799 shares of common stock. We will not receive any of the proceeds from the shares of common stock sold by the selling shareholders. Our common stock is traded on The Nasdaq Global Market under the symbol CPLA. On May 8, 2007, the last reported sale price of our common stock was $38.40 per share. The underwriters have an option to purchase a maximum of 44,880 additional shares from us and 477,870 additional shares from certain of the selling shareholders to cover over-allotments of shares. Investing in our
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information concerning our company, the common stock being sold in this offering and our financial statements appearing in this prospectus. Because this is only a summary, you should read the rest of this prospectus before you invest in our common stock. Read
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+prospectus summary contains a summary of information contained elsewhere in this prospectus. You should read the entire prospectus carefully, especially the risks of investing in the securities discussed under "Risk Factors", and the financial statements and the notes to the financial statements under the Financial Statements section beginning on page F-1 prior to making an investment decision. About Us Resolve Staffing, Inc. ( Resolve or the Company ), headquartered in Cincinnati, Ohio, is a national provider of outsourced human resource services with approximately 74 offices reaching from California to New York. Resolve provides a full range of supplemental staffing and outsourced solutions, including solutions for temporary, temporary-to-hire, or direct hire staffing in the medical, truck driver, clerical, office administration, customer service, professional and light industrial. Moreover, with the merger with ELS, Resolve now manages a PEO payroll of over 10,000 worksite employees in over 40 states with operations and service centers throughout the country. Resolve Staffing now provides turn key human resource management services to help its small-business clients tackle increased complexities associated with the employment aspect of their businesses. These services include payroll processing, employee benefits and administration, workers' compensation coverage, effective risk management and workplace safety programs. We offer a comprehensive range of human resource management services to help small and medium-sized businesses manage the increasing costs and complexities of a broad array of employment-related issues. We believe that the combination of these two principal services, PEO and staffing, enables us to provide our clients with a unique blend of services not offered by our competition. Our platform of human resource outsourcing ( HRO ) services is built upon our expertise in payroll processing, employee benefits and administration, workers' compensation coverage, effective risk management and workplace safety programs and human resource administration. In a PEO arrangement, we enter into a contract to become a co-employer of the client's existing workforce and assume responsibility for some or all of the client's human resource management responsibilities. Staffing services include on-demand or short-term staffing assignments, long-term or indefinite-term contract staffing and comprehensive on-site management. Our staffing services also include direct placement services, which involve fee-based search efforts for specific employee candidates at the request of our PEO clients, staffing customers or other companies. On October 1, 2006, Resolve Staffing, Inc., entered into an equity purchase agreement ( Agreement ), to purchase Employee Leasing Services, Inc. ( ELS ) (the Combination ), a privately-held company located in Cincinnati, Ohio. The Company s Chief Executive Officer and Director, Ronald Heineman, is a principal shareholder, officer and director of ELS. Pursuant to the equity purchase agreement, Resolve acquired the ownership interest in the group of companies which comprised ELS. In connection with the Combination on October 1, 2006, ELS was deemed to be the acquiring company for accounting purposes and the Combination was accounted for as a reverse acquisition under the purchase method of accounting for business combinations in accordance with accounting principles generally accepted in the United States of America. The acquisition of the ELS entities was treated as a reverse acquisition for financial accounting purposes and therefore the accompanying comparative financial information is that of ELS rather than the historical financial statements of Resolve Staffing, Inc. The financial information for 2006 includes the consolidated balances and consolidated results of operations of the individual entities which comprise Resolve. The combined results of operations for the acquired entities include the activities of each entity from the date of acquisition to December 31, 2006. Our ability to offer clients a broad range of services allows us to become an outsourced human resource department and strategic partner for our clients. We believe our approach allows our clients to focus on their core business rather than human resources, thus making them more productive. Page - Our Business The Company focuses on meeting our clients' flexible staffing needs, targeting opportunities in a fragmented; growing market that we believe has been under-served by large, full-service staffing companies. Significant benefits to clients include providing the ability to outsource the recruiting and many logistical aspects of their staffing needs, as well as converting the fixed cost of employees to the variable cost of outsourced services. A summary of our Payroll Administration Services and Aggregation of Statutory and Non-Statutory Employee Benefits Services is as follows: Payroll Administration Services - We assume responsibility for our employees for payroll and attendant record-keeping, payroll tax deposits, payroll tax reporting, and all federal, state, payroll tax reports (including 941s, 940s, W-2s, W-3s, W-4s and W-5s), state unemployment taxes, employee file maintenance, unemployment claims and monitoring and responding to changing regulatory requirements; Aggregation of Statutory and Non-Statutory Employee Benefits Services - We provide workers' compensation and unemployment insurance to our service employees. Workers' compensation is a state-mandated comprehensive insurance program that requires employers to fund medical expenses, lost wages, and other costs that result from work related injuries and illnesses, regardless of fault and without any co-payment by the employee. Unemployment insurance is an insurance tax imposed by both federal and state governments. Our human resources and claims administration departments monitor and review workers' compensation for loss control purposes. We are the employer of record with respect to flexible staffing services and assume responsibility for most employment regulations, including compliance with workers' compensation and state unemployment laws. As part of our basic services in the flexible staffing market, we conduct a human resources needs analysis for clients and client employees. Such analysis includes reviewing work schedules and productivity data, in addition to recruiting, interviewing, and qualifying candidates for available positions. Based on the results of that review, we recommend basic and additional services that the client should implement. We provide certain other services to our flexible industrial staffing clients on a fee-for-service basis. These services include screening, recruiting, training, workforce deployment, loss prevention and safety training, pre-employment testing and assessment, background searches, compensation program design, customized personnel management reports, job profiling, description, application, turnover tracking and analysis, drug testing policy administration, affirmative action plans, opinion surveys and follow-up analysis, exit interviews and follow-up analysis, and management development skills workshops. The focus of our temporary staffing service is to provide short and long term employees as well as temp to hire employees to financially secured employers. The average employee will work a 40 hour work week for a client and will work for an average of two employers per month. It is estimated an employee will work an average of 14 days per month. Our service specializes in a variety of staffing fields including medical, truck driver, clerical, and light industrial staffing with the largest percentage in the clerical and light industrial fields. Each applicant is thoroughly interviewed tested and screened to meet the requirements of our customers. For long term and temp to hire positions a large percentage of our customers will interview our candidates and then select the one they believe to be best suited for the position. The Market The Human Resource Outsourcing (HRO) market is large and growing rapidly. Some of the key factors driving growth include the desire of businesses to outsource non-core business functions, to reduce regulatory compliance risk, to rationalize the number of service providers that they use, and to reduce costs by integrating human resource systems and processes. The outsourcing of business processes represents a growing trend within the United States. By utilizing the expertise of outsourcing service providers, businesses are able to reduce processing costs and administrative burdens while at the same time offering competitive benefits for their employees. The technical capabilities, knowledge and operational expertise that we have built, along with our broad portfolio of services for clients, have enabled us to capitalize on the growing business processing outsourcing trend. Our goal is to become a leading national provider of HRO services for small and medium-sized businesses. We seek to differentiate our strategic position by offering a full spectrum of PEO and staffing services. We believe that the integrated nature of our service platform assists our clients and customers in successfully aligning and strengthening their organizational structure to meet the demands of their businesses. In pursuit of this goal, we have adopted the operating and growth strategies described below to provide the framework for our future growth, while maintaining the quality and integrity of our current service offerings. Page - Competition We compete with many small providers in addition to several large public companies, including Ablest, Inc., Spherion, Adecco, S.A., Kelly Services, Inc., Manpower, Inc., and others. There are limited barriers to entry and new competitors frequently enter the market. Although a large percentage of flexible staffing providers are locally operated with fewer than five offices, most of the large public companies have significantly greater marketing, financial and other resources than us. We believe that by focusing primarily on customer service, we enjoy a competitive advantage over many of our competitors that attempt to provide a broader range of staffing services. We also believe that by targeting regional and local companies, rather than the national companies that are generally being pursued by our competitors; we can gain certain competitive advantages. We believe that several factors contribute to obtaining and retaining clients in the professional, clerical, administrative, light industrial and technical support staffing market. These factors include an understanding of clients' specific job requirements, the ability to reliably provide the correct number of employees on time, the ability to monitor job performance, and the ability to offer competitive prices. To attract qualified candidates for flexible employment assignments, companies must offer competitive wages, positive work environments, flexibility of work schedules, an adequate number of available work hours and, in some cases, vacation and holiday pay. We believe we are reasonably competitive in these areas in the markets in which we compete, although we cannot assure you that we will maintain a competitive standing in the future. Employees As of the date of this prospectus, we provided payroll and PEO ( Professional Employer Organization ) services for over 10,000 PEO employees and employed a temporary staff of over 4,000 temporary employees. In addition, we have approximately 250 corporate employees. Typical Client Our clients represent a cross-section of the industrial sector, of which no client currently represents more than 5% of our total revenues. We attempt to maintain diversity within our client base in order to decrease our exposure to downturns or volatility in any particular industry, but we cannot assure you that we will be able to maintain such diversity or decrease our exposure to such volatility. All prospective clients fill out a questionnaire to help us evaluate workers' compensation risk, creditworthiness, unemployment history, and operating stability. Generally, flexible industrial staffing clients do not sign long-term contracts. We are not dependent on any one customer in any of the markets we serve. Our Offices Resolve s headquarters are located at 3235 Omni Drive, Cincinnati, Ohio 45245. Our telephone number is 800-894-4250. In addition to our corporate headquarters, Resolve leases facilities at approximately 74 locations throughout the United States. Our offices are adequate for our present level of operations. In the future we will need additional facilities in which to centralize our accounting, training, human resource, risk management and executive work activities. We anticipate that we will require larger scale data processing and network communication capabilities, which will be needed in order to facilitate the assimilation of acquired companies into our methods of operating and accounting standards, and to provide customers state-of-the-art service and support. Page - SUMMARY OF THE OFFERING Common Stock offered by Selling Shareholders (including shares of Common Stock underlying the Warrants). 3,000,000 (2) Common Stock offered by the Company. 3,000,000 Common Stock to be outstanding after the offering, assuming full exercise of the outstanding Warrants and the total sale of shares of Common Stock being offered by the Company. 24,428,511 (1) Risk Factors Investing in our securities involves a high degree of risk. As an investor, you should be able to bear the entire risk of loss of your investment. You should carefully consider the information set forth in the Risk Factor section of this prospectus, beginning at page 9, in evaluating an investment in our Common Stock. Proceeds to the Company and Use of Proceeds The Company will not receive any of the proceeds from the resale of shares of Common Stock by the Selling Shareholders. However, the Company will receive $5,000,000 in gross offering proceeds, assuming full exercise of the outstanding Warrants underlying certain of the shares of Common Stock registered as a part of this registration statement, and an additional $9,000,000 assuming full sale at the estimated offering price for the Common Stock being offered by the Company. The net proceeds of the common stock sold by the Company will be used to pay indebtedness and for working capital. OTCBB RSFF (1) Based on 19,428,511 shares of common stock outstanding as of April 23, 2007 plus 2,000,000 shares issuable upon exercise of outstanding Warrants and up to 3,000,000 shares of Common Stock being offered by the Company. Additionally, 400,000 shares are held in escrow as collateral and are therefore not considered to be included in this outstanding number of shares. We will bear all the costs and expenses associated with the preparation and filing of this registration statement, including costs and expenses associated with the shares of Common Stock registered on behalf of the Selling Shareholders. However, the costs, expenses and commissions that may be incurred by the Selling Shareholders in the resale of their shares shall not be borne by the Company, but shall be paid solely by the Selling Shareholders. (2) Represents 24.6% of the total common stock to be outstanding after the offering, assuming full exercise of the outstanding Warrants and the total sale of shares of Common Stock. The Company agreed to issue 1,000,000 shares of restricted common stock to certain accredited investors, for an aggregate consideration of $1,500,000 ($1.50 per unit). In addition, the investors received a warrant to purchase additional shares of common stock at $2.00 ($2 million aggregate value) and a warrant to purchase additional shares of common stock at $3.00 ($3 million aggregate value). The shares of common stock acquired by these investors, including the warrant shares, have registration rights associated with them. The market value of our common stock at the time of the offer was approximately $1.75 as quoted on the OTCBB. Additional information can be found in the footnotes to the audited financial statements included in this document. Page - SUMMARY FINANCIAL DATA The summary financial information set forth below is derived from the financial statements appearing elsewhere in this Prospectus. Such information should be read in conjunction with such financial statements, including the notes thereto. Statement of Operations Data Years Ended December 31, 2006 2005 2004 Sales $103,727,965 $39,035,112 $35,114,470 Income from operations (1,924,624) 4,603,739 1,890,639 Net income (loss) ($2,716,198) $4,543,278 $1,688,262 Net income (loss) per common share ($0.48) $3.06 $1.14 Weighted average number of dilutive shares outstanding 5,705,197 1,486,685 1,486,685 Balance Sheet Data As of December 31, 2006 2005 2004 Current assets $19,461,646 $2,812,642 $1,893,021 Property and equipment, net 1,343,773 216,672 425,795 Advances and notes receivable - related party 681,237 7,712,668 1,262,676 Other assets 36,325,113 1,038,463 680,274 Total assets $57,811,769 $11,780,445 $4,261,766 Current liabilities $41,107,050 $8,200,759 $4,535,452 Long term liabilities 16,324,567 1,051,235 386,344 Shareholders equity (deficit) 380,152 2,528,451 (660,030) Total liabilities and equity $57,811,769 $11,780,445 $4,261,766 Page - RISK FACTORS This offering and an investment in our securities involves a high degree of risk. You should carefully consider the risks described below and the other information in this prospectus, including our financial statements and the notes to those statements, before you purchase any Common Stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, could negatively impact our business, results of operations or financial condition in the future. If any of the following risks and uncertainties develops into actual events, our business, results of operations or financial condition could be adversely affected. In those cases, the trading price of our securities could decline, and you may lose all or part of your investment. Risks Relating to Our Business We Lost Money in 2006 We have incurred net losses from operations in 2006. Our net loss for the fiscal year ended December 31, 2006 was $2,716,198 and as of December 31, 2006 had an accumulated deficit of $3,908,953. While we expect to become profitable in 2007, we can not guarantee profitability. We expect our operating expenses to continue to increase as we attempt to build our brand, expand our customer base and make acquisitions. While we expect to be profitable in 2007, to become profitable, we must increase revenue substantially and achieve and maintain positive gross margins. We may not be able to increase revenue and gross margins sufficiently to achieve profitability. Unless We Find a New Working Capital Funding Source, We Risk Losing Employees, Customers and Workers Compensation Coverage We pay our flexible staffing employees on a weekly basis. However, on average, we receive payment for these services from our customers 30 to 60 days after the date of invoice. As we establish or acquire new offices, or as we expand existing offices, we will have increasing requirements for cash to fund these payroll obligations. Our primary sources of working capital funds for payroll related and workers' compensation expenditures have been loans or private placements of securities to individuals, including certain of our shareholders. If we do not obtain an institutional financing source and we are unable to secure alternative financing on acceptable terms, we will lose employees, customers, and may be unable to pay payroll related premiums. We are Subject to Government Regulations and any Change in these Regulations, or the Possible Retroactive Application of These Regulations Could Result in Additional Tax Liability As an employer, we are subject to all federal, state and local statutes and regulations governing our relationships with our employees and affecting businesses generally, including our employees assigned to work at client company locations (sometimes referred to as worksite employees). Our workers' compensation loss reserves may be inadequate to cover our ultimate liability for workers' compensation costs. We maintain reserves (recorded as accrued liabilities on our balance sheet) to cover our estimated liabilities for our high deductible workers' compensation program. The determination of these reserves is based upon a number of factors, including current and historical claims activity, claims payment patterns and medical cost trends and developments in existing claims. Accordingly, reserves do not represent an exact calculation of liability. Reserves can be affected by both internal and external events, such as adverse developments on existing claims or changes in medical costs, claims handling procedures, administrative costs, inflation, and legal trends and legislative changes. Reserves are adjusted from time to time to reflect new claims, claim developments, or systemic changes, and such adjustments are reflected in the results of the periods in which the reserves are changed. Because of the uncertainties that surround estimating workers' compensation loss reserves, we cannot be certain that our reserves are adequate. If our reserves are insufficient to cover our actual losses, we would have to increase our reserves and incur charges to our earnings that could be material. Adverse developments in the market for excess workers' compensation insurance could lead to increases in our costs. We have a high deductible employer workers' compensation coverage in certain states. To manage our financial exposure in the event of catastrophic injuries or fatalities, we maintain excess workers' compensation insurance through our insurance providers. Changes in the market for excess workers' compensation insurance may lead to limited availability of such coverage, additional increases in our insurance costs or further increases in our high deductible retention, any of which may have a material adverse effect on our financial condition. Page - If we are determined not to be an "employer" under certain laws and regulations, our clients may stop using our services, and we may be subject to additional liabilities. We believe that we are an employer of employees provided to our PEO clients on a co-employment basis under the various laws and regulations of the Internal Revenue Service and the U.S. Department of Labor. If we are determined not to be an employer under such laws and regulations and are therefore unable to assume obligations of our clients for employment and other taxes, our clients may be held jointly and severally liable for payment of such taxes. Some clients or prospective clients may view such potential liability as an unacceptable risk, discouraging current clients from continuing a relationship with us or prospective clients from entering into a new relationship with us. Any determination that we are not an employer for purposes of ERISA could adversely affect our cafeteria benefits plan operated under Section 125 of the Internal Revenue Code and result in liabilities to us under the plan. We may be exposed to employment-related claims and costs and periodic litigation that could adversely affect our business and results of operations. We either co-employ employees in connection with our PEO arrangements or place our employees in our customers' workplace in connection with our staffing business. As such, we are subject to a number of risks inherent to our status as an employer, including without limitation: claims of misconduct or negligence on the part of our employees, discrimination or harassment claims against our employees, or claims by our employees of discrimination or harassment by our clients; immigration-related claims; claims relating to violations of wage, hour and other workplace regulations; claims relating to employee benefits, entitlements to employee benefits, or errors in the calculation or administration of such benefits; and Possible claims relating to misuse of customer confidential information, misappropriation of assets or other similar claims. If we experience significant incidents involving any of the above-described risk areas we could face substantial out-of-pocket losses, fines or negative publicity. In addition, such claims may give rise to litigation, which may be time consuming, distracting and costly, and could have a material adverse effect on our business. With respect to claims involving our co-employer relationship with our PEO clients, although our PEO services agreement provides that the client will indemnify us for any liability attributable to the conduct of the client or its employees, we may not be able to enforce such contractual indemnification, or the client may not have sufficient assets to satisfy its obligations to us. Our Employee Related Costs are Significant and, if Increased, and We are Unable to Pass these Costs on to Our Customers, Will Increase Our Cost of Doing Business We are required to pay a number of federal and state payroll taxes and related payroll costs, including unemployment taxes, workers' compensation insurance premiums and claims, Social Security, and Medicare, among others, for our employees. We also incur costs related to providing additional benefits to our employees, such as insurance premiums for health care. Health insurance premiums, unemployment taxes and workers' compensation insurance premiums and costs are significant to our operating results, and are determined, in part, by our claims experience. We attempt to increase fees charged to our customers to offset any increase in these costs, but we may be unable to do so or we may lose customers if we do. If the federal or state legislatures adopt laws specifying additional benefits for temporary workers, demand for our services may be adversely affected. In addition, workers' compensation expenses are based on our actual claims experiences in each state and our actual aggregate workers' compensation costs may exceed estimates. Because Our Staffers Work at the Clients Place of Business, We May be Exposed to Employment Related Claims and Costs that Arise from that Clients Work Place Location and We do not Control the Clients Working Environment Temporary staffing companies, such as ours, employ people in the workplace of their customers. This creates a risk of potential litigation based on claims by customers of employee misconduct or negligence, claims by employees of discrimination or harassment, including claims relating to actions of our customers, claims related to the inadvertent employment of illegal aliens or unlicensed personnel, payment of workers' compensation claims and other similar claims. We may be held responsible for the actions at a job site of workers not under our direct control. Page - We May Lose Customers if We are Unable to Attract Qualified Temporary Personnel Due to Low Unemployment Rates and an Increase in Competition for Qualified Temporary Personnel We compete with other temporary personnel companies to meet our customer's needs. We must continually attract reliable temporary workers to fill positions and may from time to time experience shortages of available temporary workers. During periods of increased economic activity and low unemployment, the competition among temporary staffing firms for qualified personnel increases. Many regions in which we operate are experiencing historically low rates of unemployment and we have experienced, and may continue to experience, significant difficulties in hiring and retaining sufficient number of qualified personnel to satisfy the needs of our customers. Also, we may face increased competitive pricing pressures during these periods of low unemployment rates. We Require Additional Capital to Fund Our Current Operations and to Make Acquisitions. We May Have to Curtail Our Business if we Cannot Find Adequate Funding The expansion and development of our business will require significant additional capital, which we may be unable to obtain on suitable terms, or at all. We currently have no legally binding commitments with any third parties to obtain any material amount of additional equity or debt financing. If we are unable to obtain adequate funding on suitable terms, or at all, we may have to delay, reduce or eliminate some or all of our advertising, marketing, acquisition activity, general operations or any other initiatives. If We are Unable to Successfully Integrate and Manage Acquired Business Without Substantial Expense or Delay We May Not be Able to Effectively Operate Our Business and/or It May decrease the Value of Our Common Stock In the future, we intend to expand our operations through acquisitions of small and medium size private companies, or divisions or segments of major private and public companies. We will do this to: recruit well trained, high quality professionals; expand our service offerings; gain additional industry expertise; broaden our client base; and expand our geographic presence. We may not be able to integrate successfully businesses which we may acquire in the future without substantial expense, delays or other operational or financial problems. We may not be able to identify, acquire or profitably manage additional businesses. Our Plan to Make Acquisitions May Divert Management s Attention From Day-to-Day Business Operations Which Could Prevent Our Business From Growing If we are able to identify acquisition candidates, management's time and attention will be diverted from such activities as sales, marketing and tailoring staffing solutions to meet customer's needs. If management is not able to address these day to day operational tasks, we may lose customers or fail to increase revenue. Acquisition Activities May Cause Us to Lose Existing Customers Because of Conflicts or Service Problems The clients of companies we may acquire may be in the same or similar businesses with our existing clients. Although we do not enter into agreements to restrict the type of business which we service, providing staff services to existing clients' direct competition may cause such existing clients to look elsewhere for staffing services. Page - Our Principal Stockholders, Officers and Directors Own a Controlling Interest in Our Voting Stock and Investors Will Not Have Voice in Our Management Our officers, directors and stockholders with greater than 5% holdings will, in the aggregate, beneficially own approximately 79% of our outstanding common stock. As a result, these stockholders, acting together, will have the ability to control substantially all matters submitted to our stockholders for approval, including: election of our board of directors; removal of any of our directors; amendment of our certificate of incorporation or bylaws; and adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving us. As a result of their ownership and positions, our directors and executive officers collectively are able to influence all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, sales of significant amounts of shares held by our directors and executive officers, or the prospect of these sales, could adversely affect the market price of our common stock. Management's stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price. There are a Large Number of Shares Underlying Our Warrants that May be Available for Future Sale and the Sale of These Shares May Cause the Price of Our Stock to Drop As of March 1, 2007, we had 19,828,511 shares of common stock issued and outstanding, which includes 400,000 shares held in escrow as described in Note C to the accompanying financial statements. We also have 2,000,000 shares issuable upon exercise of our warrants and options. The sale of these shares may cause the market price of our common stock to drop. The issuance of shares upon conversion or exercise of the warrants may result in substantial dilution to the interests of other stockholders. The Application of the Penny Stock Regulation Could Harm the Market Price of Our Common Stock Our securities may be deemed a penny stock. Penny stocks generally are equity securities with a price of less than $5.00 per share other than securities registered on certain national securities exchanges or quoted on the NASDAQ Stock Market, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. Our securities may be subject to "penny stock rules" that impose additional sales practice requirements on broker dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). For transactions covered by these rules, the broker dealer must make a special suitability determination for the purchase of such securities and have received the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the "penny stock rules" require the delivery, prior to the transaction, of a disclosure schedule prescribed by the Commission relating to the penny stock market. The broker dealer also must disclose the commissions payable to both the broker dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. Consequently, the "penny stock rules" may restrict the ability of broker dealers to sell our securities and may have the effect of reducing the level of trading activity and price of our common stock in the secondary market. Should We Enter Into an Acquisition in Exchange for the Issuance of Shares of Our Common Stock, Such Issuance May Have a Dilutive Effect for Our Current Shareholders and May Cause the Price of Our Common Stock to Decline The future issuance of all or part of our remaining authorized but currently unissued common stock in connection with an acquisition may result in substantial dilution in the percentage of our common stock held by our then existing shareholders. We may value any common stock issued in the future on an arbitrary basis. The issuance of common stock for future services or acquisitions or other corporate actions may have the effect of diluting the value of the shares held by our investors, and might cause the price of our common stock to decline. We compete with numerous larger competitors, many of which are better financed and have a stronger presence in the industry than ourselves. As many of these firms have significantly stronger name recognition than ourselves, they are in a position to quickly attract clients which are in need of services thus adversely impacting our potential pool of clients. Our marketing structure is not proprietary and it would not be difficult for a company to offer similar services. Further, entry into the marketplace by new competitors is relatively easy especially considering their existing presences and their greater resources for financing, advertising and marketing. Page - Any significant economic downturn could result in Resolve s clients using fewer temporary employees, which would materially adversely affect our business. Because demand for temporary personnel services is sensitive to changes in the level of economic activity, Resolve s business may suffer during economic downturns. As economic activity begins to slow down, companies tend to reduce their use of temporary employees before undertaking layoffs of their regular employees, resulting in decreased demand for temporary personnel. Significant declines in demand, and thus in revenues, can result in expense de-leveraging, which would result in lower profit levels. The staffing services industry is highly competitive with limited barriers to entry, which could limit Resolve s ability to maintain or increase its market share or profitability. The staffing services market is highly competitive with limited barriers to entry, and in recent years has been undergoing significant consolidation. Resolve competes in markets throughout North America with full-service and specialized temporary service agencies. Several of Resolve s competitors, including Adecco S.A., Vedior N.V., Randstad Holding N.V. and Kelly Services, Inc., have very substantial marketing and financial resources. Price competition in the staffing industry is intense and pricing pressures from competitors and customers are increasing. Resolve expects that the level of competition will remain high in the future, which could limit its ability to maintain or increase its market share or profitability. Unless we find a new working capital funding source, we risk losing employees, customers and workers compensation coverage We pay our flexible staffing employees on a weekly basis. However, on average, we receive payment for these services from our customers 30 to 60 days after the date of invoice. As we establish or acquire new offices, or as we expand existing offices, we will have increasing requirements for cash to fund these payroll obligations. Our primary sources of working capital funds for payroll related and workers' compensation expenditures have been loans or private placements of securities to individuals, including certain of our shareholders. If we do not obtain an institutional financing source and we are unable to secure alternative financing on acceptable terms, we will lose employees, customers, and may be unable to pay payroll related premiums. Government regulations may result in prohibition or restriction of certain types of employment services or the imposition of additional licensing or tax requirements that may reduce Resolve s future earnings. The temporary employment industry is heavily regulated. Within the United States, wherein the Company now operates, Resolve operates may have to adjust to: additional regulations that prohibit or restrict the types of employment services that Resolve currently provides; the imposition of new or additional benefit requirements; requirements that require Resolve to obtain additional licensing to provide staffing services; or Increases in taxes, such as sales or value-added taxes, payable by the providers of staffing services. Any future regulations may have a material adverse effect on Resolve s financial condition, results of operations and liquidity because they may make it more difficult or expensive for Resolve to continue to provide staffing services . Resolve s acquisition strategy may have a material adverse effect on its business due to unexpected or underestimated costs. Resolve has completed a series of acquisitions during 2005-2006 of smaller and less capitalized temporary staffing services competitors and its current plan is to continue with this acquisition strategy in the future although no assurance or guaranty can be given that Resolve will make further acquisitions. Resolve s acquisition strategy involves significant risks, including: difficulties in the assimilation of the operations, services and corporate culture of acquired companies; over-valuation by Resolve of acquired companies; insufficient indemnification from the selling parties for legal liabilities incurred by the acquired companies prior to the acquisitions; and diversion of management s attention from other business concerns. These risks could have a material adverse effect on Resolve s business because they may result in substantial costs to Resolve and disrupt Resolve s business. In addition, future acquisitions could materially adversely affect Resolve s business, financial condition, results of operations and liquidity because they would likely result in the incurrence of additional debt or dilution, contingent liabilities, an increase in interest expense and amortization expenses related to separately identified intangible assets. Possible impairment losses on goodwill and restructuring charges could also occur. Page - Intense competition may limit Resolve s ability to attract, train and retain the qualified personnel necessary for Resolve to meet its customers staffing needs. Resolve depends on its ability to attract and retain qualified temporary personnel who possess the skills and experience necessary to meet the staffing requirements of its clients. Resolve must continually evaluate and upgrade its base of available qualified personnel through recruiting and training programs to keep pace with changing client needs and emerging technologies. Competition for individuals with proven professional skills, particularly employees with accounting and technological skills, is intense, and Resolve expects demand for such individuals to remain very strong for the foreseeable future. Qualified personnel may not be available to Resolve in sufficient numbers and on terms of employment acceptable to Resolve. Developing and implementing training programs require significant expenditures and may not result in the trainees developing effective or adequate skills. Resolve may not be able to develop training programs to respond to its clients changing needs or retain employees whom it has trained. The failure to recruit, train and retain qualified temporary employees could materially adversely affect Resolve s business because it may result in an inability to meet its customers staffing needs. Resolve may be exposed to employment-related claims and costs and other litigation that could materially adversely affect its business, financial condition and results of operations. Resolve is in the business of employing people and placing them in the workplaces of other businesses. Risks relating to these activities include: claims of misconduct or negligence on the part of Resolve s employees; claims by Resolve s employees of discrimination or harassment directed at them, including claims relating to actions of its clients; claims related to the employment of illegal aliens or unlicensed personnel; payment of workers compensation claims and other similar claims; violations of wage and hour requirements; retroactive entitlement to employee benefits; errors and omissions of Resolve s temporary employees, particularly in the case of professionals, such as accountants; and claims by Resolve s clients relating to its employees misuse of client proprietary information, misappropriation of funds, other criminal activity or torts or other similar claims. Resolve may incur fines and other losses or negative publicity with respect to these problems. In addition, some or all of these claims may give rise to litigation, which could be time-consuming to its management team and costly and could have a negative impact on its business. Resolve cannot assure you that it will not experience these problems in the future or that its insurance will be sufficient in amount or scope to cover any of these types of liabilities. Resolve cannot assure you that its insurance will cover all claims that may be asserted against it. Should the ultimate judgments or settlements exceed its insurance coverage, they could have a material effect on Resolve s results of operations, financial position and cash flows. Resolve also cannot assure you that it will be able to obtain appropriate types or levels of insurance in the future or that adequate replacement policies will be available on acceptable terms, if at all. If Resolve loses its key personnel, then its business may suffer. Resolve s operations are dependent on the continued efforts of its officers and executive management. In addition, Resolve is dependent on the performance and productivity of its local managers and field personnel. Resolve s ability to attract and retain business is significantly affected by local relationships and the quality of service rendered. The loss of those key officers and members of executive management who have acquired significant experience in operating a staffing service may cause a significant disruption to Resolve s business. Moreover, the loss of Resolve s key managers and field personnel may jeopardize existing client relationships with businesses that continue to use its staffing services based upon past relationships with these local managers and field personnel. The loss of such key personnel could materially adversely affect Resolve s operations, because it may result in an inability to establish and maintain client relationships and otherwise operate its business. Page - The price of Resolve s common stock may fluctuate significantly, which may result in losses for investors. The market price for Resolve s common stock has been and may continue to be volatile. For example, during the fiscal year ended December 31, 2006, the prices of Resolve s common stock as reported on the OTCBB ranged from a high of $3.26 to a low of $.09. Resolve s stock price can fluctuate as a result of a variety of factors, including factors listed in these Risk Factors and others, many of which are beyond Resolve s control. These factors include: actual or anticipated variations in Resolve s quarterly operating results; announcement of new services by Resolve or Resolve s competitors; announcements relating to strategic relationships or acquisitions; changes in financial estimates or other statements by securities analysts; and changes in general economic conditions. Because of this volatility, Resolve may fail to meet the expectations of its shareholders or the public marketplace, and its stock price could decline as a result. Because we do not intend to pay any cash dividends on our common stock, our Shareholders will not be able to receive a return on their shares unless they sell them. We intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our Common Stock in the foreseeable future. Unless we pay dividends, our Shareholders will not be able to receive a return on their shares unless they sell them. There is no assurance that Shareholders will be able to sell shares when desired or that when they chose to do so, that they will receive a return on their investment in the Common Stock. As a public company, our administrative costs will be significantly higher than they are now, which will make it more difficult for us to be profitable and cash flow positive. Difficulties in complying with the Sarbanes-Oxley Act and other legal and accounting requirements applicable to public companies could affect our market value. As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the Commission, have imposed various new requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. Expenses as a result of our being a public company include additional amounts for legal and accounting services, transfer agent fees, additional insurance costs, printing and filing fees and fees for investor and public relations. The existence of outstanding options and warrants may impair our ability to obtain additional equity financing. The existence of outstanding options and warrants may adversely affect the terms at which we could obtain additional equity financing. The holders of these options and warrants have the opportunity to profit from a rise in the value or market price of our Common Stock and to exercise them at a time when we could obtain equity capital on more favorable terms than those contained in these securities. We may issue shares of preferred stock in the future, which could depress the price of our stock. Our corporate charter authorizes us to issue shares of blank check preferred stock. Our board of directors has the authority to fix and determine the relative rights and preferences of preferred shares, as well as the authority to issue such shares, without further shareholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders preferred rights to our assets upon liquidation, the right to receive dividends before dividends are declared to holders of our common stock, and the right to the redemption of such preferred shares, together with a premium, prior to the redemption of the common stock. To the extent that we do issue such additional shares of preferred stock, the rights of the holders of our Common Stock and other securities could be impaired thereby, including, without limitation, with respect to liquidation. We may, in the future, issue additional common shares, which would reduce investors' percent of ownership and may dilute our share value. Our corporate charter authorizes the issuance of 50,000,000 shares of Common Stock. The future issuance of Common Stock may result in substantial dilution in the percentage of our Common Stock held by our then existing shareholders. We may value any Common Stock issued in the future on an arbitrary basis. The issuance of Common Stock for future services or acquisitions or other corporate actions may have the effect of diluting the value of the shares held by our investors, and might have an adverse effect on any trading market for our Common Stock. Page - The future issuance of all or part of our remaining authorized but currently unissued Common Stock in connection with an acquisition may result in substantial dilution in the percentage of our Common Stock held by our then existing shareholders. We may value any Common Stock issued in the future on an arbitrary basis. The issuance of Common Stock for future services or acquisitions or other corporate actions may have the effect of diluting the value of the shares held by our investors, and might cause the price of our Common Stock to decline. The timing and amount of capital requirements are not entirely within our control and cannot accurately be predicted and as a result, we may not be able to raise capital in time to satisfy our needs. If capital is required, we may require financing sooner than anticipated. We have no commitments for financing, and we cannot be sure that any financing would be available in a timely manner, on terms acceptable to us, or at all. Further, any equity financing could reduce ownership of existing Shareholders and any borrowed money could involve restrictions on future capital raising activities and other financial and operational matters. If we were unable to obtain financing as needed, we could become insolvent and be subject to bankruptcy proceedings. We may not be able to raise sufficient capital or generate adequate revenue to meet our obligations and fund our operating expenses. Failure to raise adequate capital and generate adequate sales revenues to meet our obligations and develop and sustain our operations could result in our having to curtail or cease operations. Additionally, even if we do raise sufficient capital and generate revenues to support our operating expenses, there can be no assurances that the revenue will be sufficient to enable us to develop business to a level where it will generate profits and cash flows from operations. Our Common Stock is subject to the "Penny Stock" Rules of the Commission and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock. The Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: that a broker or dealer approve a person's account for transactions in penny stocks; and the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person's account for transactions in penny stocks, the broker or dealer must: obtain financial information and investment experience objectives of the person; and make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form: sets forth the basis on which the broker or dealer made the suitability determination; and that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our Common Stock and cause a decline in the market value of our stock. Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. We require additional capital to fund our current operations and to make acquisitions. We may have to curtail our business if we can not find adequate funding The expansion and development of our business will require significant additional capital, which we may be unable to obtain on suitable terms, or at all. We currently have no legally binding commitments with any third parties to obtain any material amount of additional equity or debt financing. If we are unable to obtain adequate funding on suitable terms, or at all, we may have to delay, reduce or eliminate some or all of our advertising, marketing, acquisition activity, general operations or any other initiatives. Page - Risks Related to this Offering We are controlled by a limited number of Shareholders, which will limit your ability to influence key decisions. Immediately after this offering, our executive officers and directors will, in the aggregate, beneficially own 62.34% of the issued and outstanding shares of our Common Stock, assuming all Warrants are fully exercised and assuming that we complete the offer and sale of Common Stock. As a result, these Shareholders will have the ability to exercise substantial control over our affairs and corporate actions requiring shareholder approval, including electing and removing directors, selling all or substantially all of our assets, merging with another entity or amending our articles of incorporation. This de facto control could be disadvantageous to our other Shareholders with interests that differ from those of the control group, if these Shareholders vote together. For example, the control group could delay, deter or prevent a change in control even if a transaction of that sort would benefit the other Shareholders. In addition, concentration of ownership could adversely affect the price that investors might be willing to pay in the future for our securities. As a public company, our administrative costs will be significantly higher than they are now, which will make it more difficult for us to be profitable and cash flow positive. Difficulties in complying with the Sarbanes-Oxley Act and other legal and accounting requirements applicable to public companies could affect our market value. As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the Commission, have imposed various new requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. Expenses as a result of our being a public company include additional amounts for legal and accounting services, transfer agent fees, additional insurance costs, printing and filing fees and fees for investor and public relations. If we do not maintain an effective registration statement or comply with applicable state securities laws, you may not be able to exercise the Warrants. In order for you to be able to exercise the Warrants which are now outstanding, the underlying shares of Common Stock must be covered by an effective registration statement and qualify for an exemption under the securities laws of the state in which you live. We cannot assure you that we will continue to maintain a current registration statement relating to the offer and sale of the Common Stock underlying the Warrants, or that an exemption from registration or qualification will be available throughout their term. This may have an adverse effect on the market price of our Common Stock. Future sales or the potential for sale of a substantial number of shares of our Common Stock could cause the trading price of our Common Stock to decline and could impair our ability to raise capital through subsequent equity offerings. Sales of a substantial number of shares of our Common Stock in the public markets, or the perception that these sales may occur, could cause the market price of our stock to decline and could materially impair our ability to raise capital through the sale of additional equity securities. Once this offering is completed, we will have 22,428,511 shares of Common Stock issued and outstanding and will have approximately an additional 2,000,000 million shares of Common Stock reserved for future issuance as follows: 2,000,000 shares in the aggregate underlying the Warrants The Common Stock included in the number of shares to be sold in this offering as well as the Common Stock underlying the Warrants, other than those shares held by affiliates, as defined by the rules and regulations promulgated under the Securities Act will be freely tradable without restriction. The existence of outstanding options and warrants may impair our ability to obtain additional equity financing. The existence of outstanding options and warrants may adversely affect the terms at which we could obtain additional equity financing. The holders of these options and warrants have the opportunity to profit from a rise in the value or market price of our Common Stock and to exercise them at a time when we could obtain equity capital on more favorable terms than those contained in these securities. Page - Management has broad discretion over the use of proceeds from this offering. We may use the proceeds of this offering in ways that do not improve our operating results or the market value of our securities. We will have broad discretion in determining the specific uses of the proceeds from the sale of the Common Stock. While we have general expectations as to the allocation of the net proceeds of this offering, that allocation may change in response to a variety of unanticipated events, such as differences between our expected and actual revenues from operations or availability of commercial financing opportunities, unexpected expenses or expense overruns or unanticipated opportunities requiring cash expenditures. We will also have significant flexibility as to the timing and the use of the proceeds. As a result, investors will not have the opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use the proceeds. You will rely on the judgment of our management with only limited information about their specific intentions regarding the use of proceeds. We may spend most of the proceeds of this offering in ways with which you may not agree. If we fail to apply these funds effectively, our business, results of operations and financial condition may be materially and adversely affected. We may issue shares of preferred stock in the future, which could depress the price of our stock. Our corporate charter authorizes us to issue shares of blank check preferred stock. Our board of directors has the authority to fix and determine the relative rights and preferences of preferred shares, as well as the authority to issue such shares, without further shareholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders preferred rights to our assets upon liquidation, the right to receive dividends before dividends are declared to holders of our common stock, and the right to the redemption of such preferred shares, together with a premium, prior to the redemption of the common stock. To the extent that we do issue such additional shares of preferred stock, the rights of the holders of our Common Stock and other securities could be impaired thereby, including, without limitation, with respect to liquidation. We may, in the future, issue additional common shares, which would reduce investors' percent of ownership and may dilute our share value. Our corporate charter authorizes the issuance of 50,000,000 shares of Common Stock. The future issuance of Common Stock may result in substantial dilution in the percentage of our Common Stock held by our then existing shareholders. We may value any Common Stock issued in the future on an arbitrary basis. The issuance of Common Stock for future services or acquisitions or other corporate actions may have the effect of diluting the value of the shares held by our investors, and might have an adverse effect on any trading market for our Common Stock. The future issuance of all or part of our remaining authorized but currently unissued Common Stock in connection with an acquisition may result in substantial dilution in the percentage of our Common Stock held by our then existing shareholders. We may value any Common Stock issued in the future on an arbitrary basis. The issuance of Common Stock for future services or acquisitions or other corporate actions may have the effect of diluting the value of the shares held by our investors, and might cause the price of our Common Stock to decline. Purchasers in this offering will experience immediate and substantial dilution in net tangible book value. The offering price for the Common Stock is substantially higher than the pro forma net tangible book value per share of our outstanding Common Stock. As a result, investors purchasing our Common Stock in this offering may incur immediate dilution of $2.19 per share or 73%, based on an assumed offering price of $3.00 per share. As a result of this dilution, investors purchasing Common Stock from us will have contributed 55% of the total amount invested with us but will own only 20.7% of our outstanding Common Stock. In addition, the exercise of outstanding options and warrants and future equity issuances may result in further dilution to investors and current Shareholders. The timing and amount of capital requirements are not entirely within our control and cannot accurately be predicted and as a result, we may not be able to raise capital in time to satisfy our needs. If capital is required, we may require financing sooner than anticipated. We have no commitments for financing, and we cannot be sure that any financing would be available in a timely manner, on terms acceptable to us, or at all. Further, any equity financing could reduce ownership of existing Shareholders and any borrowed money could involve restrictions on future capital raising activities and other financial and operational matters. If we were unable to obtain financing as needed, we could become insolvent and be subject to bankruptcy proceedings. We may not be able to raise sufficient capital or generate adequate revenue to meet our obligations and fund our operating expenses. Failure to raise adequate capital and generate adequate sales revenues to meet our obligations and develop and sustain our operations could result in our having to curtail or cease operations. Additionally, even if we do raise sufficient capital and generate revenues to support our operating expenses, there can be no assurances that the revenue will be sufficient to enable us to develop business to a level where it will generate profits and cash flows from operations. Page - Our Common Stock is subject to the "Penny Stock" Rules of the Commission and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock. The Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: that a broker or dealer approve a person's account for transactions in penny stocks; and the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person's account for transactions in penny stocks, the broker or dealer must: obtain financial information and investment experience objectives of the person; and make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form: sets forth the basis on which the broker or dealer made the suitability determination; and that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our Common Stock and cause a decline in the market value of our stock. Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. We require additional capital to fund our current operations and to make acquisitions. We may have to curtail our business if we can not find adequate funding The expansion and development of our business will require significant additional capital, which we may be unable to obtain on suitable terms, or at all. We currently have no legally binding commitments with any third parties to obtain any material amount of additional equity or debt financing. If we are unable to obtain adequate funding on suitable terms, or at all, we may have to delay, reduce or eliminate some or all of our advertising, marketing, acquisition activity, general operations or any other initiatives. There are a large number of shares underlying our Warrants that may be available for future sale and the sale of these shares may cause the price of our stock to drop As of April 25, 2007, we had 19,428 shares of Common Stock issued and outstanding, which excludes 400,000 shares held in escrow as described in Note E to the accompanying financial statements. We also have 2,000,000 shares issuable upon exercise of the Warrants, which includes the Warrants granted to acquire 2,000,000 shares of Company Stock which was granted on October 1, 2006. The sale of these shares of Common Stock may cause the market price of our stock to drop. The issuance of shares upon conversion or exercise of the Warrants may result in substantial dilution to the interests of other Shareholders. Page - SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that involve risks and uncertainties relating to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited, to statements concerning: the anticipated benefits and risks associated with our business strategy; our future operating results and the future value of our Common Stock; the anticipated size or trends of the markets in which we compete and the anticipated competition in those markets; our ability to attract customers in a cost-efficient manner; our ability to attract and retain qualified management personnel; potential government regulation; our future capital requirements and our ability to satisfy our capital needs; the anticipated use of the proceeds realized from this offering; the potential for additional issuances of our securities; the possibility of future acquisitions of businesses or assets. Furthermore, in some cases, you can identify forward-looking statements by terminology such as may, could, should, expect, plan, intend, anticipate, believe, estimate, predict, potential or continue, the negative of such terms or other comparable terminology. These statements are only predictions. In evaluating these statements, you should specifically consider various factors, including the risks outlined in the Risk Factors section above. These factors may cause our actual results to differ materially from any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. USE OF PROCEEDS We are registering 3,000,000 shares of our Common Stock pursuant to the registration rights granted to the Selling Shareholders in our September 26, 2006 private placement. The Company will not receive any part of the proceeds of the resale of the 1,000,000 shares of Common Stock currently held by the Selling Shareholders, nor will the Company receive any of the proceeds of the resale of any Common Stock received by the Selling Shareholders to the extent that they exercise their Warrants to purchase additional Common Stock. However, the Company will receive the exercise price for the exercise of the Warrants. The proceeds of the sale of the 5,000,000 shares of Common Stock registered in this offering, based on the assumptions set forth below, will be received by the Company and allocated as follows: The principal purposes of this offering are to provide us with capital that will allow us: to implement expansion of additional products and services; for recruitment of new customers to expand our growth and revenue; to continue the Company s growth strategy through selected acquisition opportunities; to pay existing debt; and to increase working capital. Assuming a public offering price of $3.00 per share for the shares of Common Stock being offered, considering the exercise price of the Warrants that are outstanding, after deducting the estimated expenses of this offering, and other estimated offering expenses of $46,000, we estimate that the net proceeds to us from this offering will be approximately $13,954,000. On the basis of these assumptions, we anticipate the net proceeds of the offering to be allocated as follows: Use of Proceeds Approximate Amount Approximate Percentage Acquisition Opportunities $5,000,000 35.83% Repayment of existing debt 5,000,000 35.83% Working Capital 3,954,000 28.34% Total $13,954,000 100.00% Page - DETERMINATION OF OFFERING PRICE The offering price has no relationship to any established criteria of value, such as book value or earnings per share. No valuation or appraisal has been prepared for our business and potential business expansion. The offering price was determined arbitrarily. The Company s common stock is traded on the OTCBB market under the symbol "RSFF." The OTCBB is maintained by the National Association of Securities Dealers, Inc. ( NASD ) and is a electronic medium consisting of a network of securities dealers who buy and sell stocks. The following table sets forth the high and low bid prices per share of our Common Stock during the Company s three most recent fiscal years. These prices may represent inter-dealer quotations without retail markups, markdowns, or commissions and may not necessarily represent actual transactions. Low High Fiscal Year ended December 31, 2006 First Quarter $1.38 $2.85 Second Quarter $1.60 $2.25 Third Quarter $0.90 $1.98 Fourth Quarter $1.60 $3.26 Fiscal Year ended December 31, 2005 First Quarter $0.50 $0.75 Second Quarter $0.45 $1.01 Third Quarter $0.50 $1.05 Fourth Quarter $0.63 $1.46 DILUTION If you purchase shares in this offering, your interest will be diluted to the extent of the excess of the public offering price per share of Common Stock over the as adjusted net tangible book value per share of Common Stock after this offering. Net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities, divided by the total number of shares of Common Stock outstanding. For purposes of the dilution computation and the following tables, we have allocated the exercise price of the shares of Common Stock being purchased upon exercise of the Warrants and no consideration for the Warrants. At December 31, 2006, we had a pro forma net tangible book value of approximately $380,152, or approximately $0.29 per share based on a weighted average of 5,705,197 shares issued and outstanding on a pro forma basis. After taking into account the estimated net proceeds from this offering of $13,954,000, our net tangible book value at Decembe 31, 2006 would have been approximately $19,465,789, or $0.81 per share. This represents an immediate increase of $0.52 per share to existing Shareholders and immediate dilution of $2.19 per share, or 73%, to the new investors who purchase Common Stock in this offering. The following table illustrates this per share dilution: Assumed initial public offering price per share $3.00 Net tangible book value per share at September 30, 2006 $5,511,789 Increase in net tangible book value per share attributable to new investors $13,954,000 Net tangible book value per share after the offering $0.81 Dilution per share to new investors $2.19 The following table summarizes as of December 31, 2006 the differences between the existing shareholders and the new investors with respect to the number of shares purchased, the total consideration paid and the average price per share paid: Shares Purchased Total Consideration Number Percentage Amount Percentage Average Price Per Share Founders, executive officers and directors 14,422,634 60.62% 808,746 4.96% 0.06 Other existing shareholders 4,370,107 18.37% 1,500,000 9.20% 0.34 New Investors 5,000,000 21.01% 14,000,000 85.84% 2.80 Total 23,792,741 100.00% 16,308,746 100.00% 0.69 Page - DIVIDEND POLICY Holders of the Common Stock are entitled to dividends when, as and if declared by our Board of Directors out of funds legally available therefore. We have never declared or paid any cash dividends and currently do not intend to pay cash dividends in the foreseeable future on our shares of Common Stock. We intend to retain earnings, if any, to finance the development and expansion of our business. Payment of future dividends on our Common Stock will be subject to the discretion of our Board of Directors and will be contingent on future earnings, if any, our financial condition, capital requirements, general business conditions and other factors. Therefore, there can be no assurance that any dividends on our Common Stock will ever be paid. CAPITALIZATION The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2006: l On an actual basis; l On a pro forma as adjusted basis to give effect to the sale of 3,000,000 shares of our Common Stock offered by us in this offering at an assumed public offering price of $2.96 per share, the closing sale price per share of our Common Stock as reported on the OTCBB on January 31, 2007, after deducting estimated offering expenses payable by us; and on a pro forma as adjusted basis to give effect to the sale of 2,000,000 shares of our Common Stock offered by us in this offering at the exercise price set forth in the Warrants which are exercisable for the purchase of Common Stock underlying the Warrants. You should read this table together with Management s Discussion and Analysis of Financial Condition and Results of Operations, Description of Common Stock, and our consolidated financial statements and related notes which are included elsewhere in this prospectus. As of December 31, 2006 Actual Pro Forma Before Offering Pro Forma as Adjusted Long-term debt, including current portion and capital leases (1) $22,928,570 $22,928,570 Stockholders' equity: Common Stock, par value $0.0001 per share, 50,000,000 shares authorized, 18,642,740 shares issued and outstanding, actual; 50,000,000 shares authorized, 23,642,740 shares issued and outstanding, pro forma as adjusted 6,526 500 7,026 Additional paid-in capital 4,282,579 13,953,500 18,236,079 Accumulated deficit (3,908,953) (3,908,953) Total stockholders' equity 380,152 13,954,000 14,334,152 Total capitalization $23,308,722 $13,954,000 $37,262,722 Page - PLAN OF DISTRIBUTION The Selling Shareholders and any of their pledgees, donees, transferees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of Common Stock on the OTCBB or in private transactions. These sales may be at fixed or negotiated prices. The Selling Shareholders may use any one or more of the following methods when selling shares: ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; Purchases by a broker-dealer as principal and resale by the broker-dealer for its account; an exchange distribution in accordance with the rules of the applicable exchange; privately negotiated transactions; to cover short sales made after the date that this registration statement is declared effective by the Commission; broker-dealers may agree with the Selling Shareholders to sell a specified number of such shares at a stipulated price per share; through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; a combination of any such methods of sale; and any other method permitted pursuant to applicable law. The Selling Shareholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus. Broker-dealers engaged by the Selling Shareholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Shareholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The Selling Shareholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved. The Selling Shareholders may from time to time pledge or grant a security interest in some or all of the Common Stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell shares of Common Stock from time to time under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of Selling Shareholders to include the pledgee, transferee or other successors in interest as Selling Shareholders under this prospectus. Upon the Company being notified in writing by a Selling Shareholder that any material arrangement has been entered into with a broker-dealer for the sale of Common Stock through a block trade, special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer, a supplement to this prospectus will be filed, if required, pursuant to Rule 424(b) under the Securities Act, disclosing (i) the name of each such Selling Shareholder and of the participating broker-dealer(s), (ii) the number of shares involved, (iii) the price at which such the shares of Common Stock were sold, (iv) the commissions paid or discounts or concessions allowed to such broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus, and (vi) other facts material to the transaction. In addition, upon the Company being notified in writing by a Selling Shareholder that a donee or pledgee intends to sell more than 500 shares of Common Stock, a supplement to this prospectus will be filed if then required in accordance with applicable securities law. The Selling Shareholders also may transfer the shares of Common Stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus. The Selling Shareholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Discounts, concessions, commissions and similar selling expenses, if any, that can be attributed to the sale of the Common Stock will be paid by the Selling Shareholders and/or the purchasers. Each Selling Shareholder has represented and warranted to the Company that it acquired the securities subject to this registration statement in the ordinary course of such Selling Shareholder s business and, at the time of its purchase of such securities such Selling Shareholder had no agreements or understandings, directly or indirectly, with any person to distribute any such securities. Although the shares of Common Stock covered by this prospectus are not currently being underwritten, the Selling Shareholders or their underwriters, brokers, dealers or other agents or other intermediaries, if any, that may participate with the Selling Shareholders in any offering or distribution of the Common Stock and since they could be deemed "underwriters" within the meaning of the Securities Act, any profits realized or commissions received by them may be deemed underwriting compensation thereunder. Under applicable rules and regulations under the Exchange Act, any person engaged in a distribution of shares of the Common Sstock offered hereby may not simultaneously engage in market making activities with respect to the Common Stock for a period of up to five days preceding such distribution. The Selling Stockholders will be subject to the applicable provisions of the Exchange Act and the rules and regulations promulgated thereunder, including without limitation Regulation M, which provisions may limit the timing of purchases and sales by the Selling Stockholders. In order to comply with certain state securities or blue sky laws and regulations, if applicable, the Common Stock offered hereby will be sold in such jurisdictions only through registered or licensed brokers or dealers. In certain states, the Common Stock may not be sold unless they are registered or qualified for sale in such state, or unless an exemption from registration or qualification is available and is obtained. We will bear all costs, expenses and fees in connection with the registration of the Common Stock offered hereby. However, the Selling Shareholders will bear any brokerage or underwriting commissions and similar selling expenses, if any, attributable to the sale of the their shares of Common Stock offered pursuant to this prospectus. Page - The Company has advised each Selling Shareholder that it may not use shares registered on this registration statement to cover short sales of Common Stock made prior to the date on which this registration statement shall have been declared effective by the Commission. If a Selling Shareholder uses this prospectus for any sale of the Common Stock, it will be subject to the prospectus delivery requirements of the Securities Act. The Selling Shareholders will be responsible to comply with the applicable provisions of the Securities Act and Exchange Act, and the rules and regulations thereunder promulgated, including, without limitation, Regulation M as applicable to such Selling Shareholders in connection with resales of their respective shares under this registration statement. The Company is required to pay all fees and expenses incident to the registration of the shares, but the Company will not receive any proceeds from the sale of the Common Stock. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The following table presents selected consolidated financial and other data as of and for the periods indicated. You should read the following information together with the more detailed information contained in Management s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the accompanying notes. Statement of Operations Data Years Ended December 31, 2006 2005 2004 Revenues $103,727,965 $39,035,112 $35,114,470 Income (loss) from operations (1,924,624) 4,603,739 1,890,639 Net income (loss) ($2,716,198) $4,543,278 $1,688,262 Net income (loss) per common share ($0.48) $3.06 $1.14 Weighted average number of dilutive shares outstanding 5,705,197 1,486,685 1,486,685 Balance Sheet Data As of December 31, 2006 2005 2004 Current assets $19,461,646 $2,812,642 $1,893,021 Property and equipment, net 1,343,773 216,672 425,795 Advances and notes receivable - related party 681,237 7,712,668 1,262,676 Other assets 36,325,113 1,038,463 680,274 Total assets $57,811,769 $11,780,445 $4,261,766 Current liabilities $41,107,050 $8,200,759 $4,535,452 Long term liabilities 16,324,567 1,051,235 386,344 Shareholders equity (deficit) 380,152 2,528,451 (660,030) Total liabilities and equity $57,811,769 $11,780,445 $4,261,766 Page - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes, which appear elsewhere in this prospectus. It contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly under the
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+PROSPECTUS SUMMARY This summary highlights important information about our company and business. Because it is a summary, it may not contain all of the information that is important to you. To understand this offering fully, you should read this entire prospectus and the financial statements and related notes included in this prospectus carefully, including the Risk Factors section. The terms we, us, our, and our company refer to Smart Online, Inc., a company incorporated in Delaware, and its consolidated subsidiaries, unless the context otherwise requires. Company Overview Smart Online, Inc. was incorporated under the laws of Delaware on August 10, 1993. We develop and market products and services targeted towards small businesses (less than 50 employees) that are delivered via a Software-as-a-Service, or SaaS, model. Our goal is to be the leading provider of on-demand SaaS applications for small businesses, which according to International Data Corporation, is a potential market of $3 billion. We sell our products and services primarily through private label syndication and OEM distribution channels, although small businesses may purchase products and services directly through our main portal located at www.smartonline.com. Our primary source of revenue currently comes from sales of our SaaS applications for business management, web marketing, and e-commerce, which represented 63%, 77%, and 54% of our revenue from continuing operations for the fiscal years ended December 31, 2006, 2005, and 2004, respectively. We derive revenue from sales of services that are designed to complement our product offerings and allow us to create custom business solutions that fit our end-users' and our channel partners' needs, which represented 35%, 19%, and 0% of our revenue from continuing operations for the fiscal years ended December 31, 2006, 2005, and 2004, respectively. We have designed two technology platforms to serve as the foundation for delivery of our business solutions: OneBizSM and iDirect Architecture TM, or iDA. OneBiz SM is our business management platform offered though our main portal and through the sites of our private-label partners. iDA is our web marketing and web selling platform offered through our wholly owned subsidiary, Smart Commerce, Inc. (d/b/a iMart), or Smart Commerce. Both platforms are designed to allow integrated applications to share data with the rest of the products and/or services running on our platforms. Virtually all of our products and services are offered on a subscription basis using the on-demand SaaS model. Our principal executive offices are located at 2530 Meridian Parkway, 2nd Floor, Durham, North Carolina 27713, and our telephone number is (919) 765-5000. Offering Summary Securities Being Offered by Us None. Securities Being Offered by Selling Security Holders Up to 8,707,051 shares of common stock. These shares consist of: 891,428 shares of common stock issued in private placement transactions conducted during March 2004 through September 2004, and 47,485 shares of common stock issued as a penalty for late registration of these shares; 1,405,279 shares of common stock issued in private placement transactions conducted during February 2005 through September 2005, which number includes 50,000 shares of common stock issued upon exercise of a warrant issued in connection with this private placement; 1,000,000 shares of common stock issued in private placement transactions conducted in 2006; 2,352,941 shares of common stock and 1,211,471 shares of common stock issuable upon the exercise of warrants issued in a private placement transaction conducted in February 2007; Registration No. 333-141853 As filed with the Securities and Exchange Commission on July 31, 2007. 241,628 shares of common stock issued upon exercise of warrants issued in a 2004 private offering having an exercise price of $3.50 per share; 243,617 shares of common stock issued upon exercise of warrants issued as compensation to a placement agent having an exercise price of $1.30 per share; 82,003 shares of common stock issued as a penalty for late registration of certain of the shares covered by the registration statement of which this prospectus forms a part; 18,000 shares of common stock issued in exchange for investor relations services; 768,755 shares of common stock sold by our president and CEO under certain note cancellation agreements and stock purchase agreements; and 444,444 shares of common stock issuable upon exercise of a warrant issued as consideration for an increase in an irrevocable standing letter of credit issued by a current stockholder. Offering Price The selling security holders can sell our shares at prevailing market prices, or at privately negotiated prices. Terms of the Offering The selling security holders will determine when and how they will sell the common stock offered in this prospectus. See Plan of Distribution. Securities Issued and to be Issued 17,927,137 shares of our common stock are issued and outstanding as of July 24, 2007. Options to issue 2,201,800 shares of our common stock are also outstanding as of July 24, 2007, subject to adjustment pursuant to antidilution provisions contained in the options. Use of Proceeds All of the common stock to be sold under this prospectus will be sold by existing stockholders and we will not receive any proceeds from the sale of the common stock by the selling security holders. RISK FACTORS An investment in Smart Online involves significant risks. You should read the risks described below very carefully before deciding whether to invest in Smart Online. The following is a description of what we consider our key challenges and risks. We operate in a dynamic and rapidly changing business environment that involves substantial risk and uncertainty and these risks may change over time. The following discussion addresses some of the risks and uncertainties that could cause, or contribute to causing, actual results to differ materially from expectations. In evaluating our business, you should pay particular attention to the descriptions of risks and uncertainties described below and in other sections of this document and our other filings. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties not presently known to us, that we currently deem immaterial, or that are similar to those faced by other companies in our industry or business in general may also affect our business. If any of the risks described below actually occurs, our business, financial condition, or results of operations could be materially and adversely affected. We have organized these factors into the following categories below: Our Financial Condition Our Products and Operations UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Our Market, Customers and Partners Our Officers, Directors, Employees and Stockholders Regulatory Matters that Affect Our Business Matters Related to the Market For Our Securities Risks Associated with Our Financial Condition (1) We have had recurring losses from operations since inception, and continue to have negative cash flows. If we do not rectify these deficiencies through additional financing or growth, we may have to cease operations and liquidate our business. Because we have only nominal tangible assets, you may lose your entire investment. Through March 31, 2007, we have lost an aggregate of approximately $58.7 million since inception on August 10, 1993. During the quarters ended March 31, 2007 and 2006, we incurred a net loss of approximately $1.3 million and $1.6 million, respectively. At March 31, 2007, we had $3.3 million of working capital. Our working capital, including our line of credit and recent financing transaction for $6 million, is not sufficient to fund our operations beyond July 2008, unless we substantially increase our revenue, limit expenses or raise substantial additional financing. Factors such as the commercial success of our existing services and products, the timing and success of any new services and products, the progress of our research and development efforts, our results of operations, the status of competitive services and products, the timing and success of potential strategic alliances or potential opportunities to acquire technologies or assets, and the suspension of trading of shares of our common stock by the U.S. Securities and Exchange Commission, or the SEC, and the resulting drop in share price, trading volume and liquidity, may require us to seek additional funding sooner than we expect. If we fail to raise sufficient financing, we will not be able to implement our business plan, we may have to liquidate our business and you may lose your investment. (2) Any issuance of shares of our common stock in the future could have a dilutive effect on your investment. We may issue shares of our common stock in the future for a variety of reasons. For example, under the terms of the stock purchase warrant and agreement we recently entered into with Atlas Capital, S.A., or Atlas, it may elect to purchase up to 444,444 shares of our common stock at $2.70 per share upon termination of, or if we are in breach under the terms of, our line of credit with Wachovia Bank, NA, or Wachovia. In connection with our recent private financing, we issued warrants to the investors to purchase an additional 1,176,471 shares of our common stock at $3.00 per share and a warrant to our placement agent in that transaction to purchase 35,000 shares of our common stock at $2.55 per share. In addition, we may raise funds in the future by issuing additional shares of common stock or other securities. If we raise additional funds through the issuance of equity securities or debt convertible into equity securities, the percentage of stock ownership by our existing stockholders would be reduced. In addition, such securities could have rights, preferences, and privileges senior to those of our current stockholders, which could substantially decrease the value of our securities owned by them. Depending on the share price we are able to obtain, we may have to sell a significant number of shares in order to raise the necessary amount of capital. You may experience dilution in the value of your shares as a result. (3) In the future, we may enter into certain debt financing transactions with third parties that could adversely affect our financial health. We currently have a secured loan arrangement from Fifth Third Bank. Under the terms of this agreement, Smart Commerce borrowed $1.8 million to be repaid in 24 monthly installments of $75,000 plus interest beginning in December 2006. The interest rate is prime plus 1.5% as periodically determined by Fifth Third Bank. The loan is secured by all of the assets of Smart Commerce and all of Smart Commerce s intellectual property. The loan is guaranteed by us and such guaranty is secured by all the common stock of Smart Commerce. We also have a revolving line of credit from Wachovia. This line of credit is $2.5 million, and as of July 24, 2007, we have drawn down approximately $2.1 million. Any advances made on the line of credit must be repaid no later than August 1, 2008, with monthly payments of accrued interest only commencing on December 1, 2006 on any outstanding balance. The interest shall accrue on the unpaid principal balance at the LIBOR Market Index Rate plus 0.9%. The line of credit is secured by our deposit account at Wachovia and an irrevocable standby letter of credit in the amount of $2.5 million issued by HSBC Private Bank (Suisse) S.A. with Atlas as account party. We are evaluating various equity and debt financing options and in the future may incur indebtedness that could adversely affect our financial health. For example, indebtedness could: increase our vulnerability to general adverse economic and industry conditions; require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes; limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; result in the loss of a significant amount of our assets or the assets of our subsidiary if we are unable to meet the obligations of these arrangements; place us at a competitive disadvantage compared to our competitors that have less indebtedness or better access to capital by, for example, limiting our ability to enter into new markets; and limit our ability to borrow additional funds in the future. Risks Associated with Our Products and Operations (4) Our business is dependent upon the development and market acceptance of our applications, including the acceptance of using some of our applications to conduct business. Our business models and operating plans have changed as a result of forces beyond our control. Consequently, we have not yet demonstrated that we have a successful business model or operating plan. We continually revise our business models and operating plans as a result of changes in our market, the expectations of customers and the behavior of competitors. Today, we anticipate that our future financial performance and revenue growth will depend, in large part, upon our Internet-based SaaS business model and the results of our sales efforts to reach agreements with syndication partners with small business customer bases, but this business model may become ineffective due to forces beyond our control that we do not currently anticipate. We recently entered into agreements with four new syndication partners, but we have not yet derived any revenue under these agreements. Consequently, we have not yet demonstrated that we have a successful business model or operating plan. Our evolving business model makes our business operations and prospects difficult to evaluate. There can be no assurance that our revised business model will allow us to capture significant future market potential. Investors in our securities should consider all the risks and uncertainties that are commonly encountered by companies in this stage of operations under our current business model, particularly companies, such as ours, that are in emerging and rapidly evolving markets. Our future financial performance and revenue growth will depend, in part, upon the successful development, integration, introduction, and customer acceptance of our software applications. Thereafter, other new products, either developed or acquired, and enhanced versions of our existing applications will be critically important to our business. Our business could be harmed if we fail to deliver timely enhancements to our current and future solutions that our customers desire. We also must continually modify and enhance our services and products to keep pace with market demands regarding hardware and software platforms, database technology, information security, and electronic commerce technical standards. There can be no assurance that we will be able to successfully develop new services or products, or to introduce in a timely manner and gain acceptance of our new services or products in the marketplace. Our business could be harmed if we fail to achieve the improved performance that customers want with respect to our current and future product offerings. We cannot assure you that our products will achieve widespread market penetration or that we will derive significant revenues from the sale of our applications. Certain of our services involve the storage and transmission of customers personal and proprietary information (such as credit card, employee, purchasing, supplier, and other financial and accounting data). If customers determine that our services do not provide adequate security for the dissemination of information over the Internet or corporate extranets, or are otherwise inadequate for Internet or extranet use, or if, for any other reason, customers fail to accept our products for use, our business will be harmed. Our failure to prevent security breaches, or well-publicized security breaches affecting the Internet in general, could significantly harm our business, operating results, and financial condition. (5) We may consider strategic divestiture, acquisition or investment opportunities in the future. We face risks associated with any such opportunity. From time to time we evaluate strategic opportunities available to us for product, technology or business acquisitions, investments and divestitures. In the future, we may divest ourselves of products or technologies that are not within our continually evolving business strategy or acquire other products or technologies. We may not realize the anticipated benefits of any such current or future opportunity to the extent that we anticipate, or at all. We may have to issue debt or equity securities to pay for future acquisitions or investments, the issuance of which could be dilutive to our existing stockholders. If any opportunity is not perceived as improving our earnings per share, our stock price may decline. In addition, we may incur non-cash amortization charges from acquisitions, which could harm our operating results. Any completed acquisitions or divestitures would also require significant integration or separation efforts, diverting our attention from our business operations and strategy. We have limited acquisition experience, and therefore our ability as an organization to integrate any acquired companies into our business is unproven. Acquisitions and investments involve numerous risks, including: difficulties in integrating operations, technologies, services and personnel; diversion of financial and managerial resources from existing operations; reduction of available cash; risk of entering new markets; potential write-offs of acquired assets; potential loss of key employees; inability to generate sufficient revenue to offset acquisition or investment costs; and delays in customer purchases due to uncertainty. If we fail to properly evaluate and execute acquisitions, divestitures or investments, our business and prospects may be seriously harmed. (6) We entered into a debt financing transaction in order to make certain installment payments under our agreement in the iMart acquisition. Failure to comply with the provisions of this loan agreement could have a material adverse effect on us. When we purchased iMart Incorporated, or iMart, in October 2005, we committed to make installment payments of approximately $3,462,000 and non-competition payments to two key employees of $780,000. Prior to the loan agreement described below, the cash flow we received from the business we purchased from iMart has been insufficient to cover any of the installment payments we have been required to make, and we have had to fund the difference. We recently amended the lock box agreement related to the acquisition, terminating the iMart shareholders security interest in the amounts in the lock box account, and agreed to pay the installment payments and noncompetition payments in three non-equal installments by February 2007, which have been paid in full. In order to make these payments, we entered into a loan agreement with Fifth Third Bank in order to finance a portion of the payments to the iMart shareholders. Under the terms of this agreement, Smart Commerce borrowed $1.8 million to be repaid in 24 monthly installments of $75,000 plus interest. The interest rate is prime plus 1.5% as periodically determined by Fifth Third Bank. Currently and at closing, the prime rate was 8.25%. The loan is secured by all of the assets of Smart Commerce, including a security account of $250,000 and all of Smart Commerce s intellectual property. The loan is guaranteed by us and such guaranty is secured by all the common stock of Smart Commerce. If an event of default occurs and remains uncured, then the lender could foreclose on the assets securing the loan. If that were to occur, it would have a substantial adverse effect on our business. Making the payments on the loan used to finance part of these payments may drain our financial resources or cause other material harm to our business if the lender forecloses on the secured assets. (7) We rely on third-party software that may be difficult to repair should errors or failures occur. Such an error or failure, or the process undertaken by us to correct such an error or failure, could disrupt our services and harm our business. We rely on software licensed from third parties in order to offer our services. We use key systems software from commercial vendors. The software we use may not continue to be available on commercially reasonable terms, or at all, or upgrades may not be available when we need them. We currently do not have support contracts or upgrade subscriptions with some of our key vendors. We are not currently aware of any immediate issues, but any loss of the right to use any of this software could result in delays in providing our services until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. Any errors or defects in, or unavailability of, third-party software could result in errors or a failure of our services, which could harm our business. We also use key systems software from leading open source communities that are free and available in the public domain. Our products will use additional public domain software, if needed for successful implementation and deployment. We currently do not have support contracts for the open source software that we use. We rely on our own research and development personnel and the open source community to discover and fix any errors and bugs that may exist in the software we use. As a result, if there are errors in such software of which we are unaware or are unable to repair in a timely manner, there could be a disruption in our services if certain critical defects are discovered in the software at a future date. Risks Associated with Our Markets, Customers and Partners (8) The structure of our subscription model makes it difficult to predict the rate of customer subscription renewals or the impact non-renewals will have on our revenue or operating results. Our small business customers do not sign long-term contracts. Our customers have no obligation to renew their subscriptions for our services after the expiration of their initial subscription period and, in fact, customers have often elected not to do so. In addition, our customers may renew for a lower-priced edition of our services or for fewer users. Many of our customers utilize our services without charge. These factors make it difficult to accurately predict customer renewal rates. Our customers renewal rates may decline or fluctuate as a result of a number of factors, including when we begin charging for our services, their dissatisfaction with our services and their capability to continue their operations and spending levels. Most of our subscribers are in our Smart Commerce segment. Although the number of subscribers to our Smart Online segment has remained relatively constant since September 2006, we have experienced a decline in the number of subscribers to our Smart Commerce segment. This decline is primarily attributable to the restructuring of a major customer and was anticipated when we learned of the restructuring. If our customers do not renew their subscriptions for our services, or we are not able to increase the number of subscribers, our revenue may decline and our business will suffer. (9) We depend on corporate partners to market our products through their web sites under relatively short-term agreements in order to increase subscription fees and grow revenue. Failure of our partners marketing efforts or termination of these agreements could harm our business. Subscription fees represented approximately 52%, 22%, 0% of total revenues for 2006, 2005, and 2004, respectively. Subscription fees represented approximately 67% of total revenues in the first quarter of 2007 compared to 40% of total revenues in the first quarter of 2006. With the launch of our new applications and the acquisition of iMart, subscription fees represent a significant percentage of our total revenues and our future financial performance and revenue growth depends, in large part, upon the growth in customer demand for our outsourced services delivery models. We depend on our syndication partners and referral relationships to offer our products and services to a larger customer base than we can reach through direct sales or other marketing efforts. Although we entered into nine new and renewed agreements in the first half of 2007, we have not yet derived any revenue under several of these agreements. Our success depends in part on the ultimate success of our syndication partners and referral partners and their ability to market our products and services successfully. Our partners are not obligated to provide potential customers to us. In addition, some of these third parties have entered, and may continue to enter into, strategic relationships with our competitors. Further, many of our strategic partners have multiple strategic relationships, and they may not regard us as significant for their businesses. Our strategic partners may terminate their respective relationships with us, pursue other partnerships or relationships, or attempt to develop or acquire products or services that compete with our products or services. Our strategic partners also may interfere with our ability to enter into other desirable strategic relationships. If we are unable to maintain our existing strategic relationships or enter into additional strategic relationships, we will have to devote substantially more resources to the distribution, sales, and marketing of our products and services. (10) Our future growth is substantially dependent on customer demand for our subscription services delivery models. Failure to increase this revenue could harm our business. We have invested significantly in infrastructure, operations, and strategic relationships to support our SaaS delivery model, which represents a significant departure from the delivery strategies that other software vendors and we have traditionally employed. To maintain positive margins for our small business services, our revenues will need to continue to grow more rapidly than the cost of such revenues. There can be no assurance that we will be able to maintain positive gross margins in our subscription services delivery models in future periods. If our subscription services business does not grow sufficiently, we could fail to meet expectations for our results of operations, which could harm our business. Any delays in implementation may prevent us from recognizing subscription revenue for periods of time, even when we have already incurred costs relating to the implementation of our subscription services. Additionally, subscribers can cancel their subscriptions to our services at any time and, as a result, we may recognize substantially less revenue than we expect. If large numbers of customers cancel or otherwise seek to terminate subscription agreements more quickly than we expect, our operating results could be substantially harmed. To become successful, we must cause subscribers who do not pay fees to begin paying fees and increase the length of time subscribers pay subscription fees. (11) There are risks associated with international operations, which may become a bigger part of our business in the future. We currently do not generate revenue from international operations. Although we have recently signed an agreement with a company to market our products and services in a foreign country, this agreement has not yet generated any revenue for us. We are currently evaluating whether and how to expand into additional international markets. If we continue to develop our international operations, these operations will be subject to risks associated with operating abroad. These international operations are subject to a number of difficulties and special costs, including: costs of customization and localization of products for foreign countries; laws and business practices favoring local competitors; uncertain regulation of electronic commerce; compliance with multiple, conflicting, and changing governmental laws and regulations; longer sales cycles; greater difficulty in collecting accounts receivable; import and export restrictions and tariffs; potentially weaker protection for our intellectual property than in the United States, and practical difficulties in enforcing such rights abroad; difficulties staffing and managing foreign operations; multiple conflicting tax laws and regulations; and political and economic instability. Our international operations may also face foreign currency-related risks. To date, all of our revenues have been denominated in United States Dollars, but an increasing portion of our revenues may be denominated in foreign currencies. We do not engage in foreign exchange hedging activities, and therefore our international revenues and expenses may be subject to the risks of foreign currency fluctuations. We must also customize our services and products for international markets. This process is much more complex than merely translating languages. For example, our ability to expand into international markets will depend on our ability to develop and support services and products that incorporate the tax laws, accounting practices, and currencies of particular countries. Since a large part of our value proposition to customers is tied to developing products with the peculiar needs of small businesses in mind, any variation in business practice from one country to another may substantially decrease the value of our products in that country unless we identify the important differences and customize our product to address the differences. Our international operations may also increase our exposure to international laws and regulations. If we cannot comply with domestic or foreign laws and regulations, which are often complex and subject to variation and unexpected changes, we could incur unexpected costs and potential litigation. For example, the governments of foreign countries might attempt to regulate our services and products or levy sales or other taxes relating to our activities. In addition, foreign countries may impose tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers, any of which could make it more difficult for us to conduct our business in international markets. Risks Associated with Our Officers, Directors, Employees and Stockholders (12) Our executive management team is critical to the execution of our business plan and the loss of their services could severely impact negatively on our business. Our success depends significantly on the continued services of our executive management personnel. Losing any of our officers could seriously harm our business. Competition for executives is intense. If we had to replace any of our officers, we would not be able to replace the significant amount of knowledge that they have about our operations. All of our executive team work at the same location, which could make us vulnerable to loss of our entire management team in the event of a natural or other disaster. We do not maintain key man insurance policies on any of our employees. (13) Officers, directors and principal stockholders control us. This might lead them to make decisions that do not benefit the interests of minority stockholders. If this Form is a post-effective amendment pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If the Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o CALCULATION OF REGISTRATION FEE TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED AMOUNT TO BE REGISTERED (1) PROPOSED MAXIMUM OFFERING PRICE PER SHARE PROPOSED MAXIMUM AGGREGATE OFFERING PRICE AMOUNT OF REGISTRATION FEE Common Stock, par value $0.001 per share 5,413,603 (2) $ 2.70 (3) $ 14,616,728.10 (3) $ 448.73 Common Stock, par value $0.001 per share 1,637,533 (2) $ 2.45 (4) $ 4,011,955.85 (4) $ 123.17 Common Stock, par value $0.001 per share 479,444 (5) $ 2.70 (6) $ 1,294,498.80 (6) $ 39.74 Common Stock, par value $0.001 per share 1,176,471 (5) $ 3.00 (7) $ 3,529,413.00 (7) $108.35 TOTAL 8,707,051 $ 23,452,595.75 $ 719.99 (8) (1) Pursuant to Rule 416 under the Securities Act, includes an indeterminate number of additional shares of common stock which may become issuable by reason of any stock dividend, stock split, recapitalization or other similar transaction which results in an increase in the number of outstanding shares of common stock. (2) Represents shares currently issued and outstanding and held of record by the selling security holders named in this registration statement. (3) Estimated solely for the purpose of computing the registration fee required by Rule 457(c) under the Securities Act based on the average of the bid and ask prices of the registrant's common stock as reported on the Over-the-Counter Bulletin Board on March 30, 2007. (4) Estimated solely for the purpose of computing the registration fee required by Rule 457(c) under the Securities Act based on the average of the bid and ask prices of the registrant's common stock as reported on the Over-the-Counter Bulletin Board on June 6, 2007. (5) Represents shares issuable upon exercise of outstanding common stock purchase warrants of the registrant held by certain selling security holders. (6) Estimated solely for the purpose of computing the registration fee required by Rule 457(g) under the Securities Act based on the average of the bid and ask prices of the registrant's common stock as reported on the Over-the-Counter Bulletin Board on March 30, 2007. (7) Estimated solely for the purpose of computing the registration fee required by Rule 457(g) under the Securities Act based on the exercise price of the warrants to purchase the registrant's common stock at $3.00 per share. Our officers, directors and principal stockholders beneficially own or control approximately 59% of our outstanding common stock. As a result, these persons, acting together, will have the ability to control substantially all matters submitted to our stockholders for approval (including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets) and to control our management and affairs. Accordingly, this concentration of ownership may have the effect of delaying, deferring or preventing a change in control of us, impeding a merger, consolidation, takeover or other business combination involving us or discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of us, which in turn could materially and adversely affect the market price of our common stock. Regulatory Risks (14) Compliance with new regulations governing public company corporate governance and reporting is uncertain and expensive. As a public company, we have incurred and will incur significant legal, accounting and other expenses that we did not incur as a private company. We will incur costs associated with our public company reporting requirements. We also anticipate that we will incur costs associated with recently adopted corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, as well as new rules implemented by the SEC and the NASD. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time consuming and costly. Any unanticipated difficulties in preparing for and implementing these reforms could result in material delays in complying with these new laws and regulations or significantly increase our costs. Our ability to fully comply with these new laws and regulations is also uncertain. Our failure to prepare timely for and implement the reforms required by these new laws and regulations could significantly harm our business, operating results, and financial condition. We also expect that these new rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In the past, we have incurred substantial additional professional fees and expenses associated with the SEC s suspension of trading of our securities in January 2006 and with the internal investigation authorized by our Board of Directors in March 2006. Although our insurance carrier has paid a portion of these fees, not all such fees and expenses will be covered by our insurance. (15) Remediation of deficiencies in our internal control over financial reporting is uncertain and may be expensive. By the end of fiscal 2007, we are required to comply with Sarbanes-Oxley requirements involving management's assessment of our internal control over financial reporting and our independent accountant's audit of that assessment is required for fiscal 2008. In March 2006, we retained a new Chief Financial Officer. His review of our internal control over financial reporting to date and the final findings of our Audit Committee investigation have identified several deficiencies in our internal control over financial reporting. In July 2006, the Audit Committee concluded that: (i) our Chief Executive Officer should have disclosed and sought approval from the Board of Directors before entering into certain transactions and arrangements, including personal loans; (ii) there was inadequate diligence by management and the Board of Directors regarding third parties with which we contracted, including outside investor relations vendors, some of which were registered brokers; (iii) management and our directors lacked sufficient knowledge regarding rules and regulations with respect to dealings between registered brokers and public companies, (iv) we lack clear policies regarding the limits on the Chief Executive Officer s authority to enter into business transactions and agreements without Board approval; (v) there has been inadequate legal and accounting review of material contracts; (vi) there has been inadequate training and understanding of SEC disclosure requirements; (vii) there was an unintentional violation of our Securities Trading Policy by one of our directors as previously reported in our public filings; (viii) we have inadequate processes for determination of independence of Board members; and (ix) there has been a failure to communicate and stress the importance of controls and procedures throughout our organization. The Audit Committee investigation concluded that these deficiencies primarily resulted from our transition from a private company to a publicly reporting company and insufficient preparation for, focus on, and experience with compliance requirements for a publicly reporting company. We reported the changes to our internal controls related to the Audit Committee s findings in our Annual Report on Form 10-K for the fiscal year ending December 31, 2005, filed with the SEC on July 11, 2006, or the 2005 Annual Report, and as updated in our Annual Report on Form 10-K for the fiscal year ending December 31, 2006, filed with the SEC on March 30, 2007. While we have made some progress on this remediation effort, we continue to work on addressing all the issues raised in these findings. Although we believe our on-going review and testing of our internal control over financial reporting will enable us to be compliant with these requirements, we have identified some deficiencies and may identify others that we may not be able to remediate and test by the end of fiscal 2007. If we cannot assess our internal controls over financial reporting as effective, it may affect our management s assessment of our internal control environment as it will be disclosed in our Annual Report on Form 10-K for fiscal 2007 and our stock price could decline. (16) The SEC suspension of trading of our securities has damaged our business, and it could damage our business in the future. The suspension of trading by the SEC has harmed our business in many ways, and may cause further harm in the future. Prior to our re-entry onto the OTC-BB for quotation, our ability to raise financing on favorable terms to us and our existing stockholders suffered due to the lack of liquidity of our stock, the questions raised by the SEC s action, and the resulting drop in the price of our common stock. As a result, we did not raise sufficient financing to make the sales and marketing investments we felt were needed in 2006 to substantially increase revenue. Legal and other fees related to the SEC s action also reduced our cash flow which jeopardized our ability to make the installment payments required by the agreements to acquire iMart. We recently completed a private placement financing for $6 million; however we make no assurance that we will not continue to experience additional harm as a result of the SEC matter. The time spent by our management team and directors dealing with issues related to the SEC action also detracted from the time they spent on our operations, including strategy development and implementation. Finally, an important part of our business plan is to enter into private label syndication agreements with large companies. The SEC s action and related matters have caused us to be a less attractive partner for large companies and to lose important opportunities. The SEC s action and related matters may cause other problems in our operations. Risks Associated with the Market for Our Securities (17) If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline. The trading market for our common stock relies in part on the research and reports that industry or financial analysts publish about us or our business. Because our stock is currently quoted on the OTC-BB rather than traded on a national exchange, analysts may not be interested in conducting research or publishing reports on us. If we do not succeed in attracting analysts to report about our company, most investors will not know about us even if we are successful in implementing our business plan. We do not control these analysts. There are many large, well established publicly traded companies active in our industry and market, which may mean it will be less likely that we receive widespread analyst coverage. Furthermore, if one or more of the analysts who do cover us downgrade our stock, our stock price would likely decline rapidly. If one or more of these analysts cease coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline. Lower trading volume may also mean that you could not resell your shares. Copy to: James W. Gayton, Esq. Smart Online, Inc. 2530 Meridian Parkway, 2nd Floor Durham, NC 27713 (919) 765-5000 Approximate date of commencement of proposed sale to the public: From time to time after the effective date of the registration statement until such time that all of the shares of common stock being offered hereunder have been sold. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. (8) Based on a proposed maximum aggregate offering price of $19,440,639.90 for 7,069,518 shares of common stock included in the original filing on April 3, 2007, plus a proposed maximum aggregate offering price of $4,011,955.85 for 1,637,533 additional shares of common stock registered by the amendment filed on June 15, 2007. Of the $719.99 registration fee, $596.82 was previously paid in connection with the original filing on April 3, 2007, and $123.17 was paid in connection with the amendment filed on June 15, 2007. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. (18) Our revenues and operating results may fluctuate in future periods and we may fail to meet expectations of investors and public market analysts, which could cause the price of our common stock to decline. Our revenues and operating results may fluctuate significantly from quarter to quarter. If quarterly revenues or operating results fall below the expectations of investors or public market analysts, the price of our common stock could decline substantially. Factors that might cause quarterly fluctuations in our operating results include: the evolving demand for our services and software; spending decisions by our customers and prospective customers; our ability to manage expenses; the timing of product releases; changes in our pricing policies or those of our competitors; the timing of execution of contracts; changes in the mix of our services and software offerings; the mix of sales channels through which our services and software are sold; costs of developing product enhancements; global economic and political conditions; our ability to retain and increase sales to existing customers, attract new customers and satisfy our customers requirements; subscription renewal rates for our service; the rate of expansion and effectiveness of our sales force; the length of the sales cycle for our service; new product and service introductions by our competitors; technical difficulties or interruptions in our service; regulatory compliance costs; integration of acquisitions; and extraordinary expenses such as litigation or other dispute-related settlement payments. In addition, due to a slowdown in the general economy and general uncertainty of the current geopolitical environment, an existing or potential customer may reassess or reduce its planned technology and Internet-related investments and defer purchasing decisions. Further delays or reductions in business spending for technology could have a material adverse effect on our revenues and operating results. (19) Our stock price is likely to be highly volatile and may decline. The trading prices of the securities of technology companies have been highly volatile. Accordingly, the trading price of our common stock has been and is likely to continue to be subject to wide fluctuations. Further, our common stock has a limited trading history. Factors affecting the trading price of our common stock include: variations in our actual and anticipated operating results; the volatility inherent in stock prices within the emerging sector in which we conduct business; announcements of technological innovations, new services or service enhancements, strategic alliances or significant agreements by us or by our competitors; recruitment or departure of key personnel; THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED July 31, 2007 PROSPECTUS SMART ONLINE, INC. 8,707,051 SHARES OF COMMON STOCK This prospectus relates to the resale of up to 8,707,051 shares of our common stock by the selling security holders named in this prospectus and the person(s) to whom such security holders may transfer their shares. These shares consist of: 7,051,136 currently outstanding shares; and 1,655,915 shares issuable upon exercise of outstanding warrants held by the selling security holders. The selling security holders named in this prospectus are offering all of the shares of common stock offered through this prospectus. No shares are being offered by us. We will not receive proceeds from the resale of the shares by selling security holders. We will bear substantially all expenses of registration of the shares. The selling security holders will pay any underwriting fees, discounts or commissions and transfer taxes in connection with the sale of the shares. The selling security holders and any broker-dealer who may participate in sales of the shares may use this prospectus. See Plan of Distribution. Our common stock is quoted on the Over-the-Counter Bulletin Board, or the OTC-BB, under the symbol SOLN. On July 24, 2007, the last reported sale price for our common stock as reported on the OTC-BB was $2.50 per share. The selling security holders will sell shares of our common stock at prevailing market prices or at privately negotiated prices. INVESTING
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001116435_airvana_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001116435_airvana_prospectus_summary.txt
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+Prospectus Summary 1 Risk Factors 7 Forward-Looking Statements 22 Use of Proceeds 23 Dividend Policy 23 Capitalization 24 Dilution 25 Selected Consolidated Financial Data 27 Management s Discussion and Analysis of Financial Condition and Results of Operations 30 Business 55 Management 71 Executive Compensation 77 Certain Relationships and Related Party Transactions 88 Principal Stockholders 90 Description of Capital Stock 92 Shares Eligible for Future Sale 95 Underwriters 97 Legal Matters 101 Experts 101 Where You Can Find More Information 101 Index to Consolidated Financial Statements F-1 Ex-23.1 Consent of Ernst & Young LLP You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. We have not authorized anyone to provide you with different information. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. Until , 2007 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. We use various trademarks and trade names in our business, including without limitation, Airvana and AirVista. This prospectus also contains trademarks and trade names of other businesses that are the property of their respective holders. This prospectus also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other industry data. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified the statistical and other industry data generated by independent parties and contained in this prospectus and, accordingly, we cannot guarantee their accuracy or completeness. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of
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+PROSPECTUS SUMMARY This summary highlights selected information contained in greater detail elsewhere in this prospectus and does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, especially the risks of investing in our common stock, which we discuss under Risk Factors and our consolidated financial statements and related notes. Unless otherwise indicated or required by the context, we, us, and our refer to GeoPetro Resources Company and its subsidiaries and predecessors. All financial data included in this prospectus has been prepared in accordance with generally accepted accounting principles in the United States. We have provided definitions for some of the natural gas and oil industry terms used in this prospectus in the Glossary on page A-1 of this prospectus. All dollar amounts appearing in this prospectus are stated in U.S. dollars unless specifically noted in Canadian dollars ( CDN$ ). GEOPETRO RESOURCES COMPANY Offices: Our principal executive offices are located at One Maritime Plaza, Suite 700, San Francisco, CA 94111. Our telephone number is (415) 398-8186. Our Business: We are an oil and gas company originally incorporated in the State of Wyoming in August 1994 but incorporated in California since June 1996. Our business is the exploration and the production of oil and natural gas reserves on a worldwide basis. We currently have projects in the United States, Canada, and Indonesia. The projects encompass approximately 1.03 million gross (236,170 net) acres consisting of mineral leases, production sharing contracts and exploration permits that give us the right to explore for, develop and produce crude oil and natural gas. We have developed a proven cash-flow generating property in our Madisonville Project in Texas which we operate. Elsewhere, we have assembled a geographically diversified portfolio of exploratory and appraisal prospects which we believe have the potential for oil and natural gas reserves. Corporate Strategy: Our strategy is to maximize shareholder value through the exploration of oil and natural gas prospects. To carry out this philosophy we employ the following business strategies: Identify and pursue projects which individually have the potential to be company makers which we define as projects which could generate a minimum unrisked net present value of $50 million net to our interest using a 10% discount factor. Net present value means the estimated future net cash flows resulting from the sale of oil and gas less all of the operating and capital costs, discounted to present value using a 10% discount factor. Unrisked in this context means that we have not reduced the future net cash flows to account for the risk of finding and producing the reserves; perform geological, engineering and geophysical evaluations; gain control of key acreage; generate high quality drillable exploration and lower-risk appraisal and development prospects; retain a large working interest in those projects which involve low risk development, exploitation or appraisal of proven, probable and possible reserves; and minimize early investment and exploration risk in higher risk exploratory prospects through farmouts to other oil and natural gas companies and maintain meaningful interests with a carry through the exploration phase. Management: Stuart J. Doshi, David V. Creel and J. Chris Steinhauser, the three members of our senior management team, have a combined experience of approximately 100 years in the oil and gas industry. This experience covers a broad range of activity both onshore and offshore, domestic and international and from company start-up to mature progression and company sale. This experience also covers the entire spectrum of the risk profile in any particular project from early stage exploration through full development and production. Significant Risks: Our business faces significant risks. Acquisition, exploration and overhead costs are high and have resulted in substantial losses since inception. There is a limited public market for our common shares, which may hinder our ability to raise equity capital (if needed) on advantageous terms, and there is intense competition in our industry. See Risk Factors beginning on page 5 for a detailed discussion of these and other risks. FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Madisonville Field: We own and operate a 100% working interest in the Madisonville Project in Madison County, Texas. We own working interests in approximately 4,716 gross and net acres of leases in the Rodessa Formation interval, as well as approximately 4,589 gross and net acres of leases as to depths below the Rodessa Formation interval. In October 2001, we tested the Magness Well at rates of up to 20.8 MMcf/d. Production from this well commenced in May 2003 and stabilized at a rate of approximately 18 MMcf/d of raw gas as at October 2003. In December 2004, the Fannin Well was drilled, completed and tested at rates of up to 25.7 MMcf/d. In 2006, we drilled the Wilson and Mitchell wells. Presently, the Fannin, Mitchell and Magness wells are producing while the Wilson well is shut-in (not producing) awaiting a fracture stimulation and hook up. The well reserves are being produced from the Rodessa formation existing at approximately 12,000 feet of depth. In 2005 we entered into a long-term agreement with Madisonville Gas Processing, LP ( MGP ), the gas treatment plant owner, to process Rodessa formation natural gas. In connection with the agreement, MGP is expanding the capacity of the treatment plant from 18 MMcf/d to 68 MMcf/d. MGP is jointly owned by JPMorgan Partners and Bear Cub Investments LLC. Gateway Processing Company ( Gateway ) owns and operates an approximately nine-mile sales pipeline with an estimated capacity of approximately 70 MMcf/d to transport the natural gas from the Madisonville Field to two major pipelines in the area. Alaska CBM: We entered into an agreement with Pioneer Oil Company, Inc. dated April 20, 2005, wherein we acquired a 100% working interest, 81% net revenue interest, in 122,174 acres onshore in Cook Inlet, near Anchorage, Alaska. Preliminary log analysis indicates the lease blocks may contain coal bed methane, CBM , reserves as well as conventional accumulations of natural gas in Tertiary sandstones. Please see the glossary on page A-1 for definitions of terms. The coals occur in seams which are commonly 20 feet thick and can be as thick as 70 feet. Accessible onshore areas have 200 to 300 feet of coal shallower than 5,000 feet. Gas content for these coals ranges from 80 to 250 standard cubic feet per ton. We may reduce exploration risk by finding participants to pay most or all of the money expended towards acquisition and initial exploration. Lokern Project: We have a 100% working interest in 1,280 acres over a prospect in Kern County, California. An oil and gas prospect has been identified using reprocessed seismic. Please see the glossary on page A-1 for definitions of terms. Alberta Projects: We, through our wholly-owned subsidiary, GeoPetro Canada Ltd. ( GeoPetro Canada ) have entered into a participation agreement wherein we acquired a 50% non-operated working interest in the Goodwin Prospect, which is located in the Central Alberta Basin, Canada. A total of 12,000 acres can be earned by the Company by the drilling of wells. To date, we have drilled and completed one well in this project. Elsewhere we have a 56.25% working interest in 2,560 leased acres in the central Alberta basin. Bengara (II) PSC: We, through our 12% ownership interest of Continental-GeoPetro (Bengara II) Ltd., a British Virgin Islands corporation ( C-G Bengara ) have a 12% interest in the Bengara (II) PSC Block in East Kalimantan, Indonesia (the Bengara Block ) which covers approximately 900,000 gross (108,000 net) acres. Two wells have been drilled in this block since 1938 and one of these resulted in a natural gas discovery, testing 19.5 MMcf/d together with 600 bbls condensate per day. Please see the glossary on page A-1 for definitions of terms. Elsewhere in the block, a large number of prospects and leads have been identified based primarily on seismic data. GEOPETRO RESOURCES COMPANY (Exact Name of Registrant as specified in its Charter) California 1311 94-3214487 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification Number) One Maritime Plaza, Suite 700 San Francisco, CA 94111 (415) 398-8186 (415) 398-9227-Fax (Address Including Zip Code and Telephone Number Including Area Code of Registrant s Principal Executive Offices) (1) Includes 780,857 shares of common stock issuable upon exercise of warrants. (2) Assumes the sale by the selling stockholders of all the shares of common stock available for resale under this prospectus, except for 780,857 shares of common stock issuable upon exercise of warrants. Stuart J. Doshi President GeoPetro Resources Company One Maritime Plaza, Suite 700 San Francisco, CA 94111 (415) 398-8186 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) SUMMARY CONSOLIDATED FINANCIAL DATA The following table sets forth certain of our summary consolidated financial data for the periods indicated. The data presented below has been derived from our financial statements included elsewhere in this prospectus except for the balance sheet data as of December 31, 2004, 2003 and 2002 and the consolidated statement of operations data for the years ended December 31, 2003 and 2002, which are derived from our audited consolidated financial statements not included in this prospectus. You should read this information together with the consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus and the information under Selected Consolidated Financial Data and Management s Discussion and Analysis of Financial Condition and Results of Operations. Six Months Ended For The Years Ended December 31, June 30, 2007 June 30, 2006 2006 2005 2004 2003 2002 (unaudited) (unaudited) (audited) (audited) (audited) (audited) (audited) Consolidated Statement of Operations: Revenues 4,212,192 3,467,517 6,716,360 7,975,990 5,825,072 2,452,648 21,659 Lease operating expense 846,107 717,929 1,602,932 878,176 780,237 582,889 19,955 General and administrative 1,526,919 1,287,620 2,347,447 1,551,747 1,963,649 1,259,269 856,491 Net profits expense 428,588 360,471 632,708 856,837 579,590 225,869 Impairment expense 38,849 2,038,422 473,496 Depreciation and depletion expense 1,229,870 1,106,162 2,406,612 1,832,693 2,077,004 798,555 5,138 Earnings (loss) from operations 180,708 (4,665 ) (312,188 ) 2,856,537 (1,613,830 ) (887,430 ) (859,925 ) Net income (loss) 56,164 (60,092 ) (482,406 ) 2,640,471 (2,077,615 ) (1,684,692 ) (1,284,480 ) Net income (loss) attributable to common shareholders 56,164 (322,617 ) (1,011,806 ) 2,111,074 (2,606,978 ) (1,943,565 ) (1,299,700 ) Earnings (Loss) per Share: Basic 0.00 (0.01 ) (0.04 ) 0.10 (0.14 ) (0.12 ) (0.09 ) Diluted 0.00 (0.01 ) (0.04 ) 0.09 (0.14 ) (0.12 ) (0.09 ) Weighted Average Number of Common Shares Outstanding: Basic 28,510,691 24,609,367 25,990,868 20,890,841 18,901,607 16,497,898 14,465,177 Diluted 30,897,006 24,609,367 25,990,868 24,001,888 18,901,607 16,497,898 14,465,177 Production Data: Natural gas (Mcf) 1,108,338 1,084,684 2,229,059 1,991,105 2,316,895 1,217,327 14,737 Natural gas (Mcfd) 6,123 5,993 6,107 5,455 6,348 3,335 40 Production Data reduced by net profits interests: Natural gas (Mcf) 969,796 949,099 1,950,427 1,742,217 2,027,283 1,065,161 14,737 Natural gas (Mcfd) 5,358 5,244 5,344 4,773 5,554 2,918 40 Average Sales Prices: Natural gas (per Mcf) 3.80 3.19 3.01 4.01 2.51 2.01 1.47 As of As of December 31, June 30, 2007 2006 2005 2004 2003 2002 (unaudited) (audited) (audited) (audited) (audited) (audited) Balance Sheet Information: Current Assets 3,625,503 2,366,081 1,718,893 1,579,388 2,967,626 832,255 Total Assets 40,560,691 39,061,478 25,014,826 22,771,411 18,875,981 13,652,187 Current liabilities 4,216,018 3,604,342 3,574,466 7,582,377 1,471,248 2,383,725 Long-term liabilities 51,226 48,842 26,641 24,705 5,242,554 4,853,409 Deferred income taxes Accumulated Deficit (10,337,821 ) (10,393,985 ) (9,382,179 ) (11,493,253 ) (8,886,275 ) (6,942,710 ) Copies to: Adam P.Siegman Greene Radovsky Maloney Share & Hennigh LLP Four Embarcadero Center, Suite 4000 San Francisco, CA 94111 Tel: (415) 981-1400 Fax: (415) 777-4961 RISK FACTORS An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this prospectus before making an investment decision. If any of the possible adverse events described below actually occurs, our business, results of operations and financial condition could suffer. Under these circumstances, the market price of our common stock could decline and you could lose all or part of your investment. Risks Related to Our Business As of June 30, 2007, we have capitalized costs totaling $49.7 million as evaluated and unevaluated oil and gas properties, whereas we have generated revenues of only $27,182,262 since January 1, 2003. Since inception, our activities have been primarily related to acquiring and exploring leasehold interests in oil and natural gas properties in Texas, California, Alaska, Alberta, Indonesia and Australia. We incur substantial acquisition and exploration costs and overhead expenses in our operations, and until 2003, excluding minor interest and dividend income, our only significant cash inflows were the recovery of capital invested in projects through sale or other divestitures of interests in oil and gas prospects to industry partners. As a result, we have sustained an accumulated deficit through June 30, 2007 of $10,337,821. Our production activities commenced in May 2003. Since May 2003, over 90% of our revenue has been generated from natural gas sales derived from wells in the Madisonville Field in Texas. It is possible that in the future we will be unable to continue to generate revenues from our sales of natural gas from our Madisonville Field wells because our proved reserves decline as reserves are produced from the wells. The drilling of exploratory oil and natural gas wells is highly speculative and often unproductive. Our participation in future drilling activities to explore, develop and exploit the properties in which we have an interest, or in which we may acquire interests, may be unsuccessful, may fail to generate positive cash flow, and may not enable us to maintain profitability in the future. Approximately 99% of our current revenues are generated by our interest in the Madisonville Project. Delays or interruptions of the Madisonville Project natural gas drilling and production operations including, but not limited to, events beyond our control or the failure of third parties on which we rely to provide key services, could negatively impact our revenues. Approximately 99% of our oil and natural gas revenues for the year ended December 31, 2006 and the six months ended June 30, 2007 were derived from the Madisonville Project. In connection with that project, we have contracted with third parties to provide key services, including: (a) Madisonville Gas Processing, LP ( MGP ), which owns and operates gathering pipelines and a dedicated natural gas treatment plant which we utilize to treat impurities in the Madisonville Project natural gas; and (b) Gateway, which operates a sales pipeline for such natural gas. The failure of MGP or Gateway to perform their contractual obligations to us could impose delays or interruptions in our production operations and prevent us from generating revenues. In addition, events which are beyond our control, or that of Gateway or MGP, could affect our production operations. Such events include, but are not limited to: events referred to as force majeure, such as an act of God, act of a public enemy, war, blockade, public riot, lightning, fire, storm, flood, explosion and any other causes whether of the kind enumerated or otherwise not reasonably within the control of MGP, Gateway or our company. subsurface conditions or formations encountered during the drilling of wells, whether natural or mechanical, including but not limited to blowout, igneous rock, salt, saltwater flow, loss of circulation, loss of hole, abnormal pressures, or any other impenetrable substance or adverse condition, which renders further drilling of a well impossible or impractical. the inability to secure raw materials or equipment, Approximate date of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. o If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o CALCULATION OF REGISTRATION FEE Title of each class of securities to be registered Number of shares to be registered(1) Proposed maximum offering price per share(2) Proposed maximum aggregate offering price Amount of registration fee Common stock, no par value per share 2,783,456 $ 3.99 $ 11,105,989 $ 340.95 transportation accidents, and labor disputes and equipment failures. In excess of 90% of our revenues to date have been derived from sales by MGP to two customers. The loss of one or both these customers could have a material adverse impact on our oil and gas revenues. Approximately 99% of our oil and natural gas revenues for the year ended December 31, 2006 and the six months ended June 30, 2007 were derived from the Madisonville Project. During 2006, and in the current year to date, approximately 99% of our revenues have been derived from sales by MGP to two customers, Atmos Pipeline-Texas, and ETC Katy Pipeline, Ltd. The loss of one of these customers could impact the price we receive for our gas sold due to lessened competition. The loss of both customers could result in a total loss of our revenue. Unless we replace our oil and natural gas reserves, our reserves and production will decline. The volume of production from oil and natural gas properties generally declines as reserves are depleted, with the rate of decline depending on reservoir characteristics. Our proved reserves will decline as reserves are produced from our properties unless we are able to acquire or develop new reserves. The business of exploring for, developing or acquiring reserves is capital intensive. For example, as of June 30, 2007 we have capitalized costs totaling $49.7 million as evaluated and unevaluated oil and gas properties. To the extent cash flow from operations is reduced and external sources of capital become limited or unavailable, our ability to make the necessary capital investment to maintain or expand our asset base of oil and natural gas reserves will be impaired. Even if we are able to raise capital to develop or acquire additional properties, no assurance can be given that our future exploitation and development drilling activities will result in the discovery of any reserves. Our exploration and development drilling activities may not be commercially successful. The drilling of exploratory oil and natural gas wells is expensive, highly speculative and often unproductive. Exploration for oil and natural gas on unproven prospects is expensive, highly speculative and involves a high degree of risk, including the risk that no commercially productive oil or natural gas reservoirs will be encountered. Reserves are dependent on our ability to successfully complete drilling activity on proven prospects. The cost of drilling, completing and operating wells is often uncertain, and drilling operations may be curtailed, delayed or cancelled as a result of a variety of factors, including: unexpected drilling conditions, pressure or irregularities in formations; equipment failures or accidents, adverse weather conditions; compliance with governmental requirements; and shortages or delays in the availability of drilling rigs and the delivery of equipment. Our evaluations of the oil and gas prospects of our properties may be wrong. With the exception of the Madisonville Project, the properties in which we have an interest are prospects in which the presence of oil and natural gas reserves in commercial quantities has not been established. Any decision to engage in exploratory drilling or other activities on any of these properties will be dependent in part on the evaluation of data compiled by petroleum engineers and geologists and obtained through geophysical testing and geological analysis. Reservoir engineering, geophysics and geology are not exact sciences and the results of studies and tests used to make such evaluations are sometimes inconclusive or subject to varying interpretations. As such, there is no certain way to know in advance whether any of our prospects will yield oil and natural gas in commercial quantities. Further, it is possible that we will participate in the drilling of more dry holes than productive wells or that all or substantially all of the wells drilled will be dry holes. The drilling of dry holes on prospects in which we have an interest could adversely affect their values and our decision to undertake further exploration and Acreage and Productive Wells The following table sets forth our ownership interest in undeveloped acreage, developed acreage and productive wells in the areas indicated where we own a working interest as of December 31, 2006. Gross represents the total number of acres or wells in which we own a working interest. Net represents our proportionate working interest resulting from our ownership in gross acres or wells. Productive wells are wells in which we have a working interest and that are capable of producing natural gas or oil. Wells that are completed in more than one producing horizon are counted as one well. Undeveloped Acreage Developed Acreage Producing Wells Non-Producing Wells Gross Net Gross Net Gross Net Gross Net Indonesia 900,000 108,000 Australia(1) 530,896 160,216 2 0.52 Texas 3,383 3,383 1,333 1,333 2 2.00 4 3.02 California 1,280 1,280 Alaska 122,174 122,174 Total 1,557,733 395,053 1,333 1,333 2 2.00 (1) Includes 780,857 shares of common stock issuable upon exercise of warrants and 2,002,599 outstanding shares of common stock. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933 based on the average of the high and low prices of the Registrant s common stock, as reported on The American Stock Exchange on October 4, 2007, in U.S. dollars. The Registrant hereby amends this Registrant Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. development drilling of such prospects. It is not certain or predictable whether, and no assurance can be made that, the wells drilled on the properties in which we have an interest will be productive or, if productive, that we will recover all or any part of our investment in the properties. In sum, our participation in future drilling activities may not be successful and, if unsuccessful, such failure will negatively impact our revenues and have a material adverse effect on our results of operations and financial condition. Our oil and natural gas revenues were $6,716,360 million for the year ended December 31, 2006 and $4,212,192 for the six months ended June 30, 2007. Future revenues could decline from those levels if our future drilling efforts are not successful. Furthermore, as of June 30, 2007 we have capitalized costs totaling $49.7 million as evaluated and unevaluated oil and gas properties. Should our future drilling activities be unsuccessful, we may then be required to record an impairment charge equal to a portion of, or all, of the capitalized costs resulting in an immediate adverse impact on our results of operations and financial position. Our business may be harmed by failures of third party operators on which we rely. Our ability to manage and mitigate the various risks associated with certain of our exploration and operations in Alberta, Canada, and Indonesia is limited since we rely on third parties to operate our projects. We are a non-operating interest owner in our Canadian and Indonesian properties. With respect to our interests outside of the United States, we have entered into agreements with third party operators for the conduct and supervision of drilling, completion and production operations. In the event that commercial quantities of oil and natural gas are discovered on one of our properties, the success of the oil and natural gas operations on that property depends in large measure on whether the operator of the property properly performs its obligations. The failure of such operators and their contractors to perform their services in a proper manner could result in materially adverse consequences to the owners of interests in that particular property, including us. Our percentage share of oil and gas revenues from our Indonesian property is diminished by the terms of our production sharing contract in the Bengara Block. C-G Bengara is subject to a production sharing contract, which means generally that C-G Bengara is entitled to receive, from production proceeds, 100% of expenditures in the block as cost recovery. Once these costs are recovered, C-G Bengara s production share will be reduced to approximately 26.7% of oil produced and 62.5% of all natural gas produced. We are entitled to 12% of C-G Bengara s reduced share of any such production. See the discussion under Properties in this prospectus for more information concerning the production sharing contract. Drilling and completion equipment, services, supplies and personnel are scarce and may not be available when needed, which could significantly disrupt or delay our operations. From time to time, there has been a general shortage of drilling rigs, equipment, supplies and oilfield services in North America and Indonesia, which may intensify with current increased industry activity. In addition, the costs and delivery times of rigs, equipment and supplies have risen. There can be no assurance that sufficient drilling and completion equipment, services and supplies will be available when needed. Shortages could delay our proposed exploration, development drilling, and sales activities, which could have a material adverse effect on our results of operations. Our oil and natural gas revenues were $6.7 million for the year ended December 31, 2006. Future revenues could decline from those levels if we experience delays in our proposed exploration, development drilling, and sales activities. The demand for, and wage rates of, qualified rig crews have risen in the drilling industry due to the increasing number of active rigs in service. If the demand for qualified rig crews continues to rise in the drilling industry, then the oil and gas industry may experience shortages of qualified personnel to operate drilling rigs. This could delay our drilling operations and adversely affect our financial condition and results of operations. Our working interest in properties, and our ability to realize any profits from such properties, will be diminished to the extent that we enter into farmout arrangements with unaffiliated third parties. We have previously entered into, and may in the future enter into, farmout arrangements with third parties willing to drill natural gas and oil wells on leaseholds in which we originally acquired working interests, in exchange for our assignment of part or all of our leasehold interests. As a consequence of these arrangements, our retained interests in properties which are subject to farmout arrangements have been or may be diminished. Our Information contained in this prospectus is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state. Subject to completion, dated October 5, 2007. PROSPECTUS GEOPETRO RESOURCES COMPANY 2,783,456 shares of Common Stock (No Par Value) The Offering: This offering relates to the possible sale, from time to time, by the shareholders listed on page 84 of this prospectus, the selling shareholders, of up to 2,783,456 shares of common stock of GeoPetro Resources Company. The shares of our common stock and securities which are exercisable for shares of our common stock which are being offered by this prospectus were issued to the selling shareholders pursuant to financing transactions. We will not receive any proceeds from sales by selling shareholders. The selling shareholders may sell all or a portion of their shares covered by this prospectus through public or private transactions at fixed prices, at prevailing market prices at the time of sale, at varying prices or negotiated prices, in negotiated transactions, or in trading markets for our common stock. We will bear all costs associated with this registration. Current Trading Market: Our common stock trades on the American Stock Exchange under the symbol GPR . Our common stock is also listed on the Toronto Stock Exchange under the symbol GEP.s . On October 4, 2007, the last reported sale prices for our common stock on the American Stock Exchange and the Toronto Stock Exchange were $3.99 and $4.00, respectively. Investing in our common stock involves a high degree of risk. See Risk Factors Beginning on Page 5. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this prospectus is , 2007 opportunity to realize revenues and profits from properties which are successfully developed under farmout arrangements will be diminished to the extent of our reduced interests. Competition with other oil and natural gas exploration and development drilling companies for viable oil and natural gas properties may limit our success. It is likely that in seeking future property acquisitions, we will compete with companies which have substantially greater financial and management resources. Our competition comes primarily from three sources: (a) those competitors that are seeking oil and gas fields for expansion, further drilling, or increased production through improved engineering techniques; (b) income-seeking entities purchasing a predictable stream of earnings based upon historic production from fields being acquired; and (c) junior companies seeking exploration opportunities in unknown, unproven territories. Our competitors may be able to pay more for productive oil and natural gas properties and may be able to define, evaluate, bid for and purchase a greater number of properties and prospects than we can. Our ability to acquire additional properties in the future will depend upon our ability to conduct efficient operations, evaluate and select suitable properties, implement advanced technologies and consummate transactions in a highly competitive environment. Estimates of oil and natural gas reserves are inherently imprecise. Any material inaccuracies in these reserve estimates or underlying assumptions will affect materially the quantities and present value of our reserves. Estimates of proved oil and natural gas reserves and the future net cash flows attributable to those reserves are prepared by independent petroleum engineers and geologists. There are numerous uncertainties inherent in estimating quantities of proved oil and natural gas reserves and cash flows attributable to such reserves, including factors beyond our control and that of our engineers. Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner. Different reserve engineers may make different estimates of reserves and cash flows based on the same available data. The accuracy of an estimate of quantities of reserves, or of cash flows attributable to such reserves, is a function of the available data, assumptions regarding future oil and natural gas prices and expenditures for future development drilling and exploration activities, and of engineering and geological interpretation and judgment. Additionally, reserves and future cash flows may be subject to material downward or upward revisions, based upon production history, development drilling and exploration activities and prices of oil and natural gas. Actual future production, revenue, taxes, development drilling expenditures, operating expenses, underlying information, quantities of recoverable reserves and the value of cash flows from such reserves may vary significantly from the assumptions and underlying information set forth herein. Competitive pressures may force us to implement new technologies at substantial cost and our limited financial resources may limit our ability to implement such technologies at the same rate as our competitors. The oil and gas industry is characterized by rapid and significant technological advancements and introductions of new products and services utilizing new technologies. Other oil and gas companies may have greater financial, technical and personnel resources that allow them to enjoy technological advantages and may in the future allow them to implement new technologies before we do. There can be no assurance that we will be able to respond to such competitive pressures and implement such technologies on a timely basis or at all. One or more of the technologies currently utilized by us or implemented in the future may become obsolete. We will require additional capital to fund our future activities. Our ability to pursue our business plan may be restricted by our access to additional financing. Until such time as the properties in which we own interests are generating sufficient cash flow to fund planned capital expenditures, we will be required to raise additional capital through the issuance of additional securities or otherwise sell or farm out interests in our oil and natural gas properties to third parties. If and when the properties in which we own interests become productive and have adequate reserves, we may borrow funds to finance our future oil and natural gas operations and exploratory and development drilling activities. We may not be able to raise additional funds in the future from any source or, if such additional funds are made available to us, we may not be able to obtain such additional financing on terms acceptable to us. To the extent such funds are not available from any of those sources, our operations and activities will be limited to those operations and activities we can afford with the funds then available to us. We have committed to a three well drilling program in our Madisonville project to facilitate the expansion of the gas treatment plant. The commitment is not discretionary. While we have fulfilled the commitment to drill the first two wells of the three well commitment, we are further required to commence the drilling of a third well sufficient to test the Smackover Formation (estimated to be encountered at approximately 18,000 feet) on or before September 30, 2008. This well is expected to cost approximately $10 million to drill and complete. We have granted MGP a security interest in the Madisonville Field properties to secure the three well commitment. Subject to events of force majeure, and the availability of suitable drilling rigs, well services, and equipment, our failure to drill this well could result in the loss of our interest in the Madisonville Project. Our larger competitors, by reason of their size and relative financial strength, may be more easily able to access capital markets than us. The volatility in crude oil and natural gas prices could adversely affect our financial results and ability to raise additional capital. Our revenues, cash flows and profitability are substantially dependent on prevailing prices for both oil and natural gas. Decreases in natural gas prices will decrease revenues and cash flows from the Madisonville Project and our other producing properties, if any, and decreases in oil and natural gas prices could deter potential investors from investing in our company and generally impede our ability to raise additional financing to fund our exploration and development drilling activities. Historically, oil and natural gas prices and markets have been volatile, and they are likely to continue to be volatile in the future. Prices for oil and natural gas are subject to wide fluctuations in response to relatively minor changes in the supply of, and demand for, oil and natural gas, market uncertainty and a variety of additional factors that are beyond our control. These factors include, but are not limited to, political conditions in the Middle East and other regions, internal and political decisions of OPEC and other oil and natural gas producing nations to decrease or increase production of crude oil, domestic and foreign supplies of oil and natural gas, consumer demand, weather conditions, domestic and foreign government regulations, transportation costs, the price and availability of alternative fuels and overall economic conditions. Our current operations are particularly exposed to volatility in natural gas prices because a portion of the fees we pay to process natural gas at the Madisonville gas treatment plant is fixed. The sale price of natural gas must be above a minimum price of approximately $3.00 per Mcf at the present time before we earn any net revenues from the sale of natural gas. We are subject to a number of operational risks beyond our control against which we may not have, or be able to obtain insurance. Our operations are subject to the many risks and hazards incident to exploring and drilling for, and producing and transporting, oil and natural gas, including among other risks: blowouts, fires, craterings, pollution and equipment failures that may result in damage to or destruction of wells, producing formations, production facilities and equipment; personal injuries or death due to accidents, human error or acts of God; unavailability of materials and equipment to drill and complete or re-complete wells; unfavorable weather conditions; engineering and construction delays; fluctuations in product markets and prices; proximity and capacity of pipeline, and trucking or termination facilities to our oil and natural gas reserves; hazards resulting from unusual or unexpected geological or environmental conditions; environmental regulations and requirements; accidental leakage of toxic or hazardous materials, such as petroleum liquids or drilling fluids into the environment, remediation and clean-up costs; and political instability and civil unrest, insurrections or disruptions in foreign countries in which some of our interests are located. You should rely only on the information contained in this prospectus. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. The selling shareholders are not making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date. If one or more of these events occurs, we could incur substantial liabilities to third parties or governmental entities, the payment of which could have a material adverse effect on our financial condition and results of operations, or we could lose properties in which we have invested significant sums (totaling $49.7 million) which are capitalized as evaluated and unevaluated oil and gas properties as of June 30, 2007. A loss not covered by insurance could result in substantial expenses to us. We do not insure fully against all business risks either because such insurance is not available or because premium costs are prohibitive. This is a common practice in the oil and gas industry. However, a loss not fully covered by insurance could result in expenses to us and could have a material adverse effect on our financial position and results of operations. Uninsured losses in excess of $1.0 million would be materially adverse. We are subject to extensive government regulations that can change from time to time, compliance with which are costly and could negatively impact our production, operations and financial results. The oil and gas industry is subject to extensive government regulations in the countries in which we operate. Matters subject to regulation include discharge permits for drilling operations, drilling bonds, reports concerning operations, unitization and pooling of properties and taxation. Historically, our costs of complying with these regulations have not exceeded $100,000 per year. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and natural gas wells below actual production capacity in order to conserve supplies of oil and natural gas. We are also subject to changing and extensive tax laws, the effects of which cannot be predicted. Legal requirements are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effects on our operations. Future laws, or existing laws or regulations, as currently interpreted or reinterpreted or changed in the future, could result in increased operating costs, fines and liabilities, in amounts which are unknown at this time, any of which could materially adversely affect our results of operations and financial condition. Our industry is subject to extensive environmental regulation that may limit our operations and negatively impact our production. Extensive national, state, provincial and local environmental laws and regulations in the United States and foreign jurisdictions affect nearly all of our operations. These laws and regulations set various standards regulating certain aspects of health and environmental quality, provide for penalties and other liabilities for the violation of such standards and establish in certain circumstances obligations to remediate current and former facilities and locations where operations are or were conducted. In addition, special provisions may be appropriate or required in environmentally sensitive areas of operation. Environmental legislation may require that we, among other things: acquire permits before commencing drilling; restrict spills, releases or emissions of various substances produced in association with our operations; limit or prohibit drilling activities on protected areas such as wetlands or wilderness areas; take reclamation measures to prevent pollution from former operations; take remedial measures to mitigate pollution from former operations, such as plugging abandoned wells and remediating contaminated soil and groundwater; take remedial measures with respect to property designated as a contaminated site. The cost of any of these actions is presently unknown but is likely to be significant. Compliance with existing or future environmental legislation is unknown but could be substantial. Compliance with such legislation can require significant expenditures and a breach may result in the imposition of fines and penalties. The discharge of oil, natural gas or other pollutants into the air, soil or water may give rise to liabilities to governments and third parties and may require us to incur substantial costs to remedy such discharge. Under these laws and regulations, we could be liable for personal injury, clean-up costs and other environmental and property damages, as well as administrative, civil and criminal penalties. We could be required to cease production on properties if environmental damage occurs. Environmental legislation is evolving in a manner expected to result in stricter standards and enforcement, larger fines and liability and potentially increased capital expenditures and operating costs. Changes in, or enforcement of, environmental laws may result in a curtailment of our production activities, or a material increase in the costs of production, development drilling or exploration, any of which could have a material adverse effect on our financial condition and results of operations or prospects. We are not presently aware of any environmental liabilities or able to predict the ultimate cost of liabilities not yet recognized. We have recorded an asset retirement obligation in connection with the estimated future costs to plug certain wells in our Madisonville Project in Texas upon abandonment totaling approximately $51,226 as of June 30, 2007. Our natural gas deliveries to the Madisonville gas treatment plant may be affected by the demands of Crimson Exploration, Inc. ( Crimson ) and other third parties for access to the plant, and as a result, our access to the plant could be restricted. We are dependent upon the Madisonville gas treatment plant to treat our natural gas. We have committed all natural gas production from our interest in the Madisonville Project to MGP, which has in turn committed to provide treatment capacity of up to 68 MMcf/d for our natural gas. Third parties may seek access to the gas treatment plant through regulatory proceedings, which could restrict our access to the plant, disrupt our production operations and negatively impact our revenues. An example of such a proceeding is the complaint filed by Crimson with the Texas Railroad Commission described under Properties Description of the Properties Texas The Madisonville Gas Treatment Plant and Gathering Facilities. On August 9, 2006, the Texas Railroad Commission issued an order requiring MGP to ratably process, take, transport or purchase natural gas produced by Crimson into the Madisonville gas treatment plant. MGP recently completed its expansion of the capacity of the treatment plant from 18 MMcf/d to 68 MMcf/d and the additional treating capacity at such facilities is currently being phased in. There is no guarantee that we will be able to obtain full access to treatment capacity of up to 68 MMcf/d once the phase-in is completed because, for example, Crimson now has the right to have its natural gas treated at the plant, which may reduce the plant s ability to treat all of our natural gas, unless the plant s capacity is further expanded. Political and/or economic conditions in Indonesia, Canada or the United States could change in manners that negatively affect our operations and prospects in those countries. Our business activities in Indonesia, Canada and the United States are subject to political and economic risks, including: loss of revenue, property and equipment as a result of unforeseen events like expropriation, nationalization, war, terrorist attacks and insurrection; increases in import, export and transportation regulations and tariffs, taxes and governmental royalties; renegotiation of contracts with governmental entities; changes in laws and policies governing operations of foreign-based companies; exchange controls, currency fluctuations and other uncertainties arising out of foreign government sovereignty over international operations; laws and policies affecting foreign trade, taxation and investment; and the possibility of being subject to the exclusive jurisdiction of foreign courts in connection with legal disputes and the possible inability to subject foreign persons to the jurisdiction of courts in the United States. Terrorist attacks could have an adverse effect on our oil and natural gas operations, especially overseas. To date, our operations have not been disrupted by terrorist activity. It is uncertain how terrorist activity will affect us in the future, or what steps, if any, the Indonesian, Canadian or American government may take in response to terrorist activities. The attack on the New York World Trade Center in 2001 and the subsequent wars in Afghanistan and Iraq have increased the likelihood that U.S. citizens and U.S. owned interests may be targeted by terrorist groups operating both in the United States and in foreign countries, especially in Indonesia. If we do not satisfy the work requirements of our Production Sharing Contract ( PSC ), the Indonesian government may terminate all or part of our contracts. Please see the Glossary for a definition of Terms. Our Indonesian PSC requires us and our partners to undertake work by specified dates in order to maintain our oil and natural gas rights. See Properties Description of the Properties Indonesia. We may not be able to satisfy our contractual obligations. If we do not otherwise comply with the work requirements of the PSC, or successfully renegotiate the terms, all or part of our contract may be terminated. If this contract is terminated, we would also lose all of our investment in that overseas prospect. If we forfeit our interest in the contract area, it will be necessary to record an impairment write-down equal to the net capitalized costs recorded for the area forfeited. This could have a material adverse impact on our financial condition and results of future operations in future periods. On September 29, 2006, we sold 70% of our interest in C-G Bengara to CNPC. C-G Bengara owns 100% of the underlying rights in the Indonesian contract area known as the Bengara Block. CNPC has agreed to fund our unmet work commitments in the Bengara Block. As discussed in greater detail under Properties in this prospectus, C-G Bengara is subject to prior work commitments for the ten-year period ended December 3, 2007 requiring total expenditures of $25 million. As of July 31, 2007, C-G Bengara has met approximately $12.8 million of the $25.0 million required expenditures, leaving an approximate $12.2 million shortfall. The applicable governing authority granted a deferral of the prior years commitments until December 2007 and we expect additional deferrals to be granted to December 2008. If the prior and future work commitments are not timely satisfied and if further deferrals of such commitments are not secured, we will need to record an impairment charge equal to the amount of costs capitalized which were approximately $878,865 as of June 30, 2007, and we may lose all of our rights in the Bengara Block. We may not be able to sell our natural gas production in Indonesia, limiting our ability to obtain a return on our investment there. Our Indonesian operations lack a local market for natural gas, and if we produce natural gas in Indonesia, it will most likely have to be transported to an area where there is a demand. If no market for natural gas develops in Indonesia, we may incur costs for transportation. If we are not able to sell our natural gas production at a commercially acceptable price or at all, we may not be able to obtain a return on our investment in our Indonesian property. We could lose our ownership interests in our properties due to a title defect of which we are not presently aware. As is customary in the oil and gas industry, only a perfunctory title examination, if any, is conducted at the time properties believed to be suitable for drilling operations are first acquired. Before starting drilling operations, a more thorough title examination is usually conducted and curative work is performed on known significant title defects. We typically depend upon title opinions prepared at the request of the operator of the property to be drilled. The existence of a title defect on one or more of the properties in which we have an interest could render it worthless and could result in a large expense to our business. Industry standard forms of operating agreements usually provide that the operator of an oil and natural gas property is not to be monetarily liable for loss or impairment of title. The operating agreements to which we are a party provide that, in the event of a monetary loss arising from title failure, the loss shall be borne by all parties in proportion to their interest owned. Our acquisition activities are subject to uncertainties, may not be successful and provide a return to us on our investments. We have grown primarily through acquisitions and intend to continue acquiring undeveloped oil and gas properties. Although we perform a review of the properties proposed to be acquired, such reviews are subject to uncertainties. It generally is not feasible to review in detail every individual property involved in an acquisition. Ordinarily, management review efforts are focused on the higher-valued properties; however, even a detailed review of all properties and records may not reveal existing or potential problems; nor will it permit us to become sufficiently familiar with the properties to assess fully their deficiencies and capabilities. Inspections are not always performed on every well, and potential problems, such as mechanical integrity of equipment and environmental conditions that may require significant remedial expenditures, are not necessarily observable even when an inspection is undertaken. We are dependent upon our key officers and employees and our inability to retain and attract key personnel could significantly hinder our growth strategy and cause our business to fail. While no assurances can be given that our current management resources will enable us to succeed as planned, a loss of one or more of our current directors, officers or key employees could severely and negatively impact our operations and delay or preclude us from achieving our business objectives. Stuart Doshi, David Creel and Chris Steinhauser, the three members of our senior management team, have a combined experience of approximately 100 years in the oil and gas industry. Although we have entered into employment agreements with Messrs. Doshi, Creel and Steinhauser, we could suffer the loss of key individuals for one reason or another at any time in the future. There is no guarantee that we could attract or locate other individuals with similar skills or experience to carry out our business objectives. We maintain key man insurance with respect to our Chief Executive Officer, Stuart Doshi. Some of our directors may become subject to conflicts of interest which could impair their abilities to act in our best interest. Nick DeMare, one of our directors, is a director, officer and/or significant shareholder of other natural resource companies and David Anderson, another one of our directors, is a director and officer of Dundee Securities Corporation, an investment banking firm that was the lead underwriter of our public offering of common stock in Canada and concurrent previous private placement of common shares with qualified institutional buyers in the U.S. Their association with these other companies in the oil and gas business may give rise to conflicts of interest from time to time. For example, they could be presented with business opportunities in their capacities as our directors, which they could, in turn, offer to the other companies for whom they also serve as directors, rather than to us, whose interests might be competitive with ours. Our directors are required by law to act honestly and in good faith with a view to our best interests and to disclose any interest which they may have in any project or opportunity to us; however, their interests in the other companies may affect their judgment and cause such directors to act in a manner that is not necessarily in our best interests. Our directors and officers hold significant positions in our shares and their interests may not always be aligned with those of our other shareholders. As of October 4, 2007 our directors and officers beneficially own 21.4% of our outstanding common stock. See Security Ownership of Certain Beneficial Owners and Management . This shareholding level will allow the directors, officers and certain beneficial owners to have a significant degree of influence on matters that are required to be approved by shareholders, including the election of directors and the approval of significant transactions. The short-term interests of our directors, officers and certain beneficial owners may not always be aligned with the long-term interests of our public shareholders, and vice versa. Because our directors, officers and certain beneficial owners have a significant degree of influence on matters that are required to be approved by our shareholders, they could influence the approval of transactions. Our failure to manage internal or acquisition-based growth may cause operational difficulties and negatively affect our financial performance. We expect to experience internal and/or acquisition-based growth, which may bring many challenges. Growth in the number of employees, sales and operations will place additional pressure on already limited resources and infrastructure. No assurances can be given that we will be able to effectively manage this or future growth. Our growth may place a significant strain on our managerial, operational, financial and other resources. Our success will depend upon our ability to manage our growth effectively which will require that we continue to implement and improve our operational, administrative and financial and accounting systems and controls and continue to expand, train and manage our employee base. Our systems, procedures and controls may not be adequate to support our operations and our management may not be able to achieve the rapid execution necessary to exploit the market for our business model. If we are unable to manage internal and/or acquisition-based growth effectively, our business, results of operations and financial condition will be materially adversely affected. THE OFFERING Common stock that may be offered by the selling shareholders: 2,783,456 shares(1) Common stock to be outstanding immediately after this offering: 31,583,007 shares(2) Use of proceeds: We will not receive any proceeds from the sales of our common stock by the selling shareholders. Risk factors: See
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider in making your investment decision. You should read this summary together with the more detailed information, including our consolidated financial statements and the related notes, elsewhere in this prospectus. You should carefully consider, among other things, the matters discussed in Risk Factors. Unless otherwise indicated, the terms NetSuite, the Company, we, us and our refer to NetSuite Inc. and its subsidiaries. Our Company NetSuite is a leading vendor of on-demand, integrated business management application suites for small and medium-sized businesses. We provide a comprehensive suite of enterprise resource planning, or ERP, customer relationship management, or CRM, and e-commerce capabilities that enables customers to manage their critical back-office, front-office and web operations in a single application. Our suite serves as a single system for running business operations and is targeted at small and medium-sized businesses, or SMBs, as well as divisions of large companies. Our suite is designed to be affordable and easy to use, while delivering functionality and levels of reliability, scalability and security that have typically only been available to large enterprises with substantial information technology resources. We deliver our suite over the Internet as a subscription service using the software-as-a-service or on-demand model. Our revenue has grown from $17.7 million in 2004 to $67.2 million in 2006. For the nine months ended September 30, 2007, we had revenue of $76.8 million. As of September 30, 2007, we had over 5,400 active customers. Industry Background Over the past decade, many large enterprises have transitioned from custom integrations of multiple point software applications to comprehensive, integrated business management suites, such as those offered by Oracle Corporation, or Oracle, and SAP AG, or SAP, as their core business management platforms. SMBs have application software requirements that are similar, in many respects, to large enterprises because their core business processes are substantially the same. According to a 2006 forecast for the CRM market and 2007 forecasts for the ERP and supply chain management, or SCM, markets from Gartner, Inc., companies in North America spent approximately $13.7 billion on ERP, CRM and SCM software applications in 2006, of which SMBs accounted for $4.4 billion, or 32.0%. Gartner projects that SMB spending on these applications will grow 8.7% annually from 2006 to 2010, compared to 5.7% for large businesses. SMBs, which we define as businesses with up to 1,000 employees, are generally less capable than large enterprises of performing the costly, complex and time-consuming integration of multiple point products from one or more vendors. As a result, SMBs can frequently derive greater benefits from a comprehensive business suite. Suites designed for, and broadly adopted by, large enterprises to provide a comprehensive, integrated platform for managing their core business processes, however, generally are not well suited to SMBs due to the cost and complexity of such applications. Recently, SMBs have begun to benefit from the development of the on-demand software-as-a-service, or SaaS, model. SaaS uses the Internet to deliver software applications from a centrally hosted computing facility to end users through a web browser. SaaS eliminates the costs associated with installing and maintaining applications within the customer s information technology infrastructure. As a result, on-demand applications require substantially less initial and ongoing investment in software, hardware and implementation services and lower ongoing support and maintenance, making them more affordable for SMBs. To date, the SaaS model has been applied to a variety of types of business software applications, including CRM, security, accounting, human resources management, messaging and others, and it has been broadly UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents adopted by a wide variety of businesses. IDC estimates worldwide on-demand enterprise software vendor revenues were approximately $3.7 billion in 2006 and that they will grow 32% annually through 2011 to $14.8 billion. While SaaS applications have enabled SMBs to benefit from enterprise-class capabilities, most are still point products that require extensive, costly and time-consuming integration to work with other applications. Until NetSuite, SMBs generally have been unable to purchase a comprehensive business management application suite at an affordable cost that enables them to run their businesses using a single system of record, provides real-time views of their operations and can be readily customized and rapidly implemented. Our Solution Our comprehensive business management application suite is designed to serve as a single system for running a business. All elements of our application suite share the same customer and transaction data, enabling seamless, cross-departmental business process automation and real-time monitoring of core business metrics. In addition, our integrated ERP, CRM and e-commerce capabilities provide users with real-time visibility and appropriate application functionality through dashboards tailored to their particular job function and access rights. Because our offering is delivered over the Internet, it is available wherever a user has Internet access. The key advantages of our application suite to our customers are: One Integrated System for Running a Business. Our integrated business application suite provides the capabilities required to automate the core operations of SMBs and divisions of large companies, enabling companies to create cross-functional business processes; extend access to appropriate customers, partners, suppliers or other relevant constituencies; and efficiently share and disseminate information in real time. Role-Based Application Functionality and Real-Time Business Intelligence. Users access our suite through a role-based user interface, or dashboard, that delivers specific application functionality and information appropriate for each user s job responsibilities in a format familiar to them. On-Demand Delivery Model. We deliver our suite over the Internet, eliminating the need for customers to buy and maintain on-premise hardware and software. Our suite is designed to achieve levels of reliability, scalability and security for our customers that have typically only been available to large enterprises with substantial information technology resources. Low Total Cost of Ownership. Our comprehensive on-demand suite eliminates the costs associated with attempting to integrate disparate applications, significantly reduces software purchase and implementation costs and eliminates ongoing maintenance and upgrade charges. Rapid Implementation. Our comprehensive suite significantly reduces the time and risk associated with implementation as compared to attempting to integrate multiple point products. In addition, we have tailored our offering to the specific needs of selected industries to enable those customers to more rapidly meet their distinct business requirements. Ease of Customization and Configuration. We provide tools that enable configuration by users without software programming expertise as well as customization by more sophisticated users. As new versions of our suite become available, each customer s existing customizations and configurations are maintained with little or no additional effort or expense. AMENDMENT NO. 6 TO FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 Table of Contents Our Strategy Our goal is to enhance our position as a leading vendor of on-demand, integrated business management application suites for SMBs. The key elements of our strategy include: expanding our leadership in on-demand, integrated business suites; tailoring our offering to customers specific industries; growing our customer base and expanding use of our service within existing customers; fostering the continued development of the NetSuite partner network; and addressing the multinational business requirements of SMBs. Auction Process We are conducting this offering using an auction process. We believe allowing open participation in this offering through a technology-enabled auction process aligns with our corporate culture and business mission. In the same way that our software application suite allows companies of all sizes to benefit from capabilities previously only available to large organizations, we are conducting this offering through an auction process to open participation in our initial public offering to all investors, both individual and institutional. The auction process differs from methods that have been traditionally used in most other underwritten initial public offerings in the United States. In particular, we and our underwriters will conduct an auction open to prospective purchasers to determine the initial public offering price and the allocation of shares in the offering. To participate in the auction, investors will submit bids to purchase shares of our common stock through one of our underwriters. An investor may submit bids that specify the number of shares the investor is interested in purchasing and the price the investor is willing to pay. We intend to use the auction to determine a clearing price for the offering, which is the highest price at which all of the shares offered (including shares subject to the underwriters over-allotment option) may be sold to potential investors. We may set the initial public offering price at the clearing price, though we and our underwriters have discretion to set the initial public offering price below the clearing price. All valid bids to purchase shares at or above the initial public offering price will receive an allocation of shares at the initial public offering price. If the number of shares represented by successful bids exceeds the number of shares we and the selling stockholders are offering, then we will allocate the shares among successful bids on a pro rata basis. Please see the section titled Auction Process for a description of how this process will work. Controlled Company Status Lawrence J. Ellison has transferred 31,964,898 shares of our common stock (representing all of the shares formerly held directly by Tako Ventures, an investment entity controlled by Mr. Ellison) to NetSuite Restricted Holdings LLC, or the LLC, a limited liability company formed for the limited purpose of holding the NetSuite shares and funding charitable gifts as and when directed by Mr. Ellison. As of November 30, 2007, those shares represented approximately 61% of our outstanding stock. Mr. Ellison is the Chief Executive Officer, a director and a principal stockholder of Oracle. We have been told that Mr. Ellison made the transfer in view of his position and duties at Oracle, to effectively eliminate his voting control over the election of our directors and certain other matters, to limit the circumstances under which his voting control could be exercised or restored, and to avoid and mitigate potential future conflicts of interest that might otherwise arise. As part of these arrangements, the LLC Operating Agreement contains provisions designed to neutralize, in certain situations, the voting power of the NetSuite shares held by the LLC, which provisions will not lapse or be subject to change while Mr. Ellison is either an officer or director of Oracle, except with the approval of an independent committee of Oracle s board of directors. For a more detailed description of the voting restrictions that apply as part of this arrangement, see the section titled, Certain Relationships and Related Party Transactions Share Transfer by Lawrence J. Ellison. We have filed the LLC Operating Agreement as an exhibit to the registration statement of NetSuite Inc. (Exact name of Registrant as specified in its charter) Table of Contents which this prospectus forms a part. Because a majority of our outstanding common stock will be held by a single stockholder upon the closing of this offering, we qualify for the controlled company exception to the New York Stock Exchange board independence listing standards. We do not expect to utilize this exception, though it is possible that we may choose to do so in the future. Risks Affecting Us Our business is subject to numerous risks, which are highlighted in the section titled Risk Factors immediately following this prospectus summary. These risks represent challenges to the successful implementation of our strategy and to the growth and future profitability of our business. Some of these risks are: we have a history of losses, and we may not achieve profitability in the near future. We experienced a net loss of $35.7 million for 2006 and $20.6 million for the nine months ended September 30, 2007. As of September 30, 2007, our accumulated deficit was $241.6 million; because we provide a suite of on-demand applications that many of our SMB customers use to manage their critical business processes, the market for our service may develop more slowly than we expect; our customers are small and medium-sized businesses, which can be challenging to cost-effectively reach, acquire and retain; our quarterly operating results may fluctuate, and we have a limited operating history; we identified a material weakness in our internal controls relating to the need for additional finance and accounting personnel with skill sets necessary to operate as a public company; we use a single data center to deliver our services. Any disruption of service at this facility could harm our business; and we may become liable to our customers and lose customers if we have defects or disruptions in our service or if we provide poor service. Company Information We were incorporated in the State of California in 1998 and we were reincorporated in the State of Delaware in 2007. Our principal executive offices are located at 2955 Campus Drive, Suite 100, San Mateo, California 94403-2511, and our telephone number is (650) 627-1000. Our website address is www.netsuite.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website as part of this prospectus or in deciding whether to purchase shares of our common stock. NetSuite , NetSuite CRM , NetSuite Customer Center, NetSuite Small Business, NetSuite University, the stylistic in the NetSuite logo, One System, No Limits, SuiteBuilder, SuiteBundler, SuiteFlex, SuiteScript and SuiteTalk are registered or common law trademarks or service marks of NetSuite appearing in this prospectus. This prospectus also contains additional trade names, trademarks and service marks of ours and of other companies. We do not intend our use or display of other companies trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies. Delaware 7372 94-3310471 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 2955 Campus Drive Suite 100 San Mateo, CA 94403-2511 Tel: (650) 627-1000 (Address, including zip code, and telephone number, including area code, of Registrant s principal executive offices) Table of Contents The Offering Common stock offered by us 6,200,000 shares Over-allotment option We and the selling stockholders, which include our chief executive officer, the chairman of our board of directors and chief technology officer, and certain other members of our management, have granted the underwriters an option for a period of 30 days to purchase up to 930,000 additional shares of common stock. If the over-allotment option is exercised in full, the selling stockholders would sell 365,000 shares and we would sell 565,000 shares. Common stock to be outstanding after this offering 59,510,706 shares Use of proceeds from this offering We plan to use the net proceeds of the offering to retire the outstanding balance ($8.0 million as of September 30, 2007) on the secured line of credit with Tako Ventures, LLC, which is an investment entity controlled by Lawrence J. Ellison, for capital expenditures of approximately $10 million to $15 million and for working capital and other general purposes. We may also use a portion of the proceeds from the offering to acquire other businesses, products or technologies. We do not, however, have agreements or commitments for any specific acquisitions at this time. We will not receive any of the proceeds from the shares of common stock sold by the selling stockholders. See the section titled Use of Proceeds. Dividend policy Currently, we do not anticipate paying cash dividends.
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our ordinary shares. You should read the entire prospectus carefully, especially the risks related to our lead product candidate, EUR-1008, our business, our industry and investing in our ordinary shares that we describe under "Risk Factors," and our consolidated financial statements and the related notes included at the end of this prospectus, before deciding to invest in our ordinary shares. Solely for your convenience, this summary and prospectus contain translations of euros into U.S. dollars at a specified rate, or convenience rate of 1.3197 U.S. dollars per euro, as described more fully under "Exchange Rate Information." Unless the context requires otherwise, references to "Eurand," the "Company," "we," "our" and "us" in this prospectus refer to Eurand N.V. and our subsidiaries. Our Company We are a specialty pharmaceutical company that develops, manufactures and commercializes enhanced pharmaceutical and biopharmaceutical products based on our proprietary drug formulation technologies. We utilize these technologies to develop novel products that we believe will have advantages over existing products or will address unmet medical needs. Two Phase III clinical trials have been completed for our lead product candidate, EUR-1008, for the treatment of exocrine pancreatic insufficiency, or EPI. If approved by the U.S. Food and Drug Administration, or FDA, we expect to launch EUR-1008 in 2008. In addition to EUR-1008, we are also developing a number of other products both for our collaboration partners and for our proprietary portfolio. Currently, the most advanced of our pipeline products include three co-development products and one proprietary product candidate. We are an established business with manufacturing and research facilities in the United States, Italy and France. We were formed in 1999 when affiliates of Warburg Pincus LLC and Gear id Faherty, our Chief Executive Officer, acquired the drug delivery business of American Home Products Corporation, now Wyeth. In 2006, we had approximately $109 million (or 83 million) in revenues, primarily from sales of products developed and manufactured by us using our formulation technologies that our licensees commercialize. Our licensees market over 40 different products using our technologies in many of the world's largest pharmaceutical markets. These products generated $92 million (or 70 million) in product sales for us in 2006. The remainder of our revenues consisted of royalties and development fees. We have successfully applied our technologies to drug products in a diverse range of therapeutic areas, including cardiovascular, gastrointestinal, pain, nutrition and respiratory. Our Lead Product Candidate EUR-1008 EUR-1008 is a new porcine-derived proprietary enzyme replacement product for the treatment of exocrine pancreatic insufficiency, a deficiency of digestive enzymes normally produced by the pancreas that can result from a number of diseases, including cystic fibrosis and chronic pancreatitis. This deficiency of enzymes results in poor digestion and reduced absorption of nutrients and, if left untreated, causes malnutrition, which can lead to impaired growth, impaired immune response and shortened life expectancy. Patients with exocrine pancreatic insufficiency are treated with porcine-derived pancreatic enzyme products, or PEPs. According to IMS Health Incorporated, or IMS, PEPs generated approximately $720 million in worldwide sales in 2005. The enzyme profile of porcine-derived PEPs closely mimics that of normal human pancreatic secretions. We believe this similarity Comprehensive loss (3,474 ) Exercise of stock options (Note 14) 1 Cash used in investing activities (1,418 ) (2,469 ) (7,820 ) Financing Activities Increase in long-term debt from banks 2,000 Repayment of long-term debt from banks (6,197 ) (2,725 ) (5,175 ) Net change in short-term borrowings (3,181 ) (21 ) 2,979 Exercise of stock options Italy 51,328 47,372 54,621 20,332 24,313 28,323 United States 22,350 16,015 17,951 18,109 22,129 21,257 France 6,557 6,600 7,698 1,439 1,709 2,026 Other 2,614 2,268 977 2 3 has led to the long clinical use of these products in treating EPI. PEPs have been utilized since before the enactment of the U.S. Federal Food Drug and Cosmetic Act, or FDCA, in 1938, and, consequently, none of the currently available products are marketed under a new drug application, or NDA, approved by the FDA. In April 2004, the FDA mandated that all manufacturers of EPI drug products file a NDA and receive approval for their products by April 2008 or be subject to regulatory action. Pancreatic enzyme products are inherently unstable and thus, to compensate for enzyme degradation over time, all manufacturers currently include an overfill of enzymes in the finished product. As a result, patients receive PEPs with variable and uncertain levels of potency, resulting in an inconsistent therapeutic effect. In April 2006, the FDA issued Guidance for Industry addressing, among other matters, the elimination of overfill, the nature of clinical trials to be conducted to obtain FDA approval for a NDA, the formulation requirements for the product and the need for manufacturers to provide viral inactivation results and full characterization of the enzymes in the product. Because of the complex nature of these products, we believe that some of the companies currently marketing PEPs in the United States may not be able to satisfy the FDA's NDA requirements by April 2008. We believe this will present EUR-1008, if approved, with a significant market opportunity. We have designed EUR-1008 to meet the FDA requirements for pancreatic enzyme products. EUR-1008 is a highly stable formulation containing eight key porcine-derived enzymes and a number of coenzymes and cofactors that we believe are necessary for proper digestion. We believe that due to its novel formulation EUR-1008 will have advantages over the current EPI products, including: Zero overfill. EUR-1008 is formulated to 100% of label-claimed lipase activity, which leads to more consistent and reliable dosing and reduced pill burden for patients. Multiple dosage strengths. Due to variability in dosing requirements, we have developed four different dosage strengths to facilitate dose titration. Elimination of concurrent PPI dosing. Based on the efficacy results from our clinical trials, we believe that EUR-1008 does not require the concurrent administration of proton pump inhibitors, or PPIs, to achieve efficacy. Pediatric formulation. We have developed and clinically tested a low-dose pediatric formulation of EUR-1008 for children under the age of seven. We also believe that EUR-1008 will offer advantages in safety and efficacy over other potential products that are currently in various stages of clinical development. In addition, unlike PEPs that have a long history of use, non-porcine, microbial or synthetic enzyme products will be required to undergo long-term toxicology and pharmacology studies. Additionally, the FDA has stated that developers of PEPs will not be able to file for approval using the abbreviated new drug application, or ANDA, process. As a result, we do not expect generic PEPs to be on the market after April 2008. Based on publicly available materials, our industry knowledge and the fact that we are not aware of any PEP manufacturer that has filed a NDA for a PEP under the recently published FDA guidance, we believe EUR-1008, if approved, will be one of the first PEPs to be FDA-approved under the recently published FDA guidelines for the treatment of EPI. We have also recently filed three patent applications that include claims intended to provide market exclusivity for certain commercial aspects of EUR-1008, including the formulation, the methods of making, the methods of using and the commercial packaging of the product. We evaluated EUR-1008 in cystic fibrosis patients suffering from EPI in two Phase III clinical trials. We designed these Phase III trials for EUR-1008 in collaboration with the SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Therapeutic Development Network of the Cystic Fibrosis Foundation. The pivotal Phase III clinical trial, which was completed in November 2006, evaluated EUR-1008 in patients aged seven and older. The primary endpoint of this trial was to compare the coefficient of fat absorption following oral administration of EUR-1008 versus placebo in patients with EPI. The supportive Phase III trial, which was completed in September 2006, evaluated EUR-1008 in patients under the age of seven. We believe this was the first trial of this size conducted in young children and infants with EPI evaluating a pancreatic replacement therapy. The primary endpoint of this trial was the percentage of "responders", defined as those patients without the presence of excess fat in stools and signs and symptoms of malabsorption. We received the audited results from both of our Phase III clinical trials in January 2007 and the trials successfully met all of their respective defined endpoints. EUR-1008 received a fast track designation from the FDA in January 2007. Subject to review of our protocol by the FDA we expect to commence in the summer of 2007 a bioavailability study required for the submission of our NDA for EUR-1008. We expect the bioavailability study to take approximately six months to complete and to include 12 subjects. Assuming we commence the study in the summer of 2007, we would expect results from the study to be available in December 2007 or early in 2008. We have been advised by the FDA that it has concluded that our request to file our NDA for EUR-1008 as a rolling submission is acceptable, and we intend to commence such rolling submission during the second quarter of 2007. A rolling submission does not necessarily result in a faster approval process. If we receive FDA approval to market EUR-1008 in the United States, we intend to commercialize this product ourselves by establishing a specialty sales and marketing organization that will target the approximately 115 Cystic Fibrosis Treatment Centers and selected gastroenterologists and pulmonologists. We propose to market EUR-1008 under the name of "Zentase ". We currently intend to out-license commercial rights to EUR-1008 in regions outside the United States, including Europe and Japan, by the end of 2008. Other Pipeline Opportunities We are also developing a pipeline of products both for our collaboration partners and for our proprietary portfolio. Currently, the most advanced of our co-development products include: EUR-1047, two orally disintegrating formulations of Benadryl, a leading over-the-counter allergy medication, initially developed with Pfizer Consumer Healthcare, and now developed with McNeil-PPC, Inc., or McNeil, a subsidiary of Johnson & Johnson; EUR-1002, a sustained release formulation of cyclobenzaprine, a muscle relaxant, that will be marketed by ECR Pharmaceuticals, or ECR, and for which the FDA approved a NDA in February 2007; and EUR-1000, a generic to Inderal LA, which is a sustained release formulation of propranolol for the treatment of hypertension and migraines, developed with Reliant Pharmaceuticals. We expect ECR to launch EUR-1002 in 2007. In addition to EUR-1008, the most advanced of our proprietary product candidates is EUR-1025, a once-a-day oral formulation of ondansetron, an anti-emetic prescribed to prevent nausea and vomiting in cancer patients undergoing chemotherapy and radiotherapy. We also AMENDMENT NO. 2 to FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 have several other co-development and proprietary products that are in various earlier stages of research and development. Established Business We currently generate revenues from product sales, royalties on products our licensees commercialize and development fees related to our co-development work. Product sales represent revenues from products developed, manufactured and sold by us to our licensees, who in turn market and distribute the products. Our ability to meet the drug optimization goals of our collaboration partners, coupled with our broad and validated technology platform and multinational research and development infrastructure, has allowed us to attract many of the leading pharmaceutical and biopharmaceutical companies as collaboration partners and licensees. These collaborators and licensees, who include Eisai, GlaxoSmithKline, Novartis, McNeil and sanofi-aventis, currently market products using our technologies in many of the world's largest pharmaceutical markets. Since January 2005, we have signed 18 new co-development agreements with pharmaceutical companies located in the United States, Europe and Japan. The cash flow generated from our existing business funds our research and development programs. Our largest product, based on revenue, is pancreatin, a pancreatic enzyme product that we developed and manufacture and supply to licensees in both the United States and Europe. For the years ended 2004, 2005 and 2006, revenues attributable to pancreatin accounted for 32%, 27% and 28% of our revenues, respectively. We have incurred net losses in each of the last three years primarily as a result of investing in our research and development programs and costs incurred in connection with servicing our debt. In addition to these expenditures, we experienced declines in revenue during 2004 and 2005 for the reasons described in "Operating and Financial Review and Prospects." However, revenues increased in 2006 by approximately 15% as compared to 2005. Product Development Technologies We have a broad portfolio of proprietary drug formulation technologies, including four primary technology platforms and nine distinct technologies. We utilize these technologies to develop and expand our own internal pipeline and to secure additional co-development agreements with pharmaceutical and biopharmaceutical companies. Our four primary technology platforms include: Customized release technologies to reduce daily dosing requirements and time the release of drugs in the body either to increase efficacy or to reduce side effects; Dosage form technologies to increase patient compliance through more convenient dosage forms such as orally disintegrating tablets and taste-masked drugs; Bioavailability enhancement technology to improve drug absorption, resulting in dose reduction and improved onset of action; and Drug conjugation technology to extend drug half-life and to target specific organs or other biological targets such as tumors. Eurand N.V. (Exact name of registrant as specified in its charter) The Netherlands (State or other jurisdiction of incorporation or organization) 2834 (Primary Standard Industrial Classification Code Number) 98-0455653 (I.R.S. Employer Identification No.) Olympic Plaza Fred. Roeskestraat 123 1076 EE Amsterdam The Netherlands +31 20-673-2744 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Eurand, Incorporated 845 Center Drive Vandalia, Ohio 45377-3129 (937) 898-9669 (Name, address, including zip code, and telephone number, including area code, of agent for service) Our Competitive Strengths We believe the following are the key competitive strengths of our business: Broad and late-stage pipeline. Two Phase III clinical trials were recently completed for our lead product candidate, EUR-1008, in which all defined primary and secondary endpoints were met. We expect to commence a rolling submission of a NDA under the FDA's 505(b)(2) procedure in the second quarter of 2007. If approved, we expect to launch EUR-1008 in 2008. We expect that one of our co-development products, EUR-1002, for which the FDA approved a NDA in February 2007, will be launched in 2007. Other products, such as EUR-1047 and EUR-1000, and product candidates, such as EUR-1025, are in advanced stages of development or close to launch. In addition, we have a number of other co-development and proprietary products in earlier stages of research and development. Proven track record in drug development. We have extensive drug development and regulatory experience. Since 2001, four of our products have been approved by the FDA, consisting of three collaborative NDAs and one proprietary ANDA. Broad and validated technology portfolio and research infrastructure. With our four technology platforms, approximately 300 patents and research capabilities in the United States and Italy, we are well positioned to further develop and expand our product pipeline. Relationships with many of the world's leading pharmaceutical companies. We have collaboration partnerships and marketing agreements with many of the world's leading pharmaceutical and biopharmaceutical companies. These relationships facilitate expansion of our product pipeline and the worldwide marketing of our products. Diversified revenue base. We have an established, diversified business that generated revenues of approximately $109 million (or 83 million) in 2006. The cash flow generated by our marketing and collaboration partnerships provides us with financial resources to internally fund our development and commercialization programs and maintain our research and manufacturing capabilities. Since 2000, we have invested over $80 million in our property, plant and equipment. Multinational manufacturing capabilities. With facilities in the United States, Italy and France, we are well positioned to supply the global pharmaceutical market. For many years, we have been one of the largest manufacturers and suppliers of currently marketed PEPs in the United States. We believe our years of experience in PEP development and manufacturing represent a competitive advantage in our development and commercialization of EUR-1008 in the United States. Experienced management team. Our senior management team has an average of more than 20 years of experience in the pharmaceutical industry. Through experience gained in many different countries and companies around the world, our management has a deep knowledge and understanding of the industry and a proven track record in product development, registration, manufacturing and marketing. Our Strategy Our objective is to be a leader in the development, manufacturing and commercialization of innovative specialty pharmaceutical and biopharmaceutical products. The primary components of our strategy include the following: Establish a U.S. specialty sales and marketing organization for EUR-1008; Continue to build and develop our product pipeline; Copies to: Steven J. Gartner, Esq. Mark A. Cognetti, Esq. Willkie Farr & Gallagher LLP 787 Seventh Avenue New York, New York 10019 (212) 728-8000 Kris F. Heinzelman, Esq. LizabethAnn R. Eisen, Esq. Cravath, Swaine & Moore LLP 825 Eighth Avenue New York, New York 10019-7475 (212) 474-1000 Enter into additional collaboration partnerships; and Acquire additional businesses, products and technologies. Recent Developments As of the date of this prospectus, we preliminarily estimate that for the three months ended March 31, 2007 our revenues will be between 21.3 million (or $28.1 million) and 22.3 million (or $29.4 million). The midpoint of this range, 21.8 million (or $28.8 million), at the average rate of the three months ended March 31, 2006, corresponds to approximately 22.9 million (or $30.2 million), which would represent an increase of approximately 8% as compared to revenues of 21.2 million (or $28.0 million) for the three months ended March 31, 2006. However, the increase is negatively affected by changes in foreign exchange rates equivalent to approximately 5% of revenues caused by a weakening of the U.S. dollar with respect to the euro for the three months ended March 31, 2007 compared to the same period in 2006. Taking into account the change in foreign exchange rates, the increase is approximately 3%. The expected increase in revenues for the three months ended March 31, 2007 as compared to March 31, 2006 revenues is primarily due to increased product sales and development fees. We preliminarily estimate that revenue for the three months ended March 31, 2007 attributable to product sales will have increased approximately 1% to 4% as compared to the same time period in 2006. In addition, we preliminarily estimate that revenue attributable to development fees will have increased approximately 8% to 12% in the three months ended March 31, 2007 as compared to 2006, primarily due to favorable progress of our co-development projects. These percentage increases include the negative foreign exchange effect mentioned above. These are preliminary management estimates and are subject to further review. Accordingly, our actual revenues and operating income for the three months ended March 31, 2007 could differ from our estimates, and any such difference could be significant. We are currently performing our internal review procedures. You should consider this additional information in conjunction with the audited consolidated financial statements for the three-year period ended December 31, 2006, as well as "Risk Factors," "Forward-Looking Statements," "Selected Financial Data," "Operating and Financial Review and Prospects" and the other financial information included elsewhere in this prospectus. Risks Related to Our Business We are subject to certain risks related to our lead product candidate, EUR-1008, our business, our industry and this offering. The risks set forth under the section entitled "Risk Factors" beginning on page 17 of this prospectus reflect risks and uncertainties that could significantly and adversely affect our business, prospects, financial condition, operating results and growth strategy. In summary, significant risks related to our business include: our ability to achieve and sustain operating profitability; delays in obtaining, or a failure to obtain and maintain, regulatory approval for our product candidates, including our lead product candidate, EUR-1008; the possibility that the FDA may not remove existing PEPs from the U.S. market that do not receive approval for NDAs by the April 2008 deadline; our ability to commercialize EUR-1008 and effectively develop our sales, marketing and distribution capabilities; our ability to continue to successfully manufacture our existing products; Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. our ability to effectively maintain existing collaboration partnerships and to establish new collaboration partnerships; our ability to effectively maintain existing licensing relationships and establish new licensing relationships; the expense, time and uncertainty involved in the development of our products and product candidates, some or all of which may never reach the regulatory approval or commercialization stage; our reliance on collaboration partners, whose actions we cannot control, to obtain and maintain regulatory approval for our products and product candidates, and to commercialize such products; our ability to compete in the pharmaceutical industry; and our ability to maintain and protect our proprietary intellectual property assets. In
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before buying shares in this offering. Therefore, you should read this entire prospectus carefully, including the Risk Factors section beginning on page 9 and our consolidated financial statements and the related notes. Unless the context requires otherwise, the words we, us, our and Intellon refer to Intellon Corporation and its consolidated subsidiaries. Intellon Corporation Overview We are a leading fabless semiconductor company that designs and sells integrated circuits (ICs) for high-speed communications over existing electrical wiring. Our ICs enable home connectivity, which is the sharing and moving of content among personal computers and other consumer electronics products in the home. For example, products containing our ICs allow consumers to share video content that has been downloaded to a personal computer from the Internet with a television in another room. Consumer demand for broadband services and the proliferation of digital video, audio and data content are driving the rapidly growing market for home connectivity. We believe our solutions are particularly well-suited to address the challenges of sharing entertainment content throughout the home. Products using our ICs are easy to install and use, and deliver connectivity through electrical outlets across the home. Our newest ICs also meet the performance demands required for the delivery of high-definition video content. Our largest market is the digital home, which we define as a home enabled with high-speed connectivity among devices such as personal computers and consumer electronics products. In the digital home, our ICs are used in both powerline-to-Ethernet adapters, which can be used to connect products having Ethernet ports, and in embedded products, where our ICs are incorporated directly into the product. To date, most of our HomePlug IC products have been used in powerline-to-Ethernet adapters to provide connectivity between broadband modems or routers and personal computers, set-top boxes, gaming consoles and other electronic products, through the existing electrical wiring within a home. We also sell our ICs for use in powerline communications applications in electric utility and other commercial markets. In the utility market, our ICs enable various smart grid applications, which help utilities monitor and manage in-home electricity consumption during peak periods. In the commercial market, our ICs enable the distribution of broadband services over existing electrical wiring and coaxial cable to individual units within apartment buildings and other multiple dwelling units. We believe we are a leader in powerline communications technology, which uses existing electrical wiring as its network medium. We developed and patented the baseline technology behind the initial standard adopted by the HomePlug Powerline Alliance, a global industry group formed to create and promote standards for powerline communications. We introduced the first HomePlug-based IC in 2001, and have since developed several new generations of HomePlug-based ICs. In 2006, we introduced the first HomePlug AV-based IC, which can deliver the quality of service required to support reliable, uninterrupted distribution of standard- and high-definition video among personal computers and consumer electronics products. Our HomePlug-based ICs are based on open technology standards that are designed to enable SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents communication among products from different manufacturers. We have also developed proprietary features and functionality beyond the HomePlug standards, which are designed to better meet specific customer and market requirements. Our ICs are incorporated into third-party products for sale to retail consumers and service providers. Service providers use our HomePlug-based ICs to provide in-home connectivity for a variety of services, including Internet Protocol Television (IPTV) and broadband distribution as well as movies-on-demand. We sell our ICs directly to original equipment manufacturers (OEMs) and service providers or through original design manufacturers (ODMs) and distributors. Our ICs are currently incorporated into products by over 50 OEMs and used by more than 40 service providers worldwide. As of September 30, 2007, we had shipped more than 19.5 million powerline communications ICs, including over 12.6 million HomePlug-based ICs. We shipped over 5.3 million powerline communications ICs in 2006, an 87% increase over 2005 shipments of 2.9 million powerline communications ICs. Our revenue grew to $33.7 million for 2006 from $16.6 million for 2005 and to $36.6 million for the nine months ended September 30, 2007 from $24.8 million for the nine months ended September 30, 2006. HomePlug-based ICs represented approximately 94% of our revenue for the nine months ended September 30, 2007. We incurred net losses of $7.8 million for 2006 and $4.4 million for the nine months ended September 30, 2007, and our accumulated deficit as of September 30, 2007 was $133.7 million. Our Markets We believe we are a leader in our largest and primary market, the digital home, with significant opportunities in the electric utility and commercial markets. In the digital home, the convergence of personal computers and consumer electronics products is driving an increasing need for reliable transmission capacity, known as bandwidth or throughput. Although wireless technologies such as wireless local area networks, or Wi-Fi LANs, facilitate some aspects of home networking including laptop mobility, we believe that these technologies have limitations and that an additional wired network technology is needed to handle the growing and more demanding multi-media connectivity requirements of the digital home. The market for home networking and audio/video connectivity in the digital home is experiencing rapid growth driven by the following trends: Increased penetration and use of broadband access across the home and improvements in cable modem and digital subscriber line (DSL) technologies; Growing demand for high-definition video through the introduction of high-definition television (HDTV) technology, digital video recorders (DVRs), set-top boxes and service provider programming; and Convergence of personal computers and consumer electronics products driving the need for Internet sharing and audio/video connectivity in the home. These trends create challenges that providers of home networking technologies must address. Consumers want home connectivity solutions that are easy to install, reliable and simple to use. We believe consumers also expect solutions that avoid the cost and inconvenience of installing new wires. In addition, consumers want home connectivity solutions that work reliably across the home, rather than just in limited areas. Wi-Fi has been the predominant technology to address these needs; however, using it can be challenging because Amendment No. 7 to FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 Table of Contents of range limitations and interference from electrical devices in the home. The proliferation of new media devices and applications within the home has also increased the quality of service requirements consumers expect, which we believe cannot be satisfied with wireless technology. In the electric utility market, companies seek technology solutions that enable them to increase operating efficiencies, decrease capital expenditures and increase revenue. In the commercial markets, service providers seek more cost-effective ways to distribute content and services within apartment buildings and other multiple dwelling units (MDUs). Customers in the trucking industry require solutions to monitor tractor-trailer truck anti-lock brake systems, a function mandated by the U.S. Department of Transportation. Our Solutions We believe our ICs are well-suited to address the rapid growth and challenges of digital home connectivity and offer advantages relative to other wireline and wireless connectivity solutions. For example, powerline-to-Wi-Fi adapters containing our ICs can also be used to create hybrid networks to deliver mobile broadband access to rooms in a house that are not well-served by the wireless signal. Our ICs are used in both powerline adapters, which are add-on accessories that provide powerline connectivity to other products, and embedded products, where the IC is incorporated directly into an end-user product such as a set-top box or home gateway. Our ICs are designed to provide effective solutions to the challenges in the electric utility market and other commercial markets. Our HomePlug-based ICs enable electric utilities to monitor real-time electricity consumption in their customers homes and send signals to limit use of certain appliances during peak demand periods. Our ICs also enable electric utilities to identify outages more quickly and schedule repairs on a preventative basis. Further, our ICs are used to provide No New Wires communications in the commercial market to distribute Internet, video-on-demand and other services within MDUs. In addition, our ICs provide anti-lock brake system monitoring by communicating over electrical wires between a tractor and a trailer. We believe that the following competitive strengths will enable us to maintain a leading position in the market for powerline communications ICs: Experience in Powerline Communications. With over 15 years of experience in powerline communications, we have achieved a significant first-mover advantage and are the first semiconductor company to ship ICs based on several industry specifications, including the Consumer Electronics Bus (CEBus ) powerline specification, the HomePlug 1.0 specification and the HomePlug AV specification. Leadership in Setting Powerline Standards. We are a founder and current contributor member of the HomePlug Powerline Alliance, a global industry group formed to create and promote standards for powerline communications in and to the home. We invented and patented the baseline technology for the HomePlug 1.0 standard, and we were a major contributor to the baseline technology for the HomePlug AV standard. Technology Advantage. We have a growing intellectual property portfolio, with 28 issued U.S. patents and 26 pending U.S. patents, with foreign counterparts in some jurisdictions. We have also developed and added proprietary extensions and special features to some of our products to provide feature and performance advantages. INTELLON CORPORATION (Exact name of Registrant as specified in its charter) Table of Contents Strong Business Relationships. We have established business relationships with over 50 companies that build or sell products using our ICs, as well as with more than 40 service providers that use products containing our ICs in their customer deployments. Breadth of HomePlug Products. We are the only semiconductor company to offer a line of three different HomePlug-based ICs targeted at different price/performance points. Our broad product offering enables us to migrate customers to higher performance ICs as their bandwidth and application requirements increase. Our Strategy Our objective is to extend our leadership in powerline communications technology and to expand our markets over time to other wireline media. We are pursuing the following strategies to achieve this objective: Extend Our Technology Advantage. We have been a leader in developing the HomePlug powerline standards and proprietary extensions to these specifications. We intend to extend our leadership by continuing to invest in research and development that enhances our technology and broadens our connectivity capabilities over other home networking media, including coaxial cable and telephone wiring. Increase Our Penetration of the Digital Home Market. We believe there is opportunity for significant increased adoption of powerline communications, and we intend to continue to increase our penetration of the digital home market by delivering innovative, easy-to-use and cost-effective products. Increase Our Penetration of Other Markets. We believe there is significant demand for smart grid functionality from electric utility companies and significant opportunity to deliver broadband service to MDUs. We intend to expand our market share by increasing awareness among these target markets. Promote HomePlug Standards and the Intellon Brand. We intend to increase the awareness, promotion and use of powerline communications, HomePlug standards and the Intellon brand through our own activities as well as by working together with the HomePlug Powerline Alliance, our customers and our strategic partners. Drive Continued Integration and Price/Performance. We plan to reduce the total solution cost and increase the performance of our products and may decide to combine our powerline communications technology with other intellectual property to create lower-cost, more fully-integrated solutions. Risks Related to Our Business Our business is subject to numerous risks and uncertainties, as more fully described under Risk Factors beginning on page 9, which you should carefully consider prior to deciding whether to invest in our common stock. For example: We have incurred substantial losses in the past, and we anticipate additional future losses. We have sustained losses and have not achieved profitability on a quarterly or annual basis. If we fail to increase revenue or manage our expenses, we may not achieve or sustain profitability in the future. DELAWARE 3674 59-2744155 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 5100 West Silver Springs Boulevard Ocala, Florida 34482 (352) 237-7416 (Address, including zip code, and telephone number, including area code, of Registrant s principal executive offices) Table of Contents We have grown rapidly and if we fail to manage our growth effectively, our business will suffer. Our growth has placed, and any future growth will continue to place, a significant strain on our management, personnel, systems and financial resources. If we expand our business too rapidly in anticipation of increased demand for our products and this demand does not materialize at the rate we expect, our business could be harmed. We face significant competition and may be unsuccessful against current and future competitors. The markets for ICs generally, and ICs for powerline communications, in particular, are intensely competitive. We expect competition to increase and intensify as more and larger IC manufacturers enter our markets, which could result in price pressure, reduced profitability and loss of market share. We are subject to order and shipment uncertainties, and differences in our estimates of customer demand and product mix from actual results could negatively impact our inventory levels, sales and operating results. We have limited visibility into the future customer demand and product mix that our customers will require. Because of this limited visibility, our forecasts of customer demand may be materially different from actual customer demand. If such material differences were to occur they could result in either excess inventory or product shortages and may also lead to revenue and margin forecasts above those we were actually able to achieve. If we fail to develop and introduce new and enhanced products that achieve market acceptance in a timely and cost-effective manner, our operating results and competitive position will be harmed. Our markets are characterized by rapidly changing technology, evolving and competing industry standards, changing customer needs and intense competition. If our HomePlug-based ICs or our other new and enhanced products do not achieve market acceptance, our business could be materially adversely affected. The average selling price of our products will decrease over their product life cycle. If the selling price reductions are greater than we expect, or if we are unable to effectively offset average selling price erosion, our results of operations may be adversely affected. We believe that we will be required to continue to reduce the average unit prices of our powerline communications products due to a number of factors. If the cost of our ICs increases the retail cost of our customer s product to an unacceptable level, the customer will not add a powerline communications solution to the product. A reduction in the average selling price to one of our customers could force us to lower our average selling price to other customers. Company Information We were founded and incorporated in the State of Florida in 1989. We reincorporated in the State of Delaware in June 2003. Our principal offices are located at 5100 West Silver Springs Boulevard, Ocala, Florida 34482. Our telephone number is (352) 237-7416. You can access our Web site at www.intellon.com. Information contained on our Web site is not part of this prospectus and is not incorporated in this prospectus by reference. We have seven registered trademarks including: Intellon, No New Wires, PLC4Trucks, PLC4Trucks and Design, PowerPacket, Spread Spectrum Carrier and SSC. Charles E. Harris Chief Executive Officer and Chairman of the Board of Directors Intellon Corporation 5100 West Silver Springs Boulevard Ocala, Florida 34482 (352) 237-7416 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents The Offering Total common stock offered 7,500,000 shares Common stock to be outstanding after this offering 29,945,227 shares Use of proceeds We intend to use the net proceeds from this offering for working capital, for capital expenditures and for other general corporate purposes. We may also use a portion of our net proceeds to fund potential acquisitions. See Use of Proceeds. Proposed NASDAQ Global Market symbol ITLN
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information, including the discussion of Risk Factors beginning on page 8 and our financial statements and related notes beginning on page F-1, appearing elsewhere throughout this prospectus. We urge you to read this entire prospectus carefully before deciding whether to invest in the common shares offered hereby.
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+S-1/A 1 v28530a5sv1za.htm AMENDMENT TO FORM S-1 sv1za Table of Contents As filed with the Securities and Exchange Commission on July 24, 2007 Registration No. 333-142646 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 5 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ImaRx Therapeutics, Inc. (Exact Name of Registrant as Specified in Its Charter) Delaware 2834 86-0974730 (State or Other Jurisdiction of Incorporation or Organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 1635 East 18th Street Tucson, AZ 85719 (520) 770-1259 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant s Principal Executive Offices) Bradford A. Zakes 1635 East 18th Street Tucson, AZ 85719 (520) 770-1259 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) Copies to: John M. Steel, Esq. Jody R. Samuels, Esq. Mark F. Hoffman, Esq. Benjamin M. Alexander, Esq. Heidi M. Drivdahl, Esq. Richardson Patel LLP DLA Piper US LLP 405 Lexington Avenue, 26th Floor 701 Fifth Avenue, Suite 7000 New York, NY 10174 Seattle, WA 98104-7044 (212) 907-6686 (206) 839-4800 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. CALCULATION OF REGISTRATION FEE Proposed Maximum Title of Each Class of Number of Shares Offering Price Proposed Maximum Amount of Securities to be Registered to be Registered per Share Aggregate Offering Price(1) Registration Fee(3) Common Stock, par value $0.0001 per share 3,450,000(2) $5.00 $17,250,000 $529.58 (1) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933. (2) Represents 3,450,000 shares of the registrant s common stock being offered pursuant to the registrant s initial public offering, including 450,000 shares subject to the underwriters over-allotment option. (3) A registration fee of $8,025 has been paid previously by ImaRx Therapeutics, Inc. on May 19, 2006 in connection with Registration No. 333-134311. Pursuant to Rule 457(p), such previous filing fee offsets the filing fee due herewith. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. Table of Contents Summary You should read the entire prospectus carefully before deciding to invest in shares of our common stock. ImaRx Therapeutics, Inc. Overview We are a biopharmaceutical company developing and commercializing therapies for vascular disorders. Our research and development efforts are focused on therapies for stroke and other vascular disorders, using our proprietary microbubble technology to treat vascular occlusions, or blood vessel blockages, as well as the resulting ischemia, which is tissue damage caused by a reduced supply of oxygen. Our commercialization efforts are currently focused on our product approved by the U.S. Food and Drug Administration, or FDA, for the treatment of acute massive pulmonary embolism, or blood clots in the lungs. Over eight million people in the U.S. are afflicted each year with complications related to blood clots. Approximately 700,000 adults in the U.S., or one every 45 seconds, are afflicted with, and 150,000 die as a result of, some form of stroke each year. Stroke is currently the third leading cause of death, and the leading cause of disability, in the United States. Approximately three million Americans are currently disabled from stroke. The American Stroke Association estimates that approximately $62.7 billion will be spent in the U.S. in 2007 for stroke-related medical costs and disability. The vast majority of strokes, approximately 87% according to the American Stroke Association, are ischemic strokes, meaning that they are caused by blood clots, while the remainder are the more deadly hemorrhagic strokes caused by bleeding in the brain. Currently available treatment options for ischemic stroke are subject to significant therapeutic limitations. For example, the most widely used treatment for ischemic stroke is a clot-dissolving, or thrombolytic, drug that can be administered only during a narrow time window and poses a risk of bleeding, resulting in 6% or less of ischemic stroke patients receiving such treatment. To facilitate increased administration of stroke therapies, in 2005 the Centers for Medicare and Medicaid Services, or CMS, responded to requests by the American Stroke Association and related groups for higher reimbursement amounts for ischemic stroke patients treated with a thrombolytic drug by approximately doubling the amount of reimbursement provided for such treatment to $11,578 per patient. In addition to the brain and the lungs, blood clots can block blood flow and cause damage to other tissues in the body such as the heart, in the case of coronary arterial disease, and the legs and other extremities, in the case of peripheral vascular disease. We believe our development and research stage products may address significant unmet medical needs not only for stroke but also for clot-induced damage in tissues other than the brain. Our Commercial and Development Stage Products The following table summarizes the status of our commercial product and development stage product candidates: Product or Candidate Product Elements Indication Development Status SonoLysistm+tPA therapy MRX-801 microbubbles Ultrasound tPA Ischemic stroke Phase I/II clinical trial in progress SonoLysis therapy MRX-801 microbubbles Ischemic stroke Preclinical Ultrasound Abbokinase Urokinase Acute massive pulmonary embolism Approved for marketing Table of Contents SonoLysis Program. Our SonoLysis program is focused on the development of two product candidates that involve the administration of our proprietary MRX-801 microbubbles and ultrasound, with or without a thrombolytic drug, to break up blood clots and restore blood flow to oxygen deprived tissues. Our MRX-801 microbubbles are a proprietary formulation of a lipid shell encapsulating an inert biocompatible gas. We believe the sub-micron size of our MRX-801 microbubbles allows them to penetrate a blood clot, so that when ultrasound is applied their expansion and contraction, or cavitation, can break the clot into very small particles. We believe that these product candidates have the potential to treat a broad variety of vascular disorders associated with blood clots. Our initial therapeutic focus for our SonoLysis program is ischemic stroke. The only FDA approved drug for the treatment of ischemic stroke is the thrombolytic drug alteplase, or tPA. The FDA has restricted tPA s use to patients who are able to begin treatment within three hours of onset of ischemic stroke symptoms and who do not have certain risk factors for bleeding, such as recent surgery or taking medications that prevent clotting. According to Datamonitor, approximately 23% of ischemic stroke patients arrive at a hospital within three hours of onset of symptoms. However, due to the three-hour window for treatment and other limitations, only 1.6% to 2.7% of patients with ischemic stroke in community hospitals, and only 4.1% to 6.3% in academic hospitals or specialized stroke centers are treated with a thrombolytic therapy. Our two SonoLysis product candidates being developed as potential treatments for ischemic stroke are further described below: SonoLysis+tPA therapy involves the administration of our proprietary MRX-801 microbubbles and ultrasound in conjunction with tPA. We believe that this therapeutic approach incorporates two complementary mechanisms of action, mechanical and enzymatic, that together can reduce the time required to dissolve a blood clot and help ensure more rapid and complete restoration of blood flow to at risk brain tissues in patients with ischemic stroke. We are conducting a Phase I/II dose-escalation clinical trial evaluating SonoLysis+tPA therapy in patients with ischemic stroke. We initiated this trial in January 2007, and intend to enroll a total of 72 patients in various medical centers in the United States and Europe. We anticipate enrollment for this trial will be completed in the first half of 2008 and intend to initiate a Phase II study following completion of the ongoing Phase I/II study. We estimate that if approved by the FDA, over 90,000 ischemic stroke patients in the U.S. could be eligible for SonoLysis+tPA therapy annually. SonoLysis therapy involves administration of our MRX-801 microbubbles with ultrasound, but without the administration of a thrombolytic drug. Because SonoLysis therapy does not involve use of a thrombolytic drug and its associated risk of bleeding, we believe SonoLysis therapy may offer advantages over existing treatments for ischemic stroke, including extending the treatment window beyond three hours from onset of symptoms and broadening treatment availability to patients for whom thrombolytic drugs are contraindicated due to risk of bleeding. We have not yet conducted any clinical trials using our proprietary MRX-801 microbubbles with ultrasound to treat blood clot indications without a thrombolytic drug. We are conducting and intend to conduct additional preclinical studies of SonoLysis therapy through the first half of 2008. We expect to initiate a Phase II study to treat patients with ischemic stroke following completion of our SonoLysis+tPA therapy Phase I/II clinical trial. Because of the preclinical data package as well as our ongoing Phase I/II clinical trial evaluating SonoLysis+tPA therapy in patients with ischemic stroke, we believe no Phase I study will be required prior to initiating the Phase II study for SonoLysis therapy. We estimate that if approved by the FDA, over 200,000 ischemic stroke patients in the U.S. could be eligible for SonoLysis therapy annually. Abbokinase. Our commercially available urokinase product, which we market as Abbokinase, is a thrombolytic drug. Urokinase is a natural human protein primarily produced in the kidneys that stimulates the body s natural clot-dissolving processes. Abbokinase is FDA approved and marketed for the treatment of acute massive pulmonary embolism. Abbokinase has been administered to over four million patients, and we estimate that approximately 400 acute care hospitals in the U.S. include Abbokinase on their pharmacy formulary today. We acquired Abbokinase, including approximately a four-year supply of inventory, from Abbott Laboratories in April 2006, and began selling Abbokinase in October 2006. We believe Abbokinase sales will provide us with near-term revenue and an opportunity to form relationships with vascular physicians and acute care institutions that regularly administer blood clot therapies. Of the Abbokinase vials that we Table of Contents Table of Contents expect hospitals to purchase, approximately 64% as of March 31, 2007 will no longer be saleable after October 2007 based on their current expiration dates. All of these vials are currently unlabeled and therefore eligible for expiration date extension. In order to facilitate obtaining an extension of current expiration dates, we intend to continue the stability testing program started by Abbott Laboratories, which has been ongoing for over four years. Based on the testing to date, which has shown that the product changes very little from year to year, we believe it is probable that the stability data will support extension of the inventory expiration dates. In connection with our Abbokinase acquisition, we issued a $15.0 million non-recourse promissory note that matures in December 2007. If we are unable to satisfy this debt obligation when due, Abbott Laboratories will have the right to reclaim our remaining inventory of Abbokinase, along with a portion of the cash we have received from our sales of Abbokinase. In April 2007 we sold approximately $9.0 million of Abbokinase, net of discounts and fees, to two of our primary wholesalers. As of June 30, 2007, we had received aggregate net proceeds of approximately $13.8 million from sales of Abbokinase to our wholesalers and customers, of which approximately $4.2 million has been placed into an escrow account as security for repayment of our $15.0 million non-recourse promissory note due in December 2007. If the escrowed amount were to be applied to the outstanding balance of principal and accrued interest on that note, the remaining balance due under the note would be approximately $11.9 million as of June 30, 2007. Our Research Stage Product Candidates The following table summarizes the status of our research stage product candidates: Research Product Candidate Product Elements Indication(s) Status SonoLysis therapy MRX-801 microbubbles Ultrasound Ischemic stroke in pre- hospital setting Preclinical SonoLysis+tPA therapy MRX-801 microbubbles Ultrasound tPA Myocardial infarction Peripheral arterial occlusive disease Deep vein thrombosis Preclinical Preclinical Preclinical NanO2tm MRX-804 emulsion/microbubbles Hemorrhagic shock Neuroprotection for ischemic stroke Preclinical Research Targeted SonoLysis therapy MRX-802 targeted microbubbles Myocardial infarction and other vascular clots Research Targeted drug delivery MRX-803 targeted drug delivery microbubbles Angiogenic tumors Research Additional SonoLysis Opportunities. We believe SonoLysis therapy may be suitable for administration for ischemic stroke in an ambulance before arriving at a hospital because it does not involve use of a thrombolytic drug and its associated risk of bleeding. To pursue an ambulance-based ischemic stroke treatment, we would be required to show either that hemorrhage can be ruled out in an ambulance setting, or that SonoLysis therapy has no detrimental effect on a hemorrhagic stroke. Additionally, we believe that the ability of our SonoLysis+tPA therapy to reduce the time required to dissolve a blood clot could make this therapy suitable for use in treating a broad variety of vascular disorders beyond ischemic stroke. For example, we believe SonoLysis+tPA therapy could potentially enable more rapid treatment of recently formed acute clots, such as those that cause myocardial infarction, or heart attack. We also believe SonoLysis+tPA therapy has the potential to treat more established sub-acute and chronic clots, such as those in peripheral vascular indications that cannot be effectively treated with thrombolytic therapy alone. Other Research Stage Opportunities. We are exploring a number of potential future product development opportunities based on our microbubble technology, including: Oxygen Delivery. We are investigating the potential use of our proprietary MRX-804 emulsion/microbubbles, which we call NanO2, to carry oxygen to parts of the body as a potential treatment for a Table of Contents Page Summary 1 Risk Factors 9 Forward-looking Statements 28 Use of Proceeds 30 Dividend Policy 31 Capitalization 32 Dilution 34 Conversion of Series F Preferred Stock and Note Principal 35 Selected Consolidated Financial Data 36 Management s Discussion and Analysis of Financial Condition and Results of Operations 38 Our Business 51 Management 73 Certain Relationships and Related Transactions 88 Principal Stockholders 90 Description of Capital Stock 93 Material U.S. Federal Tax Consequences to Non-U.S. Holders 97 Shares Eligible for Future Sale 100 Underwriting 102 Legal Matters 107 Experts 107 Where You Can Find Additional Information 107 Index to Consolidated Financial Statements F-1 EXHIBIT 23.1 You should rely only on the information contained in this prospectus or any filed issuer free writing prospectus. We have not, and the underwriters have not, authorized anyone to provide you with information different from that contained in this prospectus or any filed issuer free writing prospectus. We are offering to sell, and are seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus or any filed issuer free writing prospectus is accurate only as of its date, regardless of its time of delivery or of any sale of the common stock. Table of Contents broad variety of disorders in which reduced blood flow results in oxygen-deprived tissues, such as ischemic stroke, heart attack, and injuries that involve significant blood loss, or hemorrhagic shock. We are working with an academic collaborator who has recently received an approximately $700,000 grant from the U.S. Department of Defense to conduct preclinical animal studies of MRX-804 microbubbles to treat hemorrhagic shock. We believe our NanO2 product candidate may have the ability to be stored at room temperature, which could make it suitable for emergency battlefield or ambulance-based treatments. Targeted SonoLysis Therapy. Our research team has developed MRX-802, our next generation SonoLysis microbubbles with targeting technology that causes the microbubbles to bind to blood clots. We believe that our MRX-802 targeted microbubbles will have a greater ability to break-up blood clots than non-targeted microbubbles when combined with ultrasound. To further the research on our next generation SonoLysis technology, we have received and are near the mid-point of our work on an approximately $1.2 million grant from the National Institutes of Health, or NIH, to study MRX-802 targeted microbubbles to treat vascular clots. Targeted Drug Delivery. We have also developed targeted drug delivery microbubbles, known as MRX-803, which have the potential for selective drug delivery when used in conjunction with ultrasound. We have received an approximately $1.0 million subcontract and have reached the mid-point of our research on an NIH grant to study the use of our proprietary MRX-803 targeted drug delivery microbubbles to treat a variety of tumors. We believe this technology has the potential for broad applications, including delivering drugs to dissolve blood clots or arterial plaque as well as to treat a variety of types of cancer. Our Business Strategy Our goal is to become the leading provider of therapies for stroke and other vascular disorders by developing and marketing products to treat occlusions as well as the resulting ischemia. The key elements of our business strategy are to: develop and commercialize our SonoLysis product candidates to expand the number of ischemic stroke patients who are eligible for treatment; sell our Abbokinase inventory and benefit from our commercial relationships; leverage our SonoLysis product candidates to accelerate initiation of treatment for ischemic stroke in an ambulance setting and address additional clot disorders in cardiology and peripheral vascular disease; and create a deep pipeline of products based on our microbubble technologies to address additional indications. Risks Related to Our Business and Business Strategy Our business is subject to numerous risks that could prevent us from successfully implementing our business strategy. These risks are highlighted in the section entitled Risk Factors immediately following this prospectus summary, and include the following: we have a history of operating losses, including an accumulated deficit of approximately $65.5 million and an overall stockholders deficit of approximately $32.7 million at March 31, 2007, and expect to continue to incur substantial losses for the foreseeable future; we will need substantial additional capital to fund our operations; we may never complete clinical development of our product candidates or have more than one product approved for marketing, and even if approved, our product candidates may never achieve market acceptance; Table of Contents failure to comply with various government regulations in connection with the development, manufacture and commercialization of our product candidates, and post-approval manufacturing and marketing of our products, could result in significant interruptions or delays in our development and commercialization activities; we may not be able to sell our inventory of Abbokinase at such times, in such quantities, and at such prices as we anticipate, or at all; if we are unable to meet testing specifications for extension of the expiration dates currently applicable to about 64% of our vials of Abbokinase that we expect hospitals to purchase, we will not be allowed to continue selling these vials after October 2007; if we fail to satisfy our December 2007 debt obligation to Abbott Laboratories, Abbott Laboratories could reclaim our remaining inventory of Abbokinase, along with the portion of the cash we have received from our sales of Abbokinase that is in an escrow account; and we compete against companies that have longer operating histories, more established products and greater resources than we do. In addition, our independent registered public accounting firm has expressed doubt as of May 4, 2007 about our ability to continue as a going concern. Our Corporate Information We were organized as an Arizona limited liability company on October 7, 1999, which was our date of inception for accounting purposes. We were subsequently converted to an Arizona corporation on January 12, 2000, and then reincorporated as a Delaware corporation on June 23, 2000. Our principal executive offices are located at 1635 E. 18th St., Tucson, Arizona 85719, and our telephone number at that location is (520) 770-1259. Our corporate website address is www.imarx.com. The information contained in or that can be accessed through our corporate website is not part of this prospectus. Unless the context indicates otherwise, as used in this prospectus, the terms ImaRx, we, us and our refer to ImaRx Therapeutics, Inc., a Delaware corporation. We have rights to use Abbokinase , which is a U.S. registered trademark owned by Abbott Laboratories. We use SonoLysistm, NanO2tm and the ImaRx Therapeutics logo as trademarks in the U.S. and other countries. All other trademarks and trade names mentioned in this prospectus are the property of their respective owners. Table of Contents The Offering Common stock offered 3,000,000 shares Common stock to be outstanding after this offering 10,007,868 shares Estimated initial public offering price $5.00 per share Use of proceeds To continue the development of our product candidates, including clinical trials, to fund our commercialization efforts, to fund our research and preclinical development activities, and for working capital and other general corporate purposes including a possible partial repayment of debt. See Use of Proceeds. Proposed NASDAQ Capital Market symbol Currently no market for our common stock exists. We have applied to have our common stock listed on The NASDAQ Capital Market under the symbol IMRX . The number of shares to be outstanding immediately after this offering as shown above is based on 7,007,868 shares outstanding as of May 31, 2007 and excludes: 550,959 shares of common stock issuable upon the exercise of options outstanding having a weighted average exercise price of $18.43 per share, and 64,264 shares of common stock reserved for future grants, under our 2000 Stock Plan; 233,321 shares of common stock issuable upon the exercise of options to be granted under our 2000 Stock Plan upon completion of this offering, having an exercise price equal to the public offering price per share in this offering; 38,500 shares of common stock to be issued pursuant to restricted stock grants under our 2000 Stock Plan upon completion of this offering; 352,324 shares of common stock issuable upon the exercise of warrants outstanding, having a weighted average exercise price of $15.79 per share; 175,000 shares of common stock issuable upon the exercise of the representative s warrant and 496,589 shares of common stock issuable upon the exercise of other warrants to be granted upon completion of this offering, having an exercise price equal to 115% of the public offering price per share in this offering; and 850,000 shares of common stock reserved for future issuance under our 2007 Performance Incentive Plan, which will become effective immediately upon the signing of the underwriting agreement for this offering. Except as otherwise indicated, all information in this prospectus assumes: the conversion of all our outstanding shares of preferred stock into 4,401,129 shares of common stock upon the closing of this offering, assuming a 1-to-1.176 conversion ratio of our Series F preferred stock. See Conversion of Series F Preferred Stock ; a one-for-three reverse stock split of our common stock that was effected on May 4, 2007; the filing of our amended and restated certificate of incorporation upon completion of this offering; and no exercise of the underwriters over-allotment option. Table of Contents Summary Consolidated Financial Data The following tables summarize certain of our consolidated financial data. We derived the consolidated statements of operations data for the years ended December 31, 2004, 2005 and 2006 from our consolidated audited financial statements included elsewhere in this prospectus. We derived the consolidated statements of operations data for the three months ended March 31, 2006 and 2007, as well as the balance sheet data at March 31, 2007 from our unaudited financial statements included elsewhere in this prospectus. You should read this data together with our financial statements and related notes included elsewhere in this prospectus and the information under Selected Consolidated Financial Data and Management s Discussion and Analysis of Financial Condition and Results of Operations. (Dollar amounts in thousands, except for per share data.) Years Ended December 31, Three Months Ended March 31, 2004 2005 2006 2006 2007 (Unaudited) Consolidated Statements of Operations Data: Product sales, grant and other revenue $ 575 $ 619 $ 1,327 $ 177 $ 1,208 Costs and expenses: Cost of product sales 204 461 Research and development 2,490 3,579 8,396 1,723 1,500 General and administrative 3,183 4,142 7,371 1,618 1,098 Depreciation and amortization 186 194 1,049 60 363 Acquired in-process research and development 24,000 Total cost and expenses 5,859 31,915 17,020 3,401 3,422 Interest and other income, net 29 122 381 104 41 Interest expense (469 ) (587 ) (1,515 ) (225 ) (225 ) Gain on extinguishment of debt 3,835 16,128 Net loss (5,724 ) (27,926 ) (699 ) (3,345 ) (2,398 ) Accretion of dividends on preferred stock (301 ) (601 ) (1,167 ) (150 ) (433 ) Net loss attributable to common stockholders $ (6,025 ) $ (28,527 ) $ (1,866 ) $ (3,495 ) $ (2,831 ) Net loss attributable to common stockholders per share Basic and diluted $ (5.37 ) $ (15.11 ) $ (0.72 ) $ (1.35 ) $ (1.09 ) Weighted average shares outstanding Basic and diluted 1,122,881 1,888,291 2,599,425 2,585,315 2,605,915 Table of Contents The following table sets forth a summary of our consolidated balance sheet data at March 31, 2007: on an actual basis; on a pro forma basis to reflect the conversion of all outstanding shares of preferred stock, valued on our balance sheet at approximately $40.3 million, into 4,401,129 shares of common stock upon the closing of this offering; and on a pro forma as adjusted basis to reflect our receipt of the estimated net cash proceeds from our sale of 3,000,000 shares of common stock in this offering at an assumed initial public offering price of $5.00, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. At March 31, 2007 Pro Forma Actual Pro Forma as Adjusted (In thousands) (Unaudited) Consolidated Balance Sheet Data: Cash and cash equivalents $ 2,748 $ 2,748 $ 15,053 Working capital(1) 583 583 12,888 Total assets 23,384 23,384 35,689 Redeemable convertible preferred stock 36,297 Total stockholders equity (deficit) $ (32,676 ) $ 3,621 $ 15,926 (1) Includes $147,000 of deferred financing costs. Table of Contents Risk Factors Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our common stock. If any of the following events were to occur, our business, financial condition or results of operations could be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose some or all of your investment. Risks Relating to Our Business Unless we are able to generate sufficient product or other revenue, we will continue to incur losses from operations and may never achieve or maintain profitability. We have a history of net losses and negative cash flow from operations since inception. In the quarter ended March 31, 2007, we generated product revenue of approximately $1.1 million and have funded our operations primarily from private sales of our securities. Net losses attributable to common stockholders for the fiscal years ended December 31, 2004, 2005, and 2006 were approximately $6.0 million, $28.5 million, and $1.9 million, respectively, and for the quarters ended March 31, 2006 and 2007 we had net losses attributable to common stockholders of approximately $3.5 million and $2.8 million, respectively. At March 31, 2007, we had an accumulated deficit of approximately $65.5 million. Except for Abbokinase, which is approved and marketed for the treatment of acute massive pulmonary embolism and which we acquired from Abbott Laboratories in April 2006, we do not have regulatory approval for any of our product candidates. Even if we receive regulatory approval for any product candidates, sales of such products may not generate sufficient revenue for us to achieve or maintain profitability. Our ability to generate revenue depends on a number of factors, including our ability to: market and sell our sole commercial product, Abbokinase, or any of our product candidates if we ever obtain regulatory approval for their sale; obtain regulatory approval for SonoLysis+tPA therapy, SonoLysis therapy, NanO2 and other product candidates; obtain commercial quantities of our products after approval at acceptable cost levels; and enter into strategic partnerships for some of our product candidates. We anticipate that our expenses will increase substantially following this offering as a result of: research and development programs, including significant requirements for clinical trials, preclinical testing, contract manufacturing, and potential regulatory submissions; developing additional infrastructure and hiring additional management and other employees to support the anticipated growth of our development and regulatory activities; regulatory submissions and commercialization activities; additional costs for intellectual property protection and enforcement; and expenses as a result of being a public company. Because of the numerous risks and uncertainties associated with developing and commercializing our potential products, we may experience larger than expected future losses and may never become profitable. Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern. We have received an audit report from our independent registered accounting firm containing an explanatory paragraph stating that our historical recurring losses from operations and net capital deficiency raise substantial doubt about our ability to continue as a going concern. We believe that the completion of this offering will eliminate this doubt and allow us to continue as a going concern at least in the near term. We Table of Contents estimate that the net proceeds from this offering and our existing cash and cash equivalents will be sufficient to meet our anticipated cash requirements until September 2008, assuming continuing sales of Abbokinase (including the extension of product expiration date) to wholesalers will be adequate to repay the $15.0 million note due to Abbott Laboratories on December 31, 2007. We believe that, based on conversations with our wholesale distributors about the current market demand for Abbokinase, we will sell a sufficient amount of Abbokinase prior to December 31, 2007 to repay the note to Abbott Laboratories. It is possible that the sales of Abbokinase that we expect to occur prior to December 31, 2007 may instead occur in the first quarter of 2008 or later. In such event we would use a portion of the net proceeds of this offering to repay the note on December 31, 2007 and we would replenish our cash resources from subsequent sales of Abbokinase. Alternatively, we may refinance the note using our Abbokinase inventory as collateral. If we are unable to complete this offering, we will need to obtain alternative financing and modify our operational plans to continue as a going concern. We incurred significant indebtedness in connection with our acquisition of Abbokinase assets from Abbott Laboratories. If we are unable to satisfy this obligation in December 2007, Abbott Laboratories will have a right to reclaim our remaining inventory of Abbokinase, along with a portion of the cash we have received from our sales of Abbokinase. In connection with our April 2006 acquisition of the remaining inventory of and certain rights related to Abbokinase, we issued to Abbott Laboratories a $15.0 million non-recourse note that is secured by the inventory and rights acquired and matures in December 2007. Although we have commenced selling Abbokinase to obtain near-term revenue that will help fund our cash needs, the asset purchase agreement provides that after we have received initial net revenue of $5.0 million from the sale of Abbokinase, we are then required to deposit 50% of the cash receipts we receive from further sales of Abbokinase into an escrow account to secure the repayment of the note. As of June 30, 2007, our net cash received from sales of Abbokinase to wholesalers and customers totaled approximately $13.8 million and we had deposited approximately $4.2 million in escrow as security for the note. If the escrow amount is not adequate to repay the note and we are otherwise unable to repay the note by its maturity date, Abbott Laboratories has the right to reclaim our remaining inventory of Abbokinase, along with the portion of the cash we have received from our sales of Abbokinase that is in the escrow account. We will need substantial additional capital to fund our operations. If we are unable to raise capital when needed, we may be forced to delay, reduce or eliminate our research and development programs or commercialization efforts, and we may be unable to timely pay our debts or may be forced to sell or license assets or otherwise terminate further development of one or more of our programs. Since our inception, we have financed our operations principally through the private placement of shares of our common and preferred stock and convertible notes and the receipt of government grants. Upon completion of this offering we believe that we will have working capital sufficient to meet our anticipated cash needs through September 2008, assuming our projected sales of Abbokinase to wholesalers occur within a timeframe adequate to repay the $15.0 million note due to Abbott Laboratories on December 31, 2007. We expect our expenses to increase substantially following this offering, and we will require substantial additional financing at various times in the future as we expand our operations and as our debt obligations mature. Our funding requirements will, however, depend on numerous factors, including: the timing, scope and results of our preclinical studies and clinical trials; the timing and amount of revenue from sales of Abbokinase; our ability to refinance our $15.0 million secured non-recourse note due to Abbott Laboratories on December 31, 2007, if sales of Abbokinase are insufficient to repay the note; the timing and amount of revenue from grants and other sources; the timing of initiation of manufacturing for our product candidates; Table of Contents sophisticated entities, all of whom are accredited investors, as such term is defined in Rule 501 promulgated under the Securities Act, and all of whom had adequate access, through their relationship with us, to information about us. The sale of securities described in items (3), (5), (7), (8), (11) and (13) above were exempt from registration under Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. The recipients of securities in each of these transactions represented their intention to acquire the securities for investment only and not with view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationship with the registrant, to information about the registrant. No underwriters were involved in the foregoing sales of securities. Item 16. Exhibits and Financial Statement Schedules (a) Exhibits. Exhibit Number Description of Document 1 .1 Form of Underwriting Agreement 3 .1 Fourth Amended and Restated Certificate of Incorporation of the registrant 3 .2 Amendment to Certificate of Incorporation of the registrant to effect a six-for-ten reverse stock split 3 .3 Second Amendment to Certificate of Incorporation of the registrant to effect a one-for-three reverse stock split 3 .4 Form of Amended and Restated Certificate of Incorporation of the registrant, to be effective following this offering 3 .5 Bylaws of the registrant, as amended 3 .6 Form of Amended and Restated Bylaws of the registrant, to be effective following this offering 4 .1 Specimen certificate evidencing shares of common stock 5 .1 Opinion of DLA Piper US LLP 10 .1 Form of Indemnification Agreement entered into between the registrant and each of its directors and officers 10 .2 Second Amended and Restated Investors Rights Agreement, dated April 14, 2006, by and among the registrant and certain stockholders 10 .3 2000 Stock Plan and related agreements 10 .4 2007 Performance Incentive Plan and related agreements 10 .5 Bonus Plan 10 .6 License Agreement, dated January 4, 2005, between the registrant and Dr. med. Reinhard Schlief 10 .7 Exclusive Sublicense Agreement, dated October 10, 2003, between the registrant and UNEMED Corporation 10 .8 Assignment, Assumption and License Agreement, dated October 7, 1999, between the registrant and Bristol-Myers Squibb Medical Imaging, Inc. (as successor to DuPont Contrast Imaging, Inc.) dated October 7, 1999, and amendments thereto 10 .9 License Agreement, dated February 10, 2006, between the registrant and the University of Arkansas for Medical Sciences 10 .10 Asset Purchase Agreement, dated April 10, 2006, between the registrant and Abbott Laboratories, and amendments thereto 10 .11 Escrow Agreement, dated April 14, 2006, between the registrant and Abbott Laboratories 10 .12 Inventory Trademark License Agreement, dated April 14, 2006, between the registrant and Abbott Laboratories Table of Contents EXHIBIT INDEX Exhibit Number Description of Document 1 .1 Form of Underwriting Agreement 3 .1 Fourth Amended and Restated Certificate of Incorporation of the registrant 3 .2 Amendment to Certificate of Incorporation of the registrant to effect a six-for-ten reverse stock split 3 .3 Second Amendment to Certificate of Incorporation of the registrant to effect a one-for-three reverse stock split 3 .4 Form of Amended and Restated Certificate of Incorporation of the registrant, to be effective following this offering 3 .5 Bylaws of the registrant, as amended 3 .6 Form of Amended and Restated Bylaws of the registrant, to be effective following this offering 4 .1 Specimen certificate evidencing shares of common stock 5 .1 Opinion of DLA Piper US LLP 10 .1 Form of Indemnification Agreement entered into between the registrant and each of its directors and officers 10 .2 Second Amended and Restated Investors Rights Agreement, dated April 14, 2006, by and among the registrant and certain stockholders 10 .3 2000 Stock Plan and related agreements 10 .4 2007 Performance Incentive Plan and related agreements 10 .5 Bonus Plan 10 .6 License Agreement, dated January 4, 2005, between the registrant and Dr. med. Reinhard Schlief 10 .7 Exclusive Sublicense Agreement, dated October 10, 2003, between the registrant and UNEMED Corporation 10 .8 Assignment, Assumption and License Agreement, dated October 7, 1999, between the registrant and Bristol-Myers Squibb Medical Imaging, Inc. (as successor to DuPont Contrast Imaging, Inc.) dated October 7, 1999, and amendments thereto 10 .9 License Agreement, dated February 10, 2006, between the registrant and the University of Arkansas for Medical Sciences 10 .10 Asset Purchase Agreement, dated April 10, 2006, between the registrant and Abbott Laboratories, and amendments thereto 10 .11 Escrow Agreement, dated April 14, 2006, between the registrant and Abbott Laboratories 10 .12 Inventory Trademark License Agreement, dated April 14, 2006, between the registrant and Abbott Laboratories 10 .13 Security Agreement, dated April 14, 2006, between the registrant and Abbott Laboratories 10 .14 Secured Promissory Note, dated April 14, 2006, between the registrant and Abbott Laboratories 10 .15 Second Amended Executive Employment Agreement, dated May 15, 2006, between the registrant and Evan C. Unger 10 .16 Consulting Agreement, dated October 20, 2006, between the registrant and Evan C. Unger 10 .17 Confidential Separation Agreement and Mutual General Release of All Claims, dated November 28, 2006, between the registrant and Evan C. Unger 10 .18 Consulting Agreement, dated April 11, 2005, between the registrant and Greg Cobb 10 .19 Amended Executive Employment Agreement, dated February 1, 2007, between the registrant and Greg Cobb 10 .20 Amended Executive Employment Agreement, dated February 1, 2007, between the registrant and Bradford A. Zakes Table of Contents the timing of, and the costs involved in, obtaining regulatory approvals; our ability to establish and maintain collaborative relationships; personnel, facilities and equipment requirements; and the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other patent-related costs, including litigation costs, if any, and the result of any such litigation. We intend to seek additional funding from a variety of sources, which may include collaborations involving our technology, technology licensing, grants and public or private equity and debt financings. We cannot be certain that any additional funding will be available on terms acceptable to us, or at all. Accordingly, we may not be able to secure the substantial funding that is required to maintain and continue our commercialization and development programs at levels that may be required in the future. We may be forced to accept funds on terms or pricing that are highly dilutive or otherwise disadvantageous to our existing stockholders. We are restricted from granting any additional security interest in our Abbokinase assets that we acquired in 2006. Raising additional funds through debt financing, if available, may involve covenants that restrict our business activities. To the extent that we raise additional funds through collaborations and licensing arrangements, we may have to relinquish valuable rights and control over our technologies, research programs or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to secure adequate financing, we could be required to sell or license assets, delay, scale back or eliminate one or more of our development programs or enter into licenses or other arrangements with third parties to commercialize products or technologies that we would otherwise seek to develop and commercialize ourselves. We have expanded our business strategy to include the sale of Abbokinase and this exposes us to additional risks which we may not be able to overcome. Until September 2005, our business strategy focused on the development of microbubbles for the treatment of blood clots and various vascular disorders. In October 2006 we began selling Abbokinase, a thrombolytic drug that we acquired in April 2006. Abbokinase is approved by the FDA for marketing in the U.S. for acute massive pulmonary embolism. We have limited experience in marketing or selling Abbokinase, and we may not be successful in these undertakings. Use of Abbokinase in general involves significant risks, such as bleeding. In addition, adding Abbokinase to our business places additional burdens on our management and technical staff to undertake commercialization activities and may distract them from development activities. Furthermore, our customers may return outdated, short dated or damaged product that is in its original, unopened cartons and received by us prior to 12 months past the expiration date. Finally, the FDA must formally approve the release of each lot of Abbokinase we wish to sell. We must submit a request for each lot we intend to ship to our product wholesalers prior to shipment. If the FDA does not release these lots for shipment in a timely manner or at all, our sales of Abbokinase may be adversely affected. We may be unable to sell our existing inventory of Abbokinase before product expiration, and even if we are able to sell the existing inventory, the product may be returned prior to use by hospitals and clinics. Additionally, even if we are successful in extending the product expiration dates, we will need to re-brand the product. In our acquisition of Abbokinase, we received approximately 153,000 vials of Abbokinase manufactured between 2003 and 2005. At the time of our acquisition of Abbokinase, we estimated that hospitals would purchase, and we would thereby recognize revenue for, approximately 111,000 vials, or approximately 72% of the total vials we acquired, which we believe represented approximately a four-year supply of inventory. We also estimated that, due to expiration of the vials or for other reasons, hospitals would not purchase approximately 42,000 vials, or approximately 28% of the vials we acquired. Approximately $16.7 million of the $20.0 million purchase price for Abbokinase was allocated to the vials we expect hospitals to purchase. Of our vials of Abbokinase held in inventory either by us or by our wholesalers as of March 31, 2007, approximately 64% of the vials we expect hospitals to purchase, or approximately $10.7 million in inventory value, are unlabeled and will expire by October 2007 based on current stability data. The remaining approximately 36% of the vials we expect to sell to hospitals, or approximately $6.1 million in inventory Table of Contents value, are labeled and will expire at various times between December 2008 and August 2009. We commenced sales of Abbokinase in October 2006. We may or may not be able to sell the entire inventory we acquired before the product expires, and we are not permitted to sell this inventory after its expiration dates. We will continue our ongoing stability program to potentially extend the expiration dates for this inventory. Our license to use the Abbokinase trademark does not cover any inventory with extended expiration dates. Accordingly, if we are successful in demonstrating extended stability and shelf life, we would need to re-brand the inventory to commercialize it. We cannot be certain that we will be successful in establishing an alternate brand name for Abbokinase and obtaining market acceptance. Even if we are able to sell the Abbokinase inventory to wholesalers prior to expiration, the product may be returned to us if outdated or short dated, and our sales could be significantly reduced. The thrombolytic drug market is highly competitive and dominated by products from Genentech. We have limited sales and marketing capabilities and depend on drug wholesalers to distribute our Abbokinase product. The market for thrombolytic drugs is currently dominated by thrombolytic drugs offered by Genentech, Inc., in particular alteplase, or tPA, which is approved for treatment of ischemic stroke and pulmonary emboli, among other indications. We cannot be certain that we have sufficient resources to effectively market or sell Abbokinase. We have a limited sales and marketing staff and depend on the efforts of third parties for the sale and distribution of Abbokinase to hospitals and clinics. If we are unable to maintain effective third party distribution on commercially reasonable terms, we may be unable to market and sell Abbokinase in commercial quantities. Drug wholesale companies may be unwilling to continue selling Abbokinase, or we may be forced to accept lower prices or other unfavorable terms or to expend significant additional resources to sell our Abbokinase inventory. Additionally, even if we are able to market and sell Abbokinase in commercial quantities, we do not expect sales of Abbokinase to generate enough revenue for us to achieve profitability. Our competitors generally are larger than we are, have greater financial resources available to them than we do and may have a superior ability to develop and commercialize competitive products. In addition, if our competitors have products that are approved in advance of ours, marketed more effectively or demonstrated to be safer or more effective than ours, our commercial opportunity will be reduced or eliminated and our business will be harmed. Our industry sector is intensely competitive, and we expect competition to continue to increase. Many of our actual or potential competitors have substantially longer operating histories and greater financial, research and development and marketing capabilities than we do. Many of them also have substantially greater experience than we have in undertaking preclinical studies and clinical trials, obtaining regulatory approvals and manufacturing and distributing products. Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical companies. In addition, academic institutions, government agencies and other public and private research organizations also conduct research, seek patent protection and establish collaborative arrangements for product development and marketing. We may not be able to develop products that are more effective or achieve greater market acceptance than our competitors products. Any company that brings competitive products to market before us may achieve a significant competitive advantage. We believe that the primary competitive factors in the market for treatments of vascular disorders include safety and efficacy, access to and acceptance by leading physicians, cost-effectiveness, physician relationships and sales and marketing capabilities. We may be unable to compete successfully on the basis of any one or more of these factors, which could have a material adverse effect on our business, financial condition and results of operations. Table of Contents If we are unable to develop, manufacture and commercialize our product candidates, we may not generate sufficient revenue to continue our business. We currently have only one product, urokinase, currently marketed as Abbokinase, that has received regulatory approval, and we have limited experience commercializing Abbokinase. The process to develop, obtain regulatory approval for and commercialize potential drug candidates is long, complex and costly. Our proprietary SonoLysis microbubble technology has not been used in clinical trials other than our ongoing Phase I/II clinical trial of our SonoLysis+tPA therapy. We do not expect to have the results of any clinical trials using our proprietary MRX-801 microbubbles until at least 2008. As a result, our business in the near term is substantially dependent upon our ability to sell Abbokinase and to complete development, obtain regulatory approval for and commercialize our SonoLysis product candidates in a timely manner. If we are unable to further develop, commercialize or license our SonoLysis product candidates, we may not be able to earn sufficient revenue to continue our business. If we want to sell urokinase beyond our existing inventory of Abbokinase, we would need to undertake manufacturing and secure regulatory approval for a new manufacturing process and facility. As part of our acquisition of Abbokinase, we acquired cell lines that could be used to manufacture urokinase. If we want to sell urokinase beyond our existing inventory of acquired Abbokinase, we would need to undertake manufacturing and to demonstrate that our manufactured material is comparable to the urokinase we purchased from Abbott Laboratories. To demonstrate this, we would need to have our manufacturing process validated by the FDA and may be required to conduct additional preclinical studies, and possibly additional clinical trials, to demonstrate its safety and efficacy. In addition, the manufacturing process for Abbokinase involves a roller bottle production method that is used infrequently today and is available only from a limited number of manufacturers worldwide. We do not currently intend to undertake any efforts required for manufacturing and regulatory approval of additional urokinase in the near term, and even if we were to undertake these efforts in the future, we cannot be certain that we would be able to manufacture and receive regulatory approval for additional sales of urokinase beyond our existing inventory. We do not plan to manufacture any of our product candidates and will depend on commercial contract manufacturers to manufacture our products. We do not have our own manufacturing facilities, have no experience in large-scale product manufacturing, and do not intend to develop such facilities or capabilities. Our ability to conduct clinical trials and commercialize our product candidates will depend, in part, on our ability to manufacture our products through contract manufacturers. For all of our product candidates, we or our contract manufacturers will need to have sufficient production and processing capacity to support human clinical trials, and if those clinical trials are successful and regulatory approvals are obtained, to produce products in commercial quantities. Delays in providing or increasing production or processing capacity could result in additional expense or delays in our clinical trials, regulatory submissions and commercialization of our products. In addition, we will be dependent on such contract manufacturers to adhere to the FDA s current Good Manufacturing Practices, or cGMP, and other regulatory requirements. Establishing contract manufacturing is costly and time-consuming and we cannot be certain that we will be able to engage contract manufacturers who can meet our quantity and quality requirements in a timely manner and at competitive costs. The manufacturing processes for our product candidates have not yet been tested at commercial levels, and it may not be possible to manufacture such materials in a cost-effective manner. Further, there is no guarantee that the components of our proposed drug product candidates will be available to our manufacturers when needed on terms acceptable to us. If we are unable to obtain contract manufacturing on commercially reasonable terms, we may not be able to conduct or complete planned or necessary clinical trials or commercialize our product candidates. Table of Contents If our clinical trials are not successful, or if we are unable to obtain regulatory approvals, we will not be able to commercialize our products and we will continue to incur significant operating losses. Abbokinase is our only product approved for commercial sale. The sale of all of our product candidates in the U.S. requires approval from the FDA and from foreign regulatory agencies for sales outside the U.S. To gain regulatory approval for the commercial sale of our product candidates, we must demonstrate the safety and efficacy of each product candidate in human clinical trials. This process is expensive and can take many years, and failure can occur at any stage of the testing process. There are many risks associated with our clinical trials. For example: the only completed clinical trials related to our development of SonoLysis therapy or SonoLysis+tPA therapy have not utilized our proprietary MRX-801 microbubbles and may not be indicative of the safety and effectiveness of our product candidates; if the clinical trial is not conducted in accordance with current Good Clinical Practices, or cGCP, it may not be possible to complete the trial and the FDA may not accept the results of the clinical trial; clinicians, physicians and regulators may not favorably interpret the results of our preclinical studies and clinical trials; some patients in our clinical trials may experience unforeseen adverse medical events related or unrelated to the use of our product candidates; we may be unable to secure a sufficient number of clinical trial sites or patients to enroll in our clinical trials; we may experience delays in securing the services of, or difficulty scheduling, clinical investigators for our clinical trials; third parties who conduct our clinical trials may not fulfill their obligations; we may in the future experience, and have in the past experienced, deviations from the approved clinical trial protocol by our clinical trial investigators; the FDA or the local institutional review board, or IRB, at one or more of our clinical trial sites may interrupt, suspend or terminate a clinical trial or the participation of a particular site in a clinical trial; and the FDA or other regulatory bodies may change the policies and procedures we are required to follow in connection with our clinical trials. Any of these or other unexpected events could cause us to delay or terminate our ongoing clinical trials, increase the costs associated with our clinical trials or affect the statistical analysis of the safety and efficacy of our product candidates. If we fail to adequately demonstrate the safety and efficacy of our product candidates, we will not obtain regulatory approval to commercialize our products. Significant delays in clinical development could materially increase our product development costs or impair our competitive position. In addition, any approvals we may obtain may not cover all of the clinical indications for which we seek approval, or an approval may contain significant limitations in the form of narrow labeling and warnings, precautions or contraindications with respect to limitations on use. Accordingly, we may not be able to obtain our desired product registration or marketing approval for any of our product candidates. We rely on third parties to conduct our clinical trials who may not carry out their contractual duties, with resulting negative impacts on our clinical trials. We depend on contract research organizations, or CROs, for managing some of our preclinical testing and clinical trials. If we are not able to retain CROs in a timely manner and on commercially reasonable terms, we may not be able to conduct or complete clinical trials or commercialize our product candidates and we do not know whether we will be able to develop or attract partners with such capabilities. We have established relationships with multiple CROs for our existing clinical trials, although there is no guarantee that the CROs Table of Contents will be available for future clinical trials on terms acceptable to us. We may not be able to control the amount and timing of resources that CROs devote to our clinical trials. In the event that we are unable to maintain our relationship with any of our CROs or elect to terminate the participation of any of these CROs, we may lose the ability to obtain follow-up information for patients enrolled in ongoing clinical trials unless we are able to transfer the care of those patients to another qualified CRO. Our product candidates may never achieve market acceptance. We cannot be certain that our products will achieve any degree of market acceptance among physicians and other health care providers and payors, even if necessary regulatory approvals are obtained. We believe that recommendations by physicians and other health care providers and payors will be essential for market acceptance of our products, and we cannot be certain we will ever receive any positive recommendations or reimbursement. Physicians will not recommend our products unless they conclude, based upon clinical data and other factors, that our products are safe and effective. We are unable to predict whether any of our product candidates will ever achieve market acceptance, either in the U.S. or internationally. A number of factors may limit the market acceptance of our products, including: the timing and scope of regulatory approvals of our products and market entry compared to competitive products; the safety and efficacy of our products, including any inconveniences in administration, as compared to alternative treatments; the rate of adoption of our products by hospitals, doctors and nurses and acceptance by the health care community; the product labeling and marketing claims permitted or required by regulatory agencies for each of our products; the competitive features of our products, including price, as compared to other similar products; the availability of sufficient third party coverage or reimbursement for our products; the extent and success of our sales and marketing efforts; and possible unfavorable publicity concerning our products or any similar products. If our products are not commercialized, our business will be materially harmed. Technological change and innovation in our market sector may cause our products to become obsolete shortly after or even before such products reach the market. New products and technological development in the pharmaceutical and medical device industries may adversely affect our ability to complete required regulatory requirements and introduce our product candidates into the market or may render our products obsolete. The markets into which we plan to introduce our products are characterized by constant and sometimes rapid technological change, new and improved product introductions, changes in regulatory requirements, and evolving industry standards. Our ability to execute our business plan will depend to a substantial extent on our ability to identify new market trends and develop, introduce and support our candidate products on a timely basis. If we fail to develop and commercialize our product candidates on a timely basis, we may be unable to compete effectively. For example, we are aware of other thrombolytic drugs in development such as ancrod and desmoteplase, which are currently in Phase III clinical trials as treatments for acute ischemic stroke. Since none of our product candidates for treatment of ischemic stroke will be able to achieve regulatory approval for commercial sale in the U.S. any earlier than 2011, if ever, we could by that time find that competitive developments have diminished our product opportunities, which would have an adverse impact on our business prospects and financial condition. Table of Contents If we are unable to obtain acceptable prices or adequate reimbursement from third-party payors for any product candidates that we seek to commercialize, our revenue and prospects for profitability will suffer. The commercialization of our product candidates is substantially dependent on whether third-party coverage and reimbursement is available from governmental payors such as Medicare and Medicaid, private health insurers, including managed care organizations and other third-party payors. The U.S. Centers for Medicare and Medicaid Services, health maintenance organizations and other third-party payors in the U.S. and in other jurisdictions are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for new drugs and medical devices and, as a result, they may not cover or provide adequate payment for our products. Our products may not be considered cost-effective and reimbursement may not be available to consumers or may not be sufficient to allow our products to be marketed on a competitive basis. Large private payors, managed care organizations, group purchasing organizations and similar organizations are exerting increasing influence on decisions regarding the use of, and reimbursement levels for, particular treatments. Such third-party payors, including Medicare, are challenging the prices charged for medical products and services, and many third-party payors limit or delay reimbursement for newly approved medical products and indications. Cost-control initiatives could lower the price we may establish for our products which could result in product revenue lower than anticipated. If the prices for our product candidates decrease or if governmental and other third-party payors do not provide adequate coverage and reimbursement levels, our prospects for profitability could suffer. We intend to rely heavily on third parties to implement critical aspects of our business strategy, and our failure to enter into and maintain these relationships on acceptable business terms, or at all, would materially adversely affect our business. We intend to rely on third parties for certain critical aspects of our business, including: manufacturing of our MRX-801 and other proprietary microbubbles; conducting clinical trials; conducting preclinical studies; performing stability and product release testing with respect to Abbokinase; preparing, submitting and maintaining regulatory records sufficient to meet the requirements of the FDA; and customer logistics and distribution of our products. We do not currently have many of these relationships in place. Although we use a third party manufacturer to produce MRX-801 microbubbles for our clinical trials on a purchase order basis, that third party does not have the capacity to produce the volume of MRX-801 microbubbles necessary for large-scale clinical trials or commercial sales. We currently have agreements with contract research organizations to manage our clinical trials; audit our clinical trials; help us write protocols and study reports for our clinical trials; store, label, package and distribute our commercial product; and conduct stability and product release testing for our commercialized product. We also have agreements with wholesalers to market and distribute our product, as well as agreements in place with many Group Purchasing Organizations that negotiate prices on behalf of hospitals and clinics. To the extent that we are unable to maintain these relationships or to enter into any one or more of the additional relationships necessary to our business on commercially reasonable terms, or at all, or to eliminate the need for any such relationship by establishing our own capabilities in a particular functional area in a timely manner, we could experience significant delays or cost increases that could have a material adverse effect on our ability to develop and commercialize our product candidates. Table of Contents We rely on third party products, technology and intellectual property, which could negatively affect our ability to sell our MRX-801 microbubbles or other products commercially or could adversely affect our ability to derive revenue from such products. Our SonoLysis program may require the use of multiple proprietary technologies, including commercially available ultrasound devices and patented technologies. Manufacturing our products or customizing related ultrasound devices may also require licensing technologies and intellectual property from third parties. Obtaining and maintaining licenses for these technologies may require us to make royalty payments or other payments to several third parties, potentially reducing our revenue or making the cost of our products commercially prohibitive. We cannot be certain that we will be able to establish any or all of the partnering relationships and technology licenses that may be necessary for the pursuit of our business strategy, or, even if such relationships can be established, that they will be on terms favorable to us or that they can be managed in a way that will assist us in executing our business plan. As a highly specialized scientific business enterprise, our ability to execute our business plan is substantially dependent on certain key members of our scientific and management staff, the loss of any of whom could have a material adverse effect on our business. A small number of key officers and members of our professional staff are responsible for certain critical areas of our business, such as product research and development, clinical trials, regulatory affairs, manufacturing, intellectual property protection and licensing. The services provided by our key personnel, including: Bradford A. Zakes, our President and Chief Executive Officer; Lynne Weissberger, our Vice President, Regulatory Affairs, Quality Assurance and Regulatory Compliance; Walter Singleton, our Chief Medical Officer; Terry Matsunaga, our Vice President, Research; Rajan Ramaswami, our Vice President, Product Development; Reena Zutshi, our Vice President, Operations; John McCambridge, our Vice President, Sales and Marketing; and Greg Cobb, our Chief Financial Officer, would be difficult to replace. Dr. Singleton recently advised us of his decision to leave the employ of the Company to pursue personal interests. He has entered into a one-year consulting agreement with us. We believe that we will be able to continue our drug development activities as planned. All of our employees are employed at will. Our business and future operating results also depend significantly on our ability to attract and retain qualified management, manufacturing, technical, marketing, regulatory, sales and support personnel for our operations, and competition for such personnel is intense. We cannot be certain that our key executive officers and scientific staff members will remain with us or that we will be able to attract or retain such personnel. If we are unable to retain and continue to attract qualified management and technical staff, this could significantly delay and may prevent the achievement of our research, development and business objectives. We do not maintain key-person life insurance on the lives of any of our executive officers or scientific staff and we do not intend to secure any key-person life insurance after the completion of this offering. We will need to increase the size of our organization, and we may experience difficulties in managing our growth. As of May 31, 2007, we had 32 full-time employees. In the future, we will need to expand our managerial, operational, financial, clinical, regulatory and other personnel to manage and expand our operations, undertake clinical trials, manufacture our product candidates, continue our research and development and collaborative activities and commercialize our product candidates. In the next 12 months we anticipate hiring between five and eight new employees at an approximate aggregate cost of between $450,000 and $700,000 annually. Our management and scientific personnel, systems and facilities currently in place will not be adequate to support our planned future growth. Our need to effectively manage our operations, growth and various projects requires that we: utilize a small sales and marketing organization; identify and manage third party manufacturers for our products; manage our clinical trials effectively; Table of Contents manage our internal research and development efforts effectively while carrying out our contractual obligations to collaborators and other third parties; continue to improve our operational, financial and management controls, reporting systems and procedures under increasing regulatory requirements; and attract and retain sufficient numbers of talented employees. We may be unable to implement and manage many of these tasks on a larger scale or in a timely manner and, accordingly, may not achieve our research, development and commercialization goals. We depend on patents and other proprietary rights, some of which are uncertain and unproven. Further, our patent portfolio and other intellectual property rights are expensive to maintain, protect against infringement claims by third parties, and enforce against third party infringements, and are subject to potential adverse claims. Because we are developing product candidates that rely on advanced and innovative technologies, our ability to execute our business plan will depend in large part on our ability to obtain and effectively use patents and licensed patent rights, preserve trade secrets and operate without infringing upon the proprietary rights of others. Our Abbokinase product has no patent protection and we have a one-half interest in a patent related to the manufacturing process for Abbokinase. Some of our intellectual property rights are based on licenses that we have entered into with owners of patents. Although we have rights to 143 issued U.S. patents, plus some foreign equivalents and numerous pending patent applications, the patent position of pharmaceutical, medical device and biotechnology companies in general is highly uncertain and involves complex legal and factual questions. Effective intellectual property protection may also be unavailable or limited in some foreign countries. We have not pursued foreign patent protection in all jurisdictions or for all of our patentable intellectual property. As a result, our patent protection for our intellectual property will likely be less comprehensive if and when we commence international sales. There are also companies that are currently commercializing FDA approved microbubbles-based products for diagnostic uses. These companies may promote these products for off-label uses which may directly compete with our products when and if approved. Additionally, physicians may prescribe the use of such products for off-label indications which could have the impact of reducing our revenues for our product candidates when and if approved. In the U.S. and internationally, enforcing intellectual property rights against infringing parties is often costly. Pending patent applications may not issue as patents and may not issue in all countries in which we develop, manufacture or sell our products or in countries where others develop, manufacture and sell products using our technologies. Patents issued to us may be challenged and subsequently narrowed, invalidated or circumvented. We have been notified that, in February 2005, a third party filed an opposition claim to one of our patents in Europe that relates to targeted bubbles for therapeutic and diagnostic use. The third party has agreed to voluntarily dismiss and terminate this claim, but other such conflicts could occur and could limit the scope of the patents that we may be able to obtain or may result in the denial of our patent applications. If a third party were to obtain intellectual property protection for any of the technologies upon which our business strategy is based, we could be required to challenge such protections, terminate or modify our programs that rely on such technologies or obtain licenses for use of these technologies. For example, in July 2003 we received a notice from a third party who owns a patent relating to the administration of ultrasound to break up blood clots indicating that we may need a license to its patent if we intend to administer our therapies according to its patented method. Although we do not intend to administer our therapies according to the third party s patented method, other similar third party patents, if valid, could require us to seek a license that may not be available on terms acceptable to us or at all, could impose limitations on how we administer our therapies, and may require us to adopt restrictions or requirements as to the manner of administration of our products that we might not otherwise adopt to avoid infringing patents of others. Moreover, we may not have the financial resources to protect our patent and other intellectual property rights and, in that event, our patents may not afford meaningful protection for our technologies or product candidates, which would materially Table of Contents adversely affect our ability to develop and market our product candidates and to generate licensing revenue from our patent portfolio. Additional risks related to our patent rights and other proprietary rights include: challenge, invalidation, circumvention or expiration of issued patents already owned by or licensed to us; claims by our consultants, key employees or other third parties that our products or technologies are the result of technological advances independently developed by them and, therefore, not owned by us; our failure to pay product development costs, license fees, royalties, milestone payments or other compensation required under our technology license and technology transfer agreements, and the subsequent termination of those agreements; failure by our licensors or licensees to comply with the terms of our license agreements; misrepresentation by technology owners of the extent to which they have rights to the technologies that we purport to acquire or license from them; a potentially shorter patent term as a result of legislation which sets the patent termination date at 20 years from the earliest effective filing date of the patent application instead of 17 years from the date of the grant; and loss of rights that we have licensed due to our failure or decision not to fund further research or failure to achieve required development or commercialization milestones or otherwise comply with our obligations under the license and technology transfer agreements. If any of these events occurs, our business may be harmed. We have limited patent protection for Abbokinase, and third parties likely could develop urokinase without a license from us, which could decrease the market opportunity for Abbokinase. We own a one-half interest in a patent related to the manufacturing process for Abbokinase. We also have a license to use the Abbokinase trademark that expires when our inventory is sold, expires or its expiration date is extended, and trade secrets relating to the manufacturing process for Abbokinase. A third party could acquire or develop a cell line capable of producing urokinase and could devise a manufacturing process that could yield a product consistent with or superior to our Abbokinase product in quality, safety and activity, in each case without a license from us, which could decrease the market opportunity for Abbokinase. Other companies may claim that we infringe their patents or trade secrets, which could subject us to substantial damages. A number of third parties, including certain of our competitors, have developed technologies, filed patent applications or obtained patents on technologies and compositions that are related to aspects of our business, including thrombolytic drug therapy, microbubbles and ultrasound. Such third parties may sue us for infringing their patents. If we face an infringement action, defending against such an action could require substantial resources that may not be available to us. In the event of a successful claim of infringement against us, we may be required to: pay substantial damages; stop using infringing technologies and methods; stop certain research and development efforts; develop non-infringing products or methods; and obtain one or more licenses from third parties. Table of Contents Any claims of infringement could cause us to incur substantial costs and could divert management s attention away from our business in defending against the claim, even if the claim is invalid. A party making a claim could secure a judgment that requires us to pay substantial damages. A claim of infringement could also be used by our competitors to delay market introduction or acceptance of our products. If we are sued for infringement, we could encounter substantial delays in development, manufacture and commercialization of our product candidates. Any litigation, whether to enforce our patent rights or to defend against allegations that we infringe third party rights, will be costly and time consuming and will likely distract management from other important tasks. Our rights to develop and commercialize certain of our product candidates are subject to the terms and conditions of licenses or sublicenses granted to us by third parties, including other pharmaceutical companies, that contain restrictions that may limit our ability to capitalize on these products. Our SonoLysis therapy and SonoLysis+tPA therapy product candidates are based in part on patents and other intellectual property that we license or sublicense from third parties. Our rights to develop and commercialize these product candidates using intellectual property licensed from UNEMED Corporation may terminate, in whole or in part, if we fail to pay royalties to third party licensors, or if we fail to comply with certain restrictions regarding our development activities. In the event of an early termination of any such license or sublicense agreement, rights licensed and developed by us under such agreements may be extinguished, and our rights to the licensed technology may revert back to the licensor. Any termination or reversion of our rights to develop or commercialize any such product candidate may have a material adverse effect on our business. We are party to an agreement with Bristol-Myers Squibb that restricts us from using our bubble technology for non-targeted diagnostic imaging applications. Bristol-Myers Squibb also has a right of first negotiation should we wish to license to a third party any of our future products or technology related to the use of bubbles for targeted imaging of blood clots, or breaking up blood clots with ultrasound and bubbles. Bristol-Myers Squibb has waived its rights under this agreement with respect to our current generation of MRX-801 microbubbles that we are developing for breaking up blood clots, as well as a new generation of MRX-802 microbubbles that we are developing for breaking up blood clots that include targeting mechanisms to cause the bubbles to attach to blood clots. This right of first negotiation for future technology we may develop in these applications could adversely impact our ability to attract a partner or acquirer for SonoLysis therapy. In addition, we have been awarded various government funding grants and contracts from The National Institutes of Health and other government agencies. These grants include provisions that provide the U.S. government with the right to use the technologies developed under such grants for certain uses, under certain circumstances. If the government were to exercise its rights, our ability to commercialize such technology would likely be impaired. We could be exposed to significant product liability claims, which could be time consuming and costly to defend, divert management attention and adversely impact our ability to obtain and maintain insurance coverage. The expense and potential unavailability of insurance coverage for our company or our customers could adversely affect our ability to sell our products, which would negatively impact our business. We face a risk of product liability exposure related to the testing of our product candidates in clinical trials and will face even greater risks upon any commercialization by us of our product candidates. Thrombolytic drugs are known to involve certain medical hazards, such as risks of bleeding or immune reactions. Our product candidates may also involve presently unknown medical risks of equal or even greater severity. Product liability claims or other claims related to our products, or their off-label use, regardless of their merits or outcomes, could harm our reputation in the industry, and reduce our product sales. Additionally, any lawsuits or product liability claims against us may divert our management from pursuing our business strategy and may be costly to defend. Further, if we are held liable in any of these lawsuits, we may incur substantial liabilities and may be forced to limit or forego further commercialization of one or more of our Table of Contents products. A product liability related claim or recall could be materially detrimental to our business. Our current product liability insurance, which provides us with $10 million of coverage in the aggregate, may be insufficient. We may not be able to obtain or maintain such insurance in adequate amounts, or on acceptable terms, to provide coverage against potential liabilities. The product liability coverage we currently have for our clinical trials may be insufficient to cover fully the costs of any claim or any ultimate damages we may be required to pay. Our inability to obtain or maintain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or limit the commercialization of any products we develop, and could leave us exposed to significant financial losses relating to any products that we do develop and commercialize. Moreover, Abbokinase is made from human neonatal kidney cells. Products made from human source material may contain infectious agents, such as viruses, that can cause disease. We believe the risk that Abbokinase will transmit an infectious agent has been reduced by changes made by Abbott Laboratories to its tissue acquisition and related manufacturing process that included screening donors for prior exposure to certain viruses, testing donors for the presence of certain current virus infections, testing for certain viruses during manufacturing and inactivating and/or removing certain viruses. All of our inventory was produced after these changes were made. Despite these measures, Abbokinase may still present a risk of transmitting infectious agents, which could expose us to product liability lawsuits. If we use hazardous or biological materials in a manner that causes injury or violates applicable law, we may be liable for damages. Our research and development activities involve the controlled use of potentially hazardous substances, including toxic chemical and biological materials. Our recent expansion of our business strategy to include the sale of Abbokinase has increased our involvement in the handling and distribution of biological materials. In addition, our operations produce hazardous waste products. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these hazardous and biological materials. While we believe that we are currently in compliance with these laws and regulations, continued compliance may be expensive, and current and future environmental regulations may impair our research, development and manufacturing efforts. In addition, if we fail to comply with these laws and regulations at any point in the future, we may be subject to criminal sanctions and substantial civil liabilities and could be required to suspend or modify our operations. Even if we continue to comply with all applicable laws and regulations regarding hazardous materials, we cannot eliminate the risk of accidental contamination or discharge and our resultant liability for any injuries or other damages caused by these accidents. Although we maintain general liability insurance, this insurance may not fully cover potential liabilities for these damages, and the amount of uninsured liabilities may exceed our financial resources and materially harm our business. The FDA approval process for drugs involves substantial time, effort and financial resources, and we may not receive any new approvals for our product candidates on a timely basis, or at all. The process required by the FDA before product candidates may be marketed in the U.S. generally involves the following: preclinical laboratory and animal testing; submission of an IND application which must become effective before clinical trials may begin; adequate and well-controlled human clinical trials to establish the safety and efficacy of proposed drugs or biologics for their intended use; pre-approval inspection of manufacturing facilities, company regulatory files and selected clinical investigators; and FDA approval of a new drug application, or NDA, or FDA approval of an NDA supplement in the case of a new indication if the product is already approved for another indication. Table of Contents The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any new approvals for our product candidates will be granted on a timely basis, if at all. We have failed in the past, and may in the future fail, to make timely submissions of required reports or modifications to clinical trial documents, and such delays as well as possible errors or omissions in such submissions could endanger regulatory acceptance of clinical trial results or even our ability to continue with our clinical trials. The results of product development, preclinical tests and clinical trials are submitted to the FDA as part of an NDA, or as part of an NDA supplement. The FDA may deny approval of an NDA or NDA supplement if the applicable regulatory criteria are not satisfied, or it may require additional clinical data or an additional pivotal Phase III clinical trial. Even if such data are submitted, the FDA may ultimately decide that the NDA or NDA supplement does not satisfy the criteria for approval. The FDA may move to withdraw product approval, once issued, if ongoing regulatory standards are not met or if safety problems occur after the product reaches the market. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products which have been commercialized, and the FDA may move to prevent or limit further marketing of a product based on the results of these post-marketing programs. Satisfaction of FDA requirements or similar requirements of state, local and foreign regulatory agencies typically takes several years and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease. Government regulation may delay or prevent marketing of product candidates for new indications for a considerable period of time and impose costly procedures upon our activities. The FDA or any other regulatory agency may not grant approvals for new indications for our product candidates on a timely basis, if at all. Success in early stage clinical trials does not ensure success in later stage clinical trials. Data obtained from clinical trials is not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. Even if a product candidate receives regulatory approval, the approval may be significantly limited to specific disease states, patient populations and dosages. Further, even after regulatory approval is obtained, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. Delays in obtaining, or failures to obtain, additional regulatory approvals for our products would harm our business. In addition, we cannot predict what adverse governmental regulations may arise from future U.S. or foreign governmental action. The FDA s policies may change and additional government regulations may be enacted, which could prevent or delay regulatory approval of our product candidates or approval of new indications for our product candidates. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, either in the U.S. or internationally. If we or our contract manufacturers fail to comply with applicable regulations, sales of our products could be delayed and our revenue could be harmed. Every medical product manufacturer is required to demonstrate and maintain compliance with cGMP. We and any third party manufacturers or suppliers with whom we enter into agreements will be required to meet these requirements. Our contract manufacturers will be subject to unannounced inspections by the FDA and corresponding foreign and state agencies to ensure strict compliance with cGMP and other applicable government quality control and record-keeping regulations. In addition, transfer of ownership of products triggers a mandatory manufacturing inspection requirement from the FDA. We cannot be certain that we or our contract manufacturers will pass any of these inspections. If we or our contract manufacturers fail one of these inspections in the future, our operations could be disrupted and our manufacturing and sales delayed significantly until we can demonstrate adequate compliance. If we or our contract manufacturers fail to take adequate corrective action in a timely fashion in response to a quality system regulations inspection, the FDA could shut down our or our contract manufacturers manufacturing operations and require us, among other things, to recall our products, either of which would harm our business. Failure to comply with cGMP or other applicable legal requirements can lead to federal seizure of violative products, injunctive actions brought by the federal government, and potential criminal and civil liability on the Table of Contents part of a company and its officers and employees. Because of these and other factors, we may not be able to replace our manufacturing capacity quickly or efficiently in the event that our contract manufacturers are unable to manufacture our products at one or more of their facilities. As a result, the sale and marketing of our products could be delayed or we could be forced to develop our own manufacturing capacity, which would require substantial additional funds and personnel and compliance with extensive regulations. Our products will remain subject to ongoing regulatory review even if they receive marketing approval. If we fail to comply with applicable regulations, we could lose these approvals, and the sale of our products could be suspended. Even if we receive regulatory approval to market a particular product candidate, the FDA or foreign regulatory authority could condition approval on conducting additional and costly post-approval clinical trials or could limit the scope of approved labeling. For example, to sell Abbokinase, we are required to continue an ongoing immunogenicity clinical trial that Abbott Laboratories commenced in 2003. Moreover, the product may later cause adverse effects that limit or prevent its widespread use, force us to withdraw it from the market or impede or delay our ability to obtain regulatory approvals in additional countries. In addition, the manufacturer of the product and its facilities will continue to be subject to FDA review and periodic inspections to ensure adherence to applicable regulations. After receiving marketing approval, the FDA imposes extensive regulatory requirements on the manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion and record keeping related to the product. We may not promote or advertise any future FDA-cleared or approved products for use outside the scope of our product s label or make unsupported promotional claims about the benefits of our products. If the FDA determines that our claims are outside the scope of our label or are unsupported, it could require us to revise our promotional claims, correct any prior statements or bring an enforcement action against us. Moreover, the FDA or other regulatory authorities may bring charges against us or convict us of violating these laws, and we could become subject to third party litigation relating to our promotional practices and there could be a material adverse effect on our business. If we fail to comply with the regulatory requirements of the FDA and other applicable U.S. and foreign regulatory authorities or discover previously unknown problems with our products, manufacturers or manufacturing processes, we could be subject to administrative or judicially imposed sanctions, including: restrictions on the products, manufacturers or manufacturing processes; warning letters; civil or criminal penalties or fines; injunctions; product seizures, detentions or import bans; voluntary or mandatory product recalls and publicity requirements; suspension or withdrawal of regulatory approvals; total or partial suspension of production; and refusal to approve pending applications of marketing approval of new drugs or supplements to approved applications. If we were subject to any of the foregoing actions by the FDA, our sales could be delayed, our revenue could decline and our reputation among clinicians, doctors, inventors and research and academic institutions could be harmed. Table of Contents Marketing and reimbursement practices and claims processing in the pharmaceutical and medical device industries are subject to significant regulation in the U.S. In addition to FDA restrictions on marketing of pharmaceutical products, several other state and federal laws have been applied to regulate certain marketing practices in the pharmaceutical and medical device industries in recent years, in particular anti-kickback statutes and false claims statutes. The federal health care program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any health care item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers and formulary managers on the other. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from potential liability, the exemptions and safe harbors are drawn narrowly. Practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Our future practices may not in all cases meet the criteria for safe harbor protection from anti-kickback liability. Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to have a false claim paid. For example, several pharmaceutical and other health care companies have been prosecuted under these laws for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the company s marketing of the product for unapproved, and thus non-reimbursable, uses. The majority of states also have statutes or regulations similar to the federal anti-kickback and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturer s products from reimbursement under government programs, criminal fines and imprisonment. Because of the breadth of these laws and the limited safe harbors, it is possible that some of our commercial activities in the future could be subject to challenge under one or more of such laws. Such a challenge could have a material adverse effect on our business. If we seek regulatory approvals for our products in foreign jurisdictions, we may not obtain any such approvals. We may market our products outside the U.S., either with a commercial partner or alone. To market our products in foreign jurisdictions, we will be required to obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and jurisdictions and can involve additional testing, and the time required to obtain foreign approvals may differ from that required to obtain FDA approval. We have no experience with obtaining any such foreign approvals. Additionally, the foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. For all of these reasons, we may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or jurisdictions or by the FDA. We may not be able to submit applications for regulatory approvals and may not receive necessary approvals to commercialize our products in any market. The failure to obtain these approvals could materially adversely affect our business, financial condition and results of operations. Risks Related to this Offering We have broad discretion in the use of the net proceeds from this offering and may not use them effectively. Our management will have broad discretion in the application of the net proceeds of this offering, including for any of the purposes described in Use of Proceeds. The failure of our management to apply Table of Contents these funds effectively could result in financial losses and materially harm our business, cause the price of our common stock to decline and delay product development. Our principal stockholders and management own a significant percentage of our stock and will be able to exercise significant influence over our affairs. Our executive officers, current directors and holders of five percent or more of our common stock, as of the date of this prospectus, beneficially owned approximately 57.0% of our common stock. We expect that upon the closing of this offering, that same group will continue to hold approximately 40.1% of our outstanding common stock. Consequently, even after this offering, these stockholders will likely continue to have significant influence over our operations. The interests of these stockholders may be different than the interests of other stockholders. This concentration of ownership could also have the effect of delaying or preventing a change in control of our company or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could reduce the price of our common stock. We will incur increased costs as a public company which may make it more difficult to achieve profitability. Upon effectiveness of the registration statement for this offering, we will become subject to the reporting obligations set forth in the Securities Exchange Act of 1934, as amended. As a public company, we will incur significant legal, accounting, insurance, investor relations and other expenses that we did not incur as a private company. The disclosures that we will be required to make will generally involve a substantial expenditure of financial resources. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the Securities and Exchange Commission, or SEC, and The NASDAQ Capital Market have required changes in corporate governance practices of public companies. We expect that full compliance with these new rules and regulations will significantly increase our legal and financial compliance costs and make some activities more time-consuming and costly. For example, in connection with becoming a reporting company, we have created additional board committees and will be required to adopt and maintain policies regarding internal controls and disclosure controls and procedures. We plan to retain a consultant to assist us in developing our internal controls to comply with regulatory requirements and may have to retain additional consultants and employees to assist us with other aspects of complying with regulatory requirements applicable to public companies. Such additional reporting and compliance costs may negatively impact our financial results and may make it more difficult to achieve profitability. The rules and regulations imposed by the SEC and as implemented under the Sarbanes-Oxley Act may also make it more difficult and expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. To the extent our earnings suffer as a result of the financial impact of our SEC reporting or compliance costs, our business could be harmed. If you purchase shares of common stock in this offering, you will suffer immediate and substantial dilution of your investment. Purchasers of common stock in this offering will pay a price per share that substantially exceeds the per share book value of our tangible assets after subtracting our liabilities. Assuming an initial public offering price of $5.00 per share, our pro forma as adjusted net tangible book value per share as of March 31, 2007 would have been $1.37. This represents immediate dilution of $3.63 per share to new investors purchasing shares of common stock in this offering at the assumed initial public offering price. See Dilution. There has been no prior public market for our common stock, and an active trading market for our common stock may not develop, potentially lessening the value of your shares and impairing your ability to sell. Prior to this offering, there has been no public market for our common stock. Although we have applied to have our common stock listed on The NASDAQ Capital Market, an active trading market for our shares may never develop or be sustained following this offering. Accordingly, you may not be able to sell your shares quickly or at the market price if trading in our stock is not active. We will negotiate and determine the initial public offering price with the representative of the underwriters and this price may not be indicative of Table of Contents prices that will prevail in the trading market after the offering. Investors may not be able to sell their common stock at or above the initial public offering price. In addition, there are continuing eligibility requirements for companies listed on The NASDAQ Capital Market. If we are not able to continue to satisfy the eligibility requirements of The NASDAQ Capital Market, then our stock may be delisted. This could result in a lower price of our common stock and may limit the ability of our stockholders to sell our stock, any of which could result in your losing some or all of your investment. We expect the price of our common stock to be volatile, and if you purchase shares of our common stock you could incur substantial losses if you are unable to sell your shares at or above the offering price. The price for the shares of our common stock sold in this offering will be determined by negotiation between the representatives of the underwriters and us, but this price may not reflect the market price for our common stock following the offering. In addition, our stock price is likely to be volatile. The stock markets in general and the market for small health care companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the initial public offering price. The price for our common stock may be influenced by many factors, including: announcements of technological innovations or new products by us or our competitors; announcements of the status of FDA review of our products; the success rate of our discovery efforts, animal studies and clinical trials; developments or disputes concerning patents or proprietary rights, including announcements of infringement, interference or other litigation regarding these rights; the willingness of collaborators to commercialize our products and the timing of commercialization; changes in our strategic relationships which adversely affect our ability to acquire or commercialize products; announcements concerning our competitors or the health care industry in general; public concerns over the safety of our products or our competitors products; changes in governmental regulation of the health care industry; changes in the reimbursement policies of third-party insurance companies or government agencies; actual or anticipated fluctuations in our operating results from period to period; variations in our quarterly results; changes in financial estimates or recommendations by securities analysts; changes in accounting principles; and the loss of any of our key scientific or management personnel. A decline in the market price of our common stock could cause investors to lose some or all of their investment and may adversely impact our ability to attract and retain employees and raise capital. A significant portion of our outstanding common stock may be sold into the market in the near future. Substantial sales of common stock, or the perception that such sales are likely to occur, could cause the price of our common stock to decline. If our existing stockholders sell a large number of shares of common stock or the public market perceives that existing stockholders might sell shares of common stock, the market price of our common stock could decline significantly. All of the shares offered under this prospectus will be freely tradable without restriction or further registration under the federal securities laws, unless purchased by our affiliates, as that term is defined in Rule 144 under the Securities Act of 1933. An aggregate of 7,007,868 shares of our common stock Table of Contents outstanding prior to this offering may also be sold pursuant to Rules 144, 144(k) and 701 upon completion of this offering, subject to the expiration of lock-up agreements covering an aggregate of 6,969,608 of these shares. Lock-up agreements covering 6,006,226 shares expire 180 days after the date of this prospectus, and lock-up agreements covering the remaining 963,382 shares expire 12 months after the date of this prospectus. In addition, as of May 31, 2007, holders of an aggregate of 6,124,239 shares of common stock and warrants to purchase an aggregate of 984,530 shares of common stock (including certain warrants to be issued contingent upon the closing of this offering) have rights with respect to the registration of their shares of common stock with the SEC. See Description of Capital Stock Registration Rights. If we register their shares of common stock following the expiration of the lock-up agreements, they can immediately sell those shares in the public market. Promptly following this offering, we intend to file a registration statement covering up to a maximum of 1,712,047 shares of common stock that are authorized for issuance under our equity incentive plans. As of May 31, 2007, 550,959 shares were subject to outstanding options, of which 273,452 shares were vested. Once we register these shares, they can be freely sold in the public market upon issuance, subject to lock-up agreements and restrictions on our affiliates. For more information, see the discussion under the caption Shares Eligible for Future Sale. If we fail to develop and maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud; as a result, current and potential stockholders could lose confidence in our financial reporting, which could harm our business and the trading price of our common stock, should a market for such securities ever develop. Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We have not undertaken any efforts to develop a sophisticated financial reporting system. Section 404 of the Sarbanes-Oxley Act of 2002 will require us, beginning with our fiscal year 2008, to evaluate and report on our internal controls over financial reporting and will require our independent registered public accounting firm annually to attest to such evaluation, as well as issue their own opinion on our internal control over financial reporting. Because we have historically operated as a private company, we have limited experience attempting to comply with public company obligations, including Section 404 of the Sarbanes-Oxley Act. The process of strengthening our internal controls and complying with Section 404 is expensive and time consuming, and requires significant management attention, especially given that we have not previously undertaken any efforts to comply with the requirements of Section 404. We plan to retain a consultant to assist us in developing our internal controls to comply with regulatory requirements and may be required to retain additional consultants or employees to assist us with other aspects of complying with regulatory requirements applicable to public companies in the future. The implementation of compliance efforts with Section 404 will be challenging in the face of our planned rapid growth to support our operations as well as the establishment of infrastructure to support our commercial operations. We cannot be certain that the measures we will undertake will ensure that we will maintain adequate controls over our financial processes and reporting in the future. Furthermore, if we are able to rapidly grow our business, the internal controls that we will need will become more complex, and significantly more resources will be required to ensure our internal controls remain effective. Failure to implement required controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we or our auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could diminish investors confidence in our financial statements and harm our stock price. In addition, non-compliance with Section 404 could subject us to a variety of administrative sanctions, including ineligibility for listing on The NASDAQ Capital Market and the inability of registered broker-dealers to make a market in our common stock. Anti-takeover defenses that we have in place could prevent or frustrate attempts to change our direction or management. Provisions of our amended and restated certificate of incorporation and bylaws that will become effective upon the closing of this offering and applicable provisions of Delaware law may make it more difficult or Table of Contents impossible for a third party to acquire control of us without the approval of our board of directors. These provisions: limit who may call a special meeting of stockholders; establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on at stockholder meetings; prohibit cumulative voting in the election of our directors, which would otherwise permit holders of less than a majority of our outstanding shares to elect directors; prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; and provide our board of directors the ability to designate the terms of and issue new series of preferred stock without stockholder approval. In addition, Section 203 of the Delaware General Corporation Law generally prohibits us from engaging in any business combination with certain persons who own 15% or more of our outstanding voting stock or any of our associates or affiliates who at any time in the past three years have owned 15% or more of our outstanding voting stock. These provisions may have the effect of entrenching our management team and may deprive you of the opportunity to sell your shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock. We may become involved in securities class action litigation that could divert management s attention and harm our business. The stock market in general, and The NASDAQ Capital Market and the market for biopharmaceutical companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and health care industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a particular company s securities, securities class action litigation has often been brought against that company. We may become involved in this type of litigation in the future, regardless of the merits. Litigation often is expensive and diverts management s attention and resources, which could materially harm our financial condition and results of operations. We do not intend to pay cash dividends on our common stock in the foreseeable future. We have never declared or paid any cash dividends on our common stock or other securities, and we currently do not anticipate paying any cash dividends in the foreseeable future. Instruments governing any future indebtedness may also contain various covenants that would limit our ability to pay dividends. Accordingly, our stockholders will not realize a return on their investment unless the trading price of our common stock appreciates. Our common stock may not appreciate in value after the offering and may not even maintain the price at which investors purchased shares. Forward-looking Statements This prospectus contains forward-looking statements that are based on our management s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in the
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+This summary highlights information contained elsewhere in this prospectus. This summary sets forth the material terms of this offering, but does not contain all of the information that you should consider before investing in our Class A common stock. You should read the entire prospectus carefully before making an investment decision, especially the risks of investing in our Class A common stock discussed under Risk Factors. Unless the context otherwise requires, the terms we, us, our, our company and VMware refer to VMware, Inc. and its consolidated subsidiaries. Unless the context otherwise requires, the term EMC refers to our parent company, EMC Corporation, and its consolidated subsidiaries other than us. Our Business We are the leading provider of virtualization solutions. Our virtualization solutions represent a pioneering approach to computing that separates the operating system and application software from the underlying hardware to achieve significant improvements in efficiency, availability, flexibility and manageability. Our solutions enable organizations to aggregate multiple servers, storage infrastructure and networks together into shared pools of capacity that can be allocated dynamically, securely and reliably to applications as needed, increasing hardware utilization and reducing spending. We believe that the market opportunity for our virtualization solutions is large and expanding, with 24.6 million x86 servers and 489.7 million business client PCs installed worldwide as of December 2006. Our customer base includes 100% of the Fortune 100 and over 84% of the Fortune 1,000. Our customer base for our server solutions has grown to include 20,000 organizations of all sizes across numerous industries. We believe our solutions deliver significant economic value for customers, and many have adopted our solutions as the strategic and architectural foundation for their future computing initiatives. In the eight years since the introduction of our first virtualization platform, we have expanded our offering with virtual infrastructure automation and management products to address distributed and heterogeneous infrastructure challenges such as system recoverability and reliability, backup and recovery, resource provisioning and management, capacity and performance management and desktop security. Our broad and proven suite of virtualization solutions addresses a range of complex IT problems that include infrastructure optimization, business continuity, software lifecycle management and desktop management. We work closely with over 200 technology partners, including leading server, processor, storage, networking and software vendors. We have shared the economic opportunities surrounding virtualization with our partners by facilitating solution development through open application programming interfaces (APIs), formats and protocols and providing access to our source code and technology. The endorsement and support of our partners have further enhanced the awareness, reputation and adoption of our virtualization solutions. We have developed a multi-channel distribution model to expand our presence and reach various segments of the market. We derive a significant majority of our revenues from our large indirect sales channel of more than 4,000 channel partners that include distributors, resellers, x86 system vendors and systems integrators. We believe that our partners benefit greatly from the sale of our solutions through additional services, software and hardware sales opportunities. We have trained a large number of partners and end users to deploy and leverage our solutions. We have achieved strong financial performance to date, as demonstrated by our revenue growth. Our total revenues were $703.9 million in 2006 and $387.1 million in 2005, representing an increase of 82% in 2006. Software license revenues were $491.9 million in 2006 and $287.0 million in 2005, representing an increase of 71% in 2006. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents The historical financial information we have included in this prospectus includes allocations of certain corporate functions historically provided to us by EMC, including tax, accounting, treasury, legal and human resources services and other general corporate expenses. These allocations were made based on estimates which are considered reasonable by our management. Our historical results are not necessarily indicative of what our results of operations, financial position, cash flows or costs and expenses would have been had we been an independent entity during the historical periods presented or what our results of operations, financial position, cash flows or costs and expenses will be in the future when we are a publicly traded, stand-alone company. Industry Background The introduction of x86 servers in the 1980s provided a low-cost alternative to mainframe and proprietary UNIX systems. The broad adoption of Windows and the emergence of Linux as server operating systems in the 1990s established x86 servers as the industry standard. The growth in x86 server and desktop deployments has introduced new operational risks and IT infrastructure challenges. These challenges include: Low Infrastructure Utilization. Typical x86 server deployments achieve an average utilization of only 10% to 15% of total capacity, according to International Data Corporation (IDC), a market research firm. Organizations typically run one application per server to avoid the risk of vulnerabilities in one application affecting the availability of another application on the same server. Increasing Physical Infrastructure Costs. The operational costs to support growing physical infrastructure have steadily increased. Most computing infrastructure must remain operational at all times, resulting in power consumption, cooling and facilities costs that do not vary with utilization levels. Increasing IT Management Costs. As computing environments become more complex, the level of specialized education and experience required for infrastructure management personnel and the associated costs of such personnel have increased. Organizations spend disproportionate time and resources on manual tasks associated with server maintenance, and thus require more personnel to complete these tasks. Insufficient Failover and Disaster Protection. Organizations are increasingly affected by the downtime of critical server applications and inaccessibility of critical end user desktops. The threat of security attacks, natural disasters, health pandemics and terrorism has elevated the importance of business continuity planning for both desktops and servers. Desktop Management and Security. Managing and securing enterprise desktops present numerous challenges. Controlling a distributed desktop environment and enforcing management, access and security policies without impairing users ability to work effectively is complex and expensive. Numerous patches and upgrades must be continually applied to desktop environments to eliminate security vulnerabilities. Virtualization was first introduced in the 1970s to enable multiple business applications to share and fully harness the centralized computing capacity of mainframe systems. Virtualization was effectively abandoned during the 1980s and 1990s when client-server applications and inexpensive x86 servers and desktops established the model of distributed computing. Rather than sharing resources centrally in the mainframe model, organizations used the low cost of distributed systems to build up islands of computing capacity, providing some benefits but also introducing new challenges. In 1999, VMware introduced virtualization to x86 systems as a means to efficiently address many of these challenges and to transform x86 systems into general purpose, shared hardware infrastructure that offers full isolation, mobility and operating system choice for application environments. Amendment No. 6 to Form S-1 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 Table of Contents We believe that the addressable market opportunity for our virtualization solutions is large and expanding. IDC estimates that less than one million of the 24.6 million x86 servers and less than five million of the 489.7 million business client PCs deployed worldwide are running virtualization software. We believe industry trends towards more powerful yet under-utilized multi-core servers and the increasing complexity of managing desktop environments will further accelerate the widespread adoption of virtualization for both server and desktop deployments. Our Solution Our virtualization solutions run on industry-standard servers and desktops and support a wide range of operating system and application environments, as well as networking and storage infrastructure. We have designed our solutions to function independently of the hardware and operating system to provide customers with a broad platform choice. Our solutions provide a key integration point for hardware and infrastructure management vendors to deliver differentiated value that can be applied uniformly across all application and operating system environments. Key benefits to our virtualization solutions include: Server Consolidation and Infrastructure Optimization. Our solutions enable organizations to achieve significantly higher resource utilization by pooling common infrastructure resources and breaking the legacy one application to one server model. Physical Infrastructure Cost Reduction. Through server consolidation and containment, our solutions reduce the required number of servers and other related infrastructure overhead. Organizations are able to significantly decrease physical infrastructure costs through reduced data center space, power and cooling requirements. Improved Operational Flexibility and Responsiveness. We offer a set of automation and management solutions that reduce the amount of time IT professionals must spend on largely reactive tasks, such as provisioning, configuration, monitoring and maintenance. Additionally, as the need for physical infrastructure decreases, so does the need for the highly-specialized personnel required to manage and maintain such environments. Increased Application Availability and Improved Business Continuity. Our solutions enable organizations to reduce both planned and unplanned downtime in their computing environments by allowing them to securely migrate entire virtual environments to separate servers or even data center locations without user interruption. Improved Desktop Manageability and Security. Our desktop virtualization solutions allow IT organizations to efficiently control and secure desktop environments to end users regardless of their location, desktop hardware, operating system or business application access needs. Our Competitive Strengths We believe that the following competitive strengths position us well to maintain and extend our leadership in virtualization solutions: leading technology and market position; broad product portfolio; open standards and choice of operating systems; large installed base of customers; strong partner network; and robust global support operations and services. Table of Contents Our Growth Strategy Our objective is to extend our market leadership in virtualization solutions. To accomplish this objective, we intend to: broaden our product portfolio; enable choice for customers and drive standards; expand our network of technology and distribution partners; increase sales to existing customers and pursue new customers; and increase market awareness and drive adoption of virtualization. Risks that We Face
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+included in the most comparable GAAP measure. In this prospectus, we disclose EBITDAX, which is, and PV-10, which may be, a non-GAAP financial measure. See note 3 to Summary Summary Consolidated Historical and Pro Forma Financial Information, note 3 to Summary Summary Historical Reserve and Operating Data and note 2 to the table in Business and Properties Our Areas of Operations. Table of Contents Index to Financial Statements SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before investing in our common stock. You should read this entire prospectus carefully, including Risk Factors and our consolidated financial statements and the notes to those financial statements included elsewhere in this prospectus, as well as the exhibits to the registration statement of which this prospectus forms a part. See Where You Can Find More Information. Some of the statements in this prospectus are forward-looking statements. See Cautionary Statement Concerning Forward-Looking Statements. Unless otherwise indicated, the information contained in this prospectus (i) assumes that the underwriters do not exercise their option to purchase additional shares of our common stock and (ii) gives effect to a reverse stock split of our common stock expected to be effected in connection with this offering. Unless the context requires otherwise, references in this prospectus to (i) Ascent, we, us and our refer to Ascent Energy Inc., its Parent and its subsidiaries, and (ii) Parent or SLPH refers to South Louisiana Property Holdings, Inc., formerly known as Forman Petroleum Corporation, which holds approximately 83% of the outstanding common stock (on a non-diluted basis) of Ascent Energy Inc. prior to the consummation of this offering, the Recapitalization and the Incentive Issuance, each as further described below. Overview We are a growth-oriented, independent natural gas and oil company engaged in the acquisition, exploration and development of both conventional and unconventional natural gas and oil properties in Texas, Oklahoma, Louisiana and the Appalachian region. Our growth efforts are directed primarily at finding and developing natural gas reserves in unconventional shale gas areas and in known tight gas areas. We operate substantially all of our properties. Since joining us in mid-2003, our senior management team has embarked on a strategy to acquire and develop a risk-balanced inventory of high growth opportunities, predominately in shale gas. In order to implement this strategy, our new management initially devoted a substantial portion of its efforts to improving our operational efficiency and increasing our liquidity. Since 2004, our management has successfully added unconventional shale gas acreage in four large shale gas exploration areas and entered the prospective tight gas areas of the Cotton Valley trend in east Texas. Our unconventional shale gas acreage acquired through December 31, 2006 consists of approximately 183,368 gross acres (138,139 net acres) located in the Woodford/Barnett shale in west Texas, the Barnett shale in north Texas, the Woodford shale and the Caney shale in Oklahoma and the Devonian shale in the Appalachian region. We have employed a strategy to acquire a meaningful position in several prospective shale gas areas to diversify risk while providing exposure to significant potential reserves. As of December 31, 2006, most of our current production was from our approximate 61,641 gross acres (37,134 net acres) of conventional natural gas and oil properties in Texas, Oklahoma and Louisiana, which includes our acreage in the tight gas sands of the Cotton Valley trend in east Texas and the Vicksburg and Wilcox trends in south Texas. Each of these fields is characterized by established production profiles and numerous producing wells. We plan to expand our production and reserves from such conventional areas by further developing our current properties as well as acquiring additional properties that we believe can generate near-term production and cash flow. Based on reserve reports prepared by our independent reserve engineering firms, our total proved reserves as of December 31, 2005 were approximately 106.1 Bcfe (equivalent to 17.7 MMBoe), of which 51.7% were proved UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents Index to Financial Statements Natural Gas and Oil Information We have provided definitions for the natural gas and oil terms used in this prospectus in the Glossary of Natural Gas and Oil Terms included as Appendix A. Unless otherwise indicated, all natural gas and oil statistics with respect to our proved reserves as of December 31, 2005 and as of June 30, 2006 set forth in this prospectus are based on reserve reports prepared by Netherland, Sewell & Associates, Inc. and LaRoche Petroleum Consultants, Ltd., independent reserve engineering firms. A summary of Netherland, Sewell & Associates, Inc. s report on our proved reserves as of December 31, 2005 is attached to this prospectus as Appendix B and a summary of Netherland, Sewell & Associates, Inc. s report on our proved reserves as of June 30, 2006 is attached to this prospectus as Appendix D. A summary of LaRoche Petroleum Consultants, Ltd. s report on our proved reserves as of December 31, 2005 is attached to this prospectus as Appendix C and a summary of LaRoche Petroleum Consultants, Ltd. s report on our proved reserves as of June 30, 2006 is attached to this prospectus as Appendix E. Our Investors Unless the context requires otherwise, references in this prospectus to The Jefferies Investors means Jefferies & Company, Inc. and certain of its affiliated funds and employees, all of which are our securityholders, and The TCW Funds refers to certain affiliated funds that are our securityholders. On September 27, 2006, certain of The TCW Funds transferred their securities in us to an unaffiliated third party pursuant to the liquidation of such funds portfolios. Our Financial Statements The consolidated financial statements of Ascent Energy Inc. as of December 31, 2004 and December 31, 2005, and for each of the three years in the period ended December 31, 2005, appearing elsewhere in this prospectus and registration statement, have been audited by Ernst & Young LLP. In May 2006, Ernst & Young LLP informed us that the India member firm of E&Y Global had a business arrangement with an affiliate of Jefferies Group, Inc. in the United Kingdom that was not in accordance with the SEC s auditor independence rules regarding Ernst & Young s independence in its performance of audit services for us because Jefferies & Company, Inc., which is another affiliate of Jefferies Group, Inc., is a substantial shareholder of us. We have been advised by Ernst & Young LLP and Jefferies Group, Inc. that this business arrangement was terminated in June 2006. Please read Experts for additional information. (1) As of June 30, 2006, our estimated net proved reserves were 92.7 Bcfe (equivalent to 15.4 MMBoe), which was determined using June 30, 2006 posted prices, in accordance with SEC guidelines, of $6.04 per MMBtu of natural gas and $70.50 per Bbl of oil and includes 53.3 Bcfe (equivalent to 8.9 MMBoe) attributable to our Oklahoma properties, 27.7 Bcfe (equivalent to 4.6 MMBoe) attributable to our Texas properties and 11.7 Bcfe (equivalent to 1.9 MMBoe) attributable to our Louisiana properties. See note 3 to Summary Historical Reserve and Operating Data for additional information regarding adjustments to posted prices. Our June 30, 2006 reserve estimates are based on reserve reports prepared by our independent reserve engineers. See Business and Properties Proved Reserves. (2) PV-10 represents the present value of estimated future cash inflows from proved natural gas and oil reserves, less future development and production expenses, discounted at 10% per annum to reflect timing of future cash flows and using December 31, 2005 posted prices for natural gas and oil. See note 3 to Summary Historical Reserve and Operating Data for additional information about our computation of PV-10 and its reconciliation to the standardized measure of discounted future net cash flows, which is its most comparable GAAP financial measure as well as price sensitivity analysis related to PV-10. (3) Reserve life is calculated by dividing our proved reserves as of December 31, 2005 by our annualized December 2006 average net daily production. We have budgeted to drill between 30 and 35 wells in 2007 and have a 2007 capital expenditure budget of approximately $73.6 million, of which $61.0 million is targeted for drilling and workovers and $7.0 million is targeted for leasehold acquisitions. Approximately 58% of our 2007 capital expenditure budget is allocated to the acquisition, exploration and development of unconventional shale gas properties, and approximately 42% is allocated to exploration and development of our conventional resource properties, including our tight gas sands. During 2006, we spent approximately $44.7 million on the drilling of 40 gross wells and the completion of 29 producing wells. Six of the wells were pending completion and evaluation and four wells were pending pipeline connections as of December 31, 2006. Subsequent to December 31, 2006, one of those wells was completed and two were connected to sales lines. Amendment No. 4 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents Index to Financial Statements Unconventional Shale Gas Our growth strategy is primarily directed at acquiring opportunities for reserve growth in long-lived reservoirs in unconventional shale gas areas. Unlike with most conventional reservoirs, the determination whether the development of our unconventional shale gas acreage is economically viable could take one to two years from the time we assemble a significant leasehold position. Our unconventional shale gas properties are located in regions that have experienced significant increases in industry leasing and drilling activity in the past several years. The following is a brief description of our unconventional shale gas acreage: Appalachian Devonian Shale. As of December 31, 2006, we had leasehold interests in approximately 47,427 gross (43,623 net) acres in this region. We have initiated a five-well drilling program to test for natural gas and gather data that will help us determine the most appropriate drilling and completion strategy. We are the operator of this acreage and own a 100% working interest. North Texas Barnett Shale. As of December 31, 2006, we had leasehold interests in approximately 21,508 gross (20,705 net) acres in this region. We expect to drill our initial test wells on a portion of this acreage in the first half of 2007. We are the operator of this acreage with a 100% working interest. Oklahoma Woodford Shale and Caney Shale. As of December 31, 2006, we had leasehold interests in approximately 9,404 gross (2,576 net) acres in the Woodford shale and approximately 3,848 gross (2,850 net) acres in the Caney shale. We have drilled and completed our first vertical test well in the Woodford shale. Based on the initial production results of approximately 411 Mcf/d from this well, we have drilled three additional wells in the Woodford shale, two of which are currently producing and the third is being evaluated. We have also drilled our initial horizontal well in the Caney shale, which is currently producing. We are the operator of our Woodford shale acreage and our Caney shale acreage with working interests in each ranging from 50% to 80%. West Texas Woodford/Barnett Shale. As of December 31, 2006, we had leasehold interests in approximately 101,181 gross (68,385 net) acres in this region, all of which are located in Brewster County. We hold this interest subject to a contractual obligation to drill and test five wells. We are the operator of this acreage with an average working interest of approximately 75%. East Texas Tight Gas Our growth strategy also includes acquiring property in tight gas sand areas in east Texas that has existing infrastructure to transport natural gas to market. This area is characterized by lower exploration and development risk than many of our other projects. We believe there are several offset opportunities that can be enhanced with the use of modern completion and stimulation techniques. We began acquiring leasehold interests and drilling in this area in the fourth quarter of 2005. As of December 31, 2006, we had drilled and completed 12 wells in this area with a 100% success rate and we had acquired leasehold interests in approximately 7,119 gross (4,959 net) acres in the tight gas sands of the Cotton Valley trend in east Texas. We are the operator of this acreage with working interests ranging from 38% to 100%. Our December 31, 2005 proved reserves from this acreage are associated with 12 proved undeveloped and proved developed producing locations. South Texas Natural Gas We are continuously seeking to expand our acreage in south Texas, including the Vicksburg and Wilcox trends, by acquiring property located in mature producing areas that we believe can generate near-term production and cash flow. As of December 31, 2006, we had leasehold interests in approximately 4,229 gross (3,337 net) acres in the Vicksburg trend and approximately 3,415 gross (3,018 net) acres in the Wilcox trend, Ascent Energy Inc. (Exact name of registrant as specified in its charter) Delaware 1311 72-1493233 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 4965 Preston Park Blvd., Suite 800 Plano, Texas 75093 (972) 543-3900 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Terry W. Carter Chief Executive Officer and President Ascent Energy Inc. 4965 Preston Park Blvd., Suite 800 Plano, Texas 75093 (972) 543-3900 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents Index to Financial Statements including producing acreage in the region. During 2006, we drilled five wells in this area with a 100% success rate. We are the operator of this acreage with working interests ranging from 75% to 100%. As of December 31, 2006, we had 38 producing wells in this region. Our December 31, 2005 proved reserves from this acreage are associated with 49 proved undeveloped and proved developed producing locations. Our Strengths High Quality Asset Base in Mature Producing Basins. Our producing properties, consisting of approximately 36,702 gross developed acres (23,262 net developed acres) as of December 31, 2006, are located in prolific producing areas of south and east Texas, Oklahoma and Louisiana, with long histories of natural gas and oil production. We support our unconventional shale gas exploration with the cash flow generated from these mature properties. Significant Growth Opportunities. We believe our approximate two-year inventory of conventional and tight gas drilling projects will generate near-term production growth and cash flow. In addition, we have acquired acreage positions in several unconventional shale gas areas where industry drilling and production activity has increased in the past several years. If our initial unconventional shale gas drilling projects are successful, we expect to increase significantly our long-term reserves, production and drilling inventory. Effective Risk Management. Our areas of operation provide us with geographic, geological and operational diversity. Our diversified inventory of conventional and unconventional resource drilling locations ranges from lower risk development locations to higher risk exploration locations, including most of our unconventional shale gas acreage, that expose us to opportunities for greater reserve and production growth. Experienced, Incentivized Management Team with Strong Technical Capability. Our senior management team has on average more than 28 years of industry experience and has considerable technical expertise in engineering, geoscience and field operations. Our in-house technical personnel have extensive experience in geology, geophysics, engineering and drilling and completion technology, including horizontal drilling and fracturing technology. Assuming an initial public offering price of $ per share (the mid-point of the range set forth on the cover of this prospectus) and 14,450,000 shares of our common stock outstanding immediately after the consummation of this offering, the Recapitalization and the Incentive Issuance, our officers will beneficially own approximately 1.2% of our common stock after the consummation of this offering, the Recapitalization and the Incentive Issuance. Our Business Strategy Drive Growth Through the Drillbit. We intend to create near-term reserve and production growth from our approximate two-year inventory of drilling opportunities. We anticipate most of our cash flow in the next several years will be generated from our existing producing properties and proved reserves as well as our lower-risk drilling opportunities, exploration and development. We have allocated a significant portion of our 2007 exploration budget to our higher-risk unconventional shale gas exploration and our tight gas sands exploration. Focus on Growing Our Inventory of Shale Gas Opportunities. We intend to continue expanding our acreage positions in multiple shale gas areas. As of December 31, 2006, we had leasehold interests in approximately 182,528 gross (137,571 net) acres of undeveloped shale gas property over four areas. We spent approximately $11.9 million in 2006 to acquire shale gas acreage and have budgeted approximately $4.2 million to acquire shale gas acreage in 2007. Pursue Tight Gas Sand Opportunities. We are pursuing multiple tight gas sand opportunities. We believe that our tight gas sand areas have significant potential reserves that have not been depleted by the use of past Copies to: T. Mark Kelly J. Michael Chambers Caroline B. Blitzer Akin Gump Strauss Hauer & Feld LLP Vinson & Elkins L.L.P. 1111 Louisiana Street, 44th Floor 2500 First City Tower Houston, Texas 77002 1001 Fannin (713) 220-5800 Houston, Texas 77002-6760 (713) 758-2222 Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said section 8(a), may determine. Table of Contents Index to Financial Statements drilling and completion techniques. We typically pursue opportunities in known tight gas sand areas that have existing infrastructure to transport natural gas to the market. During 2006, we spent approximately $26.6 million to drill 14 wells in our tight gas sand operations in south and east Texas, and we have budgeted approximately $24.5 million to drill wells in our tight gas sand operations in south and east Texas in 2007. Operate Substantially All of Our Assets. We serve as the operator of substantially all of our producing properties and intend to continue to do so in the future. Operating control enables us to better control timing and risk as well as the cost of exploration and development drilling and ongoing operations. We believe that in the competitive market for drilling rigs it is advantageous to be in a position to make longer term commitments to drilling rig operators in order to secure service. Maintain Financial Flexibility. Following the completion of this offering and our anticipated Recapitalization and Incentive Issuance, we will have increased our equity capital base by over $ million and will have approximately $ million of undrawn availability under our credit facility. We believe that future cash flow and access to the capital markets following this offering will provide us with financial flexibility that both enhances our ability to execute our business plan and allows us to selectively seek and complete acquisitions. Seek Acquisitions that Complement Our Exploration and Development Plans. We pursue acquisitions that add efficiency to our existing operations or represent attractive additions to our exploration and development prospect inventory in large, mature producing regions. We maintain a disciplined acquisition process to help ensure that acquisitions fit our strategic and financial objectives. Recapitalization and Incentive Issuance Immediately prior to the sale of our shares in this offering, we intend to consummate a corporate recapitalization involving the following transactions: we will issue shares of our common stock in repayment of our senior subordinated notes that are not repaid with the net proceeds of this offering in a transaction that we refer to as the Debt Exchange; we will issue shares of our common stock in exchange for our outstanding Series A preferred stock (including accrued but unpaid dividends thereon) and cancel all outstanding warrants in a transaction that we refer to as the Preferred Exchange; and our Parent will become a wholly owned subsidiary of Ascent Energy Inc. in a tax-free transaction that we refer to as the Parent Merger. We refer to the Debt Exchange, the Preferred Exchange and the Parent Merger, collectively, as the Recapitalization. In addition, we intend to terminate our Amended and Restated Equity Incentive Plan, or 2005 Incentive Plan, and the awards granted thereunder. Participants in the 2005 Incentive Plan will receive cash bonuses and awards of restricted stock, which vest over a three-year period, in exchange for terminating their rights under the 2005 Incentive Plan. We refer to this exchange as the Incentive Issuance. The Incentive Issuance is contingent on the consummation of this offering and the Recapitalization. Upon the consummation of this offering, the application of the net proceeds of this offering as described in Use of Proceeds and the consummation of the Recapitalization and the Incentive Issuance, we will have outstanding 14,450,000 shares of our common stock, all of our senior notes and senior subordinated notes will be extinguished and our outstanding indebtedness will consist solely of approximately $ million of borrowings under our credit facility which mature November 1, 2010. Table of Contents Index to Financial Statements For additional information about the Recapitalization and the Incentive Issuance, please see Recapitalization and Incentive Issuance and Use of Proceeds. The Jefferies Investors, including Jefferies & Company, Inc., one of the underwriters in this offering, and certain of its affiliates, and The TCW Funds are the principal holders of our securities, and will receive cash and shares of our common stock in this offering and the Recapitalization. In addition, our executive officers have agreed to participate in the Incentive Issuance and therefore are expected to receive cash and shares of our common stock in this offering and the Incentive Issuance. Please see Related Person Transactions, Principal Stockholders, Management and Compensation. Our Company Ascent Energy Inc. is a Delaware corporation formed in 2001. Our principal executive offices are located at 4965 Preston Park Blvd., Suite 800, Plano, Texas 75093. Our telephone number at that address is (972) 543-3900. After this offering, we will maintain a web site at www.ascentenergy.com. This web site will contain information about us. Our web site and the information contained on it and connected to it are not a part of, and will not be deemed incorporated by reference into, this prospectus. Table of Contents Index to Financial Statements The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. Subject to Completion, dated February 8, 2007 PROSPECTUS Shares Common Stock Table of Contents Index to Financial Statements THE OFFERING Common stock offered shares Underwriters option to purchase additional shares shares Common stock outstanding immediately after the completion this offering, the Recapitalization and the Incentive Issuance (1) 14,450,000 shares Use of proceeds We estimate that the net proceeds from this offering, after deducting underwriting discounts and estimated offering expenses payable by us, will be approximately $148.4 million, based on an assumed initial public offering price of $ per share. We intend to use the net proceeds of this offering to repay a portion of the indebtedness outstanding under our credit facility, all of our senior notes and a portion of our senior subordinated notes; to refinance some of our derivative arrangements; and to pay cash bonuses to employees participating in the Incentive Issuance. See Use of Proceeds. The Jefferies Investors, including Jefferies & Company, Inc., one of the underwriters in this offering, are holders of our senior notes and our senior subordinated notes and therefore are expected to receive a portion of the net proceeds of this offering and shares of common stock in connection with this offering and the Recapitalization. In addition, affiliates of certain of the underwriters in this offering are lenders under our credit facility and accordingly are expected to receive a portion of the net proceeds of this offering. See Use of Proceeds, Related Person Transactions Recapitalization, Principal Stockholders, and Underwriting. Our executive officers have agreed to participate in the Incentive Issuance and therefore are expected to receive a portion of the net proceeds of this offering and shares of our common stock in connection with this offering and the Incentive Issuance. See Use of Proceeds, Compensation 2005 Incentive Plan Termination of 2005 Incentive Plan, Related Person Transactions Termination of 2005 Incentive Plan and Principal Stockholders. Upon the consummation of this offering, the application of the net proceeds of this offering as described in Use of Proceeds and the consummation of the Recapitalization and the Incentive Issuance, we will have outstanding 14,450,000 shares of our common stock, all of our senior notes and senior subordinated notes will be extinguished and our outstanding indebtedness will consist solely of approximately $ million of borrowings under our credit facility which mature November 1, 2010. This is the initial public offering by Ascent Energy Inc. We are offering shares of our common stock for which no public market currently exists. We currently expect the initial public offering price to be between $ and $ per share. We have applied to list our common stock on The Nasdaq Global Market under the symbol ASNT. Investing in our common stock involves risks. Please read
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+Prospectus Summary 1 Risk Factors 7 Special Note Regarding Forward-Looking Statements 23 Use of Proceeds 24 Dividend Policy 24 Capitalization 25 Dilution 27 Selected Consolidated Financial Data 29 Management s Discussion and Analysis of Financial Condition and Results of Operations 31 Business 56 Management 72 Related Party Transactions 88 Principal Stockholders 90 Description of Capital Stock 93 Shares Eligible for Future Sale 95 Certain U.S. Federal Income Tax Considerations For Non-U.S. Holders 98 Underwriting 101 Notice to Canadian Residents 106 Legal Matters 107 Experts 107 Where You Can Find More Information 107 Index to Consolidated Financial Statements F-1 Ex-10.18 Contractor Agreement between Persistent Systems Pvt. Ltd and the Company Ex-23.1 Consent of PricewaterhouseCoopers LLP You should rely only on the information contained in this document and any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. Dealer Prospectus Delivery Obligation Until , 2007 (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions. Table of Contents PROSPECTUS SUMMARY This summary highlights information appearing elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the Risk Factors section beginning on page 7 and our consolidated financial statements and the related notes appearing elsewhere in this prospectus, before making an investment decision. NETEZZA CORPORATION Overview Netezza is a leading provider of data warehouse appliances. Our product, the Netezza Performance Server, or NPS, integrates database, server and storage platforms in a purpose-built unit to enable detailed queries and analyses on large volumes of stored data. The results of these queries and analyses, often referred to as business intelligence, provide organizations with actionable information to improve their business operations. We designed our NPS data warehouse appliance specifically for analysis of terabytes of data at higher performance levels and at a lower total cost of ownership with greater ease of use than can be achieved via traditional data warehouse systems. Our NPS appliance performs faster, deeper and more iterative analyses on larger amounts of detailed data, giving our customers greater insight into trends and anomalies in their businesses, thereby enabling them to make better strategic decisions. From our inception through April 30, 2007, we have sold over 230 of our data warehouse appliances worldwide to 101 data-intensive customers including large global enterprises, mid-market companies and government agencies. Our customers span multiple vertical industries and include data intensive companies and government agencies. Some of our more well-known customers include Ahold, Amazon.com, American Red Cross, AOL, Blue Cross Blue Shield of Rhode Island, Catalina Marketing, CNET Networks, CompuCredit Corporation, Epsilon, LoanPerformance, Marriott, the NASD, Neiman Marcus Group, Nielsen Company, Orange UK, Premier Inc., Restoration Hardware, Ross Stores, Ryder System, Source Healthcare Analytics, Inc., a Wolters Kluwer Health company, the United States Army Corps of Engineers and the United States Department of Veterans Affairs. Each of the companies listed is a current customer who has purchased at least $300,000 worth of products or services from us. Our revenues have increased rapidly, from $13.6 million in fiscal 2004 to $79.6 million in fiscal 2007, representing a compound annual growth rate of 80.1%. We have not been profitable in any fiscal period since we were formed. We incurred net losses of approximately $10.0 million in fiscal 2004, $3.0 million in fiscal 2005, $14.0 million in fiscal 2006 and $8.0 million in fiscal 2007. As of April 30, 2007, our accumulated deficit was approximately $83.0 million. The Industry The amount of data that is being generated and stored by organizations is exploding. Examples of this data include click-stream records generated by e-business, customer purchasing histories, call data records, information from RFID tagging of inventory and products, and pharmaceutical trial data. Additionally, compliance initiatives driven by government regulations, such as those issued under the Sarbanes-Oxley Act of 2002 and the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as well as company policies requiring data preservation, are expanding the proportion of data that must be retained and easily accessible for future use. As the volume of data continues to grow, enterprises have recognized the value of analyzing such data to significantly improve their operations and competitive position. These enterprises have also realized that frequent analysis of data at a more detailed level is more meaningful than periodic analysis of sampled data. This increasing amount of data and importance of data analysis has led to heightened demand for data warehouses that provide the critical framework for data-driven enterprise decision-making and business intelligence. A data warehouse consists of three main elements database, server, and storage and interacts with external systems to acquire and retain raw data, receive query instructions and provide analytical results. The data warehouse acts as a data repository for an enterprise, aggregating information from many departments, and more importantly, enabling analytics through the querying of the data to deliver specific information. The need for more robust, yet cost-effective, data warehouse solutions is being accelerated by the growing number of users of business Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED JULY 3, 2007 9,000,000 Shares Netezza Corporation Common Stock This is the initial public offering of shares of our common stock. We are selling 9,000,000 shares of our common stock. Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $9.00 and $11.00 per share. We have applied to list our common stock on NYSE Arca under the symbol NZ. Investing in our common stock involves risks. See
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+PROSPECTUS SUMMARY This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should carefully read the entire prospectus, including , ' ': , ' ': Risk Factors and the consolidated financial statements, before making an investment decision. BioMimetic Therapeutics, Inc. We develop and commercialize biologically active drug-device combination products for the healing of injuries and diseases to the skeleton and associated tissues, including periodontal, orthopedic, spine and sports injury applications. We received US marketing approval of our first product for bone regeneration in periodontal defects following completion of human clinical trials, which demonstrated the efficacy of our platform technology in periodontal indications and suggest its potential safety and efficacy in orthopedic, spine and sports injury indications. Our product and product candidates all combine a protein growth factor that actively stimulates tissue healing and regeneration with a scaffold that provides structure and support for tissue regeneration at the wound site. We believe our regenerative therapies will improve the treatment options and quality of life for millions of patients with injuries or deterioration of the bones, cartilage, tendons and ligaments. Product Overview Our product and product candidates use recombinant human Platelet-Derived Growth Factor (rhPDGF), one of the principal wound healing stimulators in the body. We believe that rhPDGF is well suited for various applications due to its stimulation of a broad spectrum of cellular events critical for the initiation and progression of periodontal and orthopedic tissue healing. rhPDGF acts like a magnet to attract cells necessary for tissue healing through a process known as chemotaxis, while also stimulating an increase in the number of healing cells through a process known as mitogenesis, thereby expanding the number of cells available for the repair process. In addition, published animal and in vitro studies demonstrate that rhPDGF may enhance processes important in new blood vessel formation at the wound site, a process critical for wound healing. Our first drug-device combination product, GEM 21S Growth-factor Enhanced Matrix, received US Food and Drug Administration, or FDA, approval in November 2005 for the treatment of periodontal bone defects and gum tissue recession associated with periodontal disease. GEM 21S combines rhPDGF-BB with a clinically proven synthetic bone matrix, beta-tricalcium phosphate ( -TCP). GEM 21S is the first totally synthetic product, combining a growth factor which stimulates bone and periodontal regeneration with a synthetic bone matrix, approved for human application by the FDA. Pivotal (Phase III) clinical trials demonstrated that GEM 21S stimulated significant bone regeneration at the treatment site. Building upon the successful approval of GEM 21S, we have a pipeline of drug-device combination product candidates called GEM OS that we are developing for a broad range of orthopedic clinical indications. Our GEM OS family of product candidates, which also incorporate rhPDGF in combination with a bone matrix, is targeted to be used in the open (surgical) treatment of fractures and fusions (GEM OS1), the closed (non-surgical) treatment of fractures (GEM OS2), and the stimulation of bone formation at sites of risk for fracture, such as the spine in individuals with osteoporosis (GEM OS2). Our GEM OS1 product candidate was the subject of pilot clinical trials for certain fracture repair and bone fusions in the US and the European Union, or EU, and we recently completed patient enrollment in a registration trial in Canada for the healing of foot and ankle fusions. Table of Contents Interim results for the US and EU pilot studies have been announced, as well as on the first 32 patients enrolled in the Canadian foot and ankle fusion clinical study. The interim results in the US and Canadian studies suggest that GEM OS1 is at least comparable to autograft (bone harvested from elsewhere in the patient s own body and currently considered the standard of care for bone graft) for the stimulation of bone healing (fusion), without the pain and morbidity associated with harvesting the autograft material. The interim results from the EU study suggest that use of GEM OS1 to treat wrist fractures (distal radius fractures) results in accelerated bone healing at earlier time points. Further, animal studies have demonstrated that rhPDGF is able to stimulate increased bone growth throughout much of the skeleton, suggesting that it may have broad therapeutic utility in fracture repair. In addition, we have ongoing and planned animal studies evaluating product candidates for the treatment of various sports injuries, including those requiring cartilage, ligament or tendon repair. Our Alliances We have licensed patents from ZymoGenetics, Inc., or ZymoGenetics, for the exclusive use of rhPDGF in our fields of interest. In addition, we have exclusively licensed the rights of Harvard College, or Harvard, with respect to certain patents that we co-own with Harvard relating to the use of rhPDGF. We also have an exclusive manufacturing agreement with Chiron Corporation, or Chiron, which was recently acquired by the Novartis Group, for the commercial supply of rhPDGF for the treatment of skeletal applications, including bone, cartilage, tendons and ligaments. We have partnered with Luitpold Pharmaceuticals, Inc., or Luitpold, a US subsidiary of Daiichi Sankyo Co., Ltd., for the worldwide marketing and distribution of GEM 21S. We expect that milestone payments, royalties on sales and a sole source manufacturing agreement will generate significant near- and long-term payments to us. We have retained all marketing rights to our orthopedic and sports injury product candidates. As of September 30, 2006, we had an accumulated deficit of $34.5 million. We expect to incur losses for at least the next few years as we continue to incur significant expenses for clinical trials. Market Trends The musculoskeletal business sector as a whole—including all treatment, services, devices, pharmaceuticals and biologics used to treat the skeleton and associated tissues, including bones, muscles, ligaments, tendons and joints that move the body and maintain its form—represents a market of approximately $350 billion. Our product candidates have the potential to impact a broad range of clinical indications in the musculoskeletal sector, including periodontal defects, the open and closed treatment of fractures, bone fusions, loss of bone density related to osteoporosis, and the repair of injuries to cartilage, tendons and ligaments. Each year, approximately 23 million fractures are treated by physicians in the US. Osteoporosis is identified as a contributing factor in an estimated 1.5 million of these fractures and complications resulting from the prolonged rehabilitation often required for osteoporotic fractures is considered a leading cause of injury related deaths among elderly women. In addition, there were an estimated 22 million patients treated for cartilage, ligament and tendon injuries in 2003. Growth in the orthopedic and sports injury market is being driven by aging baby boomers, the desire for active lifestyles well into retirement and the growth in the incidence of osteoporosis, osteoarthritis, obesity, diabetes and other diseases that cause injury to orthopedic tissues and/or impair the ability of the body to heal injuries. These factors have caused a strong demand for the adoption of biologically active treatments, which seek to stimulate the body s own capabilities for regeneration of tissue at injury sites. Despite the substantial morbidity risk faced by geriatric women suffering hip fractures, there is no biological therapy approved today to accelerate the healing of these osteoporotic fractures. Table of Contents According to industry data, the worldwide orthopedic market was estimated at $19 billion in 2004. This includes joint replacement, fracture repair, sports injury and spinal procedures. One of the fastest growing segments within the orthopedic market is grafting or osteobiologics products, which stimulate the growth and repair of bone in the area of bone injury. According to securities research analyst reports, US sales of bone grafting products and orthobiologics reached $1.3 billion in 2005, a 27% increase over 2004 sales. Based on currently available therapies alone, that figure is expected to increase to $2.5 billion by 2010. Periodontal disease is the second most prevalent disease in the US after heart disease. It is estimated that greater than 50 million people are affected with periodontal disease at the moderate to severe level. Of these, only 15 to 20% receive treatment, with an estimated $6 billion spent annually in the US to treat the disease. As a result of findings implicating periodontal disease with multiple significant healthcare problems, the US Surgeon General issued a report in 2000 highlighting periodontal disease as a major healthcare issue. Strategy Our product development strategy is to combine proprietary and potent tissue growth factors with medical devices, such as synthetic and natural tissue matrices or scaffolds, to generate drug-device combination products that provide results superior to existing therapies. Development of , ' ': , ' ': convergent devices has revolutionized the way that cardiovascular disease is treated and has proven to be both a clinical and commercial success. We believe the orthopedic industry will undergo a similar transformation from the use of traditional, passive, highly invasive metallic devices to more advanced, bio-active devices. With GEM 21S approved for marketing and several product candidates in the research and development pipeline, we believe that we are well positioned to capitalize on this transformation. We believe that our management s experience in the development of drug-device combination products, combined with our intellectual property rights, the well characterized biology and history of safe use of rhPDGF and the clinically proven efficacy of our first GEM technology all position us to become a leader in the development and commercialization of biologically-active devices that will capitalize on the growing market for these products in orthopedics and sports injury applications. We cannot be sure that we will be successful in developing, obtaining regulatory approval for, or commercializing, our product candidates or that we will do so in a timely fashion. We initially filed an application in the US for an investigational device exemption, an IDE, for GEM OS1 in June 2005. The FDA initially did not approve our application and requested additional information from us. We received FDA approval to initiate a feasibility study under our IDE in January 2006 and we completed patient enrollment in July 2006. We are continuing to follow these patients. We have also completed enrollment for a 60 patient registration trial in Canada using GEM OS1 in foot and ankle fusions. In October 2006, the independent Data Monitoring Committee recommended continuing unmodified the Canadian registration and US feasibility clinical studies with GEM OS1 for foot and ankle fusions and the expansion of the US program into pivotal clinical trials. We anticipate initiation of US pivotal trials in the first half of 2007. A separate clinical study for GEM OS1 was approved in the EU (Sweden) in May 2005 for the treatment of distal radius fractures, and we completed patient enrollment in April 2006. The interim results for this study suggest that GEM OS1 accelerated bone regeneration for these fractures at earlier time points. We also initiated a study with GEM OS2 in Sweden in January 2007 for the treatment of distal radius fractures. Risks Associated with Our Business Our business is subject to numerous risks, as more fully described in the section entitled , ' ': , ' ': Risk Factors immediately following this prospectus summary. We have a limited operating Table of Contents history and have incurred substantial losses since inception. We expect to continue to incur substantial losses for the foreseeable future and are unable to predict the extent of future losses or when we will become profitable, if at all. GEM 21S is the only approved product that we have for commercial sale, and it presently generates limited revenues. All of our product candidates are in various stages of development, have not yet received regulatory approval, and failure of product candidates is common and can occur at any stage of development. Our ability to generate product revenue in the future will depend heavily on the successful development and commercialization of our product candidates. Even if we succeed in developing and commercializing one or more of our product candidates, we may never generate sufficient sales revenue to achieve and sustain profitability. GEM 21S and our product candidates are all based on the same protein, PDGF. If PDGF is found to be unsafe or ineffectual, the development path for all of our product candidates could be impacted. We may be unable to maintain and protect our intellectual property, which could have a substantial impact on our ability to generate revenue. Our product and product candidates are subject to regulation by governmental authorities in the US and in other countries. Failure to comply with such regulations or to receive the necessary approvals or clearances for our product and product candidates may have a material adverse effect on our business. Corporate Information We were incorporated under the laws of the State of Tennessee in April 1999. In May 2001, we reincorporated in the State of Delaware under the name BioMimetic Merger Corp., and we thereafter changed our name to BioMimetic Pharmaceuticals, Inc. In August 2005, we subsequently changed our name to BioMimetic Therapeutics, Inc. Our principal executive offices are located at 389-A Nichol Mill Lane, Franklin, Tennessee 37067, and our telephone number is (615) 844-1280. Our website address is www.biomimetics.com. The information on our website is not a part of this prospectus. GEM 21S , GEM 21A , GEM OS , GEM , GEM C , GEM LT , and OsteoMimetic , are our trademarks. GEM 21S, GEM OS and GEM have been registered by the United States Patent and Trademark Office and the other trademarks are covered by pending applications for registration in the US. In addition, applications for registration of our trademarks are pending in various countries around the world. Each other trademark, tradename or service mark appearing in this prospectus belongs to its respective holder. Unless the context requires otherwise, the words , ' ': , ' ': BioMimetic, , ' ': , ' ': we, , ' ': , ' ': Company, , ' ': , ' ': us, and , ' ': , ' ': our refer to BioMimetic Therapeutics, Inc., our subsidiary formed in the United Kingdom in October 2005, BioMimetic Therapeutics Limited, and our subsidiary formed in Australia in October 2006, BioMimetic Therapeutics Pty Ltd. Table of Contents The Offering Common stock we are offering 1,800,000 shares Common stock offered by the selling stockholders 610,000 shares Common stock to be outstanding after this offering 17,449,362 shares Use of proceeds after expenses We estimate that our net proceeds from this offering will be approximately $24.9 million, based on the last reported sales price for our common stock on February 1, 2007, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use these net proceeds to fund our research and development activities, for general corporate purposes (including working capital needs and to hire additional employees), to commercialize our lead product, GEM 21S (including building our manufacturing capabilities), and to license additional molecules and matrix materials. We will not receive any of the proceeds from the sale of shares of common stock by the selling stockholders. See , ' ': , ' ': Use of Proceeds. Risk factors You should read the , ' ': , ' ': Risk Factors section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock. Nasdaq Global Market symbol BMTI The number of shares of common stock to be outstanding immediately after the closing of this offering is based on 15,633,111 shares of our common stock outstanding as of September 30, 2006. The number of shares of common stock outstanding immediately after this offering excludes: 1,503,902 shares of common stock issuable upon the exercise of stock options outstanding as of September 30, 2006 at a weighted average exercise price of $3.33 per share; and 516,148 shares of common stock that will be reserved for future issuance under our stock plans as of the completion of this offering. Unless otherwise noted, the information in this prospectus assumes that the underwriters do not exercise their over-allotment option. Table of Contents
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the following summary together with the more detailed information appearing in this prospectus, including our financial statements and notes, and our risk factors beginning on page 10, before deciding whether to purchase shares of our common stock. Unless the context otherwise requires, we use the terms Infinera, the company, we, us and our in this prospectus to refer to Infinera Corporation and its subsidiaries. INFINERA CORPORATION Overview Infinera has developed a solution that we believe will change the economics, operating simplicity, flexibility, reliability and scalability of optical communications networks. At the core of our Digital Optical Network architecture is what we believe to be the world s only commercially-deployed, large-scale photonic integrated circuit, or PIC. Our PICs transmit and receive 100 Gigabits per second, or Gbps, of optical capacity and incorporate the functionality of over 60 discrete optical components into a pair of indium phosphide chips approximately the size of a child s fingernail. We have used our PIC technology to design a new digital optical communications system called the DTN System. The DTN System is designed to enable cost-efficient optical to electrical to optical conversion of communications signals. The DTN System is architected to improve significantly communications service providers economics and service offerings as compared to optical systems that do not use large-scale photonic integration. We refer to these optical systems as traditional systems. Our carrier-class DTN System runs our Infinera IQ Network Operating System and is integrated with our Infinera Management Suite software, which together enhance and simplify network monitoring, management and control. We believe that photonic integrated circuits can change optical communications networks in a fashion similar to the integrated circuit s impact on electronics beginning in the 1950 s. Our DTN System is designed to serve as the key element for long-haul and metro optical transport networks of U.S. and international communications service providers. Our DTN System currently competes in the wavelength division multiplexing segment of the global optical communications equipment market. Our Digital Optical Network and our DTN System are designed to provide significant advantages over traditional systems, including: Operating simplicity and cost savings. Our DTN System provides our customers with flexible management and control and is designed to simplify network planning, engineering and operation, consume less power, enable simplified testing and improve system reliability. In addition, our DTN System provides optical capacity in 100 Gbps increments, enabling our customers to more easily scale their optical networks; Enhanced revenue generation. Our DTN System lowers the cost of optical to electrical to optical conversion, which enables our customers to access markets cost-effectively that had previously not been served due to cost constraints. We also believe that our DTN System enables communications service providers to add customers and provision new services more rapidly than traditional systems; and Capital cost savings. Our DTN System incorporates the functionality of over 60 discrete optical components into a single PIC pair, reducing capital expenditures and the physical space required for a given amount of optical network capacity. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents We began commercial shipment of our DTN System in November 2004. In the third quarter of 2005, we believe we achieved, and have since maintained through the fourth quarter of 2006, the largest market share of 10 Gbps long-haul ports shipped worldwide. According to Ovum RHK, a third party industry analyst, we achieved the number one position, with a 27% market share, of the North American multi-reach dense wavelength division multiplexing, or DWDM, market based on our invoiced shipments and our competitors revenues, as reported by Ovum RHK, for the trailing four quarters through the second quarter of 2007. In addition, according to Ovum RHK, we achieved a 12% market share, or the number four position, of the international multi-reach DWDM market for the same period. As of September 29, 2007, we have sold our DTN System for deployment in the optical networks of 38 customers worldwide, including Internet2, Interoute, Level 3 Communications and Qwest Communications. We do not have long-term purchase commitments with our customers. To date, a few of our customers have accounted for a significant percentage of our revenue. In 2006 and in the first two quarters of 2007, Level 3 and Broadwing Corporation, which Level 3 acquired in January 2007, together accounted for approximately 75% and 55% of our revenue, respectively. Industry Background A number of trends in the communications industry are driving growth in demand for network capacity, including increases in total Internet users and bandwidth consumed per Internet user. We believe increasing demand for network capacity ultimately will increase demand for optical communications systems. Most optical communications systems utilize wavelength division multiplexing technology that transmits multiple signals, each as separate colors of light, or wavelengths, on a single fiber in a communications service provider s network. These systems have historically used discrete optical components or sub-systems that can limit the quality and reliability of the optical communications system. Traditional systems use either optical to electrical to optical conversion to process digital data or an all-optical architecture to reduce the need for expensive optical to electrical to optical conversions. With traditional systems, communications service providers must choose at multiple network access points whether to utilize a wavelength division multiplexing system that enables high-performance digital management and processing but with high optical to electrical to optical conversion costs, or to use an all-optical architecture that reduces optical to electrical to optical conversion costs but may also limit service reach and add cost. Most traditional systems involve significant capital expenditure, space and power consumption. Each wavelength in these systems requires its own optical to electrical to optical conversion, and discrete components are required for each optical to electrical to optical conversion, which adds significant cost and reduces reliability. Expanding optical communications networks with traditional systems is often manually intensive because communications service providers may need to redesign the network, re-allocate available wavelengths or deploy additional hardware at multiple locations each time a new circuit is added. Advanced features, such as network-wide provisioning or optical layer protection, often involve high costs because additional equipment may be required. All-optical architectures, including reconfigurable optical add/drop multiplexers, often provide limited digital processing of data, which prevents these systems from efficiently adding and dropping communications traffic at intermediate network access points. This can result in a reduced network footprint and decreased revenue opportunities for communications service providers, particularly in smaller regions and markets. In addition, associated network planning and service provisioning can be more costly and time consuming. All-optical approaches can limit overall network capacity due to wavelength blocking, or the inability to use wavelengths of light because they are already in use in another part of the network. AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 Table of Contents We believe significant demand exists for an optical communications system that is simple and easy to operate and that reduces operating and capital costs for communications service providers. The Infinera Solution and Strategy Our PIC technology facilitates a new network architecture, the Digital Optical Network architecture, that allows communications service providers to realize the benefits of both wavelength division multiplexing and digital processing more fully and cost-effectively. Our PICs enable our DTN System to provide lower-cost optical to electrical to optical conversions at every network access point to provide communications service providers with the ability to digitally process the information being transported across their optical networks. Our software enables our customers to leverage this digital information to simplify and speed the delivery of differentiated services and to optimize the utilization of their optical networks. Our goal is to be a preeminent provider of optical systems to communications service providers. Key aspects of our strategy are: Increase our customer footprint. We intend to increase penetration of our installed base of communications service providers while also targeting new U.S. and international communications service providers, including U.S. regional bell operating companies, international postal, telephone and telegraph companies, cable multiple system operators, or MSOs, and U.S. competitive local exchange carriers; Penetrate adjacent markets. We intend to increase our addressable market by adding functionality to our DTN System, by developing new products, including products for government, research and educational institutions, MSOs and internet content provider markets, and by creating the service and support infrastructure needed to address these markets; Maintain and extend our technology lead. We intend to incorporate the functionality of additional discrete components into our PICs and to pursue further functional integration in our DTN System in order to enhance the performance, scalability and economics of our DTN System; and Continue investment in PIC manufacturing activities. We believe that our manufacturing capabilities serve as a significant competitive advantage and intend to continue investing in the manufacturing capabilities needed to produce new generations of our PICs. Risks Associated With Our Business Our business is subject to numerous risks, as discussed more fully in the section titled Risk Factors immediately following this prospectus summary. We incurred net losses of $66.5 million in 2004, $64.8 million in 2005, $89.9 million in 2006 and $45.9 million in the six months ended June 30, 2007. As of June 30, 2007, our accumulated deficit was $360.0 million. Our management determined, subsequent to their issuance, that our financial statements should be restated. In connection with the audit of our financial statements for 2005 and 2006, our management and our independent registered public accounting firm reported to our board of directors a material weakness for each year in the design and operation of our internal control over financial reporting. We believe we have remediated the material weakness identified in 2005 related to our inventory valuation process by implementing additional procedures and controls, hiring additional accounting personnel and increasing management review and oversight. We have developed a remediation plan to address the material weakness identified in 2006 related to non-routine manual accounting and reporting processes involving our revenue process in 2006 and net loss per common share computations in 2002 through 2006, but we cannot assure you that we will be able to remediate this material weakness. INFINERA CORPORATION (Exact name of Registrant as specified in its charter) * Stock-based compensation expense deferred to inventory and deferred inventory costs in prior periods and recognized in the current period. Delaware 3661 77-0560433 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 169 Java Drive Sunnyvale, CA 94089 (408) 572-5200 (Address, including zip code, and telephone number, including area code, of Registrant s principal executive offices) Table of Contents December 31, 2006 September 29, 2007 (Unaudited) (in thousands) Balance Sheet Data: Cash, cash equivalents and short-term investments $ 29,572 $ 174,826 Working capital 2,218 154,256 Total assets 230,466 406,569 Current and long-term debt 28,382 Total stockholders equity (deficit) (306,321 ) 188,226 Total ratable revenue increased from $6.1 million in the three months ended September 30, 2006 to $62.1 million in the corresponding period in 2007. The increase reflected an increase in invoiced shipments of bundled products from $40.4 million in the three months ended September 30, 2006 to $80.3 million in the corresponding period in 2007. The increase in invoiced shipments of bundled products was due to increased purchases of our DTN System by existing customers and the addition of new customers. In the nine months ended September 29, 2007, we recorded $208.7 million of invoiced shipments of bundled products, recognized $169.8 million of revenue and added $46.2 million to the deferred revenue balance. We added 23 new customers between September 30, 2006 and September 29, 2007 for a total of 38 customers as of September 29, 2007. We had two customers that exceeded 10% of our revenue on a GAAP basis for the three months ended September 29, 2007, reflecting continued diversification in our customer base. In the quarter ended September 29, 2007, Level 3 accounted for 47% of our revenue on a GAAP basis. In the third quarter of 2006, we recognized $4.4 million of deferred revenue from prior periods and $1.7 million from invoiced shipments of bundled products in the period. In the third quarter of 2007, we recognized $54.7 million of deferred revenue from prior periods and $7.4 million from current period invoiced shipments of bundled products. As of September 29, 2007, deferred revenue was $157.2 million, of which $60.1 million, $43.8 million, $29.8 million, $14.6 million and $8.9 million will be recognized in the fourth quarter of 2007, the first, second and third quarters of 2008 and future periods, respectively. We have experienced significant revenue growth over the last two years and expect to see continued revenue growth into the future but at somewhat lower growth rates. Revenue growth will be directly impacted by underlying growth in invoiced shipments. Although we expect growth in invoiced shipments to continue on a year-over-year basis, the quarter-over-quarter growth may be impacted by several factors including the timing of large product deployments, acquisitions of new customers and general market conditions. Therefore, the quarter-over-quarter revenue growth could be somewhat volatile and growth may not always occur in a linear manner. In addition, the rate at which we recognize revenue will be directly impacted by our ability to establish vendor specific objective evidence, or VSOE, or fair value for training and software warranty or product support services. See the section titled Management s Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies and Estimates for a description of our revenue recognition policy. We expect our gross margins to be volatile in the short-term, likely declining in the three months ending December 29, 2007 versus the three months ended September 29, 2007, and to improve in the long-term as deferred revenue is recognized and as average selling prices and product mix improve due to new and existing customers purchasing higher margin network components to increase the capacity of their installed DTN Systems. Gross margins improved from the three months ended September 30, 2006 to the corresponding period in 2007 due to the impact of the recognition of $23.9 million of deferred gross margin related to invoiced shipments in prior periods. In addition, there was a significant improvement in gross margins on current period invoiced shipments reflecting improved Jagdeep Singh President and Chief Executive Officer Infinera Corporation 169 Java Drive Sunnyvale, CA 94089 (408) 572-5200 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents pricing and cost structures. Although we continued to sell common equipment at low or negative margins, we experienced a reduction of $1.0 million in lower of cost or market, or LCM, adjustments in the current period compared to the third quarter of 2006, primarily due to a continued decline in component pricing. We also recorded a favorable change in estimate to our warranty reserve of $1.9 million primarily due to improved expected future failure rates. Both of these changes, which we do not expect to occur consistently on a going forward basis, along with an improved customer mix and improved product mix, caused our gross margin during the quarter ended September 29, 2007 to improve versus prior periods. In the next twelve months, capital expenditures are expected to be approximately $20 million, primarily for product development and manufacturing expansion and upgrades. Corporate Information Infinera was founded in December 2000, originally operated under the name Zepton Networks, and is headquartered in Sunnyvale, California. Our principal executive offices are located at 169 Java Drive, Sunnyvale, CA 94089. Our telephone number is (408) 572-5200. Our website address is www.infinera.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website to be part of this prospectus. Infinera, Infinera DTN, IQ, iPIC, Infinera Digital Optical Network and other trademarks or service marks of Infinera Corporation appearing in this prospectus are the property of Infinera Corporation. This prospectus contains additional trade names, trademarks and service marks of other companies. We do not intend our use or display of other companies trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies. Copies to: Larry W. Sonsini, Esq. Matthew W. Sonsini, Esq. Wilson Sonsini Goodrich & Rosati Professional Corporation 650 Page Mill Road Palo Alto, CA 94304 Telephone: (650) 493-9300 Telecopy: (650) 493-6811 Michael O. McCarthy III, Esq. Infinera Corporation 169 Java Drive Sunnyvale, CA 94089 Telephone: (408) 572-5200 Telecopy: (408) 572-5243 Eric C. Jensen, Esq. John T. McKenna, Esq. Cooley Godward Kronish LLP Five Palo Alto Square 3000 El Camino Real Palo Alto, CA 94306 Telephone: (650) 843-5000 Telecopy: (650) 849-7400 Table of Contents THE OFFERING Common stock offered by Infinera 5,000,000 shares Common stock offered by the selling stockholders 5,000,000 shares Common stock to be outstanding after this offering 90,357,657 shares Common stock offered by Infinera as a percentage of common stock to be outstanding after this offering 5.5% Use of proceeds We intend to use the net proceeds from this offering for working capital and other general corporate purposes. We may also use a portion of the net proceeds to acquire other businesses, products or technologies. We do not, however, have agreements or commitments for any specific acquisitions at this time. We will not receive any proceeds from the shares sold by the selling stockholders. See the section titled Use of Proceeds. Dividend policy Currently, we do not anticipate paying cash dividends.
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+Prospectus Summary 1 Risk Factors 8 Information Regarding Forward-Looking Statements 23 Market and Industry Data 23 Use of Proceeds 24 Dividend Policy 24 Capitalization 25 Dilution 27 Selected Consolidated Financial Data 29 Management s Discussion and Analysis of Financial Condition and Results of Operations 31 Business 44 Management 57 Principal and Selling Stockholders 76 Certain Relationships and Related Party Transactions 80 Description of Capital Stock 82 Shares Eligible For Future Sale 86 Certain Material U.S. Federal Income Tax Consequences to Non-U.S. Holders 88 Underwriting 91 Legal Matters 96 Experts 96 Where You Can Find Additional Information 96 Index to Consolidated Financial Statements F-1 EX-3.1.2 Certificate of Amendment EX-23.1 Consent of PricewaterhouseCoopers LLP You should rely only on the information contained in this prospectus or contained in any free writing prospectus filed with the Securities and Exchange Commission, or SEC. We have not authorized anyone to provide you with information different from that contained in this prospectus. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Until , 2007 (25 days after the commencement of this offering), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. Table of Contents PROSPECTUS SUMMARY This summary highlights selected information more fully described elsewhere in this prospectus. You should read the following summary together with the entire prospectus, including the more detailed information regarding us and the common stock being sold in this offering and our financial statements and the related notes appearing elsewhere in this prospectus. You should carefully consider, among other things, the matters discussed in the section entitled Risk Factors beginning on page 8 before deciding to invest in our common stock. Unless otherwise stated or the context requires otherwise, references in this prospectus to we, our, or us refer to AuthenTec, Inc. and its subsidiaries. Overview We are a leading mixed-signal semiconductor company providing fingerprint authentication sensors and solutions to the high-volume PC, wireless device and access control markets. Since our inception in 1998, we have shipped over 16 million sensors which have been integrated into over 150 different models of laptops, desktops and PC peripherals as well as over 6 million mobile phones. In response to accelerating demand, we shipped over 6.9 million sensor units in 2006, a 122.6% increase over the 3.1 million sensor units we shipped in 2005. Correspondingly, our revenue increased over the same period from $19.2 million in 2005 to $33.2 million in 2006, a 72.9% increase. During the three months ended March 30, 2007, we shipped 1.9 million sensor units and generated revenue of $9.3 million, an increase of 32.0% and 25.7%, respectively, over the three months ended March 31, 2006. However, since our inception in 1998, we have experienced net losses, including $9.8 million for 2006 and $5.7 million for the three months ended March 30, 2007. As of March 30, 2007, we had an accumulated deficit of $70.7 million. In the last two years, we generated revenue from over 100 customers including ASUSTek Computer, Inc., Fujitsu Ltd., Hewlett-Packard Company, High Tech Computer Corp., Hitachi, Ltd., Lenovo Group Limited, LG Electronics Inc., Samsung Electronics Co., Ltd. and Toshiba Corporation. In 2006, we derived 59.0% of our revenue from two customers, and 80.7% and 83.9% of our revenues from our top five customers in 2006 and the three months ended March 30, 2007, respectively. We believe we are well positioned to benefit from the continuous drive of customers in our target markets to add features to, and enhance the functionality of, their products including the demand for integrated and convenient security solutions. Our research, development and marketing efforts are focused on the following markets which are characterized by significant unit volumes and high growth rates: PCs: laptops, desktops and PC peripheral products, such as memory keys, hard drives, keyboards, mice and other devices; Wireless devices: cellular phones and other wireless communication devices, including personal digital assistants, or PDAs; and Access Control: time and attendance products, home security systems, business physical access control systems and other access control devices. In the PC laptop market, the use of fingerprint sensors has been embraced by customers worldwide. We estimate that approximately 10% of laptops shipped in 2006 contained an integrated fingerprint sensor. Our sensors are used to secure the PC and the data stored on it, as well as to replace passwords used to access networks or websites. In addition, wireless device manufacturers in certain countries, particularly in Japan, have incorporated our sensors into their products in order to support security and mobile commerce, or M-commerce, applications. M-commerce is the use of a wireless device for personal financial transactions including credit or debit transactions. We estimate that over 15% of M-commerce enabled mobile phones shipped in Japan in 2006 included a fingerprint sensor. We believe that as PC, wireless devices and access control product manufacturers continue to integrate additional features, demand for our products will continue to grow. We believe our sensors, which are based on our patented TruePrint technology, are the most accurate, reliable, cost-effective, easy to use and versatile products commercially available today. Unlike most competing Table of Contents sensor technologies which read the skin s surface layer, our TruePrint technology is capable of obtaining high-density images from fingers under virtually any condition. Our TruePrint technology uses radio-frequency, or RF, signals to read below the skin s outer surface layer to the live layer of the skin. TruePrint extracts and produces high-quality, high density fingerprint images from which large amounts of information can then be extracted to uniquely identify the individual. This technology also allows us to build sensors that use less silicon than competing silicon-based technologies, making our solution well suited for our target markets where small form factor and cost are critical determinants. Our TrueMatch matching algorithms and TrueFinger anti-spoofing technologies use high quality images produced by TruePrint to rapidly identify an individual in a highly accurate and secure fashion. These technologies, and others, are protected by 33 issued U.S. patents and 28 U.S. patent applications. In addition to the convenient security features of our products, we have recently launched several other product capabilities and enhancements under our Power of Touch initiative. These include TrueNav, a navigation feature that allows the sensor to be used for cursor control, and TrueYou, a personalization feature that allows each finger to be used for a specific function, for example, using each finger for a separate speed dial on a phone or for launching a specific PC application. We believe the convergence of security, navigation, personalization and convenience enables our customers to efficiently and cost effectively create products that are more secure, attractive, innovative and easier to use. We are continuing to expand our product portfolio by offering additional features and functionality specific to our target markets. We operate our business using a fabless semiconductor business model, whereby we do not own or operate semiconductor fabrication, wafer bumping, assembly or test facilities. We depend on independent subcontractors to fabricate, assemble and test our fingerprint sensor products. By outsourcing manufacturing, we are able to avoid the cost associated with owning and operating our own manufacturing facility. This allows us to focus our efforts on the design and marketing of our products. Industry Overview The fingerprint sensor market is experiencing rapid growth driven by the proliferation of mobile computing and wireless communication devices. These devices store an increasing amount of sensitive and valuable personal and corporate data, yet are highly vulnerable to loss, theft, intrusion and fraud as they are generally shipped with minimal authentication protection, if any, and can be easily manipulated by unauthorized users. In 2006, businesses and consumers lost approximately $49.3 billion to identity theft, according to Javelin Strategy and Research. In addition, the Ponemon Institute found that nearly 81% of 500 companies surveyed in August 2006 reported losing one or more laptops with sensitive information. The silicon fingerprint sensor market is growing at a rapid rate driven by a variety of factors including: heightened awareness of the need for security; demand for enhanced security as PCs and wireless devices continue to store additional sensitive data; proliferation of portable electronics; inadequacies and/or expense associated with various security solutions; growth in E- and M-commerce; need for small and cost-effective solutions catering to high volume end markets; and the desire for additional functionality such as navigation and personalization features. Significant challenges are involved in providing authentication technologies in response to a more electronically oriented and mobile society that will require protection of sensitive personal and corporate information. To achieve this goal, we believe manufacturers will require the integration of fingerprint sensor technologies into their products that are low-cost, reliable, accurate, fast, convenient, small in size and capable of reading fingerprints under virtually any condition. We believe that significant demand for fingerprint sensors exists in the PC, wireless device and access control end markets to meet the security and authentication requirements of our original equipment manufacturer, or OEM, customers. Table of Contents Table of Contents Our Strengths We believe the following competitive strengths will enable us to maintain a leading position in the fingerprint sensor market: Proprietary and Proven Advanced Technology Platform. Our patented TruePrint technology is able to read the live layer of skin below the skin s outer surface whereas other fingerprint technologies generally read only the surface layer of the skin. Our TrueMatch matching algorithms use these higher quality images to accurately and securely match the user. Low-Cost Advantage. As a result of our TruePrint and TrueMatch technologies, our sensors use less silicon as compared to other commercially available silicon-based solutions. We believe this provides us with a significant cost advantage over our competitors. Comprehensive Fingerprint Authentication Solutions. Our comprehensive solutions include the sensors, algorithms, software and reference designs that allow our customers to easily integrate our solutions into their products. Multiple Products Targeted for High Volume End Markets. As a result of being a focused semiconductor company, we offer 14 products tailored specifically to our target markets. Our products include some of the smallest fingerprint sensors available in the market, a critical consideration for many of our customers. Strong Relationships With Leading Global PC and Wireless Device Manufacturers. We have developed long-standing collaborative relationships with leading customers worldwide. These strong relationships enable us to work with our customers and tailor our solutions to fit into their research and development efforts. Increased Functionality With the Power of Touch. In addition to the convenient security aspects of our products, our sensor solutions also provide other features such as TrueNav and TrueYou. TrueNav allows the sensor to be used as a touchpad or joystick type device where the sensor tracks the motion of the finger. TrueYou allows the sensor to be used to personalize or customize customers products. Our Strategy Our objective is to maintain and extend our leadership in the fingerprint sensor market by pursuing the following strategies: Increase Penetration Within Existing and New End Markets. We believe the opportunity for significant continued adoption of fingerprint sensors remains in our targeted markets, which shipped more than 1.5 billion units in 2006. We plan to increase our penetration of these markets by continuing to offer the most compelling solutions in terms of ease of integration, size, cost, ease of use and security. In addition, to continue our growth into access control, and move into the automotive and consumer electronic markets, we intend to expand our sales and marketing team. Extend Leadership Position to Remain Provider of Choice for Fingerprint Sensors. We intend to continue to invest in research and development to enhance our technology platform, to protect our intellectual property and to maintain our position as a technology innovator. We are developing additional features to extend the functionality and performance of our portfolio of products for current and additional targeted market segments. Continue to Enhance the Functionality of Our Products. Our current product offering provides our customers with an accurate, reliable, cost-effective, versatile and secure solution. We plan to continue to add differentiating features to our sensor products and solutions. Pursue Selective Acquisitions of Complementary Technologies or Companies. We intend to evaluate and potentially make acquisitions of technologies and products that are complementary to our product portfolio. Table of Contents Continue to Maintain Low-Cost Leadership. We intend to preserve our low-cost advantage by improving our design process and packaging techniques, integrating additional functionality into our existing solutions and leveraging our fabless manufacturing model as our shipments increase. Risks Affecting Us Our business is subject to numerous risks, which are highlighted in the section entitled Risk Factors immediately following this prospectus summary. These risks represent challenges to the successful implementation of our strategy and to the growth and future profitability of our business. Some of these risks include: we were established in 1998 and have not been profitable in any fiscal period since we were formed. We experienced net losses of $4.6 million, $11.1 million and $9.8 million for 2004, 2005 and 2006, respectively, and $1.3 million and $5.7 million for the three months ended March 31, 2006 and March 30, 2007, respectively; we derive a substantial portion of our revenues from a limited number of customers, and the loss of, or a significant reduction in, orders from one or a few of our major customers would adversely affect our operations and financial condition; the market for our products is highly competitive, and if we do not compete effectively, we may not be able to increase our market penetration, grow our revenue or improve our gross margins; the average selling prices of products in our markets have historically decreased over time and will likely do so in the future, which could harm our revenues and gross profits; we may not be able to sustain our recent significant growth and our quarterly operating results are likely to fluctuate in the future, making it difficult to predict our future operating results; and we rely on a limited number of independent subcontractors for the manufacture, warehousing and shipping of our products and the failure for these third parties to deliver products or otherwise perform as requested could damage our relationships with our customers, decrease our revenue and limit our growth. Corporate Information We were incorporated in Delaware in 1998. Our principal executive offices are located at 100 Rialto Road, Suite 400, Melbourne, Florida 32901, and our telephone number is (321) 308-1300. Our website address is www.authentec.com. The information on, or that can be accessed through, our website is not part of this prospectus. Trademarks and Service Marks Our trademarks include AuthenTec , Entr Pad , FingerLoc , Personal Security for the Real World , Power of Touch , TrueFinger , TruePrint , TrueMatchtm, TrueNavtm, TrueSuitetm and TrueYoutm. All other trademarks or service marks appearing in this prospectus are trademarks or service marks of others. Table of Contents The Offering Common stock offered by us 5,625,000 shares Common stock offered by the selling stockholders 1,875,000 shares Common stock to be outstanding after this offering 26,000,148 shares Use of proceeds We intend to use the net proceeds for general corporate purposes, including as yet undetermined amounts related to working capital, a portion of which will be used to increase the number of personnel in our sales and marketing and research and development groups. We may also use a portion of our net proceeds to acquire or invest in other technologies, businesses or other assets. We have no current agreements or commitments with respect to any material acquisitions. We will not receive any of the proceeds from the sale of shares of our common stock by the selling stockholders. See Use of Proceeds. Nasdaq Global Market symbol AUTH Unless otherwise stated, all information in this prospectus assumes: a four to one reverse stock split of our common stock effected June 26, 2007; the automatic conversion of all shares of our convertible preferred stock outstanding as of May 31, 2007 into 18,143,255 shares of common stock immediately prior to completion of this offering; the automatic conversion of $7.5 million aggregate principal amount of our outstanding senior secured convertible notes issued on February 28, 2007, or the convertible notes, into 1,249,993 shares of common stock immediately prior to completion of this offering; no exercise of the underwriters option to purchase from certain selling stockholders an aggregate of 1,125,000 additional shares of common stock; and an initial public offering price of $10.00 per share, the mid point of the range set forth in the cover of this prospectus. The number of shares of common stock to be outstanding immediately after this offering: is based upon 20,375,148 shares of common stock outstanding, including 981,900 shares of common stock outstanding as of May 31, 2007, and 18,143,255 shares of common stock to be issued upon the automatic conversion of all outstanding shares of our convertible preferred stock and 1,249,993 shares of common stock to be issued upon the conversion of all our outstanding convertible notes, in each case, immediately prior to completion of this offering; excludes 3,582,124 shares of common stock issuable upon the exercise of options outstanding as of May 31, 2007, at a weighted average exercise price of $1.69 per share; excludes 1,967,716 shares of common stock issuable upon the exercise of warrants outstanding as of May 31, 2007, at a weighted average exercise price of $2.29 per share; excludes 169,144 shares of common stock available for future issuance under our 2004 stock incentive plan as of May 31, 2007; and excludes up to 3,524,348 shares of common stock that we expect will be available for future issuance under our 2007 stock incentive plan as of the time we complete this offering. Table of Contents Summary Consolidated Financial Data The following table presents our summary historical consolidated financial information. The summary consolidated statements of operations data for each of the three fiscal years in the period ended December 29, 2006 and the consolidated balance sheet data as of December 29, 2006 have been derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The summary consolidated balance sheet data as of March 30, 2007 and the summary consolidated statements of operations data for each of the three months ended March 30, 2007 and March 31, 2006 have been derived from the unaudited consolidated financials that are included elsewhere in this prospectus. You should read this information together with the financial statements and related notes and other information under Management s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this prospectus. These historical results are not necessarily indicative of results to be expected in any future period. In 2006, we changed our fiscal year from a calendar year to a year ending the last Friday before December 31. Fiscal Year Ended Three Months Ended December 31, December 29, March 31, March 30, 2004 2005 2006 2006 2007 (In thousands, except per share data) Consolidated Statements of Operations Data: Revenue $ 13,835 $ 19,243 $ 33,174 $ 7,386 $ 9,295 Cost of revenue(1) 7,424 11,314 19,264 4,169 5,015 Gross profit 6,411 7,929 13,910 3,217 4,280 Operating expenses: Research and development(1) 6,002 7,355 9,631 2,279 2,774 Selling and marketing(1) 3,986 5,432 7,067 1,684 1,985 General and administrative(1)(2) 1,270 1,284 5,084 321 1,467 Total operating expenses 11,258 14,071 21,782 4,284 6,226 Loss from operations (4,847 ) (6,142 ) (7,872 ) (1,067 ) (1,946 ) Other income (expense): Warrant expense(3) (933 ) (2,195 ) (284 ) (3,753 ) Interest expense (11 ) (26 ) Interest income 214 449 285 98 70 Total other income (expense), net 203 (484 ) (1,910 ) (186 ) (3,709 ) Loss before income tax expense and cumulative effect of change in accounting principle (4,644 ) (6,626 ) (9,782 ) (1,253 ) (5,655 ) Income tax expense Loss before cumulative effect of change in accounting principle (4,644 ) (6,626 ) (9,782 ) (1,253 ) (5,655 ) Cumulative effect of change in accounting principle(4) (4,469 ) Net loss $ (4,644 ) $ (11,095 ) $ (9,782 ) $ (1,253 ) $ (5,655 ) Net loss per common share, basic and diluted $ (24.65 ) $ (36.59 ) $ (15.18 ) $ (2.41 ) $ (7.30 ) Shares used in computing basic and diluted net loss per common share 188 303 644 521 774 Pro-forma net loss per common share, basic and diluted (unaudited) $ (0.49 ) $ (0.28 ) Shares used in computing basic and diluted pro-forma net loss per common share (unaudited) 19,878 20,008 Table of Contents (1) Includes charges for stock-based compensation: Cost of revenue $ $ $ * $ * $ 4 Research and development 11 * 43 Selling and marketing 5 * 19 General and administrative 79 1 109 * Less than $1. (2) 2006 includes accrued future litigation related legal expense of $2,781. (3) Reflects changes in the fair value of our freestanding preferred stock warrants. See note (4) below. (4) 2005 includes the cumulative effect of a change in accounting principle related to the manner in which we account for freestanding warrants on redeemable preferred stock. As of March 30, 2007 Pro Forma Actual Pro Forma As Adjusted (In thousands) Consolidated Balance Sheet Data: Cash and cash equivalents $ 10,117 $ 10,117 $ 60,730 Working capital (626 ) 10,329 60,942 Total assets 25,531 25,531 76,144 Total stockholders equity (deficit) (68,992 ) 12,467 63,080 The preceding table presents a summary of our consolidated balance sheet data as of March 30, 2007: on an actual basis; on a pro forma basis to give effect to the automatic conversion of all of our outstanding shares of convertible preferred stock and convertible notes into an aggregate of 19,233,628 shares of common stock immediately prior to completion of this offering and the reclassification of preferred stock warrants liability to additional paid in capital upon conversion of these warrants to purchase shares of our convertible preferred stock into warrants to purchase shares of our common stock; and as adjusted to give effect to the sale by us of 5,625,000 shares of common stock in this offering at an assumed initial public offering price of $10.00 per share, the midpoint of the range set forth on the cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Table of Contents RISK FACTORS You should carefully consider the risks described below before making a decision to buy our common stock. If any of the following risks actually occurs, our business, financial condition and results of operations could be harmed. In that case, the trading price of our common stock could decline and you might lose all or part of your investment in our common stock. You should also refer to the other information set forth in this prospectus, including our financial statements and the related notes. Risks Related to Our Business We have a history of losses from operations and our achievement of sustained profitability is uncertain. We were founded in 1998 and have never made a profit. We recognized net losses of $5.7 million in the three months ended March 30, 2007, $9.8 million in fiscal 2006 and $11.1 million in fiscal 2005. As of March 30, 2007, we had an accumulated deficit of $70.7 million. To become profitable, we will have to generate greater total revenue while controlling costs and expenses. Our ability to increase revenue or achieve and sustain profitability in the future will depend substantially on our ability to increase sales of our products to new and existing customers, to introduce and sell new products and to reduce the cost of revenue. Furthermore, we expect to make significant expenditures related to the development of our products and expansion of our business, including sales, marketing and administrative expenses. As a public company, we will also incur significant legal, accounting and other expenses that we did not incur as a private company. We cannot assure you that our operations will become profitable in the future. We have experienced significant revenue growth recently, and we cannot assure you this trend will continue. We have grown rapidly in a short period of time, with our revenue increasing 72.9% from $19.2 million for fiscal 2005 to $33.2 million for fiscal 2006, and 25.7% from $7.4 million for the three months ended March 31, 2006 to $9.3 million for the three months ended March 30, 2007. We cannot assure you that we will achieve similar growth rates in future periods. You should not rely on the results of any prior periods as an indication of our future operating performance. If we are unable to maintain adequate revenue growth, our stock price may decline, and we may not have adequate financial resources to execute our business objectives. You must consider our business and prospects in light of the risks and difficulties we encounter as a rapidly growing technology company in a very competitive market. These risks and difficulties include, but are not limited to, the risks identified below and in particular the following factors: our focus on a single product market, the market for fingerprint authentication solutions; the difficulties we face in managing rapid growth in personnel and operations; the timing and success of new products and new technologies introduced by us and our competitors; our ability to build brand awareness in a highly competitive market; and our ability to increase production in a timely and cost effective basis. We may not be able to successfully address any of these risks or others. Failure to do so adequately could harm our business and cause our operating results to suffer. Our quarterly operating results will likely fluctuate in the future. As our business continues to grow, we believe our quarterly operating results will be subject to greater fluctuation due to various factors, many of which are beyond our control. Factors that may affect quarterly operating results in the future include: our ability to attract new customers, retain existing customers and increase revenue; unpredictability of the timing and size of customer orders or customer cancellations of existing orders, since most of our customers purchase our products on a purchase order basis rather than pursuant to a long-term contract; Table of Contents fluctuations in the capacities of and costs from our subcontractors in order to satisfy customer requirements; variability of our margins based on changes in the mix of products shipped, production yields and other costs; variability of operating expenses as a percentage of revenue; our ability to introduce new and innovative fingerprint authentication solutions that appeal to our customers; changes in our product pricing including those made in response to new product announcements and pricing changes of our competitors; fluctuations based upon seasonality; our rate of expansion, domestically and internationally; the effectiveness of our sales force and the efforts of our distributors and sales representatives; the effect of mergers and acquisitions on our company, our competitors, our suppliers or our customers; and general economic conditions in our geographic markets. Accordingly, it is difficult for us to accurately forecast our growth and results of operations on a quarterly basis. If we fail to meet expectations of investors or analysts, our stock price may fall rapidly and without notice. Further, the fluctuation of quarterly operating results may render period-to-period comparisons of our operating results less meaningful, and you should not rely upon them as an indication of future performance. We may not be able to manage our future growth effectively, and we may need to incur significant expenditures to address the additional operational and control requirements of our growth and those of being a public company. We are experiencing a period of significant growth and expansion, which has placed, and any future expansion will continue to place, a significant strain on our management, personnel, systems and financial resources. To manage our growth successfully, we believe we must effectively: hire, train, integrate and manage additional qualified engineers for research and development activities, as well as sales, marketing, financial and information technology personnel; expand and upgrade our technological capabilities; manage simultaneous relationships with our customers, distributors, sales representatives, subcontractors, suppliers and other third parties; implement new customer service and production control systems; and develop and put into practice the financial and management systems to comply with government and public company requirements. Our efforts may require substantial managerial and financial resources and may increase our operating costs even though these efforts may not be successful. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities, develop new products, satisfy customer requirements, execute our business plan, respond to competitive pressures or comply with public company requirements. We are dependent upon a relatively small number of significant end customers for more than 80% of our 2006 revenue. The loss of any one or more of these customers could reduce our revenue. A relatively small number of end customers account for a significant portion of our revenue in any particular period. In fiscal 2006, Fujitsu Ltd. and Hewlett-Packard Company, either directly or through their Table of Contents suppliers, accounted for 32.2% and 26.8%, respectively, of our revenue in 2006. Our top five end customers accounted for 80.7% of our revenue in fiscal 2006 and 83.9% of our revenue in the three months ended March 30, 2007. We expect that our history of high end customer concentration and attendant risk will continue in future periods. The loss of any significant end customer will limit our ability to sustain and grow our revenue. The market in which we participate is highly competitive, and if we do not compete effectively, we may not be able to increase our market penetration, grow our revenue or improve our gross margins. The fingerprint authentication market is very competitive and changing rapidly. We expect increased challenges from existing as well as new competitors. Some of our competitors have offered solutions at lower prices, which has resulted in pricing pressure on sales of our fingerprint sensors. We expect further downward pricing pressure from our competitors and expect that we will have to price our fingerprint sensors aggressively to increase our market share. If we are unable to reduce our costs, our operating results could be negatively impacted. Increased competition generally may also result in reduced revenue, lower margins or the failure of our products to achieve or maintain widespread market acceptance, any of which could have a material adverse effect on our business, results of operations and financial condition. Some of our present or future competitors could enjoy one or more substantial competitive advantages, such as: greater name recognition and deeper penetration of our target markets; a broader and more diversified array of products and services; larger sales, marketing, organizations, research and development teams and budgets; more established relationships with customers, contract manufacturers and suppliers; better sales channels; larger customer service and support organizations with greater geographic scope; longer operating histories; and substantially greater financial, technical and other resources. Our present competitors include private companies such as Atrua, Inc., Fidelicia Microsystems, Inc., Symwave, Inc., UPEK, Inc., Validity Sensors, Inc., and public companies such as Atmel Corporation, or Atmel, Lite-on Technology Group and Mitsumi Electronic Co., Ltd. In addition, certain of our customers offer competitive technologies which could displace our own. Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. The challenges we face from new and potentially larger competitors will become greater if consolidation or collaboration between or among our competitors occurs in our industry. For all of these reasons, we may not be able to compete successfully against our current or future competitors, and if we do not compete effectively, our ability to increase our revenue may be impaired. Our future financial performance will depend on the widespread acceptance of biometric solutions. In its short history, the biometrics market has been characterized by the frequent introduction of new technologies and products. The application of biometric technologies in non-governmental applications, including fingerprint, is relatively new. Although the market has been growing rapidly, there is no assurance that this growth will continue. Consumers and corporations may not find value in having biometric technologies integrated in the products they use such as PCs, wireless devices and access control systems. If end users do not value the product, then our customers may decide not to use our sensors in their future products. In addition, there are multiple variants of biometric technologies beyond fingerprint including face, hand, vein, voice, iris and others. Our customers, and their end users, may find these technologies of greater value and choose these technologies over our own. Table of Contents The expansion of the biometric market also depends on the following factors: public perception regarding the intrusiveness of our biometrics and the manner in which organizations use the biometric information collected; legislation related to biometric information; publicity regarding biometric solutions; and security or use issues associated with our or competitive products that may reflect poorly on the biometrics market in general. Even if biometric solutions gain wide market acceptance, our solutions may not adequately address market requirements and may not continue to gain market acceptance. Resolution of claims that we have violated or may violate the intellectual property rights of others could materially harm our business and could require us to indemnify our customers, resellers or vendors, redesign our products, pay significant royalties to third parties or expend additional development resources to redesign our products. The semiconductor industry is marked by a large number of patents, copyrights, trade secrets and trademarks and by frequent litigation based on allegations of infringement or other violation of intellectual property rights. At any time, a third-party may assert that our technology or products violates such party s intellectual property rights. For example, we are presently subject to a patent infringement lawsuit filed by Atmel Corporation, or Atmel, and certain of its affiliates alleging that our fingerprint sensors and related software infringe two of Atmel s patents. Successful intellectual property claims against us from Atmel or others could result in significant financial liability or prevent us from operating our business or portions of our business as currently conducted. In addition, resolution of claims may require us to redesign our solutions, to obtain licenses to use intellectual property belonging to third parties, which we may not be able to obtain on reasonable terms, to cease using the technology covered by those rights and to indemnify our customers, resellers or vendors. Any claim, regardless of its merits, could be expensive and time consuming to defend against and divert the attention of our technical and management resources. Questions of infringement in the biometrics and semiconductor market involve highly technical and subjective analyses. Litigation may be necessary in the future to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity, and we may not prevail in any such future litigation. Litigation, whether or not determined in our favor or settled, is costly, could harm our reputation, could cause our customers to use our competitors products and could divert the efforts and attention of our management and technical personnel from normal business operations. Any failure to protect our intellectual property rights, trade secrets, copyrights, trademarks and technical know-how could impair our competitiveness. Our ability to prevent competitors from gaining access to our technology is essential to our success. If we fail to protect our intellectual property rights adequately, we may lose an important advantage in the markets in which we compete. Trademark, patent, copyright and trade secret laws in the United States and other jurisdictions as well as our internal confidentiality procedures and contractual provisions are the core of our efforts to protect our proprietary technology and our brand. Our patents and other intellectual property rights may be challenged by others or invalidated through administrative proceedings or litigation, and we may initiate claims or litigation against third parties for infringement of our proprietary rights. Such administrative proceedings and litigation are inherently uncertain and divert resources that could be put towards other business priorities. We may not be able to obtain a favorable outcome and may spend considerable resources in our efforts to defend and protect our intellectual property. Table of Contents Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. We may be unable to obtain additional patent protection in the future or obtain patents with claims of scope necessary to cover our technology. Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which our products are available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property and using our technology for their competitive advantage. Any such infringement or misappropriation could have a material adverse effect on our business, results of operations and financial condition. There can be no assurance that the patents of others will not have an effect on our ability to do business. In addition, we cannot assure you that these our intellectual property rights will be adequate to prevent our competitors from copying or reverse-engineering our products, or that our competitors will not independently develop similar or competing technologies or methods or design around any patents that may be issued to us. Our products must meet exacting specifications, and defects and failures may occur, which may cause customers to return or stop buying our products. Our customers generally establish demanding specifications for quality, performance and reliability that our products must meet. However, our products are highly complex and may contain defects and failures when they are first introduced or as new versions are released. Our products are also subject to rough environments as they are integrated into our customer products for use by the end customers. If defects and failures occur in our products, we could experience lost revenue, increased costs, including warranty expense and costs associated with customer support, delays in or cancellations or rescheduling of orders or shipments, product returns or discounts, diversion of management resources or damage to our reputation and brand equity, and in some cases consequential damages, any of which would harm our operating results. In addition, delays in our ability to fill product orders as a result of quality control issues may negatively impact our relationship with our customers. We cannot assure you that we will have sufficient resources, including any available insurance, to satisfy any asserted claims. We rely on a limited number of independent subcontractors for the manufacture, warehousing and shipping of our products, and the failure of any of these third-party vendors to deliver products or otherwise perform as requested could damage our relationships with our customers, decrease our revenue and limit our growth. We do not have our own wafer fabrication, assembly or test facilities and have a very limited in-house prototype testing operation. Therefore, we must rely on third-party subcontractors to manufacture the products we design and sell. We currently primarily rely on Taiwan Semiconductor Manufacturing Company Ltd., or TSMC, to fabricate our semiconductor products. We also rely on Chipbond Technology Corp., or Chipbond, for special coating technologies, which are referred to as bumping, and on Signetics Corporation, or Signetics, to assemble and test our products. If these vendors do not provide us with high-quality manufacturing services and capacity in a timely manner, or if one or more of these vendors terminates its relationship with us, we may be unable to obtain satisfactory replacements to fulfill customer orders on a timely basis, our relationships with our customers could suffer and our revenue could decrease. The fabrication of integrated circuits is a complex and technically demanding process. Our subcontractors could, from time to time, experience manufacturing defects and reduced manufacturing yields. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials could result in lower than anticipated manufacturing yields or unacceptable performance. Many of these problems are difficult to detect at an early stage of the manufacturing process and may be time consuming and expensive to correct. In addition, production yields for new products are generally lower at the initial production ramp. Product yields depend on our product design, the fabrication technology and the assembly process. Identifying yield problems can only occur in the production cycle when a product can be physically analyzed and tested in volume. Poor Table of Contents yields, integration issues or other performance problems in our products could cause us significant customer relations and business reputation problems, harm our financial results and result in financial or other damages to our customers. Our customers could also seek damages from us for their losses. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend. Other potential risks associated with relying on third-party subcontractors include: reduced control over product cost, delivery schedules and product quality; potential price increases; inability to achieve required production or test capacity and acceptable yields on a timely basis; longer delivery times; increased exposure to potential misappropriation of our intellectual property; shortages of materials used to manufacture our products; labor shortages or labor strikes; and quarantines or closures of manufacturing facilities due to the outbreak of viruses, such as SARS, the avian flu or any similar future outbreaks worldwide. We currently do not have long-term supply contracts with any of our subcontractors. Therefore, they are not obligated to perform services or supply products to us for any specific period, in any specific quantities or at any specific price, except as may be provided in a particular purchase order. Our subcontractors have not provided contractual assurances to us that adequate capacity will be available for us to meet future demand for our products. These third-party vendors may allocate capacity to the production of other companies products while reducing deliveries to us on short notice. In particular, other customers that are larger and better financed than we are or that have long-term agreements with TSMC, Chipbond or Signetics may cause them to reallocate capacity to those customers, decreasing the capacity available to us. The average selling prices of semiconductor products have historically decreased rapidly and will likely do so in the future, which could harm our revenue, gross margin and profits if we are unable to reduce our costs commensurately. The semiconductor products we develop and sell are often subject to rapid declines in average selling prices. From time to time, we have had to reduce our prices significantly to meet customer, market and competitive pressures, and we may be required to reduce our prices more aggressively than planned. Reductions in our average selling prices to one customer could impact our average selling prices to all customers. Our financial results will suffer if we are unable to offset any reductions in our average selling prices by increasing our unit volumes, reducing our costs or developing new products on a timely basis. If we fail to achieve initial design-wins for our products, we may lose the opportunity to generate revenue for a significant period of time and be unable to recoup our investments in our products. We expend considerable resources to achieve design-wins for our products, especially our new products and product enhancements. Once a customer designs a fingerprint sensor into a product, it is likely to continue to use the same sensor or enhanced versions of that sensor from the same supplier across a number of similar and successor products for a lengthy period of time due to the significant costs associated with qualifying a new supplier and potentially redesigning the product to incorporate a different fingerprint sensor. If we fail to achieve an initial design-win in a customer s procurement process, we may lose the opportunity for significant sales to that customer for a number of its products and for a lengthy period of time. This may cause us to be unable to recoup our investments in our products, which would harm our business. Furthermore, should a design-win not culminate in a volume production order, our revenue would suffer. Table of Contents We manufacture our products based on our estimates of customer demand, and if our estimates are incorrect, our financial results could be negatively impacted. Our revenue is made on the basis of purchase orders rather than long-term purchase commitments. In addition, our customers may cancel purchase orders or defer the shipments of our products. We manufacture our products according to our estimates of customer demand. This process requires us to make multiple demand forecast assumptions, each of which may introduce error into our estimates. If we overestimate customer demand, we may manufacture products that we may not be able to sell. In addition, the rapid pace of innovation in our industry could render obsolete significant portions of such inventory. Excess or obsolete inventory levels for these or other reasons could result in unexpected expenses or increases in our reserves which would adversely affect our business and financial results. Conversely, if we underestimate customer demand or if sufficient manufacturing capacity were unavailable, we would forego revenue opportunities, lose market share and damage our customer relationships. Our sales cycle is lengthy and expensive and could adversely affect the amount, timing and predictability of future revenue. Our customers generally need three months to three years, if not longer, after initial contact to make a final purchase decision with respect to our products. Our typical sales cycle often includes a prototype phase as a method to show proof of concept and manufacturability. As customers weigh their purchase options, we may expend significant resources in pursuit of a sale that may ultimately fail to close. We have little control over our customers budget cycles and approval processes, or the strength of competitors relationships with our potential customers, all of which could adversely affect our sales efforts. The introduction of new products and product enhancements may lengthen our sales cycle as customers defer a decision on purchasing existing products and evaluate our new products. If we are unsuccessful in closing sales after expending significant resources, our revenue and operating expenses will be adversely affected. We must work closely with our subcontractors to make timely new product introductions. We rely on our close working relationships with our independent subcontractors and other suppliers, including TSMC, Chipbond and Signetics, to anticipate and deliver new products on a timely basis when new generation materials and technologies are made available. If we are not able to maintain our relationships with our subcontractors, our ability to quickly offer advanced technology and product innovations to our customers would be impaired. Maintaining and improving our financial controls and complying with rules and regulations applicable to public companies may be a significant burden on our management team and require considerable expenditures of our resources. As a public company, we will incur additional legal, accounting and other expenses that we did not incur as a private company. The Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act of 2002 and The Nasdaq Marketplace Rules will apply to us as a public company. Compliance with these rules and regulations will necessitate significant increases in our legal and financial budgets and may also strain our personnel, systems and resources. The Exchange Act requires, among other things, filing of annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. Satisfying these requirements involves a commitment of significant resources and management oversight. As a result of management s efforts to comply with such requirements, other important business concerns may receive insufficient attention, which could have a material adverse effect on our business, financial condition and results of operations. Failure to meet certain of these regulatory requirements could cause us to be delisted from the Nasdaq Global Market. We also expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced coverage or incur Table of Contents substantially higher costs to maintain coverage. If we are unable to maintain adequate directors and officers insurance, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which could adversely affect our operating results, our ability to operate our business and our stock price. Commencing in fiscal 2008, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management and our independent registered certified public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. As of the date of this prospectus, we have not undertaken any formal assessment of our internal controls over financial reporting. Our testing, or the subsequent testing by our independent registered certified public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered certified public accounting firm identifies deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities, which would require additional financial and management resources. Our headquarters are located in Florida, and our third-party manufacturing subcontractors are concentrated in Asia, areas subject to significant natural disaster risks. TSMC, which fabricates our semiconductors, and Chipbond, which performs substantially all of our bumping, are located in China and Taiwan, respectively, and Signetics, which provides substantially all of our assembly and test support, is located in South Korea. The risk of extreme weather and an earthquake in the Pacific Rim region is significant due to the proximity of major earthquake fault lines. In September 1999, a major earthquake in Taiwan affected the facilities of TSMC, as well as other providers of foundry, assembly and test services. In 2005, several typhoons also disrupted the operations of TSMC. As a result of these natural disasters, these subcontractors suffered power outages and disruptions that impaired their production capacity. In March 2002 and June 2003, additional earthquakes occurred in Taiwan. The occurrence of earthquakes and other natural disasters could result in the disruption of operations. There is also a level of political unrest or uncertainty in some of these areas. We may not be able to obtain alternate capacity on favorable terms, if at all, which could harm our operating results. In addition, our headquarters are located in Florida. The risk of a hurricane in Florida is significant. In 2004, the centers of two hurricanes came close to the area in which we operate, and we suffered power outages and disrupted business operations. If we lose F. Scott Moody, our Chief Executive Officer and Chairman, or any other key employee or are unable to attract additional key employees, we may not be able to implement our business strategy in a timely manner. Our future success depends in large part upon the continued service of our executive management team and other key employees. In particular, F. Scott Moody, our Chief Executive Officer and Chairman of the Board, is key to our overall management. Mr. Moody co-founded our company and has been our Chief Executive Officer since our inception. His experience in running our business and his personal involvement in significant relationships with customers and strategic partners is extremely valuable to us. Additionally, we are particularly dependent on the continued service of our existing research and development personnel because of the complexity of our products and technologies. Our employment arrangements with our executives and employees do not require them to provide services to us for any specific length of time, and they can terminate Table of Contents their employment with us at any time, with or without notice, without penalty. The loss of services of any of these executives or of one or more other key members of our team could seriously harm our business. To execute our growth plan, we must continue to attract additional highly qualified personnel. Competition for qualified personnel is intense. We have experienced in the past, and may continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. If we are unable to attract and integrate additional key employees in a manner that enables us to scale our business and operations effectively, or if we do not maintain competitive compensation policies to retain our employees, our ability to operate effectively and efficiently could be limited. We recently implemented a new accounting system and our limited experience with it may cause delays in the preparation of our financial results. In March 2007, we implemented a new accounting system, and as such we have limited experience in the real time preparation of financial statements utilizing this system. Until we have additional experience with our accounting system, we cannot assure you that our financial reporting can be prepared without significant resources and management oversight. The semiconductor industry has historically experienced significant fluctuations with prolonged downturns, which could impact our operating results, financial condition and cash flows. The semiconductor industry has historically exhibited cyclical behavior, which at various times has included significant downturns in customer demand. Though we have not yet experienced any of these industry downturns, we may in the future. Because a significant portion of our expenses is fixed in the near term or is incurred in advance of anticipated revenue, we may not be able to decrease our expenses rapidly enough to offset any unanticipated shortfall in revenue. If this situation were to occur, it could adversely affect our operating results, cash flow and financial condition. Furthermore, the semiconductor industry has experienced periods of increased demand and production constraints. If this happens in the future, we may not be able to produce sufficient quantities of our products to meet the increased demand. We may also have difficulty in obtaining sufficient wafer, assembly and test resources from our independent subcontractors. Any factor adversely affecting the semiconductor industry in general, or the particular segments of the industry that our products target, may adversely affect our ability to generate revenue and could negatively impact our operating results. Security breaches in systems which integrate our products could result in the disclosure of sensitive information that could result in the loss of customers and negative publicity. Many of the sensors we sell protect private corporate or personal information. A security breach in one of these systems which integrate our products could cause serious harm to our business as a result of negative publicity and lost business. This risk is difficult to manage since our primary customer base, OEMs and ODMs, control the overall system design and security feature integration. In addition, most customers currently use third party software to interface with our fingerprint sensors. However, should a customer or end user lose important sensitive information, they may elect to pursue a legal claim against us for their perceived damage. Our success will depend on the timely introduction of new products with increased functionality. Our future financial performance will depend on our ability to meet customer specifications and requirements by enhancing our current fingerprint authentication solutions and developing products with new and better functionality. We expect to devote significant resources to identifying new market trends and developing products to meet anticipated customer demand for fingerprint sensor solutions. Ultimately, however, customers may not purchase our solutions. Accordingly, we can not assure you that demand for the type of solutions we offer and plan to offer will continue to develop as we anticipate, or at all. We must develop new products and enhance our existing products with improved technologies to meet rapidly evolving customer requirements. For example, we are spending a material portion of our research and development budget on the development of highly secure sensors and software. The success of new features Table of Contents depends on several factors, including their timely introduction and market acceptance. We may not be successful in developing enhancements or new solutions or bringing them to market in a timely manner. We could experience delays in completing the development and introduction of new products and product enhancements that may render our products, when introduced, obsolete and unmarketable. Customers may also defer purchases of our existing products pending the introduction of anticipated new products. If our new solutions are not competitive with solutions offered by other vendors, we may not be perceived as a technology leader and could miss market opportunities. If we are unable to enhance the functionality of our solutions or introduce new solutions which achieve widespread market acceptance, our reputation will be damaged, the value of our brand will diminish, and our business will suffer. In addition, uncertainties about the timing and nature of new features and products could result in increases in our research and development expenses with no assurance of future sales. We work with distributors and sales representatives to sell our products, and if our relationships with one or more of those distributors or sales representatives were to terminate, our operating results may be impacted. We rely in part upon third parties, including our independent sales representatives and our distributors, to promote our products, generate demand and sales leads, and obtain orders for our products. Our distributors and sales representatives also provide technical sales support to our customers. The activities of these third parties are not within our direct control. Our failure to manage our relationships with these third parties effectively could impair the effectiveness of our sales, marketing and support activities. A reduction in the sales efforts, technical capabilities or financial viability of these parties, a misalignment of interest between us and them, or a termination of our relationship with a major sales representative or our distributor could have a negative effect on our revenue, financial results and ability to support our customers. These parties are engaged under short-term contracts, which typically may be terminated by either party on 30 to 60 days notice. It generally takes approximately three months for a third-party such as a sales representative to become educated about our products and capable of providing quality sales and technical support to our customers. If we were to terminate our relationship with our distributor or one of our larger sales representatives, or if one of them decided to discontinue its relationship with us, sales to current and prospective customers could be disrupted or delayed, and we could experience a diversion of substantial time and resources as we seek to identify, contract with and train a replacement. If we switch to another foundry to manufacture our semiconductors, our current manufacturing process could be disrupted which could negatively impact our unit volumes and revenue. As a result of the complexity in semiconductor manufacturing, it is difficult to retain and rely on a new foundry. We may not be able to enter into a relationship with a new foundry that produces satisfactory yields on a cost-effective basis. If we need another foundry because of increased demand, or the inability to obtain timely and adequate deliveries from our current provider, we might not be able to cost-effectively and quickly retain other vendors to satisfy our requirements. Any failure to successfully integrate a new foundry could negatively impact our unit volumes and revenue. Our business depends on customers, suppliers and our own operations outside the United States, and as a result we are subject to regulatory, operational, financial and political risks, which could adversely affect our financial results. The percentage of our revenue attributable to shipments to customers outside the United States was 88.1% in fiscal 2005, 91.9% in fiscal 2006 and 97.2% in the three months ended March 30, 2007. We expect that revenue from customers outside the United States will continue to account for a significant percentage of our revenue. In addition, we maintain international sales and technical support offices in China, Germany, Japan, South Korea and Taiwan, and we rely on a network of distributors and sales representatives to sell our products internationally. Moreover, we have in the past relied on, and expect to continue to rely on, Table of Contents subcontractors located in China, South Korea and Taiwan. Accordingly, we are subject to several risks and challenges, any of which could harm our business and financial results. These risks and challenges include: difficulties and costs of staffing and managing international operations across different geographic areas and cultures; compliance with a wide variety of domestic and foreign laws and regulations, including those relating to the import or export of semiconductor products; legal uncertainties regarding employee issues, taxes, tariffs, quotas, export controls, export licenses and other trade barriers; our ability to receive timely payment and collect our accounts receivables; political, legal and economic instability, foreign conflicts, natural disasters and the impact of regional and global infectious diseases such as SARS or avian flu in the countries in which we and our customers, suppliers and subcontractors are located; and legal uncertainties regarding protection of intellectual property rights. Future transactions and this offering may limit our ability to use our net operating loss carry forwards. As of December 29, 2006, we had U.S. federal tax net operating loss carry forwards of approximately $50.3 million. These net operating loss carry forwards may be used to offset future taxable income and thereby reduce our U.S. federal income taxes otherwise payable. Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, imposes an annual limit on the ability of a corporation that undergoes an ownership change to use its net operating loss carry forwards to reduce its tax liability. Due in part to equity financings, we experienced ownership changes as defined in Section 382 of the Code. It is impossible for us to ensure that we will not experience an ownership change in the future because changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code. Furthermore, our ability to utilize net operating loss carry forwards may be limited by the issuance of common stock in this offering. Accordingly, our use of the net operating loss carry forwards and credit carry forwards is limited by the annual limitations described in Sections 382 and 383 of the Code. The limitation on the use of net operating loss carry forwards means that we may need to pay U.S. federal income taxes prior to utilizing these carry forwards in their entirety. If we acquire any companies or technologies in the future, they could prove difficult to integrate, disrupt our business, dilute stockholder value and adversely affect our operating results. In the future, we may acquire or make investments in companies, assets or technologies that we believe are complementary or strategic. We have not made any acquisitions or investments to date, and therefore our ability as an organization to make acquisitions or investments is unproven. If we decide to make an acquisition or investment, we face numerous risks, including: difficulties in integrating operations, technologies, products and personnel; diversion of financial and managerial resources from existing operations; risk of overpaying for or misjudging the strategic fit of an acquired company, asset or technology; problems or liabilities stemming from defects of an acquired product or intellectual property litigation that may result from offering the acquired product in our markets; challenges in retaining employees key to realizing the value of the acquisition or investment; inability to generate sufficient return on investment; incurrence of significant one-time write-offs; and delays in customer purchases due to uncertainty. Table of Contents If we proceed with an acquisition or investment, we may be required to use a considerable amount of our cash, including proceeds from this offering, which may decrease our liquidity, or to finance the transaction through debt or equity securities offerings, which may dilute our stockholders and affect the market price of our stock. As a result, if we fail to properly evaluate and execute acquisitions or investments, our business and prospects may be harmed. If we fail to comply with export control regulations we could be subject to substantial fines, or other sanctions. Certain of our products are subject to the Export Administration Regulations, administered by the Department of Commerce, Bureau of Industry Security, which require that we obtain an export license before we can export products or technology to specified countries. Additionally, some of our products are subject to the International Traffic in Arms Regulations, which restrict the export of information and material that may be used for military or intelligence applications by a foreign person. Failure to comply with these laws could result in sanctions by the government, including substantial monetary penalties, denial of export privileges and debarment from government contracts and could negatively impact our business, financial condition and results of operations. We rely on partners to enhance our product offerings, and our inability to continue to develop or maintain such relationships in the future would harm our ability to remain competitive. We have developed relationships with third-party partners, which we refer to as our Solution Provider Network, which provide application software, hardware reference designs and other services designed for specific uses with our products. We believe these relationships enhance our customers ability to get their products to market quickly. If we are unable to continue to develop or maintain these relationships, we might not be able to enhance our customers ability to commercialize their products in a timely fashion and our ability to remain competitive would be harmed. Risks Related To This Offering There is no existing market for our common stock, and we do not know if one will develop that will provide you with adequate liquidity. Currently there is no public market for our common stock. Investor interest in us may not lead to the development of an active trading market. The initial public offering price for the shares offered pursuant to this prospectus will be negotiated between us and representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. You may not be able to resell our common stock at or above the initial public offering price. The trading price of our common stock is likely to be volatile, and you might not be able to sell your shares at or above the initial public offering price. Though our common stock has no prior trading history, the trading prices of technology company securities in general have been highly volatile. Accordingly, the trading price of our common stock is likely to be subject to wide fluctuations. Factors, in addition to those outlined elsewhere in this prospectus, that may affect the trading price of our common stock include: actual or anticipated variations in our operating results; announcements of technological innovations, new products or product enhancements, strategic alliances or significant agreements by us or by our competitors; changes in recommendations by any securities analysts that elect to follow our common stock; the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; the loss of a key customer; Table of Contents the loss of a key supplier; the loss of key personnel; government regulations affecting biometrics; technological advancements rendering our products less valuable; lawsuits filed against us; changes in operating performance and stock market valuations of other companies that sell similar products; price and volume fluctuations in the overall stock market; market conditions in our industry, the industries of our customers and the economy as a whole; and other events or factors, including those resulting from war, incidents of terrorism or responses to these events. Substantial future sales of our common stock in the public market could cause our stock price to fall. Additional sales of our common stock in the public market after this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline. Upon completion of this offering, we will have 26,000,148 shares of common stock outstanding. All shares sold in this offering will be freely transferable without restriction or additional registration under the Securities Act of 1933. The shares of common stock outstanding after this offering, including the shares offered hereby, will be available for sale, assuming the effectiveness of lock-up agreements under which our directors, executive officers and most of our stockholders have agreed not to sell or otherwise dispose of their shares of common stock in the public market, as follows: Number of Shares Date of Availability for Sale 7,766,497 Date of this prospectus 207,936 90 days after the date of this prospectus 16,315,837 Upon expiration of the 180-day lock-up agreement, subject to volume limitations and other limits as applicable Any or all of these shares may be sold prior to expiration of the 180-day lock-up period at the discretion of Lehman Brothers Inc. To the extent shares are released before the expiration of the lock-up period and these shares are sold into the market, the market price of our common stock could decline. Immediately following the 180-day lock-up period, 24,290,270 shares of our common stock will be available for sale. The remaining shares of our common stock will become available for sale at various times thereafter upon the expiration of one-year holding periods under Rule 144. We expect that the holders of our outstanding warrants will exercise warrants to purchase 1,885,501 prior to their expiration on December 31, 2007. In addition, after this offering, the holders of 21,360,964 shares of common stock, which includes shares issuable upon exercise of our outstanding warrants, will be entitled to rights to cause us to register the sale of those shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares, other than shares purchased by our affiliates, becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline. The research and reports that industry or financial analysts publish about us or our business will likely have an effect on the trading price of our common stock. If an industry analyst decides not to cover us, or if an industry analyst decides to cease covering us at some point in the future, we could lose visibility in the market, which in turn could cause our stock price to decline. If an industry analyst downgrades our stock, our stock price would likely decline rapidly in response. Table of Contents The concentration of our capital stock ownership with insiders upon the completion of this offering will likely limit your ability to influence corporate matters. We anticipate that our executive officers, directors, current five percent or greater stockholders and affiliated entities will together beneficially own approximately 45.4% of our common stock outstanding after this offering. As a result, these stockholders, acting together, will have significant influence over all matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other stockholders, including those who purchase shares in this offering, oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control that other stockholders may view as beneficial. Our management will have broad discretion over the use of the proceeds from this offering and might not apply the proceeds of this offering in ways that increase the value of your investment. Our management will have broad discretion to use the net proceeds from this offering. Though at this time we have not designated the net proceeds for specific projects, we expect to use the net proceeds from this offering for general corporate purposes, including working capital. We may also use net proceeds for other purposes, including for possible investments in, or acquisitions of, companies, products or technologies, although we have no specific plans at this time to do so. Management may fail to use these funds effectively to yield a significant return, or any return, on any investment of these net proceeds. You will experience immediate and substantial dilution in the net tangible book value of the shares you purchase in this offering. The initial public offering price of our common stock will be substantially higher than the book value per share of the outstanding common stock after this offering. Therefore, based on an assumed offering price of $10.00 per share, if you purchase our common stock in this offering, you will suffer immediate and substantial dilution of approximately $7.54 per share. Provisions of our certificate of incorporation and bylaws and Delaware law might discourage, delay or prevent a change of control of or changes in our management and, as a result, depress the trading price of our common stock. Our certificate of incorporation and bylaws contain provisions that could discourage, delay or prevent a change in control or changes in our management that our stockholders may deem advantageous. These provisions: require super-majority voting to amend some provisions in our certificate of incorporation and bylaws; authorize the issuance of blank check preferred stock that our board could issue to increase the number of outstanding shares and to discourage a takeover attempt; limit the ability of our stockholders to call special meetings of stockholders; prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings. In addition, we are subject to Section 203 of the Delaware General Corporation Law, which, subject to some exceptions, prohibits business combinations between a Delaware corporation and an interested stockholder, which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation s voting stock for a three-year period following the date that the stockholder became an interested stockholder. Section 203 could have the effect of delaying, deferring or preventing a change in control that our stockholders might consider to be in their best interests. See Description of Capital Stock. Table of Contents These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take corporate actions other than those you desire. We do not expect to pay any cash dividends for the foreseeable future. We do not anticipate that we will pay any cash dividends to holders of our common stock in the foreseeable future. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends in the foreseeable future should not purchase our common stock. Table of Contents INFORMATION REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are contained principally in the sections entitled Prospectus Summary, Risk Factors, Management s Discussion and Analysis of Financial Condition and Results of Operations and Business. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about: our expectations regarding our expenses and revenue; our anticipated cash needs and our estimates regarding our capital requirements and our needs for additional financing; plans for future products, for enhancements of existing products and for development of new technologies; our anticipated growth strategies; existing and new customer relationships and design-wins; our technology strengths; our intellectual property, third-party intellectual property and claims related to infringement thereof; anticipated trends and challenges in our business and the markets in which we operate; and sources of new revenue. In some cases, you can identify forward-looking statements by terms such as may, might, objective, intend, should, could, can, would, expect, believe, estimate, predict, will, potential, plan, or the negative of these terms, and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in this prospectus in greater detail under the heading
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+Prospectus summary This summary highlights selected information appearing elsewhere in this prospectus and does not contain all the information you should consider before investing in our common stock. You should carefully read this prospectus in its entirety before investing in our common stock, including the section entitled Risk factors, and our consolidated financial statements and related notes included elsewhere in this prospectus. Certain technical terms used in this summary are defined in the Glossary section of this prospectus. Our business Overview We are a leading innovator, manufacturer and marketer of a proprietary suite of microarrays, and related products and services, which we sell into the life sciences research market. Microarrays are research tools used to analyze many parts of the genetic code, or DNA, simultaneously. Our proprietary microarrays offer an unmatched combination of high data quality and high information content. The entire genetic code present in every living cell is known as a genome, the study of which is referred to as genomics. Our products and services enable scientists to obtain, analyze and integrate complex genomic data not previously accessible, providing a clearer and unprecedented understanding of genome structure, function and biology, which we refer to as High Definition GenomicsSM. In addition, our technology facilitates rapid, low-cost design and testing of new products, or prototyping, allowing us to enter new markets rapidly with optimized products. While we have had a history of net losses, our revenues have grown substantially since inception, primarily from sales to leading academic institutions, genomic research centers and government laboratories, as well as pharmaceutical, biotechnology and agrichemical companies. A clear understanding of the many ways in which genomes vary in structure, function and activity is important to the development of improved diagnostics, therapeutics and agricultural products. According to Strategic Directions International, Inc., an analytical instrument consulting firm, approximately $5 billion is spent annually on tools used in the analysis of genome variation including microarrays and other products for measuring various aspects of the genetic code. Of the many ways in which genomes are known to vary, the first that was capable of being analyzed with microarrays involved determining whether genes are active or inactive, referred to as gene expression analysis. The second measure of genome variation capable of being addressed with microarrays was analysis of single point variations between individuals that occur throughout the genetic code, referred to as SNP genotyping. There are many other types of genome variation that researchers routinely study, but microarrays and methods for their use that would allow other forms of variation to be analyzed efficiently on a genome-wide basis are only just beginning to emerge. Through our proprietary technology and rapid prototyping, we have become a leading company in introducing microarray-based products that enable the cost-effective genome-wide analysis for several of these types of variation, each of which has important scientific and medical implications. We believe these applications, and others that we UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Table of Contents plan to enable in the next several years, will compare favorably in market size to microarray-based gene expression analysis and SNP genotyping. We believe that our technology is uniquely efficient for developing new microarray products and applications, manufacturing individual microarrays and scaling our operations. A microarray is comprised of a specialized substrate, such as a glass slide, containing thousands to millions of individual spots, known as features, each comprised of specifically designed sequences of DNA, called probes. Our Maskless Array Synthesis, or MAS technology, builds up DNA sequences at each feature of our microarrays by combining proprietary light-activated chemistry and photolithography, a process by which light is directed to specific locations on a surface. Traditional approaches to photolithography involve the use of a series of devices called masks to pattern light. Masks act like stencils, allowing light to pass through in some places and not in others, and a different mask is required prior to each step in the light-directed synthesis. In our process, we use digital micromirror device chips, or DMDs, manufactured by Texas Instruments to pattern the light on a real-time basis, rather than patterning the light using a costly series of physical masks that may take weeks to develop. DMDs are the engine inside the digital light processor systems, or DLPs, which Texas Instruments has developed for mass market applications such as high-definition television and cinematography, and these are readily available as components of consumer products. A DMD is comprised of thousands of tiny mirrors that are each individually controlled by computers so that pixels of light can be directed in real-time. The combination of our proprietary instrument designs, chemistry, optics, liquid handling systems and software has allowed us to successfully develop, manufacture and commercialize microarrays made with DMD chips. Our technology allows us to deliver microarrays with a unique combination of product characteristics, including: High data quality. We have developed special high-yield photochemistry with which we routinely synthesize long DNA probes containing up to 85 bases at each feature on a microarray. A base is an individual unit of the genetic code, and a DNA probe is a series of bases that are chemically attached to each other. These long probes can deliver enhanced sensitivity, specificity and precision at each feature, compared with the short DNA probes of 25-30 bases used by some of our competitors. As a result, each of our features can yield useful data and minimize the use of redundant features. Long probes can cost more to make than short probes, and their enhanced sensitivity may not be required for some applications. High information content. Our standard microarrays produce data from 385,000 different features in a single experiment. We have recently begun to commercialize a new generation of our microarrays that allow us to obtain data on 2.1 million features in a single experiment. In addition to the large number of features we offer, our use of long probes does not require us to use the high feature redundancy that some of our competitors require, thereby further contributing to our greater information content per microarray. Some applications may not require the greater information content we offer. Our MAS technology used to manufacture our microarrays also provides significant competitive advantages to our business model: Rapid prototyping and low-cost research and development. Our technology allows us to design and then manufacture microarrays utilizing new probe sequences in a matter of days or Amendment No. 3 To FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents even hours, as compared to weeks or months for some of our competitors. A number of leading genomic researchers have used our technology to quickly design and develop new applications which have become important new markets for us. Relatively mature applications that are not changing frequently may not benefit as much from the ability to rapidly introduce new products. Modular, low-cost manufacturing. We manufacture our microarrays in proprietary, automated bench-top modular units called MAS systems, which we design and build. In contrast to some of our competitors manufacturing processes, which can sometimes require significant up-front investments in factories costing tens of millions of dollars, our system allows us to operate with limited labor and relatively low fixed costs. Our microarray manufacturing is performed by automated systems that require minimal human attention, take up little space, and operate in a low cost, light industrial environment that does not require expensive clean rooms. In relatively mature applications, there may be no significant benefit to the low up-front costs associated with our approach. Leverage external research and development. We have increased the number of features on our microarrays from 385,000 to 2.1 million features with minimal R&D expense by leveraging advances in the DMD chips that Texas Instruments manufactures for mass-market applications, such as high-definition television and cinematography, substantially reducing our expense in basic R&D technology. Genomics and microarray applications Genomics is the study of an organism s entire genome, as well as the comparison of genomes between species, individuals, and even between different tissues or cells from the same individual. Genomes are extremely large: the human genome is more than 3 billion base pairs of DNA, and even bacteria have approximately 5 million base pairs of DNA. Genomic research became practical when variation could be measured on a large scale. Microarray-based products have emerged as vital tools in genomics because they are able to analyze hundreds of thousands or even millions of genetic data points in a single experiment. As additional types of variation have become practical to analyze on a genome-wide scale, corresponding new applications of microarrays have emerged as commercial markets. Gene expression analysis and SNP genotyping were the first applications to emerge as large commercial markets for genomic microarrays. The annual markets for these applications are currently estimated at $2.7 billion and $1.0 billion, respectively. While we believe our technology is capable of being highly competitive in these established markets, we have elected to focus our resources on newer, emerging applications where there are no entrenched competitors and where our technology offers a substantial competitive advantage. The emerging applications that we are currently focused on commercializing include: Comparative Genomic Hybridization, or CGH. CGH addresses one of the most commonly documented forms of genomic variation, which involves differences in the number of copies of specific segments of DNA. DNA copy number changes underlie the majority of known genetic diseases. Copy Number Polymorphism, or CNP. It has recently become increasingly clear that there are many small regions of DNA throughout the genome that are known to vary in copy number NIMBLEGEN SYSTEMS, INC. (Exact Name of Registrant as Specified in its Charter) Table of Contents between individuals. These normal copy number variations, called polymorphisms, can be used as genetic markers to study the molecular basis of complex diseases in a manner directly analogous to how SNPs are used today. Chromatin Immunoprecipitation assays on microarrays, known as ChIP-chip. This technique allows scientists to detect and measure levels of proteins that bind to DNA and regulate gene expression. For every condition in which scientists have studied changes in gene expression levels, a ChIP-chip experiment would enable them to determine the factors regulating gene expression and the genes they regulate. DNA Methylation. It is widely accepted that the presence on DNA of chemical entities known as methyl groups is involved in regulating gene expression in specific tissues. The presence or absence of methyl groups on DNA is referred to as methylation state. The methylation state of particular genes is thought to underlie the origin of certain cancers. Our DNA methylation microarrays allow scientists to study patterns of DNA methylation on a genome-wide basis with high resolution and sensitivity. We believe that we are a technology leader in each of these applications. According to a study we commissioned from Frost & Sullivan, a business research consulting firm, these microarray applications collectively have the potential to become a $900 million market opportunity by 2012. There are many applications of genomics beyond those listed above. Our products and services Microarrays. We have created and continuously expand a catalogue of designs of our microarrays, under our NimbleChipTM brand, which we can manufacture for our customers. As of February 2007, our product portfolio included more than 3,700 different microarray designs addressing a growing family of applications such as CGH, CNP, ChIP-chip, DNA methylation, among others. In addition, we frequently produce microarrays based on prototypes for new applications, and also produce custom designs for customers who desire them for non-standard applications. Instruments, reagents and consumables. We sell a variety of microarray-related products and plan to expand our offering to include a broad range of equipment, reagents and consumables used by our customers to process our microarrays. Such products will include a variety of instruments that we will sell on an OEM basis under the NimbleGen brand. We are also developing consumable kits including protocols and reagents optimized by us for use with our microarrays. Analytical services. We provide analytical services using our microarrays for applications including CGH, CNP, ChIP-chip, DNA methylation, among others. Such applications are utilized by scientific and medical researchers for purposes of obtaining data concerning genomic information that will expand our understanding of biology and will enable the development of improved diagnostics, therapeutics and agricultural products. We have built one of the largest microarray analysis laboratories in the world in Iceland, and we service customers who desire to outsource their sample analysis, or who value our unique microarray technology, but do not have the expertise or equipment to process our microarrays. Customers throughout the world send us samples which we quality control test, process and analyze following application Delaware 541710 39-2003768 (State or Other Jurisdiction of Incorporation or Organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) Table of Contents specific protocols desired by the customer. We return the results to the customer in electronic format. Our strategy We intend to continue developing and commercializing a family of products that enable scientists to analyze many different forms of genome variation. We expect that our strategy will include: Maintaining and building our leadership position, and collaborating with scientific thought leaders, in important emerging microarray markets in which we have a significant competitive advantage to drive a high margin, recurring revenue business with rapid product innovations. Selling our microarrays and services, and providing an end-to-end solution, including instruments, consumables, reagents, analytical software and technical support, to help ensure that our customers are successful in working with our microarrays. Improving the performance and capabilities of our products and our manufacturing technology. Expanding our direct sales force in the United States and in select major countries around the world, and utilizing distribution partners elsewhere. Evaluating strategic partnerships and licensing opportunities in other important genomic markets and certain high-impact clinical diagnostics applications. As part of our strategy to expand direct product sales worldwide, we announced license agreements with Affymetrix, Inc. and Oxford Gene Technology IP Limited in late 2006 and early 2007, respectively. We continue to operate one of the largest microarray analysis laboratories in the world in Iceland, which we built when our strategy was primarily focused on providing analytical services using our microarrays. In late 2006, we began a major expansion of our sales force and commercial infrastructure worldwide. We are now well positioned to meet the needs of our customers whether they prefer to take delivery of our microarrays and related products to analyze their own samples, or to outsource the entire process to our service laboratory. We continue to aggressively develop emerging applications in genomics and explore additional strategic growth opportunities. Corporate information We are incorporated in Delaware and commenced operations in 1999. Our principal offices are located at One Science Court, Madison, Wisconsin 53711, and our telephone number is (608) 218-7600. We maintain a website at http://www.nimblegen.com. The information contained on our website is not incorporated into and does not constitute a part of this prospectus, and the only information that you should rely on in making your decision whether to invest in our common stock is the information contained in this prospectus and in the registration statement on Form S-1, of which this prospectus is a part, and the exhibits, as filed with the SEC. NimbleGen Systems, Inc. One Science Court Madison, Wisconsin 53711 (608) 218-7600 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant s Principal Executive Offices) Table of Contents The offering Common stock offered by NimbleGen shares Common stock to be outstanding immediately following this offering shares Use of proceeds We intend to use the net proceeds from this offering for sales and research and development activities, sales and marketing initiatives, capital expenditures, license fees, value-sharing bonuses, working capital and general corporate purposes, which may include the acquisition of complementary technologies, products or businesses and funding operating losses. See Use of proceeds. Dividend policy We do not anticipate paying any cash dividends on our common stock. See Dividend policy.
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+The items in the following summary are described in more detail later in this prospectus. This summary provides an overview of selected information and does not contain all the information you should consider before investing in our common stock. Therefore, before making an investment decision, you should also read the more detailed information set out in this prospectus, including Risk Factors and the financial statements and related notes included elsewhere in this prospectus. References in this prospectus to we, us, our, company and Devax refer to Devax, Inc. unless the context requires otherwise. Devax, Inc. Our Business We are a medical device company focused on developing and commercializing novel drug-eluting stent systems. Our technology targets the treatment of bifurcation lesions, or vascular disease located at the division of one artery into two, which may occur throughout the vasculature. Collectively, treatment of these bifurcation lesions results in approximately 1.0 million procedures per year, representing a worldwide market opportunity of approximately $2.0 billion given our current product pricing assumptions. Treatment options for bifurcation lesions are limited given that surgery is highly invasive, medical treatments are often ineffective and the complex anatomy of the bifurcation often results in sub-optimal stenting outcomes. Traditional drug-eluting stents, which are used off-label to treat bifurcation lesions, do not conform to the natural shape of the bifurcation and may result in poor clinical outcomes, including elevated rates of repeat procedures and restenosis, the renarrowing of the arteries over time. The United States Food and Drug Administration, or FDA, has not approved any stent for the treatment of bifurcation lesions. We are the only company with human clinical experience utilizing a drug-eluting stent designed specifically for use in bifurcation lesions, with over 360 patients treated to date. We believe our product development and clinical progress to date will enable us to achieve a significant first-mover advantage in the worldwide market for the treatment of bifurcation lesions. Our initial areas of focus include: Epicardial Arteries, or ECA: Our first product, the Axxess stent system, is designed to treat ECA bifurcation lesions. To date, we have treated over 330 patients with the Axxess stent system, and we are awaiting an Investigational Device Exemption, or IDE, from the FDA to commence clinical trials in the United States, which we expect to receive by late 2007. In addition, we expect to receive CE Mark approval from European regulatory authorities by late 2007. We estimate the worldwide market opportunity to be in excess of $1.0 billion annually. Left Main Coronary Artery, or LMCA: Our second product, the Axxess LM stent system, is designed to treat LMCA bifurcation lesions. These lesions are rarely treated with traditional stents, and the current standard of care is open chest surgery involving a coronary artery bypass graft, or CABG. To date, we have treated more than 30 patients with the Axxess LM stent system with favorable clinical outcomes. We estimate the worldwide market opportunity to be in excess of $500 million annually. Carotid Arteries, or Carotids: Our third product targets Carotid bifurcation lesions. Approximately 90% of Carotid lesions occur within 20mm of the point where the common Carotid bifurcates into the internal and external Carotids, and may therefore benefit from a stent specifically designed to treat bifurcation lesions. The device is in the prototype phase and has not yet been used in humans. All currently marketed Carotid stents are bare metal. We estimate the worldwide market opportunity to be in excess of $400 million annually. Table of Contents DEVAX, INC. INDEX TO FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm F-1 Balance Sheets F-2 Statements of Operations F-3 Statements of Redeemable Convertible Preferred Stock and Stockholders Equity (Deficit) F-4 Statements of Cash Flows F-8 Notes to Financial Statements F-9 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents Our stents are made from a shape-memory alloy, known as nitinol, coated with an anti-inflammatory, anti-proliferative drug and a biodegradable polymer, which in combination are intended to reduce the incidence of restenosis. The proprietary conical shape of our stent is designed to conform to the anatomy of the bifurcation, providing complete coverage of the lesion and lending structural stability to the vessel. Our stent coating, which we license from a third party, consists of Biolimus A9 and polylactic acid, or PLA, a commonly used biodegradable polymer. Our stents are delivered to the site of the lesion through a low-profile, rapid exchange catheter, a delivery system preferred by most cardiologists. The unique design of our stent systems allows them to be used alone or adjunctively with one or more traditional stents depending on the nature of the disease being treated. Clinical and Regulatory Status Our drug-eluting stent systems are combination devices, comprised of a stent with a drug coating, which require clinical trials and regulatory approval as medical devices before they can be marketed. We have completed treatment of patients in three clinical trials: AXXESS, AXXESS PLUS and AXXENT. The six-month data from the AXXESS PLUS trial, which studied the Axxess stent system in 139 patients, was presented at the Transcatheter Cardiovascular Therapeutics Conference, or TCT, in October 2005 and demonstrated favorable initial safety and effectiveness for the treatment of ECA bifurcation lesions. In October 2006 at TCT, we presented the six-month data from the 33 patient AXXENT study, which we believe is the only clinical study of a stent specifically designed to treat LMCA bifurcation lesions. The data showed that the Axxess LM stent can successfully treat LMCA lesions and had an in-stent binary restenosis rate of 0% at six-month follow-up. We believe that the results of these trials indicate that the Axxess technology platform may offer superior clinical results when compared with stenting techniques not indicated for use, or off-label. We license our drug coating from a third party, an affiliate of Biosensors International Group, Ltd., or Biosensors, and our filings with regulatory authorities in the United States and the European Union reference Biosensors drug master file, or DMF, and device master file, or MAF. The approval of our products by these regulatory authorities is dependent in part upon data contained within Biosensors DMF and MAF as they relate to our products. We submitted an application for the CE Mark to gain European regulatory approval for our Axxess stent system and, in December 2006, we received questions from the Competent Authority regarding, among other things, Biosensors DMF and MAF as they relate to our products. We are prepared to respond to these questions following the resolution of the questions relating to Biosensors European DMF and MAF for Biolimus A9. We expect to receive CE Mark approval by late 2007. Such approval will allow us to begin commercialization of the Axxess stent system in select countries within the European Union and countries outside of the European Union that recognize the CE Mark for regulatory purposes. We will need pre-market approval, or PMA, from the FDA before we can market our products in the United States, which we expect will require data from clinical trials of approximately 2,000 patients in the aggregate treated with a Biolimus A9-eluting stent. Our current trial, DIVERGE, is a multi-center, controlled clinical study of our Axxess stent system, and we expect to enroll up to 600 patients in this study. To initiate clinical trials in the United States, we first need the FDA to grant us an IDE. As soon as the DIVERGE IDE is approved by the FDA, we will begin enrolling patients in the United States. In the meantime, we have enrolled over 185 patients, and plan to enroll at least 115 additional patients outside of the United States that we believe we will be allowed to include under the DIVERGE protocol in our PMA submission. We submitted an amendment to our DIVERGE IDE on April 30, 2007. Our pivotal study, which will be required for our PMA application, will be a randomized clinical trial comparing 650 patients treated with Axxess stents against 650 patients treated with traditional drug-eluting stents utilizing off-label stenting techniques. The remaining patients will be collected from either post-market studies conducted with the Axxess stent or by pooling data from other Biolimus A9-eluting stent studies, if allowed by the FDA. We anticipate submitting our PMA application during the second half of 2009. DEVAX, INC. (Exact name of registrant as specified in its charter) Table of Contents Market Opportunity Vascular disease is one of the leading causes of death worldwide. The disease is the result of an accumulation of plaque, which is a mixture of fat, cholesterol, calcium and white blood cells, in the artery walls. As the disease progresses, the build-up of plaque can narrow or occlude the vessel, forming sites referred to as lesions. Locations where arteries bifurcate are particularly susceptible to the development of lesions because of the disturbance in the flow of blood at the site of the division. Vascular disease in the coronary arteries, which is commonly referred to as coronary artery disease, or CAD, is the most common form of vascular disease and the leading cause of death in the United States and Europe. According to the American Heart Association, CAD affects over 15.8 million people in the United States, accounting for 1.2 million heart attacks and contributing to over 450,000 deaths annually. Vascular disease in arteries outside the coronary arteries, commonly referred to as peripheral artery disease, or PAD, affects eight million people in the United States according to the American Heart Association and is associated with significant morbidity and mortality. The treatment of vascular disease has experienced significant innovation and has evolved from invasive bypass surgery to percutaneous, or catheter-based, interventions, such as balloon angioplasty and stenting. The most recent percutaneous innovation for the treatment of CAD was the development of drug-eluting stents, which are bare metal stents coated with a drug that is intended to reduce restenosis. To our knowledge, no drug-eluting stent has been approved to treat bifurcation lesions in any market. While bifurcations occur in arteries throughout the body, the most clinically relevant areas are the ECA, LMCA, and Carotids. ECA lesions constitute the largest market opportunity for stents today. Based in part upon information from Health Research International, we believe that approximately 20% of those patients undergoing percutaneous coronary interventions, or PCI, suffer from ECA bifurcation lesions, and we believe these patients could benefit from an appropriately designed stent. However, there is no widely accepted data regarding the total prevalence of ECA bifurcation lesions and existing data cited in the literature and clinical studies vary significantly. Assuming an estimated 20% prevalence, the potential worldwide market opportunity is approximately 540,000 PCI procedures annually. This estimated percentage does not include patients currently treated surgically or with drug therapy, which could further expand this market. An estimated 3.5% of the approximately 5.0 million patients receiving coronary diagnostic angiography worldwide present with arterial lesions at the bifurcation of the LMCA. Blockages of the LMCA can be life threatening and require immediate treatment, which is typically done with highly invasive CABG surgery. These CABG surgeries, as well as those LMCA lesions treated off-label with current stent technology, represent a significant market opportunity for an appropriately designed stent, which we estimate at 175,000 procedures annually on a worldwide basis. Interventional cardiologists have been reluctant to treat LMCA patients off-label with existing stent technology due to the significant risks associated with procedural and post-procedural complications. Presently, revascularization of the Carotids is done either surgically with an invasive endarterectomy procedure or percutaneously with a stent procedure. Stent procedures have grown from use in approximately 13% of Carotid revascularization procedures in 2004 to approximately 25% in 2007, and are projected to increase to over 39% by 2010. There are over 270,000 Carotid stenting and surgical procedures performed annually, 90% of which we estimate may benefit from a stent specifically designed for bifurcation lesions. Delaware 3841 41-1949998 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification No.) 20996 Bake Parkway, Suite 106 Lake Forest, California 92630 (949) 334-2333 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Stephen L. Wilson Executive Vice President and Chief Financial Officer Devax, Inc. 20996 Bake Parkway, Suite 106 Lake Forest, California 92630 (949) 334-2333 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Lawrence B. Cohn Michael A. Hedge Stradling Yocca Carlson & Rauth 660 Newport Center Drive, Suite 1600 Newport Beach, California 92660 (949) 725-4000 Thomas R. Pollock Paul, Hastings, Janofsky & Walker LLP 55 Second Street 24th Floor San Francisco, California 94105 (415) 856-7000 Stephen D. Cooke Paul, Hastings, Janofsky & Walker LLP 695 Town Center Drive, 17th Floor Costa Mesa, California 92626 (714) 668-6200 Table of Contents Limitations of Current Stenting Treatments for Coronary Bifurcation Lesions In an attempt to treat bifurcation lesions percutaneously, interventional cardiologists have implanted traditional drug-eluting stents off-label, distorting the shape of the stents in order to match the irregular shape of the dividing arteries. These off-label procedures often result in one or more of the following: stents layered on top of each other; shifting or plowing of plaque into one of the vessels; and incomplete coverage of the lesion, particularly at the origin of the side branch, or ostium. Off-label use of traditional drug-eluting stents is limited by several significant deficiencies, which may include: Poor procedural outcomes that result in compromised revascularization of one or both arteries; Complex and time consuming procedures that are difficult to perform, even for experienced interventional cardiologists, which may lead the physician to refer the patient to surgery; Stent damage and poor drug performance resulting from stent deformation required in many positioning techniques, which may contribute to stent thrombosis and restenosis; and Reduced access for repeat interventions due to occlusion of the side branch vessel caused by stent placement, plaque shift, or restenosis. Our Solution We believe that our Axxess stent technology is the only system designed to address the unique physiological and structural challenges inherent in the treatment of bifurcation lesions. The Axxess stent technology incorporates a self-expanding, nitinol stent and a drug coating, which in combination are intended to reduce the incidence of restenosis of the treated arteries and associated complications. The key aspects of our technology include: Innovative Stent Designed Specifically for Bifurcation Lesions. Our Axxess stents are self-expanding and conform to the unique geometry of bifurcation lesions, which results in full apposition to the vessel wall ensuring proper delivery of the drug, minimizing plaque shift, maintaining access to the side branch, and preserving blood flow to downstream vessels. Simple Stent Deployment and Placement. Our Axxess stents are delivered to the site of the bifurcation in a low-profile, rapid exchange delivery catheter and are easily and accurately deployed within the main vessel at the point of bifurcation through a quick and simple placement technique. Flexible Treatment Options. Our Axxess stents can be used alone, or in conjunction with one or more traditional coronary stents in order to fully address the lesion depending on the nature of the disease and the anatomy of the artery being treated. This flexibility allows physicians to customize the stent selection to address the broad anatomical variety of bifurcation lesions. Anti-Restenosis Drug and Biodegradable Coating. Our drug coating, Biolimus A9, has been shown to be effective against tissue proliferation, a leading cause of restenosis. The biodegradable PLA coating facilitates the delivery of the drug in a consistent fashion. The advantage of PLA is that it is safely and fully absorbed by the body, which we believe may reduce the likelihood of late-stent thrombosis, or the formation of a clot 30 or more days after the procedure. Our Strategy Our goal is to become the first provider of drug-eluting stents specifically designed and approved for the treatment of bifurcation lesions, replacing all bifurcation treatment techniques used by physicians today, and to establish a durable leadership position. In addition, we expect to expand the existing stent market to include other bifurcation lesions that are suitable for stent therapy, such as those in the LMCA and Carotids. Key elements of our strategy include: Demonstrate the clinical safety and effectiveness of, and gain regulatory approval for, the Axxess and Axxess LM stent systems; Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Table of Contents Commercialize and drive worldwide adoption of our products; Build awareness and support among physicians through close collaboration with key opinion leaders in the field of interventional cardiology; Enhance the range of physician treatment options, including the choice of traditional drug-eluting stents used adjunctively with our stent; Leverage our technology platform into multiple indications including bifurcation lesions in the Carotids and elsewhere in the peripheral vasculature; and Expand and strengthen our intellectual property position. Risks Associated with Our Business Our business is subject to numerous risks, as discussed more fully in the section entitled Risk Factors following this prospectus summary. We are a development stage company and will be unable to accurately predict our future performance. We do not have any approved products for sale in any jurisdiction and as a result, have not generated revenue to date. As of March 31, 2007, we had an accumulated deficit of $39.4 million and we may never achieve profitability. We may be unable, for many reasons, including those that are beyond our control, to implement our current business strategy. We rely on a third party, Biosensors, over whom we have little or no control, for the supply of the drug coating we use on our stents and for submitting regulatory documentation to regulatory authorities for the use of this drug coating on stents. In order to demonstrate the safety and effectiveness of our products, we will need to conduct expensive clinical trials involving large patient populations comparing our stents to other currently established drug-eluting stents. There can be no assurance that the results of these clinical trials will demonstrate the safety and effectiveness of our stent systems. While our clinical trials to date have yielded results that are favorable, these data are not necessarily indicative of data we will obtain in other trials and are not necessarily predictive of regulatory approval or commercial success. We will depend on the adoption of our products by physicians to generate revenue from the sales of our stent systems. Our success also depends on our ability to effectively design, develop, maintain and prosecute adequate intellectual property covering, obtain regulatory approvals for, and commercialize our products. We may face competition from large multinational competitors who have more experience and resources in manufacturing, sales and marketing and research and development than we do. Corporate Information We were incorporated in Delaware in August 1999. Our principal executive office is located at 20996 Bake Parkway, Suite 106, Lake Forest, California, 92630 and our telephone number is (949) 334-2333. Our website is located at http://www.devax.net. The information on, or that can be accessed through, our website is not incorporated by reference into this prospectus and should not be considered a part of this prospectus. Axxess , Axxess Plus and Axxess LM are our trademarks. This prospectus also includes brand names, trademarks, service marks and trade names owned by other parties, and these brand names, trademarks, service marks and trade names are the property of their respective owners. CALCULATION OF REGISTRATION FEE Title of Each Class of Securities to be Registered Proposed Maximum Aggregate Offering Price(1) Amount of Registration Fee Common Stock ($0.001 par value) $85,000,000 $2,609.50 (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. Table of Contents The Offering Common stock offered shares Common stock outstanding after this offering shares Use of proceeds We intend to use the net proceeds of this offering to support our continuing clinical trials and research and development activities, to obtain necessary regulatory approvals, to build the necessary infrastructure for commercialization of our products, and for capital expenditures, working capital and other general corporate purposes. See Use of Proceeds. Proposed Nasdaq Global Market symbol DEVX
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+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. You should read the following summary together with the entire prospectus and our consolidated financial statements and the related notes appearing elsewhere
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001157743_equallogic_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001157743_equallogic_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the following summary together with the more detailed information appearing in this prospectus, including our consolidated financial statements and related notes, and the risk factors beginning on page 7, before deciding whether to purchase shares of our common stock. Unless the context otherwise requires, we use the terms "EqualLogic," "our company," "we," "us" and "our" in this prospectus to refer to EqualLogic, Inc. and its subsidiaries. EqualLogic Overview EqualLogic is a leading provider of high-performance storage products that simplify the way enterprises retain, access, manage and protect their data. Our products are designed specifically for mid-sized enterprises that have complex storage needs but cannot justify the high procurement and ongoing management costs of other storage area network, or SAN, alternatives. Our products are offered in an integrated, all-inclusive package that combines resilient disk storage with a comprehensive suite of intelligent storage management software. Our product architecture employs innovative, proprietary virtualization software that severs the traditional tie between stored data and disk drive hardware. This virtualization software masks the complexity of the underlying storage configuration and enables our storage arrays to cooperate with one another to automatically share resources and balance workloads. Our products are based on the iSCSI network protocol, which utilizes widely-deployed Internet Protocol, or IP, networks. As a result, our customers can cost-effectively install, expand and modify their data storage resources. IDC, a leading technology research firm, estimates that we have the third largest market share in the iSCSI SAN market. According to Gartner, a leading technology research and advisory company, we had the second largest revenue share of the iSCSI SAN market in 2006. We sell our products exclusively through our network of channel partners, more than 480 of which sold our products and services during the twelve months ended September 30, 2007. Since our inception, we have sold our products to over 3,200 customers in more than 30 countries across a broad range of industries. Our revenue was $10.4 million, $30.0 million and $68.1 million during the years ended December 31, 2004, 2005 and 2006, respectively, with corresponding net losses of $12.1 million, $9.4 million and $0.5 million, respectively. During the nine months ended September 30, 2007, we had revenue of $90.9 million and net income of $1.2 million. Industry Background Significant business and technological trends are rapidly increasing the demands on enterprise storage systems. These trends include rapid data growth, server virtualization and the critical need for data protection and disaster recovery. Mid-sized enterprises require flexible and secure storage systems capable of optimizing performance and functionality even as their stored data increases. At the same time, enterprises must accomplish these goals with lower capital, operating and management costs. Enterprises are increasingly deploying SANs to address their storage challenges. According to IDC, new storage capacity deployed on SANs will increase at a compound annual growth rate of 67.4% between 2006 and 2011. Given the lower cost, wide availability and ease-of-use of IP networking, SANs are being deployed on IP networks at a more rapid rate than on traditional Fibre Channel networks. According to IDC, from 2006 to 2011, new storage capacity deployed on iSCSI SANs is expected to grow at a compound annual growth rate of 143.2% compared to 44.2% for Fibre Channel SANs. Our competitors typically offer mid-sized enterprises stripped-down versions of their high-end SAN products, which are complex to deploy and manage. These competitors also have business models that require their customers to purchase additional software and professional services to achieve essential functionality. As a result, a substantial unmet need has developed among mid-sized enterprises for cost-effective storage systems that provide seamless capacity growth, high-performance, high-reliability, advanced data protection and ease-of-management. The EqualLogic High-Performance Storage Solution Our high-performance PS Series SANs are specifically designed to be cost effective and easy for mid-sized enterprises to deploy and manage. Our products are highly reliable through the use of fault tolerance, full redundancy and hot-swappable components. Our PS Series products are sold in one all-inclusive package with all required hardware and software components. Our products can be expanded without downtime and collaborate automatically as additional arrays are added to increase both performance and capacity. This enables our customers to "pay-as-they-grow." Our PS Series storage products provide our customers with the following benefits: Robust feature set: Our products include, at no extra cost, our pre-installed data management software with features such as virtualization, automatic load balancing, storage tiering, centralized management, thin provisioning and advanced data protection. Easy to purchase, deploy and manage: Our products are delivered ready to deploy, operate and automatically perform common storage tasks "out-of-the-box." Our products can be managed by IT generalists without the need for professional services or additional software. On-demand scalability: Our products are able to scale automatically without downtime from a single-array SAN to a large multi-array SAN, with performance and capacity increasing as each array is added. High performance: Our products provide exceptional performance for the applications deployed by our customers to run their businesses. Low total cost of ownership: Our self-managing products operate on lower-cost IP networks, are expandable in increments and are bundled with all software features at no additional cost. Customers that purchase service agreements receive new software capabilities at no charge on an ongoing basis. Our Strategy Our goal is to be the leading provider of IP SANs that address the current and emerging storage needs of mid-sized enterprises. The key elements of our strategy are to: Maintain our customer-focused approach: We will continue to enhance our product family and customer service capabilities with the goal of making storage management even easier and more cost-effective for our customers. Leverage our installed customer base: We will gain future sales from existing customers as their capacity needs grow and as they deploy additional applications. Extend our technology advantage: We will continue to invest in technology to deliver even more innovative and higher-performance products and to identify challenging storage needs that our products can address. Expand our channel presence and brand to accelerate new customer acquisition: We will expand our 100% channel model across a broad range of industries and geographies to increase our rate of new customer acquisition. (unaudited) Net (loss) income $ (12,138 ) $ (9,434 ) $ (459 ) $ (1,488 ) $ 1,189 Other comprehensive income (loss): Foreign currency adjustment 6 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Enhance the value of our products: We will continue to augment the software capabilities we include in our products under our "pay-one-price" business model to provide even more feature-rich products and increasing value to our customers. Concentration of Share Ownership Upon the closing of this offering, our directors and executive officers and their affiliates will beneficially own, in the aggregate, approximately % of the outstanding shares of our common stock, assuming no exercise by the underwriters of their option to purchase additional shares of our common stock in this offering. As a result, these stockholders will be able to determine the outcome of all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. For information regarding the ownership of our outstanding stock by our executive officers and directors and their affiliates, see the section titled "Principal and Selling Stockholders." Corporate Information We were incorporated in Delaware in May 2001. Our corporate headquarters are located at 110 Spit Brook Road, Building ZKO2, Nashua, NH 03062, and our telephone number is (603) 249-7700. Our website address is www.equallogic.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website to be part of this prospectus or in deciding whether to purchase shares of our common stock. EqualLogic, the EqualLogic logo and other trademarks or service marks of EqualLogic appearing in this prospectus are the property of EqualLogic. This prospectus contains additional trade names, trademarks and service marks of other companies. Unless the context otherwise indicates, the term "customers" in this prospectus refers to the end-users who purchase our products from our channel partners and the term "channel partners" refers to our resellers and other distribution partners. (unaudited) North America 91 % 87 % 83 % 87 % 82 % Europe 6 10 14 10 15 Asia Pacific 3 3 3 3 Amendment No. 2 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Except as otherwise noted, all information in this prospectus: gives effect to a -for- reverse split of our common stock effected on October , 2007; assumes no exercise by the underwriters of their option to purchase additional shares of our common stock in this offering; gives effect to the automatic conversion of all outstanding shares of our convertible preferred stock into 132,761,959 shares of our common stock upon the closing of this offering; and gives effect to the restatement of our certificate of incorporation and amendment and restatement of our bylaws prior to the closing of this offering. EQUALLOGIC, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware (State or Other Jurisdiction of Incorporation or Organization) 3572 (Primary Standard Industrial Classification Code No.) 02-0526678 (I.R.S. Employer Identification No.) 110 Spit Brook Road Building ZKO2 Nashua, NH 03062 (603) 249-7700 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) (2)The pro forma weighted average shares outstanding reflects the conversion of all outstanding shares of our convertible preferred stock (using the if-converted method) into shares of our common stock as though the conversion had occurred at the beginning of the period. Donald P. Bulens President and Chief Executive Officer 110 Spit Brook Road Building ZKO2 Nashua, NH 03062 (603) 249-7700 (Name, address, including zip code, and telephone number, including area code, of agent for service) (unaudited) (unaudited) (unaudited) (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents $ 17,182 $ 8,061 $ 9,765 $ 17,616 $ 17,616 Working capital 17,671 9,985 12,639 20,002 20,002 Total assets 23,525 23,379 39,592 67,083 67,083 Total convertible redeemable preferred stock 55,513 59,036 62,834 65,906 Total stockholders' equity (deficit) (37,615 ) (50,453 ) (53,698 ) (53,191 ) 13,132 Copies to: David A. Westenberg, Esq. Wilmer Cutler Pickering Hale and Dorr LLP 60 State Street Boston, Massachusetts 02109 (617) 526-6000 William J. Schnoor, Jr., Esq. Jocelyn M. Arel, Esq. Nicole G. Fitzpatrick, Esq. Goodwin Procter LLP Exchange Place 53 State Street Boston, Massachusetts 02109 (617) 570-1000 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001162298_idleaire_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001162298_idleaire_prospectus_summary.txt
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+Prospectus summary This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all the information you should consider before investing in our common stock. You should read the entire prospectus carefully, including Risk factors, on page 11 and our financial statements and notes to those financial statements, on page F-1, before making an investment decision. Unless otherwise stated, all references to IdleAire, we, us, our, and similar designations refer to IdleAire Technologies Corporation. IdleAire We are the leading provider of comprehensive in-cab idle-reduction services to the heavy-duty trucking industry. Our services include heating, ventilation and air conditioning, or HVAC, electric power, Internet access, satellite television, telephone, and remote delivery of computer-based driver safety and training courses. We deliver these services through our patented ATE Advanced Travel Center Electrification system, or ATE system, comprised of an in-cab service module connected to an external HVAC unit mounted on a truss structure above parking spaces. We are the first company to develop a comprehensive cost-effective solution for travel center electrification and idle-reduction that provides significant value to key participants in the trucking industry and environmental benefits to the public at large. We believe we have gained a significant competitive advantage in the market by creating a recognizable brand and changing the way professional drivers rest and sleep in their heavy-duty trucks. Owners and drivers of heavy-duty diesel trucks with sleeper cabs represent our primary market. Based on our research and industry trends, we believe there are approximately 1.3 million such trucks currently operating in the United States. Currently, heavy-duty truck drivers idle their trucks during federally mandated resting periods to maintain comfortable in-cab temperatures, provide electric power and warm the engine block to keep fuel from freezing in extremely cold weather. However, idling consumes fuel, increases engine wear and generates noise and vibration which contribute to driver sleep deprivation. In addition, diesel air emissions from idling adversely impact air quality and make it more difficult for local communities to comply with the US Environmental Protection Agency s, or the EPA s, air quality standards, which may result in the potential suspension of funding for certain highway and transit projects. Currently, more than 20 states, municipalities and the District of Columbia have adopted anti-idling laws to reduce air pollution. As pressure from environmental, energy conservation and regulatory agencies increases, we expect increased enforcement of the existing laws as well as adoption of new anti-idling laws by other states and municipalities. By using our ATE system, drivers can maintain comfortable in-cab temperatures and receive additional services and benefits without idling their trucks during federally mandated resting periods. We have been able to charge an hourly rate for our basic ATE services that is less than the hourly cost of fuel consumed while idling a heavy-duty truck engine. We are building a nationwide network of ATE locations at travel centers and fleet terminals where drivers idle their trucks. We believe that a nationwide ATE network will strengthen our appeal and accelerate the use of our services by fleet owners and truck drivers. We plan to install our ATE systems along major interstate highways at a density that allows truck drivers to plan their resting periods at our locations without incurring additional travel time and related fuel costs. We currently have long-term lease and installation agreements with travel center owners and operators, including two of the three largest national commercial travel center chains, for the right to install our ATE systems in approximately 73,600 parking spaces at over 600 locations. As of August 31, 2007, our ATE systems were installed in 8,246 parking spaces at 127 locations across 33 states, and we had Table of Contents Travel center parking spaces equipped with ATE technology ATE service module Table of Contents provided approximately 19.9 million hours of service since inception. Truck fleet customers who have used our ATE services over the past three months include more than 900 truck fleets and approximately 43,000 independent owner-operators, representing more than 208,000 heavy-duty trucks, a small percentage of the 53,000 truck fleets and approximately 1.3 million heavy-duty trucks with sleeper cabs operating in the US. Our service offering Our basic services include in-cab HVAC, electric power, satellite television, Internet access, local telephone, customer support and other services. We charge for these services on an hourly basis, with a one hour minimum. We also offer premium services to drivers, such as expanded satellite television channels, movies-on-demand, high-speed Ethernet and wireless Internet access, and long distance telephone service, at an additional charge. We offer premium services to fleet owners including remote delivery of computer-based driver safety and training courses. Our ATE system consists of an in-cab service module that is connected via a flexible, insulated hose to an external HVAC unit mounted on a truss structure above parking spaces. Drivers can easily connect the service module to their truck cab window with our inexpensive, lightweight, secure plastic window adapter. The service module includes a Pentium-class microcomputer with a touch screen and color liquid crystal display, or LCD, filtered air supply and return vents, electrical outlets, and ports for satellite television, telephone, Ethernet, and Universal Serial Bus, or USB, connections for computer accessories. Once the service module has been inserted into the window adapter and the driver has logged in using a fleet fuel card, credit card, or IdleAire membership card, the driver can control all of the functions of the system from an easy-to-use touch screen computer. Each individual ATE unit is connected to our nationwide, secure, proprietary wide area network, or WAN, allowing us to operate remotely our on-site ATE systems, providing payment processing, trouble-shooting and customer support services 24 hours a day, seven days a week. Our strengths Compelling value proposition We believe that our ATE system is the most cost-effective idle-reduction alternative providing significant benefits to key stakeholders in the trucking industry as described below: Benefits for fleet owners. Truck fleets operate in a low margin business environment and are highly focused on reducing their operating costs. By using our ATE system, fleet owners save approximately one gallon of diesel fuel otherwise consumed per hour of idling, and related engine wear and maintenance expenses. Our ATE system also provides fleet owners with improved means of communication with their drivers, and remote delivery of driver safety training courses which reduces operating costs associated with training at a fleet headquarters or terminal. In addition, we believe fleet owners use our services to recruit new drivers and increase driver retention, resulting in lower human resource costs. Benefits for travel center operators. Travel center operators provide truck parking spaces as an inducement for drivers to purchase goods and services at their facilities, such as fuel, restaurant meals, truck maintenance, showers, laundry and other retail products. Currently, few travel centers charge for parking spaces. Our ATE system provides travel center operators with a new source of income from the receipt of lease consideration from us with no capital outlay. It also provides travel center operators with a broader service offering to attract additional customers to their facilities. Table of Contents Continental US Map with EPA non-attainment regions and ATE locations (as of August 31, 2007). Source: US Department of Energy Table of Contents Benefits for truck drivers. By using our ATE system, truck drivers enjoy in-cab amenities and other services during federally mandated resting periods. Under the Department of Transportation s, or DOT s, hours of service, or HOS rule, truck drivers are required to rest a minimum of 10 hours after driving a maximum of 11 hours. By using our ATE system, a driver can rest in a sleeper cab free from the noise, vibration and fumes generated by an idling engine, and breathe thermostatically controlled, clean, filtered and UVC light-treated air. A driver can also enjoy stress-reducing home conveniences, such as satellite television and on-demand movies, communicate with family and friends via telephone and the Internet in the privacy of their sleeper cab, and receive remote safety training without the down-time involved returning to fleet headquarters or terminals. Benefits for communities and the environment. Minimizing truck idling reduces air pollution and conserves fossil fuel energy. Diesel air emissions from idling adversely impact air quality and make it more difficult for local communities to comply with the EPA s National Ambient Air Quality Standards, or NAAQS. Through August 31, 2007, we estimate that our ATE system has eliminated approximately 464.5 million pounds of diesel air emissions that would otherwise have been emitted by those heavy-duty trucks that are using our ATE system and has helped conserve approximately 19.9 million gallons of fuel. In addition, we believe use of our ATE system reduces driver sleep deprivation which the National Transportation Safety Board, or the NTSB, has identified as a contributing factor in heavy-duty truck fatalities. Strong relationships with travel center operators We have long-term lease and installation agreements with travel center owners and operators, including two of the three largest national commercial travel center chains, for the right to install our ATE systems in approximately 73,600 parking spaces at over 600 locations along major interstate highways. These agreements typically give us the exclusive right to provide in-cab heating and cooling services by means of external HVAC units at these locations over 10- or 15-year terms, and are renewable for one or two additional five-year terms. Since travel center operators receive lease consideration from us and the installation of our ATE systems at their facilities involves no capital outlay from them, we believe we are a desirable partner to travel center operators. Intellectual property protection We have been issued two patents by the US Patent and Trademark Office that protect our proprietary ATE technology and enhance our ability to build a nationwide ATE network. In November 2002, we were issued a patent to protect our business of providing convenience services to a stationary vehicle allowing the vehicle to conserve fuel and reduce noise and particulate matter emissions by shutting off the engine. This patent will expire in February 2020. In March 2004, we were issued a patent in the US that protects the design and construction of our service module and other components of the ATE system. This patent will expire in September 2022. First mover advantage in a capital-intensive industry We spent five years and more than $100 million developing, engineering, testing and refining our ATE service delivery system, including the factory-assembled, interlocking overhead truss Table of Contents Options Pursuant to our Amended and Restated 2000 Incentive Stock Plan, or Incentive Stock Plan, we have, in the past three years, granted options to purchase shares of our common stock. Some of these options have lapsed or otherwise expired and are no longer exercisable. The maximum number of shares of common stock which may be issued pursuant to our Incentive Stock Plan is 10,000,000. Since January 1, 2004, we have granted options to purchase 2,527,284 shares of common stock, at various exercise prices. Since January 1, 2004 we have issued 167,233 shares of common stock upon exercise of options, in exchange for an aggregate of $268,595 paid in exercise prices. As of August 31, 2007, there remain outstanding options to purchase 5,379,061 shares of our common stock. The Company became subject to reporting obligations of the Securities Exchange Act of 1934 in July 2006. Shares issued on the exercise of options granted prior to July 2006 were issued pursuant to Rule 701 of the Securities Act. Warrants In December 2005, we issued and sold $320.0 million of 13% senior discount notes with 320,000 detachable warrants to purchase 30% of our common stock on a fully-diluted basis. These warrants were issued to qualified institutional buyers in accordance with Rule 144A and institutional accredited investors under Regulation D of the Securities Act. In December 2005, we also issued to Jefferies Company, Inc., the initial purchaser of the senior discount notes, 53,333 warrants, in a private placement pursuant to Section 4(2) of the Securities Act. Item 16. Exhibits and financial statement schedules Exhibit No. Description 1 .1@ Form of Underwriting Agreement 3 .1.1 Amended and Restated Certificate of Incorporation of the Company, dated May 7, 2002 (filed with the registration statement on Form 10-SB on May 2, 2006) 3 .1.2 Certificate of Designation of Voting Powers, Designations, Preferences, Limitations, Restrictions and Relative Rights of Series A Convertible Preferred Stock of IdleAire Technologies Corporation, dated December 30, 2002 (filed with the registration statement on Form 10-SB on May 2, 2006) 3 .1.3 First Certificate of Amendment to Amended and Restated Certificate of Incorporation of IdleAire Technologies Corporation, dated November 11, 2003 (filed with the registration statement on Form 10-SB on May 2, 2006) 3 .1.4 First Amendment to Certificate of Designation of Voting Powers, Designations, Preferences, Limitations, Restrictions and Relative Rights of Series A Convertible Preferred Stock of IdleAire Technologies Corporation, dated November 11, 2003 (filed with the registration statement on Form 10-SB on May 2, 2006) 3 .1.5 Certificate of Designation of Voting Powers, Designations, Preferences, Limitations, Restrictions and Relative Rights of Series B Convertible Preferred Stock of IdleAire Technologies Corporation, dated November 11, 2003 (filed with the registration statement on Form 10-SB on May 2, 2006) Table of Contents structure with distributed/switched electric power, service module, WAN and Internet access distribution, data centers, video-on-demand and proprietary software. We have also developed best practices for providing payment processing, trouble-shooting and customer support services for a network of remote retail locations. We have raised an aggregate of more than $300 million through the sale of equity and debt securities and government grants to fund our initial research and development activities and initial stages of our ATE network expansion. Scalable supplier base and proven installation capabilities We work closely with market-leading suppliers for key components and content of our ATE system. Eaton Corporation supplies our high voltage electrical distribution systems, remote management switches and truss structure. Jaco Electronics, Inc. supplies our service modules. Cisco Systems, Inc. supplies our networking and information technology components and wireless Internet access. DirecTV, Inc. provides our satellite television services and LodgeNet Entertainment Corporation provides our interactive television services and movie content. Based on their performance to date, we believe each of these suppliers will be able to produce components or provide content for our ATE system on an expeditious and scalable basis to meet the needs of our nationwide network expansion plan. The major components of our ATE system are pre-constructed off-site and shipped to each location for assembly and integration. We have agreements with regional general contractors, who work under the supervision of our in-house construction team, to build our ATE network. Experienced and proven management team Our senior management team has significant experience leading high growth companies in the areas of technology and network operations, research and engineering, sales and marketing, customer support, human resources, construction and finance. Several members of our senior management team played key roles in the initial public offerings of three other companies and have had significant experience in the transportation industry. Our growth strategy We are focused on strengthening our position as the leading provider of comprehensive in-cab idle-reduction services to the heavy-duty trucking industry. Key elements of our growth strategy include the following: Expand and operate our nationwide ATE network We believe that expanding our ATE network will improve the convenience and availability of our services to truck drivers, enhance brand awareness, and accelerate the use of our services by fleet owners and truck drivers. We plan to install our ATE systems along major interstate highways at a density that allows truck drivers to plan their resting periods at our locations without incurring additional travel time and related fuel costs. We expect our overall system utilization rate to increase as we expand and increase the density of our ATE network and we believe our key suppliers and general contractors have the capacity to produce, assemble and install our ATE systems to meet the needs of our nationwide network expansion plan. Expand long-term agreements with additional truck idling locations We plan to secure additional parking spaces by entering into long-term agreements with owners and operators of commercial travel centers and other locations, including fleet terminals, where drivers park and idle their heavy-duty trucks. We have identified 960 travel centers, each with a Table of Contents Exhibit No. Description 3 .1.7 Certificate of Designation of Voting Powers, Designations, Preferences, Limitations, Restrictions and Relative Rights of Series C Convertible Preferred Stock of IdleAire Technologies Corporation, dated November 3, 2004 (filed with the registration statement on Form 10-SB on May 2, 2006) 3 .1.8 Second Certificate of Amendment to Amended and Restated Certificate of Incorporation of IdleAire Technologies Corporation, dated December 21, 2005 (filed with the registration statement on Form 10-SB on May 2, 2006) 3 .1.9 Third Certificate of Amendment to Amended and Restated Certificate of Incorporation of IdleAire Technologies Corporation, dated January 20, 2006 (filed with the registration statement on Form 10-SB on May 2, 2006) 3 .2 Bylaws of IdleAire Technologies Corporation (filed with the registration statement on Form 10-SB on May 2, 2006) 4 .1.1 Form of 13% Senior Secured Discount Note (filed with the registration statement on Form 10-SB on May 2, 2006) 4 .1.2 Warrant Agreement, dated as of December 30, 2005, between IdleAire Technologies Corporation and Wells Fargo Bank, National Association, as Warrant Agent (filed with the registration statement on Form 10-SB on May 2, 2006) 4 .1.2a Amendment to Warrant Agreement, dated as of December 27, 2006, between the Company and Wells Fargo Bank, National Association, as Warrant Agent (filed with Form 10K-SB on April 2, 2007) 4 .1.2b Second Amendment to Warrant Agreement, dated as of September 17, 2007, between the Company and Wells Fargo Bank, National Association, as Warrant Agent (filed with Form 8-K on September 17, 2007) 4 .1.3 Warrant Agreement, dated December 30, 2005, with Jefferies Company, Inc. (filed with the registration statement on Form 10-SB on May 2, 2006) 4 .1.4 Warrant Agreement, dated May 23, 2001, to Purchase Common Stock with Lana Batts (filed with the registration statement on Form 10-SB on May 2, 2006) 4 .1.4a First Amendment to Warrant Agreement to Purchase Common Stock with Lana Batts (filed with the registration statement on Form 10-SB on May 2, 2006) 4 .1.4b Second Amendment to Warrant Agreement to Purchase Common Stock, dated May 23, 2004, with Lana Batts (filed with the registration statement on Form 10-SB on May 2, 2006) 4 .1.4c Third Amendment to Warrant Agreement to Purchase Common Stock, dated May 23, 2005, with Lana Batts (filed with the registration statement on Form S-4 on 2006) 4 .1.4d Fourth Amendment to Warrant Agreement to Purchase Common Stock, dated May 13, 2006, with Lana Batts (filed with the registration statement on Form S-4 on July 3, 2007) 4 .1.5 Warrant Agreement to Purchase Common Stock, dated January 18, 2002, with CIBC World Markets Corp. (filed with the registration statement on Form 10-SB on May 2, 2006) Table of contents Page Prospectus summary 1 Risk factors 11 Special note regarding forward-looking statements 25 Use of proceeds 26 Dividend policy 26 Capitalization 27 Dilution 29 Selected financial data 31 Management s discussion and analysis of financial condition and results of operations 34 Business 57 Management 79 Executive compensation 88 Certain relationships and related party transactions 96 Principal stockholders 98 Description of capital stock 101 Shares eligible for future sale 105 Certain United States federal income tax consequences 108 Underwriting 112 Legal matters 115 Experts 115 Where you can find more information 116 Index to financial statements F-1 Ex-10.8 Ex-10.9.1 Ex-10.9.3 Ex-10.9.4 Ex-10.9.5 Ex-10.9.6 Ex-23.1 You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information that is different. We are offering to sell and seeking offers to buy shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. This prospectus includes statistical data that were obtained from industry publications. These industry publications generally indicate that the authors of these publications have obtained information from sources believed to be reliable, but do not guarantee the accuracy and completeness of their information. While we believe these industry publications to be reliable, we have not independently verified their data. The following items referred to in this prospectus are our registered service marks in the United States pursuant to applicable intellectual property laws and are our property: IdleAire and ATE Advanced Travel Center Electrification . This prospectus also includes trademarks, service marks and trade names of other companies. Our use or display of other companies trademarks, service marks or trade names is not intended to and does not imply a relationship with, or endorsement or sponsorship by or of us, by or of, such other companies. Table of Contents minimum of 100 paved parking spaces, providing an aggregate of approximately 148,000 paved parking spaces nationwide as prospective locations for our ATE network. We will continue to focus our installation efforts on travel centers along major interstate highways that have a high historical number of parked trucks overnight, a minimum of 100 paved parking spaces, and high quality driver amenities. Focus marketing, sales and branding efforts on truck fleets and drivers We plan to increase ATE system utilization by our existing fleet customers while continuing to expand our fleet customer base by focusing our marketing efforts on the features and economic benefits of our ATE services. We regularly review driver utilization rate reports with our existing fleet customers to highlight the actual and potential additional cost savings that could accompany increased use of our ATE system. Our marketing efforts to attract new fleet customers include face-to-face sales meetings, participation in trade shows, and advertisements in our monthly publication, The Guide, and on satellite radio. We also conduct on-site demonstrations at fleet terminals and trade shows utilizing our show truck with a sleeper cab, giving prospective customers an opportunity to experience first-hand the services, features and comfort provided by our ATE system. We plan to increase driver usage of our services by emphasizing the personal health, entertainment and communication benefits of our ATE system. Professional truck drivers are the end-users of our ATE system and they make the ultimate purchasing decision. Our branding strategy incorporates our Life. Improved. theme which reinforces our commitment to driver comfort and stress reduction, and we train our on-site employees to show respect and courtesy to the professional driver community. Our customer support call center works closely with our on-site employees to ensure that high quality and reliable customer service are available to drivers 24 hours a day, seven days a week. Leverage our ATE network to generate additional revenue streams Our WAN, computer technology and on-site employees provide a platform for the delivery of a variety of value-added services. By leveraging our technology and our access to a focused demographic of end users, we are able to deliver targeted services to professional truck drivers. For instance, in June 2007, we added remote delivery of computer-based driver training and safety related materials through our ATE system as a premium service to fleet owners. We will continue to explore ways to expand our future service offerings, including advertising and electronic commerce, to generate additional revenue streams. Risk factors Our business is subject to risks, including the following: We have never been profitable and cannot predict when, if ever, we will achieve profitability. We have incurred operating and net losses since our inception, and as of June 30, 2007, had an accumulated deficit of $197.5 million. We expect to continue to incur and report net losses during the early phases of our nationwide ATE network expansion; We have incurred substantial amounts of debt; We have identified significant deficiencies in our internal control over financial reporting for the twelve months ended December 31, 2006; Table of Contents The market for our services is developing, and our services have yet to gain broad market acceptance; and We may be unable to protect our intellectual property. For a discussion of these and other risks we face, see
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+S-1/A You should rely only on the information contained in this prospectus. None of us, the underwriters or the selling stockholder have authorized any other person to provide you with different information. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in this prospectus is accurate only as of the date on the front cover, but the information may have changed since that date. Table of Contents EXHIBIT INDEX Exhibit Index Description of Document Filed Herewith To be Filed by Amendment Incorporated by Reference To: 1.1 Form of Underwriting Agreement X 2.1 Share Exchange Agreement, dated June 22, 2006, among the registrant, Wonder Auto Limited and its stockholders. Exhibit 2.1 to the registrant s current report on Form 8-K filed on June 22, 2006 2.2 Stock Purchase Agreement, dated December 19, 2005, by and among the Registrant, Halter Financial Investments, L.P., Hisonic International, Inc. Exhibit 10.1 to Schedule 13D filed on December 21, 2005 3.1 Articles of Incorporation of the registrant as filed with the Secretary of State of Nevada, as amended to date. Exhibit 3.1 to the registrant s registration statement on Form SB-2 filed on December 11, 2001 in commission file number 333-74914 3.2 Amended and Restated Bylaws of the registrant.* 5 Opinion of Thelen Reid Brown Raysman & Steiner LLP as to the legality of the shares X 10.1 Form of the Stock Purchase and Subscription Agreement, dated June 22, 2006. Exhibit 10.1 to the registrant s current report on Form 8-K filed on June 22, 2006. 10.2 Escrow Agreement, dated June 22, 2006, among the registrant, Sterne Agee & Leach, Inc., Empower Century Limited, Choice Inspire Limited and Securities Transfer Corporation. Exhibit 10.2 to the registrant s current report on Form 8-K filed on June 22, 2006. 10.3 Escrow Agreement, dated June 22, 2006, by and among Wonder Auto Limited, Empower Century Limited, Thelen Reid & Priest LLP and certain purchasers. Exhibit 10.3 to the registrant s current report on Form 8-K filed on June 22, 2006. 10.4 Stock Purchase Agreement, dated April 28, 2004, between Jinzhou Wonder Industry (Group) Co., Ltd and Wonder Auto Limited. Exhibit 10.4 to the registrant s current report on Form 8-K filed on June 22, 2006. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Table of Contents Exhibit Index Description of Document Filed Herewith To be Filed by Amendment Incorporated by Reference To: 10.5 Technical Cooperation Agreement, dated July 25, 2003, between Jinzhou Halla Electrical Equipment Co., Ltd and MEISTER (Korea) Company Limited. Exhibit 10.5 to the registrant s current report on Form 8-K filed on June 22, 2006. 10.6 Strategic Cooperation Agreement, dated June 7, 2004, between Jinzhou Halla Electrical Equipment Co., Ltd. and HIVRON Inc. Exhibit 10.6 to the registrant s current report on Form 8-K filed on June 22, 2006. 10.7 Form of Purchase Contract with Supplier. Exhibit 10.7 to the registrant s current report on Form 8-K filed on June 22, 2006. 10.8 Equipment Purchase Agreement, dated January 1, 2006, between Jinzhou Halla Electrical Equipment Co., Ltd. and Suzhou Tenuo Automation Co., Ltd. Exhibit 10.8 to the registrant s current report on Form 8-K filed on June 22, 2006. 10.9 Equipment Purchase Agreement, dated May 19, 2005, between Jinzhou Halla Electrical Equipment Co., Ltd. and DMG meccanica. Exhibit 10.9 to the registrant s current report on Form 8-K filed on June 22, 2006. 10.10 Equipment Purchase Agreement, dated December 17, 2004, between Jinzhou Halla Electrical Equipment Co., Ltd. and OMT Co., Ltd. Exhibit 10.10 to the registrant s current report on Form 8-K filed on June 22, 2006. 10.11 Loan Agreement, dated October 18, 2005, between Jinzhou Halla Electrical Equipment Co., Ltd. and China Construction Bank (Jinzhou Linghe Branch). Exhibit 10.11 to the registrant s current report on Form 8-K filed on June 22, 2006. 10.12 Loan Agreement, dated September 30, 2005, between Jinzhou Halla Electrical Equipment Co., Ltd. and Jinzhou Commercial Bank (Chengjian Branch). Exhibit 10.12 to the registrant s current report on Form 8-K filed on June 22, 2006. 10.13 Loan Agreement, dated July 8, 2005, between Jinzhou Halla Electrical Equipment Co., Ltd and China Construction Bank (Jinzhou Linghe Branch). Exhibit 10.13 to the registrant s current report on Form 8-K filed on June 22, 2006. AMENDMENT No. 1 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 WONDER AUTO TECHNOLOGY, INC. (Exact name of registrant as specified in its charter) Nevada 3714 88-0495105 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification No.) No. 16 Yulu Street Taihe District, Jinzhou City, Liaoning Province People s Republic of China, 121013 (86) 416-2661186 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Table of Contents Exhibit Index Description of Document Filed Herewith To be Filed by Amendment Incorporated by Reference To: 10.14 Mortgage Agreement, dated September 30, 2005, between Jinzhou Halla Electronic Equipment Co., Ltd. and Jinzhou Commercial Bank (Linghe Branch). Exhibit 10.14 to the registrant s current report on Form 8-K filed on June 22, 2006. 10.15 Lease Agreement, dated November 8, 2005, by and among Beijing International Technological Cooperation Center Wang Jing Tower Company, Jinzhou Halla Electrical Equipment Co., Ltd. and Beijing Zhucheng Real Property Management Company. Exhibit 10.15 to the registrant s current report on Form 8-K filed on June 22, 2006. 10.16 Employment Contract, dated June 21, 2006, between Wonder Auto Limited and Qingjie Zhao. Exhibit 10.16 to the registrant s current report on Form 8-K filed on June 22, 2006. 10.17 Employment Contract, dated June 21, 2006, between Wonder Auto Limited and Yuncong Ma. Exhibit 10.17 to the registrant s current report on Form 8-K filed on June 22, 2006. 10.18 Employment Contract, dated June 21, 2006, between Wonder Auto Limited and Meirong Yuan Exhibit 10.18 to the registrant s current report on Form 8-K filed on June 22, 2006. 10.19 Employment Contract between Jinzhou Halla Electrical Equipment Co., Ltd. and Seuk Jun Kim. Exhibit 10.19 to the registrant s current report on Form 8-K filed on June 22, 2006. 10.20 Employment Contract between Jinzhou Halla Electrical Equipment Co., Ltd. and Yuguo Zhao. Exhibit 10.20 to the registrant s current report on Form 8-K filed on June 22, 2006. 10.21 Employment Contract between Jinzhou Halla Electrical Equipment Co., Ltd. and Yongdong Liu. Exhibit 10.21 to the registrant s current report on Form 8-K filed on June 22, 2006. 10.22 Amendment No. 1 to the Employment Contract, dated July 2, 2007, between Wonder Auto Limited and QingJie Zhao* 10.23 Amendment No. 1 to the Employment Contract, dated July 2, 2007, between Wonder Auto Limited and YunCong Ma* Qingjie Zhao No. 16 Yulu Street Taihe District, Jinzhou City, Liaoning Province People s Republic of China, 121013 (86) 416-2661186 Copies to: Louis A. Bevilacqua, Esq. Thomas M. Shoesmith, Esq. Joseph R. Tiano, Jr., Esq. Thelen Reid Brown Raysman & Steiner LLP 701 8th Street, N.W. Washington, D.C. 20001 (202) 508-4000 Kurt J. Berney, Esq. O Melveny & Myers LLP 37th & 38th Floors Plaza 66, 1266 Nanjing Road West Shanghai, 200040 People s Republic of China (86-21) 2307-7007 (Names, addresses and telephone numbers of agents for service) Table of Contents Exhibit Index Description of Document Filed Herewith To be Filed by Amendment Incorporated by Reference To: 10.24 Amendment No. 1 to the Employment Contract, dated July 2, 2007, between Wonder Auto Limited and Meirong Yuan* 10.25 Consulting Agreement, dated April 22, 2006, between Heritage Management Consultants, Inc. and Wonder Auto Limited. Exhibit 10.22 to the registrant s current report on Form 8-K filed on June 22, 2006. 10.26 Amendment No. 1 to the Consulting Agreement, dated June 23, 2006, between Heritage Management Consultants, Inc. and Wonder Auto Limited. Exhibit 10.23 to Amendment No. 1 to the Registration Statement on Form S-1 filed on August 7, 2006 in file number 333-135250. 10.27 Financial Advisory Agreement, dated March 15, 2006, between Wonder Auto Group and HFG International, Limited. Exhibit 10.23 to the registrant s current report on Form 8-K filed on June 22, 2006. 10.28 Assignment and Assumption Agreement, dated May 31, 2006, between Wonder Auto Group, HFG International Limited and Wonder Auto Limited. Exhibit 10.24 to the registrant s current report on Form 8-K filed on June 22, 2006. 10.29 Put Option Agreement, dated December 19, 2005, by and among the Registrant, Halter Financial Investments, L.P. and Rachel (Pin) Kang. Exhibit 10.2 to Schedule 13D filed on December 21, 2005. 10.30 Credit Facility Agreement, dated August 21, 2006, by and between Jinzhou Halla Electrical Equipment Co., Ltd. and the Bank of China Jinzhou Tiebei branch. Exhibit 10.1 to the registrant s current report on Form 8-K filed on August 25, 2006. 10.31 Share Purchase Agreement, dated August 23, 2006, by and between Wonder Auto Limited and Winning International Development Limited. Exhibit 10.2 to the registrant s current report on Form 8-K filed on August 25, 2006. 10.32 Domestic Business Invoice Discount Agreement, dated August 21, 2006, by and between Jinzhou Halla Electrical Equipment Co., Ltd. and the Bank of China Jinzhou branch. Exhibit 10.1 to the registrant s current report on Form 8-K filed on October 3, 2006. Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement the same offering. CALCULATION OF REGISTRATION FEE Title of each class of securities to be registered Proposed maximum aggregate offering price(1)(2) Amount of registration fee Common stock, $0.0001 par value $89,700,000 $2,754(3) (1) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. (2) Includes 6,500,000 shares of the Registrant s common stock that may be offered by the Registrant and by the selling stockholder named in the Registration Statement. Also includes 975,000 shares of common stock that the underwriters have the option to purchase to cover over-allotments, if any. (3) Previously Paid. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall hereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine. Table of Contents Exhibit Index Description of Document Filed Herewith To be Filed by Amendment Incorporated by Reference To: 10.33 RMB Short-term Loan Agreement, dated September 13, 2006, by and between Jinzhou Halla Electrical Equipment Co., Ltd. and the Bank of China Jinzhou Tiebei branch. Exhibit 10.2 to the registrant s current report on Form 8-K filed on October 3, 2006. 10.34 Mortgage Agreement, dated September 13, 2006, by and between Jinzhou Halla Electrical Equipment Co., Ltd. and the Bank of China Jinzhou Tiebei branch. Exhibit 10.3 to the registrant s current report on Form 8-K filed on October 3, 2006. 10.35 Independent Director s Contract, dated as of March 23, 2007, by and between the registrant and Larry Goldman, CPA. Exhibit 10.1 to the registrant s current report on Form 8-K filed on March 29, 2007. 10.36 Independent Director s Contract, dated as of March 23, 2007, by and between the registrant and David Murphy. Exhibit 10.2 to the registrant s current report on Form 8-K filed on March 29, 2007. 10.37 Form of the Indemnification Agreement, dated as of March 23, 2007, by and between the registrant and the Independent Directors. Exhibit 10.4 to the registrant s current report on Form 8-K filed on March 29, 2007. 10.38 Share Purchase Agreement, dated as of April 2, 2007, by and between Wonder Auto Limited and Hong Kong Birch Branches Limited. Exhibit 10.1 to the registrant s current report on Form 8-K filed on April 4, 2007. 10.39 Share Purchase Agreement, dated as of April 2, 2007, by and between Jinzhou Halla Electrical Equipment Co., Ltd. and Jinzhou Wonder Auto Suspension System Co., Ltd. Exhibit 10.2 to the registrant s current report on Form 8-K filed on April 4, 2007. 14 Code of Ethics Exhibit 14 to the registrant s current report on Form 8-K filed on March 29, 2007. 21 List of subsidiaries of the registrant.* 23.1 Consent of PKF Hong Kong, Certified Public Accountants, Hong Kong. X 23.2 Consent of Thelen Reid Brown Raysman & Steiner LLP, included in exhibit 5. * Previously filed with the Registration Statement on Form S-1 filed on July 6, 2007. Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. Subject to completion, dated August 7, 2007 6,500,000 Shares WONDER AUTO TECHNOLOGY, INC. Common Stock $ per share Wonder Auto Technology, Inc. is offering 5,000,000 shares of common stock and the selling stockholder is offering 1,500,000 shares of common stock. We will not receive any proceeds from the sale of our common stock by the selling stockholder. The last reported sale price of our common stock on August 6, 2007 was $6.48 per share. Trading symbol: Our common stock has been approved for listing on the Nasdaq Global Market and is expected to start trading under the symbol WATG on or around August 9, 2007. This investment involves risk. See
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001163698_soundbite_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001163698_soundbite_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..67eec75860f81632ba74bfc17879bb80181ded82
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001163698_soundbite_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should carefully read
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001164048_maxum_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001164048_maxum_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d807fff0fb16aa913560399ffb753e71156fbfe0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001164048_maxum_prospectus_summary.txt
@@ -0,0 +1 @@
+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001164049_signal_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001164049_signal_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d807fff0fb16aa913560399ffb753e71156fbfe0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001164049_signal_prospectus_summary.txt
@@ -0,0 +1 @@
+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001164051_maxum_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001164051_maxum_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d807fff0fb16aa913560399ffb753e71156fbfe0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001164051_maxum_prospectus_summary.txt
@@ -0,0 +1 @@
+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001164052_maxum_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001164052_maxum_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d807fff0fb16aa913560399ffb753e71156fbfe0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001164052_maxum_prospectus_summary.txt
@@ -0,0 +1 @@
+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001164053_open-mri_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001164053_open-mri_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d807fff0fb16aa913560399ffb753e71156fbfe0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001164053_open-mri_prospectus_summary.txt
@@ -0,0 +1 @@
+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001164057_nddc-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001164057_nddc-inc_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d807fff0fb16aa913560399ffb753e71156fbfe0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001164057_nddc-inc_prospectus_summary.txt
@@ -0,0 +1 @@
+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001164059_maxum_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001164059_maxum_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d807fff0fb16aa913560399ffb753e71156fbfe0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001164059_maxum_prospectus_summary.txt
@@ -0,0 +1 @@
+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
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+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001166389_china_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001166389_china_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights some information from this prospectus, and it may not contain all of the information that is important to you. You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering, including "Risk Factors" and our financial statements and related notes, included elsewhere in, or incorporated by reference into, this prospectus. The Company Our Business China Agritech is a holding company whose direct and indirect subsidiaries manufacture and sell organic liquid compound fertilizers and related agricultural products. Our business operations are primarily conducted through our China-based subsidiaries, Anhui Agritech, Beijing Agritech and Pacific Dragon. Our revenues are derived primarily from the sale of our organic fertilizer products and related agricultural products to our customers. Our main products include LvLingBao III, LvLingBao IV, Tailong I, and Green Vitality and other customized, crop specific fertilizers that are tailored to our customers' specific requirements. Our products promote crop growth and development and can be applied on a widespread basis via spraying by machine or aircraft. China is the principal market for our fertilizer products, which are primarily sold to farmers in 12 provinces in China: Heilongjiang, Hebei, Liaoning, Jilin, Shandong, Inner Mongolia, Henan, Sichuan, Guangdong, Xinjiang, Yunnan and Guizhou. Our annual fertilizer production capacity in 2006 was approximately 9,000 metric tons and our 2007 capacity is expected to be 13,000 metric tons. Our sales revenue increased from $25.3 million in 2005 to $29.5 million in 2006 and our net income increased from $3.7 million in 2005 to $5.3 million in 2006. Our sales revenue increased 27.9% from $23.5 million in the nine months ended September 30, 2006 to $30.0 million in the same period in 2007, and our net income grew 68.1% from $4.2 million in the nine months ended September 30, 2006 to $7.1 million in the same period in 2007. Our Industry In China, the total output of fertilizer in 2005 reached 48.3 million metric tons, which was the one third of the world s output. China is the principal market for our organic liquid compound fertilizers and related agricultural products. It is anticipated that the total demand of fertilizer will exceed to 50 million metric ton by the year 2015. As a subset of the broader fertilizer market, the use of compound fertilizers in China has likewise increased, from 1,796,000 tons in 1985 to 13,032,000 in 2005, an increase rate of 5.8% from 2001 to 2002, 6.7% from 2002 to 2003, and 8% increase in 2004 and 2005 (Source: 2006 China statistics Yearbook). It is expected that the total demand of organic fertilizer will reach to about 25 million metric ton by the year 2015. The large size and high growth rate of the Chinese fertilizer market, particularly the environmentally friendly organic fertilizer market, can be attributed to several factors, including China s large population, significant farming and agricultural activities, government incentives and environmental concerns. Future growth in the fertilizer market is expected to be due largely to the projected growth in the use of fertilizer products and a continuation of the high level of farming and agricultural activities. Our Challenges Our ability to successfully operate our business and achieve our goals and strategies is subject to numerous challenges and risks as discussed more fully in the section titled Risk Factors, including for example: any failure to expand our operations and production capacity sufficiently to meet our customers demands; any inability to effectively manage rapid growth and accurately project market demand for our products; risks associated with future investments or acquisitions; any loss of key members of our senior management; loss of any skilled personnel or any failure to continue to attract skilled personnel in the future; any failure to protect the proprietary formula and manufacturing processes for out concentrated organic liquid compound fertilizer; potential product liability claims arising from fertilizer products; failure to renew our fertilizer registration certificate; unexpected changes to China s political or economic situation or legal environment; failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by our PRC resident stockholders; and determination of the China Securities Regulatory Commission, or CSRC, or another PRC regulatory agency that CSRC approval is required in connection with this offering You should read and consider the information set forth in Risk Factors and all other information set forth in this prospectus before investing in our common stock. Corporate Information Our corporate name is China Agritech, Inc. We were originally incorporated on January 5, 1925 under the laws of the State of Nevada as Argyle Mining Company for the development of mining claims. Since then, we have changed our business model several times. We had no active operations during the period from 1986 until February 2005, when we completed a reverse acquisition transaction with, China Tailong Holdings Company Limited, a Hong Kong Corporation, which is the holding company for Pacific Dragon, one of our operating companies. In addition to Pacific Dragon, we conduct business operations through two other PRC based operating companies: Anhui Agritech and Beijing Agritech. See Our Corporate Structure and History. The following chart reflects our organizational structure as of the date of this prospectus. Approximate date of commencement of proposed sale to public: From time to time after the effective date of this Registration Statement, as determined by market conditions and other factors. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement the same offering. o If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o CALCULATION OF REGISTRATION FEE Title of each class of securities to be registered Amount to be registered(1) (3) Proposed maximum offering price per unit(2) Proposed maximum aggregate offering price Amount of registration fee Common stock, $0.001 par value(4) 10,565,188 $ 2.575 $ 27,205,359 $ 835.20 Common stock, $0.001 par value(5) 388,920 $ 2.70 $ 1,050,084 $ 32.24 Total 10,954,108 $ 867.44 (3) (1) In accordance with Rule 416(a), the Registrant is also registering hereunder an indeterminate number of shares that may be issued and resold resulting from stock splits, stock dividends or similar transactions. (2) Estimated pursuant to Rule 457(c) of the Securities Act of 1933 solely for the purpose of computing the amount of the registration fee based on the average of the high and low prices reported on the OTC Bulletin Board on August 16, 2007. (3) Represents shares of the Registrant's common stock being registered for resale that have been issued to or are held by the selling stockholders named in this registration statement. (4) Represents shares of the Registrant s common stock being registered for resale that have been issued to the selling stockholders named in this registration statement. (5) Represents shares of common stock issuable upon exercise of five-year warrants to purchase shares of common stock held by the selling stockholders named in this registration statement. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine. The address of our principal executive office is Room 301 No. 11 Building No. Zone of Future Business Center, 1st Street of Wuliqiao Road, China 100024. Our telephone number is (86)10-59621278. We maintain a website at http://www.chinaagritechinc.com that contains information about us, but that information is not part of this prospectus. Recent Developments On July 5, 2007, we completed a private placement transaction whereby we sold 5,556,000 shares of our common stock to 20 investors for approximately $15 million. The shares were offered and sold to investors in reliance upon exemptions from the registration requirements of the Securities Act pursuant to Section 4(2) and Rule 506 thereunder. Conventions In this prospectus, unless indicated otherwise, references to: China Agritech, the Company, we, us or our refer to the combined business of all of the entities that form our consolidated business enterprise but do not include the selling stockholders Tailong refers to China Tailong Holdings Company Limited which is our wholly-owned subsidiary Anhui Agritech refers to Anhui Agritech Development Co. Ltd. which is our wholly-owned subsidiary Beijing Agritech refers to Agritech Fertilizer Co. Ltd. , which is our indirect, wholly-owned subsidiary. Pacific Dragon refers to Pacific Dragon Fertilizers Co., Ltd., which is our 90%-owned subsidiary. CAI Investments refers to CAI Investments, Inc. , our direct wholly-owned subsidiary. Securities Act refers to the Securities Act of 1933 and Exchange Act refers to the Securities Exchange Act of 1934; China, Chinese and PRC refer to the People s Republic of China; RMB refers to Renminbi, the legal currency of China; and U.S. dollars, dollars and $ refer to the legal currency of the United States. The Offering Common stock offered by selling stockholders 10,954,108 shares. This number represents 44.35% of our current outstanding stock (1) Common stock outstanding before the offering 24,699,615 shares. Common stock outstanding after the offering 24,699,615 shares. Proceeds to us We will not receive proceeds from the resale of shares by the selling stockholders, but we may receive proceeds of up to $1,050,084 from the exercise of warrants. (1) Based on 24,699,615 shares of common stock outstanding as of November 20, 2007. This registration statement covers common stock of the Company issued in four separate private placements which occurred in February, 2005, June, 2005, January, 2006 and July, 2007, along with certain other common stock of the Company. Each private placement was a separate transaction and the securities are being registered in a single registration statement solely for the convenience of the Company and its stockholders. Summary Consolidated Financial Information The following table summarizes selected historical financial data regarding our business and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes included elsewhere in this prospectus. The summary consolidated income statement information for the years ended December 31, 2006, 2005 and 2004 and the balance sheet information as of December 31, 2006 and 2005, were derived from our audited financial statements included in this prospectus. We derived our summary historical consolidated financial data as of September 30, 2007 and 2006 and for the nine months ended September 30, 2007 and 2006 from our unaudited consolidated financial statements included in this prospectus, which include all adjustments that our management considers necessary for a fair presentation of our financial position and operating results for the periods presented. The results of operations for past accounting periods are not necessarily indicative of the results to be expected for any future accounting period. For the Period Ended September 30, For the Years Ended in December 31, 2007 2006 2006 2005 2004 Income Statement Data: Net revenue $ 30,074,430 $ 23,522,609 29,525,577 $ 25,335,316 $ 15,850,044 Cost of revenue (13,631,864 ) (11,307,639 ) (14,161,358 ) (12,848,958 ) (8,153,463 ) Total operating expenses (3,978,062 ) (4,127,112 ) (4,999,008 ) (5,005,673 ) (1,961,774 ) Income from operations 12,464,504 8,087,858 10,365,211 7,480,685 5,734,807 Provision for income taxes (4,452,532 ) (3,188,858 ) (4,248,144 ) (3,173,533 ) (1,982,252 ) Net income 7,076,949 4,210,356 5,349,338 3,675,879 3,753,373 Basic and diluted weighted average shares outstanding 20,914,208 18,614,203 18,735,944 13,945,937 13,435,143 Basic and diluted earnings per share $ 0.34 0.23 0.29 0.26 $ 0.28 September 30, 2007 September 30, 2006 2006 2005 2004 Balance sheet data: Cash and cash equivalents $ 13,697,914 8,134,284 6,430,009 255,831 $ 38,065 Working capital 48,259,502 25,348,963 26,502,571 10,230,715 4,249,437 Total assets 56,408,721 30,455,164 31,026,914 12,646,305 7,582,971 Total current liabilities 4,431,861 2,835,195 2,010,220 1,350,444 2,205,082 Long term liabilities - - - - - Total liabilities 7,585,263 4,754,047 2,010,220 1,350,444 2,205,082 Total stockholders' equity 48,823,458 25,701,117 26,856,119 10,057,951 5,377,882 RISK FACTORS An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this prospectus, before making an investment decision. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. Risks Related To Our Business If we fail to effectively expand our operations and capacity to satisfy demand for our fertilizer products, our results of operations and business prospects could be impaired. Our future success depends on our ability to expand our business to address the growth in demand for our fertilizer products. Because our industry is highly competitive, if we are unable to increase our production capabilities to meet increased demand for our products, we may lose existing customers, as well as potential additional customers, to competitors with greater production capacities. If we are unable to satisfy existing customers increased demands for products, such customers may terminate there relationships with us which could reduce our revenues and significantly hurt our overall financial performance. In addition, we currently rely on 10 major distributors, each of whom distribute our products to multiple end user customers. If we are unable to meet the demand of end user customers of any of these distributors, such distributors may terminate their relationships with us with respect to all of their end user customers in favor or one or more of our competitors who could meet the demands of all of such customers. Failure to continue to attract new customers may impair our revenue growth. If our production capacity and revenues do not continue to grow, our competitive position, margins and profits could materially decline. We recently completed construction of our Anhui Agritech and Beijing Agritech manufacturing lines as well as the factories in Chongqing and Xinjiang which became operational in July, 2006 and September, 2006, March, 2007, and July, 2007 respectively, resulting in overall annual fertilizer production capacity of approximately 13,000 metric tons. Our ability to add production capacity and increase output is subject to significant risks and uncertainties, including: the availability of additional funding to build manufacturing facilities and purchase raw materials on favorable terms or at all; our management and minimization of delays and cost overruns caused by problems with our suppliers of raw materials and third-party vendors; and our receipt of any necessary government approvals or permits that may be required to expand our operations in a timely manner or at all. If we cannot successfully implement additional production capacity increases efficiently and cost-effectively, we will be unable to satisfy any increased demand for our products, which could significantly impair our financial performance. See also We face risks associated with recent and future investments or acquisitions below. Our rapid expansion could significantly strain our resources, management and operational infrastructure which could impair our ability to meet increased demand for our products and hurt our business results. To accommodate the recent and anticipated growth of our production assets, we will need to expend capital resources and dedicate personnel to implement and upgrade our accounting, operational and internal management systems and enhance our record keeping and contract tracking system. Such measures will require us to dedicate additional financial resources and personnel to optimize our operational infrastructure and to recruit more personnel to train and manage our growing employee base. If we cannot successfully implement these measures efficiently and cost-effectively, then we could fail to utilize our production assets sufficiently to meet demand for our products and our operating costs could increase disproportionately, either of which could impair our revenue growth and hurt our overall financial performance. If we fail to accurately project market demand for our products, our business expansion plan could be jeopardized and our financial condition and results of operations will suffer. We plan to increase our annual manufacturing capacity of our fertilizer products to meet an expected increase in demand for our products. We anticipate that our annual production capacity of our organic fertilizer products will be approximately 13,000 metric tons for the 2007 fiscal year. Our decision to increase our production capacity was based primarily on our projected increases in our sales volume and growth in the size of the fertilizer market in China. If actual customer orders are less than our projected market demand, we will likely suffer overcapacity problems, may have to leave capacity idle and may accumulate substantial inventories of our fertilizer products, which may reduce our overall profitability and hurt our financial condition and results of operations due to the loss of cash flow from the increasing inventory and may cause us to sell our products at a lower price than we might otherwise agree upon with a customer. Our business will be harmed if our major distributors reduce their orders or discontinue doing business with us. For the year ended December 31, 2006, we sold approximately 34.2% of our fertilizer products through ten major distributors, including Liaoning Shenyang Military District Subsidiary Farm, Xinjiang Construction Military Group and Heilongjiang Qiqihar Agricultural Department. We anticipate that a similar percentage of our products will be sold through some of these and other distributors in 2007. Although we believe that our relationship with these distributors is good, we have no long term supply agreements with them and any or all of them could termination their relationship with us in favor of competitors with increased productions capabilities or offering lower prices or other favorable terms. If some or all of these distributors reduce their orders or discontinue doing business with us, we could have difficulties finding new distributors to distribute our products and our revenues and net income could in turn decline considerably. Our reliance on these major distributors could also affect our bargaining power in getting favorable prices for our products. In addition, untimely payment and/or failure to pay by these major distributors would negatively affect our cash flow. We depend heavily on Mr. Yu Chang, our CEO, President, Secretary and director, and without his services our prospects would be severely limited. Our future business and results of operations depend in significant part upon the continuing contribution of Mr. Yu Chang, our CEO, President, Secretary and director. Mr. Chang has extensive experience in the liquid compound fertilizer industry and is directly involved in all of our business operations. Mr. Chang has a 3-year employment agreement with our subsidiary, Pacific Dragon, which expires on January 5, 2008. There can be no assurance that we will be able to retain Mr. Chang after the expiration of his employment agreement. If Mr. Chang ceases to be employed by us, we may have difficulty finding a suitable replacement with equal leadership and industry experience, and our business would suffer because we will not have the leadership needed to capitalize on market opportunities and to direct our growth, leading to a possible decrease in revenues and inappropriate capital investments in projects that may not benefit our long-term growth. Mr. Chang has both sales contacts in the Agricultural industry and know-how to produce our products, making his expertise both unique and valuable to us. We face risks associated with recent and future investments or acquisitions. An important element of our growth strategy is to invest in or acquire businesses that will enable us, among other things, to expand the fertilizer products we offer to our existing target customer base, expand our production capacity, lower our costs for raw materials and components and capitalize on opportunities to expand into new markets. If we are unable to identify acquisition candidates or to effectively and efficiently acquire and integrate such businesses into our existing business, we may be unable to meet the demand for our products or maintain a competitive advantage over our competitors in terms of products offered, supply capacity, product price and quality. Even if we are able to identify and acquire additional businesses, if we are able to efficiently integrate such businesses, then the anticipated advantages of such acquisitions may be lost and our costs could increase, our margins could decline and our financial results could be significantly harmed. During the past 12 months, we expanded our operations through our recently formed Anhui Agritech and Beijing Agritech operating subsidiaries which we expect to contribute to our future growth. Anhui Agritech operates our facility in the Anhui province and manufactures and sells our fertilizer products to customers in the Anhui, Hubei, and Henan provinces of China. Beijing Agritech supervises our Beijing operation, which serves as a research and development center and our primary syrup production center and converting factory. We may be unable to effectively integrate Anhui Agritech and Beijing Agritech into our overall operations and we may not realize the anticipated benefits from the transactions. In the future, we may be unable to identify other suitable investment or acquisition candidates or may be unable to make these investments or acquisitions on commercially reasonable terms, if at all. If we complete any such investment or acquisition, we may not realize the anticipated benefits from the transaction. Integrating an acquired business is distracting and time consuming, as well as a potentially expensive process. The successful integration of our Anhui Agritech and Beijing Agritech operations and any other newly established or acquired businesses require us to: integrate and retain key management, sales, research and development, production and other personnel; incorporate the newly developed products or additional capabilities into our offerings from an product development, sales and marketing perspective; coordinate research and development efforts; integrate and support pre-existing supplier, distribution and customer relationships; and consolidate duplicate facilities and functions and combine back office accounting, order processing and support functions. We may be unsuccessful in effectively performing these tasks. Geographic distance between business operations, the compatibility of the technologies and operations being integrated also present significant challenges. If we are unsuccessful in our investments and acquisitions our financials results may be harmed by the lost transaction costs, potential disposition costs if the target is resold later and lost opportunities our management is unable to capitalize upon while focused on the investments and acquisitions.. See also If we fail to effectively expand our operations and capacity to satisfy demand for our fertilizer products, our results of operations and business prospects could be impaired above. We depend heavily on skilled personnel, and any loss of such personnel, or the failure to continue to attract such personnel in the future, could harm our business. The agricultural chemicals business is specialized and requires the employment of personnel with significant scientific and operational experience in the industry. Accordingly, we must attract, recruit and retain a sizeable workforce of technically and scientifically competent employees. Our ability to effectively implement our business strategy will depend upon, among other factors, the successful recruitment and retention of additional management and other key personnel that have the necessary scientific, technical and operational skills and experience with the fertilizer industry. These individuals are difficult to find in the PRC and we may not be able to retain such skilled employees. If we are unable to hire the correct individuals we may not be able to produce enough product to optimize profits, research and development initiatives may be delayed and we may encounter disruptions in production and research which will negatively impact our financial condition. Any disruption of the operations in our factories would damage our business. All of our fertilizer products are currently manufactured in our factories in Harbin, Beijing, and Anhui China. We currently maintain insurance covering only our leased factories. Our operations could be interrupted by fire, flood, earthquake and other events beyond our control. Any disruption of the operations in our factories would have a significant negative impact on our ability to manufacture and deliver products, because we would likely not be able to outsource our production on terms favorable to the company, if at all. Failure to be able to replace any lost production capability would cause a potential diminution in sales, the cancellation of orders, loss of valuable employees, damage to our reputation and potential lawsuits. We currently rely on a small number of third parties to supply the key raw materials we use to produce our products. Our business depends upon the availability of key raw materials, including humic acid, nitrogen, phosphorus, kalium, and other supplementary material. We rely on only a few external suppliers for these raw materials. In fiscal year 2006, we purchased approximately 14.8% of our humic acid from Inner-Mongolia Humic Acid Factory, approximately 33.8% of our Nitrogen, phosphorus and kalium from Beijing Zhongxin Chemical Technology Development Co., and approximately 27.1% of our other supplementary material from Shenzhen Hongchou Technology Company. For the 2007 fiscal year, we expect that our raw materials suppliers will be substantially similar to past years and the amount of raw materials will increase commensurate with the increase in the demand of our fertilizer products. We have entered into written agreements with all of these suppliers. If any of our major suppliers were to default or become unable to deliver the raw materials in sufficient quantities, we may be unable to purchase these raw materials from alternative sources on the same or similar terms, which could result in a significant increase in our operating costs. In addition, any disruption in the supply of our raw materials could cause delay in the delivery of our products which would be harmful to our sales reputation and business. If supply is disrupted the increased amount we have to pay for raw materials could negatively impact our margins, cause us to delay deliveries which may cause us to breach contracts or damage customer relationships or cause us to cease production if an alternate supplier cannot be found. If we were unable to procure replacement supplies, our ability to meet the production demands of our customers could cause the loss of customers and/or market share. Our financial results could be negatively impacted by the lost sales or decreased margins. If we cannot protect the proprietary formula and manufacturing processes for our concentrated organic liquid compound fertilizer it could increase our competition and cause our operating results to suffer. Our success will depend in part on our ability to protect our proprietary formula and manufacturing process for highly concentrated organic liquid compound fertilizer products. We rely on trade secrets to protect our proprietary formulas and manufacturing processes. We have not applied for patents for our technology and formulas because we believe an application for such patents would result in public knowledge of our proprietary technology and formulas and could lead competitors to attempt to copy our products, thereby increasing competition. This could in turn result in a decrease of our market share and hurt our operating results. Our subsidiary Pacific Dragon has entered into a license agreement with Mr. Yu Chang, our Chairman CEO and President, under which Mr. Chang granted us an exclusive license to use his know-how in manufacturing organic liquid compound fertilizer on a royalty-free basis. Under the license agreement, Mr. Chang has the obligation to maintain the confidentiality of this technology and is prohibited from licensing this technology to any third party or using the technology for his own benefit. In addition, only certain of our key executives have knowledge of our proprietary technology and formulas. Despite these precautions, the legal regime protecting intellectual property rights in China is weak. If we are not able to enforce our licensing agreement with Mr. Chang, and fully protect our proprietary trade secrets, if our employees unintentionally or willfully disclose our confidential technology to competitors, or if our competitors independently develop similar or superior products, our competitors may be able to more effectively offer products similar to ours and/or produce products with a cost structure similar to ours, if not better, and we may thereby lose any competitive advantage that we currently have. If we are forced to take legal action to protect our proprietary formula and processes, we will incur significant expense and further could not guarantee a favorable outcome. In addition, our competitors may counterfeit our products and use our trademark. These counterfeit products could damage our reputation and create confusion for our customers. Our financial results would be negatively impacted by the lost sales to the fake and/or competitive product or by lost sales from a damaged reputation. Certain of our officers and directors' associations with other business enterprises could impede their ability to devote ample time to our business and could pose conflicts of interest. Mr. Yu Chang, our CEO, President, Secretary and director, and Ms. Xiaorong Teng, our Chief Operating Officer, serve as the chairman and a director, respectively, of Yinlong Industrial Co. Ltd. These existing responsibilities to another entity could limit the amount of time they can spend on our affairs. Mr. Chang currently spends about 90% of his time on our affairs and about 10% of his time on the affairs of Yinlong. Ms. Teng currently spends about 95% of her time on our affairs and about 5% of her time on the affairs of Yinlong. In addition, in carrying out their responsibilities for both us and Yinlong, Mr. Chang and Ms. Teng could face conflicts of interest from time to time. We will attempt to resolve any such conflicts of interest in our favor. Our officers and directors are accountable to us and our shareholders as fiduciaries, which requires that such officers and directors exercise good faith and integrity in handling our affairs. Our financials results could be negatively impacted if our officers and directors do not capitalize on opportunities for us because of their other obligations or if we are unable to take advantage of a potential opportunity because of a perceived conflict of interest with an officer and/or director. We may be exposed to potential risks relating to our internal controls over financial reporting and our ability to have those controls attested to by our independent auditors. As directed by Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404, the Securities and Exchange Commission adopted rules requiring public companies to include a report of management on the company's internal controls over financial reporting in their annual reports on Form 10-K. In addition, the independent registered public accounting firm auditing a company's financial statements must also attest to and report on management's assessment of the effectiveness of the company's internal controls over financial reporting as well as the operating effectiveness of the company's internal controls. We are subject to these requirements. We can provide no assurance that we will be able to comply with all of the requirements imposed thereby. There can be no positive assurance that we will receive a positive attestation from our independent auditors. In the event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner or we are unable to receive a positive attestation from our independent auditors with respect to our internal controls, investors and others may lose confidence in the reliability of our financial statements. This may negatively impact the value of our stock as investors may be less willing to invest in us if we cannot comply with all of the requirements. We have only recently hired an English speaking financial officer to help with, among other things, interactions with auditors and we may need to hire additional personnel in the future who may be difficult to find in the PRC. We may not be able to implement a SOX 404 compliance program in a timely manner if we do not have the proper personnel. We may need to raise additional capital in the foreseeable future and may not be able to do so on terms favorable to us or you or at all. Part of our strategy involves increasing our fertilizer production capacity by constructing additional manufacturing facilities and making strategic investments and acquisitions which require significant capital resources. As of September 30, 2007, we had approximately $13.7 million in cash with $37,302 in restricted cash. Based on current reserves and anticipated cash flow from our operations, we anticipate that the available funds will be sufficient to meet our anticipated needs for working capital, capital expenditures and business expansion for the next twelve months. If we decide to expand our business operations more broadly than currently anticipated or if cash flows from operations are inadequate for our capital needs, we may seek to satisfy our future capital requirements from the sale of our securities in public or private offerings, or through loans from financial institutions or our controlling stockholders. Adequate funds may not be available when needed or on terms satisfactory to us. A lack of funds also may cause us to delay, reduce and/or abandon certain or all aspects of our organic liquid compound fertilizer product research and development programs, close facilities and/or lay-off employees which, in turn, will likely result in decreased sales and profits. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced and our stockholders may experience additional dilution. In addition, such equity or convertible debt securities may have rights, preferences and privileges senior to those of our common stock. This may reduce a stockholder's return on investment or cause a complete loss in the investment. Our holding company structure may limit the payment of dividends. We have no direct business operations, other than the direct and indirect ownership of our subsidiaries Pacific Dragon, Anhui Agritech and Beijing Agritech. We have no current intention of paying dividends. As a holding company, if we decide to pay dividends in the future our ability to do so will depend upon the receipt of dividends or other payments from our operating subsidiaries and other holdings and investments. Our operating subsidiaries may be subject to restrictions on their ability to make distributions to us due to Chinese law, restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions as discussed below. If future dividends are paid in Renminbi, fluctuations in the exchange rate for the conversion of Renminbi into U.S. dollars may reduce the amount received by U.S. stockholders upon conversion of the dividend payment into U.S. dollars. Chinese regulations currently permit the payment of dividends only out of accumulated profits as determined in accordance with Chinese accounting standards and regulations. Our subsidiaries in China are also required to set aside a portion of their after tax profits according to Chinese accounting standards and regulations to fund certain reserve funds. Currently, our subsidiaries in China are the only sources of revenues or investment holdings for the payment of dividends. If they do not accumulate sufficient profits under Chinese accounting standards and regulations to first fund certain reserve funds as required by Chinese accounting standards, we will not receive any dividends and will be unable to pay any dividends to our stockholders. Our inability to pay dividends may harm the market price of our stock. Risks Related To Our Industry Our operating results will suffer if the price of raw materials increases and we cannot pass the increased cost through to our customers. The primary raw materials included in our products are humic acid, nitrogen, phosphorus, kalium and other supplementary material. The prices for these raw materials are subject to market forces largely beyond our control, including energy costs, organic chemical feedstock, market demand, and freight costs. The prices for these raw materials may fluctuate significantly based upon changes in these forces. Our operating results may be seriously harmed if we are unable to pass any raw material price increases through to our customers due to lower margins from our sales. If we are forced to increase prices of our products due to increases in the prices of raw materials, the demand for our products could decrease, which could materially harm our operations and financial results. See If we fail to accurately project market demand for our products, our business expansion plan could be jeopardized and our financial condition and results of operations will suffer above. If we cannot renew our fertilizer registration certificate, which expires in December, 2007, we will be unable to sell some of our products which will cause our sales revenues to significantly decrease. All fertilizers produced in China must be registered with the PRC Ministry of Agriculture. No fertilizer can be manufactured without such registration. There are two kinds of registrations: interim registration and formal registration. The interim registration is valid for one year and applies to fertilizers in the stages of in-the-field testing and test selling. Fertilizers that have completed in-the-field testing and test selling must obtain formal registration, which is valid for five years, and thereafter must be renewed each five years. We have obtained a Formal Fertilizer Registration Certificate covering all of our fertilizer products from the PRC Ministry of Agriculture. Such certificate was issued on September 3, 2002 and will expire in December, 2007. We have pursued renewal application of this certificate since June, 2007 and we expect to complete the renewal process by the end of December 2007. Our belief is that the PRC Ministry of Agriculture generally will grant an application for renewal in the absence of illegal activity by the applicant. However, there is no guarantee that the PRC Ministry of Agriculture will grant renewal of our Formal Fertilizer Registration Certificate. If we cannot obtain the necessary renewal, we will not be able to manufacture and sell our fertilizer products in China which will cause the termination of our commercial operations. Adverse weather conditions could reduce demand for fertilizer products. The demand for our organic fertilizer products fluctuates significantly with weather conditions, which may delay the application of the fertilizer or render it unnecessary at all. If any natural disasters, such as flood, drought, hail, tornado or earthquake, occur, demands for our products will be reduced. In addition, in some cases, we allow our distributors to purchase our products partially on credit. The distributors, in turn, may sell the fertilizer to farmers on credit. If any natural disaster occurs, reduced crop yields may cause farmers to default on their payments which could harm our cash flow and results of operations. If we are unable to collect on our sales our cash flows will decrease and we will have additional expenses from bad debts which will harm our published financials results. Competition in the fertilizer industry in China and elsewhere is intense. We compete with approximately 300 small-sized, local Chinese fertilizer manufacturers. The number of these small companies varies from time to time. While we may have greater resources than our smaller competitors, it is possible that these competitors have better access in certain local markets to customers and prospects, an enhanced ability to customize products to a particular region or locality and established local distribution channels within a small region. Furthermore, we face competition from large domestic and international fertilizer producers and traders who import fertilizers into China such as Guangxi Beihai Penshibao Co., Ltd (www.psb.com.cn), Henan Luo Xiaowang Group (www.luoxiaowang.com), and Shangdong Tianda 2116 (www.2116.cn). Our major international competitors are Phosyn from the UK (www.cuikang.com/news/), Shi Ma (Chinese translation) part of BASF of Germany, Kemira GrowHow Oyj from Finland, and Leffingwell from the USA. These imported products range from fertilizers with single chemical elements, such as urea, phosphate and potash, to standard nitrogen phosphate, potassium compound fertilizers. The quality of the imported products is generally higher and more stable than fertilizers produced in China. While our resources may not be as great as our larger competitors, we believe our product quality, sales network, brand recognition and sales network are superior. If our competitors are able to gain greater market share or improve their sales efforts, our sales may decrease, we may be forced to lower our prices, or our marketing costs may increase, all of which could negatively impact our financial results. Historically, imported fertilizers have been subject to tariffs, duties and quota imposed by the Chinese government. In connection with China's entry into the World Trade Organization, based on the WTO commitment, the Chinese government started to allow foreign companies to sell and distribute fertilizers beginning in December 2006. As the Chinese fertilizer market starts to gain more market participants, we will face increased competition which may create pricing, supply and demand constraints and cause our profit margins to suffer. The fertilizer products that we manufacture pose safety risks and could expose us to product liability claims. Defects in, or unknown harmful effects caused by, organic and inorganic chemical and elements in our products could subject us to potential product liability claims that our products cause some harm to the human body or to property. Although we have adopted safety measures of industry standard in our research, development and manufacturing processes, accidents may still occur. Any accident, either at the manufacturing phase or during the use of our products, may subject us to significant liabilities to persons harmed by these products. We have renewed product liability insurance to cover claims from personal injuries or property damage caused by our products for the period from July 11, 2007 to July 10, 2008. Our insurance coverage was limited to approximately $500,000 (RMB 4,000,000) and may not have been sufficient to cover potential claims. A successful claim against us that is in excess of our insurance coverage could significantly harm our business and financial condition. Public perception that our products are not safe, whether justified or not, could impair our reputation, involve us in litigation, damage our brand names and our business. As of the filing of this Report, no product liability claim has ever been brought against us. However, if we are involved in litigation in the future the potential judgment or settlement along with the litigation costs could harm our financial performance. Risks Related To Doing Business In China Adverse changes in political and economic policies of the PRC government could impede the overall economic growth of China, which could reduce the demand for our products and damage our business. We conduct substantially all of our operations and generate most of our revenue in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The PRC economy differs from the economies of most developed countries in many respects, including: the higher level of government involvement; the early stage of development of the market-oriented sector of the economy; the rapid growth rate; the higher level of control over foreign exchange; and the allocation of resources. As the PRC economy continues to transition from a planned economy to a more market-oriented economy, the PRC government has implemented and continues to implement various measures to encourage economic growth and guide the allocation of resources by controlling payment of foreign currency-denominated obligations, setting monetary policy and imposing policies that impact particular industries or companies in different ways. While these measures may benefit the overall PRC economy, they may also have a negative effect on us, especially if such measures create an unfriendly environment for businesses in the agricultural sector of the economy. For example, PRC governmental entities, whether local or national, could implement additional regulations requiring the payment of increased taxes, tariffs or other duties, or increase the level of government supervision, review, licensing or other involvement in our operations and expansion efforts. Such regulations could significantly increase our costs of doing business, producing products or acquisition efforts. We may not be able to pass these additional costs along to costumers by increasing the costs of our products, or if we are forced to increase the prices of our products, our sales may be negatively effected and our competitors, whether in other areas of the PRC or internationally, may gain an advantage over the company. If the PRC government changes laws to which we are subject, particularly laws relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters our business could be harmed. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations. Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us. We conduct substantially all of our business through our operating subsidiaries in China, primarily Pacific Dragon, Anhui Agritech and Beijing Agritech. Our operating subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference, but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. For example, while contractual disputes occurs, the arbitration will be brought to the China International Economic and Trade Arbitration Commission ( CIETAC ) in accordance with CIETAC Arbitration Rules, the agreements are governed by PRC law and an arbitration award may be challenged in accordance with PRC law. For example, a claim that the enforcement of an award in our favor will be detrimental to the public interest, or that an issue does not fall within the scope of the arbitration would require us to engage in administrative and judicial proceedings to defend an award. China s legal system is a civil law system based on written statutes and unlike common law systems, it is a system in which decided legal cases have little value as precedent. As a result, China s administrative and judicial authorities have significant discretion in interpreting and implementing statutory and contractual terms, and it may be more difficult to evaluate the outcome of administrative and judicial proceedings and the level of legal protection available than in more developed legal systems. These uncertainties may impede our ability to enforce the terms of the contracts that we may enter into with our business partners. Any inability to enforce agreement or an award thereunder could materially and adversely affect our business and operation. The inability to get the benefits of the contractual rights for which we bargained may also negatively impact our financial results as we may have expenditures that are not match with reciprical benefits. Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries ability to distribute profits to us or otherwise materially adversely affect us. In October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, generally referred to as Circular 75, which required PRC residents to register with the competent local SAFE branch before establishing or acquiring control over an offshore special purpose company, or SPV, for the purpose of engaging in an equity financing outside of China on the strength of domestic PRC assets originally held by those residents. Internal implementing guidelines issued by SAFE, which became public in June 2007 (known as Notice 106), expanded the reach of Circular 75 by (i) purporting to cover the establishment or acquisition of control by PRC residents of offshore entities which merely acquire control over domestic companies or assets, even in the absence of legal ownership; (ii) adding requirements relating to the source of the PRC resident s funds used to establish or acquire the offshore entity; (iii) covering the use of existing offshore entities for offshore financings; (iv) purporting to cover situations in which an offshore SPV establishes a new subsidiary in China or acquires an unrelated company or unrelated assets in China; and (v) making the domestic affiliate of the SPV responsible for the accuracy of certain documents which must be filed in connection with any such registration, notably, the business plan which describes the overseas financing and the use of proceeds. Amendments to registrations made under Circular 75 are required in connection with any increase or decrease of capital, transfer of shares, mergers and acquisitions, equity investment or creation of any security interest in any assets located in China to guarantee offshore obligations, and Notice 106 makes the offshore SPV jointly responsible for these filings. In the case of an SPV which was established, and which acquired a related domestic company or assets, before the implementation date of Circular 75, a retroactive SAFE registration was required to have been completed before March 31, 2006; this date was subsequently extended indefinitely by Notice 106, which also required that the registrant establish that all foreign exchange transactions undertaken by the SPV and its affiliates were in compliance with applicable laws and regulations. Failure to comply with the requirements of Circular 75, as applied by SAFE in accordance with Notice 106, may result in fines and other penalties under PRC laws for evasion of applicable foreign exchange restrictions. Any such failure could also result in the SPV s affiliates being impeded or prevented from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the SPV, or from engaging in other transfers of funds into or out of China. We believe our stockholders who are PRC residents as defined in Circular 75 have registered with the relevant branch of SAFE, as currently required, in connection with their equity interests in us and our acquisitions of equity interests in our PRC subsidiaries. However, we cannot provide any assurances that their existing registrations have fully complied with, and they have made all necessary amendments to their registration to fully comply with, all applicable registrations or approvals required by Circular 75. Moreover, because of uncertainty over how Circular 75 will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies. For example, our present and prospective PRC subsidiaries ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 75 by our PRC resident beneficial holders. In addition, such PRC residents may not always be able to complete the necessary registration procedures required by Circular 75. We also have little control over either our present or prospective direct or indirect stockholders or the outcome of such registration procedures. A failure by our PRC resident beneficial holders or future PRC resident stockholders to comply with Circular 75, if SAFE requires it, could subject these PRC resident beneficial holders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects. If the China Securities Regulatory Commission, or CSRC, or another PRC regulatory agency, determines that CSRC approval is required in connection with this offering, this offering may be delayed or cancelled, or we may become subject to penalties. On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective on September 8, 2006. This new regulation, among other things, has certain provisions that require SPVs formed for the purpose of acquiring PRC domestic companies and controlled by PRC individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock market. However, the new regulation does not expressly provide that approval from the CSRC is required for the offshore listing of a SPV which acquires, directly or indirectly, equity interest or shares of domestic PRC entities held by domestic companies or individuals by cash payment, nor does it expressly provide that approval from CSRC is not required for the offshore listing of a SPV which has fully completed its acquisition of equity interest of domestic PRC equity prior to September 8, 2006. On September 21, 2006, the CSRC published on its official website a notice specifying the documents and materials that are required to be submitted for obtaining CSRC approval. It is not clear whether the provisions in the new regulation regarding the offshore listing and trading of the securities of a SPV applies to an offshore company such as us which has acquired the equity interest of PRC domestic entities in cash and has completed the acquisition of the equity interest of PRC domestic entities prior to the effective date of the new regulation. Since the new regulation has only recently been adopted, there remains some uncertainty as to how this regulation will be interpreted or implemented. If the CSRC or another PRC regulatory agency subsequently determines that the CSRC s approval is required for this offering, we may face sanctions by the CSRC or another PRC regulatory agency. If this happens, these regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from this offering into the PRC, restrict or prohibit payment or remittance of dividends to us or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our shares. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to delay or cancel this offering before settlement and delivery of the shares being offered by us. We may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt Practices Act could have a material adverse effect on our business. We are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business. We have operations, agreements with third parties and make sales in China, which may experience corruption. Our activities in China create the risk of unauthorized payments or offers of payments by one of the employees, consultants, sales agents or distributors of our Company, even though these parties are not always subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire. Our business will suffer if we lose our land use rights. There is no private ownership of land in China and all land ownership is held by the government of the PRC, its agencies and collectives. Land use rights can be obtained from the government for a period up to 70 years, and are typically renewable. Land use rights can be transferred upon approval by the land administrative authorities of the PRC (State Land Administration Bureau) upon payment of the required land transfer fee. We have received the necessary land use right certificate for our primary operating facilities, but we can give no assurance that our land use rights will be renewed on terms favorable to us or renewed at all. If we lose our land right certificates we may lose production facilities that may be difficult or impossible to replace. Should we have to relocate, our workforce may be unable or unwilling to work in the new location and our operations will be disrupted during the relocation. The relocation or loss of facilities could cause us to lose sales and/or increase our costs of production, which will negatively impact our financial results. Accounting laws in China mandate accounting practices which may not be consistent with U.S. generally accepted accounting principles and therefore our financials and their interpretation involve uncertainties. The PRC accounting laws require an annual "statutory audit" to be performed in accordance with PRC accounting standards and the books of foreign invested enterprises to be maintained in accordance with Chinese accounting laws. These Chinese accounting practices which may not be consistent with U.S. generally accepted accounting principles, or GAAP. Article 14 of the PRC Wholly Foreign-Owned Enterprise Law requires a wholly foreign-owned enterprise to submit certain periodic fiscal reports and statements to designated financial and tax authorities. Noncompliance with such requirements may cause revocation of our business license. The translation of the financial statements from the requirements of the PRC to U.S. GAAP, requires interpretation and exercise of judgment. This may increase costs or cause additional errors. Moreover, our PRC accounting records may not convert directly into the needed U.S. GAAP accounting records, causing unaccuracies or mistatements that could negatively impact our ability to get a clean audit opinion in the U.S. or may lead to fines by certain governmental bodies, which could negatively impact our financial performance and/or stock price. Restrictions on currency exchange may limit our ability to receive and use our sales revenue effectively. Most of our sales revenue and expenses are denominated in Renminbi. Under PRC law, the Renminbi is currently convertible under the current account, which includes dividends and trade and service-related foreign exchange transactions, but not under the capital account, which includes foreign direct investment and loans. Currently, our PRC operating subsidiaries may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, without the approval of the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, the relevant PRC government authorities may limit or eliminate our ability to purchase foreign currencies in the future. Since a significant amount of our future revenue will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside China that are denominated in foreign currencies. Foreign exchange transactions by PRC operating subsidiaries under the capital account continue to be subject to significant foreign exchange controls and require the approval of or need to register with PRC government authorities, including SAFE. In particular, if our PRC operating subsidiaries borrow foreign currency through loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance the subsidiaries by means of additional capital contributions, these capital contributions must be approved by certain government authorities, including the Ministry of Commerce, or their respective local counterparts. These limitations could affect our PRC operating subsidiaries ability to obtain foreign exchange through debt or equity financing. This could negatively impact our financial performance as it may limit our ability to reallocate capital and to take advantage of market opportunities. Fluctuations in exchange rates could hurt our business and the value of our stock. The value of our common stock will be indirectly affected by the foreign exchange rate between U.S. dollars and the Renminbi and between those currencies and other currencies in which our sales may be denominated. Because substantially all of our earnings and cash assets are denominated in Renminbi and the net proceeds from this offering will be denominated in U.S. dollars, fluctuations in the exchange rate between the U.S. dollar and the Renminbi will affect the relative purchasing power of these proceeds, our balance sheet and our earnings per share in U.S. dollars following this offering. In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue after this offering that will be exchanged into U.S. dollars and earnings from, and the value of, any U.S. dollar-denominated investments we make in the future. Since July 2005, the Renminbi has no longer been pegged to the U.S. dollar. Although the People s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the Renminbi may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future the PRC authorities may lift restrictions on fluctuations in the Renminbi exchange rate and lessen intervention in the foreign exchange market. Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currencies. If Renminbi weakens relative to the dollar our earnings will be less valuable in terms of the equivalent U.S. Dollars which may negatively impact our stock price. We own our PRC subsidiaries rather than merely having a contractual relationship with such entities. We own our PRC subsidiaries, as opposed to having a mere contractual relationship with entities who operate in the PRC. This makes our investment in the PRC more rigid and long-term. We may be unable to quickly sell, dispose of our subsidiaries or exit the PRC if conditions in the PRC become unfavorable for business. Should we wish to exit the PRC and be unable to do so the value of stock may decrease due to our inability to relocate our corporate operations. Risks Related To Our Common Stock The market price for our common stock may be volatile which could result in a complete loss of your investment. Our stock is not widely traded or traded in great volume so the market price for our common stock is likely to be highly volatile and subject to wide fluctuations in response to factors including the following: actual or anticipated fluctuations in our quarterly operating results; announcements of new products by us or our competitors; changes in financial estimates by securities analysts; conditions in the fertilizer market; changes in the economic performance or market valuations of other companies involved in fertilizer production; announcements by our competitors of significant acquisitions; additions or departures of key personnel; and potential litigation. Our stock price could change very quickly and could move in a negative direction at any time. Certain of our stockholders hold a significant percentage of our outstanding voting securities. Our Chairman, Chief Executive Officer and President, Mr. Yu Chang is the beneficial owner of approximately 41.85% of our outstanding common stock. As a result, he possesses significant influence, giving him the ability, among other things, to elect a majority of our Board of Directors and to authorize or prevent significant corporate transactions. His ownership and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer. This might result in limitations on, or a decrease in the price of, our common stock. Our common stock is quoted on the OTC bulletin board which may have an unfavorable impact on our stock price and liquidity. Our common stock is quoted on the OTC Bulletin Board under the symbol "CAGC.OB." The OTC Bulletin Board is a significantly more limited market than the New York Stock Exchange or Nasdaq system. The quotation of our shares on the OTC Bulletin Board may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future. We are subject to penny stock regulations and restrictions. The SEC has adopted regulations which generally define so-called "penny stocks" to be an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. As of November 20, 2007, the closing bid and asked prices for our common stock were $3.16 and $3.25 per share and, therefore, it is designated a "penny stock." Although since February 3, 2005, we have met the net worth exemption from the "penny stock" definition, no assurance can be given that such exemption will be maintained. As a "penny stock," our common stock may become subject to Rule 15g-9 under the Exchange Act of 1934, or the "Penny Stock Rule." This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and "accredited investors" (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market. Unless exempt, for any transaction involving a penny stock, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in the penny stock. There can be no assurance that our common stock will qualify for exemption from the Penny Stock Rule. In any event, even if our common stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of a penny stock if the SEC determines that such a restriction would be in the public interest. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This document contains forward-looking statements, which reflect our views with respect to future events and financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. These forward-looking statements are identified by, among other things, the words "anticipates," "believes," "estimates," "expects," "plans," "projects," "targets" and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward- looking statements, even if new information becomes available in the future. Important factors that may cause actual results to differ from those projected include the
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001169166_wilkes_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001169166_wilkes_prospectus_summary.txt
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+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001169567_oxford_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001169567_oxford_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights material information regarding our company and the offering contained in this prospectus. You should read the entire prospectus carefully, including the financial information and related notes, before making an investment decision. Reference in this prospectus to "Oxford", "we", "us", and "our" all refer collectively to Oxford Technologies, Inc. and its subsidiary unless the context indicates otherwise or as otherwise noted. BUSINESS -------- Oxford Technologies, Inc. conducts its business through its wholly owned subsidiary, Axiom Manufacturing Services Ltd. in the United Kingdom ("Axiom"), which provides contract electronics manufacturing services to original equipment manufacturers ("OEM") in the computers and related products for business enterprises, industrial control equipment, testing and instrumentation products, medical devices and domestic appliances markets. We offer OEMs a full range of services, from initial design through production, test, distribution and after- market support. In many cases, we build and service products that carry the brand names of our customers. Substantially all of our manufacturing services are provided on a turnkey basis, whereby we purchase customer-specified components, assemble the components on printed circuit boards, perform post-production testing and provide OEMs with production process and testing documentation. We also provide manufacturing services on a consignment basis, whereby we utilize components supplied by our customers to provide assembly and post-production testing services. We have no website. Axiom Manufacturing Services Ltd., our subsidiary, has a website, whose address is www.axiom-ms.com. We were organized as a Delaware corporation on March 8, 2002. Our principal executive office is located at 80 Wall Street, Suite 818, New York, NY 10005, and our telephone number is (212) 809-1200. The Offering ------------ We are authorized to issue 80,000,000 shares of $0.001 par value common stock. As of the date of this prospectus, there are 18,654,002 shares of our common stock issued and outstanding. Up to 5,213,000 shares of our common stock may be offered by the selling security holders. The selling security holders may sell all or any portion of the shares in this offering in one or more transactions through a variety of methods. The selling security holders will sell their shares at a fixed price of $1.00 per share until our shares are quoted on the OTC Bulletin Board and thereafter at prevailing market prices or privately negotiated prices. Estimated Use of Proceeds ------------------------- We will not receive any of the proceeds from the sale of those shares being offered by the selling security holders, although we agreed to pay all offering expenses, which are approximately $75,907.79. <PAGE> - 5 - Plan of Distribution -------------------- We are unaware of the nature and timing of any future sales of common stock by existing shareholders. There is no minimum number of shares to be sold in this offering. No underwriting arrangements for this offering exist. Summary Financial Data ---------------------- The following summary financial data as of December 31, 2005 and for the two years ended December 31, 2004 and 2003 have been derived from our audited statements. The selected financial data as of September 30, 2006 and for the nine months ended September 30, 2006 and 2005 have been derived from our unaudited financial statements which, in the opinion of our management, reflect all adjustments, which are of a normal recurring nature, necessary to present such information fairly. Statement of Operations Data: ----------------------------- (Dollars in thousands except per share data) <TABLE> <CAPTION> Fiscal years ended Nine months ended December 31, September 30, ------------------------------------ ------------------------ 2005 2004 2003 2006 2005 ------------ ---------- ---------- ------------ ----------- <s> <c> <c> <c> <c> <c> (unaudited) Revenues $ 30,684 $ 27,818 $ 20,421 $ 28,891 $ 22,391 Cost of Sales $ 27,788 $ 25,572 $ 20,949 $ 25,532 $ 20,188 Net income (loss) $ 1,474 $ 363 $ (1,852) $ 1,490 $ 568 =========== ========= ========== =========== ========== Basic and diluted income (loss) per share $ 0.08 $ 0.02 $ (0.10) $ 0.08 $ 0.03 =========== ========= ========== =========== ========== Basic and diluted weighted average number of shares of common stock outstanding 18,564,002 18,564,002 17,988,660 18,564,002 18,564,002 =========== ========== =========== =========== ========= </TABLE> Balance Sheet Data: ------------------- (Dollars in thousands) <TABLE> <CAPTION> September 30, 2006 December 31, 2005 ------------------------ ---------------------- (Unaudited) <s> <c> <c> Total assets $ 30,093 $ 26,884 Total liabilities $ 12,269 $ 11,992 Stockholders' equity $ 17,824 $ 14,892 </TABLE> <PAGE> - 6 -
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001173752_aruba_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001173752_aruba_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider in making your investment decision. You should read this summary together with the more detailed information, including our financial statements and the related notes and schedule, included elsewhere in this prospectus. You should carefully consider, among other things, the matters discussed in
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001175474_von_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001175474_von_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..13e236fe07903c51457b0abd86016022eae28455
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001175474_von_prospectus_summary.txt
@@ -0,0 +1 @@
+This summary highlights material information appearing elsewhere in this prospectus. You should read the entire prospectus carefully. This prospectus contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in "Risk Factors" and elsewhere in this prospectus. All references to a particular fiscal year of Visant Corporation, or Visant, are to the four fiscal quarters ended the Saturday nearest to December 31. Our Company In this document, references to the "Company," "Visant," "we," "our," or "us" refer to Visant Corporation and its consolidated subsidiaries, and references to "Visant Holding," "Holdings," "our parent" and "our parent company" refer to our indirect parent, Visant Holding Corp. Visant Corporation operates Jostens, Inc. and its subsidiaries ("Jostens"), Von Hoffmann Holdings Inc. and its subsidiaries ("Von Hoffmann"), AHC I Acquisition Corp. and its subsidiaries ("Arcade"), Dixon Direct Corp. ("Dixon") and Neff Holding Company and its subsidiary ("Neff"). We are a leading marketing and publishing services enterprise servicing the school affinity, direct marketing, fragrance and cosmetics sampling and educational publishing markets. We were formed through the October 2004 consolidation of Jostens, Von Hoffmann and Arcade. On June 8, 2006, we entered into definitive agreements to sell our Jostens Photography businesses, which previously comprised a reportable segment. The transactions closed on June 30, 2006. The discontinued operations of the Jostens Photography businesses are excluded from the consolidated financial statements retrospective from the date of disposition. On June 16, 2006, we acquired, through a wholly owned subsidiary, substantially all of the assets and assumed certain liabilities of the Dixon Web operation of the Sleepeck Printing Company, a provider of innovative marketing services and products located in Dixon, Illinois. At the time of acquisition, the name of the business was changed to Dixon Direct Corp. The results of Dixon's operations have been included in the consolidated financial statements since that date. On September 8, 2006, a newly formed subsidiary of ours acquired substantially all of the assets and assumed certain liabilities of the Vertis, Inc. fragrance sampling business. The acquired business currently operates under the Arcade Marketing name. The acquisition was a strategic step to continue to expand our Marketing and Publishing Services segment, which services the fragrance, cosmetic, personal care and other consumer product market segments. The results of these acquired operations have been included in the consolidated financial statements since that date. As of December 2006, our Von Hoffmann Holdings Inc., Von Hoffmann Corporation and Anthology, Inc. businesses were held as assets for sale. On January 3, 2007, we entered into a Stock Purchase Agreement (the "Von Hoffmann Stock Purchase Agreement") with R.R. Donnelley & Sons Company providing for the sale of Von Hoffmann Holdings Inc., Von Hoffmann Corporation and Anthology, Inc., which previously comprised the Educational Textbook segment and a portion of the Marketing and Publishing Services segment. The regulatory review of the proposed transaction through a second request by the Federal Trade Commission has been completed, and we expect to close the transaction on or about May 16, 2007. The operations of the Von Hoffmann businesses are reported as discontinued operations in the consolidated financial statements for all periods presented. On March 16, 2007, we acquired all of the outstanding capital stock of Neff Holding Company and its wholly owned subsidiary Neff Motivation, Inc. Neff is a leading single source provider of custom award programs and apparel, including chenille letters and letter jackets, to the scholastic market segment. Neff operates as a direct subsidiary of Visant under the Neff brand name and its results will KKR and related funds(2). 2,664,356 44.6 % 1 (3) 100.0 % DLJMBP III and related funds(4) 2,664,357 44.6 % David F. Burgstahler(4)(8) 2,666,438 44.6 % Alexander Navab(2)(8) 2,666,437 44.6 % 1 (3) 100.0 % Tagar C. Olson(2)(8) 2,666,437 44.6 % 1 (3) 100.0 % Charles P. Pieper(4)(8) 2,666,438 44.6 % George M.C. Fisher(2)(5)(6) 4,163 * Marc L. Reisch(7)(8)(10) 115,989 1.9 % Marie D. Hlavaty(7)(8) 15,608 * Paul B. Carousso(7)(8) 7,805 * Michael L. Bailey(7)(8) 38,004 * John Van Horn(7)(9) 5,203 * Directors and officers (13 persons) as a group(2)(4)(5)(6)(8)(9)(10) 5,540,045 90.8 % Balance January 1, 2005 Balance December 30, 2006 (In thousands) Service cost $ 6,603 $ 8,016 Interest cost 14,989 14,901 Expected return on plan assets (22,611 ) (21,255 ) Amortization of prior year service cost (478 ) 53 Amortization of net actuarial loss 3 WHERE YOU CAN FIND MORE INFORMATION We and our guarantor subsidiaries have filed with the Securities and Exchange Commission, or the SEC, a registration statement on Form S-1 under the Securities Act with respect to the notes being offered hereby. This prospectus, which forms a part of the registration statement, does not contain all of the information set forth in the registration statement. For further information with respect to us and the notes, reference is made to the registration statement. Statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete. We and our guarantor subsidiaries are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith, file reports and other information with the SEC. The registration statement, such reports and other information can be read and copied at the Public Reference Room of the SEC located at 100 F Street, N.E., Washington D.C. 20549. Copies of such materials, including copies of all or any portion of the registration statement, can be obtained from the Public Reference Room of the SEC at prescribed rates. You can call the SEC at 1-800-SEC-0330 to obtain information on the operation of the Public Reference Room. Such materials may also be accessed electronically by means of the SEC's home page on the Internet (http://www.sec.gov). So long as we and our guarantor subsidiaries are subject to the periodic reporting requirements of the Exchange Act, we and our guarantor subsidiaries are required to furnish the information required to be filed with the SEC to the trustee and the holders of the outstanding notes. We and our guarantor subsidiaries have agreed that, even if we and our guarantor subsidiaries are not required under the Exchange Act to furnish such information to the SEC, we will nonetheless continue to furnish information that would be required to be furnished by us and our guarantor subsidiaries by Sections 13 or 15(d) of the Exchange Act. be reported from the date of acquisition together with the results of the Jostens scholastic operations as the renamed Scholastic segment. Our three reportable segments as of December 30, 2006 consisted of: Jostens Scholastic provides services related to the marketing, sale and production of class rings, graduation products and other scholastic products; Jostens Yearbook provides services related to the publication, marketing, sale and production of school yearbooks; and Marketing and Publishing Services produces multi-sensory and interactive advertising sampling systems, primarily for the fragrance, cosmetics and personal care market segments, and provides innovative products and services to the direct marketing sector. The group also produces book covers and other components for educational publishers. Jostens Jostens is a leading provider of school-related affinity products and services that help people celebrate important moments, recognize achievements and build affiliation. Founded in 1897, Jostens has a history of providing quality products, which has enabled it to develop long-standing relationships with school administrators throughout the country. Jostens' high degree of customer satisfaction translates into annual retention rates of over 90% in its major product lines. Jostens' products and services are predominantly offered to North American high school and college students, through a national network of primarily independent sales representatives and associates. Jostens' operations are reported in two segments: (1) Scholastic and (2) Yearbook. Scholastic. Jostens is one of the leading providers of services related to the marketing, sale and production of class rings and an array of graduation products, such as caps, gowns, diplomas and announcements and graduation-related accessories. In the Scholastic segment, Jostens primarily serves U.S. high schools, colleges, universities and other specialty markets, marketing and selling its products to students and administrators through independent sales representatives. Jostens provides a high level of customer service in the marketing and sale of class rings and certain other graduation products, which often involves a high degree of customization. Jostens also provides ongoing warranty service on its class and affiliation rings. Jostens maintains product-specific tooling as well as a library of school logos and mascots that can be used repeatedly for specific school accounts over time. In addition to its class ring offerings, Jostens also designs, manufactures, markets and sells championship rings for professional sports and affinity rings for a variety of specialty markets. Yearbook. Jostens is one of the leading providers of services related to the publication, marketing, sale and production of yearbooks, primarily serving U.S. high schools, colleges, universities and middle schools. Jostens generates the majority of its revenues from high school accounts. Jostens' sales representatives and technical support employees assist students and faculty advisers with the planning and layout of yearbooks, including through the provision of on-line layout and editorial tools to assist in the publication of the yearbook. With a new class of students each year and periodic faculty advisor turnover, Jostens' independent sales representatives and customer service employees are the main point of continuity for the yearbook production process on a year-to-year basis. Marketing and Publishing Services The Marketing and Publishing Services segment produces multi-sensory and interactive advertising sampling systems, primarily for the fragrance, cosmetics and personal care market segment, and innovative, highly personalized products primarily targeted at the direct marketing sector. We are also a leading producer of supplemental materials and related components such as decorative covers and UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 plastic transparencies for educational publishers. With over a 100-year history as Arcade Marketing, we pioneered our ScentStrip product in 1980. We also offer an extensive portfolio of proprietary, patented and patent-pending technologies that can be incorporated into various marketing programs designed to reach the consumer at home or in-store, including magazine and catalog inserts, remittance envelopes, statement enclosures, blow-ins, direct mail, direct sell and point-of-sale materials and gift-with-purchase/purchase-with-purchase programs. We specialize in high-quality, in-line finished products and can accommodate large marketing projects with a wide range of dimensional products and in-line finishing production, data processing and mailing services. Our personalized imaging capabilities offer individualized messages to each recipient within a geographical area or demographic group for targeted marketing efforts. Company Background On October 4, 2004, an affiliate of Kohlberg Kravis Roberts & Co. L.P., or KKR, and affiliates of DLJ Merchant Banking Partners III, L.P., or DLJMBP III (together with KKR, the "Sponsors"), completed a series of transactions, which created a marketing and publishing services enterprise servicing the school affinity, direct marketing, fragrance and cosmetics sampling and educational publishing market segments through the consolidation of Jostens, Von Hoffmann and Arcade (the "Transactions"). Prior to the Transactions, Von Hoffmann and Arcade were each controlled by affiliates of DLJ Merchant Banking Partners II, L.P., or DLJMBP II, and DLJMBP III owned approximately 82.5% of our outstanding equity, with the remainder held by other co-investors and certain members of management. Upon consummation of the Transactions, an affiliate of KKR invested $256.1 million and was issued equity interests representing approximately 49.6% of our voting interest and 45.0% of our economic interest, and affiliates of DLJMBP III held equity interests representing approximately 41.0% of Holdings' voting interest and 45.0% of Holdings' economic interest, with the remainder held by other co-investors and certain members of management. Approximately $175.6 million of the proceeds were distributed to certain stockholders, and certain treasury stock held by Von Hoffmann was redeemed. After giving effect to the issuance of equity to additional members of management, as of April 23, 2007, affiliates of KKR and DLJMBP III held approximately 49.0% and 41.0%, respectively, of Holdings' voting interest, while each continued to hold approximately 44.6% of Holdings' economic interest. As of April 23, 2007, the other co-investors held approximately 8.4% of the voting interest and 9.1% of the economic interest of Holdings, and members of management held approximately 1.6% of the voting interest and approximately 1.7% of the economic interest of Holdings. FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (1)As of April 23, 2007, affiliates of KKR and DLJMBP III held approximately 49.0% and 41.0%, respectively, of the voting interests of Visant Holding, while each continued to hold approximately 44.6% of the economic interests of Visant Holding. As of April 23, 2007, other co-investors held approximately 8.4% of the voting interests and approximately 9.1% of the economic interests of Visant Holding, while members of management held approximately 1.6% of the voting interest and approximately 1.7% of the economic interest. (2)Consists of 83/4% Senior Notes due 2013 of Visant Holding. (3)Consists of 101/4% Senior Discount Notes Due 2013 of Visant Holding. (4)Visant Secondary Holdings Corp. pledged the stock of Visant as security for the benefit of the lenders under Visant's senior secured credit facilities and is a guarantor of Visant's senior secured credit facilities. (5)Visant's senior secured credit facilities consist of a Term Loan C facility, with $716.5 million outstanding as of December 30, 2006, and a $250.0 million senior secured revolving facility. As of December 30, 2006, Visant had $233.3 million of availability under the revolving credit facility (net of $16.7 million in outstanding letters of credit). The Term Loan C facility matures in 2011 and the revolving credit facility matures in 2009. (6)Consists of the 75/8% Senior Subordinated Notes due 2012 of Visant. VISANT CORPORATION (Exact name of registrant as specified in its charter) (See table of additional registrants) Delaware (State or other jurisdiction of incorporation or organization) 3911 (Primary Standard Industrial Classification Code Number) 90-0207604 (I.R.S. Employer Identification Number) 357 Main Street Armonk, New York 10504 (914) 595-8200 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Marie D. Hlavaty, Esq. Visant Corporation 357 Main Street Armonk, New York 10504 (914) 595-8200 (Name, address, including zip code, and telephone number, including area code, of agent for service) Summary of Terms of the Notes Issuer Visant Corporation Notes Offered $500,000,000 aggregate principal amount of 75/8% Senior Subordinated Notes due 2012. Maturity Date October 1, 2012. Interest Payment Dates April 1 and October 1 of each year, beginning April 1, 2005. Guarantees The notes are guaranteed, jointly and severally, on a senior subordinated unsecured basis, by each of our 100% owned subsidiaries that guarantees our obligations under our senior secured credit facilities and certain of our future subsidiaries. Ranking The notes and the guarantees are our and our subsidiary guarantors' senior subordinated obligations and rank: junior to all of our and the guarantors' existing and future senior indebtedness, including any borrowings under our senior secured credit facilities; equally with any of our and the guarantors' future senior subordinated indebtedness and trade payables; senior to any of our and the guarantors' future indebtedness that is expressly subordinated in right of payment to the notes; effectively senior to the 101/4% Senior Discount Notes due 2013 and the 83/4% Senior Notes due 2013 of Visant Holding, which are not guaranteed by us; and effectively junior to all of the existing and future liabilities of our subsidiaries that do not guarantee the notes. As of December 30, 2006, the notes and the subsidiary guarantees would have ranked junior to: approximately $716.5 million of senior indebtedness; and $24.7 million of total liabilities, including trade payables but excluding intercompany obligations, of our non-guarantor subsidiaries. Copies of all communications, including communications sent to agent for service, should be sent to: Ris B. Norman, Esq. Simpson Thacher & Bartlett LLP 425 Lexington Avenue New York, New York 10017 (212) 455-2000 As of December 30, 2006, our non-guarantor subsidiaries had approximately 2.7% of our assets. Our non-guarantor subsidiaries generated approximately 3.7% of our revenues for the year ended December 30, 2006. Optional Redemption Prior to October 1, 2008, we may redeem the notes, in whole or in part, at a price equal to 100% of the principal amount thereof plus the make-whole premium described under "Description of the Notes Optional Redemption". We may redeem some or all of the notes at any time and from time to time on or after October 1, 2008, in whole or in part, in cash at the redemption prices described in this prospectus, plus accrued and unpaid interest to the date of redemption. In addition, until October 1, 2007, we may redeem up to 35% of the aggregate principal amount of the notes with the proceeds of certain equity offerings. Change of Control If a change of control occurs, each holder of the notes may require us to repurchase all or a portion of such holder's notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of repurchase. We may not have sufficient funds to repurchase the notes upon a change of control. Furthermore, restrictions in our senior secured credit facilities may limit our ability to repurchase the notes upon a change of control, as described under "Risk Factors Risks Related to Our Indebtedness and the Notes We may not be able to repurchase notes upon a change of control." Restrictive Covenants The terms of the notes place certain limitations on our ability and the ability of our restricted subsidiaries to, among other things: incur or guarantee additional indebtedness or issue disqualified or preferred stock; pay dividends or make other equity distributions; repurchase or redeem capital stock; make investments; sell assets or consolidate or merge with or into other companies; create limitations on the ability of our restricted subsidiaries to make dividends or distributions; engage in transactions with affiliates; and Approximate date of commencement of proposed sale to the public: As soon as practicable after the Registration Statement becomes effective. Our principal executive offices are located at 357 Main Street, Armonk, New York 10504 and our telephone number there is (914) 595-8200. We were incorporated in the State of Delaware on July 21, 2003. We maintain a website at www.visant.net. Information contained on our websites does not constitute a part of this prospectus and is not being incorporated by reference herein. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. 105,325 95,647 LIFO reserve 8 CALCULATION OF REGISTRATION FEE (1)Certain selected financial data have been reclassified for all periods presented to reflect the results of discontinued operations consisting of certain Von Hoffmann businesses in December 2006, our Jostens Photography businesses in June 2006 and the exit of Jostens' Recognition business in December 2001. (2)For 2005 and 2004, transaction costs represented $1.2 million and $6.8 million, respectively, of expenses incurred in connection with the Transactions. For the successor period in 2003, transaction costs represented $0.2 million of expenses incurred in connection with the 2003 Jostens merger. For the predecessor period in 2003, transaction costs represented $31.0 million of expenses incurred in connection with the 2003 Jostens merger. (3)For 2006, the Company recorded $2.3 million relating to an impairment loss to reduce the value of Jostens former corporate office buildings, which were later sold, and net $0.1 million of special charges for severance and related benefit costs. For 2005, special charges consisted of restructuring charges of $5.1 million for employee severance related to closed facilities and $0.3 million related to a withdrawal liability under a union retirement plan that arose in connection with the consolidation of certain operations. For 2004, special charges consisted of $11.8 million of restructuring charges consisting primarily of severance costs for the termination of senior executives and other employees associated with reorganization activity as a result of the Transactions. (4)For 2004, loss on redemption of debt represented a loss of $31.5 million in connection with repayment of all existing indebtedness and remaining preferred stock of Jostens and Arcade in conjunction with the Transactions and a loss of $0.4 million in connection with the repurchase of $5.0 million principal amount of Jostens' 12.75% senior subordinated notes prior to the Transactions. For the successor period in 2003, loss on redemption of debt represented a loss of $0.4 million in connection with the repurchase of $8.5 million principal amount of Jostens' 12.75% senior subordinated notes. For the predecessor period in 2003, loss on redemption of debt represented a loss of $13.9 million consisting of the write-off of unamortized deferred financing costs in connection with refinancing Jostens' senior secured credit facility. For 2002, loss on redemption of debt represented a loss of $1.8 million in connection with the repurchase of $7.5 million principal amount of Jostens' 12.75% senior subordinated notes. (5)For the purposes of calculating the ratio of earnings to fixed charges, earnings represent income (loss) from continuing operations before income taxes plus fixed charges. Fixed charges consist of interest expense (including capitalized interest) on all indebtedness plus amortization of debt issuance costs (and for any period subsequent to the adoption of SFAS 150, accretion of preferred stock dividends), and the portion of rental expense that we believe is representative of the interest component of rental expense. For 2004 and the successor period in 2003, earnings did not cover fixed charges by $78.6 million and $70.1 million, respectively. (6)Liquidation preference of redeemable preferred stock as of the end of 2003 and 2002 was $222.6 million and $86.3 million, respectively. Title of Each Class of Securities to be Registered Amount to be Registered Proposed Maximum Offering Price Per Unit Proposed Maximum Aggregate Offering Price Amount of Registration Fee
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+Prospectus Summary 1 Risk Factors 7 Special Note Regarding Forward-Looking Statements and Industry Data 22 Use of Proceeds 23 Dividend Policy 23 Capitalization 24 Dilution 25 Selected Consolidated Financial Data 27 Management s Discussion and Analysis of Financial Condition and Results of Operations 29 Business 46 Management 55 Compensation Discussion and Analysis 60 Certain Relationships and Related Party Transactions 76 Principal Stockholders 80 Description of Capital Stock 82 Shares Eligible for Future Sale 86 Material United States Federal Tax Considerations for Non-United States Holders of Common Stock 88 Underwriters 91 Legal Matters 95 Experts 95 Where You Can Find Additional Information 95 Index to Consolidated Financial Statements F-1 EXHIBIT 21.1 EXHIBIT 23.1 You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. We have not authorized anyone to provide you with additional or different information. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. Until , 2007 (25 days after commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States. Table of Contents PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our audited consolidated financial statements and the related notes and the information set forth under the headings Risk Factors and Management s Discussion and Analysis of Financial Condition and Results of Operations, in each case included elsewhere in this prospectus. CAVIUM NETWORKS, INC. We are a provider of highly integrated semiconductor processors that enable intelligent networking, communications and security applications. We refer to our products as enabling intelligent processing because they allow customers to develop networking equipment that is application-aware and content-aware and securely processes voice, video and data traffic at high speeds. Our products also include a rich suite of embedded security protocols that enable unified threat management, or UTM, secure connectivity and network perimeter protection. Our products are systems on a chip, or SoCs, which incorporate single or multiple processor cores, a highly integrated architecture and customizable software that is based on a broad range of standard operating systems. As a result, our products offer high levels of performance and processing intelligence while reducing product development cycles for our customers and lowering power consumption for end market equipment. Our products are used in a broad array of networking equipment, including routers, switches, content-aware switches, UTM and other security appliances, application-aware gateways, voice/video/data, or triple-play, gateways, wireless local area network, or WLAN, and 3G access and aggregation devices, storage networking equipment, servers and intelligent network interface cards. In 2006, we generated revenue from over 100 customers, including Aruba Networks, Inc., Cisco Systems, Inc., Citrix Systems, Inc., F5 Networks, Inc., Furukawa Electric Co., Ltd., Juniper Networks, Inc., Nokia Corporation, SafeNet, Inc., SonicWALL, Inc. and Yamaha Corporation. We received 56% of our revenue in 2006 from our top five customers and 60% of our revenue in the first quarter of 2007 from our top five customers. Since our first commercial shipments in 2003, we have shipped more than 1.7 million processors. Traffic on the Internet and enterprise networks is rapidly increasing due to trends that include greater adoption of Web 2.0 applications, voice over IP, or VoIP, video over broadband, file sharing, greater use of web-based services, and the proliferation of stored content that is accessed through networks. Enterprises and service providers are demanding networking equipment that can take advantage of these trends, and address the significant market opportunities that these trends provide. To address these demands, providers of networking equipment must offer products that include functionality such as intelligent routing or switching of network traffic prioritized by application and data content, as well as security services. These attributes require advanced semiconductor processing solutions. To enable this processing capability, networking equipment providers have historically used a variety of approaches, including internally designed custom semiconductor products, such as ASICs, FPGAs or other proprietary chips, multiple chip offerings based on a single general purpose microprocessor unit, or MPU, from merchant suppliers, software-based solutions or a combination of these approaches. While these approaches have been adequate for basic network processing, they are less effective as the need for intelligent processing at high speeds increases. As a result, providers of networking equipment are increasingly turning to third-party vendors for high performance, power-efficient and cost-effective intelligent processing products. According to estimates from a March 2007 market analysis forecast by iSuppli Corporation, a market research firm, the market for digital application specific semiconductor products, or Logic ASSPs, and MPUs shipped into wired communications devices was $5.8 billion in 2006. This market is estimated to grow to $7.3 billion by 2010. We offer intelligent processing products for enterprise network, data center, broadband and consumer, and access and service provider markets. Our products have the following key features: High Performance Multi-Core Architecture. Our products can utilize multiple microprocessor cores as well as proprietary hardware accelerators on one chip, which can perform application-aware and content-aware functions at high speeds. Table of Contents Highly Integrated SoC. Our highly integrated semiconductor processors can replace a number of single function semiconductors with a multi function SoC, which significantly improves performance and lowers power consumption and cost. Software-Enabled Development Tools. Our intelligent processing products feature internally developed, embedded software tools and development kits based on industry standard software tailored for use with our SoCs. Scalability and Product Breadth. Each of our processor families shares a common architecture across a range of product offerings which allow our customers to provide networking equipment for the most basic to the most advanced network infrastructure. This allows our customers to leverage software design efforts across multiple systems. Efficient Power Usage. We have designed our products to optimize power usage. Our products include multiple power efficient processor cores and a proprietary advanced multi-core power management architecture, which allow our customers to optimize power usage across their products. Our objective is to be the leading provider of intelligent processing products for next-generation networking, communications and security applications. Key elements of our strategy include: Extend Our Technology Leadership Positions. We intend to continue to invest in the development of successive generations of our products to meet the increasingly higher performance, lower cost and lower power requirements of our customers. Expand Our Customer Relationships. We intend to continue to build and strengthen our relationships with our customers to identify and secure new market opportunities. Target New Applications Requiring Intelligent Processing. We intend to leverage our core design expertise to develop new processors for a broader range of applications and end markets. Expand International Presence. We intend to continue to expand our sales, design and technical support organization to broaden our customer reach in new markets, primarily in Asia and Europe. Risks Affecting Us Our business is subject to numerous risks, which are highlighted in the section entitled Risk Factors immediately following this prospectus summary. These risks represent challenges to the successful implementation of our strategy and to the growth and future profitability of our business. Some of these risks are: we were established in 2000 and have not been profitable in any fiscal period since we were formed. We experienced net losses of $11.7 million, $11.7 million and $9.0 million for the years ended December 31, 2004, 2005 and 2006, respectively, and $3.0 million and $1.0 million for the three months ended March 31, 2006 and 2007, respectively; the market for our products is highly competitive, and we face competition from a number of established companies; we receive a substantial portion of our revenues from a limited number of customers, and the loss of, or a significant reduction in, orders from one or a few of our major customers would adversely affect our operations and financial condition. We received 56% of our revenue in 2006 from our top five customers and 60% of our revenue in the first quarter of 2007 from our top five customers; we expect our revenues and expense levels to vary in the future, making it difficult to predict our future operating results; the average selling prices of products in our markets have historically decreased over time and will likely do so in the future, which could harm our revenues and gross profits; and we rely on third parties for substantially all of our manufacturing operations, including wafer fabrication, assembly, test, warehousing and shipping. Table of Contents Table of Contents For further discussion of these and other risks you should consider before making an investment in our common stock, see the section entitled Risk Factors immediately following this prospectus summary. Corporate Information We were incorporated in California in November 2000 and reincorporated in Delaware in February 2007. Our principal executive offices are located at 805 East Middlefield Road, Mountain View, California 94043, and our telephone number is (650) 623-7000. Our web site address is www.caviumnetworks.com. The information on, or accessible through, our web site is not part of this prospectus. Unless the context requires otherwise, references in this prospectus to Cavium Networks, company, we, us and our refer to Cavium Networks, Inc. and its wholly-owned subsidiaries on a consolidated basis. Cavium Networks and the Cavium Networks logo are trademarks of Cavium Networks, Inc. This prospectus also includes other trademarks of Cavium Networks, Inc. and trademarks of other persons. Table of Contents THE OFFERING Common stock offered 6,250,000 shares Common stock to be outstanding after this offering 38,057,971 shares Over-allotment option 937,500 shares Use of proceeds We intend to use the net proceeds of this offering to repay approximately $3.6 million of outstanding indebtedness under one of our credit facilities, pay $1.9 million under a license agreement and for working capital and other general corporate purposes, which may also include acquisitions of or investments in complementary businesses, technologies or other assets. See Use of Proceeds. NASDAQ Global Market symbol CAVM The number of shares of common stock to be outstanding after this offering is based on 31,807,971 shares outstanding as of March 31, 2007, and excludes: 4,414,697 shares of common stock issuable upon exercise of options outstanding as of March 31, 2007, at a weighted average exercise price of $2.48 per share; 102,619 shares of common stock issuable upon exercise of warrants to purchase common stock and preferred stock outstanding as of March 31, 2007, at a weighted average exercise price of $4.50 per share; and 5,000,000 shares of common stock reserved for issuance under our 2007 Equity Incentive Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan. Except as otherwise indicated, all information in this prospectus assumes: the conversion of each outstanding share of our Series A, Series B, Series C and Series D preferred stock into one share of common stock, upon completion of this offering; conversion of all outstanding warrants to purchase shares of our convertible preferred stock into warrants to purchase an aggregate of 102,619 shares of common stock, effective upon completion of this offering; a one-for-two reverse stock split of our common and preferred stock effected on April 12, 2007; no exercise by the underwriters of their option to purchase up to an additional 937,500 shares of common stock from us to cover over-allotments; and the filing of our amended and restated certificate of incorporation prior to completion of this offering. Table of Contents SUMMARY CONSOLIDATED FINANCIAL DATA We present below our summary consolidated financial data. The summary consolidated statements of operations data for each of the years ended December 31, 2004, 2005 and 2006, and the summary consolidated balance sheet data as of December 31, 2006, have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the three months ended March 31, 2006 and 2007 and the consolidated balance sheet data as of March 31, 2007 are derived from our unaudited interim financial statements included in this prospectus. You should read this information together with Management s Discussion and Analysis of Financial Condition and Results of Operations and our audited consolidated financial statements and related notes, each included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected in any future period. The pro forma net loss per common share data is computed using the weighted average number of shares of common stock outstanding, after giving effect to the conversion (using the if-converted method) of all shares of our convertible preferred stock into common stock as though the conversion had occurred on the original dates of issuance. Three Months Ended March 31, Year Ended December 31, (unaudited) 2004 2005 2006 2006 2007 (in thousands, except share and per share data) Consolidated Statements of Operations Data: Revenue $ 7,411 $ 19,377 $ 34,205 $ 7,049 $ 11,141 Cost of revenue(1)(2) 3,080 7,865 13,092 2,622 4,182 Gross profit 4,331 11,512 21,113 4,427 6,959 Operating expenses: Research and development(2) 12,010 16,005 18,651 5,120 4,326 Sales, general and administrative(2) 3,752 6,840 10,058 2,154 3,209 Total operating expenses 15,762 22,845 28,709 7,274 7,535 Loss from operations (11,431 ) (11,333 ) (7,596 ) (2,847 ) (576 ) Other income (expense), net: Interest expense (388 ) (183 ) (707 ) (85 ) (208 ) Warrant revaluation expense (411 ) (467 ) (151 ) (225 ) Interest income 86 355 345 81 69 Total other income (expense), net (302 ) (239 ) (829 ) (155 ) (364 ) Loss before income tax expense and cumulative effect of change in accounting principle (11,733 ) (11,572 ) (8,425 ) (3,002 ) (940 ) Income tax expense (560 ) (2 ) (57 ) Loss before cumulative effect of change in accounting principle (11,733 ) (11,572 ) (8,985 ) (3,004 ) (997 ) Cumulative effect of change in accounting principle (100 ) Net loss $ (11,733 ) $ (11,672 ) $ (8,985 ) $ (3,004 ) $ (997 ) Net loss per common share, basic and diluted $ (1.82 ) $ (1.59 ) $ (1.11 ) $ (0.39 ) $ (0.12 ) Shares used in computing basic and diluted net loss per common share 6,459,050 7,318,607 8,065,995 7,760,640 8,579,094 Pro forma net loss per common share, basic and diluted (unaudited) $ (0.29 ) $ (0.03 ) Shares used in computing pro forma basic and diluted net loss per common share (unaudited) 29,631,993 30,943,465 Table of Contents (1) Includes acquired intangible asset amortization of $254, $1,007 and $1,116 in the years ended December 31, 2004, 2005 and 2006, respectively, and $279 and $279 for the three months ended March 31, 2006 and 2007, respectively. (2) Includes stock-based compensation expense as follows: Three Months Year Ended December 31, Ended March 31, 2004 2005 2006 2006 2007 (in thousands) (unaudited) Cost of revenue $ $ $ 9 $ $ 4 Research and development 10 396 19 138 Sales, general and administrative 85 75 340 39 215 Total stock-based compensation expense $ 85 $ 85 $ 745 $ 58 $ 357 The pro forma consolidated balance sheet data as of December 31, 2006 in the table below gives effect to (i) the conversion of all outstanding shares of our convertible preferred stock into shares of our common stock and (ii) the reclassification of the preferred stock warrant liability to additional paid-in capital upon the conversion of these warrants to purchase shares of our convertible preferred stock into warrants to purchase shares of our common stock, as if each had occurred at March 31, 2007. The pro forma as adjusted consolidated balance sheet data as of March 31, 2007 also gives effect to (i) our receipt of the estimated net proceeds from this offering, based on an assumed initial public offering price of $12.50 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and (ii) our use of proceeds from this offering to repay approximately $3.6 million of outstanding indebtedness under one of our credit facilities and pay $1.9 million under a license agreement, as if each of these events had occurred at March 31, 2007. As of March 31, 2007 Pro Forma Actual Pro Forma As Adjusted (in thousands) (unaudited) Consolidated Balance Sheet Data: Cash and cash equivalents 9,444 9,444 74,105 Working capital 9,578 10,501 76,675 Total assets 31,525 31,525 98,086 Preferred stock warrant liability 923 Capital lease and technology license obligations 2,890 2,890 2,890 Notes payable 3,645 3,645 Other non-current liabilities 16 16 16 Convertible preferred stock 72,440 Common stock and additional paid-in capital 4,536 77,899 148,105 Total stockholders equity (deficit) (57,381 ) 15,982 86,188 Table of Contents RISK FACTORS Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in shares of our common stock. The occurrence of any of the following risks, or other risks that are currently unknown or unforeseen by us, could harm our business, financial condition, results of operations or growth prospects. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. Risks Related to Our Business We have a history of losses, and we may not achieve or sustain profitability in the future, on a quarterly or annual basis. We were established in 2000 and have not been profitable in any fiscal period since we were formed. We experienced net losses of $11.7 million, $11.7 million and $9.0 million for the years ended December 31, 2004, 2005 and 2006, respectively, and $3.0 million and $1.0 million for the three months ended March 31, 2006 and 2007, respectively. As of March 31, 2007, our accumulated deficit was $61.9 million. We expect to make significant expenditures related to the development of our products and expansion of our business, including research and development and sales and administrative expenses. As a public company, we will also incur significant legal, accounting and other expenses that we did not incur as a private company. Additionally, we may encounter unforeseen difficulties, complications, product delays and other unknown factors that require additional expenditures. As a result of these increased expenditures, we may have to generate and sustain substantially increased revenue to achieve profitability. Our revenue growth trends in prior periods may not be sustainable. Accordingly, we may not be able to achieve or maintain profitability and we may continue to incur significant losses in the future. We face intense competition and expect competition to increase in the future, which could reduce our revenue and customer base. The market for our products is highly competitive and we expect competition to intensify in the future. This competition could make it more difficult for us to sell our products, and result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses and failure to increase, or the loss of, market share or expected market share, any of which would likely seriously harm our business, operating results and financial condition. For instance, semiconductor products have a history of declining prices as the cost of production is reduced. However, if market prices decrease faster than product costs, gross and operating margins can be adversely affected. Currently, we face competition from a number of established companies, including Broadcom Corporation, Freescale Semiconductor, Inc., hi/fn, inc., Intel Corporation, Marvell Technology Group Ltd., PMC-Sierra, Inc. and others. We also face competition from a number of private companies, including Raza Microelectronics, Inc. and others. A few of our current competitors operate their own fabrication facilities and have, and some of our potential competitors could have, longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we have. Potential customers may prefer to purchase from their existing suppliers rather than a new supplier regardless of product performance or features. We expect increased competition from other established and emerging companies both domestically and internationally. Our current and potential competitors may also establish cooperative relationships among themselves or with third parties. If so, new competitors or alliances that include our competitors may emerge that could acquire significant market share. We expect these trends to continue as companies attempt to strengthen or maintain their market positions in an evolving industry. In the future, further development by our competitors could cause our products to become obsolete. We expect continued competition from incumbents as well as from new entrants into the markets we serve. Our ability to compete depends on a number of factors, including: our success in identifying new and emerging markets, applications and technologies; our products performance and cost effectiveness relative to that of our competitors products; our ability to deliver products in large volume on a timely basis at a competitive price; Table of Contents our success in utilizing new and proprietary technologies to offer products and features previously not available in the marketplace; our ability to recruit design and application engineers and sales and marketing personnel; and our ability to protect our intellectual property. In addition, we cannot assure you that existing customers or potential customers will not develop their own products, purchase competitive products or acquire companies that use alternative methods to enable networking, communication or security applications to facilitate network-aware processing in their systems. Any of these competitive threats, alone or in combination with others, could seriously harm our business, operating results and financial condition. Our customers may cancel their orders, change production quantities or delay production, and if we fail to forecast demand for our products accurately, we may incur product shortages, delays in product shipments or excess or insufficient product inventory. We generally do not obtain firm, long-term purchase commitments from our customers. Because production lead times often exceed the amount of time required to fulfill orders, we often must build in advance of orders, relying on an imperfect demand forecast to project volumes and product mix. Our demand forecast accuracy can be adversely affected by a number of factors, including inaccurate forecasting by our customers, changes in market conditions, adverse changes in our product order mix and demand for our customers products. Even after an order is received, our customers may cancel these orders or request a decrease in production quantities. Any such cancellation or decrease subjects us to a number of risks, most notably that our projected sales will not materialize on schedule or at all, leading to unanticipated revenue shortfalls and excess or obsolete inventory which we may be unable to sell to other customers. Alternatively, if we are unable to project customer requirements accurately, we may not build enough products, which could lead to delays in product shipments and lost sales opportunities in the near term, as well as force our customers to identify alternative sources, which could affect our ongoing relationships with these customers. We have in the past had customers dramatically increase their requested production quantities with little or no advance notice. If we do not timely fulfill customer demands, our customers may cancel their orders and we may be subject to customer claims for cost of replacement. Either underestimating or overestimating demand would lead to insufficient, excess or obsolete inventory, which could harm our operating results, cash flow and financial condition, as well as our relationships with our customers. We receive a substantial portion of our revenues from a limited number of customers, and the loss of, or a significant reduction in, orders from one or a few of our major customers would adversely affect our operations and financial condition. We receive a substantial portion of our revenues from a limited number of customers. We received an aggregate of approximately 49%, 52% and 56% of our revenues from our top five customers for the years ended December 31, 2004, 2005 and 2006, respectively, and 57% and 60% for the three months ended March 31, 2006 and 2007, respectively. We anticipate that we will continue to be dependent on a limited number of customers for a significant portion of our revenues in the immediate future and in some cases the portion of our revenues attributable to certain customers may increase in the future. However, we may not be able to maintain or increase sales to certain of our top customers for a variety of reasons, including the following: our agreements with our customers do not require them to purchase a minimum quantity of our products; some of our customers can stop incorporating our products into their own products with limited notice to us and suffer little or no penalty; and many of our customers have pre-existing or concurrent relationships with our current or potential competitors that may affect the customers decisions to purchase our products. In the past, we have relied in significant part on our strategic relationships with customers that are technology leaders in our target markets. We intend to pursue the expansion of such relationships and the formation of new strategic relationships but we cannot assure you that we will be able to do so. These relationships often require us to develop new products that may involve significant technological challenges. Our customers frequently place Table of Contents considerable pressure on us to meet their tight development schedules. Accordingly, we may have to devote a substantial amount of our resources to our strategic relationships, which could detract from or delay our completion of other important development projects. Delays in development could impair our relationships with our strategic customers and negatively impact sales of the products under development. Moreover, it is possible that our customers may develop their own product or adopt a competitor s solution for products that they currently buy from us. If that happens, our sales would decline and our business, financial condition and results of operations could be materially and adversely affected. In addition, our relationships with some customers may also deter other potential customers who compete with these customers from buying our products. To attract new customers or retain existing customers, we may offer certain customers favorable prices on our products. In that event, our average selling prices and gross margins would decline. The loss of a key customer, a reduction in sales to any key customer or our inability to attract new significant customers could seriously impact our revenue and materially and adversely affect our results of operations. We expect our operating results to fluctuate. We expect our revenues and expense levels to vary in the future, making it difficult to predict our future operating results. In particular, we experience variability in demand for our products as our customers manage their product introduction dates and their inventories. Additional factors that could cause our results to fluctuate include, among other things: fluctuations in demand, sales cycles, product mix and prices for our products; the timing of our product introductions, and the variability in lead time between the time when a customer begins to design in one of our products and the time when the customer s end system goes into production and they begin purchasing our products; the forecasting, scheduling, rescheduling or cancellation of orders by our customers; our ability to successfully define, design and release new products in a timely manner that meet our customers needs; changes in manufacturing costs, including wafer, test and assembly costs, mask costs, manufacturing yields and product quality and reliability; the timing and availability of adequate manufacturing capacity from our manufacturing suppliers; the timing of announcements by our competitors or us; future accounting pronouncements and changes in accounting policies; volatility in our stock price, which may lead to higher stock compensation expenses; general economic and political conditions in the countries where we operate or our products are sold or used; costs associated with litigation, especially related to intellectual property; and productivity and growth of our sales and marketing force. Unfavorable changes in any of the above factors, most of which are beyond our control, could significantly harm our business and results of operations. We may not sustain our growth rate, and we may not be able to manage any future growth effectively. We have experienced significant growth in a short period of time. Our revenues increased from approximately $7.4 million in 2004 to approximately $34.2 million in 2006. We may not achieve similar growth rates in future periods. You should not rely on our operating results for any prior quarterly or annual periods as an indication of our future operating performance. If we are unable to maintain adequate revenue growth, our financial results could suffer and our stock price could decline. Table of Contents To manage our growth successfully and handle the responsibilities of being a public company, we believe we must effectively, among other things: recruit, hire, train and manage additional qualified engineers for our research and development activities, especially in the positions of design engineering, product and test engineering, and applications engineering; add additional sales personnel and expand sales offices; implement and improve our administrative, financial and operational systems, procedures and controls; and enhance our information technology support for enterprise resource planning and design engineering by adapting and expanding our systems and tool capabilities, and properly training new hires as to their use. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities or develop new products and we may fail to satisfy customer requirements, maintain product quality, execute our business plan or respond to competitive pressures. The average selling prices of products in our markets have historically decreased over time and will likely do so in the future, which could harm our revenues and gross profits. Average selling prices of semiconductor products in the markets we serve have historically decreased over time. Our gross profits and financial results will suffer if we are unable to offset any reductions in our average selling prices by reducing our costs, developing new or enhanced products on a timely basis with higher selling prices or gross profits, or increasing our sales volumes. Additionally, because we do not operate our own manufacturing, assembly or testing facilities, we may not be able to reduce our costs as rapidly as companies that operate their own facilities, and our costs may even increase, which could also reduce our margins. We have reduced the prices of our products in anticipation of future competitive pricing pressures, new product introductions by us or our competitors and other factors. We expect that we will have to do so again in the future. We may be unsuccessful in developing and selling new products or in penetrating new markets. We operate in a dynamic environment characterized by rapidly changing technologies and industry standards and technological obsolescence. Our competitiveness and future success depend on our ability to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost effective basis. A fundamental shift in technologies in any of our product markets could harm our competitive position within these markets. Our failure to anticipate these shifts, to develop new technologies or to react to changes in existing technologies could materially delay our development of new products, which could result in product obsolescence, decreased revenues and a loss of design wins to our competitors. The success of a new product depends on accurate forecasts of long-term market demand and future technological developments, as well as on a variety of specific implementation factors, including: timely and efficient completion of process design and transfer to manufacturing, assembly and test processes; the quality, performance and reliability of the product; and effective marketing, sales and service. If we fail to introduce new products that meet the demand of our customers or penetrate new markets that we target our resources on, our revenues will likely decrease over time and our financial condition could suffer. Fluctuations in the mix of products sold may adversely affect our financial results. Because of the wide price differences among our processors, the mix and types of performance capabilities of processors sold affect the average selling price of our products and have a substantial impact on our revenue. Generally, sales of higher performance products have higher gross margins than sales of lower performance products. We currently offer both higher and lower performance products within each of our NITROX and OCTEON product families. To the extent our sales mix shifts toward increased sales of lower performance products, our overall gross margins will be negatively affected. Fluctuations in the mix and types of our products may also affect the extent to which we are able to recover our fixed costs and investments that are associated with a particular product, and as a result can negatively impact our financial results. Table of Contents Our products must meet exacting specifications, and defects and failures may occur, which may cause customers to return or stop buying our products. Our customers generally establish demanding specifications for quality, performance and reliability that our products must meet. However, our products are highly complex and may contain defects and failures when they are first introduced or as new versions are released. If defects and failures occur in our products during the design phase or after, we could experience lost revenues, increased costs, including warranty expense and costs associated with customer support, delays in or cancellations or rescheduling of orders or shipments, product returns or discounts, diversion of management resources or damage to our reputation and brand equity, and in some cases consequential damages, any of which would harm our operating results. In addition, delays in our ability to fill product orders as a result of quality control issues may negatively impact our relationship with our customers. We cannot assure you that we will have sufficient resources, including any available insurance, to satisfy any asserted claims. We may have difficulty selling our products if our customers do not design our products into their systems, and the nature of the design process requires us to incur expenses prior to recognizing revenues associated with those expenses which may adversely affect our financial results. One of our primary focuses is on winning competitive bid selection processes, known as design wins, to develop products for use in our customers products. We devote significant time and resources in working with our customers system designers to understand their future needs and to provide products that we believe will meet those needs and these bid selection processes can be lengthy. If a customer s system designer initially chooses a competitor s product, it becomes significantly more difficult for us to sell our products for use in that system because changing suppliers can involve significant cost, time, effort and risk for our customers. Thus, our failure to win a competitive bid can result in our foregoing revenues from a given customer s product line for the life of that product. In addition, design opportunities may be infrequent or may be delayed. Our ability to compete in the future will depend, in large part, on our ability to design products to ensure compliance with our customers and potential customers specifications. We expect to invest significant time and resources and to incur significant expenses to design our products to ensure compliance with relevant specifications. We often incur significant expenditures in the development of a new product without any assurance that our customers system designers will select our product for use in their applications. We often are required to anticipate which product designs will generate demand in advance of our customers expressly indicating a need for that particular design. Even if our customers system designers select our products, a substantial period of time will elapse before we generate revenues related to the significant expenses we have incurred. The reasons for this delay generally include the following elements of our product sales and development cycle timeline and related influences: our customers usually require a comprehensive technical evaluation of our products before they incorporate them into their designs; it can take from 9 months to 3 years from the time our products are selected to commence commercial shipments; and our customers may experience changed market conditions or product development issues. The resources devoted to product development and sales and marketing may not generate material revenue for us, and from time to time, we may need to write off excess and obsolete inventory if we have produced product in anticipation of expected demand. We may spend resources on the development of products that our customers may not adopt. If we incur significant expenses and investments in inventory in the future that we are not able to recover, and we are not able to compensate for those expenses, our operating results could be adversely affected. In addition, if we sell our products at reduced prices in anticipation of cost reductions but still hold higher cost products in inventory, our operating results would be harmed. Additionally, even if system designers use our products in their systems, we cannot assure you that these systems will be commercially successful or that we will receive significant revenue from the sales of processors for those systems. As a result, we may be unable to accurately forecast the volume and timing of our orders and revenues associated with any new product introductions. Table of Contents If customers do not believe our products solve a critical need, our revenues will decline. Our products are used in networking and security equipment including routers, switches, UTM appliances, intelligent switches, application-aware gateways, triple-play gateways, WLAN and 3G access and aggregation devices, storage networking equipment, servers, and intelligent network interface cards. In order to meet our growth and strategic objectives, providers of networking equipment must continue to incorporate our products into their systems and the demands for their systems must grow as well. Our future depends in large part on factors outside our control, and the sale of next-generation networks may not meet our revenue growth and strategic objectives. In the event we terminate one of our distributor arrangements, it could lead to a loss of revenues and possible product returns. A portion of our sales are made through third-party distribution agreements. Termination of a distributor relationship, either by us or by the distributor, could result in a temporary or permanent loss of revenues, until a replacement distributor can be established to service the affected end-user customers. We may not be successful in finding suitable alternative distributors on satisfactory terms or at all and this could adversely affect our ability to sell in certain locations or to certain end-user customers. Additionally, if we terminate our relationship with a distributor, we may be obligated to repurchase unsold products. We record a reserve for estimated returns and price credits. If actual returns and credits exceed our estimates, our operating results could be harmed. Our arrangements with our distributors typically also include price protection provisions if we reduce our list prices. We rely on our ecosystem partners to enhance our product offerings and our inability to continue to develop or maintain such relationships in the future would harm our ability to remain competitive. We have developed relationships with third parties, which we refer to as ecosystem partners, which provide operating systems, tool support, reference designs and other services designed for specific uses with our SoCs. We believe that these relationships enhance our customers ability to get their products to market quickly. If we are unable to continue to develop or maintain these relationships, we might not be able to enhance our customers ability to commercialize their products in a timely fashion and our ability to remain competitive would be harmed. The loss of any of our key personnel could seriously harm our business, and our failure to attract or retain specialized technical, management or sales and marketing talent could impair our ability to grow our business. We believe our future success will depend in large part upon our ability to attract, retain and motivate highly skilled managerial, engineering, sales and marketing personnel. The loss of any key employees or the inability to attract, retain or motivate qualified personnel, including engineers and sales and marketing personnel, could delay the development and introduction of and harm our ability to sell our products. We believe that our future success is highly dependent on the contributions of Syed Ali, our co-founder, President and Chief Executive Officer, and others. None of our employees have fixed-term employment contracts; they are all at-will employees. The loss of the services of Mr. Ali, other executive officers or certain other key personnel could materially and adversely affect our business, financial condition and results of operations. For instance, if any of these individuals were to leave our company unexpectedly, we could face substantial difficulty in hiring qualified successors and could experience a loss in productivity during the search for and while any such successor is integrated into our business and operations. There is currently a shortage of qualified technical personnel with significant experience in the design, development, manufacturing, marketing and sales of integrated circuits. In particular, there is a shortage of engineers who are familiar with the intricacies of the design and manufacture of networking processors, and competition for these engineers is intense. Our key technical personnel represent a significant asset and serve as the source of our technological and product innovations. We may not be successful in attracting, retaining and motivating sufficient numbers of technical personnel to support our anticipated growth. To date, we have relied primarily on our direct marketing and sales force to drive new customer design wins and to sell our products. Because we are looking to expand our customer base and grow our sales to existing customers, we will need to hire additional qualified sales personnel in the near term and beyond if we are to achieve revenue growth. The competition for qualified marketing and sales personnel in our industry, and particularly in Table of Contents Silicon Valley, is very intense. If we are unable to hire, train, deploy and manage qualified sales personnel in a timely manner, our ability to grow our business will be impaired. In addition, if we are unable to retain our existing sales personnel, our ability to maintain or grow our current level of revenues will be adversely affected. Stock options generally comprise a significant portion of our compensation packages for all employees. The FASB requirement to expense the fair value of stock options awarded to employees beginning in the first quarter of our fiscal 2006 has increased our operating expenses and may cause us to reevaluate our compensation structure for our employees. Our inability to attract, retain and motivate additional key employees could have an adverse effect on our business, financial condition and results of operations. We have a limited operating history, and we may have difficulty accurately predicting our future revenues for the purpose of appropriately budgeting and adjusting our expenses. We were established in 2000. We have not yet become profitable and therefore do not yet have a history from which to predict and manage profitability. Our limited operating experience, a dynamic and rapidly evolving market in which we sell our products, our dependence on a limited number of customers, as well as numerous other factors beyond our control, impede our ability to forecast quarterly and annual revenues accurately. As a result, we could experience budgeting and cash flow management problems, unexpected fluctuations in our results of operations and other difficulties, any of which could make it difficult for us to gain and maintain profitability and could increase the volatility of the market price of our common stock. Some of our operations and a significant portion of our customers and contract manufacturers are located outside of the United States, which subjects us to additional risks, including increased complexity and costs of managing international operations and geopolitical instability. We have sales offices and research and development facilities and we conduct, and expect to continue to conduct, a significant amount of our business with companies that are located outside the United States, particularly in Asia and Europe. Even customers of ours that are based in the U.S. often use contract manufacturers based in Asia to manufacture their systems, and it is the contract manufacturers that purchase products directly from us. As a result of our international focus, we face numerous challenges, including: increased complexity and costs of managing international operations; longer and more difficult collection of receivables; difficulties in enforcing contracts generally; geopolitical and economic instability and military conflicts; limited protection of our intellectual property and other assets; compliance with local laws and regulations and unanticipated changes in local laws and regulations, including tax laws and regulations; trade and foreign exchange restrictions and higher tariffs; travel restrictions; timing and availability of import and export licenses and other governmental approvals, permits and licenses, including export classification requirements; foreign currency exchange fluctuations relating to our international operating activities; transportation delays and limited local infrastructure and disruptions, such as large scale outages or interruptions of service from utilities or telecommunications providers; difficulties in staffing international operations; heightened risk of terrorism; local business and cultural factors that differ from our normal standards and practices; differing employment practices and labor issues; Table of Contents regional health issues (e.g., SARS) and natural disasters; and work stoppages. We outsource our wafer fabrication, assembly, testing, warehousing and shipping operations to third parties, and rely on these parties to produce and deliver our products according to requested demands in specification, quantity, cost and time. We rely on third parties for substantially all of our manufacturing operations, including wafer fabrication, assembly, testing, warehousing and shipping. We depend on these parties to supply us with material of a requested quantity in a timely manner that meets our standards for yield, cost and manufacturing quality. We do not have any long-term supply agreements with our manufacturing suppliers. Any problems with our manufacturing supply chain could adversely impact our ability to ship our products to our customers on time and in the quantity required, which in turn could cause an unanticipated decline in our sales and possibly damage our customer relationships. The fabrication of integrated circuits is a complex and technically demanding process. Our foundries could, from time to time, experience manufacturing defects and reduced manufacturing yields. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by our foundries could result in lower than anticipated manufacturing yields or unacceptable performance. Many of these problems are difficult to detect at an early stage of the manufacturing process and may be time consuming and expensive to correct. Poor yields from our foundries, or defects, integration issues or other performance problems in our products could cause us significant customer relations and business reputation problems, harm our financial results and result in financial or other damages to our customers. Our customers could also seek damages from us for their losses. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend. Our products are manufactured at a limited number of locations. If we experience manufacturing problems at a particular location, we would be required to transfer manufacturing to a backup location or supplier. Converting or transferring manufacturing from a primary location or supplier to a backup fabrication facility could be expensive and could take one to two quarters. During such a transition, we would be required to meet customer demand from our then-existing inventory, as well as any partially finished goods that can be modified to the required product specifications. We do not seek to maintain sufficient inventory to address a lengthy transition period because we believe it is uneconomical to keep more than minimal inventory on hand. As a result, we may not be able to meet customer needs during such a transition, which could delay shipments, cause a production delay or stoppage for our customers, result in a decline in our sales and damage our customer relationships. In addition, we have no long-term supply contracts with the foundries that we work with. Availability of foundry capacity has in the recent past been reduced due to strong demand. The ability of each foundry to provide us with semiconductor devices is limited by its available capacity and existing obligations. Foundry capacity may not be available when we need it or at reasonable prices. In addition, a significant portion of our sales is to customers that practice just-in-time order management from their suppliers, which gives us a very limited amount of time in which to process and complete these orders. As a result, delays in our production or shipping by the parties to whom we outsource these functions could reduce our sales, damage our customer relationships and damage our reputation in the marketplace, any of which could harm our business, results of operations and financial condition. Any increase in the manufacturing cost of our products could reduce our gross margins and operating profit. The semiconductor business exhibits ongoing competitive pricing pressure from customers and competitors. Accordingly, any increase in the cost of our products, whether by adverse purchase price variances or adverse manufacturing cost variances, will reduce our gross margins and operating profit. We do not have any long-term supply agreements with our manufacturing suppliers and we typically negotiate pricing on a purchase order by purchase order basis. Consequently, we may not be able to obtain price reductions or anticipate or prevent future price increases from our suppliers. Some of our competitors may be better financed than we are, may have long-term agreements with our main foundries and may induce our foundries to reallocate capacity to those customers. This reallocation could impair Table of Contents our ability to secure the supply of components that we need. Although we use several independent foundries to manufacture substantially all of our semiconductor products, most of our components are not manufactured at more than one foundry at any given time, and our products typically are designed to be manufactured in a specific process at only one of these foundries. Accordingly, if one of our foundries is unable to provide us with components as needed, we could experience significant delays in securing sufficient supplies of those components. We cannot assure you that any of our existing or new foundries will be able to produce integrated circuits with acceptable manufacturing yields, or that our foundries will be able to deliver enough semiconductor devices to us on a timely basis, or at reasonable prices. These and other related factors could impair our ability to meet our customers needs and have a material and adverse effect on our operating results. In order to secure sufficient foundry capacity when demand is high and mitigate the risks described in the foregoing paragraph, we may enter into various arrangements with suppliers that could be costly and harm our operating results, such as nonrefundable deposits with or loans to foundries in exchange for capacity commitments and contracts that commit us to purchase specified quantities of integrated circuits over extended periods. We may not be able to make any such arrangement in a timely fashion or at all, and any arrangements may be costly, reduce our financial flexibility, and not be on terms favorable to us. Moreover, if we are able to secure foundry capacity, we may be obligated to use all of that capacity or incur penalties. These penalties may be expensive and could harm our financial results. If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. Any inability to provide reliable financial reports or prevent fraud could harm our business. The Sarbanes-Oxley Act of 2002 requires management and our auditors to evaluate and assess the effectiveness of our internal control over financial reporting. We will be required to adhere to these requirements by the end of the year after the one in which we become a public company. These Sarbanes-Oxley Act requirements may be modified, supplemented or amended from time to time. Implementing these changes may take a significant amount of time and may require specific compliance training of our personnel. In the future, we may discover areas of our internal controls that need improvement. If our auditors or we discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market s confidence in our financial statements and harm our stock price. We may not be able to effectively and timely implement necessary control changes and employee training to ensure continued compliance with the Sarbanes-Oxley Act and other regulatory and reporting requirements. Our rapid growth in recent periods, and our possible future expansion through acquisitions, present challenges to maintain the internal control and disclosure control standards applicable to public companies. If we fail to maintain effective internal controls, we could be subject to regulatory scrutiny and sanctions and investors could lose confidence in the accuracy and completeness of our financial reports. We cannot assure you that we will be able to fully comply with the requirements of the Sarbanes-Oxley Act or that management or our auditors will conclude that our internal controls are effective in future periods. We rely on third-party technologies for the development of our products and our inability to use such technologies in the future would harm our ability to remain competitive. We rely on third parties for technologies that are integrated into our products, such as wafer fabrication and assembly and test technologies used by our contract manufacturers, as well as licensed MIPS architecture technologies. If we are unable to continue to use or license these technologies on reasonable terms, or if these technologies fail to operate properly, we may not be able to secure alternatives in a timely manner and our ability to remain competitive would be harmed. In addition, if we are unable to successfully license technology from third parties to develop future products, we may not be able to develop such products in a timely manner or at all. Our failure to protect our intellectual property rights adequately could impair our ability to compete effectively or to defend ourselves from litigation, which could harm our business, financial condition and results of operations. We rely primarily on patent, copyright, trademark and trade secret laws, as well as confidentiality and non-disclosure agreements and other methods, to protect our proprietary technologies and know-how. We have been Table of Contents issued eight patents in the United States and two patents in foreign countries and have an additional 25 patent applications pending in the United States and 27 patent applications pending in foreign countries. Even if the pending patent applications are granted, the rights granted to us may not be meaningful or provide us with any commercial advantage. For example, these patents could be opposed, contested, circumvented or designed around by our competitors or be declared invalid or unenforceable in judicial or administrative proceedings. The failure of our patents to adequately protect our technology might make it easier for our competitors to offer similar products or technologies. Our foreign patent protection is generally not as comprehensive as our U.S. patent protection and may not protect our intellectual property in some countries where our products are sold or may be sold in the future. Many U.S.-based companies have encountered substantial intellectual property infringement in foreign countries, including countries where we sell products. Even if foreign patents are granted, effective enforcement in foreign countries may not be available. Monitoring unauthorized use of our intellectual property is difficult and costly. Although we are not aware of any unauthorized use of our intellectual property in the past, it is possible that unauthorized use of our intellectual property may have occurred or may occur without our knowledge. We cannot assure you that the steps we have taken will prevent unauthorized use of our intellectual property. Our failure to effectively protect our intellectual property could reduce the value of our technology in licensing arrangements or in cross-licensing negotiations, and could harm our business, results of operations and financial condition. We may in the future need to initiate infringement claims or litigation. Litigation, whether we are a plaintiff or a defendant, can be expensive, time-consuming and may divert the efforts of our technical staff and managerial personnel, which could harm our business, whether or not such litigation results in a determination favorable to us. Some of the software used with our products, as well as that of some of our customers, may be derived from so-called open source software that is generally made available to the public by its authors and/or other third parties. Such open source software is often made available to us under licenses, such as the GNU General Public License, which impose certain obligations on us in the event we were to make available derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public, and/or license such derivative works under a particular type of license, rather than the forms of license customarily used to protect our intellectual property. In addition, there is little or no legal precedent for interpreting the terms of certain of these open source licenses, including the determination of which works are subject to the terms of such licenses. While we believe we have complied with our obligations under the various applicable licenses for open source software, in the event the copyright holder of any open source software were to successfully establish in court that we had not complied with the terms of a license for a particular work, we could be required to release the source code of that work to the public and/or stop distribution of that work. Assertions by third parties of infringement by us of their intellectual property rights could result in significant costs and cause our operating results to suffer. The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights and positions, which has resulted in protracted and expensive litigation for many companies. We expect that in the future we may receive, particularly as a public company, communications from various industry participants alleging our infringement of their patents, trade secrets or other intellectual property rights. Any lawsuits resulting from such allegations could subject us to significant liability for damages and invalidate our proprietary rights. Any potential intellectual property litigation also could force us to do one or more of the following: stop selling products or using technology that contain the allegedly infringing intellectual property; lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property against others; incur significant legal expenses; pay substantial damages to the party whose intellectual property rights we may be found to be infringing; redesign those products that contain the allegedly infringing intellectual property; or attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all. Table of Contents Any significant impairment of our intellectual property rights from any litigation we face could harm our business and our ability to compete. Our customers could also become the target of litigation relating to the patent and other intellectual property rights of others. This could trigger technical support and indemnification obligations in some of our licenses or customer agreements. These obligations could result in substantial expenses, including the payment by us of costs and damages relating to claims of intellectual property infringement. In addition to the time and expense required for us to provide support or indemnification to our customers, any such litigation could disrupt the businesses of our customers, which in turn could hurt our relationships with our customers and cause the sale of our products to decrease. We cannot assure you that claims for indemnification will not be made or that if made, such claims would not have a material adverse effect on our business, operating results or financial conditions. Our third-party contractors are concentrated primarily in Taiwan, an area subject to earthquake and other risks. Any disruption to the operations of these contractors could cause significant delays in the production or shipment of our products. Substantially all of our products are manufactured by third-party contractors located in Taiwan. The risk of an earthquake in Taiwan and elsewhere in the Pacific Rim region is significant due to the proximity of major earthquake fault lines to the facilities of our foundries and assembly and test subcontractors. For example, in March 2002 and June 2003, major earthquakes occurred in Taiwan. Although our third-party contractors did not suffer any significant damage as a result of these most recent earthquakes, the occurrence of additional earthquakes or other natural disasters could result in the disruption of our foundry or assembly and test capacity. Any disruption resulting from such events could cause significant delays in the production or shipment of our products until we are able to shift our manufacturing, assembling or testing from the affected contractor to another third-party vendor. We may not be able to obtain alternate capacity on favorable terms, if at all. The semiconductor and communications industries have historically experienced significant fluctuations with prolonged downturns, which could impact our operating results, financial condition and cash flows. The semiconductor industry has historically exhibited cyclical behavior, which at various times has included significant downturns in customer demand. Though we have not yet experienced any of these industry downturns, we may in the future. Because a significant portion of our expenses is fixed in the near term or is incurred in advance of anticipated sales, we may not be able to decrease our expenses rapidly enough to offset any unanticipated shortfall in revenues. If this situation were to occur, it could adversely affect our operating results, cash flow and financial condition. Furthermore, the semiconductor industry has periodically experienced periods of increased demand and production constraints. If this happens in the future, we may not be able to produce sufficient quantities of our products to meet the increased demand. We may also have difficulty in obtaining sufficient wafer, assembly and test resources from our subcontract manufacturers. Any factor adversely affecting the semiconductor industry in general, or the particular segments of the industry that our products target, may adversely affect our ability to generate revenue and could negatively impact our operating results. The communications industry has, in the past, experienced pronounced downturns, and these cycles may continue in the future. To respond to a downturn, many networking equipment providers may slow their research and development activities, cancel or delay new product development, reduce their inventories and take a cautious approach to acquiring our products, which would have a significant negative impact on our business. If this situation were to occur, it could adversely affect our operating results, cash flow and financial condition. In the future, any of these trends may also cause our operating results to fluctuate significantly from year to year, which may increase the volatility of the price of our stock. We may experience difficulties in transitioning to new wafer fabrication process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries and increased expenses. In order to remain competitive, we expect to continue to transition our semiconductor products to increasingly smaller line width geometries. This transition requires us to modify our designs to work with the manufacturing processes of our foundries. We periodically evaluate the benefits, on a product-by-product basis, of migrating to new process technologies to reduce cost and improve performance. We may face difficulties, delays and expenses Table of Contents as we continue to transition our products to new processes. We are dependent on our relationships with our foundry contractors to transition to new processes successfully. We cannot assure you that the foundries that we use will be able to effectively manage the transition or that we will be able to maintain our existing foundry relationships or develop new ones. If any of our foundry contractors or we experience significant delays in this transition or fail to efficiently implement this transition, we could experience reduced manufacturing yields, delays in product deliveries and increased expenses, all of which could harm our relationships with our customers and our results of operations. As new processes become more prevalent, we expect to continue to integrate greater levels of functionality, as well as customer and third-party intellectual property, into our products. However, we may not be able to achieve higher levels of design integration or deliver new integrated products on a timely basis. Any acquisitions we make could disrupt our business and harm our financial condition. In the future, we may choose to acquire companies that are complementary to our business, including for the purpose of expanding our new product design capacity, introducing new design, market or application skills or enhancing and expanding our existing product lines. In connection with any such future acquisitions, we may need to use a significant portion of our available cash, issue additional equity securities that would dilute current stockholders percentage ownership and incur substantial debt or contingent liabilities. Such actions could adversely impact our operating results and the market price of our common stock. In addition, difficulties in assimilating any acquired workforce, merging operations or avoiding unplanned attrition could disrupt or harm our business. Furthermore, the purchase price of any acquired businesses may exceed the current fair values of the net tangible assets of the acquired businesses. As a result, we would be required to record material amounts of goodwill, and acquired in-process research and development charges and other intangible assets, which could result in significant impairment and acquired in-process research and development charges and amortization expense in future periods. These charges, in addition to the results of operations of such acquired businesses, could have a material adverse effect on our business, financial condition and results of operations. We cannot forecast the number, timing or size of future acquisitions, or the effect that any such acquisitions might have on our operating or financial results. We expense stock options, which will negatively impact our net income in future periods. In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment, or SFAS 123(R), which requires the measurement of all share-based payments to employees and other service providers, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our consolidated statements of operations. Effective January 1, 2006, we adopted the fair-value-based recognition provisions of SFAS 123(R) using the prospective transition method, which requires us to apply the provisions of SFAS 123(R) only to awards granted, modified, repurchased or cancelled after the adoption date. The total expense reported for the year ended December 31, 2006 and for the three months ended March 31, 2006 and 2007 related to stock options amounted to $745,000, $58,000 and $357,000, respectively. We expect this amount to increase in future years as new grants are made to existing employees and other service providers and to new employees and other service providers as they join the company. These additional expenses will decrease operating income and correspondingly reduce our net income in future periods. Being a public company will increase our costs and affect our ability to attract and retain qualified board members. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the Securities and Exchange Commission and The NASDAQ Global Market, have imposed various new requirements on public companies, including requiring changes in corporate governance practices. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. Under the Sarbanes-Oxley Act and NASDAQ rules, we are required to maintain an independent board. If we are unable to maintain adequate directors and officers insurance, our ability to recruit and retain qualified directors, especially those directors who may be deemed independent for purposes of The NASDAQ rules, and officers will be significantly curtailed. Table of Contents Our future effective tax rates could be affected by the allocation of our income among different geographic regions, which could affect our future operating results, financial condition and cash flows. We are in the process of expanding our international operations and staff to better support our expansion into international markets. This expansion includes the implementation of an international structure that includes, among other things, a research and development cost-sharing arrangement, certain licenses and other contractual arrangements between us and our wholly-owned domestic and foreign subsidiaries. As a result of these changes, we anticipate that our consolidated pre-tax income will be subject to foreign tax at relatively lower tax rates when compared to the U.S. federal statutory tax rate and, as a consequence, our effective income tax rate is expected to be lower than the U.S. federal statutory rate. Our future effective income tax rates could be adversely affected if tax authorities challenge our international tax structure or if the relative mix of U.S. and international income changes for any reason. Accordingly, there can be no assurance that our income tax rate will be less than the U.S. federal statutory rate. Risks Related to this Offering and Ownership of our Common Stock There has been no prior trading market for our common stock, and an active trading market may not develop or be sustained following this offering. Prior to this offering, there has been no public market for our common stock, and we cannot assure you that an active trading market will develop or be sustained after this offering. The initial public offering price will be negotiated between us and representatives of the underwriters and may not be indicative of the market price of our common stock after this offering. The market price of our common stock may be volatile, which could cause the value of your investment to decline. Prior to this offering, our common stock has not been traded in a public market. We cannot predict the extent to which a trading market will develop or how liquid that market might become. The initial public offering price may not be indicative of prices that will prevail in the trading market. The trading price of our common stock following this offering is therefore likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include: quarterly variations in our results of operations or those of our competitors; general economic conditions and slow or negative growth of related markets; announcements by us or our competitors of design wins, acquisitions, new products, significant contracts, commercial relationships or capital commitments; our ability to develop and market new and enhanced products on a timely basis; commencement of, or our involvement in, litigation; disruption to our operations; the emergence of new sales channels in which we are unable to compete effectively; any major change in our board of directors or management; changes in financial estimates including our ability to meet our future revenue and operating profit or loss projections; changes in governmental regulations; and changes in earnings estimates or recommendations by securities analysts. In addition, the stock market in general, and the market for semiconductor and other technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Such fluctuations may be even more pronounced in the trading market shortly following this offering. These broad market and industry factors may seriously harm Table of Contents the market price of our common stock, regardless of our actual operating performance. These trading price fluctuations may also make it more difficult for us to use our common stock as a means to make acquisitions or to use options to purchase our common stock to attract and retain employees. In addition, in the past, following periods of volatility in the overall market and the market price of a company s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management s attention and resources. If securities analysts or industry analysts downgrade our stock, publish negative research or reports, or do not publish reports about our business, our stock price and trading volume could decline. The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us, our business and our market. If one or more analysts adversely change their recommendation regarding our stock or our competitors stock, our stock price would likely decline. If one or more analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Purchasers in this offering will immediately experience substantial dilution in net tangible book value. The initial public offering price is substantially higher than the prices paid for our common stock in the past and higher than the book value of the shares we are offering. This is referred to as dilution. Accordingly, if you purchase common stock in the offering, you will incur immediate dilution of approximately $10.28 per share in the net tangible book value per share from the price you pay for our common stock based on the assumed initial public offering price of $12.50. If the holders of outstanding stock options and warrants exercise those securities, you will incur additional dilution. The price of our stock could decrease as a result of shares being sold in the market after this offering. Additional sales of our common stock in the public market after this offering, or the perception that these sales could occur, could cause the market price of our shares to decline. Upon the completion of this offering, we will have approximately 38,057,971 shares of common stock outstanding. All of the shares sold in this offering will be freely transferable without restriction or additional registration under the Securities Act of 1933, as amended. Our directors, officers and other existing security holders will be subject to lock-up agreements described under the caption Shares Eligible for Future Sale. Subject to the volume and other restrictions under Rules 144 and 701 under the Securities Act, these securities will be available for sale following the expiration of these lock-up agreements. These lock-up agreements expire 180 days after the date of this prospectus or in certain circumstances up to 214 days after the date of this prospectus. A limited number of stockholders will have the ability to influence the outcome of director elections and other matters requiring stockholder approval. After this offering, our directors and executive officers and their affiliates will beneficially own approximately 44.0% of our outstanding common stock. These stockholders, if they acted together, could exert substantial influence over matters requiring approval by our stockholders, including electing directors, adopting new compensation plans and approving mergers, acquisitions or other business combination transactions. This concentration of ownership may discourage, delay or prevent a change of control of our company, which could deprive our stockholders of an opportunity to receive a premium for their stock as part of a sale of our company and might reduce our stock price. These actions may be taken even if they are opposed by our other stockholders, including those who purchase shares in this offering. Management will have broad discretion over the use of proceeds from this offering. The net proceeds from this offering will be used for general corporate purposes, including working capital and capital expenditures as well as the repayment of approximately $3.6 million of outstanding indebtedness under one of our credit facilities and the payment of $1.9 million under a license agreement. We currently anticipate spending a portion of the net proceeds on sales and marketing activities, research and development activities, general and administrative matters and on capital expenditures. In addition, we may use a portion of the net proceeds to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. We have not reserved or allocated specific amounts for these purposes and we cannot specify with certainty how we will Table of Contents use the net proceeds. Accordingly, our management will have considerable discretion in the application of the net proceeds and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not increase our operating results or market value. Until the net proceeds are used, they may be placed in investments that do not produce income or that lose value. Delaware law and our amended and restated certificate of incorporation and bylaws contain provisions that could delay or discourage takeover attempts that stockholders may consider favorable. Provisions in our amended and restated certificate of incorporation and bylaws, as they will be in effect upon the closing of this offering, may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following: the division of our board of directors into three classes; the right of the board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or due to the resignation or departure of an existing board member; the prohibition of cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates; the requirement for the advance notice of nominations for election to the board of directors or for proposing matters that can be acted upon at a stockholders meeting; the ability of our board of directors to alter our bylaws without obtaining stockholder approval; the ability of the board of directors to issue, without stockholder approval, up to 10,000,000 shares of preferred stock with terms set by the board of directors, which rights could be senior to those of our common stock; the elimination of the rights of stockholders to call a special meeting of stockholders and to take action by written consent in lieu of a meeting; the required approval of at least 662/3% of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or repeal the provisions of our amended and restated certificate of incorporation regarding the election and removal of directors and the inability of stockholders to take action by written consent in lieu of a meeting; and the required approval of at least a majority of the shares entitled to vote at an election of directors to remove directors without cause. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, particularly those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions in our amended and restated certificate of incorporation and bylaws and under Delaware law could discourage potential takeover attempts, could reduce the price that investors are willing to pay for shares of our common stock in the future and could potentially result in the market price being lower than they would without these provisions. Table of Contents SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA This prospectus, particularly the sections entitled
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information
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+This summary highlights material information appearing elsewhere in this prospectus. You should read the entire prospectus carefully. This prospectus contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in "Risk Factors" and elsewhere in this prospectus. All references to a particular fiscal year of Visant Corporation, or Visant, are to the four fiscal quarters ended the Saturday nearest to December 31. Our Company In this document, references to the "Company," "Visant," "we," "our," or "us" refer to Visant Corporation and its consolidated subsidiaries, and references to "Visant Holding," "Holdings," "our parent" and "our parent company" refer to our indirect parent, Visant Holding Corp. Visant Corporation operates Jostens, Inc. and its subsidiaries ("Jostens"), Von Hoffmann Holdings Inc. and its subsidiaries ("Von Hoffmann"), AHC I Acquisition Corp. and its subsidiaries ("Arcade"), Dixon Direct Corp. ("Dixon") and Neff Holding Company and its subsidiary ("Neff"). We are a leading marketing and publishing services enterprise servicing the school affinity, direct marketing, fragrance and cosmetics sampling and educational publishing markets. We were formed through the October 2004 consolidation of Jostens, Von Hoffmann and Arcade. On June 8, 2006, we entered into definitive agreements to sell our Jostens Photography businesses, which previously comprised a reportable segment. The transactions closed on June 30, 2006. The discontinued operations of the Jostens Photography businesses are excluded from the consolidated financial statements retrospective from the date of disposition. On June 16, 2006, we acquired, through a wholly owned subsidiary, substantially all of the assets and assumed certain liabilities of the Dixon Web operation of the Sleepeck Printing Company, a provider of innovative marketing services and products located in Dixon, Illinois. At the time of acquisition, the name of the business was changed to Dixon Direct Corp. The results of Dixon's operations have been included in the consolidated financial statements since that date. On September 8, 2006, a newly formed subsidiary of ours acquired substantially all of the assets and assumed certain liabilities of the Vertis, Inc. fragrance sampling business. The acquired business currently operates under the Arcade Marketing name. The acquisition was a strategic step to continue to expand our Marketing and Publishing Services segment, which services the fragrance, cosmetic, personal care and other consumer product market segments. The results of these acquired operations have been included in the consolidated financial statements since that date. As of December 2006, our Von Hoffmann Holdings Inc., Von Hoffmann Corporation and Anthology, Inc. businesses were held as assets for sale. On January 3, 2007, we entered into a Stock Purchase Agreement (the "Von Hoffmann Stock Purchase Agreement") with R.R. Donnelley & Sons Company providing for the sale of Von Hoffmann Holdings Inc., Von Hoffmann Corporation and Anthology, Inc., which previously comprised the Educational Textbook segment and a portion of the Marketing and Publishing Services segment. The regulatory review of the proposed transaction through a second request by the Federal Trade Commission has been completed, and we expect to close the transaction on or about May 16, 2007. The operations of the Von Hoffmann businesses are reported as discontinued operations in the consolidated financial statements for all periods presented. On March 16, 2007, we acquired all of the outstanding capital stock of Neff Holding Company and its wholly owned subsidiary Neff Motivation, Inc. Neff is a leading single source provider of custom award programs and apparel, including chenille letters and letter jackets, to the scholastic market segment. Neff operates as a direct subsidiary of Visant under the Neff brand name and its results will KKR and related funds(2). 2,664,356 44.6 % 1 (3) 100.0 % DLJMBP III and related funds(4) 2,664,357 44.6 % David F. Burgstahler(4)(8) 2,666,438 44.6 % Alexander Navab(2)(8) 2,666,437 44.6 % 1 (3) 100.0 % Tagar C. Olson(2)(8) 2,666,437 44.6 % 1 (3) 100.0 % Charles P. Pieper(4)(8) 2,666,438 44.6 % George M.C. Fisher(2)(5)(6) 4,163 * Marc L. Reisch(7)(8)(10) 115,989 1.9 % Marie D. Hlavaty(7)(8) 15,608 * Paul B. Carousso(7)(8) 7,805 * Michael L. Bailey(7)(8) 38,004 * John Van Horn(7)(9) 5,203 * Directors and officers (13 persons) as a group(2)(4)(5)(6)(8)(9)(10) 5,540,045 90.8 % Balance January 1, 2005 Balance December 30, 2006 (In thousands) Service cost $ 6,603 $ 8,016 Interest cost 14,989 14,901 Expected return on plan assets (22,611 ) (21,255 ) Amortization of prior year service cost (478 ) 53 Amortization of net actuarial loss 3 WHERE YOU CAN FIND MORE INFORMATION We and our guarantor subsidiaries have filed with the Securities and Exchange Commission, or the SEC, a registration statement on Form S-1 under the Securities Act with respect to the notes being offered hereby. This prospectus, which forms a part of the registration statement, does not contain all of the information set forth in the registration statement. For further information with respect to us and the notes, reference is made to the registration statement. Statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete. We and our guarantor subsidiaries are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith, file reports and other information with the SEC. The registration statement, such reports and other information can be read and copied at the Public Reference Room of the SEC located at 100 F Street, N.E., Washington D.C. 20549. Copies of such materials, including copies of all or any portion of the registration statement, can be obtained from the Public Reference Room of the SEC at prescribed rates. You can call the SEC at 1-800-SEC-0330 to obtain information on the operation of the Public Reference Room. Such materials may also be accessed electronically by means of the SEC's home page on the Internet (http://www.sec.gov). So long as we and our guarantor subsidiaries are subject to the periodic reporting requirements of the Exchange Act, we and our guarantor subsidiaries are required to furnish the information required to be filed with the SEC to the trustee and the holders of the outstanding notes. We and our guarantor subsidiaries have agreed that, even if we and our guarantor subsidiaries are not required under the Exchange Act to furnish such information to the SEC, we will nonetheless continue to furnish information that would be required to be furnished by us and our guarantor subsidiaries by Sections 13 or 15(d) of the Exchange Act. be reported from the date of acquisition together with the results of the Jostens scholastic operations as the renamed Scholastic segment. Our three reportable segments as of December 30, 2006 consisted of: Jostens Scholastic provides services related to the marketing, sale and production of class rings, graduation products and other scholastic products; Jostens Yearbook provides services related to the publication, marketing, sale and production of school yearbooks; and Marketing and Publishing Services produces multi-sensory and interactive advertising sampling systems, primarily for the fragrance, cosmetics and personal care market segments, and provides innovative products and services to the direct marketing sector. The group also produces book covers and other components for educational publishers. Jostens Jostens is a leading provider of school-related affinity products and services that help people celebrate important moments, recognize achievements and build affiliation. Founded in 1897, Jostens has a history of providing quality products, which has enabled it to develop long-standing relationships with school administrators throughout the country. Jostens' high degree of customer satisfaction translates into annual retention rates of over 90% in its major product lines. Jostens' products and services are predominantly offered to North American high school and college students, through a national network of primarily independent sales representatives and associates. Jostens' operations are reported in two segments: (1) Scholastic and (2) Yearbook. Scholastic. Jostens is one of the leading providers of services related to the marketing, sale and production of class rings and an array of graduation products, such as caps, gowns, diplomas and announcements and graduation-related accessories. In the Scholastic segment, Jostens primarily serves U.S. high schools, colleges, universities and other specialty markets, marketing and selling its products to students and administrators through independent sales representatives. Jostens provides a high level of customer service in the marketing and sale of class rings and certain other graduation products, which often involves a high degree of customization. Jostens also provides ongoing warranty service on its class and affiliation rings. Jostens maintains product-specific tooling as well as a library of school logos and mascots that can be used repeatedly for specific school accounts over time. In addition to its class ring offerings, Jostens also designs, manufactures, markets and sells championship rings for professional sports and affinity rings for a variety of specialty markets. Yearbook. Jostens is one of the leading providers of services related to the publication, marketing, sale and production of yearbooks, primarily serving U.S. high schools, colleges, universities and middle schools. Jostens generates the majority of its revenues from high school accounts. Jostens' sales representatives and technical support employees assist students and faculty advisers with the planning and layout of yearbooks, including through the provision of on-line layout and editorial tools to assist in the publication of the yearbook. With a new class of students each year and periodic faculty advisor turnover, Jostens' independent sales representatives and customer service employees are the main point of continuity for the yearbook production process on a year-to-year basis. Marketing and Publishing Services The Marketing and Publishing Services segment produces multi-sensory and interactive advertising sampling systems, primarily for the fragrance, cosmetics and personal care market segment, and innovative, highly personalized products primarily targeted at the direct marketing sector. We are also a leading producer of supplemental materials and related components such as decorative covers and UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 plastic transparencies for educational publishers. With over a 100-year history as Arcade Marketing, we pioneered our ScentStrip product in 1980. We also offer an extensive portfolio of proprietary, patented and patent-pending technologies that can be incorporated into various marketing programs designed to reach the consumer at home or in-store, including magazine and catalog inserts, remittance envelopes, statement enclosures, blow-ins, direct mail, direct sell and point-of-sale materials and gift-with-purchase/purchase-with-purchase programs. We specialize in high-quality, in-line finished products and can accommodate large marketing projects with a wide range of dimensional products and in-line finishing production, data processing and mailing services. Our personalized imaging capabilities offer individualized messages to each recipient within a geographical area or demographic group for targeted marketing efforts. Company Background On October 4, 2004, an affiliate of Kohlberg Kravis Roberts & Co. L.P., or KKR, and affiliates of DLJ Merchant Banking Partners III, L.P., or DLJMBP III (together with KKR, the "Sponsors"), completed a series of transactions, which created a marketing and publishing services enterprise servicing the school affinity, direct marketing, fragrance and cosmetics sampling and educational publishing market segments through the consolidation of Jostens, Von Hoffmann and Arcade (the "Transactions"). Prior to the Transactions, Von Hoffmann and Arcade were each controlled by affiliates of DLJ Merchant Banking Partners II, L.P., or DLJMBP II, and DLJMBP III owned approximately 82.5% of our outstanding equity, with the remainder held by other co-investors and certain members of management. Upon consummation of the Transactions, an affiliate of KKR invested $256.1 million and was issued equity interests representing approximately 49.6% of our voting interest and 45.0% of our economic interest, and affiliates of DLJMBP III held equity interests representing approximately 41.0% of Holdings' voting interest and 45.0% of Holdings' economic interest, with the remainder held by other co-investors and certain members of management. Approximately $175.6 million of the proceeds were distributed to certain stockholders, and certain treasury stock held by Von Hoffmann was redeemed. After giving effect to the issuance of equity to additional members of management, as of April 23, 2007, affiliates of KKR and DLJMBP III held approximately 49.0% and 41.0%, respectively, of Holdings' voting interest, while each continued to hold approximately 44.6% of Holdings' economic interest. As of April 23, 2007, the other co-investors held approximately 8.4% of the voting interest and 9.1% of the economic interest of Holdings, and members of management held approximately 1.6% of the voting interest and approximately 1.7% of the economic interest of Holdings. FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (1)As of April 23, 2007, affiliates of KKR and DLJMBP III held approximately 49.0% and 41.0%, respectively, of the voting interests of Visant Holding, while each continued to hold approximately 44.6% of the economic interests of Visant Holding. As of April 23, 2007, other co-investors held approximately 8.4% of the voting interests and approximately 9.1% of the economic interests of Visant Holding, while members of management held approximately 1.6% of the voting interest and approximately 1.7% of the economic interest. (2)Consists of 83/4% Senior Notes due 2013 of Visant Holding. (3)Consists of 101/4% Senior Discount Notes Due 2013 of Visant Holding. (4)Visant Secondary Holdings Corp. pledged the stock of Visant as security for the benefit of the lenders under Visant's senior secured credit facilities and is a guarantor of Visant's senior secured credit facilities. (5)Visant's senior secured credit facilities consist of a Term Loan C facility, with $716.5 million outstanding as of December 30, 2006, and a $250.0 million senior secured revolving facility. As of December 30, 2006, Visant had $233.3 million of availability under the revolving credit facility (net of $16.7 million in outstanding letters of credit). The Term Loan C facility matures in 2011 and the revolving credit facility matures in 2009. (6)Consists of the 75/8% Senior Subordinated Notes due 2012 of Visant. VISANT CORPORATION (Exact name of registrant as specified in its charter) (See table of additional registrants) Delaware (State or other jurisdiction of incorporation or organization) 3911 (Primary Standard Industrial Classification Code Number) 90-0207604 (I.R.S. Employer Identification Number) 357 Main Street Armonk, New York 10504 (914) 595-8200 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Marie D. Hlavaty, Esq. Visant Corporation 357 Main Street Armonk, New York 10504 (914) 595-8200 (Name, address, including zip code, and telephone number, including area code, of agent for service) Summary of Terms of the Notes Issuer Visant Corporation Notes Offered $500,000,000 aggregate principal amount of 75/8% Senior Subordinated Notes due 2012. Maturity Date October 1, 2012. Interest Payment Dates April 1 and October 1 of each year, beginning April 1, 2005. Guarantees The notes are guaranteed, jointly and severally, on a senior subordinated unsecured basis, by each of our 100% owned subsidiaries that guarantees our obligations under our senior secured credit facilities and certain of our future subsidiaries. Ranking The notes and the guarantees are our and our subsidiary guarantors' senior subordinated obligations and rank: junior to all of our and the guarantors' existing and future senior indebtedness, including any borrowings under our senior secured credit facilities; equally with any of our and the guarantors' future senior subordinated indebtedness and trade payables; senior to any of our and the guarantors' future indebtedness that is expressly subordinated in right of payment to the notes; effectively senior to the 101/4% Senior Discount Notes due 2013 and the 83/4% Senior Notes due 2013 of Visant Holding, which are not guaranteed by us; and effectively junior to all of the existing and future liabilities of our subsidiaries that do not guarantee the notes. As of December 30, 2006, the notes and the subsidiary guarantees would have ranked junior to: approximately $716.5 million of senior indebtedness; and $24.7 million of total liabilities, including trade payables but excluding intercompany obligations, of our non-guarantor subsidiaries. Copies of all communications, including communications sent to agent for service, should be sent to: Ris B. Norman, Esq. Simpson Thacher & Bartlett LLP 425 Lexington Avenue New York, New York 10017 (212) 455-2000 As of December 30, 2006, our non-guarantor subsidiaries had approximately 2.7% of our assets. Our non-guarantor subsidiaries generated approximately 3.7% of our revenues for the year ended December 30, 2006. Optional Redemption Prior to October 1, 2008, we may redeem the notes, in whole or in part, at a price equal to 100% of the principal amount thereof plus the make-whole premium described under "Description of the Notes Optional Redemption". We may redeem some or all of the notes at any time and from time to time on or after October 1, 2008, in whole or in part, in cash at the redemption prices described in this prospectus, plus accrued and unpaid interest to the date of redemption. In addition, until October 1, 2007, we may redeem up to 35% of the aggregate principal amount of the notes with the proceeds of certain equity offerings. Change of Control If a change of control occurs, each holder of the notes may require us to repurchase all or a portion of such holder's notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of repurchase. We may not have sufficient funds to repurchase the notes upon a change of control. Furthermore, restrictions in our senior secured credit facilities may limit our ability to repurchase the notes upon a change of control, as described under "Risk Factors Risks Related to Our Indebtedness and the Notes We may not be able to repurchase notes upon a change of control." Restrictive Covenants The terms of the notes place certain limitations on our ability and the ability of our restricted subsidiaries to, among other things: incur or guarantee additional indebtedness or issue disqualified or preferred stock; pay dividends or make other equity distributions; repurchase or redeem capital stock; make investments; sell assets or consolidate or merge with or into other companies; create limitations on the ability of our restricted subsidiaries to make dividends or distributions; engage in transactions with affiliates; and Approximate date of commencement of proposed sale to the public: As soon as practicable after the Registration Statement becomes effective. Our principal executive offices are located at 357 Main Street, Armonk, New York 10504 and our telephone number there is (914) 595-8200. We were incorporated in the State of Delaware on July 21, 2003. We maintain a website at www.visant.net. Information contained on our websites does not constitute a part of this prospectus and is not being incorporated by reference herein. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. 105,325 95,647 LIFO reserve 8 CALCULATION OF REGISTRATION FEE (1)Certain selected financial data have been reclassified for all periods presented to reflect the results of discontinued operations consisting of certain Von Hoffmann businesses in December 2006, our Jostens Photography businesses in June 2006 and the exit of Jostens' Recognition business in December 2001. (2)For 2005 and 2004, transaction costs represented $1.2 million and $6.8 million, respectively, of expenses incurred in connection with the Transactions. For the successor period in 2003, transaction costs represented $0.2 million of expenses incurred in connection with the 2003 Jostens merger. For the predecessor period in 2003, transaction costs represented $31.0 million of expenses incurred in connection with the 2003 Jostens merger. (3)For 2006, the Company recorded $2.3 million relating to an impairment loss to reduce the value of Jostens former corporate office buildings, which were later sold, and net $0.1 million of special charges for severance and related benefit costs. For 2005, special charges consisted of restructuring charges of $5.1 million for employee severance related to closed facilities and $0.3 million related to a withdrawal liability under a union retirement plan that arose in connection with the consolidation of certain operations. For 2004, special charges consisted of $11.8 million of restructuring charges consisting primarily of severance costs for the termination of senior executives and other employees associated with reorganization activity as a result of the Transactions. (4)For 2004, loss on redemption of debt represented a loss of $31.5 million in connection with repayment of all existing indebtedness and remaining preferred stock of Jostens and Arcade in conjunction with the Transactions and a loss of $0.4 million in connection with the repurchase of $5.0 million principal amount of Jostens' 12.75% senior subordinated notes prior to the Transactions. For the successor period in 2003, loss on redemption of debt represented a loss of $0.4 million in connection with the repurchase of $8.5 million principal amount of Jostens' 12.75% senior subordinated notes. For the predecessor period in 2003, loss on redemption of debt represented a loss of $13.9 million consisting of the write-off of unamortized deferred financing costs in connection with refinancing Jostens' senior secured credit facility. For 2002, loss on redemption of debt represented a loss of $1.8 million in connection with the repurchase of $7.5 million principal amount of Jostens' 12.75% senior subordinated notes. (5)For the purposes of calculating the ratio of earnings to fixed charges, earnings represent income (loss) from continuing operations before income taxes plus fixed charges. Fixed charges consist of interest expense (including capitalized interest) on all indebtedness plus amortization of debt issuance costs (and for any period subsequent to the adoption of SFAS 150, accretion of preferred stock dividends), and the portion of rental expense that we believe is representative of the interest component of rental expense. For 2004 and the successor period in 2003, earnings did not cover fixed charges by $78.6 million and $70.1 million, respectively. (6)Liquidation preference of redeemable preferred stock as of the end of 2003 and 2002 was $222.6 million and $86.3 million, respectively. Title of Each Class of Securities to be Registered Amount to be Registered Proposed Maximum Offering Price Per Unit Proposed Maximum Aggregate Offering Price Amount of Registration Fee
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+This summary highlights material information appearing elsewhere in this prospectus. You should read the entire prospectus carefully. This prospectus contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in "Risk Factors" and elsewhere in this prospectus. All references to a particular fiscal year of Visant Corporation, or Visant, are to the four fiscal quarters ended the Saturday nearest to December 31. Our Company In this document, references to the "Company," "Visant," "we," "our," or "us" refer to Visant Corporation and its consolidated subsidiaries, and references to "Visant Holding," "Holdings," "our parent" and "our parent company" refer to our indirect parent, Visant Holding Corp. Visant Corporation operates Jostens, Inc. and its subsidiaries ("Jostens"), Von Hoffmann Holdings Inc. and its subsidiaries ("Von Hoffmann"), AHC I Acquisition Corp. and its subsidiaries ("Arcade"), Dixon Direct Corp. ("Dixon") and Neff Holding Company and its subsidiary ("Neff"). We are a leading marketing and publishing services enterprise servicing the school affinity, direct marketing, fragrance and cosmetics sampling and educational publishing markets. We were formed through the October 2004 consolidation of Jostens, Von Hoffmann and Arcade. On June 8, 2006, we entered into definitive agreements to sell our Jostens Photography businesses, which previously comprised a reportable segment. The transactions closed on June 30, 2006. The discontinued operations of the Jostens Photography businesses are excluded from the consolidated financial statements retrospective from the date of disposition. On June 16, 2006, we acquired, through a wholly owned subsidiary, substantially all of the assets and assumed certain liabilities of the Dixon Web operation of the Sleepeck Printing Company, a provider of innovative marketing services and products located in Dixon, Illinois. At the time of acquisition, the name of the business was changed to Dixon Direct Corp. The results of Dixon's operations have been included in the consolidated financial statements since that date. On September 8, 2006, a newly formed subsidiary of ours acquired substantially all of the assets and assumed certain liabilities of the Vertis, Inc. fragrance sampling business. The acquired business currently operates under the Arcade Marketing name. The acquisition was a strategic step to continue to expand our Marketing and Publishing Services segment, which services the fragrance, cosmetic, personal care and other consumer product market segments. The results of these acquired operations have been included in the consolidated financial statements since that date. As of December 2006, our Von Hoffmann Holdings Inc., Von Hoffmann Corporation and Anthology, Inc. businesses were held as assets for sale. On January 3, 2007, we entered into a Stock Purchase Agreement (the "Von Hoffmann Stock Purchase Agreement") with R.R. Donnelley & Sons Company providing for the sale of Von Hoffmann Holdings Inc., Von Hoffmann Corporation and Anthology, Inc., which previously comprised the Educational Textbook segment and a portion of the Marketing and Publishing Services segment. The regulatory review of the proposed transaction through a second request by the Federal Trade Commission has been completed, and we expect to close the transaction on or about May 16, 2007. The operations of the Von Hoffmann businesses are reported as discontinued operations in the consolidated financial statements for all periods presented. On March 16, 2007, we acquired all of the outstanding capital stock of Neff Holding Company and its wholly owned subsidiary Neff Motivation, Inc. Neff is a leading single source provider of custom award programs and apparel, including chenille letters and letter jackets, to the scholastic market segment. Neff operates as a direct subsidiary of Visant under the Neff brand name and its results will KKR and related funds(2). 2,664,356 44.6 % 1 (3) 100.0 % DLJMBP III and related funds(4) 2,664,357 44.6 % David F. Burgstahler(4)(8) 2,666,438 44.6 % Alexander Navab(2)(8) 2,666,437 44.6 % 1 (3) 100.0 % Tagar C. Olson(2)(8) 2,666,437 44.6 % 1 (3) 100.0 % Charles P. Pieper(4)(8) 2,666,438 44.6 % George M.C. Fisher(2)(5)(6) 4,163 * Marc L. Reisch(7)(8)(10) 115,989 1.9 % Marie D. Hlavaty(7)(8) 15,608 * Paul B. Carousso(7)(8) 7,805 * Michael L. Bailey(7)(8) 38,004 * John Van Horn(7)(9) 5,203 * Directors and officers (13 persons) as a group(2)(4)(5)(6)(8)(9)(10) 5,540,045 90.8 % Balance January 1, 2005 Balance December 30, 2006 (In thousands) Service cost $ 6,603 $ 8,016 Interest cost 14,989 14,901 Expected return on plan assets (22,611 ) (21,255 ) Amortization of prior year service cost (478 ) 53 Amortization of net actuarial loss 3 WHERE YOU CAN FIND MORE INFORMATION We and our guarantor subsidiaries have filed with the Securities and Exchange Commission, or the SEC, a registration statement on Form S-1 under the Securities Act with respect to the notes being offered hereby. This prospectus, which forms a part of the registration statement, does not contain all of the information set forth in the registration statement. For further information with respect to us and the notes, reference is made to the registration statement. Statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete. We and our guarantor subsidiaries are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith, file reports and other information with the SEC. The registration statement, such reports and other information can be read and copied at the Public Reference Room of the SEC located at 100 F Street, N.E., Washington D.C. 20549. Copies of such materials, including copies of all or any portion of the registration statement, can be obtained from the Public Reference Room of the SEC at prescribed rates. You can call the SEC at 1-800-SEC-0330 to obtain information on the operation of the Public Reference Room. Such materials may also be accessed electronically by means of the SEC's home page on the Internet (http://www.sec.gov). So long as we and our guarantor subsidiaries are subject to the periodic reporting requirements of the Exchange Act, we and our guarantor subsidiaries are required to furnish the information required to be filed with the SEC to the trustee and the holders of the outstanding notes. We and our guarantor subsidiaries have agreed that, even if we and our guarantor subsidiaries are not required under the Exchange Act to furnish such information to the SEC, we will nonetheless continue to furnish information that would be required to be furnished by us and our guarantor subsidiaries by Sections 13 or 15(d) of the Exchange Act. be reported from the date of acquisition together with the results of the Jostens scholastic operations as the renamed Scholastic segment. Our three reportable segments as of December 30, 2006 consisted of: Jostens Scholastic provides services related to the marketing, sale and production of class rings, graduation products and other scholastic products; Jostens Yearbook provides services related to the publication, marketing, sale and production of school yearbooks; and Marketing and Publishing Services produces multi-sensory and interactive advertising sampling systems, primarily for the fragrance, cosmetics and personal care market segments, and provides innovative products and services to the direct marketing sector. The group also produces book covers and other components for educational publishers. Jostens Jostens is a leading provider of school-related affinity products and services that help people celebrate important moments, recognize achievements and build affiliation. Founded in 1897, Jostens has a history of providing quality products, which has enabled it to develop long-standing relationships with school administrators throughout the country. Jostens' high degree of customer satisfaction translates into annual retention rates of over 90% in its major product lines. Jostens' products and services are predominantly offered to North American high school and college students, through a national network of primarily independent sales representatives and associates. Jostens' operations are reported in two segments: (1) Scholastic and (2) Yearbook. Scholastic. Jostens is one of the leading providers of services related to the marketing, sale and production of class rings and an array of graduation products, such as caps, gowns, diplomas and announcements and graduation-related accessories. In the Scholastic segment, Jostens primarily serves U.S. high schools, colleges, universities and other specialty markets, marketing and selling its products to students and administrators through independent sales representatives. Jostens provides a high level of customer service in the marketing and sale of class rings and certain other graduation products, which often involves a high degree of customization. Jostens also provides ongoing warranty service on its class and affiliation rings. Jostens maintains product-specific tooling as well as a library of school logos and mascots that can be used repeatedly for specific school accounts over time. In addition to its class ring offerings, Jostens also designs, manufactures, markets and sells championship rings for professional sports and affinity rings for a variety of specialty markets. Yearbook. Jostens is one of the leading providers of services related to the publication, marketing, sale and production of yearbooks, primarily serving U.S. high schools, colleges, universities and middle schools. Jostens generates the majority of its revenues from high school accounts. Jostens' sales representatives and technical support employees assist students and faculty advisers with the planning and layout of yearbooks, including through the provision of on-line layout and editorial tools to assist in the publication of the yearbook. With a new class of students each year and periodic faculty advisor turnover, Jostens' independent sales representatives and customer service employees are the main point of continuity for the yearbook production process on a year-to-year basis. Marketing and Publishing Services The Marketing and Publishing Services segment produces multi-sensory and interactive advertising sampling systems, primarily for the fragrance, cosmetics and personal care market segment, and innovative, highly personalized products primarily targeted at the direct marketing sector. We are also a leading producer of supplemental materials and related components such as decorative covers and UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 plastic transparencies for educational publishers. With over a 100-year history as Arcade Marketing, we pioneered our ScentStrip product in 1980. We also offer an extensive portfolio of proprietary, patented and patent-pending technologies that can be incorporated into various marketing programs designed to reach the consumer at home or in-store, including magazine and catalog inserts, remittance envelopes, statement enclosures, blow-ins, direct mail, direct sell and point-of-sale materials and gift-with-purchase/purchase-with-purchase programs. We specialize in high-quality, in-line finished products and can accommodate large marketing projects with a wide range of dimensional products and in-line finishing production, data processing and mailing services. Our personalized imaging capabilities offer individualized messages to each recipient within a geographical area or demographic group for targeted marketing efforts. Company Background On October 4, 2004, an affiliate of Kohlberg Kravis Roberts & Co. L.P., or KKR, and affiliates of DLJ Merchant Banking Partners III, L.P., or DLJMBP III (together with KKR, the "Sponsors"), completed a series of transactions, which created a marketing and publishing services enterprise servicing the school affinity, direct marketing, fragrance and cosmetics sampling and educational publishing market segments through the consolidation of Jostens, Von Hoffmann and Arcade (the "Transactions"). Prior to the Transactions, Von Hoffmann and Arcade were each controlled by affiliates of DLJ Merchant Banking Partners II, L.P., or DLJMBP II, and DLJMBP III owned approximately 82.5% of our outstanding equity, with the remainder held by other co-investors and certain members of management. Upon consummation of the Transactions, an affiliate of KKR invested $256.1 million and was issued equity interests representing approximately 49.6% of our voting interest and 45.0% of our economic interest, and affiliates of DLJMBP III held equity interests representing approximately 41.0% of Holdings' voting interest and 45.0% of Holdings' economic interest, with the remainder held by other co-investors and certain members of management. Approximately $175.6 million of the proceeds were distributed to certain stockholders, and certain treasury stock held by Von Hoffmann was redeemed. After giving effect to the issuance of equity to additional members of management, as of April 23, 2007, affiliates of KKR and DLJMBP III held approximately 49.0% and 41.0%, respectively, of Holdings' voting interest, while each continued to hold approximately 44.6% of Holdings' economic interest. As of April 23, 2007, the other co-investors held approximately 8.4% of the voting interest and 9.1% of the economic interest of Holdings, and members of management held approximately 1.6% of the voting interest and approximately 1.7% of the economic interest of Holdings. FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (1)As of April 23, 2007, affiliates of KKR and DLJMBP III held approximately 49.0% and 41.0%, respectively, of the voting interests of Visant Holding, while each continued to hold approximately 44.6% of the economic interests of Visant Holding. As of April 23, 2007, other co-investors held approximately 8.4% of the voting interests and approximately 9.1% of the economic interests of Visant Holding, while members of management held approximately 1.6% of the voting interest and approximately 1.7% of the economic interest. (2)Consists of 83/4% Senior Notes due 2013 of Visant Holding. (3)Consists of 101/4% Senior Discount Notes Due 2013 of Visant Holding. (4)Visant Secondary Holdings Corp. pledged the stock of Visant as security for the benefit of the lenders under Visant's senior secured credit facilities and is a guarantor of Visant's senior secured credit facilities. (5)Visant's senior secured credit facilities consist of a Term Loan C facility, with $716.5 million outstanding as of December 30, 2006, and a $250.0 million senior secured revolving facility. As of December 30, 2006, Visant had $233.3 million of availability under the revolving credit facility (net of $16.7 million in outstanding letters of credit). The Term Loan C facility matures in 2011 and the revolving credit facility matures in 2009. (6)Consists of the 75/8% Senior Subordinated Notes due 2012 of Visant. VISANT CORPORATION (Exact name of registrant as specified in its charter) (See table of additional registrants) Delaware (State or other jurisdiction of incorporation or organization) 3911 (Primary Standard Industrial Classification Code Number) 90-0207604 (I.R.S. Employer Identification Number) 357 Main Street Armonk, New York 10504 (914) 595-8200 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Marie D. Hlavaty, Esq. Visant Corporation 357 Main Street Armonk, New York 10504 (914) 595-8200 (Name, address, including zip code, and telephone number, including area code, of agent for service) Summary of Terms of the Notes Issuer Visant Corporation Notes Offered $500,000,000 aggregate principal amount of 75/8% Senior Subordinated Notes due 2012. Maturity Date October 1, 2012. Interest Payment Dates April 1 and October 1 of each year, beginning April 1, 2005. Guarantees The notes are guaranteed, jointly and severally, on a senior subordinated unsecured basis, by each of our 100% owned subsidiaries that guarantees our obligations under our senior secured credit facilities and certain of our future subsidiaries. Ranking The notes and the guarantees are our and our subsidiary guarantors' senior subordinated obligations and rank: junior to all of our and the guarantors' existing and future senior indebtedness, including any borrowings under our senior secured credit facilities; equally with any of our and the guarantors' future senior subordinated indebtedness and trade payables; senior to any of our and the guarantors' future indebtedness that is expressly subordinated in right of payment to the notes; effectively senior to the 101/4% Senior Discount Notes due 2013 and the 83/4% Senior Notes due 2013 of Visant Holding, which are not guaranteed by us; and effectively junior to all of the existing and future liabilities of our subsidiaries that do not guarantee the notes. As of December 30, 2006, the notes and the subsidiary guarantees would have ranked junior to: approximately $716.5 million of senior indebtedness; and $24.7 million of total liabilities, including trade payables but excluding intercompany obligations, of our non-guarantor subsidiaries. Copies of all communications, including communications sent to agent for service, should be sent to: Ris B. Norman, Esq. Simpson Thacher & Bartlett LLP 425 Lexington Avenue New York, New York 10017 (212) 455-2000 As of December 30, 2006, our non-guarantor subsidiaries had approximately 2.7% of our assets. Our non-guarantor subsidiaries generated approximately 3.7% of our revenues for the year ended December 30, 2006. Optional Redemption Prior to October 1, 2008, we may redeem the notes, in whole or in part, at a price equal to 100% of the principal amount thereof plus the make-whole premium described under "Description of the Notes Optional Redemption". We may redeem some or all of the notes at any time and from time to time on or after October 1, 2008, in whole or in part, in cash at the redemption prices described in this prospectus, plus accrued and unpaid interest to the date of redemption. In addition, until October 1, 2007, we may redeem up to 35% of the aggregate principal amount of the notes with the proceeds of certain equity offerings. Change of Control If a change of control occurs, each holder of the notes may require us to repurchase all or a portion of such holder's notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of repurchase. We may not have sufficient funds to repurchase the notes upon a change of control. Furthermore, restrictions in our senior secured credit facilities may limit our ability to repurchase the notes upon a change of control, as described under "Risk Factors Risks Related to Our Indebtedness and the Notes We may not be able to repurchase notes upon a change of control." Restrictive Covenants The terms of the notes place certain limitations on our ability and the ability of our restricted subsidiaries to, among other things: incur or guarantee additional indebtedness or issue disqualified or preferred stock; pay dividends or make other equity distributions; repurchase or redeem capital stock; make investments; sell assets or consolidate or merge with or into other companies; create limitations on the ability of our restricted subsidiaries to make dividends or distributions; engage in transactions with affiliates; and Approximate date of commencement of proposed sale to the public: As soon as practicable after the Registration Statement becomes effective. Our principal executive offices are located at 357 Main Street, Armonk, New York 10504 and our telephone number there is (914) 595-8200. We were incorporated in the State of Delaware on July 21, 2003. We maintain a website at www.visant.net. Information contained on our websites does not constitute a part of this prospectus and is not being incorporated by reference herein. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. 105,325 95,647 LIFO reserve 8 CALCULATION OF REGISTRATION FEE (1)Certain selected financial data have been reclassified for all periods presented to reflect the results of discontinued operations consisting of certain Von Hoffmann businesses in December 2006, our Jostens Photography businesses in June 2006 and the exit of Jostens' Recognition business in December 2001. (2)For 2005 and 2004, transaction costs represented $1.2 million and $6.8 million, respectively, of expenses incurred in connection with the Transactions. For the successor period in 2003, transaction costs represented $0.2 million of expenses incurred in connection with the 2003 Jostens merger. For the predecessor period in 2003, transaction costs represented $31.0 million of expenses incurred in connection with the 2003 Jostens merger. (3)For 2006, the Company recorded $2.3 million relating to an impairment loss to reduce the value of Jostens former corporate office buildings, which were later sold, and net $0.1 million of special charges for severance and related benefit costs. For 2005, special charges consisted of restructuring charges of $5.1 million for employee severance related to closed facilities and $0.3 million related to a withdrawal liability under a union retirement plan that arose in connection with the consolidation of certain operations. For 2004, special charges consisted of $11.8 million of restructuring charges consisting primarily of severance costs for the termination of senior executives and other employees associated with reorganization activity as a result of the Transactions. (4)For 2004, loss on redemption of debt represented a loss of $31.5 million in connection with repayment of all existing indebtedness and remaining preferred stock of Jostens and Arcade in conjunction with the Transactions and a loss of $0.4 million in connection with the repurchase of $5.0 million principal amount of Jostens' 12.75% senior subordinated notes prior to the Transactions. For the successor period in 2003, loss on redemption of debt represented a loss of $0.4 million in connection with the repurchase of $8.5 million principal amount of Jostens' 12.75% senior subordinated notes. For the predecessor period in 2003, loss on redemption of debt represented a loss of $13.9 million consisting of the write-off of unamortized deferred financing costs in connection with refinancing Jostens' senior secured credit facility. For 2002, loss on redemption of debt represented a loss of $1.8 million in connection with the repurchase of $7.5 million principal amount of Jostens' 12.75% senior subordinated notes. (5)For the purposes of calculating the ratio of earnings to fixed charges, earnings represent income (loss) from continuing operations before income taxes plus fixed charges. Fixed charges consist of interest expense (including capitalized interest) on all indebtedness plus amortization of debt issuance costs (and for any period subsequent to the adoption of SFAS 150, accretion of preferred stock dividends), and the portion of rental expense that we believe is representative of the interest component of rental expense. For 2004 and the successor period in 2003, earnings did not cover fixed charges by $78.6 million and $70.1 million, respectively. (6)Liquidation preference of redeemable preferred stock as of the end of 2003 and 2002 was $222.6 million and $86.3 million, respectively. Title of Each Class of Securities to be Registered Amount to be Registered Proposed Maximum Offering Price Per Unit Proposed Maximum Aggregate Offering Price Amount of Registration Fee
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully together with our consolidated financial statements and the related notes appearing elsewhere in this prospectus before making an investment decision. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those discussed in the Rick Factors and other sections of the prospectus. In this prospectus, the words EarlyDETECT, EDI, company, we, our, ours and us refer only to EarlyDETECT Inc. and our wholly owned subsidiaries, unless the context indicates otherwise. The following summary contains basic information about this offering. You should read carefully this entire prospectus, including the Risk Factors, financial information and related notes, as well as the documents we have incorporated by reference into this prospectus before making an investment decision. Company Background and Products Our company was incorporated in the State of Nevada on September 19, 1996 under the name Advance Medical Systems Inc. and, on June 25, 2002, we changed our name to EarlyDETECT Inc. Our company was founded to develop, manufacture and market in vitro diagnostic (IVD) tests for over-the-counter (OTC or consumer), and point-of-care (POC or professional) use markets. At our inception we tried to market our products outside the United States, primarily Canada. In 2004, we stopped all our marketing and sales efforts in Canada, and we decided to sell in the United States the 20 products we now offer. Our company currently manufactures and markets a range of diagnostic test kits for consumer use through over-the-counter (OTC) sales, and for use by health care professionals, generally located at medical clinics, physician offices and hospitals known as Points-of-Care (POC), in the United States. These test kits are known as in vitro diagnostic test kits or IVD products. We believe that based on publicly available information that worldwide sales of at-home healthcare-related diagnostic kits have increased from $2.9 billion in 1999 to more than $6 billion in 2006 and is continuing to grow annually. Currently we market 20 products consisting of ten OTC products and ten POC products in the U.S. Two of the 20 products are assembled and packaged differently and are sold in both the OTC and POC markets. Of the ten POC products, we manufacture three of them and the remaining 18 products we repackage and add certain components depending on the products. With respect to the products we do not manufacture directly, we buy components from various FDA inspected and registered facilities located throughout the U.S. that have met certain requirements in order to be designated as GMP facilities. GMP means good manufacturing practices. These components are delivered to our facility located in San Diego, California (the San Diego Facility ) where they are repackaged, assembled, labeled and inserted in their final containers. Some of the components used in our products do not need to be manufactured at FDA inspected and registered facilities. Examples of such components are lance sets to puncture skin, bandages and alcohol. At the San Diego Facility, we also insert in each package pre-printed instructions. We use different labels depending on whether a product is destined for the OTC or POC markets. We obtain the cardboard packaging that our final products are placed in from a single supplier. We manufacture our own labels. We discuss our products in greater detail below. Our OTC distribution channels consist of large chains and smaller retail outlets. We sell directly to the large chains by shipping our products to their respective distribution centers. We sell our products to smaller retail outlets either directly or through a middleman distributor, ANDA Distributors, who distributes to approximately 16,000 stores of which approximately 200 stores currently carry at least one of our OTC products. In addition, approximately 200 small retailers purchase our products directly from us. We also sell our products on the Internet through two websites: Drugstore.com and Amazon.com. Currently we do not sell our products directly to the public because we do not want to compete with our retail outlets. We sell at least one of the products from our line of OTC products to the following large chain stores, which include drug stores, mass merchandisers, and food stores (some stores do not carry our entire line of OTC products) as set forth in the table below. With the exception of Wal-Mart, we do not sell in all of the stores of each of the retail chains. EarlyDETECT Distributor Channels Name of Distribution Outlet Products Carried by Each Distribution Outlet Number of Stores in Each Distribution Outlet Carrying Product Location Albertson (including Save-On) Glucose 490 CA, NV, OR, NM, AZ, and UT Hyvee Entire Line 495 Midwest Meijer Entire Line 365 Midwest Circle K Pregnancy 195 CA and NV Big Lots Pregnancy 200 CA PathMark Entire Line 125 Northeast General Nutrition Colorectal, Glucose, Cholesterol 120 Nationwide Wal-Mart Colorectal 1,985 Nationwide In addition to our activities relating to the sales of our 20 products, we are engaged in certain research and development activities in two broad areas: to increase our IVD products line and to continue our attempts to develop two bio-pharmaceutical products. These two products are our H5N1 Avian Flu vaccine for birds and our SB15 compound to treat certain anxiety-related diseases and disorders. Neither of these two products are currently generating any revenue. However, we intend to devote approximately eight percent of the proceeds from this offering to our research and development activities devoted to these two bio-pharmaceutical products and approximately two percent of the proceeds from this offering to enhance our existing IVD product line. There can be no assurance that our research and development efforts will be successful in producing commercially viable products or in improving our existing IVD product line. We have never been profitable. Since our inception, we have generated aggregate revenues of $1,202,315, of which $763,809 was generated prior to 2004. Since the end of our most recent fiscal year ending August 31, 2006 through the nine months ending May 31, 2007 we have lost $30,325,571 on sales of $287,291. We have suffered significant losses since our inception and these losses have increased yearly with the most significant increase occurring from fiscal year 2005 (a net loss of $5,652,135) to fiscal year 2006 (a net loss of $20,062,078). Our loss of $30,325,571 since August 31, 2006 is primarily attributed to acquisition costs and offsets associated with our acquisitions of Sherman Biotech and Pan Probe Biotech. We currently manufacture (including repackaging and assembling) and market 20 products for consumer and professional markets in the United States. Except for our DNA Paternity Test, all of our products are sold pursuant to U.S. Food and Drug Administration regulations that apply to screening tests known as Class I and Class II FDA 510(K) tests. See the EarlyDETECT Product List Information Table on page 4. All of our products are designed to provide instant or rapid test results using simple and sanitary testing devices. The results of our IVD tests are designed to be easily read by consumers. Our products do not require refrigeration. Our IVD test kits are packaged individually for the retail market and in bulk for professional channels. Of our 20 products, ten are sold in the OTC market primarily through large retail chains or smaller retail outlets and ten are sold in the POC market primarily to health clinics, physician offices, correctional institutions, and hospitals. Our products are available through the Internet. We consider our glucose tests as two separate products because we sell it in both the OTC and POC markets with some slight variation. The same holds true for our urinary tract infection tests. When we say we manufacture products we mean that we either combine and repackage components from FDA regulated third party vendors or, we manufacture at least one of the components in the test kit ourselves. Currently, we directly manufacture three POC test kits as follows: pregnancy, menopause, and drugs-of-abuse. The vast majority of our products are sold in packages that carry our EarlyDETECT name and logo, with respect to which we own the trademark. We also sell certain of our products under a different trademark that we own - LiveSURE. Currently, we are selling LiveSURE branded products only to the Big Lots retail chain. The retail prices to the consumer of our OTC products generally range from approximately $9.95 to approximately $19.95 per kit. We sells our POC products by the case of 25 or 50 kits to a case. We charge our POC purchasers per case a range of approximately $5.00 to $265.00 and we charge our wholesale purchasers per kit a range of approximately $3.25 to approximately $180. Registration No. 333-_______________ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________________ FORM S-1 Registration Statement Under The Securities Act Of 1933 ___________________ EARLYDETECT INC. (Exact name of registrant as specified in its charter) Nevada (State or jurisdiction of incorporation or organization) 2835 (Primary Standard Industrial Classification Code Number) 88-0368729 (IRS Employer Identification No.) 2082 Michelson Dr., Suite 212 Irvine, CA 92612 (949) 553-1127 (Address and telephone number of principal executive offices and principal place of business) Charles A. Strongo Chief Executive Officer 2082 Michelson Dr., Suite 212 Irvine, CA 92612 (949) 553-1127 (Name, address and telephone number for agent for service) Copies of all communications to: Raymond A. Lee, Esq. Chris Y. Chen, Esq. Greenberg Traurig, LLP 650 Town Center Drive, Suite 1700 Costa Mesa, CA 92626 (714) 708-6500 David S. Cooper, Esq. Daniel H. Kolber, Esq. Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C. 3414 Peachtree Road, Suite 1600 Atlanta, GA 30326 (404) 577-6000 Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: o If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o The following describes our product line. EarlyDETECT Pregnancy Wand Test (OTC) and EarlyDETECT Cassette Test (POC): This test series uses simplified technology. It is used by consumers in their home (OTC) and by the professional market (POC) to determine pregnancy. We believe that of all consumer IVD tests on the market sold by us or our competitors, the pregnancy test is the most popular. We know of at least five other companies who compete with us regarding this product. EarlyDETECT Ovulation Wand Test (OTC) and EarlyDETECT Ovulation Cassette Test (POC): This test series predicts the onset of ovulation. Ovulation tests are widely used by women trying to conceive. We know of at least four other companies who compete with us regarding this product. EarlyDETECT Menopause Wand Test (OTC) and EarlyDETECT Menopause Cassette Test (POC): This test series is a simple urine-based test to determine if menopause has occurred. This test shows if there is a high constant level of follicle-stimulating hormone, indicating that menopause has taken place. EarlyDETECT Drugs-of-Abuse Cup Test (OTC) and EarlyDETECT Drugs-of-Abuse Dipstick Multipanel Test (POC): This test series detects the presence of metabolites of cocaine, marijuana, methamphetamines, amphetamines, benzodiazepines, PCP, and opiates in urine. The tests are sold to a variety of markets such as parents, governmental agencies, schools, and employers. Our tests are completed onsite within ten minutes. EarlyDETECT Glucose Test (same product for OTC and POC markets with different packages): This test indicates the apparent presence of diabetes or hypoglycemia. EarlyDETECT Cholesterol Test (OTC) and EarlyDETECT Cholesterol Colormetric Test (POC): This test series determines the levels of cholesterol in whole blood which assists in combating the treat of heart disease. Early DETECT Cholesterol Test (OTC) and EarlyDETECT Cholesterol Test Colormetric Test (POC): This test series determines the levels of cholesterol in whole blood which assists in combating the threat of heart disease. EarlyDETECT Urinary Tract Infection Test (same product for OTC and POC markets with different packages): This test determines nitrates in urine, a symptom of urinary tract infection in men and women. EarlyDETECT Breast Self-Examination Pad (OTC only): This highly sensitive pad is used by women to self-examine their breasts on a routine basis, for the early detection of breast lumps. It reduces the friction of skin against skin, making lumps easier to feel. The test includes a six-minute video demonstrating the correct method of breast self-examination and stressing the need for early detection and treatment of breast cancer. EarlyDETECT DNA Paternity Test (OTC only): This test is a swab test. A sample is swabbed from the mouth of the mother, father, and child and the sample is sent to an independent unaffiliated lab for testing and analysis of DNA match. EarlyDETECT Colorectal Test (OTC only): In their early stages, colorectal diseases such as cancer, ulcers, hemorrhoids, polyps, colitis, diverticulitis, and fissures often do not show visible symptoms. This test detects unseen blood and thereby serves as an early warning signal for disease. A tissue is thrown in the toilet and the patient then sees if the tissue changes color thus indicating the presence of blood. We know of only one other competitor offering this type of product. EarlyDETECT Mononucleosis Test (POC only): This test is an antibody rapid diagnostic test, which indicates mononucleosis using whole blood samples. EarlyDETECT Strep A Test (POC only): This test is a rapid diagnostic test using reagents added to a swab containing a throat mucus sample. EarlyDETECT Influenza Test (POC only): This test is a diagnostic test, which indicates antibodies of influenza using whole blood samples. EarlyDETECT H-Pylori Test (POC only): This ten-minute test determines the presence of the Helicobacter-Pylori bacteria in the digestive system. EarlyDETECT Fecal Occult Blood (POC only): This test adds reagents to a stool sample to determine the existence of blood in the stool. CALCULATION OF REGISTRATION FEE Title of each class of securities to be registered Amount to be registered Proposed offering price per share Proposed maximum aggregate offering price Amount of registration fee Common stock, par value $0.001 per share 3,050,000(1 ) $ 10.00(2 ) $ 30,500,000(2 ) $ 936.35 Common stock, par value $0.001 per share 3,555,206(3 ) $ 10.00(4 ) $ 35,552,060(4 ) $ 1,091.45 (1) Includes 50,000 shares issued to the underwriters as part of compensation in connection with the offering. (2) The registration fee for securities to be offered by the Registrant is based on the offering price and such estimate is solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933. (3) This Registration Statement also covers the resale under a separate resale prospectus (the Resale Prospectus ) by selling stockholders of the Registrant of up to 3,555,206 shares of common stock previously issued to such selling stockholders as named in the Resale Prospectus. (4) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. EarlyDETECT Product List Information Name of Product FDA Class Designation (I, II, III) 510 (K) Number Over the Counter OTC Point of Care POC (1) Dates Pregnancy Wand Test II K050546 x 5-20-05 Cassette Test II K020968 x 7-15-02 Ovulation Wand Test I K983113 x 11-18-98 Ovulation Cassette Test I K951538 x 7-11-95 Menopause Wand Test I K030058 x 7-30-03 Menopause Cassette Test I K030058 x 7-30-03 Drugs-of-Abuse Cup Test II K992748 x 9-2-99 Drugs-of-Abuse Dipstick Multipanel Test II K990325 x 7-14-99 Glucose Test II K943503 x x 7-23-96 Cholesterol Test II K943279 x 5/01/95 Cholesterol Colorimetric Test I K864159/0 x 6-10-88 Urinary Tract Infection Test II K990873 x x 9-1-99 Breast Self-Examination Pad II K991469 x x 7-20-99 DNA Paternity Test x Colorectal Test II K850431/A x 6-17-85 Mononucleosis Test II K042272 x 2-23-05 Strep A Test I K924007 x 4-6-93 Influenza Test I K991633 x 9-24-99 H-Pylori Test I K024350 x 4-3-03 Fecal Occult Blood II K063673 x 3-5-07 ________ (1) Our Glucose Test, Urinary Tract Infection Test, and Breast Self-Examination Pad are the same products for OTC and POC markets, and we include them as part of our ten OTC products but do not double-count them in our ten POC products. In addition to the products described above, we are engaged in certain research and development activities with the objective of developing and marketing two bio-pharmaceutical drugs - an H5N1 Avian Flu vaccine for birds and a compound we call SB15 that might be used to treat anxiety related diseases and disorders. Neither of these products are ready to be marketed although we believe that the prospects for their development justifies spending approximately 8% of the proceeds from this offering to continue our research and development efforts. As of May 31, 2007 we spent approximately $75,000 and approximately $60,000 for research and development on the H5N1 Avian Bird Flu vaccine and the SB15 compound, respectively. We intend to devote approximately 2% of the proceeds from this offering to continue our research and development activities to improve our existing OTC and POC products lines by enhancing existing products and by adding new products. Currently of the 20 products that we now market we repackage or assemble components from third party vendors with respect to 17 of the products and manufacture three of the products ourselves. To the extent that we have the capacity to manufacture products directly as opposed or repackaging them or assembling them from others our operating margins should improve. Therefore, we intend to devote approximately 5% of the proceeds from this offering for the purpose of enabling us to manufacture products directly. There can be no assurances that we will be successful in manufacturing any or all of our products that we currently repackage or assemble. EXPLANATORY NOTE This Registration Statement contains a prospectus to be used in connection with the initial public offering of up to 3,000,000 shares of the Registrant's common stock through the underwriters named on the cover page of that prospectus (the "IPO Prospectus"). In addition, the Registrant registering on this Registration Statement for the resale of up to 3,555,206 shares of its common stock held by selling stockholders. Consequently, this Registration Statement contains a second prospectus to cover these possible resales (the "Resale Prospectus") by certain of the Registrant's stockholders named on the Resale Prospectus (the "Selling Stockholders"). The IPO Prospectus and the Resale Prospectus are substantively identical, except for the following principal points: they contain different outside and inside front covers; they contain different Offering sections in the Prospectus Summary section beginning on page 6; they contain different Use of Proceeds sections on page 16; the Capitalization section is deleted from the Resale Prospectus on page 17; the Dilution section is deleted from the Resale Prospectus on page 17; a Selling Stockholder section is included in the Resale Prospectus beginning on page 41A; references in the IPO Prospectus to the Resale Prospectus is deleted from the Resale Prospectus; the Shares Eligible for Future Sale section is deleted from the Resale Prospectus on page 42; the Certain Material U.S. Federal Income Tax Consequences to Non-US Holders section is deleted from the Resale Prospectus on page 43; the Underwriting section from the IPO Prospectus on page 46 is deleted from the Resale Prospectus and a Plan of Distribution is inserted in its place; the Legal Matters section in the Resale Prospectus on page 49 deletes the reference to counsel for the underwriters that is contained in the IPO Prospectus; and the outside back cover of the IPO Prospectus is deleted from the Resale Prospectus. The Registrant has included in this Registration Statement, after the financial statements, alternate pages to reflect the foregoing differences. On July 26, 2005, we purchased all the issued and outstanding shares of Pan Probe Biotech, Inc., a California corporation ( Pan Probe ), for an aggregate purchase price of $16,000,000 consisting of 2,500,000 shares of EDI common stock (approximately 15% of EDI s then issued and outstanding shares) valued at $12,500,000 ($5.00 per share) and an EDI note in the amount of $3,500,000 of which $3,500,000 is outstanding and which we intend to retire from the proceeds of this offering. We now operate Pan Probe as a wholly owned subsidiary. We purchased Pan Probe primarily because it employed Dr. Shujie Cui as its lead scientist and because of its leasehold interest in an FDA inspected and registered Class II (which includes Class I products such as our products) approximately 8,800 square foot diagnostic laboratory and plant to manufacture our products. This facility is located at 7936 Trade St., San Diego, CA. We maintain Pan Probe s Class II status by ensuring it meets FDA Good Manufacturing Practices (GMP s). The FDA is expected to inspect Pan Probe at least every two years. Dr. Shujie Cui is now our Chief Science Officer. The three POC test products we manufacture directly (pregnancy - cassette, menopause - cassette and drugs-of-abuse) requires us to produce certain reagents and anti-bodies which we do at our Pan Probe facility. On August 31, 2006, we acquired all the issued and outstanding shares of Sherman Biotech, Inc., a Delaware corporation ( Sherman Biotech ), for an aggregate purchase price of $15,000,000 in shares of our common stock. We now operate Sherman Biotech as a wholly owned subsidiary. We purchased Sherman Biotech primarily because of its knowledge and trade secrets related to its development of a compound known as SB15 which we intend to continue developing with the objective of marketing a commercially viable product that could be used for the treatment of anxiety-related diseases and disorders such as autism and Fragile X Syndrome also known as FXS. There can be no assurances we will be successful in developing SB15. Our principal executive offices are located at 2082 Michelson Dr., Suite 212, Irvine, California 92612. Our telephone number is (949) 553-1127 and our fax number is (949) 752-6195. Our website address is www.earlydetect.com. The information on, or accessible through, our website is not part of this prospectus. EarlyDETECT and LiveSURE are our trademarks. This prospectus also contains trademarks and tradenames of other companies not affiliated with us. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE HAVE FILED A REGISTRATION STATEMENT WITH THE SECURITIES AND EXCHANGE COMMISSION RELATING TO THIS OFFERING. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED AUGUST 16, 2007 PROSPECTUS 3,000,000 Shares Maximum offering of 3,000,000 shares Minimum offering of 1,000,000 shares Common Stock $10.00 per Share EARLYDETECT INC. [LOGO] ______________ This is a public offering of 3,000,000 shares of common stock by EarlyDETECT Inc. We are offering through our underwriters on a best efforts basis a minimum of 1,000,000 shares and up to a maximum of 3,000,000 shares of our common stock. The offering period shall commence on the effective date of this prospectus until the earlier of: December 31, 2007 or the date we have sold all of the shares we are offering or such other date as may be agreed upon by our underwriters and us. Until the closing of the offering, all proceeds received from this offering will be placed into a non interest-bearing escrow account at [_____________] and will not be released until at least the minimum offering of 1,000,000 shares of common stock are subscribed for and paid for. If the minimum offering is not reached within ___ days from the date of this Prospectus (unless we extend it with the consent of the underwriters for up to ___ additional days), all funds placed in the escrow account will be promptly returned without interest. Purchasers of our common stock will have no right to the return of their funds during the term of the escrow. The termination date for the maximum offering is ___ days from the date of this Prospectus. See Underwriting. We anticipate that the initial public offering price of our common stock will be $10.00 per share. Assuming an initial public offering price of $10.00 per share, the aggregate purchase price of the common stock offered hereby would be $10,000,000 for the minimum offering and $30,000,000 for the maximum offering. EarlyDETECT Inc. is a Nevada corporation that was formed on September 19, 1996 under the name Advance Medical Systems Inc. and on June 25, 2002 changed its name to EarlyDETECT Inc. This is an initial public offering of our common stock and prior to this offering there has been no public market for our securities. EarlyDETECT Inc. ( EDI ) is an early stage company that has not generated any net revenues. Our products are currently available for purchase at certain retail chain outlets and elsewhere as more fully explained herein. We need money from this offering in order to increase our manufacturing, marketing, and sales effort among other uses. We are applying to have our common stock quoted for trading on the Nasdaq Capital Market under the symbol ERLY . There can be no guarantee that we will be successful in having our stock listed thereon although we believe we will meet the Nasdaq Capital Market minimum listing requirements. See the Risk Factors listed under Risk Factors beginning on page 8. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. This Offering Securities offered A minimum of 1,000,000 shares of common stock and a maximum of 3,000,000 shares of common stock. Common stock outstanding after this offering if the maximum amount is fully subscribed based on 22,437,099 shares outstanding as of August 1, 2007 25,437,099 Use of proceeds The principal purposes of this offering are to increase our marketing and sales efforts with respect to our existing line of 20 products, fund our development activities so we can directly manufacture more than our current number of three products instead of repackaging them from components obtained from others, fund the use and operations of a laboratory and manufacturing facility for the purpose of developing two biopharmaceutical products - H5N1 Bird Flu vaccine and SB15 compound, repay certain outstanding loans and increase our working capital and funding for general corporate purposes, including marketing and increasing inventory. See Use of Proceeds beginning on page 16. Risk Factors The securities offered by this prospectus involve a high degree of risk and should be considered speculative. Investors who cannot afford to lose their entire investment should not purchase the securities. See Risk Factors beginning on page 8. Dividend policy We do not anticipate declaring or paying any regular cash dividends on our common stock in the foreseeable future. Any payment of cash dividends on our common stock in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, earnings, capital requirements, financial condition, future prospects, contractual restrictions and other factors deemed relevant by our Board of Directors. Proposed Nasdaq Capital Market symbol ERLY We have 22,437,099 shares of common stock outstanding as of August 1, 2007. Unless the context indicates otherwise, all share and per-share common stock information in this prospectus assumes a public offering price of $10.00 per share. Public Offering Price Proceeds to Us(1) Per share $ $ Minimum offering $ $ Maximum offering $ $ (1) The expenses of this offering will include an aggregate of 11% of the gross proceeds from the offering payable to the underwriters, including commission and non-accountable marketing expense allowance. Such fees and expenses range from $1,100,000 for the minimum offering to $3,300,000 for the maximum offering. In addition, we have issued to the underwriters 50,000 shares of common stock and a warrant to purchase that number of common stock equal to 10% of the number of shares sold in the offering. MidSouth Capital, Inc. The date of this Prospectus is ________________, 2007
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. It is not complete and may not contain all of the information that is important to you. To understand this offering fully, you should read the entire prospectus carefully. Investors should carefully consider the information set forth under the heading "Risk Factors." In this prospectus, the terms "Maverick" "we," "us," and "our" refer to Maverick Oil and Gas, Inc. Our Company We are an early stage independent energy company seeking to economically find and develop oil and gas reserves. Our primary areas of concentration are in the Barnett Shale play of Wise County, Texas, and the Fayetteville Shale play of eastern Arkansas. We have smaller non-operated interests in projects in South Texas (Zapata County), West Texas (Turner/Escalera) and the Piceance Basin of Colorado (Whitewater). We are managed by a small team of highly experienced technical and managerial employees, led by our Chief Executive Officer, Mr. James A. Watt. Mr. Watt joined the company in August of 2006. He began his career as a geophysicist in 1971 with Amoco Production Company. Since that time, he has held numerous exploration and production managerial positions with several independent oil companies. In 1997, he became President and Chief Operating Officer of Box Energy Corporation, later renamed Remington Oil and Gas Corporation. As Chief Executive Officer of Remington, he led the company through a major corporate restructuring and initiated and implemented a successful offshore exploration program in the Gulf of Mexico. The company was sold to another offshore producer in June of 2006. We seek to acquire and exploit properties with certain of the following characteristics: Significant upside from exploratory drilling or applied technology Near existing infrastructure and within established productive trends Favorable long term economics Potential to acquire meaningful working interests and become operator These opportunities will be generated from the initial stages of exploration, from investing in ongoing operations of others, from acquisition of properties from others and from time to time in corporate transactions. We intend to place primary emphasis on issuances of public and private debt and equity to finance our business. Our ability to generate future revenues and operating cash flow will depend on the successful exploration, exploitation and acquisition of oil and gas producing properties, the volume and timing of Exploratory Wells: Oil 4 0.9 1 0.7 Gas 9 2.3 8 2.8 Dry 2 0.4 Total Wells: Oil 5 1.3 2 0.2 Gas 10 2.4 9 3.4 Dry 3 0.7 our production, as well as commodity prices for oil and gas. Such pricing factors are largely beyond our control, and may result in fluctuations in our earnings. We currently have interests in five project areas. The most successful project to date is in the Barnett Shale play in Wise County, Texas. In the Maverick operated portion of the leasehold, we have one well producing and one shut in pending a potential work over. In the non-operated portion of the leasehold we have four wells producing. Numerous additional locations are possible on this approximately 9700 gross (3500 net) acre block. It is anticipated this area will be sold in early 2007. Our largest potential play is in the Fayetteville Shale of Woodruff County, Arkansas. We have leased approximately 125,000 gross (56,400 net) acres in the play and drilled four test wells. Although these wells have not established production to date, further tests are necessary to determine the commerciality of this area. Our limited capital resources have caused us to scale back our activity in the play. We are currently observing industry activity in the area and seeking a partner to participate in further testing of our existing wells and drilling new wells to delineate the acreage. The Whitewater project is a shallow Cretaceous age sand play in Mesa and Delta counties of the Piceance basin of Colorado. Recent drilling activity in which we participated indicated the area could yield commercial production; however, significant infrastructure investments are required to bring this production to market. We are negotiating the sale of the property. We have a minor interest in two producing wells in Zapata County. Additionally, we participated in several tests in the Turner/La Escalera area of West Texas that were not successful. We do not anticipate any further activity in these two areas. The terms of our Secured Convertible Debentures require us to use our best efforts to secure a bona fide offer for the purchase of our interest in the Barnett Shale property by December 31, 2006, and to complete the sale of that property by February 28, 2007. The proceeds from the sale of our interest in the Barnett Shale property must be applied towards the $36,750,000 principal amount we owe under our outstanding Secured Convertible Debentures, plus a 25% prepayment penalty. Thus, to the extent sales proceeds are less than $44,250,000, some portion of our Secured Convertible Debentures will remain outstanding. However, following a sale of our Barnett Shale property, we will not have the capital resources to repay any such remaining amounts in the absence of a material new financing transaction, as to which we can offer no assurances. Furthermore, if the cash consideration to be received by us in any such sale is less than $35 million, we will need to obtain the consent of the holders of a majority of the outstanding principal amount of the Secured Convertible Debentures for the sale. We received a non-binding offer to purchase the Barnett Shale property prior to the December 31, 2006 deadline and we are in the process of negotiating the terms of a definitive agreement with the party that submitted the offer. That transaction, if completed pursuant to the terms of the offer, would generate net sale proceeds for our portion of the property of less than $35 million. We have tentatively received the consent of the holders of our Secured Convertible Debentures to pursue the completion of that transaction. If we do not obtain the holders consent to the completion of the transaction or are otherwise unable to complete the transaction by February 28, 2007, the holders of our Secured Convertible Debentures would have the right to redeem a portion of the Secured Convertible Debentures and we do not have funds available for that purpose. If we are able to complete the transaction, since the anticipated proceeds would be less than the amount required to redeem all of our outstanding Secured Convertible Debentures, a substantial principal amount of our Secured Convertible Debentures would remain outstanding. As we work to complete a sale of the Barnett Shale property, we intend to examine alternative methods by which we can recapitalize and refinance the Company. Since the sale would leave us with a substantial principal balance outstanding under the Secured Convertible Debentures, we will need to refinance the Secured Convertible Debentures and secure additional financing thereafter to fund our continued plan of operations. This includes the continued development of our Fayetteville Shale project (if interim evaluation demonstrates the appropriate value proposition), as well as locating and acquiring additional exploration opportunities and development projects with existing production. If Total 3 0.9 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (1) Excludes 5,225,000 shares sold by us in a private placement on December 19, 2006, that are in the process of being issued. Amendment No. 2 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Total proceeds raised by offering: We will not receive any proceeds from the resale or other disposition of the shares covered by this prospectus by any selling shareholder. We will receive proceeds from exercise of the warrants for shares of common stock that are covered by this prospectus if those warrants are exercised for cash. If the warrants are exercised by means of "cashless exercise," we will not receive any additional proceeds. In addition, our obligation to pay amounts otherwise due under the January 2006 Debentures and June 2006 Debentures will be reduced as a result of the issuance of our common stock in conversion or redemption of, or the payment of the principal of, or interest on, any such debentures.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001207074_virtusa_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001207074_virtusa_prospectus_summary.txt
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+Prospectus summary This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including Risk factors on page 7 and our consolidated financial statements and related notes on page F-1, before making an investment decision. Unless the context otherwise requires, we use the terms Virtusa, the company, we, us and our and similar references in this prospectus to refer to Virtusa Corporation and its subsidiaries. Our company We are a global information technology services company. We use an offshore delivery model to provide a broad range of information technology, or IT, services, including IT consulting, technology implementation and application outsourcing. Using our enhanced global delivery model, innovative platforming approach and industry expertise, we provide cost-effective services that enable our clients to use IT to enhance business performance, accelerate time-to-market, increase productivity and improve customer service. Headquartered in Massachusetts, we have offices in the United States and the United Kingdom and global delivery centers in Hyderabad and Chennai, India and Colombo, Sri Lanka. We have experienced compounded annual revenue growth of 50% over the five-year period ended March 31, 2007. Our enhanced global delivery model leverages a highly-efficient onsite-to-offshore service delivery mix and proprietary tools and processes to manage and accelerate delivery, foster innovation and promote continual improvement. Our global service delivery teams work seamlessly at our client locations and at our global delivery centers in India and Sri Lanka to provide value-added services rapidly and cost-effectively. They do this by using our enhanced global delivery model, which we manage to a 20/80 onsite-to-offshore service delivery mix. We apply our innovative platforming approach across all of our services. We help our clients combine common business processes and rules, technology frameworks and data into reusable application platforms that can be leveraged across the enterprise to build, enhance and maintain existing and future applications. Our platforming approach enables our clients to continually enhance their software platforms and applications in response to changing business needs and evolving technologies while also realizing long-term and ongoing cost savings. We provide our IT services primarily to enterprises engaged in the following industries: communications and technology; banking, financial services and insurance; and media and information. Our current clients include leading global enterprises such as Aetna Life Insurance Company, British Telecommunications plc, ING North America Insurance Corporation, International Business Machines Corporation, Iron Mountain Information Management, Inc., JPMorgan Chase Bank, N.A. and Thomson Healthcare Inc., and leading enterprise software developers such as Pegasystems Inc. and Vignette Corporation. We have a high level of repeat business among our clients. For instance, during the fiscal year ended March 31, 2007, 97% of our revenue came from clients to whom we had been providing services for at least one year and 84% came from clients to whom we had been providing services for at least two years. Our top ten clients accounted for approximately 65%, 62% and 72% of our total revenue in the fiscal years ended March 31, 2005, 2006 and 2007, respectively. At March 31, 2007, we had 3,576 employees, or team members, and for the fiscal year ended March 31, 2007, we had revenue of $124.7 million and income from operations of $14.2 million. Table of Contents Market opportunity The role of IT in enterprises has grown far beyond operational support to become a source of competitive advantage. Leading enterprises are using IT to accelerate time-to-market, increase productivity and improve customer service. Business and IT leaders recognize that delivering these benefits cost-effectively is vital to the success of their enterprises. Many enterprises increasingly manage their technology costs and resource constraints by outsourcing IT services offshore. According to a 2006 IDC report, 20.8% of U.S. IT services, including application management, custom application development, IT consulting, information systems outsourcing, systems integration and other related activities, will move to offshore players by 2010. A 2005 NASSCOM-McKinsey report estimates that global offshore IT services adoption will grow at a compounded annual growth rate of 24.4%, from $18.4 billion for the 12 months ended March 31, 2005 to $55.0 billion for the 12 months ending March 31, 2010. Engaging offshore IT service providers to improve business performance, beyond reducing costs, can be challenging. The rate of technological change, the impact of mergers and acquisitions and a historical approach to building and managing stand-alone, legacy IT systems and applications have led to fragmented IT environments, which are complex, inefficient and costly to maintain and operate. We believe enterprises seek service providers that can cost-effectively address this range of complex challenges. Our solution Our broad range of IT services, enhanced global delivery model and innovative platforming approach enable us to deliver IT solutions to our clients that enhance business performance, accelerate time-to-market, increase productivity and improve customer service. Our enhanced global delivery model enables us to deliver IT services cost-effectively. We reduce the effort and costs required to maintain and develop IT applications on an ongoing basis by streamlining and consolidating our clients applications. We believe that our solution provides our clients with the consultative and high-value services associated with large consulting and systems integration firms, the cost-effectiveness associated with offshore IT outsourcing firms and the ability to streamline and continually improve their software platforms and applications. Our growth strategy Key elements of our growth strategy include: Deepen and grow our client base. We seek to deepen and broaden our existing client relationships and grow our client base. We focus on expanding existing client relationships and converting new engagements to long-term relationships. For example, in March 2007, British Telecommunications plc entered into a five-year IT services agreement with us and also purchased, through a wholly-owned subsidiary, 918,807 shares of our common stock. We also have a dedicated business development team focused on generating engagements with new clients. Expand our service offerings. We seek to create new and innovative service offerings by analyzing emerging technologies and industry trends and changing client needs. Our industry solution teams work closely with our marketing group, industry and technology practice groups and research and development teams to develop new, highly-differentiated services. Table of Contents Table of Contents Deepen and expand our industry expertise. We seek to deepen our existing industry expertise and to develop expertise in new industries. We plan to extend our domain expertise beyond those industries that we currently serve to adjacent industries, where we can directly leverage existing in-house skills, experience and client relationships. Strengthen our brand. We seek to enhance our profile and brand equity to help us acquire new clients, enhance our existing client relationships and attract and retain talented team members. We believe our platforming approach to IT services positions us as a thought leader with clients and enables us to attract and retain talented team members. Develop new strategic alliances. We seek to strengthen our existing strategic alliances and build new ones. We intend to leverage our strategic alliances to win new clients, extend our services to existing clients and enter new geographic or industry markets. We believe that some of these alliances with software company clients enable us to compete more effectively for the technology implementation and support services required by our clients customers. Risks affecting us Our business is subject to numerous risks, as more fully described under Risk factors beginning on page 7, which you should carefully consider prior to deciding whether to invest in our common stock. For example: our revenue is highly dependent on a small number of clients and the loss of any one of our major clients could significantly harm our results of operations and financial condition the IT services market is highly competitive and our competitors may have advantages that may allow them to compete more effectively than we do to secure client contracts and attract skilled IT professionals if we cannot attract and retain highly-skilled IT professionals, our ability to obtain, manage and staff new projects and continue to expand existing projects may result in loss of revenue and an inability to expand our business our quarterly financial position, revenue, operating results and profitability are difficult to predict and may vary from quarter to quarter, which could cause our share price to decline significantly Our corporate information We were originally incorporated in Massachusetts in November 1996 as Technology Providers, Inc. We reincorporated in Delaware as eRunway, Inc. in May 2000 and subsequently changed our name to Virtusa Corporation in April 2002. Our principal executive offices are located at 2000 West Park Drive, Westborough, Massachusetts 01581, and our telephone number at this location is (508) 389-7300. Our website address is www.virtusa.com. We have included our website address as an inactive textual reference only. The information on, or that can be accessed through, our website is not part of this prospectus. Table of Contents The offering Common stock offered by us 4,400,000 shares Common stock to be outstanding after this offering 22,826,867 shares Use of proceeds We expect to use approximately $30 million of the net proceeds from this offering to fund the construction and build-out of a new facility on our planned campus in Hyderabad, India. The balance of the net proceeds will be used for working capital and other general corporate purposes, including to finance the expansion of our global delivery centers in Chennai, India and Colombo, Sri Lanka, the hiring of additional personnel, sales and marketing activities, capital expenditures, the costs of operating as a public company and possible strategic alliances or acquisitions. See Use of proceeds. Over-allotment option The underwriters have an option for a period of up to 30 days to purchase from us and the selling stockholders up to 197,205 additional shares and 462,795 additional shares, respectively, of common stock to cover over-allotments.
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+The items in the following summary are described in more detail later in this prospectus. This summary does not contain all the information you should consider before investing in our common stock. You should carefully read the more detailed information set out in this prospectus, especially the risks of investing in our common stock that we discuss under the "Risk Factors" section, as well as the financial statements and the related notes to those statements included elsewhere in this prospectus. References in this prospectus to "we," "us," "our," "company" and "XTENT" refer to XTENT, Inc. unless the context requires otherwise. Overview We are a development stage medical device company focused on developing and commercializing our innovative customizable drug eluting stent systems for the treatment of coronary artery disease, or CAD. Our drug eluting stent systems are designed to enable physicians to customize both length and diameter of the stent at the site of the diseased section of the artery, or lesion, which we refer to as in-situ customization. Our stent systems are designed to treat longer lesions than currently available drug eluting stents and multiple lesions with the use of a single device. Our stent systems, the Custom NX 36 and the Custom NX 60, incorporate a modular cobalt chromium stent design as well as a proprietary delivery system. In addition, our stents have a drug coating that is made up of Biolimus A9, an anti-inflammatory drug, and PolyLactic Acid, a biodegradable polymer, which in combination are intended to reduce the incidence of restenosis, or renarrowing of the previously treated artery over time. We believe our technology, if approved by regulatory authorities, will enable us to compete in the approximately $5.3 billion worldwide drug eluting stent market. We are developing 36mm and 60mm stent systems based on our proprietary technology platform. Our stent design is modular in that it consists of multiple 6mm segments in which the ends of each segment interleave with the ends of the adjacent segments, or are interdigitated. This interdigitated, modular stent design allows the physician to customize the stent length and deploy the necessary stent segments in the artery in-situ. Our delivery system incorporates a protective sheath and a proprietary mechanism to control the number of stent segments deployed. Our first two stent systems in development are the Custom NX 36 and the Custom NX 60. We believe that these two systems will enable physicians to provide a therapeutic solution for the majority of CAD patients treated with currently marketed drug eluting stents. Our Custom NX 36 is customizable in length and designed to treat single or multiple lesions. Our Custom NX 60 is designed to give physicians a suitable length stent to treat one long lesion or multiple smaller lesions with the use of one device, reducing the need for multiple catheter exchanges and related device costs. We believe that the ability to customize our stent and potentially treat multiple lesions and long lesions with one device may improve procedural efficacy and efficiency and lower costs. Status of Regulatory Approval Our Custom NX DES Systems are combination devices that include a stent and drug coating, for which we must receive regulatory approval as a medical device before we can market our systems. We are conducting clinical trials to evaluate our Custom NX 36 and Custom NX 60 stent and stent delivery systems. In May 2006, the eight month clinical data from our CUSTOM I clinical trial was presented at the 2006 Paris Course on Revascularization conference and in October 2006, six month clinical data from our CUSTOM II clinical trial for 40 patients was presented at the 2006 Transcatheter Cardiovascular Therapeutics conference. We believe the data from these clinical trials provided preliminary evidence of safety and efficacy and supports further development of our in-situ customization approach. We completed enrollment of our CUSTOM II and initiated our CUSTOM III clinical trials, which are designed to further evaluate the safety and efficacy of in-situ customization with our stent systems, particularly in long lesions and multiple lesions. Assuming the results from these trials are favorable, we believe that the data from our CUSTOM I, II and III clinical trials will be sufficient to support our submission to our designated Notified Body in the European Union for CE Mark. We expect to submit our application for CE Mark in late 2007. We will need premarket approval, or PMA, from the U.S. Food and Drug Administration, or FDA, before we can market our products in the United States, which we expect will require data from large clinical trials of up to 2,500 patients. To initiate these clinical trials, we must first obtain clearance of an investigational device exemption, or IDE, from the FDA. We anticipate applying for our IDE in the first half of 2007 based on the results from our CUSTOM I, II and III clinical trials. We expect to submit a PMA application to the FDA in 2009. We expect to be able to commercialize our products, at the earliest, in the European Union in the second half of 2008 and in the United States in the first half of 2010. Recently published clinical data indicates that higher rates of blood clot formation, or thrombosis, which could lead to heart attacks or death, has occured in patients who received drug eluting stents when compared to patients who received bare metal stents. As a result of this clinical data, the use of bare metal stents has reportedly increased, and the use of drug eluting stents has correspondingly decreased, at certain hospitals in the United States and elsewhere. In response, the FDA evaluated this clinical data during a public meeting of its Circulatory System Devices Advisory Panel on December 7 and 8, 2006. The FDA has not issued final conclusions or recommendations from this meeting. The Panel made the following statements in response to the FDA's questions: The Panel agreed that drug eluting stents are associated with a clinically important numerical excess of late-stent thromboses compared to bare metal stents. The Panel concluded that drug eluting stents were not associated with an increased risk of death or heart attacks compared to bare metal stents despite an apparent increase in late-stent thrombosis rates. The Panel requested longer-term follow-up and an increased number of patients in future drug eluting stent clinical trials. The Panel reached consensus that the drug eluting stent safety concerns do not outweigh their benefits compared to bare metal stents when used within the limits of the currently approved FDA indications. The Panel discussed different options for modifying the labeling of drug eluting stents. The Panel's opinion is advisory and the FDA has not issued final conclusions or recommendations from this meeting. We cannot assure you that any long-term data produced in response to the Panel's request will support its current conclusions and the FDA may determine to alter or change its determination regarding the safety and efficacy of drug eluting stents. Any adverse determination by the FDA regarding the safety and efficacy of drug eluting stents would cause delays in, and require us to modify, our planned clinical trials and have a significant adverse impact on our business. We license our drug coating from Occam International, B.V., or Occam, a wholly-owned subsidiary of Biosensors International Group, Ltd., which together with Occam and each of their affiliated companies, are referred to as Biosensors in this prospectus. Regulatory approvals of our products are dependent upon Biosensors obtaining a favorable opinion from the relevant drug authority on its drug master file, or DMF, in the European Union and approval from the FDA in the United States. Market Opportunity Coronary artery disease, or CAD, is the most common form of cardiovascular disease and the number one cause of death in the United States and Europe. CAD is primarily caused by the accumulation of UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 fat-laden cells, also known as plaque, in the arteries leading to the heart. Over time, the accumulation of plaque in an artery, known as a lesion, narrows the diameter of its lumen, or inner channel, and may significantly reduce or stop blood flow. A reduction in blood flow to the heart can cause chest pain, a heart attack or potentially death. CAD accounts for over 650,000 deaths annually, and according to the American Heart Association, affects over 13 million Americans. Risk factors for CAD include old age, smoking, diabetes, obesity, sedentary lifestyle and an individual's genetic history. Evolution of Treatments for Coronary Artery Disease A number of surgical procedures and interventional therapies have been developed over the past four decades to treat CAD, each with the goal of quickly and safely restoring blood flow. The treatment of CAD has experienced significant innovation and has evolved from invasive coronary artery bypass graft surgery to percutaneous coronary interventions, or PCIs, such as balloon angioplasty and coronary stenting. The most recent PCI innovation was the development of drug eluting stents. Currently marketed drug eluting stents are conventional bare metal stents that are coated with a drug that is designed to reduce restenosis. The development of drug eluting stents has resulted in a rapid shift in physician treatment of CAD and drug eluting stents are used in approximately 89% of the stent procedures in the United States. In 2005, according to Millennium Research Group, a third-party consultant compensated by us for the use and analysis of their market data, drug eluting stents were used in 1.5 million of the 2.2 million coronary stent procedures performed worldwide. Evolution of Delivery Methods for Percutaneous Coronary Interventions In addition to the advancements in therapies, the methods of their delivery have also improved over time. These improvements have made PCI procedures easier to perform for physicians and have reduced the amount of time for a single procedure. The most recent innovation in the delivery of therapies was the development of rapid exchange delivery systems, which allow the procedure to be performed by a single operator. Rapid exchange systems are used in the majority of PCI procedures today. According to Millennium Research Group, in 2005, 70% of the drug eluting stents used in the United States were delivered with a rapid exchange system. Despite improving procedural efficiency, rapid exchange systems still require time consuming catheter exchanges when multiple devices are needed for a single procedure. Limitations of Current Percutaneous Coronary Intervention Therapies Although significant advances have been made with drug eluting stents, we believe the designs of current stents and methods of delivery limit effectiveness for patients and efficiency of the physicians treating CAD and can result in increased costs for healthcare providers. Current commercially available stent systems include stents with fixed-lengths of up to 33mm, and require a separate device for each stent used. Fixed-length stent systems require physicians to estimate the size and shape of the artery's lumen, and then use their judgment to select the proper length and diameter stent for the lesion. The characteristics of existing technology lead to the following limitations: Inability to customize treatment options in-situ; Multiple catheter exchanges required to treat one or multiple lesions; Overlapping of stents to cover long lesions; Inaccurate placement of stents; Alteration of the artery anatomy; and AMENDMENT NO. 6 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Required physician planning and inventories. We believe that while current stent systems can provide effective therapy for patients, there is a significant opportunity for improvement in efficacy, efficiency and cost due to the limitations described above. The XTENT Solution Our customizable drug eluting stent systems are designed to enable the treatment of single lesions, long lesions and multiple lesions of varying lengths and diameters, in one or more arteries with a single device. We believe our Custom NX DES Systems' ability to customize therapy without the need to exchange catheters may enable physicians to treat patients more effectively and efficiently. We believe that the potential benefits provided by our technology include the following: In-Situ Customization. Our Custom NX DES Systems are designed to allow physicians to determine the appropriate length of stent for the patient while inside the artery at the site of the lesion, or in-situ. Treatment of Multiple Lesions With a Single Device. Our Custom NX DES Systems are comprised of multiple segments that are interdigitated. The physician can distribute the stent segments across multiple lesions in a customized manner in increments of 6mm. Treatment of Long Lesions Without Multiple Overlapping Stents. Our Custom NX 60 is designed to be able to effectively treat longer sections of diseased artery as compared with current fixed-length alternatives. Physicians can place up to 60mm of stent to treat a single long lesion. Improved Stent Placement Accuracy. We believe the ability to customize the length of the stent while in the patient's artery may reduce the incidence of geographic miss and the resulting problems of thrombosis and the need for reinterventions. Increased Stent Flexibility and Deliverability. Our stents incorporate a modular design consisting of multiple individual segments, which we believe provides increased stent flexibility. We believe our stent's increased flexibility may allow an artery to better maintain its natural shape and curvature as well as move and flex with the contractions of the heart. Biodegradable Polymer as Our Drug Carrier. Our drug coating is biodegradable, leaving behind a thin permanent primer. Our primer has been commonly used for approximately 30 years on cardiac defibrillators, pacemakers, neurostimulators, catheters, needles and other medical device components. As a result, we believe our primer has an insignificant physiological response when used in the body. We believe the biodegradability of our drug coating may reduce the potential for late-stent thrombosis, or the occurrence of thrombosis 30 or more days after the procedure, that may be associated with durable polymers. Our Strategy Our goal is to become the world leader in the development and commercialization of drug eluting stent systems that will significantly improve the treatment of arterial disease. To achieve this goal, we are pursuing the following business strategies: Demonstrate the clinical safety and efficacy and gain regulatory approval of our Custom NX DES Systems; Commercialize and drive adoption of our Custom NX DES Systems; XTENT, INC. (Exact name of Registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 3841 (Primary Standard Industrial Classification Code Number) 41-2047573 (I.R.S. Employer Identification Number) 125 Constitution Drive Menlo Park, California 94025-1118 (650) 475-9400 (Address, including zip code and telephone number, including area code, of Registrant's principal executive offices) Build awareness and support among leading physicians; Leverage our technology platform into other indications; Expand and strengthen our intellectual property position; and Provide the highest quality products for our customers. Risks Associated With Our Business Our business is subject to numerous risks, as discussed more fully in the section entitled "Risk Factors" following this prospectus summary. We have a limited operating history and may be unable to accurately predict our future performance. We do not have any approved products for sale in any jurisdiction and as a result, have not generated revenue to date. As of September 30, 2006, we had an accumulated deficit of $46.9 million and we may never achieve profitability. We may be unable, for many reasons, including those that are beyond our control, to implement our current business strategy. We rely on a third-party, Biosensors, over whom we have little or no control for the supply of the drug coating we use on our stents and for submitting regulatory documentation to regulatory authorities for the use of this drug coating on stents. In order to demonstrate the safety and efficacy of our products we will likely need to conduct expensive clinical trials involving large patient populations comparing our stents to other currently established drug eluting stents. There can be no assurance that the results of these clinical trials will demonstrate the safety and efficacy of our stent systems. Our success also depends on our ability to effectively design, develop, maintain and prosecute adequate intellectual property coverage, obtain regulatory approvals for, and commercialize, our products. We will depend on the adoption of our products by physicians to generate revenue from the sales of our stent systems. We will compete with large multinational competitors who already have their own drug eluting stents on the market and who have more experience and resources in manufacturing, sales and marketing and research and development than we do. Corporate Information We were incorporated in Delaware in June 2002. Our offices are located at 125 Constitution Drive, Menlo Park, California 94025-1118, and our telephone number is (650) 475-9400. Our website is located at www.xtentinc.com. The information found on, or accessible through, our website is not a part of this prospectus. XTENT is a registered trademark of our company in the United States, the European Union and Australia. Applications for our XTENT trademark are pending in Canada and Japan. CUSTOM NX is a registered trademark of our company in Australia, the European Union and Japan. Applications for our CUSTOM NX trademark are pending in the United States and Canada. We have also applied to register NX as a trademark in the United States and the European Union and our XTENT logo as a trademark in the United States. All other trademarks, tradenames and service marks appearing in this prospectus are the property of their respective owners. Gregory D. Casciaro President, Chief Executive Officer and Director XTENT, Inc. 125 Constitution Drive Menlo Park, California 94025-1118 (650) 475-9400 (Name, address, including zip code and telephone number, including area code, of agent for service) The Offering Common stock offered by us 4,700,000 shares Common stock to be outstanding after this offering 22,796,308 shares Initial public offering price $ per share Use of proceeds We intend to use the net proceeds of this offering for clinical trials, research and development activities, building our commercialization infrastructure, working capital, and general corporate purposes. See "Use of Proceeds." Proposed NASDAQ Global Market symbol XTNT The number of shares of common stock that will be outstanding after this offering is based on 18,096,308 shares outstanding as of December 31, 2006, and excludes: 1,876,429 shares of common stock issuable upon exercise of all outstanding options under our 2002 Stock Plan at a weighted-average exercise price of $3.11 per share; 17,344 shares of common stock issuable upon exercise of all outstanding stand-alone options at a weighted-average exercise price of $0.34 per share; 132,113 shares of common stock reserved for future grant or issuance under our 2002 Stock Plan; 900,000 shares of common stock reserved for future grant or issuance under our 2006 Equity Incentive Plan and our 2006 Employee Stock Purchase Plan; and automatic annual increases in the number of shares of common stock reserved for issuance under our 2006 Equity Incentive Plan and 2006 Employee Stock Purchase Plan. Except as otherwise noted, all information in this prospectus assumes: a 1-for-2 reverse split of the shares of our common stock and convertible preferred stock on or before the closing of this offering; no exercise of the underwriters' over-allotment option; the conversion of all outstanding shares of our convertible preferred stock into 14,744,196 shares of our common stock upon the closing of this offering; and the filing of our amended and restated certificate of incorporation, which will occur immediately prior to the completion of this offering. Copies to: J. Casey McGlynn, Esq. Philip H. Oettinger, Esq. Elton Satusky, Esq. Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, CA 94304 (650) 493-9300 William C. Davisson, Esq. B. Shayne Kennedy, Esq. Latham & Watkins LLP 650 Town Center Drive 20th Floor Costa Mesa, CA 92626 (714) 540-1235 (1) See Note 2 of the notes to our financial statements for a description of the method used to compute basic and diluted net loss per share attributable to common stockholders and pro forma basic and diluted net loss per share. Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. (1) On a pro forma as adjusted basis to give effect to the conversion of all outstanding shares of redeemable convertible preferred stock into common stock upon the closing of this offering and to reflect the sale of 4,700,000 shares of our common stock in this offering at the assumed initial public offering price of $17.00 per share, the midpoint of the range on the front cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase or decrease in the assumed initial public offering price of $17.00 per share would increase or decrease, respectively, cash and cash equivalents, working capital, total assets and total stockholders equity by approximately $4.4 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
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+this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the Risk Factors section and our financial statements and the related notes appearing at the end of this prospectus, before making an investment decision. Adnexus Therapeutics, Inc. Overview We aim to build a leading biotechnology business that discovers, develops and commercializes our novel, proprietary drug class that we call Adnectins. We believe Adnectins possess competitive therapeutic, manufacturing and commercial advantages over traditional targeted therapeutic classes, such as antibodies and small molecules. We generate Adnectins from human fibronectin by applying our proprietary protein engineering system, PROfusion. Our scientists engineer trillions of protein variations at a time in order to find the optimal Adnectin drug using this system. With our novel Adnectin class and PROfusion system, our patent estate and experienced team, we believe we are positioned to lead a new era in targeted biologics. We intend to deploy Adnectins and PROfusion to create best-in-class drugs in multiple therapeutic areas, including those areas covered by existing antibody patents. We believe Adnectins avoid patents covering antibody-based products due to differences in composition. However, Adnectin-based products can benefit from the experience of antibody-based products because Adnectins have a therapeutic shape that resembles the targeting domain of antibodies. We believe we can create superior products compared to antibodies based on advantages conferred by the simpler protein structure of Adnectins. Our first Adnectin, Angiocept, is an antagonist of the VEGFR-2 pathway and is in clinical development in the United States. Our development strategy for Angiocept is to establish, under our sole control, the preclinical and clinical foundation for our Adnectin class, as well as to build value and demonstrate significant commercial potential of our first product. Angiocept has the potential to be a best-in-class product in the growing, multi-billion dollar anti-angiogenic market. Unlike Avastin, Sutent and Nexavar, the three approved agents in this market, Angiocept is designed to be both a potent and highly specific VEGFR-2 pathway antagonist. We are conducting our phase 1 clinical trial of Angiocept in the United States in oncology patients. We believe our phase 1 clinical trial has generated sufficient patient data to enable us to advance to phase 2 clinical trials. We are planning multiple phase 2 clinical trials in oncology to establish the potentially broad applicability of Angiocept. We expect to commence our first phase 2 clinical trial in the first quarter of 2008. We intend to pursue a diversified commercialization strategy by participating in the commercialization of our products and accelerating our growth through selective strategic alliances. Our growing pipeline and intellectual property position in the field of Adnectins and PROfusion provide us with the opportunity to enter into alliances with other pharmaceutical companies to expand our commercial and therapeutic reach. Our first Adnectin-PROfusion alliance is with Bristol-Myers Squibb, or BMS, and includes up to 6 programs based on 4 targets in oncology. For products resulting from this alliance, we are eligible to receive development milestones from BMS of $211.5 million for the first product directed to a certain target of the first program and $141.0 million per program for each of 5 other potential programs, plus a sales milestone of $131.0 million per program, in addition to escalating double-digit royalties on product sales. Advantages of Adnectins As a distinct, novel class, we believe that our Adnectins offer superior therapeutic and commercial promise across multiple therapeutic applications currently dominated by first-generation targeted biologic approaches. We designed Adnectins based on a targeting domain whose shape has precedence in antibody-based therapeutics but which we believe also offers significant discovery, development and commercialization advantages over traditional targeted biologics, such as antibodies. We believe that our phase 1 Table of Contents clinical trial results to date for Angiocept in regards to safety, tolerability and immunogenicity have helped to establish the initial clinical foundation for our Adnectin class. Adnectin advantages are based on its simple amino acid sequence and precedented therapeutic shape. An Adnectin consists of a backbone of the natural amino acid sequence of a certain domain of human fibronectin, which has a shape that resembles the targeting domain of an antibody. In addition, each Adnectin domain has one to three targeting loops engineered using our PROfusion system. A single Adnectin domain contains about 90 to 100 amino acids, in contrast to a typically much larger full-length human antibody that contains approximately 1,500 amino acids. Adnectin-based products offer the following potential advantages: Potent, specific therapeutics: high affinity, specific binding to a therapeutic target with only a single Adnectin domain; Enhanced efficacy: greater potential to specifically modulate multiple therapeutic targets for multiple therapeutic effects in a single drug molecule; Opportunity to pursue patent protected, first generation targeted biologics markets: potential avoidance of antibody patents enables pursuit of antibody-validated products and pathways prior to patent expiration; Broad therapeutic applications: creating Adnectins to many target types, including targets that are hard to drug by antibodies or small molecules; Potential for more convenient dosing: using Adnectins designed with different systemic half-lives in humans (for example, as long as a month or as short as hours) or with properties for administration of long-lasting, concentrated doses; Faster and lower risk manufacturing: manufacturing in E. coli, permitted by the relatively simple Adnectin amino acid sequence compared to an antibody, may result in higher probability of success and greater speed to the clinic and market; Potential for improved tissue penetration: an Adnectin domain is about 15 times smaller than a full-length antibody; and Reduced immunogenicity potential: the Adnectin backbone is designed from a naturally occurring human fibronectin protein that has evolved to be tolerated by the human immune system. Proprietary PROfusion Discovery Engine Our drug discovery technology, PROfusion, capitalizes on the inherent advantages of the Adnectin class through the rapid and efficient engineering, evaluation and optimization of product candidates. Our scientists utilize our proprietary PROfusion system to simultaneously engineer trillions of Adnectin amino acid sequences to determine which Adnectins are best suited as product candidates. This has the potential of increasing pipeline productivity by reducing the time and cost of identifying high quality product candidates. PROfusion enables us to generate Adnectins using cell-free production methods, avoiding the time-and resource-consuming cloning, cell production and testing often used in other traditional drug discovery methods. The power of PROfusion is based on its ability to engineer protein variants from DNA to RNA to protein without using cells, while also directly attaching a unique tag to each protein variant made. In biology, DNA makes RNA and RNA makes protein. The tag that PROfusion attaches to each protein variant is the unique mRNA that was used to synthesize that specific protein variant. This means that each protein variant is directly tagged with the mRNA sequence that encodes the protein variant to which it is attached. These tags help our scientists track Adnectins with the most desirable properties for product candidates. TABLE OF CONTENTS Summary 1 Risk Factors 9 Special Note Regarding Forward-Looking Statements 30 Use of Proceeds 31 Dividend Policy 32 Capitalization 33 Dilution 35 Selected Financial Data 37 Management s Discussion and Analysis of Financial Condition and Results of Operations 39 Business 52 Management 81 Certain Relationships and Related Party Transactions 109 Principal Stockholders 114 Description of Capital Stock 117 Shares Eligible for Future Sale 121 Underwriting 124 Industry and Market Data 129 Legal Matters 129 Experts 129 Where You Can Find More Information 129 Index to Financial Statements F-1 Ex-3.1 Certificate of Incorporation of the Registrant, as amended Ex-3.2 By-Laws of the Registrant Ex-10.1 Strategic Alliance and Collaboration Agreement, dated February 14, 2007 Ex-10.2 License Agreement, dated July 1, 1999 Ex-10.3 Amended and Restated License Agreement, dated July 27, 1998 Ex-10.4 License, Manufacturing and Supply Agreement, dated August 5, 2005 Ex-10.5 Mutual Patent License Agreement, dated December 10, 2004 Ex-10.6 License Agreement, dated March 27, 2000 Ex-10.7 Lease Agreement, dated November 14, 2006 Ex-10.8 Master Security Agreement, dated February 14, 2002 Ex-10.9 Warrant to Purchase Common Stock Ex-10.10 Loan and Security Agreement, dated December 15, 2003 Ex-10.11 Warrant to Purchase Series A Preferred Stock, Issued to Comerica Bank, December 15, 2003 Ex-10.12 Warrant to Purchase Series A Preferred Stock, Issued to Comerica Bank, July 8, 2005 Ex-10.13 2002 Stock Incentive Plan, as amended Ex-10.14 Form of Restricted Stock Agreement under the 2002 Stock Incentive Plan Ex-10.15 Form of Incentive Stock Option Agreement under the 2002 Stock Incentive Plan Ex-10.16 Form of Nonstatutory Stock Option Agreement under the 2002 Stock Incentive Plan Ex-10.22 Second Amended and Restated Investor Rights Agreement, dated July 11, 2007 Ex-10.23 Employment Letter, dated April 24, 2005, between Dr. John Mendlein and the Registrant Ex-10.24 Severance and Change of Control Agreement, dated August 15, 2007 (Edwards) Ex-10.25 Severance and Change of Control Agreement, dated August 16, 2007 (Lanciani) Ex-10.26 Severance and Change of Control Agreement, dated August 15, 2007 (Furfine) Ex-10.27 Severance and Change of Control Agreement, dated August 16, 2007 (Bosley) Ex-10.28 Severance and Change of Control Agreement, dated August 16, 2007 (Freed) Ex-23.1 Consent of Ernst & Young LLP Ex-23.3 Consent of Orchard Partners You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. Until , 2007 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. Table of Contents We believe PROfusion provides us with significant competitive advantages, including the ability to: make and test up to 200 trillion protein variations in a single process, leading to rapid engineering of new drug variations; engineer large numbers of protein variations, enabling us to see variations that may not emerge from other protein discovery technologies; identify proteins with high affinity for the therapeutic target, typically in the picomolar range with a single Adnectin domain; use a broader range of test conditions to find molecules with favorable physical properties; tune the specificity of Adnectins across related targets; be applied to all types of therapeutic protein classes; and be applied to all types of protein targets. Angiocept Angiocept is a highly potent, specific and complete VEGFR-2 pathway antagonist. It is designed to inhibit tumor angiogenesis, the formation of new blood vessels in tumors, which is vital to the progression of tumor growth. Anti-angiogenic drugs that block the formation of these new blood vessels have emerged as an important new drug category in the treatment of cancer. Cancer cells secrete a variety of protein activators or growth factors that bind to receptors and promote angiogenesis. We believe that the most important pathway in this process is the VEGFR-2 pathway. We believe that Angiocept is the only pure antagonist of all protein activators in the VEGFR-2 pathway and is specific for the VEGFR-2 receptor, thus potentially avoiding off-target side effects. It is also the smallest anti-angiogenic biologic, which may potentially improve tissue distribution. Therefore, we believe Angiocept has a number of properties that may create the opportunity for a best-in-class anti-angiogenic treatment. Our phase 1 clinical trial results to date are consistent with the mechanism that Angiocept is acting as an antagonist to its intended target, human VEGFR-2. We are planning multiple phase 2 trials in oncology to establish the potentially broad applicability of Angiocept. Our phase 1 clinical trial also allowed us to identify a well-tolerated and pharmacologically active dose of Angiocept, which we plan to use in our first phase 2 clinical trial. We are initially developing an intravenous formulation of Angiocept for the treatment of glioblastoma multiforme, or GBM. GBM is highly malignant and the fastest growing type of brain tumor, and there is a significant need for improved treatments. Recurrent GBM phase 2 clinical studies of other anti-angiogenic drugs have provided encouraging data for non-specific VEGFR-2 pathway inhibitors with significant improvements in response rate, progression-free survival and overall survival compared with the historical standard of care data. However, no drug in the anti-angiogenic category is currently approved to treat GBM. We believe that our strategy to initiate a phase 2 clinical trial with Angiocept in GBM as its first indication will lead to a relatively rapid assessment of efficacy and potentially accelerate the regulatory approval process. Table of Contents Adnectin Pipeline In addition to Angiocept, which is in clinical development, we and our partner, BMS, are also pursuing several other research programs in a variety of therapeutic areas. Program Therapeutic Area Stage of Development Partner Angiocept (VEGFR-2 pathway antagonist) Oncology Phase 2 clinical trial expected to commence in Q1 2008 Solely-owned BMS-ATI 1 (antagonist) (formerly ATI-002) Oncology Product optimization Bristol-Myers Squibb* ATI-003 (interleukin-12 antagonist) Autoimmune diseases Product optimization Solely-owned BMS-ATI 2 (bispecific antagonist) Oncology PROfusion lead discovery Bristol-Myers Squibb* BMS-ATI 3 (agonist) Oncology PROfusion lead discovery Bristol-Myers Squibb* ATI-004 Musculo-skeletal disease PROfusion lead discovery Solely-owned ATI-005 Neurodegenerative disease PROfusion lead discovery Solely-owned * Adnexus retains a co-promotion right in the United States to the first product from the BMS collaboration for which a drug approval application is filed in the United States by BMS. Our Business Strategy Our objective is to create best-in-class therapeutics for compelling commercial opportunities utilizing Adnectins and PROfusion. The critical components of our business strategy are to: discover, develop and commercialize a pipeline of best-in-class products with Adnectins for patent-protected, antibody-validated therapeutic pathways; develop and commercialize our clinical product candidate, Angiocept; expand the preclinical, clinical and manufacturing validation of the Adnectin product class; aggressively prosecute and expand our Adnectin and PROfusion intellectual property; accelerate our growth through selective strategic alliances; pursue a diversified commercialization strategy; and build an industry-leading business by executing with excellence, rigor and prudent speed to benefit patients, partners, shareholders, employees and our community. Risks Associated with Our Business Our business is subject to a number of risks of which you should be aware before making an investment decision. These risks are discussed more fully in the Risk Factors section of this prospectus immediately following this prospectus summary. We have a limited operating history and have not yet commercialized any products. We have incurred substantial operating losses in each year since inception. Our net loss was $16.1 million in 2005 and $14.3 million in 2006. As of June 30, 2007, our accumulated deficit was $59.5 million. We expect to incur significant and increasing net losses for at least the next several years. It is uncertain whether any of our product candidates under development will become effective treatments. All of our product candidates are undergoing clinical trials or are in earlier stages of development, and failure is common and can occur at any stage of development. None of our drug candidates has received regulatory approval for commercialization, and we do not expect that any drugs resulting from our or our collaborators research and development efforts will be commercially available for a number of years, if at all. We may never receive any product sales revenues or achieve profitability. Table of Contents Our Corporate Information We were incorporated under the laws of the State of Delaware on September 16, 2002. Our principal executive offices are located at 100 Beaver Street, Waltham, Massachusetts 02453, and our telephone number is (781) 891-3745. Our website address is www.adnexustx.com. The information contained on, or that can be accessed through, our website is not a part of this prospectus. We have included our website address in this prospectus solely as an inactive textual reference. Unless the context otherwise requires, we use the terms Adnexus, our company, we, us and our in this prospectus to refer to Adnexus Therapeutics, Inc. Adnexus, Adnectin, Angiocept, PROfusion and other trademarks or service marks of Adnexus appearing in this prospectus are the property of Adnexus. This prospectus contains additional trade names, trademarks and service marks of other companies. Table of Contents The Offering Issuer Adnexus Therapeutics, Inc. Common stock offered Shares Common stock to be outstanding after this offering Shares Over-allotment option Shares Use of proceeds We estimate that the net proceeds from this offering will be approximately $ million, or approximately $ million if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and offering expenses payable by us. We expect to use most of the net proceeds from this offering to fund the clinical development activities for Angiocept and to support research and development of our other product candidates, with the balance to be used for working capital and other general corporate purposes. See Use of Proceeds on page 31 for a more complete description of our intended use of proceeds from this offering.
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+PROSPECTUS SUMMARY This summary highlights information contained in other parts of this prospectus. Because it is only a summary, it does not contain all of the information that you should consider before investing in shares of our common stock and it is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. You should read the entire prospectus carefully, especially Risk Factors and the consolidated financial statements and notes to these financial statements contained in this prospectus, before deciding to buy shares of our common stock. Our Company We are a leading fabless semiconductor company that designs, develops and markets systems solutions to enable connected home entertainment. Our technologies significantly change the way high-definition television-quality video, or HD video, and other multimedia content such as movies, music, games and photos are brought into and delivered throughout the home. We are a pioneer of key technologies that enable connected home networking of digital entertainment over existing coaxial cables. We are a founding member of the Multimedia over Coax Alliance, or MoCA, a global home networking consortium that sets standards for the distribution of video and other multimedia entertainment over coaxial cable. Our products include: home networking chipsets based on the MoCA standard; high-speed broadband access chipsets; integrated circuits that simplify and enhance digital broadcast satellite services; and silicon television tuner integrated circuits. Our products allow telecommunications carriers, cable multiple service operators and digital broadcast satellite service providers, which we collectively refer to as service providers, to enhance and expand their service offerings and reduce deployment costs in an increasingly competitive environment. Our home networking solutions capitalize on the worldwide conversion of multimedia content, including video, from analog to digital. Multimedia content is now easy to store on digital video recorders, or DVRs, gaming consoles, DVD recorders and personal computers. The ability to store this content on various devices has created islands of digital entertainment within the home. Our products bridge these islands and allow consumers to access their multimedia content throughout the home. Today, we are the only high-volume supplier of MoCA-compliant chipsets, which can be embedded in a wide variety of consumer electronic devices. Service providers can employ our solutions to offer consumer applications such as multi-room DVR, multi-room and online gaming, personal computer-to-television personal content sharing, and streaming of downloaded movies stored on a personal computer to a television. We have extensive knowledge and capabilities in key aspects of our business, such as video communications, networking algorithms and protocols, system-on-a-chip design, embedded software, mixed signal and radio frequency integrated circuit design, and communications and radio frequency systems, which we refer to as our core competencies. We use our considerable experience with service provider-based deployments to create solutions that address the complex requirements associated with delivering multiple streams of HD video into and throughout the home while seamlessly coexisting with video, voice and data services that are using the same coaxial cable infrastructure. We generate the majority of our revenues from sales of our products to original design manufacturers, or ODMs, and original equipment manufacturers, or OEMs, that provide customer premises equipment to service providers. While we did not launch our home networking products in significant volume until 2006, during 2006 and the nine months ended September 30, 2007, Entropic and its recently acquired subsidiary RF Magic, Inc. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 together derived revenues from more than 80 customers globally, including Actiontec Electronics, Inc., Jabil Circuit, Inc. and Motorola, Inc. We have also established relationships with leading service providers including EchoStar Satellite L.L.C., Jupiter Telecommunications Co., Ltd., or J:COM, and Verizon Communications Inc. We currently rely on sales of products that are incorporated by our customers into products purchased by Verizon and EchoStar for substantially all of our revenues. For the nine months ended September 30, 2007, Entropic and RF Magic generated pro forma revenues of $97.4 million and incurred pro forma losses of $14.4 million. Industry Background Intense competition among service providers seeking to maximize revenues is driving a revolution in the delivery of video and other multimedia content into and throughout the home. Service providers are making significant infrastructure investments to differentiate their offerings, increase average revenue per user, increase subscriber growth and reduce subscriber turnover. Several favorable trends such as the increasing availability of digital multimedia content and consumer applications and the proliferation of digital media devices within the home are contributing to the increasing revenue opportunity for service providers. Service providers and OEMs have identified a tremendous opportunity to seamlessly network the islands of stored multimedia content and enable the sharing of such content across devices and between rooms throughout the home. According to iSuppli Corporation, the number of network-enabled devices is expected to increase from 321 million in 2007 to 760 million in 2011, representing a compound annual growth rate of approximately 24%. To address this opportunity, service providers are introducing new customer premises equipment and service offerings. By providing customer premises equipment, service providers are able to easily introduce new services, simplify and enhance the user experience, and provide content security and service reliability. The stringent communications requirements associated with high-quality HD video and other multimedia content present a significant obstacle for service providers today. In response, service providers require technology solutions that enable the distribution of such content into and throughout the home while maintaining the requisite high-quality standards demanded by subscribers. For any such technology solution to succeed, we believe it must satisfy the following requirements: high bandwidth, reliability and full quality of service, or QoS, for HD video; co-existence with other services and devices; cost-effective deployment for service providers; customer ease of use and minimal maintenance; and consumer privacy and content security. Our Solutions We provide systems solutions comprised of silicon integrated circuits and associated software as a platform to enable delivery of multiple streams of HD video and other multimedia content into and throughout the home. Our products include home networking, broadband access, DBS outdoor unit and silicon television tuner solutions. Service providers currently employ our home networking solutions to offer consumer applications such as multi-room DVR, multi-room and online gaming, personal computer-to-television personal content sharing, and streaming of downloaded movies stored on a personal computer to a television. Moreover, our solutions are currently utilized to enhance a variety of service offerings, including video placeshifting, or the ability to access content from multiple locations and devices, video timeshifting, or the ability to pause, fast forward and rewind live or stored video, wireless backbone, or the ability to use in-home coaxial cables to increase the coverage of the wireless home network, and triple-play services, or bundled video, voice and broadband data services. We began offering DBS outdoor unit and silicon television tuner products as a result of our acquisition AMENDMENT NO. 11 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 of RF Magic. Our solutions are currently used in consumer electronic and networking devices, including set-top boxes, broadband routers with embedded wireless home networking, optical network terminals, low-noise block converters, multi-room DVRs and residential gateways, and can potentially be used in other devices, such as digital televisions, gaming consoles, media servers and network attached storage devices. Home Networking Our home networking solutions target a large and rapidly growing market. According to iSuppli, the worldwide home networking silicon total available market is expected to grow from $1.1 billion in 2007 to $3.1 billion in 2011, representing a compound annual growth rate of approximately 29%. Our home networking solutions are based on the MoCA standard. MoCA-based products use existing coaxial cable to create a robust internet protocol-based network for easy sharing of HD video and other multimedia content throughout the home. We have been working on MoCA-related technology since 2001 and are presently shipping our second generation of MoCA-compliant products. Our MoCA-compliant chipsets are incorporated in the equipment being deployed by Verizon as part of its FiOS offering. We are currently the exclusive provider of chipsets that enable home networking applications such as multi-room DVR for such offering as well as connectivity between Verizon s fiber optic network termination and existing home coaxial cabling. However, other semiconductor companies may, in the future, supply competing products for the FiOS offering. We believe that our pioneering role in developing the MoCA standard and our success to date in providing these solutions position us well to continue to be the leading provider of MoCA-based connected home entertainment solutions. Our home networking solutions provide the following key benefits: High data rates. Deliver field-tested consistent net throughput in excess of 110 megabits per second and a physical layer rate of up to 270 megabits per second. High-quality video experience. Satisfy stringent quality of service requirements of service providers and allow distribution of multiple streams of HD video. Ease of installation and use. Leverage existing coaxial cable infrastructure to simplify installation and enable plug-and-play implementation for consumers. Security and reliability. Create a shielded, self-healing network that provides high levels of fault tolerance and reliability and supports service provider-based conditional access systems and encryption to protect the privacy of personal multimedia content. Remote upgrade and diagnostics. Deploy additional service offerings and perform system diagnostics through remotely upgradeable firmware and remote diagnostics tools. Broadband Access Our broadband access solutions are designed to meet broadband access requirements in areas characterized by fiber optic networks that terminate within approximately one kilometer of a customer premises. In particular, our solutions allow cable multiple service operators with fiber optic deployments to offer broadband access services that are competitive with very high-speed digital subscriber line, or VDSL, services offered by telecommunications carriers. According to International Data Corporation, or IDC, worldwide broadband service subscriptions for our current target market, which consists of cable modem and fiber-to-the-home deployments, are expected to increase from 104 million in 2007 to 160 million in 2011. Our solutions use coaxial cable infrastructure to deliver last kilometer connectivity for high-speed broadband access to single-family homes and multiple dwelling units. They incorporate the same physical layer used in our home networking products and a different network-optimized media access controller technology and offer high performance with net throughput in excess of 100 megabits per second. Our high-speed broadband access solutions enable digital voice, streaming video downloads, high-speed broadband data and bundled triple-play services. Entropic Communications, Inc. (Exact Name of Registrant as Specified in Its Charter) DBS Outdoor Unit Our DBS outdoor unit solutions, which consist of our band translation switch and channel stacking switch products, target the large and growing digital broadcast satellite market. According to IMS Research, worldwide households with digital satellite free-to-air and pay-television are expected to increase from approximately 266 million in 2007 to 377 million in 2011. In a traditional satellite installation, each tuner usually requires a unique cable from the satellite dish to the set-top box to receive the full channel lineup. Our DBS outdoor unit solutions, which support HDTV, can significantly reduce the deployment costs for digital broadcast satellite providers by allowing them to send multiple video streams from individual or multiple satellites into the home over a single cable. This simplified cabling architecture can enable digital broadcast satellite providers to deploy set-top boxes, with multiple tuner capabilities, in multiple rooms, and roll out new services without expensive installation and retrofitting while also improving aesthetics. Silicon Television Tuner We provide silicon television tuner integrated circuits for satellite, cable and terrestrial applications that conform to most of the major digital video broadcast standards, including the U.S. and international HDTV standards. According to IMS, worldwide shipments of satellite, cable and terrestrial set-top box and integrated digital televisions are expected to increase from approximately 186 million in 2007 to 277 million in 2011. Our tuner integrated circuits integrate radio frequency functions, including those performed by a surface acoustic wave filter, with other major discrete components onto a single die while maintaining the performance of traditional non-silicon can tuners. Our highly integrated solutions significantly reduce our customers design costs and shrink the tuner footprint in consumer electronic devices. Our Strategy Our goal is to be the leading provider of systems solutions for the connected home entertainment market by enabling the delivery of multiple streams of HD video and other multimedia content into and throughout the home. The key elements of our strategy are to: Extend our technology leadership. We have created innovative systems-level solutions such as our MoCA-based home networking and DBS outdoor unit products. We intend to extend our leadership by focusing on our research and development efforts and through targeted technology acquisitions. Expand relationships with industry leaders and customers. We intend to expand our existing relationships with service providers, ODMs and OEMs by securing additional design wins and by positioning our connected home entertainment technologies as the key differentiator in next generation customer premises equipment. Continue to broaden our solutions. We intend to add additional features and capabilities to our products and provide full platform solutions to address the large and growing connected home entertainment market. Expand our presence in international markets. We intend to continue to expand our sales and technical support organization to broaden our service provider reach in international markets, primarily in Asia and Europe. Drive industry standards. We intend to continue to use our technology leadership to define specifications and drive industry standards, such as MoCA, which we believe will lead to widespread adoption of our solutions. Delaware 3674 33-0947630 (State or Other Jurisdiction of Incorporation or Organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 9276 Scranton Road Suite 200 San Diego, CA 92121 (858) 625-3200 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant s Principal Executive Offices) Risk Factors We are subject to a number of risks, which you should be aware of before you buy our common stock. For example: we have a history of losses and may not achieve or sustain profitability in the future; we face intense competition and expect competition to increase in the future, with many of our competitors being larger, more established and better capitalized than us; we depend on a limited number of customers and ultimately service providers for a substantial portion of our revenues, and the loss of, or a significant shortfall in orders from, any of these parties could significantly impair our financial condition and results of operations; if the market for HD video and other multimedia content delivery solutions based on the MoCA standard does not develop as we anticipate, our revenues may decline or fail to grow, which would adversely affect our operating results; and even if service providers, ODMs and OEMs adopt multimedia content delivery solutions based on the MoCA standard, we may not compete successfully in the market for MoCA-compliant chipsets. These and other risks affecting us are more fully described in Risk Factors. Corporate Information We were incorporated in Delaware in January 2001. Our principal executive offices are located at 9276 Scranton Road, Suite 200, San Diego, California 92121, and our telephone number is (858) 625-3200. Our corporate website address is www.entropic.com. We do not incorporate the information contained on, or accessible through, our website into this prospectus, and you should not consider it part of this prospectus. In May 2007, we acquired Arabella Software Ltd., a developer of embedded software. In June 2007, we acquired RF Magic, a provider of digital broadcast satellite outdoor unit and silicon television tuner solutions. For convenience in this prospectus, Entropic, we, us, and our refer to Entropic Communications, Inc. and its subsidiaries, taken as a whole, unless otherwise noted. We use Entropic, Entropic Communications, c.LINK and RF Magic as registered trademarks. This prospectus also contains trademarks and tradenames of other companies, and those trademarks and tradenames are the property of their respective owners. Patrick C. Henry Chief Executive Officer Entropic Communications, Inc. 9276 Scranton Road Suite 200 San Diego, CA 92121 (858) 625-3200 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)
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+detail later in this prospectus. This summary does not contain all the information you should consider before investing in our common stock. You should carefully read the more detailed information set out in this prospectus, especially the risks of investing in our common stock that we discuss under the
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001232468_reliant_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001232468_reliant_prospectus_summary.txt
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+This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our audited consolidated financial statements and the related notes and the information set forth under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," in each case included elsewhere in this prospectus. References in this prospectus to "we," "us," "our" and "Reliant Technologies" refer to Reliant Technologies, Inc. unless the context requires otherwise. Our Company We are a medical device company that designs, develops and markets non-surgical therapies for the treatment of various skin conditions under the Fraxel brand. We believe our Fraxel laser systems have created a new class of skin rejuvenation therapy and provide patients with consistent and effective treatments that can be delivered quickly without significant pain or downtime. Our Fraxel laser systems are used by physicians to treat a broad range of skin conditions that include wrinkles and fine lines, acne and surgical scars, pigmentation, sun damage, uneven tone and texture and melasma, a blotchy skin discoloration. Patients undergo treatments from our Fraxel laser systems in order to reverse the signs of aging, achieve healthier, younger looking skin and improve their overall appearance. Following the launch of our first Fraxel laser system in 2004, our revenues have grown from $4.5 million in 2004 to $57.5 million in 2006, and to $51.5 million for the first nine months of 2007. We have incurred cumulative net losses of approximately $79.7 million from our inception to September 30, 2007, and we expect to continue to incur net losses for the foreseeable future as we expand our sales force, increase spending on marketing and research and development activities, and incur additional costs related to being a public company. Our Fraxel laser systems represent a new class of skin rejuvenation therapy based on fractional resurfacing technology, which we introduced and commercialized in 2004. We believe that fractional resurfacing offers significant advantages over other alternatives for skin rejuvenation. Our fractional resurfacing technology can achieve advanced aesthetic results by creating thousands of microscopic treatment zones per square centimeter, which affect only a fraction of the total skin in the area of treatment. We base our technology on our extensive research into skin science. We intend to continue our study of skin science to improve our current technology, enlarge our product range for skin rejuvenation and anti-aging, and enter new aesthetics markets. Because we launched our first Fraxel laser system in 2004, there is no data available regarding the long-term safety and efficacy of our Fraxel laser systems, and the results in our existing clinical studies may not be indicative of results that will be experienced by patients over time. As of September 30, 2007, we held several patents covering multiple areas of our technology. We currently market two Fraxel laser systems, the Fraxel re:store system, which is our flagship product, and the Fraxel re:fine system, which we recently introduced. Both systems offer treatments for milder skin conditions such as fine lines and pigmentation. In addition the Fraxel re:store system is targeted to provide treatments for acne and surgical scars, deeper lines and wrinkles and actinic keratoses. In the first quarter of 2008, we expect to launch another laser system, the Fraxel re:pair system, for the treatment of even more severe skin conditions. This system has already received FDA clearance for dermatological procedures requiring ablation, coagulation and resurfacing of soft tissue and is currently in clinical trials for additional indications, including vascular dyschromia, a sun-induced redness. Balance at September 30, 2007 (unaudited) 8,651,224 $ 60,595 1,370,908 $ We intend to build awareness of our Fraxel brand among patients and physicians to increase our market share, expand the overall skin rejuvenation market, and grow sales of our laser systems and consumable products. Today, we primarily market our laser systems to dermatologists and plastic surgeons. We intend to expand our customer base to include general practitioners, gynecologists, ophthalmologists and others. As of September 30, 2007, we had sold approximately 1,300 Fraxel laser systems worldwide. We receive recurring revenue through the sales of our consumable treatment tips that are used during Fraxel laser treatments. Our consumable treatment tips are generally not required to be replaced following each Fraxel treatment, but after approximately three to five treatments for the Fraxel re:store laser system and approximately five to six treatments for the Fraxel re:fine laser system, the consumable treatment tip is depleted of its useful life and must be replaced. We expect that the consumable treatment tips used in our Fraxel re:pair laser system to be introduced in the first quarter of 2008 must be replaced following each Fraxel treatment. Beginning in the fourth quarter of 2007, we intend to expand our recurring revenue by offering a branded line of cosmeceutical products, or cosmetics that offer additional benefits. These products are designed for use by patients after a Fraxel laser treatment and as part of their daily skin care regimen. Aesthetic Industry Overview The market for aesthetic procedures includes a broad range of surgical and non-surgical procedures. In the United States in 2006, Millennium Research Group, or Millennium, estimated that 7.3 million light, laser and energy based procedures and 3.1 million facial aesthetic injectable procedures, including Botox, hyaluronic acid, collagen and particle and polymer fillers were performed. Additionally, the American Society of Aesthetic Plastic Surgery estimated that 1.9 million surgical procedures and an aggregate of 2.2 million microdermabrasion, chemical peel, fat injection and sclerotherapy procedures were performed in the United States in 2006. Our initial focus is on the broad range of non-surgical laser and light based treatments to improve overall skin tone and texture and reduce the signs of aging such as wrinkles, irregular pigmentation and related conditions, which we refer to as skin rejuvenation. Millennium estimated that there were 2.5 million procedures in 2006 in the United States focused on these treatments (categorized by Millennium as skin rejuvenation, skin resurfacing and pigmented lesion treatments), and projects the annual number of these procedures to grow to 8.0 million in 2011, representing a compounded annual growth rate of 26%. This projection is based on projected sales of new systems and increased utilization rates for the installed base. In the United States in 2005, there were an estimated 17,700 dermatologists and plastic surgeons and more broadly, approximately 268,000 general surgeons and family practitioners according to Freedonia Research, Inc. According to Millennium, as of 2006, there was an installed base of approximately 11,500 laser and light based systems in the United States, which were utilized to perform procedures categorized by Millennium as skin rejuvenation, skin resurfacing and pigmented lesion treatments. The Evolution of Skin Rejuvenation and Other Anti-Aging Procedures Laser and light based skin rejuvenation procedures typically involve the process of damaging the patient's skin in a controlled manner in order to induce the skin's natural wound-healing process. The objective is to stimulate the growth of new skin resulting in a more youthful appearance. LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 3,034 $ 9,725 $ 8,179 Accrued liabilities 3,386 8,226 4,796 Deferred margin 909 247 170 Preferred stock warrant liability 7,789 7,967 8,296 $ Line of credit obligation 2,000 2,000 Current portion of notes payable 2,131 2,190 1,897 Current portion of deferred service contract revenue 796 1,179 1,214 Current portion of liability for early exercise of employee stock options 92 12 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 One approach to skin rejuvenation, referred to as a bulk ablative approach, is to completely remove one or more layers of the skin in the treatment area. This procedure is often limited to patients with light skin and is rarely used off the face. Bulk ablative procedures can be effective in rejuvenating the skin, however they often expose patients to substantial pain, long healing times and substantial risk of complications. Adverse side effects may include infection, scarring and other possible complications such as hypopigmentation, which is a long-lasting or permanent whitening of the skin. We believe these factors have contributed to a decline in the number of these bulk ablative procedures performed annually. A second approach to skin rejuvenation is a bulk non-ablative approach, which stimulates the skin's natural wound healing process by mildly damaging collagen in the dermis without breaking or removing one or more layers of the skin. Bulk non-ablative procedures commonly have drawbacks such as limited effectiveness and inconsistent results and can have adverse side effects, including temporary bruising, localized darkening and scarring of the skin. Other alternative anti-aging procedures for improving the appearance of the skin include neurotoxin injections (such as Botox), dermal fillers, chemical peels, microdermabrasion and cosmeceuticals. These procedures often need to be repeated from time-to-time to maintain the desired results. A new class of skin rejuvenation therapy, first introduced and commercialized by us, is referred to as fractional resurfacing. Fractional resurfacing creates thousands of microscopic treatment zones per square centimeter to stimulate repair and rejuvenation by inducing the skin's natural wound-healing response. At the same time, fractional resurfacing spares a significant portion of the tissue in the treatment area, and stimulates the spared tissue around each microscopic treatment zone to rejuvenate and resurface the treated tissue. Our Solution We believe our Fraxel laser systems afford a new class of skin rejuvenation therapy that provides patients with effective, consistent results without significant downtime and risk of complications. We currently market two products, the Fraxel re:store laser system and the Fraxel re:fine laser system. These systems non-ablatively treat a broad range of skin conditions that includes wrinkles and fine lines, pigmentation, sun damage, uneven skin texture and melasma by delivering laser light to the skin to create lesions to predetermined depths within the skin to induce the skin's natural wound-healing response. In addition the Fraxel re:store laser system is targeted for treating more severe conditions, such as acne and surgical scars, deeper lines and wrinkles, and actinic keratoses. We are also developing the Fraxel re:pair laser system, our ablative fractional resurfacing system, to treat the above conditions and additionally vascular dyschromia. This system has already received FDA 510(k) clearance for indications requiring the ablation, coagulation and resurfacing of soft tissue. We anticipate launching it commercially in the first quarter of 2008. Differentiating benefits of our Fraxel laser systems include: Effective Treatments. Our Fraxel laser systems create deep microscopic lesions using precise dosage control technology, which automatically adjusts the amount, pattern, depth and location of energy delivered into the skin to optimize treatment results and to provide effective, consistent results. Ease of Use. The motion control technology within our Fraxel laser systems enables practitioners to deliver Fraxel laser treatments by performing a simple painting motion on AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 the patient's skin, providing a more uniform post-treatment appearance and reduced treatment time. Broad Applications. We offer Fraxel laser systems that can treat multiple skin conditions on all skin colors, and can be used on all skin areas, while other laser technologies are often confined to facial applications. Enhanced Safety. Our Intelligent Optical Tracking system reduces the risk of operator error, including deactivating the laser if it is not in motion on the skin. The fact that our treatment tips can be removed and disinfected further enhances the safety of the Fraxel re:store and Fraxel re:fine laser systems. System Reliability. Our Fraxel re:store and Fraxel re:fine laser systems incorporate advanced fiber laser technology that eliminates the need for optical alignment or adjustments within the laser source, and reduces total cost of ownership. Our Strategy Our goal is to pioneer a new class of laser-based non-surgical therapy and build the Fraxel brand in order to be the leader in an expanded market for skin rejuvenation and to enter new aesthetics markets where we can apply our Fraxel technology. The key elements of our business strategy to achieve this goal are the following: Build Brand Awareness Among Patients and Physicians. Increase Our Physician Market Opportunity and Expand Our Sales and Marketing Capabilities. Drive Continued Technology Leadership and Differentiation Through Excellence in Skin Science. Offer Wide Range of Advanced Skin Rejuvenation Solutions to Meet Diverse Needs of Patients. Develop Innovative Solutions to Target New Markets. Drive Sales of Consumable Products by Supporting Our Physicians. Risks Affecting Us Our business is subject to numerous risks, as more fully described in the section entitled "Risk Factors" immediately following this prospectus summary. We have a limited history of operations, have a history of operating losses, and may not achieve or maintain profitability. We are dependent upon the sale of our Fraxel laser systems and our consumable treatment tips and generate a significant percentage of our revenue at the end of each quarter. We operate in a highly competitive market and compete against companies that have longer operating histories, more established products and greater resources than we do. We have experienced seasonal patterns in our revenue and expect these patterns to continue. We are dependent on third party suppliers, including sole source suppliers, to develop and manufacture the critical components used in our laser systems and other products. We rely on third party distributors to market, sell and service a significant portion of our laser systems. Any future intellectual property litigation could impact our future business and financial performance. Corporate Information We are the successor to Reliant Laser Corporation, which was originally incorporated in California in 1990 and reincorporated in Delaware in 1993 as Reliant Technologies, Inc. In 2001, we were purchased by RTI Holdings, Inc., a Nevada corporation that subsequently merged with us in 2002. In 2004, we were merged into our own wholly-owned subsidiary as part of a recapitalization in connection with an equity financing to form the present corporation. The address of our principal executive office is 464 Ellis Street, Mountain View, California 94043, and our telephone number is (650) 605-2200. Our corporate website is located at www.reliant-tech.com. The information contained on our corporate website or our product website located at www.fraxel.com are not part of this prospectus. The terms "Reliant," "Fraxel," "Reliant Technologies," "Intelligent Optical Tracking" and the stylized Reliant logo are our registered trademarks. In addition, we have applied to register the trademarks "Fraxel re:fine," "Fraxel re:store," "Fraxel re:pair," and "FDDA" as well as our logo. All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners. 464 ELLIS STREET MOUNTAIN VIEW, CALIFORNIA 94043 (650) 605-2200 (Address, including zip code and telephone number, including area code, of registrant's principal executive offices) The Offering Common stock offered by us 4,700,000 shares Common stock to be outstanding after the offering 14,790,769 shares Initial public offering price per share $ Use of proceeds We intend to use the net proceeds of the offering for sales and marketing initiatives, research and product development activities and for capital expenditures, working capital and general corporate purposes. See "Use of Proceeds." We will not receive any proceeds from the sale of shares by the selling stockholders in the event the underwriters exercise their over-allotment option. Proposed Nasdaq Global Market symbol RLNT The number of shares of common stock to be outstanding after this offering is based on 10,090,769 shares outstanding as of September 30, 2007, and excludes: 2,365,743 shares of common stock issuable upon exercise of outstanding options under our 2003 Equity Incentive Plan with a weighted average exercise price of $11.94 per share; 1,489,078 shares of common stock issuable upon exercise of outstanding warrants with a weighted average exercise price of $6.72 per share; 27,832 shares of unvested common shares that are subject to repurchase rights by us; 333,333 shares of common stock reserved for future issuance under our 2007 Equity Incentive Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan; and 200,000 shares of common stock reserved for future issuance under our 2007 Employee Stock Purchase Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan. Unless otherwise noted, all information in this prospectus assumes: a one-for-three reverse split of our common and convertible preferred stock effected on October 25, 2007; no exercise of the underwriters' over-allotment option; the conversion of all shares of our outstanding convertible preferred stock into 8,719,861 shares of our common stock upon the completion of this offering; the conversion of all outstanding warrants to purchase shares of our convertible preferred stock into warrants to purchase an aggregate of 846,491 shares of common stock, effective upon completion of this offering; and the filing of our amended and restated certificate of incorporation which will occur immediately following the closing of this offering. ERIC B. STANG CHIEF EXECUTIVE OFFICER RELIANT TECHNOLOGIES, INC. 464 ELLIS STREET MOUNTAIN VIEW, CALIFORNIA 94043 (650) 605-2200 (Name, address, including zip code and telephone number, including area code, of agent for service) Copies to: ERIC C. JENSEN GORDON K. HO COOLEY GODWARD KRONISH LLP FIVE PALO ALTO SQUARE 3000 EL CAMINO REAL PALO ALTO, CA 94306 (650) 843-5000 CHARLES K. RUCK DAVID B. ALLEN LATHAM & WATKINS LLP 650 TOWN CENTER DRIVE 20th FLOOR COSTA MESA, CA 92626 (714) 540-1235 (1)Please see Note 4 of the notes to our consolidated financial statements for an explanation of the method used to calculate basic and diluted net loss per common share and pro forma basic and diluted net loss per common share. (2)On a pro forma basis to reflect the conversion of all outstanding shares of convertible preferred stock into shares of common stock upon the closing of this offering. (3)On a pro forma as-adjusted basis to reflect (a) the conversion of all outstanding shares of convertible preferred stock into shares of common stock upon the closing of this offering; and (b) the sale of shares of our common stock in this offering at an assumed initial public offering price of $15.00 per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, the mid-point of the range set forth on the cover page on this prospectus, would increase (decrease) each of cash, cash equivalents and short-term investments, working capital, total assets and total stockholders' equity by approximately $4.4 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. A 1.0 million share increase (decrease) in the number of shares offered by us at the assumed offering price of $15.00 per share would result in a pro forma as adjusted net tangible book value of approximately $85.6 million, or $5.42 per share, and the pro forma dilution per share to investors in this offering would be $9.58 per share. Price and share adjustments may also occur in conjunction with one another. Each increase (decrease) of 1.0 million shares in the number of shares offered by us, together with a corresponding $1.00 increase (decrease) in the assumed offering price of $15.00 per share, would increase (decrease) pro forma as adjusted net tangible book value by approximately $19.3 million, or $0.91 per share, and the pro forma dilution per share to investors in this offering by $0.09 per share. The pro forma information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing. Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our financial statements and the related notes and the information set forth under the headings
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+PROSPECTUS SUMMARY This summary highlights selected information more fully described elsewhere in this prospectus. Because it is a summary, it is not complete and does not contain all of the information you should consider before buying shares of our common stock in this offering. You should read the entire prospectus carefully, including Risk Factors, Cautionary Note Regarding Forward-Looking Statements and our consolidated financial statements and the notes to those financial statements appearing elsewhere in this prospectus, before deciding to invest in our common stock. MedAssets, Inc. Our Business We provide technology-enabled products and services which together deliver solutions designed to improve operating margin and cash flow for hospitals and health systems. We believe implementation of our full suite of solutions has the potential to improve customer operating margins by 1.5% to 5.0% of revenues through increasing revenue capture and decreasing supply costs. The sustainable financial improvements provided by our solutions occur in the near-term and can be quantified and confirmed by our customers. Our solutions integrate with our customers existing operations and enterprise software systems and require minimal upfront costs or capital expenditures. Our solutions help mitigate the increasing financial pressures facing hospitals and health systems, such as the increasing complexity of healthcare reimbursement, rising levels of bad debt and uncompensated care and significant increases in supply utilization and operating costs. According to the American Hospital Association, average community hospital operating margins were 3.7% in 2005, and approximately 25% of community hospitals had negative total margins. Bad debt and charity care, or uncompensated care, have had a significant impact on operating margins, costing community hospitals $31.2 billion, or 5.7% of total expenses in 2006. We believe that hospital and health system operating margins will remain under long-term and continual financial pressure due to shortfalls in available government reimbursement, managed care pricing leverage and continued escalation of supply utilization and operating costs. Our success in improving our customers ability to increase revenue and manage supply expense has driven substantial growth in our customer base and has allowed us to expand sales of our products and services to existing customers. These factors have contributed to our compound annual revenue growth rate of 41.4% over our last four fiscal years. Our Revenue Cycle Management segment currently has more than 1,000 hospital customers, which makes us one of the largest providers of revenue cycle management solutions to hospitals. Our Spend Management segment manages approximately $15 billion of supply spending by healthcare providers, has more than 1,700 hospital customers and includes the third largest group purchasing organization, or GPO, in the United States. For the twelve months ended December 31, 2006, we generated net revenue of $146.2 million and net income of $8.8 million and, on a pro forma basis, we generated net revenue of $177.9 million and net loss of $6.4 million. We also use certain financial measures that are not defined under generally accepted accounting principles, or GAAP, to evaluate the operating performance of the company, including Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) before net interest expense, income tax expense (benefit), depreciation and amortization and other non-recurring, non-cash or non-operating items. For the twelve months ended December 31, 2006, we generated Adjusted EBITDA of $50.8 million and, on a pro forma basis, we generated Adjusted EBITDA of $56.2 million. See Management s Discussion and Analysis of Financial Condition and Results of Operations Use of Non-GAAP Financial Measures. Our Solutions Our technology-enabled solutions are delivered primarily through company-hosted, or ASP-based, software supported by enterprise-wide sales, account management, implementation services and consulting. This integrated, customer-centric approach to delivering our solutions, combined with the ability to deliver measurable financial improvement, has resulted in high retention of our large health system customers, and, in Table of Contents turn, a predictable base of stable, recurring revenue. Our ability to expand the breadth and value of our solutions over time has allowed us to develop strong relationships with our customers senior management teams. We deliver our solutions through two business segments, Revenue Cycle Management and Spend Management: Revenue Cycle Management. Our Revenue Cycle Management segment provides a comprehensive suite of software and services spanning the hospital revenue cycle workflow from patient admission, charge capture, case management and health information management through claims processing and accounts receivable management. Our workflow solutions, together with our data management and business intelligence tools, increase revenue capture and cash collections, reduce accounts receivable balances and increase regulatory compliance. Based on our analysis of certain customers that have implemented a portion of our products and services, we estimate that implementation of our full suite of revenue cycle management solutions has the potential to increase a typical health system s net patient revenue by 1.0% to 3.0%. Spend Management. Our Spend Management segment provides a comprehensive suite of technology-enabled services that help our customers manage their non-labor expense categories. Our solutions lower supply and medical device pricing and utilization by managing the procurement process through our group purchasing organization s portfolio of contracts, consulting services and business intelligence tools. Based on our analysis of certain customers that have implemented a portion of our products and services, we estimate that implementation of our full suite of spend management solutions has the potential to decrease a typical health system s supply expenses by 3% to 10%, which equates to an increase in operating margin of 0.5% to 2.0% of revenue. Our solutions are primarily focused on acute care hospitals, whether operating on their own or as part of large health systems consisting of multiple hospitals and other non-hospital healthcare providers. The U.S. healthcare market has approximately 5,700 acute care hospitals, of which approximately 2,700 are part of health systems. Our customer base currently includes over 125 health systems and, including those that are part of our health system customers, more than 2,500 acute care hospitals and approximately 30,000 ancillary or non-acute provider locations. We estimate the total addressable market for our revenue cycle management and spend management solutions to be $6.5 billion. Our Competitive Strengths We are uniquely positioned to execute on our strategy. Our competitive strengths include: Comprehensive and flexible suite of solutions. The breadth and depth of our product and service offering is unique and our ability to combine our offerings enables us to deliver value-based, customer-specific solutions that differentiate us from our competitors. Superior proprietary data. Our solutions are supported by proprietary databases that we believe are the industry s most comprehensive, including our master item file that contains approximately 4 million products and our chargemaster that contains over 160,000 distinct charges. Large and experienced sales force. We employ a highly-trained and focused sales team of more than 110 people, one of the largest among our competitors, providing national sales coverage for establishing and managing customer relationships. Long-term and expanding customer relationships. Our collaborative approach and ability to deliver measurable and sustainable financial improvement have resulted in high retention of our large health system customers. Proven management team and dynamic culture. Our senior management team has an average of 17 years experience in the healthcare industry, an average of six years of service with us and a proven track record of delivering measurable financial improvement for healthcare providers. TABLE OF CONTENTS Page PROSPECTUS SUMMARY 1
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+PROSPECTUS SUMMARY This prospectus is part of a registration statement that we filed with the Securities and Exchange Commission, or SEC, utilizing a "shelf" registration statement. The selling stockholder may from time to time sell his shares of our common stock in one or more transactions. This prospectus provides you with a general description of the common stock being offered. You should read this prospectus, including all documents incorporated herein by reference, together with additional information described under the heading "Where You Can Find More Information." This summary highlights information contained elsewhere in this prospectus but might not contain all of the information that is important to you. Before investing in our common stock, you should read the entire prospectus and the reports and other filings incorporated by reference carefully, including the "Risk Factors" section and our consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, as amended and any subsequent SEC filings. Except as otherwise indicated by the context, references in this prospectus to "CSST," "we," "us," "our," "our Company," or "the Company" are to China Security & Surveillance Technology, Inc., a Delaware corporation and its direct and indirect subsidiaries. Unless the context otherwise requires, all references to (i) "Safetech" are to China Safetech Holdings Limited, a British Virgin Islands corporation and our direct, wholly owned subsidiary; (ii) "CSST HK" are to China Security & Surveillance Technology (HK) Ltd., a Hong Kong corporation and our direct, wholly owned subsidiary; (iii) "CSST China" are to China Security & Surveillance Technology (PRC) Inc., a corporation incorporated in the People s Republic of China and our indirect, wholly owned subsidiary; (iv) "Golden" are to Golden Group Corporation (Shenzhen) Limited, a corporation incorporated in the People s Republic of China and our indirect, wholly owned subsidiary; (v) "Cheng Feng" are to Shanghai Cheng Feng Digital Technology Co. Ltd., a corporation incorporated in the People s Republic of China and our indirect, wholly owned subsidiary; (vi) "Hongtianzhi" are to Shenzhen Hongtianzhi Electronics Co., Ltd., a corporation incorporated in the People s Republic of China and our indirect, wholly owned subsidiary; (vii) "Minking" are to Changzhou Minking Electronics Co., Ltd., a corporation incorporated in the People s Republic of China and our indirect, wholly owned subsidiary; (viii) "HiEasy" are to Wuhan HiEasy Electronic Technology Development Co., Ltd., a corporation incorporated in the People s Republic of China and our indirect, wholly owned subsidiary; (ix) "Hangzhou Tsingvision" are to Hangzhou Tsingvision Intelligence System Co., Ltd., a corporation incorporated in the People s Republic of China and our indirect, wholly owned subsidiary; (x) "BVI" are to the British Virgin Islands; (xi) "PRC" and "China" are to the People s Republic of China; (xii) "U.S. dollar," "$" and "US$" are to United States dollars; (xiii) "RMB" are to Yuan Renminbi of China; (xiv) "Securities Act" are to Securities Act of 1933, as amended; and (xv) "Exchange Act" are to the Securities Exchange Act of 1934, as amended. Our Company Overview We are a Delaware holding company whose China-based operating subsidiaries are primarily engaged in manufacturing, distributing, installing and servicing security and surveillance products and systems and developing security and surveillance related software in China. Our customers mainly comprise (i) governmental entities (including customs agencies, courts, public security bureaus and prisons), (ii) nonprofit organizations (including schools, museums, sports arenas and libraries) and (iii) commercial entities (including airports, hotels, real estate, banks, mines, railways, supermarkets and entertainment venues). These account for approximately 42%, 1% and 57% of revenues, respectively. A majority of our revenues is derived from the provision of security and surveillance packaged solutions which include the products, installation and after sale service maintenance to our customers. Because majority of our revenues are derived from the installation, they are generally non-recurring. Our revenues are not concentrated within any one customer or group of related customers. Maintenance services in our packaged solution are included for the first year from the date of completion. Our customers have an option to sign up for our maintenance program after the first year. Item 16. Exhibits. Reference is made to the attached Exhibit Index. Item 17. Undertakings. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that paragraphs (i), (ii) and (iii) above do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Securities and Exchange Commission by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement, or is contained in a form of prospectus filed pursuant to Rule 424(b) that is part of the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, As filed with the Securities and Exchange Commission on November 30, 2007 Registration No. 333-142479 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _____________________ PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 _____________________ CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. (Exact name of Registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 98-0509431 (I.R.S. Employer Identification No.) 13/F, Shenzhen Special Zone Press Tower, Shennan Road Futian District, Shenzhen, China 518034 (86) 755-8351-0888 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Guoshen Tu CEO and President 13/F, Shenzhen Special Zone Press Tower Shennan Road Futian District, Shenzhen, China 518034 (86) 755-8351-0888 (Names and addresses, including zip codes, and telephone numbers, including area codes, of agents for service) With copies to: Louis A. Bevilacqua, Esq. Thomas M. Shoesmith, Esq. Joseph R. Tiano, Jr., Esq. Thelen Reid Brown Raysman & Steiner LLP 701 8th Street, N.W. Washington, D.C. 20001 (202) 508-4000 Approximate date of commencement of proposed sale to the public: From time to time after this Registration Statement becomes effective. _____________________ If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. o If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. x Our sales network covers most of China s populated areas and we do not rely on any particular region for our business. Among our subsidiaries, Golden has 33 branch offices in provincial cities, Cheng Feng has 22 distribution points, Hongtianzhi has 53 distribution points, HiEasy has 11 distribution points, Minking has 10 distribution points and Hangzhou Tsingvision has 4 distribution points. We were incorporated in the BVI on April 8, 2002 under the name "Apex Wealth Enterprises Limited" as a corporation under the International Business Companies Ordinance of 1984. In November 2006, we changed our domicile from the BVI to Delaware by merging the BVI corporation into a newly incorporated Delaware corporation China Security & Surveillance Technology, Inc. Prior to our reverse acquisition of Safetech in September 2005, we were a development stage enterprise and had not yet generated any revenues. From and after the reverse acquisition, our business became the business of our indirect, wholly owned subsidiary, Golden and the newly acquired subsidiaries Cheng Feng, Hongtianzhi, HiEasy, Minking and Hangzhou Tsingvision. Golden is a corporation incorporated in the PRC which is engaged in the business of manufacturing, distributing, installing and maintaining security and surveillance systems. Golden was organized in the PRC in January 1995. In 2006, we acquired Cheng Feng, which is engaged in the business of manufacturing, marketing and sales of security and surveillance related hardware as well as the development and integration of related software. On April 2, 2007, we acquired 100% of the equity of Chain Star Investment, a Hong Kong corporation and the holding company of Hongtianzhi, a manufacturer of digital camera. On May 11, 2007, we acquired 100% of the equity of Link Billion Limited, a Hong Kong corporation and the holding company of HiEasy, a software developer. On June 4, 2007, we acquired 100% of the equity of Allied Rich Limited, a Hong Kong corporation and the holding company of Minking, a manufacturer of high speed dome cameras. On July 2, 2007, we acquired 100% the equity of Ocean Pacific Technology Limited, a Hong Kong corporation and the holding company of Hangzhou Tsingvision which is engaged in the business of researching, developing, manufacturing and selling computer software and digital audio and video products. We are headquartered in Shenzhen, China. The Offering Common stock offered by selling stockholders 1,538,462 shares Common stock outstanding before the offering 42,246,154 shares (1) Common stock outstanding after the offering 42,246,154 shares Proceeds to us We will not receive any proceeds from the sale of common stock covered by this prospectus.
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+PROSPECTUS SUMMARY This summary does not contain all of the information you should consider before buying our common shares. You should read the entire prospectus carefully, especially the "Risk Factors" section, the "Special Note Regarding Forward-Looking Statements" section and our consolidated financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in our common shares. OncoGenex Technologies Inc. Our Company We are a biopharmaceutical company committed to the development and commercialization of new cancer therapies that address treatment resistance in cancer patients. Our product candidates are being developed to block the production of specific proteins associated with the development of treatment resistance, which we believe will increase survival time and improve the quality of life for cancer patients. In response to many cancer therapies (including hormone ablation therapy, chemotherapy and radiation therapy), tumor cells become stressed and increase production of certain proteins. These proteins cause tumor cells to become resistant to the cancer therapies and promote the survival of tumor cells. Therefore, in spite of the initial effectiveness of cancer therapies, many patients develop treatment resistance and the patients die due to the lack of an effective therapy. We currently have three product candidates in development: OGX-011, OGX-427 and OGX-225. These product candidates are designed to selectively inhibit the production of proteins that are associated with treatment resistance and that are over-produced in response to a variety of cancer treatments. Our aim in targeting these particular proteins is to disable the tumor cell's adaptive defenses, render the tumor cells susceptible to attack with a variety of cancer therapies, including chemotherapy, and facilitate tumor cell death. Cancer is a group of diseases characterized by the uncontrolled growth and spread of abnormal cells. Cancer growth can cause tissue damage, organ failure and, ultimately, death. In North America, cancer is expected to strike one in two men and one in three women in their lifetimes and has recently surpassed heart disease as the leading cause of death in the United States. Our product candidates are currently being developed for use in the treatment of prostate, non-small cell lung, breast, ovarian and bladder cancers and multiple myeloma. Collectively, these cancers account for approximately 44 percent of the cancer deaths in the United States each year. Product Development Programs While we are encouraged by the results of our clinical trials to-date, we will need to conduct additional clinical trials for each of our product candidates in order to generate the safety and efficacy data needed to support an application with the FDA and regulatory agencies in other countries. Successful early clinical trials do not ensure that later clinical trials will also be successful. Our Lead Product Candidate, OGX-011 The development program for our lead product candidate, OGX-011, is focused on reducing clusterin production to enhance treatment sensitivity and delay tumor progression in patients who Balance, December 31, 2001 1,217,500 294 7 have not fully developed treatment resistance and to restore treatment sensitivity in patients who have developed treatment resistance. Clusterin is a cell survival protein that is over-produced in several cancer indications and in response to many cancer treatments, including hormone ablation therapy, chemotherapy and radiation therapy. Increased clusterin production is observed in many human cancers, including prostate, non-small cell lung, breast, ovarian, bladder, renal, pancreatic, anaplastic large cell lymphoma and colon cancers and melanoma. Increased clusterin production is linked to faster rates of cancer progression, treatment resistance and shorter survival duration. A broad range of pre-clinical studies conducted by the Prostate Centre at Vancouver General Hospital, or the Prostate Centre, and others have shown that reducing clusterin production facilitates tumor cell death by sensitizing human prostate, non-small cell lung, breast, ovarian, bladder, renal, and melanoma tumor cells to chemotherapy. Pre-clinical studies conducted by the Prostate Centre and others also indicate that reducing clusterin production sensitizes prostate tumor cells to hormone ablation therapy and sensitizes prostate and non-small cell lung tumor cells to radiation therapy. Three phase 1 clinical trials, involving a total of 75 patients, have been completed with OGX-011. In all of these clinical trials, OGX-011 was well tolerated by the patients, some of whom have experienced various adverse events, the majority of which are associated with other treatments in the protocol and the disease. The majority of adverse events were mild and the most common adverse events consisted of flu-like symptoms. In the first phase 1 clinical trial, OGX-011 was intravenously administered once per week in combination with hormone ablation therapy to 25 patients with localized prostate cancer in advance of surgery to remove the prostate gland to evaluate safety and to determine drug concentration and clusterin inhibition in the prostate gland. Six different doses of OGX-011 were evaluated ranging from 40 mg per patient per dose to 640 mg per patient per dose. This clinical trial showed that OGX-011 reduced clusterin mRNA levels in both prostate cancer tissue and lymph node tissue in a dose dependent manner which was statistically significant (PTrend = 0.008 and PTrend<0.001, respectively) in each case. This clinical trial also showed that OGX-011 increased prostate tumor cell death in a dose dependent manner which was statistically significant (PTrend<0.001). A PTrend value of less than 0.05 was deemed statistically significant. At the 640 mg dose, OGX-011 reduced clusterin mRNA by approximately 92 percent in prostate cancer tissue and approximately 98 percent in lymph node tissue, and more than doubled the number of prostate tumor cells undergoing cell death compared to hormone ablation therapy alone. OGX-011 was well-tolerated and there were no serious adverse events reported. The most common adverse events were a mild suppression of white blood cell counts, flu-like symptoms and mild elevations in liver enzyme levels. In the second phase 1 clinical trial, OGX-011 was intravenously administered once per week in combination with docetaxel chemotherapy to 40 patients with solid tumors known to express clusterin. Six different doses of OGX-011 were evaluated ranging from 40 mg per patient per dose to 640 mg per patient per dose. This clinical trial showed that serum clusterin levels dropped in patients while on treatment with 640 mg OGX-011 in combination with docetaxel. A statistical analysis was not performed. Ten patients experienced 13 serious adverse events. Six of the 13 serious adverse events were attributed to the combination of OGX-011 and the chemotherapy. In the third phase 1 clinical trial, OGX-011 was intravenously administered once per week in combination with two commonly used chemotherapeutic agents to 10 patients with advanced non-small cell lung cancer. Two different doses of OGX-011 were evaluated ranging from 480 mg SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 4 TO FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 per patient per dose to 640 mg per patient per dose. The one-year survival rate for all ten patients was 60 percent and for patients that received at least one dose of OGX-011 in combination with these chemotherapies was approximately 67 percent. This compares with results from prior published phase 3 clinical trials which reported one-year survival rates of 33 to 43 percent for patients that received chemotherapy treatment alone. Statistical analysis for treatment response was not performed. Five serious adverse events were reported in four of the 10 patients evaluated. All of the serious adverse events were attributed to the chemotherapy or disease, except for one case of elevated creatinine and one case of fever with a reduced number of cells of a specific white blood cell type which were both attributed to the combination of OGX-011 and the chemotherapeutic agents. OGX-011 is currently in five phase 2 clinical trials investigating the potential to improve treatment outcomes for patients with prostate cancer, non-small cell lung cancer and breast cancer. We are conducting these clinical trials in parallel, rather than sequentially, to accelerate our evaluation of OGX-011 in several cancer indications and in combination with several treatment regimes, which will accelerate our assessment of these indications and combinations for further development. We plan to evaluate the results of our ongoing phase 2 clinical trials to determine which cancer indications and which treatment combinations demonstrate promise and we will design our phase 3 clinical trials accordingly. We have completed enrollment of four of our five phase 2 clinical trials and we expect that data from all five phase 2 clinical trials will be available by the end of 2007. OGX-011 is being developed to work in combination with therapies that are broadly used by clinicians and considered highly effective in the treatment of each cancer indication that we are targeting with the intent of delaying treatment resistance to those therapies. Since production of clusterin and the resulting treatment resistance occurs in an array of cancer indications and in response to a variety of cancer treatments, we believe that our development options for OGX-011 are numerous. Our Second Product Candidate, OGX-427 The development program for our second product candidate, OGX-427, is focused on reducing heat shock protein 27 (Hsp27) production to enhance treatment sensitivity and delay tumor progression in patients who have not fully developed treatment resistance and to restore treatment sensitivity in patients who have developed treatment resistance. Hsp27 is a cell survival protein that is over-produced in response to many cancer treatments, including hormone ablation therapy, chemotherapy and radiation therapy. Increased Hsp27 production is observed in many human cancers, including prostate, non-small cell lung, breast, ovarian, bladder, renal, pancreatic, multiple myeloma and liver cancers. Increased Hsp27 production is linked to faster rates of cancer progression, treatment resistance and shorter survival duration. A number of pre-clinical studies conducted by the Prostate Centre and others have shown that inhibiting the production of Hsp27 in human prostate, breast, ovarian, pancreatic and bladder tumor cells sensitizes the cells to chemotherapy. The Prostate Centre has also conducted pre-clinical studies that indicate that reducing Hsp27 production sensitizes prostate tumor cells to hormone ablation therapy. Pre-clinical studies conducted by the Prostate Centre and others have shown that reducing Hsp27 production induces tumor cell death in prostate, breast, non-small cell lung, bladder and pancreatic cancers. Redeemable convertible preferred share accretion $ 1,843 $ 1,248 $ 385 $ 129 $ Redeemable convertible preferred share accretion $ 1,843 $ 1,248 $ 385 $ 129 $ # $ (In thousands of U.S. dollars, except share amounts) Class A preferred Series 1 Balance, December 31, 2000 Issued for cash, net of issue costs of $58 475,113 1,267 Accretion of redeemable convertible preferred shares ONCOGENEX TECHNOLOGIES INC. (Name of Registrant as specified in its Charter) Canada State or other Jurisdiction of Incorporation or Organization 2834 Primary Standard Industrial Classification Code Number N/A I.R.S Employer Identification No 1001 West Broadway, Suite 400 Vancouver, British Columbia Canada V6H 4B1 (604) 736-3678 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) DL Services Inc. 1420 Fifth Avenue, Suite 3400 Seattle, Washington 98101 (206) 903-8800 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) We intend to file our investigational new drug application for OGX-427 in early 2007 and begin dosing patients in our initial phase 1 clinical trial by mid-2007. Our Third Product Candidate, OGX-225 The development program for our third product candidate, OGX-225, is focused on reducing the production of both insulin-like growth factor binding protein-2 (IGFBP-2) and insulin-like growth factor binding protein-5 (IGFBP-5) with a single product to enhance treatment sensitivity and delay tumor progression in patients who are resistant to hormone ablation therapy. In the treatment of cancers that require hormones for growth, clinicians use hormone ablation therapy to inhibit the production of the primary hormone (e.g., testosterone or estrogen) required for tumor growth. While tumors often regress initially following hormone ablation therapy, IGFBP-2 or IGFBP-5 make an alternate hormone, insulin-like growth factor-1, or IGF-1, available to the tumor that facilitates continued tumor growth. By inhibiting the production of IGFBP-2 and IGFBP-5, the tumor's access to IGF-1 is reduced and tumor growth is delayed. Increased IGFBP-2 or IGFBP-5 production is observed in several cancers, including prostate, non-small cell lung, breast, ovarian, bladder, pancreatic and colon cancers, acute myeloid leukemia, acute lymphoblastic leukemia, neuroblastoma, glioma and melanoma. Increased IGFBP-2 or IGFBP-5 production is linked to faster rates of cancer progression, treatment resistance and shorter survival duration. Pre-clinical studies conducted by the Prostate Centre and others in human prostate, bladder, glioma and breast cancer, have shown that reducing IGFBP-2 and IGFBP-5 production with OGX-225 induced tumor cell death or sensitized all of these tumor types to chemotherapy. We intend to continue to evaluate OGX-225 in pre-clinical studies to assess its ability to inhibit or delay progression of hormone-dependent and other tumors. Our Approach to Treatment Resistance We are focused on inhibiting the processes by which cancers develop treatment resistance. Our current product candidates are designed to target and selectively inhibit the production of proteins that facilitate the survival and growth of tumor cells. A protein's influence in the body can be inhibited by either interfering with its structure and function, or by disrupting its production; however, the structure of certain proteins, such as clusterin and Hsp27, have not been solved and hence are difficult to inhibit by interfering with their structure or function. For this reason, we are focusing on disrupting the production of these proteins. We have chosen to disrupt the production of these proteins using "second-generation" antisense technology because we believe that it is the most effective means of disrupting production of these proteins. To facilitate this approach, our protein production inhibitors have been combined with Isis Pharmaceuticals, Inc.'s second- generation antisense chemistry to overcome the limitations of first-generation antisense technology. Our Strategy Focus on developing and commercializing new cancer therapies to inhibit treatment resistance in cancer patients. Focus on enhancing the effectiveness of broadly used cancer therapeutics through combination with OGX-011. Copies of Communications to: Randal R. Jones Christopher L. Doerksen Dorsey & Whitney LLP 1420 Fifth Avenue, Suite 3400 Seattle, Washington 98101 (206) 903-8800 J. Douglas Seppala DuMoulin Black LLP 10th Floor 595 Howe Street Vancouver, BC Canada V6C 2T5 (604) 687-1224 R. Hector MacKay-Dunn, Q.C. Farris, Vaughan, Wills & Murphy LLP 25th Floor, 700 West Georgia Street Vancouver, BC Canada V7Y 1B3 (604) 684-9151 Christopher J. Cummings Shearman & Sterling LLP Suite 4405 P.O. Box 247 Toronto, Ontario Canada M5L 1E8 (416) 360-8484 Accelerate the assessment of OGX-011 by conducting concurrent clinical trials in multiple indications. Advance our product pipeline by conducting clinical trials across multiple cancer indications for each of OGX-427 and OGX-225. Optimize the development of our product candidates through use of outsourcing and internal expertise. Selectively establish collaborations that expand capabilities and accelerate development and marketing of our product candidates. Risk Factors Investing in our common shares involves substantial risk. In executing our business strategy we face significant risks and uncertainties, which are highlighted in the section entitled "Risk Factors". These risks include the following: We are not profitable and have incurred significant net losses in each year since our inception. As of September 30, 2006, we had incurred cumulative losses before taxes of $19.9 million, and we expect to incur losses for the foreseeable future. In order to successfully implement our strategy, we will need to raise substantial additional capital to support our operations for a number of years while we continue our research activities and pursue the development of, and regulatory approval for, our product candidates. All of our product candidates are subject to regulatory approval by the U.S. Food and Drug Administration and comparable agencies in other countries. None of our product candidates have completed the expensive and lengthy clinical trials required for obtaining regulatory approval. If we are unable to develop, receive regulatory approval for and successfully commercialize any of our product candidates, we will be unable to generate significant revenues, and we may never become profitable. Company Information We were incorporated under the Canada Business Corporations Act, or CBCA, on May 26, 2000 as 3766284 Canada Inc. We changed our named to OncoGenex Technologies Inc. on July 6, 2000. We have one wholly-owned subsidiary: OncoGenex, Inc., a corporation incorporated under the laws of the State of Washington. Unless the context otherwise requires, any reference to "OncoGenex", "the Company", "we", "our" and "us" in this prospectus refers to OncoGenex Technologies Inc. and our subsidiary. Our principal place of business is at 1001 West Broadway, Suite 400, Vancouver, British Columbia, V6H 4B1. Our telephone number is (604) 736-3678 and our facsimile number is (604) 736-3687. We also maintain a web site at www.oncogenex.ca. The information contained in, or that can be accessed through, our web site is not a part of this prospectus. Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.
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+Prospectus Summary 1
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+S-1/A 1 a2178170zs-1a.htm S-1/A Use these links to rapidly review the document TABLE OF CONTENTS Helicos BioSciences Corporation (A development stage company) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS As filed with the Securities and Exchange Commission on May 24, 2007 Registration No. 333-140973 Balance at March 31, 2007 (unaudited) 28,182,246 $ 26,869 31,007,752 $ 39,886 1,966,682 $ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Amendment No. 7 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Total future minimum payments 2,891 Less: amount representing interest (418 ) Less: debt discount (25 ) Add: amortization of debt discount HELICOS BIOSCIENCES CORPORATION (Exact Name of Registrant as Specified in Its Charter) Delaware (State of Incorporation) 3826 (Primary Standard Industrial Classification Code Number) 05-0587367 (I.R.S. Employer Identification Number) One Kendall Square Building 700 Cambridge, Massachusetts 02139 (617) 264-1800 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) Stanley N. Lapidus President and Chief Executive Officer Helicos BioSciences Corporation One Kendall Square Building 700 Cambridge, Massachusetts 02139 (617) 264-1800 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service) Copies to: Lawrence S. Wittenberg, Esq. Edward A. King, Esq. Goodwin Procter LLP Exchange Place 53 State Street Boston, Massachusetts 02109 (617) 570-1000 Mark C. Solakian, Esq. Vice President and Corporate Counsel Helicos BioSciences Corporation One Kendall Square Building 700 Cambridge, Massachusetts 02139 (617) 264-1800 Donald J. Murray, Esq. Eric W. Blanchard, Esq. Dewey Ballantine LLP 1301 Avenue of the Americas New York, New York 10019-6092 (212) 259-8000 Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Cash, cash equivalents and short-term investments $ 22,760 $ 65,948 Working capital 20,718 63,906 Total assets 27,161 70,349 Long-term debt, net of current portion 1,610 1,610 Redeemable convertible preferred stock warrants 202 Redeemable convertible preferred stock 66,755 Deficit accumulated during development stage (65,599 ) (65,599 ) Total stockholders' equity (deficit) (44,961 ) 65,184 The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), shall determine. PROSPECTUS 5,400,000 Shares Common Stock This is the initial public offering of our common stock. No public market currently exists for our common stock. We are offering all of the 5,400,000 shares of our common stock offered by this prospectus. Certain of our existing stockholders have indicated an interest in purchasing up to $12 million of our common stock in this offering at the public offering price, or up to 1,333,332 shares of our common stock. Because indications of interest are not binding agreements or commitments to purchase, these stockholders may not purchase any common stock in this offering. Our common stock has been approved for quotation on the NASDAQ Global Market under the symbol "HLCS." Investing in our common stock involves a high degree of risk. Before buying any shares, you should carefully read the discussion of material risks of investing in our common stock in "Risk factors" beginning on page 9 of this prospectus. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Per share Total Public offering price $ 9.00 $ 48,600,000 Underwriting discounts and commissions $ 0.63 $ 3,402,000 Proceeds, before expenses, to us $ 8.37 $ 45,198,000 The underwriters may also purchase up to an additional 810,000 shares of our common stock at the public offering price, less the underwriting discounts and commissions payable by us, to cover over-allotments, if any, within 30 days from the date of this prospectus. If the underwriters exercise this option in full, the total underwriting discounts and commissions will be $3,912,300 and our total proceeds, before expenses, will be $51,977,700. Underwriting discounts and commissions with respect to the up to 1,333,332 shares of common stock that may be purchased in this offering by certain of our existing stockholders will be $0.2625 per share. To the extent all of these shares are purchased, our net proceeds, before expenses, will be $45,688,000 and underwriting discounts and commissions will be $2,912,000. If the underwriters exercise their over-allotment option in full, our net proceeds, before expenses, will be $52,467,700 and underwriting discounts and commissions will be $3,422,300. The underwriters are offering the common stock as set forth under "Underwriting." Delivery of the shares will be made on or about May 30, 2007. UBS Investment Bank JPMorgan Leerink Swann & Company Pacific Growth Equities, LLC The date of this prospectus is May 24, 2007. You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with additional information or information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of shares of our common stock. TABLE OF CONTENTS Three months ended March 31, 158,656 0.77 % On the date of this prospectus 7,751 0.04 % 90 days after the date of this prospectus 10,994,013 53.58 % 180 days after the date of this prospectus due to expiration of lock-up agreements between the holders of these shares and the underwriters. However, UBS Securities LLC can waive the provisions of these lock-up agreements and allow these stockholders to sell their shares at any time 469,815 2.29 % 180 days after the date of this prospectus due to the expiration of lock-up agreements between the holders of these shares and us 3,489,740 17.01 % Between 181 and 365 days after the date of this prospectus, depending on the requirements of the federal securities laws In addition, as of March 31, 2007, there were 18,040 shares of common stock issuable upon the exercise of Series B redeemable convertible preferred stock warrants, 1,219,870 shares subject to outstanding options, 277,777 shares of common stock reserved for future issuance as charitable contribution to the Broad Institute of MIT and Harvard and an additional 1,685,934 shares reserved for future issuance under our stock option plan that will become eligible for sale in the public market to the extent permitted by any applicable vesting requirements, the lock-up agreements and Rules 144 and 701 under the Securities Act of 1933, as amended. Moreover, after this offering, holders of an aggregate of approximately 14,073,415 shares of our common stock as of March 31, 2007, will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register all shares of common stock that we may issue under our employee benefit plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements. You will incur immediate and substantial dilution as a result of this offering. If you purchase common stock in this offering, you will pay more for your shares than the amounts paid by existing stockholders for their shares. For instance, purchasers of shares of our common stock in this offering will have contributed approximately 41.9% of the aggregate price paid by all purchasers of our common stock, but following this offering will only own 26.3% of the shares of our common stock outstanding after this offering. In addition, the initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock. As a result, you will incur immediate and substantial dilution of $5.82 per share, representing the difference between the initial public offering price of $9.00 per share and our net tangible book value per share after giving effect to this offering. Moreover, we issued options in the past to acquire common stock at prices significantly below the initial public offering price. As of March 31, 2007, there were 81,184 shares of Series B redeemable convertible preferred stock issuable upon the exercise 25 of warrants at an exercise price of $1.29 per share, which convert into 18,040 shares of common stock, and 1,219,870 shares subject to outstanding options at a weighted average exercise price of $6.03 per share. To the extent that these warrants or outstanding options are ultimately exercised, you will incur further dilution. Provisions in our certificate of incorporation and by-laws or Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock. Provisions of our certificate of incorporation and by-laws and Delaware law may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include: >a staggered board of directors; >limitations on the removal of directors; >advance notice requirements for stockholder proposals and nominations; >the inability of stockholders to act by written consent or to call special meetings; and >the ability of our board of directors to make, alter or repeal our by-laws. The affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote is necessary to amend or repeal the above provisions of our certificate of incorporation. In addition, our board of directors has the ability to designate the terms of and issue new series of preferred stock without stockholder approval. Also, absent approval of our board of directors, our by-laws may only be amended or repealed by the affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote. Accordingly, any two of our significant stockholders identified under the heading "Principal stockholders" acting together will have the ability to block any such amendment. In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition. We have broad discretion in the use of the net proceeds from this offering and may not use them effectively. We cannot specify with certainty the particular uses of the net proceeds we will receive from this offering. Our management will have broad discretion in the application of the net proceeds, including for any of the purposes described in "Use of proceeds." Accordingly, you will have to rely upon the judgment of our management with respect to the use of the proceeds, with only limited information concerning management's specific intentions. Our management may spend a portion or all of the net proceeds from this offering in ways that our stockholders may not desire or that may not yield a 26 favorable return. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value. We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock. We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares. ($ in thousands) Net cash provided by (used in): Operating activities $ (6,439 ) $ (10,014 ) $ (16,532 ) $ (3,638 ) $ (7,584 ) Investing activities (13,369 ) 11,704 (3,998 ) (751 ) 345 Financing activities 135 Net cash provided by financing activities 135 Special note regarding forward-looking statements This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this prospectus regarding our strategy, future operations, future financial position, future net sales, projected costs, projected expenses, prospects and plans and objectives of management are forward-looking statements. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that the expectations underlying any of our forward-looking statements are reasonable, these expectations may prove to be incorrect, and all of these statements are subject to risks and uncertainties. We discuss many of the risks that we believe could cause actual results or events to differ materially from these forward-looking statements in greater detail in the section entitled
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001277021_visant_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001277021_visant_prospectus_summary.txt
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+This summary highlights material information appearing elsewhere in this prospectus. You should read the entire prospectus carefully. This prospectus contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in "Risk Factors" and elsewhere in this prospectus. All references to a particular fiscal year of Visant Holding Corp. are to the four fiscal quarters ended the Saturday nearest to December 31. Our Company In this document, references to "Visant Holding," "Holdings," the "Company," "we," "our," or "us" refer to Visant Holding Corp. and its consolidated subsidiaries, and references to "Visant" refer to our indirect subsidiary, Visant Corporation. Visant Corporation operates Jostens, Inc. and its subsidiaries ("Jostens"), AHC I Acquisition Corp. and its subsidiaries ("Arcade"), Dixon Direct Corp. ("Dixon") and Neff Holding Company and its subsidiary ("Neff") and, until May 16, 2007, operated Von Hoffmann Holdings Inc. and its subsidiaries Von Hoffmann Corporation and Anthology, Inc. ("Von Hoffmann"). We are a leading marketing and publishing services enterprise servicing the school affinity, direct marketing, fragrance and cosmetics and educational publishing markets. We were formed through the October 2004 consolidation of Jostens, Von Hoffmann and Arcade. On June 8, 2006, we entered into definitive agreements to sell our Jostens Photography businesses, which previously comprised a reportable segment. The transactions closed on June 30, 2006. The discontinued operations of the Jostens Photography businesses are excluded from the consolidated financial statements retrospective from the date of disposition. On June 16, 2006, we acquired, through a wholly owned subsidiary, substantially all of the assets and assumed certain liabilities of the Dixon Web operation of the Sleepeck Printing Company, a provider of innovative marketing services and products located in Dixon, Illinois. At the time of acquisition, the name of the business was changed to Dixon Direct Corp. The results of Dixon's operations have been included in the consolidated financial statements since that date. On September 8, 2006, a newly formed subsidiary of ours acquired substantially all of the assets and assumed certain liabilities of the Vertis, Inc. fragrance sampling business. The acquired business currently operates under the Arcade Marketing name. The acquisition was a strategic step to continue to expand our Marketing and Publishing Services segment, which services the fragrance, cosmetic, personal care and other consumer product market segments. The results of these acquired operations have been included in the consolidated financial statements since that date. As of December 2006, our Von Hoffmann Holdings Inc., Von Hoffmann Corporation and Anthology, Inc. businesses were held as assets for sale. On January 3, 2007, we entered into a Stock Purchase Agreement (the "Von Hoffmann Stock Purchase Agreement") with R.R. Donnelley & Sons Company providing for the sale of Von Hoffmann Holdings Inc., Von Hoffmann Corporation and Anthology, Inc., which previously comprised the Educational Textbook segment and a portion of the Marketing and Publishing Services segment. We closed the transaction on May 16, 2007. The operations of the Von Hoffmann businesses are reported as discontinued operations in the consolidated financial statements for all periods presented. On March 16, 2007, we acquired all of the outstanding capital stock of Neff Holding Company and its wholly owned subsidiary Neff Motivation, Inc. Neff is a leading single source provider of custom award programs and apparel, including chenille letters and letter jackets, to the scholastic market segment. Neff operates as a direct subsidiary of Visant under the Neff brand name and its results are KKR and related funds(2) 2,664,356 44.6 % 1 (3) 100.0 % DLJMBP III and related funds(4) 2,664,357 44.6 % David F. Burgstahler(4)(8) 2,666,438 44.6 % Alexander Navab(2)(8) 2,666,437 44.6 % 1 (3) 100.0 % Tagar C. Olson(2)(8) 2,666,437 44.6 % 1 (3) 100.0 % Charles P. Pieper(4)(8) 2,666,438 44.6 % George M.C. Fisher(2)(5)(6) 4,163 * Marc L. Reisch(7)(8)(10) 115,989 1.9 % Marie D. Hlavaty(7)(8) 15,608 * Paul B. Carousso(7)(8) 7,805 * Michael L. Bailey(7)(8) 38,004 * John Van Horn(7)(9) 5,203 * Directors and officers (12 persons) as a group(2)(4)(5)(6)(8)(9)(10) 5,538,484 90.7 % Balance January 1, 2005 Balance December 30, 2006 Service cost $ 6,603 $ 8,016 Interest cost 14,989 14,901 Expected return on plan assets (22,611 ) (21,255 ) Amortization of prior year service cost (478 ) 53 Amortization of net actuarial loss 3 Net cash used in investing activities (840 ) (19,006 ) (23 ) (19,869 ) Intercompany payable (receivable) 30,002 (30,003 ) WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to the notes. This prospectus, which is a part of the registration statement, omits certain information included in the registration statement and the exhibits thereto. For further information with respect to us and the securities, we refer you to the registration statement and its exhibits. The descriptions of each contract and document contained in this prospectus are summaries and qualified in their entirety by reference to the copy of each such contract or document filed as an exhibit to the registration statement. You may read and copy the registration statement, including exhibits thereto, at the Commission's Public Reading Room located at 100 F Street, N.E., Washington D.C. 20549. You may obtain information on the operation of the Public Reading Room by calling the Commission at 1-800-SEC-0330. The Commission also maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants such as we who file electronically with the Commission. We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, or Exchange Act, and in accordance therewith, will file reports with the Commission. You may inspect and copy these reports and other information at the addresses set forth above. You may request copies of the documents, at no cost, by telephone at (914) 595-8200 or by mail to Visant Holding Corp., 357 Main Street, Armonk, New York 10504. reported from the date of acquisition together with the results of the Jostens scholastic operations as the renamed Scholastic segment. Our three reportable segments as of March 31, 2007 consisted of: Scholastic provides services related to the marketing, sale and production of class rings and an array of graduation products and other scholastic products to students and administrators primarily in high schools, colleges and other post-secondary institutions; Yearbook provides services related to the publication, marketing, sale and production of school yearbooks; and Marketing and Publishing Services produces multi-sensory and interactive advertising sampling systems, primarily for the fragrance, cosmetics and personal care market segments, and provides innovative products and services to the direct marketing sector. The group also produces book covers and other components for educational publishers. Scholastic We are a leading provider of services related to the marketing, sale and production of class rings and an array of graduation products, such as caps, gowns, diplomas and announcements and graduation-related accessories, and other scholastic products. In the Scholastic segment, we primarily serve U.S. high schools, colleges, universities and other specialty markets, marketing and selling products to students and administrators. Jostens relies on a network of independent sales representatives to sell its scholastic products. Jostens provides a high level of customer service in the marketing and sale of class rings and certain other graduation products, which often involves a high degree of customization. Jostens also provides ongoing warranty service on its class and affiliation rings. Jostens maintains product-specific tooling as well as a library of school logos and mascots that can be used repeatedly for specific school accounts over time. In addition to its class ring offerings, Jostens also designs, manufactures, markets and sells championship rings for professional sports and affinity rings for a variety of specialty markets. Since the acquisition of Neff in March 2007, a leading single source provider of custom award programs and apparel, we also market, manufacture and sell an array of additional scholastic products, including chenille letters, letter jackets, mascot mats, plaques and sports apparel. Yearbook Through our Jostens subsidiary we are a leading provider of services related to the publication, marketing, sale and production of yearbooks, primarily serving U.S. high schools, colleges, universities and middle schools. Jostens generates the majority of its revenues from high school accounts. Jostens' sales representatives and technical support employees assist students and faculty advisers with the planning and layout of yearbooks, including through the provision of on-line layout and editorial tools to assist in the publication of the yearbook. With a new class of students each year and periodic faculty advisor turnover, Jostens' independent sales representatives and customer service employees are the main point of continuity for the yearbook production process on a year-to-year basis. Marketing and Publishing Services The Marketing and Publishing Services segment produces multi-sensory and interactive advertising sampling systems, primarily for the fragrance, cosmetics and personal care market segment, and innovative, highly personalized products primarily targeted at the direct marketing sector. We are also a leading producer of supplemental materials and related components such as decorative covers and plastic transparencies for educational publishers. With over a 100-year history as Arcade Marketing, we pioneered our ScentStrip product in 1980. We also offer an extensive portfolio of proprietary, UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 patented and patent-pending technologies that can be incorporated into various marketing programs designed to reach the consumer at home or in-store, including magazine and catalog inserts, remittance envelopes, statement enclosures, blow-ins, direct mail, direct sell and point-of-sale materials and gift-with-purchase/purchase-with-purchase programs. We specialize in high-quality, in-line finished products and can accommodate large marketing projects with a wide range of dimensional products and in-line finishing production, data processing and mailing services. Our personalized imaging capabilities offer individualized messages to each recipient within a geographical area or demographic group for targeted marketing efforts. Recent Events Between May 18, 2007 and May 23, 2007, Visant made optional pre-payments in the aggregate amount of $375.0 million on its Term Loan C facility. After giving effect to these optional prepayments, Visant's remaining term borrowings under the Term Loan C facility are $341.5 million in principal amount. Company Background On October 4, 2004, an affiliate of Kohlberg Kravis Roberts & Co. L.P., or KKR, and affiliates of DLJ Merchant Banking Partners III, L.P., or DLJMBP III (together with KKR, the "Sponsors"), completed a series of transactions, which created a marketing and publishing services enterprise servicing the school affinity, direct marketing, fragrance and cosmetics and educational publishing market segments through the consolidation of Jostens, Von Hoffmann and Arcade (the "Transactions"). Prior to the Transactions, Von Hoffmann and Arcade were each controlled by affiliates of DLJ Merchant Banking Partners II, L.P., or DLJMBP II, and DLJMBP III owned approximately 82.5% of our outstanding equity, with the remainder held by other co-investors and certain members of management. Upon consummation of the Transactions, an affiliate of KKR invested $256.1 million and was issued equity interests representing approximately 49.6% of our voting interest and 45.0% of our economic interest, and affiliates of DLJMBP III held equity interests representing approximately 41.0% of Holdings' voting interest and 45.0% of Holdings' economic interest, with the remainder held by other co-investors and certain members of management. Approximately $175.6 million of the proceeds were distributed to certain stockholders, and certain treasury stock held by Von Hoffmann was redeemed. After giving effect to the issuance of equity to additional members of management, as of May 25, 2007, affiliates of KKR and DLJMBP III held approximately 49.0% and 41.0%, respectively, of Holdings' voting interest, while each continued to hold approximately 44.6% of Holdings' economic interest. As of May 25, 2007, the other co-investors held approximately 8.4% of the voting interest and 9.1% of the economic interest of Holdings, and members of management held approximately 1.6% of the voting interest and approximately 1.7% of the economic interest of Holdings. AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (1)As of May 25, 2007, affiliates of KKR and DLJMBP III held approximately 49.0% and 41.0%, respectively, of the voting interests of Visant Holding, while each continued to hold approximately 44.6% of the economic interests of Visant Holding. As of May 25, 2007, other co-investors held approximately 8.4% of the voting interests and approximately 9.1% of the economic interests of Visant Holding, while members of management held approximately 1.6% of the voting interest and approximately 1.7% of the economic interest. (2)Consists of 83/4% Senior Notes due 2013 of Visant Holding. (3)Consists of 101/4% Senior Discount Notes Due 2013 of Visant Holding. (4)Visant Secondary Holdings Corp. pledged the stock of Visant as security for the benefit of the lenders under Visant's senior secured credit facilities and is a guarantor of Visant's senior secured credit facilities. (5)Visant's senior secured credit facilities consist of a Term Loan C facility, with $716.5 million outstanding as of March 31, 2007, and a $250.0 million senior secured revolving facility. As of March 31, 2007, Visant had $233.6 million of availability under the revolving credit facility (net of $16.4 million in outstanding letters of credit). Between May 18, 2007 and May 23, 2007, Visant made optional pre-payments in the aggregate amount of $375.0 million on its Term Loan C facility. After giving effect to these optional prepayments, Visant's remaining term borrowings under the Term Loan C facility are $341.5 million in principal amount. The Term Loan C facility matures in 2011 and the revolving credit facility matures in 2009. (6)Consists of the 75/8% Senior Subordinated Notes due 2012 of Visant. Net loss $ (1,239 ) $ (1,136 ) Change in cumulative translation adjustment Net income $ 7,264 $ 1,755 Change in cumulative translation adjustment VISANT HOLDING CORP. (Exact Name of Registrant as Specified in Its Charter) Delaware (State or Other Jurisdiction of Incorporation or Organization) 3911 (Primary Standard Industrial Classification Code Number) 90-0207875 (I.R.S. Employer Identification No.) 357 Main Street Armonk, New York 10504 (914) 595-8200 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) Marie D. Hlavaty, Esq. Visant Holding Corp. 357 Main Street Armonk, New York 10504 (914) 595-8200 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service) Summary of Terms of the Notes The summary below describes the principal terms of the notes. Some of the terms and conditions described below are subject to important limitations and exceptions. The "Description of the Notes" section of this prospectus contains a more detailed description of the terms and conditions of the notes. Issuer Visant Holding Corp. Securities $247.2 million in aggregate principal amount at maturity of 101/4% senior discount notes due 2013. Maturity December 1, 2013. Accretion; Interest The notes were initially issued at a discount to their aggregate principal amount at maturity. Prior to December 1, 2008, interest will accrue on the notes in the form of an increase in the accreted value of such notes. Upon their original date of issuance, the notes had an initial accreted value of $606.82 per $1,000 stated principal amount at maturity. The accreted value of each note will increase until December 1, 2008, at a rate of 101/4% per annum, reflecting the accrual of non-cash interest, such that the accreted value will equal the stated principal amount at maturity on December 1, 2008. Thereafter, cash interest on the notes will accrue and be payable semiannually in arrears on June 1 and December 1, commencing on June 1, 2009, at a rate of 101/4% per annum. Ranking The notes are unsecured senior obligations of Visant Holding. The notes rank: senior in right of payment to all of Visant Holding's future subordinated indebtedness; equally in right of payment with all of Visant Holding's unsecured senior indebtedness (including its 83/4% Senior Notes due 2013); junior to all of Visant Holding's future secured indebtedness to the extent of the value of the security for that indebtedness; and structurally junior to all of the existing and future indebtedness and other liabilities and preferred stock of Visant Holding's subsidiaries. As of March 31, 2007, Visant Holding's subsidiaries had $1,232.9 million of indebtedness outstanding, including $716.5 million of secured indebtedness under Visant's senior secured credit facilities and $500.0 million of senior subordinated notes of Visant and $16.4 million outstanding in the form of letters of credit. Between May 18, 2007 and May 23, 2007, Visant made optional pre-payments in the aggregate amount of $375.0 million on its Term Loan C facility. See "Description of the Notes Ranking." Copies to: Ris B. Norman, Esq. Simpson Thacher & Bartlett LLP 425 Lexington Avenue New York, New York 10017 (212) 455-2000 Optional Redemption We may redeem some or all of the notes at any time prior to December 1, 2008 at the make-whole premium described in this prospectus, plus accrued and unpaid interest to the date of redemption. We may redeem some or all of the notes at any time on or after December 1, 2008 at the redemption prices listed under "Description of the Notes Optional Redemption." Change of Control If we experience a change of control (as defined in the indenture), we will be required to make an offer to repurchase the notes at a price equal to 101% of their accreted value, plus accrued and unpaid interest, if any, to the date of repurchase. We may not have sufficient funds to repurchase the notes upon a change of control. Furthermore, restrictions in Visant's senior secured credit facilities may limit our ability to repurchase the notes upon a change of control, as described under "Risk Factors Risks Related to Our Indebtedness and the Notes Visant Holding may not be able to repurchase the notes upon a change of control." Certain Covenants The indenture governing the notes, among other things, limits our ability and the ability of our restricted subsidiaries to: incur or guarantee additional indebtedness or issue preferred stock; pay dividends or make distributions to our stockholders; repurchase or redeem capital stock or subordinated indebtedness; make investments; create liens; incur restrictions on the ability of our subsidiaries to pay dividends or to make other payments to us; enter into transactions with our affiliates; and merge or consolidate with other companies or transfer all or substantially all of our assets. These limitations are subject to a number of exceptions and qualifications. See "Description of the Notes Certain Covenants."
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001277092_zhongpin_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001277092_zhongpin_prospectus_summary.txt
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@@ -0,0 +1,30 @@
+Prospectus Summary, Risk Factors, Management s
+ Discussion and Analysis of Financial Condition and Results of Operations, 
+ Business, and elsewhere in this prospectus constitute forward-looking
+ statements. These statements involve risks known to us, significant
+ uncertainties, and other factors which may cause our actual results, levels
+ of
+ activity, performance, or achievements to be materially different from any
+ future results, levels of activity, performance, or achievements expressed
+ or
+ implied by those forward-looking statements.
+
+ 
+
+ You
+ can
+ identify forward-looking statements by the use of the words may, will, 
+ should, could, expects, plans, anticipates, believes, estimates, 
+ predicts, intends, potential, proposed, or continue or the negative of
+ those terms. These statements are only predictions. In evaluating these
+ statements, you should specifically consider various factors, including the
+ risks outlined above. These factors may cause our actual results to differ
+ materially from any forward-looking statement.
+
+ 
+
+ Although
+ we believe that the exceptions reflected in the forward-looking statements
+ are
+ reasonable, we cannot guarantee future results, levels of activity, performance
+ or achievements.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001282393_bioform_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001282393_bioform_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..c4e57515a7e5c8de0bb24d29e6645fa07c3686db
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001282393_bioform_prospectus_summary.txt
@@ -0,0 +1 @@
+Table of Contents Tax Consequences The following summary is intended as a general guide to the United States federal income tax consequences relating to the issuance and exercise of stock options granted under our 2003 (Terminated) Stock Plan, our 2003 (Active) Stock Plan and our 2007 Equity Incentive Plan. This summary does not attempt to describe all possible federal or other tax consequences of such grants or tax consequences based on particular circumstances. Incentive Stock Options Optionees recognize no taxable income for regular income tax purposes as the result of the grant or exercise of an incentive stock option qualifying under Section 422 of the Internal Revenue Code (unless the optionee is subject to the alternative minimum tax). Optionees who neither dispose of their shares acquired upon the exercise of an incentive stock option, or ISO shares, within two years after the stock option grant date nor within one year after the exercise date normally will recognize a long-term capital gain or loss equal to the difference, if any, between the sale price and the amount paid for the ISO shares. If an optionee disposes of the ISO shares within two years after the stock option grant date or within one year after the exercise date (each a disqualifying disposition ), the optionee will realize ordinary income at the time of the disposition in an amount equal to the excess, if any, of the fair market value of the ISO shares at the time of exercise (or, if less, the amount realized on such disqualifying disposition) over the exercise price of the ISO shares being purchased. Any additional gain will be capital gain, taxed at a rate that depends upon the amount of time the ISO shares were held by the optionee. A capital gain will be long-term if the optionee s holding period is more than 12 months. We will be entitled to a deduction in connection with the disposition of the ISO shares only to the extent that the optionee recognizes ordinary income on a disqualifying disposition of the ISO shares. Nonstatutory Stock Options Optionees generally recognize no taxable income as the result of the grant of a nonstatutory stock option. Upon the exercise of a nonstatutory stock option, the optionee normally recognizes ordinary income equal to the difference between the stock option exercise price and the fair market value of the shares on the exercise date. If the optionee is an employee of ours, such ordinary income generally is subject to withholding of income and employment taxes. Upon the sale of stock acquired by the exercise of a nonstatutory stock option, any subsequent gain or loss, generally based on the difference between the sale price and the fair market value on the exercise date, will be taxed as capital gain or loss. A capital gain or loss will be long-term if the optionee s holding period is more than 12 months. We generally should be entitled to a deduction equal to the amount of ordinary income recognized by the optionee as a result of the exercise of a nonstatutory stock option, except to the extent such deduction is limited by applicable provisions of the Internal Revenue Code. Nonqualified Deferred Compensation None of our named executive officers participate in non-qualified defined contribution plans or other deferred compensation plans maintained by us. Our compensation committee, which will be comprised solely of outside directors as defined for purposes of Section 162(m) of the Code, may elect to provide our officers and other employees with non-qualified defined contribution or deferred compensation benefits if the compensation committee determines that doing so is in our best interests. 2007 Director Compensation Effective upon the closing of this offering, we will pay each non-employee director $1,500 for each board meeting attended in person and $500 for each board meeting attended telephonically. Each non- employee director will receive an annual retainer of $20,000. In addition, each non-employee director who serves as the chairperson of our audit committee, compensation committee or nominating and UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 * Previously filed. ** To be filed by amendment. Confidential treatment has been requested for portions of this exhibit. These portions have been omitted from the Registration Statement and submitted separately to the Securities and Exchange Commission. AMENDMENT NO. 5 TO FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 BIOFORM MEDICAL, INC. (Exact name of Registrant as specified in its charter) Delaware 3841 39-1979642 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 1875 South Grant Street Suite 110 San Mateo, California 94402 (650) 286-4000 (Address, including zip code, and telephone number, including area code, of Registrant s principal executive offices) Steven L. Basta Chief Executive Officer BioForm Medical, Inc. 1875 South Grant Street Suite 110 San Mateo, California 94402 (650) 286-4000 (Name, address, including zip code, and telephone number, including area code, of agent for service) Please send copies of all communications to: David J. Saul Adrian M. Rich Wilson Sonsini Goodrich & Rosati Professional Corporation 650 Page Mill Road Palo Alto, California 94304 (650) 493-9300 William H. Hinman, Jr. Simpson Thacher & Bartlett LLP 2550 Hanover Street Palo Alto, California 94304 (650) 251-5000 Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a) may determine. Table of Contents
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001284218_upek-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001284218_upek-inc_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..d8a72f4e522b8f078251087ebbb20133bdcf7051
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common stock. You should carefully read the entire prospectus, including Risk Factors and the consolidated financial statements, before making an investment decision. Except where the context otherwise requires, in this prospectus the Company, UPEK, we, us and our refer to UPEK, Inc., a Delaware corporation, and, where appropriate, its subsidiaries. When used in reference to dates or time periods prior to March 4, 2004, the Company, UPEK, we, us and our may also refer to the TouchChip business unit of STMicroelectronics N.V., or STM. Overview We are a leading provider of security products and solutions for the fingerprint authentication market. Our fingerprint authentication products are embedded in millions of notebook computers each year to provide convenient security for end users. Our products incorporate sophisticated security technologies to provide accurate and reliable fingerprint authentication in small, durable and low-cost form factors suitable for use in notebook computers, other portable electronic devices and physical access control. Our fingerprint modules and chipsets ensure high levels of security and privacy, and our sensor-only products are designed for cost sensitive applications. We believe that our fingerprint solutions, which integrate our compact silicon sensors with our proprietary coprocessors and our software, are among the most secure fingerprint authentication products in the industry. We sell our products to original equipment manufacturers, or OEMs, principally through distributors and original design manufacturers, or ODMs. We offer our products as comprehensive solutions, comprised of proprietary hardware and software components, to minimize the time and cost required for manufacturers to integrate our fingerprint authentication solutions into their products. Our OEM end customers include seven of the top ten global notebook computer manufacturers, including Lenovo Group Limited, Toshiba Corporation, Dell Inc. and Sony Corporation. Our fingerprint authentication products are also used by governmental agencies to control physical access to secure areas and logical access to computer networks. Industry Background Increasing need for reliable and convenient user authentication and data security A number of factors are contributing to an increasing need for a reliable and convenient user authentication solution to secure sensitive information, communications and transactions, including: the proliferation of mobile devices, such as notebook computers, mobile phones, smart handheld devices and portable storage drives, which has significantly increased the risk of unauthorized access to confidential information and communications; the proliferation of sensitive and high-value transactions conducted via the Internet; the increasing prevalence of identity theft and fraud, which significantly increases the financial consequences of unauthorized access to information; and UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents increasing regulatory compliance standards, such as the Federal Financial Institutions Examination Council, or FFIEC, the Health Insurance Portability and Accountability Act, or HIPPA, and the Sarbanes-Oxley Act, which require enterprises to demonstrate a robust process for ensuring that corporate and personal data remain confidential and are accessed only by individuals with appropriate authorization. These and other factors contribute to the increasingly critical need to ensure that the person using a device to communicate, access information and conduct transactions is actually the person who is authorized to do so. Traditional forms of authentication are inadequate, expensive and inconvenient The primary form of authentication utilized over the last 25 years has been passwords. Passwords, however, are inherently insecure and inefficient and are commonly lost, stolen, shared or forgotten. In order to provide stronger multi-factor authentication, enterprises and service providers have historically employed one-time password tokens or smart cards. While hardware tokens and smart cards have helped to improve security, they are typically complex and costly to deploy, are commonly lost or stolen and are usually used for a single application. Additionally, smart cards require an entire infrastructure of card readers to be deployed, which makes mass adoption in corporate environments difficult and costly. Adoption of fingerprint biometrics as a next generation authentication and identification technology The security issues, cost and inconvenience of passwords and traditional forms of strong authentication have contributed to the increased focus on biometrics in recent years. The desire for cost-effective and convenient security has led to the emergence of fingerprint biometrics as a mass market solution for commercial applications, driven primarily by its use in notebook computers. Today, many of the leading manufacturers of notebook computers are shipping computers incorporating fingerprint biometrics. Of the 82.4 million notebook computers that International Data Corporation, or IDC, an independent research firm, estimates shipped during 2006, UPEK estimates that more than ten percent contained fingerprint biometrics. We believe that other emerging end markets for fingerprint authentication, such as mobile phones, smart handheld devices and portable storage drives, currently represent penetration levels that are significantly lower than those in the notebook computer market and provide attractive opportunities for the future integration of our solutions. Our Solution We have designed our solutions to enable computer and other electronic systems manufacturers to rapidly incorporate our fingerprint authentication into their products. Our products incorporate sophisticated security technologies to provide accurate and reliable fingerprint authentication in small, durable and low-cost form factors suitable for use in notebook computers, other portable electronic devices and physical access control. Our fingerprint modules and chipsets ensure high levels of security and privacy, and our sensor-only products are designed for cost sensitive applications. Competitive strengths of our fingerprint authentication solutions include: Secure, integrated architecture. We design our fingerprint authentication solutions with our secure, integrated architecture to ensure a high level of security. We typically offer these Table of Contents solutions as fingerprint modules or chipsets, which integrate our compact silicon sensors with our proprietary coprocessors and our software. These hardware and software solutions secure the fingerprint image through the entire authentication process by processing the image within our secured hardware coprocessor, thereby eliminating the security risk of relying on a host system s microprocessor to authenticate the fingerprint. Comprehensive fingerprint authentication solution. We have developed and offer comprehensive fingerprint authentication solutions comprised of proprietary hardware and software components. Our solutions include a fingerprint sensor, a companion processor for matching, a pre-boot authentication capability for integration into the Basic Input/Output System, or BIOS, system firmware, matching algorithms and a suite of software applications for enrollment and authentication of users. We believe that it is critical to own and provide this complete solution to our customers as it would be significantly more time consuming and costly for computer and other electronic systems manufacturers to source these components from separate vendors and integrate them into their products. Accurate and reliable fingerprint authentication technology. Our solutions use our sophisticated technologies to reliably capture fingerprint images and accurately authenticate users. Our proprietary Active Capacitive Sensing technology enables us to analyze fingerprints both on the surface as well as at deep levels within the skin of the finger, enhancing the ability of our sensors to capture the unique ridges and valleys of a fingerprint with a high degree of accuracy. Cost and mobility advantages for the commercial market. We have designed a proprietary silicon sensor that we couple with our proprietary technologies to provide low-cost fingerprint authentication solutions that can be incorporated into mobile devices, such as notebook computers, mobile phones, smart handheld devices and portable storage drives. Designed for, and proven in, high volume and heavy use applications. We have designed our products to meet the mass market requirements of the largest computer and other electronic systems manufacturers. We have also developed a unique manufacturing process to address the need for highly durable fingerprint sensors in order to withstand both intended and accidental physical contact with human skin and other foreign objects to which silicon-based integrated circuits are not typically exposed when embedded in an electronic device, as well as other environmental factors such as electrostatic discharge and chemical contamination. We focus on product reliability for all of our hardware products from the initial stage of the design cycle through each specific design process. Low-cost manufacturing process. We operate our business using a fabless semiconductor model and, as such, do not own or operate semiconductor manufacturing facilities. In addition, we outsource packaging, assembly and test of our fingerprint sensor products. Our fabless business model is designed to enable us to contain our capital expenditures and fixed costs and allow us to focus our resources on the design of innovative products and solutions for the fingerprint authentication market. Our Strategy Our objective is to maintain and expand our position as a leading provider of fingerprint authentication products and solutions. Key elements of our strategy to achieve this objective include: Leverage our leadership position in fingerprint authentication. Through our design wins and significant sales, we believe we have achieved an industry leading position in the notebook UPEK, Inc. (Exact name of Registrant as specified in its charter) Table of Contents computer market. We are currently selling our products to seven of the top ten global notebook computer manufacturers and intend to continue to penetrate our installed base of notebook computer end customers and expand our customer base in the notebook computer market. We intend to leverage our early leadership in the notebook computer market and industry recognition to enter and penetrate emerging high volume commercial end markets for fingerprint authentication, such as the mobile phone, smart handheld device and portable storage drive markets. Offer a range of products to meet the requirements of our end markets. We have developed and continue to enhance a portfolio of products that can be deployed in a broad range of applications and offers customers a choice among a variety of levels of user experience, security and cost, in each category from entry level to our most secure solution. Our products support both our unified solution architecture, PerfectTrust, and a common user interface and offer easy product transitions with mechanical compatibility. We believe we are the only single supplier that provides a range of comprehensive solution choices to the market that can meet entry level and high security needs. Expand technology leadership in fingerprint authentication. We intend to continue to invest in research and development of advanced biometric and security technologies to extend our competitive advantage and to continuously migrate toward more advanced silicon technology in our next generation sensors, including larger wafer sizes and more advanced process technology, to further drive down the cost, size and power requirements of our products. Provide value-added services to our installed base of end users. We have designed all of our products and technologies with a common set of interfaces to enable us to pursue opportunities in complementary markets now and in the future. In this regard, we have recently entered into a strategic alliance with Pay By Touch, a provider of biometric-based marketing and payment services, whereby end users will be able to use fingerprint authentication to securely access their online accounts and services. Continue to focus on government and physical security markets. We sell products based on our fingerprint authentication technology into the government security market. We believe that the rigorous security demands of this market reinforce the security and quality of the products we offer to our commercial customers and position us to pursue cross-segment opportunities. We intend to continue to develop and deliver silicon fingerprint sensors certified for use in government and high security physical access applications. We provide our products to manufacturers of Automated Fingerprint Identification Systems, or AFIS, and other technology components providers for use in homeland security and other government biometric identity management initiatives. Pursue strategic alliances to extend market reach and visibility. We intend to develop strategic alliances with third-party technology and solution providers with complementary offerings to extend our market reach and visibility. Potential alliance partners may include providers of security solutions, enterprise and consumer software and healthcare solutions. Our Relationship with STMicroelectronics N.V. On March 4, 2004, we acquired the biometric fingerprint security business of STM, known as the TouchChip business unit, and commenced operations as a standalone company. In exchange for the contributed assets, we issued 3,333,333 shares of our Series A preferred stock to STM. In Delaware 7373 20-0589725 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 2200 Powell Street, Suite 300 Emeryville, California 94608 (510) 420-2600 (Address, including zip code, and telephone number, including area code, of Registrant s principal executive offices) Table of Contents July 2005, STM sold all of such shares to the holders of our Series B-1 preferred stock. Other than the warrant described below, STM does not own any equity interest in our company. Assuming the warrant is exercised, after our initial public offering, STM will hold, in the aggregate, 666,666 shares of our common stock, representing approximately percent of our total outstanding shares of common stock. We entered into several agreements with STM, which governed our acquisition of the assets and liabilities associated with the TouchChip business unit and govern our current relationship with STM, including a contribution agreement, a noncompetition agreement, a license agreement and a purchase and supply agreement. See Related Party Transactions elsewhere in this prospectus for more information. Contribution Agreement. Under the terms of the contribution agreement, STM transferred to us the assets of the TouchChip business and we assumed STM s rights and obligations under certain agreements and other liabilities associated with the TouchChip business. The contribution agreement provided for standard indemnification from STM for breaches of representations, warranties and covenants for a period of 18 months following the closing of the transaction. We made a claim for indemnification under the contribution agreement from STM, as more fully described in the section Business Legal Proceedings elsewhere in this prospectus. Noncompetition Agreement. In addition, under the contribution agreement, STM and its affiliates are prohibited through March 2008 from competing with us in the development, marketing or sale of products, components, subsystems, solutions or services for fingerprint biometric applications. License Agreement. Under our license agreement with STM, STM has granted us an irrevocable, perpetual, royalty-free license to certain patents and pending patent applications to use, sell and otherwise dispose of products and services. Until March 2008 this license is limited to use in fingerprint biometric applications and silicon fingerprint sensors as navigation devices. From and after March 2008, there is no field of use restriction. STM has agreed not to assert any claims against us under certain of its patents and intellectual property rights that were embodied in TouchChip products as of the consummation of our acquisition of the TouchChip business in the event any such claims relate to fingerprint biometric applications or the use of silicon fingerprint sensors as navigation devices. Under the license agreement, we granted to STM a perpetual, royalty-free, non-transferable license to any improvements on the patents we licensed from STM that we patent during a four-year period ending in March 2008 outside of the field of fingerprint biometric applications. We also agreed not to assert any claims against STM related to any improvements that are not patented by us during this period. Purchase and Supply Agreement. Our purchase and supply agreement with STM provides for the supply of processed semiconductor wafers, sensors and companion chips and related foundry and manufacturing services by STM. This agreement is subject to automatic renewal on an annual basis unless terminated by either party with at least six months notice. We have not received any notice of termination of this agreement from STM. Under this agreement, STM is obligated only to use reasonable efforts to supply us with products subject to STM s capacity availability, and STM may discontinue the manufacturing of these materials at any time. Prices for materials we order under this agreement are to be negotiated in good faith on an annual Alan Kramer President and Chief Executive Officer UPEK, Inc. 2200 Powell Street, Suite 300 Emeryville, California 94608 (510) 420-2600 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents basis and based on the most favorable prices offered by STM to other customers for products in similar technologies and volumes. The purchase and supply agreement provides for STM to indemnify us against any intellectual property infringement claims relating to its design rules or design kit models and for us to indemnify STM for certain claims arising out of the combination of an STM product manufactured for us with other products and certain claims related to the specifications, designs or software we provide to STM. STM has made a claim for indemnification from us under the purchase and supply agreement, as more fully described in the section Business Legal Proceedings elsewhere in this prospectus. Warrant. STM holds a warrant to purchase 666,666 shares of our common stock at an exercise price equal to $0.03 per share. We issued the warrant to STM in consideration of STM s agreement to provide us with audited financial statements for, and other financial information related to, the TouchChip business unit and certain other conditions. STM is a semiconductor company that designs, develops, manufactures and markets semiconductor integrated circuits and discrete devices.
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+S-1 TABLE OF CONTENTS Page Map of Our Market Area ii Summary 1 Risk Factors 16 Selected Consolidated Financial and Other Data 22 How Our Net Proceeds Will be Used 24 We Intend to Continue to Pay Quarterly Cash Dividends 25 Market for Our Common Stock 25 Abington Bank Meets All of Its Regulatory Capital Requirements 27 Our Capitalization 28 Pro Forma Data 30 Management s Discussion and Analysis of Financial Condition and Results of Operations 34 Business 53 Regulation 76 Taxation 84 Management 85 Beneficial Ownership of Common Stock 104 Proposed Management Purchases 106 The Conversion and Offering 107 Restrictions on Acquisitions of Abington Bancorp and Abington Bank and Related Anti-Takeover Provisions 129 Description of Our Capital Stock 137 Experts 138 Legal and Tax Opinions 139 Where You Can Find Additional Information 139 Index to Financial Statements 141 SUMMARY This summary highlights selected information from this document and may not contain all the information that is important to you. To understand the stock offering fully, you should read this entire document carefully, including the financial statements and the notes to the financial statements of Abington Community Bancorp. Abington Bancorp, Inc. Abington Bancorp, Inc. is a newly formed Pennsylvania corporation. Abington Bancorp, Inc. is conducting this stock offering in connection with the conversion of Abington Mutual Holding Company from the mutual to the stock form of organization. The shares of common stock of Abington Bancorp, Inc. to be sold represent the 57.1% ownership interest in Abington Community Bancorp, Inc., the mid-tier stock holding company, that is currently owned by Abington Mutual Holding Company. The remaining 42.9% ownership interest in Abington Community Bancorp, Inc. is currently owned by other shareholders (who are sometimes referred to as the public shareholders ) and will be exchanged for shares of Abington Bancorp s common stock based on an exchange ratio of 1.46073 to 1.97628. The exchange ratio may be increased to as much as 2.27273 in the event the maximum of the offering range is increased by 15%. The actual exchange ratio will be determined at the closing of the offering and will depend on the number of shares of Abington Bancorp s common stock sold in the stock offering. The executive offices of Abington Bancorp, Inc. are located at 180 Old York Road, Jenkintown, Pennsylvania 19046, and its telephone number is (215) 886-8280. Abington Bank Abington Bank is a Pennsylvania chartered stock-form savings bank originally organized in 1867. The bank reorganized into the mutual holding company format in December 2004. While the bank s legal name is Abington Savings Bank, we conduct business under the Abington Bank name. Abington Bank s headquarters and main office are located in Jenkintown, Pennsylvania and we have a loan processing office as well as nine additional full service branch offices and five limited service banking offices located in Montgomery, Bucks and Delaware Counties, Pennsylvania. Abington Bank s business primarily consists of attracting deposits from the general public and using those funds to originate loans and invest in securities. Our market area is located in Montgomery, Bucks and Delaware Counties, Pennsylvania, which are suburbs of Philadelphia. In addition, particularly with respect to commercial and construction lending, we also make loans in Philadelphia and Chester Counties, Pennsylvania, and contiguous counties in New Jersey and Delaware. This area is referred to as the Delaware Valley region. Since its mutual holding company reorganization in 2004, the bank has added two additional full service and one limited service banking office. We plan to open two additional full service banking offices by mid-2007. We also plan to add two additional de novo full service branch offices in Montgomery and Bucks Counties in 2008 and two more in 2009 as well as two or three limited service offices by the end of 2009. At December 31, 2006 compared to September 30, 2004 (the quarter-end prior to its mutual holding company reorganization), Abington Bank s total deposits have increased by $197.9 million or 50.9% and its net loans receivable have increased by $209.1 million or 52.8%. We expect to continue to grow Abington Bank s franchise through additional de novo branch offices and, if prudent opportunities are available, through acquisitions. Abington Bank currently is regulated by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation. As part of the conversion and reorganization, Abington Bank is electing, pursuant to Section 10(l) of the Home Owners Loan Act, to be treated as a savings association. As a result, Abington Bancorp, Inc. will be a registered savings and loan holding company subject to regulation of the Office of Thrift Supervision. Abington Bank will continue to be regulated by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation will continue as the bank s primary Federal banking regulator. Abington Mutual Holding Company Abington Mutual Holding Company currently is the mutual holding company parent of Abington Community Bancorp. The principal business purpose of Abington Mutual Holding Company is owning more than a majority of the outstanding shares of common stock of Abington Community Bancorp. Abington Mutual Holding Company currently owns 57.1% of the outstanding shares of Abington Community Bancorp. Abington Mutual Holding Company will no longer exist upon completion of the conversion and reorganization. MAP OF OUR MARKET AREA (Map of Pennsylvania with Montgomery, Bucks and Delaware Counties highlighted and showing Abington Bank s offices to be inserted) Abington Bank Office Locations Abington Community Bancorp, Inc. Abington Community Bancorp, Inc. is a Pennsylvania corporation which currently is the mid-tier stock holding company for Abington Bank. The common stock of Abington Community Bancorp is registered under the Securities Exchange Act of 1934, as amended, and is publicly traded on the Nasdaq Global Market. At the conclusion of the stock offering and the conversion of Abington Mutual Holding Company, Abington Community Bancorp will no longer exist. The existing public shareholders of Abington Community Bancorp will have their shares converted into 1.46073 to 1.97628 shares of Abington Bancorp common stock. As of December 31, 2006, Abington Community Bancorp had $925.2 million in total assets and $114.1 million in stockholders equity. The following chart shows our current ownership structure which is commonly referred to as the two-tier mutual holding company structure: Following our conversion and this offering, our ownership structure will be as follows: As filed with the Securities and Exchange Commission on March 16, 2007 Registration No. These transactions are commonly referred to as a second-step conversion. We have several business strategies that are designed to further improve our long-term profitability and enhance our franchise. These strategies include: $ Continuing geographic expansion of our market presence by opening additional de novo branches or through acquisitions; $ Continuing our emphasis on commercial real estate, multi-family residential, home equity, and construction loans; $ Maintaining high asset quality; $ Continuing our traditional residential mortgage lending; and $ Increasing core deposits. The Offering We are selling common stock which represents the 57.1% ownership interest in Abington Community Bancorp, Inc. now owned by Abington Mutual Holding Company in the following order of priority. FIRST: Eligible Account Holders (depositors at Abington Bank with $50 or more on deposit as of September 30, 2005). SECOND: Abington Bank s employee stock ownership plan. THIRD: Supplemental Eligible Account Holders (depositors at Abington Bank with $50 or more on deposit as of _______________ __, 2007). FOURTH: Other Depositors (depositors at Abington Bank as of _______________ __, 2007). We are selling between 12,750,000 and 17,250,000 shares of common stock, all at a price of $10.00 per share. The number of shares to be sold may be increased to 19,837,500. The actual number of shares we sell will depend on an independent appraisal performed by RP Financial, LC, an independent appraisal firm. We are also exchanging shares of Abington Community Bancorp, Inc., other than those held by Abington Mutual Holding Company, for shares of Abington Bancorp, Inc. based on an exchange ratio of between 1.46073 and 1.97628. The exchange ratio may be increased to as much as 2.27273 in the event the stock offering closes at the maximum, as adjusted of the valuation range. See The Conversion and Offering - How we Determined the Price Per Share and the Offering Range at page _____. The subscription offering will terminate at 12:00 noon, Eastern time, on _______________ __, 2007. We may extend this expiration date without notice to you for up to 45 days, until ________________ __, 2007. Once submitted, your order is irrevocable unless the offering is terminated or extended beyond _______________ __, 2007. We may request permission from the Office of Thrift Supervision to extend the offering beyond _______________ __, 2007, but in no event may the offering be extended beyond _______________ __, 2009. If the offering is extended beyond _______________ __, 2007, we will be required to notify each subscriber and resolicit subscriptions. We may cancel the conversion and the offering at any time prior to the special meeting of depositors of Abington Bank to vote on the plan of conversion and reorganization and the special meeting of shareholders of Abington Community Bancorp, Inc. to vote on the plan of conversion and reorganization. We may also cancel the conversion and stock offering after the special meetings with the concurrence of the Office of Thrift Supervision. If we cancel the offering, orders for common stock already submitted will be canceled and subscribers funds will be returned with interest at Abington Bank s passbook savings rate. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________________ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ________________________ ABINGTON BANCORP, INC. (Exact name of registrant as specified in its articles of incorporation) Pennsylvania 6036 20-8613037 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (IRS Employer Identification No.) 180 Old York Road Jenkintown, Pennsylvania 19046 (215) 886-8280 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Robert W. White Chairman, President and Chief Executive Officer Abington Bancorp, Inc. 180 Old York Road Jenkintown, Pennsylvania 19046 (215) 886-8280 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Raymond A. Tiernan, Esq. Hugh T. Wilkinson, Esq. Elias, Matz, Tiernan & Herrick L.L.P. 734 15th Street, N.W., 12th Floor Washington, D.C. 20005 John F. Breyer, Jr., Esq. Breyer & Associates P.C. 8180 Greensboro Drive, Suite 785 McLean, Virginia 22102 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ X ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering. [ ] CALCULATION OF REGISTRATION FEE Title of each Class of Securities to be Registered Amount to be Registered Purchase Price Per Share Aggregate Offering Price Registration Fee Common Stock, $.01 par value per share ................... 36,245,920 shares (1) $10.00 $362,459,200 $38,783.13 (1) Estimated solely for the purpose of calculating the registration fee. The Registrant hereby amends this Registration Statement on such date as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that the Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a) may determine. Commencing concurrently with the subscription offering, we may also offer shares of common stock in a community offering. In the community offering, natural persons who reside in Montgomery, Bucks and Delaware Counties, Pennsylvania, will have a preference. This part of the offering may terminate at any time without notice but no later than _________________ __, 2007. Shares not sold in this subscription or community offering may be offered for sale in a syndicated community offering, which would be an offering to the general public on a best efforts basis by a syndicate of broker-dealers managed by Keefe, Bruyette & Woods. This part of the offering may terminate at any time without notice but no later than _________________ __, 2007. You cannot transfer your subscription rights. If you attempt to transfer your rights, you may lose the right to purchase shares and may be subject to criminal prosecution and/or other sanctions. Shares purchased in the subscription offering must be registered in the names of all depositors on the qualifying account(s). Deleting depositors or adding non-depositors or otherwise altering the form of beneficial ownership of a qualifying account will result in a loss of subscription rights. We have the right to reject any orders of stock in the community offering and syndicated community offering either in whole or in part. If your order is rejected in part, you cannot cancel the remainder of your order. We have described the offering in greater detail beginning at page _____. The Exchange of Abington Community Bancorp Common Stock If you are now a shareholder of Abington Community Bancorp, the existing publicly traded mid-tier holding company, your shares will be cancelled and exchanged for new shares of Abington Bancorp common stock. The number of shares you will get will be based on an exchange ratio determined as of the closing of the conversion. The actual number of shares you receive will depend upon the number of shares we sell in our offering, which in turn will depend upon the final appraised value of Abington Bancorp. The following table shows how the exchange ratio will adjust, based on the number of shares sold in our offering. The table also shows how many shares a hypothetical owner of Abington Community Bancorp common stock would receive in the exchange, based on the number of shares sold in the offering. Shares to be sold in the offering Shares of Abington Bancorp stock to be exchanged for current Abington Community Bancorp common stock Total shares of Abington Bancorp common stock to be outstanding after the conversion Exchange ratio 100 shares of Abington Community Bancorp common stock would be exchanged for the following number of shares of Abington Bancorp Amount Percent Amount Percent Minimum 12,750,000 57.1 % 9,581,897 42.9 % 22,331,897 1.46073 146 Midpoint 15,000,000 57.1 11,272,820 42.9 26,272,820 1.71851 171 Maximum 17,250,000 57.1 12,963,743 42.9 30,213,743 1.97628 197 15% above the maximum 19,837,500 57.1 14,908,305 42.9 34,745,805 2.27273 227 If you currently own shares of Abington Community Bancorp which are held in street name, they will be exchanged without any action on your part. If you currently are the record owner of shares of Abington Community Bancorp and hold certificates you will receive, after the conversion and offering is completed, a transmittal form with instructions to surrender your stock certificates. New certificates of our common stock will be mailed within five business days after the exchange agent receives properly executed transmittal forms and certificates. No fractional shares of our common stock will be issued to any public shareholder of Abington Community Bancorp upon consummation of the conversion. For each fractional share that would otherwise be issued, we will pay an amount equal to the product obtained by multiplying the fractional share interest to which the holder would otherwise be entitled by the $10.00 per share subscription price. PROSPECTUS ABINGTON BANCORP, INC. (Proposed holding company for Abington Savings Bank) Up to 17,250,000 Shares of Common Stock for Sale and up to 12,963,743 Shares of Common Stock for Exchange (Anticipated Maximum) Abington Bancorp, Inc. is offering up to 17,250,000 shares of its common stock to the public in connection with the conversion of Abington Mutual Holding Company from the mutual to the stock form of organization. The shares being offered represent the 57.1% ownership interest in Abington Community Bancorp, Inc. now owned by Abington Mutual Holding Company, its mutual holding company parent. Abington Community Bancorp currently is the mid-tier holding company of Abington Bank. The remaining 42.9% ownership interest in Abington Community Bancorp is owned by the public and will be exchanged for shares of Abington Bancorp s common stock. If you are now a shareholder of Abington Community Bancorp, Inc., your shares will be canceled and exchanged for shares of Abington Bancorp. The number of shares you will receive will be based on an exchange ratio that will depend upon the number of new shares we sell in our offering. All shares of common stock being offered for sale will be sold at a price of $10.00 per share. If you are a current or former depositor of Abington Bank as of the eligibility record dates, you may have priority rights to purchase shares in the subscription offering. If you are a current shareholder of Abington Community Bancorp, your shares will be exchanged automatically for between 1.46073 and 1.97628 new shares of Abington Bancorp, Inc. or up to 2.27273 shares in the event the maximum of the offering range is increased by 15%. If you are not a depositor, but are interested in purchasing shares of our common stock, you may be able to purchase shares of our common stock in the community offering to the extent shares remain available after priority orders are filled. We are offering up to 17,250,000 shares of common stock for sale to the public on a best efforts basis, subject to certain conditions. We must sell a minimum of 12,750,000 shares to complete the offering. If, as a result of regulatory considerations, demand for the shares or changes in market conditions, or the independent appraiser determines our market value has increased, we may sell up to 19,837,500 shares without giving you further notice or the opportunity to change or cancel your order. The offering is expected to close at 12:00 noon, Eastern time, on _______________ __, 2007. We may extend this close date without notice to you until _______________ __, 2007, unless the Office of Thrift Supervision approves a later date, which will not be beyond _______________ __, 2009. The minimum purchase is 25 shares. Once submitted, orders are irrevocable unless the offering is terminated or extended beyond _______________ __, 2007. If the offering is extended beyond _______________ __, 2007, subscribers will have the right to modify or rescind their purchase orders. Funds received before completion of the offering up to the minimum of the offering range will be maintained at Abington Bank. Funds received in excess of the minimum of the offering range may be maintained at Abington Bank, or at our discretion, in an escrow account at an independent insured depository institution. In either case, we will pay interest on all funds received at a rate equal to Abington Bank s passbook rate, which is currently _____% per annum. If we do not sell the minimum number of shares or if we terminate the offering for any other reason, we will promptly return your funds with interest at Abington Bank s passbook rate. This investment involves a degree of risk, including the possible loss of principal. Please read Risk Factors beginning on page _____. Abington Community Bancorp s common stock is currently listed on the Nasdaq Global Market under the Symbol ABBC. We have applied to have the common stock of Abington Bancorp listed for trading on the Nasdaq Global Select Market and we expect that the common stock will trade under the symbol ABBCD for a period of 20 trading days after completion of the offering. Thereafter, Abington Bancorp s trading symbol will revert to ABBC. We cannot assure you our common stock will be approved for listing on the Nasdaq Global Select Market. Keefe, Bruyette & Woods will assist us in our selling efforts on a best efforts basis. Keefe Bruyette & Woods is not obligated to purchase any of the common stock that is being offered. Purchasers will not pay any commission to purchase shares of common stock in the offering. Under Pennsylvania and federal law and regulations, current public shareholders of Abington Community Bancorp do not have dissenters rights or appraisal rights. Reasons for the Conversion We are pursuing the conversion for the following reasons: The additional funds resulting from the offering will support continued growth and expansion as well as provide increased lending capability. We believe that our current mutual holding company structure has limited our opportunities to acquire other institutions because we cannot now issue stock in an acquisition in an amount that would cause Abington Mutual Holding Company to own less than a majority of the outstanding shares of Abington Community Bancorp. We expect that our conversion will facilitate our ability to acquire other institutions in the future by eliminating this requirement of majority ownership by our mutual holding company. Currently, we have no plans, agreements or understandings regarding any merger or acquisition transactions. The conversion will increase the number of outstanding shares held by public shareholders and we expect our stock to have greater liquidity. Conditions to Completion of the Conversion We cannot complete our conversion and related offering unless: The plan of conversion is approved by at least a majority of votes eligible to be cast by depositors of Abington Bank; The plan of conversion is approved by at least: two-thirds of the outstanding shares of Abington Community Bancorp common stock; and a majority of the votes cast by shareholders of Abington Community Bancorp, not including those shares held by Abington Mutual Holding Company; We sell at least the minimum number of shares offered; and We receive the final approval of the Office of Thrift Supervision, Pennsylvania Department of Banking and Federal Deposit Insurance Corporation to complete the conversion and offering and related transactions. Abington Mutual Holding Company intends to vote its 57.1% ownership interest in favor of the conversion. In addition, as of ________________ __, 2007, directors and executive officers of Abington Community Bancorp and their associates beneficially owned 665,501 shares of Abington Community Bancorp or 4.3% of the outstanding shares. They intend to vote those shares in favor of the plan of conversion. How We Determined the Price Per Share, the Offering Range and the Exchange Ratio The offering range and the exchange ratio are based on an independent appraisal by RP Financial, LC, an appraisal firm experienced in appraisals of savings institutions. The pro forma market value is the estimated market value of our common stock assuming the sale of shares in this offering. RP Financial has indicated that in its opinion as of February 23, 2007, our common stock=s estimated full market value was $262.7 million at the midpoint. In the offering, we are selling the number of shares representing the 57.1% of shares currently owned by Abington Mutual Holding Company. This results in an offering range between $127.5 million and $172.5 million, with a midpoint of $150.0 million. The appraisal was based in part upon Abington Community Bancorp s financial condition and operations and the effect of the additional capital we will raise from the sale of common stock in this offering. Description/Address(1) Leased/Owned Date of Lease Expiration Net Book Value of Property Amount of Deposits Rydal Park Limited Service Office 1515 The Fairway Rydal, PA 19046 Leased 5/21/08 $ $ 10,562 Centennial Station Limited Service Office 12106-B Centennial Station Warminster, PA 18974 Leased 7/31/08 3 4,762 Regency Towers Limited Service Office 1003 Easton Road Willow Grove, PA 19090 Leased 10/31/08 36 6,266 Ann s Choice Limited Service Office 10000 Ann s Choice Way Warminster, PA 18974 Leased 7/31/08 1 40,697 Maris Grove Limited Service Office(3) 100 Maris Grove Way Glen Mills, PA 19342 Leased 9/30/11 Subject to regulatory approval, we may increase the amount of common stock offered by up to 15%. Accordingly, at the minimum of the offering range, we are offering 12,750,000 shares, and at the maximum, as adjusted, of the offering range we are offering 19,837,500 shares in the subscription offering. The appraisal will be updated before the conversion is completed. If the pro forma market value of the common stock at that time is either below $127.5 million or above $198.4 million, we will notify subscribers, return their subscription amounts and subscribers will have the opportunity to modify or cancel their order. See The Conversion and Offering - How We Determined the Price Per Share and the Offering Range for a description of the factors and assumptions used in determining the stock price and offering range. In preparing its appraisal, RP Financial considered the information in this prospectus, including our financial statements. RP Financial also considered the following factors, among others: our historical, present and projected operating results including, but not limited to, historical income statement information such as return on assets, return on equity, net interest margin trends, operating expense ratios, levels and sources of non-interest income, and levels of loan loss provisions; our historical, present and projected financial condition including, but not limited to, historical balance sheet size, composition and growth trends, loan portfolio composition and trends, liability composition and trends, credit risk measures and trends, and interest rate risk measures and trends; the economic, demographic and competitive characteristics of Abington Bank s primary market area including, but not limited to, employment by industry type, unemployment trends, size and growth of the population, trends in household and per capita income, deposit market share and largest competitors by deposit market share; a comparative evaluation of the operating and financial statistics of Abington Bank with those of other similarly situated, publicly traded companies, which included a comparative analysis of balance sheet composition, income statement ratios, credit risk, interest rate risk and loan portfolio composition; the impact of the stock offering on Abington Bancorp s consolidated stockholders equity and earning potential including, but not limited to, the increase in consolidated equity resulting from the offering, the estimated increase in earnings resulting from the reinvestment of the net proceeds of the offering, the estimated impact on the consolidated equity and earnings resulting from adoption of the employee benefit plans and the effect of higher consolidated equity on Abington Bancorp s future operations; and the trading market for securities of comparable institutions and general conditions in the market for such securities. Two of the measures investors use to analyze whether a stock might be a good investment are the ratio of the offering price to the issuer s book value and the ratio of the offering price to the issuer s annual net income. RP Financial considered these ratios, among other factors, in preparing its appraisal. Book value is the same as total equity, and represents the difference between the issuer s assets and liabilities. RP Financial s appraisal also incorporates an analysis of a peer group of publicly traded companies that RP Financial considered to be comparable to us. The following table presents a summary of selected pricing ratios for the peer group companies and for us on a reported basis as utilized by RP Financial in its appraisal. These ratios are based on earnings for the twelve months ended December 31, 2006 and book value as of December 31, 2006. Compared to the average pricing ratios of the peer group at the maximum of the offering range, our stock would be priced at a premium of 90.8% to the peer group on a price-to-earnings basis and a discount of 20.6% to the peer group on a price-to book value basis and 31.5% on a price to tangible book value basis. This means that, at the maximum of the offering range, a share of our common stock would be more expensive than the peer group based on an earnings per share basis and less expensive than the peer group based on a book value per share basis. See Pro Forma Data for the assumptions used to derive these pricing ratios. Benefit Plans Supplemental Executive Retirement Plan. Abington Bank maintains a Supplemental Executive Retirement Plan for selected executive officers. Currently, Messrs. White, Sandoski, Gormley, and Kovalcheck participate in the Supplemental Executive Retirement Plan. The Supplemental Retirement Plan provides the participants with a ten-year benefit upon retirement at age 65 or older in an amount equal to 50% of the executive s average base compensation, as defined, for the highest three calendar years during the 10 years immediately preceding retirement. Pension Benefits The table below shows the present value of accumulated benefits payable to Messrs. White, Sandoski, Gormley and Kovalcheck, including the number of years of credited service, under the supplemental executive retirement plan determined using interest rate and mortality rate assumptions consistent with those used in our financial statements. Name Plan Name Number of Years Credited Service Present Value of Accumulated Benefit(1) Robert W. White Supplemental Executive Retirement Plan 33 $ 815,417 Jack J. Sandoski Supplemental Executive Retirement Plan 19 427,045 Edward W. Gormley Supplemental Executive Retirement Plan 35 287,011 Frank Kovalcheck Supplemental Executive Retirement Plan OFFERING SUMMARY Price per Share: $10.00 Minimum Maximum Maximum, as Adjusted Number of shares 12,750,000 17,250,000 19,837,500 Gross offering proceeds $ 127,500,000 $ 172,500,000 $ 198,375,000 Estimated offering expenses(1) $ 1,300,000 $ 1,300,000 $ 1,300,000 Selling agent fees and expenses $ 1,169,350 $ 1,583,350 $ 1,821,400 Estimated net proceeds $ 125,030,650 $ 169,616,650 $ 195,253,600 Estimated net proceeds per share $ 9.81 $ 9.83 $ 9.84 Price to Earnings Multiple Price to Book Value Ratio Price to Tangible Book Value Ratio Abington Bancorp (pro forma) Minimum 24.80 x 98.41 % 98.41 % Maximum 30.96 113.54 113.54 Maximum, as adjusted 34.08 120.38 120.38 Peer group companies as of February 23, 2007 Average 16.23 x 143.06 % 165.70 % Median 16.76 138.23 158.59 Because of differences and important factors such as operating characteristics, location, financial performance, asset size, capital structure, and business prospects between us and other fully converted institutions, you should not rely on these comparative valuation ratios as an indication as to whether or not the stock is an appropriate investment for you. The independent valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing the common stock. Because the independent valuation is based on estimates and projections on a number of matters, all of which are subject to change from time to time, no assurance can be given that persons purchasing the common stock will be able to sell their shares at a price equal to or greater than the purchase price. See Risk Factors - Our Stock Price May Decline When Trading Commences at page ___ and Pro Forma Data at page ___ and The Conversion and Offering - How We Determined The Price Per Share And The Offering Range at page ___. After-Market Performance Information The following table presents for all second-step conversions that began trading from January 1, 2004 to February 23, 2007, the percentage change in the trading price from the initial trading date of the offering to the dates shown in the table. The table also presents the average and median trading prices and percentage change in trading prices for the same dates. This information relates to stock performance experienced by other companies that may have no similarities to us with regard to market capitalization, offering size, earnings quality and growth potential, among other factors. Two of the three largest offerings listed in the table involved a simultaneous acquisition of another financial institution. The table is not intended to indicate how our common stock may perform. Data represented in the table reflects a small number of transactions and is not necessarily indicative of general stock market performance trends or of price performance trends of companies that undergo second-step conversions. Furthermore, this table presents only short-term price performance and may not be indicative of the longer-term stock price performance of these companies. There can be no assurance that our stock price will appreciate or that our stock price will not trade below $10.00 per share. The movement of any particular company s stock price is subject to various factors, including, but not limited to, the amount of proceeds a company raises, the company s historical and anticipated operating results, the nature and quality of the company s assets, the company s market area and the quality of management and management s ability to deploy proceeds (such as through loans and investments, the acquisition of other financial institutions or other businesses, the payment of dividends and common stock repurchases). In addition, stock prices may be affected by general market and economic conditions, the interest rate environment, the market for financial institutions and merger or takeover transactions and the presence of professional and other investors who purchase stock on speculation, as well as other unforeseeable events not in the control of management. Before you make an investment decision, please carefully read this prospectus, including Risk Factors. (1) Excludes selling agent fees and expenses payable to Keefe, Bruyette & Woods. (1) Included a simultaneous acquisition. THERE CAN BE NO ASSURANCE THAT OUR STOCK PRICE WILL TRADE SIMILARLY TO THESE COMPANIES. THERE CAN ALSO BE NO ASSURANCE THAT OUR STOCK PRICE WILL NOT TRADE BELOW $10.00 PER SHARE, PARTICULARLY AS THE PROCEEDS RAISED AS A PERCENTAGE OF PRO FORMA STOCKHOLDERS EQUITY MAY HAVE A NEGATIVE EFFECT ON OUR STOCK PRICE PERFORMANCE. Use of Proceeds from the Sale of Our Common Stock We will use the proceeds from the offering as follows: Use of Proceeds Amount, at the minimum Amount, at the maximum Percentage of net offering proceeds at the maximum Loan to our employee stock ownership plan $ 10,200,000 $ 13,800,000 8.14 % Repurchase of shares for recognition and retention plan $ 5,100,000 $ 6,900,000 4.07 % Investment in Abington Bank $ 62,515,175 $ 84,808,325 50.00 % General corporate purposes - dividend payments, possible acquisitions and stock repurchases $ 47,215,475 $ 64,108,325 37.79 % Abington Bancorp may use the portion of the proceeds that it retains to, among other things, invest in securities, pay dividends to shareholders, repurchase shares of common stock (subject to regulatory restrictions), finance the possible acquisition of financial institutions or other businesses that are related to banking (although we have no current plans, agreements or understandings with respect to any possible acquisitions) or for general corporate purposes. These securities are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Neither the Securities and Exchange Commission, the Office of Thrift Supervision, nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense. KEEFE, BRUYETTE & WOODS The date of this prospectus is ________________ __, 2007 The proceeds to be contributed to Abington Bank will be available for general corporate purposes including to support the future expansion of operations through acquisitions of other financial institutions, the establishment of additional branch offices or other customer facilities, expansion into other lending markets or diversification into other banking related businesses, although no such transactions are specifically being considered at this time. Abington Bank also intends to use a portion of the proceeds to support its lending activities. In addition, the increased capital resulting from the offering may allow us to leverage our balance sheet by purchasing investment and mortgage-backed securities funded by advances from the Federal Home Loan Bank of Pittsburgh. The Amount of Stock You May Purchase The minimum purchase is 25 shares. Generally, you may purchase no more than $500,000 (50,000 shares) of common stock offered in any single priority category. The maximum amount of shares that a person together with any associates or group of persons acting in concert with such person may purchase generally is $1.0 million (100,000 shares) of common stock. Your associates are the following persons: persons on joint accounts with you; relatives living in your house; companies, trusts or other entities in which you have a controlling interest or hold a position; or other persons who may be acting together with you. We have the right to determine, in our sole discretion, whether subscribers are associates or acting in concert. Persons having the same address or with accounts registered at the same address generally will be assumed to be associates or acting in concert. We may decrease or increase the maximum purchase limitation without notifying you with the concurrence of the Office of Thrift Supervision. In the event the maximum purchase limitation is increased, persons who subscribed for the maximum will be notified and permitted to increase their subscription. For additional information, see The Conversion and Offering - Limitations on Common Stock Purchases at page _____. How to Order Shares in the Offering If you want to place an order for shares in the offering, you must complete an original stock order and certification form and send it to us, together with full payment. You must also sign the certification that is on the reverse side of the stock order and certification form. The certification also includes an acknowledgement from you that before purchasing shares of our common stock, you received a copy of this prospectus and that you are aware of the risks involved in the investment, including those described under Risk Factors at page ___. We must receive your stock order and certification form before the end of the subscription offering or the end of the community offering, as appropriate. Once we receive your order, you cannot cancel or change it. To ensure that we properly identify your subscription rights, you must list all of your deposit accounts as of the eligibility date on the stock order and certification form. If you fail to do so, your subscription may be reduced or rejected if the offering is oversubscribed. To preserve your purchase priority, you must register the shares only in the name or names of eligible purchasers at the applicable date of eligibility. You may not add the names of others who were not eligible to purchase common stock in the offering on the applicable date of eligibility. We may, in our sole discretion, reject orders received in the community offering or syndicated community offering, either in whole or in part. In addition, we may reject an order submitted by a person who we believe is making false representations or who we believe is attempting to violate, evade or circumvent the terms and conditions of the plans of reorganization and additional stock issuance. If your order is rejected in part, you cannot cancel the remainder of your order. How Shares Can Be Paid For In the offering, subscribers may pay for shares only by: cash (if delivered in person); personal check, bank check or money order; or authorizing Abington Bank to withdraw money from the subscriber s deposit account(s) maintained with Abington Bank (we will waive any applicable penalties for early withdrawals from certificate of deposit accounts). We will pay interest on your subscription funds from the date we receive your funds at Abington Bank s passbook rate until the stock offering is completed or terminated. All funds authorized for withdrawal from deposit accounts will earn interest at the applicable account rate until the stock offering is completed or terminated. If, as a result of a withdrawal from a certificate of deposit, the balance falls below the minimum balance requirement, the remaining funds will be transferred to a savings account and will earn interest at our passbook rate. There will be no early withdrawal penalty for withdrawals from certificates of deposits at Abington Bank used to pay for stock. Funds received in the subscription offering will be held in a segregated deposit account at Abington Bank established to hold funds received as payment for shares. Owners of self-directed IRAs may use the assets of such IRAs to purchase shares of common stock in the subscription and community offerings, provided that such IRAs are not maintained at Abington Bank. Persons with IRAs maintained at Abington Bank must have their accounts transferred to an unaffiliated institution or broker to purchase shares of common stock in the subscription and community offerings. Any interested parties wishing to use IRA funds for stock purchases are advised to contact the stock information center for additional information and allow sufficient time for the account to be transferred as required. Abington Bank cannot lend funds to anyone for the purpose of purchasing shares. Deadline for Orders of Stock For those depositors of Abington Bank with subscription rights who wish to purchase shares in the offering, a properly completed stock order form, together with payment for the shares, must be received by Abington Bank no later than 12:00 noon, Eastern time, on _________________ __, 2007, unless this deadline is extended by us. Subscribers may submit order forms by mail using the return envelope provided, by overnight courier to the indicated address on the order form, or by bringing their order forms to one of our full-service branch offices during regular business hours. Once submitted, orders are irrevocable unless the offering is terminated or extended beyond _________________ __, 2007. Termination of the Offering In the event that there is a community offering in addition to the subscription offering, we anticipate that such direct community offering would expire not later than 45 days subsequent to the expiration of the subscription offering. We may extend this expiration date without notice to you, until _________________ __, 2007, unless the Office of Thrift Supervision approves a later date. If the subscription offering and/or community offering extends beyond _________________ __, 2007. If an extension beyond _______________________ __, 2007 is granted, we will notify subscribers of the extension of time and subscribers will have the right to modify or rescind their subscriptions. If we do not receive an affirmative response from a subscriber to any resolicitation, the subscriber s order will be rescinded and all funds received will be returned promptly with interest, or withdrawal authorizations will be cancelled. All further extensions, in the aggregate, may not last beyond _________________ __, 2009. Our Dividend Policy Abington Community Bancorp has paid quarterly cash dividends since the second quarter of 2005. During the quarter ended December 31, 2006, the cash dividend was $0.06 per share. We intend to continue to pay cash dividends on a quarterly basis after we complete the conversion and the offering. We currently expect that the level of cash dividends per share after the conversion and offering will be substantially consistent with the current amount of dividends per share paid by Abington Bank on its common stock as adjusted for the additional shares issued pursuant to the exchange ratio. For example, based on the current cash dividend of $0.06 per share and an assumed exchange ratio of 1.97628 at the maximum of the offering range, the cash dividend, if paid, would be approximately $0.03 per share. However, the dividend rate and the continued payment of dividends will depend on a number of factors, including our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions. No assurance can be given that we will continue to pay dividends or that they will not be reduced in the future. Additionally, we cannot guarantee that the amount of dividends that we pay after the reorganization will be equal to the per share dividend amount that Abington Community Bancorp s shareholders currently receive, as adjusted to reflect the exchange ratio. Your Subscription Rights Are Not Transferable You may not assign or sell your subscription rights. Any transfer of subscription rights is prohibited by law. If you exercise subscription rights, you will be required to certify that you are purchasing shares solely for your own account and that you have no agreement or understanding regarding the sale or transfer of shares. We intend to pursue any and all legal and equitable remedies if we learn of the transfer of any subscription rights. We will reject orders that we determine to involve the transfer of subscription rights. Benefits to Management from the Offering Our employees, officers and directors will benefit from the offering due to various stock-based benefit plans. Full-time employees, including officers, will be participants in our existing employee stock ownership plan which will purchase additional shares of common stock in the offering; Subsequent to completion of the offering, we intend to implement a: new stock recognition and retention plan; and new stock option plan which will benefit our employees and directors. Employee Stock Ownership Plan. The employee stock ownership plan will provide retirement benefits to all eligible employees of Abington Bank. The plan will purchase 8.0% of Abington Bancorp s common stock sold in the offering, with the proceeds of a loan from Abington Bancorp. As the loan is repaid and shares are released from collateral, the shares will be allocated to the accounts of participants based on a participant s compensation as a percentage of total plan compensation. Non-employee directors are not eligible to participate in the employee stock ownership plan. We will incur additional compensation expense as a result of this plan. See Pro Forma Data for an illustration of the effects of this plan. New Stock Option and Stock Recognition and Retention Plans. We intend to implement new stock option and stock recognition and retention plans no earlier than six months after the conversion. Under these plans, we may award stock options and shares of restricted stock to employees and directors. Shares of restricted stock will be awarded at no cost to the recipient. Stock options will be granted at an exercise price equal to 100% of the fair market value of our common stock on the option grant date. We will incur additional compensation expense as a result of both plans. See Pro Forma Data for an illustration of the effects of these plans. Under the new stock option plan, we may grant stock options in an amount up to 10.0% of Abington Bancorp s common stock sold in the offering. Under the stock recognition and retention plan, we may award restricted stock in an amount equal to 4.0% of Abington Bancorp s common stock sold in the offering. The plans will comply with all applicable Office of Thrift Supervision regulations. The new stock option and stock recognition and retention plans will supplement our existing 2005 Stock Option Plan and 2005 Recognition and Retention Plan, which will continue as plans of Abington Bancorp. (1) Assumes the value of Abington Bancorp s common stock is $10.00 per share for purposes of determining the total estimated value of the grants. (2) Assumes the value of a stock option is $2.64, which was determined using the Black-Scholes option - pricing formula. See Pro Forma Data. (1) Shares purchased or awarded and options granted prior to the conversion have been adjusted for the 1.97628 exchange ratio at the maximum of the offering range. (2) Approximately 150,545 (76,176 shares prior to adjustment for the exchange ratio) of these shares have been allocated to the accounts of participants. (3) 112,118 (56,732 shares prior to adjustment for the exchange ratio) of the indicated 2005 Recognition and Retention Plan awards have vested, and the shares of Abington Community Bancorp common stock subject to these awards have been distributed. (4) The actual value of new recognition and retention plan awards will be determined based on their fair value as of the date grants are made. For purposes of this table, fair value is assumed to be the same as the offering price of $10.00 per share. (5) Of this amount, no options have been exercised to date, and all previously granted options remain outstanding. (6) The weighted-average fair value of stock options under the 2005 Stock Option Plan has been estimated at $3.03 using the Black-Scholes option pricing model and assumes that all options have been granted and are outstanding. Prior to the adjustment for exchange ratio, the 2005 stock option plan covered 714,150 shares. The assumptions used for the options were the following: exercise price, $12.46; dividend yield, 1.65%; expected life three to seven years; expected volatility, 23.60%; and risk-free interest rate, 3.74% to 4.61%, based on Abington Community Bancorp s historical trading activity. The fair value of stock options to be granted under the new stock option plan has been estimated at $2.64 per option using the Black-Scholes option pricing model with the following assumptions: exercise price, $10.00; trading price on date of grant, $10.00; dividend yield, 1.47%; expected life, six years; expected volatility, 23.4%; and risk-free interest rate, 4.14% to 4.61%. Market For Common Stock Abington Community Bancorp s common stock is currently listed on the Nasdaq Global Market under the symbol ABBC . We have applied to have the common stock of Abington Bancorp listed for trading on the Nasdaq Global Select Market . For the first 20 trading days after the conversion and offering is completed, we expect Abington Bancorp s common stock to trade under the symbol ABBCD, thereafter it will revert to the ABBC trading symbol. Federal and State Income Tax Consequences We have received the opinion of Elias, Matz, Tiernan & Herrick L.L.P. and Beard Miller Company LLP, respectively that, under federal and Pennsylvania income tax law and regulation, the tax basis to the shareholders of the common stock purchased in the offering will be the amount paid for the common stock, and that the conversion will not be a taxable event for us. This opinion, however, is not binding on the Internal Revenue Service. The full texts of the opinions are filed as exhibits to the Registration Statement of which this prospectus is a part, and copies may be obtained from the SEC. See Where You Can Find Additional Information. Restrictions on the Acquisition of Abington Bancorp and Abington Bank Federal regulation, as well as provisions contained in the charter and bylaws of Abington Bancorp, contain certain restrictions on acquisitions of Abington Bancorp or its capital stock. These restrictions include the requirement that a potential acquirer of common stock obtain the prior approval of the Office of Thrift Supervision before acquiring in excess of 10% of the stock of Abington Bancorp. Additionally, Office of Thrift Supervision approval would be required for us to be acquired within three years after the conversion. In addition, the charter and bylaws of Abington Bancorp contain provisions that may discourage takeover attempts and prevent you from receiving a premium over the market price of your shares as part of a takeover. These provisions include: prohibitions on the acquisition of more than 10% of our stock; limitations on voting rights of shares held in excess of 10% thereafter; staggered election of only approximately one-third of our board of directors each year; limitations on the ability of shareholders to call special meetings; advance notice requirements for shareholder nominations and new business; removals of directors only for cause and by a majority vote of all stockholders; requirement of a 75% vote of shareholders for certain amendments to the bylaws and certain provisions of the articles of incorporation; the right of the board of directors to issue shares of preferred or common stock without shareholder approval; and a 75% vote of stockholders requirement for the approval of certain business combinations not approved by two-thirds of the board of directors. For further information, see Restrictions on Acquisition of Abington Bancorp and Abington Bank and Related Anti-Takeover Provisions. Receiving a Prospectus and an Order Form To ensure that each purchaser receives a prospectus at least 48 hours before the applicable expiration date, in accordance with Rule 15c2-8 of the Securities Exchange Act of 1934, no prospectus will be mailed any later than five days prior to the expiration date or hand delivered any later than two days prior to the expiration date. Execution of the order form will confirm receipt or delivery in accordance with Rule 15c2-8. Order forms will only be distributed with a prospectus. How You Can Obtain Additional Information Our Stock Information Center is located at ______________________ Street, ______________________, Pennsylvania _________. The phone number is (_____) _____-__________. The Stock Information Center s hours of operation are Monday through Thursday from 9:00 a.m. to 4:00 p.m., Eastern time and Fridays from 9:00 a.m. to 12:00 p.m., Eastern time. The Stock Information Center will be closed weekends and bank holidays. FOR ASSISTANCE, PLEASE CONTACT THE STOCK INFORMATION CENTER AT (_____) _____-_______. RISK FACTORS You should consider carefully the following risk factors in deciding how to vote on the conversion and before purchasing Abington Bancorp common stock. Risks Related to Our Business Market Rates of Interest Have Hurt Our Profitability Market rates of interest have risen from historically low levels. Many institutions, including Abington Bank, have experienced a narrowing or compression of their net interest spread, which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Abington Bank s net interest spread was 2.13% for the year ended December 31, 2006 compared to 2.27% and 2.30% for the years ended December 31, 2005 and 2004, respectively. Abington Bank s net interest margin, which is net interest income as a percentage of average interest-earning assets, was 2.68% for the year ended December 31, 2006 compared to 2.78% and 2.67% for the years ended December 31, 2005 and 2004, respectively. In a period of rising interest rates, like the last two years, the interest income earned on our assets may not increase as rapidly as the interest expense paid on our liabilities. In addition, increases in market rates of interest could adversely affect our net portfolio value. In the event of an immediate and sustained 200 basis point increase in interest rates, Abington Bank s net portfolio value, which is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts, would decrease by $23.2 million or 18.46%. Under the same circumstances, our net interest income would be expected to decrease by $1.6 million or 6.62%. Competition for Core Deposits Is Increasing As a result of rising interest rates in recent periods, deposit customers have transferred significant amounts of their deposits from low-cost core deposits such as checking and savings accounts to certificates of deposits, also known as time deposits. For the year ended December 31, 2006 core deposits comprised 36.8% of our average total deposits compared to 47.9% and 55.6% for the years ended December 31, 2005 and 2004, respectively. At December 31, 2006, $389.0 million, or 66.3%, of our total deposits were certificates of deposit, and of that amount $227.3 million, or 58.4% of our total certificates of deposit, were jumbo certificates of $100,000 or more. Our balances of certificates of deposit have increased as a result of, among other factors, the increased rates now available on those products relative to other deposit products or other investments in the current interest rate environment. The inflow of jumbo certificates of deposit and the retention of these deposits upon maturity are particularly sensitive to general interest rates and money market conditions, making jumbo certificates of deposits traditionally a more volatile source of funding than our checking, savings and money market deposit accounts. As more customers invest in time deposits and as competition for low-cost core deposits increases, the average rate Abington Bank pays on its deposits will likely increase. This will have the effect of narrowing our net interest spread and net interest margin, which could adversely affect our profitability. The average rate we paid on our interest-bearing deposits was 3.39% for the year ended December 31, 2006 compared to 2.38% and 1.88% for the years ended December 31, 2005 and 2004, respectively. Our Portfolio of Loans With a Higher Risk of Loss Is Increasing In recent years, we have increased our originations of construction loans and commercial real estate and multi-family residential real estate loans. These loans have a higher risk of default and loss than single-family residential mortgage loans. The aggregate of construction loans and commercial real estate and multi-family residential loans has increased from $111.6 million or 27.9 % of our total loan portfolio at December 31, 2002 to $227.4 million or 34.8% of the total loan portfolio at December 31, 2006. At the same time, the percentage of the loan portfolio comprised of single-family residential mortgage loans has decreased. Our single-family residential mortgage loans amounted to $247.2 million or 61.7% of our total loan portfolio at December 31, 2002 compared to $375.7 million or 57.6% at December 31, 2006. Construction loans and commercial real estate and multi-family residential real estate loans all generally have a higher risk of loss than single-family residential mortgage loans. At December 31, 2006 and 2005, we had $2.3 million and $2.9 million, respectively, of commercial real estate and multi-family residential loans and construction loans that were considered non-performing. These loans were deemed to be impaired and placed on non-accrual status. The impaired loans at December 31, 2006 were comprised of two construction and three commercial real estate loans to one borrower. The impaired loan at December 31, 2005 was a construction loan to one borrower. Our Results of Operations are Significantly Dependent on Economic Conditions and Related Uncertainties Banking is affected, directly and indirectly, by domestic and international economic and political conditions and by governmental monetary and fiscal policies. Conditions such as inflation, recession, unemployment, volatile interest rates, real estate values, government monetary policy, international conflicts, the actions of terrorists and other factors beyond our control may adversely affect our results of operations. Changes in interest rates, in particular, could adversely affect our net interest income and have a number of other adverse effects on our operations, as discussed the first risk factor above. Adverse economic conditions also could result in an increase in loan delinquencies, foreclosures and nonperforming assets and a decrease in the value of the property or other collateral which secures our loans, all of which could adversely affect our results of operations. We are particularly sensitive to changes in economic conditions and related uncertainties in the Delaware Valley because we derive substantially all of our loans, deposits and other business from the greater Philadelphia region in eastern Pennsylvania and contiguous counties in New Jersey and Delaware. Accordingly, we remain subject to the risks associated with prolonged declines in national or local economies. Our Allowance for Losses on Loans May Not Be Adequate to Cover Probable Losses We have established an allowance for loan losses based upon various assumptions and judgments about the collectibility of our loan portfolio which we believe is adequate to offset probable losses on our existing loans. Since we must use assumptions regarding individual loans and the economy, our current allowance for loan losses may not be sufficient to cover actual loan losses, and increases in the allowance may become necessary in the future. There can be no assurance that any future declines in real estate market conditions, general economic conditions or changes in regulatory policies will not require us to increase our allowance for loan losses, which would adversely affect our results of operations. We may also need to significantly increase our provision for loan losses, particularly if one or more of our larger loans or credit relationships becomes delinquent. In addition, federal regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize loan charge-offs. Our allowance for loan losses amounted to 62.7% of non-performing loans at December 31, 2006. Our Loans are Concentrated to Borrowers In Our Market Area At December 31, 2006, the preponderance of our total loans were to individuals and/or secured by properties located in our market area of the Delaware Valley region. We have relatively few loans outside of our market. As a result, we have a greater risk of loan defaults and losses in the event of an economic downturn in our market area as adverse economic changes may have a negative effect on the ability of our borrowers to make timely repayment of their loans. Additionally, a decline in local property values could adversely affect the value of property used as collateral. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values to satisfy the debt, our earnings and capital could be adversely affected. The Building of Market Share Through our Branching Strategy Could Cause our Expenses to Increase Faster than Revenues We intend to continue to build market share through our branching strategy. We are planning four new branches that we intend to open within the next 24 months. There are costs involved in opening branches and new branches generally require a period of time to generate sufficient revenues to offset their costs, especially in areas in which we do not have an established presence. Accordingly, any new branch may negatively impact our earnings for some period of time until the branch reaches certain economies of scale. Our expenses could be further increased if we encounter delays in the opening of any of our new branches. Finally, we have no assurance our new branches will be successful even after they have been established. We are Dependent Upon the Services of Our Management Team Our future success and profitability depend upon the management and banking abilities of our senior executives. We believe that our future results will also depend in part upon our attracting and retaining highly skilled and qualified management. We are especially dependent on a limited number of key management personnel. The loss of our chief executive officer or other senior executive officers could have a material adverse impact on our operations because other officers may not have the experience and expertise to readily replace these individuals. Competition for such personnel is intense, and we cannot assure you that we will be successful in attracting or retaining such personnel. Changes in key personnel and their responsibilities may be disruptive to our business and could have a material adverse effect on our business, financial condition and results of operations. We are Subject to Extensive Regulation Which Could Adversely Affect Our Business and Operations We are subject to extensive federal and state governmental supervision and regulation, which are intended primarily for the protection of depositors. In addition, we are subject to changes in federal and state laws, as well as changes in regulations, governmental policies and accounting principles. The effects of any such potential changes cannot be predicted but could adversely affect our business and operations in the future. Strong Competition Within our Market Area May Limit our Growth and Profitability Competition in the banking and financial services industry is intense. In our market area, we compete with numerous commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Risks Related to this Offering Additional Expenses Following the Offering From New Equity Benefit Plans Will Adversely Affect Our Net Income Following the offering, we will recognize additional annual employee compensation and benefit expenses stemming from options and shares granted to employees, directors and executives under new benefit plans. These additional expenses will adversely affect our net income. We cannot determine the actual amount of these new stock-related compensation and benefit expenses at this time because applicable accounting practices generally require that they be based on the fair market value of the options or shares of common stock at the date of the grant; however, we expect them to be significant. We will recognize expenses for our employee stock ownership plan when shares are committed to be released to participants accounts and will recognize expenses for restricted stock awards and stock options generally over the vesting period of awards made to recipients. These benefit expenses in the first year following the offering have been estimated to be approximately $2.0 million at the maximum of the offering range as set forth in the pro forma financial information under Pro Forma Data assuming the $10.00 per share purchase price as fair market value. Actual expenses, however, may be higher or lower, depending on the price of our common stock at that time. For further discussion of these plans, see Management-New Stock Benefit Plans. Our Return on Equity May Be Low Which May Negatively Impact Our Stock Price Return on equity, which equals net income divided by average equity, is a ratio used by many investors to compare the performance of a particular company with other companies. Abington Community Bancorp s return on average equity was 5.94% and 5.27% for the years ended December 31, 2006 and 2005, respectively. These returns are lower than returns on equity for many comparable publicly traded financial institutions. We expect our return on equity ratio will not increase substantially, due in part to our increased capital level upon completion of the offering. Consequently, you should not expect a competitive return on equity in the near future. Failure to attain a competitive return on equity ratio may make an investment in our common stock unattractive to some investors which might cause our common stock to trade at lower prices than comparable companies with higher returns on equity. The net proceeds from the stock offering, which may be as much as $195.3 million, will significantly increase our stockholders equity. On a pro forma basis and based on net income for the year ended December 31, 2006, our return on equity ratio, assuming shares are sold at the maximum of the offering range, would be approximately 3.7%. Based on trailing 12 month data for the most recent publicly available financial information (December 31, 2006 or September 30, 2006), the 10 companies comprising our peer group in the independent appraisal prepared by RP Financial and all publicly traded savings banks had average ratios of returns on equity of 6.92% and 6.42%, respectively. After Market Trading Activity Second Step Offerings Completed Closing Dates between January 1, 2004 and February 23, 2007 Price Performance from Initial Trading Date Transaction Ticker Closing Date Gross Proceeds 1 Day 1 Week 1 Month Through February 23, 2007 (In millions) Osage Bancshares, Inc. OSBK 01/18/07 $ 25.1 -0.5 % -0.5 % -6.8 % -2.3 % New Westfield Financial, Inc. WFD 01/04/07 184.0 7.0 7.5 9.0 8.5 Citizens Community Bancorp, Inc. CZWI 11/01/06 52.9 -2.5 -1.0 -3.3 -4.4 Liberty Bancorp, Inc. LBCP 07/24/06 28.1 2.5 1.0 1.5 13.5 First Clover Leaf Financial Corp.(1) FCLF 07/11/06 41.7 3.9 6.0 11.2 18.5 Monadnock Bancorp, Inc. MNKB 06/29/06 5.7 -5.0 -13.8 -14.4 NEBS Bancshares, Inc. NEBSD 12/29/05 30.8 6.6 7.0 7.0 36.2 American Bancorp, Inc. ABNJ 10/06/05 99.2 1.6 -2.5 1.6 19.1 Hudson City Bancorp, Inc. HCBK 06/07/05 3,929.8 9.6 10.8 15.9 37.9 First Federal of Northern Michigan Bancorp, Inc. FFNM 04/04/05 17.0 -5.1 -8.0 -16.0 -8.0 Rome Bancorp, Inc. ROME 03/31/05 59.0 0.5 -2.5 -5.6 26.8 Roebling Financial Corp. RCKB 10/01/04 9.1 -1.0 -0.5 -8.0 25.5 DSA Financial Corporation DRBN 07/30/04 8.5 -2.0 -5.0 -7.0 40.0 Partners Trust Financial Group, Inc. (1) PRTR 07/15/04 148.8 -0.1 -0.2 -1.9 14.8 Synergy Financial Group, Inc. SYNF 01/21/04 70.4 8.1 8.0 7.9 62.3 Provident Bancorp, Inc. (1) PBCP 01/15/04 195.7 15.0 11.5 15.1 40.0 Average 2.7 % 1.7 % 0.4 % 19.6 % Median 1.1 % -0.4 % -0.2 % 18.8 % We Have Broad Discretion in Allocating the Proceeds of the Offering We intend to contribute approximately 50% of the net proceeds of the offering to Abington Bank. Abington Bancorp may use the portion of the proceeds that it retains to, among other things, invest in securities, pay cash dividends or repurchase shares of common stock, subject to regulatory restriction. Abington Bank initially intends to use the net proceeds it retains to purchase investment and mortgage-backed securities. In the future, Abington Bank may use the portion of the proceeds that it receives to fund new loans, open new branches, invest in securities and expand its business activities. Abington Bancorp and Abington Bank may also use the proceeds of the offering to diversify their business and acquire other companies, although we have no specific plans to do so at this time. We have not allocated specific amounts of proceeds for any of these purposes, and we will have significant flexibility in determining how much of the net proceeds we apply to different uses and the timing of such applications. There is a risk that we may fail to effectively use the net proceeds which could have a negative effect on our future profitability ratios. Our Employee Stock Benefit Plans Will Be Dilutive If the offering is completed and shareholders subsequently approve a stock recognition and retention plan and a stock option plan, we will allocate stock to our officers, employees and directors through these plans. If the shares for the stock recognition and retention plan are issued from our authorized but unissued stock, the ownership percentage of outstanding shares of Abington Bancorp would be diluted by approximately 2.23%. However, it is our intention to purchase shares of our common stock in the open market to fund the stock recognition and retention plan. Assuming the shares of our common stock to be awarded under the stock recognition and retention plan are purchased at a price equal to the offering price in the offering, the reduction to stockholders equity from the stock recognition and retention plan would be between $5.1 million and $7.9 million at the minimum and the maximum, as adjusted, of the offering range. The ownership percentage of Abington Bancorp stockholders would also decrease by approximately 5.40% if all potential stock options under our proposed stock option plan are exercised and are filled using shares issued from authorized but unissued stock, assuming the offering closes at the maximum of the offering range. On a combined basis, if authorized but unissued shares of our common stock was the source of shares for both the recognition and retention plan and the stock option plan, the interests of shareholders would be diluted by approximately 7.40%. See Pro Forma Data for data on the dilutive effect of the stock recognition and retention plan and the stock option plan and Management - New Stock Benefit Plans for a description of the plans. Our Stock Price May Decline When Trading Commences. We cannot guarantee that if you purchase shares in the offering that you will be able to sell them at or above the $10.00 purchase price. The trading price of the common stock will be determined by the marketplace, and will be influenced by many factors outside of our control, including prevailing interest rates, investor perceptions, securities analyst research reports and general industry, geopolitical and economic conditions. Publicly traded stock, including stocks of financial institutions, often experience substantial market price volatility. These market fluctuations might not be related to the operating performance of particular companies whose shares are traded. There May Be a Limited Market For Our Common Stock, Which May Adversely Affect Our Stock Price Currently, shares of Abington Community Bank common stock are listed on the Nasdaq Global Market. Since Abington Community Bank common stock began trading in 2004, trading in our shares has been relatively limited. There is no guarantee that the offering will improve the liquidity of our stock. If an active trading market for our common stock does not develop, you may not be able to sell all of your shares of common stock in an efficient manner and the sale of a large number of shares at one time could temporarily depress the market price. There also may be a wide spread between the bid and asked price for our common stock. When there is a wide spread between the bid and asked price, the price at which you may be able to sell our common stock may be significantly lower than the price at which you could buy it at that time. We Intend to Remain Independent Which May Mean You Will Not Receive a Premium for Your Common Stock We intend to remain independent for the foreseeable future. Because we do not plan on seeking possible acquirors, it is unlikely that we will be acquired in the foreseeable future. Accordingly, you should not purchase our common stock with any expectation that a takeover premium will be paid to you in the near term. Our Stock Value May Suffer from Anti-Takeover Provisions That May Impede Potential Takeovers That Management Opposes Provisions in our corporate documents, as well as certain federal regulations, may make it difficult and expensive to pursue a tender offer, change in control or takeover attempt that our board of directors opposes. As a result, our shareholders may not have an opportunity to participate in such a transaction, and the trading price of our stock may not rise to the level of other institutions that are more vulnerable to hostile takeovers. Anti-takeover provisions contained in our corporate documents include: restrictions on acquiring more than 10% of our common stock by any person and limitations on voting rights; the election of members of the board of directors to staggered three-year terms; the absence of cumulative voting by shareholders in the election of directors; provisions restricting the calling of special meetings of shareholders; and our ability to issue preferred stock and additional shares of common stock without shareholder approval. See Restrictions on Acquisition of Abington Bancorp and Abington Bank and Related Anti-Takeover Provisions for a description of anti-takeover provisions in our corporate documents and federal regulations. Our Stock Value May Suffer From Federal Regulations Restricting Takeovers For three years following the offering, Office of Thrift Supervision regulations prohibit any person from acquiring or offering to acquire more than 10% of our common stock without the prior written approval of the Office of Thrift Supervision. Accordingly, the range of potential acquirors for Abington Bancorp will be limited which will correspondingly reduce the likelihood that shareholders will be able to realize a gain on their investment through an acquisition of Abington Bancorp. See Restrictions on Acquisition of Abington Bancorp and Abington Bank and Related Anti-Takeover Provisions - Regulatory Restrictions for a discussion of applicable Office of Thrift Supervision and Pennsylvania laws and regulations regarding acquisitions. FORWARD-LOOKING STATEMENTS This document contains forward-looking statements, which can be identified by the use of words such as would be, will, estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include: statements of goals, intentions and expectations; statements regarding prospects and business strategy; statements regarding asset quality and market risk; and estimates of future costs, benefits and results. These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the factors discussed under the heading Risk Factors beginning at page ___ that could affect the actual outcome of future events and the following factors: general economic conditions, either nationally or in our market area, that are worse than expected; changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; legislative or regulatory changes that adversely affect our business; adverse changes in the securities markets; our ability to successfully manage our growth; changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the SEC or the Financial Accounting Standards Board; and our ability to successfully implement our branch expansion strategy, enter into new markets and/or expand product offerings successfully and take advantage of growth opportunities. Any of the forward-looking statements that we make in this prospectus and in other public statements we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements and you should not rely on such statements. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The selected consolidated financial and other data of Abington Community Bancorp, Inc. set forth below does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including the consolidated financial statements and related notes, appearing elsewhere herein. At December 31, 2006 2005 2004 2003 2002 (Dollars in Thousands) Selected Financial and Other Data: Total assets $ 925,186 $ 844,072 $ 717,978 $ 604,439 $ 535,797 Cash and cash equivalents 44,565 27,714 33,296 19,696 51,702 Investment securities and FHLB stock: Held-to-maturity 20,393 20,396 10,220 Available-for-sale 85,730 89,890 86,614 89,023 50,351 Mortgage-backed securities: Held-to-maturity 56,144 67,411 81,704 43,009 10,060 Available-for-sale 78,023 79,943 83,028 78,213 41,251 Loans receivable, net 605,063 529,487 412,656 364,620 371,024 Deposits 587,002 501,183 405,290 362,666 344,336 FHLB advances 196,293 201,445 170,666 173,732 122,761 Other borrowings 17,781 16,114 12,866 8,681 11,937 Stockholders equity 114,102 117,231 123,055 53,234 50,591 Banking offices(1) 14 12 12 12 9 Year Ended December 31, 2006 2005 2004 2003 2002 (Dollars in Thousands, except per share data) Selected Operating Data: Total interest income $ 49,818 $ 40,011 $ 30,849 $ 29,997 $ 31,797 Total interest expense 27,268 18,999 14,209 13,898 14,583 Net interest income 22,550 21,012 16,640 16,099 17,214 Provision for loan losses 186 25 45 375 500 Net interest income after provision for loan losses 22,364 20,987 16,595 15,724 16,714 Total non-interest income 2,876 2,798 2,243 1,859 741 Total non-interest expense 15,746 14,976 12,015 11,472 10,611 Income before income taxes 9,494 8,809 6,823 6,111 6,844 Income taxes 2,692 2,507 2,268 2,021 2,467 Net income $ 6,802 $ 6,302 $ 4,555 $ 4,090 $ 4,377 Basic earnings per share $ 0.46 $ 0.41 n/a (2 ) n/a n/a Diluted earnings per share $ 0.45 $ 0.41 n/a (2 ) n/a n/a Cash dividends per share $ 0.23 $ 0.15 $ n/a n/a (1) An additional bank branch office was opened in Lansdale, Pennsylvania in January 2007. (2) Due to the timing of the Bank s reorganization into the mutual holding company form and the completion of Abington Community Bancorp s initial public offering on December 16, 2004, earnings per share for the period from December 16, 2004 to December 31, 2004 is not considered meaningful and is not shown. (3) With the exception of end of period ratios, all ratios are based on average monthly balances during the indicated periods. (4) Average interest rate spread represents the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities, and net interest margin represents net interest income as a percentage of average interest-earning assets. (5) The efficiency ratio represents the ratio of non-interest expense divided by the sum of net interest income and non-interest income. (6) Asset quality ratios are end of period ratios, except for net charge-offs to average loans receivable. (7) Non-performing assets consist of non-performing loans and real estate owned. Non-performing loans consist of all accruing loans 90 days or more past due and all non-accruing loans. It is our policy to cease accruing interest on all loans 90 days or more past due. Real estate owned consists of real estate acquired through foreclosure and real estate acquired by acceptance of a deed-in-lieu of foreclosure. (8) Capital ratios are end of period ratios and are calculated for Abington Bank per regulatory requirements. The following table presents the total value of all shares expected to be available for restricted stock awards under the new stock recognition and retention plan, based on a range of market prices from $8.00 per share to $14.00 per share. Ultimately, the value of the grants will depend on the actual trading price of our common stock, which depends on numerous factors. Value of Share Price 510,000 Shares Awarded at Minimum of Range 600,000 Shares Awarded at Midpoint of Range 690,000 Shares Awarded at Maximum of Range 793,500 Shares Awarded at 15% Above Maximum of Range (Dollars in Thousands) $ 8.00 $ 4,080 $ 4,800 $ 5,520 $ 6,348 10.00 5,100 6,000 6,900 7,935 12.00 6,120 7,200 8,280 9,522 14.00 7,140 8,400 9,660 11,109 The following table presents the total value of all stock options expected to be made available for grant under the new stock option plan, based on a range of market prices from $8.00 per share to $14.00 per share. For purposes of this table, the value of the stock options was determined using the Black-Scholes option-pricing formula. See Pro Forma Data. Ultimately, financial gains can be realized on a stock option only if the market price of the common stock increases above the price at which the option is granted. Value of Per Share Exercise Price Per Share Option Value 1,275,000 Options Granted at Minimum of Range 1,500,000 Options Granted at Midpoint of Range 1,725,000 Options Granted at Maximum of Range 1,983,750 Options Granted at 15% Above Maximum of Range (Dollars in Thousands, Except Per Share Amounts) $ 8.00 $ 2.11 $ 2,694 $ 3,169 $ 3,645 $ 4,191 10.00 2.64 3,368 3,962 4,554 5,240 12.00 3.17 4,041 4,754 5,467 6,288 14.00 3.70 4,715 5,547 6,379 7,335 The following table summarizes, at the minimum and the maximum of the offering range, the total number and value of the shares of common stock that the employee stock ownership plan expects to acquire and the total value of all restricted stock awards and stock options that are expected to be available under the anticipated new stock recognition and retention plan and stock option plan, respectively. Number of Shares to be Granted or Purchased Total Estimated Value of Grants At Minimum of Offering Range At Maximum of Offering Range As a % of Common Stock to Be Issued in the Offering At Minimum of Offering Range At Maximum of Offering Range (Dollars in thousands) Employee stock ownership plan(1) 1,020,000 1,380,000 8.0 % $10,200 $13,800 Recognition and retention plan awards(1) 510,000 690,000 4.0 5,100 6,900 Stock options(2) 1,275,000 1,725,000 10.0 3,366 4,554 Total 2,805,000 3,795,000 22.0 % $ 18,666 $ 25,254 (1) Does not include $3.1 million of assets to be received from Abington Mutual Holding Company. Abington Bancorp intends to invest 100% of the proceeds it retains from the offering initially in short-term, liquid investments. Although there can be no assurance that Abington Bancorp will invest the net proceeds in anything other than short-term, liquid investments, over time, Abington Bancorp may use the proceeds it retains from the offering: to invest in securities; to pay dividends to shareholders; to repurchase shares of its common stock, subject to regulatory restrictions; to finance the possible acquisition of financial institutions or branch offices or other businesses that are related to banking (although we currently have no plans, understandings or agreements with respect to any specific acquisitions); and for general corporate purposes. Under current Office of Thrift Supervision regulations, Abington Bancorp may not repurchase shares of its common stock during the first year following the conversion and offering, except to fund equity benefit plans or, with prior regulatory approval, when extraordinary circumstances exist. Abington Bank intends to initially use the net proceeds it receives to purchase investment and mortgage-backed securities. In the future, Abington Bank may use the proceeds that it receives from the offering, which is shown in the table above as the amount contributed to Abington Bank: to fund new loans; to invest in mortgage-backed securities; to finance the possible expansion of its business activities, including developing new branch locations; and for general corporate purposes. We may need regulatory approvals to engage in some of the activities listed above. Except as described above, neither Abington Bancorp nor Abington Bank has any specific plans for the investment of the proceeds of this offering and has not allocated a specific portion of the proceeds to any particular use. WE INTEND TO CONTINUE TO PAY QUARTERLY CASH DIVIDENDS Abington Community Bancorp has paid quarterly cash dividends since the second quarter of 2005. Abington Community Bancorp s current quarterly dividend is $0.06 per share. After we complete the conversion, dividends will be paid by Abington Bancorp on its outstanding shares of common stock. We currently expect that the level of cash dividends per share after the conversion, and offering will be substantially consistent with the current amount of dividends per share paid by Abington Community Bancorp on its common stock as adjusted for the additional shares issued pursuant to the exchange ratio. For example, based on the current cash dividend of $0.06 per share and an assumed exchange ratio of 1.97628 at the maximum of the offering range, the cash dividend, if paid, would be approximately $0.03 per share. However, the rate of such dividends and the initial or continued payment thereof will be in the discretion of the board of directors of Abington Bancorp and will depend upon a number of factors, including the amount of net proceeds retained by us in the offering, investment opportunities available to us, capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. No assurance can be given that we will continue to pay dividends or that they will not be reduced in the future. We cannot guarantee that the amount of dividends that we pay after the conversion will be equal to the per share dividend amount that Abington Community Bancorp s shareholders currently receive, as adjusted to reflect the exchange ratio. In addition, during the first three years after the reorganization, no dividend will be declared or paid if it would be classified as a return of capital. Dividends from Abington Bancorp may eventually depend, in part, upon receipt of dividends from Abington Bank, because Abington Bancorp initially will have no source of income other than dividends from Abington Bank, earnings from the investment of proceeds from the sale of common stock retained by us, and interest payments with respect to our loan to our employee stock ownership plan. Any payment of dividends by Abington Bank to Abington Bancorp which would be deemed to be drawn out of Abington Bank s bad debt reserves would require a payment of taxes at the then-current tax rate by Abington Bank on the amount of earnings deemed to be removed from the reserves for such distribution. Abington Bank does not intend to make any distribution to Abington Bancorp that would create such a federal tax liability. See Taxation. Unlike Abington Bank, Abington Bancorp is not subject to the above regulatory restrictions on the payment of dividends to our shareholders. MARKET FOR OUR COMMON STOCK Abington Community Bancorp s common stock is currently listed on the Nasdaq Global Market under the symbol ABBC , and there is an established market for such common stock. We have applied to have the common stock of Abington Bancorp listed for trading on the Nasdaq Global Select Market and we expect that the common stock will trade under the symbol ABBCD for a period of 20 trading days after completion of the offering. Thereafter, Abington Bancorp s trading symbol will revert to ABBC. We cannot assure you our common stock will be approved for listing on the Nasdaq Global Select Market. Making a market may include the solicitation of potential buyers and sellers in order to match buy and sell orders. The development of a liquid public market depends upon the existence of willing buyers and sellers, the presence of which is not within our control or the control of any market maker. You should view the common stock as a long-term investment. Furthermore, there can be no assurance that you will be able to sell your shares at or above the purchase price. Shareholders will experience a reduction or dilution of their ownership interest of approximately 7.40% if we use newly issued shares to fund the awards of stock options and restricted shares under the proposed new stock option plan and recognition and retention plan expected to be implemented after the conversion and reorganization (or taken individually, 5.40% for the new stock option plan and 2.23% for the new recognition and retention plan). If any options previously granted under the 2005 Stock Option Plan are exercised during the first year following completion of the conversion, they will be funded with newly issued shares as the Office of Thrift Supervision regulations do not permit us to repurchase our shares during the first year following the completion of this stock offering except to fund the restricted stock plan or under extraordinary circumstances. We have been advised by the staff of the Office of Thrift Supervision that the exercise of outstanding options and cancellation of treasury shares in the conversion will not constitute an extraordinary circumstance for purposes of this test. The following table presents information regarding our existing employee stock ownership plan, options and restricted stock previously awarded under our 2005 Stock Option Plan and our 2005 Recognition and Retention Plan, our employee stock ownership plan and our proposed new stock option plan and recognition and retention plan. The table below assumes that 30,213,743 shares are outstanding after the offering, which includes the sale of 17,250,000 shares in the offering at the maximum of the offering range and the issuance of 12,963,743 shares in exchange for shares of Abington Community Bancorp common stock using an exchange ratio of 1.97628. It is also assumed that the value of the stock is $10.00 per share and that the exchange of existing shares is in accordance with the exchange ratio at the maximum of the offering range. Existing and New Stock Benefit Plans Participants Shares(1) Estimated Value Percentage of Shares Outstanding After the Conversion Employee Stock Ownership Plan: All Employees Shares purchased in 2004 mutual holding company reorganization 1,129,088 (2) $ 11,290,880 3.74 % Shares to be purchased in this offering 1,380,000 13,800,000 4.57 Total employee stock ownership plan 2,509,088 $ 25,090,880 8.31 Recognition and Retention Plans: Directors and Officers 2005 Recognition and Retention Plan 564,544 (3) $ 5,645,440 1.87 Proposed New Recognition and Retention Plan 690,000 (4) 6,900,000 2.28 Total Recognition and Retention Plans 1,254,544 $ 12,545,440 4.15 Stock Option Plans: Directors and Officers 2005 Stock Option Plan 1,411,360 (5) $ 4,276,420 (6) 4.67 Proposed New Stock Option Plan 1,725,000 4,554,000 5.71 Total stock option plans 3,136,360 $ 8,830,420 10.38 Total stock benefits plans 6,899,992 $ 46,466,740 22.84 % The following table sets forth the high and low closing stock prices for Abington Community Bancorp common stock and cash dividends per share declared for the periods indicated. Stock Price Per Share Cash Dividends Quarter ended: High Low Per Share March 31, 2007 (through _______ __, 2007) $ $ $ December 31, 2006 19.74 14.87 .06 September 30, 2006 15.45 14.10 .06 June 30, 2006 15.72 13.25 .06 March 31, 2006 13.69 12.78 .05 December 31, 2005 13.65 11.90 .05 September 30, 2005 13.09 11.65 .05 June 30, 2005 13.15 10.30 .05 March 31, 2005 13.75 12.79 n/a At November 29, 2006, the business day immediately preceding the public announcement of the conversion, and at _______________ __, 2007, the date of this prospectus, the closing prices of Abington Community Bancorp common stock as reported on the Nasdaq Global Market were $15.88 per share and $_____ per share, respectively. At December 31, 2006, Abington Community Bancorp had approximately 1,508 shareholders of record. (1) Adjusted total or adjusted risk-weighted assets, as appropriate. (2) Includes $3.1 million in assets to be received from Abington Mutual Holding Company. (1) As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the offering range of up to 15% to reflect changes in market and financial conditions before we complete the offering or to fill the order of our employee stock ownership plan. (2) Does not reflect withdrawals from deposit accounts for the purchase of common stock in the offering. Such withdrawals would reduce pro forma deposits and assets by the amount of such withdrawals. (Footnotes continued on next page) (3) Our pro forma amounts of common stock and additional paid-in capital have been increased to reflect the number of shares of our common stock to be outstanding, which includes the exchange of all of the currently outstanding shares of Abington Community Bancorp common stock pursuant to the exchange ratio. No effect has been given to the issuance of additional shares of common stock pursuant to our proposed stock option plan. We intend to adopt a new stock option plan and to submit such plan to shareholders at a meeting of shareholders to be held at least six months following completion of the conversion. If the plan is approved by shareholders, an amount equal to 10.0% of the shares of Abington Bancorp common stock sold in the offering. Your ownership percentage would decrease by approximately 5.40% if all potential stock options are exercised from our authorized but unissued stock. See Pro Forma Data and Management - New Stock Benefit Plans - Stock Option Plan. (4) The retained earnings of Abington Bank will be partially restricted after the offering. (5) Assumes that 8.0% of Abington Bancorp s common stock sold in the offering, will be purchased by our employee stock ownership plan in addition to the shares already owned by the employee stock ownership plan. The common stock acquired by our employee stock ownership plan is reflected as a reduction of shareholders equity. Assumes the funds used to acquire our employee stock ownership plan shares will be borrowed from us. See Note 1 to the tables set forth under Pro Forma Data and Management-New Stock Benefit Plans - Employee Stock Ownership Plan. (6) Gives effect to the recognition plan which we expect to adopt after the conversion and offering and present to shareholders for approval at a meeting of shareholders to be held at least six months after we complete the offering. No shares will be purchased by the recognition plan in the conversion and offering, and such plan cannot purchase any shares until shareholder approval has been obtained. If the recognition plan is approved by our shareholders, the plan intends to acquire an amount of common stock equal to 4.0% of the shares of Abington Bancorp common stock sold in the offering. The table assumes that shareholder approval has been obtained and that such shares are purchased in the open market at $10.00 per share. The common stock so acquired by the recognition plan is reflected as a reduction in shareholders equity. If the shares are purchased at prices higher or lower than the initial purchase price of $10.00 per share, such purchases would have a greater or lesser impact, respectively, on shareholders equity. If the recognition plan purchases authorized but unissued shares from us, such issuance would dilute the voting interests of existing shareholders by approximately 2.23%. See Pro Forma Data and Management - New Stock Benefit Plans - Recognition Plan. PRO FORMA DATA The actual net proceeds from the sale of Abington Bancorp common stock in the offering cannot be determined until the offering is completed. However, the net proceeds are currently estimated to be between $125.0 million and $169.6 million, or up to $195.3 million in the event the offering range is increased by approximately 15%, based upon the following assumptions: We will sell all shares of common stock in the subscription offering and community offering with no shares sold in a syndicated community offering; Our employee stock ownership plan will purchase an amount equal to 8.0% of the shares sold in the offering at a price of $10.00 per share with a loan from Abington Bancorp; expenses of the offering, other than the fees to be paid to Keefe Bruyette & Woods, are estimated to be $1.3 million; 365,000 shares of common stock will be purchased by our employees, directors and their immediate families; and Keefe Bruyette & Woods will receive a fee equal to $50,000 plus 1.0% of the aggregate purchase price of the shares of stock sold in the offering, excluding any shares purchased by any employee benefit plans, and any of our directors, officers or employees or members of their immediate families. We have prepared the following table, which sets forth our historical consolidated net income and stockholders equity prior to the reorganization and offering and our pro forma consolidated net income and stockholders equity following the reorganization and offering. In preparing these tables and in calculating pro forma data, the following assumptions have been made: Pro forma earnings have been calculated assuming the stock had been sold at the beginning of the periods and the net proceeds had been invested at an average yield of 4.99% for the year ended December 31, 2006, which approximates the yield on a one-year U.S. Treasury bill at such date. We have used an assumed yield of 4.99% in lieu of the arithmetic average method because we believe it more accurately reflects the yield that we will receive on the net proceeds of the offering. The pro forma after-tax yield on the net proceeds from the offering is assumed to be 3.29% for the year ended December 31, 2006 based on an effective tax rate of 34.0%. No withdrawals were made from Abington Bank s deposit accounts for the purchase of shares in the offering. Historical and pro forma per share amounts have been calculated by dividing historical and pro forma amounts by the indicated number of shares of stock, as adjusted in the pro forma net income per share to give effect to the purchase of shares by the employee stock ownership plan. Pro forma stockholders equity amounts have been calculated as if our common stock had been sold in the offering on December 31, 2006 and no effect has been given to the assumed earnings effect of the transactions. The following pro forma information may not be representative of the financial effects of the offering at the date on which the offering actually occurs and should not be taken as indicative of future results of operations. Pro forma shareholders equity represents the difference between the stated amount of our assets and liabilities computed in accordance with generally accepted accounting principles. Stockholders equity does not give effect to intangible assets in the event of a liquidation or to Abington Bank s bad debt reserve. The pro forma stockholders equity is not intended to represent the fair market value of the common stock and may be different than amounts that would be available for distribution to shareholders in the event of liquidation. The tables reflect the possible issuance of additional shares to be reserved for future issuance pursuant to our proposed new stock option plan which we expect to adopt following the offering and present, together with the stock recognition plan discussed below, to our shareholders for approval at a meeting to be held at least six months after the offering is completed. See Management - New Stock Benefit Plans. For purposes of the tables, we have assumed that shareholder approval was obtained, that the exercise price of the stock options and the market price of the common stock at the date of grant were $10.00 per share, that the stock options had a term of 10 years and vested pro rata over five years, and that the new stock option plan granted options to acquire common stock equal to 10.0% of Abington Bancorp s common stock sold in the offering. We applied the Black-Scholes option pricing model to estimate a grant date fair value of $2.64 for each option. In addition to the terms of the options described above, the Black-Scholes option pricing model incorporated an estimated volatility rate of 23.4% for the common stock based on our actual weekly trading activity for the year ended December 31, 2006, dividend yield of 1.47%, an expected option life of six years and a risk free interest rate of 4.14% to 4.61%. Finally, we assumed that 20.0% of the stock options were non-qualified options granted to directors, resulting in a tax benefit (at an assumed tax rate of 34.0%) for a deduction equal to the grant date fair value of the options. There can be no assurance that shareholder approval of the stock option plan will be obtained, that the exercise price of the options will be $10.00 per share or that the Black-Scholes option pricing model assumptions used to prepare the table will be the same at the time the options are granted. The tables also give effect to the stock recognition and retention plan, which we expect to adopt following the conversion and offering and present, together with the new stock option plan discussed above, to our shareholders for approval at a meeting to be held at least six months after the offering is completed. If approved by shareholders, the stock recognition and retention plan intends to acquire an amount of common stock equal to 4.0% of Abington Bancorp s common stock to be sold in the conversion and offering, either through open market purchases, if permissible, or from authorized but unissued shares of common stock. The tables assume that shareholder approval has been obtained and that the shares acquired by the stock recognition and retention plan are purchased in the open market at $10.00 per share and vest over a five-year period. There can be no assurance that shareholder approval of the stock recognition and retention plan will be obtained, that the shares will be purchased in the open market or that the purchase price will be $10.00 per share. The tables on the following pages summarize historical consolidated data of Abington Community Bancorp and Abington Bancorp s pro forma data at or for the dates and periods indicated based on the assumptions set forth above and in the table and should not be used as a basis for projection of the market value of our common stock following the reorganization and the offering. At or For the Year Ended December 31, 2006 12,750,000 shares sold at $10.00 per share (Minimum of range) 15,000,000 shares sold at $10.00 per share (Midpoint of range) 17,250,000 shares sold at $10.00 per share (Maximum of range) 19,837,500 shares sold at $10.00 per share (15% above Maximum)(8) (Dollars in thousands, except per share amounts) Gross proceeds $ 127,500 $ 150,000 $ 172,500 $ 198,375 Less: estimated offering expenses 2,469 2,676 2,883 3,121 Estimated net proceeds 125,031 147,324 169,617 195,254 Less: common stock acquired by employee stock ownership plan(1) (10,200 ) (12,000 ) (13,800 ) (15,870 ) Less: common stock to be acquired by recognition and retention plan(2) (5,100 ) (6,000 ) (6,900 ) (7,934 ) Plus: assets received from mutual holding company 3,092 3,092 3,092 3,092 Net investable proceeds, as adjusted $ 112,823 $ 132,416 $ 152,009 $ 174,541 Pro Forma Net Income: Pro forma net income: Historical $ 6,802 $ 6,802 $ 6,802 $ 6,802 Pro forma income on net investable proceeds(3) 3,716 4,361 5,006 5,748 Less: pro forma employee stock ownership plan adjustments(1) (224 ) (264 ) (304 ) (349 ) Less: pro forma restricted stock award expense(2) (673 ) (792 ) (911 ) (1,047 ) Less: pro forma stock option expense(4) (616 ) (725 ) (834 ) (959 ) Pro forma net income $ 9,005 $ 9,382 $ 9,759 $ 10,195 Pro forma net income per share: Historical, as adjusted(5) $ 0.33 $ 0.28 $ 0.25 $ 0.21 Pro forma income on net investable proceeds 0.18 0.18 0.18 0.18 Less: pro forma employee stock ownership plan adjustments(1) (0.03 ) (0.03 ) (0.03 ) (0.03 ) Less: pro forma restricted stock award expense(2) (0.01 ) (0.01 ) (0.01 ) (0.01 ) Less: pro forma stock option expense(4) (0.03 ) (0.03 ) (0.03 ) (0.03 ) Pro forma net income per share $ 0.44 $ 0.39 $ 0.36 $ 0.32 Offering price as a multiple of pro forma net income per share 22.73 x 25.64 x 27.78 x 31.25 x Number of shares used to calculate pro forma net income per share(6) 20,442,658 24,050,185 27,657,713 31,806,371 Pro Forma Stockholders Equity: Pro forma stockholders equity (book value)(4): Historical $ 114,102 $ 114,102 $ 114,102 $ 114,102 Estimated net proceeds 125,031 147,324 169,617 195,254 Less: common stock acquired by employee stock ownership plan(1) (10,200 ) (12,000 ) (13,800 ) (15,870 ) Less: common stock to be acquired by recognition and retention plan(2) (5,100 ) (6,000 ) (6,900 ) (7,935 ) Plus: assets received from mutual holding company 3,092 3,092 3,092 3,092 Pro forma stockholders equity $ 226,925 $ 246,518 $ 266,111 $ 288,643 Pro forma stockholders equity per share(5): Historical $ 5.11 $ 4.34 $ 3.78 $ 3.28 Estimated net proceeds 5.60 5.61 5.62 5.63 Less: common stock acquired by employee stock ownership plan(1) (0.46 ) (0.46 ) (0.46 ) (0.46 ) Less: common stock to be acquired by recognition and retention plan(2) (0.23 ) (0.23 ) (0.23 ) (0.23 ) Plus: assets received from mutual holding company 0.14 0.12 0.10 0.09 Pro forma stockholders equity per share $ 10.16 $ 9.38 $ 8.81 $ 8.31 Offering price as a percentage of pro forma stockholders equity per share 98.43 % 106.61 % 113.51 % 120.34 % Number of shares used to calculate pro forma stockholders equity per share(6) 22,331,897 26,272,820 30,213,743 34,745,805 (Footnotes continued on next page) (1) Assumes that the employee stock ownership plan will acquire a number of shares equal to 8.0% of Abington Bancorp s common stock to be sold in the offering. The employee stock ownership plan will borrow the funds used to acquire these shares from the net proceeds from the offering retained by Abington Bancorp. The amount of this borrowing has been reflected as a reduction from gross proceeds to determine estimated net investable proceeds. This borrowing will have an interest rate of 8.0%, and a term of 30 years. Abington Bank intends to make contributions to the employee stock ownership plan in amounts at least equal to the principal and interest requirement of the debt. Interest income that Abington Bancorp will earn on the loan will offset the interest paid on the loan by Abington Bank. As the debt is paid down, shares will be released for allocation to participants accounts and shareholders equity will be increased. The adjustment to pro forma net income for the employee stock ownership plan reflects the after-tax compensation expense associated with the plan, based on an assumed effective tax rate of 34.0%. Applicable accounting principles require that compensation expense for the employee stock ownership plan be based upon shares committed to be released and that unallocated shares be excluded from earnings per share computations. An equal number of shares (3.3% of the total, based on a 30-year loan) will be released each year over the term of the loan. The valuation of shares committed to be released would be based upon the average market value of the shares during the year, which, for purposes of this calculation, was assumed to be equal to the $10.00 per share purchase price. If the average market value per share is greater than $10.00 per share, total employee stock ownership plan expense would be greater. (2) Assumes that Abington Bancorp will purchase in the open market a number of shares equal to 4.0% of the shares of Abington Bancorp common stock sold in the offering, that will be reissued as restricted stock awards under the recognition and retention plan proposed to be adopted following the offering. Repurchases will be funded with cash on hand at Abington Bancorp or with dividends paid to Abington Bancorp by Abington Bank. The cost of these shares has been reflected as a reduction from gross proceeds to determine estimated net investable proceeds. In calculating the pro forma effect of the restricted stock awards, it is assumed that the required shareholder approval has been received, that the shares used to fund the awards were acquired at the beginning of the respective period and that the shares were acquired at the $10.00 per share purchase price. The issuance of authorized but unissued shares of common stock instead of shares repurchased in the open market would dilute the ownership interests of existing shareholders, by approximately 2.23%, assuming the midpoint of the offering range. The adjustment to pro forma net income for the restricted stock awards reflects the after-tax compensation expense associated with the awards. Its is assumed that the fair market value of a share of Abington Bancorp common stock was $10.00 at the time the awards were made, that all shares were granted in the first year after the offering, that shares of restricted stock issued under the recognition and retention plan vest over a five-year period, or 20% per year, that compensation expense is recognized on a straight-line basis over each vesting period so that 20% of the value of the shares awarded was an amortized expense during each year, and that the combined federal and state income tax rate was 34.0%. If the fair market value per share is greater than $10.00 per share on the date shares are awarded under the recognition and retention plan, total recognition and retention plan expense would be greater. (3) Pro forma income on net investable proceeds is equal to the net proceeds less the cost of acquiring shares in the open market at the $10.00 per share purchase price to fund the employee stock ownership plan and the restricted stock awards under the recognition and retention plan multiplied by the after-tax reinvestment rate. The after-tax reinvestment rate is equal to 3.29% based on the following assumptions: combined federal and state income tax rate of 34.0% and a pre-tax reinvestment rate of 4.99%. (4) The adjustment to pro forma net income for stock options reflects the compensation expense associated with the stock options (assuming no federal tax benefit) that may be granted under the new stock option plan to be adopted following the offering. If the new stock option plan is approved by shareholders, a number of shares equal to 10.0% of Abington Bancorp s common stock sold in the offering will be reserved for future issuance upon the exercise of stock options that may be granted under the plan. Using the Black-Scholes option-pricing formula, each option is assumed to have a value of $2.64 based on the following assumptions: exercise price, $10.00; trading price on date of grant, $10.00; dividend yield, 1.47%; expected life, six years; expected volatility, 23.4%; and risk-free interest rate, 4.14% to 4.61%. It is assumed that all stock options were granted in the first year after the offering, that stock options granted under the stock option plan vest over a five-year period, or 20.0% per year, that compensation expense is recognized on a straight-line basis over each vesting period so that 20.0% of the value of the options awarded was an amortized expense during each year. If the fair market value per share is different than $10.00 per share on the date options are awarded under the stock option plan, or if the assumptions used in the option-pricing formula are different from those used in preparing this pro forma data, the value of the stock options and the related expense would be different. Applicable accounting standards do not prescribe a specific valuation technique to be used to estimate the fair value of employee stock options. Abington Bancorp may use a valuation technique other than the Black-Scholes option-pricing formula and that technique may produce a different value. The issuance of authorized but unissued shares of common stock to satisfy option exercises instead of shares repurchased in the open market would dilute the ownership interests of existing shareholders by approximately 5.40%, assuming the midpoint of the offering range. (Footnotes continued on next page) (5) The historical net income per share has been adjusted to reflect the exchange ratio of the additional shares to be issued by Abington Bancorp in exchange for the shares of Abington Community Bancorp common stock. As reported, the basic net income per share of Abington Community Bancorp for the year ended December 31, 2006 was $0.46. (6) The number of shares used to calculate pro forma net income per share is equal to the total number of shares to be outstanding upon completion of the offering, less the number of shares purchased by the employee stock ownership plan not committed to be released within one year following the offering. The number of shares used to calculate pro forma shareholders equity per share is equal to the total number of shares to be outstanding upon completion of the offering. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Abington Community Bancorp was formed by Abington Bank in connection with the bank s reorganization into the mutual holding company form and commenced operations in December 2004. Abington Community Bancorp s results of operations are primarily dependent on the results of Abington Bank, which is a wholly owned subsidiary. The bank s results of operations depend to a large extent on net interest income, which is the difference between the income earned on its loan and investment portfolios and the cost of funds, which is the interest paid on deposits and borrowings. Results of operations are also affected by our provisions for loan losses, service charges and other non-interest income and non-interest expense. Non-interest expense principally consists of salaries and employee benefits, office occupancy and equipment expense, professional services expense, data processing expense, advertising and promotions and other expense. Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially impact our financial condition and results of operations. Abington Bank is subject to regulation by the Federal Deposit Insurance Corporation and the Pennsylvania Department of Banking. The bank s executive offices and loan processing office are in Jenkintown, Pennsylvania, with nine other branches and five limited service facilities located in nearby Montgomery, Bucks and Delaware County neighborhoods. Abington Bank is principally engaged in the business of accepting customer deposits and investing these funds in loans, primarily residential mortgages. We had net income of $6.8 million for the year ended December 31, 2006, representing an increase of $500,000 or 7.9% over net income of $6.3 million for the year ended December 31, 2005. Diluted earnings per share increased to $0.45 for 2006 from $0.41 for 2005. Our net interest income improved by $1.5 million or 7.3% to $22.6 million for 2006 from $21.0 million for 2005. The improvement was primarily a result of an increase in the average balance of our loan portfolio combined with an increase in the average yield on those assets. This increase was partially offset by an increase in the average balance of and average rate paid on deposits. Our average interest rate spread and net interest margin for 2006 decreased to 2.13% and 2.68%, respectively, from 2.27% and 2.78%, respectively, for 2005. Our total assets increased $81.1 million, or 9.6%, to $925.2 million at December 31, 2006 compared to $844.1 million at December 31, 2005. The primary reason for the increase in total assets during 2006 was a $75.6 million or 14.3% increase in net loans receivable. Our total deposits increased $85.8 million or 17.1% to $587.0 million at December 31, 2006 compared to $501.2 million at December 31, 2005. The increase was due to an increase in certificate accounts of $102.9 million and checking accounts of $5.6 million that was partially offset by a decrease in savings and money market accounts of $22.6 million. We continue to remain focused on maintaining and growing our base of core deposits over the long term. The recent opening of three new branches in 2006 and January 2007 and the anticipated opening of two additional branches by mid-2007 are expected to contribute towards this goal. The conversion and offering also will support our continuing growth. In reviewing and understanding financial information for Abington Community Bancorp, Inc., you are encouraged to read and understand the significant accounting policies used in preparing our consolidated financial statements. These policies are described in Note 1 of the notes to our consolidated financial statements. The accounting and financial reporting policies of Abington Community Bancorp, Inc. conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Management evaluates these estimates and assumptions on an ongoing basis including those related to the allowance for loan losses and deferred income taxes. Management bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the bases for making judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Allowance for Loan Losses The allowance for loan losses is increased by charges to income through the provision for loan losses and decreased by charge-offs (net of recoveries). The allowance is maintained at a level that management considers adequate to provide for losses based upon evaluation of the known and inherent risks in the loan portfolio. Management s periodic evaluation of the adequacy of the allowance is based on our past loan loss experience, the volume and composition of lending conducted by us, adverse situations that may affect a borrower s ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors affecting the known and inherent risk in the portfolio. This evaluation is inherently subjective as it requires material estimates including, among others, the amount and timing of expected future cash flows on impacted loans, exposure at default, value of collateral, and estimated losses on our commercial and residential loan portfolios. All of these estimates may be susceptible to significant change. The allowance consists of specific allowances for impaired loans, a general allowance on all classified loans which are not impaired and a general allowance on the remainder of the portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio. We establish an allowance on certain impaired loans for the amount by which the discounted cash flows, observable market price or fair value of collateral, if the loan is collateral dependent, is lower than the carrying value of the loan. A loan is considered to be impaired when, based upon current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay or insignificant shortfall in amount of payments does not necessarily result in the loan being identified as impaired. We establish a general valuation allowance on classified loans which are not impaired. We segregate these loans by category and assign allowance percentages to each category based on inherent losses associated with each type of lending and consideration that these loans, in the aggregate, represent an above-average credit risk and that more of these loans will prove to be uncollectible compared to loans in the general portfolio. The categories used by us include doubtful, substandard and special mention. Classification of a loan within such categories is based on identified weaknesses that increase the credit risk of the loan. We establish a general allowance on non-classified loans to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem loans. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience, delinquency trends, and management s evaluation of the collectibility of the loan portfolio. The allowance is adjusted for significant factors that, in management s judgment, affect the collectibility of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, loss experience in particular segments of the portfolio, duration of the current business cycle, and bank regulatory examination results. The applied loss factors are reevaluated each reporting period to ensure their relevance in the current economic environment. While management uses the best information available to make loan loss allowance valuations, adjustments to the allowance may be necessary based on changes in economic and other conditions, changes in the composition of the loan portfolio or changes in accounting guidance. In times of economic slowdown, either regional or national, the risk inherent in the loan portfolio could increase resulting in the need for additional provisions to the allowance for loan losses in future periods. An increase could also be necessitated by an increase in the size of the loan portfolio or in any of its components even though the credit quality of the overall portfolio may be improving. Historically, our estimates of the allowance for loan losses have approximated actual losses incurred. In addition, the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation, as an integral part of their examination processes, periodically review our allowance for loan losses. The Pennsylvania Department of Banking or the Federal Deposit Insurance Corporation may require the recognition of adjustment to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management s estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods. Other-Than-Temporary Impairment of Securities - Securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline and our intent and ability to retain our investment in the security for a period of time sufficient to allow for an anticipated recovery in the fair value. The term other-than-temporary is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized. Income Taxes Management makes estimates and judgments to calculate some of our tax liabilities and determine the recoverability of some of our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. Management also estimates a reserve for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. Historically, our estimates and judgments to calculate our deferred tax accounts have not required significant revision from management s initial estimates. In evaluating our ability to recover deferred tax assets, management considers all available positive and negative evidence, including our past operating results and our forecast of future taxable income. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings. Comparison of Financial Condition at December 31, 2006 and December 31, 2005 Our total assets increased $81.1 million, or 9.6%, to $925.2 million at December 31, 2006 compared to $844.1 million at December 31, 2005. The primary reason for the increase in total assets during 2006 was a $75.6 million or 14.3% increase in net loans receivable. The largest loan growth occurred in one- to four-family residential loans, which increased $52.0 million or 16.1% and multi-family residential and commercial loans, which increased $15.8 million or 20.6%. Additionally, construction loans increased $2.2 million or 1.6%. These increases were partially offset by a $7.1 million decrease in home equity lines of credit. Also contributing to the overall increase in assets during 2006 was an increase in property and equipment, net, of $2.4 million or 36.8%, primarily as a result of increased investment in our new branches. The first of these branches opened in April 2006 in Warrington, Pennsylvania, and was followed by the opening of another branch in Concordville, Pennsylvania in October 2006. An additional branch in Lansdale, Pennsylvania opened in January 2007, and will be followed by the opening of two more branches in Springhouse and Chalfont, Pennsylvania by mid-2007. These increases in assets in 2006 were somewhat offset by a decrease in investment and mortgage-backed securities of $17.5 million in the aggregate, which occurred as a portion of the cash proceeds received on maturing and repaying securities were reinvested into new loans. Our total deposits increased $85.8 million or 17.1% to $587.0 million at December 31, 2006 compared to $501.2 million at December 31, 2005. The increase was due to an increase in certificate accounts of $102.9 million and checking accounts of $5.6 million that was partially offset by a decrease in savings and money market accounts of $22.6 million. The shift towards higher-rate certificates of deposit was a result of the increased rates available on those products relative to other deposit products and other investments in the current interest rate environment. Year Ended December 31, 2006 2005 2004 2003 2002 Selected Operating Ratios(3): Average yield on interest-earning assets 5.93% 5.30% 4.95% 5.36% 6.47% Average rate on interest-bearing Liabilities 3.80 3.03 2.65 2.86 3.44 Average interest rate spread(4) 2.13 2.27 2.30 2.50 3.03 Net interest margin(4) 2.68 2.78 2.67 2.88 3.50 Average interest-earning assets to average interest-bearing liabilities 117.21 120.28 116.08 115.11 116.12 Net interest income after provision for loan losses to non-interest expense 142.03 140.14 138.12 137.06 157.52 Total non-interest expense to average assets 1.78 1.88 1.85 1.97 2.09 Efficiency ratio(5) 61.93 62.90 63.63 63.88 59.10 Return on average assets 0.77 0.79 0.70 0.70 0.86 Return on average equity 5.94 5.27 7.52 7.85 9.11 Average equity to average assets 12.94 15.02 9.30 8.94 9.46 At or For the Year Ended December 31, 2006 2005 2004 2003 2002 Asset Quality Ratios(6): Non-performing loans as a percent of total loans receivable(7) 0.42 % 0.54 % 0.05 % 0.12 % 0.31 % Non-performing assets as a percent of total assets(7) 0.28 0.34 0.03 0.08 0.23 Allowance for loan losses as a percent of non-performing loans 62.69 50.29 622.03 315.15 145.04 Net charge-offs/(recoveries) to average loans receivable 0.01 (0.00 ) 0.02 0.21 0.08 Capital Ratios(8): Tier 1 leverage ratio 10.54 % 10.46 % 12.73 % 8.81 % 9.33 % Tier 1 risk-based capital ratio 16.49 16.93 21.24 15.12 14.64 Total risk-based capital ratio 16.77 17.21 21.57 15.53 15.18 Our stockholders equity decreased $3.1 million to $114.1 million at December 31, 2006 compared to $117.2 million at December 31, 2005. The decrease was primarily due to the purchase of approximately 582,000 shares of Abington Community Bancorp common stock for an aggregate of $8.3 million as part of the company s stock repurchase program announced in January 2006. The payment of quarterly cash dividends of $0.05 per share in March 2006 and $0.06 per share in June, September and December 2006 reduced retained earnings by $3.4 million, but this was offset by our $6.8 million of net income for 2006, resulting in a net increase to retained earnings of $3.4 million. Liquidity and Capital Resources Our primary sources of funds are from deposits, amortization of loans, loan prepayments and pay-offs, mortgage-backed securities and other investments, and other funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing investment securities are relatively predictable sources of funds, deposit flows and loan prepayments can be greatly influenced by general interest rates, economic conditions and competition. We also maintain excess funds in short-term, interest-bearing assets that provide additional liquidity. At December 31, 2006, our cash and cash equivalents amounted to $44.6 million. In addition, at that date we had $16.8 million in investment securities scheduled to mature within the next 12 months. Our available for sale investment and mortgage-backed securities amounted to an aggregate of $152.5 million at December 31, 2006. We use our liquidity to fund existing and future loan commitments, to fund maturing certificates of deposit and demand deposit withdrawals, to invest in other interest-earning assets, and to meet operating expenses. At December 31, 2006, we had certificates of deposit maturing within the next 12 months of $260.6 million. Based upon historical experience, we anticipate that a significant portion of the maturing certificates of deposit will be redeposited with us. For years ended December 31, 2006 and 2005, the average balance of our outstanding Federal Home Loan Bank ( FHLB ) advances was $201.8 million and $192.2 million, respectively. At December 31, 2006, we had $196.3 million in outstanding FHLB advances and we had $372.8 million in additional FHLB advances available to us. In addition to cash flow from loan and securities payments and prepayments as well as from sales of available for sale securities, we have significant borrowing capacity available to fund liquidity needs. We have increased our utilization of borrowings in recent years as a cost efficient addition to deposits as a source of funds. Our borrowings consist primarily of advances from the Federal Home Loan Bank of Pittsburgh, of which we are a member. Under terms of the collateral agreement with the Federal Home Loan Bank, we pledge substantially all of our residential mortgage loans and mortgage-backed securities as well as all of our stock in the Federal Home Loan Bank as collateral for such advances. Our stockholders equity amounted to $114.1 million at December 31, 2006, a decrease of $3.1 million from stockholders equity of $117.2 million at December 31, 2005. The decrease was primarily due to the purchase of approximately 582,000 shares of Abington Community Bancorp common stock for an aggregate of $8.3 million as part of the stock repurchase program announced in January 2006. We believe that the stock repurchase program benefits our shareholders by improving our return on equity and earnings per share and, at the same time, aids us in managing our strong capital position. Our quarterly stock dividend was increased in the second quarter of 2006 from $0.05 per share to $0.06 per share or an aggregate of $3.4 million for the year ended December 31, 2006. Approximately one half of our net income of $6.8 million for 2006 was paid out in dividends to shareholders, resulting in a net increase to our retained earnings of $3.4 million. Our long-term plan is to leverage our capital through retail deposit and loan growth. Towards this goal, we opened three new branches in 2006 and January 2007, and we anticipate the opening of two additional branches by mid-2007. The following table summarizes our regulatory capital ratios as of the dates indicated and compares them to current regulatory requirements. Actual Ratios At December 31, Regulatory Minimum To Be Well Capitalized 2006 2005 Capital Ratios: Tier 1 leverage ratio Abington Community Bancorp 12.80 % 14.28 % 4.00 % N/A Abington Bank 10.54 10.46 4.00 5.00 % Tier 1 risk-based capital ratio Abington Community Bancorp 20.01 23.19 4.00 N/A Abington Bank 16.49 16.93 4.00 6.00 Total risk-based capital ratio Abington Community Bancorp 20.29 23.47 8.00 N/A Abington Bank 16.77 17.21 8.00 10.00 Derivative Financial Instruments A derivative financial instrument includes futures, forwards, interest rate swaps, option contracts, and other financial instruments with similar characteristics. On occasion during the three years ended December 31, 2006, we have used interest rate caps and swap agreements to manage our exposure to fluctuations in interest rates on a portion of our fixed-rate loans and variable rate deposits. We used interest rate swap agreements to hedge interest rate risk resulting from our portfolio of interest-earning loans and interest-bearing deposit liabilities. We do not hold any derivative financial instruments for trading purposes. At December 31, 2006 and 2005, we were not a party to any cap or swap agreements. We previously were party to two swap agreements with terms expiring in June 2005 and December 2005, respectively. The swaps we held in 2005 and 2004 did not qualify as hedges under SFAS No. 133. As such, the fair value of the interest rate swaps were reflected as a liability in the consolidated statements of financial condition when in existence with the offset recorded in loss on derivative instruments, net in the consolidated statements of income. Amounts paid or received under the cap or swap agreement were recognized in gain (loss) on derivative instruments, net in our consolidated statements of income during the period in which they accrued. During the year ended December 31, 2005, we received $13,000 from the contra parties under the agreements. During the year ended December 31, 2004, we paid $641,000 to the contra parties under the agreements. In addition, the unrealized gains on derivatives recognized in our consolidated statements of income were $85,000 and $501,000 for the years ended December 31, 2005 and 2004, respectively. No interest was received from or paid to the contra party during, and no unrealized gains or losses were recognized for, the year ended December 31, 2006. Share-Based Compensation In December 2004, the Financial Accounting Standards Board ( FASB ) issued Statement of Financial Accounting Standards ( SFAS ) No. 123R (revised 2004), Share-Based Payment, which revises SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board ( APB ) Opinion No. 25, Accounting for Stock Issued to Employees. This Statement requires an entity to recognize the cost of employee services received in share-based payment transactions and measure the cost on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. The provisions of SFAS No. 123R were adopted by us as of July 1, 2005. We have two stock-based compensation plans, our 2005 Recognition and Retention Plan and the 2005 Stock Option Plan. Share awards were first issued under these plans in July 2005. HOW OUR NET PROCEEDS WILL BE USED The following table shows how we intend to use the net proceeds of the offering. The actual net proceeds will depend on the number of shares of common stock sold in the offering and the expenses incurred in connection with the offering. Payments for shares made through withdrawals from deposit accounts at Abington Bank will reduce Abington Bank s deposits and will not result in the receipt of new funds for investment. See Pro Forma Data for the assumptions used to arrive at these amounts. Minimum of Offering Range Midpoint of Offering Range Maximum of Offering Range 15% Above Maximum of Offering Range 12,750,000 Shares at $10.00 Per Share Percent of Net Proceeds 15,000,000 Shares at $10.00 Per Share Percent of Net Proceeds 17,250,000 Shares at $10.00 Per Share Percent of Net Proceeds 19,837,500 Shares at $10.00 Per Share Percent of Net Proceeds (Dollars in thousands) Offering proceeds $ 127,500 102.0 % $ 150,000 101.8 % $ 172,500 101.7 % $ 198,375 101.6 % Less: offering expenses 2,469 2.0 2,676 1.8 2,883 1.7 3,121 1.6 Net offering proceeds 125,031 100.0 147,324 100.0 169,617 100.0 195,254 100.0 Less: Proceeds contributed to Abington Bank(1) 62,516 50.0 73,662 50.0 84,809 50.0 97,627 50.0 Proceeds used for loan to employee stock ownership plan 10,200 8.2 12,000 8.2 13,800 8.1 15,870 8.1 Proceeds used to repurchase shares for stock recognition plan 5,100 4.1 6,000 4.0 6,900 4.1 7,934 4.1 Proceeds remaining for Abington Bancorp $ 47,215 37.7 % $ 55,662 37.8 % $ 64,108 37.8 % $ 73,823 37.8 % The estimated fair value of options granted to our named executive officers during 2005 was $3.07 per share. No options were granted to executive officers during 2006. The fair value was estimated on the date of grant in accordance with SFAS No. 123R using the Black-Scholes Single Option Pricing Model with the following weighted average assumptions used: Year Ended December 31, 2006 2005 Dividend yield n/a 1.67 % Expected volatility n/a 23.62 % Risk-free interest rate n/a 3.98 - 4.05 % Expected life of options n/a 6 - 7 years During the years ended December 31, 2006 and 2005, approximately $370,000 and $181,000, respectively, was recognized in compensation expense for the 2005 Option Plan. At December 31, 2006, approximately $1.4 million in additional compensation expense for awarded options remained unrecognized. At December 31, 2006, the weighted average period over which this expense is scheduled to be recognized is approximately 3.5 years. During the years ended December 31, 2006 and 2005, we recognized approximately $680,000 and $333,000, respectively, in compensation expense related to the amortization of recognition and retention plan shares. No expense was recognized in 2004. As of December 31, 2006, approximately $2.4 million in additional compensation expense is scheduled to be recognized over the remaining lives of the recognition and retention plan awards. At December 31, 2006, the weighted average remaining lives of the recognition and retention plan awards was approximately 3.5 years. We also have an employee stock ownership plan. Shares awarded under the ESOP are accounted for in accordance with AICPA Statement of Position ( SOP ) 93-6, Employers Accounting for Employee Stock Ownership Plans. As ESOP shares are committed to be released and allocated among participants, we recognize compensation expense equal to the average market price of the shares over the period earned. We recognized approximately $563,000 and $475,000 in compensation expense due to the ESOP in the years ended December 31, 2006 and 2005, respectively. For a further description of these plans, see Note 14 of the notes to the consolidated financial statements included elsewhere herein. Commitments and Off-Balance Sheet Arrangements We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and the unused portions of lines of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. Commitments to extend credit and lines of credit are not recorded as an asset or liability by us until the instrument is exercised. At December 31, 2006 and 2005, we had no commitments to originate loans for sale. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management s credit evaluation of the customer. The amount and type of collateral required varies, but may include accounts receivable, inventory, equipment, real estate and income-producing commercial properties. At December 31, 2006 and 2005, commitments to originate loans and commitments under unused lines of credit, including undisbursed portions of construction loans in process, for which we were obligated amounted to approximately $118.1 million and $125.2 million, respectively. Letters of credit are conditional commitments issued by us guaranteeing payments of drafts in accordance with the terms of the letter of credit agreements. Commercial letters of credit are used primarily to facilitate trade or commerce and are also issued to support public and private borrowing arrangements, bond financings and similar transactions. Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. Collateral may be required to support letters of credit based upon management s evaluation of the creditworthiness of each customer. The credit risk involved in issuing letters of credit is substantially the same as that involved in extending loan facilities to customers. Most letters of credit expire within one year. At December 31, 2006 and December 31, 2005, we had letters of credit outstanding of approximately $16.3 million and $14.1 million, respectively, of which $14.8 million and $12.5 million, respectively, were standby letters of credit. At December 31, 2006 and 2005, the uncollateralized portion of the letters of credit extended by us was approximately $97,000 and $169,000, respectively, of which $97,000 was for standby letters of credit in both years. We are also subject to various pending claims and contingent liabilities arising in the normal course of business, which are not reflected in the consolidated financial statements. Management considers that the aggregate liability, if any, resulting from such matters will not be material. Among our contingent liabilities are exposures to limited recourse arrangements with respect to sales of whole loans and participation interests. At December 31, 2006, the exposure, which represents a portion of credit risk associated with the sold interests, amounted to $185,000. The exposure is for the life of the related loans and payable, on our proportional share, as losses are incurred. We anticipate that we will continue to have sufficient funds and alternative funding sources to meet our current commitments. The following tables summarize our outstanding commitments to originate loans and to advance additional amounts pursuant to outstanding letters of credit, lines of credit and under our construction loans at December 31, 2006. Amount of Commitment Expiration - Per Period Total Amounts Committed Through One Year After One Through Three Years After Three Through Five Years After Five Years (In Thousands) Letters of credit $ 16,327 $ 15,328 $ 994 $ $ 5 Recourse obligations on loans sold 185 185 Commitments to originate loans 3,622 3,622 Unused portion of home equity lines of credit 22,382 22,382 Unused portion of commercial lines of credit 46,762 46,762 Undisbursed portion of construction loans in process 45,338 27,617 17,721 Total commitments $ 134,616 $ 93,329 $ 18,715 $ $ 22,572 The following tables summarize our contractual cash obligations at December 31, 2006. Payments Due By Period Total Through One Year After One Through Three Years After Three Through Five Years After Five Years (In Thousands) Certificates of deposit $ 388,973 $ 260,645 $ 103,603 $ 10,637 $ 14,088 FHLB advances 196,293 33,681 52,622 84,558 25,432 Repurchase agreements 17,781 17,781 Total debt 214,074 51,462 52,622 84,558 25,432 Operating lease obligations 6,965 713 1,242 1,145 3,865 Total contractual obligations $ 610,012 $ 312,820 $ 157,467 $ 96,340 $ 43,385 Comparison of Operating Results for the Years Ended December 31, 2006 and 2005 General. We had net income of $6.8 million for the year ended December 31, 2006, representing an increase of $500,000 or 7.9% over net income of $6.3 million for the year ended December 31, 2005. Diluted earnings per share increased to $0.45 for 2006 from $0.41 for 2005. Our net interest income improved by $1.5 million or 7.3% to $22.6 million for 2006 from $21.0 million for 2005. The improvement was primarily a result of an increase in the average balance of our loan portfolio combined with an increase in the average yield on those assets. This increase was partially offset by an increase in the average balance of and average rate paid on deposits. Our average interest rate spread and net interest margin for 2006 decreased to 2.13% and 2.68%, respectively, from 2.27% and 2.78%, respectively, for 2005. Our non-interest income improved $78,000 or 2.8% to $2.9 million for 2006 from $2.8 million for 2005. Our non-interest expense also increased, growing $771,000 or 5.1% to $15.7 million for 2006 from $15.0 million for 2005. Interest Income. Interest income was $49.8 million for the year ended December 31, 2006, an increase of $9.8 million or 24.5% from $40.0 million of interest income for the year ended December 31, 2005. The average balance of our interest-bearing assets increased $85.8 million or 11.4% to $840.5 million for 2006 compared to $754.7 million for 2005. The average yield on our interest-bearing assets increased 63 basis points to 5.93% for 2006 compared to 5.30% for 2005. The increase in interest income in 2006 was primarily a result of growth in the average balance of our loan portfolio. The average balance of our loan portfolio increased $101.8 million or 21.7% to $570.9 million for the year ended December 31, 2006 from $469.1 million for the year ended December 31, 2005. Additionally, the average yield on our loan portfolio increased 53 basis points to 6.77% for 2006 from 6.24% for 2005. The asset growth has been a result our strategic plan to leverage our capital through loan growth. The growth of the loan portfolio was partially offset by a $22.6 million or 13.6% decrease in the average balance of our mortgage-backed securities to $143.7 million for 2006 from $166.3 million for 2005. Interest Expense. Interest expense increased $8.3 million or 43.5% to $27.3 million for the year ended December 31, 2006 compared to $19.0 million for the year ended December 31, 2005. The increase in interest expense for 2006 was primarily the result of increases in the average balance of, and average rate paid on, deposits. During the year ended December 31, 2006 compared to the year ended December 31, 2005, our average deposit balance grew by $80.1 million or 19.3%, primarily due to growth in higher-rate certificates of deposit. The average balance of our certificates of deposit increased $102.8 million or 43.4% to $339.7 million for 2006 from $237.0 million for 2005. The growth in certificates of deposit was a result of higher market rates of interest on certificates of deposit relative to other deposit products and other investments in the current interest rate environment. The average rate we paid on our certificate of deposits increased 106 basis points to 4.60% for 2006 from 3.54% for 2005. As a result of the increase in our certificates of deposit as a proportion of our total deposits, as well as the rising interest rate environment, the average rate we paid on all of our deposits increased 101 basis points to 3.39% for 2006 from 2.38% for 2005. Over the long term, we continue to remain focused on maintaining and growing our base of core deposits. There is, however, significant competition for core deposits, and no assurance can be given that we will succeed in increasing the proportion of core deposits that we hold. In fact, our core deposits have decreased as a percentage of total deposits during the past three years. Also contributing to the increase in interest expense in 2006 compared to 2005 was a $9.6 million or 5.6% increase in the average balance of our FHLB advances to $201.8 million for 2006 compared to $192.2 million for 2005. The average rate on our FHLB advances increased 27 basis points to 4.78% for 2006 from 4.51% for 2005. (1) Investment securities for the 2006 period include 47 non-taxable municipal bonds with an aggregate average balance of $20.4 million and an average yield of 4.2%. Investment securities for the 2005 period include 47 non-taxable municipal bonds with an aggregate average balance of $16.3 million and an average yield of 4.2%. The tax-exempt income from such securities has not been calculated on a tax equivalent basis. (2) Includes non-accrual loans during the respective periods. Calculated net of deferred fees and discounts, loans in process and allowance for loan losses. The impact of loan fee income has an immaterial effect on this analysis. (3) Equals net interest income divided by average interest-earning assets. ABINGTON BANK MEETS ALL OF ITS REGULATORY CAPITAL REQUIREMENTS At December 31, 2006, Abington Bank exceeded all of its regulatory capital requirements. The table below sets forth Abington Bank s historical capital under accounting principles generally accepted in the United States of America and regulatory capital at December 31, 2006, and the pro forma capital of Abington Bank after giving effect to the offering, based upon the sale of the number of shares shown in the table. The pro forma capital amounts reflect the receipt by Abington Bank of 50% of the net offering proceeds. The pro forma risk-based capital amounts assume the investment of the net proceeds received by Abington Bank in assets which have a risk-weight of 20% under applicable regulations, as if such net proceeds had been received and so applied at December 31, 2006. Pro Forma at December 31, 2006 Minimum of Offering Range Midpoint of Offering Range Maximum of Offering Range 15% Above Maximum of Offering Range Abington Bank Historical at December 31, 2006 12,750,000 Shares at $10.00 per Share 15,000,000 Shares at $10.00 Per Share 17,250,000 Shares at $10.00 Per Share 19,837,500 Shares at $10.00 Per Share Amount Percent of Assets(1) Amount Percent of Assets Amount Percent of Assets Amount Percent of Assets Amount Percent of Assets (Dollars in Thousands) GAAP capital $ 93,560 10.11 % $ 148,968 15.04 % $ 158,314 15.80 % $ 167,661 16.55 % $ 178,409 17.39 % Tier 1 leverage capital: Actual $ 96,083 10.54 % $ 151,491 15.50 % $ 160,837 16.27 % $ 170,184 17.02 % $ 180,932 17.87 % Requirement 36,469 4.00 39,094 4.00 39,540 4.00 39,986 4.00 40,498 4.00 Excess $ 59,613 6.54 % $ 112,397 11.50 % $ 121,297 12.27 % $ 130,198 13.02 % $ 140,434 13.87 % Tier 1 risk-based capital: Actual $ 96,083 16.49 % $ 151,491 25.43 % $ 160,837 26.90 % $ 170,184 28.35 % $ 180,932 30.02 % Requirement 23,306 4.00 23,831 4.00 23,920 4.00 24,009 4.00 24,112 4.00 Excess $ 72,777 12.49 % $ 127,660 21.43 % $ 136,917 22.90 % $ 146,175 24.35 % $ 156,820 26.02 % Total risk-based capital: Actual $ 97,686 16.77 % $ 153,094 25.70 % $ 162,440 27.16 % $ 171,787 28.62 % $ 182,535 30.28 % Requirement 46,613 8.00 47,662 8.00 47,841 8.00 48,019 8.00 48,224 8.00 Excess $ 51,073 8.77 % $ 105,432 17.70 % $ 114,599 19.16 % $ 123,768 20.62 % $ 134,311 22.28 % Reconciliation of capital infused into Abington Bank: Net proceeds infused (2) $ 65,608 $ 76,754 $ 87,901 $ 100,719 Less: Common Stock acquired by employee stock ownership plan (10,200 ) (12,000 ) (13,800 ) (15,870 ) Pro forma increase in GAAP and regulatory capital $ 55,408 $ 64,754 $ 74,101 $ 84,849 (1) Investment securities for the 2006 period include 47 non-taxable municipal bonds with an aggregate average balance of $20.4 million and an average yield of 4.2%. Investment securities for the 2005 period include 47 non-taxable municipal bonds with an aggregate average balance of $16.3 million and an average yield of 4.2%. The tax-exempt income from such securities has not been calculated on a tax equivalent basis. Provision for Loan Losses. We made a $186,000 provision for loan losses for the year ended December 31, 2006 compared to a provision of $25,000 for the year ended December 31, 2005. The provision for loan losses is charged to expense as necessary to bring our allowance for loan losses to a sufficient level to cover known and inherent losses in the loan portfolio. The provision taken during 2006 was primarily the result of growth in the loan portfolio. At December 31, 2006, we held an aggregate of $2.3 million of loans to one borrower, consisting of construction and commercial real estate loans that were placed on non-accrual status in the fourth quarter and were determined to be impaired. The loans were placed on non-accrual status as certain loans had become over 90 days delinquent. We have obtained a confessed judgment against the borrower, which provides us with additional collateral securing the loans. We also obtained current appraisals of the underlying collateral properties, which support the full value of the loans. Based on the value of the properties, as well as the additional collateral available, we do not expect to incur any losses on the loans to this borrower. As such, no allowance for loan losses was established for these loans as a result of our measurement of impaired loans at December 31, 2006. At December 31, 2006, non-performing loans amounted to 0.42% of loans receivable and our allowance for loan losses amounted to 62.69% of non-performing loans. Non-interest Income. Our total non-interest income amounted to $2.9 million for the year ended December 31, 2006 compared to $2.8 million for year ended December 31, 2005, an increase of $78,000 or 2.8%. This increase was due in part to a $186,000 increase in income on bank owned life insurance ( BOLI ). Our BOLI is expected to continue to generate positive income going forward and is intended to fund various employee benefit programs that we maintain. Additionally, non-interest income improved due to the fact that no impairment charge was recorded on our investment securities in 2006 whereas a $73,000 impairment charge on investment securities was recorded in 2005. The impaired securities were sold for a loss in the first quarter of 2006. The impairment charge taken during 2005 was the result of management s periodic evaluations of its investment portfolio and the determination that the fair value of certain securities would not recover to their cost. Although market values of our investments fluctuate as market conditions change, management believes that the overall credit quality of its investment portfolio is strong and further impairment charges are not expected in 2007. The increases in income in bank owned life insurance and impairment charge on investment securities were partially offset by a $98,000 decrease in the gain on derivative instruments, net, as our final swap agreement expired in December 2005, as well as a $60,000 decrease in service charge income. Non-interest Expense. Our total non-interest expense for the year ended December 31, 2006 amounted to $15.7 million, representing an increase of $771,000 or 5.1% from the year ended December 31, 2005. Decreases in occupancy expense and professional services expense were offset by increases in other expense categories. The largest increases in expense for 2006 compared to 2005 were in salaries and employee benefits expense, depreciation expense, data processing expense and other non-interest expense. The decrease in professional services expense of $224,000 for 2006 compared to 2005 was primarily the result of reduced audit fees. No such decrease is expected for 2007. Salaries and employee benefits expense increased $662,000 or 8.3% for the year ended December 31, 2006 compared to the year ended December 31, 2005. This increase was primarily due to additional expenses of $379,000 in the aggregate relating to the Company s 2005 Stock Option Plan and 2005 Recognition and Retention Plan, both of which began in the third quarter of 2005. The aggregate expense for these plans is expected to remain relatively consistent in 2007, but is anticipated to increase in future years in light of our plans to implement new stock option and stock recognition and retention plans. See Management - New Stock Benefit Plans. The remainder of the increase in salaries and employee benefits expense was primarily due to growth in the total number of employees from 134 total employees at December 31, 2005 to 148 total employees at December 31, 2006, primarily due to the opening of additional branch offices. In addition, salaries and employee benefits expense increased in 2006 due to normal merit increases in salaries, higher health and insurance benefit costs, and an increase in the expense for our ESOP, partially offset by a decrease in the total year-end bonuses paid. We anticipate additional increases in salaries and employee benefits due to additional staffing needs, further merit increases in salary, and continued rising benefit costs. We also anticipate an increase in the expense for our ESOP, which is based on the market price of our stock, in light of the additional shares to be purchased by the ESOP in the conversion and offering. Depreciation expense for 2006 compared to 2005 increased $152,000 or 29.3%. The increase for the full year was primarily due to our new branch office facilities. We expect a further increase in depreciation expense in 2007 as a result of these new branches and additional branches expected to open in 2007. Data processing expense for 2006 compared to 2005 increased $79,000 or 6.5%, primarily due to the increase in our deposit and loan accounts and transactions and our additional branch offices. This expense is also expected to increase for 2007 as our deposit and loan activity increases and additional branch offices are added. Additional expenses of approximately $158,000 were recognized in other non-interest expense for stock option plan and recognition and retention plan awards to directors in 2006, but were somewhat offset by decreases in various other categories of other non-interest expense. The aggregate expense for stock option plan and recognition and retention plan awards to directors is expected to remain relatively consistent in 2007. Income Tax Expense. Income tax expense for the year ended December 31, 2006 amounted to $2.7 million compared to $2.5 million for the year ended December 31, 2005. The fluctuation in income tax expense from year to year is primarily the result of an increase in our pre-tax income. Our effective tax rate improved slightly to 28.4% for the year ended December 31, 2006 from 28.5% for the year ended December 31, 2005. Comparison of Operating Results for the Years Ended December 31, 2005 and 2004 General. We had net income of $6.3 million for the year ended December 31, 2005, representing an increase of $1.7 million or 38.4% over net income of $4.6 million for the year ended December 31, 2004. Earnings per share was $0.41 for the year ended December 31, 2005. Our net interest income improved by $4.4 million or 26.3% to $21.0 million for 2005 from $16.6 million for 2004. The improvement was primarily a result of an increase in the average balances of our interest earning assets, most notably loans, combined with increases in the average yields on those assets. These increases were partially offset by increases in the average balances of our interest bearing liabilities and the rates paid on those liabilities. Overall, our net interest margin improved 11 basis points to 2.78% for 2005 from 2.67% for 2004, although our average interest rate spread decreased slightly to 2.27% for 2005 from 2.30% for 2004. Our non-interest income improved $555,000 or 24.7% to $2.8 million for 2005 from $2.2 million for 2004. The increase was due primarily to an improvement in our gain (loss) on derivative instruments, net and income on bank owned life insurance, which was purchased in 2005. Our non-interest expense also increased, growing $3.0 million or 24.6% to $15.0 million for 2005 from $12.0 million for 2004. The increase was due primarily to increases in salaries and employee benefits expense, occupancy expense, professional services expense and advertising and promotions expense. OUR CAPITALIZATION The following table presents the historical capitalization of Abington Community Bancorp at December 31, 2006, and the pro forma consolidated capitalization of Abington Bancorp after giving effect to the conversion and offering, based upon the sale of the number of shares shown below and the other assumptions set forth under Pro Forma Data. Abington Bancorp - Pro Forma Based Upon Sale at $10.00 Per Share Abington Community Bancorp - Historical Capitalization 12,750,000 Shares (Minimum of Offering Range) 15,000,000 Shares (Midpoint of Offering Range) 17,250,000 Shares (Maximum of Offering Range) 19,837,500 Shares(1) (15% above Maximum of Offering Range) (In thousands) Deposits(2) $ 587,002 $ 587,002 $ 587,002 $ 587,002 $ 587,002 Borrowings 214,075 214,075 214,075 214,075 214,075 Total deposits and borrowings $ 801,077 $ 801,077 $ 801,077 $ 801,077 $ 801,077 Stockholders equity: Preferred stock, $.01 par value, (post offering) 20,000,000shares authorized; none to be issued Common stock, $.01 par value, (post-offering) 80,000,000 shares authorized; shares to be issued as reflected(3) $ 159 $ 223 $ 263 $ 302 $ 347 Additional paid-in capital(3) 69,674 186,323 208,576 230,830 256,422 Retained earnings(4) 65,252 65,252 65,252 65,252 65,252 Plus: Assets received from mutual holding company 3,092 3,092 3,092 3,092 Less: Accumulated other comprehensive loss (2,610 ) (2,610 ) (2,610 ) (2,610 ) (2,610 ) Treasury stock (8,318 ) Common stock held by the employee stock ownership plan(5) (6,389 ) (16,589 ) (18,389 ) (20,189 ) (22,259 ) Common stock held by the recognition and retention plan(6) (2,607 ) (7,707 ) (8,607 ) (9,507 ) (10,541 ) Deferred compensation plans trust (1,059 ) (1,059 ) (1,059 ) (1,059 ) (1,059 ) Total stockholders equity $ 114,102 $ 226,925 $ 246,518 $ 266,111 $ 288,642 Stockholders equity to assets 12.33 % 21.86 % 23.31 % 24.70 % 26.25 % Interest Income. Interest income was $40.0 million for the year ended December 31, 2005, an increase of $9.2 million or 29.7% from $30.8 million of interest income for the year ended December 31, 2004. This increase in interest income was primarily a result of growth in the average balance of interest-earning assets, as well as increases in the average yields on those assets. The average balance of our interest-earning assets improved $132.0 million or 21.2% to $754.7 million for 2005 compared to $622.7 million for 2004. The average yield on our interest-earnings assets improved 35 basis points to 5.30% for 2005 compared to 4.95% for 2004. The most substantial growth was seen in our loan portfolio. The average balance of our loan portfolio increased $84.1 million or 21.8% to $469.1 million for 2005 from $385.0 million for 2004. Additionally, the average yield on our loan portfolio improved 31 basis points to 6.24% for 2005 compared to 5.93% for 2004. The average balance of our mortgage-backed securities in 2005 increased by $29.4 million over the 2004 average and the average balance of our investment securities increased by $12.5 million over the same periods. The average yields on such securities in 2005 improved 17 and 49 basis points, respectively, from the prior year to 4.13% and 3.36%, respectively, for 2005. The asset growth has been a result of our strategic plan to leverage the capital raised in our 2004 initial public offering, in part, through loan growth. A substantial amount of the net proceeds that had been initially invested in securities and deposits that yielded a market rate were redeployed into loans throughout 2005. Interest Expense. Interest expense increased $4.8 million or 33.7% to $19.0 million for the year ended December 31, 2005 compared to $14.2 million for the year ended December 31, 2004. The increase in interest expense for 2005 was the result of increases in the average balances of, and average rates paid on, all categories of interest-bearing liabilities. The average balance of our interest-bearing liabilities increased $91.0 million or 17.0% to $627.5 million for 2005 compared to $536.4 million for 2004. The average rate on our interest-bearing liabilities increased 38 basis points to 3.03% for 2005 compared to 2.65% for 2004. For 2005 compared to 2004, our average deposit balance grew by $66.0 million or 18.9%, due primarily to growth in higher-rate certificates of deposit. The average balance of our certificates of deposit increased $61.5 million or 35.0% to $237.0 million for 2005 compared to $175.5 million for 2004. The growth in certificates of deposit was a result of higher market rates of interest on certificates of deposit relative to other deposit products. The average balance of FHLB advances also increased for 2005 when compared to 2004. The average balance of our FHLB advances increased $22.5 million or 13.3% to $192.2 million for 2005 compared to $170.0 million for 2004. The average rate on our FHLB advances was relatively consistent, increasing only seven basis points to 4.51% for 2005 compared to 4.44% for 2004. (1) Investment securities for the 2005 period include 47 non-taxable municipal bonds with an aggregate average balance of $16.3 million and an average yield of 4.2%. Investment securities for the 2004 period include 26 non-taxable municipal bonds with an aggregate average balance of $3.4 million and an average yield of 4.3%. The tax-exempt income from such securities has not been calculated on a tax equivalent basis. (2) Includes non-accrual loans during the respective periods. Calculated net of deferred fees and discounts, loans in process and allowance for loan losses. The impact of loan fee income has an immaterial effect on this analysis. (3) Equals net interest income divided by average interest-earning assets. (1) Investment securities for the 2005 period include 47 non-taxable municipal bonds with an aggregate average balance of $16.3 million and an average yield of 4.2%. Investment securities for the 2004 period include 26 non-taxable municipal bonds with an aggregate average balance of $3.4 million and an average yield of 4.3%. The tax-exempt income from such securities has not been calculated on a tax equivalent basis. Provision for Loan Losses. We made a $25,000 provision for loan losses for the year ended December 31, 2005 compared to a provision of $45,000 for the year ended December 31, 2004. The provision taken during 2005 was primarily the result of growth in the loan portfolio while the overall credit quality of the loan portfolio remained strong. At December 31, 2005, non-performing loans amounted to 0.54% of loans receivable and our allowance for loan losses amounted to 50.3% of non-performing loans. The balance of non-performing loans at December 31, 2005 consisted primarily of one loan, with a carrying value of $2.9 million, placed on non-accrual status in the fourth quarter. An allowance was reserved on this loan at December 31, 2005. The outstanding balance of this loan, including all past due interest and costs, was paid in full in April 2006. Non-interest Income. Our total non-interest income amounted to $2.8 million for the year ended December 31, 2005 compared to $2.2 million for year ended December 31, 2004. The increase was due primarily to $499,000 of income from BOLI purchased in March 2005 and a $98,000 gain on derivative instruments in 2005 compared to a loss of $141,000 in 2004. Income from BOLI and the gain on derivative instruments in the year ended December 31, 2005, was partially offset by a $73,000 impairment charge on investment securities recognized in 2005 with no comparable charge in 2004, a $67,000 decrease in service charges and a $31,000 decrease in other non-interest income. The decrease in service charges in 2005 when compared to 2004 was due primarily to a $61,000 decrease in fees generated by our overdraft protection program due to a decrease in the volume of customer overdrafts. The decrease in other non-interest income in 2005 compared to 2004 was due to decreases in various categories of income. Non-interest Expense. Our total non-interest expense for the year ended December 31, 2005 amounted to $15.0 million, representing an increase of $3.0 million or 24.6% from the year ended December 31, 2004. The overall increase was due to increases in all categories of non-interest expense other than data processing expense, which decreased slightly. Salaries and employee benefits expense increased $1.6 million or 24.7% for 2005 compared to 2004. This increase was primarily due to additional expenses of $838,000 in the aggregate relating to our ESOP, stock option plan and recognition and retention plan, all of which began in 2005. The remainder of the increase in salaries and employee benefits expense was due to growth in the total number of employees, normal merit increases in salaries, and higher benefit costs. Our occupancy expense increased approximately $480,000 or 41.2% in 2005 compared to 2004, due in part to the leases entered into for three new branches. Professional services expense increased approximately $382,000 or 75.1% due primarily to increased audit and professional fees as the result of becoming a public reporting entity. Other non-interest expense increased approximately $374,000 or 25.8% due primarily to additional expense of $151,000 for stock option plan and recognition and retention plan awards to directors combined with smaller increases in various other categories of other non-interest expense. Income Tax Expense. Income tax expense for the year ended December 31, 2005 amounted to $2.5 million compared to $2.3 million for the year ended December 31, 2004. The fluctuations in income tax expense from year to year is the result of an increase in our pre-tax income partially offset by an improvement in our effective tax rate. Our effective tax rate decreased to 28.5% for 2005 from 33.2% for 2004. The improved tax rate was primarily a result of increased investment in tax-exempt municipal securities and BOLI income, which is also tax exempt. Asset/Liability Management and Market Risk Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from the interest rate risk which is inherent in our lending and deposit taking activities. To that end, management actively monitors and manages interest rate risk exposure. In addition to market risk, our primary risk is credit risk on our loan portfolio. We attempt to manage credit risk through our loan underwriting and oversight policies. The principal objective of our interest rate risk management function is to evaluate the interest rate risk embedded in certain balance sheet accounts, determine the level of risk appropriate given our business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with approved guidelines. We seek to manage our exposure to risks from changes in interest rates while at the same time trying to improve our net interest spread. We monitor interest rate risk as such risk relates to our operating strategies. We have established an Asset/Liability Committee at Abington Bank, which is comprised of our President and Chief Executive Officer, three Senior Vice Presidents and two Vice Presidents of Lending, and which is responsible for reviewing our asset/liability policies and interest rate risk position. The Asset/Liability Committee meets on a regular basis. The extent of the movement of interest rates is an uncertainty that could have a negative impact on future earnings. In recent years, we primarily have utilized the following strategies in our efforts to manage interest rate risk: we have increased our originations of shorter term loans and/or loans with adjustable rates of interest, particularly construction loans, commercial real estate and multi-family residential mortgage loans and home equity lines of credit; we have attempted to match fund a portion of our securities portfolio with borrowings having similar expected lives; we have attempted, where possible, to extend the maturities of our deposits and borrowings; and we have invested in securities with relatively short anticipated lives, generally three to five years, and increased our holding of liquid assets. Gap Analysis. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are interest rate sensitive and by monitoring a bank s interest rate sensitivity gap. An asset and liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to affect adversely net interest income while a positive gap would tend to result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to affect adversely net interest income. Our current asset/liability policy provides that our one-year interest rate gap as a percentage of total assets should not exceed positive or negative 20%. This policy was adopted by our management and Board based upon their judgment that it established an appropriate benchmark for the level of interest-rate risk, expressed in terms of the one-year gap, for Abington Bank. In the event our one-year gap position were to approach or exceed the 20% policy limit, we would review the composition of our assets and liabilities in order to determine what steps might appropriately be taken, such as selling certain securities or loans or repaying certain borrowings, in order to maintain our one-year gap in accordance with the policy. Alternatively, depending on the then-current economic scenario, we could determine to make an exception to our policy or we could determine to revise our policy. In recent periods, our one-year gap position was well within our policy. Our one-year cumulative gap was a negative 14.70% at December 31, 2006, compared to a negative 4.09% at December 31, 2005. We have become more liability sensitive in 2006 mainly as a result of increases in our short-term deposits, primarily short-term certificates of deposit. Partially for this reason, we continue to remain focused on maintaining and growing our base of core deposits, which are less interest-rate sensitive. Part of the reason that we determined several years ago to increase our originations of commercial real estate and multi-family residential real estate loans, construction loans, home equity lines and commercial business loans, all of which generally have shorter terms to maturity than single-family residential mortgage loans and are more likely to have floating or adjustable rates of interest, was, in part, to increase the amount of our interest rate sensitive assets in the one- to three-year time horizon. By increasing the amount of our interest rate sensitive assets in the one-to three-year time horizon, we felt that we better positioned ourselves to benefit from a rising interest rate environment because the average interest rates on our loans would increase as general market rates of interest were increasing. The following table sets forth the amounts of our interest-earning assets and interest-bearing liabilities outstanding December 31, 2006, which we expect, based upon certain assumptions, to reprice or mature in each of the future time periods shown (the GAP Table ). Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at December 31, 2006, on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and anticipated prepayments of adjustable-rate loans and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans. Annual prepayment rates for adjustable-rate and fixed-rate single-family and multi-family mortgage loans are assumed to range from 10% to 26%. The annual prepayment rate for mortgage-backed securities is assumed to range from 9% to 63%. Money market deposit accounts, savings accounts and interest-bearing checking accounts are assumed to have annual rates of withdrawal, or decay rates, of 16%, 12.5% and 0%, respectively. (1) Interest-earning assets are included in the period in which the balances are expected to be redeployed and/or repriced as a result of anticipated prepayments, scheduled rate adjustments and contractual maturities. (2) For purposes of the gap analysis, loans receivable includes non-performing loans net of the allowance for loan losses, undisbursed loan funds, unamortized discounts and deferred loan fees. (3) Interest-rate sensitivity gap represents the difference between net interest-earning assets and interest-bearing liabilities. Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates both on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their adjustable-rate loans may decrease in the event of an interest rate increase. Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates both on a short-term basis and over the life of the assets. Further, in the event of change in interest rates, prepayment and early withdrawal levels would likely deviate significantly for those assumed in calculating the table. Finally, the ability of may borrowers to service their adjustable-rate loans may decrease in the event of an interest rate increase. Net Portfolio Value and Net Interest Income Analysis. Our interest rate sensitivity also is monitored by management through the use of models which generate estimates of the change in its net portfolio value ( NPV ) and net interest income ( NII ) over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities, and off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The following table sets forth our NPV as of December 31, 2006 and reflects the changes to NPV as a result of immediate and sustained changes in interest rates as indicated. Net Portfolio Value NPV as % of Portfolio Value of Assets Change in Interest Rates In Basis Points (Rate Shock) Amount $ Change % Change NPV Ratio Change (Dollars in Thousands) 200bp $ 102,537 $ (23,209 ) (18.46 )% 11.75 % (239)bp 100 115,600 (10,146 ) (8.07 ) 12.86 (128 ) Static 125,746 13.61 (100) 121,608 (4,138 ) (3.29 ) 12.98 (115 ) (200) 106,949 (18,797 ) (14.95 ) 11.38 (276 ) In addition to modeling changes in NPV, we also analyze potential changes to NII for a twelve-month period under rising and falling interest rate scenarios. The following table shows our NII model as of December 31, 2006. Change in Interest Rates in Basis Points (Rate Shock) Net Interest Income $ Change % Change (Dollars in Thousands) 200bp $ 22,063 $ (1,564 ) (6.62 )% 100 22,959 (668 ) (2.83 ) Static 23,627 (100) 23,212 (415 ) (1.76 ) (200) 18,869 (4,758 ) (20.14 ) The above table indicates that as of December 31, 2006, in the event of an immediate and sustained 200 basis point increase in interest rates, Abington Bank s net interest income for the 12 months ending December 31, 2007 would be expected to decrease by $1.6 million or 6.62% to $22.1 million. As is the case with the GAP Table, certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV and NII require the making of certain assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the models presented assume that the composition of our interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV measurements and net interest income models provide an indication of interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on net interest income and will differ from actual results. Recent Accounting Pronouncements In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments. This statement amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement resolves issues addressed in Statement 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interest in Securitized Financial Assets. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity s first fiscal year that begins after September 15, 2006. We adopted this guidance on January 1, 2007. The adoption did not have any effect on our financial position or results of operations. In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Asset- An Amendment of FASB Statement No. 140. This statement amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This statement requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. It also permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. We adopted this statement effective January 1, 2007. The adoption did not have a material effect on our financial position or results of operations. In July 2006, the FASB issued FASB Interpretation ( FIN ) No. 48, Accounting for Uncertainty in Income Taxes. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. We adopted this Interpretation on January 1, 2007. The adoption did not have any effect on our financial position or results of operations. In September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force ( EITF ) in Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 applies to life insurance arrangements that provide an employee with a specified benefit that is not limited to the employee s active service period, including certain bank-owned life insurance ( BOLI ) policies. EITF 06-4 requires an employer to recognize a liability and related compensation costs for future benefits that extend to postretirement periods. EITF 06-4 is effective for fiscal years beginning after December 15, 2007, with earlier application permitted. We are continuing to evaluate the impact of this consensus, which will require us to recognize an additional liability and compensation expense related to our BOLI policies. In September 2006, the FASB ratified the consensus reached by the EITF in Issue 06-5, Accounting for Purchases of Life Insurance Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance. Technical Bulletin No. 85-4 states that an entity should report as an asset in the statement of financial position the amount that could be realized under the insurance contract. EITF 06-5 clarifies certain factors that should be considered in the determination of the amount that could be realized. EITF 06-5 is effective for fiscal years beginning after December 15, 2006, with earlier application permitted under certain circumstances. We are continuing to evaluate the impact of this consensus, but do not expect that the guidance will have a material effect on our consolidated financial position or results of operations. In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. FASB Statement No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. We are currently evaluating the potential impact, if any, of the adoption of FASB Statement No. 157 on our consolidated financial position or results of operations. In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R). This statement which amends SFAS No. 87 and SFAS No. 106 to require recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS No. 158, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS No. 87 and SFAS No. 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost. The measurement date the date at which the benefit obligation and plan assets are measured is required to be the company s fiscal year end. SFAS No. 158 is effective for publicly-held companies for fiscal years ending after December 15, 2006, except for the measurement date provisions, which are effective for fiscal years ending after December 15, 2008. We adopted SFAS No. 158 as of December 31, 2006. We maintain a nonqualified, unfunded, defined benefit pension plan for the board of directors and certain officers that is more fully described in Note 14 of the notes to our consolidated financial statements. The incremental effect of applying SFAS No. 158 to this plan on individual line items in the consolidated statement of financial condition as of December 31, 2006 is as follows: Before Application of SFAS No. 158 Adjustments After Application of SFAS No. 158 Deferred tax asset $ 2,536,432 $ 272,284 $ 2,808,716 Total assets 924,913,998 272,284 925,186,282 Accounts payable and accrued expenses 4,078,549 800,836 4,879,385 Total liabilities 810,283,222 800,836 811,084,058 Accumulated other comprehensive loss (2,081,848 ) (528,552 ) (2,610,400 ) Total stockholders equity 114,630,776 (528,552 ) 114,102,224 In September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year misstatement. Prior to SAB No. 108, companies might evaluate the materiality of financial-statement misstatements using either the income statement or balance sheet approach, with the income statement approach focusing on new misstatements added in the current year, and the balance sheet approach focusing on the cumulative amount of misstatement present in a company s balance sheet. Misstatements that would be material under one approach could be viewed as immaterial under another approach, and not be corrected. SAB No. 108 now requires that companies view financial statement misstatements as material if they are material according to either the income statement or balance sheet approach. We adopted SAB No. 108 as of December 31, 2006, and it had no impact on our reported financial position or results of operations. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This statement is effective as of the beginning of an entity s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No.157. We are currently evaluating the potential impact, if any, of the adoption of FASB Statement No. 159 on our consolidated financial position or results of operations. BUSINESS General Abington Community Bancorp, Inc. is a Pennsylvania corporation which was organized to be a mid-tier holding company for Abington Bank. Abington Bank is a Pennsylvania-chartered, FDIC-insured savings bank. The bank is a wholly owned subsidiary of Abington Community Bancorp. Abington Community Bancorp s results of operations are primarily dependent on the results of Abington Bank and the bank s wholly owned subsidiaries, ASB Investment Co., Keswick Services II and its wholly owned subsidiaries, and Abington Corp. As of December 31, 2006, on a consolidated basis, we had total assets of $925.2 million, total deposits of $587.0 million, and total stockholders equity of $114.1 million. Abington Community Bancorp was formed when Abington Bank reorganized from a mutual savings bank to a mutual holding company structure in December 2004. Abington Mutual Holding Company, a Pennsylvania corporation, is the mutual holding company parent of Abington Community Bancorp. Abington Mutual Holding Company owns approximately 57.1% of outstanding common stock of Abington Community Bancorp. Abington Bank is a community-oriented savings bank, which was originally organized in 1867 and is headquartered in Jenkintown, Pennsylvania, approximately eight miles north of center city Philadelphia. Our banking office network currently consists of our headquarters and main office, nine other full-service branch offices and five limited service branch offices. In addition, we maintain a loan processing office in Jenkintown, Pennsylvania. Eleven of our banking offices are located in Montgomery County, Pennsylvania, three are in neighboring Bucks County, Pennsylvania and one is in Delaware County, Pennsylvania. We plan to open two additional bank branch offices in 2007 - one in Montgomery County and one in Bucks County. Both branch offices are expected to open in mid-2007. Our limited service offices have limited hours of operation and/or are limited to serving customers who live or work in the community in which the limited service office is located. Four of our limited service offices are located in retirement or age restricted communities. We maintain ATMs at all of our banking offices and we also have two off-site ATMs, located at a local grocery store and a local college. We also provide on-line banking and telephone banking services. We are primarily engaged in attracting deposits from the general public and using those funds to invest in loans and securities. Our principal sources of funds are deposits, repayments of loans and mortgage-backed securities, maturities of investments and interest-bearing deposits, funds provided from operations and funds borrowed from outside sources such as the Federal Home Loan Bank of Pittsburgh. These funds are primarily used for the origination of various loan types including single-family residential mortgage loans, construction loans, non-residential or commercial real estate mortgage loans, home equity loans, commercial business loans and consumer loans. We are an active originator of residential home mortgage loans and home construction loans in our market area. In addition to offering loans and deposits, we also offer securities and annuities to our customers through an affiliation with a third-party broker-dealer. Market Area and Competition Our market area is located in Montgomery, Bucks and Delaware Counties, Pennsylvania, which are suburbs of Philadelphia. In addition, particularly with respect to commercial and construction lending, we also make loans in Philadelphia and Chester Counties, Pennsylvania and contiguous counties in New Jersey and Delaware. This area is referred to as the Delaware Valley region. We face significant competition in originating loans and attracting deposits. This competition stems primarily from commercial banks, other savings banks and savings associations and mortgage-banking companies. Within our market area, more than 50 other banks, savings institutions and credit unions are operating. Many of the financial service providers operating in our market area are significantly larger and have greater financial resources than us. We face additional competition for deposits from short-term money market funds and other corporate and government securities funds, mutual funds and from other non-depository financial institutions such as brokerage firms and insurance companies. Lending Activities General. At December 31, 2006, our net loan portfolio totaled $605.1 million or 65.4% of total assets. Historically, our principal lending activity has been the origination of loans collateralized by one- to four-family, also known as single-family, residential real estate loans located in our market area. In addition, while we have been making construction loans to homebuilders and others for more than 30 years, we have increased our construction lending activities in recent years. We also have increased our emphasis on originating commercial real estate and multi-family (over four units) residential mortgage loans. We also originate home equity lines of credit, commercial business loans and consumer loans. The types of loans that we may originate are subject to federal and state law and regulations. Interest rates charged by us on loans are affected principally by the demand for such loans and the supply of money available for lending purposes and the rates offered by our competitors. These factors are, in turn, affected by general and economic conditions, the monetary policy of the federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters. Loan Portfolio Composition. The following table shows the composition of our loan portfolio by type of loan at the dates indicated. December 31, 2006 2005 2004 2003 2002 Amount % Amount % Amount % Amount % Amount % (Dollars in Thousands) Real estate loans: One- to four-family residential $ 375,744 57.55 % $ 323,710 54.88 % $ 243,705 54.69 % $ 223,963 55.95 % $ 247,159 61.70 % Commercial real estate and multi-family residential 92,428 14.16 76,647 12.99 74,642 16.75 64,029 16.00 61,247 15.29 Construction 134,976 20.67 132,789 22.51 83,253 18.68 66,875 16.71 50,401 12.58 Home equity lines of credit 33,953 5.20 41,063 6.96 32,049 7.19 31,185 7.79 25,571 6.38 Total real estate loans 637,101 97.58 574,209 97.34 433,649 97.31 386,052 96.45 384,378 95.95 Commercial business loans 11,416 1.75 10,975 1.86 8,540 1.92 10,403 2.60 11,353 2.83 Consumer non-real estate loans 4,400 0.67 4,712 0.80 3,433 0.77 3,792 0.95 4,877 1.22 Total non-real estate loans 15,816 2.42 15,687 2.66 11,973 2.69 14,195 3.55 16,230 4.05 Total loans 652,917 100.00 % 589,896 100.00 % 445,622 100.00 % 400,247 100.00 % 400,608 100.00 % Less: Undisbursed portion of construction loans in process 45,338 57,690 30,131 32,699 25,880 Deferred loan fees, net 913 1,264 1,423 1,472 1,891 Allowance for loan losses 1,603 1,455 1,413 1,456 1,813 Net loans $ 605,063 $ 529,487 $ 412,655 $ 364,620 $ 371,024 Contractual Terms to Final Maturities. The following table shows the scheduled contractual maturities of our loans as of December 31, 2006, before giving effect to net items. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. The amounts shown below do not take into account loan prepayments. One- to Four-Family Residential Commercial Real Estate and Multi-Family Residential Construction Home Equity Lines of Credit Commercial Business Loans Consumer Total (In Thousands) Amounts due after December 31, 2006 in: One year or less $ 13,266 $ 32,007 $ 79,412 $ 33,953 $ 7,593 $ 198 $ 166,429 After one year through two years 2,768 4,813 39,032 290 453 47,356 After two years through three years 3,777 115 6,044 950 1,868 12,754 After three years through five years 9,042 756 6,989 2,583 1,648 21,018 After five years through ten years 31,891 11,402 3,499 76 46,868 After ten years through fifteen years 89,565 10,981 107 100,653 After fifteen years 225,435 32,354 50 257,839 Total $ 375,744 $ 92,428 $ 134,976 $ 33,953 $ 11,416 $ 4,400 $ 652,917 The following table shows the amount of our loans at December 31, 2006, which are due after December 31, 2007, and indicates whether they have fixed-rates of interest or rates which are floating or adjustable. Fixed-Rate Floating or Adjustable-Rate Total at December 31, 2006 (In Thousands) One- to four-family residential $ 296,873 $ 65,605 $ 362,478 Commercial real estate and multi-family residential 43,727 16,694 60,421 Construction 55,564 55,564 Home equity lines of credit Commercial business loans 3,459 364 3,823 Consumer non-real estate 3,575 627 4,202 Total $ 347,634 $ 138,854 $ 486,488 Loan Originations. Our lending activities are subject to underwriting standards and loan origination procedures established by our board of directors and management. Loan originations are obtained through a variety of sources, primarily existing customers as well as new customers obtained from referrals and local advertising and promotional efforts. In addition, our commercial and construction loan officers actively solicit new loans throughout our market area. Single-family residential mortgage loan applications and consumer loan applications are taken at any of Abington Bank s banking offices. Beginning in November 2005, we also began taking single-family residential mortgage loan applications and consumer loan applications on-line. Applications for other loans typically are taken personally by our commercial or construction lending officers, although they may be received by a branch office initially and then referred to a construction or commercial lender. All loan applications are processed and underwritten centrally at our loan processing office and main office in Jenkintown, Pennsylvania. Our single-family residential mortgage loans are written on standardized documents used by the Federal Home Loan Mortgage Corporation ( FHLMC or Freddie Mac ) and Federal National Mortgage Association ( FNMA or Fannie Mae ). We also utilize automated loan processing and underwriting software systems developed by Freddie Mac for our new single-family residential mortgage loans. Property valuations of loans secured by real estate are undertaken by our in-house appraiser or by an independent third-party appraiser approved by our board of directors. Specified loan officers of Abington Bank have limited authority to approve automobile loans and other consumer loans up to $15,000. Home equity loans and lines of credit may be approved jointly by two authorized Vice Presidents. Our loan policy generally requires that all other loans up to $2.0 million must be approved by either the Consumer Loan Committee (which is comprised of the Bank s President, Senior Vice President - Lending and five other officers) or Commercial Loan Committee (comprised of the Bank s President, Senior Vice President - Lending and five other officers). All of such loans are reported to our board of directors on a monthly basis. Loans exceeding $2.0 million must be approved by the full board of directors. (1) Other items consist of loans in process, deferred fees and the allowance for loan losses. One- to Four-Family Residential Mortgage Lending. One of our primary lending activities continues to be the origination of loans secured by first mortgages on one- to four-family residences in our market area. At December 31, 2006, $375.7 million of our total loan portfolio consisted of single-family residential mortgage loans. Due primarily to increased mortgage loan prepayments, primarily as a result of refinance activity in the relatively low interest rate environment in recent years, as well as our increased emphasis on commercial real estate, construction and commercial business loans, the percentage of single-family residential mortgage loans in our portfolio has decreased from 61.7% at December 31, 2002 to 57.6% at December 31, 2006. Our single-family residential mortgage loans generally are underwritten on terms and documentation conforming with guidelines issued by Freddie Mac and Fannie Mae. We utilize proprietary software developed by Freddie Mac in processing and underwriting our single-family residential mortgage loans. Applications for one- to four-family residential mortgage loans are accepted at any of our banking offices and are then referred to the Residential Lending Department at our main office and our Loan Processing Center in order to process the loan, which consists primarily of obtaining all documents required by Freddie Mac and Fannie Mae underwriting standards, and complete the underwriting, which includes making a determination whether the loan meets our underwriting standards such that the bank can extend a loan commitment to the customer. We generally have retained for our portfolio a substantial portion of the single-family residential mortgage loans that we originate. We service all loans that we have originated through our in-house loan servicing department. We currently originate fixed-rate, fully amortizing mortgage loans with maturities of 15, 20, 30 or 40 years. We also currently offer adjustable rate mortgage ( ARM ) loans. We began offering ARM loans in 2005 after not offering single-family ARM loans for more than 10 years through the end of 2004. The temporary discontinuation of our ARM loans was a result of our evaluation of local market conditions. At December 31, 2006, $4.7 million, or 1.2%, of our one- to four-family residential loan portfolio consisted of ARM loans. We underwrite one- to four-family residential first mortgage loans with loan-to-value ratios of up to 95%, provided that the borrower obtains private mortgage insurance on loans that exceed 80% of the appraised value or sales price, whichever is less, of the secured property. We also will concurrently originate first mortgage loans with loan-to-value ratios of up to 80% together with a home equity loan, resulting in a combined loan-to-value ratio of up to 90%, which relieves our borrower from the cost of obtaining private mortgage insurance. We also require that title insurance, hazard insurance and, if appropriate, flood insurance be maintained on all properties securing real estate loans. Our in-house appraiser or another licensed appraiser appraises all properties securing one- to four-family first mortgage loans. Our mortgage loans generally include due-on-sale clauses which provide us with the contractual right to deem the loan immediately due and payable in the event the borrower transfers ownership of the property. Due-on-sale clauses are an important means of adjusting the yields of fixed-rate mortgage loans in our portfolio, and we generally exercise our rights under these clauses. Our single-family residential mortgage loans also include home equity loans, which amounted to $38.1 million at December 31, 2006. We offer fixed-rate home equity loans in amounts up to $200,000. Our home equity loans are fully amortizing and have terms to maturity of up to 15 years. While home equity loans also are secured by the borrower s residence, we generally obtain a second mortgage position on these loans. Our lending policy provides that our home equity loans have loan-to-value ratios, when combined with any first mortgage, of 90% or less, although the preponderance of our home equity loans have combined loan-to-value ratios of 80% or less. Our single-family residential mortgage loans also include some loans to local businessmen for a commercial purpose, but which are secured by liens on the borrower s residence. Commercial Real Estate and Multi-Family Residential Real Estate Loans. At December 31, 2006, our commercial real estate and multi-family residential loans amounted to $92.4 million or 14.2% of our total loan portfolio. In recent years, we have increased our portfolio of commercial real estate and multi-family residential loans. In addition to commercial real estate loans, we offer lines of credit for commercial uses. In most cases our commercial lines of credit are secured by commercial real estate. At December 31, 2006, the unused portion of unused commercial lines of credit amounted to $46.8 million. Our commercial real estate and residential multi-family real estate loan portfolio consists primarily of loans secured by office buildings, retail and industrial use buildings, strip shopping centers, residential properties with five or more units and other properties used for commercial and multi-family purposes located in our market area. Our commercial and multi-family real estate loans tend to be originated in an amount less than $3.0 million but will occasionally exceed that amount. We currently employ five commercial lenders who actively solicit commercial real estate and multi-family residential mortgage loans in our market area. Although terms for commercial real estate and multi-family loans vary, our underwriting standards generally allow for terms up to 30 years with monthly amortization over the life of the loan and loan-to-value ratios of not more than 80%. Interest rates are either fixed or adjustable, based upon designated market indices such as the 5-year Treasury CMT plus a margin, and fees of up to 2.0% are charged to the borrower at the origination of the loan. Generally, we obtain personal guarantees of the principals as additional collateral for commercial real estate and multi-family real estate loans. Commercial real estate and multi-family real estate lending involves different risks than single-family residential lending. These risks include larger loans to individual borrowers and loan payments that are dependent upon the successful operation of the project or the borrower s business. These risks can be affected by supply and demand conditions in the project s market area of rental housing units, office and retail space, warehouses, and other commercial space. In addition, many of our commercial real estate loans are not fully amortizing and require significant balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance the underlying property in order to make the balloon payment. At December 31, 2006, we had three commercial loans with a carrying value of $1.3 million that were considered non-performing. These three loans, which are to one borrower, were over 90 days delinquent at December 31, 2006 and were classified as non-accrual. These were our only delinquent commercial real estate loans or multi-family residential real estate loans at such date. We have obtained a confessed judgment against the borrower, which provides us with additional collateral securing the loans. We also obtained current appraisals of the underlying collateral properties, which support the full value of the loans. Based on the value of the properties, as well as the additional collateral available, we do not expect to incur any losses on the loans to this borrower. At December 31, 2005 and 2004 none of our commercial real estate and multi-family residential mortgage loans were either delinquent for more than 30 days or considered non-performing. No commercial real estate and multi-family residential real estate loans were charged-off in 2006 or 2005. We charged-off $99,000 in commercial real estate and multi-family residential real estate loans in the year ended December 31, 2004. Various aspects of a commercial and multi-family loan transactions are evaluated in an effort to mitigate the additional risk in these types of loans. We generally originate these types of loans to borrowers with whom we are familiar and which have demonstrated historical results. In our underwriting procedures, consideration is given to the stability of the property s cash flow history, future operating projections, current and projected occupancy levels, location and physical condition. Generally, we impose a debt service ratio (the ratio of net cash flows from operations before the payment of debt service to debt service) of not less than 110% in the case of multi-family residential real estate loans and 120% in the case of commercial real estate loans. We also evaluate the credit and financial condition of the borrower, and if applicable, the guarantor. Appraisal reports prepared by independent appraisers or, in some cases, Abington Bank s staff appraiser are obtained on each loan to substantiate the property s market value, and are reviewed by us prior to the closing of the loan. After the loan is made, we periodically monitor the operation of the business or project and the physical condition of the property. Construction Lending. We have been an active originator of construction loans since the mid 1990s. We increased our construction loan efforts in 2002 when we hired a second construction loan officer. We targeted construction loans as a growth area for Abington Bank because they have shorter terms to maturity and they generally have floating or adjustable interest rates. We have focused our construction lending on making loans to homebuilders in the Delaware Valley area to acquire, develop and build single-family residences. Our construction loans include, to a lesser extent, loans for the construction of commercial and industrial use properties such as office buildings, retail shops and warehouses. At December 31, 2006, our construction loans amounted to $135.0 million, or 20.7% of our total loan portfolio. This amount includes $45.3 million of undisbursed loans in process. Our construction loan portfolio has grown appreciably over the past four years. At December 31, 2002, our construction loans amounted to $50.4 million, or 12.6% of our total loan portfolio. A substantial amount of our construction loans are construction and development loans to contractors and builders primarily to finance the construction of single-family homes and subdivisions. Loans to finance the construction of single-family homes and subdivisions are generally offered to experienced builders in the Delaware Valley with whom we have an established relationship. Residential construction and development loans are typically offered with terms of up to 36 months. One or two six-month extensions may be provided for at our option. The maximum loan-to-value limit applicable to these loans is 80% of the appraised post construction value. We often establish interest reserves and obtain personal and/or corporate guarantees as additional security on our construction loans. Construction loan proceeds are disbursed periodically in increments as construction progresses and as inspection by our approved appraisers or loan inspectors warrants. Our construction loans are negotiated on an individual basis but typically have floating rates of interest based upon The Wall Street Journal prime rate or, in some cases, LIBOR. Additional fees may be charged as funds are disbursed. In addition to interest payments during the term of the construction loan, we typically require that payments to principal be made as units are completed and released. Generally such principal payments must be equal to 110% of the amount attributable to acquisition and development of the lot plus 100% of the amount attributable to construction of the individual home. We permit a limited pre-determined number of model homes to be constructed on an unsold or speculative basis. All other units must be pre-sold before we will disburse funds for construction. Our construction loans also include loans to acquire and hold unimproved land, loans to acquire land and develop the basic infrastructure, such as roads and sewers, and construction loans for commercial uses. The majority of our construction loans are secured by properties located in Bucks and Montgomery Counties, Pennsylvania. However, we also make construction loans throughout the Delaware Valley region. Construction financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property s value at completion of construction compared to the estimated costs, including interest, of construction and other assumptions. Additionally, if the estimate of value proves to be inaccurate, we may be confronted with a project, when completed, having a value less than the loan amount. Our construction loans require us to advance funds based upon our security interest in the project, which is of uncertain value until the construction is completed. In addition, at the time we commit to make a construction loan, it is uncertain whether the costs estimated for the project will be sufficient to cover actual construction costs. If there are cost overruns, additional financing may be necessary to complete the project. Compared to single-family residential mortgage loans, it is relatively more difficult to evaluate accurately the total funds necessary to complete the project and the ultimate loan-to-value ratio. We have attempted to minimize these risks by generally concentrating on residential construction loans in our market area to contractors with whom we have established relationships. At December 31, 2006, we had two construction loans with an aggregate carrying value of $1.1 million that were considered non-performing. These two loans, which are to one borrower, were over 90 days delinquent at December 31, 2006 and are classified as non-accrual. These were our only delinquent construction loans at such date. We have obtained a confessed judgment against the borrower, which provides us with additional collateral securing the loans. We also obtained current appraisals of the underlying collateral properties, which support the full value of the loans. Based on the value of the properties, as well as the additional collateral available, we do not expect to incur any losses on the loans to this borrower. At December 31, 2005, we had one construction loan with a carrying value of $2.9 million that was considered non-performing. This one construction loan, which was placed on non-accrual status in November 2005, was 60 days delinquent at December 31, 2005 and was our only delinquent construction loan at such date. The outstanding balance of this loan, including all past due interest and costs, was paid in full in April 2006. At December 31, 2004 we had no construction loans that were considered non-performing. We have not charged-off any construction loans in more than five years. Home Equity Lines. At December 31, 2006, the outstanding balance of our home equity lines of credit amounted to $34.0 million or 5.2% of our net loan portfolio. The unused portion of home equity lines was $22.4 million at such date. We offer home equity lines in amounts up to $200,000 on a revolving line of credit basis with interest tied to the prime rate. Generally, we have a second mortgage on the borrower s residence as collateral on its home equity lines. Generally, our home equity lines have loan-to-value ratios (combined with any loan secured by a first mortgage) of 80% or less. Our customers may apply for home equity lines as well as home equity loans at any banking office or on-line through our website. Commercial Business Loans. Our commercial business loans amounted to $11.4 million or 1.8% of the total loan portfolio at December 31, 2006. Our commercial business loans typically are to small to mid-sized businesses in our market area and may be for working capital, inventory financing or accounts receivable financing. Small business loans may have adjustable or fixed rates of interest and generally have terms of three years or less but may go up to 10 years. Our commercial business loans generally are secured by equipment, machinery or other corporate assets. In addition, we generally obtain personal guarantees from the principals of the borrower with respect to all commercial business loans. Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Tax-exempt income and yields have not been adjusted to a tax-equivalent basis. All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be. Year Ended December 31, 2006 2005 Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate (Dollars in Thousands) Interest-earning assets: Investment securities(1) $ 100,211 $ 4,005 4.00 % $ 96,786 $ 3,250 3.36 % Mortgage-backed securities 143,664 6,031 4.20 166,309 6,869 4.13 Loans receivable(2) 570,850 38,633 6.77 469,076 29,283 6.24 Other interest-earning assets 25,809 1,149 4.45 22,551 609 2.70 Total interest-earning assets 840,534 49,818 5.93 % 754,722 40,011 5.30 % Cash and non-interest bearing balances 19,095 20,413 Other non-interest-earning assets 25,617 21,556 Total assets $ 885,246 $ 796,691 Interest-bearing liabilities: Deposits: Savings and money market accounts $ 101,755 1,129 1.11 % $ 125,834 1,412 1.12 % Checking accounts 53,676 11 0.02 52,282 66 0.13 Certificate accounts 339,712 15,634 4.60 236,962 8,391 3.54 Total deposits 495,143 16,774 3.39 415,078 9,869 2.38 FHLB advances 201,810 9,656 4.78 192,189 8,668 4.51 Other borrowings 20,155 838 4.16 20,198 462 2.29 Total interest-bearing liabilities 717,108 $ 27,268 3.80 % 627,465 $ 18,999 3.03 % Non-interest-bearing liabilities: Non-interest-bearing demand accounts 42,191 39,900 Real estate tax escrow accounts 2,528 2,263 Other liabilities 8,831 7,406 Total liabilities 770,658 677,034 Stockholders equity 114,588 119,657 Total liabilities and stockholders equity $ 885,246 $ 796,691 Net interest-earning assets $ 123,426 $ 127,257 Net interest income; average Interest rate spread $ 22,550 2.13 % $ 21,012 2.27 % Net interest margin(3) 2.68 % 2.78 % Our five commercial lenders actively solicit commercial business loans in our market area. Given the on-going consolidation of financial institutions, we are seeking to increase our commercial business loan portfolio. In particular, we are targeting loans of $250,000 to $500,000 that generally are considered too small by the regional and super-regional banks operating in our market. Commercial business loans generally are deemed to involve a greater degree of risk than single-family residential mortgage loans. Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists. As a result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing other loans, such as inventory or equipment, may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. Consumer Lending Activities. In our efforts to provide a full range of financial services to our customers, we offer various types of consumer loans such as loans secured by deposit accounts, automobile loans and unsecured personal loans. These loans are originated primarily through existing and walk-in customers and direct advertising. At December 31, 2006, $4.4 million, or 0.7% of the total loan portfolio consisted of these types of loans. Consumer loans generally have higher interest rates and shorter terms than residential loans, however, they have additional credit risk due to the type of collateral securing the loan or in some cases the absence of collateral. In the years ended December 31, 2006, 2005 and 2004 we charged-off $56,000, $70,000 and $32,000 of consumer loans, respectively. The 2006 and 2005 charge-offs include $54,000 and $60,000, respectively, of charge-offs of overdrawn deposit balances, which are classified as loans for reporting purposes. Loan Approval Procedures and Authority. Our board of directors establishes the Bank s lending policies and procedures. Our Lending Policy Manual is reviewed on at least an annual basis by our management team in order to propose modifications as a result of market conditions, regulatory changes and other factors. All modifications must be approved by our board of directors. Various officers or combinations of officers of Abington Bank have the authority within specifically identified limits to approve new loans. The largest individual lending authority is $2.0 million. Amounts in excess of the individual lending limits must be approved by the Commercial Lending Committee or the Consumer Lending Committee. Loans in excess of $2.0 million must be approved by the board of directors of Abington Bank. Asset Quality General. One of our key objectives has been, and continues to be, maintaining a high level of asset quality. In addition to maintaining credit standards for new originations which we believe are sound, we are proactive in our loan monitoring, collection and workout processes in dealing with delinquent or problem loans. In addition, in recent years, we have retained independent, third parties to undertake regular reviews of the credit quality of our loan portfolio. When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by making personal contact with the borrower. Initial contacts are generally made 15 days after the date the payment is due. In most cases, deficiencies are promptly resolved. If the delinquency continues, late charges are assessed and additional efforts are made to collect the deficiency. All loans delinquent 60 days or more are reported to the board of directors of Abington Bank. On loans where the collection of principal or interest payments is doubtful, the accrual of interest income ceases ( non-accrual loans). On single-family residential mortgage loans 120 days or more past due and all other loans 90 days or more past due, as to principal and interest payments, our policy, with certain limited exceptions, is to discontinue accruing additional interest and reverse any interest currently accrued. On occasion, this action may be taken earlier if the financial condition of the borrower raises significant concern with regard to his/her ability to service the debt in accordance with the terms of the loan agreement. Interest income is not accrued on these loans until the borrower s financial condition and payment record demonstrate an ability to service the debt. Real estate which is acquired as a result of foreclosure is classified as real estate owned until sold. Real estate owned is recorded at the lower of cost or fair value less estimated selling costs. Costs associated with acquiring and improving a foreclosed property are usually capitalized to the extent that the carrying value does not exceed fair value less estimated selling costs. Holding costs are charged to expense. Gains and losses on the sale of real estate owned are charged to operations, as incurred. We account for our impaired loans under generally accepted accounting principles. An impaired loan generally is one for which it is probable, based on current information, that the lender will not collect all the amounts due under the contractual terms of the loan. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment. Loans collectively evaluated for impairment include smaller balance commercial real estate loans, residential real estate loans and consumer loans. These loans are evaluated as a group because they have similar characteristics and performance experience. Larger commercial real estate, construction and commercial business loans are individually evaluated for impairment. At December 31, 2006 and 2005, the Company had $2.3 million and $2.9 million of loans, respectively, that were determined to be impaired. The impaired loans at December 31, 2006 included two construction and three commercial real estate loans to one borrower. No reserve for these loans is included in the Company s allowance for loan losses at December 31, 2006 as the value of the underlying collateral properties support the full value of the loans. The impaired loan at December 31, 2005 was a construction loan to one borrower, and a reserve on this loan is included in the Company s allowance for loan losses at December 31, 2005. The outstanding balance of this loan, including all past due interest and costs, was paid in full in April 2006. Federal regulations and our policies require that we utilize an internal asset classification system as a means of reporting problem and potential problem assets. We have incorporated an internal asset classification system, consistent with Federal banking regulations, as a part of our credit monitoring system. We currently classify problem and potential problem assets as special mention, substandard, doubtful or loss assets. An asset is considered special mention if it does not yet warrant adverse classification such as substandard or doubtful, but nonetheless possesses credit deficiencies or potential weaknesses deserving management s close attention. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. When an insured institution classifies one or more assets, or portions thereof, as special mention, substandard or doubtful, it is required that a general valuation allowance for loan losses be established for loan losses in an amount deemed prudent by management. General valuation allowances represent loss allowances which have been established to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies one or more assets, or portions thereof, as loss, it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount. Rate/Volume Analysis. The following table shows the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities affected our interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate, which is the change in rate multiplied by prior year volume, and (2) changes in volume, which is the change in volume multiplied by prior year rate. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume. Year Ended December 31, 2006 Compared to 2005 Increase (Decrease) Due to Rate Volume Rate/Volume Total Increase (Decrease) (Dollars in Thousands) Interest income: Investment securities(1) $ 618 $ 115 $ 22 $ 755 Mortgage-backed securities 113 (935 ) (16 ) (838 ) Loans receivable, net 2,462 6,353 535 9,350 Other interest-earning assets 395 88 57 540 Total interest-earning assets 3,588 5,621 598 9,807 Interest expense: Savings accounts (16 ) (270 ) 3 (283 ) Checking accounts (55 ) 2 (2 ) (55 ) Certificate accounts 2,514 3,638 1,091 7,243 Total deposits 2,443 3,370 1,092 6,905 FHLB advances 528 434 26 988 Other borrowings 378 (1 ) (1 ) 376 Total interest-bearing liabilities 3,349 3,803 1,117 8,269 Increase in net interest income $ 239 $ 1,818 $ (519 ) $ 1,538 A savings institution s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by federal and state bank regulators which can order the establishment of additional general or specific loss allowances. The federal banking agencies, have adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the collectibility of the portfolio in a reasonable manner; and that management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. In July 2001, the SEC issued Staff Accounting Bulletin ( SAB ) No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues. The guidance contained in the SAB focuses on the documentation the SEC staff normally expects registrants to prepare and maintain in support of the allowance for loan and lease losses. Concurrent with the SEC s issuance of SAB No. 102, the federal banking agencies, represented by the Federal Financial Institutions Examination Council ( FFIEC ), issued an interagency policy statement entitled Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions (Policy Statement). The SAB and Policy Statement were the result of an agreement between the SEC and the federal banking agencies in March 1999 to provide guidance on allowance for loan and lease losses methodologies and supporting documentation. Our allowance for loan losses includes a portion which is allocated to non-classified loans by type of loan, based primarily upon our periodic reviews of the risk elements within the various categories of loans. Our management believes that, based on information currently available, its allowance for loan losses is maintained at a level which covers all known and inherent losses that are both probable and reasonably estimable at each reporting date. However, actual losses are dependent upon future events and, as such, further additions to the level of allowances for loan losses may become necessary. Delinquent Loans. The following table shows the delinquencies in our loan portfolio as of the dates indicated. December 31, 2006 December 31, 2005 December 31, 2004 30-89 Days Overdue 90 or More Days Overdue 30-89 Days Overdue 90 or More Days Overdue 30-89 Days Overdue 90 or More Days Overdue Number of Loans Principal Balance Number of Loans Principal Balance Number of Loans Principal Balance Number of Loans Principal Balance Number of Loans Principal Balance Number of Loans Principal Balance (Dollars in Thousands) One- to four-family residential 10 $ 447 4 $ 210 15 $ 608 1 $ 8 6 $ 460 3 $ 227 Commercial real estate and multi-family residential 3 1,270 Construction 2 1,077 1 2,885 1 2,900 Commercial business Home equity lines of credit 2 84 2 89 2 314 Consumer non- real estate 3 4 Total delinquent loans 12 $ 531 9 $ 2,557 21 $ 3,586 1 $ 8 9 $ 3,674 3 $ 227 Delinquent loans to total net loans 0.09 % 0.42 % 0.68 % % 0.89 % .06 % Delinquent loans to total loans 0.08 % 0.39 % 0.61 % % 0.82 % 0.05 % (1) Non-performing loans consist of non-accruing loans plus accruing loans 90 days or more past due. Property acquired by Abington Bank through foreclosure is initially recorded at the fair value of the related assets at the date of foreclosure, less estimated costs to sell. Thereafter, if there is a further deterioration in value, we charge earnings for the diminution in value. Our policy is to obtain an appraisal on all real estate subject to foreclosure proceedings prior to the time of foreclosure and to require appraisals on a periodic basis on foreclosed properties and conduct inspections on foreclosed properties. Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses. We maintain the allowance at a level believed to cover all known and inherent losses in the portfolio that are both probable and reasonable to estimate at each reporting date. Management reviews the allowance for loan losses on no less than a quarterly basis in order to identify those inherent losses and to assess the overall collection probability for the loan portfolio. Our evaluation process includes, among other things, an analysis of delinquency trends, non-performing loan trends, the level of charge-offs and recoveries, prior loss experience, total loans outstanding, the volume of loan originations, the type, size and geographic concentration of our loans, the value of collateral securing the loan, the borrower s ability to repay and repayment performance, the number of loans requiring heightened management oversight, local economic conditions and industry experience. In addition, in establishing the allowance for loan losses, we have implemented a nine point internal rating system for all loans originated by the Commercial Lending Department. At the time of origination, each loan, other than single-family residential mortgage loans, home equity lines and consumer loans, is assigned a rating based on the assumed risk elements of the loan. Such risk ratings are periodically reviewed by management and revised as deemed appropriate. The establishment of the allowance for loan losses is significantly affected by management judgment and uncertainties and there is a likelihood that different amounts would be reported under different conditions or assumptions. Various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require the bank to make additional provisions for estimated loan losses based upon judgments different from those of management. As of December 31, 2006, our allowance for loan losses was 0.26% of total loans receivable. In the five-year period ended December 31, 2006, our loan charge-offs have been relatively minimal and one borrower and his affiliates were responsible for 80.2% of such charge-offs. During the year ended December 31, 2004, we charged-off $99,000 of one- to four-family residential mortgage loans. Such loans were all to the one aforementioned borrower and previously had been deemed impaired. During the year ended December 31, 2003, we charged-off $671,000 of commercial real estate and multi-family residential mortgage loans to this borrower. As of December 31, 2004, all loans to this borrower had been charged-off. We will continue to monitor and modify our allowances for loan losses as conditions dictate. No assurances can be given that our level of allowance for loan losses will cover all of the inherent losses on our loans or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for loan losses. The following table shows changes in our allowance for loan losses during the periods presented. At or For the Year Ended December 31, 2006 2005 2004 2003 2002 (Dollars in Thousands) Total loans outstanding at end of period $ 652,917 $ 589,896 $ 445,622 $ 400,247 $ 401,453 Average loans outstanding 570,850 469,076 384,990 361,548 366,246 Allowance for loan losses, beginning of period $ 1,455 $ 1,413 $ 1,456 $ 1,813 $ 1,590 Provision for loan losses 186 25 45 375 500 Charge-offs: One- to four-family residential 16 Commercial real estate and multi-family residential 671 298 Construction Commercial business Home equity lines of credit 99 Consumer non-real estate 56 70 32 89 Total charge-offs 56 70 147 760 298 Recoveries on loans previously charged off 18 87 59 28 21 Allowance for loan losses, end of period $ 1,603 $ 1,455 $ 1,413 $ 1,456 $ 1,813 Allowance for loan losses as a percent of non-performing loans 62.69 % 50.29 % 622.03 % 315.15 % 145.04 % Ratio of net charge-offs during the period to average loans outstanding during the period 0.01 % n/a 0.02 % 0.21 % 0.08 % Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Tax-exempt income and yields have not been adjusted to a tax-equivalent basis. All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be. Year Ended December 31, 2005 2004 Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate (Dollars in Thousands) Interest-earning assets: Investment securities(1) $ 96,786 $ 3,250 3.36 % $ 84,320 $ 2,423 2.87 % Mortgage-backed securities 166,309 6,869 4.13 136,864 5,421 3.96 Loans receivable(2) 469,076 29,283 6.24 384,990 22,821 5.93 Other interest-earning assets 22,551 609 2.70 16,554 184 1.11 Total interest-earning assets 754,722 40,011 5.30 % 622,728 30,849 4.95 % Cash and non-interest bearing balances 20,413 17,241 Other non-interest-earning assets 21,556 11,157 Total assets $ 796,691 $ 651,126 Interest-bearing liabilities: Deposits: Savings and money market accounts $ 125,834 1,412 1.12 % $ 120,748 1,065 0.88 % Checking accounts 52,282 66 0.13 52,804 44 0.08 Certificate accounts 236,962 8,391 3.54 175,492 5,452 3.11 Total deposits 415,078 9,869 2.38 349,044 6,561 1.88 FHLB advances 192,189 8,668 4.51 169,699 7,532 4.44 Other borrowings 20,198 462 2.29 17,703 116 0.66 Total interest-bearing liabilities 627,465 $ 18,999 3.03 % 536,446 $ 14,209 2.65 % Non-interest-bearing liabilities: Non-interest-bearing demand accounts 39,900 45,861 Real estate tax escrow accounts 2,263 2,204 Other liabilities 7,406 6,028 Total liabilities 677,034 590,539 Stockholders equity 119,657 60,587 Total liabilities and stockholders equity $ 796,691 $ 651,126 Net interest-earning assets $ 127,257 $ 86,282 Net interest income; average Interest rate spread $ 21,012 2.27 % $ 16,640 2.30 % Net interest margin(3) 2.78 % 2.67 % The following table shows how our allowance for loan losses is allocated by type of loan at each of the dates indicated. December 31, 2006 2005 2004 2003 2002 Amount of Allowance Loan Category as a % of Total Loans Amount of Allowance Loan Category as a % of Total Loans Amount of Allowance Loan Category as a % of Total Loans Amount of Allowance Loan Category as a % of Total Loans Amount of Allowance Loan Category as a % of Total Loans (Dollars in Thousands) One- to four-family residential $ 378 57.55 % $ 647 54.88 % $ 657 54.69 % $ 625 55.95 % $ 694 61.70 % Commercial real estate and multi-family residential 507 14.16 230 12.99 458 16.75 224 16.00 636 15.29 Construction 486 20.67 333 22.51 106 18.68 68 16.71 49 12.58 Home equity lines of credit 68 5.20 82 6.96 70 7.19 51 7.79 55 6.38 Commercial business 114 1.75 110 1.86 85 1.92 104 2.60 114 2.83 Consumer non-real estate 48 0.67 52 0.80 34 0.77 38 0.95 49 1.22 Unallocated 2 1 3 346 216 Total $ 1,603 100.00 % $ 1,455 100.00 % $ 1,413 100.00 % $ 1,456 100.00 % $ 1,813 100.00 % The allowance consists of specific and general components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. Investment Activities General. We invest in securities pursuant to our Investment Policy, which has been approved by our board of directors. The Investment Policy designates our President and three Senior Vice Presidents as the Investment Committee. The Investment Committee is authorized by the board to make the bank s investments consistent with the Investment Policy. The board of directors of Abington Bank reviews all investment activity on a monthly basis. Our investment policy is designed primarily to manage the interest rate sensitivity of our assets and liabilities, to generate a favorable return without incurring undue interest rate and credit risk, to complement our lending activities and to provide and maintain liquidity. We also use a leveraged investment strategy for the purpose of enhancing returns. Pursuant to this strategy, we have utilized borrowings from the FHLB of Pittsburgh to purchase additional investment securities. We attempt to match the advances with the securities purchased in order to obtain a favorable difference, or spread, between the interest paid on the advance against the yield received on the security purchased. At December 31, 2006, our investment and mortgage-backed securities amounted to $229.0 million in the aggregate or 24.8% of total assets at such date. The largest component of our securities portfolio in recent periods has been mortgage-backed securities, which had a carrying value of $134.2 million or 58.6% of the securities portfolio at December 31, 2006. In addition, we invest in U.S. government and agency obligations, municipal securities, corporate debt obligations and other securities. The majority of our agency debt securities have call provisions which provide the agency with the ability to call the securities at specified dates. Pursuant to Statement of Financial Accounting Standards ( SFAS ) No. 115, Accounting for Certain Investments in Debt and Equity Securities, our securities are classified as available for sale, held to maturity, or trading, at the time of acquisition. Securities classified as held to maturity must be purchased with the intent and ability to hold that security until its final maturity and can be sold prior to maturity only under rare circumstances. Held to maturity securities are accounted for based upon the amortized cost of the security. Available for sale securities can be sold at any time based upon needs or market conditions. Available for sale securities are accounted for at fair value, with unrealized gains and losses on these securities, net of income tax provisions, reflected in retained earnings as accumulated other comprehensive income. At December 31, 2006, we had $152.5 million of securities classified as available for sale, $76.5 million of securities classified as held to maturity and no securities classified as trading account. We do not purchase mortgage-backed derivative instruments that would be characterized high-risk under Federal banking regulations at the time of purchase, nor do we purchase corporate obligations which are not rated investment grade or better. Our mortgage-backed securities consist primarily of mortgage pass-through certificates issued by the Government National Mortgage Association ( GNMA or Ginnie Mae ), Fannie Mae or Freddie Mac. Our mortgage-backed securities also include collateralized mortgage obligations ( CMOs ) issued by such agencies and certain AAA rated private issuers. At December 31, 2006, $19.6 million of our mortgage-backed securities were CMOs. At December 31, 2006, $119.4 million or 89.0% of our mortgage-backed securities were issued by the GNMA, FNMA or FHLMC. The remaining $14.7 million of our mortgage-backed securities were issued by certain AAA rated private issuers. Investments in mortgage-backed securities involve a risk that actual prepayments will be greater than estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments thereby changing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities or in the event such securities are redeemed by the issuer. In addition, the market value of such securities may be adversely affected by changes in interest rates. Ginnie Mae is a government agency within the Department of Housing and Urban Development which was created to help finance government-assisted housing programs. Ginnie Mae securities are backed by loans insured by the Federal Housing Administration or guaranteed by the Veterans Administration. The timely payment of principal and interest on Ginnie Mae securities is guaranteed by Ginnie Mae and backed by the full faith and credit of the U.S. Government. Freddie Mac is a private corporation chartered by the U.S. Government. Freddie Mac issues participation certificates backed principally by conventional mortgage loans. Freddie Mac guarantees the timely payment of interest and the ultimate return of principal on participation certificates. Fannie Mae is a private corporation chartered by the U.S. Congress with a mandate to establish a secondary market for mortgage loans. Fannie Mae guarantees the timely payment of principal and interest on Fannie Mae securities. Freddie Mac and Fannie Mae securities are not backed by the full faith and credit of the U.S. Government, but because Freddie Mac and Fannie Mae are U.S. Government-sponsored enterprises, these securities are considered to be among the highest quality investments with minimal credit risks. Collateralized mortgage obligations are typically issued by a special-purpose entity, in our case, of government agencies or selected AAA rated private issuers, which may be organized in a variety of legal forms, such as a trust, a corporation, or a partnership. Substantially all of the collateralized mortgage obligations held in our portfolio consist of senior sequential tranches. By purchasing senior sequential tranches, management attempts to ensure the cash flow associated with such an investment. The following table sets forth certain information relating to our investment and mortgage-backed securities portfolios and our investment in FHLB stock at the dates indicated. December 31, 2006 2005 2004 Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value (In Thousands) Mortgage-backed securities $ 135,975 $ 131,980 $ 149,623 $ 145,449 $ 165,005 $ 164,350 U.S. government and agency obligations 71,492 70,230 74,991 73,120 71,489 70,393 Corporate bonds 500 500 999 998 1,000 1,012 Municipal obligations 20,396 20,317 20,576 20,497 10,400 10,520 Investment certificates of deposit 785 785 1,183 1,183 1,282 1,282 Mutual funds 3,058 2,978 3,422 3,347 3,395 3,292 FHLB stock 11,241 11,241 11,061 11,061 10,450 10,450 Other 3 1 Total investment and mortgage-backed securities $ 243,447 $ 238,031 $ 261,855 $ 255,655 $ 263,024 $ 261,300 The following table sets forth the amount of investment securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 2006. No tax-exempt yields have been adjusted to a tax-equivalent basis. Amounts at December 31, 2006 Which Mature In One Year or Less Weighted Average Yield Over One Year Through Five Years Weighted Average Yield Over Five Through Ten Years Weighted Average Yield Over Ten Years Weighted Average Yield (Dollars in Thousands) Bonds and other debt securities: U.S. government and agency obligations $ 16,500 3.01 % $ 43,000 4.65 % $ 9,992 4.00 % $ 2,000 6.50 % Corporate bonds 500 5.96 Municipal obligations 20,393 4.18 Mortgage-backed securities 1,355 4.51 55,239 3.93 13 9.00 79,368 4.68 Investment certificates of deposit 299 4.46 486 5.13 Total $ 18,154 3.15 % $ 99,225 4.26 % $ 10,005 4.01 % $ 101,761 4.61 % Sources of Funds General. Deposits, loan repayments and prepayments, proceeds from sales of loans, cash flows generated from operations and Federal Home Loan Bank advances are the primary sources of our funds for use in lending, investing and for other general purposes. Deposits. We offer a variety of deposit accounts with a range of interest rates and terms. Our deposits consist of checking, both interest-bearing and non-interest-bearing, money market, savings and certificate of deposit accounts. At December 31, 2006, 33.7% of the funds deposited with Abington Bank were in core deposits, which are deposits other than certificates of deposit. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. Our deposits are obtained predominantly from the areas where our branch offices are located. We have historically relied primarily on customer service and long-standing relationships with customers to attract and retain these deposits; however, market interest rates and rates offered by competing financial institutions significantly affect our ability to attract and retain deposits. Abington Bank uses traditional means of advertising its deposit products, including broadcast and print media and generally does not solicit deposits from outside its market area. Typically we do not actively solicit certificate accounts in excess of $100,000, known as jumbo CDs. During 2006, we obtained a limited amount of jumbo CDs through the use of a broker. We had not previously utilized such deposits, known as brokered deposits, as a funding tool. At December 31, 2006, $10.8 million of our deposits were brokered deposits, all of which were jumbo CDs. Our jumbo CDs amounted to $227.3 million and $140.4 million, respectively, at December 31, 2006 and 2005, of which $150.7 million and $76.0 million, respectively, were scheduled to mature in 12 months. At December 31, 2006, the weighted average remaining maturity of our certificate of deposit accounts was 13.3 months. The following table shows the distribution of, and certain other information relating to, our deposits by type of deposit, as of the dates indicated. December 31, 2006 2005 2004 Amount % Amount % Amount % (Dollars in Thousands) Certificate accounts: 1.00% - 1.99% $ 6 % $ 71 0.01 % $ 32,923 8.12 % 2.00% - 2.99% 9,164 1.56 29,675 5.92 38,636 9.53 3.00% - 3.99% 36,535 6.22 83,256 16.61 60,106 14.83 4.00% - 4.99% 43,758 7.45 127,144 25.37 19,691 4.86 5.00% - 5.99% 298,252 50.81 31,521 6.29 29,078 7.18 6.00% - 6.99% 1,030 0.18 14,454 2.88 2,337 0.58 7.00% or more 228 0.08 Total certificate accounts 388,973 66.26 286,121 57.08 182,771 45.10 Transaction accounts: Savings and money market 93,315 15.90 115,909 23.13 125,204 30.89 Checking: Interest bearing 59,528 10.14 55,820 11.14 59,719 14.73 Non-interest bearing 45,186 7.70 43,333 8.65 37,596 9.28 Total transaction accounts 198,029 33.74 215,062 42.92 222,519 54.90 Total deposits $ 587,002 100.00 % $ 501,183 100.00 % $ 405,290 100.00 % The following table shows the average balance of each type of deposit and the average rate paid on each type of deposit for the periods indicated. Year Ended December 31, 2006 2005 2004 Average Balance Interest Expense Average Rate Paid Average Balance Interest Expense Average Rate Paid Average Balance Interest Expense Average Rate Paid (Dollars in Thousands) Savings and money market $ 101,755 $ 1,129 1.11 % $ 125,834 $ 1,412 1.12 % $ 120,748 $ 1,065 0.88 % Checking 53,676 11 0.02 52,282 66 0.13 52,804 44 0.08 Certificates of deposit 339,712 15,634 4.60 236,962 8,391 3.54 175,492 5,452 3.11 Total interest-bearing deposits 495,143 16,774 3.39 415,078 9,869 2.38 349,044 6,561 1.88 Total deposits $ 537,334 $ 16,774 3.12 % $ 460,939 $ 9,869 2.14 % $ 394,905 $ 6,561 1.66 % The following table shows our savings flows during the periods indicated. Year Ended December 31, 2006 2005 2004 (In Thousands) Total deposits $ 3,423,345 $ 3,536,390 $ 3,387,865 Total withdrawals 3,353,643 3,449,453 3,351,887 Interest credited 16,117 8,956 6,646 Total increase in deposits $ 85,819 $ 95,893 $ 42,624 The following table presents, by various interest rate categories and maturities, the amount of our certificates of deposit at December 31, 2006. Balance at December 31, 2006 Maturing in the 12 Months Ending December 31, Certificates of Deposit 2007 2008 2009 Thereafter Total (In Thousands) Less than 2.00% $ 6 $ $ $ $ 6 2.00% - 2.99% 8,202 583 346 33 9,164 3.00% - 3.99% 24,132 8,337 3,067 999 36,535 4.00% - 4.99% 22,198 3,484 3,858 14,218 43,758 5.00% - 5.99% 205,342 83,115 387 9,408 298,252 6.00% - 6.99% 537 425 68 1,030 7.00% or more 228 228 Total certificate accounts $ 260,645 $ 95,944 $ 7,658 $ 24,726 $ 388,973 The following table shows the maturities of our certificates of deposit of $100,000 or more at December 31, 2006, by time remaining to maturity. At December 31, 2006 Quarter Ending: Amount Weighted Average Rate (Dollars in Thousands) March 31, 2007 $ 45,143 5.07 % June 30, 2007 55,951 5.25 September 30, 2007 27,433 5.31 December 31, 2007 22,206 5.39 After December 31, 2007 76,596 5.29 Total certificates of deposit with balances of $100,000 or more $ 227,329 5.25 % Borrowings. We utilize advances from the FHLB of Pittsburgh as an alternative to retail deposits to fund our operations as part of our operating strategy. These FHLB advances are collateralized primarily by certain of our mortgage loans and mortgage-backed securities and secondarily by our investment in capital stock of the FHLB of Pittsburgh. FHLB advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the Federal Home Loan Bank of Pittsburgh will advance to member institutions, including Abington Bank, fluctuates from time to time in accordance with the policies of the Federal Home Loan Bank. At December 31, 2006, we had $196.3 million in outstanding FHLB advances and $372.8 million of additional FHLB advances available. Approximately $73.5 million of our FHLB advances at December 31, 2006 were part of our matched funding program whereby we use such advances to purchase securities. Our current policy permits us to utilize up to $100.0 million of advances to match-fund securities. Given the proper interest rate environment, it is likely that we would increase this limit to permit additional FHLB advances for such match-funding purposes. In addition to FHLB advances, our borrowings include securities sold under agreements to repurchase (repurchase agreements). Repurchase agreements are contracts for the sale of securities owned or borrowed by Abington Bank, with an agreement to repurchase those securities at an agreed upon price and date. We use repurchase agreements as an investment vehicle for our commercial sweep checking product. We enter into securities repurchase agreements with our commercial checking account customers under a sweep account arrangement. Account balances are swept on a daily basis into mortgage-backed securities purchases from us, which we agree to repurchase as the checking account is drawn upon by the customer. At December 31, 2006, our securities repurchase agreements amounted to $17.8 million and all of such borrowings were short-term, having maturities of one year or less. The average balance of our securities sold under repurchase agreements for the year ended December 31, 2006 was $20.2 million. The following table shows certain information regarding our borrowings at or for the dates indicated: At or For the Year Ended December 31, 2006 2005 2004 (Dollars in Thousands) FHLB advances: Average balance outstanding $ 201,810 $ 192,189 $ 169,699 Maximum amount outstanding at any month-end during the period 211,735 212,580 185,588 Balance outstanding at end of period 196,293 201,445 170,666 Average interest rate during the period 4.78 % 4.51 % 4.36 % Weighted average interest rate at end of period 4.87 % 4.51 % 4.42 % Other borrowed money: Average balance outstanding $ 20,155 $ 20,198 $ 17,703 Maximum amount outstanding at any month-end during the period 25,665 25,038 27,686 Balance outstanding at end of period 17,781 16,114 12,866 Average interest rate during the period 4.16 % 2.29 % 0.82 % Weighted average interest rate at end of period 4.90 % 3.88 % 1.79 % At December 31, 2006, $51.5 million of our borrowings were short-term (maturities of one year or less). Such short-term borrowings had a weighted average interest rate of 4.87% at December 31, 2006. 6 Months or Less More than 6 Months to 1 Year More than 1 Year to 3 Years More than 3 Years to 5 Years More than 5 Years Total Amount (Dollars in Thousands) Interest-earning assets(1): Loans receivable(2) $ 240,883 $ 45,261 $ 128,763 $ 73,126 $ 119,546 $ 607,579 Mortgage-backed securities 24,690 19,335 48,168 21,045 22,525 135,763 Investment securities 13,757 6,100 25,986 18,000 32,356 96,199 Other interest-earning assets 33,670 33,670 Total interest-earning assets 313,000 70,696 202,917 112,171 174,427 873,211 Interest-bearing liabilities: Savings and money market accounts $ 13,913 $ 13,913 $ 35,108 $ 16,154 $ 14,227 $ 93,315 Checking accounts 59,527 59,527 Certificate accounts 276,096 70,330 17,823 10,636 14,088 388,973 FHLB advances 118,056 9,605 37,062 11,409 20,161 196,293 Other borrowed money 17,781 17,781 Total interest-bearing liabilities 425,846 93,848 89,993 38,199 108,003 755,889 Interest-earning assets less interest-bearing liabilities $ (112,846 ) $ (23,152 ) $ 112,924 $ 73,972 $ 66,424 $ 117,322 Cumulative interest-rate sensitivity gap(3) $ (112,846 ) $ (135,998 ) $ (23,074 ) $ 50,898 $ 117,322 Cumulative interest-rate gap as a percentage of total assets at December 31, 2006 (12.20 )% (14.70 )% (2.49 )% 5.50 % 12.68 % Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities at December 31, 2006 73.50 % 73.83 % 96.22 % 107.86 % 115.52 % PROPERTIES We currently conduct business from our main office, nine full-service banking offices and five limited service offices. We also maintain a loan processing office. The following table sets forth the net book value of the land, building and leasehold improvements and certain other information with respect to our offices at December 31, 2006. Description/Address(1) Leased/Owned Date of Lease Expiration Net Book Value of Property Amount of Deposits (In Thousands) Main Office 180 Old York Road Jenkintown, PA 19046 Owned N/A $ 1,249 $ 176,831 Loan Processing Office 179 Washington Lane Jenkintown, PA 19046 Owned N/A 965 n/a Glenside Branch 273 Keswick Avenue Glenside, PA 19038 Bldg. Owned Ground Leased 12/31/19 435 77,907 Abington Branch 990 Old York Road Abington, PA 19001 Leased 1/31/19 215 56,499 Willow Grove Branch 275 Moreland Road Willow Grove, PA 19090 Owned N/A 1,410 71,688 Horsham Branch Rt 611 & County Line Road Horsham, PA 19044 Leased 5/31/08 197 41,696 Huntingdon Valley Branch 667 Welsh Road Huntingdon Valley, PA 19006 Leased 12/31/13 125 30,080 Fort Washington Branch 101 Fort Washington Avenue Fort Washington, PA 19034 Leased 8/15/08 117 29,531 Montgomeryville Branch 521 Stump Road North Wales, PA 19454 Leased 3/31/11 55 32,199 Warrington Branch(2) 1111 Easton Road Warrington, PA 18976 Leased 6/30/15 1,028 5,606 (1) We opened our fifteenth banking office in Lansdale, Pennsylvania in January 2007, which is a leased office. (2) Opened in April 2006. (3) Opened in October 2006. Employees At December 31, 2006, we had 114 full-time employees, and 34 part-time employees. None of such employees are represented by a collective bargaining group, and we believe that our relationship with our employees is excellent. Subsidiaries Abington Bank has one active subsidiary, ASB Investment Co., a Delaware corporation. ASB Investment Co. was organized to hold certain securities and other investments. Abington Bank has two other direct subsidiaries, Keswick Services Group II, Inc., a Pennsylvania corporation, and Abington Corp., a Delaware corporation, both of which are inactive. Keswick Services Group II, has two inactive Pennsylvania chartered subsidiaries, Easton Service Group, Inc. and York Service Group, Inc. Legal Proceedings We are not presently involved in any legal proceedings of a material nature. From time to time, we are a party to legal proceedings incidental to our business to enforce our security interest in collateral pledged to secure loans made by Abington Bank. REGULATION General Abington Bank, as a Pennsylvania-chartered savings bank with deposits insured by the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation, is subject to extensive regulation and examination by the Pennsylvania Department of Banking and by the Federal Deposit Insurance Corporation. The federal and state laws and regulations applicable to banks regulate, among other things, the scope of their business, their investments, the reserves required to be kept against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. This regulatory structure also gives the federal and state banking agencies extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. The laws and regulations governing Abington Bank generally have been promulgated to protect depositors and not for the purpose of protecting shareholders. Federal law provides the federal banking regulators, including the Federal Deposit Insurance Corporation and the Federal Reserve Board, with substantial enforcement powers. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders, and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. Any change in such regulation, whether by the Pennsylvania Department of Banking, the Federal Deposit Insurance Corporation, the Federal Reserve Board or the United States Congress, could have a material impact on us and our operations. Abington Community Bancorp and Abington Mutual Holding Company are registered as bank holding companies under the Bank Holding Company Act and Abington Community Bancorp and Abington Mutual Holding Company are subject to regulation and supervision by the Federal Reserve Board and by the Pennsylvania Department of Banking. Abington Community Bancorp and Abington Mutual Holding Company are also required to file annually a report of its operations with, and are subject to examination by, the Federal Reserve Board and the Pennsylvania Department of Banking. This regulation and oversight is generally intended to ensure that Abington Community Bancorp and Abington Mutual Holding Company limit their activities to those allowed by law and that they operate in a safe and sound manner without endangering the financial health of Abington Bank. As part of the conversion and reorganization, Abington Bank is electing, pursuant to Section 10(l) of the Home Owners Loan Act, as amended, to be treated as a savings association. As a result, Abington Bancorp, Inc. will be a registered savings and loan holding company subject to regulation of the Office of Thrift Supervision. Abington Bank will continue to be regulated by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation. Regulation of Abington Community Bancorp and Abington Mutual Holding Company Bank Holding Company Act Activities and Other Limitations. Under the Bank Holding Company Act, Abington Community Bancorp and Abington Mutual Holding Company must obtain the prior approval of the Federal Reserve Board before they may acquire control of another bank or bank holding company, merge or consolidate with another bank holding company, acquire all or substantially all of the assets of another bank or bank holding company, or acquire direct or indirect ownership or control of any voting shares of any bank or bank holding company if, after such acquisition, Abington Community Bancorp and Abington Mutual Holding Company would directly or indirectly own or control more than 5% of such shares. Federal statutes impose restrictions on the ability of a bank holding company and its nonbank subsidiaries to obtain extensions of credit from its subsidiary bank, on the subsidiary bank s investments in the stock or securities of the holding company, and on the subsidiary bank s taking of the holding company s stock or securities as collateral for loans to any borrower. A bank holding company and its subsidiaries are also prevented from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services by the subsidiary bank. A bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the policy of the Federal Reserve Board that a bank holding company should stand ready to use available resources to provide adequate capital to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board regulations, or both. Non-Banking Activities. The business activities of Abington Community Bancorp and Abington Mutual Holding Company, as bank holding companies, are restricted by the Bank Holding Company Act. Under the Bank Holding Company Act and the Federal Reserve Board s bank holding company regulations, bank holding companies may only engage in, or acquire or control voting securities or assets of a company engaged in: banking or managing or controlling banks and other subsidiaries authorized under the Bank Holding Company Act; and any Bank Holding Company Act activity the Federal Reserve Board has determined to be so closely related that it is incidental to banking or managing or controlling banks. The Federal Reserve Board has by regulation determined that certain activities are closely related to banking including operating a mortgage company, finance company, credit card company, factoring company, trust company or savings association; performing certain data processing operations; providing limited securities brokerage services; acting as an investment or financial advisor; acting as an insurance agent for certain types of credit-related insurance; leasing personal property on a full-payout, non-operating basis; providing tax planning and preparation services; operating a collection agency; and providing certain courier services. However, as discussed below, certain other activities are permissible for a bank holding company that becomes a financial holding company. Financial Modernization. The Gramm-Leach-Bliley Act permits greater affiliation among banks, securities firms, insurance companies, and other companies under a new type of financial services company known as a financial holding company. A financial holding company essentially is a bank holding company with significantly expanded powers. Financial holding companies are authorized by statute to engage in a number of financial activities previously impermissible for bank holding companies, including securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; and merchant banking activities. The Gramm-Leach-Bliley Act also permits the Federal Reserve Board and the Treasury Department to authorize additional activities for financial holding companies if they are financial in nature or incidental to financial activities. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized, well managed, and has at least a satisfactory Community Reinvestment Act rating. A financial holding company must provide notice to the Federal Reserve Board within 30 days after commencing activities previously determined by statute or by the Federal Reserve Board and Department of the Treasury to be permissible. Abington Community Bancorp and Abington Mutual Holding Company have not submitted notices to the Federal Reserve Board of their intent to be deemed financial holding companies. However, they are not precluded from submitting a notice in the future should they wish to engage in activities only permitted to financial holding companies. Regulatory Capital Requirements. The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the Bank Holding Company Act. The Federal Reserve Board s capital adequacy guidelines for Abington Community Bancorp, on a consolidated basis, are similar to those imposed on Abington Bank by the Federal Deposit Insurance Corporation. See -Regulation of Abington Bank - Regulatory Capital Requirements. At December 31, 2006, Abington Community Bancorp met all applicable regulatory capital requirements. Restrictions on Dividends. Abington Community Bancorp s ability to declare and pay dividends may depend in part on dividends received from Abington Bank. The Pennsylvania Banking Code regulates the distribution of dividends by savings banks and states, in part, that dividends may be declared and paid out of accumulated net earnings, provided that the bank continues to meet its surplus requirements. In addition, dividends may not be declared or paid if Abington Bank is in default in payment of any assessment due the Federal Deposit Insurance Corporation. A Federal Reserve Board policy statement on the payment of cash dividends states that a bank holding company should pay cash dividends only to the extent that the holding company s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company s capital needs, asset quality and overall financial condition. The Federal Reserve Board also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the federal prompt corrective action regulations, the Federal Reserve Board may prohibit a bank holding company from paying any dividends if the holding company s bank subsidiary is classified as undercapitalized. See - Regulation of Abington Bank - Prompt Corrective Action, below. The Sarbanes-Oxley Act of 2002. As a public company, Abington Community Bancorp is subject to the Sarbanes-Oxley Act of 2002, which implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate America and better protect investors from corporate wrongdoing. The Sarbanes-Oxley Act s principal legislation and the derivative regulation and rule-making promulgated by the SEC includes: the creation of an independent accounting oversight board; auditor independence provisions that restrict non-audit services that accountants may provide to their audit clients; additional corporate governance and responsibility measures, including the requirement that the chief executive officer and chief financial officer certify financial statements; a requirement that companies establish and maintain a system of internal control over financial reporting and that a company s management provide an annual report regarding its assessment of the effectiveness of such internal control over financial reporting to the company s independent accountants and that such accountants provide an attestation report with respect to management s assessment of the effectiveness of the company s internal control over financial reporting (we expect to prepare an annual report regarding our assessment of the effectiveness of our internal control over financial reporting and receive the related attestation report for the year ending December 31, 2007); the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement; an increase in the oversight of, and enhancement of certain requirements relating to audit committees of public companies and how they interact with the company s independent auditors; the requirement that audit committee members must be independent and are absolutely barred from accepting consulting, advisory or other compensatory fees from the issuer; the requirement that companies disclose whether at least one member of the committee is a financial expert (as such term is defined by the SEC) and if not, why not; expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during pension blackout periods; a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions; disclosure of a code of ethics and the requirement of filing of a Form 8-K for a change or waiver of such code; mandatory disclosure by analysts of potential conflicts of interest; and a range of enhanced penalties for fraud and other violations. Restrictions Applicable to Mutual Holding Companies. Under authority of Section 115.1 of the Pennsylvania Banking Code of 1965, as amended ( Banking Code ), and a policy statement issued by the Pennsylvania Department of Banking, the Department is authorized to approve the reorganization of a state chartered savings bank to a mutual holding company, provided the savings bank has a CAMEL composite rating of one or two under the Uniform Financial Institutions Rating System. While regulations governing the formation of Pennsylvania-chartered mutual holding companies have not been adopted, the policy statement and form of application issued by the Department provide the means by which such applications will be processed and approved. Pursuant to Pennsylvania law, a mutual holding company may engage only in the following activities: Investing in the stock of one or more financial institution subsidiaries. Acquiring one or more additional financial institution subsidiaries into a subsidiary of the holding company. Merging with or acquiring another holding company, one of whose subsidiaries is a financial institution subsidiary. Investing in a corporation the capital stock of which is available for purchase by a savings bank under federal law or under the Banking Code. Engaging in such activities as are permitted, by statute or regulation, to a holding company of a federally chartered insured mutual institution under federal law. Engaging in such other activities as may be permitted by the Pennsylvania Department of Banking. If a mutual holding company acquires or merges with another holding company, the holding company acquired or the holding company resulting from such merger or acquisition may only invest in assets and engage in activities listed above, and has a period of two years to cease any non-conforming activities and divest of any non-conforming investments. The mutual holding company will be subject to such regulations as the Pennsylvania Department of Banking may prescribe. No mutual holding company regulations have been issued to date by the Department. Regulation of Abington Bank Pennsylvania Savings Bank Law. The Pennsylvania Banking Code contains detailed provisions governing the organization, location of offices, rights and responsibilities of directors, officers, and employees, as well as corporate powers, savings and investment operations and other aspects of Abington Bank and its affairs. The code delegates extensive rule-making power and administrative discretion to the Pennsylvania Department of Banking so that the supervision and regulation of state-chartered savings banks may be flexible and readily responsive to changes in economic conditions and in savings and lending practices. The Pennsylvania Banking Code also provides that state-chartered savings banks may engage in any activity permissible for a federal savings association, subject to regulation by the Pennsylvania Department of Banking. The Federal Deposit Insurance Act, however, prohibits Abington Bank from making new investments, loans, or becoming involved in activities as principal and equity investments which are not permitted for national banks unless: the Federal Deposit Insurance Corporation determines the activity or investment does not pose a significant risk of loss to the Deposit Insurance Fund; and Abington Bank meets all applicable capital requirements. Accordingly, the additional operating authority provided to Abington Bank by the Pennsylvania Banking Code is significantly restricted by the Federal Deposit Insurance Act. Insurance of Accounts. The deposits of Abington Bank are insured to the maximum extent permitted by the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance Corporation, and is backed by the full faith and credit of the U.S. Government. As insurer, the Federal Deposit Insurance Corporation is authorized to conduct examinations of, and to require reporting by, insured institutions. It also may prohibit any insured institution from engaging in any activity the Federal Deposit Insurance Corporation determines by regulation or order to pose a serious threat to the Federal Deposit Insurance Corporation. The Federal Deposit Insurance Corporation also has the authority to initiate enforcement actions against savings institutions. Under regulations effective January 1, 2007, the FDIC adopted a new risk-based premium system that provides for quarterly assessments based on an insured institution s ranking in one of four risk categories based upon supervisory and capital evaluations. Well-capitalized institutions (generally those with CAMELS composite ratings of 1 or 2) are grouped in Risk Category I and assessed for deposit insurance at an annual rate of between five and seven basis points. The assessment rate for an individual institution is determined according to a formula based on a weighted average of the institution s individual CAMEL component ratings plus either five financial ratios or, in the case of an institution with assets of $10.0 billion or more, the average ratings of its long-term debt. Institutions in Risk Categories II, III and IV are assessed at annual rates of 10, 28 and 43 basis points, respectively. In addition, all institutions with deposits insured by the Federal Deposit Insurance Corporation are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership government corporation established to recapitalize a predecessor to the Deposit Insurance Fund. These assessments will continue until the Financing Corporation bonds mature in 2019. The Federal Deposit Insurance Corporation may terminate the deposit insurance of any insured depository institution, including Abington Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the Federal Deposit Insurance Corporation. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the Federal Deposit Insurance Corporation. Management is aware of no existing circumstances which would result in termination of Abington Bank s deposit insurance. Regulatory Capital Requirements. The Federal Deposit Insurance Corporation has promulgated capital adequacy requirements for state-chartered banks that, like Abington Bank, are not members of the Federal Reserve Board System. The capital regulations establish a minimum 3% Tier 1 leverage capital requirement for the most highly rated state-chartered, non-member banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively increases the minimum Tier 1 leverage ratio for such other banks to 4% to 5% or more. Under the Federal Deposit Insurance Corporation s regulations, the highest-rated banks are those that the Federal Deposit Insurance Corporation determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, which are considered a strong banking organization, rated composite 1 under the Uniform Financial Institutions Rating System. Tier 1, or leverage capital, is defined as the sum of common shareholders equity, including retained earnings, noncumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain purchased mortgage servicing rights and purchased credit card relationships. The Federal Deposit Insurance Corporation s regulations also require that state-chartered, non-member banks meet a risk-based capital standard. The risk-based capital standard requires the maintenance of total capital, defined as Tier 1 capital and supplementary (Tier 2) capital, to risk weighted assets of 8%. In determining the amount of risk-weighted assets, all assets, plus certain off balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the Federal Deposit Insurance Corporation believes are inherent in the type of asset or item. The components of Tier 1 capital for the risk-based standards are the same as those for the leverage capital requirement. The components of supplementary (Tier 2) capital include cumulative perpetual preferred stock, mandatory subordinated debt, perpetual subordinated debt, intermediate-term preferred stock, up to 45% of unrealized gains on equity securities and a portion of a bank s allowance for loan losses. Allowance for loan losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital that may be included in total capital is limited to 100% of Tier 1 capital. A bank that has less than the minimum leverage capital requirement is subject to various capital plan and activities restriction requirements. The Federal Deposit Insurance Corporation s regulations also provide that any insured depository institution with a ratio of Tier 1 capital to total assets that is less than 2.0% is deemed to be operating in an unsafe or unsound condition pursuant to Section 8(a) of the Federal Deposit Insurance Act and could be subject to potential termination of deposit insurance. Abington Bank is also subject to minimum capital requirements imposed by the Pennsylvania Department of Banking on Pennsylvania chartered depository institutions. Under the Pennsylvania Department of Banking s capital regulations, a Pennsylvania bank or savings association must maintain a minimum leverage ratio of Tier 1 capital, as defined under the Federal Deposit Insurance Corporation s capital regulations, to total assets of 4%. In addition, the Pennsylvania Department of Banking has the supervisory discretion to require a higher leverage ratio for any institution or association based on inadequate or substandard performance in any of a number of areas. The Pennsylvania Department of Banking incorporates the same Federal Deposit Insurance Corporation risk-based capital requirements in its regulations. As of December 31, 2006, Abington Bank was in compliance with all applicable regulatory capital requirements and was deemed to be a well-capitalized institution. Affiliate Transaction Restrictions. Federal laws strictly limit the ability of banks to engage in certain transactions with their affiliates, including their bank holding companies. Transactions deemed to be a covered transaction under Section 23A of the Federal Reserve Act and between a subsidiary bank and its parent company or the nonbank subsidiaries of the bank holding company are limited to 10% of a bank subsidiary s capital and surplus and, with respect to such parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary s capital and surplus. Further, covered transactions that are loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also requires that covered transactions and certain other transactions listed in Section 23B of the Federal Reserve Act between a bank and its affiliates be on terms as favorable to the bank as transactions with non-affiliates. Federal Home Loan Bank System. Abington Bank is a member of the Federal Home Loan Bank of Pittsburgh, which is one of 12 regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the Federal Home Loan Bank. As a member, Abington Bank is required to purchase and maintain stock in the Federal Home Loan Bank of Pittsburgh in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of its outstanding advances from the Federal Home Loan Bank. At December 31, 2006, Abington Bank was in compliance with this requirement. Federal Reserve Board System. The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts, which are primarily checking and NOW accounts, and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy the liquidity requirements that are imposed by the Pennsylvania Department of Banking. At December 31, 2006, Abington Bank was in compliance with these reserve requirements. Regulation of Abington Bancorp General. Upon consummation of the reorganization, Abington Bancorp will be subject to regulation as a savings and loan holding company under the Home Owners Loan Act, as amended, instead of being subject to regulation as a bank holding company under the Bank Holding Company Act of 1956 because Abington Bank is making an election under Section 10(l) of the Home Owners Loan Act to be treated as a savings association for purposes of Section 10 of the Home Owners Loan Act. As a result, Abington Bancorp will register with the Office of Thrift Supervision and will be subject to Office of Thrift Supervision regulations, examinations, supervision and reporting requirements relating to savings and loan holding companies. Abington Bancorp will also be required to file certain reports with, and otherwise comply with the rules and regulations of, the Pennsylvania Department of Banking and the Securities and Exchange Commission. As a subsidiary of a savings and loan holding company, Abington Bank will be subject to certain restrictions in its dealings with Abington Bancorp and affiliates thereof. Abington Bancorp will be a nondiversified unitary savings and loan holding company within the meaning of federal law. Generally, companies that become savings and loan holding companies following the May 4, 1999 grandfather date in the Gramm-Leach-Bliley Act of 1999 may engage only in the activities permitted for financial institution holding companies under the law for multiple savings and loan holding companies. Although savings and loan holding companies are not currently subject to specific capital requirements or specific restrictions on the payment of dividends or other capital distributions, federal regulations do prescribe such restrictions on subsidiary savings institutions as described below. Abington Bank must notify the OTS 30 days before declaring any dividend to Abington Bancorp. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the OTS and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution. Acquisition of Control. Under the federal Change in Bank Control Act, a notice must be submitted to the Office of Thrift Supervision if any person (including a company), or group acting in concert, seeks to acquire control of a savings and loan holding company or savings association. An acquisition of control can occur upon the acquisition of 10% or more of the voting stock of a savings and loan holding company or savings institution or as otherwise defined by the Office of Thrift Supervision. Under the Change in Bank Control Act, the Office of Thrift Supervision has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that so acquires control would then be subject to regulation as a savings and loan holding company. Qualified Thrift Lender Test. Under Section 2303 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996, a savings association can comply with the Qualified Thrift Lender test by either meeting the Qualified Thrift Lender test set forth in the Home Owners Loan Act and implementing regulations or qualifying as a domestic building and loan association as defined in Section 7701(a)(19) of the Internal Revenue Code of 1986, as amended. A savings bank subsidiary of a savings and loan holding company that does not comply with the Qualified Thrift Lender test must comply with the following restrictions on its operations: the institution may not engage in any new activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for a national bank; the branching powers of the institution shall be restricted to those of a national bank; and payment of dividends by the institution shall be subject to the rules regarding payment of dividends by a national bank. In addition to originating loans, we occasionally purchase participation interests in larger balance loans, typically commercial real estate and multi-family residential mortgage loans and construction loans, from other financial institutions in our market area. Such participations are reviewed for compliance with our underwriting criteria before they are purchased. Generally, we have purchased such loans without recourse to the seller. However, we actively monitor the performance of such loans through the receipt of regular reports from the lead lender regarding the loan s performance, physically inspecting the loan security property on a periodic basis, discussing the loan with the lead lender on a regular basis and receiving copies of updated financial statements from the borrower. We purchased an aggregate of $30.3 million and of loan participation interests from other financial institutions during the year ended December 31, 2006. On occasion, we have sold residential mortgage loans into the market, but we did not sell any residential mortgage loans during 2006, 2005 or 2004. Depending on market conditions, we may consider such sales in the future. In addition, we have sold participation interests in loans originated by us to other institutions. When we have sold participation interests or whole loans, it generally has been done on the basis of very limited recourse. As of December 31, 2006, our total exposure to recourse arrangements with respect to our sales of whole loans and participation interests in loans was $185,000. We generally have sold participation interests in loans only when a loan would exceed our loans-to-one borrower limits. The Bank s loans-to-one borrower limit, with certain exceptions, generally is 15% of our unimpaired capital and surplus, or $14.0 million at December 31, 2006. During the year ended December 31, 2006, we sold $3.0 million in loan participation interests to other institutions. The following table shows our total loans originated, purchased, sold and repaid during the periods indicated. Year Ended December 31, 2006 2005 2004 (In Thousands) Loan originations: One- to four-family residential $ 91,963 $ 100,321 $ 64,593 Commercial real estate and multi-family residential 13,551 30,734 23,996 Construction 38,163 94,857 51,159 Home equity lines of credit 7,558 12,836 13,196 Commercial business 20,157 14,729 11,607 Consumer non-real estate 322 561 1,389 Total loan originations 171,714 254,038 165,940 Loans purchased: Whole loans 11,508 Participation interests 30,289 18,100 15,300 Total loans purchased 30,289 29,608 15,300 Loans sold: Whole loans Participation interests (3,000 ) (8,281 ) Total loans sold (3,000 ) (8,281 ) Loan principal repayments (135,981 ) (131,091 ) (135,866 ) Total loans sold and principal repayments (138,981 ) (139,372 ) (135,866 ) Increase or (decrease) due to other items, net(1) 12,554 (27,442 ) 2,661 Net increase in loan portfolio $ 75,576 $ 116,832 $ 48,035 Upon the expiration of three years from the date the institution ceases to meet the Qualified Thrift Lender test, it must cease any activity and not retain any investment not permissible for a national bank (subject to safety and soundness considerations). Abington Bank believes that it meets the provisions of the Qualified Thrift Lender test. Limitations on Transactions with Affiliates. Transactions between savings institutions and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings institution is any company or entity which controls, is controlled by or is under common control with the savings institution. In a mutual holding company context, the mutual holding company and mid-tier holding company of a savings institution (such as Abington Bancorp) and any companies which are controlled by such holding companies are affiliates of the savings institution. Generally, Section 23A limits the extent to which the savings institution or its subsidiaries may engage in covered transactions with any one affiliate to an amount equal to 10% of such institution s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus. Section 23B applies to covered transactions as well as certain other transactions and requires that all transactions be on terms substantially the same, or at least as favorable, to the savings institution as those provided to a non-affiliate. The term covered transaction includes the making of loans to, purchase of assets from and issuance of a guarantee to an affiliate and similar transactions. Section 23B transactions also include the provision of services and the sale of assets by a savings institution to an affiliate. In addition to the restrictions imposed by Sections 23A and 23B, Section 11 of the Home Owners Loan Act prohibits a savings institution from (i) making a loan or other extension of credit to an affiliate, except for any affiliate which engages only in certain activities which are permissible for bank holding companies, or (ii) purchasing or investing in any stocks, bonds, debentures, notes or similar obligations of any affiliate, except for affiliates which are subsidiaries of the savings institution. In addition, Sections 22(g) and (h) of the Federal Reserve Act place restrictions on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, an executive officer and to a greater than 10% stockholder of a savings institution, and certain affiliated interests of either, may not exceed, together with all other outstanding loans to such person and affiliated interests, the savings institution s loans to one borrower limit (generally equal to 15% of the institution s unimpaired capital and surplus). Section 22(h) also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to employees of the institution and (ii) does not give preference to any director, executive officer or principal stockholder, or certain affiliated interests of either, over other employees of the savings institution. Section 22(h) also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a savings institution to all insiders cannot exceed the institution s unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers. At December 31, 2006, Abington Bank was in compliance with the above restrictions. Restrictions on Acquisitions. Except under limited circumstances, savings and loan holding companies are prohibited from acquiring, without prior approval of the Director of the Office of Thrift Supervision, (i) control of any other savings institution or savings and loan holding company or substantially all the assets thereof or (ii) more than 5% of the voting shares of a savings institution or holding company thereof which is not a subsidiary. Except with the prior approval of the Director, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such company s stock, may acquire control of any savings institution, other than a subsidiary savings institution, or of any other savings and loan holding company. The Director of the Office of Thrift Supervision may only approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings institutions in more than one state if (i) the multiple savings and loan holding company involved controls a savings institution which operated a home or branch office located in the state of the institution to be acquired as of March 5, 1987; (ii) the acquiror is authorized to acquire control of the savings institution pursuant to the emergency acquisition provisions of the Federal Deposit Insurance Act ; or (iii) the statutes of the state in which the institution to be acquired is located specifically permit institutions to be acquired by the state-chartered institutions or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions). Federal Securities Laws. Upon completion of the offering, Abington Bancorp s common stock will be registered with the Securities and Exchange Commission under Section 12(b) of the Securities Exchange Act of 1934, as amended. We will be subject to information, proxy solicitation, insider trading restrictions, and other requirements under the Securities Exchange Act of 1934. The Sarbanes-Oxley Act. As a public company, Abington Bancorp will be subject to the Sarbanes-Oxley Act of 2002, which implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate America and better protect investors from corporate wrongdoing. See Regulation of Abington Community Bancorp and Abington Mutual Holding Company The Sarbanes-Oxley Act of 2002. TAXATION Federal Taxation General. Abington Community Bancorp, Abington Bancorp, Abington Mutual Holding Company and Abington Bank are subject to federal income taxation in the same general manner as other corporations with some exceptions listed below. The following discussion of federal, state and local income taxation is only intended to summarize certain pertinent income tax matters and is not a comprehensive description of the applicable tax rules. Method of Accounting. For federal income tax purposes, Abington Bank reports income and expenses on the accrual method of accounting and files its federal income tax return on a calendar year basis. Bad Debt Reserves. The Small Business Job Protection Act of 1996 eliminated the use of the reserve method of accounting for bad debt reserves by savings associations, effective for taxable years beginning after 1995. Prior to that time, Abington Bank was permitted to establish a reserve for bad debts and to make additions to the reserve. These additions could, within specified formula limits, be deducted in arriving at taxable income. As a result of the Small Business Job Protection Act of 1996, savings associations must use the specific charge-off method in computing their bad debt deduction beginning with their 1996 federal tax return. In addition, federal legislation required the recapture over a six year period of the excess of tax bad debt reserves at December 31, 1995 over those established as of December 31, 1987. Taxable Distributions and Recapture. Prior to the Small Business Job Protection Act of 1996, bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income if Abington Bank failed to meet certain thrift asset and definitional tests. New federal legislation eliminated these savings association related recapture rules. However, under current law, pre-1988 reserves remain subject to recapture should Abington Bank make certain non-dividend distributions or cease to maintain a bank charter. At December 31, 2006, Abington Bank s total federal pre-1988 reserve was approximately $3.2 million. The reserve reflects the cumulative effects of federal tax deductions by Abington Bank for which no federal income tax provisions have been made. Alternative Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences. The alternative minimum tax is payable to the extent such alternative minimum tax income is in excess of the regular income tax. Net operating losses, of which Abington Bank has none, can offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. Abington Bank has not been subject to the alternative minimum tax or any such amounts available as credits for carryover. Corporate Dividends-Received Deduction. Abington Community Bancorp may, and Abington Bancorp will be able to, exclude from its income 100% of dividends received from Abington Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is 80% in the case of dividends received from corporations which a corporate recipient owns less than 80%, but at least 20% of the distributing corporation. Corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct only 70% of dividends received. State and Local Taxation Pennsylvania Taxation. Abington Community Bancorp is, and Abington Bancorp will be, subject to the Pennsylvania Corporate Net Income Tax, Capital Stock and Franchise Tax. The Corporation Net Income Tax rate for 2006 is 9.99% and is imposed on unconsolidated taxable income for federal purposes with certain adjustments. In general, the Capital Stock and Franchise Tax is a property tax imposed on a corporation s capital stock value at a statutorily defined rate, such value being determined in accordance with a fixed formula based upon average net income and net worth. Abington Bank is subject to tax under the Pennsylvania Mutual Thrift Institutions Tax Act, as amended to include thrift institutions having capital stock. Pursuant to the Mutual Thrift Institutions Tax, the tax rate is 11.5%. The Mutual Thrift Institutions Tax exempts Abington Bank from other taxes imposed by the Commonwealth of Pennsylvania for state income tax purposes and from all local taxation imposed by political subdivisions, except taxes on real estate and real estate transfers. The Mutual Thrift Institutions Tax is a tax upon net earnings, determined in accordance with generally accepted accounting principles with certain adjustments. The Mutual Thrift Institutions Tax, in computing income according to generally accepted accounting principles, allows for the deduction of interest earned on state and federal obligations, while disallowing a percentage of a thrift s interest expense deduction in the proportion of interest income on those securities to the overall interest income of Abington Bank. Net operating losses, if any, thereafter can be carried forward three years for Mutual Thrift Institutions Tax purposes. MANAGEMENT Management of Abington Bancorp and Abington Bank Board of Directors. The board of directors of Abington Bancorp will be divided into three classes, each of which will contain one-third of the board. The directors will be elected by our shareholders for staggered three-year terms, or until their successors are elected and qualified. One class of directors, consisting of Ms. Margraff Kieser and Mr. White, will have a term of office expiring at the first annual meeting of shareholders after the conversion and reorganization, a second class, consisting of Messrs. Pannepacker and Czerwonka, will have a term of office expiring at the second annual meeting of shareholders and a third class, consisting of Messrs. Wilson and McHugh will have a term of office expiring at the third annual meeting of shareholders. (1) Includes service as a director/trustee of Abington Bank. In addition to the above directors, Messrs. A. Stuard Graham, Jr., Harold N. Grier and Baron Rowland serve as directors emeritus of Abington Community Bancorp and Abington Bank. Director Compensation. Directors of Abington Bancorp initially will not be compensated by Abington Bancorp but will also serve as directors of Abington Bank and be compensated by Abington Bank for such service. It is not anticipated that separate compensation will be paid to Abington Bancorp s directors until such time as such persons devote significant time to the separate management of its affairs, which is not expected to occur unless we become actively engaged in additional businesses other than holding the stock of Abington Bank. We may determine that such compensation is appropriate in the future. Members of Abington Bank s board of directors received $1,100 per meeting attended and a $10,000 annual retainer for fiscal 2006. In fiscal 2006, the Secretary of Abington Bank s Audit Committee received an additional $100 per quarter for preparation of the minutes, members of the Audit Committee received $500 per meeting, with the Chair receiving $700 per meeting. The members of the Compensation and Nominating and Corporate Governance Committees receive $400 per meeting, with the Chair receiving $500. Such fees are paid only if the meeting is attended. Board fees are subject to periodic adjustment by the board of directors. We maintain a Deferred Compensation Plan for our board of directors whereby directors may elect to defer a portion of their board fees until the earlier of retirement, termination of service or death. We also maintain a board Retirement Plan. Pursuant to the Board s Retirement Plan, upon retirement at age 75, directors will receive an annual benefit equal to 75% of the director fees paid in the year of retirement for a period of 10 years. (1) Reflects expense recognized in accordance with Statement of Financial Accounting Standards No. 123(R) related to grants of restricted stock awards to directors in July 2005 under the 2005 Recognition and Retention Plan. Such awards vest pro rata over five years commencing July 5, 2006. Each director, other than Mr. Wilson, received an award of 12,000 shares that had a grant date fair value of $144,120. (2) Reflects expense recognized in accordance with Statement of Financial Accounting Standards No. 123(R) related to grants of stock options under the 2005 Stock Option Plan made to each non-employee director, other than Mr. Wilson, covering 30,000 shares in July 2005 which vest pro rata over five years commencing July 5, 2006 and, in the case of Mr. Wilson covering 4,000 shares made in November 2006, which vests pro rata over five years commencing November 17, 2007. The full grant date values of the awards are set forth below. Name Grant Date Fair Value of Option Awards Michael F. Czerwonka, III $ 97,740 A. Stuard Graham, Jr. 62,580 Jane Margraff Kieser 73,740 Joseph B. McHugh 73,740 Robert J. Pannepacker, Sr. 97,740 G. Price Wilson, Jr. 17,176 (3) Our directors participate in the board of directors deferred compensation plan and Board of Trustees Retirement Plan. In addition, Ms. Margraff-Kieser maintains an account in the executive deferred compensation plan with respect to amounts accumulated while she served as an executive officer. The amounts represent the changes in the actuarial present value of accumulated pension benefits. There are no above-market or preferential earnings paid on the accounts under the deferred compensation plan. (4) Consists of dividends paid on shares awarded pursuant to the 2005 Recognition and Retention Plan that vested during 2006. (5) At December 31, 2006, each non-employee director held the following amount of unvested stock awards under our 2005 Recognition and Retention Plan and outstanding options under our 2005 Stock Option Plan: Name Unvested Stock Awards Option Awards Michael F. Czerwonka, III 9,600 30,000 A. Stuard Graham, Jr. 9,600 30,000 Jane Margraff Kieser 9,600 30,000 Joseph B. McHugh 9,600 30,000 Robert J. Pannepacker, Sr. 9,600 30,000 G. Price Wilson, Jr. 4,000 Committees of the Board of Directors. In connection with the completion of the conversion and reorganization, Abington Bancorp will establish a nominating and corporate governance committee, a compensation committee and an audit committee. All of the members of the audit committee, the nominating and corporate governance committee and the compensation committee will be independent directors as defined in the listing standards of The Nasdaq Stock Market. Such committees will operate in accordance with written charters which we expect to have available on our website at www.abingtonbank.com. Executive Officers Who Are Not Directors. The following individuals currently serve as executive officers of Abington Community Bancorp and Abington Bank and will serve in the same positions with Abington Bancorp following the conversion and reorganization. Ages are as of March 31, 2007. Name Age Principal Occupation During the Past Five Years Edward W. Gormley 58 Senior Vice President and Corporate Secretary of Abington Community Bancorp since June 2004; Senior Vice President of Abington Bank since 1997 and Secretary of Abington Bank since 1985. Frank Kovalcheck 49 Senior Vice President of Abington Community Bancorp since June 2004; Senior Vice President of Abington Bank since June 2001; prior thereto, Senior Vice President and Assistant Secretary, First Federal Savings and Loan Association of Bucks County, Bristol, Pennsylvania from 1976 to 2001. Jack J. Sandoski 63 Senior Vice President and Chief Financial Officer of Abington Community Bancorp since June 2004; Senior Vice President of Abington Bank since 1997 and Chief Financial Officer and Treasurer since 1988. In accordance with Abington Bancorp s bylaws, our executive officers will be elected annually and hold office until their respective successors have been elected and qualified or until death, resignation or removal by the board of directors. Compensation Discussion and Analysis Overview. Our executive compensation program is designed to provide incentives to our executive officers to effectively lead and manage our business to achieve our growth strategy. Because the compensation of our executive officers plays an integral role in our success, our compensation programs are designed to attract, retain, and motivate qualified, effective executives and professionals. Decisions regarding executive compensation are determined by our Compensation Committee, which reviews a number of factors in their decisions, including performance of the individual executive officers, the performance of Abington Community Bancorp and publicly available compensation surveys for comparable companies. In the year ended December 31, 2006, the members of our Compensation Committee were Ms. Margraff Kieser and Messrs. Graham and Pannepacker, who is Chairman. In this compensation discussion and analysis, our chief executive officer, our chief financial officer and our two other most highly compensated executive officers during 2006 are referred to collectively as our named executive officers. During the year ended December 31, 2006, we compensated our named executive officers with a combination of base salary, bonus, equity compensation and participation in benefit plans at levels that we believed were comparable to other financial institutions of similar size within our region. In addition to base salary and bonuses, the primary benefit plans made available to our named executive officers include our employee stock ownership plan, 2005 stock option plan and 2005 recognition and retention plan (both of which have provisions in compliance with the regulations of the Federal Deposit Insurance Corporation for recently converted savings banks), 401(k) Plan, our frozen deferred compensation plan, supplemental executive retirement plan and split-dollar life insurance. Our compensation plans have been developed by our board of directors and the Compensation Committee with the assistance of our management. Historically, the Compensation Committee has conducted an analysis of our compensation levels based on its review of various publicly available surveys or reports to assist in setting appropriate levels of compensation for our named executive officers. In the future, we may determine to engage the services of compensation consultants to review our policies and procedures with respect to executive compensation, or conduct annual benchmark reviews of our executive compensation, however, we have no specific plans to do so at this time. Following the completion of our mutual holding company reorganization in December 2004, we adopted a stock option plan and a restricted stock plan in June 2005 in order to more closely align the interests of our directors and executive officers with our shareholders. When these plans were approved by our shareholders in fiscal 2005, we made significant grants of stock options and service-based restricted stock awards to our directors and executive officers, both as a reward for past service as well as to provide an incentive for future performance. All grants of options under our 2005 Stock Option Plan were made with exercise prices equal to the market value of our common stock on the date of grant and become vested over five years at the rate of 20% on each anniversary of the date of grant. In connection with our mutual holding company reorganization we implemented an employee stock ownership plan. Through our employee stock ownership plan, as well as our 401(k) Plan, we provide all of our employees, including our named executive officers, with tax-qualified retirement benefits. In light of the costs associated with the employee stock ownership plan and the benefits available under our 2005 Stock Option Plan and 2005 Recognition and Retention Plan, in December 2005, the board of directors elected to freeze our deferred compensation plan retroactive to January 1, 2005. We offer various fringe benefits to all of our employees, including our executive officers, on a non-discriminatory basis, including group policies for medical, dental, life, disability and accidental death insurance. Our President and Chief Executive Officer receives an automobile allowance and country club dues. The Compensation Committee believes that such additional benefits are appropriate and assist Mr. White in fulfilling his employment obligations. No perquisites are provided to the other executive officers of the company. Objectives of Our Compensation Programs. The primary objectives of our executive compensation policies and programs are to attract, retain and motivate talented and qualified individuals to manage and lead our company, which we believe will promote our corporate growth strategy and enhance long-term shareholder value. We focus on determining appropriate compensation levels that will enable the organization to meet the following objectives: To attract, retain and motivate an experienced, competent executive management team; To reward the executive management team for the enhancement of shareholder value based on our annual earnings performance and the market price of our stock; To make certain that compensation rewards are adequately balanced between short-term and long-term considerations; To encourage ownership of our common stock through grants of stock options and restricted stock awards to all levels of bank management; and To maintain compensation levels that are competitive with other financial institutions particularly those of executive officers at peer institutions based on asset size and market area. Elements of Executive Compensation Base Salary. For 2006, the Compensation Committee determined the base salaries of Messrs White, Sandoski, Gormley and Kovalcheck and submitted such determination to the full board of directors for review. Mr. White, the only named executive officer who is also a member of the Board, did not participate in discussions regarding his own compensation. In setting base salary, the Compensation Committee conducted a review of external competitiveness based on publicly available salary surveys produced by America s Community Bankers (ACB) and L. R. Webber. The ACB is a national bank trade organization and their survey lists various job titles by asset size of the bank and the geographic region in which the bank operates. The L. R. Webber survey is for Pennsylvania banks and also provides information based on the institution s asset size and geographic region within the state. Generally, the peer groups consisted of financial institutions with asset ranges of $700 million to $1 billion and $1 billion to $2.5 billion in the mid-Atlantic region. In determining base salary for 2006, the Compensation Committee considered the overall financial performance of Abington Community Bancorp, the individual s contribution to the attainment of the company s internal budget expectations, growth in market share, leadership, complexity of position, expense containment, asset quality and Abington Bank s ratings with our banking regulators, however, no particular weight is given to any single factor. The base salaries for Messrs White, Sandoski, Gormley and Kovalcheck were $285,000, $143,000, $138,000 and $122,000, respectively for 2006, increases of 3.6%, 3.6%, 3.2% and 6.1%, respectively, from 2005 salaries. The Compensation Committee believes that the base salaries paid to each member of the senior management team is commensurate with their duties, performance and range for the industry compared with financial institutions of similar size within our region. Incentive/Bonus Compensation. The Compensation Committee determines the annual bonus paid to Messrs White, Sandoski, Gormley and Kovalcheck from a bonus pool for all employees that, for fiscal 2006, represented 8% of net profit. The Compensation Committee determines the aggregate amount from that pool that is paid to the named executive officers as a group, and which for 2006 amounted to 43.0% of the total bonus pool. For 2006, such amount was allocated on a pro rata basis to the named executive officers based on their base salary. As part of their determination, the Compensation Committee considered the ACB and L. R. Webber surveys described above and determined that the aggregate and individual cash bonus amounts were commensurate with the performance of the company and the named executive officers during the year. The cash bonuses paid to Messrs White, Sandoski, Gormley and Kovalcheck for 2006 were $97,347, $48,844, $47,136 and $41,671 respectively. The cash bonuses paid were between 16.7% and 19.0% less than the cash bonuses paid in 2005. The Compensation Committee had determined to pay bonuses in 2005 that were slightly higher than the company s typical bonuses in consideration of, among other factors, the freezing the deferred compensation plan in 2005. By utilizing a calculation of cash bonus based on a percentage of net profit, the Compensation Committee believes this component of executive compensation properly focuses management on the company s short term profitability. Equity Compensation. The Compensation Committee uses the award of stock options and recognition and retention plan shares to align the interests of the named executive officers with those of Abington Community Bancorp s shareholders. At the annual meeting of shareholders in 2005, shareholders approved our stock option plan and recognition and retention plan. Messrs. White, Sandoski, Gormley and Kovalcheck received awards from the Compensation Committee under those plans during 2005 which are vesting at a rate of 20% per year over five years. No additional awards were granted to any of the named executive officers in 2006. The Compensation Committee believes that the five year vesting of stock options and recognition and retention plan awards will focus senior management on long term performance and stock appreciation. Vesting at a rate over no less than five years was mandated under the federal banking regulations applicable as a result of our mutual holding company reorganization and facilitates our goal of retaining our experienced, effective management team. Stock option awards have an exercise price equal to the fair market of the Company s common stock value on the date of the award. Much has been written in the financial journals over the past year about corporations backdating stock options at the expense of the corporation. The Compensation Committee closely monitors the stock option awards to all employees and directors. No changes to the option awards or option exercise price have ever been made to any option granted under our 2005 Stock Option Plan. Information regarding the outstanding stock option grants and unvested recognition and retention plan awards is included in the section titled Management - Outstanding Equity Awards at Fiscal Year End. No stock options were exercised by the named executive officers in fiscal 2006. For information regarding Abington Community Bancorp s expense related to the portion of each stock option and recognition and retention plan award that vested during fiscal 2006, as calculated in accordance with Statement of Financial Accounting Standards No. 123(R), see Management - Summary Compensation Table. Employment Agreements. Abington Bank has entered into employment agreements with each of the named executive officers. The contracts are reviewed annually by the Compensation Committee and the full board of directors. In December 2006, the boards of directors of Abington Community Bancorp, Abington Bank and Abington Bancorp approved the amendment and restatement of Abington Bank s employment agreements with each of the named executive officers. The employment agreements were amended and restated primarily in order to reflect the proposed conversion of Abington Mutual Holding Company and to comply with new Section 409A of the Internal Revenue Code. As part of the revisions to comply with Section 409A of the Internal Revenue Code, Abington Community Bancorp and Abington Bank provided for cash severance payments to be paid in a lump sum in order to utilize an exemption from Section 409A. Furthermore, various defined terms, including the definitions of change in control and disability, were revised to be consistent with Section 409A of the Internal Revenue Code. For additional information regarding the terms of the employment agreements, see Management - Employment Agreements. Benefit Plans. The Compensation Committee reviews annually the expense and appropriateness of all benefit plans for the named executive officers and all other employees. Our benefit plans include a supplemental executive retirement plan, 401(k) plan, deferred compensation plan, employee stock ownership plan, and other benefit plans such as medical, dental, life and disability insurance. (1) In addition to salary, the amounts disclosed in this column include amounts contributed by the named executive officer to the Abington Bank 401(k) Plan. We periodically review, and may increase, base salaries in accordance with the terms of employment agreements or Abington Bancorp s normal annual compensation review for each of our named executive officers. (2) Reflects the amount expensed in accordance with Statement of Financial Accounting Standards No. 123(R) during fiscal 2006 with respect to awards of restricted stock awards and/or stock options, as the case may be, with respect to each of the named executive officers. For a discussion of the assumptions used to establish the valuation of the restricted stock awards and stock options, reference is made to Management s Discussion and Analysis of Financial Condition and Results of Operations - Share-Based Compensation. (3) Messrs. White, Sandoski, Gormley and Kovalcheck are participants in Abington Bank s frozen executive deferred compensation plan and supplemental executive retirement plan ( SERP ). The amounts for Messrs. White, Sandoski, Gormley and Kovalcheck reflect increases in the actuarial present value of SERP benefits. There are no above-market or preferential earnings paid on the named executive officers accounts under the deferred compensation plan. (4) Includes employer matching contributions of $11,000, $7,150, $6,900, and $6,100 allocated in 2006 to the accounts of Messrs. White, Sandoski, Gormley and Kovalcheck, respectively, under Abington Bank s 401(k) plan and split dollar life insurance premiums paid by Abington Bank of $504, $553, $416 and $231 for Messrs. White, Sandoski, Gormley and Kovalcheck, respectively. Also includes the fair market value at December 31, 2006 of the shares of common stock allocated pursuant to the ESOP in 2006, representing $35,658, $23,178, $22,368 and $19,794 for each of Messrs. White, Sandoski, Gormley and Kovalcheck, respectively, and dividends paid on shares awarded pursuant to the 2005 Recognition and Retention Plan that vested during 2006. Includes $6,000 of country club dues and automobile allowances of $14,178 for Mr. White in 2006. Non-Performing Loans and Real Estate Owned. The following table sets forth information regarding our non-performing loans and real estate owned. Our general policy is to cease accruing interest on single-family residential mortgages which are 120 days or more past due and all other loans which are 90 days or more past due and to charge-off all accrued interest. We may also cease accruing or charge-off interest at an earlier date if collection is considered doubtful. For the years ended December 31, 2006, 2005 and 2004, the amount of additional interest income that would have been recognized on non-accrual loans if such loans had continued to perform in accordance with their contractual terms was $68,000, $20,000 and $5,000, respectively. The following table shows the amounts of our non-performing assets (defined as non-accruing loans, accruing loans 90 days or more past due and real estate owned) at the dates indicated. We did not have troubled debt restructurings at any of the dates indicated. December 31, 2006 2005 2004 2003 2002 (Dollars in Thousands) Non-accruing loans: One- to four-family residential $ $ $ $ 99 $ Commercial real estate and multi-family residential 1,270 671 Construction 1,077 2,885 Commercial business Home equity lines of credit 99 Consumer non-real estate 16 Total non-accruing loans 2,347 2,885 115 770 Accruing loans 90 days or more past due: One- to four-family residential 210 8 227 222 424 Multi-family residential and commercial real estate Construction Commercial business Home equity lines of credit 109 Consumer non-real estate 16 56 Total accruing loans 90 days or more past due 210 8 227 347 480 Total non-performing loans(1) 2,557 2,893 227 462 1,250 Real estate owned, net Total non-performing assets $ 2,557 $ 2,893 $ 227 $ 462 $ 1,250 Total non-performing loans as a percentage of loans 0.42 % 0.54 % 0.06 % 0.13 % 0.34 % Total non-performing loans as a percentage of total assets 0.28 % 0.34 % 0.03 % 0.08 % 0.23 % Total non-performing assets as a percentage of total assets 0.28 % 0.34 % 0.03 % 0.08 % 0.23 % (1) Options vest at a rate of 20% per year commencing on July 5, 2006. Option Exercises and Stock Vested The table below sets forth the number of shares acquired and their value on the date of vesting pursuant to our 2005 Recognition and Retention Plan for the year ended December 31, 2006. None of our named executive officers exercised stock options during the fiscal year. Option Awards Stock Awards Name Number of Shares Acquired On Exercise Value Realized On Exercise Number of Shares Acquired On Vesting(1) Value Realized On Vesting Robert W. White $ 14,000 $ 203,420 Jack J. Sandoski 3,500 50,855 Edward W. Gormley 3,500 50,855 Frank Kovalcheck 3,500 50,855 (1) Represents shares granted pursuant to the 2005 Recognition and Retention Plan that vested on July 5, 2006. Employment Agreements On December 27, 2006, the Boards of Directors of Abington Community Bancorp, Abington Bank and Abington Bancorp, Inc., a Pennsylvania corporation recently formed to become Abington Bank s new stock-form holding company upon consummation of its second-step conversion, approved the amendment and restatement of Abington Bank s employment agreement, dated January 21, 2004, entered into with Robert W. White, Chairman of the Board, President and Chief Executive Officer of the Company and the Bank; and the January 1, 2005 employment agreements entered into between Abington Bank and each of our Senior Vice Presidents: Edward W. Gormley, Frank Kovalcheck and Jack J. Sandoski. The employment agreements were primarily amended and restated in 2006 in order to reflect the proposed second-step conversion of Abington Bank and to comply with new Section 409A of the Internal Revenue Code of 1986, as amended, including the proposed regulations issued by the Internal Revenue Service. Section 409A of the Internal Revenue Code governs the deferral of compensation where the director, officer or employee has a legally binding right to compensation that is payable in a future year. Section 409A imposes new requirements with respect to deferral elections, payment events and payment elections. As part of the revisions to comply with Section 409A of the Internal Revenue Code, Abington Community Bancorp and Abington Bank provided for cash severance payments to be paid in a lump sum in order to utilize an exemption from Section 409A. A specified employee is generally any employee whose annual compensation exceeds a specified dollar amount ($140,000 for 2006), which amount adjusts annually. Furthermore, various defined terms, including the definitions of change in control and disability, were revised to be consistent with Section 409A of the Internal Revenue Code. In addition to amending and restating the employment agreement between Abington Bank and Mr. White, the Boards of Directors approved a new employment agreement between Abington Bancorp and Mr. White. The amended and restated agreement between Abington Bank and Mr. White and the new agreement between Abington Bancorp and Mr. White are substantially similar, provided, however, that in order to comply with the policies of the Office of Thrift Supervision, which will become the primary federal bank regulatory authority of Abington Bancorp upon consummation of our conversion and reorganization, certain payments otherwise payable under the amended and restated agreement with Abington Bank will be reduced or scaled back if they would constitute a parachute payment pursuant to Section 280G of the Internal Revenue Code. In addition, the amended and restated agreement between Abington Bank and Mr. White and the agreement between Abington Bancorp and Mr. White include the following provisions: Salary and other compensation payable to Mr. White will be shared by Abington Bancorp and Abington Bank on a proportional basis. In the event Mr. White s employment is involuntarily terminated, other than for cause, disability, retirement or death, or by Mr. White for good reason, as defined, prior to a change in control, he will be entitled to a lump sum payment equal three times his current base salary plus highest bonus received in the prior three years, plus the continuation of certain employee benefits for a period up to the remaining term of the agreement. In the event Mr. White s employment is terminated concurrently with or within 12 months following a change in control, Mr. White will be entitled to a lump sum payment equal to 2.99 times his base amount as defined under Section 280G of the Internal Revenue Code, subject to reduction in the amended and restated agreement with Abington Bank, plus the continuation of certain employee benefits for up to three years. Under his agreement with Abington Bancorp, Abington Bancorp will reimburse Mr. White for any excise tax liability incurred pursuant to Sections 280G and 4999 of the Internal Revenue Code and for any additional taxes incurred as a result of such reimbursement. In the event of Mr. White s disability, he will be entitled to receive aggregate annual disability benefits at least equal to 60% of his then current salary through his 70th birthday. A death benefit equal to three times Mr. White s base salary. The agreements contain non-competition and arbitration provisions substantially similar to those currently in place with Mr. White. In addition, Abington Bank s Amended and Restated Employment Agreements with Messrs. Gormley, Kovalcheck and Sandoski include the following provisions: If the executive s employment is terminated by Abington Bank, other than for cause, disability, retirement or death, or is terminated by the executive for good reason, as defined, prior to a change in control, the executive will be entitled to a lump sum payment equal to two times his current base salary and any bonus received in the prior year, plus continuation of certain employee benefits for up to two years. If the executive s employment is terminated concurrently with or within 12 months following a change in control, the executive will be entitled, with certain exceptions, to a lump sum payment equal to three times his current base salary and bonus for the prior year plus continuation of certain employee benefits for up to three years, subject to reduction in the event such payments or benefits would constitute a parachute payment under Section 280G of the Internal Revenue Code. Although the above-described employment agreements could increase the cost of any acquisition of control of Abington Bancorp, we do not believe that the terms thereof would have a significant anti-takeover effect. Potential Payments Upon Termination of Employment or Change in Control The tables below reflect the amount of compensation to each of the named executive officers of Abington Bancorp and Abington Bank in the event of termination of such executive s employment. The amount of compensation payable to each named executive officer upon voluntary termination, early retirement, involuntary not-for-cause termination, termination following a change in control and in the event of disability or death of the executive is shown below. The amounts shown assume that such termination was effective as of December 29, 2006, and thus includes amounts earned through such time and are estimates of the amounts which would be paid out to the executives upon their termination. The actual amounts to be paid out can only be determined at the time of such executive s separation from Abington Bancorp and Abington Bank. Robert W. White. The following table shows the potential payments upon termination or a change in control of Abington Bancorp or Abington Bank for Robert W. White, our President and Chief Executive Officer. Payments and Benefits Voluntary Termination Termination for Cause Involuntary Termination Without Cause or Termination by the Executive for Good Reason Absent a Change in Control Change in Control With Termination of Employment Death or Disability (n) Retirement (o) Accrued leave(a) $ $ $ $ $ $ Severance payments and benefits: (b) Cash severance(c) 1,214,073 906,500 773,705 (p ) ESOP allocations(d) 154,814 Medical and dental benefits (e) 47,587 47,587 Other welfare benefits (f) 2,887 2,887 Club dues (g) 18,000 18,000 Automobile expenses (h) 42,534 42,534 280G tax gross-up (i) 706,218 Equity awards: (j) Unvested stock options (k) 1,006,668 1,006,668 Unvested restricted stock awards (l) 1,074,080 1,074,080 Total payments and benefits (m) $ $ $ 1,325,081 $ 3,959,288 $ 2,854,453 $ (footnotes following the table on page __) Jack J. Sandoski. The following table shows the potential payments upon termination or a change in control of Abington Bancorp or Abington Bank for Jack J. Sandoski, our Senior Vice President and Chief Financial Officer. Payments and Benefits Voluntary Termination Termination for Cause Involuntary Termination Without Cause or Termination by the Executive for Good Reason Absent a Change in Control Change in Control With Termination of Employment Death or Disability (n) Retirement (o) Accrued leave(a) $ 16,500 $ 16,500 $ 16,500 $ 16,500 $ 16,500 $ 16,500 Severance payments and benefits: (b) Cash severance(c) 406,126 609,189 ESOP allocations(d) 101,161 Medical and dental benefits (e) 30,980 46,333 Other welfare benefits (f) 1,988 3,038 Club dues (g) Automobile expenses (h) 280G cut-back (i) (426,693 ) Equity awards: (j) Unvested stock options (k) 335,556 335,556 Unvested restricted stock awards (l) 268,520 268,520 Total payments and benefits (m) $ 16,500 $ 16,500 $ 455,594 $ 953,604 $ 620,576 $ 16,500 (footnotes following the table on page __) Edward W. Gormley. The following table shows the potential payments upon termination or a change in control of Abington Bancorp or Abington Bank for Edward W. Gormley, our Senior Vice President and Corporate Secretary. Payments and Benefits Voluntary Termination Termination for Cause Involuntary Termination Without Cause or Termination by the Executive for Good Reason Absent a Change in Control Change in Control With Termination of Employment Death or Disability (n) Retirement (o) Accrued leave(a) $ 15,923 $ 15,923 $ 15,923 $ 15,923 $ 15,923 $ 15,923 Severance payments and benefits: (b) Cash severance(c) 392,382 588,573 ESOP allocations(d) 97,837 Medical and dental benefits (e) 29,618 44,971 Other welfare benefits (f) 1,713 2,618 Club dues (g) Automobile expenses (h) 280G tax gross-up (i) (412,973 ) Equity awards: (j) Unvested stock options (k) 335,556 335,556 Unvested restricted stock awards (l) 268,520 268,520 Total payments and benefits (m) $ 15,923 $ 15,923 $ 439,636 $ 941,025 $ 619,999 $ 15,923 (footnotes following the table on page __) (a) Employees are credited with vacation and sick time each calendar year based on position and tenure. If an employee voluntarily resigns, dies or retires during the year, he or she is paid for a portion of the current year s unused vacation and sick leave. A payment also would be made if employment was involuntarily terminated with or without cause, by an executive for good reason, death, disability or retirement. Employees are unable to carryover to the following year any unused vacation time, but employees, except for Mr. White, may carryover up to 90 days of unused sick leave from one year to the next. In the event of termination of employment, however, only a maximum of 30 days of unused sick leave is paid. The amounts shown represent each executive s accrued but unused vacation time and sick leave in the cases of Messrs. Gormley, Sandoski and Kovalcheck, but not in the case of Mr. White, as of December 29, 2006. (b) These severance payments and benefits are payable if the executive s employment is terminated prior to a change in control either (i) by the Company or the Bank for any reason other than cause, disability, retirement or death or (ii) by the executive if the Company or the Bank takes certain adverse actions (a good reason termination). The severance payments and benefits are also payable if an executive s employment is terminated during the term of the executive s employment agreement following a change in control. (c) For Mr. White, the amount in the Involuntary Termination column represents a lump sum payment equal to three times the sum of his current base salary from the Company and the Bank and his highest bonus paid in the prior three calendar years, while the amount in the Change in Control column represents 2.99 times his average taxable income from the Company and the Bank for the five years preceding the year in which the date of termination occurs. For each other executive, the amount in the Involuntary Termination column represents two times the sum of the executive s current base salary and bonus for the prior calendar year, while the amount in the Change in Control column represents a lump sum cash payment equal to three times the sum of the executive s current base salary and bonus for the prior calendar year. (d) Upon a change in control, the ESOP will be terminated and the unallocated ESOP shares will first be used to repay the outstanding ESOP loan. Any remaining unallocated ESOP shares will then be allocated among ESOP participants on a pro rata basis based on account balances. Based on the December 29, 2006 closing price of $19.18 per share, the value of the remaining unallocated ESOP shares exceeds the remaining principal balance of the loan by approximately $3.2 million, and the Change in Control column reflects each executive s proportionate share of such amount. (e) In the Involuntary Termination column, represents the estimated present value cost of providing continued medical and dental coverage to each of the executives for the remaining term of Mr. White s employment agreement or for an additional 24 months for each of the other executives. In the Change in Control column, represents the estimated present value cost of providing continued medical and dental coverage to each of the executives for an additional 36 months. In each case, the benefits will be discontinued if the executive obtains full-time employment with a subsequent employer which provides substantially similar benefits. The estimated costs assume the current insurance premiums or costs increase by 10% in each of 2008 and 2009. (f) In the Involuntary Termination column, represents the estimated present value cost of providing continued life, accidental death and long-term disability coverage to each of the executives for the remaining term of Mr. White s employment agreement or for an additional 24 months for each of the other executives. In the Change in Control column, represents the estimated present value cost of providing such benefits to each of the executives for an additional 36 months. In each case, the benefits will be discontinued if the executive obtains full-time employment with a subsequent employer which provides substantially similar benefits. The estimated costs assume the current insurance premiums or costs increase by 10% in each of 2008 and 2009. (g) Represents the estimated costs of paying club dues to Mr. White for an assumed additional 36 months, based on the amounts paid in 2006. The amounts have not been discounted to present value. (h) Represents the estimated costs of paying automobile leases and related expenses to Mr. White for an assumed additional 36 months, based on the amounts paid in 2006. The amounts have not been discounted to present value. (i) The payments and benefits to Mr. White in the Change in Control column are subject to a 20% excise tax to the extent the parachute amounts associated therewith under Section 280G of the Code equal or exceed three times his average taxable income for the five years ended December 31, 2005. His payments exceed this threshold. If a change in control was to occur, the Company believes that the Section 280G gross-up payments could be reduced or even eliminated if the timing of the change in control permitted tax planning to be done. However, if the excise tax cannot be avoided, then the Company has agreed in its employment agreement with Mr. White to pay the 20% excise tax and the additional federal, state and local income taxes and excise taxes on such reimbursement in order to place him in the same after-tax position he would have been in if the excise tax had not been imposed. If the parachute amounts associated with the payments and benefits to Messrs. Sandoski, Gormley and Kovalcheck equal or exceed three times their average taxable income for the five years ended December 31, 2005, such payments and benefits in the event of a change of control will be reduced by the minimum amount necessary so that they do not trigger the 20% excise tax. The amount of the reductions for such officers are shown in the tables. If the timing of the change in control permitted tax planning to be done, the Company believes that the amount of the cut-backs could be reduced or even eliminated. (j) The vested stock options held by Messrs. White, Sandoski, Gormley and Kovalcheck had a value of approximately $252,000, $84,000, $84,000, $84,000 and $84,000, respectively, based on the December 29, 2006 closing price of $19.18 per share. Such value can be obtained in the event of termination due to voluntary termination, death, disability, retirement or cause only if the executive actually exercises the vested options in the manner provided for by the relevant option plan and subsequently sells the shares received for $19.18 per share. In the event of a termination of employment, each executive (or his estate in the event of death) will have the right to exercise vested stock options for the period specified in his option grant agreement. If the termination of employment occurs following a change in control, each executive can exercise the vested stock options for the remainder of the original ten-year term of the option. (k) All unvested stock options will become fully vested upon an executive s death, disability or retirement after age 65 or upon a change in control. None of the executives had reached age 65 as of December 29, 2006. (l) If an executive s employment is terminated as a result of death or disability, unvested restricted stock awards are deemed fully earned. In addition, in the event of a change in control of the Company, the unvested restricted stock awards are deemed fully vested. (m) Does not include the value of the vested benefits to be paid under our tax-qualified 401(k) plan and ESOP or under our SERP and our Executive Deferred Compensation Plan. See the Pension Benefits table and the Nonqualified Deferred Compensation table under - Benefit Plans above. Also does not include the value of vested stock options set forth in Note (j) above, earned but unpaid salary and reimbursable expenses. (n) If the employment of any of the executives is terminated due to death, such executive s beneficiaries or estate will receive life insurance proceeds of $350,000 under our bank owned life insurance policies. For Mr. White, this amount is in addition to the continuation of his base salary in the event of his death as described in Note (p) below. The life insurance coverage is based on three times base salary, subject to a cap of $350,000. If the employment of any of the executives is terminated due to disability, they would each receive disability benefits equal to 65% of their base salary for the first six months, and thereafter would receive disability benefits of $5,000 per month until the executive reaches his normal retirement age of 65, minus Social Security disability benefits. In addition, Mr. White has a separate disability policy that would pay him $3,750 per month until his 65th birthday. Mr. White will also receive supplemental disability benefits as described in Note (p) below. In addition, each executive s unvested stock options and unvested restricted stock awards will become fully vested upon death or disability. The SERP benefits discussed in Note (o) below will also become payable following death or disability. (o) The Company has a supplemental executive retirement plan (the SERP ) covering each executive. Under the SERP, the normal retirement benefits in the event of retirement, death or disability on or after age 65 is an annual benefit equal to 50% of the executive s salary for the highest three of the last 10 years, with the annual benefit payable for 10 years in quarterly installments. If the executive dies before age 65, his beneficiary or estate will receive a lump sum payment equal to the present value of the aggregate retirement benefit accrued by us. If the executive becomes disabled before age 65, then his 40 quarterly installments will begin as of the first day of the first full quarter following his 65th birthday. See the Pension Benefits table under - Benefit Plans above. (p) Represents the estimated present value of the supplemental disability benefits that Mr. White would be entitled to receive under his employment agreement if he remained disabled until age 70. In the event of disability, he is entitled to receive supplemental disability benefits equal to the difference between 60% of his base salary and the disability benefits otherwise payable to him, as described in Note (n) above. If Mr. White had died as of December 9, 2006, his spouse or his estate would have received a lump sum cash payment of approximately $831,000, representing the present value of his base salary for 36 months. (1) In 2005 the executive deferred compensation plan was frozen retroactive to January 1, 2005. No contributions have been made to the named executive officers since the date that the executive deferred compensation plan was frozen. We have established a rabbi trust to fund certain benefit plans, including the executive deferred compensation plan. The aggregate earnings amounts in 2006 in the table reflect the increase in value of the assets held in the rabbi trust, which include our common stock for Messrs. White, Sandoski, Gormley and Kovalcheck, respectively. Endorsement Split Dollar Insurance Agreements. Abington Bank has purchased insurance policies on the lives of the four executive officers named in the Summary Compensation Table, and has entered into Split Dollar Insurance Agreements with each of those officers. The policies are owned by Abington Bank which pays each premium due on the policies. Under the agreements with the named executive officers, upon an officer s death while he remains employed by Abington Bank the executive s beneficiary shall receive proceeds in the amount of the executive s salary at the time of death multiplied by three (up to a maximum of $250,000) plus an additional $100,000. In the case of the officer s death after termination of employment with Abington Bank, provided he reached age 65 before such termination, the officer s beneficiary shall receive proceeds in the amount of $100,000. Abington Bank is entitled to receive the amount of the death benefits less those paid to the officer s beneficiary, which is expected to reimburse Abington Bank in full for its life insurance investment. The Split Dollar Insurance Agreements may be terminated at any time by Abington Bank or the officer, by written notice to the other. The Split Dollar Insurance Agreements will also terminate upon cancellation of the insurance policy by Abington Bank, cessation of Abington Bank s business or upon bankruptcy, receivership or dissolution or by Abington Bank upon the officer s termination of service to Abington Bank. Upon termination, the officer forfeits any right in the death benefit and Abington Bank may retain or terminate the insurance policy in its sole discretion. Related Party Transactions During fiscal 2006, Abington Bank has had, and expects to have in the future, banking transactions in the ordinary course of business with its directors and officers, and other related parties. These transactions have been made on substantially the same terms, including interest rates, collateral, and repayment terms, as those prevailing at the same time for comparable transactions with unaffiliated parties. The extensions of credit to these persons have not and do not currently involve more than the normal risk of collectability or present other unfavorable features. None of these loans or other extensions of credit are disclosed as non-accrual, past due, restructured or potential problem loans. Under Abington Community Bancorp s Audit Committee Charter, the Audit Committee is required to review and approve all related party transactions, as described in Item 404 of Regulation S-K of the SEC s rules. To the extent such transactions are ongoing business relationships with Abington Bancorp or Abington Bank, such transactions shall be reviewed annually and such relationships shall be on terms not materially less favorable than what would be usual and customary in similar transactions between unrelated persons dealing at arms length. Compensation Committee Interlocks and Insider Participation Ms. Margraff Kieser and Messrs. Graham and Pannepacker, who is Chairman, serve as members of the Compensation Committee. None of the members of the Compensation Committee during 2006 was a current or former officer or employee of Abington Community Bancorp or Abington Bank other than Ms. Margraff Kieser, who served as our Senior Vice President, Operations and Human Resources from 1980 to 2001. Nor did any member engage in certain transactions with Abington Community Bancorp or Abington Bank required to be disclosed by regulations of the SEC. Additionally, there were no compensation committee interlocks during 2006, which generally means that no executive officer of Abington Community Bancorp served as a director or member of the compensation committee of another entity, one of whose executive officers served as a director or member of the Compensation Committee of Abington Community Bancorp. New Stock Benefit Plans Employee Stock Ownership Plan. Abington Bank has established an employee stock ownership plan for its employees which previously acquired 571,320 shares of Abington Bank s common stock on behalf of participants. Employees, other than those paid solely on a retainer or fee basis, who have been credited with at least 1,000 hours of service during a 12-month period, have completed six months of employment and who have attained age 21 are eligible to participate in Abington Bank s employee stock ownership plan. As part of the conversion and reorganization, the employee stock ownership plan intends to purchase a number of shares of Abington Bancorp common stock equal to 8.0% of the shares sold in the offering, or 1,380,000 shares and 1,587,000 shares based on the maximum and 15% above the maximum of the offering range, respectively. We anticipate that the employee stock ownership plan will borrow funds from Abington Bancorp, and that such loan will equal 100% of the aggregate purchase price of the common stock acquired by the employee stock ownership plan. Abington Bancorp has agreed to loan the employee stock ownership plan the funds necessary to purchase shares. If the employee stock ownership plan s order is not completely filled in the offering, we expect that the employee stock ownership plan will purchase shares in the open market after the offering is completed at a price which may be more or less than $10.00 per share, subject to prior OTS approval. The loan to the employee stock ownership plan will be repaid principally from Abington Bank s contributions to the employee stock ownership plan and the collateral for the loan will be the common stock purchased by the employee stock ownership plan. The interest rate for the employee stock ownership plan loan will be fixed and is expected to be at Abington Bank s prime rate at the date the employee stock ownership plan enters into the loan. Abington Bancorp may, in any plan year, make additional discretionary contributions for the benefit of plan participants in either cash or shares of common stock, which may be acquired through the purchase of outstanding shares in the market or from individual shareholders, upon the original issuance of additional shares by Abington Bancorp or upon the sale of treasury shares by Abington Bancorp. Such purchases, if made, would be funded through additional borrowings by the employee stock ownership plan or additional contributions from Abington Bancorp or from Abington Bank. The timing, amount and manner of future contributions to the employee stock ownership plan will be affected by various factors, including prevailing regulatory policies, the requirements of applicable laws and regulations and market conditions. Shares purchased by Abington Bancorp s employee stock ownership plan with the loan proceeds will be held in a suspense account and released for allocation to participants on a pro rata basis as debt service payments are made. Shares released from the employee stock ownership plan will be allocated to each eligible participant s plan account based on the ratio of each such participant s base compensation to the total base compensation of all eligible employee stock ownership plan participants. Forfeitures may be used for several purposes such as the payment of expenses or be reallocated among remaining participating employees. Upon the completion of five years of service, the account balances of participants within the employee stock ownership plan becomes 100% vested. In the case of a change in control, as defined in the plan, however, participants will become immediately fully vested in their account balances. Participants also become fully vested in their account balances upon death, disability or retirement. Benefits may be payable upon retirement or separation from service. Generally accepted accounting principles require that any third party borrowing by the Abington Bancorp employee stock ownership plan be reflected as a liability on its statement of financial condition. Since the employee stock ownership plan is borrowing from Abington Bancorp, the loan will not be treated as a liability but instead will be excluded from shareholders equity. If the employee stock ownership plan purchases newly issued shares from Abington Bancorp, total shareholders equity would neither increase nor decrease, but per share shareholders equity and per share net earnings would decrease as the newly issued shares are allocated to the employee stock ownership plan participants. Abington Bank s employee stock ownership plan is subject to the requirements of the Employee Retirement Income Security Act of 1974, as amended, and the applicable regulations of the IRS and the Department of Labor. Stock Option Plan. Following consummation of the conversion and reorganization, Abington Bancorp intends to adopt a new stock option plan, which will be designed to attract and retain qualified personnel in key positions, provide directors, officers and key employees with a proprietary interest in Abington Bancorp as an incentive to contribute to its success and reward key employees for outstanding performance. The new stock option plan will provide for the grant of incentive stock options, intended to comply with the requirements of Section 422 of the Internal Revenue Code, and non-incentive or compensatory stock options. Options may be granted to our directors and key employees. The new stock option plan will be administered and interpreted by a committee of the board of directors. Unless sooner terminated, the new stock option plan shall continue in effect for a period of 10 years from the date the stock option plan is adopted by the board of directors. Under the new stock option plan, the committee will determine which directors, officers and key employees will be granted options, whether options will be incentive or compensatory options, the number of shares subject to each option, the exercise price of each option, whether options may be exercised by delivering other shares of common stock and when such options become exercisable. The per share exercise price of an incentive stock option must at least equal the fair market value of a share of common stock on the date the option is granted (110% of fair market value in the case of incentive stock options granted to employees who are 5% shareholders). At a meeting of Abington Bancorp s shareholders after the conversion and reorganization, which under applicable Office of Thrift Supervision policies may be held no earlier than six months after the completion of the conversion and reorganization, Abington Bancorp intends to present the stock option plan to shareholders for approval and to reserve an amount equal to 10.0% of the shares of Abington Bancorp common stock sold in the offering, which is 1,725,000 shares or 1,983,750 shares based on the maximum and 15% above the maximum of the offering range, respectively, for issuance under the new stock option plan. Office of Thrift Supervision regulations provide that, in the event such plan is implemented within one year after the conversion and reorganization, no individual officer or employee of Abington Bancorp may receive more than 25% of the options granted under the new stock option plan and non-employee directors may not receive more than 5% individually, or 30% in the aggregate of the options granted under the new stock option plan. Office of Thrift Supervision regulations also provide that the exercise price of any options granted under any such plan must be at least equal to the fair market value of the common stock as of the date of grant. Further, options under such plan generally are required to vest over a five year period at 20% per year. Each stock option or portion thereof will be exercisable at any time on or after it vests and will be exercisable until 10 years after its date of grant or for periods of up to five years following the death, disability or other termination of the optionee s employment or service as a director. However, failure to exercise incentive stock options within three months after the date on which the optionee s employment terminates may result in the loss of incentive stock option treatment. We currently anticipate that the new stock option plan will be submitted to shareholders of Abington Bancorp within one year, but not earlier than six months from, the date of completion of the conversion and reorganization and the offering. Accordingly, we expect that the above described limitations imposed by regulations of the Office of Thrift Supervision would be applicable. However, we reserve the right to submit the new stock option plan to shareholders more than one year from the date of the conversion and reorganization, in which event the above-described Office of Thrift Supervision regulations may not be fully applicable. The Office of Thrift Supervision requires that stock option plans implemented by institutions within one year of a conversion and reorganization must be approved by a majority of the outstanding shares of voting stock. Stock option plans implemented more than one year after a conversion and reorganization could be approved by the affirmative vote of the shares present and voting at the meeting of shareholders. At the time an option is granted pursuant to the new stock option plan, the recipient will not be required to make any payment in consideration for such grant. With respect to incentive or compensatory stock options, the optionee will be required to pay the applicable exercise price at the time of exercise in order to receive the underlying shares of common stock. The shares reserved for issuance under the new stock option plan may be authorized but previously unissued shares, treasury shares, or shares purchased by Abington Bancorp on the open market or from private sources. In the event of a stock split, reverse stock split or stock dividend, the number of shares of common stock under the new stock option plan, the number of shares to which any option relates and the exercise price per share under any option shall be adjusted to reflect such increase or decrease in the total number of shares of common stock outstanding. If Abington Bancorp declares a special cash dividend or return of capital after implementation of the stock option plan in an amount per share which exceeds 10% of the fair market value of a share of common stock as of the date of declaration, the per share exercise price of all previously granted options which remain unexercised as of the date of such declaration shall, subject to certain limitations, be proportionately adjusted to give effect to the special cash dividend or return of capital as of the date of payment of such special cash dividend or return of capital. Under current provisions of the Internal Revenue Code, the federal income tax treatment of incentive stock options and compensatory stock options is different. A holder of incentive stock options who meets certain holding period requirements will not recognize income at the time the option is granted or at the time the option is exercised, and a federal income tax deduction generally will not be available to Abington Bancorp at any time as a result of such grant or exercise. With respect to compensatory stock options, the difference between the fair market value on the date of exercise and the option exercise price generally will be treated as compensation income upon exercise, and Abington Bancorp will be entitled to a deduction in the amount of income so recognized by the optionee. Recognition Plan. After the conversion and reorganization, Abington Bancorp intends to adopt a stock recognition and retention plan for its directors, officers and employees. The objective of the stock recognition and retention plan will be to enable Abington Bancorp to provide directors, officers and employees with a proprietary interest in Abington Bancorp as an incentive to contribute to its success. Abington Bancorp intends to present the stock recognition and retention plan to its shareholders for their approval at a meeting of shareholders which, pursuant to applicable Office of Thrift Supervision regulations, may be held no earlier than six months after the offering. The recognition plan will be administered by a committee of Abington Bancorp s board of directors, which will have the responsibility to invest all funds contributed to the trust created for the stock recognition and retention plan. Abington Bancorp will contribute sufficient funds to the trust so that it can purchase, following the receipt of shareholder approval, a number of shares equal to 4.0% of the shares of Abington Bancorp common stock sold in the offering, which is 690,000 shares or 793,500 shares based on the maximum and 15% above the maximum of the offering range, respectively. Shares of common stock granted pursuant to the recognition plan generally will be in the form of restricted stock vesting at a rate to be determined by Abington Bancorp s board of directors or a board committee. Currently, Abington Bancorp expects that shares granted under the recognition plan will vest over a five year period at a rate no faster than 20% per year. For accounting purposes, compensation expense in the amount of the fair market value of the common stock at the date of the grant to the recipient will be recognized pro rata over the period during which the shares vest. A recipient will be entitled to all voting and other shareholder rights, except that the shares, while restricted, may not be sold, pledged or otherwise disposed of and are required to be held in the trust. Under the terms of the recognition plan, recipients of awards will be entitled to instruct the trustees of the recognition plan as to how the underlying shares should be voted, and the trustees will be entitled to vote all unallocated shares in their discretion. If a recipient s employment is terminated as a result of death or disability, all restrictions will expire and all allocated shares will become unrestricted. Abington Bancorp will be able to terminate the recognition plan at any time, and if it did so, any shares not allocated will revert to Abington Bancorp. Recipients of grants under the recognition plan will not be required to make any payment at the time of grant or when the underlying shares of common stock become vested, other than payment of withholding taxes. We currently anticipate that the stock recognition and retention plan will be submitted to shareholders of Abington Bancorp within one year, but not earlier than six months from, the date of completion of the conversion and reorganization. Accordingly, we expect that the above described limitations imposed by regulations of the Office of Thrift Supervision would be applicable. However, we reserve the right to submit the stock recognition and retention plan to shareholders more than one year from the date of the conversion and reorganization, in which event the above-described Office of Thrift Supervision regulations may not be fully applicable. * Represents less than 1% of our outstanding common stock. (1) Based upon filings made pursuant to the Securities Exchange Act of 1934 and information furnished by the respective individuals. Under regulations promulgated pursuant to the Securities Exchange Act of 1934, shares of common stock are deemed to be beneficially owned by a person if he or she directly or indirectly has or shares (i) voting power, which includes the power to vote or to direct the voting of the shares, or (ii) investment power, which includes the power to dispose or to direct the disposition of the shares. Unless otherwise indicated, the named beneficial owner has sole voting and dispositive power with respect to the shares. (2) Includes shares over which the directors and officers have voting power which have been granted pursuant to the Abington Community Bancorp 2005 Recognition and Retention Plan and are held in the associated trust and stock options granted pursuant to the Abington Community Bancorp 2005 Stock Option Plan which are exercisable within 60 days as follows: Name Recognition Plan Trust Stock Options Michael F. Czerwonka, III 9,600 6,000 A. Stuard Graham, Jr. 9,600 6,000 Jane Margraff Kieser 9,600 6,000 Joseph B. McHugh 9,600 6,000 Robert J. Pannepacker, Sr. 9,600 6,000 Robert W. White 56,000 35,100 G. Price Wilson, Jr. Edward W. Gormley 14,000 11,700 Frank Kovalcheck 14,000 11,700 Jack J. Sandoski 14,000 11,700 All Directors and Executive Officers as a Group (10 persons) 146,000 100,200 (3) Includes 9,000 shares held jointly with Mr. Czerwonka s spouse 16,000 shares held by Mr. Czerwonka s spouse and 4,450 shares held in Mr. Czerwonka s individual retirement account. (4) Includes 10,424 shares held in a Deferred Compensation Plan over which Ms. Kieser disclaims ownership. (5) Includes 55,096 shares are held jointly with Mr. McHugh s spouse. (6) Includes 25,370 shares held by Mr. Pannepacker s spouse, 24,000 shares held by Mr. Pannepacker s mother whom he has power of attorney and over which he disclaims beneficial ownership and 2,000 shares held by Penny s Flowers, Inc., a corporation of which Mr. Pannepacker is a 50% owner, and over which he disclaims beneficial ownership except with respect to his pecuniary interest therein. (7) Includes 14,712 shares held in the Abington Bank 401(k) Plan, 47,864 shares held in the Deferred Compensation Plan over which Mr. White disclaims beneficial ownership and 3,679 shares allocated to Mr. White s account in the employee stock ownership plan, over which Mr. White has voting power. (8) The 1,031 shares are held in Mr. Wilson s individual retirement account. (9) Includes 37,116 shares held in Abington Bank s 401(k) Plan, 22,269 shares held in the Deferred Compensation Plan over which Mr. Gormley disclaims beneficial ownership and 2,325 shares allocated to Mr. Gormley s account in the employee stock ownership plan over which Mr. Gormley has voting power. (10) Includes 7,680 shares held jointly with Mr. Kovalcheck s spouse, 9,807 shares held by Mr. Kovalcheck s spouse, 6,046 shares held in the Abington Bank 401(k) Plan, 4,900 shares held in the Deferred Compensation Plan over which Mr. Kovalcheck disclaims beneficial ownership and 2,027 shares allocated to Mr. Kovalcheck s account in the employee stock ownership plan over which Mr. Kovalcheck has voting power. (11) Includes 30,000 shares held in Abington Bank s 401(k) Plan, 20,153 shares held in the Deferred Compensation Plan over which Mr. Sandoski disclaims beneficial ownership, 10,000 shares held by Mr. Sandoski s mother for whom he has power of attorney and over which he disclaims beneficial ownership and 2,404 shares allocated to Mr. Sandoski s account in the employee stock ownership plan, over which Mr. Sandoski has voting power. (1) Excludes shares which may be received upon the exercise of outstanding and exercisable stock options. Based upon the exchange ratio of 1.71851 of Abington Bancorp shares for each share of Abington Community Bancorp common stock at the midpoint of the estimated valuation range, the persons named in the table would have options to purchase our common stock as follows: 51,555 shares for each of Ms. Margraff-Kieser and Messrs. Czerwonka, Graham, McHugh and Pannepacker 6,874 shares for Mr. Wilson, 301,598 shares for Mr. White and 100,532 shares for each of Messrs. Gormley, Kovalcheck and Sandoski, and for all directors and executive officers as a group, 867,843 shares. (2) Excludes unvested shares awarded under the recognition and retention plan, based upon the exchange ratio, in the following amounts: 16,497 shares for each of Ms. Margraff-Kieser and Messrs. Czerwonka, Graham, McHugh and Pannepacker, no shares for Mr. Wilson, 96,236 shares for Mr. White and 24,059 shares for each of Messrs. Gormley, Kovalcheck and Sandoski, and for all directors and executive officers as a group, 250,898 shares. (3) Excludes stock options and awards that may be granted under the proposed new stock option plan and recognition and retention plan if such plans are approved by stockholders at an annual or special meeting of stockholders at least six months following the conversion and reorganization. See Management-New Stock Benefit Plans. THE CONVERSION AND OFFERING The Boards of Directors of Abington Bancorp, Abington Mutual Holding Company, Abington Community Bancorp and Abington Bank all have approved the plan of conversion and reorganization. The plan of conversion and reorganization also has been conditionally approved by the Office of Thrift Supervision, subject to approval by the depositors of Abington Bank and the shareholder of Abington Community Bancorp. Such Office of Thrift Supervision approval, however, does not constitute a recommendation or endorsement of the plan of conversion by such agency. General The Boards of Directors of Abington Mutual Holding Company, Abington Community Bancorp and Abington Bank unanimously adopted the plan of conversion and reorganization on November 29, 2006. The plan of conversion and reorganization has been approved by the Office of Thrift Supervision, subject to, among other things, approval of the plan of conversion by the depositors of Abington Bank and the shareholders of Abington Community Bancorp. The special meeting of depositors and special meeting of shareholders have been called for this purpose on _________________ __, 2007. In order for the conversion to be completed, we also must receive approvals of applications filed with the Federal Deposit Insurance Corporation under the Bank Merger Act and of our application filed with the Pennsylvania Department of Banking. The following is a brief summary of the conversion and is qualified in its entirety by reference to the provisions of the plan of conversion and reorganization. A copy of the plan of conversion and reorganization is available for inspection at each branch office of Abington Bank and at the Northeast Regional and Washington D.C. offices of the Office of Thrift Supervision. The plan of conversion and reorganization also is filed as an exhibit to the registration statement of which this document is a part, copies of which may be obtained from the Securities and Exchange Commission. See Where You Can Find Additional Information. Purposes of the Conversion Abington Mutual Holding Company, as a mutual holding company, does not have shareholders and has no authority to issue capital stock. As a result of the conversion and reorganization, we will be structured in the form used by holding companies of commercial banks, most business entities and a growing number of savings institutions. The conversion and reorganization will be important to our future growth and performance by providing a larger capital base to support our operations and by enhancing our future access to capital markets, ability to continue to grow our asset base, through additional new branches, acquisitions or otherwise, and to diversify into other financial services related activities and to provide additional services to the public. Although Abington Community Bancorp currently has the ability to raise additional capital through the sale of additional shares of Abington Community Bancorp common stock, that ability is limited by the mutual holding company structure which, among other things, requires that Abington Mutual Holding Company always hold a majority of the outstanding shares of Abington Community Bancorp common stock. The conversion and reorganization also will result in an increase in the number of shares of common stock held by public shareholders, as compared to the current number of outstanding shares of Abington Community Bancorp common stock, which will facilitate development of a more active and liquid trading market for our common stock. See Market for Our Common Stock. We have pursued a plan of expansion and growth since the formation of Abington Mutual Holding Company and total assets of Abington Community Bancorp have increased from $718.0 million as of December 31, 2004 to $925.2 million at December 31, 2006. During the same period, Abington Bank increased the number of its banking offices from 12 to 14, opened an additional branch office in January 2007, and plans to open two additional banking offices in 2007. Abington Bank remains committed to controlled growth and diversification. The additional funds received in the conversion and reorganization will facilitate Abington Bank s ability to continue to grow in accordance with its business plan, through both internal growth and possible acquisitions of other institutions or branch offices. Abington Bank believes that its current mutual holding company form may impede its ability to undertake certain acquisitions. Given the current consolidation efforts in the banking industry in general and in Abington Bank s market area in particular, we believe that there will continue to be significant acquisition opportunities in the future. We believe that the conversion and reorganization will enhance Abington Bank s ability to continue its growth through possible acquisitions and will support its ability to more fully serve the borrowing and other financial needs of the communities it serves. In light of the foregoing, the Boards of Directors of Abington Bancorp, Abington Mutual Holding Company, Abington Community Bancorp and Abington Bank believe that it is in the best interests of such companies and their respective members and shareholders to continue to implement our strategic business plan, and that the most feasible way to do so is through the conversion and reorganization. Description of the Conversion The conversion and reorganization will result in the elimination of the mutual holding company, the creation of a new stock form holding company which will own all of the outstanding shares of Abington Bank, the exchange of shares of common stock of Abington Community Bancorp by public shareholders for shares of the new stock form holding company, Abington Bancorp, the issuance and sale of additional shares to depositors of Abington Bank and others in the offering. The conversion and reorganization will be accomplished through a series of substantially simultaneous and interdependent transactions as follows: Abington Bank will elect to be treated as a savings association pursuant to Section 10(l) of the Home Owners Loan Act and Abington Mutual Holding Company and Abington Community Bancorp will convert to a Federal mutual holding company and Federal mid-tier holding company, respectively, pursuant to interim mergers; the resulting Federal mid-tier holding company will convert to a federal interim stock savings institution and simultaneously merge with and into Abington Bank with Abington Bank being the survivor and the resulting Federal mutual holding company will convert from mutual form to a federal interim stock savings institution and simultaneously merge with and into Abington Bank, pursuant to which the mutual holding company will cease to exist and the shares of Abington Community Bancorp common stock held by the mutual holding company will be canceled; and an interim savings association will be formed as a wholly owned subsidiary of the newly formed Pennsylvania corporation, Abington Bancorp, and then will merge with and into Abington Bank. As a result of the above transactions, Abington Bank will become a wholly-owned subsidiary of the new holding company, Abington Bancorp, and the outstanding shares of Abington Community Bancorp common stock will be converted into the shares of Abington Bancorp common stock pursuant to the exchange ratio, which will result in the holders of such shares owning in the aggregate approximately the same percentage of the Abington Bancorp common stock to be outstanding upon the completion of the conversion and reorganization as the percentage of Abington Community Bancorp common stock owned by them in the aggregate immediately prior to consummation of the conversion and reorganization before giving effect to (a) the payment of cash in lieu of issuing fractional exchange shares, and (b) any shares of common stock purchased by public shareholders in the offering. Consummation of the conversion and reorganization (including the sale of common stock in the offering, as described below) is conditioned upon the approval of the plan of conversion by (1) the Office of Thrift Supervision, (2) at least a majority of the total number of votes eligible to be cast by depositors of Abington Bank at the special meeting of depositors and (3) holders of at least two-thirds of the shares of the outstanding Abington Community Bancorp common stock at the special meeting of shareholders. In addition, we have conditioned the consummation of the conversion on the approval of the plan of conversion and reorganization by at least a majority of the votes cast, in person or by proxy, by the current shareholders of Abington Community Bancorp excluding Abington Mutual Holding Company at the special meeting of shareholders. In order to complete the conversion and reorganization we also must receive the requisite approvals of the Federal Deposit Insurance Corporation of the application under the Bank Merger Act and of the Pennsylvania Department of Banking. Effect of the Conversion on Current Shareholders Effect on Outstanding Shares of Abington Community Bancorp. Federal regulations provide that in a conversion of a mutual holding company to stock form, the public shareholders of Abington Community Bancorp will be entitled to exchange their shares of common stock for common stock of the converted holding company, provided that the bank and the mutual holding company demonstrate to the satisfaction of the Office of Thrift Supervision that the basis for the exchange is fair and reasonable. Each publicly held share of Abington Community Bancorp common stock will, on the date of completion of the conversion, be automatically converted into and become the right to receive a number of shares of common stock of Abington Bancorp determined pursuant to the exchange ratio (we refer to these shares as the exchange shares ). The public shareholders of Abington Community Bancorp common stock will own the same percentage of common stock in Abington Bancorp, Inc. after the conversion as they hold in Abington Community Bancorp subject to additional purchases, or the receipt of cash in lieu of fractional shares. The total number of shares of Abington Bancorp, Inc. held by the former public shareholders of Abington Community Bancorp common stock after the conversion will also be affected by any purchases by these persons in the offering. Based on the independent valuation, the 57.1% of the outstanding shares of Abington Community Bancorp, Inc. common stock held by Abington Mutual Holding Company as of the date of the independent valuation and the 42.9% public ownership interest of Abington Community Bancorp, the following table sets forth, at the minimum, mid-point, maximum, and adjusted maximum of the offering range: the total number of shares of common stock to be issued in the conversion; the total shares of common stock outstanding after the conversion; the exchange ratio; and the number of shares an owner of 100 shares of Abington Community Bancorp common stock will receive in the exchange, adjusted for the number of shares sold in the offering. Shares to be sold in this offering Shares of Abington Bancorp to be exchanged for existing shares of Abington Community Bancorp Total shares of Abington Bancorp common stock to be outstanding Exchange ratio 100 shares of Abington Community Bancorp would be exchanged for the following number of shares of Abington Bancorp Amount Percent Amount Percent Minimum 12,750,000 57.1 % 9,581,897 42.9 % 22,331,897 1.46073 146 Midpoint 15,000,000 57.1 11,272,820 42.9 26,272,820 1.71851 171 Maximum 17,250,000 57.1 12,963,743 42.9 30,213,743 1.97628 197 Maximum, as adjusted 19,837,500 57.1 14,908,305 42.9 34,745,805 2.27273 227 Effect on Shareholders Equity per Share of the Shares Exchanged. As adjusted for exchange ratio, the conversion will increase the shareholder equity per share of the current shareholder of Abington Community Bancorp common stock. At December 31, 2006, the shareholders equity per share of Abington Community Bancorp common stock including shares held by Abington Mutual Holding Company was $7.46. Based on the pro forma information set forth for December 31, 2006, in Pro Forma Data, pro forma shareholders equity per share following the conversion will be $10.16, $9.38, $8.81 and $8.31 at the minimum, mid-point, maximum and adjusted maximum, respectively, of the offering range. As adjusted at that date for the exchange ratio, the effective shareholders equity per share for current shareholder would be $14.84, $16.12, $17.41 and $18.89 at the minimum, mid-point, maximum and adjusted maximum, respectively, of the offering range. Effect on Earnings per Share of the Shares Exchanged. As adjusted for exchange ratio, the conversion will also increase the pro forma earnings per share. For the year ended December 31, 2006, basic earnings per share of Abington Community Bancorp common stock was $0.46, including shares held by Abington Mutual Holding Company. Based on the pro forma information set forth for the year ended December 31, 2006, in Pro Forma Data, earnings per share of common stock following the conversion will range from $0.44 to $0.32, respectively, for the minimum to the adjusted maximum of the offering range. As adjusted at that date for the exchange ratio, the effective annualized earnings per share for current shareholder would range from $0.64 to $0.73, respectively, for the minimum to the adjusted maximum of the offering range. Effect on the Market and Appraised Value of the Shares Exchanged. The aggregate subscription price of the shares of common stock received in exchange for the publicly held shares of Abington Community Bancorp common stock is $9.6 million, $11.3 million, $13.0 million, and $14.9 million at the minimum, mid-point, maximum and adjusted maximum, respectively, of the offering range. The last trade of Abington Community Bancorp common stock on November 29, 2006, the last trading day preceding the announcement of the conversion, was $15.88 per share, and the price at which Abington Community Bancorp common stock last traded on _________________ __, 2007 was $_____ per share. Dissenters and Appraisal Rights. The public shareholders of Abington Community Bancorp common stock will not have dissenters rights or appraisal rights in connection with the exchange of publicly held shares of Abington Community Bancorp common stock as part of the conversion. Effects of the Conversion on Depositors and Borrowers General. Prior to the conversion, each depositor in Abington Bank has both a deposit account in the institution and a pro rata ownership interest in the net worth of Abington Bank based upon the balance in his account, which interest may only be realized in the event of a liquidation of Abington Bank. However, this ownership interest is tied to the depositor s account and has no tangible market value separate from such deposit account. A depositor who reduces or closes his account receives a portion or all of the balance in the account but nothing for his ownership interest in the net worth of Abington Bank, which is lost to the extent that the balance in the account is reduced or closed. Consequently, the depositors in a stock subsidiary of a mutual holding company normally have no way to realize the value of their ownership interest, which has realizable value only in the unlikely event that Abington Bank is liquidated. In such event, the depositors of record at that time, as owners, would share pro rata in any residual surplus and reserves of Abington Bank after other claims are paid. Continuity. While the conversion is being accomplished, the normal business of Abington Bank of accepting deposits and making loans will continue without interruption. Abington Bank will continue to be subject to regulation by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation. After the conversion, Abington Bank will continue to provide services for depositors and borrowers under current policies by its present management and staff. The directors and officers of Abington Bank at the time of the conversion will continue to serve as directors and officers of Abington Bank after the conversion. Effect on Deposit Accounts. Under the plan of conversion, each depositor in Abington Bank at the time of the conversion will automatically continue as a depositor after the conversion, and each of the deposit accounts will remain the same with respect to deposit balance, interest rate and other terms, except to the extent that funds in the accounts are withdrawn to purchase common stock to be issued in the offering. Each account will be insured by the Federal Deposit Insurance Corporation to the same extent as before the conversion. Depositors will continue to hold their existing certificates, passbooks and other evidences of their accounts. Effect on Loans. No loan outstanding from Abington Bank will be affected by the conversion, and the amount, interest rate, maturity and security for each loan will remain as they were contractually fixed prior to the conversion. Tax Effects. We will receive an opinion of counsel or tax advisor with regard to federal and state income taxation which indicate that the adoption and implementation of the plan of conversion and reorganization set forth herein will not be taxable for federal or state income tax purposes to Abington Community Bancorp, Abington Mutual Holding Company, the public shareholder, members of Abington Mutual Holding Company or Abington Bank s Eligible Account Holders, Supplemental Eligible Account Holders or Other Depositors, except as discussed below. See -
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001293373_mesa-mri_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001293373_mesa-mri_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d807fff0fb16aa913560399ffb753e71156fbfe0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001293373_mesa-mri_prospectus_summary.txt
@@ -0,0 +1 @@
+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001293374_mountain_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001293374_mountain_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d807fff0fb16aa913560399ffb753e71156fbfe0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001293374_mountain_prospectus_summary.txt
@@ -0,0 +1 @@
+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001293375_los-gatos_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001293375_los-gatos_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d807fff0fb16aa913560399ffb753e71156fbfe0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001293375_los-gatos_prospectus_summary.txt
@@ -0,0 +1 @@
+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001293376_woodbridge_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001293376_woodbridge_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d807fff0fb16aa913560399ffb753e71156fbfe0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001293376_woodbridge_prospectus_summary.txt
@@ -0,0 +1 @@
+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001293377_jefferson_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001293377_jefferson_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d807fff0fb16aa913560399ffb753e71156fbfe0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001293377_jefferson_prospectus_summary.txt
@@ -0,0 +1 @@
+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001293378_jefferson_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001293378_jefferson_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d807fff0fb16aa913560399ffb753e71156fbfe0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001293378_jefferson_prospectus_summary.txt
@@ -0,0 +1 @@
+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001293379_orange_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001293379_orange_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d807fff0fb16aa913560399ffb753e71156fbfe0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001293379_orange_prospectus_summary.txt
@@ -0,0 +1 @@
+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001293380_san_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001293380_san_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d807fff0fb16aa913560399ffb753e71156fbfe0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001293380_san_prospectus_summary.txt
@@ -0,0 +1 @@
+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001293382_valencia_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001293382_valencia_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d807fff0fb16aa913560399ffb753e71156fbfe0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001293382_valencia_prospectus_summary.txt
@@ -0,0 +1 @@
+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001293389_parkway_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001293389_parkway_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d807fff0fb16aa913560399ffb753e71156fbfe0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001293389_parkway_prospectus_summary.txt
@@ -0,0 +1 @@
+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001293393_comprehens_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001293393_comprehens_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d807fff0fb16aa913560399ffb753e71156fbfe0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001293393_comprehens_prospectus_summary.txt
@@ -0,0 +1 @@
+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001293395_comprehens_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001293395_comprehens_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d807fff0fb16aa913560399ffb753e71156fbfe0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001293395_comprehens_prospectus_summary.txt
@@ -0,0 +1 @@
+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001293402_tme_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001293402_tme_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d807fff0fb16aa913560399ffb753e71156fbfe0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001293402_tme_prospectus_summary.txt
@@ -0,0 +1 @@
+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001293409_comprehens_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001293409_comprehens_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d807fff0fb16aa913560399ffb753e71156fbfe0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001293409_comprehens_prospectus_summary.txt
@@ -0,0 +1 @@
+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001293412_comprehens_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001293412_comprehens_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d807fff0fb16aa913560399ffb753e71156fbfe0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001293412_comprehens_prospectus_summary.txt
@@ -0,0 +1 @@
+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001293414_syncor_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001293414_syncor_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d807fff0fb16aa913560399ffb753e71156fbfe0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001293414_syncor_prospectus_summary.txt
@@ -0,0 +1 @@
+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001293415_syncor_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001293415_syncor_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d807fff0fb16aa913560399ffb753e71156fbfe0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001293415_syncor_prospectus_summary.txt
@@ -0,0 +1 @@
+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001293416_phoenix_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001293416_phoenix_prospectus_summary.txt
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+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. We encourage you to read this entire prospectus, including the section entitled Risk Factors, and the documents referred to in the section entitled Where You Can Find More Information prior to deciding whether to invest in the notes. All references to we, us, our, our company or the Company in this prospectus mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to Holdings in this prospectus mean InSight Health Services Holdings Corp. by itself. All references to InSight in this prospectus mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself. References in this prospectus to Successor refer to our company on or after August 1, 2007, after giving effect to (1) the cancellation of Holdings common stock prior to the effective date; (2) the issuance of new Holdings common stock in exchange for all of InSight s senior subordinated notes and the cancelled Holdings common stock; and (3) the application of fresh-start reporting. References to Predecessor refer to our company prior to August 1, 2007. Our Company We are a nationwide provider of diagnostic imaging services through our integrated network of fixed-site centers and mobile facilities which are focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are non-invasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders. As of September 30, 2007, our network consists of 99 fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Reorganization In November 2006, we engaged Lazard Fr res Co. LLC as our financial advisor to assist us in exploring strategic alternatives. In March 2007, we announced an offer to exchange shares of Holdings common stock for up to $194.5 million aggregate principal amount of InSight s 9.875% senior subordinated notes due 2011, or senior subordinated notes. The exchange offer initially provided for consummation on an out-of-court basis or in connection with the filing of a prepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. On May 29, 2007, Holdings and InSight filed voluntary petitions to reorganize their business under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 07-10700). The other subsidiaries of Holdings were not included in the bankruptcy filing and continued to operate their business. On July 10, 2007, the bankruptcy court confirmed Holdings and InSight s Second Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. The plan of reorganization became effective and Holdings and InSight emerged from bankruptcy protection on August 1, 2007, or the effective date. On August 1, 2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings common stock, all options for Holdings common stock and all of InSight s senior subordinated notes were cancelled, and the Table of Contents TABLE OF ADDITIONAL REGISTRANTS Set forth below is certain information regarding each of the additional registrants. For each such registrant, its primary standard industrial classification code number is 8071, its principal executive office is c/o InSight Health Services Holdings Corp., 26250 Enterprise Court, Suite 100, Lake Forest, CA 92630 and its telephone number is (949) 282-6000. I.R.S. Employer State or Other Jurisdiction of Identification Exact Name of Registrant Guarantor as Specified in its Charter Incorporation or Organization Number InSight Health Services Holdings Corp. Delaware 04-3570028 InSight Health Corp. Delaware 52-1278857 Signal Medical Services, Inc. Delaware 33-0802413 Open MRI, Inc. Delaware 94-3251529 Maxum Health Corp. Delaware 75-2287276 Maxum Health Services Corp. Delaware 75-2135957 MRI Associates, L.P. Indiana 35-1881106 Maxum Health Services of North Texas, Inc. Texas 75-2435797 Maxum Health Services of Dallas, Inc. Texas 75-2615132 NDDC, Inc. Texas 75-2407830 Wilkes-Barre Imaging, L.L.C Pennsylvania 52-2238781 Orange County Regional PET Center Irvine, LLC California 91-2070190 San Fernando Valley Regional PET Center, LLC California 91-2070191 Valencia MRI, LLC California 91-2070193 Parkway Imaging Center, LLC Nevada 33-0872858 Comprehensive Medical Imaging, Inc. Delaware 95-4662473 Comprehensive Medical Imaging Centers, Inc. Delaware 95-4666946 TME Arizona, Inc. Texas 76-0539851 Comprehensive Medical Imaging Fairfax, Inc. Delaware 95-4666947 Comprehensive OPEN MRI Carmichael/ Folsom, LLC California 77-0505765 Syncor Diagnostics Sacramento, LLC California 91-1838444 Syncor Diagnostics Bakersfield, LLC California 77-0469131 Phoenix Regional PET Center Thunderbird, LLC Arizona 77-0578521 Mesa MRI Texas 76-0316425 Mountain View MRI Texas 86-0651713 Los Gatos Imaging Center Texas 94-3040209 Woodbridge MRI Texas 54-1623177 Jefferson MRI Bala Texas 76-0300719 Jefferson MRI Texas 23-2579343 EXPLANATORY NOTE This Registration Statement contains a prospectus relating to certain market-making transactions in an indeterminate amount of the senior secured floating rate notes due 2011 of InSight Health Services Corp. to be carried out, from time to time, by J.P. Morgan Securities Inc. The information contained herein includes certain information contained in the registration statement on Form S-4 (no. 333-146397), previously filed with the Securities and Exchange Commission. Table of Contents PRESENTATION OF FINANCIAL INFORMATION We refer to Adjusted EBITDA in various places in this prospectus. We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding the gain on repurchase of notes payable, the loss on dissolution of partnership, the impairment of goodwill and other intangible assets and reorganization items, net. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Please see our reconciliation of net cash provided by operating activities to Adjusted EBITDA as it appears under the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital projects, financing needs, debt repurchases, plans or intentions relating to acquisitions and new fixed-site developments, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this prospectus the words estimates, expects, anticipates, projects, plans, intends, believes, and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we can give no assurance that our expectations, beliefs and projections will be realized. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this prospectus are set forth in this prospectus, including the factors described in
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001295079_shengtai_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001295079_shengtai_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read the entire prospectus, including
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001295557_bare_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001295557_bare_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read together with, the more detailed information and financial statements and related notes thereto appearing elsewhere in this prospectus. Before you decide to invest in our common stock, you should read the entire prospectus carefully, including the risk factors and the financial statements and related notes included or incorporated by reference in this prospectus. Our Company Bare Escentuals is one of the fastest growing prestige beauty companies in the U.S. and a leader by sales and consumer awareness in mineral-based cosmetics. We develop, market and sell cosmetics, skin care, and body care products under our i.d. bareMinerals, i.d., RareMinerals and namesake Bare Escentuals brands, and professional skin care products under our md formulations brand. We believe our i.d. bareMinerals cosmetics, particularly our core foundation products, offer a highly differentiated, healthy and lightweight alternative to conventional liquid- or cream-based cosmetics while providing light to maximum coverage for all skin types. As such, we believe our foundation products have broad appeal to women of all ages including women who did not previously wear foundation before using i.d. bareMinerals. We utilize a distinctive marketing strategy and a multi-channel distribution model consisting of infomercials, specialty beauty retailers, company-owned boutiques, home shopping television, spas and salons and online shopping. This model has enabled us to increase our brand awareness, consumer loyalty and market share and achieve favorable operating margins. Bare Escentuals was the top-selling cosmetics brand company-wide at leading specialty beauty retailers Sephora and Ulta during 2005 and 2006. From 2002 through 2006, we increased net sales approximately 57.0% on a compound annual basis, and during the fiscal year ended December 31, 2006, our operating income was 35.2% of net sales. Our i.d. bareMinerals-branded products include our core foundation products and a wide variety of eye and face products such as blushes, all-over-face colors, liner shadows, eyeshadows and glimmers. Our i.d. bareMinerals products are made primarily from finely milled minerals and do not contain any of the chemical additives commonly found in liquid, cream and pressed cosmetics, such as preservatives, oil, fragrances, talc, waxes, binders and other potential skin irritants. We have designed our products to provide women with the look and feel of "bare" skin while effectively concealing skin imperfections that can be exacerbated by traditional cosmetics. In addition to our i.d. bareMinerals products, we offer a broad range of cosmetics and accessories under the i.d. brand and a mineral-based nighttime skin revival treatment product under the RareMinerals brand. We also offer innovative and exclusive formulas for bath, body and face under our Bare Escentuals brand and a wide range of professional skin care products under the md formulations brand. We use third-party contract manufacturers and suppliers to manufacture all of our finished products. A core element of our success is our distinctive marketing strategy and multi-channel distribution model. We leverage educational media such as our infomercials as well as live demonstrations and consumer interactions on home shopping television to showcase the unique benefits of and application techniques for our products while simultaneously engaging and developing intimate relationships with our consumers. As of April 1, 2007, our domestic points of distribution included infomercials, 33 company-owned boutiques, approximately 345 retail locations consisting of specialty beauty retailers Sephora and Ulta, home shopping television, approximately 900 spa and salon locations and online at www.bareescentuals.com, www.bareminerals.com and www.mdformulations.com. Competitive Strengths We believe the following competitive strengths position us for continued, sustainable growth in the future: Recognized expertise within mineral-based cosmetics category. We believe our focus on and distinctive experience with mineral-based cosmetics distinguish us from our competitors. Our brand message centers on key points of differentiation of our mineral-based products, including their efficacy, unique application and natural look and feel. We believe we are at the vanguard of women's conversion to mineral-based cosmetics as women have discovered the benefits of our products. We also believe our mineral-based cosmetics capitalize on consumers' growing desire for healthy living and natural products. Enthusiastic and loyal consumer base. We believe our cosmetics appeal to a broad demographic of consumers, who exhibit brand loyalty and enthusiasm for our products, promoting sales of our products through word-of-mouth referrals and high rates of participation in our infomercial continuity program. Our August 2005 response survey of our infomercial customers revealed that 90% of respondents expect to use i.d. bareMinerals indefinitely, and 87% of these respondents would enthusiastically recommend i.d. bareMinerals to a friend. Consumer-focused product development and packaging. We focus a significant portion of our product development efforts on creating new products and improving existing products based on feedback from our consumer community. We also seek to reinforce the benefits of our products by highlighting the emotions they are intended to inspire in our marketing and packaging. We believe that this "emotion-inspired" marketing and product packaging differentiates us from our competitors and enhances our brand strength. Authentic brand and differentiated marketing approach. The Bare Escentuals brand is meant to be refreshing, fun, interactive and centered on our consumer, with an emphasis on a natural image and ease of product application. Our differentiated marketing approach focuses on educating consumers as to the natural formulation of, and unique application techniques for, our products; communicating product efficacy through product demonstrations; featuring our consumers instead of celebrities; and developing direct connections with these consumers. Mutually reinforcing distribution channels. We believe that our multi-channel distribution strategy provides for greater consumer diversity, reach and convenience while reinforcing the authenticity and premium image of our brands. For example, our infomercial programs and home shopping television appearances educate consumers regarding the benefits of our products and promote sales through these channels as well as through our boutiques and premium wholesale channels. In turn, our company-owned boutiques support the authenticity of the brand, while our presence in specialty beauty retailers such as Sephora and Ulta further strengthens our brand image. Experienced management team. Our Chief Executive Officer, Leslie Blodgett, is a key creative driver of our business and the leading personality behind our brands. She is supported by a senior management team with complementary experiences managing prestige cosmetic brands within retail and wholesale distribution channels and overseeing operations in the branded consumer products industry. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Growth Strategy Our goal is to strengthen our position as a leading developer and marketer of premium cosmetics and skin care products through the following strategies: Further penetrate each of our multiple distribution channels. Wholesale. We intend to continue to increase net sales through key premium wholesale accounts, such as Sephora and Ulta, home shopping television, and spas and salons. Within Sephora and Ulta, we will seek to improve our in-store product positioning and collaborative marketing efforts. In addition, we expect our premium wholesale sales will grow as Sephora and Ulta open new stores. We are also exploring additional opportunities to sell our products in department stores. Retail. We intend to expand our base of company-owned boutiques and to grow our infomercial and online shopping sales. We believe substantial opportunity exists to open additional domestic boutiques. As of April 1, 2007, we operated 33 boutiques. We had average net sales of approximately $1,900 per square foot for the twelve months ended April 1, 2007. We intend to continue growing our infomercial sales by increasing and improving the effectiveness of our media spending. Leverage our strong market position in foundation to cross-sell our other products. We plan to capitalize on the brand recognition and leadership of our i.d. bareMinerals foundation products to cross-sell our other i.d.-branded cosmetics products, including blush, eye makeup and lip products. To date, we have demonstrated success in cross-selling our non-foundation products in channels where we interact directly with consumers, such as in our boutiques and on home shopping television. Develop new product concepts. We believe that we can use our specialized distribution platform to market new concepts and products. We intend to create new and improve existing products by incorporating consumer feedback into our product development efforts. Expand our global presence. We plan to increase net sales in international markets with large cosmetics sales, particularly with respect to sales of foundation products, well-established prestige cosmetics distribution channels, and television-commerce channels with sufficient scale to support an education-based marketing strategy. We currently believe that Japan, the United Kingdom, Germany, France and South Korea represent the most significant market opportunities for expanding our global presence.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001296755_dli_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001296755_dli_prospectus_summary.txt
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+Prospectus summary This summary highlights information appearing elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before making an investment decision. You should carefully read the entire prospectus, including the section entitled Risk factors beginning on page 13 and our financial statements and notes to those financial statements included elsewhere in this prospectus before making any investment decision. Unless the context otherwise requires, in this prospectus, DLI Holding means DLI Holding Corp., the issuer of the shares of common stock being offered in this offering, and Del means Del Laboratories, Inc. Del is our primary operating company and a direct wholly owned subsidiary of DLI Holding II Corp., which is wholly-owned by DLI Holding. DLI Holding is a holding company, and our operations are conducted entirely through our subsidiaries. We, us and our mean DLI Holding and its consolidated subsidiaries, including Del. Our company We are a leading developer, manufacturer and marketer of cosmetics and over-the-counter, or OTC, pharmaceuticals. Our product portfolio comprises several market leading brands, including Sally Hansen nail care products, Sally Hansen/La Cross beauty implements, N.Y.C. New York Color value cosmetics and Orajel oral treatment products. We also have other OTC pharmaceutical brands that are leaders in their respective product categories. We believe that our market leading positions have been achieved due to the treatment benefits provided by most of our products, our history of product innovation, our focused marketing and promotional strategies, and our excellent and longstanding customer relationships. In 2006, we generated approximately 75% of our domestic gross sales from products that are either #1 or #2 in their respective product categories. Our cosmetics business, accounting for approximately 80% of our 2006 net sales, is focused on nail color, nail treatment, bleaches and hair removal products, or depilatories, beauty implements and value cosmetics. Sally Hansen, our flagship cosmetics brand, is the market leader in total nail care, which includes nail color and nail treatment. Our Sally Hansen brand is uniquely positioned because its high quality products combine treatment and cosmetic benefits. In our Sally Hansen line, we also lead the market with our comprehensive line of bleaches and depilatories. Sally Hansen/La Cross offers consumers a full range of beauty implements, while N.Y.C. New York Color is a well recognized brand of value cosmetics offering a broad collection of high quality products at opening price points. We believe our success in the cosmetics business is due to our ability to provide a broad range of consumers with quality products at attractive prices, while continually evaluating cosmetic trends and consumer preferences and updating our product offerings accordingly. Our OTC pharmaceutical business, accounting for approximately 20% of our 2006 net sales, is focused on oral analgesics, children s toothpaste and sore throat relief and specialty OTC products. Orajel, our flagship OTC pharmaceuticals brand, is the number one product in the total oral analgesics category, which includes toothache pain and teething pain. We have grown our Orajel business by successfully developing new market segments and introducing products targeted at the specific needs of consumers. We have expanded our Orajel brand into additional complementary areas, including children s toothpaste and sore throat relief. For our Orajel products focused on infants and children, we have obtained licenses to feature well-recognized UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents characters on those products that we believe appeal to infants and children, including Little Bear, Thomas the Tank Engine, Scooby Doo and Baby Pooh. In addition to our Orajel products, we have market leading brands in other areas, including our Dermarest brand for psoriasis and eczema and our Gentle Naturals brand of naturally-based creams and lotions targeted at specialty infant healthcare needs. In the United States, we primarily sell our products to mass merchandisers such as Wal-Mart Stores, Inc., or Wal-Mart, and Target Corporation, or Target, major drug store chains such as Walgreen Co., or Walgreens, CVS Caremark Corporation, or CVS, and Rite-Aid Corp., or Rite-Aid , and select food retailers. We believe our products provide attractive profit margins for retailers and enjoy significant retail shelf space. Our products are available in more than 60,000 retail locations domestically. Internationally, we have experienced strong growth from our direct operations in Canada, the United Kingdom, Puerto Rico and Mexico and through distributors, licensees and joint venture relationships in approximately 60 countries. Our goal is to enter markets where we have an opportunity to leverage our product development capabilities and retail relationships to deliver quality products at attractive prices. We have focused our efforts around our core brands and have been able to achieve market-leading positions for most of our targeted product categories. The following table sets forth market position and market share data for our core brands by category or category segment. Brand Category or category segment Market position(1) Market share(1) Cosmetics: Sally Hansen Total nail care #1 24.4% Nail color #1 41.1% Nail treatment #1 46.0% Bleaches and depilatories #1 33.9% Sally Hansen/La Cross Beauty implements #2 14.6% N.Y.C. New York Color Value cosmetics #2 38.9% OTC Pharmaceuticals: Orajel Total oral analgesics #1 33.3% Toothache pain #1 56.6% Teething pain #1 61.8% Children s toothpaste #3 19.4% Mouth sores #5 6.1% Dermarest Psoriasis, Eczema #3 19.1% (1) Market position and market share data is based on data for mass merchandisers, drug store chains and food retailers for the 24 weeks ended June 17, 2007, excluding Wal-Mart, as reported by Information Resources, Inc., or IRI. Competitive strengths We believe the following competitive strengths position us for continued, sustainable growth in the future: Portfolio of well-recognized brands with leading market positions Our principal brands, including Sally Hansen, Sally Hansen/La Cross and N.Y.C. New York Color in our cosmetics business, and Orajel in our OTC pharmaceuticals business, are among the most Amendment No. 1 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents widely recognized brands in their respective product categories and often define the product category because of their market leadership and innovative products. We also own several other established OTC pharmaceutical brands, including Dermarest, Gentle Naturals, Stye, Pronto, Auro-Dri, Skin Shield and Boil-Ease, which compete in niche markets in which we are often the market leader and at times offer the only branded product in the relevant product category. Sally Hansen is the market leader in total nail care. Through our differentiated product offerings, distinctive marketing strategy and history of innovative product lines, we have developed #1 market positions in two major nail care subcategories (nail color and nail treatment) with market shares more than three times that of our nearest competitors. Our market share in the nail color and nail treatment categories grew by 4 percentage points and 3 percentage points, respectively, for the 24 weeks ended June 17, 2007 compared with the 24 weeks ended June 18, 2006. Orajel is the market leader in the oral analgesics market and continues to drive new product development in this market. Orajel products, which provide specific oral treatment benefits across a variety of categories, hold #1 market positions in toothache pain and teething pain, with over 50% market share in each. Additionally, we have developed strong positions in the children s toothpaste category in which we have experienced double digit market share growth in each of the last four years. Our brands have held leading market positions for several years. We believe we have a stable and loyal consumer base that is attracted to both the overall value of our products and the treatment benefits that they generally provide. We believe our brands have a reputation for innovation and high-quality, leading to repeat purchases and providing retailers with strong sell-through. In addition, we believe our brands enjoy significant retail shelf space and favorable store placement due to their important role in increasing consumer traffic in both the cosmetics and OTC pharmaceuticals areas of retail stores. We support our brands through advertising campaigns designed to be visually striking and memorably communicate a unique selling proposition to the consumer and by designing promotional programs through collaborative efforts with our retailers. We also leverage our core brands to expand into new product lines and categories that are either complementary to our existing products or provide new avenues for growth. History of innovation and successful product launches We consider ourselves a leading product innovator, with a rapid and efficient new product development process that is responsive to both retailers and consumers. We dedicate significant resources to product innovation and consumer research in order to develop differentiated products with new and distinctive features, and we strive to be first-to-market with these products. We develop all of our Sally Hansen nail care products, as well as most of our other Sally Hansen cosmetics products, to provide a treatment benefit to our consumers. We have a history of successfully developing new and innovative products and quickly introducing them into the marketplace. In 2007, we introduced Sally Hansen Complete Care 4-in-1 Nail Treatment, a formula designed to reinforce, hydrate and shield nails, which has become one of our top selling products. Other examples of innovative cosmetics product launches include Nail Growth Miracle, No Chip 10 Day Nail Color and Salon Nail Color. In OTC pharmaceuticals, we have developed several new product categories through the launch of our Table of Contents Orajel Tooth Desensitizer, Orajel Protective Mouth Sore Discs and Orajel Toddler Toothpaste products. In 2006, we continued our expansion into new product categories with our Just Feet and Lip Inflation introductions in our cosmetics business and Orajel Kids Sore Throat Relief Strips, in our OTC pharmaceutical business. We believe our product development capabilities allow us to identify and respond to consumer trends in a timely fashion, enabling us to better serve our consumers, as evidenced through our numerous awards from well-known publications such as Women s Wear Daily, Allure, Glamour, Cosmopolitan, Essence and Bride s and organizations such as Cosmetics Executive Women. Excellent, longstanding customer relationships We have developed excellent, longstanding relationships with our customers by creating a culture focused on responsiveness. We have had relationships with a number of our major customers for over 30 years. We believe that our longstanding customer relationships are the result of our ability to provide high-quality products that are regularly updated with new introductions, that are supported with meaningful advertising and promotional activity, and that provide attractive profit margins to retailers. We believe our focused marketing, in-store promotional programs and value-added services, such as our category management and shelf space optimization services provided to retailers, give us a competitive advantage. As a result, we believe that our products and services in both cosmetics and OTC pharmaceuticals present retailers with attractive profit margins and sales per square foot while improving sell-through. Experienced management team We have an experienced senior management team averaging ten years with our company and approximately 24 years of industry experience. Our management team has a history of successfully implementing revenue building and cost savings programs. Since 2005, they have been responsible for product line enhancements and rationalization, consolidating manufacturing and distribution facilities, improving operational efficiencies, developing outsourcing initiatives overseas, improving the effectiveness of advertising and promotional expenditures, and implementing process improvements in sales and operations. Strategies We intend to expand our position as a leading developer, manufacturer and marketer of cosmetics and OTC pharmaceuticals by pursuing the following strategies: Continue to grow core brands and expand into new categories and distribution channels Our well-recognized cosmetics and OTC pharmaceutical brands, leading market shares and proven ability to develop and launch innovative new products create opportunities for us to grow our core brands and expand into strategically aligned new categories in which we do not currently have a significant presence. Our recent successful launches of Sally Hansen Lip Inflation and Just Feet and Orajel Kids Sore Throat Relief Strips and Therapeutic Mouth Sore Rinse demonstrate our ability to effectively leverage the Sally Hansen and Orajel brands. Joseph Sinicropi Chief Financial Officer DLI Holding Corp. 726 RexCorp Plaza, P.O. Box 9357 Uniondale, NY 11553-9357 (516) 844-2020 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents We plan to capitalize on our strong brand names, longstanding customer relationships and product innovation experience to expand in our current product categories, grow under-developed product categories such as foot care and toddler care, and increase our presence in the mouth sore category. Additionally, we believe there are significant opportunities to further penetrate new distribution channels, including dollar stores, club stores and convenience stores, and to increase the presence of cosmetics in food stores. Expand our international presence We plan to expand our efforts internationally by broadening our penetration within markets where we already have distribution and by entering significant new markets. Our international sales and distribution strategy is to establish additional direct operations in selected foreign markets such as Mexico and the United Kingdom. At the same time, we plan to use distributors to expand our presence in existing markets, such as Russia and Germany, and enter into new markets such as France, India, Brazil and China, which we believe together represent the most significant opportunities for expanding our global presence. We believe that international expansion presents an opportunity to capitalize on our internationally recognized Sally Hansen and Orajel brands. Additionally, we believe there is significant opportunity to expand the N.Y.C. New York Color cosmetics brand internationally by positioning it as a masstige brand, which is an affordable product line sold through mass market channels that confers the benefits of a prestige brand. International sales have grown 22% since the beginning of 2005 and accounted for approximately 17% of our net sales in 2006. Continue to strengthen our relationships with retailers We believe our longstanding customer relationships are a significant competitive advantage. As such, we are well positioned to continue to provide our retailers with innovative products that deliver enhanced features, benefits, convenience and value. We intend to continue to strengthen our relationships through improved service levels, enhanced category management and effective merchandising programs, all designed to provide our retailers with enhanced sales productivity, attractive profit margins and improved sell-through. Increase profitability and continue operational improvements We will continue to focus on increasing our profitability and improving the overall efficiency of our operations. We have undertaken initiatives designed to improve our sales mix towards higher margin products and reduce customer returns, and we continue to consolidate facilities, pursue outsourcing initiatives and explore additional cost savings opportunities. In addition, we continue to implement sales and operational process initiatives designed, among other things, to improve sales forecasting, demand planning and production scheduling, and the efficiency level of our manufacturing facilities. We expect to continue to realize cost savings over the course of the next two years both from initiatives we have implemented to date and those to be implemented in the near term. Our gross margin improved by 1.9 percentage points in the first half of 2007 compared to the first half of 2006. With copies to: Peter J. Loughran, Esq. Debevoise & Plimpton LLP 919 Third Avenue New York, New York 10022 (212) 909-6000 Marc D. Jaffe, Esq. Latham & Watkins LLP 885 Third Avenue New York, New York 10022 (212) 906-1200 Table of Contents Pursue strategic acquisitions We intend to evaluate and selectively pursue acquisitions or license agreements that we believe are strategically important to us. We will evaluate acquisitions at attractive valuation levels based on established selected financial criteria. We intend to pursue highly complementary market leading brands that we can further expand by leveraging our existing distribution platform, innovation expertise, and marketing and advertising capabilities. We will continue to pursue licensing patented technologies with application to our product categories as well as other licensing opportunities. Principal and selling stockholders Investment funds affiliated with Kelso & Company, L.P., or the Kelso affiliates, through their ownership interests in DLI Holding LLC, or DLI LLC, beneficially own approximately 97.6% of our outstanding common stock. Kelso & Company, L.P., or Kelso, is a New York-based investment firm founded in 1971. Since 1980, Kelso has acquired over 90 companies with total initial capital at closing of approximately $50 billion. One of the members of our board of directors is a principal of Kelso and one is a transaction professional of Kelso. In January 2005, DLI Acquisition Corp., an indirect, wholly-owned subsidiary of DLI Holding, merged with and into Del with Del being the surviving corporation. This transaction is referred to in this prospectus as the Merger. In connection with the Merger, the Kelso affiliates contributed approximately $136.1 million in cash in exchange for interests in DLI LLC. The Kelso affiliates will receive approximately $ million in aggregate net proceeds from the sale by DLI LLC of shares of our common stock in this offering, calculated at an assumed initial public offering price of $ per share, the mid-point of the range set forth on the cover page of this prospectus and assuming the underwriters do not exercise their option to purchase additional shares from the selling stockholders. Following the completion of this offering, the Kelso affiliates will beneficially own approximately % of our outstanding common stock, with a value of approximately $ million, calculated at an assumed initial public offering price of $ per share, the mid-point of the range set forth on the cover page of this prospectus and assuming the underwriters do not exercise their option to purchase additional shares from the selling stockholders. In connection with the Merger, Charles J. Hinkaty, our President and Chief Executive Officer, and Harvey P. Alstodt, the President of Del Cosmetics, each contributed $20,000 in cash in exchange for 611 common units each in DLI LLC, for an aggregate of approximately 0.03% of the common units of DLI LLC. As a result of their investment in DLI LLC, Messrs. Hinkaty and Alstodt were each granted 98,162 profit interests, or Override Units, in DLI LLC that may entitle them to approximately 4%, in the aggregate, of any appreciation in the value of the assets of DLI LLC. In addition, in connection with the Merger, Messrs. Hinkaty and Alstodt exchanged options to purchase common stock of Del for options to purchase DLI Holding common stock. The value of the options exchanged by Mr. Hinkaty and Mr. Alstodt at the time of the Merger was approximately $2.0 million and $0.5 million, respectively. Messrs. Hinkaty and Alstodt are not selling any of the shares underlying these exchange options in this offering. In the second quarter of 2007, Mr. Hinkaty purchased from us 5,714 shares of our common stock for an aggregate purchase price of approximately $0.2 million. Mr. Hinkaty and Mr. Alstodt will receive Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement. Table of Contents approximately $ and $ , respectively, in net proceeds from the sale by DLI LLC of shares of our common stock in this offering based on their interests in the common units and Override Units of DLI LLC, calculated at an assumed initial public offering price of $ per share, the mid-point of the range set forth on the cover page of this prospectus and assuming the underwriters do not exercise their option to purchase additional shares from the selling stockholders. Following the completion of this offering, Mr. Hinkaty and Mr. Alstodt will beneficially own approximately % and %, respectively, of our outstanding common stock, with a value of approximately $ and $ , respectively, calculated at an assumed initial public offering price of $ per share, the mid-point of the range set forth on the cover page of this prospectus and assuming the underwriters do not exercise their option to purchase additional shares from the selling stockholders. See Security ownership of certain beneficial owners, management and the selling stockholders. Risks relating to our business Our business is subject to a number of important risks and uncertainties, including risks and uncertainties related to: our substantial amount of debt; our significant debt service and ongoing cash requirements; implementation of our business strategies and realization of expected cost savings; our significant net losses in each of the last two years; the high level of competition in our industry; risks related to manufacturing by third party suppliers; adverse occurrences or catastrophic losses at one or more of our key manufacturing facilities; customer concentration and risk of loss of one or more of our key customers; changing consumer demands; reduction by consumers of discretionary spending due to an economic downturn; regulatory requirements; quality control and our ability to deliver products in a timely manner; risks associated with doing business outside the United States; and material weaknesses in our internal controls. You should carefully consider these factors as well as all of the information set forth in this prospectus and, in particular, the information under the heading Risk factors beginning on page 13 for risks involved in investing in our common stock. * * * * DLI Holding is incorporated under the laws of the state of Delaware. Our corporate headquarters are located at 726 RexCorp Plaza, P.O. Box 9357, Uniondale, New York 11553-9357. Our telephone number is (516) 844-2020. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities of an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. CALCULATION OF REGISTRATION FEE Table of Contents The offering Common stock offered shares of common stock, par value $0.01 per share, of DLI Holding. Shares of common stock offered by the selling stockholders shares of our common stock. Shares of common stock outstanding after the offering shares of our common stock. Option to purchase additional shares of common stock: The selling stockholders have granted the underwriters a 30-day option to purchase up to shares of our common stock. Use of proceeds All of the shares of common stock offered by this prospectus are being sold by the selling stockholders. We will not receive any proceeds from the sale of our common stock by the selling stockholders. Dividend policy We do not expect to pay dividends on our common stock for the foreseeable future. The NASDAQ Global Market proposed symbol DLIH. Unless we specifically state otherwise, all share information in this prospectus: reflects a -for- split of our common stock to be effected prior to the consummation of the offering contemplated by this prospectus; excludes shares of common stock issuable upon the exercise of outstanding stock options at a weighted average exercise price of $ per share; and assumes no exercise of the underwriters option to purchase additional shares from the selling stockholders. Title of each class of securities to be registered Proposed maximum aggregate offering price(1) Amount of Registration Fee Common Stock, $0.01 par value $200,000,000 $6,140(2) (1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) promulgated under the Securities Act of 1933, as amended. Includes shares of common stock subject to the underwriters option. (2) Previously paid. Table of Contents Summary financial data The following tables present summary historical and as adjusted consolidated financial data for our business. The summary consolidated financial data as of December 31, 2006 and for the year then ended, for the periods February 1, 2005 to December 31, 2005, or the 2005 Successor Period, and January 1, 2005 to January 31, 2005, or the 2005 Predecessor Period, and for the year ended December 31, 2004 have been derived from our audited consolidated financial statements and the related notes thereto included elsewhere in this prospectus. The summary consolidated financial data for the six-month periods ended June 30, 2007 and 2006 and as of June 30, 2007 have been derived from our unaudited consolidated financial statements and the related notes thereto included elsewhere in this prospectus. On July 1, 2004, DLI Holding and its subsidiary, DLI Acquisition Corp., entered into a merger agreement with Del. On January 27, 2005, DLI Acquisition Corp. merged with and into Del with Del being the surviving corporation. DLI Holding and its subsidiaries are referred to collectively herein as the Company or Successor Company and Del and its subsidiaries prior to the Merger are referred to collectively herein as the Predecessor Company. Since the actual results between the period January 28, 2005 and January 31, 2005 were not material to the Successor Company, we have utilized January 31, 2005 as the acquisition date. We applied Statement of Financial Accounting Standards, or SFAS, No. 141, Business Combinations, on the acquisition date and, as a result, the Merger consideration was allocated to the respective values of the assets acquired and liabilities assumed from the Predecessor Company. As a result of the application of purchase accounting, the capital structure of and the basis of accounting for the Company differs from that of the Predecessor Company. Therefore, the Successor Company s financial data generally will not be comparable to the Predecessor Company s financial data. See Management s discussion and analysis of financial condition and results of operations Accounting for the Merger. You should read the following summary historical and as adjusted consolidated financial data in conjunction with the historical financial statements and the related notes thereto and other financial information appearing elsewhere in this prospectus, including Capitalization, Selected consolidated financial data and Management s discussion and analysis of financial condition and results of operations. The financial data reflect the restatement by Del of certain of its previously issued financial statements. See Management s discussion and analysis of financial condition and results of operations Restatement. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Table of Contents Predecessor Company Successor Company (Dollars in thousands except per share data) Year ended December 31, 2004 January 1, 2005 January 31, 2005 February 1, 2005 December 31, 2005 Year ended December 31, 2006 (1) Six months ended June 30, 2006 June 30, 2007 Statement of operations data: Net sales $395,174 $18,206 $379,358 $425,935 $205,158 $226,052 Cost of goods sold (2) 198,425 9,718 211,014 242,378 106,257 112,737 Gross profit 196,749 8,488 168,344 183,557 98,901 113,315 Selling and administrative expenses 167,078 11,475 158,562 178,252 89,063 95,698 Gain on pension curtailment (994 ) (5,582 ) Severance expenses 20 3,250 632 474 805 Merger expenses 1,415 18,974 4,711 Loss (gain) on sale of property 146 (555 ) (41 ) (41 ) (115 ) Income (loss) from operations 28,090 (21,961 ) 2,376 5,708 9,405 22,509 Other income (expense), net Interest expense, net (3,584 ) (264 ) (27,661 ) (37,132 ) (18,274 ) (18,876 ) Loss on early extinguishment of debt (6,449 ) Other, net 331 (232 ) 531 313 292 1,222 Other expense, net (3,253 ) (496 ) (33,579 ) (36,819 ) (17,982 ) (17,654 ) Earnings (loss) before income taxes 24,837 (22,457 ) (31,203 ) (31,111 ) (8,577 ) 4,855 Income tax expense (benefit) 10,159 (24,434 ) (15,359 ) (11,377 ) (3,134 ) 2,922 Net earnings (loss) $14,678 $1,977 $(15,844 ) $(19,734 ) $(5,443 ) $1,933 Weighted average shares outstanding Basic Diluted Net earnings (loss) per share Basic $ $ $ $ Diluted $ $ $ $ Other financial data: Depreciation and amortization $17,472 $1,512 $20,217 $26,093 $12,097 $13,177 Credit Agreement EBITDA (3) 55,042 48,452 27,646 35,523 Statement of cash flow data: Net cash provided by (used in): Operating activities 7,209 190 (28,446 ) 17,299 (1,292 ) (7,945 ) Investing activities (4,714 ) (797 ) (382,985 ) (6,740 ) (2,789 ) (120 ) Financing activities (812 ) (868 ) 411,744 (13,153 ) 4,496 9,312 Table of Contents Historical As adjusted (4) (Dollars in thousands) As of December 31, 2006 (1) June 30, 2007 As of June 30, 2007 Balance sheet data: Cash and cash equivalents $42 $644 Working capital (5) 105,255 130,296 Property, plant and equipment, net 44,647 38,693 Total assets 684,884 687,037 Long term debt (including current portion) 370,404 380,978 Shareholders equity 112,714 115,940 (1) Our consolidated financial statements as of December 31, 2006 and for the year then ended have been revised to correct an immaterial error in our accounting for display fixture reimbursement costs. See note 2 of our audited consolidated financial statements included elsewhere in this prospectus. (2) Included in cost of goods sold for the year ended December 31, 2006 is a fourth quarter charge of $25.1 million relating to the provision for excess and slow moving inventory. Included in cost of goods sold for the period February 1, 2005 to December 31, 2005 is $8.1 million related to the step-up of inventory recorded under purchase accounting and amortized during the year. (3) Credit Agreement EBITDA as presented herein is a financial measure that is used in the credit agreement for Del s asset based revolving credit facility, or the ABL credit facility. Credit Agreement EBITDA is not a defined term under U.S. GAAP and should not be considered as an alternative to operating income or net income, as a measure of operating results or cash flows or as a measure of liquidity. Credit Agreement EBITDA differs from the term EBITDA as it is commonly used. Credit Agreement EBITDA, as used in this prospectus, means Consolidated EBITDA, as that term is defined in Del s ABL credit facility and used as part of the calculation of the term Consolidated Fixed Charge Coverage Ratio which is used in the credit agreement s financial condition covenant and affects Del s ability to incur additional indebtedness in specified circumstances. Under the ABL credit facility, the minimum Consolidated Fixed Charge Coverage Ratio test requires Del to comply with a minimum coverage ratio of Consolidated EBITDA to Consolidated Fixed Charges (as defined in the ABL credit facility) of at least 1:1 whenever excess availability under the ABL credit facility is less than $10.0 million. Del s Consolidated Fixed Charge Coverage Ratio was 2.03:1 and 1.11:1 for the 2005 Successor Period and the year ended December 31, 2006, respectively, and 1.30:1 and 1.64:1 for the six months ended June 30, 2006 and 2007, respectively. Excess availability under the ABL credit facility did not fall below $10.0 million in any of these periods. Credit Agreement EBITDA consists of consolidated net income, adjusted to exclude income tax expense, interest expense, and depreciation and amortization, as well as certain other items and expenses, including amortization of intangibles, extraordinary, unusual or non-recurring gains or losses, consultation fees and expense reimbursements associated with implementing process improvements and cost reductions developed by us in conjunction with Synergetics Installations Worldwide, Inc., or Synergetics, certain non-cash charges or expenses deducted in determining net income, certain cash restructuring charges, loss or gain associated with the sale or write down of assets not in the ordinary course of business, the amount of any net minority expense, certain losses relating to the disposition of excess, surplus or obsolete inventory, and certain sponsor monitoring fees. Borrowings under the ABL credit facility are a key source of Del s liquidity, and Del s ability to borrow thereunder will depend on Del s compliance with the covenants under the credit agreement. Failure to comply with these covenants would result in a violation of the credit agreement which, absent a waiver or an amendment, would permit the lenders to accelerate borrowings thereunder. See Management s discussion and analysis of financial condition and results of operations Liquidity and capital resources Financial covenants and Description of certain indebtedness. Table of Contents The information in this prospectus is not complete and may be changed. We may not issue these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. Subject to completion, dated September 27, 2007 Prospectus shares DLI Holding Corp. Common stock This is an initial public offering of shares of common stock of DLI Holding Corp., which we refer to in this prospectus as DLI Holding. The selling stockholders identified in this prospectus are offering all of the shares in this offering. We will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders. Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $ and $ . We have applied to list the common stock on The NASDAQ Global MarketSM under the symbol DLIH. See
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+S-1/A Summary 1
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before buying shares of our common stock. You should read the entire prospectus carefully, especially the section entitled Risk Factors and our consolidated financial statements and accompanying notes appearing elsewhere in this prospectus, before making an investment in our common stock. Akrion, Inc. We design, manufacture, install and service advanced surface preparation systems used in the manufacture of semiconductor devices. Our systems are used in numerous steps during the semiconductor manufacturing process to remove contaminants from the surface of the silicon wafers on which semiconductor devices are built. If these contaminants are not removed without damaging the devices being made, some or all of the devices on the wafer could be rendered inoperable. Our systems are used in yield-critical surface preparation process steps in the manufacture of a wide variety of semiconductor devices, including logic devices, analog devices, flash memory, dynamic random access memory, or DRAM, and micro-electro mechanical systems, or MEMS. In addition, our systems are used to clean bare silicon and test wafers as well as photomasks used in the production of semiconductor devices. We are able to address a wide variety of surface preparation applications in a number of market segments because we offer both single-wafer and batch-immersion systems that can be configured, as needed, with proprietary megasonics, spray and drying technologies. Our single-wafer systems process one wafer at a time in each process chamber, while our batch-immersion systems simultaneously process 25 to 100 wafers in each process chamber. Our customers include semiconductor device manufacturers, consisting of integrated device manufacturers and foundries, specialized wafer manufacturers and photomask manufacturers. These customers include Samsung Electronics Co. Ltd., STMicroelectronics N.V., National Semiconductor Corporation, Silterra Manufacturing, Inc., Kinik, Inc. and Micron Technology, Inc. Although we derive a significant portion of our revenue each quarter from the sale of systems to a relatively small number of customers, as of June 30, 2007, almost 500 of our systems were installed at more than 80 semiconductor fabrication sites worldwide. In addition, as a result of our October 2006 acquisition of SCP Global Technologies, Inc., we provide upgrades, spare parts and service for an installed base of over 1,000 systems manufactured and sold by SCP and its predecessors. Our Industry Opportunity Growth in the semiconductor industry has been driven by global demand for semiconductor devices used in a broad range of electronic products. The market for equipment used in the manufacture of semiconductor devices is driven by the needs of semiconductor device manufacturers either to add manufacturing capacity to meet growing semiconductor demand or to invest in advanced manufacturing capabilities that utilize technological innovations to enhance device performance. The continuing evolution of the semiconductor industry towards smaller and more complex devices makes the removal of contaminants from wafers being processed more difficult and increases the risk that these contaminants will create critical defects on the devices being made. In addition, new materials used in the manufacture of advanced semiconductor devices are increasingly susceptible to damage by conventional surface preparation methods. Defects in and damage to devices have the direct effect of reducing manufacturing yields and, therefore, the profitability of semiconductor device manufacturers. Furthermore, as manufacturers use larger wafers so that more devices are created from each wafer, the economic impact of critical defects and damage rises significantly. As a result of these trends, surface preparation is becoming increasingly important to device manufacturers and UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents more technology intensive than it has been in the past. In many cases, new chemicals are needed, different means of chemical application and drying are required and physical contact must be avoided. Many device manufacturers continue to have an unmet need for greater cleaning process control, selectivity, repeatability and efficiency while minimizing physical damage to and cross-contamination of the wafers they are processing. Gartner, a leading information technology research and advisory company, forecasts that the worldwide semiconductor wafer fabrication equipment market will increase from $26.0 billion in 2005 to $38.3 billion in 2011, representing a compound annual growth rate of 6.7%. Our products serve the surface preparation market, primarily the segments of the semiconductor wafer fabrication equipment market defined by Gartner as single-wafer processors and auto wet stations. Gartner forecasts that these two wet cleaning markets will increase from an aggregate of $1.5 billion in 2005 to $1.9 billion in 2011, representing a 4.1% compound annual growth rate. The single-wafer processor market is forecast by Gartner to increase from $0.5 billion in 2005 to $1.0 billion in 2011, representing a 10.9% compound annual growth rate, while the batch-immersion market is forecast to decrease slightly from just over $0.9 billion in 2005 to just under $0.9 billion in 2011. Our Solution Key attributes of our solution that we believe enable our customers to address many of the growing challenges in surface preparation include: Innovative technology. We design our systems to remove particles without damage-causing physical contact and, when appropriate, to selectively remove other unwanted materials without using aggressive chemistries that may impair the integrity of fragile materials. We believe that this ability is enabled by our use of patented single-wafer and batch-immersion megasonics technology, patent pending JetStream Nano spray technology and proprietary Sahara Dry technology, which confer important competitive advantages. Technical solutions for a variety of process steps. We offer both single-wafer and batch-immersion systems that can be configured to address substantially all of the wet cleaning steps in semiconductor device manufacturing, which can include up to 100 wet cleaning steps for the most advanced devices. Flexible product design. Our products are modular so that they can be configured for a wide variety of surface preparation applications in a number of semiconductor market segments and for 300mm or 200mm wafers without complex redesigns or modifications. This flexibility helps our customers delay equipment obsolescence and provides them with economical upgrade paths. High returns on investment. We believe that our products deliver productivity and cost of ownership benefits that address our customers focus on return on investment by satisfying their device yield, throughput and process cycle time specifications while at the same time offering a small footprint for certain systems, reduced consumables costs and consumable disposal expenses and a range of capacity and technology options. Highly reliable and repeatable systems. We believe that the reliability of our systems reduces system maintenance costs and enables efficient equipment utilization, thereby providing low total cost of ownership to our customers. In addition, our use of advanced computational tools and our process know-how and other technologies enable high repeatability, which is important from a yield perspective as processes must be tightly calibrated for effective cleaning. Our Strategy Our objective is to be the leading supplier of surface preparation systems. Key elements of our strategy to achieve this objective include: Expand relationships with existing customers. We believe that we have significant opportunities to supply additional systems to our existing customers for process steps for which they currently use our products as they expand capacity. We also believe we are well-positioned to accelerate our sales of systems for additional process steps to these customers, particularly if we continue to deliver them high-quality products and services. Amendment No. 2 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents Develop relationships with new customers. Because our technology is applicable to a wide variety of surface preparation applications in a number of market segments, we are focused on expanding our revenue base by developing relationships with semiconductor device manufacturers that have not previously purchased surface preparation systems from us. In particular, our recent acquisition of SCP gives us access to a significant number of potential new customers for our systems. Expand our addressable markets. We believe that we have many opportunities to expand the addressable markets for our surface preparation systems and technologies, including by selling our wet cleaning systems as a replacement for systems used in certain process steps not currently addressed by wet cleaning systems and by selling subsystems based on our wet cleaning technologies to other wafer fabrication equipment manufacturers. Enhance our technology position. As technological innovation and differentiation become increasingly important to success in the wet cleaning market, we intend to continue to develop new technologies and ways to extend our existing technologies to gain market share from competitors whose products are unable to meet the emerging challenges in wet cleaning. Continue to diversify our revenue base. We believe that our market diversification helps insulate us from fluctuations in demand in any particular semiconductor market segment. We expect to continue serving such diverse markets and to find additional sources of revenue in new market segments that value our core process expertise and intellectual property. Pursue additional selective acquisitions. Our acquisitions have given us the opportunity to expand our technologies, enter new markets, enhance the value we provide to our customers and otherwise strengthen our relationships with existing and potential new customers. We intend to continue to selectively pursue acquisition opportunities that we believe will enable us to further these goals on an attractive basis. Focus on producing high-quality, reliable products and providing a high level of customer service and support. We intend to continue to invest in improving the quality of our products as well as our customer service efforts so that we can deliver even greater reliability and product uptime and, accordingly, greater value to our customers. Risks Associated with Our Business Our business is subject to numerous risks and uncertainties, as more fully described under Risk Factors beginning on page 7 of this prospectus, which you should carefully consider prior to deciding to invest in our common stock. For example: we have a history of losses, and we may be unable to achieve or sustain profitability; our financial performance may fluctuate from quarter to quarter and may fall below expectations in any particular fiscal quarter, which may cause our stock price to fluctuate or decline; the cyclicality in the semiconductor industry and the semiconductor equipment industry has historically led to substantial variations in demand for our products and consequently our operating results; we depend on purchases from a small number of customers with which we do not have long-term contracts, and the loss of these customers or the cancellation, delay or reduction of orders from these customers may harm our business; if we do not continue to develop new or enhanced products that achieve market acceptance, we will not be able to compete effectively; and we may be unable to protect our intellectual property, which could negatively affect our ability to compete. Table of Contents Company Information We were formed in August 1999 under the laws of the State of Delaware as a limited liability company named Akrion LLC, and in October 1999 we purchased substantially all of the assets of SubMicron Systems Corporation in a bankruptcy sale. In August 2004, we converted from a limited liability company into a corporation named Akrion, Inc. through a merger of the limited liability company into a wholly-owned subsidiary corporation. In this prospectus, unless otherwise stated or the context otherwise requires, references to Akrion, we, us, our and similar references refer to Akrion LLC and its subsidiaries prior to August 26, 2004 and to Akrion, Inc. and its subsidiaries from and after that date. Our principal executive offices are located at 6330 Hedgewood Drive, Suite 150, Allentown, Pennsylvania 18106. Our telephone number is (610) 391-9200. Our website address is www.akrion.com. Information contained on our website or that can be accessed through our website is not a part of this prospectus, and investors should not rely on any such information in deciding whether to purchase our common stock. We have included our website address in this prospectus as an inactive textual reference only. The following terms used in this prospectus are our trademarks: GAMA , Goldfinger , Velocity , i-Clean , JetStream Nano and Sahara Dry . 6330 Hedgewood Drive, Suite 150 Allentown, Pennsylvania 18106 (610) 391-9200 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant s Principal Executive Offices) Table of Contents The Offering Common stock offered by us shares Common stock to be outstanding after this offering shares Over-allotment option shares Use of proceeds We intend to use $25 million of the net proceeds from this offering for working capital and other general corporate purposes and for possible acquisitions of complementary product lines, technologies or businesses. We intend to use the remaining net proceeds to repay outstanding debt, including debt payable to our principal stockholder, and to pay other obligations. See Use of Proceeds. Proposed Nasdaq Global Market symbol AKRI
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+PROSPECTUS SUMMARY The following summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk Factors" and our consolidated financial statements and accompanying notes. On January 26, 2006, Marquee Holdings Inc. ("Holdings"), the parent of AMC Entertainment Inc. ("AMC Entertainment"), merged with LCE Holdings, Inc. ("LCE Holdings"), the parent of Loews Cineplex Entertainment Corporation ("Loews"), with Holdings continuing after the merger, and Loews merged with and into AMC Entertainment, with AMC Entertainment continuing after the merger (collectively, the "Mergers"). As used in this prospectus, unless the context otherwise requires, references to "AMC Entertainment" or "AMCE" refer to AMC Entertainment Inc. and its subsidiaries prior to giving effect to the Mergers. Upon completion of this initial public offering, Holdings will change its name to AMC Entertainment Inc. and AMC Entertainment will change its name to AMC, Inc. Except as otherwise indicated or otherwise required by the context, references in this prospectus to "we," "us," the "combined company" or the "company" refer to the combined business of Holdings and its subsidiaries after giving effect to the Mergers. As used in this prospectus, the term "pro forma" refers to, in the case of pro forma financial information, such information after giving pro forma effect to the Merger Transactions (as defined below), the NCM Transactions (as described under "Prospectus Summary Recent Developments") and this offering. Except as stated otherwise herein, the share data set forth in this prospectus reflects a reclassification of Holdings' capital stock as more fully described under "Prospectus Summary The Reclassification." Holdings has a 52-week or 53-week fiscal year ending on the Thursday closest to April 1. Fiscal years 2002, 2004, 2005 and 2006 contained 52 weeks. Fiscal year 2003 contained 53 weeks. Who We Are We are one of the world's leading theatrical exhibition companies based on a number of characteristics, including total revenues. We were founded in 1920 and since that time have pioneered many of the industry's most important innovations, including the multiplex theatre format in the early 1960's and the North American megaplex theatre format in the mid-1990's. In addition, we have acquired some of the most respected companies in the theatrical exhibition industry, including Loews and General Cinema, and we have a demonstrated track record of successfully integrating those companies through timely theatre conversion, headcount reductions and consolidation of corporate operations. As of December 28, 2006, we owned, operated or held interests in 382 theatres with a total of 5,340 screens, approximately 87% of which were located in the United States and Canada. Our theatres are primarily located in large urban markets in which we have a strong market position relative to our competitors. We believe that we have one of the most modern and productive theatre circuits, as evidenced by our average screen per theatre count of 14.7 and our pro forma attendance per theatre of more than 680,000 patrons, both of which we believe to be substantially in excess of industry averages. For the 52 weeks ended December 28, 2006, on a pro forma basis, we had revenues of $2.4 billion, Adjusted EBITDA of $392.8 million, a loss from continuing operations of ($123.3 million) and, on a historical basis, we had net cash provided by operating activities of $139.6 million, which does not include $142.5 million of cash acquired in the Mergers. See "Summary Unaudited Pro Forma Financial and Operating Data." In the United States and Canada, as of December 28, 2006, we operated 316 theatres with 4,637 screens in 30 states, the District of Columbia and 2 Canadian provinces. We have a significant presence in most major urban "Designated Market Areas," or "DMA's" (television areas as defined by Nielsen Media Research). Our U.S. and Canada theatre circuit represented 92.6% of our revenues for the 52 weeks ended December 28, 2006 on a pro forma basis. Change of interest gain pursuant to SAB Topic 5H $ 131,481 Other expense (income) Other income (6,103 ) 1,172 (4,931 ) (7,219 ) 1,172 (6,047 ) Interest expense Corporate borrowings 30,035 30,035 60,332 60,332 Capital and financing lease obligations 1,695 (471 ) 1,224 3,380 (957 ) 2,423 Investment income (976 ) 1 (975 ) (480 ) Interest expense 1,878 598 1,560 2,056 Investment income (5 ) Comprehensive loss (41,654 ) Sale of equity to LCE management 91,948 Net periodic benefit cost Service cost $ 351 $ 198 $ 155 $ 425 Interest cost 720 404 274 691 Amortization of transition obligation 39 22 15 39 Net recognized return on plan assets (642 ) (441 ) (314 ) (683 ) Amortization of losses 12 5 *1.1 Underwriting Agreement. *2.1(a) Modified First Amended Joint Plan of Reorganization of Debtors and Official Committee of Unsecured Creditors for GC Companies, Inc. and its Jointly Administered Subsidiaries filed on March 1, 2002 with the United States Bankruptcy Court for the District of Delaware (incorporated by reference from Exhibit 2.2 to Form 8-K filed March 7, 2002). *2.1(b) Agreement and Plan of Merger, dated June 20, 2005, by and among Marquee Holdings Inc. and LCE Holdings, Inc. (incorporated by reference from Exhibit 2.1 to the Company's Form 8-K filed on June 24, 2005). *2.2 Purchase and Sale Agreement, dated as of March 9, 2002, by and among G.S. Theaters, L.L.C., a Louisiana limited liability Company, Westbank Theatres, L.L.C., a Louisiana limited liability company, Clearview Theatres, L.L.C., a Louisiana limited liability company, Houma Theater, L.L.C., a Louisiana limited liability company, Hammond Theatres, L.L.C., a Louisiana limited liability company, and American Multi- Cinema, Inc. together with Form of Indemnification Agreement (Appendix J) (incorporated by reference from Exhibit 2.1 to Form 8-K filed March 13, 2002). *2.3 Agreement and Plan of Merger, dated as of July 22, 2004 by and among Marquee Holdings Inc., Marquee Inc. and AMC Entertainment Inc. (incorporated by reference from Exhibit 2.1 to Form 8-K filed June 23, 2004). *3.1 Form of Third Amended and Restated Certificate of Incorporation of Marquee Holdings Inc. *3.2 Form of Third Amended and Restated Bylaws of Marquee Holdings Inc. *4.1(a) Credit Agreement, dated January 16, 2006 among AMC Entertainment Inc., Grupo Cinemex, S.A. de C.V., Cadena Mexicana de Exhibicion, S.A. de C.V., the Lenders and the Issuers named therein, Citicorp U.S. and Canada, Inc. and Banco Nacional de Mexico, S.A., Integrante del Groupo Financiero Banamex. (incorporated by reference from Exhibit 10.4 to the Company's Form 8-K (File No. 1-8747) filed January 31, 2006). *4.1(b) Guaranty, dated January 26, 2006 by AMC Entertainment Inc. and each of the other Guarantors party thereto, in favor of the Guaranteed Parties named therein (incorporated by reference from Exhibit 10.5 to the Company's Form 8-K (File No. 1-8747) filed January 31, 2006). *4.1(c) Pledge and Security Agreement, dated January 26, 2006, by AMC Entertainment Inc. and each of the other Grantors party thereto in favor of Citicorp U.S. and Canada, Inc., as agent for the Secured Parties (incorporated by reference from Exhibit 10.6 to the Company's Form 8-K (File No. 1-8747) filed January 31, 2006). *4.1(d) Consent and Release, dated as of April 17, 2006, by and between AMC Entertainment Inc. and Citicorp U.S. and Canada, Inc. (incorporated by reference from Exhibit 4.1(d) to the Company's Form S-4 (File No. 333-133574) filed April 27, 2006). As of December 28, 2006, our international circuit of 66 theatres with 703 screens consisted principally of wholly-owned theatres in Mexico and an unconsolidated joint venture in South America. In Mexico, we owned and operated 44 theatres with 488 screens primarily located in the Mexico City Metropolitan Area, or MCMA, through Grupo Cinemex, S.A. de C.V. and its subsidiaries (Cinemex). We believe that we have the number one market share in the MCMA with an estimated 49% of MCMA attendance through December 31, 2006. In addition, as of December 28, 2006, we participated in a 50% joint venture in South America (Hoyts General Cinema South America), which owned 17 theatres with 160 screens, and wholly-owned three theatres and 42 screens in Europe. Our wholly-owned international circuit represented 7.4% of our revenues for the 52 weeks ended December 28, 2006 on a pro forma basis. Our Competitive Strengths There are several principal characteristics of our business that we believe make us a particularly effective competitor in our industry and position us well for future growth. These include: Leading Scale and Major Market Position. We are one of the world's leading theatrical exhibition companies and enjoy geographic market diversification and leadership in major markets worldwide. We believe the breadth of our operations allows us to achieve economies of scale, providing us with competitive advantages in real estate negotiations, theatre-level operations, purchasing, theatre support and general and administrative activities. We also believe our size and scale positions us to benefit from positive industry attendance trends and revenue generating opportunities. Our theatres are generally located in large, urban markets. Traditionally, the population densities, affluence and ethnic and cultural diversity of top DMA's generate higher levels of box office per capita and greater opportunity for a broader array of film genres, all of which we believe position our circuit to benefit from the potential growth in these markets. We also believe our major-market presence makes our theatres incrementally more important to studios who rely on our markets for a disproportionate share of box office receipts. As of December 28, 2006, we operated in all but two of the Top 25 DMA's, and had the number one or two market share in 21 of the top 25 DMA's, including the number one market share in New York City, Chicago, Dallas and Boston. We also operated 25 of the top 50 theatres in the U.S. and Canada in terms of box office revenues as measured by Rentrak. Modern, Highly Productive Theatre Circuit. We are an industry leader in the development and operation of megaplex theatres, typically defined as a theatre having 14 or more screens and offering amenities to enhance the movie-going experience, such as stadium seating providing unobstructed viewing, digital sound and enhanced seat design. As of December 28, 2006, 3,320, or approximately 72%, of our screens in the U.S. and Canada were located in megaplex theatres and the average number of screens per theatre was 14.7, more than twice the industry average of 6.5, according to the National Association of Theatre Owners. We believe our megaplex theatres provide a more enjoyable experience for our patrons, in that they offer a wider selection of films and showtimes and generally are equipped with a variety of other amenities. Accordingly, we believe our high proportion of megaplex theatres provide us with better asset utilization and enhanced revenue opportunities. For the 52 weeks ended December 28, 2006, on a pro forma basis, our theatre circuit in the United States and Canada produced box office revenues per screen at rates approximately 27% higher than our closest peer competitor and 45% higher than the industry average, as measured by Rentrak. On average, our theatres do more business and serve more customers, which positions us to benefit from our highly profitable concessions operations and growth in other ancillary sources of revenue. Strong Cash Flow Generation. The combination of our major market focus and highly productive theatre circuit allows us to generate significant cash flow. For the nine months ended December 28, *4.2(a) Indenture, dated February 24, 2004, respecting AMC Entertainment Inc.'s 8% Senior Subordinated Notes due 2014. (Incorporated by reference from Exhibit 4.7 to the Company's Registration Statement on Form S-4 (File No. 333-113911) filed on March 24, 2004). *4.2(b) First Supplemental Indenture, dated December 23, 2004, respecting AMC Entertainment Inc.'s 8% Senior Subordinated Notes due 2014 (incorporated by reference from Exhibit 4.7(b) to the Company's Registration Statement on Form S-4 (File No. 333-122376) filed on January 28, 2005). *4.2(c) Second Supplemental Indenture, dated January 26, 2006, respecting AMC Entertainment Inc.'s 8% Senior Subordinated Notes due 2014 (incorporated by reference from Exhibit 4.6(c) to the Company's Form 10-Q filed on February 13, 2006). *4.2(d) Third Supplemental Indenture dated April 20, 2006, respecting AMC Entertainment Inc.'s 8% Senior Subordinated Notes due 2014 (incorporated by reference from Exhibit 4.6(d) to the Company's Form S-4 (File No. 333-133574) filed April 27, 2006). *4.3 Registration Rights Agreement, dated February 24, 2004, respecting AMC Entertainment Inc.'s 8% senior subordinated notes due 2014. (Incorporated by reference from Exhibit 4.8 to the Company's Registration Statement on Form S-4 (File No. 333-113911) filed on March 24, 2004). *4.4(a) Indenture, dated August 18, 2004, respecting AMC Entertainment Inc.'s, as successor by merger to Marquee Inc.'s, 85/8% Senior Notes due 2012 (incorporated by reference from Exhibit 4.9(a) to the Company's Registration Statement on Form S-4 (File No. 333-122376) filed on January 28, 2005). *4.4(b) First Supplemental Indenture, dated December 23, 2004, respecting AMC Entertainment Inc.'s, as successor by merger to Marquee Inc.'s, 85/8% Senior Notes due 2012 (incorporated by reference from Exhibit 4.9(b) to the Company's Registration Statement on Form S-4 (File No. 333-122376) filed on January 28, 2005). *4.4(c) Second Supplemental Indenture, dated January 26, 2006, respecting AMC Entertainment Inc.'s, as successor by merger to Marquee Inc.'s, 85/8% Senior Notes due 2012 (incorporated by reference from Exhibit 4.8(c) to the Company's Form 10-Q filed on February 13, 2006). *4.4(d) Third Supplemental Indenture dated April 20, 2006, respecting AMC Entertainment Inc.'s 85/8% Senior Notes due 2012 (incorporated by reference from Exhibit 4.8(d) to the Company's Form S-4 (File No. 333-133574) filed April 27, 2006). *4.5(a) Registration Rights Agreement dated August 18, 2004, respecting AMC Entertainment Inc.'s, as successor by merger to Marquee Inc.'s, 85/8% Senior Notes due 2012 (incorporated by reference from Exhibit 4.10(a) to the Company's Registration Statement on Form S-4 (File No. 333-122376) filed on January 28, 2005). UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 2006, our net cash provided by operating activities totaled $205.4 million. In future years, we expect to generate enough cash flow to maintain existing facilities, consistent with our high standards of quality, invest in our business when we find attractive opportunities to build or acquire theatres, service our debt, and pay dividends to our stockholders. Proven Management Team. Our senior management team has an average of approximately 24 years of experience in the theatrical exhibition industry. Our leadership team has guided our company through a number of economic and industry cycles, and has successfully integrated a number of important acquisitions while achieving immediate cost savings.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001303497_cardiovasc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001303497_cardiovasc_prospectus_summary.txt
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+PROSPECTUS SUMMARY The items in the following summary are described in more detail later in this prospectus. This summary provides an overview of selected information and does not contain all the information you should consider. Therefore, you should also read the more detailed information set out in this prospectus, including the section entitled Risk Factors and our financial statements and the related notes appearing elsewhere in this prospectus. Overview We are a biopharmaceutical company focused on developing new drugs for the treatment of cardiovascular diseases, where the growth of new blood vessels can improve the outcome for patients with these diseases. The active pharmaceutical ingredient ( API ) in our drug candidates is FGF-1141 (formerly called Cardio Vascu-Grow ) and it facilitates the growth of new blood vessels in the heart and other tissues and organs with an impaired vascular system, a process referred to in the scientific community as angiogenesis. We have never generated revenues. We are a development-stage company and are funding FDA clinical trials and preclinical studies for our product pipeline of current and potential future drug candidates. Market Opportunity According to the American Heart Association Heart Disease and Stroke Statistics 2007 Update, or AHA 2007 Update, coronary heart diseases account for more deaths than any other single cause or group of causes in the United States. The AHA 2007 Update indicates that cardiovascular disease as the underlying cause of death accounted for 36.3% of deaths in 2004 in the United States. We are now working with a team of experienced drug development scientists and business professionals to confirm the medical benefit of our drug candidate for Severe Coronary Heart Disease, CVBT-141A, with our API, in U.S. Food and Drug Administration, or FDA, authorized Phase I clinical trials which we commenced in November 2003 and completed in March 2006. A Phase II clinical protocol has been finalized with input from Kendle, Inc., the clinical contract research organization that will conduct our multi-site international Phase II trial. Presently, it is anticipated that we will handle the distribution and sale of our drug candidate in the United States and eventually, if approved, we will also handle the sale and distribution of our drug candidate in the rest of North America, Europe and Japan. In the remaining international marketplaces, if approved, we anticipate selling our drug through affiliated or unrelated regional distributors. The market for wound healing includes diabetic, bedridden and elderly patients that suffer from wounds, open sores and diabetic ulcers. According to the U.S. Healthcare Finance Administration, approximately 3 to 5 million patients a year suffer from these maladies. Annual treatment costs in the United States alone are in the range of $5-7 billion. Our investigative new drug, or IND, application to the FDA has been allowed, and the FDA has authorized us to commence a Phase I clinical trial in patients with diabetes or venous stasis ulcers, using our second drug candidate CVBT-141B. Peripheral Artery Disease, or PAD, is a disease in which the arteries of the leg become blocked, leading, in many cases, to intense pain and suffering for these patients. FGF-1141 has proven to be a potent stimulator for growing new blood vessels in affected areas of the legs of rabbits, thereby providing blood perfusion to the leg. In its most severe form, PAD can lead to extensive tissue loss and gangrene, which, for patients, particularly those suffering from diabetes, results in amputation of the limb. Though many therapies are being developed to treat PAD, there are an increasing number of limb amputations in such patients, many of whom suffer from diabetes. According to the AHA 2007 Update, there are about 8million Americans suffering from PAD. We have received authorization from the FDA to initiate a Phase I safety trial in patients with intermittent claudication, a form of PAD with our third drug candidate CVBT-141C. Research and Development Our research and development is focused on developing new drug candidates in which FGF-1141 is the API for the treatment of cardiovascular diseases, where the growth of new blood vessels can improve the outcome for patients with these diseases. We conduct research to identify and evaluate medical indications that may benefit from our drug candidates. When, in our opinion, the evidence and results of our research warrant, a potential new drug candidate is graduated from research to development. Each of our drug candidates follows a similar development pathway. Our first step is animal studies. We look for the correct biological response of drug candidates using FGF-1141 in animal models of cardiovascular disease. We also do toxicity studies where we look for any expected or unexpected side effects of our drug candidates compared to similar products on the market, if such products exist. We will then initiate our clinical development program, which commences with the submission of an IND application to the FDA. Human studies may begin once the FDA allows the IND to proceed. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents The Company works with the FDA on a case-by-case basis to determine the extent of clinical testing with each drug candidate in development. Our clinical development includes our drug candidates for Severe Coronary Heart Disease, Wound Healing (Dermal Ulcers) and Peripheral Artery Disease. Our pre-clinical development includes our drug candidates for Chronic Back Pain and Lumbar Ischemia, as well as Injection Catheter Delivery for our Severe Coronary Heart Disease drug candidate. We plan to continue our research activities in relation to possible indications where the API may show efficacy that would indicate therapeutic utility. Our Business Strategy According to the AHA 2007 Update, approximately $283 billion were spent in the U.S. on direct health care costs treating and caring for patients with cardiovascular diseases and stroke in 2006. Of this total, an estimated $47 billion was spent on medical durables. Additionally, the cost in the U.S. of lost productivity and morbidity of patients with cardiovascular diseases and stroke is estimated in this report to total approximately $149 billion. This totals an estimated $432 billion of direct and indirect costs in the U.S. associated with cardiovascular diseases and stroke in 2006. The prevalence and cost of cardiovascular disease and stroke in the U.S. is growing and far exceeds that of cancer and HIV. We believe there is a significant and growing business opportunity for new drugs that can address cardiovascular diseases and stroke. We will focus first on the growth of new blood vessels in patients with coronary heart disease. According to the AHA 2007 Update, over $9.2 billion is likely to be spent on drugs that treat coronary heart diseases in 2007. Existing treatments include open heart by-pass procedures, balloon angioplasty procedures to open blocked arteries, insertion of stents into blocked arteries and selected drugs including nitrates that dilate the coronary arteries. If the clinical trials continue to be successful, we believe that treatment with our drug candidate CVBT-141A will be able to lower the overall cost of treating coronary heart disease. This analysis reinforces our decision to make the treatment of coronary heart disease the first market for development. Our goal is to establish our drug candidates as an integral part of the treatment regimen for cardiovascular disease where the growth of new blood vessels can improve the outcome for patients with these diseases. The key elements of our strategy are to (1) obtain regulatory approval of our drug candidates, (2) maintain our source of supply of FGF-1141 through our current or other outsourced manufacturing companies, and (3) establish our marketing sales and distribution capabilities. Amendment No. 1 To FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents The Offering Common stock being offered for resale to the public by the Selling Security holders 31,533,660 shares including 2,143,345 shares previously registered. Warrants held by Mickael A. Flaa ( Flaa Warrants ) Warrant to Purchase 200,000 shares of our common stock at $2.00 per share. Warrant to Purchase 250,000 shares our common stock at $10.00 per share. Both warrants were previously registered. Total Proceeds The Company will not receive any proceeds from the resale of our common stock or the warrants pursuant to this offering. The Company will be entitled to receive up to a maximum of $9,837,497, when and if the Flaa Warrants, and warrants issued to First Dunbar Securities Corporation and the other selling security holders are exercised to purchase our common stock to be resold under this prospectus. OTC Bulletin Board Symbol CVBT.OB
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001303565_tarpon_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001303565_tarpon_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights some information contained elsewhere in the prospectus and does not contain all the information you should consider before making an investment decision. You should read this summary, together with the more detailed information, including our financial statements and the related notes, contained elsewhere in the prospectus. You should carefully consider, among other things, the risk factors discussed on page 8. This summary is not complete and does not contain all of the information you should consider before investing in our shares. You should read the entire prospectus carefully. Throughout this prospectus we refer to Tarpon Industries, Inc. and its subsidiaries as "Tarpon", the "Company", "we", "our" and "us". THE COMPANY Introduction We manufacture and sell engineered steel storage rack systems and structural and mechanical steel tubing. Our subsidiaries are Eugene Welding Co., or "EWCO," acquired in April 2004, Steelbank, Inc., or "Steelbank," acquired in May 2004, and substantially all of the assets and business of the Haines Road facility of Bolton Steel Tube Co., Ltd., in February 2005. EWCO has two manufacturing facilities in Michigan, within 80 miles north of Detroit, and Steelbank has a manufacturing facility in Mississauga, Ontario, Canada, a suburb of Toronto. We have determined to sell or liquidate the Steelbank facility by October 2007. Our executive offices are located at 2420 Wills Street, Marysville, Michigan 48040. Our telephone number is (810) 364-7421. Our e-mail address is tarponir@tarponind.com and our web site address is http://www.tarponind.com. Information accessed on or through our web site is not part of this prospectus and should not be relied upon in making any decision to invest in our shares. Our Business Strategy Our business strategy is to: o expand sales of our SpaceRak and steel tubing products, o invest in production equipment to reduce costs and increase quality, and o acquire facilities, customers and management through strategic acquisitions of steel storage rack system and steel tube manufacturers and distributors. Industry Overview The steel tubing storage rack systems and tubing industries are fragmented, with more than 100 manufacturers in the United States and Canada serving regional markets. Because of the size and weight of structural and mechanical steel tubing, costs of transportation are significant, and it is generally not cost effective to ship these products more than 800 miles from the manufacturing plant. This and customers' short lead-time requirements limit the geographic market for steel tubing manufacturers. Steel Storage Rack Systems Steel storage rack systems are generally structural steel tubing or structural beams, assembled from fabricated metal components and are welded together to form frames and beams. These standard components can be assembled to form: o selective racks, which are typically used in public and commercial warehouse applications where the ability to select palletized materials is desired, which represent a substantial majority of our steel storage rack system sales, o drive-in/through racks, which provide high-density storage of palletized long shelf life products, such as salt, o push back racks, another form of high-density storage, which provides some degree of selectivity, o cantilevered racks, which are typically used in the bulk storage of large unit items, such as lumber, plywood and drywall. o archival storage systems, which are designed to provide high density records storage, including the legal, medical and banking industries; and <PAGE> o order-picking systems, which are designed to incorporate into the rack a conveying system and multi-level mezzanine from which product can be taken off pallets and repackaged for shipment to individual store locations. These systems are used in the home center, retail distribution, public warehouse and commercial and industrial distribution markets. Engineering and system design services are involved in choosing the appropriate components for the system. Leading manufacturers of steel storage rack systems are members of the Rack Manufacturers Institute, which promulgates standards for, and certifies standard rack components. Structural and Mechanical Steel Tubing Structural steel tubing, also known as hollow structural sections or "HSS", is processed continuously from hot rolled steel coil, roll formed and welded in line using high frequency welding. The tubing is cut to length by an in-line traveling saw or shear. HSS is manufactured at EWCO in round, square and rectangular sections in sizes ranging from 1.5 inches square and round through 5 inches round and 4 inches square and associated rectangles and rounds to ASTM A500 Grade B and C specifications. HSS is used as structural members for buildings and structural frames and parts for equipment in a variety of applications and industries. Structural steel tubing provides a high strength-to-weight ratio, uniform strength, torsional rigidity, an aesthetic appearance, cost-effectiveness and recyclability. Mechanical steel tubing is typically manufactured to smaller sizes, 2 inches square and below. At EWCO mechanical tubing is produced from hot rolled pickled and oiled, cold rolled, aluminized, pre-galvanized (G-60 or G-90), and galvalume steel and galvanneal strip. These products are manufactured typically to ASTM A513 type 1 or 2 specifications. Mechanical steel tubing is manufactured from low carbon to high strength, low alloy material, for greater strength and formability. Using this type of steel allows for lighter weight products for use in automotive parts and furniture and in a variety of applications for machine and equipment parts, typically where formability, machinability and fluid conduction are required. Significant Risks ----------------- Our business is subject to substantial risk. See "Risk Factors" and the other information in this prospectus for a discussion of the factors. We have not authorized anyone to give you information or to make any presentation other than those contained in this prospectus. 5 <PAGE> THE OFFERING Common shares offered by us 30,000,000 shares, not including over- allotment Common shares presently 10,470,654 shares, not including ______ shares outstanding described below(1) Common shares to be outstanding 40,470,654 shares, not including ______ shares immediately after this described below(1) offering Use of Proceeds We expect to use the net proceeds of this offering, assuming the underwriters do not exercise their over-allotment option, primarily for the reduction of our debt, as follows: - Repayment of bridge loan debt in the principal amount of $1,700,000 plus accrued interest, of approximately $______. - Repayment of subordinated debt due to Laurus Master Fund, Ltd., of approximately $________. - Payment of accounts payable of approximately $__________. - Capital expenditure for manufacturing and finishing equipment of approximately $_______. - Working capital of approximately $_______. See "Use of Proceeds." on page _____ for additional information. American Stock Exchange Symbol TPO Risk Factors You should carefully consider the information set forth in this prospectus and, in particular, the specific factors set forth in the "Risk Factors" section beginning on page _____ of this prospectus before deciding whether or not to invest in our securities. (1) The number of shares presently outstanding and to be outstanding immediately after the public offering do not include the following: (a) an estimated _____________ common shares issuable upon the exercise of warrants, (b) 1,000,000 common shares reserved for issuance under our 2004 Stock Option Plan, of which options to purchase an aggregate of 606,000 common shares are expected to be outstanding as of the closing of this offering, (c) ________ common shares issuable upon exercise of the warrant issuable to designees of the lead underwriters in connection with this offering, and (d) 4,500,000 common shares issuable upon exercise of the underwriters' over-allotment option. 6 <PAGE> SUMMARY FINANCIAL DATA The following selected financial data as of June 30, 2007, for the six-month periods ended June 30, 2007 and for each of the three years ended December 31, 2006, 2005 and 2004 have been derived from our financial statements, which appear elsewhere in this prospectus. In the opinion of management, the interim financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for such interim periods and as of such dates. You should read the selected financial data together with the financial statements and related notes to financial statements and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. <TABLE> <CAPTION> Six Months Ended June 30, Years Ended December 31, 2007 2006 2005 2004 ---- ---- ---- ---- (Unaudited) (In thousands, except per share data) Statement of Operations Data: <S> <C> <C> <C> <C> Net Sales $ 27,227 $75,331 $60,851 $63,202 Gross profit 1,321 5,801 4,320 7,984 Interest expense, net 2,152 3,087 1,075 968 Depreciation & Amortization 387 929 939 141 Net (loss) before taxes (4,816) (9,993) (7,411) (868) Net (loss) $ (4,816) $(9,993) $(7,310) $ (868) Net (loss) per common share $ (0.66) $ (2.09) $ (1.74) $(0.71) - basic and diluted Weighted average number of 7,331 4,814 4,194 1,227 common shares outstanding </TABLE> <TABLE> <CAPTION> June 30, 2007 December 31, 2006 ------------- ----------------- (Unaudited) Balance Sheet Data ($ thousands): <S> <C> <C> Cash and cash equivalents $ 669 $ 1,376 Working capital (11,861) (9,847) Total assets 18,891 24,116 Long-term debt, net of current portion 60 3 Accumulated deficit (25,530) (20,714) Shareholders' deficit $ (5,624) $(3,427) </TABLE> 7 <PAGE>
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001304623_aca_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001304623_aca_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary highlights information contained elsewhere, or incorporated by reference, in this prospectus and may not contain all of the information that may be important to you. You should read all of the information contained in or incorporated by reference in this prospectus, including the consolidated financial statements and related notes and the risks of investing in our common stock discussed under "Risks Relating to Our Business and this Offering" beginning on page 6 and "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2006, before making an investment decision. OUR BUSINESS ACA Capital is a holding company that provides financial guaranty insurance products to participants in the global credit derivatives markets, structured finance capital markets and public finance capital markets. We also provide asset management services to specific segments of the structured finance capital markets. We participate in our target markets both as a provider of credit protection through the sale of financial guaranty insurance products, for risk-based revenues, and as an asset manager, for fee-based revenues. Our business model seeks to combine the operational leverage of our core credit and asset management capabilities with the financial leverage provided by our "A" rated financial guaranty insurance platform. As of March 31, 2007, we had insured credit exposure of $57.0 billion and our assets under management for third parties were $16.3 billion. For the three months ended March 31, 2007, we had total revenues of $115.8 million and net income of $11.4 million. For the year ended December 31, 2006, we had total revenues of $464.1 million and net income of $58.7 million. As of March 31, 2007, our stockholders' equity was $424.7 million. Our core competency is selecting, analyzing, structuring and managing credit risk in a variety of fixed income financial asset classes, including investment grade and non-investment grade corporate obligations (including bonds and loans), asset-backed securities, or ABS (including mortgage-backed securities, or MBS, and other asset classes) and public finance and other debt obligations. Throughout our businesses we generally assume credit risk to the scheduled maturity of the underlying credit, including credit risks that are of low investment grade quality or high non-investment grade. We apply a rigorous underwriting and credit process to analyze each transaction and its incremental effect on our existing credit portfolio, and have adopted a risk management approach which is designed to ensure that the risk profile of a given credit or transaction meets our credit, profitability and loss tolerance standards. We operate our businesses through three strategic business lines, which consist of our two financial guaranty insurance lines of business, Structured Credit and Public Finance, and our CDO Asset Management business. Each of these businesses relies on our core competencies and applying these competencies across our platform allows us to create efficiencies in our operations and to deliver a wide range of services and product solutions to our institutional customers. In 2006, we opened offices in London and Singapore to further expand our operations into the European and Asian credit markets. Financial Guaranty Insurance Lines of Business Structured Credit: As a part of our financial guaranty insurance business, we apply our substantial experience in credit analysis to select, structure and sell credit protection, principally on highly rated exposures, through insured credit swaps in the institutional fixed income markets. A credit swap is a derivative instrument, the performance of which is directly related to the performance of an underlying financial obligation, or reference obligation, such as a bond or a loan, issued by a third party, or reference entity. Credit swaps are capital markets products used to manage or transfer credit risk and are freely tradable separately from the obligations of the underlying reference entity. We execute our credit swaps through special purpose vehicles whose obligations under these swaps are insured by ACA Financial Guaranty Corporation. Although ACA Financial Guaranty's "A" rating ("strong," the sixth highest of 21 rating levels) by Standard & Poor's Rating Services, or S&P, affords our Structured Credit business significant flexibility to offer credit protection on any portion of a given capital structure, historically, we have generally sold credit protection through insured credit swaps on exposures attaching above the "AAA" rated level of subordination associated with pools of assets that were either selected by us or held within CDOs of financial assets managed by third parties. The financial assets underlying our insured credit swaps principally include corporate credits, ABS and MBS. We generate revenues in our Structured Credit business through the premiums paid to ACA Financial Guaranty to insure against the risk of default on the assets underlying our credit swaps. We executed our first Structured Credit transaction in July 2002 and in 2006 we expanded into the Asian credit markets through our Singapore office. As of March 31, 2007, we had 185 Structured Credit transactions outstanding with 31 different counterparties. The 185 transactions totaled $50.2 billion in insured credit swaps. The weighted average premium rate on our then current insured Structured Credit portfolio was 0.16% per annum. Public Finance: We provide financial guaranty insurance on public finance and other debt obligations that guarantee to the investor the timely payment of interest and principal on such obligations. Through our "A" rated financial guaranty insurance subsidiary, we target low investment grade, high non-investment grade and unrated sectors of the public finance market that, based on our analysis, have strong credit profiles and security, or other enhancements. Our market segment is underserved by higher rated financial guarantors due to rating agency limitations and company specific risk policy constraints. We also target markets that are underserved by reason of industry sector, credit characteristics or transaction size. ACA Financial Guaranty is licensed to provide financial guaranty insurance in all 50 states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands. The maintenance of our financial guaranty insurance subsidiary also provides us with significant execution flexibility that we utilize across our other business lines. We generate revenue in our Public Finance business through the receipt of premiums for the insurance we provide. As of March 31, 2007, we had $6.2 billion of net par insured in our Public Finance portfolio. As of March 31, 2007, our weighted average premium as a percentage of total debt service on our insured Public Finance portfolio was 2.51%. Other Financial Services CDO Asset Management: We apply our core competencies of evaluating and managing credit risk for fees in our CDO Asset Management line of business. Specifically, we serve as an asset manager of collateralized debt obligations, or CDOs, for the benefit of the third party investors in these CDOs. A CDO is a securitization of fixed income assets such as bonds, loans, ABS, MBS and credit swaps. To grow our assets under management, we sponsor CDOs that acquire pools of fixed-income assets that we select and manage. This growth is augmented by our diversification across asset classes and our geographical expansion of this line of business into the European markets through our London office. CDO assets are funded by the issuance of various liabilities with credit profiles ranging from "AAA" rated debt to non-rated equity. Our CDOs have a diverse worldwide institutional investor base that includes banks, money managers, non-bank financial institutions, hedge funds, pension funds and insurance companies. Our CDO Asset Management revenues consist of asset management fees and risk-based revenue in the form of return on our equity investments in our CDOs. Typically, we invest in some portion of the equity of our managed CDOs, currently targeting 10% of the total equity offered. These investments increase the marketability of our CDOs by aligning our interests as asset manager with those of our CDO investors and thereby maximizing our CDO assets under management. In 2006 and UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 the first three months of 2007, we invested a total of $10.0 million in the equity of our CDOs while increasing our assets under management by $7.7 billion. We completed our first CDO in January 2002 and, as of March 31, 2007, we managed CDO assets in 24 CDOs and have grown our CDO assets under management from $2.4 billion as of year-end 2002 to $16.3 billion as of March 31, 2007. At March 31, 2007, our weighted average asset management fee was 0.24% per annum on CDO assets under our management. Based on our knowledge of the market, we believe we are one of the largest global CDO managers as ranked by assets under management. Growth in Our Markets Our three business lines focus on segments of the credit markets that have experienced rapid growth and/or represent large markets which remain underserved by traditional providers of credit protection products. Our Structured Credit business has benefited from the high rate of growth in the number of transactions and market participants, including banks, broker/dealers, hedge funds and other institutional investors, in the global credit derivatives markets. The total notional outstanding of the credit swaps market has grown from approximately $918.9 billion in 2001 to approximately $34.4 trillion through the end of 2006, representing a compound annual growth rate of 106% during this period. Within our Public Finance business we benefit from being the only "A" rated financial guarantor focused on markets that are large and underserved. The total amount of new low investment grade, high non-investment grade and non-rated municipal issues in 2006, excluding the sectors of the public finance market in which we currently do not participate based on our underwriting criteria, was $38.9 billion, of which we had a 1.6% overall market penetration. Our CDO Asset Management products are designed to serve investors' growing demand for structured products. New issue funded CDO volume in the U.S. and European markets increased from $94.4 billion at December 31, 1998 to $603.5 billion at December 31, 2006, representing a compound annual growth rate of 26% during this period. Competitive Strengths We believe that the following competitive strengths enable us to capitalize on opportunities to assume credit exposures through our "A" rated insurance company on select opportunities that meet our risk-adjusted return objectives and to grow our assets under management. Extensive credit and risk management expertise. We have a proven track record in each of our principal business lines of strong and successful credit analysis and risk management as evidenced by our low loss experience. We apply a rigorous underwriting and credit process to analyze each transaction and its incremental effect on our existing risk portfolio and also employ sophisticated qualitative and quantitative institutional risk management systems to monitor and manage our exposure across our business lines and in our investment portfolios. In our Structured Credit business, we use proprietary quantitative models to analyze and optimize risk positions in terms of capital usage and risk-adjusted returns. We have significant competence in understanding and assessing relative values between transactional opportunities. Since the establishment of this business line in July 2002, we have made no payments in respect of defaults under our insured credit swaps. In our Public Finance business, we have a seasoned underwriting team with substantial experience in our target markets. Since our inception in September 1997, we have paid $5.2 million of net losses and loss adjustment expenses, which represents less than 1.7% of premiums written on our total Public Finance portfolio. In our CDO Asset Management business, our strength lies in our asset selection expertise and ongoing management of individual credits included in our CDOs. Since the completion of our FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 first CDO in January 2002, we have not experienced any adverse rating actions or downgrades on any of the debt securities issued by our CDOs. As a part of our credit analysis fundamental to each of our lines of business, we have adopted formalized underwriting and risk management policies and procedures. These policies and procedures are designed to ensure that the risk profile of a given credit is consistent with our credit standards and that the related transaction affords us adequate profitability and is otherwise appropriate for our portfolio. Our credit assessment, underwriting, risk management and surveillance processes across all of our business lines are designed to limit loss frequency and severity, though we do anticipate some cyclical and idiosyncratic credit event loss activity across our portfolio of credit exposures. Consequently, we place significant emphasis on managing loss severity should losses occur. Operating flexibility and counterparty security from our insurance subsidiary's "A" financial strength rating. Our insurance subsidiary's "A" financial strength rating enables us to achieve an optimal balance between providing broad operating flexibility for us and providing security for our counterparties and investors in our Structured Credit and Public Finance businesses. Structured Credit. Our "A" rating affords our Structured Credit business significant flexibility to offer credit protection through our financial guaranty insurance products on any portion of a given capital structure, from "AAA" equivalent exposures through equity, and on a diverse mix of asset classes, as compared to other market participants with higher credit ratings or more limited operating platforms. Though our "A" rating generally eliminates the need to post security on performing transactions, we have the flexibility, unlike other higher rated entities, to post collateral to secure our transactions, primarily in the event we experience a corporate credit event such as a downgrade of ACA Financial Guaranty to below an "A-" financial strength rating. Our willingness to provide such security, combined with our "A" rated platform, enhances counterparties' willingness to transact with us. Public Finance. As the only "A" rated financial guarantor in the public finance business, our insurance subsidiary is not only able to guarantee the obligations of lower investment grade issuers, but is the only financial guaranty insurer able to offer significant capacity to non-investment grade and unrated public finance credits. In the public finance market, our financial guaranty insurance platform allows us to issue policies for the life of the insured exposure, a significant advantage versus bank letter of credit competition in that market. Diverse revenue sources. Our three business lines provide diverse revenue sources, both risk- and fee-based, from three distinct segments of the credit markets. The Structured Credit business provides risk-based revenue and attractive risk-adjusted returns on capital. The Public Finance business generally receives premiums up-front which provide current year cash flow and a predictable stream of longer term revenues as the unearned premiums are recognized as income over the typically 30-year life of the guaranteed obligation. We also earn interest income on ACA Financial Guaranty's investment portfolio, which had invested assets of $658.5 million as of March 31, 2007. The CDO Asset Management business provides a stable and growing source of fee income based on assets under management. We also receive fees related to the origination of CDOs and a return on our equity investments in our CDOs. A significant portion of such revenues is included as investment income in our financial statements since some of our earlier CDOs are consolidated under accounting principles generally accepted in the United States of America, or U.S. GAAP. Efficient and scalable operations. Our credit analysis, transaction structuring and risk management expertise, together with our quantitative analytical capability and infrastructure of information technology, accounting, legal and other professionals with significant experience in our businesses, allows us to easily and quickly grow our assets under management and expand into new credit-based product lines without incurring significant additional costs. ACA Capital Holdings, Inc. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 6351 (Primary Standard Industrial Classification Code Number) 75-3170112 (I.R.S. Employer Identification Number) 140 Broadway New York, New York 10005 (212) 375-2000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Nora J. Dahlman, Esq. Senior Managing Director, General Counsel ACA Capital Holdings, Inc. 140 Broadway New York, New York 10005 (212) 375-2000 (Name, address, including zip code, and telephone number, including area code, of agent for service) Management team with significant industry and operating experience. Our senior executive management team has an average of over 20 years of industry experience in fixed income analysis, finance, investment banking, and financial guaranty insurance and reinsurance. Additionally, our Board of Directors consists of members with substantial experience in the financial services industry. Business Strategy Our business strategy is to continue to leverage our credit management expertise to generate attractive risk-adjusted returns on our capital in our financial guaranty insurance lines of business through the insurance of targeted credit exposure and to grow our assets under management. We plan to achieve these objectives through the following strategies: Grow our insured credit exposure and assets under management. We have significantly increased our insured credit exposure and assets under management, and intend to continue to grow our financial guaranty insurance Structured Credit and Public Finance businesses and CDO Asset Management business, in terms of number of transactions, size of transactions, as well as the types of asset classes that we insure and manage. For example, in the first three months of 2007, we insured additional credit exposure in our Structured Credit portfolio of $10.8 billion and in our CDO Asset Management line of business we closed our first European leveraged loan CDO, or CLO, in the second quarter of 2007. We have also expanded our Structured Credit and CDO Asset Management businesses internationally. Target the most attractive risk-adjusted returns in the credit markets. In our financial guaranty insurance business lines, we target those segments of the markets that we believe offer enhanced economic returns. In our Structured Credit business, we currently focus on selling credit protection through our insurance products on layers of exposure attaching above the "AAA" rated level of subordination, which we believe currently offers the most favorable risk-adjusted returns. However, we have the operating flexibility to assume credit exposures throughout the entire capital structure based on our relative value view of risk and return under changing market conditions. In our Public Finance business, we will continue to increase penetration in our target markets which we believe offer attractive risk-adjusted returns. Expand our existing products into broader geographical areas, asset classes and credit profiles and develop new credit product areas. Our ability to expand existing products into broader geographic areas, asset classes and credit profiles is a function of the flexibility of our execution alternatives and "A" rating of ACA Financial Guaranty. By using our execution alternatives (insurance policies, insured credit swaps and cash), alone or in combination, we can assume credit exposure in various markets and access opportunities when they emerge. In our Structured Credit business we will continue developing our credit expertise as the credit swap markets continue to evolve. In our Public Finance business, we plan to utilize our expertise in financing public health care, transportation, student housing, and similar revenue-based projects to expand our business into broader financing opportunities for enterprises, tax-exempt or otherwise. Expand counterparty and other key relationships for our insurance lines of business. Our Structured Credit business is dependent upon our developing and maintaining strong business relationships with other financial institutions that act as counterparties in insured credit swap transactions. We have substantially increased our relationships in recent years, increasing our Structured Credit counterparties to 31 at March 31, 2007, and will continue to focus on building new counterparty relationships. In our Public Finance business, we intend to strengthen our marketing efforts and expand our relationships with the investment banks and financial advisors most responsible for producing transactions in our target markets. Sustain the operating flexibility of an "A" financial strength rating for our financial guaranty insurance subsidiary. We believe an "A" rating for our insurance subsidiary is optimal for maximizing our Copies to: Valerie Ford Jacob, Esq. Stuart H. Gelfond, Esq. Fried, Frank, Harris, Shriver & Jacobson LLP One New York Plaza New York, New York 10004 (212) 859-8000 Ethan T. James, Esq. Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 (212) 450-4000 strategic business opportunities. Our objective is to maintain capital adequacy in excess of S&P's requirements for "A" rated insurers so that we have excess rating agency capital to absorb unforeseen losses but to otherwise operate in a manner consistent with the greater operating flexibility afforded to us due to our "A" rating by S&P, which is not afforded higher rated insurers. Risks Relating to Our Business and this Offering We face certain risk factors that could materially affect our business, results of operations or financial condition, which include: Failure to effectively analyze credit and other risks. Our ability to analyze and manage credit risk is at the core of each of our business lines. All of our business lines will be materially impacted if we fail to do this effectively. Concentration of liabilities and investments. While we seek diversification across our businesses, in each of our business lines and in our investment portfolios, we face risks to the extent that our aggregate exposure to losses is concentrated geographically, by industry, sector, obligor or type of credit or investment. In the event that a particular industry or region experiences an economic downturn or natural disaster, or we are over-exposed to a business or product type that experiences a credit event, our performance may be materially negatively impacted. General economic and capital markets factors. Our business is impacted by general economic conditions and capital markets activities that affect demand for our products, including the potential negative impact of recessions and business failures as well as any tightening of credit spreads. Possibility of negative ratings action. If S&P places ACA Financial Guaranty on CreditWatch or downgrades its financial strength rating, it could have a material adverse effect on our ability to compete and on our results of operations. Adequacy of loss reserves. We establish estimated liabilities, or loss reserves, to reflect the estimated cost of claims incurred that we will ultimately be required to pay in respect of the financial guaranty insurance we have written. If our loss reserves at any time are determined to be inadequate, we would be required to increase loss reserves at the time of such determination. This could cause a material increase in our liabilities and a reduction in our profitability, or possibly an operating loss and reduction of capital. Risks Relating to this Offering. Future sales of additional shares into the market may depress the market price of our common stock. Also, the price of our common stock may fluctuate and you could lose all or a significant part of your investment. For more information about these and other risks relating to our Company and this offering, please see "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2006, which is incorporated by reference in this prospectus. You should carefully consider these risk factors together with all the other information included in or incorporated by reference into this prospectus. Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the registration statement for the same offering . ADDITIONAL INFORMATION ACA Capital is a Delaware corporation formed in 1997. Our principal subsidiary through which we currently operate our business is ACA Financial Guaranty Corporation, our "A" rated insurance subsidiary that is organized in the State of Maryland. ACA Service, L.L.C., a wholly-owned direct subsidiary of ACA Financial Guaranty, is a Delaware limited liability company that owns the majority of the special purpose entities through which we execute our insured credit swaps. ACA Financial Guaranty insures the obligations of the special purpose vehicles in our Structured Credit line of business. Our CDO Asset Management services are conducted through ACA Management, L.L.C., also a wholly-owned indirect subsidiary of ACA Financial Guaranty, and ACA Capital Management (U.K.) Pte. Limited, a wholly-owned indirect subsidiary of ACA Capital. ACA Management, L.L.C. is a Delaware limited liability company. ACA Management, L.L.C. is registered with the Securities and Exchange Commission as an investment adviser. ACA Capital Management (U.K.), a United Kingdom private limited company, became authorized and regulated by the Financial Services Authority ("FSA") as an investment manager in January 2007. In addition to our three operating businesses, we have a fourth line of business that includes insurance products in which we no longer write new business. Our principal executive office is located at 140 Broadway, New York, New York 10005 and our telephone number is (212) 375-2000. We maintain a website at www.aca.com. Information on our website is not a part of this prospectus. CALCULATION OF REGISTRATION FEE (in thousands, except per share amounts) Statement of Operations Data(a): Gross premiums written $ 53,350 $ 60,981 $ 44,570 $ 41,280 $ 31,322 $ 4,788 $ 5,041 Net premiums written $ 45,520 $ 57,516 $ 45,481 $ 41,918 $ 30,817 $ 4,663 $ 4,910 Premiums earned $ 12,062 $ 18,796 $ 29,833 $ 33,343 $ 28,699 $ 4,882 $ 5,149 Net insured credit swap revenue 1,557 6,841 16,018 21,571 57,602 14,180 3,699 Net investment income 20,269 52,868 126,170 254,591 338,166 77,712 89,920 Net realized gains (losses) on investments 4,138 3,188 (6,547 ) (2,777 ) (4,034 ) (1,967 ) (3,708 ) Net realized and unrealized gains (losses) on derivative instruments (25,092 ) 9,124 6,520 8,410 8,559 3,642 2,080 Other net credit swap revenue 4,975 12,121 10,990 4,157 10,106 2,913 12,306 Fee income 4,236 8,898 6,091 11,110 24,495 4,118 6,332 Other income 676 423 3,937 189 522 51 56 Total revenues 22,821 112,259 193,012 330,594 464,115 105,531 115,834 Loss and loss adjustment expenses 1,801 3,168 46,590 14,038 8,800 2,021 1,373 Policy acquisition costs 4,046 4,077 3,835 8,652 8,740 1,392 1,477 Other operating expenses 18,683 29,466 38,645 37,443 49,436 10,613 16,153 Interest expense 9,869 39,260 101,137 214,313 291,757 66,419 76,408 Depreciation and amortization 1,081 4,115 6,935 8,583 9,556 2,492 2,259 Total expenses 35,480 80,086 197,142 283,029 368,289 82,937 97,670 (Income) loss of minority interest 476 (3,708 ) (4,038 ) (1,155 ) (879 ) Income (loss) before provision (benefit) for income taxes (12,659 ) 32,173 (3,654 ) 43,857 91,788 21,439 17,285 Provision (benefit) for income taxes (6,318 ) 12,206 135 15,097 33,080 7,292 5,868 Net income (loss) $ (6,341 ) $ 19,967 $ (3,789 ) $ 28,760 $ 58,708 $ 14,147 $ 11,417 Share and Per Share Data(b): Earnings (loss) per share Basic $ (1.01 ) $ 3.18 $ (0.61 ) $ 1.26 $ 2.38 $ 0.62 $ 0.31 Diluted $ (1.01 ) $ 1.51 $ (0.61 ) $ 0.96 $ 1.89 $ 0.47 $ 0.31 Weighted average number of shares of common stock outstanding Basic 6,282 6,270 6,168 22,794 24,694 22,806 36,540 Diluted 6,282 13,260 6,168 29,886 31,032 30,044 37,120 Book value per share(c) $ 12.42 $ 15.04 $ 12.38 $ 13.04 $ 13.96 $ 13.67 $ 11.62 Title of Each Class of Securities to be Registered Amount to be Registered(1) Proposed Maximum Offering Price Per Unit(2) Proposed Maximum Offering Price(2) Amount of Registration Fee (a)Under U.S. GAAP, we are required to consolidate into our financial statements the income, expense, assets and liabilities related to certain of our CDOs when we are deemed to be the primary beneficiary of the CDO vehicle. Although these CDOs are consolidated, we do not have the right to use the assets of the CDOs for general operations or in satisfaction of our corporate debt obligations. Our investment exposure to our CDOs is therefore limited to the equity we retain, which is the first loss position of the CDO. For a description of the impact of consolidation on our financial statements, see "Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies and Estimates Consolidation of Variable Interest Entities (VIEs) and Other Restricted Investments" and "Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations CDO Asset Management Supplementary Information" included in our Annual Report on Form 10-K for the year ended December 31, 2006 and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007, which are incorporated by reference in this prospectus. (b)Earnings per share and weighted average number of shares of common stock outstanding were restated to reflect the 6-for-1 stock split that was completed on August 23, 2006. (c)Book value per share is based on total stockholders' equity divided by basic common stock outstanding after giving effect to the August 23, 2006 stock split and gives effect to the conversion of our convertible preferred stock, senior convertible preferred stock and series B senior convertible preferred stock on a post-conversion basis. (d)Includes cash and cash equivalents related to our consolidated CDOs of $6.1 million, $109.6 million, $141.3 million, $125.2 million, $265.0 million and $333.9 million as of December 31, 2002, 2003, 2004, 2005 and 2006 and March 31, 2007, respectively. Also includes restricted cash balances of $22.0 million, $30.9 million, $30.1 million, $50.2 million, $67.1 million and $70.2 million as of December 31, 2002, 2003, 2004, 2005 and 2006 and March 31, 2007, respectively. Restricted cash balances relate to cash on deposit for the benefit of various counterparties in our CDO Asset Management and Structured Credit businesses. (e)Includes investments related to our consolidated CDOs of $382.7 million, $2,711.4 million, $4,732.2 million, $4,810.9 million, $4,536.7 million and $4,328.2 million and a guaranteed investment contract related to our consolidated CDOs of $122.5 million, $122.5 million, $122.6 million, $119.3 million, $119.3 million and $119.3 million both as of December 31, 2002, 2003, 2004, 2005 and 2006 and March 31, 2007, respectively. Includes non-recourse debt related to our consolidated CDOs of $494.5 million, $2,804.8 million, $4,728.6 million, $4,833.2 million, $4,711.8 million and $4,683.4 million as of December 31, 2002, 2003, 2004, 2005 and 2006 and March 31, 2007, respectively. (f)Equal to the amount of notional and net par outstanding guaranteed by ACA Financial Guaranty. (g)This information is not derived from our audited consolidated financial statements or unaudited interim consolidated financial statements. (h)Under statutory accounting practices, or SAP, prescribed or permitted by the Maryland Insurance Administration, we are required to establish contingency reserves based on a specified percentage of either written premiums or insured exposure by bond type. A contingency reserve is an additional liability reserve established to protect the policyholder against the effects of adverse economic developments or cycles or other unforeseen circumstances. (i)Qualified statutory capital, comprised of the sum of policyholders' surplus and contingency reserve, is a commonly used measure of statutory based equity in the financial guaranty industry. Common Stock, $0.10 par value per share 4,536,143 $14.63 $66,363,772 $2,037.37
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+Prospectus Summary 1
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+This summary highlights material information appearing elsewhere in this prospectus. You should read the entire prospectus carefully. This prospectus contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in "Risk Factors" and elsewhere in this prospectus. All references to a particular fiscal year of Visant Corporation, or Visant, are to the four fiscal quarters ended the Saturday nearest to December 31. Our Company In this document, references to the "Company," "Visant," "we," "our," or "us" refer to Visant Corporation and its consolidated subsidiaries, and references to "Visant Holding," "Holdings," "our parent" and "our parent company" refer to our indirect parent, Visant Holding Corp. Visant Corporation operates Jostens, Inc. and its subsidiaries ("Jostens"), Von Hoffmann Holdings Inc. and its subsidiaries ("Von Hoffmann"), AHC I Acquisition Corp. and its subsidiaries ("Arcade"), Dixon Direct Corp. ("Dixon") and Neff Holding Company and its subsidiary ("Neff"). We are a leading marketing and publishing services enterprise servicing the school affinity, direct marketing, fragrance and cosmetics sampling and educational publishing markets. We were formed through the October 2004 consolidation of Jostens, Von Hoffmann and Arcade. On June 8, 2006, we entered into definitive agreements to sell our Jostens Photography businesses, which previously comprised a reportable segment. The transactions closed on June 30, 2006. The discontinued operations of the Jostens Photography businesses are excluded from the consolidated financial statements retrospective from the date of disposition. On June 16, 2006, we acquired, through a wholly owned subsidiary, substantially all of the assets and assumed certain liabilities of the Dixon Web operation of the Sleepeck Printing Company, a provider of innovative marketing services and products located in Dixon, Illinois. At the time of acquisition, the name of the business was changed to Dixon Direct Corp. The results of Dixon's operations have been included in the consolidated financial statements since that date. On September 8, 2006, a newly formed subsidiary of ours acquired substantially all of the assets and assumed certain liabilities of the Vertis, Inc. fragrance sampling business. The acquired business currently operates under the Arcade Marketing name. The acquisition was a strategic step to continue to expand our Marketing and Publishing Services segment, which services the fragrance, cosmetic, personal care and other consumer product market segments. The results of these acquired operations have been included in the consolidated financial statements since that date. As of December 2006, our Von Hoffmann Holdings Inc., Von Hoffmann Corporation and Anthology, Inc. businesses were held as assets for sale. On January 3, 2007, we entered into a Stock Purchase Agreement (the "Von Hoffmann Stock Purchase Agreement") with R.R. Donnelley & Sons Company providing for the sale of Von Hoffmann Holdings Inc., Von Hoffmann Corporation and Anthology, Inc., which previously comprised the Educational Textbook segment and a portion of the Marketing and Publishing Services segment. The regulatory review of the proposed transaction through a second request by the Federal Trade Commission has been completed, and we expect to close the transaction on or about May 16, 2007. The operations of the Von Hoffmann businesses are reported as discontinued operations in the consolidated financial statements for all periods presented. On March 16, 2007, we acquired all of the outstanding capital stock of Neff Holding Company and its wholly owned subsidiary Neff Motivation, Inc. Neff is a leading single source provider of custom award programs and apparel, including chenille letters and letter jackets, to the scholastic market segment. Neff operates as a direct subsidiary of Visant under the Neff brand name and its results will KKR and related funds(2). 2,664,356 44.6 % 1 (3) 100.0 % DLJMBP III and related funds(4) 2,664,357 44.6 % David F. Burgstahler(4)(8) 2,666,438 44.6 % Alexander Navab(2)(8) 2,666,437 44.6 % 1 (3) 100.0 % Tagar C. Olson(2)(8) 2,666,437 44.6 % 1 (3) 100.0 % Charles P. Pieper(4)(8) 2,666,438 44.6 % George M.C. Fisher(2)(5)(6) 4,163 * Marc L. Reisch(7)(8)(10) 115,989 1.9 % Marie D. Hlavaty(7)(8) 15,608 * Paul B. Carousso(7)(8) 7,805 * Michael L. Bailey(7)(8) 38,004 * John Van Horn(7)(9) 5,203 * Directors and officers (13 persons) as a group(2)(4)(5)(6)(8)(9)(10) 5,540,045 90.8 % Balance January 1, 2005 Balance December 30, 2006 (In thousands) Service cost $ 6,603 $ 8,016 Interest cost 14,989 14,901 Expected return on plan assets (22,611 ) (21,255 ) Amortization of prior year service cost (478 ) 53 Amortization of net actuarial loss 3 WHERE YOU CAN FIND MORE INFORMATION We and our guarantor subsidiaries have filed with the Securities and Exchange Commission, or the SEC, a registration statement on Form S-1 under the Securities Act with respect to the notes being offered hereby. This prospectus, which forms a part of the registration statement, does not contain all of the information set forth in the registration statement. For further information with respect to us and the notes, reference is made to the registration statement. Statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete. We and our guarantor subsidiaries are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith, file reports and other information with the SEC. The registration statement, such reports and other information can be read and copied at the Public Reference Room of the SEC located at 100 F Street, N.E., Washington D.C. 20549. Copies of such materials, including copies of all or any portion of the registration statement, can be obtained from the Public Reference Room of the SEC at prescribed rates. You can call the SEC at 1-800-SEC-0330 to obtain information on the operation of the Public Reference Room. Such materials may also be accessed electronically by means of the SEC's home page on the Internet (http://www.sec.gov). So long as we and our guarantor subsidiaries are subject to the periodic reporting requirements of the Exchange Act, we and our guarantor subsidiaries are required to furnish the information required to be filed with the SEC to the trustee and the holders of the outstanding notes. We and our guarantor subsidiaries have agreed that, even if we and our guarantor subsidiaries are not required under the Exchange Act to furnish such information to the SEC, we will nonetheless continue to furnish information that would be required to be furnished by us and our guarantor subsidiaries by Sections 13 or 15(d) of the Exchange Act. be reported from the date of acquisition together with the results of the Jostens scholastic operations as the renamed Scholastic segment. Our three reportable segments as of December 30, 2006 consisted of: Jostens Scholastic provides services related to the marketing, sale and production of class rings, graduation products and other scholastic products; Jostens Yearbook provides services related to the publication, marketing, sale and production of school yearbooks; and Marketing and Publishing Services produces multi-sensory and interactive advertising sampling systems, primarily for the fragrance, cosmetics and personal care market segments, and provides innovative products and services to the direct marketing sector. The group also produces book covers and other components for educational publishers. Jostens Jostens is a leading provider of school-related affinity products and services that help people celebrate important moments, recognize achievements and build affiliation. Founded in 1897, Jostens has a history of providing quality products, which has enabled it to develop long-standing relationships with school administrators throughout the country. Jostens' high degree of customer satisfaction translates into annual retention rates of over 90% in its major product lines. Jostens' products and services are predominantly offered to North American high school and college students, through a national network of primarily independent sales representatives and associates. Jostens' operations are reported in two segments: (1) Scholastic and (2) Yearbook. Scholastic. Jostens is one of the leading providers of services related to the marketing, sale and production of class rings and an array of graduation products, such as caps, gowns, diplomas and announcements and graduation-related accessories. In the Scholastic segment, Jostens primarily serves U.S. high schools, colleges, universities and other specialty markets, marketing and selling its products to students and administrators through independent sales representatives. Jostens provides a high level of customer service in the marketing and sale of class rings and certain other graduation products, which often involves a high degree of customization. Jostens also provides ongoing warranty service on its class and affiliation rings. Jostens maintains product-specific tooling as well as a library of school logos and mascots that can be used repeatedly for specific school accounts over time. In addition to its class ring offerings, Jostens also designs, manufactures, markets and sells championship rings for professional sports and affinity rings for a variety of specialty markets. Yearbook. Jostens is one of the leading providers of services related to the publication, marketing, sale and production of yearbooks, primarily serving U.S. high schools, colleges, universities and middle schools. Jostens generates the majority of its revenues from high school accounts. Jostens' sales representatives and technical support employees assist students and faculty advisers with the planning and layout of yearbooks, including through the provision of on-line layout and editorial tools to assist in the publication of the yearbook. With a new class of students each year and periodic faculty advisor turnover, Jostens' independent sales representatives and customer service employees are the main point of continuity for the yearbook production process on a year-to-year basis. Marketing and Publishing Services The Marketing and Publishing Services segment produces multi-sensory and interactive advertising sampling systems, primarily for the fragrance, cosmetics and personal care market segment, and innovative, highly personalized products primarily targeted at the direct marketing sector. We are also a leading producer of supplemental materials and related components such as decorative covers and UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 plastic transparencies for educational publishers. With over a 100-year history as Arcade Marketing, we pioneered our ScentStrip product in 1980. We also offer an extensive portfolio of proprietary, patented and patent-pending technologies that can be incorporated into various marketing programs designed to reach the consumer at home or in-store, including magazine and catalog inserts, remittance envelopes, statement enclosures, blow-ins, direct mail, direct sell and point-of-sale materials and gift-with-purchase/purchase-with-purchase programs. We specialize in high-quality, in-line finished products and can accommodate large marketing projects with a wide range of dimensional products and in-line finishing production, data processing and mailing services. Our personalized imaging capabilities offer individualized messages to each recipient within a geographical area or demographic group for targeted marketing efforts. Company Background On October 4, 2004, an affiliate of Kohlberg Kravis Roberts & Co. L.P., or KKR, and affiliates of DLJ Merchant Banking Partners III, L.P., or DLJMBP III (together with KKR, the "Sponsors"), completed a series of transactions, which created a marketing and publishing services enterprise servicing the school affinity, direct marketing, fragrance and cosmetics sampling and educational publishing market segments through the consolidation of Jostens, Von Hoffmann and Arcade (the "Transactions"). Prior to the Transactions, Von Hoffmann and Arcade were each controlled by affiliates of DLJ Merchant Banking Partners II, L.P., or DLJMBP II, and DLJMBP III owned approximately 82.5% of our outstanding equity, with the remainder held by other co-investors and certain members of management. Upon consummation of the Transactions, an affiliate of KKR invested $256.1 million and was issued equity interests representing approximately 49.6% of our voting interest and 45.0% of our economic interest, and affiliates of DLJMBP III held equity interests representing approximately 41.0% of Holdings' voting interest and 45.0% of Holdings' economic interest, with the remainder held by other co-investors and certain members of management. Approximately $175.6 million of the proceeds were distributed to certain stockholders, and certain treasury stock held by Von Hoffmann was redeemed. After giving effect to the issuance of equity to additional members of management, as of April 23, 2007, affiliates of KKR and DLJMBP III held approximately 49.0% and 41.0%, respectively, of Holdings' voting interest, while each continued to hold approximately 44.6% of Holdings' economic interest. As of April 23, 2007, the other co-investors held approximately 8.4% of the voting interest and 9.1% of the economic interest of Holdings, and members of management held approximately 1.6% of the voting interest and approximately 1.7% of the economic interest of Holdings. FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (1)As of April 23, 2007, affiliates of KKR and DLJMBP III held approximately 49.0% and 41.0%, respectively, of the voting interests of Visant Holding, while each continued to hold approximately 44.6% of the economic interests of Visant Holding. As of April 23, 2007, other co-investors held approximately 8.4% of the voting interests and approximately 9.1% of the economic interests of Visant Holding, while members of management held approximately 1.6% of the voting interest and approximately 1.7% of the economic interest. (2)Consists of 83/4% Senior Notes due 2013 of Visant Holding. (3)Consists of 101/4% Senior Discount Notes Due 2013 of Visant Holding. (4)Visant Secondary Holdings Corp. pledged the stock of Visant as security for the benefit of the lenders under Visant's senior secured credit facilities and is a guarantor of Visant's senior secured credit facilities. (5)Visant's senior secured credit facilities consist of a Term Loan C facility, with $716.5 million outstanding as of December 30, 2006, and a $250.0 million senior secured revolving facility. As of December 30, 2006, Visant had $233.3 million of availability under the revolving credit facility (net of $16.7 million in outstanding letters of credit). The Term Loan C facility matures in 2011 and the revolving credit facility matures in 2009. (6)Consists of the 75/8% Senior Subordinated Notes due 2012 of Visant. VISANT CORPORATION (Exact name of registrant as specified in its charter) (See table of additional registrants) Delaware (State or other jurisdiction of incorporation or organization) 3911 (Primary Standard Industrial Classification Code Number) 90-0207604 (I.R.S. Employer Identification Number) 357 Main Street Armonk, New York 10504 (914) 595-8200 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Marie D. Hlavaty, Esq. Visant Corporation 357 Main Street Armonk, New York 10504 (914) 595-8200 (Name, address, including zip code, and telephone number, including area code, of agent for service) Summary of Terms of the Notes Issuer Visant Corporation Notes Offered $500,000,000 aggregate principal amount of 75/8% Senior Subordinated Notes due 2012. Maturity Date October 1, 2012. Interest Payment Dates April 1 and October 1 of each year, beginning April 1, 2005. Guarantees The notes are guaranteed, jointly and severally, on a senior subordinated unsecured basis, by each of our 100% owned subsidiaries that guarantees our obligations under our senior secured credit facilities and certain of our future subsidiaries. Ranking The notes and the guarantees are our and our subsidiary guarantors' senior subordinated obligations and rank: junior to all of our and the guarantors' existing and future senior indebtedness, including any borrowings under our senior secured credit facilities; equally with any of our and the guarantors' future senior subordinated indebtedness and trade payables; senior to any of our and the guarantors' future indebtedness that is expressly subordinated in right of payment to the notes; effectively senior to the 101/4% Senior Discount Notes due 2013 and the 83/4% Senior Notes due 2013 of Visant Holding, which are not guaranteed by us; and effectively junior to all of the existing and future liabilities of our subsidiaries that do not guarantee the notes. As of December 30, 2006, the notes and the subsidiary guarantees would have ranked junior to: approximately $716.5 million of senior indebtedness; and $24.7 million of total liabilities, including trade payables but excluding intercompany obligations, of our non-guarantor subsidiaries. Copies of all communications, including communications sent to agent for service, should be sent to: Ris B. Norman, Esq. Simpson Thacher & Bartlett LLP 425 Lexington Avenue New York, New York 10017 (212) 455-2000 As of December 30, 2006, our non-guarantor subsidiaries had approximately 2.7% of our assets. Our non-guarantor subsidiaries generated approximately 3.7% of our revenues for the year ended December 30, 2006. Optional Redemption Prior to October 1, 2008, we may redeem the notes, in whole or in part, at a price equal to 100% of the principal amount thereof plus the make-whole premium described under "Description of the Notes Optional Redemption". We may redeem some or all of the notes at any time and from time to time on or after October 1, 2008, in whole or in part, in cash at the redemption prices described in this prospectus, plus accrued and unpaid interest to the date of redemption. In addition, until October 1, 2007, we may redeem up to 35% of the aggregate principal amount of the notes with the proceeds of certain equity offerings. Change of Control If a change of control occurs, each holder of the notes may require us to repurchase all or a portion of such holder's notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of repurchase. We may not have sufficient funds to repurchase the notes upon a change of control. Furthermore, restrictions in our senior secured credit facilities may limit our ability to repurchase the notes upon a change of control, as described under "Risk Factors Risks Related to Our Indebtedness and the Notes We may not be able to repurchase notes upon a change of control." Restrictive Covenants The terms of the notes place certain limitations on our ability and the ability of our restricted subsidiaries to, among other things: incur or guarantee additional indebtedness or issue disqualified or preferred stock; pay dividends or make other equity distributions; repurchase or redeem capital stock; make investments; sell assets or consolidate or merge with or into other companies; create limitations on the ability of our restricted subsidiaries to make dividends or distributions; engage in transactions with affiliates; and Approximate date of commencement of proposed sale to the public: As soon as practicable after the Registration Statement becomes effective. Our principal executive offices are located at 357 Main Street, Armonk, New York 10504 and our telephone number there is (914) 595-8200. We were incorporated in the State of Delaware on July 21, 2003. We maintain a website at www.visant.net. Information contained on our websites does not constitute a part of this prospectus and is not being incorporated by reference herein. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. 105,325 95,647 LIFO reserve 8 CALCULATION OF REGISTRATION FEE (1)Certain selected financial data have been reclassified for all periods presented to reflect the results of discontinued operations consisting of certain Von Hoffmann businesses in December 2006, our Jostens Photography businesses in June 2006 and the exit of Jostens' Recognition business in December 2001. (2)For 2005 and 2004, transaction costs represented $1.2 million and $6.8 million, respectively, of expenses incurred in connection with the Transactions. For the successor period in 2003, transaction costs represented $0.2 million of expenses incurred in connection with the 2003 Jostens merger. For the predecessor period in 2003, transaction costs represented $31.0 million of expenses incurred in connection with the 2003 Jostens merger. (3)For 2006, the Company recorded $2.3 million relating to an impairment loss to reduce the value of Jostens former corporate office buildings, which were later sold, and net $0.1 million of special charges for severance and related benefit costs. For 2005, special charges consisted of restructuring charges of $5.1 million for employee severance related to closed facilities and $0.3 million related to a withdrawal liability under a union retirement plan that arose in connection with the consolidation of certain operations. For 2004, special charges consisted of $11.8 million of restructuring charges consisting primarily of severance costs for the termination of senior executives and other employees associated with reorganization activity as a result of the Transactions. (4)For 2004, loss on redemption of debt represented a loss of $31.5 million in connection with repayment of all existing indebtedness and remaining preferred stock of Jostens and Arcade in conjunction with the Transactions and a loss of $0.4 million in connection with the repurchase of $5.0 million principal amount of Jostens' 12.75% senior subordinated notes prior to the Transactions. For the successor period in 2003, loss on redemption of debt represented a loss of $0.4 million in connection with the repurchase of $8.5 million principal amount of Jostens' 12.75% senior subordinated notes. For the predecessor period in 2003, loss on redemption of debt represented a loss of $13.9 million consisting of the write-off of unamortized deferred financing costs in connection with refinancing Jostens' senior secured credit facility. For 2002, loss on redemption of debt represented a loss of $1.8 million in connection with the repurchase of $7.5 million principal amount of Jostens' 12.75% senior subordinated notes. (5)For the purposes of calculating the ratio of earnings to fixed charges, earnings represent income (loss) from continuing operations before income taxes plus fixed charges. Fixed charges consist of interest expense (including capitalized interest) on all indebtedness plus amortization of debt issuance costs (and for any period subsequent to the adoption of SFAS 150, accretion of preferred stock dividends), and the portion of rental expense that we believe is representative of the interest component of rental expense. For 2004 and the successor period in 2003, earnings did not cover fixed charges by $78.6 million and $70.1 million, respectively. (6)Liquidation preference of redeemable preferred stock as of the end of 2003 and 2002 was $222.6 million and $86.3 million, respectively. Title of Each Class of Securities to be Registered Amount to be Registered Proposed Maximum Offering Price Per Unit Proposed Maximum Aggregate Offering Price Amount of Registration Fee
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+This summary highlights material information appearing elsewhere in this prospectus. You should read the entire prospectus carefully. This prospectus contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in "Risk Factors" and elsewhere in this prospectus. All references to a particular fiscal year of Visant Corporation, or Visant, are to the four fiscal quarters ended the Saturday nearest to December 31. Our Company In this document, references to the "Company," "Visant," "we," "our," or "us" refer to Visant Corporation and its consolidated subsidiaries, and references to "Visant Holding," "Holdings," "our parent" and "our parent company" refer to our indirect parent, Visant Holding Corp. Visant Corporation operates Jostens, Inc. and its subsidiaries ("Jostens"), AHC I Acquisition Corp. and its subsidiaries ("Arcade"), Dixon Direct Corp. ("Dixon") and Neff Holding Company and its subsidiary ("Neff") and, until May 16, 2007, operated Von Hoffmann Holdings Inc. and its subsidiaries Von Hoffmann Corporation and Anthology, Inc. ("Von Hoffmann"). We are a leading marketing and publishing services enterprise servicing the school affinity, direct marketing, fragrance and cosmetics and educational publishing markets. We were formed through the October 2004 consolidation of Jostens, Von Hoffmann and Arcade. On June 8, 2006, we entered into definitive agreements to sell our Jostens Photography businesses, which previously comprised a reportable segment. The transactions closed on June 30, 2006. The discontinued operations of the Jostens Photography businesses are excluded from the consolidated financial statements retrospective from the date of disposition. On June 16, 2006, we acquired, through a wholly owned subsidiary, substantially all of the assets and assumed certain liabilities of the Dixon Web operation of the Sleepeck Printing Company, a provider of innovative marketing services and products located in Dixon, Illinois. At the time of acquisition, the name of the business was changed to Dixon Direct Corp. The results of Dixon's operations have been included in the consolidated financial statements since that date. On September 8, 2006, a newly formed subsidiary of ours acquired substantially all of the assets and assumed certain liabilities of the Vertis, Inc. fragrance sampling business. The acquired business currently operates under the Arcade Marketing name. The acquisition was a strategic step to continue to expand our Marketing and Publishing Services segment, which services the fragrance, cosmetic, personal care and other consumer product market segments. The results of these acquired operations have been included in the consolidated financial statements since that date. As of December 2006, our Von Hoffmann Holdings Inc., Von Hoffmann Corporation and Anthology, Inc. businesses were held as assets for sale. On January 3, 2007, we entered into a Stock Purchase Agreement (the "Von Hoffmann Stock Purchase Agreement") with R.R. Donnelley & Sons Company providing for the sale of Von Hoffmann Holdings Inc., Von Hoffmann Corporation and Anthology, Inc., which previously comprised the Educational Textbook segment and a portion of the Marketing and Publishing Services segment. We closed the transaction on May 16, 2007. The operations of the Von Hoffmann businesses are reported as discontinued operations in the consolidated financial statements for all periods presented. On March 16, 2007, we acquired all of the outstanding capital stock of Neff Holding Company and its wholly owned subsidiary Neff Motivation, Inc. Neff is a leading single source provider of custom award programs and apparel, including chenille letters and letter jackets, to the scholastic market segment. Neff operates as a direct subsidiary of Visant under the Neff brand name and its results are KKR and related funds(2). 2,664,356 44.6 % 1 (3) 100.0 % DLJMBP III and related funds(4) 2,664,357 44.6 % David F. Burgstahler(4)(8) 2,666,438 44.6 % Alexander Navab(2)(8) 2,666,437 44.6 % 1 (3) 100.0 % Tagar C. Olson(2)(8) 2,666,437 44.6 % 1 (3) 100.0 % Charles P. Pieper(4)(8) 2,666,438 44.6 % George M.C. Fisher(2)(5)(6) 4,163 * Marc L. Reisch(7)(8)(10) 115,989 1.9 % Marie D. Hlavaty(7)(8) 15,608 * Paul B. Carousso(7)(8) 7,805 * Michael L. Bailey(7)(8) 38,004 * John Van Horn(7)(9) 5,203 * Directors and officers (12 persons) as a group(2)(4)(5)(6)(8)(9)(10) 5,538,484 90.7 % Balance January 1, 2005 Balance December 30, 2006 (In thousands) Service cost $ 6,603 $ 8,016 Interest cost 14,989 14,901 Expected return on plan assets (22,611 ) (21,255 ) Amortization of prior year service cost (478 ) 53 Amortization of net actuarial loss 3 Net cash used in investing activities (840 ) (19,006 ) (23 ) (19,869 ) Intercompany payable (receivable) 30,002 (30,003 ) WHERE YOU CAN FIND MORE INFORMATION We and our guarantor subsidiaries have filed with the Securities and Exchange Commission, or the SEC, a registration statement on Form S-1 under the Securities Act with respect to the notes being offered hereby. This prospectus, which forms a part of the registration statement, does not contain all of the information set forth in the registration statement. For further information with respect to us and the notes, reference is made to the registration statement. Statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete. We and our guarantor subsidiaries are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith, file reports and other information with the SEC. The registration statement, such reports and other information can be read and copied at the Public Reference Room of the SEC located at 100 F Street, N.E., Washington D.C. 20549. Copies of such materials, including copies of all or any portion of the registration statement, can be obtained from the Public Reference Room of the SEC at prescribed rates. You can call the SEC at 1-800-SEC-0330 to obtain information on the operation of the Public Reference Room. Such materials may also be accessed electronically by means of the SEC's home page on the Internet (http://www.sec.gov). So long as we and our guarantor subsidiaries are subject to the periodic reporting requirements of the Exchange Act, we and our guarantor subsidiaries are required to furnish the information required to be filed with the SEC to the trustee and the holders of the outstanding notes. We and our guarantor subsidiaries have agreed that, even if we and our guarantor subsidiaries are not required under the Exchange Act to furnish such information to the SEC, we will nonetheless continue to furnish information that would be required to be furnished by us and our guarantor subsidiaries by Sections 13 or 15(d) of the Exchange Act. reported from the date of acquisition together with the results of the Jostens scholastic operations as the renamed Scholastic segment. Our three reportable segments as of March 31, 2007 consisted of: Scholastic provides services related to the marketing, sale and production of class rings and an array of graduation products and other scholastic products to students and administrators primarily in high schools, colleges and other post-secondary institutions; Yearbook provides services related to the publication, marketing, sale and production of school yearbooks; and Marketing and Publishing Services produces multi-sensory and interactive advertising sampling systems, primarily for the fragrance, cosmetics and personal care market segments, and provides innovative products and services to the direct marketing sector. The group also produces book covers and other components for educational publishers. Scholastic We are a leading provider of services related to the marketing, sale and production of class rings and an array of graduation products, such as caps, gowns, diplomas and announcements and graduation-related accessories, and other scholastic products. In the Scholastic segment, we primarily serve U.S. high schools, colleges, universities and other specialty markets, marketing and selling products to students and administrators. Jostens relies on a network of independent sales representatives to sell its scholastic products. Jostens provides a high level of customer service in the marketing and sale of class rings and certain other graduation products, which often involves a high degree of customization. Jostens also provides ongoing warranty service on its class and affiliation rings. Jostens maintains product-specific tooling as well as a library of school logos and mascots that can be used repeatedly for specific school accounts over time. In addition to its class ring offerings, Jostens also designs, manufactures, markets and sells championship rings for professional sports and affinity rings for a variety of specialty markets. Since the acquisition of Neff in March 2007, a leading single source provider of custom award programs and apparel, we also market, manufacture and sell an array of additional scholastic products, including chenille letters, letter jackets, mascot mats, plaques and sports apparel. Yearbook Through our Jostens subsidiary we are a leading provider of services related to the publication, marketing, sale and production of yearbooks, primarily serving U.S. high schools, colleges, universities and middle schools. Jostens generates the majority of its revenues from high school accounts. Jostens' sales representatives and technical support employees assist students and faculty advisers with the planning and layout of yearbooks, including through the provision of on-line layout and editorial tools to assist in the publication of the yearbook. With a new class of students each year and periodic faculty advisor turnover, Jostens' independent sales representatives and customer service employees are the main point of continuity for the yearbook production process on a year-to-year basis. Marketing and Publishing Services The Marketing and Publishing Services segment produces multi-sensory and interactive advertising sampling systems, primarily for the fragrance, cosmetics and personal care market segment, and innovative, highly personalized products primarily targeted at the direct marketing sector. We are also a leading producer of supplemental materials and related components such as decorative covers and plastic transparencies for educational publishers. With over a 100-year history as Arcade Marketing, we pioneered our ScentStrip product in 1980. We also offer an extensive portfolio of proprietary, UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 patented and patent-pending technologies that can be incorporated into various marketing programs designed to reach the consumer at home or in-store, including magazine and catalog inserts, remittance envelopes, statement enclosures, blow-ins, direct mail, direct sell and point-of-sale materials and gift-with-purchase/purchase-with-purchase programs. We specialize in high-quality, in-line finished products and can accommodate large marketing projects with a wide range of dimensional products and in-line finishing production, data processing and mailing services. Our personalized imaging capabilities offer individualized messages to each recipient within a geographical area or demographic group for targeted marketing efforts. Recent Events Between May 18, 2007 and May 23, 2007, Visant made optional pre-payments in the aggregate amount of $375.0 million on its Term Loan C facility. After giving effect to these optional prepayments, Visant's remaining term borrowings under the Term Loan C facility are $341.5 million in principal amount. Company Background On October 4, 2004, an affiliate of Kohlberg Kravis Roberts & Co. L.P., or KKR, and affiliates of DLJ Merchant Banking Partners III, L.P., or DLJMBP III (together with KKR, the "Sponsors"), completed a series of transactions, which created a marketing and publishing services enterprise servicing the school affinity, direct marketing, fragrance and cosmetics and educational publishing market segments through the consolidation of Jostens, Von Hoffmann and Arcade (the "Transactions"). Prior to the Transactions, Von Hoffmann and Arcade were each controlled by affiliates of DLJ Merchant Banking Partners II, L.P., or DLJMBP II, and DLJMBP III owned approximately 82.5% of our outstanding equity, with the remainder held by other co-investors and certain members of management. Upon consummation of the Transactions, an affiliate of KKR invested $256.1 million and was issued equity interests representing approximately 49.6% of our voting interest and 45.0% of our economic interest, and affiliates of DLJMBP III held equity interests representing approximately 41.0% of Holdings' voting interest and 45.0% of Holdings' economic interest, with the remainder held by other co-investors and certain members of management. Approximately $175.6 million of the proceeds were distributed to certain stockholders, and certain treasury stock held by Von Hoffmann was redeemed. After giving effect to the issuance of equity to additional members of management, as of May 25, 2007, affiliates of KKR and DLJMBP III held approximately 49.0% and 41.0%, respectively, of Holdings' voting interest, while each continued to hold approximately 44.6% of Holdings' economic interest. As of May 25, 2007, the other co-investors held approximately 8.4% of the voting interest and 9.1% of the economic interest of Holdings, and members of management held approximately 1.6% of the voting interest and approximately 1.7% of the economic interest of Holdings. AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (1)As of May 25, 2007, affiliates of KKR and DLJMBP III held approximately 49.0% and 41.0%, respectively, of the voting interests of Visant Holding, while each continued to hold approximately 44.6% of the economic interests of Visant Holding. As of May 25, 2007, other co-investors held approximately 8.4% of the voting interests and approximately 9.1% of the economic interests of Visant Holding, while members of management held approximately 1.6% of the voting interest and approximately 1.7% of the economic interest. (2)Consists of 83/4% Senior Notes due 2013 of Visant Holding. (3)Consists of 101/4% Senior Discount Notes Due 2013 of Visant Holding. (4)Visant Secondary Holdings Corp. pledged the stock of Visant as security for the benefit of the lenders under Visant's senior secured credit facilities and is a guarantor of Visant's senior secured credit facilities. (5)Visant's senior secured credit facilities consist of a Term Loan C facility, with $716.5 million outstanding as of March 31, 2007, and a $250.0 million senior secured revolving facility. As of March 31, 2007, Visant had $233.6 million of availability under the revolving credit facility (net of $16.4 million in outstanding letters of credit). Between May 18, 2007 and May 23, 2007, Visant made optional pre-payments in the aggregate amount of $375.0 million on its Term Loan C facility. After giving effect to these optional prepayments, Visant's remaining term borrowings under the Term Loan C facility are $341.5 million in principal amount. The Term Loan C facility matures in 2011 and the revolving credit facility matures in 2009. (6)Consists of the 75/8% Senior Subordinated Notes due 2012 of Visant. (In thousands) Net loss $ (1,239 ) $ (1,136 ) Change in cumulative translation adjustment (In thousands) Net income $ 7,264 $ 1,755 Change in cumulative translation adjustment VISANT CORPORATION (Exact name of registrant as specified in its charter) (See table of additional registrants) Delaware (State or other jurisdiction of incorporation or organization) 3911 (Primary Standard Industrial Classification Code Number) 90-0207604 (I.R.S. Employer Identification Number) 357 Main Street Armonk, New York 10504 (914) 595-8200 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Marie D. Hlavaty, Esq. Visant Corporation 357 Main Street Armonk, New York 10504 (914) 595-8200 (Name, address, including zip code, and telephone number, including area code, of agent for service) Summary of Terms of the Notes Issuer Visant Corporation Notes Offered $500,000,000 aggregate principal amount of 75/8% Senior Subordinated Notes due 2012. Maturity Date October 1, 2012. Interest Payment Dates April 1 and October 1 of each year, beginning April 1, 2005. Guarantees The notes are guaranteed, jointly and severally, on a senior subordinated unsecured basis, by each of our 100% owned subsidiaries that guarantees our obligations under our senior secured credit facilities and certain of our future subsidiaries. Ranking The notes and the guarantees are our and our subsidiary guarantors' senior subordinated obligations and rank: junior to all of our and the guarantors' existing and future senior indebtedness, including any borrowings under our senior secured credit facilities; equally with any of our and the guarantors' future senior subordinated indebtedness and trade payables; senior to any of our and the guarantors' future indebtedness that is expressly subordinated in right of payment to the notes; effectively senior to the 101/4% Senior Discount Notes due 2013 and the 83/4% Senior Notes due 2013 of Visant Holding, which are not guaranteed by us; and effectively junior to all of the existing and future liabilities of our subsidiaries that do not guarantee the notes. As of March 31, 2007, the notes and the subsidiary guarantees would have ranked junior to: approximately $716.5 million of senior indebtedness; and $18.9 million of total liabilities, including trade payables but excluding intercompany obligations, of our non-guarantor subsidiaries. Copies of all communications, including communications sent to agent for service, should be sent to: Ris B. Norman, Esq. Simpson Thacher & Bartlett LLP 425 Lexington Avenue New York, New York 10017 (212) 455-2000 As of March 31, 2007, our non-guarantor subsidiaries had approximately 2.5% of our assets. Our non-guarantor subsidiaries generated approximately 4.1% of our revenues for the quarter ended March 31, 2007. Optional Redemption Prior to October 1, 2008, we may redeem the notes, in whole or in part, at a price equal to 100% of the principal amount thereof plus the make-whole premium described under "Description of the Notes Optional Redemption". We may redeem some or all of the notes at any time and from time to time on or after October 1, 2008, in whole or in part, in cash at the redemption prices described in this prospectus, plus accrued and unpaid interest to the date of redemption. In addition, until October 1, 2007, we may redeem up to 35% of the aggregate principal amount of the notes with the proceeds of certain equity offerings. Change of Control If a change of control occurs, each holder of the notes may require us to repurchase all or a portion of such holder's notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of repurchase. We may not have sufficient funds to repurchase the notes upon a change of control. Furthermore, restrictions in our senior secured credit facilities may limit our ability to repurchase the notes upon a change of control, as described under "Risk Factors Risks Related to Our Indebtedness and the Notes We may not be able to repurchase notes upon a change of control." Restrictive Covenants The terms of the notes place certain limitations on our ability and the ability of our restricted subsidiaries to, among other things: incur or guarantee additional indebtedness or issue disqualified or preferred stock; pay dividends or make other equity distributions; repurchase or redeem capital stock; make investments; sell assets or consolidate or merge with or into other companies; create limitations on the ability of our restricted subsidiaries to make dividends or distributions; engage in transactions with affiliates; and Effect of exchange rate changes on cash and cash equivalents 109 Effect of exchange rate changes on cash and cash equivalents 109 Net cash (used in) provided by financing activities 30,002 (30,003 ) 1 Effect of exchange rate changes on cash and cash equivalents 6 Approximate date of commencement of proposed sale to the public: As soon as practicable after the Registration Statement becomes effective. Our principal executive offices are located at 357 Main Street, Armonk, New York 10504 and our telephone number there is (914) 595-8200. We were incorporated in the State of Delaware on July 21, 2003. We maintain a website at www.visant.net. Information contained on our websites does not constitute a part of this prospectus and is not being incorporated by reference herein. In thousands Holdings: Interest expense $ 7,635 $ $ 7,635 100.0 % Amortization of debt discount, premium and deferred financing costs 5,638 4,815 823 17.1 % Interest income (7 ) If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. 105,325 95,647 LIFO reserve 8 139,121 105,325 LIFO reserve 8 Net periodic benefit income expense $ (738 ) $ (374 ) $ (19 ) $ CALCULATION OF REGISTRATION FEE (1)Certain selected financial data have been reclassified for all periods presented to reflect the results of discontinued operations consisting of certain Von Hoffmann businesses in December 2006, our Jostens Photography businesses in June 2006 and the exit of Jostens' Recognition business in December 2001. (2)For 2005 and 2004, transaction costs represented $1.2 million and $6.8 million, respectively, of expenses incurred in connection with the Transactions. For the successor period in 2003, transaction costs represented $0.2 million of expenses incurred in connection with the 2003 Jostens merger. For the predecessor period in 2003, transaction costs represented $31.0 million of expenses incurred in connection with the 2003 Jostens merger. (3)During the three months ended March 31, 2007, we did not record any special charges. During the three months ended April 1, 2006, we recorded $0.4 million of special charges relating to severance and related benefits costs and $2.3 million related to an impairment loss to reduce the value of the former Jostens corporate office buildings. For 2006, the Company recorded $2.3 million relating to an impairment loss to reduce the value of Jostens former corporate office buildings, which were later sold, and net $0.1 million of special charges for severance and related benefit costs. For 2005, special charges consisted of restructuring charges of $5.1 million for employee severance related to closed facilities and $0.3 million related to a withdrawal liability under a union retirement plan that arose in connection with the consolidation of certain operations. For 2004, special charges consisted of $11.8 million of restructuring charges consisting primarily of severance costs for the termination of senior executives and other employees associated with reorganization activity as a result of the Transactions. (4)For 2004, loss on redemption of debt represented a loss of $31.5 million in connection with repayment of all existing indebtedness and remaining preferred stock of Jostens and Arcade in conjunction with the Transactions and a loss of $0.4 million in connection with the repurchase of $5.0 million principal amount of Jostens' 12.75% senior subordinated notes prior to the Transactions. For the successor period in 2003, loss on redemption of debt represented a loss of $0.4 million in connection with the repurchase of $8.5 million principal amount of Jostens' 12.75% senior subordinated notes. For the predecessor period in 2003, loss on redemption of debt represented a loss of $13.9 million consisting of the write-off of unamortized deferred financing costs in connection with refinancing Jostens' senior secured credit facility. For 2002, loss on redemption of debt represented a loss of $1.8 million in connection with the repurchase of $7.5 million principal amount of Jostens' 12.75% senior subordinated notes. (5)For the purposes of calculating the ratio of earnings to fixed charges, earnings represent income (loss) from continuing operations before income taxes plus fixed charges. Fixed charges consist of interest expense (including capitalized interest) on all indebtedness plus amortization of debt issuance costs (and for any period subsequent to the adoption of SFAS 150, accretion of preferred stock dividends), and the portion of rental expense that we believe is representative of the interest component of rental expense. For the three months ended March 31, 2007, three months ended April 1, 2006, twelve months ended 2004, and the five-month successor period in 2003, earnings did not cover fixed charges by $1.4 million, $3.6 million, $78.6 million and $70.1 million, respectively. (6)Liquidation preference of redeemable preferred stock as of the end of 2003 and 2002 was $222.6 million and $86.3 million, respectively. Title of Each Class of Securities to be Registered Amount to be Registered Proposed Maximum Offering Price Per Unit Proposed Maximum Aggregate Offering Price Amount of Registration Fee
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+PROSPECTUS SUMMARY This summary highlights selected information which is described in more detail elsewhere in this Prospectus. You should read this entire Prospectus carefully before making an investment decision, including the
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+PROSPECTUS SUMMARY This summary highlights certain information included elsewhere in this prospectus and does not contain all of the information that you should consider before making a decision to purchase shares of our common stock. You should read this summary together with the more detailed information included elsewhere or incorporated by reference in this prospectus, including the risks discussed in "Risk Factors" and our consolidated financial statements and related notes. Except as otherwise indicated, the information in this prospectus assumes that the underwriter will not exercise its over-allotment option. As used in this prospectus, unless otherwise expressly stated or the context otherwise indicates, all references to "Aviza," "we," "us," "our" and "ourselves" shall mean Aviza Technology, Inc., together with its consolidated subsidiaries. Aviza Technology, Inc. We design, manufacture, sell and support advanced semiconductor capital equipment and process technologies for the global semiconductor industry and related markets. Our systems are used in a variety of segments of the semiconductor market, such as advanced silicon for memory devices, advanced 3-D packaging and power integrated circuits, or ICs, for communications. We focus our efforts on designing systems that enable device manufacturers to meet today's challenging technology and manufacturing requirements. We offer both front-end-of-line and back-end-of-line systems and process technologies used for the aforementioned markets addressing critical thin film formation technologies, including atomic layer deposition, or ALD, physical vapor deposition, or PVD, chemical vapor deposition, or CVD, plasma etch, or Etch, and thermal processing systems. Our customer base is geographically diverse and includes both integrated device manufacturers and foundry-based manufacturers. We have a broad installed base, with approximately 2,500 systems in active operation for which we are providing ongoing parts and services worldwide. We believe that these systems are installed at many of the world's semiconductor manufacturers, including a majority of the top 25 semiconductor manufacturers around the world. We sell our systems globally primarily through a direct sales force and in some instances through local independent sales representatives. Our global sales and support organization is focused on developing and nurturing long-term customer relationships. Our largest customers by net sales for our fiscal year ended September 29, 2006 were Inotera Memories, Inc., Infineon Technologies AG (including Qimonda AG, formerly the DRAM division of Infineon Technologies AG), Semiconductor Manufacturing International Corporation, United Microelectronics Corporation and Winbond Electronics Corporation. Industry Overview The design and manufacture of semiconductor devices involve a complex and capital-intensive multi-step process. This process involves different types of capital equipment used to manufacture, assemble and test these devices. For example, to build an IC, transistors are first created on a wafer, such as silicon, by performing a series of deposition, patterning and selective removal of unwanted layers. Interwoven within these steps are multiple thermal treatments to stabilize or activate various layers. These early fabrication process steps are typically called front-end-of-line processing. Following front-end-of-line processing, the transistors are microscopically wired together through the formation of interconnected metal layers and insulating dielectric materials, known as back-end-of-line processing. Each process step, which may be performed multiple times, is subject to a tightly controlled series of chemical, thermal and lithographic processes in order to yield a fully functional IC. Semiconductor designers and manufacturers are under increasing pressure to bring high-quality and increasingly complex devices to market faster and at lower cost. They must also continue to improve device performance while controlling or minimizing capital expenditures. This becomes more critical as cost-effective scaling presents significant challenges. As a result, device companies are Income (loss) before income taxes 2 % (16) % (9) % (9) % (24) % Income taxes 0 % 0 % 0 % 0 % BALANCE September 24, 2004 243,206 BALANCE September 30, 2005 475,065 beginning to rely heavily on non-scaling techniques such as new film materials and new device structures to deliver improved device performance. Capital equipment plays an important role in enabling device designers and manufacturers to lower their overall costs, get products to market quickly and improve the product's quality and reliability. As a direct result of the increasing pressure placed on designers and manufacturers to keep pace with Moore's Law, which predicts that for minimum component cost, the number of transistors on an IC doubles every 24 months, capital equipment suppliers are facing new challenges in meeting their needs. The key challenges that capital equipment manufacturers like Aviza must address include: New Materials; Advanced Packaging Requirements; Low Cost of Ownership; Time-to-Market Pressures; and Shrinking Device Features. Our Solutions We deliver a broad range of capital equipment and process technologies to serve the needs of a wide range of device manufacturers. In addition to providing the high product performance expected by our customers, we believe maintaining the quality standards of our organization and our worldwide service and support are important to meeting these needs. We believe our customers choose our products because of the following factors: Advanced Film Development and Process Technology. Our continued development of process technologies, such as our ALD systems, enables semiconductor manufacturers to use new materials necessary to manufacture and package next-generation devices. Our systems have been developed with proprietary technologies, such as our Across-Flow and Direct Liquid Injection technology, which enable the use of advanced materials. Low Cost of Ownership. Our systems are designed to improve the yield, throughput and utilization of semiconductor manufacturing facilities. Our systems offer integrated process technology, extendibility and optimized process flow to help IC makers achieve their overall cost-of-ownership and functionality objectives. Worldwide Customer Service and Support. Our goal is to provide our customers with global technical service, in-depth process engineering support and rapid delivery of our systems and parts. We provide customer support through our global service organization 24 hours per day, seven days per week. In addition, we have multiple parts depots around the world to support our installed base of systems. Focus on Customer Relationships and Strategic Alliances. We believe that our regular dialogue with our customers and our visibility of their technology roadmaps allow us to serve their needs effectively. We also work to develop strategic alliances with equipment and materials suppliers to the semiconductor industry to produce next-generation films and processes in order to keep pace with the International Technology Roadmap for Semiconductors. Net income (loss) UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Our Strategy Our objective is to be a leading provider of advanced capital equipment and process technologies to semiconductor manufacturers in our served markets. To achieve this objective, our strategy is comprised of the following elements: Provide our customers with a broad range of systems, such as our ALD, PVD, CVD, Etch and thermal processing systems, to address multiple film formation requirements; Further penetrate our existing customer base by seeking opportunities to sell our customers systems from our expanding portfolio of systems that they are not already purchasing from us; Expand our customer base in the DRAM and flash markets with our ALD systems; Target the advanced packaging market with an integrated solution of PVD, CVD and Etch systems; Capitalize on our field service infrastructure in order to continue to understand our customers' current and future needs, while delivering a positive customer experience throughout the product life cycle; and Continue to drive cost-reduction initiatives, including the improvement of our global supply chain and reduction in materials costs. Company Information Our principal executive offices are located at 440 Kings Village Road, Scotts Valley, California 95066, and our telephone number is (831) 438-2100. Our website address is www.avizatechnology.com, although the information on our website does not constitute a part of this prospectus, and we are not incorporating information on our website into this prospectus. Amendment No. 2 To FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 The Offering Common stock offered by us 4,000,000 shares Common stock to be outstanding after this offering 20,150,752 shares Use of proceeds We intend to use the net proceeds from this offering for working capital, research and development and other general corporate purposes, which may include repaying borrowings under our mortgage and revolving lines of credit. See "Use of Proceeds." Nasdaq Global Market symbol AVZA The number of shares of our common stock to be outstanding after this offering is based on 16,150,752 shares of our common stock outstanding as of February 5, 2007 but excludes: 3,832,467 shares of common stock issuable upon exercise of stock options outstanding as of February 5, 2007 with a weighted average exercise price of $4.93 per share; 406,725 shares of common stock issuable upon exercise of warrants outstanding as of February 5, 2007 with a weighted average exercise price of $28.31 per share; 1,026,263 shares of common stock reserved as of February 5, 2007 for future issuance under our stock plans; and 10,636 shares of common stock issuable upon settlement of stock options exercised as of February 5, 2007 for which shares of common stock have not yet been issued. These stock options have a weighted average exercise price of $4.49 per share. Income (loss) from operations AVIZA TECHNOLOGY, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware (State or Other Jurisdiction of Incorporation or Organization) 3559 (Primary Standard Industrial Classification Code Number) 20-1979646 (I.R.S. Employer Identification Number) Aviza Technology, Inc. 440 Kings Village Road Scotts Valley, CA 95066 (831) 438-2100 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents $ 15,537 $ 43,342 Total assets 139,622 167,427 Short term borrowings and current portion of note payable 41,978 41,978 Long term obligations 1,030 1,030 Stockholders' equity 41,462 69,267 The as adjusted consolidated balance sheet data above gives effect to our receipt of the estimated net proceeds from the sale of 4,000,000 shares of our common stock in this offering at an assumed public offering price of $7.54 per share, after deducting the estimated underwriting discount and estimated offering expenses payable by us. Patrick C. O'Connor Executive Vice President and Chief Financial Officer Aviza Technology, Inc. 440 Kings Village Road Scotts Valley, CA 95066 (831) 438-2100 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001311953_summit_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001311953_summit_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. It is not complete and may not contain all the information that may be important to you. You should read the entire prospectus carefully before making an investment decision, especially the information presented under the heading Risk Factors and our financial statements and the related notes included elsewhere in this prospectus. Our Company Through our wholly-owned operating subsidiary, Maritime Logistics US Holdings Inc. (referred to as Maritime Logistics or MLI), and its subsidiaries, we are an international third-party logistics provider specializing in ocean transportation intermediary services for Asia and North America. We offer domestic and international ocean, air and ground third-party logistics services. We maintain offices on the East and West Coasts of the United States, major ports in China (primarily through an exclusive agency network) specifically in Hong Kong and Shanghai and have operations in Russia and Turkey. Currently, we operate a global network of freight forwarding and ocean transportation intermediaries in 25 key transportation hubs, and have over 13 logistics centers with over 1.9 million square feet of warehouse space in the United States. In addition, we serve over 40 independent agent-owned offices. Our business is managed from 5 principal support offices located in East Rutherford, New Jersey; Los Angeles, California; St. Petersburg, Russia; and Hong Kong, as well as Shanghai, China. Our History We are a reporting company under the Exchange Act, and our common stock is quoted on the NASD s Over-the-Counter Bulletin Board quotation system. We were formed as a Nevada corporation on February 25, 2004, under the name Aerobic Creations, Inc. Our initial business plan was to produce and sell aerobics workout DVDs. However, prior to the transaction with Maritime Logistics on November 8, 2006, we have not had any meaningful business operations. We were reincorporated as a Delaware corporation in August 2006 through a migratory merger. On November 8, 2006, Maritime Logistics, a Delaware corporation, merged with our wholly-owned subsidiary. Maritime Logistics was the surviving corporation of the merger and became our wholly-owned subsidiary and we assumed the business and operations of Maritime Logistics. The former security holders of Maritime Logistics received an aggregate of 1,451,000 shares of our common stock as merger consideration. As a result of the merger and the issuance of common stock to the security holders of Maritime Logistics, the former security holders of Maritime Logistics held approximately 85.5% of our outstanding common stock immediately after the merger and prior to the financings and the acquisitions described below. Accounting principles generally accepted in the United States generally require that a company whose security holders retain the majority voting interest in the combined business be treated as the acquirer for financial reporting purposes. The acquisition was accounted for as a reverse acquisition whereby Maritime Logistics was deemed to be the accounting acquirer. Additionally, upon the effectiveness of the merger, our then existing officers and directors were replaced by individuals associated with Maritime Logistics. Maritime Logistics was established on February 6, 2006 as an ocean transportation intermediary logistics company. During 2006, and prior to its merger with our subsidiary, Maritime Logistics completed several acquisitions, including the acquisition of AmeRussia Shipping Company Inc. and AmeRussia Ltd. in May, and SeaMaster Logistics (Holding) Ltd. ( SeaMaster ) in September. In addition, in October 2006, Maritime Logistics entered into agreements to acquire (i) all of the equity interests of FMI Holdco I, LLC (referred to as FMI) and its parent company, FMI Blocker, Inc. and, (ii) certain of the assets or equity interests of the TUG Logistics group of companies, including certain of the assets of TUG Logistics, Inc., TUG Logistics (Miami), Inc. and Glare Logistics, Inc. and all of the equity interests of Clare Freight, Los Angeles, Inc. and TUG New York, Inc. (such assets and companies are collectively referred to as TUG). After completion of the merger with Maritime Logistics, we joined the senior credit facility, the note financing and the common stock financing commitments arranged by Maritime Logistics. Our senior credit facility consists of a $55 million term loan and a $10 million revolving loan. In the note financing, we received $65 million in exchange for the issuance of secured convertible notes (in the aggregate principal face amount of $65 million and convertible into 5,909,091 of our shares of common stock) and warrants to purchase 2,363,636 shares of common stock at an exercise price of $11.00 per share. In connection with the note financing, we issued our placement agent, Rodman & Renshaw LLC, a warrant to purchase 354,545 shares of our common stock, on the same terms as the warrants issued in the note financing. In the common stock financing, we received proceeds of approximately $33.5 million in exchange for the issuance of 3,346,950 shares of common stock and warrants to purchase 2,510,213 shares of common stock, at an exercise price of $10.00 per share. Additionally, in connection with the common stock financing, we issued our placement agent, Rodman & Renshaw LLC, a warrant to purchase 171,000 shares of our common stock, on the same terms as the warrants issued in the common stock financing. The sale price, conversion price and exercise price were not established in a competitive market, but were arbitrarily determined by us and our placement agent through negotiations with potential investors. Such prices bear no relationship to our assets, book value, historical results of operations or any other established criterion of value, and may not be indicative of the fair value of the common stock or its trading price in any market that may develop in the future. In connection with the common stock financing, note financing and senior credit facility, we incurred transaction and financings costs of approximately $18.3 million, including payment to our placement agent, Rodman & Renshaw, LLC, of an aggregate fee of $6.26 million in cash and expenses of $0.5 million. The purchase price of FMI consisted of 1,317,500 (or a 4.0% interest on a fully diluted basis) shares of our common stock and $118.0 million in cash of which $114.0 million was paid to holders of equity interests in FMI and holders of stock of FMI Blocker, Inc. and a total of $1 million was paid to certain FMI employees. In addition, we issued 232,500 restricted shares of our common stock to certain FMI employees. The purchase price for TUG was approximately $4 million in cash and 550,000 restricted shares of our common stock. Additionally, an estimated $6 million may be paid in cash pursuant to an earn-out agreement based on the performance of TUG and our common stock. In addition, 1,000 restricted shares of our common stock, were issued to a certain TUG employee. See Management s Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations for a discussion of the earn-out. On February 20, 2007, we effected the reverse split and changed our name from Aerobic Creations, Inc. to Summit Global Logistics, Inc. On May 21, 2007, we completed a restructuring of our credit facilities and a financing to raise working capital. The restructuring and financing included (i) an amendment of our existing $65 million senior secured credit facility to waive certain declared defaults and better align our financial covenants with our current business plans, (ii) a restructuring of our $65 million senior secured convertible notes and warrants to waive certain declared defaults and to better align our financial covenants with our current business plan, (iii) a private placement of senior secured convertible notes and warrants resulting in $15 million in gross proceeds from the existing convertible note holders and certain members of management, and (iv) a waiver of certain accrued registration rights penalties resulting from our failure to timely register for resale certain of our securities. In connection with the restructuring, we paid our senior secured creditors $265,000 and increased the applicable margins by 0.50% on the interest rate on the senior secured credit facility. The convertible note holders agreed to defer approximately $8 million in interest payments for five consecutive quarters. In exchange, we (i) reduced the conversion price of our convertible notes (from $11.00 to $5.50 per share), (ii) reduced the exercise price of our warrants in connection with the convertible notes (from $11.00 to $5.50 per share) and (iii) increased the interest rate on our convertible notes by increasing the applicable margin by 0.50 percent. The convertible notes issued in connection with the restructuring in the May 2007 private placement were in the aggregate principal amount of approximately $83.4 million, which is comprised of (a) the original principal amount, (b) the additional amount sold in the private placement, (c) the penalty interest amount, and (d) the registration rights penalty. Additionally, for services rendered in connection with our restructuring, we issued to our investment banker, Raymond James & Associates, Inc., (i) a warrant to purchase 64,773 shares of our common stock (on such terms as the note holders received in the restructuring) and (ii) a convertible note in the amount of $712,500 (on such terms as the convertible noteholders received in the restructuring) and paid them approximately $1 million in cash. In connection with the merger, the acquisitions and the note and common stock financings, we agreed to file a registration statement registering for resale the shares of common stock issued and issuable in connection with such transactions. The registration statement of which this prospectus forms a part of is being filed to fulfill these obligations as well as our obligations in connection with the private placement we completed in May 2007. In connection with the restructuring, a majority of the holders of our common stock of the Company agreed to (i) waive certain penalties pursuant to the registration rights agreement relating to our failure to cause certain shares of our common stock and shares of our common stock underlying warrants to become registered under the Securities Act of 1933 and (ii) extended the deadline for causing such shares to be registered under this prospectus, in exchange for all of the participants in our prior private placement of common stock receiving, pro rata, unsecured convertible notes in the aggregate principal face amount of $1 million. Business Overview Our Services We seek to use our global network, relationships with ocean common carriers and other transportation providers, and expertise in outsourced logistics services to improve our customers visibility into their supply chains while reducing their logistics costs. We offer domestic and international ocean, air and ground third-party logistics services. We expect that our revenues primarily will be generated from a number of diverse services, including air freight forwarding, ocean freight forwarding and intermediary transportation, customs brokerage, logistics, warehousing, local and line-haul trucking, and other value-added services. One Meadowlands Plaza East Rutherford, NJ 07073 (201-806-3700) Selling Security Holders The shares of common stock offered under this prospectus are being offered by certain holders of our common stock, convertible notes convertible into our common stock and warrants exercisable for shares of our common stock. These holders acquired their securities in connection with our acquisition of certain businesses, the common stock financing, the note financing and the restructuring or held shares of our common stock prior to the financings and acquisitions. We prepared this prospectus to satisfy the registration rights we granted in connection with the financings, the acquisitions and the restructuring. We are not selling any securities under this prospectus and will not receive any of the proceeds from the sale of shares by the selling security holders. Corporate Information We were initially incorporated under the laws of the State of Nevada on February 25, 2004 as Aerobic Creations, Inc. On August 21, 2006 we reincorporated as a Delaware corporation by completing a merger with and into a Delaware corporation with the same name. Unless otherwise provided, all of the share numbers and per share prices in this prospectus reflect a reverse stock split approved by written consent of more than a majority of our security holders, on November 8, 2006 and effected on February 20, 2007. In connection with the reverse split and other amendments to our certificate of incorporation, each 11.2261585365 shares of our common stock was combined into one share of common stock and our name was changed to Summit Global Logistics, Inc. The address of our principal executive offices is One Meadowlands Plaza, East Rutherford, NJ 07073. Our telephone number is (201) 806-3700. Our website address is www.summitgl.com. Information contained in or connected to our website is not part of this prospectus.
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+Prospectus Summary 1
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+this prospectus. This summary does not contain all the information you should consider before buying shares of our common stock. You should read the entire prospectus carefully, especially the risks of investing in shares of our common stock that we describe under Risk Factors and our consolidated financial statements and the related notes included at the end of this prospectus, before deciding to invest in shares of our common stock. Unless the context requires otherwise, reference to TomoTherapy , we , our and us in this prospectus refers to TomoTherapy Incorporated and its subsidiaries. Our Business We have developed, manufacture and sell the Hi Art system, an advanced and versatile radiation therapy system for the treatment of a wide range of cancer types. The Hi Art system combines integrated CT imaging with radiation therapy to deliver radiation treatments with speed and precision while reducing radiation exposure to surrounding healthy tissue, which we believe can lead to improved patient outcomes. The Hi Art system contains a linear accelerator, which is a device that generates external beam radiation that is used both to capture high quality, quantitative images and to deliver therapeutic radiation in a helical, or spiral, delivery pattern 360 degrees around the body. The linear accelerator rotates around a rigid circular frame, or ring gantry, that is housed in a protective casing. This integrated design contrasts with traditional radiation therapy systems, which utilize a single, rotating arm, referred to as a C-arm , that can deliver radiation from only a limited number of angles. Generating CT images with traditional C-arm systems typically requires the addition of auxiliary devices that generally lack the quantitative imaging capabilities necessary to accurately image the location, size, shape and density of tumors and internal anatomy. The Hi Art system s helical delivery pattern and imaging capabilities, combined with the system s advanced treatment planning software and ability to precisely shape the beam delivering radiation, allow clinicians to locate and define the size, shape and density of tumors, maximize radiation delivered to diseased tissue, minimize radiation delivered to healthy tissue and measure the radiation dose actually received by the patient. We believe these capabilities allow the Hi Art system to deliver sophisticated radiation treatments with speed and precision. The Hi Art system s combination of technologies allows clinicians to make modifications to a patient s cancer treatment plan as changes in the location, size, shape and density of tumors or in the patient s internal anatomy are detected over the course of treatment. To deliver radiation therapy, the Hi Art system first optimizes a patient s treatment plan by calculating the radiation dose pattern that maximizes the radiation dose to the tumor and minimizes exposure of healthy tissue. A quantitative CT image of the treatment area is taken to identify the location, size, shape and density of the tumor and is used to position the patient on the treatment couch. The optimized radiation dose is then delivered using a proprietary device referred to as a multi-leaf collimator, or MLC. The MLC consists of tungsten leaves that open and close to modulate the shape of radiation beams produced by the linear accelerator as the patient passes horizontally through the ring gantry. The data acquired for the accurate positioning of the patient can also be used to compute the dose received by the patient. Data regarding the dose distribution is used by the clinician to evaluate and, if necessary, adjust the treatment plan in subsequent treatment sessions to address changes in patient anatomy, such as tumor shrinkage or weight loss, as well as any previous errors accumulated in treatment delivery and planning. We believe that the process of making iterative adjustments to a patient s treatment plan, referred to as adaptive radiation therapy, should become a standard technique for the treatment of most cancer patients receiving radiation therapy. The Hi Art system has the ability to provide daily, quantitative imaging and enables clinicians to incorporate adaptive radiation therapy easily and efficiently into their regular clinical workflow. We market the Hi Art system to hospitals and cancer treatment centers in North America, Europe and Asia, and offer customer support services in each region. Since the commercial introduction of the Hi Art system in 2003, we have experienced significant revenue growth and have invested extensively in our manufacturing capabilities and customer service and support infrastructure. For the years ended December 31, 2005 and 2006, we had revenue of $75.8 million and $156.1 million, respectively. For the six months ended June 30, 2006 and 2007, we had revenue of $59.3 million and $94.9 million, respectively. For the years ended Table of Contents The information contained in this prospectus is not complete and may be changed. The selling shareholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Subject to Completion Preliminary Prospectus dated October 1, 2007 PROSPECTUS 8,500,000 Shares Common Stock The selling shareholders named in this prospectus, including members of our board of directors and senior management, and entities affiliated with them, are offering 8,500,000 shares of our common stock. We will not receive any of the proceeds from the sale of shares by the selling shareholders. Our common stock is listed on the Nasdaq Global Market under the symbol TTPY. On September 28, 2007, the last sale price of our common stock on the Nasdaq Global Market was $23.23 per share. Investing in shares of our common stock involves risks that are described in the Risk Factors section beginning on page 9 of this prospectus. Per Share Total Public offering price $ $ Underwriting discount $ $ Proceeds, before expenses, to the selling shareholders $ $ The underwriters may also purchase up to an additional 1,275,000 shares from the selling shareholders at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover overallotments. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The underwriters expect to deliver the common shares on or about , 2007. Merrill Lynch Co. Piper Jaffray Thomas Weisel Partners LLC Robert W. Baird Co. William Blair Company The date of this prospectus is , 2007. Table of Contents December 31, 2005 and 2006, we had net income of $0.2 million and $12.8 million, respectively. Net income for 2006 included a $7.8 million benefit from deferred income taxes and an expense of $3.1 million reflecting the fair value of outstanding warrants. For the six months ended June 30, 2006 and 2007, we had net income of $0.8 million and $3.2 million, respectively. Net income for the six months ended June 30, 2006 included a $3.4 million benefit from deferred income taxes and an expense of $2.3 million reflecting the fair value of outstanding warrants. As of June 30, 2007, we had a worldwide installed base of over 125 units and a backlog of approximately $207 million. Our Market According to the World Health Organization, in 2005 there were approximately 24.6 million people worldwide living with cancer and an estimated 7.6 million cancer deaths, accounting for 13% of all deaths globally. The World Health Organization estimates that approximately 10.9 million new cases of cancer are diagnosed globally each year. The National Cancer Institute estimates that nearly 50% of cancer patients in the United States are treated using radiation therapy. Currently, the most common type of radiation therapy is external beam radiation therapy, during which patients are treated with high-energy radiation generated by medical equipment external to the patient. Approximately 90% of patients treated with radiation therapy in the United States receive external beam radiation generated by a device called a linear accelerator. Linear accelerator-based radiation therapy systems represent the largest product segment by expenditure within the global radiation therapy equipment market, which totaled approximately $2.0 billion in 2006. Radiation energy is an effective method for killing cells and is used to treat a wide range of cancer types. While the goal of radiation therapy is to selectively deliver radiation solely to cancer cells, traditional radiation therapy can result in healthy tissue being exposed to significant doses of radiation. Damage to healthy tissue can cause side effects ranging in severity from superficial burns, nausea and vomiting to more serious side effects such as damage to vital organs. Recent advances in radiation therapy technologies have focused on further improving the ability to target the radiation dose more precisely at cancer cells, while minimizing the exposure of healthy tissue. These advances include: Intensity Modulated Radiation Therapy (IMRT), which varies the radiation beam intensity to conform the dose more accurately to the shape of the tumor; Image Guided Radiation Therapy (IGRT), which involves delivering IMRT guided by images taken shortly before treatment to compare the patient s position to, and make adjustments from, the original treatment plan for more precision; Dose escalation, which involves delivering the cumulative prescribed dose of radiation to the patient over less than the typical number of treatment sessions by relying on extremely precise targeting to deliver a higher dose of radiation during each session; and Adaptive radiation therapy, which we believe requires continual adjustments to the treatment plan throughout the entire course of treatment, facilitated by both the regular acquisition of updated images showing the location, geometry and density of the tumor, as well as verification of the actual radiation dose received by the patient. We believe that an increasing demand for advanced medical treatments in many international markets, growth in cancer cases worldwide and improvements in the sophistication of radiation therapy techniques will continue to drive demand for more advanced linear accelerators. However, despite advances in radiation therapy techniques, most commercially available radiation therapy systems still present significant limitations that restrict clinicians ability to provide the most efficient and effective treatment possible. These limitations include the following: Limited versatility and precision. The limited speed and range of C-arm gantries used by most other systems often make it impractical to deliver radiation from more than five to nine treatment angles during a typical treatment session. These mechanical limitations reduce the system s ability to deliver precisely targeted radiation that avoids healthy tissue. Table of Contents Table of Contents Limited ability to provide frequent, quantitative images. Many traditional radiation therapy systems either do not incorporate CT imaging functionality or use imaging technologies that do not have the ability to generate daily, quantitative images. Since it is common for internal organs to shift and for the size of the tumor to change during the course of treatment, failure to obtain updated images and adapt the treatment plan throughout the course of treatment may result in a portion or potentially all of the radiation dose missing the tumor and instead being absorbed by healthy tissue. Failure to integrate multiple functions. Many traditional radiation therapy systems were designed solely for the purpose of delivering radiation and therefore do not possess integrated imaging, treatment planning, dose verification or quality assurance capabilities necessary for more advanced treatment protocols. The TomoTherapy Solution The Hi Art system is an advanced and versatile radiation therapy system for the treatment of a wide range of cancer types. We have designed the Hi Art system to offer clinicians and patients the following benefits: More versatile treatment capabilities. The Hi Art system s high-speed ring gantry and beam-shaping capability allow the intensity of the radiation beam to be modified and treatment to be delivered continuously in a helical pattern 360 degrees around the patient s body. It also enables treatment to be delivered from thousands of angles without extending the time it takes to complete the procedure. Daily, quantitative imaging for better identification of tumors, dose verification and treatment planning. The Hi Art system is the only commercially available radiation therapy system offering integrated quantitative CT imaging capabilities, which we market as our CTrue imaging technology. This technology depicts the density of tumors and healthy tissue more accurately than traditional radiation therapy systems. We believe that daily, quantitative images are necessary for the accurate delivery of IMRT and are essential to optimizing a patient s treatment by enabling clinicians to adapt the treatment plan in response to anatomical changes and the cumulative amount of radiation received by specific areas within the patient over time. Fully integrated treatment system for more precise radiation delivery. We believe that the integration of our CTrue imaging technology, treatment planning and helical delivery of radiation beams shaped by the MLC enables highly precise radiation delivery. This ensures that the radiation conforms to the patient s tumor and avoids sensitive structures. We also believe these features significantly benefit patients by providing a precisely targeted dose distribution which maximizes the radiation delivered to cancerous tissues and minimizes damage to healthy tissues. Efficient clinical workflow for IGRT and adaptive radiation therapy. We believe that the Hi Art system allows clinicians to easily and rapidly scan, plan and treat cancer patients. This capability enables healthcare providers to increase patient throughput for sophisticated IGRT and adaptive radiation therapy procedures using the Hi Art system. Low barriers to installation and implementation. The Hi Art system s compact design, with built-in shielding, allows customers to retrofit the Hi Art system into existing treatment rooms and avoid or reduce the significant construction costs that can be associated with the installation of other systems. We preassemble, test and commission each Hi Art system at our manufacturing facility and ship the unit almost fully assembled. This assembly process allows radiation beam-on within four days and treatments to begin within 45 days of delivery in most cases. Platform for further technological advancements in adaptive radiation therapy. We believe that the Hi Art system is the only commercially available linear accelerator that enables adaptive radiation therapy because of its unique ability to provide daily, quantitative images, high speed TABLE OF CONTENTS Page Summary 1 Risk Factors 9 Special Note Regarding Forward-Looking Statements 26 Use of Proceeds 27 Dividend Policy 27 Price Range of Common Stock 27 Capitalization 28 Selected Consolidated Financial Data 29 Management s Discussion and Analysis of Financial Condition and Results of Operations 31 Business 53 Management 73 Compensation Discussion and Analysis 80 Principal and Selling Shareholders 100 Transactions with Related Persons, Promoters, and Certain Control Persons 106 Description of Capital Stock 110 Shares Eligible for Future Sale 115 Material U.S. Federal Tax Considerations for Non-U.S. Holders of our Common Stock 118 Underwriting 122 Legal Matters 125 Experts 125 Where You Can Find More Information 125 Index to Consolidated Financial Statements F-1 Opinion of Michael Best & Friedrich LLP Consent of Grant Thornton LLP Consent of Virchow Krause Valuation, LLC Power of Attorney You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on our behalf. We have not, and the underwriters have not, authorized anyone to provide you with information different from, or in addition to, that contained in this prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date. Table of Contents delivery of radiation from 360 degrees around the body and the data necessary for clinicians to verify the actual radiation dose received by the patient. We also believe that the combination of these design features and our integrated treatment planning and optimization software will allow us to continue to enhance the Hi Art system s adaptive capabilities to a point where clinicians can routinely and easily adjust a patient s treatment as needed. Our Strategy Our goal is to become a leading provider of radiation therapy systems and the technology of choice for radiation therapy providers around the world. We are pursuing the following strategies to achieve this goal: Increase market awareness of the Hi Art system s clinical and economic benefits. In order to expand our installed base of Hi Art systems, we intend to continue to position the Hi Art system as the most advanced radiation therapy system for treating a wide range of cancer types effectively and efficiently. Expand our worldwide sales presence. We intend to add additional direct sales representatives to better penetrate the United States market, while further investing in direct and indirect sales and marketing efforts in international markets. Increase our profitability through cost reductions and improved operating leverage. In order to increase our profitability, we will seek to decrease our reliance on single-source suppliers of key components in order to enable us to negotiate better prices with a wider range of suppliers and to improve component reliability. In addition, a number of opportunities exist to reduce costs through re-engineering higher cost components. We will also seek to increase our profitability as we leverage our investments in our global service and support infrastructure through increased sales volumes. Continue to enhance our customer service and support capabilities. We intend to build upon our infrastructure and technology advantages by hiring additional support personnel, implementing regional training programs and expanding the number of local spare parts depots to continually augment and refine our customer service. Enhance the Hi Art system s treatment capabilities through on-going research and development initiatives. Our research and development initiatives are focused on making the treatment optimization process more fully automated, thereby decreasing the time necessary for clinicians to develop and adapt treatment plans. We believe these enhancements will allow clinicians to increase patient throughput without compromising treatment plan quality and increase our customers return on their investment. Risks Our business is subject to numerous risks as more fully described under Risk Factors including: We depend on the Hi Art system for substantially all of our revenue. The long sales cycle and high unit price of the Hi Art system, as well as other factors, may contribute to substantial fluctuations in our quarterly operating results and stock price. We face competition from numerous competitors, many of whom have greater resources than we do. Our reliance on single-source suppliers for critical components of the Hi Art system could harm our ability to meet demand for our products in a timely and cost-effective manner. Sales of the Hi Art system may be adversely affected if clinicians do not widely adopt IGRT and adaptive radiation therapy. Table of Contents We may be delayed or prevented from implementing our long-term sales strategy if we fail to educate clinicians about the benefits of the Hi Art system. If we are unable to satisfy the requirements of our licenses with the Wisconsin Alumni Research Foundation, or WARF, we could lose access to those licensed technologies and be unable to produce or sell the Hi Art system. Recent Developments Although our financial statements for the quarter ended September 30, 2007 are not yet complete, the following financial information reflects our estimate of those results, based on currently available information. We estimate that revenues for the three months ended September 30, 2007 were between $58 million and $60 million, compared to revenues of $37.2 million for the three months ended September 30, 2006, and $43.7 million for the three months ended June 30, 2007. As of September 30, 2007, we had a worldwide installed base of over 150 units and we estimate that our backlog was at least $225 million. The foregoing financial information is not a comprehensive statement of our financial results for the quarter ended September 30, 2007. The foregoing information should therefore be considered together with our full results of operations when published. The foregoing information has not been reviewed or audited by our independent registered public accounting firm and is subject to adjustment based upon, among other things, the finalization of our quarter-end closing and reporting processes. The estimates for any interim period are not necessarily indicative of our operating results for a full year or any future period, and are qualified in their entirety by, and should be read in conjunction with, Management s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements. Company Information We were incorporated in Wisconsin in 1997 under the name TomoTherapy Incorporated. Our principal executive offices are located at 1240 Deming Way, Madison, WI 53717-1954, and our telephone number is (608) 824-2800. TomoTherapy , Tomo , Hi Art and the TomoTherapy logo are registered trademarks of TomoTherapy and StatRTtm, CTruetm, TomoPortaltm, TomoGatewaytm and TomoExchangetm are trademarks of TomoTherapy. Our website is located at www.TomoTherapy.com. Information on our website is not part of this prospectus. Table of Contents THE OFFERING Selling shareholders The selling shareholders include members of our board of directors and senior management, and entities affiliated with them. Common shares offered by selling shareholders 8,500,000 Number of shares to be outstanding immediately after the offering 49,414,153 Use of proceeds We will not receive any proceeds from this offering. All proceeds of this offering will be received by the selling shareholders. We will pay all expenses of this offering, other than underwriter discounts.
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+Prospectus summary This summary highlights information contained in other parts of this prospectus. Because it is only a summary, it does not contain all of the information that you should consider before investing in shares of our common stock and it is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. You should read the entire prospectus carefully, especially "Risk factors" and our financial statements and notes to these financial statements, before deciding to invest in shares of our common stock. NovaCardia, Inc. We are a clinical-stage pharmaceutical company focused on developing drugs to treat major cardiovascular diseases that are underserved by existing therapies. We have two compounds in clinical development, KW-3902 for congestive heart failure, or CHF, and K201 (JTV-519) for atrial fibrillation, or A-Fib, an irregular heartbeat. We believe each compound has potential for use in both acute and chronic settings. We are currently testing the intravenous, or IV, formulation of KW-3902 in Phase 3 clinical trials for the treatment of the acute form of CHF in patients with renal impairment and fluid overload. We expect to have the results from our pivotal Phase 3 trials in mid-2008. We also plan to initiate a Phase 2 clinical trial of the oral formulation of KW-3902 for the treatment of chronic CHF in the second half of 2007. In addition, we intend to initiate a Phase 2 trial of the IV formulation of K201 (JTV-519) for the acute treatment of A-Fib in the second half of 2007. We hold commercial rights to our product candidates in major markets, including the United States and Europe, but excluding Asia, and plan to establish a hospital-based sales force to market the IV formulations of our product candidates in the United States. We plan to partner with third parties for the commercialization of our IV product candidates outside the United States and for the further development and commercialization of our oral product candidates in all regions where we have commercial rights. To expand our product pipeline, we intend to in-license additional product candidates with the potential to treat cardiovascular diseases. KW-3902 There are nearly five million people in the United States with CHF, according to the American Heart Association, or AHA. Many CHF patients experience acute CHF, a rapid deterioration of their condition, requiring urgent treatment in the hospital. Renal function is an important determinant of the management and outcome of both acute and chronic CHF, and we estimate that more than half of CHF patients have some degree of renal impairment, based on a study published in Circulation in 2004. Worsening renal function during hospital stay is a strong predictor of negative outcomes, including length of hospital stay and mortality. Fluid overload is one of the major causes of hospitalization for CHF patients, and approximately 80% of CHF patients are on chronic diuretic therapy to manage their fluid overload at the time of their hospitalization, according to the ADHERE Registry, a registry of acute heart failure patient cases in the United States. However, the use of diuretic therapy, such as Lasix, to manage fluid overload in CHF patients may lead to further deterioration of renal function. As a result, we believe there is a significant need for a new therapy that protects renal function while further reducing fluid overload in both acute and chronic CHF patients. KW-3902 is an adenosine A1 receptor antagonist that selectively blocks the effect of adenosine on the adenosine A1 receptor. In the kidneys, adenosine acts through the adenosine A1 receptor to restrict blood flow to the kidneys, which may result in worsening renal function and may also increase reabsorption of salt and water, thereby contributing to fluid overload. By blocking the adenosine A1 receptor, KW-3902 increases blood flow to the kidneys and reduces reabsorption of salt and water. We believe that these effects have the potential to improve the treatment of CHF patients by preserving renal function, improving the symptoms of fluid overload and enabling the more effective use of other CHF therapies. Therefore, KW-3902 may improve short- and long-term outcomes in CHF patients. We are developing IV and oral formulations of KW-3902 to be co-administered with diuretics for the treatment of acute and chronic CHF, respectively. We have completed three multi-center, placebo-controlled Phase 2 clinical trials of the IV formulation of KW-3902 in which we demonstrated that KW-3902 preserves renal function and improves diuresis in acute CHF patients. In addition, in March 2007, we completed a preliminary analysis of data obtained from 276 patients in our 304-patient pilot Phase 3 clinical trial of KW-3902. In this analysis, we observed an improvement in patients' shortness of breath, a symptom for which CHF patients are frequently hospitalized, and a persistent maintenance of renal function. In addition, we confirmed the optimal dosing regimen for our Phase 3 trials and we did not observe an adverse safety profile for KW-3902. We initiated two pivotal Phase 3 clinical trials of the IV formulation of KW-3902 in May 2007 and expect to have results from these trials in mid-2008. We have designed these pivotal trials to examine the effect of KW-3902 on dyspnea, or shortness of breath, renal function and worsening heart failure. We plan to initiate two additional Phase 3 trials of the IV formulation of KW-3902 and expect to commence one of these trials in mid-2007 and the other trial in the third quarter of 2007. We plan to commence a Phase 2 clinical trial of an oral formulation of KW-3902 in outpatients with chronic CHF in the second half of 2007. K201 (JTV-519) We are developing K201 (JTV-519) to treat A-Fib, a condition that afflicts over 2.2 million people in the United States and leads to over 440,000 hospitalizations per year, according to the most recent data from the AHA. A-Fib is an independent risk factor for stroke and increases the severity of symptoms experienced by CHF patients. We are developing IV and oral formulations of K201 (JTV-519) to address acute and chronic A-Fib, respectively. We believe K201 (JTV-519) has the potential to treat A-Fib without the side effects, such as life-threatening ventricular arrhythmias, associated with current therapies. We plan to commence a Phase 2 clinical trial of the IV formulation of K201 (JTV-519) for the acute treatment of A-Fib in the second half of 2007. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Strategy Our strategy is to in-license, develop and commercialize drugs to treat major cardiovascular diseases that are underserved by existing therapies. We intend to: rapidly develop and commercialize our product candidates; partner with third parties for the commercialization of our IV product candidates outside the United States and for the further development and commercialization of our oral product candidates in all regions where we hold commercial rights; establish a hospital-based sales force to sell our products in the acute care setting in the United States; and in-license additional cardiovascular product candidates. Risks relating to our business Our business and our ability to execute on our business strategy are subject to a number of risks of which you should be aware before you decide to buy our common stock. In particular, you should consider the following risks, which are discussed more fully in "Risk factors" beginning on page 8: We are highly dependent on the success of our two product candidates, KW-3902 and K201 (JTV-519), and we cannot give any assurance that either product candidate will receive regulatory approval or be successfully commercialized. KW-3902 and K201 (JTV-519) may not demonstrate adequate efficacy, may cause undesirable side effects or may have other properties that could delay or prevent their regulatory approval or commercialization or limit their commercial potential. The timing of clinical development activities is hard to predict, and delays in the clinical trials for either of our product candidates could result in increased costs and delay or limit our ability to obtain regulatory approval. We rely on third parties to conduct our clinical trials and manufacture our product candidates, and we cannot be sure that they will successfully carry out their contractual duties or meet expected deadlines. If we fail to enter into collaborations with respect to the oral formulations of our product candidates, we may not be able to execute this portion of our business strategy. Even if our product candidates are approved by regulatory authorities, they may still face regulatory and commercialization difficulties and will face intense competition. Our two product candidates, KW-3902 and K201 (JTV-519), are both in-licensed from third parties, and any dispute with these parties may adversely affect our ability to develop and commercialize these product candidates. We have had a history of losses since our inception, and we expect that losses will increase in future periods. Our net loss was $17.9 million in 2006 and $8.5 million during the first quarter of 2007 and, as of March 31, 2007, we had an accumulated deficit of $51.5 million. We may not have adequate intellectual property protection for our product candidates. (unaudited) Long-term debt, less current portion $ 953 $ 7,074 $ Stockholders' equity: Convertible preferred stock, $0.001 par value: 88,547,619 shares authorized and 85,268,699 shares issued and outstanding, actual; 88,547,619 shares authorized and 85,268,699 shares issued and outstanding, pro forma; 5,000,000 shares authorized and no shares issued and outstanding, pro forma as adjusted 85 85 Common stock, $0.001 par value: 105,000,000 shares authorized and 2,726,219 shares issued and outstanding, actual and pro forma; 100,000,000 shares authorized and shares issued and outstanding, pro forma as adjusted 3 3 Additional paid-in capital(2) 90,218 90,218 Accumulated other comprehensive income 3 AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Corporate information We were incorporated in Delaware in November 2001. Our principal executive offices are located at 12750 High Bluff Drive, Suite 300, San Diego, California 92130 and our telephone number is (858) 509-0455. Our corporate website address is www.novacardia.com. We do not incorporate the information contained on, or accessible through, our website into this prospectus, and you should not consider it part of this prospectus. Unless the context indicates otherwise, as used in this prospectus, the terms "NovaCardia," "we," "us" and "our" refer to NovaCardia, Inc., a Delaware corporation. We have applied for registration of the trademark "NovaCardia" and our NovaCardia logo with the United States Patent and Trademark Office. This prospectus also contains trademarks and tradenames of other companies, including Lasix and ADENTRI , and those trademarks and tradenames are the property of their respective owners. NovaCardia, Inc. (Exact Name of Registrant as Specified in Its Charter) The offering Common stock offered by NovaCardia shares Common stock to be outstanding after this offering shares Over-allotment option We have granted the underwriters an option for a period of 30 days to purchase up to additional shares of common stock. Use of proceeds We intend to use the net proceeds from this offering to fund clinical development of KW-3902 and K201 (JTV-519) and for working capital and general corporate purposes. See "Use of proceeds" beginning on page 42. Proposed NASDAQ Global Market symbol NCAR The number of shares of common stock that will be outstanding after this offering is based on 88,543,718 shares outstanding as of March 31, 2007, after giving pro forma effect to the assumed cash exercise of warrants to purchase 548,800 shares of our Series B preferred stock outstanding as of March 31, 2007 that will terminate if not exercised prior to the effectiveness of this offering, and excludes: 7,609,832 shares of common stock subject to outstanding options under our 2003 equity incentive plan, with a weighted average exercise price of $0.21 per share; 1,233,949 shares of common stock reserved for future issuance under our 2003 equity incentive plan; 18,000,000 shares of common stock reserved for future issuance under our 2007 equity incentive plan, 2007 non-employee directors' stock option plan and 2007 employee stock purchase plan, each of which will become effective upon the completion of this offering; 663,809 shares of common stock subject to outstanding warrants, with a weighted average exercise price of $0.97 per share; and up to 933,333 shares of common stock subject to an outstanding warrant issued in April 2007, with an exercise price of $1.125 per share, 666,666 shares of which are immediately exercisable and the remaining 266,667 shares of which will become exercisable if we borrow additional amounts under our credit facility (with the actual number of shares becoming exercisable equaling 3.0% of the amount actually drawn down under the credit facility, divided by the exercise price). Unless otherwise stated, all information contained in this prospectus assumes: a 1-for- reverse stock split of our common stock to be effected immediately prior to the completion of this offering; the conversion of all outstanding shares of our preferred stock, including 548,800 shares of Series B preferred stock issued upon the assumed cash exercise of warrants that will terminate if not exercised prior to the effectiveness of this offering, into an aggregate of 85,817,499 shares of common stock upon the completion of this offering; the filing of our amended and restated certificate of incorporation and adoption of our amended and restated bylaws, which will occur upon the completion of this offering; and no exercise of the underwriters' over-allotment option. Delaware 2834 33-0989994 (State or Other Jurisdiction of Incorporation or Organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 12750 High Bluff Drive, Suite 300 San Diego, CA 92130 (858) 509-0455 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) (1)Please see Note 1 to our financial statements for an explanation of the method used to calculate the historical and pro forma net loss per share and the number of shares used in the computation of the per share amounts. Randall E. Woods President and Chief Executive Officer NovaCardia, Inc. 12750 High Bluff Drive, Suite 300 San Diego, CA 92130 (858) 509-0455 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) (1)The pro forma balance sheet data give effect to $5.0 million borrowed in April 2007 and the restructuring of our outstanding indebtedness in April 2007 in connection with an amendment to our loan and security agreement with Lighthouse Capital Partners V, L.P. (2)The pro forma as adjusted balance sheet data also give effect to the assumed cash exercise of warrants to purchase 548,800 shares of our Series B preferred stock outstanding as of March 31, 2007 that will terminate if not exercised prior to the effectiveness of this offering at an exercise price of $1.125 per share, resulting in aggregate proceeds of $617,400, the sale of shares of our common stock in this offering at an assumed initial public offering price of $ per share, the mid-point of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering costs payable by us and the automatic conversion of all preferred stock, including the 548,800 shares of Series B preferred stock issued upon the assumed cash exercise of warrants that will terminate if not exercised prior to the effectiveness of this offering. A $1.00 increase (decrease) in the assumed initial public offering price of $ per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering and our cash, cash equivalents and short-term investments, working capital, total assets and total stockholders' equity by $ million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering costs payable by us. The pro forma as adjusted information is illustrative only and, following the completion of this offering, will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. Copies to: Barbara L. Borden, Esq. J. Patrick Loofbourrow, Esq. Cooley Godward Kronish LLP 4401 Eastgate Mall San Diego, CA 92121 (858) 550-6000 Charles K. Ruck, Esq. Cheston J. Larson, Esq. Latham & Watkins LLP 12636 High Bluff Drive, Suite 400 San Diego, CA 92130 (858) 523-5400
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+Prospectus Summary 1
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. Before investing in our common stock, you should read the entire prospectus carefully, including the section entitled "Risk Factors", and our financial statements and the related notes, which are incorporated by reference to our annual report on Form 10-K, filed with the SEC on September 17, 2007. Unless the context requires otherwise, the terms "we," "us," "our," "our company" and "our business" collectively refer to: (1) the combined operations of the Claims Services Group of Automatic Data Processing, Inc., or ADP, for periods prior to its acquisition by Solera Holdings, LLC, (2) the consolidated operations of Solera Holdings, LLC for the periods following its April 2006 acquisition of the Claims Services Group and prior to the completion of our corporate reorganization, and (3) Solera Holdings, Inc. as of the completion of our corporate reorganization and thereafter. Our fiscal year ends on June 30 of each year. Fiscal years are identified in this prospectus according to the calendar year in which they end. For example, the fiscal year ended June 30, 2007 is referred to as "fiscal 2007." Our Company We are the leading global provider of software and services to the automobile insurance claims processing industry. Our customers include more than 900 automobile insurance companies, including each of the ten largest automobile insurance companies in Europe and each of the ten largest automobile insurance companies in North America. We also provide our software and services to over 33,000 collision repair facilities, 7,000 independent assessors and 3,000 automotive recyclers. Our software and services help our customers: estimate the costs to repair damaged vehicles; determine pre-collision fair market values for vehicles damaged beyond repair; automate steps of the claims process; outsource steps of the claims process that insurance companies have historically performed internally; and improve their ability to monitor and manage their businesses through data reporting and analysis. The automobile insurance claims process is complex and time-consuming, with multiple steps requiring significant interaction among several parties. Our software and services automate and simplify this process, and include: estimating and workflow software that helps our customers determine vehicle repair costs, calculate the fair market values of vehicles, connect with other industry participants and manage the overall claims process; salvage and recycling software that helps automotive recyclers manage their inventory and locate, sell and exchange vehicle parts; business intelligence and consulting services that help our customers assess and monitor their performance through customized data, reports and analyses; and shared services that are designed to help insurance companies outsource claims-related tasks, such as estimate reviews and policyholder interaction. We generated revenues of $472.0 million in fiscal 2007. Approximately 69% of these revenues were generated outside the U.S., due in large part to our historical roots in Europe, our ability to enter new markets and the opportunities for growth we have found in certain non-U.S. markets. Industry Trends We estimate that the global automobile insurance industry processes over 100 million claims per year. The primary participants in the automobile insurance claims process are automobile insurance companies, collision repair facilities, independent assessors and automotive recyclers. Our business is affected by trends associated with these participants, including: growth in the number of worldwide vehicles; an increasing percentage of vehicles that are covered by automobile insurance; initiatives by automobile insurance companies and other industry participants to reduce costs and increase claims processing efficiency; and increased use of recycled and aftermarket parts. Key Competitive Strengths We believe that the following strengths make Solera the leading global provider of software and services to the automobile insurance claims processing industry. Leading Global Provider. We operate in 49 countries across five continents and believe we are either the largest or second-largest provider of automobile insurance claims processing software and services in each of our markets, except the four countries that we have recently entered. Significant Barriers to Entry. We believe our proprietary databases pose barriers to entry due to the significant capital investment and time that would be required to replicate and customize them for use in local markets. We have developed our proprietary repair estimating database over the last 35 years. Long-Standing Relationships with Customers. Our relationships with our ten largest customers in Europe and North America date back, on average, 16 and 17 years, respectively. History of Developing New Software and Services. We continually develop new software and services to meet our customers' needs through both internal development and the acquisition and licensing of third-party products and technology. Attractive Operating Model. We believe we have an attractive operating model due to the recurring nature of our revenues, the scalability of our databases and software and the significant operating cash flow we generate. Business Strategy Broaden the Scope of our Software and Services. We intend to further broaden the capabilities, features and functionality of our claims processing software, as well as the breadth of our service offerings. Expand Customer Base in Existing Markets. We seek to expand our customer base in existing markets by competing on the quality of our software and services, our industry expertise and our strong industry relationships. Expand into New Markets. We intend to expand in markets where we have recently established operations, such as China and India, and enter markets where we currently have no operations. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Improve Operational Efficiencies. We have identified and targeted several operational efficiency initiatives, including the elimination of database and infrastructure redundancies; productivity and technological enhancements; and reduction of overhead. Pursue Strategic Acquisitions. We plan to supplement our organic growth by acquiring businesses or technologies to expand the range of our services, increase our customer base and enter new markets. Our History Our operations began in 1966, when Swiss Re Corporation founded our predecessor. Solera was founded in February 2005 by our Chief Executive Officer, Tony Aquila, and private equity firm GTCR Golder Rauner II, L.L.C., or GTCR. On April 13, 2006, Solera acquired the Claims Services Group from ADP for approximately $1.0 billion. We refer to this acquisition in this prospectus as the Acquisition. On May 16, 2007, we completed an initial public offering of our common stock. Risks Affecting Us You should carefully consider the information under the heading "Risk Factors" beginning on page 8 of this prospectus and all other information in this prospectus before investing in our common stock. Corporate and Other Information Our principal executive offices are located at 6111 Bollinger Canyon Road, Suite 200, San Ramon, California 94583, and our telephone number is (925) 866-1100. Our website is www.solerainc.com. The information contained in, or that can be accessed through, our website is not a part of this prospectus and should not be relied upon in determining whether to make an investment in our common stock. This prospectus refers to brand names, trademarks, service marks and trade names of us and other companies and organizations, and these brand names, service marks and trade names are the property of their respective holders. Amendment No.1 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 The Offering Common stock offered by the selling stockholders 18,131,435 shares Common stock to be outstanding after this offering 64,793,563 shares Option to purchase additional shares Certain of our existing stockholders have granted the underwriters an option to purchase up to an additional 2,719,715 shares. Use of proceeds We will not receive any proceeds from the sale of shares by the selling stockholders. See "Use of Proceeds." Dividend policy We currently intend to retain all future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. New York Stock Exchange symbol "SLH" The number of shares of our common stock to be outstanding after this offering excludes: 423,600 shares of our common stock issuable upon the exercise of options held by certain of our employees; 214,342 shares of our common stock issuable upon the vesting of restricted stock units held by certain of our named executive officers and employees; and 5,071,670 additional shares of our common stock reserved for issuance under our 2007 Long-Term Equity Incentive Plan and our 2007 Employee Stock Purchase Plan. Except as otherwise indicated, all of the information in this prospectus assumes no exercise of the underwriters' option to purchase additional shares. Solera Holdings, Inc. (Exact name of Registrant as specified in its charter) Delaware 7370 20-4552341 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification in Number) (I.R.S. Employer Identification No.) 6111 Bollinger Canyon Road, Suite 200 San Ramon, California 94583 (925) 866-1100 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) Jack Pearlstein Chief Financial Officer Solera Holdings, Inc. 6111 Bollinger Canyon Road, Suite 200 San Ramon, California 94583 (925) 866-1100 (Name, address, including zip code, and telephone number, including area code, of agent for service) (1)The Claims Services Group was owned by ADP until subsidiaries of Solera Holdings, LLC acquired it on April 13, 2006. (2)The statement of operations data for fiscal 2006 include the results of operations for our predecessor from April 14, 2006 and the results of operations for Solera Holdings, LLC for all of fiscal 2006. Financial information presented reflects adjustment of assets and liabilities to then-fair value at the date of the Acquisition, which is used as the basis for amounts included in our results of operations from April 14, 2006 until June 30, 2006. Prior to the Acquisition, Solera Holdings, LLC's operations consisted primarily of developing our business plan, recruiting personnel, providing consulting services, raising capital and identifying and evaluating operating assets for acquisition. (3)All unit/share and per unit/share amounts reflect a one-for-three reverse split of our common units, which was completed on April 30, 2007. (4)We define EBITDA as the sum of (1) net income (loss), (2) income tax provision (benefit), (3) interest expense and (4) depreciation and amortization. EBITDA does not represent and should not be considered as an alternative to net income or cash flow from operations, as determined by U.S. generally accepted accounting principles, or GAAP, and our calculation thereof is not comparable to that reported by other companies. Our management uses EBITDA as a means of evaluating our operating performance and comparing our performance against our operations in prior periods. Annual bonus payments to our management are also based, in large part, on the achievement of specified levels of EBITDA. We believe that EBITDA is useful to investors, when presented along with the primary GAAP presentation of net income (loss) and the related discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations," incorporated by reference to our annual report on Form 10-K filed with the SEC on September 17, because it provides them with information relating to our operating results on the same basis as that used by our management. EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are: it does not reflect our capital expenditures or future requirements for capital expenditures or contractual commitments; Copies to: Dennis M. Myers, P.C. Gregory C. Vogelsperger Kirkland & Ellis LLP 200 East Randolph Drive Chicago, Illinois 60601 Telephone: (312) 861-2000 Telecopy: (312) 861-2200 Steven B. Stokdyk Michael E. Sullivan Latham & Watkins LLP 633 West Fifth Street, Suite 4000 Los Angeles, California 90071 Telephone: (213) 485-1234 Telecopy: (213) 891-8763 (a)For the period ended April 13, 2006, Claims Services Group's Acquisition-related costs of $1.7 million consisted of $1.6 million of transaction and retention compensation and $0.1 million of legal fees, professional fees, severance costs and other transition costs. For the fiscal year ended June 30, 2006, our Acquisition-related costs of $1.6 million consisted of $0.5 million of expense related to the exercise by employees of the Claims Services Group of ADP stock options and $1.1 million of legal fees, professional fees, severance costs and other transition costs. For the fiscal year ended June 30, 2007, our Acquisition-related costs of $11.7 million consisted of $9.5 million of severance costs, $0.1 million of legal and professional fees and $2.1 million of other transaction costs. Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001328003_redpoint_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001328003_redpoint_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus that we believe is most important to understanding how our business is currently being conducted. It is not complete and may not contain all of the information that is important to you. You should read the entire prospectus carefully, including the Risk Factors section and the consolidated financial statements and related notes included in this prospectus, before making an investment decision. Business Overview Redpoint is a development stage biotechnology company using advanced technology to discover and develop novel taste enhancers and aversive taste blockers for the food and beverage and pharmaceutical industries. Our discovery programs are designed to capitalize on advances in taste science and our know-how to create new products. We believe these products, when developed, may have the potential to make processed foods and beverages healthier and enhance the acceptability, safety and efficacy of many types of pharmaceutical products. We have developed an integrated discovery platform and identified prototype compounds for both enhancement of sweet and savory taste and blocking bitter taste. To leverage our technology in the food and beverage markets, we intend to partner with major ingredient suppliers, or food and beverage companies, to develop and commercialize taste enhancers through strategic collaborations and licensing agreements. To this end, we have entered into a joint research and development and license agreement with Givaudan Schweiz AG to develop and commercialize compounds that enhance sweetness or savory sensation, as well as compounds that block or desensitize bitter taste for use in the food and beverage industry. In addition, we plan to use our technology to discover aversive taste blockers, principally to develop a pipeline of proprietary taste-modified pharmaceutical products. We may develop such products ourselves or partner with pharmaceutical companies who are seeking to extend the patent life or enhance the performance of their products. We have identified several categories of products where patient acceptability, or the potential for novel formulation options, are currently limited due to the intense bitter or other aversive taste of the active pharmaceutical ingredient. We plan to incorporate the proprietary bitter taste or aversive taste blockers to be found through our discovery programs with drugs of proven safety and efficacy to create novel, valued-added formulations. We currently own or have exclusive licenses to seven issued U.S. patents and 18 pending U.S. applications and one issued foreign patent and 18 foreign applications. We have not yet developed any products that are commercially available. Our research and development efforts are currently focused upon the identification of two novel compounds for taste modification. We are working to identify a compound that can be used to enhance the taste of both sweet and savory flavors in a wide variety of food and beverage applications. Additionally, we are working to identify a compound that could act as a universal bitter taste blocker for use both in our pharmaceutical product pipeline and for collaborative formulation development programs with major pharmaceutical companies. We intend to design our compounds to be safe and effective in minute quantities, and to be able to incorporate them into food and pharmaceutical products through the GRAS (Generally Recognized as Safe) determination/notification process. Although the GRAS process involves extensive testing to ensure safety in use, we believe that the overall time required (estimated to be 18-24 months) and development costs incurred (estimated to be $1-2 million per compound) are modest compared to the size of the accessible markets. Moreover, a single GRAS-determined taste enhancer can potentially be used in a wide range of food applications. In addition, a GRAS determination is heavily relied upon by the Food and Drug Administration, or FDA, to evaluate the safety and inclusion of flavor modifiers into pharmaceutical products. A single aversive taste blocker can potentially be used to create a multitude of new drug formulations that in many cases may be patentable in their own right. New drug product or product variations will require FDA approval through the new drug approval, or NDA, process. We believe there may be additional potential applications for our technology for the modification of Copies to: Andrew P. Gilbert, Esq. Morgan, Lewis & Bockius LLP 502 Carnegie Center Princeton, New Jersey 08540 (609) 919-6600 aversive taste sensations in food products, as well as potential for discovering novel compounds for other pharmaceutical applications. The Offering This prospectus relates to the resale by the selling security holders identified in this prospectus of up to 55,851,515 shares of common stock, of which 42,079,263 shares are issued and outstanding as of June 22, 2007 and 13,772,252 shares are issuable upon the exercise of certain warrants. All of the shares, when sold, will be sold by these selling security holders. The selling security holders may sell their shares of common stock from time to time at market prices prevailing at the time of sale, at prices related to the prevailing market price, or at negotiated prices. We will not receive any proceeds from the sale of the shares of common stock by the selling security holders other than as a result of the exercise of warrants for cash held by the selling security holders. Corporate History Redpoint was incorporated in August 1995 under the name of Linguagen Corp., based on the pioneering work of its scientific founder Robert Margolskee, M.D., Ph.D. Dr. Margolskee is Professor of Neuroscience and Pharmacology at the Mount Sinai School of Medicine. Dr. Margolskee s laboratory has made major discoveries in the molecular biology of taste signaling pathways. We have obtained exclusive licenses to key technology patents, covering discoveries in his laboratory, from the Mount Sinai School of Medicine. Originally we were focused on broadening the application of natural products such as nucleotides for food and pharmaceutical taste modification applications. Since November 2003, we successfully recruited a professional management and scientific team with extensive experience in biotechnology, pharmaceutical discovery and product development, and refocused our research efforts on the discovery of proprietary compounds acting through novel biochemical mechanisms, either as enhancers acting for sweet and savory tastes, or as bitter blockers for pharmaceutical applications. Since refocusing our efforts, we have made key advances in the discovery of prototype compounds for both sweet and savory taste enhancement and pharmaceutical product bitter blocking. We have filed patent applications covering both aspects of our discovery technology and chemical compositions of matter for active compounds. In order to drive our discovery programs, we built an integrated discovery platform incorporating many state-of-the art tools and capabilities pioneered in the pharmaceutical industry, including capabilities in molecular biology, biochemistry, pharmacology, high throughput screening, electrophysiology, cheminformatics, and transgenic/operant animal models. We complement these capabilities with sensory testing and regulatory affairs expertise, to complete a platform for the discovery and development of proprietary compounds for use in pharmaceutical, prescription, OTC, food and beverage products. Our principal executive offices are located at 7 Graphics Drive, Ewing, New Jersey, 08628. Our telephone number is (609) 637-9700. Our website address is www.redpointbio.com. The information contained on our website is not incorporated by reference into, and does not form any part of, this prospectus. Recent Developments Reverse Triangular Merger and Private Placement On March 12, 2007, we entered into the Agreement and Plan of Merger, dated as of March 12, 2007, by and among Redpoint, on the one hand, and Robcor, Robcor Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Robcor, referred to herein as Merger Sub, Robcor, LLC, a Kentucky Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o limited liability company and wholly-owned subsidiary of Robcor, referred to herein as Robcor, LLC, and Halter Financial Investments, L.P., a Texas limited partnership, and Michael Heitz, as stockholders of Robcor, on the other hand, referred to herein as the Reverse Merger Agreement. The transactions contemplated by the Reverse Merger Agreement were consummated on March 12, 2007, which is referred to herein as the Closing or Closing Date. Pursuant to the Reverse Merger Agreement, on the Closing Date, Merger Sub merged with and into Redpoint, which will be referred to herein as the Reverse Merger, with Redpoint being the surviving corporation. Redpoint became a wholly-owned subsidiary of Robcor and the outstanding shares of capital stock, convertible notes and certain warrants to purchase capital stock of Redpoint were converted into an aggregate of 35,073,259 shares of Robcor common stock in accordance with the Delaware General Corporation Law, also known as the DGCL, on the terms and conditions as set forth in the Reverse Merger Agreement. Additionally, on the Closing Date, Robcor cancelled and extinguished 1,150,000 shares of Robcor common stock held by our former stockholder Michael Heitz in exchange for the transfer to Mr. Heitz, simultaneous with the Closing, of Robcor s membership interest in Robcor, LLC held prior to the Closing Date. Contemporaneously with the Reverse Merger, Redpoint and Robcor completed the first closing of a private placement, referred to herein as the Private Placement, of an aggregate of 24,729,060 shares of Robcor common stock at a price of $0.81 per share, together with three-year warrants to buy 25% of the number of shares of Robcor common stock purchased at a cash exercise price of $1.35 per share, referred to herein as the Investor Warrants. On April 6, 2007, Redpoint and Robcor completed the second and final closing of the Private Placement of an aggregate of 16,084,347 shares of Robcor common stock at a price of $0.81 per share, together with the Investor Warrants. Givaudan Agreement On March 27, 2007, we entered into a Joint Research and Development and License Agreement, which we refer to as the Givaudan Agreement, with Givaudan Schweiz AG, a Swiss company (Givaudan), for the development and commercialization of compounds that enhance sweetness or savory sensation, as well as compounds that block or desensitize bitter taste for use in the food and beverage industry, which we refer to as the Field. Under the Givaudan Agreement, Redpoint and Givaudan will collaborate exclusively with each other to discover and develop taste enhancer compounds and bitter blocker compounds that act primarily through the modulation of the TRPM5 channel (Collaboration Compounds) pursuant to the research plan and the development plan, respectively. In consideration of our agreement to conduct research and develop Collaboration Compounds and grant exclusive licenses and other rights to Givaudan pursuant to the terms and conditions of the Givaudan Agreement, Givaudan agreed to pay us an upfront technology fee in the amount of $1.3 million and provide research funding to us over the initial 3.5 year term of the Givaudan Agreement of up to $11.6 million. Givaudan will also reimburse us for costs incurred by Redpoint in connection with obtaining certain regulatory approvals. In addition, Givaudan also agreed to pay us milestone payments of up to $2.5 million upon the achievement of specified development and commercialization events set forth in the Givaudan Agreement. Givaudan will make royalty payments to us, including an annual minimum royalty and royalty payments based on net sales of Givaudan products that contain the Collaboration Compounds for use in the Field. We will make certain limited payments to Givaudan relating to the use of the Collaboration Compounds outside the Field. Reincorporation Merger On May 3, 2007, the holders of a majority (approximately 61.1%) of the 78,668,675 shares of our common stock outstanding as of May 3, 2007 executed a written consent approving the Reincorporation The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Merger described earlier. The Reincorporation Merger was deemed effective on June 15, 2007 and resulted in: the change in our state of incorporation from Florida to Delaware via the merger of Robcor into Redpoint, pursuant to the Agreement and Plan of Merger, dated May 3, 2007, between us and Redpoint, which means that we, as the surviving corporation in the Reincorporation Merger, are now governed by the laws of the State of Delaware; the change of Robcor s duly registered name from Robcor Properties, Inc. to Redpoint Bio Corporation ; Redpoint s Third Amended and Restated Certificate of Incorporation becoming the certificate of incorporation of the surviving corporation, under which the authorized number of shares of common stock was decreased from 1,000,000,000 shares of common stock, no par value per share, as authorized under Robcor s articles of incorporation, to 150,000,000 shares of common stock, $0.0001 par value per share, and the authorized number of shares of preferred stock was decreased from 20,000,000 shares of preferred stock, no par value per share, as authorized under Robcor s articles of incorporation, to 10,000,000 shares of preferred stock, $0.0001 par value per share; Redpoint s Amended and Restated By-laws became our by-laws as the surviving corporation; and a 4,132,705 share increase to the maximum number of shares of common stock reserved for issuance under our 2007 Omnibus Equity Compensation Plan, from 13,511,562 to 17,644,267 shares. Outstanding Securities As of June 22, 2007, there were 78,916,157 shares of our common stock outstanding, outstanding options to purchase 8,947,393 shares of our common stock, and outstanding warrants to purchase 13,963,737 shares of our common stock. The information in this prospectus is not complete and may be changed. The selling security holders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED JULY 18, 2007 File No. 333-143507 PROSPECTUS 55,851,515 Shares of Common Stock REDPOINT BIO CORPORATION Summary Financial Data The following is a summary of our financial position. You should read this information together with our financial statements and the related notes appearing at the end of this prospectus and the Management s Discussion and Analysis of Financial Condition and Results of Operations section of this prospectus. Three Months Ended Year ended December 31, March 31, 2004 2005 2006 2006 2007 (in thousands, except per share data) Statements of Operations Data: Research and grant revenue $ 224 $ 410 $ $ $ 41 Operating expenses: Research and development 2,400 2,899 3,631 908 2,569 General and administrative 2,659 2,126 2,811 708 911 Total operating expenses 5,059 5,025 6,442 1,616 3,480 Operating loss (4,835 ) (4,615 ) (6,442 ) (1,616 ) (3,439 ) Interest income 32 94 53 16 21 Interest expense (100 ) (929 ) (42 ) (1,630 ) Loss before income taxes (4,803 ) (4,621 ) (7,318 ) (1,642 ) (5,048 ) Income tax benefit 254 466 Net loss (4,803 ) (4,367 ) (6,852 ) (1,642 ) (5,048 ) Accretion of redeemable convertible preferred stock (669 ) (1,148 ) (1,159 ) (284 ) (225 ) Net loss applicable to common stockholders $ (5,472 ) $ (5,515 ) $ (8,011 ) $ (1,926 ) $ (5,273 ) Basic and diluted net loss per common share $ (1.60 ) $ (1.25 ) $ (1.81 ) $ (0.43 ) $ (0.30 ) Weighted average number of shares outstanding 3,412 4,403 4,429 4,493 17,321 As of March 31, 2007 (in thousands) Balance Sheet Data: Cash and cash equivalents $ 16,722 Working capital 15,370 Total assets 19,866 Long-term debt, net of current portion 498 Deficit accumulated during the development stage (27,567 ) Total stockholders equity 14,989 This prospectus relates to offers and resales or other dispositions by certain of our security holders or their transferees of up to 55,851,515 shares of our common stock, par value $0.0001 per share, including 13,772,252 shares issuable upon the exercise of warrants. These shares may be sold by the selling security holders from time to time in the over-the-counter market or other national securities exchange or automated interdealer quotation system on which our common stock is then listed or quoted, through negotiated transactions or otherwise. The prices at which the selling security holders may sell the shares will be determined by the prevailing market price for the shares or in negotiated transactions. We will not receive any of the proceeds from the disposition of these shares by the selling security holders, other than as a result of the exercise of warrants for cash held by the selling security holders. We will bear all costs, expenses and fees in connection with the registration of these shares. The selling security holders will bear all commissions and discounts, if any, attributable to their respective sales of shares. Our common stock is currently quoted on the OTC Bulletin Board under the symbol RPBC. On July 16, 2007, the last reported sales price of our common stock on the OTC Bulletin Board was $2.40 per share.
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+PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. Unless otherwise stated in this prospectus, references to we, us or our company refer to Alpha Security Group Corporation. Unless we tell you otherwise, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option and that Maxim Group LLC has not exercised its purchase option. The term business combination as used in this prospectus means an acquisition, through a merger, capital stock exchange, asset acquisition or other similar business combination, of one or more operating businesses in the U.S. homeland security or defense industries or a combination thereof. As used in this prospectus, a target business shall include assets or an operating business in the U.S. homeland security or defense industries or a combination thereof. The term initial stockholder as used in this prospectus refers to those persons that held shares of our common stock prior to the date of this prospectus. The term public stockholder as used in this prospectus refers to those persons that purchase the securities offered by this prospectus and any of our initial stockholders that purchase these securities either in this offering or afterwards, provided that our initial stockholders status as public stockholders shall only exist with respect to those securities so purchased. The term trust account as used in this prospectus means a trust account at JP MorganChase, New York, New York maintained by American Stock Transfer and Trust Company, acting as trustee. The term special advisor as used in this prospectus means Michael Weinstein, who has served as a special advisor to us since June 2005. Unless the context indicates otherwise, numbers in this prospectus have been rounded and are, therefore, approximate. All share and per share information in this prospectus gives retroactive effect to a 0.80-for-1 reverse stock split effected in September 2006. The Company We are a Delaware blank check company, also known as a Business Combination Companytm or BCCtm, formed in April 2005 for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition or other similar business combination, one or more domestic or international operating businesses in the U.S. homeland security or defense industries or a combination thereof. We do not have any specific merger, capital stock exchange, asset acquisition or other business combination under consideration and we have not, nor has anyone on our behalf, contacted any potential target business or had any discussions, formal or otherwise, with respect to such a transaction. To date our efforts have been limited to organizational activities as well as activities related to this offering. As a result of the events of September 11, 2001 and the war on global terrorism, many defense industry-based companies expanded their businesses into the homeland security industry in order to take advantage of their existing government sales channels and expand the market for their products and services. Accordingly, we believe the current environment is conducive to the purchase of one or more operating businesses engaged in the U.S. homeland security industry or the defense industry or a combination thereof, in order to capitalize on such businesses existing government contracts and relationships. Our management, board of directors and special advisor have established an extensive network of relationships from which to identify and generate acquisition opportunities within the homeland security and defense industries. Certain of our directors have extensive experience in the defense sector and more recently in homeland security, including serving at the highest levels of the United States Armed Forces and the Department of Homeland Security as well as in high levels of government. In addition, we believe the experience of our officers and directors in investment banking and private equity investments will be beneficial in structuring and consummating a business combination. Table of Contents We are focused on a business combination in the U.S. homeland security or defense industries, or a combination thereof, which includes, among others, the following sectors: nuclear and radiological prevention; ground transport security; aviation security; port and maritime security; border security; physical infrastructure protection; cyber security; emergency and disaster preparedness and response; bioterrorism prevention; counterterrorism and law enforcement; domestic and foreign intelligence; information technology solutions, systems engineering and operation, management and support services to the U.S. Department of Defense and other U.S. government agencies; and support services related to defense for the various U.S. national laboratories. While we may seek to effect business combinations with more than one target business in the U.S. homeland security or defense industries or a combination thereof, our initial business combination must be for assets or with a target business the fair market value of which is at least equal to 80% of our net assets at the time of such acquisition (exclusive of Maxim Group LLC s deferred underwriting compensation, including interest thereon, held in the trust account). Consequently, it is likely that we will have the ability to effect only a single business combination. There is no limitation on our ability to raise funds privately or through loans that would allow us to acquire a target business or businesses with a fair market value in an amount greater than 80% of our net assets at the time of acquisition. We have not made any agreements or arrangements, or had any preliminary discussions, with respect to financing arrangements with any third party. We do not have any specific business combination under consideration or contemplation and we have not, nor has anyone on our behalf, contacted any prospective target business or had any discussions, formal or otherwise with respect to such a transaction. Moreover, we have not engaged or retained any agent or other representative to identify or locate any suitable acquisition candidate for us. Additionally, neither we nor any of our agents or affiliates have been approached by any candidates or representatives of any candidates with respect to a possible business combination with our company. If we are unable to consummate a business combination within the allotted time periods set forth in this prospectus, we will implement a plan of dissolution and distribution which will include the liquidation of our trust account to our public stockholders. Our officers and directors will not receive any compensation in this offering other than reimbursement for out-of-pocket expenses incurred by them on our behalf, which includes an aggregate of $187,800 in loans made to us in May, 2005 by Steven M. Wasserman, our Chief Executive Officer, President and Co-Chairman of our board of directors, and Robert B. Blaha, our Chief Management Officer, Executive Vice President and a director, and an additional loan of up to $250,000 to be made by Mr. Wasserman prior to the closing date of this offering to pay for offering expenses. Also, we have agreed to pay ASG Management, Inc., an affiliated third party of which Mr. Wasserman and Mr. Blaha are principals, $7,500 per month for office space and certain additional general and administrative services. Our executive offices are located at 328 West 77th Street, New York, New York, 10024, and our telephone number at that location is (212) 877-1588. Table of Contents Prior to the closing of this offering, Steven M. Wasserman, our Chief Executive Officer, President and Co-Chairman of our board of directors and Constantinos Tsakiris, a member of our board of directors, will have purchased an aggregate of 3,200,000 warrants from us at a price of $1.00 per warrant ($3,200,000 in the aggregate) in a private placement under the Securities Act of 1933, as amended. Such warrants are identical to the warrants included in the units in this offering. In the event we fail to consummate a business combination the private placement warrants will expire worthless. Furthermore, these warrants are subject to transfer restrictions which expire on the earlier of: (i) a business combination or (ii) our dissolution and liquidation. We have granted the underwriters a 45-day option to purchase up to 900,000 additional units solely to cover over-allotments, if any. The over-allotment option will be used only to cover the net syndicate short position resulting from the initial distribution. Table of Contents Private Placement No less than two days before the effectiveness of the registration statement of which this prospectus forms a part, Steven M. Wasserman, our Chief Executive Officer, President and Co-Chairman of our board of directors and Constantinos Tsakiris, a member of our board of directors, will purchase from us an aggregate of 3,200,000 warrants at $1.00 per warrant ($3,200,000 in the aggregate) in a private placement. Mr. Wasserman will purchase 500,000 warrants and Mr. Tsakiris will purchase 2,700,000 warrants. Messrs. Wasserman and Tsakiris will pay the purchase price for the private placement warrants out of their own funds and will not receive, directly or indirectly, any cash or other consideration from any party in order to make these purchases. Such funds will not be borrowed from any third party. Such warrants are identical to the warrants included in the units in this offering. Each warrant is exercisable into one share of common stock at $7.50 per share and will become exercisable on the later of: (i) the completion of a business combination with a target business or (ii) one year from the date of this prospectus. The warrants will expire at 5:00 p.m., New York City time, on [ ], 2011, four years from the date of this prospectus. All of the gross proceeds from the sale of the 3,200,000 warrants in the private placement, or $3,200,000, will be deposited into the trust account. The private placement warrants contain restrictions prohibiting their transfer until the earlier of the consummation of a business combination or our dissolution and liquidation and will be subject to a lock-up agreement and held in accounts established by each of Mr. Wasserman and Mr. Tsakiris with Maxim Group LLC until such time as the restrictions on transfer expire. Mr. Wasserman and Mr. Tsakiris will not request, and Maxim Group LLC will not grant, any waiver of the lock-up agreement. Furthermore, in each case, these warrants may not be transferred other than in accordance with the Securities Act of 1933, as amended. [remainder of page intentionally left blank] TABLE OF CONTENTS Page Prospectus Summary 1 Summary Financial Data 14 Risk Factors 16 Use of Proceeds 37 Dilution 42 Capitalization 44 Management s Discussion and Analysis of Financial Condition and Results of Operations 45 Proposed Business 48 Management 64 Principal Stockholders 71 Certain Relationships and Related Transactions 73 Description of Securities 75 Underwriting 81 Legal Matters 87 Experts 87 Where You Can Find Additional Information 87 Index to Financial Statements F-1 EX-1.1: FORM OF UNDERWRITING AGREEMENT EX-4.4: FORM OF WARRANT AGREEMENT EX-5.1: OPINION OF EISEMAN LEVINE LEHRHAUPT KAKOYIANNIS PC EX-10.2: FORM OF INVESTMENT MANAGEMENT TRUST AGREEMENT EX-10.3: FORM OF STOCK ESCROW AGREEMENT EX-10.6.3: AMENDED AND RESTATED LETTER AGREEMENT EX-10.7: FORM OF UNIT PURCHSE OPTION AGREEMENT EX-10.8: FORM OF SUBSCRIPTION AGREEMENT EX-23.1: CONSENT OF GOLDSTEIN GOLUB KESSLER LLP You should rely only on the information contained or incorporated by reference in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information in this prospectus is accurate as of any date other than the date on the front cover of this prospectus. We obtained statistical data, market data and other industry data and forecasts used throughout this prospectus from publicly available information. While we believe that the statistical data, industry data, forecasts and market research are reliable, we have not independently verified the data, and we do not make any representation as to the accuracy of the information. This prospectus contains forward-looking statements that involve substantial risks and uncertainties as they are not based on historical facts, but rather are based on current expectations, estimates and projections about our industry, our beliefs, and our assumptions. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. You should not place undue reliance on any forward-looking statements, which apply only as of the date of this prospectus. Business Combination Companytm and BCCtm are service marks of Maxim Group LLC. Table of Contents The Offering In making your decision on whether to invest in our securities, you should take into account not only the backgrounds of our management team and the U.S. homeland security and defense industries targeted by us for an acquisition, but also the special risks we face as a blank check company, as well as the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, and, therefore, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. Additionally, our existing stockholders initial equity investment is below that which is required under the guidelines of the North American Securities Administrators Association, Inc. and we do not satisfy such association s policy regarding sound financial condition. You should carefully consider these and the other risks set forth in the section entitled Risk Factors beginning on page 16 of this prospectus. Securities offered: 6,000,000 units, at $10.00 per unit, each unit consisting of: one share of common stock; and one warrant The units will begin trading on or promptly after the date of this prospectus. Each of the common stock and warrants may trade separately on the 90th day after the date of this prospectus unless Maxim Group LLC, the representative of the underwriters, determines that an earlier date is acceptable based on its assessment of the relative strengths of the securities markets and small capitalization companies in general, and the trading pattern of, and demand for, our securities in particular. If Maxim Group LLC permits separate trading of the common stock and warrants prior to the 90th day after the date of this prospectus, we will issue a press release and file a Current Report on Form 8-K with the SEC announcing when such separate trading will begin. In no event will Maxim Group LLC allow separate trading of the common stock and warrants until we file an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file a Current Report on Form 8-K, including an audited balance sheet, upon the consummation of this offering, which is anticipated to take place four business days from the date of this prospectus. The audited balance sheet will include proceeds we receive from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Current Report on Form 8-K. If the over-allotment option is exercised following the initial filing of the 8-K, an amended Form 8-K will be filed to provide updated financial information reflecting the exercise of the over-allotment option. For more information, see Description of Securities Units. Common stock: Number outstanding before this offering: 1,580,000 shares Number to be outstanding after this offering: 7,580,000 shares Table of Contents Public Warrants: Number of public warrants outstanding before this offering: None Number of public warrants to be outstanding after this offering and the private placement: 6,000,000 warrants Exercisability: Each warrant is exercisable for one share of common stock. The public warrants, at the option of the holder, may be exercised by cash payment of the exercise price or by cashless exercise. A cashless exercise means that, in lieu of paying the aggregate exercise price for the shares of common stock being purchased upon exercise of the warrants in cash, the holder will forfeit a number of shares underlying the warrants with a market value equal to such aggregate exercise price. We will not receive additional proceeds to the extent the warrants are exercised by cashless exercise. Exercise price: $7.50 per share Exercise period: The public warrants will become exercisable on the later of: the completion of a business combination with a target business, or , 2008 [one year from the date of this prospectus] The public warrants will expire at 5:00 p.m., New York City time, on , 2011 [four years from the date of this prospectus] or earlier upon redemption. Redemption: We may redeem the outstanding public warrants (including any warrants issued to Maxim Group LLC if it exercises its unit purchase option): in whole and not in part (and only in conjunction with the redemption of the private placement warrants), at a price of $.01 per warrant at any time after the warrants become exercisable, upon a minimum of 30 days prior written notice of redemption, and if, and only if, the last sale price of our common stock equals or exceeds $14.25 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. We have established these criteria to provide public warrant holders with a premium to the initial warrant exercise price as well as a degree of liquidity to cushion the market reaction, if any, to our redemption call. If the foregoing conditions are satisfied and we call the warrants for redemption, each warrant holder shall then be entitled to exercise his or her warrant prior to the date scheduled for redemption, by payment of the exercise price in cash or on a cashless exercise basis in lieu of paying the exercise price in cash as described in this prospectus. However, there can be no assurance that the price of the common Table of Contents stock will exceed the call trigger price ($14.25) or the warrant exercise price after the redemption call is made. Private Placement Warrants: Number of private placement warrants outstanding before this offering and the private placement None Number of private placement warrants outstanding after this offering and the private placement 3,200,000 Exercisability: Each private placement warrant is exercisable for one share of common stock. Exercise price: $7.50 Exercise period: The 3,200,000 private placement warrants will become exercisable on the later of: the completion of a business combination; or [ ], 2008 [one year from the date of this prospectus]. The private placement warrants will expire at 5:00 p.m., New York City time, on [ ], 2011 [four years from the date of this prospectus]. Redemption: We may redeem the private placement warrants: in whole and not in part (and only in conjunction with the redemption of the public warrants); at a redemption price of $0.01 per warrant at any time after the warrants become exercisable; upon a minimum of 30 days prior written notice of redemption; and if, and only if, the closing price of our common stock equals or exceeds $14.25 per share for any 20 trading days within a 30-trading day period ending three business days before we send the notice of redemption. If the foregoing conditions are satisfied and we call the private placement warrants for redemption, each warrant holder will be entitled to exercise his warrants before the date scheduled for redemption. Proposed American Stock Exchange symbols for our: Units: HDSU Common Stock: HDS Warrants: HDSW Offering proceeds to be held in trust: $60,000,000 of the proceeds of this offering and the proceeds of the private placement ($68,820,000 if the over-allotment is exercised in full) will be placed in a trust account at JP Morgan Chase New York, New York maintained by American Stock Transfer Trust Company, pursuant to an investment management trust agreement to be signed on the date of this prospectus. Of this amount, Table of Contents up to $58,060,000 ($66,430,000 if the over-allotment is exercised in full) may be used by us for the purpose of effecting a business combination, and up to $1,800,000 ($2,250,000 if the over-allotment is exercised in full), plus interest earned thereon, will be paid to Maxim Group LLC if a business combination is consummated, but will be forfeited by Maxim Group LLC if a business combination is not consummated. The $60,000,000 of proceeds will not be released until the earlier of the completion of a business combination or implementation of our plan of dissolution and liquidation. These proceeds include $54,860,000 ($9.14 per unit) from the proceeds of this offering, the $3,200,000 purchase price of the private placement ($0.53 per unit), up to $1,800,000 ($0.30 per unit) in deferred underwriting discounts and commissions, $90,000 in deferred legal fees and $50,000 of an additional officer loan of up to $250,000 to be made on or prior to the closing of this offering by Steven M. Wasserman. We believe that the inclusion in the trust account of the proceeds of the private placement and deferred underwriting discounts and commissions is a benefit to our stockholders because additional proceeds will be available for distributions to investors if we liquidate our trust account as part of our dissolution and prior to our completing an initial business combination. These funds will not be released until the earlier of the completion of a business combination or implementation of our plan of dissolution and liquidation, provided, however, that we plan to draw the following amounts from the interest income earned on the trust account prior to, or upon consummation of, a business combination or our dissolution and liquidation: (i) taxes payable on interest income earned on the trust account, State of Delaware franchise taxes, repayment of up to $250,000 of an additional officer loan to be made on or prior to closing of the offering by Steven W. Wasserman and (ii) up to $1,825,000 ($1,925,000 if the over-allotment option is exercised in full) of interest income to fund our working capital and dissolution and liquidation expenses if we fail to consummate a business combination; however, if the underwriters over-allotment option is exercised in full, after our receipt of $125,000 of interest income we will not be permitted to draw such amounts until $180,000 (or a lesser amount if less than the full over-allotment option is exercised, pro rata based on the amount of the over-allotment exercised) of interest shall have been earned on the trust account with the resulting effect that there shall be a minimum of $10.00 per unit held in the trust account. We have agreed with Maxim Group LLC, the representative of the underwriters, that we may withdraw such interest monthly (or weekly during the first month after the offering). If we dissolve and liquidate and distribute the funds in the trust account, Maxim Group LLC has agreed to waive any right it may have to the $1,800,000 ($2,250,000 if the over-allotment is exercised in full) of deferred underwriting discount, plus interest earned thereon, held in the trust account, all of which shall be distributed to our public stockholders. Table of Contents Unless and until a business combination is consummated, other than as described above, the funds held in the trust account will not be available for our use for any expenses related to this offering or expenses which we may incur related to the investigation and selection of a target business and the negotiation of an agreement to acquire a target business. The expenses that we may incur prior to a business combination may only be paid from interest income earned on the trust account and released to us as provided above. For more information, see the section entitled Use of Proceeds. There will be no fees, reimbursements or cash payments made to our initial stockholders and/or officers or directors other than repayment of up to $437,800 in aggregate loans made by Mr. Wasserman and Mr. Blaha to us prior to the closing date of this offering, reimbursement for expenses incident to this offering and payment to ASG Management, Inc., an affiliated third party of which Messrs. Wasserman and Blaha are principals, of $7,500 per month for office space and certain general and administrative services. It is possible that we could use a portion of the interest income earned on the trust account and released to us, as provided above, to make a deposit, down payment or fund a no-shop provision with respect to a particular proposed business combination. In the event we were ultimately required to forfeit such funds (whether as a result of our breach of the agreement relating to such payment or otherwise), we may not have a sufficient amount of working capital available outside of the trust account to pay expenses related to finding a suitable business combination without securing additional financing. If we were unable to secure additional financing, we would most likely fail to consummate a business combination in the allotted time and would dissolve the company and liquidate our trust account as part of our plan of dissolution and distribution. None of the public warrants may be exercised until the later of our completion of a business combination or , 2008 [one year from the date of this prospectus], and thus, after the proceeds of the trust account have been disbursed, the warrant exercise price will be paid directly to us, except we will not receive proceeds to the extent the warrants are exercised by cashless exercise. For more information, see the section entitled Description of Securities Warrants. Stockholders must approve business combination: We will seek stockholder approval before we effect any business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable state law. In connection with the vote required for any business combination, all of our initial stockholders, including all of our officers and directors, have agreed to vote the shares of common stock owned by them immediately before this offering (including the shares contained in the units) in accordance with the majority of the shares of common stock voted by the public stockholders. In addition, our initial stockholders have agreed to vote any shares of common stock acquired in this offering, or in the aftermarket in favor of the business combination submitted to our stockholders for approval. Table of Contents Accordingly, our initial stockholders (including investors in the private placement) will not be able to exercise redemption rights with respect to a potential business combination. We will proceed with a business combination only if a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and public stockholders owning less than 35% of the shares sold in this offering vote against the business combination and, subsequently, exercise their redemption rights described below. In addition, if we seek approval from our stockholders to consummate a business combination within 90 days of the expiration of 24 months (assuming that the period in which we need to consummate a business combination has been extended, as provided in our amended and restated certificate of incorporation) from the date of this offering, the proxy statement related to such business combination will also seek stockholder approval for our board s recommended plan of dissolution and distribution in the event our stockholders do not approve such business combination. For more information, see the section entitled Proposed Business Effecting a Business Combination Opportunity for stockholder approval of a business combination. In the event that more than 20% of the public stockholders exercise their redemption rights, a proportional percentage of the shares of common stock held by our initial stockholders will automatically, and without any further action required by us or such stockholders, be forfeited and cancelled upon consummation of the business combination. The percentage of shares forfeited will be equal to the percentage of redemptions above 20% and will be pro rata among the initial stockholders based on the 1,580,000 shares owned by them. For example, if 20% or fewer of the public stockholders exercise their redemption rights, no shares will be forfeited. If 34.99% of the public stockholders exercise their redemption rights, 14.99% of the initial stockholder shares will be forfeited. Voting against the business combination alone will not result in redemption of a stockholder s shares into a pro rata share of the trust account. Such stockholder must have also exercised the redemption rights described below. Even if less than 35% of the stockholders exercise their redemption rights, we may be unable to consummate a business combination if such redemption leaves us with funds less than a fair market value at least equal to 80% of the amount in the trust account (exclusive of Maxim Group LLC s deferred underwriting compensation, including interest thereon, held in the trust account) at the time of such acquisition, which amount is required as a condition to the consummation of our initial business combination. In such event, we may be forced to find additional financing to consummate such a business combination, consummate a different business combination or dissolve and liquidate. Raising additional funds to cover any shortfall may involve dilutive equity financing or incurring indebtedness at higher than desirable levels. This may limit our ability to effectuate the most attractive business combination available to us. The shares sold prior to this offering do not have redemption rights. However, the voting obligations described above provide our initial stockholders with significant influence over matters requiring stockholder approval. Table of Contents We will not enter into any business combination with any affiliates of our initial stockholders, officers or directors unless (i) such business combination has been approved by our audit committee and our board of directors, and (ii) we obtain an opinion from an independent investment banking firm that a business combination with any such company is fair to our stockholders from a financial point of view. Redemption rights for stockholders voting to reject a business combination: Public stockholders voting against a business combination will be entitled to redeem their common stock for $10.00 per share (plus a portion of the interest income earned on the funds in the trust account), but net of: (i) taxes payable on interest income earned, State of Delaware franchise taxes, repayment of up to $250,000 of an additional officer loan to be made on or prior to the closing of this offering by Steven M. Wasserman and (ii) up to $1,825,000 ($1,925,000 if the over-allotment option is exercised in full) of interest income earned on the trust account released to us to fund our working capital and dissolution and liquidation expenses if we fail to consummate a business combination; however, if the underwriters over-allotment option is exercised in full, after our receipt of $125,000 of interest income we will not be permitted to draw such amounts until $180,000 (or a lesser amount if less than the full over-allotment option is exercised, pro rata based on the amount of the over-allotment exercised) of interest shall have been earned on the trust account with the resulting effect that there shall be a minimum of $10.00 per unit held in the trust account. Any determination of the portion of interest payable to public stockholders redeeming their common stock shall be made on a pro rata basis, in relation to all the public stockholders through the date of redemption. However, the ability of stockholders to receive $10.00 per unit is subject to any valid claims by our creditors which are not covered by amounts held in the trust account or the indemnities provided by certain of our directors and officers. Public stockholders that redeem their stock into their pro rata share of the trust account will continue to have the right to exercise any warrants they may hold. If a business combination is approved, stockholders that vote against the business combination and elect to redeem their shares of common stock for cash will be entitled to receive their pro rata portion of the $1,800,000 ($0.30 per share), or $2,250,000 if the over-allotment option is exercised in full, of deferred underwriting discount (plus interest earned thereon) held in the trust account. Public stockholders will not be required to tender their shares in connection with the exercise of their redemption rights. Public stockholders who exercise their redemption rights will receive their redemption amount upon consummation of a business combination and we will cancel their shares at that time. Initial stockholders are not entitled to redeem any of their shares of common stock acquired prior to this offering into a pro rata share of the trust account. However, initial stockholders who acquire shares of common stock as part of this offering or after this offering will be entitled to a pro rata share of the trust account upon the liquidation of the trust account after the approval of a business combination or as part of our overall plan of dissolution and liquidation in the event we do not consummate a business combination within the required time periods. The term public stockholders Table of Contents means the holders of common stock sold as part of the units in this offering or in the open market, including any of our initial stockholders that purchase these securities either in this offering or in the open market. For more information see the section entitled Proposed Business Effecting a Business Combination Redemption rights. Dissolution and liquidation if no business combination: Pursuant to the terms of the trust agreement by and between us and American Stock Transfer and Trust Company and applicable provisions of the Delaware General Corporation Law, we will promptly dissolve and liquidate and distribute all funds held in the trust account to our public stockholders as part of our overall plan of dissolution and liquidation if we do not effect a business combination within 18 months after consummation of this offering (or within 24 months from the consummation of this offering if a letter of intent, agreement in principle or definitive agreement has been executed within 18 months after consummation of this offering and the business combination has not yet been consummated within such 18 month period). Pursuant to the terms of the trust agreement, upon such dissolution and liquidation, public stockholders will receive the full purchase price of $10.00 per unit (plus a portion of the interest earned on the funds in the trust account), but net of: (i) taxes payable on interest earned, State of Delaware franchise taxes, repayment of up to $250,000 of an additional officer loan to be made on or prior to the closing of this offering by Steven M. Wasserman and (ii) up to $1,825,000 ($1,925,000 if the over-allotment option is exercised in full) of interest income earned on the trust account and released to us to fund our working capital and dissolution and liquidation expenses, subject to any valid claims by our creditors that are not covered by amounts held in the trust account or the indemnities provided by certain of our directors and officers; however, if the underwriters over-allotment option is exercised in full, after our receipt of $125,000 of interest income we will not be permitted to draw such amounts until $180,000 (or a lesser amount if less than the full over-allotment option is exercised, pro rata based on the amount of the over-allotment exercised) of interest shall have been earned on the trust account with the resulting effect that there shall be a minimum of $10.00 per unit held in the trust account. In the event of our dissolution and liquidation, we will comply with the requirements of Section 281(b) of the Delaware General Corporation Law, which requires that we pay or make provision for the payment of all claims and obligations of creditors, including those we believe are likely to arise in the future, before determining assets remaining for distribution to our stockholders. Under Delaware law, claims of our creditors will have priority over the distribution to our stockholders of amounts held in the trust account. See Risk Factors, beginning on page 16 of this prospectus. We cannot provide investors with assurances of a specific timeframe for the dissolution and liquidation. Pursuant to our amended and restated certificate of incorporation, upon the expiration of the applicable time periods, our purpose and powers will be limited to dissolving, liquidating and winding up. Also contained in our amended and restated certificate of incorporation is the agreement of our board to dissolve our company at that time. Consistent with Table of Contents such obligations, we will seek stockholder approval for any such plan of dissolution and liquidation, and our directors and executive officers have agreed to vote in favor of such dissolution and liquidation. Immediately upon the approval by our stockholders of our plan of dissolution and liquidation, we will liquidate our trust account to our public stockholders and pay, or reserve for payment in accordance therewith, from funds not held in trust (including interest earned on funds in the trust account that have been released to us to fund our working capital requirements and, if needed, dissolution and liquidation expenses if we fail to consummate a business combination), our liabilities and obligations. Our initial stockholders have agreed to waive their respective rights to participate in any liquidation distribution occurring upon our failure to consummate a business combination, but only with respect to those shares of common stock acquired by them prior to this offering upon the liquidation of the trust account, as part of any plan of dissolution and liquidation in the event we do not consummate a business combination within the required time periods. They will participate in any liquidation distribution with respect to any shares of common stock acquired as part of this offering or following this offering. We will pay the costs associated with our dissolution and liquidation and the distribution of the trust account from our interest income earned on the trust account released to us to fund our working capital requirements and dissolution and liquidation expenses. In addition, if we seek approval from our stockholders to consummate a business combination within 90 days of the expiration of 24 months (assuming that the period in which we need to consummate a business combination has been extended, as provided in our amended and restated certificate of incorporation) from the date of this offering, the proxy statement related to such business combination will also seek stockholder approval for our board s recommended plan of dissolution and liquidation, in the event our stockholders do not approve such business combination. If no proxy statement seeking the approval of our stockholders for a business combination has been filed 30 days prior to the date which is 24 months from the date of this offering, our board will, prior to such date, convene, adopt and recommend to our stockholders a plan of dissolution and liquidation, and within five (5) days of such date file a proxy statement with the Securities and Exchange Commission seeking stockholder approval for such plan. We estimate that our total costs and expenses for implementing and completing our stockholder-approved plan of dissolution and liquidation will be in the range of $50,000 to $75,000. This amount includes all costs and expenses relating to the filing of our articles of dissolution in the State of Delaware, the winding up of our company and the costs of a proxy statement and meeting relating to the approval by our stockholders of our plan of dissolution and liquidation. We expect that all costs associated with the implementation and completion of our plan of dissolution and liquidation will be funded by any funds not held in our trust account (including interest income earned on the funds held in the trust account that is released to us) although we cannot assure you that there will be sufficient funds for such purpose. In the event we seek stockholder approval for a plan of dissolution and liquidation and do not obtain Table of Contents such approval, we will nonetheless continue to pursue stockholder approval for our dissolution and liquidation. Steven M. Wasserman, our Chief Executive Officer, President and Co-Chairman of our board of directors and Robert B. Blaha, our Chief Management Officer, Executive Vice President and a director, have agreed to indemnify and hold us harmless against liabilities, claims, damages and expenses to which we may become subject as a result of any claim by any target business, prospective target business, vendor or other creditor owed money by us for services rendered or products sold to us or the claims of any prospective target business or target business, to the extent necessary to ensure that the amount in the trust account is not reduced. Pursuant to the terms of our amended and restated certificate of incorporation, our powers following the expiration of the permitted time periods for consummating a business combination will automatically thereafter be limited to acts and activities relating to dissolving and winding up our affairs, including liquidation. The funds held in our trust account may not be distributed except upon our dissolution and liquidation and, unless and until stockholder approval is obtained for our dissolution and liquidation, the funds held in our trust account will not be released. Consequently, holders of a majority of our outstanding stock must approve our dissolution and liquidation in order for our public stockholders to receive the funds held in our trust account and the funds will not be available for any other corporate purpose at that time. There will be no distribution from the trust account with respect to our warrants, and all rights with respect to our warrants will effectively cease upon our dissolution and liquidation. For more information, see the section entitled Proposed Business Effecting a Business Combination Plan of dissolution and liquidation if no business combination. Escrow of initial stockholders shares and private placement warrants: On the date of this prospectus, all of our initial stockholders, including all of our officers and directors, will place the shares they owned before this offering into an escrow account maintained by American Stock Transfer Trust Company, acting as escrow agent. Subject to certain limited exceptions, such as transfers to family members and trusts for estate planning purposes and upon death (with such shares remaining subject to the escrow agreement following such transfers), these shares will not be transferable during the escrow period and will not be released from escrow until one year following our consummation of a business combination, unless we receive the approval of our public stockholders to release the shares from escrow. All of the warrants sold in the private placement will be subject to a lock-up agreement that will expire upon the consummation of a business combination and will be held in accounts established by Mr. Wasserman and Mr. Tsakiris with Maxim Group LLC, until such time as we consummate a business combination. Mr. Wasserman and Mr. Tsakiris will not request, and Maxim Group LLC will not grant, any waiver of the lock-up agreement. For more information, see the section entitled Principal Stockholders. Table of Contents SUMMARY FINANCIAL DATA The following table summarizes the relevant financial data for our business and should be read with our financial statements, which are included in this prospectus. To date, our efforts have been limited to organizational activities relating to this offering, so only balance sheet data is presented. December 31, 2006 Actual As Adjusted (1) Balance Sheet Data: Working capital/(deficiency) $ (506,069 ) $ 58,049,643 Total assets 502,831 58,099,643 Total liabilities (2) 513,188 50,000 Value of common stock which may be redeemed for cash(3) 20,364,180 Stockholders equity (10,357 ) 37,685,463 (1) The as adjusted information gives effect to the sale of the units we are offering in this offering and the warrants sold in our private placement, including the application of the related gross proceeds and the payment of the estimated remaining costs from such sale. (2) Gives effect to an estimated $50,000 of an additional loan of up to $250,000 to be made by Steven M. Wasserman, our Chief Executive Officer, President and Co-Chairman of our board of directors, on or prior to the closing date of this offering, which will be repaid within 90 days of the closing of this offering. (3) If the business combination is approved and completed, public stockholders who voted against the combination will be entitled to redeem their stock for $10.00 per share plus their pro rata share of any accrued interest earned on the trust account (net of: (i) taxes payable on interest income earned, State of Delaware franchise taxes, repayment of up to $250,000 of an additional officer loan to be made on or prior to the closing of this offering by Steven M. Wasserman and (ii) up to $1,825,000 ($1,925,000 if the over-allotment is exercised in full) of interest income earned on the trust account released to us to fund our working capital; however, if the underwriters over-allotment option is exercised in full, after our receipt of $125,000 of interest income we will not be permitted to draw such amounts until $180,000 (or a lesser amount if less than the full over-allotment option is exercised, pro rata based on the amount of the over-allotment exercised) of interest shall have been earned on the trust account with the resulting effect that there shall be a minimum of $10.00 per unit held in the trust account. However, the ability of stockholders to receive $10.00 per unit is subject to any valid claims by our creditors which are not covered by amounts held in the trust account or the indemnities provided by Steven M. Wasserman, our Chief Executive Officer, President and Co-Chairman of our board of directors and Robert B. Blaha, our Chief Management Officer, Executive Vice President and a director. The working capital (as adjusted) and total assets (as adjusted) amounts include the $58,060,000, or $66,430,000 if the underwriter s over-allotment option is exercised in full, to be held in the trust account, which will be available to us only upon the consummation of a business combination within the time period described in this prospectus. If a business combination is not so consummated, we will promptly liquidate the trust account pursuant to our trust agreement with American Stock Transfer and Trust Company as part of our plan of dissolution and liquidation and all proceeds held in the trust will be distributed solely to our public stockholders after the payment of or provision for our obligations and claims against us as required under Delaware law. The term public stockholders means the holders of common stock sold as part of the units in this offering or in the open market, including any initial stockholders to the extent that they purchase or acquire such shares. We will not proceed with a business combination if public stockholders owning 35% or more of the shares sold in this offering vote against the business combination and exercise their redemption rights. Accordingly, we may effect a business combination if public stockholders owning less than 35% of the shares sold in this offering exercise their redemption rights. If this occurred, we would be required to redeem for cash up to approximately 34.99% of the 6,000,000 shares of common stock sold in this offering, or 2,099,400 shares of common stock, at a per-share conversion price of $10.00, plus a pro rata share of the accrued interest Table of Contents earned on the trust account (net of: (i) taxes payable on interest earned, State of Delaware franchise taxes, repayment of up to $250,000 of an additional officer loan to be made on or prior to the closing of this offering by Steven M. Wasserman and (ii) up to $1,825,000 ($1,925,000 if the over-allotment option is exercised in full) of interest income released to us to fund our working capital, including a pro rata share of the accrued interest earned on the underwriters deferred compensation; however, if the underwriters over-allotment option is exercised in full, after our receipt of $125,000 of interest income we will not be permitted to draw such amounts until $180,000 (or a lesser amount if less than the full over-allotment option is exercised, pro rata based on the amount of the over-allotment exercised) of interest shall have been earned on the trust account with the resulting effect that there shall be a minimum of $10.00 per unit held in the trust account). Investors are cautioned that the ability of stockholders to receive $10.00 per unit is subject to any valid claims by our creditors which are not covered by amounts held in the trust account or the indemnities provided by Steven M. Wasserman, our Chief Executive Officer, President and Co-Chairman of our board of directors and Robert B. Blaha, our Chief Management Officer, Executive Vice President and director. The expected redemption price per share is greater than each stockholder s initial pro rata share of the trust account of $9.70. Of the excess redemption price, $0.30 per share represents a portion of the underwriters deferred fee, which Maxim Group LLC has agreed to forego for each share that is redeemed. Accordingly, the total deferred underwriting compensation payable to Maxim Group LLC in the event of a business combination will be reduced by $0.30 for each share that is redeemed. The balance will be paid from proceeds held in the trust account which are payable to us upon consummation of the business combination. Even if less than 35% of the stockholders exercise their redemption rights, we may be unable to consummate a business combination if such redemption leaves us with funds less than a fair market value at least equal to 80% of the amount in the trust account (exclusive of Maxim Group LLC s deferred underwriting compensation, including interest thereon, held in the trust account) at the time of such acquisition, which amount is required as a condition to the consummation of our initial business combination, and we may be forced to find additional financing to consummate such a business combination, consummate a different business combination or liquidate. Raising additional funds to cover any shortfall may involve dilutive equity financing or incurring indebtedness at higher than desirable levels. This may limit our ability to effectuate the most attractive business combination available to us. In the event that more than 20% of the public stockholders exercise their redemption rights, a proportional percentage of the shares of common stock held by our initial stockholders will automatically, and without any further action required by us or such stockholders, be forfeited and cancelled upon consummation of the business combination. The percentage of shares forfeited will only be equal to the percentage of redemptions above 20% and will be pro rata among the initial stockholders based on the 1,580,000 shares owned by them. Table of Contents RISK FACTORS An investment in our securities involves a high degree of risk. You should consider carefully all of the material risks described below, together with the other information contained in this prospectus before making a decision to invest in our securities. If any of the following events occur, our business, financial condition and results of operations may be materially adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment. Risks Associated With Our Current Business We are a newly formed company with no operating history and, accordingly, you will not have any basis on which to evaluate our ability to achieve our business objective. We are a recently formed company with no operating results to date and our efforts to date have been limited to organizational activities as well as activities related to this offering. Therefore, our ability to begin operations is dependent upon obtaining financing through the public offering of our securities. Since we do not have any operations or an operating history, you will have no basis upon which to evaluate our ability to achieve our business objective, which is to acquire one or more domestic or international operating businesses in the U.S. homeland security or defense industries or a combination thereof. We do not have any specific merger, capital stock exchange, asset acquisition or other business combination under consideration and we have not, nor has anyone on our behalf, contacted any potential target business or had any discussions, formal or otherwise, with respect to such a transaction. Moreover, we have not engaged or retained any agent or other representative to identify or locate any suitable acquisition candidate for us. We will not generate any revenues or income (other than interest income on the proceeds of this offering and the private placement) until, at the earliest, after the consummation of a business combination. We may not be able to consummate a business combination within the required timeframe, in which case, we would be forced to liquidate. We must complete a business combination with a fair market value of at least 80% of our net assets at the time of acquisition (exclusive of Maxim Group LLC s deferred underwriting compensation, including interest thereon, held in the trust account) within 18 months after the consummation of this offering (or within 24 months after the consummation of this offering if a letter of intent, agreement in principle or a definitive agreement has been executed within 18 months after the consummation of this offering and the business combination relating thereto has not yet been consummated within such 18 month period). If we fail to consummate a business combination within the required time frame, we will be forced to liquidate our assets. We may not be able to find suitable target businesses within the required time frame. In addition, our negotiating position and our ability to conduct adequate due diligence on any potential target may be reduced as we approach the deadline for the consummation of a business combination. We do not have any specific business combination under consideration, and neither we, nor any representative acting on our behalf, has had any contacts with any target business regarding a business combination. If we are forced to liquidate before a business combination, our warrants will expire worthless. If we are unable to complete a business combination and are forced to liquidate the trust account, there will be no distribution with respect to our outstanding warrants and, accordingly, the warrants will expire worthless. For a more complete discussion of the effects on our stockholders if we are unable to complete a business combination, see the section below entitled Effecting a Business Combination Plan of dissolution and liquidation if no business combination. You will not be entitled to protections normally afforded to investors of blank check companies. Since the net proceeds of this offering are intended to be used to complete a business combination with a target business that has not been identified, we may be deemed to be a blank check company under the United States securities laws. However, since we will have net tangible assets in excess of $5,000,000 upon the consummation of this offering and will file a Current Report on Form 8-K with the SEC within four business days of the consummation of this offering, including an audited balance sheet demonstrating this fact, Table of Contents we are exempt from rules promulgated by the SEC to protect investors in blank check companies such as Rule 419. Accordingly, investors will not be afforded the benefits or protections of those rules. Because we are not subject to Rule 419, our units will be immediately tradeable and we will have a longer period of time within which to complete a business combination in certain circumstances. For a more detailed comparison of our offering to offerings under Rule 419, see the section entitled Proposed Business Comparison to Offerings of Blank Check Companies. Because there are numerous companies with a business plan similar to ours seeking to effectuate a business combination, it may be more difficult for us to complete a business combination. Based upon publicly available information, approximately 89 similarly structured blank check companies have completed initial public offerings since August 2003 and 45 others have registration statements currently pending before the SEC. Of the blank check companies that have completed their public offerings, only 22 companies have consummated a business combination, while 21 other companies have announced they have entered into a definitive agreement for a business combination but have not consummated such business combination and five are in liquidation. Accordingly, there are approximately 41 blank check companies with approximately $3.49 billion in trust that are seeking to carry out a business plan similar to our business plan. While many of these companies are targeted towards specific industries in which they must complete a business combination, certain of these companies may consummate a business combination in any industry they choose, which may include the homeland security and defense industries. As a result, there may be significant demand for the kinds of privately-held companies that we target, which demand may limit the universe of potential acquisition targets for us. Further, the fact that relatively few companies have completed business combinations or entered into definitive agreements for a business combination may be an indication that there are only a limited number of attractive target businesses available to blank check companies, or that many target businesses may not be inclined to enter into business combinations with blank check companies such as ours. We therefore cannot assure you that we will be able to successfully compete for an attractive business combination. Additionally, because of this competition, we cannot assure you that we will be able to effectuate a business combination within the required time periods. If we are unable to find a suitable target business within such time periods, our purpose and powers will be limited to dissolving, liquidating and winding up. Since we have not currently selected a prospective target business with which to complete a business combination, investors in this offering are unable to currently ascertain the merits or risks of the target business s operations. Since we have not yet selected or approached a prospective target business, investors in this offering have no current basis to evaluate the possible merits or risks of the target business s operations. To the extent we complete a business combination with a financially unstable company, an entity in its development stage and/or an entity subject to unknown or unmanageable liabilities, we may be affected by numerous risks inherent in the business operations of those entities. Although our management will endeavor to evaluate the risks inherent in a particular target business, we cannot assure you that we will properly ascertain or assess all of the significant risk factors. We also cannot assure you that an investment in our securities will not ultimately prove to be less favorable to investors in this offering than a direct investment, if an opportunity were available, in a target business. For a more complete discussion of our selection of a target business, see the section entitled Proposed Business Effecting a Business Combination We have not selected or approached any target business. If third parties bring claims against us, the proceeds held in trust could be reduced and the per-share liquidation price received by stockholders from the trust account as part of our plan of dissolution and liquidation will be less than $10.00 per share. Our placing of funds in trust may not protect those funds from third party claims against us. Although we will seek to have all vendors, target businesses, prospective target businesses or other entities we engage execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our public stockholders, there is no guarantee that they will execute such Table of Contents agreements, or even if they execute such agreements that they would be prevented from bringing claims against the trust account including, but not limited to, fraudulent inducement, breach of fiduciary responsibility or other similar claims, as well as claims challenging the enforceability of the waiver, in each case in order to gain an advantage with a claim against our assets, including the funds held in the trust account. If any third party refused to execute an agreement waiving such claims to the monies held in the trust account, we would perform an analysis of the alternatives available to us if we chose not to engage such third party and evaluate whether such engagement would be in the best interest of our stockholders if such third party refused to waive such claims. Examples of possible instances where we may engage a third party that refused to execute a waiver include the engagement of a third party consultant whose particular expertise or skills are believed by management to be significantly superior to those of other consultants that would agree to execute a waiver or in cases where management is unable to find a provider of required services willing to provide the waiver. In any event, our management would perform an analysis of the alternatives available to it and would only enter into an agreement with a third party that did not execute a waiver if management believed that such third party s engagement would be significantly more beneficial to us than any alternative. In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with us and will not seek recourse against the trust account for any reason. Accordingly, the proceeds held in trust could be subject to claims which could take priority over the claims of our public stockholders and the per-share liquidation price could be less than the initial $10.00 per share held in the trust account, plus interest (net of any taxes due on such interest, which taxes, if any, shall be paid from the trust account, franchise taxes payable to the State of Delaware, repayment of up to $250,000 of an additional officer loan to be made on or prior to the closing of this offering by Steven M. Wasserman, which will be repaid within 90 days of the closing of this offering, and any amounts released to us described elsewhere in this prospectus), due to claims of such creditors. Steven M. Wasserman, our Chief Executive Officer, President and Co-Chairman of the board of directors, and Robert B. Blaha, our Chief Management Officer, Executive Vice President and a director, have agreed to indemnify and hold us harmless against liabilities, claims, damages and expenses to which we may become subject as a result of any claim by any target business, prospective target business, vendor or other entity owed money by us for services rendered or products sold to us or the claims of any target business or prospective target business, to the extent necessary to ensure that such claims do not reduce the amount in the trust account. However, we cannot assure you that Messrs. Wasserman and Blaha will be able to satisfy those obligations. Additionally, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, the funds held in our trust account will be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. To the extent any bankruptcy claims deplete the trust account we cannot assure you we will be able to return to our public stockholders the liquidation amounts due them. Unlike most other bank check offerings, we allow up to approximately 34.99% of our public stockholders to exercise their redemption rights. This higher threshold will make it easier for us to consummate a business combination with which you may not agree. When we seek stockholder approval of a business combination, we will offer each public stockholder (other than our initial stockholders) the right to redeem their shares of common stock for cash if the stockholder votes against the business combination and the business combination is approved and consummated. We will consummate the initial business combination only if the following two conditions are met: (i) a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and (ii) public stockholders owning 35% or more of the shares sold in this offering do not vote against the business combination and exercise their redemption rights. Most other blank check companies have a redemption threshold of 20%, which makes it more difficult for such companies to consummate their initial business combination. Because we permit a larger number of stockholders to exercise their redemption rights, it will be easier for us to consummate an initial business combination with a target business which you may believe is not suitable for us. Table of Contents Unlike most other blank check offerings, we allow up to approximately 34.99% of our public stockholders to exercise their redemption rights. The ability of a larger number of our stockholders to exercise their redemption rights may require us to arrange third party financing in order to consummate a business combination. When we seek stockholder approval of a business combination, we will offer each public stockholder (other than our initial stockholders) the right to redeem their shares of common stock for cash if the stockholder votes against the business combination and the business combination is approved and consummated. Such holder must both vote against such business combination and then exercise their redemption rights to receive $10.00 per share (plus a portion of the interest income earned on the funds in the trust account), but net of: (i) taxes payable on interest income earned, State of Delaware franchise taxes, repayment of up to $250,000 of an additional officer loan to be made on or prior to the closing of this offering by Steven M. Wasserman and (ii) up to $1,825,000 ($1,925,000 if the over-allotment option is exercised in full) of interest income earned on the trust account released to us to fund our working capital and dissolution and liquidation expenses if we fail to consummate a business combination. Unlike most other blank check offerings which have a 20% threshold, we allow up to approximately 34.99% of our public stockholders to exercise their redemption rights and the business combination to go forward, however, we must still acquire a target business with a fair market value equal to at least 80% of the amounts held in trust for our benefit (determined prior to stockholder redemptions). Even if less than 35% of the stockholders exercise their redemption rights, we may be unable to consummate a business combination if such redemption leaves us with funds less than a fair market value at least equal to 80% of the amount in the trust account (exclusive of Maxim Group LLC s deferred underwriting compensation, including interest thereon, held in the trust account) at the time of such acquisition, which amount is required as a condition to the consummation of our initial business combination, and we may be forced to find additional financing to consummate such a business combination, consummate a different business combination or liquidate. Raising additional funds to cover any shortfall may involve dilutive equity financing or incurring indebtedness at higher than desirable levels. This may limit our ability to effectuate the most attractive business combination available to us. We will dissolve and liquidate if we do not consummate a business combination and our stockholders may be held liable for claims by third parties against us to the extent of distributions received by them. Pursuant to, among other documents, our amended and restated certificate of incorporation, if we do not complete a business combination within 18 months after the consummation of this offering, or within 24 months after the consummation of this offering if the extension criteria described below have been satisfied, our purpose and powers will be limited to dissolving, liquidating and winding up. We view this obligation to dissolve and liquidate as an obligation to our public stockholders and neither we nor our board of directors will take any action to amend or waive any provision of our certificate of incorporation to allow us to survive for a longer period of time if it does not appear we will be able to consummate a business combination within the foregoing time periods. Upon dissolution, we will distribute to all of our public stockholders, in proportion to their respective equity interest, an aggregate sum equal to the amount in the trust account, inclusive of any interest. Our initial stockholders have waived their rights to participate in any liquidation distribution with respect to their initial shares and have agreed to vote in favor of any plan of dissolution and liquidation that we will present to our stockholders for vote. There will be no distribution from the trust account with respect to our warrants which will expire worthless. We will pay the costs of our dissolution and liquidation of the trust account from our remaining interest earned on funds in the trust account that has been released to us to fund our working capital. If we enter into either a letter of intent, an agreement in principle or a definitive agreement to complete a business combination prior to the expiration of 18 months after the consummation of this offering, but are unable to complete the business combination within the 18-month period, then we will have an additional six months in which to complete the business combination contemplated by the letter of intent, agreement in principle or definitive agreement. If we are unable to consummate a transaction within 24 months following the consummation of this offering our purpose and powers will be limited to dissolving, liquidating and winding up. Upon notice from us, the trustee of the trust account will liquidate the investments constituting the trust account and will turn over the proceeds to our transfer agent for distribution to our public Table of Contents stockholders as part of our plan of dissolution and liquidation. Concurrently, we shall pay, or reserve for payment, from funds not held in trust, our liabilities and obligations, although we cannot assure you that there will be sufficient funds for such purpose. Under the Delaware General Corporation Law, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. If we comply with certain procedures set forth in Section 280 of the Delaware General Corporation Law intended to ensure that we make reasonable provision for all claims against us, including a 60-day notice period during which any third-party claims can be brought against us, a 90-day period during which we may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder s pro- rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution. However, as stated above, we will make liquidating distributions to our public stockholders as soon as reasonably possible as part of our plan of dissolution and liquidation and, therefore, we do not intend to comply with those procedures. As such, our stockholders could potentially be liable for any claims to the extent of distributions received by them in a dissolution and any liability of our stockholders may extend beyond the third anniversary of such dissolution. Because we will not be complying with Section 280, we will seek stockholder approval to comply with Section 281(b) of the Delaware General Corporation Law, requiring us to adopt a plan of dissolution that will provide for our payment, based on facts known to us at such time, of: (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against us within the subsequent 10 years. However, because we are a blank check company, rather than an operating company, and our operations will be limited to searching for prospective target businesses to acquire, the only likely claims to arise would be from our vendors (such as accountants, lawyers, investment bankers, etc.), target businesses or potential target businesses. As described above, we intend to have all vendors, target businesses and prospective target businesses execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the trust account. As a result of seeking those waivers, the claims that could be made against us should be significantly limited and the likelihood that any claim that would result in any liability extending to the trust should be minimal. Our Chief Executive Officer, President and Co-Chairman of our board of directors and our Chief Management Officer, Executive Vice President and a director have agreed to indemnify and hold us harmless against liabilities, claims, damages and expenses to which we may become subject as a result of any claim by any target business, prospective target business, vendor or other entity owed money by us for services rendered or products sold to us or the claims of any target business or prospective target business, to the extent necessary to protect the amounts held in the trust account. In the event that our board recommends and our stockholders approve a plan of dissolution and liquidation where it is subsequently determined that the reserve for claims and liabilities is insufficient, stockholders who received a return of funds from the liquidation of our trust account could be liable for such amounts to creditors. In addition, in the event of approval of a plan of dissolution and liquidation, we would remain obligated to enforce the above referenced indemnification agreements with our executive officers. Our public stockholders will be entitled to receive funds from the trust account only in the event of our dissolution and liquidation or if they seek to redeem their respective shares into cash upon a business combination that the stockholder voted against and which is completed by us. In no other circumstances will a stockholder have any right or interest of any kind to or in the trust account. If we do not consummate a business combination and dissolve, payments from the trust account to our public stockholders may be delayed. We currently believe that any plan of dissolution and liquidation subsequent to the expiration of the 18 and 24 month deadlines would proceed in approximately the following manner: our board of directors will, consistent with its obligations described in our amended and restated certificate of incorporation to dissolve, prior to the passing of such deadline, convene and adopt a specific plan of dissolution and liquidation, which it will then vote to recommend to our stockholders; Table of Contents at such time it will also cause to be prepared a preliminary proxy statement setting out such plan of dissolution and liquidation as well as the board s recommendation of such plan; upon such deadline, we would file our preliminary proxy statement with the Securities and Exchange Commission; if the Securities and Exchange Commission does not review the preliminary proxy statement, then, 10 days following the passing of such deadline, we will mail the proxy statement to our stockholders, and 30 days following the passing of such deadline we will convene a meeting of our stockholders, at which they will either approve or reject our plan of dissolution and liquidation; and if the Securities and Exchange Commission does review the preliminary proxy statement, we currently estimate that we will receive its comments 30 days following the passing of such deadline. We will mail the proxy statement to our stockholders following the conclusion of the comment and review process (the length of which we cannot predict with any certainty, and which may be substantial) and we will convene a meeting of our stockholders at which they will either approve or reject our plan of dissolution and liquidation. In the event we seek stockholder approval for a plan of dissolution and liquidation and do not obtain such approval, we will nonetheless continue to pursue stockholder approval for our dissolution. Pursuant to the terms of our amended and restated certificate of incorporation, our powers following the expiration of the permitted time periods for consummating a business combination will automatically thereafter be limited to acts and activities relating to dissolving and winding up our affairs, including liquidation. The funds held in our trust account may not be distributed except upon our dissolution and, unless and until such approval is obtained from our stockholders, the funds held in our trust account will not be released. Consequently, holders of a majority of our outstanding stock must approve our dissolution in order to receive the funds held in our trust account and the funds will not be available for any other corporate purpose. These procedures, or a vote to reject any plan of dissolution and liquidation by our stockholders, may result in substantial delays in the liquidation of our trust account to our public stockholders as part of our plan of dissolution and liquidation. We may choose to redeem our outstanding public warrants at a time that is disadvantageous to our warrant holders. Subject to there being a current prospectus under the Securities Act of 1933, as amended, with respect to the shares of common stock issuable upon exercise of the warrants, we may redeem the public warrants issued as a part of our units at any time after the warrants become exercisable, in whole and not in part, at a price of $.01 per warrant, upon a minimum of 30 days prior written notice of redemption, if and only if, the last sales price of our common stock equals or exceeds $14.25 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. Redemption of the public warrants could force the warrant holders: (i) to exercise the warrants and pay the exercise price therefore at a time when it may be disadvantageous for the holders to do so, (ii) to sell the warrants at the then current market price when they might otherwise wish to hold the warrants, or (iii) to accept the nominal redemption price which, at the time the warrants are called for redemption, is likely to be substantially less than the market value of the warrants. Although we are required to use our best efforts to have an effective registration statement covering the issuance of the shares underlying the public warrants at the time that our warrant holders exercise their warrants, we cannot guarantee that a registration statement will be effective, in which case our public warrant holders may not be able to exercise our warrants. Holders of our public warrants issued in this offering as part of our units will be able to exercise the warrants only if: (i) a current registration statement under the Securities Act of 1933, as amended, relating to the shares of our common stock underlying the warrants is then effective and current and a prospectus is available for use by our public stockholders and (ii) such shares are qualified for sale or exempt from qualification under the applicable securities laws of the states in which the various holders of warrants reside. Table of Contents Although we have undertaken in the warrant agreement, and therefore have a contractual obligation, to use our best efforts to maintain a current registration statement covering the shares underlying the public warrants following completion of this offering to the extent required by federal securities laws, and we intend to make every effort to comply with such undertaking, we cannot assure that we will be able to do so. If we are unable to maintain the effectiveness of such registration statement until the expiration of the public warrants and therefore are unable to deliver registered shares, the warrants may become worthless. In addition, we have agreed to use our reasonable efforts to register the shares underlying the public warrants under the blue sky laws of the states of residence of the exercising warrantholders, to the extent an exemption is not available. The value of the public warrants may be greatly reduced if a registration statement covering the shares issuable upon the exercise of the warrants is not effective and current and a prospectus is not available for use by the holders of the public warrants or if the securities are not qualified, or exempt from qualification, in the states in which the holders of warrants reside. Holders of the public warrants who reside in jurisdictions in which the shares underlying the warrants are not qualified and in which there is no exemption will be unable to exercise their warrants and would either have to sell their warrants in the open market or allow them to expire unexercised. If the public warrants become worthless, the price paid by holders for their units will thereafter relate solely to the common stock underlying the units. If and when the public warrants become redeemable by us, we may exercise our redemption right even if we are unable to qualify the underlying securities for sale under all applicable state securities laws. Because the warrants sold in the private placement were originally issued pursuant to an exemption from registration requirements under the federal securities laws, the holders of those warrants will be able to exercise their warrants even if, at the time of exercise, a prospectus relating to the common stock issuable upon exercise of such warrants is not current. As a result, the holders of the warrants purchased in the private placement will not have any restrictions with respect to the exercise of their warrants. As described above, the holders of the public warrants purchased in this offering will not be able to exercise them unless we have a current registration statement covering the shares issuable upon their exercise. In no event will the registered holders of a warrant be entitled to receive a net-cash settlement, stock, or other consideration in lieu of physical settlement in shares of our common stock. We may issue shares of our capital stock, including convertible securities, to complete a business combination, which would reduce the equity interest of our stockholders and likely cause a change in control of our ownership. Our amended and restated certificate of incorporation authorizes the issuance of up to 30,000,000 shares of common stock, par value $.0001 per share, and 1,000,000 shares of preferred stock, par value $.0001 per share. Immediately after this offering (assuming no exercise of the underwriters over-allotment option), there will be 13,010,000 authorized but unissued shares of our common stock available for issuance (after appropriate reservation for the issuance of shares upon full exercise of our outstanding warrants and the purchase option issued to the representative of the underwriters) and all of the 1,000,000 shares of preferred stock available for issuance. Although we have no commitments as of the date of this offering to issue our securities, we may issue a substantial number of additional shares of our common stock or preferred stock, or a combination of common and preferred stock, to complete a business combination. The issuance of additional shares of our common stock or any number of shares of our preferred stock: may significantly reduce the equity interest of investors in this offering; will likely cause a change in control if a substantial number of our shares of common stock are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and most likely also result in the resignation or removal of our present officers and directors; and may adversely affect prevailing market prices for our common stock. For a more complete discussion of the possible structure of a business combination, see the section entitled Proposed Business Effecting a Business Combination Selection of a target business and structuring of a business combination. Table of Contents We may issue notes or other debt securities, or otherwise incur substantial debt, to complete a business combination, which may adversely affect our financial condition. Although we have no commitments as of the date of this offering to issue any notes or other debt securities, or to otherwise incur outstanding debt, we may choose to issue a substantial amount of notes or other debt securities, or opt to incur substantial debt, or a combination of both, to complete a business combination. If we finance the purchase of assets or operations through the issuance of debt securities, it could result in: default and foreclosure on our assets if our operating revenues after a business combination were insufficient to pay our debt obligations; acceleration of our obligations to repay the indebtedness even if we have made all principal and interest payments when due, if the debt security contained covenants that required the maintenance of certain financial ratios or reserves and any such covenant was breached without a waiver or renegotiation of that covenant; our immediate payment of all principal and accrued interest, if any, to the extent the debt security was payable on demand; and our inability to obtain additional financing, if necessary, if the debt security contained covenants restricting our ability to obtain additional financing while such security was outstanding. For a more complete discussion of the possible structure of a business combination, see the section entitled Proposed Business Effecting a Business Combination Selection of a target business and structuring of a business combination. Because of our limited resources and the significant competition for business combination opportunities, we may not be able to consummate an attractive business combination. In addition to other similarly situated blank check companies, we expect to encounter intense competition from other entities having a business objective similar to ours, including private equity and venture capital funds, leveraged buyout funds and operating businesses competing for acquisitions. Many of these entities are well established and have extensive experience in identifying and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human and other resources than we do and our financial resources will be relatively limited when contrasted with those of many of these competitors. While we believe that there are numerous potential target businesses that we could acquire with the net proceeds of this offering, our ability to compete in acquiring certain sizable target businesses will be limited by our available financial resources. This inherent competitive limitation gives others an advantage in pursuing the acquisition of certain target businesses. Further: our obligation to seek stockholder approval of a business combination may delay the consummation of a transaction; our obligation to redeem up to 35% of the publicly-held shares of our common stock into cash for dissenting shareholders may reduce the resources available for a business combination; and our outstanding warrants and the purchase option granted to the representative of the underwriters, and the future dilution they potentially represent, may not be viewed favorably by certain target businesses. Any of these obligations may place us at a competitive disadvantage in successfully negotiating and completing a business combination. In addition, because it is possible that our business combination may entail the contemporaneous acquisition of several operating businesses and may be with several different sellers, we will need to convince such sellers to agree that the purchase of their businesses is contingent upon the simultaneous closings of the other acquisitions. Table of Contents Our ability to effect a business combination and to execute any potential business plan afterwards will be largely dependent upon the efforts of our key personnel, some of whom may join us following a business combination and may be unfamiliar with the requirements of operating a public company. Our ability to effect a business combination will be totally dependent upon the efforts of our key personnel. The future role of our key personnel following a business combination, however, cannot presently be fully ascertained. Specifically, the members of our current management are not obligated to remain with us subsequent to a business combination, and we cannot assure you that the resignation or retention of our current management will be included as a term or condition in any agreement with respect to a business combination. Although our management and other key personnel, particularly our Chief Executive Officer and President and our Chief Management Officer and Executive Vice President, may remain associated with us following a business combination, we may employ other personnel following the business combination. While we intend to closely scrutinize any additional individuals we employ after a business combination, we cannot assure you that our assessment of those individuals will prove to be correct. Moreover, our current management will only be able to remain with the combined company after the consummation of a business combination if they are able to negotiate such as part of the business combination. If we acquired a target business in an all-cash transaction, it would be more likely that current members of management would remain with us if they chose to do so. If a business combination were structured as a merger whereby the stockholders of the target business were to control the combined company following a business combination, it may be less likely that management would remain with the combined company unless it was negotiated as part of the transaction via the acquisition agreement, an employment agreement or other arrangement. In making the determination as to whether current management should remain with us following the business combination, management will analyze the experience and skill set of the target business s management and negotiate as part of the business combination that certain members of current management remain if it is believed that it is in the best interests of the combined company post-business combination. If management were to negotiate to be retained by our company post-business combination as a condition to any potential business combination, such negotiations may result in a conflict of interest. Our current management will only be able to remain with the combined company after the consummation of a business combination if they are able to negotiate mutually agreeable employment terms as part of any such combination, which terms would be disclosed to stockholders in any proxy statement relating to such transaction. The financial interest of our officers and directors could influence their motivation in selecting a target business and thus, there may be a conflict of interest when determining whether a particular business combination is in the stockholders best interest. Our officers and directors will allocate their time to other businesses, thereby causing conflicts of interest in their determination as to how much time to devote to our affairs. This could have a negative impact on our ability to consummate a business combination. Our officers and directors are not required to, and will not, commit their full time to our affairs, which may result in a conflict of interest in allocating their time between our operations and other businesses. This could have a negative impact on our ability to consummate a business combination. We do not intend to have any full time employees prior to the consummation of a business combination. Each of our executive officers are engaged in several other business endeavors and are not obligated to contribute any specific number of hours per week to our affairs. For example, Steven M. Wasserman, our Chief Executive Officer, President and Co-Chairman of our board of directors, currently serves as managing partner of AMT Ventures LLC, an entity primarily engaged in public and private equity and debt investments on a principal basis as well as managing partner of AMT Capital Partners LLC, an investment banking advisory firm. In addition, Robert B. Blaha, our Chief Management Officer and Executive Vice President, currently serves as president of Human Capital Resources, a management consulting company and vice chairman of Integrity Bank Trust, a commercial bank. If our officers and directors other business affairs require them to devote substantial amounts of time to such affairs in excess of their current commitment levels, it could limit their ability to devote time to our affairs and could have a negative impact on our ability to consummate a business combination. We cannot assure you that these conflicts will be resolved in our favor. For a complete discussion of the potential Table of Contents conflicts of interest that you should be aware of, see the sections entitled Management Directors and Executive Officers and Management Conflicts of Interest. Our officers and directors are currently and may in the future become affiliated with entities engaged in business activities similar to those intended to be conducted by us and accordingly, may have conflicts of interest in determining which entity a particular business opportunity should be presented to. Our officers and directors are currently, and may in the future become affiliated with entities, including other blank check companies, engaged in business activities similar to those intended to be conducted by us. Additionally, our officers and directors may become aware of business opportunities which may be appropriate for presentation to us as well as the other entities with which they are or may be affiliated. Further, certain of our officers and directors are currently involved in other businesses that are similar to the business activities that we intend to conduct following a business combination. Due to these existing or potential affiliations, they have prior fiduciary obligations to present potential business opportunities to those entities prior to presenting them to us which could cause additional conflicts of interest. Accordingly, they may have conflicts of interest in determining to which entity a particular business opportunity should be presented. We cannot assure you that these conflicts will be resolved in our favor. For a complete discussion of our management s business affiliations and the potential conflicts of interest that you should be aware of, see the sections entitled Management Directors and Executive Officers and Management Conflicts of Interest. If we seek to effect a business combination with an entity that is directly or indirectly affiliated with one or more of our existing stockholders, conflicts of interest could arise. Our initial stockholders either currently have or may in the future have affiliations with companies in the homeland security and/or defense industries. If we were to seek a business combination with a target business with which one or more of our initial stockholders may be affiliated, conflicts of interest could arise in connection with negotiating the terms of and completing the business combination. Conflicts that may arise may not be resolved in our favor. Since our officers and directors own shares of our common stock and warrants which will not participate in the liquidation of the trust account distributions, they may have a conflict of interest in determining whether a particular target business is appropriate for a business combination. All of our officers and directors own shares of common stock in our company which were issued prior to this offering, but have waived their right to receive distributions with respect to those shares upon the liquidation of the trust account if we are unable to complete a business combination. Additionally, Steven M.Wasserman, our Chief Executive Officer, President and Co-Chairman of our board of directors and Constantinos Tsakiris, a director, have agreed to purchase an aggregate of $3,200,000 of warrants directly from us in a private placement transaction consummated not less than two days prior to the effective date of the registration statement of which this prospectus forms a part. These warrants will not be exercisable until the later of: (i) the consummation of a business combination or (ii) one year from the date of this prospectus. The shares and warrants owned by our directors will be worthless if we do not consummate a business combination. The personal and financial interests of our officers and directors may influence their motivation in identifying and selecting a target business and completing a business combination in a timely manner. Consequently, our officers and directors discretion in identifying and selecting a suitable target business may result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination are appropriate and in our stockholders best interest. Our initial stockholders will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the amount not held in the trust account unless the business combination is consummated and therefore they may have a conflict of interest. Our initial stockholders will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the amount not held in the trust account unless the business combination is consummated and there are sufficient funds available for reimbursement after such consummation. The financial interest of such persons could influence their motivation in selecting a target business and Table of Contents thus, there may be a conflict of interest when determining whether a particular business combination is in the stockholders best interest. If our common stock becomes subject to the SEC s penny stock rules, broker-dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected. If at any time we have net tangible assets of $5,000,000 or less and our common stock has a market price per share of less than $5.00, transactions in our common stock may be subject to the penny stock rules promulgated under the Securities Exchange Act of 1934, as amended. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must: make a special written suitability determination for the purchaser; receive the purchaser s written agreement to a transaction prior to sale; provide the purchaser with risk disclosure documents which identify certain risks associated with investing in penny stocks and which describe the market for these penny stocks as well as a purchaser s legal remedies; and obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a penny stock can be completed. If our common stock becomes subject to these rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected. As a result, the market price of our securities might be depressed, and you might find it more difficult to sell our securities. It is probable that we will only be able to complete one business combination, which will cause us to be solely dependent on a single business. The net proceeds from this offering and the private placement will provide us with approximately $58,060,000 ($66,430,000 if the underwriters exercise the over-allotment option in full) which we may use to complete a business combination. Our initial business combination must be with a business or businesses with a collective fair market value of at least 80% of our net assets at the time of such acquisition (exclusive of Maxim Group LLC s deferred underwriting compensation, including interest thereon, held in the trust account). We may further seek to acquire a target business that has a fair market value significantly in excess of 80% of our net assets. Although as of the date of this prospectus we have not engaged or retained, had any discussions with, or entered into any agreements with, any third party regarding any such potential financing transactions, we could seek to fund such a business combination by raising additional funds through the sale of our securities or through loan arrangements. However, if we were to seek such additional funds, any such arrangement would likely only be consummated simultaneously with our consummation of a business combination. Consequently, it is probable that we will have the ability to complete only a single business combination, although this may entail the simultaneous acquisitions of several assets or closely related operating businesses at the same time. Accordingly, the prospects for our ability to effect our business strategy may be: solely dependent upon the performance of a single business; or dependent upon the development or market acceptance of a single or limited number of products, processes or services. In this case, we will not be able to diversify our operations or benefit from the possible spreading of risks or offsetting of losses, unlike other entities which may have the resources to complete several business combinations in different industries or different segments of a single industry. Further, our prospects for success are likely to be entirely dependent upon the future performance of the initial target business or businesses we acquire. Furthermore, it is possible that our business combination may entail the simultaneous acquisition of several assets or operating businesses at the same time and may be with different sellers, in Table of Contents which case we will need to convince such sellers to agree that the purchase of their assets or businesses is contingent upon the simultaneous closings of the other acquisitions. We may be unable to obtain additional financing, if required, to complete a business combination or to fund the operations and growth of the target business, which could compel us to restructure the transaction or abandon a particular business combination. Although we believe, based upon the knowledge and experience of our management and board of directors in the homeland security and defense industries, that the net proceeds of this offering and the private placement and the interest earned on the trust account will be sufficient to allow us to consummate a business combination, in as much as we have not yet selected or approached any prospective target business, we cannot ascertain the capital requirements for any particular transaction. Furthermore, our management and Board of Directors have no experience with blank check companies or the search for and consummation of a business combination through a blank check company. If the net proceeds of this offering and the private placement and the interest earned on the trust account prove to be insufficient, either because of the size of the business combination or the depletion of the available net proceeds in searching for a target business, or because we become obligated to redeem into cash a significant number of shares from dissenting stockholders, we will be required to seek additional financing. We cannot assure you that such financing would be available on acceptable terms, if at all. To the extent that additional financing proves to be unavailable when needed to consummate a particular business combination, we would be compelled to restructure the transaction or abandon that particular business combination and seek an alternative target business candidate. In addition, it is possible that we could use a portion of the funds not in the trust account to make a deposit, down payment or fund a no-shop provision with respect to a proposed business combination. In the event that we were ultimately required to forfeit such funds (whether as a result of our breach of the agreement relating to such payment or otherwise), without securing additional financing we may not have a sufficient amount of working capital available outside of the trust account to conduct due diligence and pay other expenses related to finding a suitable business combination. If we were unable to secure additional financing, we would most likely fail to consummate a business combination in the allotted time and would dissolve and liquidate the trust account as part of our plan of dissolution and liquidation, resulting in a loss of a portion of your investment. In addition, if we consummate a business combination, we may require additional financing to fund the operations or growth of the target business. The failure to secure additional financing could have a material adverse effect on the continued development or growth of the target business. None of our officers, directors, stockholders or special advisor is required to provide any financing to us in connection with or after a business combination. We will depend upon interest earned on the trust account to fund our search for a target company and otherwise fulfill our business purposes. Before we complete a business combination, we may withdraw up to $1,825,000 ($1,925,000 if the underwriters over-allotment option is exercised in full) of the interest income earned on the funds in the trust account, after provision for taxes, including State of Delaware franchise taxes, and repayment of up to $250,000 of an additional officer loan to be made on or prior to the closing of this offering by Steven M. Wasserman (such loan to be repaid within 90 days of the closing of this offering), to fund our working capital needs and expenses, including expenses associated with the pursuit of a business combination and, if necessary, with our potential dissolution and liquidation. We estimate that the total costs and expenses for implementing and completing our stockholder-approved plan of dissolution and liquidation will be in the range of $50,000 to $75,000. This amount includes all costs and expenses related to the filing of our articles of dissolution, the winding-up of our company and the costs of a proxy statement and meeting related to the approval by our stockholders of our plan of dissolution and liquidation. We have agreed with the representative of the underwriters that we may withdraw interest monthly (or weekly during the first month after the offering). We will depend upon sufficient interest being earned on the proceeds held in the trust account to provide us with the working capital we will need to engage in these activities. If interest rates were to decline substantially, we may not have sufficient funds available to fulfill our business purpose. In such event, we would need to find other sources of funds, which may not be available on favorable terms, if at all, or be forced to liquidate. Table of Contents Our initial stockholders, including our officers and directors, control a substantial interest in us and thus may influence certain actions requiring stockholder vote. Upon consummation of this offering, our initial stockholders (including all of our officers and directors) will collectively beneficially own 20.8% of our issued and outstanding shares of common stock (assuming no exercise of the underwriters over-allotment option), which could permit them to effectively influence the outcome of all matters requiring approval by our stockholders at such time, including the approval of our initial business combination, and, following such business combination, the election of directors and approval of significant corporate transactions. See the section entitled, Principal Stockholders. In connection with the vote required for any business combination, all of our initial stockholders, including all of our officers and directors, have agreed to vote the shares of common stock owned by them immediately before this offering in accordance with the majority of the shares of common stock voted by the public stockholders. In addition, our initial stockholders have agreed to vote any shares of common stock acquired in or following this offering in favor of the business combination submitted to our stockholders for approval. Our board of directors is divided into two classes, each of which will generally serve for a term of two years with only one class of directors being elected in each year. It is unlikely that there will be an annual meeting of stockholders to elect new directors prior to the consummation of a business combination, in which case all of the current directors will continue in office at least until the consummation of the business combination. If there is an annual meeting, as a consequence of our staggered board of directors, initially only one-half of the board of directors will be considered for election and our initial stockholders, because of their ownership position, will have considerable influence regarding the outcome. Accordingly, our initial stockholders will likely continue to exert control at least until the consummation of a business combination. In addition, our initial stockholders and their affiliates and relatives are not prohibited from purchasing units in this offering or in the aftermarket. If they do, we cannot assure you that our initial stockholders will not have considerable influence upon the vote in connection with a business combination. Our initial stockholders paid an aggregate of $25,000, or approximately $0.0156 per share, for their shares and, accordingly, you will experience immediate and substantial dilution from the purchase of our common stock. The difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering constitutes the dilution to you and the other investors in this offering. The fact that our initial stockholders acquired their shares of common stock at a nominal price has significantly contributed to this dilution. Upon completion of the offering, you and the other new investors will incur an immediate and substantial dilution of approximately 28.1% or $2.81 per share (the difference between the pro forma net tangible book value per share of $7.19, and the initial offering price of $10.00 per unit). Our outstanding warrants may have an adverse effect on the market price of our common stock and make it more difficult to effect a business combination. In connection with this offering, as part of the units offered by this prospectus (but not including any over-allotments issued to the underwriters), we will be issuing warrants to purchase 6,000,000 shares of common stock and, in our private placement, we will be issuing warrants to purchase an aggregate of 3,200,000 shares of our common stock to Steven M. Wasserman, Chief Executive Officer, President and Co-Chairman of the board of directors and Constantinos Tsakiris, a director. In addition, we have agreed to sell to the representative of the underwriters an option to purchase up to a total of 105,000 units that, if exercised, would result in the issuance of warrants to purchase an additional 105,000 shares of common stock. To the extent we issue shares of common stock to effect a business combination, the potential for the issuance of substantial numbers of additional shares upon exercise of these warrants (to the extent the warrants are exercised on a cashless exercise basis the number of shares to be issued by us will be reduced) could make us a less attractive acquisition vehicle in the eyes of a target business as such securities, when exercised, will increase the number of issued and outstanding shares of our common stock and reduce the value of the shares issued to complete the business combination. Accordingly, our warrants may make it more difficult to effectuate a business combination or increase the cost of the target business. Additionally, the sale, or even the possibility of sale, of the shares underlying the warrants could have an adverse effect on the market price for Table of Contents our securities or on our ability to obtain future public financing. If and to the extent these warrants are exercised, you will experience dilution to your holdings. If our initial stockholders and the holders of our private placement warrants exercise their registration rights, it may have an adverse effect on the market price of our common stock and the existence of these rights may make it more difficult to effect a business combination. Our initial stockholders are entitled to require us to register the resale of their shares of common stock at any time after the date on which their shares are released from escrow, which, except in limited circumstances including approval by our public stockholders, will not be before one year from the date of consummation of a business combination. The holders of our private placement warrants are entitled to require us to register the shares of our common stock issuable upon exercise of the warrants at any time after the date on which we publicly announce entering into a letter of intent with respect to a business combination, although such securities remain subject to a lock-up agreement and cannot be transferred or exercised, as the case may be, until the consummation of a business combination. If our initial stockholders, including the holders of our private placement warrants, exercise their registration rights with respect to all of their shares of common stock, then there will be an additional 4,780,000 shares of common stock eligible for trading in the public market. The presence of this additional number of shares of common stock eligible for trading in the public market may have an adverse effect on the market price of our common stock. In addition, the existence of these rights may make it more difficult to effectuate a business combination or increase the cost of the target business, as the stockholders of the target business may be discouraged from entering into a business combination with us or may request a higher price for their securities as a result of these registration rights and the potential future effect their exercise may have on the trading market for our common stock. The American Stock Exchange may delist our securities, which could limit investors ability to make transactions in our securities and subject us to additional trading restrictions. We have applied to have our securities listed on the American Stock Exchange. We cannot assure you that our securities will be listed on the American Stock Exchange or, if listed, that we will be able to maintain the listing. Additionally, in connection with our business combination, it is likely that the American Stock Exchange may require us to file a new initial listing application and meet its initial listing requirements as opposed to its more lenient continued listing requirements. If we are unable to meet those stricter listing requirements, our securities would not be listed on the American Stock Exchange and might not be listed on any securities exchange. If we are unable to maintain the listing of our securities on the American Stock Exchange, we could face significant material adverse consequences including: decreased trading liquidity and a limited availability of market quotations for our securities; a determination that our common stock is a penny stock, with the consequences described in If our common stock becomes subject to the SEC s penny stock rules, broker-dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected ; a limited amount of news and analyst coverage for our company; and a decreased ability to issue additional securities or obtain additional financing. Our determination of the offering price of our units and of the aggregate amount of proceeds we are raising in this offering was more arbitrary than would typically be the case if we were an operating company rather than an acquisition vehicle. Before this offering there has been no public market for any of our securities. The public offering price of the units, the terms of the public warrants and the aggregate proceeds we are raising and the amount to be Table of Contents placed in the trust account were negotiated between us and the representative of the underwriters. Among the factors considered in making these determinations were: our management s assessment of the amount of funds necessary to complete an acquisition in the U.S. homeland security and/or defense industries; the history and prospects of other blank check companies whose principal business is the acquisition of other companies; the actual and proposed offerings of those companies, including the structure and size of the offerings; an assessment of our management team and its experience in identifying acquisition targets and structuring acquisitions in the U.S. homeland security and/or defense industries; our prospects for acquiring an operating business in the U.S. homeland security and/or defense industries at attractive valuations; our capital structure; the general conditions of the securities markets that we expect to prevail at the time of the offering; the likely competition for acquisition targets; and the likely number of potential targets. Furthermore, since we do not have an operating history or financial results and we have not begun to investigate potential target businesses whose operations could be evaluated, the underwriters were unable to compare our financial results and prospects with those of public companies operating in the same U.S. homeland security and defense industries, nor could they determine the accuracy of our estimate of the amount needed to fund our operations for the next 24 months. In addition, because we have not identified any potential target businesses, our assessment of the financial resources necessary to complete a business combination may prove to be inaccurate, in which case we may not have sufficient funds to consummate a business combination and we would be forced to either seek additional financing or liquidate. If we are deemed to be an investment company, we may be required to institute burdensome compliance requirements and our activities may be restricted, which may make it difficult for us to complete a business combination. If we are deemed to be an investment company under the Investment Company Act of 1940, as amended, our activities may be restricted which, among other problems, may make it difficult for us to complete a business combination. Such restrictions include: restrictions on the nature of our investments; and restrictions on the issuance of our securities. In addition, we may have imposed upon us burdensome requirements, including: registration and regulation as an investment company; adoption of a specific form of corporate structure; and reporting, record keeping, voting, proxy and disclosure requirements and other rules and regulations. We do not believe that our anticipated principal activities will subject us to the Investment Company Act of 1940, as amended. The proceeds held in trust will be invested only in United States government securities, defined as any Treasury Bill issued by the United States having a maturity of one hundred and eighty days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940, as amended, so that we are not deemed to be an investment company under the Investment Company Act, as amended. By restricting the investment of the proceeds to these instruments, we intend to meet the requirements for the exemption provided in Rule 3a-1 promulgated under Table of Contents the Investment Company Act of 1940, as amended. If we were deemed to be subject to such act, compliance with these additional regulatory burdens would require additional expense that we have not allotted for. Our directors, including those serving on our audit committee, may not be considered independent under the policies of the North American Securities Administrators Association, Inc. Under the policies of the North American Securities Administrators Association, Inc., an international organization devoted to investor protection, because all of our directors own shares of our common stock and may receive reimbursement for out-of-pocket expenses incurred by them in connection with activities on our behalf, such as identifying potential target businesses and performing due diligence on suitable business combinations, state securities administrators could take the position that such individuals are not independent. If this were the case, they would take the position that we would not have the benefit of independent directors examining the propriety of expenses incurred on our behalf and subject to reimbursement. Additionally, there is no limit on the amount of out-of-pocket expenses that could be incurred and there will be no review of the reasonableness of the expenses by anyone other than members of our audit committee and board of directors, which would include persons who may seek reimbursement, or a court of competent jurisdiction if such reimbursement is challenged. To the extent such out-of-pocket expenses exceed the available proceeds not deposited in the trust account, such out-of-pocket expenses would not be reimbursed by us unless we consummate a business combination. Although we believe that all actions taken by our directors on our behalf will be in our best interests, whether or not they are deemed to be independent, we cannot assure you that this will actually be the case. If actions are taken, or expenses are incurred, that are actually not in our best interests, it could have a material adverse effect on our business and operations and the price of our stock held by the public stockholders. Because our initial stockholders initial equity investment was only $25,000, our offering may be disallowed by state administrators that follow the North American Securities Administrators Association, Inc. Statement of Policy on promotional or development stage companies. Pursuant to the Statement of Policy Regarding Promoter s Equity Investment promulgated by The North American Securities Administrators Association, Inc., any state administrator may disallow an offering of a promotional or development stage company if the initial equity investment by a company s promoters does not equal a certain percentage of the aggregate public offering price. Our promoters initial investment of $25,000 is less than the required $1,610,000 minimum amount pursuant to this policy. Accordingly, a state administrator would have the discretion to disallow our offering if it wanted to. We cannot assure you that our offering would not be disallowed pursuant to this policy. The inability of the sellers of companies we may acquire to fulfill their indemnification obligations to us under our acquisition agreements could increase our liabilities and adversely affect our results of operations and financial position. We intend to make an effort to negotiate as a term in our acquisition agreements, that the respective sellers will agree to retain responsibility for and indemnify us against damages resulting from certain third-party claims or other liabilities. However, there may be instances in which we decide to enter into an acquisition agreement without such seller indemnification obligations, such as in purchases of assets out of bankruptcy. These third-party claims and other liabilities include, without limitation, premium payments to funds created under applicable Federal laws, costs associated with various litigation matters, and certain environmental liabilities. The lack of seller indemnification obligations or the failure of any seller to satisfy its obligations with respect to claims and retained liabilities covered by the acquisition agreements could have an adverse effect on our results of operations and financial position because claimants may successfully assert that we are liable for those claims and/or retained liabilities. In addition, we expect that certain obligations of the sellers to indemnify us will terminate upon expiration of the applicable indemnification period and will not cover damages in excess of the applicable coverage limit. The assertion of third-party claims after the expiration of the applicable indemnification period or in excess of the applicable coverage limit, or the failure of any seller to satisfy its indemnification obligations with respect to breaches of its representations and warranties, could have an adverse effect on our results of operations and financial position. Table of Contents Risks Associated with the U.S. Homeland Security and Defense Industries Even if we acquire domestic or international operations, of which no assurances can be given, our proposed business will be subject to numerous risks, including the following: Risks Associated with Government Contracts We may acquire a target business that contracts directly with federal, state or local governments with respect to homeland security or defense or a combination thereof. Alternatively, our target business may act as a subcontractor, supplier or partner with another party or parties that contract with the government. Set forth below are the risk factors associated with government contracts that may impact us. Our target business could be adversely affected by significant changes in the contracting or fiscal policies of governments and governmental entities. The revenues of our target business may be substantially derived from contracts with federal, state and local governments and government agencies and subcontracts under federal government prime contracts and we believe that the growth of our target business may depend on our procurement of government contracts either directly or through prime contractors. Accordingly, changes in government contracting policies or government budgetary constraints could directly affect the financial performance of our target business. Among the factors that could adversely affect our target business are: changes in fiscal policies or decreases in available government funding; changes in government programs or applicable requirements; the adoption of new laws or regulations or changes to existing laws and regulations; changes in political or social attitudes with respect to homeland security or defense issues; and potential delays or changes in the government appropriations process. These and other factors could cause governments and governmental agencies, or prime contractors that may use our target business as a subcontractor, to reduce their purchases under existing contracts, to exercise their rights to terminate contracts at-will or to abstain from exercising options to renew contracts, any of which could have a material adverse effect on the business, financial condition and results of operations of our target business. Government contracts typically contain unfavorable provisions. Government contracts often include provisions that are not standard in private commercial transactions. For example, government contracts may: include provisions that allow the government agency to terminate the contract without penalty under certain circumstances; contain onerous procurement procedures; be subject to cancellation if government funding becomes unavailable; and subject the contracting party to suspension or ban from doing business with the government or a government agency, impose fines and penalties and subject the contracting party to criminal prosecution. Accordingly, the business, financial condition and results of operations of our target business may be adversely affected by such provisions (or other provisions) contained in government contracts. Government contracts are subject to audit and cost adjustments, which could reduce revenue of our target, disrupt its business or otherwise adversely affect its results of operations. Government agencies routinely audit and investigate government contracts and government contractors administrative processes and systems. These agencies review performance on contracts, pricing practices, cost Table of Contents structure and compliance with applicable laws, regulations and standards. They also review the contracting parties compliance with regulations and policies and the adequacy of internal control systems and policies, including the purchasing, property, estimating, compensation and management information systems of our target business. Any costs found to be improperly allocated to a specific contract will not be reimbursed and any such costs already reimbursed must be refunded. Moreover, if any of the administrative processes and systems are found not to comply with requirements, our target business may be subjected to increased government oversight and approval that could delay or otherwise adversely affect its ability to compete for or perform contracts. Therefore, an unfavorable outcome to a government audit could cause the actual results of our target business to differ materially from those anticipated. If an investigation uncovers improper or illegal activities, our target business may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeitures of profits, suspension of payments, fines and suspension or debarment from doing business with the government. In addition, our target business could suffer serious harm to its reputation if allegations of impropriety were made against it. Each of these results could cause the actual results of our target business to differ materially from those anticipated. Our target business may derive significant revenue from contracts awarded through a competitive bidding process. Government contracts are awarded through a competitive bidding process. A material portion of our target s business in the future may be awarded through competitive bidding. The competitive bidding process presents a number of risks, including the following: bids are made on programs before the completion of their design, which may result in unforeseen difficulties and cost overruns; substantial cost and managerial time and effort to prepare bids is made on proposals for contracts that may not be won; it may be difficult to estimate accurately the resources and cost structure that will be required to service any contract won; and expense and delay may be encountered if competitors protest or challenge awards of contracts to our target business in competitive bidding, and any such protest or challenge could result in the resubmission of bids on modified specifications, or in the termination, reduction, or modification of the awarded contract. Budgetary pressures and changes in the procurement process have caused many government clients to increasingly purchase goods and services through indefinite deliver/indefinite quantity, or ID/IQ, contracts, GSA schedule contracts and other government-wide acquisition contracts. These contracts, some of which are awarded to multiple contractors, have increased competition and pricing pressure, requiring that our target business make sustained post-award efforts to realize revenue under each such contract. In addition, the net effect of such programs may reduce the number of bidding opportunities available to our target business. Moreover, even if our target business was highly qualified to work on a particular new contract, it might not be awarded business because of the government s policy and practice of maintaining a diverse contracting base. Our target business will likely have to comply with complex procurement laws and regulations. Our target business will likely have to comply with and will be affected by laws and regulations relating to the formation, administration and performance of federal government contracts, which affect how it does business with its customers and may impose added costs on its business. For example, our target business or parties with which it does business will likely be subject to the Federal Acquisition Regulations and all supplements (including those issued by the Department of Homeland Security and the Department of Defense), which comprehensively regulate the formation, administration and performance of federal government contracts, and to the Truth-in-Negotiations Act, which requires certification and disclosure of cost and pricing data in connection with contract negotiations. In addition, our target business or parties with which it does business will likely be subject to industrial security regulations of Department of Defense and other federal agencies that are designed to safeguard against foreigners access to classified information. Our target business may also be liable for Table of Contents systems and services failures and security breaks with respect to the solutions, services, products, or other applications it sells to the government. If our target business was to come under foreign ownership, control or influence, its federal government customers could terminate or decide not to renew their contracts, and it could impair the ability of our target business to obtain new contracts. The government may reform its procurement practices or adopt new contracting rules and regulations, including cost-accounting standards, that could be costly to satisfy or that could impair the ability of our target business to obtain new contracts. Other Risks Associated with the U.S. Homeland Security and Defense Industries If our target business is unable to respond to the technological, legal, financial or other changes in the security industry and changes in our customers requirements and preferences, we will not be able to effectively compete with our competitors. If our target business is unable, for technological, legal, financial or other reasons, to adapt in a timely manner to changing market conditions, customer needs or regulatory requirements, it could lose customers. Changes in customer requirements and preferences, the introduction of new products and services embodying new technologies, and the emergence of new industry standards and practices could render the existing products of the company we acquire obsolete. The success of our target business will depend, in part, on its ability to: Enhance products and services; Anticipate changing customer requirements by designing, developing, and launching new products and services that address the increasingly sophisticated and varied needs of customers; Respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis; and Respond to changing regulatory requirements in a cost effective and timely manner. The development of additional products and services involves significant technological and business risks and requires substantial expenditures and lead time. If our target business fails to introduce products with new technologies in a timely manner, or adapt its products to these new technologies, our target business will not be able to effectively compete with our competitors. We cannot assure you that, even if our target business is able to introduce new products or adapt our products to new technologies, that its products would gain acceptance among its customers. We may be unable to protect or enforce the intellectual property rights of any target businesses that we acquire. We may acquire a target business whose business is dependent upon its proprietary technology and intellectual property. Accordingly, the protection of trademarks, copyrights, patents, domain names, trade dress, and trade secrets may be critical to the ability of our target business to compete with its competitors. In such a case, our target business will likely rely on a combination of copyright, trademark, trade secret laws and contractual restrictions to protect any proprietary technology and rights that it may acquire. Despite the efforts of our target business to protect its proprietary technology and rights, our target business may not be able to prevent misappropriation of its proprietary rights or deter independent development of technologies that compete with the business we acquire. Our target business s competitors may file patent applications or obtain patents and proprietary rights that block or compete with its patents. Litigation may be necessary in the future to enforce our target business s intellectual property rights, to protect its trade secrets, or to determine the validity and scope of the proprietary rights of others. It is also possible that third parties may claim our target business has infringed their patent, trademark, copyright or other proprietary rights. Claims or litigation, with or without merit, could result in substantial costs and diversions of resources, either of which could have a material adverse effect on the competitive position and business of our target business. Depending on the target business or businesses that we acquire, we may have to protect trademarks, patents, and domain names in an increasing number of jurisdictions, a process that is expensive and may not be successful in every location. With respect to certain proprietary rights, such as trademarks and copyrighted materials, of the target business or businesses that we will acquire, the target business or businesses may have entered into license agreements in the past and will continue to enter into such agreements in the future. These licensees may take Table of Contents actions that diminish the value of such target business or businesses proprietary rights or cause harm to such target business or businesses reputation. Our target business may face inherent product liability or other liability risks which could result in large claims against us. Our target business may face the inherent risk of exposure to product liability and other liability claims resulting from the use of its products, especially to the extent such products will be depended upon in emergency, rescue and public safety situations that may involve physical harm or even death to individuals, as well as potential loss or damage to property. Despite quality control systems and inspection, there remains an ever-present risk of an accident resulting from a faulty manufacture or maintenance of products, or an act of an agent outside the control of the companies or their suppliers. A product liability claim, or other legal claims based on theories including personal injury or wrongful death, made against our target business could adversely affect its operations and financial condition. Although there may be insurance to cover the product liability claims, the amount of coverage may not be sufficient. Furthermore, we cannot assure you that our target business, if engaged in the sale of so-called anti-terrorism technologies could avail itself of the liability protections intended to be afforded by the Support Anti-Terrorism by Fostering Effective Technologies Act of 2002, or the SAFETY Act. A decline in the U.S. defense budget may adversely affect the operations of our target. We may acquire a target business with material sales under contracts with the U.S. Department of Defense, including sales under subcontracts having the Department of Defense as the ultimate purchaser. The U.S. defense budget declined from time to time in the late 1980s and the early 1990s, resulting in a slowing of new program starts, program delays and program cancellations. These reductions caused most defense-related government contractors to experience declining revenues, increasing pressure on operating margins and, in some cases, net losses. While spending authorizations for defense-related programs by the government have increased in recent years, and in particular after the September 11, 2001 terrorist attacks, these spending levels may not be sustainable, and future levels of expenditures and authorizations for those programs may decrease, remain constant or shift to programs in areas where our target business may provide limited or no products or services. A change in the U.S. Presidential Administration or in the composition of Congress could also materially affect levels of support for military expenditures. A significant decline in military expenditures could harm the operating results of our target business. Our target business may regularly employ subcontractors to assist in satisfying its contractual obligations. If these subcontractors fail to adequately perform their contractual obligations, our target business s prime contract performance and its ability to obtain future business could be materially and adversely impacted. The performance by our target business of government contracts may involve the issuance of subcontracts to other companies upon which our target business may rely to perform all or a portion of the work it is obligated to deliver to customers. There is a risk that our target business may have disputes with subcontractors concerning a number of issues including the quality and timeliness of work performed by the subcontractor. A failure by one or more of our target business s subcontractors to satisfactorily deliver on a timely basis the agreed-upon supplies and/or perform the agreed-upon services may materially and adversely impact the ability of our target business to perform its obligations as a prime contractor. In extreme cases, such subcontractor performance deficiencies could result in the government terminating our target s contract for default. A default termination could expose our target business to liability for excess costs of reprocurement by the government and have a material adverse effect on the ability of our target business to compete for future contracts. If our target business cannot obtain the necessary security clearances, it may not be able to perform classified work for the government and the revenues of our target business may suffer. Certain government contracts may require the facilities of our target business and some of its employees to maintain security clearances. If our target business loses or is unable to obtain required security clearances, the customer can terminate the contract or decide not to renew it upon its expiration. As a result, to the extent Table of Contents our target business cannot obtain the required security clearances for its employees working on a particular contract, our target business may not derive the revenue anticipated from the contract, which, if not replaced with revenue from other contracts, could seriously harm its operating results. Security breaches of sensitive government systems could result in the loss of customers and negative publicity. Our target business may offer products and services involving managing and protecting information involved in national security and other sensitive government functions. A security breach involving our target business s products or services could cause serious harm to its business, could result in negative publicity and could prevent our target business from having further access to such critically sensitive information or other similarly sensitive areas for other governmental customers. Table of Contents USE OF PROCEEDS We estimate that the net proceeds of this offering and the private placement will be as set forth in the following table: Without Over- Over-Allotment Allotment Option Option Exercised Gross proceeds Private placement $ 3,200,000 $ 3,200,000 Offering 60,000,000 69,000,000 Total $ 63,200,000 $ 72,200,000 Offering and private placement expenses(1) Underwriting discount(2) 1,980,000 2,160,000 Deferred underwriting compensation(3) 1,800,000 2,250,000 Underwriting non-accountable expense allowance (1% of gross proceeds without the over-allotment option) 600,000 600,000 Legal fees and expenses (including blue sky services and expenses)(4) 458,650 458,650 Printing and engraving expenses 100,000 100,000 Miscellaneous expenses 26,006 26,006 Accounting fees and expenses 60,000 60,000 SEC registration fee 16,135 16,135 NASD registration fee 14,209 14,209 Amex listing fee 85,000 85,000 Total offering expenses $ 5,140,000 $ 5,770,000 Net proceeds Held in trust for our benefit 58,060,000 66,430,000 Not held in trust 0 0 Total net proceeds 58,060,000 66,430,000 Adjustments Deferred underwriting compensation to be held in trust(3) $ 1,800,000 $ 2,250,000 Deferred legal fees(4) 90,000 90,000 Portion of additional officer loan(5) 50,000 50,000 Total held in trust $ 60,000,000 $ 68,820,000 Estimated expenses related to a business combination to be paid from interest income earned on the trust account allocated for working capital purposes ($1,825,000 or $1,925,000 if the over-allotment option is exercised in full)(6) Legal, accounting and other expenses attendant to the structuring, negotiation and consummation of a business combination $ 400,000 $ 400,000 Payment of office space, administrative services and support to ASG Management, Inc. ($7,500 per month for up to 24 months) 180,000 180,000 Identification, evaluation and due diligence of prospective target businesses 500,000 500,000 Legal and accounting fees relating to SEC reporting obligations 100,000 100,000 Directors and officers liability insurance 150,000 150,000 Working capital to cover miscellaneous expenses (including deferred legal fees(4), potential deposits, down payments or funding of a no-shop provision in connection with a particular business combination), key-man insurance, dissolution and liquidation obligations and reserves 495,000 595,000 Total $ 1,825,000 $ 1,925,000 Table of Contents (1) A portion of the offering expenses including SEC registration fees, NASD filing fees, AMEX listing fees and legal and accounting fees have been paid from loans we received from Messrs. Wasserman and Blaha described below. These loaned funds will be repaid without interest out of the proceeds of this offering and the interest income earned on the trust account. (2) Represents 3.3% of the gross proceeds from the sale of the 6,000,000 units in this offering ($1,980,000) and 2% of the gross proceeds from the sale of the 900,000 units subject to the underwriters over-allotment option. (3) Represents 3% of the gross proceeds from the sale of the 6,000,000 units in this offering ($1,800,000) and 5% of the gross proceeds from the sale of the 900,000 units subject to the underwriters over-allotment option ($2,250,000, assuming that the underwriters exercise the over-allotment option in full) that Maxim Group LLC agreed to deposit into the trust account and forfeit (including interest earned thereon) in the event we do not complete a business combination. These amounts will be paid to Maxim Group LLC only upon completion of a business combination and then only with respect to those units as to which the component shares have not been redeemed. If we do not complete a business combination and the trust account is liquidated, these amounts will be distributed among our public stockholders. (4) Includes a portion of the legal fees ($90,000) related to the offering that is being deferred and will be paid, without contingency, from interest income earned from the trust account released to us for working capital. (5) Represents $50,000 of an additional loan of up to $250,000 to be made by Mr. Wasserman on or prior to the closing of this offering to pay for offering expenses, which will be repaid within 90 days of the closing of this offering. Interest income earned on the funds in the trust account will be used to repay this loan of up to $250,000 (which is non-interest bearing) along with: (i) taxes payable on interest income earned on the trust account and State of Delaware franchise taxes and (ii) up to $1,825,000 ($1,925,000 if the over-allotment option is exercised in full) of interest income to fund our working capital expenses. (6) We expect to fund our operating expenses from interest income earned from the trust account released to us. An aggregate of $1,825,000 ($1,925,000 if the underwriters over-allotment option is exercised in full) of the interest earned on the trust account will be released to us to fund our working capital requirements; however, if the underwriters over-allotment option is exercised in full, after our receipt of $125,000 of interest income we will not be permitted to draw such amounts until $180,000 (or a lesser amount if less than the full over-allotment option is exercised, pro rata based on the amount of the over-allotment exercised) of interest shall have been earned on the trust account with the resulting effect that there shall be a minimum of $10.00 per unit held in the trust account. We shall not be entitled to draw upon the interest income earned on the $1,800,000 in deferred underwriting discounts (or $2,250,000 if the underwriters over-allotment option is exercised in full), which will be paid to Maxim Group LLC if a business combination is consummated, but which will be forfeited by Maxim Group LLC if a business combination is not consummated. On the closing date of this offering, $60,000,000, or $68,820,000 if the underwriters over-allotment option is exercised in full, will be placed in a trust account at JP Morgan Chase NewYork, New York maintained by American Stock Transfer Trust Company, as trustee. This amount includes the net proceeds of this offering and the private placement, and $1,800,000 ($2,250,000 if the underwriters over-allotment option is exercised in full) of deferred underwriting compensation to be paid to Maxim Group LLC if and only if a business combination is consummated. We have agreed with Maxim Group LLC that we may withdraw interest earned on the trust account (net of taxes payable) in an amount not to exceed $1,825,000 ($1,925,000 if the underwriters over-allotment option is exercised in full) in the aggregate, and that we can withdraw interest monthly (or weekly during the first month after the offering), in order to fund our working capital needs and expenses and dissolution and liquidation expenses if we fail to consummate a business combination. Although we do not know the rate of interest to be earned on the trust account, we believe that even at an interest rate of 3% per annum, the interest available to us on the trust account less interest on the underwriters $1,800,000 ($2,250,000 if the underwriters over-allotment option is exercised in full) deferred underwriting compensation, which is payable to the underwriters if we complete a business combination will be sufficient to fund our working capital Table of Contents requirements even if they exceed our estimates. The remaining proceeds held in trust will not be released from the trust account until the earlier of the completion of a business combination or the liquidation of the trust account as part of any plan of dissolution and liquidation approved by our stockholders. The proceeds held in the trust account (exclusive of Maxim Group LLC s deferred underwriting compensation, including interest thereon held in the trust account or used to pay stockholders who have exercised their redemption right) may be used as consideration to pay the sellers of a target business with which we ultimately complete a business combination. Any amounts not paid as consideration to the sellers of the target business (other than amounts paid for finders, or professional fees or amounts paid for any fees or costs incurred in connection with any debt or equity financing made in connection with the business combination) may be used to finance operations of the target business. We have agreed to pay ASG Management, Inc., an affiliated third party of which Mr. Wasserman and Mr. Blaha are principals, $7,500 per month for office space and certain additional general and administrative services. Prior to the closing of a business combination, we have agreed to obtain key-man life insurance in the amount of $2,000,000 on the life of Steven M. Wasserman for a three year period. We expect that identification, evaluation and due diligence of prospective target businesses will be performed by some or all of our officers and directors, and may include engaging market research and valuation firms, as well as other third party consultants. None of our officers and directors will receive any compensation for their due diligence efforts, other than reimbursement of any out-of-pocket expenses (such as travel expenses) they may incur on our behalf while performing due diligence of a prospective target business. We intend to fund our working capital from a portion of the interest earned on the proceeds being held in the trust account. We have agreed with the representative of the underwriters that $1,825,000 (or $1,925,000 if the underwriters over-allotment option is exercised in full) of the interest income earned on the proceeds being held in the trust account for our benefit will be released to us monthly, or weekly during the first month after the offering; however, if the underwriters over-allotment option is exercised in full, after our receipt of $125,000 of interest income we will not be permitted to draw such amounts until $180,000 (or a lesser amount if less than the full over-allotment option is exercised, pro rata based on the amount of the over-allotment exercised) of interest shall have been earned on the trust account with the resulting effect that there shall be a minimum of $10.00 per unit held in the trust account. It is also possible that we could use a portion of our working capital to make a deposit, down payment or fund a no-shop provision with respect to a particular proposed business combination, although we do not have any current intention to do so. In the event that we were ultimately required to forfeit such funds (whether as a result of our breach of the agreement relating to such payment or otherwise), if such payment was large enough and we had already used up the funds available for due diligence and related expenses in connection with the aborted transaction, we could be left with insufficient funds to continue search for, or conduct due diligence with respect to, other potential target businesses. Thus, if we were unable to secure additional financing, we would most likely fail to consummate a business combination in the allotted time and would be forced to liquidate. Although there are no existing written or oral agreements in place, or obligations on the part of our initial stockholders, it is possible that our initial stockholders could advance us the additional required funds, thereby increasing the amount of excess out-of-pocket expenses to be reimbursed following a business combination. To the extent that our capital stock is used in whole or in part as consideration to effect a business combination, the proceeds held in the trust account as well as any other net proceeds not expended will be used to finance the operations of the target business. In May 2005, Mr. Wasserman and Mr. Blaha loaned us an aggregate of $187,800 which was used to pay a portion of the expenses of this offering, such as SEC registration fees, NASD registration fees, AMEX listing fees and legal and accounting fees and expenses. Such loans will be payable without interest on the closing of the offering. Prior to the closing date of this offering, Mr. Wasserman will loan the Company up to an additional $250,000 to pay expenses of this offering. The loan will be payable from accrued interest on the Table of Contents trust account within 90 days of the closing. We believe that the amount allocated to working capital, together with interest earned on the trust account available to us, as described above, will be sufficient to cover the costs related to the acquisition of a target business and reimbursement costs, even if the costs of due diligence, legal, accounting and other expenses of structuring and negotiating a business combination exceed our estimates. The net proceeds of this offering held in the trust account and not immediately required for the purposes set forth above will be invested only in United States government securities, defined as any Treasury Bills issued by the United States having a maturity of 180 days or less, or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940, as amended, so that we are not deemed to be an investment company under the Investment Company Act, as amended. By restricting the investment of the proceeds of this offering to these instruments, we intend to avoid being deemed to be an investment company within the meaning of the Investment Company Act, as amended. Notwithstanding our belief that we are not required to comply with the requirements of such act, in the event that the stockholders do not approve a plan of dissolution and liquidation and the funds remain in the trust account for an indeterminable amount of time, we may be considered to be an investment company and thus required to comply with such act. The interest income derived from investment of these net proceeds during this period will be used to defray our general and administrative expenses, as well as costs relating to compliance with securities laws and regulations, including associated professional fees, until a business combination is completed. We believe that, upon consummation of this offering, we will have sufficient available funds to operate for at least the next 24 months, assuming that a business combination is not consummated during that time. We may not use all of the proceeds held in trust in connection with a business combination, either because the consideration for the business combination is less than the proceeds in trust or because we have financed a portion of the consideration with our capital stock or debt securities. In that event, the proceeds held in the trust account, as well as any other net proceeds not expended, will be used to finance the operations of the target businesses, which may include subsequent acquisitions. Other than the $7,500 per month general and administrative service fees described above and the reimbursable out-of-pocket expenses incurred in connection with a business combination, no compensation of any kind (including finder s and consulting fees) will be paid to any of our initial stockholders or any of their affiliates, for services rendered to us prior to or in connection with the consummation of the business combination. However, our initial stockholders will receive reimbursement for any out-of-pocket expenses incurred by them in connection with activities on our behalf, such as identifying potential target businesses and performing due diligence on suitable business combinations. Prior to consummation of a business combination, such reimbursement of expenses incurred by our initial stockholders shall only be made from permitted distributions of interest earned on the funds held in the trust account and any such expenses in excess of such interest earned on the trust account will be reimbursed upon consummation of a business combination. After the consummation of a business combination, if any, to the extent our management remains as officers of the resulting business, we anticipate that they may enter into employment agreements, the terms of which shall be negotiated and which we expect to be comparable to employment agreements with other similarly-situated companies in the homeland security and/or defense industries. Further, after the consummation of a business combination, if any, to the extent our directors remain as directors of the resulting business, we anticipate that they will receive compensation comparable to directors at other similarly-situated companies in the homeland security and/or defense industries. A public stockholder will be entitled to receive funds from the trust account including interest earned on his, her or its portion of the trust account, net of: (i) taxes payable on interest income earned on the trust account, State of Delaware franchise taxes and repayment of up to $250,000 of an additional officer loan on or prior to the closing of this offering by Steven M. Wasserman and (ii) up to $1,825,000 ($1,925,000 if the over-allotment option is exercised in full) of interest income released to us to fund our working capital and dissolution and liquidation expenses if we fail to consummate a business combination subject to certain conditions described in this prospectus), only in the event of the liquidation of the trust account as part of our plan of dissolution and liquidation approved by our stockholders upon our failure to complete a business combination within the allotted time or if the public stockholder were to seek to redeem such shares for cash in connection with a business combination which the public stockholder voted against and which we actually Table of Contents consummate. In no other circumstances will a public stockholder have any right or interest of any kind to or in the trust account. In the event of our dissolution and liquidation, we will comply with the requirements of Section 281(b) of the Delaware General Corporation Law, which requires that we pay or make provision for the payment of all claims and obligations to creditors, including those we believe are likely to arise in the future, before determining assets remaining for distribution to our stockholders. Under Delaware Law, claims of our creditors will have priority over the distribution to our stockholders of amounts held in the trust account. Table of Contents DILUTION The difference between the public offering price per share of common stock, assuming no value is attributed to the warrants included in the units, and the pro forma net tangible book value per share of our common stock after this offering and the private placement constitutes the dilution to investors in this offering. Net tangible book value per share is determined by dividing our net tangible book value, which is our total tangible assets less total liabilities (including the value of common stock which may be converted into cash if voted against the business combination), by the number of outstanding shares of our common stock. At December 31, 2006, our net tangible book value was a deficiency of $506,069, or approximately $(0.32) per share of common stock. After giving effect to the sale of 6,000,000 shares of common stock included in the units to be sold in this offering (but excluding shares issuable upon exercise of the warrants included in the units and the warrants sold in our private placement), and the deduction of underwriting discounts and estimated expenses of this offering, our pro forma net tangible book value (as decreased by our value of 2,099,400 shares of common stock which may be redeemed into cash and 236,842 shares held by initial stockholders which may be forfeited and cancelled if 34.99% of the public stockholders exercise their redemption rights) at December 31, 2006 would have been $37,685,463 or $7.19 per share, representing an immediate increase in net tangible book value of $7.51 per share to the initial stockholders and an immediate dilution of $2.81 per share or 28.1% to new investors not exercising their redemption rights. The following table illustrates the dilution to the new investors on a per-share basis, assuming no value is attributed to the warrants included in the units: Public offering price $ 10.00 Net tangible book value before this offering $ (0.32 ) Increase attributable to new investors $ 7.51 Pro forma net tangible book value after this offering $ 7.19 Dilution to new investors $ 2.81 For purposes of presentation, our pro forma net tangible book value after this offering has been reduced by approximately $20,364,180 because if we effect a business combination, the redemption rights to the public stockholders may result in the redemption for cash of up to approximately 34.99% of the aggregate number of the shares sold in this offering at a per-share redemption price equal to $10.00 (of which $0.30 represents deferred underwriting discounts and commissions), plus their pro rata share of any interest earned on the trust account (net of taxes payable) not previously distributed to us. In the event that more than 20% of the public stockholders exercise their redemption rights, a proportional percentage of the shares of common stock held by our initial stockholders will automatically, and without any further action required by us or such stockholders, be forfeited and cancelled upon consummation of the business combination. The percentage of shares forfeited will be equal to the percentage of redemptions above 20% and will be pro rata among the initial stockholders based on the 1,580,000 shares owned by them. The following table sets forth information with respect to our initial stockholders prior to and the new investors: Shares Purchased(1) Total Consideration Average Price Number Percentage Amount Percentage per Share Initial stockholders 1,580,000 20.84 % $ 24,688 0.04 % $ 0.0156 New investors(2) 6,000,000 79.16 % $ 60,000,000 99.96 % $ 10.00 7,580,000 100.00 % $ 60,024,688 100.00 % (1) Assumes: (i) the sale of 6,000,000 units in this offering, but not the exercise of 6,000,000 warrants to purchase shares of our common stock sold as part of such units and (ii) no exercise of the underwriters over- Table of Contents allotment option. Also gives effect to the redemption on September 8, 2006 of 20,000 shares of our common stock. (2) Does not include 3,200,000 shares of common stock issuable upon exercise of the warrants issued in the private placement. No less that two days before effectiveness of the registration statement of which this prospectus forms a part, we will issue an aggregate of 3,200,000 warrants at a price of $1.00 per warrant ($3,200,000 in the aggregate) in a private placement. Steven M. Wasserman, our Chief Executive Officer, President and Co-Chairman of our board of directors, will purchase 500,000 of these warrants and Constantinos Tsakiris, a member of our board of directors will purchase the remaining 2,700,000 warrants. Messrs. Wasserman and Tsakiris will pay the purchase price for the private placement warrants out of their own funds and will not receive, directly or indirectly, any cash or other consideration from any party in order to make these purchases. Such funds will not be borrowed from any third party. The private placement warrants are identical to the warrants included in the units in this offering. Each of the private placement warrants is exercisable for one share of common stock at $7.50 and becomes exercisable on the later of: (i) the completion of a business combination with a target business or (ii) one year from the date of the prospectus. All of the warrants sold in the private placement will be subject to a lock-up agreement that will expire upon the consummation of a business combination and will be held in accounts established by Mr. Wasserman and Mr. Tsakiris with Maxim Group LLC, until such time as we consummate a business combination. Mr. Wasserman and Mr. Tsakiris will not request, and Maxim Group LLC will not grant, any waiver of the lock-up agreement. The exercise of any of the private placement warrants will result in immediate dilution to the public stockholders. The pro forma net tangible book value after the offering is calculated as follows: Numerator: Net tangible book value before the offering and the private placement $ (506,069 ) Net proceeds from this offering and the private placement 58,060,000 Offering costs paid in advance and excluded from tangible book value before this offering and the private placement 495,712 Less: Proceeds held in trust subject to redemption for cash (2,099,400 x $9.70)(1) (20,364,180 ) $ 37,685,463 Denominator: Shares of common stock outstanding prior to this offering 1,580,000 Shares of common stock included in the units offered 6,000,000 Less: Shares subject to redemption (6,000,000 x 34.99%) (2,099,400 ) Less: Maximum shares of common stock held by initial stockholders subject to forfeiture (1,580,000 x 14.99%) (236,842 ) 5,243,758 (1) Does not include the deferred underwriting discounts and commissions ($0.30 per share) which may be distributed to the public stockholders. Table of Contents CAPITALIZATION The following table sets forth our capitalization at December 31, 2006 and as adjusted to give effect to the sale of our units and the application of the estimated net proceeds derived from the sale of our units: December 31, 2006 As Actual Adjusted Notes Payable to Stockholders $ 187,802 $ 50,000 (1) Common stock, $.0001 par value, -0- and 2,099,400 shares which are subject to possible redemption, shares at redemption value(2) 20,364,180 Stockholders equity: Preferred stock, $.0001 par value, 1,000,000 shares authorized; none issued or outstanding Common stock, $.0001 par value, 30,000,000 shares authorized; 1,580,000 shares issued and outstanding; 7,580,000 shares issued and outstanding (including 2,099,400 shares subject to possible redemption and 236,842 insider shares subject to forfeiture (3)), as adjusted 158 758 Additional paid-in capital 24,530 37,719,750 Deficit accumulated during the development stage (35,045 ) (35,045 ) Total stockholders equity (deficit) (10,357 ) 37,685,463 Total capitalization $ 177,445 $ 58,099,643 (1) Gives effect to an estimated $50,000 of an additional loan of up to $250,000 to be made by Steven M. Wasserman, our Chief Executive Officer, President and Co-Chairman of our board of directors, on or prior to the closing date of this offering, which will be repaid within 90 days of closing. (2) If we consummate a business combination, the redemption rights afforded to our public stockholders may result in the redemption for cash (approximately $20,364,180) of up to approximately 34.99% of the aggregate number of shares (approximately 2,099,400 shares) sold in this offering at a per-share redemption price equal to the amount in the trust account ($10.00 per share), inclusive of any interest thereon (net of taxes payable, which taxes, if any, shall be paid from the trust account). Does not include deferred underwriting discounts and commissions ($0.30 per share) which may be distributed to redeeming stockholders. (3) If we consummate a business combination, up to approximately 236,842 shares held by the initial stockholders may be forfeited and cancelled in the event that public stockholders holding an aggregate of 34.99% of the shares sold in this offering exercise their redemption rights. Table of Contents MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We were formed on April 20, 2005, to serve as a vehicle to acquire one or more domestic or international operating businesses in the U.S. homeland security or defense industries or a combination thereof, through a merger, capital stock exchange, asset acquisition or other similar business combination. We do not have any specific business combination under consideration, and neither we, nor any representative acting on our behalf, has had any contacts with any target businesses regarding a business combination. We intend to utilize cash derived from the proceeds of this offering and the private placement, our capital stock, debt or a combination thereof, in effecting a business combination. The issuance of additional shares of our capital stock: may significantly reduce the equity interest of our stockholders; will likely cause a change in control if a substantial number of our shares of common stock are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and may also result in the resignation or removal of one or more of our present officers and directors; and may adversely affect prevailing market prices for our common stock. Similarly, if we issued debt securities, it could result in: default and foreclosure on our assets if our operating revenues after a business combination were insufficient to pay our debt obligations; acceleration of our obligations to repay the indebtedness even if we have made all principal and interest payments when due if the debt security contained covenants that require the satisfaction or maintenance of certain financial ratios or reserves and any such covenants were breached without a waiver or renegotiation of that covenant; our immediate payment of all principal and accrued interest, if any, if the debt securities were payable on demand; and our inability to obtain additional financing, if necessary, if the debt securities contained covenants restricting our ability to obtain additional financing while such securities were outstanding. We have neither engaged in any operations nor generated any revenues to date. Our entire activity since inception has been to prepare for our proposed fundraising through an offering of our equity securities. We estimate that the net proceeds from the sale of the units in this offering and the private placement, after deducting offering expenses of approximately $5,140,000 (or $5,770,000 if the underwriters over-allotment option is exercised in full), including $600,000 evidencing the underwriters non-accountable expense allowance of 1.0% of the gross proceeds, and underwriting discounts of approximately $1,980,000 (or $2,160,000 if the underwriters over-allotment option is exercised in full), will be $58,060,000. Steven M. Wasserman, our Chief Executive Officer, President and Co-Chairman of our board of directors, has agreed to make an additional loan to us of up to $250,000 to pay the cost of offering expenses in excess of $5,000,000, so that on the closing date a total of $60,000,000, or $68,820,000 if the underwriters over-allotment option is exercised in full, will be in the trust account. See Use of Proceeds for a detailed breakdown of the offering expenses. $58,060,000, or $66,430,000 if the underwriters over-allotment option is exercised in full, will be held in trust. In addition to the net proceeds from the sale of the units in this offering and the sale of warrants in our private placement, on the closing date of this offering the trust account will include $1,800,000 or ($2,250,000 if the underwriter s over-allotment option is exercised in full) of deferred underwriting compensation to be paid to Maxim Group LLC with accrued interest if and only if a business combination is consummated, $90,000 of deferred legal fees to be paid, without contingency, from interest income earned on the trust account released to us and $50,000 of an additional officer loan of up to $250,000 to be made by Mr. Wasserman on or prior to the closing date of this offering to pay for offering expenses (such loan to be repaid within 90 days of the closing of this offering). Accordingly, on the closing date of this offering, a total of $60,000,000, or $68,820,000 if the underwriters over-allotment option is exercised in full, will be in the trust account. Table of Contents While funds are held in the trust account, they will only be invested in Treasury Bills issued by the United States government having a maturity of 180 days or less or money market funds meeting the criteria under Rule 2a-7 under the 1940 Act. Interest earned will be applied in the following order of priority: payment of taxes on trust account interest income; payment of State of Delaware franchise taxes; repayment of up to $250,000 of an additional officer loan to be made on or prior to the closing of this offering by Steven M. Wasserman; our working capital requirements before we complete a business combination and, if necessary, funding the costs of our potential dissolution and liquidation; solely if we complete a business combination, interest on the amount of deferred underwriters compensation payable to the underwriters; and the balance, if any, to us if we complete a business combination or to our public stockholders if we do not complete a business combination. We believe that the interest income earned on trust account funds in the period before we effect a business combination will be sufficient to fund the costs and expenses relating to our liquidation and dissolution if we do not consummate a business combination. We will use substantially all of the net proceeds of this offering and the proceeds from the private placement, interest income earned on the funds in the trust account and other funds in the trust account available for use to acquire a target business, including identifying and evaluating prospective acquisition candidates, selecting the target business, and structuring, negotiating and consummating the business combination. Costs and expenses incurred prior to the consummation of a business combination, including those that relate to a business combination that is not consummated, will be paid from the interest earned income on funds held in the trust account (to the extent such interest is released to us). To the extent that our capital stock is used in whole or in part as consideration to effect a business combination, the proceeds held in the trust account as well as any other net proceeds not expended will be used to finance the operations of the target business. We believe that, upon consummation of this offering, the funds available to us from interest income earned on the trust account ($1,825,000, or $1,925,000 if the underwriters over-allotment option is exercised in full; however, if the underwriters over-allotment option is exercised in full, after our receipt of $125,000 of interest income we will not be permitted to draw such amounts until $180,000 (or a lesser amount if less than the full over-allotment option is exercised, pro rata based on the amount of the over-allotment exercised) of interest shall have been earned on the trust account with the resulting effect that there shall be a minimum of $10.00 per unit held in the trust account) will be sufficient to allow us to operate for at least the next 24 months, assuming that a business combination is not consummated during that time. Over this time period, we anticipate making the following approximate expenditures: $400,000 of expenses for legal, accounting and other expenses attendant to the structuring, negotiating and consummation of a business combination, $500,000 of expenses for identification, evaluation and due diligence investigation of a target business, $180,000 for administrative services and support payable to an affiliated third party ($7,500 per month for 24 months), $100,000 of expenses in legal and accounting fees relating to our SEC reporting obligations, $150,000 for directors and officers liability insurance and $495,000 ($595,000 if the underwriters over-allotment option is exercised in full) for general working capital that will be used for miscellaneous expenses and reserves, costs of dissolution and liquidation and reserves, if any, which we currently estimate to be approximately $50,000 to $75,000, potential deposits, down payments or funding of a no-shop provision in connection with a particular business combination and key-man insurance. We do not believe we will need to raise additional funds following this offering in order to meet the expenditures required for operating our business prior to consummating a business combination. However, we may need to raise additional funds through a private offering of debt or equity securities if such funds are required to consummate a business combination that is presented to us. We will use substantially all of the net proceeds of this offering, the proceeds from the private placement and other funds in the trust account available for our use to acquire a target business, including identifying and Table of Contents evaluating prospective acquisition candidates, selecting the target business, and structuring, negotiating and consummating the business combination. To the extent that our capital stock is used in whole or in part as consideration to effect a business combination, the proceeds held in the trust account as well as any other net proceeds not expended will be used to finance the operations of the target business. In May 2005, Mr. Wasserman and Mr. Blaha loaned us an aggregate of $187,800, which was used to pay a portion of the expenses of this offering, such as SEC registration fees, NASD registration fees and legal and accounting fees and expenses. This loan will be payable without interest on the earlier of June 30, 2007 or the consummation of this offering. The loan will be repaid out of the net proceeds of this offering. In addition, Mr. Wasserman has agreed to loan us up to $250,000 on or prior to the closing of this offering for payment of offering expenses. This loan will be repaid from accrued interest on the trust account within 90 days of the closing of this offering. We have agreed that upon completion of the this offering we will sell to the representative of the underwriters, for $100, an option to purchase up to a total of 105,000 units. The units issuable upon exercise of this option are identical to those offered by this prospectus. This option is exercisable at $11.00 per unit commencing after 24 months from the date of this prospectus and expiring five years from the date of this prospectus. The option and the 105,000 units, the 105,000 shares of common stock and the 105,000 warrants underlying such units, and the 105,000 shares of common stock underlying such warrants, have been deemed compensation by the National Association of Securities Dealers, or NASD, and are therefore subject to a 180-day lock-up pursuant to Rule 2710(g)(1) of the NASD Conduct Rules. Additionally, the option may not be sold, transferred, assigned, pledged or hypothecated for an 24-month period (including the foregoing 180-day period) following the date of this prospectus. However, all or any portion of the option may be transferred to any underwriter and selected dealer participating in the offering and their bona fide officers or partners. The option may expire unexercised and the underlying warrants unredeemed if we fail to maintain an effective registration statement covering the units (including the common stock and warrants) issuable upon exercise of the option. There are no circumstances upon which we will be required to net cash settle the option. The option will not be issued if this offering is not consummated. We will account for this purchase option as a cost of raising capital and will include the instrument as equity in our financial statements. Accordingly, there will be no net impact on our financial position or results of operations, except for the recording of the $100 proceeds from the sale. We have estimated, based upon a Black Scholes model, that the fair value of the purchase option on the date of sale is approximately $4.46 per unit (a total value of $468,300), using an expected life of five years, volatility of 47.60% and a risk-free rate of 4.75%. The volatility calculation is based on the average volatility of 12 companies in the U.S. homeland security and defense industries during the period from March 14, 2002 to March 15, 2007. Because we do not have a trading history, we needed to estimate the potential volatility of the unit price, which will depend on a number of factors which cannot be ascertained at this time. We used these companies because management believes that the volatility of these companies is a reasonable benchmark to use in estimating the expected volatility for our units. Although an expected life of five years was used in the calculation, if we do not consummate a business combination within the prescribed time period and our company is liquidated, the option will become worthless. Table of Contents PROPOSED BUSINESS We were organized in April 2005 as a Delaware Business Combination Companytm, or BCCtm, formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition or other similar business combination, one or more domestic or international operating businesses in the U.S. homeland security or defense industries or a combination thereof. We do not have any specific merger, capital stock exchange, asset acquisition or other business combination under consideration and we have not, nor has anyone on our behalf, contacted any potential target business or had any discussions, formal or otherwise, with respect to such a transaction. To date our efforts have been limited to organizational activities as well as activities related to this offering. Introduction Beginning with the terrorist attacks on September 11, 2001 and continuing with our country s war on global terrorism, homeland security has become of paramount importance in the United States and around the world. Unfortunately, the events of September 11, 2001 exposed the fact that one of the greatest strengths of our society its openness and interconnectedness can also be one of its greatest vulnerabilities. Such events have driven the need for improved protection of our coastline, airlines, railroads, ports, and manufacturing facilities. We believe that our country s homeland security depends upon developing and maximizing the use of new technologies, adopting industry-wide standards and shortening the cycle between innovation and security applications. According to the Civitas Group, a strategic advisory and investment services firm serving the homeland security market, the global homeland security market was approximately $55 billion in 2006 and the U.S. homeland security market is projected to grow approximately $140 billion over the next five years. In addition, by 2015 the global homeland security market is projected to exceed $170 billion, according to Homeland Security Research Corp., a homeland security market research firm. As a result of September 11, 2001 and the war on global terrorism, many defense industry-based companies expanded their businesses into the homeland security industry in order to take advantage of their existing government sales channels and expand the market for their products and services. Accordingly, we may purchase one or more operating businesses engaged in the homeland security industry or the defense industry or a combination thereof, in order to similarly capitalize on their existing government contracts and relationships. The U.S. federal budget for government fiscal year 2007 includes discretionary defense spending of $436.6 billion, a 4% increase over enacted fiscal 2006 funding levels and Department of Homeland Security discretionary spending of $34.8 billion, a 13% increase over 2006. Our management, board of directors and special advisor have established an extensive network of relationships from which to identify and generate acquisition opportunities within the U.S. homeland security and defense industries. Certain of our directors have extensive experience in the defense sector and more recently in homeland security, including serving at the highest levels of the United States Armed Forces and the Department of Homeland Security as well as in high levels of government. In addition, we believe the experience of our officers and directors in investment banking and private equity investments will be beneficial in structuring and consummating a business combination. Homeland Security and Defense Industry Segments We are focused on a business combination in the U.S. homeland security or defense industries, or a combination thereof, which includes, among others, the following sectors: nuclear and radiological prevention; ground transport security; aviation security; port and maritime security; Table of Contents border security; physical infrastructure protection; cyber security; emergency and disaster preparedness and response; bioterrorism prevention; counterterrorism and law enforcement; domestic and foreign intelligence; information technology solutions, systems engineering and operation, management and support services to the U.S. Department of Defense and other U.S. government agencies; and support services related to defense for the various U.S. national laboratories. While we may effect a business combination with more than one target business, which may be in different homeland security and defense sectors, our initial business acquisition must be with one or more operating businesses the fair market value of which is, either individually or collectively, at least equal to 80% of our net assets at the time of such acquisition (exclusive of Maxim Group LLC s deferred underwriting compensation, including interest thereon, held in the trust account). We do not have any specific business combination under consideration, and we have not had any preliminary contacts or discussions with any target businesses regarding a business combination. Prior to completion of a business combination, we will seek to have all vendors, target businesses, prospective target businesses or other entities that we engage execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our public stockholders. In the event that a vendor, target business, prospective target business or other entity were to refuse to execute such a waiver, we will execute an agreement with that entity only if our management first determines that we would be unable to obtain, on a reasonable basis, substantially similar services or opportunities from another entity willing to execute such a waiver. Competitive Advantages We believe that the experience and contacts of our directors, officers and special advisor will give us an advantage in sourcing, structuring and consummating a business combination. The future role of our key personnel following a business combination, however, cannot presently be fully ascertained. Specifically, the members of our current management are not obligated to remain with us subsequent to a business combination, and we cannot assure you that the resignation or retention of our current management will be included as a term or condition in any agreement relating to a business combination. In addition, despite the competitive advantages we believe we enjoy, we remain subject to significant competition with respect to identifying and executing a business combination. Established Deal Sourcing Network Through our management team, our directors and special advisor we believe we have extensive contacts and sources from which to generate acquisition opportunities within the homeland security and defense sectors. These contacts and sources include government, private and public companies within the U.S. homeland security and defense industries, private equity and venture capital funds, investment bankers, attorneys and accountants. Table of Contents Effecting a Business Combination General We are not presently engaged in, and we will not engage in, any substantive commercial business for an indefinite period of time following this offering. We intend to utilize cash derived from the proceeds of this offering and the private placement, our capital stock, debt or a combination of these in effecting a business combination. Although substantially all of the net proceeds of this offering and the private placement are intended to be generally applied toward effecting a business combination as described in this prospectus, the proceeds are not otherwise being designated for any more specific purposes. Accordingly, prospective investors will invest in us without an opportunity to evaluate the specific merits or risks of any one or more business combinations. A business combination may involve the acquisition of, or merger with, a company which does not need substantial additional capital but which desires to establish a public trading market for its shares, while avoiding what it may deem to be adverse consequences of undertaking a public offering itself. These include time delays, significant expense, loss of voting control and compliance with various Federal and state securities laws. In the alternative, we may seek to consummate a business combination with a company that may be financially unstable or in its early stages of development or growth. While we may seek to effect business combinations with more than one target business, we will probably have the ability, as a result of our limited resources, to effect only a single business combination with the proceeds of this offering and the private placement. We have not selected or approached any target business We do not have any specific merger, capital stock exchange, asset acquisition or other business combination under consideration and we have not, nor has anyone on our behalf, contacted any potential target business or had any preliminary contact or discussions, formal or otherwise, with respect to such a transaction. Additionally, we have not engaged or retained any agent or other representative to identify or locate any suitable acquisition candidate. Finally, there have been no diligence, discussions, negotiations and/or other similar activities undertaken, directly or indirectly, by us, our affiliates or representatives, or by any third party, with respect to a business combination transaction with us. Subject to the limitations that a target business or businesses have a collective fair market value of at least 80% of our net assets at the time of the acquisition (exclusive of Maxim Group LLC s deferred underwriting compensation, including interest thereon, held in the trust account), as described below in more detail, we will have virtually unrestricted flexibility in identifying and selecting a prospective acquisition candidate. Accordingly, there is no basis for investors in this offering to evaluate the possible merits or risks of the target business with which we may ultimately complete a business combination. To the extent we effect a business combination with a financially unstable company or an entity in its early stage of development or growth, including entities without established records of sales or earnings, we may be affected by numerous risks inherent in the business and operations of financially unstable and early stage or potential emerging growth companies. Although our management will endeavor to evaluate the risks inherent in a particular target business, we cannot assure you that we will properly ascertain or assess all significant risk factors. Sources of target businesses We anticipate that target business candidates will be brought to our attention from various unaffiliated sources, including investment bankers, attorneys, accountants, venture capital funds, private equity funds, leveraged buyout funds, management buyout funds, brokers and other members of the financial community as well as sources and relationships in the U.S. homeland security and defense industries and government, who may present solicited or unsolicited proposals. We expect such sources to become aware that we are seeking a business combination candidate by a variety of means, such as publicly available information relating to this offering, public relations and marketing efforts and/or direct contact by management to be commenced following the completion of this offering. Our initial stockholders, officers, directors and special advisor as well as their affiliates may also bring to our attention target business candidates. While our officers and directors make no commitment as to the amount of time they will spend trying to identify or investigate potential target businesses, they believe that the various relationships they have developed over their careers Table of Contents together with their direct inquiry of their contacts will generate a number of potential target businesses that will warrant further investigation. We anticipate that the positions held and contacts maintained by our officers, directors and special advisor within the investment community and the homeland security and defense industries will generate potential acquisition candidates. While we do not presently anticipate engaging the services of professional firms that specialize in business acquisitions or any other third parties on any formal basis, we may engage these parties in the future, in which event we may pay a finder s fee or other compensation. The terms of any such arrangements will be negotiated with such persons on an arm s length basis and disclosed to our stockholders in the proxy materials we provide in connection with any proposed business combination. While our officers and directors make no commitment as to the amount of time they will spend trying to identify or investigate potential target businesses, they believe that the various relationships they have developed over their careers together with their direct inquiry of their contacts will generate a number of potential target businesses that will warrant further investigation. In no event, however, will we pay any of our existing officers, directors, special advisor or stockholders or any entity with which they are affiliated any finder s fee or other compensation for services rendered to us prior to or in connection with the consummation of a business combination. However, in the event any of our existing officers, directors, special advisor or stockholders has a pre-existing relationship with any company that we enter into a business combination with, they may be entitled to receive compensation from the target company pursuant to their pre-existing relationship. We will not enter into any business combinations with any affiliates of our initial stockholders, officers or directors unless (i) such business combination has been approved by our audit committee and our Board of Directors and (ii) we obtain an opinion from an independent investment banking firm that a business combination with any such company is fair to our stockholders from a financial point of view. Selection of a target business and structuring of a business combination Subject to the requirement that our initial business combination must be with a target business or businesses with a collective fair market value that is at least 80% of our net assets at the time of such acquisition (exclusive of Maxim Group LLC s deferred underwriting compensation, including interest thereon, held in the trust account), our management will have virtually unrestricted flexibility in identifying and selecting a prospective target business. In evaluating a prospective target business (including any such target that may have international operations or assets), our management will consider, among other factors, the following: financial condition and results of operation; growth potential; experience and skill of management and availability of additional personnel; capital requirements; competitive position; barriers to entry into the target business s industries; stage of development of the products, processes or services; degree of current or potential market acceptance of the products, processes or services; proprietary features and degree of intellectual property or other protection of the products, processes or services; regulatory environment of the industry; and costs associated with effecting the business combination. These criteria are not intended to be exhaustive. Any evaluation relating to the merits of a particular business combination will be based, to the extent relevant, on the above factors as well as other considerations deemed relevant by our management in effecting a business combination consistent with our business objective. In evaluating a prospective target business, we will conduct an extensive due diligence review which will encompass, among other things, meetings with incumbent management, where applicable, and inspection of facilities, as well as review of financial and other information which will be made available to us. Table of Contents We expect that our Chief Executive Officer and President and our Chief Management Officer and Executive Vice President will allocate a significant amount of their time, as necessary, for meetings with management and/or other representatives of target business candidates, site visits, due diligence, interviews with incumbent management, negotiations and any other activities necessary to complete a business combination. We may also engage an independent third party consultant or expert to assist us in the due diligence process although we have not identified or engaged any such consultants or experts as of the date of this prospectus. We will endeavor to structure a business combination so as to achieve the most favorable tax treatment to us, the target business and its stockholders, as well as our own stockholders. We cannot assure you, however, that the Internal Revenue Service or appropriate state tax authority will agree with our tax treatment of the business combination. The time and costs required to select and evaluate a target business and to structure and complete the business combination cannot presently be ascertained with any degree of certainty. Any costs incurred with respect to the identification and evaluation of a prospective target business with which a business combination is not ultimately completed will result in a loss to us and reduce the amount of capital available to otherwise complete a business combination. We will not pay any finders or consulting fees to our initial stockholders, or any of their respective affiliates, for services rendered to or in connection with a business combination. However, in the event any of our existing officers, directors or stockholders has a pre-existing relationship with any company that we enter into a business combination with, they may be entitled to receive compensation from the target company pursuant to their pre-existing relationship. We will not enter into any business combinations with any affiliates of our initial stockholders, officers or directors unless (i) such business combination has been approved by our audit committee and our Board of Directors and (ii) we obtain an opinion from an independent investment banking firm that a business combination with any such company is fair to our stockholders from a financial point of view. Fair market value of target business The initial target business or businesses that we acquire must have a collective fair market value equal to at least 80% of our net assets at the time of such acquisition (exclusive of Maxim Group LLC s deferred underwriting compensation, including interest thereon held in the trust account). In the event we acquire less than 100% of the stock of a target business, for purposes of determining whether the acquisition is equal to or greater than 80% of our net assets, we will multiply our post-transaction ownership percentage times 100% of the fair market value of the target business as determined by our Board of Directors. There is no limitation on our ability to raise funds privately or through loans that would allow us to acquire a target business or businesses with a fair market value in an amount considerably greater than 80% of our net assets at the time of acquisition. We have not had any preliminary discussions, or made any agreements or arrangements, with respect to financing arrangements with any third party. The fair market value of any such business or businesses will be determined by our board of directors based upon standards generally accepted by the financial community, such as actual and potential sales, earnings and cash flow and book value. If our board is not able to independently determine that the target business has a sufficient fair market value because generally accepted valuation standards would not adequately reflect fair market value of the target business, such as valuation of intangible assets, we will obtain an opinion from an unaffiliated, independent investment banking firm which is a member of the National Association of Securities Dealers, Inc. with respect to the satisfaction of such criteria. However, we will not be required to obtain an opinion from an investment banking firm as to the fair market value if our board of directors independently determines that the target business has sufficient fair market value. We expect that any such opinion will be included in our proxy soliciting materials furnished to our stockholders in connection with a business combination, and that such independent investment banking firm will be a consenting expert. Probable lack of business diversification While we may seek to effect business combinations with more than one target business, our initial business combination must be with a target business which satisfies the minimum valuation standard at the time of such acquisition, as discussed above. Consequently, it is probable that we will have the ability to effect only a single business combination. Accordingly, the prospects for our ability to execute any potential business Table of Contents plan may be entirely dependent upon the future performance of a single business. Unlike other entities which may have the resources to complete several business combinations of entities operating in multiple industries or multiple areas of a single industry, it is probable that we will not have the resources to diversify our operations or benefit from the possible spreading of risks or offsetting of losses. By consummating a business combination with only a single entity, our lack of diversification may: subject us to numerous economic, competitive and regulatory developments, any or all of which may have a substantial adverse impact upon the particular industry in which we may operate subsequent to a business combination, and result in our dependency upon the development or market acceptance of a single or limited number of products, processes or services. Additionally, since it is possible that our business combination may entail the simultaneous acquisitions of several assets or operating businesses at the same time and may be with different sellers, we will need to convince such sellers to agree that the purchase of their assets or closely related businesses is contingent upon the simultaneous closings of the other acquisitions. Limited ability to evaluate the target business s management Although we intend to closely scrutinize the management of prospective target businesses when evaluating the desirability of effecting a business combination, we cannot assure you that our assessment of the target business s management will prove to be correct. In addition, we cannot assure you that the future management will have the necessary skills, qualifications or abilities to manage a public company intending to embark on a program of business development. Furthermore, the future role of our officers and directors, if any, in the target businesses cannot presently be stated with any certainty. While it is possible that one or more of our officers and directors will remain associated with us in some capacity following a business combination, it is unlikely that any of them will devote their full efforts to our affairs subsequent to a business combination. Moreover, we cannot assure you that our officers and directors will have significant experience or knowledge relating to the operations of the particular target business acquired. Following a business combination, we may seek to recruit additional managers to supplement the incumbent management of the target business. We cannot assure you that we will have the ability to recruit additional managers, or that additional managers will have the requisite skills, knowledge or experience necessary to enhance the incumbent management. Opportunity for stockholder approval of a business combination Prior to the completion of a business combination, we will submit the transaction to our stockholders for approval, even if the nature of the acquisition is such as would not ordinarily require stockholder approval under applicable state law. In connection with seeking stockholder approval of a business combination, we will furnish our stockholders with proxy solicitation materials prepared in accordance with the Securities Exchange Act of 1934, as amended, which, among other matters, will include a description of the operations of the target business and certain required financial information regarding the business. In connection with the vote required for any business combination, all of our initial stockholders, including all of our officers and directors, have agreed to vote their respective shares of common stock owned by them immediately prior to this offering in accordance with the majority of the shares of common stock voted by the public stockholders. In addition, our initial stockholders have agreed to vote any shares of common stock acquired in or following this offering in favor of the business combination submitted to our stockholders for approval. Accordingly, they will not be able to exercise redemption rights with respect to a potential business combination. We will proceed with the business combination only if a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and public stockholders owning less than 35% of the shares sold in this offering exercise their redemption rights. Voting against the business combination alone will not result in redemption of a stockholder s shares into a pro rata share of the trust account. Such stockholder must have also exercised its redemption rights described below. Table of Contents Redemption rights At the time we seek stockholder approval of any business combination, we will offer each public stockholder the right to have such stockholder s shares of common stock redeemed for cash if the stockholder votes against the business combination and the business combination is approved and completed. The actual per-share redemption price will be equal to $10.00 per share (plus a portion of the interest earned), but net of: (i) taxes payable on interest earned on the trust account, State of Delaware franchise taxes, repayment of up to $250,000 of an additional officer loan to be made on or prior to the closing of the offering by Steven M. Wasserman (such loan to be repaid within 90 days of this offering) and (ii) up to $1,825,000 ($1,925,000 if the over-allotment is exercised in full) of interest income released to us to fund our working capital and dissolution and liquidation expenses if we fail to consummate a business combination; however, if the underwriters over-allotment option is exercised in full, after our receipt of $125,000 of interest income we will not be permitted to draw such amounts until $180,000 (or a lesser amount if less than the full over-allotment option is exercised, pro rata based on the amount of the over-allotment exercised) of interest shall have been earned on the trust account with the resulting effect that there shall be a minimum of $10.00 per unit held in the trust account. Any determination of the portion of interest payable to public stockholders redeeming their common stock shall be made on a pro-rata basis, in relation to all the public stockholders through the date of redemption. An eligible stockholder may request redemption at any time after the mailing to our stockholders of the proxy statement and prior to the vote taken with respect to a proposed business combination at a meeting held for that purpose, but the request will not be granted unless the stockholder votes against the business combination and the business combination is approved and completed. Any request for redemption, once made, may be withdrawn at any time up to the date of the meeting. Public stockholders will not be required to tender their shares in connection with the exercise of their redemption rights. Public stockholders who exercise their redemption rights will receive their redemption amount upon consummation of a business combination and we will cancel their shares at that time. It is anticipated that the funds to be distributed to stockholders entitled to redeem their shares who elect redemption will be distributed promptly after completion of a business combination. Public stockholders who redeem their stock into their share of the trust account still have the right to exercise the warrants that they received as part of the units. We will not complete any business combination if public stockholders, owning 35% or more of the shares sold in this offering, exercise their redemption rights. Even if less than 35% of the stockholders exercise their redemption rights, we may be unable to consummate a business combination if such redemption leaves us with funds less than a fair market value equal to 80% of the amount in the trust account (exclusive of Maxim Group LLC s deferred underwriting compensation, including interest thereon, held in the trust account) at the time of such acquisition, which amount is required as a condition to the consummation of our initial business combination, and we may be forced to find additional financing to consummate such a business combination, consummate a different business combination or liquidate. Raising additional funds to cover any shortfall may involve dilutive equity financing or incurring indebtedness at higher than desirable levels. This may limit our ability to effectuate the most attractive business combination available to us. The securities issued in the private placement do not have redemption rights. Investors who choose to remain as stockholders and do not exercise their redemption rights will be effectively diluted as the number of public shares decreases (thereby decreasing the total number of shares outstanding) and the number of shares held by our initial stockholders remains the same. In the event that more than 20% of the public stockholders exercise their redemption rights, a proportional percentage of the shares of common stock held by our initial stockholders will automatically, and without any further action required by us or such stockholders, be forfeited and cancelled upon consummation of the business combination. The percentage of shares forfeited will be equal to the percentage of redemptions above 20% and will be pro rata among the initial stockholders based on the 1,580,000 shares owned by them. For example, if 20% or fewer of the public stockholders exercise their redemption rights, no shares will be forfeited. If 34.99% of the public stockholders exercise their redemption rights, 14.99% of the initial stockholder shares will be forfeited. Table of Contents Plan of dissolution and liquidation if no business combination Pursuant to the terms of the trust agreement between us and American Stock Transfer and Trust Company, and only as part of any plan of dissolution and liquidation if we do not complete a business combination within 18 months after the consummation of this offering, or within 24 months if the extension criteria described below have been satisfied, we will dissolve and promptly liquidate and distribute only to our public stockholders, in proportion to their respective equity interests, an aggregate sum equal to the amount in the trust account, inclusive of any interest but net of: (i) taxes payable on interest income earned on the trust account, State of Delaware franchise taxes, repayment of up to $250,000 of an additional officer loan to be made on or prior to the closing of this offering by Steven M. Wasserman (such loan to be repaid within 90 days of the closing of this offering) and (ii) up to $1,825,000 ($1,925,000 if the over-allotment is exercised in full) of interest income released to us to fund our working capital and dissolution and liquidation expenses if we fail to consummate a business combination; however, if the underwriters over-allotment option is exercised in full, after our receipt of $125,000 of interest income we will not be permitted to draw such amounts until $180,000 (or a lesser amount if less than the full over-allotment option is exercised, pro rata based on the amount of the over-allotment exercised) of interest shall have been earned on the trust account with the resulting effect that there shall be a minimum of $10.00 per unit held in the trust account. In the event we seek stockholder approval for a plan of dissolution and liquidation and do not obtain such approval, we will nonetheless continue to pursue stockholder approval for our dissolution. Pursuant to the terms of our amended and restated certificate of incorporation, our board has agreed to dissolve after the expiration of those time periods (assuming that there has been no business combination consummated), and furthermore, our powers following the expiration of the permitted time periods for consummating a business combination will automatically thereafter be limited to acts and activities relating to dissolving and winding up our affairs, including liquidation. The funds held in our trust account may not be distributed except upon our dissolution and, unless and until such approval is obtained from our stockholders, the funds held in our trust account will not be released. Consequently, holders of a majority of our outstanding stock must approve our dissolution in order to receive the funds held in our trust account and the funds will not be available for any other corporate purpose. Immediately upon the approval by our stockholders of our plan of dissolution and liquidation, we will liquidate our trust account to our public stockholders. Our initial stockholders have waived their rights to participate in any liquidation of our trust account in connection with our dissolution with respect to shares of common stock owned by them immediately prior to this offering and to vote their shares of common stock in favor of any plan of dissolution and distribution which we will submit to a vote of our stockholders. Upon the liquidation of our trust account as part of our dissolution, Maxim Group LLC has agreed to waive any right it may have to the $1,800,000 ($2,250,000 if the underwriters over-allotment option is exercised in full), plus interest thereon, of deferred underwriting discount currently being held in the trust account. There will be no distribution from the trust account with respect to our warrants, which will expire worthless. We will pay the costs of dissolution from our remaining interest earned on funds in the trust account that has been released to us to fund our working capital. If we are unable to consummate a business combination and we expend all of the interest income on the trust account released to us to fund our working capital, without taking into account interest, if any, earned on the trust account, the initial per-share liquidation price to holders of the 6,000,000 shares (6,900,000 shares if the underwriters over-allotment option is exercised in full) entitled to participate in liquidation distributions to be equal to the $10.00 per unit offering price. The proceeds deposited in the trust account could, however, become subject to the claims of our creditors which could be prior to the claims of our public stockholders. In such event, we cannot assure you that the actual per-share liqudation price will not be less than $10.00, including interest (net of taxes payable, which taxes, if any, State of Delaware franchise taxes and repayment of up to $250,000 of an additional officer loan to be made on or prior to the closing of this offering by Steven M. Wasserman shall be paid from the trust account), due to claims of creditors (including costs and expenses incurred in connection with our plan of dissolution and liquidation currently estimated at approximately $50,000 to $75,000). Although we will seek to have all vendors, target businesses, prospective target businesses or other entities we engage execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our public stockholders, there is no Table of Contents guarantee that they will execute such agreements or even if they execute such agreements that they would be prevented from bringing claims against the trust account including, but not limited to, fraudulent inducement, breach of fiduciary responsibility or other similar claims, as well as claims challenging the enforceability of the waiver, in each case in order to gain an advantage with a claim against our assets, including the funds held in the trust account. If any third party refused to execute an agreement waiving such claims to the monies held in the trust account, we would perform an analysis of the alternatives available to us if we chose not to engage such third party and evaluate if such engagement would be in the best interest of our stockholders if such third party refused to waive such claims. Examples of possible instances where we may engage a third party that refused to execute a waiver include the engagement of a third party consultant whose particular expertise or skills are believed by management to be significantly superior to those of other consultants that would agree to execute a waiver or in cases where management is unable to find a provider of required services willing to provide the waiver. In any event, our management would perform an analysis of the alternatives available to it and would only enter into an agreement with a third party that did not execute a waiver if management believed that such third party s engagement would be significantly more beneficial to us than any alternative. In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with us and will not seek recourse against the trust account for any reason. Steven M. Wasserman, our Chief Executive Officer, President and Co-Chairman of our board of directors and Robert B. Blaha, our Chief Management Officer, Executive Vice President and a director, have agreed pursuant to agreements with us and Maxim Group LLC that they will indemnify and hold us harmless against any and all loss, liability, claims, damages and expense to which we may become subject as a result of any claim by any target business, prospective target business or any vendor or other entity owed money by us for services rendered or products sold to us or the claims of any target business or prospective target business, but only to the extent necessary to ensure that the amount in the trust account is not reduced by such loss, liability, claim, damage or expense, and provided that and to the extent that (with the approval of our Chief Executive Officer and the vote or written consent of no less than a majority of our board of directors, including all our non-independent directors) we have elected to forego obtaining valid and enforceable waivers from such third parties. Based on information we have obtained from such individuals, we currently believe that such persons are of substantial means and capable of funding a shortfall in our trust account even though we have not asked them to reserve for such an eventuality. We cannot assure you, however, that they would be able to satisfy those obligations. Accordingly, we cannot assure you that the actual per-share liquidation value receivable by our public stockholders will not be less than $10.00 per share, plus interest (net of taxes payable on interest earned on the trust account, State of Delaware franchise taxes and repayment of up to $250,000 of an additional loan to be made on or prior to the closing by Steven M. Wasserman), due to claims of creditors. In the event of approval of a plan of dissolution and liquidation, we would remain obligated to enforce the above referenced indemnification agreements with our executive officers. We believe the likelihood of our executive officers, Mr. Wasserman and Mr. Blaha, having to indemnify the trust account is limited because we will endeavor to have all vendors, target businesses and prospective target businesses as well as other entities execute agreements with us waiving any right, title, interest or claim of any kind in or to monies held in the trust account. The indemnification provisions are set forth in the insider letters, executed by Mr. Wasserman and Mr. Blaha. The insider letters provide that in the event we obtain a valid and enforceable waiver of any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our stockholders from a target business, prospective target business, vendor or other creditor, the indemnification will not be available. In the event that the board recommends and our stockholders approve a plan of dissolution and liquidation where it is subsequently determined that the reserve for claims and liabilities is insufficient, stockholders who received a return of funds from the liquidation of our trust account could be liable for such claims made by creditors. We also will have access to any funds released to us to fund working capital requirements with which to pay any such potential claims (including costs and expenses incurred in connection with our plan of dissolution and liquidation currently estimated at approximately $50,000 to $75,000). Table of Contents Additionally, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, the funds held in our trust account will be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. To the extent any bankruptcy claims deplete the trust account we cannot assure you we will be able to return to our public stockholders the liquidation amounts due them. We will dissolve and liquidate our trust account to our public stockholders if we do not complete a business combination within 18 months after the consummation of this offering (or within 24 months after the consummation of this offering if certain extension criteria are satisfied). Under Sections 280 through 282 of the Delaware General Corporation Law, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. If the corporation complies with certain procedures intended to ensure that it makes reasonable provision for all claims against it, including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution. However, we will seek stockholder approval to liquidate our trust account to our public stockholders as soon as reasonably possible as part of our plan of dissolution and distribution and, therefore, we do not intend to comply with those procedures. As such, our stockholders could potentially be liable for any claims to the extent of distributions received by them in a dissolution and any liability of our stockholders may extend beyond the third anniversary of such dissolution. Accordingly, we cannot assure you that third parties will not seek to recover from our stockholders amounts owed to them by us. Pursuant to, among other documents, our amended and restated certificate of incorporation, if we do not complete a business combination within 18 months after the consummation of this offering, or within 24 months after the consummation of this offering if the extension criteria described below have been satisfied, our purpose and powers will be limited to dissolving, liquidating and winding up. We view this obligation to dissolve and liquidate as an obligation to our stockholders and neither we nor our board of directors will take any action to amend or waive any provision of our certificate of incorporation to allow us to survive for a longer period of time if it does not appear we will be able to consummate a business combination within the foregoing time periods. Upon dissolution, we will distribute to all of our public stockholders, in proportion to their respective equity interest, an aggregate sum equal to the amount in the trust account, inclusive of any interest. Our initial stockholders have waived their rights to participate in any liquidation distribution with respect to their initial shares and have also agreed to vote in favor of any plan of dissolution and liquidation which we will present to our stockholders for vote. There will be no distribution from the trust account with respect to our warrants which will expire worthless. We will pay the costs of dissolution and liquidation from our remaining interest earned on funds in the trust account that has been released to us to fund our working capital. If we enter into either a letter of intent, an agreement in principle or a definitive agreement to complete a business combination prior to the expiration of 18 months after the consummation of this offering, but are unable to complete the business combination within the 18-month period, then we will have an additional six months in which to complete the business combination contemplated by the letter of intent, agreement in principle or definitive agreement. If we are unable to consummate a transaction within 24 months following the consummation of this offering our purpose and powers will be limited to dissolving, liquidating and winding up. Upon notice from us, the trustee of the trust account will liquidate the investments constituting the trust account and will turn over the proceeds to our transfer agent for distribution to our public stockholders as part of our plan of dissolution and liquidation. Concurrently, we shall pay, or reserve for payment, from funds not held in trust, our liabilities and obligations, although we cannot assure you that there will be sufficient funds for such purpose. Our public stockholders shall be entitled to receive funds from the trust account only in the event of our liquidation or if the stockholders seek to redeem their respective shares into cash upon a business combination which the stockholder voted against and which is actually completed by us. In no other circumstances shall a stockholder have any right or interest of any kind to or in the trust account. Voting against the business Table of Contents combination alone will not result in redemption of a stockholder s shares into a pro rata share of the trust account. Such stockholder must have also exercised the redemption rights described above. Under the Delaware General Corporation Law, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. If the corporation complies with certain procedures set forth in Section 280 of the Delaware General Corporation Law intended to ensure that it makes reasonable provision for all claims against it, including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution. Although we will make liquidating distributions to our stockholders as soon as reasonably possible as part of our plan of dissolution and liquidation, we do not intend to comply with those procedures. As such, our stockholders could potentially be liable for any claims to the extent of distributions received by them in a dissolution and any liability of our stockholders may extend beyond the third anniversary of such dissolution. Because we will not be complying with Section 280, we will seek stockholder approval to comply with Section 281(b) of the Delaware General Corporation Law, requiring us to adopt a plan of dissolution that will provide for our payment, based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against us within the subsequent 10 years. Under Section 281(b), the payment and provision for payment of these claims and expenses has priority over the distribution of funds to stockholders. However, because we are a blank check company, rather than an operating company, and our operations will be limited to searching for prospective target businesses to acquire, the only likely claims to arise would be from our vendors (such as accountants, lawyers, investment bankers, etc.), target businesses or potential target businesses. As described above, we intend to have all vendors, target businesses and prospective target businesses execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the trust account. As a result of such waivers, the claims that could be made against us should be significantly limited and the likelihood that any claim that would result in any liability extending to the trust account should be minimal. We expect that all costs associated with the implementation and completion of our plan of dissolution and liquidation will be funded by any funds not held in our trust account, although we cannot assure you that there will be sufficient funds for such purpose. We currently believe that any plan of dissolution and liquidation subsequent to the expiration of the 18 and 24 month deadlines would proceed in the following manner: our board of directors will, consistent with its obligations described in our amended and restated certificate of incorporation to dissolve, prior to the passing of such deadline, convene and adopt a specific plan of dissolution and liquidation, which it will then vote to recommend to our stockholders; at such time it will also cause to be prepared a preliminary proxy statement setting out such plan of dissolution and liquidation and the board s recommendation of such plan; upon such deadline, we would file the preliminary proxy statement with the Securities and Exchange Commission; if the Securities and Exchange Commission does not review the preliminary proxy statement, then 10 days following the passing of such deadline, we will mail the proxy statements to our stockholders, and 30 days following the passing of such deadline we will convene a meeting of our stockholders at which they will either approve or reject our plan of dissolution and liquidation; and if the Securities and Exchange Commission does review the preliminary proxy statement, we currently estimate that we will receive their comments 30 days following the passing of such deadline. We will mail the proxy statements to our stockholders following the conclusion of the comment and review process (the length of which we cannot predict with any certainty), and we will convene a meeting of our stockholders at which they will either approve of reject our plan of dissolution and liquidation. In the event we seek stockholder approval for a plan of dissolution and liquidation and do not obtain such approval, we will nonetheless continue to pursue stockholder approval for our dissolution. Pursuant to the Table of Contents terms of our amended and restated certificate of incorporation, our powers following the expiration of the permitted time periods for consummating a business combination will automatically thereafter be limited to acts and activities relating to dissolving and winding up our affairs, including liquidation. The funds held in our trust account may not be distributed except upon our dissolution and, unless and until such approval is obtained from our stockholders, the funds held in our trust account will not be released. Consequently, holders of a majority of our outstanding stock must approve our dissolution in order to receive the funds held in our trust account and the funds will not be available for any other corporate purpose. In addition, if we seek approval from our stockholders to consummate a business combination within 90 days of the expiration of 24 months (assuming that the period in which we need to consummate a business combination has been extended, as provided in our amended and restated certificate of incorporation) from the date of this offering, the proxy statement related to such a business combination will also seek stockholder approval for our board s recommended plan of dissolution and liquidation, in the event our stockholders do not approve such a business combination. If no proxy statement seeking the approval of our stockholders for a business combination has been filed 30 days prior to the date which is 24 months from the date of this offering, our board will, prior to such date, convene, adopt and recommend to our stockholders a plan of dissolution and liquidation, and on such date file a proxy statement with the Securities and Exchange Commission seeking stockholder approval for such plan. Immediately upon the approval by our stockholders of our plan of dissolution and liquidation, we will liquidate our trust account to our public stockholders. Competition for Target Businesses In identifying, evaluating and selecting a target business, we may encounter intense competition from other entities having a business objective similar to ours. Many of these entities are well established and have extensive experience identifying and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human and other resources than us and our financial resources will be relatively limited when contrasted with those of many of these competitors. While we believe based upon the knowledge and experience of our officers and directors that there are numerous potential target businesses that we could acquire with a fair market value equal to at least 80% of our net assets at the time of the acquisition (exclusive of Maxim Group LLC s deferred underwriting compensation, including interest thereon, held in the trust account) with the net proceeds of this offering, our ability to compete in acquiring certain sizable target businesses will be limited by our available financial resources. This inherent competitive limitation gives others an advantage in pursuing the acquisition of a target business. Further: our obligation to seek stockholder approval of a business combination or obtain the necessary financial information to be included in the proxy statement to be sent to stockholders in connection with such business combination may delay or prevent the completion of a transaction; our obligation to redeem into cash shares of common stock held by our public stockholders in certain instances may reduce the resources available to us for a business combination; our outstanding warrants and options, and the future dilution they potentially represent, may not be viewed favorably by certain target businesses; and the requirement to acquire assets or an operating business that has a fair market value equal to at least 80% of our net assets at the time of the acquisition (exclusive of Maxim Group LLC s deferred underwriting compensation, including interest thereon, held in the trust account) could require us to acquire several assets orclosely related operating businesses at the same time, all of which sales would be contingent on the closings of the other sales, which could make it more difficult to consummate the business combination. Additionally, we face competition from other blank-check companies which have formed recently, a number of which may consummate a business combination in any industry they choose. We may therefore be subject to competition from these companies, which are seeking to consummate a business plan similar to ours and which will, as a result, increase demand for privately-held companies to combine with companies structured similarly to ours. Further, the fact that based on publicly available information only 22 of approximately 89 such companies since August 2003 have completed a business combination and 21 of such companies have entered into a definitive agreement for a business combination may be an indication that there Table of Contents are only a limited number of attractive target businesses available to such entities or that many privately-held target businesses may not be inclined to enter into business combinations with publicly held blank check companies like us. Any of these factors may place us at a competitive disadvantage in negotiating a business combination. If we effect a business combination, there will be, in all likelihood, intense competition from competitors of the target business. We cannot assure you that, subsequent to a business combination, we will have the resources or ability to compete effectively. Facilities We maintain our executive offices at 328 West 77th Street, New York, New York, 10024. We have agreed to pay ASG Management, Inc., an affiliated third party of which Mr. Wasserman and Mr. Blaha are principals, $7,500 per month for office space (located at our executive offices) and certain additional general and administrative services. We consider our current office space adequate for our current operations. Upon completion of a business combination or the implementation of our plan of dissolution and distribution, we will no longer be required to pay this monthly fee. Employees We have two officers, both of whom are also members of our board of directors. These individuals are not obligated to contribute any specific number of hours per week and intend to devote only as much time as they deem necessary to our affairs. The amount of time they will devote in any time period will vary based on the availability of suitable target businesses to investigate, although we expect such individuals to devote an average of approximately ten hours per week to our business. We do not intend to have any full time employees prior to the consummation of a business combination. Periodic Reporting and Financial Information We will register our units, common stock and warrants under the Securities Exchange Act of 1934, as amended, and have reporting obligations, including the requirement that we file annual and quarterly reports with the SEC. In accordance with the requirements of the Securities Exchange Act of 1934, as amended, our annual reports will contain financial statements audited and reported on by our independent accountants. We will not acquire an operating business in the U.S. homeland security or defense industries if audited financial statements based on United States generally accepted accounting principles cannot be obtained for such target business. Alternatively, we will not acquire assets if the financial information called for by applicable law cannot be obtained for such assets. Additionally, our management will provide stockholders with the foregoing financial information as part of the proxy solicitation materials sent to stockholders to assist them in assessing each specific target business or assets we seek to acquire. Our management believes that the requirement of having available financial information for the target business or assets may limit the pool of potential target businesses or assets available for acquisition. We will be required to comply with the internal control requirements of the Sarbanes-Oxley Act. A target business may not be in compliance with the provisions of the Sarbanes-Oxley Act regarding adequacy of their internal controls. The development of the internal controls of any such entity to achieve compliance with the Sarbanes-Oxley Act may increase the time and costs necessary to complete any such acquisition. Legal Proceedings To the knowledge of our management, there is no litigation currently pending or contemplated against us or any of our officers or directors in their capacity as such. Table of Contents Comparison to Offerings of Blank Check Companies The following table compares and contrasts the terms of our offering and the terms of an offering of blank check companies under Rule 419 promulgated by the SEC assuming that the gross proceeds, underwriting discounts and underwriting expenses for the Rule 419 offering are the same as this offering and that the underwriters will not exercise their over-allotment option. None of the terms of a Rule 419 offering will apply to this offering. Terms of Our Offering Terms Under a Rule 419 Offering Escrow of offering proceeds $60,000,000 of the net offering proceeds (including proceeds from the private placement) will be deposited into a trust account at JP MorganChase New York, New York maintained by American Stock Transfer Trust Company. $50,058,000 would be required to be deposited into either an escrow account with an insured depositary institution or in a separate bank account established by a broker-dealer in which the broker- dealer acts as trustee for persons having the beneficial interests in the account. Investment of net proceeds The $60,000,000 of the net offering proceeds (including proceeds from the private placement) held in trust will be invested only in U.S. government securities, defined as Treasury Bills issued by the United States having a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 under the Investment Company Act of 1940, as amended. Proceeds could be invested only in specified securities such as a money market fund meeting conditions of the Investment Company Act of 1940, as amended, or in securities that are direct obligations of, or obligations guaranteed as to principal or interest by the United States. Limitation on fair value or net assets of target business The initial target business that we acquire must have a fair market value equal to at least 80% of our net assets (exclusive of Maxim Group LLC s deferred underwriting compensation, including interest thereon, held in the trust account) at the time of such acquisition. We would be restricted from acquiring a target business unless the fair value of such business or net assets to be acquired represent at least 80% of the maximum offering proceeds. Trading of securities issued The units shall commence trading on or promptly after the date of this prospectus. The common stock and warrants comprising the units may begin to trade separately on the 90th No trading of the units or the underlying common stock and warrants would be permitted until the completion of a business combination. During this period, the securities would be held in the escrow or trust account. day after the date of this prospectus unless the representative of the underwriters informs us of its decision to allow earlier separate trading, provided we have filed with the SEC a Current Report on Form 8-K, which includes an audited balance sheet reflecting our receipt of the gross proceeds of this offering (including proceeds from the private placement), including any proceeds we receive from the exercise of the over-allotment option, if such option is exercised prior to the filing of the Form 8-K. Thereafter the units will no longer trade. Table of Contents Terms of Our Offering Terms Under a Rule 419 Offering Exercise of the warrants The warrants cannot be exercised until the later of the completion of a business combination or one year from the date of this prospectus and, accordingly, will only be exercised after the trust account has been terminated and distributed. The warrants could be exercised prior to the completion of a business combination, but securities received and cash paid in connection with the exercise would be deposited in the escrow or trust account. Election to remain an investor We will give our stockholders the opportunity to vote on the business combination. In connection with seeking stockholder approval, we will send each stockholder a proxy statement containing information required by the SEC. A stockholder following the procedures described in this prospectus is given the right to redeem his or her shares into his or her pro rata share of the trust account. However, a stockholder who does not follow these procedures or a stockholder who does not take any action would not be entitled to the return of any funds. A prospectus containing information required by the SEC would be sent to each investor. Each investor would be given the opportunity to notify the company, in writing, within a period of no less than 20 business days and no more than 45 business days from the effective date of the post-effective amendment, to decide whether he or she elects to remain a stockholder of the company or require the return of his or her investment. If the company has not received the notification by the end of the 45th business day, funds and interest or dividends, if any, held in the trust or escrow account would automatically be returned to the stockholder. Unless a sufficient number of investors elect to remain investors, all of the deposited funds in the escrow account must be returned to all investors and none of the securities would be issued. Business combination deadline A business combination must occur within 18 months after the consummation of this offering or within 24 months after the consummation of this offering if a letter of intent, agreement in principle or definitive agreement relating to a prospective business combination was entered into prior to the end of the 18 month period. If a business combination does not occur within these time frames our purpose and powers will be limited to dissolving, liquidating and winding up. If an acquisition has not been consummated within 18 months after the effective date of the initial registration statement, funds held in the trust or escrow account would be returned to investors. Table of Contents Terms of Our Offering Terms Under a Rule 419 Offering Release of funds The proceeds held in the trust account will not be released until the earlier of the completion of a business combination or as part of any plan of dissolution and liquidation of our company approved by our stockholders upon our failure to effect a business combination within the allotted time, except that to the extent the trust account earns interest or we are deemed to have earned income in connection therewith, we will be permitted from time to time to receive disbursements of that interest for the purposes of: (i) paying taxes on interest income earned on the trust account, State of Delaware franchise taxes and repayment of up to $250,000 of an additional officer loan to be made on or prior to the closing of this offering by Steven M. Wasserman (such loan to be repaid within 90 days of the closing of this offering) and (ii) up to $1,825,000 ($1,925,000 if the over-allotment option is exercised in full) of interest income to fund our working capital and dissolution and liquidation expenses if we fail to consummate a business combination; however, if the underwriters over- allotment option is exercised in full, after our receipt of $125,000 of interest income we will not be permitted to draw such amounts until $180,000 (or a lesser amount if less than the full over- allotment option is exercised, pro rata based on the amount of the over-allotment exercised) of interest shall have been earned on the trust account with the resulting effect that there shall be a minimum of $10.00 per unit held in the trust account. While we intend, in the event of our dissolution and liquidation, to distribute funds from our trust account to our public stockholders as promptly as possible pursuant to our stockholder approved plan of dissolution and liquidation, the actual time at which our public stockholders receive their funds will be longer than the 5 business days under a Rule 419 offering. For a detailed discussion of the timing involved in a return of funds from our trust account to our public stockholders as part of our plan of dissolution and liquidation, see Proposed Business Plan of dissolution and liquidation if no business combination. The proceeds held in the escrow account would not be released until the earlier of the completion of a business combination or the failure to effect a business combination within the allotted time. See Risk Factors Risks associated with our business You will not be entitled to protections normally afforded to investors of blank check companies. In the event a business combination was not consummated within 18 months, proceeds held in the trust account would be returned within 5 business days of such date. Table of Contents MANAGEMENT Directors and Executive Officers Our current directors and executive officers are as follows: Name Age Position Gary E. Johnson 53 Co-Chairman of the Board of Directors Steven M. Wasserman 45 Chief Executive Officer, President, Secretary and Co-Chairman of the Board of Directors Robert B. Blaha 51 Chief Management Officer, Executive Vice President and Director Carol A. DiBattiste 54 Director Ronald R. Fogleman 64 Director Robert T. Herres 73 Director Constantinos Tsakiris 35 Director Governor Gary E. Johnson has served as Co-Chairman of our board of directors since August 2005. In July 2005, he was elected a director. Since June 2004, Governor Johnson has been the president of HighBeta of New Mexico, a venture capital company specializing in investments in companies focused on alternative forms of energy. From October 1998 to the present, Governor Johnson has also served as president of GEJ Enterprises, Inc., a construction consulting company. From January 1995 to December 2002, Governor Johnson served as the Governor of the State of New Mexico, and was the first governor in the history of New Mexico to be elected for two consecutive four year terms. He was ranked among the nation s seven top governors in each of the Cato Institute s fiscal report cards between 1996 and 2002. As Governor, Mr. Johnson signed into law tax credits to help Sandia National Laboratories offer assistance to small businesses and a joint-powers agreement between the State of New Mexico and Los Alamos National Laboratories to improve Internet accessibility to rural areas. Prior to serving as Governor, from April 1975 to October 1998 Mr. Johnson was the founder and president of Big J Enterprises, Inc., a full-service commercial and industrial construction company located in New Mexico with clients such as Sandia National Laboratories, Honeywell International Inc. (NYSE: HON) and Intel Corp. (Nasdaq: INTC). Mr. Johnson sold Big J Enterprises Inc. in 1999, at the time of its sale one of New Mexico s leading construction companies. Steven M. Wasserman has served as our Chief Executive Officer and Secretary since April 2005 and as our President and Co-Chairman of our board of directors since August 2005. From April 2005 to August 2005, Mr. Wasserman also served as our Chairman. Mr. Wasserman also currently serves as the managing partner of AMT Ventures LLC, an entity primarily engaged in public and private equity and debt investments on a principal basis, a position he has held since April 2004. In addition, Mr. Wasserman is the managing partner of AMT Capital Partners LLC, an investment banking and advisory firm, a position he has held since June 1998. During his tenure as the managing partner of AMT Capital Partners, LLC, clients of AMT Capital Partners, LLC have included the following: Ktech Corporation, a provider of technical support services, scientific and engineering services and management expertise to a variety of government defense and industry clients; Nanodetex Corporation, a leader in lab-on-chip (LOC) platform technologies for gas phase chemical analysis and explosive detection; Agent Science Technologies Incorporated, a provider of neural information management software solutions to the defense industry; Link One, LLC, a technology transfer advisory group to Los Alamos National Laboratory; American Detection Technologies, Inc., a homeland security company engaged in contraband detection services using canines; ETEK International Corporation, a network security provider; and Securant Technologies, Inc., an Internet security software company which was sold to RSA Security, Inc. in September 2001. From June 1997 to July 2001, Mr. Wasserman was the managing director of the Cardinal Fund, a risk arbitrage fund. From April 1995 to May 1998, Mr. Wasserman served as the President and Chief Executive Officer of Pudgies Chicken Inc. In September 1996, Pudgies Chicken Inc. Table of Contents filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code and the sale of all of the company s assets was approved in May 1998. Robert B. Blaha has served as our Chief Management Officer, Executive Vice President and a director since July 2005. Since June 1993, Mr. Blaha has served as the president of Human Capital Associates, a management consulting company. Since February 2003, Mr. Blaha has also served as the vice chairman and member of the board of directors of Integrity Bank Trust, a commercial bank based in Colorado Springs, Colorado. During his career, Mr. Blaha has held management positions with Asea Brown Boveri (NYSE: ABB) as vice president of Human Resources and senior vice president of administration from 1990 to 1993, Englehard Corporation (NYSE: EC) as a manager from 1986 to 1990, Monsanto Company (NYSE: MON), as a personnel supervisor and superintendent from 1979 to 1986 and Ford Motor Company (NYSE: F), as a labor relations representative from 1977 to 1979. Mr. Blaha has authored numerous articles and three books, entitled Beyond Survival, The Archer Chronicles and The Lean Six Sigma Accelerator, on issues relating to high performance work systems, leadership and achieving organizational wide commitment to change and efficiency. Carol A. DiBattiste has served as a director since July 2005. Ms. DiBattiste is currently the general counsel and chief privacy officer with ChoicePoint Inc. (NYSE: CPS), a leading provider of identification and credential verification services, a position she has held since September 2006. From April 2005 until September 2006, she was the chief credentialing, compliance and privacy officer for ChoicePoint Inc. From July 2004 to April 2005, Ms. DiBattiste served as deputy administrator, Transportation Security Administration (TSA), Department of Homeland Security, and as the TSA s chief of staff from March 2003 to July 2004, with responsibility for overseeing all TSA functions and serving as liaison between TSA and the Department of Homeland Security. From February 2001 to February 2003, Ms. DiBattiste was a partner at the law firm of Holland Knight, LLP. Additionally, Ms. DiBattiste served as under secretary in the United States Air Force from August 1999 to January 2001, the second highest position, responsible for readiness, recruiting, training and equipping a force of 710,000 individuals and a budget of over $70 billion. From December 1997 to August 1999, Ms. DiBattiste was the deputy United States attorney, Southern District of Florida and from July 1994 to December 1997, she was the director of the Executive Office for United States Attorneys, Department of Justice. From August 1993 to July 1994, she was the principal deputy general counsel for the Department of the Navy and from July 1991 to August 1993 she was an assistant United States attorney for the Southern District of Florida. Ms. DiBattiste enlisted in the United States Air Force in March 1971, received her commission in September 1976 and retired in the rank of Major after twenty years of service in 1991. General Ronald R. Fogleman has served as a director since July 2005. General Fogleman retired in 1997 after 34 years of distinguished service in the United States Air Force. General Fogleman is currently the senior vice president of Projects International, an international business advising company, a position that he has held since May 2001. General Fogleman served as chairman and chief executive officer of Durango Aerospace, Inc., an international aviation consulting firm, from January 1998 until December 2004. In addition, from January 1998 to the present, General Fogleman has served as a consultant to various defense industry and related companies, including Northrop Grumman Corporation (NYSE: NOC), East Inc., RSL Electronics USA Inc., FMC Technologies, Inc. (NYSE: FTI), Bell Helicopter Textron Inc. (a subsidiary of Textron Inc. (NYSE: TXT)), Twentieth Century Alliance and Ahura Corporation. From October 1994 to September 1997, General Fogleman served as a member of the Joint Chiefs of Staff, acting as military advisor to the Secretary of Defense, the National Security Counsel and the President of the United States. From October 1994 to September 1997, he also served as the 15th Chief of Staff of the U.S. Air Force, as the senior uniformed officer responsible for organizing, training and equipping of 750,000 active duty, guard, reserve and civilian forces serving in the United States and overseas. From August 1992 to October 1994, he served as commander-in-chief of the U.S. Transportation Command (CINCTRANS). He currently serves on the board of directors of the following public companies: AAR Corporation (NYSE: AIR), a supplier of products and services to the aviation industry; Alliant Techsystems Inc. (NYSE: ATK), a provider of conventional munitions, rocket motors and advanced weapons and space systems; and World Airways, Inc., an air carrier providing customized transportation services. On May 31, 2004, General Fogleman became the non-executive Chairman of the Board of World Airways, Inc. (Nasdaq: WLDA). Table of Contents General Robert T. Herres has served as a director since July 2005. General Herres retired from the United States Air Force in February 1990 after 36 years of distinguished service. General Herres is currently an advisor and consultant to a family trust and a director of Ellison Management Co., LLC, which provides asset management support and services to the trust, a position he has held since November 2000. From September 1993 until April 2000, General Herres served as chief executive officer of United Services Automobile Association (USAA), a member-owned diversified insurance and financial service organization serving current and former members of the U.S. military and their families. From September 1993 until October 2002, he served as USAA s chairman. From March 2001 until September 2003, General Herres served as chairman of Luby s, Inc. (NYSE: LUB), an owner and operator of restaurants. From February 1987 until February 1990, General Herres was vice chairman of the Joint Chiefs of Staff, acting as military advisor to the Secretary of Defense, the National Security Council and the President of the United States. During the prior ten years of his career in the Air Force, General Herres held the following positions: commander-in-chief, North American Aerospace Defense Command and U.S. space command and commander, U.S. Air Force Space Command (July 1984 to September 1987), commander of the Eighth Air Force (July 1981 to October 1982) and commander of the Air Force Communications Command (June 1979 to July 1981). He also served as the director for command, control and communications of the Department of Defense Joint Staff (from October 1982 to July 1984). General Herres has received numerous awards and commendations, including the Distinguished Service Medal, Defense Distinguished Service Medal, the Legion of Merit and the Bronze Star. Constantinos Tsakiris has served as a director since August 2006. Mr. Tsakiris is the managing director and majority-owner of Paradise Navigation S.A., a tanker fleet manager and operator based in Athens, Greece, a position he has held since May 1996. Since July 2002 he has also been a director and majority-owner of Paradise Tankers Corp., a tanker fleet owner. Since December 2005 Mr. Tsakiris has also been the director and majority-owner of Parsfial Holdings, a Greek real estate company. He is the director and a majority owner of the following companies, each of which is the owner of a single tanker: Srefania Maritime Ltd. (since March 1999), Natalie Maritime Ltd. (since April 1999), Redina Maritime Ltd. (since December 1999), Aspropyrgos Maritime Ltd. (since June 2002), Ikaros Maritime Ltd. (since November 2002), Daedalos Maritime Ltd. (since April 2003). From June 2003 to March 2005, Mr. Tsakiris was the director and majority-owner of Herculito Maritime Ltd., and from September 1997 to September 2003, he was the director and majority-owner of A.F. Maritime Ltd., each of which was a single tanker-owning company. Mr.Tsakiris is also the majority owner of PAE Panionios NFC, a professional soccer club based in Greece. Director Independence Our board of directors has determined that Governor Gary E. Johnson, Carol A. DiBattiste, General Ronald R. Fogelman and Robert T. Herres are independent directors within the meaning of Rule 121(A) of the American Stock Exchange Company Guide and Rule 10A-3 promulgated under the Securities Act of 1934, as amended. Number and Term of Directors Our board of directors is divided into two classes with only one class of directors being elected in each year and each class serving a two-year term. The term of office of the first class of directors, consisting of Mr. Wasserman, General Fogleman and Governor Johnson, will expire at our first annual meeting of stockholders. The term of office of the second class of directors, consisting of Mr. Blaha, Ms. DiBattiste, General Herres and Mr. Tsakiris, will expire at the second annual meeting of stockholders. These individuals will play a key role in identifying and evaluating prospective acquisition candidates, selecting the target business, and structuring, negotiating and consummating its acquisition. Other than Ms. DiBattiste and General Fogleman, none of these individuals has been a principal of or affiliated with a public company or blank check company that executed a business plan similar to our business plan and none of these individuals is currently affiliated with such an entity. However, we believe that the skills and expertise of these individuals, their collective access to acquisition opportunities and ideas, their contacts, and their transaction expertise should enable them to identify and effect an acquisition although we cannot assure you that they will, in fact, be able to do so. Table of Contents Executive Officer and Director Compensation No executive officer, director or initial stockholder, nor any affiliate thereof, has received any cash compensation for services rendered. No compensation of any kind, including finder s and consulting fees, will be paid by us to any of our initial stockholders, including our officers and directors, or any of their respective affiliates, for services rendered prior to or in connection with a business combination. However, these individuals will be reimbursed for any out-of-pocket expenses incurred in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations, and we have agreed to pay ASG Management, Inc., an affiliated entity of which Mr. Wasserman and Mr. Blaha are principals, $7,500 per month for office space and certain additional general and administrative services. Such individuals may be paid consulting, management or other fees from target businesses as a result of the business combination, with any and all amounts being fully disclosed to stockholders, to the extent then known, in the proxy solicitation materials furnished to the stockholders. There is no limit on the amount of these out-of-pocket expenses. Our board of directors has designated Steven M. Wasserman, our Chief Executive Officer and President, to pass upon the reasonableness of the reimbursement of expenses incurred by any member of our management or board of directors in an amount of $10,000 or less. Reimbursement of expenses in excess of $10,000 will be passed upon by our audit committee, with any interested director abstaining. Other than through this review process, or by review by a court of competent jurisdiction if such reimbursement is challenged, provided that no proceeds held in the trust account will be used to reimburse out-of-pocket expenses prior to a business combination, there will be no other review of the reasonableness of these expenses. If all of our directors are not deemed independent, we will not have the benefit of independent directors examining the propriety of expenses incurred on our behalf and subject to reimbursement, or monitoring our compliance with the terms of this offering. In addition, since the role of our current management and directors subsequent to a business combination is uncertain, we have no ability to determine what remuneration, if any, will be paid to our current management and directors prior to or after a business combination by any target businesses. Special Adviser In addition to our board of directors, we also have access to special advisors who have the background and experience to assist us in evaluating target businesses and consummating a business combination. We have initially identified Mr. Weinstein as our special advisor. Michael Weinstein has been our special advisor since July 2005. Mr. Weinstein will from time to time assist us in evaluating target businesses and consummating a business combination. He has not and will not receive compensation for acting as our special advisor other than reimbursement for out-of-pocket expenses incurred by him on our behalf. Mr. Weinstein has over twenty years of experience in government procurement, business development, technology investments and law. Since October 2006, Mr. Weinstein has been the President and Founder of Military Religious Freedom Foundation, an organization supporting the upholding of religious freedoms in the United States armed forces. From November 2004 until September 2006, Mr. Weinstein was the director of business development, department of energy programs, for Perot Systems Corporation (NYSE: PER), a provider of technology-based business solutions. From December 2003 until November 2004, Mr. Weinstein was a partner with New York Technology Partners, LLC, a technology transfer startup company. From December 2002 to December 2003, Mr. Weinstein served as chief executive officer for Information Architects Corp. (OTCPK: IACH), an internet-based pre-employment screening company. From October 2000 to December 2002, he was the managing partner of Focos Investments, Inc., an angel investment firm. From June 2000 to August 2001, Mr. Weinstein acted as a partner in Link 1 LLC, a technology transfer startup company. Previously, Mr. Weinstein served as Assistant General Counsel in the Executive Office of the President of the United States from May 1986 to May 1987. From April 1984 to May 1986, he served as attorney advisor for telecommunications and information systems, Office of Management and Budget, Executive Office of the President of the United States and first chief of telecommunications and information systems procurement law for the United States Air Force from October 1982 to April 1984. Table of Contents Board Committees Our board of directors has an audit committee and our board of directors has adopted a charter for the audit committee, as well as a code of conduct and ethics that governs the conduct of our directors, officers and employees. Our audit committee consists of General Herres, General Fogleman and Governor Johnson. Each member of our audit committee is financially literate under the current listing standards of the American Stock Exchange. The audit committee will review the professional services and independence of our independent registered public accounting firm and our accounts, procedures and internal controls. The audit committee will also select our independent registered public accounting firm, review and approve the scope of the annual audit, review and evaluate the independent public accounting firm our annual audit and annual consolidated financial statements, review with management the status of internal accounting controls, evaluate problem areas having a potential financial impact on us that may be brought to the committee s attention by management, the independent registered public accounting firm or the board of directors, and evaluate all of our public financial reporting documents. In addition, our audit committee will be required to pre-approve all related party transactions between us and any of our officers, directors and 5% or more stockholders and their respective affiliates. Nominees for the Company s board of directors will be selected by vote of a majority of the Company s independent directors. The compensation of our chief executive officer and other officers will be determined by a majority of our independent directors in accordance with Section 805 of the American Stock Exchange Company Guide. Our audit committee (with any interested directors abstaining) will pass upon the reasonableness of any reimbursable expenses in excess of $10,000. Steven M. Wasserman, our Chief Executive Officer and President, will determine the reasonableness of reimbursement of lesser amounts. Code of Ethics We have adopted a code of ethics applicable to our directors, officers and employees in accordance with applicable federal securities laws and rules of The American Stock Exchange. Conflicts of Interest Potential investors should be aware of the following potential conflicts of interest: None of our officers or directors is required to commit their full time to our affairs and, accordingly, they may have conflicts of interest in allocating management time among various business activities; In the course of their other business activities, our officers and directors may become aware of investment and business opportunities which may be appropriate for presentation to us as well as the other entities with which they are affiliated. They may have conflicts of interest in determining to which entity a particular business opportunity should be presented; Certain of our officers and directors are affiliated with entities in the homeland security and defense industries. In addition, our officers and directors may in the future become affiliated with entities, including other blank check companies, engaged in business activities similar to those intended to be conducted by us; Since our directors own shares of our common stock which will be released from escrow only in certain limited situations, our board may have a conflict of interest in determining whether a particular target business is appropriate to effect a business combination. The personal and financial interests of our directors and officers may influence their motivation in identifying and selecting a target business and completing a business combination timely; Table of Contents Our current management will only be able to remain with the combined company after the consummation of a business combination if they are able to negotiate mutually agreeable employment terms as part of any such combination, which terms would be disclosed to stockholders in any proxy statement relating to such transaction. The financial interest of our officers and directors could influence their motivation in selecting a target business and thus, there may be a conflict of interest when determining whether a particular business combination is in the stockholders best interest; and Our officers and directors may receive reimbursement of out-of-pocket expenses incurred by them prior to the consummation of a business combination. However, our officers and directors will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the amount not held in the trust account unless the business combination is consummated and there are sufficient funds available for reimbursement after such consummation. The financial interest of such persons could influence their motivation in selecting a target business and thus, there may be a conflict of interest when determining whether a particular business combination is in the stockholders best interest. In general, officers and directors of a corporation incorporated under the laws of the State of Delaware are required to present business opportunities to a corporation if: the corporation could financially undertake the opportunity; the opportunity is within the corporation s line of business; and it would not be fair to the corporation and its stockholders for the opportunity not to be brought to the attention of the corporation. Accordingly, as a result of multiple business affiliations, our officers and directors may have similar legal obligations relating to presenting business opportunities meeting the above-listed criteria to multiple entities. In addition, conflicts of interest may arise when our board evaluates a particular business opportunity with respect to the above-listed criteria. We cannot assure you that any of the above mentioned conflicts will be resolved in our favor. In order to minimize potential conflicts of interest which may arise from multiple corporate affiliations, each of our officers and directors has agreed in principle, until the earlier of a business combination, our liquidation or such time as he or she ceases to be an officer or director, to present to us for our consideration, prior to presentation to any other entity, any business opportunity which may reasonably be required to be presented to us under Delaware law, subject to any pre-existing fiduciary obligations they might have. Steven M. Wasserman, our Chief Executive Officer, President and Co-Chairman of our board of directors, is also the managing partner of AMT Capital Partners LLC. Although AMT Capital Partners LLC provides investment banking services to certain companies engaged in the homeland security and defense industries, Mr. Wasserman has agreed that our initial business combination will not be with any of such companies so long as they remain clients of AMT Capital Partners LLC, in order to avoid potential conflicts of interest that may arise from these clients. We will not enter into any business combination with any affiliates of our initial stockholders, officers or directors unless: (i) such business combination has been approved by our audit committee and our Board of Directors, and (ii) we obtain an opinion from an independent investment banking firm that a business combination with any such company is fair to our stockholders from a financial point of view. Each of our directors has, or may come to have, to a certain degree, other fiduciary obligations. In addition, all of our officers and directors have fiduciary obligations to those companies on whose boards of directors they may sit. To the extent that they identify business opportunities that may be suitable for the entities to which they owe a fiduciary obligation, our officers and directors will honor those fiduciary obligations. The entities that are within the homeland security or defense industries or that may make acquisitions or investments in such industries to which our officers and directors owe a fiduciary duty include: AMT Ventures LLC and AMT Capital Partners LLC (Steven M. Wasserman); High Beta of New Mexico (Governor Gary E. Johnson); ChoicePoint Inc. (NYSE:CPS) (Carol A. DiBattiste); Projects International, AAR Table of Contents Corporation (NYSE:AIR) and Alliant Techsystems Inc. (NYSE:ATK) (General Ronald R. Fogleman). Accordingly, they may not present opportunities to us that otherwise may be attractive to us unless the entities to which they owe a fiduciary obligation and any successors to such entities have declined to accept such opportunities. Our directors may receive reimbursement for reasonable out-of-pocket expenses incurred by them in connection with activities on our behalf, such as identifying potential target businesses and performing due diligence on suitable business combinations. As a matter of policy, our audit committee (with any interested director abstaining) pass upon the reasonableness of any reimbursable expenses incurred by members of our board of directors that exceed $10,000. Mr. Wasserman, our Chief Executive Officer and President, will pass upon the reasonableness of reimbursement of expenses of $10,000 or less. Other than through this review process, or the review of a court of competent jurisdiction if such reimbursement is challenged, there will be no other review of the reasonableness of these expenses. In connection with the vote required for any business combination, all of our initial stockholders, including all of our officers and directors, have agreed to vote their respective shares of common stock which were owned prior to this offering in accordance with the vote of the public stockholders owning a majority of the shares of our common stock sold in this offering. In addition, our initial stockholders have agreed to vote any shares of common stock acquired in or following this offering in favor of the business combination submitted to our stockholders for approval. Accordingly, they will not be able to exercise redemption rights with respect to a potential business combination. In addition, they have agreed to waive their respective rights to participate in any liquidation distribution occurring upon our failure to consummate a business combination. Table of Contents PRINCIPAL STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of our common stock as of the date of this prospectus, and as adjusted to reflect the sale of our common stock included in the units offered by this prospectus (assuming no purchase of units in this offering), by: each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock; each of our officers and directors; and all our officers and directors as a group. Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them. Amount and Approximate Percentage Nature of of Outstanding Common Stock Beneficial Before After Name and Address of Beneficial Owner(1) Ownership Offering Offering(3)(4) Steven M. Wasserman(2)(4) 830,000 52.5 % 10.9 % Robert B. Blaha 400,000 25.3 % 5.3 % Constantinos Tsakiris(4) 50,000 3.2 % * Gary E. Johnson 50,000 3.2 % * Carol A. DiBattiste 50,000 3.2 % * Ronald R. Fogleman 50,000 3.2 % * Robert T. Herres 50,000 3.2 % * Michael Weinstein 50,000 3.2 % * Laura Haffner 50,000 3.2 % * All directors and executive officers as a group (seven individuals) 1,480,000 93.7 % 19.5 % * Less than 1% (1) Unless otherwise indicated, the business address of each beneficial owner of more than 5% of our outstanding common stock is 328 West 77th Street, New York, New York 10024. (2) Includes 80,000 shares of common stock owned by Tukwila Group LLC, an entity in which Mr. Wasserman is the sole manager and equity holder and has sole voting and dispositive power with respect to such shares and reflects the redemption in September 2006 of 20,000 shares of our common stock previously owned by Tukwila Group LLC. (3) Assumes only the sale of 6,000,000 units in this offering but not the exercise of the 6,000,000 warrants to purchase our common stock included in such units or the exercise of the underwriters over-allotment option. (4) Does not include an aggregate of 3,200,000 warrants, each to purchase one share our common stock, to be issued in our private placement, to be completed prior to the effective date of this offering, of which 50,000 warrants will be issued to Steven M. Wasserman and 2,700,000 warrants will be issued to Constantinos Tsakiris, as such warrants are not exercisable until the later of: (i) the completion of a business combination or (ii) one year from the date of this prospectus. None of our other initial stockholders, officers and directors has indicated to us that they intend to purchase units in the offering or warrants on the open market. Immediately after this offering, assuming no exercise of the over-allotment option by the underwriters, our initial stockholders, which include all of our officers and directors, collectively, will beneficially own 20.8% of the then issued and outstanding shares of our common stock. Because of this ownership block, these stockholders may be able to effectively influence the outcome of all matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions other than approval of a business combination. Table of Contents All of the shares of our common stock outstanding prior to the date of this prospectus will be placed in escrow with American Stock Transfer Trust Company, as escrow agent, until one year following our consummating a business combination with a target business. During the escrow period, the holders of these shares will not be able to sell or transfer their securities except to family members and trusts for estate planning purposes and upon death (with such shares remaining subject to the escrow agent following such transfers), but will retain all other rights as our stockholders, including, without limitation, the right to vote their shares of common stock and the right to receive cash dividends, if declared. If dividends are declared and payable in shares of common stock, such dividends will also be placed in escrow. If we are unable to effect a business combination and liquidate, none of our initial stockholders will receive any portion of the liquidation proceeds with respect to common stock owned by them prior to the date of this prospectus. All of the warrants sold in the private placement will be subject to a lock-up agreement that will expire upon the consummation of a business combination and will be held in accounts established by Mr. Wasserman and Mr. Tsakiris with Maxim Group LLC, until such time as we consummate a business combination. Mr. Wasserman and Mr. Tsakiris will not request, and Maxim Group LLC will not grant, any waiver of the lock-up agreement. In the event that more than 20% of the public shareholders exercise their redemption rights, a proportional percentage of the shares of common stock held by our initial stockholders will automatically, and without any further action required by us or such stockholders, be forfeited and cancelled upon consummation of the business combination. The percentage of shares forfeited will only be equal to the percentage of redemptions above 20% and will be pro rata among the initial stockholders based on the 1,580,000 shares owned by them. In addition, in connection with the vote required for our initial business combination, all of our initial stockholders, including all of our officers and directors, have agreed to vote the shares of common stock owned by them immediately before this offering in accordance with the majority of the shares of common stock voted by the public stockholders. In addition, our initial stockholders have agreed to vote any shares of common stock acquired in or following this offering in favor of the business combination submitted to our stockholders for approval. Accordingly, they will not be able to exercise redemption rights with respect to a potential business combination. Mr. Wasserman may be deemed to be our parent and is deemed our promoter, as those terms are defined under the federal securities laws. Table of Contents CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Prior Share Issuances In July 2005, we issued 1,600,000 shares of our common stock to the individuals and entity set forth below for an aggregate amount of $25,000 in cash, at an average purchase price of $0.0158 per share, as follows: Name Number of Shares Relationship to Us Steven M. Wasserman 780,000 Chief Executive Officer, President, Secretary and Co-Chairman of our board of directors Robert B. Blaha 420,000 Chief Management Officer, Executive Vice President and director Tukwila Group LLC 100,000 Affiliate of Steven M. Wasserman Gary E. Johnson 50,000 Co-Chairman of our board of directors Carol A. DiBattiste 50,000 Director Ronald R. Fogleman 50,000 Director Robert T. Herres 50,000 Director Michael Weinstein 50,000 Special Advisor Laura Haffner 50,000 Stockholder The holders of the majority of these shares will be entitled to require us, on up to two occasions, to register these shares pursuant to an agreement to be signed prior to or on the date of this prospectus. The holders of the majority of these shares may elect to exercise these registration rights at any time after the date on which these shares of common stock are released from escrow, which, except in limited circumstances, is not before one year following our consummation of a business combination. In addition, these stockholders have certain piggy-back registration rights on registration statements filed subsequent to the date on which these shares of common stock are released from escrow. We will bear the expenses incurred in connection with the filing of any such registration statements. No less than two days before the effectiveness of the registration statement of which this prospectus forms a part, Steven M. Wasserman, our Chief Executive Officer, President and Co-Chairman of our board of directors and Constantinos Tsakiris, a member of our board of directors, will purchase from us an aggregate of 3,200,000 warrants at $1.00 per warrant or an aggregate of $3,200,000 in a private placement (Mr. Wasserman will purchase 500,000 warrants and, Mr. Tsakiris will purchase 2,700,000 warrants). Messrs. Wasserman and Tsakiris will pay the purchase price for the private placement warrants out of their own funds and will not receive directly or indirectly, any cash or other consideration from any party in order to make these purchases. Such funds will not be borrowed from any third party. Such warrants are identical to the warrants included in the units being sold in this offering. Each warrant is exercisable into one share of common stock at $7.50 and will become exercisable on the later of: (i) the completion of a business combination with a target business or (ii) one year from the date of this prospectus. The warrants will be subject to a lock-up agreement and held in accounts established by Mr. Wasserman and Mr. Tsakiris with Maxim Group LLC until such time as we consummate a business combination. Mr. Wasserman and Mr. Tsakiris will not request, and Maxim Group LLC will not grant, any waiver of the lock-up agreement. In May 2005, Steven M. Wasserman, our Chief Executive Officer, President and Co-Chairman of our board of directors, and Robert B. Blaha, our Chief Management Officer and Executive Vice President and a director, loaned us an aggregate of $187,800 which was used to pay a portion of the expenses of this offering, such as SEC registration fees, NASD registration fees and legal and accounting fees and expenses. This loan will be payable without interest on the earlier of June 30, 2007 or the consummation of this offering. The loan will be repaid out of the net proceeds of this offering not being placed in trust. Table of Contents In addition, on or prior to the closing date of this offering, Mr. Wasserman will loan us (on an interest-free basis) up to an additional $250,000 for expenses of this offering. This loan will be repaid from accrued interest on the trust account within 90 days of the closing of this offering. We have agreed to pay ASG Management, Inc., an affiliated third party of which Mr. Wasserman and Mr. Blaha are principals, $7,500 per month for office space and certain additional general and administrative services. In September 2006, we redeemed an aggregate of 20,000 shares of our common stock owned by Tukwila Group LLC, an entity owned by Steven M. Wasserman, for an aggregate consideration of $312.50 or $.01 per share. On January 31, 2007, Steven M. Wasserman (30,000 shares) and Robert B. Blaha (20,000 shares) transferred an aggregate of 50,000 shares of our common stock to Constantinos Tsakiris for an aggregate consideration of $500 or $.01 per share. We will reimburse our officers and directors for any reasonable out-of-pocket business expenses incurred by them in connection with certain activities on our behalf such as identifying and investigating possible target businesses and business combinations. Our audit committee (with any interested directors abstaining) will pass upon the reasonableness of any reimbursable expenses in excess of $10,000. Steven M. Wasserman, our Chief Executive Officer and President, will pass upon the receivableness of reimbursement of lesser amounts. There is no limit on the amount of accountable out-of-pocket expenses reimbursable by us, which will be reviewed only by our board or a court of competent jurisdiction if such reimbursement is challenged. Other than the reimbursable out-of-pocket expenses payable to our officers and directors and the $7,500 per month payment to ASG Management, Inc., the principals of which are Mr. Wasserman and Mr. Blaha, no compensation or fees of any kind, including finders and consulting fees, will be paid by us to any of our initial stockholders, officers or directors who owned our common stock prior to this offering, or to any of their respective affiliates for services rendered to us prior to or with respect to the business combination. Our initial stockholders will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed permitted working capital distributions as described herein unless the business combination is consummated and there are sufficient funds available for reimbursement after such consummation. The financial interest of such persons could influence their motivation in selecting a target business and thus, there may be a conflict of interest when determining whether a particular business combination is in the stockholders best interest. After the consummation of a business combination, if any, to the extent our management remains as officers of the resulting business, we anticipate that our officers and directors may enter into employment agreements, the terms of which shall be negotiated at the time of the business combination. Further, after the consummation of a business combination, if any, to the extent our directors remain as directors of the resulting business, we anticipate that they will receive compensation for their service as directors. All ongoing and future transactions between us and any of our officers and directors or their respective affiliates, including loans by our officers and directors, will be on terms believed by us at the time of such transactions to be no less favorable than are available from unaffiliated third parties. Such transactions or loans, including any forgiveness of loans, will require prior approval in each instance of our audit committee. In addition, our audit committee will gather pricing information, estimates or fairness opinions from unaffiliated third parties with respect to similar transactions undertaken by us to ascertain whether such transactions with affiliates are on terms that are no less favorable to us than are otherwise available from such unaffiliated third parties. If a transaction with an affiliated third party were found to be on terms less favorable to us than with an unaffiliated third party, we would not engage in such transaction. Table of Contents DESCRIPTION OF SECURITIES General We are authorized to issue 30,000,000 shares of common stock, par value $.0001, and 1,000,000 shares of preferred stock, par value $.0001. As of the date of this prospectus, 1,580,000 shares of common stock are outstanding, held by ten record holders. No shares of preferred stock are currently outstanding. Units Each unit consists of one share of common stock and one warrant. Each warrant entitles the holder to purchase one share of common stock. The common stock and warrants may begin to trade separately on the 90th day after the date of this prospectus unless Maxim Group LLC informs us of its decision to allow earlier separate trading based on its assessment of the relative strengths of the securities markets and small capitalization companies in general, and the trading pattern of, and demand for, our securities in particular. If Maxim Group LLC permits separate trading of the common stock and warrants prior to the 90th day after the date of this prospectus, we will issue a press release and file a Current Report on Form 8-K with the SEC announcing when such separate trading will begin. In no event may the common stock and warrants be traded separately until we have filed with the SEC a Current Report on Form 8-K which includes an audited balance sheet reflecting our receipt of the gross proceeds of this offering. Thereafter the units will no longer trade as units. We will file a Current Report on Form 8-K which includes this audited balance sheet upon the consummation of this offering. The audited balance sheet will reflect any proceeds we receive from the exercise of the over-allotment option or any portion thereof, if all or any portion of the over-allotment option is exercised prior to the filing of the Form 8-K. Common Stock Our stockholders are entitled to one vote for each share held of record on all matters to be voted on by stockholders. In connection with the vote required for any business combination, all of our initial stockholders, including all of our officers and directors, have agreed to vote their respective shares of common stock owned by them immediately prior to this offering in accordance with the majority of the shares of common stock voted by the public stockholders. In addition, our initial stockholders have agreed to vote any shares of common stock acquired by them in or following this offering in favor of the business combination submitted to our stockholders for approval. Accordingly, they will not be able to exercise redemption rights with respect to a potential business combination. Additionally, our initial stockholders, including our officers and directors, will vote all of their shares in any manner they determine, in their sole discretion, with respect to any other items that come before a vote of our stockholders. We will proceed with the business combination only if a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and public stockholders owning less than 35% of the shares sold in this offering exercise their redemption rights discussed below. Voting against the business combination alone will not result in redemption of a stockholder s shares into a pro rata share of the trust account. Such stockholder must have also exercised its redemption rights described below. In the event that more than 20% of the public shareholders exercise their redemption rights, a proportional percentage of the shares of common stock held by our initial stockholders will automatically, and without any further action required by us or such stockholders, be forfeited and cancelled upon consummation of the business combination. The percentage of shares forfeited will be equal to the percentage of redemptions above 20% and will be pro rata among the initial stockholders based on the 1,580,000 shares owned by them. Our board of directors is divided into two classes, each of which will generally serve for a term of two years with only one class of directors being elected in each year. For more information, see the section entitled Management. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors. Table of Contents If we are forced to liquidate our trust account because we have not consummated a business combination within the required time periods, our public stockholders are entitled to share ratably in the trust account as a part of any plan of dissolution and liquidation, inclusive of any interest (net of taxes payable, which taxes, State of Delaware franchise taxes and repayment of up to $250,000 of an additional officer loan to be made on or prior to the closing of this offering by Steven M. Wasserman shall be paid from the trust account) and up to $1,825,000 of interest income earned on the trust account ($1,925,000 if the over-allotment option is exercised in full), and any net assets remaining available for distribution to them after payment of liabilities. Our initial stockholders have agreed to waive their respective rights to participate in any liquidation occurring upon our failure to consummate a business combination and have also agreed to vote their shares of common stock in favor of any plan of dissolution and liquidation which we will submit to a vote of our stockholders, but only with respect to those shares of common stock acquired by them prior to this offering. Additionally, upon the liquidation of our trust account as a part of any plan of dissolution and liquidation Maxim Group LLC has agreed to waive any right it may have to the $1,800,000 ($2,250,000 if the underwriters over-allotment option is exercised in full) of deferred underwriting discount held in the trust account all of which shall be distributed to our publicstockholders. Our stockholders have no redemption, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the common stock, except that public stockholders have the right to have their shares of common stock redeemed to cash equal to their pro rata share of the trust account if they vote against the business combination and the business combination is approved and completed. Public stockholders who redeem their stock into their share of the trust account still have the right to exercise the warrants that they received as part of the units. Preferred Stock Our amended and restated certificate of incorporation authorizes the issuance of 1,000,000 shares of blank check preferred stock with such designation, rights and preferences as may be determined from time to time by our board of directors. No shares of preferred stock are being issued or registered in this offering. Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of common stock, although the underwriting agreement prohibits us, prior to a business combination, from issuing preferred stock which participates in any manner in the proceeds of the trust account, or which votes as a class with the common stock on a business combination. We may issue some or all of the preferred stock to effect a business combination. In addition, the preferred stock could be utilized as a method of discouraging, delaying or preventing a change in control of us. Although we do not currently intend to issue any shares of preferred stock, we cannot assure you that we will not do so in the future. Warrants Each warrant sold in this offering and in the private placement entitles the registered holder to purchase one share of our common stock at a price of $7.50 per share, subject to adjustment as discussed below, at any time commencing on the later of: the completion of the initial business combination; or one year from the date of this prospectus. The warrants will expire four years from the date of this prospectus at 5:00 p.m., New York City time. The warrants, at the option of the holder, may be exercised by cash payment of the exercise price or by cashless exercise. A cashless exercise means that in lieu of paying the aggregate purchase price for the shares being purchased upon exercise of the warrants in cash, the holder will forfeit a number of shares underlying the warrants with a fair market value equal to such aggregate exercise price. We will not receive additional proceeds to the extent that warrants are exercised by cashless exercise. The fair market value will be determined using the average reported last sales price of our common stock for the ten trading days ending on the third business day prior to the exercise of the warrants, or in the event that we have given a notice of Table of Contents redemption to the holder of the warrants, on the third business day prior to the date on which any notice of redemption is sent to the holders of the warrants listed below. We may call the public warrants (including any warrants issued to the underwriters if they exercise their unit purchase option) for redemption, in whole and not in part (and only in conjunction with the redemption of the private placement warrants); at a price of $.01 per warrant; at any time after the warrants become exercisable; upon not less than 30 days prior written notice of redemption to each warrant holder; and if, and only if, the last sale price of the common stock equals or exceeds $14.25 per share, for any 20 trading days within a 30 trading day period ending on the third business day prior to the notice of redemption to warrant holders. We have established these criteria to provide public warrant holders with a premium to the initial warrant exercise price as well as a degree of liquidity to cushion the market reaction, if any, to our redemption call. If the foregoing conditions are satisfied and we call the public warrants for redemption, each warrant holder shall then be entitled to exercise his or her warrant prior to the date scheduled for redemption either by payment of the exercise price in cash or on a cashless exercise basis; however, there can be no assurance that the price of the common stock will exceed the call trigger price or the warrant exercise price after the redemption call is made. The public warrants will be issued in registered form under a warrant agreement between American Stock Transfer Trust Company, 59 Maiden Lane, New York, New York 10038, as warrant agent, and us. You should review a copy of the warrant agreement, which has been filed as an exhibit to the registration statement of which this prospectus is a part, for a complete description of the terms and conditions applicable to the warrants. The public exercise price and number of shares of common stock issuable on exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuances of common stock at a price below their respective exercise prices. The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified check payable to us or by cashless exercise, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of common stock and any voting rights until they exercise their warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders. No public warrants will be exercisable unless at the time of exercise a registration statement relating to common stock issuable upon exercise of the warrants is effective and current, a prospectus is available for use by our public stockholders and the common stock has been registered under the Securities Act of 1933, as amended, or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms of the warrant agreement, we have agreed to meet these conditions and use our best efforts to maintain a current prospectus relating to common stock issuable upon exercise of the warrants until the expiration of the warrants. However, we cannot assure you that we will be able to do so. If we are unable to maintain the effectiveness of such registration statement until the expiration of the warrants and therefore are unable to deliver registered shares, the warrants may become worthless. If the warrants become worthless, the price paid by holders for their units will thereafter relate solely to the common stock underlying the units. Additionally, the market for the warrants may be limited if the prospectus relating to the Table of Contents common stock issuable upon the exercise of the warrants is not current or if the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside. In no event will the registered holders of a warrant be entitled to receive a net-cash settlement, stock, or other consideration in lieu of physical settlement in shares of our common stock. No fractional shares will be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round up to the nearest whole number the number of shares of common stock to be issued to the warrant holder. Because the warrants sold in the private placement were originally issued pursuant to an exemption from the registration requirements under the federal securities laws, the holders of those warrants will be able to exercise their warrants even if, at the time of exercise, a prospectus relating to the common stock issuable upon exercise of such warrants is not current. As described above, the holders of the public warrants purchased in this offering will not be able to exercise them unless we have a current registration statement covering the shares issuable upon their exercise and a prospectus is available for use by our public stockholders. Purchase Option We have agreed to sell to the representative of the underwriters an option to purchase up to a total of 105,000 units at $11.00 per unit. The securities underlying these units are identical to those offered by this prospectus. For a more complete description of the purchase option, see the section below entitled Underwriting Underwriting Terms. Dividends We have not paid any dividends on our common stock to date and do not intend to pay dividends prior to the completion of a business combination. The payment of dividends in the future will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition subsequent to completion of a business combination. The payment of any dividends subsequent to a business combination will be within the discretion of our then board of directors. It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, our board does not anticipate declaring any dividends in the foreseeable future. Our Transfer Agent and Warrant Agent The transfer agent for our securities and warrant agent for our warrants is American Stock Transfer Trust Company, 59 Maiden Lane, New York, New York 10038. Shares Eligible for Future Sale Immediately after this offering, we will have 7,580,000 shares of common stock outstanding, or 8,480,000 shares if the underwriters over-allotment option is exercised in full. Of these shares, the 6,000,000 shares sold in this offering, or 6,900,000 shares if the over-allotment option is exercised in full, will be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended, except for any shares purchased by one of our affiliates within the meaning of Rule 144 under the Securities Act, as amended. All of the remaining 1,580,000 shares are restricted securities under Rule 144, in that they were issued in private transactions not involving a public offering. All of those shares are currently available for sale under Rule 144. Notwithstanding this, all of those shares have been placed in escrow and will not be transferable for a period of one year from the consummation of a business combination subject to certain limited exceptions, such as transfers to, family members and trusts for estate planning purposes and upon death, and will only be released prior to that date if we are forced to liquidate, in which case the certificate representing such shares will be destroyed, the approval of our public stockholders, and the consummation of a liquidation, merger, stock exchange or other similar transaction which results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property subsequent to our consummating a business combination with a target business. Table of Contents Rule 144 In general, under Rule 144 as currently in effect, a person who has beneficially owned restricted shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of either of the following: 1% of the number of shares of common stock then outstanding, which will equal 75,800 shares immediately after this offering (or 84,800 if the underwriters exercise their over-allotment option);and the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales under Rule 144 are also limited by manner of sale provisions and notice requirements and to the availability of current public information about us. Rule 144(k) Under Rule 144(k), a person who is not deemed to have been one of our affiliates at the time of or at any time during the three months preceding a sale, and who has beneficially owned the restricted shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell their shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. SEC Position on Rule 144 Sales The Securities and Exchange Commission has taken the position that promoters or affiliates of a blank check company and their transferees, both before and after a business combination, would act as an underwriter under the Securities Act of 1933, as amended, when reselling the securities of a blank check company. Accordingly, the Securities and Exchange Commission believes that those securities can be resold only through a registered offering and that Rule 144 would not be available for those resale transactions despite technical compliance with the requirements of Rule 144. Registration Rights The holders of our 1,580,000 issued and outstanding shares of common stock on the date of this prospectus will be entitled to registration rights pursuant to an agreement to be signed prior to or on the effective date of this offering. The holders of the majority of these shares are entitled to require us, on up to two occasions, to register these shares. The holders of the majority of these shares can elect to exercise these registration rights at any time after the date on which these shares of common stock are released from escrow. In addition, these stockholders have certain piggy-back registration rights on registration statements filed subsequent to the date on which these shares of common stock are released from escrow. We will bear the expenses incurred in connection with the filing of any such registration statements. The holders of the 3,200,000 warrants sold in our private placement are entitled to registration rights pursuant to a subscription agreement signed prior to the date of this offering. The holders of 75% of the 3,200,000 shares of common stock underlying the warrants have the right on two occasions to require us to register those shares of common stock. The demand registration right can be exercised by those holders at any time after we have publicly announced entering into a letter of intent, or made a comparable announcement, regarding a business combination, although such securities remain subject to a lock-up agreement and cannot be transferred or exercised, as the case may be, until the consummation of a business combination. These stockholders also have certain piggy-back registration rights on registration statements filed by us after we have consummated a business combination. We are obligated to bear the expenses for any such demand or piggy-back registrations. Table of Contents Amendments to Our Certificate of Incorporation Our amended and restated certificate of incorporation filed with the State of Delaware contains provisions designed to provide certain rights and protections to our stockholders prior to the consummation of a business combination, including: a requirement that all proposed business combinations be within the homeland security or defense industries or a combination thereof; a requirement that all proposed business combinations be presented to stockholders for approval regardless of whether or not Delaware law requires such a vote; a prohibition against completing a business combination if stockholders owning 35% or more of the shares sold in this offering exercise their redemption rights in lieu of approving a business combination; the right of stockholders voting against a business combination to redeem their shares for a pro-rata portion of the trust account in lieu of participating in a proposed business combination; a requirement that in the event we do not consummate a business combination by the later of 18 months after the consummation of this offering or 24 months after the consummation of this offering in the event that either a letter of intent, an agreement in principle or a definitive agreement to complete a business combination was executed, our purpose and powers will be limited to dissolving, liquidating and winding up; provided, however, that we will reserve our rights under Section 278 of the Delaware General Corporation Law to bring or defend any action, suit or proceeding brought by or against us; a requirement that our management take all actions necessary to liquidate our trust account as part of any plan of dissolution and distribution in the event we do not consummate a business combination by the later of 18 months after the consummation of this offering or 24 months after the consummation of this offering in the event that either a letter of intent, an agreement in principle or a definitive agreement to complete a business combination was executed but was not consummated within such 18 month period; a limitation on stockholders rights to receive a portion of the trust account so that they may only receive a portion of the trust account upon the liquidation of our trust account as part of any plan of dissolution and liquidation or upon the exercise of their redemption rights; and the bifurcation of our board of directors into two classes and the establishment of related procedures regarding the standing and election of such directors. Our amended and restated certificate of incorporation and the underwriting agreement that we will enter into with the underwriters in connection with this offering, prohibit the amendment or modification of any of the foregoing provisions prior to the consummation of a business combination. Additionally, our board of directors has undertaken not to amend or modify the foregoing provisions. While these rights and protections have been established for the purchasers of units in this offering, it is nevertheless possible that the prohibition against amending or modifying these rights and protections at any time prior to the consummation of the business combination could be challenged as unenforceable under Delaware law, although, pursuant to the underwriting agreement we are prohibited from amending or modifying these rights and protections at any time prior to the consummation of the business combination. We have not sought an unqualified opinion regarding the enforceability of the prohibition on amendment or modification of such provisions because we view these provisions as fundamental and contractual terms of this offering. We believe these provisions to be obligations of our company to its stockholders and that investors will make an investment in our company relying, at least in part, on the enforceability of the rights and obligations set forth in these provisions including, without limitation, the prohibition on any amendment or modification of such provisions. As a result, the board of directors will not, and pursuant to section 3.26 of the underwriting agreement cannot, at any time prior to the consummation of a business combination, propose any amendment or modification of our amended and restated certificate of incorporation relating to any of the foregoing provisions and will not support, directly or indirectly, or in any way endorse or recommend that stockholders approve an amendment or modification to such provisions. Table of Contents UNDERWRITING Maxim Group LLC is lead managing underwriter and sole bookrunner of this offering and is acting as representative of the underwriters named below. Subject to the terms and conditions in the underwriting agreement, each underwriter named below has agreed to purchase from us, on a firm commitment basis, the respective number of units shown opposite its name below, at the public offering price, less the underwriting discount set forth on the cover page of this prospectus: Number of Underwriter Units Maxim Group LLC I-Bankers Securities, Inc. Total 6,000,000 The underwriting agreement provides that the underwriters are committed to purchase all of the units offered by this prospectus if they purchase any of the units. This commitment does not apply to the units subject to an over-allotment option granted by us to the underwriters to purchase additional units in this offering. The underwriting agreement also provides that the obligations of the underwriters to pay for and accept delivery of the units are subject to the passing upon of certain legal matters by counsel and certain other conditions. Underwriting Terms Pursuant to the underwriting agreement, we have granted to the underwriters an option, exercisable for 45 days after the date of this prospectus, to purchase up to an additional 900,000 units from us on the same terms and at the same per unit price as the other units being purchased by the underwriters from us. The underwriters may exercise the option solely to cover over-allotments, if any, in the units that the underwriters have agreed to purchase from us. If the over-allotment option is exercised in full, the total public offering price, underwriting discounts and commissions and proceeds to us before expenses will be $69,000,000, $2,160,000 and $66,840,000, respectively. The following table shows the public offering price, underwriting discount to be paid by us to the underwriters and the proceeds, before expenses, to us. This information assumes either no exercise or full exercise by the underwriters of their over-allotment option. Per Unit Without Option With Option Public offering price $ 10.00 $ 60,000,000 $ 69,000,000 Discount(1) $ 0.33 $ 1,980,000 $ 2,160,000 Non-accountable expense allowance(2) $ 0.10 $ 600,000 $ 600,000 Deferred underwriting compensation(3) $ 0.30 $ 1,800,000 $ 2,250,000 Proceeds before expenses(4) $ 9.27 $ 55,620,000 $ 63,990,000 (1) Does not include an additional 3% of the gross proceeds from the sale of the 6,000,000 units in this offering ($1,800,000) and 5% of the gross proceeds from the sale of the 900,000 units subject to the underwriters over-allotment option ($450,000) that will be paid to the underwriters, with interest accrued thereon, only upon consummation of a business combination (and then only with respect to those units as to which the component shares have not been redeemed) which amounts are reflected in this table as deferred underwriting compensation. If a business combination is not consummated and we are liquidated, such amounts will not be paid to the underwriters, but rather will be distributed among our public stockholders. (2) The 1% non-accountable expense allowance is not payable with respect to the units sold upon exercise of the underwriters over-allotment option. (3) The per unit deferred underwriting compensation is $0.30 with respect to units sold in the offering and is $0.50 per unit with respect to the units sold pursuant to the underwriters over-allotment option. The underwriters have agreed to forego their deferred underwriting compensation with respect to each share that we redeem for cash upon the consummation of a business combination. (4) The offering expenses are estimated at $760,000. Table of Contents We have agreed to sell the units to the underwriters at the initial public offering price less the underwriting discount set forth on the cover page of this prospectus. The underwriting agreement also provides that Maxim Group LLC, as representative of the underwriters, will be paid a non-accountable expense allowance equal to 1% of the gross proceeds from the sale of the units offered by this prospectus ($50,000 of which has been previously advanced to Maxim Group LLC), exclusive of any units purchased on exercise of the over-allotment option. In the event the offering is terminated, Maxim Group LLC will return to us the amount previously advanced by us less Maxim Group LLC s actual out-of-pocket expenses incurred in connection with the offering. We estimate that the total expenses of the offering payable by us, not including underwriting discounts, commissions, the non-accountable expense allowance and not taking into consideration the underwriters over-allotment option, will be approximately $760,000. These expenses include, but are not limited to, SEC registration fees, NASD filing fees, AMEX listing fees, accounting fees and expenses, legal fees and expenses, printing and engraving expenses, transfer agent fees and blue sky fees and expenses. The underwriters will initially offer the units to be sold in this offering directly to the public at the initial public offering price set forth on the cover of this prospectus and to selected dealers at the initial public offering price less a selling concession not in excess of $ per unit. The underwriters may allow, and the selected dealers may reallow, a concession not in excess of $ per unit on sales to brokers and dealers. After the offering, the underwriters may change the offering price and other selling terms. No change in those terms will change the amount of proceeds to be received by us as set forth on the cover of this prospectus. We have also agreed to sell to Maxim Group LLC for $100, an option to purchase up to a total of 105,000 units, exercisable at $11.00 per unit. The units issuable upon exercise of this option are identical to those offered by this prospectus. This option commences on the later of the consummation of a business combination and 24 months from the date of this prospectus and expiring five years from the date of this prospectus. The option and the 105,000 units, the 105,000 shares of common stock and the 105,000 warrants underlying such units, and the 105,000 shares of common stock underlying such warrants, have been deemed compensation by the NASD and are therefore subject to a 180-day lock-up pursuant to Rule 2710(g)(1) of the NASD Conduct Rules. Additionally, the option may not be sold, transferred, assigned, pledged or hypothecated for a 24 months (including the foregoing 180-day period) following the date of this prospectus. However, the option may be transferred to any underwriter and selected dealer participating in the offering and their bona fide officers or partners. Thereafter, the representative s units will be transferable provided such transfer is in accordance with the provisions of the Securities Act of 1933, as amended. Although the purchase option and its underlying securities have been registered under the registration statement of which this prospectus forms a part of, the option grants to holders demand and piggy back rights for periods of five and seven years, respectively, from the date of this prospectus with respect to the registration under the Securities Act of 1933, as amended of the securities directly and indirectly issuable upon exercise of the option. We will bear all fees and expenses attendant to registering the securities, other than underwriting commissions which will be paid for by the holders themselves. The exercise price and number of units issuable upon exercise of the option may be adjusted in certain circumstances including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. However, the option will not be adjusted for issuances of common stock at a price below its exercise price. We will set aside and at all times have available a sufficient number of shares of common stock to be issued upon exercise of the representative s units. The option may expire unexercised and the underlying warrants unredeemed if we fail to maintain an effective registration statement covering the units (including the common stock and warrants) issuable upon exercise of the option. There are no circumstances upon which we will be required to net cash settle the option. We have engaged Maxim Group LLC, the representative of the underwriters, on a non-exclusive basis, as our agent for the solicitation of the exercise of the warrants. To the extent not inconsistent with the guidelines of the NASD and the rules and regulations of the SEC, we have agreed to pay the representative for bona fide services rendered a cash commission equal to 5% of the exercise price for each warrant exercised more than one year after the date of this prospectus either for cash or by cashless exercise, in either case only if the Table of Contents exercise was solicited by the underwriters. In addition to soliciting, either orally or in writing, the exercise of the warrants, the representative s services may also include disseminating information, either orally or in writing, to warrant holders about us or the market for our securities, and assisting in the processing of the exercise of the warrants. No compensation will be paid to the representative upon the exercise of the warrants if: the market price of the underlying shares of common stock is lower than the exercise price; the holder of the warrants has not confirmed in writing that Maxim Group LLC solicited the exercise; the warrants are held in a discretionary account; the warrants are exercised in an unsolicited transaction; or the arrangement to pay the commission is not disclosed in the prospectus provided to warrant holders at the time of exercise. We have given Maxim Group LLC the right to designate an observer to our board of directors for two years following the date of this prospectus. The observer will have the right to attend all board meetings, receive all notices, correspondence and communications sent to the board, and be reimbursed for expenses. We will require the observer to sign a confidentiality agreement that restricts the advisor from disclosing any of our confidential information received by the observer as a result of attending meetings of our board of directors. The observer will not be allowed to attend any meetings of our board of directors unless such a confidentiality agreement is signed and delivered to us. Prior to this offering there has been no public market for any of our securities. The public offering price of the units and the terms of the warrants were negotiated between us and the representative. Factors considered in determining the prices and terms of the units, including the common stock and warrants underlying the units, include: the history and prospects of companies whose principal business is the acquisition of other companies; prior offerings of those companies; our prospects for acquiring an operating business at attractive values; our capital structure; an assessment of our management and their experience in identifying operating companies; general conditions of the securities markets at the time of the offering; and other factors as were deemed relevant. However, although these factors were considered, the determination of our offering price is more arbitrary than the pricing of securities for an operating company in a particular industry since the underwriters are unable to compare our financial results and prospects with those of public companies operating in the same industry. Although they are not obligated to do so, any of the underwriters may introduce us to potential target businesses or assist us in raising additional capital, as needs may arise in the future, but there are no preliminary agreements or understandings between any of the underwriters and any potential targets. We are not under any contractual obligation to engage any of the underwriters to provide any services for us after this offering, but if we do, we may pay the underwriters a finder s fee that would be determined at that time in an arm s length negotiation where the terms would be fair and reasonable to each of the interested parties; provided that no agreement will be entered into and no fee will be paid prior to the one year anniversary of the date of this prospectus. In connection with this offering, the underwriters may distribute prospectuses electronically. No forms of prospectus other than printed prospectuses and electronically distributed prospectuses that are printable in Adobe PDF format will be used in connection with this offering. Table of Contents The underwriters have informed us that they will not confirm sales of units offered by this prospectus to accounts over which they exercise discretionary authority without obtaining the specific approval of the account holder. In connection with this offering, our underwriters may engage in stabilizing transactions, over-allotment transactions, covering transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934, as amended. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed the maximum price specified in Regulation M, which generally requires, among other things, that no stabilizing bid shall be initiated at or increased to a price higher than the lower of the offering price or the highest independent bid for the security on the principal trading market for the security. Over-allotment involves sales by the underwriters of units in excess of the number of units the underwriters are obligated to purchase, which creates a short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of units over-allotted by the underwriters is not greater than the number of units that it may purchase in the over-allotment option. In a naked short position, the number of units involved is greater than the number of units in the over-allotment option. The underwriters may close out any covered short position by either exercising their over-allotment option or purchasing units in the open market. Covering transactions involve the purchase of units in the open market after the distribution has been completed in order to cover short positions. In determining the source of units to close out the short position, the underwriters will consider, among other things, the price of units available for purchase in the open market as compared to the price at which it may purchase units through the over-allotment option. If the underwriters sell more units than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying units in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the units in the open market after pricing that could adversely affect investors who purchase in this offering. Penalty bids permit the underwriters to reclaim a selling concession from a selected dealer when the units originally sold by the selected dealer is purchased in stabilizing or syndicate covering transactions. These stabilizing transactions, covering transactions and penalty bids may have the effect of raising or maintaining the market price of our units or preventing or retarding a decline in the market price of our units. As a result, the price of our units may be higher than the price that might otherwise exist in the open market. However, neither we nor the underwriters make any representation or prediction as to the effect the transactions described above may have on the price of our securities. If any of these transactions are commenced, they may be discontinued without notice at any time. The underwriting agreement provides for indemnification between us and the underwriters against specified liabilities, including liabilities under the Securities Act of 1933, as amended, and for contribution by us and the underwriters to payments that may be required to be made with respect to those liabilities. We have been advised that, in the opinion of the Securities and Exchange Commission, indemnification against liabilities under the Securities Act of 1933, as amended, is against public policy as expressed in the Securities Act of 1933, as amended, and is therefore, unenforceable. Foreign Regulatory Restrictions on Purchase of the Units We have not taken any action to permit a public offering of the units outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to this offering of units and the distribution of the prospectus outside the United States. Table of Contents Italy. This offering of the units has not been cleared by Consob, the Italian Stock Exchange s regulatory agency of public companies, pursuant to Italian securities legislation and, accordingly, no units may be offered, sold or delivered, nor may copies of this prospectus or of any other document relating to the units be distributed in Italy, except (1) to professional investors (operatori qualificati); or (2) in circumstances which are exempted from the rules on solicitation of investments pursuant to Decree No. 58 and Article 33, first paragraph, of Consob Regulation No. 11971 of May 14, 1999, as amended. Any offer, sale or delivery of the units or distribution of copies of this prospectus or any other document relating to the units in Italy under (1) or (2) above must be (i) made by an investment firm, bank or financial intermediary permitted to conduct such activities in Italy in accordance with the Decree No. 58 and Legislative Decree No. 385 of September 1, 1993, or the Banking Act; and (ii) in compliance with Article 129 of the Banking Act and the implementing guidelines of the Bank of Italy, as amended from time to time, pursuant to which the issue or the offer of securities in Italy may need to be preceded and followed by an appropriate notice to be filed with the Bank of Italy depending, inter alia, on the aggregate value of the securities issued or offered in Italy and their characteristics; and (iii) in compliance with any other applicable laws and regulations. Germany. The offering of the units is not a public offering in the Federal Republic of Germany. The units may only be acquired in accordance with the provisions of the Securities Sales Prospectus Act (Wertpapier-Verkaudfspropsektgestz), as amended, and any other applicable German law. No application has been made under German law to publicly market the units in or out of the Federal Republic of Germany. The units are not registered or authorized for distribution under the Securities Sales Prospectus Act and accordingly may not be, and are not being, offered or advertised publicly or by public promotion. Therefore, this prospectus is strictly for private use and the offering is only being made to recipients to whom the document is personally addressed and does not constitute an offer or advertisement to the public. The units will only be available to persons who, by profession, trade or business, buy or sell shares for their own or a third party s account. France. The units offered by this prospectus may not be offered or sold, directly or indirectly, to the public in France. This prospectus has not been or will not be submitted to the clearance procedure of the Autorit des March s Financiers, or the AMF, and may not be released or distributed to the public in France. Investors in France may only purchase the units offered by this prospectus for their own account and in accordance with articles L. 411-1, L. 441-2 and L. 412-1 of the Code Mon taire et Financier and decree no. 98-880 dated October 1, 1998, provided they are qualified investors within the meaning of said decree. Each French investor must represent in writing that it is a qualified investor within the meaning of the aforesaid decree. Any resale, directly or indirectly, to the public of the shares offered by this prospectus may be effected only in compliance with the above mentioned regulations. Les actions offertes par ce document d information ne peuvent pas tre, directement ou indirectement, offertes ou vendues au public en France. Ce document d information n a pas t ou ne sera pas soumis au visa de l Autorit des March s Financiers et ne peut tre diffus ou distribu au public en France. Les investisseurs en France ne peuvent acheter les actions offertes par ce document d information que pour leur compte propre et conform ment aux articles L. 411-1, L. 441-2 et L. 412-1 du Code Mon taire et Financier et du d cret no. 98-880 du 1 octobre 1998, sous r serve qu ils soient des investisseurs qualifi s au sens du d cret susvis . Chaque investisseur doit d clarer par crit qu il est un investisseur qualifi au sens du d cret susvis . Toute revente, directe ou indirecte, des actions offertes par ce document d information au public ne peut tre effectu e que conform ment la r glementation susmentionn e. Switzerland. This prospectus may only be used by those persons to whom it has been directly handed out by the offeror or its designated distributors in connection with the offer described therein. The units are only offered to those persons and/or entities directly solicited by the offeror or its designated distributors, and are not offered to the public in Switzerland. This prospectus constitutes neither a public offer in Switzerland nor an issue prospectus in accordance with the respective Swiss legislation, in particular but not limited to Article 652A Swiss Code Obligations. Accordingly, this prospectus may not be used in connection with any other offer, whether private or public and shall in particular not be distributed to the public in Switzerland. United Kingdom. In the United Kingdom, the units offered by this prospectus are directed to and will only be available for purchase to a person who is an exempt person as referred to at paragraph (c) below and Table of Contents who warrants, represents and agrees that: (a) it has not offered or sold, will not offer or sell, any units offered by this prospectus to any person in the United Kingdom except in circumstances which do not constitute an offer to the public in the United Kingdom for the purposes of the section 85 of the Financial Services and Markets Act 2000 (as amended) ( FSMA ); and (b) it has complied and will comply with all applicable provisions of FSMA and the regulations made thereunder in respect of anything done by it in relation to the units offered by this prospectus in, from or otherwise involving the United Kingdom; and (c) it is a person who falls within the exemptions to Section 21 of the FSMA as set out in The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 ( the Order ), being either an investment professional as described under Article 19 or any body corporate (which itself has or a group undertaking has a called up share capital or net assets of not less than 500,000 (if more than 20 members) or otherwise 5 million) or an unincorporated association or partnership (with net assets of not less than 5 million) or is a trustee of a high value trust or any person acting in the capacity of director, officer or employee of such entities as defined under Article 49(2)(a) to (d) of the Order, or a person to whom the invitation or inducement may otherwise lawfully be communicated or cause to be communicated. The investment activity to which this document relates will only be available to and engaged in only with exempt persons referred to above. Persons who are not investment professionals and do not have professional experience in matters relating to investments or are not an exempt person as described above, should not review nor rely or act upon this document and should return this document immediately. It should be noted that this document is not a prospectus in the United Kingdom as defined in the Prospectus Regulations 2005 and has not been approved by the Financial Services Authority or any competent authority in the United Kingdom. Israel. The units offered by this prospectus have not been approved or disapproved by the Israeli Securities Authority (ISA). The units may not be offered or sold, directly or indirectly, to the public in Israel. The ISA has not issued permits, approvals or licenses in connection with the offering of the units or publishing the prospectus; nor has it authenticated the details included herein, confirmed their reliability or completeness, or rendered an opinion as to the quality of the units being offered. Any resale, directly or indirectly, to the public of the units offered by this prospectus is subject to restrictions on transferability and must be effected only in compliance with the Israeli securities laws and regulations. Sweden. Neither this prospectus nor the units offered hereunder have been registered with or approved by the Swedish Financial Supervisory Authority under the Swedish Financial Instruments Trading Act (1991:980) (as amended), nor will such registration or approval be sought. Accordingly, this prospectus may not be made available nor may the units offered hereunder be marketed or offered for sale in Sweden other than in circumstances which are deemed not to be an offer to the public in Sweden under the Financial Instruments Trading Act. This prospectus may not be distributed to the public in Sweden and a Swedish recipient of the prospectus may not in any way forward the prospectus to the public in Sweden. Norway. This prospectus has not been produced in accordance with the prospectus requirements laid down in the Norwegian Securities Trading Act 1997, as amended. This prospectus has not been approved or disapproved by, or registered with, either the Oslo Stock Exchange or the Norwegian Registry of Business Enterprises. This prospectus may not, either directly or indirectly be distributed to Norwegian potential investors. Denmark. This prospectus has not been prepared in the context of a public offering of securities in Denmark within the meaning of the Danish Securities Trading Act No. 171 of 17 March 2005, as amended from time to time, or any Executive Orders issued on the basis thereof and has not been and will not be filed with or approved by the Danish Financial Supervisory Authority or any other public authority in Denmark. The offering of units will only be made to persons pursuant to one or more of the exemptions set out in Executive Order No. 306 of 28 April 2005 on Prospectuses for Securities Admitted for Listing or Trade on a Regulated Market and on the First Public Offer of Securities exceeding EUR 2,500,000 or Executive Order No. 307 of 28 April 2005 on Prospectuses for the First Public Offer of Certain Securities between EUR 100,000 and EUR 2,500,000, as applicable. Table of Contents LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by Eiseman Levine Lehrhaupt Kakoyiannis, P.C., New York, New York. Ellenoff Grossman Schole LLP, New York, New York is acting as counsel for the underwriters in this offering. EXPERTS The financial statements included in this prospectus and in the registration statement have been audited by Goldstein Golub Kessler LLP an independent registered public accounting firm, to the extent and for the period set forth in their report appearing elsewhere in this prospectus and in the registration statement. The financial statements and the report of Goldstein Golub Kessler LLP are included in reliance upon their report given upon the authority of Goldstein Golub Kessler LLP as experts in auditing and accounting. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the SEC a registration statement on Form S-1, which includes exhibits, schedules and amendments, under the Securities Act, with respect to this offering of our securities. Although this prospectus, which forms a part of the registration statement, contains all material information included in the registration statement, parts of the registration statement have been omitted as permitted by rules and regulations of the SEC. We refer you to the registration statement and its exhibits for further information about us, our securities and this offering. The registration statement and its exhibits, as well as our other reports filed with the SEC, can be inspected and copied at the SEC s public reference room at 100 F. Street, N.E., Washington, D.C. 20549-1004. The public may obtain information about the operation of the public reference room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a web site at http://www.sec.gov which contains the Form S-1 and other reports, proxy and information statements and information regarding issuers that file electronically with the SEC. Table of Contents PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The estimated expenses payable by us in connection with the offering described in this registration statement (other than the underwriting discount and commissions and the representative s non-accountable expense allowance) will be as follows: Initial Trustees fee $ 1,000 (1) SEC Registration Fee 16,135 NASD filing fee 14,209 AMEX listing fee 85,000 Accounting fees and expenses 60,000 Printing and engraving expenses 100,000 Directors Officers liability insurance premiums 150,000 (2) Legal fees and expenses 440,000 Blue sky services and expenses 18,650 Miscellaneous 26,006 (3) Total $ 911,000 (1) In addition to the initial acceptance fee that is charged by American Stock Transfer Trust Company, as trustee following the offering, the registrant will be required to pay to American Stock Transfer Trust Company annual fees of approximately $3,000 for acting as trustee, approximately $4,800 for acting as transfer agent of the registrant s common stock, approximately $2,400 for acting as warrant agent for the registrant s warrants and approximately $1,800 for acting as escrow agent. (2) This amount represents the approximate amount of Director and Officer liability insurance premiums that we anticipate paying following the consummation of our initial public offering and until we consummate a business combination. (3) This amount represents additional expenses that may be incurred by us in connection with the offering over and above those specifically listed above, including distribution and mailing costs. Item 14. Indemnification of Directors and Officers Our amended and restated certificate of incorporation provides that all of our directors, officers, employees and agents shall be entitled to be indemnified by us to the fullest extent permitted by Section 145 of the Delaware General Corporation Law. Section 145 of the Delaware General Corporation Law concerning indemnification of officers, directors, employees and agents is set forth below. Section 145. Indemnification of officers, directors, employees and agents; insurance. (a) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person s conduct was unlawful. The termination of any action, suit or II-1 Table of Contents proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the person s conduct was unlawful. (b) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys fees) actually and reasonably incurred by such person in connection therewith. (d) Any indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in subsections (a) and (b) of this section. Such determination shall be made, with respect to a person who is a director or officer at the time of such determination, (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders. (e) Expenses (including attorneys fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including attorneys fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the corporation deems appropriate. (f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person s official capacity and as to action in another capacity while holding such office. (g) A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person s status as such, whether or not the corporation would have the power to indemnify such person against such liability under this section. II-2 Table of Contents (h) For purposes of this section, references to the corporation shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. (i) For purposes of this section, references to other enterprises shall include employee benefit plans; references to fines shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to serving at the request of the corporation shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner not opposed to the best interests of the corporation as referred to in this section. (j) The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (k) The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. The Court of Chancery may summarily determine a corporation s obligation to advance expenses (including attorneys fees). Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers, and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment of expenses incurred or paid by a director, officer or controlling person in a successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to the court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. Paragraph B of Article Eighth of our amended and restated certificate of incorporation provides: The Corporation, to the full extent permitted by Section 145 of the GCL, as amended from time to time, shall indemnify all persons whom it may indemnify pursuant thereto. Expenses (including attorneys fees) incurred by an officer or director in defending any civil, criminal, administrative, or investigative action, suit or proceeding for which such officer or director may be entitled to indemnification hereunder shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized hereby. Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement, we have agreed to indemnify the underwriters, and the underwriters have agreed to indemnify us, against certain civil liabilities that may be incurred in connection with this offering, including certain liabilities under the Securities Act. II-3 Table of Contents Item 15. Recent Sales of Unregistered Securities (a) During the past three years, we sold the following shares of common stock without registration under the Securities Act: Number of Stockholders Shares Steven M. Wasserman 780,000 Robert B. Blaha 420,000 Tukwila Group, LLC 100,000 Gary E. Johnson 50,000 Michael Weinstein 50,000 Robert T. Herres 50,000 Carol A. DiBattiste 50,000 Ronald R. Fogleman 50,000 Laura Haffner 50,000 Such shares were issued on July 14, 2005 in connection with our organization pursuant to the exemption from registration contained in Section 4(2) of the Securities Act as they were sold to sophisticated, wealthy individuals and an entity. The shares issued to the individuals and entity above were sold for an aggregate offering price of $25,000 at an average purchase price of $0.0158 per share. No underwriting discounts or commissions were paid with respect to such sales. Steven M. Wasserman, our President, Chief Executive Officer and Co-Chairman of the board of directors and Constantinos Tsakiris, a member of our board of directors, have agreed to purchase an aggregate of 3,200,000 warrants no less than two days prior to the effectiveness of the registration statement for our initial public offering at $1.00 per warrant, in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2). No underwriting discounts or commissions were paid with respect to such sales. II-4 Table of Contents Item 16. Exhibits and Financial Statement Schedules (a) The following exhibits are filed as part of this Registration Statement: Exhibit No. Description 1.1 Form of Underwriting Agreement.** 3.1 Fourth Amended and Restated Certificate of Incorporation.* 3.2 Amended and Restated By-laws. * 4.1 Specimen Unit Certificate.* 4.2 Specimen Common Stock Certificate.* 4.3 Specimen Warrant Certificate.* 4.4 Form of Warrant Agreement between American Stock Transfer Trust Company and the Registrant.*** 5.1 Opinion of Eiseman Levine Lehrhaupt Kakoyiannis PC.*** 10.1.1 Letter Agreement among the Registrant, Maxim Group LLC and Steven M. Wasserman.* 10.1.2 Letter Agreement among the Registrant, Maxim Group LLC and Robert B. Blaha.* 10.1.3 Letter Agreement among the Registrant, Maxim Group LLC and Michael Weinstein.* 10.1.4 Letter Agreement among the Registrant, Maxim Group LLC and Carol A. DiBattiste.* 10.1.5 Letter Agreement among the Registrant, Maxim Group LLC and Robert T. Herres.* 10.1.6 Letter Agreement among the Registrant, Maxim Group LLC and Gary E. Johnson.* 10.1.7 Letter Agreement among the Registrant, Maxim Group LLC and Ronald R. Fogleman.* 10.1.8 Letter Agreement among the Registrant, Maxim Group LLC and Laura Haffner.* 10.1.9 letter Agreement among the Registrant, Maxim Group LLC and Constantinos Tsakiris.* 10.1.10 Letter Agreement among the Registrant, Maxim Group LLC and Tukwila Group LLC.* 10.2 Form of Investment Management Trust Agreement between American Stock Transfer Trust Company and the Registrant.*** 10.3 Form of Stock Escrow Agreement between the Registrant, American Stock Transfer Trust Company and the Initial Stockholders.** 10.4 Form of Registration Rights Agreement among the Registrant and the Initial Stockholders.* 10.5 Office Services Agreement by and between the Registrant and ASG Management, Inc.* 10.6.1 Promissory Note, dated May 18, 2005, as amended on January 16, 2007, issued to Steven M. Wasserman, in the principal amount of $137,802.50.* 10.6.2 Promissory Note, dated May 18, 2005, as amended on January 16, 2007, issued to Robert B. Blaha, in the principal amount of $50,000.* 10.6.3 Amended and Restated Letter Agreement between the Registrant and Steven M. Wasserman with respect to loan of up to $250,000.*** 10.7 Form of Unit Purchase Option Agreement between the Registrant and Maxim Group LLC.*** 10.8 Form of Subscription Agreement by and among the Registrant, Steven M. Wasserman and Constantinos Tsakiris.*** 14.1 Code of Ethics.* 23.1 Consent of Goldstein Golub Kessler LLP.** 23.2 Consent of Eiseman Levine Lehrhaupt Kakoyiannis PC (included in Exhibit 5.1).* 24 Power of Attorney (included in signature page to Registration Statement). * previously filed ** filed herewith *** amended herewith II-5 Table of Contents Item 17. Undertakings (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: i. To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; ii. To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the Calculation of Registration Fee table in the effective registration statement. iii. To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) The undersigned hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (d) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 Table of Contents SIGNATURE Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 16th day of March, 2007. ALPHA SECURITY GROUP CORPORATION By: /s/ Steven M. Wasserman Name: Steven M. Wasserman Title: Chief Executive Officer and President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Name Position Date /s/ Steven M. Wasserman Steven M. Wasserman Chief Executive Officer, President, Secretary and Co-Chairman of the Board of Directors (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) March 16, 2007 /s/ Robert B. Blaha Robert B. Blaha Chief Management Officer, Executive Vice President and a Director March 16, 2007 * Gary E. Johnson Co-Chairman of the Board of Directors March 16, 2007 * Carol A. DiBattiste Director March 16, 2007 * Ronald R. Fogleman Director March 16, 2007 * Robert T. Herres Director March 16, 2007 * Constantinos Tsakiris Director March 16, 2007 By: /s/ Steven M. Wasserman Steven M. Wasserman, Attorney-In-Fact II-7 Table of Contents EXHIBIT INDEX Exhibit No. Description 1 .1 Form of Underwriting Agreement.** 3 .1 Fourth Amended and Restated Certificate of Incorporation.* 3 .2 Amended and Restated By-laws.* 4 .1 Specimen Unit Certificate.* 4 .2 Specimen Common Stock Certificate.* 4 .3 Specimen Warrant Certificate.* 4 .4 Form of Warrant Agreement between American Stock Transfer Trust Company and the Registrant.*** 5 .1 Opinion of Eiseman Levine Lehrhaupt Kakoyiannis PC.*** 10 .1.1 Letter Agreement among the Registrant, Maxim Group LLC and Steven M. Wasserman.* 10 .1.2 Letter Agreement among the Registrant, Maxim Group LLC and Robert B. Blaha.* 10 .1.3 Letter Agreement among the Registrant, Maxim Group LLC and Michael Weinstein.* 10 .1.4 Letter Agreement among the Registrant, Maxim Group LLC and Carol A. DiBattiste.* 10 .1.5 Letter Agreement among the Registrant, Maxim Group LLC and Robert T. Herres.* 10 .1.6 Letter Agreement among the Registrant, Maxim Group LLC and Gary E. Johnson.* 10 .1.7 Letter Agreement among the Registrant, Maxim Group LLC and Ronald R. Fogleman.* 10 .1.8 Letter Agreement among the Registrant, Maxim Group LLC and Laura Haffner.* 10 .1.9 Letter Agreement among the Registrant, Maxim Group LLC and Constantinos Tsakiris.* 10 .1.10 Letter Agreement among the Registrant, Maxim Group LLC and the Tukwila Group LLC.* 10 .2 Form of Investment Management Trust Agreement between American Stock Transfer Trust Company and the Registrant.*** 10 .3 Form of Stock Escrow Agreement between the Registrant, American Stock Transfer Trust Company and the Initial Stockholders.** 10 .4 Form of Registration Rights Agreement among the Registrant and the Initial Stockholders.* 10 .5 Office Services Agreement by and between the Registrant and ASG Management, Inc.* 10 .6.1 Promissory Note, dated May 18, 2005, as amended on January 16, 2007, issued to Steven M. Wasserman, in the amount of $137,802.50.* 10 .6.2 Promissory Note, dated May 18, 2005, as amended on January 16, 2007, issued to Robert B. Blaha, in the amount of $50,000.* 10 .6.3 Amended and Restated Letter Agreement between the Registrant and Steven M. Wasserman with respect to loan of up to $250,000.*** 10 .7 Form of Unit Purchase Option Agreement between the Registrant and Maxim Group LLC.*** 10 .8 Form of Subscription Agreement by and among the Registrant, Steven M. Wasserman and Constantinos Tsakiris.*** 14 .1 Code of Ethics.* 23 .1 Consent of Goldstein Golub Kessler LLP.** 23 .2 Consent of Eiseman Levine Lehrhaupt Kakoyiannis PC (included in Exhibit 5.1).* 24 Power of Attorney (included in signature page to Registration Statement).* * previously filed ** filed herewith *** amended herewith II-8 Table of Contents The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is declared effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Preliminary Prospectus Subject to Completion, dated March 16, 2007 $60,000,000 6,000,000 units Alpha Security Group Corporation is a Business Combination Companytm, BCCtm, formed in April 2005. A BCC is a blank check company formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition or other similar business combination, an unidentified operating business. We intend to focus on identifying a prospective target business in the U.S. homeland security or defense industries or a combination thereof. We do not have any specific merger, capital stock exchange, asset acquisition or other similar business combination under consideration and have not contacted any prospective target business or had any discussion, formal or otherwise, with respect to such a transaction. This is the initial public offering of our securities. We are offering 6,000,000 units at an offering price of $10.00 per unit. Each unit consists of one share of common stock and one warrant to purchase one share of common stock. Prior to this offering no public market has existed for the units, our common stock or the warrants. Each warrant entitles the holder to purchase one share of our common stock at a price of $7.50. Each warrant will become exercisable on the later of our completion of a business combination or , 2008 [the first anniversary of the date of this prospectus], and will expire on , 2011 [the fourth anniversary of the date of this prospectus], or earlier upon redemption. There is presently no market for our units, common stock or warrants. We have applied to have our units listed on the American Stock Exchange under the symbol HDSU on or promptly after the date of this prospectus. Once the securities comprising the units begin separate trading, the common stock and warrants will be traded on the American Stock Exchange under the symbols HDS and HDSW , respectively. Investing in our securities involves a high degree of risk. See Risk Factors beginning on page 16 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Underwriting Public discount and Proceeds, before offering price commissions (1)(2) expenses, to us Per unit $ 10.00 $ 0.33 $ 9.67 Total $ 60,000,000 $ 1,980,000 $ 58,020,000 (1) Does not include a non-accountable expense allowance in the amount of 1% of the gross proceeds, or $0.10 per unit ($600,000 in total) payable to Maxim Group LLC. (2) Does not include deferred underwriting compensation in the amount of 3% of the gross proceeds, or $0.30 per unit (up to $1,800,000), payable to Maxim Group LLC only upon consummation of a business combination and then only with respect to those units as to which the component shares have not been redeemed. The deferred underwriting compensation will be equal to 5% of any of the gross proceeds from the sale of units acquired pursuant to the exercise of the underwriters over-allotment option, or $0.50 per unit, for total deferred underwriting compensation to Maxim Group LLC of up to $2,250,000 (plus interest earned thereon) if the over-allotment option is exercised in full. Of the net proceeds we receive from this offering and the private placement, $60,000,000 ($68,820,000 if the underwriters over-allotment option is exercised in full) will be deposited into a trust account at JP MorganChase New York, New York maintained by American Stock Transfer Trust Company acting as trustee. This amount includes up to $1,800,000 ($0.30 per unit), or $2,250,000 ($0.50 per over-allotment unit if the underwriters over-allotment option is exercised in full) which will be paid to Maxim Group LLC if a business combination is consummated, but which will be forfeited by Maxim Group LLC if a business combination is not consummated. As a result, our public stockholders will receive, subject to any valid claims by our creditors which are not covered by amounts in the trust account or indemnities provided by our officers and directors, the full purchase price of $10.00 per unit (plus a portion of the interest earned on the trust account, but net of: (i) taxes payable on interest earned, State of Delaware franchise taxes, repayment of up to $250,000 of an additional officer loan to be made on or prior to the closing of this offering by Steven M. Wasserman (such loan to be repaid within 90 days of the closing of this offering) and (ii) up to $1,825,000 of interest income earned on the trust account ($1,925,000 if the over-allotment option is exercised in full), released to us to fund our working capital and dissolution and liquidation expenses if we fail to consummate a business combination). We shall not be entitled to draw upon the interest income earned on the $1,800,000 in deferred underwriting discounts (or $2,250,000 if the underwriters over-allotment option is exercised in full), which will be paid to Maxim Group LLC if a business combination is consummated, but which will be forfeited by Maxim Group LLC if a business combination is not consummated. Under Delaware law, claims of our creditors will have priority over the distribution to our stockholders of amounts held in the trust account. We are offering the units for sale on a firm commitment basis. Maxim Group LLC, acting as representative of the underwriters, expects to deliver our securities to investors in the offering on or about , 2007. Maxim Group LLC I-Bankers Securities, Inc. Sole Bookrunner The date of this prospectus is , Table of Contents Until , 2007, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. No dealer, salesperson or any other person is authorized to give any information or make any representations in connection with this offering other than those contained in this prospectus and, if given or made, the information or representations must not be relied upon as having been authorized by us. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the securities offered by this prospectus, or an offer to sell or a solicitation of an offer to buy any securities by anyone in any jurisdiction in which the offer or solicitation is not authorized or is unlawful. TABLE OF CONTENTS Page Prospectus Summary 1
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+Prospectus Summary 1
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+PROSPECTUS SUMMARY
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+3
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+RISK FACTORS
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+6
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+DESCRIPTION OF OUR BUSINESS
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+15
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+SELECTED FINANCIAL DATA
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+19
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+MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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+19
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+AND RESULTS OF OPERATIONS
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+19
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+USE OF PROCEEDS
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+24
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+MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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+24
+
+DESCRIPTION OF OUR AUTHORIZED CAPITAL
+
+25
+
+DIRECTORS AND
+
+EXECUTIVE
+
+ OFFICERS
+
+26
+
+LITIGATION
+
+29
+
+CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
+
+29
+
+CORPORATE GOVERNANCE
+
+30
+
+EXECUTIVE COMPENSATION
+
+30
+
+SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
+
+36
+
+SELLING STOCKHOLDERS
+
+37
+
+DILUTION
+
+40
+
+PLAN OF DISTRIBUTION
+
+40
+
+EXPERTS
+
+43
+
+LEGAL MATTERS
+
+43
+
+Page 2 of 79
+
+PROSPECTUS SUMMARY
+
+This summary highlights selected information contained elsewhere in this prospectus. It is not complete and may not contain all of the information that is important to you. To understand this offering fully, you should read the entire prospectus carefully. Investors should carefully consider the information set forth under the heading Risk Factors. In this prospectus, unless otherwise indicated, the terms International Power Group, we, us, and our refer to International Power Group, LTD.
+
+Our Company
+
+We are a development stage company that was incorporated in the State of Delaware on November 30, 1998. We plan to build and operate WTE facilities ( WTE ) to process solid and hazardous wastes by incineration on our own and through collaboration with strategic partners and others. We expect this processing will produce marketable electricity, potable water and components in construction materials including cement and road beds. 
+
+Our business plan is to locate, finance, build and operate WTE facilities for governmental entities and others charged with the disposal of municipal, commercial, industrial and certain hazardous wastes. We intend to focus on municipalities that have significant waste-handling and land fill problems and areas that can benefit from potable water and additional electricity production. Our primary marketing strategies include direct contact with government officials and large producers and handlers of waste. We also intend to rely on limited and highly targeted advertising. Integral to these methods is the development of strong brand identification for us coupled with increasing awareness of our target markets in the financial, ecological and tactical advantages of WTE technology.
+
+We have access to components and technologies that incinerate solid waste and hazardous waste at high temperatures. The incinerator produces steam, which drives a turbine which produces electricity and condenses the steam into water. The electricity and steam drive further processes which scrub smoke-stack air emissions, produce potable water, ash and enough excess electricity to sell. We believe we can customize the operation of WTE facilities to suit community needs by maximizing electricity or potable water, with little or no loss of efficiency or environmental friendliness.
+
+We believe our WTE facilities will generate revenues for ourselves, waste generators and collectors, and governments charged with disposal. We expect that our facilities will reduce the potential liabilities of waste generators and collectors for land-fill clean-up and reduce the need for governments to create land-fills. We anticipate three primary income streams: (i) tipping fees, (ii) the sale of electricity and (iii) the sale of potable water. We also expect to augment revenues by selling up to 70% of the ash produced from the processes as construction material, thereby also reducing our disposal costs.
+
+We plan to build plants that are comprised of lines or modules. Initially, each plant will have two to six lines that will cost in the range of $30 million to $50 million per line to construct, depending on the type of waste we are to receive. Each line is estimated to consume approximately 100 tons of waste per day per line. These estimated costs do not include land acquisition costs, legal fees or management time. We therefore need substantial additional capital to undertake plant development and construction and sales efforts. If we cannot obtain such financing, we will not be able to execute our business plan or continue to operate.
+
+We recently purchased proprietary patented technologies, including AddPower, a low temperature turbine (LTT), and ScrubPower, a special emission-to-energy system, from three Swedish entities - Anovo AB Angelholm, AddPower AB Angelholm, and SUPE Ltd - for a total consideration of $2.8 million. We plan to use these technologies to increase the efficiency of our own planned WTE facilities. We also believe that we will be able to sell these technologies to other companies in the energy space in order to help these companies increase their output of electricity. 
+
+We believe that the acquisition of these technologies,
+
+including AddPower,
+
+ will allow us to convert greater quantities of heat, produced from boilers and turbines, and potentially increase the output of salable electricity by 20% to 30% over technologies that are currently available. We also believe that the LTT technology will provide us with an efficient low-temp turbine which is powered by a proprietary fluid to drive the turbine and produce electricity at approximately 200 F, whereas most conventional boilers and turbines can only produce electricity at temperatures between 600 - 800 F.
+
+ 
+
+Page 3 of 79
+
+During the last fiscal year we developed contacts in several countries that we believe may lead to the construction of WTE facilities. These contacts are located, and WTE facilities are proposed, in the Kingdom of Saudi Arabia, Mexico, Egypt and the United States. The Kingdom of Saudi Arabia s Presidency of Metrology and Environment issued to us in July 2006 an environmental license which we expect will enable us to establish WTE plants in this country. We have identified certain countries and geographic regions where, due to varying combinations of land fill shortages, energy needs and potable water scarcity, we believe WTE technology would be particularly effective. We believe our management s experience in the waste management industry positions us to address the waste management needs of developed and developing nations. In November 2006, we entered into a Joint Venture Agreement with Sistemas Ecologicas Para La Proteccion Ambiental S.A. ( SEPA ) and Mr. Mario Salguero Rossainzz. The agreement provides that the joint venture will build and operate a WTE plant in the City of Mexicali, North Baja California, Mexico. We have not realized any WTE related revenues to date. 
+
+We maintain our principal offices at 950 Celebration Boulevard, Celebration, Florida. Our telephone number at that address is (407) 566-0318. Our web site address is www.international-power.com. Information provided on our web site, however, is not part of this prospectus. 
+
+Page 4 of 79
+
+SELECTED FINANCIAL DATA
+
+The table below summarizes our selected historical financial information for each of the last three years. The Company did not have any financial results for the fiscal years ended December 31, 2002 and 2003. The summary of operations for the years ended December 31, 2004, 2005 and 2006, and the balance sheet data as of December 31, 2005 and 2006, has been derived from our audited Consolidated Financial Statements included in Financial Statements in this prospectus. The balance sheet data as of December 31, 2004, has been derived from our audited Consolidated Financial Statements not included in this report. The summary of operations for the quarters ended March 31, 2006 and 2007, and the balance sheet data as of March 31, 2007, has been derived from our unaudited Consolidated Financial Statements included in Financial Statements in this prospectus. The historical selected financial information may not be indicative of our future performance, and should be read in conjunction with the information contained in Management s Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements and the accompanying Notes to the Consolidate Financial Statements in this prospectus.
+
+ Year ended December 31,
+
+ 
+
+Quarter ended March 31,
+
+ 2004
+
+ 2005
+
+ 2006
+
+ 
+
+2006
+
+ 
+
+2007
+
+Results of Operations
+
+ 
+
+Revenue
+
+$ - 
+
+ $ - 
+
+ $ - 
+
+ 
+
+$ - 
+
+ 
+
+$ - 
+
+Operating expenses
+
+37,637 
+
+ 3,267,710 
+
+ 12,829,775 
+
+ 
+
+2,164,340 
+
+ 
+
+2,227,938 
+
+Net loss
+
+(37,637)
+
+ (3,267,710)
+
+ (12,831,316)
+
+ 
+
+(2,164,340)
+
+ 
+
+(2,227,958)
+
+Net loss per share
+
+(0.00)
+
+ (0.01)
+
+ (0.04)
+
+ 
+
+(0.01)
+
+ 
+
+(0.01)
+
+ 
+
+ 
+
+ As of December 31,
+
+ 
+
+As of March 31,
+
+Balance Sheet Data
+
+2004 
+
+ 2005 
+
+ 2006 
+
+ 
+
+2007 
+
+ 
+
+Working capital
+
+$ 18,863 
+
+ $ 937,722 
+
+ $ (477,832)
+
+ 
+
+$ (796,091)
+
+ 
+
+Total assets
+
+27,147 
+
+ 1,022,621 
+
+ 4,388,709 
+
+ 
+
+3,129,637 
+
+ 
+
+Total stockholders equity
+
+23,363 
+
+ 939,722 
+
+ 2,245,576 
+
+ 
+
+1,829,651
+
+ 
+
+ 
+
+The Offering
+
+Common stock outstanding
+
+350,757,846
+
+ shares as of
+
+June 4
+
+, 2007
+
+Common stock that may be offered by
+
+selling stockholders
+
+Up to
+
+34,807,496
+
+ shares; representing
+
+28,957,496
+
+ shares of our common stock that were previously issued to the selling stockholders and 5,
+
+850
+
+,000 shares issuable upon the exercise of warrants.
+
+Total proceeds raised by offering
+
+We will not receive any proceeds from the resale or other disposition of the shares covered by this prospectus by any selling stockholder. However, we may receive proceeds on exercise of outstanding warrants for shares of common stock covered by this prospectus. Such funds, if any, will be used for working capital and general corporate purposes.
+
+Risk factors
+
+There are significant risks involved in investing in our company. For a discussion of risk factors, you should consider before buying our common stock, see Risk Factors set forth below.
+
+Page 5 of 79
+
+RISK FACTORS
+
+An investment in our securities is highly speculative and involves a high degree of risk. Therefore, in evaluating us and our business you should carefully consider the risks set forth below, which are only a few of the risks associated with investing in our common stock. You should be in a position to risk the loss of your entire investment.
+
+Business and Financial Risks
+
+Our accountants have issued a going concern opinion and we have limited working capital, minimal net worth and substantial current losses that inhibit our ability to implement our business plan.
+
+To date, we have met our working capital requirements through the private placement of our securities and through loans. We believe that we will need an additional $11.7 million to fund the plant design and development and operations that we plan to do over the next 12 months. Since entering the WTE field in November 2004, we have not generated any revenue from WTE facilities operations and have experienced substantial losses. As of 
+
+March
+
+ 31,
+
+2007
+
+, we had a cash balance of $
+
+0.4
+
+ million and negative working capital of $0
+
+.8
+
+ million. 
+
+As of May 15
+
+, 2007, our cash balance has been reduced to approximately $
+
+50,000
+
+.
+
+We have a history of losses and an accumulated deficit; our future profitability is uncertain.
+
+We have experienced significant operating losses since our inception and we expect to incur additional operating losses as we develop WTE facilities. For the year ended December 31, 2006, we reported a loss of approximately $12.
+
+8 million, and as of March 31, 2007, we had an accumulated deficit of approximately $18.4
+
+ million.
+
+There is no assurance that we will successfully develop a commercially viable product.
+
+We plan to be assemblers of WTE technology. As of December 31, 2006, other than the process by which we plan to assemble the described WTE facilities and our AddPower patented technology, we do not have any patented intellectual property of our own and we are dependent on our relationships with third-parties for location of sites to build facilities, permits for operation, construction of the facilities, purchase of the parts to assemble the facilities, operation of the facilities and sales of the by-products. Since our formation in November 30, 1998, we have engaged in various activities and businesses, but we have not produced a profit. We have generated no revenue from WTE facilities operations, do not have any operational WTE facilities, and no revenues are expected to be realized from WTE facilities until 2008, if at all. There can be no assurance that our efforts will lead to the construction of WTE facilities, or revenues or profits from such facilities if built.
+
+We will need substantial additional funds to construct WTE facilities; if financing is not available, we may be required to reduce or cease operations or pursue other financing alternatives. 
+
+Our operations to date have consumed substantial amounts of cash. Negative cash flow from operations is expected to continue in the foreseeable future. Without substantial additional financing, we may be required to reduce some or all of our WTE project development plans or cease operations. We plan to build plants that are comprised of lines or modules. Initially, each plant will have two to six lines that will cost in the range of $30 million to $50 million per line to construct, depending on the type of waste we are to receive. Each line is estimated to consume approximately 100 tons of waste per day per line. These estimated costs do not include land acquisition costs, legal fees or management time. We therefore need substantial additional capital to undertake plant development and construction and sales efforts. If we cannot obtain such financing, we will not be able to execute our business plan or continue to operate. 
+
+Our cash requirements may vary materially from those now planned because of responses to our proposals and permit requests, cost of financing projects, availability and price of materials to construct our proposed WTE plants, changes in tipping fees that we hope to receive, availability and timely delivery of waste to power WTE facilities once built, the amount we can charge for the WTE by-products and the costs of environmental compliance, including disposal of residual waste. We may seek to satisfy future funding requirements through public or private offerings of equity securities, by collaborative or other arrangements with other partners and competitors, issuance of debt or from other sources. Additional financing may not be available when needed or may not be available on acceptable terms. If adequate financing 
+
+Page 6 of 79
+
+is not available, we may not be able to continue as a going concern or may be required to delay, scale back or eliminate certain programs, forego desired opportunities or license third parties rights to develop locations that we would otherwise seek to develop internally. To the extent we raise additional capital by issuing equity securities, ownership dilution to existing stockholders will result.
+
+Our chances for success are reduced because we are an early stage company with regard to our new business operation. 
+
+We have a limited operating history. We are therefore subject to all the risks and challenges associated with the operation of a new enterprise, including inexperience, lack of a track record, difficulty in entering the targeted market place, competition from more established businesses with greater financial resources and experience, an inability to attract and retain qualified personnel (including technical, engineering, sales and marketing personnel) and a need for additional capital to finance our efforts and intended growth. We cannot assure you that we will be successful in overcoming these and other risks and challenges that we face as a new business enterprise.
+
+We need substantial additional financing to execute our business plan which may not be available. If we are unable to raise additional capital, we may not be able to continue operations. 
+
+We need substantial additional capital to undertake plant development and construction and sales efforts. Our current resources are insufficient to fund operations. We believe that we will need an additional $11.7 million to fund the plant design and development and operations that we plan to do over the next 12 months. We have not and cannot assure you that we will be able to secure any such financing. We may not be able to find financing on terms that are acceptable to us. If we cannot obtain such financing, we will not be able to execute our business plan or continue operations.
+
+We do not have employment contracts with any of our employees. 
+
+Development of our business depends to a significant degree on the continuing contributions of our key management and technical personnel on whom we rely to assist in the design, development, construction and operation of our proposed WTE facilities. We cannot assure you that they will remain with us, especially because we do not have any employment contracts with these persons.
+
+We are dependent on third party relationships for critical aspects of our business; problems in these relationships may increase costs and/or diminish our ability to implement our business plan. 
+
+We intend to use the expertise and resources of strategic partners and other third parties in a number of key areas, including (i) engineering, (ii) development, including licensing and permitting, (iii) product development and sales and (iv) construction and operation of WTE facilities. If these third parties do not perform in a timely and satisfactory manner, we may incur costs and delays as we seek alternate sources, if available. Such costs and delays may have a material adverse effect on our business.
+
+We may seek additional third party relationships in certain areas, particularly in marketing and construction, where collaborators may enable us to enter geographic markets that are otherwise beyond our current resources and/or capabilities. There is no assurance that we will be able to obtain any such relationships. Our inability to obtain and maintain relationships with third parties may have a material adverse effect on our business, by slowing our ability to execute our business plan, requiring us to expand our internal capabilities, increasing our overhead expenses, impinging on future growth opportunities or causing us to delay or terminate projects.
+
+We may face delays in the development of our technologies and our technology may not work as expected or be economically viable. 
+
+The technologies we intend to use have not yet been widely applied within the solid waste industry and may not work as well as expected or be economically viable. The successful application of the technologies at the scales we contemplate has yet to occur. The inability to produce large volumes of energy under our current plan may require investment in capital equipment and operating expenses beyond our business and construction plans. Unforeseen difficulties in the development or acceptance of energy produced from waste may lead to delays in the implementation of our WTE process and the subsequent generation of revenue.
+
+Page 7 of 79
+
+We will depend on a significant supply of solid waste and timely payment for that solid waste.
+
+If we do not obtain a supply of solid waste at quantities and qualities that are sufficient to operate our proposed facilities at expected operating levels, our financial condition and operating results could adversely be affected. One or more of the following factors could impact the price and supply of waste:
+
+ 
+
+defaults by waste suppliers under their contracts;
+
+ 
+
+a decline in solid waste supply due to increased recovery by material recovery facilities;
+
+ 
+
+composting of solid waste;
+
+ 
+
+incineration of solid waste;
+
+ 
+
+legal prohibitions against processing of certain types of solid waste in our facilities; or
+
+ 
+
+increased competition from landfills and recycling facilities.
+
+Environmental regulations and litigation could subject us to fines, penalties, judgments and limitations on our ability to expand. 
+
+We are subject to potential liability and restrictions under environmental laws, including those relating to handling, recycling, treatment, storage of wastes, discharges to air and water, and the remediation of contaminated soil, surface water and groundwater. The waste management industry has been and will continue to be subject to regulation, including permitting and related financial assurance requirements, as well as to attempts to further regulate the industry through new legislation. Our business is subject to a wide range of federal, state and, in some cases, local environmental, odor and noise and land use restrictions and regulations. If we are not able to comply with the requirements that apply to a particular facility or if we operate without necessary approvals, we could be subject to civil, and possibly criminal, fines and penalties, and we may be required to spend substantial capital to bring an operation into compliance or to temporarily or permanently discontinue, and/or take corrective actions. We currently do not have insurance coverage for our environmental liabilities, and we may not be able to obtain sufficient coverage in the future. Those costs or actions could be significant to us and significantly impact our results of operations, as well as our available capital.
+
+In addition to the costs of complying with environmental laws and regulations, if governmental agencies or private parties brought environmental litigation against us, we would likely incur substantial costs in defending against such actions. We may in the future be a defendant in lawsuits brought by parties alleging environmental damage, personal injury, and/or property damage. A judgment against us, or a settlement by us, could harm our business, our prospects and our reputation.
+
+We cannot predict with certainty the extent of future costs under environmental, health and safety laws, and cannot guarantee that they will not be material.
+
+We could be liable if our operations cause environmental damage to our properties or to the property of other landowners, particularly as a result of the contamination of potable water sources or soil. Under current law, we could even be held liable for damage caused by conditions that existed before we acquired the assets or operations involved. Any substantial liability for environmental damage could have a material adverse effect on our financial condition, results of operations and cash flows.
+
+We may be exposed to litigation in the ordinary course of our business. 
+
+Since our personnel are expected to routinely handle solid waste materials, we may be subject to liability claims by employees, customers and third parties. 
+
+We may be unable to obtain required financing or permits. 
+
+We plan to construct our initial facilities in Mexico and the Kingdom of Saudi Arabia which will require substantial funding. We cannot assure you that we will obtain the necessary financing or environmental permits to build and operate these facilities, or retain the permits that are required to operate the facilities or obtain financing or permits we require to build and operate our intended additional facilities. Permits to build and operate waste processing facilities have become increasingly difficult and expensive to obtain and retain as a result of many factors including numerous hearings and compliance with zoning, environmental and other regulatory measures. The granting of these permits is also often subject to resistance from citizen.
+
+Page 8 of 79
+
+Waste to energy technology has not yet gained market acceptance, nor do we know whether a market will develop for it in the foreseeable future. 
+
+WTE technology has received only limited market acceptance. This technology is relatively new to the market place and we have not generated any revenues from WTE technology. Although ever growing concerns and regulation regarding the environment and pollution has increased interest in environmentally friendly products generally, the industry remains in an evolving state. WTE technology competes with more established companies in the waste and alternative energy fields. Acceptance of WTE technology to traditional products and/or services depends upon a number of factors including:
+
+ 
+
+favorable pricing vis a vis other alternatives
+
+ 
+
+the ability to establish the feasibility and reliability of WTE technology
+
+ 
+
+public perception of the product
+
+For these reasons, we are uncertain whether WTE technology will gain acceptance. Our future success depends upon such acceptance.
+
+WTE technology may be adversely affected by future technological changes and environmental regulatory requirements as well as reduction of traditional energy costs or the establishment of lower priced energy alternatives. 
+
+Changes in governmental regulation and technological advances by others in the waste or energy industries may render our technology obsolete. Research in this area is currently being sponsored by governmental agencies, major utilities, oil companies and other energy suppliers. If such research is successful, the need for our technology could be reduced or eliminated.
+
+Confidentiality agreements may not adequately protect our business information which could result in unauthorized disclosure or unfair competition. 
+
+We consider our business relationships and process for assembling commercially available equipment to construct WTE facilities proprietary. We require our employees, consultants and third parties with whom we share our business plans and confidential information to execute confidentiality agreements upon the commencement of their relationship with us. The agreements generally provide that trade secrets and all inventions conceived by the individual and all confidential information developed or made known to the individual during the term of the relationship will be our exclusive property and will be kept confidential and not disclosed to third parties except in specified circumstances. There can be no assurance, however, that these agreements will provide meaningful protection for our business information in the event of unauthorized use or disclosure of such information. If our unpatented intellectual property is publicly disclosed before we have been granted patent protection, our competitors could be unjustly enriched and we could lose the ability to profitably develop products from such information.
+
+We face intense competition and may not have the financial and human resources necessary to keep up with rapid technological changes which may result in our technology becoming obsolete. 
+
+The energy production and alternate energy businesses and related businesses are subject to rapid technological change, especially due to environmental protection regulations, and subject to intense competition. We compete with both established companies and a significant number of startup enterprises. Most of our competitors have substantially greater financial, engineering and marketing resources than we do and may independently develop superior technologies which may result in our technology becoming less competitive or obsolete. We may not be able to keep pace with this change. If we cannot keep up with these advances in a timely manner, we will be unable to compete in our chosen markets.
+
+We depend on our executive officers and need additional marketing, engineering, administrative and technical personnel to be successful. We cannot assure you that we will be able to retain or attract such persons; our current officers have other business endeavors in addition to their work for our company.
+
+Page 9 of 79
+
+Since we are a small company, a loss of one or more of our current officers would severely and negatively impact our operations. To implement our business plan, we will need additional marketing, administrative, engineering and technical personnel. The market for such persons remains competitive and our limited financial resources may make it more difficult for us to recruit and retain qualified persons. If any of our officers were to resign or not be able to continue to devote his time to our business, it may have a materially adverse effect upon our business.
+
+Our officers, who are active employees, presently devote in excess of 40 hours per week to our business activities. However, they also have outside business activities which may cause a conflict regarding the time available to devote to our business.
+
+Our current management has a significant voting majority of our company s outstanding common stock and can prevent changes in management, policy or outside takeover of our business. 
+
+Our current officers and directors own over
+
+58
+
+% of our issued and outstanding common stock and can control the appointment and/or election of all directors and officers. 
+
+Risks Related to Construction of WTE Plants
+
+We will depend on third parties to design and build our WTE facilities. However, their failure to perform could force us to abandon business, hinder out ability to operate profitably or decrease the value of your investment. 
+
+We will be highly dependent upon third parties to design and build our WTE facilities. If the third parties do not perform for any reason, there is no assurance that we would be able to obtain a replacement general contractor. Any such event may force us to abandon our business. We do, however, intend to purchase performance bonds to mitigate some of the risk of a contractor terminating its relationship with us after initiation of construction.
+
+We may need to increase cost estimates for construction of our WTE facilities, and such increase could result in devaluation of your investment if plant construction requires additional capital. 
+
+We anticipate that our WTE facilities will be built for a fixed contract price, based on the plans and specifications in anticipated design-build agreements. We will base our cost estimates for construction of any WTE facilities on certain assumptions after discussions and negotiations with parties with design-build experience. There is no assurance that the final cost of the plants will not be higher. There is no assurance that there will not be design changes or cost overruns associated with the construction of the WTE facilities. In addition, steel prices and shortages of steel could affect the final cost and final completion date of any project. Any significant increase in the estimated construction cost of the plants could delay our ability to generate revenues and reduce the value of your investment because our expected revenue streams may not be able to adequately support the increased cost and expense attributable to increased construction costs.
+
+The political climate in some of the countries where we intend to build WTE facilities could cause problems in the completion of our plants, negatively affecting our plans.
+
+We may meet resistance to our efforts to build our WTE facilities in certain countries. The r sistance may be caused by political unrest, labor or union issues, environmental problems, shortage of materials, economic conditions or other issues. There is no assurance that such resistance will not have a material adverse effect on our ability to implement our business plan.
+
+WTE facility construction delays could result in devaluation of your investment if our production and sale of power are similarly delayed. 
+
+Construction projects often involve delays in obtaining permits, construction delays due to weather conditions, or other events that delay the construction schedule. The builder and designer of the plants may be involved in the construction of other projects while constructing our WTE facilities. This could cause delays in our construction schedules. Changes in interest rates or the credit environment or changes in political administrations at the federal, state or local level that result in policy changes towards waste to energy or our proposed projects could also cause construction and operation delays. If it takes longer to construct the WTE facilities than we anticipate, it would delay our ability to generate revenue and make it difficult for us to meet our debt service obligations. This could reduce the value of your investment.
+
+Page 10 of 79
+
+Defects in construction could result in devaluation of your investment if our plants do not produce power as anticipated. 
+
+There is no assurance that defects in materials and/or workmanship in the WTE facilities will not occur. Under the terms of the anticipated design-build agreements, the designer builder would warrant that the material and equipment furnished to build the plant will be new, of good quality, and free from material defects in material or workmanship at the time of delivery. Though we expect the design-build agreements to require the contractors to correct all defects in material or workmanship for a period of one year after substantial completion of the plant, material defects in material or workmanship may still occur. Such defects could delay the commencement of operations of the plants, or, if such defects are discovered after operations have commenced, could cause us to halt or discontinue the plant s operation. Halting or discontinuing plant operations could delay our ability to generate revenues and reduce the value of your investment.
+
+Plant sites may have unknown environmental problems that could be expensive and time consuming to correct, which may delay or halt WTE facilities construction and delay our ability to generate revenue. 
+
+We intend to build our WTE facilities all over the world. Accordingly, in areas with which we are not familiar, we will depend on third parties in locating and evaluating the proposed sites for our plants. As a result, we could encounter unknown environmental problems that will be costly and time consuming to correct, or may not be correctible at all. These risks of environmental problems could have a material adverse effect on our ability to implement our business plan. Upon encountering a hazardous environmental condition, we may suspend work in the affected area. If we receive notice of a hazardous environmental condition, we may be required to correct the condition prior to continuing construction. The presence of a hazardous environmental condition will likely delay construction of the plant and may require significant expenditure of our resources to correct the condition. In addition, the designer builder will likely be entitled to an adjustment in price and time of performance if it has been adversely affected by the hazardous environmental condition. If we encounter any hazardous environmental conditions during construction that require time or money to correct, such event could delay our ability to generate revenues and reduce the value or your investment.
+
+Changes in environmental regulations or violations of the regulations could be expensive and reduce the value of your investment. 
+
+We will be subject to extensive air, water and other environmental regulations and we will need to obtain a number of environmental permits to construct and operate WTE facilities. In addition, it is likely that our obtaining debt financing will be contingent on our ability to obtain the various environmental permits that we will require. If for any reason, any of these permits are not granted, construction costs for WTE facilities may increase, or the WTE facilities may not be constructed at all. Additionally, any changes in environmental laws and regulations, both at the federal and state level, could require us to invest or spend considerable resources in order to comply with future environmental regulations. The expense of compliance could be significant enough to reduce the value of your investment. 
+
+The operation of WTE facilities could subject us to claims or liability lawsuits. 
+
+The operation of WTE facilities may be considered inherently dangerous and injury to individuals or property may occur, subjecting us to lawsuits. We do not currently have insurance for such possibilities. Although we intend to seek insurance coverage, we may not be to do so at a cost we can afford, or the coverage may prove to be insufficient. The time and cost of defending such suits could have an adverse effect on our ability to implement our business plan. Similarly, a costly judgment against us could cause us to cease operations.
+
+Changes and advances in production technology could require us to incur costs to update our plans or could otherwise hinder our ability to compete in the industry or operate profitably. 
+
+Advances and changes in the technology of WTE facilities are expected to occur. Such advances and changes may make the technology we plan to install in our WTE facilities less desirable or obsolete. These advances could also allow our competitors to operate a lower cost than we expect. If we are unable to adopt or incorporate technological advances, our methods and processes could be less efficient than our competitors, which could cause us to become uncompetitive or our projects obsolete. If our competitors develop, obtain or license technology that is superior to ours or that makes our 
+
+Page 11 of 79
+
+technology obsolete, we may be required to incur significant costs to enhance or acquire new technology so that we remain competitive. Alternatively, we may be required to seek third-party licenses, which could also result in significant expenditures. We cannot guarantee or assure you that third-party licenses will be available or, if obtained, will continue to be available on commercially reasonable terms, if at all. These costs could negatively impact our expected financial performance by increasing planned operating costs and reducing expected revenues, which could reduce the value of your investment.
+
+Risks Related To The Power Industry
+
+Competition from the advancement of alternative power may lessen the demand for our technology which could negatively impact our potential for profitability and reduce the value or your investment. 
+
+Alternative power and energy technologies and production methods are continually under development. New developments could reduce the demand for our expected power production and technology, which would negatively impact the value of your investment.
+
+Consumer resistance to the concept of converting waste to energy based on the belief that it is expensive to produce, adds to air pollution, is odorous and takes more energy to produce than it contributes may affect our ability to achieve market acceptance and reduce the value of your investment. 
+
+Based upon public consumer reports, we believe that certain consumers may resist the concept of converting waste to energy due to the fallacy that WTE facilities add to air pollution and are odorous. Still other consumers may believe that the process of producing power from waste takes more energy in the conversion than the power that is actually produced. If we cannot overcome these misconceptions, market acceptance may be difficult and this could negatively affect the value of your investment.
+
+Risks Related To Our Common Stock.
+
+Applicable SEC rules governing the trading of Penny Stocks Limits the trading and liquidity of our common stock. 
+
+The bid and ask quotations of our common stock have been reflected on the Over-the-Counter Bulletin Board under the symbol IPWG since March 9, 2007. Prior thereto, the quotations were reflected on the Unsolicited Pink Sheets. Since our common stock continues to be quoted below $5.00 per share, our common stock is considered a penny stock and is subject to SEC rules and regulations that impose limitations upon the manner in which our stock can be publicly traded. These regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination for the purchaser and receive the purchaser s written agreement to a transaction prior to sale. These regulations have the effect of limiting the trading activity of our common stock and reducing the liquidity of an investment in our common stock.
+
+The trading price of our common stock may be volatile.
+
+The trading price of our stock has, from time to time, fluctuated widely and in the future may be subject to similar fluctuations. The trading price may be affected by a number of factors including the risk factors set forth in this prospectus as well as our operating results, financial condition, announcements of innovations or new products by us or our competitors, general conditions in the market place, and other events or factors. In recent years, stock market indices, in general, and the securities of technology companies, in particular, have experienced substantial price fluctuations. Such market fluctuations may adversely affect the future trading price of our common stock.
+
+Page 12 of 79
+
+We have sold stock in private placements; the stock sold in those private placements and any others we may conduct may become freely tradable and have a depressive effect on the market price of our stock. 
+
+Approximately
+
+66,488
+
+,700 of our
+
+350,757,846
+
+ shares outstanding as of
+
+June 4
+
+, 2007 are in the publicly trading float. Public sale of those shares, as well as the registration and subsequent public sale of the remaining shares could have a depressive effect on the public market price of our common stock.
+
+Our outstanding options and warrants may adversely affect our ability to consummate future equity financings due to the dilution potential to future investors. 
+
+We have outstanding options and warrants for the purchase of shares of our common stock which may adversely affect our ability to consummate future equity financings. To the extent any such options and warrants are exercised, the value of our outstanding shares of our common stock will be diluted.
+
+We currently have outstanding vested options to purchase 22,900,000 shares of common stock at a weighted-average exercise price of $0.46 and vested warrants to purchase
+
+9,519,373
+
+ shares of common stock with a weighted-average price of $0.50.
+
+Due to the number of shares of common stock we are obligated to sell pursuant to outstanding options and warrants described above, potential investors may not purchase our future equity offerings at market price because of the potential dilution such investors may suffer as a result of the exercise of the outstanding options and warrants.
+
+The market price of our common stock has experienced significant volatility. 
+
+The securities markets from time to time experience significant price and volume fluctuations unrelated to the operating performance of particular companies. In addition, the market prices of the common stock of many publicly traded solid waste companies have been and can be expected to be especially volatile. Our common stock price in the 52-week period ended
+
+June 4, 2007
+
+, had a low of $
+
+0.19
+
+ and high of $
+
+0.92
+
+. Announcements of technological innovations or new products by us or our competitors, developments or disputes concerning patents or proprietary rights, publicity regarding actual or potential by us or our competitors, regulatory developments in both the United States and foreign countries, delays in our schedules and economic and other external factors, as well as period-to-period fluctuations in our financial results, may have a significant impact on the market price of our common stock. The realization of any of the risks described in these Risk Factors may have a significant adverse impact on such market prices.
+
+We may pay vendors in stock as consideration for their services; this may result in stockholder dilution, additional costs and difficulty retaining certain vendors. 
+
+In order for us to preserve our cash resources, we have previously and may in the future pay certain vendors in stock, warrants or options to purchase shares of our common stock rather than cash. Payments for services in stock may materially and adversely affect our stockholders by diluting the value of outstanding shares of our common stock. In addition, in situations where we have agreed to register the stock issued to a vendor, this will generally cause us to incur additional expenses associated with such registration. Paying vendors in stock, warrants or options to purchase shares of common stock may also limit our ability to contract with the vendor of our choice should that vendor decline payment in stock.
+
+We do not intend to pay dividends on our common stock. Until such time as we pay cash dividends our stockholders must rely on increases in our stock price for appreciation. 
+
+We have never declared or paid dividends on our common stock. We intend to retain future earnings to develop and commercialize our products and therefore we do not intend to pay cash dividends in the foreseeable future. Until such time as we determine to pay cash dividends on our common stock, our stockholders must rely on increases in our common stock s market price for appreciation.
+
+Page 13 of 79
+
+If we do not effectively manage our growth, our resources, systems and controls may be strained and our operating results may suffer. 
+
+We plan to add to our workforce and to continue to increase the size of our workforce and scope of our operations as we continue to develop our business plan and move towards construction of WTE facilities. This growth of our operations will place a significant strain on our management personnel, systems and resources. We may need to implement new and upgraded operational and financial systems, procedures and controls, including the improvement of our accounting and other internal management systems. These endeavors will require substantial management effort and skill, and we may require additional personnel and internal processes to manage these efforts. If we are unable to effectively manage our expanding operations, our revenue and operating results could be materially and adversely affected.
+
+Our obligations as a public company under the laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 ( Sarbanes-Oxley Act ) and related regulations, are likely to increase our expenses and administrative burden. These expenses and burdens are particularly acute on companies of our small size. Changes in the laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and related regulations implemented by the Securities and Exchange Commission and the National Association of Securities Dealers, are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We have and will continue to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management s time and attention from commercialization activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies regulatory authorities may initiate legal proceedings against us and our business may be harmed.
+
+There are limitations on the liability of our directors, and we may have to indemnify our officers and directors in certain instances. 
+
+Our certificate of incorporation limits the personal liability of our directors for monetary damages for breach of their fiduciary duties as directors. Our bylaws provide that we will indemnify our officers and directors and may indemnify our employees and other agents. These provisions may be in some respects broader than the specific indemnification provisions under Delaware law. The indemnification provisions may require us, among other things, to indemnify such officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from willful misconduct of a culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified and to obtain directors and officers insurance. Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify a director, officer, employee or agent made or threatened to be made a party to an action by reason of the fact that he or she was a director, officer, employee or agent of the corporation or was serving at the request of the corporation, against expenses actually and reasonably incurred in connection with such action if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. Delaware law does not permit a corporation to eliminate a director s duty of care and the provisions of our certificate of incorporation have no effect on the availability of equitable remedies, such as injunction or rescission, for a director s breach of the duty of care.
+
+We believe that our limitation of officer and director liability assists us to attract and retain qualified employees and directors. However, in the event an officer, a director or the board of directors commits an act that may legally be indemnified under Delaware law, we will be responsible to pay for such officer(s) or director(s) legal defense and potentially any damages resulting therefrom. Furthermore, the limitation on director liability may reduce the likelihood of derivative litigation against directors, and may discourage or deter stockholders from instituting litigation against directors for breach of their fiduciary duties, even though such an action, if successful, might benefit us and our stockholders. Given the difficult environment and potential for incurring liabilities currently facing directors of publicly-held corporations, we believe that director indemnification is in our and our stockholders best interests because it enhances our ability to attract and retain highly qualified directors and reduce a possible deterrent to entrepreneurial decision-making.
+
+Page 14 of 79
+
+Nevertheless, limitations of director liability may be viewed as limiting the rights of stockholders, and the broad scope of the indemnification provisions contained in our certificate of incorporation and bylaws could result in increased expenses. Our board of directors believes, however, that these provisions will provide a better balancing of the legal obligations of, and protections for, directors and will contribute positively to the quality and stability of our corporate governance. Our board of directors has concluded that the benefit to stockholders of improved corporate governance outweighs any possible adverse effects on stockholders of reducing the exposure of directors to liability and broadened indemnification rights.
+
+DESCRIPTION OF OUR BUSINESS
+
+We were incorporated in the State of Delaware on November 30, 1998. We plan to build and operate WTE facilities ( WTE ) to process solid and hazardous wastes by incineration on our own and through collaboration with strategic partners and others. We expect that this processing will produce marketable electricity, potable water and components in construction materials including cement and road beds. 
+
+Our business plan is to locate, finance, build and operate WTE facilities for governmental entities and others charged with the disposal of municipal, commercial, industrial and certain hazardous wastes. We intend to focus on municipalities that have significant waste-handling and land fill problems and areas that can benefit from potable water and additional electricity production. Our primary marketing strategies include direct contact with government officials and large producers and handlers of waste. We also intend to rely on limited and highly targeted advertising. Integral to these methods is the development of strong brand identification for us coupled with increasing awareness of our target markets in the financial, ecological and tactical advantages of WTE technology.
+
+We have access to components and technologies that incinerate solid waste and hazardous waste at high temperatures. The incinerator produces steam, which drives a turbine which produces electricity and condenses the steam into water. The electricity and steam drive further processes which scrub smoke-stack air emissions, produce potable water, ash and enough excess electricity to sell. We believe we can customize the operation of WTE facilities to suit community needs by maximizing electricity or potable water, with little or no loss of efficiency or environmental friendliness.
+
+We believe we have technology and contractors available to us to build WTE disposal facilities that reduce solid waste output to approximately 16% of input, which we expect will break down as follows: 1.7% fly ash must be treated before it can be placed on a landfill and 14.3% is bottom ash of which 15% is ferrous materials that may be sold as scrap metal, 70% may be sold as construction material for manufacture of concrete, cinder block road beds, and 15% is discarded.
+
+We believe our WTE facilities will generate revenues for ourselves, waste generators and collectors, and governments charged with disposal. We expect that our facilities will reduce the potential liabilities of waste generators and collectors for land-fill clean-up and reduce the need for governments to create land-fills. We anticipate three primary income streams: (i) waste disposal (tipping fees), (ii) the sale of electricity and (iii) the sale of potable water. We also expect to augment revenues by selling up to 70% of the ash produced from the processes as construction material, thereby also reducing our disposal costs.
+
+We plan to build plants that are comprised of lines or modules. Initially, each plant will have two to six lines that will cost in the range of $30 million to $50 million per line to construct, depending on the type of waste we are to receive. Each line is estimated to consume approximately 100 tons of waste per day per line. These estimated costs do not include land acquisition costs, legal fees or management time. We therefore need substantial additional capital to undertake plant development and construction and sales efforts. If we cannot obtain such financing, we will not be able to execute our business plan or continue to operate.
+
+We recently purchased proprietary patented technologies, including AddPower, a low temperature turbine (LTT), and ScrubPower, a special emission-to-energy system, from three Swedish entities - Anovo AB Angelholm, AddPower AB Angelholm, and SUPE Ltd - for a total consideration of $2.8 million. We plan to use these technologies to increase the efficiency of our own planned WTE facilities. We also believe that we will be able to sell these technologies to other companies in the energy space in order to help these companies increase their output of electricity. 
+
+Page 15 of 79
+
+We believe that the acquisition of these technologies will allow us to convert greater quantities of heat, produced from boilers and turbines, and potentially increase the output of salable electricity by 20% to 30% over technologies that are currently available. We also believe that the LTT technology will provide us with an efficient low-temp turbine which is powered by a proprietary fluid to drive the turbine and produce electricity at approximately 200 F, whereas most conventional boilers and turbines can only produce electricity at temperatures between 600 - 800 F. 
+
+During the last fiscal year we developed contacts in several countries that we believe may lead to the construction of WTE facilities. These contacts are located, and WTE facilities are proposed, in the Kingdom of Saudi Arabia, Mexico, Egypt and the United States. The Kingdom of Saudi Arabia s Presidency of Metrology and Environment issued to us in July 2006 an environmental license which we expect will enable us to establish WTE plants in this country. We have identified certain countries and geographic regions where, due to varying combinations of land fill shortages, energy needs and potable water scarcity, we believe WTE technology would be particularly effective. We believe our management s experience in the waste management industry positions us to address the waste management needs of developed and developing nations. In November 2006, we entered into a Joint Venture Agreement with Sistemas Ecologicas Para La Proteccion Ambiental S.A. ( SEPA ) and Mr. Mario Salguero Rossainzz. The agreement provides that the joint venture will build and operate a WTE plant in the City of Mexicali, North Baja California,
+
+and
+
+ Mexico. We have not realized any WTE related revenues to date.
+
+Competition
+
+Competition for disposal of solid waste is high. This competition comes from public and private commercial trash haulers, commercial and industrial companies that handle their own waste collection and disposal, public and private WTE companies and municipalities and regional government authorities. We have developed a business plan that we believe will maximize our know-how and limited financial assets in a manner that will best enable us to compete in this very competitive environment. 
+
+We believe that the WTE field, due to its relatively young age in the history of solid waste disposal, presents opportunity because of the disparities in technologies and fragmentation in the industry. New technologies emerge frequently. Many have local application only, or insufficient exposure to draw global interest. The components of our planned WTE technologies are commercially available. We do not believe, however, that any entity has assembled or engineered facilities in the same manner as facilities that we plan to construct. That is not to say that there is not substantial competition for the three primary sources of income from which we expect to receive revenue tipping fees sales of electricity and potable water. As to the production of saleable by-products, i.e. electricity, potable water and usable ash, we believe there will be competitors in the production of each of these products in each locale in which we plan to operate. Due to the limited production of those products by our process and because they are only by-products, we plan to partner with potential competing vendors in those locales to gain the efficiencies of the established distribution networks.
+
+Governmental agencies may be able to offer lower direct charges to waste producers for waste removal and potentially WTE incineration by subsidizing costs with tax revenues and tax-exempt financing. Most municipalities presently operate solid waste disposal facilities, most of them as landfills. These facilities generally are subsidized by tax revenues and often produce fiscal losses in addition to environmental damage. We believe we can partner with governmental authorities and provide WTE technologies that can produce profits for IPWG, save our customers substantial amounts and be environmentally responsible.
+
+We expect to compete for business on the basis of geographic location, environmental advantages of WTE over landfills, tipping or waste disposal fees, power generation fees, the sale of potable water, and the quality of operations. Our ability to obtain permits and to locate WTE facilities may be limited in areas where there is adequate space for low cost landfill based disposal of waste, inadequate tipping fees for waste disposal, or abundant and inexpensive sources of electrical power generation and potable water. We expect that operational costs will be offset (with excess revenue for debt service and profits) by a combination of tipping fees and sales of by-products (electricity, water and saleable ash products). If the combination of the revenue streams is estimated to be insufficient to operate a WTE facility, service its debt and produce a profit, we believe that neither local community nor our potential financial sources will approve such a facility. Labor, operating and disposal costs, as well as the value of our by-products, vary widely throughout the areas in which we plan to operate. The tipping fees we expect to charge will be determined locally, and typically vary by the volume and weight, type of waste, treatment requirements, risk of handling or disposal, and labor costs.
+
+Page 16 of 79
+
+Raw materials
+
+We believe there is a readily available supply of machinery, materials, equipment and associated vendors to design, fabricate, construct and if necessary operate the WTE plants that we expect to build. We believe the worldwide need for WTE plants continues to expand as energy costs and the need for potable water increases and open space for land-fills declines. Increasing energy costs coupled with waste generation and fewer landfills provides a growing opportunity for renewable energy solutions. We do not believe we are dependent on any one source for supply of any of the products used in our planned WTE process.
+
+We also do not believe that there will be a shortage of waste on which to run our proposed facilities. However, as mentioned above in Competition, others compete for tipping fees to dispose of solid and hazardous wastes. We anticipate that the government and private agencies for whom we build WTE facilities will be responsible for providing the waste which will be processed through our planned facilities. We plan to enter into long term tipping arrangements with producers of waste and possibly to securitize or insure the revenues of those contracts to finance construction and operation of our facilities.
+
+We believe there are adequate capital markets, assuming the creditworthiness of the contracting party to the tipping fee contracts, the power generation agreements and potable water sales (or availability of insurance to augment the creditworthiness of such contracting parties), to securitize the cash flow from such agreements.
+
+Intellectual Property 
+
+We own certain proprietary patented technologies through AddPower. We otherwise do not own any patents, trademarks or licenses. We expect this AddPower patented technology will benefit our business of developing WTE facilities and expanding into other alternative energy businesses. We continue to negotiate with parties who provide adequate technologies to execute our business plan.
+
+Our business plan relies upon the use of existing technology available and commonly applied in various non-US countries, as well as proprietary technologies that we hope to purchase or license. We intend to employ WTE technology that has been developed in Sweden and other European countries (over 29 WTE power plants exist in Sweden alone). WTE solutions are increasingly common in other countries, as well, including other industrialized nations such as Japan that emphasize WTE because of their limited landfill space. WTE can reduce the volume of waste disposed in landfills by up to 90 percent, which prolongs the life of available landfill space. 
+
+Page 17 of 79
+
+Government Approval and the Effect of Government Regulations
+
+The United States Environmental Protection Agency ( US EPA ) has adopted regulations related to several aspects of solid waste management, including but not limited to regulations related to the products of waste combustion, heavy metal disposal and ground water contamination. We believe that our proposed WTE facilities regulated emissions will be less than permissible limits although no assurance can be given that the proposed WTE facilities will perform as specified or that applicable regulations will not be strengthened. Additionally, we will be required to comply with all regulations, rules and directives imposed by the host governments in connection with the operation of WTE plants outside the United States.
+
+We also anticipate that in each country of operation, we will face various requirements of independent testing and verification of emissions outputs, water sampling, and other environmental monitoring requirements, in addition to oversight and testing by the various government agencies.
+
+The technology that we plan to utilize is based on WTE facilities already in operation. We have emissions reports of some of those operational facilities. We believe that we can rely on the emissions output of similar plants in representing the anticipated emissions levels of the plants we intend to build and operate. It is important to us both as a responsible ecological citizen and to build relationships with the communities that we plan to serve, that our emissions are as clean as possible. We believe that a dirty WTE process would threaten our growth and future.
+
+Number of Employees
+
+We currently have 12 employees (seven officers and five administrative personnel). Our officers devote as much time to our business as they deem necessary, which presently is in excess of 40 hours per week. However, each is also involved in other business ventures. Our administrative employees work fulltime for us.
+
+Executive Offices
+
+Our executive offices are located at 950 Celebration Blvd., Suite A, Celebration, Florida 34747. We lease these premises at approximately $6,000 per month. The lease expires in January 2011. We do not currently own any substantial real or personal property. We also maintain satellite offices as follows: (i) Mexican Office: Culiacan No. 17-105, Colonia Hipodromo Condesa, Delegacion Cuauht moc, Mexico City. Z. C., Mexico, month-to-month rental at $747.50 (USD) per month; (ii) London Office: 1 Threadneedle Street, London EC2R8AW, England, month-to-month arrangement requiring 60 days notice; monthly rent: $1,304.17 (USD); (iii) Northeast England Office: Royal Albert House, Sheet Street, Windsor Royal Berkshire, England, month-to-month arrangement requiring 60 days notice; monthly rent: $1,130.28 (USD); and (iv) Sweden Office: Florettgatan 29B. 25467 Helsingborg, Sweden; one year lease with option to renew monthly rent: $1,455.00 (USD).
+
+Page 18 of 79
+
+SELECTED FINANCIAL DATA
+
+The table below summarizes our selected historical financial information for each of the last three years. The Company did not have any financial results for the fiscal years ended December 31, 2002 and 2003. The summary of operations for the years ended December 31, 2004, 2005 and 2006, and the balance sheet data as of December 31, 2005 and 2006, has been derived from our audited Consolidated Financial Statements included in Financial Statements in this prospectus. The balance sheet data as of December 31, 2004, has been derived from our audited Consolidated Financial Statements not included in this report. The summary of operations for the quarters ended March 31, 2006 and 2007, and the balance sheet data as of March 31, 2007, has been derived from our unaudited Consolidated Financial Statements included in Financial Statements in this prospectus. The historical selected financial information may not be indicative of our future performance, and should be read in conjunction with the information contained in Management s Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements and the accompanying Notes to the Consolidate Financial Statements in this prospectus.
+
+ Year ended December 31,
+
+ 
+
+Quarter ended March 31,
+
+ 2004
+
+ 2005
+
+ 2006
+
+ 
+
+2006
+
+ 
+
+2007
+
+Results of Operations
+
+ 
+
+Revenue
+
+$ - 
+
+ $ - 
+
+ $ - 
+
+ 
+
+$ - 
+
+ 
+
+$ - 
+
+Operating expenses
+
+37,637 
+
+ 3,267,710 
+
+ 12,829,775 
+
+ 
+
+2,164,340 
+
+ 
+
+2,227,938 
+
+Net loss
+
+(37,637)
+
+ (3,267,710)
+
+ (12,831,316)
+
+ 
+
+(2,164,340)
+
+ 
+
+(2,227,958)
+
+Net loss per share
+
+(0.00)
+
+ (0.01)
+
+ (0.04)
+
+ 
+
+(0.01)
+
+ 
+
+(0.01)
+
+ 
+
+ 
+
+ As of December 31,
+
+ 
+
+As of March 31,
+
+Balance Sheet Data
+
+2004
+
+ 2005
+
+ 2006
+
+ 
+
+2007
+
+ 
+
+Working capital
+
+$ 18,863 
+
+ $ 937,722 
+
+ $ (477,832)
+
+ 
+
+$ (796,091)
+
+ 
+
+Total assets
+
+27,147 
+
+ 1,022,621 
+
+ 4,388,709 
+
+ 
+
+3,129,637 
+
+ 
+
+Total stockholders equity
+
+23,363 
+
+ 939,722 
+
+ 2,245,576 
+
+ 
+
+1,829,651 
+
+ 
+
+MANAGEMENT S DISCUSSION AND ANALYSIS
+
+OF FINANCIAL CONDITION
+
+ AND RESULTS OF OPERATIONS
+
+Overview
+
+We commenced our development stage on April 15, 2002. The Company has spent approximately the last two years initiating and developing our WTE technology business plan. Initial steps in that process were negotiation for the opportunity to construct WTE Plants in Mexico and Saudi Arabia. In July 2006, the Kingdom of Saudi Arabia s Presidency of Metrology and Environment issued to us an environmental license which will enable us to establish WTE plants in the country. The second step in developing our business plan was to find sources that could assist us to raise the capital required to build and begin operating WTE facilities. IPWG has not had any revenues and cumulative losses of $
+
+18.4
+
+ million since inception. Accordingly, a comparison of our financial information for accounting periods would likely not be meaningful or helpful in making an investment decision regarding our Company.
+
+Page 19 of 79
+
+We expect to begin realizing operating revenues in the fourth quarter of 2007 from the receipt of tipping fees associated with one or more of our WTE facilities. We are expecting to store waste on our property during the construction of a facility. We are expecting revenue from our first WTE energy plant to commence in 2009 after the completion of the construction of the first plant.
+
+In October 2006, we purchased proprietary patented technologies, AddPower, a low temperature turbine (LTT), and ScrubPower, a special emission-to-energy system from three Swedish entities, Anovo AB Angelholm, AddPower AB Angelholm, and SUPE Ltd for a total consideration of $2.8 million. 
+
+We believe that we will be able to sell these technologies to other companies in the energy space in order to help these companies increase their output of clean electricity. The Company also plans to use these technologies to increase the efficiency of its own planned WTE facilities. 
+
+We believe that the acquisition of these technologies will allow us to convert greater quantities of heat, produced from boilers and turbines, and potentially increase the output of salable electricity by 20 to 30% or more over technologies that are currently available. We also believe that the LTT technology will provide us with an extremely efficient low-temp turbine which is powered by a proprietary fluid to drive the turbine and produce electricity at approximately 200 F, whereas most conventional boilers and turbines can only produce electricity at temperatures between 600 - 800 F.
+
+We believe that we will be able to sell these technologies to other companies in the energy space in order to help these companies increase their output of electricity. The Company also plans to use these technologies to increase the efficiency of its own planned WTE facilities. We believe we will begin to receive orders for our AddPower units by the beginning of 2008.
+
+Plan of Operation
+
+Prior to the adoption of our present business plan, we investigated the option of engaging in the management of low level radioactive waste as a result of our acquisition of Terra Mar Environmental Systems, Inc. (TMES) assets. We determined not to pursue that business because of the time and expense of compliance with government regulation in the field.
+
+Our operating plan for the next 12 months and thereafter has three components: (1) to complete pending negotiations to initiate construction of WTE projects in Mexicali, Mexico, Saudi Arabia and Egypt, (2) complete the research and development of our AddPower electrical generating unit to make it a commercially viable product, and (3) to continue our existing program of introducing WTE technology to governments and others charged with responsibility to manage solid waste and/or provide potable water and electricity to various population segments. In furtherance of this general plan we have self-imposed the following goals:
+
+PROJECTED DATE
+
+Goal
+
+ Projected Date
+
+1. Processing of site permits in Mexico
+
+ Present through July 2007
+
+2. Complete R&D of AddPower
+
+ Present through September 2007
+
+3. Introduction of WTE technology in the Kingdom of Saudi Arabia and Egypt beginning of WTE site location negotiations
+
+ Present through October 2007
+
+4. Negotiations for WTE sites in several foreign countries now identified. Form subsidiaries as may be required in other countries
+
+ Foreseeable future
+
+Research and Development.
+
+We do not expect to establish a discrete program of research or development as part of our business plan. We expect to expend our research and development efforts towards on the job training. We intend to cooperate with our development partners to develop efficient WTE technology customized to each customer s needs. We intend to share the learning from each project and application to improve all areas of existing WTE technology from air scrubbing to waste disposal.
+
+Purchase of Plant and Equipment.
+
+Page 20 of 79
+
+The development and construction of each proposed WTE facility will be dependent on: (i) locating appropriate land and obtaining permits for a WTE facility, (ii) obtaining significant external financing (including related financial guaranty and risk insurance) for purchase of materials and equipment and construction of facilities and (iii) securing contracts for delivery of waste and sales of byproducts necessary to produce revenues sufficient to cover debt service and operation costs. In the event we are not able to finance one or more proposed WTE facilities, we would be forced to abandon any such projects.
+
+WTE Facility Finance. 
+
+Our plan to build one or more WTE facilities will require significant capital which we do not currently have. We intend to finance the construction and operation of WTE facilities through a combination of loans and securitization of income from long-term contracts for tipping fees, power and potable water sales. We believe that we will be successful in securing such financing although no assurance can be given.
+
+Changes in the Number of Employees.
+
+We expect a substantial increase in full and part time employees in the foreseeable future to bolster our technical and marketing departments. We expect that plant construction projects will be completed by third parties who will be engaged pursuant to contractual agreements.
+
+Trends.
+
+We believe that the trend that is most likely to affect our business is the burgeoning need of local governments at all levels in most countries to manage sold waste, significant quantities of which are hazardous. We believe this trend will generate demand for the technology we offer although no assurance can be given. 
+
+We also believe the trend of global warming will affect our business. The trend to reduce the output of greenhouse gases has caused a trend to find ways of generating cleaner electricity from cleaner renewable energy sources. We believe the trend will generate a demand for our technology and services we offer although no assurance can be given.
+
+Financial Condition
+
+Ability to Meet Cash Requirements.
+
+We are considered to be in the development stage as defined in the Statement of Financial Accounting Standards ( FASB ) No. 7. To date, we have received no income from our business operations. We have incurred substantial losses since our inception. As of
+
+March
+
+ 31,
+
+2007,
+
+ we had an accumulated loss of $
+
+18.4
+
+ million during the development stage. The expenses that produced this operating loss included stock based compensation expenses in the sum of $
+
+11.4
+
+ million and other expenses, including cash expenses, of approximately $7.0 million. At
+
+March 31
+
+ 2007, our cash balance
+
+was
+
+$0.4
+
+million. During the first quarter of 2007 the Company cash balance decreased by $1.
+
+2 million. 
+
+We used approximately
+
+$1.5 million for our operating activities and made $0.6 million in payments for the acquisition of AddPower. These uses of cash were offset by $0.6 million in stock sales and $0.3 million in cash from the exercise of stock warrants.
+
+ 
+
+Without additional equity or debt financing,
+
+we will not be able to satisfy
+
+ our cash requirements for the next twelve months.
+
+Two Year Cash Forecast.
+
+We have developed a two-year timeline and cash forecast of our cash needs to execute our business plan and we are in the process of raising the funds required to fund our operations for the next 24 months until the time we estimate that our first WTE facility will come online and revenues are expected to commence. There can be no assurance, however, that we will be able to raise the amounts of financing required to operate our business until revenues commence, that we will be able to timely commence revenue generating operations of WTE facility(ies) or that if such facility(ies) commence operation, that we will generate sufficient revenue to be profitable.
+
+Page 21 of 79
+
+We are in the process of attempting to raise capital to address approximately $26.4 million of financing needs for the next twenty-four months, outside of construction/project financing for specific waste to energy projects. Uses of the capital we are attempting to raise include:
+
+1)
+
+Working capital to cover overhead and execution costs during construction of waste to energy plants (approximately $16.0 million), additional details provided in the chart below. 
+
+2)
+
+Working capital to cover the recently completed acquisition of Ad-Power AB and the commercialization of AddPower units (a patented low temperature turbine used for converting waste heat into electricity) of approximately $1.6 million.
+
+3)
+
+Additional development funding to apply AddPower technology to low cost solar power generation, as well as to test the feasibility of integrating the AddPower technology into small scale solar units for office parks, malls, and residential projects ($8.8 million). 
+
+A detailed schedule of our capital needs for the two years ended December 31, 2008 is as follows:
+
+ 2007
+
+ 2008
+
+ Total
+
+ 
+
+Employee Costs
+
+ $2,463,000 
+
+ $3,687,000 
+
+ $6,150,000 
+
+Travel
+
+ 1,040,000 
+
+ 1,040,000 
+
+ 2,080,000 
+
+Construction/Project Management
+
+ 300,000 
+
+ 720,000 
+
+ 1,020,000 
+
+Legal Fees
+
+ 852,000 
+
+ 840,000 
+
+ 1,692,000 
+
+Outsourced Engineering
+
+ 275,000 
+
+ 600,000 
+
+ 875,000 
+
+Contractors/Consultants
+
+ 826,000 
+
+ 818,000 
+
+ 1,644,000 
+
+External & Internal Audit
+
+ 124,000 
+
+ 300,000 
+
+ 424,000 
+
+Corporate Insurance
+
+ 250,000 
+
+ 450,000 
+
+ 700,000 
+
+Accounting Services (Outsourced)
+
+ 75,000 
+
+ 300,000 
+
+ 375,000 
+
+Marketing 
+
+ 155,000 
+
+ 300,000 
+
+ 455,000 
+
+Rental /Office Expenses
+
+ 279,000 
+
+ 300,000 
+
+ 579,000 
+
+Total Operating Costs
+
+ 6,639,000 
+
+ 9,355,000 
+
+ 15,994,000 
+
+ 
+
+Additional Investment/Commercialization of
+
+Other Proprietary Technology 
+
+ 
+
+ 
+
+Cash for AddPower Acquisition
+
+ 1,564,000 
+
+ - 
+
+ 1,564,000 
+
+R&D of AddPower unit for commercialization
+
+ 3,500,000 
+
+ - 
+
+ 3,500,000 
+
+R&D of AddPower unit for potential solar
+
+commercialization
+
+ 
+
+ - 
+
+ 
+
+5,300,000 
+
+ 
+
+5,300,000 
+
+Total Forecasted Cash Usage Excluding
+
+ 
+
+Project Specific Financing
+
+ $11,703,000 
+
+ $14,655,000 
+
+ $26,358,000 
+
+In addition to the above, we plan to develop and execute contracts for our WTE facilities in Saudi Arabia, Egypt, Mexico and elsewhere (these contracts may include long term, ie.7-10 year, commitments for waste disposal, electric and water sales). We expect to use these contracts, and the expected revenue sources they represent, to secure project specific financing. We expect to have multiple financing sources for project/construction financing on a project by project basis outside of this specific equity raise.
+
+Page 22 of 79
+
+Payments Due under Contractual Obligations
+
+We have future commitments
+
+at March 31, 2007
+
+ consisting of office lease obligations as follows: 
+
+Year Ending December 31,
+
+ Office Lease Obligations
+
+2007
+
+ 
+
+$ 66,998 
+
+2008
+
+ 89,959 
+
+2009
+
+ 91,603 
+
+2010
+
+ 91,443 
+
+2011
+
+ 7,639 
+
+Total
+
+ 
+
+$347,642 
+
+In addition, we are obligated to pay during 2007 the remaining $962,057 for the purchase of AddPower. We will not be able to meet this obligation without proceeds of external financing, of which we provide no assurance. 
+
+Results of Operations.
+
+Quarter ended March 31, 2007 compared to the quarter ended March 31, 2006
+
+We only had a 3% increase in net (cash and non-cash) losses from operations for the quarter ended March 31, 2007 as compared to the quarter ended March 31, 2006, or a total increase in net losses of $63,618. The net non-cash losses decreased from $1,260,000 for the quarter ended March 31, 2006 to $1,024,500 for the quarter ended March 31, 2007. This $235,500 decrease is primarily attributable to the difference in the amount of stock options granted in each period ($175,000) and the value associated with the issuance of common stock for services performed ($90,500) and permitting option exercises without charging the strike price in exchange for services ($70,000) in the first quarter of 2006, offset by $100,000 of amortization expense recorded in the first quarter of 2007 that was associated with our intangible asset patents that was acquired in the fourth quarter of 2006. The net cash losses increased from $904,340 for the quarter ended March 31, 2006 to $1,203,438 for the quarter ended March 31, 2007, or a total increase in net cash losses of $299,098. This increase in net cash losses is primarily attributable to employee related costs (i.e., salaries and travel). We hired 9 new employees in 2006.
+
+Year ended December 31, 2006 compared to the year ended December 31, 2005
+
+We had an increase in net (cash and non-cash) losses from operations from $3,267,710 for the year ended December 31, 2005 to $12,831,316 for the year ended December 31, 2006, or a total increase in net losses of $9,563,606. The net non-cash losses increased from $2,354,319 for the year ended December 31, 2005 to $8,288,250 for the year ended December 31, 2006, or a total increase in net non-cash losses of $5,933,931 This increase in net non-cash losses is primarily attributable to the issuance of common stock for services performed ($5,281,250) and permitting option exercises without charging the strike price in exchange for services ($262,500), and the value of options ($2,644,500) granted to officers, directors and consultants and finders. The net cash losses increased from $913,391 for the year ended December 31, 2005 to $4,543,066 for the year ended December 31, 2006, or a total increase in net cash losses of $3,629,675. This increase in net cash losses is primarily attributable to fees paid to professionals service firms and consultants and employee related costs (i.e., salaries and travel). We hired 9 new employees in 2006.
+
+Year ended December 31, 2005 compared to the year ended December 31, 2004
+
+We had an increase in net (cash and non-cash) losses from operations from $37,637 for the year ended December 31, 2004 to $3,267,710 for the year ended December 31, 2005, or a total increase in net losses of $3,239,073. The net non-cash losses increased from $11,500 for the year ended December 31, 2004 to $2,354,319 for the year ended December 31, 2005, or a total increase in net non-cash losses of $2,342,819. This increase in net non-cash losses is primarily attributable to the issuance of common stock for services performed ($20,319) and permitting option exercises without charging the strike price in return for services ($72,500), and the value of 
+
+Page 23 of 79
+
+options ($2,140,000) granted to officers, directors and consultants and finders. The net cash losses increased from $26,137 for the year ended December 31, 2004 to $913,391 for the year ended December 31, 2005, or a total increase in net cash losses of $887,254. This increase in net cash losses is primarily attributable to fees paid to professionals and consultants.
+
+USE OF PROCEEDS
+
+We will not receive any proceeds from sale of the shares of common stock covered by this prospectus by the selling stockholders. However, we may receive proceeds on exercise of outstanding warrants for shares of common stock covered by this prospectus. Any such proceeds received by us will be used for working capital and general corporate purposes.
+
+MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
+
+Market Information
+
+Our shares of common stock have been quoted on the Over-the-Counter Bulletin Board operated by the National Association of Securities Dealers, Inc. under the symbol IPWG beginning on March 9, 2007. Prior thereto, bid and ask quotations for our common stock were reflected on the Unsolicited Pink Sheets under the symbol IPWG. A summary of the quotations by quarter for our
+
+2007,
+
+ 2006 and 2005 fiscal
+
+years
+
+ is as follows: 
+
+ High
+
+Low 
+
+Fiscal Year 2007
+
+ 
+
+Quarter ended March 31, 2007
+
+$0. 48 
+
+$0.24 
+
+Quarter ended June 30, 2007 (through May 31, 2007)
+
+0.35 
+
+0.19
+
+ 
+
+Fiscal Year 2006
+
+ 
+
+Quarter ended March 31, 2006
+
+$1.18 
+
+$1.00 
+
+Quarter ended June 30, 2006
+
+0.88 
+
+0.81 
+
+Quarter ended September 30, 2006
+
+0.92 
+
+0.50 
+
+Quarter ended December 31, 2006
+
+0.70 
+
+0.30 
+
+Fiscal Year 2005
+
+ 
+
+Quarter ended March 31, 2005
+
+$0.45 
+
+$.045 
+
+Quarter ended June 30, 2005
+
+0.40 
+
+0.25 
+
+Quarter ended September 30, 2005
+
+0.72 
+
+0.64 
+
+Quarter ended December 31, 2005
+
+1.86 
+
+1.59 
+
+Source:
+
+Inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual
+
+Transactions
+
+Holders 
+
+As
+
+of June 4,
+
+ 2007, there were approximately 276 holders of record of our common stock, not including holders who hold their shares in street name. 
+
+Page 24 of 79
+
+DESCRIPTION OF OUR AUTHORIZED CAPITAL
+
+Authorized and Outstanding
+
+Our authorized capital consists of 750 million shares of common stock, par value $.00001 per share and no shares of preferred stock. As
+
+of June 4,
+
+ 2007, there were issued and outstanding (i)
+
+350,757,846
+
+ shares of common stock; (ii) options to acquire 22,900,000 shares of common stock, with a weighted average exercise price of $
+
+0
+
+.46 per share; and (iii) warrants to acquire 9
+
+,519,373
+
+ shares of common stock with a weighted average exercise price of $
+
+0
+
+.50 per share
+
+Voting Rights
+
+Holders of our common stock have the right to cast one vote for each share of stock in their name on the books of our company, whether represented in person or by proxy, on all matters submitted to a vote of holders of common stock, including election of directors. There is no right to cumulative voting in election of directors. Except where a greater requirement is provided by statute or by the articles of incorporation, or in the by-laws, the presence, in person or by proxy duly authorized, of one or more holders of a majority of the outstanding shares of our common stock constitutes a quorum for the transaction of business. The vote by the holders of a majority of a class of outstanding shares is required to effect certain fundamental corporate changes such as liquidation, merger, or amendment of our articles of incorporation.
+
+Dividends
+
+There are no restrictions in our articles of incorporation or by-laws that prevent us from declaring dividends. The Delaware General Corporation Law does, however, prohibit us from declaring dividends where, after giving effect to the distribution of the dividend (1) we would not be able to pay our debts as they become due in the usual course of business or (2) our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of stockholders who have preferential rights superior to those receiving the distribution. We have not declared any dividends, and we do not plan to declare any dividends in the foreseeable future.
+
+Preemptive Rights
+
+Holders of our common stock are not entitled to preemptive rights, and no redemption or sinking fund provisions are applicable to our common stock. All outstanding shares of our common stock are fully paid and non-assessable.
+
+Amendment of our Bylaws
+
+Our bylaws may be adopted, amended or repealed by the affirmative vote of a majority of our outstanding shares. Subject to applicable law, our bylaws also may be adopted, amended or repealed by our board of directors.
+
+Our Transfer Agent
+
+We have retained Routh Transfer, Inc. of Plano, Texas as our transfer agent.
+
+Page 25 of 79
+
+DIRECTORS AND EXECUTIVE OFFICERS
+
+Our directors and executive officers, their ages, and the positions they hold are set forth below. Our directors hold office until our next annual meeting of stockholders and until their successors in office are elected and qualified. All officers serve at the discretion of our Board of Directors.
+
+(A)
+
+Directors and Executive Officers
+
+Name
+
+Age
+
+Title
+
+Peter Toscano
+
+58
+
+Chairman of the Board, Chief Executive Officer/President
+
+Jack Wagenti
+
+70
+
+Vice President, Secretary, and Director
+
+Jose Garcia
+
+50 
+
+Vice President and Director
+
+Louis D. Garcia
+
+56
+
+Vice President, Finance
+
+James W. FitzGibbons
+
+38 
+
+Controller and Chief Accounting Officer
+
+Sheik Hani A. Z. Yamani
+
+46
+
+Director
+
+Georgi Grechko
+
+76
+
+Director
+
+Salvatore Arnone
+
+46
+
+Director
+
+Robert Astore
+
+70
+
+Director
+
+Walter J. Salvadore
+
+51
+
+Director
+
+Mr. Peter Toscano. Mr. Toscano has been Director, President and Chief Executive Officer of International Power Group since October of 2004. Mr. Toscano also is President, Chief Executive Officer and Director of U.S. Precious Metals, Inc., positions he has held since May 9, 2002. Mr. Toscano was an officer of Material Waste Recycling, Inc. from February 2001 through May 9, 2002. Material Waste Recycling, Inc. was in the business of recycling wools, cottons and acrylics both in the United States and Mexico. Mr. Toscano over the past five years has been involved in materials reprocessing, export, and importation in Mexico. In addition, Mr. Toscano has had experience in the development of systems for the management of hazardous wastes in Russia and Central Asia. Also, Mr. Toscano has been involved in various low-level radioactive waste management projects within the Pacific Rim. Within those arenas, Mr. Toscano has spearheaded projects that utilized strategic alliances with major companies such as Westinghouse Electric Company and Waste Management, Inc. Among his responsibilities, Mr. Toscano has acted as a liaison bridging the gap between Russian and US corporations. U.S. Precious Metals, Inc. is a venture owned by, among others, Messrs. Toscano, Wagenti and J. Garcia. U.S. Precious Metals, Inc. s principal activity is to acquire, explore and develop mineral properties in Mexico. It is in its exploration stage and is focused on acquiring prospective mineral properties, principally gold and silver. U.S. Precious Metals, Inc. acquired exploration concessions to certain mineral properties known as Solidaridad I, Solidaridad II, Solidaridad III, Solidaridad IV and Solidaridad V located in Michoacan, Mexico. Material Waste Recycling, Inc., which ceased operations in May 2002, was in the business of collecting and recycling fabric remnants. The remnants were collected primarily from domestic U.S clothing manufacturers and sold to overseas processors.
+
+Mr. Jack Wagenti. Mr. Wagenti has been Director and Secretary of International Power Group since October of 2004. He has also served as Chief Financial Officer of the Company from its inception to October 2006. Mr. Wagenti is also a Director and the Secretary and Chief Financial Officer of U.S. Precious Metals Inc., a company which is traded on the Over The Counter Bulletin Board. Mr. Wagenti has held positions with U.S. Precious Metals since May 2002. From 1996 to the present, Mr. Wagenti has served in varying capacities of American International Ventures, Inc., a company which is traded on the Over the Counter Bulletin Board and Pink Sheets Market. Presently, Mr. Wagenti is a Director of American International Ventures, Inc. American International Ventures, Inc. is in the mineral exploration business in the State of Nevada and its assets include the Brunner Property located in Nye County, Nevada.
+
+Mr. Jose Garcia. Mr. Garcia has been a Director and Vice President of International Power Group since October of 2004. Mr. Garcia was employed by La Carvella Restaurant from February 2001 to May 9, 2002. Mr. Garcia has been Vice President of U.S. Precious Metals, Inc. since May 2002, a company trading on the Over The Counter Bulletin Board and President of U.S. Precious Metals de Mexico since March 2003. Mr. Garcia is from Morelia, Mexico and is President of IPW Group de Mexico, which is a wholly owned subsidiary of International Power Group, Ltd. 
+
+Page 26 of 79
+
+Mr. Louis D. Garcia. Mr. Garcia has been the Company s Vice President, Finance since May 15, 2006. From 1997 through March 2006, Mr. Garcia was the Managing Director of Providence Financial Services, LLC. Prior to Providence, Mr. Garcia was a Senior Managing Director with GCR Highland LLC and Senior Managing Director (Real Estate) with Jesup, Josenthal and Co., Inc. Mr. Garcia received a Bachelor of Science in Finance from Saint Johns University in New York. 
+
+James W. FitzGibbons. Mr. FitzGibbons has served as Controller and Chief Accounting Officer of the Company since October 2006. He previously served as Vice President Finance and Chief Accounting Officer of NDC-Health Corporation, a NYSE traded healthcare services company from January 2004 through January 2006. Prior to NDCHealth, beginning in January 1999, Mr. FitzGibbons was Vice President Controller of McKesson Corporation s Information Solutions business unit. Mr. FitzGibbons received his Bachelor of Science degree in accounting from the University of Alabama. He is a certified public accountant in the State of Georgia. 
+
+Sheik Hani A. Z. Yamani. Sheik Yamani has been a Director of International Power Group, Ltd. since March 2006. He is also the Executive Chairman of Hazy Trading Establishment and its affiliated companies, an organization he founded in 1988. Hazy Trading Establishment has completed energy and development projects in Africa and Middle East valued at over 5 billion US. He has been an advisor to a number of multi-national companies including Asea Brown Boveri (ABB) (1991 to 1998), Astaldi spA. (1991 to 1998), Interbeton BV (1992 to 1999) and Avia Mineral (1994 to 1998). He has also been a member of World Travel & Tourism Council and the Young Presidents Organization. He is a member of the Board and the Executive Committee of the International Islamic Relief Organization.
+
+Sheik Yamani attended Oxford University and the Wharton School of Business at the University of Pennsylvania and, from 1983 to 1984, trained at Citibank in New York City and Geneva, and at MKS Finance in Geneva, one of the world s leading integrated precious metals and foreign exchange trading houses. Sheik Yamani is also the author of To Be a Saudi , a book that received positive reviews in the international media during the late 1990s. Sheik Yamani is often an editorial contributor in the Saudi Arabian media on economic, political and social issues.
+
+Dr. Georgi Grechko. Dr. Grechko has been a Director since October 2004. He brings extensive technical expertise in the field of applied sciences. He will also help foster the international cooperation that is required for International Power s operation. He qualifies as an independent director as defined under the Sarbanes Oxley Act of 2002. Dr. Grechko, a Russian cosmonaut, flew on three space flights and at one time held the space endurance record. He graduated from the Leningrad Institute of Mechanics with a doctorate in mathematics. He went on to work at Sergei Korolev s design bureau and from there was selected for cosmonaut training in the Soviet moon program. He went on to work on the Salyut space stations. After leaving the space program in 1992, Dr. Grechko became a lecturer in atmospheric physics at the Soviet Academy of Sciences. Dr. Grechko from November 1997 to September 2004 was the Chief Advisor to the Chairman of the Board of Investsberbank, Pokrovka Street 47A, Moscow, 105062, Russian Federation; from September 2004 to present he is a member of the Board of Directors of Investsberbank.
+
+Mr. Salvatore J. Arnone. Mr. Arnone has been a director of International Power Group, Ltd. since December 2004. He is a Senior Account Executive with KMBS, Inc. (a/k/a Konica-Minolta Business Systems, Inc.), a company that manufactures, sells and services photocopiers and other office equipment. Mr. Arnone has been with KMBS, Inc. since May of 1998. Mr. Arnone has received many exceptional achievement awards in management and sales.
+
+Mr. Robert Astore. Mr. Astore has been a director of International Power Group, Ltd. since January 2005. He was President and owner of Bergen Film Laboratories, Inc., Lodi New Jersey from 1960 to 1981. From 1981 to 1990 Mr. Astore was a self employed builder. Mr. Astore from 1990 to present he has been employed as an independent consultant in seafood sales and brokerage. Mr. Astore received a Bachelor s Degree in Business Administration from the University of Miami.
+
+Mr. Walter Salvadore. Mr. Salvadore has been a director of International Power Group, Ltd. since January 2006. Since 1982, Mr. Salvadore, a ceramic engineer, has been the president of R&S Enterprises, a business consulting firm located in Medford, New Jersey. In addition, since 2000, he has maintained a junior partnership position in 
+
+Page 27 of 79
+
+Draseena Funds Group, an asset management firm located in Stateline, Nevada. From 1982 to 1999, Mr. Salvadore was the President and CEO of Risco, an/engineering and distribution firm specializing in high temperature refractory and industrial insulation materials. From 1977 to 1982, he held various engineering and marketing positions with the Carborundum Company (Niagara Falls, New York). He was a former president of the American Ceramic Society and has a B.S. degree in Ceramic Engineering from Rutgers University.
+
+Mr. Thomas J. Mitchell resigned as a director of the Company on February 3, 2007. He had served as a director of the Company since January 2006. 
+
+Our officers are not full time employees and are involved in other business endeavors. We do not have a formal conflicts of interest policy governing its officers and directors. We do not have written employment agreements with any of our officers. Our officers intend to devote sufficient business time and attention to the our affairs to develop our business in a prudent and business-like manner. 
+
+Other Officers (non-executive) and Significant Personnel.
+
+Dr. Kenny Tang. In March 2006, the Company appointed Dr. Tang, 47, to its newly created Environmental Advisory Board. Currently, he is the first and, to date, the only member of this board. Since June 2000, Dr. Kenny Tang has been the CEO of Oxbridge Capital, an investment and advisory firm which he founded at that time, specializing in environmental clean technologies and renewable energy. Prior to June 2000, he was employed in corporate finance with the Union Bank of Switzerland in London and as a strategy consultant with KPMG Consultants and Stern Stewart, the later two being pioneers in corporate governance and shareholder value creation. Dr. Tang also serves (since 2005) as the European Managing Partner at Enhancement Partners LP which is a global consortium that is developing Gigawatt-size wind farms in China. Prior to 2000, he was the President and CEO of SUSTAIN, an Asian research institute focusing on economic and environmental sustainability from an Asian perspective, which he founded.
+
+Dr. Tang earned his doctorate at Judge Business School, Cambridge University s business school and he is a member of the Board of Governors of Middlesex University, London. He is also a Chartered Financial Analyst (CFA).
+
+Gregory J. Callageri. In April 2006, the Company appointed Gregory J. Callageri, 47, as Chairman of its newly formed Finance Advisory Committee. He is the first and, to date, the only member of this board. Mr. Callageri is the CEO of REGF, LLC, a private investment manager and consulting firm that he founded in April 2005. From 1999 to April 2005, Mr. Callageri owned and operated an asset management and consulting firm named MAP Fund LLC, which he had founded. Mr. Callageri sold MAP Fund LLC in April 2005.
+
+Mr. Callageri has over 23 years experience working with global banks, asset managers and hedge funds. Throughout his career, he has had prominent roles and high level responsibilities in international capital markets and has worked in the major financial centers. His experience in hedge funds and derivatives operations has given him a broad range of exposure and experience in dealing with international banking institutions. He has visited, analyzed and completed due diligence on over 200 hedge funds throughout his career. He received an MBA from Pace University in New York and lives in Chicago, Illinois. 
+
+(C)
+
+Involvement in Certain Legal Proceedings. To the knowledge of the Company, none of its officers or directors has been personally involved in any bankruptcy or insolvency proceedings within the last five years. Similarly, to the knowledge of the Company, none of the directors or officers, within the last five years, have been convicted in any criminal proceedings (excluding traffic violations and other minor offenses) or are the subject of a criminal proceeding which is presently pending, nor have such persons been the subject of any order, judgment, or decree of any court of competent jurisdiction, permanently or temporarily enjoining them from acting as an investment advisor, underwriter, broker or dealer in securities, or as an affiliated person, director or insurance company, or from engaging in or continuing in any conduct or practice in connection with any such activity or in connection with the purchase or sale of any security, nor were any of such persons the subject of a federal or state authority barring or suspending, for more than 60 
+
+Page 28 of 79
+
+days, the right of such person to be engaged in any such activity, which order has not been reversed or suspended.
+
+(D)
+
+Audit Committee Financial Expert. The Company does not have an audit committee or an audit committee financial expert; as such term is defined in Item 401(e) of Regulation S-B. The Company is not required at this time to have an audit committee because it is not a listed issuer as described in Rule 10A-3(c)(2) promulgated under the Exchange Act. The Board is considering current and potential independent board members for this committee when the appropriate time arrives.
+
+(E)
+
+Compliance with Section 16(A) of the Exchange Act. Section 16(a) of the Exchange Act requires the Company s directors, executive officers, and persons who own more than 10% of the Company s equity securities to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, Directors and greater than 10% stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. During the fiscal year ended December 31, 2006 there were 10 such individuals who were subject to the reporting requirements of the Exchange Act. To the best of the Company s knowledge, all our executive officers, directors and persons who beneficially own more than ten percent of our common stock are current in their Section 16 filings.
+
+(F)
+
+Code of Ethics. The Company s Board of Directors has been considering adoption of a Code of Ethics to be applicable to its Chief Executive Officer and senior financial executives. The Code of Ethics will be designed to deter wrong-doing and promote honest and ethical behavior, full, fair, timely, accurate and understandable disclosure, and compliance with applicable laws. The Board anticipates it will adopt the Code of Ethics during the current fiscal year.
+
+LITIGATION
+
+From time to time, we may be involved in various claims, lawsuits, and disputes with third parties, actions incidental to the normal operations of the business. As of the date of this prospectus, we are not aware of any material claims, lawsuits, disputes with third parties or the like that would have any material affect on our business.
+
+CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
+
+Neither our directors and executive officers, any person who beneficially owns, directly or indirectly, shares
+
+representing
+
+ more than 5% of our common stock
+
+, any other related person as defined in Item 404 of Regulation S-K promulgated under the Securities Act of 1933,
+
+ nor any members of the immediate family (including spouse, parents, children, siblings, and in-laws) of any of the foregoing persons, has any material interest, direct or indirect, in any transaction that we have entered
+
+into since the beginning of our last fiscal year, during
+
+ the two
+
+fiscal years preceding our last fiscal year, or in
+
+ or any proposed transaction
+
+in which the amount involved exceeds $120,000, except that during the fourth quarter of our fiscal
+
+ year ended December 31
+
+, 2006,
+
+ U.S. Precious Metals, Inc. ( USPM
+
+ ), a company of which
+
+ Peter Toscano, Jack Wagenti and Jose Garcia
+
+are officers and directors
+
+, loaned
+
+to us
+
+ $250,000 at a 6% interest rate and we repaid this loan in the same quarter. 
+
+Page 29 of 79
+
+CORPORATE GOVERNANCE
+
+Director Independence
+
+The board of directors is responsible for directing the management of the business and affairs of the Company. The board holds regular meetings each year and holds additional special meetings as required. Directors are expected to attend board meetings and to spend the time needed and meet as frequently as necessary to properly discharge their responsibilities. Although participation by conference telephone or other communications equipment is allowed, personal attendance is encouraged.
+
+Our board has affirmatively determined, after considering all of the relevant facts and circumstances, that all of the directors other than Peter Toscano, Jack Wagenti, Jose Garcia, and Robert Astore are independent from our management under the standards set forth in the listing standards of the NASDAQ Stock Market. This means that none of the independent directors have any direct or indirect material relationship with the Company that will interfere with their exercise of independent judgment in carrying out their responsibilities as a director.
+
+Board meetings and Committees; Annual Meeting Attendance
+
+The board does not have a separately designated nominating, compensation or audit committee, which functions are handled by the board of directors. The board of directors held 15 meetings during the fiscal year ended December 31, 2006. Each of the directors attended at least 75% of the meetings of the board of directors held during the 2006 fiscal year while he was a member of the board.
+
+EXECUTIVE COMPENSATION
+
+The Company s Executive Compensation Program Philosophy
+
+The Company strives to attract, motivate and retain high-quality executives with the requisite skills and abilities to enable the Company to achieve superior results. Accordingly, the Company s compensation programs are designed to provide compensation commensurate with performance and to reward above average performance and provide incentive opportunity to be competitive for talent in the labor markets in which the Company participates. The board of directors assumes the duties of a compensation committee. The board of directors sets executive compensation and its own compensation using industry standards as a guideline. The Company does not currently have any compensation consultants assisting the Company with executive and/or director compensation matters.
+
+The key elements of the Company s compensation programs are base salaries, performance cash bonuses for contributions to short and long-term goals, and the grant of stock options. Base salaries and cash bonuses are the core elements of the Company s compensation programs. Base salaries are a necessary element to enable the Company to compete and are determined following negotiations with the individual and are based on competitive market conditions. To date, the Company awards cash bonuses based on a subjective evaluation of performance by the board of directors. The board of directors believe that base salaries, along with cash bonuses and stock options enable the Company to meet its objectives of attracting, motivating and retaining the right mix of employees needed to achieve the Company s business objectives. The board of directors also believes that its compensation structure is both fair and competitive and allows the Company to reward extraordinary accomplishments. 
+
+While the Company rewards performance that contributes to business developments that meet the Company s long-term goals, the Company does not have any long-term compensation plans in place, pursuant to which performance will be measured over a period of more than one year and compensation will be paid out after a period of more than a year.
+
+Page 30 of 79
+
+The Company has used utilized market data in making compensation decisions but the Company has not targeted any of its compensation decisions to any specific benchmarks or peer groups. The Company does not have any formal equity ownership requirements.
+
+The Company reviews and considers the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code, which provides that the Company may not deduct compensation of more than $1 million in any taxable year that is paid to certain individuals unless the compensation is performance based. The Company believes that the compensation paid under its compensation programs is generally fully deductible for federal income tax purposes.
+
+Compensation Committee Report
+
+The following report of the board of directors does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates this report by reference therein.
+
+The board of directors has reviewed and discussed with management the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K. Based on such review and discussion, the board of directors approved the inclusion of the Compensation Discussion and Analysis in this prospectus.
+
+ 
+
+Peter Toscano
+
+ 
+
+Jack Wagenti
+
+ 
+
+Jose Garcia
+
+ 
+
+Salvatore Arnone
+
+ 
+
+Robert Astore
+
+ 
+
+Walter J. Salvadore
+
+ 
+
+Sheik Hani A.Z. Yamani
+
+ 
+
+Georgi Grechko
+
+Page 31 of 79
+
+The following table sets forth certain information regarding the compensation of our Chief Executive Officer and our
+
+four next most highly compensated
+
+executive officers
+
+ for the fiscal years ended December 31, 2006, 2005
+
+and 2004
+
+. Except as set forth below, no other compensation was paid to these individuals during the years indicated.
+
+Annual Compensation Name and
+
+Principal Position
+
+Year 
+
+Salary 
+
+Bonus 
+
+Stock Awards
+
+Option Awards
+
+Non-Equity Incentive Plans Compensation
+
+Non-Qualified Deferred Compensation
+
+All Other Compensation
+
+Total
+
+Peter Toscano 
+
+2006 
+
+$46,231 
+
+$ - 
+
+- 
+
+$ - 
+
+- 
+
+- 
+
+$39,379(5)
+
+$85,610 
+
+President, Chief Executive 
+
+2005 
+
+19,558 
+
+- 
+
+- 
+
+20,000(1)
+
+- 
+
+- 
+
+2,991 
+
+42,549 
+
+Officer and Director 
+
+2004 
+
+- 
+
+- 
+
+5,000(6)
+
+- 
+
+- 
+
+- 
+
+ 
+
+5,000 
+
+ 
+
+Jack Wagenti 
+
+2006 
+
+46,231 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+18,386(5)
+
+64,617 
+
+Vice President and Director 
+
+2005 
+
+17,058 
+
+- 
+
+- 
+
+20,000(1)
+
+- 
+
+- 
+
+2,949 
+
+40,007 
+
+ 
+
+2004
+
+ 
+
+- 
+
+- 
+
+5,000(6)
+
+- 
+
+- 
+
+- 
+
+- 
+
+5,000 
+
+ 
+
+Jose Garcia
+
+2006 
+
+84,583 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+84,583 
+
+Vice President and Director 
+
+2005 
+
+17,058 
+
+- 
+
+- 
+
+20,000(1)
+
+- 
+
+- 
+
+- 
+
+37,058 
+
+ 
+
+2004 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+ - 
+
+ - 
+
+- 
+
+ 
+
+Chris Duncan (2)
+
+2006 
+
+130,769 
+
+- 
+
+- 
+
+307,000(3)
+
+- 
+
+- 
+
+- 
+
+437,769 
+
+Former Chief Operating Officer 
+
+2005 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+ 
+
+2004 
+
+-
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+ 
+
+ 
+
+John Mack (4)
+
+2006 
+
+80,769 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+80,769 
+
+Former Chief Financial Officer 
+
+2005 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+ 
+
+2004
+
+ 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+-
+
+ 
+
+ 
+
+1)
+
+The financial value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average assumptions used for the valuation of these option awards are as follows: Expected dividends 0%; Expected volatility 156.24%; Risk free interest rate 3.75%; expected life of options 75 years. The assumptions are also disclosed in Note 8 in the Notes to the Consolidated Financial Statements included in this prospectus.
+
+2)
+
+Mr. Duncan resigned as the Company s Chief Operating Officer on January 2, 2007.
+
+3)
+
+The financial value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average assumptions used for the valuation of these option awards are as follows: Expected dividends 0%; Expected volatility 100.85%; Risk free interest rate 4.96%; expected life of options 1.39 years. The assumptions are also disclosed in Note 8 in the Notes to the Consolidated Financial Statements included in this prospectus.
+
+4)
+
+Mr. Mack resigned as the Company s Chief Financial Officer on January 5, 2007.
+
+We have no employment contracts with any our officers.
+
+5)
+
+These amounts include car allowance for Messrs Toscano and Wagenti for $12,979 and $18,386, respectively. In addition, Mr. Toscano received a housing allowance in the amount of$26,400.
+
+6)
+
+The $5,000 in compensation received by Messrs Toscano and Wagenti in 2004 was paid in the form of 50,000,000 shares each which was valued as salary compensation at $0.0001 per share.
+
+Page 32 of 79
+
+2006 GRANTS OF PLAN-BASED AWARDS
+
+The table below sets forth information regarding grants of plan-based awards made to each of the named executive officers during 2006:
+
+Name
+
+Grant Date
+
+Estimated Future Payouts Under Non-Equity Incentive Plan Awards
+
+Estimated Future Payouts Under Equity Incentive Plan Awards
+
+All Other Stock Awards: Number of Shares of Stock or Units (#)
+
+All Other Option Awards:
+
+Number of Securities Underlying Options (1) (#)
+
+Exercise or Base Price of Option Awards ($/Sh)
+
+Grant Date Fair Value of Stock and Stock Options ($)(2)
+
+Threshold
+
+Target
+
+Maximum
+
+Threshold
+
+Target
+
+Maximum
+
+Peter Toscano 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+ 
+
+Jack Wagenti 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+ 
+
+Jose Garcia
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+ 
+
+Chris Duncan 
+
+03/14/2006 
+
+ 
+
+1,000,000 
+
+$0.83 
+
+$210,000 
+
+ 
+
+07/18/2006 
+
+ 
+
+200,000 
+
+$0.67 
+
+$240,000 
+
+ 
+
+11/21/2006 
+
+ 
+
+300,000 
+
+$0.67 
+
+$ 57,000 
+
+ 
+
+John Mack 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+- 
+
+ 
+
+ 
+
+(1)
+
+ Reflects options granted during 2006 pursuant to our 2005 Stock Option Plan.
+
+(2)
+
+ The grant date fair value of each stock award and Chris Duncan s option award is determined pursuant to SFAS 123(R).
+
+ 
+
+Page 33 of 79
+
+The following table discloses information regarding outstanding equity awards as of December 31, 2006 for each of our senior executive officers.
+
+OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
+
+Name and Principal Position
+
+ 
+
+Number of Securities
+
+Underlying Unexercised Options/Exercisable (1)
+
+ 
+
+Number of Securities
+
+Underlying Unexercised
+
+Options/Un-exercisable (1)
+
+Option
+
+Exercise Price
+
+ 
+
+Option
+
+Expiration date
+
+Peter Toscano, President, CEO 
+
+ 
+
+ 
+
+and Director
+
+ 1,000,000 
+
+ - 
+
+ $ 
+
+0.10 
+
+ 6/14/2010 
+
+ 
+
+ 
+
+Jack Wagenti
+
+ 
+
+Vice President and Director
+
+ 
+
+ 1,000,000 
+
+ - 
+
+ 0.10 
+
+ 6/14/2010 
+
+ 
+
+ 
+
+Jose Garcia
+
+ 
+
+Vice President and Director
+
+ 
+
+1,000,000 
+
+ 
+
+- 
+
+ 
+
+0.10 
+
+ 
+
+6/14/2010 
+
+ 
+
+ 
+
+Chris Duncan(1)
+
+ 1,000,000 
+
+ - 
+
+ 0.83 
+
+ 6/14/2010 
+
+ 
+
+Former Chief Operating
+
+ 200,000 
+
+ - 
+
+ 0.67 
+
+ 7/17/2010 
+
+ 
+
+Officer
+
+ 300,000 
+
+ - 
+
+ 0.67 
+
+ 6/14/2010 
+
+ 
+
+ 
+
+John Mack(2)
+
+ 
+
+Former Chief Financial Officer
+
+ - 
+
+ - 
+
+ - 
+
+ - 
+
+ 
+
+(1) Mr. Duncan resigned as the Company s Chief Operating Officer on January 2, 2007.
+
+(2) Mr. Mack resigned as the Company s Chief Financial Officer on January 5, 2007. 
+
+Option Exercises and stock vested: No stock options, SARs and similar instruments were exercised and no stock, including restricted stock, restricted stock units or similar instruments vested during our fiscal year ended December 31, 2006.
+
+Directors Compensation.
+
+Directors receive no monetary compensation for their service as directors. Directors are reimbursed for expenses incurred in connection with the Company s business.
+
+Page 34 of 79
+
+The following table documents the compensation of our directors for the fiscal years ended December 31, 2006.
+
+Name
+
+Fees Earned or Paid in Cash
+
+ Stock
+
+Awards
+
+ Option
+
+Awards (1)
+
+ Non-Equity
+
+Incentive Plan
+
+Compensation
+
+ Nonqualified
+
+Deferred Compensation
+
+ All Other
+
+Compensation
+
+ Total
+
+ Salvatore Arnone
+
+$ - 
+
+ $ - 
+
+ $ - 
+
+ $ - 
+
+ $ - 
+
+ $ - 
+
+ $ - 
+
+ Robert Astore
+
+- 
+
+ - 
+
+ - 
+
+ - 
+
+ - 
+
+ - 
+
+ - 
+
+ Jose Garcia
+
+- 
+
+ - 
+
+ - 
+
+ - 
+
+ - 
+
+ - 
+
+ - 
+
+ Georgi Grecko
+
+- 
+
+ - 
+
+ - 
+
+ - 
+
+ - 
+
+ - 
+
+ - 
+
+ Thomas Mitchell
+
+- 
+
+ - 
+
+ 210,000 
+
+ - 
+
+ - 
+
+ - 
+
+ 210,000 
+
+ Walter Salvatore
+
+- 
+
+ - 
+
+ 210,000 
+
+ - 
+
+ - 
+
+ - 
+
+ 210,000 
+
+ Hani A. Z. Yamani
+
+- 
+
+ - 
+
+ 1,210,000 
+
+ - 
+
+ - 
+
+ - 
+
+ 1,210,000 
+
+ 
+
+(1) The financial value of each option was estimated using the Black-Scholes option-pricing model and the assumptions disclosed in Note 8 in the Notes to the Consolidated Financial Statements included in this Form 10-K
+
+/A2.
+
+ The following is a list of the outstanding option held by each director as of December 31, 2006: 
+
+Salvatore Arnone
+
+(1,000,000)
+
+ 
+
+Robert Astore
+
+(1,000,000)
+
+ 
+
+Jose Garcia
+
+(1,000,000)
+
+ 
+
+Georgi Crechko
+
+(1,000,000)
+
+ 
+
+Thomas Mitchell
+
+(1,000,000)
+
+ 
+
+Walter Salvatore
+
+(1,000,000)
+
+ 
+
+Sheik Hani A. Z. Yamani
+
+(1,000,000)
+
+ 
+
+ 
+
+(2) Mr. Mitchell resigned as a director of the Company on February 3, 2007. 
+
+All Directors have been granted stock options for their board service. All such options were granted at or above fair market value determined on the date of grant.
+
+Stock Incentive Plans. On September 13, 2005, our Board adopted and our shareholders approved the Company s 2005 Stock Option Plan, effective June 15, 2005, a copy of which is attached as Exhibit 4.1 to the Company s Form 10-QSB filed with the SEC on November 21, 2005. This plan authorizes the granting of options representing up to 30,000,000 shares of common stock to Officers, Directors, and consultants. As of December 31, 2006, options to purchase 30,000,000 shares of common stock had been granted pursuant to this plan to individuals at an exercise prices ranging from $0.10 to $0.83 per share. The options vested upon grant, including options to purchase 11,800,000 shares of common stock that were granted to directors 7,100,000 options have been exercised. The options issued pursuant to this plan have been deemed by the Company to have a value ranging from $0.11 to $0.20 per share.
+
+Page 35 of 79
+
+SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
+
+The following table indicates the number of shares of our common stock that were beneficially owned as of
+
+June 4,
+
+ 2007, by (1) each person known by us to be the owner of more than 5% of our outstanding shares of common stock, (2) our directors, (3) our executive officers, and (4) our directors and executive officers as a group. In general, beneficial ownership includes those shares a director or executive officer has sole or shared power to vote or transfer (whether or not owned directly) and rights to acquire common stock through the exercise of stock options or warrants that are exercisable currently or become exercisable within 60 days. Except as indicated otherwise, the persons name in the table below have sole voting and investment power with respect to all shares shown as beneficially owned by them. We based our calculation of the percentage owned on
+
+383,177,219
+
+ beneficially owned shares outstanding on
+
+June 4,
+
+ 2007. The address of each director and executive officer listed below is c/o International Power Group, Ltd., 950 Celebration Boulevard, Celebration, Florida 34747.
+
+Name and Address
+
+Number of Shares Beneficially Owned
+
+ Percent of Class
+
+Peter Toscano
+
+100,954,830 
+
+ 
+
+26.35%
+
+Jack Wagenti
+
+106,194,480 
+
+ 
+
+27.71%
+
+Jose Garcia
+
+2,500,000 
+
+(1)
+
+* 
+
+Louis D. Garcia
+
+2,000,000 
+
+ * 
+
+James W. FitzGibbons
+
+200,000 
+
+(2)
+
+* 
+
+Salvatore Arnone
+
+2,300,000 
+
+(3)
+
+* 
+
+Dr. Georgi Grechko
+
+1,040,000 
+
+(9)
+
+* 
+
+Robert Astore
+
+2,300,000 
+
+(4)
+
+* 
+
+Walter Salvadore
+
+1,660,000 
+
+(5)
+
+* 
+
+Sheik Hani A.Z. Yamani
+
+6,000,000 
+
+(6)
+
+* 
+
+Armada Partners, L.P. (7)
+
+25,000,000 
+
+(8)
+
+6.52%
+
+All officers and directors as a group (10 persons)
+
+225,149,310 
+
+ 
+
+58.76%
+
+* Represents less than 1%
+
+_____________________________ 
+
+(1) Includes 1 million shares issuable upon presently exercisable stock options.
+
+(2) Includes 200,000 shares issuable upon presently exercisable stock options. 
+
+(3) Includes 1 million shares issuable upon presently exercisable stock options. 
+
+(4) Includes 1.3 million shares issuable upon presently exercisable stock options. 
+
+(5) Includes 1.5 million shares issuable upon presently exercisable stock options. 
+
+(6) Includes 6 million shares issuable upon presently exercisable stock options. 
+
+(7) The address for Armada Partners, L.P. is 650 5th Avenue, New York, NY 10199. Voting control and dispositive
+
+power over these shares is held by Mr. Armando Ruiz. 
+
+(8) Includes 5 million shares issuable upon presently exercisable warrants.
+
+(9)
+
+ Includes 1 million shares issuable upon presently exercisable stock options.
+
+ 
+
+Page 36 of 79
+
+SELLING STOCKHOLDERS
+
+The table below sets forth the name of each person who is offering for resale shares of common stock covered by this prospectus, the number of shares of common stock beneficially owned by each person, the number of shares of common stock that may be sold in this offering, and the number of shares of common stock each person will own after the offering, assuming they sell all of the shares offered.
+
+The shares of common stock being offered in this prospectus (including shares issuable upon the exercise of warrants) were issued in private placement transactions by us, each of which was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) of the Securities Act.
+
+Because the selling stockholders may offer all, some, or none of their shares of our common stock, we cannot provide a definitive estimate of the number of shares that the selling stockholders will hold after this offering.
+
+Other than as indicated, none of the selling stockholders has at any time during the past three years acted as one of our employees, officers, or directors or otherwise had a material relationship with us.
+
+In accordance with the terms of registration rights agreements with the selling stockholders, this prospectus covers the resale of all of the shares issued in the private placements and, as to certain shareholders, the shares issuable upon the exercise of warrants sold in the private placements. 
+
+For purposes of the following table, beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a selling stockholder and the percentage ownership of that selling stockholder, shares of common stock issuable through the exercise of warrants that are currently exercisable within 60 days are deemed beneficially owned. Each selling stockholder s percentage of ownership in the following table is based on
+
+383,177,219
+
+ shares of common stock outstanding as of
+
+June 4,
+
+ 2007.
+
+Page 37 of 79
+
+Selling Stockholder
+
+Shares beneficially owned prior to the offering
+
+Number of common shares registered in this prospectus
+
+Shares beneficially owned after the offering
+
+Number
+
+Percent
+
+Number
+
+Percent
+
+Armada Partners, L.P.
+
+25,000,000 (1)
+
+6.52%
+
+25,000,000
+
+0
+
+0%
+
+Alan Nathan
+
+375,000 (2)
+
+*
+
+375,000
+
+0
+
+0%
+
+Trust Philip & Lola Pomeranc TTEES U/A 2/4/94
+
+150,000 (3)
+
+*
+
+150,000
+
+0
+
+0%
+
+Amianna Stovall
+
+300,000 (4)
+
+*
+
+300,000
+
+0
+
+0%
+
+Alejandra Vazquez
+
+225,000 (5)
+
+*
+
+225,000
+
+0
+
+0%
+
+Bradley C. Reifler
+
+1,500,000 (6)
+
+ 1,500,000
+
+0
+
+0%
+
+Jason Guggenheim (7)
+
+150,000
+
+*
+
+150,000
+
+0
+
+0%
+
+Jill E. Gardner & Phillip Winesberry TEN COM
+
+100,000
+
+*
+
+100,000
+
+0
+
+0%
+
+Daniel Wagener & Wanda F. Wagener JTWROS 
+
+100,000
+
+*
+
+100,000
+
+0
+
+0%
+
+Paul Zeinfeld 
+
+50,000
+
+*
+
+50,000
+
+0
+
+0%
+
+Dr. Daniel P. Conte 
+
+75,
+
+000
+
+*
+
+75,
+
+000
+
+0
+
+0%
+
+Paul S. Hudson
+
+50,000
+
+*
+
+50,000
+
+0
+
+0%
+
+Joseph W. Princiotta 
+
+25,000
+
+*
+
+25,000
+
+0
+
+0%
+
+Samuel T. Cosma & Matthew T. Rega TEN COM 
+
+125,000
+
+*
+
+125,000
+
+0
+
+0%
+
+Valentine Corporation 
+
+25,000(8)
+
+*
+
+25,000
+
+0
+
+0%
+
+The Valentine Family Trust 
+
+25,000
+
+(9)
+
+*
+
+25,000
+
+0
+
+0%
+
+Anthony R. Lorie 
+
+25,000
+
+*
+
+25,000
+
+0
+
+0%
+
+Guy Radthe & Susan Radthe JTWROS
+
+50,000
+
+*
+
+50,000
+
+0
+
+0%
+
+Joseph De Mateo & Carmine De Matteo JTWROS 
+
+50,000
+
+*
+
+50,000
+
+0
+
+0%
+
+Jerry Pane
+
+150,000
+
+*
+
+150,000
+
+0
+
+0%
+
+Chester A. Yates
+
+50,000
+
+*
+
+50,000
+
+0
+
+0%
+
+Vern Hollingsworth
+
+25,000
+
+*
+
+25,000
+
+0
+
+0%
+
+Salvatore D Angelo
+
+50,000
+
+*
+
+50,000
+
+0
+
+0%
+
+John Stellar & John Schmidt
+
+25,000
+
+*
+
+25,000
+
+0
+
+0%
+
+Seymour Strasser
+
+41,666
+
+*
+
+41,666
+
+0
+
+0%
+
+Elia Vacchione & Floraine Vecchione
+
+16,666
+
+*
+
+16,666
+
+0
+
+0%
+
+Mohammed S. Alyamani
+
+166,667
+
+*
+
+166,667
+
+0
+
+0%
+
+Monica E. Jones
+
+20,000
+
+*
+
+20,000
+
+0
+
+0%
+
+Timothy P. Jones
+
+20,000
+
+*
+
+20,000
+
+0
+
+0%
+
+Gregory D. Ackerman
+
+20,000
+
+*
+
+20,000
+
+0
+
+0%
+
+Gerald W. Soderquist
+
+20,000
+
+*
+
+20,000
+
+0
+
+0%
+
+Peter D. Ackerman
+
+20,000
+
+*
+
+20,000
+
+0
+
+0%
+
+Arthur DeWitt Ackerman
+
+16,666
+
+*
+
+16,666
+
+0
+
+0%
+
+Robert Vecchione & Rosalie Vecchione
+
+58,331
+
+*
+
+58,331
+
+0
+
+0%
+
+Page 38 of 79
+
+George Giannandrea
+
+20,000
+
+*
+
+20,000
+
+0
+
+0%
+
+Frank
+
+Marter
+
+20,000
+
+*
+
+20,000
+
+0
+
+0%
+
+Jeffrey J. Harrington
+
+150,000
+
+*
+
+150,000
+
+0
+
+0%
+
+Daniel
+
+Driscoll
+
+1,500,000
+
+*
+
+1,500,000
+
+0
+
+0%
+
+Noel Williams Quinn & Paul Quinn JTWROS
+
+25,000
+
+*
+
+25,000
+
+0
+
+0%
+
+Lawrence R. Mesarick
+
+62,500
+
+*
+
+62,500
+
+0
+
+0%
+
+Todd & Maria King JTWROS
+
+150,000
+
+*
+
+150,000
+
+0
+
+0%
+
+Irene K. Ackley
+
+125,000
+
+*
+
+125,000
+
+0
+
+0%
+
+Irving & Bette Betrock
+
+450,000
+
+*
+
+450,000
+
+0
+
+0%
+
+Sharon Najger
+
+125,000
+
+*
+
+125,000
+
+0
+
+0%
+
+E.P. Desrochers
+
+125,000
+
+*
+
+125,000
+
+0
+
+0%
+
+James & Sally Mayer JTWROS
+
+250,000
+
+*
+
+250,000
+
+0
+
+0%
+
+John & Martha King JTWROS
+
+150,000
+
+*
+
+150,000
+
+0
+
+0%
+
+Michael B. Crews Sr.
+
+20,832
+
+*
+
+20,832
+
+0
+
+0%
+
+Rebecca B. Crews
+
+20,834
+
+*
+
+20,834
+
+0
+
+0%
+
+Michael B. Crews Jr. 
+
+41,666
+
+*
+
+41,666
+
+0
+
+0%
+
+Joseph C. Crews
+
+41,668
+
+*
+
+41,668
+
+0
+
+0%
+
+M. Shane Thompson
+
+75,000
+
+*
+
+75,000
+
+0
+
+0%
+
+Timothy R. Thompson
+
+75,000
+
+*
+
+75,000
+
+0
+
+0%
+
+Amy Freese
+
+75,000
+
+*
+
+75,000
+
+0
+
+0%
+
+Ronald W. Thompson
+
+125,000
+
+*
+
+125,000
+
+0
+
+0%
+
+Marilinette Thompson
+
+125,000
+
+*
+
+125,000
+
+0
+
+0%
+
+Allen Dukes
+
+275,000
+
+*
+
+275,000
+
+0
+
+0%
+
+Benjamin E. Jefferies
+
+250,000
+
+*
+
+250,000
+
+0
+
+0%
+
+James Tully
+
+62,500
+
+*
+
+62,500
+
+0
+
+0%
+
+Shirley Desrochers
+
+125,000
+
+*
+
+125,000
+
+0
+
+0%
+
+Martha R. King
+
+62,500
+
+*
+
+62,500
+
+0
+
+0%
+
+Richard and Eleanor Neubauer
+
+250,000
+
+*
+
+250,000
+
+0
+
+0%
+
+James Mayer 
+
+62,500
+
+*
+
+62,500
+
+0
+
+0%
+
+Daniel Wagener
+
+250,000
+
+*
+
+250,000
+
+0
+
+0%
+
+Thomas Rampen
+
+330,000
+
+*
+
+330,000
+
+0
+
+0%
+
+Terry Walcott
+
+62,500(10)
+
+*
+
+62,500
+
+0
+
+0%
+
+Deborah Walcott
+
+125,000(11)
+
+*
+
+125,000
+
+0
+
+0%
+
+Howard Schechter
+
+25,000
+
+*
+
+25,000
+
+0
+
+0%
+
+Sheldon Baer & Norma Baer JWTROS
+
+25,000
+
+*
+
+25,000
+
+0
+
+0%
+
+Steven Zeinfeld
+
+50,000
+
+*
+
+50,000
+
+0
+
+0%
+
+TOTAL
+
+34,807,496
+
+ 
+
+34,807,496
+
+ 
+
+Page 39 of 79
+
+*
+
+Represents less than 1%.
+
+(1) These shares include 5 million shares issuable upon the exercise of a warrant.
+
+The warrant is exercisable into common stock at $0.40 per share and expires on December 21, 2010. Of these shares, 10 million were granted in exchange for services provided by Armada Partners, L.P. and/or Mr. Armando Ruiz. Voting control and dispositive power over these shares is held by Mr. Armando Ruiz. Armada Partners, L. P. and/or Mr. Armando Ruiz, the principal of its investment advisor s may continue to introduce the Company to financial institutions which could potentially provide analyst coverage and/or to persons or entities that may be able to assist the Company with project financing for the Company s planned construction of WTE plants and the financing of the Company s planned Addpower business.
+
+(2) These shares include 125,000 shares issuable upon the exercise of a warrant. 
+
+The warrant is exercisable into common stock at $0.40 per share and expires on December 21, 2010
+
+ 
+
+(3) These shares include 50,000 shares issuable upon the exercise of a warrant.
+
+The warrant is exercisable into common stock at $0.40 per share and expires on December 21, 2010. Voting control and dispositive power over these shares is held by Philip & Lola Pomeranc.
+
+(4) These shares include 100,000 shares issuable upon the exercise of a warrant.
+
+The warrant is exercisable into common stock at $0.40 per share and expires on December 21, 2010.
+
+ 
+
+(5) These shares include 75,000 shares issuable upon the exercise of a warrant.
+
+The warrant is exercisable into common stock at $0.40per share and expires on December 21, 2010
+
+ 
+
+(6) These shares include 500,000 shares issuable upon the exercise of a warrant.
+
+The warrant is exercisable into common stock at $0.40 per share and expires on December 21, 2010.
+
+ 
+
+(7) Mr. Guggenheim served as our Vice President of Strategy and Business Development from October 2006 through January 2007. 
+
+These shares were issued to Mr. Guggenheim as severance benefits in January 2007.
+
+(8)
+
+ Voting control and dispositive power over these shares is held by Robert O. Valentine, Sr.
+
+(9)
+
+ Voting control and dispositive power over these shares is held by Robert O. Valentine, Sr. and Madeleine Valentine.
+
+(10)
+
+ These shares include 31,250 shares issuable upon the exercise of a warrant. The warrant is exercisable into common stock at $0.40 per share and expires on April 27, 2008.
+
+ 
+
+(11) These shares include 62,500 shares issuable upon the exercise of a warrant.
+
+The warrant is exercisable into common stock at $0.40 per share and expires on April 27, 2008.
+
+ 
+
+DILUTION
+
+The common stock to be sold by the selling stockholders is common stock that is currently issued and outstanding or is issuable on exercise of warrants that have already been issued. Accordingly, there will be no dilution to our existing stockholders from the sale of shares registered hereby.
+
+PLAN OF DISTRIBUTION
+
+The selling stockholders may sell all or a portion of the shares beneficially owned by them and offered hereby from time to time directly or through one or more underwriters, broker-dealers or agents. If the shares are sold through underwriters or broker-dealers, the selling stockholders will be responsible for underwriting discounts or commissions or agent's commissions. The shares may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale, or at negotiated prices. These sales may be effected in transactions, which may involve crosses or block transactions, 
+
+ 
+
+on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale;
+
+ 
+
+in the over-the-counter market;
+
+ 
+
+in transactions otherwise than on these exchanges or systems or in the over-the-counter market;
+
+ 
+
+through the writing of options, whether such options are listed on an options exchange or otherwise;
+
+ 
+
+ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
+
+ 
+
+block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
+
+ 
+
+purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
+
+ 
+
+an exchange distribution in accordance with the rules of the applicable exchange;
+
+ 
+
+privately negotiated transactions;
+
+ 
+
+short sales;
+
+Page 40 of 79
+
+ 
+
+sales pursuant to Rule 144;
+
+ 
+
+broker-dealers may agree with the selling security holders to sell a specified number of such shares at a stipulated price per share;
+
+ 
+
+a combination of any such methods of sale; and
+
+ 
+
+any other method permitted pursuant to applicable law.
+
+If the selling stockholders effect such transactions by selling shares to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the selling stockholders or commissions from purchasers of the shares for whom they may act as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the types of transactions involved). In connection with sales of the shares or otherwise, the selling stockholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the shares in the course of hedging in positions they assume. The selling stockholders may also sell shares short and deliver shares covered by this prospectus to close out short positions and to return borrowed shares in connection with such short sales. The selling stockholders may also loan or pledge shares to broker-dealers that in turn may sell such shares.
+
+The selling stockholders may pledge or grant a security interest in some or all of the warrants or shares owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933, as amended, amending, if necessary, the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer and donate the shares in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.
+
+The selling stockholders and any broker-dealer participating in the distribution of the shares may be deemed to be "underwriters" within the meaning of the Securities Act, and any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act. At the time a particular offering of the shares is made, a prospectus supplement, if required, will be distributed which will set forth the aggregate amount of shares being offered and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the selling stockholders and any discounts, commissions or concessions allowed or re-allowed or paid to broker-dealers.
+
+Under the securities laws of some states, the shares may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the shares may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.
+
+There can be no assurance that any selling stockholder will sell any or all of the shares registered pursuant to the
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001334303_icx_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001334303_icx_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..cc7e61cb5940851659d8222c56e0c214c2892075
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001334303_icx_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. Although we believe this summary is materially complete, you should read this entire prospectus carefully, including the matters set forth under Risk Factors, Management s Discussion and Analysis of Financial Condition and Results of Operations, our consolidated financial statements and the notes thereto and the financial statements and notes thereto for each our subsidiaries appearing elsewhere in this prospectus, before making an investment decision. Unless the context requires otherwise, references in this prospectus to ICx, we, us, and our refer to ICx Technologies, Inc. and its subsidiaries on a consolidated basis. ICx Technologies, Inc. Overview We are a leading developer, manufacturer, marketer and integrator of advanced sensing technologies, products and solutions. Our first and for now principal market is homeland security. Our high precision, proprietary technologies provide a strong foundation upon which we have built a comprehensive line of products that detect, identify and prevent a broad range of critical security threats. Through our proven ability to develop and convert next generation technologies into unique, commercially successful products, we are able to offer a wide range of high quality, compact detection and surveillance products that we believe are more sensitive, more accurate and more cost-effective than conventional products. Our business is organized into three divisions Detection, Surveillance and Solutions through which we develop, manufacture and market complete solutions that proactively address some of the most sophisticated and severe security threats facing the world today. We believe our ability to understand the nature of sophisticated security threats, the technological potential of security solutions and the complex procurement processes of both government and private sector customers differentiates us from other companies in the market. We have developed what we believe is the most comprehensive line of products and integration capabilities for the homeland security market available through a single company. Our revenue grew 187% from $31.4 million in 2005 to $90.2 million in 2006, primarily as a result of acquisitions in 2005 and organically grew 54% to $94.6 million in the first nine months of 2007 as compared to $61.6 million for the same period in 2006. Our net loss increased 764% from $14.8 million in 2005 to $128 million in 2006, primarily due to a goodwill impairment charge of $66 million and a loss from discontinued operations of $18.9 million in 2006. In the first nine months of 2007 as compared to the same period in 2006, our net loss decreased 38% from $37.8 million to $23.3 million primarily due to increased revenue in the first nine months of 2007. As of September 30, 2007, our accumulated deficit was $170.9 million. We have achieved and intend to expand our leadership position in the homeland security market by developing innovative technologies. More than half of our approximately 820 employees are highly skilled technologists. From the beginning of 2004 through September 30, 2007, we and the companies we have acquired have invested approximately $47 million of internal funds in research and development and in addition have recognized approximately $126 million under contracts to conduct research and development for programs we believe will advance our technology and products and strengthen our leadership position in the homeland security market. Through these directed resources, we believe we have developed best-in-class technology and products. For example, our explosives detection systems use amplifying fluorescence polymer technology to detect trace levels of explosives with a level of precision that is in excess of 1,000 times more sensitive than currently deployed systems. We believe we have developed the most stable and accurate gamma and neutron radiation detection systems available in the market today with immediate isotope identification that allows our systems to differentiate between benign and potentially threatening radiation sources. We also have developed new approaches to identify and amplify DNA fragments for more precise and reliable identification of biological agents. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Table of Contents Building on our technological expertise, we have successfully commercialized and marketed a portfolio of products and solutions that we believe are more sensitive, accurate, compact and affordable than those of our competitors. For example, we build the most sensitive portable explosive detector, the smallest spectroscopic radiation detector and the most accurate mobile solutions for perimeter surveillance available in the market today. We will continue converting our innovative technology pipeline into new growth platforms, enabling us to pursue new market opportunities. We sell our products and services both directly through a global sales force and indirectly through leading industry participants with whom we have developed strategic alliances and partnerships. Due to the breadth and diverse nature of our product offerings and technology portfolio, as well as our ability to deliver solutions for a comprehensive range of critical security applications, the future success of our business is not dependent upon a single product, technology, customer or government program. Our direct customers include federal agencies, such as the U.S. Department of Homeland Security, U.S. Customs & Border Protection (Border Patrol) and the Transportation Security Administration, as well as various state and local governments and agencies, including the New York Police Department and the Port of Long Beach. We also sell our products, components and sub-systems to leading integrators in the security and defense industries who either resell our products or integrate them into comprehensive security installations for their end customers. The value-added-resellers and system integrators that we sell products to include The Boeing Company, Honeywell International, Inc., Northrop Grumman Corp., Raytheon Company, SAIC, Inc. and Thermo Fisher Scientific Inc. We sell to military customers such as the U.S. Department of Defense (DoD), the U.S. Air Force, the U.S. Marines and the U.S. Army. Additionally, we are expanding our addressable markets by selling to private sector customers such as Federal Express Corporation, The Walt Disney Company and two international airports serving the city of Houston, Texas and surrounding communities. Industry Overview The proliferation of global security threats has reached unprecedented levels. These threats not only jeopardize innocent lives, but also have the potential to inflict severe damage upon the global economy. Both the government and private sectors are preparing to address increasingly sophisticated types of terrorist attacks, including chemical, biological, radiological, nuclear and explosive threats, as well as other major security risks and natural disasters. The homeland security market is estimated to be approximately $55 billion in 2006. Because of the importance of security to the global economy, we believe the homeland security market is less exposed to economic downturns and will continue to grow rapidly over the next decade. The U.S. military is facing challenges adapting to a new style of asymmetric warfare that requires tactics similar to those used in the homeland security market. An increasingly large amount of the DoD budget is expected to shift in fiscal year 2007 toward advanced technologies that better equip U.S. military forces to face such threats. We have identified $20 billion in the $450 billion fiscal year 2007 DoD budget that is associated with the types of programs we can address. We expect such spending to increase in future years as the full extent of the new threats become more apparent and the DoD works through the aftermath of the current conflicts. The demand for new security products and technologies also extends to the $145 billion private sector, a rapidly growing market in which many large commercial organizations have made detection, access control and advanced video surveillance a focal point for their security initiatives. Private sector organizations are expected to spend approximately $30 billion on these technologies in 2007. In addition, we believe our technologies will have utility in a wide range of applications outside the homeland security and military markets. Historically, advanced technologies developed for security and military Amendment No. 5 to FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 Table of Contents applications have later been found to have applications in other commercial markets, such as biological research and energy, and have led to the creation of entirely new markets. We believe our technologies may in the future be used in products and solutions for markets that surpass the size of the markets we currently serve. Market Opportunity Conventional security products typically are not portable, are either not sensitive enough or generate too many false positives, are difficult to network, or are too expensive for many users to buy and operate. In addition, due to the fragmented nature of the market, many market participants have either focused on manufacturing specific products or acted as integrators who network the products of other companies without having a detailed understanding of the capabilities of these products. As a result, customers are demanding single-source providers in order to allow them to streamline their procurement processes and isolate accountability with fewer vendors. We provide an expansive portfolio of technology products and solutions that address many of the specific demands of our customers. Our products not only address the shortcomings of conventional products, but also interact in a manner that facilitates the interchange of critical security information. We believe that our ability to network advanced sensors into highly effective, integrated solutions will enable us to capture market share and deliver our customers high-value solutions that warrant premium pricing. We believe our ability to understand the nature of sophisticated security threats, the technological potential of security solutions and the complex procurement processes of both government and private sector customers differentiates us from other companies in the market. By leveraging our unique technical expertise, we develop, produce and market what we believe are the most advanced sensor and surveillance products available in the homeland security market today. We believe we will be able to apply our technological expertise in security to develop new products in non-security markets. Our Competitive Strengths We develop, manufacture, market and integrate products and solutions that detect, identify and prevent a broad range of critical security threats. We believe the following competitive strengths will continue to enhance our leadership position in the homeland security market and the broader security industry. Leading proprietary technologies. We are a leading innovator developing high precision, proprietary security technologies that are more accurate, compact and less susceptible to false positives than most conventional technologies. More than half of our approximately 820 employees are highly skilled technologists. From the beginning of 2004 through September 30, 2007, we and companies we have acquired have invested approximately $47 million in research and development and have received approximately $126 million under contracts to conduct research and development for programs we believe will advance our technology and products and strengthen our leadership position in the homeland security market. Our emphasis on innovation has resulted in over 50 issued patents, over 25 pending patents and over 40 licensed patents and patent applications. We also have strong connections with leading research laboratories and universities which foster innovation and advance our technology leadership. Proven ability to develop, market and commercialize products. We have been successful in utilizing our advanced technologies to develop commercially viable products and solutions. We have received and expect to continue to receive substantial government funding to carry out our research and product development. Since 2005, we have quadrupled the size of our product line through acquisitions and individual development from 10 to 40 products. We also understand and are able to successfully navigate the complex security procurement processes of our customers. The growth in sales of our products demonstrates our commercial success. Broad and diversified product portfolio. Leveraging our unique technical expertise, we develop, produce and market what we believe are the most advanced products and solutions that detect, identify and prevent a broad range of critical security threats. We believe that our solutions are more sensitive, accurate, compact and ICx Technologies, Inc. (Exact name of Registrant as specified in its charter) Table of Contents affordable than those of our competitors. Due to our diverse product portfolio and our ability to provide solutions for a wide range of critical security applications, the future success of our business is not dependent on a single product, technology, customer or government program. Ability to deliver comprehensive integrated solutions to key customers. Our ability to integrate our technology and products into comprehensive, reliable and affordable solutions provides our customers a single source to help address a broad range of critical security threats. We have developed our products in a manner that facilitates interoperability and functional efficiency and also accommodates third-party hardware and software. Our ability to understand the nature of complex security threats, our breadth of product offerings and broad integration capabilities allows us to deliver and implement effective solutions to meet our customers needs. Experienced management team. Our management team and advisory board has a mix of government and private sector experience across different geographies, industries and functions. Our team promotes entrepreneurial creativity and emphasizes the importance of attracting, developing and retaining the most highly-qualified personnel in our industry. Since our inception, our management team has acquired and integrated 15 diverse companies that have enhanced our capabilities and technology leadership, and our management is in the process of integrating a company we acquired in October 2007. Our Growth Strategy Our objective is to strengthen our position as a leading provider of technologies, products and solutions that detect, identify and prevent a broad range of critical security threats for the homeland security and military markets and to expand on that leadership position by developing products for other markets. As part of our growth strategy, we seek to: Strengthen our technological leadership. We intend to continue to develop and acquire next generation technologies to strengthen our technological leadership position. We will continue to work closely with our customers and partners and will seek further government development funding. We will also invest a substantial amount of our own funds in research and development to further enhance our technology leadership position. Enhance and extend our product line. We plan to introduce new models of our current products with enhancements to the capabilities of those products in order to address our customers evolving needs. We will continue converting our innovative technologies in our research and development pipeline into new products and platforms to pursue new market opportunities. Provide integrated solutions. We intend to continue to provide integrated, single-source solutions that prevent a broad range of critical security threats. We believe that significant opportunities exist for companies that understand the nature of complex security threats and meet customers needs by developing and delivering effective solutions that respond to those threats and make it easier to capture data from advanced, multifunctional products through integrated networked command platforms. Scale our distribution channels. We intend to continue to build and strengthen our direct sales force and expand our indirect channels to extend our geographic reach and market penetration. We have hired key personnel from companies such as FLIR Systems Inc., General Electric Company, Johnson Controls, Inc., Smiths Detection and Thermo Fisher Scientific Inc., as well as from government agencies including the DoD, the U.S. Air Force and the Executive Office of the White House. In addition, in 2007 we significantly expanded our network of sales representatives to market our products to private sector customers and state and local governments and agencies. Expand into non-security markets. While in the near-term we intend to continue to focus primarily on products and solutions for the homeland security and military markets, we have developed technologies that are being used in non-security applications, such as chemical sensors for pesticide detection and thermal cameras used to inspect brakes on commercial trucks. We believe our technologies have utility in a wide variety of Delaware 3826 77-0619113 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 2100 Crystal Drive Suite 650 Arlington, VA 22202 (703) 678-2111 (Address, including zip code, and telephone number, including area code, of Registrant s principal executive offices) Table of Contents non-security applications and we intend to continue to explore applications for our technologies in markets that are not related to security. We believe this will allow us to leverage our existing intellectual property and infrastructure to expand our addressable markets and further accelerate our growth. Grow through complementary acquisitions. We aim to grow our business, relationships and product offerings by acquiring select companies and assets that enhance our technology leadership, broaden our product offerings or expand our customer relationships. We maintain a highly disciplined approach in our pursuit of acquisitions and their integration, including a rigorous assessment of technological strengths, growth prospects, synergy potential, management strengths and the intrinsic value of potential targets. Since our inception, we have acquired and integrated 15 companies, and we are in the process of integrating a company we acquired in October 2007. Summary Risks There are numerous risks and uncertainties that may affect our financial and operating performance and our growth. You should carefully consider all of the risks discussed in Risk Factors, which begins on page 12, before investing in our common stock. These risks include the following: our limited operating history, the nature of our business and the development of the markets we serve; our reliance on sales to the U.S. government that could be affected by changes in federal funding levels; our reliance on sales to prime contractors, systems integrators and original equipment manufacturers; the highly competitive nature of the homeland security market, and the adverse consequences if we are unable to compete effectively; risks related to our ability to innovate successfully and quickly; and operational risks that cannot be adequately covered by insurance or indemnity. Corporate Information We were incorporated in Delaware in 2003. Our principal executive offices are located at 2100 Crystal Drive, Suite 650, Arlington, Virginia 22202 and our telephone number is (703) 678-2111. Our website is located at www.icxt.com. Information on our website should not be considered part of this prospectus. Daniel T. Mongan Vice President, General Counsel and Secretary ICx Technologies, Inc. 2100 Crystal Drive Suite 650 Arlington, VA 22202 (703) 678-2111 Fax (703) 678-2112 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Michael J. Danaher, Esq. Jon Layman, Esq. Wilson Sonsini Goodrich & Rosati Professional Corporation 650 Page Mill Road Palo Alto, CA 94304 (650) 493-9300 Fax (650) 493-6811 Kirk A. Davenport II, Esq. Latham & Watkins LLP 885 Third Avenue New York, NY 10022 (212) 906-1200 Table of Contents The Offering Common stock offered by us 5,000,000 shares Common stock to be outstanding after the offering 33,471,939 shares Option to purchase additional shares We have granted the underwriters an option exercisable for 30 days after the date of this prospectus to purchase, from time to time, in whole or in part, up to an aggregate of 750,000 shares of common stock at the public offering price less underwriting discounts and commissions. Use of proceeds We will receive net proceeds from this offering of approximately $82.5 million, assuming an initial public offering price of $18.00 per share (the midpoint of the range set forth on the cover of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, which we will use for general corporate purposes, including working capital, the expansion of our sales and marketing organizations, acceleration of our research and development efforts, the expansion of our manufacturing capabilities, purchases of capital equipment and potential acquisitions of businesses, products and technologies that we believe are complementary to our business. We have no definitive agreements with respect to future acquisitions and have no commitments with respect to the net proceeds of this offering. We also will use a portion of the offering proceeds to repay a $7.0 million promissory note and all accrued interest payable to DP1, LLC. We have granted the underwriters an option exercisable for 30 days after the date of this prospectus to purchase up to 750,000 additional shares at the initial public offering price less underwriting discounts and commissions. To the extent the underwriters exercise this option in full, we estimate that the net proceeds to us from such exercise will be approximately $12.6 million. See Use of Proceeds. NASDAQ Global Market symbol ICXT The number of shares of common stock to be outstanding after this offering is based on shares of common stock outstanding as of September 30, 2007, and includes 18,525,595 shares that we will issue upon conversion to common stock of all of our outstanding shares of preferred stock, effective immediately prior to completion of this offering, and 75,718 shares of restricted stock that will vest upon the completion of this offering. The number of shares of common stock to be outstanding after this offering excludes the following shares: 3,306,101 shares issuable upon exercise of stock options outstanding as of September 30, 2007, which have a weighted average exercise price of $8.77 per share; Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a) may determine. Table of Contents 346,590 shares of unvested restricted stock awards and restricted stock units as of September 30, 2007; 393,219 shares of common stock issuable upon exercise of warrants at a weighted average exercise price of $14.55 per share; and 8,000,000 shares of common stock reserved for future issuance under our 2007 Equity Incentive Plan and 5,000,000 shares of common stock reserved for future issuance under our 2007 Employee Stock Purchase Plan, each of which will be effective upon the completion of this offering. Unless otherwise stated, all information contained in this prospectus: gives effect to the conversion into common stock of all of our outstanding preferred stock; gives effect to amendments to our certificate of incorporation and bylaws that will become effective upon completion of this offering; assumes no exercise of the underwriters option to purchase 750,000 additional shares of common stock from us; and assumes an initial public offering price of $18.00 per share, the mid-point of the price range set forth on the cover page of this prospectus. Table of Contents Summary Consolidated Financial Information The following tables summarize the financial data of our business. You should read this information along with our discussion in Management s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and accompanying notes included elsewhere in this prospectus. The summary consolidated statement of operations data for each of the three years in the period ended December 31, 2006 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statement of operations data for the nine months ended September 30, 2007 and 2006, and the actual summary consolidated balance sheet data as of September 30, 2007, have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. Our unaudited summary consolidated financial data as of September 30, 2007 and for the nine months ended September 30, 2007 and 2006 have been prepared on the same basis as the annual consolidated financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of this data in all material respects. We have completed a number of acquisitions over the last three fiscal years, each of which was accounted for as a purchase transaction, which may affect year-over-year comparisons of our consolidated summary financial data. For a more detailed description of such acquisitions, see note 4, Business Combinations and Related Intangibles, in the notes to our consolidated financial statements contained elsewhere in this prospectus. Accordingly, in addition to our actual financial information, we have also included pro forma operating results for 2006 and 2005, prepared as if our 2005 business acquisitions had been consummated as of the beginning of 2004. The pro forma financial information is for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the businesses been acquired at that time, nor are they intended to be a projection of future results. Table of Contents The information contained in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Subject to Completion, dated November 7, 2007 PROSPECTUS 5,000,000 Shares ICx Technologies, Inc. Common Stock (1) In August 2006, we realized a $3.1 million gain on the sale of substantially all of the assets of a non-strategic operation owned by Nomadics, Inc. that was acquired in August 2005. In December 2006, we adopted a plan for the sale of three companies that did not align with our overall strategic plans. In February, March and April 2007, we sold Nuvonyx Europe, Harbinger Technologies Group, Inc. and Nuvonyx, Inc., respectively, pursuant to this plan. Loss from discontinued operations was $18.9 million in 2006, which includes a $13.1 million impairment loss to write-down the carrying amounts of two of the discontinued companies to their estimated fair values less costs associated with the sale of the companies. (2) Gives effect to the conversion of our outstanding preferred stock to common stock on a one-for-one basis immediately prior to the completion of this offering. We are offering 5,000,000 shares of our common stock in this initial public offering. No public market currently exists for our common stock. Our common stock has been approved for listing on The NASDAQ Global Market under the symbol ICXT. We anticipate that the initial public offering price will be between $17.00 and $19.00 per share. Investing in our common stock involves risks. See
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+PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. Unless otherwise stated in this prospectus, references to "we," "us" or "our company" refer to Industrial Services Acquisition Corp. The term "public stockholders" means the holders of common stock sold as part of the units in this offering or in the aftermarket, including any existing stockholders to the extent that they purchase or acquire such shares. All share and per share information in this prospectus gives effect to a 1-for-1.404444 reverse stock split effected on May 2, 2006, a 1.071285-for-1 forward stock split effected on September 1, 2006 and a 1-for-1.123596 reverse stock split on January 19, 2007. Unless we tell you otherwise, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option. The Company We are a blank check company organized under the laws of the State of Delaware on August 4, 2005. We were formed to acquire, through a merger, capital stock exchange, asset acquisition, stock purchase or other similar business combination a currently unidentified operating business. To date, our efforts have been limited to organizational activities. We intend to focus on businesses within the business services sector, although our acquisition efforts will not be limited to any particular industry. Although our acquisition strategy is not limited to any particular industry, we intend to focus on target businesses in the following sectors of the business services industry: logistics; freight brokerage; freight forwarding; insurance brokerage; medical lab testing; and staffing. Examples of companies operating in these sectors are: UTi Worldwide Inc. and Landstar System Inc. (logistics), CH Robinson Worldwide Inc. and HUB Group Inc. (freight brokerage), EGL, Inc. and Forward Air, Inc. (freight forwarding), Marsh Inc. and AON Corporation (insurance brokerage), Quest Diagnostics Incorporated and Laboratory Corporation of America Holdings (medical lab testing) and Barrett Business Services, Inc. and RemedyTemp Inc. (staffing). Given the experience of our management team, we intend to seek targets within one of several sectors of the business services industry. Typical target businesses will leverage scale of operations and a specific expertise to perform value-added services for customers, allowing customers to conduct their operations more efficiently or more effectively. We intend to pursue targets operating in low capital-intensive industries that are less sensitive to business cycles and not subject to obsolescence. In addition, prospective target businesses are likely to exhibit some of the following characteristics: strong customer relationships and a well-diversified customer base; recurring revenue, which is revenue that typically is generated from customers on a regular basis as a result of, among other things, contractual obligations or due to the customers need for, and payment for, a particular service at regular intervals; stable cash flow, which is cash flow that does not fluctuate dramatically from fiscal period to period; and opportunities for both organic growth and consolidation through acquisitions within fragmented industries. While we may seek to effect business combinations with more than one target business, our initial business combination must be with a target business or businesses whose collective fair market value is at least equal to 80% of our net assets (exclusive of Maxim Group LLC s deferred underwriting compensation being held in the trust account) at the time of such acquisition. Consequently, it is likely that we will have the ability to initially complete only a single business combination, although this may entail the simultaneous acquisitions of several operating businesses. We may not be able to acquire more than one target business because of various factors, including possible complex accounting issues, which would include generating pro forma financial statements reflecting the operations of several target businesses as if they had been combined, and numerous logistical issues, which could include attempting to coordinate the timing of negotiations, proxy statement disclosure and closings with multiple target businesses. In addition, we would also be exposed to the risks that conditions to closings with respect to the acquisition of one or more of the target businesses would not be satisfied bringing the fair market value of the initial business combination below the required fair market value of 80% of net assets threshold. As used in this prospectus, a target business is an operating business, and a business combination means the acquisition by us of such a target business through a merger, capital stock exchange, asset acquisition, stock purchase or other similar business combination. We do not have any specific business combination under consideration and we have not, nor has anyone on our behalf, contacted any potential target business or had any discussions, formal or otherwise, with any prospective target business with respect to such a transaction. Additionally, we have not engaged or retained any agent or other representative to identify or locate any acquisition candidate. Neither we nor any of our agents, affiliates or representatives have conducted any research or taken any measures, directly or indirectly, to locate or contact a target business. However, Burke Smith, our chief financial officer, secretary and a director, has had limited and non-substantive personal conversations with his former boss at UBS, an investment professional, stating that the Company is in the process of pursuing an initial public offering as one of several business ventures in which he is engaged in. This contact took place over lunch sometime in August or September of 2005. During such encounter, no potential targets or targeted business sectors were ever discussed. Furthermore, there has been no subsequent contact between these parties. Neither the Company s management nor its stockholders have been contacted by this individual in regard to any matters. Similarly, Ronald Kesselman, one of our directors, sometime in August or September of 2005, had a non-substantive conversation with a private equity principal of Charterhouse Group Inc., a person with whom Mr. Kesselman works from time to time. Mr. Kesselman had a general conversation about what the Company is and what its investment focus would be. At no point during this conversation were specific targets discussed. Neither Mr. Kesselman nor any member of the Company s management have had dialogue with, or have been contacted by, this individual since then. Such contacts have not introduced, identified, selected or chosen any target businesses to or for us. Our offices are located at c/o AMCO Distribution Services, Inc., 2807 El Presidio St., Carson, California 90810, and our telephone number is (310) 900-1450. Private Placement Certain of our officers, directors or their affiliates, have agreed to purchase from us an aggregate of 292,660 insider units, at $8.00 per unit, in a private placement that will occur prior to the effective date of this offering. The funds utilized to acquire the insider units are funds of the insiders and affiliated and are not borrowed funds. All such insider units will be identical to the units offered in this offering, except that: (i) subject to certain limited exceptions, none of the insider units will be transferable or salable until after we complete a business combination; (ii) the common stock included in the insider units will not have any rights to liquidation distributions in the event we fail to consummate a business combination; (iii) the holders of the insider units may not exercise conversion rights with respect to the shares of common stock included in the insider units; (iv) the shares of common stock included in the insider units must be voted in favor of any proposed business combination; and (v) the warrants included in the insider units are not subject to redemption if held by the initial holders thereof or their permitted transferees and may be exercised on a cashless basis. The $2,247,629 of net proceeds from the sale of these insider units will be added to the portion of the proceeds from this offering to be held in the trust account pending the completion of our initial business combination. Incentive Warrants Prior to the private placement, we will issue to certain officers, directors or their affiliates incentive warrants to purchase up to an aggregate of 690,000 shares of our common stock. These warrants will be similar to the warrants included in the units offered in this offering and will be exercisable for $0.01 per share, except that: (i) they are not exercisable until three months after we complete a business combination, and then the incentive warrants will vest in three installments, with the first 345,000 shares vesting on the date that is six months from the consummation of a business combination, the second 172,500 shares vesting on the date that is nine months from the business combination, and the last 172,500 shares vesting on the date that is one year from the date of the business combination; (ii) they will expire five years from the date of this prospectus; and (iii) they are not redeemable so long as they are held by the initial holder thereof (or any of its permitted transferees). UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amendment No. 5 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 INDUSTRIAL SERVICES ACQUISITION CORP. (Exact name of registrant as specified in its charter) Delaware 6770 20-2122262 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number) 2807 El Presidio St. Carson, California 90810 (310) 900-1450 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Mark McKinney, Chief Executive Officer Industrial Services Acquisition Corp. 2807 El Presidio St. Carson, California 90810 (310) 900-1450 (Name, address, including zip code, and telephone number, including area code, of agent for service) Kenneth R. Koch, Esq. Steven M. Skolnick, Esq. Ivan K. Blumenthal, Esq. Lowenstein Sandler PC Mintz Levin Cohn Ferris Glovsky and Popeo, P.C. 65 Livingston Avenue 666 Third Avenue Roseland, NJ 94111-3580 New York, New York 10017 (973) 597-2500 (212) 935-3000 (973) 597-2400 Facsimile (212) 983-3115 Facsimile Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. x If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o The Offering Securities offered: 4,000,000 units, at $8.00 per unit, each unit consisting of: one share of common stock; and one warrant. The units will begin trading on or promptly after the date of this prospectus. Each of the common stock and warrants may trade separately on the 90th day after the date of this prospectus, unless Maxim Group LLC determines that an earlier date is acceptable, based on their assessment of the relative strengths of the securities markets and small capitalization companies in general, and the trading pattern of, and demand for, our securities in particular. However, Maxim Group LLC may decide to allow continued trading of the units following such separation. In no event will Maxim Group LLC allow separate trading of the common stock and warrants until (i) we file an audited balance sheet reflecting our receipt of the gross proceeds of this offering, (ii) we file a Current Report on Form 8-K and issue a press release announcing when such separate trading will begin, and (iii) the business day following the earlier to occur of the expiration of the underwriters over-allotment option or its exercise in full. We will file a Current Report on Form 8-K with the Securities and Exchange Commission, or SEC, including an audited balance sheet, upon the consummation of this offering, which is anticipated to take place three business days from the date of this prospectus. The audited balance sheet will include proceeds we receive from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Form 8-K. If the over-allotment option is exercised following the initial filing of such Form 8-K, an amended Form 8-K will be filed with the SEC to provide updated financial information to reflect the exercise of the over-allotment option. The Form 8-K will be publicly available on the SEC s website at www.sec.gov. Common stock: Number outstanding before this offering and the private placement 1,072,624 shares, after giving effect to a 1-for-1.404444 reverse stock split effected on May 2, 2006, a 1.071285-for-1 forward stock split effected on September 1, 2006 and a 1-for-1.123596 reverse stock split effected on January 19, 2007. Number to be outstanding after this offering 5,365,284 shares. Warrants: Number outstanding before this offering and the private placement 0 Number to be outstanding after this offering and the private placement 4,000,000 warrants plus 292,660 warrants included in the insider units, plus 690,000 incentive warrants. Exercisability Each warrant is exercisable for one share of common stock. Exercise price $5.00 for each warrant, $0.01 for each incentive warrant. Exercise period The warrants will become exercisable on the later of: the completion of a business combination with a target business; or [____________], 2008 [one year from the date of this prospectus]. The warrants will expire at 5:00 p.m., New York City time, on [_________], 2011 [four years from the date of this prospectus], or earlier upon redemption. The incentive warrants will expire at 5:00 p.m., New York City time, on [_____________], 2012 [five years from the date of this prospectus]. Redemption: We may redeem the outstanding warrants (including any warrants issued upon exercise of the unit purchase option sold to Maxim Group LLC): in whole and not in part; at a price of $0.01 per warrant at any time after the warrants become exercisable; upon a minimum of 30 days prior written notice of redemption; and if and only if, the last sales price of our common stock equals or exceeds $11.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. We have established this criteria to provide warrant holders with a significant premium to the initial warrant exercise price as well as a sufficient degree of liquidity to cushion the market reaction, if any, to our redemption call. If the foregoing conditions are satisfied and we call the warrants for redemption, each warrant holder shall then be entitled to exercise his or her warrant prior to the date scheduled for redemption, however, there can be no assurance that the price of the common stock will exceed $11.50 or the warrant exercise price after the redemption call is made. We do not need the consent of Maxim Group LLC in order to redeem the outstanding warrants. In addition, we may not call the warrants for redemption unless the warrants comprising part of the units sold in this offering and the shares of common stock underlying those warrants are covered by an effective registration statement from the date of the redemption notice through the date fixed for the redemption. The warrants underling the private placement units and the incentive warrants are non-redeemable so long as such warrants are being held by the initial holder or its permitted transferee. Insider units purchased in the private placement: Certain of our officers, directors, or their affiliates, have agreed to purchase from us an aggregate of 292,660 insider units, at $8.00 per unit, in a private placement that will occur prior to the effective date of this offering. The net proceeds from the private placement of $2,247,629 will be added to the portion of the proceeds from this offering to be held in the trust account pending our completion of a business combination. The funds utilized to acquire the insider units are funds of the insiders and affiliated and are not borrowed funds. All such insider units will be identical to the units offered in this offering, except that: (i) subject to certain limited exceptions, none of the insider units will be transferable or salable until after we complete a business combination; (ii) the common stock included in the insider units will not have any rights to liquidation distributions in the event we fail to consummate a business combination; (iii) the holders of such warrants may not exercise conversion rights with respect to the shares of common stock included in the insider units; (iv) the shares of common stock included in the insider units must be voted in favor of any proposed business combination and, accordingly, such shares do not have conversion rights, as described below; and (v) the warrants included in the insider units are not subject to redemption if held by the initial holders thereof or their permitted transferees and may be exercised on a cashless basis. In addition, commencing on the date following consummation of a business combination, the insider units and the securities included in the insider units are entitled to registration rights pursuant to an agreement to be entered into in connection with the private placement. Incentive warrants: Prior to the private placement, we will issue to certain officers, directors or their designees incentive warrants to purchase up to an aggregate of 690,000 shares of our common stock. These warrants will be similar to the warrants included in the units offered in this offering and will be exercisable for $0.01 per share, except that: (i) they are not exercisable until three months after we complete a business combination, and then the incentive warrants will vest in three installments, with the first 345,000 shares vesting on the date that is six months from the consummation of a business combination, the second 172,500 shares vesting on the date that is nine months from the business combination, and the last 172,500 shares vesting on the date that is one year from the date of the business combination; (ii) they will expire five years from the date of this prospectus; and (iii) they are not redeemable so long as they are held by the initial holder thereof (or any of its permitted transferees). In addition, the incentive warrants cannot be sold or transferred by the designee until we complete a business combination (except that the officers, directors or their designees may transfer their incentive warrants only to persons or entities controlling, controlled by, or under common control of the officers, directors or their designees). In addition, commencing on the date such warrants become exercisable, the incentive warrants and the underlying common stock are entitled to registration rights under an agreement to be signed before the date of this prospectus. With those exceptions, the incentive warrants have terms and provisions that are identical to those of the warrants being sold as part of the units in this offering. Proposed OTC Bulletin Board symbols for our: Units [_____] Common stock [____] Warrants [____] Offering and private placement proceeds to be held in the trust account: $32,000,000 ($8.00 per publicly traded unit) of the net proceeds of this offering and the private placement (or $36,800,000 if the over-allotment option is exercised in full) will be placed in a trust account at Deutsche Bank Trust Company Americas maintained by Continental Stock Transfer & Trust Company, pursuant to an agreement to be signed on the date of this prospectus. Assuming no exercise of the over-allotment option, up to $31,066,000 of this amount ($7.76 per publicly traded unit) may be used by us for the purpose of effecting a business combination, and up to $960,000 ($0.24 per publicly traded unit) will be paid to Maxim Group LLC if a business combination is consummated, but will be forfeited by Maxim Group LLC if a business combination is not consummated. These proceeds will not be released until the earlier of the completion of a business combination or our liquidation; provided, however, that up to a maximum of $1,150,000 of interest earned on the trust account (net of taxes payable) will be released to us to fund our working capital requirements. The $960,000 of the funds attributable to the deferred underwriting compensation will be distributed to Maxim Group LLC less any amounts attributable to stockholders exercising their conversion rights upon completion of a business combination on the terms described in this prospectus or to the public stockholders upon our liquidation, but will in no event be available for use by us in a business combination. Therefore, unless and until a business combination is consummated, the proceeds held in the trust account (other than a portion of the interest earned on the trust account and released to us) will not be available to us. In the event the over-allotment is exercised in full, to the extent the amount held in trust is less than $8.00 per unit, then we have agreed to forego 50% of the interest earned on the amount held in trust to cover such shortfall until the interest earned provides the trust with an amount that would equal $8.00 per unit, which amount would be $192,000 if the over-allotment was exercised in full. No interest will be payable to public stockholders converting in connection with a business combination. The expenses that we may incur prior to consummation of a business combination may only be paid from the net proceeds of this offering and the private placement not in the trust account (initially, approximately $26,000 after payment of the expenses relating to this offering), and any interest earned on the trust account and released to us. It is possible that we could use a portion of the funds not in the trust account to make a deposit or down payment or fund a no-shop provision with respect to a particular proposed business combination. In the event we were ultimately required to forfeit such funds (whether as a result of our breach of the agreement relating to such payment or otherwise), we may not have a sufficient amount of working capital available outside of the trust account to pay expenses related to finding a suitable business combination without securing additional financing. If we were unable to secure additional financing, we would most likely fail to consummate a business combination in the allotted time and would be required to initiate procedures to dissolve and liquidate the trust account as part of a stockholder approved plan of dissolution and liquidation. There will be no fees, reimbursements or cash payments made to our existing stockholders and/or officers and directors other than: CALCULATION OF REGISTRATION FEE CHART Title of each Class of Security being Registered Amount being Registered Proposed Maximum Offering Price Per Security(1) Proposed Maximum Aggregate Offering Price(1) Amount of Registration Fee Units, each consisting of one share of Common Stock, $.0001 par value, and one Warrant (2) 4,600,000 Units $ 8.00 $ 36,800,000 $ 3,937.60 Shares of Common Stock included as part of the Units (2) 4,600,000 Shares (3 ) Warrants included as part of the Units (2) 4,600,000 Warrants (3 ) Shares of Common Stock underlying the Warrants included in the Units (4)(5) 4,600,000 Shares $ 5.00 $ 23,000,000 $ 2,461 Representative s Unit Purchase Option 1 $ 100.00 $ 100.00 (3 ) Units underlying the Representative s Unit Purchase Option ( Underwriters Units ) (4)(5) 200,000 Units $ 10.00 $ 2,000,000 $ 214 Shares of Common Stock included as part of the Underwriters Units (4)(5) 200,000 Shares (3 ) Warrants included as part of the Underwriters Units (4)(5) 200,000 Warrants (3 ) Shares of Common Stock underlying the Warrants included in the Underwriters Units (4)(5) 200,000 Shares $ 5.00 $ 1,000,000 $ 107 Total $ 62,800,100 $ 6,719.60(5 ) repayment at the closing of this offering of an aggregate of $112,500 of loans made to us by our officers, directors or their affiliates; payment of up to $7,500 per month to AMCO Distribution Services, Inc., a corporation owned and managed by Mark McKinney, our chief executive officer, and Burke Smith, our Chief financial officer, for office space and administrative services; and reimbursement for any expenses incident to the offering and finding a suitable business combination. None of the warrants may be exercised until after the consummation of a business combination and, thus, after the proceeds of the trust account have been disbursed, the warrant exercise price will be paid directly to us and not placed in the trust account. Stockholders must approve business combination: We will seek stockholder approval before we effect any business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable state law. In connection with the vote required for any business combination, all of our existing stockholders, including all of our officers and directors, have agreed to vote the shares of common stock owned by them immediately before this offering in accordance with the majority of the shares of common stock voted by the public stockholders. As used in this prospectus in accordance with the majority means that such existing stockholders will vote the entirety of their shares of common stock owned by them immediately before this offering either for or against a business combination, as determined by the totality of the public stockholder vote. In addition, all of our existing stockholders have agreed to vote any shares of common stock acquired by them in the private placement and in the offering or in the aftermarket in favor of the business combination submitted to the public stockholders for approval. We will proceed with a business combination only if a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and public stockholders owning less than 30% of the shares sold in this offering exercise their conversion rights described below. Voting against the business combination alone will not result in conversion of a stockholder s shares into a pro rata share of the trust account. Such stockholder must have also exercised its conversion rights described below. Conversion rights for stockholders voting to reject a business combination: Public stockholders voting against a business combination will be entitled to convert their stock into a pro rata share of the trust account (net of taxes payable and interest previously released to us from the trust account), including any interest earned on their portion of the trust account, if the business combination is approved and completed. Public stockholders that convert their stock into their pro rata share of the trust account will continue to have the right to exercise any warrants they may hold. Because the initial per-share conversion price is $8.00 per share (plus any interest earned on the trust account (net of taxes payable)), excluding interest previously released to us or interest earned on that portion of the deferred underwriting compensation payable to Maxim Group LLC and which may be lower than the market price of the common stock on the date of the conversion, there may be a disincentive on the part of public stockholders to exercise their conversion rights. Our existing stockholders will not have such conversion rights with respect to any shares of common stock owned by them, directly or indirectly, prior to this offering. Dissolution and liquidation if no business combination: We have agreed with the trustee to promptly adopt a plan of dissolution and liquidation and initiate procedures for our dissolution and liquidation and the distribution of our assets, including the funds held in the trust account, if we do not effect a business combination within 18 months after consummation of this offering (or within 24 months after the consummation of this offering if a letter of intent, agreement in principle, or definitive agreement has been executed within 18 months after consummation of this offering and the business combination related thereto has not yet been consummated within such 18-month period). We cannot provide investors with assurances of a specific time frame for the dissolution and distribution. Pursuant to our third amended and restated certificate of incorporation, upon the expiration of such time periods, our purpose and powers will be limited to acts and activities relating to dissolving, liquidating, and winding up. In addition, our directors have agreed to adopt a resolution pursuant to Delaware law finding our dissolution advisable at that time. Consistent with such obligations and pursuant to Delaware law, we will seek the approval of the holders of a majority of our outstanding common stock for any plan of dissolution and liquidation. Upon the approval by our stockholders of our plan of dissolution and liquidation, we will liquidate our assets, including the trust account, and after reserving amounts sufficient to cover our liabilities and obligations and the costs of dissolution and liquidation, distribute those assets solely to our public stockholders. Our existing stockholders have agreed to waive their respective rights to participate in any liquidation distribution occurring upon our failure to consummate a business combination, but only with respect to those shares of common stock acquired by them prior to this offering, including those shares of common stock included in the insider units purchased in the private placement, and have agreed to vote all of their shares in favor of any such plan of dissolution and liquidation. Our attorneys and accountants have not waived and will not be required to waive any right, title, interest or claim of any kind in or to any monies held in the trust account. In addition, Maxim Group LLC has agreed to waive its rights to the $960,000 ($1,104,000 if the underwriters over-allotment option is exercised in full) of deferred underwriting compensation deposited in the trust account for its benefit. Accordingly, we estimate that in the event we liquidate the trust account, our public stockholders will receive $8.00 per share plus interest, without taking into account interest earned on the trust account (net of taxes payable on such interest) not previously released to us. We will pay the costs of liquidation and dissolution from remaining assets outside of the trust account. We estimate that our total costs and expenses for implementing and completing our stockholder-approved plan of dissolution and liquidation will be in the range of $50,000 to $75,000. This amount includes all costs and expenses relating to filing of our dissolution in the State of Delaware, the winding up of our company and the costs of a proxy statement and meeting relating to the approval by our stockholders of our plan of dissolution and liquidation. We believe that there should be sufficient funds available from the proceeds not held in the trust account to fund the $50,000 to $75,000 of expenses, as well as payment to any creditors, although we cannot give you assurances that these will be sufficient funds for such purposes. If we do not have sufficient funds for those purposes or to cover our liabilities and obligations and the indemnity provided by our officers is insufficient, the amount distributed to our public stockholders would be less than $8.00 per share, plus interest, without taking into account interest earned on the trust account (net of taxes payable on such interest) not previously released to us. (1) Estimated solely for the purpose of calculating the registration fee. (2) Includes 600,000 Units, 600,000 shares of Common Stock, and 600,000 Warrants included in such Units which may be issued on exercise of a 45-day option granted to the underwriters to cover over-allotments, if any. (3) No fee pursuant to Rule 457(g). (4) Pursuant to Rule 416, there are also being registered such indeterminable additional securities as may be issued as a result of the anti-dilution provisions contained in the Warrants. (5) $12,504.89 has been previously paid. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the commission, acting pursuant to said Section 8(a), may determine. For more information regarding the dissolution and liquidation procedures and the factors that may impair our ability to distribute our assets, including stockholder approval requirements, or cause distributions to be less than $8.00 per share, please see the sections entitled Risk Factors If third parties bring claims against us, the proceeds held in a trust account could be reduced and the per-share liquidation price received by our stockholders could be less than approximately $8.00 per share, Risk Factors Under Delaware law, our dissolution requires the approval of the holders of a majority of our outstanding stock, without which we will not be able to dissolve, liquidate and distribute our assets to our public stockholders, Risk Factors Our stockholders may be held liable for claims by third parties against us to the extent of distributions received by them, and Business Dissolution and Liquidation if No Business Combination. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Preliminary Prospectus Subject to Completion, January 24, 2007 PROSPECTUS $32,000,000 Industrial Services Acquisition Corp. 4,000,000 units Escrow of existing stockholders shares: On the date of this prospectus, all of our existing stockholders, including all of our officers and directors, will place the shares they owned before this offering into an escrow account maintained by Continental Stock Transfer & Trust Company, acting as escrow agent. Subject to certain limited exceptions, such as transfers to family members and trusts for estate planning purposes and upon death while remaining subject to the escrow agreement, these shares will not be transferable during the escrow period and will not be released from escrow until the six-month anniversary of the consummation of a business combination, unless we were to consummate a transaction after the consummation of the initial business combination which results in all of the stockholders of the combined entity having the right to exchange their shares of common stock for cash, securities or other property. If we are forced to liquidate, these shares will be cancelled. The underwriters have not required that such securities be placed in escrow and that such securities only be subject to no-transfer restrictions as set forth in the Placement Unit Agreement. These terms do not apply to the units purchased in the private placement. Although the shares of common stock and warrants included in the insider units sold in the private placement and the incentive warrants will not be placed in escrow, the officers, directors, or their affiliates, have contractually agreed that they will not sell or transfer any of such securities or the shares underlying such warrants until after we have completed a business combination, subject to the same exceptions described above with respect to the escrowed shares. Risks In making your decision on whether to invest in our securities, you should take into account not only the backgrounds of our management team, but also the special risks we face as a blank check company, as well as the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, and, therefore, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. Additionally, our initial stockholders initial equity investment is below that which is required under the guidelines of the North American Securities Administrators Association, Inc. and we do not satisfy such association's policy regarding unsound financial condition. You should carefully consider these and the other risks set forth in the section entitled Risk Factors beginning on page 10 of this prospectus. Industrial Services Acquisition Corp. is a Business Combination Company, or BCC. A BCC is a blank check company formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase or other similar business combination, an unidentified operating business. Our objective is to acquire an operating business in the business services industry, although our efforts will not be limited to any particular industry. We do not have any specific merger, capital stock exchange, asset acquisition, stock purchase or other business combination under consideration or contemplation and we have not, nor has anyone on our behalf, contacted any potential target business or had any discussions, formal or otherwise, with any prospective target business with respect to such a transaction. However, members of our management have had non-substantive communications with a limited number of their contacts that a pool of capital is being raised for acquisitions and that we intend to seek an acquisition after the consummation of this offering. Such contacts have not introduced, identified, selected or chosen any potential target businesses to or for us. This is an initial public offering of our securities. Each unit consists of: one share of our common stock; and one warrant. Each warrant entitles the holder to purchase one share of our common stock at a price of $5.00. Each warrant will become exercisable on the later of our completion of a business combination or [_________], 2007 [one year from the date of this prospectus], and will expire on [_________], 2011 [four years from the date of this prospectus], or earlier upon redemption. Certain of our officers, directors or their affiliates, have agreed to purchase, in a private placement that will occur prior to the effective date of this offering, 292,660 insider units at a price of $8.00 per unit ($2,341,280 in the aggregate). All such insider units will be identical to the units offered in this offering, except that: (i) subject to certain limited exceptions, none of such insider units will be transferable or salable until after we complete a business combination; (ii) the common stock included in the insider units will not have any rights to liquidation distributions in the event we fail to consummate a business combination; (iii) the holders of the insider units may not exercise conversion rights with respect to the shares of common stock included in the insider units; (iv) the shares of common stock included in the insider units must be voted in favor of any proposed business combination; and (v) the warrants included in the insider units are not subject to redemption if held by the initial holders thereof or their permitted transferees and may be exercised on a cashless basis. The private placement will result in $2,247,629 in net proceeds to us ($2,341,280 of gross proceeds less a placement fee of $93,651). We have granted the underwriters a 45-day option to purchase up to 600,000 additional units solely to cover over-allotments, if any (over and above the 4,000,000 units referred to above). The over-allotment will be used only to cover the net syndicate short position resulting from the initial distribution. We have also agreed to sell to Maxim Group LLC, the representative of the underwriters, for $100, as additional compensation, an option to purchase up to a total of 200,000 units at a per-unit offering price of $10.00 (125% of the price per unit sold in the offering), which option is exercisable between the first and fifth anniversaries of the date of this prospectus. Except for the per unit purchase price, the units issuable upon exercise of this option are identical to those offered by this prospectus. The purchase option and its underlying securities have been registered under the registration statement of which this prospectus forms a part. There is presently no public market for our units, common stock or warrants. We anticipate that the units will be quoted on the OTC Bulletin Board under the symbol [____] on or promptly after the date of this prospectus. Each of the common stock and warrants may trade separately on the 90th day after the date of this prospectus, unless Maxim Group LLC determines that an earlier date is acceptable. Once the securities comprising the units begin separate trading, we anticipate that the common stock and warrants will be quoted on the OTC Bulletin Board under the symbols [____] and [____], respectively but we cannot assure you that our securities will be so quoted or, if quoted, will continue to be quoted. (1) Excludes the $100 purchase price for the purchase option issued to Maxim Group LLC. The as adjusted information gives effect to: (i) the sale of the units we are offering and the sale of the units in the private placement, including the application of the related gross proceeds and the payment of the estimated remaining costs from such transactions, including the repayment of $112,500 in promissory notes to our officers; (ii) the 1-for-1.404444 reverse split of our common stock effected on May 2, 2006; (iii) the 1.0712853-for-1 forward stock split of our common stock effected on September 1, 2006 and (iv) the 1-for-1.123596 reverse stock split effected on January 19, 2007. The working capital (as adjusted) and total assets (as adjusted) amounts include the $32,000,000 being held in the trust account. Of this amount, $960,000 represents the deferred underwriting compensation payable to Maxim Group LLC upon a business combination. The balance of $31,066,000 will be available to us only upon the consummation of a business combination within the time period described in this prospectus. If a business combination is not so consummated, we have agreed with the trustee to promptly adopt a plan of dissolution and liquidation and initiate procedures for our dissolution and liquidation and the distribution of our assets, including the funds held in the trust account will be distributed solely to our public stockholders. We will not proceed with a business combination if public stockholders owning 30% or more of the shares sold in this offering vote against the business combination and exercise their conversion rights. Accordingly, we may effect a business combination if public stockholders owning up to approximately 29.99% of the shares sold in this offering exercise their conversion rights. If this occurred, we would be required to convert to cash up to approximately 29.99% of the 4,000,000 shares of common stock sold in this offering, or 1,199,999 shares of common stock, at an initial per-share conversion price of $8.00, without taking into account interest earned on the trust account (net of taxes payable). The actual per-share conversion price will be equal to the amount in the trust account, including all accrued interest (net of taxes payable and interest previously released to us from the trust account), as of two business days prior to the proposed consummation of the business combination, divided by the number of shares of common stock sold in the offering. Investing in our securities involves a high degree of risk. See Risk Factors beginning on page 10 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Public offering price Underwriting discount and commissions(1) Proceeds, before expenses, to us Per unit $ 8.00 $ 0.32 $ 7.68 Total $ 32,000,000 $ 1,280,000 $ 30,720,000 RISK FACTORS An investment in our securities involves a high degree of risk. You should consider carefully all of the material risks described below, together with the other information contained in this prospectus before making a decision to invest in our units. We believe that the risks described below are all of the material risks we face. Risks associated with our business Because our initial stockholders initial equity investment was only $12,640, our offering may be disallowed by state administrators that follow the North American Securities Administrators Association, Inc. Statement of Policy. Pursuant to the Statement of Policy Regarding Promoter s Equity Investment promulgated by The North American Securities Administrators Association, Inc., an international organization devoted to investor protection, any state administrator may disallow an offering of a development stage company if the initial equity investment by a company s promoters does not equal a certain percentage of the aggregate public offering price. Our initial stockholders initial investment of $12,640 is less than the required $5,110,000 minimum amount pursuant to this policy. Accordingly, a state administrator would have the discretion to disallow our offering if it wanted to. We cannot assure you that our offering would not be disallowed pursuant to this policy. Additionally, the initial equity investment made by the initial stockholders may not adequately protect investors. We are a development stage company with no operating history and, accordingly, you will not have any basis on which to evaluate our ability to achieve our business objective. We are a recently incorporated development stage company with no operating results to date. Therefore, our ability to begin operations is dependent upon obtaining financing through the public offering of our securities. Since we do not have an operating history, you will have no basis upon which to evaluate our ability to achieve our business objective, which is to acquire an operating business. We do not have any specific business combination under consideration and we have not, nor has anyone on our behalf, contacted any potential target business or had any discussions, formal or otherwise, with respect to such a transaction. Additionally, we have not engaged or retained any agent or other representative to identify or locate any acquisition candidate. Neither we nor any of our agents, affiliates or representatives have conducted any research or taken any measures, directly or indirectly, to locate or contact a target business. However, Burke Smith, our chief financial officer, secretary and a director, has had limited and non-substantive personal conversations with his former boss at UBS, an investment professional, stating that the Company is in the process of pursuing an initial public offering as one of several business ventures in which he is engaged in. This contact took place over lunch sometime in August or September of 2005. During such encounter, no potential targets or targeted business sectors were ever discussed. Furthermore, there has been no subsequent contact between these parties. Neither the Company s management nor its stockholders have been contacted by this individual in regard to any matters. Similarly, Ronald Kesselman, one of our directors, sometime in August or September of 2005, had a non-substantive conversation with a private equity principal of Charterhouse Group Inc., a person with whom Mr. Kesselman works from time to time. Mr. Kesselman had a general conversation about what the Company is and what its investment focus would be. At no point during this conversation were specific targets discussed. Neither Mr. Kesselman nor any member of the Company s management have had dialogue with, or have been contacted by, this individual since then. Such contacts have not introduced, identified, selected or chosen any target businesses to or for us. We will not generate any revenues until, at the earliest, after the consummation of a business combination. We may not be able to consummate a business combination within the required time frame, in which case, we will be forced to dissolve and liquidate. We must complete a business combination with a fair market value equal to at least 80% of our net assets at the time of the acquisition within 18 months after the consummation of the offering (or within 24 months after the consummation of this offering if a letter of intent, agreement in principle or a definitive agreement has been executed within 18 months after the consummation of this offering and the business combination relating thereto has not yet been consummated within such 18-month period). If we fail to consummate a business combination within the required time frame, we have agreed with the trustee to promptly adopt a plan of dissolution and liquidation and initiate procedures for our dissolution and liquidation and the distribution only to our public stockholders, as part of our plan of dissolution and liquidation, of our assets, including the funds held in the trust account. We may not be able to find suitable target businesses within the required time frame. In addition, our negotiating position and our ability to conduct adequate due diligence on any potential target may be reduced as we approach the deadline for the consummation of a business combination. This increases the risk that we will pay an unreasonably high price or undertake unreasonable risk in order to complete a business combination by the deadline, which could negatively impact your investment. If we are forced to dissolve and liquidate before a business combination, our warrants will expire worthless. If we are unable to complete a business combination and are forced to dissolve and liquidate our assets, there will be no distribution with respect to our outstanding warrants and, accordingly, the warrants will expire worthless. For a more complete discussion of the effects on our stockholders if we are unable to complete a business combination, see the section below entitled Proposed Business Effecting a Business Combination Dissolution and liquidation if no business combination. An effective registration statement may not be in place when an investor desires to exercise warrants, thus precluding such investor from being able to exercise his, her or its warrants and causing such warrants to be practically worthless. No warrant will be exercisable and we will not be obligated to issue shares of common stock unless at the time a holder seeks to exercise such warrant, a prospectus relating to the common stock issuable upon exercise of the warrant is current and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. In addition, holders of the warrants are not entitled to net cash settlement and the warrants may only be settled by delivery of shares of our common stock and not cash. Under the terms of the warrant agreement, we have agreed to use our best efforts to meet these conditions and to maintain a current prospectus relating to the common stock issuable upon exercise of the warrants until the expiration of the warrants. However, we cannot assure you that we will be able to do so, and if we do not maintain a current prospectus related to the common stock issuable upon exercise of the warrants, holders will be unable to exercise their warrants and we will not be required to settle any such warrant exercise. If the prospectus relating to the common stock issuable upon the exercise of the warrants is not current or if the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside, the warrants may have no value, the market for the warrants may be limited and the warrants may expire worthless. You will not be entitled to protections normally afforded to investors of blank check companies. Since the net proceeds of this offering are intended to be used to complete a business combination with a target business that has not been identified, we may be deemed to be a blank check company under the United States securities laws. However, since we will have net tangible assets in excess of $5,000,000 upon the successful consummation of this offering and will file a Current Report on Form 8-K with the SEC upon consummation of this offering including an audited balance sheet demonstrating this fact, we are exempt from rules promulgated by the SEC to protect investors of blank check companies such as Rule 419. Accordingly, investors will not be afforded the benefits or protections of those rules. Because we are not subject to Rule 419, our units will be immediately tradable and we have a longer period of time to complete a business combination in certain circumstances. For a more detailed comparison of our offering to offerings under Rule 419, see the section entitled Comparison to offerings of blank check companies below. Under Delaware law, our dissolution requires the approval of the holders of a majority of our outstanding stock, without which we will not be able to dissolve and liquidate, and distribute our assets to our public stockholders. We have agreed with the trustee to promptly adopt a plan of dissolution and liquidation and initiate procedures for our dissolution and liquidation if we do not effect a business combination within 18 months after consummation of this offering (or within 24 months after the consummation of this offering if a letter of intent, agreement in principle, or definitive agreement has been executed within 18 months after consummation of this offering and the business combination related thereto has not yet been consummated within such 18-month period). However, pursuant to Delaware law, our dissolution requires the affirmative vote of stockholders owning a majority of our then outstanding common stock. Soliciting the vote of our stockholders will require the preparation of preliminary and definitive proxy statements, which will need to be filed with the Securities and Exchange Commission and could be subject to their review. This process could take a substantial amount of time ranging from 40 days to several months. As a result, the distribution of our assets to the public stockholders could be subject to a considerable delay. Furthermore, we may need to postpone the stockholders meeting, resolicit our stockholders, or amend our plan of dissolution and liquidation to obtain the required stockholder approval, all of which would further delay the distribution of our assets and result in increased costs. If we are not able to obtain approval from a majority of our stockholders, we will not be able to dissolve and liquidate and we will not be able to distribute funds from our trust account to holders of our common stock sold in this offering and these funds will not be available for any other corporate purpose. If our stockholders do not approve a plan of dissolution and liquidation and the funds remain in the trust account for an indeterminate amount of time, we may be considered to be an investment company. Please see the section entitled If we are deemed to be an investment company, we would be subject to burdensome regulation which would restrict our activities and make it difficult for us to complete a business combination. Because there are numerous companies with a business plan similar to ours seeking to effectuate a business combination, it may be more difficult for us to complete a business combination. Based upon publicly available information, as of January 23, 2007, we have identified 78 blank check companies which have gone public in the United States since August 2003, of these companies, 19 have completed a business combination, and four are in liquidation. The remaining 55 blank check companies have more than $4.0 billion in trust and are seeking to complete business combinations. Of these companies, only 22 companies have announced that they have entered into either a definitive agreement or a letter of intent for a business combination but not yet consummated them. Accordingly, there are approximately 33 blank check companies with approximately $2.5 billion in trust that are seeking to carryout a business plan similar to our business plan. Furthermore, we have identified approximately 49 additional offerings for blank check companies in the United States, with approximately $4.2 billion that would be placed in trust, that are still in the registration process but have not completed initial public offerings, and there are likely to be more blank check companies filing registration statements for initial public offerings after the date of this prospectus and prior to our completion of a business combination. While some of the blank check companies must complete their respective business combinations in specific industries, a number of them may consummate their business combinations in any industry they choose. Therefore, we may be subject to competition from these and other companies seeking to consummate a business combination. We cannot assure you that we will be able to successfully compete for an attractive business combination. Additionally, because of this competition, we cannot assure you that we will be able to effectuate a business combination within the required time period. TABLE OF CONTENTS Prospectus Summary 1
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. Because it is a summary, it might not contain all of the information that is important to you. Accordingly, you are urged to carefully review this prospectus in its entirety, including Risk Factors beginning on page 3 and our financial statements and related notes thereto included in this prospectus, before making an investment decision. Our Company Innovive Pharmaceuticals, Inc. is a development stage biopharmaceutical company engaged in the development of compounds for the treatment of cancer. We currently have four products in development, INNO-406, tamibarotene, INNO-206 and INNO-305. INNO-406 is a small molecule that we licensed from Nippon Shinyaku in December 2005. We believe pre-clinical data demonstrate that INNO-406 significantly inhibits both the Bcr-Abl tyrosine kinase and the Lyn kinase. These kinases are believed to play a major role in chronic myelogenous leukemia, or CML. Our data suggests that the product has application in therapy intolerant or refractory CML due to its anticipated lack of side effects as well as application in Gleevec refractory CML as the predominant forms of resistance come about due to Bcr-Abl amplification, Bcr-Abl point mutations and up-regulation of other pathways such as Lyn. Preclinical findings suggest that this product candidate is active against and targets cells exhibiting Bcr-Abl and Lyn activation thus giving INNO-406 a competitive profile versus other compounds being developed for this disease. We began our Phase I clinical study with INNO-406 in July 2006 and we expect to establish a dose in the second half of 2007. Assuming positive results in our Phase I clinical study, we expect to begin a single arm Phase II clinical study in chronic phase CML patients that are either resistant to or cannot tolerate dasatinib (third line) in the second half of 2007. We anticipate being able to file a U.S. New Drug Application, or NDA, for INNO-406 in the first half of 2009. In January 2007, the U.S. Food and Drug Administration, or FDA, granted orphan drug status to INNO-406 for the treatment of CML. Tamibarotene is a synthetic retinoid that we licensed the North American rights to from TMRC Co., Ltd. in December 2006 for the treatment of acute promyelocytic leukemia, or APL. Differentiation therapy with all-trans retinoic acid, or ATRA, is the basis for the treatment of APL. Tamibarotene was developed to specifically overcome resistance to ATRA. We expect to initiate a pivotal study in APL patients who have developed resistance to ATRA and arsenic trioxide in the second half of 2007. We believe that this study, if successful, and in combination with data from two completed Japanese studies, would form the basis of a U.S. NDA that we would expect to file with the FDA in the second half of 2008. In June 2007, Tamibarotene received Fast Track Designation from the FDA for the treatment of APL. INNO-206 (formerly DOXO-EMCH) is a prodrug for doxorubicin. Doxorubicin has demonstrated efficacy in a wide variety of cancers including breast cancer, lung cancer, sarcomas, and lymphomas. INNO-206 is a complex of doxorubicin attached to an acid sensitive linker. We believe this novel agent has attributes that improve on native doxorubicin, including reduction of adverse events, improvement in efficacy and the ability to preferentially reach the tumor. We intend to initially develop INNO-206 as a therapeutic for solid tumors, first pursuing small cell lung cancer, or SCLC, patients who are resistant to or have relapsed after initial chemotherapy. We filed an investigational new drug application, or IND, with the FDA in March 2007, which was allowed by the FDA in April 2007, and began a single arm Phase II study in the second quarter of 2007. We licensed INNO-206 from KTB Tumorforschungs GmbH in August 2006. INNO-305 is a WT1 peptide immunotherapeutic that we licensed from the Memorial Sloan Kettering Cancer Center in December 2005. Pre-clinical data suggests that the multi-peptide therapy may be used to treat certain solid tumors and certain leukemias including acute myelogenous leukemia, or AML. We believe that INNO-305 may be able to overcome many of the challenges that other cancer vaccines have faced for several reasons including its ability to target WT1, AML being an immune responsive tumor, and ease of manufacture at a commercial scale. Additionally, the literature indicates that leukemia responds favorably to treatment with similar compounds. We began a Phase I clinical study of INNO-305 in October 2006 and the study is expected to be completed in the second half of 2007. We plan to develop and commercialize our product candidates. In addition, we intend to leverage our development infrastructure by acquiring and developing additional clinical candidates in the areas of oncology and hematology. Our success will depend on the clinical and regulatory success of our product candidates, which are in the early stages of development, and our ability to retain on commercially reasonable terms financial and managerial The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the SEC is effective. This prospectus is not an offer to sell these securities, and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. PROSPECTUS Subject to completion, dated August , 2007 INNOVIVE PHARMACEUTICALS, INC. 8,516,528 Shares of Common Stock The selling stockholders identified in this prospectus are offering for sale from time to time up to 8,516,528 shares of our common stock, $0.001 par value per share. The selling stockholders may sell the common stock from time to time in public transactions or in privately negotiated transactions, without limitation, through any means described in the section hereof entitled Plan of Distribution, at market prices prevailing at the time of sale or at negotiated prices. The timing and amount of any sale are within the sole discretion of the selling stockholders. We will not receive any proceeds from the sale of shares registered under this prospectus. Our common stock is quoted on the Over-the-Counter Bulletin Board under the symbol IVPH. On July 27, 2007, the closing sale price of our common stock was $2.75. You should read this prospectus and any prospectus supplement carefully before you invest. See Where You Can Find More Information for more information. Investing in our stock involves a high degree of risk. See Risk Factors on page 3 for information that should be considered by prospective investors. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. The date of this prospectus is August , 2007. resources of which we currently have only a limited amount. To date, we have not received regulatory approval for any of our product candidates nor have we derived any revenues from their sale. We have retained a management team with core competencies and expertise in numerous fields, including research, clinical, regulatory, finance and business development. Our management and advisors are comprised of experienced pharmaceutical and biotechnology industry veterans and respected experts. We are led by our Chief Executive Officer, Steven Kelly, an industry veteran who has over 18 years of pharmaceutical experience. Our executive offices are located at 555 Madison Avenue, 25th Floor, New York, New York 10022 and our telephone number at that location is (212) 716-1810. Our website address is www.innovivepharma.com. The information contained on our website is not a part of, and should not be construed as being incorporated by reference into, this prospectus. The Offering The selling stockholders identified beginning on page 58 of this prospectus are offering on a resale basis a total of 8,516,528 shares of the following shares of our common stock: 5,494,515 shares of our outstanding common stock issued in connection with our April 24, 2007 private placement of common stock; 2,747,287 shares of our common stock issuable at a price of $3.75 per share upon the exercise of warrants issued to the investors in our June 24, 2007 private placement of common stock; and 274,726 shares of our common stock issuable at a price of $3.75 per share upon the exercise of warrants issued to the placement agent in our April 24, 2007 private placement of common stock. Common stock offered by the selling stockholders 8,516,528 Common stock outstanding before the offering(1) 14,641,583 Common stock to be outstanding after the offering(2) 17,663,596 Common stock OTC Bulletin Board symbol IVPH (1) Based on the number of shares outstanding as of July 31, 2007. Does not include shares issuable pursuant to warrants held by the selling stockholders. Does not include 925,000 shares reserved for issuance under our 2004 Stock Plan, including 799,601 shares issuable upon exercise of options outstanding on July 31, 2007. Does not include 1,500,000 shares reserved for issuance under our 2007 Stock Plan. (2) Assumes the issuance of all 3,022,013 shares offered hereby that are issuable upon exercise of warrants. Does not include 925,000 shares reserved for issuance under our 2004 Stock Plan, including 889,601 shares issuable upon exercise of options outstanding on July 31, 2007. Does not include 1,500,000 shares reserved for issuance under our 2007 Stock Plan, including 450,000 shares issuable upon exercise of options outstanding on July 31, 2007. Use of Proceeds We will not receive any of the proceeds from the sale of shares in this offering. The selling stockholders will receive all net proceeds from the sale of shares of our common stock in this offering. Dividend Policy We have never paid dividends on our capital stock and do not anticipate paying any cash dividends for the foreseeable future. See Dividend Policy.
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS CERTAIN INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. FOR A MORE COMPLETE UNDERSTANDING OF THIS OFFERING, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE RISK FACTORS AND THE FINANCIAL STATEMENTS. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER IS NOT PERMITTED. EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS PROSPECTUS AND ALL PER SHARE INFORMATION HAS BEEN ADJUSTED TO REFLECT A ONE SHARE FOR EACH FIVE SHARES OUTSTANDING STOCK DIVIDEND THAT WAS EFFECTED ON MARCH 6, 2007 (WHICH IS AFTER THE DATE OF THE FINANCIAL STATEMENTS INCLUDED IN THIS PROSPECTUS). UNLESS OTHERWISE STATED IN THIS PROSPECTUS, o REFERENCES TO "WE," "US," "OUR" OR "OUR COMPANY" REFER TO MEDIA & ENTERTAINMENT HOLDINGS, INC; o "EXISTING STOCKHOLDERS" REFERS TO ALL OF OUR STOCKHOLDERS EXISTING BEFORE THIS OFFERING, INCLUDING ALL OF OUR OFFICERS AND DIRECTORS AND THE HEARST CORPORATION, WHICH IS INCLUDED IN THIS GROUP BECAUSE IT WILL BE PURCHASING EXISTING STOCKHOLDERS' WARRANTS, DESCRIBED BELOW, ON THE SAME TERMS AS OUR OFFICERS AND DIRECTORS, THOUGH IT WILL NOT HAVE ANY ROLE IN THE MANAGEMENT OF OUR BUSINESS; o "PUBLIC STOCKHOLDERS" REFERS TO THE HOLDERS OF THE SHARES OF COMMON STOCK WHICH ARE BEING SOLD AS PART OF THE UNITS IN THIS PUBLIC OFFERING, INCLUDING ANY OF OUR EXISTING STOCKHOLDERS TO THE EXTENT THAT THEY PURCHASE OR ACQUIRE SUCH SHARES; o "REPRESENTATIVES" REFERS TO LAZARD CAPITAL MARKETS LLC AND LADENBURG THALMANN & CO. INC., THE REPRESENTATIVES OF THE UNDERWRITERS; o "INITIAL SHARES" REFERS TO THE 4,500,000 SHARES OF COMMON STOCK THAT OUR EXISTING STOCKHOLDERS ORIGINALLY PURCHASED FROM US FOR $25,000 IN AUGUST 2005 (OR 2,700,000 SHARES, GIVING EFFECT TO THE CONTRIBUTION TO US BY CERTAIN OF OUR EXISTING STOCKHOLDERS OF A TOTAL OF 1,125,000 AND 675,000 SHARES OF COMMON STOCK APRIL 2006 AND JUNE 2006 AND A ONE SHARE FOR EACH FIVE SHARES OUTSTANDING STOCK DIVIDEND EFFECTED BY THE COMPANY IN MARCH 2007, RESPECTIVELY REFERRED TO BELOW); o "EXISTING STOCKHOLDERS' WARRANTS" REFERS TO THE AGGREGATE OF 2,700,000 WARRANTS WE ARE SELLING PRIVATELY TO OUR EXISTING STOCKHOLDERS SIMULTANEOUSLY WITH THE CONSUMMATION OF THIS OFFERING; o "BUSINESS COMBINATION" REFERS SOLELY TO OUR INITIAL BUSINESS COMBINATION WITH AN OPERATING BUSINESS; o THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS WILL NOT EXERCISE THEIR OVER-ALLOTMENT OPTION; AND o THE INFORMATION IN THIS PROSPECTUS GIVES RETROACTIVE EFFECT TO THE CONTRIBUTIONS TO US BY CERTAIN OF OUR EXISTING STOCKHOLDERS OF A TOTAL OF 1,125,000 SHARES OF COMMON STOCK IN APRIL 2006 AND A TOTAL OF 675,000 SHARES OF COMMON STOCK IN JUNE 2006 AND THE ONE FOR EACH FIVE SHARES STOCK DIVIDEND EFFECTED BY THE COMPANY IN MARCH 2007. We are a blank check company organized under the laws of the State of Delaware on July 8, 2005. We were formed to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business limited to the entertainment, media and communications industries, both domestically and internationally, particularly in Europe and Asia to take advantage of our management team's experience in those markets. To date, our efforts have been limited to organizational activities. The entertainment, media and communications industries encompass those companies which create, produce, deliver, own, distribute and/or market entertainment and information content, products and services. These companies serve both domestic and international audiences and, therefore, the operating businesses with which the company will seek to do a business combination are located throughout the world. Among the areas of particular interest to the company are businesses engaged in: o broadcast television; o cable, satellite and terrestrial television content delivery; o film, television and video content production and distribution; o newspaper, book, magazine, and specialty publishing; -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- o motion picture exhibition and related services; o radio services via broadcast and satellite; o video game production and distribution; o Internet media production and distribution; o advertising agencies and other advertising services, including direct marketing; o recorded music and other audio content production and distribution; and o live event entertainment and venue management. Our management team has extensive experience in the entertainment, media and communications industries as senior executives, business consultants and/or entrepreneurs. Herbert A. Granath, our Chairman of the Board and Chief Executive Officer, currently serves as the Chairman Emeritus of ESPN, the 24-hour cable sports network, and was previously employed as an executive of ABC for over 35 years. Harvey M. Seslowsky, our President and Chief Operating Officer, currently serves as President of Transmedia Corporation, a private media consulting firm he founded which provides consulting services to a variety of clients, including Accenture Ltd., one of the world's leading management consulting and technology services organizations. Robert C. Clauser, Jr., our Executive Vice President and Chief Financial Officer, most recently served as Lead Strategy Partner of the Media & Entertainment Practice (Americas) of Accenture Ltd., where he advised senior executive officers and the board of directors of numerous media and entertainment companies on setting strategy, transforming operations, and integrating technology to deliver growth, profitability and value. Bruce Maggin, our Executive Vice President and Secretary, currently serves as Vice President, Secretary and a Managing Member of The H.A.M Media Group, LLC, an international investment and advisory firm that specializes in the entertainment and communications industries. We intend to leverage the industry experience of our executive officers by focusing our efforts on identifying a prospective target business solely in the entertainment, media and communications industries. We believe that companies involved in these industries represent attractive acquisition targets for a number of reasons, including a favorable economic environment for these industries, potentially attractive valuations and the large number of middle market acquisition candidates. We believe, based solely on our management's collective business experience, that there are numerous business opportunities in the entertainment, media and communications industries. However, neither we nor any of our agents, representatives or affiliates have conducted any research with respect to identifying the number and characteristics of the potential acquisition candidates within these industries or the likelihood or probability of success of any proposed business combination. Accordingly, we cannot assure you that we will be able to locate a target business in such industries or that we will be able to engage in a business combination with a target business on favorable terms. We do not have any specific business combination under consideration, and we have not, nor has anyone on our behalf, either directly or indirectly, contacted any potential target businesses or their representatives or had any discussions, formal or otherwise, with respect to effecting a business combination with our company. We have not (nor have any of our agents, representatives or affiliates) been approached by any candidates (or representatives of any candidates) with respect to a possible transaction with our company. Moreover, we have not, nor has anyone on our behalf, taken any measure, directly or indirectly, to identify or locate any suitable acquisition candidate, nor have we engaged or retained any agent or other representative to identify or locate such an acquisition candidate for us. Our business combination must be with a target business whose fair market value is at least equal to 80% of our net assets (all of our assets, including the funds held in the trust account, less our liabilities) at the time of such acquisition. If our initial business combination involves a transaction in which we acquire less than a 100% interest in the target company, the value of the interest we acquire will similarly be equal to 80% of our net assets at the time of such acquisition. In all instances, we would be the controlling shareholder of the target company. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- The key factors that we will rely on in determining controlling shareholder status would be our acquisition of at least 51% of the voting equity interests of the target company and control of the majority of any governing body of the target company. We will not consider any transaction that does not meet such criteria. Consequently, it is likely that we will have the ability to initially complete only a single business combination, although this may entail the simultaneous acquisition of several operating businesses at the same time. If we determine to simultaneously acquire several businesses and such businesses are owned by different sellers, we would need each of the sellers to agree that our purchase of its business is contingent on the simultaneous closings of the other acquisitions, which may be difficult for us to accomplish and could delay the completion of the business combination. With multiple acquisitions, we could also face additional risks, including additional burdens and costs with respect to possible multiple negotiations and due diligence investigations (if there are multiple sellers) and the additional risks associated with the subsequent assimilation of the operations and services or products of the acquired companies in a single operating business. The target business that we acquire may have a fair market value substantially in excess of 80% of our net assets. In order to consummate such an acquisition, we may issue a significant amount of debt or equity securities to the sellers of such businesses and/or seek to raise additional funds through a private offering of debt or equity securities. Since we have no specific business combination under consideration, we have not entered into any such fundraising arrangement and have no current intention of doing so. In determining the size and nature of this offering, management held customary organizational meetings with representatives of the underwriters, both prior to inception of our company and thereafter, with respect to the state of capital markets, generally, and the amount the representatives believed they reasonably could raise on behalf of our company given our proposed target industries. At no time during these organizational meetings and thereafter were potential target businesses or acquisitions discussed. Although neither management nor any of management's agents, representatives or affiliates has conducted any research or taken any measures, directly or indirectly, to locate or contact a target business or independently research recent transactions in the target industries, management believes that the net proceeds of this offering, particularly in light of the fact that our company could also utilize a combination of cash and equity and/or debt securities as consideration in a potential acquisition, would be sufficient to enable our company to pursue either "spin-off" transactions with larger, well-established companies in the target industries (in which our company would acquire a target subsidiary or business division of a seasoned large or mid-cap company) or acquisitions of small- or mid-cap companies in the target industries with attractive valuations between $60 million and $500 million that are in need of a new, highly experienced management team. Management believes that companies that have valuations greater than $500 million generally are acquisition candidates for larger and more established operating companies that have developed marketing and distribution capabilities and the ability to leverage existing products and/or services to increase their market presence. Management further believes that whether it solely applies, as acquisition consideration, the proceeds of the trust, combines such proceeds with additional equity securities, or raises additional acquisition consideration through the issuance and sale of debt securities, it will be able to complete a business combination with a company (or acquire a partial interest in a company) whose fair market value is equal to at least 80% of our company's net assets. Members of management, in their sole discretion, may purchase units in this offering. However, they are not obligated to do so, and we do not have any agreement with them requiring them to purchase such securities. Our executive offices are located at 4429 Edmondson Avenue, Dallas, Texas 75205, and our telephone number at such address is (214) 522-9893. -------------------------------------------------------------------------------- OFFERING SECURITIES OFFERED .................. 10,800,000 units, at $8.00 per unit, each unit consisting of: o one share of common stock; and o one warrant. The units will begin trading on or promptly after the date of this prospectus. Each of the common stock and warrants may trade separately on the 90th day after the date of this prospectus unless the representatives determine that an earlier date is acceptable (based upon their assessment of the relative strengths of the securities markets and small capitalization companies in general, and the trading pattern of, and demand for, our securities in particular). In no event will the representatives allow separate trading of the common stock and warrants until (i) we file an audited balance sheet reflecting our receipt of the gross proceeds of this offering and (ii) at least 5 days have passed since the distribution of our units in this offering has been completed. The distribution of the units in this offering will be completed once all the units have been sold, all stabilizing transactions have been completed and all penalty bids have either been reclaimed or withdrawn. We will file a Current Report on Form 8-K with the Securities and Exchange Commission, including an audited balance sheet, upon the consummation of this offering, which is anticipated to take place three business days from the date the units commence trading. The audited balance sheet will reflect our receipt of the proceeds from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Form 8-K. If the over-allotment option is exercised after our initial filing of a Form 8-K, we will file an amendment to the Form 8-K to provide updated financial information to reflect the exercise of the over-allotment option. We will also include in this Form 8-K, or in an amendment thereto, or in a subsequent Form 8-K, information indicating whether the representatives have allowed separate trading of the common stock and warrants prior to the 90th day after the date of this prospectus. Although we will not distribute copies of the Current Report on Form 8-K to individual unit holders, the Current Report will be available on the SEC's website after its filing. For more information on where you can find a copy of these and other of our filings, see the section appearing elsewhere in the prospectus titled "Where You Can Find Additional Information." COMMON STOCK: NUMBER OUTSTANDING BEFORE THIS OFFERING ................... 2,700,000 shares NUMBER TO BE OUTSTANDING AFTER THIS OFFERING ................... 13,500,000 shares -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- WARRANTS: NUMBER OUTSTANDING BEFORE THIS OFFERING ................... 0 warrants NUMBER TO BE OUTSTANDING AFTER THIS OFFERING ................... 13,500,000 warrants (including 2,700,000 sold privately) EXERCISABILITY ...................... Each warrant is exercisable for one share of common stock. EXERCISE PRICE ...................... $5.00 EXERCISE PERIOD ..................... The warrants will become exercisable on the later of: o the completion of a business combination with a target business; or o [_______], 2008 [ONE YEAR FROM THE DATE OF THIS PROSPECTUS]. The warrants will expire at 5:00 p.m., eastern time, on [_______], 2011 [FOUR YEARS FROM THE DATE OF THIS PROSPECTUS] or earlier upon redemption. REDEMPTION .......................... We may redeem the outstanding warrants (other than the existing stockholders' warrants) with the representatives' prior consent o in whole and not in part; o at a price of $.01 per warrant at any time after the warrants become exercisable; o upon a minimum of 30 days' prior written notice of redemption; and o if, and only if, the last sales price of our common stock equals or exceeds $11.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. We have established these criteria to provide warrant holders with a reasonable premium to the initial warrant exercise price, as well as a degree of liquidity to cushion the market reaction, if any, to our redemption call. If the foregoing conditions are satisfied, we may redeem the warrants regardless of the weekly trading volume of our common stock. If the foregoing conditions are satisfied and we call the warrants for redemption, each warrant holder shall then be entitled to exercise his or her warrant prior to the date scheduled for redemption, however, there can be no assurance that the price of the common stock will exceed $11.50 or the warrant exercise price after the redemption call is made. Since we may redeem the warrants only with the prior consent of the representatives, and the representatives may hold warrants subject to redemption, the representatives may have a conflict of interest in determining whether or not to consent to such redemption. We cannot assure you that the representatives will consent to such redemption if it is not in their best interest even if it is in our best interest. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- AMERICAN STOCK EXCHANGE SYMBOLS FOR OUR: UNITS ............................. TVH.U COMMON STOCK ...................... TVH WARRANTS .......................... TVH.WS OFFERING PROCEEDS TO BE HELD IN TRUST: ............................ $84,242,000 (or $96,618,800 if the underwriters' over-allotment option is exercised in full), or approximately $7.80 per unit (or $7.78 per unit if the underwriters' over-allotment is exercised in full), which includes (i) the portion of the underwriting discount and the full amount of the representatives' non-accountable expense allowance being deferred, and (ii) the proceeds of $2,700,000 from the private sale of existing stockholders' warrants simultaneously with the consummation of this offering, but excludes offering expenses of approximately $920,000 and an additional $50,000 to be used for miscellaneous working capital purposes, will be placed in a trust account at JPMorganChase NY Bank, maintained by Continental Stock Transfer & Trust Company, acting as trustee, under an agreement to be signed on the date of this prospectus. The underwriters have agreed to defer payment of a portion of the underwriting discount equal to 2.5% of the gross proceeds of this offering, or $2,160,000 (or $0.20 per unit), or $2,484,000 if the underwriter's over-allotment option is exercised in full, and the full amount of the representatives' non-accountable expense allowance, or $864,000. These proceeds will be held in the trust account and will not be released until the earlier to occur of: (1) the completion of our initial business combination on the terms described in this prospectus, in which case such proceeds will be released to the underwriters, and (2) our liquidation, in which case such proceeds will be disributed to the public stockholders, together with all of the other funds held in the trust account. Therefore, unless and until our initial business combination is consummated, the proceeds held in the trust account will not be available for our use for any expenses related to this offering, expenses that we may incur related to the investigation and selection of a target business or the negotiation of an agreement to effect our initial business combination. However, up to an aggregate of $1,800,000 of the interest accrued on the amounts held in the trust account (net of taxes, if any, payable by us with respect to such interest) will be released to us in monthly installments to fund a portion of our working capital requirements. We may use a portion of such interest to pay taxes, if any, attributable to previously-accrued interest. Once an aggregate of $1,800,000 is released to us, all of the interest earned on the amounts held in the trust account (net of taxes payable) will remain in the trust account until we consummate our initial business combination or liquidate. We believe that the deferment of payment of a portion of the underwriting discount equal to 2.5% of the gross proceeds of this offering and the full amount of the representatives' non-accountable expense allowance equal to 1% of the gross proceeds of this offering -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- and the placement of these amounts in the trust account will benefit our stockholders because this will preserve more money for possible distribution to the public stockholders in the event of liquidation prior to our initial business combination or in the event less than 20% of our public stockholders (but not our existing stockholders) elect to convert their shares of common stock in connection with our initial business combination. Upon the consummation of an initial business combination, the deferred portion of the underwriting discount and the full amount of the representatives' non-accountable expense allowance will be released to the representatives of the underwriters out of the proceeds of this offering held in the trust account, less approximately $7.80 (or $7.78 if the underwriters' over-allotment is exercised in full) plus accrued interest for each share of our common stock that our public stockholders (but not our existing stockholders) elect to convert in connection with our initial business combination. The underwriters will not be entitled to any interest accrued on the deferred portion of the underwriting discount or on the full amount of the representatives' non-accountable expense allowance. The trust will pay taxes, if any, on the income, if any, earned by the proceeds held in trust from the income on such proceeds. None of the warrants may be exercised until the later of one year after the date of this prospectus or the consummation of our initial business combination. After the proceeds of the trust account have been disbursed upon consummation of our initial business combination, the warrant exercise price, if exercised, will be paid directly to us. We may use a portion of the interest earned by the principal in the trust account to make a deposit or fund a "no-shop, standstill" provision with respect to a prospective business combination, although we do not have any present intention to do so. In the event that we are required to forfeit such funds (whether as a result of a breach of the agreement relating to such payment or otherwise), we may not have sufficient working capital available to pay expenses related to locating a suitable business combination without securing additional financing. In such event, if we are unable to secure additional financing, we may not consummate a business combination in the prescribed time period and we will be forced to liquidate and dissolve. SECURITIES TO BE SOLD TO EXISTING STOCKHOLDERS ............. We anticipate that simultaneously with the consummation of this offering, we will privately sell an aggregate of 2,700,000 warrants to our existing stockholders and one of their affiliates, Transmedia Corporation, at a price of $1.00 per warrant, for an aggregate purchase price of $2,700,000. All of the proceeds we receive from these purchases will be placed in the trust account. The privately placed existing stockholders' warrants will be identical to the warrants offered by this prospectus in many respects, however the existing stockholders' warrants may be exercised on a cashless basis so long as such warrants are held by our existing stockholders or their affiliates, and the existing stockholders' warrants are not redeemable by us. Furthermore, the purchasers of the existing stockholders' warrants, including all of our executive officers, have agreed not to sell or -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- transfer their existing stockholders' warrants (or any of the underlying shares of common stock) until 90 days after the consummation of our initial business combination. The existing stockholders' warrants purchased by The Hearst Corporation and Transmedia Corporation will be subject to the same terms and conditions as those purchased by our officers and directors. LIMITED PAYMENTS TO INSIDERS ........ There will be no fees or other cash payments paid to our existing stockholders, officers, directors or their affiliates prior to, or for any services they render in order to effectuate, the consummation of a business combination other than: o Repayment of a $300,000 interest-free loan made by our executive officers to cover offering expenses, which repayment will be effected by a reduction in the purchase price paid by such executive officers for existing stockholders' warrants; o Payment of $7,500 per month to an affiliate of Harvey Seslowsky, our President and Chief Operating Officer, for office space and administrative services; and o Reimbursement of out-of-pocket expenses incurred by them in connection with activities on our behalf in identifying and investigating possible business targets and business combinations. Although it is our present intention to have our current officers and directors remain with us following a business combination, the future role of our officers and directors and their respective remuneration, if any, in the target business following a business combination cannot presently be stated with any certainty. Our current officers and directors would only be able to remain with the company after the consummation of a business combination if they are able to negotiate employment or consulting agreements in connection with the business combination. Such negotiations would take place simultaneously with the negotiation of the business combination and could provide for such individuals to receive compensation in the form of cash payments and/or our securities for services they would render to the company after the consummation of the business combination. While the personal and financial interests of such individuals may influence their motivation in identifying and selecting a target business, the ability of such individuals to remain with the company after the consummation of a business combination will not be the determining factor in our decision as to whether or not we will proceed with any potential business combination, though these considerations will be a factor in our decision, which poses potential conflicts of interest. See "Management; Conflicts of Interest." Additionally, we cannot assure you that our officers and directors will have significant experience or knowledge relating to the operations of the particular target business. PUBLIC STOCKHOLDERS MUST APPROVE BUSINESS COMBINATION .............. We will seek stockholder approval before we effect any business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable state law. In connection with the vote required for our initial business combination, all of our -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- existing stockholders have agreed to vote the shares of common stock owned by them, including any shares of common stock purchased in or following this offering, in accordance with the majority of the shares of common stock voted by the public stockholders (other than our existing stockholders). We will proceed with a business combination only if (i) a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and (ii) public stockholders (but not our existing stockholders) owning less than 20% of the shares sold in this offering exercise their conversion rights (described below). Accordingly, it is our understanding and intention in every case to structure and consummate a business combination in which approximately 19.99% of the public stockholders (but not our existing stockholders) may exercise their conversion rights and a business combination will still go forward. Voting against the business combination alone will not result in conversion of a stockholder's shares for a pro rata share of the trust fund. Such stockholder must have also exercised its conversion rights described below. We view the above procedures governing the approval of our initial business combination, each of which are set forth in Article Fifth of our amended and restated certificate of incorporation, as obligations to our public stockholders and terms of this offering, and neither we nor our board of directors will propose, or seek stockholder approval of, any amendment of these procedures. CONVERSION RIGHTS FOR STOCKHOLDERS VOTING TO REJECT A BUSINESS COMBINATION ............ Public stockholders (but not our existing stockholders) voting against a business combination will be entitled to convert their stock into a pro rata share of the amount held in the trust account (including the amount held in the trust account representing the deferred portion of the underwriters' fee and the full amount of the representatives' non-accountable expense allowance and including the aggregate proceeds from the private purchase of the existing stockholders' warrants) net of taxes, if any, payable by us with respect to interest earned from the trust account, excluding up to $1,800,000 of interest earned on the monies in the trust account used by us as working capital, if the business combination is approved and completed. However, voting against the business combination alone will not result in an election to exercise a stockholder's conversion rights. A stockholder must also affirmatively exercise such conversion rights at or prior to the time the business combination is voted upon by the stockholders. Our existing stockholders will not have such conversion rights with respect to any shares of common stock owned by them, directly or indirectly, whether included in their initial shares or any shares of common stock purchased in or following this offering. Public stockholders who convert their stock into a pro rata share of the trust account retain their warrants. Investors in this offering that do not subsequently sell, or who receive less than $.20 collectively for the warrants included in the units once separate -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- trading of the common stock and warrants commences, or public stockholders that have purchased common stock in the aftermarket at a price in excess of $7.80 (or $7.78 if the underwriters' over-allotment is exercised in full) per share, may have a disincentive to exercise their conversion rights because the amount they would receive upon conversion could be less than their original or adjusted purchase price. LIQUIDATION IF NO BUSINESS COMBINATION ....................... If a letter of intent, agreement in principle or definitive agreement for a business combination has not been executed prior to 16 months from the date of this offering, which is two months before the initial deadline for a business combination, our board will, prior to such date, convene, adopt and recommend to our stockholders a plan of dissolution and distribution and on such date file a proxy statement with the SEC seeking stockholder approval for such plan. If, however, a letter of intent, agreement in principle or definitive agreement for a business combination has been executed prior to 18 months from the date of this offering, we will abandon our plan of dissolution and distribution that had been submitted to our stockholders and will instead seek the consummation of that business combination. If, following the execution of such letter of intent, agreement in principle or definitive agreement, a proxy statement seeking the approval of our stockholders for that business combination has not been filed prior to 22 months from the date of this offering, our board will, prior to such date, convene, adopt and recommend to our stockholders a plan of dissolution and distribution, and on such date file a proxy statement with the SEC seeking stockholder approval for such plan. Upon dissolution, we will promptly distribute only to our public stockholders the amount in our trust account (including the amount held in the trust account representing the deferred portion of the underwriters' fee and all of the representatives' non-accountable expense allowance but subject to the claims of our creditors, if any, based on fraudulent inducement, breach of fiduciary responsibility or similar claims, which would be prior to the claims of our public stockholders, in which case our public stockholders would receive less than $7.80 per unit (or $7.78 per unit if the underwriters' over-allotment is exercised in full) upon exercise of their conversion rights) plus any remaining net assets. We will not seek approval of our stockholders to amend our charter to allow us to survive for a longer period of time if it does not appear we will be able to consummate a business combination within the foregoing time periods. Our existing stockholders will have waived their rights to participate in any liquidation distribution with respect to their initial shares and their shares included within the initial units (but not with respect to shares of common stock purchased in the after market). We will pay the costs of liquidation and dissolution from our remaining assets outside of the trust account. If such funds are insufficient, our executive officers will pay the funds necessary to complete such liquidation. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ESCROW OF MANAGEMENT SHARES ......... On the date of this prospectus, all of our existing stockholders, including all of our executive officers, will place their initial shares into an escrow account maintained by Continental Stock Transfer & Trust Company, acting as escrow agent. Except for transfers to family members and trusts for estate planning purposes and upon death, these shares will not be transferable during the escrow period and will not be released from escrow until 12 months after the date of a business combination unless we were to consummate a liquidation, merger, stock exchange or other similar transaction after the consummation of the initial business combination which results in all of the stockholders of the combined entity having the right to exchange their shares of common stock for cash, securities or other property. RISKS In making your decision on whether to invest in our securities, you should take into account not only the backgrounds of our management team, but also the special risks we face as a blank check company, as well as the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, and, therefore, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. Additionally, our initial stockholders' initial equity investment is below that which is required under the guidelines of the North American Securities Administrators Association, Inc. and we do not satisfy such association's policy regarding unsound financial condition. You should carefully consider these and the other risks set forth in the section entitled "Risk Factors" beginning on page 13 of this prospectus. --------------------------------------------------------------------------------
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+S-1/A 1 v26347a0sv1za.htm AMENDMENT NO. 10 TO FORM S-1 sv1za Table of Contents As filed with the Securities and Exchange Commission on March 12, 2007 File No. 333-128384 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amendment No. 10 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 SANTA MONICA MEDIA CORPORATION (Exact name of registrant as specified in its charter) Delaware 6770 59-3810312 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification No.) 9229 Sunset Boulevard, Suite 505 Los Angeles, California 90069 (310) 256-3680 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) David Marshall, Chairman and Chief Executive Officer 9229 Sunset Boulevard, Suite 505 Los Angeles, California 90069 (310) 256-3680 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: David L. Ficksman Marc Brown Troy Gould Professional Corporation 1801 Century Park East, 16th Floor Los Angeles, California 90067 Telephone: (310) 553-4441 Facsimile: (310) 201-4746 Ann Chamberlain Floyd I. Wittlin Bingham McCutchen LLP 399 Park Avenue New York, NY 10022-4689 Telephone: (212) 705-7000 Facsimile: (212) 752-5378 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus. TABLE OF CONTENTS Page SUMMARY 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001338520_titanium_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001338520_titanium_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should carefully read this entire prospectus and the financial statements contained in this prospectus before purchasing our securities. Titanium Group Limited Titanium Group Limited was incorporated on May 17, 2004 as an international business company pursuant to the International Business Companies Act ( IBC Act ) of the British Virgin Islands ( BVI ) and subsequently reregistered under the BVI Business Companies Act ( BVIBC Act ) on January 1, 2007 when the IBC Act was repealed and replaced with the BVIBC Act. On June 22, 2005, we acquired all of the entire issued share capital of Titanium Technology Limited, a company incorporated in Hong Kong on February 14, 2001 with limited liability ( Titanium Technology ). On September 20, 2002, Titanium Technology and EAE Productions (HK) Limited, a company incorporated in Hong Kong on October 8, 1997, established Titanium Technology (Shenzhen) Co., Ltd., a wholly foreign owned enterprise in China. We established a BVI company to hold Titanium Technology, as we believed that it would be easier to attract investment capital into a BVI company rather than a Hong Kong company. While the BVI entity is the parent company, our accounting history is that of Titanium Technology and therefore our operations go back to 2001 when Titanium Technology began operations. Through our wholly-owned subsidiary, Titanium Technology, we develop and market biometrics technologies. Based in Hong Kong, with a research and development center in ShenZhen, People s Republic of China ( PRC ), and a sales representative office in the United States, we have built a network of over 40 IT practitioners and researchers, enabling us to provide proprietary biometrics products and professional services. In order to ensure the sustainability of technological development, we have engaged both Tsinghua University and the Chinese Academy of Science, Institute of Automation to perform certain research and development work on our behalf. Our primary office is located at 4/F, BOCG Insurance Tower, 134-136 Des Voeux Road Central, Hong Kong, where our telephone number is 852 3427 3177. Our website is located at www.titanium-tech.com. Information contained in our website is not part of this prospectus. The Offering Securities offered 4,014,400 shares of common stock. Use of proceeds We will not receive any of the proceeds from the selling security holders of shares of our common stock. Securities outstanding 50,000,000 shares of common stock. Plan of distribution The offering is made by the selling security holders named in this prospectus, to the extent they sell shares. Sales may be made in the open market or in private negotiated transactions, at fixed or negotiated prices. See Plan of Distribution.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001338578_china_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001338578_china_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights some information from this prospectus, and it may not contain all of the information that is important to you in making an investment decision. You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering, including
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001338949_majestic_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001338949_majestic_prospectus_summary.txt
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+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001341740_concentric_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001341740_concentric_prospectus_summary.txt
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+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001343719_energy_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001343719_energy_prospectus_summary.txt
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+S-1 1 v079118_s1.htm Unassociated Document Table of Contents As filed with the Securities and Exchange Commission on June 26, 2007 Registration No. 333- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents SUMMARY This summary contains basic information about us and the offering. Because it is a summary, it does not contain all the information that you should consider before investing in our common stock. You should read and carefully consider this entire prospectus before making an investment decision, especially the information presented under the heading Risk Factors and the consolidated and pro forma financial statements and the accompanying notes thereto included elsewhere in this prospectus. Overview Energy XXI (Bermuda) Limited is an independent energy company engaged in the acquisition, development, exploration and production of oil and natural gas reserves in the United States Gulf Coast and the Gulf of Mexico. We were originally formed and incorporated in July 2005 as an exempted company under the laws of Bermuda to serve as a vehicle for the acquisition of oil and gas reserves and related assets. Since our incorporation, we have completed three major acquisitions of oil and natural gas properties, the most recent of which closed on June 8, 2007 when we acquired certain oil and natural gas properties in the Gulf of Mexico (the Pogo Properties ) from Pogo Producing Company (the Pogo Acquisition ). Our first and second major acquisitions closed on April 4, 2006 and July 28, 2006. In October 2005, we completed a $300 million initial public offering of common stock and warrants on the Alternative Investment Market of the London Stock Exchange. We operate geographically focused producing reserves and target the acquisition of oil and gas properties that lend themselves to an intensive exploitation program to significantly increase production and ultimate recovery of reserves, or that alternatively offer the potential for using reprocessed seismic data to identify previously overlooked exploration opportunities. Approximately two-thirds of our capital is currently spent on exploitation with the balance of our capital expenditures split between lower risk exploration opportunities and higher impact exploration plays. Since acquiring our largest field in April 2006, the South Timbalier 21 field, and employing our focused exploitation program, we have realized a 90% increase in daily production levels from inception to the month ended March 31, 2007. Production from this large legacy field is currently at a 21-year high. Our exploitation of this field has involved the drilling of 13 new wells and 10 workovers of existing wells through March 31, 2007. We have 19 remaining identified proven well opportunities in South Timbalier 21 and anticipate selectively employing our exploitation strategy to our other offshore assets. Our high quality assets are located in mature and predictable fields. As of March 31, 2007, after giving effect to the Pogo Acquisition, we operate or have an interest in 284 producing wells over 283,000 net acres in 73 fields. All of our properties are located on the Gulf Coast and in the Gulf of Mexico, with approximately 60% of our proved reserves being offshore. All of the Pogo Properties are located offshore. This concentration facilitates our ability to manage the operated fields efficiently, and our high number of wellbore locations provides significant diversification of our reserves. We believe managing our assets is a key strength, and we operate 79% of our properties. We utilize an exploitation strategy with respect to our offshore Gulf of Mexico assets to enhance production, from our existing reserve base, as evidenced by our success with the South Timbalier 21 field. In the Gulf Coast, our strategy is to acquire, merge and reprocess seismic data to identify previously overlooked exploration opportunities. We have a significant seismic database covering approximately 2,400 square miles from our existing operations. Through the exploration of our existing asset base, we have identified at least 109 development and exploration opportunities. We believe the Pogo Properties will lend themselves well to our aggressive exploitation strategy to increase production from mature legacy fields and will provide us extensive incremental exploration opportunities within our core geographic area. We actively manage price risk and hedge a high percentage of our proved developing producing reserves to enhance revenue certainty and predictability. We intend to apply the same strategy with regard to the Pogo Properties. Our disciplined hedging strategy provides substantial price protection so that our cash flow is largely driven by production results rather than commodity prices. This greater price certainty allows us to efficiently allocate our capital resources and minimize our operating cost. For further information regarding our hedging activities, please read Management s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures about Market Risk . Our exploration and production activities commenced in April 2006 upon our acquisition of Marlin Energy Offshore, LLC and its affiliates ( Marlin ), and their Gulf of Mexico assets consisting of working interests in 30 oil and gas fields with 118 producing wells. In July 2006, we acquired additional oil and gas working interests in 15 onshore and inland water Louisiana Gulf Coast fields from affiliates of Castex Energy, Inc. ( Castex ). There are 49 producing wells in these fields we acquired from Castex. Pro forma for the acquisition of the Castex assets, our net proved reserve base totaled over 37.5 MMBoe as of June 30, 2006. Our average daily production for the three months ended March 31, 2007 was approximately 14,500 Boed. On June 8, 2007, we completed the Pogo Acquisition. The net proved reserve base of the Pogo Properties totaled 20.9 MMBoe as of December 31, 2006. We expect the Pogo Properties to add 7,400 Boed to our current production profile, not including the additional 1,500 Boed of production shut-in due to hurricane related damage, following an integration period and based on current operating assumptions. (1) Includes drilling activity for the period from January 1, 2006 in which we have an economic interest. The following table shows the drilling and completion activity for the year ended December 31, 2006 with respect to the Pogo Properties. In the table, gross refers to the total number of wells in which Pogo had a working interest and net refers to gross wells multiplied by Pogo s working interest in such wells. No development or exploratory wells were drilled on the Pogo Properties for the three month period ended March 31, 2007. ENERGY XXI (BERMUDA) LIMITED (Exact name of registrant as specified in its charter) Table of Contents Year Ended December 31, 2006 Gas Oil Dry Total Development Gross 1 0 1 2 Net 0.2 0 0.5 0.7 Exploratory Gross 1 0 0 1 Net 0.5 0 0 0.5 Properties Below is a map showing the location of our significant properties, including properties acquired in the Pogo Acquisition. Risk Factors Investing in our common stock involves risks that include the speculative nature of natural gas and oil exploration, competition, volatile natural gas and oil prices and other material factors. You should read carefully the section entitled Risk Factors beginning on page 5 for an explanation of these risks before investing in our common stock. Our Offices Our company was founded in 2005 and is incorporated as an exempted company in Bermuda. Our principal executive offices are located at Canon s Court, 22 Victoria Street, PO Box HM 1179, Hamilton HM EX, Bermuda, and our telephone number at that address is (441) 295-2244. Our website address is http://www.energyxxi.com. Bermuda 1311 98-0499286 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification No.) Table of Contents The Offering Common stock offered by the selling shareholders Up to 148,503,324 shares, consisting of the following: 60,449,358 shares of common stock; 73,053,966 shares of common stock issuable upon the exercise of common stock purchase warrants at an exercise price of $5.00 per share; 5,000,000 shares of common stock issuable upon the exercise of unit purchase options at an exercise price of $6.60 per unit. Each unit purchase option is exerciseable into one common share and two common stock purchase warrants, each; and 10,000,000 shares of common stock issuable upon the exercise of common stock purchase warrants at an exercise price of $5.00 per share issuable upon the exercise of unit purchase options. Common stock outstanding prior to this offering 84,072,699 shares Use of Proceeds We will not receive any proceeds from the sale of common stock. Please read Use of Proceeds. Alternative Investment Market (AIM) Symbol for Unrestricted Common Stock EXXI AIM Symbol for Restricted Common Stock EXXS Over-the-Counter Bulletin Board (OTCBB) Symbol EXXIF.OB Canon s Court, 22 Victoria Street, PO Box HM 1179 Hamilton HM EX, Bermuda (441) 295-2244 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant s Principal Executive Offices) Table of Contents RISK FACTORS Risks Associated with Our Securities The market for our common stock and warrants is and may remain relatively illiquid. Our common stock and warrants are admitted for trading on the Alternative Investment Market of the London Stock Exchange (AIM) and on the United States Over-the-Counter Bulletin Board (OTCBB). AIM is a market designed primarily for emerging or smaller companies. The rules of this market are less demanding than those of exchanges in the United States. Investments in shares traded on AIM is perceived to carry a higher risk than an investment in shares quoted on exchanges with more stringent listing requirements, such as the New York Stock Exchange, the American Stock Exchange or the NASDAQ Global Market. In addition, we may not always retain a listing on the AIM. In the United States, our common stock is not eligible for trading on any national or regional exchange. Our common stock is eligible for trading on the Over-the-Counter Bulletin Board (OTCBB). This market tends to be highly illiquid and there is a greater chance for market volatility for securities that trade on the OTCBB as opposed to securities that trade on a national exchange. We may not be able to list or thereafter maintain a listing of our securities on any national or regional exchange in the United States. Risks Associated with Energy XXI Generally Because we have a limited operating history, you may not be able to evaluate our current and future business prospects accurately. We have a limited operating and financial history upon which you can base an evaluation of our current and future business. The results of exploration, development, production and operation of our properties may differ significantly from that of prior owners. The possible lack of business diversification may adversely affect our results of operations. Unlike other entities which are geographically diversified, we will not have the resources to diversify effectively our operations or benefit from the possible spreading of risks or offsetting of losses. By consummating only offshore Gulf of Mexico and Louisiana acquisitions our lack of diversification may: subject us to numerous economic, competitive and regulatory developments, any or all of which may have a substantial adverse impact upon the particular industry in which we operate; and result in our dependency upon a single or limited number of reserve basins. Our indebtedness may limit our ability to borrow additional funds or capitalize on acquisition or other business opportunities. We have incurred substantial indebtedness in acquiring our properties. Our leverage and the current and future restrictions contained in the agreements governing our indebtedness may reduce our ability to incur additional indebtedness, engage in certain transactions or capitalize on acquisition or other business opportunities. Our indebtedness and other financial obligations and restrictions could have important consequences. For example, they could: impair our ability to obtain additional financing in the future for capital expenditures, potential acquisitions, general corporate purposes or other purposes; result in higher interest expense in the event of increases in interest rates since some of our debt is at variable rates of interest; have a material adverse effect if we fail to comply with financial and restrictive covenants in any of our debt agreements, including an event of default if such event is not cured or waived; require us to dedicate a substantial portion of its future cash flow to payments of our indebtedness and other financial obligations, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate requirements; limit our flexibility in planning for, or reacting to, changes in our business and industry; and place us at a competitive disadvantage compared to our competitors that have proportionately less debt. If we are unable to meet future debt service obligations and other financial obligations, we could be forced to restructure or refinance our indebtedness and other financial transactions, seek additional equity or sell assets. We may then be unable to obtain such financing or capital or sell assets on satisfactory terms, if at all. Juliet Evans Canon s Court, 22 Victoria Street, PO Box HM 1179 Hamilton HM EX, Bermuda (441) 298-3262 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) Table of Contents We expect to have substantial capital requirements, and we may be unable to obtain needed financing on satisfactory terms. We expect to make substantial capital expenditures for the acquisition, development, production, exploration and abandonment of oil and gas reserves. Our capital requirements will depend on numerous factors, and we cannot predict accurately the timing and amount of our capital requirements. We intend to primarily finance our capital expenditures through cash flow from operations. However, if our capital requirements vary materially from those provided for in our current projections, we may require additional financing sooner than anticipated. A decrease in expected revenues or adverse change in market conditions could make obtaining this financing economically unattractive or impossible. Without additional capital resources, we may be forced to limit or defer our planned natural gas and oil exploration and development program and this will adversely affect the recoverability and ultimate value of our natural gas and oil properties, in turn negatively affecting our business, financial condition, and results of operations. As a result, we may lack the capital necessary to complete potential acquisitions or to capitalize on other business opportunities. Risks Associated with Acquisitions and our Risk Management Program Our acquisitions may be stretching our existing resources. Since our inception in July 2005, we have made three major acquisitions and become a reporting company in the United States. These transactions may prove to stretch our internal resources and infrastructure. As a result, we may need to invest in additional resources, which will increase our costs. Any further acquisitions we make over the short term would likely exacerbate these risks. We may be unable to successfully integrate the operations of the properties we acquire. Integration of the operations of the properties we acquire, such as the Pogo Properties, with our existing business will be a complex, time-consuming and costly process. Failure to successfully integrate the acquired businesses and operations in a timely manner may have a material adverse effect on our business, financial condition, results of operations and cash flows. The difficulties of combining the acquired operations include, among other things: operating a significantly larger combined organization; coordinating geographically disparate organizations, systems and facilities; integrating corporate, technological and administrative functions; integrating internal controls and other corporate governance matters; diverting management s attention from other business concerns; loss of key vendors from the acquired businesses; a significant increase in our indebtedness; and potential environmental or regulatory liabilities and title problems. The process of integrating our operations could cause an interruption of, or loss of momentum in, the activities of our business. Members of our senior management may be required to devote considerable amounts of time to this integration process, which will decrease the time they will have to manage our business. If our senior management is not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, our business could suffer. Our operating performance, revenues and costs could be materially adversely affected if: we are not successful in completing the integration of the Pogo Properties into our operations; the integration takes longer or is more complex than anticipated; or we cannot operate the Pogo Properties as effectively as we anticipate. In addition, we face the risk of identifying, competing for and pursuing other acquisitions, which takes time and expense and diverts management s attention from other activities. We may not realize all of the anticipated benefits from our acquisitions. We may not realize all of the anticipated benefits from our April and July 2006 acquisitions, from the Pogo Acquisition and from future acquisitions, such as increased earnings, cost savings and revenue enhancements, for various reasons, including difficulties integrating operations and personnel, higher than unexpected acquisition and operating costs or other difficulties, unknown liabilities, inaccurate reserve estimates and fluctuations in markets. Table of Contents Regulatory noncompliance with Pogo Properties may lower the initial production realized and increase the costs related to the Pogo Acquisition. For the three month period ending March 31, 2007, the Pogo Properties produced approximately 6,400 Boed. The Pogo Properties have been the subject of a significant number of incidents of noncompliance by the MMS, which, in some cases, has resulted in the historical forced shut-in of production by the MMS for such noncompliance as well as additional shut-ins by Pogo as it sought to refocus its operations on compliance issues. To the extent that we do not provide sufficiently strong supervision to correct historical compliance issues, we may incur similar difficulties as the predecessor operator, may realize a lower level of production initially from the Pogo Properties than the estimated 7,400 Boed, and may realize a longer delay in reaching 7,400 Boed than anticipated. We expect to incur significant charges relating to the integration plan that could materially and adversely affect our period-to-period results of operations. We anticipate that from time to time we will incur charges to our earnings in connection with the integration of the Pogo Gulf of Mexico operations into our business. These charges will include expenses incurred in connection with recruiting and retaining new employees and increased professional and consulting costs. We are not yet able to quantify the costs or timing of the integration. Some factors affecting the cost of the integration include the training of new employees and the education of the field personnel to our approach to safety and regulatory compliance. If we are unable to effectively manage the commodity price risk of our production if energy prices fall, we may not realize the anticipated cash flows from our acquisitions. Compared to some other participants in the oil and gas industry, we are a relatively small company with modest resources. Therefore, there is the possibility that we may be required to either purchase relatively expensive put options, or commit to deliver future production, to manage the commodity price risk of our future production. To the extent that we commit to deliver future production, we may be forced to make cash deposits available to counterparties as they mark to market these financial hedges. This funding requirement may limit the level of commodity price risk management that we are prudently able to complete. In addition, we are unlikely to hedge undeveloped reserves to the same extent that we hedge the anticipated production from proven developed reserves. If we do not manage or are not capable of managing the commodity price risk of our production and energy prices fall significantly, we may not be able to realize the cash flows from our assets that are currently anticipated even if we are successful in increasing the production and ultimate recovery from the reserves. If we place hedges on future production and encounter difficulties meeting that production, we may not realize the originally anticipated cash flows. Our assets consist of a mix of reserves, with some being developed while others are undeveloped. To the extent that we sell the production of these reserves on a forward-looking basis but do not realize that anticipated level of production, our cash flow may be adversely affected if energy prices rise above the prices for the forward-looking sales. In this case, we would be required to make payments to the purchaser of the forward-looking sale equal to the difference between the current commodity price and that in the sales contract multiplied by the physical volume of the shortfall. There is the risk that production estimates could be inaccurate or that storms or other unanticipated problems could cause the production to be less than the amount anticipated causing us to make payments to the purchasers pursuant to the terms of the hedging contracts. Risks Related to the Oil and Gas Business Oil and natural gas prices are volatile, and a decline in oil and natural gas prices would significantly affect our financial results and impede growth. Our future revenues, profitability and cash flow will depend substantially upon the prices and demand for oil and natural gas. The markets for these commodities are volatile and even relatively modest drops in prices can significantly affect our financial results and impede our growth. Prices for oil and natural gas fluctuate widely in response to relatively minor changes in the supply and demand for oil and natural gas, market uncertainty and a variety of additional factors beyond our control, such as: domestic and foreign supplies of oil and natural gas; price and quantity of foreign imports of oil and natural gas; actions of the Organization of Petroleum Exporting Countries and other state-controlled oil companies relating to oil and natural gas price and production controls; level of consumer product demand; level of global oil and natural gas exploration and productivity; domestic and foreign governmental regulations; Approximate date of commencement of proposed sale to the public: From time to time after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box. x If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Table of Contents level of global oil and natural gas inventories; political conditions in or affecting other oil-producing and natural gas-producing countries, including the current conflicts in the Middle East and conditions in South America and Russia; weather conditions; technological advances affecting oil and natural gas consumption; overall U.S. and global economic conditions; and price and availability of alternative fuels. Further, oil prices and natural gas prices do not necessarily fluctuate in direct relationship to each other. Lower oil and natural gas prices may not only decrease our expected future revenues on a per unit basis but also may reduce the amount of oil and natural gas that we can produce economically. This may result in us having to make substantial downward adjustments to our estimated proven reserves and could have a material adverse effect on our financial condition and results of operations. To attempt to reduce our price risk, we periodically enter into hedging transactions with respect to a portion of our expected future production. We cannot assure you that such transactions will reduce the risk or minimize the effect of any decline in oil or natural gas prices. Any substantial or extended decline in the prices of or demand for oil or natural gas would have a material adverse effect on our financial condition and results of operations. Reserve estimates depend on many assumptions that may turn out to be inaccurate and any material inaccuracies in the reserve estimates or underlying assumptions of the Marlin, Castex or Pogo properties will materially affect the quantities and present value of those reserves. Estimating oil and gas reserves is complex and inherently imprecise. It requires interpretation of the available technical data and making many assumptions about future conditions, including price and other economic conditions. In preparing such estimates, projection of production rates, timing of development expenditures and available geological, geophysical, production and engineering data are analyzed. The extent, quality and reliability of this data can vary. This process also requires economic assumptions about matters such as oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. If our interpretations or assumptions used in arriving at our reserve estimates prove to be inaccurate, the amount of oil and gas that will ultimately be recovered may differ materially from the estimated quantities and net present value of reserves owned by us. Any significant inaccuracies in these interpretations or assumptions could also materially effect the estimated quantities of reserves shown in the reserve reports summarized herein. Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and gas reserves most likely will vary from estimates, perhaps significantly. In addition, we may adjust estimates of proven reserves to reflect production history, results of exploration and development, prevailing oil and natural gas prices and other factors, many of which are beyond our control. Unless we replace oil and gas reserves our future reserves and production will decline. Our future oil and gas production will depend on our success in finding or acquiring additional reserves. If we are unable to replace reserves through drilling or acquisitions, our level of production and cash flows will be adversely affected. In general, production from oil and gas properties declines as reserves are depleted, with the rate of decline depending on reservoir characteristics. Our total proven reserves decline as reserves are produced unless we conduct other successful exploration and development activities or acquire properties containing proven reserves, or both. Our ability to make the necessary capital investment to maintain or expand our asset base of oil and gas reserves would be impaired to the extent cash flow from operations is reduced and external sources of capital become limited or unavailable. We may not be successful in exploring for, developing or acquiring additional reserves. We also may not be successful in raising funds to acquire additional reserves. Relatively short production periods or reserve life for Gulf of Mexico properties subject us to higher reserve replacement needs and may impair our ability to reduce production during periods of low oil and natural gas prices. High production rates generally result in recovery of a relatively higher percentage of reserves from properties in the Gulf of Mexico during the initial few years when compared to other regions in the United States. Typically, 50% of the reserves of properties in the Gulf of Mexico are depleted within three to four years. Due to high initial production rates, production of reserves from reservoirs in the Gulf of Mexico generally decline more rapidly than from other producing reservoirs. The vast majority of our existing operations are in the Gulf of Mexico. As a result, our reserve replacement needs from new prospects may be greater than those of other oil and gas companies with longer life reserves in other producing areas. Also, our expected revenues and return on capital will depend significantly on prices prevailing during these relatively short production periods. Our need to generate revenues to fund ongoing capital commitments or repay debt may limit our ability to slow or shut in production from producing wells during periods of low prices for oil and natural gas. Table of Contents Competition for oil and gas properties and prospects is intense and some of our competitors have larger financial, technical and personnel resources that give them an advantage in evaluating and obtaining properties and prospects. We operate in a highly competitive environment for reviewing prospects, acquiring properties, marketing oil and gas and securing trained personnel. Many of our competitors are major or independent oil and gas companies that possess and employ financial resources that allow them to obtain substantially greater technical and personnel resources than we. We actively compete with other companies when acquiring new leases or oil and gas properties. For example, new leases acquired from the Minerals Management Service, or MMS, are acquired through a sealed bid process and are generally awarded to the highest bidder. These additional resources can be particularly important in reviewing prospects and purchasing properties. Competitors may be able to evaluate, bid for and purchase a greater number of properties and prospects than our financial or personnel resources permit. Competitors may also be able to pay more for productive oil and gas properties and exploratory prospects than we are able or willing to pay. If we are unable to compete successfully in these areas in the future, our future revenues and growth may be diminished or restricted. The unavailability or high cost of drilling rigs, equipment, supplies, personnel and oil field services could adversely affect our ability to execute exploration and exploitation plans on a timely basis and within budget, and consequently could adversely affect our anticipated cash flow. We utilize third party services to maximize the efficiency of our organization. The cost of oil field services has increased significantly during the past year as oil and gas companies have sought to increase production. While we currently have excellent relationships with oil field service companies, there is no assurance that we will be able to contract for such services on a timely basis or that the cost of such services will remain at a satisfactory or affordable level. Shortages or the high cost of drilling rigs, equipment, supplies or personnel could delay or adversely affect our exploitation and exploration operations, which could have a material adverse effect on our business, financial condition or results of operations. The geographic concentration of our properties in the Gulf of Mexico subjects us to an increased risk of loss of revenue or curtailment of production from factors affecting the Gulf of Mexico specifically. The geographic concentration of our properties in the Gulf of Mexico (including the Pogo Properties) means that some or all of the properties could be affected should the Gulf of Mexico experience: severe weather; delays or decreases in production, the availability of equipment, facilities or services; delays or decreases in the availability of capacity to transport, gather or process production; and/or changes in the regulatory environment. For example, the oil and gas properties that we acquired in April 2006 were damaged by both Hurricanes Katrina and Rita, which required us to spend a significant amount of time and capital on inspections, repairs, debris removal, and the drilling of replacement wells. Although we maintain insurance coverage to cover a portion of these types of risks, there may be potential risks associated with our operations not covered by insurance. There also may be certain risks covered by insurance where the policy does not reimburse us for all of the costs related to a loss. Because all or a number of the properties could experience any of the same conditions at the same time, these conditions could have a relatively greater impact on our results of operations than they might have on other producers who have properties over a wider geographic area. Our future business will involve many uncertainties and operating risks that can prevent us from realizing profits and can cause substantial losses. We engage in exploration activities. Any such activities may be unsuccessful for many reasons, including adverse weather conditions (such as hurricanes and tropical storms in the Gulf of Mexico), cost overruns, equipment shortages and mechanical difficulties. Moreover, the successful drilling of a gas or oil well does not ensure we will realize a profit on our investment. A variety of factors, both geological and market-related, could cause a well to become uneconomic or only marginally economic. In addition to their costs, unsuccessful wells could impede our efforts to replace reserves. Our business involves a variety of inherent operating risks, including: fires; explosions; Table of Contents CALCULATION OF REGISTRATION FEE Title of Each Class of Securities to be Registered Amount to be Registered Proposed Maximum Aggregate Offering Price Proposed Maximum Aggregate Offering Price Amount of Registration Fee Common Stock, par value $0.001 60,449,358 $ 6.04(1 ) $ 365,114,123 $ 11,209 Common Stock, par value $0.001, issuable upon exercise of warrants exercisable at $5.00 per share 73,053,966 $ 5.00(2 ) $ 365,269,830 $ 11,214 Common Stock, par value $0.001, issuable upon exercise of unit purchase options exercisable at $6.60 per unit purchase option(3) 5,000,000 $ 6.60(4 ) $ 33,000,000 $ 1,014 Common Stock, par value $0.001, issuable upon exercise of warrants at $5.00 per share issuable upon exercise of unit purchase options exercisable at $6.60 per unit purchase option(3) 10,000,000 $ 5.00(2 ) $ 50,000,000 $ 1,535 Total: 148,503,324 N/A $ 813,383,953 $ 24,972 (5) (1) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933, as amended ( the Securities Act ), using the average of the high and low price as reported on the Alternative Investment Market of the London Stock Exchange on June 22, 2007. (2) Pursuant to Rule 457(g) under the Securities Act, the maximum offering price per security represents the exercise price of the warrants. (3) Each unit purchase option gives the holder the option of acquiring for $6.60 per unit one common share and two warrants to purchase common share at $5.00 per share. (4) Pursuant to Rule 457(g) under the Securities Act, the maximum offering price per security represents the exercise price of the unit purchase option. (5) A registration fee of $17,696 has previously been paid with respect to 115,302,362 shares of common stock for Registration Statement File No. 333-140916, such shares are being carried over to this Registration Statement pursuant to rule 457(p) under the Securities Act. Accordingly, the amount of registration fee with respect to this Registration Statement is reduced to $7,256. Table of Contents blow-outs and surface cratering; uncontrollable flows of gas, oil and formation water; natural disasters, such as hurricanes and other adverse weather conditions; pipe, cement, subsea well or pipeline failures; casing collapses; mechanical difficulties, such as lost or stuck oil field drilling and service tools; abnormally pressured formations; and environmental hazards, such as gas leaks, oil spills, pipeline ruptures and discharges of toxic gases. If we experience any of these problems, well bores, platforms, gathering systems and processing facilities could be affected, which could adversely affect our ability to conduct operations. We could also incur substantial losses due to costs and/or liability incurred as a result of: injury or loss of life; severe damage to and destruction of property, natural resources and equipment; pollution and other environmental damage; clean-up responsibilities; regulatory investigations and penalties; suspension of our operations; and repairs to resume operations. Our offshore operations will involve special risks that could affect operations adversely. Offshore operations are subject to a variety of operating risks specific to the marine environment, such as capsizing, collisions and damage or loss from hurricanes or other adverse weather conditions. These conditions can cause substantial damage to facilities and interrupt production. As a result, we could incur substantial liabilities that could reduce or eliminate the funds available for exploration, development or leasehold acquisitions, or result in loss of equipment and properties. In particular, we are not intending to put in place business interruption insurance due to the fact that this is not economically viable and therefore may not be able to rely on insurance cover in the event of such natural phenomena. Currently, we have only one deepwater leasehold block with no production or proved reserves. However, we may evaluate activity in the deepwater Gulf of Mexico in the future. Exploration for oil or natural gas in the deepwater of the Gulf of Mexico generally involves greater operational and financial risks than exploration on the shelf. Deepwater drilling generally requires more time and more advanced drilling technologies, involving a higher risk of technological failure and usually higher drilling costs. Deepwater wells use subsea completion techniques with subsea trees tied back to host production facilities with flow lines. The installation of these subsea trees and flow lines requires substantial time and the use of advanced remote installation mechanics. These operations may encounter mechanical difficulties and equipment failures that could result in significant cost overruns. Furthermore, the deepwater operations generally lack the physical and oilfield service infrastructure present on the shelf. As a result, a significant amount of time may elapse between a deepwater discovery and the marketing of the associated oil or natural gas, increasing both the financial and operational risk involved with these operations. Because of the lack and high cost of infrastructure, some reserve discoveries in the deepwater may never be produced economically. The properties which we acquire may not produce as projected, and we may be unable to determine reserve potential, identify liabilities associated with the acquired properties or obtain protection from sellers against such liabilities. The properties which we acquire may not produce as expected, may be in an unexpected condition and we may be subject to increased costs and liabilities, including environmental liabilities. Although we will review acquired properties prior to acquisition in a manner consistent with industry practices, such reviews are not capable of identifying all potential conditions. Generally, it is not feasible to review in depth every individual property involved in each acquisition. We focus our review efforts on the higher value properties or properties with known adverse conditions and will sample the remainder. However, even a detailed review of records and properties may not necessarily reveal existing or potential problems or permit a buyer to become sufficiently familiar with the properties to fully assess their condition, any deficiencies, and development potential. Inspections may not always be performed on every well, and environmental problems, such as ground water contamination, are not necessarily observable even when an inspection is undertaken. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. EXPLANATORY NOTE Energy XXI (Bermuda) Limited (the "Company") has previously filed a Registration Statement on Form S-1 and certain amendments thereto, File No. 333-140916 (the "Prior Registration Statement"), to register 115,302,363 shares of its common stock, consisting of up to 40,763,202 shares of common stock, 59,539,161 shares of common stock issuable upon exercise of common stock purchase warrants, 5,000,000 shares of common stock issuable upon exercise of unit purchase options and 10,000,000 shares of common stock issuable upon exercise of common sock purchase warrants issuable upon exercise of unit purchase options. The Prior Registration Statement was declared effective by the SEC on April 6, 2007. Pursuant to Rule 429 under the Securities Act, this Registration Statement, upon effectiveness, constitutes a post-effective amendment to the Prior Registration Statement terminating the offering of the 115,302,363 shares of common stock covered by the Prior Registration Statement. Pursuant to Rule 457(p) under the Securities Act, this Registration Statement carries forward from the Prior Registration Statement 115,302,363 shares of common stock, and accordingly the filing fee associated with this Registration Statement is offset by the total dollar amount of the filing fee associated with the Prior Registration Statement. This Registration Statement also registers an additional 33,100,961 shares of common stock, consisting of 19,686,156 shares of common stock, which the Company has voluntarily agreed to register, and 13,414,805 shares of common stock isssuable upon exercise of common stock purchase warrants, which the Company has agreed to register pursuant to the terms of an Investor Rights Agreement, dated October 13, 2005. Table of Contents Market conditions or transportation impediments may hinder access to oil and gas markets or delay production. Market conditions, the unavailability of satisfactory oil and natural gas transportation or the remote location of our drilling operations may hinder our access to oil and natural gas markets or delay production. The availability of a ready market for oil and gas production depends on a number of factors, including the demand for and supply of oil and gas and the proximity of reserves to pipelines or trucking and terminal facilities. In deepwater operations, the availability of a ready market depends on the proximity of and our ability to tie into existing production platforms owned or operated by others and the ability to negotiate commercially satisfactory arrangements with the owners or operators. We may be required to shut in gas wells or delay initial production for lack of a market or because of inadequacy or unavailability of gas pipeline or gathering system capacity. When that occurs, we will be unable to realize revenue from those wells until the production can be tied to a gathering system. This can result in considerable delays from the initial discovery of a reservoir to the actual production of the oil and gas and realization of revenues. In some cases, our wells may be tied back to platforms owned by parties with no economic interests in these wells. There can be no assurance that owners of such platforms will continue to operate the platforms. If the owners cease to operate the platforms or their processing equipment, we may be required to shut in the associated wells, which could adversely affect our results of operations. We will not be the operator on all of our properties and therefore will not be in a position to control the timing of development efforts, the associated costs, or the rate of production of the reserves in respect of such properties. As we carry out our planned drilling program, we will not serve as operator of all planned wells. We operate 79% of our properties. As a result, we may have limited ability to exercise influence over the operations of some non-operated properties or their associated costs. Dependence on the operator and other working interest owners for these projects, and limited ability to influence operations and associated costs could prevent the realization of targeted returns on capital in drilling or acquisition activities. The success and timing of development and exploitation activities on properties operated by others depend upon a number of factors that will be largely outside of our control, including: the timing and amount of capital expenditures; the availability of suitable offshore drilling rigs, drilling equipment, support vessels, production and transportation infrastructure and qualified operating personnel; the operator s expertise and financial resources; approval of other participants in drilling wells; selection of technology; and the rate of production of the reserves. Our insurance may not protect us against business and operating risks. We maintain insurance for some, but not all, of the potential risks and liabilities associated with our business. For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially, and in some instances, certain insurance policies are economically unavailable or available only for reduced amounts of coverage. As a result, we procure other desirable insurance on commercially reasonable terms, if possible. Although we will maintain insurance at levels we believe is appropriate and consistent with industry practice, we will not be fully insured against all risks, including business interruption insurance which cannot be sourced on economic terms, and drilling and completion risks that are generally not recoverable from third parties or insurance. In addition, pollution and environmental risks generally are not fully insurable. Losses and liabilities from uninsured and underinsured events and delay in the payment of insurance proceeds could have a material adverse effect on our financial condition and results of operations. As a result of a number of recent catastrophic events like the terrorist attacks on September 11, 2001 and Hurricanes Ivan, Katrina and Rita, insurance underwriters increased insurance premiums for many of the coverages historically maintained and issued general notices of cancellation and significant changes for a wide variety of insurance coverages. The oil and natural gas industry suffered extensive damage from Hurricanes Ivan, Katrina and Rita. As a result, insurance costs have increased significantly as compared to the costs that similarly situated participants in this industry have historically incurred. Insurers are requiring higher retention levels and limit the amount of insurance proceeds that are available after a major wind storm in the event that damages are incurred. If storm activity in the future is as severe as it was in 2005, insurance underwriters may no longer insure Gulf of Mexico assets against weather-related damage. A number of industry participants have previously maintained business interruption insurance. This insurance may cease to be economically available in the future, which could adversely impact business prospects in the Gulf of Mexico and adversely impact our operations. If a significant accident or other event resulting in damage to our operations, including severe weather, terrorist acts, war, civil disturbances, pollution or environmental damage, occurs and is not fully covered by insurance or a recoverable indemnity from a customer, it could adversely affect our financial condition and results of operations. Moreover, we may not be able to maintain adequate insurance in the future at rates we consider reasonable or be able to obtain insurance against certain risks. Table of Contents The information in this prospectus is not complete and may be changed. Neither we nor the selling shareholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED JUNE 25, 2007 PRELIMINARY PROSPECTUS 148,503,324 Shares ENERGY XXI (BERMUDA) LIMITED Common Stock Table of Contents Our operations will be subject to environmental and other government laws and regulations that are costly and could potentially subject us to substantial liabilities. Oil and natural gas exploration and production operations in the United States and the Gulf of Mexico are subject to extensive federal, state and local laws and regulations. Companies operating in the Gulf of Mexico are subject to laws and regulations addressing, among others, land use and lease permit restrictions, bonding and other financial assurance related to drilling and production activities, spacing of wells, unitization and pooling of properties, environmental and safety matters, plugging and abandonment of wells and associated infrastructure after production has ceased, operational reporting and taxation. Failure to comply with such laws and regulations can subject us to governmental sanctions, such as fines and penalties, as well as potential liability for personal injuries and property and natural resources damages. We may be required to make significant expenditures to comply with the requirements of these laws and regulations, and future laws or regulations, or any adverse change in the interpretation of existing laws and regulations, could increase such compliance costs. Regulatory requirements and restrictions could also significantly delay or curtail our operations and could have a significant impact on our financial condition or results of operations. Our oil and gas operations are subject to stringent laws and regulations relating to the release or disposal of materials into the environment or otherwise relating to environmental protection. These laws and regulations: require the acquisition of a permit before drilling commences; restrict the types, quantities and concentration of substances that can be released into the environment in connection with drilling and production activities; limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas; and impose substantial liabilities for pollution resulting from operations. Failure to comply with these laws and regulations may result in: the imposition of administrative, civil and/or criminal penalties; incurring investigatory or remedial obligations; and the imposition of injunctive relief. Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent or costly waste handling, storage, transport, disposal or cleanup requirements could require us to make significant expenditures to attain and maintain compliance and may otherwise have a material adverse effect on our industry in general and on our own results of operations, competitive position or financial condition. Although we intend to be in compliance in all material respects with all applicable environmental laws and regulations, we cannot assure you that we will be able to comply with existing or new regulations. In addition, the risk of accidental spills, leakages or other circumstances could expose us to extensive liability. We are unable to predict the effect of additional environmental laws and regulations which may be adopted in the future, including whether any such laws or regulations would materially adversely increase our cost of doing business or affect operations in any area. Under certain environmental laws and regulations, we could be held strictly liable for the removal or remediation of previously released materials or property contamination regardless of whether we were responsible for the release or contamination, or if current or prior operations were conducted consistent with accepted standards of practice. Such liabilities can be significant, and if imposed could have a material adverse effect on our financial condition or results of operations. Other Risks If we are not able to implement the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 in a timely manner or with adequate compliance, we may be unable to provide the required financial information in a timely and reliable manner and may be subject to sanctions by regulatory authorities. Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related regulations implemented by the SEC are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. We are evaluating our internal controls systems to allow management to report on, and our independent auditors to attest to, our internal controls. We will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. While we anticipate being able to fully implement the requirements relating to internal controls and all other aspects of Section 404 by our June 30, 2008 deadline, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations since there is presently no precedent available by which to measure compliance adequacy. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities such as the SEC. Any such action could adversely affect our financial results or investors confidence in our company. In addition, the controls and procedures that we will implement may not comply with all of the relevant rules and regulations of the SEC. If we fail to develop and maintain effective controls and procedures, we may be unable to provide the financial information in a timely and reliable manner. This prospectus relates to the resale by the selling stockholders of up to 148,503,324 shares of our common stock, consisting of up to 60,449,966 shares of common stock, 73,053,966 shares of common stock issuable upon exercise of common stock purchase warrants, 5,000,000 shares of common stock issuable upon exercise of unit purchase options and 10,000,000 shares of common stock issuable upon exercise of common stock purchase warrants issuable upon exercise of unit purchase options. We are not selling any shares of common stock under this prospectus and will not receive any proceeds from the sale of common stock by the selling stockholders. As part of our initial public offering on the Alternative Investment Market of the London Stock Exchange in October 2005, we issued common shares, common stock purchase warrants (each exercisable into one common share for $5.00) and unit purchase options (each exercisable for $6.60 into one common share and two common stock purchase warrants (each common stock purchase warrant then exercisable for one common share for $5.00)). Pursuant to an Investor Rights Agreement dated October 13, 2005 by and among us, Sunrise Securities Corp. and Collins Stewart Limited, we agreed to register the common stock underlying the warrants and the unit purchase options. We have also offered to register for sale the common shares of any holder of common shares electing to participate in this offering. The shares of common stock to which this prospectus relates may be offered and sold from time to time directly by the selling stockholders or alternatively through underwriters or broker-dealers or agents. The shares of common stock may be sold in one or more transactions, at fixed prices, at prevailing market prices at the time of sale, or at negotiated prices. Our restricted and unrestricted common stock trades on the Alternative Investment Market of the London Stock Exchange under the symbols EXXS and EXXI , respectively, and on the United States Over-the-Counter Bulletin Board under the symbol EXXIF.OB . Table of Contents We depend on key personnel, the loss of any of whom could materially adversely affect future operations. Our success will depend to a significant extent upon the efforts and abilities of our executive officers. The loss of the services of one or more of these key employees could have a material adverse effect on us. Our business will also be dependent upon our ability to attract and retain qualified personnel. Acquiring and keeping these personnel could prove more difficult or cost substantially more than estimated. This could cause us to incur greater costs, or prevent us from pursuing our exploitation strategy as quickly as we would otherwise wish to do. Unanticipated decommissioning costs could materially adversely affect our future financial position and results of operations. We may become responsible for costs associated with abandoning and reclaiming wells, facilities and pipelines. Abandonment and reclamation of facilities and the costs associated therewith is often referred to as decommissioning. Should decommissioning be required that is not presently anticipated, such costs may exceed the value of reserves remaining at any particular time. We may have to draw on funds from other sources to satisfy such costs. The use of other funds to satisfy such decommissioning costs could have a material adverse effect on our financial position and results of operations. If we are unable to acquire or renew permits and approvals required for operations, we may be forced to suspend or cease operations altogether. The construction and operation of energy projects require numerous permits and approvals from governmental agencies. We may not be able to obtain all necessary permits and approvals, and as a result its operations may be adversely affected. In addition, obtaining all necessary permits and approvals may necessitate substantial expenditures and may create a significant risk of expensive delays or loss of value if a project is unable to function as planned due to changing requirements or local opposition. We may be taxed as a United States Corporation. We are incorporated under the laws of Bermuda because of our long-term desire to have substantial business interests outside the United States and recent legislation in the United States that penalizes domestic corporations that reincorporate in a foreign country. We plan to purchase any U.S. assets through our wholly owned subsidiary Energy XXI U.S.A., Inc. Energy XXI U.S.A., Inc. and its subsidiaries will pay U.S. taxes on U.S. income. We do not currently intend to engage in any business activity in the U.S. However, there is a risk that some or all of our income could be challenged, and considered as effectively connected to a U.S. trade or business, and therefore subject to U.S. taxation. In consideration of this risk, we and our U.S. subsidiaries will implement certain operational steps to separate the U.S. operations from our other operations. In general, all employees based in the U.S. will be employees of our U.S. subsidiaries, and will be paid for their services by such U.S. subsidiaries. Salaries of our employees who are resident in the United States and who render services to the U.S. business activities will be allocated as expenses of the U.S. subsidiaries. Investing in our common stock involves a high degree of risk. See Risk Factors beginning on page 5. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense. Table of Contents CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS Various statements in this prospectus, including those that express a belief, expectation, or intention, as well as those that are not statements of historical fact, are forward-looking statements. The forward-looking statements may include projections and estimates concerning the timing and success of specific projects and our future reserves, production, revenues, income, and capital spending. When we use the words believe, intend, expect, may, should, anticipate, could, estimate, plan, predict, project, or their negatives, other similar expressions, or the statements that include those words are usually forward-looking statements. The forward-looking statements contained in this prospectus are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management s assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this prospectus are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed in the Risk Factors section and elsewhere in this prospectus. All forward-looking statements speak only as of the date of this prospectus. We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise. These cautionary statements qualify all forward-looking statements attributable to us, or persons acting on our behalf. The risks, contingencies and uncertainties relate to, among other matters, the following: our business strategy; our financial position; our cash flow and liquidity; integration of acquisitions, including the Pogo Acquisition; declines in the prices we receive for our oil and gas affecting our operating results and cash flows; economic slowdowns that can adversely affect consumption of oil and gas by businesses and consumers; uncertainties in estimating our oil and gas reserves; replacing our oil and gas reserves; uncertainties in exploring for and producing oil and gas; our inability to obtain additional financing necessary in order to fund our operations, capital expenditures, and to meet our other obligations; availability of drilling and production equipment and field service providers; disruptions capacity constraints in, or other limitations on the pipeline systems which deliver our gas and other processing and transportation considerations; competition in the oil and gas industry; our inability to retain and attract key personnel; the effects of government regulation and permitting and other legal requirements; costs associated with perfecting title for mineral rights in some of our properties; and other
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+PROSPECTUS SUMMARY This summary highlights information contained in this prospectus. Before investing in our common shares, you should read this entire prospectus carefully, including the section entitled "Risk Factors" and our financial statements and related notes, for a more complete understanding of our business and this offering. Unless we specify otherwise, all references in this prospectus to "we," "our," "us" and the "Company" refer to Aegean Marine Petroleum Network Inc. and its subsidiaries. Please read "Glossary of Industry Terms" included in this prospectus for definitions of certain terms that are commonly used in our industry. Unless otherwise indicated, all references to "dollars" and "$" in this prospectus are to, and amounts are presented in, U.S. dollars. Except where we or the context otherwise indicate, the information presented in this prospectus assumes (1) that the underwriters will not exercise their over-allotment option to purchase additional shares and (2) no issuance of any shares of our common stock reserved for issuance under our equity incentive plan. The information in this prospectus gives effect to a 1.26-for-one stock option split in the form of a stock dividend which occurred on November 21, 2006. Our Company We are a marine fuel logistics company that physically supplies and markets refined marine fuel and lubricants to ships in port and at sea. As a physical supplier, we purchase marine fuel from refineries, major oil producers and other sources and resell and deliver these fuels using our bunkering tankers to a broad base of end users. With service centers in Greece, Gibraltar, the United Arab Emirates, Jamaica, Singapore, Belgium, the United Kingdom and Ghana, we believe that we are one of a limited number of independent physical suppliers that owns and operates a fleet of bunkering tankers and conducts physical supply operations in multiple jurisdictions. We presently own a fleet of 17 bunkering tankers, comprised of 14 double hull and three single hull tankers with an average cargo-carrying capacity of approximately 6,233 deadweight tons, or dwt. We provide fueling services to virtually all types of ocean-going and many types of coastal vessels, such as oil tankers, container ships, drybulk carriers, cruise ships and ferries. Our customers include a diverse group of ocean-going and coastal ship operators and marine fuel traders, brokers and other users. We provide our customers with a service that requires sophisticated logistical operations designed to meet their strict fuel quality and delivery scheduling needs. We believe that our extensive experience, management systems and proprietary software systems allow us to meet our customers' specific requirements when they purchase and take delivery of marine fuels and lubricants around the world, this together with the capital intensive nature of our industry and the limited available shipyard capacity for new vessel construction represent a significant barrier to the entry of competitors. We have devoted our efforts to building a global brand, and believe that our customers recognize our brand as representing high quality service and products at each of our locations around the world. We use our bunkering tankers in our physical delivery operations and do not generally charter them out to others. We manage our technical ship operations in-house, which helps us maintain high levels of customer service. The volume of marine fuel that we have sold has grown from approximately 1.0 million metric tons in the fiscal year ended December 31, 2002 to approximately 2.4 million metric tons in the fiscal year ended December 31, 2006. During the same period, our gross spread on marine petroleum products has grown from $8.2 million to $62.0 million and our operating income has grown from $0.8 million to $30.5 million. From the first to the third quarter of 2007, we grew our sales of marine fuel from 718,445 to 897,147 metric tons, generating gross spread on marine petroleum products of $18.1 million and $22.3 million, respectively, and increasing our net income by 18.2% from $6.6 million to $7.8 million. The refined marine fuel supply industry is a multi-billion dollar industry that serves an essential function in the shipping industry year-round. According to Lloyd's Marine Intelligence Unit, or Lloyd's MIU, ship-to-ship fueling of vessels in port and at sea, as distinguished from delivery via truck or pipeline, is the most commonly used method of delivery of refined marine fuel. Due to the significance of marine fuel costs in vessels' operating expenses, environmental concerns and customers' desire to minimize engine damage and off-hire time, we believe that customers are increasingly searching for a global network of marine fuel service centers with high quality operations and reliable and consistent service. According to Lloyd's MIU, in the past three decades, major oil producers have been reducing their bunkering operations. Our global network of marine fuel service centers provides us with greater flexibility in our sourcing and pricing strategies and enhances our competitiveness against other smaller independent physical suppliers as well as existing large trader and broker networks that leverage their size to perform intermediary services in our industry. We intend to continue expanding our business and marine fuel delivery capabilities. We have recently acquired a marine fuel logistics company based in Belgium with offshore operations in Northern Europe. In addition, we recently established a service center in Ghana and acquired a company that operates a marine fuel terminal in the United Kingdom. We expect to commence operations in both Ghana and the United Kingdom by the end of the year. We plan to establish new service centers in other selected locations around the world during the next several years and will pursue acquisitions opportunistically as a means of expanding our service. As we increase our global presence, we plan to expand our fleet by at least 30 new double hull bunkering tankers during the next three years and may purchase additional secondhand vessels in the future. In order to do this, we have entered into newbuilding contracts for the construction of 26 new double hull bunkering tankers, scheduled for delivery between the fourth quarter of 2007 and 2009, and have options, which we plan to exercise, to build four additional double hull bunkering tankers for delivery through the first quarter of 2010. For further discussion of our 26 newbuilding contracts and the options for four additional new double hull bunkering tankers, please refer to the section of this prospectus entitled "Business Our Fleet." In addition to expanding our bunkering tanker fleet, we have entered into newbuilding contracts for the construction of two new double hull petroleum products tankers with roll-on roll-off facilities and refueling capabilities for fuel trucks, which we call specialty tankers. Our specialty tankers are scheduled for delivery in the fourth quarter of 2007 and first quarter of 2008, and we have options, which we plan to exercise, to build four additional specialty tankers. We plan to use these specialty tankers for the distribution of gasoline and other refined petroleum products to island economies. We view this business as complementary to our bunkering business, involving relatively complex customer requirements and requiring significant investment in management and software systems. We currently intend to deploy our specialty tankers primarily under contracts of affreightment. For further discussion of our two newbuilding contracts and the option to build four additional specialty tankers, please refer to the section of this prospectus entitled "Business Our Fleet." We believe that we currently have a well-maintained, high quality fleet of double hull bunkering tankers. We currently own a fleet of 17 bunkering tankers, 14 of which are double hull, with an average age of approximately 17.6 years. According to Lloyd's MIU, the aggregate number of double hull tankers physically suitable for use in the marine fuel supply industry represents only approximately 21% of all tankers (excluding chemical tankers) suitable for such use. Following the delivery of the 26 newbuildings and the four additional vessels subject to an option, we expect to have 47 bunkering tankers in our fleet, 44 of which will be double hull, with an average age of approximately 10.8 years by the end of the first quarter of 2010. Under environmental protection laws and regulations, single hull tankers, including bunkering tankers, are undergoing a phase-out. The European Union, or the EU, and the International Maritime Organization, or the IMO, have already banned single hull tankers of 5,000 dwt and above from UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 carrying heavy grade oil, or HGO, which includes most of the grades of marine fuel, as of October 2003 and as of April 2005, respectively, and are scheduled to ban all single hull tankers of less than 5,000 dwt but above 600 dwt from carrying HGO in 2008. The EU and the IMO will require a phase-out of all other single hull tankers in 2010. The IMO, however, permits a flag state to extend the phase-out period to the earlier of 2015 or the 25th anniversary of the vessel's delivery. Given the fragmentation of the marine fuel supply market, we believe that the expanded size of our fleet of double hull bunkering tankers and our presence around the world makes us one of the leaders among independent physical suppliers of marine petroleum products. In certain markets, we have deployed floating storage facilities which enable us to maintain more efficient refueling operations, have more reliable access to a supply of bunker fuel and deliver a higher quality service to our customers. We own two double hull Panamax tankers with a cargo-carrying capacity of approximately 68,000 dwt each, which we use as floating storage facilities in Gibraltar and the United Arab Emirates. We also own one double hull Aframax tanker with a cargo-carrying capacity of approximately 83,900 dwt, which we are deploying for hire in the international spot market. We plan to position this vessel in Ghana for use as a floating storage facility. In addition to our bunkering operations, we have recently commenced the production and marketing of our own brand of marine lubricants, Alfa Marine Lubricants. Alfa Marine Lubricants can be used on most major vessels and reach the same customers as our bunkering business. Alfa Marine Lubricants are currently available in our service centers in Greece and Singapore. We plan to expand the distribution of marine lubricants throughout our other service centers and bunkering ports worldwide. Our Competitive Strengths We believe that we possess a number of strengths that provide us with competitive advantages in the marine fuel supply industry, including: Integrated Service Capability. Our ability to control the process of physically supplying refined marine fuel to end users from procurement to delivery provides us with a distinct competitive advantage. We have: long-term contractual arrangements with supply sources for marine petroleum products; local service centers that monitor and support the logistics of each customer order; bunkering tankers to transport marine fuel from our suppliers to customers; floating storage facilities to manage supply of marine fuel; and our own brand of marine lubricants for sale to our existing and new customers. Our direct control and management of bunkering tankers and delivery schedules enhance our ability to provide marine fuel to ships on a timely and cost effective basis while controlling the quality of our product, service and fueling safety. As a result, we believe that we can better service our customers than traders or brokers, who solely resell marine petroleum products or contract with third parties to deliver the products. Strong Customer Relationships. We have developed strong relationships with our customers as a result of the quality of our operations and reliability of our service. We service a broad base of customers, including international ship operators, marine fuel traders, brokers and other users. Our strong customer relationships result in repeat business across our service locations. We believe that we can leverage our successful relationships with our customers to provide us with significant opportunities to expand our business and establish additional service centers throughout the world. AMENDMENT NO. 2 TO FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Fleet of Double Hull Bunkering Tankers. The percentage of our fleet comprised of double hull bunkering tankers significantly exceeds the industry average. Given the expected ban of a significant portion of single hull bunkering tankers, the capacity constraint of the world's shipyards, the capital requirements necessary to renew bunkering fleets and the impracticality of retrofitting most single hull tankers with double hulls, we believe that the number of bunkering tankers worldwide will decline significantly through 2008. We expect to have 44 double hull vessels in our operating fleet of bunkering tankers by the end of the second quarter of 2010. Since we expect the global supply of bunkering tankers to decline and our double hull fleet to more than triple, we believe that we will be favorably positioned to expand our business in existing and new markets. Effective Credit Controls. We provide trade credit to customers who, according to our in-house credit system, exhibit an acceptable credit risk profile. We believe our active credit risk management has been essential to our success. Our credit evaluation system has enabled our business to grow while allowing us to effectively manage our credit exposure. For the past three years, our write-offs of receivables were less than $0.1 million in the aggregate. Limited Inventory Price Risk. We minimize the risk of oil price fluctuations by generally purchasing inventory for which we already have a confirmed sales order. Our cost of marine fuel is typically tied to average spot pricing, and we generally do not fix future prices to our customers for periods in excess of one week. We typically arrange to take fuel deliveries on the day of, or a few days prior to, the delivery to our customer and thereby maintain inventory close to minimum operating levels. Accordingly, we believe that fluctuating oil prices do not cause us to experience material levels of inventory or transactional losses. Strong Management with Successful Track Record. We have assembled a management team of senior executive officers and key employees with decades of experience in the commercial, technical, management and financial areas of the marine fuel supply and shipping industries. Given that we began operations in Greece and subsequently expanded into Gibraltar, the United Arab Emirates, Jamaica, Singapore and, most recently, Ghana and Belgium, we believe that our management team has a demonstrated history of successfully expanding our marine fuel delivery capabilities by entering into new geographic markets and adding vessels to our fleet of bunkering tankers. Our Strategy We believe that future growth will be achieved not only by increasing market share in our current locations but also by expanding operations to other locations. As part of our strategy, we intend to: Expand the Global Reach of our Business and our Fleet. We intend to capitalize on our ability to effectively manage bunkering operations in multiple locations and increase the global reach of our business and our fleet. We plan to expand our operations through opening new service centers in selected locations around the world during the next several years and explore acquisition opportunities of marine fuel supply and complementary businesses. Since December 2006, we have acquired four secondhand bunkering tankers and taken delivery of one newbuilding. We intend to continue to grow our bunkering tanker fleet through timely and selective acquisitions of newly-built and secondhand bunkering tankers. Maintain and Leverage Relationships with our Customers. We intend to maintain strong relationships with our customers by providing high quality products, reliable service and innovative solutions to meet their needs. As we continue to expand into additional markets and provide new services and products, we plan to leverage our existing customer relationships to capture additional business. AEGEAN MARINE PETROLEUM NETWORK INC. (Exact name of Registrant as specified in its charter) Marshall Islands (State or other jurisdiction of incorporation or organization) 5172 (Primary Standard Industrial Classification Code Number) N/A (I.R.S. Employer Identification No.) 42 Hatzikyriakou Avenue Piraeus 185 38 Athens Greece 011 30 210 458-6200 (Address and telephone number of Registrant's principal executive offices) Seward & Kissel LLP Attention: Gary J. Wolfe, Esq. One Battery Park Plaza New York, New York 10004 (212) 574-1200 (Name, address and telephone number of agent for service) Capitalize on Phase-Out of Single Hull Bunkering Tankers. Given the expected ban of a significant portion of single hull bunkering tankers by 2008, we believe that the number of bunkering tankers worldwide will decline significantly. As we expect to grow our double hull bunkering tanker fleet by early 2010, we plan to leverage our modern, high-quality vessels to fill a portion of the market currently serviced by single hull vessels. Given the fragmentation of the marine fuel delivery market, we believe that the expanded size of our fleet of double hull bunkering tankers and presence around the world will further enhance our industry position. Flexible Sourcing of Marine Fuels. We employ a variety of methods for purposes of obtaining an adequate supply of high quality marine fuels. In some of our markets, such as Greece and Jamaica, we have entered into long-term supply contracts with marine fuel suppliers. In markets which are more susceptible to supply constraints or where we have not identified reliable local suppliers, our strategy is to develop the capability of storing marine fuel on a short-term basis. Currently, we have positioned two floating storage facilities in Gibraltar and the United Arab Emirates and plan to position one floating storage facility in Ghana primarily for purposes of meeting our customers' demand and mitigating the impact of short-term supply shortages. Provide Innovative Solutions. Our management continues to seek innovative solutions to existing and future energy needs. For example, access to gasoline and other refined petroleum products is costly and may from time to time be subject to restrictions or disruptions in many island economies, including the Greek Islands. In response, we have designed and plan to operate a fleet of specialty tankers with roll-on roll-off facilities and refueling capabilities for fuel trucks intended to make distribution of gasoline and other refined petroleum products in island areas more cost effective and environmentally friendly.
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+S-1/A 1 w32512a1sv1za.htm AMENDMENT NO. 1 TO FORM S-1 S-1/A Table of Contents As filed with the Securities and Exchange Commission on April 20, 2007 Securities Act File No. 333-141856 AMENDMENT NO. 1 TO UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 COMPASS DIVERSIFIED TRUST (Exact name of Registrant as specified in charter) Delaware 7363 57-6218917 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) COMPASS GROUP DIVERSIFIED HOLDINGS LLC (Exact name of Registrant as specified in its charter) Delaware 7363 20-3812051 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) Sixty One Wilton Road Second Floor Westport, CT 06880 (203) 221-1703 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) I. Joseph Massoud Chief Executive Officer Compass Group Diversified Holdings LLC Sixty One Wilton Road Second Floor Westport, CT 06880 (203) 221-1703 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Stephen C. Mahon Fred A. Summer Squire, Sanders Dempsey L.L.P. 312 Walnut Street Cincinnati, OH 45202 (513) 361-1200 (513) 361-1201 Facsimile Michael P. Reed Alston Bird LLP The Atlantic Building 950 F Street N.W. Washington, D.C. 20004 (202) 756-3300 (202) 756-3333 Facsimile Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: o If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. TABLE OF CONTENTS Page Summary 1 Risk Factors 11 Forward-Looking Statements 32 Use of Proceeds 34 Price Range of Shares 34 Dividend and Distribution Policy 35 Pro Forma Capitalization 37 Pro Forma Condensed Combined Financial Statements 38 Selected Financial Data 49 Management s Discussion and Analysis of Financial Condition and Results of Operations 50 Quantitative and Qualitative Disclosures About Market Risk 72 Business 73 Our Manager 115 Management 129 Executive Compensation 130 Principal Shareholders/Security Ownership of Directors and Executive Officers 136 Certain Relationships and Related Party Transactions 137 Description of Shares 142 Material U.S. Federal Income Tax Considerations 149 Underwriting 164 Legal Matters 168 Experts 168 Where You Can Find Additional Information 168 Index to Financial Statements F-1 EX-1.1: FORM OF UNDERWRITING AGREEMENT EX-10.3: REGISTRATION RIGHTS AGREEMENT EX-10.16: FORM OF SHARE PURCHASE AGREEMENT EX-23.1: CONSENT OF GRANT THORNTON LLP EX-23.2: CONSENT OF GRANT THORNTON LLP EX-23.3: CONSENT OF CLIFTON GUNDERSON LLP You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with different information. We, and the underwriters, are not making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information in this prospectus is accurate as of any date other than the date on the front cover of this prospectus. In this prospectus, we rely on and refer to information and statistics regarding market data and the industries of the businesses we own that are obtained from internal surveys, market research, independent industry publications and other publicly available information, including publicly available information regarding public companies. The information and statistics are based on industry surveys and our manager s and its affiliates experience in the industry. This prospectus contains forward-looking statements that involve substantial risks and uncertainties as they are not based on historical facts, but rather are based on current expectations, estimates, projections, beliefs and assumptions about our businesses and the industries in which they operate. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. You should not place undue reliance on any forward-looking statements, which apply only as of the date of this prospectus. Table of Contents SUMMARY This summary highlights selected information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read this entire prospectus carefully, including the sections entitled Risk Factors and Management s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and the notes relating thereto. Unless we tell you otherwise, the information set forth in this prospectus assumes that the underwriters have not exercised their overallotment option. Further, unless the context otherwise indicates, numbers in this prospectus have been rounded and are, therefore, approximate. Compass Diversified Trust, which we refer to as the trust, acquires and owns its businesses through a Delaware limited liability company, Compass Group Diversified Holdings LLC, which we refer to as the company. Except as otherwise specified, references to Compass Diversified, we, us and our refer to the trust and the company and its businesses together. See the section entitled Description of Shares for more information about certain terms of the shares, trust interests and allocation interests. Overview Compass Diversified Trust offers investors an opportunity to participate in the ownership and growth of middle market businesses that traditionally have been owned and managed by private equity firms or other financial investors, large conglomerates or private individuals or families. Through the ownership of a diversified group of middle market businesses, we also offer investors an opportunity to diversify their portfolio risk while participating in the cash flows of our businesses through the receipt of quarterly distributions. We acquire and manage middle market businesses based in North America with annual cash flows between $5 million and $40 million. We seek to acquire controlling ownership interests in the businesses in order to maximize our ability to work actively with the management teams of those businesses. Our model for creating shareholder value is to be disciplined in identifying and valuing businesses, to work closely with management of the businesses we acquire to grow the cash flows of those businesses, and to exit opportunistically businesses when we believe that doing so will maximize returns. We currently own six businesses in six distinct industries and we believe that these businesses will continue to produce stable and growing cash flows over the long term, enabling us to meet our objectives of growing distributions to our shareholders, independent of any incremental acquisitions we may make, and investing in the long-term growth of the company. In identifying acquisition candidates, we target businesses that: produce stable cash flows; have strong management teams largely in place; maintain defensible positions in industries with forecasted long-term macroeconomic growth; and face minimal threat of technological or competitive obsolescence. We maintain a long-term ownership outlook which we believe provides us the opportunity to develop more comprehensive strategies for the growth of our businesses through various market cycles, and will decrease the possibility, often faced by private equity firms or other financial investors, that our businesses will be sold at unfavorable points in a market cycle. Furthermore, we provide the financing for both the debt and equity in our acquisitions, which allows us to pursue growth investments, such as add-on acquisitions, that might otherwise be restricted by the requirements of a third-party lender. We have also found sellers to be attracted to our ability to provide both debt and equity financing for the consummation of acquisitions, enhancing the prospect of confidentiality and certainty of consummating these transactions. In addition, we believe that our ability to be long-term owners alleviates the concern that many private company owners have with regard to their businesses going through multiple sale processes in a short period of time and the disruption that this may create for their employees or customers. Table of Contents We have a strong management team that has worked together since 1998 and, collectively, has approximately 75 years of experience in acquiring and managing middle market businesses. During that time, our management team has developed a reputation for acquiring middle market businesses in various industries through a variety of processes. These include corporate spin-offs, transitions of family-owned businesses, management buy-outs, management based roll-ups, reorganizations, bankruptcy sales and auction-based acquisitions from financial owners. The flexibility, creativity, experience and expertise of our management team in structuring complex transactions provides us with strategic advantages by allowing us to consider non-traditional and complex transactions tailored to fit specific acquisition targets. Our manager, who we describe below, has demonstrated a history of growing cash flows at the businesses in which it has been involved. As an example, for the four businesses we acquired concurrent with our initial public offering, which we refer to as the IPO, 2006 full-year operating income increased, in total, over 2005 by approximately 20.5%. Our quarterly distribution rate has increased by 14.3% from the IPO, on May 16, 2006 until January 2007, from $0.2625 per share to $0.30 per share. From the date of the IPO until December 31, 2006 (including the distribution paid in January 2007 for the quarter ended December 31, 2006), our distribution coverage ratio (estimated cash flow available for distribution divided by total distributions) was approximately 1.7x. See Management s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources. Our Businesses To date, we have acquired controlling interests in the following seven businesses: Advanced Circuits On May 16, 2006, concurrent with the IPO, we acquired a controlling interest in Compass AC Holdings, Inc., which we refer to as Advanced Circuits. Advanced Circuits, headquartered in Aurora, Colorado, is a provider of prototype and quick-turn printed circuit boards, or PCBs, throughout the United States. PCBs are a vital component of virtually all electronic products. The prototype and quick-turn portions of the PCB industry are characterized by customers requiring high levels of responsiveness, technical support and timely delivery. Due to the critical roles that PCBs play in the research and development process of electronics, customers often place more emphasis on the turnaround time and quality of a customized PCB rather than on other factors, such as price. Advanced Circuits meets this market need by manufacturing and delivering custom PCBs in as little as 24 hours, providing its approximately 8,000 customers with approximately 98% error-free production and real-time customer service and product tracking 24 hours per day. Advanced Circuits had full-year operating income of approximately $11.6 million for the year ended December 31, 2006. Aeroglide On February 28, 2007, we acquired a controlling interest in Aeroglide Corporation, which we refer to as Aeroglide. Aeroglide, headquartered in Cary, North Carolina, is a leading global designer and manufacturer of industrial drying and cooling equipment. Aeroglide provides specialized thermal processing equipment designed to remove moisture and heat as well as roast, toast and bake a variety of processed products. Its machinery includes conveyer driers and coolers, impingement driers, drum driers, rotary driers, toasters, spin cookers and coolers, truck and tray driers and related auxiliary equipment and is used in the production of a variety of human foods, animal and pet feeds and industrial products. Aeroglide utilizes an extensive engineering department to custom engineer each machine for a particular application. Aeroglide had full-year operating income of approximately $3.1 million for the year ended December 31, 2006. Anodyne On August 1, 2006, we acquired a controlling interest in Anodyne Medical Device, Inc., which we refer to as Anodyne. Anodyne, headquartered in Los Angeles, California, is a leading manufacturer of medical support services and patient positioning devices used primarily for the prevention and treatment of pressure Table of Contents wounds experienced by patients with limited or no mobility. On October 5, 2006, Anodyne acquired the patient positioning business of Anatomic Global, Inc. Anodyne is one of the nation s leading designers and manufacturers of specialty support surfaces and is able to manufacture products in multiple locations to better serve a national customer base. Anodyne had operating income of approximately $0.3 million for the ten and one-half month period ended December 31, 2006. CBS Personnel On May 16, 2006, concurrent with the IPO, we acquired a controlling interest in CBS Personnel Holdings, Inc., which we refer to as CBS Personnel. CBS Personnel, headquartered in Cincinnati, Ohio, is a provider of temporary staffing services in the United States. In order to provide its 4,000 clients with tailored staffing services to fulfill their human resources needs, CBS Personnel also offers employee leasing services, permanent staffing and temporary-to-permanent placement services. CBS Personnel operates 144 branch locations in various cities in 18 states. CBS Personnel had full-year operating income of approximately $21.1 million for the year ended December 31, 2006. Crosman On May 16, 2006, concurrent with the IPO, we acquired a controlling interest in Crosman Acquisition Corporation, which we refer to as Crosman. Crosman, headquartered in East Bloomfield, New York, was one of the first manufacturers of airguns and is a manufacturer and distributor of recreational airgun products and related products and accessories. The Crosman brand is one of the pre-eminent names in the recreational airgun market and is widely recognized in the broader outdoor sporting goods industry. Crosman s products are sold in over 6,000 retail locations worldwide through approximately 500 retailers, which include mass market and sporting goods retailers. On January 5, 2007, we sold Crosman on the basis of a total enterprise value of approximately $143 million. We have reflected Crosman as a discontinued operation for all periods presented in this prospectus. For further information, see Note D Discontinued Operations, to our consolidated financial statements included elsewhere in this prospectus. Crosman had full-year operating income of approximately $17.6 million for the year ended December 31, 2006. Halo On February 28, 2007, we acquired a controlling interest in Halo Branded Solutions, Inc., which we refer to as Halo, and which operates under the brand names of Halo and Lee Wayne. Halo, headquartered in Sterling, Illinois, serves as a one-stop shop for over 30,000 customers, providing design, sourcing, management and fulfillment services across all categories of its customers promotional product needs. Halo has established itself as a leader in the promotional products and marketing industry through its focus on service through its approximately 700 account executives. Halo had full-year operating income of approximately $6.1 million for the year ended December 31, 2006. Silvue On May 16, 2006, concurrent with the IPO, we acquired a controlling interest in Silvue Technologies Group, Inc., which we refer to as Silvue. Silvue, headquartered in Anaheim, California, is a developer and producer of proprietary, high performance liquid coating systems used in the high-end eyewear, aerospace, automotive and industrial markets. Silvue s patented coating systems can be applied to a wide variety of materials, including plastics, such as polycarbonate and acrylic, glass, metals and other surfaces. These coating systems impart properties, such as abrasion resistance, improved durability, chemical resistance, ultraviolet or UV protection, anti-fog and impact resistance, to the materials to which they are applied. Silvue has sales and distribution operations in the United States, Europe and Asia, as well as manufacturing operations in the United States and Asia. Silvue had full-year operating income of approximately $6.7 million for the year ended December 31, 2006. Table of Contents Our Manager We have entered into a management services agreement with Compass Group Management LLC, who we refer to as our manager or CGM, pursuant to which our manager manages the day-to-day operations and affairs of the company and oversees the management and operations of our businesses. While working for a subsidiary of Compass Group Investments, Inc., which we refer to as CGI, our management team originally oversaw the acquisition and operations of each of our initial businesses and Anodyne prior to our acquiring them from CGI. We pay our manager a quarterly management fee equal to 0.5% (2.0% annualized) of our adjusted net assets as of the last day of each fiscal quarter for the services it performs on our behalf and reimburse our manager for certain expenses. In addition, our manager is entitled to receive a profit allocation upon the occurrence of certain trigger events and has the right to cause the company to purchase the allocation interests upon termination of the management services agreement. See Our Manager Our Relationship with Our Manager and Supplemental Put Agreement and Certain Relationships and Related Party Transactions for further descriptions of the management fees and profit allocation and our manager s supplemental put right. The company s chief executive officer and chief financial officer are employees of our manager and have been seconded to us. Neither the trust nor the company has any other employees. Although our chief executive officer and chief financial officer are employees of our manager, they report directly to the company s board of directors. The management fee paid to our manager covers all expenses related to the services performed by our manager, including the compensation of our chief executive officer and other personnel providing services to us. The company reimburses our manager for the salary and related costs and expenses of our chief financial officer and his staff, who dedicate a substantial majority of their time to the affairs of the company. See Our Manager Our Relationship with Our Manager and Certain Relationships and Related Party Transactions for further descriptions of costs and expenses for which we typically reimburse our manager. Market Opportunity We believe that the merger and acquisition market for middle market businesses is highly fragmented and provides opportunities to purchase businesses at attractive prices. For example, according to Mergerstat, during the twelve month period ended December 31, 2006, businesses that sold for less than $100 million were sold for a median of approximately 7.9x the trailing twelve months of earnings before interest, taxes, depreciation and amortization as compared to a median of approximately 9.3x for businesses that were sold for between $100 million and $300 million and 11.7x for businesses that were sold for over $300 million. We expect to acquire companies in the first two categories described above, and our manager has, to date, typically been successful in consummating attractive acquisitions at multiples at or below 7x the trailing twelve months of earnings before interest, taxes, depreciation and amortization, both on behalf of the company and prior to our formation while working for a subsidiary of CGI. We believe that among the factors contributing to lower acquisition multiples for businesses of the size we target are the fact that sellers of these businesses frequently consider non-economic factors, such as continuing board membership or the effect of the sale on their employees and customers, and that these businesses are less frequently sold pursuant to an auction process. Our Strategy In seeking to maximize shareholder value, we focus on the acquisition of new platforms and the management of our existing businesses (including acquisition of add-on businesses by those existing businesses). While we continue to identify, perform due diligence on, negotiate and consummate additional platform acquisitions of attractive middle market businesses that meet our acquisition criteria, we believe that our current businesses alone will allow us to pay and grow distributions to our shareholders. Table of Contents we must advance expenses, as incurred, to our directors and executive officers in connection with a legal proceeding to the extent permitted by Delaware law and may advance expenses as incurred to our other employees and agents, unless otherwise determined by the company s board of directors. The indemnification provisions contained in our LLC agreement are not exclusive of any other rights to which a person may be entitled by law, agreement, vote of members or disinterested directors or otherwise. In addition, we will maintain insurance on behalf of our directors and executive officers and certain other persons insuring them against any liability asserted against them in their respective capacities or arising out of such status. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment of expenses incurred or paid by a director, officer or controlling person in a successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to the court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this registration statement, we have agreed to indemnify the underwriters and the underwriters have agreed to indemnify us against certain civil liabilities that may be incurred in connection with this offering, including certain liabilities under the Securities Act. Item 15. Recent Sales of Unregistered Securities. On May 16, 2006, concurrently with the IPO, we issued 5,733,333 shares to CGI in a private placement under Section 4(2) of the Securities Act of 1933 at a purchase price of $15.00 per share, for an aggregate offering price of $86 million and completed the private placement of 266,667 shares to Pharos I LLC an entity controlled by Mr. Massoud, the chief executive officer of the company, and owned by our management team, at a purchase price of $15.00 per share for an aggregate offering price approximately $4.0 million. In connection with the purchase of Anodyne from CGI on August 1, 2006, we issued 950,000 shares of our newly issued shares to CGI in a private placement under Section 4(2) of the Securities Act of 1933 as part of the purchase price. The shares were valued at $13.1 million or $13.77 per share, the average closing price of the shares on the NASDAQ Global Market for the ten trading days ending on July 27, 2006. Item 16. Exhibits and Financial Statement Schedules. (a) The following exhibits are filed as part of this Registration Statement: Exhibit Number Description 1 .1 Form of Underwriting Agreement* 3 .1 Certificate of Trust of Compass Diversified Trust(1) 3 .2 Certificate of Formation of Compass Group Diversified Holdings LLC(1) 3 .3 Amended and Restated Trust Agreement of Compass Diversified Trust(3) 3 .4 Second Amended and Restated Operating Agreement of Compass Group Diversified Holdings, LLC dated January 9, 2007(7) Table of Contents Acquisition Strategy Our strategy for new platforms involves the acquisition of businesses that we expect to be accretive to our cash flow available for distribution. An ideal acquisition candidate for us is a North American company which demonstrates a reason to exist, that is, it is a leading player in its market niches, has predictable and growing cash flows, operates in an industry with long-term macroeconomic growth and has a strong and incentivizable management team. We believe that attractive opportunities to make such acquisitions will continue to present themselves, as private sector owners seek to monetize their interests and large corporate parents seek to dispose of their non-core operations. We benefit from our manager s ability to identify diverse acquisition opportunities in a variety of industries. In addition, we rely upon our management team s experience and expertise in researching and valuing prospective target businesses, as well as negotiating the ultimate acquisition of such target businesses. Management Strategy Our management strategy involves the active financial and operational management of our businesses in order to improve financial and operational efficiencies and achieve appropriate growth rates. After acquiring a controlling interest in a new business, we rely on our management team s experience and expertise to work efficiently and effectively with the management of the new business to jointly develop and execute a business plan and to manage the business consistent with our management strategy. In addition, we expect to sell businesses that we own from time to time, when attractive opportunities arise. Our decision to sell a business is based on our belief that doing so will increase shareholder value to a greater extent than would continued ownership of that business. Our sale of Crosman is an example of our ability to successfully execute this strategy. With respect to the sale of Crosman, we recognized a gain of approximately $35.9 million having owned Crosman for under eight months and having earned operating income of $13.3 million through December 31, 2006. Corporate Structure The trust is a Delaware statutory trust. Our principal executive offices are located at Sixty One Wilton Road, Second Floor, Westport, Connecticut 06880, and our telephone number is 203-221-1703. Our website is at www.CompassDiversifiedTrust.com. The information on our website is not incorporated by reference and is not part of this prospectus. We are selling 8,000,000 shares of the trust in connection with this offering and an additional 1,764,706 shares in the separate private placement transaction. Each share of the trust represents one undivided beneficial interest in the trust property. The purpose of the trust is to hold the trust interests of the company, which is one of two classes of equity interests in the company the trust interests, of which 100% are held by the trust, and allocation interests, of which 100% are held by our manager. The trust has the authority to issue shares in one or more series. See the section entitled Description of Shares for more information about the shares, trust interests and allocation interests. Your rights as a holder of trust shares, and the fiduciary duties of the company s board of directors and executive officers, and any limitations relating thereto are set forth in the documents governing the trust and the company. The documents governing the company specify that the duties of its directors and officers are generally consistent with the duties of a director of a Delaware corporation. Investors in the trust shares will be treated as beneficial owners of trust interests in the company. The company s board of directors oversees the management of the company and our businesses and the performance by our manager. The company s board of directors is comprised of seven directors, all of whom were initially appointed by our manager, as holder of the allocation interests, and four of whom are the company s independent directors. Six of the directors are elected by our shareholders in three staggered classes. As holder of the allocation interests, our manager has the right to appoint one director to the company s board of directors, subject to adjustment. An appointed director will not be required to stand for election by our shareholders. See the section entitled Description of Shares Voting and Consent Rights Board of Directors Appointee for more information about our manager s right to appoint a director. Table of Contents An illustration of our organizational structure is set forth below. Table of Contents The Offering Shares offered by us in this offering. 8,000,000 shares Shares outstanding after this offering and the separate private placement transaction 30,214,706 shares Use of proceeds We estimate that our net proceeds from the sale of the shares in this offering will be approximately $129.2 million (or approximately $148.6 million if the underwriters overallotment option is exercised in full), but without giving effect to the payment of public offering costs of approximately $2.2 million. We intend to use the net proceeds from this offering and the $30 million of proceeds from the separate private placement transaction to repay borrowings under our revolving credit facility and any remaining amounts for general corporate purposes. See the section entitled Use of Proceeds for more information about the use of the proceeds of this offering. NASDAQ Global Select Market symbol CODI Dividend and distribution policy We intend to declare and pay regular quarterly cash distributions on all outstanding shares, based on distributions received by the trust on the trust interests in the company. The declaration and amount of any distributions will be subject to the approval of the company s board of directors, which will include a majority of independent directors, and will be based on the results of operations of our businesses and the desire to provide sustainable levels of distributions to our shareholders. Any cash distribution paid by the company to the trust will, in turn, be paid by the trust to its shareholders. See the sections entitled Dividend and Distribution Policy for a discussion of our intended distribution rate and Material U.S. Federal Income Tax Considerations for more information about the tax treatment of distributions by the trust and the company. Shares of the trust Each share of the trust represents an undivided beneficial interest in the trust property, and each share of the trust corresponds to one underlying trust interest of the company owned by the trust. Unless the trust is dissolved, it must remain the sole holder of 100% of the trust interests, and at all times the company will have outstanding the identical number of trust interests as the number of outstanding shares of the trust. If the trust is dissolved, each share of the trust will be exchanged for one trust interest in the company. Each outstanding share of the trust is entitled to one vote on any matter with respect to which the trust, as a holder of trust interests in the company, is entitled to vote. The company, as the sponsor of the trust, will provide to our shareholders proxy materials to enable our shareholders to exercise, in proportion to their percentage ownership of outstanding shares, the voting rights of the trust, and the trust will vote its trust interests in the same proportion as the vote of holders of shares. The allocation Table of Contents interests do not grant to our manager voting rights with respect to the company except in certain limited circumstances. See the section entitled Description of Shares for information about the material terms of the shares, the trust interests and allocation interests. U.S. federal income tax considerations Subject to the discussion in Material U.S. Federal Income Tax Considerations, neither the trust nor the company will incur U.S. federal income tax liability; rather, each holder of trust shares will be required to take into account his or her allocable share of company income, gain, loss, deduction, and other items. The trust is currently seeking approval from the shareholders of record as of April 10, 2007, to authorize the board to amend the trust agreement to provide that the trust be taxed as a partnership. Assuming that approval is granted, the trust will report tax information to the shareholders for the 2007 taxable year and all future taxable years thereafter on Schedule K-1. If that approval is not granted, the trustees intend to dissolve the trust and each shareholder would receive a direct interest in the company in exchange for their shares in the trust. If that occurs, the company will continue to treat the trust as a grantor trust for the initial portion of the 2007 tax year and the trust will report the same tax information as found on the Schedule K-1 to the shareholders on Form 1041. See the section entitled Material U.S. Federal Income Tax Considerations for information about the potential U.S. federal income tax consequences of the purchase, ownership and disposition of shares and for a discussion of recent developments concerning treatment of the trust as a grantor trust for federal income tax purposes.
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+MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We were formed on September 9, 2005 to serve as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with a currently unidentified operating business. In October 2005, we sold 100 shares of common stock, 8,150,000 warrants for a total of $407,501. In March 2006, we issued an aggregate of 4,075,000 Class W warrants and 4,075,000 Class Z warrants to its three existing warrantholders in exchange for the return and cancellation of the outstanding 8,150,000 warrants that were purchased in October 2005. Also in March 2006, we sold an additional 1,400,000 warrants for total proceeds of $70,000. In May 2006, we sold an additional 13,850,000 warrants for total proceeds of $692,500. In January 2007, the warrants were exchanged for 11,700,000 Class W warrants and 11,700,000 Class Z warrants and we sold an additional 3,800,000 Class W warrants and 3,800,000 Class Z warrants for total proceeds $380,000. On April 4, 2007, we issued 6,249,900 shares of our common stock in exchange for the return and cancellation of the 31,000,000 outstanding warrants. We intend to utilize cash derived from these transactions, the proceeds of this offering, our capital stock, debt or a combination of cash, capital stock and debt, in effecting a business combination. The issuance of additional shares of our capital stock: may significantly reduce the equity interest of our stockholders; may subordinate the rights of holders of common stock if preferred stock is issued with rights senior to those afforded to our common stockholders; will likely cause a change in control if a substantial number of our shares of common stock are issued, which may affect, among other things, our ability to use our net operating loss carryforwards, if any, and most likely will also result in the resignation or removal of some or all of our present officers and directors; and may adversely affect prevailing market prices for our common stock. Similarly, if we issue debt securities, it could result in: default and foreclosure on our assets if our operating revenues after a business combination were insufficient to pay our debt obligations; acceleration of our obligations to repay the indebtedness even if we have made all principal and interest payments when due if the debt security contains covenants that required the maintenance of certain financial ratios or reserves and any such covenant is breached without a waiver or renegotiation of that covenant; our immediate payment of all principal and accrued interest, if any, if the debt security is payable on demand; and our inability to obtain additional financing, if necessary, if the debt security contains covenants restricting our ability to obtain additional financing while such security is outstanding. We have neither engaged in any operations nor generated any revenues to date. Our entire activity since inception has been to prepare for our proposed fundraising through an offering of our equity securities. We estimate that the net proceeds from the sale of the units, after deducting offering expenses of approximately $800,000, and underwriting discounts of approximately $6,500,000 (or $7,475,000 if the representative s over-allotment option is exercised in full), will be approximately $192,850,000, or $221,875,000 if the representative s over-allotment option is exercised in full, all of which will be held in trust. An additional $5,550,000 will also be deposited into trust upon consummation of this offering from the sale of our initial shares as well as the sale of the insider warrants described below. We will likely use substantially all of the net proceeds of this offering, including the funds held in the trust account, together with our existing cash, to acquire a target business and to pay our expenses relating thereto, including the aggregate $7,400,000 fee payable to HCFP/Brenner Securities, the representative of the underwriters, and Pali Capital, one of the underwriters, upon the consummation of a business combination for acting as our investment bankers on a non-exclusive basis to assist us in obtaining approval of a business combination (but not for purposes of locating potential target candidates for our business combination). The portion of the funds used to pay this fee will not be available to us to use in connection with or following the business combination. To the extent that our capital stock is used in whole or in part as consideration to effect a business combination, the remaining proceeds held in the trust fund that are not used for such purpose, as well as any other net proceeds not expended to acquire a target business, will be used as working capital to finance the operations of the target business and to pay our expenses relating thereto, including the $7,400,000 fee payable to HCFP/Brenner Securities, the representative of the underwriters, and Pali Capital, one of the underwriters, upon the consummation of a business combination for acting as our investment bankers on a non-exclusive basis to assist us in obtaining approval of a business combination (but not for purposes of locating potential target candidates for our business combination). The funds used to pay this fee will not be available to us to use in connection with or following the business combination. Such working capital funds could be used in a variety of ways, including continuing or expanding the target business operations, for strategic acquisitions and for marketing, research and development of existing or new products. Such funds could also be used to repay any operating expenses or finders fees which we had incurred prior to the completion of our business combination if the funds available to us outside of the trust account were insufficient to cover such expenses. We believe that, upon consummation of this offering, the funds available to us outside of the trust fund (approximately $300,000), together with the up to $3,000,000 of interest income earned on the trust account which may be released to us from the trust account as well as any amounts necessary to pay our tax obligations, will be sufficient to allow us to operate for the next 24 months, assuming that a business combination is not consummated during that time. We will only be entitled to withdraw up to the maximum amount of actual interest earned at any time. We believe that the timing of the interest received will permit us to meet our operational needs. Over this time period, we will be using these funds for identifying and evaluating prospective target businesses, performing business due diligence on target businesses, traveling to and from the offices, plants or similar locations of prospective target businesses, and reviewing corporate documents and material agreements of, prospective target businesses, selecting the target business to acquire and structuring, negotiating and consummating the business combination. We anticipate approximately $500,000 of expenses for legal, accounting and other expenses attendant to the due diligence investigations, and the structuring and negotiating of a business combination, $300,000 of expenses for the due diligence investigations of prospective target businesses, $180,000 for the administrative fee payable to PLM International Inc. ($7,500 per month for 24 months), $100,000 of expenses in legal and accounting fees relating to our SEC reporting obligations and $2,220,000 for general working capital that may be used for miscellaneous expenses, taxes and reserves, including approximately $150,000 for director and officer liability insurance premiums and the costs of liquidation and reserves, if any. We do not believe we will need to raise additional funds following this offering in order to meet the expenditures required for operating our business. However, we may need to raise additional funds through the sale of our securities or through loan arrangements if such funds are required to consummate a business combination that we deem desirable or suitable for us. We have not, however, engaged or retained, had any discussions with, or entered into any agreement with, any third party regarding any potential additional funding for a business combination. If we do determine to seek such additional funds, we would only consummate such a financing simultaneously with the consummation of a business combination. We are obligated, commencing on the date of this prospectus, to pay to PLM International Inc., an affiliate of Mr. Engle, our Chairman of the Board and Chief Executive Officer, and Mr. Coyne, our Chief Financial Officer and a Director, a monthly fee of $7,500 for general and administrative services. We have agreed to issue to the representative of the underwriters, for $100, an option to purchase up to a total of 1,250,000 units. We estimate that the value of this option is approximately $4,371,000 using a Black-Scholes option pricing model. The fair value of the option granted to the representative is estimated as of the date of grant using the following assumptions: (1) expected volatility of 51.68% (2) risk-free interest rate of 4.55% and (3) contractual life of 5 years. PROPOSED BUSINESS Introduction We are a Delaware blank check company incorporated on September 9, 2005, to serve as a vehicle for the acquisition of an operating business. Our efforts in identifying a prospective target business will not be limited to a particular industry, although our management intends to focus on businesses having at least a majority of their assets, based on either a historical balance sheet valuation or a fair market valuation, represented by real estate or other physical assets, or which utilize these types of assets to derive at least a majority of its revenue. Examples of these types of businesses include retailers, manufacturers and transportation businesses, as well as other businesses with significant investments in machinery and equipment. Our management believes that there are a variety of situations that would make a target business attractive to us including: businesses operating under a poorly focused business plan, such as one not utilizing its assets to their optimal realizable value; businesses having a significant amount of growth potential due to current economic factors such as niche businesses servicing geographic markets experiencing high growth or undergoing significant rebuilding; and special situation opportunities such as businesses with unresolved liabilities, both in terms of amount and timing, including deferred liabilities, environmental liabilities and litigations arising from product liabilities. Management believes that potential sources for target businesses are numerous and may include, among others: underperforming divisions of public companies; businesses owned by private equity firms, insurance companies and other financial institutions with a current motivation to monetize investment; and businesses owned by banks as a result of foreclosures or restructurings. While we believe that there are numerous business opportunities in these areas based on our management s prior experience, we have not conducted any research into potential targets and, therefore, cannot assure you that we will be able to locate a target business or that we will ultimately be successful in consummating a business combination on favorable terms or at all. Effecting a business combination General We are not presently engaged in, and we will not engage in, any substantive commercial business for an indefinite period of time following this offering. We intend to utilize cash derived from the proceeds of this offering, as well as our existing cash, our capital stock, debt or a combination of these in effecting a business combination. Although substantially all of the net proceeds of this offering are intended to be generally applied toward effecting a business combination as described in this prospectus, the proceeds are not otherwise being designated for any more specific purposes. Accordingly, investors in this offering are investing without first having an opportunity to evaluate the specific merits or risks of any one or more business combinations we may ultimately undertake. A business combination may involve the acquisition of, or merger with, a company which does not need substantial additional capital but which desires to establish a public trading market for its shares, while avoiding what it may deem to be adverse consequences of undertaking a public offering itself. These include time delays, significant expense, loss of voting control and compliance with various federal and state securities laws. In the alternative, a business combination may involve a company which may be financially unstable or in its early stages of development or growth. We have not identified a target business or target industry Although we intend to initially focus on businesses having a majority of their assets, based on either a historical balance sheet valuation or a fair market valuation, represented by real estate or other physical assets, or which utilize these types of assets to derive at least a majority of their revenue. We are not required to limit our search to any target business or target industry for a business combination. Our officers, directors, promoters and other affiliates have not engaged in discussions on our behalf with representatives of other companies regarding the possibility of a potential merger, capital stock exchange, asset acquisition or other similar business combination with us, nor have we, nor any of our agents of affiliates, been approached by any candidates (or representatives of any candidates) with respect to a possible acquisition transaction with our company. We have also not, nor has anyone on our behalf, taken any measure, directly or indirectly, to identify or locate any suitable acquisition candidate. Additionally, we have not contacted any entity in which any of our officers or directors or their affiliates have or has an investment or with which any of the foregoing have a consulting arrangement or other relationship. While management is not aware of any such opportunities, has not had any preliminary or informal consultation with respect to any such entity and does not currently intend to contact any such business with respect to a potential business combination, we may contact such a business in the future if facts change and we believe such an opportunity is advantageous to us. Moreover, we have not engaged or retained any agent or other representative to identify or locate such an acquisition candidate on our behalf. We have also not conducted any research with respect to identifying the number and characteristics of the potential acquisition candidates. As a result, we cannot assure you that we will be able to locate a target business or that we will be able to engage in a business combination with a target business on favorable terms. Subject to the limitations that a target business or the controlling interest (but not less than a majority of the voting interest) therein that we acquire, have a fair market value of at least 80% of our net assets at the time of the acquisition, as described below in more detail, we will have virtually unrestricted flexibility in identifying and selecting a prospective acquisition candidate. We have not established any other specific attributes or criteria (financial or otherwise) for prospective target businesses. We have not conducted any research with respect to identifying potential acquisition candidates for our company, or with respect to determining the likelihood or probability of whether or not we will be able to locate and complete a business combination. Accordingly, there is no basis for investors in this offering to evaluate the possible merits or risks of the particular industry in which we may ultimately operate or the target business with which we may ultimately complete a business combination. To the extent we effect a business combination with a financially unstable company or an entity in its early stage of development or growth, including entities without established records of sales or earnings, we may be affected by numerous risks inherent in the business and operations of financially unstable and early stage or potential emerging growth companies. Although our management will endeavor to evaluate the risks inherent in a particular target business, we cannot assure you that we will properly ascertain or assess all significant risk factors. Sources of target businesses While we have not yet identified any acquisition candidates, we believe that there are numerous acquisition candidates for us to target. Following the consummation of the offering, we expect to generate a list of potential target opportunities from a host of different sources. The candidates comprising the list of potential business combinations will be examined through analysis of available information and general due diligence to identify inefficiencies or high cost structures within such enterprises. We will narrow our search for potential target opportunities through this due diligence process, focusing on what we determine are the most promising businesses that can most readily benefit from efforts to improve operating efficiencies and cost structures. We anticipate that target business candidates will be brought to our attention from various unaffiliated sources, including securities broker-dealers, investment bankers, venture capitalists, bankers and other members of the financial community. Target businesses may be brought to our attention by such unaffiliated sources as a result of being solicited by us through calls, meetings or mailings. These sources may also introduce us to target businesses they think we may be interested in on an unsolicited basis, since many of these sources will have read this prospectus or our other public filings and reports and know the types of businesses we are targeting. Our initial stockholders, including our officers and directors, and their affiliates may also bring to our attention target business candidates that they become aware of through their business contacts as a result of formal or informal inquiries or discussions they may have, as well as attending trade shows or conventions. While we do not presently anticipate engaging the services of professional firms that specialize in business acquisitions on any formal basis (other than HCFP/Brenner Securities in the manner described below), we may engage these firms in the future, in which event we may pay a finder s fee or other compensation to be determined in an arm s length negotiation based on the terms of the transaction. In no event, however, will any of our initial stockholders, including our officers, directors, or senior advisors or any entity with which they are affiliated, be paid any finder s fee, consulting fee or other compensation prior to, or for services they render in order to effectuate, the consummation of a business combination. If we determine to enter into a business combination with a target business that is affiliated with our initial stockholders, officers, directors or senior advisors or their affiliates, we would do so only if we obtained an opinion from an independent investment banking firm indicating that the business combination is fair to our unaffiliated stockholders from a financial point of view. Selection of a target business and structuring of a business combination Subject to the requirement that our initial business combination must be with a target business, or of a controlling interest (but not less than a majority of the voting interest) therein, that has a fair market value that is equal to at least 80% of our net assets at the time of such acquisition, our management will have virtually unrestricted flexibility in identifying and selecting a prospective target business. We have not established any other specific attributes or criteria (financial or otherwise) for prospective target businesses, though we intend to focus on middle market companies with significant real estate or other physical assets. Moreover, there is no limitation on our ability to raise additional funds through the sale of our securities or through loan transactions that would, if we were successful in raising such funds, enable us to acquire a target company, or controlling interest (but not less than a majority of the voting interest) therein, with a fair market value significantly in excess of 80% of our net assets. In evaluating a prospective target business, our management will consider, among other factors, the following: financial condition and results of operation; growth potential; experience and skill of management and availability of additional personnel; capital requirements; competitive position; barriers to entry; stage of development of the products, processes or services; degree of current or potential market acceptance of the products, processes or services; proprietary features and degree of intellectual property or other protection of the products, processes or services; regulatory environment of the industry; and costs associated with effecting the business combination. The above criteria are not intended to be exhaustive. Any evaluation relating to the merits of a particular business combination will be based, to the extent relevant, on the above factors as well as other considerations deemed relevant by our management in effecting a business combination consistent with our business objective. In evaluating a prospective target business, we will conduct an extensive due diligence review which will encompass, among other things, meetings with incumbent management and inspection of facilities, as well as review of financial and other information which will be made available to us. This due diligence review will be conducted either by our management or by unaffiliated third parties we may engage, although we have no current intent to engage any such third parties. We will also seek to have all prospective target businesses execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the trust. If any prospective target business refuses to execute such agreement, it is unlikely we would continue negotiations with such target business. We will endeavor to structure a business combination so as to achieve the most favorable tax treatment to us, the target business and both companies stockholders. We cannot assure you, however, that the Internal Revenue Service or appropriate state tax authorities will agree with our tax treatment of the business combination. The time and costs required to select and evaluate a target business and to structure and complete the business combination cannot presently be ascertained with any degree of certainty. Any costs incurred with respect to the identification and evaluation of a prospective target business with which a business combination is not ultimately completed will result in a loss to us and reduce the amount of capital available to otherwise complete a business combination. We have engaged HCFP/Brenner Securities, the representative of the underwriters, and Pali Capital, one of the underwriters, on a non-exclusive basis, to act as our investment bankers to assist us in obtaining approval of a business combination (but not for purposes of locating potential target candidates for our business combination). We will pay a cash fee for these services at the closing of our business combination of $7,400,000. We believe that the fee is reasonable in light of the services we expect to be provided to us, the likely size of a business combination and the fact that these entities may provide services in connection with potential business combinations which may not be completed. Fair market value of target business The initial target business, or controlling interest (but not less than a majority of the voting interest) therein, that we acquire must have a fair market value equal to at least 80% of our net assets at the time of such acquisition, although we may acquire a target business whose fair market value significantly exceeds 80% of our net assets. We can also satisfy the requirement that the business combination have a fair market value at least equal to 80% of our net assets in a business combination where we acquire less than a 100% interest in the target business, provided that the fair market value of the interest in such business or businesses is at least equal to 80% of our net assets at the time of such acquisition. We may pay an amount in excess of the proceeds of the trust fund to acquire a target business. Therefore, we may seek to raise additional funds through the sale of our securities or through loan arrangements if such funds are required to consummate such a business combination, although we have not engaged or retained, had any discussions with, or entered into any agreements with, any third party regarding any such potential financing transactions. If we were to seek such additional funds, any such arrangement would only be consummated simultaneously with our consummation of a business combination. The fair market value of such business will be determined by our board of directors based upon standards generally accepted by the financial community, such as actual and potential sales, earnings and cash flow and book value. If our board is not able to independently determine that the target business has a sufficient fair market value, we will obtain an opinion from an unaffiliated, independent investment banking firm that is a member of the National Association of Securities Dealers, Inc. with respect to the satisfaction of such criteria. Since any opinion, if obtained, would merely state that the fair market value of the target business meets the 80% of net assets threshold, it is not anticipated that copies of such opinion would be distributed to our stockholders, although copies will be provided to stockholders who request it. We will not be required to obtain an opinion from an investment banking firm as to the fair market value if our board of directors independently determines that the target business has sufficient fair market value. In the event we acquire a controlling interest in a target business or businesses, the portion of such business that we acquire shall represent at least a majority of the voting interest and must have a fair market value equal to at least 80% of our net assets. Such portion will be calculated based on a valuation of 100% of such target business or businesses. The portion of such business or businesses that we will acquire shall be based on the portion of assets, stock or other interest we acquire. Determination of offering amount In determining to value the offering at $200,000,000 in consultation with the underwriters, we considered the viable size ranges of a target business for which we could reasonably be expected to complete a successful acquisition following the offering. It was determined that if we were to seek to complete an offering that is significantly less than this offering, we would encounter significant competition from venture capital firms for target businesses. Alternatively, if we were to seek to complete an offering that is significantly larger than this offering, we would have materially greater funds in the trust fund and the size of the business combination we would seek to complete would have to be significantly larger. In such case, we believed that the likelihood that we would be competing with larger leveraged buy-out firms for target businesses would be significant. We believe we would be at a competitive disadvantage with such larger leveraged buy-out firms because such firms would generally be able to complete a transaction more quickly than us, since we must have a business combination approved by the holders of a majority of the common stock sold in this offering present and entitled to vote at the meeting called for such purpose. If choosing between a competing bid from us and a leveraged buy-out firm, such target businesses may be less inclined to take the risk that our public stockholders will not approve the transaction. We also considered that larger target businesses would likely have other exit strategies available to them, such as buy-outs, direct financing sources and credit facilities. Lack of business diversification While we may seek to effect business combinations with more than one target business, our initial business combination must be with a target business which satisfies the minimum valuation standard at the time of such acquisition, as discussed above. Consequently, initially we will have the ability to complete only a single business combination, although this may entail the simultaneous acquisitions of several closely related operating businesses. If we acquire a single operating business, the prospects for our success may be entirely dependent upon the future performance of such single business. Unlike other entities which may have the resources to complete several business combinations of entities operating in multiple industries or multiple areas of a single industry, it is probable that we will not have the resources to diversify our operations or benefit from the possible spreading of risks or offsetting of losses. By consummating a business combination with only a single entity, our lack of diversification may: subject us to numerous economic, competitive and regulatory developments, any or all of which may have a substantial adverse impact upon the particular industry in which we may operate subsequent to a business combination, and result in our dependency upon the development or market acceptance of a single or limited number of products, processes or services. Additionally, in the event our business combination involves the simultaneous acquisition of several related businesses and such businesses are owned by different sellers, we will need for each of such sellers to agree that our purchase of its business is contingent on the simultaneous closings of the other acquisitions, which may make it more difficult for us, and delay our ability, to complete the business combination. With multiple acquisitions, we could also face additional risks, including additional burdens and costs with respect to possible multiple negotiations and due diligence investigations (if there are multiple sellers) and the additional risks associated with the subsequent assimilation of the operations and services or products of the acquired companies in a single operating business. Limited ability to evaluate the target business management Although we intend to closely scrutinize the management of a prospective target business when evaluating the desirability of effecting a business combination, we cannot assure you that our assessment of the target business management will prove to be correct. In addition, we cannot assure you that the future management will have the necessary skills, qualifications or abilities to manage a public company intending to embark on a program of business development. Furthermore, because there are many factors which can influence the decision of each member of management s decision whether to remain with us following a business combination, some of which may be personal to each individual and therefore cannot be anticipated by us, the future role of our officers and directors, if any, in the target business cannot presently be stated with any certainty. Although we expect Messrs. Engle and Coyne, our executive officers, to remain with us in senior management or advisory positions following a business combination, it is possible that some of them will not devote their full efforts to our affairs subsequent to a business combination. Moreover, they would only be able to remain with the company after the consummation of a business combination if they are able to negotiate employment or consulting agreements in connection with the business combination. Such negotiations would take place simultaneously with the negotiation of the business combination and could provide for such individuals to receive compensation in the form of cash payments and/or our securities for services they would render to our company after the consummation of the business combination. While the personal and financial interests of such individuals may cause them to have a conflict of interest in determining whether a potential business combination is most appropriate for us and influence their motivation in identifying and selecting a target business, the ability of such individuals to remain with our company after the consummation of a business combination will not be the determining factor in our decision as to whether or not we will proceed with any potential business combination. Additionally, we cannot assure you that our officers and directors will have significant experience or knowledge relating to the operations of the particular target business. Following a business combination, we may seek to recruit additional managers to supplement the incumbent management of the target business. We cannot assure you that we will have the ability to recruit additional managers, or that any such additional managers will have the skills, knowledge or experience necessary to enhance the incumbent management. Provisions of our charter relating to a business combination Article Seventh of our charter provides that certain provisions that apply to a business combination may not be amended, including those provisions relating to: the requirement that public stockholders approve the business combination; conversion rights afforded to public stockholders; our inability to consummate a business combination if holders of 30% or more of the shares of common stock sold in this offering exercise their conversion rights; the requirement that our initial business combination be a target business, or a controlling interest (but not less than a majority of the voting interest) therein, whose fair market value be at least 80% of our net assets at the time of the acquisition; and the distribution of the trust fund if a business combination does not occur within the specified time periods. Our counsel has advised us that these restrictions on charter amendments may not be enforceable under Delaware law. Nevertheless, we view these business combination procedures in our charter and this prospectus as obligations to our investors and we will not propose any amendment to these procedures to our stockholders. Opportunity for stockholder approval of business combination Prior to the completion of a business combination, we will submit the transaction to our stockholders for approval, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable state law. The completion of a business combination means the closing of a transaction in which we acquire, merge or otherwise combine with a target business. The execution of a definitive agreement does not constitute the completion of a business combination. In connection with any such transaction, we will also submit to our stockholders for approval a proposal to amend our amended and restated certificate of incorporation to provide for our corporate life to continue perpetually following the completion of such business combination. Any vote to extend our corporate life to continue perpetually following the completion of a business combination will be taken only if the business combination is approved. We will only consummate a business combination if stockholders vote both in favor of such business combination and our amendment to extend our corporate life. In connection with seeking stockholder approval of a business combination, we will furnish our stockholders with proxy solicitation materials prepared in accordance with the Securities Exchange Act of 1934, which, among other matters, will include a description of the operations of the target business and audited historical financial statements of the business. In connection with the vote required for any business combination, all of our existing stockholders, including all of our officers, directors and seniors advisors, have agreed to vote their respective initial shares in accordance with the majority of the shares of common stock voted by the public stockholders. This voting arrangement shall not apply to shares included in units purchased in this offering or purchased following this offering in the aftermarket by any of our existing stockholders, officers, directors or senior advisors, including any shares included within the units purchased by each of Gary D. Engle, James A. Coyne, Jonathan Davidson and Brian Kaufman under an agreement with HCFP/Brenner Securities, pursuant to which such individuals, or entities they control, will place limit orders for up to an aggregate of $15 million of our units, commencing 30 calendar days after we file a preliminary proxy statement seeking approval of our stockholders for a business combination and ending 30 days thereafter. Accordingly, they may vote the shares included in such units any way they choose, including on a business combination. We will not proceed with a business combination if the holders of a majority of the shares of common stock sold in this offering cast at the meeting to approve the business combination fail to vote in favor of such business combination or if stockholders owning 30% or more of the outstanding shares of common stock sold in this offering both exercise their conversion rights and vote against the business combination. Conversion rights At the time we seek stockholder approval of any business combination, we will offer each public stockholder the right to have his, her or its shares of common stock converted to cash if he, she or it votes against the business combination and the business combination is approved and completed. Our existing stockholders will not have such conversion rights with respect to any shares of common stock owned by them, directly or indirectly, whether included in their initial shares or purchased by them in this offering or in the aftermarket. The actual per-share conversion price will be equal to the amount in the trust fund inclusive of any interest (net of taxes and interest amounts released to us) calculated as of two business days prior to the proposed consummation of the business combination, divided by the number of shares sold in this offering. Without taking into account any interest earned on the trust fund, the initial per-share conversion price would be approximately $7.94 (which includes $0.222 per share from the proceeds we receive from the private placements of our initial shares and insider warrants), or $0.06 less than the per-unit offering price of $8.00. Public stockholders wishing to exercise their conversion rights must (i) vote against the proposed business combination and (ii) demand that we convert their shares into cash. Additionally, we may require public stockholders to tender their certificates to our transfer agent prior to the meeting or to deliver their shares to the transfer agent electronically using Depository Trust Company s DWAC (Deposit/Withdrawal At Custodian) System. The proxy solicitation materials that we will furnish to stockholders in connection with the vote for any proposed business combination will indicate whether we are requiring stockholders to satisfy such certification and delivery requirements. Traditionally, in order to perfect conversion rights in connection with a blank check company s business combination, a holder could simply vote no against a proposed business combination and check a box on the proxy card indicating such holder was seeking to convert. After the business combination was approved, the company would contact such stockholder to arrange for him to deliver his certificate to verify ownership. As a result, the stockholder then had an option window after the consummation of the business combination during which he could monitor the price of the stock in the market. If the price rose above the conversion price, he could sell his shares in the open market before actually delivering his shares to the company for cancellation. Thus, the conversion right, to which stockholders were aware they needed to commit before the stockholder meeting, would become a put right surviving past the consummation of the business combination until the converting holder delivered his certificate. The requirement for physical or electronic delivery prior to the meeting ensures that a converting holder s election to convert is irrevocable once the business combination is approved. Any request for conversion, once made, may be withdrawn at any time up to the date of the meeting. If a stockholder delivered his certificate for conversion and subsequently decided prior to the meeting not to elect conversion, he may simply request that the transfer agent return the certificate (physically or electronically). It is anticipated that the funds to be distributed to stockholders entitled to convert their shares who elect conversion will be distributed promptly after completion of a business combination. Any public stockholder who converts his, her or its stock into his, her or its share of the trust fund still has the right to exercise any warrants they still hold. If a vote on our initial business combination is held and the business combination is not approved, we may continue to try to consummate a business combination with a different target until twenty four months from the date of this prospectus. If the initial business combination is not approved or completed for any reason, then public stockholders voting against our initial business combination who exercised their conversion rights would not be entitled to convert their shares of common stock into a pro rata share of the aggregate amount then on deposit in the trust account. In such case, if we have required public stockholders to tender their certificates prior to the meeting, we will promptly return such certificates to the tendering public stockholder. Public stockholders would be entitled to receive their pro rata share of the aggregate amount on deposit in the trust account only in the event that the initial business combination they voted against was duly approved and subsequently completed, or in connection with our liquidation. We will not complete any business combination if public stockholders, owning 30% or more of the shares sold in this offering, both vote against the business combination and exercise their conversion rights. Accordingly, it is our understanding and intention in every case to structure and consummate a business combination in which approximately 29.99% of the public stockholders may exercise their conversion rights and a business combination will still go forward. We have increased the conversion percentage from 20% to 30% in order to reduce the likelihood that a small group of investors holding a large block of our stock will be able to stop us from completing a business combination that is otherwise approved by a large majority of our public stockholders. As this is unfair and detrimental to the vast majority of our public stockholders, we determined the higher conversion threshold was appropriate. Liquidation if no business combination Our amended and restated certificate of incorporation provides that we will continue in existence only until , 2009 [twenty four months from the date of this prospectus]. This provision may not be amended except in connection with the consummation of a business combination. If we have not completed a business combination by such date, our corporate existence will cease except for the purposes of winding up our affairs and liquidating, pursuant to Section 278 of the Delaware General Corporation Law. This has the same effect as if our board of directors and stockholders had formally voted to approve our dissolution pursuant to Section 275 of the Delaware General Corporation Law. Accordingly, limiting our corporate existence to a specified date as permitted by Section 102(b)(5) of the Delaware General Corporation Law removes the necessity to comply with the formal procedures set forth in Section 275 (which would have required our board of directors and stockholders to formally vote to approve our dissolution and liquidation and to have filed a certificate of dissolution with the Delaware Secretary of State). We view this provision terminating our corporate life by , 2009 [twenty four months from the date of this prospectus] as an obligation to our stockholders and will not take any action to amend or waive this provision to allow us to survive for a longer period of time except in connection with the consummation of a business combination. If we are unable to complete a business combination by , 2009 [twenty four months from the date of this prospectus], we will distribute to all of our public stockholders, in proportion to their respective equity interests, an aggregate sum equal to the amount in the trust account, inclusive of any interest, plus any remaining net assets (subject to our obligations under Delaware law to provide for claims of creditors as described below). We anticipate notifying the trustee of the trust account to begin liquidating such assets promptly after such date and anticipate it will take no more than 10 business days to effectuate such distribution. Our initial stockholders have waived their rights to participate in any liquidation distribution with respect to their initial shares. There will be no distribution from the trust account with respect to our warrants, which will expire worthless. We will pay the costs of liquidation from our remaining assets outside of the trust account. If such funds are insufficient, our chief executive officer, president and chief financial officer have agreed to advance us the funds necessary to complete such liquidation (currently anticipated to be no more than approximately $15,000) and have agreed not to seek repayment of such expenses. If we were to expend all of the net proceeds of this offering, other than the proceeds deposited in the trust account, and without taking into account interest, if any, earned on the trust account, the initial per-share liquidation price would be approximately $7.94. The proceeds deposited in the trust account could, however, become subject to the claims of our creditors (which could include vendors and service providers we have engaged to assist us in any way in connection with our search for a target business and that are owed money by us, as well as target businesses themselves) which could have higher priority than the claims of our public stockholders. Each of Messrs. Engle and Coyne have agreed that they will be personally liable to ensure that the proceeds in the trust fund are not reduced by the claims of target businesses or of vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us and that have not executed an agreement waiving any right, title, interest or claim of any kind in or to any monies held in the trust. We have questioned these individuals and reviewed their financial information and believe that each of these individuals has a substantial net worth. As a result, we believe that these individuals will be able to satisfy their indemnification obligations. However, we cannot assure you that these individuals will be able to satisfy those obligations. Accordingly, the per-share liquidation price could be less than $7.94 due to claims of creditors. A public stockholder shall be entitled to receive funds from the trust fund only in the event we do not complete a business combination within the applicable time period or if the public stockholder elected to convert his, her or its shares into cash upon our completion of a business combination that the public stockholder voted against and such business combination is actually completed by us. In no other circumstances shall a public stockholder have any right or interest of any kind to or in the trust fund. Under the Delaware General Corporation Law, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. If the corporation complies with certain procedures set forth in Section 280 of the Delaware General Corporation Law intended to ensure that it makes reasonable provision for all claims against it, including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution. However, as stated above, it is our intention to make liquidating distributions to our stockholders as soon as reasonably possible after , 2009 [twenty four months from the date of this prospectus] and, therefore, we do not intend to comply with those procedures. As such, our stockholders could potentially be liable for any claims to the extent of distributions received by them (but no more) and any liability of our stockholders may extend well beyond the third anniversary of such date. Because we will not be complying with Section 280, Section 281(b) of the Delaware General Corporation Law requires us to adopt a plan that will provide for our payment, based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against us within the subsequent 10 years. Accordingly, we would be required to provide for any claims of creditors known to us at that time or those that we believe could be potentially brought against us within the subsequent 10 years prior to our distributing the funds in the trust account to our public stockholders. However, because we are a blank check company, rather than an operating company, and our operations will be limited to searching for prospective target businesses to acquire, the only likely claims to arise would be from our vendors and service providers (such as accountants, lawyers and investment bankers) and potential target businesses. As described above, in accordance with our obligations contained in our underwriting agreement, we will seek to have all vendors, service providers and prospective target businesses execute agreements with us waiving any right, title, interest or claim of any kind they may have in or to any monies held in the trust account. We therefore believe that any necessary provision for creditors will be reduced and should not have a significant impact on our ability to distribute the funds in the trust account to our public stockholders. Nevertheless, we cannot assure you of this fact as there is no guarantee that vendors, service providers and prospective target businesses will execute such agreements. Nor is there any guarantee that, even if they execute such agreements with us, they will not seek recourse against the trust account. A court could also conclude that such agreements are not legally enforceable. As a result, if we liquidate, the per-share distribution from the trust account could be less than approximately $7.94 due to claims or potential claims of creditors. If we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, any distributions received by stockholders could be viewed under applicable debtor/creditor and/or bankruptcy laws as either a preferential transfer or a fraudulent conveyance . As a result, a bankruptcy court could seek to recover all amounts received by our stockholders. Furthermore, because we intend to distribute the proceeds held in the trust account to our public stockholders promptly after , 2009 [twenty four months from the date of this prospectus], this may be viewed or interpreted as giving preference to our public stockholders over any potential creditors with respect to access to or distributions from our assets. Furthermore, our board may be viewed as having breached their fiduciary duties to our creditors and/or may have acted in bad faith, and thereby exposing itself and our company to claims of punitive damages, by paying public stockholders from the trust account prior to addressing the claims of creditors. We cannot assure you that claims will not be brought against us for these reasons. Competition In identifying, evaluating and selecting a target business, we may encounter intense competition from other entities having a business objective similar to ours. There are approximately 77 blank check companies in the United States with more than $6.7 billion in trust that are seeking to carry out a business plan similar to our business plan and there are likely to be more blank check companies filing registration statements for initial public offerings after the date of this prospectus and prior to the completion of a business combination. Additionally, we will be subject to competition from other companies looking to expand their operations through the acquisition of a target business. Many of these entities are well established and have extensive experience identifying and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human and other resources than us and our financial resources will be relatively limited when contrasted with those of many of these competitors. While we believe there are numerous potential target businesses that we could acquire with the net proceeds of this offering, our ability to compete in acquiring certain sizable target businesses will be limited by our available financial resources. This inherent competitive limitation gives others an advantage in pursuing the acquisition of a target business. Further: our obligation to seek stockholder approval of a business combination may delay the completion of a transaction; our obligation to convert into cash shares of common stock held by our public stockholders if such holders both vote against the business combination and also seek conversion of their shares may reduce the resources available to us for a business combination; and our outstanding warrants and option, and the future dilution they potentially represent, may not be viewed favorably by certain target businesses. Any of these factors may place us at a competitive disadvantage in successfully negotiating a business combination. Our management believes, however, that our status as a public entity and potential access to the United States public equity markets may give us a competitive advantage over privately-held entities having a similar business objective as ours in acquiring a target business on favorable terms. If we succeed in effecting a business combination, there will be, in all likelihood, intense competition from competitors of the target business. In particular, certain industries which experience rapid growth frequently attract an increasingly larger number of competitors, including competitors with increasingly greater financial, marketing, technical and other resources than the initial competitors in the industry. The degree of competition characterizing the industry of any prospective target business cannot presently be ascertained. We cannot assure you that, subsequent to a business combination, we will have the resources to compete effectively, especially to the extent that the target business is in a high-growth industry. Facilities We maintain our executive offices at 555 Fifth Avenue, New York, New York 10017. The cost for this space is included in the $7,500 per-month fee. PLM International Inc. charges us for general and administrative services pursuant to a letter agreement between us and PLM International Inc., an affiliate of Messrs. Engle and Coyne. We believe, based on rents and fees for similar services in the midtown New York City area, that the fee charged by PLM International Inc. is at least as favorable as we could have obtained from an unaffiliated person. We consider our current office space adequate for our current operations. Employees We have two executive officers, all of whom are also members of our board of directors. These individuals are not obligated to contribute any specific number of hours to our matters and intend to devote only as much time as they deem necessary to our affairs. The amount of time they will devote in any time period will vary based on whether a target business has been selected for a business combination and the stage of our business combination process. Accordingly, once management locates a suitable target business to acquire, they will spend more time investigating such target business and negotiating and processing the business combination (and consequently more time on our affairs) than they would prior to locating a suitable target business. We do not intend to have any full time employees prior to the consummation of a business combination. Legal Proceedings We have not been, and are not currently, a party to any legal proceedings and we are not aware that there are any pending legal proceedings against us. Periodic Reporting and Audited Financial Statements We have registered our securities under the Securities Exchange Act of 1934, as amended, and have reporting obligations, including the requirement that we file annual and quarterly reports with the SEC. In accordance with the requirements of the Securities Exchange Act of 1934, our annual reports will contain financial statements audited and reported on by our independent registered public accounting firm. We will not acquire a target business if audited financial statements cannot be obtained for the target business. Additionally, our management will provide our stockholders with audited financial statements, prepared in accordance with generally accepted accounting principles, of the prospective target business as part of the proxy solicitation materials sent to stockholders to assist them in assessing the target business. Our management believes that the requirement of having available audited financial statements for the target business will not materially limit the pool of potential target businesses available for acquisition. Comparison to offerings of blank check companies The following table compares and contrasts the terms of our offering and the terms of an offering of blank check companies under Rule 419 promulgated by the SEC assuming that the gross proceeds, underwriting discounts and underwriting expenses for the Rule 419 offering are the same as this offering and that the representative will not exercise its over-allotment option. None of the terms of a Rule 419 offering will apply to this offering. Terms of Our Offering Terms Under a Rule 419 Offering Escrow of offering proceeds $198,400,000 of the net offering proceeds, including amounts we have received or will receive from the sale of our securities to our initial stockholders, will be deposited into a trust account maintained by Continental Stock Transfer & Trust Company. $174,150,000 of the offering proceeds would be required to be deposited into either an escrow account with an insured depositary institution or in a separate bank account established by a broker-dealer in which the broker-dealer acts as trustee for persons having the beneficial interests in the account. Investment of net proceeds The $198,400,000 of net offering proceeds, including amounts we have received or will receive from the sale of our securities to our initial stockholders, will only be invested in U.S. government securities, (as such term is defined in the Investment Company Act of 1940) money market funds selected by us, which invest principally in either short-term securities issued or guaranteed by the United States having a rating in the highest investment category granted thereby by a nationally recognized credit rating agency at the time of acquisition or short-term exempt municipal bonds issued by governmental entities located within the United States and otherwise meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940. Proceeds could be invested only in specified securities such as a money market fund meeting conditions of the Investment Company Act of 1940 or in securities that are direct obligations of, or obligations guaranteed as to principal or interest by, the United States. Limitation on Fair Value or Net Assets of Target Business The initial target business that we acquire, or the controlling interest (but not less than a majority of the voting interest) therein, must have a fair market value equal to at least 80% of our net assets at the time of such acquisition. We would be restricted from acquiring a target business unless the fair value of such business or net assets to be acquired represent at least 80% of the maximum offering proceeds. Terms of Our Offering Terms Under a Rule 419 Offering Trading of securities issued The units may commence trading on or promptly after the date of this prospectus. The common stock and warrants comprising the units will begin to trade separately on the 90th day after the date of this prospectus unless HCFP/Brenner Securities informs us of its decision to allow earlier separate trading (based upon its assessment of the relative strengths of the securities markets and small capitalization companies in general and the trading pattern of, and demand for, our units in particular), provided we have filed with the SEC a Current Report on Form 8-K, which includes audited financial statements reflecting our receipt of the proceeds of this offering, including any proceeds we receive from the exercise of the over-allotment option, if such option is exercised prior to the filing of the Form 8-K. No trading of the units or the underlying common stock and warrants would be permitted until the completion of a business combination. During this period, the securities would be held in the escrow or trust account. Exercise of the warrants The warrants cannot be exercised until the later of the completion of a business combination and one year from the date of this prospectus and, accordingly, will be exercised only after the trust account has been terminated and distributed. The warrants could be exercised prior to the completion of a business combination, but securities received and cash paid in connection with the exercise would be deposited in the escrow or trust account. Election to remain an investor We will give our stockholders the opportunity to vote on the business combination. In connection with seeking stockholder approval, we will send each stockholder a proxy statement containing information required by the SEC. A stockholder following the procedures described in this prospectus is given the right to convert his or her shares into his or her pro rata share of the trust fund. However, a stockholder who does not follow these procedures or a stockholder who does not take any action would not be entitled to the return of any funds. A prospectus containing information required by the SEC would be sent to each investor. Each investor would be given the opportunity to notify the company, in writing, within a period of no less than 20 business days and no more than 45 business days from the effective date of the post-effective amendment, to decide whether he or she elects to remain a stockholder of the company or require the return of his or her investment. If the company has not received the notification by the end of the 45th business day, funds and interest or dividends, if any, held in the trust or escrow account would automatically be returned to the stockholder. Unless a sufficient number of investors elect to remain investors, all of the deposited funds in the escrow account must be returned to all investors and none of the securities will be issued. Terms of Our Offering Terms Under a Rule 419 Offering Business combination deadline Pursuant to our amended and restated certificate of incorporation, our corporate existence will cease 24 months from the date of this prospectus except for the purposes of winding up our affairs and liquidating. However, if we complete a business combination within this time period, we will amend this provision to allow for our perpetual existence following such business combination. If an acquisition has not been consummated within 18 months after the effective date of the initial registration statement, funds held in the trust or escrow account would be returned to investors. Interest earned on the funds in the trust account There can be released to us, from time to time, interest earned on the funds in the trust account (i) up to an aggregate of $3,000,000 to fund expenses related to investigating and selecting a target business and our other working capital requirements and (ii) any amounts necessary to pay our tax obligations. The remaining interest earned on the funds in the trust account will not be released until the earlier of the completion of a business combination and our liquidation upon failure to effect a business combination within the allotted time. All interest earned on the funds in the trust account will be held in trust for the benefit of public stockholders until the earlier of the completion of a business combination and our liquidation upon failure to effect a business combination within the allotted time. Release of trust funds The proceeds held in the trust fund will not be released until the earlier of the completion of a business combination or our liquidation, except that there may be released to us from the trust account funds as described above. The proceeds held in the escrow account would not be released until the earlier of the completion of a business combination or the failure to effect a business combination within the allotted time. MANAGEMENT Directors, Executive Officers and Senior Advisors Our current directors, executive officers and senior advisors are as follows: Name Age Position Gary D. Engle 58 Chairman of the Board and Chief Executive Officer James A. Coyne 47 Vice Chairman and Chief Financial Officer Geoffrey A. Thompson 65 Director Michael Clayton 59 Director Jonathan Davidson 41 Director Brian Kaufman 43 Senior Advisor Milton J. Walters 64 Senior Advisor Gary D. Engle has been our Chief Executive Officer and Chairman since our inception. From December 1994 until December 2005, Mr. Engle served as President, Chief Executive Officer and controlling shareholder of Equis Corporation. Through Equis and other affiliates, Mr. Engle owned and operated a variety of equipment finance, leasing and real estate companies. Equis and its affiliates have managed in excess of $1 billion of real estate assets and equipment leasing assets, have structured and financed more than $2 billion in lease financing transactions and remarketed over $1 billion in equipment. Since February 2001, Mr. Engle has been a director of PLM International Inc., a transportation company that leases marine containers, shipping vessels, commercial aircraft and other assets. PLM sold its rail leasing assets to CIT Group in August 2005 and its marine, aviation and other leasing businesses to an affiliate of AMA Capital Partners in November 2005. Since August 2003, Mr. Engle has served as a member of the executive committee of CBI Acquisition, LLC, the holding company of Caneel Bay, a luxury resort on the island of St. John, U.S.V.I. Since May 2000, Mr. Engle has served on the Board of Managers of DSC/Purgatory, LLC and, since 1999, he has served on the Board of Managers of Mountain Springs Kirkwood, LLC. DSC and Mountain Springs own and operate ski resorts in the western United States. Since March 2000, Mr. Engle has been a member of the Board of Managers of Echelon Development Holdings, LLC, a Florida-based commercial and residential real estate development company. Since 1997, Mr. Engle has been the Chairman and Chief Executive Officer of Semele Group Inc., which serves as a holding company for a number of investments and is a joint venture partner in Rancho Malibu, a 264-acre residential development in Malibu, California. Semele Group also owns the general partner of Kettle Valley, a 1,012 unit residential development in Kelowna, British Columbia. From 1987 to 1994, Mr. Engle was a principal of Cobb Partners Development Inc., a mortgage trading and real estate company which he co-founded in 1987. From 1980 to 1987, Mr. Engle served in various capacities with Arvida Disney Company, a large-scale community real estate company owned by The Walt Disney Company, including Senior Vice President from April 1980 to 1987; Chief Financial Officer and Senior Vice President Acquisitions from May 1984 to 1987; and Chief Executive Officer of Arvida Disney Financial Services from May 1984 to 1987. Mr. Engle was a founding Director of Disney Development, the real estate development division of The Walt Disney Company. Mr. Engle received a B.S. from the University of Massachusetts (Amherst) and an M.B.A. from Harvard University. James A. Coyne has been our Vice Chairman since January 2007 and our Chief Financial Officer and a member of our Board of Directors since our inception. He has also served as President and Chief Executive Officer of PLM International Inc. since August 2002, and has been a member of its Board of Directors since February 2001. From December 1994 until December 2005, Mr. Coyne served as the Senior Vice President of Equis Corporation. Since May 2000, Mr. Coyne has served on the Board of Managers of DSC/Purgatory, LLC, and, since 1999, has served on the Board of Managers of Mountain Springs Kirkwood, LLC. Since March 2000, Mr. Coyne has been a member of the Board of Managers of Echelon Development Holdings, LLC. In January 2007, Mr. Coyne became a Director of Xybernaut Corporation, a technology company acquired by East River Capital, a private equity firm that is an affiliate of Mr. Coyne. Since 1997, Mr. Coyne has served as President and a member of the Board of Directors of Semele Group, Inc. Mr. Coyne received a B.S. from John Carroll University, a Master of Accountancy from Case Western Reserve University, and is a certified public accountant. Geoffrey A. Thompson has been a member of our Board of Directors since March 2006. Since September 2003, Mr. Thompson has been a Partner at Palisades Advisors, LLC, a private equity firm. From 1997 to September 2003, Mr. Thompson served as an independent business consultant. From 1995 to 1997, Mr. Thompson served as a Principal at Kohlberg & Company, a private equity firm specializing in middle-market investing. In 1992, Mr. Thompson retired as Chief Executive Officer of Marine Midland Bank, Inc. (currently HSBC Bank (USA)). Mr. Thompson is a member of the Board of Directors of Guardian Trust Company, a Guardian Life Insurance subsidiary. Mr. Thompson is also lead director of Thor Industries, Inc., a New York Stock Exchange listed producer and seller of a wide range of recreation vehicles and small and mid-size buses in the United States and Canada. Mr. Thompson also serves as trustee of the Woods Hole Oceanographic Institution. Mr. Thompson received a B.A. from Columbia University and an M.B.A. from Harvard University. Jonathan Davidson has been a member of our Board of Directors since April 2007 and served as our Senior Advisor from January 2007 to April 2007. Since November 2004, Mr. Davidson has been a Director of Centinela Freeman Holdings, Inc. In July 2003, Mr. Davidson co-founded Westridge Capital LLC and has served as a Managing Member since inception. From September 2003 to September 2004, Mr. Davidson also served as a Vice President of PLM International. From 1996 to July 2003, Mr. Davidson served as a Managing Director of Digital Coast Partners (now known as Montgomery & Co.) where he managed the Business and Consumer Services Group. From 1994 to 1996, Mr. Davidson was a founder and the Chief Financial Officer of Screenz, L.L.C., the developer of ScreenzNet, a private online service. From 1987 to 1994, Mr. Davidson served as a Vice President of Chemical Securities (now known as JPMorgan Chase), where he provided corporate finance and merger and acquisition advisory services. Mr. Davidson received a B.A. and an M.B.A. from the University of California at Los Angeles. Michael Clayton has been a member of our Board of Directors since March 2006. Since August 2005, Mr. Clayton has been a Principal and Managing Director of ACM Capital, an acquisition evaluation, advisory, and private equity firm. From April 2002 through November 2005, Mr. Clayton served as President of PLM Transportation Equipment Corp., a former subsidiary of PLM International. From May 2001 to April 2002, Mr. Clayton was a Principal of Highland Capital, a financial services and asset management firm. From 1997 to May 2001, Mr. Clayton served as Senior Vice President, Global Operations and Development, and was a member of the Executive Committee of GATX Corporation, a New York Stock Exchange listed lessor of freight and tank cars. Prior to joining GATX, Mr. Clayton had over 30 years of additional experience in various capacities. Mr. Clayton was a Senior Vice President Original Equipment and International Operations (1992-1995) and Vice President International Operations (1991-1992) of Fel Pro, Inc., a company engaged in the manufacturing and distribution of automotive engine components to original equipment manufacturers and after-market sectors. From 1979-1991, Mr. Clayton served in several capacities at Navistar International Corp., a producer of trucks and diesel engines. Mr. Clayton currently serves on the Board of Directors of Andy Frain and Associates, a commercial security and crowd management company and Coreblox Inc., a hosted website IT support company. He is a Fellow of Leadership Greater Chicago and recipient of the Urban League s annual service award. Mr. Clayton received a B.A. from Illinois Institute of Technology and an M.B.A. from the University of Chicago. Brian Kaufman has been our Senior Advisor since January 2007. Since November 2004, Mr. Kaufman has been a Director of Centinela Freeman Holdings, Inc., an owner of three general acute care hospitals in Los Angeles. In July 2003, Mr. Kaufman co-founded Westridge Capital LLC and has served as a Managing Member since inception. Westridge is a private equity firm specializing in investments in companies that have significant tangible asset bases. From September 2003 to September 2004, Mr. Kaufman also served as a Vice President of PLM International. From February 2000 to July 2003, Mr. Kaufman served as a Managing Director of Digital Coast Partners (now known as Montgomery & Co.), a boutique investment banking firm where he managed activities in both the Middle Market and Media Groups. From 1998 to 2000, Mr. Kaufman served as a principal of Imperial Capital LLC, a boutique investment banking firm, where Mr. Kaufman worked in both investment banking and the firm s private investments. From 1994 to 1998, Mr. Kaufman was a co-founder and principal of Kirkland Messina LLC, a boutique merchant bank targeting leveraged buy-outs of middle market companies. From 1992 to 1994, Mr. Kaufman was an associate at the law firm of Brobeck, Phleger & Harrison. From 1989 to 1992, Mr. Kaufman attended law school at Georgetown University Law Center. From 1986 to 1989, Mr. Kaufman was at Drexel Burnham Lambert Incorporated, where he provided corporate finance and merger and acquisition advisory services to financial institutions. Mr. Kaufman received a B.B.A. degree from the University of Notre Dame, with highest honors, and a J.D. degree from Georgetown University Law Center, cum laude. Milton J. Walters has been our Senior Advisor since April 2007 and served as our President and a member of our Board of Directors from our inception until April 2007. Mr. Walters has served as the President of MJW Partners, Inc., doing business as Tri-River Capital, a boutique investment banking company, since he founded that company in 1999. Mr. Walters also founded and served as the President of the predecessor company to Tri-River, Walters & Co. Incorporated, doing business as Tri-River Capital Group, from 1988 to 1997. From 1997 to 1999, Mr. Walters served as a Managing Director in the financial institutions investment banking group of Prudential Securities. From 1984 to 1988, Mr. Walters served as the Manager of the financial institutions investment banking group of Smith Barney. At AG Becker, and its successor, Warburg Paribas Becker, Mr. Walters headed investment banking for financial institutions from 1969 to 1984. Since November 2001, Mr. Walters has served on the Board of Directors and as Chairman of the Audit and Compensation Committee of Sun Healthcare Group, Inc., a Nasdaq-listed company. Mr. Walters also serves on the Board of Directors of several private companies. Mr. Walters received a B.A. from Hamilton College. Our board of directors is divided into three classes with only one class of directors being elected in each year and each class serving a three-year term. The term of office of the first class of directors, consisting of Messrs. Coyne and Thompson, will expire at our first annual meeting of stockholders. The term of office of the second class of directors, consisting of Messrs. Davidson and Clayton, will expire at the second annual meeting. The term of office of the third class of directors, consisting of Mr. Engle, will expire at the third annual meeting. These individuals will play a key role in identifying and evaluating prospective acquisition candidates, selecting the target business, and structuring, negotiating and consummating its acquisition. None of our officers or directors have been or currently is a principal of, or affiliated with, a blank check company. However, we believe that the skills and expertise of these individuals, their collective access to acquisition opportunities and ideas, their contacts, and their transactional expertise should enable them to successfully identify and effect an acquisition. Executive Compensation No executive officer has received any cash compensation for services rendered. Commencing on the effective date of this prospectus through the acquisition of a target business, we will pay PLM International Inc., an affiliate of Messrs. Engle and Coyne, a fee of $7,500 per month for providing us with office space and certain office and administrative services. However, this arrangement is solely for our benefit and is not intended to provide Messrs. Engle or Coyne compensation in lieu of a salary. No other initial securityholder of ours is an officer, director or principal shareholder of PLM International Inc. Other than this $7,500 per-month fee, no compensation of any kind, including finder s and consulting fees, will be paid to any of our initial stockholders, officers, directors, or any of their respective affiliates, prior to, or for any services they render in order to effectuate, the consummation of a business combination. However, they will be reimbursed for any out-of-pocket expenses incurred in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations. There is no limit on the amount of these out-of-pocket expenses and there will be no review of the reasonableness of the expenses by anyone other than our board of directors, which includes persons who may seek reimbursement, or a court of competent jurisdiction if such reimbursement is challenged. Because of the foregoing, we will generally not have the benefit of independent directors examining the propriety of expenses incurred on our behalf and subject to reimbursement. Director Independence The American Stock Exchange requires that a majority of our board must be composed of independent directors, which is defined generally as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of our board of directors would interfere with the director s exercise of independent judgment in carrying out the responsibilities of a director. We have determined that, upon consummation of this offering, each of Geoffrey A. Thompson, Michael Clayton and Jonathan Davidson will be an independent director as defined under the American Stock Exchange s listing standards, constituting a majority of our board. Our independent directors will have regularly scheduled meetings at which only independent directors are present. Any affiliated transactions will be on terms no less favorable to us than could be obtained from independent parties. Any affiliated transactions must be approved by a majority of our independent and disinterested directors. Audit Committee Effective upon consummation of this offering, we will establish an audit committee of the board of directors, which will consist of Geoffrey A. Thompson, Michael Clayton and Jonathan Davidson, each of whom is an independent director under the American Stock Exchange s listing standards. The audit committee s duties, which are specified in our audit committee charter, include, but are not limited to: reviewing and discussing with management and the independent auditor the annual audited financial statements, and recommending to the board whether the audited financial statements should be included in our Form 10-K; discussing with management and the independent auditor significant financial reporting issues and judgments made in connection with the preparation of our financial statements; discussing with management major risk assessment and risk management policies; monitoring the independence of the independent auditor; verifying the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law; reviewing and approving all related-party transactions; inquiring and discussing with management our compliance with applicable laws and regulations; pre-approving all audit services and permitted non-audit services to be performed by our independent auditor, including the fees and terms of the services to be performed; appointing or replacing the independent auditor; determining the compensation and oversight of the work of the independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work; and establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or reports which raise material issues regarding our financial statements or accounting policies. Financial Experts on Audit Committee The audit committee will at all times be composed exclusively of independent directors who are financially literate as defined under the American Stock Exchange listing standards. The American Stock Exchange listing standards define financially literate as being able to read and understand fundamental financial statements, including a company s balance sheet, income statement and cash flow statement. In addition, we must certify to the American Stock Exchange that the committee has, and will continue to have, at least one member who has past employment experience in finance or accounting, requisite professional certification in accounting, or other comparable experience or background that results in the individual s financial sophistication. The board of directors has determined that Jonathan Davidson satisfies the American Stock Exchange s definition of financial sophistication and also qualifies as an audit committee financial expert, as defined under rules and regulations of the SEC. Nominating Committee Effective upon consummation of this offering, we will establish a nominating committee of the board of directors, which will consist of Geoffrey A. Thompson, Michael Clayton and Jonathan Davidson, each of whom is an independent director under the American Stock Exchange s listing standards. The nominating committee is responsible for overseeing the selection of persons to be nominated to serve on our board of directors. The nominating committee considers persons identified by its members, management, shareholders, investment bankers and others. Guidelines for Selecting Director Nominees The guidelines for selecting nominees, which are specified in the nominating committee charter, generally provide that persons to be nominated: should have demonstrated notable or significant achievements in business, education or public service; should possess the requisite intelligence, education and experience to make a significant contribution to the board of directors and bring a range of skills, diverse perspectives and backgrounds to its deliberations; and should have the highest ethical standards, a strong sense of professionalism and intense dedication to serving the interests of the stockholders. The nominating committee will consider a number of qualifications relating to management and leadership experience, background and integrity and professionalism in evaluating a person s candidacy for membership on the board of directors. The nominating committee may require certain skills or attributes, such as financial or accounting experience, to meet specific board needs that arise from time to time. The nominating committee does not distinguish among nominees recommended by stockholders and other persons. Code of Ethics Effective upon consummation of this offering, we will adopt a code of ethics that applies to all of our executive officers, directors and employees. The code of ethics codifies the business and ethical principles that govern all aspects of our business. Conflicts of Interest Potential investors should be aware of the following potential conflicts of interest: None of our officers and directors are required to commit their full time to our affairs and, accordingly, they may have conflicts of interest in allocating management time among various business activities. In the course of their other business activities, our officers and directors may become aware of investment and business opportunities which may be appropriate for presentation to us as well as the other entities with which they are affiliated. They may have conflicts of interest in determining to which entity a particular business opportunity should be presented. For a complete description of our management s other affiliations, see the previous section entitled Directors and Executive Officers. Our officers and directors may in the future become affiliated with entities, including other blank check companies, engaged in business activities similar to those intended to be conducted by us. The initial shares owned by our officers, directors and senior advisors will be released from escrow only if a business combination is successfully completed, and the insider warrants purchased by our officers, directors and senior advisors and any warrants which they may purchase in this offering or in the aftermarket will expire worthless if a business combination is not consummated. Additionally, our officers, directors and senior advisors will not receive liquidation distributions with respect to any of their initial shares. Furthermore, our officers, directors and senior advisors have agreed that the insider warrants will not be sold or transferred by them until after we have completed a business combination. For the foregoing reasons, our board may have a conflict of interest in determining whether a particular target business is appropriate to effect a business combination with. Our directors and officers may enter into consulting or employment agreements with the company as part of a business combination pursuant to which they may be entitled to compensation for their services following the business combination. The personal and financial interests of our directors and officers may influence their motivation in identifying and selecting a target business, and completing a business combination in a timely manner. Gary D. Engle, our Chairman and Chief Executive Officer, James A. Coyne, our Vice Chairman and Chief Financial Officer, Jonathan Davidson, a director, and Brian Kaufman, one of our Senior Advisors, have entered into an agreement with HCFP/Brenner Securities pursuant to which such individuals, or entities they control, will place limit orders for an aggregate of $15 million of our units commencing 30 calendar days after we file a preliminary proxy statement seeking approval of our stockholders for a business combination and ending 30 days thereafter. Each of Messrs. Engle, Coyne, Davidson and Kaufman has agreed that he will not sell or transfer any units purchased by him pursuant to this agreement (or any of the securities included in such units) until the earlier of the completion of a business combination or our liquidation. If Messrs. Engle, Coyne, Davidson and Kaufman purchase units pursuant to that agreement or if any of them or any of our other officers, directors or senior advisors purchase units or common stock as part of this offering or in the open market, they would be entitled to vote the shares of common stock they so acquire on a proposed business combination any way they choose which may influence whether or not the business combination is approved. In general, officers and directors of a corporation incorporated under the laws of the State of Delaware are required to present business opportunities to a corporation if: the corporation could financially undertake the opportunity; the opportunity is within the corporation s line of business; and it would not be fair to the corporation and its stockholders for the opportunity not to be brought to the attention of the corporation. Accordingly, as a result of multiple business affiliations, our officers and directors may have similar legal obligations relating to presenting business opportunities meeting the above-listed criteria to multiple entities. In addition, conflicts of interest may arise when our board evaluates a particular business opportunity with respect to the above-listed criteria. We cannot assure you that any of the above mentioned conflicts will be resolved in our favor. If any of these conflicts are not resolved in our favor, it may diminish our ability to complete a favorable business combination. In order to minimize potential conflicts of interest which may arise from multiple corporate affiliations, each of our officers and directors has agreed, until the earlier of a business combination or the distribution of the trust fund to our public stockholders, or such time as he ceases to be an officer or director, to present to our company for our consideration, prior to presentation to any other entity, any suitable business opportunity which may reasonably be required to be presented to us subject to any pre-existing fiduciary or contractual obligations he might have. Our management has advised us that the entities with which they are affiliated do not seek to acquire assets with a purchase price in excess of $55 million. Because the initial target business, or the controlling interest (but not less than a majority of the voting interest) therein, that we acquire must have a fair market value equal to at least 80% of our net assets at the time of the acquisition, a transaction which could be consummated as a business combination would not be considered by any entities affiliated with our management. Our senior advisors have fiduciary obligations to the other entities with which they are directors or officers. They have no fiduciary obligations to present to us for our consideration any suitable business opportunity. In connection with the vote required for any business combination, all of our existing stockholders, including all of our officers, directors and senior advisors, have agreed to vote their respective initial shares in accordance with the vote of the public stockholders owning a majority of the shares of our common stock sold in this offering. In addition, they have agreed to waive their respective rights to participate in any liquidation distribution with respect to those shares of common stock acquired by them prior to this offering. Any common stock acquired by existing stockholders in the offering or aftermarket will be considered part of the holdings of the public stockholders. Except with respect to the conversion rights afforded to public stockholders, these existing stockholders will have the same rights as other public stockholders with respect to such shares, including voting rights in connection with a potential business combination. Accordingly, they may vote such shares on a proposed business combination any way they choose. To further minimize potential conflicts of interest, we have agreed not to consummate a business combination with an entity which is affiliated with any of our existing stockholders unless we obtain an opinion from an independent investment banking firm that the business combination is fair to our stockholders from a financial point of view. Such fairness opinion will be received by us either prior to the execution of a definitive agreement relating to the business combination, or such opinion will be a condition to the consummation of such business combination. If we receive a fairness opinion at the time we enter into a definitive agreement relating to the business combination, we expect that we would pay all or a portion of the fee upon delivery of the opinion and the balance, if any, upon closing of the business combination. If we receive the fairness opinion and payment is contingent on the consummation of the business combination (which we do not anticipate happening), we expect that the fee would not be payable until the business combination is completed. Additionally, in no event will any of our existing officers, directors, stockholders or senior advisors, or any entity with which they are affiliated, be paid any finder s fee, consulting fee or other compensation prior to, or for any services they render in order to effectuate, the consummation of a business combination. PRINCIPAL STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of our common stock as of May 21, 2007 on an actual basis, and as adjusted to reflect the sale of our common stock included in the units offered by this prospectus (assuming none of the individuals listed purchase units in this offering), by: each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock; each of our officers, directors and senior advisors; and all our officers and directors as a group. Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them. Name and Address of Beneficial Owner(1) Amount and Nature of Beneficial Ownership Approximate Percentage of Outstanding Common Stock Before Offering After Offering Gary D. Engle(2) 3,346,244 (3) 53.5 % 10.7 % James A. Coyne(2) 2,107,422 (4) 33.7 % 6.7 % Brian Kaufman(5) 307,335 (6) 4.9 % * Jonathan Davidson(5) 307,335 (6) 4.9 % * Milton J. Walters 125,037 (7) 2.0 % * Geoffrey A. Thompson 39,203 * * Michael Clayton(8) 17,424 * * All directors and executive officers as a group (five individuals) 5,817,628 (9) 93.1 % 18.6 % * Less than 1%. (1) Unless otherwise noted, the business address of each of the following is 555 Fifth Avenue, New York, New York 10017. (2) The business address of this individual is c/o Hera East Holdings, LLC, 20 Marshall Street, Suite 104, South Norwalk, Connecticut 06854. (3) Does not include 3,273,434 shares of common stock issuable upon exercise of insider warrants held by Mr. Engle which are not currently exercisable and will not become exercisable within 60 days. (4) These shares are held by JAC Opportunity Fund I, LLC, a family-held entity of which Mr. Coyne is the sole manager. Does not include 2,061,567 shares of common stock issuable upon exercise of insider warrants held by JAC Opportunity Fund I, LLC which are not currently exercisable and will not become exercisable within 60 days. (5) The business address of this individual is 11150 Santa Monica Boulevard, Suite 700, Los Angeles, California 90025. (6) Does not include 300,648 shares of common stock issuable upon exercise of insider warrants held by such individual which are not currently exercisable and will not become exercisable within 60 days. (7) Does not include 38,703 shares of common stock issuable upon exercise of insider warrants held by Mr. Walters which are not currently exercisable and will not become exercisable within 60 days. (8) The business address of this individual is 3030 Blackthorn Road, Riverwoods, Illinois 60015. (9) Does not include 5,635,649 shares of common stock issuable upon exercise of insider warrants held by such individuals which are not currently exercisable and will not become exercisable within 60 days. Immediately after this offering, our existing stockholders, which include all of our officers, directors and senior advisors, collectively, will beneficially own 20% of the then issued and outstanding shares of our common stock (assuming none of them purchase any units offered by this prospectus). None of our existing stockholders, officers and directors has indicated to us that he intends to purchase our securities in the offering. Because of the ownership block held by our existing stockholders, such individuals may be able to effectively exercise control over all matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions other than approval of our initial business combination. All of the initial shares outstanding prior to the date of this prospectus will be placed in escrow with Continental Stock Transfer & Trust Company, as escrow agent, until one year after the consummation of our initial business combination. The initial shares may be released from escrow earlier than this date if, within the first year after we consummate a business combination, we consummate a subsequent liquidation, merger, stock exchange or other similar transaction which results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property. During the escrow period, the holders of these shares will not be able to sell or transfer their securities except (i) to relatives and trusts for estate planning purposes or (ii) by private sales made at or prior to the consummation of a business combination to individuals that the holders believe may bring value to our company, at prices no greater than the price at which the shares were originally purchased, in each case where the transferee agrees to the terms of the escrow agreement, but will retain all other rights as our stockholders, including, without limitation, the right to vote their shares of common stock and the right to receive cash dividends, if declared. Transfers made pursuant to clause (ii) of the previous sentence may result in our incurring a share-based compensation charge if the transfer is deemed compensatory in nature. The initial stockholders have no current intention or plans to make any such transfers. If dividends are declared and payable in shares of common stock, such dividends will also be placed in escrow. If we are unable to effect a business combination and liquidate, none of our existing stockholders will receive any portion of the liquidation proceeds with respect to their initial shares. Our officers, directors and senior advisors have committed to purchase the insider warrants (for a total purchase price of $4,450,000) from us. These purchases will take place on a private placement basis simultaneously with the consummation of this offering. The insider warrants will be identical to warrants underlying the units being offered by this prospectus except that if we call the warrants for redemption, the insider warrants will be exercisable on a cashless basis so long as they are still held by the purchasers or their affiliates. The purchasers have agreed that the insider warrants will not be sold or transferred by them until after the consummation of our initial business combination. In addition, Gary D. Engle, our Chairman and Chief Executive Officer, James A. Coyne, our Vice Chairman and Chief Financial Officer, Jonathan Davidson, a director, and Brian Kaufman, one of our Senior Advisors, have entered into an agreement with HCFP/Brenner Securities which is intended to comply with Rule 10b5-1 under the Exchange Act, pursuant to which such individuals, or entities such individuals control, will place limit orders for an aggregate of $15 million of our units commencing 30 calendar days after we file a preliminary proxy statement seeking approval of a business combination and ending 30 days thereafter. If $15 million of units are purchased under this agreement at a price of $8.65 per unit, these officers, directors and senior advisors would own, in the aggregate, approximately 25.6% of the outstanding common stock, in addition to any common stock they may purchase in the market after this offering. Each of Messrs. Engle, Coyne, Davidson and Kaufman may vote the shares of common stock included in these units on a proposed business combination in any manner they choose and may influence whether or not the business combination is approved. They have also agreed that none of them will sell or transfer any units purchased pursuant to this agreement (or any of the securities included in such units) until the earlier of the completion of a business combination or our liquidation. It is intended that these purchases will comply with Rule 10b-18 under the Exchange Act and, accordingly, any purchases that are not in compliance with the safe harbor provisions of Rule 10b-18 will not be made. These purchases will be made at a price not to exceed $8.65 per unit and will be made by HCFP/Brenner Securities or another broker-dealer mutually agreed upon by such individuals and HCFP/Brenner Securities in such amounts and at such times as HCFP/Brenner Securities or such other broker-dealer may determine, in its sole discretion, so long as the purchase price does not exceed the above-referenced per unit purchase price. Each of Messrs. Engle, Coyne, Davidson and Kaufman has made available, and has agreed to make available in the future, to HCFP/Brenner Securities monthly statements confirming that such individual has sufficient funds to satisfy these transactions. Messrs. Engle, Coyne, Davidson and Kaufman have agreed with each other that, to the extent that one of such individuals does not satisfy his pro rata portion of his obligation under that agreement, he will transfer all or a portion of his shares to the individual or individuals that are required by HCFP/Brenner Securities to satisfy his obligation under that agreement. Messrs. Engle and Coyne are deemed to be our promoters, as such term is defined under the Federal securities laws. CERTAIN TRANSACTIONS On October 15, 2005, in connection with our organization, we issued the following securities: Name Number of Shares of Common Stock Number of Warrants Milton J. Walters 100 2,715,000 Gary D. Engle 2,720,000 JAC Opportunity Fund I, LLC 2,715,000 The 100 shares of common stock were sold at a purchase price of $0.01 per share for an aggregate price of $1.00 and the 8,150,000 warrants were sold at a purchase price of $0.05 per warrant for an aggregate price of $407,500. The warrants were exercisable at a price of $5.00 per share and expired eight years from the date of this prospectus. On March 15, 2006, we issued an aggregate of 4,075,000 Class W warrants and 4,075,000 Class Z warrants to three existing warrantholders in exchange for the return and cancellation of the outstanding 8,150,000 warrants held by them. On the same date, we also issued additional Class W warrants and Class Z warrants as follows: Name Number of Class W Warrants Number of Class Z Warrants Milton J. Walters 167,500 167,500 Gary D. Engle 165,000 165,000 JAC Opportunity Fund I, LLC 167,500 167,500 Geoffrey A. Thompson 100,000 100,000 Michael Clayton 100,000 100,000 All of these warrants were sold at a purchase price of $0.05 per warrant for an aggregate purchase price of $70,000. These Class W warrants and Class Z warrants were exercisable at $5.00 per share and had expiration dates of five and seven years from the date of this prospectus, respectively. On May 25, 2006, we issued additional warrants as follows: Name Number of Class W Warrants Number of Class Z Warrants Milton J. Walters 1,700,000 1,700,000 Gary D. Engle 3,400,000 3,400,000 JAC Opportunity Fund I, LLC 1,700,000 1,700,000 Geoffrey A. Thompson 125,000 125,000 All of these warrants were sold at a purchase price of $0.05 per warrant for an aggregate price of $692,500. On January 23, 2007, we issued an aggregate of 11,700,000 Class W warrants and 11,700,000 Class Z warrants to our five existing warrantholders in exchange for the return for cancellation of all of the then outstanding warrants. On the same date, we also issued additional warrants as follows: Name Number of Class W Warrants Number of Class Z Warrants Milton J. Walters 475,000 475,000 Gary D. Engle 950,000 950,000 JAC Opportunity Fund I, LLC 475,000 475,000 Jonathan Davidson 950,000 950,000 Brian Kaufman 950,000 950,000 All of these warrants were sold at a purchase price of $0.05 per warrant for an aggregate price of $380,000. The Class W warrants and Class Z warrants issued in January 2007 are exercisable at prices of $1.75 per share and $1.50 per share, respectively, and will expire eight years from the date of this prospectus. On April 4, 2007, we issued 6,249,900 shares of our common stock in exchange for the return and cancellation of the 31,000,000 outstanding warrants. In May 2007, Brian Kaufman transferred 74,206 shares of common stock to Gary D. Engle and Jonathan Davidson transferred 16,856 shares of common stock to Mr. Engle and 57,350 shares of common stock to James A. Coyne. The shares were transferred at the same price that Messrs. Kaufman and Davidson originally paid for them. Accordingly, as of the date of this prospectus, we have issued 6,250,000 shares of common stock for $1,550,000 in cash, or a purchase price of $0.248 per share, as follows: Name Number of Shares of Common Stock Relationship to Us Gary D. Engle 3,346,244 Chairman of the Board and Chief Executive Officer James A. Coyne 2,107,422 (1) Vice Chairman and Chief Financial Officer Jonathan Davidson 307,335 Director Brian Kaufman 307,335 Senior Advisor Milton J. Walters 125,037 Senior Advisor Geoffrey A. Thompson 39,203 Director Michael Clayton 17,424 Director (1) These shares are held by JAC Opportunity Fund I, LLC, a family-held entity of which Mr. Coyne is the sole manager. The holders of the majority of these securities will be entitled to make up to two demands that we register these securities pursuant to an agreement to be signed prior to or on the date of this prospectus. The holders of the majority of these securities may elect to exercise these registration rights at any time commencing three months prior to the date on which these shares of common stock are released from escrow. In addition, these stockholders have certain piggy-back registration rights with respect to registration statements filed subsequent to the consummation of a business combination. We will bear the expenses incurred in connection with the filing of any such registration statements. Our officers, directors and senior advisors have committed to purchase the insider warrants (for a total purchase price of $4,450,000 or approximately $0.75 per warrant) from us. These purchases will take place on a private placement basis simultaneously with the consummation of this offering. The insider warrants were generally priced at a slight premium in relation to what we anticipate will be the approximate market price for our warrants at the time the common stock and warrants commence separate trading based upon the trading prices of similar warrants of other blank check companies. The purchase price for the insider warrants will be delivered to Blank Rome, our counsel in connection with this offering, who will also be acting solely as escrow agent in connection with the private sale of insider warrants, at least 24 hours prior to the date of this prospectus to hold in an account until we consummate this offering. Blank Rome will deposit the purchase price into the trust account simultaneously with the consummation of the offering. The insider warrants will be identical to warrants underlying the units being offered by this prospectus except that if we call the warrants for redemption, the insider warrants will be exercisable on a cashless basis so long as they are still held by the purchasers or their affiliates. The purchasers have agreed that the insider warrants will not be sold or transferred by them until after the consummation of our initial business combination. The holders of the majority of these insider warrants (or underlying shares) will be entitled to demand that we register these securities pursuant to an agreement to be signed prior to or on the date of this prospectus. The holders of the majority of these securities may elect to exercise these registration rights with respect to such securities at any time after we consummate a business combination. In addition, these holders have certain piggy-back registration rights with respect to registration statements filed subsequent to such date. We will bear the expenses incurred in connection with the filing of any such registration statements. In addition, Gary D. Engle, our Chairman and Chief Executive Officer, James A. Coyne, our Vice Chairman and Chief Financial Officer, Jonathan Davidson, a director, and Brian Kaufman, one of our Senior Advisors, have entered into an agreement with HCFP/Brenner Securities which is intended to comply with Rule 10b5-1 under the Exchange Act pursuant to which such individuals, or entities such individuals control, will place limit orders for an aggregate of $15 million of our units commencing 30 calendar days after we file a preliminary proxy statement seeking approval of a business combination and ending 30 days thereafter. Each of Messrs. Engle, Coyne, Davidson and Kaufman may vote the shares of common stock included in such units on a proposed business combination any way they choose. It is intended that these purchases will comply with Rule 10b-18 under the Exchange Act and, accordingly, any purchases that are not in compliance with the safe harbor provisions of Rule 10b-18 will not be made. These purchases will be made at a price not to exceed $8.65 per unit and will be made by HCFP/Brenner Securities or another broker dealer mutually agreed upon by such individual and HCFP/Brenner Securities in such amounts and at such times as HCFP/Brenner Securities or such other broker dealer may determine, in its sole discretion, so long as the purchase price does not exceed the above-referenced per unit purchase price. Each of Messrs. Engle, Coyne, Davidson and Kaufman has agreed to make available to HCFP/Brenner Securities monthly statements confirming that such individual has sufficient funds to satisfy these transactions. If $15 million of units are purchased under this agreement at a price of $8.65 per unit, these officers, directors and senior advisors would own, in the aggregate, approximately 25.6% of the outstanding common stock, in addition to any common stock they may purchase in the open market after this offering which could result in these individuals having the ability to influence whether or not the business combination is approved. Each of Messrs. Engle, Coyne, Davidson and Kaufman has agreed that he will not sell or transfer any units purchased by him pursuant to this agreement (or any of the securities included in such units) until the earlier of the completion of a business combination or our liquidation. Messrs. Engle, Coyne, Davidson and Kaufman have agreed with each other that, to the extent that one of such individuals does not satisfy his pro rata portion of his obligation under that agreement, he will transfer all or a portion of his shares to the individual or individuals that are required by HCFP/Brenner Securities to satisfy his obligation under that agreement. PLM International, an affiliate of Messrs. Engle and Coyne, has agreed that, commencing on the effective date of this prospectus through the consummation of a business combination, it will make available to us office space and certain office and administrative services, as we may require from time to time. We have agreed to pay PLM International $7,500 per month for these services. Mr. Engle is a director of PLM International and Mr. Coyne is the President and Chief Executive Officer of PLM International. Mr. Engle s and Mr. Coyne s families own approximately 62% and 33%, respectively, of PLM International through various family entities. Consequently, each will benefit from this transaction to the extent of his interest in PLM International. However, this arrangement is solely for our benefit and is not intended to provide Messrs. Engle or Coyne compensation in lieu of a salary. We believe, based on rents and fees for similar services in the midtown New York City area, that the fees charged by PLM International is at least as favorable as we could have obtained from an unaffiliated person. However, as our directors may not be deemed independent, we did not have the benefit of disinterested directors approving this transaction. We will reimburse our initial stockholders, including our officers and directors, for any reasonable out-of-pocket business expenses incurred by them in connection with certain activities on our behalf such as identifying and investigating possible target businesses and business combinations. There is no limit on the amount of accountable out-of-pocket expenses reimbursable by us, which will be reviewed only by our board or a court of competent jurisdiction if such reimbursement is challenged. Other than the $7,500 per-month administrative fee payable to PLM International Inc. and reimbursable out-of-pocket expenses payable to our officers and directors, no compensation or fees of any kind, including finders and consulting fees, will be paid to any of our initial stockholders, officers or directors, or to any of their affiliates prior to, or for any services they render in order to effectuate, the consummation of the business combination. Any ongoing or future transactions between us and any of our officers, directors, senior advisors or their respective affiliates, including loans by our officers, directors or senior advisors will require prior approval in each instance by a majority of our disinterested independent directors (to the extent we have any) or the members of our board who do not have an interest in the transaction. These directors will, if they determine necessary or appropriate, have access, at our expense, to our attorneys or independent legal counsel. We will not enter into any such transaction unless our disinterested independent directors (or, if there are no independent directors, our disinterested directors) determine that the terms of such transaction are no less favorable to us than those that would be available to us with respect to such a transaction from unaffiliated third parties. In May 2006 and January 2007, we undertook an analysis of the value of our common stock based on traditional criteria of value, including such considerations as historical operations, assets and revenues, if any, at the time. Based on this analysis, we determined that our common stock had only a nominal value, or no more than its par value of $.01 per share, at the date of each subsequent sale or exchange of warrants. At the time of the initial purchase of shares of common stock and warrants, we had only recently been formed and had no assets, revenues or operations. Unlike an early stage operating company which may be seeking a financing privately or through an initial public offering and typically has some assets, revenues, strategic relationships, customers, proprietary technology, intellectual property and/or other assets which are expected to provide value, we had no such assets and nothing to create value. At September 9, 2005, we had no assets, revenues or historical operations that could be measured as value in accordance with the above criteria, and nothing else of value, such as strategic relationships, customers, proprietary technology, intellectual property or other assets. At September 9, 2005, we had only recently been formed and had only a letter of intent with respect to a possible public offering. A letter of intent is merely a statement of intent and is not a binding obligation of the underwriter to engage in this offering. We did not contemplate a private placement or other offering before a possible public offering or any other means to bring us value. In fact, our value, as measured by our balance sheet, has declined since the initial stockholders purchase of the common stock and warrants, as we spent cash and incurred liabilities, without obtaining any tangible assets. At each of March 2006, May 2006 and January 2007, the dates of subsequent sales of warrants, we determined that no change to fair value of the initially issued common stock had occurred. At each such date, we still had none of the indicia of value described above, or any other means of creating value, other than cash of approximately $433,053, $339,000 and $931,841, respectively. Further, our working capital, our liabilities and our stockholders equity (after deducting the deferred registration costs relating to the proposed offering, an asset which is either written off when the offering is abandoned or netted against the proceeds when the offering is completed) were relatively unchanged, other than additional capital resulting from these warrant purchases and the incurrence of expenses relating to this offering. Additionally, at each such date, with respect to a proposed public offering, we still only had a non-binding letter of intent, the underwriter had not yet marketed the offering or solicited indications of interest, and the underwriter was not committed to complete the proposed public offering, as the underwriter does not have a firm commitment obligation until such time, if any, that it executes an underwriting agreement with us committing itself to such obligation. Accordingly, we believe that, at each such date, the value of our common stock was still only nominal, or no more than its par value of $.01 per share. We also conducted a comparable company analysis and examined the price per share of founders stock issued by other blank check companies formed for the purpose of completing a public offering. This analysis also concluded that our common stock had only a nominal value, which was no more than $.01 per share, at each date of purchase of our securities. DESCRIPTION OF SECURITIES General As of the date of this prospectus, we are authorized to issue 100,000,000 shares of common stock, par value $.0001, and 5,000,000 shares of preferred stock, par value $.0001. As of the date of this prospectus, 6,250,000 shares of our common stock are outstanding, held by seven record holders. No shares of our preferred stock are currently outstanding. Units Each unit consists of one share of common stock and one warrant. Each warrant entitles the holder to purchase one share of common stock. The common stock and warrants comprising the units will begin to trade separately on the 90th day after the date of this prospectus unless HCFP/Brenner Securities determines that an earlier date is acceptable, based upon its assessment of the relative strengths of the securities markets and small capitalization companies in general and the trading pattern of, and demand for, our units in particular. In no event, however, may such securities be traded separately until we have filed a Current Report on Form 8-K with the SEC that includes audited financial statements reflecting our receipt of the gross proceeds of this offering. We will file with the SEC a Current Report on Form 8-K which will include audited financial statements following the consummation of this offering. Such audited financial statements will reflect proceeds we receive from the exercise of the over-allotment option, if the over-allotment option is exercised prior to the filing of the Form 8-K. If the over-allotment option is exercised after our initial filing of a Form 8-K, we will file an amendment to the Form 8-K with the SEC to provide updated information to reflect the exercise of the over-allotment option. We will also include in this Form 8-K, or an amendment thereto, or in a subsequent Form 8-K, information indicating if HCFP/Brenner Securities has allowed earlier separate trading of the common stock and warrants comprising the units. Common Stock Our stockholders of record are entitled to one vote for each share held on all matters to be voted on by stockholders. In connection with the vote required for any business combination, all of our existing stockholders, including all of our officers, directors and senior advisors, have agreed to vote their respective shares of common stock owned by them immediately prior to this offering in accordance with the majority of the shares of our common stock voted by our public stockholders. This voting arrangement shall not apply to shares included in units purchased in this offering or purchased following this offering in the open market by any of our existing stockholders, officers, directors and senior advisors. Our existing stockholders, officers, directors and senior advisors will vote all of their shares in any manner they determine, in their sole discretion, with respect to any other items that come before a vote of our stockholders. We will proceed with a business combination only if a majority of the shares of common stock present and voting at the meeting to approve the business combination vote in favor of the business combination and public stockholders owning less than 30% of the shares sold in this offering both vote against the business combination and exercise their conversion rights discussed elsewhere herein. Pursuant to our amended and restated certificate of incorporation, if we do not consummate a business combination by , 2009 [twenty four months from the date of this prospectus], our corporate existence will cease except for the purposes of winding up our affairs and liquidating. If we are forced to liquidate prior to a business combination, our public stockholders are entitled to share ratably in the trust fund, including any interest, and any net assets remaining available for distribution to them after payment of liabilities. Our existing stockholders have agreed to waive their rights to share in any distribution with respect to their initial shares. Our board of directors is divided into three classes, each of which will generally serve for a term of three years with only one class of directors being elected in each year. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors. Our stockholders have no conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the common stock, except that public stockholders have the right to have their shares of common stock converted to cash equal to their pro rata share of the trust fund if they elect such conversion within the prescribed time period (following receipt of a proxy statement and prior to a vote), they vote against the business combination and the business combination is ultimately approved and completed. Public stockholders who convert their stock into their share of the trust fund still have the right to exercise the warrants that they received as part of the units. Preferred Stock Our certificate of incorporation authorizes the issuance of 5,000,000 shares of blank check preferred stock with such designation, rights and preferences as may be determined from time to time by our board of directors. No shares of preferred stock are being issued or registered in this offering. Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of common stock, although our charter and the underwriting agreement prohibits us, prior to a business combination, from issuing preferred stock which participates in any manner in the proceeds of the trust fund, or which votes as a class with the common stock on a business combination. We may issue some or all of the preferred stock to effect a business combination. In addition, the preferred stock could be utilized as a method of discouraging, delaying or preventing a change in control of us. Although we do not currently intend to issue any shares of preferred stock, we cannot assure you that we will not do so in the future. Warrants No warrants are currently outstanding. Each warrant entitles the registered holder to purchase one share of our common stock at a price of $5.50 per share, subject to adjustment as discussed below, at any time commencing on the later of: the completion of a business combination; and , 2008 [one year from the date of this prospectus]. The warrants will expire four years from the date of this prospectus at 5:00 p.m., New York City time. We may call the warrants (including the insider warrants and any warrants issued upon exercise of the unit purchase option), without HCFP/Brenner Securities prior consent, for redemption, in whole or in part, at a price of $.01 per warrant at any time after the warrants become exercisable, upon not less than 30 days prior written notice of redemption to each warrantholder, and if, and only if, the reported last sale price of our common stock equals or exceeds $11.50 per share, for any 20 trading days within a 30-trading day period ending on the third business day prior to the notice of redemption to the warrantholders (referred to as the measurement period ). In addition, we may not call the warrants for redemption unless the warrants and the shares of common stock underlying the warrants are covered by an effective registration statement from the beginning of the measurement period through the date fixed for redemption. The redemption criteria for our warrants have been established at prices which are intended to provide warrantholders a reasonable premium to the initial exercise price and provide a sufficient degree of liquidity to cushion the market reaction to our redemption call. The insider warrants will be identical to the warrants underlying the units being offered by this prospectus, except that if we call the warrants for redemption, the insider warrants will be exercisable on a cashless basis so long as they are still held by the purchasers or their affiliates. The warrants will be issued in registered form under a warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and us. You should review a copy of the warrant agreement, which has been filed as an exhibit to the registration statement of which this prospectus is a part, for a complete description of the terms and conditions applicable to the warrants. The exercise price and number of shares of common stock issuable on exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuances of common stock at a price below their exercise price. The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified check payable to us, for the number of warrants being exercised. The warrantholders do not have the rights or privileges of holders of common stock or any voting rights until they exercise their warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by common stockholders. No warrants held by public stockholders or issuable upon exercise of the representative s purchase option will be exercisable and we will not be obligated to issue shares of common stock unless at the time a holder seeks to exercise such warrant, a prospectus relating to the common stock issuable upon exercise of the warrants is current and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms of the warrant agreement, we have agreed to use our best efforts to meet these conditions and to maintain a current prospectus relating to the common stock issuable upon exercise of the warrants until the expiration of the warrants. However, we cannot assure you that we will be able to do so and, if we do not maintain a current prospectus relating to the common stock issuable upon exercise of the warrants, holders will be unable to exercise their warrants and we will not be required to settle any such warrant exercise. In no event shall we be required to net cash settle any exercise of our warrants. If the prospectus relating to the common stock issuable upon the exercise of the warrants is not current or if the warrants held by public stockholders or issuable upon exercise of the representative s purchase option may have no value, the market for such warrants may be limited, we will not be required to net cash settle the warrant exercise, such warrants may expire worthless and a purchaser of units will have paid the full purchase price of the units solely for the shares included in the units. Even if the prospectus relating to the common stock issuable upon exercise of the warrants is not current, the insider warrants may be exercisable for unregistered shares of common stock. No fractional shares will be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round up to the nearest whole number the number of shares of common stock to be issued to the warrant holder. If the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside, the warrants held by public stockholders or issuable upon exercise of the representative s purchase option may have no value, the market for such warrants may be limited and such warrants may expire worthless. However, the warrants are not exercisable until the completion of a business combination. At that time, we will be an operating company, and intend to either register the warrants in additional states or seek an exemption from registration in the various states in which an exemption is not available to us to issue shares of common stock upon exercise of the warrants. Purchase Option We have agreed to sell to the representative of the underwriters an option to purchase up to a total of 1,250,000 units at a per unit price of $10.00. For a more complete description of the purchase option, including the terms of the units underlying the option, see the section below entitled Underwriting Purchase Option. Dividends We have not paid any cash dividends on our common stock to date and do not intend to pay dividends prior to the completion of a business combination. The payment of dividends in the future will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition subsequent to completion of a business combination. The payment of any dividends subsequent to a business combination will be within the discretion of our then board of directors. It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, our board does not anticipate declaring any dividends in the foreseeable future. Our Transfer Agent and Warrant Agent The transfer agent for our securities and warrant agent for our warrants is Continental Stock Transfer & Trust Company, 17 Battery Place, 8th Floor, New York, New York 10004. American Stock Exchange Listing There is presently no public market for our units, common stock or warrants. We anticipate that the units will be listed on the American Stock Exchange under the symbol SOC.U on or promptly after the date of this prospectus. Once the securities comprising the units begin separate trading, we anticipate that the common stock and warrants will be listed on the American Stock Exchange under the symbols SOC and SOC.WS respectively. Shares Eligible for Future Sale Immediately after this offering, we will have 31,250,000 shares of common stock outstanding, or 35,000,000 shares of common stock if the representative s over-allotment option is exercised in full. All of these shares except for the 6,250,000 shares of common stock issued prior to this offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by any of our affiliates within the meaning of Rule 144 under the Securities Act. The remaining 6,250,000 shares of common stock are restricted securities under Rule 144, in that they were issued in a private transaction not involving a public offering. Rule 144 In general, under Rule 144 as currently in effect, a person who has beneficially owned restricted shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: 1% of the number of shares of common stock then outstanding, which will equal 312,500 shares of common stock immediately after this offering (or 350,000 if the representative of the underwriters exercises its over-allotment option); and if the common stock is listed on a national securities exchange or on the Nasdaq Stock Market, the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales under Rule 144 are also limited by manner of sale provisions and notice requirements and to the availability of current public information about us. Rule 144(k) Under Rule 144(k), a person who is not deemed to have been one of our affiliates at the time of or at any time during the three months preceding a sale, and who has beneficially owned the restricted shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell their shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. SEC Position on Rule 144 Sales The Securities and Exchange Commission has taken the position that promoters or affiliates of a blank check company and their transferees, both before and after a business combination, would act as an underwriter under the Securities Act when reselling the securities of a blank check company acquired prior to the consummation of its initial public offering. Accordingly, the Securities and Exchange Commission believes that those securities can be resold only through a registered offering and that Rule 144 would not be available for those resale transactions despite technical compliance with the requirements of Rule 144. Registration Rights The holders of our shares issued and outstanding on the date of this prospectus, as well as the holders of the insider warrants (and underlying securities), will be entitled to registration rights pursuant to an agreement to be signed prior to or on the effective date of this offering. The holders of the majority of these securities are entitled to make up to two demands that we register such securities. The holders of the majority of the initial shares can elect to exercise these registration rights at any time commencing three months prior to the date on which these shares of common stock are to be released from escrow. The holders of a majority of the insider warrants (or underlying securities) can elect to exercise these registration rights at any time after we consummate a business combination. In addition, the holders have certain piggy-back registration rights with respect to registration statements filed subsequent to our consummation of a business combination. We will bear the expenses incurred in connection with the filing of any such registration statements. We are only required to use our best efforts to cause the registration statement to be declared effective and, once effective, only to use our best efforts to maintain its effectiveness. If a registration statement is not effective at the time a warrant is exercised, we will not be obligated to deliver common stock, and there are no contracted penalties for our failure to do so. UNDERWRITING In accordance with the terms and conditions contained in the underwriting agreement, we have agreed to sell to each of the underwriters named below, and each of the underwriters, for which HCFP/Brenner Securities is acting as representative of the underwriters, has individually agreed to purchase on a firm commitment basis the number of units set forth opposite their respective name below: Underwriters Number of Units HCFP/Brenner Securities LLC Pali Capital, Inc. Total 25,000,000 A copy of the underwriting agreement has been filed as an exhibit to the registration statement of which this prospectus forms a part. Pricing of Securities We have been advised by the representative that the underwriters propose to offer the units to the public at the offering price set forth on the cover page of this prospectus. They may allow some dealers concessions not in excess of $ per unit and the dealers may reallow a concession not in excess of $ per unit to other dealers. Prior to this offering there has been no public market for any of our securities. The public offering price of the units and the terms of the warrants were negotiated between us and the representative. Factors considered in determining the prices and terms of the units, including the common stock and warrants underlying the units, include: the history and prospects of companies whose principal business is the acquisition of other companies; prior offerings of those companies; our prospects for acquiring an operating business at attractive values; our capital structure; an assessment of our management and their experience in identifying operating companies; general conditions of the securities markets at the time of the offering; and other factors as were deemed relevant. However, although these factors were considered, the determination of our offering price is more arbitrary than the pricing of securities for an operating company in a particular industry since the underwriters are unable to compare our financial results and prospects with those of public companies operating in the same industry. Over-Allotment Option We have also granted to the representative an option, exercisable during the 45-day period commencing on the date of this prospectus, to purchase from us at the offering price, less underwriting discounts, up to an aggregate of 3,750,000 additional units for the sole purpose of covering over-allotments, if any. The over-allotment option will only be used to cover the net syndicate short position resulting from the initial distribution. The representative may exercise that option if the underwriters sell more units than the total number set forth in the table above. Commissions and Discounts The following table shows the public offering price, underwriting discount to be paid by us to the underwriters and the proceeds, before expenses, to us. This information assumes either no exercise or full exercise by the representative of its over-allotment option. Per unit Without Option With option Public offering price $ 8.00 $ 200,000,000 $ 230,000,000 Discount $ 0.26 $ 6,500,000 $ 7,475,000 Proceeds before expenses(1) $ 7.74 $ 193,500,000 $ 222,525,000 (1)
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001346685_sterling_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001346685_sterling_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e3b0834b905f8110263fcfbced048ae231b479e0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001346685_sterling_prospectus_summary.txt
@@ -0,0 +1,318 @@
+SUMMARY OF PROSPECTUS 
+ 
+
+ Sterling Mining s
+ Business:
+
+ 
+ Sterling Mining Company is engaged in the business of acquiring, exploring, and developing mineral properties, primarily those containing silver
+and associated base and precious metals. Sterling s principal mining property is the Sunshine Mine in Idaho, United States. Sterling has developed and implemented a multiphase plan to return the Sunshine Mine to long-term sustainable
+production. Sterling also has interests in the Barones project and other projects and prospects in Mexico, Montana and Idaho.
+ 
+ Sterling was incorporated under the laws of the State of Idaho on February 3, 1903. Our head office is located at 609 Bank Street, Wallace, Idaho 83873, and we
+maintain a second administrative office at 2201 Government Way, Suite E, Coeur d Alene, ID 83814. Our telephone number is (208) 666-4070.
+
+ Summary of
+ Selected Financial
+
+Information:
+
+ 
+The following tables set forth selected financial data for each of the years in the three-year period ended December 31, 2006. The consolidated statement of operations data and balance
+sheet data are derived from the audited Consolidated Financial Statements of Sterling. The following selected financial data should be read in conjunction with Management s Discussion and Analysis of Financial Condition and Results of
+Operations and the Consolidated Financial Statements, including the notes thereto.
+
+ 
+ 
+ Consolidated Statement of Operations
+Data:
+
+ 
+
+ 
+ 
+Year Ended
+December 31,
+ 
+ 
+Year Ended
+December 31,
+ 
+ 
+Year Ended
+December 31,
+ 
+
+ 
+ 
+2006
+ 
+ 
+2005
+ 
+ 
+2004
+ 
+
+ Net Revenues
+
+ 
+$
+887,524
+ 
+ 
+$
+491,716
+ 
+ 
+$
+62,873
+ 
+
+ Loss from operations
+
+ 
+$
+(6,568,432
+)
+ 
+$
+(4,255,611
+)
+ 
+$
+(5,001,375
+)
+
+ Net income (loss)
+
+ 
+$
+(5,230,395
+)
+ 
+$
+(4,548,957
+)
+ 
+$
+(5,529,707
+)
+
+ Net income (loss) per share:
+
+ 
+
+ 
+
+ 
+
+ Basic
+
+ 
+$
+(0.24
+)
+ 
+$
+(0.26
+)
+ 
+$
+(0.36
+)
+
+ Diluted
+
+ 
+$
+(0.24
+)
+ 
+$
+(0.26
+)
+ 
+$
+(0.36
+)
+
+ 
+ 
+ Consolidated Balance Sheet Data:
+
+ 
+
+ 
+ 
+Year Ended
+December 31,
+2006
+ 
+Year Ended
+December 31,
+2005
+ 
+Year Ended
+December 31,
+2004
+
+ Total assets
+
+ 
+$
+20,920,367
+ 
+3,655,506
+ 
+$
+3,681,847
+
+ Current liabilities
+
+ 
+ 
+5,861,656
+ 
+849,378
+ 
+ 
+1,024,579
+
+ Long-term obligations
+
+ 
+ 
+519,763
+ 
+ 
+ 
+ 
+ 
+
+ Cash dividends per common share
+
+ 
+$
+ 
+ 
+ 
+ 
+$
+ 
+
+ 
+ 
+ Quarterly Information
+
+ 
+The following tables set forth selected financial data for interim periods ended June 30, 2007. The consolidated statement of operations data and balance sheet data are derived from the
+unaudited Consolidated Financial Statements of Sterling. The following selected financial data should be read in conjunction with Management s Discussion and Analysis of Financial Condition and Results of Operations and the
+Consolidated Financial Statements, including the notes thereto.
+
+Table of Contents
+
+ Consolidated Statement of Operations Data: 
+ 
+
+ 
+ 
+Six Months Ended
+June 30, 2007
+ 
+ 
+Six Months Ended
+June 30, 2006
+ 
+
+ Net Revenues
+
+ 
+$
+1,045,488
+ 
+ 
+$
+597,033
+ 
+
+ Loss from operations
+
+ 
+$
+(6,142,665
+)
+ 
+$
+(2,862,964
+)
+
+ Net income (loss)
+
+ 
+$
+(5,921,008
+)
+ 
+$
+(2,864,833
+)
+
+ Net Income (loss) per share
+
+ 
+
+ 
+
+ Basic
+
+ 
+$
+(0.20
+)
+ 
+$
+(0.14
+)
+
+ Diluted
+
+ 
+$
+(0.20
+)
+ 
+$
+(0.14
+)
+
+ Consolidated Balance Sheet Data: 
+ 
+
+ 
+ 
+June 30, 2007
+
+ Total assets
+
+ 
+$
+24,671,597
+
+ Current liabilities
+
+ 
+$
+2,967,745
+
+ Long-term obligations
+
+ 
+$
+505,832
+
+ Cash dividends per common share
+
+ 
+$
+-0-
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001347406_radiate_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001347406_radiate_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..90f09644425e4f5d38db32ae6fe22ef85bae1c3d
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001347406_radiate_prospectus_summary.txt
@@ -0,0 +1 @@
+Prospectus Summary 5 Risk Factors 6 Forward-Looking Statements 10 Use of Proceeds 10 Dividends 11 Selected Financial Data 11 Management Discussion and Analysis of Financial Condition and Results of Operations 14 Business 17 Management 18 Principal Shareholders 22 Related Party Transactions 23 Selling Shareholders 23 Plan of Distribution 28 Description of Share Capital 30 Taxation 36 Legal Matters 37 Where You Can Find More Information 37 Index to Financial Statements 38 Except as otherwise required by the context, all references in this prospectus to we, us, our, the Company or Radiate refer to the operations of Radiate Research, Inc., a Canadian corporation. Prospectus Summary This summary provides a brief overview of some information about us and this offering. You should read the entire prospectus carefully including the risk factors and our financial statements and related notes before deciding to invest in our Common Stock. Unless otherwise indicated all amounts included in this prospectus have been expressed in Canadian Dollars. Our Company We are a Canadian company involved in the development and sale of products for use with our low voltage foil heating system. Our primary product is the Mothers Warmth Comfort Change System designed to provide a warm and comfortable surface for changing baby s diapers. We commenced sales activities in Canada in early 2005. We have targeted retail stores that specialize in baby products and we intend to continue to develop our market in Canada and commence marketing activities the United States. We have also developed products that use our heating system for floor heating but we have not generated sales to third parties. Since inception (June 10, 2004) to May 31, 2006 we have generated revenues of $38,566 and net losses of $796,763 and have no significant assets. Our auditors have expressed substantial doubt about our ability to continue as a going concern. We will need to raise US$150,000 over the next twelve months to continue operations. These funds will take the form of proceeds generated from the exercise of warrants issued in 2005. There is no guarantee that the warrants will be exercised over the next 12 months if ever. The exchange rate on September 21, 2006 was $1.1195 Canadian Dollars to one US Dollar. We currently are dependent on the sale of one product. We don t know if it will achieve significant levels of market acceptance or if we will be able to develop other products that will achieve market acceptance. We may encounter unforeseen difficulties that may deplete our limited capital resources more rapidly than anticipated. We had only $659 of cash as of December 15, 2006 and we will need additional capital if we are not able to generate profitable sales in the next 12 months. We may be required to make significant product development expenditures and spend additional money to maintain and expand our marketing efforts. We may need to seek additional equity financing in the future if our products do not generate revenue or if our expenses are greater than expected. The timing and amount of any capital requirements cannot be predicted at this time. We cannot be sure that any financing will be available on acceptable terms, if at all. If such financing is not available on satisfactory terms, we may be unable to continue, develop or expand our business, develop new products or penetrate existing markets at the rate desired and our ability to continue in business may be jeopardized. If adequate financing is not available, we may be required to terminate or significantly curtail our operations. This would have a negative impact on the value of your shares. We were incorporated in Canada on June 10, 2004. On November 9, 2005 we undertook a corporate re-organization whereby each former common shareholder received two (2) new Common Shares and ninety-eight (98) Special Class A shares. Our principal office is located at Suite 436, 300 March Road, Ottawa, ON K2K 2E2, Canada and all of our executive administrative sales and research and development functions are based at that office. We have only one full time employee. Our telephone number at our principal office is (613) 599-9108. Risk Factors For a discussion of some of the risks you should consider before purchasing shares of our Common Stock, you are urged to carefully review and consider the section entitled Risk Factors in this prospectus. The Offering The selling Shareholders identified in the section below of this prospectus entitled Selling Shareholders are offering on a resale basis a total of 3,637,400 shares of the following shares of our Common Stock: 1,400,000 shares of our Common Stock issued in connection with our November 2005 private placement; 237,400 shares of our Common Stock issued to our existing shareholders as part of our November 9, 2005 corporate reorganization; 2,000,000 shares of our Common Stock issuable at a price of US$0.075 per share upon the exercise of warrants issued to certain of the Selling Shareholders in our December 10, 2005 private placement The offering comprises 100% of the issued and issuable (upon exercise of the warrants) Common Stock of the Company. On November 9, 2005, at the request of the warrant holders the Company underwent a corporate reorganization. The pre-existing shareholders exchanged 11.870,000 original common shares for 11,632,600 Class A Special Shares and 237,400 shares of Common Stock. The shares were issued on a pari passu basis such that each existing shareholder received their pro-rata share of Class A Special Shares and Common Stock. The Class A Special Shares are convertible into Common Stock at any time after 18 months from November 9, 2005. The effect of the delayed conversion right is to prohibit pre-existing shareholders from converting their Class A Special Shares for the 18 month period. Further, as part of the reorganization the Company changed its Articles of Incorporation to allow the Company to offer its shares to the public Risk Factors An investment in our Common Stock is very risky. You may lose the entire amount of your investment. Before you invest in shares of our Common Stock, you should be aware of various risks, including those described below. You should carefully consider these risk factors, together with all of the other information included in this prospectus, before you decide whether to purchase the shares of our Common Stock. The risks set out below are not the only risks we face. We are a development stage company and we only have a limited operating history on which to evaluate our business or prospects. Our business was formed in June 2004 and we have only a limited operating history on which you can base an evaluation of our business and prospects, with only approximately $38,566 in net revenue generated from our initial product over the period from June 10, 2004 (inception) to May 31,2006. Accordingly, our business prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development. Those risks and uncertainties include whether or not there is a demand for our primary product, the Mothers Warmth Comfort Change System, and whether our product pricing is sufficiently attractive to cause the consumer to adopt our new product. If there is insufficient demand at a profitable price then we won t be able to sustain our operations. We don t know if we be able to develop any other products that will achieve market acceptance. If we are unable to do so we will be completely dependent upon the sales of one product. We only have one full-time employee and one consultant neither of whom has managed the reporting requirements of a public company. Mr. Micah Grinstead is our only full-time employee and he will be primarily responsible for developing our business and for managing our reporting requirements. Mr. Grinstead will be assisted by one consultant, Mr. Ross Tuddenham. Although both have substantial business experience neither has been responsible for the reporting requirements of a public company. One member of our Board of Directors, Mr. William Sklar has been responsible for the reporting requirements of public companies. We will require additional financing in order to continue the development of our products and our business operations. Such financing may not be available on acceptable terms, if at all. We currently are dependent on the sale of one product. We don t know if it will achieve significant levels of market acceptance or if we will be able to develop other products that will achieve market acceptance. We may encounter unforeseen difficulties that may deplete our limited capital resources more rapidly than anticipated. We had only $659 of cash as of December 15, 2006 and we will need additional capital if we are not able to generate profitable sales in the next 12 months. We may be required to make significant product development expenditures and spend additional money to maintain and expand our marketing efforts. We may need to seek additional equity financing in the future if our products do not generate revenue or if our expenses are greater than expected. The timing and amount of any capital requirements cannot be predicted at this time. We cannot be sure that any financing will be available on acceptable terms, if at all. If such financing is not available on satisfactory terms, we may be unable to continue, develop or expand our business, develop new products or penetrate existing markets at the rate desired and our ability to continue in business may be jeopardized. If adequate financing is not available, we may be required to terminate or significantly curtail our operations. This would have a negative impact on the value of your shares. We have experienced significant losses since inception and there is doubt about our ability to continue as a going concern. Our continued existence is dependent upon our ability to generate additional revenue, achieve profitability and maintain adequate financing arrangements. Our failure to do so would have severe consequences on our business, financial condition and results of operations. From inception through May 31, 2006, we have generated revenue of $38,566 and net losses from operations totaling $639,880 and net losses of $796,763 for the period after reflecting losses on derivative liabilities. We had working capital deficit of $65,567 as of May 31, 2006. Because of our limited revenue, our losses and our limited capital, our auditor has expressed doubt about our ability to continue as a going concern. We may not generate sufficient royalty income to cover our costs Our business plan involves the minimization of sales, marketing and inventory costs by the licensing of our product. For the period from inception to May 31, 2006 we received royalties from the manufacturer distributor, Abond Corporation, of $1,436. Our initial product is used for infant care and if it malfunctions and injures an infant or if other infant care or other products we develop cause injury we may be liable for such injury. Our products are used in connection with infant care and home heating. Should these devices fail to perform as intended, or should these devices directly or indirectly cause injuries or illness to people, we may be required to incur substantial costs in defending against claims and may be required to pay damages arising from these actions. Damages awarded in a product liability action could be substantial and our financial condition would be negatively affected. Our initial product uses a low voltage heating system that could become obsolete if someone develops a safer or more efficient technology and we must be able to adapt to any such changes in the market. Our success will be dependent upon our ability to adapt to technological advances and changes in the industry. There is no assurance that we will be successful in our efforts in these respects. For example if another company discovers a means of effective low temperature heating such as radiant heating systems, it may have a negative impact on us. We must also keep abreast of technological advances such as improved High Temperature Systems (such as furnaces and radiators). We only have one officer Mr. Micah Grinstead and our success will depend upon the continued services of Mr. Micah Grinstead. Our success will depend upon the continued services of our President: Micah Grinstead, President. Although the members of our Board of Directors have significant business experience they are not responsible for day-to day business operations. The loss of his services could have a material adverse effect upon our business. Although we don t believe it would cause us to cease operations, we would have to locate a replacement for Mr. Grinstead. We currently do not maintain any key personnel insurance and we have no employment agreements with him. We have never declared any dividends and we are not likely to declare any in the near future. We have not declared any dividends since inception, and we have no present intention of paying any cash dividends on our Common Stock in the foreseeable future. The payment of dividends, if any, in the future, rests in the discretion of our Board of Directors and will depend, among other things, upon our earnings, capital requirements and financial condition. The issuance of additional shares may impact the value of our Common Stock. We have an unlimited number of authorized shares of Common Stock. We may issue more shares to fund our operations. Sales of substantial amounts of Common Stock (including shares issuable upon the exercise of stock options, the conversion of notes and the exercise of warrants), or the perception that such sales could occur, could materially adversely affect prevailing market prices for our Common Stock and our ability to raise equity capital in the future. In addition, our board of directors has the authority without further shareholder approval to issue special shares with rights superior to those currently held by our common shareholders. On October 19, 2005 we entered into a Securities Purchase Agreement involving the potential issuance of 47,791,667 Common Shares, whereby investors subscribed for a combination of Common Shares and warrants which would yield up to US$780,000 to us should all the warrants be exercised. The exercise of the warrants and issuance of additional shares of Common Stock could potentially result in a significant dilution to the holders of our Common Stock. We have issued warrants that are exercisable at a price of $0.075 which are below the selling shareholder price of $0.10. This may create immediate downward pressure on the price of our Class A Common Shares, which may make the exercise of our warrants highly uncertain, especially if the market price of our Class A Common Shares falls to a price equal to or below the $0.075 exercise price of our warrants. Radiate is a Canadian company and it may be difficult for United States shareholders to effect service on or to realize on judgments obtained against Radiate in the United States. Radiate is a Canadian corporation. All of our directors and officers are residents of Canada and a significant part of our assets are, or will be, located outside of the United States. As a result, it may be difficult for shareholders resident in the United States to effect service within the United States upon us or upon, directors, officers or experts who are not residents of the United States, or to realize in the United States judgments of courts of the United States predicated upon civil liability of Radiate, or directors or officers. Accordingly, United States shareholders may be forced to bring actions against Radiate and our directors and officers under Canadian law and in Canadian courts in order to enforce any claims that they may have against Radiate or our directors and officers. There may be material tax consequences to United States investors There may be material Canadian federal income tax consequences that apply to a shareholder who is resident in the United States of America. You should consult with your own tax adviser to determine whether an investment in the Common Stock of Radiate is appropriate for you. Our Officers and Directors and existing shareholders own a substantial interest in our voting shares including our Class A Special Shares and Class B Special Shares and purchasers of our Common Stock offered pursuant to this prospectus will not have a significant voice in our management. Our officers and directors currently collectively own approximately 2.06% of our issued and outstanding shares of Common Stock. However, these officers and directors also own Class A and B Special Shares which are convertible at the option of the holder eighteen months after December 10, 2005. Collectively, our Class A Special Shares and Class B Special shares are entitled to voting rights equal to the number of shares of Common Stock into which they are convertible. The Class A Special Shares are convertible into the number of shares that equal 75% of the then outstanding number of share of Common Stock. Each Class B Special Share is convertible into five shares of Common Stock. Upon conversion our officers and directors will collectively own approximately 26.46% of the common shares and hold 26.46% of the voting rights. The holders of our Class A Special Shares and Class B Special Shares, if acting together, will be able to significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. There is no market for our Common Stock and there will be no market until a market maker agrees to quote our stock and makes an application for listing our stock on the OTC Bulletin and our application is accepted. There is no market for our Common Stock and there will be no market for our Common Stock in the United States until it is quoted on the OTC Bulletin Board. No application has been filed but we intend to have our shares quoted on the OTC Bulletin Board. No assurance can be given that our Common Stock will be quoted on the OTC Bulletin Board or elsewhere. Even should our stock be approved for quotation by a market maker through the over-the-counter bulletin board, stocks traded over this quotation system are usually thinly traded, highly volatile and not followed by analysts. Should our application for listing on the Frankfurt Exchange not be accepted, non-Canadian domiciled shareholders will be subject to Canadian tax consequences on their disposition of our shares. No application has been filed, but we intend for our shares to trade on the Frankfurt Exchange. The OTC Bulletin Board is not a proscribed exchange for purposes of the Canadian Income Tax Act and Regulations there to. Failure to obtain a Frankfurt Exchange listing, which is a proscribed exchange , could result in adverse Canadian Income Tax results for our non-Canadian domiciled Shareholders, in that they will become subject to Canadian Income Tax on the proceeds of their disposition of our shares as the shares were not traded on a proscribed exchange . Our success will depend on our ability to protect our proprietary technology. Our rights to a substantial portion of our technology are as the assignee of United States patent applications. We have not been granted any patents and we don t know when or if any patents will be granted. We hold no U.S. trademarks. Our patent application for our Infant Warming System is now under review by the United States Patent and Trademark Office. All rights regarding the patent have been assigned to us. We are also the assignee of a design patent for the heated contour change pad. All rights have been assigned to Radiate. We are not able to predict the likelihood or timing of a grant of our applications. If our applications are granted we may nevertheless be required to defend our products from patent infringement and maintain our trade secrets. Failure to do so may introduce competition that could significantly reduce our ability to generate revenue. The sale or transfer of our Common Stock by shareholders in the United States will be subject to the so-called penny stock rules. It is likely that shares of our Common Stock, assuming a market were to develop in the United States, will be subject to the regulations on the sale of penny stocks; consequently, the market liquidity for the Common Stock may be adversely affected by such regulations limiting the ability of broker/dealers to sell our Common Stock and the ability of shareholders to sell their securities in the secondary market in the US. Broker dealers who sell penny stocks must give purchasers a risk disclosure document and must make a determination that the penny stock is suitable for the purchaser and obtain the purchaser s written agreement to purchase. Some broker /dealers don t sell penny stocks. Accordingly, you may not be able to resell shares of our Common Stock at times and prices you feel are appropriate. Moreover, our shares may only be sold or transferred by shareholders in those jurisdictions in the United States in which an exemption for such secondary trading exists or in which the shares may have been registered. Forward-Looking Statements This prospectus contains various forward-looking statements that are based on our beliefs as well as assumptions made by and information currently available to us. For this purpose, any statements contained in this Prospectus that are not statements of historical fact may be deemed to be forward-looking statements. When used in this Prospectus, the words believe, expect, anticipate, estimate, plan and similar expressions are intended to help identify forward-looking statements. These statements are subject to certain risks,
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001347815_flagstone_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001347815_flagstone_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a1f3e47c2af3f5be6bc3401dbc822f6821adba63
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001347815_flagstone_prospectus_summary.txt
@@ -0,0 +1 @@
+Prospectus Summary 1
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001348155_global_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001348155_global_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2dfd9a983891522e2ad5c30c6facd0a755c4f1ad
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001348155_global_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY 1
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001348259_validus_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001348259_validus_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9839943883fb3e596507b12db46dfcc4a7569254
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001348259_validus_prospectus_summary.txt
@@ -0,0 +1 @@
+Prospectus Summary 1 Risk Factors 16 Cautionary Note Regarding Forward-Looking Statements 35 Use of Proceeds 37 Dividend Policy 38 Capitalization 39 Dilution 40 Selected Financial Information 41 Management s Discussion and Analysis of Financial Condition and Results of Operations 44 Industry Overview 78 Business 81 Acquisition of Talbot 98 Unaudited Condensed Consolidated Pro-forma Financial Information 107 Management 120 Principal and Selling Shareholders 137 Certain Relationships and Related Party Transactions 142 Description of Share Capital 145 Description of Certain Indebtedness 154 Shares Eligible for Future Sale 156 Certain Tax Considerations 158 Underwriting 168 Validity of Common Shares 173 Experts 174 Additional Information 174 Enforceability of Civil Liabilities Under United States Federal Securities Laws and Other Matters 175 EX-23.3: CONSENT OF PRICEWATERHOUSECOOPERS EX-23.4: CONSENT OF KPMG AUDIT PLC You should rely only on the information contained in this prospectus. Neither we nor the underwriters have authorized any other person to provide you with different information. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or any sale of our common shares. The selling shareholders are offering to sell, and seeking offers to buy, our common shares only in jurisdictions where offers and sales are permitted. The distribution of this prospectus and the public offering of our common shares in certain jurisdictions may be restricted by law. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of our common shares and the distribution of this prospectus outside the United States. This prospectus does not constitute, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy, any securities offered by this prospectus by any person in any jurisdiction in which it is unlawful for such person to make such an offer or solicitation. Common shares may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act of 2003 and the Exchange Control Act of 1972, and related regulations of Bermuda which regulate the sale of securities in Bermuda. In addition, the Bermuda Monetary Authority, which we refer to herein as the BMA, must approve all issuances and transfers of securities of a Bermuda exempted company. We have received from the BMA permission for the issue of our common shares and for the free transferability of our common shares as long as the common shares are listed on the New York Stock Exchange or other appointed stock exchange. Any other transfers remain subject to approval by the BMA. The BMA accepts no responsibility for the financial soundness of any proposal or for the correctness of any of the statements made or opinions expressed in this prospectus. Table of Contents PROSPECTUS SUMMARY This summary highlights selected information described more fully elsewhere in this prospectus and may not contain all of the information that is important to you. You should read the
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001351051_genesis_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001351051_genesis_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0f6812c8e2a51d3e1aa9a8541db800a95f0674dd
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001351051_genesis_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights certain information about us and this offering. This summary is not comprehensive and does not contain all of the information that may be important to you. You should
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001351901_commonweal_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001351901_commonweal_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f94164ef7fae377fadd7ea846ab24828041d271c
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001351901_commonweal_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING IS A SUMMARY WHICH HIGHLIGHTS THE MATERIAL INFORMATION CONTAINED IN THIS PROSPECTUS. IT MAY NOT INCLUDE ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THIS OFFERING FULLY, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE RISK FACTORS AND THE FINANCIAL STATEMENTS.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001352801_burger_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001352801_burger_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..a67ce954f4f5f8d96cbd0d5e47cfcad592b5ea99
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+Prospectus summary This summary highlights information contained elsewhere in this prospectus. This summary does not contain all the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the risks of investing in our common stock discussed under Risk Factors and the financial statements and notes included elsewhere in this prospectus. Unless we specifically state otherwise, the information in this prospectus does not take into account the sale of up to 3,000,000 shares of common stock that the underwriters have the option to purchase from the selling stockholders. On December 13, 2002, we acquired Burger King Corporation, which we refer to as BKC , through private equity funds controlled by Texas Pacific Group, Bain Capital Partners and the Goldman Sachs Funds, or the sponsors . In this prospectus, unless the context otherwise requires, all references to we , us and our refer to Burger King Holdings, Inc. and its subsidiaries, including BKC, for all periods subsequent to our December 13, 2002 acquisition of BKC. All references to our predecessor refer to BKC and its subsidiaries for all periods prior to the acquisition, which operated under a different ownership and capital structure. The King of Burgers When the first Burger King restaurant opened its doors in 1954, our founders had a smart idea: serve great-tasting food fast and allow guests to customize their hamburgers their way. Much has changed in the half century since our founders sold the first Whopper sandwiches in a Miami drive-up hamburger stand in 1957, but these core principles have remained. We believe that the Burger King and Whopper brands are two of the world s most widely-recognized consumer brands. These brands, together with our signature flame-broiled products and the Have It Your Way brand promise, are among the strategic assets that we believe set Burger King restaurants apart from other regional and national fast food hamburger restaurant chains. Have It Your Way is increasingly relevant as consumers increasingly demand personalization and choice over mass production. In a competitive industry, we believe we have differentiated ourselves through our attention to individual guests preferences by offering great tasting fresh food served fast and in a friendly manner. We are the world s second largest fast food hamburger restaurant chain, as measured by the number of restaurants and system-wide sales. As of December 31, 2006, we owned or franchised 11,184 restaurants in 66 countries and U.S. territories, of which approximately 90% are franchised. For the fiscal year ended June 30, 2006, our total revenues were $2.05 billion and our net income was $27 million. For the six months ended December 31, 2006 our total revenues were $1.11 billion and net income was $78 million. Where We Started Our founders sold Burger King Corporation to The Pillsbury Company in 1967, taking it from a small privately held franchised chain to a subsidiary of a large food conglomerate. The Pillsbury Company was purchased by Grand Metropolitan plc, which, in turn, merged with Guinness plc to form Diageo plc, a British spirits company. Then in December 2002, Burger King Corporation was acquired by private equity funds controlled by Texas Pacific Group, Bain Capital Partners and the Goldman Sachs Funds. In May 2006, we issued and sold 25 million shares of common stock and our sponsors sold 3.75 million shares of common stock at a price of $17.00 per share Table of Contents in our initial public offering. Upon completion of the offering, our common stock became listed on the New York Stock Exchange under the symbol BKC . Upon their acquisition of us, the sponsors focused on attracting an experienced management team, including our current Chief Executive Officer, John Chidsey, who joined the company in March 2004 and became our CEO in April 2006. Immediately, the management team developed and launched the Go Forward growth plan, a comprehensive plan guided by the following four principles: Grow Profitably (a market plan); Fund the Future (a financial plan); Fire-up the Guest (a product plan); and Working Together (a people plan). What We ve Accomplished by Going Forward Together Guided by our Go Forward plan and strong executive team leadership, we implemented a number of strategic initiatives that stabilized and improved overall operational and financial performance. We continue to build on these successes as evidenced by the following recent accomplishments: twelve consecutive quarters of positive system-wide comparable sales growth, our best comparable sales growth in more than a decade, including comparable sales growth of 3.7% for the second quarter of fiscal 2007; eleven consecutive quarters of positive comparable sales growth in the United States and Canada, including comparable sales growth of 4.4% for the second quarter of fiscal 2007; all-time high annual revenues of $2.05 billion in fiscal 2006; all-time record high average restaurant sales of $1.13 million for fiscal 2006, $1.16 million for the trailing 12-month period ended December 31, 2006 and as of December 31, 2006, $1.51 million, for the last 50 free-standing restaurants that opened in the United States and have operated at least twelve months (approximately 30% higher than the U.S. average); opening 301 new restaurants in EMEA/ APAC and Latin America, since January 1, 2006, increasing the net restaurant count by 175 to 3,682 as of December 31, 2006; award-winning advertising and promotion programs focused on our core consumers; a robust pipeline of new products that generated system-wide sales of more than $3 billion in the past three years; completion of our Franchisee Financial Restructuring Program, or FFRP program, which we created in February 2003 to assist U.S. and Canadian franchisees in financial distress; the introduction in April 2005 of new, smaller restaurant designs that reduce the average building costs by approximately 25% and the opening of 65 restaurants in such format as of December 31, 2006, with an additional 40 under construction; all-time high guest satisfaction scores, as well as record speed of service and cleanliness scores; completion of our initial public offering in May 2006; announcement on January 30, 2007 of our first quarterly cash dividend as a public company of 6.25 cents per share; and a net reduction in total debt from $1.283 billion as of June 30, 2005 to $872 million as of January 31, 2007. Table of contents Page Prospectus summary 1 Risk factors 10 Special note regarding forward-looking statements 27 Use of proceeds 29 Market price of our common stock 30 Dividend policy 30 Capitalization 31 Selected consolidated financial and other data 32 Management s discussion and analysis of financial condition and results of operations 39 Business 83 Management 105 Principal and selling stockholders 124 Certain relationships and related transactions 128 Description of capital stock 132 Description of our credit facility 137 Material United States federal tax consequences for non-United States holders of common stock 139 Underwriting 141 Legal matters 146 Experts 146 Where you can find more information 146 Index to Consolidated Financial Statements F-1 EX-1.1 Form of Underwriting Agreement EX-23.1 Consent of KPMG LLP No one is authorized to provide you with information that conflicts with information in the registration statement we have filed with the Securities and Exchange Commission. The selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only where those offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of when this prospectus is delivered or any sale of our common stock occurs. In this prospectus, we rely on and refer to information regarding the restaurant industry, the quick service restaurant segment and the fast food hamburger restaurant category that has been prepared by the industry research firm NPD Group, Inc. (which prepares and disseminates Consumer Reported Eating Share Trends, or CREST data) or compiled from market research reports, research analyst reports and other publicly available information. All industry and market data that are not cited as being from a specified source are from internal analyses based upon data available from noted sources or other proprietary research and analysis. Table of Contents Why We Are The King Distinctive brand with global platform: We believe that our Burger King and Whopper brands are two of the most widely-recognized consumer brands in the world. We have one of the largest restaurant networks in the world, with 11,184 restaurants operating in 66 countries and U.S. territories, of which 4,000 are located in our international markets. We believe that the demand for new international franchise restaurants is growing and that our global platform will allow us to leverage our established infrastructure to significantly increase our international restaurant count with limited incremental investment or expense. Attractive business model: Approximately 90% of our restaurants are franchised, which is a higher percentage than that of our major competitors in the fast food hamburger restaurant category. We believe that our franchise restaurants will generate a consistent, profitable royalty stream to us, with minimal ongoing capital expenditures or incremental expense by us. We also believe this will provide us with significant cash flow to reinvest in growing our brand and enhancing shareholder value. Although we believe that this restaurant ownership mix is beneficial to us, it also presents a number of drawbacks, such as our limited control over franchisees and limited ability to facilitate changes in restaurant ownership. Innovative marketing campaigns, creative advertising and strategic sponsorships: We utilize our successful marketing, advertising and sponsorships to drive sales and generate restaurant traffic. In 2006, our U.S. television advertisements were ranked among the most liked or most recalled new ads more often than those of any national advertisers in the past 24 months ending December 31, 2006, according to advertising industry researcher IAG. In addition, our successful Xbox gaming collection sold more than 3.2 million copies, making it the best-selling video game of the 2006 holiday season. We are also reaching out to a broad spectrum of restaurant guests with mass appeal sports and entertainment sponsorships, such as the National Football League (NFL) and NASCAR, and family oriented movie tie-ins. Experienced management team: We have a seasoned management team with significant experience in managing and leading franchised and branded businesses. Our management team has extensive experience with companies such as Avis Rent-A-Car, Budget Rent-A-Car, Coca-Cola, Frito Lay, Jackson Hewitt Tax Services, McDonald s, PepsiCo, Pillsbury, Taco Bell, Seagram, Wendy s and 7-Eleven. The core of our management team has been working together since 2004. Our Way Going Forward Drive further sales growth and profitability: We remain focused on achieving our comparable sales, average restaurant sales and profitability potential. An essential component of our success is to grow system-wide average restaurant sales through an enhanced guest experience. Our key guest satisfaction and operations metrics were at all-time highs in December 2006 and we intend to focus our efforts on further improving these metrics. In addition, we intend to implement initiatives to reduce the gap between our hours of operation and those of our competitors, which we believe will increase comparable sales and average restaurant sales in U.S. restaurants. We also believe that significant opportunities exist to enhance restaurant profitability by better utilizing our fixed cost base, and continuing to explore ways to reduce variable costs. Specifically, we expect to see margin improvement as we roll out our new labor scheduling system and flexible batch broiler to Table of Contents our U.S. company restaurants during fiscal 2007 and to our franchise restaurants during the next three years. Expand our large international platform: We intend to leverage our substantial international infrastructure to expand our franchise network and restaurant base. Internationally we are much smaller than our largest competitor, and therefore we believe we have significant growth opportunities. We have developed a detailed global development plan to accelerate worldwide growth over the next five years. We expect to focus our expansion plans on (1) under-penetrated markets where we already have an established presence, such as Germany, Spain and Mexico, (2) markets in which we have a small presence, but which we believe offer significant opportunities for development, such as Brazil, China, Taiwan and Italy and (3) financially attractive new markets such as Japan and Indonesia, in which we have recently executed development agreements with new franchisees, and countries in the Middle East, Eastern Europe and the Mediterranean region. We believe that our successful entry into Brazil where in two years we have recruited seven new franchisees, opened 27 restaurants in 10 cities and put development agreements in place to add more than 150 restaurants within the next five years, validates the opportunities that exist for us in rapidly developing international markets. Accelerate our new restaurant development: The expansion of our restaurant network and an increase in the number of new restaurants are key ingredients in our growth plan. We expect that most of our new restaurant growth will come from franchisees. Consequently, we believe that providing our franchisees with a development process that is streamlined, financially flexible and capital-efficient will accelerate the pace of restaurant development. As part of this strategy, we developed new, smaller restaurant designs that reduce the level of capital investment required while also addressing a change in consumer preference from dine-in to drive-thru (61% of U.S. company restaurant sales are currently made in the drive-thru). These smaller restaurant models reduce average building costs by approximately 25% and are anticipated to reduce utility and other operating expenses. We are also actively pursuing co-branding and site sharing programs to reduce initial investment expense and have begun testing a turn-key development assistance program that reduces the time and uncertainty associated with new builds. Finally, we are offering financial incentives and investigating innovative financing programs for our franchisees. Employ innovative marketing strategies and expand product offerings: We intend to continue to employ innovative and creative marketing strategies to increase our restaurant traffic and reinforce the Have It Your Way brand promise. As part of this promise, we intend to launch new products to fill gaps in our breakfast, dessert and snack menu, offer more choices to our guests and enhance the price/value proposition of our products with offerings such as the BKTM Value Menu and the soon-to-be launched BKTM Breakfast Value Menu (the first such offering in the FFHR category). In addition, we intend to roll-out more than 15 other new and limited time offer products in the second half of fiscal 2007 and fiscal 2008. Table of Contents Ownership by sponsors Our principal stockholders are the private equity funds controlled by the sponsors. As of January 17, 2007, these funds beneficially owned approximately 75.1% of our outstanding common stock. Following completion of this offering, these funds will beneficially own approximately 60.2% of our common stock, or 58.0% if the underwriters option to purchase additional shares is fully exercised. Recent developments On January 30, 2007, we announced a quarterly cash dividend of 6.25 cents per share. The dividend payment will be made on March 15, 2007 to holders of record of our common stock on February 15, 2007. On January 30, 2007, we made a prepayment of an additional $25 million of term debt under our credit facility using cash generated from operations. Our headquarters Our global headquarters are located at 5505 Blue Lagoon Drive, Miami, Florida 33126. Our telephone number is (305) 378-3000. Our website is accessible through www.burgerking.com or www.bk.com. Information on, or accessible through, this website is not a part of, and is not incorporated into, this prospectus. Burger King , Whopper , Have It Your Way , BK Joe , Tendercrisp , Burger King Bun Halves and Crescent Logo, BKTM Value Menu, BKTM Breakfast Value Menu, BKTM Stacker, and BK Hold emsTM trademarks are protected under applicable intellectual property laws and are the property of Burger King Brands, Inc., an indirect wholly-owned subsidiary of Burger King Holdings, Inc. Cheesy TotsTM is a trademark of H.J. Heinz Company and used under license by Burger King Corporation. Other registered trademarks referred to in this prospectus are the property of their respective owners. The offering Common stock offered by the selling stockholders 20,000,000 shares(1) Common stock to be outstanding after this offering 134,448,716 shares(2) Voting Rights One vote per share. Use of Proceeds We will not receive any of the proceeds from the sale of our common stock by the selling stockholders. New York Stock Exchange Symbol BKC
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001354166_highland_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001354166_highland_prospectus_summary.txt
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+S-1 1 d46044sv1.htm FORM S-1 sv1 Table of Contents As filed with the Securities and Exchange Commission on April 30, 2007 Registration No. 333- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Highland Financial Partners, L.P. (Exact name of registrant as specified in its charter) Delaware 6199 83-0446391 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) Two Galleria Tower 13455 Noel Road, Suite 800 Dallas, Texas 75240 (972) 628-4100 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) J. Kevin Ciavarra General Counsel Highland Financial Partners, L.P. Two Galleria Tower 13455 Noel Road, Suite 800 Dallas, Texas 75240 (972) 628-4100 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copy to: David J. Goldschmidt, Esq. Skadden, Arps, Slate, Meagher Flom Four Times Square New York, New York 10036-6522 (212) 735-3000 Approximate date of commencement of proposed sale to the public: As soon as practicable after the registration statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. CALCULATION OF REGISTRATION FEE Proposed Maximum Proposed Maximum Title of Securities Amount to be Offering Price Aggregate Offering Amount of to be Registered Registered Per Unit Price(1) Registration Fee(2) Common units representing limited partner interests 2,000,000 $25.00 $50,000,000 $1,535 (1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. (2) Calculated in accordance with Rule 457(o) under the Securities Act of 1933. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on the date as the Commission, acting pursuant to said Section 8(a), may determine. TABLE OF CONTENTS Page MARKET DATA ii SUMMARY 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001355467_sungard_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001355467_sungard_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..8a9be28b01c9a0997eaa15caea17f38d8f407aa7
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that may be important to you in making your investment decision. You should read this entire prospectus, including the financial data and related notes and section entitled Risk Factors, before making an investment decision. Unless the context otherwise indicates, as used in this prospectus, the terms SunGard, we, our, us and the company and similar terms refer to SunGard Data Systems Inc. and its subsidiaries on a consolidated basis. Our Company We are one of the world s leading software and IT services companies. We provide software and processing solutions to institutions throughout the financial services industry, higher education, and the public sector; and we help enterprises of all types to maintain the continuity of their business through information availability services. We operate our business in three segments: Financial Systems ( FS ), Higher Education and Public Sector Systems ( HEPS ) and Availability Services ( AS ). Our FS segment primarily serves financial services companies, corporate and government treasury departments and energy companies. Our HEPS segment primarily serves higher education institutions, state and local governments and not-for-profit organizations. Our AS segment serves information-dependent companies across virtually all industries. Our company supports more than 25,000 customers in over 50 countries, including the world s 50 largest financial services companies. We seek to establish long-term customer relationships by negotiating multi-year contracts and by emphasizing customer support and product quality and integration. We believe that we are one of the most efficient operators of mission-critical information technology, or IT, solutions as a result of the economies of scale we derive from serving multiple customers on shared platforms. Our revenue is highly diversified by customer and product, with no single customer accounting for more than 3% of our total revenue during any of the past three fiscal years. We estimate that approximately 89% of our revenue for the past three fiscal years was recurring in nature. From fiscal year 1990 through fiscal year 2006, we increased both revenue and EBITDA at a compound annual rate of approximately 20%. We were acquired on August 11, 2005 by a consortium of private equity investment funds associated with Bain Capital Partners, The Blackstone Group, Goldman Sachs & Co., Kohlberg Kravis Roberts & Co., Providence Equity Partners, Silver Lake and Texas Pacific Group. The transaction was accomplished through the merger of Solar Capital Corp. into SunGard Data Systems Inc., with SunGard Data Systems Inc. being the surviving company. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (1) Segment EBITDA excludes $147 million of corporate level expenses of SunGard Data Systems Inc. Total EBITDA for the year ended December 31, 2006 was
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001355610_assent_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001355610_assent_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..8a9be28b01c9a0997eaa15caea17f38d8f407aa7
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that may be important to you in making your investment decision. You should read this entire prospectus, including the financial data and related notes and section entitled Risk Factors, before making an investment decision. Unless the context otherwise indicates, as used in this prospectus, the terms SunGard, we, our, us and the company and similar terms refer to SunGard Data Systems Inc. and its subsidiaries on a consolidated basis. Our Company We are one of the world s leading software and IT services companies. We provide software and processing solutions to institutions throughout the financial services industry, higher education, and the public sector; and we help enterprises of all types to maintain the continuity of their business through information availability services. We operate our business in three segments: Financial Systems ( FS ), Higher Education and Public Sector Systems ( HEPS ) and Availability Services ( AS ). Our FS segment primarily serves financial services companies, corporate and government treasury departments and energy companies. Our HEPS segment primarily serves higher education institutions, state and local governments and not-for-profit organizations. Our AS segment serves information-dependent companies across virtually all industries. Our company supports more than 25,000 customers in over 50 countries, including the world s 50 largest financial services companies. We seek to establish long-term customer relationships by negotiating multi-year contracts and by emphasizing customer support and product quality and integration. We believe that we are one of the most efficient operators of mission-critical information technology, or IT, solutions as a result of the economies of scale we derive from serving multiple customers on shared platforms. Our revenue is highly diversified by customer and product, with no single customer accounting for more than 3% of our total revenue during any of the past three fiscal years. We estimate that approximately 89% of our revenue for the past three fiscal years was recurring in nature. From fiscal year 1990 through fiscal year 2006, we increased both revenue and EBITDA at a compound annual rate of approximately 20%. We were acquired on August 11, 2005 by a consortium of private equity investment funds associated with Bain Capital Partners, The Blackstone Group, Goldman Sachs & Co., Kohlberg Kravis Roberts & Co., Providence Equity Partners, Silver Lake and Texas Pacific Group. The transaction was accomplished through the merger of Solar Capital Corp. into SunGard Data Systems Inc., with SunGard Data Systems Inc. being the surviving company. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (1) Segment EBITDA excludes $147 million of corporate level expenses of SunGard Data Systems Inc. Total EBITDA for the year ended December 31, 2006 was
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001355611_asc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001355611_asc_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..8a9be28b01c9a0997eaa15caea17f38d8f407aa7
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001355611_asc_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that may be important to you in making your investment decision. You should read this entire prospectus, including the financial data and related notes and section entitled Risk Factors, before making an investment decision. Unless the context otherwise indicates, as used in this prospectus, the terms SunGard, we, our, us and the company and similar terms refer to SunGard Data Systems Inc. and its subsidiaries on a consolidated basis. Our Company We are one of the world s leading software and IT services companies. We provide software and processing solutions to institutions throughout the financial services industry, higher education, and the public sector; and we help enterprises of all types to maintain the continuity of their business through information availability services. We operate our business in three segments: Financial Systems ( FS ), Higher Education and Public Sector Systems ( HEPS ) and Availability Services ( AS ). Our FS segment primarily serves financial services companies, corporate and government treasury departments and energy companies. Our HEPS segment primarily serves higher education institutions, state and local governments and not-for-profit organizations. Our AS segment serves information-dependent companies across virtually all industries. Our company supports more than 25,000 customers in over 50 countries, including the world s 50 largest financial services companies. We seek to establish long-term customer relationships by negotiating multi-year contracts and by emphasizing customer support and product quality and integration. We believe that we are one of the most efficient operators of mission-critical information technology, or IT, solutions as a result of the economies of scale we derive from serving multiple customers on shared platforms. Our revenue is highly diversified by customer and product, with no single customer accounting for more than 3% of our total revenue during any of the past three fiscal years. We estimate that approximately 89% of our revenue for the past three fiscal years was recurring in nature. From fiscal year 1990 through fiscal year 2006, we increased both revenue and EBITDA at a compound annual rate of approximately 20%. We were acquired on August 11, 2005 by a consortium of private equity investment funds associated with Bain Capital Partners, The Blackstone Group, Goldman Sachs & Co., Kohlberg Kravis Roberts & Co., Providence Equity Partners, Silver Lake and Texas Pacific Group. The transaction was accomplished through the merger of Solar Capital Corp. into SunGard Data Systems Inc., with SunGard Data Systems Inc. being the surviving company. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (1) Segment EBITDA excludes $147 million of corporate level expenses of SunGard Data Systems Inc. Total EBITDA for the year ended December 31, 2006 was
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001355621_data_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001355621_data_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..8a9be28b01c9a0997eaa15caea17f38d8f407aa7
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001355621_data_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that may be important to you in making your investment decision. You should read this entire prospectus, including the financial data and related notes and section entitled Risk Factors, before making an investment decision. Unless the context otherwise indicates, as used in this prospectus, the terms SunGard, we, our, us and the company and similar terms refer to SunGard Data Systems Inc. and its subsidiaries on a consolidated basis. Our Company We are one of the world s leading software and IT services companies. We provide software and processing solutions to institutions throughout the financial services industry, higher education, and the public sector; and we help enterprises of all types to maintain the continuity of their business through information availability services. We operate our business in three segments: Financial Systems ( FS ), Higher Education and Public Sector Systems ( HEPS ) and Availability Services ( AS ). Our FS segment primarily serves financial services companies, corporate and government treasury departments and energy companies. Our HEPS segment primarily serves higher education institutions, state and local governments and not-for-profit organizations. Our AS segment serves information-dependent companies across virtually all industries. Our company supports more than 25,000 customers in over 50 countries, including the world s 50 largest financial services companies. We seek to establish long-term customer relationships by negotiating multi-year contracts and by emphasizing customer support and product quality and integration. We believe that we are one of the most efficient operators of mission-critical information technology, or IT, solutions as a result of the economies of scale we derive from serving multiple customers on shared platforms. Our revenue is highly diversified by customer and product, with no single customer accounting for more than 3% of our total revenue during any of the past three fiscal years. We estimate that approximately 89% of our revenue for the past three fiscal years was recurring in nature. From fiscal year 1990 through fiscal year 2006, we increased both revenue and EBITDA at a compound annual rate of approximately 20%. We were acquired on August 11, 2005 by a consortium of private equity investment funds associated with Bain Capital Partners, The Blackstone Group, Goldman Sachs & Co., Kohlberg Kravis Roberts & Co., Providence Equity Partners, Silver Lake and Texas Pacific Group. The transaction was accomplished through the merger of Solar Capital Corp. into SunGard Data Systems Inc., with SunGard Data Systems Inc. being the surviving company. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (1) Segment EBITDA excludes $147 million of corporate level expenses of SunGard Data Systems Inc. Total EBITDA for the year ended December 31, 2006 was
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001355634_microhedge_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001355634_microhedge_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..8a9be28b01c9a0997eaa15caea17f38d8f407aa7
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+++ b/parsed_sections/prospectus_summary/2007/CIK0001355634_microhedge_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that may be important to you in making your investment decision. You should read this entire prospectus, including the financial data and related notes and section entitled Risk Factors, before making an investment decision. Unless the context otherwise indicates, as used in this prospectus, the terms SunGard, we, our, us and the company and similar terms refer to SunGard Data Systems Inc. and its subsidiaries on a consolidated basis. Our Company We are one of the world s leading software and IT services companies. We provide software and processing solutions to institutions throughout the financial services industry, higher education, and the public sector; and we help enterprises of all types to maintain the continuity of their business through information availability services. We operate our business in three segments: Financial Systems ( FS ), Higher Education and Public Sector Systems ( HEPS ) and Availability Services ( AS ). Our FS segment primarily serves financial services companies, corporate and government treasury departments and energy companies. Our HEPS segment primarily serves higher education institutions, state and local governments and not-for-profit organizations. Our AS segment serves information-dependent companies across virtually all industries. Our company supports more than 25,000 customers in over 50 countries, including the world s 50 largest financial services companies. We seek to establish long-term customer relationships by negotiating multi-year contracts and by emphasizing customer support and product quality and integration. We believe that we are one of the most efficient operators of mission-critical information technology, or IT, solutions as a result of the economies of scale we derive from serving multiple customers on shared platforms. Our revenue is highly diversified by customer and product, with no single customer accounting for more than 3% of our total revenue during any of the past three fiscal years. We estimate that approximately 89% of our revenue for the past three fiscal years was recurring in nature. From fiscal year 1990 through fiscal year 2006, we increased both revenue and EBITDA at a compound annual rate of approximately 20%. We were acquired on August 11, 2005 by a consortium of private equity investment funds associated with Bain Capital Partners, The Blackstone Group, Goldman Sachs & Co., Kohlberg Kravis Roberts & Co., Providence Equity Partners, Silver Lake and Texas Pacific Group. The transaction was accomplished through the merger of Solar Capital Corp. into SunGard Data Systems Inc., with SunGard Data Systems Inc. being the surviving company. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (1) Segment EBITDA excludes $147 million of corporate level expenses of SunGard Data Systems Inc. Total EBITDA for the year ended December 31, 2006 was
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001355635_wall_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001355635_wall_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8a9be28b01c9a0997eaa15caea17f38d8f407aa7
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001355635_wall_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that may be important to you in making your investment decision. You should read this entire prospectus, including the financial data and related notes and section entitled Risk Factors, before making an investment decision. Unless the context otherwise indicates, as used in this prospectus, the terms SunGard, we, our, us and the company and similar terms refer to SunGard Data Systems Inc. and its subsidiaries on a consolidated basis. Our Company We are one of the world s leading software and IT services companies. We provide software and processing solutions to institutions throughout the financial services industry, higher education, and the public sector; and we help enterprises of all types to maintain the continuity of their business through information availability services. We operate our business in three segments: Financial Systems ( FS ), Higher Education and Public Sector Systems ( HEPS ) and Availability Services ( AS ). Our FS segment primarily serves financial services companies, corporate and government treasury departments and energy companies. Our HEPS segment primarily serves higher education institutions, state and local governments and not-for-profit organizations. Our AS segment serves information-dependent companies across virtually all industries. Our company supports more than 25,000 customers in over 50 countries, including the world s 50 largest financial services companies. We seek to establish long-term customer relationships by negotiating multi-year contracts and by emphasizing customer support and product quality and integration. We believe that we are one of the most efficient operators of mission-critical information technology, or IT, solutions as a result of the economies of scale we derive from serving multiple customers on shared platforms. Our revenue is highly diversified by customer and product, with no single customer accounting for more than 3% of our total revenue during any of the past three fiscal years. We estimate that approximately 89% of our revenue for the past three fiscal years was recurring in nature. From fiscal year 1990 through fiscal year 2006, we increased both revenue and EBITDA at a compound annual rate of approximately 20%. We were acquired on August 11, 2005 by a consortium of private equity investment funds associated with Bain Capital Partners, The Blackstone Group, Goldman Sachs & Co., Kohlberg Kravis Roberts & Co., Providence Equity Partners, Silver Lake and Texas Pacific Group. The transaction was accomplished through the merger of Solar Capital Corp. into SunGard Data Systems Inc., with SunGard Data Systems Inc. being the surviving company. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (1) Segment EBITDA excludes $147 million of corporate level expenses of SunGard Data Systems Inc. Total EBITDA for the year ended December 31, 2006 was
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001355636_world_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001355636_world_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8a9be28b01c9a0997eaa15caea17f38d8f407aa7
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001355636_world_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that may be important to you in making your investment decision. You should read this entire prospectus, including the financial data and related notes and section entitled Risk Factors, before making an investment decision. Unless the context otherwise indicates, as used in this prospectus, the terms SunGard, we, our, us and the company and similar terms refer to SunGard Data Systems Inc. and its subsidiaries on a consolidated basis. Our Company We are one of the world s leading software and IT services companies. We provide software and processing solutions to institutions throughout the financial services industry, higher education, and the public sector; and we help enterprises of all types to maintain the continuity of their business through information availability services. We operate our business in three segments: Financial Systems ( FS ), Higher Education and Public Sector Systems ( HEPS ) and Availability Services ( AS ). Our FS segment primarily serves financial services companies, corporate and government treasury departments and energy companies. Our HEPS segment primarily serves higher education institutions, state and local governments and not-for-profit organizations. Our AS segment serves information-dependent companies across virtually all industries. Our company supports more than 25,000 customers in over 50 countries, including the world s 50 largest financial services companies. We seek to establish long-term customer relationships by negotiating multi-year contracts and by emphasizing customer support and product quality and integration. We believe that we are one of the most efficient operators of mission-critical information technology, or IT, solutions as a result of the economies of scale we derive from serving multiple customers on shared platforms. Our revenue is highly diversified by customer and product, with no single customer accounting for more than 3% of our total revenue during any of the past three fiscal years. We estimate that approximately 89% of our revenue for the past three fiscal years was recurring in nature. From fiscal year 1990 through fiscal year 2006, we increased both revenue and EBITDA at a compound annual rate of approximately 20%. We were acquired on August 11, 2005 by a consortium of private equity investment funds associated with Bain Capital Partners, The Blackstone Group, Goldman Sachs & Co., Kohlberg Kravis Roberts & Co., Providence Equity Partners, Silver Lake and Texas Pacific Group. The transaction was accomplished through the merger of Solar Capital Corp. into SunGard Data Systems Inc., with SunGard Data Systems Inc. being the surviving company. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (1) Segment EBITDA excludes $147 million of corporate level expenses of SunGard Data Systems Inc. Total EBITDA for the year ended December 31, 2006 was
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001355638_plaid_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001355638_plaid_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8a9be28b01c9a0997eaa15caea17f38d8f407aa7
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001355638_plaid_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that may be important to you in making your investment decision. You should read this entire prospectus, including the financial data and related notes and section entitled Risk Factors, before making an investment decision. Unless the context otherwise indicates, as used in this prospectus, the terms SunGard, we, our, us and the company and similar terms refer to SunGard Data Systems Inc. and its subsidiaries on a consolidated basis. Our Company We are one of the world s leading software and IT services companies. We provide software and processing solutions to institutions throughout the financial services industry, higher education, and the public sector; and we help enterprises of all types to maintain the continuity of their business through information availability services. We operate our business in three segments: Financial Systems ( FS ), Higher Education and Public Sector Systems ( HEPS ) and Availability Services ( AS ). Our FS segment primarily serves financial services companies, corporate and government treasury departments and energy companies. Our HEPS segment primarily serves higher education institutions, state and local governments and not-for-profit organizations. Our AS segment serves information-dependent companies across virtually all industries. Our company supports more than 25,000 customers in over 50 countries, including the world s 50 largest financial services companies. We seek to establish long-term customer relationships by negotiating multi-year contracts and by emphasizing customer support and product quality and integration. We believe that we are one of the most efficient operators of mission-critical information technology, or IT, solutions as a result of the economies of scale we derive from serving multiple customers on shared platforms. Our revenue is highly diversified by customer and product, with no single customer accounting for more than 3% of our total revenue during any of the past three fiscal years. We estimate that approximately 89% of our revenue for the past three fiscal years was recurring in nature. From fiscal year 1990 through fiscal year 2006, we increased both revenue and EBITDA at a compound annual rate of approximately 20%. We were acquired on August 11, 2005 by a consortium of private equity investment funds associated with Bain Capital Partners, The Blackstone Group, Goldman Sachs & Co., Kohlberg Kravis Roberts & Co., Providence Equity Partners, Silver Lake and Texas Pacific Group. The transaction was accomplished through the merger of Solar Capital Corp. into SunGard Data Systems Inc., with SunGard Data Systems Inc. being the surviving company. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (1) Segment EBITDA excludes $147 million of corporate level expenses of SunGard Data Systems Inc. Total EBITDA for the year ended December 31, 2006 was
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001355639_portfolio_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001355639_portfolio_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8a9be28b01c9a0997eaa15caea17f38d8f407aa7
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001355639_portfolio_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that may be important to you in making your investment decision. You should read this entire prospectus, including the financial data and related notes and section entitled Risk Factors, before making an investment decision. Unless the context otherwise indicates, as used in this prospectus, the terms SunGard, we, our, us and the company and similar terms refer to SunGard Data Systems Inc. and its subsidiaries on a consolidated basis. Our Company We are one of the world s leading software and IT services companies. We provide software and processing solutions to institutions throughout the financial services industry, higher education, and the public sector; and we help enterprises of all types to maintain the continuity of their business through information availability services. We operate our business in three segments: Financial Systems ( FS ), Higher Education and Public Sector Systems ( HEPS ) and Availability Services ( AS ). Our FS segment primarily serves financial services companies, corporate and government treasury departments and energy companies. Our HEPS segment primarily serves higher education institutions, state and local governments and not-for-profit organizations. Our AS segment serves information-dependent companies across virtually all industries. Our company supports more than 25,000 customers in over 50 countries, including the world s 50 largest financial services companies. We seek to establish long-term customer relationships by negotiating multi-year contracts and by emphasizing customer support and product quality and integration. We believe that we are one of the most efficient operators of mission-critical information technology, or IT, solutions as a result of the economies of scale we derive from serving multiple customers on shared platforms. Our revenue is highly diversified by customer and product, with no single customer accounting for more than 3% of our total revenue during any of the past three fiscal years. We estimate that approximately 89% of our revenue for the past three fiscal years was recurring in nature. From fiscal year 1990 through fiscal year 2006, we increased both revenue and EBITDA at a compound annual rate of approximately 20%. We were acquired on August 11, 2005 by a consortium of private equity investment funds associated with Bain Capital Partners, The Blackstone Group, Goldman Sachs & Co., Kohlberg Kravis Roberts & Co., Providence Equity Partners, Silver Lake and Texas Pacific Group. The transaction was accomplished through the merger of Solar Capital Corp. into SunGard Data Systems Inc., with SunGard Data Systems Inc. being the surviving company. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (1) Segment EBITDA excludes $147 million of corporate level expenses of SunGard Data Systems Inc. Total EBITDA for the year ended December 31, 2006 was
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001356104_mellanox_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001356104_mellanox_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..327367aea7f1514721dd6d8c68bdd4105c26af96
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001356104_mellanox_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY 1 RISK FACTORS 7 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 23 USE OF PROCEEDS 24 DIVIDEND POLICY 24 CAPITALIZATION 25 DILUTION 27 CONVERSION OF SERIES D PREFERRED SHARES 29 SELECTED CONSOLIDATED FINANCIAL DATA 30 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 32 BUSINESS 44 MANAGEMENT 62 COMPENSATION DISCUSSION AND ANALYSIS 69 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 88 PRINCIPAL SHAREHOLDERS 92 DESCRIPTION OF AUTHORIZED SHARE CAPITAL 96 ISRAELI TAX CONSIDERATIONS AND GOVERNMENT PROGRAMS 101 U.S. FEDERAL INCOME TAXATION CONSIDERATIONS 106 SHARES ELIGIBLE FOR FUTURE SALE 110 UNDERWRITING 112 INTERNATIONAL SELLING RESTRICTIONS 116 LEGAL MATTERS 120 EXPERTS 120 ENFORCEABILITY OF CIVIL LIABILITIES 120 WHERE YOU CAN FIND MORE INFORMATION 121 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1 EXHIBIT 23.3 EXHIBIT 23.4 Unless the context requires otherwise, the words Mellanox, we, company, us and our refer to Mellanox Technologies, Ltd. and our wholly-owned subsidiary, Mellanox Technologies, Inc. For purposes of this prospectus, the term shareholders shall refer to the holders of our ordinary shares. Table of Contents PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our ordinary shares, you should carefully read this entire prospectus, including our financial statements and the related notes included in this prospectus and the information set forth under the headings Risk Factors and Management s Discussion and Analysis of Financial Condition and Results of Operations. MELLANOX TECHNOLOGIES, LTD. We are a leading supplier of semiconductor-based, high-performance interconnect products that facilitate data transmission between servers and storage systems through communications infrastructure equipment. Our products are an integral part of a total solution focused on computing, storage and communication applications used in enterprise data centers, high-performance computing and embedded systems. We are one of the pioneers of InfiniBand, an industry standard architecture that provides specifications for high-performance interconnects. We believe that we are the leading merchant supplier of field-proven InfiniBand-compliant semiconductor products that deliver industry-leading performance and capabilities, which we believe is demonstrated by the performance, efficiency and scalability of clustered computing and storage systems that incorporate our products. In addition to supporting InfiniBand, our next generation of products also support the industry standard Ethernet interconnect specification, which we believe will expand our total addressable market. We are a fabless semiconductor company that provides high-performance interconnect solutions based on semiconductor integrated circuits, or ICs. We design, develop and market adapter and switch ICs, both of which are silicon devices that provide high performance connectivity. We also offer adapter cards that incorporate our ICs. These ICs are added to servers, storage, communications infrastructure equipment and embedded systems by either integrating them directly on circuit boards or inserting adapter cards into slots on the circuit board. We have established significant expertise with high-performance interconnect solutions from successfully developing and implementing multiple generations of our products. Our expertise enables us to develop and deliver products that serve as building blocks for creating reliable and scalable InfiniBand and Ethernet solutions with leading performance at significantly lower cost than products based on alternative interconnect solutions. We compete with other providers of semiconductor-based high performance interconnect products based on InfiniBand, Ethernet, Fibre Channel and proprietary technologies. Our products are incorporated into servers produced by the five largest server vendors: IBM, Hewlett-Packard, Dell, Sun Microsystems and Fujitsu-Siemens. These server vendors collectively shipped the majority of servers in 2005, according to the industry research firm IDC. We also supply leading storage and communications infrastructure equipment vendors such as Cisco Systems, LSI Logic, Network Appliance, SilverStorm Technologies, which was recently acquired by QLogic Corporation, and Voltaire. Additionally, our products are used by GE Fanuc, Mercury Computers, SeaChange International and other vendors of embedded systems. Since we introduced our first product in 2001, we have shipped products containing approximately 1.7 million InfiniBand ports, which we believe demonstrates an established customer and end-user base for our products. The increasing reliance of enterprises on information technology, or IT, for their everyday operations is fueling the demand for computing, storage and communications infrastructure systems that can process, store and transmit large volumes of data. High-performance interconnect solutions play a key role in enabling high-speed transmission of data and sharing of resources among systems. There are several trends and technological advances driving demand for high-performance interconnect solutions, including: Transition to clustered computing and storage using connections among multiple standard components; Transition to multiple and multi-core processors in servers; Enterprise data center infrastructure consolidation; and Increasing deployments of mission critical, latency (response time) sensitive applications. As a result of these trends and advances in computing, storage and communications infrastructure technology, the requirements on high-performance interconnect solutions have become more demanding. High-performance interconnect solutions are challenged to provide high bandwidth, low latency, reduced complexity, increased interconnect efficiency, reliability, stability and improved price/performance economics. Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED FEBRUARY 6, 2007 PRELIMINARY PROSPECTUS 6,000,000 Shares Ordinary Shares This is the initial public offering of our ordinary shares. We are selling all of the ordinary shares being sold in this offering. Prior to this offering, there has been no public market for our ordinary shares. The initial public offering price of our ordinary shares is expected to be between $14.00 and $16.00 per share. Our ordinary shares have been approved for quotation on The Nasdaq Global Market under the symbol MLNX, subject to official notice of issuance. We have granted the underwriters an option to purchase up to 900,000 additional ordinary shares from us to cover the over-allotment of shares. Investing in our ordinary shares involves a high degree of risk. See Risk Factors on page 7 of this prospectus. Underwriting Proceeds, Before Price to Discounts and Expenses, to Public Commissions Mellanox Per Share $ $ $ Total $ $ $ The underwriters expect to deliver the ordinary shares on or about , 2007. Neither the Securities and Exchange Commission nor any state securities commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Credit Suisse JPMorgan Thomas Weisel Partners LLC Jefferies Company, Inc. The date of this prospectus is , 2007. Table of Contents InfiniBand was developed to address these challenges. We believe that InfiniBand has significant advantages compared to alternative interconnect technologies. The InfiniBand standard was developed under the auspices of the InfiniBand Trade Association, or IBTA, which was founded in 1999 and is composed of leading IT vendors and hardware and software solution providers including Mellanox, Brocade, Cisco Systems, Fujitsu, Hewlett-Packard, Hitachi, IBM, Intel, LSI Logic, NEC, Network Appliance, QLogic Corporation, Sun Microsystems and Voltaire. While InfiniBand currently represents a small portion of the total interconnect market relative to established solutions such as Fibre Channel and Ethernet, InfiniBand products have achieved increasing market adoption, particularly in high-performance computing applications, and are expanding into mainstream financial, retail and other commercial enterprise data centers. We apply our strengths to enhance our position as a leading supplier of semiconductor-based, high-performance interconnect products. We consider our key strengths to include the following: We have expertise in developing high-performance interconnect solutions; We believe we are the leading merchant supplier of InfiniBand ICs with a multi-year competitive advantage; We have a comprehensive set of technical capabilities to deliver innovative and reliable products; and We have extensive relationships with our key OEM customers and many end users. We have used these strengths, along with our knowledge of InfiniBand, to design our innovative, next generation, high-performance solutions that also support the Ethernet interconnect standard. Our goal is to be the leading supplier of semiconductor-based, high-performance interconnect products for computing, storage and communications applications. To accomplish this goal, we intend to: Continue to develop leading, high-performance interconnect solutions; Facilitate and increase the continued adoption of InfiniBand; Expand our presence with existing server OEM customers; Broaden our customer base with storage, communications infrastructure and embedded systems OEMs; and Leverage our fabless business model to deliver strong financial performance. We also face several risks as we grow our business, including the need to generate and sustain higher revenues while maintaining reasonable cost and expense levels, the rate and extent of InfiniBand adoption, our reliance on a small number of customers for a significant portion of our sales and the cyclicality of the semiconductor industry in general. Our success in growing our business also depends on our ability to effectively compete, develop new products, enhance our existing products and protect our intellectual property. We also face risks associated with the outsourcing of our manufacturing and with our Israeli operations. If we are unable to adequately address these risks, our ability to grow our business will be negatively impacted. As of September 30, 2006, we had 148 full-time and 23 part-time employees located in the United States and Israel, including 94 in research and development, 25 in sales and marketing, 15 in general and administrative, 6 in operations and 8 in other administrative functions. The majority of our employees, four of our executive officers and one of our directors, who is also an executive officer, are located in Israel. We were incorporated under the laws of Israel in March 1999. Our principal executive offices in the United States are located at 2900 Stender Way, Santa Clara, California 95054, and our principal executive offices in Israel are located at Hermon Building, Yokneam, Israel 20692. Substantially all of our assets are located in Israel. Our telephone number in Santa Clara, California is (408) 970-3400, and our telephone number in Yokneam, Israel is +972-4-909-7200. Michael Gray is our agent for service of process in the United States, and is located at our principal executive offices in the United States. Our website address is www.mellanox.com. Information contained on our website is not a part of this prospectus and the inclusion of our website address in this prospectus is an inactive textual reference only. Mellanox , InfiniBridge , InfiniHost , InfiniPCI , InfiniRISC and InfiniScale are our registered trademarks. We have a trademark application pending to register ConnectX . Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of the respective holders. Table of Contents Mellanox Technologies is a fabless semiconductor company. We are a leading supplier of semiconductor-based interconnect products that facilitate high-performance data transmission. Our customers include leading server, storage, communications infrastructure equipment, and embedded systems vendors. InfiniBand Adapters InfiniBand Switches Blade COMMUNICATIONS Rack Optimized Servers INFRASTRUCTURE EMBEDDED SERVERS STORAGE EQUIPMENT SYSTEMS Table of Contents THE OFFERING Ordinary shares offered by us 6,000,000 shares. Over-allotment option 900,000 shares. Ordinary shares outstanding after this offering 29,997,725 shares. Use of proceeds We expect the net proceeds to us from this offering, after expenses, to be approximately $81.2 million. We intend to use the net proceeds of this offering to fund development of our products and for general corporate purposes, including working capital, sales and marketing activities, general and administrative matters and capital expenditures. We may also use a portion of the net proceeds to acquire or invest in complementary technologies, products or businesses or to obtain rights to such complementary technologies, products or businesses. There are no such transactions under consideration at this time. Nasdaq Global Market symbol MLNX.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001356709_cpg_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001356709_cpg_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a1f3e47c2af3f5be6bc3401dbc822f6821adba63
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001356709_cpg_prospectus_summary.txt
@@ -0,0 +1 @@
+Prospectus Summary 1
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001356712_scranton_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001356712_scranton_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a1f3e47c2af3f5be6bc3401dbc822f6821adba63
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001356712_scranton_prospectus_summary.txt
@@ -0,0 +1 @@
+Prospectus Summary 1
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001356713_azek_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001356713_azek_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a1f3e47c2af3f5be6bc3401dbc822f6821adba63
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001356713_azek_prospectus_summary.txt
@@ -0,0 +1 @@
+Prospectus Summary 1
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001356715_santana_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001356715_santana_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a1f3e47c2af3f5be6bc3401dbc822f6821adba63
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001356715_santana_prospectus_summary.txt
@@ -0,0 +1 @@
+Prospectus Summary 1
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001356719_procell_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001356719_procell_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a1f3e47c2af3f5be6bc3401dbc822f6821adba63
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001356719_procell_prospectus_summary.txt
@@ -0,0 +1 @@
+Prospectus Summary 1
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001356720_cpg-sub-i_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001356720_cpg-sub-i_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a1f3e47c2af3f5be6bc3401dbc822f6821adba63
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001356720_cpg-sub-i_prospectus_summary.txt
@@ -0,0 +1 @@
+Prospectus Summary 1
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001356721_vycom-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001356721_vycom-corp_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a1f3e47c2af3f5be6bc3401dbc822f6821adba63
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001356721_vycom-corp_prospectus_summary.txt
@@ -0,0 +1 @@
+Prospectus Summary 1
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001356722_sanatec_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001356722_sanatec_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a1f3e47c2af3f5be6bc3401dbc822f6821adba63
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001356722_sanatec_prospectus_summary.txt
@@ -0,0 +1 @@
+Prospectus Summary 1
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001356949_houston_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001356949_houston_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3b8ff290bfc50680e6d6153ddabe11832542c382
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001356949_houston_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. Because this is only a summary, it does not contain all the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, especially Risk Factors beginning on page 9 and our consolidated financial statements and related notes, before making an investment decision. Our Business We are one of the largest distributors of specialty wire and cable and related services to the U.S. electrical distribution market. In 2006, we had over 2,700 customers in over 8,000 individual locations, including virtually all of the top 200 electrical distributors in the U.S. We have strong relationships with leading wire and cable manufacturers and provide them with efficient access to the fragmented electrical distribution market. During 2006, we distributed approximately 22,000 stock-keeping units ( SKUs ) from eleven strategically located distribution centers in ten states. We are focused on providing our electrical distributor customers with a single-source solution for specialty wire and cable and related services by offering a large selection of in-stock items, exceptional customer service and high levels of product expertise. We offer products in most categories of specialty wire and cable, including: continuous and interlocked armor cable (cable encapsulated in either a seamless or interlocked aluminum protective sheath); control and power cable (single or multiple conductor industrial cable); electronic wire and cable (computer, audio and signal cable); flexible and portable cords (flexible, heavy duty industrial cable); instrumentation and thermocouple cable (cables used for transmitting signals for instruments and heat sensing devices); lead and high temperature cable (single conductor cable used for low or high temperature applications); medium voltage cable (cables used for applications between 2,001 volts and 35,000 volts); and premise and category wire and cable (cable used for home and high speed data applications). We also offer private branded products, including our LifeGuard low-smoke, zero-halogen cable. Low-smoke, zero halogen products are made with compounds that produce no halogen gases and very little smoke while under combustion. In addition to our product offerings, we provide comprehensive value-added services including: standard same day shipment from our extensive inventory and distribution network; application engineering support through our knowledgeable sales and technical support staff; custom cutting of wire and cable to exact specifications; inventory management programs that provide job-specific asset management and just-in-time delivery; job-site delivery and logistics support; 24/7/365 customer service provided by our own employees; and customized internet-based ordering capabilities. We were founded in 1975 and have a long history of reliable customer service, broad product selection and strong product expertise. In 1987, we completed our first initial public offering and were subsequently purchased in 1989 by ALLTEL Corporation. In 1997, we were purchased by an investment fund affiliated with Code Hennessy & Simmons LLC. In June 2006, we completed our second initial public offering. During our 31 year history, we have successfully expanded our business from one original location in Houston, Texas to eleven strategic locations nationwide. HOUSTON WIRE & CABLE COMPANY (Exact name of registrant as specified in its charter) Delaware 5063 36-4151663 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification No.) 10201 North Loop East Houston, TX 77029 (713) 609-2100 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) In 2000, we acquired our largest direct competitor, the Futronix division of Kent Electronics Corporation. In 2003, we implemented a new sales and marketing strategy to expand our sales force, introduce new private branded products and work in concert with our distributor customers to generate demand from end-users in our targeted markets, including the utility, industrial and infrastructure markets. As part of this initiative, we are partnering with our distributor customers and strengthening our relationships with project and specifying engineers to stimulate demand for our specialty wire and cable. With this sales and marketing strategy, we have achieved strong financial and operating growth. Our revenue has increased from $149.1 million in 2003 to $323.5 million in 2006, representing a compound annual growth rate ( CAGR ) of 29.5%. During the same period, our operating income increased from $4.7 million to $53.1 million, representing a CAGR of 124.4%. Recent Developments In June 2006, we completed an initial public offering in which we sold 4,250,000 shares of common stock, and selling stockholders sold 5,525,000 shares, at a price of $13.00 per share. We used our portion of the net proceeds from the offering to repay outstanding indebtedness. On March 14, 2007, we reported our fourth quarter and fiscal year results for 2006. For the quarter ended December 31, 2006, we generated revenue of $82.9 million, operating income of $13.7 million and net income per share of $0.39 (both on a basic and diluted basis), representing growth of 26%, 78% and 50%, respectively, over our results for fourth quarter 2005. For the year ended December 31, 2006, we generated revenue of $323.5 million, operating income of $53.1 million and net income per share of $1.62 (diluted), representing growth of 51%, 133% and 116%, respectively, over our results for 2005. Industry Overview We operate within the U.S. electrical distribution market, which Electrical Wholesaling magazine estimates had industry-wide sales of $84.4 billion in 2006 and expects to grow 10.5% to $93.3 billion in 2007. Electrical distribution has historically been a growing segment of the industrial distribution industry, with a CAGR of 4.8% since 1985. Within the electrical distribution industry, our business focuses on specialty wire and cable. According to the U.S. Census Bureau, the total value of manufacturers shipments of specialty wire and cable totaled approximately $7.8 billion in 2005. The sales channel for specialty wire and cable depends on a number of factors, including order type, product selection, service level expectations, inventory management and delivery requirements. The greater the need for customization and high service levels, the more likely the transaction will involve a specialty wire and cable distributor such as us. In certain circumstances, manufacturers of specialty wire and cable sell their products directly to the end-user. These transactions typically consist of a bulk volume of wire and cable, involve little or no customized services and may require long lead times between order and delivery. More frequently, an electrical distributor serves as the sales channel directly between the manufacturer and the contractor or end-user. The typical sale by an electrical distributor may involve a commonly purchased item that is specifically designated by the end-user and shipped from stock along with a variety of other electrical products. For customers requiring highly specialized wire and cable, custom cut lengths, technical expertise, short lead times or additional services, electrical distributors will generally source products from a specialty wire and cable distributor. We believe that the increasing complexity of specialty wire and cable specifications and the growing need for just-in-time delivery and logistics support will spur further growth in purchases through specialty wire and cable distributors. Our business is driven, in part, by the strength, growth prospects and activity in the end-markets in which our products are used. We have targeted three of these markets the utility, industrial and infrastructure markets in our recent sales and marketing initiatives. Charles A. Sorrentino President and Chief Executive Officer Houston Wire & Cable Company 10201 North Loop East Houston, TX 77029 (713) 609-2100 (Name, address, including zip code, and telephone number, including area code, of agent for service) Utility Market. The utility market includes large investor-owned utilities, rural cooperatives and municipal power authorities. We are positioned to benefit from expenditures for new power generation needed to satisfy a growing population with increasing energy demands and to comply with federal mandates to reduce toxic outputs from power generating facilities. Industrial Market. The industrial market is one of the largest segments of the U.S. economy, comprised of a diverse base of manufacturing and production companies. According to a January 2007 Industrial Information Resources report, spending on industrial projects in the U.S. during 2007 is expected to total $110 billion. We help our electrical distributor customers provide specialty wire and cable to industrial companies with large, complex plant maintenance, repair and operations ( MRO ) requirements and for new capital projects. Infrastructure Market. We believe that significant infrastructure improvements and additions will be needed over the next several years. For example, the Congressional Budget Office anticipates an increase in spending over the next two decades in the U.S. for drinking water systems and wastewater infrastructure and estimates that for the years 2000 to 2019 annual costs for investment will average between $24.6 billion and $41.0 billion. We are assisting our customers to further penetrate the engineering and construction market by working with application engineers to drive specialty wire and cable specifications in large construction projects. LifeGuard Market Opportunity. We have developed and market select private label products, including LifeGuard , a low-smoke, zero-halogen cable product line. We believe that the market for low-smoke, zero-halogen products is in its infancy in the U.S. and represents a significant market opportunity. Low-smoke, zero-halogen cables, which have been used extensively in Europe and Asia for many years, provide significant flame resistance, minimal smoke production and substantially reduced toxicity and corrosiveness when burned, as compared to traditional wire and cable. Our LifeGuard cable is designed for applications where a high degree of equipment protection and safety and environmental protection is required. We sell our LifeGuard product across most of our end-markets. Competitive Strengths We are a nationally recognized, full-service distributor of specialty wire and cable and related services. Through eleven strategic locations across the United States, we provide same-day shipment to a broad customer base including, among others, Border States Electric Supply, Consolidated Electrical Distributors, Inc., GE Supply Company (acquired by Rexel, Inc.), Graybar Electric Company, Inc., HD Supply, Inc. (formerly Hughes Supply, Inc.), Mayer Electric Supply Company Inc., Rexel, Inc., The Reynolds Company, Sonepar USA and WESCO Distribution, Inc. We operate in a highly fragmented market, and we believe that the following competitive strengths have helped us achieve our leading position in the market and a strong reputation among manufacturers and customers: Comprehensive Value-Added Services and Product Expertise. Our business model focuses on providing our customers with comprehensive value-added services and high levels of expertise across a broad range of our suppliers products. Our services are designed to provide maximum efficiency and flexibility for our customers and include extensive product knowledge and application engineering support, inventory management, custom cut capabilities and 24/7/365 customer service. We help our customers achieve efficient and effective procurement of specialty wire and cable on terms that typically include short lead times and the ability to ship a high percentage of the products ordered within 24 hours. Strength and Tenure of Specialized Sales Force. We have invested in developing a sales force of highly knowledgeable professionals with considerable industry expertise. As of December 31, 2006, our sales force consisted of 47 field sales personnel and 88 inside sales and technical support personnel. Copies to: Robert J. Minkus Larry A. Barden Richard T. Miller Robert L. Verigan Schiff Hardin LLP Sidley Austin LLP 6600 Sears Tower 1 S. Dearborn Street Chicago, Illinois 60606 Chicago, Illinois 60603 Our field sales force has increased in size significantly since 2003 and is aligned according to targeted industries, geography and select customer relationships. First-Mover Advantage with LifeGuard Cable. We believe we have established a first-mover advantage in the U.S. with our LifeGuard line of low-smoke, zero-halogen cable products. We led the development and marketing of low-smoke, zero-halogen cable in the U.S. Since its introduction in 2003, our LifeGuard line of cable has been accepted for use by over 300 end-users, including leading engineering and construction firms, and is increasingly included in specifications for utility, data center and industrial related projects. Operating Efficiency. Our ability to offer a high level of customer service is due in part to our highly efficient and effective operations that leverage centralized back-office administration and purchasing, a scalable information technology platform, automated warehouse operations and electronic product tracking. Efficient purchasing and management of our products have helped us increase our average inventory turns from 3.18 in 2001 to 4.46 in 2006 and improved our gross margin during the same period from 22.8% to 28.5%. In addition, by leveraging our national infrastructure and implementing back-office initiatives, we have decreased our operating expenses as a percentage of revenue from 18.0% in 2001 to 12.1% in 2006. Extensive Product Offering and Strong Supplier Relationships. In 2006, we sold approximately 22,000 SKUs, representing a broad and deep selection of high-quality specialty wire and cable. Our strategy is to maintain a wide breadth and depth of inventory, allowing us to ship a high percentage of the products ordered within 24 hours. We believe that our vast product offering and value-added services are significant factors in attracting and retaining many of our customers. In addition, we have strong, often decades-long, relationships with large wire and cable manufacturers such as Belden CDT, General Cable Corp., Nexans, Service Wire Company and Southwire Company. Strong and Diversified Customer Base. During 2006, we served over 2,700 customers, including virtually all of the top 200 electrical distributors in the U.S. We have experienced exceptional customer retention, and we believe that we are the primary supplier of specialty wire and cable to a majority of our customers. Each of our top ten customers in 2006 (or their predecessors) has purchased products from us every year over the last decade. Experienced Management Team. Our highly experienced team of executive officers and key management has an average tenure with us of over 14 years. This continuity strengthens our relationships with our customers and suppliers and enables us to provide our customers with a high level of product and industry expertise.
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+PROSPECTUS SUMMARY This summary highlights selected information described more fully elsewhere, or incorporated by reference, in this prospectus and may not contain all of the information that is important to you. You should read the entire prospectus, including Risk Factors and Cautionary Note Regarding Forward-Looking Statements, and the information incorporated by reference herein before making an investment decision with respect to our common shares. References in this prospectus to the terms we, us, our company or other similar terms mean Security Capital Assurance Ltd, which we refer to as SCA, and its consolidated subsidiaries unless the context otherwise requires. Unless otherwise indicated, all figures assume that the underwriters do not exercise their option to purchase additional common shares from the selling shareholder. Our Company We are a Bermuda-domiciled holding company whose operating subsidiaries provide financial guaranty insurance, reinsurance, and other credit enhancement products to the public finance and structured finance markets throughout the United States and internationally. We were formed on March 17, 2006 by XL Capital Ltd ( XL Capital ) in anticipation of contributing its ownership interests in its financial guarantee insurance and financial guarantee reinsurance operating businesses to us and selling an interest in us to the public through an initial public offering of our common shares (the IPO ). The contribution of the businesses from XL Capital to us occurred on July 1, 2006 and the IPO was consummated on August 4, 2006. As a result of the IPO, XL Capital owned approximately 63% of our voting common shares, although there are certain limitations on XL Capital s voting rights with respect to the common shares it owns. The aforementioned operating businesses consisted of: (i) XL Capital Assurance Inc. ( XLCA ) and its wholly owned subsidiary, XL Capital Assurance (U.K.) Limited ( XLCA-UK ) and (ii) XL Financial Assurance Ltd. ( XLFA ). Prior to the IPO, XLCA was an indirect wholly owned subsidiary of XL Capital and substantially all of XLFA was indirectly owned by XL Capital, except for a $54.0 million preferred stock interest which is owned by Financial Security Assurance Holdings Ltd. ( FSAH ), which was paid down to $39.0 million on March 30, 2007. XLCA is an insurance company domiciled in the State of New York and is licensed to conduct financial guarantee insurance business throughout all 50 of the United States, as well as in the Commonwealth of Puerto Rico, the District of Columbia and the U.S. Virgin Islands. In addition, XLCA through its wholly owned subsidiary, XLCA-UK, which is an insurance company organized under the laws of England, is permitted to conduct business in England, Ireland, Spain, France, Portugal, Italy, The Netherlands, Greece, Norway and Germany. To facilitate distribution of their products, XLCA maintains a branch office abroad in Singapore and XLCA-UK maintains a branch office in Madrid. In addition, XLCA has an office in California. XLCA and XLCA-UK are primarily engaged in providing credit protection through the issuance of financial guarantee insurance policies and credit default swaps. XLCA began writing direct financial guarantee insurance in 2000. XLFA is incorporated in Bermuda and is registered as a Class 3 insurer under The Insurance Act of 1978. XLFA is primarily engaged in the business of providing reinsurance of financial guarantee insurance policies and credit default swaps issued by XLCA, subsidiaries of FSAH and, on a limited basis, certain other non-affiliated triple-A-rated financial guarantee primary insurance companies. XLFA began providing financial guarantee reinsurance in 1999. Our insurance and reinsurance subsidiaries are rated Aaa by Moody s Investors Service, Inc., which we refer to as Moody s, AAA by Standard & Poor s, a division of the McGraw-Hill Companies, Inc., which we refer to as S&P, and AAA by Fitch, Inc., which we refer to as Fitch. Each of these ratings is the highest applicable rating available from that agency. Ratings are a measure of our subsidiaries ability to meet obligations to their policyholders and not an evaluation of SCA or an investment in SCA s securities, including the shares of common stock offered hereby. XL Capital is a public company whose shares are listed on the New York Stock Exchange under the symbol XL. XL Capital, through its operating subsidiaries, is a leading provider of insurance and reinsurance coverages and financial products and services to industrial, commercial and professional service firms, insurance companies and other enterprises on a worldwide basis. Competitive Strengths We believe that our competitive strengths will enable us to capitalize on opportunities in the credit enhancement and protection markets. These strengths include: Our Established Triple-A Franchise. We are one of six financial guarantors with triple-A ratings from Moody s, S&P and Fitch and the only financial guaranty reinsurer with triple-A ratings from Moody s, S&P and Fitch. In the principal market for financial guaranty insurance, typically there is either a requirement or strong commercial preference for triple-A-rated insurance policies. In the reinsurance market, a triple-A-rated reinsurer provides greater rating agency capital relief to the ceding insurer than a lower-rated reinsurer. Triple-A ratings and market acceptance are difficult and time-consuming to achieve in the financial guaranty industry. We believe that, in addition to our ratings, the market acceptance of our financial guarantees and our established track record in the financial guaranty industry allow us to compete effectively in our existing lines of business and will be advantageous to us as we enter new markets and expand our presence in existing ones. Our Focus on Risk-Adjusted Returns. We have a disciplined approach to underwriting that emphasizes risk-adjusted profitability over market share. Our approach is driven by client service without compromising our credit underwriting process. Our business is organized around integrated teams comprising transactors, credit and quantitative analysts, risk management professionals and attorneys. Our Diversified, High Quality Portfolio. We have a diversified, high-quality portfolio, comprised of $48.1 billion, $53.8 billion and $16.3 billion of consolidated net par outstanding (principal amount of guaranteed obligations net of amounts ceded to reinsurers) in the public finance, structured finance and international finance, respectively, as of March 31, 2007. Our reinsurance business gives us access to credit exposures that we may not otherwise have the opportunity to obtain through our primary insurance business. As of March 31, 2007, the weighted average credit rating of the obligations that we guaranty was A+. Our Acceptance by Fixed-Income Oriented Institutions. Our customers include a broad base of fixed-income oriented institutions. We provide an opportunity for investors to diversify their credit risk exposure to the other, larger financial guarantors. Our Experienced Management, Underwriting Team and Board. Our senior management has an average of more than 19 years experience in the insurance, reinsurance and credit and financial guaranty markets. We also have a team of 9 senior underwriters with an average of approximately 22 years of financial guaranty or similar credit experience. Our Board of Directors also has substantial financial services industry experience. Our Global Presence. We provide credit enhancement products to our customers in North America, Europe, Asia, Latin America and other parts of the world through our operations in the United States, the United Kingdom, Bermuda, Spain and Singapore. Through our U.K.-licensed subsidiary, we are able to write business in the U.K. and also in most European countries using a designated authorization known as passporting. Our range of licenses allows us to participate broadly in the global credit enhancement market. Corporate Strategy Our goals are to provide new credit capacity to investors in triple-A-guaranteed securities, profitably increase our share of the financial guaranty market across all major product lines and become an industry leader in return on equity. We plan to achieve these goals through the following strategies: Maintain Triple-A Financial Strength. Maintaining our triple-A financial strength ratings is paramount to our overall strategy. We plan to achieve this through disciplined risk selection, prudent operating and financial leverage and conservative investment guidelines. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Focus on Profitable Growth. We see a growing need for our credit enhancement and protection products due to increasing long-term demand, as well as the desire of financial intermediaries, such as banks and other market participants, to diversify their credit risk exposure to triple-A-rated financial guarantors. We plan to focus on profitability by increasing penetration in our target product and geographic markets, selecting business based on specific risk-adjusted financial and operating targets such as return on equity and the effect of such business on net income. Leverage Existing Platform. We have made significant investments in staff and infrastructure to support future growth. As a result, we believe that we have significant capacity to increase the number and size of the transactions that we underwrite using our existing platform and personnel, thereby reducing our expense ratio and increasing our profit margins over time. Dual Insurance and Reinsurance Strategy. While primary insurance comprises the vast majority of our business, we also intend to continue to provide triple-A-rated reinsurance on a selective basis. Triple-A-rated reinsurance capacity is scarce in the industry. As a result, we believe that we can complement our insurance business by focusing on sectors of the market with favorable opportunities for us to write reinsurance, particularly where it might be inefficient for us to access such opportunities through our primary insurance business. Attract and Retain Top Talent. Our ability to continue to attract and retain top talent is critical to executing our strategy successfully. As we expand our business, we will continue to identify individuals who adhere to the highest professional standards and who share our dedication to superior performance and building long-term shareholder value. Risks Relating to Our Business and this Offering We face certain risks that you should also consider. These risks could materially affect our ability to implement our strategy and include: Possibility of Negative Ratings Action. The maintenance of our triple-A ratings is essential for us to continue to operate in the triple-A financial guaranty insurance and reinsurance markets. Any decrease in the ratings of either our insurance or our reinsurance subsidiaries below current levels by any of S&P, Moody s or Fitch would have a material adverse effect on our ability to compete with other large monoline financial guaranty companies, which are our principal competitors, all of which currently have triple-A ratings from S&P, Moody s and Fitch. Risks Relating to Our Competitive Standing. The financial guaranty industry is highly competitive. The principal sources of direct and indirect competition are other financial guaranty insurance companies, most of which have significantly more resources than we do and have been in the industry for longer than we have. Our ability to compete with other financial guarantors is affected by the fact that our guaranteed bonds in certain product lines generally have not traded at parity, and in the future may not trade at parity, with those of our principal competitors in these lines of business. In particular, our guaranteed bonds in certain markets, in particular the fixed rate municipal market, trade at a small discount to those of our principal competitors. We believe that this trading differential has been caused by our short operating track record and small size compared to that of our competitors, as well as a continued perception among some investors of a ratings linkage between us and XL Capital. Failure on our part to achieve trading parity with more established financial guarantors with respect to our guaranteed bonds in any particular market could make our guarantees in that market somewhat less attractive, possibly affecting our profitability. Sufficient Capital Resources. To the extent that our existing capital is insufficient to meet our ongoing capital requirements or cover losses, we may need to raise additional funds through financings or curtail our growth and reduce our insured exposure. If we cannot obtain adequate capital on favorable terms or at all, our business, operating results and financial condition could be adversely affected. In addition, as an offshore reinsurer, our subsidiary XLFA is required to post collateral security with respect to any reinsurance liabilities that it assumes from ceding insurers domiciled in the United States in order for U.S. ceding companies to obtain full statutory and regulatory credit for our reinsurance. XLFA AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 satisfies such statutory requirements by providing to primary insurers letters of credit issued under our credit facility. To the extent that we are required to post additional security in the future, we may require additional letter of credit capacity and we cannot assure you that we will be able to obtain such additional capacity or arrange for other types of security on commercially acceptable terms. Adequacy of Loss Reserves. We establish loss and loss adjustment expense reserves based on estimates involving actuarial and statistical projections of the ultimate settlement and administration costs of claims on the policies we write. If our loss reserves are at any time determined to be inadequate, we will be required to increase our loss reserves at the time of such determination. Such an increase would cause a corresponding increase in our liabilities and a reduction in our profitability, which could have a material adverse effect on our business. Risks Relating to General Economic Conditions. General economic factors, including fluctuations in interest rates, as well as terrorist acts or natural or other catastrophes, may adversely affect our loss experience or the demand for our products. Our loss experience could be materially adversely affected by extended national or regional economic recessions, business failures, rising unemployment rates, terrorist attacks, natural or other catastrophic events such as hurricanes and earthquakes, acts of war, or combinations of such factors. Risk Associated with a Recently Proposed Statement of Financial Accounting Standards ( SFAS ) Pertaining to Accounting for Financial Guarantee Insurance Contracts. On April 18, 2007, the Financial Accounting Standards Board ( FASB ) issued Proposed SFAS, Accounting for Financial Guarantee Insurance Contracts an interpretation of FASB Statement No. 60. This proposed Statement would clarify how FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises, applies to financial guarantee insurance contracts. This proposed Statement, among other things, would change current industry practices with respect to the recognition of premium revenue and claim liabilities. In addition, this proposed Statement would require that the measurement of the initial deferred premium revenue (liability) be the present value of the contractual premium due pursuant to the terms of the financial guarantee insurance contract, thereby changing current industry accounting practice with respect to insurance contracts priced on an installment basis by requiring that the present value of all contractual premiums due under such contracts, currently or in the future, be recorded on the company s balance sheet as premiums receivable. Under current industry practice such premiums are not reflected on the balance sheet. We expect that the initial effect of applying the revenue recognition provisions of the Statement as currently proposed would be material to our financial statements and that implementation of the proposed guidance in regard to the recognition of claim liabilities would cause us to de-recognize our reserves for unallocated losses and loss adjustment expenses and preclude us from providing such reserves in the future. The FASB has indicated that the final Statement is expected to be issued in the third quarter of 2007 and become effective for financial statements issued for fiscal years beginning after December 15, 2007. We are continuing to evaluate the effect of this proposed Statement on our financial statements. For further information about the proposed Statement, see our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, which is incorporated by reference in this prospectus. Risks Relating to Potential Conflicts of Interest with XL Capital. Questions relating to conflicts of interest may arise between us and XL Capital in a number of areas. Three of our directors, each of whom was nominated to our Board of Directors by XL Capital, are officers or directors of XL Capital, including the chairman of our Board of Directors, who is also the chairman of the board of directors of each of XL Capital and Primus Guaranty Ltd. Until XL Capital s ownership of our then-outstanding common shares is first reduced to 35% or less, XL Capital will have the right, pursuant to the transition agreement, to nominate such number of nominees for director as would equal one nominee less than a majority of the nominees for director. Cetain of these directors own significant numbers of XL Capital ordinary shares, and options to purchase XL Capital ordinary shares, and certain of them participate in XL Capital pension plans. Ownership interests of our directors or officers in XL Capital ordinary shares and participation in XL Capital pension plans, or service as a director or officer of both our company and XL Capital, could give rise to potential conflicts of interest when a director or officer is faced with a decision that could have different implications for the two companies. These potential conflicts could arise, for example, over matters such as the desirability of an acquisition opportunity, employee retention SECURITY CAPITAL ASSURANCE LTD (Exact name of registrant as specified in its charter) Bermuda (State or other jurisdiction of incorporation or organization) 6351 (Primary Standard Industrial Classification Code Number) Not Applicable (I.R.S. Employer Identification Number) One Bermudiana Road Hamilton HM 11, Bermuda (441) 292-7448 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) CT Corporation System 111 Eighth Avenue New York, New York 10011 (212) 590-9200 (Name, address, including zip code, and telephone number, including area code, of agent for service) Our principal executive offices are located at One Bermudiana Road, Hamilton HM11, Bermuda. Our telephone number is (441) 294-7448. Our website address is www.scafg.com. The information contained on our website is not incorporated by reference into, or otherwise included in, this prospectus. You can also obtain additional information about us in the reports and other documents incorporated by reference in this prospectus. See Where to Find More Information and Incorporation of Certain Documents by Reference in this prospectus. Copies to: Gerard M. Meistrell, Esq. Cahill Gordon & Reindel LLP 80 Pine Street New York, New York 10005 (212) 701-3000 Lee A. Meyerson, Esq. Simpson Thacher & Bartlett LLP 425 Lexington Avenue New York, New York 10017 (212) 455-2000 (1) This number does not include any common shares that may be sold by the selling shareholder, XLI, to the underwriters upon the exercise by the underwriters of their option to purchase additional common shares from the selling shareholder. If the option to purchase additional common shares is exercised in full, the selling shareholder will sell an additional 1,452,003 common shares. Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. (1) These ratios are used by management in order to compare our performance to benchmarks commonly used by rating agencies and analysts that monitor the insurance industry. (2) Represents net losses and loss adjustment expenses divided by net premiums earned. (3) Represents operating expenses and acquisition costs, net divided by net premiums earned. (4) Represents net losses and loss adjustment expenses, operating expenses and acquisition costs, net divided by net premiums earned. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] (1) Adjusted Gross Premiums is a non-GAAP measure of new business production that management uses to evaluate our business because it provides comparability between upfront premiums and installment premiums, unlike GAAP total premiums written. Adjusted Gross Premiums for any period equals the sum of: (i) upfront premiums written in such period, (ii) current installment premiums due on business written in such period and (iii) expected future installment premiums on contracts written during such period that remain in force and for which there is a binding obligation on the part of the insured to pay the future installments, discounted at 7%. The 7% discount rate was established when our subsidiaries first started reporting Adjusted Gross Premiums based upon the view that 7% was the appropriate discount for these future premiums and that rate has not been changed in order to preserve comparability between and among periods. This measure adjusts for the fact, as described above, that upfront premiums are recorded in full as total premiums written when written but future installment premiums are not. In general, the only contractual provisions that would adversely affect the insured s obligation to pay such future installment premiums are early termination, prepayments and adjustments based upon gross par outstanding. Future installment premiums can be negatively affected by prepayments and refundings, including accelerated prepayments, early terminations, credit losses or other factors impacting our in-force book of business. Our estimate of such circumstances is reflected in the estimate of future installment premiums written and assumed included in the calculation of Adjusted Gross Premiums. Management uses this measure to review trends in new business written because it views this measure as providing comparability between business written on an upfront premium basis and business written on an installment basis. This measure is viewed by management as an essential component of information necessary to assess forward-looking earnings potential, which is substantially dependent on the size of our in-force book of business. Management also compares our Adjusted Gross Premiums production to industry figures on a quarterly basis and uses this measure to assess employee productivity, as well as our market share The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. and competitive position. Our aggregate compensation is determined within the context of our compensation plans taking into consideration certain unique aspects of our business, including its start up nature, and has been based upon several key performance factors, including Adjusted Gross Premiums production. Allocation of such compensation to individual employees is based upon similar key performance criteria. In addition to presenting total premiums written, we believe that disclosure of Adjusted Gross Premiums enables investors and other users of our financial information to analyze our performance in a manner similar to the way in which management analyzes performance. In this regard, we believe that providing only a U.S. GAAP presentation of gross premiums written makes it more difficult for users of our financial information to evaluate our underlying business. Also, we believe that analysts, investors and rating agencies who follow us and our subsidiaries include these items in their analyses for the same reasons, and they request that we and our subsidiaries provide this non-GAAP financial information on a regular basis. See Management s Discussion and Analysis of Financial Condition and Results of Operations Overview Key Factors Affecting Profitability included in our Annual Report on Form 10-K for the year ended December 31, 2006. The following is a reconciliation of total premiums written to Adjusted Gross Premiums. Total premiums written is the most directly comparable GAAP financial measure. (U.S dollars in millions) Years ended Ended December 31, Three Months Ended March 31, 2004 2005 2006 2006 2007 Total upfront premiums written $ 166.4 $ 163.8 $ 278.3 $ 52.4 $ 72.9 Total installment premiums written 110.2 121.6 130.7 29.8 32.1 Total premiums written 276.6 285.4 409.0 82.2 105.0 Present value of estimated future installment premiums written and assumed on contracts issued in the current period, discounted at 7% 18.4 110.4 147.1 28.1 33.9 Adjusted Gross Premiums $ 295.0 $ 395.8 $ 556.1 $ 110.3 $ 138.9
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. Because it is a summary, it does not contain all of the information that you should consider before investing in us. You should read the entire prospectus carefully, including the sections entitled "Risk Factors", "A Warning About Forward-Looking Statements" and the financial information contained in this prospectus before investing in us. Percentages of ownership presented on a fully diluted basis assume(1) the issuance of our common shares pursuant to (i) the exercise of 1,638,393 options we granted under our 2006 long-term equity compensation plan as described herein, and (ii) the exercise by Tower Group, Inc. of the warrants we granted to it to purchase 1,127,000 of our common shares; and (2) the issuance of 5,172 restricted common shares we granted under our 2006 long-term equity compensation plan to our non-employee directors as described herein. Overview We are a Bermuda holding company organized to provide property and casualty insurance and reinsurance business solutions, products and services primarily to small insurance companies and program underwriting agents in the United States. We were incorporated in November 2005 to take advantage of opportunities that we believe exist in the insurance and reinsurance industry for traditional quota share reinsurance, insurance risk-sharing and program business as well as insurance company services that can be purchased on a stand-alone, or unbundled basis, to small insurance companies and program underwriting agents. Tower Group, Inc., a Delaware corporation, was our sponsor and is currently our largest customer for our reinsurance and risk-sharing products. Formed in 1990, Tower is a publicly traded insurance holding company listed on the Nasdaq Global Select Market and headquartered in New York. It offers property and casualty insurance products and services through its insurance company subsidiaries and insurance service subsidiaries to small to mid-sized businesses and to individuals in New York, New Jersey, Massachusetts, New Hampshire and Maine. Reinsurance Reinsurance is an arrangement by which one insurance company, called the reinsurer, agrees to indemnify another insurance (or reinsurance) company, called the ceding company, against all or a portion of the insurance (or reinsurance) risks underwritten by the ceding company under one or more policies. As part of our reinsurance solutions, we primarily focus on offering traditional quota share reinsurance to insurance companies with limited capital base, which is the amount of capital against which they can write business, to enable these companies to overcome this limitation. We refer to traditional quota share reinsurance as a type of reinsurance whereby a reinsurer provides reinsurance coverage to an insurance company on a pro rata basis based on a ceding percentage without any provisions to limit meaningful losses within the contractual limits. Prior to spring of 2005, as an alternative to traditional quota share reinsurance, many reinsurers offered finite reinsurance which, according to the National Association of Insurance Commissioners, or the NAIC, is a type of reinsurance that transfers a finite or limited amount of risk to the reinsurer, whereby risk is reduced through accounting or financial methods, along with the actual transfer of economic risk. In the spring of 2005, various regulatory agencies began to scrutinize whether certain finite quota share reinsurance agreements contained a sufficient level of risk transfer to qualify as reinsurance under applicable accounting principles. We believe that this scrutiny has reduced the market for finite quota share reinsurance and is creating a greater demand for traditional quota share reinsurance. We offer traditional quota share reinsurance and, to a lesser extent, other ancillary reinsurance coverage through CastlePoint Re, our Bermuda reinsurance company subsidiary. Our primary target market is mainly small insurance companies with surplus of less than $100 million that underwrite commercial and personal lines policies with low to moderate hazard risks. Each of CastlePoint Re and CastlePoint Insurance Company has received a Financial Strength rating of "A-" (Excellent) from A.M. Best Company, Inc., which is the fourth highest of fifteen rating levels and indicates A.M. Best's opinion of our financial strength and ability to meet ongoing obligations to our future policyholders. In CERTAIN IMPORTANT INFORMATION For your convenience, we have included below definitions of terms used in this prospectus that are specific to the business of CastlePoint. In addition, we have provided a Glossary, beginning on page G-1, of selected insurance, reinsurance and investment terms. In this prospectus: Unless the context suggests otherwise, "CastlePoint", "our company", "we", "us" or "our" refer to CastlePoint Holdings, Ltd. and its subsidiaries, which include CastlePoint Management Corp. ("CastlePoint Management"), a Delaware corporation and our program management company; CastlePoint Bermuda Holdings, Ltd. ("CastlePoint Bermuda Holdings"), our Bermuda intermediate holding company; CastlePoint Reinsurance Company, Ltd. ("CastlePoint Re"), our Bermuda reinsurance subsidiary; and CastlePoint Insurance Company, a New York corporation and our U.S. licensed insurance company. "CastlePoint Holdings" refers to CastlePoint Holdings, Ltd.; CastlePoint Management directly owns our financing subsidiaries, CastlePoint Management Statutory Trust I and CastlePoint Management Statutory Trust II, which we recently formed to facilitate the trust preferred financing we completed in December 2006; Unless the context suggests otherwise, "Tower" refers to Tower Group, Inc. and its subsidiaries, which includes Tower Insurance Company of New York, Tower National Insurance Company, Preserver Insurance Company, Mountain Valley Indemnity Company, North East Insurance Company and Tower Risk Management Corp.; "brokerage business" refers to broad classes of business that are underwritten on an individual policy basis by an insurance company's underwriting staff through wholesale and retail agents, and for which most or all of the services are provided by the insurance company as part of the overall product offering; "program business" refers to narrowly defined classes of business that are underwritten on an individual policy basis by program underwriting agents on behalf of insurance companies; "traditional program business" refers to blocks of program business in excess of $5 million in gross written premium that Tower historically has underwritten, consisting of non-auto related personal lines and the following commercial lines of business: retail stores and wholesale trades, commercial and residential real estate, restaurants, grocery stores, office and service industries and artisan contractors; "specialty program business" refers to (i) program business other than traditional program business and (ii) traditional program business that we and Tower agree will be deemed to be specialty program business; "insurance risk-sharing" refers to various risk sharing arrangements that are designed to provide client insurance companies or program underwriting agents the ability to access our insurance company and to share in the premiums and losses of the business subject to such arrangements. Insurance risk sharing can be structured as (i) "pooling" or (ii) "alternative insurance risk sharing"; "pooling" refers to a type of risk-sharing arrangement whereby our insurance company enters into an agreement with a client insurance company and shares in premiums and losses on a pro rata basis based upon an agreed upon percentage allocation of the business underwritten by us and such client insurance company; "alternative insurance risk sharing" refers to a type of insurance risk-sharing arrangement whereby our insurance company appoints a program underwriting agent that is affiliated with another insurance company to produce business that is underwritten by our insurance company. Our insurance company and an insurance company affiliated with such program underwriting agent then June 2007, A.M. Best placed the ratings of CastlePoint Re, CastlePoint Insurance Company and CastlePoint Holdings under review with negative implications; however, those existing ratings were subsequently affirmed by A.M. Best. See " Recent Developments" below. The maintenance of the assigned ratings depends upon CastlePoint Re and CastlePoint Insurance Company operating in a manner consistent with the business plan presented to A.M. Best. A.M. Best formally evaluates its Financial Strength ratings of insurance companies at least once every twelve months and monitors the performance of rated companies throughout the year. Insurance Risk-Sharing Solutions Insurance risk-sharing business refers to various risk-sharing arrangements that are designed to provide client insurance companies or program underwriting agents the ability to access our insurance company and to share in the premiums and losses of the business subject to such arrangements. In addition to providing traditional quota share reinsurance, we offer insurance risk-sharing solutions to insurance companies with a limited capital base by enabling them to transfer or cede premiums on a pro rata basis to the U.S. licensed insurance companies we own or plan to acquire and thereby expand their capacity to write premiums. With respect to the insurance risk-sharing solutions we plan to offer to Tower, as described below under " Our Agreements with Tower", the alternative insurance risk sharing agreements we have agreed to enter into with Tower, as described below, remain subject to regulatory approval. Our insurance risk-sharing solutions also allow insurance companies with inadequate ratings or limited licensing access to the higher rating and broad based licensing capabilities of our U.S. licensed insurance companies. We offer insurance risk-sharing solutions to customers writing policies with low to moderate hazard risks. Insurance risk sharing can be structured as pooling or alternative insurance risk sharing. Pooling refers to a type of risk-sharing arrangement whereby our insurance company enters into an agreement with a client insurance company and shares in premiums and losses on a pro rata basis based upon an agreed upon percentage allocation of the business underwritten by us and such client insurance company. Alternative insurance risk sharing refers to a type of insurance risk-sharing arrangement whereby our insurance company appoints a program underwriting agent that is affiliated with another insurance company to produce business that is underwritten by our insurance company. Our insurance company and an insurance company affiliated with such program underwriting agent then participate in the risk of such business, typically by reinsuring each other, usually on an aggregate excess of loss basis, above a certain loss ratio attachment point. A number of agreements are usually involved to implement these alternative risk-sharing arrangements, and we sometimes refer in this prospectus to this set of agreements collectively as the alternative insurance risk-sharing agreements. Reinsurance and Insurance Risk-Sharing Solutions for Tower and Other Larger Insurers We also offer traditional quota share and insurance risk-sharing solutions to other insurance companies with larger capital bases, such as Tower, that are seeking to manage their capital more efficiently by ceding risk to us to generate commission and fee income as well as to expand their capacity to write business in certain geographic areas. For the year ended December 31, 2006 and for the three months ended March 31, 2007, the reinsurance business we received from Tower represented approximately 96.2% and 72%, respectively, of our premium revenue. We expect to derive at least 70% or more of our reinsurance business and insurance business from Tower and its subsidiaries during our first two years of operation. Thereafter, we plan to further develop business opportunities from other distribution sources and reduce the percentage of business derived from Tower. Program Business In addition to providing risk-sharing solutions to insurance companies, we provide comprehensive business solutions, products and services to program underwriting agents that underwrite program business. Program business refers to narrowly defined classes of business that are underwritten on an individual policy basis by program underwriting agents on behalf of insurance companies. Program underwriting agents are insurance intermediaries that aggregate insurance business from retail and Underwriting expenses Ceding commission expense Other underwriting expenses Total underwriting expenses Total fixed maturity 48,175 48,084 (109 ) Short term ($ in thousands) Current federal and state income tax expense $ Expenses: Underwriting expenses Total expenses UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 participate in the risk of such business, typically by reinsuring each other, usually on an aggregate excess of loss basis, above a certain loss ratio attachment point; "traditional quota share reinsurance" refers to a type of reinsurance whereby a reinsurer provides reinsurance coverage to an insurance company on a pro-rata basis based on a ceding percentage without any provisions to limit meaningful losses within the contractual limits; and "program underwriting agent" refers to an insurance intermediary that aggregates business from retail and wholesale agents and manages business on behalf of insurance companies, including functions such as risk selection and underwriting, premium collection, policy form design and client service. In this prospectus, amounts are expressed in U.S. dollars and the financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"), except as otherwise indicated. wholesale agents and manage business on behalf of insurance companies. Their functions may include some or all of the following: risk selection, underwriting, premium collection, policy form and design, and client service. We believe that, after prolonged soft market conditions that ended in 2001, many insurance companies have either ceased or significantly reduced writing program business due to lack of profitability or reduced commissions paid to program underwriting agents. Despite improved profitability in recent years, which has attracted more insurers and reinsurers to support program business, we believe this market is still underserved and that program underwriting agents are seeking alternatives to increase their profit margins. In response to the market opportunities that we believe are available in program business and to differentiate ourselves from other insurance companies writing program business, we plan to offer a broad line of products to expand the range of program opportunity available in the marketplace. In addition, we plan to structure program business utilizing different approaches including assuming most of the underwriting risk through CastlePoint Insurance Company or another U.S. licensed insurance company we plan to acquire or through CastlePoint Re, as well as reinsuring a substantial amount of program business with third party reinsurers to generate commission income. We also plan to provide alternative risk transfer capability to program underwriting agents to enable them to participate in the underwriting risk on the business they produce. Lines of Business In connection with our reinsurance, insurance risk-sharing and program business, we plan to offer broad lines of insurance, including commercial package, fire and allied lines, commercial general liability, workers compensation, homeowners and personal dwellings, professional liability, commercial and personal inland marine and commercial and personal automobile. We also plan to offer a comprehensive set of insurance company services which can be purchased separately from our product offerings on an unbundled basis, including claims handling, policy administration, insurance technology and consulting services such as underwriting and claims audits, program design and reinsurance structuring. We believe that these services should facilitate marketing our insurance and reinsurance products and solutions to program underwriting agents, as well as generate fee income. Acquisitions of U.S. Licensed Insurance Companies To provide insurance risk-sharing and program business solutions, we have acquired CastlePoint Insurance Company, a U.S. licensed insurance company. We anticipate that CastlePoint Insurance Company will write insurance, on an admitted basis, in the states of New York and New Jersey, as well as in those states in which CastlePoint Insurance Company subsequently applies to become, and is approved as, a licensed insurer. Until we have broadly licensed U.S. insurance companies, Tower's insurance companies are issuing policies in those states where we do not have licenses for the brokerage business, traditional program business, specialty program business and insurance risk-sharing business pursuant to program management agreements between CastlePoint and Tower's insurance companies. See also "Business Acquisitions of U.S. Licensed Insurance Companies." We plan to acquire one or more additional U.S. licensed insurance companies in the next nine months, either with little or no pre-existing business or with ongoing insurance operations, and with broader licensing, which will permit us to write insurance business in more United States jurisdictions on an admitted and non-admitted basis. We are currently looking at a number of potential U.S. licensed insurance companies in addition to CastlePoint Insurance Company, however, we have not yet identified any other targets with any reasonable certainty, and we have not entered into any related letters of intent at this time. We anticipate that the purchase price for any additional companies we may acquire will be paid in cash and will consist of the amount to be paid for the value of the target company's insurance licenses and the amount of its statutory capital and surplus, as well as the value of the business if an ongoing operating insurance company is purchased. Statutory capital and surplus refers to an insurer's assets minus its liabilities, calculated using statutory accounting principles. Based on our discussions with A.M. Best, we expect that any additional U.S. licensed insurance companies that we may acquire, upon our acquisition and capitalization of such companies, will also receive a AMENDMENT NO. 5 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Financial Strength rating of "A-" (Excellent), in view of our capital funding plans, management experience and relationship with Tower. Strategic Investments Strategic investments are integral to our overall strategy and complement our product offerings in reinsurance, risk sharing and programs. We expect to make strategic investments in some of our clients, including Tower, to strengthen our distribution system in order to provide us with more stable and predictable sources of business. We refer to clients in which we make strategic investments as "strategic clients." By developing strategic clients, we plan to build a distribution system that sources a significant portion of our overall business from these clients. We believe that this system has advantages over the typical reinsurance business model because, with respect to our strategic clients, we should be able to influence their reinsurance programs so that such clients can fully leverage their access to capital, rating, product platform and scale, while also maintaining a stable, long-term reinsurance relationship with us. In addition, we believe that we will be able to manage the market cycle better by expanding or contracting the amount of business from third party clients depending upon the market conditions, while maintaining a stable base of business from our strategic clients. We will consider making minority investments in clients that are privately held companies only when there is a clearly defined exit strategy, and we also will consider making such investments in clients that are publicly held companies, such as Tower. In addition, we may enter into joint ventures or majority investments where we have significant control, and we may acquire other companies that are our clients. We will make strategic investments in clients generally under the circumstances where we expect that the implementation of our insurance risk sharing and reinsurance solutions with them will improve their financial performance and hence our financial performance, through the risk sharing and reinsurance agreements that we will enter into with these clients. In the future we may invest in, or acquire, Bermuda-based reinsurance companies that are unable to effectively utilize their capital. We believe we can increase the profitability of such reinsurance companies, and therefore enhance the value of our investment, by providing them access to our premium flow. Consistent with this strategy, in December 2006, CastlePoint Management purchased 40,000 shares of non-cumulative convertible perpetual preferred stock of Tower for an aggregate consideration of $40 million. Our purchase of Tower's non-cumulative convertible perpetual preferred stock was approved by our audit committee. Tower redeemed all of its non-cumulative convertible perpetual preferred stock held by CastlePoint Management in January 2007, at the redemption price of $40 million in the aggregate plus $298,289 in accrued dividends. See also "Business Strategic Investments." We may make strategic investments in Tower. To the extent any such investments will be made, we expect that they will likely occur in connection with the acquisition of a book of business or another company by Tower at such times that Tower makes these types of acquisitions and when our own analysis of such proposed transactions of Tower indicates that these acquisitions will be accretive to Tower. To the extent Tower's book of business remains attractive and profitable, we may gradually increase our ownership in Tower and develop a more clearly articulated plan to address our future relationship with Tower. However, due to many factors such as Tower's stock price and its need for capital as well as our stock price and our willingness to make future investments in Tower, we cannot predict with any certainty whether, when or to what extent we may make any additional strategic investments in Tower. We strongly believe that all of our strategic investments in Tower must create value for our shareholders. Our Relationship With Tower Tower sponsored our formation and entered into a long-term strategic relationship with us to secure for it a stable source of traditional quota share reinsurance and insurance risk-sharing capability to support its anticipated future growth. This strategic relationship with Tower allows us to participate as a reinsurer and as an insurance risk-sharing participant in Tower's historically profitable book of Deferred tax liabilities: Unrealized appreciation of securities $ Total deferred tax liabilities CASTLEPOINT HOLDINGS, LTD. (Exact name of registrant as specified in its charter) Bermuda (State or other jurisdiction of incorporation or organization) 6331 (Primary Standard Industrial Classification Code Number) N/A (IRS Employer Identification Number) Victoria Hall 11 Victoria Street Hamilton HM 11 Bermuda (441) 294-6409 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) CT Corporation System 111 Eighth Avenue, 13th Floor New York, New York 10011 (212) 590-9330 (Name and address, including zip code, and telephone number, including area code, of agent for service) Copy to: Roslyn Tom, Esq. Baker & McKenzie LLP 1114 Avenue of the Americas New York, New York 10036 (212) 891-3971 business. Tower, through its insurance company subsidiaries, offers commercial insurance products to small to medium-size businesses and personal insurance products to individuals. Tower's current insurance company subsidiaries are Tower Insurance Company of New York, a New York corporation that has been rated "A-" (Excellent) by A.M. Best since October 2004, Tower National Insurance Company, a Massachusetts corporation that has been rated "A-" (Excellent) by A.M. Best since October 2005, as well as subsidiaries of Preserver Group, Inc., or Preserver, that were recently acquired by Tower, namely, Preserver Insurance Company, a New Jersey corporation, Mountain Valley Indemnity Company, a New Hampshire corporation, and North East Insurance Company, a Maine corporation, each of which is currently rated "B++" (Very Good) by A.M. Best. Tower's insurance company subsidiaries currently write business in New York, New Jersey, Massachusetts, New Hampshire and Maine. Our brokerage business quota share reinsurance agreement with Tower was amended to add the Preserver insurance companies as ceding insurers in connection with the brokerage business they write, subject to any necessary regulatory approvals. Additionally, once any necessary regulatory approvals are obtained, it is intended that the Preserver insurance companies will participate in our alternative insurance risk-sharing agreements. Tower has announced its plans for further regional expansion. We and Tower agreed that, with respect to any insurance companies Tower may acquire during the term of our master agreement, subject to the receipt of any necessary regulatory approvals, if Tower desires to cause these insurance companies to effect loss portfolio transfers, we will have a right of first refusal to assume such companies' historical losses pursuant to a loss portfolio transfer agreement, which must be on mutually acceptable market competitive terms. Although both we and Tower offer property and casualty insurance products and services on a primary insurance level, there are significant differences between the business operations of our respective companies. Tower underwrites "brokerage business," which we refer to as broad classes of business that are underwritten on an individual policy basis by Tower's staff that are produced through wholesale and retail agents. By contrast, we generate our business from other insurance companies and program underwriting agents that have established books of brokerage business and program business that they underwrite on an individual policy basis utilizing their own underwriting staff. Such brokerage business and program business are produced through their independent agency distribution system comprised of independent wholesale and retail agents or on a direct basis to consumers. We also will offer insurance risk-sharing solutions, as well as unbundled services, neither of which Tower will offer. The agreements we entered into with Tower help differentiate the types of brokerage business, traditional program business and specialty program business in which we and our subsidiaries, on the one hand, and Tower and its subsidiaries, on the other hand, engage or will engage in the future. As a result, we believe that our products, services and distribution systems do not overlap directly with those of Tower. In connection with our formation and capitalization, we issued 2,555,000 of our common shares, representing at the time of issuance 100% of our outstanding common shares, to Tower in consideration of its investment of $15.0 million in us. The common shares held by Tower currently represent 6.7% of our outstanding common shares. We also issued ten-year warrants to Tower to purchase an additional 1,127,000 of our common shares at an exercise price of $10.00 per share, which shares represent 2.7% of our common shares outstanding on a fully-diluted basis. The shares held by Tower, together with the shares issuable upon exercise of the Tower warrants, represent 9.0% of our outstanding common shares on a fully-diluted basis. Under our bye-laws, Tower's voting power in us is limited to 9.5%. Tower is a publicly traded insurance holding company listed on the Nasdaq Global Select Market. Michael H. Lee, the Chairman of the Board and Chief Executive Officer of CastlePoint Holdings and Chief Executive Officer of CastlePoint Management, is also Chairman of the Board, President and Chief Executive Officer of Tower. Our Agreements with Tower We have a master agreement with Tower that has a term of four years (as extended by our agreement with Tower for an additional year), subject to certain early termination rights of the parties. Approximate date of commencement of proposed sale of securities to the public: From time to time after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. For more information, including a description of certain early termination rights of the parties to the master agreement, certain other agreements we entered into with Tower and status of regulatory approvals with respect to our agreements with Tower, see "Certain Relationships and Related Transactions Our Arrangements with Tower and its Subsidiaries; Status of Regulatory Approvals." Pursuant to this master agreement and certain reinsurance agreements and other agreements that we entered into, or are in the process of entering into, with Tower, we provide traditional quota share reinsurance and insurance risk sharing alternatives to Tower for its brokerage business. During 2006, Tower ceded to CastlePoint Re 30% to 40% of its brokerage business under the brokerage business quota share reinsurance agreement. During the first quarter of 2007, Tower ceded to CastlePoint Re 49% of its brokerage business under the brokerage business quota share reinsurance agreement. In the second quarter of 2007, Tower ceded a total of 49% of its brokerage business to us, with 40% ceded to CastlePoint Re and 9% ceded to CastlePoint Insurance Company under the brokerage business quota share reinsurance agreement, as amended to add CastlePoint Insurance Company to that agreement. Thereafter, Tower plans to cede similar amounts of its brokerage business to us, with 40% ceded to CastlePoint Re and 9% ceded to CastlePoint Insurance Company under the brokerage business quota share reinsurance agreement. At such time as the alternative insurance risk-sharing agreements for the brokerage business receive regulatory approval, we expect that Tower will reduce the brokerage quota share cession to 40% of Tower's brokerage business, as the remaining 9% will be written directly by CastlePoint Insurance Company pursuant to the alternative insurance risk-sharing agreements. CastlePoint Management currently manages the traditional and specialty programs, and utilizes Tower's insurance companies for these programs under a program management agreement that has been approved by the New York State Insurance Department. CastlePoint Re currently assumes 50% of the traditional program business and 85% of the specialty program business from Tower's insurance Companies under corresponding quota share reinsurance agreements. Through CastlePoint Insurance Company, we also entered into three pooling agreements and related pool management agreements with Tower, which were to be effective as of January 1, 2007, subject to regulatory approval by the New York State Insurance Department. Since we have not yet received regulatory approval from the New York State Insurance Department with respect to these pooling agreements and related pool management agreements, we and Tower have withdrawn from consideration by the New York State Insurance Department the pooling agreements and related pool management agreements and, in place of such agreements, we have submitted to the New York State Insurance Department alternative insurance risk-sharing agreements, because we believe that review of these agreements will expedite the regulatory approval process, while allowing us to achieve the same economic goals that were contemplated by the pooling arrangements. Until regulatory approval of the alternative insurance risk-sharing agreements is obtained, we are writing brokerage business in CastlePoint Insurance Company. Subject to regulatory approval, we expect Tower will provide assistance in connection with servicing this business and that we will pay Tower for its assistance. We currently contemplate that the alternative insurance risk-sharing agreements for the brokerage business will be comprised of, subject to regulatory approval, a business management agreement between CastlePoint Insurance Company and Tower Risk Management Corp. covering in particular the brokerage business, to which we sometimes refer in this prospectus as the "brokerage business management agreement", as well as two aggregate excess of loss reinsurance agreements and an amendment to our brokerage business quota share reinsurance agreement with Tower. With regard to the traditional program business and specialty program business, we plan to utilize our existing program management agreements with Tower for CastlePoint Management to produce traditional program business and specialty program business using Tower's policies and then manage such traditional program business and specialty program business for Tower in return for a management fee. In addition, subject to regulatory approval, we anticipate that CastlePoint Insurance Company may enter into aggregate excess of loss reinsurance agreements with Tower with identical attachment points for the business produced by Tower Risk Management Corp. using CastlePoint Insurance Company's Net earned premium $ 78,970 46,596 Commission income 2,334 $ 1,561 Net investment income 11,184 5,791 Net realized gains 35 Net earned premium $ 78,970 $ 46,596 Commission income 2,334 1,561 Net investment income 11,184 5,791 Net realized gains 35 Commission income 1,561 Net investment income 5,791 Net realized investment gains ($ in thousands, except share and per share amounts) Revenues Net premiums earned (primarily with related parties See note 3) $ 46,596 $ Commission income (primarily with related parties See note 3) 1,561 Net investment income 5,791 Net realized gain on investment Net Investment income 5,791 Net realized capital gains The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. policies as for the business written using Tower's policies, and with CastlePoint Insurance Company's share of the traditional program business and specialty program business being 50% and 85%, respectively. All of our agreements with Tower, including the alternative insurance risk-sharing agreements, are generally subject to review, approval and requests for modification by the New York State Insurance Department and may be subject to review by the insurance departments of the other domiciliary states of Tower's or our domestic insurance companies. Further, the program management agreement between CastlePoint Management and Tower National Insurance Company, a Massachusetts domestic property/casualty insurance company, is subject to review and requests for modification by the Massachusetts Division of Insurance. For more information, see "Certain Relationships and Related Transactions Status of Regulatory Approvals." In 2006 and 2007, CastlePoint Re participated as a reinsurer in several of Tower's other ceded reinsurance programs that were placed through reinsurance intermediaries. We believe that all of these treaties were placed at market terms, conditions and prices that were determined by the other reinsurers participating in these treaties. We participated in Tower's multiline excess of loss reinsurance agreements, property excess of loss reinsurance agreements, as well as Tower's property aggregate excess of loss reinsurance agreements and property aggregate catastrophe excess of loss reinsurance agreement (for the second quarter of 2007 only). Competitive Strengths We believe we have the following competitive strengths, which position us to underwrite both insurance and reinsurance business profitably: Access to Profitable Book of Business from Tower. Pursuant to our agreements with Tower, we reinsure and, through our alternative insurance risk-sharing agreements (to be effective upon receipt of regulatory approval by the New York State Insurance Department), also expect to share in, a significant amount of the brokerage business that Tower writes. For the three years ended December 31, 2006, Tower's insurance segment, which consists predominantly of the brokerage business, generated an average gross loss ratio of 55.0%. An insurer's profitability, without considering its investment income and investment losses, is measured by its "combined ratio." The term "combined ratio" is a standard measurement of an insurer's profitability in the property and casualty insurance industry, which is calculated as a percentage equal to the sum of an insurer's "loss ratio" and its "underwriting expense ratio." The loss ratio is calculated as the ratio of losses and loss adjustment expenses to premiums earned. The underwriting expense ratio is calculated as the ratio of underwriting expenses to premiums earned. A combined ratio of less than 100% generally indicates that an insurer is profitable on an underwriting basis, in that the premiums the insurer has earned for a particular period exceed the sum of its losses, loss adjustment expenses and underwriting expenses (less policy billing fees) for the same period. Tower's average gross loss ratio for the insurance segment of 55.0% for the three-year period ended December 31, 2006, when added to Tower's average underwriting expense ratio for the insurance segment of 30.2% for the same period, results in an average combined ratio of 85.2% for the three years ended December 31, 2006. Accordingly, Tower's underwriting profit for its brokerage business for this three-year period, without considering investment income and investment losses, averaged 14.8% of every dollar of premium Tower earned on its brokerage business during this period. Under the terms of the brokerage business quota share reinsurance agreement and the management agreement that covers the brokerage business, we pay or will pay Tower commissions or management fees for our share of this business, so that within certain ranges of loss ratio, our combined ratio (that is, the sum of our net loss ratio and our maximum ceding commission percentage or management fee percentage, as the case may be) will be approximately 95%. Accordingly, we expect to earn underwriting profit for our share of the brokerage business in the amount of 5% of premiums earned on this business. Access to Established Insurance Company Infrastructure. Through our service and expense sharing agreement with Tower's subsidiaries, we and our clients will be able to access Tower's well established insurance company infrastructure, including claims handling and administration, policy administration systems, technology, underwriting acumen, program design, regulatory compliance and other services. We believe that access to these capabilities will enable us to successfully write traditional program business, specialty program business and insurance risk-sharing business, while avoiding the significant cost of establishing a primary insurance company infrastructure. Operations in Bermuda and Access to Distribution Sources in the United States. We believe that having both operations in Bermuda and access to profitable business in the United States through our strategic relationship with Tower is advantageous to us and differentiates us from many of our competitors in the insurance and reinsurance industries. Our access to Bermuda's favorable business and regulatory environment through our reinsurance subsidiary in Bermuda, CastlePoint Re, provides us with the ability to develop cost-effective insurance and reinsurance products. Our strategic relationship with Tower provides us with the opportunity to identify and underwrite historically profitable personal and commercial lines policies with low to moderate hazard risks. We believe these factors provide us with a competitive advantage over competitors that are not based in Bermuda as well as those that are based in Bermuda but do not have our underwriting expertise and access to distribution sources to write this type of business. Strong Market Relationships. We market our reinsurance products, and expect to market our insurance products, principally through our management's existing industry contacts and through independent reinsurance intermediaries. Our senior management team has extensive industry relationships, including relationships with a number of reinsurance intermediaries, program underwriting agents and insurance companies. We believe that these relationships will allow us to quickly establish our presence in the reinsurance and insurance markets. New Insurance Company. As a recently formed company, we are unencumbered by historical liability exposures currently affecting competitors, including claims relating to asbestos and environmental remediation and other mass torts. In addition, as a start-up company, we do not have outdated technology systems, as many of our larger competitors do, that require costly updating or replacement. Accordingly, we believe our ability to implement new technology systems from the beginning provides us with a competitive cost advantage. Experienced Management with Knowledge of Primary Insurance Companies and Products. We have assembled a senior management team with an average of over 20 years of property and casualty industry experience. Michael H. Lee, the Chairman of the Board and Chief Executive Officer of CastlePoint Holdings, Chief Executive Officer of CastlePoint Management and Chief Executive Officer of CastlePoint Insurance Company, was a founder of Tower in 1990 and has developed reinsurance, insurance, service and capital solutions that enabled Tower to overcome the limitations it faced as a small insurance company and management company to increase its capability to deliver products and services. Mr. Lee remains Chairman of the Board, President and Chief Executive Officer of Tower and, as such, does not serve our company on a full-time basis. In addition, our other senior officers have substantial experience in the property and casualty insurance industry. Gregory T. Doyle, the President and director of each of CastlePoint Holdings, CastlePoint Management and CastlePoint Insurance Company, and a director of CastlePoint Re, has over twenty years of experience in the reinsurance industry. Joel S. Weiner, the Chief Financial Officer and Senior Vice President of CastlePoint Holdings and the Chief Financial Officer, Senior Vice President and director of each of CastlePoint Management, CastlePoint Re and CastlePoint Insurance Company, and Joseph P. Beitz, President and director of CastlePoint Re and a director of CastlePoint Insurance Company, also have extensive experience in the insurance and reinsurance industry. Challenges Despite our competitive strengths, we believe that our lack of brand recognition, the financial size of our company and our A.M. Best rating may make our reinsurance product offerings less attractive to insurance company customers than those of some of our competitors that enjoy greater brand awareness, larger surplus and a higher A.M. Best rating than we do. These factors also may apply, although to a lesser extent, to our ability to attract business at the primary insurance level. Risks Associated with our Company and our Business Our company and our business are subject to numerous and substantial risks, as more fully described in the section entitled "Risk Factors" beginning on page 18 of this prospectus. Two significant risks associated with our company and our business are our status as a start-up company and our close business relationship with Tower. You should carefully consider all of the information contained in this prospectus prior to investing in our common shares. In particular, we urge you to carefully consider the information set forth under "Risk Factors" for a discussion of risks and uncertainties relating to us, our subsidiaries, our business and an investment in our common shares. Limited Operating History. We were formed in November 2005 and have a very limited operating history on which investors can base an estimate of our future earnings prospects. Moreover, until CastlePoint Insurance Company becomes broadly licensed or we acquire additional U.S. licensed insurance companies, we are able to engage in the primary insurance business only through the issuance of policies by Tower's insurance companies pursuant to CastlePoint Management's program management agreements with Tower's insurance companies. We only recently acquired CastlePoint Insurance Company, our U.S. licensed insurance company. Our acquisitions of other U.S. licensed insurance companies will be subject to regulatory approvals. Until CastlePoint Insurance Company becomes broadly licensed or we acquire additional U.S. licensed insurance companies, our operations will primarily consist of our reinsurance business as described herein. In addition, we may need to raise additional funds to further capitalize CastlePoint Re, CastlePoint Management and additional U.S. licensed insurance companies that we may acquire in order to further grow our business and implement our business strategy. Many of our competitors, including both the U.S.-based insurers and Bermuda-based reinsurers, due to their longer operating history or other factors, have more available access to capital than our company. Further, many of these competitors have more employees and more extensive industry contacts than we do, and they are therefore able to more fully access and penetrate the distribution systems on which both we and most of our competitors are dependent. Heavy Dependence on Tower. We are heavily dependent on Tower, our sponsor, for a substantial portion of our reinsurance and insurance business. For the year ended December 31, 2006 and for the three months ended March 31, 2007, Tower provided approximately 94.1% and 72%, respectively, of our written premium. Tower sponsored our formation and currently has an 6.7% share ownership interest in us. See also "Principal Shareholders." Further, we and Tower have overlapping management, insofar as Michael Lee, our Chairman and Chief Executive Officer, is also the Chairman, President and Chief Executive Officer of Tower. In addition to our reinsurance agreements with Tower, we recently purchased CastlePoint Insurance Company from Tower, and we purchased $40 million of Tower's non-cumulative convertible perpetual preferred stock in December 2006 (which Tower redeemed in January 2007). Such purchases were approved by our audit committee. We and Tower have agreed to extend the terms of our quota share reinsurance agreements by an additional year, so that we currently have a four year commitment, subject to certain early termination rights, from Tower to cede to us a substantial portion of its reinsurance business. However, we currently do not have any written arrangements in place with Tower to maintain its reinsurance agreements with us after four years. The information in this prospectus is not complete and may be changed. The securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED JULY 26, 2007 PROSPECTUS 26,646,589 Common Shares CastlePoint Holdings, Ltd. Need for Regulatory Approval of Transactions with Tower. Because we have been deemed an affiliate of Tower by the New York State Insurance Department and the Massachusetts Division of Insurance, any material transaction or agreement between us, on the one hand, and Tower or any of its subsidiaries, on the other hand, may be subject to regulatory review and resulting modification, depending upon size and type of transaction. If we do not obtain the approvals of these regulatory authorities, or if our agreements with Tower are subject to substantial modifications, we may not be able to fully implement our business strategy, which would have an adverse impact on our financial condition and results of operations. We also could be found to be an affiliate of Tower by the domiciliary states of Tower's other existing subsidiaries or of other companies Tower may acquire in the future. Overlapping Management and Potential Conflicts of Interest. Because Mr. Lee holds executive management positions at both Tower and our company, and because many members of our executive management are former managers of Tower, potential conflicts of interest may arise with respect to business opportunities that could be advantageous to Tower or its subsidiaries, on the one hand, and us or any of our subsidiaries, on the other hand, or may arise should the interests of Tower, CastlePoint and Mr. Lee diverge. While we expect that initially our interests and Tower's interests should be aligned, they may diverge as we develop additional business through other distribution sources and become less dependent on Tower, or as we pursue business opportunities with clients that are competitors of Tower. These potential conflicts of interest could expose us to possible claims that we have not acted in the best interests of our shareholders. Availability of Additional Capital. In order to further grow our business and fully implement our business strategy, which includes supporting our insurance and reinsurance business, and making strategic investments, we may need to raise additional capital through equity and/or debt financings. We may use a portion of the proceeds of any additional funding that we obtain to invest in our strategic clients, including Tower. See "Business Strategic Investments." Any equity or debt financing, if available at all, may be on terms that are not favorable to us. If additional capital is not available to us, our business, results of operations and financial condition would be adversely affected. Future Need for Additional Executives and Employees. Although at the present time our staff is substantially assembled, future staffing of our company and our subsidiaries may be challenging. Our business model contemplates a lean staff. As of May 15, 2007, we and our subsidiaries employed a total of 23 employees, 21 of whom were full-time. Of our 23 employees, six full-time employees are based in Bermuda. While we intend for our staffing to be lean in order to keep our expenses low, we may have difficulty recruiting, integrating and retaining highly qualified personnel such as experienced underwriters, actuarial staff and risk analysis and modeling personnel, to successfully grow our business. Further, we have recently completed our initial public offering and have become subject to new financial and other reporting and corporate governance requirements. See "Risk Factors We have recently become subject to additional financial and other reporting and corporate governance requirements that may be difficult for us to satisfy." Therefore, we seek to further develop our financial function, including the addition of accounting staff. Our inability to attract and retain the executives and additional personnel we may need, or the loss of the services of any of our senior executives or key employees, could delay or prevent us from fully implementing our business strategy and could significantly and negatively affect our business. Private Offering On April 4 and April 5, 2006, we sold an aggregate of 27,025,000 common shares in a private placement exempt from registration under the Securities Act, which we refer to in this prospectus as the private offering, at an offering price of $10.00 per share, except for 500,000 common shares sold at The selling shareholders named in this prospectus are offering up to 26,646,589 of our common shares. The selling shareholders will receive all proceeds from the sale of the common shares, and therefore we will not receive any of the proceeds from their sale of our shares. Our common shares are listed on the Nasdaq Global Market under the symbol "CPHL." On July 25, 2007, the closing price of our common shares, as reported on the Nasdaq Global Market, was $13.54. We expect that the selling shareholders will sell their shares at prevailing market prices or privately negotiated prices. See also "Plan of Distribution." Investing in our shares involves risks. See "Risk Factors" beginning on page 18 of this prospectus to read about the risks you should consider before buying our shares. $9.30 per share to Friedman, Billings, Ramsey Group, Inc., the parent company of Friedman, Billings, Ramsey & Co., Inc., or FBR, the initial purchaser of many of the shares. FBR resold the shares it purchased to investors pursuant to Rule 144A and Regulation S under the Securities Act. We raised $249.2 million in net proceeds from the private offering. We used these proceeds and the $15.0 million Tower invested in us as follows: (1) approximately $250 million to capitalize our indirect reinsurance subsidiary, CastlePoint Re; and (2) approximately $14 million to capitalize our intermediate Bermuda holding company, CastlePoint Bermuda Holdings, which in turn directly owns CastlePoint Re. See "Our Organization" below. In connection with the private offering, we entered into a registration rights agreement for the benefit of the holders of the shares sold in the private offering. We also entered into a registration rights agreement with Tower with respect to its ownership of 2,555,000 of our common shares, which are being registered pursuant to the registration statement of which this prospectus is a part, and 1,127,000 common shares issuable upon exercise of the warrants we granted to Tower. See "Description of Share Capital Registration Rights." Initial Public Offering On March 22, 2007, the SEC declared effective our registration statement on Form S-1, as amended (Registration No. 333-139939), we filed in connection with a firm commitment underwritten initial public offering of our common shares, which we refer to in this prospectus as the initial public offering. Under that registration statement and a related registration statement on Form S-1 (Registration No. 333-141530) we filed pursuant to Rule 462(b), we registered 8,816,648 common shares, including 1,134,410 shares subject to the over-allotment option we granted to FBR, Keefe, Bruyette & Woods, Inc., Cochran Caronia Waller Securities LLC and Piper Jaffray & Co., as representatives of the underwriters with respect to the initial public offering, to purchase such shares at the public offering price, less the underwriting discounts, solely to cover over-allotments. The underwriters exercised their option in full to purchase 1,134,410 additional shares upon the closing of the initial public offering, which occurred on March 28, 2007. On that date, we sold 8,697,148 shares (including the 1,134,410 over-allotment shares), and the selling shareholders (certain purchasers of our common shares in the private offering who exercised their right to sell their shares in the initial public offering) sold 119,500 shares, all at a price of $14.50 per share, in each case less underwriting discounts and commissions of $1.015 per share. No discounts were paid to underwriters with respect to 285,000 common shares purchased in the directed share program by our directors, officers, employees and certain other persons who have a relationship with our company or our management. The net proceeds to us were approximately $114 million after deducting underwriting discounts of approximately $8.5 million and other estimated offering expenses of approximately $3.6 million. The net proceeds to the selling shareholders were approximately $1.6 million in the aggregate, after deducting underwriting discounts of approximately $0.1 million. We did not receive any of the proceeds of the sale by the selling shareholders. We intend to use our net proceeds from the initial public offering to further capitalize CastlePoint Re and for general corporate purposes. Recent Developments On July 12, 2007, A.M. Best affirmed the Financial Strength rating and issuer credit rating of "A-" (Excellent) with a stable outlook of each of CastlePoint Re and CastlePoint Insurance Company, as well as the issuer credit rating of "bbb-" of CastlePoint Holdings. This action followed our announcement on June 22, 2007 relating to certain agreements we reached with AequiCap Program Administrators and certain of its subsidiaries, to which we refer in this prospectus collectively as AequiCap, regarding up to $100 million in workers' compensation and commercial automobile liability policies to be written by CastlePoint through AequiCap, and an announcement by A.M. Best on June 26, 2007 that it placed the Financial Strength rating and issuer credit rating of "A-" (Excellent) of each of CastlePoint Re and CastlePoint Insurance Company, as well as the issuer credit rating of None of the Securities and Exchange Commission (the "SEC"), any state securities commission, the Registrar of Companies in Bermuda or the Bermuda Monetary Authority has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this prospectus is , 2007 "bbb-" of CastlePoint Holdings, under review with negative implications. In its press release on July 12, 2007, A.M. Best stated that it remains concerned with the relative size of our risk sharing agreement with AequiCap, as well as the historical and prospective loss experience of this business. A.M. Best also stated in that press release that it would monitor the performance of the AequiCap transaction, as well as the risk profile of CastlePoint should it enter into any additional transactions of materiality. Subsequent to the June 26, 2007 announcement by A.M. Best, our management furnished to A.M. Best information about our arrangements with AequiCap. Pursuant to our arrangements with AequiCap, between July 2007 and July 2008, CastlePoint Insurance Company expects to reinsure AequiCap for up to $100 million in workers' compensation and commercial automobile liability premiums. During the second half of 2007, we expect that CastlePoint Insurance Company will reinsure AequiCap for approximately $47.5 million in gross premiums, of which approximately $29.1 million in net premiums written will be retained by CastlePoint Insurance Company. Our Organization CastlePoint Holdings was incorporated on November 16, 2005 as a company limited by shares under Bermuda law. Our reinsurance subsidiary, CastlePoint Re, was incorporated on March 9, 2006 and was licensed as a Class 3 Bermuda exempted insurer on March 22, 2006. CastlePoint Re commenced writing business as of April 6, 2006, following its capitalization on April 5, 2006 with a portion of the net proceeds of the private offering. As of December 31, 2006, CastlePoint Re generated $79.0 million of reinsurance premiums, which accounted for more than 97.1% of our revenues (other than investment income), and for the three months ended March 31, 2007 CastlePoint Re earned $46.6 million of reinsurance premiums, which accounted for more than 72% of our revenues (other than investment income). CastlePoint Re's premiums from Tower accounted for more than 96.2% of the 2006 premiums and approximately 72% of the premiums for the three months ended March 31, 2007. CastlePoint Re primarily focuses on providing traditional quota share reinsurance, as well as casualty excess of loss reinsurance and other ancillary reinsurance coverage. Under excess of loss reinsurance agreements (which are written in layers or bands of coverage up to a specified amount), we generally receive a specified premium for the risk we assume and indemnify the cedent against all or a specified portion of losses and expenses in excess of a specified dollar or percentage amount. CastlePoint Management, a Delaware corporation and our program management company, was incorporated in January 2006. It currently produces insurance risk sharing as well as traditional program business and specialty program business. CastlePoint Management receives commission income from Tower for the traditional and specialty program business, which is retained by Tower's insurance companies. CastlePoint Management also provides insurance company services to insurance companies and program underwriting agencies. The fees generated by CastlePoint Management accounted for 2.9% of our revenues (other than investment income) in 2006 and 3.2% of our revenues (other than investment income) for the three months ended March 31, 2007. CastlePoint Bermuda Holdings, our Bermuda intermediate holding company, was incorporated on March 27, 2006. We acquired CastlePoint Insurance Company, our U.S. licensed insurance company, from Tower in December 2006. TABLE OF CONTENTS Page (1)Tower's share ownership interest in us currently is 6.7%, and will be 9.0% on a fully diluted basis if it exercises in full the ten-year warrants that we have granted to it to purchase an additional 1,127,000 of our common shares at an exercise price of $10.00 per share. (2)For detailed information about our agreements with Tower and the various CastlePoint and Tower parties thereto, see "Certain Relationships and Related Transactions." (3)CastlePoint Management directly owns our financing subsidiaries, CastlePoint Management Statutory Trust I and CastlePoint Management Statutory Trust II, which we recently formed to facilitate the trust preferred financing we completed in December 2006. (4)Reflects our ownership of CastlePoint Insurance Company and any additional U.S. licensed insurance companies that we may acquire, subject to receipt of regulatory approvals. The principal executive office of CastlePoint Holdings is currently located at Victoria Hall, 11 Victoria Street, Hamilton HM 11, Bermuda, and our telephone number is (441) 294-6409. The Offering Shares offered by the selling shareholders A total of up to 26,646,589 common shares held by the selling shareholders, consisting of the following: 24,091,589 common shares sold in the private offering and 2,555,000 common shares held by Tower. The selling shareholders may or may not sell any or all of the common shares that have been registered by us. Shares outstanding 38,282,320 common shares. Our outstanding shares exclude: 1,127,000 common shares issuable upon the exercise of the warrants we issued to Tower; and 1,638,393 common shares issuable upon the exercise of outstanding stock options we granted to non-employee directors and certain officers and employees of our company and our subsidiaries; and 91,456 additional common shares available for issuance under our 2006 long-term equity compensation plan. Dividend policy Our board of directors currently intends to authorize the payment of an annual cash dividend of $0.10 per common share to our shareholders of record, payable on a quarterly basis. On each of July 31, 2006, October 31, 2006, February 25, 2007 and May 1, 2007, our board of directors authorized the payment of a quarterly dividend of $0.025 per share and on July 31, 2006 our board of directors authorized a special dividend of $0.025 per share, each of which has been paid. Any future determination to pay dividends is at the discretion of our board of directors and is dependent upon our results of operations and cash flows, our financial position and capital requirements, general business conditions, legal, tax, regulatory, rating agency and any contractual restrictions on the payment of dividends and any other factors our board of directors deems relevant, including Bermuda and U.S. state legal and regulatory constraints. Use of proceeds We will not receive any of the proceeds from the sale of our shares. Trading Our common shares are listed on the Nasdaq Global Market under the symbol "CPHL." Voting limitation Our bye-laws contain a provision limiting the voting rights of any person beneficially owning, directly, indirectly or, in the case of any U.S. person (as defined in the Internal Revenue Code of 1986, or the Code) constructively or by attribution, shares with more than 9.5% of the total voting power of all shares entitled to vote at a general meeting of the shareholders of our company to 9.5% of such total voting power. The common shares owned by Tower are subject to this voting rights limitation. See "Description of Share Capital Limitation on Voting Rights." Net combined ratio(4) 88.1 % 88.7 % (1)Not meaningful. (2)The net loss ratio is calculated by dividing loss and loss adjustment expenses by net premiums earned. (3)The net expense ratio is calculated by dividing net underwriting expenses (consisting of commission expense and operating expense) by net premiums earned. (4)The net combined ratio is the sum of the net loss ratio and the net expense ratio. (5)Book value per common share is calculated based on total shareholders' equity divided by the number of common shares outstanding at the end of the period. (6)Diluted book value per common share is calculated based on total shareholders' equity divided by the sum of the number of common shares and common share equivalents outstanding at the end of the period, using the treasury method (using a fair value of $11.00 per share) for potentially dilutive securities, including warrants and stock options. The following table sets forth our selected unaudited consolidated operating results for the periods ended and as of the dates indicated. These historical results are not necessarily indicative of results to be expected in any future period, and the interim results are not necessarily indicative of operations for a full fiscal year. You should read the following summary historical financial information in conjunction with the information contained in this prospectus, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes included elsewhere in this prospectus. Many factors may cause our future results to differ materially from the financial information and results presented below,
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+PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. As this is a summary, it does not contain all of the information that you should consider in making an investment decision. You should read the entire prospectus carefully, including the information under Risk Factors and our financial statements and the related notes included in this prospectus, before investing. Unless otherwise indicated herein, all share-related information contained in this prospectus, including conversion and exercise prices, are after taking into account a reverse stock split of 1-for-4.1 which the company will implement immediately upon effectiveness of this offering. Unless otherwise indicated herein, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option. Our Business We are an Internet-based, interactive merchandising, marketing and media company focused on the college student market. We are creating online communities where college students purchase products and share ideas, discoveries and experiences. Our online communities are intended to attract users through features and subjects that are compelling to college students, including student-generated content, such as blogs, videos and other multimedia content. We currently generate sales by selling products primarily to college students, and mostly at academic discount prices of up to 80% off suggested retail prices, made available to us by manufacturers on the condition that the sale be to students and other qualified purchasers in the academic community. These programs are open only to a limited number of companies and offer a significant pricing advantage. Our e-commerce model is driven by our ability to verify that a college student is the purchaser of the goods offered. We offer a comprehensive product line of more than 8,000 distinct name-brand software and other technology products, and we also plan to generate revenue from selling targeted marketing and advertising programs to advertisers and corporations to help them sell their products to college students. Our goal is to leverage our existing e-commerce business and our historical focus on the college student market to become the leading provider of Internet-based media and e-commerce by: continuing to grow our academic discount e-commerce business; developing marketing programs that provide academic discount products on a promotional basis and incorporate viral marketing; creating or acquiring media properties to expand the type of information, content, interactive tools and user-generated text and video that attracts college students; and diversifying and expanding our product offerings within our core academic discount and merchandising businesses. We expect to launch the beta versions of our initial community and content websites beginning in either the fourth quarter of 2007 or the first quarter of 2008. These sites include: www.CampusU.com, which will contain numerous interactive features and subject matters relating to college life, humor, travel, advice and entertainment; www.CampusFlix.com, which will focus on user-generated video on a variety of topics, including independent film and music; and www.LazyStudents.com, which will provide research sources and advice on studying and test taking. We have generated sales for several years, and our sales increased 73.0% from $6.9 million in 2005 to $11.9 million in 2006, although we have not yet attained profitability. For the nine months ended September 30, 2007, our sales increased by 112.6% over the comparable period in 2006. We expect to begin generating revenues from our marketing and media businesses by the end of 2007 or the first quarter of 2008, and we will seek to grow these revenues substantially over the next few years. TABLE OF CONTENTS The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Preliminary Prospectus Subject To Completion, Dated November 13, 2007 3,500,000 Shares Common Stock This is our initial public offering. We are offering 3,500,000 shares of our common stock. We currently expect the initial public offering price for our stock will be between $5.50 and $6.50 per share. Prior to this offering, there has been no public market for our common stock. Our common stock has been approved for listing on the Nasdaq Capital Market under the symbol CMPS. Investing in our securities involves a high degree of risk. See Risk Factors beginning on page 6 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities. Per Share Total Proceeds Public offering price $ [ ] $ [ ] Underwriting discounts and commissions $ [ ] $ [ ] Non-accountable expense allowance 1 $ [ ] $ [ ] Proceeds to us (before expenses) 2 $ [ ] $ [ ] (1) Payable to Maxim Group LLC, the representative of the underwriters. (2) We estimate that the total expenses of this offering, excluding the underwriters discount and the non-accountable expense allowance, will be approximately $1,600,000. We have granted an over-allotment option to the underwriters. Under this option, the underwriters may elect to purchase up to an additional 525,000 shares of common stock from us at the public offering price, less the estimated underwriting discounts and commissions, within 45 days from the date of this prospectus to cover over-allotments, if any. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. We are offering the shares of common stock for sale on a firm-commitment basis. The underwriters expect to deliver our securities to investors in the offering on or about [ ], 2007. Maxim Group LLC The date of this prospectus is [ ], 2007 TABLE OF CONTENTS Recent Developments In May 2007, we issued $3.0 million of convertible debentures. The debentures are due in May 2008 and bear interest at 8.0% per annum, payable quarterly. The debentures are convertible, at the holder s option, upon certain events, including the completion of this offering, at a price equal to 80% of the public offering price of our common stock, or $4.80, based on the $6.00 mid-point of the price range indicated on the front cover of this prospectus. In connection with the issuance of the debentures, we also issued warrants to purchase shares of our common stock in the aggregate of 40% of the shares of common stock underlying the debentures. The warrants are subject to standard anti-dilution protection for proportional splits and corporate reorganizations at an exercise price per share equal to the greater of: (i) the price of one share of common stock issued in this offering and (ii) $8.20. The warrants expire three years from the date of issuance. Additionally, in June 2007, we issued 810,000 shares of our Series A convertible preferred stock and warrants to purchase shares of our common stock in the aggregate of 40% of the shares of common stock underlying the Series A convertible preferred stock and received proceeds of $1.6 million, including $0.5 million from the conversion of a 10% promissory note. Cumulative dividends on the Series A convertible preferred stock accrue at an annual rate of 8.0% per annum and are payable quarterly. Upon completion of this offering, the shares of Series A convertible preferred stock will automatically convert at a price equal to 80% of the public offering price of our common stock, or $4.80, based on the $6.00 mid-point of the price range indicated on the front cover of this prospectus. The warrants are subject to standard anti-dilution protection for proportional splits and corporate reorganizations at an exercise price per share equal to the greater of: (i) the price of one share of common stock issued in this offering and (ii) $8.20. The warrants expire three years from the date of issuance. The shares of common stock issuable upon conversion of the debentures, the shares of Series A convertible preferred stock and the exercise of the warrants have unlimited piggyback registration rights. These shares will be subject to a six-month lock-up period following the effective date of this prospectus and the holders thereof have registration rights requiring us to file a registration statement for resale 95 days after the effective date of this prospectus to have such shares registered for resale.
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+PROSPECTUS SUMMARY The following prospectus summary does not contain all information that may be important to you and is qualified in its entirety by, and should be read in conjunction with, the more detailed information and our financial statements and the related notes appearing elsewhere in this prospectus. Virtual Radiologic Professionals of California, P.A., Virtual Radiologic Professionals of Illinois, S.C., Virtual Radiologic Professionals of Michigan, P.C., Virtual Radiologic Professionals of Minnesota, P.A., Virtual Radiologic Professionals of New York, P.A. and Virtual Radiologic Professionals of Texas, P.A. are collectively referred to as the Professional Corporations. Virtual Radiologic Professionals, LLC and the Professional Corporations are collectively referred to as the Affiliated Medical Practices. The terms Company, we, us, and our as used in this prospectus refer to Virtual Radiologic Corporation and our Affiliated Medical Practices. Our Business We believe we are one of the leading providers of remote diagnostic image interpretation, or teleradiology, services in the United States. According to Frost & Sullivan, we are the second largest provider of teleradiology services in the United States. We serve our customers radiology practices, hospitals, clinics and diagnostic imaging centers by providing diagnostic image interpretations, or reads, 24 hours a day, seven days a week, 365 days a year. Our unique distributed operating model provides our qualified team of American Board of Radiology-certified radiologists with the flexibility to choose the location from which they work, primarily within the United States, and allows us to serve customers located throughout the country. We provide these services through a robust, highly scalable communications network incorporating encrypted broadband internet connections and proprietary workflow management software. We have developed a strong customer base and have experienced significant revenue growth from $12.9 million in 2004 to $27.0 million in 2005 and $54.1 million in 2006. We have incurred net losses of $1.4 million, $1.5 million and $0.5 million for the same periods, respectively. In addition, our revenues grew from $37.9 million for the nine months ended September 30, 2006 to $63.3 million for the nine months ended September 30, 2007. We have incurred a net loss of $1.8 million and net income of $2.2 million for the same periods, respectively. In recent years, the United States healthcare industry has experienced increasing demand for diagnostic imaging services. The increase in diagnostic imaging procedures is being driven by an aging population, advances in diagnostic imaging technologies and the growing availability of imaging equipment in hospitals and clinics, as well as by more frequent physician referrals for diagnostic imaging warranted by additional medical indications. According to Frost & Sullivan, digital diagnostic image procedure volume is expected to continue to grow 15% annually to over 500 million procedures by 2009. Additionally, advances in digital technology now allow for the transmission of images in a high quality, standardized, cost-effective and encrypted format, allowing radiologists to read remotely. The number of radiologists in practice is expected to increase by less than 2% annually, according to the American Journal of Roentgenology, despite the expected growth in digital diagnostic image procedure volume. This relatively slow growth in radiologists, which is due, in part, to the retirement of existing radiologists and the limited number of positions in accredited radiology residency programs, is expected to exacerbate the radiologist shortage that currently exists. The shortage of radiologists and the growing imaging procedure volume are further compounded by the fact that contracted radiology practices are required to provide their hospital customers with services 24 hours a day, seven days a week in order to accommodate the growing number of off-hour procedures. Consequently, radiology practices and hospitals have begun to seek supplemental services to assist their own radiology staffs with both day and night coverage. Table of Contents EXHIBIT INDEX Exhibit No. Description 1.1 Form of Underwriting Agreement.* 1.2 Form of Letter Agreement, by and between Virtual Radiologic Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated.* 3.1 Certificate of Incorporation of Virtual Radiologic Consultants, Inc. (now known as Virtual Radiologic Corporation).* 3.2 Bylaws of Virtual Radiologic Consultants, Inc. (now known as Virtual Radiologic Corporation).* 3.3 Certificate of Amendment to the Certificate of Incorporation of Virtual Radiologic Consultants, Inc. (now known as Virtual Radiologic Corporation).* 3.4 Form of Amended and Restated Certificate of Incorporation of Virtual Radiologic Corporation.* 3.5 Form of Second Amended and Restated Certificate of Incorporation of Virtual Radiologic Corporation, which will be in effect upon completion of this offering.* 3.6 Form of Amended and Restated Bylaws of Virtual Radiologic Corporation, which will be in effect upon completion of this offering.* 3.7 Certificate of Amendment to the Certificate of Incorporation of Virtual Radiologic Consultants, Inc. (now known as Virtual Radiologic Corporation).* 4.1 Warrant to Purchase Common Stock, dated May 2, 2005, issued by Virtual Radiologic Corporation to William Blair & Company, L.L.C.* 4.2 Form of Stock Certificate.* 5.1 Form of Opinion of Willkie Farr & Gallagher LLP.* 10.1 Stockholders Agreement, dated as of May 2, 2005, by and among Virtual Radiologic Consultants, Inc., the Common Stockholders (as defined therein) and the Investors (as defined therein).* 10.2 Investor Rights Agreement, dated as of May 2, 2005, by and among Virtual Radiologic Consultants, Inc., the parties listed on the signature page thereto as investors and, for purposes of Section 1 only, William Blair & Company, L.L.C.* 10.3 Cross Purchase Agreement, dated as of October 24, 2003, by and among Virtual Radiologic Consultants, Inc., Sean O. Casey, Eduard Michel, David Hunter and Gary Weiss.* 10.4 Form of Indemnification Agreement, between Virtual Radiologic Corporation and each member of the Board of Directors.* 10.5 Employment Agreement, effective as of May 2, 2005, by and between Virtual Radiologic Consultants, Inc. and Sean Casey.* 10.6 Employment Agreement, effective as of August 1, 2003, by and between Virtual Radiologic Consultants, Inc. and Mark Marlow.* 10.7 Employment Agreement, effective as of November 1, 2003, by and between Virtual Radiologic Consultants, Inc. and Brent Backhaus.* 10.8 Employment Agreement, effective as of November 1, 2003, by and between Virtual Radiologic Consultants, Inc. and Lorna Lusic.* 10.9 Employment Agreement, effective as of October 4, 2004, by and between Virtual Radiologic Consultants, Inc. and George Frisch.* 10.10 Employment Agreement, effective as of July 1, 2006, by and between Virtual Radiologic Corporation and Eduard Michel, M.D.* SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents We address this industry need by providing radiology practices, hospitals, clinics and diagnostic imaging centers an attractive way to improve service levels, streamline underlying practice economics and enhance physician efficiency, without sacrificing the quality of work. We assist our customers by providing them with access to subspecialty-trained radiologists to perform reads, day or night, thereby improving the quality of patient care. Our services include both preliminary reads, which are performed for emergent care purposes, and final reads, which are performed for both emergent and non-emergent care purposes. Our ability to provide coverage 24 hours a day supports our customers when their workloads increase during the day and relieves the burden of performing reads overnight, and during holidays, weekends and other difficult-to-staff times. We believe this allows our customers to provide seamless patient care and to better attract and retain radiologists in their practices. Our unique distributed operating model and proprietary workflow management software provide our affiliated radiologists with a flexible choice of work location, predictable schedule and competitive compensation. Our affiliated radiologists, substantially all of whom are located in the United States, are certified by the American Board of Radiology, licensed by the states in which they practice and credentialed by the hospitals for which they perform reads. We have a large number of United States-based affiliated radiologists dedicated to the practice of teleradiology. Our affiliated radiologists collectively hold licenses in all 50 states, the District of Columbia and Puerto Rico. As of September 30, 2007, we had 106 radiologists providing services for us and had contracted with an additional 15 radiologists who had not yet begun servicing our customers. Our primary customers are local radiology practices that have already contracted with hospitals and clinics and require diagnostic image interpretation services for a range of imaging modalities, including computed tomography, or CT, magnetic resonance imaging, or MRI, and ultrasound. We are compensated by our customers and do not directly depend on reimbursement from patients or third party payers. As of September 30, 2007, our affiliated radiologists provided services to 457 customers serving 787 medical facilities, which includes 736 hospitals, representing approximately 13% of hospitals in the United States. This represented an increase of 32% of medical facilities served and an increase of 35% in customers under contract since September 30, 2006. Since our inception, over 98% of our customer contracts up for renewal have been renewed. Our Solution We believe we are one of the leading providers of teleradiology services to radiology practices, hospitals, clinics and diagnostic imaging centers throughout the United States. According to Frost & Sullivan, we are the second largest provider of teleradiology services in the United States. Our services and technology enable our customers to provide a high quality of medical care to their patients. We serve our customers by providing reads 24 hours a day, seven days a week, 365 days a year. Utilizing our proprietary workflow management software and secure broadband internet connections, we connect our customers and our affiliated radiologists through an easy-to-use, robust and scalable communications network. We believe that the following are our key competitive advantages: Leading Presence in Attractive Market Our established presence, comprehensive service offering and technology allow us to create a critical solution for medical care providers faced with shortages in radiology resources. We focus on quality patient care and industry-leading service levels. We believe our brand name, reputation and ability to deliver quality results drive customer relationships and retention, in turn attracting the best radiology talent and performance. Since our inception, we have played an integral role in the development of the teleradiology services market and we maintain a growing customer base with recurring revenue. Table of Contents Exhibit No. Description 10.11 Loan Agreement, dated July 20, 2004, among Virtual Radiologic Professionals, PLC, Virtual Radiologic Consultants, Inc. and Associated Commercial Finance, Inc.* 10.12 Security Agreement, dated as of July 20, 2004, by Virtual Radiologic Professionals, PLC, in favor of Associated Commercial Finance, Inc.* 10.13 Security Agreement, dated as of July 20, 2004, by Virtual Radiologic Consultants, Inc., in favor of Associated Commercial Finance, Inc.* 10.14 Assumption Agreement and Amendment of Loan Agreement, dated as of May 2, 2005, among Virtual Radiologic Professionals, LLC, Virtual Radiologic Consultants, Inc. and Associated Commercial Finance, Inc.* 10.15 Amendment to Loan Agreement, dated March 27, 2006, among Virtual Radiologic Corporation, Virtual Radiologic Professionals, LLC and Associated Commercial Finance, Inc.* 10.16 Amendment No. 1 to Security Agreement, dated as of March 27, 2006, by Virtual Radiologic Corporation and Associated Commercial Finance, Inc.* 10.17 Professional and Management Services Agreement and License, dated as of January 1, 2006, by and between Virtual Radiologic Professionals, LLC and Virtual Radiologic Corporation.* 10.18 Management Services Agreement, dated as of January 1, 2006, by and between Virtual Radiologic Corporation and Virtual Radiologic Professionals of Minnesota, P.A.* 10.19 Management Services Agreement, dated as of January 1, 2006, by and between Virtual Radiologic Corporation and Virtual Radiologic Professionals of New York, P.A.* 10.20 Management Services Agreement, dated as of January 1, 2006, by and between Virtual Radiologic Corporation and Virtual Radiologic Professionals of California, P.A.* 10.21 Management Services Agreement, dated as of January 1, 2006, by and between Virtual Radiologic Corporation and Virtual Radiologic Professionals of Illinois, P.A.* 10.22 Management Services Agreement, dated as of January 1, 2006, by and between Virtual Radiologic Corporation and Virtual Radiologic Professionals of Michigan, P.A.* 10.23 Management Services Agreement, dated as of January 1, 2006, by and between Virtual Radiologic Corporation and Virtual Radiologic Professionals of Texas, P.A.* 10.24 Professional Services Agreement, dated as of January 1, 2006, by and between Virtual Radiologic Professionals, LLC, and Virtual Radiologic Professionals of Minnesota, P.A.* 10.25 Professional Services Agreement, dated as of January 1, 2006, by and between Virtual Radiologic Professionals, LLC, and Virtual Radiologic Professionals of New York, P.A.* 10.26 Professional Services Agreement, dated as of January 1, 2006, by and between Virtual Radiologic Professionals, LLC, and Virtual Radiologic Professionals of California, P.A.* 10.27 Professional Services Agreement, dated as of January 1, 2006, by and between Virtual Radiologic Professionals, LLC, and Virtual Radiologic Professionals of Illinois, P.A.* 10.28 Professional Services Agreement, dated as of January 1, 2006, by and between Virtual Radiologic Professionals, LLC, and Virtual Radiologic Professionals of Michigan, P.A.* 10.29 Professional Services Agreement, dated as of January 1, 2006, by and between Virtual Radiologic Professionals, LLC, and Virtual Radiologic Professionals of Texas, P.A.* 10.30 Lease Agreement, dated as of March 11, 2004, by and between Midwest Holding Corp. #9, Inc. and Virtual Radiologic Consultants, LLC.* 10.31 First Amendment to Lease Agreement, dated August 12, 2004, by and between Midwest Holding Corp. #9, Inc. and Virtual Radiologic Consultants, LLC.* Amendment No. 8 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents Improved Quality of Patient Care We provide our customers with an attractive and economical way to improve service levels, increase the effectiveness of their work environment and enhance the quality of patient care. We enable our customers to provide patient care with 24 hour access to critical radiology services needed to effectively diagnose and treat patients. Since a majority of fellowship-trained specialists have traditionally located in metropolitan areas, patient access to required expertise is often limited in rural areas. Patient access to subspecialists is also limited in urban areas during off-hour, or emergency care, coverage periods when such subspecialists may not be locally available. We believe our services appropriately address this need, thereby improving the quality of patient care. Our ability to rapidly assign reads to appropriately credentialed and trained specialists permits us to deliver high quality and specialized radiology services, including subspecialty services, to our customers. Our affiliated radiologists include subspecialty fellowship-trained radiologists in areas such as neuroradiology, abdominal imaging, musculoskeletal radiology, pediatric radiology, thoracic imaging and ultrasound, enabling us to match the appropriately skilled radiologist with the patient images we receive. We believe that the broad access and quality of the radiology services we provide to our customers have allowed us to achieve a high customer retention rate to date. Sizable Group of U.S.-Based Radiologists Dedicated to Teleradiology We have a large group of United States-based radiologists dedicated to the practice of teleradiology. While our technology platform allows radiologists to be located in any part of the world with high-speed internet access, we believe the United States presence of our affiliated radiologists affords us advantages in recruiting and retaining American Board of Radiology-certified physicians. Without requiring these physicians to relocate either domestically or internationally, we provide our affiliated radiologists with a flexible choice of location, predictable schedule and competitive compensation. In addition, the location of our affiliated radiologists allows us to respond to opportunities in the market for final reads, which must be performed by United States domiciled radiologists to comply with Medicare reimbursement rules. Finally, our group of affiliated radiologists enables us to serve customers who prefer utilizing radiologists practicing within the United States to perform their reads. To date, we have experienced radiologist retention rates (excluding those radiologists we have elected to terminate for non-compliance with the terms of their contracts) of 97%, 98% and 97% for the years ended December 31, 2005 and 2006 and for the nine months ended September 30, 2007, respectively. As of September 30, 2007, we had 106 radiologists providing services for us, and had contracted with an additional 15 radiologists who had not yet begun servicing our customers. Unique Distributed Operating Model Our operating model provides radiologists with digital access to images and allows instant delivery of their reports and direct communication with attending physicians, when required. We employ our proprietary Radiology Information System, or RIS, workflow management software, and operations center to maximize the efficiency of our affiliated radiologists while maintaining a high standard of quality, service and response time. Our systems efficiently: prioritize and monitor the distribution of orders and images to radiologists; facilitate the review and interpretation of images and the preparation of written study reports; provide for rapid exchange of information between the radiologist and attending physician, if necessary; permit rapid consultations among our affiliated radiologists in a computer work environment known as our virtual reading room ; and Table of Contents Exhibit No. Description 10.32 MEDB Building Lease Agreement, dated November 28, 2005, by and between Maui Economic Development Board, Inc. and Virtual Radiologic Consultants, Inc.* 10.33 Second Revised Licensing Agreement, dated as of April 1, 2006, between Fujifilm Medical Systems U.S.A., Inc. and Virtual Radiologic Corporation.* 10.34 Virtual Radiologic Consultants, Inc. Equity Incentive Plan.* 10.35 Virtual Radiologic Consultants, Inc. Stock Purchase Plan.* 10.36 Virtual Radiologic Professionals, PLC Equity Incentive Plan.* 10.37 Form of Amended and Restated Virtual Radiologic Corporation Equity Incentive Plan, which will be in effect upon completion of this offering.* 10.38 Form of Incentive Stock Option Agreement.* 10.39 Form of Non-Incentive Stock Option Agreement.* 10.40 Revolving Loan Agreement, dated as of December 6, 2006, by and between Virtual Radiologic Corporation and Associated Bank, National Association.* 10.41 $2,000,000 Revolving Note, dated December 6, 2006, issued by Virtual Radiologic Corporation in favor of Associated Bank, National Association.* 10.42 Security Agreement, dated as of December 6, 2006, by Virtual Radiologic Corporation and Associated Bank, National Association.* 10.43 Lease Agreement, dated November 22, 2006, by and between Liberty Property Limited Partnership and Virtual Radiologic Corporation.* 10.44 First Addendum to Employment Agreement, dated January 12, 2005, by and between Virtual Radiologic Consultants, Inc. and Mark Marlow.* 10.45 Amendment No. 2 to Employment Agreement, dated January 1, 2007, by and between Virtual Radiologic Corporation and Mark Marlow.* 10.46 Separation Agreement and General Release, dated December 31, 2006, by and between Virtual Radiologic Corporation and Brent J. Backhaus.* 10.47 Separation Agreement and General Release, dated December 31, 2006, by and between Virtual Radiologic Corporation and Lorna J. Lusic.* 10.48 Amendment No. 1 to Professional and Management Services Agreement and License, dated as of February 1, 2007, by and between Virtual Radiologic Professionals, LLC and Virtual Radiologic Corporation.* 10.49 Amendment No. 1 to Professional Services Agreement, dated as of February 1, 2007, by and between Virtual Radiologic Professionals, LLC, and Virtual Radiologic Professionals of Minnesota, P.A.* 10.50 Amendment No. 1 to Professional Services Agreement, dated as of February 1, 2007, by and between Virtual Radiologic Professionals, LLC, and Virtual Radiologic Professionals of New York, P.A.* 10.51 Amendment No. 1 to Professional Services Agreement, dated as of February 1, 2007, by and between Virtual Radiologic Professionals, LLC, and Virtual Radiologic Professionals of California, P.A.* 10.52 Amendment No. 1 to Professional Services Agreement, dated as of February 1, 2007, by and between Virtual Radiologic Professionals, LLC, and Virtual Radiologic Professionals of Illinois, P.A.* 10.53 Amendment No. 1 to Professional Services Agreement, dated as of February 1, 2007, by and between Virtual Radiologic Professionals, LLC, and Virtual Radiologic Professionals of Michigan, P.A.* 10.54 Amendment No. 1 to Professional Services Agreement, dated as of February 1, 2007, by and between Virtual Radiologic Professionals, LLC, and Virtual Radiologic Professionals of Texas, P.A.* Virtual Radiologic Corporation (Exact name of registrant as specified in its charter) Delaware 8090 27-0074530 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification No.) 5995 Opus Parkway, Suite 200 Minnetonka, Minnesota 55343 (952) 392-1100 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Sean Casey, M.D. Chief Executive Officer Virtual Radiologic Corporation 5995 Opus Parkway, Suite 200 Minnetonka, Minnesota 55343 (952) 392-1100 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents provide our customers with immediate electronic access to a radiologist s written report and an immediate follow-on report in hard copy. Our proprietary workflow software manages our radiology caseload by matching the patient s need with a properly licensed and credentialed radiologist with expertise to most adequately provide patient care. Our software optimizes the assignment of cases across our affiliated radiologists to minimize read turnaround times. Finally, our centralized administrative and operations support functions allow our affiliated radiologists to focus solely on providing reads without the distraction of administrative duties. Scalable Technology Platform Our substantial investment in designing, developing and installing our distributed network, proprietary workflow management software and radiologist reading tools has allowed us to complement rapid customer growth with new radiologist hires to meet growing customer demand. In addition to developing our proprietary RIS system, we have integrated additional technological solutions such as a 3-D capable viewer and a voice recognition system and ergonomically advanced reading stations, to maximize radiologist efficiency. We have also developed automation tools for all workflow processes for radiologist recruitment and deployment, licensing and credentialing, scheduling, finance and management reporting. Our wide area network efficiently connects our customers facilities to our distributed group of affiliated radiologists. In November 2006, we contracted to begin licensing the use of our technology infrastructure and began providing support services to our radiology group customers. For the nine months ended September 30, 2007, our revenue from providing support services was $205,000. Our robust and highly reliable technological infrastructure is designed to manage volume levels several times our current size with modest additional capital investment. Experienced Management Team Our management team includes founding members who have designed our business model, infrastructure and platform necessary to deliver significant growth and execute our business plan. Dr. Sean Casey, a co-founder of our Company, has served as the Chief Executive Officer and a director of our Company and VRP s predecessor since May 2001. Dr. Casey was formerly a clinical associate professor at the University of Minnesota and has published numerous professional journal articles on radiology. An American Board of Radiology-certified radiologist and neuroradiologist, Dr. Casey is a pioneer in the clinical use of cerebral CT angiography and venography. In addition to Dr. Casey s extensive medical expertise, he is primarily responsible for the development of our service offerings and business model. Dr. Eduard Michel, a co-founder of our Company, has served as a director of our Company and VRP s predecessor since May 2001. He has served as our Company s Medical Director since July 2006, managing the engagement and performance of radiologists and overseeing the quality of radiology services. An American Board of Radiology-certified radiologist and neuroradiologist, Dr. Michel has published several professional articles on radiology and was formerly a clinical associate professor at the University of Minnesota. Dr. Michel also has significant experience in the private practice of radiology. We recently appointed Robert Kill as our President and Chief Operating Officer and Richard W. Jennings as our Chief Technology Officer. Mr. Kill has over 20 years of sales, marketing, operations and general management experience primarily in the healthcare services and technology sectors. Most recently, Mr. Kill was President of a leading software and services provider to the ambulatory market. Mr. Jennings has more than 25 years of information technology-related experience and has extensive management experience in technology focused companies. Our Strategy Our goal is to broaden our position as a leading teleradiology services provider by continuing to offer comprehensive services to our customers, 24 hours a day, seven days a week, 365 days a year. * Previously filed. *** Filed herewith. Confidential treatment has been requested for certain portions of this exhibit, which portions have been omitted and filed separately with the Securities and Exchange Commission. Copies to: Daniel D. Rubino, Esq. Willkie Farr & Gallagher LLP 787 Seventh Avenue New York, New York 10019 (212) 728-8000 Richard J. Sandler, Esq. Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 (212) 450-4000 Table of Contents We intend to build upon our industry-leading service levels, innovative and scalable technology and highly regarded team of affiliated radiologists to expand our footprint. Our focus will remain on improving patient care while providing a compelling value proposition to both our customers and our affiliated radiologists. In order to achieve our objectives, we plan to: increase our sales and marketing efforts to further expand our customer base; advance our recruitment and deployment of U.S.-based qualified radiologists to meet increased demand for both preliminary and final reads; expand services and increase utilization by our existing customer base, including final reads; develop additional applications that permit expanded use of our technology platform by customers and hospitals; and pursue acquisitions opportunistically. Business Risks Through the operation of our business and in connection with this offering, we are subject to certain risks related to our industry, our business and this transaction. The risks set forth under the section entitled Risk Factors beginning on page 11 of this prospectus reflect risks and uncertainties that could significantly and adversely affect our business, prospects, financial condition, operating results and growth strategy. In summary, significant risks related to our business include: our ability to effectively manage our growth and development; competition in the teleradiology market; our ability to recruit and retain qualified radiologists; and regulatory requirements, including the regulation of the corporate practice of medicine, that could impair our operations and profitability.
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+S-1/A CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements. Such forward-looking statements include statements regarding, among others, (1) our expectations about possible business combinations, (2) our growth strategies, (3) our future financing plans, and (4) our anticipated needs for working capital. Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words "may," "will," "should," "expect," "anticipate," "approximate," "estimate," "believe," "intend," "plan," or "project," or the negative of these words or other variations on these words or comparable terminology. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found in this prospectus. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under "Risk Factors" and matters described in this prospectus generally. In light of these risks and uncertainties, the events anticipated in the forward-looking statements may or may not occur. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore that you should not rely on any of these forward-looking statements as statements of historical fact or as guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions and the following: our status as a development stage company; our ability to continue as a going concern; our failure to receive necessary regulatory consents, or to receive them in a timely manner, in connection with our initial business combination; our dissolution or liquidation prior to a business combination, and our ability to dissolve and liquidate in a timely manner; the reduction of the proceeds held in the trust account due to third party claims; our selection of a prospective acquisition target or asset; our issuance of our capital stock or incurrence of debt to complete a business combination; our ability to consummate an attractive business combination due to our limited resources and the significant competition for business combination opportunities; our dependence on our key personnel; the tax consequences of an acquisition or disposition by us; conflicts of interest of our officers and directors; potential future affiliations of our officers and directors with competing businesses; our ability to obtain additional financing if necessary; the control by our existing stockholders, directors and officers of a substantial interest in us; the possibility of our common stock becoming subject to the SEC's penny stock rules; *All numbers and statistics in this paragraph are based on the USDA Agricultural Baseline Projections to 2015 Report, except the U.S. GDP number which is based on the Bureau of Economic Analyses, a division of the U.S. Department of Commerce, as of April 28, 2006, and except as otherwise indicated. the adverse effect the outstanding warrants and options may have on the market price of our common shares; the existence of registration rights with respect to the securities owned by our existing stockholders and underwriters; our being deemed an investment company; the lack of adequate resources to cover our operating expenses; the lack of a market for our securities; regulatory risks and operational risks of an acquisition target, including those involved in operating outside the United States; loss of our intellectual property rights; foreign currency fluctuation; limited operating histories of businesses we may acquire in the agriculture industry; cyclicality of the agriculture industry; and our failure to keep pace with changes in our target industries. These risks and others described under "Risk Factors" are not exhaustive. Any forward-looking statement made by us in this prospectus speaks only as of the date on which we make it, and is expressly qualified in its entirety by the foregoing cautionary statements. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. through 2015.** Based on trends in global population and demand for agricultural products, the USDA forecasts that U.S. gross cash income will increase from $271.7 billion in 2004 to $312.5 billion by 2015, representing a compound annual growth rate, or CAGR, of approximately 1.3%. **World Agriculture: Toward 2015/2030 Summary Report. Our management intends to focus its efforts on a business combination in the United States. If an attractive foreign business opportunity presents itself, however, our management intends to pursue it. We anticipate that target business candidates in the United States and globally will be brought to our attention from various unaffiliated sources. Our directors and officers as well as their affiliates may also bring to our attention target business candidates that they become aware of through their business contacts. Francis P. Jenkins, Jr., our chairman and chief executive officer, and G. Kenneth Moshenek, our president and chief operating officer, served as executive officers of Royster-Clark, Inc. under employment agreements that contain a non-competition provision. These agreements prohibit Messrs. Jenkins and Moshenek from directly or indirectly engaging in, or owning, managing, operating or controlling, or participating in the ownership, management, operation or control of any business or entity that engages in a substantially similar business or line of business as those conducted by Royster-Clark, Inc. until July 22, 2010. Serving as a director or officer of such a business or entity will violate the non-competition provision. According to publicly filed documents, Royster-Clark, Inc.'s business is the retail and wholesale distribution of mixed fertilizer, fertilizer materials, seed, crop protection products and agronomic services to farmers, primarily in the Southeast and Midwest regions of the United States. To the extent that we decide to pursue the acquisition of an entity that may have operations that are substantially similar to those of Royster-Clark, Inc., we will endeavor to obtain a waiver of the non-competition provision from Royster-Clark, Inc. If this negotiation proves unsuccessful, we may have to abandon our plan to acquire such entity. We believe that there are potential target acquisition candidates in the United States and globally that engage in other segments of the agriculture industry and that would not be subject to a challenge by Royster-Clark, Inc. In the event that we have a choice between potential target businesses that may be affected by such non-competition provision and potential target businesses that would not be affected by such non-competition provision, we intend to proceed with those that would not be affected by such non-competition provision. For more information on the non-competition provisions to which Messrs. Jenkins and Moshenek are subject, see "Risk Factors-Risk Relating to the Company and the Offering" and "Proposed Business-Effecting a Business Combination." We do not have any specific business combination under consideration, and we have not (nor has anyone acting on our behalf) contacted any prospective target business or had any discussions, formal or otherwise, with respect to such a transaction. We have not been approached, directly or indirectly, by any candidates (or a representative of any candidates) with respect to a possible acquisition transaction with us. Additionally, we have not engaged or retained any agent or other representative to identify or locate any suitable acquisition candidate. Our initial business combination must be with an operating business whose fair market value is equal to at least 80% of our net assets at the time of such acquisition. In order to do so, we may seek to raise additional funds through the private sale of securities or the incurrence of indebtedness that would enable us to effect a business combination with an operating business having a fair market value of at least, or greater than, 80% of our net assets at the time of such an acquisition. There is no limitation on our ability to raise such additional funds through the private sale of securities or the incurrence of indebtedness. We have not entered into any financing arrangements or had discussions, formal or otherwise, with any third parties with respect to such financing arrangements. If we are unable to consummate a business combination within the UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 allotted time periods set forth in this prospectus, we will implement a plan of dissolution and distribution which will include the liquidation of the trust account to our public stockholders. Our directors and officers will not receive any compensation prior to the consummation of our initial business combination other than reimbursement for reasonable out-of-pocket expenses incurred by them on our behalf. After the consummation of a business combination, if any, to the extent such persons remain as directors of the resulting business, we anticipate that they will receive compensation comparable to directors at other similarly-situated companies in the agriculture industry. Further, after the consummation of a business combination, if any, to the extent they remain as officers of the resulting business, we anticipate that they may enter into employment agreements, the terms of which will be negotiated and which we expect to be comparable to employment agreements with other similarly-situated companies in the agriculture industry. Our offices are located at c/o The Shermen Group, 1251 Avenue of the Americas, Suite 900, New York, NY 10020, and our telephone number is (212) 300-0020. AMENDMENT NO. 11 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (1)Assumes the underwriters' over-allotment option is not exercised and the 750,000 shares issued pursuant to the 1.15 for 1 forward stock split are forfeited. (2)Excludes the 700,000 shares of common stock underlying the underwriters' purchase option described under "Underwriting Purchase Option." SHERMEN WSC ACQUISITION CORP. (Exact name of Registrant as specified in charter) (3)Assumes that the underwriters' over-allotment option is not exercised and excludes 1,400,000 warrants underlying 700,000 units which were granted to the representatives of the underwriters in the aggregate (350,000 units to each representative) pursuant to the $100 purchase option described under "Underwriting Purchase Option." Delaware (State or other jurisdiction of incorporation or organization) 6770 (Primary Standard Industrial Classification Code Number) 20-4755936 (I.R.S. Employer Identification Number) Shermen WSC Acquisition Corp. c/o The Shermen Group 1251 Avenue of the Americas Suite 900 New York, NY 10020 (212) 300-0020 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) We established the last criterion to provide warrant holders with a premium to the initial warrant exercise price, as well as a degree of liquidity to cushion the market reaction, if any, to our redemption call. If the foregoing conditions are satisfied and we call the warrants for redemption, the warrant holders will then be entitled to exercise their warrants prior to the date scheduled for redemption. However, there can be no assurance that the price of the common stock will exceed $8.50 or the warrant exercise price after the redemption call is made. If we call our warrants for redemption, the holders of the founder warrants would still be entitled to exercise the founder warrants on a cashless basis. As a result, such holders may have a conflict of interest in determining when to call the warrants for redemption as they would potentially be able to avoid any negative price pressure on the price of the warrants and common stock due to the redemption through a cashless exercise. Founder warrant purchases: Concurrent with this offering, certain of our directors and officers will purchase through Shermen WSC Holding LLC, in a private placement, an aggregate of 5,214,286 warrants, at $0.70 per warrant from us. The proceeds from this sale will be held in the trust account pending the completion of our initial business combination. If we do not complete our initial business combination that meets the criteria described in this prospectus, then such proceeds will become part of the amount payable to our public stockholders upon the liquidation of the trust account as part of our plan of dissolution and distribution and the founder warrants will expire worthless. The terms and provisions of these warrants will be identical to those of the warrants sold in this offering except that if we call the warrants for redemption, the founder warrants will be exercisable on a cashless basis. Such directors and officers have further agreed that any warrants purchased by them or their affiliates or designees will not be sold or transferred until after we have completed our initial business combination, except Shermen WSC Holding LLC may distribute the founder warrants to its members. Proposed OTC Bulletin Board symbols for our securities: Units: [ ] Common Stock: [ ] Warrants: [ ] Proceeds to be held in trust: $119,400,000 of the net proceeds we receive from our unit offering and the private placement of the founder warrants (approximately $5.97 per unit) will be placed in a trust account at [ ], maintained by Continental Stock Transfer & Trust Company acting as trustee, pursuant to an agreement to Francis P. Jenkins, Jr. Chairman and Chief Executive Officer Shermen WSC Acquisition Corp. c/o The Shermen Group 1251 Avenue of the Americas Suite 900 New York, NY 10020 (212) 300-0020 (Name, address, including zip code, and telephone number, including area code, of agent for service) be signed on the date of this prospectus (and in the event the units are registered for sale in Colorado, pursuant to Section 11-51-302(6) of the Colorado Revised Statutes). These proceeds will not be released until the earlier of (i) the completion of a business combination on the terms described in this prospectus or (ii) our liquidation. Therefore, unless and until a business combination is consummated, the proceeds held in the trust account will not be available for our use for any expenses which we may incur related to the investigation and selection of a target business and the negotiation of an agreement to effect the business combination. These expenses may be paid prior to a business combination only from the net proceeds of this offering and the private placement of the founder warrants not held in a trust account (initially, approximately $115,000 after the payment of the expenses relating to this offering) and one half of the interest earned on the trust account, net of taxes, up to a total of $1,500,000, that will be released to us on a monthly basis to fund our working capital requirements. Shermen Capital Partners, LLC, whose managing member is Francis P. Jenkins, Jr., our chairman and chief executive officer, has loaned $150,000 to us for the payment of certain offering expenses. The final maturity for this non-interest bearing loan is five business days after twenty-four months after the date of this offering, but to the extent that our working capital in any month, including one-half of the interest earned on the trust account, net of taxes, that is released to us in that month, is greater than our current expenses in that month, all or a portion of such excess may be applied to a prepayment of the $150,000 loan from Shermen Capital Partners, LLC. All remaining interest earned on the trust account, net of taxes, will be added to the trust account. The proceeds held in the trust account will be used to pay the underwriters a deferred fee equal to 4.0% of the gross proceeds of the unit offering, or $4,800,000, less $0.24 for each share of common stock converted to cash in connection with our initial business combination. Our existing stockholders, other than Messrs. Pottinger, Prochaska and Jenkins, III, have agreed, subject to certain exceptions, that they will be personally liable, on a joint and several basis, to cover claims made by third parties, but only if, and to the extent, the claims reduce the amounts in the trust account available for payment to our stockholders in the event of a liquidation and the claims are made by a vendor or service provider for services rendered, or products sold, by us or a prospective acquisition target. However, these existing stockholders will not have any personal liability as to any claimed amounts owed to a third party who executed a waiver (including a prospective acquisition target) or the underwriters. Copies to: Gerald Adler Dechert LLP 30 Rockefeller Plaza New York, NY 10112-2200 (212) 698-3500 (212) 698-3599 Facsimile Floyd I. Wittlin Bingham McCutchen LLP 399 Park Avenue New York, NY 10022-4689 (212) 705-7000 (212) 752-5378 Facsimile Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement None of the warrants may be exercised until after the consummation of a business combination. Thus, after the proceeds of the trust account have been disbursed, the warrant exercise price will be paid directly to us. Limited payments to directors, officers and stockholders: There will be no fees or other payments paid to our existing stockholders, directors, officers or their affiliates prior to, or for any services they render in order to effectuate, the consummation of our initial business combination other than (i) the $9,950 per month payment to Shermen Capital Partners, LLC, an affiliate of Francis P. Jenkins, Jr., our chairman and chief executive officer and (ii) reimbursement of reasonable out-of-pocket expenses incurred by them in connection with our organization, this offering and certain activities on our behalf, such as identifying and investigating possible targets for our initial business combination. At this time, there is no reimbursement of such expenses to be made to our existing stockholders, directors, officers or other affiliates. There is no limit on the amount of out-of-pocket expenses that could be incurred, and there will be no review of the reasonableness of the expenses by anyone other than our board of directors, which may include persons who may seek reimbursement, or a court of competent jurisdiction if such reimbursement is challenged. The stockholders must approve a business combination: We will seek stockholder approval before we effect our initial business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable state law. In connection with the vote required for our initial business combination, all of our existing stockholders, directors and officers, have agreed to vote the shares of common stock then owned by them, including any shares of common stock purchased in or following this offering, in accordance with the majority of the shares of common stock voted by our public stockholders other than our existing stockholders, directors and officers. We will proceed with a business combination only if (i) a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and (ii) public stockholders owning less than 40% of the shares sold in this offering both vote against the business combination and exercise their conversion rights as described below. Most other blank check companies have a conversion threshold of 20%, which makes it more difficult for such companies to consummate their initial business combination. Because we permit a larger number of stockholders (up to approximately 39.99% of our public stockholders) to exercise their conversion rights, it will be easier for us to consummate an initial business combination If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. with a target business which stockholders may believe is not suitable for us. We view the procedures governing the approval of our initial business combination, each of which are set forth in our amended and restated certificate of incorporation, as obligations to our stockholders, and neither we nor our board of directors will propose, or seek stockholder approval of, any amendment of these procedures. In addition, if we seek approval from our stockholders to consummate a business combination within 90 days of the expiration of 24 months (assuming that the period in which we need to consummate a business combination has been extended, as provided in our amended and restated certificate of incorporation) from the date of this offering, the proxy statement related to such business combination will also seek stockholder approval for our board's recommended plan of dissolution and distribution, in the event our stockholders do not approve such business combination. For more information see "Proposed Business Effecting a Business Combination Opportunity for stockholder approval of business combination." If holders of no more than approximately 39.99% of the shares sold in this offering vote against a proposed business combination and seek to exercise their conversion rights and such business combination is consummated, the existing stockholders have agreed to forfeit and return to us for cancellation a number of shares so that they will collectively own no more than 23.0% of our outstanding common stock upon consummation of such business combination (without giving effect to any shares that may be issued in the business combination). Conversion rights for stockholders voting to reject a business combination: Public stockholders voting against a business combination will be entitled to convert their stock into a pro rata share (based on the number of units sold in this offering) of the amount held in the trust account, including the amount held in the trust account representing the deferred portion of the underwriters' fee and any interest earned on their pro rata share (net of taxes payable) not made available to us to fund our working capital requirements if the business combination is approved and consummated. However, voting against the business combination alone will not result in an election to exercise a stockholder's conversion rights. A stockholder must also affirmatively exercise such conversion rights prior to the time the business combination is voted upon by the stockholders. To exercise such conversion rights, a stockholder must instruct such stockholder's broker to electronically tender such stockholder's shares to the transfer agent using the facilities of the Depositary Trust Company (or, in the event that such stockholder had previously requested and received a physical certificate, to surrender such physical certificate to the transfer agent) by 5:00 P.M., Eastern Standard Time, on the business day immediately preceding the date of the stockholders meeting held to vote on a business combination. We will not require that stockholders obtain physical certificates to be tendered to us. In addition, such stockholder or such stockholder's broker will be required to deliver to the transfer agent a letter of instruction, which will provide the transfer agent with additional information related to the payment to be received from the trust account, and such stockholder will be required to comply with such other procedures as we may reasonably establish, by 5:00 P.M., Eastern Standard Time, on the business day immediately preceding the date of the stockholders meeting held to vote on a business combination. Traditionally, blank check companies have allowed converting stockholders to tender their shares after the stockholders meeting held to vote on a business combination. This procedure created uncertainty in determining whether the number of converting stockholders would result in a business combination failing. To avoid this uncertainty, we have instituted the requirement of tendering shares by converting stockholders prior to the time a business combination is voted upon by our stockholders by instructing their brokers to electronically tender their shares to the transfer agent using the facilities of the Depositary Trust Company (or, in the event that such stockholders had previously requested and received physical certificates, to surrender such physical certificates to the transfer agent). Public stockholders eligible to convert their shares who fail to comply with the procedures above will forfeit their right to receive the conversion price. We intend to remind our public stockholders of our conversion procedures in the proxy statement used in connection with the solicitation of the stockholder vote for a business combination. We intend to distribute the funds to eligible stockholders who elect conversion promptly after completion of the business combination. If either a majority of the shares of common stock voted by the public stockholders are voted against a business combination or public stockholders owning more than 40% of the shares sold in this offering both vote against the business combination and exercise their conversion rights, such business combination will not be consummated and such public stockholders will lose their conversion rights with respect to such business combination. Public stockholders who convert their stock into a pro rata share of the trust account retain their warrants. If a business combination is not consummated, we will return the shares tendered by the stockholders who elected conversion by returning such stockholders' shares electronically through the facilities of the Depositary Trust Company (or, in the event that such stockholders surrendered physical certificates, by returning such physical certificates by overnight mail), and will seek another acquisition target. Our existing stockholders, directors and officers cannot convert their common stock into a pro rata share of the trust account if a business combination is approved, because they have agreed to vote their stock in accordance with the majority of the shares of common stock voted by the public stockholders other than our existing stockholders, directors and officers. We view the procedures governing the approval of our initial business combination, each of which are set forth in our amended and restated certificate of incorporation, as obligations to our stockholders, and neither we nor our board of directors will propose, or seek stockholder approval of, any amendment of these procedures. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Subject to Completion, dated May [ ], 2007 PRELIMINARY PROSPECTUS $120,000,000 SHERMEN WSC ACQUISITION CORP. 20,000,000 Units Shermen WSC Acquisition Corp is a blank check company recently formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase or other similar business combination, an operating business in the agriculture industry. This is an initial public offering of our securities at a public offering price of $6.00 per unit. Each unit that we are offering consists of: one share of our common stock; and two warrants. Each warrant entitles the holder to purchase one share of our common stock at a price of $5.00. Each warrant will become exercisable on the later of our completion of a business combination or [ ], 2008 [insert one year from the date of this prospectus], and will expire on [ ], 2011 [insert four years from the date of this prospectus], or earlier upon redemption. We have granted the underwriters a 45-day option to purchase up to 3,000,000 additional units to cover over-allotments, if any (over and above the 20,000,000 units referred to above). The over-allotment option will be used only to cover a net short position resulting from the initial distribution. We have also agreed to sell to CIBC World Markets Corp. and CRT Capital Group LLC, the representatives of the underwriters, for $100, as additional compensation, an option to purchase up to a total of 700,000 units in the aggregate (350,000 units to each representative) at a price of $7.50 per unit. The units issuable upon exercise of this option are identical to those offered by this prospectus, except that each warrant underlying such units entitles the holder to purchase one share of our common stock at a price of $6.25. There is presently no public market for our units, common stock or warrants. We anticipate that our units will be quoted on the OTC Bulletin Board under the symbol [ ] and begin trading on or promptly after the date of this prospectus. The common stock and warrants will begin separate trading as promptly as practicable following the consummation of this offering, but in no event later than 65 days following the consummation of this offering. For more information see "Description of Securities Units." Once the securities comprising the units begin separate trading, we anticipate that the common stock and warrants will be quoted on the OTC Bulletin Board under the symbols [ ] and [ ], respectively. We cannot assure you, however, that our securities will be or will continue to be quoted on the OTC Bulletin Board. Certain of our directors and officers have agreed to purchase through Shermen WSC Holding LLC from us on the closing date of this offering an aggregate of 5,214,286 warrants for a total purchase price of $3,650,000, or $0.70 per warrant in a private placement. We refer to these 5,214,286 warrants as the "founder warrants" throughout this prospectus. The founder warrants have terms and provisions that are identical to those of the warrants being sold as part of the units in the public offering except that if we call the warrants for redemption, the founder warrants will be exercisable on a cashless basis. The founder warrants will not be transferable or salable by Shermen WSC Holding LLC or such directors or officers or their respective affiliates until after we have completed our initial business combination, except Sherman WSC Holding LLC may distribute them to its members. In addition, the holders of the founder warrants and the common stock underlying such warrants are entitled to registration rights with respect to such securities under an agreement to be signed on the date of this prospectus. The founder warrants will be differentiated from warrants, if any, purchased in or following this offering by such directors and officers through the legending of certificates representing the founder warrants indicating the restrictions and rights specifically applicable to such warrants as are described in this prospectus. Investing in our securities involves a high degree of risk. See "Risk Factors" beginning on page 17 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Public Offering Price Underwriting Discount and Commission(2)(3) Proceeds, Before Expenses, to Us Per unit $6.00 $0.18 $5.82 Total(1) $120,000,000 $3,600,000 $116,400,000 (1)The "as adjusted" information gives effect to the sale of the units we are offering pursuant to this prospectus, including the application of the estimated gross proceeds, the receipt of approximately $3,650,000 from the sale of the founder warrants in a private placement that will take place concurrently with this offering, and the payment of the estimated remaining costs from such unit sale. The working capital (as adjusted) and total assets (as adjusted) amounts do not include $1,500,000, the maximum amount from one half of the interest earned on the trust account. One half of the interest earned on the trust account will be disbursed to us on a monthly basis for working capital purposes including the repayment of the limited recourse $150,000 loan from Shermen Capital Partners, LLC. If a business combination is not so consummated, we will be dissolved and the proceeds held in the trust account, including the amount held in trust representing the deferred portion of the underwriters' fee, will be distributed solely to our public stockholders. (2)The working capital (as adjusted) amount includes the $4,800,000 ($5,520,000 if the over-allotment option is exercised in full) being held in the trust account that will either be paid to the underwriters upon consummation of our initial business combination or to our public stockholders in the event we do not consummate a business combination within the required time period. (3)The total liabilities (as adjusted) amount includes the $4,800,000 ($5,520,000 if the over-allotment option is exercised in full) being held in the trust account that will either be paid to the underwriters upon consummation of our initial business combination or to our public stockholders in the event we do not consummate a business combination within the required time period. However, for purposes of presentation, total liabilities (as adjusted) assumes that we have converted the maximum of 7,999,999 shares to cash in connection with our initial business combination, reducing the underwriters' fee by $0.24 per share, or approximately $1,920,000 ($2,208,000 if the over-allotment option is exercised in full). (1)The underwriters have an option to purchase up to an additional 3,000,000 units at the public offering price, less the underwriting discount and commission, within 45 days of the date of this prospectus to cover any over-allotments. If the underwriters exercise this option in full, the total public offering price, the underwriting discount and commission and proceeds, before expenses, to us, will be $138,000,000, $4,140,000 and $133,860,000, respectively. See "Underwriting Purchase Option." (2)This amount excludes additional underwriting fees equal to 4.0% of the gross proceeds of the unit offering, or $4,800,000 ($5,520,000 if the over-allotment option is exercised in full), which the underwriters have agreed to defer until the consummation of our initial business combination. Upon the consummation of our initial business combination, we will pay such deferred fees, less $0.24 for each share of common stock converted to cash in connection with our initial business combination, to the underwriters out of the proceeds of this offering held in a trust account at [ ], maintained by Continental Stock Transfer & Trust Company acting as trustee. In the event that a business combination is not consummated within the required time period, the deferred underwriters' fee will be included in the distribution to our public stockholders of the proceeds held in trust. (3)In addition to the underwriting discount and commission, the underwriters or their associated persons have received other items of value from us which are deemed underwriters' compensation under Rule 2710 of the NASD Conduct Rules. See "Underwriting Other Items of Value" for more information. Of the net proceeds we receive from our unit offering and the private placement of the founder warrants, $119,400,000 (approximately $5.97 per unit) will be deposited into a trust account at [ ], maintained by Continental Stock Transfer & Trust Company acting as trustee. We are offering the units for sale on a firm-commitment basis. The underwriters expect to deliver our securities to investors in the offering on or about [ ], 2007. CIBC World Markets CRT Capital Group LLC I-Bankers Securities, Inc. [ ], 2007 We will not proceed with a business combination if public stockholders owning 40% or more of the shares sold in this offering both vote against the business combination and exercise their conversion rights. Accordingly, we may effect a business combination if public stockholders owning less than 40% of the shares sold in this offering exercise their conversion rights. If this occurred, we would be required to convert to cash up to 7,999,999 of the 20,000,000 shares of common stock sold in this offering, at an initial per-share conversion price of approximately $5.97, without taking into account interest earned on the trust account (net of taxes payable). The actual per-share conversion price will be equal to the amount in the trust account, including the amount held in the trust account representing the deferred portion of the underwriters' fee and all accrued interest (net of taxes payable) not made available to us for working capital requirements as of two business days prior to the consummation of the business combination, divided by the number of units sold in this offering. In connection with any vote required for a business combination, all of our existing stockholders, directors and officers, have agreed to vote the shares of common stock then owned by them, including any shares of common stock purchased in or following this offering, in accordance with the majority of the shares of common stock voted by our public stockholders other than our existing stockholders, directors and officers. As a result, our existing stockholders, directors and officers will not have any conversion rights attributable to their shares owned prior to this offering in the event that a business combination is approved by a majority of our public stockholders other than our existing stockholders, directors and officers. Additionally, if holders of no more than approximately 39.99% of the shares sold in this offering vote against a proposed business combination and seek to exercise their conversion rights and such business combination is consummated, the existing stockholders have agreed to forfeit and return to us for cancellation a number of shares so that they will collectively own no more than 23.0% of our outstanding common stock upon consummation of such business combination (without giving effect to any shares that may be issued in the business combination). If we are unable to effect a business combination and liquidate, none of our existing stockholders will receive any portion of the liquidation proceeds with respect to common stock owned by them immediately before this offering. TABLE OF CONTENTS Page RISK FACTORS An investment in our securities involves a high degree of risk. You should consider carefully all of the risks described below, together with the other information contained in this prospectus, before making a decision to invest in our securities. If any of the following risks occur, our business, financial condition and results of operations may be adversely affected. In that event, the trading price of our securities could decline, and you could lose all or a part of your investment.
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+This summary highlights information contained elsewhere in this prospectus but does not contain all the information you should consider before investing in our shares of common stock. You should read the entire prospectus carefully, including the risks discussed in the "Risk Factors" section, the historical financial statements and the notes to those financial statements. All references in this prospectus to "we," "us," "our" and "Pinnacle" refer to Pinnacle Gas Resources, Inc. We have included as Appendix A to this prospectus a glossary of certain technical terms and abbreviations used in this prospectus that are important to an understanding of our business. PINNACLE GAS RESOURCES, INC. Overview We are an independent energy company engaged in the acquisition, exploration and development of domestic onshore natural gas reserves. We currently focus our efforts on the development of coalbed methane, or CBM, properties located in the Rocky Mountain region, and we are a substantial holder of CBM acreage in the Powder River Basin. We have assembled a large, predominantly undeveloped CBM leasehold position, which we believe positions us for significant long-term growth in production and proved reserves. In addition, we own over 94% of the rights to develop conventional and unconventional oil and gas in zones below our existing CBM reserves. Substantially all our undeveloped acreage as of June 30, 2007 was located on the northern end of the Powder River Basin in northeastern Wyoming and southern Montana. As of June 30, 2007, we owned natural gas and oil leasehold interests in approximately 478,000 gross (332,000 net) acres, approximately 94% of which were undeveloped. As of June 30, 2007, we had identified approximately 5,260 CBM drilling locations on our existing acreage, primarily on 80-acre well spacing, targeting an average of three coal seams per location. At December 31, 2006, we had estimated net proved reserves of 20.3 Bcf based on a year-end Colorado Interstate Gas, or CIG, index price of $4.46 per Mcf, with a pre-tax PV-10 value of $25.3 million. These net proved reserves were located on approximately 8% of our net acreage. Based on our drilling results to date, analysis of core samples and third-party results in adjacent areas, we believe that our remaining undeveloped CBM acreage has substantial commercial potential. None of our acreage or producing wells is associated with coal mining operations. As of December 31, 2006, we owned interests in 529 gross (281 net) producing wells and operated 98% of these wells. During 2006, we drilled 230 gross (139 net) wells and produced an average of 6.6 MMcf per day net to our interest. We exited 2006 producing 7.5 MMcf per day net to our interest. We incurred capital expenditures of $68.5 million during 2006, of which $39.9 million was primarily related to drilling, completion and infrastructure costs on our undeveloped acreage in our Kirby, Deer Creek, Cabin Creek and Green River Basin areas and the remaining $28.6 million was related to acquisitions, including $27.0 million for our Green River Basin acquisition. In response to lower CIG index prices, we reduced our 2007 total capital expenditure budget from approximately $52.6 million to approximately $30.0 million. Consequently, we expect to reduce our drilling and completion targets for 2007 from approximately 260 gross (207 net) wells to approximately 140 gross (102 net) wells. In addition, our revised 2007 capital expenditure budget will continue to be used to construct related gas and water infrastructure, to fund plans of development costs for future wells, to fund undeveloped leasehold acquisition costs carried over from 2006, to recomplete certain wells, and to fund infrastructure and completion costs related to such wells drilled in 2006. During the six months ended June 30, 2007, we incurred capital expenditures of $11.5 million primarily related to drilling, completion and infrastructure costs on our undeveloped acreage. ABOUT THIS PROSPECTUS This prospectus is part of a resale registration statement. The selling stockholders may sell some or all of their shares in one or more transactions from time to time. This prospectus highlights selected information about us and our common stock but does not contain all information that you should consider before investing in the shares. You should
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+Prospectus Summary 1
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+PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. Unless otherwise stated in this prospectus, references to we, us or our company refer to ChinaGrowth North Acquisition Corporation. Unless otherwise specified, references to China or the PRC refer to the People s Republic of China, as well as the Hong Kong Special Administration Region, or Hong Kong SAR, and the Macau Special Administration Region, but do not include Taiwan. The term public shareholders means the holders of ordinary shares sold as part of the units in this offering or in the open market, including any existing shareholders to the extent that they purchase or acquire such shares. All references to RMB or Renminbi are to the legal currency of China and all references to US dollars and $ are to the legal currency of the United States. Discrepancies in tables included in this prospectus between totals and sums of the amounts listed are due to rounding. Unless we tell you otherwise, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer is not permitted. The Company We are a blank check company incorporated under the laws of the Cayman Islands on May 3, 2006. We were formed with the purpose of acquiring through a share capital exchange, asset acquisition or other similar business combination, or control, through contractual arrangements, an operating business that has its primary operating facilities located in the People s Republic of China in any city or province north of the Yangtze River, including but not limited to the Jiangsu and Hubei provinces and Chongqing. Our efforts in identifying a prospective target business will not be limited to a particular industry. However, in the event ChinaGrowth South Acquisition Corporation, or ChinaGrowth South, an entity formed by our principals simultaneously with our incorporation, executes a definitive acquisition agreement, then we will have no geographic restrictions in identifying and selecting a prospective target business or industry in the PRC, and we may therefore also pursue acquisition opportunities south of the Yangtze River. We do not have any specific share capital exchange, asset or share acquisition or other business combination or contractual arrangements under consideration, and we have not, nor has anyone on our behalf, engaged in discussions with representatives of other companies, with respect to such a transaction. Simultaneously with our formation, our principals formed ChinaGrowth South for the purpose of acquiring through a share capital exchange, asset acquisition or other similar business combination, or control, through contractual arrangements, an operating business that has its primary operating facilities located in the PRC in any city or province south of the Yangtze River. It is anticipated that our initial public offering will coincide with that of ChinaGrowth South. Because we have a different geographic focus than ChinaGrowth South, we believe that our principals will not have any conflict of interest in determining to which entity to present a particular opportunity for a business combination. Opportunities for market expansion have emerged for businesses with operations in China due to certain changes in the PRC s political, economic and social policies as well as certain fundamental changes affecting the PRC and its neighboring countries. We believe that China represents both a favorable environment for making acquisitions and an attractive operating environment for a target business for several reasons, including, among other things, the existence of a prolonged economic expansion within the PRC, with gross domestic product growth of approximately 9.4% on average since 1988, growth of 9.9% for 2005, according to the International Monetary Fund s Report on World Economic Outlook, dated April 2006, attractive valuations for target businesses within the PRC, increased government focus within China on privatizing assets, improving foreign trade and encouraging business and economic activity, and access to a highly trained and educated workforce, as well as favorable labor rates and efficient, low-cost manufacturing capabilities. Although our efforts in identifying a prospective target business will not be limited to a particular industry, in evaluating a prospective target business, our management will consider, among other factors, the following: financial condition, including profitability, the stability of cash flow, the recurrence of revenue and the results of operation; growth potential; experience and skill of management and availability of additional personnel; capital requirements; competitive position; barriers to entry; stage of development of the products, processes or services; degree of current or potential market acceptance of the products, processes or services; proprietary features and degree of intellectual property or other protection of the products, processes or services; regulatory environment; costs associated with effecting the business combination; books and accounts that have been audited by a fully qualified auditing firm duly registered in the PRC; and relative valuation multiples of similar publicly traded companies. While we may seek to effect business combinations with more than one target business, our initial business combination must be with a business or businesses whose fair market value is at least equal to 80% of our net assets held in trust (net of taxes) at the time of such acquisition. Consequently, it is likely that we will have the ability to effect only a single business combination, although this may entail simultaneous acquisitions of several closely related operating entities. If we determine to simultaneously engage in a business combination with several operating businesses and these businesses are owned by different persons, each of the persons will have to agree that our transaction with its business is contingent on the simultaneous closings of the other transactions. This requirement may make it more difficult for us, and delay our ability, to complete the business combination. With multiple transactions, we could also face additional risks, including additional burdens and costs with respect to possible multiple negotiations and due diligence investigations (if there are multiple counterparties) and the additional risks associated with the subsequent assimilation of the operations, services and products of the various companies in a single operating business. If the business combination is with a business or businesses that have a fair market value substantially in excess of 80% of our net assets held in trust (net of taxes), in order to consummate such a transaction, we may issue a significant amount of our debt or equity securities to the owners of such businesses and seek to raise additional funds through a private offering of debt or equity securities or through commercial loans. Since we have no specific business combination under consideration, we have not entered into any such fundraising arrangement and have no current intention of doing so. There is no assurance that such fundraising arrangement, if desired, would be available on acceptable terms, if at all. As used in this prospectus, a target business will include assets or an operating business that has its primary operating facilities located in the PRC in any city or province north of the Yangtze River and a business combination will mean the acquisition by us of such target business and could involve an acquisition of assets, a share purchase, a business combination or contractual arrangement; provided however, if ChinaGrowth South executes a definitive acquisition agreement with an operating business that has its primary operating facilities located in the PRC in any city or province south of the Yangtze River, we will have no geographic restrictions in identifying and selecting a prospective target business or industry in the PRC and target business will include assets or an operating business that has its primary operating facilities located in any city or province of the PRC, and we may therefore pursue acquisition opportunities south of the Yangtze River. To comply with Chinese regulations restricting direct foreign investment in certain industries, we may effect a business combination by paying consideration to the owners of the target business and then making contractual arrangements between the Company, subsidiaries and/or affiliates and Chinese companies holding the licenses required to engage in the specific industry of the target business and its shareholders. For a detailed discussion of how we would acquire control through contractual arrangements, see the section entitled Proposed Business Effecting a Business Combination Alternative Structures to comply with regulations in certain Chinese industries on page 55 of this prospectus. If we are unable to consummate a business combination within the allotted time periods set forth in this prospectus our corporate existence will cease by operation of law and we will distribute only to our public shareholders the amount in our trust account (including interest) plus any remaining assets. We are a Cayman Islands blank check company and our executive offices are located at 1818 Canggong Road, Fengxian, Shanghai Chemical Industry Park, Shanghai, China 201417, and our telephone number at that location is 86-21-5744-8336. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 THE OFFERING Securities offered 4,500,000 units, at $8.00 per unit, each unit consisting of: one ordinary share; and one warrant. The units will begin trading on or promptly after the date of this prospectus. Each of the ordinary shares and warrants may begin trading separately on the 90th day after the date of this prospectus unless Morgan Joseph & Co., determines that an earlier date is acceptable, based on their assessment of the relative strengths of the securities markets and small capitalization companies in general, and the trading pattern of, and demand for, our securities in particular. In no event will Morgan Joseph & Co. allow separate trading of the ordinary shares and warrants until we file an audited balance sheet reflecting our receipt of the gross proceeds of this offering and the underwriters over-allotment has either expired or been exercised. We will file a Current Report on Form 6-K, including an audited balance sheet, upon the consummation of this offering, which is anticipated to take place three business days from the date the units commence trading. The audited balance sheet will include proceeds we receive from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Form 6-K. We will file a separate Current Report on Form 6-K if the over-allotment option is exercised in whole or in part after the consummation of the offering. We will also include in this Form 6-K, or amendment thereto, or in a subsequent Form 6-K information indicating if the representative has allowed separate trading of ordinary shares and warrants prior to the 90th day after the date of this prospectus. Although we will not distribute copies of the Current Report on Form 6-K to individual unit holders, the Current Report on Form 6-K will be available on the Securities and Exchange Commission s, or SEC s, website after the filing. See the section appearing elsewhere in this prospectus entitled Where You Can Find Additional Information. Ordinary shares: Number outstanding before this offering 1,125,000 shares Number to be outstanding after this offering 5,625,000 shares Warrants: Number outstanding before this offering 0 Number to be outstanding after this offering 5,400,000 warrants, including 900,000 warrants to be purchased by the founding directors prior to the closing of this offering. Exercisability Each warrant is exercisable for one ordinary share. Exercise price $6.00 per share Exercise period The warrants will become exercisable on the later of: the completion of a business combination with a target business, or , 2008. [one year from the date of this prospectus] Amendment No. 7 to FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 The warrants will expire at 5:00 p.m., New York City time, on , 2011 [four years from the date of this prospectus] or earlier upon redemption. Redemption We may redeem the outstanding warrants (other than the founding director warrants, but including any warrants issued upon exercise of the underwriters unit purchase option): in whole and not in part; at a price of $0.01 per warrant at any time after the warrants become exercisable; upon a minimum of 30 days prior written notice of redemption; if, and only if, the last sale price of our ordinary shares equals or exceeds $11.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption; and if there is an effective registration statement allowing for the resale of shares underlying the warrants. We have established these criteria to provide warrant holders with a reasonable premium to the initial warrant exercise price as well as to provide a degree of liquidity to cushion the market reaction, if any, to our redemption call. If the foregoing conditions are satisfied and we call the warrants for redemption, each warrant holder will then be entitled to exercise his or her warrant prior to the date scheduled for redemption by payment of the exercise price. However, there can be no assurance that the price of ordinary shares will exceed the call trigger price or the warrant exercise price after the redemption call is made. Our officers and directors, or their designees, will purchase founding director warrants through a private placement prior to the offering Our officers and directors, or their designees, have collectively agreed to purchase a combined total of 900,000 warrants prior to the closing of this offering at a price of $1.20 per warrant for a total of $1,080,000. We refer to these 900,000 warrants as the founding director warrants throughout this prospectus. The founding director warrants will be purchased separately and not in combination with ordinary shares in the form of units. The purchase price of the founding director warrants will be added to the proceeds from this offering to be held in the trust account pending our completion of one or more business combinations. If we do not complete one or more business combinations that meet the criteria described in this prospectus, then the $1,080,000 purchase price of the founding director warrants will become part of the amount payable to our public shareholders upon our automatic dissolution and subsequent liquidation of the trust account and the founding director warrants will expire worthless. CHINAGROWTH NORTH ACQUISITION CORPORATION (Exact name of registrant as specified in its charter) Cayman Islands 6770 Not Applicable (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number) 1818 Canggong Road, Fengxian Shanghai Chemical Industry Park, Shanghai, China 201417 Tel: 86-21-5744-8336 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Jin Shi c/o Global Vestor Capital Partners LLC 105 Main Street Hackensack, NJ 07601 Tel: (201) 996-1955 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: William N. Haddad, Esq. Douglas S. Ellenoff, Esq. DLA Piper US LLP Brian C. Daughney, Esq. 1251 Avenue of the Americas Sarah E. Williams, Esq. New York, NY 10020 Ellenoff Grossman & Schole LLP (212) 835-6000 370 Lexington Avenue Facsimile: (212) 835-6001 New York, NY 10017 (212) 370-1300 Facsimile: (212) 370-7889 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. x If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o The founding director warrants will not be transferable (except in limited circumstances) or salable by the purchasers until we complete a business combination, and will be non-redeemable so long as these persons hold such warrants. In addition, commencing on the date such warrants become exercisable, the founding director warrants and the underlying ordinary shares are entitled to registration rights under an agreement to be signed on or before the date of this prospectus. With those exceptions, the founding director warrants have terms and provisions that are identical to those of the warrants being sold as part of the units in this offering. The purchasers of the founding director warrants are permitted to transfer such warrants in certain limited circumstances, such as by will in the event of their death, but the transferees receiving such founding director warrants will be subject to the same sale restrictions imposed on the persons who initially purchase these warrants from us. If any of the purchasers acquire warrants for their own account in the open market, any such warrants will be redeemable. If our other outstanding warrants are redeemed (including the warrants subject to the underwriters unit purchase option) and the price of our ordinary shares rises following such redemption, the holders of the founding director warrants could potentially realize a larger gain on exercise or sale of those warrants than is available to other warrant holders, although there is no assurance the price of our ordinary shares would increase following a warrant redemption. We have elected to make the founding director warrants non-redeemable in order to provide the purchasers a potentially longer exercise period for those warrants because they will bear a higher risk while being required to hold such warrants until the consummation of a business combination. If our share price declines in periods subsequent to a warrant redemption and the purchasers who initially acquired these warrants from us continue to hold the founding director warrants, the value of those warrants still held by these persons may also decline. The founding director warrants will be differentiated from warrants, if any, purchased in or following this offering by the founding directors and the other purchasers through the legending of certificates representing the founding director warrants indicating the restrictions and rights specifically applicable to such warrants as are described in this prospectus. Proposed OTC Bulletin Board symbols for our: Units Ordinary Shares Warrants Offering proceeds to be held in trust Including the proceeds of this offering, the entire proceeds from the private placement of $1,080,000 payable for the founding director warrants and the $720,000 deferred underwriters fee, $34,200,000 ($7.60 per unit) will be placed in a trust account at JPMorgan Chase NY Bank maintained by American Stock Transfer & Trust Company, acting as trustee, pursuant to an agreement to be signed on the date of this prospectus. These proceeds include $32,400,000 ($7.20 per unit) from the proceeds of this offering, $1,080,000 purchase price of the founding Calculation of Registration Fee director warrants ($0.24 per unit) and approximately $720,000 ($0.16 per unit) of deferred underwriting discounts and commissions. The total dollar amount to be held in trust represents 95% of the gross proceeds of this offering. We believe that the inclusion in the trust account of the purchase price of the founding director warrants and the deferred underwriting discounts and commissions is a benefit to our shareholders because additional proceeds will be available for distributions to investors if an automatic dissolution and subsequent liquidation of the trust account occurs prior to our completing an initial business combination. These proceeds will not be released until the earlier of the completion of a business combination or upon liquidation of the trust account. If we are forced to dissolve and subsequently liquidate the trust account, the underwriters have agreed to waive any right they may have to the $720,000 of deferred underwriting discount held in the trust account, all of which shall be distributed to our public shareholders. Therefore, unless and until a business combination is consummated, the proceeds held in the trust account will not be available for our use for any expenses related to this offering or expenses that we may incur related to the investigation and selection of a target business and the negotiation of an agreement to acquire a target business, except that to the extent the trust account earns interest or we are deemed to have earned income in connection therewith, we will be permitted to seek disbursements from the trust account to pay any federal, state or local tax obligations related thereto. Expenses incurred by us while seeking a business combination may be paid prior to a business combination only from the net proceeds of this offering not held in the trust account (initially, approximately $700,000 after the payment of the expenses relating to this offering). A portion of the funds not held in the trust account will be used to repay loans made to us by our shareholders to cover offering related expenses. It is possible that we could use a portion of the funds not in the trust account to make a deposit, down payment or fund a no-shop provision with respect to a particular proposed business combination. In the event we were ultimately required to forfeit such funds (whether as a result of our breach of the agreement relating to such payment or otherwise), we may not have a sufficient amount of working capital available outside of the trust account to pay expenses related to finding a suitable business combination without securing additional financing. If we were unable to secure additional financing, we would most likely fail to consummate a business combination in the allotted time and would be forced to dissolve and subsequently liquidate the trust account. As used in this prospectus, a no-shop provision means a contractual provision that prohibits the parties in a business combination from engaging in certain actions such as soliciting better offers or other transactions prior to the completion of the business combination or the termination thereof and requires, in the event of a breach of such provision, the breaching party to make a monetary payment to the non-breaching party. In the case of a buyer of the business, such a provision can impose liquidated damages on the buyer if the buyer fails to consummate the business combination transaction in certain circumstances resulting in the forfeiture of any deposit. Disbursements from monies not held in trust Prior to the completion of a business combination, there will be no fees, reimbursements or cash payments made to our existing shareholders and/or officers and directors other than: Repayment of a $210,000 interest free loan to be made by our existing shareholders to cover offering expenses, provided the amount held in trust remains at least 95% of the gross offering proceeds; Payment of up to $7,500 per month to affiliates of our existing shareholders for office space and administrative services; and Reimbursement for any expenses incident to the offering and finding a suitable business combination. None of the warrants, including the founding direct warrants, may be exercised until after the consummation of a business combination and, thus, after the proceeds of the trust account have been disbursed, the warrant exercise price will be paid directly to us or our successor and not placed in the trust account. Shareholders must approve business combination We will seek shareholder approval before effecting any business combination, even if the business combination would not ordinarily require shareholder approval under applicable Cayman Islands law. In connection with the shareholder vote required to approve any business combination, all of our existing shareholders have agreed to vote the ordinary shares owned by them prior to this offering in the same manner as a majority of ordinary shares voted by the public shareholders. Our existing shareholders have also agreed that if they acquire ordinary shares in or following this offering, they will vote such acquired shares in favor of a business combination. We will proceed with a business combination only if a majority of the ordinary shares voted by the public shareholders are voted in favor of the business combination and public shareholders owning not more than 19.99% of the shares sold in this offering exercise their redemption rights described below. Voting against the business combination alone will not result in redemption of a shareholder s shares into a pro rata share of the trust account. Such shareholder must also exercise its redemption rights described below. We will only structure or consummate a business combination in which all shareholders exercising their redemption rights, up to 19.99%, are entitled to receive their pro rata portion of the trust account (net of taxes payable). Additionally, we will not propose a business combination to our shareholders which includes a provision that such business combination will not be consummated if shareholders owning less than 19.99% vote against such business combination and exercise their redemption rights as described herein. Redemption rights for shareholders voting to reject a business combination Public shareholders voting against a business combination will be entitled to redeem their shares into a pro rata share of the trust account, including the interest earned on their portion of the trust account (net of taxes payable), if the business combination is approved and completed. Public shareholders that redeem their shares into their pro rata share of the trust account will continue to have the right to exercise any warrants they may hold. If a business combination is approved, shareholders that vote against the business combination and elect to redeem their ordinary shares to cash will be entitled to receive their pro-rata portion of the $720,000 ($0.16 per share) of deferred underwriting discount held in the trust account. Existing shareholders are not entitled to redeem any of their ordinary shares acquired prior to this offering into a pro rata share of the trust account. However, existing shareholders who acquire ordinary shares in connection with or after this offering will be entitled to a pro rata share of the trust account upon liquidation of the trust account prior to a business combination. Liquidation Redemption and Dissolution if no business combination Our memorandum and articles of association provides that we will continue in existence only until eighteen months from the consummation of this offering or until twenty-four months if a letter of intent, an agreement in principle, or a definitive agreement to complete a business combination has been entered into. If we have not completed a business combination by such date and amended our memorandum and articles of association in connection therewith, our corporate existence will cease except for the purposes of winding up our affairs and liquidating. At that time the company will become subject to a voluntary liquidation procedure under the Companies Law (2004 Revision) of the Cayman Islands (the Companies Law ). The company s liquidator would give at least 21 days notice to creditors of his intention to make a distribution by notifying known creditors. Following such notice we anticipate the trust account would be liquidated shortly following expiration of the 21 day period. Additionally, in any liquidation proceedings of the company under Cayman Islands' law, the funds held in our trust account may be included in our estate and subject to the claims of third parties with priority over the claims of our shareholders. To the extent any such claims deplete the trust account we cannot assure you we will be able to return to our public shareholders the liquidation amounts payable to them. Furthermore, a liquidator of the company might seek to hold a shareholder liable to contribute to our estate to the extent of distributions received by them pursuant to the dissolution of the trust account beyond the date of dissolution of the trust account. If we are unable to consummate a transaction within the necessary time periods, our purpose and powers will be limited to winding up and ultimately disolving. Upon notice from us, the trustee of the trust account will distribute the amount in our trust account to our public shareholders as part of our plan of dissolution and distribution. Concurrently, we propose that our liabilities and obligations will be paid from funds not held in trust, although we cannot assure you that there will be sufficient funds for such purpose. If there are insufficient funds held outside the trust account for such purpose, our officers and directors have agreed that they will be liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us. On an automatic dissolution and subsequent liquidation of the trust account due to our failure to complete a business combination within 18 months, or within 24-months if certain extension criteria are satisfied, the funds, if any, held by the Company outside of the trust account will be returned to all shareholders pursuant to applicable law. Escrow of existing shareholders shares and founding director warrants On the date of this prospectus, all of our existing shareholders, including all of our officers and directors, will place the shares they owned before this offering and their founding director warrants issued prior to the offering into an escrow account maintained by American Stock Transfer & Trust Company, acting as escrow agent. Subject to certain limited exceptions, such as transfers to family members and trusts for estate planning purposes or upon death, while remaining subject to the escrow agreement, (i) the shares will not be transferable during the escrow period and will not be released from escrow until one year from the consummation of the business combination and (ii) the founding director warrants will not be transferable during the escrow period and will not be released from escrow until the consummation of the business combination. Risks In making your decision on whether to invest in our securities, you should take into account not only the risks of doing business in the PRC, but also the fact that we are a blank check company and this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, and, therefore, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. Additionally, our initial security holders initial equity investment is below that which is required under the guidelines of the North American Securities Administrators Association, Inc. You should carefully consider these and the other risks set forth in the section entitled Risk Factors beginning on page 11 of this prospectus. (1) If the business combination is consummated, public shareholders who voted against the business combination and exercised their redemption rights would be entitled to receive $7.60 per share, which amount represents $7.44 per share from the proceeds of this offering and the purchase price of the founding director warrants and $0.16 per share of deferred underwriting discounts and commissions which the underwriters have agreed to forfeit to pay redeeming shareholders. The working capital in the actual column excludes $197,620 of costs related to the offering that have been paid or accrued prior to October 31, 2006 and have been recorded as a long-term asset on our balance sheet. The as adjusted information gives effect to the sale of the units we are offering including the application of the related gross proceeds and the payment of the estimated remaining costs from such sale and the repayment of accrued and other liabilities to be made. The working capital and total assets amounts, as adjusted, include $33,480,000 from the proceeds of this offering (including the $1,080,000 purchase price of the founding director warrants) to be held in the trust account for our benefit which will be available to us only upon the consummation of a business combination within the time period described in this prospectus. The total amount placed in trust will be $34,200,000 which amount includes the $720,000 ($0.16 per share) of deferred underwriting discounts and commissions and represents 95% of all total gross proceeds of this offering. If a business combination is not so consummated, all of the proceeds held in the trust account ($7.60 per share) will be distributed to our public shareholders. We will not proceed with a business combination if public shareholders owning 20% or more of the shares sold in this offering vote against the business combination and exercise their redemption rights. Accordingly, we may effect a business combination if public shareholders owning up to approximately 19.99% of the shares sold in this offering exercise their redemption rights. If this occurred, we would be required to redeem into cash up to approximately 19.99% of the 4,500,000 shares sold in this offering, or 899,550 ordinary shares, at an initial per-share redemption price of $7.60 (which includes $.16 per share of deferred underwriters discounts and commissions which the underwriters have agreed to forfeit to pay redeeming shareholders), without taking into account interest earned on the trust account (net of any taxes due on such interest, which taxes, if any, shall be paid from the trust account). The actual per-share redemption price will be equal to: the amount in the trust account before payment of deferred underwriting discounts and commissions and including all accrued interest (net of taxes payable), as of two business days prior to the proposed consummation of the business combination, divided by the number of ordinary shares sold in the offering. RISK FACTORS An investment in our securities involves a high degree of risk. You should consider carefully all of the risks described below, together with the other information contained in this prospectus before making a decision to invest in our units. Risks Associated with our Business We are a development stage company with no operating history and, accordingly, you will not have any basis on which to evaluate our ability to achieve our business objective. We are a recently incorporated development stage company with no operating results to date. Therefore, our ability to begin operations is dependent upon obtaining financing through the public offering of our securities. Since we do not have any operations or an operating history, you will have no basis upon which to evaluate our ability to achieve our business objective, which is to acquire one or more operating businesses in the PRC in any city or province north of the Yangtze River. We have not conducted any discussions and have no plans, arrangements or understandings with any prospective target business with respect to a business combination. We will not generate any revenues or income until, at the earliest, after the consummation of a business combination. The financial statements do not include any adjustments that might result from our ability to consummate this offering or our ability to operate as a going concern. If we are forced to liquidate the trust account before a business combination, our public shareholders will receive less than $8.00 per share upon distribution of the trust account and our warrants will expire worthless. If we are unable to complete a business combination and are forced to liquidate our trust account, the per-share liquidation redemption price to shareholders will be less than $8.00 because of the expenses of this offering, our general and administrative expenses and the anticipated costs of seeking a business combination after this offering. Upon liquidation of the trust account, public shareholders will be entitled to receive approximately $7.60 per share plus interest earned on their pro rata portion of the trust account (net of taxes payable thereon) which includes the $1,080,000 purchase price of the founding director warrants and $720,000 ($0.16 per share) of deferred underwriting discounts and commissions. While we will pay, or reserve for payment, from funds not held in trust, our liabilities and obligations, and our directors have agreed to indemnify us for such liabilities and obligations (to the extent we do not obtain waivers from creditors), we cannot assure you, where it is subsequently determined that the reserve for liabilities is insufficient, that shareholders will not be liable for such amounts to creditors. Furthermore, there will be no distribution with respect to our outstanding warrants and, accordingly, the warrants will expire worthless if we are forced to dissolve and subsequently liquidate the trust account before the completion of a business combination. For a more complete discussion of the effects on our shareholders if we are unable to complete a business combination, see the section below entitled Proposed Business Effecting a Business Combination Automatic Dissolution and Subsequent Liquidation if no Business Combination. Additionally, if we are forced to declare insolvency or a case for involuntary liquidation is filed against us which is not dismissed, the funds held in our trust account will be subject to applicable Cayman Islands insolvency law, and may be included in our estate and subject to the claims of third parties with priority over claims of our public shareholders. To the extent any such claims deplete the trust account we cannot assure you we will be able to return to public shareholders the amounts payable to them upon a liquidation of the trust account. If the cash not held in trust is insufficient to allow us to operate for at least the next 24 months, we may be unable to complete a business combination. We believe that, upon consummation of this offering, the funds held by us outside the trust account will be sufficient to allow us to operate for a minimum of 24 months, assuming that a business combination is not consummated during that time. However, we cannot assure you that our estimates will be accurate. We could use a portion of these funds to engage consultants to assist us with our search for a target business. We could also use a portion of these funds as a down payment or to fund a no-shop provision (a provision in letters of intent designed to prevent a target businesses from shopping around for transactions with other companies on terms more favorable to such target businesses) with respect to a particular proposed business combination, although we do not have any current intention to do so. If we entered into such a letter of intent where we paid for the right to receive exclusivity from a target business and were subsequently required to forfeit such funds (whether as a result of our breach or otherwise), we may not have sufficient funds to continue searching for, or conduct due diligence with respect to, a target business. Because there are numerous companies with a business plan similar to ours seeking to effectuate a business combination, it may be more difficult for us to complete a business combination. Based upon publicly-available information, approximately 72 similarly structured blank check companies have completed initial public offerings since August 2003 and numerous others have filed registration statements. Of these companies, only 13 companies have consummated a business combination, while 28 other companies have announced they have entered into a definitive agreement for a business combination, but have not consummated such business combination. Accordingly, there are approximately 31 blank check companies with approximately $2.5 billion in trust that are seeking to carry out a business plan similar to our business plan. Furthermore, there are a number of additional offerings that are still in the registration process but have not completed initial public offerings and there are likely to be more blank check companies filing registration statements for initial public offerings after the date of this prospectus and prior to our completion of a business combination. While some of those companies have specific industries in which they must complete a business combination, a number of them may consummate a business combination in any industry they choose. We may therefore be subject to competition from these and other companies seeking to consummate a business plan similar to ours which will, as a result, increase demand for privately-held companies to combine with companies structured similarly to ours. Further, the fact that only 13 of such companies have completed a business combination and 28 of such companies have entered into a definitive agreement for a business combination may be an indication that there are only a limited number of attractive target businesses available to such entities or that many privately-held target businesses may not be inclined to enter into business combinations with publicly held blank check companies like us. We cannot assure you that we will be able to successfully compete for an attractive business combination. Additionally, because of this competition, we cannot assure you that we will be able to effectuate a business combination within the required time periods. If we are unable to find a suitable target business within such time periods, our corporate existence will cease by operation of law and we will distribute only to our public shareholders the amount in our trust account (including interest) plus any remaining assets. Based upon publicly-available information, approximately 8 similarly structured blank check companies (7 China and 1 Asia) have completed initial public offerings since August 2003 and numerous others have filed registration statements. Of these companies, only 2 companies have consummated a business combination, while 3 other companies have announced they have entered into a definitive agreement for a business combination, but have not consummated such business combination. Accordingly, there are approximately 3 blank check companies (2 China and 1 Asia/Pacific) with approximately $177 million in trust that are seeking to carry out a business plan similar to our business plan. Based upon publicly-available information, there are 9 similarly structured blank check companies (4 China and 1 Asia/Pacific) with a planned $419 million of gross proceeds currently in registration and waiting to complete initial public offerings. If third parties bring claims against us, the proceeds held in trust could be reduced and the per-share liquidation redemption price received by shareholders will be less than $7.60 per share. Our placing of funds in trust may not protect those funds from third party claims against us. Although we will seek to have all creditors, prospective target businesses or other entities with which we execute agreements waive any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our public shareholders, there is no guarantee that they will execute such agreements, or even if they execute such agreements that they would be prevented from bringing claims against the trust account. If any third party refused to execute an agreement waiving such claims to the monies held in the trust account, we would perform an analysis of the alternatives available to us if we chose not to engage such third party and evaluate if such engagement would be in the best interest of our shareholders if such third party refused to waive such claims. Examples of possible instances where we may engage a third party that refused to execute a waiver include the engagement of a third party consultant whose particular expertise or skills are believed by management to be significantly superior to those of other consultants that would agree to execute a waiver or in cases where management is unable to find a provider of required services willing to provide the waiver. In any event, our management would perform an analysis of the alternatives available to it and would only enter into an agreement with a third party that did not execute a waiver if management believed that such third party s engagement would be significantly more beneficial to us than any alternative. In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with us and not seek recourse against the trust account for any reason. Accordingly, the proceeds held in trust could be subject to claims that could take priority over the claims of our public shareholders and the per-share liquidation price could be less than the $7.60 per share held in the trust account, plus interest (net of any taxes due on such interest, which taxes, if any, shall be paid from the trust account), due to claims of such creditors. If we are unable to complete a business combination and are forced to dissolve and subsequently liquidate the trust account, and a creditor or other third party does not waive any rights or claims to the trust account, our directors will be personally liable to ensure that the proceeds in the trust account are not reduced by the claims of various creditors, prospective target businesses or other entities that are owed money by us for services rendered or products sold to us, to the extent necessary to ensure that such claims do not reduce the amount in the trust account. Based on representations made to us by our officers and directors, we currently believe that they are of substantial means and capable of funding shortfall in our trust account to satisfy their foreseeable indemnification obligations, but we have not asked them to reserve for such eventuality. The indemnification obligations may be substantially higher than our officers and directors currently foresee or expect and their financial resources may deteriorate in the future. Hence, we cannot assure you that our directors will be able to satisfy those obligations. We believe the likelihood of our directors having to indemnify the trust account is limited because we will endeavor to have all creditors and prospective target businesses as well as other entities execute agreements with us waiving any right, title, interest or claim of any kind in or to monies held in the trust account. Additionally, if we are forced to declare insolvency or a case for involuntary liquidation is filed against us which is not dismissed, the funds held in our trust account will be subject to applicable Cayman Islands insolvency law, and may be included in our estate and subject to the claims of third parties with priority over the claims of our shareholders. To the extent any such claims deplete the trust account we cannot assure you we will be able to return to our public shareholders the liquidation amounts payable to them. Our shareholders may be held liable for claims by third parties against us to the extent of distributions received by them. Our memorandum and articles of association provides that we will continue in existence only until eighteen months from the consummation of this offering or until twenty-four months if a letter of intent, an agreement in principle, or a definitive agreement to complete a business combination has been entered into. If we have not completed a business combination by such date and amended this provision in connection thereto, our corporate existence will cease except for the purposes of winding up our affairs and liquidating. At this time the company will become subject to a voluntary liquidation procedure under the Companies Law (2004 Revision) of the Cayman Islands (the Companies Law ). The company s liquidator would give at least 21 days notice to creditors of his intention to make a distribution by notifying known creditors (if any) who have not submitted claims and by placing a public advertisement in the Cayman Islands Official Gazette, although in practice this notice requirement need not necessarily delay the distribution of assets if the liquidator is satisfied that no creditors would be adversely affected as a consequence of a distribution before this time period has expired. We anticipate the trust account should be liquidated shortly following expiration of the 21 day period. As soon as the affairs of the company are fully wound-up, the liquidator must lay his final report and accounts before a final general meeting which must be called by a public notice at least one month before it takes place. After the final meeting, the liquidator must make a return to the Registrar confirming the date on which the meeting was held and three months after the date of such filing the company is dissolved. Additionally, in any liquidation proceedings of the company under Cayman Islands' law, the funds held in our trust account may be included in our estate and subject to the claims of third parties with priority over the claims of our shareholders. To the extent any such claims deplete the trust account we cannot assure you we will be able to return to our public shareholders the liquidation amounts payable to them. Furthermore, a liquidator of the company might seek to hold a shareholder liable to contribute to our estate to the extent of distributions received by them pursuant to the dissolution of the trust account beyond the date of dissolution of the trust account. Additionally, we cannot assure you that third parties will not seek to recover from our shareholders amounts owed to them by us. Furthermore, our board may be viewed as having breached their fiduciary duties to our creditors and/or may have acted in bad faith, and thereby exposing itself and our company to claims for having paid public shareholders from the trust account prior to addressing the claims of creditors. We cannot assure you that claims will not be brought against us for these reasons. If we are unable to consummate a transaction within the necessary time periods, our purpose and powers will be limited to winding up and ultimately disolving. Upon notice from us, the trustee of the trust account will distribute the amount in our trust account to our public shareholders as part of our plan of dissolution and distribution. Concurrently, we propose that our liabilities and obligations will be paid from funds not held in trust, although we cannot assure you that there will be sufficient funds for such purpose. If there are insufficient funds held outside the trust account for such purpose, our officers and directors have agreed that they will be liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us. We may issue share capital to complete a business combination, which would reduce the equity interest of our shareholders and likely cause a change in control of our ownership. Our amended and restated memorandum and articles of association authorizes the issuance of up to 20,000,000 ordinary shares, par value $.001 per share, and 1,000,000 shares of preferred shares, par value $.001 per share. Immediately after this offering (assuming no exercise of the underwriters over-allotment option), there will be 8,345,000 authorized but unissued ordinary shares available for issuance (after appropriate reservation for the issuance of shares upon full exercise of our outstanding warrants including the underwriters unit purchase option) and all of the 1,000,000 shares of preferred shares available for issuance. Although we have no commitments as of the date of this offering to issue our securities, we may issue a substantial number of additional ordinary shares or preferred shares, or a combination of ordinary shares and preferred shares, to complete a business combination. The issuance of additional ordinary shares or any number of our preferred shares: may significantly reduce the equity interest of investors in this offering; may subordinate the rights of holders of ordinary shares if preferred shares are issued with rights senior to those afforded to our ordinary shares; will likely cause a change in control if a substantial number of our ordinary shares are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and most likely also result in the resignation or removal of our present officers and directors; and may adversely affect prevailing market prices for our ordinary shares. For a more complete discussion of the possible structure of a business combination, see the section below entitled Effecting a Business Combination Selection of a Target Business and Structuring of a Business Combination. Subject to certain exceptions, we will not be required to obtain an opinion from an unaffiliated, independent investment banking firm as to the fair market value of the target business. While we have agreed with the underwriters not to consummate a business combination with an entity that is affiliated with our existing shareholders, officers or directors without obtaining an opinion from an independent investment banking firm, we have not agreed to obtain such an opinion if we enter into a business combination with an unaffiliated entity unless our board is unable, at the time of the proposed business combination, to sufficiently determine without such an opinion the fair market value of the target business. As a result, our shareholders may not have the benefit of an independent, third party opinion in determining the valuation of the target business. The ability of our shareholders to exercise their redemption rights may not allow us to effectuate the most desirable business combination or optimize our capital structure. When we seek shareholder approval of any business combination, we will offer each public shareholder the right to have his, her or its ordinary shares redeemed for cash if the shareholder votes against the business combination and the business combination is approved and completed. Accordingly, if our business combination requires us to use substantially all of our cash to pay the purchase price, because we will not know how many shareholders may exercise such redemption rights, we may either need to reserve part of the trust account for possible payment upon such redemption, or we may need to arrange third party financing to help fund our business combination in case a larger percentage of shareholders exercise their redemption rights than we expect. Therefore, we may not be able to consummate a business combination that requires us to use all of the funds held in the trust account as part of the purchase price, or we may end up having a leverage ratio that is not optimal for our business combination. This may limit our ability to effectuate the most attractive business combination available to us. We may issue notes or other debt securities, or otherwise incur substantial debt, to complete a business combination, which may adversely affect our leverage and financial condition. Although we have no commitments as of the date of this prospectus to issue any notes or other debt securities, or to otherwise incur outstanding debt, we may choose to incur substantial debt to complete a business combination. The incurrence of debt could result in: default and foreclosure on our assets if our operating cash flow after a business combination were insufficient to pay our debt obligations; acceleration of our obligations to repay the indebtedness even if we have made all principal and interest payments when due if the debt security contained covenants that required the maintenance of certain financial ratios or reserves and any such covenant were breached without a waiver or renegotiation of that covenant; our immediate payment of all principal and accrued interest, if any, if the debt security was payable on demand; covenants that limit our ability to acquire capital assets or make additional acquisitions; and our inability to obtain additional financing, if necessary, if the debt security contained covenants restricting our ability to obtain additional financing while such security was outstanding. Our ability to effect a business combination and to execute any potential business plan afterwards will be totally dependent upon the efforts of our key personnel, some of whom may join us following a business combination and whom we would have only a limited ability to evaluate. Our ability to effect a business combination will be totally dependent upon the efforts of our key personnel. The future role of our key personnel following a business combination, however, cannot presently be fully ascertained. Although some of our key personnel may remain associated with the target business following a business combination, some or all of the management of the target business may remain in place. While we intend to closely scrutinize any additional individuals we engage after a business combination, we cannot assure you that our assessment of these individuals will prove to be correct. These individuals may be unfamiliar with the requirements of operating a public company as well as with United States securities laws, which could cause us to have to expend time and resources helping them become familiar with such laws. This could be expensive and time-consuming and could lead to various regulatory issues which may adversely affect our operations. Moreover, our current management will only be able to remain with the combined company after the consummation of a business combination if they are able to negotiate and agree to mutually acceptable employment terms, which would be determined at such time between the respective parties and which may be a term of the business combination, as part of any such combination, which terms would be disclosed to shareholders in any proxy statement relating to a business combination. If we acquired a target business in an all-cash transaction, it would be more likely that current members of management would remain with us if they chose to do so. If a business combination were structured such that the shareholders of the target company were to control the combined company following a business combination, it may be less likely that management would remain with the combined company unless it was negotiated as part of the transaction via the acquisition agreement, an employment agreement or other arrangement. In making the determination as to whether current management should remain with us following the business combination, management will analyze the experience and skill set of the target business s management and negotiate as part of the business combination that certain members of current management remain if it is believed that it is in the best interests of the combined company post-business combination. If management were to negotiate to be retained by the company post-business combination as a condition to any potential business combination, such negotiations may result in a conflict of interest. Our current management will only be able to remain with the combined company after the consummation of a business combination if they are able to negotiate mutually agreeable employment terms as part of any such business combination, which terms would be disclosed to shareholders in any proxy statement relating to such transaction. The financial interest of our officers and directors, including any compensation arrangements, could influence their motivation in selecting, negotiating and structuring a transaction with a target business, and thus, there may be a conflict of interest when determining whether a particular business combination is in the shareholders best interest. Our officers and directors may allocate their time to other businesses thereby causing conflicts of interest in their determination as to how much time to devote to our affairs. This conflict of interest could have a negative impact on our ability to consummate a business combination. Our officers and directors are not required to commit their full time to our affairs, which may result in a conflict of interest in allocating their time between our operations and other businesses. We do not intend to have any full time employees prior to the consummation of a business combination. Each of our officers is engaged in several other business endeavors and is not obligated to contribute any specific number of hours per week to our affairs. If our officers other business affairs require them to devote more substantial amounts of time to such affairs, it could limit their ability to devote time to our affairs and could have a negative impact on our ability to consummate a business combination. For a discussion of potential conflicts of interest that you should be aware of, see the section below entitled Management Conflicts of Interest. We cannot assure you that these conflicts will be resolved in our favor. Our officers and directors are currently affiliated with entities engaged in business activities similar to those intended to be conducted by us and accordingly, may have conflicting fiduciary duties in determining to which entity a particular business opportunity should be presented. Certain of our officers and directors are currently involved in other businesses that are similar to the business activities that we intend to conduct following a business combination. Due to these existing affiliations, they may have conflicting fiduciary obligations with regard to presenting certain potential business opportunities to those entities that may be of interest to us. Our officers and directors may in the future become affiliated with other entities, including other blank check companies, engaged in business activities similar to those we intend to conduct. Certain members of our management are affiliated with the following such entities: Chum Capital Group Ltd., Chum Investment Corporation, Shanghai Jinqiaotong Corporation Enterprise Developments Ltd., Alpha Capital Ltd., Insight High Technology Co., Ltd., Global Vestor Capital Partners LLC, Shanghai Raychem Industries Co., Ltd., Yihua Investment Co. Ltd., Groworld U.S. Inc., PharmaSource Inc. Venture Link Assets Ltd. and Guorun Group Ltd. For a complete discussion of our management s business affiliations and the potential conflicts of interest that you should be aware of, see the sections below entitled Management Directors and Executive Officers and Management Conflicts of Interest. We cannot assure you that these conflicts will be resolved in our favor. We may seek a business combination with a target business with which one or more of our existing shareholders may be affiliated. Our officers and directors are not currently aware of any specific opportunities to consummate a business combination with any entities with which they are affiliated; however, if we become aware of an opportunity to seek a business combination with a target business with which one or more of our existing shareholders may be affiliated, conflicts of interest could arise in connection with negotiating the terms of and completing the business combination. Accordingly, such officers and directors may become subject to conflicts of interest regarding us and other business ventures in which they may be involved, which conflicts may have an adverse effect on our ability to consummate a business combination. In the event the Company decides to pursue such a business combination, it will obtain a fairness opinion from an independent investment banking firm that the business combination is fair to our shareholders from a financial point of view. In addition, certain of our officers and directors have had discussions on behalf of their affiliated entities to acquire target companies in the PRC. The Company will not enter into discussions to acquire these target companies. As a result, the number of target companies available to the Company may be reduced. None of our officers or directors, senior advisors or any of their affiliates, has ever been affiliated with a blank check company which could adversely affect our ability to consummate a business combination. None of our officers or directors, senior advisors or any of their affiliates, has ever been affiliated with a blank check company. Accordingly, you may not have sufficient information with which to evaluate the ability of our management team to identify and complete a business combination using the proceeds of this offering. Our management s lack of experience in operating a blank check company could adversely affect our ability to consummate a business combination and could result in us automatically dissolving and subsequently liquidating the trust account. Upon an automatic dissolution and liquidation of the trust account, our shareholders could receive less than the amount they paid for our securities, causing them to incur significant financial losses. All of our officers and directors own shares of our securities that will not participate in the liquidation of the trust account and therefore they may have a conflict of interest in determining whether a particular target business is appropriate for a business combination. All of our officers and directors, directly or indirectly, own ordinary shares in our company that were issued prior to this offering but have waived their right to receive distributions with respect to these shares upon a liquidation of the trust account if we are unable to complete a business combination. Additionally, our officers and directors, or their designees, have agreed to purchase $1,080,000 of warrants directly from us in a private placement transaction prior to the closing of this offering at a purchase price of $1.20 per warrant. The purchase of founding director warrants, together with any other acquisitions of our shares (or warrants which are subsequently exercised), could allow the existing shareholders to influence the outcome of matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions after completion of our initial business combination. The warrants owned by our officers and directors will be worthless if we do not consummate a business combination. The personal and financial interests of these individuals may influence their motivation in identifying and selecting a target business and completing a business combination in a timely manner. Consequently, our officers and directors discretion in identifying and selecting a suitable target business may result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination are appropriate and in our shareholders best interest. Our existing shareholders will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the portion of net proceeds of the offering that is not placed in the trust account, unless the business combination is consummated, and therefore they may have a conflict of interest. Our existing shareholders will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the portion of net proceeds of the offering that is not placed in the trust account, unless the business combination is consummated. The financial interest of such persons could influence their motivation in selecting a target business and thus, there may be a conflict of interest when determining whether a particular business combination is in the shareholders best interest. The obligation we have to seek shareholder approval of a business combination may delay the consummation of a transaction. Additionally, our outstanding warrants, and the future dilution they potentially represent, may not be viewed favorably by certain target businesses. Any of these obligations may place us at a competitive disadvantage in successfully negotiating a business combination. Furthermore, our negotiating position with any potential target may be harmed as we approach the deadline for the consummation of a business combination, as such target business will know that our deadline cannot be extended. Because only approximately 13 of the approximately 72 blank check companies that have gone public in the United States since August 2003 have either consummated a business combination or entered into a definitive agreement for a business combination, it may indicate that there are fewer attractive target businesses available to such entities like our company or that many privately held target businesses are not inclined to enter into these types of transactions with publicly held blank check companies like ours. If we are unable to consummate a business combination with a target business within the prescribed time periods, we will be forced to liquidate. It is probable that we will only be able to complete one business combination, which will cause us to be solely dependent on a single business. The net proceeds from this offering and the sale of the founding director warrants will provide us with approximately $34,200,000 (including approximately $720,000 being held in the trust account which represent deferred underwriting discounts and commissions), which, except with respect to the deferred underwriting discounts and commissions, we may use to complete a business combination, including expenses in connection therewith. Our initial business combination must be with a business or businesses with a fair market value of at least 80% of our net assets held in trust (net of taxes) at the time of such transaction. We currently have no restrictions on our ability to seek additional funds through the sale of securities or through loans. As a consequence, we could seek to acquire a target business that has a fair market value significantly in excess of 80% of our net assets held in trust (net of taxes). Although as of the date of this prospectus we have not engaged or retained, had any discussions with, or entered into any agreements with, any third party regarding any such potential financing transactions, we could seek to fund such a business combination by raising additional funds through the sale of our securities or through loan arrangements. However, if we were to seek such additional funds, any such arrangement would only be consummated simultaneously with our consummation of a business combination. Consequently, it is probable that we will have the ability to complete only a single business combination, although this may entail the simultaneous acquisitions of several assets or closely related operating businesses at the same time. However, should our management elect to pursue more than one acquisition of target businesses simultaneously, our management could encounter difficulties in consummating all or a portion of such acquisitions due to a lack of adequate resources, including the inability of management to devote sufficient time to the due diligence, negotiation and documentation of each acquisition. Furthermore, even if we complete the acquisition of more than one target business at substantially the same time, there can be no assurance that we will be able to integrate the operations of such target businesses. Accordingly, the prospects for our ability to effect our business strategy may be: solely dependent upon the performance of a single business; or dependent upon the development or market acceptance of a single or limited number of products, processes or services. In this case, we will not be able to diversify our operations or benefit from the possible spreading of risks or offsetting of losses, unlike other entities which may have the resources to complete several business combinations in different industries or different areas of a single industry. Furthermore, since our business combination may entail the simultaneous acquisitions of several assets or operating businesses at the same time and may be with different sellers, we will need to convince such sellers to agree that the purchase of their assets or businesses is contingent upon the simultaneous closings of the other acquisitions. We may be unable to obtain additional financing, if required, to complete a business combination or to fund the operations and growth of the target business, which could compel us to restructure the transaction or abandon a particular business combination. Although we believe that the net proceeds of this offering will be sufficient to allow us to consummate a business combination, in as much as we have not yet identified any prospective target business, we cannot ascertain the capital requirements for any particular transaction. If the net proceeds of this offering prove to be insufficient, either because of the size of the business combination or the depletion of the available net proceeds in search of a target business, or because we become obligated to redeem into cash a significant number of shares from dissenting shareholders, we will be required to seek additional financing. We cannot assure you that such financing would be available on acceptable terms, if at all. To the extent that additional financing proves to be unavailable when needed to consummate a particular business combination, we would be compelled to restructure the transaction or abandon that particular business combination and seek an alternative target business candidate. In addition, it is possible that we could use a portion of the funds not in the trust account to make a deposit, down payment or fund a no-shop provision with respect to a proposed business combination, although we do not have any current intention to do so. In the event that we were ultimately required to forfeit such funds (whether as a result of our breach of the agreement relating to such payment or otherwise), we may not have a sufficient amount of working capital available outside of the trust account to conduct due diligence and pay other expenses related to finding a suitable business combination without securing additional financing. If were unable to secure additional financing, we would most likely fail to consummate a business combination in the allotted time and would be forced to dissolve and liquidate the trust account, resulting in a loss of a portion of your investment. In addition, if we consummate a business combination, we may require additional financing to fund the operations or growth of the target business. The failure to secure additional financing could have a material adverse effect on the continued development or growth of the target business. None of our officers, directors or shareholders is required to provide any financing to us in connection with or after a business combination. For a more complete discussion regarding our automatic dissolution and subsequent liquidation if we cannot consummate a business combination, see Business Effecting a Business Combination Automatic Dissolution and Subsequent Liquidation if no Business Combination. Our existing shareholders, including our officers and directors, control a substantial interest in us and thus may influence certain actions requiring shareholder vote. Upon consummation of our offering, our existing shareholders (including all of our officers and directors) will collectively own 20% of our issued and outstanding ordinary shares (assuming they do not purchase units in this offering). Our officers and directors, or their designees, have also agreed to purchase $1,080,000 of warrants directly from us prior to the closing of this offering at a price per warrant of $1.20. The purchase of the founding director warrants, together with any other acquisitions of our shares (or warrants which are subsequently exercised), could allow the existing shareholders to influence the outcome of matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions after completion of our initial business combination. These warrants cannot be sold until after consummation of a business combination; however, they may be able to transfer such warrants in certain limited circumstances such as by will in the event of their death, but the transferees receiving such warrants will be subject to the same sale restrictions imposed on our officers and directors and their designees. None of our other existing shareholders, officers and directors has indicated to us that they intend to purchase units in the offering. Our board of directors is divided into two classes, each of which will generally serve for a term of two years with only one class of directors being elected in each year. It is unlikely that there will be an annual meeting of shareholders to elect new directors prior to the consummation of a business combination, in which case all of the current directors will continue in office at least until the consummation of the business combination. If there is an annual meeting, as a consequence of our staggered board of directors, initially only a minority of the board of directors will be considered for election and our existing shareholders, because of their ownership position, will have considerable influence regarding the outcome. Accordingly, our existing shareholders will continue to exert control at least until the consummation of a business combination. In addition, our existing shareholders and their affiliates and relatives are not prohibited from purchasing units in this offering or in the open market. If they do, we cannot assure you that our existing shareholders will not have considerable influence upon the vote in connection with a business combination. Our founding director warrants are non-redeemable provided they are held by the initial purchasers or their permitted transferees, which could provide such purchasers the ability to realize a larger gain than our public warrants holders. The warrants held by our public warrant holders (including the warrants subject to the underwriters unit purchase option) may be called for redemption at any time after the warrants become exercisable: in whole and not in part; at a price of $.01 per warrant; Title of Each Class of Securities to be Registered Amount to be Registered(1) Proposed Maximum Offering Price per Unit(1) Proposed Maximum Aggregate Offering Unit(1) Amount of Registration Fee upon a minimum of 30 days prior written notice of redemption to each warrant holder; if, and only if, the last sale price of the ordinary shares equals or exceeds $11.50 per share, for any 20 trading days within a 30 trading day period ending on the third business day prior to the notice of redemption to warrant holders; and if there is an effective registration statement allowing for the resale of shares underlying the warrants. As a result of the founding director warrants not being subject to the redemption features that our publicly-held warrants are subject to, holders of the founding director warrants, or their permitted transferees, could realize a larger gain than our public warrant holders. Our outstanding warrants and unit purchase option may have an adverse effect on the market price of ordinary shares and make it more difficult to effect a business combination. In connection with this offering, as part of the units (but not including any over-allotments issued to the underwriters), and in connection with the sale of 900,000 founding director warrants, we will be issuing warrants to purchase 4,500,000 ordinary shares. We will also issue an option to purchase 315,000 units to Morgan Joseph & Co. which, if exercised, will result in the issuance of an additional 315,000 ordinary shares and 315,000 warrants. To the extent we issue ordinary shares to effect a business combination, the potential for the issuance of substantial numbers of additional shares upon exercise of these warrants and option could make us a less attractive acquisition vehicle in the eyes of a target business as such securities, when exercised, will increase the number of issued and outstanding ordinary shares and reduce the value of the shares issued to complete the business combination. Accordingly, our warrants and Morgan Joseph & Co. s unit purchase option may make it more difficult to effectuate a business combination or increase the cost of the target business. Additionally, the sale, or even the possibility of sale, of the shares underlying the warrants and unit purchase option could have an adverse effect on the market price for our securities or on our ability to obtain future public financing. If and to the extent these warrants and unit purchase option are exercised, you may experience dilution to your holdings. If our existing shareholders and purchasers of the founding director warrants exercise their registration rights, it may have an adverse effect on the market price of our ordinary shares and the existence of these rights may make it more difficult to effect a business combination. Our existing shareholders are entitled to require us to register the resale of their ordinary shares at any time after the date on which their shares are released from escrow, which, except in limited circumstances, will not be before one year from the consummation of a business combination. In addition, the holders of the founding director warrants can demand that we register those warrants and the underlying ordinary shares at anytime after the date on which their shares are released from escrow, which, except in limited circumstances, will not be before the consummation of a business combination. If our existing shareholders and the holders of the founding director warrants exercise their registration rights with respect to all of their ordinary shares and warrants, then there will be an additional 1,125,000 ordinary shares and 900,000 warrants or up to 900,000 ordinary shares issued upon exercise of the founding director warrants that will be eligible for trading in the public market. The presence of this additional number of securities eligible for trading in the public market may have an adverse effect on the market price of our ordinary shares. In addition, the existence of these rights may make it more difficult to effectuate a business combination or increase the cost of the target business, as the shareholders of the target business may be discouraged from entering into a business combination with us or will request a higher price for their securities as a result of these registration rights and the potential future effect their exercise may have on the trading market for our ordinary shares. If we are deemed to be an investment company, we may be required to institute burdensome compliance requirements and our activities may be restricted, which may make it more difficult for us to complete a business combination. In the event we do not automatically dissolve and the funds must remain in trust for an indeterminable amount of time, we may be considered an investment company and thus required to comply with the Investment Company Act of 1940. If we are deemed to be an investment company under the Investment Company Act of 1940, as amended, we may be subject to certain restrictions that may make it more difficult for us to complete a business combination, including: restrictions on the nature of our investments; and restrictions on the issuance of securities. In addition, we may have imposed upon us certain burdensome requirements, including: registration as an investment company; adoption of a specific form of corporate structure; and reporting, record keeping, voting, proxy compliance policies and procedures and disclosure requirements and other rules and regulations. We do not believe that our anticipated principal activities will subject us to the Investment Company Act of 1940, as amended. To this end, the proceeds held in trust may only be invested by the trust agent in government securities within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 having a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940. By restricting the investment of the proceeds to these instruments, we intend to avoid being deemed an investment company within the meaning of the Investment Company Act of 1940. This offering is not intended for persons who are seeking a return on investments in government securities. The escrow account and the purchase of government securities for the account is intended as a holding place for funds pending the earlier to occur of either: (i) the consummation of our primary business objective, which is a business combination, or (ii) absent a business combination, our automatic dissolution and subsequent liquidation of our trust account. If we were deemed to be subject to that act, compliance with these additional regulatory burdens would require additional expense for which we have not budgeted. Our directors may not be considered independent under the policies of the North American Securities Administrators Association, Inc. and may not have the benefit of independent directors examining our financial statements and the priority of expenses incurred on our behalf subject to reimbursement. All of our officers and directors own ordinary shares, and no salary or other compensation will be paid to our officers or directors for services rendered by them on our behalf prior to or in connection with a business combination. We do not believe that any of the members of our board of directors are independent as that term is commonly used. As a result, under the policies of the North American Securities Administrators Association, Inc., because our directors may receive reimbursement for out-of-pocket expenses incurred by them in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations, it is likely that state securities administrators would take the position that we do not have the benefit of independent directors examining the propriety of expenses incurred on our behalf and subject to reimbursement. Additionally, there is no limit on the amount of out-of-pocket expenses that could be incurred and there will be no review of the reasonableness of the expenses by anyone other than our board of directors, which would include persons who may seek reimbursement, or a court of competent jurisdiction if such reimbursement is challenged. Although we believe that all actions taken by our directors on our behalf will be in our best interests, whether or not any directors are deemed to be independent, we cannot assure you that this will actually be the case. If actions are taken or expenses are incurred that are actually not in our best interests, it could have a material adverse effect on our business and operations and the price of our shares held by the public shareholders. Since we have not currently selected a prospective target business with which to complete a business combination and are not limited to any particular industry, investors in this offering are unable to currently ascertain the merits or risks of the target business s operations. Since we have not yet identified a prospective target and are not limited to any particular industry, investors in this offering have no current basis to evaluate the possible merits or risks of the target business s operations. To the extent we complete a business combination with a financially unstable company, an entity in its development stage and an entity subject to unknown or unmanageable liabilities, we may be affected by numerous risks inherent in the business operations of those entities. Although our management will endeavor to evaluate the risks inherent in a particular target business, we cannot assure you that we will properly ascertain or assess all of the significant risk factors. We also cannot assure you that an investment in our units will not ultimately prove to be less favorable to investors in this offering than a direct investment, if an opportunity were available, in a target business. For a more complete discussion of our selection of a target business, see the section below entitled Proposed Business Effecting a Business Combination We have not Identified a Target Business. Acquisitions that we may undertake would involve a number of inherent risks, any of which could cause us not to realize the benefits anticipated to result. It is possible that, following our initial acquisition, our strategy will include expanding our operations and other capabilities through acquisitions of businesses and assets. Acquisition transactions involve various inherent risks, such as: uncertainties in assessing the value, strengths and potential profitability of, and identifying the extent of all weaknesses, risks, contingent and other liabilities (including environmental liabilities) of, acquisition or other transaction candidates; the potential loss of key customers, management and employees of an acquired business; the ability to achieve identified operating and financial synergies anticipated to result from an acquisition or other transaction; problems that could arise from the integration of the acquired business; and unanticipated changes in business, industry or general economic conditions that affect the assumptions underlying the acquisition or other transaction rationale. Any one or more of these factors could cause us not to realize the benefits anticipated to result from the acquisition of businesses or assets or could result in unexpected liabilities associated with these acquisition candidates. We may become a passive foreign investment company, which could result in adverse U.S. tax consequences to U.S. investors. If we are determined to be a passive foreign investment company, known as a PFIC , U.S. holders (as defined in the section of this prospectus captioned Taxation United States Federal Income Taxation Passive Foreign Investment Company ) could be subject to adverse United States federal income tax consequences. Specifically, if we are determined to be a PFIC for any taxable year, each U.S. holder may be subject to increased tax liabilities under U.S. tax laws and regulations and may be subject to additional reporting requirements. The determination of whether we are a PFIC will be made on an annual basis and will depend on the composition of our income and assets, including goodwill. The calculation of goodwill will be based, in part, on the market value of our ordinary shares from time to time, which may be volatile. In general, we will be classified as a PFIC for any taxable year in which either (1) at least 75% of our gross income is passive income or (2) at least 50% of the value (determined on the basis of a quarterly average) of our assets is attributable to assets that produce or are held for the production of passive income. For purposes of these tests, cash, including working capital, and investments are considered assets that produce or are held for the production of passive income. Newly formed corporations, such as us, are excepted out of the PFIC rules for their first year of existence. In addition, we expect to conduct our affairs in a manner so that we will not qualify as a PFIC in the foreseeable future. Our determination of whether we are a PFIC is not binding on the Internal Revenue Service. We cannot assure you that we will not be a PFIC in any future year. We urge U.S. investors to consult their own tax advisors regarding the possible application of the PFIC rules. For a more detailed explanation of the tax consequences of PFIC classification to U.S. holders, see the section of this prospectus captioned Taxation United States Federal Income Taxation Passive Foreign Investment Company. Risks Associated with our Acquisition of a Target in the PRC After a business combination, substantially all of our assets could be located in China and substantially all of our revenue will be derived from our operations in China. Accordingly, our results of operations and prospects will be subject, to a significant extent, to the economic, political and legal developments in China. The PRC s economic, political and social conditions, as well as government policies, could affect our business. The PRC economy differs from the economies of most developed countries in many respects, including: the amount of government involvement; the level of development; the growth rate; the control of foreign exchange; and the allocation of resources. Our ability to find an attractive target business with which to consummate a business combination is based on the assumption that the Chinese economy will continue to grow. The PRC s economic growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us, depending on the industry in which we engage in a business combination. For example, our financial condition and results of operations may be adversely affected by PRC government control over capital investments or changes in tax regulations that are applicable to a potential target business and a business combination. The PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the PRC government has implemented measures emphasizing the use of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. It also exercises significant control over PRC economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. We cannot assure you that China s economic, political or legal systems will not develop in a way that becomes detrimental to our business, results of operations and prospects. For example, the PRC government has in the past implemented a number of measures intended to slow down certain segments of the PRC economy that the government believed to be overheating, including placing additional limitation on the ability of commercial banks to make loans by raising bank reserve-against-deposit rates. Our activities may be materially and adversely affected by changes in the PRC economic and social conditions and by changes in the policies of the PRC government, such as measures to control inflation, changes in the rates or method of taxation and the imposition of additional restrictions on currency conversion. A recent positive economic change has been the PRC s entry into the World Trade Organization, or WTO, the sole global international organization dealing with the rules of trade between nations. It is believed that the PRC s entry will ultimately result in a reduction on tariffs for industrial products, a reduction in trade restrictions and an increase in trading with the United States. However, the PRC has not fully complied with all of its WTO obligations to date, including fully opening its markets to American goods and easing the current trade imbalance between the two countries. If actions are not taken to rectify these problems, trade relations may be strained and this may have a negative impact on China s economy. If political relations between the PRC and the Unites States or Europe deteriorate, it could cause potential target businesses or their goods or services to become less attractive. The relationship between the PRC and the United States and Europe is subject to sudden fluctuation and periodic tension. For instance, the United States recently announced its intention to impose new short-term quotas on Chinese clothing imports, which may be extended for several years. Such import quotas may adversely affect political relations between the two countries and result in retaliatory countermeasures by the PRC in industries that may affect our ultimate target business. Relations may also be compromised if the U.S. or Europe becomes a more vocal advocate of Taiwan or proceeds to sell certain military weapons and technology to Taiwan. Changes in political conditions in the PRC and changes in the state of Sino-U.S. relations and Sino-Europe relations are difficult to predict and could adversely affect our operations or cause potential target businesses or their goods and services to become less attractive. Because we are not limited to any specific industry, there is no basis for investors in this offering to evaluate the possible extent of any impact on our ultimate operations if relations are strained between the PRC and either the United States or Europe. If the PRC imposes restrictions to reduce inflation, future economic growth in the PRC could be severely curtailed, which could lead to a significant decrease in our profitability following a business combination. While the economy of the PRC has experienced rapid growth, this growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the supply of money and rising inflation. If prices for the products of our ultimate target business rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may have an adverse effect on profitability. In order to control inflation in the past, the PRC has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. If similar restrictions are imposed, it may lead to a slowing of economic growth. Because we are not limited to any specific industry, the ultimate industry that we operate in may be affected more severely by such a slowing of economic growth. Because Chinese law will govern almost all of any target business material agreements, we may not be able to enforce our rights within the PRC or elsewhere, which could result in a significant loss of business, business opportunities or capital. Chinese law will govern almost all of our target business material agreements, many of which may be with Chinese governmental agencies. We cannot assure you that the target business will be able to enforce any of its material agreements or that remedies will be available outside of the PRC. The system of laws and the enforcement of existing laws in the PRC may not be as certain in implementation and interpretation as in the United States. The Chinese judiciary is relatively inexperienced in enforcing corporate and commercial law, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss of business, business opportunities or capital. Additionally, after the consummation of a business combination, it is likely that substantially all of our assets will be located outside of the United States and some of our officers and directors may reside outside of the United States. As a result, it may not be possible for investors in the United States to enforce their legal rights, to effect service of process upon our directors or officers or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties of our directors and officers under Federal securities laws. Moreover, we have been advised that the PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States. Further, it is unclear if extradition treaties now in effect between the United States and the PRC would permit effective enforcement of criminal penalties of the Federal securities laws. 1.1 Underwriting Agreement. 1.2 Selected Dealers Agreement. 3.1 Memorandum and Articles of Association.** 3.2 Amended and Restated Memorandum and Articles of Association. 4.1 Specimen Unit Certificate. 4.2 Specimen Ordinary Share Certificate. 4.3 Specimen Warrant Certificate. 4.4 Unit Purchase Agreement to be granted to Morgan Joseph & Co., Inc. 4.5 Warrant Agreement between American Stock Transfer & Trust Company and the Registrant. 5.1 Opinion of Maples & Calder. 8.1 Tax Opinion of Maples & Calder, (included in Exhibit 5.1). 8.2 Tax Opinion of DLA Piper US LLP. 10.1 Investment Management Trust Agreement between American Stock Transfer & Trust Company and the Registrant. 10.2 Securities Escrow Agreement among the Registrant, American Stock Transfer & Trust Company and the Existing Shareholders. 10.3 Registration Rights Agreement among the Registrant and the Existing Shareholders. 10.4 Letter Agreement among the Registrant, Morgan Joseph & Co., Inc. and Michael W. Zhang. 10.5 Letter Agreement among the Registrant, Morgan Joseph & Co., Inc. and Jin Shi. 10.6 Letter Agreement among the Registrant, Morgan Joseph & Co., Inc. and Xuechu He. 10.7 Letter Agreement among the Registrant, Morgan Joseph & Co., Inc. and Teng Zhou. 10.8 Letter Agreement among the Registrant, Morgan Joseph & Co., Inc. and Xuesong Song. 10.9 Office Services Agreement between the Registrant and Global Vestor Capital Partners LLC. 10.10 Warrant Purchase Agreement between the Company and the Existing Shareholders. 10.11 Promissory Note, dated May 18, 2006, issued to Global Vestor Capital Partners, LLC in the amount of 70,000. 10.12 Promissory Note, dated May 18, 2006, issued to Venture Link Assets Limited in the amount of 28,000. 10.13 Promissory Note, dated May 18, 2006, issued to Chum Capital Group Limited in the amount of 70,000. 10.14 Promissory Note, dated May 18, 2006, issued to Guorun Group Limited in the amount of 42,000. 23.1 Consent of Berenson LLP. 23.2 Consent of DLA Piper US LLP (included in Exhibit 8.2). 23.3 Consent of Maples & Calder (included in Exhibit 5.1). Many industries in China are subject to government regulations that limit or prohibit foreign investments in such industries, which may limit the potential number of acquisition candidates. The Chinese government has imposed regulations in various industries that would limit foreign investors equity ownership or prohibit foreign investments altogether in companies that operate in such industries. As a result, the number of potential acquisition candidates available to us may be limited. If we acquire a target business through contractual arrangements with one or more operating businesses in China, such contracts may not be as effective in providing operational control as direct ownership of such businesses and may be difficult to enforce. To comply with applicable Chinese regulations, we may effect a business combination by paying consideration to the owners of the target business and then making contractual arrangements between our company, subsidiaries and/or affiliates and Chinese companies holding the licenses required to engage in the specific industry of the target business and its stockholders. In that case, the target business would be owned by Chinese residents (most likely designated by our company) rather than directly by our company. If we choose to effect this type of business combination, we would expect to negotiate agreements that are designed to give us the full economic benefits and control comparable to those we would enjoy with full direct ownership. However, these contractual arrangements may not be as effective in providing us with the same economic benefits or control over a target business as direct ownership would. For example, if the target business or any other entity fails to perform its obligations under these contractual arrangements, we may have to incur substantial costs and expend substantial resources to enforce such arrangements, and rely on legal remedies under Chinese law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure will be sufficient to off-set the cost of enforcement and may adversely affect the benefits we expect to receive from the business combination. Moreover, we expect that the contractual arrangements upon which we would be relying would be governed by Chinese law and would be the only basis of providing resolution of disputes which may arise through either arbitration or litigation in China. Accordingly, these contracts would be interpreted in accordance with Chinese law and any disputes would be resolved in accordance with Chinese legal procedures. Uncertainties in the Chinese legal system could limit our ability to enforce these contractual arrangements. In the event we are unable to enforce these contractual arrangements, we may not be able to exert the effective level of control or receive the full economic benefits of full direct ownership over the target business. Although it has no current plans to do so, we may seek to enter into a contractual arrangement with a third party entity in satisfaction of its obligation to acquire a business with 80% of its net assets. A contractual arrangement may result in us owning less than a majority of the capital stock or voting stock of the third party. As a result, we may have less control over the operations of the entity. Our ability to control the operations of the entity may be hampered by our inability to elect a majority of directors or to appoint management or replace directors and management. This lack of control may result in our inability to change the direction of the entity if we were in disagreement with the direction of the entity. If the PRC enacts regulations in more industry segments which forbid or restrict foreign investment, our ability to consummate a business combination could be severely impaired. Many of the rules and regulations that companies face in China are not explicitly communicated. If new laws or regulations forbid foreign investment in industries in which we want to complete a business combination, they could severely impair our choice of candidate pool of potential target businesses. Additionally, if the relevant Chinese authorities find us or the target business with which we ultimately complete a business combination to be in violation of any existing or future Chinese laws or regulations, they would have broad discretion in dealing with such a violation, including, without limitation: levying fines; revoking our business and other licenses; requiring that we restructure our ownership or operations; and requiring that we discontinue any portion or all of our business. Because any target business that we attempt to complete a business combination with will be required to provide our shareholders with financial statements prepared in accordance with and reconciled to United States generally accepted accounting principles, prospective target businesses may be limited. In accordance with requirements of United States federal securities laws, in order to seek shareholder approval of a business combination, a proposed target business will be required to have certain financial statements which are prepared in accordance with, or which can be reconciled to, United States generally accepted accounting principles and audited in accordance with United States generally accepted auditing standards. To the extent that a prospective target business does not have financial statements which have been prepared with, or which can be reconciled to, United States generally accepted accounting standards, and audited in accordance with United States generally accepted auditing standards, we will not be able to acquire such target business. These financial statement requirements may limit the pool of potential target businesses which we may acquire. Any devaluation of currencies used in the PRC could negatively impact our target business results of operations and cause the cost of a target business as measured in dollars to increase. Because our objective is to acquire a target business having its primary operating facilities located in the PRC, and because substantially all revenues and income would be received in a foreign currency such as Renminbi, the main currency used in the PRC, the dollar equivalent of our net assets and distributions, if any, would be adversely affected by reductions in the value of the Renminbi. The value of the Renminbi fluctuates and is affected by, among other things, changes in the PRC s political and economic conditions. The conversion of Renminbi into foreign currencies such as the dollar has been generally based on rates set by the People s Bank of China, which are set daily based on the previous day s interbank foreign exchange market rates and current exchange rates on the world financial markets. The official exchange rate had remained stable over the past several years. However, China recently adopted a floating rate with respect to the Renminbi. As a result, the exchange rate of the Renminbi recently rose to approximately 7.81 against the dollar, as of December 21, 2006, amounting to a 5.5% appreciation of the Renminbi since July 2005. This floating exchange rate, and any appreciation of the Renminbi that may result from such rate, could cause the cost of a target business as measured in dollars to increase. Fluctuations in the value of the Renminbi relative to foreign currencies could affect our operating results. We will prepare our financial statements in United States dollars, but payroll and other costs of non-United States operations will be payable in foreign currencies, primarily Renminbi. To the extent future revenue is denominated in non-United States currencies, we would be subject to increased risks relating to foreign currency exchange rate fluctuations that could have a material adverse affect on our business, financial condition and operating results. The value of Renminbi against the United States dollar and other currencies may fluctuate and is affected by, among other things, changes in China s political and economic conditions. As our operations will be primarily in China, any significant revaluation of the Renminbi may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert United States dollars into Chinese Renminbi for our operations, appreciation of this currency against the United States dollar could have a material adverse effect on our business, financial condition and results of operations. Conversely, if we decide to convert our Renminbi into United States dollars for other business purposes and the United States dollar appreciates against this currency, the United States dollar equivalent of the Renminbi we convert would be reduced. The Chinese government recently announced that it is pegging the exchange rate of the Renminbi against a number of currencies, rather than just the United States dollar. Fluctuations in the Renminbi exchange rate could adversely affect our ability to find an attractive target business with which to consummate a business combination and to operate our business after a business combination. Recent changes in the PRC s currency policies may cause a target business ability to succeed in the international markets to be diminished. Historically, the PRC pegged its currency to the United States dollar. This meant that each unit of Chinese currency had a set ratio for which it could be exchanged for United States currency, as opposed to having a floating value like other countries currencies. Many countries argued that this system of keeping the Chinese currency low when compared to other countries gave Chinese companies an unfair price advantage over foreign companies. Due to mounting pressure from outside countries, the PRC recently reformed its economic policies to establish a floating value. As a result of this policy reform, target companies may be adversely affected since the competitive advantages that existed as a result of the former policies will cease. We cannot assure you that a target business with which we consummate a business combination will be able to compete effectively with the new policies in place. Restrictions on currency exchange may limit our ability to utilize our cash flow effectively following a business combination. Following a business combination, we will be subject to China s rules and regulations on currency conversion. In China, the State Administration for Foreign Exchange ( SAFE ) regulates the conversion of the Chinese Renminbi into foreign currencies. Currently, foreign investment enterprises ( FIEs ) are required to apply to the SAFE for Foreign Exchange Registration Certificates for FIEs. Following a business combination, the entity in which we invest in China will likely be a FIE as a result of our ownership structure. FIEs holding such registration certificates, which must be renewed annually, are allowed to open foreign currency accounts including a basic account and capital account. Currency translation within the scope of the basic account, such as remittance of foreign currencies for payment of dividends, can be effected without requiring the approval of the SAFE. However, conversion of currency in the capital account, including capital items such as direct investments, loans, and securities, require approval of the SAFE. We cannot assure you that the Chinese regulatory authorities will not impose further restrictions on the convertibility of the Chinese Renminbi. Any future restrictions on currency exchanges may limit our ability to use our cash flow for the distribution of dividends to our shareholders or to fund operations we may have outside of China. If any dividend is declared in the future and paid in a foreign currency, you may be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive. If you are a U.S. holder, you will be taxed on the U.S. dollar value of your dividends at the time you receive them, even if you actually receive a smaller amount of U.S. dollars when the payment is in fact converted into U.S. dollars. Specifically, if a dividend is declared and paid in a foreign currency, the amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the payments made in the foreign currency, determined at the spot rate of the foreign currency to the U.S. dollar on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Thus, if the value of the foreign currency decreases before you actually convert the currency into U.S. dollars, you will be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive. Recent regulations relating to offshore investment activities by PRC residents may increase the administrative burden we face and create regulatory uncertainties that may limit or adversely effect our ability to acquire PRC companies. Regulations were issued on January 24, 2005, on April 8, 2005, October 21, 2005 and on September 8, 2006, by the PRC State Administration of Foreign Exchange, or SAFE, that will require approvals from, and registrations with, PRC government authorities in connection with direct or indirect offshore investment activities by PRC residents and PRC corporate entities; however, there has been a recent announcement that such regulations may be partially reversed. The SAFE regulations retroactively require approval and registration of direct or indirect investments previously made by PRC residents in offshore companies. In the event that a PRC shareholder with a direct or indirect stake in an offshore parent company fails to obtain the required SAFE approval and make the required registration, the PRC subsidiaries of such offshore parent company may be prohibited from making distributions of profit to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries. Further, failure to comply with the various SAFE approval and registration requirements described above, as currently drafted, could result in liability under PRC law for foreign exchange evasion. More recently, however, it seems that new regulations are being drafted that may revise the policy that requires Chinese companies to obtain permission from SAFE to own overseas corporate entities. As a result of the lack of implementing rules, the uncertainty as to when the new draft regulations will take effect, and uncertainty concerning the reconciliation of the new regulations with other approval requirements, it remains unclear how these existing regulations, and any future legislation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. We are committed to complying with the relevant rules. As a result of the foregoing, we cannot assure you that we or the owners of the target business we intend to acquire, as the case may be, will be able to complete the necessary approval, filings and registrations for a proposed business combination. This may restrict our ability to implement our acquisition strategy and adversely affect our operations. See Government Regulations Regulation of Foreign Exchange in Certain Onshore and Offshore Transactions . The Ministry of Commerce, or the MOC, the State-owned Assets Supervision and Administration Commission , or the SASAC, the State Administration of Taxation, or the SAT, the State Administration for Industry and Commerce, or the SAIC, the China Security Regulatory Committee, or the CSRC, and SAFE jointly enacted the Provisions on Acquisition of Domestic Enterprises by Foreign Investors on 8 August 2006, which will become effective on 8 September 2006, or the 2006 Acquisition Provisions). In addition to the Chinese regulatory approvals for mergers with or acquisitions of the equity ownership or assets of Chinese domestic companies, the 2006 Acquisition Provisions deprive those companies established by Chinese domestic companies, enterprises or natural persons by way of merger with or acquisition of Chinese domestic affiliated companies in the name of their companies duly incorporated or controlled overseas of the tax preferential treatments granted to FIEs unless the overseas companies bring certain amount of additional capital to the Chinese company. The 2006 Acquisition Provisions also create new layers of Chinese regulatory approvals affecting offshore special purpose companies set up by Chinese domestic companies, enterprises or natural persons, and the in-bound investment made by such special purpose companies. Additionally, the financing of the special purpose company from its overseas listing must be repatriated to China according to the repatriation plan filed with SAFE. The profits, dividends and foreign exchange income obtained as a result of capital variation, which are received by the Chinese domestic companies or natural persons from their special purpose companies, must be repatriated to China within six months from the day on which they are received. See Government Regulations Regulations of Mergers and Acquisitions . If certain exemptions within the PRC regarding withholding taxes are removed we may be required to deduct Chinese corporate withholding taxes from dividends we may pay to our shareholders following a business combination. Under the PRC s current tax laws, regulations and rulings, companies are exempt from paying withholding taxes with respect dividends paid to shareholders outside of the PRC. However, if the foregoing exemption is removed in the future following a business combination, we may be required to deduct certain amounts from dividends we may pay to our shareholders to pay corporate withholding taxes. The current rate imposed on corporate withholding taxes is 20%, or 10% for individuals and entities for those countries that entered into the Protocol of Avoidance of Double Taxation within the PRC. After we consummate a business combination, our operating company in China will be subject to restrictions on dividend payments. After we consummate a business combination, we will rely on dividends and other distributions from our operating company to provide us with cash flow and to meet our other obligations. Current regulations in China would permit our operating company in China to pay dividends to us only out of its accumulated distributable profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, our operating company in China will be required to set aside at least 10% (up to an aggregate amount equal to half of its registered capital) of its accumulated profits each year. Such cash reserve may not be distributed as cash dividends. In addition, if our operating company in China incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. Recent regulations relating to offshore investment activities by PRC corporate entities may increase the administrative burden we face and create regulatory uncertainties that may limit or adversely affect our ability to acquire PRC companies. Regulations were issued on 21 October 2005, by the SAFE, which will require approvals from, and registrations with, PRC government authorities in connection with direct or indirect offshore investment activities by PRC residents and PRC corporate entities. The SAFE regulations retroactively require approval and registration of direct or indirect investments previously made by PRC residents in offshore companies. In the event that a PRC shareholder with a direct or indirect stake in an offshore parent company fails to obtain the required SAFE approval and make the required registration, the PRC subsidiaries of such offshore parent company may be prohibited from making distributions of profit to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries. Further, failure to comply with the various SAFE approval and registration requirements described above, as currently drafted, could result in liability under PRC law for foreign exchange evasion. More recently, however, it seems that new regulations are being drafted that may revise the policy that requires Chinese companies to obtain permission from SAFE to own overseas corporate entities. As a result of the lack of implementing rules, the uncertainty as to when the new draft regulations will take effect, and uncertainty concerning the reconciliation of the new regulations with other approval requirements, it remains unclear how these existing regulations, and any future legislation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. We are committed to complying with the relevant rules. As a result of the foregoing, we cannot assure you that we or the owners of any Target Business we intend to acquire, as the case may be, will be able to complete the necessary approval, filings and registrations for a proposed Business Combination. This may restrict our ability to implement our acquisition strategy and adversely affect our operations. See Government Regulations Regulation of Foreign Exchange in Certain Onshore and Offshore Transactions . The MOC, SASAC, SAT, SAIC, CSRC and SAFE jointly enacted the 2006 Acquisition Provisions. In addition to the Chinese regulatory approvals for mergers with or acquisitions of the equity ownership or assets of Chinese domestic companies, the 2006 Acquisition Provisions deprive those companies established by Chinese domestic companies, enterprises or natural persons by way of merger with or acquisition of Chinese domestic affiliated companies in the name of their companies duly incorporated or controlled overseas of the tax preferential treatments granted to FIEs, unless the overseas companies bring a certain amount of additional capital to the Chinese company. The 2006 Acquisition Provisions also create new layers of Chinese regulatory approvals affecting offshore special purpose companies set up by Chinese domestic companies, enterprises or natural persons, and the in-bound investment made by such special purpose companies . Additionally, the financing of the special purpose company from its overseas listing must be repatriated to China according to the repatriation plan filed with SAFE. The profits, dividends and foreign exchange income obtained as a result of capital variation, which are received by the Chinese domestic companies or natural persons from their special purpose companies, must be repatriated to China within six months from the day on which they are received. See Government Regulations Regulations of Mergers and Acquisitions . Regulations relating to the transfer of state-owned property rights in enterprises may increase the cost of our acquisitions and impose an additional administrative burden on us. The legislation governing the acquisition of a PRC state-owned company contains stringent governmental regulation comprising the Provisional Regulations on Using Foreign Investment to Reorganize State-owned Enterprises promulgated by SAIC and SAFE on 8 November 2002, effective from 1 January 2003 and the Provisional Measures on the Administration of the Transfer of State-Owned Property Rights in Enterprises promulgated by the SASAC and the Ministry of Finance, or MOF, on 31 December 2003, effective from 1 February 2004. The transfer of state-owned property rights in enterprises must take place through a government approved state-owned asset exchange , and the value of the transferred property rights must be evaluated by those Chinese appraisal firms qualified to do state-owned assets evaluation . The final price must not be less than 90% of the appraisal price. Additionally, bidding/auction procedures are essential in the event that there is more than one potential transferee. In the case of an acquisition by foreign investors of state-owned enterprises, the acquirer and the seller must make a resettlement plan to properly resettle the employees, and the resettlement plan must be approved by the Employees Representative Congress. The seller must pay all unpaid wages and social welfare payments from the existing assets of the target company to the employees. You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited, because we are incorporated under Cayman Islands law. We are a company incorporated under the laws of the Cayman Islands, and substantially all of our assets are located outside the United States. In addition, certain of our directors and officers are nationals or residents of jurisdictions other than the United States and all or a substantial portion of their assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon our directors or executive officers, or enforce judgments obtained in the United States courts against our directors or officers. Moreover, we have been advised that the PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States. Further, it is unclear if extraction treaties now in effect between the United States and the PRC would permit effective enforcement of criminal penalties of the United States federal securities laws. Our corporate affairs will be governed by our amended and restated memorandum and articles of association, the Companies Law (2004 Revision) of the Cayman Islands (as the same may be supplemented or amended from time to time), or the Companies Law, and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, the decisions of whose courts are of persuasive authority, but are not binding on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws as compared to the United States, and some states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The Cayman Islands courts are also unlikely: to recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws; and to impose liabilities against us, in original actions brought in the Cayman Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will in certain circumstances recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a U.S. company. For a discussion of certain differences between the provisions of the Companies Law and the laws applicable to companies incorporated in the United States and their shareholders, see Description of Share Capital Certain Differences in Corporate Law. Risks Associated with the Offering Under Cayman Islands law, the requirements and restrictions relating to this offering contained in our amended and restated memorandum and articles of association may be amended, which could reduce or eliminate the protection afforded to our shareholders by such requirements and restrictions. Our amended and restated memorandum and articles of association sets forth certain requirements and restrictions relating to this offering that shall apply to us until the consummation of a business combination. Specifically, Articles 168 through 171 of our amended and restated articles of association will provide among other things, that: prior to the consummation of our initial business combination, we shall submit such business combination to our shareholders for approval; we may consummate our initial business combination if: (i) approved by a majority of the ordinary shares voted by the public shareholders and (ii) public shareholders not owning more than 19.99% of the ordinary shares purchased by the public shareholders in this offering exercise their redemption rights. if our initial business combination is approved and consummated, public shareholders who voted against the business combination and exercised their redemption rights will receive their pro rata share of the trust account (net of taxes); if a business combination is not consummated or a letter of intent, an agreement in principle or a definitive agreement is not signed within the time periods specified in this prospectus, then our corporate existence will cease by operation of law and we will distribute to all of our public shareholders their pro rata share of the trust account (net of taxes); and we may not consummate any share capital exchange, stock purchase, asset acquisition or similar transaction other than a business combination that meets the conditions specified in this prospectus, including the requirement that our initial business combination be with one or more operating businesses whose fair market value, either individually or collectively, is equal to at least 80% of our net assets held in trust (net of taxes) at the time of such business combination. Our amended and restated memorandum and articles of association prohibits the amendment of the above-described provisions. However, the validity of provisions prohibiting amendment of the articles of association under Cayman Islands law has not been settled. A court could conclude that the prohibition on amendment violated the shareholders implicit rights to amend the amended and restated memorandum and articles of association. In that case, the above-described provisions would be amendable and any such amendment could reduce or eliminate the protection afforded to our shareholders. However, we view the foregoing provisions as obligations to our shareholders and we will not take any actions to waive or amend any of these provisions. If our ordinary shares become subject to the SEC s penny stock rules, broker-dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected. If at any time we have net tangible assets of $5,000,000 or less and our ordinary shares have a market price per share of less than $5.00, transactions in our ordinary shares may be subject to the penny stock rules promulgated under the Securities Exchange Act of 1934. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must: make a special written suitability determination for the purchaser; receive the purchaser s written agreement to a transaction prior to sale; provide the purchaser with risk disclosure documents that identify certain risks associated with investing in penny stocks and that describe the market for these penny stocks as well as a purchaser s legal remedies; and obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a penny stock can be completed. If our ordinary shares become subject to these rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected. As a result, the market price of our securities may be depressed, and you may find it more difficult to sell our securities. We intend to have our securities quoted on the OTC Bulletin Board, which will limit the liquidity and price of our securities more than if our securities were quoted or listed on the Nasdaq Stock Market or a national exchange. We anticipate that our securities will be traded in the over-the-counter market. It is anticipated that they will be quoted on the OTC Bulletin Board, an NASD-sponsored and operated inter-dealer automated quotation system for equity securities not included in the Nasdaq Stock Market. Quotation of our securities on the OTC Bulletin Board will limit the liquidity and price of our securities more than if our securities were quoted or listed on The Nasdaq Stock Market or a national exchange. If you are not an institutional investor, you may purchase our securities in this offering only if you reside within certain states and may engage in resale transactions only in those states and a limited number of other jurisdictions. We have applied to register our securities, or have obtained or will seek to obtain an exemption from registration, in Colorado, Delaware, the District of Columbia, Florida, Hawaii, Illinois, Indiana, New York and Rhode Island. If you are not an institutional investor, you must be a resident of these jurisdictions to purchase our securities in the offering. The definition of an institutional investor varies from state to state but generally includes financial institutions, broker-dealers, banks, insurance companies and other qualified entities. In order to prevent resale transactions in violation of states securities laws, you may engage in resale transactions only in these states and in a limited number of other jurisdictions in which an applicable exemption is available or an application has been filed and accepted. This restriction on resale may limit your ability to resell the securities purchased in this offering and may impact the price of our securities. For a more complete discussion of the state securities laws and registrations affecting this offering, please see Underwriting State Blue Sky Information below. Because our existing shareholders initial equity investment was only $25,000, our offering may be disallowed by state administrators that follow the North American Securities Administrators Association, Inc. Statement of Policy on promotional or development stage companies. Pursuant to the Statement of Policy Regarding Promoter s Equity Investment promulgated by the North American Securities Administrators Association, Inc., an international organization devoted to investor protection, any state administrator may disallow an offering of a promotional or development stage company if the initial equity investment by a company s promoters does not equal a certain percentage of the aggregate public offering price. Our promoters initial investment of $25,000 is less than the required $1,610,000 minimum amount pursuant to this policy. Accordingly, a state administrator would have the discretion to disallow our offering. We cannot assure you that our offering would not be disallowed pursuant to this policy. Additionally, if we are unable to complete a business combination, our promoters loss will be limited to their initial investment. Conversely, if we are able to complete a business combination, the ordinary shares acquired prior to this offering may be worth more than $25,000. You will not be entitled to protections normally afforded to investors of blank check companies. Since the net proceeds of this offering are intended to be used to complete a business combination with a target business that has not been identified, we may be deemed to be a blank check company under the United States securities laws. However, since we will have net tangible assets in excess of $5,000,000 upon the consummation of this offering and will file a Current Report on Form 6-K with the SEC upon consummation of this offering, including an audited balance sheet demonstrating this fact, we believe we are exempt from rules promulgated by the SEC to protect investors of blank check companies, such as Rule 419 of the Securities Act. Accordingly, investors Units, each consisting of one ordinary share, $.001 par value, and one Warrant (2) 5,175,000 Units $ 8.00 $ 41,400,000 $ 4,429.80 will not be afforded the benefits or protections of those rules, such as entitlement to all the interest on the funds deposited in the trust account. Because we do not believe we are subject to Rule 419, our units will be immediately tradable and we have a longer period of time to complete a business combination in certain circumstances than if we were subject to such rule. For a more detailed comparison of our offering to offerings under Rule 419, see the section entitled Proposed Business Comparison to Offerings of Blank Check Companies . Our existing shareholders paid an aggregate of $25,000, or approximately $0.02 per share, for their shares and, accordingly, you will experience immediate and substantial dilution from the purchase of our ordinary shares. The difference between the public offering price per share of our ordinary shares and the pro forma net tangible book value per share of our ordinary shares after this offering constitutes the dilution to you and the other investors in this offering. The fact that our existing shareholders acquired their ordinary shares at a nominal price has significantly contributed to this dilution. Assuming the offering is completed, you and the other new investors will incur an immediate and substantial dilution of approximately 27.3% or $2.18 per share (the difference between the pro forma net tangible book value per share of $5.82, and the initial offering price of $8.00 per unit) not including the effect of certain offering costs for which payment is deferred until consummation of a business combination. The determination for the offering price of our units is more arbitrary compared with the pricing of securities for an operating company in a particular industry. Prior to this offering there has been no public market for any of our securities. The public offering price of the units and the terms of the warrants were negotiated between us and the representative. Factors considered in determining the prices and terms of the units, including the ordinary shares and warrants underlying the units, include: the history and prospects of companies whose principal business is the acquisition of other companies; prior offerings of those companies; our prospects for acquiring an operating business at attractive values; our capital structure; an assessment of our management and their experience in identifying operating companies; general conditions of the securities markets at the time of the offering; and other factors as were deemed relevant. However, although these factors were considered, the determination of our offering price is more arbitrary than the pricing of securities for an operating company in a particular industry since we have no historical operations or financial results to compare them to. There is currently no market for our securities and a market for our securities may not develop, which would adversely affect the liquidity and price of our securities. There is currently no market for our securities. Shareholders therefore have no access to information about prior market history on which to base their investment decision. Following this offering, the price of our securities may vary significantly due to our reports of operating losses, one or more potential business combinations, the filing of periodic reports with the SEC, and general market or economic conditions. Furthermore, an active trading market for our securities may never develop or, if developed, it may not be sustained. You may be unable to sell your securities unless a market can be established or sustained. We may choose to redeem our outstanding warrants at a time that is disadvantageous to our warrant holders. We may redeem the warrants (including the warrants subject to the underwriters unit purchase option) issued as a part of our units at any time after the warrants become exercisable in whole and not in part, at a price of $.01 per warrant, upon a minimum of 30 days prior written notice of redemption, if and only if, the last sales price of our common stock equals or exceeds $11.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. Redemption of the warrants could force the warrant holders (i) to exercise the warrants and pay the exercise price therefor at a time when it may be disadvantageous for the holders to do so, (ii) to sell the warrants at the then current market price when they might otherwise wish to hold the warrants, or (iii) to accept the nominal redemption price which, at the time the warrants are called for redemption, is likely to be substantially less than the market value of the Warrants. Although we are required to use our best efforts to have an effective registration statement covering the issuance of the shares underlying the warrants at the time that our warrant holders exercise their warrants, we cannot guarantee that a registration statement will be effective, in which case our warrant holders may not be able to exercise our warrants. Holders of our warrants will be able to exercise the warrants only if (i) a current registration statement under the Securities Act of 1933 relating to the shares of our common stock underlying the warrants is then effective and (ii) such shares are qualified for sale or exempt from qualification under the applicable securities laws of the states in which the various holders of warrants reside. Although we have undertaken in the warrant agreement included as an exhibit to this registration statement, and therefore have a contractural obligation, to use our best efforts to maintain a current registration statement covering the shares underlying the warrants following completion of this offering to the extent required by federal securities laws, we cannot assure that we will be able to do so and we have no obligation to settle the warrants on a net cash basis in absence of an effective registration statement. In addition, we have agreed to use our reasonable efforts to register the shares underlying the warrants under the blue sky laws of the states of residence of the exercising warrant holders, to the extent an exemption is not available. The value of the warrants may be greatly reduced and the warrants can expire unexercised or unredeemed if a registration statement covering the shares issuable upon the exercise of the warrants is not kept current or if the securities are not qualified, or exempt from qualification, in the states in which the holders of warrants reside. Holders of warrants who reside in jurisdictions in which the shares underlying the warrants are not qualified and in which there is no exemption will be unable to exercise their warrants and would either have to sell their warrants in the open market or allow them to expire unexercised. If and when the warrants become redeemable by us, we may exercise our redemption right even if we are unable to qualify the underlying securities for sale under all applicable state securities laws. Because the units sold in the Regulation S private placement were originally issued pursuant to an exemption from registration requirements under the federal securities laws, the holders of the warrants contained in such units will be able to exercise their warrants even if, at the time of exercise, a prospectus relating to the common stock issuable upon exercise of such warrants is not current. As a result, the holders of the warrants purchased in the Regulation S private placement will not have any restrictions with respect to the exercise of their warrants. As described above, the holders of the warrants purchased in this offering will not be able to exercise them unless we have a current registration statement covering the shares issuable upon their exercise. There are limitations in connection with the availability of quotes and order information on the OTCBB. Trades and quotations on the OTCBB involve a manual process and the market information for such securities cannot be guaranteed. In addition, quote information, or even firm quotes, may not be available. The manual execution process may delay order processing and intervening price fluctuations may result in the failure of a limit order to execute or the execution of a market order at a significantly different price. Execution of trades, execution reporting and the delivery of legal trade confirmation may be delayed significantly. Consequently, one may not be able to sell our ordinary shares at the optimum trading prices. There are delays in order communication on the OTCBB. Electronic processing of orders is not available for securities traded on the OTCBB and high order volume and communication risks may prevent or delay the execution of one s OTCBB trading orders. This lack of automated order processing may affect the timeliness of order execution reporting and the availability of firm quotes for shares of our common stock, due to the manual nature of the market. Consequently, one may not be able to sell shares of our common stock at the optimum trading prices. Loss from operations (16,596 ) Interest income (1) A portion of the offering expenses, including the SEC registration fee and NASD filing fee, will be paid from the $210,000 non-interest bearing loan from our officers and directors, as further described below. We intend to repay these loans out of the net proceeds of this offering not being placed in trust upon consummation of this offering, provided the amount held in trust remains at least 95% of the offering gross proceeds. (2) Consists of an underwriting discount of 7% of the gross proceeds of this offering (including any units sold to cover over-allotments) including 2%, or $720,000 to be held in trust ($828,000 if the underwriters over-allotment option is exercised in full) until consummation of a business transaction. (3) The amount of proceeds not held in trust will be $700,000 even if the over-allotment is exercised. (4) No interest earned on the funds held in trust will be used to pay any of the expenses (except with respect to any taxes payable). The amount of $34,200,000, or $39,330,000 if the underwriters over-allotment option is exercised in full, of the net proceeds of this offering and the purchase of the founding warrants, will be placed in a trust account at JPMorgan Chase NY Bank maintained by American Stock Transfer & Trust Company, as trustee. The funds held in trust will be invested only in United States government securities, within the meaning of Section 2(a)(16) of the Investment Company Act of 1940, as amended. The proceeds will not be released from the trust account until the earlier of the completion of a business combination or the liquidation of the trust account. The proceeds held in the trust account (exclusive of any taxes and any funds held for the benefit of the underwriters) may be used as consideration to pay the sellers of a target business with which we ultimately complete a business combination. Any amounts not paid as consideration to the sellers of the target business may be used to finance operations of the target business or to effect other acquisitions, as determined by our board of directors at that time. Because we do not have any specific business combination under consideration and have not (nor has anyone on our behalf) had any discussions, formal or otherwise, with respect to such a transaction, it is impossible at this time to determine specifically how we would, following a business combination, use any proceeds held in the trust account which are not used to consummate such business combination. We have agreed to pay Global Vestor Capital Partners LLC, an affiliate of Jin Shi, our chief executive officer and director, and Michael Zhang, our chief financial officer, secretary and director, up to $7,500 per month for office space, utilities, administrative, technology and secretarial services. This arrangement is being agreed to by Global Vestor Capital Partners LLC for our benefit and is not intended to provide Mr. Shi or Mr. Zhang compensation in lieu of salary. We believe, based on rents and fees for similar services in Shanghai, PRC, that such fees are at least as favorable as we could have obtained from an unaffiliated person. This arrangement will terminate upon completion of a business combination or the distribution of the trust account to our public shareholders. Regardless of whether the underwriters exercise their over-allotment option in full, the net proceeds available to us out of trust for our search for a business combination will be approximately $700,000. We intend to use the excess working capital (approximately $120,000) for director and officer liability insurance premiums (approximately $50,000), with the balance of $70,000 being held in reserve in the event due diligence, legal, accounting and other expenses of structuring and negotiating business combinations exceed our estimates, as well as for reimbursement of any out-of-pocket expenses incurred by any of our existing shareholders in connection with activities on our behalf (including possible payments to unaffiliated third-parties for their performance of due diligence). We believe that the excess working capital will be sufficient to cover the foregoing expenses and reimbursement costs. We could use a portion of the funds not being placed in trust to engage consultants to assist us with our search for a target business. We could also use a portion of the funds not being placed in trust as a down payment or to fund a no-shop provision (a provision in letters of intent designed to keep target businesses from shopping around for transactions with other companies on terms more favorable to such target business) with respect to a particular proposed business combination, although we do not have any current intention to do so. If we entered into such a letter of intent where we paid for the right to receive exclusivity from a target business, the amount that would be used as a down payment or to fund a no-shop provision would be determined based on the terms of the specific business combination and the amount of our available funds at the time. Our forfeiture of such funds (whether as a result of our breach or otherwise) could result in our not having sufficient funds to continue searching for, or conducting due diligence with respect to, potential target businesses. To the extent that our share capital is used in whole or in part as consideration to effect a business combination, the proceeds held in the trust account and other net proceeds not expended will be used to finance the operations of the target business. Certain of our officers and directors have agreed to loan us a total of $210,000, which will be used to pay a portion of the expenses of this offering, such as transfer agent fees, SEC registration fees, NASD registration fees, blue sky expenses, background investigation expenses, printing expenses, and legal and accounting fees and expenses. We intend to repay these loans from the proceeds of this offering not being placed in trust, provided the amount held in trust remains at least 95% of the offering gross proceeds. The net proceeds of this offering not held in the trust account and not immediately required for the purposes set forth above will be invested only in United States government securities or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940 so that we are not deemed to be an investment company under the Investment Company Act, as amended. By restricting the investment of the proceeds of this offering to these instruments, we intend to avoid being deemed to be an investment company within the meaning of the Investment Company Act. The interest income derived from investment of these net proceeds during this period will be used to defray our general and administrative expenses, as well as costs relating to compliance with securities laws and regulations, including associated professional fees, until a business combination is completed. We believe that, upon consummation of this offering, we will have sufficient available funds to operate for at least the next 24 months, assuming that a business combination is not consummated during that time. Commencing on the effective date of this prospectus through the consummation of the acquisition of the target business, we will pay Global Vestor Capital Partners LLC the $7,500 monthly fee described above. However, our existing shareholders will receive reimbursement for any out-of-pocket expenses incurred by them in connection with activities on our behalf, such as identifying potential target businesses and performing due diligence on suitable business combinations (including possible payments to unaffiliated third parties for their performance of due diligence) and for out-of-pocket expenses incurred in connection with this offering. Reimbursement for such expenses will be paid by us out of the funds not held in trust and currently allocated in the above table Working capital, director and officer liability insurance premiums and reserves. To the extent that such out-of-pocket expenses exceed the available proceeds not deposited in the trust account such out-of-pocket expenses would not be reimbursed by us unless we consummate a business combination, in which event this reimbursement obligation would in all likelihood be negotiated with the owners of a target business. Since the role of present management after a business combination is uncertain, we have no ability to determine what remuneration, if any, will be paid to those persons after a business combination. A public shareholder will be entitled to receive funds from the trust account (including interest earned on his, her or its portion of the trust account, net of taxes payable, which taxes, if any, shall be paid from the trust account) only in the event of our automatic dissolution and subsequent liquidation of the trust account upon our failure to complete a business combination or if that public shareholder were to redeem such shares into cash in connection with a business combination which the public shareholder voted against and which we actually consummate. In no other circumstances will a public shareholder have any right or interest of any kind to or in the trust account. (1) Does not include shares underlying the 900,000 founding director warrants to be purchased by the existing shareholders in a private placement prior to the consummation of the offering. (2) Assumes the sale of 4,500,000 units in this offering, but not the exercise of 4,500,000 warrants to purchase ordinary shares sold as part of such units. (1) Net of underwriters discounts and commissions (including $720,000 of deferred underwriting discounts and commissions) and other offering expenses. (2) Does not include the deferred underwriting discounts and commissions ($0.16 per share) which may be distributed to the public shareholders. (1) Notes payable to existing shareholders are payable on the consummation of this offering with respect to the $210,000 loans from our officers and directors. (2) If we consummate a business combination, the redemption rights afforded to our public shareholders may result in the redemption into cash of up to approximately 19.99% of the aggregate number of shares sold in this offering at a per-share redemption price equal to the amount in the trust account, inclusive of any interest thereon (net of taxes payable), as of two business days prior to the proposed consummation of a business combination divided by the number of shares sold in this offering. (3) The as adjusted column includes $1,080,000 payable prior to the closing of this offering by our officers and directors, or their designees, in connection with the purchase of 900,000 founding director warrants. (4) Excludes the $100 purchase option to Morgan Joseph. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We were formed on May 3, 2006 to effect a share capital exchange, asset acquisition or other similar business combination within one or more operating businesses in PRC in any city or province north of the Yangtze River. We intend to utilize cash derived from the proceeds of this offering and the founding director warrants, our share capital, debt or a combination of cash, share capital and debt, in effecting a business combination. The issuance of additional share capital: may significantly reduce the equity interest of our shareholders; may subordinate the rights of holders of ordinary shares if preferred shares are issued with rights senior to those afforded to our ordinary shares; will likely cause a change in control if a substantial number of our ordinary shares are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and may also result in the resignation or removal of one or more of our present officers and directors; and may adversely affect prevailing market prices for our ordinary shares. Similarly, if we issued debt securities, it could result in: default and foreclosure on our assets if our operating revenues after a business combination were insufficient to pay our debt obligations; acceleration of our obligations to repay the indebtedness even if we have made all principal and interest payments when due if the debt security contained covenants that required the maintenance of certain financial ratios or reserves and any such covenant were breached without a waiver or renegotiation of that covenant; our immediate payment of all principal and accrued interest, if any, if the debt security was payable on demand; and our inability to obtain additional financing, if necessary, if the debt security contained covenants restricting our ability to obtain additional financing while such security was outstanding. We have neither engaged in any operations nor generated any revenues to date. Our entire activity since inception has been to prepare for our proposed fundraising through an offering of our equity securities. We estimate that the net proceeds from (i) the sale of the units, after deducting offering expenses of approximately $2,900,000 (or $3,278,000 if the underwriters over-allotment option is exercised in full), including underwriting discounts of approximately $2,520,000 (or $2,898,000 if the underwriters over-allotment option is exercised in full), and (ii) the sale of founding director warrants in a private placement transaction prior to the closing of this offering for a purchase price of $1,080,000, will be approximately $33,480,000 (or $38,502,000 if the underwriters over-allotment option is exercised in full and represents 95% of the gross proceeds of this offering). As a result of the deferral of the underwriting discount and commissions of $720,000 ($828,000 if the underwriters over-allotment is exercised in full) all of which will be held in trust along with the net proceeds of the offering and the sale of the founding director warrants, we estimate that $34,200,000 (or $39,330,000 if the underwriters over-allotment option is exercised in full) will be held in trust. Of the $34,180,000 net proceeds from the offering and sale of the founding director warrants, $700,000 will not be held in trust. We will use substantially all of the net proceeds of this offering to acquire a target business, including identifying and evaluating prospective acquisition candidates, selecting the target business, and structuring, negotiating and consummating the business combination, as described above. To the extent that our share capital is used in whole or in part as consideration to effect a business combination, the balance of proceeds held in the trust account as well as any other net proceeds not expended will be used to finance the operations of the operating business acquired in the business combination. We believe that, upon consummation of this offering, the funds available to us outside of the trust account will be sufficient to allow us to operate for at least the next 24 months, assuming that a business combination is not consummated during that time. Over this time period, we anticipate approximately $200,000 of expenses for legal, accounting and other expenses attendant to the due diligence investigations, structuring and negotiating of a business combination, $180,000 for administrative services and support payable to affiliated third parties (up to $7,500 per month for up to 24 months), $150,000 of expenses for the due diligence and investigation of a target business, $50,000 of expenses in legal and accounting fees relating to our SEC reporting obligations and $120,000 (of which $50,000 will be used to pay premiums relating to directors and officers liability insurance) for general working capital that will be used for miscellaneous expenses and reserves including the cost of dissolution and reserves, if any. We do not believe we will need to raise additional funds following this offering in order to meet the expenditures required for operating our business. Upon the release of funds held in trust to the Company, we may use the funds for any working capital expenditures and transaction related expenses, including, if applicable, expenses related to finder s fees which may be payable to unaffiliated third parties. In the event such funds are insufficient, we would raise additional funds through a private offering of debt or equity securities although we have not entered into any such arrangement and have no current intention of doing so. We would only consummate such a fundraising simultaneously with the consummation of a business combination. Certain of our officers and directors have agreed to loan us a total of $210,000, which will be used to pay a portion of the expenses of this offering, such as SEC registration fees, NASD registration fee, blue sky expenses and legal and accounting fees and expenses. The $210,000 loan from certain of our officers and directors will be payable without interest on the consummation of the offering. The loan will be repaid out of proceeds of this offering not being placed in trust, provided the amount held in trust remains at least 95% of the offering gross proceeds. We have agreed to sell to Morgan Joseph & Co., for $100, an option to purchase up to a total of 315,000 units. The sale of the option will be accounted for as a cost attributable to the proposed offering. Accordingly, there will be no net impact on our financial position or results of operations, except for the recording of the $100 proceeds from the sale. We have estimated, based upon a Black-Scholes model, that the fair value of the option on the date of sale would be approximately $1,058,652, using an expected life of five years, volatility of 48.3%, and a risk-free interest rate of 5.093%. However, because our units do not have a trading history, the volatility assumption is based on information currently available to management. We believe the volatility estimate is a reasonable benchmark to use in estimating the expected volatility of our units. The volatility calculation is based on the average of the volatilities using daily historical prices over the past five years of each of 67 companies drawn from the Shanghai Stock Exchange Composite Index that had market capitalizations of less than $75,000,000. Although an expected life of five years was used in the calculation, if we do not consummate a business combination within the prescribed time period and we automatically dissolve and subsequently liquidate the trust account, the option will become worthless. PROPOSED BUSINESS Introduction We are a blank check company organized under the laws of the state of the Cayman Islands on May 3, 2006. We were formed for the purpose of effecting a share capital exchange, asset acquisition or other similar business combination with an operating business in a specified industry. Our objective is to acquire an operating business that has its primary operating facilities located in the People s Republic of China in any city or province north of the Yangtze River, including but not limited to the Jiangsu and Hubei provinces and Chongqing. However, in the event ChinaGrowth South Acquisition Corporation executes a definitive acquisition agreement, then we will have no geographic restrictions in identifying and selecting a prospective target business or industry in the PRC, and we may therefore also pursue acquisition opportunities south of the Yangtze River. Our efforts in identifying a prospective target business will not be limited to a particular industry. We do not have any specific share capital exchange, asset or share acquisition or other business combination or contractual arrangements under consideration, and we have not, nor has anyone on our behalf, engaged in discussions with representatives of other companies, with respect to such a transaction. Simultaneously with our formation, our principals incorporated ChinaGrowth South formed for the purpose of effecting a share capital exchange, asset acquisition or other similar business combination with an operating business that has its primary operating facilities located in the People s Republic of China in any city or province south of the Yangtze River. Although no formal agreement is in place, since management between the two entities is similar, we believe that conducting these two offerings simultaneously will allow us to incur certain limited cost savings by allocating expenses between us and ChinaGrowth South such as airfare, lodging and other expenses in connection with traveling to and from China, thereby reducing the cost to each of us. Opportunities in China Opportunities for market expansion have emerged for businesses with operations in the PRC due to certain changes in the PRC s political, economic and social policies as well as certain fundamental changes affecting the PRC and its neighboring countries. We believe that China represents both a favorable environment for making acquisitions and an attractive operating environment for a target business for several reasons, including: the existence of a prolonged economic expansion within the PRC, with gross domestic product growth of approximately 9.4% on average since 1988 and growth of 9.9% for 2005, according to the International Monetary Fund s Report on World Economic Outlook, dated April 2006; attractive valuations for target businesses within the PRC; increased government focus within the PRC on privatizing assets, improving foreign trade and encouraging business and economic activity; and access to a highly trained and educated workforce as well as favorable labor rates and efficient, low-cost manufacturing capabilities. Government Regulations Government regulations relating to foreign exchange controls The principal regulation governing foreign exchange in China is the Foreign Currency Administration Rules (IPPS), as amended. Under these rules, the Renminbi, China s currency, is freely convertible for trade and service related foreign exchange transactions, but not for direct investment, loan or investment in securities outside of China unless the prior approval of SAFE is obtained. FIEs are required to apply to the SAFE for Foreign Exchange Registration Certificates for FIEs. Following a business combination, we will likely be an FIE as a result of our ownership structure. With such registration certificates, which need to be renewed annually, FIEs are allowed to open foreign currency accounts including a basic account and capital account. Currency translation within the scope of the basic account, such as remittance of foreign currencies for payment of dividends, can be effected without requiring the approval of the SAFE. However, conversion of currency in the capital account, including capital items such as direct investment, loans and securities, still require approval of the SAFE. This prior approval may delay or impair our ability to operate following a business combination. Government regulations relating to taxation According to the PRC income Tax Law of Foreign Investment Enterprises and Foreign Enterprises and the Implementation Rules for the Income Tax Law, the standard Enterprise Income Tax, or EIT, rate of FIEs is 33%, reduced or exempted in some cases under any applicable laws or regulations. Income such as dividends and profits derived from the PRC by a foreign enterprise which has no establishment in the PRC is subject to a 20% withholding tax, unless reduced or exempted by any applicable laws or regulations. The profit derived by a foreign investor from a FIE is currently exempted from EIT. However, if this exemption were to be removed in the future, we might be required to deduct certain amounts from dividends we may pay to our shareholders following a business combination to pay corporate withholding taxes. Regulation of Foreign Currency Exchange and Dividend Distribution Foreign Currency Exchange. Foreign currency exchange in China is governed by a series of regulations, including the Foreign Currency Administrative Rules (1996), as amended, and the Administrative Regulations Regarding Settlement, Sale and Payment of Foreign Exchange (1996), as amended. Under these regulations, the Renminbi is freely convertible for trade and service-related foreign exchange transactions, but not for direct investment, loans or investments in securities outside China without the prior approval of the PRC State Administration of Foreign Exchange, or SAFE. Pursuant to the Administrative Regulations Regarding Settlement, Sale and Payment of Foreign Exchange, foreign-invested enterprises in China may purchase foreign exchange without the approval of SAFE for trade and service-related foreign exchange transactions by providing commercial documents evidencing these transactions. They may also retain foreign exchange, subject to a cap approved by SAFE, to satisfy foreign exchange liabilities or to pay dividends. However, the relevant Chinese government authorities may limit or eliminate the ability of foreign-invested enterprises to purchase and retain foreign currencies in the future. In addition, foreign exchange transactions for direct investment, loan and investment in securities outside China are still subject to limitations and require approvals from SAFE. Regulation of Mergers and Acquisitions The 2006 Acquisition Provisions revised the Tentative Provisions on Acquisition of Domestic Enterprises by Foreign Investors enacted by MOFCOM, SAT, SAIC and SAFE on 7 March 2003 which became effective on 12 April 2003, or the 2003 Acquisition Provisions. As with the 2003 Acquisition Provisions, the 2006 Acquisition Provisions require Chinese regulatory approvals for mergers with or acquisitions of the equity ownership or assets of Chinese domestic companies. Additionally, the 2006 Acquisition Provisions deprive companies incorporated or controlled overseas that are established by Chinese domestic companies, enterprises or natural persons and are merging with or acquiring Chinese domestic affiliated companies of the tax preferential treatments granted to FIEs, unless the overseas companies will bring a certain amount of additional capital to the Chinese company. The 2006 Acquisition Provisions also create new layers of Chinese regulatory approvals affecting offshore special purpose companies set up by Chinese domestic companies, enterprises or natural persons, and the in-bound investment made by such special purpose companies . The 2006 Acquisition Provisions require that the parties to a merger or acquisition shall disclose to the PRC approval authority and elaborate on whether the parties are affiliates; if there are two parties who belong to the same actual controlling party, the parties concerned must disclose the actual controlling party to the PRC approval authority and explain the purpose of the merger or acquisition and whether the price agreed conforms to fair market value. The 2006 Acquisition Provisions define a special purpose company as a foreign company directly or indirectly controlled by Chinese domestic companies or natural persons for the purpose of listing in an overseas market the equity interests in a Chinese domestic company actually held by them. This definition is slightly different from that in Decree No. 75 of 2005. A Chinese domestic company that is to set up a special purpose company overseas must obtain approval from MOFCOM and disclose to MOFCOM certain information including the business plan with regard to the listing of the special purpose company in the overseas market and the appraisal report issued by a consultant with regard to the stock offering price for any future listing of the special purpose company on an overseas market. The overseas listing of the special purpose company is subject to the approval of CSRC. Additionally, the financing of the special purpose company from its overseas listing must be repatriated to China according to the repatriation plan filed with SAFE. The profits, dividends and foreign exchange income obtained as a result of capital variation, which are received by the Chinese domestic companies or natural persons from their special purpose companies, must be repatriated to China within six months from the day on which they are received. With regard to the tax treatments granted to FIEs established by Chinese domestic companies, enterprises or natural persons by way of merger with or acquisition of Chinese domestic affiliated companies in the name of their companies duly incorporated or controlled overseas, the 2006 Acquisition Provisions explicitly state that such FIEs are not eligible for the preferential treatments granted by the PRC government to FIEs, unless such overseas companies subscribe to the capital increase of the target Chinese domestic companies or contribute additional capital to the post-acquisition Chinese domestic company and the amount of the capital subscribed or contributed accounts for 25% or more of the post-acquisition registered capital of the Chinese company. The 2006 Acquisition Provisions require that if the merger or acquisition of a Chinese domestic company by foreign investors and their obtaining controlling rights (i) involves key industries, (ii) has any factor that impacts or may impact the economic security of China, or (iii) leads to a shift of controlling rights over a Chinese domestic company that possesses famous brands or traditional Chinese trade names , then the parties concerned shall file an application in respect of such issues with MOFCOM. The 2006 Acquisition Provisions emphasize that mergers with or acquisitions of Chinese domestic companies by foreign investors must not result in a loss on the sale of state-owned assets and if the merger or acquisition involves such matters as the transfer of state-owned property rights in companies or management of state-owned equity rights in listed companies the relevant provisions regarding the administration of State-owned assets must be complied with (see below). Regulation on State-owned Property Rights The acquisition of a PRC state-owned company is subject to stringent governmental regulation. The governing legislation is the Provisional Regulations on Using Foreign Investment to Reorganize State-owned Enterprises promulgated by SAIC and SAFE on 8 November 2002, effective from 1 January 2003 and the Provisional Measures on the Administration of the Transfer of State-Owned Property Rights in Enterprises promulgated by the SASAC and the MOF on 31 December 2003, effective from 1 February 2004. As a matter of principle, the transfer of state-owned property rights in enterprises must take place through a government approved state-owned asset exchange , and the value of the transferred property rights must be evaluated by those Chinese appraisal firms qualified to do state-owned assets evaluation . The final price must not be less than 90% of the appraisal price. Additionally, bidding/auction procedures are essential in the event that there is more than one potential transferee. In the case of an acquisition by foreign investors of state-owned enterprises, the acquirer and the seller must make a resettlement plan to properly resettle the employees, and the resettlement plan must be approved by the Employees Representative Congress. The seller must pay all unpaid wages and social welfare payments from the existing assets of the target company to the employees. Regulation of Foreign Exchange in Certain Onshore and Offshore Transactions Pursuant to recent regulations issued by the PRC State Administration of Foreign Exchange, or SAFE, PRC residents are required to register with and receive approvals from SAFE in connection with offshore investment activities. SAFE has stated that the purpose of these regulations is to ensure the proper balance of foreign exchange and the standardization of the cross-border flow of funds. On January 24, 2005, SAFE issued a regulation stating that SAFE approval is required for any sale or transfer by the PRC residents of a PRC company s assets or equity interests to foreign entities in exchange for the equity interests or assets of the foreign entities. The regulation also states that, when registering with the foreign exchange authorities, a PRC company acquired by an offshore company must clarify whether the offshore company is controlled or owned by PRC residents and whether there is any share or asset link between or among the parties to the acquisition transaction. On April 8, 2005, SAFE issued another regulation further explaining and expanding upon the January regulation. The April regulation clarified that, where a PRC company is acquired by an offshore company in which PRC residents directly or indirectly hold shares, such PRC residents must (i) register with the local SAFE regarding their respective ownership interests in the offshore company, even if the transaction occurred prior to the January regulation, and (ii) file amendments to such registration concerning any material events of the offshore company, such as changes in share capital and share transfers. The April regulation also expanded the statutory definition of the term foreign acquisition , making the regulations applicable to any transaction that results in PRC residents directly or indirectly holding shares in the offshore company that has an ownership interest in a PRC company. The April regulation also provides that failure to comply with the registration procedures set forth therein may result in the imposition of restrictions on the PRC company s foreign exchange activities and its ability to distribute profits to its offshore parent company. On October 21, 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice 75, which became effective as of November 1, 2005. Notice 75 replaced the two rules issued by SAFE in January and April 2005 mentioned above. According to Notice 75: prior to establishing or assuming control of an offshore company for the purpose of financing that offshore company with assets or equity interests in an onshore enterprise in the PRC, each PRC resident, whether a natural or legal person, must complete the overseas investment foreign exchange registration procedures with the relevant local SAFE branch; an amendment to the registration with the local SAFE branch is required to be filed by any PRC resident that directly or indirectly holds interests in that offshore company upon either (1) the injection of equity interests or assets of an onshore enterprise to the offshore company, or (2) the completion of any overseas fund raising by such offshore company; and an amendment to the registration with the local SAFE branch is also required to be filed by such PRC resident when there is any material change involving a change in the capital of the offshore company, such as (1) an increase or decrease in its capital, (2) a transfer or swap of shares, (3) a division, (4) a long term equity or debt investment, or (5) the creation of any security interests over the relevant assets located in China. Under the relevant rules, failure to comply with the registration procedures set forth in Notice 75 may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including the payment of dividends and other distributions to its offshore parent or affiliate and the capital inflow from the offshore entity, and may also subject relevant PRC residents to penalties under PRC foreign exchange administration regulations. As a Cayman Islands company, and therefore a foreign entity, if we purchase the assets or equity interest of a PRC company owned by PRC residents, such PRC residents will be subject to the registration procedures described in the regulations as currently drafted. Moreover, PRC residents who are beneficial holders of our shares are required to register with SAFE in connection with their investment in us. As a result of the lack of implementing rules, other uncertainties concerning how the existing SAFE regulations will be interpreted or implemented, and uncertainty as to when the new regulations will take effect, we cannot predict how they will affect our business operations following a business combination. For example, our ability to conduct foreign exchange activities following a business combination, such as remittance of dividends and foreign-currency-denominated borrowings, may be subject to compliance with the SAFE registration requirements by such PRC residents, over whom we have no control. In addition, we cannot assure you that such PRC residents will be able to complete the necessary approval and registration procedures required by the SAFE regulations. We will require all our shareholders, following a business combination, who are PRC residents to comply with any SAFE registration requirements, although we have no control over either our shareholders or the outcome of such registration procedures. Such uncertainties may restrict our ability to implement our acquisition strategy and adversely affect our business and prospects following a business combination. Regulation of wholly-owned foreign enterprises (WOFE) Generally speaking, under the current Chinese legal regime regulating foreign direct investment in China, the following forms of FIEs are available to foreign investors: Sino-foreign equity joint ventures ( EJV ); Sino-foreign co-operative joint ventures ( CJV ); and Wholly foreign-owned enterprises ( WFOE ). A WFOE is a company with limited liability and legal person status. There are only foreign investors and no Chinese partners. Unlike an EJV or CJV, articles of association are sufficient to establish a WFOE, and there is no need to draw up a joint venture contract even if there are two or more foreign investors in the WFOE. Like an EJV or CJV, the articles of association must be approved by the Chinese government. Foreign investors may prefer WFOEs to EJVs/CJVs because in the case of a WFOE (1) there is a straightforward management structure which is not dependent on the interests of a local partner; (2) it is easy to terminate compared to an EJV or CJV; and (3) intellectual property is usually better protected. Without a local partner, the foreign investor lacks local support and proper access to resources (such as connections with governmental authorities) and access to the markets of China s unique economy. While it is an issue under Chinese law whether WFOEs are allowed in certain Chinese industries, foreign investors are allowed to incorporate WFOEs in certain industries. Dividend distribution. The principal laws and regulations in China governing distribution of dividends by foreign-invested companies include: The Sino-foreign Equity Joint Venture Law (1979), as amended; The Regulations for the Implementation of the Sino-foreign Equity Joint Venture Law (1983), as amended; The Sino-foreign Cooperative Enterprise Law (1988), as amended; The Detailed Rules for the Implementation of the Sino-foreign Cooperative Enterprise Law (1995), as amended; The Foreign Investment Enterprise Law (1986), as amended; and The Regulations of Implementation of the Foreign Investment Enterprise Law (1990), as amended. Under these regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, wholly foreign-owned enterprises in China are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds unless such reserve funds have reached 50% of their respective registered capital. These reserves are not distributable as cash dividends. Effecting a Business Combination General We are not presently engaged in, and we will not engage in, any substantive commercial business for an indefinite period of time following this offering. We intend to utilize cash derived from the proceeds of this offering, our share capital, debt or a combination of these in effecting a business combination. Although substantially all of the net proceeds of this offering are intended to be generally applied toward effecting a business combination as described in this prospectus, the proceeds are not otherwise being designated for any more specific purposes. Accordingly, prospective investors will invest in us without an opportunity to evaluate the specific merits or risks of any one or more business combinations. A business combination may involve the acquisition of a company that does not need substantial additional capital but desires to establish a public trading market for its shares, while avoiding what it may deem to be adverse consequences of undertaking a public offering itself. These include time delays, significant expense, loss of voting control and compliance with various Federal and state securities laws. In the alternative, we may seek to consummate a business combination with a company that may be financially unstable or in its early stages of development or growth. While we may seek to effect business combinations with more than one target business, we will probably have the ability, as a result of our limited resources, to initially effect only a single business combination. We Have Not Identified a Target Business or Target Industry To date, we do not have any specific share capital exchange, asset acquisition or other business combination, or other contractual arrangements, under consideration or contemplation, and we have not, nor has anyone on our behalf, contacted any potential target business or had any discussions, formal or otherwise, with respect to such a transaction. There have been no discussions, diligence, negotiations or other similar activities undertaken, directly or indirectly, by us, our affiliates or representatives, or by any third party, with any potential target business, with respect to a business combination transaction with us. Additionally, we have not engaged or retained any agent or other representative to identify or locate any suitable acquisition candidate. Further, neither we nor any of our agents or affiliates have been approached by any candidates or representatives of any candidates with respect to a possible business combination with our company. Subject to the limitations that a target business or businesses have a collective fair market value of at least 80% of our net assets held in trust (net of taxes payable) at the time of the acquisition, as described below in more detail, we will have virtually unrestricted flexibility in identifying and selecting a prospective business combination candidate. With the exception of our geographical restriction, we have not established any other specific attributes or criteria (financial or otherwise) for prospective target businesses, However as discussed in Proposed Business Opportunities in China , we have identified certain characteristics which we may seek in a prospective target business. Accordingly, there is no basis for investors in this offering to evaluate the possible merits or risks of the target business with which we may ultimately complete a business combination. We do not intend to specifically target financially unstable, early stage or unestablished companies; however, to the extent we effect a business combination with a financially unstable company or an entity in its early stage of development or growth, including entities without established records of sales or earnings, we may be affected by numerous risks inherent in the business and operations of financially unstable and early stage or potential emerging growth companies. Although our management will endeavor to evaluate the risks inherent in a particular target business, we cannot assure you that we will properly ascertain or assess all significant risk factors. Sources of Target Businesses We anticipate that target business candidates will be brought to our attention from various unaffiliated sources, including investment bankers, attorneys, accountants, venture capital funds, private equity funds, leveraged buyout funds, management buyout funds, brokers and other members of the financial community, who may present solicited or unsolicited proposals. We expect such sources to become aware that we are seeking a business combination candidate by a variety of means, such as publicly available information relating to this offering, public relations and marketing efforts and direct contact by management to be commenced following the completion of this offering. Our existing shareholders, officers and directors as well as their affiliates may also bring to our attention target business candidates. None of our officers, directors or existing shareholders, or any affiliates thereof, have had any contact to date with any unaffiliated sources regarding potential business combination targets and none of our officers, directors or existing shareholders, or any affiliates thereof, have undertaken any affirmative efforts to locate a target business or business combination candidate. Management has reviewed information concerning the industries in the PRC; however, management has not made any investigations concerning specific prospective business combination candidates in the PRC. While we do not presently anticipate engaging the services of professional firms or other individuals that specialize in business acquisitions on any formal basis, we may engage these firms in the future, in which event we may pay a finder s fee or other compensation. The terms of any such arrangements will be negotiated with such persons on an arm s length basis and disclosed to our shareholders in the proxy materials we provide in connection with any proposed business combination. In no event, however, will we or any other party pay any of our existing officers, directors or shareholders or any entity with which they are affiliated any finder s fee or other compensation prior to or in connection with the consummation of a business combination. Selection of a Target Business and Structuring of a Business Combination Subject to the requirement that our initial business combination must be with a target business or businesses with a collective fair market value that is at least 80% of our net assets held in trust (net of taxes payable) at the time of such transaction, our management will have virtually unrestricted flexibility in identifying and selecting a prospective target business or industry in the PRC in any city or province north of the Yangtze River, and in the event ChinaGrowth South executes a definitive acquisition agreement, than we will have no geographic restrictions in identifying and selecting a prospective target business or industry in the PRC, and we may therefore pursue acquisition opportunities south of the Yangtze River. We have not established any other specific attributes (financial or otherwise) for prospective target businesses. In evaluating a prospective target business, our management will consider, among other factors, the following: financial condition, including profitability, the stability of cash flow, the recurrence of revenue and the results of operation; growth potential; experience and skill of management and availability of additional personnel; capital requirements; competitive position; barriers to entry; stage of development of the products, processes or services; degree of current or potential market acceptance of the products, processes or services; proprietary features and degree of intellectual property or other protection of the products, processes or services; regulatory environment; costs associated with effecting the business combination; books and accounts that have been audited by a fully qualified auditing firm duly registered in the PRC; and relative valuation multiples of similar publicly traded companies. These criteria are not intended to be exhaustive. Any evaluation relating to the merits of a particular business combination will be based, to the extent relevant, on the above factors as well as other considerations deemed relevant by our management in effecting a business combination consistent with our business objective. In evaluating a prospective target business, we will conduct an extensive due diligence review which will encompass, among other things, meetings with incumbent management and inspection of facilities, as well as review of financial and other information which will be made available to us. We may also engage an independent third party consultant or expert to assist us in the due diligence process although we have not identified or engaged any such consultants or experts as of the date of this prospectus. The time and costs required to select and evaluate a target business and to structure and complete the business combination cannot presently be ascertained with any degree of certainty. Any costs incurred with respect to the identification and evaluation of a prospective target business with which a business combination is not ultimately completed will result in a loss to us and reduce the amount of capital available to otherwise complete a business combination. While we may pay fees or compensation to third parties for their efforts in introducing us to a potential target business, in no event, however, will we or any other party pay any of our existing officers, directors or shareholders or any entity with which they are affiliated any finder s fee or other compensation for services rendered to us or in connection with the consummation of an initial business combination. Fair Market Value of Target Business Our management will have virtually unrestricted flexibility in identifying and selecting a prospective target business subject to our geographical restrictions, except that our initial business combination must be a transaction in which the fair market value of the target business or businesses acquired simultaneously is at least equal to 80% of our net assets held in trust (net of taxes payable) at the time of the business combination. In the event the Company acquires a non-controlling interest, the fair market value of the portion of the target business acquired must be equal to 80% of the net assets held in trust (net of taxes) at the time of such acquisition. In the event we determine to simultaneously acquire several businesses and such businesses are owned by different sellers, we will need for each of such sellers to agree that our purchase of its business is contingent on the simultaneous closings of the other acquisition, which may make it more difficult for us, and delay our ability to complete the business combination. With multiple acquisitions, we could also face additional risks, including additional burdens and costs with respect to possible multiple negotiations and due diligence investigations (if there are multiple sellers) and the additional risks associated with the subsequent assimilation of the operations and services or products of the acquired companies in a single operating business. We may further seek to acquire a target business that has a fair market value in excess of 80% of the net assets held in trust (net of taxes payable) we have on the consummation of this offering by raising additional funds through the sale of our securities, through loans or a combination of both. The fair market value of any such business or businesses will be determined by our board of directors based upon standards generally accepted by the financial community, such as actual and potential sales, earnings and cash flow and book value. If our board is not able to independently determine that the target business has a sufficient fair market value, we will obtain an opinion from an unaffiliated independent investment banking firm with respect to the satisfaction of such criteria. Probable Lack of Business Diversification While we may seek to effect business combinations with more than one target business, our initial business combination must be with one or more target businesses whose fair market value, collectively, is at least equal to 80% of our net assets held in trust (net of taxes payable) at the time of such acquisition, as discussed above. Consequently, it is probable that we will have the ability to effect only a single business combination although this may entail the acquisition of several operating businesses. We may not be able to engage in a business combination with more than one target business because of various factors, including possible complex accounting issues, which would include generating pro forma financial statements reflecting the operations of several target businesses as if they had been combined, and numerous logistical issues, which could include attempting to coordinate the timing of negotiations, proxy statement disclosure and other legal issues and closings with multiple target businesses. In addition, we would also be exposed to the risks that conditions to closings with respect to the transaction with one or more of the target businesses would not be satisfied, bringing the fair market value of the initial business combination below the required fair market value of 80% of net assets held in trust (net of taxes payable) threshold. Therefore, at least initially, the prospects for our success may be entirely dependent upon the future performance of a single business. Unlike entities that have the resources to complete several business combinations of entities operating in multiple industries or multiple areas of a single industry, it is probable that we will not have the resources to diversify our operations or benefit from the possible spreading of risks or offsetting of losses. By consummating a business combination with only a single entity, our lack of diversification may: subject us to numerous economic, competitive and regulatory developments, any or all of which may have a substantial adverse impact upon the particular industry in which we may operate subsequent to a business combination; and result in our dependency upon the development or market acceptance of a single or limited number of products, processes or services. Limited Ability to Evaluate the Target Business s Management Although we intend to closely scrutinize the management of a prospective target business when evaluating the desirability of effecting a business combination, we cannot assure you that our assessment will prove to be correct. In addition, we cannot assure you that new members that join our management following a business combination will have the necessary skills, qualifications or abilities to manage a public company. Furthermore, the future role of our officers and directors, if any, in the target business following a business combination cannot presently be stated with any certainty. While certain of our current officers and directors may remain associated in senior management or advisory positions with us following a business combination, they may not devote their full time and efforts to our affairs subsequent to a business combination. Moreover, they would only be able to remain with the company after the consummation of a business combination if they are able to negotiate employment or consulting agreements in connection with such business combination, which would be negotiated at the same time as the business combination negotiations are being conducted and which may be a term of the business combination. Such negotiations would take place simultaneously with the negotiation of the business combination and could provide for such individuals to receive compensation in the form of cash payments and/or our securities for services they would render to the company after the consummation of the business combination. While the personal and financial interests of such individuals may influence their motivation in identifying and selecting a target business, the ability of such individuals to remain with the company after the consummation of a business combination will not be the determining factor in our decision as to whether or not we will proceed with any potential business combination. Additionally, we cannot assure you that our officers and directors will have significant experience or knowledge relating to the operations of the particular target business. Following a business combination, we may seek to recruit additional managers to supplement the incumbent management of the target business. We cannot assure you that we will have the ability to recruit additional managers, or that any such additional managers we do recruit will have the requisite skills, knowledge or experience necessary to enhance the incumbent management. Opportunity for Shareholder Approval of Business Combination Prior to the completion of our initial business combination, we will submit the transaction to our shareholders for approval, even if the nature of the business combination is such as would not ordinarily require shareholder approval under applicable state law. In connection with seeking shareholder approval of a business combination, we will furnish our shareholders with proxy solicitation materials prepared in accordance with the Securities Exchange Act of 1934, which, among other matters, will include a description of the operations of the target business and audited historical financial statements of the business. In connection with the shareholder vote required to approve any business combination, all of our existing shareholders have agreed to vote all of the ordinary shares owned by them, either for or against a business combination, in a manner determined by majority of the public shareholders who vote at the special or annual meeting called for the purpose of approving a business combination. Our existing shareholders have also agreed that if they acquire ordinary shares in or following this offering, they will vote such acquired shares in favor of a business combination, despite the vote of the majority of public shareholders. As a result, any of our existing shareholders that acquire shares during or after this offering may not exercise redemption rights with respect to those shares in the event that the business combination transaction is approved. We will proceed with the business combination only if a majority of the ordinary shares voted by the public shareholders are voted in favor of the business combination and public shareholders owning not more than 19.99% of the shares sold in this offering exercise their redemption rights. We will only structure or consummate a business combination in which all shareholders exercising their redemption rights, up to 19.99%, will be entitled to receive their pro rata portion of the trust account (net of taxes payable). Additionally, we will not propose a business combination to our shareholders which includes a provision that such business combination will not be consummated if shareholders owning less than 19.99% vote against such business combination and exercise their redemption rights as described herein. Voting against the business combination alone will not result in redemption of a shareholder s ordinary shares into a pro rata share of the trust account. Such shareholder must have also exercised its redemption rights described below. Redemption rights At the time we seek shareholder approval of any business combination, we will offer each public shareholder, other than our existing shareholders, the right to have such shareholder s ordinary shares redeemed into cash if the shareholder votes against the business combination and the business combination is approved and completed. The redemption rights do not apply to shares outstanding prior to this offering. The actual per-share redemption price will be equal to the amount in the trust account, prior to deduction of any deferred costs and inclusive of any interest (net of any taxes due on such interest, which taxes, if any, shall be paid from the trust account, and calculated as of two business days prior to the consummation of the proposed business combination), divided by the number of shares sold in this offering. Without taking into account any interest earned on the trust account or taxes payable on such interest, the initial per-share redemption price would be $7.60 or $.40 less than the per unit offering price of $8.00. Because the initial per share redemption price is $7.60 per share (plus any interest net of taxes payable), which may be lower than the market price of the ordinary shares on the date of the redemption, there may be a disincentive on the part of public shareholders to exercise their redemption rights. If a business combination is approved, shareholders that vote against the business combination and elect to redeem their ordinary shares into cash will be entitled to receive their pro-rata portion of the $720,000 ($0.16 per share) of deferred underwriting discount held in the trust account. An eligible shareholder may request redemption at any time after the mailing to our shareholders of the proxy statement and prior to the vote taken with respect to a proposed business combination at a meeting held for that purpose, but the request will not be granted unless the shareholder votes against the business combination and the business combination is approved and completed. Any request for redemption, once made, may be withdrawn at any time up to the date of the meeting. It is anticipated that the funds to be distributed to shareholders entitled to redeem their shares who elect redemption will be distributed after completion of a business combination. Public shareholders who redeem their ordinary shares into their share of the trust account still have the right to exercise the warrants that they received as part of the units. We will not complete any business combination if public shareholders, owning 20% or more of the shares sold in this offering, both exercise their redemption rights and vote against the business combination. We will only structure or consummate a business combination in which all shareholders exercising their redemption rights, up to 19.99%, will be entitled to receive their pro rata portion of the trust account (net of taxes payable). Additionally, we will not propose a business combination to our shareholders which includes a provision that such business combination will not be consummated if shareholders owning less than 19.99% vote against such business combination and exercise their redemption rights as described herein. Automatic Dissolution and Subsequent Liquidation if no Business Combination If we do not complete a business combination within 18 months after the consummation of this offering, or within 24 months if the extension criteria described below have been satisfied, our corporate existence will cease by operation of law and we will liquidate the trust account and distribute to all of our public shareholders, in Ordinary Shares included as part of the Units (2) 5,175,000 Shares (3) proportion to their respective equity interests, an aggregate sum equal to the amount in the trust account, inclusive of any interest (net of taxes payable). Our memorandum and articles of association provides that we will continue in existence only until eighteen months from the consummation of this offering or until twenty-four months if a letter of intent, an agreement in principle, or a definitive agreement to complete a business combination has been entered into. If we have not completed a business combination by such date and amended this provision in connection thereto, our corporate existence will cease except for the purposes of winding up our affairs and liquidating. At this time, the company will become subject to a voluntary liquidation procedure under the Companies Law (2004 Revision) of the Cayman Islands (the Companies Law ). The Company s liquidator would give at least 21 days notice to creditors of his intention to make a distribution by notifying known creditors (if any) who have not submitted claims and by placing a public advertisement in the Cayman Islands Official Gazette, although in practice this notice requirement need not necessarily delay the distribution of assets if the liquidator is satisfied that no creditors would be adversely affected as a consequence of a distribution before this time period has expired. We anticipate the trust account should be liquidated shortly following expiration of the 21 day period. As soon as the affairs of the company are fully wound-up, the liquidator must lay his final report and accounts before a final general meeting which must be called by a public notice at least one month before it takes place. After the final meeting, the liquidator must make a return to the Registrar confirming the date on which the meeting was held and three months after the date of such filing the company is dissolved. Additionally, in any liquidation proceedings of the company under Cayman Islands' law, the funds held in our trust account may be included in our estate and subject to the claims of third parties with priority over the claims of our shareholders. To the extent any such claims deplete the trust account we cannot assure you we will be able to return to our public shareholders the liquidation amounts payable to them. Furthermore, a liquidator of the company might seek to hold a shareholder liable to contribute to our estate to the extent of distributions received by them pursuant to the dissolution of the trust account beyond the date of dissolution of the trust account. Additionally, we cannot assure you that third parties will not seek to recover from our shareholders amounts owed to them by us. Furthermore, our board may be viewed as having breached their fiduciary duties to our creditors and/or may have acted in bad faith, and thereby exposing itself and our company to claims for having paid paying public shareholders from the trust account prior to addressing the claims of creditors. We cannot assure you that claims will not be brought against us for these reasons. If we are unable to consummate a transaction within the necessary time periods, our purpose and powers will be limited to dissolving, liquidating and winding up and ultimately dissolving. Upon notice from us, the trustee of the trust account will distribute the amount in our trust account to our public shareholders as part of our plan of dissolution and distribution. Concurrently, we propose that our liabilities and obligations will be paid from funds not held in trust, although we cannot assure you that there will be sufficient funds for such purpose. If there are insufficient funds held outside the trust account for such purpose, our officers and directors have agreed that they will be liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us. Upon our liquidation, the underwriters have agreed to waive any right they may have to the $720,000 of deferred underwriting discount currently being held in the trust account, all of which shall be distributed to the public shareholders. There will be no redemption with respect to our warrants, which will expire worthless. We will pay the costs of the dissolution and liquidation of the trust account which are estimated to be $5,000 from our remaining assets outside of the trust account. If we were to expend all of the net proceeds of this offering, other than the proceeds deposited in the trust account, and without taking into account interest, if any, earned on the trust account, the initial per-share liquidation redemption price would be $7.60 or $0.40 less than the per unit offering price of $8.00. The proceeds deposited in the trust account could, however, become subject to the claims of our creditors which could be prior to the claims of our public shareholders. We cannot assure you that the actual per-share liquidation redemption price will not be less than $7.60, plus interest (net of taxes payable, which taxes, if any, shall be paid from the trust account), due to claims of creditors. Although we will seek to have all creditors, prospective target businesses or other entities we engage execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our public shareholders, there is no guarantee that they will execute such agreements or even if they execute such agreements that they would be prevented from bringing claims against the trust account. If any third party refused to execute an agreement waiving such claims to the monies held in the trust account, we would perform an analysis of the alternatives available to us if we chose not to engage such third party and evaluate if such engagement would be in the best interest of our shareholders if such third party refused to waive such claims. Examples of possible instances where we may engage a third party that refused to execute a waiver include the engagement of a third party consultant whose particular expertise or skills are believed by management to be significantly superior to those of other consultants that would agree to execute a waiver or in cases where management is unable to find a provider of required services willing to provide the waiver. In any event, our management would perform an analysis of the alternatives available to it and would only enter into an agreement with a third party that did not execute a waiver if management believed that such third party s engagement would be significantly more beneficial to us than any alternative. In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with us and will not seek recourse against the trust account for any reason. Our directors have agreed pursuant to agreements with us and Morgan Joseph & Co. that, if we distribute the proceeds held in trust to our public shareholders, they will be personally liable if a creditor or a prospective target business does not waive any rights or claims to the trust account to pay debts and obligations to creditors, prospective target businesses or other entities that are owed money by us for services rendered or products sold to us in excess of the net proceeds of this offering not held in the trust account, to the extent necessary to ensure that such claims do not reduce the amount in the trust account. We cannot assure you, however, that they would be able to satisfy those obligations. We believe the likelihood of our directors having to indemnify the trust account is limited because we will endeavor to have all creditors and prospective target businesses as well as other entities execute agreements with us waiving any right, title, interest or claim of any kind in or to monies held in the trust account. In the event we automatically dissolve and subsequently liquidate the trust account, where it is subsequently determined that the reserve for claims and liabilities is insufficient, shareholders who received a return of funds from the liquidation of our trust account could be liable for such amounts to creditors. If we enter into either a letter of intent, an agreement in principle or a definitive agreement to complete a business combination prior to the expiration of 18 months after the consummation of this offering but are unable to complete the business combination within the 18-month period, then we will have an additional six months in which to complete the business combination contemplated by the letter of intent, agreement in principle or definitive agreement. If we are unable to do so by the expiration of the 24-month period from the consummation of this offering, we will automatically dissolve and subsequently liquidate the trust account. Pursuant to the terms of the Investment Trust Agreement, the trustee of the trust account will commence liquidating the investments constituting the trust account and will turn over the proceeds to our transfer agent for distribution to our public shareholders. Concurrently, we shall pay, or reserve for payment, from funds not held in trust, our liabilities and obligations, although we cannot assure you that there will be sufficient funds for such purpose. Our public shareholders will be entitled to receive funds from the trust account only in the event of an automatic dissolution and subsequent liquidation of the trust account or if the shareholders seek to redeem their respective shares into cash upon a business combination which the shareholder voted against and which is actually completed by us. In no other circumstances will a shareholder have any right or interest of any kind to or in the trust account. Voting against the business combination alone will not result in redemption of a shareholder s ordinary shares into a pro rata share of the trust account. Such shareholder must have also exercised its redemption rights described above. Alternative structures to comply with regulations in certain Chinese industries We intend to acquire an operating business that has its primary operations in the PRC. We may make this acquisition through a stock exchange, asset acquisition or other similar business combination. However, there are a number of industries in China in which direct foreign investment is restricted (including telecommunications services, online commerce and advertising). Therefore, if our target business is in an industry that is subject to these requirements we may seek to acquire control of our target business through contractual arrangements with licensed companies operating in China and their owners. We may enter into a business combination in which we, our subsidiaries and/or affiliates, and the target business (the Chinese Operating Company ) and its shareholders enter into a series of contracts that are designed to secure for us economic benefits and to assume risk of losses that are substantially similar to full ownership. These contracts could result in a structure where, in exchange for our payment of the acquisition consideration, the Chinese Operating Company would be owned 100% by Chinese residents whom we designate (the Nominees ), and the Chinese Operating Company would continue to hold the requisite licenses for the target business. We may also establish a new subsidiary in China (the Chinese Subsidiary ) which would provide technology, technical support, consulting and related services to the Chinese Operating Company in exchange for fees, which are designed to transfer to us substantially all of the economic benefits of ownership of the Chinese Operating Company. These contractual arrangements would be designed to provide the following: Our exercise of substantial control over the Chinese Operating Company; A substantial portion of the economic benefits of the Chinese Operating Company would be transferred to us; and We, or our designee, would have an exclusive option to purchase all or part of the equity interests in the Chinese Operating Company owned by the Nominees, or all or part of the assets of the Chinese Operating Company, in each case when and to the extent permitted by Chinese regulations. We have not selected any target business or target industry on which to concentrate our search for a business combination and we are, therefore, unable to determine at this time what form an acquisition of a target business will take. Competition for Target Businesses In identifying, evaluating and selecting a target business, we may encounter intense competition from other entities having a business objective similar to ours. Many of these entities are well established and have extensive experience identifying and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human and other resources than we do, and our financial resources will be relatively limited when contrasted with those of many of these competitors. While we believe there are potential target businesses that we could acquire with the net proceeds of this offering, our ability to compete in acquiring certain sizable target businesses will be limited by our available financial resources. This inherent competitive limitation gives others an advantage in pursuing the acquisition of a target business. Further: our obligation to seek shareholder approval of a business combination or obtain the necessary financial information to be included in the proxy statement to be sent to shareholders in connection with such business combination may delay or prevent the completion of a transaction; our obligation to redeem into cash ordinary shares held by our public shareholders in certain instances may reduce the resources available to us for a business combination; the requirement to acquire assets or an operating business that has a fair market value equal to at least 80% of our net assets held in trust (net of taxes) at the time of the acquisition could require us to acquire several assets or closely related operating businesses at the same time, all of which acquisitions would be contingent on the closings of the other acquisitions, which could make it more difficult to consummate the business combination; and our outstanding warrants and unit purchase option, and the potential future dilution they represent, may not be viewed favorably by certain target businesses. Any of these factors may place us at a competitive disadvantage in negotiating a business combination. Our management believes, however, that our status as a public entity and our potential access to the United States public equity markets may give us a competitive advantage over privately-held entities having a similar business objective to us in acquiring a target business with significant growth potential on favorable terms. Based upon publicly-available information, approximately 8 similarly structured blank check companies (7 China and 1 Asia) have completed initial public offerings since August 2003 and numerous others have filed registration statements. Of these companies, only 2 companies have consummated a business combination, while 3 other companies have announced they have entered into a definitive agreement for a business combination, but have not consummated such business combination. Accordingly, there are approximately 3 blank check companies (2 China and 1 Asia/Pacific) with approximately $177 million in trust that are seeking to carry out a business plan similar to our business plan. Based upon publicly-available information, there are 9 similarly structured blank check companies (4 China and 1 Asia/Pacific) with a planned $419 million of gross proceeds currently in registration and waiting to complete initial public offerings. If we effect a business combination, there will be, in all likelihood, intense competition from competitors of the target business. We cannot assure you that, subsequent to a business combination, we will have the resources or ability to compete effectively. Facilities We maintain our executive offices at 1818 Canggong Road, Fengxian, Shanghai Chemical Industry Park, Shanghai, China 201417. We have agreed to pay Global Vestor Capital Partners LLC, an affiliate of Jin Shi, our chief executive officer and director, and Michael Zhang, our chief financial officer, secretary and director, up to $7,500 a month for office space at which our executive offices are located, and for utilities, administrative, technology and secretarial services. This arrangement is being agreed to by Global Vestor Capital Partners LLC for our benefit and is not intended to provide Mr. Shi or Mr. Zhang compensation in lieu of salary. We believe, based on rents and fees for similar services in Shanghai, PRC, that the fee charged by Global Vestor Capital Partners LLC is at least as favorable as we could have obtained from an unaffiliated third-party. We consider our current office space adequate for our current operations. Upon completion of a business consummation or our automatic dissolution and subsequent liquidation of the trust account, we will no longer be required to pay this monthly fee. Employees We have four officers, all of whom are also members of our board of directors. These individuals are not obligated to devote any specific number of hours to our matters and intend to devote only as much time as they deem necessary to our affairs. The amount of time they will devote in any time period will vary based on the availability of suitable target businesses to investigate. We do not intend to have any full time employees prior to the consummation of a business combination. Periodic Reporting and Audited Financial Statements We will register our units, ordinary shares and warrants under the Securities Exchange Act of 1934, as amended, and have reporting obligations, including the requirement that we file annual and quarterly reports with the SEC. In accordance with the requirements of the Securities Exchange Act of 1934, our annual reports will contain financial statements audited by our independent accountants. Escrow of offering proceeds $34,200,000 of the net offering proceeds, including the $1,080,000 in purchase price of the founding director warrants and $720,000 in deferred underwriting discounts, will be deposited into a trust account at JPMorgan Chase NY Bank maintained by American Stock Transfer & Trust Company, acting as trustee. $30,132,000 of the offering proceeds would be required to be deposited into either an escrow account with an insured depositary institution or in a separate bank account established by a broker-dealer in which the broker-dealer acts as trustee for persons having the beneficial interests in the account. Investment of net proceeds The $34,200,000 of net offering proceeds held in trust will be invested in only U.S. government securities, within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 with a maturity of 180 days or less, or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940. Proceeds could be invested only in specified securities such as a money market fund meeting conditions of the Investment Company Act of 1940 or in securities that are direct obligations of, or obligations guaranteed as to principal or interest by, the United States. Limitation on fair value or net assets of target business The initial target business that we acquire must have a fair market value equal to at least 80% of our net assets held in trust (net of taxes payable) at the time of such acquisition. We would be restricted from acquiring a target business unless the fair value of such business or net assets to be acquired represents at least 80% of the maximum offering proceeds. Trading of securities issued The units will commence trading on or promptly after the date of this prospectus. The ordinary shares and warrants comprising the units may begin to trade separately on the 90th day after the date of this prospectus, unless Morgan Joseph & Co. informs us of its decision to allow earlier separate trading, based on their assessment of the relative strengths of the securities markets and small capitalization companies in general, and the trading pattern of, and demand for, our securities in particular, and provided we have filed with the SEC a Current Report on Form 6-K that includes an audited balance sheet reflecting our receipt of the proceeds of this offering, including any proceeds we receive from the exercise of the over-allotment option, if such option is exercised prior to the filing of the Form 6-K. No trading of the units or the underlying ordinary shares and warrants would be permitted until the completion of a business combination. During this period, the securities would be held in the escrow or trust account. Exercise of the warrants The warrants cannot be exercised until the later of the completion of a business combination or one year from the date of this prospectus and, accordingly, will only be exercised after the trust account has been terminated and distributed. The warrants could be exercised prior to the completion of a business combination, but securities received and cash paid in connection with the exercise would be deposited in the escrow or trust account. Election to remain an investor We will give our shareholders the opportunity to vote on the business combination. In connection with seeking shareholder approval, we will send each shareholder a proxy statement containing information required by the SEC. A shareholder following the procedures described in this prospectus is given the right to redeem his or her shares into his or her pro rata share of the trust account. However, a shareholder who does not follow these procedures or a shareholder who does not take any action would not be entitled to the return of any funds. Although we will not distribute copies of the Current Report on Form 6-K to individual unit holders, the Current Report on Form 6-K will be available on the SEC s website. See the section appearing elsewhere in the prospectus entitled Where You Can Find Additional Information. A prospectus containing information required by the SEC would be sent to each investor. Each investor would be given the opportunity to notify the company, in writing, within a period of no less than 20 business days and no more than 45 business days from the effective date of the post-effective amendment, to decide whether he or she elects to remain a shareholder of the company or require the return of his or her investment. If the company has not received the notification by the end of the 45th business day, funds and interest or dividends, if any, held in the trust or escrow account would automatically be returned to the shareholder. Unless a sufficient number of investors elect to remain investors, all of the deposited funds in the escrow account must be returned to all investors and none of the securities will be issued. Business combination deadline A business combination must occur within 18 months after the consummation of this offering or within 24 months after the consummation of this offering if a letter of intent or definitive agreement relating to a prospective business combination was entered into prior to the end of the 18 month period. If a business combination does not occur within this time frame, our corporate existence will cease by operation of law and we will distribute to our public shareholders the amount in our trust account (including interest) plus any remaining assets. If an acquisition has not been consummated within 18 months after the effective date of the initial registration statement, funds held in the trust or escrow account would be returned to investors. Release of funds The proceeds held in the trust account will not be released until the earlier of the completion of a business combination or our automatic dissolution and subsequent liquidation of the trust account upon our failure to effect a business combination within the allotted time. The proceeds held in the escrow account would not be released until the earlier of the completion of a business combination or the failure to effect a business combination within the allotted time. See Risk Factors Risks associated with our business you will not be entitled to protection normally afforded to investors of blank check companies. Shareholders right to receive interest earned from the funds held in trust Any interest earned from the funds held in trust will be released to shareholders (net of federal, state or local taxes) upon our failure to effect a business combination within the allotted time. The interest earned on the proceeds held in the escrow account would be held for the sole benefit of the shareholders. Xuesong Song 38 Chairman of the Board Jin Shi 37 Chief Executive Officer and Director Michael W. Zhang 38 Chief Financial Officer, Secretary and Director Teng Zhou 43 EVP, Business Development and Director Xuechu He 44 Director Xuesong Song has been our Chairman of the Board since May 2006. Mr. Song has been engaged in direct investment in the PRC for the past five years as a successful investor and investment banker. Mr. Song has been Chairman and CEO of Chum Capital Group Ltd. since August 2004, and Chairman and CEO of Chum Investment Corporation since December 2001, an investment banking boutique based in Beijing, China which successfully acted as the sole advisor of Origin Agritech Ltd. and HLS Systems International in their respective mergers with Chardan China Acquisition Corporation and Chardan North China Acquisition Corporation, respectively. Mr. Song has also been the Chairman and Chief Executive Officer of Shanghai Jinqiaotong Enterprise Developments Corporation Ltd. since April 2005, a direct investment company that owns approximately 18.4% of equity interest in HLS Systems before its merger with Chardan North China Acquisition Corporation. Between February 2001 and December 2001, Mr. Song was the Vice President of ZZNode Holdings Ltd., a system integration and maintenance software and service provider. Prior to joining ZZNode, Mr. Song held various positions from President Assistant, Vice President to Deputy Executive President at China Resources Investment & Management Co., Ltd. from October 1997 to December 2000. From January 1994 to July 1995, Mr. Song assumed positions from Deputy Representative of Beijing Office to Representative of Hainan Office at Wins Group Holdings Ltd. Between July 1989 and January 1994, Mr. Song was an engineer with Tianjin Office, General Administration of Civil Aviation of China. Mr. Song received a Masters degree in Business Administration from Oklahoma City/Tianjin Program and an Associates degree in electrical engineering from Civil Aviation University of China. Mr. Song currently serves an Executive Director of Alpha Capital Ltd., an asset management firm specialized in non-performance loans of Chinese companies, and a Director of Insight High Technology Co., Ltd., a specialty chemicals and pharmaceutical intermediates producer. Mr. Song speaks English and the Mandarin Chinese. Jin Shi has been our Chief Executive Officer and a director since May 2006. Mr. Shi has been engaged in direct investments and cross-border business transactions in healthcare sector in PRC for the past decade as a successful entrepreneur and investor. Mr. Shi has been a principal of Global Vestor Capital Partners since November 2005, a merchant banking firm that invests in emerging high growth Chinese companies and advises state-owned and privately owned Chinese companies in issuing equity and debt securities in international capital markets. Mr. Shi has also been the Chairman of Shanghai RayChem Industries Co., Ltd., a research & development based active pharmaceutical ingredient producer, since he founded the company in January 2005. Since September 2004, Mr. Shi has been the CEO of Yihua Investment Co. Ltd., a direct investment company and the parent holding company of Shanghai RayChem Industries Co. Ltd. in China. Mr. Shi is also the Chairman and CEO of Groworld U.S. Inc., a company engaged in importing chemicals from overseas to China that he founded in 2001, and PharmaSource Inc., a company he founded in 1997. Between June 1995 and October 1997, Mr. Shi was VP of Sales and Marketing of Darsheng Trade & Technology Development Co., Ltd., the U.S. subsidiary of Tianjin Pharmaceuticals Corporation. From August 1992 through May 1995, Mr. Shi was a Sales Manager of Tianjin Pharmaceuticals Corporation of China. Mr. Shi received a B.S. in Chemical Engineering from Tianjin University. Mr. Shi speaks English and the Mandarin and Shanghai dialects of Chinese. Michael Zhang has been our Chief Financial Officer, Secretary and a director since May 2006. Mr. Zhang has been a principal of Global Vestor Capital Partners since November 2005, a merchant banking firm that invests in emerging high growth Chinese companies and advises state-owned and privately owned Chinese companies in issuing equity and debt securities in international capital markets. Prior to joining Global Vestor Capital Partners, Mr. Zhang was an Investment Professional with Avera Global Partners from July 2004 to March 2005, where he screened and analyzed public equity in global markets. From June 2001 to June 2002, Mr. Zhang was an investment manager for a wealthy family affiliated with Pacific Investment Corporation where he sourced and evaluated target businesses in China. Between September 1999 and March 2001, Mr. Zhang was co-founder and CEO of IQBay Technology Inc., an e-commerce service provider based in Shanghai. From July 1996 to August 1999, Mr. Zhang was an investment banker with Deutsche Bank Securities. Prior to joining Deutsche Bank, Mr. Zhang was a foreign trade manager with United Textile Corporation in Shanghai from July 1990 to July 1991. Mr. Zhang received a Masters degree in Business Administration from Yale University, a Bachelor of Science in Finance from Indiana University Bloomington and an Associate degree from College of International Business, Shanghai University. Mr. Zhang speaks English and the Mandarin and Shanghai dialects of Chinese. Teng Zhou has been our VP, Business Development and a director since May 2006. Mr. Zhou is a permanent resident of the Hong Kong SAR. Mr. Zhou has been engaged in direct investments in PRC for the past six years as a successful investor. Mr. Zhou was a key member of the team, led by Mr. He, that successfully completed various transactions of merging operating assets with listed companies on the Hong Kong Stock Exchange. Mr. Zhou has been CEO of Guorun Group Ltd. since June 2005, a direct investment company. From July 2002 to June 2005, Mr. Zhou was Executive Director of South China Information & Technology Ltd., a publicly listed company on the Hong Kong Stock Exchange whose name was changed to Guorun Holdings Ltd. in July 2002 and merged with Geely Automobile Holdings Ltd. in May 2005, the largest private automobile manufacturer in PRC. Between September 2001 and April 2003, Mr. Zhou was Executive Director of Fourseas.com Ltd., a publicly listed company in Hong Kong Stock Exchange whose name was changed to Shanghai Century Ltd. in June 2002 and merged with Shanghai Zendai Holdings in February 2003. Prior to becoming an active investor, Mr. Zhou operated his own business in trade, food service and capital market investment from August 1997 to September 2001. Mr. Zhou was assigned by China Resources Holdings Co., Ltd. in Hong Kong to manage an industrial manufacturing subsidiary from April 1986 to August 1997, during which he assumed various positions including Finance Director, CFO, Vice President and President. Mr. Zhou joined China Resources Holdings Ltd. in January 1985. From August 1983 to January 1985, Mr. Zhou researched cost accounting framework for the construction industry at China Academy of Building Research. Mr. Zhou received a B.S. in Accounting from Hunan Finance and Economic College. Mr. Zhou speaks Mandarin and Cantonese dialects of Chinese. Xuechu He has been a director since May 2006. Mr. He is a permanent resident of the Hong Kong SAR. Mr. He has been engaged in direct investments in PRC for the past six years as a successful investor and dealmaker. Mr. He earned his reputation as a value creator in the capital markets from several marquee cases in which he acted as chairman of the board and the controlling shareholder at several public companies listed on the Hong Kong Stock Exchange from June 1999 to present. Since June 2005, Mr. He has been Chairman of Guorun Group Ltd., a direct investment company. Mr. He was Chairman of the board of South China Information & Technology Ltd., from July 2002 to June 2005, a publicly listed company in Hong Kong Stock Exchange whose name was changed to Guorun Holdings Ltd. in July 2002 and merged with Geely Automobile Holdings Ltd. in May 2005, the largest private automobile manufacturer in PRC. Between September 2001 and April 2003, Mr. He was Chairman of Fourseas.com Ltd., a publicly listed company in Hong Kong Stock Exchange whose name was changed to Shanghai Century Ltd. in June 2002 and merged with Shanghai Zendai Holdings in February 2003. Between August 2000 and November 2000, Mr. He was also Chairman of Interchina Holdings Ltd., a publicly listed company in Hong Kong Stock Exchange acquired by him and merged with an operating company in the PRC. Mr. He was also Executive Director of Interchina Holdings Ltd. from November 2000 to September 2001. Prior to becoming an active investor, Mr. He established and operated his own businesses from May 1997 to June 1999, including property development, international trade and R&D of electric-powered vehicles. From December 1989 to May 1997, Mr. He assumed various positions at Finance Department of China Resources Holdings Co., Ltd. in Hong Kong, including audit manager, assistant general manager and deputy general manager, responsible for internal auditing, setting up internal control system, financial statements analysis, evaluating investment and financing projects, and providing to the board of directors critical analysis and advice related with finance in their decision-making process. Prior to joining China Resources Holdings Co., Ltd. in Hong Kong, Mr. He was the deputy director of the accounting department at China Resources Co., Ltd. in Beijing, responsible for company s financing and accounting activities related with import and export business from January 1985 to December 1989. Mr. He worked at the Ministry of Commodities (currently Ministry of Commerce), responsible for structuring accounting provisions for businesses between July 1983 and January 1985. Mr. He received a B.S. degree in finance and accounting from Anhui Finance and Trade College in 1983. Mr. He speaks Mandarin and Cantonese dialects of Chinese. Executive Compensation No executive officer has received any cash compensation for services rendered. Commencing on the effective date of this prospectus through the acquisition of a target business, we will pay Global Vestor Capital Partners LLC, an affiliate of Jin Shi, our chief executive officer and director, and Michael Zhang, our chief financial officer, secretary and director up to $7,500 per for use of office space, utilities, administrative, technology and secretarial services. This arrangement is being agreed to by Global Vestor Capital Partners LLC for our benefit and is not intended to provide Mr. Shi or Mr. Zhang compensation in lieu of salary. We believe, based on rents and fees for similar services in Shanghai, PRC, that such fees are at least as favorable as we could have obtained from an unaffiliated third party. Other than this $7,500 per month fee, no compensation of any kind by any party, including finder s and consulting fees, will be paid to any of our existing shareholders, including our officers and directors, or any of their respective affiliates, for services rendered prior to or in connection with a business combination. However, these individuals will be reimbursed for any out-of-pocket expenses incurred in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations (including possible payments to unaffiliated third parties for their performance of due diligence). After a business combination, such individuals may be paid consulting, management or other fees from target businesses, with any and all amounts being fully disclosed to shareholders, to the extent known, in the proxy solicitation materials furnished to the shareholders. There is no limit on the amount of these out-of-pocket expenses, and there will be no review of the reasonableness of the expenses by anyone other than our board of directors, which includes persons who may seek reimbursement, or a court of competent jurisdiction if such reimbursement is challenged. If none of our directors are deemed independent, we will not have the benefit of independent directors examining the propriety of expenses incurred on our behalf and subject to reimbursement. Conflicts of Interest As a result of their affiliation with ChinaGrowth South, our officers and directors may have fiduciary obligations from time to time that may cause them to have conflicts of interest in determining to which entity they present a specific business opportunity. However, since the business purpose of ChinaGrowth South is to effect a share capital exchange, asset acquisition or other similar business combination with an operating business that has its primary operating facilities located in the People s Republic of China in any city or province south of the Yangtze River, we believe the potential for conflicts of interest due to this pre-existing obligation is minimal. Potential investors also should be aware of the following potential conflicts of interest: None of our officers or directors are required to commit their full time to our affairs and, accordingly, they may have conflicts of interest in allocating management time among various business activities. In the course of their other business activities, our officers and directors may become aware of investment and business opportunities that may be appropriate for presentation to us as well as the other entities with which they are affiliated. They may have conflicting fiduciary duties in determining to which entity a particular business opportunity should be presented. For a complete description of our management s other affiliations, see the previous section entitled Directors and Executive Officers. Accordingly, such officers and directors may become subject to conflicts of interest regarding us and other business ventures in which they may be involved, which conflicts may have an adverse effect on our ability to consummate a business transaction. Since our officers and directors own ordinary shares that will be released from escrow only if a business combination is completed and may own warrants that will expire worthless if a business combination is not consummated, these persons may have a conflict of interest in determining whether a particular target business is appropriate to effect a business combination. The personal and financial interests of our directors and officers may influence their motivation in identifying and selecting a target business and timely completing a business combination and securing release of their shares. If we were to make a deposit, down payment or fund a no shop provision in connection with a potential business combination, we may have insufficient funds available outside of the trust to pay for due diligence, legal, accounting and other expenses attendant to completing a business combination. In such event, our existing shareholders may have to incur such expenses in order to proceed with the proposed business combination. As part of any such combination, such existing shareholders may negotiate the repayment of some or all of any such expenses, without interest or other compensation, which if not agreed to by the target business s management, could cause our management to view such potential business combination unfavorably, thereby resulting in a conflict of interest. If our management negotiates to be retained post business combination as a condition to any potential business combination, their financial interests, including compensation arrangements, could influence their motivation in selecting, negotiating and structuring a transaction with a target business, and such negotiations may result in a conflict of interest. In addition, conflicts of interest may arise when our board evaluates a particular business opportunity with respect to the above-listed criteria. While a director with such a conflict may decide to recuse himself, we cannot assure you that any of the above mentioned conflicts will be resolved in our favor. Under Cayman Islands law, our directors have a duty of loyalty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our amended and restated memorandum and articles of association. In certain limited circumstances, a shareholder has the right to seek damages if a duty owed by our directors is breached. Each of our directors has, or may come to have, conflicting fiduciary obligations relating to presenting business opportunities meeting the above-listed criteria to multiple entities. Our officers and directors have fiduciary obligations to those companies on whose board of directors they sit. To the extent that they identify business opportunities that may be suitable for the entities or other companies on whose board of directors they may sit, our officers and directors will honor those fiduciary obligations. Accordingly, they may not present opportunities to us that come to their attention in the performance of their duties as directors of such other entities unless any other entity to which they owe such a fiduciary obligation and any successors to such entities have declined to accept such opportunities. Additionally, certain of our directors and officers are directors of companies, both public and private, that may perform business activities in the PRC similar to those that we may perform after consummating a business combination. In connection with the shareholder vote required to approve any business combination, all of our existing shareholders have agreed to vote the ordinary shares owned by them prior to this offering in the same manner as a majority of the public shareholders who vote at the special or annual meeting called for the purpose of approving a business combination. Our existing shareholders have also agreed that if they acquire ordinary shares in or following this offering, they will vote such acquired shares in favor of a business combination. Accordingly, any ordinary shares acquired by existing shareholders in the open market will not have the same right to vote with respect to a potential business combination. Additionally, our existing shareholders will not have redemption rights with respect to shares acquired during or subsequent to this offering, except upon our automatic dissolution and liquidation of the trust account. In addition, they have agreed to waive their respective rights to participate in any liquidation of the trust account as part of our plan of distribution and dissolution occurring upon our failure to consummate a business combination but only with respect to those ordinary shares acquired by them prior to this offering and not with respect to any shares acquired in the open market. To further minimize potential conflicts of interest, we have agreed not to consummate a business combination with an entity that is affiliated with any of our existing shareholders unless we obtain an opinion from an independent investment banking firm that the business combination is fair to our shareholders from a financial point of view. Moreover, we will obtain such an opinion in the event we enter into a business combination with either a portfolio company of one of the Company s affiliates or with a company which has received financial investment from one of the Company s affiliates. Such opinion will be included in our proxy solicitation materials, furnished to shareholders in connection with their vote on such a business combination and we expect that such independent banking firm will be a consenting expert. In addition, our officers and directors have agreed not to become officers, directors or principal shareholders of entities, including but not limited to other blank check companies, which are engaged in, or in the event of the business combination, will be engaged in business activities similar to those intended to be conducted by us until the earlier of completion of a business combination or dissolution of the Company. Furthermore, in order to minimize potential conflicts of interest which may arise from our directors multiple affiliations, as set forth in the form of insider letter filed as an exhibit to our registration statement on Form F-1, our directors have agreed to present to us for our consideration, prior to presentation to any other person or entity, any suitable opportunity to acquire an operating business, until the earlier of our consummation of a business combination, our dissolution and liquidation of the trust account or until such time as such director ceases to be our director, subject to any pre-existing fiduciary obligations the director might have as a result of such director becoming a member of another similarly situated company s board of directors in the United States. In such case, the Company s director may become aware of a business opportunity through his position as a director of another company and therefore would have a pre-existing fiduciary obligation to that company with respect to the business opportunity. In addition, our directors have agreed not to accept any fees, directly or indirectly, including performance based bonuses, related to our business combination in the event one of their affiliated entities assists us with our business combination. Each of our officers and directors may have conflicts of interests as a result of the following affiliations: (i) Mr. Song is currently affiliated with Chum Capital Group, Ltd, Chum Investment Corporation, Shanghai Jingiaotong Corporation Enterprise Developments Ltd., Alpha Capital Ltd. and Insight High Technology Co., Ltd.; (ii) Mr. Shi is currently affiliated with Global Vestor Capital Partners LLC, Shangai RayChem Industries Col, Ltd., Yihua Investment Co. Ltd., Groworld U.S. Inc. and PharmaSource Inc.; (iii) Mr. Zhang is currently affiliated with Global Vestor Capital Partners LLC; (iv) Mr. He is currently affiliated with Guoron Group Ltd.; and (v) Mr. Zhou is currently affiliated with Guorun Group Ltd. and Venture Link Assets Ltd. Our management has not had any discussions with any of these entities regarding a business combination and has no current plan to enter into a business combination with these entities. Limitation of Director and Officer Liability Pursuant to our amended and restated memorandum and articles of association, every director, agent or officer of the Company shall be indemnified out of the assets of the Company against any liability incurred by him as a result of any act or failure to act in carrying out his functions other than such liability (if any) that he may incur by his own fraud or wilful default. No such director, agent or officer shall be liable to the Company for any loss or damage in carrying out his functions unless that liability arises through the fraud or wilful default of such director, agent or officer. (1) The business address of each of the individuals is 1818 Canggong Road, Fengxian, Shanghai Chemical Industry Park, Shanghai, China 201417. (2) Assumes only the sale of 4,500,000 units in this offering, but not the exercise of the 4,500,000 warrants to purchase our ordinary shares included in such units. (3) Mr. Song is the chairman of the board of our Company. Legal title to the 375,000 shares is held by Chum Capital Group Limited. Mr. Song is the sole beneficial owner of Chum Capital Group Limited. (4) Mr. Shi is the chief executive officer and a director of our Company. Legal title to the 187,500 shares is held by Global Vestor Capital Partners LLC. Mr. Shi and Mr. Zhang are the sole beneficial owners of Global Vestor Capital Partners LLC. (5) Mr. Zhang is the chief financial officer, secretary and a director of our Company. Legal title to the 187,500 shares is held by Global Vestor Capital Partners LLC. Mr. Zhang and Mr. Shi are the sole beneficial owners of Global Vestor Capital Partners LLC. (6) Mr. Zhou is the executive vice president, business development and a director of our Company. Legal title to the 150,000 shares is held by Venture Link Assets Limited. Mr. Zhou is the sole beneficial owner of Venture Link Assets Limited. (7) Mr. He is a director of our Company. Legal title to the 225,000 ordinary shares is held by Guorun Group Limited. Mr. He is the sole beneficial owner of Guorun Group Limited. Our officers and directors, or their designees, have collectively agreed that prior to the closing of this offering, such persons will purchase in a private placement transaction a combined total of 900,000 warrants from us at a price of $1.20 per warrant. These warrants, which we collectively refer to as the founding director warrants, will not be sold or transferred by the purchasers who initially purchase these warrants from us until the completion of our initial business combination. The $1,080,000 purchase price of the founding director warrants will be added to the proceeds of this offering to be held in the trust account pending our completion of one or more business combinations. If we do not complete one or more business combinations that meet the criteria described in this prospectus, then the $1,080,000 purchase price of the founding director warrants will become part of the liquidation distribution to the public shareholders and the founding director warrants will expire worthless. Immediately after this offering, our existing shareholders, which include all of our officers and directors, collectively, will beneficially own 20% of the then issued and outstanding ordinary shares. Because of this ownership block, these shareholders may be able to effectively influence the outcome of all matters requiring approval by our shareholders, including the election of directors and approval of significant corporate transactions other than approval of a business combination. In addition, if we increase the size of the offering pursuant to Rule 462(b) under the Securities Act, we may effect a share dividend in such amount to maintain the existing shareholders collective ownership at 20% of our issued and outstanding ordinary shares upon consummation of the offering. If we decrease the size of the offering we will effect a reverse split of our ordinary shares to maintain the existing shareholders collective ownership at 20% of our issued and outstanding ordinary shares upon consummation of this offering. All of the ordinary shares outstanding prior to the date of this prospectus will be placed in escrow with American Stock Transfer & Trust Company, as escrow agent, until one year following the consummation of a business combination. During the escrow period, the holders of these shares will not be able to sell or transfer their securities, except to their spouses and children or trusts established for their benefit, but will retain all other rights as our shareholders, including, without limitation, the right to vote their ordinary shares and the right to receive cash dividends, if declared. If dividends are declared and payable in ordinary shares, such dividends will also be placed in escrow. If we are unable to effect a business combination and thus we automatically dissolve and subsequently liquidate the trust account, none of our existing shareholders will receive any portion of the liquidation proceeds with respect to ordinary shares owned by them prior to the date of this prospectus. The existing shareholders have also agreed to escrow their founding director warrants until the consummation of a business combination. Each of Messrs. He, Shi, Zhou, Zhang and Song is deemed to be our parent and promoter, as these terms are defined under the Federal securities laws. (1) Legal title to the 375,000 shares is held by Chum Capital Group Limited. Mr. Song is the sole beneficial owner of Chum Capital Group Limited. (2) Legal title to the 187,500 shares is held by Global Vestor Capital Partners LLC. Mr. Shi and Mr. Zhang are the sole beneficial owners of Global Vestor Capital Partners LLC. (3) Legal title to the 187,500 shares is held by Global Vestor Capital Partners LLC. Mr. Zhang and Mr. Shi are the sole beneficial owners of Global Vestor Capital Partners LLC. (4) Legal title to the 150,000 shares is held by Venture Link Assets Limited. Mr. Zhou is the sole beneficial owner of Venture Link Assets Limited. (5) Legal title to the 225,000 ordinary shares is held by Guorun Group Limited. Mr. He is the sole beneficial owner of Guorun Group Limited. Our officers and directors, or their designees, have collectively agreed that prior to the date of this Prospectus offering, such persons will purchase a combined total of 900,000 of our warrants from us at a price of $1.20 per warrant. These warrants, which we collectively refer to as the founding director warrants, will not be sold or transferred by the purchasers who initially purchase these warrants from us until the completion of our initial business combination. The $1,080,000 purchase price of the founding director warrants will be added to the proceeds of this offering to be held in the trust account pending our completion of one or more business combinations. If we do not complete one or more business combinations that meet the criteria described in this prospectus, then the $1,080,000 purchase price of the founding director warrants will become part of the liquidation distribution to our public shareholders and the founding director warrants will expire worthless. The holders of the majority of the 1,125,000 shares, together with the holders of the founding director warrants, will be entitled to require us, on up to two occasions, to register these shares and the 900,000 founding director warrants and the 900,000 ordinary shares underlying the founding director warrants, pursuant to an agreement to be signed prior to or on the date of this prospectus. The holders of the majority of these shares and the founding director warrants may elect to exercise these registration rights at any time after the date on which these ordinary shares and founding director warrants are released from escrow, which, except in limited circumstances, is not before the one year from the consummation of a business combination in the case of the ordinary shares, and the consummation of a business combination in the case of the founding director warrants. In addition, these shareholders and the holders of the founding director warrants have certain piggy-back registration rights on registration statements filed subsequent to the date on which these ordinary shares are released from escrow or the founding director warrants become exercisable, as the case may be. We will bear the expenses incurred in connection with the filing of any such registration statements. Because the founding director warrants sold in the Regulation S private placement were originally issued pursuant to an exemption from registration requirements under the federal securities laws, founding director warrants will be exercisable even if, at the time of exercise, a prospectus relating to the common stock issuable upon exercise of such warrants is not current. Certain of our officers and directors have agreed to loan us a total of $210,000 which will be used to pay a portion of the expenses of this offering, such as SEC registration fees, NASD registration fees, blue sky expenses and legal and accounting fees and expenses. The $210,000 loan from our officers and directors will be payable without interest on the consummation of the offering. We intend to repay this loan from the proceeds of this offering not held in trust. Commencing on the effective date of this prospectus through the acquisition of the target business, we have agreed to pay Global Vestor Capital Partners LLC, an affiliate of Jin Shi, our chief executive officer and director, and Michael Zhang, our chief financial officer, secretary and director, up to $7,500 per month for use of office space, utilities, administrative, technology and secretarial services. This arrangement is being agreed to by Global Vestor Capital Partners LLC for our benefit and is not intended to provide Mr. Shi or Mr. Zhang compensation in lieu of salary. We believe, based on rents and fees for similar services in Shanghai, PRC, that such fees are at least as favorable as we could have obtained from an unaffiliated person. This arrangement will terminate upon completion of a business combination or the distribution of the trust account to our public shareholders. Each of Messrs. He, Shi, Zhou, Zhang and Song is deemed to be our parent and promoter, as these terms are defined under the Federal securities laws. We will reimburse our officers and directors for any reasonable out-of-pocket business expenses incurred by them in connection with certain activities on our behalf such as identifying and investigating possible target businesses and business combinations (including possible payments to unaffiliated third parties for their performance of due diligence). There is no limit on the amount of accountable out-of-pocket expenses reimbursable by us, which will be reviewed only by our board or a court of competent jurisdiction if such reimbursement is challenged. Accountable out-of-pocket expenses incurred by our officers and directors will not be repaid out of proceeds held in trust until these proceeds are released to us upon the completion of a business combination, provided there are sufficient funds available for reimbursement after such consummation. Other than the reimbursable out-of-pocket expenses payable to our officers and directors, no compensation or fees of any kind, including finders and consulting fees, will be paid by any party to any of our existing shareholders, officers or directors who owned our ordinary shares prior to this offering, or to any of their respective affiliates for services rendered to us prior to or with respect to the business combination. Our existing shareholders will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the amount held outside of the trust account unless the business combination is consummated and there are sufficient funds available for reimbursement after such consummation. The financial interest of such persons could influence their motivation in selecting a target business and thus, there may be a conflict of interest when determining whether a particular business combination is in the shareholders best interest. After the consummation of a business combination, if any, to the extent our management remains as officers of the resulting business, some of our officers and directors may enter into employment agreements, the terms of which shall be negotiated and which we expect to be comparable to employment agreements with other similarly-situated companies in the PRC. Further, after the consummation of a business combination, if any, to the extent our directors remain as directors of the resulting business, we anticipate that they will receive compensation comparable to directors at other similarly-situated companies in PRC. All ongoing and future transactions between us and any of our officers and directors or their respective affiliates, including the provision of the loans by our officers and directors, will be on terms believed by us at that time, based upon other similar arrangements known to us, to be no less favorable than are available from unaffiliated third parties and any transactions or loans, including any forgiveness of loans, will require prior approval in each instance by a majority of our uninterested independent directors (to the extent we have any) or the members of our board who do not have an interest in the transaction, in either case who had access, at our expense, to our attorneys or independent legal counsel. We will not enter into any such transaction unless our disinterested independent directors (or, if there are no independent directors, our disinterested directors) determine that the terms of such transaction are no less favorable to us than those that would be available to us with respect to such a transaction from unaffiliated third parties. DESCRIPTION OF SHARE CAPITAL General We are a Cayman Islands company and our affairs are governed by our amended and restated memorandum and articles of association and the Companies Law and the common law of the Cayman Islands. The following are summaries of material provisions of our amended and restated memorandum and articles of association and the Companies Law insofar as they relate to the material terms of our ordinary shares. We have filed copies of our memorandum and articles of association and our amended and restated memorandum and articles of association as exhibits to our registration statement on Form F-1. We are authorized to issue 20,000,000 ordinary shares, par value $.001, and 1,000,000 shares of preferred shares, par value $.001. As of the date of this prospectus, 1,125,000 ordinary shares are outstanding, held by five record holders. No preferred shares are currently outstanding. Units Each unit consists of one ordinary share and one warrant. Each warrant entitles the holder to purchase one ordinary share. The ordinary shares and warrants will begin to trade separately on the 90th trading day after the date of this prospectus unless Morgan Joseph & Co. informs us of its decision to allow earlier separate trading (based on their assessment of the relative strengths of the securities markets and small capitalization companies in general, and the trading pattern of, and demand for, our securities in particular), provided that in no event may the ordinary shares and warrants be traded separately until we have filed with the SEC a Current Report on Form 6-K that includes an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file a Current Report on Form 6-K that includes such audited balance sheet upon the consummation of this offering. The audited balance sheet will reflect proceeds we receive from the exercise of the over-allotment option, if the over-allotment option is exercised prior to the filing of the Form 6-K. If the over-allotment option is exercised after our initial filing of a Form 6-K, we will file an amendment to the Form 6-K to provide updated financial information to reflect the exercise of the over-allotment option. We will also include in this Form 6-K, or amendment thereto, or in a subsequent Form 6-K information indicating if the representative has allowed separate trading of the ordinary shares and warrants prior to the 90th day after the date of this prospectus. Although we will not distribute copies of the Form 6-K to individual unit holders, the Form 6-K will be available on the SEC s website after filing. See the section appearing elsewhere in this prospectus entitled Where You Can Find Additional Information. Ordinary Shares Ordinary shareholders of record are entitled to one vote for each share held on all matters to be voted on by shareholders. Rights of shareholders may not be altered, except by a special resolution requiring two-thirds shareholder approval. In connection with the shareholder vote required to approve any business combination, all of our existing shareholders have agreed to vote the ordinary shares owned by them prior to this offering in the same manner as a majority of the public shareholders who vote at the special or annual meeting called for the purpose of approving a business combination. Our existing shareholders have also agreed that if they acquire ordinary shares in or following this offering, they will vote such acquired shares in favor of a business combination. We will proceed with the business combination only if a majority of the ordinary shares voted by the public shareholders are voted in favor of the business combination and public shareholders owning not more than 19.99% of the shares sold in this offering exercise their redemption rights discussed below. Voting against the business combination alone will not result in redemption of a shareholder s ordinary shares into a pro rata share of the trust account. Such shareholder must have also exercised its redemption rights described below. Our board of directors is divided into two classes, each of which will generally serve for a term of two years with only one class of directors being elected in each year. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors. Directors may engage in transactions with the Company and vote on such transactions, provided the nature of the interest is disclosed. If we automatically dissolve and liquidate the trust account prior to a business combination, our public shareholders are entitled to share ratably in the trust account, inclusive of any interest (net of taxes payable, which taxes, if any, shall be paid from the trust account), and any net assets remaining available for distribution to them after payment of liabilities. Our existing shareholders have agreed to waive their respective rights to participate in any liquidation distribution occurring upon our failure to consummate a business combination, but only with respect to those ordinary shares acquired by them prior to this offering. Additionally, upon a liquidation redemption, the underwriters have agreed to waive any right they may have to the $720,000 of deferred underwriting discount currently being held in the trust account, all of which shall be distributed to the public shareholders. Our shareholders are entitled to receive ratable dividends when, as and if declared by the board of directors out of funds legally available. In the event of a liquidation, dissolution or winding up of the company after a business combination, our shareholders are entitled, subject to the rights of holders of preferred shares, if any, to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of shares, if any, having preference over the ordinary shares. Our shareholders have no conversion, preemptive or other subscription rights. There are no sinking fund or redemption provisions applicable to the ordinary shares, except that public shareholders have the right to redeem their ordinary shares to cash equal to their pro rata share of the trust account if they vote against the business combination and the business combination is approved and completed. Public shareholders who redeem their shares into their share of the trust account still have the right to exercise the warrants that they received as part of the units. Preferred Shares Our amended and restated memorandum and articles of association authorizes the issuance of 1,000,000 preferred shares with such designation, rights and preferences as may be determined from time to time by our board of directors. No preferred shares are being issued or registered in this offering. Accordingly, our board of directors is empowered, without shareholder approval, to issue preferred shares with dividend, liquidation, conversion, voting or other rights, which could adversely affect the voting power or other rights of the holders of ordinary shares, although the underwriting agreement prohibits us, prior to a business combination, from issuing preferred shares that participate in any manner in the proceeds of the trust account, or that vote as a class with the ordinary shares on a business combination. We may issue some or all of the preferred shares to effect a business combination. In addition, the preferred shares could be utilized as a method of discouraging, delaying or preventing a change in control of us. Although we do not currently intend to issue any preferred shares, we cannot assure you that we will not do so in the future. Due to the fact that we currently have 20,000,000 ordinary shares authorized, if we were to enter into a business combination, we may (depending on the terms of such a business combination) be required to increase the number of ordinary shares which we are authorized to issue at the same time as our shareholders vote on the business combination. Warrants Except for the founding director warrants to be issued prior to the closing of this offering, no warrants are currently outstanding. Each warrant included in the units entitles the registered holder to purchase one ordinary share at a price of $6.00 per share, subject to adjustment as discussed below, at any time commencing on the later of: the completion of a business combination; and one year from the date of this prospectus. The warrants will expire four years from the date of this prospectus at 5:00 p.m., New York City time. The warrants may trade separately on the 90th day after the date of this prospectus unless Morgan Joseph & Co. determines that an earlier date is acceptable, based upon its assessment of the relative strengths of the securities markets and small capitalization companies in general, and the trading pattern of, and demand for, our securities in particular. In no event will Morgan Joseph & Co. allow separate trading of the ordinary shares and warrants until the underwriters over-allotment option has either expired or been exercised and we file a Current Report on Form 6-K which includes an audited balance sheet reflecting our receipt of the proceeds of this offering, including any proceeds we receive from the exercise of the over-allotment option if such option is exercised prior to our filing of the Form 6-K. We may call the warrants for redemption (including any warrants issued upon exercise of the underwriters unit purchase option) at any time after the warrants become exercisable: in whole and not in part; at a price of $.01 per warrant; upon a minimum of 30 days prior written notice of redemption to each warrant holder; if, and only if, the last sale price of the ordinary shares equals or exceeds $11.50 per share, for any 20 trading days within a 30 trading day period ending on the third business day prior to the notice of redemption to warrant holders; and if there is an effective registration statement allowing for the resale of the shares underlying the warrants. We have established these criteria to provide warrant holders with a reasonable premium to the initial warrant exercise price as well as a degree of liquidity to cushion against a negative market reaction, if any, to our redemption call. If the foregoing conditions are satisfied and we call the warrants for redemption, each warrant holder will then be entitled to exercise his or her warrant prior to the date scheduled for redemption, however, there can be no assurance that the price of the ordinary shares will exceed the call trigger price or the warrant exercise price after the redemption call is made. The warrants will be issued in registered form under a warrant agreement between American Stock Transfer & Trust Company, as warrant agent, and us. You should review a copy of the warrant agreement, which has been filed as an exhibit to the registration statement of which this prospectus is a part, for a complete description of the terms and conditions applicable to the warrants. The exercise price and number of ordinary shares issuable on exercise of the warrants may be adjusted in certain circumstances, including in the event of a share dividend or our recapitalization, reorganization or consolidation. However, the warrants will not be adjusted for issuances of ordinary shares at a price below their respective exercise prices. The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified or official bank check payable to us, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of ordinary shares and any voting rights until they exercise their warrants and receive ordinary shares. After the issuance of ordinary shares upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by shareholders. No warrants will be exercisable unless at the time of exercise a prospectus relating to ordinary shares issuable upon exercise of the warrants is current and the ordinary shares have been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms of the warrant agreement, we have agreed to use our best efforts to maintain a current prospectus relating to ordinary shares issuable upon exercise of the warrants until the expiration of the warrants. However, we cannot assure you that we will be able to do so. If we are unable to maintain the effectiveness of such registration statement until the expiration of the warrants, and therefore are unable to deliver registered shares, the warrants may become worthless. Additionally, the warrants may be deprived of any value and the market for the warrants Warrants included as part of the Units(2) 5,175,000 Warrants (3) may be limited if the prospectus relating to ordinary shares issuable upon the exercise of the warrants is not current or if the ordinary shares are not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside. Under the terms of the warrant agreement, the registered holders of a warrant will not be entitled to receive a net-cash settlement, stock, or other consideration in lieu of physical settlement in shares of our common stock. Because the founding director warrants sold in the Regulation S private placement were originally issued pursuant to an exemption from registration requirements under the federal securities laws, the founding director warrants are exercisable even if, at the time of exercise, a prospectus relating to the common stock issuable upon exercise of such warrants is not current. As described above, the holders of the warrants purchased in this offering will not be able to exercise them unless we have a current registration statement covering the shares issuable upon their exercise. No fractional shares will be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round up to the nearest whole number the number of ordinary shares to be issued to the warrant holder. Our officers and directors, or their designees, have collectively agreed to purchase an aggregate of 900,000 of our warrants from us at a price of $1.20 per warrant prior to the closing of this offering. The founding director warrants have terms and provisions that are identical to the warrants included in the units being sold in this offering, except that the founding director warrants (i) will not be transferable or salable by the purchasers who initially purchase these warrants from us until we complete a business combination, (ii) will be non-redeemable so long as these persons hold such warrants, and (iii) are being purchased pursuant to an exemption from the registration requirements of the Securities Act and will become freely tradable only after they are registered pursuant to a registration rights agreement to be signed on or before the date of this prospectus, or if an exemption from registration is then available. The transfer restriction does not apply to transfers made pursuant to registration or an exemption that are occasioned by operation of law or for estate planning purposes. The non-redemption provision does not apply to warrants included in units or otherwise purchased in open market transactions, if any. The price of the warrants has been arbitrarily established by us and the representative of the underwriters after giving consideration to numerous factors, including but not limited to, the pricing of units in this offering, the pricing associated with warrants in other blank-check financings in both the public after-market and any pre-offering private placement, and the warrant purchase obligations of managers in similar type transactions. No particular weighting was given to any one aspect of those factors considered. We have not performed any method of valuation of the warrants. As part of the negotiations between the representative of the underwriters and our management, management agreed to purchase the warrants directly from us and not in open market transactions. By making a direct investment in us, the amount held in trust pending a business combination has been increased and the participating managers have committed to a specific amount of warrant purchases. The purchase of the Company s securities in a private placement also has the benefit of reducing any concerns about open-market purchases by members of management present in other blank check offerings. The warrants owned by our officers and directors will be worthless if we do not consummate a business combination. The personal and financial interests of these individuals may influence their motivation in identifying and selecting a target business and completing a business combination in a timely manner. Consequently, our officers and directors discretion in identifying and selecting a suitable target business may result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination are appropriate and in our shareholders best interest. As a result of the founding director warrants being non-redeemable, holders of the founding director warrants, or their permitted transferees, could realize a larger gain than our public warrant holders. Purchase Option We have agreed to sell to Morgan Joseph & Co., the representative of the underwriters, for $100, an option to purchase up to a total of 315,000 units at $10.00 per unit. The units issuable upon exercise of this option are identical to those offered by this prospectus. For a more complete description of the purchase option, including the registration rights afforded to the holders of such option, see the section appearing elsewhere in this prospectus entitled Underwriting Purchase Option. Dividends We have not paid any cash dividends on our ordinary shares to date and do not intend to pay dividends prior to the completion of a business combination. The payment of cash dividends in the future will be dependent upon our revenues and earnings, if any, capital requirements and general financial condition subsequent to completion of a business combination. The payment of any dividends subsequent to a business combination will be within the discretion of our then board of directors. It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, our board does not anticipate declaring any cash dividends in the foreseeable future. In addition, our board is not currently contemplating and does not anticipate declaring any share dividends in the foreseeable future. Further our ability to declare dividends may be limited to restrictive covenants if we incur any indebtedness. Changes in Capital We may from time to time by ordinary resolution increase the share capital by such sum, to be divided into shares of such amount, as the resolution shall prescribe. The new shares shall be subject to the same provisions with reference to the payment of calls, lien, transfer, transmission, forfeiture and otherwise as the shares in the original share capital. We may by ordinary resolution: consolidate and divide all or any of our share capital into shares of larger amount than our existing shares; sub-divide our existing shares, or any of them into shares of smaller amount than is fixed by our amended and restated memorandum of association, subject nevertheless to the provisions of Section 13 of the Companies Law; or cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person. We may by special resolution reduce our share capital and any capital redemption reserve fund in any manner authorized by law. Certain Differences in Corporate Law The Companies Law is modeled on English Law but does not follow recent English Law statutory enactments, and differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of some significant differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the United States and their shareholders. Mergers and Similar Arrangements. Cayman Islands law does not provide for mergers as that expression is understood under United States corporate law. There are statutory provisions that facilitate the reconstruction and amalgamation of companies in certain circumstances, which may be tantamount a merger, but we do not anticipate the use of such statutory provisions because a business combination can be achieved through other means, such as a share capital exchange, asset acquisition or control, through contractual arrangements, of an operating business. However, in the event that a business combination was sought pursuant to these statutory provisions, the arrangement in question must be approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meeting summoned for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder would have the right to express to the court the view that the transaction ought not be approved, the court can be expected to approve the arrangement if it satisfies itself that: we are not proposing to act illegally or beyond the scope of its authority and the statutory provisions as to majority vote have been complied with; the shareholders have been fairly represented at the meeting in question; the arrangement is such as a businessman would reasonably approve; and the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law or that would amount to a fraud on the minority. When a takeover offer is made and accepted by holders of 90.0% of the shares within four months, the offeror may, within a two-month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed unless there is evidence of fraud, bad faith or collusion. If the arrangement and reconstruction is thus approved, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of United States corporations, providing rights to receive payment in cash for the judicially determined value of the shares. Shareholders Suits. Our Cayman Islands counsel is not aware of any reported class action or derivative action having been brought in a Cayman Islands court. In principle, we will normally be the proper plaintiff and a derivative action may not be brought by a minority shareholder. However, based on English authorities, which could be applied by a court in the Cayman Islands, exceptions to the foregoing principle apply in circumstances in which: a company is acting or proposing to act illegally or beyond the scope of its authority; the act complained of, although not beyond the scope of the authority, could be effected if duly authorized by more than the number of votes which have actually been obtained; the individual rights of the plaintiff shareholder have been infringed or are about to be infringed; or those who control the company are perpetrating a fraud on the minority. Certain Reporting Obligations As a foreign private issuer, we are exempt from the rules under the Securities Exchange Act of 1934, as amended, prescribing the furnishing and content of proxy statements. In addition, we will not be required under the Exchange Act to file current reports with the SEC as frequently or as promptly as United States companies whose securities are registered under the Exchange Act. However, we have agreed with the representatives of the underwriters that for the period commencing with the date of this prospectus and ending on the consummation of a business combination, we will comply with the rules under the Exchange Act with respect to the furnishing and content of our proxy statement related to the business combination. We have also agreed with the representatives of the underwriters that for the period commencing with the date of this prospectus and ending on the consummation of a business combination, we will comply with the rules and regulations under the Exchange Act prescribing the requirements and filing deadlines for current reports on Form 8-K and will file reports on Form 6-K complying with those rules and regulations. In addition, we have agreed with the representatives of the underwriters that we will furnish to American shareholders an English language version of our annual financial statements and all other materials regularly provided to other shareholders, and publish, at least quarterly, an English language version of our interim financial statements filed with the SEC. Our Transfer Agent and Warrant Agent The transfer agent for our securities and warrant agent for our warrants is American Stock Transfer & Trust Company. Shares Eligible for Future Sale Immediately after this offering, we will have 5,625,000 ordinary shares outstanding, or 6,300,000 shares if the underwriters over-allotment option is exercised in full. Of these shares, the 4,500,000 shares sold in this offering, or 5,175,000 shares if the over-allotment option is exercised in full, will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by one of our affiliates within the meaning of Rule 144 under the Securities Act. All of the remaining 1,125,000 shares are restricted securities under Rule 144, in that they were issued in private transactions not involving a public offering. None of those will be eligible for sale under Rule 144 prior to , 2007. Notwithstanding this, all of those shares have been placed in escrow and will not be transferable until one year from the consummation of a business combination, subject to certain limited exceptions, such as transfers to family members and trusts for estate planning purposes and upon death while remaining subject to the escrow agreement, and will only be released prior to that date subject to certain limited exceptions, such as our automatic dissolution and subsequent liquidation of the trust account prior to a business combination (in which case the certificate representing such shares will be destroyed), and the consummation of a liquidation, share exchange or other similar transaction that results in all of our shareholders having the right to exchange their ordinary shares for cash, securities or other property subsequent to our consummating a business combination with a target business. Additionally, after this offering there will be 900,000 founding director warrants outstanding that upon full exercise will result in the issuance of 900,000 ordinary shares to the holders of the founding director warrants. The founding director warrants and the underlying ordinary shares are subject to registration as described below under Registration Rights. Rule 144 In general, under Rule 144 as currently in effect, a person who has beneficially owned restricted ordinary shares for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of either of the following: 1% of the number of ordinary shares then outstanding, which will equal 5,625 shares immediately after this offering (or 6,300 if the underwriters exercise their over-allotment option); and the average weekly trading volume of the ordinary shares during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales under Rule 144 are also limited by manner of sale provisions and notice requirements and by the availability of current public information about us. Rule 144(k) Under Rule 144(k), a person who is not deemed to have been one of our affiliates at the time of or at any time during the three months preceding a sale, and who has beneficially owned the restricted shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell their shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. SEC Position on Rule 144 Sales The SEC has taken the position that promoters or affiliates of a blank check company and their transferees, both before and after a business combination, would act as an underwriter under the Securities Act when reselling the securities of a blank check company acquired prior to the consummation of its initial public offering. Accordingly, the SEC believes that those securities can be resold only through a registered offering and that Rule 144 would not be available for those resale transactions despite technical compliance with the requirements of Rule 144. Therefore, our directors and officers will not be able to utilize Rule 144 and the Company has agreed to register their shares outstanding before this offering and their founding director warrants for future resale pursuant to their registration rights described below. Registration Rights The holders of our 1,125,000 issued and outstanding ordinary shares on the date of this prospectus and the 900,000 founding director warrants and the 900,000 ordinary shares underlying the founding director warrants will be entitled to registration rights pursuant to an agreement to be signed prior to or on the effective date of this offering. The holders of the majority of these shares are entitled to require us, on up to two occasions, to register these shares. The holders of the majority of these shares can elect to exercise these registration rights at any time after the date on which these ordinary shares, or founding director warrants as the case may be, are released from escrow. The holders of the founding director warrants are also entitled to require us to register the resale of the ordinary shares underlying the founding director warrants when such warrants become exercisable by their terms. In addition, these shareholders have certain piggy-back registration rights on registration statements filed subsequent to the date on which these ordinary shares are released from escrow. We will bear the expenses incurred in connection with the filing of any such registration statements. Our Amended and Restated Memorandum and Articles of Association Our amended and restated memorandum and articles of association became effective under the laws of the Cayman Islands on July 10, 2006. As set forth in the preamble to the amended and restated memorandum and articles of association, the objects for which the Company is established are unrestricted and the Company shall have full power and authority to carry out any object not prohibited by the Companies Law (2004 Revision) or as the same may be revised from time to time, or any other law of the Cayman Islands. Under our amended and restated memorandum and articles of association, the Company will hold its annual meetings at such time and place as determined by the Company s directors, and if not so determined, the annual meeting shall be held on the second Wednesday in December of each year. Notice of such meeting must be sent to all shareholders. The majority of directors, the chief executive officer or the chairman of the board also may call special meetings, and in any event, must call special meetings upon the request of ten percent of the Company s shareholders. Articles 168 through 173 of our amended and restated memorandum and articles of association contains provisions designed to provide certain rights and protections to our shareholders prior to the consummation of a business combination, including: a requirement that all proposed business combinations be presented to shareholders for approval regardless of whether or not the Cayman Islands requires such a vote; a prohibition against completing a business combination if 20% or more of our shareholders exercise their redemption rights in lieu of approving a business combination; the right of shareholders voting against a business combination to surrender their shares for a pro rata portion of the trust account in lieu of participating in a proposed business combination; a requirement that in the event we do not consummate a business combination by the later of 18 months after the consummation of this offering or 24 months after the consummation of this offering in the event that either a letter of intent, an agreement in principle or a definitive agreement to complete a business combination was executed but was not consummated within such 18 month period, our corporate existence will cease by operation of law and we will distribute to our public shareholders the amount in our trust account (inclusive of interest) plus any remaining assets; limitation on shareholders rights to receive a portion of the trust account so that they may only receive a portion of the trust account upon our dissolution and subsequent liquidation of the trust account or upon the exercise of their redemption rights; and the bifurcation of our board of directors into two classes and the establishment of related procedures regarding the standing and election of such directors. Our amended and restated memorandum and articles of association and the underwriting agreement that we will enter into with the underwriters in connection with this offering, prohibits the amendment or modification of any of the foregoing provisions prior to the consummation of a business combination. While these rights and protections have been established for the purchasers of units in this offering, it is nevertheless possible that the prohibition against amending or modifying these rights and protections at any time prior to the consummation of the business combination could be challenged as unenforceable under Cayman Islands law, although, pursuant to the underwriting agreement we are prohibited from amending or modifying these rights and protections at any time prior to the consummation of the business combination. We have not sought an unqualified opinion regarding the enforceability of the prohibition on amendment or modification of such provisions because we view these provisions as fundamental and contractual terms of this offering. We believe these provisions to be obligations of our company to its shareholders and that investors will make an investment in our company relying, at least in part, on the enforceability of the rights and obligations set forth in these provisions including, without limitation, the prohibition on any amendment or modification of such provisions. As a result, the board of directors will not, and pursuant to section [3.23] of the underwriting agreement cannot, at any time prior to the consummation of a business combination, propose any amendment or modification of our amended and restated memorandum and articles of association relating to any of the foregoing provisions and will not support, directly or indirectly, or in any way endorse or recommend that shareholders approve an amendment or modification to such provisions. Anti-Money Laundering Cayman Islands In order to comply with legislation or regulations aimed at the prevention of money laundering we are required to adopt and maintain anti-money laundering procedures, and may require subscribers to provide evidence to verify their identity. Where permitted, and subject to certain conditions, we may also delegate the maintenance of its anti-money laundering procedures (including the acquisition of due diligence information) to a suitable person. We reserve the right to request such information as is necessary to verify the identity of a subscriber. In the event of delay or failure on the part of the subscriber in producing any information required for verification purposes, we may refuse to accept the application, in which case any funds received will be returned without interest to the account from which they were originally debited. We also reserve the right to refuse to make any redemption payment to a shareholder if our directors or officers suspect or are advised that the payment of redemption proceeds to such shareholder might result in a breach of applicable anti-money laundering or other laws or regulations by any person in any relevant jurisdiction, or if such refusal is considered necessary or appropriate to ensure our compliance with any such laws or regulations in any applicable jurisdiction. If any person resident in the Cayman Islands knows or suspects that another person is engaged in money laundering or is involved with terrorism or terrorist property and the information for that knowledge or suspicion came to their attention in the course of their business the person will be required to report such belief or suspicion to either the Financial Reporting Authority of the Cayman Islands, pursuant to the Proceeds of Criminal Conduct Law (2005 Revision) if the disclosure relates to money laundering or to a police officer of the rank of constable or higher if the disclosure relates to involvement with terrorism or terrorist property, pursuant to the Terrorism Law. Such a report shall not be treated as a breach of confidence or of any restriction upon the disclosure of information imposed by any enactment or otherwise. TAXATION The following summary of the material Cayman Islands and United States federal income tax consequences of an investment in ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this prospectus, all of which are subject to change. This summary does not deal with all possible tax consequences relating to an investment in our ordinary shares, such as the tax consequences under state, local and other tax laws. Cayman Islands Taxation The Government of the Cayman Islands, will not, under existing legislation, impose any income, corporate or capital gains tax, estate duty, inheritance tax, gift tax or withholding tax upon the company or its shareholders. The Cayman Islands are not party to any double taxation treaties. We have applied for and can expect to receive an undertaking from the Governor-in-Cabinet of the Cayman Islands that, in accordance with section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, for a period of 20 years from the date of the undertaking, no law which is enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciations shall apply to us or our operations and, in addition, that no tax to be levied on profits, income, gains or appreciations or which is in the nature of estate duty or inheritance tax shall be payable (i) on the shares, debentures or other obligations of the company or (ii) by way of the withholding in whole or in part of a payment of dividend or other distribution of income or capital by the company to its members or a payment of principal or interest or other sums due under a debenture or other obligation of the company. United States Federal Income Taxation This section describes the material United States federal income tax consequences of the acquisition, ownership and disposition of our ordinary shares and warrants. This section does not address any aspect of United States federal gift or estate tax, or the state, local or foreign tax consequences of an investment in our ordinary shares and warrants. This section only applies to you if you acquire your ordinary shares and warrants in this offering and you hold your ordinary shares and warrants as capital assets for tax purposes. This discussion does not discuss all the tax consequences that may be relevant to particular investors in light of their circumstances or to investors that are subject to special rules, including: a bank; a dealer in securities or currencies; a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings; a tax-exempt organization; an insurance company; a person liable for alternative minimum tax; a person that actually or constructively owns 10% or more of the vote or value of our shares; a person that holds ordinary shares that are a hedge or that are hedged against currency risks or as part of a straddle or a conversion transaction; or a U.S. holder (as defined below) whose functional currency is not the U.S. dollar. This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations promulgated thereunder, and judicial and administrative interpretations thereof, all as in effect as of the date hereof and all of which are subject to changes, possibly retroactively. For purposes of the United States federal income tax discussion below, you are a U.S. holder if you are a beneficial owner of ordinary shares or warrants and you are: a citizen or resident of the United States; a domestic corporation; an estate whose income is subject to United States federal income tax regardless of its source; or a trust if (A) a United States court can exercise primary supervision over the trust s administration and one or more United States persons are authorized to control all substantial decisions of the trust, or (B) the trust was in existence on August 20, 1996, and validly elected to continue to be treated as a United States domestic trust. In general, the tax consequences for shares owned by a partnership depends on the tax status of the parties. A non-U.S. holder is a beneficial owner of ordinary shares or warrants that is not a United States Holder for United States federal income tax purposes. You should consult your own tax advisor regarding the United States federal, state and local tax consequences of owning and disposing of the ordinary shares or warrants in your particular circumstances. This discussion addresses only United States federal income taxation. Allocation of Purchase Price Between Shares and Warrants For U.S. federal income tax purposes, a U.S. holder must allocate the purchase price of a Unit between the Share and the Warrants that comprise the Unit based on the relative fair market value of each and must compute its basis in the Share and Warrants in accordance with that allocation. We may be required to allocate a portion of the purchase price of the Unit to each component comprising part of the Unit. While uncertain, it is possible that the IRS could apply, by analogy, rules pursuant to which our allocation of the purchase price will be binding on a U.S. holder of a Unit, unless the U.S. holder explicitly discloses in a statement attached to the U.S. holder s timely filed U.S. federal income tax return for the taxable year that includes the acquisition date of the Unit that the U.S. holder s allocation of the purchase price between the Share and the Warrants that comprise the Unit is different from our allocation. Our allocation is not, however, binding on the IRS. Each U.S. holder is advised to consult such holder s own tax advisor with respect to the risks associated with an allocation of the purchase price between the Shares and the Warrants that comprise a Unit that is inconsistent with our allocation of the purchase price. Taxation of Dividends U.S. Holders. Under the United States federal income tax laws, and subject to the personal foreign investment company rules discussed below, if you are a U.S. holder, the gross amount of any dividend we pay out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes) is subject to United States federal income taxation. If you are a non-corporate U.S. holder, dividends paid to you in taxable years beginning before January 1, 2011 that constitute qualified dividend income will be taxable to you at a maximum tax rate of 15% provided that you hold our ordinary shares for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meet other holding period requirements. Dividends we pay with respect to our ordinary shares generally will be qualified dividend income provided that, our ordinary shares are readily tradable on an established securities market in the United States in the year that you receive the dividend and we are not a passive foreign investment company in the year in which the dividend is paid or in the preceding taxable year. (described below). The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations. Distributions in excess of current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a non-taxable return of capital to the extent of your basis in our ordinary shares and thereafter as capital gain. If the dividend is declared and paid in a foreign currency, the amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the payments made in the foreign currency, determined at the spot foreign currency/U.S. dollar rate on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Therefore, since the value of the foreign currency may decrease before you actually convert the currency into U.S. dollars, you may actually be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will ultimately receive. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes. Dividends will be income from sources outside the United States, but generally will be passive income or financial services income, which is treated separately from other types of income for purposes of computing the foreign tax credit allowable to you. Non-U.S. Holders. If you are a non-U.S. holder, dividends paid to you in respect of our ordinary shares will not be subject to United States federal income tax unless the dividends are effectively connected with your conduct of a trade or business within the United States, and the dividends are attributable to a permanent establishment that you maintain in the United States if that is required by an applicable income tax treaty as a condition for subjecting you to United States taxation on a net income basis. In such cases you will be taxed in the same manner as a U.S. holder. If you are a corporate non-U.S. holder, effectively connected dividends may, under certain circumstances, be subject to an additional branch profits tax at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate. Taxation of Capital Gains U.S. Holders. Subject to the PFIC rules discussed below, if you are a U.S. holder and you sell or otherwise dispose of your ordinary shares or warrants, you will recognize capital gain or loss for United States federal income tax purposes equal to the difference between the U.S. dollar value of the amount that you realize and your tax basis, determined in U.S. dollars, in your ordinary shares or warrants. Capital gain of a noncorporate U.S. holder that is recognized before January 1, 2011 is generally taxed at a maximum rate of 15% where the holder has a holding period greater than one year. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes. Your ability to deduct capital losses is subject to limitations. Non-U.S. Holders. If you are a non-U.S. holder, you will not be subject to United States federal income tax on gain recognized on the sale or other disposition of your ordinary shares or warrants unless: the gain is effectively connected with your conduct of a trade or business in the United States and the dividends are attributable to a permanent establishment that you maintain in the United States if that is required by an applicable income tax treaty as a condition for subjecting you to United States taxation on a net income basis; or you are an individual, you are present in the United States for 183 or more days in the taxable year of the sale and certain other conditions exist If you are a corporate non-U.S. holder, effectively connected gains that you recognize, under certain circumstances, may also be subject to an additional branch profits tax at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate. Exercise, Disposition or Lapse of Warrants Subject to the discussion of the PFIC rules below, a U.S. holder generally will not recognize gain or loss upon the exercise of a Warrant. Shares acquired pursuant to the exercise of a Warrant will have a tax basis equal to the U.S. holder s tax basis in the Warrant (that is, an amount equal to the portion of the purchase price of each Unit allocated to the Warrant as described above in Allocation of Purchase Price Between Shares and Warrants ), increased by the amount paid to exercise the Warrant. The holding period of such Share would begin on the day following the date of exercise of the Warrant and will not include the period during which the U.S. holder held the Warrant. Subject to the discussion of the PFIC rules below, upon the sale or other disposition of a Warrant (other than by exercise), a U.S. holder will recognize capital gain or loss in an amount equal to the difference between the amount realized and the U.S. holder s tax basis in the Warrant (that is, as discussed above, the portion of the purchase price of a Unit allocated to such Warrant). Such gain or loss will be long-term capital gain or loss if the U.S. holder has held the Warrant for more than one year. Under certain circumstances, we have the right to redeem the Warrants. A redemption of Warrants will be treated as a sale or exchange of the Warrants. The terms of the Warrant provide for certain adjustments to the number of shares for which the Warrant may be exercised or to the exercise price of the Warrants. Such adjustment may, under certain circumstances, result in constructive distributions that could be taxable as a dividend to the U.S. holder of the Warrants. Conversely, the absence of an appropriate adjustment may result in a constructive distribution that could be taxable as a dividend to a U.S. holder of the Shares. See Taxation of Dividends. If a Warrant is allowed to lapse unexercised, a U.S. holder will recognize a capital loss in an amount equal to such holder s tax basis in the Warrant. Such loss will be long-term if the Warrant has been held for more than one year. The ability to deduct any such loss may be subject to certain limitations, and holders should consult their own tax advisors as to the potential applicability to them of such limitations. As discussed above in Allocation of Purchase Price Between Shares and Warrants , the allocation of price of a Unit between the Share and the Warrants comprising such Unit is not binding on the IRS. If the IRS were successfully to challenge your allocation, the amount of gain recognized upon disposition of a Share or Warrant could be increased, and the amount of loss recognized upon disposition of a Share or Warrant or upon lapse of a Warrant could be reduced. Passive Foreign Investment Company Rules Special United States tax rules apply to a company that is considered a passive foreign investment company, or PFIC. Under these rules, we will be classified as a PFIC for United States federal income tax purposes in any taxable year in which either: At least 75% of our gross income for the taxable year is passive income; or at least 50% of the gross value, determined on the basis of a quarterly average, of our assets is attributable to assets that produce or are held for the production of passive income. Passive income generally includes dividends, interest, royalties, rents (not including certain rents and royalties derived in the active conduct of a trade or business), annuities and gains from assets that produce passive income. If a foreign corporation owns directly or indirectly at least 25% by value of the stock of another corporation, the foreign corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation, and as receiving directly its proportionate share of the other corporation s income. Newly formed corporations, such as us, are excepted out of the PFIC rules for their first year of existence. In addition, we expect to conduct our affairs in a manner so that we will not qualify as a PFIC in the foreseeable future. Our determination of whether we are a PFIC is, however, not binding on the Internal Revenue Service. We cannot assure you that we will not be a PFIC in any future year. If we are treated as a PFIC, and you are a U.S. holder that does not make a mark-to-market election, as described below, you will be subject to special rules with respect to: any gain you realize on the sale or other disposition of your ordinary shares or warrants; and any excess distribution that we make to you (generally, any distributions to you during a single taxable year that are greater than 125% of the average annual distributions received by you in respect of the ordinary shares during the three preceding taxable years or, if shorter, your holding period for the ordinary shares or ordinary shares). Under these rules: the gain or excess distribution will be allocated ratably over your holding period for the ordinary shares; the amount allocated to the taxable year in which you realized the gain or excess distribution will be taxed as ordinary income; the amount allocated to each prior year, with certain exceptions, will be taxed at the highest tax rate in effect for that year; and the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such year. Additionally, if we are a PFIC, a U.S. holder who acquires Shares or Warrants from a deceased person who dies before January 1, 2010 and who was a U.S. holder would not receive the step-up of the income tax basis to fair market value for such Shares or Warrants. Instead, such U.S. holder would have a tax basis equal to the deceased s tax basis, if lower. Special rules apply for calculating the amount of the foreign tax credit with respect to excess distributions by a PFIC. If a U.S. holder has made a qualifying electing fund ( QEF ) election covering all taxable years during which the holder holds Shares and in which we are a PFIC, distributions and gains will not be taxed as described above, nor will denial of a basis step-up at death described above apply. Instead, a U.S. holder that makes a QEF election is required for each taxable year to include in income the holder s pro rata share of the ordinary earnings of the QEF as ordinary income and a pro rata share of the net capital gain of the QEF as long-term capital gain, regardless of whether such earnings or gain have in fact been distributed. Undistributed income is subject to a separate election to defer payment of taxes. If deferred, the taxes will be subject to an interest charge. U.S. holders may not make a QEF election with respect to Warrants. As a result, if a U.S. holder sells Warrants, any gain will be subject to the special tax and interest charge rules treating the gain as an excess distribution, as described above, if the company is a PFIC at any time during the period the U.S. holder holds the Warrants. If a U.S. holder that exercises Warrants properly makes a QEF election with respect to the newly acquired Shares, the adverse tax consequences relating to PFIC Shares will continue to apply with respect to the pre-QEF election period, unless the holder makes a purging election. The purging election creates a deemed sale of the Shares acquired on exercising the Warrants. The gain recognized as result of the purging election would be subject to the special tax and interest charge rules, treating the gain as an excess distribution, as described above. As a result of the purging election, the U.S. holder would have a new basis and holding period in the Shares acquired on the exercise of the Warrants for purposes of the PFIC rules. The application of the PFIC and QEF rules to Warrants and to Shares acquired upon exercise of Warrants is subject to significant uncertainties. Accordingly, each U.S. holder should consult such holder s tax advisor concerning the PFIC consequences of holding Warrants or of holding Shares acquired through the exercise of such Warrants. In order to comply with the requirements of a QEF election, a U.S. holder must receive certain information from us. The QEF election is made on a shareholder-by-shareholder basis and can be revoked only with the consent of the IRS. A shareholder makes a QEF election by attaching a completed IRS Form 8621, including the information provided in the PFIC annual information statement, to a timely filed U.S. federal income tax return and by filing a copy of the form with the IRS. We intend to provide such information as the IRS may require in order to enable U.S. holders to make the QEF election. However, there is no assurance that we will have timely knowledge of our status as a PFIC in the future. Even if a shareholder in a PFIC does not make a QEF election, if such shareholder is a U.S. holder, such shareholder must annually file a completed Form 8621 with the shareholder s tax return and with the IRS. Where a U.S. investor has elected the application of the QEF rules to its PFIC Shares, and the excess distribution rules do not apply to such Shares (because of timely election or a purge of the PFIC taint as described above in connection with the exercise of Warrants), any gain realized on the appreciation of the PFIC Shares is taxable as capital gain (if the Shares are a capital asset in the hands of the investor) and no interest charge is imposed. U.S. shareholders of a QEF are currently taxed on their pro rata shares of the fund s earnings and profits. Where earnings and profits that were included in income under this rule are later distributed, the distribution is not taxed as a dividend. The basis of a U.S. shareholder s Shares in a QEF is increased by amounts that are included in income, and decreased by amounts distributed but not taxed as dividends, under the above rules. Although a determination as to a corporation s PFIC status is made annually, an initial determination that a corporation is a PFIC will generally apply for subsequent years, whether or not it meets the tests for PFIC status in those years. A U.S. holder who makes the QEF election discussed above for the first year the U.S. holder holds or is deemed to hold Shares or Warrants and for which we are determined to be a PFIC, however, is not subject to the PFIC rules or the QEF regime for the years in which we are not a PFIC. If we are a PFIC and, at any time, have a non-U.S. subsidiary that is classified as a PFIC, U.S. holders of shares generally would be deemed to own, and also would be subject to the PFIC rules with respect to, their indirect ownership interests in that lower-tier PFIC. If we are a PFIC and a U.S. holder of Shares does not make a QEF election in respect of a lower-tier PFIC, the U.S. holder could incur liability for the deferred tax and interest charge described above if either (1) we receive a distribution from, or dispose of all or part of our interest in, the lower-tier PFIC or (2) the U.S. holder disposes of all or part of its Shares. Upon request, we will endeavor to cause any lower-tier PFIC to provide to a U.S. holder no later than ninety days after the request the information that may be required to make a QEF election with respect to the lower-tier PFIC. A mark-to-market election (discussed below) under the PFIC rules with respect to Shares would not apply to a lower-tier PFIC, and a U.S. holder would not be able to make such a mark-to-market election in respect of its indirect ownership interest in that lower-tier PFIC. Consequently, U.S. holders of Shares could be subject to the PFIC rules with respect to income of the lower-tier PFIC the value of which already had been taken into account indirectly via mark-to-market adjustments. Similarly, if a U.S. holder made a mark-to-market election under the PFIC rules in respect of our Shares and made a QEF election in respect of a lower-tier PFIC, that U.S. holder could be subject to current taxation in respect of income from the lower-tier PFIC the value of which already had been taken into account indirectly via mark-to-market adjustments. U.S. holders are urged to consult their own tax advisors regarding the issues raised by lower-tier PFICs. If you own ordinary shares in a PFIC that are treated as marketable shares, you may make a mark-to-market election. If you make this election, you will not be subject to the PFIC rules described above. Instead, in general, you will include as ordinary income each year the excess, if any, of the fair market value of your ordinary shares or warrants at the end of the taxable year over your adjusted basis in your ordinary shares or warrants. These amounts of ordinary income will not be eligible for the favorable tax rates applicable to qualified dividend income or long-term capital gains. You will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of your ordinary shares over their fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). Your basis in the ordinary shares or warrants will be adjusted to reflect any such income or loss amounts. Your gain, if any, recognized upon the sale of your ordinary shares or warrants will be taxed as ordinary income. As with the QEF election, a U.S. holder who makes a mark-to-market election would not be subject to the general PFIC regime and the denial of basis step-up at death described above. However, it is unclear whether our Shares will qualify for the mark-to-market election and prospective investors should not assume that our Shares will qualify for the mark-to-market election. Whether the shares will so qualify will depend on the volume and regularity of the trading of such shares and hence cannot be predicted at this time. In addition, notwithstanding any election you make with regard to the ordinary shares, dividends that you receive from us will not constitute qualified dividend income to you if we are a PFIC either in the taxable year of the distribution or the preceding taxable year. Dividends that you receive that do not constitute qualified dividend income are not eligible for taxation at the 15% maximum rate applicable to qualified dividend income. Instead, you must include the gross amount of any such dividend paid by us out of our accumulated earnings and profits (as determined for United States federal income tax purposes) in your gross income, and it will be subject to tax at rates applicable to ordinary income. If you own ordinary shares during any year that we are a PFIC, you must file Internal Revenue Service Form 8621. You should consult your own tax advisor regarding the application of the PFIC rules to our ordinary shares or warrants in your particular circumstances, including the availability of making an election to avoid adverse United States federal income tax consequences under the PFIC rules in the case we are determined to be a PFIC in a future year. Backup Withholding and Information Reporting If you are a noncorporate U.S. holder, information reporting requirements, on Internal Revenue Service Form 1099, generally will apply to: dividend payments or other taxable distributions made to you within the United States, and the payment of proceeds to you from the sale of ordinary shares effected at a United States office of a broker. Additionally, backup withholding may apply to such payments if you are a noncorporate U.S. holder that: fails to provide an accurate taxpayer identification number, is notified by the Internal Revenue Service that you have failed to report all interest and dividends required to be shown on your federal income tax returns, or in certain circumstances, fails to comply with applicable certification requirements. If you are a non-U.S. holder, you are generally exempt from backup withholding and information reporting requirements with respect to: dividend payments made to you outside the United States by us or another non-United States payor and other dividend payments and the payment of the proceeds from the sale of ordinary shares and warrants effected at a United States office of a broker, as long as the income associated with such payments is otherwise exempt from United States federal income tax, and the payor or broker does not have actual knowledge or reason to know that you are a United States person and you have furnished the payor or broker: dividend payments if you have provided us with an Internal Revenue Service Form W-8BEN or an acceptable substitute form upon which you certify, under penalties of perjury, that you are a non-United States person, or other documentation upon which it may rely to treat the payments as made to a non-United States person in accordance with U.S. Treasury regulations, or you otherwise establish an exemption. Payment of the proceeds from the sale of ordinary shares or warrants effected at a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, a sale of ordinary shares or warrants that is effected at a foreign office of a broker will be subject to information reporting and backup withholding if: the proceeds are transferred to an account maintained by you in the United States, the payment of proceeds or the confirmation of the sale is mailed to you at a United States address, or the sale has some other specified connection with the United States as provided in U.S. Treasury regulations, unless the broker does not have actual knowledge or reason to know that you are a United States person and the documentation requirements described above are met or you otherwise establish an exemption. In addition, a sale of ordinary shares or warrants effected at a foreign office of a broker will be subject to information reporting if the broker is: a United States person, a controlled foreign corporation for United States tax purposes, a foreign person 50% or more of whose gross income is effectively connected with the conduct of a United States trade or business for a specified three-year period, or a foreign partnership, if at any time during its tax year: one or more of its partners are U.S. persons , as defined in U.S. Treasury regulations, who in the aggregate hold more than 50% of the income or capital interest in the partnership, or such foreign partnership is engaged in the conduct of a United States trade or business, unless the broker does not have actual knowledge or reason to know that you are a United States person and the documentation requirements described above are met or you otherwise establish an exemption. Backup withholding will apply if the sale is subject to information reporting and the broker has actual knowledge that you are a United States person. You generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed your income tax liability by filing a refund claim with the United States Internal Revenue Service. A copy of the underwriting agreement has been filed as an exhibit to the registration statement of which this prospectus forms a part. State Blue Sky Information We are not making any offer of these securities in any jurisdiction where the offer is not permitted. We will offer and sell the units to retail customers only in Colorado, Delaware, the District of Columbia, Florida, Georgia, Hawaii, Illinois, Indiana, Louisiana, New York and Rhode Island. In New York and Hawaii, we have relied on exemptions from the state registration requirements for transactions between an issuer and an underwriter involving a firm-commitment underwritten offering and in coordination with the federal filing, respectively. In the other states, we have applied to have the units registered for sale and will not sell the units in these states until such registration is effective (including in Colorado, pursuant to 11-51-302(6) of the Colorado Revised Statutes). If you are not an institutional investor, you may purchase our securities in this offering only in the jurisdictions described directly above. Institutional investors in every state except Idaho and Oregon may purchase the units in this offering pursuant to exemptions provided to such entities under the Blue Sky laws of various states. The definition of an institutional investor varies from state to state but generally includes financial institutions, broker-dealers, banks, insurance companies and other qualified entities. Under the National Securities Markets Improvement Act of 1996, the resale of the units, from and after the date of this prospectus, and the ordinary shares and warrants comprising the units, once they become separately transferable, are exempt from state registration requirements because we will file periodic and annual reports under the Securities Exchange Act of 1934. However, states are permitted to require notice filings and collect fees with regard to these transactions. As of the date of this prospectus, the following states do not presently require any notice filings or fee payments and permit the resale of the units, and the ordinary shares and warrants comprising the units, once they become separately transferable: Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New York, North Carolina, Oklahoma, Pennsylvania, South Dakota, Tennessee, West Virginia, Wisconsin and Wyoming. Additionally, the following states permit the resale of the units and the ordinary shares and warrants comprising the units, once they become separately transferable, if the proper notice filings have been made and fees paid: District of Columbia, Illinois, Montana, New Hampshire, North Dakota, Puerto Rico, South Carolina, Texas, Vermont and Virginia. As of the date of this prospectus, we have not determined in which, if any, of these states we will submit the required filings or pay the required fee. Additionally, if any of these states that has not yet adopted a statute relating to the National Securities Markets Improvement Act adopts such a statute in the future requiring a filing or fee or if any state amends its existing statutes with respect to its requirements, we would need to comply with those new requirements for the securities to continue to be eligible for resale in those jurisdictions. Despite the exemption from state registration provided by the National Securities Markets Improvement Act described above, the following states and territory, regardless of whether they require a filing to be made or fee to be paid, have advised us that they do not recognize this act as a basis for exempting the registration of resales in their states of securities issued in blank check offerings: Alaska, Arizona, Idaho, Ohio, Oregon, Utah and Washington. We do not intend to register the resale of the securities sold in this offering in these states. In addition, we believe that the units, from and after the effective date and the ordinary shares and warrants comprising the units, once they become separately transferable, will be eligible for sale on a secondary market basis in each of the following states, without any notice filings or fee payments based upon the registration of the units, ordinary shares and warrants in these states or the availability of another applicable exemption from the state s registration requirements: commencing 90 days after the date of this prospectus in Nevada, New Jersey, New Mexico and Rhode Island; and commencing 180 days from the date of this prospectus in Alabama. Pricing of Securities We have been advised by the representative that the underwriters propose to offer the units to the public at the initial offering price set forth on the cover page of this prospectus. It may allow some dealers concessions not in excess of $__ per unit. Prior to this offering there has been no public market for any of our securities. The public offering price of the units and the terms of the warrants were negotiated between us and the representative. Factors considered in determining the prices and terms of the units, including the ordinary shares and warrants underlying the units, include: the history and prospects of companies whose principal business is the acquisition of other companies; prior offerings of those companies; our prospects for acquiring an operating business at attractive values; our capital structure; an assessment of our management and their experience in identifying operating companies; general conditions of the securities markets at the time of the offering; and other factors as were deemed relevant. However, although these factors were considered, the determination of our offering price is more arbitrary than the pricing of securities for an operating company in a particular industry since the underwriters are unable to compare our financial results and prospects with those of public companies operating in the same industry. Over-Allotment Option We have granted to the representative of the underwriters an option, exercisable during the 45-day period commencing on the date of this prospectus, to purchase from us at the offering price, less underwriting discounts, up to an aggregate of 675,000 additional units for the sole purpose of covering over-allotments, if any. The over-allotment option will only be used to cover the net syndicate short position resulting from the initial distribution. The representative of the underwriters may exercise the over-allotment option if the underwriters sell more units than the total number set forth in the table above. (1) Based upon the underwriters discount of 5% per unit. Does not include an additional 2% of the gross proceeds from the sale of the 4,500,000 units in this offering ($720,000 or $828,000 if the over-allotment is exercised in full) that will be paid to the underwriters only upon the consummation of a business combination (and then only with respect to those units as to which the component shares have not been redeemed into cash) which amounts are reflected in this table as deferred underwriting discount. If a business combination is not consummated and we automatically dissolve and subsequently liquidate our trust account, such amounts will not be paid to the underwriters, but rather will be distributed among our public shareholders. (2) The underwriters have agreed to forfeit their deferred underwriting discount with respect to those units as to which the underlying shares are redeemed into cash by those shareholders who voted against the business combination and exercised their redemption rights upon consummation of a business combination. (3) The offering expenses are estimated at $380,000. We have agreed to reimburse Morgan Joseph & Co. for $9,000 of expenses incurred by it in connection with the investigative background search as part of its due diligence of our management, which expense reimbursement will be deemed additional compensation under NASD Rule 2710. The underwriters will initially offer the units to be sold in this offering directly to the public at the initial public offering price set forth on the cover of this prospectus and to selected dealers at the initial public offering price less a selling concession not in excess of per unit. The underwriters may allow, and the selected dealers may reallow, a concession not in excess of per unit on sales to brokers and dealers. After the offering, the underwriters may change the offering price and other selling terms, provided, however that upon execution of the underwriting agreement, there will be no changes to the price and terms of the sale between the underwriters and the Company. No change in those terms will change the amount of proceeds to be received by us as set forth on the cover of this prospectus. Purchase Option We have agreed to sell to the representative, for $100, an option to purchase up to a total of 315,000 units. The units issuable upon exercise of this option are identical to those offered by this prospectus. This option is exercisable on a cashless basis at $10.00 per unit commencing on the later of the consummation of a business combination and one year from the date of this prospectus, and expiring five years from the date of this prospectus. The option and the 315,000 units, the 315,000 ordinary shares and the 315,000 warrants underlying such units, and the 315,000 ordinary shares underlying such warrants, have been deemed to be underwriting compensation by the NASD and are therefore subject to a 180-day lock-up pursuant to Rule 2710(g)(1) of the NASD Conduct Rules. Morgan Joseph & Co. will not sell, transfer, assign, pledge, or hypothecate this option or the securities underlying this option, nor will it engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of this option or the underlying securities for a period of 180 days from the effective date of this prospectus. Additionally, the option may not be sold, transferred, assigned, pledged or hypothecated for a one-year period (including the foregoing 180 day period) following the date of this prospectus except to any underwriter and selected dealer participating in the offering and their bona fide officers or partners. Although the purchase option and its underlying securities have been registered on the registration statement of which this prospectus forms a part, the option grants holders demand and piggy back registration rights for periods of five and seven years, respectively, from the date of this prospectus. These rights apply to all of the securities directly and indirectly issuable upon exercise of the option. We will bear all fees and expenses attendant to registering the securities issuable on exercise of the option, other than underwriting commissions incurred and payable by the holders. The exercise price and number of units issuable upon exercise of the option may be adjusted in certain circumstances including in the event of a share dividend, or our recapitalization, reorganization or consolidation. However, the option exercise price or underlying units will not be adjusted for issuances of ordinary shares at a price below the option exercise price. The sale of the option will be accounted for as a cost attributable to the proposed offering. Accordingly, there will be no net impact on our financial position or results of operations, except for the recording of the $100 proceeds from the sale. We have estimated, based upon a Black-Scholes model, that the fair value of the option on the date of sale would be approximately $1,058,652, using an expected life of five years, volatility of 48.3%, and a risk-free rate of 5.093%. However, because our units do not have a trading history, the volatility assumption is based on information currently available to management. We believe the volatility estimate calculated is a reasonable benchmark to use in estimating the expected volatility of our units. The volatility calculation is based on the average of the volatilities using daily historical prices over the past five years of each of 67 companies drawn from the Shanghai Stock Exchange Composite Index that had market capitalizations of less than $75,000,000. Although an expected life of five years was used in the calculation, if we do not consummate a business combination within the prescribed time period and we automatically dissolve and subsequently liquidate our trust account, the option will become worthless. Regulatory Restrictions on Purchase of Securities Rules of the SEC may limit the ability of the underwriters to bid for or purchase our securities before the distribution of the securities is completed. However, the underwriters may engage in the following activities in accordance with the rules: Stabilizing Transactions. The underwriters may make bids or purchases for the purpose of pegging, fixing or maintaining the price of our securities. Over-Allotments and Syndicate Coverage Transactions. The underwriters may create a short position in our securities by selling more of our securities than are set forth on the cover page of this prospectus. If the underwriters create a short position during the offering, the representative may engage in syndicate covering transactions by purchasing our securities in the open market. The representative may also elect to reduce any short position by exercising all or part of the over-allotment option. Penalty Bids. The representative may reclaim a selling concession from a syndicate member when the units originally sold by the syndicate member are purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. Stabilization and syndicate covering transactions may cause the price of the securities to be higher than they would be in the absence of these transactions. The imposition of a penalty bid may also have an effect on the prices of the securities if it discourages resales. Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the prices of the securities. These transactions may occur on the OTC Bulletin Board, in the over-the-counter market or on any trading market. If any of these transactions are commenced, they may be discontinued without notice at any time. The distribution of our securities will end upon the underwriters cessation of selling efforts and stabilization activities, provided, however, in the event that the underwriters were to exercise their over-allotment option to purchase securities in excess of their actual syndicate short position, then the distribution will not be deemed to have been completed until all of the securities have been sold. In connection with this offering, the underwriters may distribute prospectuses electronically. No forms of prospectus other than printed prospectuses and electronically distributed prospectuses that are printable in Adobe PDF format will be used in connection with this offering. Other Terms We have granted to Morgan Joseph & Co., the right to have an observer present at all meetings of our board of directors until we consummate a business combination. The observer will be entitled to the same notices and communications sent by us to our directors and to attend directors meetings, but will not have voting rights. Morgan Joseph & Co. has not named its observer as of the date of this prospectus. Although we are not under any contractual obligation to engage any of the underwriters to provide services for us after this offering, any of the underwriters may, among other things, introduce us to potential target businesses or assist us in raising additional capital, as needs may arise in the future. If any of the underwriters provide services to us after the offering we may pay such underwriter fair and reasonable fees that would be determined in an arm s length negotiation. Although they are not obligated to do so, any of the underwriters may introduce us to potential target businesses or assist us in raising additional capital, as needs may arise in the future, but there are no preliminary agreements or understandings between any of the underwriters and any potential targets. We are not under any contractual obligation (oral or written) and have no agreement or understanding to engage any of the underwriters to provide any services for us after this offering, but if we do engage any of them in the future, we may pay the underwriters a finder s fee or advisory fee for services that would be determined at that time in an arm s length negotiation where the terms would be fair and reasonable to each of the interested parties; provided that no agreement will be entered into and no fee will be paid within 90 days following the date of this prospectus. Indemnification We have agreed to indemnify the underwriters against some liabilities, including civil liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in this respect. LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by DLA Piper US LLP, New York, New York. Ellenoff Grossman & Schole LLP, New York, New York, is acting as counsel for the underwriters in this offering. Legal matters as to Cayman Islands law will be passed upon for us by Maples and Calder. DLA Piper US LLP may rely upon Maples and Calder with respect to matters governed by Cayman Islands law. EXPERTS The financial statements of ChinaGrowth North Acquisition Corporation for the period from May 3, 2006 (date of inception) through October 31, 2006 appearing in this prospectus and in the registration statement have been included herein in reliance upon the report of Berenson LLP, independent registered public accounting firm, given on the authority of such firm as experts in accounting and auditing. ENFORCEABILITY OF CIVIL LIABILITIES We are incorporated in the Cayman Islands because of the following benefits found there: political and economic stability; an effective judicial system; a favorable tax system; the absence of exchange control or currency restrictions; and the availability of professional and support services. However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include: the Cayman Islands has a less developed body of securities laws as compared to the United States and provides significantly less protection to investors; and Cayman Islands companies may not have standing to sue before the federal courts of the United States. Although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United Sates, the courts of the Cayman Islands will recognize a foreign judgment as the basis for a claim at common law in the Cayman Islands provided such judgment: is given by a competent foreign court; imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given; is final; is not in respect of taxes, a fine or a penalty; and was not obtained in a manner and is not of a kind the enforcement of which is contrary to the public policy of the Cayman Islands. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the SEC a registration statement on Form F-1, which includes exhibits, schedules and amendments, under the Securities Act, with respect to this offering of our securities. Although this prospectus, which forms a part of the registration statement, contains all material information included in the registration statement, parts of the registration statement have been omitted as permitted by rules and regulations of the SEC. We refer you to the registration statement and its exhibits for further information about us, our securities and this offering. The registration statement and its exhibits, as well as our other reports filed with the SEC, can be inspected and copied at the SEC s public reference room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information about the operation of the public reference room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a web site at http://www.sec.gov which contains the Form F-1 and other reports, proxy and information statements and information regarding issuers that file electronically with the SEC. Ordinary Shares underlying the Warrants included in the Units(4) 5,175,000 Shares $ 6.00 $ 31,050,000 $ 3,322.35 Representative s Unit Purchase Option 1 $ 100 $ Units underlying the Representative s Unit Purchase Option ( Representative s Units ) (4) 315,000 Units $ 10.00 $ 3,150,000 $ 337.05 Ordinary Shares included as part of the Representative s Units 4) 315,000 Shares (3) Warrants included as part of the Representative s Units (4) 315,000 Warrants (3) Ordinary Shares underlying the Warrants included in the Representative s Units (4) 315,000 Shares $ 6.00 $ 1,890,000 $ 202.23 Total $ 77,490,100 $ 8,291.43 (1) Estimated solely for the purpose of calculating the registration fee. (2) Includes 675,000 Units and 675,000 Ordinary Shares and 675,000 Warrants underlying such Units which may be issued on exercise of a 45-day option granted to the Underwriters to cover over allotments, if any. (3) No fee pursuant to Rule 457(g). (4) The indeterminate number of additional common shares shall be issuable pursuant to Rule 416 to prevent dilution resulting from stock splits, stock dividends or similar transactions. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. PROSPECTUS Preliminary Prospectus Subject to Completion, January 18, 2007 $36,000,000 CHINAGROWTH NORTH ACQUISITION CORPORATION 4,500,000 units ChinaGrowth North Acquisition Corporation is a Cayman Islands blank check company recently incorporated for the purpose of acquiring, through a share capital exchange, asset acquisition or other similar business combination, or control, through contractual arrangements, an operating business having its primary operations in the People s Republic of China in any city or province north of the Yangtze River. Our efforts in identifying a prospective target business will not be limited to a particular industry. However, in the event ChinaGrowth South Acquisition Corporation, an entity formed by our principals simultaneously with our incorporation, executes a definitive acquisition agreement, then we will have no geographic restrictions in identifying and selecting a prospective target business in the PRC, and we may therefore also pursue acquisition opportunities south of the Yangtze River. We do not have any specific share capital exchange, asset or share acquisition or other business combination or contractual arrangements under consideration. This is an initial public offering of our securities. Each unit is being offered at a price of $8.00 per unit and consists of: one ordinary share; and one warrant. Each warrant entitles the holder to purchase one ordinary share at a price of $6.00. Each warrant will become exercisable on the later of our completion of a business combination and , 2008 [one year from the date of this prospectus] and will expire on , 2011 [four years from the date of this prospectus] or earlier upon redemption. We have granted Morgan Joseph & Co. Inc., the representative of the underwriters, a 45-day option to purchase up to 675,000 additional units solely to cover over-allotments, if any (over and above the 4,500,000 units referred to above). The over-allotment option will be used only to cover the net syndicate short position resulting from the initial distribution. We have also agreed to sell to Morgan Joseph & Co. Inc. for $100, as additional compensation, an option to purchase up to a total of 315,000 units at $10.00 per unit. The units issuable upon exercise of this option are identical to those offered by this prospectus. The purchase option and its underlying securities have been registered under the registration statement of which this prospectus forms a part. There is presently no public market for our units, ordinary shares or warrants. We intend to apply to have our units quoted on the OTC Bulletin Board under the symbol . Each of the ordinary shares and warrants may trade separately on and after the 90th day after the date of this prospectus unless Morgan Joseph & Co. Inc., the representative of the underwriters, determines that an earlier date is acceptable. Once the securities comprising the units begin separate trading, the ordinary shares and the warrants will be traded on the OTC Bulletin Board under the symbols and , respectively. We cannot assure you, however, that any such securities will continue to be quoted on the OTC Bulletin Board. Investing in our securities involves a high degree of risk. See Risk Factors beginning on page 11 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Public offering price Underwriting discount and commissions (1) Proceeds, before expenses, to us Per unit $ 8.00 $ 0.56 $ 7.44 Total $ 36,000,000 $ 2,520,000 $ 33,480,000 (1) Includes deferred underwriting discounts and commissions of 2% of the gross proceeds, or 0.16 per unit (up to $720,000 or up to $828,000 if the underwriters over-allotment option is exercised in full), payable to the underwriters only upon consummation of a business combination and then only with respect to those units as to which the component shares have not been redeemed into cash by those shareholders who voted against the business combination and exercised their redemption rights. Of the net proceeds we receive from this offering and the sale of the founding director warrants that are described in this prospectus, $34,200,000 ($7.60 per unit) will be deposited into a trust account, of which $720,000 is attributable to the deferred underwriters discounts and commissions, at JPMorgan Chase NY Bank maintained by American Stock Transfer & Trust Company, acting as trustee. If we are forced to dissolve, the underwriters have agreed to waive any right they may have to the deferred underwriting discount held in the trust account. We are offering the units for sale on a firm-commitment basis. Morgan Joseph & Co. Inc., acting as representative of the underwriters, expects to deliver our securities to investors in the offering on or about ___, 2007. MORGAN JOSEPH GUNNALLEN FINANCIAL January __, 2007 SUMMARY FINANCIAL DATA The following table summarizes the relevant financial data for our business and should be read with our financial statements, which are included in this prospectus. We have not had any significant operations to date, so only balance sheet data is presented. October 31, 2006 Actual As Adjusted Balance Sheet Data: Working capital/(deficiency) $ (189,181 ) $ 34,188,439 Total assets 390,568 34,188,439 Total liabilities 382,129 Value of ordinary shares that may be redeemed into cash ($7.44 per share)(1) 6,692,652 Shareholders equity 8,439 27,495,787 USE OF PROCEEDS We estimate that the net proceeds of this offering will be as set forth in the following table: Without Over- Allotment Option Over-Allotment Option Exercised Offering gross proceeds $ 36,000,000 $ 41,400,000 Proceeds from sale of founding director warrants 1,080,000 1,080,000 Total gross proceeds $ 37,080,000 $ 42,480,000 Offering expenses(1) Underwriting discount(2) 2,520,000 2,898,000 Legal fees and expenses (including blue sky services and expenses) 250,000 250,000 Miscellaneous expenses 33,459 33,459 Printing and engraving expenses 50,000 50,000 Accounting fees and expenses 30,000 30,000 SEC registration fee 8,291 8,291 NASD registration fee 8,250 8,250 Total offering expenses 2,900,000 3,278,000 Net proceeds from offering and sale of founding warrants 34,180,000 39,202,000 Net offering proceeds not held in trust 700,000 700,000 Net proceeds from offering and sale of founding warrants held in trust for our benefit 33,480,000 38,502,000 Deferred underwriting discounts held in trust 720,000 828,000 Total amount held in trust 34,200,000 39,330,000 Use of net proceeds not held in trust Legal, accounting and other third-party expenses attendant to structuring and negotiation of a business combination $ 200,000 28.6 % Due diligence, identification and research of prospective target businesses and reimbursement for out-of-pocket due diligence expenses to management 150,000 21.4 % Legal and accounting fees relating to SEC reporting obligations 50,000 7.1 % Administrative fees ($7,500 per month for 24 months) 180,000 25.7 % Working capital, director and officer liability insurance premiums and reserves (including potential deposits, down payments or funding of a no-shop provision in connection with a particular business combination and dissolution obligations and reserves, if any) 120,000 17.2 % Total(3)(4) $ 700,000 100.0 % DILUTION The difference between the public offering price per ordinary share, assuming no value is attributed to the warrants included in the units, and the pro forma net tangible book value per ordinary share after this offering constitutes the dilution to investors in this offering. Net tangible book value per share is determined by dividing our net tangible book value, which is our total tangible assets less total liabilities (including the value of ordinary shares which may be redeemed for cash if voted against the business combination), by the number of outstanding ordinary shares. At October 31, 2006, our net tangible book value was a deficiency of $(189,181), or approximately $(0.17) per ordinary share. After giving effect to the sale of 4,500,000 ordinary shares included in the units, the sale of the founding director warrants and the deduction of estimated expenses of this offering, our pro forma net tangible book value at October 31, 2006 would have been $27,495,787 or $5.82 per share, representing an immediate increase in net tangible book value of $5.99 per share to the existing shareholders and an immediate dilution of $2.18 per share or 27.3% to new investors not exercising their redemption rights. For purposes of presentation, our pro forma net tangible book value after this offering is approximately $6,692,652 less than it otherwise would have been because if we effect a business combination, the redemption rights to the public shareholders may result in the redemption into cash of up to approximately 19.99% of the aggregate number of the shares sold in this offering at a per-share redemption price equal to the amount in the trust account (a portion of which is made up of $1,080,000 purchase price of the founding director warrants and $720,000 in deferred underwriting discounts and commissions) as of two business days prior to the consummation of the proposed business combination, inclusive of any interest, divided by the number of shares sold in this offering. The following table illustrates the dilution to the new investors on a per-share basis, assuming no value is attributed to the warrants included in the units: Public offering price $ 8.00 Net tangible book value before this offering (0.17 ) Increase attributable to new investors 5.99 Pro forma net tangible book value after this offering $ 5.82 Dilution to new investors $ 2.18 Shares Purchased Total Consideration Average Price Per Share Number Percentage Amount Percentage Existing shareholders(1) 1,125,000 20.0 % $ 25,000 0.069 % $ 0.02 New investors(2) 4,500,000 80.0 % $ 36,000,000 99.931 % $ 8.00 5,625,000 100.0 % $ 36,025,000 100.0 % The pro forma net tangible book value after the offering is calculated as follows: Numerator: Net tangible book value before the offering $ (189,181 ) Net proceeds from this offering and the sale of founding warrants(1) 34,180,000 Offering costs excluded from tangible book value before this offering 197,620 Less: Proceeds from this offering and the sale of founding warrants held in trust subject to redemption into cash ($33,480,000 x 19.99%) (2) (6,692,652 ) $ 27,495,787 Denominator: Ordinary shares outstanding prior to the offering 1,125,000 Ordinary shares included in the units offered 4,500,000 Less: Shares subject to redemption (4,500,000 x 19.99%) (899,550 ) 4,725,450 CAPITALIZATION The following table sets forth our capitalization at October 31, 2006 and as adjusted to give effect to the sale of our units and founding director warrants and the application of the estimated net proceeds derived from the sale of our units: October 31, 2006 Actual As Adjusted(4) Notes payable to existing shareholders(1) $ 210,000 Total debt 210,000 Ordinary shares, $.001 par value, -0- and 899,550 shares which are subject to possible redemption, shares at redemption value(2) $ 6,692,652 Preferred shares, $.001 par value, 1,000,000 shares authorized; none issued or outstanding Ordinary shares, $.001 par value, 20,000,000 shares authorized; 1,125,000 shares issued and outstanding; 4,725,000 shares issued and outstanding (excluding 899,550 shares subject to possible redemption), as adjusted 1,125 4,725 Additional paid-in capital(3) 23,875 27,507,623 Deficit accumulated during the development stage (16,561 ) (16,561 ) Total shareholders equity 8,439 27,495,787 Total capitalization $ 218,439 $ 34,188,439 We will not acquire an operating business in the PRC if audited financial statements based on United States generally accepted accounting principles cannot be obtained for such target business. Additionally, our management will provide shareholders with audited financial statements, prepared in accordance with United States generally accepted accounting principles, of the prospective target business as part of the proxy solicitation materials sent to shareholders to assist them in assessing each specific target business or assets we seek to acquire. We cannot assure you that any particular target business identified by us as a potential business combination candidate will have financial statements prepared in accordance with United States generally accepted accounting principles or that the potential target business will be able to prepare its financial statements in accordance with United States generally accepted accounting principles. The financial statements of a potential target business will be required to be audited in accordance with United States generally accepted accounting standards. To the extent that this requirement cannot be met, we will not be able to effect a business combination with the proposed target business. Our management believes that although the requirement of having available financial information for the target business or assets may limit the pool of potential target businesses or assets available for acquisition, the narrowing of the pool is not expected to be material. We may be required to comply with the internal control requirements of the Sarbanes-Oxley Act for the fiscal year ending on or after July 15, 2007. A target business may not be in compliance with the provisions of the Sarbanes-Oxley Act regarding adequacy of their internal controls. The development of the internal controls of any such entity to achieve compliance with the Sarbanes-Oxley Act may increase the time and costs necessary to complete any such acquisition. Legal Proceedings There is no litigation currently pending or, to our knowledge, contemplated against us or any of our officers or directors in their capacity as such. Comparison to Offerings of Blank Check Companies The following table compares and contrasts the terms of our offering and the terms of an offering of blank check companies under Rule 419 promulgated by the SEC assuming that the gross proceeds, underwriting discounts and underwriting expenses for the Rule 419 offering are the same as this offering and that the underwriters will not exercise their over-allotment option. None of the terms of a Rule 419 offering will apply to this offering. Terms of Our Offering Terms Under a Rule 419 Offering Terms of Our Offering Terms Under a Rule 419 Offering Terms of Our Offering Terms Under a Rule 419 Offering Terms of Our Offering Terms Under a Rule 419 Offering MANAGEMENT Directors and Executive Officers Our current directors and executive officers are as follows: Name Age Position PRINCIPAL SHAREHOLDERS The following table sets forth information regarding the beneficial ownership of our ordinary shares as of the date of this prospectus, and as adjusted to reflect the sale of our ordinary shares included in the units offered by this prospectus (assuming none of the individuals listed purchase units in this offering) by: each person known by us to be the beneficial owner of more than 5% of our outstanding ordinary shares; each of our officers and directors; and all our officers and directors as a group. Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all ordinary shares beneficially owned by them. Amount and Nature of Beneficial Ownership Approximate Percentage of Outstanding Common Stock Name and Address of Beneficial Owner(1) Before the Offering After the Offering(2) Xuesong Song(3) 375,000 33.3 % 6.7 % Jin Shi(4) 187,500 16.7 % 3.3 % Michael W. Zhang(5) 187,500 16.7 % 3.3 % Teng Zhou(6) 150,000 13.3 % 2.7 % Xuechu He(7) 225,000 20.0 % 4.0 % All directors and executive officers as a group (five individuals) 1,125,000 100.0 % 20.0 % CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In May 2006, we issued 1,125,000 ordinary shares for the benefit of the individuals set forth below for an aggregate amount of $25,000 in cash, at an average purchase price of approximately $0.001 per share, as follows: Name Number of shares Relationship to Us Xuesong Song(1) 375,000 Chairman of the Board Jin Shi(2) 187,500 Chief Executive Officer and Director Michael W. Zhang(3) 187,500 Chief Financial Officer, Secretary and Director Teng Zhou(4) 150,000 EVP, Business Development and Director Xuechu He(5) 225,000 Director UNDERWRITING In accordance with the terms and conditions contained in the underwriting agreement, we have agreed to sell to each of the underwriters named below, and each of the underwriters, for which Morgan Joseph & Co. is acting as representative, have severally, and not jointly, agreed to purchase on a firm commitment basis the number of units offered in this offering set forth opposite their respective names below: Underwriters Number of Units Morgan Joseph & Co. Inc. GunnAllen Financial, Inc. Total 4,500,000 Commissions and Discounts The following table shows the public offering price, underwriting discount to be paid by us to the underwriters and the proceeds, before expenses, to us. This information assumes either no exercise or full exercise by the underwriters of their over-allotment option. Per unit Without option With option Public Offering Price $ 8.00 $ 36,000,000 $ 41,400,000 Discount(1) $ 0.40 $ 1,800,000 $ 2,070,000 Deferred underwriting discount(2) $ 0.16 $ 720,000 $ 828,000 Proceeds before expenses(3) $ 7.44 $ 33,480,000 $ 38,502,000 ChinaGrowth North Acquisition Corporation (a development stage company) Balance Sheet October 31, 2006 ASSETS Current assets: Cash $ 192,948 Deferred offering costs 197,620 Total assets $ 390,568 LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities: Accrued expenses $ 16,250 Accrued offering costs 155,879 Unsecured promissory notes 210,000 Total current liabilities 382,129 COMMITMENTS AND CONTINGENCY Shareholders equity: Preferred shares $.001 par value; 1,000,000 shares authorized; 0 issued and outstanding Ordinary shares $.001 par value, 20,000,000 shares authorized; 1,125,000 issued and outstanding 1,125 Additional paid-in capital 23,875 Deficit accumulated during the development stage (16,561 ) Total shareholders equity 8,439 Total liabilities and shareholders equity $ 390,568 ChinaGrowth North Acquisition Corporation (a development stage company) Statement of Operations For the period from May 3, 2006 (Date of Inception) through October 31, 2006 Revenue $ Organization costs 16,596 Net loss for the period $ (16,561 ) Net loss per share basic and diluted $ (0.01 ) Weighted average number of shares outstanding basic and diluted 1,125,000 ChinaGrowth North Acquisition Corporation (a development stage company) Statement of Shareholders Equity For the period from May 3, 2006 (Date of Inception) to October 31, 2006 Additional Paid-In Capital Deficit Accumulated During the Development Stage Ordinary Shares Shares Amount Total Contributions from founding shareholders 1,125,000 $ 1,125 $ 23,875 $ $ 25,000 Net loss (16,561 ) (16,561 ) Balance at October 31, 2006 1,125,000 $ 1,125 $ 23,875 $ (16,561 ) $ 8,439 ChinaGrowth North Acquisition Corporation (a development state company) Statement of Cash Flows For the period from May 3, 2006 (Date of Inception) through October 31, 2006 Cash flows from operating activities: Net loss $ (16,561 ) Adjustment to reconcile net loss to net cash used by operating activities: Changes in: Accrued expenses 16,250 Net cash used by operating activities (311 ) Cash flows from financing activities: Proceeds from sale of ordinary shares 25,000 Issuance of unsecured promissory notes 210,000 Payments of offering costs (41,741 ) Net cash provided by financing activities 193,259 Net increase in cash 192,948 Cash beginning of period Cash end of period $ 192,948 Supplemental disclosure of non-cash flow information: Accrual of deferred offering costs: $ 155,879 Until [ ], 2007, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. No dealer, salesperson or any other person is authorized to give any information or make any representations in connection with this offering other than those contained in this prospectus and, if given or made, the information or representations must not be relied upon as having been authorized by us. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the securities offered by this prospectus, or an offer to sell or a solicitation of an offer to buy any securities by anyone in any jurisdiction in which the offer or solicitation is not authorized or is unlawful. Table Of Contents Page PROSPECTUS MORGAN JOSEPH GUNNALLEN FINANCIAL __________ __, 2007 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 6. Indemnification of Directors and Officers. Cayman Islands law does not limit the extent to which a company s amended and restated memorandum and articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our amended and restated memorandum and articles of association will provide for indemnification of our officers and directors for any liability incurred in their capacities as such, except through their own fraud or willful default. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is theretofore unenforceable. Item 7. Recent Sales of Unregistered Securities. (a) Since our incorporation, we sold the following ordinary shares without registration under the Securities Act: Beneficial Shareholders Number of Shares Xuechu He 225,000 Jin Shi 187,500 Xuesong Song 375,000 Michael W. Zhang 187,500 Teng Zhou 150,000 Total 1,125,000 Such shares were issued on May 18, 2006 in connection with our organization pursuant to the exemption from registration contained in Section 4(2) of the Securities Act as they were sold to accredited investors as defined in Rule 501(a) of the Securities Act. The shares issued to the individuals above were sold for an aggregate offering price of $25,000 at a purchase price of approximately $0.02 per share. No underwriting discounts or commissions were paid with respect to such sales. Prior to the closing of our initial public offering certain of our officers and directors will purchase 900,000 founding director warrants from us for gross proceeds of $1,080,000. The founding director warrants will be issued pursuant to the exemption from registration contained in Regulation S of the Securities Act as they were sold to accredited investors as defined in Rule 501(a) of the Securities Act. No underwriting discounts or commissions were paid with respect to such sales. In addition, if we increase the size of the offering pursuant to Rule 462(b) under the Securities Act, we may effect a share dividend in such amount to maintain the existing shareholders collective ownership at 20% of our issued and outstanding ordinary shares upon consummation of the offering If we decrease the size of the offering we will effect a reverse split of our ordinary shares to maintain the existing shareholders collective ownership at 20% of our issued and outstanding ordinary shares upon consummation of this offering. Item 8. Exhibits and Financial Statement Schedules. See the Exhibit Index, which follows the signature page which is incorporated by reference. II-1 Item 9. Undertakings. (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: i To include any prospectus required by Section 10(a)(3) of the Securities Act; ii To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the Calculation of Registration Fee table in the effective registration statement. iii To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that A. Paragraphs (a)(1)(i) and (a)(1)(ii) of this section do not apply if the registration statement is on Form S-8, and the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement; and B. Paragraphs (a)(1)(i), (a)(1)(ii) and (a)(1)(iii) of this section do not apply if the registration statement is on Form S-3 or Form F-3 and the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement, or is contained in a form of prospectus filed pursuant to Rule 424(b) that is part of the registration statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser: i. If the registrant is relying on Rule 430B: A. Each prospectus filed by the registrant pursuant to Rule 424(b)(3)shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and B. Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information II-2 required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date; or ii. If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. (5) If the registrant is a foreign private issuer, to file a post-effective amendment to the registration statement to include any financial statements required by Item 8.A. of Form 20-F at the start of any delayed offering or throughout a continuous offering. Financial statements and information otherwise required by Section 10(a)(3) of the Act need not be furnished, provided that the registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (a)(4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements. Notwithstanding the foregoing, with respect to registration statements on Form F-3, a post-effective amendment need not be filed to include financial statements and information required by Section 10(a)(3) of the Act or Rule 3-19 of this chapter if such financial statements and information are contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Form F-3. (6) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: i. Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; II-3 ii. Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; iii. The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and iv. Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. (b) The undersigned hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (c) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (d) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURE Pursuant to the requirements of the Securities Act, the registrant has duly caused this Registration Statement on Form F-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Hackensack, State of New Jersey, on the 18th day of January, 2007. CHINAGROWTH NORTH ACQUISITION CORPORATION By: /s/ Jin Shi Name: Jin Shi Title: Chief Executive Officer and Director Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Name Position Date * Chairman of the Board January 18, 2007 /s/ Jin Shi Chief Executive Officer and Director January 18, 2007 (Principal Executive Officer) * Chief Financial Officer, Secretary and Director (Principal Financial and Accounting Officer) January 18, 2007 * Executive Vice President, January 18, 2007 Business Development and Director * Director January 18, 2007 *By: /s/ Jin Shi January 18, 2007 Jin Shi, Attorney-in-fact II-5 Exhibit No. Description * To be filed by amendment. ** Previously filed. II-6 ChinaGrowth North Acquisition Corporation (a development stage company) INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm F-2 Financial Statements Balance Sheet as of October 31, 2006 F-3 Statement of Operations for the period from May 3, 2006 (date of inception) through October 31, 2006 F-4 Statement of Shareholders Equity for the period from May 3, 2006 (date of inception) through October 31, 2006 F-5 Statement of Cash Flows for the period from May 3, 2006 (date of inception) through October 31, 2006 F-6 Notes to Financial Statements F-7 Prospectus Summary 1
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+PROSPECTUS SUMMARY The following summary highlights selected information contained elsewhere in this prospectus. It does not contain all the information that may be important to you in making an investment decision and should be read together with the more detailed information contained elsewhere in this prospectus. You should read this entire prospectus carefully, including the sections entitled Risk Factors and Management s Discussion and Analysis of Financial Condition and Results of Operations, and our financial statements and related notes included elsewhere in this prospectus. In this prospectus, unless the context requires otherwise, references to Innophos, the Company, the Issuer, we, our, or us refer to Innophos Holdings, Inc., the issuer of the common stock offered hereby and its consolidated subsidiaries. Holdings refers to Innophos Holdings, Inc. alone, and Innophos Investments refers to Innophos Investments Holdings, Inc. Our Company We are the largest North American (United States, Canada and Mexico) producer of specialty phosphates, based on 2006 net sales. Most specialty phosphates are highly customized, application-specific compounds that are engineered to meet customer performance requirements. Specialty phosphates often provide critical functionality related to the taste, texture and performance of foods, beverages, pharmaceuticals, oral care products and other applications. For example, specialty phosphates act as flavor enhancers in beverages, electrolytes in sports drinks, texture additives in cheeses, leavening agents in baked goods, calcium and phosphorus sources for nutritional supplements, pharmaceutical excipients and cleaning agents in toothpaste. Our products are often essential to the performance of our customers end products and require significant development, engineering and testing. In the case of food, beverage and pharmaceutical products, our production facilities must comply with the stringent standards of the U.S. Food and Drug Administration, or FDA, or the U.S. Department of Agriculture, or USDA. We maintain long-standing relationships, most spanning decades, with blue-chip customers such as Kraft Foods, Inc., Ecolab Inc. and Albemarle Corporation, and chemical distributors such as Univar USA, Inc., Univar Canada, Ltd. and Brenntag North America, Inc. We work closely with many of our customers to design customized products that meet application-specific performance and quality requirements. We hold the number one or number two market position in each of our principal product lines; each respective market has seen consolidation to two key suppliers over the past decade. This consolidation, combined with the elimination of uneconomic capacity has led to improved effective industry utilization rates and fundamentals in the North American specialty phosphates market. We believe that we are the overall lowest-cost producer of specialty phosphate salts and specialty acids in North America as a result of our large scale and proprietary manufacturing technology. For the year ended December 31, 2006, we generated net sales, operating income and EBITDA of $541.8 million, $30.9 million, and $77.8 million, respectively. Included in the operating income and EBITDA results for the year ended December 31, 2006 were $17.6 million of unusual expenses. Our Product Lines We have three principal product lines: (1) Specialty Salts and Specialty Acids, (2) Purified Phosphoric Acid, and (3) Technical Sodium Tripolyphosphates, or STPP, and Other Products. Our products serve diverse end-use markets exhibiting stable demand growth. These markets are also characterized by a high degree of customer loyalty due to the technical complexity of our customized formulations as well as the significant production disruption and costs certain of our customers would experience if they were to switch to another supplier. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents MARKET AND INDUSTRY DATA Some of the market and industry data contained in this prospectus are based on independent industry publications or other publicly available information, while other information is based on internal studies. The information in this prospectus pertaining to market sizes, including product market sizes, has been provided by British Sulphur Consultants. Some of this information is not publicly available and was obtained by us from British Sulphur Consultants in return for a fee. Table of Contents The following table identifies the principal applications of our product lines: Principal Product Lines and Applications Specialty Salts and Specialty Acids Purified Phosphoric Acid STPP & Other Products % of 2006 Net Sales 51% 24% 25% Principal Applications Bakery, dairy, meat and seafood products Pharmaceutical excipients and nutritional supplements Oral care products Water treatment and metal finishing Specialty fertilizers Asphalt modification Petrochemical catalysis Semiconductor chip manufacturing Beverage flavor enhancer Water treatment Metal treatment Auto-dishwashing Home laundry detergents Industrial and institutional cleaners Fertilizers As noted above our principal products are used as critical and value-enhancing ingredients in a variety of end-markets which exhibit stable demand growth. Unlike agricultural phosphates, which are commodity chemicals used primarily as fertilizers and livestock feed supplements, specialty phosphates are application-specific and act as critical ingredients in a variety of end-uses. Our end-markets, which include food, beverages, cleaners, pharmaceutical, nutritional supplements and water treatment, are traditionally recession-resistant and have exhibited stable demand growth throughout economic cycles. Our Industry According to estimates by British Sulphur Consultants, the North American specialty phosphates market generated approximately $1.4 billion in total sales in 2005 (the latest year for which data is available). This specialty niche historically represents approximately 15% of the overall phosphate market volume, the rest of which is composed of more commodity-like items such as fertilizers. Highly engineered Specialty Salts and Specialty Acids represented approximately $700 million, or 49%, of the total North American specialty phosphates market, Purified Phosphoric Acid represented approximately $400 million, or 28%, and STPP represented approximately $340 million, or 23%. Overall, specialty phosphate demand has grown approximately 2% per annum over the prior five years, on a volume basis. Over the past decade, fundamentals in the North American specialty phosphates market have improved. The marketplace for each of our product lines has seen consolidation to two key suppliers, while uneconomic capacity has been eliminated during this period. Most recently, Astaris (currently affiliated with ICL) closed three manufacturing plants that produced purified phosphoric acid, specialty salts and STPP. This and previous capacity rationalizations have improved effective industry utilization rates from below 75% in 2001 to as high as an estimated 90% in 2006 prior to the startup of the Potash Corporation of Saskatchewan s, or PCS, new purified wet acid, or PWA, line in June. Further, imports have historically represented only a small portion of the North American specialty phosphates market, given high freight and logistical costs. Recently, import producers have been further disadvantaged by increasing costs of transportation and logistics and the depreciation of the U.S. dollar relative to other currencies. New suppliers to the North American Specialty Phosphate marketplace face significant barriers to entry related to capital cost, logistical costs, regulatory and customer approval processes, and customer support FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (1) Source: British Sulphur Consultants and management estimates, based on sales. (2) Source: British Sulphur Consultants and management estimates, based on production volume. High Customer Switching Costs. Our specialty phosphates are characterized by significant costs for our customers to switch to new suppliers. Our products are essential to the taste, feel and performance of our customers end-products but our specialty phosphates generally represent only a small portion of a customer s total product costs. Furthermore, we work closely with our customers to design custom-engineered chemicals that meet application-specific performance and quality requirements. In order to change its process or switch specialty phosphate suppliers, a customer often must conduct trials to validate the change or new material under stringent quality assurance processes which often include compliance with regulatory requirements, such as those of the FDA or USDA, industry standards and internal protocols. In some instances, we estimate that it can take up to 18 months to complete a single customer approval process or for a customer to qualify a new specialty phosphate supplier. Customers are therefore often reluctant to switch suppliers given this critical functionality and application-specific design. Significant Barriers to Entry. The specialty phosphates market benefits from certain financial, logistical, technological and service oriented characteristics that create meaningful barriers to entry: Technical complexity the technological aspects involved in developing and producing highly specialized phosphate products demand reliance on a complex and highly sophisticated technology INNOPHOS HOLDINGS, INC. (Exact name of registrant as specified in its charter) Delaware 5169 20-1380758 (State or Other Jurisdiction of Incorporation or Organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification No.) 259 Prospect Plains Road Cranbury, New Jersey 08512 (609) 495-2495 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Table of Contents foundation, including process expertise, application know-how, field technical services, and research and development capability. High capital costs specialty phosphate capacity is difficult to add and requires large capital investments. We estimate that building world-scale specialty phosphate capacity similar to our Coatzacoalcos, Mexico facility requires capital investment greater than $300 million and three-to-four year lead times. Infrastructure barriers customers typically require suppliers to provide significant sales and support infrastructure including technical services and just-in-time delivery capabilities. In addition, logistical challenges, high freight costs and currency risks impose significant barriers to producers outside of North America. Low-Cost Structure. Management believes that we are the overall lowest-cost producer of specialty salts and specialty acids in North America as result of our large scale and proprietary manufacturing technology. In addition, we benefit from an efficient manufacturing footprint. Our manufacturing and distribution facilities are strategically located close to our customers to minimize transportation costs and our largest manufacturing facility is located in Mexico, a low-cost region within North America. The combination of our leading market positions, high customer switching costs, significant barriers to entry and our low-cost position provides us with a strong and sustainable competitive advantage. Business Strategy Our strategic objective is to build on our strengths to selectively expand our market leadership, maintain our low-cost position and generate significant cash flow. Grow Our Market Share. We plan to grow our market share through a focus on higher growth specialty products, innovative new product applications and penetration into new geographic markets. Target high growth niches a number of segments we participate in are expected to grow faster than the overall market. For example, Specialty Salts and Specialty Acids have a range of food, beverage, consumer and pharmaceutical excipient applications that are experiencing such growth. We are targeting these niches through superior product innovation and continued collaboration with key customers. Develop new innovative products for unmet customer needs we plan to leverage our extensive experience in Specialty Salts and Specialty Acids engineering and customization to provide our customers with new value-creating products for their applications. Our research scientists and product engineers are continually working with end-customers to both improve existing products and to develop state of the art applications for new products. We have several recent product introductions. For example, Innophos used its recently developed proprietary technology to create and launch a new calcium phosphate nutritional supplement, VersaCAL Clear . VersaCAL Clear provides our customers the ability to add calcium and phosphorus supplementation to clear juices, soft drinks and colas, and sports drinks without affecting the clarity of the beverage, or more critically, the taste of the beverage. Further penetrate faster-growing geographic markets we believe our existing portfolio of proprietary products will support further penetration into faster-growing export markets such as China and South America. We have recently added distribution support staff in these markets to support this expansion and anticipate adding application development support labs in the future. Two recently introduced proprietary products into China have had demand that has exceeded our expectations. Randolph Gress Chief Executive Officer Innophos Holdings, Inc. 259 Prospect Plains Road Cranbury, New Jersey 08512 (609) 495-2495 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents Strengthen Our Low-Cost Position. We have a solid historical track record of improving our cost structure and expect to continue executing cost structure improvements. Ongoing cost saving initiatives include pursuing operational efficiencies, optimizing existing technologies and networks, maintaining a lean organizational structure and continuously managing fixed costs. As part of this ongoing process, we are currently constructing a cogeneration project at our Coatzacoalcos plant at a cost of approximately $16.0 million. This project, when completed, is expected to reduce our energy costs by approximately $6.0 million per year. In addition to the cogeneration project, we have identified numerous other optimization opportunities such as improving the integration of our Mexican and U.S. manufacturing network and reducing specific fixed cost elements. We believe that our cost structure improvement efforts initiated in 2007 and to be initiated in 2008 and 2009 will result in approximately $12.0 million to $15.0 million of annual cost savings by 2009. We are focused on realizing these savings and to continue finding future opportunities for profit improvement. We expect capital and other expenditures, including those for the cogeneration project, of approximately $21.0 million to $25.0 million will be required to realize these cost savings. Reduce Financial Leverage and Interest Expense. We significantly reduced our financial leverage with a portion of the net proceeds from the initial public offering of our common stock, or IPO, and we are focused on using a significant portion of our future net operating cash flows to further repay indebtedness. Since our IPO in November, 2006 we have reduced our annual interest expense by approximately $3.2 million by paying down debt and refinancing some of our higher cost debt. Initial Public Offering On November 7, 2006, we successfully completed our IPO, in which we sold 8.0 million shares of our common stock, and certain selling stockholders sold 695,652 shares of our common stock. Net proceeds plus cash on hand were used for the following: 1. $83.3 million principal amount of the Floating Rate Senior Notes due 2015 of Innophos Investments, or the Floating Rate Senior Notes, were called on December 11, 2006 and related premiums of $3.6 million and interest of $0.8 million were paid; 2. $38.9 million of voluntary repayments were made on the term loan portion of our senior credit facility in October and November of 2006; 3. Bain Capital was paid $13.2 million upon the consummation of the IPO to terminate our advisory agreement; and 4. IPO-related expenses were paid, including management retention bonuses of $2.5 million. Recent Events Senior Unsecured Notes. On April 16, 2007 Holdings issued $66.0 million of 9.5% Senior Unsecured notes due 2012, or the Senior Unsecured Notes, and used the net proceeds plus approximately $0.5 million of cash on hand for the full redemption of the $60.8 million Floating Rate Senior Notes that remained outstanding, and to pay related expenses. Ratings Upgrade. Moody s upgraded our debt ratings, including corporate credit rating to B1 from B2 and changed its outlook to stable and assigned a B3 rating to the new HoldCo notes. S&P has also revised its outlook from stable to positive and raised bank loan rating to B from B. Rhodia Litigation. In connection with pending litigation between our Mexican subsidiary, Innophos Fosfatados and the Tax Audit and Assessment Unit of the National Waters Commission, or CNA, more fully discussed below, we were informed that on March 22, 2007, the New York State Supreme Court Appellate Division, First Department, issued a favorable ruling affirming the partial grant of summary judgment in Copies of all communications, including communications sent to agent for service, should be sent to: Joshua N. Korff Kirkland & Ellis LLP Citigroup Center 153 East 53rd Street New York, NY 10023 Tel. (212) 446-4800 Fax (212) 446-4900 Peter M. Labonski Latham & Watkins LLP 885 Third Avenue, Suite 1000 New York, NY 10022-4802 Tel.: (212) 906-1200 Fax: (212) 751-4864 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: If this Form is filed to registered additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. CALCULATION OF REGISTRATION FEE Table of Contents February 2005 to us against Rhodia, S.A. and affiliates, or Rhodia, regarding our assertion that we are entitled to be fully indemnified for claims asserted by the CNA. The court affirmed that those claims are Taxes, as that term was used by the parties in their 2004 purchase agreement by which we acquired substantially all of the operating assets of Innophos Fosfatados from Rhodia. The appellate court also affirmed the trial court s decision that Rhodia will be obligated to provide the collateral or other forms of security required in contesting the CNA claims, which themselves are the subject of separate ongoing proceedings in Mexico. See Risk Factors, Management s Discussion and Analysis of Financial Condition and Results of Operations Claims and Legal Proceedings and Business Claims and Legal Proceedings for further information. Dismissal of CNA Salt Water Claims. On November 1, 2004, Innophos Fosfatados received notice of claims from the CNA, demanding payment of governmental duties, taxes and other charges for failure to have certain permits allowing extraction of salt water for processing in 1998 and 1999, which we refer to as the Salt Water Claims, and for the underpayment of governmental duties, taxes and other charges for the extraction and use of fresh water from national waterways from 1998 through 2002 at our Coatzacoalcos manufacturing plant, which we refer to as the Fresh Water Claims. Following proceedings before the agency, on November 3, 2005, Innophos Fosfatados filed appeals with the Mexican Federal Court of Fiscal and Administrative Justice challenging all CNA s claims and some CNA rulings, including a discretionary appeal seeking a court ruling on our substantive challenges to the Salt Water Claims that were not addressed by CNA. On May 11, 2007, a five judge panel of the court issued its decision unanimously overturning the Salt Water Claims. See Risk Factors, Management s Discussion and Analysis of Financial Condition and Results of Operations Claims and Legal Proceedings and Business Claims and Legal Proceedings for further information.
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+S-1/A 1 h48456a5sv1za.htm AMENDMENT NO. 5 TO FORM S-1 - REGISTRATION NO. 333-144938 sv1za Table of Contents As filed with the Securities and Exchange Commission on December 10, 2007 Registration No. 333-144938 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amendment No. 5 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 EAGLE ROCK ENERGY PARTNERS, L.P. (Exact name of registrant as specified in its charter) Delaware 1311 69-0629883 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 16701 Greenspoint Park Drive, Suite 200 Houston, TX 77060 (281) 408-1200 (Address, including zip code, and telephone number, including area code, of Registrant s principal executive offices) Richard W. FitzGerald 16701 Greenspoint Park Drive, Suite 200 Houston, Texas 77060 (281) 408-1200 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Barry Davis Thomas R. Lamme Thompson Knight LLP 333 Clay Street, Suite 3300 Houston, TX 77002 (713) 654-8111 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective. If any securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the Securities Act ), check the following box. If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Proposed Proposed Maximum Amount of Title of Class of Amount Maximum Price Aggregate Offering Registration Securities to be Registered to be Registered Per Unit Price Fee Common units representing limited partner interests 18,574,496 (1) (1) (1) (1) (1) The aggregate number of common units representing limited partner interests being registered in this offering includes 3,770,706 common units registered previously, in accordance with Rule 429, on Form S-1 (File No. 333-140370) for which securities remain unsold and for which the fee was paid previously on that registration statement. With respect to the remaining common units representing limited partner interests being registered in this offering, all fees were paid previously. Pursuant to Rule 429(a) under the Securities Act of 1933, the prospectus included in this Registration Statement is a combined prospectus and also relates to 3,770,706 common units in aggregate amount registered and remaining unsold under Registrant s Registration Statement on Form S-1 (No. 333-140370). Pursuant to Rule 429(b), this Registration Statement also constitutes a Post-Effective Amendment to Registration Statement No. 333-140370, which post-effective amendment shall hereafter become effective concurrently with the effectiveness of this Registration Statement and in accordance with Section 8(c) of the Securities Act of 1933. If securities previously registered under that Registration Statement are offered and sold before the effective date of this Registration Statement, the amount of previously registered securities so sold will not be included in the prospectus hereunder. TABLE OF CONTENTS SUMMARY 1
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in the ADSs discussed under Risk Factors, before deciding whether to buy our ADSs. Overview We are a leading integrated multi-platform marketing company in China with a proven track record of developing, promoting and selling consumer products and services. Our two primary sales platforms are our TV direct sales platform and nationwide distribution network. We operate the largest TV direct sales business in China in terms of revenues and TV air time purchased according to Euromonitor International (Asia) Pte Ltd., or Euromonitor. We believe we were one of the first companies in China to use TV direct sales programs, often referred to as TV infomercials, in combination with a nationwide distribution network to market and sell products and services to consumers. Our significant TV air time presence allows us to test-market, promote and sell products and services in China s geographically dispersed and fragmented consumer market. We seek to maximize sales penetration of our products and services that have strong sales and brand development potential by distributing them through our nationwide distribution network. In 2006, we also began using our TV direct sales platform to promote and sell third-party branded products and services pursuant to joint sales arrangements and marketing services arrangements. Using these integrated TV direct sales and nationwide distribution network platforms, we have developed several leading proprietary brands. In addition, we have expanded into other forms of direct selling, such as catalogs and outbound calls, to further strengthen our promotional efforts and generate additional revenue opportunities from our existing customer base. We believe our vertically integrated direct sales operations, which include product development, TV and other direct sales and marketing, call center operations, and order fulfillment and delivery, combined with our nationwide distribution network, allow us to effectively reach consumers and maximize sales throughout China. A key contributing factor to the success of our TV direct sales platform is our significant TV air time presence. Since 2003, we have been the largest TV direct sales operator in China in terms of revenue according to Euromonitor. Our TV direct sales programs, which are typically five to ten minutes in length, are currently aired on four nationwide China Central Television, or CCTV, channels, 28 national satellite TV channels, four international satellite channels operating in China and eight local channels. Sales generated through our TV direct sales platform accounted for substantially all of our direct sales net revenues, which in turn comprised 45.1% and 54.7% of our net revenues in 2005 and 2006, respectively. We also purchase TV advertising time for brand promotion advertising to enhance brand awareness of our proprietary products and services. Our brand promotion advertising in connection with our electronic learning devices was recognized in 2005 when we won the EFFIE gold award issued by the China Marketing Association chartered by New York American Marketing Association. We have three call centers in Shanghai, Beijing and Shenzhen, two of which operate 24 hours per day. Our call centers process telephone orders generated by our direct sales programs and gather real-time data to help analyze the effectiveness of our advertising spending and adjust our offerings. Each of our call centers also places outbound calls to selected customers to market our products and services. In addition, our call center sales representatives are trained to identify and act upon cross-selling opportunities while processing customer orders. As of December 31, 2006, we had 649 sales representatives and 113 customer service representatives. Our sales representatives collectively processed an average of approximately 11,800 and 12,400 incoming calls per day (in thousands, except percentages and ranks) Direct Sales: Consumer electronics(1) Soloky & Aptek Net E-cam $ 15,535 29.8 % 1 $ 32,284 41.9 % 1 $ 11,959 11.1 % 3 Neck massager/sleeping aid(2) Zehom 11,587 22.2 % 2 13,579 12.6 % 2 Electronic learning device Ozing 10,475 20.1 % 3 11,061 14.4 % 2 Posture correction product Babaka 10,139 13.2 % 3 PDA cell phones HTW 26,050 24.1 % SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents generated from our TV and other direct sales platforms in 2005 and 2006, respectively. Products sold through our TV direct sales and other direct sales platforms are delivered to our customers primarily by national express mail and local delivery companies. Our nationwide distribution network extends across all provinces and allows us to reach over 20,000 retail outlets covering nearly all of the cities and counties in China. We typically grant our distributors the exclusive right to distribute selected products and services in their respective territories. We closely work with and support our distributors to expand their retail outlet reach, extend our product and service lifecycles and maximize our sales by promotion of our brands through our TV direct sales platform, advertising in local print media and other joint promotional efforts. Sales generated through our nationwide distribution network accounted for 54.9% and 45.3% of our net revenues in 2005 and 2006, respectively. In selecting new products and services, we seek to identify offerings in underserved market segments with potential national appeal for which we believe our sales platforms and marketing and branding expertise can create value. We identify new products and services to be offered via our multiple sales platforms through a standardized selection process and typically source them from small and medium-sized suppliers and manufacturers in China. In 2006, we also began to identify products and services from more established third-party companies that we believe we can successfully market through our TV direct sales platform. Our TV direct sales programs allow us to promote specific products and services by highlighting their unique value to consumers as well as creating brand awareness. Our current featured offerings include electronic learning devices, consumer electronics products, cell phones and health and wellness products. We typically focus on marketing and sales of a limited number of featured product lines and services at any given time. In addition, we offer over 100 products via our catalogs. Our net revenues have increased each year since we commenced our operations in 1998. Our net revenues increased by 79.3% from $95.0 million in 2004 to $170.3 million in 2005, and grew an additional 15.4% to $196.5 million in 2006. Our income from operations grew by 13.0% from $17.7 million in 2004 to $20.0 million in 2005. However, in 2006 our income from operations decreased by 92.0% to $1.6 million, primarily as a result of recent PRC regulatory changes that prohibit TV direct sales programs of our branded neck massager product and our slimming product, negative media coverage (some of which we believe contained false or misleading information) of our electronic learning devices, an increase in the stock-based compensation incurred that year, deferred revenue generated in connection with our stock-tracking software and expensing of offering costs. Industry Background The consumer market in China is large and one of the fastest growing in the world. Driving this growth are China s economic expansion and a growing consumer base with increasing amounts of disposable income. According to Euromonitor, China s annual retail sales for consumer products have grown between 2003 and 2005 at a compound annual growth rate, or CAGR, of approximately 10.9%. However, China s gross domestic product, or GDP, per capita is still low compared to that of developed countries. We believe the traditional retail market, with its significant structural deficiencies, presents substantial market opportunities for companies, such as ours, that have direct sales platforms, nationwide distribution capabilities and access to a diverse product portfolio. According to historical and projected data from Euromonitor, the TV direct sales industry in China has experienced significant growth in recent years, growing from $550 million in 2003 to $890 million in 2005, representing a CAGR of 27.2%, and it is projected to grow further to $1.4 billion in 2007 according to Euromonitor, representing a CAGR of 26.3% over this five-year period. Minority interest (1,588 ) (4.3 ) (169 ) (0.5 ) (1 ) (in thousands, except percentages and ranks) Electronic learning device Ozing $ 24,758 26.0 % 1 $ 73,028 42.8 % 1 $ 62,464 31.7 % 1 Electronic wrinkle remover SCO 19,551 20.5 % 2 Consumer electronics(1) Soloky, Net E-cam & Aptek Net E-cam 17,903 18.8 % 3 35,453 20.8 % 2 13,642 6.9 % 5 Sleeping aid/neck massager(2) Zehom 17,319 18.2 % 4 9,688 5.7 % 5 24,354 12.3 % 3 Oxygen generating device Youngleda 7,346 7.7 % 5 Posture correction product Babaka 24,622 14.4 % 3 15,723 8.0 % 4 Exercise machine LTT 10,244 6.0 % 4 PDA Cell Phones HTW 26,050 13.2 % AMENDMENT NO. 5 TO FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents Our Strengths, Strategies and Challenges We believe our competitive strengths consist of our: integrated multiple sales platforms; leading market position; effective management of our significant TV media presence; proven product development and promotional capabilities; customer service expertise; and experienced and cohesive management team. Notwithstanding our competitive strengths, we expect to face certain risks and uncertainties, including: our ability to identify, develop and introduce new products and services; our dependence on a small number of featured product lines for a substantial majority of our sales; our access to TV media time and ability to maintain profitability relative to TV media expenses; our ability to respond to competitive market conditions; the effect of negative publicity on the sale of our products and services; our ability to develop our product and service brands and to successfully sell products and services through our nationwide distribution network; and uncertainties with respect to the PRC legal and regulatory environments. Our goal is to be the leading integrated cross-media marketer of consumer products and services in China. We intend to achieve our goal by implementing the following strategies: strengthen and diversify our multiple sales platforms; selectively expand existing and new product and service offerings; enhance media planning effectiveness; expand and consolidate our nationwide distribution network; and strengthen our product and service brands. Our Corporate Structure We commenced operations in 1998 through Beijing Acorn Trade Co., Ltd., or Beijing Acorn. In 2000, two other operating companies, Shanghai Acorn Network Co., Ltd., or Shanghai Acorn, and Shanghai Acorn Trade and Development Co., Ltd., or Shanghai Trade, were established and commenced business operations. (in thousands, except percentages and ranks) Electronic learning device Ozing $ 24,758 26.0 % 1 $ 73,028 42.8 % 1 $62,464 31.7 % 1 Electronic wrinkle remover SCO 19,551 20.5 % 2 Consumer electronics Soloky, Aptek Net E-cam & Net E-cam 17,903 18.8 % 3 35,453 20.8 % 2 Posture correction product Babaka 24,622 14.4 % 3 PDA cell phones HTW 26,050 13.2 % 2 Neck massager Zehom 24,354 12.3 % Distribution Sales: Electronic learning device Ozing $ 14,283 33.1 % 1 $ 61,967 66.2 % 1 $ 53,541 60.0 % 1 Electronic wrinkle remover SCO 10,709 24.8 % 2 Oxygen generating device Youngleda 6,280 14.6 % 3 5,683 6.1 % 3 Posture correction product Babaka 14,483 15.4 % 2 11,768 13.2 % 2 Neck massager/sleeping aid(2) Zehom 10,775 12.1 % Acorn International, Inc. (Exact name of Registrant as specified in its charter) Not Applicable (Translation of Registrant s name into English) Cayman Islands 5900 Not Applicable (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 12F, Xinyin Building, 888 Yishan Road Shanghai 200233 People s Republic of China (8621) 5151-8888 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Table of Contents Prior to January 1, 2005, our business was operated through Beijing Acorn, Shanghai Acorn and Shanghai Trade, including their subsidiaries. These three operating companies were under common management, operated on an integrated basis and were beneficially owned by the same shareholders and, with a limited exception, in the same shareholding percentages. To enable us to raise equity capital from investors outside of China, we established a holding company structure by incorporating China DRTV, Inc., or China DRTV, in the British Virgin Islands on March 4, 2004. In 2004, China DRTV formed four PRC subsidiaries and two consolidated PRC affiliated entities. Through a restructuring, we implemented an offshore holding company structure to comply with PRC laws imposing restrictions on foreign ownership in direct sales, wholesale distribution and advertising businesses. As part of the restructuring, each of the combined entities, including their subsidiaries, transferred to China DRTV s newly created subsidiaries and consolidated affiliated entities substantially all their assets and liabilities (with limited exceptions). Commencing on January 1, 2005, our business was conducted through China DRTV and its subsidiaries and three affiliated entities. Our three affiliated entities, Shanghai Acorn Network Technology Development Co., Ltd., or Shanghai Network, Shanghai Acorn Advertising Broadcasting Co., Ltd., or Shanghai Advertising, and Beijing Acorn, are currently owned by two PRC citizens, Don Dongjie Yang, our president and one of our directors, and David Chenghong He, one of our executive officers. We have entered into contractual arrangements with these three affiliated entities pursuant to which our wholly owned subsidiary, Acorn Information Technology (Shanghai) Co., Ltd., or Acorn Information, provides technical support and operation and management services to these three affiliated entities. In addition, we have entered into agreements with these three affiliated entities and their shareholders, Don Dongjie Yang and David Chenghong He, providing us with the ability to effectively control each of these affiliated entities. Accordingly, we have consolidated the historical financial results of these three affiliated entities into our financial statements as variable interest entities pursuant to US GAAP. See Our Corporate Structure. In anticipation of our initial public offering, we incorporated Acorn International, Inc., or Acorn International, in the Cayman Islands on December 20, 2005 as our listing vehicle. Acorn International became our ultimate holding company when it issued shares to the existing shareholders of China DRTV on March 31, 2006 in exchange for all of the shares that these shareholders held in China DRTV. CT Corporation System 111 Eighth Avenue New York, New York 10011 (212) 894-8940 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents The following diagram illustrates our current corporate structure and the place of formation and affiliation of each of our subsidiaries and the three affiliated entities as of the date of this prospectus(1): Copies to: Kurt J. Berney O Melveny & Myers LLP 37th & 38th Floors Plaza 66, 1266 Nanjing Road West Shanghai, 200040 People s Republic of China (8621) 2307-7007 Howard Zhang O Melveny & Myers LLP Suite 3120, China World Tower I 1 Jian Guo Men Wai Avenue Beijing, 100004 People s Republic of China (8610) 6505-2612 Alan D. Seem Shearman & Sterling LLP 12th Floor, East Tower, Twin Towers B-12 Jianguomenwai Dajie Beijing, 100022 People s Republic of China (8610) 5922-8000 (1) For risks related to our current corporate structure, see Risk Factors Risks Related to the Regulation of Our Business. (2) For a description of the agreements that provide us with effective control over Shanghai Acorn Network Technology Development Co., Ltd., Beijing Acorn Trade Co., Ltd. and Shanghai Acorn Advertising Broadcasting Co., Ltd., including equity pledge agreements, irrevocable powers of attorney, a loan agreement, operation and management agreements and exclusive purchase agreements, see Our Corporate Structure Contractual Arrangements with the Consolidated Affiliated Entities and their Shareholders. (3) The economic benefits of Shanghai Acorn Network Technology Development Co., Ltd., Beijing Acorn Trade Co., Ltd. and Shanghai Acorn Advertising Broadcasting Co., Ltd. accrue to Acorn Information Technology (Shanghai) Co., Ltd. pursuant to certain technical service agreements. See Our Corporate Structure Contractual Arrangements with the Consolidated Affiliated Entities and their Shareholders. Corporate Information Our principal executive offices are located at 12F, Xinyin Building, 888 Yishan Road, Shanghai 200233, the People s Republic of China. Our telephone number at this address is (8621) 5151-8888 and our fax number is (8621) 6432-0096. Our website is www.chinadrtv.com. The information contained on our website is not part of this prospectus. Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011. Conventions That Apply to This Prospectus Unless we indicate otherwise, references in this prospectus to: ADSs are to our American depositary shares, each of which represents three ordinary shares; ADRs are to American depositary receipts, which, if issued, evidence our ADSs; $, US$ and U.S. dollars are to the legal currency of the United States; China and the PRC are to the People s Republic of China, excluding, for the purposes of this prospectus only, Taiwan and the special administrative regions of Hong Kong and Macau; ordinary shares are to our ordinary shares, par value $0.01 per share; RMB and Renminbi are to the legal currency of China; and we, us, our company and our refer to Acorn International, Inc., its predecessor entities and its subsidiaries. Unless specifically indicated otherwise or unless the context otherwise requires, all references to our ordinary shares have been adjusted to give effect to the automatic conversion of all outstanding Series A convertible redeemable preferred shares and Series A-1 convertible redeemable preferred shares to ordinary shares upon the closing of this offering. Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. CALCULATION OF REGISTRATION FEE Table of Contents This prospectus contains translations of Renminbi amounts into U.S. dollars at specified rates. Unless otherwise noted, all translations from Renminbi to U.S. dollars were made at the noon buying rate in The City of New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York, or the noon buying rate, as of December 29, 2006, which was RMB7.8041 to $1.00. We make no representation that the Renminbi amounts referred to in this prospectus could have been or could be converted into U.S. dollars at any particular rate or at all. See Risk Factors Risks Relating to China Because our net revenues are generated in Renminbi and our results are reported in U.S. dollars, devaluation of the Renminbi could negatively impact our results of operations. On April 16, 2007, the noon buying rate was RMB7.7283 to $1.00. Recent Developments The following is an estimate of our selected preliminary unaudited financial results for the quarter ended March 31, 2007. In the first quarter of 2007, we expect to record, subject to the adjustments described below: total net revenues in the range of $67.7 million to $69.5 million, compared to $57.5 million in the quarter ended March 31, 2006; gross profit in the range of $36.0 million to $37.6 million, compared to $32.0 million in the quarter ended March 31, 2006; income from operations in the range of $5.8 million to $6.2 million (including approximately $1.3 million in anticipated share-based compensation expenses), compared to $4.6 million in the quarter ended March 31, 2006; and net income in the range of $6.8 million to $7.3 million (including approximately $1.5 million in investment gains), compared to $5.4 million in the quarter ended March 31, 2006. See Recent Developments for a discussion of these preliminary results and a comparison of these results to results for the quarter ended March 31, 2006. Our preliminary operating results for the quarter ended March 31, 2007 are subject to adjustment based upon, among other things, completion of our review and reporting processes. Actual results could differ materially. For additional information regarding the various risks and uncertainties inherent in such estimates, see Special Note Regarding Forward-Looking Statements. Results for the first quarter of 2007 may not be indicative of our full year results for 2007 or future quarterly periods. See Management s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this prospectus for information regarding trends and other factors that may influence our results of operations and for recent quarterly operating results. Title of Each Class of Securities to be Registered(1)(2) Amount to be Registered(2)(3) Proposed Maximum Offering Price Per Ordinary Share(3) Amount of Registration Fee(4) Ordinary Shares, par value $0.01 per ordinary share 26,565,000 $4.83 $3,939.08 ADSs Outstanding Immediately After This Offering 7,700,000 ADSs (or 8,855,000 if the underwriters exercise the over-allotment option in full). Ordinary Shares Outstanding Immediately After This Offering 89,671,364 ordinary shares after giving effect to the conversion of our Series A convertible redeemable preferred shares and Series A-1 convertible redeemable preferred shares, but excluding ordinary shares issuable upon the exercise of outstanding options and stock appreciation rights with respect to our ordinary shares under our 2006 Equity Incentive Plan (including prior year grants of options covered under this plan). Over-Allotment Option We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 1,155,000 additional ADSs at the initial public offering price to be set forth on the cover page of the final prospectus for this offering, less underwriting discounts and commissions, solely for the purpose of covering over-allotments. The ADSs Each ADS represents three ordinary shares. The ADSs will be evidenced by ADRs. The depositary will be the holder of the ordinary shares underlying the ADSs and you will have the rights of an ADR holder as provided in the deposit agreement dated , 2007 among us, the depositary and holders and beneficial owners of ADSs from time to time. You may surrender your ADSs to the depositary to withdraw the ordinary shares underlying your ADSs. The depositary will charge you a fee for such an exchange. We may amend or terminate the deposit agreement for any reason without your consent. Any amendment which imposes or increases fees or charges or which materially prejudices any substantial existing right you have as an ADS holder will not become effective as to outstanding ADSs until 30 days after notice of the amendment is given to ADS holders. If an amendment becomes effective, you will be bound by the deposit agreement as amended if you continue to hold your ADSs. (1) American depositary shares evidenced by American depositary receipts issuable upon deposit of the ordinary shares registered hereby will be registered pursuant to a separate registration statement on Form F-6 filed with the Securities and Exchange Commission on April 17, 2007, 2007 (File No. 333-142177). Each American depositary share represents three ordinary shares. (2) Includes (i) ordinary shares initially offered and sold outside the United States in the form of American depositary shares that may be resold from time to time either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public and (ii) ordinary shares represented by 1,155,000 American depositary shares that are issuable upon the exercise of the underwriters option to purchase additional shares. The ordinary shares are not being registered for the purpose of sales outside the United States. (3) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended. (4) Previously paid. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. Table of Contents To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled Description of American Depositary Shares. We also encourage you to read the deposit agreement, which is an exhibit to the registration statement that includes this prospectus. Use of Proceeds We estimate that we will receive net proceeds of approximately $80.3 million from this offering, assuming an initial public offering price of $13.50 per ADS, the mid-point of the estimated range of the initial public offering price, after deducting estimated underwriter discounts, commissions and estimated offering expenses payable by us. We intend to use our net proceeds from this offering for the following purposes: approximately $25 million to increase our purchases of, and pre-payments for, TV advertising time; approximately $10 million to build product and service brands, expand sales and marketing for our distribution sales, and further strengthen our business management system and infrastructure within our nationwide distribution network; approximately $10 million for product and service development, including upgrades of existing products and services and development of new products and services; approximately $10 million to enhance and upgrade our technology and other business infrastructure and platforms, as well as our customer data mining capabilities; approximately $20 million to explore alternative direct sales platforms, such as dedicated TV home shopping channels, catalog sales and Internet-based direct sales; and the balance to fund capital expenditures, working capital and for other general corporate purposes. We will not receive any of the proceeds from the sale of the ADSs by the selling shareholders.
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus summary. Unless the context indicates otherwise, the terms the Company , we , us and our refer to the combined company, which has been renamed GLG Partners, Inc., in connection with the acquisition by Freedom Acquisition Holdings, Inc. and its then consolidated subsidiaries ( Freedom ) of GLG Partners LP and certain of its affiliated entities (collectively, GLG ) by means of a reverse acquisition transaction, and its subsidiaries. Our Company We are the largest independent alternative asset manager in Europe and the eleventh largest globally, offering our base of long-standing prestigious clients a diverse range of investment products and account management services. Our focus is on preserving clients capital and achieving consistent, superior absolute returns with low volatility and low correlations to both the equity and fixed income markets. Since our inception in 1995, we have built on the roots of our founders in the private wealth management industry to develop into one of the world s largest and most recognized alternative investment managers, while maintaining our tradition of client-focused product development and customer service. We use a multi-strategy approach across the funds we manage, offering approximately 40 funds across equity, credit, convertible and emerging markets products. We refer to these funds as the GLG Funds. As of September 30, 2007, our gross assets under management, or AUM, (including assets invested from other GLG Funds) were approximately $23.6 billion, up from approximately $3.9 billion as of December 31, 2001, representing a compound annual growth rate, or CAGR, of 37%. As of September 30, 2007, our net AUM (net of assets invested from other GLG Funds) were approximately $20.5 billion, up from approximately $3.9 billion as of December 31, 2001, representing a CAGR of 33%. During the three months ended September 30, 2007, on a dollar-weighted basis, the net returns of the GLG Funds decreased less than 0.5% and managed account inflows and gross fund-based inflows of AUM (net of redemptions) exceeded $1.7 billion. We derive revenues by charging performance fees based on the performance of the funds and accounts we manage and management and administration fees as a percentage of the AUM of the funds and accounts we manage. Unlike other typical alternative asset managers, we do not hold any ownership interests, investments or carried interests in the GLG Funds, other than a de minimis amount of subscriber and management shares. The subscriber and management shares are for a fixed notional amount and do not have an entitlement to participate in movements in net asset value, nor do they generate any income for us. As a result, we do not receive any income by reason of investment on our own account in the GLG Funds. In addition, our principals, their related trustees and our key personnel do not have any carried interests in the GLG Funds. However, they have their own direct investments in the GLG Funds. Currently, they have invested, including certain cash proceeds from the sale of GLG, approximately $776 million of additional net AUM in the GLG Funds. Altogether, the former GLG shareowners described below (including our principals, their trustees and our key personnel) invested from their cash proceeds from the sale of GLG and from other funds approximately $877 million of additional net AUM in the GLG Funds. We have built an experienced and highly-regarded investment management team of 95 investment professionals and supporting staff of 205 personnel, based primarily in London, representing decades of experience in the alternative asset management industry. In addition, we receive dedicated research and administrative services with respect to our U.S.-focused investment strategies from GLG Inc., an independently owned dedicated service provider based in New York with 27 personnel. In June 2007, GLG Partners LP agreed to acquire GLG Inc. subject to certain conditions, including registration by GLG Inc. and GLG Partners LP (to the extent required by applicable law) as investment advisers under the U.S. Investment Advisers Act of 1940. On December 3, 2007, GLG Inc. filed a registration statement under the Investment Advisers Act with the SEC. We have been designated by GLG Partners LP as the purchaser of GLG Inc., and we expect to complete the acquisition of GLG Inc. in 2008. Table of Contents The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting offers to buy these securities in any state where the offer or sale is not permitted. Subject to Completion Dated December 19, 2007 GLG Partners, Inc. 84,150,406 Shares of Common Stock, par value $0.0001 per share 21,500,003 Warrants to purchase Common Stock This prospectus relates to the issuance by us of 67,150,403 shares of our common stock, par value $0.0001 per share, of which: 45,650,400 shares are issuable upon the exercise of outstanding warrants originally issued in our initial public offering pursuant to a prospectus dated December 21, 2006; and 21,500,003 shares are issuable upon the exercise of outstanding warrants issued in private placements to our founders and sponsors. This prospectus also relates to the resale by selling stockholders of up to (1) 17,000,003 shares of our common stock and 17,000,003 warrants underlying outstanding units and an additional 4,500,000 warrants, in each case issued in private placements to our founders and sponsors, and (2) 21,500,003 shares of our common stock issued on exercise by selling stockholders of such privately placed warrants. Each warrant entitles the holder to purchase one share of our common stock. In order to obtain the shares, the holders of the warrants must pay an exercise price of $7.50 per share. We will receive proceeds from the exercise of the warrants but not from the sale of the underlying common stock. Each unit consists of one share of our common stock and one warrant. We will not receive any proceeds from the resale of any shares of common stock or warrants sold by selling stockholders. Our common stock, warrants and units are listed on the New York Stock Exchange and trade under the symbols GLG , GLG WS and GLG.U , respectively. On December 18, 2007, the closing sale prices of the common stock, warrants and units were $13.58 per share, $6.00 per warrant and $20.09 per unit, respectively. Investing in our securities involves a high degree of risk. See Risk Factors beginning on page 7 of this prospectus for a discussion of information that should be considered before buying shares of our common stock or our warrants. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information that is different. The information contained in this prospectus is correct as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of shares of our common stock. You should be aware that some of this information may have changed by the time this document is delivered to you. The date of this prospectus is , 2007. Table of Contents Our principal executive office is located at 390 Park Avenue, 20th Floor, New York, New York 10022. Our telephone number is (212) 224-7200. Recent Developments On November 2, 2007, we completed the acquisition of GLG Partners Limited, GLG Holdings Limited, Mount Granite Limited, Albacrest Corporation, Liberty Peak Ltd., GLG Partners Services Limited, Mount Garnet Limited, Betapoint Corporation, Knox Pines Ltd., GLG Partners Asset Management Limited and GLG Partners (Cayman) Limited (each, an Acquired Company and collectively, the Acquired Companies ) pursuant to a Purchase Agreement dated as of June 22, 2007 among us, our wholly owned subsidiaries, FA Sub 1 Limited, FA Sub 2 Limited and FA Sub 3 Limited, Jared Bluestein, as the buyers representative, Noam Gottesman, as the sellers representative, Lehman (Cayman Islands) Ltd, Noam Gottesman, Pierre Lagrange, Emmanuel Roman, Jonathan Green, Leslie J. Schreyer, in his capacity as trustee of the Gottesman GLG Trust, G S Trustees Limited, in its capacity as trustee of the Lagrange GLG Trust, Jeffrey A. Robins, in his capacity as trustee of the Roman GLG Trust, Abacus (C.I.) Limited, in its capacity as trustee of the Green GLG Trust, Lavender Heights Capital LP, Ogier Fiduciary Services (Cayman) Limited, in its capacity as trustee of the Green Hill Trust, Sage Summit LP and Ogier Fiduciary Services (Cayman) Limited, in its capacity as trustee of the Blue Hill Trust (each, a GLG Shareowner and collectively, the GLG Shareowners ). We refer to Messrs. Gottesman, Lagrange and Roman collectively as the Principals, and the trustees of the Gottesman GLG Trust, the Lagrange GLG Trust and the Roman GLG Trust collectively as the Trustees. Effective upon the consummation of the acquisition, (1) each Acquired Company became a subsidiary of ours, (2) the business and assets of GLG became our only operations and (3) we changed our name from Freedom Acquisition Holdings, Inc. to GLG Partners, Inc. Because the acquisition was considered a reverse acquisition recapitalization for accounting purposes, the combined historical financial statements of GLG became our historical financial statements. On October 30, 2007, we and our wholly owned subsidiaries entered into a credit agreement with a syndicate of banks arranged and led by Citigroup Global Markets, Inc. providing our subsidiary FA Sub 3 Limited, subject to customary conditions, with: (i) a 5-year non-amortizing revolving credit facility in a principal amount of up to $40.0 million; and (ii) a 5-year amortizing term loan facility in a principal amount of up to $530.0 million. On November 2, 2007, we borrowed $530.0 million under the term loan facility to finance the purchase price for our acquisition of the Acquired Companies, including purchase price adjustments, to pay transaction costs and to repay existing GLG indebtedness. The remaining $40.0 million under the revolving credit facility was also drawn down in November 2007. On November 2, 2007, our board of directors approved a warrant and stock repurchase plan authorizing us to repurchase up to a total $100.0 million of warrants and common stock in the open market or in negotiated block purchases over the following six months. As of December 12, 2007, we have repurchased 7,149,600 warrants. Public Stockholders Warrants On December 28, 2006, we sold 48,000,000 units in our initial public offering, and on January 24, 2006, the underwriters for our initial public offering purchased an additional 4,800,000 units pursuant to an over-allotment option. Each unit consists of one share of common stock and one warrant. Each warrant entitles the holder to purchase one share of our common stock. In order to obtain the shares, the holders of the warrants must pay an exercise price of $7.50 per share. The warrants will not be exercisable until December 21, 2007 and will expire on December 28, 2011, unless earlier redeemed. Beginning December 21, 2007, we may redeem the warrants at a price of $0.01 per warrant upon a minimum of 30 days prior written notice of redemption if, and only if, the last sale price of our common stock equals or exceeds $14.25 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. Table of Contents Founders Units and Warrants Prior to our initial public offering, we issued an aggregate of 12,000,003 units, each consisting of one warrant and one share of our common stock, to our sponsors, Berggruen Holdings North America Ltd. and Marlin Equities II, LLC, and independent directors, whom we refer to collectively as our founders, in a private placement. The founders warrants are substantially similar to the public stockholders warrants, except that the founders warrants: will become exercisable if and when the last sales price of our common stock exceeds $14.25 per share for any 20 trading days within a 30-trading day period beginning January 31, 2008; and are non-redeemable so long as they are held by the founders or their permitted transferees. The founders units, shares and warrants (1) held by our founders are subject to certain restrictions on transfer pursuant to the terms of letter agreements between each of the founders and Citigroup Global Market, Inc., as sole book running manager of our initial public offering, and (2) held by our sponsors are subject to certain restriction on transfer pursuant to the terms of the founders agreement entered into among Noam Gottesmann, as Sellers Representative, the Principals, the Trustees and our sponsors, each of which provides that subject to certain exceptions, these units and the underlying shares and warrants may not be transferred until November 2, 2008. Sponsors Warrants and Co-Investment Units and Warrants In connection with our initial public offering, we issued 4,500,000 warrants to purchase common stock to our sponsors in a private placement. In addition, immediately prior to the consummation of our acquisition of GLG, we issued 5,000,000 units, each consisting of one warrant and one share of common stock, as part of the co-investment by our sponsors and certain affiliated persons, including Ian Ashken and Martin Franklin, directors of ours, of $50.0 million in a private placement. The sponsors warrants and the co-investment warrants have terms and provisions that are substantially similar to the public stockholders warrants, except that these warrants (including the common stock to be issued upon exercise of these warrants) are not transferable or salable by their holders or their permitted warrant transferees until November 2, 2008, except to permitted warrant transferees. The sponsors warrants are non-redeemable so long as the sponsors or their permitted warrant transferees hold such warrants, while the co-investment warrants are subject to the same redemption provisions as those to which the public stockholders warrants are subject. Our sponsors have agreed to exercise the sponsor warrants at the written demand of Mr. Gottesman, as the GLG Shareowners representative, any time after the redemption of the public warrants and amendment to such sponsor warrants permitting a cashless exercise. The sponsors warrants and the co-investment units, shares and warrants held by our founders and sponsors are also subject to the same restrictions on transfer applicable to the founders units, shares and warrants pursuant to letter agreements and the founders agreement described above under Founders Units and Warrants . Table of Contents THE OFFERING Shares Offered by the Company 67,150,403 shares of common stock, par value $0.0001 per share, of which: 45,650,400 shares are issuable upon exercise of outstanding warrants issued in connection with the Company s initial public offering on December 21, 2006; and 21,500,003 shares are issuable upon the exercise of outstanding warrants issued in private placements to our founders and sponsors. Shares and/or Warrants Offered by Selling Stockholders 17,000,003 shares of our common stock and warrants underlying units issued in private placements to our founders and sponsors, whom we refer to collectively as the selling stockholders, and the shares of our common stock issuable upon exercise of such warrants Additional Warrants Offered by Selling Stockholders 4,500,000 warrants issued in private placements to the selling stockholders, and the shares of our common stock issuable upon exercise of such warrants Warrant Exercise Price $7.50 per share Common Stock Outstanding as of November 30, 2007 240,894,910 shares* Common Stock to be Outstanding Assuming Exercise of All of the Warrants 308,045,313 shares* Use of Proceeds The Company will receive up to an aggregate of approximately $503,628,023 from the exercise of the warrants, if they are exercised in full. The Company expects that any net proceeds from the exercise of the warrants will be used to fund additional repurchases of warrants and shares of common stock, for general corporate purposes and to fund working capital. The selling stockholders will receive all of the proceeds from the sale of any shares of common stock and/or warrants sold by them pursuant to this prospectus. We will not receive any proceeds from these sales. NYSE Trading Symbols: Common Stock GLG Warrants GLG WS Units GLG.U * Does not include 58,904,993 shares of our common stock issuable in exchange for 58,904,993 exchangeable Class B ordinary shares of FA Sub 2 Limited and 58,904,993 associated shares of Series A voting preferred stock of the Company beneficially owned by Noam Gottesman and the Trustee of the Gottesman GLG Trust, which may be exchanged by the holder thereof at any time and from time to time. Table of Contents SUMMARY COMBINED HISTORICAL FINANCIAL INFORMATION OF GLG Because the acquisition was considered a reverse acquisition recapitalization for accounting purposes, the combined historical financial statements of GLG became our historical financial statements. The summary combined historical financial information of GLG as of and for the nine months ended September 30, 2007 and for the nine months ended September 30, 2006 was derived from unaudited condensed combined financial statements of GLG included in this prospectus. The summary combined historical financial information of GLG as of and for the years ended December 31, 2006, 2005 and 2004 was derived from combined financial statements of GLG audited by Ernst Young LLP, independent registered public accounting firm, included in this prospectus. The summary combined historical financial information of GLG as of September 30, 2006 and as of and for the years ended December 31, 2003 and 2002 was derived from unaudited combined financial statements of GLG not included in this prospectus. This information should be read in conjunction with Management s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements of GLG and the notes thereto included in this prospectus. Nine Months Ended Years Ended December 31, September 30, 2002 2003 2004 2005 2006 2006 2007 (Unaudited) (US dollars in thousands) (Unaudited) Combined Statement of Operations Data: Net revenues and other income: Management fees, net $ 30,108 $ 65,259 $ 138,988 $ 137,958 $ 186,273 $ 129,981 $ 198,892 Performance fees, net 31,288 206,685 178,024 279,405 394,740 177,047 343,835 Administration fees, net 311 34,814 25,050 42,986 Transaction charges 80,613 115,945 191,585 184,252 Other 626 6,497 6,110 1,476 5,039 1,883 7,875 Total net revenues and other income 142,635 394,386 514,707 603,402 620,866 333,961 593,588 Expenses: Employee compensation and benefits (88,994 ) (158,789 ) (196,784 ) (345,918 ) (168,386 ) (118,194 ) (110,526 ) General, administrative and other (22,052 ) (23,005 ) (42,002 ) (64,032 ) (68,404 ) (43,721 ) (79,634 ) Total expenses (111,046 ) (181,794 ) (238,786 ) (409,950 ) (236,790 ) (161,915 ) (190,160 ) Income from operations 31,589 212,592 275,921 193,452 384,076 172,046 403,428 Interest income, net 882 709 519 2,795 4,657 3,603 4,694 Income before income taxes 32,471 213,301 276,440 196,247 388,733 175,649 408,122 Income taxes (8,456 ) (49,966 ) (48,372 ) (25,345 ) (29,225 ) (14,803 ) (33,020 ) Net income $ 24,015 $ 163,335 $ 228,068 $ 170,902 $ 359,508 $ 160,846 $ 375,102 Distributions to Principals and Trustees $ (33,895 ) $ (70,825 ) $ (222,074 ) $ (106,531 ) $ (165,705 ) $ (148,533 ) $ (254,331 ) Distributions to non-controlling interest holders (14,656 ) $ (6,718 ) $ (215,744 ) Table of Contents As of December 31, As of September 30, 2002 2003 2004 2005 2006 2006 2007 (Unaudited) (US dollars in thousands) (Unaudited) Combined Balance Sheet Data: Cash and cash equivalents $ 28,450 $ 65,655 $ 136,378 $ 236,261 $ 273,148 $ 272,711 $ 391,732 Fees receivable 34,826 139,103 163,235 246,179 251,963 23,229 40,687 Working capital 15,579 25,940 20,395 42,387 370,094 198,032 273,639 Property and equipment, net 4,102 3,801 4,342 3,290 6,121 3,847 8,966 Total assets 75,359 220,829 310,592 495,340 557,377 315,111 474,195 Accrued compensation and benefits 21,654 25,038 125,850 247,745 102,507 60,310 63,199 Other liabilities 5,100 3,972 3,654 Loans payable 13,000 13,000 13,000 13,000 13,000 13,000 13,000 Total members equity 19,400 112,722 117,980 180,229 361,952 187,435 267,736 Table of Contents RISK FACTORS An investment in our securities involves a high degree of risk. You should consider carefully all of the material risks described below, together with the other information contained in this prospectus before making a decision to invest in our securities. If any of the following events occur, our business, financial condition and operating results may be materially adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment. Risks Related to Our Business Difficult market conditions may adversely affect our business in many ways, each of which could materially reduce our revenue and cash flow and adversely affect our business, results of operations or financial condition. Our business is materially affected by conditions in the global financial markets and economic conditions throughout the world that are outside our control, such as interest rates, availability of credit, inflation rates, economic uncertainty, changes in laws (including laws relating to taxation), trade barriers, commodity prices, currency exchange rates and controls and national and international political circumstances (including wars, terrorist acts or security operations). These factors may affect the level and volatility of securities prices and the liquidity and the value of investments, and we may not be able to or may choose not to manage our exposure to these market conditions. Our profitability may also be adversely affected by fixed costs and the possibility that we would be unable to scale back other costs within a time frame sufficient to match any decreases in revenue relating to changes in market and economic conditions. A general market downturn, or a specific market dislocation, may result in lower net inflows and lower returns for the GLG Funds, which would adversely affect our revenues. Furthermore, such conditions would also increase the risk of default with respect to investments held by the GLG Funds that have significant debt investments. Our revenue, net income and cash flow are dependent upon performance fees, which may make it difficult for us to achieve steady earnings growth on a semi-annual basis. Our revenue, net income and cash flow are all highly variable, primarily due to the fact that performance fees can vary significantly from period to period, in part, because performance fees are recognized as revenue only when contractually payable, or crystallized , from the GLG Funds and managed accounts to which they relate, generally on June 30 and December 31 of each year for the majority of the GLG Funds. Although we have historically had low inter-group correlations across asset classes, we may also experience fluctuations in our results from period to period due to a number of other factors, including changes in the values of the GLG Funds investments, changes in the amount of distributions, dividends or interest paid in respect of investments, changes in our operating expenses, the degree to which we encounter competition and general economic and market conditions. Such variability may lead to volatility in the trading price of our common stock and cause our results for a particular period not to be indicative of our performance in a future period. It may be difficult for us to achieve steady growth in net income and cash flow on a semi-annual basis, which could in turn lead to large adverse movements in the price of our common stock or increased volatility in our stock price generally. The GLG Funds have high water marks , whereby performance fees are earned by us only to the extent that the net asset value of a GLG Fund at the end of a semi-annual period exceeds the highest net asset value on the last date on which a performance fee was earned. Certain of the GLG Funds also have LIBOR hurdles whereby performance fees are not earned during a particular period until the returns of such funds surpass the LIBOR rate. The performance fees we earn are therefore dependent on the net asset value of the GLG Funds, which could lead to significant volatility in our semi-annual results. Because our revenue, net income and cash flow can be highly variable from period to period, we plan not to provide any guidance regarding our expected semi-annual and annual operating results. The lack of guidance may affect the expectations of public market analysts and could cause increased volatility in our stock price. Table of Contents Periods of underperformance could lead to disproportionate redemptions in the GLG Funds or a decline in the rate at which we acquire additional AUM. If the GLG Funds underperform, existing clients may decide to reduce or redeem or sell their investments or transfer asset management responsibility to other asset managers and we may be unable to obtain new asset management business. Poor performance relative to other asset management firms may result in reduced purchases of fund shares or units and increased sales or redemptions of fund shares or units. As a result, investment underperformance could have a material adverse effect on our business, results of operations or financial condition. Such underperformance would also likely lead to a decrease in our revenue and operating income. In order to retain our investment professionals during periods of poor performance, we may have to pay our investment professionals a significant amount, even if we earn low or no performance fees, which could have an adverse impact on our business, results of operations or financial condition. Competition for investment professionals in the alternative asset management industry is intense. Historically, the compensation and limited partner profit share paid to our investment personnel and senior management (other than the Principals) have been determined by the Principals or by the Trustees in consultation with the Principals. We have set compensation at levels that we believe are competitive against compensation offered by other alternative asset managers and leading investment banks against whom we compete for senior management and other key personnel, principally those located in London, while taking into account the performance of the GLG Funds and managed accounts. We believe these forms of remuneration are important to align the interests of our senior management and key personnel with those of investors in the GLG Funds. However, even if we earn low or no performance fees, we may be required to pay significant compensation and limited partner profit share to retain our key personnel. In these circumstances, these amounts may represent a greater percentage of our revenues than they have historically. Investors in the GLG Funds can generally redeem investments with only short periods of notice. Investors in the GLG Funds may generally redeem their investments in those funds with only short periods of notice. Investors may reduce the aggregate amount of their investment in such funds, or transfer their investment to other funds with different fee rate arrangements, for any number of reasons, including investment performance, changes in prevailing interest rates and financial market performance, or for no reason. If interest rates are rising and/or stock markets are declining, the pace of fund redemptions could accelerate. Redemptions of investments in the GLG Funds could also take place more quickly than assets may be sold on account of those funds to meet the price of such redemptions, which could result in the relevant funds and/or our being in breach of applicable legal, regulatory and contractual requirements in relation to such redemptions, resulting in possible regulatory and stockholder actions against us and/or the GLG Funds. Any such action could potentially cause further redemptions and/or make it more difficult to attract new investors. The redemption of investments in the GLG Funds could adversely affect our revenues, which are substantially dependent upon the AUM in the GLG Funds. If redemptions of investments in funds cause our revenues to decline, they could have a material adverse effect on our business, results of operations or financial condition. We are dependent on the continued services of our Principals and other key personnel. The loss of key personnel could have a material adverse effect on us. Our Principals and other key personnel have contributed to the growth and success of our business. We are dependent on the continued services of Messrs. Gottesman, Roman and Lagrange and other key personnel for our future success. The loss of any Principal or other key personnel may have a significant effect on our business, results of operations or financial condition. The market for experienced asset management professionals is extremely competitive and is increasingly characterized by frequent movement of employees among firms. Due to the competitive market for asset management professionals and the success achieved by some of our key personnel, the costs to attract and Table of Contents retain key personnel are significant and will likely increase over time. In particular, if we lose any of our Principals or other key personnel, there is a risk that we may also experience outflows from AUM or fail to obtain new business. As a result, the inability to attract or retain the necessary highly skilled key personnel could have a material adverse effect on our business, results of operations or financial condition. The cost of compliance with international employment, labor, benefits and tax regulations may adversely increase our costs, affect our revenue and impede our ability to expand internationally. Since we operate our business internationally, we are subject to many different employment, labor, benefit and tax laws in each country in which we operate, including laws and regulations affecting employment practices and our relations with the Principals and some of our key personnel who participate in the limited partner profit share arrangement. If we are required to comply with new regulations or new or different interpretations of existing regulations, or if we are unable to comply with these regulations or interpretations, our business could be adversely affected, or the cost of compliance may make it difficult to expand into new international markets, or we may be liable for additional costs, such as social security or social insurance, which may be substantial. Additionally, our competitiveness in international markets may be adversely affected by regulations requiring, among other things, the awarding of contracts to local contractors, the employment of local citizens and/or the purchase of services from local businesses or that favor or require local ownership. We have experienced rapid growth, which may be difficult to sustain and which may place significant demands on our administrative, operational and financial resources. As of September 30, 2007, our gross AUM were approximately $23.6 billion, up from approximately $3.9 billion as of December 31, 2001, representing a CAGR of 37%. As of September 30, 2007, our net AUM were approximately $20.5 billion, up from approximately $3.9 billion as of December 31, 2001, representing a CAGR of 33%. This rapid growth has caused, and if it continues will continue to cause, significant demands on our legal, accounting, technology and operational infrastructure, and increased expenses. The complexity of these demands, and the expense required to address them, is a function not simply of the amount by which our AUM have grown, but of significant differences in the investing strategies of our different funds. In addition, we are required to continuously develop our systems and infrastructure in response to the increasing sophistication of the investment management market and legal, accounting and regulatory developments. Our future growth depends, among other things, on our ability to maintain an operating platform and management system sufficient to address our growth and requires us to incur significant additional expenses and commit additional senior management and operational resources. As a result, we face significant challenges: in maintaining adequate financial and business controls; in implementing new or updated information and financial systems and procedures; and in training, managing and appropriately sizing our work force and other components of our business on a timely and cost-effective basis. There can be no assurance that we will be able to manage our expanding operations effectively or that we will be able to continue to grow, and any failure to do so could adversely affect our ability to generate revenue and control our expenses. There can be no assurance that our expansion into the United States or other markets will be successful. While we are currently in the process of developing distribution capability in the United States, the Middle East and Asia, expanding our operations into the United States or other markets will be difficult due to a number of factors, including the fact that several of these markets are well-developed, with established competitors and different regulatory regimes. Our failure to continue to grow our revenues (whether or not as a result of a failure to increase AUM), expand our business or control our cost base could have a material adverse effect on our business, results of operations or financial condition. Table of Contents Damage to our reputation, including as a result of personnel misconduct, failure to manage inside information or fraud, could have a material adverse effect on our business. Our reputation is one of our most important assets. Our relationships with individual and institutional investors and other significant market participants are very important to our business. Any deterioration in our reputation held by one or more of these market participants could lead to a loss of business or a failure to win new fund mandates. For example, we are exposed to the risk that litigation, regulatory action, misconduct, operational failures, negative publicity or press speculation, whether or not valid, could harm our reputation. Factors that could adversely affect our reputation include but are not limited to: fraud, misconduct or improper practice by any of our personnel, including failure to comply with applicable regulations or non-adherence by a portfolio manager to the investment guidelines applicable to each GLG Fund. Such actions can be particularly detrimental in the provision of financial services and could involve, for example, fraudulent transactions entered into for a client s account, diversion of funds, the intentional or inadvertent release of confidential information or failure to follow internal procedures. Such actions could expose us to financial losses resulting from the need to reimburse customers or other business partners or as a result of fines or other regulatory sanctions, and may significantly damage our reputation; failure to manage inside information. We frequently trade in multiple securities of the same issuer. In the course of transactions involving these securities, we may receive inside information in relation to certain issuers. If we do not sufficiently control the use of this inside information or any other inside information we receive, we and/or our employees could be subject to investigation and criminal or civil liability; and failure to manage conflicts of interest. As we have expanded the scope of our business and client base, we have been increasingly exposed to potential conflicts of interest. If we fail, or appear to fail, to deal appropriately with conflicts of interest, we could face significant damage to our reputation, litigation or regulatory proceedings or penalties. Damage to our reputation as a result of these or other factors could have a material adverse effect on our business, results of operations or financial condition. Operational risks may disrupt our business, result in losses or limit our growth. We rely heavily on our financial, accounting and other data processing systems. If any of these systems do not operate properly or are disabled, we could suffer financial loss, a disruption of our business, liability to the GLG Funds, regulatory intervention or reputational damage. In addition, we operate in a business that is highly dependent on information systems and technology. Our information systems and technology may not continue to be able to accommodate our growth, and the cost of maintaining such systems may increase from its current level. Such a failure to accommodate growth, or an increase in costs related to such information systems, could have a material adverse effect on us. Furthermore, we depend on our office in London, where most of our personnel are located, for the continued operation of our business. A disaster or a disruption in the infrastructure that supports our business, including a disruption involving electronic communications or other services used by us or third parties with whom we conduct our business, or directly affecting our London office, could have a material adverse impact on our ability to continue to operate our business without interruption. Our disaster recovery programs may not be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for our losses, if at all. Through outsourcing arrangements, we and the GLG Funds rely on third-party administrators and other providers of middle-and back-office support and development functions, such as prime brokers, custodians, market data providers and certain risk system, portfolio and management and telecommunications system providers. Any interruption in our ability to rely on the services of these third parties or deterioration in their performance could impair the quality (including the timing) of our services. Furthermore, if the contracts with Table of Contents any of these third-party providers are terminated, we may not find alternative outsource service providers on a timely basis or on equivalent terms. The occurrence of any of these events could have a material adverse effect on our business, results of operations or financial condition. Our business may suffer as a result of loss of business from key private and institutional investors. We generate a significant proportion of our revenue from a small number of our top clients. As of September 30, 2007, the assets of our top individual client accounted for approximately 5.0% of our net AUM. As of September 30, 2007, our largest institutional investor account represented approximately 4.5% of our net AUM, with the top five accounts collectively contributing approximately 18.0% of our net AUM. The loss of all or a substantial portion of the business provided by one or more of these clients would have a material impact on the income we derive from management and performance fees and consequently have a material adverse effect on our business, results of operations or financial condition. We may be subject to regulatory investigation or enforcement action or a change in regulation in the jurisdictions in which we operate. Our business is subject to regulation by various regulatory authorities that are charged with protecting the interests of our customers. The activities of certain GLG entities are regulated primarily by the FSA in the United Kingdom and are also subject to regulation in the various other jurisdictions in which it operates, including the Irish Financial Services Regulatory Authority ( IFSRA ), Cayman Islands Monetary Authority ( CIMA ) and the Commission de Surveillance du Secteur Financier in Luxembourg. The activities of GLG Inc. will be regulated by the SEC following its proposed registration as a U.S. investment adviser. In addition, the GLG Funds are subject to regulation in the jurisdictions in which they are organized. These and other regulators in these jurisdictions have broad regulatory powers dealing with all aspects of financial services including, among other things, the authority to make inquiries of companies regarding compliance with applicable regulations, to grant and in specific circumstances to vary or cancel permits and to regulate marketing and sales practices, advertising and the maintenance of adequate financial resources. We are also subject to applicable anti-money laundering regulations and net capital requirements in the jurisdictions in which we operate. For example, on February 28, 2006, the FSA found that we had committed market abuse and failed to observe proper standards of market conduct in relation to a convertible bond issued by Sumitomo Mitsui Financial Group in 2003. This finding was based solely on the conduct of Philippe Jabre, a former Managing Director who resigned from GLG in early 2006. The FSA imposed 750,000 fines on both Mr. Jabre and us. On November 23, 2006, the Autorit des March s Financiers ( AMF ), the French securities regulator, imposed a fine of 1.2 million ($1.6 million) against us in connection with our trading in the shares of Alcatel S.A. ( Alcatel ) based on confidential information prior to a December 12, 2002 issuance of Alcatel convertible securities. We have appealed this decision. On May 29, 2007, we agreed to pay a civil penalty of $500,000 and disgorgement and interest of approximately $2.7 million to settle enforcement and civil actions brought by the SEC for illegal short selling. We did not admit or deny the findings, but consented to the SEC order finding that we violated Rule 105 of Regulation M under the Exchange Act in connection with 14 public offerings and a final judgment in the civil action in the United States District Court for the District of Columbia. On June 21, 2007, the AMF imposed a fine of 1.5 million ($2.0 million) against us in connection with our trading in the shares of Vivendi Universal S.A. ( Vivendi ) based on confidential information prior to a November 14, 2002 issuance of Vivendi notes which are mandatorily redeemable for Vivendi convertible securities. We have appealed this decision. In addition, the regulatory environment in which we operate frequently changes and has seen significant increased regulation in recent years. We may be materially adversely affected as a result of new or revised legislation or regulations or by changes in the interpretation or enforcement of existing laws and regulations. Table of Contents As a result of regulatory actions, increased litigation in the financial services industry or other reasons, we could be subject to civil liability, criminal liability or sanctions (including revocation of the licenses of our employees or limited partners), censures fines, or temporary suspension or permanent bar from conducting business. Regulatory proceedings could also result in adverse publicity or negative perceptions regarding our business and divert management s attention from the day-to-day management of our business. Any regulatory investigations, proceedings, consequent liabilities or sanctions could have a material adverse effect on our business, results of operations or financial condition. We are subject to substantial litigation and regulatory enforcement risks, and we may face significant liabilities and damage to our professional reputation as a result of litigation allegations or regulatory investigations and the attendant negative publicity. The investment decisions we make in our asset management business subject us to the risk of regulatory investigations and enforcement actions in connection with our investment activities, as well as third-party litigation arising from investor dissatisfaction with the performance of those investment funds and a variety of other litigation claims. In general, we are exposed to risk of litigation by GLG Fund investors if a GLG Fund suffers losses resulting from the negligence, willful default, bad faith or fraud of the manager or the service providers to whom the manager has delegated responsibility for the performance of its duties. We have in the past been, and we may in the future be, the subject of investigations and enforcement actions by regulatory authorities resulting in fines and other penalties, which may be harmful to our reputation, as well as our business, results of operations or financial condition. In addition, we are exposed to risks of litigation or investigation relating to transactions which present conflicts of interest that are not properly addressed. In such actions, we would be obligated to bear legal, settlement and other costs (which may be in excess of available insurance coverage). Although we would be indemnified by the GLG Funds, our rights to indemnification may be challenged. If we are required to incur all or a portion of the costs arising out of litigation or investigations as a result of inadequate insurance proceeds or failure to obtain indemnification from the GLG Funds, our results of operations, financial condition and liquidity would be materially adversely affected. Each of the GLG Funds is structured as a limited liability company, incorporated in the Cayman Islands, Ireland or Luxembourg. The laws of these jurisdictions, particularly with respect to shareholders rights, partner rights and bankruptcy, differ from the laws of the United States and could change, possibly to the detriment of the GLG Funds and us. We are subject to intense competition and could lose business to our competitors. The alternative investment management industry is extremely competitive. Competition includes numerous national, regional and local asset management firms and broker-dealers, commercial bank and thrift institutions, and other financial institutions. Many of these organizations offer products and services that are similar to, or compete with, those offered by us and have substantially more personnel and greater financial resources than we do. Our key areas for competition include historical investment performance, our ability to source investment opportunities, our ability to attract and retain the best investment professionals, quality of service, the level of fees generated or earned by our managers and our investment managers stated investment strategy. We also compete for investment assets with banks, insurance companies and investment companies. Our ability to compete may be adversely affected if we underperform in comparison to relevant benchmarks or peer groups. The competitive market environment may result in increased pressure on revenue margins (e.g., by the provision of management fee rebates). Our profit margins and earnings are dependent in part on our ability to maintain current fee levels for the products and services that we offer. Competition within the alternative asset management industry could lead to pressure on us to reduce the fees that we charge our clients for products and services. A failure to compete effectively in this environment may result in the loss of existing clients and business, and of opportunities to capture new business, each of which could have a material adverse effect on our business, results of operations or financial condition. Table of Contents Certain of our investment management and advisory agreements are subject to termination on short notice. Institutional and individual clients, and firms and agencies with which we have strategic alliances, can terminate their relationships with us for various reasons, including unsatisfactory investment performance, interest rate changes and financial market performance. Termination of these relationships could have a material adverse effect on our business, results of operations and financial condition. Each of the GLG Funds has appointed either GLG Partners (Cayman) Limited (in the case of Cayman Islands funds and the Luxembourg fund) or GLG Partners Asset Management Limited (in the case of the Irish funds) as the manager under the terms of a management agreement, which is terminable on 30 days written notice by either party (i.e., the fund or the manager). The articles of association of each GLG Fund provide that the fund cannot terminate the management agreement unless holders of not less than 50% of the outstanding issued share capital have previously voted in favor of the termination at a general meeting of the fund. For each GLG Fund, the manager has appointed GLG Partners LP as investment manager under the terms of an investment management agreement, which is terminable on 30 days written notice by either party (i.e., the manager or the investment manager). The historical returns attributable to the GLG Funds may not be indicative of our future results or of any returns expected on an investment in our common stock. The historical and potential future returns of the GLG Funds are not directly linked to returns on our capital. Therefore, you should not conclude that continued positive performance of the GLG Funds will necessarily result in positive returns on an investment in our common stock. However, poor performance of the GLG Funds would cause a decline in our revenue from such funds, and would therefore have a negative effect on our performance and in all likelihood the returns on an investment in our common stock. Our insurance arrangements may not be adequate to protect us. Our business entails the risk of liability related to litigation from clients or third-party vendors and actions taken by regulatory agencies. There can be no assurance that a claim or claims will be covered by insurance or, if covered, will not exceed the limits of available insurance coverage, or that any insurer will remain solvent and will meet its obligations to provide us with coverage or that insurance coverage will continue to be available with sufficient limits at a reasonable cost. Renewals of insurance policies may expose us to additional costs through higher premiums or the assumption of higher deductibles or co-insurance liability. The future costs of maintaining insurance or meeting liabilities not covered by insurance could have a material adverse effect on our business, results of operations or financial condition. We use substantial amounts of leverage to finance our business, which exposes us to substantial risks. We have used a significant amount of borrowings to finance our business operations as a public company, including for the provision of working capital, warrant and share repurchases, making minimum tax distributions and limited partner profit share distributions, acquisition financing and general business purposes. This exposes us to the typical risks associated with the use of substantial leverage, including those discussed below under Risks Related to the GLG Funds There are risks associated with the GLG Funds use of leverage. These risks could result in an increase in our borrowing costs and could otherwise adversely affect our business in a material way. In addition, when our credit facilities expire, we will need to negotiate new credit facilities with our existing lender, replace them by entering into credit facilities with new lenders or find other sources of liquidity, and there is no guarantee that we will be able to do so on attractive terms or at all. See Management s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources for a further discussion of our liquidity. An increase in our borrowing costs may adversely affect our earnings and liquidity. We have borrowed an aggregate of $570.0 million under our new revolving credit and term loan facilities. When these facilities become due on November 2, 2012, we will be required to refinance them by entering Table of Contents into new credit facilities or issuing debt securities, which could result in higher borrowing costs, or issuing equity, which would dilute existing stockholders. We could also repay the revolving credit and term loan facilities by using cash on hand or cash from the sale of our assets. No assurance can be given that we will be able to enter into new credit facilities or issue debt or equity securities in the future on attractive terms, or at all, or that we will have sufficient cash on hand to repay the revolving credit and term loan facilities. The term loans and revolving loans bear interest at a floating rate of (1) the base rate plus 0% per annum for loans based on the base rate or (2) LIBOR plus 1.25% per annum for loans based on LIBOR, at the election of FA Sub 3 Limited, for the first two fiscal quarters ending after November 2, 2007 (the closing date of the acquisition of GLG), and thereafter at an interest rate based on certain financial ratios applicable to us and our consolidated subsidiaries. As such, the interest expense we incur will vary with changes in the applicable base or LIBOR reference rate. An increase in interest rates would adversely affect the market value of any fixed-rate debt investments and/or subject them to prepayment or extension risk, which may adversely affect our earnings and liquidity. We are subject to currency-related risks that could adversely affect our business, results of operation or financial condition. We earn a significant portion of our revenue and incur a significant portion of our expenditures in currencies other than the U.S. dollar. Movements in currency exchange rates could have an adverse effect on both our revenues and expenses. If we were deemed an investment company under the Investment Company Act of 1940, applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business. A person will generally be deemed to be an investment company for purposes of the Investment Company Act, if: it is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; or absent an applicable exemption, it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We believe that we are engaged primarily in the business of providing asset management and financial advisory services and not in the business of investing, reinvesting or trading in securities. We also believe that the primary source of income from our business will be properly characterized as income earned in exchange for the provision of services. We are an asset management and financial advisory firm and do not propose to engage primarily in the business of investing, reinvesting or trading in securities. Accordingly, we do not believe that we are an orthodox investment company as defined in Section 3(a)(1)(A) of the Investment Company Act and described in the first bullet point above. Further, we have no material assets other than our equity interests in our subsidiaries, which in turn have no material assets, other than equity interests in the Acquired Companies and inter-company debt. (These subsidiaries are vested with all management and control over the Acquired Companies.) We do not believe our equity interests in our subsidiaries or the equity interests of these subsidiaries in the Acquired Companies are investment securities. Moreover, because we believe that the subscriber shares in certain GLG Funds are neither securities nor investment securities, we believe that less than 40% of our total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis are comprised of assets that could be considered investment securities. Accordingly, we do not believe that we are an inadvertent investment company by virtue of the 40% test in Section 3(a)(1)(C) of the Investment Company Act as described in the second bullet point above. The Investment Company Act and the rules thereunder contain detailed parameters for the organization and operation of investment companies. Among other things, the Investment Company Act and the rules thereunder limit prohibit transactions with affiliates, impose limitations on the issuance of debt and equity Table of Contents securities, generally prohibit the issuance of options and impose certain governance requirements. We intend to conduct our operations so that we will not be deemed to be an investment company under the Investment Company Act. If anything were to happen which would cause us to be deemed to be an investment company under the Investment Company Act, requirements imposed by the Investment Company Act, including limitations on our capital structure, ability to transact business with affiliates (including the Acquired Companies) and ability to compensate key employees, could make it impractical for us to continue our business as currently conducted, impair the agreements and arrangements between and among us, the Acquired Companies and our senior managing directors, or any combination thereof, and materially adversely affect our business, financial condition and results of operations. In addition, we may be required to limit the amount of investments that we make as a principal or otherwise conduct our business in a manner that does not subject us to the registration and other requirements of the Investment Company Act. Risks Related to the GLG Funds We currently derive our revenues from management fees and administration fees based on the value of the assets under management in the GLG Funds and the accounts managed by us, and performance fees based on the performance of the GLG Funds and the accounts managed by us. Our stockholders are not investors in the GLG Funds and the accounts managed by us, but rather stockholders of an alternative asset manager. Our revenues could be adversely affected by many factors that could reduce assets under management or negatively impact the performance of the GLG Funds and accounts managed by us. Valuation methodologies for certain assets in the GLG Funds can be subject to significant subjectivity. In calculating the net asset values of the GLG Funds, administrators of the GLG Funds may rely on methodologies for calculating the value of assets in which the GLG Funds invest that we or other third parties supply. Such methodologies are advisory only but are not verified in advance by us or any third party, and the nature of some of the funds investments is such that the methodologies may be subject to significant subjectivity and little verification or other due diligence and may not comply with generally accepted accounting practices or other valuation principles. Any allegation or finding that such methodologies are or have become, in whole or in part, incorrect or misleading could have an adverse effect on the valuation of the relevant GLG Funds and, accordingly, on the management fees and any performance fees receivable by us in respect of such funds. Some of the GLG Funds and managed accounts are subject to emerging markets risks. Some of the GLG Funds and managed accounts invest in sovereign debt issues by emerging market countries as well as in debt and equity investments of companies and other entities in emerging markets. Many emerging markets are developing both economically and politically and may have relatively unstable governments and economies based on only a few commodities or industries. Many emerging market countries do not have firmly established product markets, and companies may lack depth of management or may be vulnerable to political or economic developments such as nationalization of key industries. Investments in companies and other entities in emerging markets and investments in emerging market sovereign debt may involve a high degree of risk and may be speculative. Risks include (1) greater risk of expropriation, confiscatory taxation, nationalization, social and political instability (including the risk of changes of government following elections or otherwise) and economic instability; (2) the relatively small current size of some of the markets for securities and other investments in emerging markets issuers and the current relatively low volume of trading, resulting in lack of liquidity and in price volatility; (3) certain national policies which may restrict a GLG Fund s or a managed account s investment opportunities including restrictions on investing in issuers or industries deemed sensitive to relevant national interests; (4) the absence of developed legal structures governing private or foreign investment and private property; (5) the potential for higher rates of inflation or hyper-inflation; (6) currency risk and the imposition, extension or continuation of foreign exchange controls; (7) interest rate risk; (8) credit risk; (9) lower levels of democratic accountability; (10) differences in accounting standards and auditing practices which may result in unreliable financial information; and (11) different corporate governance frameworks. The emerging markets risks described above increase Table of Contents counterparty risks for the GLG Funds and managed accounts investing in those markets. In addition, investor risk aversion to emerging markets can have a significant adverse affect on the value and/or liquidity of investments made in or exposed to such markets and can accentuate any downward movement in the actual or anticipated value of such investments which is caused by any of the factors described above. Emerging markets are characterized by a number of market imperfections, analysis of which requires experience in the market and a range of complementary specialist skills. These inefficiencies include (1) the effect of politics on sovereign risk and asset price dynamics; and (2) institutional imperfections in emerging markets, such as deficiencies in formal bureaucracies, historical or cultural norms of behavior and access to information driving markets. While we seek to take advantage of these market imperfections to achieve investment performance for the GLG Funds and managed accounts, we cannot guarantee that will be able do so in the future. A failure to do so could have a material adverse effect on our business, growth prospects, net inflows of AUM, revenues, results of operations and/or financial condition. Many of the GLG Funds invest in foreign countries and securities of issuers located outside of the United States and the United Kingdom, which may involve foreign exchange, political, social and economic uncertainties and risks. Many of the GLG Funds invest a portion of their assets in the equity, debt, loans or other securities of issuers located outside the United States and the United Kingdom. In addition to business uncertainties, such investments may be affected by changes in exchange values as well as political, social and economic uncertainty affecting a country or region. Many financial markets are not as developed or as efficient as those in the United States and the United Kingdom, and as a result, liquidity may be reduced and price volatility may be higher. The legal and regulatory environment may also be different, particularly with respect to bankruptcy and reorganization. Financial accounting standards and practices may differ, and there may be less publicly available information in respect of such companies. Restrictions imposed or actions taken by foreign governments may adversely impact the value of our fund investments. Such restrictions or actions could include exchange controls, seizure or nationalization of foreign deposits and adoption of other governmental restrictions which adversely affect the prices of securities or the ability to repatriate profits on investments or the capital invested itself. Income received by the GLG Funds from sources in some countries may be reduced by withholding and other taxes. Any such taxes paid by a GLG Fund will reduce the net income or return from such investments. While the GLG Funds will take these factors into consideration in making investment decisions, including when hedging positions, no assurance can be given that the GLG Funds will be able to fully avoid these risks or generate sufficient risk-adjusted returns. There are risks associated with the GLG Funds investments in high yield and distressed debt. The GLG Funds may invest in obligors and issuers in weak financial condition, experiencing poor operating results, having substantial financial needs or negative net worth, facing special competitive problems, or in obligors and issuers that are involved in bankruptcy or reorganization proceedings. Among the problems involved in investments in troubled obligors and issuers is the fact that it may frequently be difficult to obtain full information as to the conditions of such obligors and issuers. The market prices of such investments are also subject to abrupt and erratic market movements and significant price volatility, and the spread between the bid and offer prices of such investments may be greater than normally expected. It may take a number of years for the market price of such investments to reflect their intrinsic value. Some of the investments held by the GLG Funds may not be widely traded, and depending on the investment profile of a particular GLG Fund, that fund s exposure to such investments may be substantial in relation to the market for those investments. In addition, there is no recognized market for some of the investments held in GLG Funds, with the result that such investments are likely to be illiquid. As a result of these factors, the investment objectives of the relevant funds may be more difficult to achieve. Table of Contents Fluctuations in interest rates may significantly affect the returns derived from the GLG Funds investments. Fluctuations in interest rates may significantly affect the return derived from investments within the GLG Funds, as well as the market values of, and the corresponding levels of gains or losses on, such investments. Such fluctuations could materially adversely affect investor sentiment towards fixed income and convertible debt instruments generally and the GLG Funds in particular and consequently could have a material adverse effect on our business, results of operations or financial condition. The GLG Funds are subject to risks due to potential illiquidity of assets. The GLG Funds may make investments or hold trading positions in markets that are volatile and which may become illiquid. Timely divestiture or sale of trading positions can be impaired by decreased trading volume, increased price volatility, concentrated trading positions, limitations on the ability to transfer positions in highly specialized or structured transactions to which it may be a party, and changes in industry and government regulations. It may be impossible or costly for the GLG Funds to liquidate positions rapidly in order to meet margin calls, withdrawal requests or otherwise, particularly if there are other market participants seeking to dispose of similar assets at the same time or the relevant market is otherwise moving against a position or in the event of trading halts or daily price movement limits on the market or otherwise. Moreover, these risks may be exacerbated for the GLG Funds that are funds of hedge funds. For example, if one of these funds of hedge funds were to invest a significant portion of its assets in two or more hedge funds that each had illiquid positions in the same issuer, the illiquidity risk for these funds of hedge funds would be compounded. There are risks associated with the GLG Funds use of leverage. The GLG Funds have, and may in the future, use leverage by borrowing on the account of funds on a secured and/or unsecured basis and pursuant to repurchase arrangements and/or deferred purchase agreements. Leverage can also be employed in a variety of other ways including margining (that is, an amount of cash or securities an investor deposits with a broker when borrowing to buy investments) and the use of futures, warrants, options and other derivative products. Generally, leverage is used with the intention of increasing the overall level of investment in a fund. Higher investment levels may offer the potential for higher returns. This exposes investors to increased risk as leverage can increase the fund s market exposure and volatility. For instance, a purchase or sale of a leveraged investment may result in losses in excess of the amount initially deposited as margin for the investment. This increased market exposure and volatility could have a material adverse effect on the return of the funds. There are risks associated with the GLG Funds investments in derivatives. The GLG Funds may make investments in derivatives. These investments are subject to a variety of risks. Examples of such risks may include, but are not limited to: limitation of risk assessment methodologies. Decisions to enter into these derivatives and other securities contracts will be based on estimates of returns and probabilities of loss derived from our own calculations and analysis. There can be no assurance that the estimates or the methodologies, or the assumptions which underlie such estimates and methodologies, will turn out to be valid or appropriate; risks underlying the derivative and securities contracts. A general rise in the frequency, occurrence or severity of certain non-financial risks such as accidents and/or natural catastrophes will lead to a general decrease in the returns and the possibility of returns from these derivatives and securities contracts, which will not be reflected in the methodology or assumption underlying the analysis of any specific derivative or securities contract; and particular risks. The particular instruments in which we will invest on behalf of the GLG Funds may produce an unusually and unexpectedly high amount of losses, which will not be reflected in the methodology or assumptions underlying the analysis of any specific derivative or securities contract. Table of Contents The GLG Funds are subject to risks in using prime brokers, custodians, administrators and other agents. All of the GLG Funds depend on the services of prime brokers, custodians, administrators and other agents in connection with certain securities transactions. For example, in the event of the insolvency of a prime broker and/or custodian, the funds might not be able to recover equivalent assets in full as they will usually rank among the prime broker s and custodian s unsecured creditors in relation to assets that the prime broker or custodian borrows, lends or otherwise uses. In addition, the GLG Funds cash held with a prime broker or custodian may not be segregated from the prime broker s or custodian s own cash, and the GLG Funds may therefore rank as unsecured creditors in relation thereto. GLG Fund investments are subject to numerous additional risks. GLG Fund investments, including investments by its external fund of hedge funds products in other hedge funds, are subject to numerous additional risks, including the following: certain of the GLG Funds are newly established funds without any operating history or are managed by management companies or general partners who do not have a significant track record as an independent manager; generally, there are few limitations on the execution of the GLG Funds investment strategies, which are subject to the sole discretion of the management company of such funds; the GLG Funds may engage in short-selling, which is subject to the theoretically unlimited risk of loss because there is no limit on how much the price of a security may appreciate before the short position is closed out. A GLG Fund may be subject to losses if a security lender demands return of the lent securities and an alternative lending source cannot be found or if the GLG Fund is otherwise unable to borrow securities that are necessary to hedge its positions; credit risk may arise through a default by one of several large institutions that are dependent on one another to meet their liquidity or operational needs, so that a default by one institution causes a series of defaults by the other institutions. This systemic risk may adversely affect the financial intermediaries (such as clearing agencies, clearing houses, banks, securities firms and exchanges) with which the GLG Funds interact on a daily basis; the efficacy of investment and trading strategies depends largely on the ability to establish and maintain an overall market position in a combination of financial instruments. Trading orders may not be executed in a timely and efficient manner due to various circumstances, including systems failures or human error. In such event, the GLG Funds might only be able to acquire some but not all of the components of the position, or if the overall position were to need adjustment, the GLG Funds might not be able to make such adjustment. As a result, the GLG Funds would not be able to achieve the market position selected by the management company or general partner of such funds, and might incur a loss in liquidating their position; and the investments held by the GLG Funds are subject to risks relating to investments in commodities, equities, bonds, futures, options and other derivatives, the prices of which are highly volatile and may be subject to the theoretically unlimited risk of loss in certain circumstances, including if the fund writes a call option. Price movements of commodities, futures and options contracts and payments pursuant to swap agreements are influenced by, among other things, interest rates, credit market conditions, changing supply and demand relationships, trade, fiscal, monetary and exchange control programs and policies of governments and national and international political and economic events and policies. The value of futures, options and swap agreements also depends upon the price of the commodities underlying them. In addition, the assets of the GLG Funds are subject to the risk of the failure of any of the exchanges on which their positions trade or of their clearinghouses or counterparties. Most U.S. commodities exchanges limit fluctuations in certain commodity interest prices during a single day by imposing daily price fluctuation limits or daily limits, the existence of which may reduce liquidity or effectively curtail trading in particular markets. Table of Contents The GLG Funds are subject to counterparty risk with regard to over-the-counter instruments which they may hold. In the event of the insolvency of any counterparty or of any broker through which portfolio managers trade for the account of the GLG Funds, such as prime brokerage and custodian agreements to which certain of the GLG Funds are party, the funds may only rank as unsecured creditors in respect of sums due to them on the margin accounts or otherwise and any losses will be borne by the funds. The GLG Funds may also enter into currency, interest rate, total return or other swaps which may be surrogates for other instruments such as currency forwards and interest rate options. The value of such instruments, which generally depends upon price movements in the underlying assets as well as counterparty risk, will influence the performance of the GLG Funds and therefore a fall in the value of such instruments could have a material adverse effect on our business, results of operations or financial condition. In particular, certain GLG Funds frequently trade in debt securities and other obligations, either directly or on an assignment basis. Consequently, the GLG Funds will be subject to risk of default by the debtor or obligor in relation to their debt securities and other obligations, which could have a material adverse effect on our business, results of operations or financial condition. The due diligence process that we undertake in connection with investments by the GLG Funds may not reveal all facts that may be relevant in connection with an investment. Before making investments, we conduct due diligence that we deem reasonable and appropriate based on the facts and circumstances applicable to each investment. When conducting due diligence, we may be required to evaluate important and complex business, financial, tax, accounting, environmental and legal issues. Outside consultants, legal advisors, accountants and investment banks may be involved in the due diligence process in varying degrees depending on the type of investment. Nevertheless, when conducting due diligence and making an assessment regarding an investment, we rely on the resources available to us, including information provided by the target of the investment and, in some circumstances, third-party investigations. The due diligence investigation that we carry out with respect to any investment opportunity may not reveal or highlight certain facts that could adversely affect the value of the investment. The GLG Funds make investments in companies that the GLG Funds do not control. Investments by most of the GLG Funds include debt instruments and equity securities of companies that the GLG Funds do not control. Such instruments and securities may be acquired by the GLG Funds through trading activities or through purchases of securities from the issuer. These investments are subject to the risk that the company in which the investment is made may make business, financial or management decisions with which we do not agree or that the majority stakeholders or the management of the company may take risks or otherwise act in a manner that does not serve our interests. If any of the foregoing were to occur, the values of investments by the GLG Funds could decrease and our financial condition, results of operations and cash flow could suffer as a result. Risk management activities may adversely affect the return on the GLG Funds investments. When managing their exposure to market risks, the GLG Funds may from time to time use forward contracts, options, swaps, credit default swaps, caps, collars and floors or pursue other strategies or use other forms of derivative instruments to limit our exposure to changes in the relative values of investments that may result from market developments, including changes in prevailing interest rates, currency exchange rates and commodity prices. The success of any hedging or other derivative transactions generally will depend on the ability to correctly predict market changes, the degree of correlation between price movements of a derivative instrument, the position being hedged, the creditworthiness of the counterparty and other factors. As a result, while the GLG Funds may enter into a transaction in order to reduce their exposure to market risks, the transaction may result in poorer overall investment performance than if it had not been executed. Such transactions may also limit the opportunity for gain if the value of a hedged position increases. Table of Contents The GLG Funds may be subject to U.K. tax if the Company does not qualify for the U.K. Investment Manager Exemption. Certain of the GLG Funds may, under U.K. tax legislation, be regarded as carrying on a trade in the United Kingdom through their investment manager, GLG Partners LP. It is our intention to organize our affairs such that neither the investment manager nor the group companies that are partners in the investment manager constitute a U.K. branch or permanent establishment of the GLG Funds by reason of exemptions provided by Section 127 of the Finance Act 1995 and Schedule 26 of the Finance Act 2003. These exemptions, which apply in respect of income tax and corporation tax respectively, are substantially similar and are each often referred to as the Investment Manager Exemption (IME). We cannot assure you that the conditions of the IME will be met at all times in respect of every fund. Failure to qualify for the IME in respect of a fund could subject the fund to U.K. tax liability, which, if not paid, would become the liability of GLG Partners LP, as investment manager. This U.K. tax liability could be substantial. In organizing our affairs such that we are able to meet the IME conditions, we will take account of a statement of practice published by the U.K. tax authorities that sets out their interpretation of the law. A revised version of this statement was published on July 20, 2007. The revised statement applies with immediate effect, but under grandfathering provisions we may follow the original statement in respect of the GLG Funds until December 31, 2009 and, therefore, the revised statement has no impact until 2010. Furthermore, we believe that the changes in practice that have been introduced will not have a material impact on our ability to meet the IME conditions in respect of the GLG Funds. Risks Related to Our Organization and Structure Since our principal operations are located in the United Kingdom, we may encounter risks specific to companies located outside the United States. Since our principal operations are located in the United Kingdom, we are exposed to additional risks that could negatively impact our future results of operations, including but not limited to: tariffs and trade barriers; regulations related to customs and import/export matters; tax issues, such as tax law changes and variations in tax laws as compared to the United States; cultural differences; and foreign exchange controls. We are a controlled company within the meaning of the New York Stock Exchange Listed Company Manual and, as a result, qualify for, and rely on, exemptions from certain corporate governance standards, which may limit the presence of independent directors on our board of directors or board committees. Our Principals, their Trustees and certain other GLG Shareowners who have entered into a voting agreement beneficially own shares of our common stock and Series A voting preferred stock which collectively represent approximately 54% of our voting power. Accordingly, they have the ability to elect our board of directors and thereby control our management and affairs. Therefore, we are a controlled company for purposes of Section 303(A) of the New York Stock Exchange Listed Company Manual. As a controlled company, we are exempt from certain governance requirements otherwise required by the New York Stock Exchange, including the requirement that we have a nominating and corporate governance committee. Under these rules, a company of which more than 50% of the voting power is held by an individual, a group or another company is a controlled company and is exempt from certain corporate governance requirements, including requirements that (1) a majority of the board of directors consist of independent directors, (2) compensation of officers be determined or recommended to the board of directors Table of Contents by a majority of its independent directors or by a compensation committee that is composed entirely of independent directors and (3) director nominees be selected or recommended for selection by a majority of the independent directors or by a nominating committee composed solely of independent directors. We utilize some of these exemptions. For example, we do not have a nominating committee. Accordingly, the procedures for approving significant corporate decisions can be determined by directors who have a direct or indirect interest in the matters and you do not have the same protections afforded to stockholders of other companies that are required to comply with the rules of the New York Stock Exchange. In addition, although our board of directors currently consists of a majority of independent directors, we cannot assure you that we will not rely on the exemption from this requirement in the future. Because of their ownership of approximately 54% of our voting power, our Principals, their Trustees and certain other GLG Shareowners are also able to determine the outcome of all matters requiring stockholder approval (other than those requiring a super-majority vote) and are able to cause or prevent a change of control of our company or a change in the composition of our board of directors, and could preclude any unsolicited acquisition of our company. In addition, because they collectively may determine the outcome of a stockholder vote, they could deprive stockholders of an opportunity to receive a premium for their shares as part of a sale of our company, and that voting control could ultimately affect the market price of our common stock. Certain provisions in our organizational documents and Delaware law make it difficult for someone to acquire control of us. Provisions in our organizational documents make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our stockholders. For example, our organizational documents require advance notice for proposals by stockholders and nominations, place limitations on convening stockholder meetings and authorize the issuance of preferred shares that could be issued by our board of directors to thwart a takeover attempt. In addition, our organizational documents require the affirmative vote of at least 662/3% of the combined voting power of all outstanding shares of our capital stock entitled to vote generally, voting together as a single class, to adopt, alter, amend or repeal our by-laws; remove a director (other than directors elected by a series of our preferred stock, if any, entitled to elect a class of directors) from office, with or without cause; and amend, alter or repeal certain provisions of our certificate of incorporation which require a stockholder vote higher than a majority vote, including the amendment provision itself, or to adopt any provision inconsistent with those provisions. Because of their ownership of approximately 54% of the our voting power, the Principals, their Trustees and certain other GLG Shareowners are able to determine the outcome of all matters requiring stockholder approval (other than those requiring a super-majority vote) and are able to cause or prevent a change of control of our company or a change in the composition of our board of directors, and could preclude any unsolicited acquisition of our company. Certain provisions of Delaware law may also delay or prevent a transaction that could cause a change in our control. The market price of our shares could be adversely affected to the extent that the Principals control over us, as well as provisions of our organizational documents, discourage potential takeover attempts that our stockholders may favor. An active market for our common stock may not develop. Our common stock is currently listed on the New York Stock Exchange and trades under the symbol GLG . However, we cannot assure you a regular trading market of our shares will develop on the New York Stock Exchange or elsewhere or, if developed, that any market will be sustained. Accordingly, we cannot assure you of the likelihood that an active trading market for our shares will develop or be maintained, the liquidity of any trading market, your ability to sell your shares when desired, or at all, or the prices that you may obtain for your shares. The value of our common stock and warrants may be adversely affected by market volatility. Even if an active trading market develops, the market price of our shares and warrants may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our shares and warrants Table of Contents may fluctuate and cause significant price variations to occur. If the market prices of our shares and warrants decline significantly, you may be unable to resell your shares and warrants at or above your purchase price, if at all. We cannot assure you that the market price of our shares and warrants will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect the price of our shares and warrants or result in fluctuations in the price or trading volume of our shares and warrants include: variations in our quarterly operating results or dividends; failure to meet analysts earnings estimates or failure to meet, or the lowering of, our own earnings guidance; publication of research reports about us or the investment management industry or the failure of securities analysts to cover our shares after the acquisition of GLG; additions or departures of the Principals and other key personnel; adverse market reaction to any indebtedness we may incur or securities we may issue in the future; actions by stockholders; changes in market valuations of similar companies; speculation in the press or investment community; changes or proposed changes in laws or regulations or differing interpretations thereof affecting our business or enforcement of these laws and regulations, or announcements relating to these matters; adverse publicity about the asset management industry generally or individual scandals, specifically; and general market and economic conditions. We may not be able to pay dividends on our common stock. As a holding company, our ability to pay dividends is subject to the ability of our subsidiaries to provide cash to us. We intend to distribute dividends to our stockholders and/or repurchase our common stock at such time and in such amounts to be determined by our board of directors. Accordingly, we expect to cause our subsidiaries to make distributions to their stockholders or partners, as applicable, in an amount sufficient to enable us to pay such dividends to our stockholders or make such repurchases, as applicable; however, no assurance can be given that such distributions or stock repurchases will or can be made. Our board can reduce or eliminate our dividend, or decide not to repurchase our common stock, at any time, in its discretion. In addition, our subsidiaries will be required to make minimum tax distributions and intend to make limited partner profit share distributions to our key personnel pursuant to our limited partner profit share arrangement prior to distributing dividends to our stockholders or repurchasing our common stock. If our subsidiaries have insufficient funds to make these distributions, we may have to borrow funds or sell assets, which could materially adversely affect our liquidity and financial condition. In addition, our subsidiaries earnings may be insufficient to enable them to make required minimum tax distributions or intended limited partner profit share distributions to their stockholders, partners or members, as applicable, because, among other things, our subsidiaries may not have sufficient capital surplus to pay dividends or make distributions under the laws of the relevant jurisdiction of incorporation or organization or may not satisfy regulatory requirements of capital adequacy, including the regulatory capital requirements of the FSA in the United Kingdom or the Financial Groups Directive of the European Community. We will also be restricted from paying dividends or making stock repurchases under our credit facility in the event of a default or if we are required to make mandatory prepayment of principal thereunder. Table of Contents To complete the acquisition of GLG, we incurred a large amount of debt, which will limit our ability to fund general corporate requirements and obtain additional financing, limit our flexibility in responding to business opportunities and competitive developments and increase our vulnerability to adverse economic and industry conditions. We have incurred $570.0 million of indebtedness to finance the acquisition of GLG, transaction costs, deferred underwriting fees and our operations. As a result of the substantial fixed costs associated with these debt obligations, we expect that: a decrease in revenues will result in a disproportionately greater percentage decrease in earnings; we may not have sufficient liquidity to fund all of these fixed costs if our revenues decline or costs increase; we may have to use our working capital to fund these fixed costs instead of funding general corporate requirements, including capital expenditures; and we may not have sufficient liquidity to respond to business opportunities, competitive developments and adverse economic conditions. These debt obligations may also impair our ability to obtain additional financing, if needed, and our flexibility in the conduct of our business. Moreover, the terms of our indebtedness restrict our ability to take certain actions, including the incurrence of additional indebtedness, mergers and acquisitions, investments at the parent company level and asset sales. Our ability to pay the fixed costs associated with our debt obligations depends on our operating performance and cash flow, which will in turn depend on general economic conditions. A failure to pay interest or indebtedness when due could result in a variety of adverse consequences, including the acceleration of our indebtedness. In such a situation, it is unlikely that we would be able to fulfill our obligations under or repay the accelerated indebtedness or otherwise cover our fixed costs. We incurred significant costs associated with the acquisition of GLG, which reduced the amount of cash otherwise available for other corporate purposes. We incurred direct transaction costs of approximately $38.6 million associated with the acquisition of GLG, which are included as a part of the total purchase cost for accounting purposes. There is no assurance that the significant costs associated with the acquisition will prove to be justified in light of the benefit ultimately realized. Although there were no compensation charges in connection with the acquisition, we expect compensation and benefits post-acquisition to reflect the amortization of a significant non-cash equity-based compensation expense associated with the vesting of equity-based awards over the next five years. The expected compensation and benefits expense will relate to the 10,000,000 shares of our common stock issued for the benefit of our employees, service providers and certain key personnel under our 2007 Restricted Stock Plan; 33,000,000 shares of our common stock and $150 million in cash and promissory notes issued for the benefit of certain of our key personnel participating in our equity participation plan; and 77,604,988 shares of common stock and 58,904,993 exchangeable Class B ordinary shares of FA Sub 2 Limited subject to an agreement among our principals and trustees. These shares are subject to certain vesting and forfeiture provisions, and the related share-based compensation expenses are being recognized on a straight-line basis over the requisite service period. This treatment under GAAP will reduce our net income and may result in net losses in future periods. As a result, as described under Unaudited Pro Forma Condensed Combined Financial Information , we had negative net worth of $99.3 million as of September 30, 2007, and net losses of $427.1 million and $710.3 million on a pro forma basis for the nine months ended September 30, 2007 and the year ended December 31, 2006, respectively, on a pro forma basis after the consummation of the acquisition. Fulfilling our obligations as a public company will be expensive and time consuming. Prior to its acquisition by us, GLG was a private company and was not required to prepare or file periodic and other reports with the SEC under the applicable U.S. federal securities laws or to comply with the Table of Contents requirements of U.S. federal securities laws applicable to public companies, such as Section 404 of the Sarbanes-Oxley Act of 2002. Although GLG maintained separate legal and compliance and internal audit functions, which along with its Chief Operating Officer, reported on a day-to-day basis directly to its Co-Chief Executive Officer with further formal reporting to it Management Committee, and we maintained disclosure controls and procedures and internal control over financial reporting as required under the U.S. federal securities laws with respect to our activities, neither GLG nor we were required to establish and maintain such disclosure controls and procedures and internal controls over financial reporting as required with respect to a public company with substantial operations. Under the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC, as well as the rules of the New York Stock Exchange, we have been required to implement additional corporate governance practices and to adhere to a variety of reporting requirements and accounting rules. Compliance with these obligations requires significant time and resources from our management and our finance and accounting staff, may require additional staffing and infrastructure and will significantly increase our legal, insurance and financial compliance costs. As a result of the increased costs associated with being a public company, our operating income as a percentage of revenue is likely to be lower. We must comply with Section 404 of the Sarbanes-Oxley Act of 2002 in a relatively short timeframe. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to document and test the effectiveness of our internal controls over financial reporting in accordance with an established control framework and to report on our management s conclusion as to the effectiveness of these internal controls over financial reporting beginning with the fiscal year ending December 31, 2007. We will also be required to have an independent registered public accounting firm test the internal controls over financial reporting and report on the effectiveness of such controls for the fiscal year ending December 31, 2007 and subsequent years. In addition, the independent registered public accounting firm will be required to report on management s assessment. For 2007, we will be relying on relief from these requirements to limit the scope of these requirements primarily to GLG Partners, Inc. and certain subsidiaries, excluding the GLG entities. Beginning in 2008, we will be required to comply with these requirements with respect to the consolidated group, including the GLG entities. Any delays or difficulty in satisfying these requirements could adversely affect future results of operations and our stock price. We may incur significant costs to comply with these requirements. We may in the future discover areas of internal controls over financial reporting that need improvement, particularly with respect to any businesses acquired in the future. There can be no assurance that remedial measures will result in adequate internal controls over financial reporting in the future. Any failure to implement the required new or improved controls, or difficulties encountered in their implementation, could materially adversely affect our results of operations or could cause us to fail to meet our reporting obligations. If we are unable to conclude that we have effective internal controls over financial reporting, or if our auditors are unable to provide an unqualified report regarding the effectiveness of internal controls over financial reporting as required by Section 404, investors may lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our securities. In addition, failure to comply with Section 404 could potentially subject us to sanctions or investigation by the SEC or other regulatory authorities. The failure to address actual or perceived conflicts of interest that may arise as a result of the investment by our Principals and other key personnel of at least 50% of the after-tax cash proceeds they received in the acquisition in GLG Funds, may damage our reputation and materially adversely affect our business. As a result of the significant amount that our Principals, their Trustees and certain key personnel intend to invest in the GLG Funds in December 2007, other investors in the GLG Funds may perceive conflicts of interest regarding investments in the GLG Funds in which our Principals, their Trustees and other key personnel are personally invested. Actual or perceived conflicts of interests could give rise to investor dissatisfaction or litigation and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with these conflicts of interest. Investor dissatisfaction or litigation in connection with conflicts of interest could materially Table of Contents adversely affect our reputation and our business in a number of ways, including as a result of redemptions by investors from the GLG Funds and a reluctance of counterparties do business with us. We may choose to redeem our outstanding warrants at a time that is disadvantageous to our warrant holders. We may redeem the warrants issued as a part of our publicly traded units and the co-investment warrants at any time beginning December 21, 2007 in whole and not in part, at a price of $0.01 per warrant, upon a minimum of 30 days prior written notice of redemption, if and only if, the last sales price of our common stock equals or exceeds $14.25 per share for any 20 trading days within a 30-trading day period ending three business days before we send the notice of redemption. Redemption of the warrants could force the warrant holders (1) to exercise the warrants and pay the exercise price therefor at a time when it may be disadvantageous for the holders to do so, (2) to sell the warrants at the then current market price when they might otherwise wish to hold the warrants or (3) to accept the nominal redemption price which, at the time the warrants are called for redemption, is likely to be substantially less than the market value of the warrants. Our outstanding warrants may be exercised in the future, which would increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders. This might have an adverse effect on the market price of our common stock. Excluding 21,500,003 warrants beneficially owned by our founders and their affiliates (which includes 5,000,000 co-investment warrants), outstanding redeemable warrants to purchase an aggregate of 45,650,400 shares of common stock will become exercisable on December 21, 2007. These warrants would only be exercised if the $7.50 per share exercise price is below the market price of our common stock. To the extent they are exercised, additional shares of our common stock will be issued, which will result in dilution to our stockholders and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the market price of our shares. Risks Related to Taxation Our effective income tax rate depends on various factors and may increase as our business expands into countries with higher tax rates. There can be no assurance that we will continue to have a low effective income tax rate. We are a U.S. corporation that is subject to the U.S. corporate income tax on its taxable income. Our low expected effective tax rate after the acquisition of GLG is primarily attributable to the asset basis step-up resulting from the acquisition and the associated 15-year goodwill amortization deduction for U.S. tax purposes. Going forward, our effective income tax rate will be a function of our overall earnings, the income tax rates in the jurisdictions in which our entities do business, the type and relative amount of income earned by our entities in these jurisdictions and the timing of repatriation of profits back to the United States in the form of dividends. We expect that our effective income tax rate may increase as our business expands into countries with higher tax rates. In addition, allocation of income among business activities and entities is subject to detailed and complex rules and depends on the facts and circumstances. No assurance can be given that the facts and circumstances or the rules will not change from year to year or that taxing authorities will not be able to successfully challenge such allocations. U.S. persons who own 10% or more of our voting stock may be subject to higher U.S. tax rates on a sale of the stock. U.S. persons who hold 10% or more (actually and/or constructively) of the total combined voting power of all classes of our voting stock may on the sale of the stock be subject to U.S. tax at ordinary income tax rates (rather than at capital gain tax rates) on the portion of their taxable gain attributed to undistributed offshore earnings. This would be the result if we are treated (for U.S. federal income tax purposes) as principally availed to hold the stock of foreign corporation(s) and the stock ownership in us satisfies the stock Table of Contents ownership test for determining controlled foreign corporation (CFC) status (determined as if we were a foreign corporation). A foreign corporation is a CFC if, for an uninterrupted period of 30 days or more during any taxable year, more than 50% of its stock (by vote or value) is owned by 10% U.S. Shareholders . A U.S. person is a 10% U.S. Shareholder if such person owns (actually and/or constructively) 10% or more of the total combined voting power of all classes of stock entitled to vote of such corporation. Approximately 32.0% of our stock is treated as directly or constructively owned by 10% U.S. Shareholders. Therefore, any U.S. person who considers acquiring (directly, indirectly and/or constructively) 10% or more of our outstanding stock should first consult with his or her tax advisor. Our U.K. tax liability will be higher if the interest expense incurred by our subsidiary FA Sub 3 Limited cannot be fully utilized for U.K. tax purposes. Our subsidiary FA Sub 3 Limited incurred debt to finance the acquisition of GLG and is claiming a deduction for U.K. tax purposes for the interest expense incurred on such debt. If the interest expense incurred by FA Sub 3 Limited cannot be fully utilized for U.K. tax purposes against U.K. income, our U.K. tax liability might increase significantly. See also Our tax position might change as a result of a change in tax laws. below for a discussion of U.K. government proposals on interest deductibility. Our tax position might change as a result of a change in tax laws. Since we operate our business in the United Kingdom, the United States and internationally, we are subject to many different tax laws. Tax laws (and the interpretations of tax laws by taxing authorities) are subject to frequent change, sometimes retroactively. There can be no assurance that any such changes in the tax laws applicable to us will not adversely affect our tax position. The U.K. government has recently published proposals with regard to the deductibility of interest expense incurred by U.K. tax resident entities. No assurances can be given that the U.K. government will not enact legislation that restricts the ability of our subsidiary FA Sub 3 Limited to claim a tax deduction for the full amount of its interest expense. The U.S. Congress is considering changes to U.S. income tax laws which would increase the U.S. income tax rate imposed on carried interest earnings and would subject to U.S. corporate income tax certain publicly held private equity firms and hedge funds structured as partnerships (for U.S. federal income tax purposes). These changes would not apply to us because the Company is already taxed in the United States as a U.S. corporation and earns fee income and does not receive a carried interest . No assurances can be given that the U.S. Congress might not enact other tax law changes that would adversely affect us. Table of Contents FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements within the meaning of Section 21E of the Exchange Act. Our forward-looking statements include, but are not limited to, statements regarding our expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words anticipates believe, continue, could, estimate, expect, intend, may, might, plan, possible, potential, predict, project, should, would and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. The forward-looking statements contained in this prospectus are based on our current expectations and beliefs concerning future developments and their potential effects on us and speak only as of the date of such statement. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading Risk Factors and the following: financial performance; market conditions for GLG Funds; performance of GLG Funds, the related performance fees and the associated impacts on revenues, net income, cash flows and fund inflows and outflows; the cost of retaining our key investment and other personnel or the loss of such key personnel; risks associated with the expansion of our business in size and geographically; operational risk; litigation and regulatory enforcement risks, including the diversion of management time and attention and the additional costs and demands on our resources; risks associated with the use of leverage, investment in derivatives, interest rates and currency fluctuations; and other risk factors set forth in our SEC filings. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable law. This prospectus also contains forward-looking statements attributed to third parties relating to their estimates of the growth of our markets. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Forward-looking statements contained in this prospectus speak only as of the date of this prospectus. Unless required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should, however, review the risks and uncertainties we describe in the reports we will file from time to time with the SEC after the date of this prospectus. See Where you can find more information . Table of Contents USE OF PROCEEDS We will receive up to an aggregate of approximately $503,628,023 from the exercise of the warrants, if they are exercised in full. We expect that any net proceeds from the exercise of the warrants will be used to fund additional repurchases of warrants or shares of common stock, for general corporate purposes and to fund working capital. The selling stockholders will receive all of the proceeds from the sale of any shares of common stock and/or warrants sold by them pursuant to this prospectus. We will not receive any proceeds from these sales. Table of Contents PLAN OF DISTRIBUTION We are offering the shares of common stock underlying the warrants upon the exercise of the warrants by the holders thereof. The warrants may be exercised on or prior to December 28, 2011 at the offices of the warrant agent, Continental Stock Transfer Trust Company, with the exercise form certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified check payable to us, for the number of warrants being exercised. Promptly upon receipt of the notice of exercise together with full payment of the warrant price, the warrant agent will deliver to the holder the shares of common stock being purchased. The shares of common stock and warrants underlying outstanding units, and shares of our common stock issued upon the exercise of the warrants may be sold by the selling stockholders from time to time in: transactions in the over-the-counter market; negotiated transactions; underwritten offerings; or a combination of such methods of sale. The selling stockholders may sell the shares of common stock and warrants underlying outstanding units, and the shares of our common stock issued upon the exercise of the warrants at: fixed prices which may be changed; market prices prevailing at the time of sale; prices related to prevailing market prices; or negotiated prices. The selling stockholders may also resell all or a portion of the securities in open market transactions in reliance upon Rule 144 under the Securities Act, provided they meet the criteria and conform to the requirements of Rule 144. The selling stockholders may effect these transactions by selling the shares of common stock and warrants underlying outstanding units, and shares of our common stock issued upon the exercise of the warrants to or through broker-dealers, and these broker-dealers may receive compensation in the form of discounts, concessions or commissions from the selling stockholders and/or the purchasers of the securities for whom such broker-dealers may act as agents or to whom they sell as principals, or both (which compensation as to a particular broker-dealer might be in excess of customary commissions). The selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions. In connection with these transactions, broker-dealers or other financial institutions may engage in short sales of our securities in the course of hedging the positions they assume with selling stockholders. The selling stockholders may also enter into options or other transactions with broker-dealers or other financial institutions which require the delivery to such broker-dealer or other financial institution of the securities covered by this prospectus, which securities the broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction). The founders units, shares and warrants (1) held by our founders are subject to the terms of letter agreements between each of the founders and Citigroup Global Market, Inc., as sole book running manager of our initial public offering and (2) held by our sponsors are subject to certain restrictions on transfer pursuant to the terms of the founders agreement entered into among Noam Gottesman, as Sellers Representative, our Principals, the Trustees and our sponsors, each of which provides that subject to certain exceptions, these shares and warrants may not be transferred until November 2, 2008. In order to comply with the applicable securities laws of particular states, if applicable, the shares of common stock and warrants underlying outstanding units, and the shares of common stock issued upon the exercise of the warrants will be sold in the jurisdictions only through registered or licensed brokers or dealers. Table of Contents In addition, in particular states, the shares of our common stock and warrants underlying outstanding units, and the shares of common stock issued upon the exercise of the warrants may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with. The selling stockholders and any broker-dealers or agents that participate with the selling stockholders in the distribution of the shares of common stock and warrants underlying outstanding units, or the shares of our common stock issued upon the exercise of the warrants may be deemed to be underwriters within the meaning of the Securities Act, and any commissions received by them and any profit on the resale of the warrants or the shares of our common stock issued upon the exercise of the warrants purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act of 1933. Each selling stockholder will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, which provisions may limit the timing of purchases and sales of shares of our securities by the selling stockholder. We will pay for all costs of the registration of the warrants, including, without limitation, SEC filing fees and expenses of compliance with state securities or blue sky laws; except that, the selling holders will pay all underwriting discounts and selling commissions, if any. We have agreed to indemnify the selling stockholders against particular civil liabilities, including some liabilities under the Securities Act of 1933, or we will compensate them for some of these liabilities incurred in connection therewith. Table of Contents PRICE RANGE OF OUR SECURITIES On December 21, 2006, our units began trading on the American Stock Exchange under the symbol FRH.U . Each of our units consists of one share of common stock and one warrant. On January 29, 2007, the common stock and warrants underlying our units began to trade separately on the American Stock Exchange under the symbols FRH.WS and FRH , respectively. Our securities were traded on the American Stock Exchange until November 2, 2007. On November 5, 2007, our units, common stock and warrants began trading on the New York Stock Exchange under the symbols GLG.U , GLG and GLG WS , respectively. The following sets forth the high and low closing sales price of our units, common stock and warrants, as reported on the American Stock Exchange or the New York Stock Exchange for the periods shown: Units Common Stock Warrants High Low High Low High Low 2006: Fourth Quarter (beginning on December 21, 2006) $ 10.20 $ 10.00 $ $ $ $ 2007: First Quarter $ 11.15 $ 10.01 $ 10.00 $ 8.90 $ 1.50 $ 1.10 Second Quarter $ 16.68 $ 10.55 $ 12.40 $ 9.31 $ 4.60 $ 1.27 Third Quarter $ 16.80 $ 12.00 $ 12.34 $ 9.95 $ 4.55 $ 1.95 Fourth Quarter (through December 18, 2007) $ 20.75 $ 14.25 $ 14.97 $ 11.25 $ 6.63 $ 4.40 On December 18, 2007 the last reported sale price for our units, common stock and warrants on the New York Stock Exchange was $20.09 per unit, $13.58 per share and $6.00 per warrant, respectively. As of November 30, 2007 there was one holder of record of our units, 228 holders of record of our common stock and 10 holders of record of our warrants, respectively. DIVIDEND POLICY Except for the 1-for-3 stock dividend that was effected on December 14, 2006 and the 1-for-5 stock dividend that was effected on December 21, 2006, we have not paid any dividends on our common stock to date. Our board of directors currently intends to begin paying cash dividends on our common stock in 2008. However, our board of directors has not yet determined the amount and/or frequency of such cash dividends, if any. We currently anticipate that our board of directors will determine to declare a modest regular quarterly cash dividend and will consider paying a special annual dividend based upon our annual profitability beginning after the end of 2008. Our board of directors may, from time to time, examine our dividend policy and may, in its absolute discretion, change such policy. Table of Contents CAPITALIZATION The following table summarizes our capitalization as of September 30, 2007: on a historical basis; on a pro forma basis, after giving effect to the acquisition of GLG; on a pro forma as adjusted basis to give effect to the acquisition of GLG and the issuance of 67,150,403 shares of our common stock upon exercise of the warrants at a price of $7.50 per share. As of September 30, 2007 GLG Freedom Pro Forma Pro Forma Historical Historical Combined As Adjusted (In thousands, except per share amounts) Cash and cash equivalents $ 391,732 $ 1,779 $ 454,531 $ 958,159 Investments $ 163 $ $ 163 $ 163 Minority interest $ 2,031 $ $ 2,031 $ 2,031 Stockholders equity: Stockholders equity 6,843 Common stock, $.0001 par value; 200,000,000 authorized, 64,800,003 issued and outstanding, actual; 1,150,000,000 authorized, 240,894,910 issued and outstanding, pro forma; 308,045,313 issued and outstanding, pro forma as adjusted 6 23 31 Series A voting preferred stock, $.0001 par value; no shares authorized, issued and outstanding, actual; 58,904,993 authorized, issued and outstanding, pro forma and pro forma as adjusted 6 6 Additional paid-in capital 392,127 97,149 600,777 Income accumulated during the development stage 8,886 Accumulated income (deficit) 257,238 (200,143 ) (200,143 ) Accumulated other comprehensive income 3,655 3,655 3,655 Total stockholders equity 267,736 401,019 (99,310 ) 404,326 Total capitalization $ 269,767 $ 401,019 $ (97,279 ) $ 406,357 The capitalization table should be read in conjunction with the financial statements of GLG and Freedom and the unaudited pro forma condensed combined financial information and related notes included elsewhere in this prospectus. Table of Contents DILUTION If holders of warrants exercise their warrants to purchase shares of our common stock, their interests will be diluted immediately to the extent of the difference between the exercise price per share of our common stock and the as adjusted net tangible book value per share of our common stock assuming all outstanding warrants are exercised. As of September 30, 2007, our net tangible book value was approximately $(99) million, or approximately $(0.41) per share of our common stock. Net tangible book value per share is equal to our total net tangible assets, or total net assets less intangible assets, divided by the number of shares of our outstanding common stock. After giving effect to the exercise of warrants to purchase 67,150,403 shares of our common stock outstanding as of September 30, 2007, as adjusted to include the issuance of the co-investment units, at an exercise price of $7.50 per share, and the application of the proceeds therefrom, our as adjusted net tangible book value as of September 30, 2007, attributable to common stockholders would have been approximately $404 million, or approximately $1.31 per share of our common stock. This represents an immediate increase in net tangible book value of $1.72 per share to our existing stockholders, and an immediate dilution of $6.19 per share to warrant holders exercising their warrants and purchasing shares of our common stock. The following table illustrates this per share dilution: Exercise price per share $ 7.50 Net tangible book value per share before warrant exercises $ (0.41 ) Increase in net tangible book value per share attributable to warrant exercises $ 1.72 As adjusted net tangible book value per share after warrant exercises $ 1.31 Dilution per share to exercising warrant holders $ 6.19 Table of Contents SELECTED COMBINED HISTORICAL FINANCIAL INFORMATION OF GLG Because the acquisition was considered a reverse acquisition recapitalization for accounting purposes, the combined historical financial statements of GLG became our historical financial statements. The selected combined historical financial information of GLG as of and for the nine months ended September 30, 2007 and for the nine months ended September 30, 2006 was derived from unaudited condensed combined financial statements of GLG included in this prospectus. The selected combined historical financial information of GLG as of and for the years ended December 31, 2006, 2005 and 2004 was derived from combined financial statements of GLG audited by Ernst Young LLP, independent registered public accounting firm, included in this prospectus. The selected combined historical financial information of GLG as of September 30, 2006 and 2007 and as of and for the years ended December 31, 2003 and 2002 was derived from unaudited combined financial statements of GLG not included in this prospectus. This information should be read in conjunction with Management s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements of GLG and the notes thereto included in this prospectus. Years Ended December 31, Nine Months Ended September 30, 2002 2003 2004 2005 2006 2006 2007 (Unaudited) (Unaudited) (US dollars in thousands) Combined Statement of Operations Data: Net revenues and other income: Management fees, net $ 30,108 $ 65,259 $ 138,988 $ 137,958 $ 186,273 $ 129,981 $ 198,892 Performance fees, net 31,288 206,685 178,024 279,405 394,740 177,047 343,835 Administration fees, net 311 34,814 25,050 42,986 Transaction charges 80,613 115,945 191,585 184,252 Other 626 6,497 6,110 1,476 5,039 1,883 7,875 Total net revenues and other income 142,635 394,386 514,707 603,402 620,866 333,961 593,588 Expenses: Employee compensation and benefits (88,994 ) (158,789 ) (196,784 ) (345,918 ) (168,386 ) (118,194 ) (110,526 ) General, administrative and other (22,052 ) (23,005 ) (42,002 ) (64,032 ) (68,404 ) (43,721 ) (79,634 ) Total expenses (111,046 ) (181,794 ) (238,786 ) (409,950 ) (236,790 ) (161,915 ) (190,160 ) Income from operations 31,589 212,592 275,921 193,452 384,076 172,046 403,428 Interest income, net 882 709 519 2,795 4,657 3,603 4,694 Income before income taxes 32,471 213,301 276,440 196,247 388,733 175,649 408,122 Income taxes (8,456 ) (49,966 ) (48,372 ) (25,345 ) (29,225 ) (14,803 ) (33,020 ) Net income $ 24,015 $ 163,335 $ 228,068 $ 170,902 $ 359,508 $ 160,846 $ 375,102 Distributions to Principals and Trustees $ (33,895 ) $ (70,825 ) $ (222,074 ) $ (106,531 ) $ (165,705 ) $ (148,533 ) $ (254,331 ) Distributions to non-controlling interest holders (14,656 ) $ (6,718 ) $ (215,744 ) Table of Contents As of December 31, As of September 30, 2002 2003 2004 2005 2006 2006 2007 (Unaudited) (Unaudited) (US dollars in thousands) Combined Balance Sheet Data: Cash and cash equivalents $ 28,450 $ 65,655 $ 136,378 $ 236,261 $ 273,148 $ 272,711 $ 391,732 Fees receivable 34,826 139,103 163,235 246,179 251,963 23,229 40,687 Working capital 15,579 25,940 20,395 42,387 370,094 198,032 273,639 Property and equipment, net 4,102 3,801 4,342 3,290 6,121 3,847 8,966 Total assets 75,359 220,829 310,592 495,340 557,377 315,111 474,195 Accrued compensation and benefits 21,654 25,038 125,850 247,745 102,507 60,310 63,199 Other liabilities 5,100 3,972 3,654 Loans payable 13,000 13,000 13,000 13,000 13,000 13,000 13,000 Total members equity 19,400 112,722 117,980 180,229 361,952 187,435 267,736 Table of Contents SELECTED HISTORICAL FINANCIAL INFORMATION OF FREEDOM The summary historical financial information of Freedom as of December 31, 2006 and September 30, 2007 was derived from financial statements of Freedom as of December 31, 2006 audited by Rothstein, Kass Company P.C., independent registered public accounting firm, and unaudited financial statements of Freedom as of September 30, 2007, respectively, included in this proxy statement. This information should be read in conjunction with the financial statements of Freedom and the notes thereto included in this proxy statement. Since Freedom did not have any significant operations to through the date of the acquisition of GLG, only balance sheet data is presented. As of As of December 31, 2006 September 30, 2007 Balance Sheet Data: Working capital (deficiency) $ (122,294 ) $ (52,141 ) Total assets 467,306,751 524,705,119 Total liabilities 110,289,016 123,686,235 Common stock, subject to possible redemption for cash 93,247,353 102,572,088 Stockholders equity 357,017,735 401,018,884 Table of Contents MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of GLG should be read in conjunction with GLG s combined historical financial statements and the related notes. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those included in our filings with the SEC. General GLG s Business GLG is a leading alternative asset manager offering its clients a diverse range of investment products. GLG currently derives its revenues from management fees and administration fees based on the value of the assets in the funds and accounts it manages, referred to as the GLG Funds, and performance fees based on the performance of those investment funds and accounts. Substantially all of GLG s assets under management, or AUM, are attributable to third-party investors, and the GLG Funds and accounts managed by GLG are not consolidated into its financial statements. As of September 30, 2007, GLG s gross AUM (including assets invested from other GLG Funds) were approximately $23.6 billion, up from approximately $3.9 billion as of December 31, 2001, representing a compound annual growth rate, or CAGR, of 37%. As of September 30, 2007 GLG s net AUM (net of assets invested from other GLG Funds) were approximately $20.5 billion, up from approximately $3.9 billion as of December 31, 2001, representing a CAGR of 33%. Factors Affecting GLG s Business GLG s business and results of operations are impacted by the following factors: Assets under management. GLG s revenues from management and administration fees are directly linked to AUM. As a result, GLG s future performance will depend on, among other things, its ability both to retain AUM and to grow AUM from existing and new products. Fund performance. GLG s revenues from performance fees are linked to the performance of the funds and accounts it manages. Performance also affects AUM because it influences investors decisions to invest assets in, or withdraw assets from, the GLG Funds and accounts managed by GLG. Personnel, systems, controls and infrastructure. GLG depends on its ability to attract, retain and motivate leading investment and other professionals. GLG s business requires significant investment in its fund management platform, including infrastructure and back-office personnel. GLG has in the past paid and expects to continue in the future to pay these professionals significant compensation and a share of GLG s profits. Fee rates. GLG s management and administration fee revenues are linked to the fee rates it charges the GLG Funds and accounts it manages as a percentage of their AUM. GLG s performance fees are linked to the rates it charges the GLG Funds and accounts it manages as a percentage of their performance-driven asset growth, subject to high water marks , whereby performance fees are earned by GLG only to the extent that the net asset value of a GLG Fund at the end of a measurement period exceeds the highest net asset value on a preceding measurement period end for which GLG earned performance fees, and in some cases to performance hurdles. In addition, GLG s business and results of operations may be affected by a number of external market factors. These include global asset allocation trends, regulatory developments and overall macroeconomic activity. Due to these and other factors, the operating results of GLG may reflect significant volatility from period to period. GLG operates in only one business segment, the management of global investment funds and accounts. Table of Contents Critical Accounting Policies Management s Discussion and Analysis of Financial Condition and Results of Operations is based upon GLG s combined financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that could affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues, expenses and other income. Actual results could differ materially from these estimates. A summary of GLG s significant accounting policies is presented in Note 2 to GLG s audited and unaudited combined financial statements included in this prospectus. The following is a summary of GLG s critical accounting policies that are most affected by judgments, estimates and assumptions. Combination Criteria GLG has prepared financial statements on a combined basis in connection with the reverse acquisition transaction with Freedom. The financial statements combine all GLG entities under common control or management of the Principals and the Trustees. GLG s principals, Noam Gottesman, Emmanuel Roman and Pierre Lagrange, are collectively referred to as the Principals. Leslie J. Schreyer, in his capacity as trustee of the Gottesman GLG Trust, Jeffrey A. Robins, in his capacity as trustee of the Roman GLG Trust, and G S Trustees Limited, in its capacity as trustee of the Lagrange GLG Trust, are collectively referred to as the Trustees. The analysis as to whether to combine an entity is subject to a significant amount of judgment. Some of the criteria considered are the determination as to the degree of control over an entity by its various equity holders, the design of the entity, how closely related the entity is to each of its equity holders and the relationship of the equity holders to each other. GLG has determined that it does not own a substantive, controlling interest in any of the investment funds it manages and that they are not variable interest entities. As a result, none of the GLG Funds is required to be consolidated with GLG. For all GLG Funds, GLG has granted rights to the investors that provide a simple majority of the unrelated investors with the ability to remove GLG from its position as fund manager. Revenue Recognition Performance Fees Performance fee rates are calculated as a percentage of investment gains less management and administration fees, subject to high water marks and, in the case of most long-only funds, four external funds of funds, or FoHF, and two single-manager alternative strategy funds, to performance hurdles, over a measurement period, generally six months. GLG has elected to adopt the preferred method of recording performance fee income, Method 1 of Emerging Issues Task Force ( EITF ) Topic D-96, Accounting for Management Fees Based on a Formula ( Method 1 ). Under Method 1, GLG does not recognize performance fee revenues until the end of the measurement period when the amounts are contractually payable, or crystallized . The majority of the GLG Funds and accounts managed by GLG have contractual measurement periods that end on each of June 30 and December 31. As a result, the performance fee revenues for GLG s first fiscal quarter and third fiscal quarter results do not reflect revenues from uncrystallized performance fees during these three-month periods. These revenues will be reflected instead at the end of the fiscal quarter in which such fees crystallize. Compensation and Limited Partner Profit Share The portion of compensation expense related to performance fees is accrued during the period for which the related performance fee revenue is recognized. GLG also has a limited partner profit share arrangement which remunerates certain individuals through distributions of profits from two GLG entities paid either to two limited liability partnerships in which those individuals are members or directly to those individuals who are members of the two GLG entities. These partnership draws are priority distributions, which are recognized in the period in which they are payable. Table of Contents There is an additional limited partner profit share distribution, which is recognized in the period in which it is declared. These partnership draws and profit share distributions are referred to as limited partner profit shares and are discussed further under Expenses Employee Compensation and Benefits and Limited Partner Profit Share below. Compensation expense and limited partner profit share tied to fund performance is only recognized when the related performance fees crystallize, generally on June 30 and December 31 of each year. When fourth quarter financials are reported, the portion of compensation expense and limited partner profit share tied to performance will reflect crystallized second half performance as well as any adjustments to amounts accrued in the first half. Equity-Based Compensation Prior to December 31, 2006, GLG had not granted any equity-based awards. In March 2007, GLG established the equity participation plan to provide certain key individuals, through their direct or indirect limited partnership interests in two limited partnerships, Sage Summit LP and Lavender Heights Capital LP, with the right to receive a percentage of the proceeds derived from an initial public offering relating to GLG or a third-party sale of GLG. Upon consummation of the acquisition, Sage Summit LP and Lavender Heights Capital LP received collectively approximately 15% of the total consideration of cash and our capital stock payable to the GLG Shareowners in the acquisition, 99.9% of which was allocated to key individuals who are limited partners of Sage Summit LP and Lavender Heights LP. The balance of the consideration remains unallocated. Of the portion which has been allocated, 92.4% was allocated to limited partners whom we refer to as Equity Sub Plan A members and 7.6% was allocated to limited partners whom we refer to as Equity Sub Plan B members. These limited partnerships distributed to the limited partners in the Equity Sub Plan A, 25% of the aggregate amount allocated to the Equity Sub Plan A members upon consummation of the acquisition of GLG, and the remaining 75% will be distributed to the limited partners in three equal installments of 25% each upon vesting over a three-year period on the first, second and third anniversaries of the consummation of the acquisition, subject to the ability of the general partners of the limited partnerships, whose respective boards of directors consist of the Trustees, to accelerate vesting. These limited partnerships will distribute to the limited partners in Equity Sub Plan B, 25% of the aggregate amount allocated to the Equity Sub Plan B members in four equal installments of 25% each upon vesting over a four-year period on the first, second, third and fourth anniversaries of the consummation of the acquisition, subject to the ability of the general partners of the limited partnerships, whose respective boards of directors consist of the Trustees, to accelerate vesting. The unvested portion of such amounts will be subject to forfeiture in the event of termination of the individual as a limited partner prior to each vesting date, unless such termination is without cause after there has been a change in control of our company after completion of the acquisition or due to death or disability. Upon forfeiture, these unvested amounts will not be returned to us but instead to the limited partnerships, which may reallocate such amounts to their existing or future limited partners. Ten million shares of our common stock issued as part of the purchase price for the acquisition of GLG have been allocated to our employees, service providers and certain key personnel, subject to vesting, which may be accelerated under the Restricted Stock Plan. Of this amount, 123,500 shares have not yet been awarded to individuals. Any unvested stock awards will be returned to us. In connection with the acquisition, we adopted the 2007 Long-Term Incentive Plan, or LTIP, which will provide for the grants of incentive and non-qualified stock options, stock appreciation rights, common stock, restricted stock, restricted stock units, performance units and performance shares to employees, service providers, non-employee directors and certain key personnel who hold direct or indirect limited partnership interests in certain GLG entities. As of November 30, 2007, an aggregate of 478,922 shares of restricted stock have been awarded under the LTIP, subject to vesting. In addition, the Principals and the Trustees have entered into an agreement among principals and trustees which will provide that, in the event a Principal voluntarily terminates his employment with us for any reason prior to the fifth anniversary of the closing of the acquisition of GLG, a portion of the equity interests held by Table of Contents that Principal and his related Trustee as of the closing of the acquisition of GLG will be forfeited to the Principals who are still employed by us and their related Trustees. The equity portion of these plans and agreements for employees will be accounted for in accordance with the provisions of Statement of Financial Accounting Standards ( SFAS ) No. 123(R), Share-Based Payment ( SFAS 123(R) ), which requires that such equity instruments are recorded at their fair value on the measurement date, which date is typically upon the inception of the services that will be performed, and amortized into expense over the vesting period on a straight-line basis. In accordance with SFAS 123(R) for awards with performance conditions, we will make an evaluation at the grant date and future periods as to the likelihood of the performance targets being met. Compensation expense will be adjusted in future periods for subsequent changes in the expected outcome of the performance conditions until the vesting date. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Awards to limited partners and service providers are accounted for under the EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or In Conjunction with Selling, Goods or Services , which requires that such equity instruments are recorded at their fair value on the measurement date, which date is typically upon the inception of the services that will be performed, remeasured at subsequent dates to the extent the awards are unvested, and amortized into expense over the vesting period on a straight-line basis As a result, following the completion of the acquisition of GLG, compensation and benefits reflect the amortization of significant non-cash equity-based compensation expenses associated with the vesting of these equity-based awards, which under GAAP will reduce our net income and may result in net losses. The share-based compensation expense was recorded upon consummation of the acquisition of GLG. Set forth below is a summary of total share-based compensation expenses GLG will incur over the vesting terms of the stock-based awards or interests in connection with the acquisition of GLG beginning on the closing date of the acquisition (dollars in thousands): 12-Month Periods Following Acquisition Year 1 $ 1,416,968 Year 2 529,470 Year 3 301,542 Year 4 149,590 Year 5 61,716 $ 2,459,287 Share-based compensation expenses have been calculated assuming a fair value of our common stock of $13.70 per share (the closing price on November 2, 2007), no change in the fair value of our common stock over the applicable vesting period and a zero forfeiture rate. Net Revenues All fee revenues are presented in MD A net of any applicable rebates or sub-administration fees. Where a single-manager alternative strategy fund or a fund of GLG Funds (internal FoHF) managed by GLG invests in an underlying single-manager alternative strategy fund managed by GLG, the investing fund is the top-level GLG Fund into which a client invests and the investee fund is the underlying GLG Fund into which the investing fund invests. For example, the GLG European Long-Short Fund invests in the GLG Utilities Fund. In that case, the GLG European Long-Short Fund is the investing fund and the GLG Utilities Fund is the investee fund. Table of Contents Management Fees GLG s gross management fee rates are set as a percentage of fund AUM. Management fee rates vary depending on the product, as set forth in the table below (subject to fee treatment of fund-in-fund reinvestments as described below): Product Typical Range of Gross Fee Rates (% of AUM) Single-manager alternative strategy funds 1.50% 2.50%* Long-only funds 0.75% 2.25% Internal FoHF 0.25% 1.50% (at the investing fund level)* External FoHF 1.50% 1.95% * When one of the single-manager alternative strategy funds or internal FoHFs managed by GLG invests in an underlying single-manager alternative strategy fund managed by GLG, management fees are charged at the investee fund level. In addition, management fees are charged on the following GLG Funds at the investing fund level: (1) GLG Multi Strategy Fund; and (2) Prime GLG Diversified Fund. Management fees are generally paid monthly, one month in arrears. Most GLG Funds have share classes with distribution fees that are paid to third-party institutional distributors with no net economic impact to GLG. In certain cases, GLG may rebate a portion of its gross management fees in order to compensate third-party institutional distributors for marketing GLG products and, in a limited number of cases, in order to incentivize clients to invest in GLG Funds. Performance Fees GLG s gross performance fee rates are set as a percentage of fund performance, calculated as investment gains (both realized and unrealized), less management and administration fees, subject to high water marks and, in the case of most long-only funds, four multi-manager funds (external FoHF) and two single-manager alternative strategy funds, to performance hurdles. As a result, even when a GLG Fund has positive fund performance, GLG may not earn a performance fee due to negative fund performance in prior measurement periods and in some cases due to a failure to reach a hurdle rate. Performance fee rates vary depending on the product, as set forth in the table below (subject to fee treatment of fund-in-fund investments as described below): Product Typical Range of Gross Fee Rates (% of Investment Gains) Single-manager alternative strategy funds 20% 30%* Long-only funds 20% 25% Internal FoHF 0% 20% (at the investing fund level)* External FoHF 5% 10% * When one of the single-manager alternative strategy funds or internal FoHFs managed by GLG invests in an underlying single-manager alternative strategy fund managed by GLG, performance fees are charged at the investee fund level. In addition, performance fees are charged on the following GLG Funds at the investing fund level: (1) Prime GLG Diversified Fund; and (2) GLG Global Aggressive Fund, to the extent, if any, that the performance fee at the investing fund level is greater than the performance fee at the investee fund level. GLG has adopted Method 1 for recognizing performance fee revenues and under Method 1 does not recognize performance fee revenues until the end of the measurement period when the amounts are crystallized, which for the majority of the investment funds and accounts managed by GLG is on June 30 and December 31. Table of Contents Administration Fees GLG s gross administration fee rates are set as a percentage of fund AUM. Administration fee rates vary depending on the product. From its gross administration fees, GLG pays sub-administration fees to third-party administrators and custodians, with the residual fees recognized as GLG s net administration fee. Administration fees are generally paid monthly, one month in arrears. When one of the single-manager alternative strategy funds or internal FoHFs managed by GLG invests in an underlying single-manager alternative strategy fund managed by GLG, administration fees are charged at both the investing and investee fund levels. Change in Business Practice Prior to 2005, GLG levied transaction charges on certain of the funds it managed, with respect to certain investment types, on a per-trade basis, and only charged administration fees to cover sub-administration fees paid to third parties. However, beginning in 2005, GLG ceased levying transaction charges and increased administration fee rates for these funds, which going forward include a portion retained by GLG. This transition was effected on a fund-by-fund basis, with GLG ceasing to levy transaction charges on all GLG Funds by the end of 2005, and administration fees being rolled out to all of the single-manager alternative strategy GLG Funds by early 2006, and to all of the long-only GLG Funds by the end of 2006. The elimination of transaction charges was only partially offset by the increase in administration fee rates. This resulted in lower fund expenses which contributed to higher performance fees. The combined impact of this change in business practice was a net reduction in the fees and charges earned by GLG from the GLG Funds in 2005 compared to 2004. However, GLG s management believes that, given competitive factors, the increasing importance of institutional accounts and the need to better position GLG to enter new markets, this change was necessary to execute on its long-term growth strategy. Substantially all of the impact of these changes was reflected in 2006. Fees on Managed Accounts Managed account fee structures are negotiated on an account-by-account basis and may be more complex than for the GLG Funds. Across the managed account portfolio, fee rates vary according to the underlying mandate and in the aggregate are generally within the performance and management fee ranges charged with respect to comparable fund products. Expenses Employee Compensation and Benefits and Limited Partner Profit Share To attract, retain and motivate the highest quality investment and other professionals, GLG provides significant remuneration through salary, discretionary bonuses, profit sharing and other benefits. The largest component of expenses is compensation and other benefits payable to GLG s investment and other professionals. This includes significant fixed annual salary or limited partner profit share and other compensation based on individual, team and company performance and profitability. Beginning in mid-2006, GLG entered into partnership with a number of its key personnel in recognition of their importance in creating and maintaining the long-term value of GLG. These individuals ceased to be employees and either became holders of direct or indirect limited partnership interests in GLG or formed two limited liability partnerships through which they provide services to GLG. Through these partnership interests, these key individuals are entitled to partnership draws as priority distributions, which are recognized in the period in which they are payable. There is an additional limited partner profit share distribution, which is recognized in the period in which it is declared. Key personnel that are participants in the limited partner profit share arrangement do not receive salaries or discretionary bonuses from GLG. Limited partner profit share does not affect net income, whereas comparable amounts paid to these key personnel as employees had been recorded as employee compensation and benefits prior to mid-2006 and accordingly reduced net income. Under GAAP, limited partner profit share cannot be presented as employee compensation expense. However, Table of Contents management believes that it is more appropriate to treat limited partner profit share as expense when considering business performance because it reflects the cost of the services provided to GLG by these participants in the limited partner profit share arrangement. As a result, GLG presents the measure non-GAAP comprehensive limited partner profit share, compensation and benefits , or non-GAAP PSCB, which is a non-GAAP financial measure used to calculate adjusted net income, as described below under Assessing Business Performance , and which adds limited partner profit share to employee compensation expense to show the total cost of the services provided to GLG by both participants in the limited partner profit share arrangement and employees. The components of total non-GAAP PSCB are: Base compensation fixed contractual base payments made to personnel. This compensation is paid to employees in the form of base salary. Base compensation is generally paid monthly and the expense is recognized as the amounts are paid. Variable compensation payments that arise from the contractual entitlements of personnel to a fixed percentage of certain variable fee revenues attributable to such personnel with respect to GLG Funds and managed accounts. These amounts are paid to employees in the form of variable salary. Variable compensation expense is recognized at the same time as the underlying fee revenue is crystallized, which may be monthly or semi-annually (on June 30 and December 31), depending on the fee revenue source. Discretionary compensation payments that are determined by GLG s management in its sole discretion and are generally linked to performance during the year. In determining such payments, GLG s management considers, among other factors, the ratio of total discretionary compensation to total revenues; however, this ratio may vary between periods and, in particular, significant discretionary bonuses may still be paid in a period of low performance for personnel retention and incentivization purposes. This discretionary compensation is paid to employees in the form of a discretionary cash bonus. Discretionary compensation is generally declared and paid following the end of each calendar year. However, the notional discretionary compensation charge accrual is adjusted monthly based on the year-to-date profitability and revenues recognized on a year-to-date basis. As the majority of funds crystallize their performance fees at June 30 and December 31, the majority of discretionary compensation expense is generally crystallized at year end and is typically paid in January following the year end. Limited partner profit share distributions of limited partner profit shares under the limited partner profit share arrangement described below. Limited Partnership Profit Share The key personnel who are participants in the limited partner profit share arrangement provide services to GLG through two limited liability partnerships, Laurel Heights LLP and Lavender Heights LLP (the LLPs ), which are limited partners in GLG Partners LP and GLG Partners Services LP, respectively. The amount of profits attributable to each of the LLPs is determined at the discretion of GLG s management based upon the profitability of GLG s business and their view of the contribution to revenues and profitability from the services provided by each limited partnership during that period. The amount of such distribution will be accrued monthly although it is generally crystallized at year end. However, the notional distribution accrual is adjusted monthly based on the year-to-date profitability and revenues recognized on a year-to-date basis. A portion of the partnership distribution is advanced monthly as a draw against final determination of profit share. Once the final profit allocation is determined, typically in January following each year end, it will be paid to the LLPs as limited partners, less any amounts paid as advance drawings during the year. Other limited partners of GLG Partners Services LP who receive profit allocations include two investment professionals, Steven Roth and Greg Coffey (through Saffron Woods Corporation) who are not members of Lavender Heights LLP, but whose profit distributions from GLG Partners Services LP are determined in the same manner as the allocation of profit shares to individual members of the LLP described below and included in the limited partner profit measure, as described below. Table of Contents Under GAAP, such distributions are recognized when declared and paid. Because the amounts relate to revenues recognized in the previous accounting period, GLG uses a non-GAAP adjustment to deduct any LLP distributions and any distributions to Steven Roth and Saffron Woods Corporation made after the end of each accounting period relating to revenues recognized in the previous accounting period, as it believes this more accurately reflects the net income for the relevant period. This non-GAAP adjustment is also included in the measure limited partner profit share used in determining non-GAAP PSCB. Allocation of Profit Shares to Individual Members of LLPs Profit allocations made to the LLPs by GLG Partners LP and GLG Partners Services LP make up substantially all of the LLPs net profits for each period. Members are entitled to a base limited partner profit share priority drawing, which is a fixed amount and paid as a partnership draw. Certain members are also entitled to a variable limited partner profit share priority drawing based on a fixed percentage of certain variable fee revenues attributable to such personnel with respect to GLG Funds and managed accounts, which are paid as a partnership draw. After year end, the managing members of the LLPs will make discretionary allocations to the key personnel who participate in the limited partner profit share arrangement and who are LLP members from the remaining balance of the LLPs net profits, after taking into account the base and variable limited partnership profit share priority drawings, based on their view of those individuals contribution to the generation of these profits. This process will typically take into account the nature of the services provided to GLG by each key personnel, his or her seniority and the performance of the individual during the period. The notional limited partner profit share expense accrual is adjusted monthly based on year-to-date profitability and revenues recognized on a year-to-date basis. Profit allocations, net of any amounts paid during the year as priority partnership drawings, will typically be paid to the members in January following each year end. GLG s management believes that the adjustments made to include limited partner profit share in non-GAAP PSCB do not give rise to an income tax effect. See Non-GAAP Expense Measures under each period to period comparison discussed under Results of Operations Expenses for a reconciliation of non-GAAP PSCB to GAAP employee compensation and benefits for the periods presented. As GLG s investment performance improves, its compensation costs and performance-related limited partner profit share distributions are expected generally to rise correspondingly. In addition, equity-based compensation costs may vary significantly from period to period depending on the market price of our common stock, among other things. In order to retain our investment professionals during periods of poor performance, we may have to pay our investment professionals significant amounts, even if we earn low or no performance fees. In these circumstances these payments may represent a larger proportion of our revenues than historically. In addition to share-based compensation expense discussed above, GLG will record deferred compensation expense with respect to the cash portion of the awards under the equity participation plan in the aggregate amount of $150 million. For the three 12-month periods beginning with the consummation of the acquisition of GLG, deferred compensation expense will include $104.1 million, $32.0 million and $13.2 million related to the cash portion of the equity participation plan. General and Administrative GLG s non-personnel cost base represents the expenditure required to provide an effective investment infrastructure and marketing operation. Key elements of the cost base are, among other things, professional services fees, temporary and contract employees, travel, information technology and communications, business development and marketing, occupancy, facilities and insurance. Table of Contents Income Tax Historically, the only GLG entity earning significant profits subject to company-level income taxes was GLG Holdings Limited, which was subject to U.K. corporate income tax. Most of the balance of the profit was earned by pass-through or other entities that did not incur significant company-level income taxes. Although only a relatively small portion of the profits earned by GLG was subject to U.S. corporate income tax, GLG Partners, Inc. is a U.S. corporation that is subject to U.S. corporate income tax. After the acquisition of GLG, our effective tax rate will be a function of our overall earnings, the income tax rates in the jurisdictions in which we and our subsidiaries do business, the type and relative amount of income earned by us and our subsidiaries in these jurisdictions and the timing of repatriation of profits back to the United States (e.g., in the form of dividends). As our business expands into countries with higher tax rates such as the United States, we expect that our effective tax rate may increase. Allocation of income among business activities and entities is subject to detailed and complex rules applied to facts and circumstances that generally are not readily determinable at the date financial statements are prepared. Accordingly, estimates are made of income allocations in computing financial statement effective tax rates that may differ from actual allocations determined when tax returns are prepared or after examination by tax authorities. We will amortize over a 15-year period and deduct for U.S. income tax purposes the carrying value of certain assets, such as intangibles, arising in connection with the acquisition of GLG, effectively reducing U.S. tax expense on repatriated profits. The amount of annual tax deductible goodwill amortization was approximately $214 million based on the fair market value of Company common stock on November 2, 2007 of $13.70 per share and estimates of the fair market values of the assets and liabilities acquired in the acquisition. GLG accounts for taxes using the asset and liability method in accordance with SFAS No. 109, Accounting for Income Taxes , under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is established when management believes it is more likely than not that a deferred tax asset will not be realized. Assessing Business Performance As discussed above under Expenses Employee Compensation and Benefits and Limited Partner Profit Share , GLG s management assesses its personnel-related expenses based on the measure non-GAAP PSCB. Non-GAAP PSCB reflects GAAP employee compensation and benefits, adjusted to include the limited partner profit shares described above under Expenses Employee Compensation and Benefits and Limited Partner Profit Share . In addition, GLG s management assesses the underlying performance of its business based on the measure adjusted net income , which adjusts for the difference between GAAP employee compensation and benefits and non-GAAP PSCB as discussed above. See Results of Operations Adjusted Net Income for a reconciliation of adjusted net income to net income for the periods presented. Non-GAAP PSCB is not a measure of financial performance under GAAP and should not be considered as an alternative to GAAP employee compensation and benefits. Further, adjusted net income is not a measure of financial performance under GAAP and should not be considered as an alternative to GAAP net income as an indicator of GLG s operating performance or any other measures of performance derived in accordance with GAAP. The non-GAAP financial measures presented by GLG may be different from non-GAAP financial measures used by other companies. GLG is providing these non-GAAP financial measures to enable investors, securities analysts and other interested parties to perform additional financial analysis of GLG s personnel-related costs and its earnings from operations and because it believes that they will be helpful to investors in understanding all components of the personnel-related costs of GLG s business. GLG s management believes that the non-GAAP financial measures also enhance comparisons of GLG s core results of operations with historical periods. In particular, Table of Contents GLG believes that the non-GAAP adjusted net income measure better represents profits available for distribution to stockholders than does GAAP net income. In addition, GLG s management uses these non-GAAP financial measures in its evaluation of GLG s core results of operations and trends between fiscal periods and believes these measures are an important component of its internal performance measurement process. GLG s management also prepares forecasts for future periods on a basis consistent with these non-GAAP financial measures. Under the revolving credit and term loan facilities entered into in connection with the acquisition of GLG, we and our subsidiaries are required to maintain compliance with certain financial covenants based on adjusted earnings before interest expense, provision for income taxes, depreciation and amortization, or adjusted EBITDA, which is calculated based on the non-GAAP adjusted net income measure, further adjusted to add back interest expense, provision for income taxes, depreciation and amortization. Non-GAAP adjusted net income has certain limitations in that it may overcompensate for certain costs and expenditures related to GLG s business and may not be indicative of the cash flows from operations as determined in accordance with GAAP. Assets Under Management The following is a discussion of GLG s gross and net AUM as of September 30, 2007 and 2006 and as of December 31, 2006, 2005 and 2004, and GLG s average gross and net AUM for the nine months ended September 30, 2007 and 2006 and for the years ended December 31, 2006, 2005 and 2004. In order to accurately represent fund-in-fund investments whereby one GLG Fund may hold exposure to another GLG Fund, management tracks AUM on both a gross and a net basis. In a gross presentation, sub-invested funds will be counted at both the investing and investee fund level. Net presentation removes the assets at the investing fund level, indicating the total external investment from clients. GLG has achieved strong historical AUM growth. The following table sets out GLG s gross and net AUM on a historical basis, categorized by product types: AUM As of September 30, As of December 31, 2007 2006 2006 2005 2004 (US dollars in millions) Alternative strategy $ 14,713 $ 9,184 $ 10,410 $ 7,030 $ 9,171 Long-only 4,561 3,735 3,815 3,253 2,666 Internal FoHF 1,651 1,089 1,261 790 870 External FoHF 598 511 568 410 338 Gross fund-based AUM 21,524 14,519 16,053 11,484 13,045 Managed accounts 1,905 1,042 1,233 335 5 Cash and other holdings 164 372 310 229 215 Total gross AUM 23,593 15,932 17,596 12,047 13,265 Less: internal FoHF investments in GLG Funds (1,653 ) (1,091 ) (1,268 ) (805 ) (867 ) Less: external FoHF investments in GLG Funds (55 ) (48 ) (49 ) Less: alternatives fund-in-fund investments (1,419 ) (1,075 ) (1,125 ) (942 ) (726 ) Net AUM $ 20,466 $ 13,718 $ 15,154 $ 10,300 $ 11,671 Nine Months Ended September 30, Years Ended December 31, 2007 2006 2006 2005 2004 (US dollars in millions) Quarterly average gross AUM $ 20,341 $ 14,360 $ 15,007 $ 12,166 $ 11,890 Quarterly average net AUM 17,576 12,324 12,890 10,549 10,427 Table of Contents Note: Quarterly average gross and net AUM for a given period are calculated by averaging the AUM figures at the start of the period, and at the end of each quarter during the period concerned. Average AUM for a given fiscal year is calculated by averaging the AUM balances at December 31 of the prior year and each quarter-end during the fiscal year. In a similar manner, average AUM for a given nine-month period is calculated by averaging the AUM balances at December 31 of the prior year and each quarter end during the nine-month period. Quarterly average gross and net AUM are GLG management s preferred measures of assets under GLG s management in each period for the purposes of calculating key ratios such as fee yield. The following table sets out the components of growth of GLG s gross fund-based AUM, consisting of the alternative strategy, long-only, internal FoHF and external FoHF funds, and GLG s managed accounts: Components of Growth of Fund-Based and Managed Account AUM Nine Months Ended September 30, Years Ended December 31, 2007 2006 2006 2005 2004 (US dollars in millions) Opening gross fund-based AUM $ 16,053 $ 11,484 $ 11,484 $ 13,045 $ 9,425 Gross fund-based inflows (net of redemptions) 3,350 1,541 1,986 (1,704 ) 2,353 Gross fund-based net performance (net of losses) 2,121 1,494 2,584 143 1,267 Closing gross fund-based AUM $ 21,524 $ 14,519 $ 16,053 $ 11,484 $ 13,045 Opening managed account AUM $ 1,233 $ 335 $ 335 $ 5 $ 12 Managed account inflows (net of redemptions) 457 766 865 309 (10 ) Managed account net performance (net of losses) 215 (60 ) 34 20 4 Closing managed account AUM $ 1,905 $ 1,042 $ 1,233 $ 335 $ 5 September 30, 2007 Compared to December 31, 2006 Change in AUM between September 30, 2007 and December 31, 2006 As of As of September 30, December 31, 2007 2006 Change (US dollars in millions) Alternative strategy $ 14,713 $ 10,410 $ 4,303 Long-only 4,561 3,815 747 Internal FoHF 1,651 1,261 391 External FoHF 598 568 31 Gross fund-based AUM 21,524 16,053 5,471 Managed accounts 1,905 1,233 673 Cash and other holdings 164 310 (146 ) Gross AUM 23,593 17,596 5,997 Less: internal FoHF investments in GLG Funds (1,653 ) (1,268 ) (385 ) Less: external FoHF investments in GLG Funds (55 ) (49 ) (6 ) Less: alternatives fund-in-fund investments (1,419 ) (1,125 ) (294 ) Net AUM $ 20,466 $ 15,154 $ 5,312 Table of Contents Nine Months Ended September 30, 2007 (US dollars in millions) Opening gross fund-based AUM $ 16,053 Gross fund-based inflows (net of redemptions) 3,350 Gross fund-based net performance (net of losses) 2,121 Closing gross fund-based AUM $ 21,524 Opening managed account AUM $ 1,233 Managed account inflows (net of redemptions) 457 Managed account net performance (net of losses) 215 Closing managed account AUM $ 1,905 During the nine months ended September 30, 2007, gross AUM increased by $6.0 billion to $23.6 billion and net AUM increased by $5.3 billion to $20.5 billion. Overall AUM growth was attributable primarily to growth in GLG s gross fund-based AUM, which increased by $5.5 billion to $21.5 billion as of September 30, 2007, principally as a result of the following factors: strong demand for GLG s fund products, which resulted in inflows (net of redemptions) of $3.4 billion, which were responsible for 61.2% of gross fund-based AUM growth in the nine months ended September 30, 2007. positive fund performance during the nine months ended September 30, 2007, resulting in performance gains (net of losses) of $2.1 billion, which was responsible for 38.8% of gross fund-based AUM growth in the nine months ended September 30, 2007; and Managed account AUM increased by $0.7 billion to $1.9 billion as of September 30, 2007. This growth was primarily attributable to the following factors: strong demand for GLG s managed account products from certain institutional investors whose investment mandates made individual managed account solutions preferable to fund-based investments, which resulted in inflows (net of redemptions) of $457 million, representing 68.0% of managed account AUM growth in the nine months ended September 30, 2007; and positive managed account performance during the nine months ended September 30, 2007, resulting in performance gains (net of losses) of $215 million, representing 32.0% of managed account AUM growth in the nine months ended September 30, 2007. The ratio between net and gross AUM remained generally unchanged between the two dates, due to generally stable and consistent relative levels of fund-in-fund investments, with respect to both investments by GLG s FoHF products in certain GLG Funds and investments by certain single-manager alternative strategy GLG Funds in other single-manager alternative strategy GLG Funds. Table of Contents December 31, 2006 Compared to December 31, 2005 Change in AUM between December 31, 2006 and December 31, 2005 As of December 31, 2006 2005 Change (US dollars in millions) Alternative strategy $ 10,410 $ 7,030 $ 3,380 Long-only 3,815 3,253 561 Internal FoHF 1,261 790 470 External FoHF 568 410 158 Gross fund-based AUM 16,053 11,484 4,569 Managed accounts 1,233 335 898 Cash and other holdings 310 229 81 Gross AUM 17,596 12,047 5,548 Less: internal FoHF investments in GLG Funds (1,268 ) (805 ) (462 ) Less: external FoHF investments in GLG Funds (49 ) (49 ) Less: alternatives fund-in-fund investments (1,125 ) (942 ) (183 ) Net AUM $ 15,154 $ 10,300 $ 4,854 Year Ended December 31, 2006 (US dollars in millions) Opening gross fund-based AUM $ 11,484 Gross fund-based inflows (net of redemptions) 1,986 Gross fund-based net performance (net of losses) 2,584 Closing gross fund-based AUM 16,053 Opening managed account AUM 335 Managed account inflows (net of redemptions) 865 Managed account net performance (net of losses) 34 Closing managed account AUM $ 1,233 During 2006, gross AUM increased by $5.5 billion to $17.6 billion and net AUM increased by $4.9 billion to $15.2 billion. Overall AUM growth was attributable primarily to growth in GLG s gross fund-based AUM, which increased by $4.6 billion to $16.1 billion as of December 31, 2006, principally as a result of the following factors: positive fund performance during 2006, resulting in performance gains (net of losses) of $2.6 billion, which was responsible for 56.5% of gross fund-based AUM growth in 2006; and a general increase in demand for GLG s fund products, which resulted in inflows (net of redemptions) of $2.0 billion, which were responsible for 43.5% of gross fund-based AUM growth in 2006. This growth was primarily attributable to: continued interest in GLG s established investment fund products; and investor demand for GLG s new investment funds launched during 2006. This demand was, in part, attributable to returning investors who had withdrawn AUM due to underperformance in certain GLG Funds during 2005, but who were attracted to reinvest in GLG Funds in 2006. Table of Contents Managed account AUM increased significantly by $0.9 billion to $1.2 billion as of December 31, 2006. This growth was primarily attributable to the following factors: strong demand for GLG s managed account products from certain institutional investors whose investment mandates made individual managed account solutions preferable to fund-based investments, which resulted in inflows (net of redemptions) of $865 million, representing 96.3% of managed account AUM growth in the year ended December 31, 2006; and positive managed account performance during the year ended December 31, 2006, resulting in performance gains (net of losses) of $34 million, representing 3.7% of managed account AUM growth in the year ended December 31, 2006. The ratio between net and gross AUM remained generally unchanged between the two dates, due to generally stable and consistent relative levels of fund-in-fund investments, with respect to both investments by GLG s FoHF products in certain GLG Funds and investments by certain single-manager alternative strategy GLG Funds in other single-manager alternative strategy GLG Funds. December 31, 2005 Compared to December 31, 2004 Change in AUM between December 31, 2005 and December 31, 2004 As of December 31, 2005 2004 Change (US dollars in millions) Alternative strategy $ 7,030 $ 9,171 $ (2,141 ) Long-only 3,253 2,666 587 Internal FoHF 790 870 (79 ) External FoHF 410 338 72 Gross fund-based AUM 11,484 13,045 (1,561 ) Managed accounts 335 5 329 Cash and other holdings 229 215 14 Gross AUM 12,047 13,265 (1,217 ) Less: internal FoHF investments in GLG funds (805 ) (867 ) 62 Less: external FoHF investments in GLG funds Less: alternatives fund-in-fund investments (942 ) (726 ) (216 ) Net AUM $ 10,300 $ 11,671 $ (1,371 ) Year Ended December 31, 2005 (US dollars in millions) Opening gross fund-based AUM $ 13,045 Gross fund-based inflows (net of redemptions) (1,704 ) Gross fund-based net performance (net of losses) 143 Closing gross fund-based AUM $ 11,484 Opening managed account AUM $ 5 Managed account inflows (net of redemptions) 309 Managed account net performance (net of losses) 20 Closing managed account AUM $ 335 Table of Contents During 2005, gross AUM decreased by $1.2 billion to $12.0 billion and net AUM decreased by $1.4 billion to $10.3 billion. The overall decrease in AUM was attributable primarily to a reduction in GLG s gross fund-based AUM by $1.6 billion to $11.5 billion as of December 31, 2005, driven by the following factors: while still delivering performance gains (net of losses) of $0.1 billion, fund performance in 2005 was depressed by particularly significant underperformance in two of the GLG Funds, the GLG Credit Fund and the GLG Market Neutral Fund; and fund underperformance gave rise to significant redemptions of AUM, primarily from the two underperforming funds. Redemptions for this period (net of inflows) from fund-based products were $1.7 billion. During 2005, managed account AUM grew from $5 million to $335 million. This growth was primarily attributable to the following factors: strong demand for GLG s managed account products from certain institutional investors whose investment mandates made individual managed account solutions preferable to fund-based investments, which resulted in inflows (net of redemptions) of $309 million, representing 93.8% of managed account AUM growth in the year ended December 31, 2005. Fiscal 2005 was the first period in which managed accounts represented a significant source of assets for GLG; and positive managed account performance during the year ended December 31, 2005, resulting in performance gains (net of losses) of $20 million, representing 6.2% of managed account AUM growth in the year ended December 31, 2005. The ratio between net and gross AUM remained generally unchanged between the two dates, due to generally stable and consistent relative levels of fund-in-fund investments, with respect to both investments by GLG s FoHF products in certain GLG Funds and investments by certain single-manager alternative strategy GLG Funds in other single-manager alternative strategy GLG Funds. Table of Contents Results of Operations Combined GAAP Statement of Operations Information Nine Months Ended September 30, Years Ended December 31 2007 2006 2006 2005 2004 (US dollars in thousands) Net revenues and other income Management fees, net $ 198,892 $ 129,981 $ 186,273 $ 137,958 $ 138,988 Performance fees, net 343,835 177,047 394,740 279,405 178,024 Administration fees, net 42,986 25,050 34,814 311 Transaction charges 184,252 191,585 Other 7,875 1,883 5,039 1,476 6,110 Total net revenues and other income 593,588 333,961 620,866 603,402 514,707 Expenses Employee compensation and benefits (110,526 ) (118,194 ) (168,386 ) (345,918 ) (196,784 ) General, administrative and other (79,634 ) (43,721 ) (68,404 ) (64,032 ) (42,002 ) Total expenses (190,160 ) (161,915 ) (236,790 ) (409,950 ) (238,786 ) Income from operations 403,428 172,046 384,076 193,452 275,921 Interest income, net 4,694 3,603 4,657 2,795 519 Income before income taxes 408,122 175,649 388,733 196,247 276,440 Income taxes (33,020 ) (14,803 ) (29,225 ) (25,345 ) (48,372 ) Net income $ 375,102 $ 160,846 $ 359,508 $ 170,902 $ 228,068 Table of Contents Net Revenues Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006 Change in GAAP Net Revenues and Other Income between Nine Months Ended September 30, 2007 and September 30, 2006 Nine Months Ended September 30, 2007 2006 Change (US dollars in thousands) Net revenues and other income Management fees, net $ 198,892 $ 129,981 $ 68,911 Performance fees, net 343,835 177,047 166,788 Administration fees, net 42,986 25,050 17,937 Transaction charges Other 7,875 1,883 5,992 Total net revenues and other income $ 593,588 $ 333,961 $ 259,628 Key ratios Total annualized net revenues and other income/quarterly average net AUM 4.50 % 3.61 % 0.89 % Annualized management fees/quarterly average net AUM 1.51 % 1.41 % 0.10 % Total net revenues and other income increased by $259.6 million, or 78%, to $593.6 million. This increase was driven by growth in all categories of fee revenue, especially in relation to performance fees. For each type of fee revenue, GLG s management uses net fee yield as a measure of GLG s fees generated for every dollar of GLG s net AUM. The net management, performance and administration fee yield is equal to the management fees, performance fees or administration fees, respectively, divided by quarterly average net AUM for the applicable period. Management fees increased by $68.9 million, or 53%, to $198.9 million. This growth was driven by two main factors: a 42.6% higher quarterly average net AUM balance between the periods which, at constant net management fee yield, resulted in an increase in management fees of $55.4 million, or 80.4% of the total increase in management fees; and an increase in the net management fee yield from 1.41% to 1.51%, reflecting higher management fees per unit of AUM, which, when applied to the increased net AUM base, resulted in an increase in management fees of $13.5 million, or 19.6% of the total increase in management fees. The higher net management fee yield was attributable primarily to investors participating in GLG Funds and managed accounts with higher management fee rates. Performance fees increased by $166.8 million, or 94%, to $343.8 million. This growth was driven by two main factors: a 42.6% higher quarterly average net AUM balance between the periods which, at constant net performance fee yield, resulted in an increase in performance fees of $75.5 million, or 45.2% of the total increase in performance fees; an increase in the annualized net performance fee yield from 1.92% to 2.61% which, when applied to the increased net AUM base, resulted in an increase in performance fees of $91.3 million, or 54.8% of the total increase in performance fees. The higher net performance fee yield was attributable to stronger performance delivering higher performance fees per unit of AUM. Table of Contents Net administration fees increased by $17.9 million, or 72%, to $43.0 million. This growth was driven by two main factors: a 42.6% higher quarterly average net AUM balance between the periods which, at constant administration fee yield, resulted in an increase in administration fees of $10.7 million, or 59.5% of the total increase in administration fees; and an increase in the net administration fee yield from 0.27% to 0.33% which, when applied to the increased net AUM base, resulted in an increase in administration fees of $7.3 million, or 40.5% of the total increase in administration fees. The higher net administration fee yield was attributable primarily to investors participating in GLG Funds and managed accounts with higher net administration fee rates. Year Ended December 31, 2006 Compared to Year Ended December 31, 2005 Change in GAAP Net Revenues and Other Income between Years Ended December 31, 2006 and December 31, 2005 Years Ended December 31, 2006 2005 Change (US dollars in thousands) Net revenues and other income Management fees, net $ 186,273 $ 137,958 $ 48,315 Performance fees, net 394,740 279,405 115,335 Administration fees, net 34,814 311 34,503 Transaction charges 184,252 (184,252 ) Other 5,039 1,476 3,563 Total net revenues and other income $ 620,866 $ 603,402 $ 17,464 Key ratios Total net revenues and other income/quarterly average net AUM 4.82 % 5.72 % (0.90 )% Management fees/quarterly average net AUM 1.45 % 1.31 % 0.14 % Total net revenues and other income increased by $17.5 million, or 2.9%, to $620.9 million. This increase was driven by growth in both management and performance fees, offset by net revenue loss resulting from the transition from a transaction charge to an administration fee model in 2005. Management fees increased by $48.3 million, or 35.0%, to $186.3 million. This growth was driven by two main factors: a 22.2% higher quarterly average net AUM balance between the periods which, at constant net management fee yield, resulted in an increase in management fees of $30.6 million, or 63.4% of the total increase in management fees; and an increase in the net management fee yield from 1.3 1% to 1.45%, reflecting higher management fees per unit of AUM, which, when applied to the increased net AUM base, resulted in an increase in management fees of $17.7 million, or 36.6% of the total increase in management fees. The higher net management fee yield was attributable primarily to investors participating in GLG Funds and managed accounts with higher management fee rates. Performance fees increased by $115.3 million, or 41.3%, to $394.7 million. This growth was driven by two main factors: a 22.2% increase in quarterly average net AUM balances between the periods which, at constant net performance fee yield, resulted in an increase in performance fees of $62.0 million, or 53.8% of the total increase in performance fees; and Table of Contents an increase in the net performance fee yield from 2.65% to 3.06% which, when applied to the increased net AUM base, resulted in an increase in performance fees of $53.3 million, or 46.2% of the total increase in performance fees. The higher net performance fee yield was attributable to stronger performance delivering higher performance fees per unit of AUM. The increase in performance was partly attributable to the transition to an administration fee model from a transaction charge model in 2005, which reduced fund expenses and resulted in higher fund performance. Substantially all of the impact of these changes was reflected in 2006. Combined revenues from transaction charges and net administration fees fell by $149.7 million, or 81.1%, to $34.8 million. This reduction was attributable primarily to the transition from a transaction charge to an administration fee model in 2005. Year Ended December 31, 2005 Compared to Year Ended December 31, 2004 Change in GAAP Net Revenues and Other Income between Years Ended December 31, 2005 and December 31, 2004 Years Ended December 31, 2005 2004 Change (US dollars in thousands) Net revenues and other income Management fees, net $ 137,958 $ 138,988 $ (1,030 ) Performance fees, net 279,405 178,024 101,381 Administration fees, net 311 311 Transaction charges 184,252 191,585 (7,333 ) Other 1,476 6,110 (4,634 ) Total net revenues and other income $ 603,402 $ 514,707 $ 88,695 Key ratios Total net revenues and other income/quarterly average net AUM 5.72 % 4.94 % 0.78 % Management fees/quarterly average net AUM 1.31 % 1.33 % (0.03 )% Total net revenues and other income increased by $88.7 million, or 17.2%, to $603.4 million. This increase was driven primarily by growth in performance fees. Management fees decreased by $1.0 million, or 0.7%, to $138.0 million. This reduction was primarily driven by a reduction in the net management fee yield from 1.33% to 1.31%, reflecting lower management fees per unit of AUM, which, when applied to the increased net AUM base, resulted in a decrease in management fees of $2.7 million. The lower net management fee yield was attributable to increased management fee rebates, partly offset by higher management fee yields on new AUM inflows during 2005. These decreases were partially offset by a 1.2% increase in quarterly average net AUM balances between the periods which, at constant net performance fee yield, resulted in an increase in management fees of $1.6 million. Performance fees increased by $101.4 million, or 56.9%, to $279.4 million. This growth was driven by two main factors: an increase in the net performance fee yield from 1.71% to 2.65% which, when applied to the increased net AUM base, resulted in an increase in performance fees of $99.3 million, or 97.9% of the total increase in performance fees. The higher net performance fee yield was attributable to stronger performance delivering higher performance fees per unit of AUM. The increase in net performance fee yield was attributable to strong GLG Fund and managed account performance, with the principal exception of two GLG Funds which recorded significant underperformance during the 2005 period; and Table of Contents a 1.2% increase in quarterly average net AUM balances between the periods which, at constant net performance fee yield, resulted in an increase in performance fees of $2.1 million, or 2.1% of the total increase in performance fees. The transition from a transaction charge to an administration fee model, which began in 2005, also resulted in a slight increase in net administration fees and a slight decrease in transaction charges. However, due to the phased-in implementation, the effect on 2005 revenues was limited. Expenses Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006 Change in GAAP Expenses between Nine Months Ended September 30, 2007 and September 30, 2006 Nine Months Ended September 30, 2007 2006 Change (US dollars in thousands) Expenses Employee compensation and benefits $ (110,526 ) $ (118,194 ) $ 7,668 General, administrative and other (79,634 ) (43,721 ) (35,912 ) Total expenses $ (190,160 ) $ (161,915 ) $ (28,246 ) Key ratios Employee compensation and benefits/total GAAP net revenues and other income 18.62 % 35.39 % (16.77 )% General, administrative and other/total GAAP net revenues and other income 13.42 % 13.09 % 0.32 % Total expenses /total GAAP net revenues and other income 32.04 % 48.48 % (16.45 )% Employee compensation and benefits decreased by $7.7 million, or 6.5%, to $110.5 million. The decreases included a $16.8 million decrease in variable salary, and a $1.5 million decrease in base compensation and benefits, which were mainly attributable to certain GLG key personnel ceasing to be employees at or after the end of the second quarter of 2006, partially offset by a $10.6 million increase in discretionary bonuses. Under the limited partner profit share arrangement, these key personnel became holders of direct or indirect limited partnership interests in the entities which had previously employed them, resulting in comparable amounts which had been paid as compensation thereafter being paid as limited partner profit share. General, administrative and other expenses increased by $35.9 million, or 82%, to $79.6 million. This was attributable to the following factors in approximately equal proportions: the growing scale of GLG s operations, principally in relation to increases in personnel and market data expenses; and one-time regulatory and legal costs. Non-GAAP Expense Measures As discussed above under Assessing Business Performance , GLG presents a non-GAAP comprehensive limited partner profit share, compensation and benefits measure. The table below reconciles GAAP employee compensation and benefits to non-GAAP PSCB for the periods presented. Table of Contents Change in Non-GAAP Expenses between Nine Months Ended September 30, 2007 and September 30, 2006 Nine Months Ended September 30, 2007 2006 Change (US dollars in thousands) Non-GAAP expenses GAAP employee compensation and benefits $ (110,526 ) $ (118,194 ) $ 7,668 Limited partner profit share (207,500 ) (76,530 ) (130,970 ) Non-GAAP PSCB (318,026 ) (194,724 ) (123,302 ) GAAP general, administrative and other (79,634 ) (43,721 ) (35,912 ) Non-GAAP total expenses $ (397,660 ) $ (238,445 ) $ (159,215 ) Key ratios (based on non-GAAP measures) Non-GAAP PSCB /total GAAP net revenues and other income 53.58 % 58.31 % (4.73 )% General, administrative and other/total GAAP net revenues and other income 13.42 % 13.09 % 0.32 % Non-GAAP total expenses/total GAAP net revenues and other income 66.99 % 71.40 % (4.41 )% Non-GAAP PSCB, including payments of limited partner profit shares, increased by $123.3 million, or 63%, to $318.0 million. This increase was mainly attributable to the growing scale of GLG s operations, as GLG s AUM grew during the period, driving additional headcount. In particular, the 94% increase in performance fees between the periods contributed to a $123.4 million increase in non-GAAP discretionary compensation and bonus, which, together with a $6.8 million increase in non-GAAP base compensation and benefits, substantially outweighed the decreases in non-GAAP variable compensation of $6.9 million attributable to management s decision to reduce the number of personnel with contractual entitlements to variable compensation. The $131.0 million increase in limited partner profit share was composed of a $112.8 million increase in discretionary limited partner profit share, an $8.2 million increase in base limited partner profit share and a $9.9 million increase in variable limited partner profit share. The non-GAAP PSCB/total GAAP net revenues and other income ratio fell from 58.3% to 53.6%, demonstrating the increasing scalability of GLG s personnel-related cost base. Year Ended December 31, 2006 Compared to Year Ended December 31, 2005 Change in GAAP Expenses between Years Ended December 31, 2006 and December 31, 2005 Years Ended December 31, 2006 2005 Change (US dollars in thousands) Expenses Employee compensation and benefits $ (168,386 ) $ (345,918 ) $ 177,532 General, administrative and other (68,404 ) (64,032 ) (4,372 ) Total expenses $ (236,790 ) $ (409,950 ) $ 173,160 Key ratios Employee compensation and benefits/total GAAP net revenues and other income 27.12 % 57.33 % (30.21 )% General, administrative and other/total GAAP net revenues and other income 11.02 % 10.61 % 0.41 % Total expenses /total GAAP net revenues and other income 38.14 % 67.94 % (29.80 )% Table of Contents Employee compensation and benefits fell by $177.5 million, or 51.3%, to $168.4 million. The decreases included a $121.7 million decrease in discretionary bonuses and a $14.3 million decrease in variable salary, which were driven primarily by the following factors: certain GLG key personnel ceasing to be employees at or after the end of the second quarter of 2006. These key personnel became holders of direct or indirect limited partnership interests in the entities which had previously employed them, resulting in comparable amounts which had been paid as compensation being paid as limited partner profit share; and the non-recurrence in 2006 of certain one-time costs incurred in 2005, primarily the approximately $41.6 million expense recorded in 2005 related to an employment tax settlement covering the period from GLG s separation from Lehman Brothers International (Europe), or Lehman International, in 2000 to April 5, 2006. The decrease was partially offset by the following factors which increased employee compensation and benefits through the period: an increase in compensation attributable to the growth in GLG s headcount as its operations grew; and an increase in the proportion of performance-based discretionary compensation. GLG Funds are managed either by principals or by non-principals. Non-principals receive performance-based discretionary compensation related to their performance, either as bonus (for employees who do not participate in the limited partner profit share arrangement) or as discretionary limited partner profit share (for key personnel who participate in the limited partner profit share arrangement). In 2005 a number of funds managed by a former principal of GLG started to be managed by employee non-principal managers. This increased the performance-based discretionary bonuses included in employee compensation and benefits. General, administrative and other expenses increased by $4.4 million, or 6.8%, to $68.4 million. This was mainly attributable to the growing scale of GLG s operations, principally increases in personnel and market data expenses. Non-GAAP Expense Measures As discussed above under Assessing Business Performance , GLG presents a non-GAAP PSCB measure. The table below reconciles GAAP employee compensation and benefits to non-GAAP PSCB for periods presented. Change in Non-GAAP Expenses between Years Ended December 31, 2006 and December 31, 2005 Years Ended December 31, 2006 2005 Change (US dollars in thousands) Non-GAAP expenses GAAP employee compensation and benefits $ (168,386 ) $ (345,918 ) $ 177,532 Limited partner profit share (201,450 ) (201,450 ) Non-GAAP PSCB (369,836 ) (345,918 ) (23,918 ) GAAP general, administrative and other (68,404 ) (64,032 ) (4,372 ) Non-GAAP total expenses $ (438,240 ) $ (409,950 ) $ (28,290 ) Key ratios (based on non-GAAP measures) Non-GAAP PSCB/total GAAP net revenues and other income 59.57 % 57.33 % 2.24 % General, administrative and other/total GAAP net revenues and other income 11.02 % 10.61 % 0.41 % Non-GAAP total expenses/total GAAP net revenues and other income 70.59 % 67.94 % 2.65 % Table of Contents Non-GAAP PSCB, including payments of limited partner profit shares, increased by $23.9 million, or 6.9%, to $369.8 million. The increase was attributable primarily to an increase in non-GAAP discretionary compensation and bonus of $65.0 million, offset by a decrease of $7.1 million in non-GAAP variable compensation attributable to management s decision to reduce the number of personnel with contractual entitlements to variable compensation and a reduction in variable compensation pay out rates for those who continue to have such entitlements. The $201.5 million increase in limited partner profit share was composed of a $186.7 million increase in discretionary limited partner profit share, a $7.6 million increase in base limited partner profit share priority drawings, and a $7.2 million increase in variable limited partner profit share. The factors contributing to the increases include: an increase in net revenues, primarily a 41.3% increase in performance fees, which impacted performance-based variable compensation and limited partner profit share; an increase in compensation attributable to the growth in GLG s headcount as its operations grew; GLG s transition from a transaction charge to an administration fee model, which resulted in an increase in the performance fee revenues as a proportion of total net revenues and therefore an increase in the proportion of total net revenues giving rise to performance-based non-GAAP PSCB expense; and an increase in the proportion of performance-based discretionary compensation attributable to funds managed by non-principals as described above in the discussion of GAAP expenses. In 2005, this increased the performance-based discretionary bonuses included in employee compensation and benefits. In addition, beginning in mid-2006, as a result of certain of the non-principal investment managers ceasing to be employees and becoming participants in the limited partner profit share arrangement, this increased performance-based discretionary limited partner profit share. The increase caused by these factors was partially offset by the non-recurrence in 2006 of certain one-time costs incurred in 2005, primarily the approximately $41.6 million expense recorded in 2005 related to the employment tax settlement covering the period from GLG s separation from Lehman International in 2000 to April 5, 2006 discussed above. The net impact of all such factors was a slight increase in the non- GAAP PSCB/total GAAP net revenues and other income ratio by 2.2% to 59.6%. Year Ended December 31, 2005 Compared to Year Ended December 31, 2004 Change in GAAP Expenses between Years Ended December 31, 2005 and December 31, 2004 Years Ended December 31, 2005 2004 Change (US dollars in thousands) Expenses Employee compensation and benefits $ (345,918 ) $ (196,784 ) $ (149,134 ) General, administrative and other (64,032 ) (42,002 ) (22,030 ) Total expenses $ (409,950 ) $ (238,786 ) $ (171,164 ) Key ratios Employee compensation and benefits / total GAAP net revenues and other income 57.33 % 38.23 % 19.10 % General, administrative and other / total GAAP net revenues and other income 10.61 % 8.16 % 2.45 % Total expenses/total GAAP net revenues and other income 67.94 % 46.39 % 21.55 % Employee compensation and benefits increased by $149.1 million, or 75.8%, to $345.9 million, which included a $115.0 million increase in discretionary bonuses, driven primarily by a 56.9% increase in performance fees and an increase in the proportion of discretionary performance-based compensation attributable to funds managed by non-principals, offset by a $4.6 million decrease in variable salary and a $2.8 million Table of Contents decrease in base compensation and benefits. For 2005 and 2004, non-principals received as bonus performance-based discretionary compensation related to their performance. As such, an increase in the contribution of performance attributable to non-principals increased the performance-based discretionary bonus included in employee compensation and benefits. The major driver of the increase in the proportion of performance-based discretionary compensation attributable to non-principals was the transition in the management of funds managed by a former principal of GLG during the periods presented to employee non-principal investment professionals. The shift in 2005 to employee non-principal managers of the funds primarily managed by the former principal resulted in higher performance based discretionary bonuses being included in employee compensation and benefits in 2005 compared to 2004. The increase in employee compensation and benefits was also partially attributable to certain one-time costs incurred in 2005, primarily the approximately $41.6 million expense recorded in 2005 related to the employment tax settlement covering the period from GLG s separation from Lehman International in 2000 to April 5, 2006. No comparable expense was recorded in 2004. General and administrative expenses increased by $22.0 million, or 52.4%, to $64.0 million. This increase was mainly attributable to legal, professional and regulatory costs, in addition to costs associated with the development of the GLG platform to support the growing scale of GLG s operations. For these periods, there were no limited partner profit shares, as the limited partner profit share arrangement was not implemented until 2006. As a result, non-GAAP PSCB for these periods would have been the same as GAAP employee compensation and benefits. Income Tax GLG s effective income tax rate is generally low since the portion of GLG s profits comprising the limited partner profit share is included in income before income taxes but is subject to tax at the level of the limited partners and is not subject to corporation tax. In addition, some of GLG s business is conducted in the Cayman Islands which does not levy corporate income tax on GLG s earnings. Shown in the tables below are reconciliations of income taxes computed at the standard U.K. corporation tax rate to the actual income tax expense which reflect GLG s effective income tax rate. Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006 Change in Income Taxes between Nine Months Ended September 30, 2007 and September 30, 2006 Nine Months Ended September 30, 2007 2006 Change (US dollars in thousands) Income taxes $ (33,020 ) $ (14,803 ) $ (18,218 ) Reconciliation of income taxes computed at standard U.K. corporation tax rate to income tax charge Income before income taxes $ 408,122 $ 175,649 $ 232,474 Tax charge at U.K. corporation tax rate (30%) (122,437 ) (52,695 ) (69,742 ) Factors affecting charge: Overseas tax rate differences 28,913 15,438 13,475 Disallowed and non-taxable items (1,746 ) (505 ) (1,241 ) Pass through to non-controlling interest holders 62,250 22,959 39,291 Tax on profit on ordinary activities $ (33,020 ) $ (14,803 ) $ (18,218 ) Effective income tax rate 8.09 % 8.43 % (0.34 )% Income tax expense increased by $18.2 million to $33.0 million, driven mainly by a 132.4% increase in income before income taxes, partially offset by a reduction in the effective income tax rate from 8.43% to Table of Contents 8.09%. The decrease in the effective income tax rate was due to an increase in amounts distributed as limited partner profit shares included in income before income taxes that did not impact income tax expense. The increase in these distributions was a result of certain key personnel ceasing to be employees and becoming participants in the limited partner profit share arrangement at or after the end of the second quarter of 2006. Year Ended December 31, 2006 Compared to Year Ended December 31, 2005 Change in Income Taxes between Years Ended December 31, 2006 and December 31, 2005 Years Ended December 31, 2006 2005 Change (Dollars in thousands) Income taxes $ (29,225 ) $ (25,345 ) $ (3,880 ) Reconciliation of income taxes computed at standard U.K. corporation tax rate to income tax charge Income before income taxes $ 388,733 $ 196,247 $ 192,486 Tax charge at U.K. corporation tax rate (30%) (116,620 ) (58,874 ) (57,746 ) Factors affecting charge: Overseas tax rate differences 27,557 35,185 (7,628 ) Disallowed and non-taxable items (841 ) (1,656 ) 815 Pass through to non-controlling interest holders 60,679 60,679 Tax on profit on ordinary activities $ (29,225 ) $ (25,345 ) $ (3,880 ) Effective income tax rate 7.52 % 12.91 % (5.40 )% Income tax increased by $3.9 million to $29.2 million, driven by a 98.1% increase in income before income taxes, partially offset by a reduction in the effective income tax rate from 12.91% to 7.52%. The decrease in the effective income tax rate was due to an increase in amounts distributed as limited partner profit shares included in income before income taxes that did not impact income tax expense and a reduction in disallowed expenses, partially offset by an increase in the proportion of income before income taxes recognized in the United Kingdom, which applies a higher tax rate than the Cayman Islands and other jurisdictions in which GLG conducts business. The increase in these distributions was a result of certain key personnel ceasing to be employees and becoming participants in the limited partner profit share arrangement at the end of the second quarter of 2006. Year Ended December 31, 2005 Compared to Year Ended December 31, 2004 Change in Income Taxes between Years Ended December 31, 2005 and December 31, 2004 Years Ended December 31, 2005 2004 Change (Dollars in thousands) Income taxes $ (25,345 ) $ (48,372 ) $ 23,027 Reconciliation of income taxes computed at standard U.K. corporation tax rate to income tax charge Income before income taxes $ 196,247 $ 276,440 $ (80,193 ) Tax charge at U.K. corporation tax rate (30%) (58,874 ) (82,932 ) 24,058 Factors affecting charge: Overseas tax rate differences 35,185 36,118 (933 ) Disallowed and non-taxable items (1,656 ) (1,558 ) (98 ) Pass through to non-controlling interest holders Tax on profit on ordinary activities $ (25,345 ) $ (48,372 ) $ 23,027 Effective income tax rate 12.91 % 17.49 % (4.58 )% Table of Contents Income tax decreased by $23.0 million to $25.3 million, driven by both a 29.0% decrease in income before income taxes and by a reduction in the effective income tax rate from 17.49% to 12.91%. The decrease in the effective income tax rate was due to a decrease in the proportion of income before income taxes recognized in the United Kingdom, which applies a higher tax rate than the Cayman Islands and other jurisdictions in which GLG conducts business, partially offset by an increase in disallowed expenses. Adjusted Net Income As discussed above under Assessing Business Performance , GLG presents a non-GAAP adjusted net income measure. The tables below reconcile net income to adjusted net income for the periods presented. Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006 Change in Non-GAAP Adjusted Net Income between Nine Months Ended September 30, 2007 and September 30, 2006 Nine Months Ended September 30 2007 2006 Change (Dollars in thousands) Derivation of non-GAAP adjusted net income GAAP net income $ 375,102 $ 160,846 $ 214,256 Deduct: limited partner profit share (207,500 ) (76,530 ) (130,970 ) Non-GAAP adjusted net income $ 167,602 $ 84,316 $ 83,286 Adjusted net income increased by $83.3 million, or 99%, to $167.6 million. This increase was driven by increased performance, management and administration fees, resulting from GLG s larger pool of AUM, stronger performance and increased fee yields during the 2007 period. The adjusted net income measure for these periods includes limited partner profit share arising from fund performance crystallized during the nine months ended September 30, 2007. Year Ended December 31, 2006 Compared to Year Ended December 31, 2005 Change in Non-GAAP Adjusted Net Income between Years Ended December 31, 2006 and December 31, 2005 Years Ended December 31, 2006 2005 Change (Dollars in thousands) Derivation of non-GAAP adjusted net income GAAP net income $ 359,508 $ 170,902 $ 188,606 Deduct: limited partner profit share (201,450 ) (201,450 ) Non-GAAP adjusted net income $ 158,058 $ 170,902 $ (12,844 ) Adjusted net income decreased by $12.8 million, or 7.5%, to $158.1 million. This reduction was driven by an increase in non-GAAP PSCB, resulting from the transition from a transaction charge to an administration fee model and an increase in the proportion of performance attributable to non-principals, as further described under Results of Operations Expenses Year Ended December 31, 2006 Compared to Year Ended December 31, 2005 Non-GAAP Expense Measures . Such increase was partially offset by the non-recurrence in 2006 of certain one-time costs incurred in 2005, primarily relating to the approximately $41.6 million employment tax settlement with the Inland Revenue. For fiscal 2004 and 2005, there were no limited partner profit shares, as the limited partner profit share arrangement was not implemented until 2006. As a result, non-GAAP PSCB for these periods would have Table of Contents been the same as GAAP employee compensation and benefits, and non-GAAP adjusted net income would have been the same as GAAP net income. Liquidity and Capital Resources Liquidity is a measurement of GLG s ability to meet potential cash requirements, including ongoing commitments to repay borrowings, pay compensation, and satisfy other general business needs. GLG s primary sources of funds for liquidity consist of cash flows provided by operating activities, primarily the management fees and performance fees paid from the GLG Funds and accounts managed by GLG. In connection with the acquisition of GLG, GLG repaid its credit facility with the Bank of New York and we entered into a new revolving and term loan credit facilities, primarily to fund the cash purchase price for the acquisition of GLG, and which also provides funding of working capital for us and our subsidiaries. We expect that our cash on hand and our cash flows from operating activities, the issuance of debt and equity securities and existing and future bank loans will satisfy our liquidity needs over the next twelve months. We expect to meet our long-term liquidity requirements, including the repayment of debt obligations, through the generation of operating income, the issuance of debt and equity securities and existing and future bank loans. Our ability to execute our business strategy, particularly our ability to form new GLG Funds and increase our AUM, depends on our ability to raise additional investor capital within such funds. Decisions by investors to commit capital to the GLG Funds and accounts managed by us will depend upon a number of factors, including, but not limited to the financial performance of the GLG Funds and managed accounts, industry and market trends and performance and the relative attractiveness of alternative investment opportunities. Excess cash held by us on our balance sheet is either kept in deposit bearing accounts or invested in AAA-rated money market funds. Currency hedging is undertaken to maintain currency net assets at pre-determined ratios. Operating Activities GLG s net cash provided by operating activities was $529.8 million for the nine months ended September 30, 2007 compared to $189.1 million for the nine months ended September 30, 2006, reflecting significantly lower cash payments of compensation and benefits due to certain key personnel ceasing to be employees in mid-2006 and instead becoming participants in the limited partner profit share arrangement. The amounts paid as limited partner profit share are reflected beginning in 2006 as distributions to non-controlling interest holders in financing activities in the statements of cash flows. GLG s net cash provided by operating activities was $219.2 million, $208.5 million and $296.1 million during the years ended December 31, 2006, 2005 and 2004, respectively. These amounts primarily reflect cash-based fee income, less cash compensation, benefits and non-personnel costs and tax payments. The increase in net cash provided by operating activities from 2005 to 2006 was attributable to an increase in net income, driven primarily by certain key personnel ceasing to be employees in mid-2006 and instead becoming participants in the limited partner profit share arrangement, offset by GLG s need during the period to pay greater accrued compensation which had arisen in 2005. The decrease in net cash provided by operating activities from 2004 to 2005 was attributable primarily to a reduction in net income, coupled with higher year-end fees receivable. Investing Activities GLG s net cash used in investing activities was $4.4 million for the nine months ended September 30, 2007 compared to $1.7 million for the nine months ended September 30, 2006, reflecting increased purchases of fixed assets to support GLG s expanding headcount and infrastructure. GLG s net cash used in investing activities was $4.7 million, $0.6 million and $2.9 million during the years ended December 31, 2006, 2005 and 2004, respectively. These amounts primarily reflect the cash Table of Contents purchase of fixed assets to support GLG s expanding headcount and infrastructure. GLG does not undertake material investing activities, and hence net cash used in investing activities is generally not significant in the context of the business. Additionally, the amount of net cash used in investing activities on a year-to-year basis may be strongly affected by the purchase of a particular fixed asset, thereby giving rise to a potentially volatile year-to-year net cash usage. Financing Activities GLG s net cash used in financing activities was $407.6 million for the nine months ended September 30, 2007 compared to $152.1 million for the nine months ended September 30, 2006. The increase primarily reflects an increase of $149.3 million of distributions to non-controlling interest holders, the participants in the limited partner profit share arrangement. GLG s net cash used in financing activities was $179.4 million, $106.5 million and $222.1 million during the years ended December 31, 2006, 2005 and 2004, respectively. These amounts primarily reflect distributions made to principals and other participating members. The increase in net cash used in financing activities from 2005 to 2006 was attributable primarily to a decision by the Principals and Trustees to change the timing of distributions from the business from 2005 to 2006, coupled with distributions to non-controlling interest holders during 2006, resulting from certain key personnel becoming participants in the limited partner profit share arrangement beginning in mid-2006. GLG did not make quarterly distributions of profit in 2006 and there were no distributions to non-controlling interest holders in 2005 because the limited partner profit share arrangement was not yet in effect. The decrease in net cash used in financing activities from 2004 to 2005 was attributable to a decision by the Principals and Trustees to draw less cash distributions from the business during 2005. Off-Balance Sheet Arrangements GLG did not have, and we do not have, any off-balance sheet arrangements. Contractual Obligations, Commitments and Contingencies GLG has annual commitments under non-cancellable operating leases for office space located in London, the Cayman Islands and New York City (GLG Inc.) which expire on various dates through 2018. The minimum future rental expense under these leases is as follows: Future Rental Expenses Years Ended December 31, 2007 2008 2009 2010 2011 Thereafter Total (Dollars in thousands) $ 4,287 $ 4,287 $ 4,339 $ 4,339 $ 4,339 $ 27,877 $ 49,468 Rental expenses are recognized on a straight-line basis and during the years ended December 31, 2006, 2005 and 2004 were $7.5 million, $6.2 million and $5.1 million, respectively. GLG Holdings Limited entered into a credit facility in the principal amount of $13.0 million on October 29, 2002 with the Bank of New York. Interest on the loan was payable quarterly at the annual rate of LIBOR plus 75 basis points. The loan was repayable in four equal quarterly installments of $3.25 million. The first installment was originally due on January 29, 2007; however, the facility was extended on February 28, 2007 for another five years under the same terms and conditions and the repayment was to commence effective January 29, 2012. The loan was secured by a pledge of substantially all of the assets of GLG Holdings Limited and there were liens on the future revenue streams of certain GLG entities. In connection with the consummation of the acquisition of GLG, this loan was repaid in full. On October 30,2007, we and certain of our wholly owned subsidiaries entered into a credit agreement with a syndicate of banks arranged by Citigroup Global Markets, Inc. providing our subsidiary FA Sub 3 Table of Contents Limited, subject to customary conditions, with: (i) a 5-year non-amortizing revolving credit facility in a principal amount of up to $40.0 million; and (ii) a 5-year amortizing term loan facility in a principal amount of up to $530.0 million. On November 2, 2007, we borrowed $530.0 million under the term loan facility to finance the purchase price for our acquisition of GLG, including purchase price adjustments, to pay transaction costs and to repay existing GLG indebtedness. The remaining $40.0 million under the revolving credit facility was also drawn down in November 2007. Interest on the revolving and term loans is payable quarterly at the annual rate, at our option, of 1,2,3 or 6-month LIBOR plus the applicable margin (currently 1.25%), which was 5.9534% at November 30, 2007. In the normal course of business, GLG and its subsidiaries enter into operating contracts that contain a variety of representations and warranties and that provide general indemnifications. GLG s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against GLG that have not yet occurred. However, based on experience, GLG expects the risk of material loss to be remote. Qualitative and Quantitative Disclosures About Market Risk GLG s predominant exposure to market risk is related to its role as investment manager for the GLG Funds and accounts it manages for clients and the impact of movements in the fair value of their underlying investments. Changes in value of assets managed will impact the level of management and performance fee revenues. The broad range of investment strategies that are employed across the approximately 40 GLG Funds and the managed accounts mean that they are subject to varying degrees and types of market risk. In addition, as the GLG Funds and managed accounts are managed independently of each other and risk is managed at a strategy and fund level, it is unlikely that any market event would impact all GLG Funds and managed accounts in the same manner or to the same extent. Moreover, there is no netting of performance fees across funds as these fees are calculated at the fund level. The management of market risk on behalf of clients, and through the impact on fees to GLG, is a significant focus for GLG and it uses a variety of risk measurement techniques to identify and manage market risk. Such techniques include Monte Carlo Value at Risk, stress testing, exposure management and sensitivities, and limits are set on these measures to ensure the market risk taken is commensurate with the publicized risk profile of each GLG Fund and in compliance with risk limits. In order to provide a quantitative indication of the possible impact of market risk factors on GLG s future performance, the following sets forth the potential financial impact of scenarios involving a 10% increase or decrease in the fair value of all investments in the GLG Funds and managed accounts. While these scenarios are for illustrative purposes only and do not reflect GLG management s expectations regarding future performance of the GLG Funds and managed accounts, they represent hypothetical changes that illustrate the potential impact of such events. Impact on Management Fees GLG s management fees are based on the AUM of the various GLG Funds and accounts that it manages, and, as a result, are impacted by changes in market risk factors. These management fees will be increased or reduced in direct proportion to the impact of changes in market risk factors on AUM in the related GLG Funds and accounts managed by GLG. A 10% change in the fair values of all of the investments held by the GLG Funds and managed accounts as of September 30, 2007 would impact future net management fees in the following four fiscal quarters by an aggregate of $25.5 million, assuming that there is no subsequent change to the investments held by the GLG Funds and managed accounts in those four following fiscal quarters. Impact on Performance Fees GLG s performance fees are generally based on a percentage of profits of the various GLG Funds and accounts that it manages, and, as a result, are impacted by changes in market risk factors. GLG s performance fees will therefore generally increase given an increase in the market value of the investments in the relevant Table of Contents GLG Funds and managed accounts and decrease given a decrease in the market value of the investments in the relevant GLG Funds and managed accounts. However, it should be noted that GLG is not required to refund historically crystallized performance fees to the GLG Funds and managed accounts. The calculation of the performance fee includes in certain cases benchmarks and high-water marks , and as a result, the impact on performance fees of a 10% change in the fair values of the investments in the GLG Funds and managed accounts cannot be readily predicted or estimated. Impact on Administration Fees GLG s administration fees are generally based on the AUM of the GLG Funds and managed accounts to which they relate and, as a result, are impacted by changes in market risk factors. GLG s administration fees will generally increase given an increase in the market value of the investments in the relevant GLG Funds and managed accounts and decrease given a decrease in the market value of the investments in the relevant GLG Funds and managed accounts. In certain cases, the calculation of the administration fees includes minimum payments and fixed payments and, as a result, the impact on administration fees of a 10% change in the fair values of the investments in the GLG Funds and managed accounts cannot be readily predicted or estimated. Market Risk The GLG Funds and accounts managed by GLG hold investments that are reported at fair value as of the reporting date. GLG s AUM is a measure of the estimated fair values of the investments in the GLG Funds and managed accounts. GLG s AUM will therefore increase (or decrease) in direct proportion to changes in the market value of the total investments across all of the GLG Funds and managed accounts. A 10% change in the fair values of all of the investments held by the GLG Funds and managed accounts as of September 30, 2007 would impact GLG s gross AUM by $2.4 billion and net AUM by $2.0 billion as of such date. This change will consequently affect GLG s management fees and performance fees as described above. Exchange Rate Risk The GLG Funds and the accounts managed by GLG hold investments that are denominated in foreign currencies, whose value against GLG s reporting currency may fluctuate. Furthermore, share classes may be issued in the GLG Funds denominated in foreign currencies, whose value against the currency of the underlying investments, or against GLG s reporting currency, may fluctuate. The GLG Funds and the managed accounts may employ currency hedging to help mitigate such risks. In addition, foreign currency movements may impact GLG s management and performance fees as described above. GLG employs a currency hedging policy to help mitigate such risk. Interest Rate Risk The GLG Funds and accounts managed by GLG hold positions in debt obligations and derivatives thereof some of which accrue interest at variable rates and whose value is impacted by reference to changes in interest rates. Interest rate changes may therefore directly impact the AUM valuation of these GLG Funds and managed accounts, which may affect GLG s management fees and performance fees as described above. Our long-term debt consists of our outstanding revolving and term loan credit facilities. Interest on the outstanding principal amounts is currently based on 1-month LIBOR plus the applicable margin (currently 1.25%), which is reset periodically and was 5.9534% at November 30, 2007. A 10% change in the 1-month LIBOR would impact our interest expense by approximately $0.2 million for the 1-month period. Table of Contents UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION The following unaudited pro forma condensed combined balance sheets as of September 30, 2007 and the unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2007 and the year ended December 31, 2006 give effect to the acquisition by us of GLG and also give effect to certain transactions coincident with the acquisition. However, the pro forma information does not give effect to the proposed acquisition of GLG Holdings, Inc. and GLG Inc., which is subject to certain conditions precedent and is not expected to be completed until after the consummation of the acquisition of GLG. The pro forma information is based on the historical financial statements of Freedom and GLG after giving effect to the combination and applying the estimates, assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial information. The acquisition is considered to be a reverse acquisition recapitalization for accounting purposes because, among other things, the GLG Shareowners own a majority of our outstanding shares following consummation of the acquisition of GLG. Under this method of accounting, GLG is the acquiring company. The acquisition is treated as the equivalent of GLG issuing stock for the net assets of Freedom accompanied by a recapitalization. The net assets of Freedom, primarily cash, are stated at their fair value, which is equivalent to the carrying value, and accordingly no goodwill or other intangible assets are recorded for accounting purposes. For pro forma purposes, the unaudited balance sheet of Freedom as of September 30, 2007 was combined with the unaudited combined balance sheet of GLG as of September 30, 2007 as if the transaction had occurred on September 30, 2007. The unaudited statement of operations of Freedom for the nine months ended September 30, 2007 was combined with the unaudited combined statement of operations of GLG for the nine months ended September 30, 2007 and the statement of operations of Freedom for the period from June 8, 2006 (date of inception) to December 31, 2006 was combined with the combined statement of operations of GLG for the year ended December 31, 2006, in each case as if the transaction had occurred on January 1, 2006. The unaudited pro forma condensed combined financial information has been prepared for illustrative purposes and is not intended to represent the condensed combined financial position or condensed combined results of operations in future periods or what the results actually would have been had Freedom and GLG been a combined company during the specified periods. The unaudited pro forma condensed combined financial information and accompanying notes should be read in conjunction with the following information included in this prospectus: (1) the GLG historical combined financial statements and notes thereto for the year ended December 31, 2006 and the nine months ended September 30, 2007, (2) the Freedom historical financial statements for the period from June 8, 2006 (date of inception) to December 31, 2006 and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2006 and the Freedom historical condensed financial statements for the nine months ended September 30, 2007, included in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, in each case, filed with the SEC and (3) Management s Discussion and Analysis of Financial Condition and Results of Operations . Net losses of $427.1 million and $710.3 million on a pro forma basis for the nine months ended September 30, 2007 and the year ended December 31, 2006, respectively, were largely driven by non-cash share-based compensation expenses of $791 million and $1,055 million, respectively. These expenses for the nine months ended September 30, 2007 and the year ended December 31, 2006 are composed of the following: charges of $53 million and $71 million, respectively, related to the 10,000,000 shares of our common stock to be issued for the benefit of GLG s employees, service providers and certain key personnel under the Restricted Stock Plan; charges of $209 million and $279 million, respectively, related to the 33,000,000 shares of our common stock and $150 million in cash or Notes to be issued for the benefit of certain of GLG s key personnel participating in the equity participation plan; and Table of Contents charges of $529 million and $705 million, respectively, related to the 77,604,988 shares of our common stock and 58,904,993 exchangeable Class B ordinary shares of FA Sub 2 Limited subject to the agreement among principals and trustees. The shares described above are subject to certain vesting and forfeiture provisions and the related share-based compensation expenses are being recognized on a straight-line basis over the requisite service period using the accelerated method in accordance with the provisions of SFAS 123(R) for the Restricted Stock Plan and agreement among principals and trustees, and EITF Issue No. 96-18, for the equity participation plan. Total shareholders deficit on a pro forma basis as of September 30, 2007 of $99 million largely reflects the cash portion of the acquisition consideration of $1.0 billion, less certain amounts payable in relation to the equity participation plan that will be recognized in future periods. Table of Contents UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET as of September 30, 2007 GLG Freedom Pro Forma Pro Forma Historical Historical Adjustments Combined (In thousands, except share amounts) ASSETS Cash and cash equivalents $ 391,732 $ 1,779 $ (1,001,320 ) (1),(7) $ 454,531 519,142 (2) 50,000 (3) (17,952 ) (4) 511,151 (5) (1)(6) Deferred compensation, current 104,094 (1) 69,469 (34,625 ) (8) Investments 163 163 Fees receivable 40,687 40,687 Prepaid and other current assets 32,647 3,784 5,849 (5) 42,280 Cash held in trust account (restricted cash) 519,142 (519,142 ) (2) 23,892 23,892 (7) Deferred compensation, non-current 45,906 (8) 45,906 Property, plant and equipment, net 8,966 8,966 Total assets $ 474,195 $ 524,705 $ (313,006 ) $ 685,894 LIABILITIES AND MEMBERS EQUITY Current liabilities: Rebates and sub-administration fees payable $ 19,473 $ $ $ 19,473 Accrued compensation and benefits 63,199 63,199 Income taxes payable 19,038 19,038 Distributions payable 71,311 71,311 Accounts payable and accruals 14,753 1,853 36,000 (9) 52,606 Other liabilities 3,654 3,654 Loan notes 23,892 (7) 23,892 Total current liabilities 191,428 1,853 59,892 253,173 Loan payable 13,000 517,000 (5) 530,000 Deferred underwriters fee 17,952 (17,952 ) (4) Redeemable common stock and interest 103,881 (103,881 ) (6) Minority interest 2,031 (10),(16) 2,031 Members equity: Members equity 6,843 (6,843 ) (1) Common stock, $.0001 par value; 200,000,000 authorized, 64,800,003 issued and outstanding, actual; 1,150,000,000 authorized, 230,340,290 issued and outstanding, pro forma 6 17 (1) 23 Series A voting preferred stock, $.0001 par value; no shares authorized, issued and outstanding, actual; 1,000,000,000 authorized, 58,904,993 issued and outstanding, pro forma 6 (12) 6 Additional paid-in capital 392,127 (851,320 ) (1),(7) 97,149 50,000 (3) 103,880 (6) (36,000 ) (9) 6,820 (11),(12) 431,642 (8) Income accumulated during the development stage 8,886 (8,886 ) (11) Accumulated income (deficit) 257,238 8,886 (11) (200,143 ) (466,267 ) (8) Accumulated other comprehensive income 3,655 3,655 Total members equity 267,736 401,019 (768,065 ) (99,310 ) Total liabilities and members equity $ 474,195 $ 524,705 $ (313,006 ) $ 685,894 See notes to unaudited pro forma condensed combined financial information. Table of Contents UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS Nine months ended September 30, 2007 GLG Freedom Pro Forma Pro Forma Historical Historical Adjustments Combined (In thousands, except per share amounts) Net revenues and other income: Management fees, net $ 198,892 $ $ $ 198,892 Performance fees, net 343,835 343,835 Administration fees, net 42,986 42,986 Other 7,875 7,875 593,588 593,588 Expenses: Employee compensation and other benefits (110,526 ) (791,096 ) (8) (893,029 ) 8,593 (13) General, administrative and other (79,634 ) (554 ) (80,188 ) (190,160 ) (554 ) (782,503 ) (973,217 ) Income (loss) from operations 403,428 (554 ) (782,503 ) (379,629 ) Other income (expense): Interest income (expense), net 4,694 19,242 (24,981 ) (5) (20,287 ) (19,242 ) (14) Income (loss) before income taxes 408,122 18,688 (826,726 ) (399,916 ) Income taxes (33,020 ) (8,663 ) 8,663 (1) (27,223 ) 7,494 (1) (1,707 ) (13) Net income (loss) 375,102 10,025 (812,276 ) (427,149 ) Less cumulative dividends (15,880 ) (16) (15,880 ) Interest income subject to possible redemption (1,309 ) 1,309 (6) Less minority interest (479 ) (10),(16) (479 ) Net income (loss) applicable to equity interest holders $ 374,623 $ 8,716 $ (826,847 ) $ (443,508 ) Net income (loss) per common share, basic $ 0.16 $ (1.84 ) Weighted average shares outstanding, basic 64,395 240,895 Net income (loss) per common share, diluted $ 0.12 $ (1.84 ) Weighted average shares outstanding, diluted 82,542 240,895 See notes to unaudited pro forma condensed combined financial information. Table of Contents UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS Year ended December 31, 2006 GLG Freedom Pro Forma Pro Forma Historical Historical Adjustments Combined (In thousands, except per share amounts) Net revenues and other income: Management fees, net $ 186,273 $ $ $ 186,273 Performance fees, net 394,740 394,740 Administration fees, net 34,814 34,814 Other 5,039 5,039 620,866 620,866 Expenses: Employee compensation and other benefits (168,386 ) (1,054,795 ) (8) (1,212,657 ) 10,524 (1) General, administrative and other (68,404 ) (94 ) (68,498 ) (236,790 ) (94 ) (1,044,271 ) (1,281,155 ) Income (loss) from operations 384,076 (94 ) (1,044,271 ) (660,289 ) Other income (expense): Interest income (expense), net 4,657 390 (33,365 ) (5) (28,708 ) (390 ) (1) Income (loss) before income taxes 388,733 296 (1,078,026 ) (688,997 ) Income taxes (29,225 ) (127 ) 127 (1) (21,309 ) 10,010 (1) (2,094 ) (13) Net income (loss) 359,508 169 (1,069,983 ) (710,306 ) Less cumulative dividends (14,174 ) (16) (14,174 ) Interest income subject to possible redemption (182 ) (10),(16) (182 ) Less minority interest $ 359,326 $ 169 $ (1,084, 157 ) $ (724,662 ) Net income (loss) applicable to equity interest holders $ 0.01 $ (3.01 ) Net income (loss) per common share, basic 13,012 240,895 See notes to unaudited pro forma condensed combined financial information. Table of Contents NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (In thousands, except share and per share amounts) Note A. Basis of Presentation On June 22, 2007, Freedom and GLG announced a definitive agreement pursuant to which Freedom agreed to purchase all of the outstanding equity interests of certain GLG entities. Because the owners of the equity interests in the acquired GLG entities (the GLG Shareowners ) own approximately 77% of our voting interests of immediately following the consummation of the acquisition, GLG was deemed to be the acquiring company for accounting purposes. Accordingly, the transaction has been accounted for as a reverse acquisition. Because Freedom had no active business operations, the acquisition has been accounted for as a recapitalization of GLG and GLG was treated as the acquirer and continuing reporting entity for accounting purposes. The assets and liabilities of Freedom were recorded, as of completion of the acquisition, at fair value, which is considered to approximate historical cost, and added to those of GLG. The fair values of the net assets of Freedom are shown below. Cash $ 520,921 Deferred underwriters fee (17,952 ) Other net current assets 1,931 Redeemable stock (1 ) Total $ 504,899 Minority Interest FA Sub 2 Limited Exchangeable Shares Upon consummation of the transaction, Noam Gottesman and the Gottesman GLG Trust received, in exchange for their interests in the existing GLG entities, 58,904,993 exchangeable Class B ordinary shares of FA Sub 2 Limited (the Exchangeable Shares ) and 58,904,993 shares of our Series A voting preferred stock (the Series A preferred stock ), in addition to their proportionate share of the cash consideration. The Exchangeable Shares are exchangeable for an equal number of shares of our common stock at any time for no cash consideration at the holder s option. Upon exchange of the Exchangeable Shares, an equivalent number of shares of Series A preferred stock will be concurrently redeemed. The shares of Series A preferred stock are entitled to one vote per share and to vote with the common stockholders as a single class but have no economic rights. In contrast, the Exchangeable Shares carry dividend rights but no voting rights except with respect to certain limited matters which will require the majority vote or written consent of the holder of Exchangeable Shares. The combined ownership of the Exchangeable Shares and the Series A preferred stock provides the holder of these shares with voting rights that are equivalent to those of our common stockholders. The dividend rights of the Exchangeable Shares are such that the holder of these shares will receive an equivalent dividend as the common stockholders in addition to a cumulative dividend. The dividend rights of the holder of the Exchangeable Shares are in excess of those of our common stockholders, and these rights are therefore presented as a cumulative dividend in the pro forma condensed combined statements of operations. Since FA Sub 2 Limited will have negative equity on a pro forma basis following completion of the acquisition of GLG and the holder of the Exchangeable Shares will have no obligation to fund losses, we will absorb all losses after the cumulative dividends. Upon the materialization of future earnings, the majority interest will be credited to the extent of such losses previously absorbed. Table of Contents NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (Continued) GLG Holdings Inc. and GLG Inc. GLG consolidates GLG Holdings Inc. and GLG Inc. pursuant to the requirements of Financial Accounting Standards Board ( FASB ) Interpretation No. 46, Consolidation of Variable Interest Entities, since they are variable interest entities and GLG is the Primary Beneficiary. Note B. Pro Forma Adjustments Pro forma adjustments are necessary to record the purchase price of the acquisition of GLG (consisting of cash and loan notes issued to certain GLG Shareowners (the Notes )) and to reflect transactions that are a direct result of the acquisition. The following pro forma adjustments are included in the unaudited condensed combined financial statements: (1) Reflects cash paid to GLG Shareowners upon consummation of the acquisition, which comprises the $1.0 billion purchase consideration and $1.3 million net cash , as defined in the purchase agreement, less the Notes (see Note 7). (2) Reflects reclassification of Freedom s pre-acquisition cash from being held as a receivable (restricted cash) to cash since upon consummation of the acquisition the restrictions will lapse. (3) Reflects cash proceeds from the co-investment by Freedom s sponsors immediately prior to consummation of the acquisition. (4) Reflects payment of the deferred underwriters fee from Freedom s initial public offering in December 2006 to be made upon consummation of the acquisition. (5) Reflects the revolving credit and term loan facilities to be entered into upon consummation of the acquisition, repayment of existing borrowing and related interest payable. A 0.125% increase in the interest rate would have the following impacts: Interest expense $ 663 Income tax $ (199 ) (6) Reflects the redemption of 100 shares of our common stock upon consummation of the acquisition and reclassification of redeemable common stock as permanent equity. (7) Reflects Notes issued, upon request, to Sage Summit LP and Lavender Heights Capital LP upon consummation of the acquisition and the transfer of cash to an escrow account to be held for the repayment of the Notes. The amount reflects the likely maximum amount of Notes that may be requested by those key personnel that may find it advantageous to exercise their right to request Notes. Interest is payable on the Notes at a fluctuating interest rate per annum equal to the rate for the Citibank Custody Institutional Market Deposit Account less 0.10% per annum. As the total interest payable is expected to closely match the returns on restricted cash set aside for the repayment of the Notes, no adjustment has been made to net interest expense in the condensed combined pro forma statement of operations. Pro forma gross interest income on the restricted cash and interest payable on the loan notes are each $797 for the nine months ended September 30, 2007 and $1,063 for the year ended December 31, 2006. The Notes are repayable on demand by either party after an initial minimum holding period of nine months, up to the final redemption date on the second anniversary of the issuance date of the Notes. The Notes are non-recourse obligations of FA Sub 1 Limited and its affiliates (including GLG Partners, Inc.). Table of Contents NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (Continued) (8) Reflects share-based and other compensation recognized in respect of (a) the equity participation plan, (b) the 10,000,000 shares allocated for the benefit of employees, service providers and certain key personnel under the Restricted Stock Plan, and (c) the agreement among the principals and trustees. (a) Equity participation plan Upon consummation of the acquisition, certain key personnel who participate in GLG s equity participation plan are entitled through their limited partnership interests in Sage Summit LP and Lavender Heights Capital LP to receive collectively approximately 15% of the total consideration of cash (or promissory notes) and our capital stock payable to the GLG Shareowners in the acquisition. This cash and our capital stock will be subject to vesting requirements and will be accounted for in accordance with EITF Issue No. 96-18, Accounting For Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction With Selling, Goods or Services . These equity participation plan participants will receive a pro rata portion of 25% of such amounts on consummation of the acquisition, with the remaining 75% vesting in equal installments over a three-year period on the first, second and third anniversaries or in equal installments over a four-year period on the first, second, third and fourth anniversaries of the consummation of the acquisition. The unvested portion of such amounts will be subject to forfeiture in the event of termination of the individual as a limited partner prior to each vesting date, unless such termination is without cause after there has been a change in control of our company or due to death or disability. Upon forfeiture, these unvested amounts will not be returned to us but to the limited partnerships, which may reallocate such amounts to their existing or future limited partners. The total compensation expense included in the condensed combined statement of operations for the year ended December 31, 2006 for the equity participation plan is $279,000. The total expense for the equity participation plan will be $602,000 comprising cash of $150,000 and 33,000,000 Exchangeable Shares of FA Sub 1 Limited converted into our common stock promptly after the acquisition with a fair value of $452,000 (using a fair value of $13.70 per share based on the closing price per share of our common stock on November 2, 2007 and assuming no change in fair value). (b) Restricted Stock Plan Of the purchase price for the acquisition, up to 10,000,000 shares of our common stock will be allocated to the employees, service providers and certain key personnel under the Restricted Stock Plan. These shares will be subject to vesting terms. These vesting requirements have not been finally determined; however, these pro forma condensed combined financial statements assume that 25% per annum vests over a four-year period on the first, second, third and fourth anniversaries of the consummation of the acquisition. A $71,354 charge to the combined statement of operations for the year ended December 31, 2006 has been recognized using the accelerated method under SFAS 123(R), Share-based payments , assuming no forfeiture and a fair value of $13.70 per share. (c) Agreement Among Principals and Trustees In addition, in connection with the acquisition, Mr. Gottesman, Emmanuel Roman and Pierre Lagrange, (collectively, the Principals ) and the trustees of their respective trusts (collectively, the Trustees ) will enter into an agreement among principals and trustees which will provide that, in the event a Principal voluntarily terminates his employment with GLG Partners, Inc. for any reason prior to the fifth anniversary of the acquisition, a portion of the equity interests held by that Principal and his related Trustee as of the closing of the acquisition will be forfeited to the Principals who are still employed by GLG Partners, Inc. and their related Trustees. The pro forma assumes no forfeiture of shares by any Principal or Trustee. Table of Contents NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (Continued) The agreement provides for vesting at the following rates: Consummation of the acquisition 17.5 % Each anniversary from 1st to 5th year 16.5 % A $704,593 charge to the condensed combined statement of operations for the year ended December 31, 2006 has been recognized using the accelerated method of SFAS 123(R), reflecting 77,604,988 shares of our common stock and 58,904,993 Exchangeable Shares at a fair value of $13.70 per share and assuming no forfeiture. (9) Reflects GLG s and Freedom s estimated transaction costs of $36,000 consisting primarily of investment banking, legal and accounting fees. (10) Minority interests represent the economic interests of the stockholders of GLG Holdings, Inc. Pursuant to a stock purchase agreement dated June 13, 2007, GLG Partners LP (or its designee) agreed to purchase from Emerald Tree Foundation, an independent Bermuda charitable foundation, all of the outstanding shares of GLG Holdings Inc., the parent company of GLG Inc., for $2,500. The closing of the stock purchase is conditioned on, among other things, the registration with the SEC of GLG Partners LP or GLG Inc. as an investment adviser under the U.S. Investment Advisers Act of 1940. GLG Inc. is expected to file a registration statement with the SEC in early December 2007. GLG Partners, Inc. has been designated by GLG Partners LP as the purchaser of GLG Inc. The acquisition of GLG Inc. is expected to be completed in 2008, at which time GLG Inc. will become an indirect wholly owned subsidiary of GLG Partners, Inc. Due to the number of contingencies required for completion, the acquisition of GLG Holdings Inc. and GLG Inc. has not been included in the unaudited pro forma condensed combined financial information. The impact of the acquisition of GLG Holdings Inc. and GLG Inc. would be to: reduce minority interests by $2,031, reduce cash by $2,500 and increase goodwill by $469 in the unaudited pro forma condensed combined balance sheets as of September 30, 2007 for both assuming the maximum approval and assuming the minimum approval; and adjust minority interests by $479 for the nine months ended September 30, 2007 and $182 for the year ended December 31, 2006 in the unaudited pro forma condensed combined statements of operations. (11) Reflects reclassification of GLG s equity accounts to conform to Freedom s equity structure. (12) Reflects the issuance of 171,095,007 shares of our common stock and 58,904,993 shares of Series A preferred stock, which carry only voting rights and nominal economic rights. The 171,095,007 shares of our common stock includes: 138,095,007 shares of our common stock; and 33,000,000 ordinary shares of FA Sub 1 Limited, which were subject to certain put and call rights, payable upon exercise by delivery of 33,000,000 shares of our common stock. Each of the ordinary shares issued by FA Sub 1 Limited has been put by the holder in exchange for one share of our common stock; The exchange of FA Sub 1 Limited shares for shares of our common stock has been accounted for based on the carrying amounts of the assets and liabilities of FA Sub 1 Limited. The ownership interests of the minority shareholders are unchanged by the exchange. (13) Reflects reduction in Principals base compensation to $3,000 per annum (plus related payroll taxes) and employment of a general counsel and a chief financial officer post-acquisition with total basic compensation and guaranteed bonus totaling $2,000 per annum (plus related payroll taxes). The Table of Contents NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (Continued) adjustment to income tax expense reflects the reduction in allowable deduction at U.K. corporate tax rates for the U.K. component of the Principals compensation, and an increase in the allowable deduction for the U.S. component of compensation. (14) Freedom s historical interest income and related taxation expense has been eliminated since the cash held in Freedom were paid out to the GLG Shareowners upon consummation of the transaction. No pro forma adjustments relating to reporting, compliance and investor relations costs that GLG incurred as a public company have been made. (15) Reflects tax effect of interest payable on borrowings at the standard U.K. corporate tax rate. (16) Reflects cumulative quarterly cash distributions, based on our estimate of the net taxable income of FA Sub 2 Limited allocable to the holder of Exchangeable Shares of FA Sub 2 Limited multiplied by an assumed tax rate, payable to such holder. The holder of the Exchangeable Shares is entitled to a pro rata share of any dividends distributed to our stockholders as if it held an equivalent number of shares of our common stock. In accordance with ARB No. 51, Consolidated Financial Statements , paragraph 15, as losses applicable to the minority interest in FA Sub 2 Limited exceed the minority interest in the equity capital of FA Sub 2 Limited, the losses have been charged against the majority interest, as there is no obligation of the minority interest to fund the losses. Losses not shared by the minority interest holder totaled $87,149 and $142.396 for the nine months ended September 30, 2007 and the year ended December 31, 2006, respectively. Distributions to non-controlling interests of certain GLG entities relating to the limited partner profit share arrangement have not been deducted from the numerator for the purposes of calculating pro forma basic and diluted earnings per share. Note C. Pro Forma Earnings Per Share The pro forma combined basic and diluted net income per share is based on the following (in thousands): Nine Months Ended September 30, 2007 and Year Ended December 31, 2006 Freedom shares outstanding prior to the acquisition of GLG 64,800 Shares issued in the sponsors co-investment 5,000 Shares of common stock issued in connection with the acquisition of GLG 138,095 Shares of common stock issued in exchange for ordinary shares of FA Sub 1 Limited 33,000 Pro forma basic and diluted EPS denominator 240,895 It has been assumed that the 33,000,000 ordinary shares of FA Sub 1 Limited will be acquired in exchange for 33,000,000 shares of our common stock following consummation of the acquisition of GLG. Table of Contents NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (Continued) The number of pro forma additional shares that could potentially dilute pro forma basic earnings per share in the future that were not included in the computation of pro forma diluted earnings per share, because to do so would have been antidilutive are summarized as follows: Nine Months Ended Year Ended September 30, December 31, 2007 2006 FA Sub 2 Limited Exchangeable Shares 58,904,993 58,904,993 Public Offering Warrants 52,800,000 52,800,000 Founders Warrants 12,000,003 12,000,003 Sponsors Warrants 4,500,000 4,500,000 Co-Investment Warrants 5,000,000 5,000,000 133,204,996 133,204,996 Table of Contents ORGANIZATIONAL STRUCTURE The two principal entities operating our business are GLG Partners LP, an English limited partnership, and GLG Partners Services LP, a Cayman Islands exempted limited partnership. The UK and Irish Group GLG Partners LP is the investment manager of the GLG Funds and managed accounts. The general partner of GLG Partners LP is GLG Partners Limited, an English company and a wholly owned subsidiary of ours. There are three limited partners of GLG Partners LP: GLG Holdings Limited, a British Virgin Islands company, a wholly owned subsidiary of ours. Albacrest Corporation, a British Virgin Islands company, a wholly owned subsidiary of ours. Laurel Heights LLP, an English limited liability partnership. The membership interests of Laurel Heights LLP are primarily held, directly or indirectly, by key personnel of GLG who participate in the limited partner profit share arrangement and, in some cases, the equity participation plan. These key personnel hold direct profits interests in Laurel Heights LLP* and those who participate in the equity participation plan also hold capital interests through Sage Summit LP, an English limited partnership, which wholly owns Liberty Peak Limited, which holds a capital interest in Laurel Heights LLP consisting of Laurel Heights LLP s capital interest in GLG Partners LP. The managing member of Laurel Heights LLP is Mount Granite Limited. Note: The profits interests marked with an asterisk above were not acquired by us as part of the acquisition of GLG. The limited partnership agreement of GLG Partners LP vests the management of the partnership exclusively with the general partner, including the power to allocate profits and losses among the general and limited partners and the power to make distributions to the general and limited partners, provided that no more than 25,000 may be allocated to the general partner for any fiscal year. In addition, the limited partnership agreement of GLG Partners LP provides that, among other things: new limited partners may only be admitted with the consent of the general partner; limited partnership interests may only be transferred with the consent of the general partner; the general partner shall serve as general partner until its resignation, bankruptcy, dissolution or liquidation and a successor general partner may only be appointed with the consent of all the limited partners; the limited partnership will be dissolved and wound up by the general partner upon the first to occur of (1) the written consent of the general partner and all of the limited partners and (2) the sale of all or substantially all of the assets of the limited partnership; and the limited partnership agreement may be amended solely with the consent of the general partner. GLG Partners Asset Management Limited, an Irish company and a wholly owned subsidiary of ours, is the manager of the GLG Funds authorized in Ireland. The Cayman Islands Group GLG Partners Services LP engages in marketing activities and provides investor relations services outside the United Kingdom. The general partner of GLG Partners Services LP is GLG Partners Services Limited, a Cayman Islands exempted company a wholly owned subsidiary of ours. There are four limited partners of GLG Partners Services LP: Steven Roth, a GLG investment professional who holds a profits interest.** Saffron Woods Corporation, a British Virgin Islands company, which is wholly owned by a trust for the benefit of Greg Coffey, a GLG investment professional, and his family, which holds a profits interest.** Betapoint Corporation, a British Virgin Islands company, a wholly owned subsidiary of ours. Lavender Heights LLP, a Delaware limited liability partnership. The membership interests of Lavender Heights LLP are primarily held, directly or indirectly, by key personnel of GLG who participate in the Table of Contents limited partner profit share arrangement and, in some cases, the equity participation plan. These key personnel hold direct profits interests in Lavender Heights LLP** and those who participate in the equity participation plan also hold capital interests through Lavender Heights Capital LP, a Delaware limited partnership, which wholly owns Knox Pines Limited, which holds a capital interest in Lavender Heights LLP consisting of Lavender Heights LLP s capital interest in GLG Partners Services LP. The managing member of Lavender Heights LLP is Mount Garnet Limited. Note: The profits interests marked with a double asterisk above were not acquired by us as part of the acquisition of GLG. The limited partnership agreement of GLG Partners Services LP vests the management of the partnership exclusively with the general partner, including the power to allocate profits and losses among the general and limited partners. In addition, the limited partnership agreement of GLG Partners Services LP provides that: new limited partners may only be admitted with the consent of the general partner; limited partnership interest may only be transferred with the consent of the general partner; the general partner may in its absolute and sole discretion remove, for any reason and no reason, any limited partner admitted after April 30, 2006, including Steven Roth and Saffron Woods Corporation; the general partner shall serve as general partner until its resignation, bankruptcy, dissolution or liquidation and a successor general partner may only be appointed with the consent of all the limited partners; the limited partnership will be dissolved and wound up by the general partner upon the first to occur of (1) the written consent of the general partner and all of the limited partners and (2) the sale of all or substantially all of the assets of the limited partnership; and the limited partnership agreement may be amended solely with the consent of the general partner. GLG Partners (Cayman) Limited, a Cayman Islands exempted company and a wholly owned subsidiary of ours, is the manager of GLG Funds registered in the Cayman Islands and Luxembourg. GLG Partners International (Cayman) Limited, a wholly owned subsidiary of GLG Partners (Cayman) Limited, manages unit trusts offered in Japan. GLG Partners Corporation, a wholly owned subsidiary of GLG Partners (Cayman) Limited, engages in preliminary activities preparatory to client management in the United States. Other GLG Entities GLG Inc., an independently owned Delaware corporation, provides research, marketing and other services to us and which we plan to acquire. Limited Partner Profit Share Arrangement Beginning in mid-2006, we entered into partnership with a number of our key personnel in recognition of their importance in creating and maintaining the long-term value of GLG, thereby establishing the limited partner profit share arrangement. These individuals ceased to be employees and either became direct or indirect holders of limited partnership interests in GLG or formed Laurel Heights LLP and Lavender Heights LLP through which they provide services to us. Future participants in the limited partner profit share arrangement are expected to participate as members of Laurel Heights LLP and, in certain cases, Lavender Heights LLP. Through these partnership interests, our key personnel are entitled to partnership draws and limited partner profit distributions. New key personnel and additional existing personnel may be admitted as new members of Laurel Heights LLP and Lavender Heights LLP. In addition, current members of Laurel Heights LLP and Lavender Heights LLP who cease to provide services to us will be removed as members of Laurel Heights LLP and Lavender Heights LLP. We refer to these amounts as the limited partners profit shares . Key personnel that are participants in the limited partner profit share arrangement do not receive salaries or discretionary bonuses from us. As noted above, we did not acquire the membership interests of GLG s key personnel in Laurel Heights LLP and Lavender Heights LLP or Saffron Woods or Steven Roth s interest in GLG Partners Services LP representing this interest in the limited partner profit share arrangement. These interests will remain outstanding after the consummation of the acquisition of GLG and related transactions. The amounts distributed to Laurel Heights LLP by GLG Partners LP and to Lavender Heights Table of Contents LLP, Saffron Woods Corporation and Steven Roth by GLG Partners Services LP, on account of their respective limited partnership interests will be determined by the respective general partners of the limited partnerships, whose decisions will be controlled by our management. The amounts received by Laurel Heights LLP and Lavender Heights LLP will be distributed by them to our key personnel who are their members as limited partner profit shares in such amounts as shall be determined by their respective managing members, whose decisions were controlled by the Principals or the Trustees, as the case may be, prior to the acquisition of GLG and whose decisions have been controlled by GLG Partners, Inc. since the acquisition of GLG. Other than distributions in connection with the limited partners profit share arrangement, Laurel Heights LLP, Lavender Heights LLP, Saffron Woods and Steven Roth are not expected to receive any other distributions from GLG Partners LP or GLG Partners Services LP. GLG Funds The GLG Funds are structured as limited liability companies incorporated either in the Cayman Islands, Ireland or Luxembourg and each has its own, majority independent, board of directors. The following diagram shows our corporate structure: Table of Contents Key: Albacrest: Albacrest Corporation Gottesman: Noam Gottesman and the Gottesman Betapoint: Betapoint Corporation GLG Trust, individually and collectively GHL: GLG Holdings Limited Green: Jonathan Green and the Green GLG GLGPL: GLG Partners Limited Trust, individually and collectively GPAM: GLG Partners Asset Management Limited Istithmar: IPS V Limited, a wholly owned GPCL: GLG Partners (Cayman) Limited subsidiary of Istithmar (PJSC) and an GPICL: GLG Partners International (Cayman) indirect wholly owned subsidiary of Limited Dubai World GPC: GLG Partners Corporation Lagrange: Pierre Lagrange and the Lagrange GPLP: GLG Partners LP GLG Trust, individually and GPS: GLG Partners Services Limited collectively GPS LP: GLG Partners Services LP Lehman: Lehman (Cayman Islands) Ltd Knox Pines: Knox Pines Ltd. Roman: Emmanuel Roman, the Roman GLG Laurel Heights: Laurel Heights LLP Trust, Albacrest and Betapoint, Lavender Heights: Lavender Heights LLP individually and collectively Liberty Peak: Liberty Peak Ltd. Sal. Oppenheim: FARAMIR Beteiligungs und Mount Garnet: Mount Garnet Limited Verwaltungs GmbH, an indirect Mount Granite: Mount Granite Limited wholly owned subsidiary of Sal. Saffron Woods: Saffron Woods Corporation Oppenheim jr. Cie. S.C.A. Steven Roth: a GLG key personnel ** The Gottesman ownership interests reflect the Exchangeable Shares of FA Sub 2 Limited and the Freedom Series A preferred stock. * Represents profits interests of participants in GLG s limited partner profit share arrangement that are not being acquired by Freedom in the acquisition. These entities hold capital interests and discretionary profits interests in GPS LP. This entity holds capital interests and discretionary profits interests in GPLP. Note: The historical financial statements of GLG include GLG Holdings Inc. and GLG Inc., an independently owned dedicated research and administrative services provider, which GLG has agreed to acquire, subject to certain conditions. The GLG Shareowners (including the Trustee for the Gottesman GLG Trust through its holdings of Exchangeable Shares and Series A preferred stock) hold common stock and common stock equivalents which collectively currently represent approximately 77% of our voting power. The Trustee for the Gottesman GLG Trust holds 100% of the Series A preferred stock, which currently represents 19.65% of our combined voting power. The Series A preferred stock has a nominal economic interest. We hold 100% of the ordinary shares of FA Sub 1 Limited. FA Sub 1 Limited holds 100% of the Class A ordinary shares of FA Sub 2 Limited, and the Trustee for the Gottesman GLG Trust owns 100% of the Exchangeable Shares of FA Sub 2 Limited. FA Sub 2 Limited holds 100% of the ordinary shares of FA Sub 3 Limited. Table of Contents INDUSTRY Asset Management Overview Asset management generally involves the management of investments by third-party managers on behalf of investors. The total value of AUM worldwide was estimated to exceed $45 trillion in 2006. The asset management industry has experienced significant growth in worldwide AUM in the past ten years, fueled in significant respects by aging populations in both developed and emerging markets around the world, which have increased the pools of savings and particularly pension assets. Asset managers employ a diverse range of strategies, which may be generally divided into two broad categories: traditional or long-only investment strategies; and alternative investment strategies. Traditional or long-only asset management, in general, involves managing portfolios of equity, fixed income and/or derivative securities and may include funds of funds. The investment objective of these portfolios may include total return, capital appreciation, current income and/or replicating the performance of a specific index. Such portfolios may include investment companies (e.g., mutual funds and exchange-traded funds) or separate accounts managed on behalf of individuals or institutions. Investors in traditional or long-only funds may have certain limitations on withdrawals or may have unrestricted access to their funds through market transactions, in the case of closed-end mutual funds and exchange traded funds, or through withdrawals, in the case of open-end mutual funds and separate managed accounts. Traditional and long-only fund managers are generally compensated with fees that are a percentage of AUM. Alternative asset management, in general, involves a variety of investment strategies where the common element is the manager s goal of delivering investment performance on an absolute return basis within certain predefined risk parameters and investment guidelines. The universe of alternative asset managers includes hedge funds, funds of funds (i.e., funds that invest in other investment funds), private equity funds, real estate funds, venture capital and mezzanine and structured debt funds. Alternative asset management vehicles have been the fastest growing segment of the asset management industry in part because many investors have sought to diversify their investment portfolios to include alternative asset strategies and alternative asset managers have generally delivered superior returns with a lower correlation to the broader market performance than traditional asset management strategies. Hedge Funds Hedge funds are generally privately held or unregistered investment vehicles managed with the primary aim of delivering positive risk-adjusted returns under all market conditions. Hedge funds differ from traditional or long-only asset management vehicles in the more varied asset classes in which they may invest or the more varied strategies they employ, including arbitrage, asset-based lending, distressed securities, equity long-short, global macro and other quantitative and non-quantitative strategies. Hedge fund managers generally earn a base management fee based on the net asset value of the AUM in the fund and also typically earn performance fees based on the overall performance of the funds that they manage. Investors can invest and withdraw capital from the funds periodically in accordance with the terms of the prospectus, offering memorandum or subscription agreement for the funds, which may include an initial period of time in which capital may not be withdrawn, allowing for withdrawals only at specified times and other limitations on withdrawals. Historically, hedge funds have generated positive performance across a variety of market conditions with less correlation to the performance of traditional benchmarks. Hedge funds achieve this through a variety of methods, including the use of short selling, hedging or arbitrage strategies and inclusion of fixed income-related securities or derivatives in investment portfolios. As a result of employing these strategies, hedge funds Table of Contents have been utilized by an increasing number of institutional asset managers as diversification instruments and, in light of the generally positive performance, have experienced significant asset inflows in recent years. Global AUM in the hedge fund industry, as reported by HFR Industry Reports, have grown from approximately $456 billion at December 31, 1999 to an estimated $1.4 trillion at December 31, 2006, a 17.7% compound annual growth rate. Funds of Funds Funds of funds managers invest in a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities. Funds of funds managers are predominantly associated with investments in alternative strategies such as hedge funds and private equity, but some funds of funds managers invest in portfolios of traditional funds. Funds of funds managers generally earn fees based on a percentage of net asset value of AUM in the fund and may also earn performance fees. Investor liquidity varies by manager and strategy. Funds of funds generally seek to deliver the risk/return profile of the underlying fund s asset category from a diversified group of managers. Growth of the funds of funds business is driven by the increasing interest in the underlying alternative strategies of hedge funds and private equity, and by many investors preference for investing in alternative investments on a broadly diversified basis. Funds of funds help investors reduce risk by limiting exposure to single managers and by closely monitoring manager performance and making allocation decisions. Commitments to funds of funds vehicles have increased substantially over the past several years. According to HFR Industry Reports, total assets invested in funds of funds have grown from $76 billion at the end of 1999 to $547 billion at the end of 2006, representing a 32.6% compound annual growth rate. Industry Trends The following factors are expected to influence the alternative asset management industry s growth: Growing investor interest in absolute return products Prior to the late 1990s, investor interest in absolute return products was relatively limited. However, following the downturn in global equity indices between 2000 and 2002, a broader range of investors became attracted to products targeting absolute rather than relative returns, driving strong inflows into the hedge fund industry. As interest in absolute return products has increased, institutions have also become interested in methods of applying absolute-style strategies across the large proportions of their portfolios which are not allocated to alternative investments such as hedge funds. This trend is creating demand for a new style of long-only asset management product, which builds on the tools and techniques used by hedge fund managers to enhance risk-adjusted returns in a fund format acceptable to regulators and investors who do not wish to or who are restricted from investing in funds that take short positions or make substantial use of leverage or derivatives. The opening up of third-party distribution channels In the 1990s, the distribution of asset management products was dominated by large asset management firms distributing their own proprietary funds through in-house distribution channels. The increasing focus on manager performance, rather than brand or product range, as a differentiating factor has resulted in many major distributors adopting an open architecture strategy, distributing third-party products alongside their own in-house funds. This strategic shift is beginning to take hold in previously closed markets, to the benefit of independent, high performing managers lacking significant internal distribution capabilities. Increasing portfolio allocations from institutional investors Based on their relative share of new investment flows, alternative asset management strategies have gained market share from traditional asset management strategies and are expected to continue to do so. Table of Contents According to McKinsey Company, the percentage of net new investment flows into alternative asset classes has grown from 7% to 22% between 2001 and 2005. Hedge funds alone are reported by McKinsey Company to have received approximately 40% to 50% of these flows during 2005. Much of the recent growth in the alternative investment industry can be attributed to investments by a growing community of individual and institutional investors seeking alternative asset management strategies as a means to obtain diversification improving the risk adjusted return profile of their portfolios. Despite the rapid expansion in institutional inflows, alternative asset management strategies still account for a relatively small portion of total institutional assets, which in turn implies significant opportunity for continued growth. Among hedge funds, for example, Casey, Quirk Associates reported that global institutional holdings are expected to grow from approximately $360 billion in October 2006 to over $1 trillion by 2010. Likewise, global hedge fund allocations, in the aggregate, are expected to rise to 3.5% of overall institutional assets by 2010 from 2% in October 2006. The increased role of institutional investors has resulted in increased professionalism in the industry and a greater focus on risk management and investment operations. Increasing demand for transparency and controls from the largest institutional investors has created an opportunity for the largest, most established and developed alternative asset managers Institutional investors are attracted to larger funds with well established track records, systems, operations and advanced risk management capabilities. The institutionalization of the alternative asset management industry is driving alternative asset managers to develop more robust infrastructures, as large institutional investors require greater transparency and robust risk management systems. Managers controlling larger pools of assets typically manage multiple funds with various strategies and, in the case of hedge funds, may have the ability to allocate capital among strategies in a dynamic fashion based on market conditions. As a result, the number of managers controlling larger pools of assets in the hedge fund sector has increased in recent years. Regulatory developments have expanded the market for alternative investments The interest among investors for the opportunity to invest in alternative asset classes has grown over recent years and partly in response to this the European Union has sought to make the regulatory regime in the European Union more flexible. Investment funds which qualify under the European Communities (Undertakings for Collective Investment in Transferable Securities) Directive 1985, which we refer to as the UCITS Directive, are, in principle, entitled to market themselves to the public in any member state of the European Union by virtue of being appropriately authorized in a single member state of the European Union, subject to making relevant notifications in the host member state. These funds, referred to as UCITS Funds, are subject to comprehensive investment restrictions, including anti-concentration limits, prohibitions on investing in certain asset classes (such as real estate and derivatives) and limits on borrowing. The UCITS Directive has been amended by the UCITS Management Directive 2001 and the UCITS Product Directive 2001 (collectively, referred to as UCITS III) which was due to have been in force in all member states of the European Union by February 2004. UCITS III widens the range of investments in which a UCITS Fund may invest to include investments such as financial derivative instruments and money market instruments, allows a UCITS Fund to make greater use of leverage and aims to provide an enhanced investor protection regime. Effective February 2007, all UCITS Funds must comply with UCITS III. Table of Contents OUR BUSINESS Business Overview We are the largest independent alternative asset manager in Europe and the eleventh largest globally, offering our base of long-standing prestigious clients a diverse range of investment products and account management services. Our focus is on preserving clients capital and achieving consistent, superior absolute returns with low volatility and low correlations to both the equity and fixed income markets. Since our inception in 1995, we have built on the roots of our founders in the private wealth management industry to develop into one of the world s largest and most recognized alternative investment managers, while maintaining our tradition of client-focused product development and customer service. ($ BN) We use a multi-strategy approach, offering approximately 40 funds across equity, credit, convertible and emerging markets products. We have achieved strong and sustained absolute returns in both alternative and long-only strategies. As of September 30, 2007, our gross AUM (including assets invested from other GLG Funds) were approximately $23.6 billion, up from approximately $3.9 billion as of December 31, 2001, representing a compound annual growth rate, or CAGR, of 37%. As of September 30, 2007, our net AUM (net of assets invested from other GLG Funds) were approximately $20.5 billion, up from approximately $3.9 billion as of December 31, 2001, representing a CAGR of 33%. We have achieved an approximately 16.8% dollar-weighted compound net annual return on our alternatives strategies since our first fund launch in 1997. The chart above sets forth the growth of our gross and net AUM since 2001. During the three months ended September 30, 2007, on a dollar-weighted basis, the net returns of the GLG Funds decreased less than 0.5% and managed account inflows and gross fund-based inflows of AUM (net of redemptions) exceeded $1.7 billion. We have built an experienced and highly-regarded investment management team of 95 investment professionals and supporting staff of 205 personnel, based primarily in London, representing decades of experience in the alternative asset management industry. This deep team of talented and dedicated professionals includes a significant number of people who have worked with us since before 2000. In addition, we receive dedicated research and administrative services from GLG Inc., an independently owned entity with 27 personnel in New York, which GLG Partners LP agreed in June 2007 to acquire, subject to certain conditions. We have been designated by GLG Partners LP as the purchaser of GLG Inc., and we expect to complete the acquisition of GLG Inc. in 2008. For purposes of this prospectus, personnel refers to our employees and the individuals who are members of Laurel Heights LLP and Lavender Heights LLP and who provide services to us through these entities. Table of Contents We have built a highly scalable investment platform, infrastructure and support system, which represents a combination of world-class investment talent, cutting-edge technology and rigorous risk management and controls. We manage a portfolio of approximately 40 funds, comprising both alternative and long-only strategies. The charts below summarize the diversity of our overall gross AUM as of September 30, 2007. We employ a multi-strategy approach across the funds we manage, with low correlations of returns across product asset classes. The diversity of these funds and their strategies provides us with more stable performance fee revenue than more narrowly-focused alternative investment managers. The chart below summarizes for the seven largest single-manager GLG Funds the correlation of returns between individual funds, as well as the correlation of each fund to the S P 500 Index and the MSCI World Index, based on monthly returns from the fund inception date to September 30, 2007. Correlation represents a statistical measure of the degree to which the return of one GLG Fund is correlated to the return of another GLG Fund, the S P 500 Index or the MSCI World Index. It is expressed as a factor that ranges from 1.00 (perfectly inversely correlated) to +1.00 (perfectly positively correlated). A correlation of 0 indicates no correlation at all. For example, the correlation between the GLG Emerging Markets Fund and the GLG North American Opportunity Fund is 0.29, indicating a relatively low correlation between the investing strategies of each fund. Thus, the chart illustrates how relatively uncorrelated the strategies of the GLG Funds are to one another and to general market indices, resulting in a more stable flow of performance fees over an extended period of time. Alternatives Long-Only* North Global European Emerging Market American Convertible European Long-Short Markets Neutral Opportunity UCITS Equity Capital ($3.2bn ($3.1bn ($2.5bn ($1.3bn ($1.4bn ($1.3bn Appreciation Gross Gross Gross Gross Gross Gross ($0.9bn AUM) AUM) AUM) AUM) AUM) AUM) Gross AUM) European Long-Short 1.00 0.59 0.55 0.57 0.19 0.23 0.34 Emerging Markets 0.59 1.00 0.50 0.29 0.47 0.48 0.50 Market Neutral 0.55 0.50 1.00 0.53 0.53 0.28 0.55 North American Opportunity 0.57 0.29 0.53 1.00 0.51 0.38 0.62 Global Convertible UCITS 0.19 0.47 0.53 0.51 1.00 0.76 0.84 European Equity 0.23 0.48 0.28 0.38 0.76 1.00 0.76 Capital Appreciation 0.34 0.50 0.55 0.62 0.84 0.76 1.00 S P 500 Index (0.02 ) 0.18 0.16 0.31 0.64 0.75 0.65 MSCI World Index 0.06 0.29 0.26 0.37 0.72 0.85 0.75 * AUM figures include distributing funds; returns are for non-distributing fund. Our success has been driven largely by our strong and sustained track record of investment performance. The chart below summarizes investment performance since the launch of our first fund in 1997 by looking at Table of Contents the cumulative dollar-weighted net annual returns for all GLG Funds (excluding FoHFs) and for the single-manager alternative strategy GLG Funds. History Messrs. Gottesman, Lagrange and Green, who had worked together at Goldman Sachs Private Client Services since the late 1980s, left to form GLG as a division of Lehman Brothers International (Europe) in September 1995, with significant managerial control. Initially, GLG managed accounts for private client investors, primarily high and ultra-high net worth individuals from many of Europe s wealthiest families, with whom the founders had pre-existing relationships. GLG began to offer fund products in early 1997. By 1998, GLG had exceeded the five-year profitability target which had been jointly set by the founders and Lehman International in 1995. In 2000, GLG s senior management, which added Philippe Jabre in 1997, wanted to grow its business as an independent company. As a result, GLG became an independent business in 2000. A subsidiary of Lehman Brothers Holdings Inc. initially held a 20% minority interest and now holds a 10.1% interest. Mr. Green retired from GLG at the end of 2003, and Mr. Jabre resigned from GLG in early 2006. Since its separation from Lehman International in 2000, GLG has invested considerable resources to developing a cohesive investment management team and robust platform to allow it to participate in the strong growth of the alternative investment management industry. GLG has successfully established a fully independent infrastructure, seen overall headcount grow from approximately 55 in 2000 to 340 as of September 30, 2007 (including 27 personnel at GLG Inc.) and recruited a significant number of high-quality individuals from leading financial services businesses both to deepen its talent pool and management base and to support a substantial range of new product initiatives. Emmanuel Roman, a former Partner of Goldman Sachs, joined GLG in 2005 as a non-investment manager Co-Chief Executive Officer. Competitive Strengths We are one of the leading alternative asset managers in the world. Moreover, our strength in Europe and the United Kingdom has given us a highly respected brand name in the industry and has enabled us to attract and retain highly talented investment professionals as well as to invest heavily in our infrastructure. We believe that we enjoy distinct advantages for attracting and retaining talent, generating investment opportunities Table of Contents and increasing AUM because of the strength and breadth of our franchise. By capitalizing on what we regard as our competitive strengths, we expect to extend our record of growth and strong investment performance. Our Team and Culture We have a deep team of talented and dedicated professionals, a number of whom have worked at GLG since before our separation from Lehman International in 2000. Our high-quality and well-motivated team of investment professionals, led by two of our Managing Directors, Messrs. Gottesman and Lagrange, is characterized by exceptional investment and product development experience and expertise. Several of our investment professionals are widely recognized leaders and pioneers in the alternative investment management industry. In addition to our 95 investment professionals, we have 205 professionals in our marketing, legal, compliance, accounting, administrative, risk management, operations and technology groups. We have invested heavily for over ten years in recruiting, retaining and supporting this strong and cohesive team because we believe that the quality of this team has contributed and will continue to contribute materially to the strength of our business and the results we achieve for our clients. Extensive industry experience and consistency in the senior management team provide us with considerable continuity and have served to define our professional culture. Our management believes that a team approach, in which investment professionals managing multiple strategies and asset classes are encouraged to share investment perspectives and information (for example, equity, credit and emerging market specialists working together, or industry teams working across geographic regions), promotes the cross-fertilization of ideas, investment strategies and product development within the organization. Management views this team dynamic as a critical contributor to both our investment success and our ability to develop new product initiatives. Long-standing Relationships with a Prestigious Client Base We have forged long-standing relationships with many of Europe s wealthiest families and prestigious institutional asset allocators. We enjoy a balanced investor base made up of roughly half high and ultra-high net worth individuals and half institutional investors. We have discretionary power to allocate a significant portion of the assets invested by high and ultra-high net worth individuals among our various fund products. With a foundation of firmly established relationships, some originating prior to our inception in 1995, we enjoy a loyal client base. In addition to representing a high-quality source of client referrals, many of these clients have significant industry and regional knowledge, as well as experience and relationships that we are able to leverage in the investment process. Our focus on client relationship management through our marketing team and customized investment solutions places us in a strong position both to capture a greater proportion of the investable wealth of existing accounts and to attract new clients. Differentiated Multi-Strategy Approach and Product Offerings By offering a wide variety of investment strategies and products, in contrast to single strategy managers, we offer a broad solution, deploying client assets across a variety of investment products among our portfolio of approximately 40 fund products. By spinning-off successful strategies into new funds, we have been able to expand our portfolio of separate independent funds, creating growth opportunities with new and existing clients. Our multi-strategy approach provides significant advantages to our clients, most importantly the flexibility to redeploy client assets quickly among other GLG Funds in our diversified portfolio of investment products in the face of changing market conditions. Our multi-strategy profile also enhances the stability of our performance fee-based revenues, as fluctuations in fund performance and performance fees are modulated across the broad and diverse portfolio of investment products. In addition, our diversified investment product offerings allow us to take advantage of cross-selling opportunities with new and existing clients, thereby attracting or retaining investment capital that might otherwise go to non-GLG investment vehicles. Furthermore, through our managed account product, we are able to create sophisticated and highly customized solutions for our clients, providing products tailored to client requirements. Table of Contents Strong and Sustained Investment Track Record The GLG Funds have generated substantial absolute returns since inception, during periods of both supportive and difficult market conditions. By focusing on our core competencies, we have achieved outstanding returns dollar-weighted compound net annual returns of 16.8% in all alternative strategies funds and 15.0% in all GLG Funds (excluding FoHFs) since 1997. Dollar-weighted annual returns are calculated as the composite performance of all constituent funds, weighted by fund size, with performance measured by core class in each fund. Institutionalized Operational Processes and Infrastructure We have invested considerable resources into developing our personnel base and establishing our infrastructure. We have developed highly institutionalized product development, investment management, risk management, operational and information technology processes and controls. Management believes that our institutionalized product platform, operational and systems infrastructure and distribution channels are highly scalable and are attractive to institutional investors who are seeking investment funds with well-developed and robust systems, operations and advanced risk management capabilities. This, in turn, enhances our ability to participate in the strong growth of the investment management industry and demand for absolute return products. Alignment of Interests Our superior performance is due, in part, to the close alignment of interests among our management, personnel and clients. Currently, the Principals, the Trustees, our officers and directors, our key personnel, employees and service providers, and their respective affiliates, Lavender Heights Capital LP and Sage Summit LP, collectively own approximately 66% of us. Our management believes that ownership by these key personnel is an important contributor to our success by motivating these key personnel to provide outstanding fund performance, generate significant revenues for us through management and performance fees and thereby increase the value of their ownership interests. In this manner, our key personnel have a stake in the success of all of our products, not just those in which they work personally. These ownership interests will continue to align the interests of our Principals and key personnel with their clients, as well as with the other holders of our capital stock, encourage cooperation across strategies and create greater opportunities for our business. In addition, our three Principals, their Trustees, certain key personnel and their families and associated entities have agreed to invest in the GLG Funds at least 50% of the excess of the cash proceeds they received in the acquisition of GLG over the aggregate amount of any taxes payable on their respective portion of the purchase price. Currently, they have invested, including certain cash proceeds from the sale of GLG, approximately $776 million of additional net AUM in the GLG Funds and pay the same fees and otherwise invest on the same terms as other investors. Furthermore, a significant portion of the compensation and limited partner profit share of our key personnel (other than the Principals) is based on the performance of the funds and accounts we manage. In addition, our key personnel are eligible to receive discretionary bonuses and limited partner profit share, which are based upon individual and firm-wide performance. Growth Strategies Extend Strong Investment Track Record Over time, our principal goal of achieving substantial absolute returns for our investors has remained unchanged. Since inception, we have achieved a strong and sustained investment track record. In the process, we have established GLG as a leading alternative asset manager and have attracted an established high and ultra-high net worth individual and institutional client base. Table of Contents Expand Investment Products and Strategies We have consistently developed and added new products and strategies to our business, and intend to continue to selectively expand our products and strategies. Our multi-strategy approach allows us to offer clients a full-service solution, provides diversity and adds stability to our performance fee-based revenues. We currently offer approximately 40 investment fund products, including our recently launched GLG Environmental Fund, GLG Emerging Markets Special Situations Fund and GLG Esprit Fund (a quantitative long-short fund), and have several other fund products in the product development pipeline, including our first UCITS III Fund expected in January 2008. Over the last five years, we have added an average of five new fund products a year. We continue to emphasize the importance of innovation and responsiveness to client demands and market opportunities, and believe that the close and long-term relationships that we enjoy with our clients are a key source of market research helping to drive the development of new products and strategies. Build on Success in Europe and the United Kingdom to Penetrate Other Major Markets We are focused on developing a much more significant global presence and intend to expand our client relationships and distribution capabilities in regions where we have not actively sought clients, particularly the United States, the Middle East and Asia, and through new distribution channels and joint ventures. We believe that clients and institutions in these regions could represent a significant portion of future AUM growth. For example, although the United States currently represents 57% of the total alternative asset management market, according to Hedge Fund Research, Inc., it represents a de minimis portion of our net AUM. In June 2007, GLG Partners LP agreed to acquire GLG Inc. subject to certain conditions, including registration by GLG Inc. and GLG Partners LP (to the extent required by applicable law) as investment advisers under the U.S. Investment Advisers Act. GLG Inc. is expected to file a registration statement with the SEC in early December 2007. We have been designated by GLG Partners LP as the purchaser of GLG Inc., and we expect to complete the acquisition of GLG Inc. in 2008. We also believe that becoming a publicly traded, NYSE-listed company has further enhanced the brand awareness of GLG and our business and will facilitate AUM growth by attracting new clients, particularly from the United States and other under-penetrated geographic markets. In August 2007, Istithmar, the Government of Dubai-owned private equity and alternative investment firm, and Sal. Oppenheim, Europe s largest independent private bank, each completed the purchase of shares in GLG for an aggregate purchase price of $82.5 million payable by each of Istithmar and Sal. Oppenheim from Jonathan Green, one of our founders who retired from GLG in 2003, and the Green GLG Trust. Each of Istithmar and Sal. Oppenheim currently owns approximately 2% of our common stock. Both will also be investors in GLG Funds. Products and Services Investment Products As of September 30, 2007, we had five major categories of products: Single-manager alternative strategy funds: These funds represent our core investment product and are the primary means by which investors gain exposure to our core alternative investment strategies. This category comprises 18 individual funds, each being managed according to distinct investment strategies, including equity long-short funds, mixed-asset long-short funds, multi-strategy arbitrage funds, convertible bond funds, credit long-short funds and a commodities trading fund and may be characterized by the use of leverage, short positions and/or derivatives. These single-manager alternative strategy funds have gross AUM of approximately $14.7 billion representing 62% of total gross AUM and net AUM (net of alternative fund-in-fund investments) of approximately $13.3 billion. The largest funds in this category are: the GLG European Long-Short Fund, the GLG Emerging Markets Fund, the GLG Market Neutral Fund, the GLG North American Opportunity Fund and the GLG Emerging Markets Special Situation Fund. These funds may also make use of fund-in-fund investments whereby one single-manager alternative strategy fund may hold exposure to another single-manager alternative strategy Table of Contents fund. In order to accurately represent these sub-investments, management tracks AUM on both a gross and a net basis. In a gross presentation, sub-invested funds will be counted at both the investing and investee fund level. Net presentation removes the assets at the investing fund level, indicating the total external investment from clients. Long-only funds: The long-only funds facilitate access to our leading market insight and performance for those clients who are seeking full (non-hedged) exposure to the equity markets across geographic and sector-based strategies, while benefiting from our investment expertise. We currently operate 13 long-only funds, which have gross AUM of approximately $4.6 billion representing 19% of total gross AUM. The largest funds in this category are: the GLG Global Convertible UCITS Fund, the GLG Capital Appreciation Fund and the GLG European Equity Fund. Funds of GLG funds ( internal FoHF ): These funds are structured to provide broad investment exposure across our range of single-manager alternative strategy funds, as well as being a means by which investors may gain exposure to funds that are currently not being marketed. We currently have three internal FoHF funds, representing 7% of total gross AUM. The largest funds in this category are: the GLG Multi Strategy Fund SICAV and the GLG Global Opportunity Fund. Presentation of the AUM of these funds on a net basis results in minimal AUM figures, as the vast majority of their assets are sub-invested in underlying GLG single-manager alternative strategy funds, with net AUM representing only small cash balances. Due to active fund management decisions regarding leverage for investment or settlement purposes and/or due to the mechanics of the process by which our internal FoHFs are required to place investments into underlying single-manager alternative strategy funds, the value of the investments held by any internal FoHF may not be exactly equal to the gross AUM of that fund at any point in time. Multi-manager funds ( external FoHF ): The multi-manager funds represent our external FoHF offering, currently comprising five funds and 3% of total gross AUM. These funds are invested into funds managed by external asset management businesses (and, in one case, a GLG Fund). The largest funds in this category are: the Prescient Alpha Fund and the GLG MMI Enhanced Fund. Any investment of external FoHF assets into underlying GLG Funds is removed from the net presentation of an external FoHF s AUM. Managed accounts: We offer managed account solutions to larger institutional clients who want exposure to our investment strategies, but are seeking a more customized approach. Managed accounts currently represent 8% of total gross AUM through 17 separate accounts. Fund Performance and Structure Our historical success has been driven by our strong and sustained track record of investment performance. Our investment strategies have delivered cross-cycle outperformance when compared to the equity and fixed income markets. When viewed at the individual fund level, our performance (net of all fees paid to us) is equally impressive. The table below presents historical net performance for all active GLG Funds (which are not in the process of being liquidated) by AUM in each of the product categories as of September 30, 2007. It should be noted that the alternative strategy funds seek to deliver absolute performance across a broad range of market conditions. Net Performance Gross Inception Since Annualized AUM Net AUM Date Inception* Net Return* Alternative Strategies GLG European Long-Short Fund(1) $ 3.22bn $ 2.99bn 1-Oct-00 143.76 % 13.59 % MSCI Europe Index (Loc) (2.21 )% (0.32 )% GLG Financials Fund(1) $ 0.34bn $ 0.07bn 3-Jun-02 90.66 % 12.89 % Table of Contents Net Performance Gross Inception Since Annualized AUM Net AUM Date Inception* Net Return* S P Global 1200 Financial Sector Index 62.95 % 9.61 % GLG Technology Fund(1) $ 0.35bn $ 0.10bn 3-Jun-02 85.26 % 12.28 % NASDAQ Index 73.06 % 10.85 % GLG Alpha Select Fund(1) $ 0.61bn $ 0.18bn 1-Sep-04 30.46 % 9.04 % FTSE 100 Index (GBP) 45.02 % 12.85 % GLG Consumer Fund(1) $ 0.10bn $ 0.01bn 1-Nov-05 28.96 % 14.25 % MSCI World Equity Index (Loc) 29.90 % 14.68 % GLG Global Utilities Fund(1) $ 0.38bn $ 0.10bn 1-Dec-05 21.51 % 11.25 % S P 500 Index 22.19 % 11.59 % GLG Esprit Fund(1)(2) $ 0.20bn $ 0.11bn 1-Sep-06 15.71 % 14.55 % GLG European Opportunity Fund(1) $ 0.32bn $ 0.16bn 2-Jan-02 66.42 % 9.28 % MSCI Europe Index (Loc) 25.07 % 3.97 % GLG North American Opportunity Fund(1) $ 1.29bn $ 1.02bn 2-Jan-02 66.30 % 9.27 % S P 500 Index 32.98 % 5.09 % GLG Japanese Long-Short Fund(1) $ 0.03bn $ 0.03bn 1-Nov-04 (2.59 )% (0.90 )% Topix Index (JPY) 48.94 % 14.69 % GLG Global Convertible Fund(3) $ 0.54bn $ 0.54bn 1-Aug-97 181.16 % 10.71 % Merrill Lynch Global 300 Convertible Index (Loc) 87.02 % 6.35 % MSCI World Equity Index (Loc) 53.18 % 4.28 % JP Morgan Government Bond Index (Loc) 59.99 % 4.73 % GLG Market Neutral Fund(1) $ 2.53bn $ 2.28bn 15-Jan-98 494.50 % 20.16 % MSCI World Equity Index (Loc) 60.03 % 4.96 % Investment in USD 3 Month Libor Rate 46.58 % 4.02 % GLG Credit Fund(1) $ 0.55bn $ 0.38bn 2-Sep-02 69.97 % 11.00 % Investment in USD 3 Month Libor Rate 17.33 % 3.19 % GLG Absolute Return Bond Fund(1) $ 0.10bn $ 0.10bn 1-Apr-06 3.30 % 2.20 % Investment in USD 3 Month Libor Rate 8.30 % 5.48 % GLG Event Driven Fund(1)(2) $ 0.28bn $ 0.20bn 2-May-06 0.86 % 0.61 % GLG Global Futures Fund(1)(2) $ 0.08bn $ 0.00bn 1-Aug-04 4.63 % 1.44 % GLG Emerging Markets Fund(1)(2) $ 3.07bn $ 2.82bn 1-Nov-05 164.92 % 66.68 % GLG Emerging Markets Special Situations Fund(1)(2) $ 0.70bn $ 0.67bn 2-Apr-07 24.62 % 55.49 % Long Only Strategies GLG Performance Fund(3) $ 0.44bn $ 0.44bn 14-Jan-97 278.16 % 13.22 % MSCI World Equity Index (Loc) 86.78 % 6.01 % GLG Performance (Distributing) Fund(2)(3) $ 0.29bn $ 0.29bn 6-Apr-99 138.69 % 10.80 % GLG European Equity Fund(3) $ 1.27bn $ 1.27bn 11-Feb-99 169.58 % 12.18 % MSCI Europe Index (Loc) 31.02 % 3.18 % GLG North American Equity Fund(3) $ 0.14bn $ 0.14bn 2-Jan-04 45.70 % 10.59 % S P 500 Index 37.31 % 8.85 % GLG UK Select Equity Fund(3) $ 0.02bn $ 0.00bn 1-Dec-06 10.54 % 12.88 % FTSE 100 Index (GBP) 6.91 % 8.41 % Table of Contents Net Performance Gross Inception Since Annualized AUM Net AUM Date Inception* Net Return* GLG UK Select Equity (Distributing) Fund(2)(3) $ 0.02bn $ 0.00bn 2-Apr-07 4.05 % 8.29 % GLG Environment Fund(3) $ 0.03bn $ 0.00bn 2-Jan-07 8.10 % 10.97 % MSCI Europe Index (Loc) 3.69 % 4.97 % GLG Alpha Capture Fund(2)(3) $ 0.02bn $ 0.00bn 1-Mar-07 3.95 % 6.07 % GLG Capital Appreciation Fund(3) $ 0.46bn $ 0.46bn 4-Mar-97 228.77 % 11.91 % Benchmark(4) 80.04 % 5.72 % GLG Capital Appreciation (Distributing) Fund(2)(3) $ 0.41bn $ 0.41bn 1-Apr-99 107.08 % 8.94 % GLG Balanced Fund(3) $ 0.06bn $ 0.06bn 4-Mar-97 133.03 % 8.33 % Benchmark(5) 71.35 % 5.22 % GLG Global Convertible UCITS Fund(3) $ 1.38bn $ 1.38bn 12-Mar-99 109.32 % 9.02 % Merrill Lynch Global 300 Convertible Index (Loc) 67.72 % 6.23 % MSCI World Equity Index (Loc) 24.92 % 2.64 % JP Morgan Government Bond Index (Loc) 39.65 % 3.98 % GLG Global Convertible UCITS (Distributing) Fund(2)(3) $ 0.02bn $ 0.00bn 14-Oct-05 20.24 % 9.88 % Internal FoHF GLG Global Opportunity Fund(3) $ 0.50bn $ 0.50bn 4-Feb-97 416.26 % 16.66 % MSCI World Equity Index (Loc) 82.48 % 5.81 % GLG Multi-Strategy Fund(1) $ 1.13bn $ 1.13bn 7-Jan-03 53.14 % 9.44 % MSCI World Equity Index (Loc) 84.61 % 13.85 % GLG Global Aggressive Fund(1) $ 0.02bn $ 0.02bn 4-Jan-00 131.52 % 11.44 % MSCI World Equity Index (Loc) 8.40 % 1.05 % Prime GLG Diversified Fund(2)(3) $ 0.00bn $ 0.00bn 1-Jun-04 12.86 % 3.70 % External FoHF Prescient Alpha Fund(1) $ 0.22bn $ 0.22bn 1-Oct-01 46.80 % 6.61 % MSCI World Equity Index (Loc) 51.77 % 7.21 % GLG MMI Enhanced Fund(1) $ 0.28bn $ 0.28bn 1-Dec-03 66.02 % 14.16 % MSCI World Equity Index (Loc) 57.02 % 12.51 % GLG MMI Japanese Opportunity Fund(1)(2) $ 0.04bn $ 0.04bn 1-Jun-05 15.91 % 6.55 % GLG MMI Directional Fund(1)(2) $ 0.04bn $ 0.02bn 1-Jul-06 9.64 % 7.68 % GLG MMI Enhanced II Fund(1)(2) $ 0.03bn $ 0.03bn 1-Dec-06 11.98 % 14.71 % (1) GLG Partners (Cayman) Limited is the manager of these GLG Funds. (2) No comparable index. (3) GLG Partners Asset Management Limited is the manager of these GLG Funds. (4) Benchmark for GLG Capital Appreciation Fund is 65% MSCI World Index (Loc); 35% JPMorgan Gov t Bond Index (Loc). (5) Benchmark for GLG Balanced Fund is 1/3 MSCI World Index (Loc), 1/3 JPMorgan Gov t Bond Index (Loc), 1/3 US $3-month LIBOR rate. Table of Contents The investment manager for all funds is GLG Partners LP. None of the GLG Funds is registered in the United States. However, each GLG Fund is regulated in its jurisdiction of incorporation, except for the GLG MMI Japanese Opportunity Fund. See Competitive Strengths Alignment of Interests for a discussion of investments by the GLG Principals and certain key personnel in the GLG Funds. Our gross management fee rates and administration fee rates are set as a percentage of fund AUM depending on the product. Our gross performance fee rates are set as a percentage of fund performance, calculated as investment gains (both realized and unrealized), less management and administration fees, subject to high water marks and, in the case of most long-only funds, four external FoHF and two single-manager alternative strategy funds, to performance hurdles. The table below sets forth the typical range of gross fee rates for management fees and performance fees (subject to fee treatment of fund-in-fund reinvestments as described below); administration fee notes vary depending on the product: Typical Range of Gross Typical Range of Gross Performance Fee Rates Product Management Fee Rates (% of AUM) (% of Investment Gains) Single-manager alternative strategy funds 1.50% 2.50%* 20% 30%* Long-only funds 0.75% 2.25% 20% 25% Internal FoHF 0.25% 1.50% (at the investing fund level)* 0% 20% (at the investing fund level)* External FoHF 1.50% 1.95% 5% 10% Note: Where a single-manager alternative strategy fund or internal FoHF managed by us invests in an underlying single-manager alternative strategy fund managed by us, the investing fund is the top-level GLG Fund into which a client invests and the investee fund is the underlying GLG Fund into which the investing fund allocates funds for investment. When one of the single-manager alternative strategy funds or internal FoHFs managed by us invests in an underlying single-manager alternative strategy fund managed by us: management fees are charged at the investee fund level. In addition, management fees are charged on the following GLG Funds at the investing fund level: (1) GLG Multi Strategy Fund; and (2) Prime GLG Diversified Fund; performance fees are charged at the investee fund level. In addition, performance fees are charged on the following GLG Funds at the investing fund level: (1) Prime GLG Diversified Fund; and (2) GLG Global Aggressive Fund to the extent that the performance fee at the investing fund level exceeds the performance fee at the investee fund level; and administration fees are charged at both the investing and investee fund levels. Certain GLG Funds employ leverage to enable them to invest additional amounts over and above their share capital and thereby enhance equity returns. Leverage will vary with the exact composition of the fund portfolio. Leverage is provided by prime brokers and counterparties. Additionally, funds may be leveraged through the use of products such as options, futures and other derivatives. Each of the GLG Funds is structured as a limited liability company, incorporated in the Cayman Islands, Ireland or Luxembourg. In general, the Cayman Islands are preferred for alternative strategy funds of non-U.S. investors, given the flexibility available to alternative strategy funds in this jurisdiction. A limited number of our alternative strategy funds are also domiciled in Ireland. Our long-only funds are incorporated in Ireland and utilize investment strategies that comply with the regulations in Ireland and qualify for UCITS status. These long-only funds also have the ability to use a limited degree of leverage and to use derivative instruments, including synthetic short exposure, in accordance with UCITS III. One of our internal FoHF funds is domiciled in Luxembourg. Each GLG Fund has a board of directors and each board consists of a majority of independent directors. The prospectus for each fund sets out the terms and conditions upon which shareholders invest in the fund. None of the GLG Funds are subject to key man provisions. Thirty-four funds are listed on the Irish Stock Exchange, one fund is listed on the Luxembourg Stock Exchange, one fund is listed on the Cayman Islands Stock Exchange and four funds are unlisted. Table of Contents Each GLG Fund has appointed a GLG entity as its manager to provide investment management, administration and distribution services to the fund pursuant to a management agreement. The provision of these services is delegated to other GLG entities and third parties. In particular, investment management is delegated to GLG Partners LP pursuant to an investment management agreement. Because each GLG Fund is structured as a limited liability company whose owners are the investors in the fund, the manager and investment manager generally do not have an ownership interest in the fund and their sole relationship with the fund is contractual. Fund administration, custody and prime brokerage services are delegated to third-party providers pursuant to separate agreements. The material terms of these agreements relate to the scope of services to be rendered to the fund, liabilities, remuneration and rights of termination under certain circumstances. Under each management agreement, a manager is appointed to, among other things, manage the assets of the relevant GLG Fund, administer the assets of the relevant GLG Fund and distribute the assets of the relevant GLG Fund. The manager delegates each of these functions to third parties. In particular the manager delegates the investment management functions to GLG Partners LP. Under each investment management agreement, the investment manager is responsible for identifying, purchasing, managing and disposing of investments on behalf of the relevant fund in accordance with its statement of investment policy. Each management agreement and investment management agreement is terminable on 30 days written notice by either party and provides that in the absence of negligence, willful default, fraud or bad faith, the manager and its agents will not be liable for any loss or damage arising out of the performance of their obligations under the agreement. We do not hold any investments in the GLG Funds, other than a de minimis amount of subscriber and management shares. The subscriber and management shares are for a fixed notional amount and do not have an entitlement to participate in movements in net asset value, nor do they generate any income for us. As a result, we do not receive any income by reason of investment on our own account in the GLG Funds. Neither the Principals nor their affiliates have any investment management operations or businesses that are separate from GLG. All of the assets managed by us are owned by our clients and are therefore separate from GLG. We do have discretion over the management of these assets. Clients and Marketing We have a team of 13 marketing professionals which is split into geographical regions. Our marketing effort has historically been geographically focused, with Europe accounting for the majority of marketing activity, and is built on a number of complementary and diverse distribution channels: marketing to high and ultra-high net worth individuals and families through a combination of existing client referrals, marketer-led relationships and banks; and marketing to institutional investors, including funds of funds, alternative asset management divisions of banks, pension funds, insurance companies and investment platforms, through a combination of the capital introduction groups of leading prime brokers, financial intermediaries, marketer-led relationships and banks. In addition to the standard tasks of reporting performance and alerting clients to new fund and product launches, our marketing personnel offer broader investment advice, including assistance with overall portfolio planning, which, in some cases, may include non-GLG investment products. Although we have historically focused on Europe, we are committing resources to expanding into under-penetrated markets like the United States, the Middle East and Asia. We also have a 29 member dedicated client service and marketing support team that facilitates investment transactions and provides analysis and reporting to clients. Product Development We have developed approximately 40 new investment products over the last ten years, including a number of innovative offerings in the alternative investment management industry, such as the GLG Esprit, GLG Table of Contents Environment and GLG Emerging Market Special Situations funds. Consistent innovation and product development has stemmed from our close relationship to our client base, our investment team s skill and market knowledge and also our responsiveness to client and market demands. The following chart shows the historical development of current GLG Funds: We are focused on further developing our multi-strategy approach and diversified product offerings. We have continued to emphasize the importance of innovation and responsiveness to client and market demands. We believe that the close and long-term relationships that we enjoy with our clients are a key source of market research helping to drive development of successful products. Since 2005, the process of product development has been more fully formalized and is now coordinated through our non-investment manager Co-Chief Executive Officer. Idea Generation. Product development is driven by discussions with clients, internal research, internal analysis of market trends and competitor offerings. Product development is sometimes initiated through sector-focused research from investment analysts. Feasibility Testing. New products are initially vetted for feasibility to confirm our ability to support the new fund or strategy operationally and to highlight mitigating risks and other factors affecting feasibility. Initial due diligence is followed by relevant feasibility checks based on extensive investment experience from investment professionals and client managers. Product Setup. Once a new product has undergone review and feasibility testing, the product development team arranges appropriate prime brokerage and counterparty relationships, and coordinates with legal counsel to set up the legal structures of any new funds or products and to develop fund or product prospectuses in conjunction with the marketing team. Client Management. Both investment managers and marketing professionals who serve as client relationship managers meet with existing and potential investors about each relevant new product. Operational Processes and Infrastructure Investment Management Process We have a systematic investment approach which combines bottom up analysis with macroeconomic analysis and technical trading, resulting in an emphasis on both the qualitative and quantitative assessment of investment opportunities. We look at all instruments across the capital structure, from equity to subordinated loans. With extensive coordination between analysts and traders, investment ideas are scrutinized and validated at multiple stages. Our organizational structure facilitates the sharing of ideas between equity, credit and emerging markets specialists. Similarly, industry teams work across regions to develop global views and relative values strategies between investments located in different geographical areas. Analysts. Our sector and general analysts utilize their industry expertise to generate and analyze ideas for long and short investments by meeting with corporate management and performing original analytical work. Our strong relationships in the brokerage community provide analysts with significant access to third-party and industry expertise. Table of Contents Traders. Our traders confirm the short-term validity of fundamental analysis and optimize the best entry and exit points for trading ideas. Our strong relationships in the brokerage community provide traders with best execution and liquidity across asset classes. Investment Managers. Our investment managers integrate recommendations from analysts and traders, taking into account the macroeconomic environment, portfolio construction and relevant strategies. They also manage risk and ensure that capital is adequately used. Throughout this process, we utilize an extensive risk management process, as described in the following paragraphs. Portfolio Risk Management Effective risk management is central to the operation of our business. We use both quantitative and qualitative assessments in an effort to offer high annual returns combined with a low level of return volatility. Risk management helps manage volatility and avoid positions that could lead to excessive losses. Positions in the GLG Funds are actively managed, allowing for timely reallocation in response to changes in economic, business or market conditions. Investment professionals are typically authorized to trade fixed amounts of capital subject to various constraints and limitations including but not limited to value-at-risk, trading losses and position concentrations. Our Risk Committee, which includes the non-investment manager Co-Chief Executive Officer, oversees the risk management function for the GLG Funds and managed accounts. The Risk Committee is responsible for setting and ensuring adherence to risk limits, directing the development of risk management infrastructure, identifying risks to the GLG Funds and managed accounts, allocating capital, and developing fund-level hedging strategies. The Risk Committee has four members with substantial investment and risk management experience. Risk management personnel provide daily risk reporting across the GLG Funds and managed accounts, develop risk management infrastructure, and monitor the risk and performance of individual investment professionals within the business. We use both third-party commercial risk management software and proprietary systems to analyze and monitor risk in the GLG Funds and managed accounts. Daily risk reports measure exposures, expected volatility, value at risk (typically using a 98% confidence level, over a one day horizon), and liquidity. These reports also include stress tests based on historical and hypothetical scenarios, measures of aggregate exposures and sensitivities, and measures of credit risk and attributes of risk by region, country, asset class and investment professional. Additional reports analyze individual liquidity exposures and idiosyncratic or specific risks relevant to individual positions or groups of trades. Customized risk reports are also prepared and distributed to both the Risk Committee and individual investment managers. General Operational and Legal Risk Management We believe that we have adopted an approach to minimizing operational risk that is robust and systematic. This approach to operational excellence is a high-level differentiator that enables us to continue serving the most demanding private and institutional clients. We have separate finance, operations, middle office, risk management, technology, human resources and client support functions run by seasoned industry professionals who report directly to our Chief Financial Officer. The business has separate legal and compliance and internal audit functions. The Systems and Controls Committee, which includes the non-investment manager Co-Chief Executive Officer, the Chief Financial Officer, the Senior Legal Counsel and the Compliance Officer, meets monthly to consider operational management of our business, with focus on controls, legal and regulatory matters and any other related issues. Table of Contents Systems We have developed a strong information technology department of 47 experienced staff in addition to outside contractors. The department is split into infrastructure, support and development groups. We believe the strength of our specialized in-house development group, including a dedicated quantitative development team, is a significant competitive advantage. We operate a number of key proprietary and external systems. We have focused on maintaining the scalability of our systems platform and have an ongoing review process to ensure the systems can support planned growth in both assets and trading volume. Security and resiliency have been the highest priorities in the network design. We operate data centers both at our main offices and at off-site locations. We have appointed a managed service provider that provides 24 hour/7 day support through a dedicated link from our network operations center. In the event of an emergency affecting our London office, or London in general, that results in either access being denied to or the total loss of our London office, we will implement our disaster recovery plan to assist in the smooth transition to a temporary workplace to minimize disruption. Under this plan, our incident management, business management and business continuity teams will coordinate with each other to assess the nature of a disaster, implement an immediate plan and work together during the recovery process to mitigate the loss to our business. If our London office will not be available for some time, we have established the use of a disaster recovery site with office space available for key personnel and remote access to critical business information. Regulation GLG Partners LP is authorized and regulated in the United Kingdom by the FSA. GLG Partners LP has a relationship management team at the FSA with whom it has a regular dialogue. Other regulators supervising specific GLG entities and funds include the Irish Financial Services Regulatory Authority, CIMA and the Commission de Surveillance du Secteur Financier in Luxembourg. Certain of the GLG Funds are also listed on the Irish Stock Exchange, the Luxembourg Stock Exchange or the Cayman Islands Stock Exchange. The activities of GLG Inc. will be regulated by the SEC following the completion of its registration as a U.S. investment adviser. Compliance and Internal Audit We have made a significant investment in the infrastructure supporting controls and compliance. Our management believes that it is important to instill a culture of compliance throughout our organization. The primary functions of our compliance and internal audit team are to advise, educate and support our business. This team also provides assurance to our senior management team through the implementation of a risk-based monitoring program and internal audit plan. The compliance and internal audit functions are performed by a dedicated team of three professionals reporting to the Compliance Officer and through him to the Co-Chief Executive Officers. Regulatory Framework in the United Kingdom Authorization by the FSA. The current U.K. regulatory regime is based upon the FSMA, together with secondary legislation and other rules made under the FSMA. Under section 19 of the FSMA, it is an offense for any person to carry on regulated activities in the United Kingdom unless it is an authorized person or otherwise exempt from the need to be authorized. The various regulated activities are set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (as amended) (the RAO ). They include (among other things): advising on investments, arranging deals in investments, dealing in investments as agent, managing investments (i.e., portfolio management) and the safeguarding and administration of assets (including the arranging of such safeguarding and administration). Before authorizing a firm to carry on regulated activities, the FSA must be satisfied that it meets (and will continue to meet) a number of threshold conditions set out in the FSMA. For example, firms must have adequate financial resources, not have close links of a nature that would impede the FSA s supervision of the firm and generally satisfy the FSA that they are fit and proper to be authorized. Table of Contents FSA Handbook. We are subject to certain rules set out in the FSA Handbook, which also provides guidance on the application and interpretation of these rules. In particular, we must comply with certain conduct of business standards relating to, among other things, the advertising and marketing of financial products, treating customers fairly, advising on and selling investments, and managing conflicts of interest. The FSA Handbook also contains rules governing our senior management arrangements, systems and controls. In particular, these require the appointment of one or more members of senior management to take responsibility for: (1) the apportionment of significant responsibilities among directors and senior managers so that it is clear who has responsibility for the different areas of the firm s business (allowing for the proper supervision and control of the firm s activities by its governing body and relevant senior managers); and (2) overseeing the establishment and maintenance of systems and controls which are appropriate to the particular business of the firm. The person with responsibility for these functions, together with any other person who performs a controlled function within GLG, is required to be approved by the FSA under its Approved Persons regime. Persons performing a controlled function include directors, the compliance officer, the money laundering reporting officer, persons carrying out significant management functions and portfolio managers and marketers. The FSA has the power to take a wide range of disciplinary actions against regulated firms and any FSA-approved persons, including public censure, the imposition of fines, the variation, suspension or termination of the firm s authorization or the removal of approved status from individuals. Principles for businesses. We are subject to the FSA s high-level principles which are intended to ensure fairness and integrity in the provision of financial services in the United Kingdom. In particular, they require a firm to: conduct its business with integrity; conduct its business with due skill, care and diligence; take reasonable care to organize and control its affairs responsibly and effectively, with adequate risk management systems; maintain adequate financial resources; observe proper standards of market conduct; pay due regard to the interests of customers and treat them fairly; pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading; manage conflicts of interest fairly, both between itself and its customers and between a customer and another client; take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment; arrange adequate protection for clients assets when it is responsible for them; and deal with its regulators in an open and co-operative way, and disclose to the FSA in an appropriate manner anything relating to the firm of which the FSA would reasonably expect notice. Restrictions on changes of control. Firms authorized by the FSA are subject to restrictions regarding persons who may act as a controller of the firm. Broadly, a controller for the purposes of the FSA s rules means a person who alone or with associates holds (directly or indirectly) 10% or more of the shares or voting rights in a regulated firm or its parent company. Under FSMA, a person who proposes to become a controller of an FSA-authorized firm, or an existing controller who proposes to increase their interest to 20% or more, 33% or more, or 50% or more must first notify and obtain the approval of the FSA, with the FSA having up to three months to approve any such Table of Contents acquisition. The FSA is permitted to serve a notice of objection to the acquisition of or increase in control and, if it does serve such a notice, is required to specify in the notice its reasons for the objections. Breach of the notification and approval requirements is a criminal offense, although there are rights of appeal against any objection by the FSA. A person who ceases to be a 10% controller or who reduces an existing interest below the 50%, 33% or 20% level must only provide written notice to the FSA. FSA approval is not required for reduction or cessation of control. Breach of the notification requirements is a criminal offense. Certain notification obligations are also imposed on authorized firms in relation to any changes of control they undergo. Consumer complaints and compensation. Rules made by the FSA under FSMA have established a compensation scheme, which provides for limited compensation to be paid to certain categories of customers who suffer losses as a consequence of a regulated firm being unable to meet its liabilities. A financial ombudsman service has also been set up under FSMA. This operates independently of the FSA and allows certain categories of customers to escalate complaints about a firm (for example in relation to mis-selling or the provision of a poor service or product by the firm) to the ombudsman. Regulatory capital. Regulatory capital requirements form an integral part of the FSA s prudential supervision of FSA authorized firms. The regulatory capital rules oblige firms to hold a certain amount of capital at all times (taking into account the particular risks to which the firm may be exposed given its business activities), thereby helping to ensure that firms can meet their liabilities as they fall due and safeguarding their (and their counterparties ) financial stability. The FSA also expects firms to take a pro-active approach to monitoring and managing risks, consistent with its high level requirement for firms to have adequate financial resources. Regulatory capital requirements exist on two levels. The first is a solo requirement aimed at individual authorized entities (with the relevant firm being required to submit periodic reports to demonstrate compliance with the relevant requirement). The second is a consolidated (or group) requirement and relates to a part of or the entire group of which an authorized firm or firms form part. The FSA s rules in relation to capital requirements were recently updated to implement the recast EU Capital Requirements Directive ( CRD ), which came into force in the United Kingdom in January 2007 (subject to extensive transitional provisions). The CRD, which amends two existing capital requirements Directives (The Banking Consolidation Directive and the Capital Adequacy Directive), introduces a more risk-based approach to capital adequacy (with a particular emphasis on operational risk). Management expects us to be compliant with the requirements of the CRD by the required deadline and does not believe that compliance with the CRD will have a significant impact on us. Money laundering. The U.K. Money Laundering Regulations 2003 require, broadly speaking, any person who carries on financial services business in the United Kingdom to observe certain administrative procedures and checks designed to minimize the scope for money laundering. Failure to maintain the necessary procedures is a criminal offense. The Proceeds of Crime Act 2002 also contains a number of offenses in relation to money laundering. Regulatory Framework in the European Union We have obtained the appropriate European investment services passport rights to provide cross-border services into a number of other members of the European Economic Area, which we refer to as the EEA. This passport derives from the pan-European regime established by the EU Investment Services Directive ( ISD ) which regulates the provision of investment services throughout the EEA. The ISD provides investment firms which are authorized in any one EEA member state the right to provide investment services on a cross-border basis, or through the establishment of a branch to clients located in other EEA member states (known as host member states ) on the basis of their home member state authorization without the need for separate authorization by the competent authorities in the relevant host member state. This is known as passporting . Table of Contents The ISD is due to be replaced by a new directive, the EU Markets in Financial Instruments Directive ( MiFID ), which is required to be implemented across the EEA on November 1, 2007. MiFID will make substantial and important changes to the way in which investment business is conducted across the EEA. These include, among others, an extension to the scope of the passport but also clarification that the conduct of business rules of a host member state are not to apply to a firm providing services within its territory on a cross-border basis (host member state conduct of business rules will apply to branches). The FSA has recently completed the process of consulting on how it will implement MiFID in the United Kingdom, which will have a reasonably significant impact on the operation of the financial services industry. Management expects us to be compliant with the requirements of MiFID by the required deadline and does not believe that compliance with MiFID will have a significant impact on us. Regulatory Framework in Ireland GLG Partners Asset Management Limited ( GPAM ) has been authorized by the IFSRA as a management company under the UCITS regulations. As a manager authorized by the IFSRA, GPAM is subject to the supervision of the IFSRA. These supervisory requirements include: GPAM must maintain a minimum capital requirement as prescribed by the IFSRA; GPAM may not be replaced as manager of a fund without the approval of the IFSRA; appointments of directors to GPAM require the prior approval of the IFSRA and the IFSRA must be notified immediately of resignations; a minimum of two directors of GPAM must be Irish residents; approval of the IFSRA is required for any change in ownership or in significant shareholdings of GPAM. A significant shareholding is defined as a shareholding of 10%; half-yearly financial and annual audited accounts of GPAM must be filed with the IFSRA. Annual audited accounts of the corporate shareholder(s) of GPAM must also be submitted; the firm is obliged to satisfy the IFSRA on a continuing basis that it has sufficient management resources to effectively conduct its business; and GPAM is required to consult with the IFSRA prior to engaging in significant new activities. GLG Partners LP has been approved by the IFSRA to act as promoter and investment manager of Irish authorized collective investment schemes pursuant to the UCITS Notices and the Non-UCITS Notices issued by the IFSRA. The IFSRA will require that any change in ownership or in significant shareholdings of GLG Partners LP be approved by it. As above, a significant shareholding is defined as a shareholding of 10%. GPAM and GLG Partners LP currently act as manager, and promoter and investment manager, respectively of the following GLG Funds: GLG Investments plc, GLG Investments III plc, GLG Investments IV plc and GLG Investments V plc (each, a UCITS fund), GLG Global Convertible Fund plc (a professional investor fund) and GLG Global Opportunity Fund plc (a qualified investor fund). These GLG Funds are subject to the investment restrictions imposed by the IFSRA in respect of UCITS or non-UCITS funds as appropriate and as set out in the prospectus for the relevant fund. GPAM and GLG Partners LP are required to observe the terms of the prospectus in carrying out their duties. The failure by the IFSRA to approve a change in control of GPAM and/or GLG Partners LP could result in the authorization of the above GLG Funds being withdrawn if it is not possible to appoint alternative promoters, managers and investment managers. In addition to the GLG Funds which are listed on the Irish Stock Exchange, a large number of Cayman domiciled GLG Funds are also listed on the Irish Stock Exchange. A failure to comply with the Listing Rules for Investment Funds as set down by the Irish Stock Exchange may result in delisting from the Irish Stock Exchange. Table of Contents Regulatory Framework in Luxembourg GLG Partners LP is the promoter, investment manager and principal sales agent of the GLG Multi-Strategy Fund SICAV and is subject to supervision by the Commission de Surveillance du Secteur Financier, along with the GLG Multi-Strategy Fund SICAV which is domiciled in Luxembourg and listed on the Luxembourg Stock Exchange. Regulatory Framework in the Cayman Islands CIMA regulates GPCL in connection with its provision of mutual fund administration services to the GLG Funds incorporated in the Cayman Islands. GPCL is the holder of an unrestricted mutual fund administrator s license issued by CIMA pursuant to the Mutual Funds Law (as amended) of the Cayman Islands (the Mutual Funds Law ). Each of GPCL, GLG Partners International (Cayman) Limited and GLG Partners Services LP is registered with CIMA as an excluded person pursuant to the Securities Investment Business Law (as amended) of the Cayman Islands (the SIB Law ) in connection with their respective provision of services constituting securities investment business to various GLG Funds. None of these entities is regulated by CIMA in connection with its provision of services constituting securities investment business . All of the GLG Funds which are incorporated in the Cayman Islands are registered as mutual funds with, and are regulated by, CIMA in terms of the Mutual Funds Law. Most of the Cayman Islands domiciled funds are listed on the Irish Stock Exchange, one is listed on the Cayman Islands Stock Exchange and four are unlisted. None of these GLG Funds is required to be licensed or employ a licensed mutual fund administrator (although GPCL is so licensed) since the minimum aggregate investment purchasable by a prospective investor in each of such GLG Funds is equal to or exceeds either (a) in relation to those GLG Funds which were registered with CIMA prior to November 2006, $50,000 or (b) in relation to those GLG Funds which have been registered with CIMA since November 2006, $100,000 or its equivalent in any other currency. As regulated mutual funds, the GLG Funds which are incorporated in the Cayman Islands are subject to supervision by CIMA. Such funds must file their offering documents and details of any changes that materially affect any information in such documents with CIMA. They must also file annually with CIMA accounts approved by an approved auditor, together with a return containing particulars specified by CIMA, within six months of their financial year end or within such extension of that period as CIMA may allow. The Mutual Funds Law provides that a licensed mutual fund administrator such as GPCL may not issue shares and that a person owning or having an interest in shares or the transfer of shares in such licensed mutual fund administrator may not transfer or otherwise dispose of or deal in those shares or that interest, unless CIMA has given its approval to the issue, transfer, disposal or dealing, as the case may be, and any conditions of the approval are complied with. This restriction applies to all levels of ownership in a licensed mutual fund administrator, including the ultimate parent, and therefore, unless the waiver described below is obtained and maintained, may have a potential impact on the trading of our shares. The Mutual Funds Law provides that CIMA may, in respect of a licensed mutual fund administrator or its ultimate parent whose shares are publicly traded on a stock exchange recognized by CIMA (including the New York Stock Exchange), waive the obligation to obtain such approval, subject to certain conditions. We applied for and obtained such waiver from CIMA in relation to trading by GPCL at the same time as we applied for CIMA s approval of the acquisition of GLG. The waiver is subject to a condition that GPCL, as a licensed mutual fund administrator, will, as soon as reasonably practicable, notify CIMA of: any change in control of GPCL; the acquisition by any person or group of persons of shares representing more than 10% of the issued share capital or total voting rights of GPCL; or the acquisition by any person or group of persons of shares representing more than 10% of the issued share capital or total voting rights of GLG Partners, Inc., as the ultimate parent of GPCL. Table of Contents In addition, any waiver will be subject to a condition that GPCL will, as soon as reasonably practicable, provide such information to CIMA, and within such period of time, as CIMA may require for the purpose of enabling an assessment as to whether persons acquiring direct or indirect control or ownership of GPCL in the circumstances set out above are fit and proper persons to have such control or ownership. The waiver may also be granted subject to such terms and other conditions as CIMA may deem necessary. Other Pursuant to the exemption from registration as an investment adviser provided in Section 203(b)(3) of the Investment Advisers Act of 1940 and Rule 203(b)(3)-1 promulgated thereunder, neither GLG Partners LP nor GLG Inc. is registered as an investment adviser under the Investment Advisers Act. However, in connection with the proposed acquisition of GLG Inc., GLG Inc. will register as an investment adviser under the Investment Advisers Act. On December 3, 2007, GLG Inc. filed a registration statement under the Investment Advisers Act with the SEC. We have been designated by GLG Partners LP as the purchaser of GLG Inc., and we expect to complete the acquisition of GLG Inc. in 2008. We will not accept any new U.S. advisory clients prior to the SEC declaring effective the registration of GLG Inc. as an investment adviser under the Investment Advisers Act and completion of the acquisition by us of GLG Inc., other than certain clients with whom GLG was already in discussions prior to the filing of our preliminary Proxy Statement on July 12, 2007, and within the fewer than 15 clients limitation under the exemption provided by Section 203(b)(3) of the Investment Advisers Act. In addition, we are subject to securities and exchange regulations in the jurisdictions in which we trade securities. Competition The asset management industry is intensely competitive, and we expect it to remain so. We compete on a regional, industry and niche basis. We face competition in the pursuit of investors for our funds and managed accounts primarily from specialized investment funds, hedge funds and financial institutions. Many of these competitors are substantially larger and may have considerably greater financial, technical and marketing resources than will be available to us, and the number of competitors in our market has increased dramatically since 2000. We also compete with specialized investment funds, hedge funds, financial institutions, corporate buyers and others in acquiring positions in attractive investment opportunities for the GLG Funds and managed accounts. Several of these competitors have recently raised, or are expected to raise, significant amounts of capital and many of them have similar investment objectives to the GLG Funds and managed accounts, which may create additional competition for investment opportunities. Some of these competitors may also have a lower cost of capital and access to funding sources that are not available to us, which may create competitive disadvantages for us with respect to investment opportunities. In addition, some of these competitors may have higher risk tolerances, different risk assessments or lower return thresholds, which could allow them to consider a wider variety of investments and to bid more aggressively than us for investments that we want to make for the GLG Funds and managed accounts. Lastly, the allocation of increasing amounts of capital to alternative investment strategies by institutional and individual investors could lead to a reduction in the size and duration of pricing inefficiencies that many of our investment funds seek to exploit. Competition is also intense for the attraction and retention of qualified personnel. Our ability to compete effectively in our business will depend upon our ability to attract new personnel and retain and motivate our existing personnel. Personnel Our personnel consist of 340 individuals as of September 30, 2007 including 27 individuals at GLG Inc. in New York. Our institutionalized team-based investment process is driven by 119 investment professionals, including employees of GLG Inc. A key feature of our organizational structure is that approximately one-third of our personnel are directly involved in the process of investment management and revenue generation. By Table of Contents optimizing our administrative functions, we maintain an efficient back- and middle-office operation and, as a result, a reduced cost base. Properties Our principal executive offices are located in temporarily leased office space at 390 Park Avenue, 20th Floor, New York, New York. We also lease approximately 20,800 square feet of office space at One Curzon Street, London, England and the space for our offices in Berkeley Street, London, England (approximately 4,900 square feet) and George Town, Grand Cayman, Cayman Islands (approximately 1,185 square feet). We do not own any real property. We consider these facilities to be suitable and adequate for the management and operation of our business, although we are in discussions to acquire additional space in London, England and New York, New York. In addition, GLG Inc. leases approximately 10,000 square feet of office space in New York, New York. Legal and Regulatory Proceedings Alcatel On November 23, 2006, the AMF imposed a fine of 1.2 million ($1.6 million) against us in connection with our trading in the shares of Alcatel based on confidential information prior to a December 12, 2002 issuance of Alcatel convertible securities. We have appealed this decision. Vivendi On June 21, 2007, the AMF imposed a fine of 1.5 million ($2.0 million) against us in connection with our trading in the shares of Vivendi based on confidential information prior to a November 14, 2002 issuance of Vivendi convertible securities. We have appealed this decision. Other On May 29, 2007, we agreed to pay a civil penalty of $500,000 and disgorgement and interest of approximately $2.7 million to settle enforcement and civil actions brought by the SEC for illegal short selling. We did not admit or deny the findings, but consented to the SEC order finding that we violated Rule 105 of Regulation M under the Exchange Act in connection with 14 public offerings and a final judgment in the civil action in the United States District Court for the District of Columbia. We are subject to various other claims and assessments and regulatory inquiries and investigations in the normal course of our business. While it is not possible at this time to predict the outcome of the legal and regulatory proceedings discussed above with certainty and while some investigations, lawsuits, claims or proceedings may be disposed of unfavorably to us, based on our evaluation of matters that are pending or asserted our management believes the disposition of such matters will not have a material adverse effect on our business, financial condition or results of operations. An unfavorable ruling could include money damages or injunctive relief. Table of Contents MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information concerning each of our executive officers and directors: Name Age Position Noam Gottesman 46 Chairman of the Board and Co-Chief Executive Officer Emmanuel Roman 43 Co-Chief Executive Officer and Director Simon White 49 Chief Financial Officer Alejandro San Miguel 39 General Counsel and Corporate Secretary Ian G.H. Ashken 47 Director Nicolas Berggruen 46 Director Martin E. Franklin 43 Director James N. Hauslein 48 Director William P. Lauder 47 Director Paul Myners 59 Director Peter A. Weinberg 49 Director Management Noam Gottesman has been our Chairman of the Board and Co-Chief Executive Officer since November 2007. He has been a Managing Director of GLG since he co-founded GLG Partners LP as a division of Lehman International in 1995. He has also served as GLG s Co-Chief Executive Officer since September 2005 and served as its Chief Executive Officer from September 2000 until September 2005. Prior to 1995, Mr. Gottesman was an Executive Director of Goldman Sachs International, where he managed global equity portfolios in the private client group. Mr. Gottesman obtained a B.A. from Columbia University. Emmanuel Roman has been our Co-Chief Executive Officer since November 2007. He has been a Managing Director and a Co-Chief Executive Officer of GLG since September 2005. From 2000 to April 2005, Mr. Roman served as a co-head of Worldwide Global Securities Services of Goldman Sachs International Limited. In 2003, Mr. Roman also became co-head of the European Equities Division and a member of the European Management Committee, a position he held until April 2005. In 1998, Mr. Roman was elected a partner of Goldman Sachs after two years as a Managing Director. Mr. Roman also served as co-head of Worldwide Equity Derivatives at Goldman Sachs from 1996 to 2000. Mr. Roman obtained an M.B.A. in Finance and Econometrics from the University of Chicago and a bachelor s degree from the University of Paris. Simon White has been our Chief Financial Officer since November 2007. He has been GLG s Chief Operating Officer since September 2000. From 1997 to September 2000, he worked at Lehman Brothers as Executive Director and Branch Manager of the GLG Partners division. From 1995 to 1997, he was Chief Administrative Officer of Lehman Brothers European high net worth business. From 1993 to 1995, he was European Controller at Lehman Brothers. Prior to 1993, Mr. White worked at Credit Suisse First Boston and PaineWebber in a number of senior business and support roles in their London and New York offices. Mr. White is a chartered accountant and a fellow of the Institute of Chartered Accountants and has worked in the financial services business since 1986. Alejandro San Miguel has been our General Counsel and Corporate Secretary since November 2007. Mr. San Miguel was a partner at the law firm of Chadbourne Parke LLP, one of GLG s principal outside law firms, from 2001 until November 2007. He joined the firm in 1996. Mr. San Miguel received a J.D. from New York Law School and a B.A. from the University of Pennsylvania. Table of Contents Directors Ian G. H. Ashken has been a member of our board of directors since November 2007. He is Vice Chairman and Chief Financial Officer of Jarden Corporation and until February 15, 2007 was also Secretary of Jarden Corporation. Mr. Ashken was appointed to the board of directors of Jarden Corporation on June 25, 2001 and became Vice Chairman, Chief Financial Officer and Secretary effective September 24, 2001. Mr. Ashken is also a principal and executive officer of a number of private investment entities. Mr. Ashken was the Vice Chairman of the board of directors of Boll Inc. from December 1998 until February 2000. From February 1997 until his appointment as Vice Chairman, Mr. Ashken was the Chief Financial Officer and a director of Boll , Inc. Mr. Ashken previously held positions as Chief Financial Officer and a director of Lumen Technologies, Inc. from May 1996 to December 1998 and Benson Eyecare Corporation from October 1992 to May 1996. Nicolas Berggruen was Freedom s President and Chief Executive Officer until November 2007 and has been a member of our board of directors since Freedom s inception in June 2006. Mr. Berggruen heads Berggruen Holdings, Inc. which he founded in 1985 as a means to centralize his investment activities. In 1988, Mr. Berggruen also co-founded Alpha Investment Management, a hedge fund of funds business which was sold in 2004. Prior to founding Berggruen Holdings, Mr. Berggruen worked for Bass Brothers Enterprises starting in 1981. He then joined Jacobson Co., Inc. in 1983, a firm specializing in industrial buyouts, where he was a principal until 1987. Berggruen Holdings, with operations in the United States, Europe and Asia, invests on a direct basis in operating businesses, which it controls; owns and develops real estate; and maintains an in-house managed public securities portfolio. There is a passive group of hedge funds and private equity funds with whom Berggruen Holdings also actively co-invests. Berggruen Holdings is, and has been involved in a broad range of industries, including branded consumer goods businesses, manufacturing, distribution, telecom and media. On the property front, Berggruen Holdings operates in the United States, Germany, India, Turkey and Israel. Mr. Berggruen serves on the board of directors of Liberty Acquisition Holdings Corp., a blank check company. Mr. Berggruen also sits on the Board of the Berggruen Museum in Berlin. He is a member of the International Council of the Tate Gallery in London. Mr. Berggruen earned a B.S. in Finance and International Business from New York University. He is a member of the Young Presidents Organization. Martin E. Franklin was chairman of Freedom s board of directors until November 2007 and has been a member of our board of directors since Freedom s inception in June 2006. Mr. Franklin has served as chairman and chief executive officer of Jarden Corporation, a broad based consumer products company, since 2001. Prior to joining Jarden Corporation, Mr. Franklin served as chairman and a director of Boll , Inc. from 1997 to 2000, chairman of Lumen Technologies from 1996 to 1998, and as chairman and chief executive officer of its predecessor, Benson Eyecare Corporation from 1992 to 1996. Mr. Franklin also serves on the board of directors of Liberty Acquisition Holdings Corp. and Kenneth Cole Productions, Inc. Mr. Franklin also serves as a director and trustee of a number of private companies and charitable institutions. Noam Gottesman has been a member of our board of directors since November 2007. See Management for biographical information about Mr. Gottesman. James N. Hauslein has been a member of our board of directors since July 2006. Mr. Hauslein has also served as President of Hauslein Company, Inc., a private equity firm, since May 1991. From July 1991 until April 2001, Mr. Hauslein served as Chairman of the Board of Sunglass Hut International, Inc., the world s largest specialty retailer of non-prescription sunglasses. Mr. Hauslein also served as Sunglass Hut s Chief Executive Officer from May 1997 to February 1998 and again from January 2001 to May 2001. During Mr. Hauslein s tenure at Sunglass Hut International, he led the growth of its revenues from approximately $35 million to approximately $680 million for fiscal 2000 prior to its acquisition by Luxottica Group (NYSE: LUX) in April 2001. At the time of Luxottica Group s acquisition, Sunglass Hut International (previously NASDAQ: RAYS) operated approximately 2,000 company-owned Sunglass Hut International, Watch Station, Watch World and combination stores in the United States, Canada, the Caribbean, Europe, Asia, Australia and New Zealand. Mr. Hauslein is also currently a member of the board of directors of Liberty Acquisition Holdings Corp., Atlas Acquisition Corp., Promethean India, PLC and of two private companies. Mr. Hauslein Table of Contents serves on several philanthropic boards and foundations and is a member of several Alumni Advisory Boards at Cornell University. Mr. Hauslein received his M.B.A., with Distinction, from Cornell University s Johnson Graduate School of Management and his B.S. in chemical engineering from Cornell University. William P. Lauder has been a member of our board of directors since July 2006. Mr. Lauder has been the President and Chief Executive Officer of The Est e Lauder Companies Inc. since July 1, 2004. Mr. Lauder has also served as Chief Operating Officer of The Est e Lauder Companies Inc. from January 2003 through June 2004, and Group President of The Est e Lauder Companies Inc. from July 2001 through 2002, where he was responsible for the worldwide business of Clinique and Origins and the company s retail store and online operations. From 1998 to 2001, Mr. Lauder was President of Clinique Laboratories. Prior to then, he was President of Origins Natural Resources Inc.; he had been the senior officer of the Origins brand since its creation in 1990. He joined The Est e Lauder Companies in 1986 as Regional Marketing Director of Clinique U.S.A. in the New York Metro area. Mr. Lauder then spent two years at Prescriptives as Field Sales Manager. Prior to joining The Est e Lauder Companies, he completed Macy s executive training program in New York City and became Associate Merchandising Manager of the New York Division/Dallas store at the time of its opening in September 1985. Mr. Lauder graduated from the Wharton School of the University of Pennsylvania in 1983 with a Bachelor of Science degree in Economics. He is a member of the Board of Trustees of the University of Pennsylvania and the Boards of Directors of the Fresh Air Fund, the 92nd Street Y and the Partnership for New York City. He is also a member of the Boards of The Est e Lauder Companies Inc. and True Temper Corporation. Paul Myners has been a member of our board of directors since November 2007. He is currently Chairman of Guardian Media Group plc and Land Securities Group plc. From 2004 to 2006, he served as Chairman of Marks Spencer Group plc. From 1986 to 2001, he served as Chief Executive Officer of Gartmore Investment Management plc. He has also served in advisory posts to the U.K. Treasury and the U.K. Department of Trade Industry, with particular focus on corporate governance practices. He is Chairman of the Trustees of Tate and a member of the Court of Directors of the Bank of England. Emmanuel Roman has been a member of our board of directors since November 2007. See Management for biographical information about Mr. Roman. Peter A. Weinberg has been a member of our board of directors since November 2007. Mr. Weinberg has been a partner of Perella Weinberg Partners since the inception of the firm in 2006. Prior to joining Perella Weinberg Partners, Mr. Weinberg was Chief Executive Officer of Goldman Sachs International from 1999 to 2005 and held a number of senior management positions over his 18 year career at Goldman Sachs. Mr. Weinberg was elected a partner at Goldman Sachs in 1992, founded the Financial Sponsors Group, headed Investment Banking Services, headed the Communications, Media and Telecom Group and co-headed Global Investment Banking. During his tenure at Goldman Sachs, Mr. Weinberg also served on the Firm s Management Committee from 1999 to 2005 and headed the European Management Committee. Mr. Weinberg also serves on the boards of BAE Systems plc, as well as a number of charitable and philanthropic organizations. Mr. Weinberg received a Bachelor of Arts from Claremont McKenna College and an M.B.A. from Harvard Business School. Controlled Company Certain of the GLG Shareowners who have entered into a voting agreement beneficially own our common stock and Series A preferred stock which collectively represent approximately 54% of our voting power and have the ability to elect our board of directors. As a result, we are a controlled company for purposes of Section 303(A) of the New York Stock Exchange Listed Company Manual. As a controlled company, we are exempt from certain governance requirements otherwise required by the New York Stock Exchange, including the requirements that (1) we have a nominating and corporate governance committee and (2) our compensation committee be comprised entirely of independent directors. Notwithstanding the fact that, as a controlled company, we are not required to have a board of directors comprised of a majority of independent directors, our board of directors has determined that a majority of the individuals who comprise our board of directors, Table of Contents Ian G.H. Ashken, Martin E. Franklin, James N. Hauslein, William P. Lauder and Paul Myners, are independent as defined in Section 303A.02 of the New York Stock Exchange Listed Company Manual. Because of their ownership of approximately 54% of our voting power, our Principals, their Trustees and certain other GLG Shareowners are also able to determine the outcome of all matters requiring stockholder approval (other than those requiring a super-majority vote) and will be able to cause or prevent a change of control of our company or a change in the composition of our board of directors, and could preclude any unsolicited acquisition of our company. In addition, because they collectively may determine the outcome of a stockholder vote, they could deprive stockholders of an opportunity to receive a premium for their shares as part of a sale of our company. That voting control could ultimately affect the market price of our shares. In addition, pursuant to the voting agreement, we have agreed not to take certain actions without the consent of the GLG Shareowners party to the voting agreement so long as they collectively beneficially own (1) more than 25% of our voting stock and at least one Principal is an employee, partner or member of our company or any of our subsidiaries or (2) more than 40% of our voting stock. Committees Audit Committee Our board of directors has established an audit committee which currently consists of Messrs. Ashken, Hauslein and Lauder, all of whom have been determined to be independent as defined in Rule 10A-3 of the Exchange Act and the rules of the New York Stock Exchange. Our board of directors has determined that each of Messrs. Ashken, Hauslein and Lauder also satisfies the financial literacy and experience requirements of the New York Stock Exchange and the rules of the SEC such that each member is an audit committee financial expert . The responsibilities of our audit committee include: meeting with our management periodically to consider significant financial reporting issues, including the adequacy of our internal control over financial reporting and the objectivity of our financial reporting; appointing the independent registered public accounting firm, determining the compensation of the independent registered public accounting firm and pre-approving the engagement of the independent registered public accounting firm for audit and non-audit services; overseeing the independent registered public accounting firm, including reviewing independence, performance and quality control procedures and experience and qualifications of audit personnel that are providing us audit services; meeting with the independent registered public accounting firm and reviewing the scope and significant findings of the audits performed by them, and meeting with management and internal financial personnel regarding these matters; reviewing our financial statements, financing plans, the adequacy and sufficiency of our financial and accounting controls, practices and procedures, the activities and recommendations of the auditors and our reporting policies and practices, and reporting recommendations to our full board of directors for approval; being responsible for the review and approval of related-party transactions; establishing procedures for the receipt, retention and treatment of complaints regarding internal accounting controls or auditing matters and, if applicable, the confidential, anonymous submissions by employees of concerns regarding questionable accounting or auditing matters; and preparing the report required by the rules of the SEC to be included in our annual proxy statement. Table of Contents Compensation Committee Our board of directors has established a compensation committee which consists of Messrs. Ashken, Franklin and Berggruen. Messrs. Ashken and Franklin have been determined to be independent as defined in the rules of the New York Stock Exchange. The functions of our compensation committee include: establishing overall compensation policies and recommending to our board of directors major compensation programs; subsequent to our consummation of a business combination, reviewing and approving the compensation of our executive officers and non-employee directors, including salary and bonus awards; administering any employee benefit, pension and equity incentive programs in which executive officers and directors participate; reviewing officer and director indemnification and insurance matters; and preparing an annual report on executive compensation for inclusion in our proxy statement. Compensation Committee Interlocks and Insider Participation From July 2006 through November 2, 2007, the compensation committee consisted of each of Messrs. Hauslein and Lauder and Herbert Morey. No member of the compensation committee during fiscal 2006 was or is currently an officer or employee of our company or was formerly an officer or employee of our company. In addition, no executive officer of the company during fiscal 2006 served or currently serves as a member of another entity s board of directors or as a member of the compensation committee of another entity (or other board committee performing equivalent functions), which entity had an executive officer serving on the board of directors of our company. Code of Ethics, Corporate Governance Guidelines and Committee Charters We have adopted a code of ethics and corporate governance guidelines that apply to our officers and directors. Our code of ethics, corporate governance guidelines and board committee charters are available on our website (www.glgpartners.com) and in print to any stockholder upon request. Table of Contents COMPENSATION DISCUSSION AND ANALYSIS Prior to the Acquisition of GLG Prior to the acquisition of GLG, neither Mr. Berggruen nor any of our other directors received any cash compensation for services rendered. No compensation of any kind, including finder s and consulting fees, will be paid to any of our existing stockholders, including our officers and directors, or any of their respective affiliates, for services rendered prior to or in connection with the acquisition of GLG. However, these individuals were reimbursed for any out-of-pocket expenses incurred in connection with activities on our behalf, such as identifying potential target businesses and performing due diligence on suitable business combinations. There is no limit on the amount of these out-of-pocket expenses, and there will be no review of the reasonableness of the expenses by anyone other than our audit committee, which includes persons who may seek reimbursement, or a court of competent jurisdiction if such reimbursement is challenged. If all of our directors are not deemed independent, we will not have the benefit of independent directors examining the propriety of expenses incurred on our behalf and subject to reimbursement. In July 2006, each of our independent directors purchased 51,201 units (after giving effect to our reverse stock split and stock dividends) for a purchase price of $106. However, none of them served as officers of ours nor received any compensation for serving in such role, other than reimbursement of actual out-of-pocket expenses. As the price paid was fair market value at the time, we do not consider the value of the units at the offering price to be compensation. Rather, we believe that because they own such shares, no compensation (other than reimbursement of out of pocket expenses) is necessary and such persons agreed to serve in such role without compensation. We agreed to pay Berggruen Holdings, Inc., an affiliate of Mr. Berggruen, a total of $10,000 per month for office space, administrative services and secretarial support until the earlier of our consummation of a business combination or our liquidation. This arrangement was agreed to by Berggruen Holdings, Inc. for our benefit and was not intended to provide Berggruen Holdings, Inc. compensation in lieu of a management fee. We believe that such fees are at least as favorable as we could have obtained from an unaffiliated third party. Other than this $10,000 per-month fee, no compensation of any kind, including finder s and consulting fees, was paid to Mr. Berggruen, our other directors, or any of their respective affiliates, for services rendered prior to or in connection with a business combination. However, these individuals and the sponsors were reimbursed for any out-of-pocket expenses incurred in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations. Other than the securities described above and in the section appearing elsewhere in this prospectus entitled Principal Stockholders , none of our directors prior to the acquisition of GLG received any of our equity securities. GLG Prior to our acquisition of GLG, GLG s compensation philosophy had been to create a system that rewards the Principals, key personnel and all other employees for performance. The primary objectives of GLG s compensation programs have been to (1) attract, motivate and retain talented and dedicated senior management and other key personnel and (2) link annual compensation to both individual performance and fund performance, together with our overall financial results. GLG believes this aligns the interests of its senior management and other key personnel with those of the investors in the GLG Funds. To achieve these objectives, GLG compensated its senior management and other key personnel with a combination of fixed salary, discretionary bonus and cash distributions or limited partner profit shares. Prior to our acquisition of GLG, these amounts were determined, in the case of Principals, key personnel and employees providing services to GLG Partners LP, by the Principals in their capacities as managing directors of GLG Partners LP and as directors of GLG Partners Limited, the general partner of GLG Partners LP, and, in the case of Principals, key personnel and employees providing services to GLG Partners Services LP, by the Trustees (or their designees), upon consultation with the Principals, in their capacities as directors of GLG Partners Services Limited, the general partner of GLG Partners Services LP. GLG set compensation at levels that it Table of Contents believed were competitive against compensation offered by other alternative asset managers and leading investment banks, primarily in London, against whom GLG competes for senior management and other key personnel, while taking into account the performance of the GLG Funds and managed accounts. Historically, GLG s management has paid primarily cash compensation and has focused on the total compensation package paid to the Principals, senior management and key personnel. However, the most significant portion of the remuneration paid by GLG to its senior management and key personnel (other than the Principals) has been and is expected to continue to be in the form of discretionary bonuses and discretionary limited partner profit share. GLG believes these forms of remuneration are important to align the interests of its senior management and key personnel with those of investors in the GLG Funds. In determining compensation levels, GLG took into account various factors such as market compensation paid by other leading alternative asset managers generally. This is achieved by: discussions with other investment professionals and peer groups from other alternative asset managers; discussions with professional advisors about market rates across the board; discussions with recruitment agencies used by us and review of salary surveys generated by recruitment agencies; and publicly available information ascertained via various means, such as newspapers, magazines, the internet and reports such as the Hedge Fund Compensation Report. As a privately owned business, GLG did not formally benchmark its compensation arrangements against any specific list of companies, nor did it maintain a certain target percentile within a peer group. Direct comparison may not be possible as elements of individual compensation would vary from firm to firm by virtue of a number of factors, including, among other things: different levels of equity ownership; varying responsibilities; roles and years of service of each individual; the amount of assets under management; the investment performance; the firm size; and differing reinvestment requirements. Salary and Bonus Base salaries have generally been based upon an individual s scope of responsibilities, level of experience, amounts paid to comparable individuals (both within and outside of our company) and length of service. Discretionary annual bonuses have generally been based on individual performance in absolute and qualitative terms, as well as team performance and our overall performance. Discretionary annual bonuses are designed to reward high-performing key personnel and employees who drive our results and provide an incentive to sustain this performance in the long-term. Prior to our acquisition of GLG, each of the Principals had entered into an employment agreement with GLG Partners LP, pursuant to which he received an annual salary payable in pounds sterling, which increased by 10% effective December 1 of each calendar year. In addition, each Principal was eligible to receive a discretionary bonus annually under these employment agreements. Prior to our acquisition of GLG, each of the Principals had also entered into an employment agreement with GLG Partners Services Limited, pursuant to which he received an annual salary payable in U.S. dollars, which increased by 10% effective December 1 of each calendar year. In addition, each Principal was eligible to receive a discretionary bonus annually under these employment agreements. Table of Contents Effective as of November 2, 2007, Mr. Gottesman, our Chairman of the Board and Co-Chief Executive Officer, entered into employment agreements with each of GLG Partners LP, GLG Partners Services Limited and GLG Partners, Inc., pursuant to which he receives an aggregate annual salary of $1,000,000 each calendar year. In addition, Mr. Gottesman is eligible to receive a discretionary bonus and equity incentive awards, including under our 2007 Long-Term Incentive Plan (the LTIP ), annually under these employment agreements, provided that no awards will be granted to him for 2007. Effective as of November 2, 2007, Mr. Roman, our Co-Chief Executive Officer, also entered into employment agreements with each of GLG Partners LP, GLG Partners Services Limited and GLG Partners, Inc., pursuant to which he receives an aggregate annual salary of $1,000,000 each calendar year. In addition, Mr. Roman is eligible to receive a discretionary bonus and equity incentive awards, including under our LTIP, annually under these employment agreements, provided that no awards will be granted to him for 2007. Effective as of November 2, 2007, Pierre Lagrange, a Managing Director of GLG, entered into employment agreements with each of GLG Partners LP and GLG Partners Services Limited, pursuant to which he receives an aggregate annual salary of $1,000,000 each calendar year. In addition, Mr. Lagrange is eligible to receive a discretionary bonus and equity incentive awards, including under our LTIP, annually under these employment agreements, provided that no awards will be granted to him for 2007. Distributions and Limited Partner Profit Shares Prior to our acquisition of GLG, the Principals had direct and indirect ownership interests in certain GLG entities, principally GLG Partners LP and GLG Partners Services LP, through which they were entitled to receive distributions of profits earned by these GLG entities. In addition, GLG sought to align the interests of its non-principal senior management and other key personnel with those of the investors in the GLG Funds through the limited partner profit share arrangement. Under this arrangement, these individuals have direct or indirect profits interests in these GLG entities, which entitles these individuals to receive distributions of profits derived from the fees earned by these GLG entities. Prior to an acquisition of GLG, each of these individuals received the majority of his or her economic benefit in the form of distributions in respect of his or her ownership interests in these GLG entities, in the case of the Principals, and limited partner profit shares, in the case of non-principals. For purposes of this discussion, distributions to each Principal include distributions to his respective Trustee. Participants in the limited partner profit share arrangement, which will remain in place, are paid base limited partner profit share generally based on the individual s scope of responsibilities, level of experience, amounts paid comparable individuals (both within and outside of our company) and length of service. Discretionary limited partner profit share is based on the individual s contribution to the generation of profits by GLG Partners LP and GLG Partners Services LP, taking into account the nature of the services provided to us by each individual, his or her seniority and the performance of the individual during the period. A significant portion of the distributions received by the Principals, senior management and key personnel historically has been performance-based. In making compensation decisions, management has taken in the past, and is expected to continue to take in the future, into account performance during the year both absolutely and against established goals for our company to generate revenue and profits, leadership qualities of the individual, the individual s contribution to the growth of the business, operational performance, business responsibilities, length of service, current compensation arrangements and long-term potential to enhance value for investors in the GLG Funds. Specific factors affecting compensation decisions include: key financial measurements such as fee revenue, operating profit, fund inflows and fund performance; promoting commercial excellence, including by creating new product or investment ideas, improving fund performance, introducing new clients, growing AUM, being a leading market player or attracting and retaining other talented individuals and investors; achieving excellence and respect among the senior management, peers and other employees; and enhancing the growth and reputation of the our business as a whole. Table of Contents Although we do not set specific financial performance targets for the individual based on any quantitative formula, the key factors and financial measurements listed will be considered together with management s judgment about each individual s performance in determining the appropriate compensation in light of our current year performance. We believe that GLG s philosophy of seeking to align the interests of our key personnel with those of the investors in the GLG Funds has been a key contributor to GLG s growth and successful performance. The Principals, their Trustees and certain of the key personnel participating in the equity participation plan have agreed to invest in the GLG Funds at least 50% of the excess of the cash proceeds they received in the acquisition over the aggregate amount of any taxes payable on their respective portion of the purchase price, further aligning their interests with those of the investors in these funds. Currently, the Principals, their Trustees and these key personnel have invested, including certain cash proceeds from the sale of GLG, approximately $776 million of additional net AUM in the GLG Funds and pay the same fees and invest on the same terms as other investors. The determination of the GLG Funds into which our key personnel participating in the equity participation plan will invest the proceeds of the acquisition and the amounts to be invested in each GLG Fund will be made by the general partners of Sage Summit LP and Lavender Heights Capital LP, respectively, the vehicles through which the equity participation plan is implemented, in consultation with certain of our key personnel. The general partners of these limited partnerships are Sage Summit Ltd. and Mount Garnet Limited, the directors of which are the Trustees. See Certain Relationships and Related Person Transactions GLG Investment Transactions . Long-Term Incentive Compensation On October 31, 2007, our stockholders approved the adoption of our 2007 Restricted Stock Plan and the LTIP. We believe the continued ownership by our senior management and key personnel of significant amounts of our common stock, either directly or indirectly through stock-based awards under the Restricted Stock Plan and the LTIP, will afford significant alignment with holders of our common stock. Our long-term incentive compensation will be delivered through the grant of stock options (and in some cases, shares of restricted stock) and shares of restricted stock to senior management, key personnel and employees under the plans. Stock options will aid in the attraction and retention of our senior management, key personnel and employees and align the interests of these individuals with those of our stockholders. Stock options will have value for our senior management, key personnel and employees only if the price of our common stock increases and our personnel remain employed by us for the period required for the stock options and the shares of restricted stock to vest and become exercisable (typically four years), thus providing an incentive to remain employed by our company. The compensation committee or another committee designated by the board will determine all material aspects of the long-term incentive awards who receives an award, the amount of the award, the grant price of the award, the timing of the awards as well as any other aspect of the award it may deem material. When making its decisions regarding long-term incentives, the compensation committee may consider many factors. In addition to competitive market data, it may consider the number of shares of our common stock outstanding, the amount of equity incentives currently outstanding and the number of shares available for future grant under the plans. Furthermore, individual stock option awards may be based on many individual factors such as relative job scope and contributions made during the prior year and the number of shares held by individual members of our senior management, key personnel and employees. Table of Contents COMPENSATION OF EXECUTIVE OFFICERS Summary Compensation Table The following table sets forth certain summary information concerning compensation paid or accrued by GLG for services rendered in all capacities during the fiscal year ended December 31, 2006 by our named executive officers. As discussed above under Compensation Discussion and Analysis , in addition to receiving an annual salary and discretionary bonus, each of our named executive officers received the majority of their compensation in the form of distributions in respect of their direct or indirect ownership interests in GLG and/or limited partner profit shares. Therefore, a significant portion of the distributions received by our named executive officers has been performance-based, because all of their distributions have been calculated based on their respective percentage interests in the profits of GLG and their allocated limited partner profit shares. Cash distributions to the Gottesman GLG Trust, Roman GLG Trust and Lagrange GLG Trust in respect of GLG s fiscal and tax year ended December 31, 2006 were $54,579,000 to Mr. Gottesman, $19,152,000 to Mr. Roman and $47,581,000 to Mr. Lagrange. In addition, Mr. White received limited partner profit share in the amount of $2,206,000 for the second half of 2006. Change in Pension Value and Nonqualified Deferred Compensation All Other Salary Bonus Earnings Compensation Total Name and Principal Position Year ($) ($) ($) ($) ($) Noam Gottesman 2006 4,664,130 81,200 (1) 4,745,330 Co-Chief Executive Officer and Managing Director Emmanuel Roman 2006 4,659,420 81,200 (1) 4,740,620 Co-Chief Executive Officer and Managing Director Pierre Lagrange 2006 4,700,090 81,200 (1) 4,781,290 Managing Director Simon White 2006 294,000 5,700 (2) 299,700 Chief Operating Officer (1) Maximum allowance for health, medical and other fringe (1) benefits. (2) Medical, dental and health benefits. Employment Agreements Prior to November 2, 2007, each of Messrs. Gottesman, Roman and Lagrange had entered into an employment agreement with GLG Partners LP, pursuant to which he received an annual salary of $3,346,622, $3,341,912 and $3,585,667, respectively, in fiscal 2006. The individuals did not receive any discretionary bonus in fiscal 2006 under these employment agreements. Each of Messrs. Gottesman, Roman and Lagrange had also entered into an employment agreement with GLG Partners Services Limited, pursuant to which he received an annual salary of $1,317,508, $1,317,508 and $1,114,423, respectively, in fiscal 2006. The Principals did not receive any discretionary bonuses in fiscal 2006 under these employment agreements. Prior to June 30, 2006, Mr. White was an employee of GLG Partners LP. As an employee, Mr. White received salary of $294,000 through such date. On June 30, 2006, he ceased to be an employee and became the holder of an indirect limited partnership interest in GLG Partners LP. On November 2, 2007, we entered into employment agreements with each of our named executive officers and Alejandro San Miguel, our new General Counsel and Corporate Secretary. Table of Contents Noam Gottesman Pursuant to an employment agreement with us, Mr. Gottesman serves as our Chairman of the Board and Co-Chief Executive Officer. Under the terms of his employment agreement, Mr. Gottesman receives an annual salary of $400,000 and other benefits as set forth in the employment agreement. Mr. Gottesman is also eligible to receive a discretionary bonus and to receive equity incentive awards, including under LTIP, provided that no awards will be granted to him for 2007. In addition, the employment agreement provides that Mr. Gottesman may terminate his employment with us by giving not less than 12 weeks notice to us and we may terminate Mr. Gottesman s employment by giving him not less than twelve weeks notice of termination. During the notice period, we are obligated to provide Mr. Gottesman with salary, but are under no obligation to provide him with any work. No notice is required if we terminate Mr. Gottesman s employment for cause (as defined in Mr. Gottesman s employment agreement). In addition, we may terminate Mr. Gottesman s employment without cause with immediate effect by paying him twelve weeks salary in lieu of a notice of termination. During Mr. Gottesman s employment with us and for a period of 12 to 18 months thereafter, he will be subject to various non-competition and non-solicitation restrictions. Mr. Gottesman also entered into employment agreements with each of GLG Partners LP and GLG Partners Services LP. Pursuant to his employment agreement with GLG Partners LP, Mr. Gottesman serves as Co-Chief Executive Officer and Managing Director of GLG Partners LP and receives an annual salary of $400,000. Pursuant to his employment agreement with GLG Partners Services LP, Mr. Gottesman receives an annual salary of $200,000. The other material terms of Mr. Gottesman s employment agreements with each of GLG Partners LP and GLG Partners Services LP are the same as those contained in his employment agreement with us. Emmanuel Roman Pursuant to an employment agreement with us, Mr. Roman serves as our Co-Chief Executive Officer. Under the terms of his employment agreement, Mr. Roman receives an annual salary of $400,000 and other benefits as set forth in the employment agreement. Mr. Roman is also eligible to receive a discretionary bonus and to receive equity incentive awards, including under the LTIP, provided that no awards will be granted to him for 2007. The termination provisions and non-competition and non-solicitation restrictions contained in Mr. Roman s employment agreement are the same as those contained in Mr. Gottesman s employment agreement with the Company. Mr. Roman also entered into employment agreements with each of GLG Partners LP and GLG Partners Services LP. Pursuant to his employment agreement with GLG Partners LP, Mr. Roman serves as Co-Chief Executive Officer and Managing Director of GLG Partners LP and receives an annual salary of $400,000. Pursuant to his employment agreement with GLG Partners Services LP, Mr. Roman receives an annual salary of $200,000. The other material terms of Mr. Roman s employment agreements with each of GLG Partners LP and GLG Partners Services LP are the same as those contained in his employment agreement with us. Pierre Lagrange Mr. Lagrange entered into employment agreements with each of GLG Partners LP and GLG Partners Services LP. Pursuant to his employment agreement with GLG Partners LP, Mr. Roman serves as a Managing Director of GLG Partners LP and receives an annual salary of $800,000. Pursuant to his employment agreement with GLG Partners Services LP, Mr. Lagrange receives an annual salary of $200,000. The termination provisions and non-competition and non-solicitation restrictions contained in Mr. Lagrange s employment agreements are the same as those contained in Mr. Gottesman s employment agreement with us. Simon White Pursuant to an employment agreement with us, Mr. White serves as our Chief Financial Officer. Under the terms of his employment agreement, Mr. White receives an annual salary of $500,000 and other benefits Table of Contents as set forth in the employment agreement. Mr. White is also eligible to receive a discretionary bonus and to receive equity incentive awards, including under the LTIP. The termination provisions (except for the definition of cause) and non-competition and non-solicitation restrictions contained in Mr. White s employment agreement are the same as those contained in Mr. Gottesman s employment agreement with us. Mr. White also participates in the limited partner profit share arrangement and equity participation plan. On November 2, 2007, Mr. White s interest letter with Laurel Heights LLP was amended to provide that he will no longer receive any partnership draw from Laurel Heights LLP. Alejandro San Miguel Pursuant to his employment agreement with us, Mr. San Miguel serves as our General Counsel and Corporate Secretary and receives: (a) an annual salary of $500,000, (b) an annual bonus equal to at least $1.0 million, a portion of which may be conditioned upon the achievement of performance goals, (c) an award of 253,631 shares of restricted stock, which will vest as described below under Restricted Stock Award , and (d) other benefits as set forth in the employment agreement. Mr. San Miguel is also eligible to receive a discretionary bonus and to receive equity incentive awards, including under the LTIP. Pursuant to a restricted stock award agreement entered into on November 2, 2007, Mr. San Miguel was awarded 253,631 shares of restricted stock under the LTIP, subject to vesting. Potential Payments Upon Termination or Change of Control The following discussion summarizes certain provisions of the employment agreements between each of the Principals and GLG Partners LP and GLG Partners Services Limited that were in effect as of the end of the 2006 fiscal year (the Prior Agreements ). In connection with the acquisition of GLG, as described above, each of Messrs. Gottesman, Roman, Lagrange and White entered into new employment agreements. Under the Prior Agreements, each of GLG s Principals could terminate his employment with GLG Partners LP by giving not less than four weeks notice to GLG Partners LP. GLG Partners LP could terminate the employment of a Principal by giving not less than four weeks notice of termination where the applicable period of service is up to four years, and thereafter one additional week s notice for each year in excess of four, subject to a maximum of 12 weeks notice. During the notice period, GLG Partners LP was only obligated to provide a Principal with salary and benefits and was under no obligation to provide a Principal with any work. No notice was required if GLG Partners LP terminated a Principal s employment for cause. In addition, GLG Partners LP could terminate the employment of a Principal without cause with immediate effect by paying his annual salary to him in lieu of a notice of termination. Assuming his employment was terminated without notice by GLG Partners LP on December 31, 2006, each of Messrs. Gottesman, Roman and Lagrange would have been entitled to receive $3,410,255, $3,410,255 and $3,653,485, respectively, in a lump sum payment on such date. Under the Prior Agreements, each Principal could terminate his employment with GLG Partners Services Limited by giving not less than four weeks notice to GLG Partners Services Limited. GLG Partners Services Limited could terminate the employment of a Principal by giving not less than four weeks notice of termination where the applicable period of service is up to four years, and thereafter one additional week s notice for each year in excess of four, subject to a maximum of 12 weeks notice. During the notice period, GLG Partners Services Limited was only obligated to provide a Principal with salary and benefits and was under no obligation to provide a Principal with any work. No notice was required if GLG Partners Services Limited terminated a Principal s employment for cause. In addition, GLG Partners Services Limited could terminate the employment of a Principal without cause with immediate effect by paying his annual salary to him in lieu of a notice of termination. Assuming his employment was terminated without notice by GLG Partners Services Limited on December 31, 2006, each of Messrs. Gottesman, Roman and Lagrange would have been entitled to receive $1,461,538, $1,461,538 and $1,217,948, respectively, in a lump sum payment on such date. Under the Prior Agreements, Messrs. Gottesman, Roman and Lagrange were not entitled to any payments based upon a change in control of GLG Partners LP or GLG Partners Services Limited. Table of Contents Under the Prior Agreements, each of Messrs. Gottesman, Roman and Lagrange could not use or disclose confidential information following the termination of his employment. In addition, Mr. Roman was subject to certain post-employment restrictions on his competition with the business of GLG Partners LP and GLG Partners Services Limited or solicitation of existing or potential clients, intermediaries or employees for periods of 12 or 18 months. For purposes of Mr. Roman s Prior Agreement, business is defined as the management, investment management, and investment advisory businesses, and the fund structuring, establishment, marketing, distribution and management businesses, carried on by GLG Partners LP, GLG Partners Services LP, or an associated company on Mr. Roman s employment termination date or during the 12-month period immediately preceding such date, and any other business that, to Mr. Roman s knowledge, GLG Partners LP or GLG Partners Services LP intends to conduct during the 12-month period following his termination of employment. Mr. White is a member of Laurel Heights LLP and a limited partner of Sage Summit LP and Lavender Heights Capital LP, through which he participates in the limited partner profit share arrangement and the equity participation plan described below under Certain Relationships and Related Person Transactions GLG Limited Partner Profit Share Arrangement and Equity Participation Plan . Laurel Heights LLP may remove Mr. White as a member (1) for cause, (2) where certain triggering events have occurred, (3) upon his reaching age 60 or (4) for any reason or no reason. Laurel Heights LLP may remove Mr. White as a member pursuant to clause (4) by giving not less than 12 weeks notice. Mr. White s removal may be with immediate effect if Laurel Heights LLP makes full payment of his monthly drawings otherwise payable to him during the notice period. In all other removal circumstances, the removal will be with immediate effect. Assuming Mr. White was removed as a member pursuant to clause (4) described above without notice by Laurel Heights LLP on December 31, 2006, he would have been entitled to receive $86,250 in a lump sum payment on such date with respect to such removal. Each of Sage Summit LP and Lavender Heights Capital LP may remove Mr. White as a limited partner (1) at any time prior to a liquidity event, (2) for cause, (3) where he has ceased his service as a partner, member, employee or otherwise of an associated entity, (4) at any time after his awards under the equity participation plan have fully vested, (5) at any time, if the Principals maintain control of GLG Partners LP and (6) upon his death or disability. In addition, Sage Summit LP may remove Mr. White as a limited partner upon his voluntary withdrawal as a member of Laurel Heights LLP. Mr. White s removal as a limited partner will be effective immediately upon delivery of a removal notice. Under the terms of the applicable limited liability partnership agreement and limited partnership agreements, Mr. White may not use or disclose confidential information following the termination of his membership or limited partnership relationship. In addition, Mr. White is subject to certain post-termination restrictions on his competition with GLG s business or his solicitation of existing or potential clients, intermediaries or employees for periods of 6, 12 or 18 months, as the case may be. Director Compensation Our board of directors receives no compensation for their service, other than reimbursement of travel expenses for attending meetings. Members of our board of directors are eligible to receive awards under our Restricted Stock Plan and our LTIP. Paul Myners, one of our directors, received an award of 148,368 shares of restricted stock under the LTIP in November 2007. Table of Contents CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH RELATED PERSONS Investment Transactions All GLG Shareowners, including the Principals and their Trustees and the key personnel participating in the equity participation plan will invest in the GLG Funds at least 50% of the excess of the cash proceeds they received in the acquisition over the aggregate amount of any taxes payable on their respective portion of the purchase price, further aligning their interests with those of the investors in these funds. The Principals and the Trustees (including certain family members of the Principals) had as of September 30, 2007, investments in GLG Funds equal to approximately $105 million of net AUM and pay the same fees and invest on the same terms as do other investors. Because these investments are made at the same fees and on the same terms as those of other investors, we believe these investments do not result in conflicts of interest with other investors in the GLG Funds. Currently, the Principals, their Trustees and these key personnel have invested, including certain cash proceeds from the sale of GLG, approximately $776 million of additional net AUM in the GLG Funds and pay the same fees and invest on the same terms as other investors. The determination of the GLG Funds into which our key personnel participating in the equity participation plan will invest the proceeds of the acquisition and the amounts to be invested in each GLG Fund will be made by the general partners of Sage Summit LP and Lavender Heights Capital LP, the vehicles through which the equity participation plan is implemented, in consultation with such GLG key personnel. The general partners of these limited partnerships are Sage Summit Ltd. and Mount Garnet Limited, respectively, the directors of which are the Trustees. Lehman Brothers Bankhaus AG Loans A subsidiary of Lehman Brothers Holdings Inc. holds an approximately 10.1% equity interest in our company. In 2000, Lehman Brothers Bankhaus AG, an affiliate of Lehman International, which we refer to as Lehman Bankhaus, made loans to each of the Gottesman GLG Trust, the Lagrange GLG Trust, the Green GLG Trust, and Stirling Trustees Limited, in its capacity as trustee of the Jabre GLG Trust, a trust established by Philippe Jabre for the benefit of himself and his family (the Jabre GLG Trust ). In 2002, the loan to Abacus (C.I.) Limited was novated and assigned to Mr. Green. The loans were non-recourse to the assets of the borrowers, except that they were secured by a pledge to Lehman Bankhaus by each of the borrowers of 1,000 shares of non-voting stock (representing all of the non-voting stock) in each of GLG Holdings Limited, GLG Partners Services Limited, GLG Partners (Cayman) Limited and GLG Partners Asset Management Limited owned by the borrowers and any dividends paid on such shares. The loans required that dividends be paid on the non-voting shares from time to time and that all dividends paid on the non-voting shares be applied to the repayment of the loans. In June 2007, the loan to the Jabre GLG Trust was repaid in full. The largest amounts of principal outstanding under the loans during 2006 and the amounts of principal and interest paid on the loans during 2006 by the Gottesman GLG Trust, the Lagrange GLG Trust, Mr. Green and the Jabre GLG Trust were $32,515,222, $17,588,083, $23,597,775 and $16,526,705, respectively, and $10,840,000, $5,849,000, $7,849,000 and $5,496,501, respectively. The loans bore interest at a rate of 3.0% per annum, other than the loan to the Gottesman GLG Trust, which bore interest at a rate of 4.53% per annum. As of June 15, 2007, the loan to Mr. Green was novated and assigned, and all of Mr. Green s non-voting shares in each of the GLG entities referred to above were transferred to Chapter Investment Assets Limited, subject to receipt of all requisite regulatory approvals. Prior to the closing of the acquisition, each of GLG Holdings Limited and GLG Partners Services Limited declared dividends payable to holders of record immediately prior to the closing of the acquisition on its non-voting shares based on a formula which is expected to result in an amount sufficient to repay fully (but not exceed) outstanding amounts on the loans to the Gottesman GLG Trust, the Lagrange GLG Trust and Mr. Green described above. Immediately prior to the closing of the acquisition, Lehman Bankhaus released the pledge on the non-voting shares, but not on any dividend, and all of the non-voting shares were repurchased or redeemed by the relevant GLG entity. Lehman Bankhaus agreed to forgive the remaining outstanding balance after the closing if the formula-based dividend is not sufficient to repay the loans. Table of Contents Transactions with Lehman Brothers Lehman Brothers Holdings Inc. and its affiliates (collectively, Lehman Brothers ) provide services to the GLG Funds through the following related arrangements: Lehman Brothers provides prime brokerage services to certain of the GLG Funds pursuant to prime brokerage agreements with each of the GLG Funds. In addition, Lehman Brothers acts as a broker, prime broker, derivatives counterparty and stock lending agent for certain of the GLG Funds and managed accounts pursuant to market standard trading agreements. Lehman Brothers also clears and settles securities and derivatives trades for certain of the GLG Funds and for certain managed accounts pursuant to a clearing and settlement agreement dated September 2000 with GLG Partners LP. In addition, Lehman Brothers provides on-going services such as issuing contract notes to our clients and provides certain systems, such as a convertible bond trading system, pursuant to an ongoing services agreement, dated September 2000. Pursuant to a dealing agreement, dated September 2000, Lehman Brothers provides custody services to certain of our clients. This agreement also establishes the regulatory relationship between Lehman Brothers and us. Lehman Brothers also provides payroll services to us and has agreed to provide us with disaster recovery support, such as office space. Pursuant to these agreements, the GLG Funds paid Lehman Brothers an aggregate of approximately $91.2 million, $75.5 million and $76.8 million for these services during 2006, 2005 and 2004, respectively, and approximately $94.0 million for the nine months ended September 30, 2007 and GLG paid Lehman Brothers approximately $76,000, $81,000, and $63,000 in the aggregate in respect of payroll services provided during 2006, 2005 and 2004, respectively, and approximately $52,000 for the nine months ended September 30, 2007. In addition, Lehman Brothers distributes GLG Funds through their private client sales force, and we rebate to Lehman Brothers, on an arm s-length basis, certain of the fees that we receive from the GLG Funds in relation to these investments. The annual charge to GLG was approximately $3.8 million, $2.3 million and $1.9 million in 2006, 2005 and 2004, respectively. Limited Partner Profit Share Arrangement Beginning in mid-2006, we entered into partnership with a number of our key personnel in recognition of their importance in creating and maintaining the long-term value of our company. These individuals ceased to be employees and either became holders of direct or indirect limited partnership interests in GLG or formed two limited liability partnerships through which they provide services to GLG. Through these partnership interests, these key individuals are entitled to a fixed and discretionary share of the profits earned by certain GLG entities. The Principals do not participate in the limited partner profit share arrangement. For 2006, Mr. White received limited partner profit share in the amount of $2,206,000. For a further discussion of the limited partner profit share arrangement, see Organizational Structure Other GLG Entities Limited Partner Profit Share Arrangement . Equity Participation Plan In March 2007, we established the equity participation plan to provide certain key individuals, through their direct or indirect limited partnership interests in two limited partnerships, Sage Summit LP and Lavender Heights Capital LP, with the right to receive a percentage of the proceeds derived from an initial public offering relating to GLG or a third-party sale of GLG. The Principals do not participate in the equity participation plan. Upon consummation of the acquisition, Sage Summit LP and Lavender Heights Capital LP received collectively 33,000,000 shares of our common stock and $150 million in cash or promissory notes payable to the GLG Shareowners in the acquisition, 99.9% of which was allocated to key individuals who are limited partners of Sage Summit LP and Lavender Heights LP. The balance of the consideration remains unallocated. Of the portion which has been allocated, 92.4% was allocated to limited partners whom we refer to as Equity Sub Plan A members and 7.6% was allocated to limited partners whom we refer to as Equity Sub Plan B members. These limited partnerships distributed to the Equity Sub Plan A members, 25% of the aggregate amount allocated to them upon consummation of the acquisition of GLG, and the remaining 75% will be distributed to the members in three equal installments of 25% each upon vesting over a three-year Table of Contents period on the first, second and third anniversaries of the consummation of the acquisition, subject to the ability of the general partners of the limited partnerships, whose respective boards of directors consist of the Trustees, to accelerate vesting. These limited partnerships will distribute to the Equity Sub Plan B members, 25% of the aggregate amount allocated to them in four equal installments of 25% each upon vesting over a four-year period on the first, second, third and fourth anniversaries of the consummation of the acquisition, subject to the ability of the general partners of the limited partnerships, whose respective boards of directors consist of the Trustees, to accelerate vesting. The unvested portion of such amounts will be subject to forfeiture in the event of termination of the individual as a limited partner prior to each vesting date, unless such termination is without cause after there has been a change in control of our company after completion of the acquisition or due to death or disability. Upon forfeiture, these unvested amounts will not be returned to us but instead to the limited partnerships, which may reallocate such amounts to their existing or future limited partners. In March 2007, Mr. White was admitted as a limited partner in each of Sage Summit LP and Lavender Heights Capital LP through which he is entitled to receive 0.2% of the total consideration of the acquisition, subject to vesting as described above. Schreyer Consulting Agreement GLG Partners Services LP entered into a consulting agreement, dated as of January 1, 2002, with Leslie J. Schreyer. Under the terms of the consulting agreement, GLG Partners Services LP agreed to engage Mr. Schreyer as its legal counsel and adviser on a part-time basis. The consulting agreement was for a one-year term and automatically renewed each year for an additional one-year term, unless terminated. The consulting agreement provided for an annual base salary of $1.5 million, of which $500,000 was paid in monthly installments and the balance was paid when bonuses are payable. Mr. Schreyer was also eligible to receive a bonus and other benefits, such as health insurance. Mr. Schreyer received total compensation of $2.9 million during 2006. The consulting agreement could be terminated on 90 days written notice by either GLG Partners Services LP or Mr. Schreyer. On November 2, 2007, the consulting agreement was terminated and Mr. Schreyer entered into an employment agreement with GLG Partners, Inc. Pursuant to his employment agreement, Mr. Schreyer serves as an advisor to us and is employed by us on a part-time basis. The initial term of the employment agreement expires on December 31, 2008, and the agreement automatically renews for one-year periods thereafter unless advance notice of at least 90 days is given. Mr. Schreyer receives an annual base salary of $1.5 million, $500,000 of which is paid in monthly installments and the balance of which is paid at the same time that annual bonuses are paid by us. Mr. Schreyer is also eligible for a discretionary bonus, to participate in the LTIP, and to receive employee benefits, such as health insurance. On November 2, 2007, Mr. Schreyer received restricted stock awards under the Restricted Stock Plan and the LTIP of an aggregate of 576,923 shares of restricted stock. Each of the awards vests as follows: 25% on each of the first four anniversaries of the grant date, provided that 100% of each award vests earlier if Mr. Schreyer dies, becomes disabled or is terminated from employment by us for any reason, including a decision by us not to extend the term of Mr. Schreyer s employment agreement. Mr. Schreyer is a partner of Chadbourne Parke LLP, one of GLG s principal outside law firms. Green Consulting Fee In 2006, GLG Partners LP paid Jonathan Green, a former principal, a consulting fee in the amount of $1.0 million. Resignations of Former Principals In April 2006, Philippe Jabre resigned as an employee of GLG Partners LP and GLG Partners Services LP. In January 2007, Mr. Jabre resigned as a director of GLG Partners Limited, and an officer of Stirling Trustees Limited, the trustee of the Jabre GLG Trust, resigned as a director of each of GLG Holdings Limited, GLG Partners Services Limited, GLG Partners Asset Management Limited and GLG Partners (Cayman) Table of Contents Limited. In connection with his resignation from GLG, Mr. Jabre transferred to Mr. Gottesman all of his voting shares in GLG Partners Limited, and the Jabre GLG Trust, transferred to the Gottesman GLG Trust, all of its voting shares in GLG Holdings Limited, GLG Partners Services Limited, GLG Partners Asset Management Limited and GLG Partners (Cayman) Limited the aggregate. These transfers were made in two installments in mid-2006 and late-2006. In October 2007, the Principals and the Trustees agreed with Mr. Jabre and the Jabre GLG Trustee to resolve, at no cost to GLG, ongoing disagreements with respect to profit allocations in prior years and the transfer of Mr. Jabre s and the Jabre GLG Trustee s shares in GLG through a distribution of profits to the Jabre GLG Trustee which would otherwise have been made to the Trustees prior to the closing of the acquisition and an adjustment in the purchase price for Mr. Jabre s and the Jabre GLG Trustee s shares in GLG. In addition, Mr. Jabre and the Jabre GLG Trustee, on the one hand, and GLG and others, on the other hand, have agreed to mutual general releases, and Mr. Gottesman, Mr. Lagrange, the Gottesman GLG Trust and the Lagrange GLG Trust, agreed to release Mr. Jabre and the Jabre GLG Trust from certain non-competition and non-solicitation arrangements among them related to GLG. In May 2005, in connection with certain regulatory investigations relating to Mr. Jabre, GLG Partners Limited, GLG Holdings Limited, GLG Partners Services Limited, GLG Partners Asset Management Limited and GLG Partners (Cayman) Limited released Mr. Jabre and the Jabre GLG Trust, in respect of liabilities arising out of trading in securities of Sumitomo Mitsui Financial Group Inc. and/or Alcatel S.A. by certain GLG Funds managed at the time by Mr. Jabre, except for liabilities resulting from certain third-party claims. There have been no such claims. In connection with Mr. Green s resignation from GLG, which was effective January 1, 2004, Mr. Green and the Green GLG Trust, agreed to transfer a portion of their voting shares in each of the GLG entities in which he or it was a shareholder, namely GLG Partners Limited, GLG Holdings Limited, GLG Partners Services Limited, GLG Partners Asset Management Limited and GLG Partners (Cayman) Limited, on each of the first, second and third anniversaries of his resignation to Mr. Gottesman, Mr. Lagrange, the Gottesman GLG Trust and the Lagrange GLG Trust. These transfers were made in 2006 and 2007. In addition, in connection with the sale by Mr. Green and the Green GLG Trust of their equity interests in the Acquired Companies to Istithmar and Sal. Oppenheim, Messrs. Gottesman, Lagrange and Roman and the Gottesman GLG Trust, Lagrange GLG Trust and Roman GLG Trust agreed to release Mr. Green and the Green GLG Trust from certain non-competition and non-solicitation arrangements among them related to GLG. Investments The following GLG Funds and managed accounts hold our units (common stock and warrants): the GLG Century Fund SICAV managed account (18,800), the GLG North American Equity Fund (71,400), the GLG North American Opportunity Fund (300,000) and the GLG Pleiade SICAV managed account (8,100). The Principals control the voting and disposition of the units held by these GLG Funds and managed accounts by virtue of GLG entities acting as manager of these GLG Funds and managed accounts. Perella Weinberg Partners LP Peter Weinberg, who is a member of our board of directors, is a partner of Perella Weinberg Partners LP, or PWP, GLG s financial adviser in connection with the acquisition. Pursuant to an engagement letter entered into in January 2007, GLG retained PWP to provide financial advisory services to GLG in connection with exploring various strategic alternatives available to GLG. GLG paid PWP a fee of $16 million upon the consummation of the acquisition. In addition, GLG reimbursed PWP for its reasonable out-of-pocket expenses incurred in connection with the engagement. Policies and Procedures for Related Person Transactions We have adopted an audit committee charter that provides, among other things, that the audit committee will be responsible for the review and approval of all related-party transactions. Table of Contents PRINCIPAL STOCKHOLDERS The table below sets forth the beneficial ownership of our common stock and Series A preferred stock as of November 30, 2007 by the following individuals or entities: each person who beneficially owns more than 5% of the outstanding shares of our capital stock; the individuals who are our Co-Chief Executive Officers, Chief Financial Officer and one other most highly compensated executive officer; the individuals who are our directors; and the individuals who are our directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the SEC. Except as otherwise indicated, each person or entity named in the table has sole voting and investment power with respect to all shares of our capital stock shown as beneficially owned, subject to applicable community property laws. As of November 30, 2007, 240,894,910 shares of our common stock were issued and outstanding. In computing the number of shares of our capital stock beneficially owned by a person and the percentage ownership of that person, shares of our capital stock that will be subject to options held by that person that are currently exercisable or that are exercisable within 60 days of November 30, 2007 are deemed outstanding. These shares are not, however, deemed outstanding for the purpose of computing the percentage ownership of any other person. None of the shares of our common stock owned by any of our directors or officers have been pledged as security. The business address of Messrs. Gottesman, Roman, White, San Miguel, Hauslein, Lauder, Myners and Weinberg is c/o GLG Partners, Inc., 390 Park Avenue, 20th Floor, New York, New York 10022. The business address for Mr. Lagrange and Sage Summit LP is c/o GLG Partners, LP, One Curzon Street, London W1J 5HB, England. Pro Forma Approximate Percentage Approximate Percentage of Outstanding Number of Shares of Outstanding Common Stock of Common Stock Common Stock Beneficially Name of Beneficial Owner and Management Beneficially Owned Beneficially Owned* Owned** Berggruen Holdings North America Ltd.(1) 14,882,700 6.2 5.0 Marlin Equities II, LLC(2) 12,173,200 5.1 4.1 Lehman Brothers Holdings, Inc.(3) 33,666,990 14.0 11.2 Sage Summit LP(4) 161,892,481(10)(11)(12)(13) 54.0 54.0 Lavender Heights Capital LP(4) 161,892,481(10)(11)(12)(13) 54.0 54.0 Noam Gottesman(4)(5) 162,677,951(10)(11)(12)(13) 54.3 54.3 Emmanuel Roman(4)(5) 162,677,951(10)(11)(12)(13) 54.3 54.3 Pierre Lagrange(4)(5) 162,677,951(10)(11)(12)(13) 54.3 54.3 Simon White(6) 110,000 * * Alejandro San Miguel(7) Ian G.H. Ashken(8) 1,000,000 * * Nicolas Berggruen(1) 14,882,700 6.2 5.0 Martin E. Franklin(2) 12,173,200 5.1 4.1 James N. Hauslein 51,201 * * William P. Lauder 51,201 * * Paul Myners(9) Peter A. Weinberg All directors and executive officers as a group (11 individuals) 190,946,053 63.7 63.7 * Does not include 58,904,993 shares of our common stock into which 58,904,993 Exchangeable Shares and 58,904,993 associated shares of Series A preferred stock beneficially owned by Noam Gottesman and the Trustee of the Gottesman GLG Trust may be exchanged by the holder thereof at any time and from time to time. ** Assumes 299,799,903 shares of our common stock are issued and outstanding upon the exchange of 58,904,993 Exchangeable Shares and 58,904,993 associated shares of Series A preferred stock beneficially owned by Noam Gottesman and the Trustee of the Gottesman GLG Trust. Table of Contents * Less than 1% (1) Based on a Schedule 13D/A filed on November 13, 2007, Berggruen Acquisition Holdings Ltd ( BAH ) owns 5,923,200 shares included in founders units and Berggruen Holdings owns 4,209,500 shares, of which 2,500,000 are included in co-investment units. The number shown in the table above includes an aggregate of 4,750,000 shares of common stock issuable upon exercise of sponsors warrants and co-investment warrants, all of which become exercisable on December 21, 2007 but excludes 5,923,200 shares of common stock issuable upon exercise of founders warrants which are not exercisable within 60 days of November 30, 2007. BAH is a direct subsidiary of Berggruen Holdings. Berggruen Holdings is a direct, wholly owned subsidiary of Medici I Investments Corp. ( Medici ) and the managing and majority shareholder of BAH. Medici is a direct, wholly owned subsidiary of Berggruen Holdings Ltd. ( BHL ). All of the outstanding capital stock of BHL is owned by the Tarragona Trust ( Tarragona ). The trustee of Tarragona is Maitland Trustees Limited, a BVI corporation acting as an institutional trustee in the ordinary course of business without the purpose or effect of changing or influencing control of us. Mr. Berggruen is a director of BHL. Mr. Berggruen may be considered to have beneficial ownership of BAH s interests in us and disclaims beneficial ownership of any shares in which he does not have a pecuniary interest. The principal business address of each of BAH, Berggruen Holdings, Medici and BHL is 1114 Avenue of the Americas, 41st Floor, New York, New York 10036. The principal business address of Mr. Berggruen is 9-11 Grosvenor Gardens, London, SW1W OBD, United Kingdom. The principal business address of Tarragona is 9 Columbus Centre, Pelican Drive, Road Town, Tortola, British Virgin Islands. (2) Based on a Schedule 13D filed on November 13, 2007, Marlin Equities owns 5,923,200 shares included in founders units and Mr. Franklin owns 2,000,000 shares included in co-investment units. Includes an aggregate of 4,250,000 shares of common stock issuable upon exercise of sponsors warrants and co-investment warrants, all of which become exercisable on December 21, 2007. Excludes 5,923,200 shares of common stock issuable upon exercise of founders warrants which are not exercisable within 60 days of November 30, 2007. Mr. Franklin is the sole managing member of Marlin Equities. Mr. Franklin may be considered to have beneficial ownership of Marlin Equities interests in us. Mr. Franklin disclaims beneficial ownership of any shares, or warrants, as the case may be, in which he does not have a pecuniary interest. The business address of Marlin Equities and Mr. Franklin is 555 Theodore Fremd Avenue, Suite B-302, Rye, New York 10580. (3) Based on a Schedule 13D filed on November 13, 2007, Lehman (Cayman Islands) Ltd ( LCI ) holds 33,659,998 shares of our common stock, and Lehman Brothers Inc. ( LBI ) holds 692 shares and 3,150 shares included in units. The warrants included in the units become exercisable for 3,150 shares of common stock on December 21, 2007. LCI and LBI are wholly owned subsidiaries of Lehman Brothers Holdings, Inc. The business address of Lehman Brothers Holdings, Inc. is 745 Seventh Avenue New York, New York 10019. (4) Represents shares held by the parties to a Voting Agreement, dated as of June 22, 2007, among the Principals, the Trustees, Lavender Heights Capital LP, Sage Summit LP and us. Each of the parties to the Voting Agreement disclaims beneficial ownership of shares held by the other parties to the Voting Agreement (except each Principal with respect to his respective Trustee). (5) Includes 392,635 shares included in units held by certain GLG Funds. The warrants included in the units become exercisable for 392,635 shares of our common stock on December 21, 2007. Each of the Principals serves as a Managing Director of GLG Partners Limited, the general partner of GLG Partners LP. GLG Partners LP serves as the investment manager of the GLG Funds that have invested the 392,635 units. GLG Partners LP, as investment manager of these GLG Funds, may be deemed the beneficial owner of all of our securities owned by these GLG Funds. GLG Partners Limited, as general partner of GLG Partners LP, may be deemed the beneficial owner of all of our securities owned by these GLG Funds. Each of the Principals, as a Managing Director of GLG Partners Limited with power to exercise investment discretion, may be deemed the beneficial owner of all of our securities owned by these GLG Funds. Each of GLG Partners LP, GLG Partners Limited and the Principals disclaims beneficial ownership of any of these securities, except for their pecuniary interest therein. Table of Contents (6) Mr. White is entitled to receive 440,000 shares under the equity participation plan, 25% of which he received upon consummation of the acquisition of GLG, and the remaining 75% of which will be distributed to him in three equal installments of 25% each over a three-year period on the first, second and third anniversaries of the consummation of the acquisition. (7) Mr. San Miguel was awarded 253,631 shares of restricted stock subject to vesting as follows: 105,263 shares vest in four equal installments on November 2, 2008, 2009, 2010 and 2011; 74,184 shares vest in four equal installments on November 2, 2009, 2010, 2011 and 2012; and 74,184 shares vest in four equal installments on November 2, 2010, 2011, 2012 and 2013. (8) Includes 400,000 and 100,000 shares of common stock included in co-investment units owned by Mr. Ashken and Tasburgh LLC, respectively, and an aggregate of 500,000 shares issuable upon the exercise of the co-investment warrants, which become exercisable on December 21, 2007. Mr. Ashken is the majority owner and managing member of Tasburgh LLC. The business address for Mr. Ashken is 555 Theodore Fremd Avenue, Suite B-302, Rye, New York 10580. (9) Mr. Myners was awarded 148,368 shares of restricted stock under the LTIP, which vest in four equal installments on the first, second, third and fourth anniversaries of the date of grant. (10) Includes 14,850,000 and 9,900,000 shares beneficially owned by Sage Summit LP and Lavender Heights Capital LP, respectively. The Trustees are the directors of the general partner of each of these limited partnerships. The Principals may be deemed beneficial owners of the foregoing shares. Each of the Principals disclaims beneficial ownership of any of these securities. (11) Includes 58,900,370 Exchangeable Shares and 58,900,370 associated shares of Series A preferred stock beneficially owned by the Gottesman GLG Trust and 4,623 Exchangeable Shares and 4,623 shares of Series A Preferred Stock beneficially owned by Mr. Gottesman. Each Exchangeable Share is exchangeable by the holder at any time and from time to time into one share of our common stock, and each share of Series A preferred stock will be automatically redeemed upon the exchange of an Exchangeable Share. (12) Includes 18,698,529 and 1,466 shares beneficially owned by the Roman GLG Trust and Mr. Roman, respectively. (13) Includes 58,900,370 and 4,623 shares beneficially owned by the Lagrange GLG Trust and Mr. Lagrange, respectively. Table of Contents SELLING STOCKHOLDERS The shares of our common stock and warrants which may be sold hereunder by the selling stockholders are: 17,000,003 shares of common stock underlying outstanding units; 17,000,003 warrants underlying outstanding units; 4,500,000 sponsors warrants issued in private placements; and 21,500,003 shares of common stock underlying founders , sponsors and co-investment warrants. The shares of common stock and warrants being sold by the selling stockholders in this offering were generally issued in transactions exempt from the registration requirements of the Securities Act. The following table sets forth information, as of November 30, 2007, with respect to the selling stockholders and the shares of common stock and warrants to purchase common stock beneficially owned by each selling stockholder that may be offered pursuant to this prospectus. The information is based on information provided by or on behalf of the selling stockholders: Securities Owned Securities Securities Owned
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus and does not contain all of the information you should consider in making your investment decision. You should read the following summary together with the more detailed information regarding us and our common stock, including our consolidated financial statements and the related notes, appearing elsewhere in this prospectus. For convenience in this prospectus, Veraz Networks, Veraz, we, us, and our refer to Veraz Networks, Inc. and its subsidiaries, taken as a whole, unless otherwise noted. Our Company We are a leading global provider of Internet Protocol, or IP, softswitches, media gateways and digital compression products to established and emerging wireline, wireless and broadband service providers. Service providers use our products to transport, convert and manage voice traffic over legacy and IP networks, while enabling voice over IP, or VoIP, and other multimedia communications services. Our IP products consist of our innovative ControlSwitch softswitch solution and I-Gate 4000 family of media gateway products. Our media gateways are used to convert traditional telephone voice traffic into IP, compress the data packets and transport this data on IP networks. Our softswitch solution manages and directs the IP traffic (such as a voice call) to its appropriate destination, whether it starts out as IP traffic or is traditional traffic that has been converted. The media gateway and ControlSwitch products work together, allowing service providers to unify and manage IP and traditional networks. This benefits service providers with mixed networks by enabling them to deliver value-added communications services, such as toll-free and pre-paid calling, to users across legacy circuit-switched and IP networks, while enabling a smooth, incremental transition to all IP networks. Intense competition in the telecommunications industry has driven service providers to seek ways to lower costs, deploy more efficient networks, offer new value-added services and enhance their competitive position. Many service providers are combining separate voice and data networks onto one converged network using IP technologies to offer VoIP and other multimedia communications services. Our products ability to convert traditional voice traffic to IP and back allows our customers to operate two distinct networks as a single network and thereby continue to utilize their existing wireless and wireline legacy networks while simultaneously offering next generation IP applications and services. This functionality provides our customers the flexibility to smoothly and incrementally migrate to all IP networks in a cost-effective manner while still being able to deploy advanced communications services and without compromising service quality. Our portfolio of products enables service providers to deploy flexible networks that can adapt to changing end user demands, regulatory conditions and competitive industry dynamics. Traditional voice switches are deployed in specific configurations with customized hardware and software modules. In contrast, the Veraz solution includes standards-based programmable software components that allow service providers to offer these services with less hardware build-out and cost. The Veraz solution only requires our media gateway hardware and ControlSwitch, which when combined offer great flexibility of deployments to service providers. We have developed innovative IP product solutions incorporating leading technologies that enable service providers to accomplish several objectives, including: seamless migration of legacy networks to IP; cost reduction; rapid introduction of new services; revenue growth and margin improvement; and compatibility of existing investment with emerging standards. Our business initially was focused on the sale of digital circuit multiplication equipment, or DCME, products to service providers for use in their legacy networks. Our DCME products are communications Table of Contents systems that use proprietary signal processing technology to increase the effective capacity of transmission links by compressing voice and fax traffic while maintaining the quality of that traffic. We continue to sell DCME products compatible with both legacy and next generation networks, and DCME sales comprise a significant portion of our present business. We have increasingly focused our efforts on our IP products, and we have experienced rapid growth in our IP product revenues. By leveraging our large installed base of DCME customers, we believe we are well positioned to be the provider of IP network solutions to our existing customers as they migrate to IP networks. Our customers include over 400 service providers that have deployed our DCME products in over 90 countries and over 55 service providers that have deployed our IP products. A representative sample of customers include Belgacom International Carrier Services, Cable Wireless (Panama and Jamaica), Equant, Meditelcom Inc., Moessel (Jamaica) Limited (Digicel), Multiregional Transit-Telecom (MTT), Primus Telecommunications, Inc., Telekom SA, Vimplecom and Vodacom SA. We sell our products worldwide through a direct sales force, distributors, systems integrators and resellers. We generated revenues of $76.2 million and $99.6 million for the years ended December 31, 2005, and 2006, respectively. We incurred a net loss of $14.3 million in 2005 and $13.9 million in 2006, and our accumulated deficit as of December 31, 2006 was $59.9 million. Industry Background The global telecommunications industry has been experiencing dramatic changes, driven by several trends, including: significant deregulation in the telecommunications market worldwide; intensified competition in the telecommunication services market; the introduction and adoption of broadband Internet services; and increased subscriber demand for advanced voice, video and data telecommunications services. To meet the challenges of these evolving industry dynamics, some industry analysts believe that service providers will make substantial capital investments in deploying IP network communications equipment that allows switching and transport of voice traffic and services delivery over IP networks, giving service providers the opportunity to converge voice and data traffic onto a single IP network. In a May 2006 report, IDC, an independent research firm, predicted that the market for media gateways and softswitches will grow from $1.8 billion in 2005 to $7.6 billion in 2010, representing a compound annual growth rate of 33%. Our Competitive Strengths We have established ourselves as a leading provider of innovative next generation IP network solutions. We believe our core competitive strengths are: Programmable softswitch solution that enables service providers to rapidly deploy customized multimedia services. Distributed softswitch architecture that enables flexible network design and deployment. Leading compression technology that optimizes network bandwidth while maintaining high voice quality. Interoperable solution with multi-protocol connectivity that supports both legacy and next-generation network solutions. Programmable softswitch solution readily capable of compliance with next-generation IMS network architectures and standards. Global and diversified installed customer base of leading wireless and wireline service providers. TABLE OF CONTENTS Page Prospectus Summary 1 Risk Factors 7 Special Note Regarding Forward-Looking Statements 31 Use of Proceeds 32 Dividend Policy 32 Capitalization 33 Dilution 36 Selected Consolidated Financial Data 38 Management s Discussion and Analysis of Financial Condition and Results of Operations 40 Business 59 Management 71 Compensation Discussion and Analysis 78 Certain Relationships and Related Party Transactions 100 Principal and Selling Stockholders 105 Description of Capital Stock 108 Shares Eligible for Future Sale 112 Underwriting 114 Notice to Canadian Residents 119 United States Federal Income Tax Consequences to non-United States Holders 121 Legal Matters 123 Experts 123 Change in Accountants 124 Where You Can Find More Information 124 Index to Financial Statements F-1 EXHIBIT 3.2 EXHIBIT 4.2 EXHIBIT 10.16 EXHIBIT 10.17 EXHIBIT 23.1 You should rely only on the information contained in this document and any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. Dealer Prospectus Delivery Obligation Until , 2007 (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions. Table of Contents Highly leverageable business model that allows us to rapidly add features and functionalities to our solutions with little incremental cost. Our Strategy We intend to be the leading global provider of IP-based network solutions to service providers in the telecommunications industry. Principal elements of our strategy include: Leverage our relationships with existing DCME customers to drive sales for our softswitch and media gateway solutions. Increase our customer base by penetrating new segments in wireless and wireline service providers, such as fixed-mobile convergence and voice over broadband services. Continue to enhance our technology leadership by adding new features and functionality to our solutions. Expand our global sales, marketing and distribution capabilities to support our growing global customer base. Grow our base of software applications and development partners to provide complementary products and services for next generation network solutions. Corporate Information We were incorporated in Delaware in October 2001 under the name Softswitch Enterprises, Inc., and we subsequently changed our name to NexVerse Networks, Inc. in December 2001. In December 2002, we received financing from ECI Telecom Ltd., among other investors, and purchased all of the outstanding shares of two subsidiaries of ECI Telecom Ltd. In connection with these transactions, we changed our name to Veraz Networks, Inc. Our principal executive offices are located at 926 Rock Avenue, Suite 20, San Jose, California, 95131. Our telephone number is (408) 750-9400. Our website address is www.veraznetworks.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website to be part of this prospectus or in deciding whether to purchase shares of our common stock. Veraz Networks, Veraz, ControlSwitch, I-Gate 4000 PRO, I-Gate 4000 EDGE, and DTX-600, and other trademarks or service marks of Veraz Networks appearing in this prospectus are the property of Veraz Networks. This prospectus also contains trade names, trademarks and service marks of other companies. Table of Contents THE OFFERING Common stock offered by us 6,750,000 shares Common stock offered by the selling stockholder, ECI Telecom Ltd. 2,250,000 shares Common stock to be outstanding after the offering 39,561,561 shares Use of proceeds from this offering We intend to use the net proceeds from this offering for capital expenditures in connection with our anticipated expansion and the balance added to working capital for general corporate purposes. A portion may also be used for potential acquisitions of businesses, products or technologies. We will not receive any proceeds from the sale of shares by the selling stockholder. See Use of Proceeds. Nasdaq Global Market symbol VRAZ The common stock outstanding after this offering is based on 13,829,370 shares of common stock outstanding as of January 15, 2007 plus 17,532,502 shares of common stock issuable upon the conversion of all outstanding shares of Series C convertible preferred stock and 1,449,689 shares of common stock issuable upon the conversion of all outstanding shares of Series D convertible preferred stock and redemption of all outstanding shares of Series A-1, A-2 and B-1 redeemable preferred stock upon the closing of this offering, and excludes: 7,779,083 shares of common stock that may be issued upon the exercise of options outstanding as of January 15, 2007 under our stock option and equity incentive plans, with a weighted average exercise price of $1.12 per share; 60,000 shares of common stock that may be issued upon the exercise of options outstanding as of January 15, 2007 and granted outside of our stock option and equity incentive plans, with a weighted average exercise price of $0.38 per share; 13,693 shares of common stock that will be issued upon the net exercise of a warrant outstanding as of January 15, 2007 to purchase 16,225 shares of Series C convertible preferred stock immediately prior to the closing of this offering and the subsequent conversion of such Series C convertible preferred stock into common stock, exercisable at an exercise price of $1.716 per share and based on an assumed initial public offering price of $11.00 per share; and an aggregate of 527,651 additional shares of our common stock reserved for future grants under our 2006 Equity Incentive Plan and our 2006 Employee Stock Purchase Plan, both of which were adopted by our board of directors in June 2006 and approved by our stockholders in March 2007, will become effective immediately upon the signing of the underwriting agreement for this offering and contain provisions that automatically increase their share reserves each year as more fully described in Management Employee Compensation and Defined Contribution Plans. Unless specifically stated otherwise, all information contained in this prospectus assumes: the conversion of all outstanding shares of Series C and Series D convertible preferred stock upon the closing of this offering; the redemption and subsequent cancellation of all our outstanding shares of Series A-1, A-2 and B-1 redeemable preferred stock for the par value of $0.001 per share, or an aggregate of $14,000; the amendment and restatement of our certificate of incorporation following the closing of this offering; and that the underwriters do not exercise their over-allotment option. Except as otherwise described in this prospectus, all references to number of shares and per share amounts have been retroactively adjusted to reflect a 2-for-1 (2:1) reverse split of our common stock, Series C convertible preferred stock and Series D convertible preferred stock effected in March 2007. Table of Contents SUMMARY CONSOLIDATED FINANCIAL DATA The following table summarizes our consolidated and pro forma financial and other operating data for the periods indicated. Our historical results are not necessarily indicative of future operating results. You should read the information set forth below in conjunction with Capitalization, Selected Consolidated Financial Data, Management s Discussion and Analysis of Financial Condition and Results of Operations and with our audited consolidated financial statements and their related notes included elsewhere in this prospectus. We derived the summary consolidated statements of operations data for each of the years in the three year period ended December 31, 2006 from our audited consolidated financial statements included elsewhere in this prospectus. The following table also sets forth summary unaudited pro forma and pro forma as adjusted consolidated financial data, which gives effect to the transactions described in the footnotes to the table. The unaudited pro forma and pro forma as adjusted consolidated financial data is presented for informational purposes only and does not purport to represent what our results of operations or financial position actually would have been had the transactions reflected occurred on the dates indicated or to project our financial position as of any future date or our results for any future period. The consolidated statements of operations data and the consolidated balance sheets data set forth herein include significant related party transactions as more fully described in our Consolidated Statements of Operations and in Note 3 to our Notes to Consolidated Financial Statements. Years Ended December 31, 2004 2005 2006 (In thousands, except per share data) Consolidated Statements of Operations Data: Revenues: IP Products $ 12,480 $ 24,474 $ 47,314 DCME Products 48,105 41,681 38,563 Services 8,522 10,089 13,769 Total revenues 69,107 76,244 99,646 Gross profit 39,073 43,098 53,685 Loss from operations (7,043 ) (15,029 ) (14,160 ) Net loss $ (5,825 ) $ (14,311 ) $ (13,917 ) Net loss allocable to common stockholder per share basic and diluted $ (0.50 ) $ (1.18 ) $ (1.04 ) Weighted average common shares used in computing per share amounts 11,683 12,119 13,396 Pro forma net loss allocable to common stockholders (unaudited)(1) $ (17,827 ) Pro forma net loss allocable to common stockholder per share basic and diluted (unaudited) $ (0.58 ) Weighted average common shares used in computing pro forma per share amounts (unaudited)(2) 30,916 Table of Contents (5) In December 2002, we issued and sold an aggregate of 17,482,502 shares of Series C convertible preferred stock at a purchase price per share of $1.716 to 12 purchasers, for an aggregate purchase price of approximately $30 million, net of amount allocated to the Series C convertible preferred stock issued to ECI Telecom, Ltd. in connection with our purchase of certain assets of ECI Telecom, Ltd. (6) In December 2002, we issued an aggregate of 9,000,000 shares of Series B-1 redeemable preferred stock and 6,834,720 shares of common stock to ECI Telecom, Ltd. in connection with our purchase of certain assets of ECI Telecom, Ltd. (7) In December 2002, we issued an aggregate of 5,000,048 shares of Series A-1 redeemable preferred stock and an aggregate of 4,540,240 shares of common stock to the holders of record of Series A preferred stock and Series B preferred stock in connection with the voluntary conversion of 12,974,738 shares of Series A preferred stock and 30,000,000 shares of Series B preferred stock. (8) In December 2002, we issued one share of Series A-2 redeemable preferred stock and a warrant to purchase 16,225 shares of Series C convertible preferred stock at an exercise price per share of $1.716 to Comdisco Ventures, Inc. for an aggregate exercise price of approximately $28,000. We claimed exemption from registration under the Securities Act for the sales and issuances of securities in the transactions described in paragraphs 1 and 2 above by virtue of Section 4(2) of the Securities Act as transactions not involving any public offering or under Rule 701 promulgated under the Securities Act, in that they were offered and sold either pursuant to written compensatory plans or pursuant to a written contract relating to compensation, as provided by Rule 701. We claimed exemption from registration under the Securities Act for the sales and issuances of securities in the transactions described in paragraphs 3, 4, 5, 6, 7 and 8 by virtue of Section 4(2) of the Securities Act and/or Regulation D promulgated thereunder as transactions not involving any public offering. We claim these exemptions on the basis that the purchasers in each case represented their intention to acquire the securities for investment only and not with view to or the distribution thereof and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationships with us, to information about us made without general solicitation or advertising and each purchaser was a sophisticated investor with access to all relevant information necessary to evaluate the investment and represented to us that the shares were being acquired for investment. Item 16. Exhibits and financial statement schedule (a) Exhibits Exhibit No. Description 1 .1 Form of Underwriting Agreement.(2) 2 .1 Share Exchange Agreement, dated October 30, 2002, by and among ECI Telecom Ltd., ECI Telecom NGTS Inc. and the Registrant.(2) 2 .2 Amendment No. 1 to the Share Exchange Agreement, dated December 31, 2002, by and among ECI Telecom Ltd., ECI Telecom NGTS Inc. and the Registrant.(2) 3 .1 Amended and Restated Certificate of Incorporation.(2) 3 .2 Certificate of Amendment to Amended and Restated Certificate of Incorporation.(1) 3 .3 Amended and Restated Certificate of Incorporation to be effective immediately following completion of this offering.(2) 3 .4 Bylaws.(2) 3 .5 Amended and Restated Bylaws to be effective immediately prior to completion of this offering.(2) 4 .1 Reference is made to Exhibits number 3.1, 3.2, 3.3, 3.4 and 3.5. 4 .2 Form of Specimen Stock Certificate.(1) Table of Contents As of December 31, 2006 Pro Pro Forma Actual Forma(3) As Adjusted(4) (In thousands) Consolidated Balance Sheet Data: Cash and cash equivalents $ 23,189 $ 23,175 $ 93,170 Working capital 7,314 7,300 77,295 Total assets 76,014 76,000 145,995 Redeemable and convertible preferred stock 64,541 Total stockholder s (deficit) equity (53,554 ) 10,973 80,968 (1) The pro forma net loss allocable to common stockholders reflects a deemed dividend of $3.9 million, or $3.924 per share, to the holders of 996,596 shares of Series D convertible preferred stock outstanding as of December 31, 2006. Such deemed dividend results from the contingent beneficial conversion feature of the Series D convertible preferred stock. As a result of the issuance of an additional 527,355 shares of Series D convertible preferred stock in January 2007, the total deemed dividend increased by $2.1 million to $6.0 million. Only the $3.9 million dividend is included in the pro forma net loss allocable to common stockholders. (2) The pro forma weighted average common shares outstanding reflects the conversion of all outstanding shares of Series C convertible preferred stock and of 996,596 shares of Series D convertible preferred stock (using the if-converted method) into common stock as though the conversion had occurred on the original date of issuance. (3) The pro forma consolidated balance sheet data as of December 31, 2006 gives effect to each of the following as if each had occurred at December 31, 2006. the conversion of all outstanding shares of our Series C convertible preferred stock into shares of our common stock, the conversion of 996,596 shares of our Series D convertible preferred stock into 948,031 shares of our common stock, and the redemption of all outstanding shares of our Series A-1 redeemable preferred stock, Series A-2 redeemable preferred stock and Series B-1 redeemable preferred stock for the par value of $0.001 per share, or an aggregate of fourteen thousand dollars. (4) The pro forma as adjusted consolidated balance sheet data as of December 31, 2006 reflects the issuance of 6,750,000 shares of common stock in this offering at an assumed initial public offering price of $11.00 per share (the midpoint of the estimated range shown on the cover page of this prospectus), and our receipt of the net proceeds from this offering of approximately $66.5 million, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, as if these events had occurred at December 31, 2006, the issuance of 527,355 shares of Series D convertible preferred stock in January 2007 at $6.54 per share for total cash proceeds of approximately $3.4 million, and the conversion of 527,355 shares of our Series D convertible preferred stock issued in January 2007, into 501,658 shares of our common stock. Table of Contents RISK FACTORS Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus, including our consolidated financial statements and the related notes, before investing in our common stock. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that affect us. If any of the following risks materialize, our business, financial condition or results of operations could be materially harmed. In that case, the trading price of our common stock could decline, and you could lose some or all of your investment. Risks Related to Our Business The demand for our solutions depends in large part on continued capital spending in the telecommunications equipment industry. A decline in demand, or a decrease or delay in capital spending by service providers, could have a material adverse effect on our results of operations. Capital spending in the telecommunications equipment industry has in the past, and may in the future, fluctuate significantly based on numerous factors, including: capital spending levels of service providers; competition among service providers; pricing pressures in the telecommunications equipment market; end user demand for new services; service providers emphasis on generating revenues from traditional infrastructure instead of migrating to emerging networks and technologies; lack of or evolving industry standards; consolidation in the telecommunications industry; changes in the regulation of communications services; and general global economic conditions. We cannot assure you of the rate, or extent to which, the telecommunications equipment industry will grow, if at all. Demand for our solutions and our IP products in particular will depend on the magnitude and timing of capital spending by service providers as they extend and migrate their networks. Furthermore, industry growth rates may not be as forecast, resulting in spending on product development well ahead of market requirements. The telecommunications equipment industry from time to time has experienced and may again experience a pronounced downturn. To respond to a downturn, many service providers may be required to slow their capital expenditures, cancel or delay new developments, reduce their workforces and inventories and take a cautious approach to acquiring new equipment and technologies, which could have a negative impact on our business. A downturn in the telecommunications industry may cause our operating results to fluctuate from period to period, which also may increase the volatility of the price of our common stock and harm our business. Our success depends in large part on continued migration to an IP network architecture for interactive communications. If the migration to IP networks does not occur or if it occurs more slowly than we expect, our operating results would be harmed. Our IP products are used by service providers to deliver premium interactive communications over IP networks. Our success depends on the continued migration of service providers networks to a single IP network architecture. The migration of voice traffic from the public switched telephone network, or PSTN, to IP networks is in its early stages, and the continued migration to IP networks depends on a number of factors outside of our control. Among other things, existing networks include switches and other equipment that may have remaining useful lives of twenty or more years and therefore may continue to operate reliably Table of Contents for a lengthy period of time. Other factors that may delay or speed the migration to IP networks include service providers concerns regarding initial capital outlay requirements, available capacity on legacy networks, competitive and regulatory issues, and the implementation of an enhanced services business model. As a result, service providers may defer investing in products, such as ours, that are designed to migrate interactive communications to IP networks. If the migration to IP networks does not occur for these or other reasons, or if it occurs more slowly than we expect, our operating results will be harmed. Our revenue and operating results may be adversely impacted if the market for IP products does not develop as we expect or if sales of our IP products and other products do not make up for expected declines in revenue from our DCME products. Our DCME products incorporate mature technologies that we expect to be in less demand by our customers in the future. While we are actively pursuing new customers for our DCME products and seeking to increase sales of our additional product offerings to these customers, including our IP products, we believe that there are fewer opportunities for new DCME sales, and we expect DCME sales to continue to decrease for the foreseeable future. If the decrease in DCME revenues occurs more rapidly than we anticipate and/or the sales of our other products, including our IP products, do not make up for the decline in revenues, our business and results of operations will be harmed. Further, we believe that in some future periods, including the quarter ending March 31, 2007, total revenues will likely be lower than recent periods as DCME revenues decrease while our IP revenues fluctuate. Our accountants have identified and reported to us material weaknesses for the years ended December 31, 2003, 2004 and 2005, relating to our internal controls over financial reporting. If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which could adversely affect our operating results, our ability to operate our business and our stock price. In connection with the audit of our consolidated financial statements for the years ended December 31, 2003, 2004 and 2005, our independent registered public accounting firm identified material weaknesses in our internal controls over financial reporting related to closing processes, adequate maintenance of books and records and our revenue recognition processes. Our audit for 2005 and 2006 resulted in the discovery of the following significant deficiencies, as established in the Public Company Accounting Oversight Board, or PCAOB, Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements: For 2005, we had significant deficiencies with respect to insufficient control over cash disbursements and deficiencies in internal control over financial reporting related to accounting for derivative financial instruments resulting in errors in accounting for changes in the estimated fair value of certain derivative financial instruments. For 2006, we had significant deficiencies with respect to inconsistency in the effectiveness of management s review of the deferred costs and inconsistency in effectiveness of management s review over revenue arrangements. For the years ended December 31, 2003, 2004 and 2005, the deficiencies resulted in adjustments to revenues of a net decrease of $0.7 million, a net increase of $0.5 million and a net decrease of $1.6 million, respectively. During the same periods, the deficiencies resulted in an increase in net loss of $0.6 million, a decrease of $0.8 million and an increase of $2.1 million, respectively. For the year ended December 31, 2006, the deficiencies resulted in adjustments to revenues of a net increase of $0.1 million, a net increase in cost of goods sold of $0.5 million and an increase in net loss of $0.4 million. Our independent registered public accounting firm was not, however, engaged to audit, nor has it audited, the effectiveness of our internal control over financial reporting. Accordingly, our independent registered public accounting firm has not rendered an opinion on our internal control over financial reporting. Similarly, we have not performed an evaluation of internal controls over financial reporting, as we are not currently required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. Additional material weaknesses, significant deficiencies and other control deficiencies may have existed or may in the future be identified when such additional evaluations are performed. Table of Contents Measures that have already been taken, and measures that will be taken in the future, by us to remediate the material weaknesses and significant deficiencies are grouped into the following categories: (a) hiring of additional, experienced personnel, (b) improving training, and (c) implementing appropriate internal control processes. Personnel: From April 2005 through December 2006, we hired several experienced employees in key financial management positions, including our Chief Financial Officer, Worldwide Financial Controller, and Director of Financial Planning and Analysis. In addition, we created new financial management and administrative positions, and hired experienced and qualified employees for such new positions as follows: Director of Accounting, Director of Financial Reporting and Compliance, General Counsel, General Accounting Manager and Revenue Manager. We plan to continue to evaluate our personnel needs and hire experienced and qualified employees as appropriate. Training: Since April 2005, the majority of our finance and administration staff have participated in one or more continuing professional education courses, industry roundtables or other formal and informal training courses. In addition, we have conducted in-house training (one-on-one, and in group settings) concerning various matters (i.e. the revenue recognition process, closing process, etc.) for the finance, administration and sales staff. The objective of this training is to strengthen the general proficiency and specific knowledge of our employees, as well as improve internal controls over financial reporting. We plan to continue to conduct such training in the future. Internal Process: We have steadily made improvements in our internal processes. The objective of such internal process improvements has been to remediate the material weaknesses and significant deficiencies, and achieve an overall improvement in internal controls over financial reporting. Such process improvements have included, but are not limited to, the establishment of a centralized electronic database of key contracts, accounting records and related documentation, increased uniformity and consistency with respect to customer contracts, accounting records and related documentation, and increased level of management review of key processes, particularly the revenue cycle and sales process. We plan to continue to evaluate our internal controls and make improvements as appropriate. Due to these measures that have already been taken, and measures that will be taken in the future, to remediate the material weaknesses and significant deficiencies, our finance and administrative costs have increased from $5.8 million in 2005 to $8.8 million in 2006, an increase of $3.0 million. While it is difficult to differentiate the increase in costs that are attributable to remediation, as compared to an ordinary increase in costs resulting from the growth in the overall business, we believe that the majority of the increase is directly or indirectly attributable to measures taken to remediate the material weaknesses and significant deficiencies. Further, we believe such costs may materially increase in the future. As a result, we expect to incur significant additional expenses which are expected to negatively impact our financial performance. This remediation process also will result in a diversion of management s time and attention. We cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations and may not be able to ensure that the process is effective or that the internal controls are or will be effective in a timely manner. Ensuring that we have adequate internal financial and accounting controls and procedures in place to help ensure that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be evaluated frequently. Although we have taken measures to remediate the material weaknesses as well as the other significant deficiencies and control deficiencies, we cannot assure you that we have identified all, or that we will not in the future have additional, material weaknesses, significant deficiencies and control deficiencies. Our independent registered public accounting firm has not evaluated any of the measures we have taken, or that we propose to take, to address the material weakness and the significant deficiencies and control deficiencies discussed above. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in implementation, could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect management s assessment of our disclosure controls and procedures, required with the filing of our quarterly and annual reports after our initial public offering, and the results of periodic management evaluations and Table of Contents annual auditor attestation reports regarding the effectiveness of our internal controls over financial reporting that will be required when the SEC s rules under Section 404 of the Sarbanes-Oxley Act for 2002 expected to be applicable to us beginning with our Annual Report on Form 10-K for the year ending December 31, 2008, to be filed in early 2009. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price. We have not been profitable and our losses could continue. We have experienced significant losses in the past and have never been profitable. For the fiscal years ended December 31, 2004, 2005 and 2006, we recorded net losses of approximately, $5.8 million, $14.3 and $13.9 million, respectively. As of December 31, 2006, our accumulated deficit was $59.9 million. We have never generated sufficient cash to fund our operations and can give no assurance that our losses will not continue. Our limited operating history makes it difficult to evaluate our current business and future prospects, and may increase the risk of your investment. Our company was formed in October 2001, and much of our growth has occurred since December 2002. Our limited operating history may make it difficult to evaluate our current business and our future prospects. We have encountered and will continue to encounter significant risks related to our growth and substantial risks related to the rapidly changing telecommunications industry. If we are unable to address these and other risks successfully, our business, financial condition and results of operations likely would be adversely affected. We face intense competition from the leading telecommunications networking companies in the world as well as from emerging companies. If we are unable to compete effectively, we might not be able to achieve sufficient market penetration, revenue growth or profitability. Competition in the market for our products and especially our IP products is intense. This market has historically been dominated by established telephony equipment providers, such as Alcatel-Lucent, Ericsson LM Telephone Co., Nortel Networks Corp. and Siemens Industries Ltd., all of which are our direct competitors. We also face competition from other telecommunications and networking companies, including Cisco Systems, Inc., Sonus Networks, Inc., Tekelec and Huawei, some of which have entered our market by acquiring companies that design competing products. Because the market for our products is rapidly evolving, additional competitors with significant financial resources may enter these markets and further intensify competition. Many of our current and potential competitors have significantly greater selling and marketing, technical, manufacturing, financial and other resources available to them, allowing them to offer a more diversified bundle of products and services. In some cases, our competitors have undercut the pricing of our products or provided more favorable financing terms, which has made us uncompetitive or forced us to reduce our average selling prices, negatively impacting our margins. Further, some of our competitors sell significant amounts of other products to our current and prospective customers. In addition, some potential customers when selecting equipment vendors to provide fundamental infrastructure products prefer to purchase from larger, established vendors. Our competitors broad product portfolios, coupled with already existing relationships, may cause our customers or potential customers to buy our competitors products or harm our ability to attract new customers. To compete effectively, we must deliver innovative products that: provide extremely high reliability, compression rates and voice quality; scale and deploy easily and efficiently; interoperate with existing network designs and other vendors equipment; Table of Contents Exhibit No. Description 10 .1 Warrant to Purchase Series C Preferred Stock, dated as of December 31, 2002, issued by the Registrant to Comdisco Ventures, Inc.(2) 10 .2 U.S. Separation and Asset Purchase Agreement, dated as of December 31, 2002, by and between ECI Telecom-NGTS Inc. and Veraz Networks International, Inc.(2) 10 .3 Separation and Assets Purchase Agreement, dated December 31, 2002, by and among ECI Telecom Ltd., ECI Telecom NGTS, Ltd. and Veraz Networks Ltd.(2) 10 .4 DCME Master Manufacturing and Distribution Agreement, dated as of December 31, 2002, by and among ECI Telecom Ltd, Veraz Networks Ltd. and the Registrant.(2) 10 .5 Trademark License Agreement, dated as of December 31, 2002, by and between the Registrant and ECI Telecom, Ltd.(2) 10 .6 Intellectual Property License Agreement, made as of October 2002, by and among ECI Telecom Ltd., ECI Telecom NGTS Ltd. and Veraz Networks, Ltd.(2) 10 .7 Intellectual Property Assignment Agreement, dated December 31, 2002, by and among ECI Telecom Ltd., ECI Telecom NGTS Ltd. and Veraz Networks, Ltd.(2) 10 .8 License Agreement, dated as of October 2002, by and between ECI Telecom Ltd. and Veraz Networks Ltd.(2) 10 .9 Assignment and Assumption Agreement, dated as of December 31, 2002, by and among ECI Telecom Ltd., ECI Telecom NGTS Ltd. and the Veraz Networks, Ltd.(2) 10 .10 Assignment and Assumption Agreement, dated as of December 31, 2002, by and between ECI Telecom NGTS Inc. and the Veraz Networks International, Inc.(2) 10 .11 Series C Preferred Stock Purchase Agreement, dated October 30, 2002, by and among the Registrant and the Purchasers listed on Exhibit A thereto.(2) 10 .12 Amended and Restated Investor Rights Agreement, dated as of December 19, 2006, by and among the Registrant and the Investors listed on Exhibit A thereto.(2) 10 .13 Amended and Restated Voting Agreement, dated December 19, 2006, by and among the Registrant and the stockholders listed on Exhibit A and Exhibit B thereto.(2) 10 .14 2001 Equity Incentive Plan and forms of related agreements.(2) 10 .15 2003 Israeli Share Option Plan.(2) 10 .16 2006 Equity Incentive Plan and forms of related agreements.(1) 10 .17 2006 Employee Stock Purchase Plan.(1) 10 .18 Offer of Employment with the Registrant, dated as of November 17, 2004, by and between the Registrant and Doug Sabella.(2) 10 .19 Amendment to Offer of Employment with the Registrant, dated November 17, 2004, made by and between the Registrant and Doug Sabella, as of April 21, 2006.(2) 10 .20 Employment Agreement, dated as of November 20, 2001, by and between the Registrant and Amit Chawla and Personnel Action Notice, dated June 30, 2005.(2) 10 .21 Offer of Employment with the Registrant, dated April 13, 2005, by and between the Registrant and Al Wood.(2) 10 .22 Amendment to Offer of Employment with the Registrant, dated April 13, 2005, made by and between the Registrant and Al Wood, as of April 21, 2006.(2) 10 .23 Letter of Employment Agreement, dated January 1, 2003, by and between Veraz Networks, Ltd. and Israel Zohar.(2) 10 .24 Sublease Agreement, dated August 31, 2004, by and between the Registrant and ECI Telecom, Inc.(2) 10 .25 Amendment to Sublease Agreement, dated January 31, 2006, by and between the Registrant and ECI Telecom, Inc.(2) Table of Contents EXHIBIT INDEX Exhibit No. Description 1 .1 Form of Underwriting Agreement.(2) 2 .1 Share Exchange Agreement, dated October 30, 2002, by and among ECI Telecom Ltd., ECI Telecom NGTS Inc. and the Registrant.(2) 2 .2 Amendment No. 1 to the Share Exchange Agreement, dated December 31, 2002, by and among ECI Telecom Ltd., ECI Telecom NGTS Inc. and the Registrant.(2) 3 .1 Amended and Restated Certificate of Incorporation.(2) 3 .2 Certificate of Amendment to Amended and Restated Certificate of Incorporation.(1) 3 .3 Amended and Restated Certificate of Incorporation to be effective immediately following completion of this offering.(2) 3 .4 Bylaws.(2) 3 .5 Amended and Restated Bylaws to be effective immediately prior to completion of this offering.(2) 4 .1 Reference is made to Exhibits number 3.1, 3.2, 3.3, 3.4 and 3.5 4 .2 Form of Specimen Stock Certificate.(1) 5 .1 Opinion of Cooley Godward Kronish LLP.(2) 10 .1 Warrant to Purchase Series C Preferred Stock, dated as of December 31, 2002, issued by the Registrant to Comdisco Ventures, Inc.(2) 10 .2 U.S. Separation and Asset Purchase Agreement, dated as of December 31, 2002, by and between ECI Telecom-NGTS Inc. and Veraz Networks International, Inc.(2) 10 .3 Separation and Assets Purchase Agreement, dated December 31, 2002, by and among ECI Telecom Ltd., ECI Telecom NGTS, Ltd. and Veraz Networks Ltd.(2) 10 .4 DCME Master Manufacturing and Distribution Agreement, dated as of December 31, 2002, by and among ECI Telecom Ltd, Veraz Networks Ltd. and the Registrant.(2) 10 .5 Trademark License Agreement, dated as of December 31, 2002, by and between the Registrant and ECI Telecom, Ltd.(2) 10 .6 Intellectual Property License Agreement, made as of October 2002, by and among ECI Telecom Ltd., ECI Telecom NGTS Ltd. and Veraz Networks, Ltd.(2) 10 .7 Intellectual Property Assignment Agreement, dated December 31, 2002, by and among ECI Telecom Ltd., ECI Telecom NGTS Ltd. and Veraz Networks, Ltd.(2) 10 .8 License Agreement, dated as of October 2002, by and between ECI Telecom Ltd. and Veraz Networks Ltd.(2) 10 .9 Assignment and Assumption Agreement, dated as of December 31, 2002, by and among ECI Telecom Ltd., ECI Telecom NGTS Ltd. and the Veraz Networks, Ltd.(2) 10 .10 Assignment and Assumption Agreement, dated as of December 31, 2002, by and between ECI Telecom NGTS Inc. and the Veraz Networks International, Inc.(2) 10 .11 Series C Preferred Stock Purchase Agreement, dated October 30, 2002, by and among the Registrant and the Purchasers listed on Exhibit A thereto.(2) 10 .12 Amended and Restated Investor Rights Agreement, dated as of December 19, 2006, by and among the Registrant and the Investors listed on Exhibit A thereto.(2) 10 .13 Amended and Restated Voting Agreement, dated December 19, 2006, by and among the Registrant and the stockholders listed on Exhibit A and Exhibit B thereto.(2) 10 .14 2001 Equity Incentive Plan and forms of related agreements.(2) 10 .15 2003 Israeli Share Option Plan.(2) 10 .16 2006 Equity Incentive Plan and forms of related agreements.(1) 10 .17 2006 Employee Stock Purchase Plan.(1) 10 .18 Offer of Employment with the Registrant, dated as of November 17, 2004, by and between the Registrant and Doug Sabella.(2) 10 .19 Amendment to Offer of Employment with the Registrant, dated November 17, 2004, made by and between the Registrant and Doug Sabella, as of April 21, 2006.(2) Table of Contents support existing and emerging industry, national and international standards; provide effective network management; are accompanied by comprehensive customer support and professional services; provide a cost-effective and space efficient solution for service providers; and offer a broad array of services. If we are unable to compete successfully against our current and future competitors, we could experience price reductions, order cancellations, loss of customers and revenues and reduced gross profit margins, each of which would adversely impact our business. Our business is dependent upon our relationship with ECI Telecom Ltd. and certain of its subsidiaries and affiliates, or ECI, and ECI is our largest stockholder and a significant technology and commercial partner of ours. If ECI s business is adversely affected or if our relationship with ECI is adversely affected for any reason, our business could be harmed and our results of operations would likely be negatively affected. We have strong historical and commercial ties to ECI. We acquired the technology and rights to our I-Gate 4000 family of products pursuant to our 2002 acquisition of two of ECI s wholly-owned subsidiaries. ECI and an affiliate entity assigned to us certain intellectual property rights with respect to VoIP and granted us an irrevocable license under certain patents and intellectual property. ECI invested $10 million in our Series C convertible preferred stock and continues to be our largest stockholder. Given the backdrop of our historical relationship, our agreements with ECI were entered into in the context of affiliated parties and were negotiated in the overall context of the 2002 share acquisition. As a result, the terms of our agreements with ECI may be more or less favorable to us than if they had been negotiated with unaffiliated third parties. Conflicts of interest may arise between ECI and us with respect to any number of matters, including indemnification obligations we have to each other, labor, tax, employee benefit and other matters arising from the 2002 share acquisition transaction, intellectual property matters and business opportunities that are attractive to ECI and us. Either we or ECI may make strategic choices that are not in the best interest of the other party. For example, other than restrictions with respect to ECI s exploitation of DCME products, nothing prohibits ECI from competing with us in other matters or offering VoIP products which compete with ours. We may not be able to resolve any potential conflicts that may arise between ECI and us, and even if we are able to do so, the resolution may be less favorable than if we were dealing with an unrelated third party. ECI also owns the technology underlying our DCME product lines. Pursuant to the DCME Master Manufacturing and Distribution Agreement, or the DCME Agreement, we have secured the right to act as exclusive worldwide distributor of ECI s DCME line of products. Under the DCME Agreement, ECI provides certain supply, service and warranty obligations and manufactures or subcontracts the manufacture of all DCME equipment sold by us. The DCME Agreement may only be terminated by ECI in the event we project DCME revenues of less than one million dollars in a calendar year, we breach a material provision of the DCME Agreement and fail to cure such breach within 30 days or we become insolvent. Upon the occurrence of one of these events and the election by ECI to terminate the DCME Agreement, ECI would be under no obligation to continue to contract with us. If the value of the shares held by ECI declines, either by disposition of the shares or a decline in our stock price, ECI may be less likely to enter into agreements on reasonable terms or at all. Accordingly, in the event of the occurrence of one of these termination events, we cannot assure you that the DCME Agreement will be extended or renewed at all or on reasonable commercial terms. In addition, our relationship with ECI could be adversely affected by divestment of its shares of our common stock or by declines in our stock price. We do not currently have an independent ability to produce DCME products and have not entered into arrangements with any third party that would enable us to obtain DCME or similar products in the event that ECI ceases to provide us with DCME products. Should ECI, or a successor entity to ECI, become unable or unwilling to fulfill its obligations under the DCME Agreement for any reason or if the DCME Table of Contents Agreement is terminated, we will need to take remedial measures to manufacture DCME or similar products, which could be expensive, and if such efforts fail, our business would be materially harmed. ECI beneficially owns a significant percentage of our common stock, which will allow ECI to significantly influence us and matters requiring stockholder approval and could discourage potential acquisitions of our company. Following this offering and assuming no exercise of the underwriters over-allotment option, ECI will own approximately 28% of our outstanding common stock. As a result of its ownership in us, ECI is able to exert significant influence over actions requiring the approval of our stockholders, including change of control transactions and any amendments to our certificate of incorporation. In addition, Giora Bitan, Executive Vice President and Chief Financial Officer of ECI and Dror Nahumi, Executive Vice President and Chief Strategy Officer of ECI, are members of our board of directors. Because of the nature of our business relationship with ECI, the size and nature of ECI s ownership position in us and the membership of Messrs. Bitan and Nahumi on our board of directors, the interests of ECI may be different than those of our other stockholders. In addition, the significant ownership percentage of ECI could have the effect of delaying or preventing a change in control of our company or otherwise discouraging a potential acquirer from obtaining control of our company. The largest customers in the telecommunications industry have substantial negotiating leverage, which may require that we agree to terms and conditions that are less advantageous to us than the terms and conditions of our existing customer relationships or risk limiting our ability to sell our products to these large service providers, thereby harming our operating results. Large telecommunications service providers have substantial purchasing power and leverage negotiating contractual terms and conditions relating to the sale of our products to them. As we seek to sell more products to these large telecommunications providers, we may be required to agree to such terms and conditions in order to complete such sales, which may result in lower margins, affect the timing of the recognition of the revenue derived from these sales and the amount of deferred revenues, each of which may have an adverse effect on our business and financial condition. In addition, our future success depends in part on our ability to sell our products to large service providers operating complex networks that serve large numbers of subscribers and transport high volumes of traffic. The communications industry historically has been dominated by a relatively small number of service providers. While deregulation and other market forces have led to an increasing number of service providers in recent years, large service providers continue to constitute a significant portion of the market for communications equipment. If we fail to sell additional IP products to our large customers or to expand our customer base to include additional customers that deploy our products in large-scale networks serving significant numbers of subscribers, our revenue growth will be limited. Consolidation or downturns in the telecommunications industry may affect demand for our products and the pricing of our products which could limit our growth and may harm our business. The telecommunications industry, which includes all of our customers, has experienced increased consolidation in recent years, and we expect this trend to continue. Consolidation among our customers and prospective customers may cause delays or reductions in capital expenditure plans and/or increased competitive pricing pressures as the number of available customers declines and their relative purchasing power increases in relation to suppliers. The occurrence of any of these factors, separately or in combination, may lead to decreased sales or slower than expected growth in revenues and could harm our business and operations. The communications industry is cyclical and reactive to general economic conditions. In the recent past, worldwide economic downturns, pricing pressures and deregulation have led to consolidations and reorganizations. These downturns, pricing pressures and restructurings have been causing delays and reductions in capital and operating expenditures by many service providers. These delays and reductions, in Table of Contents turn, have been reducing demand for communications products like ours. A continuation or subsequent recurrence of these industry patterns, as well as general domestic and foreign economic conditions and other factors that reduce spending by companies in the communications industry, could harm our operating results in the future. If we fail to anticipate and meet specific customer requirements or if our products fail to interoperate with our customers existing networks or with existing and emerging industry, national and international standards, we may not be able to retain our current customers or attract new customers. We must effectively anticipate, and adapt our business, products and services in a timely manner to meet customer requirements. We must also meet existing and emerging industry, national and international standards in order to meet changing customer demands. Prospective customers may require product features and capabilities that are not included in our current product offerings. The introduction of new or enhanced products also requires that we carefully manage the transition from our older products in order to minimize disruption in customer ordering patterns and ensure that adequate supplies of our new products can be delivered to meet anticipated customer demand. If we fail to develop products and offer services that satisfy customer requirements, or if we fail to effectively manage the transition from our older products to our new or enhanced products, our ability to create or increase demand for our products would be seriously harmed and we may lose current and prospective customers, thereby harming our business. Many of our customers will require that our products be designed to interface with their existing networks or with existing or emerging industry, national and international standards, each of which may have different and unique specifications. Issues caused by a failure to achieve homologation to certain standards or an unanticipated lack of interoperability between our products and these existing networks may result in significant warranty, support and repair costs, divert the attention of our engineering personnel from our hardware and software development efforts and cause significant customer relations problems. If our products do not interoperate with our customers respective networks or applicable standards, installations could be delayed or orders for our products could be cancelled, which would seriously harm our gross margins and result in the loss of revenues and/or customers. We expect that a majority of the revenues generated from our products, especially our IP products, will be generated from a limited number of customers. If we lose customers or are unable to grow and diversify our customer base, our revenues may fluctuate and our growth likely would be limited. To date, we have sold our IP products to over 55 customers. We expect that for the foreseeable future, the majority of the revenues from our IP products will be generated from a limited number of customers in sales transactions that are unpredictable in many key respects, including, but not limited to, the timing of when these transactions close relative to when the related revenue will be recognized, when cash will be received, the mix of hardware and software, the gross margins related to these transactions and the total amount of payments to be received. We do not expect to have regular, recurring sales to a limited number of customers. Due to the limited number of our customers and the irregular sales cycle in the industry, if we lose customers and/or fail to grow and diversify our customer base, or if they do not purchase our IP products at levels or at the times we anticipate, our ability to maintain and grow our revenues will be adversely affected. The growth of our customer base could also be adversely affected by: consolidation in the telecommunications industry affecting our customers; unwillingness of customers to implement our new products or renew contracts as they expire; potential customer concerns about our status as an emerging telecommunications equipment vendor; delays or difficulties that we may experience in the development, introduction and/or delivery of products or product enhancements; deterioration in the general financial condition of our customers; new product introductions by our competitors; Table of Contents geopolitical risks and uncertainties in countries where our customers or our own facilities are located; or failure of our products to perform as expected. Our quarterly operating results have fluctuated significantly in the past and may continue to fluctuate in the future, which could lead to volatility in the price of our common stock. Our quarterly revenues and operating results have fluctuated significantly in the past and they may continue to fluctuate in the future, due to a number of factors, many of which are outside of our control and any of which may cause our stock price to fluctuate. From our experience, customer purchases of telecommunications equipment have been unpredictable and irregular batch sales as customers build out their networks, rather than regular, recurring sales. The primary factors that may affect our quarterly revenues and results include the following: fluctuation in demand for our products and the timing and size of customer orders; the length and variability of the sales cycle for our products; new product introductions and enhancements by our competitors and us; our ability to develop, introduce and ship new products and product enhancements that meet customer requirements in a timely manner; the mix of product configurations sold; our ability to obtain sufficient supplies of sole or limited source components; our ability to attain and maintain production volumes and quality levels for our products; costs related to acquisitions of complementary products, technologies or businesses; changes in our pricing policies, the pricing policies of our competitors and the prices of the components of our products; the timing of revenue recognition and amount of deferred revenues; difficulties or delays in deployment of customer IP networks that would delay anticipated customer purchases of additional products and services; general economic conditions, as well as those specific to the telecommunications, networking and related industries; consolidation within the telecommunications industry, including acquisitions of or by our customers; and the failure of certain of our customers to successfully and timely reorganize their operations, including emerging from bankruptcy. In addition, as a result of our accounting policies, we may be unable to recognize all of the revenue associated with certain customer contracts in the same period as the costs associated with those contracts are expensed, which could cause our quarterly gross margins to fluctuate significantly. Further, our accounting policies may require that revenue related to certain customer contracts be delayed for periods of a year or more. This delay may cause spikes in our revenue in quarters when it is recognized and may result in deferred revenue to revenue conversion taking longer than anticipated. A significant portion of our operating expenses are fixed in the short-term. If revenues for a particular quarter are below expectations, we may not be able to reduce operating expenses proportionally for the quarter. Therefore, any such revenue shortfall would likely have a direct negative effect on our operating results for that quarter. Table of Contents We believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. For example, although our Net Loss during the quarter ended December 31, 2006 was substantially lower than previous quarters, we expect that our Net Loss for the period ending March 31, 2007 will be significantly higher. We believe it likely that in some future quarters, our operating results may be below the expectations of public market analysts and investors, which may adversely affect our stock price. If we do not respond rapidly to technological changes or to changes in industry standards, our products could become obsolete. The market for IP infrastructure products and services is characterized by rapid technological change, frequent new product introductions and evolving standards. We may be unable to respond quickly or effectively to these developments. We may experience difficulties with software development, hardware design, manufacturing, marketing or certification that could delay or prevent our development, introduction or marketing of new products and enhancements. The introduction of new products by our competitors, the market acceptance of products based on new or alternative technologies or the emergence of new industry standards could render our existing or future products obsolete. If the standards adopted are different from those that we have chosen to support, market acceptance of our products may be significantly reduced or delayed. If our products become technologically obsolete, we may be unable to sell our products in the marketplace and generate revenues, and our business could be adversely affected. Because our products are sophisticated and designed to be deployed in complex environments and in multiple locations, they may have errors or defects that we find only after full deployment. If these errors lead to customer dissatisfaction or we are unable to establish and maintain a support infrastructure and required support levels to service these complex environments, our business may be seriously harmed. Our products are sophisticated and are designed to be deployed in large and complex networks. Because of the nature of our products, they can only be fully tested when substantially deployed in very large networks with high volumes of traffic. Some of our customers have only recently begun to commercially deploy our products or deploy our products in larger configurations and they may discover errors or defects in the software or hardware, or the products may not operate as expected or our products may not be able to function in the larger configurations required by certain customers. If we are unable to fix errors or other performance problems that may be identified after full deployment of our products, we could experience: cancellation of orders or other losses of, or delays in, revenues; loss of customers and market share; harm to our reputation; a failure to attract new customers or achieve market acceptance for our products; increased service, support and warranty costs and a diversion of development resources; increased insurance costs and losses to our business and service provider customers; and costly and time-consuming legal actions by our customers. If we experience warranty failure that indicates either manufacturing or design deficiencies, we may be required to recall units in the field and/or stop producing and shipping such products until the deficiency is identified and corrected. In the event of such warranty failures, our business could be adversely affected resulting in reduced revenue, increased costs and decreased customer satisfaction. Because customers often delay deployment of a full system until they have tested the products and any defects have been corrected, we expect these revisions may cause delays in orders by our customers for our systems. Because our strategy is to introduce more complex products in the future, this risk will intensify over time. Service provider customers have discovered errors in our products. If the costs of remediating problems experienced by our customers exceed our expected expenses, which historically have not been significant, these costs may adversely affect our operating results. Table of Contents In addition, because our products are deployed in large and complex networks around the world. Our customers expect us to establish a support infrastructure and maintain demanding support standards to ensure that their networks maintain high levels of availability and performance. To support the continued growth of our business, our support organization will need to provide service and support at a high level throughout the world. This will include hiring and training customer support engineers both at our primary corporate locations as well as our smaller offices in new geographies such as Central and South America and Russia. If we are unable to provide the expected level of support and service to our customers, we could experience: loss of customers and market share; a failure to attract new customers in new geographies; increased service, support and warranty costs and a diversion of development resources; and network performance penalties. We intend to expand our operations and increase our expenditures in an effort to grow our business. If we are not able to manage this growth and expansion, or if our business does not grow as we expect, our operating results may suffer. We significantly expanded our operations in 2005 and 2006. For example, during the period from December 31, 2004 to December 31, 2006, we increased the number of our employees and full-time contractors by 40%, from 340 to 476, and we opened new offices in Singapore, France and Brazil. In addition, our total operating expenses net of grants received from OCS for the year ended December 31, 2006 increased by 17% as compared to the fiscal year ended December 31, 2005, and for the year ended December 31, 2005 were 26% higher than for the year ended December 31, 2004. We anticipate that further expansion of our infrastructure and headcount will be required to achieve planned expansion of our product offerings, projected increases in our customer base and anticipated growth in the number of product deployments. Our rapid growth has placed, and will continue to place, a significant strain on our administrative and operational infrastructure. Our ability to manage our operations and growth will require us to continue to refine our operational, financial and management controls, human resource policies, and reporting systems and procedures. Further, we intend to grow our business by entering new markets, developing new product and service offerings and pursuing new customers. If we fail to timely or efficiently expand operational and financial systems in connection with such growth or if we fail to implement or maintain effective internal controls and procedures, resulting operating inefficiencies could increase costs and expenses more than we planned and might cause us to lose the ability to take advantage of market opportunities, enhance existing products, develop new products, satisfy customer requirements, respond to competitive pressures or otherwise execute our business plan. Additionally, if we increase our operating expenses in anticipation of the growth of our business and such growth does not meet our expectations, our financial results likely would be negatively impacted. The long and variable sales and deployment cycles for our products may cause our operating results to vary materially, which could result in a significant unexpected revenue shortfall in any given quarter. Our products have lengthy sales cycles, which typically extend from six to twelve months and may take up to two years. A customer s decision to purchase our products often involves a significant commitment of the customer s resources and a product evaluation and qualification process that can vary significantly in length. The length of our sales cycles also varies depending on the type of customer to which we are selling, the product being sold and the type of network in which our product will be utilized. We may incur substantial sales and marketing expenses and expend significant management effort during this time, regardless of whether we make a sale. Even after making the decision to purchase our products, our customers may deploy our products slowly. Timing of deployment can vary widely among customers. The length of a customer s deployment period will impact our ability to recognize revenue related to such customer s purchase and may also Table of Contents directly affect the timing of any subsequent purchase of additional products by that customer. As a result of these lengthy and uncertain sales and deployment cycles for our products, it is difficult for us to predict the quarter in which our customers may purchase additional products or features from us, and our operating results may vary significantly from quarter to quarter, which may negatively affect our operating results for any given quarter. We rely on indirect channel partners for a significant portion of our revenue. Our failure to effectively develop and manage these third party distributors, systems integrators and resellers specifically and our indirect sales channel generally, and disruptions to the processes and procedures that support our indirect sales channels could adversely affect our ability to generate revenues from the sale of our products. We rely on third party distributors, systems integrators and resellers for a significant portion of our revenue. Our revenues depend in large part on the performance of these indirect channel partners. Although many aspects of our partner relationships are contractual in nature, our arrangements with our indirect channel partners are not exclusive. Accordingly, important aspects of these relationships depend on the continued cooperation between the parties. In particular, we have appointed ECI as an agent for selling our IP and DCME products in Russia and an affiliate of ECI provides services for us in Russia. During the fiscal years ended December 31, 2005 and 2006, $20.4 million and $28.7 million, respectively, of our revenues were derived from sales by ECI. The agreement governing this arrangement may be terminated by either party with three months written notice. In the event ECI, a successor entity to ECI or this affiliate entity of ECI is unable to continue to sell our products for any reason, elects not to sell our products or elects to terminate this agreement, then our business and results of operations would likely be materially harmed. Many factors out of our control could interfere with our ability to market, license, implement or support our products with any of our partners, which in turn could harm our business. These factors include, but are not limited to, a change in the business strategy of one of our partners, the introduction of competitive product offerings by other companies that are sold through one of our partners, potential contract defaults by one of our partners, or changes in ownership or management of one of our distribution partners. Some of our competitors may have stronger relationships with our distribution partners than we do, and we have limited control, if any, as to whether those partners implement our products rather than our competitors products or whether they devote resources to market and support our competitors products rather than our offerings. In addition, we recognize a portion of our revenue based on a sell-through model using information provided by our partners. If those partners provide us with inaccurate or untimely information, then the amount or timing of our revenues could be adversely impacted and our operating results may be harmed. Moreover, if we are unable to leverage our sales and support resources through our distribution partner relationships, we may need to hire and train additional qualified sales and engineering personnel. We cannot assure you, however, that we will be able to hire additional qualified sales and engineering personnel in these circumstances, and our failure to do so may restrict our ability to generate revenue or implement our products on a timely basis. Even if we are successful in hiring additional qualified sales and engineering personnel, we will incur additional costs and our operating results, including our gross margin, may be adversely affected. The loss of or reduction in sales by these resellers could reduce our revenues. If we fail to maintain relationships with these third party resellers, fail to develop new relationships with third party resellers in new markets, fail to manage, train, or provide incentives to, existing third party resellers effectively or if these third party resellers are not successful in their sales efforts, sales of our products may decrease and our operating results would suffer. We may face risks associated with our international sales that could impair our ability to grow our revenues. For the fiscal years ended December 31, 2004, 2005 and 2006, international revenues were approximately, $55.2 million, $63.0 million and $81.8 million, respectively. We intend to continue selling into our existing international markets and expand into additional international markets where we currently do not Table of Contents do business. If we are unable to continue to sell products effectively in these existing international markets and expand into additional new international markets, our ability to grow our business will be adversely affected. Some factors that may impact our ability to maintain our international operations and sales include: difficulty enforcing contracts and collecting accounts receivable in foreign jurisdictions, leading to longer collection periods; certification and qualification requirements relating to our products; the impact of recessions in economies outside the United States; unexpected changes in foreign regulatory requirements, including import and export regulations, and currency exchange rates; certification and qualification requirements for doing business in foreign jurisdictions; inadequate protection for intellectual property rights in certain countries; less stringent adherence to ethical and legal standards by prospective customers in certain foreign countries, including compliance with the Foreign Corrupt Practices Act; potentially adverse tax consequences; and political and economic instability. Maintaining and improving our financial controls and the requirements of being a public company may strain our resources, divert management s attention and affect our ability to attract and retain qualified board members. As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and The NASDAQ Stock Market Rules, or Nasdaq rules. The requirements of these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and may also place undue strain on our personnel, systems and resources. The Exchange Act will require, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act will require, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. As a public company, our systems of internal controls over financial reporting will be required to be periodically assessed and reported on by management and management s assessment of internal controls over financial reporting will be subject to annual audits by our independent auditors. We are presently evaluating our internal controls for compliance. During the course of our evaluation, we may identify areas requiring improvement and may be required to design enhanced processes and controls to address issues identified through this review. This could result in significant delays and cost to us and require us to divert substantial resources, including management time, from other activities. We have commenced a review of our existing internal control structure and plan to hire additional personnel. Although our review is not complete, we have taken steps to improve our internal control structure by hiring or transferring dedicated, internal Sarbanes-Oxley Act compliance personnel to analyze and improve our internal controls, to be supplemented periodically with outside consultants as needed. However, we cannot be certain regarding when we will be able to successfully complete the procedures, certification and attestation requirements of Section 404 of the Sarbanes-Oxley Act. If we fail to achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal controls over financial reporting in accordance with the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to satisfy the requirements of Section 404 on a timely basis could result in the loss of investor confidence in the reliability of our financial statements, which in turn could Table of Contents harm the market value of our common stock. Any failure to maintain effective internal controls also could impair our ability to manage our business and harm our financial results. Under the Sarbanes-Oxley Act and Nasdaq rules, we are required to maintain an independent board. We also expect these rules and regulations will make it more difficult and more expensive for us to maintain directors and officers liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to maintain coverage. If we are unable to maintain adequate directors and officers insurance, our ability to recruit and retain qualified directors, especially those directors who may be deemed independent for purposes of Nasdaq rules, and officers will be significantly curtailed. If we lose the services of one or more members of our current executive management team or other key employees, or if we are unable to attract additional executives or key employees, we may not be able to execute on our business strategy. Our future success depends in large part upon the continued service of our executive management team and other key employees. In particular, Doug Sabella, our president and chief executive officer, is critical to the overall management of our company as well as to the development of our culture and our strategic direction. Pinhas Reich, our vice president of global sales, plays a key role in our sales efforts and strategy. In order to be successful, we must also retain and motivate key employees, including those in managerial, technical, marketing and sales positions. In particular, our product generation efforts depend on hiring and retaining qualified engineers. Experienced management and technical, sales, marketing and support personnel in the telecommunications and networking industries are in high demand and competition for their talents is intense. This is particularly the case in Silicon Valley, where our headquarters and significant operations are located. The loss of services of any of our executives or of one or more other members of our executive management or sales team or other key employees, none of which is bound by an employment agreement for any specific term could seriously harm our business. We have a substantial employee presence in India and the hiring and retention of skilled employees in India has become increasingly difficult. If we are unable to hire and retain skilled employees in India and elsewhere, we may not be able to execute our business strategy. As of December 31, 2006, we had a staff of 127 employees and contractors in India. Due to increased expansion into India of research and development by technology companies, hiring and retaining skilled employees has become increasingly difficult. In the past we have experienced substantial turnover and we expect this turnover to get worse as competition for skilled employees increases. If we are unable to retain our current employees and/or hire skilled employees in the future, we may not be able to execute on our business strategy. We have no internal hardware manufacturing capabilities and we depend exclusively upon contract manufacturers to manufacture our hardware products. In particular, our I-Gate 4000 media gateways are exclusively manufactured for us by Flextronics (Israel) Ltd., or Flextronics. We buy our DCME products from ECI who subcontracts manufacturing of these products to Flextronics. Our failure to successfully manage our relationships with Flextronics, ECI or other replacement contract manufacturers would impair our ability to deliver our products in a manner consistent with required volumes or delivery schedules, which would likely cause us to fail to meet the demands of our customers and damage our customer relationships. We outsource the manufacturing of all of our hardware products. Our I-Gate 4000 media gateways are exclusively manufactured for us by Flextronics. We buy our DCME products from ECI who subcontracts the manufacturing to Flextronics. These contract manufacturers provide comprehensive manufacturing services, including assembly of our products and procurement of materials and components. Each of our contract manufacturers also builds products for other companies and may not always have sufficient Table of Contents quantities of inventory available or may not allocate their internal resources to fill these orders on a timely basis. We do not have long-term supply contracts with these contract manufacturers and they are not required to manufacture products for any specified period at any specified price. We do not have internal manufacturing capabilities to meet our customers demands and we cannot assure you that we will be able to develop or contract for additional manufacturing capacity on acceptable terms on a timely basis if it is needed. An inability to manufacture our products at a cost comparable to our historical costs could impact our gross margins or force us to raise prices, affecting customer relationships and our competitive position. Qualifying a new contract manufacturer and commencing commercial scale production is expensive and time consuming and could result in a significant interruption in the supply of our products. If our contract manufacturers are not able to maintain our high standards of quality, increase capacity as needed, or are forced to shut down a factory, our ability to deliver quality products to our customers on a timely basis may decline, which would damage our relationships with customers, decrease our revenues and negatively impact our growth. We and our contract manufacturers rely on single or limited sources for the supply of some components of our products and if we fail to adequately predict our manufacturing requirements or if our supply of any of these components is disrupted, we will be unable to ship our products on a timely basis, which would likely cause us to fail to meet the demands of our customers and damage our customer relationships. We and our contract manufacturers currently purchase several key components of our products, including commercial digital signal processors, from single or limited sources. We purchase these components on a purchase order basis. If we overestimate our component requirements, we could have excess inventory, which would increase our costs and result in write-downs harming our operating results. If we underestimate our requirements, we may not have an adequate supply, which could interrupt manufacturing of our products and result in delays in shipments and revenues. We currently do not have long-term supply contracts with our component suppliers and they are not required to supply us with products for any specified periods, in any specified quantities or at any set price, except as may be specified in a particular purchase order. Because the key components and assemblies of our products are complex, difficult to manufacture and require long lead times, in the event of a disruption or delay in supply, or inability to obtain products, we may not be able to develop an alternate source in a timely manner, at favorable prices, or at all. In addition, during periods of capacity constraint, we are disadvantaged compared to better capitalized companies, as suppliers may in the future choose not to do business with us or may require higher prices or less advantageous terms. A failure to find acceptable alternative sources could hurt our ability to deliver high-quality products to our customers and negatively affect our operating margins. In addition, reliance on our suppliers exposes us to potential supplier production difficulties or quality variations. Our customers rely upon our ability to meet committed delivery dates, and any disruption in the supply of key components would seriously adversely affect our ability to meet these dates and could result in legal action by our customers, loss of customers or harm our ability to attract new customers, any of which could decrease our revenues and negatively impact our growth. Failure to manage expenses and inventory risks associated with meeting the demands of our customers may adversely affect our business or results of operations. To ensure that we are able to meet customer demand for our products, we place orders with our contract manufacturers and suppliers based on our estimates of future sales. If actual sales differ materially from these estimates because of inaccurate forecasting or as a result of unforeseen events or otherwise, our inventory levels and expenses may be adversely affected and our business and results of operations could suffer. In addition, in order to remain competitive, we must continue to introduce new products and processes into our manufacturing environment. There cannot be any assurance, however, that the introduction of new products will not create obsolete inventories related to older products. Table of Contents If we are not able to obtain necessary licenses of third-party technology at acceptable prices, or at all, our products could become obsolete. We have incorporated third-party licensed technology into our current products. From time to time, we may be required to license additional technology from third parties to develop new products or product enhancements. Third-party licenses may not be available or continue to be available to us on commercially reasonable terms or at all. The inability to maintain or re-license any third-party licenses required in our current products or to obtain any new third-party licenses to develop new products and product enhancements could require us to obtain substitute technology of lower quality or performance standards or at greater cost, and delay or prevent us from making these products or enhancements, any of which could seriously harm the competitiveness of our products. Failures by our strategic partners or by us in integrating our products with those provided by our strategic partners could seriously harm our business. Our solutions include the integration of products supplied by strategic partners, who offer complementary products and services and we expect to further integrate our IP Products with such partner products and services in the future. We rely on these strategic partners in the timely and successful deployment of our solutions to our customers. If the products provided by these partners have defects or do not operate as expected, or if we do not effectively integrate and support products supplied by these strategic partners, we may have difficulty with the deployment of our solutions, which may result in: a loss of, or delay in, recognizing revenues; increased service, support and warranty costs and a diversion of development resources; and network performance penalties. In addition to cooperating with our strategic partners on specific customer projects, we also may compete in some areas with these same partners. If these strategic partners fail to perform or choose not to cooperate with us on certain projects, in addition to the effects described above, we could experience: a loss of customers and market share; and a failure to attract new customers or achieve market acceptance for our products. Our ability to compete and our business could be jeopardized if we are unable to protect our intellectual property. We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. Our patent applications may not issue as patents at all or they may not issue as patents in a form that will be advantageous to us. Our issued patents and those that may issue in the future may be challenged, invalidated or circumvented, which could limit our ability to stop competitors from marketing related products. Although we have taken steps to protect our intellectual property and proprietary technology, there is no assurance that third parties will not be able to invalidate or design around our patents. Furthermore, although we have entered into confidentiality agreements and intellectual property assignment agreements with our employees, consultants and advisors, such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements. Additionally, despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our products is difficult and we cannot be certain that the steps we have taken to do so will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as comprehensively as in the United States. If competitors are able to use our technology or develop Table of Contents unpatented proprietary technology similar to ours or competing technologies, our ability to compete effectively could be harmed. Possible third-party claims of infringement of proprietary rights against us could have a material adverse effect on our business, results of operation or financial condition. The telecommunications industry generally and the market for IP telephony products in particular are characterized by a relatively high level of litigation based on allegations of infringement of proprietary rights. We have in the past received and may in the future receive inquiries from other patent holders and may become subject to claims that we infringe their intellectual property rights. We cannot assure you that we are not in infringement of third party patents. Any parties claiming that our products infringe upon their proprietary rights, regardless of its merits, could force us to license their patents for substantial royalty payments or to defend ourselves and possibly our customers or contract manufacturers in litigation. We may also be required to indemnify our customers and contract manufacturers for damages they suffer as a result of such infringement. These claims and any resulting licensing arrangement or lawsuit, if successful, could subject us to significant royalty payments or liability for damages and invalidation of our proprietary rights. Any potential intellectual property litigation also could force us to do one or more of the following: stop selling, incorporating or using our products that use the challenged intellectual property; obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all; or redesign those products that use any allegedly infringing technology. Any lawsuits regarding intellectual property rights, regardless of their success, would be time-consuming, expensive to resolve and would divert our management s time and attention. Doug Sabella, our President and Chief Executive Officer, was recently named as a defendant in a class action lawsuit related to his employment with a prior employer and in the event this lawsuit consumes a significant portion of Mr. Sabella s time and diverts his attention from his performance as our President and Chief Executive Officer, then our business may be harmed. In January 2007, a complaint was filed in United States District Court, Northern District of California, against Terayon Communications Systems, Inc., or Terayon, and additional named defendants, including Douglas A. Sabella, our President and Chief Executive Officer. The complaint alleged, among other things, that several officers, including Mr. Sabella, were responsible for making false and misleading statements about Terayon during their respective employment. Because of the inherent uncertainty of litigation in general and particularly class action litigation, such litigation can sometimes take years to resolve and can be expensive to defend. Therefore, the amount of time required by Mr. Sabella to devote to his defense may be significant and may divert his attention from his performance of his duties for the Company. In the event this lawsuit consumes a significant portion of Mr. Sabella s time and diverts his attention from his performance as our President and Chief Executive Officer, then our business may be harmed. In addition, if the plaintiffs claims ultimately prevail, Mr. Sabella s credibility could be negatively impacted, and he could be prevented from serving as our President and Chief Executive Officer or from sitting on our board of directors. Such an outcome could significantly harm our business, financial position and results of operations and cause our stock price to decline substantially. If we acquire or invest in other companies, assets or technologies and we are not able to integrate them with our business, or we do not realize the anticipated financial and strategic goals for any of these transactions, our financial performance may be impaired. If appropriate opportunities present themselves, we may consider acquiring or making investments in companies, assets or technologies that we believe to be strategic. We do not have any experience in doing Table of Contents so, and if we do succeed in acquiring or investing in a company, asset or technology, we will be exposed to a number of risks, including: we may find that the acquired company, asset or technology does not further our business strategy, that we overpaid for the company, asset or technology or that the economic conditions underlying our acquisition decision have changed; we may have difficulty integrating the assets, technologies, operations or personnel of an acquired company, or retaining the key personnel of the acquired company; our ongoing business and management s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically or culturally diverse enterprises; we may encounter difficulty entering and competing in new product or geographic markets, and we may face increased competition, including price competition or intellectual property litigation; and we may experience significant problems or liabilities associated with product quality, technology and legal contingencies relating to the acquired business or technology, such as intellectual property or employment matters. In addition, from time to time we may enter into negotiations for acquisitions or investments that are not ultimately consummated. These negotiations could result in significant diversion of management time, as well as substantial out-of-pocket costs. If we were to proceed with one or more significant acquisitions or investments in which the consideration included cash, we could be required to use a substantial portion of our available cash, including proceeds of this offering. To the extent we issue shares of capital stock or other rights to purchase capital stock, including options and warrants, existing stockholders might be diluted and earnings per share might decrease. In addition, acquisitions and investments may result in the incurrence of debt, large one-time write-offs, such as of acquired in-process research and development costs, and restructuring charges. Regulation of the telecommunications industry could harm our operating results and future prospects. The telecommunications industry is highly regulated and our business and financial condition could be adversely affected by the changes in the regulations relating to the telecommunications industry. Currently, there are few laws or regulations that apply directly to access to, or delivery of, voice services on IP networks. We could be adversely affected by regulation of IP networks and commerce in any country, including the United States, where we operate. Such regulations could include matters such as voice over the Internet or using Internet protocol, encryption technology, and access charges for service providers. The adoption of such regulations could decrease demand for our products, and at the same time increase the cost of selling our products, which could have a material adverse effect on our business, operating result and financial condition. Compliance with regulations and standards applicable to our products may be time consuming, difficult and costly, and if we fail to comply, our product sales will decrease. In order to achieve and maintain market acceptance, our products must continue to meet a significant number of regulations and standards. In the United States, our products must comply with various regulations defined by the Federal Communications Commission and Underwriters Laboratories, including particular standards relating to our DCME products and our enhanced access switching solution, also known as our Class 5 solution. As these regulations and standards evolve, and if new regulations or standards are implemented, we will be required to modify our products or develop and support new versions of our products, and this will increase our costs. The failure of our products to comply, or delays in compliance, with the various existing and evolving industry regulations and standards could prevent or delay introduction of our products, which could harm our business. User uncertainty regarding future policies may also affect demand for communications products, including our products. Moreover, distribution partners or customers may require us, or we Table of Contents may otherwise deem it necessary or advisable, to alter our products to address actual or anticipated changes in the regulatory environment. Our inability to alter our products to address these requirements and any regulatory changes could have a material adverse effect on our business, financial condition and operating results. Failure of our hardware products to comply with evolving industry standards and complex government regulations may prevent our hardware products from gaining wide acceptance, which may prevent us from growing our sales. The market for network equipment products is characterized by the need to support industry standards as different standards emerge, evolve and achieve acceptance. We will not be competitive unless we continually introduce new products and product enhancements that meet these emerging standards. Our products must comply with various domestic regulations and standards defined by agencies such as the Federal Communications Commission, in addition to standards established by governmental authorities in various foreign countries and the recommendations of the International Telecommunication Union. If we do not comply with existing or evolving industry standards or if we fail to obtain timely domestic or foreign regulatory approvals or certificates we will not be able to sell our products where these standards or regulations apply, which may harm our business. Production and marketing of products in certain states and countries may subject us to environmental and other regulations including, in some instances, the requirement to provide customers the ability to return product at the end of its useful life and make us responsible for disposing or recycling products in an environmentally safe manner. Additionally, certain states and countries may pass regulations requiring our products to meet certain requirements to use environmentally friendly components. Such laws and regulations have recently been passed in several jurisdictions in which we operate, including the European Union which issued Directive 2002/96/EC Waste Electrical and Electronic Equipment, or WEEE, to mandate funding, collection, treatment, recycling and recovery of WEEE by producers of electrical or electronic equipment into Europe. China is in the final approval stage of compliance programs which will harmonize with the European Union WEEE and RoHS directives. In the future, Japan and other countries are expected to adopt environmental compliance programs. If we fail to comply with these regulations, we may not be able to sell our products in jurisdictions where these regulations apply, which would have a material adverse affect on our results of operations. We have invested substantially in our enhanced access switching solution and we may be unable to achieve and maintain substantial sales. We have spent considerable effort and time developing our Class 5 solution, and have had limited sales of this product line to date. We anticipate substantial sales of our access solution as part of our operational plan and we may not achieve the success rate we currently anticipate or we may not achieve any success at all. The market for our access solution is new and it is unclear whether there will be broad adoption of this solution by our existing and future potential customers. Recent rulemaking by the Financial Accounting Standards Board, or FASB, requires us to expense equity compensation given to our employees and may impact our ability to effectively utilize equity compensation to attract and retain employees. FASB has adopted changes that require companies to record a charge to earnings for employee stock option grants and other equity incentives effective January 1, 2006, which we have adopted. These accounting changes may cause us to reduce the availability and amount of equity incentives provided to employees, which may make it more difficult for us to attract, retain and motivate key personnel. Additionally, it may be difficult for us to estimate the impact of such compensation charges on future operating results because they will be based upon the fair market value of our common stock and other assumptions at future dates. Table of Contents Future interpretations of existing accounting standards could adversely affect our operating results. Generally accepted accounting principles in the United States are subject to interpretation by the FASB, the American Institute of Certified Public Accountants, or AICPA, the SEC and various other bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. For example, we recognize our product software license revenue in accordance with AICPA Statement of Position, or SOP, 97-2, Software Revenue Recognition, as amended by SOP 98-9, Software Revenue Recognition with Respect to Certain Transactions, and related interpretations. The AICPA or other accounting standards setters may continue to issue interpretations and guidance for applying the relevant accounting standards to a wide range of sales contract terms and business arrangements that are prevalent in software licensing arrangements. Future interpretations of existing accounting standards, including SOP 97-2 and SOP 98-9, or changes in our business practices could result in future changes in our revenue recognition accounting policies that have a material adverse effect on our results of operations. We may be required to delay revenue recognition into future periods, which could adversely affect our operating results. We have in the past had to, and in the future may have to, defer recognition for license fees due to several factors, including whether a transaction involves: software arrangements that include undelivered elements for which we do not have vendor specific objective evidence, or VSOE, of fair value; requirements that we deliver services for significant enhancements and modifications to customize our software for a particular customer; material acceptance criteria or other identified product-related issues; or payment terms extending beyond our customary terms. Because of these factors and other specific requirements under accounting principles generally accepted in the United States for software revenue recognition, we must have very precise terms in our software arrangements in order to recognize revenue when we initially deliver software or perform services. Negotiation of mutually acceptable terms and conditions can extend our sales cycle, and we sometimes accept terms and conditions that do not permit revenue recognition at the time of delivery. We may require significant capital to pursue our growth strategy, but we may not be able to obtain additional financing on favorable terms or at all. As described in more details in Use of Proceeds, we intend to continue spending substantial amounts in connection with our expansion in order to grow our business. We may need to obtain additional financing to pursue our business strategy, to develop new products, to respond to competition and market opportunities and to acquire complementary businesses or technologies. We can offer no assurances that we will be able obtain such financing on favorable terms or at all. If we were to raise additional capital through further sales of our equity securities, our stockholders would suffer dilution of their equity ownership in the Company. Product liability claims related to our customers networks could result in substantial costs. Our products are critical to the business operations of our customers. If one of our products fails, a service provider may assert a claim for substantial damages against us, regardless of our responsibility for the failure. Our product liability insurance may not cover claims brought against us. Product liability claims could require us to spend significant time and money in litigation or to pay significant damages. Any product liability claims, whether or not successful, could seriously damage our reputation and our business. Table of Contents Risks Related to Our Operations in Israel Substantially all of the manufacturing of our hardware products occurs in Israel. We are in the process, however, of diversifying the location of our manufacturing capabilities to locations outside of the Middle East. In addition, a substantial portion of our operations is located in Israel, including a total of 176 employees and contractors, which includes our entire media gateway research and development team. Increased political, economic and social instability in the Middle East, may adversely affect our business and operating results. The continued threat of terrorist activity and other acts of war or hostility, including the war in Iraq and threats against Israel, have created uncertainty throughout the Middle East and have significantly increased the political, economic and social instability in Israel where substantially all of our products are manufactured. Acts of terrorism, either domestically or abroad and particularly in Israel, or a resumption of the confrontation along the northern border of Israel, would likely create further uncertainties and instability. To the extent terrorism, or the political, economic or social instability results in a disruption of our operations or delays in our manufacturing or shipment of our products, then our business, operating results and financial condition could be adversely affected. Our I-Gate 4000 media gateways and our DCME products are exclusively manufactured for us by Flextronics, with the DCME products being manufactured by Flextronics through our relationship with ECI. The Flextronics manufacturing facility is located in Migdal-Haemek, Israel, which is located in northern Israel. While Flextronics has other locations across the world at which our manufacturing requirements may be fulfilled, any disruption to its Israeli manufacturing capabilities in Migdal-Haemek would likely cause a material delay in our manufacturing process. If we are forced or if we decide to switch the manufacture of our products to a different Flextronics facility, the time and expense of such switch along with the increased costs, if any, of operating in another location, would adversely affect our operations. In addition, while we expect that Flextronics will have the capacity to manufacture our products at facilities outside of Israel, there can be no assurance that such capacity will be available when we require it or upon terms favorable or acceptable to us. To the extent terrorism, or political, economic or social instability results in a disruption of Flextronics manufacturing facilities in Israel or ECI operations in Israel as they relate to our business, then our business, operating results and financial condition could be adversely affected. In addition, any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel, could adversely affect our operations and product development, cause our revenues to decrease and adversely affect the price of our shares. Furthermore, several countries, principally in the Middle East, still restrict doing business with Israel, Israeli companies or companies with operations in Israel. Should additional countries impose restrictions on doing business with Israel, our business, operating results and financial condition could be adversely affected. Our operations may be disrupted by the obligations of our personnel to perform military service. Many of our employees in Israel, including certain key employees, are obligated to perform up to one month (in some cases more) of annual military reserve duty until they reach age 45 and, in emergency circumstances, could be called to active duty. Recently, there have been call-ups of military reservists, including several of our employees, and it is possible that there will be additional call-ups in the future. Our operations could be disrupted by the absence of a significant number of our employees due to military service or the absence for extended periods of one or more of our key employees for military service. Such disruption could adversely affect our business and results of operations. The grants we have received from the Israeli government for certain research and development expenditures restrict our ability to manufacture products and transfer technologies outside of Israel and require us to Table of Contents satisfy specified conditions. If we fail to satisfy these conditions, we may be required to refund grants previously received together with interest and penalties. Our research and development efforts have been financed, in part, through grants that we have received from the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, or the OCS. We, therefore, must comply with the requirements of the Israeli Law for the Encouragement of Industrial Research and Development, 1984 and related regulations, or the Research Law. Under the Research Law, the discretionary approval of an OCS committee is required for any transfer of technology or manufacturing of products developed with OCS funding. OCS approval is not required for the export of any products resulting from the research or development. There is no assurance that we would receive the required approvals for any proposed transfer. Such approvals, if granted, may be subject to the following additional restrictions: we could be required to pay the OCS a portion of the consideration we receive upon any transfer of such technology or upon an acquisition of our Israeli subsidiary by an entity that is not Israeli. Among the factors that may be taken into account by the OCS in calculating the payment amount are the scope of the support received, the royalties that were paid by us, the amount of time that elapsed between the date on which the know-how was transferred and the date on which the grants were received, as well as the sale price; and the transfer of manufacturing rights could be conditioned upon an increase in the royalty rate and payment of increased aggregate royalties and payment of interest on the grant amount. These restrictions may impair our ability to sell our company, technology assets or to outsource manufacturing outside of Israel. The restrictions will continue to apply even after we have repaid the full amount of royalties payable for the grants. Risks Related to This Offering There has been no prior market for our common stock, our stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price. Prior to the offering there has been no public market for our common stock. The initial public offering price for our common stock was determined through negotiations between the underwriters and us. This initial public offering price may vary from the market price of our common stock following this offering. If you purchase shares of our common stock, you may not be able to resell those shares at or above the initial public offering price. We cannot predict the extent to which investor interest in our company will lead to the development of a trading market on the Nasdaq Global Market or otherwise or how liquid that market might become. An active public market for our common stock may not develop or be sustained after the offering. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you, or at all. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including: price and volume fluctuations in the overall stock market; changes in operating performance and stock market valuations of other technology companies generally, or those that sell telecommunications products in particular; the timing of customer orders that may cause quarterly or other periodic fluctuations in our results that may, in turn, affect the market price of our common stock; the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; changes in financial estimates by any securities analysts who follow our company, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our stock; Table of Contents ratings downgrades by any securities analysts who follow our company; the public s response to our press releases or other public announcements, including our filings with the SEC; market conditions or trends in our industry or the economy as a whole; the development and sustainability of an active trading market for our common stock; future sales of our common stock by our officers, directors and significant stockholders; and other events or factors, including those resulting from war, incidents of terrorism or responses to these events. In addition, the stock markets, and in particular the Nasdaq Global Market, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, it could have substantial costs and divert resources and the attention of management from our business. A significant portion of our total outstanding common stock is restricted from immediate resale but may be sold into the market in the near future. If there are substantial sales of our common stock or issuances of our common stock by us, our stock price could decline. If our existing stockholders sell substantial amounts of our common stock in the public market or we issue additional shares of common stock following the offering, the market price of our common stock could decline. Upon completion of the offering, we will have 39,561,561 outstanding shares of common stock based on the number of shares outstanding as of January 15, 2007 and adjusting for the 6,750,000 shares that we are selling in this offering. The 9,000,000 shares being sold in this offering may be resold in the public market immediately following the closing of this offering. The remaining 30,561,561 shares, or 77% of our outstanding shares after this offering, are currently restricted as a result of securities laws, market standoff agreements entered into by our stockholders with us or lock-up agreements entered into by our stockholders with the underwriters but will be able to be sold in the public market beginning 180 days after the date of this prospectus. However, the underwriters can waive the provisions of these lock-up agreements and allow these stockholders to sell their shares at any time. We have also agreed that we will not sell additional shares of our common stock during this period. However, these lockup agreements are subject to important exceptions. See Underwriting. In addition, the shares subject to outstanding options, of which 4,816,006 are exercisable as of January 15, 2007, and the shares reserved for future issuance under our stock option and equity incentive plans will become available for sale immediately upon the exercise of such options and the expiration of the lock-up agreements. Anti-takeover provisions in our charter documents and Delaware corporate law might deter acquisition bids for us that you might consider favorable. Our amended and restated certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. These provisions: establish a classified board of directors so that not all members of our board are elected at one time; authorize the issuance of undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval, including rights superior to the rights of the holders of common stock; Table of Contents prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws; and establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions you desire. Due to these factors, sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. If you purchase shares of common stock sold in this offering, you will incur immediate and substantial dilution. If you purchase shares of common stock in this offering, you will incur immediate and substantial dilution in the amount of $8.95 per share, because the assumed initial public offering price of $11.00 is substantially higher than the pro forma net book value per share of our outstanding common stock. This dilution is due in large part to the fact that our earlier investors paid substantially less that the initial public offering price when they purchased their shares. In addition, you may also experience additional dilution upon future equity issuances or the exercise of stock options to purchase common stock granted to our employees, consultants and directors under our stock option and equity incentive plans. See Dilution. Our existing principal stockholders, executive officers and directors will continue to have substantial control over the company after this offering, which may prevent you and other stockholders from influencing significant corporate decisions and may harm the market price of our common stock. Upon completion of this offering, assuming no exercise of the underwriters over-allotment option and including stock options that are exercisable within 60 days of January 15, 2007, our existing principal stockholders, executive officers and directors together with their affiliates, will beneficially own, in the aggregate, approximately 72% of our outstanding common stock, and our executive officers and directors will beneficially own, in the aggregate, approximately 57% of our outstanding common stock. These stockholders may have interests that conflict with yours and, if acting together, have the ability to determine the outcome of matters submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, may have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership may harm the market price of our common stock by: delaying, deferring or preventing a change in control; impeding a merger, consolidation, takeover or other business combination involving us; or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us. If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline. The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishes Table of Contents inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline. Because management has broad discretion as to the use of the net proceeds from this offering, you may not agree with how we use them, and such proceeds may not be invested successfully. We currently intend to use the net proceeds from the offering for capital expenditures for the purchase of equipment and for leasehold improvements in connection with our expansion and working capital for general corporate purposes, including expansion of our marketing and sales departments. However, in the event of changes in our business or market conditions, we may otherwise direct the proceeds from this offering to other corporate purposes. You will be relying on the judgment of our management concerning these uses and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The failure of our management to apply these funds effectively could result in unfavorable returns and uncertainty about our prospects, each of which could cause the price of our common stock to decline. We do not expect to pay any cash dividends for the foreseeable future. The continued expansion of our business will require substantial funding. Accordingly, we do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock. Table of Contents SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus, particularly the sections entitled
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+Prospectus Summary 1 Risk Factors 14 Cautionary Note Regarding Forward Looking Statements 40 Use of Proceeds 42 Dividend Policy 46 Capitalization 47 Dilution 48 Management s Discussion and Analysis of Financial Condition and Results of Operations 50 Proposed Business 52 Management 75 Transactions with Related Persons 79 Principal Stockholders 83 Description of Securities 86 Shares Eligible For Future Sale 90 United States Federal Income Tax Considerations 91 Underwriting 96 Legal Matters 99 Experts 99 Where You Can Find Additional Information 100 Index to Financial Statements F-1 EX-23.1 Consent of Grant Thornton LLP You should rely only on the information contained or incorporated by reference in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information in this prospectus is accurate as of any date other than the date on the front cover of this prospectus. Industry and Market Data In this prospectus we rely on and refer to information and statistics regarding our industry. We obtained this market data from independent industry publications or other publicly available information. Unless otherwise indicated all information comes from the Centers for Medicare and Medicaid Services website located at www.cms.hhs.gov/researchers/. Table of Contents PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering you should read the entire prospectus carefully including the risk factors, the financial statements, and the related notes and schedules thereto. Unless otherwise stated in this prospectus, references to we, us, or our refer to MBF Healthcare Acquisition Corp. Unless we tell you otherwise, the information in this prospectus assumes that the underwriters have not exercised their over-allotment option; the term business combination as used in this prospectus means an acquisition through a merger, capital stock exchange, stock purchase, asset acquisition, or other similar business combination of one or more operating businesses in the healthcare industry; and the term public stockholder as used in this prospectus refers to those persons who purchase securities offered by this prospectus, including our existing stockholder. However, our existing stockholder s status as a public stockholder shall exist only with respect to those securities offered pursuant to this prospectus. We are a blank check company recently formed for the purpose of acquiring, through a merger, capital stock exchange, stock purchase, asset acquisition or other similar business combination, one or more operating businesses in the healthcare industry. To date, our efforts have been limited to organizational activities. According to the Centers for Medicare and Medicaid Services, or CMS, the healthcare industry is one of the largest segments of the U.S. economy, with total U.S. healthcare expenditures in 2005 of nearly $2.0 trillion, or $6,697 per person, which accounted for 16% of the 2005 U.S. gross domestic product, or GDP. Overall, national healthcare spending is anticipated to continue to grow at close to 7% per year, reaching nearly $4.0 trillion by 2015. The primary drivers behind these expenditures are: (i) medical service spending, (ii) hospital spending and (iii) prescription drug spending. In 2005, over 81% of total U.S. healthcare expenditures related to the above categories, with medical services (including nursing homes and home healthcare), hospital care and prescription drugs comprising 41%, 30% and 10%, respectively. We anticipate that the substantial growth in healthcare witnessed over the past 25 years will continue. Therefore, we believe the healthcare industry offers a favorable environment to complete one or more business combinations, with which we expect to be able to create further value through the application of our management expertise. We intend to direct our efforts on identifying acquisition candidates in the healthcare industry that have at least one of the following characteristics: A strong fundamental yet under-capitalized business with the potential to further grow its products, services or geographic reach; A valuable asset embedded in an underperforming business that would be more effectively utilized by improved management, technology or operational advances; and A moderate or lagging business that may benefit from improved operational and financial performance. We were organized and sponsored by a management team that brings together complementary skills and experience in the healthcare industry, including transactional execution, operations, raising private equity and finance. Much of our management team shares a common background and history with our existing shareholder, MBF Healthcare Partners, L.P., a private equity firm focused on investments in healthcare companies and that was formed in April 2005. Our management team is further differentiated by its operational experience: Miguel B. ( Mike ) Fernandez, our Chairman and Chief Executive Officer, is a business leader who has formed and successfully grown several healthcare services companies. Mr. Fernandez has over 30 years of experience in the healthcare industry in the areas of operations, health insurance programs, managed care solutions, business development and investments. Mr. Fernandez is the Chairman and a Managing Director of MBF Healthcare Partners, L.P. Jorge Rico, our Senior Vice President and Chief Operating Officer, has served as a Managing Director of MBF Healthcare Partners, L.P. since its inception. Mr. Rico has over 20 years of Table of Contents experience in the healthcare industry in the areas of operations, health plan administration, hospital administration, business development and information technology. Marcio Cabrera, our Senior Vice President and Chief Financial Officer, has served as a Managing Director of MBF Healthcare Partners, L.P. since its inception and has over 14 years of experience in the healthcare industry in the areas of finance, operations and health plan administration. Our management team currently intends to stay involved with us following a business combination, either as managers or in an advisory capacity. The role that our management team will assume following a business combination will depend on the type of business acquired and the sector of the healthcare industry in which the target company operates. If they do remain with our company, we may enter into employment or other compensation arrangements with them following a business combination, the terms of which have not yet been determined. In addition to management s abilities and experience, our management and directors have built and maintained extensive networks of relationships that we plan to use to identify and generate acquisition opportunities. These relationships include, among other sources, executives and board members at public and private healthcare companies, business brokers, private equity and venture capital firms, consultants, investment bankers, attorneys and accountants. We are seeking to raise approximately $150,000,000 in this offering (or approximately $172,500,000 if the underwriters over-allotment option is exercised in full). While we may seek to effect business combinations with more than one target business, our initial business combination must be with one or more operating businesses whose fair market value is at least equal to 80% of the balance in the trust account (less the deferred underwriting discounts and commissions and taxes payable) at the time of such acquisition. If we acquire less than 100% of one or more target businesses in our initial business combination, the aggregate fair market value of the portion or portions we acquire must equal at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions and taxes payable as described above) at the time of such initial business combination. In no instance will we acquire less than majority voting control of a target business. However, this restriction will not preclude a reverse merger or similar transaction where we will acquire the target business. We expect that an initial public offering of $150,000,000 will enable us to effect an initial business combination with a business whose fair market value is at least $115,200,000. Although we have no specific target business identified for a specific business combination, we believe, based on the experience of our management in the healthcare industry, that there should be opportunities to effect a business combination with a target business or a portion of a target business whose value is at least $115,200,000. We have not identified or been provided with the identity of, or had any indirect contact with potential acquisition candidates. In addition, neither we nor any of our affiliates or representatives has, as of the date of the prospectus, taken steps towards locating or consummating a business combination transaction. Furthermore, we do not have any specific business combination under consideration and have not had any discussions with respect to such a transaction. Neither management, nor the directors, any affiliate, agent or any other representative of ours has taken direct or indirect measures to locate a target business. In addition, no unaffiliated sources have approached us with potential target businesses for acquisition. The actual amount of consideration which we will be able to pay for the business combination will depend on whether we choose, or are able, to pay a portion of the business combination consideration with shares of our common stock or if we are able to finance a portion of the consideration with debt financing. Although we have not identified any potential target businesses for our initial business combination, we believe that businesses that can be purchased for this amount are most likely to be able to operate on a merged basis with us as a stand alone publicly traded reporting company and to provide us with a large enough platform, in terms of assets and other resources, to grow the acquisition target and improve its performance. We believe that an initial public offering providing less net proceeds than this offering would make it more difficult for us to find a suitable target. On the other hand, if we were to raise substantially more than $150,000,000 (or $172,500,000 if the underwriters over-allotment option is exercised in full), the minimum size of the target businesses we could consider would be significantly larger. We believe the number of Table of Contents potentially available acquisition candidates of this kind are limited and we would face greater competition, especially from private equity investors, for these larger private companies. No financing arrangements have been entered into or contemplated with any third parties to raise any additional funds, whether through the sale of securities or otherwise, that we may need if we decide to consummate a business combination for consideration in excess of our available assets at the time of acquisition. We have not undertaken any diligence, evaluations, discussions, formal or informal, negotiations or other similar activities, whether directly by us, one of our affiliates, or through an unrelated third party, with respect to a business combination transaction. This includes the time period before our corporate existence was established and encompasses any and all evaluations or discussions that may have taken place prior to the involvement of our principals. While MBF Healthcare Partners, L.P., and its partners and employees, have engaged in the review of acquisition targets on behalf of MBF Healthcare Partners, L.P., they have not reviewed any acquisition targets on our behalf. To minimize any conflicts, or the appearance of conflicts, MBF Healthcare Partners, L.P. and our directors and officers have granted us a right of first refusal, effective upon the consummation of this offering, with respect to any company or business in the healthcare industry whose aggregate enterprise value is at least equal to 80% of the balance in the trust account (less deferred underwriting discounts and commissions and taxes payable). Furthermore, we have agreed that any target companies with respect to which MBF Healthcare Partners, L.P. has initiated any contacts or entered into any discussions, formal or informal, or negotiations regarding such company s acquisition prior to the completion of this offering will not be a potential acquisition target for us. We are a Delaware corporation formed on June 2, 2006. Our offices are located at 121 Alhambra Plaza, Suite 1100, Coral Gables, Florida 33134 and our telephone number is (305) 461-1162. Table of Contents Securities to be Purchased by Our Existing Stockholder MBF Healthcare Partners, L.P., our existing stockholder, has purchased from us an aggregate of 343,750 units at a price of $8.00 per unit and 4,250,000 warrants at a price of $1.00 per warrant, for an aggregate purchase price of $7,000,000, in a private placement that occurred prior to this offering. Each warrant purchased in the private placement entitles the holder to purchase one share of our common stock at a purchase price of $6.00 per share. In the absence of an active trading market for our securities, the $1.00 purchase price for the warrants was determined jointly by the underwriters and us after reviewing and discussing comparable transactions. No other financial or quantitative analyses were used in determining the purchase price. The units and the warrants are subject to the escrow and voting arrangements and the waiver of liquidating distributions described below. The private placement warrants, including the warrants included in the private placement units, are identical to the warrants included in the units to be sold and issued in this offering, except that (1) upon a redemption of warrants, MBF Healthcare Partners, L.P. will have the right to exercise those warrants on a cashless basis and (2) upon an exercise of warrants, MBF Healthcare Partners, L.P. will receive unregistered shares of common stock. Exercising warrants on a cashless basis means that in lieu of paying the aggregate exercise price for the shares of common stock being purchased upon exercise of the warrant in cash, the holder will forfeit a number of shares underlying the warrant with a market value equal to such aggregate exercise price. Accordingly, we would not receive additional proceeds to the extent the warrants are exercised on a cashless basis. Warrants included in the units sold in this offering are not exercisable on a cashless basis and the exercise price with respect to the warrants will be paid directly to us. Even if the prospectus relating to the common stock issuable upon exercise of the warrants issued in this offering is not current, the warrants, including the warrants included in the units, issued in the private placement to MBF Healthcare Partners, L.P. will be exercisable for unregistered shares of common stock. MBF Healthcare Partners, L.P. has also agreed, pursuant to an agreement with the underwriters in accordance with guidelines specified by Rule 10b5-1 under the Securities Exchange Act of 1934, to purchase up to $12.0 million of our common stock in the open market, at market prices not to exceed the per share amount held in the trust account (less taxes payable), commencing on the later of (a) ten business days after we file a Current Report on Form 8-K announcing our execution of a definitive agreement for our initial business combination or (b) 60 calendar days after the end of the restricted period under Regulation M, and ending on the business day immediately preceding the record date for the meeting of stockholders at which such business combination is to be voted upon by our stockholders. MBF Healthcare Partners, L.P. will not have any discretion or influence with respect to such purchases and will not be able to sell or transfer any common stock purchased in the open market pursuant to such agreement until six months following the consummation of a business combination. MBF Healthcare Partners, L.P. has agreed to vote all such shares of common stock purchased in the open market in favor of our initial business combination. If no business combination is approved by our stockholders, MBF Healthcare Partners, L.P. has agreed not to sell such shares, provided that it will be entitled to participate in any liquidating distributions with respect to such shares purchased in the open market. Table of Contents The Offering Securities Offered 18,750,000 units, at $8.00 per unit, each unit consisting of: one share of common stock; and one warrant. The units will begin trading on or promptly after the date of this prospectus. The common stock and warrants will begin separate trading 60 days after the earlier to occur of the expiration or termination of the underwriters option to purchase up to 2,812,500 additional units to cover over-allotments or the exercise in full of that option. In no event will separate trading of the common stock and warrants commence until we have filed an audited balance sheet reflecting our receipt of the gross proceeds of this offering and issued a press release announcing when separate trading will begin. We will file a Current Report on Form 8-K, including an audited balance sheet, promptly after the consummation of this offering, which is anticipated to take place three business days after the date of this prospectus. The audited balance sheet will include proceeds we receive from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Current Report on Form 8-K and, if such over-allotment option is exercised after such time, we will file an additional Current Report on Form 8-K including a balance sheet reflecting our receipt of the gross proceeds from the exercise of the over-allotment. For more information, see the section entitled Description of Securities Units. The Current Report on Form 8-K will be publicly available on the Securities and Exchange Commission s website at http://www.sec.gov. Common Stock: Number of shares outstanding before the date of this prospectus 4,687,500 shares Number of shares to be outstanding after this offering and the private placement 23,781,250 shares Warrants: Number of warrants outstanding before the date of this prospectus 0 warrants Number of warrants to be outstanding after this offering and the private placement 23,343,750 warrants Exercisability Each warrant is exercisable for one share of common stock. Exercise price $6.00. In no event shall a warrant holder be entitled to receive a net cash settlement upon the exercise of warrants. Exercise period The warrants will become exercisable on the later of: the completion of a business combination on the terms described in this prospectus; or , 2008. The warrants will expire at 5:00 p.m., New York City time, on , 2011 or earlier, upon redemption. Table of Contents Securities to be purchased by our existing stockholder MBF Healthcare Partners, L.P., our existing stockholder, has purchased from us an aggregate of 343,750 units at a price of $8.00 per unit and 4,250,000 warrants at a price of $1.00 per warrant, for an aggregate purchase price of $7,000,000, in a private placement that occurred prior to this offering. Mike Fernandez owns approximately 78% of the limited partnership interests and controls the general partner of MBF Healthcare Partners, L.P. MBF Healthcare Partners, L.P. has also agreed, pursuant to an agreement with the underwriters in accordance with guidelines specified by Rule 10b5-1 under the Securities Exchange Act of 1934, to purchase up to $12.0 million of our common stock in the open market, at market prices not to exceed the per share amount held in the trust account (less taxes payable), commencing on the later of (a) ten business days after we file a Current Report on Form 8-K announcing our execution of a definitive agreement for our initial business combination or (b) 60 calendar days after the end of the restricted period under Regulation M, and ending on the business day immediately preceding the record date for the meeting of stockholders at which such business combination is to be voted upon by our stockholders. MBF Healthcare Partners, L.P. will not have any discretion or influence with respect to such purchases and will not be able to sell or transfer any common stock purchased in the open market pursuant to such agreement until six months following the consummation of a business combination. Redemption We may redeem the outstanding warrants at any time after the warrants become exercisable: in whole and not in part; at a price of $0.01 per warrant; upon a minimum of 30 days prior written notice of redemption; and only if the last sales price of our common stock equals or exceeds $11.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. We established the last criterion to provide warrant holders with a premium to the initial warrant exercise price, as well as a degree of liquidity to cushion the market reaction, if any, to our redemption call. If the above conditions are satisfied and we call the warrants for redemption, the warrant holders will then be entitled to exercise their warrants before the date scheduled for redemption. However, there can be no assurance that the price of the common stock will exceed $11.50 or the warrant exercise price after the redemption call is made. We do not need the consent of the underwriters or our stockholders to redeem the outstanding warrants. Upon a redemption of warrants, MBF Healthcare Partners, L.P. will have the right to exercise the warrants, including the warrants included in the units, purchased by it in the private placement, on a cashless basis. Warrants included in the units issued in this offering are not exercisable on a cashless basis. Table of Contents American Stock Exchange symbols for our securities Units MBH.U Common Stock MBH Warrants MBH.WS Offering proceeds to be held in the trust account $149,250,000 of the proceeds from this offering and the private placement (approximately $7.96 per unit) will be placed in a trust account at JPMorgan Chase Co., maintained by Continental Stock Transfer Trust Company acting as trustee, pursuant to an agreement to be signed on the date of this prospectus. Of the proceeds held in the trust account, $5,250,000, representing deferred underwriting discounts and commissions, will be paid to the underwriters if a business combination is consummated (subject to a $0.28 per share reduction for public stockholders who exercise their conversion rights as described below). The proceeds held in the trust account will not be released until the earlier of (i) the completion of a business combination on the terms described in this prospectus or (ii) our liquidation. See Use of Proceeds. Therefore, unless and until a business combination is consummated, the proceeds held in the trust account will not be available for our use for any expenses related to this offering or any expenses which we may incur related to the investigation and selection of a target business or the negotiation of an agreement to effect a business combination, including to make a down payment or deposit or fund a lock-up or no-shop provision with respect to a potential business combination. These expenses may be paid prior to a business combination only from the net proceeds from this offering not held in the trust account (approximately $1,800,000 after the payment of the expenses related to this offering). None of the warrants may be exercised until the later of the completion of a business combination or , 2008. Thus, after the proceeds of the trust account have been disbursed, the warrant exercise price will be paid directly to us upon the exercise of any warrants. Payments to insiders There will be no fees or other payments paid to our existing stockholder, officers, directors or their affiliates prior to, or for any services they render in order to effectuate, the consummation of our initial business combination other than: repayment of a loan of up to $400,000, plus interest of 5% per year, made by MBF Healthcare Partners, L.P. in the form of a non-revolving line of credit, to cover expenses relating to the offering contemplated by this prospectus. The 5% interest rate on the loan was based on the market rate of other loans of similar risk. The unpaid principal balance under the line of credit as of December 31, 2006 was $240,000; payment to MBF Healthcare Partners, L.P. or its assignee of a monthly fee of $7,500 for general and administrative services, including office space, utilities, Table of Contents and secretarial support, plus the reimbursement of up to $750 per person per flight that may be paid to MBF Healthcare Management, an entity owned by Mike Fernandez, for costs arising from our officers and directors use of its corporate jet in connection with activities on our behalf, such as identifying and investigating targets for our initial business combination. We believe that, based on rents and fees for similar services in Miami, Florida, the fees charged by MBF Healthcare Partners, L.P. and MBF Healthcare Management are at least as favorable as we could have obtained from unaffiliated third-parties; and reimbursement of out-of-pocket expenses incurred by our officers and directors in connection with activities on our behalf, such as identifying and investigating targets for our initial business combination. There is no limit on the amount of out-of-pocket expenses that could be incurred and there will be no review of the reasonableness of the expenses by anyone other than our Board of Directors, which may include persons who may seek reimbursement, or a court of competent jurisdiction if such reimbursement is challenged. The stockholders must approve our initial business combination We will seek stockholder approval before we effect our initial business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable state law. In connection with any vote required for our initial business combination, our existing stockholder has agreed to vote the shares of common stock held by it prior to the completion of this offering, including any shares of common stock included in the units purchased by it in the private placement, either for or against a business combination in the same manner that a majority of the shares of common stock are voted by our public stockholders. Our existing stockholder and our officers and directors also have agreed that if they acquire shares of common stock in or following completion of this offering, they will vote all such acquired shares in favor of our initial business combination. We will proceed with our initial business combination only if: a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination; and public stockholders owning less than 30% of the shares sold in this offering both vote against the business combination and exercise their conversion rights as described below. Our threshold for conversion rights has been established at 30% in order for this offering to be competitive with other offerings by blank check companies currently in the market. However, a 20% threshold is more typical in offerings of this type. We have selected the higher threshold to reduce the risk of a small group of shareholders exercising undue influence on the stockholder approval process. However, the Table of Contents 30% threshold entails certain risks described under the headings, Risk Factors Unlike most other blank check offerings, we allow up to but less than 30% of our public shareholders to exercise their conversion rights. This higher threshold will reduce the requirement to consummate a business combination that you may choose to vote against, and you may not receive the full amount of your original investment upon exercise of your conversion rights and Unlike most other blank check offerings, we allow up to but less than 30% of our public shareholders to exercise their conversion rights. The ability of a larger number of our shareholders to exercise their conversion rights may not allow us to consummate the most efficient business combination or optimize our capital structure. Voting against the business combination alone will not result in an election to exercise a stockholder s conversion rights. A stockholder must also affirmatively exercise such conversion rights at the time a business combination is voted upon by the stockholders. For more information, see the section entitled Proposed Business Effecting a Business Combination Stockholder Approval of our Initial Business Combination. Conversion rights for stockholders voting to reject our initial business combination Public stockholders voting against our initial business combination will be entitled to convert their stock into a pro rata share of the amount held in the trust account (including the amount held in the trust account representing the deferred portion of the underwriters discounts and commissions), including any interest earned on their pro rata share (net of taxes payable), if the business combination is approved and consummated. Public stockholders who convert their stock into a pro rata share of the trust account will continue to have the right to exercise any warrants they may hold. Our existing stockholder will not have any conversion rights with respect to shares of common stock held by it prior to the completion of this offering, including any shares of common stock included in units purchased in the private placement. In addition, by virtue of their agreement to vote any shares acquired in or after the completion of this offering in favor of a business combination, our existing stockholder and our officers and directors will not have any conversion rights in respect of those shares. We view the procedures governing the approval of our initial business combination, each of which are set forth in our amended and restated certificate of incorporation, as obligations to our stockholders, and neither we nor our Board of Directors will propose, or seek stockholder approval of, any amendment of these procedures. Dissolution and distribution of assets if no business combination occurs If we do not effect a business combination by , 2009 (24 months after the consummation of this offering), our corporate existence will terminate except for the purposes of winding up our affairs and liquidating pursuant to Section 278 of the Delaware General Corporation Law, or DGCL, in which case we will as Table of Contents promptly as practicable thereafter adopt a plan of distribution in accordance with Section 281(b) of the DGCL. Section 281(b) will require us to adopt a plan for the distribution of our assets that will provide for the payment to our creditors and potential creditors, based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may subsequently be brought against us in the subsequent 10 years. The plan will also provide that after reserving amounts sufficient to cover our liabilities and obligations and the costs of dissolution and liquidation, we will promptly distribute our remaining assets, including the amounts held in the trust account, solely to our public stockholders. We will liquidate our assets, including the trust account, and after reserving amounts sufficient to cover our liabilities and obligations and the costs of dissolution and liquidation, distribute those assets solely to our public stockholders. However, we cannot assure you that third parties will not seek to recover from the assets distributed to our public stockholders any amounts owed to them by us. Under the DGCL, our stockholders could be liable for any claims against the corporation to the extent of distributions received by them in dissolution. Further, since we will distribute our assets in accordance with Section 281(b) rather than Sections 280 and 281(a), any such liability of our stockholders could extend to claims for which an action, suit or proceeding is begun after the third anniversary of our dissolution. MBF Healthcare Partners, L.P. has waived its right to participate in any distributions occurring upon our failure to complete a business combination with respect to shares of common stock acquired by it prior to this offering and in the private placement. In addition, MBF Healthcare Partners, L.P. and our officers and directors have agreed to waive any claim against us and the trust account, other than with respect to any shares of common stock acquired in this offering or in the open market following the consummation of this offering. We estimate that, in the event we liquidate the trust account, a public stockholder will receive from the trust account (1) approximately $7.96 per share plus (2) his proportionate share of the net interest earned on the trust account. We expect that all costs associated with implementing our plan for the distribution of our assets, including payments to any creditors, will be funded by the portion of the proceeds of this offering and the private placement which are not held in the trust account. We estimate that our total costs and expenses for implementing and completing our plan for distribution will be in the range of $50,000 to $75,000. This amount includes all costs and expenses relating to the winding up of our company. While we believe that there should be sufficient funds available from the proceeds not held in the trust account to fund the $50,000 to $75,000 of expenses, MBF Healthcare Partners, L.P. has agreed to pay the costs of liquidation in the event our remaining assets outside the trust account are insufficient to pay those costs. However, if we do not have sufficient funds to cover our liabilities and obligations, or if MBF Healthcare Partners, L.P. does not have sufficient funds to cover the amount that the costs and expenses for implementing and completing our liquidation Table of Contents exceeds our remaining assets outside the trust account, if any, the amount distributed to our public stockholders would be less than $7.96 per share. In addition, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us that is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. Therefore, we cannot assure you that the actual per-share liquidation price will not be less than approximately $7.96. Escrow of existing stockholder s units, shares and warrants On the date of this prospectus, our existing stockholder will place the shares it owned before this offering and the units, and underlying shares and warrants, and the warrants purchased in the private placement, into an escrow account maintained by Continental Stock Transfer Trust Company, acting as escrow agent. We may not waive the escrow provisions. Subject to certain limited exceptions, such as transfers to family members and trusts for estate planning purposes and upon death, these units, shares and warrants will not be transferable during the escrow period and will not be released from escrow until the earlier of: our liquidation; and six months following the consummation of our initial business combination, unless we were to consummate a transaction after the consummation of the initial business combination which results in all of the shareholders of the combined entity having the right to exchange their shares of common stock for cash, securities or other property. Audit Committee We have established and will maintain an Audit Committee which initially will be composed of a majority of independent directors and will be within one year composed entirely of independent directors to, among other things, monitor compliance with the terms described above and the other terms relating to this offering and review and approve any affiliated transactions involving our company. If any noncompliance is identified, then the Audit Committee will be charged with responsibility to immediately take all action necessary to rectify such noncompliance or otherwise to cause compliance with the terms of this offering. For more information, see the section entitled Management Committees of the Board of Directors Audit Committee. Risks In making your decision whether to invest in our securities you should take into account not only the business experience of our management but also the special risks we face as a blank check company. Additionally, this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, and, therefore, you will not be entitled to the protections normally afforded to investors in Rule 419 blank check offerings. You should carefully consider these and the other risks set forth in the section entitled Risk Factors beginning on page 14 of this prospectus. Table of Contents Summary Financial Data The following table summarizes the relevant financial data for our business and should be read in conjunction with our financial statements, and the notes and schedules related thereto, which are included in this prospectus. To date, our efforts have been limited to organizational activities and activities related to this offering, so only balance sheet data is presented below. December 31, 2006 Actual As Adjusted(1) Balance Sheet Data: Working capital (deficiency) $ (495,300 ) $ 147,337,608 Total assets 470,312 151,012,608 Underwriters discounts and commissions payable(2) 3,675,000 Total liabilities 507,704 3,675,000 Value of common stock that may be converted to cash (approximately $7.96 per share(2) 44,774,992 Stockholders equity (deficit) (37,392 ) 102,562,616 (1) Excludes deferred underwriting discounts and commissions equal to 3.5% of the gross proceeds, or $5,250,000 ($6,037,500 if the underwriters over-allotment option is exercised in full), which will be deposited in the trust account and which the underwriters have agreed to defer until the consummation of our initial business combination. See the section entitled Underwriting Commissions and Discounts. (2) For purposes of presentation, this table assumes that we have converted the maximum of 5,624,999 shares to cash in connection with our initial business combination, reducing the underwriters fee by $0.28 per share, or approximately $1,575,000. If no shares were converted to cash in connection with our initial business combination, the underwriters fee payable would be $5,250,000. The $7.96 per share amount includes $0.28 per share attributable to the deferred underwriters discounts and commissions. In addition to the $7.96 per share amount, stockholders who exercise their conversion rights will receive their proportionate share of interest earned on the funds in the trust account. The as adjusted information gives effect to the private placement and the sale of the units we are offering pursuant to this prospectus, including the application of the estimated net proceeds and the repayment of the loan of up to $400,000 payable to MBF Healthcare Partners, L.P. The working capital (as adjusted) and total assets (as adjusted) amounts include $149,250,000 that will be held in the trust account following the completion of this offering, including deferred underwriting discounts and commissions of $5,250,000 ($6,037,500 if the underwriters over-allotment option is exercised in full) (less $0.28 per share that the underwriters have agreed to forego with respect to shares public stockholders have elected to convert into cash pursuant to their conversion rights), which will be available to us only upon the consummation of a business combination within the time period described in this prospectus. If a business combination is not so consummated, we will be liquidated and the proceeds held in the trust account will be distributed solely to our public stockholders. We will not proceed with a business combination that has been approved by a majority of shares of common stock voted by our public stockholders if public stockholders owning 30% or more of the shares sold in this offering both vote against the business combination and exercise their conversion rights. Accordingly, we may effect a business combination only if (i) a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and (ii) public stockholders owning less than 30% of the shares sold in this offering exercise their conversion rights. If this occurred, we would be required to convert to cash up to 5,624,999 of the 18,750,000 shares of common stock included in the units sold in this offering at an initial per share conversion price of $7.96, without taking into account interest earned on the trust account (net of taxes payable on income of the funds in the trust account). The actual per share conversion price will be equal to the amount in the trust account, including all accrued interest (net of taxes Table of Contents payable on income of the funds in the trust account), as of two business days prior to the consummation of the business combination, divided by the number of shares of common stock sold in this offering. In connection with any vote required for our initial business combination, our existing stockholder has agreed to vote all of the shares of common stock held by it prior to the completion of this offering, including any shares of common stock included in the units purchased in the private placement, either for or against a business combination in the same manner that a majority of the shares of common stock are voted by our public stockholders. Our existing stockholder will not have conversion rights with respect to those shares. Our existing stockholder and our officers and directors also have agreed that if they acquire shares of common stock in or following consummation of this offering, they will vote all such acquired shares, including shares purchased in the open market pursuant to an agreement with the underwriters, in favor of our initial business combination. By virtue of this agreement, our existing stockholder and our officers and directors will not have any conversion rights in respect of those shares acquired in or following consummation of this offering. Table of Contents RISK FACTORS An investment in our securities involves a high degree of risk. You should consider carefully all of the risks described below, together with the other information contained in this prospectus, before making a decision to invest in our securities. If any of the following risks occur, our business, financial condition and results of operations may be adversely affected. In that event, the trading price of our securities could decline, and you could lose all or a part of your investment. Risks Relating to the Company and the Offering We are a development stage company with no operating history and, accordingly, you will have no basis upon which to evaluate our ability to achieve our business objective. We are a recently incorporated development stage company with no operating results to date. Therefore, our ability to begin operations is dependent upon obtaining financing through the public offering of our securities. Because we do not have an operating history, you will have no basis upon which to evaluate our ability to achieve our business objective, which is to acquire one or more operating businesses in the healthcare industry. We do not have any business combination under consideration and we have neither identified, nor been provided with the identity of, any potential target businesses. Neither we, nor any of our affiliates or representative acting on our behalf, has had any direct or indirect contacts or discussions with any target business regarding a business combination or taken any direct or indirect measures to locate a target business or consummate a business combination. We will not generate any revenues (other than interest income on the proceeds of this offering held in the trust account) until, if at all, after the consummation of a business combination. We cannot assure you as to when, or if, a business combination will occur. We may not be able to complete a business combination within the required time frame, in which case our corporate existence will terminate and we will be forced to liquidate. We must complete a business combination with a fair market value at least equal to 80% of the balance in the trust account (less the deferred underwriting discounts and commissions and taxes payable) at the time of the acquisition by , 2009 (24 months after the consummation of this offering). If we fail to complete a business combination within the required time frame, our corporate existence will terminate and our amended and restated certificate of incorporation requires that we promptly initiate procedures to liquidate and distribute our assets in compliance with Section 281(b) of the Delaware General Corporation Law (DGCL). We do not have any business combination under consideration and we have neither identified nor been provided with the identity of any potential target businesses. Furthermore, we have agreed that any target companies with respect to which MBF Healthcare Partners, L.P. has initiated any contacts or entered into any discussions, formal or informal, or negotiations regarding such company s acquisition prior to the completion of this offering will not be a potential acquisition target for us. Consequently, we may not be able to find suitable target businesses within the required time frame. In addition, our negotiating position and our ability to conduct adequate due diligence on any potential target may be reduced as we approach the deadline for the consummation of a business combination. If we are forced to liquidate before a business combination, our public stockholders will receive less than $8.00 per share upon distribution of the funds held in the trust account and our warrants will expire with no value. If we are unable to complete a business combination and are forced to liquidate our assets, the per share liquidation amount will be less than $8.00 because of the expenses related to this offering, our general and administrative expenses, and the anticipated costs associated with seeking a business combination. Furthermore, holders of our warrants are not entitled to participate in a liquidation distribution and the warrants will expire with no value if we liquidate before the completion of a business combination. As a result, purchasers of the units will have paid the full unit purchase price of $8.00 solely for the share of common stock included in each unit. Table of Contents Unlike most other blank check offerings, we allow up to but less than 30% of our public stockholders to exercise their conversion rights. This higher threshold will make it easier for us to get a business combination approved over stockholder dissent, and you may not receive the full amount of your original investment upon exercise of your conversion rights. When we seek stockholder approval of a business combination, we will offer each public stockholder (other than our existing stockholder and our officers and directors) the right to have their shares of common stock converted to cash if the stockholder votes against the business combination and the business combination is approved and consummated. We will consummate the initial business combination only if the following two conditions are met: (i) a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and (ii) public stockholders owning 30% or more of the shares sold in this offering do not vote against the business combination and exercise their conversion rights. Because we permit a larger number of stockholders to exercise their conversion rights, it will reduce the requirement to consummate an initial business combination with a target business which you may vote against, making it easier for us to get a business combination approved over stockholder dissent, and you may not receive the full amount of your original investment upon exercise of your conversion rights. Unlike most other blank check offerings, we allow up to but less than 30% of our public stockholders to exercise their conversion rights. The ability of a larger number of our stockholders to exercise their conversion rights may not allow us to consummate the most efficient business combination or optimize our capital structure. When we seek stockholder approval of a business combination, we will offer each public stockholder (other than our existing stockholder and our officers and directors) the right to have their shares of common stock converted to cash if the stockholder votes against the business combination and the business combination is approved and consummated. Such holder must both vote against such business combination and then exercise their conversion rights to receive a pro rata share of the trust account. Unlike most other blank check offerings which have a 20% threshold, we allow up to but less than 30% of our public stockholders to exercise their conversion rights. Accordingly, if our business combination requires us to use substantially all of our cash to pay the purchase price, because we will not know how many stockholders may exercise such conversion rights, we may either need to reserve part of the trust account for possible payment upon such conversion if the transaction is approved, or we may need to arrange third party financing to help fund our business combination in case a larger percentage of stockholders exercise their conversion rights than we expect. In the event that the acquisition involves the issuance of our stock as consideration, we may be required to issue a higher percentage of our stock to make up for a shortfall in funds. Raising additional funds to cover any shortfall may involve dilutive equity financing or incurring indebtedness at a higher than desirable level. This may limit our ability to effectuate the most attractive business combination available to us. Under Delaware law, the requirements and restrictions relating to this offering contained in our amended and restated certificate of incorporation may be amended, which could reduce or eliminate the protection afforded to our stockholders by such requirements and restrictions. Our amended and restated certificate of incorporation contains certain requirements and restrictions relating to this offering that will apply to us until the consummation of a business combination. Specifically, our amended and restated certificate of incorporation provides, among other things, that: upon consummation of this offering, $149,250,000 (or a greater amount up to $170,962,500, depending on the amount of the over-allotment option that is exercised, if any) of the proceeds from this offering and of the private placement, and the deferred underwriting discount will be placed into the trust account, which funds may not be disbursed from the trust account except in connection with our initial business combination or upon our liquidation; prior to the consummation of our initial business combination, we will submit such business combination to our stockholders for approval; Table of Contents we may not consummate our initial business combination unless (i) it is approved by a majority of the shares of our common stock voted by our public stockholders and (ii) public stockholders owning less than 30% of the shares sold in this offering both vote against the business combination and exercise their conversion rights; if our initial business combination is approved and consummated, public stockholders who voted against the business combination and who exercised their conversion rights will receive their pro rata share of the trust account (net of taxes payable); if a business combination is not consummated within the 24-month period specified in this prospectus, our corporate existence will terminate and our power will immediately thereupon be limited to acts and activities relating to winding up our affairs, including distribution of our assets, and we will not be able to engage in any other business activities; and we may not consummate our initial business combination unless it meets the conditions specified in this prospectus, including the requirement that the business combination be with an operating business whose fair market value is equal to at least 80% of the balance in the trust account (less the deferred underwriting discounts and commissions and taxes payable) at the time of such business combination. Our amended and restated certificate of incorporation requires that we obtain the unanimous consent of our stockholders to amend the above provisions. However, the validity of unanimous consent provisions under Delaware law has not been settled. A court could conclude that the unanimous consent requirement constitutes a practical prohibition on amendment in violation of the stockholders implicit rights to amend the corporate charter. In that case, some or all of the above provisions could be amended without unanimous consent and any such amendment could reduce or eliminate the protection afforded to our stockholders. However, we view the foregoing provisions as obligations to our stockholders and we will not take any action to waive or amend any of these provisions. Because there are numerous blank check companies similar to ours seeking to effectuate a business combination, it may be more difficult for us to complete a business combination. Based upon publicly available information, as of January 31, 2007, approximately 81 similarly structured blank check companies have completed initial public offerings in the United States since August 2003 and numerous others have filed registration statements. Of these companies, we estimate that only 17 companies have consummated a business combination, while 27 other companies have announced that they have entered into definitive agreements or letters of intent with respect to potential business combinations but have not yet consummated such business combinations. Accordingly, there are approximately 37 blank check companies which we estimate to have more than $2.9 billion in trust, and potentially an additional 52 blank check companies with more than an additional $4.4 billion in trust, that have filed registration statements and are or will be seeking to enter into a business combination. While some of these companies have specific industries in which they must identify a potential target business, a number of these companies may complete a business combination in any industry they choose. We believe that there are approximately three blank check companies that have identified the healthcare industry as the industry in which they are seeking to complete a business combination, and another 15 companies that have declared that they intend to target a broader range of companies to effect a business combination, which may include companies in the healthcare industry. As a result, we may be subject to competition from these and other companies seeking to complete a business combination within the healthcare industry which, in turn, will result in an increased demand for privately-held companies in these industries. Further, the fact that only 17 blank check companies have completed a business combination, and 27 other companies have entered into definitive agreements or letters of intent with respect to potential business combinations, may be an indication that there are a limited number of attractive target businesses available or that many target businesses may not be inclined to enter into a business combination with a publicly-held blank check company. Because of this competition, we cannot assure you that we will be able to effectuate a business combination within the Table of Contents required time period. If we are unable to find a suitable target operating business within such time periods, the terms of our amended and restated certificate of incorporation will require us to liquidate. We may have insufficient resources to cover our operating expenses and the expenses of consummating a business combination. We have reserved approximately $1,800,000 from the proceeds of this offering to cover our operating expenses for the next 24 months, including expenses incurred in connection with a business combination, based upon our management s estimate of the amount required for these purposes. This estimate may prove inaccurate, especially if a portion of the available proceeds is used to make a down payment or pay exclusivity or similar fees in connection with a business combination or if we expend a significant portion of the available proceeds in pursuit of a business combination that is not consummated. If we do not have sufficient proceeds available to cover our expenses, we may be forced to obtain additional financing. We may not be able to obtain additional financing and neither MBF Healthcare Partners, L.P. nor our management is obligated to provide any additional financing. If we do not have sufficient proceeds and are unable to obtain additional financing, we may be forced to liquidate prior to consummating a business combination. The ability of our stockholders to exercise their conversion rights may not allow us to consummate the most desirable business combination or optimize our capital structure. When we seek stockholder approval of our initial business combination, we will offer each public stockholder (other than our existing stockholder) the right to have his, her or its shares of common stock converted to cash if the stockholder votes against our initial business combination and our initial business combination is approved and consummated. Such holder must both vote against such business combination and then exercise his, her or its conversion rights to receive a pro rata share of the trust account. Accordingly, if our business combination requires us to use substantially all of our cash to pay the purchase price, because we will not know how many stockholders may exercise such conversion rights, we may either need to reserve part of the trust account for possible payment upon such conversion, or we may need to arrange third party financing to help fund our business combination in case a larger percentage of stockholders exercise their conversion rights than we expect. Therefore, we may not be able to consummate a business combination that requires us to use all of the funds held in the trust account as part of the purchase price, or we may end up having to incur an amount of leverage that is not optimal for our business combination. This may limit our ability to effectuate the most attractive business combination available to us. Because the amount of time it will take to obtain physical stock certificates is uncertain and beyond our control, stockholders who wish to convert may be unable to obtain physical certificates by the deadline for exercising their conversion rights. We may require that stockholders who wish to exercise their conversion rights tender physical certificates representing their shares to us not later than the day prior to the stockholders meeting. While some blank check companies have required physical delivery of certificates, most such companies do not impose such a requirement. Consequently, our stockholders may have a higher likelihood of encountering difficulty in converting their shares than they would in connection with other blank check companies. In order to obtain a physical stock certificate, a stockholder s broker and/or clearing broker, DTC and our transfer agent will need to act to facilitate this request. It is our understanding that stockholders should generally allot at least two weeks to obtain physical certificates from the transfer agent. However, because we do not have any control over this process or over the brokers or DTC, it may take significantly longer than two weeks to obtain a physical stock certificate. If it takes longer than we anticipate to obtain a physical certificate, stockholders who wish to convert may be unable to obtain physical certificates by the deadline for exercising their conversion rights and thus will be unable to convert their shares. Table of Contents Our determination of the offering price of our units and of the aggregate amount of proceeds we are raising in this offering was more arbitrary than typically would be the case if we were an operating company rather than an acquisition vehicle. Prior to this offering we had no operating history and there was no public market for any of our securities. The public offering price of the units, the terms of the warrants, aggregate proceeds we are raising, and the amount to be placed in a trust account were the products of negotiations between the underwriters and us. The factors that were considered in making these determinations included: the history and prospects of companies whose principal business is the acquisition of other companies; prior offerings of those companies; our prospects for acquiring an operating business in the healthcare industry; our capital structure; an assessment of our management team and their experience in identifying acquisition targets and structuring acquisitions; general conditions of the securities markets at the time of the offering; the likely competition for acquisition targets; and the likely number of potential targets. We expect that an initial public offering of $150,000,000 will enable us to effect an initial business combination with a business whose fair market value is at least $115,200,000. The actual amount of consideration which we will be able to pay for the business combination will depend on whether we choose, or are able, to pay a portion of the business combination consideration with shares of our common stock or if we are able to finance a portion of the consideration with debt financing. Although these factors were considered, the determination of our per unit offering price and aggregate proceeds was more arbitrary than typically would be the case if we were an operating company, as it is management s estimate of the amount needed to fund our operations for the next 24 months since we have no operating history or financial results. In addition, because we have not identified any potential target businesses, management s assessment of the financial requirements necessary to complete a business combination may prove to be inaccurate, in which case we may not have sufficient funds to complete a business combination and we will be forced to either find additional financing or liquidate. You will not be entitled to protections normally afforded to investors of blank check companies under federal securities laws. Because the net proceeds from this offering are intended to be used to complete a business combination with one or more operating businesses that have not been identified, we may be deemed to be a blank check company under federal securities laws. However, since we will have net tangible assets in excess of $5,000,000 upon the successful consummation of this offering and subsequently will file a Current Report on Form 8-K with the Securities and Exchange Commission, or the SEC, including an audited balance sheet demonstrating this fact, we believe that we are exempt from the rules promulgated by the SEC to protect investors in blank check companies, such as Rule 419. Accordingly, investors will not be afforded the benefits or protections of those rules. Because we do not believe we are subject to Rule 419, our units will be immediately tradeable and we will have a longer period of time within which to complete a business combination in certain circumstances than would be permitted under Rule 419. If we do not consummate a business combination and dissolve, payments from the trust account to our public stockholders may be delayed. We currently believe that our dissolution and any plan of distribution subsequent to the expiration of the 24-month deadline contained in our amended and restated certificate of incorporation would proceed in Table of Contents approximately the following manner. Our board of directors will, consistent with our amended and restated certificate of incorporation, as promptly as practicable thereafter adopt a plan of distribution in accordance with Section 281(b) of the DGCL. Due to the need to comply with Section 281(b), we cannot provide any assurances that the distribution of our assets will occur within a specified time frame. Our stockholders may be held liable for claims by third parties against us to the extent of distributions received by them, regardless of when the claims are filed. We cannot assure you that third parties will not seek to recover from the assets distributed to our public stockholders any amounts owed to them by us. Under the DGCL, our stockholders could be liable for any claims against the company to the extent of distributions received by them in dissolution. Further, because we will distribute our assets in accordance with Section 281(b) rather than Sections 280 and 281(a), any such liability of our stockholders could extend to claims for which an action, suit or proceeding is begun after the third anniversary of our dissolution. The limitations on stockholder liability under the DGCL for claims against a dissolved corporation are determined by the procedures that a corporation follows for distribution of its assets following dissolution. If we complied with the procedures set forth in Sections 280 and 281(a) of the DGCL (which would include, among other things, a 60-day notice period during which any third-party claims can be brought against us, a 90-day period during which we may reject any claims brought, an additional 150-day waiting period before any liquidating distributions are made to stockholders, as well as review by the Delaware Court of Chancery) our stockholders would have no further liability with respect to claims on which an action, suit or proceeding is begun after the third anniversary of our dissolution. However, in accordance with our intention to dissolve and distribute our assets to our stockholders as soon as reasonably possible after dissolution, our amended and restated certificate of incorporation provides that we will comply with Section 281(b) of the DGCL instead of Sections 280 and 281(a). Accordingly, our stockholders liability could extend to claims for which an action, suit or proceeding is begun after the third anniversary of our dissolution. If third parties bring claims against us, the proceeds held in the trust account could be reduced and the per share liquidation price received by our stockholders would be less than approximately $7.96 per share. Placing the funds in a trust account may not protect those funds from third-party claims against us. Pursuant to Sections 280 and 281 of the DGCL, upon our dissolution we will be required to pay or make reasonable provision to pay all claims and obligations of the corporation, including all contingent, conditional, or unmatured claims. While we intend to pay those amounts from our funds not held in trust, we cannot assure you those funds will be sufficient to cover such claims and obligations. Although we will seek to have all vendors, prospective target businesses, and other entities with whom we execute agreements waive any right, title, interest, or claim of any kind in or to any monies held in the trust account for the benefit of our public stockholders, there is no guarantee that they will enter into such agreements, and it is not a condition to our doing business with anyone. Examples of possible instances where we may engage a third party that refuses to execute a waiver include the engagement of a third party consultant whose particular expertise or skills are believed by management to be significantly superior to those of other consultants that would agree to execute a waiver or in cases where management is unable to find a provider of required services willing to provide the waiver. In any event, our management would perform an analysis of the alternatives available to it and would enter into an agreement with a third party that did not execute a waiver only if management believed that such third party s engagement would be significantly more beneficial to us than any alternative. In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts, or agreements with us and will not seek recourse against the trust account for any reason. Accordingly, the proceeds held in the trust account could be subject to claims that could take priority over the claims of our public stockholders and the per share liquidation price could be less than approximately $7.96, plus interest (net of taxes payable on such interest, which taxes, if any, shall be paid from the trust account), due to claims of such creditors or other entities. Any insurance we may procure to cover such claims will be subject to various limits and exclusions and may be insufficient to adequately protect the trust account against such claims. Table of Contents If we are unable to complete a business combination and are forced to liquidate, our current officers have each agreed to be jointly and severally personally liable for ensuring that the proceeds in the trust account are not reduced by (i) the claims of vendors for services rendered or products sold to us, (ii) claims of prospective target businesses for fees and expenses of third parties for which we agree in writing to be liable and (iii) claims by vendors or prospective target businesses, or if such person or entity does not provide a valid and enforceable waiver to rights or claims to the trust account so as to ensure that the proceeds in the trust account are not reduced by the claims of such persons that are owed money by us, in each case to the extent any insurance we may procure is inadequate to cover any claims made against the trust account and the payment of such debts or obligations actually reduces the amount in the trust account. Based on representations made to us by our officers, we currently believe that they are of substantial means and capable of funding a shortfall in our trust account to satisfy their foreseeable indemnification obligations, but we have not asked them to reserve for such an eventuality. The indemnification obligations may be substantially higher than our officers currently foresee or expect and their financial resources may deteriorate in the future. Hence, we cannot assure you that our officers will be able to satisfy those obligations or that the proceeds in the trust account will not be reduced by those claims. If our Board of Directors adopts a plan of distribution of our assets and it is subsequently determined that our reserve for claims and liabilities to third parties is insufficient, stockholders who received funds from our trust account could be liable for up to such amounts to creditors. If we are forced to file a bankruptcy case or an involuntary case is filed against us that is not dismissed, the funds held in the trust account will be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. To the extent any bankruptcy claims deplete the trust account, the per share liquidation distribution would be less than the initial $7.96 per share held in the trust account. Because we have not selected any prospective target businesses, you will be unable to ascertain the merits or risks of any particular target business operations. Because we have not yet selected or approached any prospective target businesses with respect to a business combination, there is no basis to evaluate the possible merits or risks of any particular target business operations, financial condition, or prospects. To the extent we complete a business combination, we may be affected by numerous risks inherent in the business operations of the acquired company or companies. Although our management will endeavor to evaluate the risks inherent in a particular target business, we cannot assure you that we will properly ascertain or assess all of the significant
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+PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors set forth in the section below entitled Risk Factors and the financial statements, and the related notes and schedules thereto. Unless otherwise stated in this prospectus, references to we, us or our refer to China Healthcare Acquisition Corp. Unless otherwise specified, references to China or PRC refer to the People s Republic of China as well as the Hong Kong Special Administration Region and the Macau Special Administration Region, but does not include Taiwan. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where that offer is not permitted. Unless we tell you otherwise, the information in this prospectus assumes that the underwriters have not exercised their over-allotment option. Unless we tell you otherwise, the term business combination as used in this prospectus means an acquisition of, through a merger, capital stock exchange, asset acquisition or other business acquisition, one or more operating businesses. In addition, unless we tell you otherwise, the term public stockholder as used in this prospectus refers to those persons that purchase the securities offered by this prospectus including any of our existing stockholders that purchase these securities either in this offering or afterwards; provided that our existing stockholders status as public stockholders shall exist only with respect to those securities so purchased in this offering or afterwards. Certain numbers in this prospectus have been rounded. China Healthcare Acquisition Corp., is a recently organized Delaware blank check company formed on June 7, 2006, for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition or other similar business combination or acquisition, one or more businesses with operations primarily in China. To date, our efforts have been limited to organizational activities. We do not have any specific business combination under consideration, and we have not had any preliminary contacts or discussions with any target business regarding a business combination. Our efforts in identifying a prospective target will not be limited to a particular industry, although we intend to focus our efforts on acquiring one or more operating businesses in the healthcare sector. We believe that the healthcare sector offers potential for significant growth in the coming decade as the social demographic and a demand for better healthcare and quality of life creates opportunities in the pharmaceuticals, medical products and hospital care sectors. We believe that the future of the Chinese economy and current market conditions present favorable opportunities for acquisitions of Chinese companies. Due to changes in the PRC s political, economic and social policies, opportunities for market expansion have emerged for businesses with operations in the PRC in a number of industries, including the healthcare sector. We believe that the PRC presents an attractive operating environment for several reasons, including: prolonged economic expansion within the PRC; increased government focus within the PRC on privatizing assets, improving foreign trade and encouraging business and economic activity; access to a highly trained and educated workforce; favorable labor rates and efficient, low cost manufacturing capabilities; attractive valuations for target businesses within the PRC; the increased development and activity of the public equity markets in the PRC; the recent entry of the PRC into the World Trade Organization, the sole global international organization dealing with the rules of trade between nations, which may lead to a reduction on tariffs for industrial products, a reduction in trade restrictions and an increase in trading with the United States; and the emergence of opportunities in the healthcare sector in China. Our management team is experienced in starting, financing, growing, sourcing, structuring and consummating business combinations in the PRC as well as in North America. We believe our management team is well positioned to explore acquisitions in the healthcare sector in China primarily as a result of the prior experience and extensive contacts Jack Kang, our Chairman of the Board of Directors, and Alwin Tan, our Chief Executive Officer, have in this area. Mr. Kang is the chief executive officer and director of Searainbow Holding Company (hereinafter referred to as SR ) which was established in 1986 and is listed on the Shenzhen Exchange. In 2004, the International Journal of Medicine included Mr. Kang as one of the ten leaders in China s medical industry for his contribution in establishing national medical E-commerce platforms in 29 provinces and municipalities while serving as president of SR and general designer of Searainbow Medical E-commerce. Alwin Tan, our President and Chief Executive Officer, has acted as a consultant to companies in the pharmaceutical industry in the United States and China. In addition, other members of management have experience in the bioscience and pharmaceutical industries and experience advising companies in China and Southeast Asia. Our management team intends to use its operating and transactional experience to find and evaluate potential target companies and to maintain and build on the relationships that they have developed through their years of experience in the U.S. and Chinese business arenas. While our management will have flexibility in identifying and selecting a prospective target business and may seek to effect business combinations with more than one target business, our initial business acquisition must be with one or more operating businesses whose fair market value, collectively, is at least equal to 80% of our net assets (excluding any fees and expenses held in the trust account for the benefit of the underwriters) at the time of such acquisition. We may further seek to acquire a target business that has a fair market value in excess of 80% of the net assets at the time of acquisition by raising additional funds through the sale or exchange of our securities, through loans or a combination of both. China Healthcare Acquisition Corp., is a Delaware corporation formed on June 7, 2006. Our offices are located at 1233 Encino Drive, Pasadena, California 91108-1009. Our telephone number is (626) 568-9924. THE OFFERING Private Placement: Our Chairman has agreed to purchase from us an aggregate of 3,000,000 warrants at $0.50 per warrant in a private placement that will occur prior to this offering. Securities Offered: 8,500,000 units, at $6.00 per unit, each unit consisting of: one share of common stock; and two warrants. The units will begin trading on or promptly after the date of this prospectus. Each of the common stock and warrants will trade separately on the 90th day after the date of this prospectus unless Ferris, Baker Watts, Incorporated determines that an earlier date is acceptable, based upon its assessment of the relative strengths of the securities market and small capitalization companies in general, and the trading pattern of, and demand for, our securities in particular. In no event will Ferris, Baker Watts, Incorporated allow separate trading of the common stock and warrants until we file an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file a Current Report on Form 8-K, including an audited balance sheet, upon the consummation of this offering. The audited balance sheet will include proceeds we receive from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Current Report on Form 8-K. If the over-allotment option is exercised after our initial filing of a Form 8-K, we will file an amendment to the Form 8-K to provide updated financial information to reflect the exercise of the over-allotment option. We will also include in this Form 8-K, or amendment thereto, or in a subsequent Form 8-K information indicating if Ferris, Baker Watts, Incorporated has allowed separate trading of the common stock and warrants prior to the 90th day after the date of this prospectus. Common Stock(1): Number of shares that will be outstanding before this offering: 2,125,000 shares Number of shares to be outstanding after this offering: 10,625,000 shares Warrants(1): Number of warrants outstanding before this offering: 3,000,000 warrants Number of warrants to be outstanding after this offering and the private placement: 20,000,000 warrants Exercisability: Each warrant is exercisable for one share of common stock. Exercise price: $5.00 Exercise period: The warrants will become exercisable on the later of: the completion of a business combination; or March , 2008. The warrants will expire at 5:00 p.m., Washington, DC time, on March , 2012 or earlier upon redemption. None of the warrants may be exercised until after the consummation of a business combination and, thus, after the proceeds of the trust account have been disbursed. Upon exercise of the warrants and disbursement of the trust, the warrant exercise price will be paid directly to us. (1) Excludes shares and warrants issuable upon the exercise of the underwriters purchase option. Redemption: We may redeem the outstanding warrants (including warrants held by underwriters as a result of the exercise of the purchase option and warrants held as a result of the private placement to our Chairman; in whole and not in part; at a price of $.01 per warrant at any time after the warrants become exercisable; upon a minimum of 30 days prior written notice of redemption; and if, and only if, the last sales price of our common stock equals or exceeds $8.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. We have established our redemption criteria to provide warrant holders with a premium to the initial warrant exercise price as well as a reasonable cushion against a negative market reaction, if any, to our redemption call. If the foregoing conditions are satisfied, we will call the warrants and each warrant holder will be entitled to exercise his or her warrants prior to the date scheduled for redemption. There can be no assurance, however, that the price of the common stock will exceed $8.50 or the warrant exercise price after the redemption call is made. Proposed American Stock Exchange symbols for our securities: Units: CHM.U Common Stock: CHM Warrants: CHM.WS Offering proceeds to be held in trust: $50,042,500 of the proceeds of this offering (approximately $5.89 per unit) will be placed in a trust account at Lehman Brothers Inc. maintained by American Stock Transfer Trust Company acting as trustee, pursuant to an agreement to be signed on the date of this prospectus. These proceeds consist of $46,502,500 from the net proceeds payable to us, $1,500,000 from the private placement of our warrants, and $2,040,000 of the proceeds attributable to the underwriters deferred non-accountable expense allowance and the deferred portion of the underwriting discount. These proceeds will not be released until the earlier of (i) the completion of a business combination on the terms as described in this prospectus or (ii) our liquidation. Therefore, unless and until a business combination is consummated, these proceeds held in the trust account will not be available for our use for any expenses related to this offering or expenses which we may incur related to the investigation and selection of a target business and the negotiation of an agreement to effect the business combination. These expenses will be paid, prior to a business combination, only from the interest earned by the principal in the trust account, up to an aggregate of $1,200,000, net of income tax. Amounts in the trust account could be used to pay claims made against us that are not the subject of the founders indemnity described elsewhere in this prospectus. The $2,040,000 of the proceeds attributable to the underwriters deferred non-accountable expense allowance and the deferred portion of the underwriting discount which are being held in the trust account will be released to the underwriters upon completion of a business transaction on the terms described in this prospectus or to our public stockholders upon the liquidation of the trust account and will in no event be available for use by us. We may use a portion of the funds not held in the trust account to make a deposit or fund a no-shop, standstill provision with respect to a prospective business combination. In the event that we are required to forfeit such funds (whether as a result of a breach of the agreement relating to such payment or otherwise), we may not have sufficient working capital available to pay expenses related to locating a suitable business combination without securing additional financing. In such event, if we are unable to secure additional financing, we may not consummate a business combination in the prescribed time period and we will be forced to liquidate and dissolve. Prior to the consummation of a business combination, there will be no fees, reimbursements or cash payments made to our existing stockholders and/or officers and directors other than: Repayment of the $150,000 loan made by our Chairman which will be repaid without interest at closing out of our offering proceeds; Repayment of the loan made at closing by our Chairman in the principal amount of $150,000 with interest at the rate of 4% per annum to cover working capital which will be paid out of interest earned on the trust account; Payment of up to $5,000 per month to National Capital Investment Limited (NCIL), an affiliate of our existing stockholders, for office space and administrative expenses; Reimbursement for any expenses incident to the offering and finding a suitable business combination; and Other than the agreement for up to $5,000 per month payable to NCIL, there are no current agreements or understandings with any of our existing stockholders or any of their respective affiliates with respect to the payment of compensation of any kind subsequent to a business combination. However, there can be no assurance that such agreements may not be negotiated in connection with, or subsequent to, a business combination. Purchase of shares in market upon announcement of business combination: Our Chairman has agreed, pursuant to an agreement with the underwriters in accordance with guidelines specified by Rule 10b5-1 under the Securities Exchange Act of 1934, to purchase, or cause his affiliate to purchase, up to $8 million of our common stock in the open market, at market prices not to exceed the per share amount held in the trust account (less taxes payable), commencing on the later of (a) ten business days after we file a Current Report on Form 8-K announcing our execution of a definitive agreement for our initial business combination or (b) 60 calendar days after the end of the restricted period under Regulation M, and ending on the business day immediately preceding the record date for the meeting of stockholders at which such business combination is to be voted upon by our stockholders. Neither our Chairman, nor his affiliate, will have any discretion or influence with respect to such purchases and will not be able to sell or transfer any common stock purchased in the open market pursuant to such agreement until six months following the consummation of a business combination. Our Chairman has agreed to vote all such shares of common stock purchased in the open market in favor of our initial business combination. If no business combination is approved by our stockholders, our Chairman has agreed not to sell such shares, provided that he or such affiliate will be entitled to participate in any liquidating distributions with respect to such shares purchased in the open market. It is intended that these purchases will comply with Rule 10b-18 under the Exchange Act and accordingly, any purchases that are not permitted by Rule 10b-18 will not be made. These purchases will be made at market prices up to a price equal to the per share amount held in our trust account as reported in such Form 8-K and will be made by Ferris, Baker Watts or an independent broker dealer mutually agreed upon by our Chairman and Ferris, Baker Watts (including in the event that Ferris, Baker Watts participation in the purchases would violate Rule 10b-18) in such amounts and at such times as Ferris, Baker Watts or such other broker dealer may determine, in its sole discretion. As a result of Ferris, Baker Watts interest in our consummation of a business combination, they may not be deemed to be independent for purposes of this agreement. The stockholders must approve business combination: We will seek stockholder approval before we effect our initial business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable state law. In connection with the vote required for our initial business combination, all of our existing stockholders, including all of our officers, directors and special advisors, have agreed to vote the shares of common stock owned by them (whether purchased prior to, during or after the consummation of the offering) in accordance with the majority of the shares of common stock voted by the public stockholders other than our existing stockholders. We will proceed with a business combination only if: (i) a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and (ii) public stockholders owning less than 20% of the shares sold in this offering subsequently exercise their conversion rights described below. Our amended and restated certificate of incorporation prohibits the amendment of the above-described provisions prior to our consummation of a business combination. While we will not take any action to amend or waive these provisions, the validity of provisions prohibiting amendment of the certificate of incorporation under Delaware law has not been settled. A court could conclude that the prohibition on amendment violates the stockholders implicit rights to amend the corporate charter. In that case, the above-described provisions would be amendable and any such amendment could reduce or eliminate the protection afforded to our stockholders. However, we view the foregoing provisions as obligations to our stockholders, and we will not take any actions to waive or amend any of these provisions. Certificate of Incorporation: As discussed below, there are additional specific provisions in our amended and restated certificate of incorporation that may not be amended prior to our consummation of a business combination relating to our dissolution. Our amended and restated certificate of incorporation also provides that we will continue in existence only until March , 2009 if we have not completed a business combination by such date. If we have not completed a business combination by such date, our corporate existence will cease except for the purposes of winding up our affairs and liquidating, pursuant to Section 278 of the Delaware General Corporation Law. This has the same effect as if our board of directors and stockholders had formally voted to approve our dissolution pursuant to Section 275 of the Delaware General Corporation Law. Accordingly, limiting our corporate existence to a specified date as permitted by Section 102(b)(5) of the Delaware General Corporation Law removes the necessity to comply with the formal procedures set forth in Section 275 (which would have required our board of directors and stockholders to formally vote to approve our dissolution and liquidation and to have filed a certificate of dissolution with the Delaware Secretary of State). In connection with any proposed business combination we submit to our stockholders for approval, we will also submit to stockholders a proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence, thereby removing this limitation on our corporate life. We will only consummate a business combination if stockholders vote both in favor of such business combination and our amendment to provide for our perpetual existence. The approval of the proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence would require the affirmative vote of a majority of our outstanding shares of common stock. We view this provision terminating our corporate life by March , 2009 as an obligation to our stockholders and will not take any action to amend or waive this provision to allow us to survive for a longer period of time except in connection with the consummation of a business combination. Conversion rights for stockholders voting to reject a business combination: Public stockholders voting against a business combination will be entitled to convert their stock into a pro rata share of the trust account (approximately $5.89 per unit), plus any remaining interest earned on their portion of the trust account, net of working capital (up to a maximum of $1,200,000) and taxes payable. This amount includes a pro rata portion of the $2,040,000 (approximately $0.24 per unit) of the deferred non-accountable expense allowance and the deferred portion of the underwriting discount held in the trust account, if the business combination is approved and consummated. In order for a business combination to be approved a majority of the shares of common stock voted by the public stockholders would need to vote in favor of the combination and our existing shareholders, as described above, would be required to vote their shares in accordance with the vote of the majority to approve the business combination. Accordingly, since they did not vote against the business combination, our existing stockholders would not be entitled to exercise conversion rights with respect to the stock they own. In order to exercise this right, the public stockholders must make an affirmative election. Voting against a business combination does not automatically trigger the conversion right. Public stockholders who convert their shares of stock into their share of the trust account will continue to have the right to exercise any warrants they may hold. Liquidation if no business combination: As described above, if we have not consummated a business combination by March , 2009, our corporate existence will cease by operation of law and we will distribute only to our public stockholders the amount in our trust account inclusive of the $2,040,000 attributable to the deferred underwriters non-accountable expense allowance and the deferred portion of the underwriting discount, and proceeds from the private placement of the warrants plus any remaining net assets. At that time, pursuant to Section 281 of the Delaware General Corporation Law, we will adopt a plan that will provide for our payment, based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against us within the subsequent 10 years. Accordingly, we would be required to provide for any creditors known to us at that time as well as provide for any claims that we believe could potentially be brought against us within the subsequent 10 years prior to distributing the funds held in the trust to our public stockholders. We cannot assure you that we will properly assess all claims that may be potentially brought against us. Our stockholders could, therefore, potentially be liable for claims to the extent of distributions received by them in a dissolution and any liability of our stockholders may extend beyond the third anniversary of such dissolution. Furthermore, while we will seek to have all vendors and service providers (which would include any third parties we engaged to assist us in any way in connection with our search for a target business) and prospective target businesses execute agreements with us waiving any right, title, interest or claim of any kind they may have in or to any monies held in the trust account, there is no guarantee that they will execute such agreements. Nor is there any guarantee that, even if such entities execute such agreements with us, they will not seek recourse against the trust account. A court could also conclude that such agreements are not legally enforceable. Our founders will be personally liable to ensure that the proceeds in the trust account, excluding interest, are not reduced by the claims of various vendors, prospective target businesses or other entities that are owed money by us for services rendered or products sold to us. However, we cannot assure you that such individuals will be able to satisfy those obligations should they arise. If the founders fail to follow through on their indemnification obligations or otherwise took action which may be viewed as giving shareholders a cause of action, the board of directors, in the exercise of its fiduciary duties under Delaware law, would be required to consider whether pursuit of these possible claims would be in the best interests of the shareholders. If the Board concluded pursuit of a claim was in the best interests of the shareholders, the board would be required to file an action against the founders. If the board concluded otherwise but shareholders disagreed, shareholders could pursue a derivative suit after demand of the board had been made and refused. In addition, shareholders could pursue claims against the board for breach of fiduciary duty. The agreements containing indemnification obligations are governed by Delaware law and would be decided either in a Delaware court applying Delaware law or in another state court applying Delaware law. Furthermore, in the event of liquidation, to the extent that there are claims not reimbursed out of the indemnity obligations of the founders, then we may use funds from the trust account to satisfy such claims, in which case, the per-share liquidation price could be less than $5.89 per share. We anticipate the distribution of the funds in the trust account to our public stockholders will occur within 10 business days from the date our corporate existence ceases. Our existing stockholders have waived their rights to participate in any liquidation distribution with respect to their initial shares. We will pay the costs of liquidation from our remaining assets outside of the trust account. Escrow of existing stockholder shares: On the date of this prospectus, all of our existing stockholders (which includes all of our officers, directors and special advisors) will place the shares of common stock they own prior to this offering into an escrow account maintained by American Stock Transfer Trust Company, acting as escrow agent. Subject to certain limited exceptions, such as transfers to family members and trusts for estate planning purposes and upon death, while in each case remaining in the escrow account, these shares will not be released from escrow until six months after the consummation of a business combination. The shares will only be released prior to that date if we are forced to liquidate, in which case the shares would be cancelled, or if we were to consummate a transaction after the consummation of a business combination which results in all of the stockholders of the combined entity having the right to exchange their shares of common stock for cash, securities or other property. The warrants purchased in the private placement will be included in the escrow account and such warrants may not be exercised until after the consummation of a business combination. Risks In making your decision on whether to invest in our securities, you should take into account not only (1) the background of our management team in private equity and mergers and acquisitions, which are described in the section entitled Management appearing elsewhere in this prospectus and (2) the nature of our proposed business, which is described in the section entitled Proposed Business appearing elsewhere in this prospectus, but also the special risks we face as a blank check company, as well as the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, and, therefore, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. You should carefully consider these and the other risks set forth in the section entitled Risk Factors beginning on page 10 of this prospectus. Except as otherwise indicated, all information in the prospectus assumes: an initial public offering price of $6.00 per Unit; that the total public offering price of the Units set forth on the cover of this prospectus does not exceed $51,000,000; and no exercise of the underwriters over-allotment option. Summary Financial Data The following table summarizes the relevant financial data for our business and should be read in conjunction with our financial statements, and the related notes and schedules thereto, which are included in this prospectus. To date, our efforts have been limited to organizational activities so only balance sheet data is presented. December 31, 2006 Actual As Adjusted(1) Balance Sheet Data: Working capital (deficiency) $ (309,479 ) $ 48,024,500 Total assets $ 380,828 $ 48,174,500 Total liabilities $ 358,828 $ 150,000 Value of common stock that may be converted to cash(2) $ 9,595,700 Stockholders equity (deficiency) $ 22,000 $ 38,428,800 (1) (i) Includes $1,500,000 from the proceeds of the private placement, (ii) excludes the $100 purchase price of the purchase option payable by the underwriters and (iii) excludes $2,040,000 representing the underwriters deferred non-accountable expense allowance and the deferred portion of the underwriting discount described in footnote 2 payable to the underwriters only upon consummation of a business combination. (2) If the business combination is approved and completed, public stockholders who voted against the combination will be entitled to redeem their stock for approximately $5.89 per unit (or $10,003,496 in the aggregate), which amount represents approximately $5.65 per unit (or $9,595,700 in the aggregate) representing the redeeming shareholders proportionate share of the net proceeds of the offering and private placement of the warrants and $0.24 per unit (or $407,796 in the aggregate) representing the underwriters non-accountable expense allowance and the deferred portion of the underwriting discount which the underwriters have agreed to deposit into the trust account and to forfeit to pay redeeming stockholders, and does not take into account interest earned on the trust account. The working capital (deficiency) excludes $331,479 of costs related to this offering which were paid or accrued prior to December 31, 2006. These deferred offering costs have been recorded as a long-term asset and are reclassified against stockholders equity in the as adjusted column. The as adjusted information gives effect to the sale of the units in this offering and private placement of the warrants, including the application of the estimated gross proceeds and the payment of the estimated remaining costs from such sale. The working capital (as adjusted) and total assets (as adjusted) amounts will be available to us only upon the consummation of a business combination within the time period described in this prospectus. The underwriters have agreed to defer approximately $2,040,000 of the proceeds attributable to their non-accountable expense allowance and the deferred portion of the underwriting discount until the consummation of a business combination. Upon the consummation of a business combination, we will pay such deferred non-accountable expense allowance and the deferred portion of the underwriting discount to the underwriters out of the proceeds of this offering held in trust. If a business combination is not so consummated, we will be dissolved and the proceeds held in the trust account will be distributed solely to our public stockholders. We will not proceed with a business combination if public stockholders owning 20% or more of the shares sold in this offering vote against the business combination and then subsequently exercise their conversion rights. Accordingly, if public shareholders owning a majority of the shares sold in this offering approve a business combination, we may effect that business combination even if public stockholders owning up to approximately 19.99% of the shares sold in this offering exercise their conversion rights. If this occurs, we would be required to convert to cash up to approximately 19.99% of the 8,500,000 shares of common stock sold in this offering, or 1,699,150 shares of common stock, at an initial per-share conversion price of approximately $5.89, without taking into account interest earned on the trust account, if we choose to pursue the business combination and such business combination is completed. The actual per-share conversion price will be equal to: the amount in the trust account, including accrued interest not applied toward working capital and taxes, as described in this prospectus, as of two business days prior to the proposed consummation of the business combination; divided by the number of shares of common stock sold in this offering. The actual amount per share a public stockholder would receive on conversion could be reduced as a result of any potential claims of creditors against us which are senior to the claims of our public stockholders. RISK FACTORS An investment in our securities involves a high degree of risk. You should consider carefully all of the material risks described below, together with the other information contained in this prospectus, before making a decision to invest in our securities. If any of the following risks occur, our business and financial conditions may be materially adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment. Additional risks not currently known to us, or that we deem immaterial, may also harm us or affect your investment. We make various statements in this section which constitute forward-looking statements . See Forward-Looking Statements. Risks associated with our business We are a development stage company with no operating history and, accordingly, you will have no basis upon which to evaluate our ability to achieve our business objective. Moreover, our financial statements contain a statement indicating that our ability to continue as a going concern is dependent on the consummation of this offering. We are a recently incorporated development stage company with no operating results to date. Therefore, our ability to begin operations is dependent upon obtaining financing through the public offering of our securities. Because we do not have an operating history, you will have no basis upon which to evaluate our ability to achieve our business objective, which is to acquire one or more operating businesses with operations primarily in China as described in this prospectus. We have not conducted any discussions and we have no plans, arrangements or understandings with any prospective acquisition candidates. We will not generate any revenues (other than interest income on the proceeds of this offering) until, at the earliest, after the consummation of a business combination. We cannot assure you as to when or if a business combination will occur. The report of our independent registered public accountants on our financial statements includes an explanatory paragraph stating that our ability to continue as a going concern is dependent on the consummation of this offering. The financial statements do not include any adjustments that might result from our inability to consummate this offering or our ability to continue as a going concern. We may not be able to consummate a business combination within the required time frame, in which case, we would be forced to liquidate. We must complete a business combination with a fair market value of at least 80% of our net assets (excluding the non-accountable expense allowance and the deferred portion of the underwriting discount held in the trust account for the benefit of the underwriters) at the time of acquisition within 24 months after the consummation of this offering. If we fail to consummate a business combination within the required time frame, we will be forced to liquidate our assets. We may not be able to find suitable target businesses within the required time frame. In addition, our negotiating position and our ability to conduct adequate due diligence on any potential target may be reduced as we approach the deadline for the consummation of a business combination. We do not have any specific merger, capital stock exchange, asset acquisition or other similar business combination under consideration and have not had any discussions, formal or otherwise, with respect to such a transaction. Under Delaware law the requirements and restrictions relating to this offering contained in our amended and restated certificate of incorporation may be amended, which could reduce or eliminate the protection afforded to our stockholders by such requirements and restrictions. Our amended and restated certificate of incorporation sets forth certain requirements and restrictions relating to this offering that shall apply to us until the consummation of a business combination. Specifically, our amended and restated certificate of incorporation provides, among other things, that: prior to the consummation of our initial business combination, we shall submit such business combination to our stockholders for approval along with a proposal to amend the amended and restated certificate of incorporation to provide for our perpetual existence following such business combination; we may consummate our initial business combination if: (i) approved by a majority of the shares of common stock voted by the public stockholders, and (ii) public stockholders owning less than 20% of the shares purchased by the public stockholders in this offering exercise their conversion rights; if our initial business combination is approved and consummated, public stockholders who voted against the business combination and exercised their conversion rights will receive their pro rata share of the trust account plus accrued interest not applied toward working capital, and taxes payable, less any amounts reserved for any pending claims; if a business combination is not consummated within 24 months of the date of this prospectus, then we will be dissolved and distribute to all of our public stockholders their pro rata share of the trust account plus accrued interest not applied toward working capital and taxes payable, less any amounts reserved for any pending claims; and we may not consummate any other merger, capital stock exchange, stock purchase, asset acquisition or similar transaction other than a business combination that meets the conditions specified in this prospectus, including the requirement that our initial business combination be with one or more operating businesses whose fair market value, either individually or collectively, is equal to at least 80% of our net assets (excluding the deferred non-accountable expense allowance and the deferred portion of the underwriting discount held in trust for the benefit of the underwriters) at the time of such business combination. Our amended and restated certificate of incorporation prohibits the amendment of the above-described provisions. However, the validity of provisions prohibiting amendment of a certificate of incorporation under Delaware law has not been settled. A court could conclude that the prohibition on amendment violates the stockholders implicit rights to amend the corporate charter. In that case, the above-described provisions would be amendable and any such amendment could reduce or eliminate the protection afforded to our stockholders. However, we view the foregoing provisions as obligations to our stockholders, and we will not take any actions to waive or amend any of these provisions. If we are forced to liquidate before a business combination, our public stockholders will receive less than $6.00 per share upon distribution of the trust account and our warrants will expire worthless. If we are unable to complete a business combination and are forced to liquidate our assets, the per-share liquidation will be less than $6.00 because of the expenses related to this offering, our general and administrative expenses and the anticipated costs of seeking a business combination. Interest earned on the trust account, less up to $1,200,000, net of taxes payable, applied toward working capital will be included in payments to our stockholders in the event of liquidation. We expect that all costs associated with implementing our plan of dissolution and liquidation as well as payments to any creditors will be funded from the interest on the trust account up to $1,200,000, net of taxes payable, available to us as working capital. However, if those funds are not sufficient to cover costs of dissolution and liquidation or any liabilities and obligations to creditors not reimbursed from our founders indemnity, remaining interest as well as the principal in the trust account may be applied for such purpose and the amount distributed to our public stockholders would be less than $5.89 per share. Furthermore, the warrants will expire worthless if we liquidate before the completion of a business combination. For a more complete description on the effects on our stockholders if we are unable to complete a business combination, see the section below entitled Proposed Business Effecting a business combination Liquidation if no Business Combination. You will not be entitled to protections normally afforded to investors of blank check companies under federal securities laws. Because the net proceeds of this offering are intended to be used to complete a business combination with one or more operating businesses that have not been identified, we may be deemed to be a blank check company under the federal securities laws. However, since we will have net tangible assets in excess of $5,000,000 upon the successful consummation of this offering and our units are being offered at an initial price of $6.00 per unit, we believe that we are exempt from rules promulgated by the SEC to protect investors of blank check companies such as Rule 419. Accordingly, investors will not be afforded the benefits or protections of those rules. For example, under Rule 419 interest earned on the trust account is for the sole benefit of investors. We are permitted under our charter, however, to apply interest up to $1,200,000, net of taxes, to working capital. Furthermore, claims of creditors in excess of our $1,200,000 working capital allowance may be satisfied out of remaining interest. Because we do not believe we are subject to Rule 419, our units will be immediately tradable and we have a longer period of time within which to complete a business combination in certain circumstances. For a more detailed comparison of our offering to offerings under Rule 419, see the section below entitled Proposed Business Comparison to offerings of Blank Check Companies. If third parties bring claims against us, the proceeds held in trust could be reduced and the per-share liquidation or conversion price received by stockholders may be less than approximately $5.89 per share. Our placing of funds in trust may not protect those funds from third party claims against us. Although we will seek to have all vendors, prospective target businesses or other entities we engage execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our public stockholders, there is no guarantee that they will execute such agreements, or even if they execute such agreements that they would be prevented from bringing claims against the trust account. If any third party refused to execute an agreement waiving such claims to the monies held in the trust account, we would perform an analysis of the alternatives available to us if we chose not to engage such third party and evaluate if such engagement would be in the best interest of our stockholders if such third party refused to waive such claims. Examples of possible instances where we may engage a third party that refused to execute a waiver include the engagement of a third party consultant whose particular expertise or skills are believed by management to be significantly superior to those of other consultants that would agree to execute a waiver or in cases where management is unable to find a provider of required services willing to provide the waiver. In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with us and will not seek recourse against the trust account for any reason. Moreover, a court may conclude that any third party waivers are unenforceable. Accordingly, the proceeds held in trust could be subject to claims which could take priority over the claims of our public stockholders and the per-share liquidation price could be less than approximately $5.89 plus partial interest, due to claims of such creditors. If we are unable to complete a business combination and are forced to liquidate, our founders will be personally liable to ensure that the proceeds in the trust account, excluding interest, are not reduced by the claims of various vendors, prospective target businesses or other entities that are owed money by us for services rendered or products sold to us. Based upon information we have obtained from such individuals, we currently believe that such persons are of substantial means and capable of funding a shortfall in our trust account, even though we have not asked them to provide a reserve for such an eventuality. However, we cannot assure you that such individuals will be able to satisfy those obligations should they arise. If the founders fail to follow through on their indemnification obligations or otherwise took action which may be viewed as giving shareholders a cause of action, the board of directors, in the exercise of its fiduciary duties under Delaware law, would be required to consider whether pursuit of these possible claims would be in the best interests of the shareholders. If the Board concluded pursuit of a claim was in the best interests of the shareholders, the board would be required to file an action against the founders. If the board concluded otherwise but shareholders disagreed, shareholders could pursue a derivative suit after demand of the board had been made and refused. In addition, shareholders could pursue claims against the board for breach of fiduciary duty. The agreements containing indemnification obligations are governed by Delaware law and would be decided either in a Delaware court applying Delaware law or in another state court applying Delaware law. In addition, such third party claims may result in the per share conversion price received by stockholders who vote against a business combination and elect to convert their shares into cash being less than approximately $5.89 per share. Furthermore, in the event of a liquidation, to the extent that there are claims not reimbursed out of the indemnity obligations of the founders, then we may use funds from the trust account to satisfy such claims, in which case, the per-share liquidation price could be less than $5.89 per share. Additionally, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, the funds held in our trust account will be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. To the extent any bankruptcy claims deplete the trust account we cannot assure you we will be able to return to our public stockholders the liquidation amounts due them. Our stockholders may be held liable for claims by third parties against us to the extent of distributions received by them. Our amended and restated certificate of incorporation provides that we will continue in existence only until 24 months from the date of this prospectus. If we have not completed a business combination by such date and amended this provision in connection thereto, pursuant to the Delaware General Corporation Law, our corporate existence will cease except for the purposes of winding up our affairs and liquidating. Under Sections 280 through 282 of the Delaware General Corporation Law, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. If the corporation complies with certain procedures set forth in Section 280 of the Delaware General Corporation Law intended to ensure that it makes reasonable provision for all claims against it, including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution. However, it is our intention to make liquidating distributions to our stockholders as soon as reasonably possible after the expiration of the twenty four month period and, therefore, we do not intend to comply with those procedures. Because we will not be complying with those procedures, we are required, pursuant to Section 281 of the Delaware General Corporation Law, to adopt a plan that will provide for our payment, based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against us within the subsequent 10 years. Accordingly, we would be required to provide for any creditors known to us at that time or those that we believe could be potentially brought against us within the subsequent 10 years prior to distributing the funds held in the trust to stockholders. We cannot assure you that we will properly assess all claims that may be potentially brought against us. As such, our stockholders could potentially be liable for any claims to the extent of distributions received by them (but no more) and any liability of our stockholders may extend well beyond the third anniversary of such date. Accordingly, we cannot assure you that third parties will not seek to recover from our stockholders amounts owed to them by us. If we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, any distributions received by stockholders could be viewed under applicable debtor/creditor and/or bankruptcy laws as either a preferential transfer or a fraudulent conveyance. As a result, a bankruptcy court could seek to recover all amounts received by our stockholders. Furthermore, because we intend to distribute the proceeds held in the trust account to our public stockholders promptly after March , 2009 if a business combination has not been completed by such date, this may be viewed or interpreted as giving preference to our public stockholders over any potential creditors with respect to access to or distributions from our assets. Furthermore, our board may be viewed as having breached their fiduciary duties to our creditors and/or may have acted in bad faith, and thereby exposing itself and our company to claims of punitive damages, by paying public stockholders from the trust account prior to addressing the claims of creditors. We cannot assure you that claims will not be brought against us for these reasons. We will dissolve and liquidate if we do not consummate a business combination. Our amended and restated certificate of incorporation provides that we will continue in existence only until 24 months from the date of this prospectus. If we have not completed a business combination by such date and amended this provision in connection therewith, our corporate existence will cease except for the purposes of winding up our affairs and liquidating. We view this obligation to dissolve and liquidate as an obligation to our public stockholders and neither we nor our board of directors will take any action to amend or waive any provision of our amended and restated certificate of incorporation to allow us to survive for a longer period of time if it does not appear we will be able to consummate a business combination within the foregoing time periods. Upon dissolution, we will distribute to all of our public stockholders, in proportion to their respective equity interest, an aggregate sum equal to the amount in the trust account, inclusive of any remaining interest not applied toward working capital of up to $1,200,000, and taxes payable. Our existing stockholders have waived their rights to participate in any liquidation distribution with respect to their initial shares and have agreed to vote in favor of any plan of dissolution and distribution which we will present to our stockholders for vote. In the event of liquidation, there will be no distribution from the trust account with respect to our warrants which will expire worthless. We will pay the costs of our dissolution and liquidation, which we currently estimate to be approximately $75,000, from our remaining assets outside of the trust fund. Our founders have agreed pursuant to an agreement with us and Ferris, Baker Watts, Incorporated that, if we liquidate prior to the consummation of a business combination, they will be personally liable to ensure that the proceeds of the trust account, excluding interest, are not reduced by the claims of vendors, prospective target businesses, or other entities that are owed money by us for services rendered or products sold to us. Based on information we have obtained from such individuals, we currently believe that such persons are of substantial means and capable of funding a shortfall in our trust account, even though we have not asked them to provide a reserve for such an eventuality. We cannot assure you, however, that such individuals will be able to satisfy those obligations should they arise. Furthermore, in the event of a liquidation, to the extent that there are claims not reimbursed out of the indemnity obligations of the founders then we may use funds from the trust account to satisfy such claims, in which case, the per-share liquidation price could be less than $5.89 per share. If we have not completed a business combination within 24 months of the date of this prospectus and amended our certificate of incorporation to allow for perpetual existence following such business combination, our purpose and powers will be limited to dissolving, liquidating and winding up. Upon notice from us, the trustee of the trust account will liquidate the investments constituting the trust account and will turn over the proceeds to our transfer agent for distribution to our public stockholders as part of our plan of dissolution and distribution. Concurrently, we shall pay, or reserve for payment, from funds not held in trust, our liabilities and obligations, although we cannot assure you that there will be sufficient funds for such purpose. If funds are insufficient, the amount per share distributed in liquidation may be less than $5.89. Our public stockholders will be entitled to receive funds from the trust account only in the event of our dissolution and liquidation or if they seek to convert their respective shares into cash upon a business combination which the stockholder voted against and which is completed by us. In no other circumstances will a stockholder have any right or interest of any kind to or in the trust account. Because we have not currently selected any prospective target businesses with which to complete a business combination, investors in this offering are unable to currently ascertain the merits or risks of any particular target business operations. Because we have not yet identified any prospective target businesses, investors in this offering have no current basis to evaluate the possible merits or risks of any particular target business operations. To the extent we complete a business combination with a financially unstable company or an entity in its development stage, we may be affected by numerous risks inherent in the business operations of those entities. Although our management will endeavor to evaluate the risks inherent in a particular target business, we cannot assure you that we will properly ascertain or assess all of the significant risk factors, or that we will have adequate time to complete due diligence. We also cannot assure you that an investment in our units will not ultimately prove to be less favorable to investors in this offering than a direct investment, if an opportunity were available, in any particular target business. For a more complete discussion of our selection of target businesses, see the section below entitled Proposed Business Effecting a Business Combination We have not identified any target businesses. We may issue shares of our capital stock, including through convertible debt securities, to complete a business combination, which would reduce the equity interest of our stockholders and likely cause a change in control of our ownership. Our amended and restated certificate of incorporation authorizes the issuance of up to 50,000,000 shares of common stock, par value $.0001 per share and 1,000,000 shares of preferred stock, par value $.0001 per share. Immediately after this offering (assuming no exercise of the underwriters over-allotment option), there will be 17,875,000 authorized but unissued shares of our common stock available for issuance (after appropriate reservation for the issuance of shares upon full exercise of our outstanding warrants and the purchase option granted to the underwriters) and all of the 1,000,000 shares of preferred stock available for issuance. Although we have no other commitments as of the date of this offering to issue any securities, we may issue a substantial number of additional shares of our common stock or preferred stock or a combination of both, including through convertible debt securities, to complete a business combination. The issuance of additional shares of our common stock including upon conversion of any debt securities: may significantly dilute the equity interest of investors in this offering; will likely cause a change in control if a substantial number of our shares of common stock or voting preferred are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and most likely also result in the resignation or removal of our present officers and directors; may adversely affect the voting power or other rights of holders of our common stock if we issue preferred stock with dividend, liquidation, compensation or other rights superior to the common stock; and may adversely affect prevailing market prices for our common stock, warrants or units. For a more complete discussion of the possible structure of a business combination, see the section below entitled Proposed Business Effecting a Business Combination Selection of target businesses and structuring of a business combination. We may issue notes or other debt securities, or otherwise incur substantial debt, to complete a business combination, which may adversely affect our leverage and financial condition. Although we have no commitments as of the date of this offering to incur any debt, we may choose to incur a substantial amount of debt to finance a business combination. The incurrence of debt: may lead to default and foreclosure on our assets if our operating revenues after a business combination are insufficient to pay our debt obligations; may cause an acceleration of our obligations to repay the debt even if we make all principal and interest payments when due if we breach the covenants contained in the terms of the debt documents; may create an obligation to immediately repay all principal and accrued interest, if any, upon demand to the extent any debt securities are payable on demand; and may hinder our ability to obtain additional financing, if necessary, to the extent any debt securities contain covenants restricting our ability to obtain additional financing while such security is outstanding, or to the extent our existing leverage discourages other potential investors. For a more complete discussion of the possible structure of a business combination, see the section below entitled Proposed Business Effecting a Business Combination Selection of target businesses and structuring of a business combination. Our current officers and directors may resign upon consummation of a business combination. Our ability to successfully effect a business combination will be totally dependent upon the efforts of our key personnel. The future role of our key personnel, particularly Jack Kang, our Chairman of the Board, Alwin Tan, our Chief Executive Officer and President, Steven Wang, our Chief Financial Officer and Treasurer, and Mark Tan, our Vice President and Secretary, following a business combination, however, cannot presently be ascertained. While several of our management and other key personnel, particularly Jack Kang and Alwin Tan, have indicated their willingness to remain associated with us following a business combination, we have no current expectation that they will do so, and we may employ other personnel following the business combination. Moreover, our current management will only be able to remain with the combined company after the consummation of a business combination if they are able to negotiate the same as part of any such combination. If we acquired a target business in an all-cash transaction, it would be more likely that current members of management would remain with us if they chose to do so. If a business combination were structured as a merger whereby the stockholders of the target company were to control the combined company following a business combination, it may be less likely that management would remain with the combined company unless it was negotiated as part of the transaction via the acquisition agreement, an employment agreement or other arrangement. In making the determination as to whether current management should remain with us following the business combination, management will analyze the experience and skill set of the target business management and negotiate as part of the business combination that certain members of current management remain if it is believed that it is in the best interests of the combined company post-business combination. If management negotiates to be retained post-business combination as a condition to any potential business combination, such negotiations may result in a conflict of interest. Our ability to successfully effect a business combination and to be successful afterwards will be completely dependent upon the efforts of our key personnel, some of whom may join us following a business combination and whom we would have only a limited ability to evaluate. We may employ other personnel following a business combination regardless of whether our existing personnel remain with us. While we intend to closely scrutinize any additional individuals we engage after a business combination, we cannot assure you that our assessment of these individuals will prove to be correct. These individuals may be unfamiliar with the requirements of operating a public company as well as United States securities laws, which could cause us to have to expend time and resources helping them become familiar with such laws. This could be expensive and time-consuming and could lead to various regulatory issues that may adversely affect our operations. Our officers, directors and special advisors may allocate their time to other businesses, thereby causing conflicts of interests in their determination as to how much time to devote to our affairs. This may have a negative impact on our ability to consummate a business combination. Our officers, directors and special advisors are not required to, and will not, commit their full time to our affairs, which may result in a conflict of interest in allocating their time between our operations and other businesses. This could have a negative impact on our ability to consummate a business combination. We do not intend to have any full time employees prior to the consummation of a business combination. Each of our officers is engaged in several other business endeavors and are not obligated to contribute any specific number of hours per week to our affairs. If Jack Kang s and Alwin Tan s other business affairs require them to devote substantial amounts of time to such affairs, it could limit their ability to devote time to our affairs and could have a negative impact on our ability to consummate a business combination. We cannot assure you that these conflicts will be resolved in our favor. For a complete discussion of the potential conflicts of interest that you should be aware of, see the section below entitled Certain Relationships and Related Transactions. Our officers, directors and special advisors may in the future become affiliated with entities engaged in business activities similar to those intended to be conducted by us and, accordingly, may have conflicts of interest in determining to which entity a particular business opportunity should be presented. Our officers, directors and special advisors may in the future become affiliated with entities, including other blank check companies, engaged in business activities similar to those intended to be conducted by us. However, none of our officers, directors or special advisors currently has any affiliation with another blank check company. Additionally, our officers, directors and special advisors may become aware of business opportunities that may be appropriate for presentation to us as well as the other entities with which they are or may be affiliated. Our officers, directors and special advisors who become involved in businesses similar to what we may intend to conduct following a business combination may have fiduciary or contractual obligations to present opportunities to those entities first. We cannot assure you that any such conflicts will be resolved in our favor. For a complete discussion of our management s business affiliations and the potential conflicts of interest that you should be aware of, see the sections below entitled Management Directors and Executive Officers and Certain Relationships and Related Transactions. Because all of our officers, directors and our special advisors own shares of our securities that will not participate in liquidation distributions, they may have a conflict of interest in determining whether a particular target business is appropriate for a business combination. All of our officers, directors and our special advisors own stock in our company, but have, with respect to those shares of common stock, waived their right to receive distributions upon our liquidation in the event we fail to complete a business combination. In addition, our Chairman has agreed to purchase an aggregate of 3,000,000 warrants in a private placement that will occur prior to this offering. Those shares and warrants owned by our officers, directors and our special advisors will be worthless if we do not consummate a business combination. The personal and financial interests of our officers and directors may influence their motivation in identifying and selecting target businesses and completing a business combination in a timely manner. Consequently, our officers and directors discretion in identifying and selecting suitable target businesses may result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination are appropriate and in our stockholders best interest. If our common stock becomes subject to the SEC s penny stock rules, broker-dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected. If at any time we have net tangible assets of $5,000,000 or less and our common stock has a market price per share of less than $5.00, transactions in our common stock may be subject to the penny stock rules promulgated under the Securities Exchange Act of 1934, as amended. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must: make a special written suitability determination for the purchaser; receive the purchaser s written agreement to a transaction prior to sale; provide the purchaser with risk disclosure documents that identify certain risks associated with investing in penny stocks and that describe the market for these penny stocks as well as a purchasers legal remedies; and obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a penny stock can be completed. If our common stock becomes subject to these rules, broker-dealers may find it difficult to effect customer transactions and trading activity in our securities may be adversely affected. As a result, the market price of our securities may be depressed, and you may find it more difficult to sell our securities. It is probable that we will only be able to complete one business combination, which may cause us to be solely dependent on a single business and a limited number of products or services. The net proceeds from this offering and private placement of warrants will provide us with approximately $48,002,500 (subject to reduction resulting from shareholders electing to convert their shares into cash), which we may use to complete a business combination. While we may seek to effect a business combination with more than one target business, our initial business acquisition must be with one or more operating businesses whose fair market value, collectively, is at least equal to 80% of our net assets (excluding the non-accountable expense allowance and the deferred portion of the underwriting discount held in the trust account for the benefit of the underwriters) at the time of such acquisition. At the time of our initial business combination, we may not be able to acquire more than one target business because of various factors, including insufficient financing or the difficulties involved in consummating the contemporaneous acquisition of more than one operating company; therefore, it is probable that we will have the ability to complete a business combination with only a single operating business, which may have only a limited number of products or services. The resulting lack of diversification may: result in our dependency upon the performance of a single or small number of operating businesses; result in our dependency upon the development or market acceptance of a single or limited number of products, processes or services; and subject us to numerous economic, competitive and regulatory developments, any or all of which may have a substantial adverse impact upon the particular industry in which we may operate subsequent to a business combination. subject us to numerous economic, competitive and regulatory developments, any or all of which may have a substantial adverse impact upon the particular industry in which we may operate subsequent to a business combination. In this case, we will not be able to diversify our operations or benefit from the possible spreading of risks or offsetting of losses, unlike other entities that may have the resources to complete several business combinations in different industries or different areas of a single industry so as to diversify risks and offset losses. Further, the prospects for our success may be entirely dependent upon the future performance of the initial target business or businesses we acquire. We will not generally be required to obtain a determination of the fair market value of a target business from an independent, unaffiliated third party. The initial target business or businesses with which we entered into a business combination must have a collective fair market value equal to at least 80% of our net assets (excluding the non-accountable expense allowance and the deferred portion of the underwriting discount held in the trust account for the benefit of the underwriters) at the time of such acquisition. The fair market value of such business generally will be determined by our board of directors based upon standards generally accepted by the financial community, such as actual and potential sales, earnings and cash flow and book value. We will obtain an opinion from an unaffiliated, independent investment banking firm that is a member of the National Association of Securities Dealers, Inc. with respect to the satisfaction of the 80% requirement if our board is not able to independently determine that the target businesses have a sufficient fair market value or if a conflict of interest exists with respect to such determination, such as the target business being affiliated with one or more of our officers or directors or with the underwriters and their respective affiliates. We will not be required to obtain an opinion from an investment banking firm as to the fair market value if our board of directors independently determines that the target business has sufficient fair market value or if no such conflict exists. We have substantial discretion as to how to spend the proceeds in this offering which are held outside of the trust. Our management has broad discretion as to how to spend the proceeds in this offering which are held outside of the trust account and may spend these proceeds in ways with which our stockholders may not agree. If we choose to invest some of the proceeds held outside of the trust account, we cannot predict that investment of the proceeds will yield a favorable return, if any. Because of our limited resources and the significant competition for business combination opportunities, we may not be able to consummate an attractive business combination. We expect to encounter intense competition from other entities having a business objective similar to ours, including venture capital funds, leveraged buyout funds and operating businesses competing for acquisitions. Many of these entities are well established and have extensive experience in identifying and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human and other resources than we do and our financial resources will be relatively limited when contrasted with those of many of these competitors. While we believe that there are numerous potential target businesses that we could acquire with the net proceeds of this offering, together with additional financing if available, our ability to compete in acquiring certain sizable target businesses will be limited by our available financial resources. This inherent competitive limitation gives others an advantage in pursuing the acquisition of certain target businesses. Further: our obligation to seek stockholder approval of a business combination may delay the consummation of a transaction; our obligation to convert into cash the shares of common stock in certain instances may reduce the resources available for a business combination; and our outstanding warrants, the unit purchase option granted to the underwriters and the future dilution they potentially represent, may not be viewed favorably by certain target businesses. In addition, because our business combination may entail the contemporaneous acquisition of several operating businesses and may be with different sellers, we will need to convince such sellers to agree that the purchase of their businesses is contingent upon the simultaneous closings of the other acquisitions. Any of these obligations may place us at a competitive disadvantage in successfully negotiating a business combination. Because there are numerous companies with a business plan similar to ours seeking to effectuate a business combination, it may be more difficult for us to do so. Since August 2003, based upon publicly available information, approximately 84 similarly structured blank check companies have completed initial public offerings. Of these companies, only 21 companies have consummated a business combination, while 28 other companies have announced that they have entered into a definitive agreement for a business combination, but have not consummated such business combination. Five companies are in liquidation. Accordingly, there are approximately 30 blank check companies with approximately $3.2 billion in trust that are seeking to carry out a business plan similar to our business plan. Of these companies, 7 companies are seeking to acquire a business in China. While, like us, some of those companies have specific regions that they must complete a business combination in, a number of them may consummate a business combination in any industry or region they choose. We may, therefore, be subject to competition from these and other companies seeking to consummate a business plan similar to ours, which will, as a result, increase demand for privately-held companies to combine with companies structured similarly to ours. Further, the fact that only 21 of such companies have completed a business combination and 28 of such companies have entered into a definitive agreement for a business combination may be an indication that there are only a limited number of attractive target businesses available to such entities or that many privately-held target businesses may not be inclined to enter into business combinations with publicly held blank check companies like us. We cannot assure you that we will be able to successfully compete for an attractive business combination. Additionally, because of this competition, we cannot assure you that we will be able to effectuate a business combination within the required time periods. If we are unable to find a suitable target business within such time periods, we will be forced to liquidate. We may be unable to obtain additional financing, if required, to complete a business combination or to fund the operations and growth of the target business, which could compel us to restructure or abandon a particular business combination. Although we believe that the net proceeds of this offering will be sufficient to allow us to consummate a business combination, in as much as we have not yet identified any prospective target businesses, we cannot ascertain the capital requirements for any particular business combination. If the net proceeds of this offering prove to be insufficient, either because of the size of the business combination or the depletion of the available net proceeds in search of target businesses, or because we become obligated to convert into cash a significant number of shares from dissenting stockholders, we will be required to seek additional financing through the issuance of equity or debt securities or other financing arrangements. We cannot assure you that such financing would be available on acceptable terms, if at all. To the extent that additional financing proves to be unavailable when needed to consummate a particular business combination, we would be compelled to restructure or abandon that particular business combination and seek alternative target business candidates. In addition, if we consummate a business combination, we may require additional financing to fund the operations or growth of the target businesses. The failure to secure additional financing could have a material adverse effect on the continued development or growth of the target businesses. None of our officers, directors or stockholders is required to provide any financing to us in connection with or after a business combination. Our existing stockholders, including our officers, directors and special advisors, control a substantial interest in us and thus may influence certain actions requiring stockholder vote. Upon consummation of our offering our existing stockholders, including our officers, directors and special advisors, will collectively own approximately 20% of our issued and outstanding shares of common stock (excluding shares issuable upon an exercise of the warrants issued in the private placement). In connection with the vote required for our initial business combination, all of our existing stockholders, including all of our officers, directors and special advisors, have agreed to vote the shares of common stock owned by them (whether purchased prior to, during or after the offering) in accordance with the majority of the shares of common stock voted by the public stockholders. The target business may be affiliated with one or more of the initial stockholders. We may complete a business combination with a target company with which one or more of the initial stockholders is affiliated or has been affiliated, which may give rise to a conflict of interest. In the event we propose to acquire a target company that is affiliated with one of our initial stockholders, we will obtain an opinion from an independent investment banking firm that the business combination is fair from a financial point of view and will file such opinion with the Securities and Exchange Commission. Our existing stockholders paid an aggregate of $25,000, or an average of approximately $.01 per share for their shares and, accordingly, you will experience immediate and substantial dilution from the purchase of our common stock. The difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering constitutes the dilution to you and the other investors in this offering. The fact that our existing stockholders acquired their shares of common stock at a nominal price has significantly contributed to this dilution. Assuming the offering is completed, you and the other new investors will incur an immediate and substantial dilution of approximately 28% or $1.69 per share (the difference between the pro forma net tangible book value per share of $4.31 and the initial offering price of $6.00 per unit). An effective registration statement may not be in place when an investor desires to exercise warrants, thus precluding such investor from being able to exercise his, her or its warrants. No warrants will be exercisable and we will not be obligated to issue shares of common stock underlying such warrants unless, at the time a holder seeks to exercise, a prospectus relating to the common stock issuable upon exercise of the warrants is current and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of our warrants. Under the terms of a warrant agreement between American Stock Transfer Trust Company, as warrant agent, and us, we have agreed to use our best efforts to meet these conditions and to maintain a current prospectus relating to the common stock issuable upon exercise of the warrants until the expiration of the warrants. However, we cannot assure you that we will be able to do so. Additionally, we have no obligation to settle the warrants for cash in the absence of an effective registration statement or under any other circumstances. The warrants may be deprived of any value and the market for the warrants may be limited if the prospectus relating to the common stock issuable upon the exercise of the warrants is not current or if the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside. Consequently, the warrants may expire unexercised or unredeemed. We may redeem your unexpired warrants prior to their exercise We have the ability to redeem outstanding warrants, in whole or in part, at any time after they become exercisable and prior to their expiration, at the price of $.01 per warrant, provided that the last reported sales price of the common stock equals or exceeds $8.50 per share for any twenty (20) trading days within a thirty (30) trading day period ending on the third business day, before we send notice of redemption to warrant holders. We may not exercise the right to redeem such warrants unless a registration statement that includes a current prospectus is effective registering the common stock issuable on exercise of such warrants during the redemption period. Our outstanding warrants may have an adverse effect on the market price of common stock and make it more difficult to effect a business combination. In connection with this offering, and the private placement, as part of the units, we will be issuing warrants to purchase 20,000,000 shares of common stock (assuming no exercise of the underwriter s over-allotment option). In addition, we have agreed to sell to the underwriters an option to purchase up to a total of 500,000 units, which, if exercised, will result in the issuance of warrants to purchase an additional 1,000,000 shares of common stock. To the extent we issue shares of common stock to effect a business combination, the potential for the issuance of substantial numbers of additional shares upon exercise of these warrants could make us a less attractive acquisition vehicle in the eyes of a target business as such securities, when exercised, will increase the number of issued and outstanding shares of our common stock and reduce the value of the shares issued to complete the business combination. Accordingly, our warrants may make it more difficult to effectuate a business combination or increase the cost of a target business. Additionally, the sale, or even the possibility of sale, of the shares underlying the warrants could have an adverse effect on the market price for our securities or on our ability to obtain future public financing. If and to the extent these warrants are exercised, you may experience dilution to your holdings. Our Chairman s obligation to purchase common stock in the open market commencing on the later of ten business days after we file a current report on Form 8-K announcing our execution of a definitive agreement for our initial business combination or 60 calendar days after the end of the restricted period under Regulation M and ending on the business day immediately preceding the record date for the meeting of stockholders at which such business combination is voted upon by our stockholders may support the market price of the common stock and/or warrants during such period and, accordingly, the termination of the support provided by such purchases may materially adversely affect the market price of the common stock and/or warrants. Our Chairman has agreed, pursuant to an agreement with the underwriters in accordance with guidelines specified by Rule 10b5-1 under the Securities Exchange Act of 1934, to purchase, or cause his affiliate to purchase, up to $8 million of our common stock in the open market, at market prices not to exceed the per share amount held in the trust account (less taxes payable), commencing on the later of (a) ten business days after we file a Current Report on Form 8-K announcing our execution of a definitive agreement for our initial business combination ( Signing 8-K ) or (b) 60 calendar days after the end of the restricted period under Regulation M, and ending on the business day immediately preceding the record date for the meeting of stockholders at which such business combination is to be voted upon by our stockholders. The per share amount held in the trust account (less taxes payable) will be determined by us as of the close of business on the day prior to the filing of the Signing 8-K and will be disclosed in the Signing 8-K. Neither our Chairman, nor his affiliate, will have any discretion or influence with respect to such purchases and will not be able to sell or transfer any common stock purchased in the open market pursuant to such agreement until six months following the consummation of a business combination. Consequently, if the market does not view a business combination positively, these purchases may have the effect of counteracting the market s view of the business combination, which would otherwise be reflected in a decline in the market price of our securities. The termination of the support provided by these purchases may materially adversely affect the market price of our securities. Our Chairman s obligations to purchase common stock in the open market commencing on the later of ten business days after we file a current report on Form 8-K announcing our execution of a definitive agreement for our initial business combination or 60 calendar days after the end of the restricted period under Regulation M will have the effect of reducing the number of shares held by the public required to approve a business combination and increasing the percentage of shares held by the public necessary to vote against the transaction and to elect conversion of a sufficient number of shares to defeat a proposed business combination. Mr. Kang s purchase of shares in the market will reduce the number of shares held by public stockholders and he will vote such shares in favor of the business combination. As a result, a smaller percentage of the remaining shares held by the public will be required to approve a business combination. Therefore, obtaining approval of a business combination is more likely. In addition, because Mr. Kang will vote his shares in favor of a business combination, such shares will not be eligible to elect conversion to cash. Therefore, as a practical matter, a higher percentage of the shares held by public shareholders electing to convert than otherwise would be necessary will be necessary to defeat a proposed business combination. If our existing stockholders exercise their registration rights, it may have an adverse effect on the market price of our common stock and the existence of these rights may make it more difficult to effect a business combination. Our existing stockholders are entitled under certain circumstances after their shares are released from escrow to require us to use our best efforts to register the resale of the 2,125,000 shares of common stock they acquired prior to this offering and our Chairman and/or an affiliate owned or controlled by him may request us to register for resale the warrants and shares of common stock underlying the 3,000,000 warrants he is purchasing in the private placement. In addition, the holders of units issuable under the underwriters purchase option are entitled to make a demand that we use our best efforts to register these units, the 500,000 shares of common stock included in the units, and the 1,000,000 shares of common stock issuable upon exercise of the warrants included in the units. If our existing stockholders and the underwriters exercise their registration rights with respect to all of their shares of common stock that have been issued and/or are issuable pursuant to the underwriters purchase option and such registration statement becomes effective, then there will be up to an additional 6,625,000 shares of common stock eligible for trading in the public market. The presence of this additional number of shares of common stock eligible for trading in the public market may have an adverse effect on the market price of our common stock. In addition, the existence of these rights may make it more difficult to effect a business combination or increase the cost of a target business, as the stockholders of a particular target business may be discouraged from entering into a business combination with us or will request a higher price for their securities as a result of these registration rights and the potential future effect their exercise may have on the trading market for our common stock. The American Stock Exchange may delist our securities from quotation on its exchange which could limit investors ability to make transactions in our securities and subject us to additional trading restrictions. We have applied to list our securities on the American Stock Exchange, a national securities exchange, upon consummation of this offering. Our listing has not yet been approved by the American Stock Exchange and we cannot assure you that our securities will be listed or, if listed, will continue to be listed on the American Stock Exchange in the future. Additionally, in connection with our business combination, it is likely that the American Stock Exchange may require us to file a new initial listing application and meet its initial listing requirements as opposed to its more lenient continued listing requirements. We cannot assure you that we will be able to meet those initial listing requirements at that time. If the American Stock Exchange delists our securities from trading on its exchange, we could face significant material adverse consequences including: a limited availability of market quotations for our securities; a determination that our common stock is a penny stock which will require brokers trading in our common stock to adhere to more stringent rules and possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock; a limited amount of news and analyst coverage for our company; and a decreased ability to issue additional securities or obtain additional financing in the future. There is currently no market for our securities and a market for our securities may not develop, which could adversely affect the liquidity and price of our securities. There is currently no market for our securities. Therefore, stockholders should be aware that they cannot benefit from information about prior market history as to their decisions to invest which means they are at further risk if they invest. In addition, the price of the securities, after the offering, can vary due to general economic conditions and forecasts, our general business condition and the release of our financial reports. Furthermore, an active trading market for our securities may never develop or, if developed, it may not be maintained. Investors may be unable to sell their securities unless a market can be established or maintained. If we are deemed to be an investment company, we may be required to institute burdensome compliance requirements and our activities may be restricted, which may make it difficult for us to complete a business combination. If we are deemed to be an investment company under the Investment Company Act of 1940, as amended, our activities may be restricted, including: restrictions on the nature of our investments; and restrictions on the issuance of securities, each of which may make it difficult for us to complete a business combination. In addition, we may have imposed upon us burdensome requirements, including: registration as an investment company; adoption of a specific form of corporate structure; and reporting, record keeping, voting, proxy and disclosure requirements; and complying with other rules and regulations. Generally, a company that holds itself out as being engaged primarily in the business of investing in securities and that actually invests a substantial portion of its assets in investment securities would be deemed an investment company under the Investment Company Act of 1940. We do not believe that our anticipated principal activities will subject us to the Investment Company Act of 1940. To this end, the proceeds held in trust may only be invested by the trust agent in government securities (within the meaning of the Investment Company Act of 1940) with specific maturity dates or in money market funds meeting certain conditions under Rule 2a-7 under that Act. By restricting the investment of the proceeds to these instruments, we intend to meet the requirements for the exemption provided in Rule 3a-1 promulgated under the Investment Company Act of 1940. If we were deemed to be subject to the act, compliance with these additional regulatory burdens would require additional expense that we have not allotted for. Actions taken and expenses incurred by our officers and directors on our behalf will generally not be subject to independent review. Each of our directors owns shares of our common stock and, although no salary or other compensation will be paid to them for services rendered prior to or in connection with a business combination, they may receive reimbursement for out-of -pocket expenses incurred by them in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations. There is no limit on the amount of these out-of -pocket expenses and there will be no review of the reasonableness of the expenses by anyone other than our board of directors, which includes persons who may seek reimbursement, or a court of competent jurisdiction if such reimbursement is challenged. Although we believe that all actions taken by our directors on our behalf will be in our best interests, we cannot assure you that this will be the case. If actions are taken, or expenses are incurred that are not in our best interests, it could have a material adverse effect on our business and operations and the price of our stock held by the public stockholders. Risks associated with companies with operations primarily in China. Economic, political, social and other factors in China may adversely affect our ability to achieve our business objective which is to acquire one or more operating businesses with operations primarily in China. Our ability to achieve our business objective may be adversely affected by economic, political, social and religious factors, changes in Chinese law or regulations and the status of China s relations with other countries. In addition, the economy of China may differ favorably or unfavorably from the U.S. economy in such respects as the growth rate of its gross domestic product, the rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position. The Chinese economy differs from the economies of most developed countries in many respects, including: the amount of governmental involvement; the level of development; the growth rate; the control of foreign exchange; and the allocation of resources. These differences may adversely affect our ability to acquire one or more businesses with operations primarily in China. Also, while the Chinese economy has experienced significant growth in the past 20 years, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us if we do acquire an operating business or businesses in China. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. The Chinese government s control over the national economy and economic growth in China could adversely affect our business. The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the Chinese government. The continued control of these assets and other aspects of the national economy by the Chinese government could materially and adversely affect our business. The Chinese government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Efforts by the Chinese government to slow the pace of growth of the Chinese economy could result in decreased capital expenditures by the public which in turn could reduce demand for goods and services. Any adverse change in the economic conditions or government policies in China could have a material adverse effect on overall economic growth and the level of investments and expenditures in China, including in those related to healthcare, which in turn could lead to a reduction in demand for our products and consequently have a materially adverse effect on our business. Because the Chinese judiciary, which is relatively inexperienced in enforcing corporate and commercial law, will determine the scope and enforcement under Chinese law of almost all of our target business agreements, we may be unable to enforce our rights inside and outside of China. Chinese law will govern almost all of our target business agreements, some of which may be with Chinese governmental agencies. We cannot assure you that the target business will be able to enforce any of its material agreements or that remedies will be available outside of the PRC. The Chinese judiciary is relatively inexperienced in enforcing corporate and commercial law, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. The inability to enforce or obtain a remedy under any of our future agreements may have a material adverse impact on our operations. If the United States imposes trade sanctions on the PRC due to its currency policies, our target business ability to succeed in the international markets may be diminished. The PRC currently pegs its currency to the United States dollar. This means that each unit of Chinese currency has a set ratio for which it may be exchanged for United States currency, as opposed to having a floating value like other countries currencies. China has recently allowed its currency to advance slightly against the U.S. dollar. This policy is currently under review by policy-makers in the United States. Trade groups in the United States have blamed the cheap value of the Chinese currency for causing job losses in American factories, giving Chinese exporters an unfair advantage and making exports to China expensive. There is increasing pressure for the PRC to change its currency policies to provide for its currency to float freely on international markets. As a result, Congress has passed a bill that would require the United States Secretary of the Treasury to report to Congress whether the PRC is manipulating its currency to gain a trade advantage. If Congress deems this to be the case, tariffs could be imposed on Chinese imports in addition to those already in force. If an additional tariff is imposed, it is possible that China-based companies will no longer maintain the significant price advantages over foreign companies, including the United States, on their goods and services. If the PRC changes its existing currency policies or if the United States or other countries enact laws to penalize the PRC for its existing currency policies, our target companies are likely to be adversely affected since the current competitive advantages that exist as a result of existing currency policies will cease. Exchange controls that exist in the PRC may limit our ability to utilize our cash flow effectively following a business combination. Following a business combination, we will be subject to the PRC s rules and regulations on currency conversion. In the PRC, the State Administration for Foreign Exchange (SAFE) regulates the conversion of Renminbi into foreign currencies. Currently, foreign investment enterprises (FIEs) are required to apply to the SAFE for Foreign Exchange Registration Certificates for FIEs. Following a business combination, we will likely be an FIE as a result of our business structure. FIEs holding such registration certificates, which must be renewed annually, are allowed to open foreign currency accounts, including a basic account and capital account. Currency translation within the scope of the basic account, such as remittance of foreign currencies for payment of dividends, can be effected without requiring the approval of the SAFE. However, conversion of currency in the capital account including capital items such as direct investment, loans and securities, still require approval of the SAFE. We cannot assure you that the PRC regulatory authorities will not impose further restrictions on the convertibility of the Renminbi. Any future restrictions on currency exchanges may limit our ability to use our cash flow for the distribution of dividends to our shareholders or to fund operations we may have outside of the PRC. If certain tax exemptions within the PRC regarding withholding taxes are removed, we may be required to deduct corporate withholding taxes from any dividends we may pay in the future. Under the PRC s current tax laws, regulations and rulings, companies are exempt from paying withholding taxes with respect to dividends paid to stockholders outside of the PRC. However, if the foregoing exemption is removed in the future following a business combination, we may be required to deduct certain amounts from dividends we pay to our shareholders to pay corporate withholding taxes. The current rate imposed on corporate withholding taxes is 20%, or 10% for individuals and entities of those countries that entered into the Protocol of Avoidance of Double Taxation with the PRC. China has different corporate disclosure, governance and regulatory requirements than those in the United States which may make it more difficult or complex to consummate a business combination. Companies in China are subject to accounting, auditing, regulatory and financial standards and requirements that differ, in some cases significantly, from those applicable to public companies in the United States, which may make it more difficult or complex to consummate a business combination. In particular, the assets and profits appearing on the financial statements of a Chinese company may not reflect its financial position or results of operations in the way they would be reflected had such financial statements been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). There is substantially less publicly available information about Chinese companies than there is about United States companies. Moreover, companies in China are not subject to the same degree of regulation as are United States companies with respect to such matters as insider trading rules, tender offer regulation, shareholder proxy requirements and the timely disclosure of information. To meet the requirements of the United States Federal securities laws, in order to seek stockholder approval of a business combination, a proposed target business will be required to have certain financial statements which are prepared in accordance with, or which can be reconciled to GAAP and audited in accordance with U.S. Generally Accepted Auditing Standards (GAAS). GAAP and GAAS compliance may limit the potential number of acquisition targets. Legal principles relating to corporate affairs and the validity of corporate procedures, directors fiduciary duties and liabilities and shareholders rights for Chinese corporations may differ from those that may apply in the U.S., which may make the consummation of a business combination with a Chinese company more difficult. We therefore may have more difficulty in achieving our business objective. If political relations between the U.S. and China weaken, it could make a target business operations less attractive. The relationship between the United States and China may deteriorate over time. Changes in political conditions in China and changes in the state of Chinese-U.S. relations are difficult to predict and could adversely affect our future operations or cause potential target businesses to become less attractive. This could lead to a decline in our profitability. Any weakening of relations with China could have a material adverse effect on our operations after a successful completion of a business combination. FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements, including, among others, (a) our expectations about possible business combinations, (b) our growth strategies, (c) our future financing plans, and (d) our anticipated needs for working capital. Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words may, should, expect, anticipate, approximate, estimate, believe, intend, plan, or project, or the negative of these words or other variations on these words or comparable terminology. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found in this prospectus. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under Risk Factors and matters described in this prospectus generally. In light of these risks and uncertainties, the events anticipated in the forward-looking statements may or may not occur. These statements are based on current expectations and speak only as of the date of such statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise, except as required by applicable law and regulations. The information contained in this prospectus identifies important factors that could adversely affect actual results and performance. Prospective investors are urged to carefully consider such factors. All forward-looking statements attributable to us are expressly qualified in their entirety by the foregoing cautionary statements. USE OF PROCEEDS We estimate that the net proceeds of this offering will be set forth in the following table: Without Over- With Over- Allotment Option Allotment Option Gross proceeds(1) Offering $ 51,000,000 $ 58,650,000 Private Placement 1,500,000 1,500,000 Total 52,500,000 60,150,000 Offering expenses(2) Underwriting discount (4.5% of offering) 2,295,000 2,639,250 Underwriting non-accountable expense allowance (2.75% of offering without the over-allotment option)(3) 1,402,500 1,402,500 Legal fees and expenses 450,000 450,000 Printing and engraving expenses 70,000 70,000 Accounting fees and expenses 55,000 55,000 SEC registration fee 26,100 26,100 NASD registration fee 24,900 24,900 AMEX listing fees 91,000 91,000 Initial Trustee s fees 12,000 12,000 Miscellaneous expenses 71,000 71,000 Net proceeds 48,002,500 55,308,250 Held in trust(4) $ 50,042,500 $ 57,443,875 Amount Percentage Interest earned on amount held in trust for working capital: Legal, accounting and other expenses attendant to structuring and negotiation of a business combination(6) $ 200,000 16.7 % Due diligence of prospective target businesses(6) 300,000 25.0 Legal and accounting fees relating to SEC reporting obligations 115,000 9.5 Administrative fees relating to office space ($5,000 per month for 24 months) 120,000 10.0 Travel, miscellaneous expenses, (including potential deposits, down payments or funding of a no-shop provision with respect to a prospective business combination) D O insurance and reserves 240,000 20.0 Repayment of the loan from our Chairman(5) 150,000 12.5 Liquidation reserve 75,000 6.3 Total(5) $ 1,200,000 100.0 % (1) Excludes the payment of $100 from the underwriters for its purchase option, proceeds from the sale of units under the purchase option and proceeds from the exercise of any warrants. (2) A portion of the offering expenses has been paid from the funds we received from our Chairman as described below. These funds will be repaid without interest out of the proceeds of this offering. (3) The underwriters have agreed to deposit the non-accountable expense allowance equal to 2.75% of the gross proceeds of this offering ($0.165 per Unit) and a portion of the underwriting discount equal to 1.25% of the gross proceeds of this offering ($0.075 per Unit) into the trust account until the earlier of the completion of a business combination or the liquidation of the trust account. Upon the consummation of a business combination, we will pay such deferred non-accountable expense allowance and the deferred portion of the underwriting discount to the underwriters out of the proceeds of this offering held in trust, less the pro rata portion of such deferred non-accountable expense allowance and the deferred portion of the underwriting discount payable to stockholders that vote against the business combination and elect to convert their shares of common stock to cash. The underwriters have further agreed to forfeit any rights to or claims against such proceeds unless we complete a business combination. (4) Includes the private placement proceeds of $1,500,000 as well as $1,402,500 which represents the underwriters non-accountable expense allowance and $637,500 (or $733,125 if the over-allotment option is exercised in full) which represents the deferred portion of the underwriting discount which is further described in footnote 3. (5) We may use a maximum of $1,200,000 of the interest earned from monies in the trust account to fund the expenses reflected in the table. At closing, the Chairman will loan the Company $150,000. The loan, which will bear interest at 4%, will be repaid from the interest earned from the funds held in trust. The loan is separate from the $150,000 loan made by our Chairman prior to this offering which will be repaid without interest from offering proceeds. (6) The $200,000 is expected to be paid to legal, accounting and other outside professionals to conduct due diligence once a potential target for a business combination is identified and to assist in negotiating and structuring the ultimate business transaction. The $300,000 represents costs expected to be incurred by the Company and its officers, directors and employees in identifying and reviewing potential targets for business combinations, some portion of which may represent reimbursement to third parties. We intend to use the proceeds from the sale of the units and the private placement warrants to acquire one or more operating businesses with operations primarily in China. $50,042,500, or $57,443,875 if the underwriters over-allotment option is exercised in full, of net proceeds of this offering and the private placement will be placed in a trust account at Lehman Brothers Inc. maintained by American Stock Transfer Trust Company acting as trustee. Upon consummation of a business combination, $2,040,000, or $2,135,625 if the underwriters over-allotment option is exercised in full, will be paid to the underwriters from the trust in respect of the deferred underwriters non-accountable expense allowance and the deferred portion of the underwriting discount. The proceeds will not be released from the trust account until the earlier of the completion of a business combination or our liquidation. The proceeds held in the trust account may be used as consideration to pay the sellers of a target business with which we ultimately complete a business combination. Any amounts not paid as consideration to the sellers of the target business may be used to finance operations of the target businesses, other than amounts paid to the underwriters for their non-accountable expense allowance, amounts paid for finders or professional fees or amounts paid for any fees or costs incurred in connection with any debt or equity financing made in connection with the business combination. The Company does not currently have any agreement with any party with respect to the payment of finders or professional fees. If the Company agrees to pay such fees in the future, such fees shall be negotiated on an arms-length basis. While it is difficult to determine what the specific operating expenses of a target business may entail, we expect that they may include some or all of the following: capital expenditures, expenditures for future projects, general ongoing expenses including supplies and payroll, expanding markets and strategic acquisitions or alliances. We have agreed to pay NCIL, an affiliate of Alwin Tan, a monthly fee of $5,000 for general and administrative services including office space, utilities and secretarial support. This arrangement is for our benefit and is not intended to provide Mr. Tan, the General Partner of NCIL our Chief Executive Officer and President, with compensation in lieu of salary. We believe, based on rents and fees for similar services in the Los Angeles metropolitan area, that the fee charged by NCIL is at least as favorable as we could have obtained from an unaffiliated third party. However, because our directors may not be deemed independent , we did not have the benefit of disinterested directors approving the transaction. We are entitled to use up to $1,200,000 of interest, net of taxes, for working capital which includes repayment of the loan from our Chairman, director and officer liability insurance premiums, with the balance being held in reserve for other expenses such as, travel to China, due diligence, legal, accounting, and other expenses of structuring and negotiating business combinations, and deposits, down payments and/or funding of a no shop provision in connection with a business combination as well as for reimbursement of any out-of-pocket expenses incurred by our existing stockholders in connection with activities on our behalf as described below. We believe that the working capital will be sufficient to cover the foregoing expenses and reimbursement costs. We may not use all of the proceeds in the trust in connection with a business combination, either because the consideration for the business combination is less than the proceeds in trust or because we financed a portion of the consideration with our capital stock or debt securities. In that event, the proceeds held in the trust account as well as any other net proceeds not expended, will be used to finance the operations of the target businesses, which may include subsequent acquisitions. Our Chairman has loaned a total of $150,000 to us for the payment of offering expenses. Upon the consummation of this offering, the loan will be repaid without interest and the Chairman will loan an additional $150,000 to us which will be deposited into our operating account, will bear interest at a rate of 4% per year and will be payable out of the interest earned on the trust account on the earlier of the first anniversary of the consummation of this offering or the consummation of a business combination. The net proceeds of this offering, including the private placement proceeds and the deferred underwriters non-accountable expense allowance and the deferred portion of the underwriting discount held in the trust account, that are not immediately required for the purposes set forth above will be invested only in United States government securities, defined as any Treasury Bill issued by the United States having a maturity of 180 days or less, or in money market funds meeting certain conditions under Rule 2a-7 of the Investment Company Act of 1940, so that we are not deemed to be an investment company under the Investment Company Act of 1940. The interest income derived from investment of the net proceeds not held in trust during this period will be used to defray our general and administrative expenses, as well as costs relating to compliance with securities laws and regulations, including associated professional fees, until a business combination is completed. We believe that, upon consummation of this offering, we will have sufficient available funds to operate for at least the next 24 months, assuming that a business combination is not consummated during that time. We intend to allocate a portion of the working capital for expenses incurred in examining and evaluating prospective target businesses. Alwin Tan will supervise this process and we expect that he will devote substantially all of his time to our business once we have signed a term sheet with a target business. We anticipate that Mr. Tan will be assisted in his efforts by the officers and advisors of the Company, together with the Company s outside attorneys, accountants and other representatives. Other than the monthly fee to NCIL, we will not pay compensation of any kind (including finder s and consulting fees) to the Company s directors, officers, employees, stockholders or special advisors or their respective affiliates for services rendered to us prior to or in connection with the consummation of the business combination. However, our existing stockholders will receive reimbursement for any out-of-pocket expenses incurred by them in connection with activities on our behalf, such as identifying potential target businesses and performing due diligence on suitable business combinations. These reimbursements may be paid from the $300,000 allocated for due diligence. Since the role of present management after a business combination is uncertain, we have no ability to determine what remuneration, if any, will be paid to those persons after a business combination. However, other than the agreement with NCIL described above, there are no current agreements or understandings with any of our existing stockholders or any of their respective affiliates with respect to the payment of compensation of any kind subsequent to a business combination. A public stockholder will be entitled to receive funds from the trust account (including interest earned on his, her or its portion of the trust account net of working capital (up to a maximum of $1,200,000) and taxes payable.) only in the event of our liquidation upon our failure to complete a business combination or if that public stockholder were to seek to convert such shares into cash in connection with a business combination which the public stockholder voted against and which we actually consummate. The amount a public stockholder would be entitled to receive could be reduced as a result of any potential claims of creditors against us which are senior to the claims of our public stockholders. In no other circumstances will a public stockholder have any right or interest of any kind to or in the trust account. Upon the consummation of a business combination, the underwriters will be entitled to receive that portion of the proceeds attributable to the non-accountable expense allowance and the deferred portion of the underwriting discount held in trust and any accrued interest thereon, less the pro rata portion of such amount payable to stockholders that vote against the business combination and elect to convert their shares of common stock to cash. In the event that we are unable to consummate a business combination and the trustee is forced to liquidate the trust account, the underwriters have agreed to the following: (i) forfeit any rights or claims to such proceeds and any remaining accrued interest thereon; and (ii) that the proceeds attributable to the underwriters non-accountable expense allowance and the deferred portion of the underwriting discount will be distributed on a pro rata basis among the public shareholders along with any remaining accrued interest thereon. In addition, the $1,500,000 from the proceeds of the private placement of the warrants also will be distributed pro rata among the public shareholders in the event of such liquidation. DILUTION The difference between the public offering price per share of common stock, assuming no value is attributed to the warrants included in the units, and the pro forma net tangible book value per share of our common stock after this offering constitutes the dilution to investors in this offering. Net tangible book value per share is determined by dividing our net tangible book value, which is our total tangible assets less total liabilities (including the value of common stock that may be converted into cash), by the number of outstanding shares of our common stock. At December 31, 2006 our net tangible book value was a deficiency of $(309,479) or approximately $(0.15) per share of common stock. After giving effect to the sale of 8,500,000 shares of common stock included in the units sold in this offering (but excluding shares underlying the warrants included in the units), and the deduction of underwriting discounts and estimated expenses of this offering, our pro forma net tangible book value (as decreased by the value of 1,699,150 shares of common stock which may be converted into cash) as of December 31, 2006 would have been approximately $38,428,800 or approximately $4.31 per share, representing an immediate increase in net tangible book value of $4.46 per share to the existing stockholders and an immediate dilution of $1.69 per share or approximately 28% to new investors not exercising their conversion rights. The following table illustrates, the dilution to the new investors on a per-share basis, assuming no value is attributed to the warrants included in the units: Public offering price $ 6.00 Net tangible book value before this offering $ (0.15 ) Increase attributable to new investors 4.46 Pro forma net tangible book value after this offering 4.31 Dilution to new investors $ 1.69 Our pro forma net tangible book value after this offering has been reduced by approximately $9,595,700 because if we effect a business combination, the conversion rights to the public stockholders may result in the conversion into cash of up to approximately 19.99% of the aggregate number of the shares sold in this offering at a per-share conversion price equal to the amount in the trust account calculated as of the record date for determination of stockholders entitled to vote on a proposed business consummation, inclusive of any interest, divided by the number of shares sold in this offering. The following table sets forth information with respect to our existing stockholders prior to and after the offering and the new investors: Shares Purchased Total Consideration Average Price Number Percentage Amount Percentage per Share Existing stockholders 2,125,000 20.00 % $ 25,000 .05 % $ .01 Warrant Private Placement $ 1,500,000 2.85 New investors 8,500,000 80.00 % $ 51,000,000 97.10 6.00 Total 10,625,000 100.00 % $ 52,525,000 100.00 % Our pro forma net tangible book value after this offering is calculated as follows: Numerator: Net tangible book value before this offering $ (309,479 ) Proceeds from this offering and the private placement 48,002,500 Offering costs excluded from net tangible book value before this offering 331,479 Less: Proceeds held in trust subject to conversion to cash (9,595,700 ) $ 38,428,880 Denominator: Shares of common stock outstanding prior to this offering 2,125,000 Shares of common stock included in the units offered 8,500,000 Less: Shares subject to conversion (8,500,000 19.99%) (1,699,150 ) 8,925,850 The preceding calculations assume the payment in full of the underwriters discount and expense allowance and do not reflect $0.24 per unit representing the underwriters non-accountable expense allowance and the deferred portion of the underwriting discount which the underwriters have agreed to deposit into the trust account and to forfeit to pay redeeming stockholders. DIVIDEND POLICY We have never declared or paid any cash dividends on our common stock. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our board of directors and will depend upon our financial condition, operating results, capital requirements, Delaware law, and other factors that our board of directors deems relevant. CAPITALIZATION The following table sets forth our capitalization at December 31, 2006 and as adjusted to give effect to the sale of our units and the application of the estimated net proceeds derived from the sale of our units and the proceeds of the private placement: December 31, 2006 Actual As Adjusted(1) Notes payable to stockholder $ 150,000 $ 150,000 Common Stock, $.0001 par value -0- and 1,699,150 shares which are subject to possible conversion, shares at conversion value 9,595,700 Stockholders equity Preferred stock, $.0001 par value, 1,000,000 shares authorized; none issued and outstanding Common stock, $.0001 par value, 50,000,000 shares authorized; 2,500,000 shares issued and outstanding, 8,925,850 shares issued and outstanding (excluding 1,699,150 shares which are subject to possible conversion), as adjusted 250 893 Additional paid-in capital 24,750 38,430,907 Deficit accumulated during the development stage (3,000 ) (3,000 ) Total stockholders equity 22,000 38,428,800 Total capitalization $ 172,000 $ 48,174,500 (1) Includes $1,500,000 from the proceeds of the private placement, excludes the $100 purchase price of the purchase option payable by the underwriters, reflects the cancellation of 375,000 shares of common stock surrendered by the initial stockholders, and assumes full payment of the underwriters non-accountable expense allowance and underwriting discounts. If we consummate a business combination, the conversion rights afforded to our public stockholders may result in the conversion into cash of up to approximately 19.99% of the aggregate number of shares sold in this offering at a per-share conversion price equal to the amount in the trust account, inclusive of any applicable net interest income thereon, as of the record date for determination of stockholders entitled to vote on a proposed business combination, divided by the number of shares sold in this offering. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We were formed on June 7, 2006, as a blank check company for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition or other similar business combination, one or more businesses in an unspecified industry, with operations primarily in China. We do not have any specific merger, capital stock exchange, asset acquisition or other similar business combination under consideration and have not had any discussions, formal or otherwise, with respect to such a transaction. We intend to use cash derived from the proceeds of this offering, our capital stock, debt or a combination of cash, capital stock and debt, to effect a business combination. The issuance of additional capital stock, including upon conversion of any convertible debt securities we may issue, or the incurrence of debt could have material consequences on our business and financial condition. The issuance of additional shares of our capital stock (including upon conversion of convertible debt securities): may significantly reduce the equity interest of our stockholders; will likely cause a change in control if a substantial number of our shares of common stock or voting preferred stock are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and may also result in the resignation or removal of one or more of our present officers and directors; may adversely affect the voting power or other rights of holders of our common stock if we issue preferred stock with dividend, liquidation, conversion or other rights superior to the common stock; and may adversely affect prevailing market prices for our common stock, warrants or units. Similarly, the incurrence of debt: may lead to default and foreclosure on our assets if our operating revenues after a business combination are insufficient to pay our debt obligations; may cause an acceleration of our obligations to repay the debt even if we make all principal and interest payments when due if we breach the covenants contained in the terms of the debt documents, such as covenants that require the maintenance of certain financial ratios or reserves, without a waiver or renegotiation of such covenants; may create an obligation to immediately repay all principal and accrued interest, if any, upon demand to the extent any debt securities are payable on demand; and may hinder our ability to obtain additional financing, if necessary, to the extent any debt securities contain covenants restricting our ability to obtain additional financing while such security is outstanding, or to the extent our existing leverage discourages other potential investors. To date, our efforts have been limited to organizational activities. We have neither engaged in any operations nor generated any revenues to date. We estimate that the net proceeds from the sale of the units in
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+summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements and the related notes and schedules thereto. Unless otherwise stated in this prospectus: references to we, us or our company refer to Churchill Ventures Ltd.; unless we tell you otherwise, the information in this prospectus assumes that the underwriter will not exercise its over-allotment option; references to a business combination mean our initial acquisition of one or more operating businesses through a merger, capital stock exchange, stock purchase, asset acquisition or other similar business combination in the communications, media or technology industries; references to the private placement refer to our private placement of warrants to purchase 5,000,000 shares of our common stock at a price of 1.00 per warrant to Churchill Capital Partners LLC, our principal stockholder, which will occur prior to the completion of this offering; and references to our public stockholders mean our stockholders who hold shares that were issued in this offering. Our Company Churchill Ventures Ltd. is a blank check company incorporated on June 26, 2006 for the purpose of effecting a merger, capital stock exchange, stock purchase, asset acquisition or other similar business combination with an unidentified operating business in the communications, media or technology industries. Our management team, board of directors and advisory board have extensive experience in our target industries, as operating managers, investment professionals and dealmakers. We also have a deep history of international transactions and operations, including in Israel, the United States and Europe, along with substantial relationships and connections. Our team includes seasoned investors and operators from the United States, Europe and Israel: Itzhak Fisher, executive Chairman and a Director, is the founder and former Chief Executive Officer of RSL Communications and the current Chairman of Nielsen BuzzMetrics; Chris Bogart, Chief Executive Officer and a Director, is the former Chief Executive Officer of Time Warner Cable Ventures and Executive Vice President of Time Warner Inc.; Elizabeth O Connell, CFA, Chief Financial Officer and a Director, is a former telecom and technology investment banker at Credit Suisse First Boston and Citigroup/Salomon Brothers; Nir Tarlovsky, Executive Vice President, Business Development and a Director, served as Vice President, Business Development for RSL Communications and was a director of deltathree, Inc. and telegate AG and oversaw the operations of PSINet Europe; Shraga Brosh, Director, is the President of the Manufacturers Association of Israel, the Chairman of the Federation of Israeli Economic Organizations / Chambers of Commerce and the former Chairman of the Israel Export and International Cooperation Institute; Gerhard Weissch del, Director, is the former Chief Executive Officer of Deutsche Telekom Media, a former Managing Director at Veronis Suhler Stevenson in London, and a partner at Invision AG, a Swiss private investment firm; and Tom Baxter, Special Advisor, is the former President of Time Warner Cable and Comcast Cable, the former Chief Executive Officer of Audible Inc. and a former operating partner at Evercore Partners. We have identified the following criteria that we believe are important and that we intend to use in evaluating business combination opportunities. While management intends to utilize these criteria in evaluating business combination opportunities, no individual criterion is intended to be determinative to a decision to pursue a particular opportunity, and a particular business combination opportunity which management ultimately determines to pursue may not satisfy one or more of these criteria. Established businesses with cash flow. Proprietary acquisition opportunities. Competitive technology, media or communications platforms. Capacity to be an industry consolidator. Potential to enhance value through applied improvements. We will utilize the collective experience and expertise of our management team, board of directors and advisory board to identify potential target acquisitions. We will employ a disciplined approach to identifying, evaluating and negotiating with potential target businesses and will focus our efforts on selecting what we believe is the best opportunity or opportunities for a business combination. Assuming we complete our initial business combination, we may pursue additional business combinations to, among other objectives, drive sales growth, penetrate complementary markets, introduce new products or broaden our sources of revenue. While our management team, board of directors and advisory board have significant operational and transaction experience on which we will draw to support the management team of the company we acquire, we do not intend to assume day-to-day operational management of our target business. Accordingly, we will either acquire a business with strong operating management, or we will install new management from our extensive network of operating managers. As of the date of this prospectus, we do not have any specific business combination under consideration and we have not (nor has anyone on our behalf), either directly or indirectly, contacted, or been contacted by, any potential target businesses or their representatives or had any discussions, formal or otherwise, nor has anyone on our behalf, taken any measure, directly or indirectly, to identify or locate any suitable acquisition candidate with respect to effecting any potential business combination with our company. Our initial business combination must be with one or more target businesses whose fair market value, individually or collectively, is equal to at least 80.0% of our net assets (all of our assets, including the funds held in the trust account excluding the deferred underwriting discount and commission of 3.5 million or 3.85 million if the over-allotment option is exercised in full, less our liabilities) at the time of such business combination. This may be accomplished by identifying and acquiring a single business or multiple operating businesses, which may or may not be related, contemporaneously. Such 80.0% refers to the total fair market value of the target business or businesses acquired by us. In the event that our initial business combination is structured such that we acquire less than 100% of the target business or businesses, the interest acquired by us must have a fair market value, individually or collectively, equal to at least 80.0% of our net assets. Our certificate of incorporation requires that we make an acquisition of an operating business . We will not present to stockholders for approval any business combination opportunity in which we would propose to acquire less than a majority of the outstanding voting securities of the target business or businesses. The fair market value of such business will be determined by our board of directors based upon standards generally accepted by the financial community, such as the following: comparative company analysis, including, without limitation, earnings, earnings before interest, taxes, depreciation, and amortization, revenue, equity, and assets; industry analysis based upon then current trends, historical growth, and other relevant industry statistics; forecasted financial data, such as sales, earnings, and cash flow; and other relevant indicia of value. In this connection, our board of directors shall prepare, or cause to be prepared on its behalf by third parties, a formal valuation and quantitative analysis in connection with any business combination opportunity to be presented to stockholders for approval. Our offices are located at 50 Revolutionary Road, Scarborough, New York 10510 and our telephone number is (914) 762-2553. Private Placement Churchill Capital Partners LLC, beneficially owned by Messrs. Bogart, Fisher, Tarlovsky and Ms. O Connell, has entered into an agreement with us to acquire warrants to purchase 5,000,000 shares of our common stock at a price of 1.00 per warrant for a total of 5 million in a private placement prior to completion of this offering. We refer to these warrants as sponsor warrants throughout this prospectus. The sponsor warrants will not be transferable or salable by Churchill Capital Partners LLC or its permitted transferees (except as described below) until we complete a business combination and will not be subject to redemption by the Company so long as they are held by Churchill Capital Partners LLC or its permitted transferees. Churchill Capital Partners LLC will be permitted to transfer sponsor warrants to members of our management team, but the transferees receiving such sponsor warrants must first agree to be subject to the same sale restrictions imposed on Churchill Capital Partners LLC. In addition, commencing on the date the sponsor warrants become exercisable, the sponsor warrants and the underlying common stock are entitled to registration rights. Except as set forth above, the sponsor warrants have terms and provisions that are identical to those of the warrants being sold as part of the units in this offering. The proceeds of the private placement will be held in the trust account pending our completion of a business combination on the terms described in this prospectus. If we do not complete such a business combination, then these funds will be part of the liquidating distribution to our public stockholders, and the warrants issued in the private placement will expire worthless. The Offering Securities offered 12,500,000 units, at 8.00 per unit, each unit consisting of: one share of common stock; and one warrant. Trading commencement and separation of common stock and warrants The units will begin trading on or promptly after the date of this prospectus. The common stock and warrants comprising the units will begin separate trading five business days following the earlier to occur of (1) expiration or termination of the underwriter s over-allotment option or (2) its exercise in full, subject in either case to our having filed the Form 8-K described below and having issued a press release announcing when such separate trading will begin. Separate trading of the common stock and warrants In no event will the common stock and warrants begin to trade sepa- rately until we have filed a Current Report on Form 8-K with the SEC containing an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file this Form 8-K promptly after the consummation of this offering, which is anticipated to take place three business days from the date of this prospectus. If the over-allotment option is exercised following the initial filing of such Form 8-K, a sec- ond or amended Form 8-K will be filed to provide updated financial information to reflect the exercise of the over-allotment option. Common stock: Number outstanding before this offering and the private placement 3,125,000 shares Number to be outstanding after this offering and the private placement 15,625,000 shares Warrants: Number outstanding before this offering and the private placement 0 warrants Number to be outstanding after this offering and the private placement 17,500,000 warrants Exercisability Each warrant is exercisable for one share of common stock. Exercise price 6.00; provided, however, that the holder of the warrant may elect to exercise the warrant on a cashless basis. The exercise price and number of units issuable upon exercise of the warrants may be adjusted in certain circumstances, including in the event of an extraordinary dividend, a stock dividend, a stock split, a reclassification, or our recapitalization, reorganization, merger or con- solidation. However, the warrants will not be adjusted for issuances of common stock at a price below the exercise price of the warrants. Exercise period The warrants will become exercisable on the later of: the completion of a business combination with a target business, and __________, 2008 [one year from the date of this prospectus]. The warrants will expire at 5:00 p.m., New York City local time, on _________, 2011 [four years from the date of this prospectus] or ear- lier upon redemption. Redemption We may redeem the outstanding warrants. in whole and not in part, at a price of 0.01 per warrant at any time after the warrants become exercisable, upon a minimum of 30 days prior written notice of redemption, and if, and only if, the last sales price of our common stock equals or exceeds 11.50 per share for redemption of the warrants, for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. The redemption criteria for our warrants have been established at a price which is intended to provide warrant holders a reasonable pre- mium to the initial exercise price and to provide a sufficient degree of liquidity to cushion the market to our redemption call. However, there is no assurance that the price of the common stock will exceed 11.50 or the warrant exercise price after the redemption call is made. Private placement Churchill Capital Partners LLC, our principal stockholder, has agreed to acquire from us warrants to purchase 5,000,000 shares of our com- mon stock at 1.00 per warrant, for a total of 5 million, in a private placement prior to the completion of this offering. We refer to these warrants as sponsor warrants throughout this prospectus. The sponsor warrants will not be transferable or salable by Churchill Capital Partners LLC or its permitted transferees (except as described below) until we complete a business combination and will not be subject to redemption by the Company so long as they are held by Churchill Capital Partners LLC or its permitted transferees. In addition, com- mencing on the date the sponsor warrants become exercisable, the sponsor warrants and the underlying common stock are entitled to reg- istration rights. With those exceptions, the sponsor warrants have terms and provisions that are identical to those of the warrants being sold as part of the units in this offering. Churchill Capital Partners LLC will be permitted to transfer sponsor warrants to members of our management team, but the transferees receiving such sponsor warrants must first agree to be subject to the same sale restrictions imposed on Churchill Capital Partners LLC. Churchill Capital Partners LLC is a limited liability company that is beneficially owned by Messrs. Bogart, Fisher, Tarlovsky and Ms. O Connell, who are our officers and directors. Churchill Capital Partners LLC does not conduct any business other than serving as a holding company for the securities issued by us that are beneficially owned by these officers and directors and to provide administrative services to us. The 5 million of proceeds from the private placement will be added to the proceeds of this offering and will be held in the trust account pend- ing our completion of a business combination on the terms described in this prospectus. If we do not complete such a business combination, then these funds will be part of the liquidating distribution to our pub- lic stockholders and the sponsor warrants issued in the private place- ment will expire worthless. Proposed American Stock Exchange symbols for our: Units CHV.U Common stock CHV Warrants CHV.W Offering and private placement proceeds to be held in the trust account 100.0 million, or approximately 8.00 per share, will be placed in a trust account maintained by JPMorgan Chase Bank, NA, pursuant to an agreement to be signed on the date of this prospectus. Interest accrued on the trust account (excluding 1.35 million of such interest which may be released to us to cover a portion of our operating expenses), net of taxes payable on such interest, will be distributed pro rata to the holders of our common stock sold in this offering if and when any dis- tribution of the trust account is made to such holders (whether upon our dissolution and liquidation or upon exercise of their conversion rights in connection with a business combination) and, in the event of a business combination, any amount not distributed to investors who elect to convert their shares in connection with a business combination will be distributed to us for use in connection with the business combi- nation or for general corporate purposes. The amount to be placed in the trust account includes the 5 million of proceeds from the private placement and 3.5 million of deferred underwriting discount ( 3.85 million if the over-allotment option is exercised in full). We believe that the inclusion in the trust account of the 5 million of the proceeds from the private placement and the deferred underwriting discount is a bene- fit to our stockholders because additional proceeds will be available for distribution to investors if a liquidation of our company occurs prior to our completing an initial business combination. These proceeds will not be released until the earlier of (i) the completion of a business com- bination and (ii) our dissolution and implementation of a plan for the distribution of our assets except there may be released to us from the trust account interest income earned on the trust account balance to pay any income taxes on such interest and up to 1.35 million of the inter- est earned on the trust account may be released to us to cover a portion of our operating expenses. Therefore, except with respect to such inter- est, unless and until a business combination is consummated, the pro- ceeds held in the trust account will not be available for our use for any expenses related to this offering or expenses which we may incur related to the investigation and selection of a target business and the negotiation of an agreement to acquire a target business. These expenses may be paid prior to a business combination only from the proceeds of this offering not held in the trust account (initially 950,000) and 1.35 million of interest earned on the trust account which may be released to us. It is possible that we could use a portion of the funds not in the trust account to make a deposit, down payment or fund a no-shop provision with respect to a particular proposed business combination. In the event we were ultimately required to for- feit such funds (whether as a result of our breach of the agreement relating to such payment or otherwise), we may not have a sufficient amount of working capital available outside of the trust account to pay expenses related to finding a suitable business combination without securing additional financing. If we were unable to secure additional financing, we would most likely fail to consummate a business combi- nation in the allotted time and would be forced to dissolve. The underwriter has agreed to defer 3.5 million of its underwriting discount, equal to 3.5% of the gross proceeds of this offering, ( 3.85 million if the over-allotment option is exercised in full) until the consummation of our initial business combination. Upon the consummation of an initial business combination, this deferred under- writing discount (subject to a $0.28 per share reduction for public stockholders who vote against our initial business combination and exercise their conversion rights, as described below), will be released to the underwriter out of the proceeds of this offering held in the trust account maintained by JPMorgan Chase Bank, NA acting as trustee. The underwriter will not be entitled to any interest accrued on the deferred underwriting discount. Warrant proceeds paid to us None of the warrants may be exercised until after the consummation of a business combination and, thus, after the proceeds of the trust account have been disbursed. Accordingly, the warrant exercise price will be paid directly to us and not placed in the trust account. Limited payments to the insiders Prior to the completion of a business combination, there will be no fees, reimbursements or cash payments made to our existing stockhold- ers, officers and directors and their respective affiliates other than: repayment upon the closing of this offering of a 240,000 interest- free loan made by Churchill Capital Partners LLC, our principal stockholder, to cover offering expenses; payment of 7,500 per month to Churchill Capital Partners LLC, our principal stockholder, for office space and administrative serv- ices; and reimbursement for out-of-pocket expenses incident to the offering and identifying and investigating a suitable business combination. Stockholders must approve our initial business combination We will seek stockholder approval before we effect our initial business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable state law. In connection with the vote required for our initial business combination, all of our stockholders existing prior to this offering and all of our officers and directors have agreed to vote the shares of common stock then-owned by them in accordance with the majority of the shares of common stock voted by the public stockholders. We will proceed with a busi- ness combination only if a majority of the shares of common stock voted by the public stockholders (including our existing stockholders who acquired shares of our common stock in the offering or in the after market) is voted in favor of the business combination and only if public stockholders owning less than 20.0% of the shares sold in this offering exercise their conversion rights described below. Voting against the business combination alone will not result in conversion of a stock- holder s shares for a pro rata share of the trust account. Such stock- holder must have also exercised its conversion rights described below. We will only structure or consummate a business combination in which all stockholders exercising their conversion rights, up to approximately 19.99%, are entitled to receive their pro rata portion of the trust account (net of taxes payable). Moreover, we will not propose a business combination to our stockholders that includes a provision reducing to below 20% the maximum number of shares sold in this offering that can both vote against the business combination and exercise their conversion rights as described below as we consider this as an obligation to our stockholders. In addition, if we seek approval from our stockholders to consum- mate a business combination more than 18 months after consummation of this offering, the proxy statement related to such business combina- tion will also seek stockholder approval for our board s recommended plan of dissolution and distribution in the event our stockholders do not approve such business combination. Conversion rights for public stockholders voting to reject a business combination If our initial business combination is approved and completed, public stockholders voting against our initial business combination will be entitled to convert their shares of common stock into a pro rata share of the aggregate amount then on deposit in the trust account, including the deferred underwriting discount and interest income earned on the trust account (net of income taxes and up to 1.35 mil- lion of the interest which may be released to us to cover a portion of our operating expenses). Public stockholders who convert their com- mon stock into a pro rata share of the trust account will be paid promptly their conversion price following the consummation of our ini- tial business combination and will continue to have the right to exercise any warrants they own. We estimate that the initial per share conversion price will be approximately 8.00 per share, which may be lower than the mar- ket price of the common stock on the date of conversion. Accordingly, there may be a disincentive on the part of public stockholders to exer- cise their conversion rights. Dissolution and distribution of assets if no business combination We will promptly initiate procedures for our dissolution and the distri- bution to our public stockholders of our assets, including the funds held in the trust account after paying or reserving for payment of our liabilities (from assets outside the trust account and, if necessary within the trust account), if we do not effect a business combination within 18 months after consummation of this offering (or within 24 months after the consummation of this offering if a letter of intent, agreement in principle or definitive agreement has been executed within 18 months after consummation of this offering and the business combination related thereto has not been consummated within such 24-month period). Pursuant to our amended and restated certificate of incorpora- tion, upon the expiration of such time periods, our purpose and powers will be limited to acts and activities relating to dissolving, liquidating and winding up. We will seek stockholder approval for our dissolution and plan of distribution, but unless and until such approval is received, the funds held in the trust account will not be released. We cannot pro- vide assurances that the distribution of our assets will occur within a specific timeframe. Our amended and restated certificate of incorporation also provides that we must comply with Section 281(b) of the Delaware General Corporation Law ( DGCL ). Section 281(b) requires us to adopt a plan for the distribution of our assets that will provide for the payment to our creditors and potential creditors, based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may subsequently be brought against us in the subsequent 10 years. The plan will also provide that after reserving amounts suffi- cient to cover our liabilities and obligations and the costs of dissolution and liquidation, we will distribute our remaining assets, including the amounts held in the trust account, solely to our public stockholders. We will seek stockholder approval for our dissolution and plan for the distribution of our assets. Upon the approval by our stockholders of our dissolution and plan for the distribution of our assets, we will liquidate our assets, including the trust account, and after reserving amounts suf- ficient to cover our liabilities and obligations and the costs of dissolu- tion and liquidation, distribute those assets solely to our public stockholders. However, we cannot assure you that third parties will not seek to recover from the assets distributed to our public stockholders any amounts owed to them by us. Under the DGCL, our stockholders could be liable for any claims against the corporation to the extent of distributions received by them in dissolution. Further, because our amended and restated certificate of incorporation provides that we dis- tribute our assets in accordance with Section 281(b) rather than Sections 280 and 281(a), any such liability of our stockholders would extend to claims for which an action, suit or proceeding is begun after the third anniversary of our dissolution. Our existing stockholders, including all of our officers and directors, have waived their rights to participate in any distributions occurring upon our failure to complete a business combination with respect to shares of common stock acquired by them prior to this offering, and have agreed to vote all of their shares in favor of our dissolution. We estimate that, in the event we liquidate the trust account, a public stock- holder will receive approximately 8.00 per share, without taking into account net interest earned on the trust account, out of the funds in the trust account. We expect that all costs associated with implementing our dissolution and plan for the distribution of our assets, including payments to any creditors will be funded by the proceeds of this offer- ing not held in the trust account, but if we do not have sufficient funds outside of the trust account for those purposes or to cover our liabilities and obligations, the amount distributed to our public stockholders would be less than 8.00 per share. We estimate that our total costs and expenses for implementing and completing our stockholder-approved dissolution and plan for distribution will be in the range of 50,000 to 75,000. This amount includes all costs and expenses relating to filing our certificate of dissolution in the State of Delaware, the winding up of our company and the costs of a proxy statement and meeting relat- ing to the approval by our stockholders of our dissolution and plan for the distribution of our assets. While we believe that there should be sufficient funds available from the proceeds not held in the trust account to fund the 50,000 to 75,000 of expenses, Churchill Capital Partners LLC has agreed to pay the costs of dissolution and liquidation in the event our remaining assets outside the trust account are insuffi- cient to pay those costs. Churchill Capital Partners LLC is a newly- formed entity and its sole source of capital is anticipated to be the repayment of the 240,000 made to us upon the consummation of this offering. As such, the Company believes that Churchill Capital Partners LLC may have insufficient assets to pay these costs. Accordingly, in the event that Churchill Capital Partners LLC is unable to pay such costs, then Messrs. Bogart, Fisher and Tarlovsky and Ms. O Connell have agreed to pay such costs. In the event that these individuals fail to satisfy these obligations or assert that the obligations in question are not covered by such indemnification, we would commence appropriate litigation if doing so would be in the best interests of our stockholders, which is a decision that would be made by our board of directors based on its fiduciary duties as set forth under Delaware law. In addition, if we seek approval from our stockholders to consummate a business combination more than 18 months after the consummation of this offering, the proxy statement related to such business combina- tion will also seek stockholder approval for our dissolution, in the event our stockholders do not approve such business combination. If no proxy statement seeking the approval of our stockholders for a business combination has been filed 30 days prior to the date that is 24 months after the consummation of this offering (assuming that the period in which we need to consummate a business combination has been extended, as provided in our amended and restated certificate of incor- poration), our board will, prior to such date, convene, adopt and recom- mend to our stockholders our dissolution and plan for the distribution of our assets, and on such date file a proxy statement with the SEC seeking stockholder approval for our dissolution and such plan. Lock-up of securities All of our existing stockholders have agreed that, subject to certain limited exceptions described under Principal Stockholders on page 50 of this prospectus, the shares they owned prior to the completion of this offering (but not the sponsor warrants purchased in the private placement by Churchill Capital Partners LLC) will not be transferable until one year from the date of the closing of the initial business com- bination. The sponsor warrants purchased in the private placement will be subject to the same lock-up restrictions except that the lock-up period will end upon consummation of the initial business combina- tion. Any transferee of securities will be subject to the same restrictions imposed on the existing stockholders. Risks We are a newly formed company that has no operations and has generated no revenues. Until we complete a business combination, we will have no operations and will generate no operating revenues. In making your decision on whether to invest in our securities, you should take into account not only the backgrounds of our management team but also the special risks we face as a blank check company, as well as the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, and, therefore, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. If we make down payments or pay exclusivity or similar fees in connection with structuring and negotiating our initial business combination and we do not complete the specific business combination, the costs incurred for the proposed transaction will not be recoverable. Such an event will result in a loss to us of the costs incurred and could materially and adversely affect subsequent attempts to locate and acquire or merge with another business. You should carefully consider these and the other risks set forth in the section entitled Risk Factors beginning on page 11 of this prospectus.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001368147_whitehall_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001368147_whitehall_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2dfd9a983891522e2ad5c30c6facd0a755c4f1ad
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001368147_whitehall_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY 1
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001368613_apex_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001368613_apex_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a1f3e47c2af3f5be6bc3401dbc822f6821adba63
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001368613_apex_prospectus_summary.txt
@@ -0,0 +1 @@
+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001368812_ishares_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001368812_ishares_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d5686f9a199c604c012cb0b79c3c519d6b907fb6
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001368812_ishares_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights some of the information contained in this prospectus. This summary does not contain all of the information you should consider before investing in the Shares. You should carefully read this entire prospectus, including Risk Factors beginning on page 12, before making a decision to invest in the Shares. This prospectus is intended to be used beginning [ ], 2007. Structure of the Trust and the Investing Pool iShares S&P GSCI Industrial Metals Commodity-Indexed Trust, or the Trust, was formed as a Delaware statutory trust on [ ], 2007. The Trust intends to continuously offer Shares to the public. Each Share represents a unit of fractional undivided beneficial interest in the net assets of the Trust. Substantially all of the assets of the Trust consist of its holdings of the limited liability company interests in the Investing Pool, called Investing Pool Interests, which are the only securities in which the Trust may invest. The term of the Trust is perpetual, unless it is earlier dissolved under the circumstances described under Description of the Shares, the Trust Agreement and the Investing Pool Agreement Amendment and Dissolution . The principal offices of the Trust are located at 45 Fremont Street, San Francisco, CA 94105, and the Trust s telephone number is (415) 597-2000. iShares S&P GSCI Industrial Metals Commodity-Indexed Investing Pool LLC, or the Investing Pool, was formed as a Delaware limited liability company on [ ], 2007. The Investing Pool will issue Investing Pool Interests only to the Trust and to Barclays Global Investors International, Inc., the Manager of the Investing Pool. The Manager will maintain a limited equity interest in the Investing Pool with the balance of the Investing Pool owned by the Trust. Neither the Trust nor the Manager may transfer Investing Pool Interests to any other person. The Investing Pool will invest in long positions in futures contracts on the S&P GSCI Industrial Metals Excess Return Index, called CERFs, and post as margin cash or Short-Term Securities to collateralize its CERF positions. The term of the Investing Pool is perpetual, unless it is earlier terminated by judicial decree or the consent of its members. The principal offices of the Investing Pool are located at 45 Fremont Street, San Francisco, CA 94105, and the Investing Pool s telephone number is (415) 597-2000. Each of the Trust and the Investing Pool is a commodity pool as defined in the Commodity Exchange Act, or CEA, and the regulations of the Commodity Futures Trading Commission, or CFTC. Each entity is operated by Barclays Global Investors International, Inc., which is a commodity pool operator registered with the CFTC and is an indirect subsidiary of Barclays Bank PLC. The Advisor, Barclays Global Fund Advisors, which is an indirect subsidiary of Barclays Bank PLC, serves as the commodity trading advisor of the Investing Pool and is registered with the CFTC. The Trust will not have a separate commodity trading advisor. Neither the Trust nor the Investing Pool is an investment company registered under the Investment Company Act and neither is required to register under that Act. The material terms of the agreements governing the Trust and the Investing Pool are discussed in greater detail under Description of the Shares, the Trust Agreement and the Investing Pool Agreement . Creations and Redemptions The Trust will issue Shares only in one or more blocks of 50,000 Shares, called Baskets, in exchange for CERFs and cash (or, in the discretion of the Sponsor, Short-Term Securities in lieu of cash) in the Basket Amount. The Trust will redeem Shares only in Baskets in exchange for CERFs and cash (or, in the discretion of the Sponsor, Short-Term Securities in lieu of cash) in the Basket Amount. The Trust will not redeem individual Shares. The Trust will contribute to the Investing Pool all CERFs, cash and Short-Term Securities that it receives in exchange for issuing Baskets in return for an increase in its equity interest in the Investing Pool. The Trust will obtain all CERFs, cash and Short-Term Securities that it uses to fulfill redemptions of Baskets through an in-kind redemption from the Investing Pool that will decrease the Trust s equity interest in the Investing Pool. Table of Contents THE COMMODITY FUTURES MARKETS Futures contracts on physical commodities and commodity indices are traded on regulated futures exchanges, and physical commodities and other derivatives on physical commodities and commodity indices are traded in the over-the-counter market and on various types of physical and electronic trading facilities and markets. At present, all of the contracts included in the Index are exchange-traded futures contracts. An exchange-traded futures contract provides for the purchase and sale of a specified type and quantity of a commodity or financial instrument during a stated delivery month for a fixed price. A futures contract on an index of commodities provides for the payment and receipt of cash based on the level of the index at settlement or liquidation of the contract. A futures contract provides for a specified settlement month in which the cash settlement is made or in which the commodity or financial instrument is to be delivered by the seller (whose position is described as short ) and acquired by the purchaser (whose position is described as long ). There is no purchase price paid or received on the purchase or sale of a futures contract. Instead, an amount of cash or cash equivalents must be deposited with the broker as initial margin . This amount varies based on the requirements imposed by the exchange clearing houses, but may be lower than 7% of the value of the contract. This margin deposit provides collateral for the obligations of the parties to the futures contract. By depositing margin, which may vary in form depending on the exchange, with the clearing house or broker involved, a market participant may be able to earn interest on its margin funds, thereby increasing the total return that it may realize from an investment in futures contracts. The market participant normally makes to, and receives from, the broker subsequent daily payments as the price of the futures contract fluctuates. These payments are called variation margin and are made as the existing positions in the futures contract become more or less valuable, a process known as marking to the market . Futures contracts are traded on organized exchanges known as contract markets in the United States. At any time prior to the expiration of a futures contract, subject to the availability of a liquid secondary market, a trader may elect to close out its position by taking an opposite position on the exchange on which the trader obtained the position. This operates to terminate the position and fix the trader s profit or loss. Futures contracts are cleared through the facilities of a centralized clearing house and a brokerage firm, referred to as a futures commission merchant , which is a member of the clearing house. The clearing house guarantees the performance of each clearing member that is a party to a futures contract by, in effect, taking the opposite side of the transaction. Clearing houses do not guarantee the performance by clearing members of their obligations to their customers. Unlike equity securities, futures contracts, by their terms, have stated expirations and, at a specified point in time prior to expiration, trading in a futures contract for the current delivery month will cease. As a result, a market participant wishing to maintain its exposure to a futures contract on a particular commodity with the nearest expiration must close out its position in the expiring contract and establish a new position in the contract for the next delivery month, a process referred to as rolling . For example, a market participant with a long position in November crude oil futures that wishes to maintain a position in the nearest delivery month will, as the November contract nears expiration, sell November futures, which serves to close out the existing long position, and buy December futures. This will roll the November position into a December position, and, when the November contract expires, the market participant will still have a long position in the nearest delivery month. Futures exchanges and clearing houses in the United States are subject to regulation by the CFTC. Exchanges may adopt rules and take other actions that affect trading, including imposing speculative position limits, maximum price fluctuations and trading halts and suspensions and requiring liquidation of contracts in certain circumstances. See
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001368813_ishares_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001368813_ishares_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d5686f9a199c604c012cb0b79c3c519d6b907fb6
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001368813_ishares_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights some of the information contained in this prospectus. This summary does not contain all of the information you should consider before investing in the Shares. You should carefully read this entire prospectus, including Risk Factors beginning on page 12, before making a decision to invest in the Shares. This prospectus is intended to be used beginning [ ], 2007. Structure of the Trust and the Investing Pool iShares S&P GSCI Industrial Metals Commodity-Indexed Trust, or the Trust, was formed as a Delaware statutory trust on [ ], 2007. The Trust intends to continuously offer Shares to the public. Each Share represents a unit of fractional undivided beneficial interest in the net assets of the Trust. Substantially all of the assets of the Trust consist of its holdings of the limited liability company interests in the Investing Pool, called Investing Pool Interests, which are the only securities in which the Trust may invest. The term of the Trust is perpetual, unless it is earlier dissolved under the circumstances described under Description of the Shares, the Trust Agreement and the Investing Pool Agreement Amendment and Dissolution . The principal offices of the Trust are located at 45 Fremont Street, San Francisco, CA 94105, and the Trust s telephone number is (415) 597-2000. iShares S&P GSCI Industrial Metals Commodity-Indexed Investing Pool LLC, or the Investing Pool, was formed as a Delaware limited liability company on [ ], 2007. The Investing Pool will issue Investing Pool Interests only to the Trust and to Barclays Global Investors International, Inc., the Manager of the Investing Pool. The Manager will maintain a limited equity interest in the Investing Pool with the balance of the Investing Pool owned by the Trust. Neither the Trust nor the Manager may transfer Investing Pool Interests to any other person. The Investing Pool will invest in long positions in futures contracts on the S&P GSCI Industrial Metals Excess Return Index, called CERFs, and post as margin cash or Short-Term Securities to collateralize its CERF positions. The term of the Investing Pool is perpetual, unless it is earlier terminated by judicial decree or the consent of its members. The principal offices of the Investing Pool are located at 45 Fremont Street, San Francisco, CA 94105, and the Investing Pool s telephone number is (415) 597-2000. Each of the Trust and the Investing Pool is a commodity pool as defined in the Commodity Exchange Act, or CEA, and the regulations of the Commodity Futures Trading Commission, or CFTC. Each entity is operated by Barclays Global Investors International, Inc., which is a commodity pool operator registered with the CFTC and is an indirect subsidiary of Barclays Bank PLC. The Advisor, Barclays Global Fund Advisors, which is an indirect subsidiary of Barclays Bank PLC, serves as the commodity trading advisor of the Investing Pool and is registered with the CFTC. The Trust will not have a separate commodity trading advisor. Neither the Trust nor the Investing Pool is an investment company registered under the Investment Company Act and neither is required to register under that Act. The material terms of the agreements governing the Trust and the Investing Pool are discussed in greater detail under Description of the Shares, the Trust Agreement and the Investing Pool Agreement . Creations and Redemptions The Trust will issue Shares only in one or more blocks of 50,000 Shares, called Baskets, in exchange for CERFs and cash (or, in the discretion of the Sponsor, Short-Term Securities in lieu of cash) in the Basket Amount. The Trust will redeem Shares only in Baskets in exchange for CERFs and cash (or, in the discretion of the Sponsor, Short-Term Securities in lieu of cash) in the Basket Amount. The Trust will not redeem individual Shares. The Trust will contribute to the Investing Pool all CERFs, cash and Short-Term Securities that it receives in exchange for issuing Baskets in return for an increase in its equity interest in the Investing Pool. The Trust will obtain all CERFs, cash and Short-Term Securities that it uses to fulfill redemptions of Baskets through an in-kind redemption from the Investing Pool that will decrease the Trust s equity interest in the Investing Pool. Table of Contents THE COMMODITY FUTURES MARKETS Futures contracts on physical commodities and commodity indices are traded on regulated futures exchanges, and physical commodities and other derivatives on physical commodities and commodity indices are traded in the over-the-counter market and on various types of physical and electronic trading facilities and markets. At present, all of the contracts included in the Index are exchange-traded futures contracts. An exchange-traded futures contract provides for the purchase and sale of a specified type and quantity of a commodity or financial instrument during a stated delivery month for a fixed price. A futures contract on an index of commodities provides for the payment and receipt of cash based on the level of the index at settlement or liquidation of the contract. A futures contract provides for a specified settlement month in which the cash settlement is made or in which the commodity or financial instrument is to be delivered by the seller (whose position is described as short ) and acquired by the purchaser (whose position is described as long ). There is no purchase price paid or received on the purchase or sale of a futures contract. Instead, an amount of cash or cash equivalents must be deposited with the broker as initial margin . This amount varies based on the requirements imposed by the exchange clearing houses, but may be lower than 7% of the value of the contract. This margin deposit provides collateral for the obligations of the parties to the futures contract. By depositing margin, which may vary in form depending on the exchange, with the clearing house or broker involved, a market participant may be able to earn interest on its margin funds, thereby increasing the total return that it may realize from an investment in futures contracts. The market participant normally makes to, and receives from, the broker subsequent daily payments as the price of the futures contract fluctuates. These payments are called variation margin and are made as the existing positions in the futures contract become more or less valuable, a process known as marking to the market . Futures contracts are traded on organized exchanges known as contract markets in the United States. At any time prior to the expiration of a futures contract, subject to the availability of a liquid secondary market, a trader may elect to close out its position by taking an opposite position on the exchange on which the trader obtained the position. This operates to terminate the position and fix the trader s profit or loss. Futures contracts are cleared through the facilities of a centralized clearing house and a brokerage firm, referred to as a futures commission merchant , which is a member of the clearing house. The clearing house guarantees the performance of each clearing member that is a party to a futures contract by, in effect, taking the opposite side of the transaction. Clearing houses do not guarantee the performance by clearing members of their obligations to their customers. Unlike equity securities, futures contracts, by their terms, have stated expirations and, at a specified point in time prior to expiration, trading in a futures contract for the current delivery month will cease. As a result, a market participant wishing to maintain its exposure to a futures contract on a particular commodity with the nearest expiration must close out its position in the expiring contract and establish a new position in the contract for the next delivery month, a process referred to as rolling . For example, a market participant with a long position in November crude oil futures that wishes to maintain a position in the nearest delivery month will, as the November contract nears expiration, sell November futures, which serves to close out the existing long position, and buy December futures. This will roll the November position into a December position, and, when the November contract expires, the market participant will still have a long position in the nearest delivery month. Futures exchanges and clearing houses in the United States are subject to regulation by the CFTC. Exchanges may adopt rules and take other actions that affect trading, including imposing speculative position limits, maximum price fluctuations and trading halts and suspensions and requiring liquidation of contracts in certain circumstances. See
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001368814_ishares_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001368814_ishares_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..399f6bc576a3cebcd8de41f664f93a79c5c7b5db
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001368814_ishares_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights some of the information contained in this prospectus. This summary does not contain all of the information you should consider before investing in the Shares. You should carefully read this entire prospectus, including Risk Factors beginning on page 12, before making a decision to invest in the Shares. This prospectus is intended to be used beginning [ ], 2007. Structure of the Trust and the Investing Pool iShares S&P GSCI Non-Energy Commodity-Indexed Trust, or the Trust, was formed as a Delaware statutory trust on [ ], 2007. The Trust intends to continuously offer Shares to the public. Each Share represents a unit of fractional undivided beneficial interest in the net assets of the Trust. Substantially all of the assets of the Trust consist of its holdings of the limited liability company interests in the Investing Pool, called Investing Pool Interests, which are the only securities in which the Trust may invest. The term of the Trust is perpetual, unless it is earlier dissolved under the circumstances described under Description of the Shares, the Trust Agreement and the Investing Pool Agreement Amendment and Dissolution . The principal offices of the Trust are located at 45 Fremont Street, San Francisco, CA 94105, and the Trust s telephone number is (415) 597-2000. iShares S&P GSCI Non-Energy Commodity-Indexed Investing Pool LLC, or the Investing Pool, was formed as a Delaware limited liability company on [ ], 2007. The Investing Pool will issue Investing Pool Interests only to the Trust and to Barclays Global Investors International, Inc., the Manager of the Investing Pool. The Manager will maintain a limited equity interest in the Investing Pool with the balance of the Investing Pool owned by the Trust. Neither the Trust nor the Manager may transfer Investing Pool Interests to any other person. The Investing Pool will invest in long positions in futures contracts on the S&P GSCI Non-Energy Excess Return Index, called CERFs, and post as margin cash or Short-Term Securities to collateralize its CERF positions. The term of the Investing Pool is perpetual, unless it is earlier terminated by judicial decree or the consent of its members. The principal offices of the Investing Pool are located at 45 Fremont Street, San Francisco, CA 94105, and the Investing Pool s telephone number is (415) 597-2000. Each of the Trust and the Investing Pool is a commodity pool as defined in the Commodity Exchange Act, or CEA, and the regulations of the Commodity Futures Trading Commission, or CFTC. Each entity is operated by Barclays Global Investors International, Inc., which is a commodity pool operator registered with the CFTC and is an indirect subsidiary of Barclays Bank PLC. The Advisor, Barclays Global Fund Advisors, which is an indirect subsidiary of Barclays Bank PLC, serves as the commodity trading advisor of the Investing Pool and is registered with the CFTC. The Trust will not have a separate commodity trading advisor. Neither the Trust nor the Investing Pool is an investment company registered under the Investment Company Act and neither is required to register under that Act. The material terms of the agreements governing the Trust and the Investing Pool are discussed in greater detail under Description of the Shares, the Trust Agreement and the Investing Pool Agreement . Creations and Redemptions The Trust will issue Shares only in one or more blocks of 50,000 Shares, called Baskets, in exchange for CERFs and cash (or, in the discretion of the Sponsor, Short-Term Securities in lieu of cash) in the Basket Amount. The Trust will redeem Shares only in Baskets in exchange for CERFs and cash (or, in the discretion of the Sponsor, Short-Term Securities in lieu of cash) in the Basket Amount. The Trust will not redeem individual Shares. The Trust will contribute to the Investing Pool all CERFs, cash and Short-Term Securities that it receives in exchange for issuing Baskets in return for an increase in its equity interest in the Investing Pool. The Trust will obtain all CERFs, cash and Short-Term Securities that it uses to fulfill redemptions of Baskets through an in-kind redemption from the Investing Pool that will decrease the Trust s equity interest in the Investing Pool. Table of Contents THE COMMODITY FUTURES MARKETS Futures contracts on physical commodities and commodity indices are traded on regulated futures exchanges, and physical commodities and other derivatives on physical commodities and commodity indices are traded in the over-the-counter market and on various types of physical and electronic trading facilities and markets. At present, all of the contracts included in the Index are exchange-traded futures contracts. An exchange-traded futures contract provides for the purchase and sale of a specified type and quantity of a commodity or financial instrument during a stated delivery month for a fixed price. A futures contract on an index of commodities provides for the payment and receipt of cash based on the level of the index at settlement or liquidation of the contract. A futures contract provides for a specified settlement month in which the cash settlement is made or in which the commodity or financial instrument is to be delivered by the seller (whose position is described as short ) and acquired by the purchaser (whose position is described as long ). There is no purchase price paid or received on the purchase or sale of a futures contract. Instead, an amount of cash or cash equivalents must be deposited with the broker as initial margin . This amount varies based on the requirements imposed by the exchange clearing houses, but may be lower than 7% of the value of the contract. This margin deposit provides collateral for the obligations of the parties to the futures contract. By depositing margin, which may vary in form depending on the exchange, with the clearing house or broker involved, a market participant may be able to earn interest on its margin funds, thereby increasing the total return that it may realize from an investment in futures contracts. The market participant normally makes to, and receives from, the broker subsequent daily payments as the price of the futures contract fluctuates. These payments are called variation margin and are made as the existing positions in the futures contract become more or less valuable, a process known as marking to the market . Futures contracts are traded on organized exchanges known as contract markets in the United States. At any time prior to the expiration of a futures contract, subject to the availability of a liquid secondary market, a trader may elect to close out its position by taking an opposite position on the exchange on which the trader obtained the position. This operates to terminate the position and fix the trader s profit or loss. Futures contracts are cleared through the facilities of a centralized clearing house and a brokerage firm, referred to as a futures commission merchant , which is a member of the clearing house. The clearing house guarantees the performance of each clearing member that is a party to a futures contract by, in effect, taking the opposite side of the transaction. Clearing houses do not guarantee the performance by clearing members of their obligations to their customers. Unlike equity securities, futures contracts, by their terms, have stated expirations and, at a specified point in time prior to expiration, trading in a futures contract for the current delivery month will cease. As a result, a market participant wishing to maintain its exposure to a futures contract on a particular commodity with the nearest expiration must close out its position in the expiring contract and establish a new position in the contract for the next delivery month, a process referred to as rolling . For example, a market participant with a long position in November crude oil futures that wishes to maintain a position in the nearest delivery month will, as the November contract nears expiration, sell November futures, which serves to close out the existing long position, and buy December futures. This will roll the November position into a December position, and, when the November contract expires, the market participant will still have a long position in the nearest delivery month. Futures exchanges and clearing houses in the United States are subject to regulation by the CFTC. Exchanges may adopt rules and take other actions that affect trading, including imposing speculative position limits, maximum price fluctuations and trading halts and suspensions and requiring liquidation of contracts in certain circumstances. See
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001368815_ishares_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001368815_ishares_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights some of the information contained in this prospectus. This summary does not contain all of the information you should consider before investing in the Shares. You should carefully read this entire prospectus, including Risk Factors beginning on page 12, before making a decision to invest in the Shares. This prospectus is intended to be used beginning [ ], 2007. Structure of the Trust and the Investing Pool iShares S&P GSCI Non-Energy Commodity-Indexed Trust, or the Trust, was formed as a Delaware statutory trust on [ ], 2007. The Trust intends to continuously offer Shares to the public. Each Share represents a unit of fractional undivided beneficial interest in the net assets of the Trust. Substantially all of the assets of the Trust consist of its holdings of the limited liability company interests in the Investing Pool, called Investing Pool Interests, which are the only securities in which the Trust may invest. The term of the Trust is perpetual, unless it is earlier dissolved under the circumstances described under Description of the Shares, the Trust Agreement and the Investing Pool Agreement Amendment and Dissolution . The principal offices of the Trust are located at 45 Fremont Street, San Francisco, CA 94105, and the Trust s telephone number is (415) 597-2000. iShares S&P GSCI Non-Energy Commodity-Indexed Investing Pool LLC, or the Investing Pool, was formed as a Delaware limited liability company on [ ], 2007. The Investing Pool will issue Investing Pool Interests only to the Trust and to Barclays Global Investors International, Inc., the Manager of the Investing Pool. The Manager will maintain a limited equity interest in the Investing Pool with the balance of the Investing Pool owned by the Trust. Neither the Trust nor the Manager may transfer Investing Pool Interests to any other person. The Investing Pool will invest in long positions in futures contracts on the S&P GSCI Non-Energy Excess Return Index, called CERFs, and post as margin cash or Short-Term Securities to collateralize its CERF positions. The term of the Investing Pool is perpetual, unless it is earlier terminated by judicial decree or the consent of its members. The principal offices of the Investing Pool are located at 45 Fremont Street, San Francisco, CA 94105, and the Investing Pool s telephone number is (415) 597-2000. Each of the Trust and the Investing Pool is a commodity pool as defined in the Commodity Exchange Act, or CEA, and the regulations of the Commodity Futures Trading Commission, or CFTC. Each entity is operated by Barclays Global Investors International, Inc., which is a commodity pool operator registered with the CFTC and is an indirect subsidiary of Barclays Bank PLC. The Advisor, Barclays Global Fund Advisors, which is an indirect subsidiary of Barclays Bank PLC, serves as the commodity trading advisor of the Investing Pool and is registered with the CFTC. The Trust will not have a separate commodity trading advisor. Neither the Trust nor the Investing Pool is an investment company registered under the Investment Company Act and neither is required to register under that Act. The material terms of the agreements governing the Trust and the Investing Pool are discussed in greater detail under Description of the Shares, the Trust Agreement and the Investing Pool Agreement . Creations and Redemptions The Trust will issue Shares only in one or more blocks of 50,000 Shares, called Baskets, in exchange for CERFs and cash (or, in the discretion of the Sponsor, Short-Term Securities in lieu of cash) in the Basket Amount. The Trust will redeem Shares only in Baskets in exchange for CERFs and cash (or, in the discretion of the Sponsor, Short-Term Securities in lieu of cash) in the Basket Amount. The Trust will not redeem individual Shares. The Trust will contribute to the Investing Pool all CERFs, cash and Short-Term Securities that it receives in exchange for issuing Baskets in return for an increase in its equity interest in the Investing Pool. The Trust will obtain all CERFs, cash and Short-Term Securities that it uses to fulfill redemptions of Baskets through an in-kind redemption from the Investing Pool that will decrease the Trust s equity interest in the Investing Pool. Table of Contents THE COMMODITY FUTURES MARKETS Futures contracts on physical commodities and commodity indices are traded on regulated futures exchanges, and physical commodities and other derivatives on physical commodities and commodity indices are traded in the over-the-counter market and on various types of physical and electronic trading facilities and markets. At present, all of the contracts included in the Index are exchange-traded futures contracts. An exchange-traded futures contract provides for the purchase and sale of a specified type and quantity of a commodity or financial instrument during a stated delivery month for a fixed price. A futures contract on an index of commodities provides for the payment and receipt of cash based on the level of the index at settlement or liquidation of the contract. A futures contract provides for a specified settlement month in which the cash settlement is made or in which the commodity or financial instrument is to be delivered by the seller (whose position is described as short ) and acquired by the purchaser (whose position is described as long ). There is no purchase price paid or received on the purchase or sale of a futures contract. Instead, an amount of cash or cash equivalents must be deposited with the broker as initial margin . This amount varies based on the requirements imposed by the exchange clearing houses, but may be lower than 7% of the value of the contract. This margin deposit provides collateral for the obligations of the parties to the futures contract. By depositing margin, which may vary in form depending on the exchange, with the clearing house or broker involved, a market participant may be able to earn interest on its margin funds, thereby increasing the total return that it may realize from an investment in futures contracts. The market participant normally makes to, and receives from, the broker subsequent daily payments as the price of the futures contract fluctuates. These payments are called variation margin and are made as the existing positions in the futures contract become more or less valuable, a process known as marking to the market . Futures contracts are traded on organized exchanges known as contract markets in the United States. At any time prior to the expiration of a futures contract, subject to the availability of a liquid secondary market, a trader may elect to close out its position by taking an opposite position on the exchange on which the trader obtained the position. This operates to terminate the position and fix the trader s profit or loss. Futures contracts are cleared through the facilities of a centralized clearing house and a brokerage firm, referred to as a futures commission merchant , which is a member of the clearing house. The clearing house guarantees the performance of each clearing member that is a party to a futures contract by, in effect, taking the opposite side of the transaction. Clearing houses do not guarantee the performance by clearing members of their obligations to their customers. Unlike equity securities, futures contracts, by their terms, have stated expirations and, at a specified point in time prior to expiration, trading in a futures contract for the current delivery month will cease. As a result, a market participant wishing to maintain its exposure to a futures contract on a particular commodity with the nearest expiration must close out its position in the expiring contract and establish a new position in the contract for the next delivery month, a process referred to as rolling . For example, a market participant with a long position in November crude oil futures that wishes to maintain a position in the nearest delivery month will, as the November contract nears expiration, sell November futures, which serves to close out the existing long position, and buy December futures. This will roll the November position into a December position, and, when the November contract expires, the market participant will still have a long position in the nearest delivery month. Futures exchanges and clearing houses in the United States are subject to regulation by the CFTC. Exchanges may adopt rules and take other actions that affect trading, including imposing speculative position limits, maximum price fluctuations and trading halts and suspensions and requiring liquidation of contracts in certain circumstances. See
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001368879_tailwind_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001368879_tailwind_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..ea3709d5a3ca46fa128f1a05b40f98e9b656a0b3
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. Unless otherwise stated in this prospectus: references to "we," "us," "company" or "our company" refer to Tailwind Financial Inc.; references to "business combination" mean our initial acquisition of one or more assets or operating businesses through a merger, capital stock exchange, asset or stock acquisition, exchangeable share transaction or other similar business combination, whose fair market value is at least equal to 80% of our net assets (excluding the amount held in the trust account representing a portion of the underwriters' discount) at the time of such acquisition, pursuant to which we will require that a majority of the shares of common stock voted by the public stockholders are voted in favor of the acquisition and less than 30% of the public stockholders both exercise their conversion rights and vote against the proposed acquisition; references to "private stockholders" mean the holders of our securities prior to consummation of this offering; references to "C$" mean Canadian Dollars and to "$" mean U.S. Dollars; and unless expressly stated to the contrary, the information in this prospectus assumes that the representative of the underwriters will not exercise its over-allotment option. Except as otherwise specified, all information in this prospectus and all per share information have been adjusted to reflect a 1 for 1.15 stock split in the form of a stock dividend that was effected on March 14, 2007. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer is not permitted. Our Business We are a blank check development stage company organized under the laws of the State of Delaware on June 30, 2006. We were formed to acquire, through a merger, capital stock exchange, asset or stock acquisition, exchangeable share transaction or other similar business combination, one or more businesses in the financial services industry. We do not currently have any specific operating businesses under consideration. We have not identified or been provided with the identity of, or had any direct or indirect contact with, potential targets. Additionally, we have not engaged or retained any agent or other representative to identify or locate any suitable target, although we may do so following the offering. To date, our efforts have been limited to organizational activities and activities related to this offering. Our management team has extensive experience in the financial services sector with a particular emphasis on the Canadian asset management industry. Gordon A. McMillan, our Chairman of the Board, has founded or co-founded four separate asset management firms in Canada and has overseen the sale of these firms to larger industry consolidators in Canada for aggregate sale proceeds in excess of C$100 million. Andrew A. McKay, our Chief Executive Officer was the founder and, until its recent sale, the Chief Executive Officer of JovFunds Management Inc. (formerly, Fairway Asset Management Corp.), or JovFunds, a Canadian manager of closed-end investment trusts and venture capital funds. Our board of directors includes Philip Armstrong, Robert C. Hain, Stephen T. Moore and Robert Penteliuk, who also have significant experience in the financial services sector. Mr. Armstrong is a Director of JovFunds and the President, Chief Executive Officer and a Director of Jovian Capital Corporation, a TSX Venture Exchange-listed company which invests in financial services companies and is the parent company of JovFunds. Mr. Hain was formerly the Chief Executive Officer of INVESCO UK Ltd., one of the largest asset managers in the UK. Mr. Moore currently chairs the board of governors of CI Funds Inc., one of Canada's largest mutual fund companies. Mr. Penteliuk is a principal of Genuity Capital Markets, a subsidiary of Genuity Financial Group and a registered broker dealer which provides merger, acquisition, valuation and strategic advisory services to the financial services and other industries. Messrs. McMillan, McKay, Armstrong, Hain, Moore and Penteliuk each have extensive relationships within the financial services sector, which we believe will provide us with access to a broad range of potential acquisition targets. However, the results of our management team's prior business ventures are not necessarily indicative of our company's future performance or results. In addition, whether or not any member of our management team remains with our company following our consummation of a business combination depends on whether or not each person is offered a management role with the resulting company in connection with our negotiation of the business combination. Our management's ability to remain with the company following consummation of a business combination will not be the determining factor in our decision whether or not to proceed with any particular potential business combination. While we may seek to consummate business combinations with more than one target, our initial business combination must be with one or more targets whose fair market value is at least equal to 80% of our net assets (excluding the amount held in the trust account representing a portion of the underwriters' discount) at the time of such acquisition. Consequently, it is possible that we will have the ability to consummate only a single business combination. However, we have no limitation on our ability to raise additional funds through the sale of securities or the incurrence of additional indebtedness that would enable us to consummate a business combination with an operating business having a fair market value in excess of 80% of our net assets (excluding the amount held in the trust account representing a portion of the underwriters' discount) at the time of such an acquisition. Since we have no specific business combination under consideration, we have not entered into any such fund raising agreement and have no current intention of doing so. Other than the $7,500 per month administrative fee payable to Parkwood Holdings Ltd., a company wholly owned by Gordon A. McMillan, Andrew A. McKay and JovFunds, or to an affiliate of Parkwood Holdings Ltd., none of our officers, directors or initial investors will receive any compensation from us prior to the consummation of our initial business combination, except for out-of-pocket expenses incurred by them on our behalf. Our executive offices are located at BCE Place, 181 Bay Street, Suite 2040, Toronto, Ontario, Canada M5J 2T3, our telephone number is (416) 601-2422 and our website is www.tailwindfc.com. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001368925_taliera_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001368925_taliera_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3942b1a6edbfb8fc09533993d25e6bdd47c8a45e
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001368925_taliera_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. Unless otherwise stated in this prospectus: references to "we," "us" or "our company" refer to Taliera Corporation; "initial shares" refers to the 1,818,750 shares of common stock that our initial stockholder, Taliera Holdings, LLC, originally purchased from us for $25,000 in June 2006 and the 56,250 shares of restricted stock granted to our independent directors in July and October 2006 for a total of 1,875,000 shares of common stock; "insider warrants" refers to the 1,666,667 warrants we are selling privately to Taliera Holdings, LLC upon consummation of this offering; the term "public stockholders" means the holders of the shares of common stock which are being sold as part of the units in this public offering, including any of our existing stockholders to the extent that they purchase such shares, whether included in our units or separately; and the information in this prospectus assumes that the representative of the underwriters has not exercised its over-allotment option, unless specifically noted otherwise. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer is not permitted. The Company We are a blank check company organized under the laws of the State of Delaware on June 28, 2006. We were formed with the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. To date, our efforts have been limited to organizational activities. Our efforts to identify a prospective target business will not be limited to a particular industry, although we intend to focus our search for target businesses operating in the global beverage alcohol industry. We believe that companies involved in this industry represent attractive acquisition targets for a number of reasons, including potentially attractive valuations, the large number of middle market acquisition candidates and a favorable economic and regulatory environment. Furthermore, we intend to leverage the industry experience of our executive officers, who have been associated with leading providers of many products in the beverage alcohol industry, in identifying a prospective target business. Notwithstanding the forgoing, we are not limited to this particular industry and may seek to effect a business combination with a company outside of our initial area of focus. We do not have any specific business combination under consideration and we have not (nor has anyone on our behalf) contacted any prospective target business or had any discussions, formal or otherwise, with respect to such a transaction. We have not (nor have any of our agents or affiliates) been approached by any candidates (or representative of any candidates) with respect to a possible acquisition transaction with our company. Additionally, we have not, nor has anyone on our behalf, taken any measure, directly or indirectly, to identify or locate any suitable acquisition candidate, nor have we engaged or retained any agent or other representative to identify or locate any such acquisition candidate. Our initial business combination must be with a target business whose fair market value is at least equal to 80% of our net assets (all of our assets, including the funds held in the trust account, less our liabilities) at the time of such acquisition, although this may entail simultaneous acquisitions of several operating businesses. If we determine to simultaneously acquire several businesses and such businesses are owned by different sellers, we will need for each of such sellers to agree that our purchase of its business is contingent on the simultaneous closings of the other acquisitions, which may make it more difficult for us, and delay our ability, to complete the business combination. With multiple acquisitions, we could also face additional risks, including additional burdens and costs with respect to possible multiple negotiations and due diligence investigations (if there are multiple sellers) and the additional risks associated with the subsequent integration of the operations and services or products of the acquired companies in a single operating business. The target business that we acquire may have a fair market value substantially in excess of 80% of our net assets. In order to consummate such an acquisition, we may issue a significant amount of our debt or equity securities to the sellers of such business and/or seek to raise additional funds through a private offering of debt or equity securities. Since we have no specific business combination under consideration, we have not entered into any such fund raising arrangement and have no current intention of doing so. Our principal executive offices are located at 250 East 96th Street, Suite 415, Indianapolis, IN 46240 and our telephone number is (317) 574-6400. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 The Offering Securities offered 7,500,000 units, at $8.00 per unit, each unit consisting of: one share of common stock; and one warrant. The units will begin trading on or promptly after the date of this prospectus. Each of the common stock and warrants may trade separately on the 90th day after the date of this prospectus unless Morgan Joseph & Co. determines that an earlier date is acceptable (based upon its assessment of the relative strengths of the securities markets and small capitalization companies in general, and the trading pattern of, and demand for, our securities in particular). In no event will Morgan Joseph & Co. allow separate trading of the common stock and warrants until we file an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file a Current Report on Form 8-K with the Securities and Exchange Commission, including an audited balance sheet, upon the consummation of this offering, which is anticipated to take place three business days from the date the units commence trading. The audited balance sheet will reflect our receipt of the proceeds from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Form 8-K. If the over-allotment option is exercised after our initial filing of a Form 8-K, we will file an amendment to the Form 8-K to provide updated financial information to reflect the exercise of the over-allotment option. We will also include in this Form 8-K, or amendment thereto, or in a subsequent Form 8-K, information indicating if Morgan Joseph & Co. has allowed separate trading of the common stock and warrants prior to the 90th day after the date of this prospectus. Securities to be sold privately to insiders simultaneously with the consummation of this offering Taliera Holdings (which is owned by certain of our officers and directors and other investors) has agreed to purchase an aggregate of 1,666,667 insider warrants at a price of $1.20 per warrant (for an aggregate purchase price of $2,000,000). This purchase will take place on a private placement basis simultaneously with the consummation of this offering. The purchase of insider warrants is mandatory and only conditional on completion of the offering. Taliera Holdings also may not obtain a refund of the purchase price of the insider warrants. The insider warrants will be identical to the warrants underlying the units being offered by this prospectus except that if we call the warrants for redemption as described below, the insider warrants may be exercisable on a cashless basis so long as such warrants are held by these purchasers or their affiliates. Additionally, Taliera Holdings has agreed that the insider warrants will not be sold or transferred by it until after we have completed a business combination. Amendment No. 6 To FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Limited Recourse Line of Credit Taliera Holdings has agreed to provide us with a limited recourse revolving line of credit under which we may have up to $700,000 of outstanding borrowings at any time. The revolving line of credit terminates upon the earlier of the completion of a business combination, or our liquidation. The revolving line of credit bears interest at the rate of 8% per annum. Other than certain expenses directly related to the offering, principal and interest owed by us under the line of credit will be payable only if we consummate a business combination. Common stock: Number outstanding before this offering 1,875,000 shares Number to be outstanding after this offering 9,375,000 shares Warrants: Number outstanding before this offering 0 warrants Number to be sold to insiders 1,666,667 warrants Number to be outstanding after this offering and sale to insiders 9,166,667 warrants Exercisability Each warrant is exercisable for one share of common stock Exercise price $5.00 Exercise period The warrants will become exercisable on the later of: the completion of a business combination with a target business, and [ ], 2008 [one year from the date of this prospectus]. The warrants will expire at 5:00 p.m., New York City time, on [ ], 2011 [four years from the date of this prospectus] or earlier upon redemption. Redemption We may redeem the outstanding warrants (including any of the insider warrants and any outstanding warrants issued upon exercise of the unit purchase option issued to Morgan Joseph & Co.): in whole and not in part, at a price of $.01 per warrant at any time while the warrants are exercisable (which will occur only if a registration statement relating to the common stock issuable upon exercise of the warrants is effective and current), upon a minimum of 30 days' prior written notice of redemption, and TALIERA CORPORATION (Exact name of registrant as specified in its charter) Delaware 6770 20-5068748 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 250 East 96th Street, Suite 415 Indianapolis, Indiana 46240 (317) 496-6660 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) if, and only if, the last sales price of our common stock equals or exceeds $11.50 per share for any 20 trading days within a 30-trading day period ending three business days before we send the notice of redemption. Any redemption is at our discretion. For this reason, the redemption criteria for our warrants have been established at a price which is intended to provide warrant holders a reasonable premium to the initial exercise price and provide a sufficient degree of liquidity to cushion the market reaction to our redemption call. If we call the warrants for redemption, Taliera Holdings will be entitled to exercise its insider warrants for cash or on a "cashless basis." In such event, Taliera Holdings would pay the exercise price by surrendering the warrants for that number of shares of common stock equal to the quotient obtained by dividing (x) the product of the number of shares of common stock underlying the warrants, multiplied by the difference between the exercise price of the warrants and the "fair market value" (defined below) by (y) the fair market value. The "fair market value" shall mean the average reported last sale price of the common stock for the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of warrants. As a result, our officers and directors who are also members of Taliera Holdings may have a conflict of interest in determining when to call the warrants for redemption as they would potentially be able to avoid any negative price pressure on the price of the warrants and common stock due to the redemption through a cashless exercise. Proposed American Stock Exchange symbols for our: Units TLE.U Common stock TLE Warrants TLE.WS J. Smoke Wallin 250 East 96th Street, Suite 415 Indianapolis, Indiana 46240 (317) 496-6660 (Name, address, including zip code, and telephone number, including area code, of agent for service) Offering proceeds to be held in trust $57,400,000 of the proceeds of this offering plus the $2,000,000 we will receive from the sale of the insider warrants (for an aggregate of $59,400,000 or $7.92 per share sold to the public in this offering) will be placed in a trust account at Smith Barney, a division of Citigroup Global Markets, Inc., maintained by Continental Stock Transfer & Trust Company, acting as trustee pursuant to an agreement to be signed on the date of this prospectus. This amount includes $2,100,000 of underwriting discounts and commissions payable to the underwriters in the offering. The underwriters have agreed that such amount will not be paid unless and until we consummate a business combination. Except as set forth below, these proceeds will not be released until the earlier of the completion of a business combination or our liquidation. Therefore, unless and until a business combination is consummated, the proceeds held in the trust account will not be available for our use for any expenses related to this offering or expenses which we may incur related to the investigation and selection of a target business and the negotiation of an agreement to acquire a target business. Notwithstanding the foregoing, there can be released to us from the trust account interest earned on the funds in the trust account any amounts we may need to pay our income tax obligations and up to an aggregate of $750,000 to fund expenses related to investigating and selecting a target business and our other working capital requirements (but only if the $700,000 line of credit from Taliera Holdings is fully drawn). Assuming an interest rate of % and an effective tax rate of %, approximately $ of interest income would be available to us to pay our income tax obligations and to fund any necessary working capital requirements during the 24 month period following the date of this prospectus. With this exception, expenses incurred by us may be paid prior to a business combination only from the funds we draw down from our revolving line of credit. None of the warrants may be exercised until after the consummation of a business combination and, thus, after the proceeds of the trust account have been disbursed. Accordingly, the warrant exercise price will be paid directly to us and not placed in the trust account. Limited payments to insiders There will be no fees or other cash payments paid to Taliera Holdings, our officers, our directors or their affiliates prior to, or for any services they render in order to effectuate, the consummation of a business combination other than: repayment at the closing of this offering of that portion of $180,000, plus any accrued interest, which was advanced by Taliera Holdings under the line of credit directly relating to offering expenses; payment of $7,500 per month to eSkye Solutions, Inc., an affiliate of S.K. Johnston III, our chairman of the board, and J. Smoke Wallin, our chief executive officer, chief financial officer, secretary and director, for office space and related services; and Copies to: Joseph E. DeGroff, Esq. Ice Miller LLP One American Square Suite 3100 Indianapolis, Indiana 46282-0200 (317) 236-2100 (317) 592-4637 Facsimile David Alan Miller, Esq. Graubard Miller The Chrysler Building 405 Lexington Avenue New York, New York 10174 (212) 818-8800 (212) 818-8881 Facsimile reimbursement of out-of-pocket expenses incurred by them in connection with certain activities on our behalf, such as identifying and investigating possible business targets and business combinations. Certificate of Incorporation As discussed below, there are specific provisions in our amended and restated certificate of incorporation that may not be amended prior to our consummation of a business combination, including our requirements to seek stockholder approval of such a business combination and to allow our stockholders to seek conversion of their shares if they do not approve of such a business combination. We view these provisions, which are contained in Article Seventh of our amended and restated certificate of incorporation, as obligations to our stockholders and will not take any action to amend or waive these provisions. Our amended and restated certificate of incorporation also provides that we will continue in existence only until , 2009 [twenty four months from the date of this prospectus]. If we have not completed a business combination by such date, our corporate existence will cease except for the purposes of winding up our affairs and liquidating, pursuant to Section 278 of the Delaware General Corporation Law. This has the same effect as if our board of directors and stockholders had formally voted to approve our dissolution pursuant to Section 275 of the Delaware General Corporation Law. Accordingly, limiting our corporate existence to a specified date as permitted by Section 102(b)(5) of the Delaware General Corporation Law removes the necessity to comply with the formal procedures set forth in Section 275 (which would have required our board of directors and stockholders to formally vote to approve our dissolution and liquidation and to have filed a certificate of dissolution with the Delaware Secretary of State). In connection with any proposed business combination we submit to our stockholders for approval, we will also submit to stockholders a proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence, thereby removing this limitation on our corporate life. We will only consummate a business combination if stockholders vote both in favor of such business combination and our amendment to provide for our perpetual existence. The approval of the proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence would require the affirmative vote of a majority of our outstanding shares of common stock. We view this provision terminating our corporate life by , 2009 [twenty four months from the date of this prospectus] as an obligation to our stockholders and will not take any action to amend or waive this provision to allow us to survive for a longer period of time except in connection with the consummation of a business combination. Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Stockholders must approve business combination Pursuant to our amended and restated certificate of incorporation, we will seek stockholder approval before we effect any business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable state law. We view this requirement as an obligation to our stockholders and will not take any action to amend or waive this provision in our certificate of incorporation. In connection with the vote required for any business combination, Taliera Holdings has agreed to vote the shares of common stock owned by it immediately before this offering in accordance with the majority of the shares of common stock voted by the public stockholders. We will proceed with a business combination only if (i) a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and (ii) public stockholders owning less than 30% of the shares sold in this offering exercise their conversion rights described below. Accordingly, it is our understanding and intention in every case to structure and consummate a business combination in which approximately 29.99% of the public stockholders may exercise their conversion rights and the business combination will still go forward. Conversion rights for stockholders voting to reject a business combination Pursuant to our amended and restated certificate of incorporation, public stockholders voting against a business combination will be entitled to convert their stock into a pro rata share of the trust account, estimated to be $7.92 per share plus any interest earned on their portion of the trust account but less the interest that may be released to us as described above to pay any of our tax obligations, if the business combination is approved and completed. We view this requirement as an obligation to our stockholders and will not take any action to amend or waive this provision in our amended and restated certificate of incorporation. Taliera Holdings will not have such conversion rights with respect to any shares of common stock owned by it, directly or indirectly, whether included in its initial shares or purchased by it in this offering or in the aftermarket. Our officers and directors will not have such conversion rights with respect to any shares of common stock purchased by them in this offering or in the aftermarket. Public stockholders who convert their stock into their share of the trust fund will continue to have the right to exercise any warrants they may hold. Investors in this offering who do not sell, or who receive less than $0.08 of net sales proceeds for, the warrant included in the units, and persons who purchase common stock in the aftermarket at a price in excess of $7.92 per share, may have a disincentive to exercise their conversion rights because the amount they would receive upon conversion could be less than their original or adjusted purchase price. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Liquidation if no business combination As described above, if we have not consummated a business combination by , 2009 [twenty four months from the date of this prospectus], our corporate existence will cease by operation of law and we will promptly distribute only to our public stockholders the amount in our trust account (including any accrued interest) plus any remaining net assets. At that time, pursuant to Section 281 of the Delaware General Corporation Law, we will adopt a plan of liquidation that will provide for our payment, based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against us within the subsequent 10 years. Accordingly, we would be required to provide for any creditors known to us at that time as well as provide for any claims that we believe could potentially be brought against us within the subsequent 10 years prior to distributing the funds held in the trust to our public stockholders. We cannot assure you that we will properly assess all claims that may be potentially brought against us. As such, our stockholders could potentially be liable for any claims of creditors to the extent of distributions received by them (but no more). Furthermore, while we will seek to have all vendors and service providers (which would include any third parties we engaged to assist us in any way in connection with our search for a target business) and prospective target businesses execute agreements with us waiving any right, title, interest or claim of any kind they may have in or to any monies held in the trust account, there is no guarantee that they will execute such agreements. Nor is there any guarantee that, even if such entities execute such agreements with us, they will not seek recourse against the trust account or that a court would not conclude that such agreements are not legally enforceable. Certain of our officers and directors have agreed that they will be personally liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us. However, we cannot assure you that they will be able to satisfy those obligations, if they are required to do so. As a result, we cannot assure you that the per-share distribution from the trust fund, if we liquidate, will not be less than $7.92, plus interest then held in the trust fund. We anticipate the distribution of the funds in the trust account to our public stockholders will occur within 10 business days from the date our corporate existence ceases. Our initial stockholders have waived their rights to participate in any liquidation distribution with respect to their initial shares. We will pay the costs of liquidation (currently anticipated to be no more than $15,000) from the $700,000 line of credit being provided to us by Taliera Holdings. Escrow of existing stockholders' shares On the date of this prospectus, all of our initial shares shall be placed into an escrow account maintained by Continental Stock Transfer & Trust Company, acting as escrow agent. Subject to certain limited exceptions (such as transfers to relatives and trusts for estate planning purposes, while remaining in escrow), these shares will not be transferable during the escrow period and will not be released from escrow until one year after the consummation of a business combination or earlier if, following a business combination, we engage in a subsequent transaction resulting in our stockholders having the right to exchange their shares for cash or other securities. Additionally, a portion of such shares may be forfeited by Taliera Holdings and returned to us for cancellation if holders of shares sold in this offering vote against a proposed business combination and seek to exercise their conversion rights and such business combination is consummated. Risks In making your decision on whether to invest in our securities, you should take into account not only the backgrounds of our management team, but also the special risks we face as a blank check company. In addition, this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, and, therefore, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. You should carefully consider these and the other risks set forth in the section entitled "Risk Factors" beginning on page 12 of this prospectus. (1)Includes $2,000,000 that we will receive from the sale of the insider warrants to Taliera Holdings. Additionally, if a business combination is consummated, public stockholders who voted against the business combination and exercised their conversion rights would be entitled to receive approximately $7.92 per share (plus any accrued interest), which amount represents $7.64 per share from the proceeds of this offering and the private placement and $0.28 per unit of deferred underwriting discounts and commissions which the underwriters have agreed to forfeit to pay converting stockholders. The "as adjusted" information gives effect to the sale of the units we are offering by this prospectus and the insider warrants, including the application of the related gross proceeds and the payment of the estimated remaining costs of this public offering and the repayment of the accrued and other liabilities required to be repaid. The working capital and total assets amounts include $57,300,000 of the amount to be held in the trust account, which will be available to us only upon the consummation of a business combination within the time period described in this prospectus. The total amount to be placed in trust includes an additional $2,100,000 ($0.28 per unit) of deferred underwriting discounts and commissions payable to the underwriters in the offering only if we consummate a business combination. If a business combination is not so consummated, the trust account, and all accrued interest earned thereon less (i) up to $750,000 that may be released to us to fund our working capital requirements, after we have fully drawn our $700,000 line of credit from Taliera Holdings, and (ii) any amounts released to us to pay our income and other tax obligations, will be distributed solely to our public stockholders (subject to our obligations under Delaware law to provide for claims of creditors). We will not proceed with a business combination if public stockholders owning 30% or more of the shares sold in this offering vote against the business combination and exercise their conversion rights. Accordingly, we may effect a business combination if public stockholders owning up to approximately 29.99% of the shares sold in this offering exercise their conversion rights. If this occurs, we would be required to convert to cash up to approximately 29.99% of the 7,500,000 shares sold in this offering, or 2,249,250 shares of common stock, at an initial per-share conversion price of $7.92 (for a total of $17,814,060), without taking into account interest earned on the trust account. The actual per-share conversion price will be equal to: the amount in the trust account, including all accrued interest after distribution of interest income on the trust account balance to us as described above, as of two business days prior to the proposed consummation of the business combination, divided by the number of shares of common stock sold in the offering. The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Preliminary Prospectus Subject to Completion, March 6, 2007 PROSPECTUS $60,000,000 TALIERA CORPORATION 7,500,000 units Taliera Corporation is a newly formed blank check company organized for the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. Our efforts to identify a prospective target business will not be limited to a particular industry, although we intend to focus our search for target businesses operating in the global beverage alcohol industry. We do not have any specific business combination under consideration and we have not (nor has anyone on our behalf) contacted any prospective target business or had any discussions, formal or otherwise, with respect to such a transaction. This is an initial public offering of our securities. Each unit that we are offering has a price of $8.00 and consists of one share of our common stock and one warrant. Each warrant entitles the holder to purchase one share of our common stock at a price of $5.00 per share. Each warrant will become exercisable on the later of our completion of a business combination and , 2008 [one year from the date of this prospectus], and will expire on , 2011 [four years from the date of this prospectus], or earlier upon redemption. Taliera Holdings, LLC (an Indiana limited liability company owned by certain of our officers and directors and other investors) has committed to purchase from us 1,666,667 warrants at $1.20 per warrant (for an aggregate purchase price of $2,000,000). This purchase will take place on a private placement basis simultaneously with the consummation of this offering. All of the proceeds we receive from the purchase will be placed in the trust fund described below. The "insider warrants" to be purchased will be identical to the warrants underlying the units being offered by this prospectus except that if we call the warrants for redemption, the insider warrants may be exercisable on a cashless basis so long as they are held by Taliera Holdings or its affiliates. Taliera Holdings has agreed that the insider warrants will not be sold or transferred by it until after we have completed a business combination. We have granted Morgan Joseph & Co. Inc., the representative of the underwriters for this offering, a 45-day option to purchase up to 1,125,000 units (over and above the 7,500,000 units referred to above) solely to cover over-allotments, if any. The over-allotment will be used only to cover the net syndicate short position resulting from the initial distribution. We have also agreed to sell to Morgan Joseph & Co., for $100, as additional compensation, an option to purchase up to a total of 550,000 units at $10.00 per unit. The units issuable upon exercise of this option are identical to those offered by this prospectus. The purchase option and its underlying securities have been registered under the registration statement of which this prospectus forms a part. There is presently no public market for our units, common stock or warrants. We applied to have the units listed on the American Stock Exchange. Assuming that the units are listed on the American Stock Exchange, the units will be listed under the symbol TLE.U on or promptly after the date of this prospectus. Assuming that the units are listed on the American Stock Exchange, once the securities comprising the units begin separate trading, the common stock and warrants will be listed on the American Stock Exchange under the symbols TLE and TLE.WS, respectively. We cannot assure you that our securities will be listed or will continue to be listed on the American Stock Exchange. Investing in our securities involves a high degree of risk. See "Risk Factors" beginning on page 12 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Public offering price RISK FACTORS An investment in our securities involves a high degree of risk. You should consider carefully the material risks described below, which we believe represent all of the material risks relating to the offering, together with the other information contained in this prospectus, before making a decision to invest in our units. Risks associated with our business and this offering We are a development stage company with no operating history and, accordingly, you will not have any basis on which to evaluate our ability to achieve our business objective. We are a recently incorporated development stage company with no operating results to date. Therefore, our ability to commence operations is dependent upon obtaining financing through the public offering of our securities. Since we do not have an operating history, you will have no basis upon which to evaluate our ability to achieve our business objective, which is to acquire an operating business. We have not conducted any discussions and we have no plans, arrangements or understandings with any prospective acquisition candidates. We will not generate any revenues until, at the earliest, after the consummation of a business combination. You will not be entitled to protections normally afforded to investors of blank check companies. Since the net proceeds of this offering are intended to be used to complete a business combination with a target business that has not been identified, we may be deemed to be a "blank check" company under the United States securities laws. However, since our securities will be listed on the American Stock Exchange, a national securities exchange, and we will have net tangible assets in excess of $5,000,000 upon the successful consummation of this offering and will file a Current Report on Form 8-K, including an audited balance sheet demonstrating this fact, we are exempt from rules promulgated by the SEC to protect investors in blank check companies such as Rule 419. Accordingly, investors will not be afforded the benefits or protections of those rules. Because we are not subject to Rule 419, our units will be immediately tradable and we have a longer period of time to complete a business combination in certain circumstances than we would if we were subject to such rule. Because there are numerous companies with a business plan similar to ours seeking to effectuate a business combination, it may be more difficult for us to do so. Since August 2003, based upon publicly available information, approximately 87 similarly structured blank check companies have completed initial public offerings in the United States. Of these companies, only 22 companies have consummated a business combination, while five will be liquidating. The remaining approximately 60 blank check companies have more than $5.2 billion in trust and are seeking to complete business combinations. Of these companies only 21 have announced they have entered into a definitive agreement for a business combination, but have not consummated such business combination. Accordingly, there are approximately 39 blank check companies with more than $3.6 billion in trust that are seeking to carry out a business plan similar to our business plan. Furthermore, there are a number of additional offerings for blank check companies that are still in the registration process but have not completed initial public offerings and there are likely to be more blank check companies filing registration statements for initial public offerings after the date of this prospectus and prior to our completion of a business combination. While some of those companies must complete a business combination in specific industries, a number of them may consummate a business combination in any industry they choose. Therefore, we may be subject to competition from these and other companies seeking to consummate a business plan similar to ours. Because of this competition, we cannot assure you that we will be able to effectuate a business combination within the required time periods. Underwriting discount and commissions(1) We will depend on the funds available to us under our line of credit to fund our search for a target business or businesses and to complete our initial business combination. We will not be able to use any of the net proceeds of this offering to fund our working capital requirements. Instead, we will rely on funds from our line of credit being made available to us by Taliera Holdings. Although we believe, based on the represented net worth and liquidity of Taliera Holdings and of those providing funding to Taliera Holdings, that such funds will be available to us at any time we need them, we cannot assure you that this will actually be the case. If such funds are not readily available for our use, we would need to borrow funds from other sources, which might be difficult to do without any security for their repayment. If we cannot borrow funds from other sources, we will be forced to liquidate. We may not be able to consummate an initial business combination within the required time frame, in which case we would be forced to liquidate. We must complete an initial business combination with a fair market value of at least 80% of our net assets at the time of the business combination within 24 months from the date of this prospectus. If we fail to consummate an initial business combination within the required time frame, we will be forced to liquidate our assets. We view this obligation to liquidate as an obligation to our public stockholders and neither we nor our board of directors will take any action to amend or waive any provision of our amended and restated certificate of incorporation to allow us to survive for a longer period of time if it does not appear we will be able to consummate a business combination within the foregoing time period. Upon liquidation, we will distribute to all of our public stockholders, in proportion to their respective equity interest, an aggregate sum equal to the amount in the trust account, inclusive of any interest net of any taxes payable. Taliera Holdings and all other existing stockholders have waived their rights to participate in any liquidation with respect to their initial shares. There will be no distribution from the trust account with respect to our warrants which will expire worthless. We will pay the costs of our liquidation of the trust account from our remaining assets outside of the trust fund. Concurrently, we shall pay, or reserve for payment, our liabilities and obligations from funds provided by Taliera Holdings under our line of credit, although we cannot assure you that there will be sufficient funds for such purpose. We may not be able to find a suitable target within the required time frame. In addition, our negotiating position and our ability to conduct adequate due diligence on any potential target may be reduced as we approach the deadline for the consummation of an initial business combination and we have not, nor has anyone on our behalf, either directly or indirectly, contacted any potential target businesses or their representatives or had any discussions, formal or otherwise, with any of the foregoing with respect to effecting a business combination with our company. Moreover, we have not engaged or retained any agent or other representative to identify or locate any suitable target, although we may do so following the offering. Because of our limited resources and structure, we may not be able to consummate an attractive business combination. We expect to encounter intense competition from entities other than blank check companies having a business objective similar to ours, including venture capital funds, leveraged buyout funds and operating businesses competing for acquisitions. Many of these entities are well established and have extensive experience in identifying and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human and other resources than we do and our financial resources will be relatively limited when contrasted with those of many of these competitors. While we believe that there are numerous potential target businesses that we could acquire with the net proceeds of this offering, our ability to compete in acquiring certain sizable target businesses will be limited by our available financial resources. This inherent competitive limitation gives others an Proceeds, before expenses, to us advantage in pursuing the acquisition of certain target businesses. Furthermore, the obligation we have to seek stockholder approval of a business combination may delay the consummation of a transaction. Additionally, our outstanding warrants, and the future dilution they potentially represent, may not be viewed favorably by certain target businesses. Any of these obligations may place us at a competitive disadvantage in successfully negotiating a business combination. Because only 22 of the 87 blank check companies that have gone public in the United States since August 2003 have consummated a business combination, it may indicate that there are fewer attractive target businesses available to such entities like our company or that many privately held target businesses are not inclined to enter into these types of transactions with publicly held blank check companies like ours. If we are unable to consummate a business combination with a target business within the prescribed time periods, we will be forced to liquidate. If we are forced to liquidate before a business combination and distribute the trust account, our public stockholders will receive less than $8.00 per share and our warrants will expire worthless. If we are unable to complete a business combination within 24 months from the date of this prospectus and are forced to liquidate our assets, investors who did not sell their warrant included in the unit offered by this prospectus will lose money on their initial investment as the per-share liquidation distribution will be less than $8.00 because of the expenses of this offering. Furthermore, there will be no distribution with respect to our outstanding warrants which will expire worthless if we liquidate before the completion of a business combination. A decline in interest rates could limit the amount available to fund our search for a target business or businesses and complete a business combination since we will depend in part on interest earned on the trust account to fund our search, to pay our tax obligations and to complete our initial business combination. Of the net proceeds of this offering, $700,000 will be available to us via a revolving line of credit offered by Taliera Holdings. Once the line of credit is fully drawn, we may also depend on interest being earned on the proceeds held in the trust account, up to an aggregate of $750,000, to provide us with additional working capital needed to identify target businesses and to complete our initial business combination. While we are entitled to have released to us for such purposes the aforementioned interest earned on the funds in the trust account, a substantial decline in interest rates may result in our having insufficient funds available with which to structure, negotiate or close an initial business combination. In such event, we would need to borrow funds from our initial stockholders to operate or may be forced to liquidate. Our initial stockholders are under no obligation to advance funds in such circumstances. We may be unable to obtain additional financing, if required, to complete a business combination or to fund the operations and growth of the target business, which could compel us to restructure or abandon a particular business combination. Although we believe that the net proceeds of this offering will be sufficient to allow us to consummate a business combination, because we have not yet identified any prospective target business, we cannot ascertain the capital requirements for any particular transaction. If the net proceeds of this offering prove to be insufficient, either because of the size of the business combination, the depletion of the available net proceeds in search of a target business, or the obligation to convert into cash a significant number of shares from dissenting stockholders, we will be required to seek additional financing. We cannot assure you that such financing will be available on acceptable terms, if at all. To the extent that additional financing proves to be unavailable when needed to consummate a particular business combination, we would be compelled to either restructure the transaction or abandon that particular business combination and seek an alternative target business candidate. In addition, if we consummate a business combination, we may require additional financing to fund the operations or growth of the target business. The failure to secure additional financing could have a material adverse Per unit $ 8.00 $ 0.56 $ 7.44 Total $ 60,000,000 $ 4,200,000 $ 55,800,000 effect on the continued development or growth of the target business. None of our officers, directors or stockholders is required to provide any financing to us in connection with or after a business combination. If third parties bring claims against us, the proceeds held in trust could be reduced and the per-share liquidation price received by stockholders will be less than $7.92 per share. Our placing of funds in trust may not protect those funds from third party claims against us. Although we will seek to have all vendors and service providers we engage and prospective target businesses we negotiate with, execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our public stockholders, there is no guarantee that they will execute such agreements. Furthermore, there is no guarantee that, even if such entities execute such agreements with us, they will not seek recourse against the trust account. Nor is there any guarantee that a court would uphold the validity of such agreements. If we liquidate before the completion of a business combination and distribute the proceeds held in trust to our public stockholders, Messrs. Johnston, Wallin and Hammond have agreed that they will be personally liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us. Because we will seek to have all vendors and prospective target businesses execute agreements with us waiving any right, title, interest or claim of any kind they may have in or to any monies held in the trust account, we believe the likelihood of Messrs. Johnston, Wallin and Hammond having any such obligations is minimal. Notwithstanding the foregoing, we have questioned such individuals on their financial net worth and reviewed their financial information and believe they will be able to satisfy any indemnification obligations that may arise. However, we cannot assure you that they will be able to satisfy those obligations. Accordingly, the proceeds held in trust could be subject to claims which could take priority over those of our public stockholders. We cannot assure you that the per-share distribution from the trust fund, if we liquidate, will not be less than $7.92 plus interest then held in the trust fund, due to such claims. Additionally, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. To the extent any bankruptcy claims deplete the trust account, we cannot assure you we will be able to return to our public stockholders at least $7.92 per share. Our stockholders may be held liable for claims by third parties against us to the extent of distributions received by them. Our amended and restated certificate of incorporation provides that we will continue in existence only until twenty four months from the date of this prospectus. If we have not completed a business combination by such date and amended this provision in connection thereto, pursuant to the Delaware General Corporation Law, our corporate existence will cease except for the purposes of winding up our affairs and liquidating. Under Sections 280 through 282 of the Delaware General Corporation Law, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. If the corporation complies with certain procedures intended to ensure that it makes reasonable provision for all claims against it, including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder's pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution. Because we will not be complying with those procedures, we (1)Of the underwriting discount and commissions, $2,100,000 ($0.28 per unit) is being deferred by the underwriters and will not be payable by us to the underwriters unless and until we consummate a business combination. $57,400,000 of the net proceeds of this offering (including $2,100,000 of underwriting discounts and commissions payable to the underwriters in this offering which is being deferred by them until we consummate a business combination), plus the additional aggregate $2,000,000 we will receive from the purchase of the insider warrants being made by Taliera Holdings simultaneously with the consummation of this offering, for an aggregate of $59,400,000 (or $7.92 per share sold to the public in this offering), will be deposited into a trust account at Smith Barney, a division of Citigroup Global Markets, Inc., maintained by Continental Stock Transfer & Trust Company acting as trustee. We are offering the units for sale on a firm-commitment basis. Morgan Joseph & Co. Inc., acting as representative of the underwriters, expects to deliver our securities to investors in the offering on or about , 2007. GUNNALLEN FINANCIAL LEGEND MERCHANT GROUP, INC. , 2007 are required, pursuant to Section 281 of the Delaware General Corporation Law, to adopt a plan of liquidation and distribution that will provide for our payment, based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against us within the subsequent 10 years. Accordingly, we would be required to provide for any creditors known to us at that time or those that we believe could be potentially brought against us within the subsequent 10 years prior to distributing the funds held in the trust to stockholders. We cannot assure you that we will properly assess all claims that may be potentially brought against us. As such, our stockholders could potentially be liable for any claims to the extent of distributions received by them (but no more) and any liability of our stockholders may extend well beyond the third anniversary of such date. We cannot assure you that third parties will not seek to recover from our stockholders amounts owed to them by us. Additionally, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, any distributions received by stockholders in our dissolution could be viewed under applicable debtor/creditor and/or bankruptcy laws as either a "preferential transfer" or a "fraudulent conveyance." As a result, a bankruptcy court could seek to recover all amounts received by our stockholders in our liquidation. Furthermore, because we intend to distribute the proceeds held in the trust account to our public stockholders promptly after , 2009 [twenty-four months from the date of this prospectus], this may be viewed or interpreted as giving preference to our public stockholders over any potential creditors with respect to access to or distributions from our assets. Furthermore, our board of directors may be viewed as having breached their fiduciary duties to our creditors and/or may have acted in bad faith, and thereby exposing itself and our company to claims of punitive damages, by paying public stockholders from the trust account prior to addressing the claims of creditors. We cannot assure you that claims will not be brought against us for these reasons. Under Delaware law, the requirements and restrictions relating to this offering contained in our amended and restated certificate of incorporation may be amended, which could reduce or eliminate the protection afforded to our stockholders by such requirements and restrictions. Our amended and restated certificate of incorporation contains certain requirements and restrictions relating to this offering that will apply to us until the consummation of a business combination. Specifically, our amended and restated certificate of incorporation provides, among other things, that: prior to the consummation of a business combination, we will submit such business combination to our stockholders for approval; we may consummate the business combination if approved by a majority of the shares of common stock voted by the public stockholders and public stockholders owning less than 30% of the shares sold in this offering exercise their conversion rights; if a business combination is approved and consummated, public stockholders who voted against the business combination and exercised their conversion rights will receive their pro rata share of the trust account; and if a business combination is not consummated or a letter of intent, an agreement in principle or a definitive agreement is not signed within the time periods specified in this prospectus, then we will liquidate the trust account and distribute to all of our public stockholders their pro rata share of the trust account. Our amended and restated certificate of incorporation requires that we obtain unanimous consent of our stockholders to amend the above-described provisions. However, the validity of unanimous consent provisions under Delaware law has not been settled. A court could conclude that the unanimous consent requirement constitutes a practical prohibition on amendment in violation of the stockholders' implicit rights to amend the corporate charter. In that case, the above-described provisions would be amendable without unanimous consent and any such amendment could reduce or eliminate the protection afforded to our stockholders. However, we view the foregoing provisions as obligations to our stockholders, and neither we nor our board of directors will propose, or seek stockholder approval of, any amendment of these provisions. An effective registration statement may not be in place when an investor desires to exercise warrants, thus precluding such investor from being able to exercise his, her or its warrants and causing such warrants to be practically worthless. We will have no obligation to settle warrants for cash or otherwise net cash settle any warrant exercise and have no obligation to issue shares of common stock unless at the time a holder seeks to exercise such warrant, a prospectus relating to the common stock issuable upon exercise of the warrant is current and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms of the warrant agreement, we have agreed to use our best efforts to meet these conditions and to maintain a current prospectus relating to the common stock issuable upon exercise of the warrants until the expiration of the warrants. However, we cannot assure you that we will be able to do so, and if we do not maintain a current prospectus related to the common stock issuable upon exercise of the warrants, holders will be unable to exercise their warrants and we will not be required to cash settle any such warrant exercise. If the prospectus relating to the common stock issuable upon the exercise of the warrants is not current or if the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside, the warrants may have no value, the market for the warrants may be limited and the warrants may expire worthless. An investor will only be able to exercise a warrant if the issuance of common stock upon such exercise has been registered or qualified or is deemed exempt under the securities laws of the state of residence of the holder of the warrants. No warrants will be exercisable and we will not be obligated to issue shares of common stock unless the common stock issuable upon such exercise has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Because the exemptions from qualification in certain states for resales of warrants and for issuances of common stock by the issuer upon exercise of a warrant may be different, a warrant may be held by a holder in a state where an exemption is not available for issuance of common stock upon an exercise and the holder will be precluded from exercise of the warrant. At the time that the warrants become exercisable (following our completion of a business combination), we expect to either continue to be listed on the American Stock Exchange (or become listed on another national securities exchange which would provide an exemption from registration in every state), or we would register the warrants in every state (or seek another exemption from registration in such states). Accordingly, we believe holders in every state will be able to exercise their warrants as long as our prospectus relating to the common stock issuable upon exercise of the warrants is current. However, we cannot assure you of this fact. As a result, the warrants may be deprived of any value, the market for the warrants may be limited and the holders of warrants may not be able to exercise their warrants if the common stock issuable upon such exercise is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside. Since we are not limited to any particular industry and have not yet selected a particular target business with which to complete a business combination, we are unable to currently ascertain the merits or risks of the industry or business in which we may ultimately operate. Although we initially intend to focus our search on target businesses in the global beverage alcohol industry, we are not restricted to this industry and may consummate a business combination with a company in any industry we choose. Accordingly, there is no current basis for you to evaluate the possible merits or risks of the particular industry in which we may ultimately operate or the target business which we may ultimately acquire. To the extent we complete a business combination with a financially unstable company or an entity in its development stage, we may be affected by numerous risks inherent in the business operations of those entities. If we complete a business combination with an entity in an industry characterized by a high level of risk, we may be affected by the currently unascertainable risks of that industry. Although our management will endeavor to evaluate the risks inherent in a particular industry or target business, we cannot assure you that we will properly ascertain or assess all of the significant risk factors. We also cannot assure you that an investment in our units will not ultimately prove to be less favorable to investors in this offering than a direct investment, if an opportunity were available, in a target business. We may acquire a target business located outside of the U.S. which may subject us to additional risks that could have an adverse effect on our business operations and financial results subsequent to a business combination. Acquiring and operating a foreign target may involve additional risks, including changes in trade protection and investment laws, policies and measures, and other regulatory requirements affecting foreign trade and investment, social, political, labor, or economic conditions in a specific country or region; and difficulties in staffing and managing foreign operations. In addition, significant fluctuations in exchange rates between the U.S. dollar and foreign currencies may adversely affect the price of acquiring a foreign business and, subsequent to acquisition, our future net revenues. These types of risks may impede our ability to successfully consummate a business combination with a targeted business located outside of the U.S. and may impair our financial results and operations if we consummate such a business combination. Our determination of the offering price of our units and of the aggregate amount of proceeds we are raising in this offering was more arbitrary than is typically the case in the pricing of securities and the determination of aggregate proceeds for an operating company in a particular industry. Prior to this offering there has been no public market for any of our securities. The public offering price of the units, the terms of the warrants, the aggregate proceeds we are raising and the amount to be placed in trust were the products of a negotiation between the underwriters and us. The determination of our per unit offering price and aggregate proceeds was more arbitrary than is typically the case in the pricing of securities for an operating company in a particular industry. In addition, because we have neither identified nor been provided with the identity of any potential target businesses, management's assessment of the financial requirements necessary to complete a business combination is also arbitrary. If management's assessments prove to be inaccurate, then we may not have sufficient funds to operate and consummate a business combination, in which case we may be forced to liquidate. We may issue shares of our capital stock or debt securities to complete a business combination, which would reduce the equity interest of our stockholders and likely cause a change in control of our ownership. Our amended and restated certificate of incorporation authorizes the issuance of up to 22,000,000 shares of common stock, par value $.0001 per share, and 1,000,000 shares of preferred stock, par value $.0001 per share. Immediately after this offering and the purchase of the insider warrants (assuming no exercise of the over-allotment option), there will be 2,358,333 authorized but unissued shares of our common stock available for issuance (after appropriate reservation for the issuance of the shares upon full exercise of our outstanding warrants and the unit purchase option granted to the underwriter) and all of the 1,000,000 shares of preferred stock available for issuance. Although we have no commitment as of the date of this offering, we are likely to issue a substantial number of additional shares of our common or preferred stock, or a combination of common and preferred stock, to complete a business combination. The issuance of additional shares of our common stock or any number of shares of our preferred stock: may significantly reduce the equity interest of investors in this offering; may subordinate the rights of holders of common stock if we issue preferred stock with rights senior to those afforded to our common stock; will likely cause a change in control if a substantial number of our shares of common stock are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and could result in the resignation or removal of our present officers and directors; and may adversely affect prevailing market prices for our common stock. However, the issuance of additional securities will not reduce the per share conversion price as we are not permitted to issue any additional securities that may share in the funds held in the trust account. Similarly, if we issue debt securities, it could result in: default and foreclosure on our assets if our operating revenues after a business combination are insufficient to repay our debt obligations; acceleration of our obligations to repay the indebtedness even if we make all principal and interest payments when due if we breach certain covenants that require the maintenance of certain financial ratios or reserves without a waiver or renegotiation of that covenant; our immediate payment of all principal and accrued interest, if any, if the debt security is payable on demand; and our inability to obtain necessary additional financing if the debt security contains covenants restricting our ability to obtain such financing while the debt security is outstanding. Our ability to successfully effect a business combination and to be successful thereafter will be totally dependent upon the efforts of our key personnel, some of whom may join us following a business combination. Our ability to successfully effect a business combination is dependent upon the efforts of our key personnel. The role of our key personnel in the target business, however, cannot presently be ascertained. Although some of our key personnel such as Messrs. Wallin and Hammond may remain with the target business in senior management or advisory positions following a business combination, it is likely that some or all of the management of the target business will remain in place. While we intend to closely scrutinize any individuals we engage after a business combination, we cannot assure you that our assessment of these individuals will prove to be correct. These individuals may be unfamiliar with the requirements of operating a public company which could cause us to have to expend time and resources helping them become familiar with such requirements. This could be expensive and time-consuming and could lead to various regulatory issues which may adversely affect our operations. Our key personnel may negotiate employment or consulting agreements with a target business in connection with a particular business combination. These agreements may provide for them to receive compensation following a business combination and as a result, may cause them to have conflicts of interest in determining whether a particular business combination is the most advantageous to us. Our key personnel will be able to remain with the company after the consummation of a business combination only if they are able to negotiate employment or consulting agreements in connection with the business combination. Such negotiations would take place simultaneously with the negotiation of the business combination and could provide for such individuals to receive compensation in the form of cash payments and/or our securities for services they would render to the company after the consummation of the business combination. The personal and financial interests of such individuals may influence their motivation in identifying and selecting a target business. None of our officers or directors has ever been a principal of, or affiliated with, a blank check company. None of our officers or directors has served as an officer or director of, or been affiliated with, a blank check company. Accordingly, you may not be able to adequately evaluate our officers' and directors' ability to consummate successfully a business combination using a blank check company such as us, which may have disadvantages compared to competitors which are not blank check companies. Additionally, our management's lack of experience in operating a blank check company could adversely affect our ability to consummate a business combination and could result in our having to liquidate our trust account as part of our liquidation. If we are forced to liquidate prior to consummating a business combination, our public stockholders will receive less than the amount they paid for our securities. Our officers and directors may not have significant experience or knowledge of the industry of the target. If we decide to complete a business combination with a target that operates in a field outside of the realm of experience of our officers and directors, we cannot assure you that our officers and directors will have gained enough experience or have sufficient knowledge relating to the industry of the target to make an appropriate business combination decision. Our officers and directors will allocate their time to other businesses thereby causing conflicts of interest in their determination as to how much time to devote to our affairs. This conflict of interest could have a negative impact on our ability to consummate a business combination. Our officers and directors are not required to commit their full time to our affairs, which could create a conflict of interest when allocating their time between our operations and their other commitments. We do not intend to have any full time employees prior to the consummation of a business combination. All of our executive officers are engaged in several other business endeavors and are not obligated to devote any specific number of hours to our affairs. If our officers' and directors' other business affairs require them to devote more substantial amounts of time to such affairs, it could limit their ability to devote time to our affairs and could have a negative impact on our ability to consummate a business combination. We cannot assure you that these conflicts will be resolved in our favor. Our officers and directors may in the future become affiliated with entities engaged in business activities similar to those intended to be conducted by us and accordingly, may have conflicts of interest in determining to which entity a particular business opportunity should be presented. Our officers and directors may in the future become affiliated with entities, including other "blank check" companies, engaged in business activities similar to those intended to be conducted by us. Additionally, our officers and directors may become aware of business opportunities which may be appropriate for presentation to us and the other entities to which they owe fiduciary duties. Accordingly, they may have conflicts of interest in determining to which entity a particular business opportunity should be presented. We cannot assure you that these conflicts will be resolved in our favor. As a result, a potential target business may be presented to another entity prior to its presentation to us, potentially depriving us of an attractive business combination. Through Taliera Holdings, all of our officers and directors (except for Messrs. Frost, Cheek and Todd) indirectly own shares of our common stock issued prior to this offering and will indirectly own warrants after this offering. These securities will not participate in liquidation distributions. Additionally, Taliera Holdings will be lending us the funds necessary for our operating expenses, which funds will not be repaid unless we complete a business combination. Therefore, our officers and directors may have a conflict of interest in determining whether a particular target business is appropriate for a business combination. All of our officers and directors (except for Messrs. Frost, Cheek and Todd) indirectly own shares of our common stock that were issued prior to this offering through Taliera Holdings, of which they are members. Taliera Holdings is also purchasing insider warrants upon consummation of this offering. Taliera Holdings has waived its right to receive distributions with respect to the initial shares upon our liquidation if we are unable to consummate a business combination. The shares acquired by Taliera Holdings prior to this offering, as well as the insider warrants, and any warrants purchased by Taliera Holdings or our officers or directors in this offering or in the aftermarket will be worthless if we do not consummate a business combination. Furthermore, the funds borrowed by us under the line of credit being provided by Taliera Holdings will not be repaid unless and until we consummate a business combination. The personal and financial interests of our directors and officers may influence their motivation in timely identifying and selecting a target business and completing a business combination. Consequently, our directors' and officers' discretion in identifying and selecting a suitable target business may result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination are appropriate and in our stockholders' best interest. We have taken the following actions, among others, to minimize potential conflicts of interest which may arise from multiple corporate affiliations: (i) each of our officers has agreed to present to us for our consideration, prior to presentation to any other entity, any business opportunity which may reasonably be required to be presented to us under Delaware law; (ii) Taliera Holdings has agreed to vote the shares of common stock which it owned prior to this offering in accordance with the vote of the public stockholders owning a majority of the shares of our common stock sold in this offering; and (iii) we have agreed not to consummate a business combination with an entity which is affiliated with any of our existing stockholders unless we obtain an opinion from an independent investment banking firm that the business combination is fair to our unaffiliated stockholders from a financial point of view. The American Stock Exchange may delist our securities from quotation on its exchange which could limit investors' ability to make transactions in our securities and subject us to additional trading restrictions. We anticipate that our securities will be listed on the American Stock Exchange, a national securities exchange, upon consummation of this offering. We cannot assure you that our securities will continue to be listed on the American Stock Exchange in the future prior to a business combination. Additionally, in connection with our business combination, it is likely that the American Stock Exchange may require us to file a new initial listing application and meet its initial listing requirements as opposed to its more lenient continued listing requirements. We cannot assure you that we will be able to meet those initial listing requirements at that time. If the American Stock Exchange delists our securities from trading on its exchange, we could face significant material adverse consequences, including: a limited availability of market quotations for our securities; a determination that our common stock is a "penny stock" which will require brokers trading in our common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock; a limited amount of news and analyst coverage for our company; and a decreased ability to issue additional securities or obtain additional financing in the future. After our business combination, we will be solely dependent on a single business and a limited number of products or services. Our business combination must be with a business with a fair market value of at least 80% of our net assets at the time of such acquisition, although this may entail the simultaneous acquisitions of several operating businesses at the same time. By consummating a business combination with only a single entity, our lack of diversification may subject us to numerous economic, competitive and regulatory developments. Further, we would not be able to diversify our operations or benefit from the possible spreading of risks or offsetting of losses, unlike other entities which may have the resources to complete several business combinations in different industries or different areas of a single industry. Accordingly, the prospects for our success may be: solely dependent upon the performance of a single business, or dependent upon the development or market acceptance of a single or limited number of products, processes or services. Alternatively, if our business combination entails the simultaneous acquisitions of several operating businesses at the same time from different sellers, we would face additional risks, including difficulties and expenses incurred in connection with the subsequent integration of the operations and services or products of the acquired companies into a single operating business. If we are unable to adequately address these risks, it could negatively impact our profitability and results of operations. The ability of our stockholders to exercise their conversion rights may not allow us to effectuate the most desirable business combination or optimize our capital structure. When we seek stockholder approval of any business combination, we will offer each public stockholder (but not our existing stockholders) the right to have his, her or its shares of common stock converted to cash if the stockholder votes against the business combination and the business combination is approved and completed. Such holder must both vote against such business combination and then exercise his, her or its conversion rights to receive a pro rata portion of the trust account. Accordingly, if our business combination requires us to use substantially all of our cash to pay the purchase price, because we will not know how many stockholders may exercise such conversion rights, we may either need to reserve part of the trust account for possible payment upon such conversion, or we may need to arrange third party financing to help fund our business combination in case a larger percentage of stockholders exercise their conversion rights than we expect. Since we have no specific business combination under consideration, we have not taken any steps to secure third party financing. Therefore, we may not be able to consummate a business combination that requires us to use all of the funds held in the trust account as part of the purchase price, or we may end up having a leverage ratio that is not optimal for our business combination. This may limit our ability to effectuate the most attractive business combination available to us. We may consummate a business combination, so long as a majority of the shares of common stock voted by the public shareholders approve the transaction and public shareholders owning less than 30% of the shares sold in this offering exercise their conversion rights. We have increased the conversion percentage from 20% to 30% in order to increase the likelihood that we will be able to identify and complete an approved business combination after this offering. While other offerings similar to ours also include a 30% conversion provision rather than 20%, we cannot say that 30% is necessarily customary or standard for offerings such as ours. We may not obtain an opinion from an unaffiliated third party as to the fair market value of the target acquisition or that the price we are paying for the business is fair to our stockholders. We are not required to obtain an opinion from an unaffiliated third party that either the target acquisition we select has a fair market value in excess of at least 80% of our net assets (excluding the contingent underwriting discount) or that the price we are paying is fair to our stockholders, unless the target is affiliated with our officers or directors. If no opinion is obtained, our stockholders will be relying on the judgment of our board of directors, whose collective experience in business evaluations for blank check companies like ours is not significant. Indirectly through Taliera Holdings our officers and directors, control a substantial interest in us and thus may influence certain actions requiring a stockholder vote. Upon consummation of our offering, our directors and officers will directly or indirectly own 20% of our issued and outstanding shares of common stock (assuming that neither Taliera Holdings nor individual officers and directors purchase any units in this offering). In connection with the vote required for any initial business combination, Taliera Holdings, the holder of substantially all of our outstanding shares of common stock prior to this offering, and our officers and directors have agreed to vote all shares of common stock owned them, whether acquired prior to this offering or in this offering or afterward, in accordance with the majority of the shares of common stock voted by the public stockholders. In connection with a vote for any matters other than an initial business combination, Taliera Holdings and our independent directors, will vote all of their shares in any manner they determine, in their sole discretion. Our board of directors is divided into two classes, each of which will generally serve for a term of two with only one class of directors being elected in each year. It is unlikely that there will be an annual meeting of stockholders to elect new directors prior to the consummation of a business combination, in which case all of the current directors will continue in office until at least the consummation of the business combination. If there is an annual meeting, as a consequence of our "staggered" board of directors, only two members of the board of directors will be considered for election and Taliera Holdings (and, indirectly, our current officers and directors) because of its ownership position, will have considerable influence regarding the outcome. Accordingly, Taliera Holdings (and, indirectly, our current officers and directors) will continue to exert control at least until the consummation of a business combination. Taliera Holdings paid an aggregate of $25,000, or approximately $0.014 per share, for its portion of the initial shares and, accordingly, you will experience immediate and substantial dilution from the purchase of our common stock. The difference between the public offering price per share and the pro forma net tangible book value per share of our common stock after this offering constitutes the dilution to the investors in this offering. Taliera Holdings acquired its initial shares of common stock at a nominal price, significantly contributing to this dilution. Assuming the offering is completed, you and the other new investors will incur an immediate and substantial dilution of approximately 24% or $1.89 per share (the difference between the pro forma net tangible book value per share of $6.11 after the offering and the initial offering price of $8.00 per unit). Our outstanding warrants and option may have an adverse effect on the market price of our common stock and make it more difficult to effect a business combination. We will be issuing warrants to purchase 7,500,000 shares of common stock as part of the units offered by this prospectus and the insider warrants to purchase 1,666,667 shares of common stock. We will also issue an option to purchase 550,000 units to the representative of the underwriters which, if exercised, will result in the issuance of an additional 550,000 warrants. To the extent we issue shares of common stock to effect a business combination, the potential for the issuance of a substantial number of additional shares upon exercise of these warrants and option could make us a less attractive acquisition vehicle in the eyes of a target business. Such securities, when exercised, will increase the number of issued and outstanding shares of our common stock and reduce the value of the shares issued to complete the business combination. Accordingly, our warrants and option may make it more difficult to effectuate a business combination or increase the cost of acquiring the target business. Additionally, the sale, or even the possibility of sale, of the shares underlying the warrants and option could have an adverse effect on the market price for our securities or on our ability to obtain future financing. If and to the extent these warrants and option are exercised, you may experience dilution to your holdings. If Taliera Holdings or Morgan Joseph & Co. exercises its registration rights with respect to its initial shares, it may have an adverse effect on the market price of our common stock and the existence of these rights may make it more difficult to effect a business combination. Taliera Holdings is entitled to make a demand that we register the resale of its initial shares at any time commencing three months prior to the date on which their shares are released from escrow. If Taliera Holdings exercises its registration rights with respect to all of its initial shares, then there will be an additional 1,818,750 shares of common stock eligible for trading in the public market. In addition, Morgan Joseph & Co., the representative of the underwriters, is entitled to demand that we register the resale of the securities underlying its unit purchase option. If Morgan Joseph & Co. exercises its registration rights with respect to the shares of common stock issuable upon exercise of its purchase option and the warrants issuable under the purchase option, there will be an additional 1,100,000 shares of common stock, assuming exercise of the warrants held by Morgan Joseph & Co., eligible for trading in the public market. The presence of these additional shares of common stock trading in the public market may have an adverse effect on the market price of our common stock. In addition, the existence of these rights may make it more difficult to effectuate a business combination or increase the cost of acquiring the target business, as the stockholders of the target business may be discouraged from entering into a business combination with us or will request a higher price for their securities because of the potential effect the exercise of such rights may have on the trading market for our common stock. If we are deemed to be an investment company, we may be required to institute burdensome compliance requirements and our activities may be restricted, which may make it difficult for us to complete a business combination. If we are deemed to be an investment company under the Investment Company Act of 1940, we may be subject to certain restrictions that may make it more difficult for us to complete a business combination, including: restrictions on the nature of our investments; and restrictions on the issuance of securities. In addition, we may have imposed upon us certain burdensome requirements, including: registration as an investment company; adoption of a specific form of corporate structure; and reporting, record keeping, voting, proxy, compliance policies and procedures and disclosure requirements and other rules and regulations. We do not believe that our anticipated principal activities will subject us to the Investment Company Act of 1940. To this end, the proceeds held in trust may be invested by the trust agent only in United States "government securities" within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 having a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940. By restricting the investment of the proceeds to these instruments, we intend to meet the requirements for the exemption provided in Rule 3a-1 promulgated under the Investment Company Act of 1940. If we were deemed to be subject to that act, compliance with these additional regulatory burdens would require additional expense for which we have not allotted. There is currently no market for our securities and a market for our securities may not develop, which could adversely affect the liquidity and price of our securities. There is currently no market for our securities. Therefore, you cannot benefit from information about prior market history as to your decisions to invest. In addition, the price of the securities after the offering can vary due to general economic conditions and forecasts, our general business condition and the release of our financial reports. Furthermore, an active trading market for our securities may never develop or, if developed, may not be maintained. An active and orderly trading market will depend on the existence, and individual decisions, of willing buyers and sellers at any given time. We will not have any control over these factors. If an active trading market does not develop or is sporadic, this may hurt the market value of our units and make it difficult to buy or sell units on short notice. We cannot assure you that if you purchase units in the offering you will later be able to sell them at or above the purchase price. Risks associated with the global beverage alcohol industry The beverage alcohol industry is regulated by federal, state and local laws which may affect our ability to complete a business acquisition on a timely basis. The manufacture, distribution and sale of products in the beverage alcohol industry is subject to and governed by various federal, state and local laws. In the United States, federal law has established what is known as the three tier system, with tier one comprised of suppliers who produce alcohol-based beverages, tier two comprised of distributors of alcohol-based beverages and tier three comprised of all retail sellers of alcohol-based beverages. The laws in other countries vary with some countries being more restrictive than the United States while others are less restrictive. Licensing and permits are often required in the United States and other countries, and change of control procedures will often apply requiring new owners to seek new licenses or permits. We do not have the ability to control regulatory provisions in either the U.S. or in foreign jurisdictions or their application to our efforts to identify and complete a business combination. We believe it may be more difficult to complete a business combination in a regulated industry, such as the beverage alcohol industry, than completing a business combination in an unregulated industry as a result of applicable regulatory approvals or similar procedural requirements. More stringent regulations applicable to the alcohol-based beverage industry could adversely affect our ability to be successful following a business combination. Any future changes in federal, state and local regulations of the beverage alcohol industry are beyond our control and future regulatory changes affecting the production, distribution and sale of alcohol-based beverages could have a material adverse effect on us. Upon completion of our business combination in the beverage alcohol industry, we may not be able comply with all applicable governmental regulations or the conditions of licenses or permits we may receive. Should we fail to comply, we may have our licenses and permits suspended or revoked which could have a material adverse effect on our business. The beverage alcohol industry is highly competitive, and we may not be able to successfully compete with others with greater financial resources. At all levels or tiers in the beverage alcohol industry, competition is very strong with some competitors having substantial advantages over others due to greater financial resources, more established businesses, long-standing customer and supplier relationships, worldwide sales and distribution networks, experienced and deep management teams, etc. Following a business combination with a company in the beverage alcohol industry, we may not have the financial resources to successfully compete with larger organizations exhibiting some or all of the foregoing characteristics. The beverage alcohol industry has become the subject of considerable attention which could result in further regulation and less consumption of alcohol-based beverages. Considerable societal and political attention has been given in recent years to the beverage alcohol industry as a result of growing public concern over alcoholic beverage-related problems, including underage drinking, alcoholism, and health consequences from the abuse of alcohol. Some jurisdictions have adopted measures to attempt to deal with some of these concerns, including more stringent driving under the influence of alcohol laws and more restrictive regulations regarding advertising and zoning for businesses that sell alcohol-based beverages. These measures could have the effect of reducing the consumption of alcohol-based beverages and could have a material adverse effect on our business if we were dependent on the sale of such beverages in jurisdictions where these measures had been taken or put into place. Direct shipment to retail customers of alcohol-based beverages has been the subject of a number of legal and regulatory decisions in recent years. Our business could be adversely affected if we were dependent on the continued protection provided by the three tier system. Recent court or regulatory decisions have reduced or eliminated requirements that alcoholic-based beverages be purchased or sold through the three tier system of suppliers, distributors and retailers. For example, the U.S. Supreme Court recently reduced restrictions on the ability of consumers to purchase wine or other alcoholic-based beverages across state lines and directly from the suppliers. Many suppliers are establishing direct marketing programs to take advantage of new opportunities provided by some of these recent rulings. Several large retailers are seeking the ability to purchase alcohol-based beverages directly from suppliers and there have been some court rulings in favor of such retailers. If we entered the alcohol-based beverage industry as a distributor, our business could be adversely affected by these decisions if more direct purchases were allowed by consumers and retailers.
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+PROSPECTUS SUMMARY This summary does not contain all of the information you should consider before investing in our common stock and you should read this entire prospectus, including the documents incorporated in this prospectus by reference, carefully before investing, especially the information discussed under Risk Factors beginning on page 7. As used in this prospectus, the terms we, our, us, or Double-Take Software refer to Double-Take Software, Inc. and its subsidiaries, taken as a whole, as well as any predecessor entities, unless the context otherwise indicates. Double-Take Software, Inc. Double-Take Software develops, sells and supports affordable software that reduces downtime and protects data for business-critical systems. We believe that we are the leading supplier of replication software for Microsoft server environments and that our business is distinguished by our focus on software license sales, our productive distribution network and our efficient services infrastructure. Organizations of all sizes increasingly rely on application systems and stored electronic data to conduct business. Threats of business disruptions from events such as 9/11 and Hurricane Katrina and new regulations that have increased data protection requirements for businesses in many industries are causing more organizations to re-examine their data and server recovery strategies. Our software responds to these needs by continuously replicating changes made to application data on a primary operating server to a duplicate server located on- or off-site. Because the duplicate server can commence operating in place of the primary server at almost any time, our software facilitates rapid failover and application recovery in the event of a disaster or other service interruption. Our success has been driven in large part by our software technology, which was first released in 1995 and has been enhanced by years of customer feedback. Residing on the server operating system, our software continuously monitors and captures file system activity. Intercepting file system changes enables our software to replicate only those changes that are being written to files. Our hardware- and application-independent software efficiently protects data created by any application on almost any type or brand of disk storage on any brand of server running Windows file systems or VMware ESX Server. We sell our software through multiple channels, including a global distribution network that is supported by an experienced direct sales force. Our distribution partners include leading server manufacturers, such as Dell Computer Corporation and Hewlett-Packard Company, leading distributors, such as Bell Microproducts Inc. and Tech Data Corporation, and over 250 value-added resellers that we believe are generally well-connected with small- and medium-sized enterprises. Our direct sales force augments the revenue generated by our distribution partners and actively supports them in their third-party sales efforts. Our broad distribution network, coupled with affordable price points, feature-rich proven software, modest implementation costs and dependable support, makes our software accessible and scalable from small enterprises of 20 people to Fortune 500 companies. As of March 31, 2007, our customer base of more than 10,000 organizations included over half of the Fortune 500 companies as well as a large number of law firms, financial institutions, hospitals, school districts and governmental entities. We believe that we have a highly satisfied customer base. Many of our customers provide references that help us to generate new sales opportunities and to shorten sales cycles. Our sales personnel often enlist the assistance of satisfied customers to recommend our software to potential customers in similar industries or that have similar applications or server configurations. The breadth and diversity of our customers frequently allows us to refer to a similar configuration when making a new sale. The satisfaction of our customer base also contributes to reduced support costs. Our Markets and Opportunities We believe that the software replication market is large and growing, and that our software is particularly attractive to businesses in the small and medium-sized enterprise information technology market, which has Table of Contents been growing at a faster rate than the large enterprise information technology market. We expect that growth in our market will continue to be driven by a number of factors, including the following: the rapid growth in digital data, driven by increased usage of automated systems; an increased focus on protecting a growing number of business-critical applications, such as email applications, particularly in service-oriented industries; a heightened awareness of the potential for natural and man-made disasters; the increasingly high cost of downtime, which is partly attributable to an increase in the sharing of applications with customers, partners and remote users; and government and industry regulations, such as the Health Insurance Portability and Accountability Act of 1996 and the Sarbanes-Oxley Act of 2002, which require data protection and recovery. Our Software By combining efficient, continuous, remote and local data replication with the ability to monitor and quickly switch critical applications to alternate servers, we believe that we have designed our software to provide an affordable, easy to implement and scalable approach to reduce downtime and enhance data recovery for business-critical applications. Our software provides organizations with recovery solutions that we believe meet their needs by providing the following: Fast and Reliable Data Recovery. Our software provides fast recovery for the server and application itself, creating a server ready to take over, substantially on command, and provide rapid access or failover to the replicated data to meet the new availability requirements of business-critical applications, such as Microsoft Exchange Server or Microsoft SQL Server. Simple and Affordable Software. Our software can be easily installed on new or existing file or application servers, can work with most existing storage and network infrastructure and is hardware and application independent. This makes it possible to install and begin protecting an existing server easily and quickly and makes the solution more cost effective than some other approaches. Once installed, our application recovery tools automate failover and user redirection. With a median selling price of approximately $4,000, our software is affordable for a wide variety of organizations. Flexible and Scalable Software. Our software works with a variety of applications within the Windows server environment and almost any type of storage architecture from almost any mix of vendors. It efficiently captures changes, optimizes data transmission, and controls which files and which changes need to be replicated, rather than blindly copying disk block changes regardless of whether they contain required information. Our software is easily deployed and can be centrally managed across any number of machines, including virtual machines partitioned with software such as VMware. Continuous Backup of Data. Our software minimizes or eliminates data loss by continuously and efficiently replicating data changes to one or more protected, local or remote locations. Even open applications and files can be mirrored and changes replicated, which enables our software to protect 24x7 applications, such as email and databases. Efficient, Optimized Protection. Our software captures the exact changes an application is generating before those changes are abstracted into generic disk blocks. For example, it can distinguish between a new email being sent to an Exchange mailbox that needs to be immediately replicated from a temporary file that does not need to be protected. Efficiently transmitting the minimum amount of data to maintain protection is a significant architectural advantage. Significant Expertise and Experience. Our software incorporates our years of experience protecting critical Windows servers and applications like Microsoft Exchange Server, Microsoft SQL Server, Microsoft SharePoint Portal Server and Oracle Database. Although our focus has been on the Windows TABLE OF CONTENTS Page Prospectus Summary 1 Risk Factors 8 Special Note Regarding Forward-Looking Statements 19 Use of Proceeds 20 Capitalization 21 Market Price of Common Stock 21 Principal and Selling Stockholders 22 Certain Relationships and Related Persons Transactions 24 Description of Capital Stock 28 Material U.S. Federal Income Tax Considerations for Non-U.S. Holders of Common Stock 31 Underwriting 34 Legal Matters 38 Experts 38 Where You Can Find Additional Information 38 Incorporation by Reference 38 You should rely only on the information contained in this prospectus. We have not, and the selling stockholders and underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the selling stockholders and underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date. Market data and industry statistics used in this prospectus are based on independent industry publications and other publicly available information. Table of Contents server environment because of its large position in the business critical market place, we anticipate that we can apply our technology in other server environments to the extent market dynamics shift. Our suite of software is offered in a variety of versions that are aligned to operating system capabilities. Additional versions include those that have been specifically crafted to run within virtual systems, to perform replication only, and versions designed to run within Microsoft Cluster Services called GeoCluster. Some versions are also available from OEM partners under different brand names. Our Strategy Our goal is to provide affordable software that will reduce our customers downtime for business-critical systems to as close to zero as possible and offer effective protection and recovery for less critical systems. In striving for this goal, we seek to be the leading provider of software for application availability and data protection. We are pursuing the following key initiatives: Expand our customer base within our current markets; Cross-sell existing and new software to our customer base; Enter new markets; Expand globally; and Continue to innovate. Recent Developments On July 24, 2007, we announced financial results for our second quarter ended June 30, 2007. Total revenue for the quarter, which consists of software revenue, maintenance and professional services revenue, increased 36.2% to $20.0 million from $14.7 million in the second quarter of 2006. Revenue for the second quarter of 2007 includes revenue from Double-Take EMEA for the entire quarter. (Double-Take EMEA, which was Double-Take Software s near exclusive distributor in Europe, was acquired by the Company on May 23, 2006). Software revenue increased 24.4% to $12.0 million in the second quarter of 2007 from $9.6 million in the second quarter of 2006. Maintenance and professional services revenue increased 58.7% to $8.0 million in the second quarter of 2007 from $5.1 million in the second quarter of 2006. Operating expenses for the second quarter of 2007 increased 35.6% to $13.9 million from $10.3 million in the second quarter of 2006. Included in the operating expenses are: (i) stock option expense of $0.5 million in the second quarter of 2007 related to SFAS 123R as compared to $0.3 million in the same quarter in 2006 related to SFAS 123R and the vesting of stock options for the former Chief Executive Officer; and (ii) amortization of intangible assets of $0.2 million for the second quarter of 2007 as compared to $0.1 million in the second quarter of 2006 related to the acquisition of Double Take EMEA. Income from operations was $4.0 million in the second quarter of 2007 compared to $2.1 million in the second quarter of 2006. We recently completed an analysis of the valuation allowance recorded against our deferred tax assets and concluded that we should reduce the valuation allowance related to the deferred tax assets by $4.7 million. This amount represents the benefit that we have determined, in the second quarter, that we are more likely than not to realize in future periods from utilization of net operating loss carryforwards. Additionally, we recorded a current tax expense of $1.9 million in the second quarter. The result was a net tax benefit during the quarter of $2.8 million. Net income attributable to common stockholders, which includes the aforementioned deferred tax benefit, was $7.5 million, or $0.33 per diluted share, in the second quarter of 2007 compared to net income attributable to common stockholders of $0.1 million, or $0.02 per diluted share, in the second quarter of 2006. Cash, cash equivalents, and short term investments at June 30, 2007 totaled $60.9 million. Table of Contents About Us We were organized as a New Jersey corporation in 1991, and we reincorporated in Delaware in 2003. In July 2006, we changed our name to Double-Take Software, Inc. from NSI Software, Inc. Our principal executive offices are located at 257 Turnpike Road, Suite 210, Southborough, Massachusetts 01772, and our main telephone number at that address is (877) 335-5674. We maintain our general corporate website at www.doubletake.com. The contents of our website, however, are not a part of this prospectus. We own, or claim ownership rights to, a variety of trade names, service marks and trademarks for use in our business, including Double-Take , GeoCluster , Balancetm, Double-Take for Virtual Systemstm and Double-Take for Virtual Serverstm in the United States and, where appropriate, in foreign countries. This prospectus also includes product names and other trade names and service marks owned by us and other companies. The trade names and service marks of other companies are the property of those other companies. Table of Contents THE OFFERING Common stock offered by us 100,000 shares Common stock offered by the selling stockholders 2,690,000 shares Common stock to be outstanding after this offering 21,242,121 shares Use of proceeds We estimate that our net proceeds from this offering will be approximately $1.0 million (or $1.3 million if the underwriters exercise their overallotment option in full). We intend to use the net proceeds of this offering for working capital and other general corporate purposes. We will not receive any of the proceeds from the sale of shares of our common stock by the selling stockholders, except for the exercise price of the stock options being exercised by a selling stockholder.
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider before investing in our ADSs. You should
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+PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. You should read the entire prospectus carefully, including Risk Factors and our financial statements and related notes appearing elsewhere in this prospectus before you decide to invest in our securities. References in this prospectus to we, us and our refer to Trans-India Acquisition Corporation, unless the context requires otherwise. The term public stockholders refers to the persons that purchase the securities offered by this prospectus in this offering or in the aftermarket. Furthermore, as used in this prospectus, a target business shall mean a business with operations primarily in India and a business combination shall mean the acquisition of one or more target businesses. Unless we tell you otherwise, private placement units shall mean 200,000 units that certain of our officers and directors and their affiliates, our special advisor and Trans-India Investors Limited have agreed to purchase in private placements immediately prior to this offering and references to units in this prospectus includes the units offered by this prospectus in this offering and such private placement units. Unless we specify otherwise, the information in this prospectus assumes that the representatives of the underwriters will not exercise the over-allotment option. Certain numbers in this prospectus have been rounded. Our Company We are a recently organized Delaware blank check company formed on April 13, 2006 for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition or other similar business combination, one or more target businesses with operations primarily in India. Given the experience of our management team, we intend to seek targets within the life sciences sector of the Indian economy. We will, however, consider acquisitions outside of the life sciences sector if such acquisitions become available to us on attractive terms. To date, our efforts have been limited to organizational activities and this offering. We believe that a number of favorable factors combine to make India a uniquely desirable country in which to target business acquisitions. India has entered an era of rapid economic growth and is developing a large and increasingly prosperous middle class. The Indian economy is transitioning from traditional farming and handicrafts to modern agriculture, modernized industries and services. India has become one of the world s largest democracies, and in recent years, has undergone significant deregulation of certain sectors of its economy. According to the World Factbook published by the U.S. Central Intelligence Agency (updated as of September 7, 2006), India is the world s second most populous country and the Indian economy has posted an average annual growth rate of over 7% since 1994, and has become the fifth largest economy in the world. According to the World Factbook, the Indian economy is estimated to have had a Gross Domestic Product in 2005 of approximately $3.6 trillion (purchasing power parity) and grew at a rate of approximately 7.6%. Although our acquisition strategy is not limited to any particular industry, we intend to focus on target businesses in the life sciences sector. It is commonly known that India has become a major global resource for outsourcing of a variety of services. We believe that the intersection of high value-added outsourcing with the growing life sciences sector presents an attractive opportunity. We believe that unique opportunities exist to acquire companies in India that are positioned to benefit from increases in the outsourcing of important life sciences activities, including but not limited to: drug research and clinical trials; manufacturing of drugs and drug products; medical devices; diagnostic products and services; biofuels; and agricultural biotechnology. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents We do not have any specific business combination under consideration and we have not (nor has anyone on our behalf) contacted any prospective target business or had any discussions, formal or otherwise, with respect to such a transaction. We have not (nor have any of our agents or affiliates) been approached by any candidates (or representative of any candidates) with respect to a possible acquisition transaction with our company. Additionally, we have not, nor has anyone on our behalf, taken any measure, directly or indirectly, to identify any suitable acquisition candidate, nor have we engaged or retained any agent or other representative to identify any such acquisition candidate. We cannot assure you that we will be able to identify a target business meeting the criteria described above or that we will be able to engage in a business combination with a target business on favorable terms. Our management will have virtually unrestricted flexibility in identifying and selecting a prospective target business, except that our initial business combination must be with a target business whose fair market value is equal to at least 80% of our net assets (all of our assets, including the funds held in the trust account but excluding the funds held in the trust account for the benefit of the representatives, less our liabilities) at the time of such acquisition, although this may entail simultaneous acquisitions of more than one target business. We may not be able to acquire more than one target business because of various factors, including possible complex accounting issues, which would include generating pro forma financial statements reflecting the operations of several target businesses as if they had been combined, and numerous logistical issues, which could include attempting to coordinate the timing of due diligence and negotiations, proxy statement disclosure, foreign exchange or other clearances and closings with multiple target businesses. In addition, we would also be exposed to the risk that conditions to closings with respect to the acquisition of one or more of the target businesses would not be satisfied, bringing the fair market value of the initial business combination below the required fair market value of 80% of our net assets threshold. The target business or businesses that we acquire may have a fair market value substantially in excess of 80% of our net assets. The fair market value of such business or businesses will be determined by our board of directors based upon standards generally accepted by the financial community. If our board of directors is not able to independently determine that the target business has a sufficient fair market value, we will obtain an opinion from an unaffiliated, independent investment banking firm. In order to consummate such a business combination, we may issue a significant amount of our debt or equity securities to the sellers of such business and/or seek to raise additional funds through a private offering of debt or equity securities. Since we have no specific business combination under consideration, we have not entered into any such fund raising arrangement and have no current intention of doing so. However, if we did, such arrangement would only be consummated simultaneously with the consummation of the business combination. Our offices are located at 300 South Wacker Drive, Suite 1000, Chicago, IL 60606, and our telephone number at that address is (312) 922-1980. Private Placements Certain of our officers and directors and their affiliates, our special advisor and Trans-India Investors Limited have agreed that they will purchase an aggregate of 200,000 units from us at a purchase price of $8.00 per unit in private placements that will occur immediately prior to this offering. These units will be identical to the units being offered by this prospectus except that they will not be registered. The $1,600,000 of gross proceeds from the private placements will be held in the trust account for the benefit of the public stockholders. The purchasers in the private placements will not have any conversion rights or rights to liquidation distributions with respect to the shares included in these units in the event we fail to consummate a business combination. The private placement warrants will not be exercisable at any time when a registration statement is not effective and a current prospectus available. AMENDMENT NO. 6 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents Management Loans Certain of our officers and directors and their affiliates have agreed to loan us up to an aggregate of $400,000 at a 5% per annum interest rate to cover expenses related to this offering and the private placements. The balance of such loans will be repaid at closing from the proceeds of this offering. The Offering Securities offered: 10,000,000 units, at $8.00 per unit, each consisting of: one share of common stock; and one warrant. The units will begin trading on or promptly after the date of this prospectus. Each of the common stock and warrants may trade separately on the 90th day after the date of this prospectus, unless I-Bankers Securities, Inc. determines that an earlier date is acceptable and may decide to allow continued trading of the units, based on their assessment of the relative strengths of the securities markets and small capitalization companies in general, and the trading pattern of, and demand for, our securities in particular. In no event will I-Bankers Securities, Inc. allow separate trading of the common stock and warrants until (i) we file an audited balance sheet reflecting our receipt of the gross proceeds of this offering, (ii) we file a Current Report on Form 8-K and issue a press release announcing when such separate trading will begin, and (iii) the business day following the earlier to occur of the expiration of the underwriters over-allotment option or its exercise in full. We will file a Current Report on Form 8-K with the Securities and Exchange Commission, or SEC, including an audited balance sheet, upon the consummation of this offering, which is anticipated to take place three business days from the date of this prospectus. The audited balance sheet will include proceeds we receive from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Form 8-K. If the over-allotment option is exercised following the initial filing of such Form 8-K, an amended Form 8-K will be filed with the SEC to provide updated financial information to reflect the exercise of the over-allotment option. The Form 8-K will be publicly available on the SEC s website at www.sec.gov. Common stock: Number outstanding before this offering 2,500,000 shares Number to be sold in the private placements 200,000 shares Number to be outstanding after this offering and the private placements 12,700,000 shares, or 14,200,000 shares if the underwriters over-allotment option is exercised in full. Trans-India Acquisition Corporation (Exact name of Registrant as specified in its charter) Table of Contents Warrants: Number outstanding before this offering None Number to be sold in the private placements 200,000 warrants Number to be outstanding after this offering and the private placements 10,200,000 warrants, or 11,700,000 warrants if the underwriters over-allotment option is exercised in full. Exercisability Each warrant is exercisable for one share of common stock and may be exercised on a net-exercise (cashless) basis. Exercise price $5.00 Exercise period The warrants will become exercisable on the later of: the completion of a business combination on terms described in this prospectus; and , 2008 [one year from the date of this prospectus]. Prior to the time the warrants become exercisable, we will endeavor to register the common stock that warrant holders will receive upon exercise and maintain the effectiveness of such registration until the expiration of the warrants. The warrants will not be exercisable at any time when a registration statement is not effective. None of the warrants may be exercised until after the consummation of a business combination and, thus, after the proceeds of the trust account have been disbursed. Upon exercise of the warrants, the warrant exercise price, if any, will be paid directly to us. The warrants will expire at 5:00 p.m., New York City time, on , 2012 [five years from the date of this prospectus] or earlier upon redemption. Redemption We may redeem the outstanding warrants (including any warrants issued upon exercise of the representatives unit purchase option), with the prior consent of I-Bankers Securities, Inc.: in whole and not in part; at a price of $0.01 per warrant at any time after the warrants become exercisable; upon a minimum of 30 days prior written notice of redemption; and if, and only if, the last sales price of our common stock equals or exceeds $11.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. Delaware 6770 20-5063512 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 300 South Wacker Drive, Suite 1000 Chicago, IL 60606 (312) 922-1980 (Address, including zip code, and telephone number, including area code, of Registrant s principal executive offices) Table of Contents We have established these criteria to provide warrant holders with a reasonable premium to the initial warrant exercise price as well as a reasonable cushion against a negative market reaction, if any, to our redemption call. If the foregoing conditions are satisfied and we call the warrants for redemption, each warrant holder shall then be entitled to exercise his, her or its warrant prior to the date scheduled for redemption, by payment of the exercise price or on a net-exercise (cashless) basis in lieu of paying the cash exercise price as described in this prospectus. However, there can be no assurance that the price of the common stock will exceed $11.50 or the warrant exercise price after the redemption call is made. In addition, such redemption can and may occur while a registration statement is not effective and a current prospectus is not available and therefore the warrants are not exercisable. If this occurs, the warrants would not be exercisable and would only be worth the redemption price. Since we may redeem the warrants only with the prior consent of I-Bankers Securities, Inc., which firm may also hold warrants subject to redemption, it may have a conflict of interest in determining whether or not to consent to such redemption. We cannot assure you that I-Bankers Securities, Inc. will consent to such redemption if it is not in its best interest, even if it is in our best interest. Proposed American Stock Exchange Market symbols for our: Units TIL.U Common stock TIL Warrants TIL.WS Offering and private placement proceeds to be held in trust: $73,400,000 of the net proceeds of this offering (or $84,650,000 if the over-allotment option is exercised in full) plus the $1,600,000 we receive from the sale of the units in the private placements will be placed in a trust account at Morgan Stanley maintained by Continental Stock Transfer & Trust Company, acting as trustee, pursuant to an agreement to be entered into on the date of this prospectus. In addition, $3,200,000 of the aggregate of $6,000,000 of underwriting discounts and commissions and non-accountable expenses that may be payable (or $3,680,000 if the over-allotment option is exercised in full) to the underwriters in this offering will be placed in the trust account. The underwriters have agreed that such amount will not be paid unless and until we consummate a business combination, but will be forfeited by the underwriters if a business combination is not consummated. Except for a portion of the interest earned on the trust account, these proceeds will not be released until the earlier of the completion of a business combination or our liquidation. Therefore, unless and until a business combination is consummated, the proceeds held in the trust account (other than up to $2,300,000 of interest earned on the trust account that may be Bobba Venkatadri President and Chief Executive Officer Trans-India Acquisition Corporation 300 South Wacker Drive, Suite 1000 Chicago, IL 60606 (312) 922-1980 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents released to us) will not be available for our use for any expenses related to this offering or expenses which we may incur related to the investigation and selection of a target business and the negotiation of an agreement to acquire a target business. These business combination related expenses may be paid following the date of this prospectus and prior to a business combination only from amounts available outside the trust account (initially, approximately $190,240) and up to $2,300,000 of interest earned on the trust account that may be released to us to fund our working capital requirements. The $3,200,000 of the proceeds attributable to the underwriting discounts and commissions and non-accountable expenses will be paid to the representatives and any stockholders exercising their conversion rights upon completion of a business combination on the terms described in this prospectus or to our public stockholders upon our liquidation, but will, in no event, be available for use by us in a business combination. Based on interest rates as of the date of this prospectus for the permitted investments of the trust funds, we estimate that the funds held in the trust account will earn interest at a rate of approximately 5% per annum. We may use a portion of the funds not held in the trust account or released to us to make a deposit, down payment or fund a no-shop provision with respect to a particular proposed business combination. In the event we were ultimately required to forfeit such funds (whether as a result of our breach of the agreement relating to such payment or otherwise), we may not have a sufficient amount of working capital available outside of the trust account to pay expenses related to finding a suitable business combination without securing additional financing. If we were unable to secure additional financing, we would most likely fail to consummate a business combination in the allotted time and would be required to dissolve and liquidate. None of the warrants may be exercised until after the consummation of a business combination and, thus, after the proceeds of the trust account have been disbursed. The warrant exercise price will be paid directly to us and not placed in the trust account. Release of offering proceeds held in trust: Up to $2,300,000 of the interest earned on the trust account, net of taxes, may be released to us periodically to pay our operating expenses, including costs associated with the investigation and selection of a target business and the negotiation of any agreement to acquire a target business and the remaining interest, net of taxes, will be retained in the trust account and distributed as described below. In addition, funds in the trust account will be released to us periodically to pay income taxes on interest earned on the trust account. The entire proceeds held in trust will be released to us upon completion of a business combination, except for payments made to holders of our common stock who convert their shares into cash and Copies to: Kevin K. Rooney, Esq. Hayden Bergman Rooney, Professional Corporation 150 Post Street, Suite 650 San Francisco, CA 94108 Telephone: (415) 692-3310 Facsimile: (415) 399-9320 Kathleen L. Cerveny, Esq. Dilworth Paxson LLP 1133 Connecticut Avenue N.W. Suite 620 Washington, DC 20036 Telephone: (202) 452-0900 Facsimile: (202) 452-0930 Table of Contents except for the deferred underwriting discounts and commissions and interest thereon that will be paid to the underwriters. Holders of common stock whose shares are converted to cash in connection with our initial business combination will receive their pro rata portion of the amount held in trust ($7.82 per share), including the deferred portion of the underwriting discounts and commissions and non-accountable expenses ($0.32 per share) and the proceeds of the private placements, plus the pro rata portion of any interest on the portion of the trust account representing the net proceeds of this offering not released to us, net of taxes. Upon completion of the business combination, the underwriters will be paid the deferred underwriting discounts and commissions and non-accountable expenses, plus interest thereon, less $0.32 for each share converted to cash in connection with our business combination. In the event we fail to consummate a business combination within the permitted time, our board will, in accordance with our amended and restated certificate of incorporation, adopt a resolution, within 15 days thereafter, finding our dissolution advisable and provide notice as promptly thereafter as practicable to our stockholders in connection with our dissolution in accordance with Delaware law. In the event stockholders owning a majority of our outstanding common stock approve our dissolution, all public stockholders will be entitled to receive their pro rata portion of the amount deposited in trust ($7.82 per unit), including the deferred portion of the underwriting discounts and commissions and non-accountable expenses ($0.32 per unit) and proceeds of the private placements, plus the pro rata portion of any interest earned on the net proceeds not released to us, net of taxes. In addition, such holders will be entitled to receive a pro rata portion of our remaining assets not held in trust, less amounts we pay, or reserve to pay, for all of our liabilities and obligations, and the underwriters will forfeit the entire deferred underwriting discounts and commissions. Our existing stockholders will not be entitled to any liquidating distributions. Limited payment to insiders: Prior to completion of a business combination, there will be no fees, reimbursements or cash payments made to our existing stockholders and/or officers and directors other than: repayment at the closing of this offering of $200,000 of loans with 5% interest made by certain of our officers and directors and their affiliates to date to cover expenses related to this offering and the private placements; payment of $7,500 per month to Johnson and Colmar, an affiliate of one of our officers and directors for office space and administrative services; and reimbursement for any expenses incident to the offering and related to identifying and investigating possible business targets and business combinations. Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Table of Contents Stockholders must approve business combination: We will seek stockholder approval before we effect any business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable state law. In connection with the vote required for any business combination, all of our existing stockholders, including all of our officers and directors, have agreed to vote the shares of common stock owned by them immediately before this offering, including any shares included in the private placement units, in accordance with the majority of the shares of common stock voted by the public stockholders. We will proceed with a business combination only if (i) a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and (ii) public stockholders owning less than 25% of the aggregate shares sold in this offering exercise their conversion rights described below. Voting against the business combination alone will not result in conversion of a stockholder s shares for a pro rata share of the trust account. Such stockholder must have also exercised his, her or its conversion rights described below. Conversion rights for stockholders voting to reject a business combination: Pursuant to our amended and restated certificate of incorporation, public stockholders voting against a business combination will be entitled to convert their stock into a pro rata share of the amount held in the trust account representing the net proceeds of this offering, including accrued interest thereon (net of taxes payable and up to $2,300,000 of interest that may be released to us to fund our working capital), plus the underwriting deferred discounts and commissions, plus the proceeds of the private placements, if the business combination is approved and completed. We view this requirement as an obligation to our stockholders and will not take any action to amend or waive this provision in our certificate of incorporation. Our existing stockholders will not have such conversion rights with respect to any shares of common stock owned by them, directly or indirectly, prior to this offering, including shares included in the private placement units. Public shareholders who convert their shares into a pro rata share of the trust account will be paid promptly following their exercise of conversion rights and will continue to have the right to exercise any warrants they own. Investors in this offering who do not sell, or who receive less than an aggregate of $0.18 of net sales proceeds for, the warrants included in the units, and persons who purchase common stock in the aftermarket at a price in excess of $7.82 per share, may have a disincentive to exercise their conversion rights because the amount they would receive upon conversion could be less than the $8.00 per unit price in this offering and may be lower than the market price of the common stock on the date of conversion. Audit committee to monitor compliance: On completion of this offering, our board of directors will have and maintain an audit committee composed entirely of independent directors to, among other things, monitor compliance on a quarterly Calculation of Registration Fee Table of Contents basis with the terms described above and the other terms relating to this offering. If any noncompliance is identified, then the audit committee will be charged with the responsibility to immediately take all action necessary to rectify such noncompliance or otherwise cause compliance with the terms of this offering. Liquidation if no business combination: If we do not effect a business combination within 18 months after consummation of this offering (or within 24 months from the consummation of this offering if a letter of intent, agreement in principle or definitive agreement has been executed within 18 months after consummation of this offering and the business combination has not yet been consummated within such 18 month period), in accordance with our amended and restated certificate of incorporation: our corporate purposes and powers will immediately thereupon be limited to acts and activities relating to dissolving and winding up our affairs, including liquidation, and we will not be able to engage in any other business activities; our board of directors will be required to adopt, within 15 days thereafter, a resolution pursuant to Section 275(a) of the Delaware General Corporation Law finding our dissolution advisable and provide such notices to our stockholders as are required by Section 275(a) as promptly thereafter as possible; and in the event stockholders owning a majority of our outstanding common stock approve our dissolution, we must promptly adopt a plan of distribution which provides that only the public stockholders shall be entitled to receive liquidating distributions. We cannot provide investors with assurances of a specific timetable for our dissolution and liquidation in such circumstances. However, we will take all actions necessary to promptly dissolve and liquidate. As required under Delaware law, we will seek stockholder approval for any plan of dissolution and liquidation. If such stockholder approval is not obtained, we will not be dissolved and liquidated and we will not be able to distribute funds held in the trust account to our stockholders. Our existing stockholders have agreed to vote in favor of such dissolution and liquidation in these circumstances. Upon the approval by our stockholders of our plan of dissolution and liquidation, we will liquidate our assets, including the trust account, and after reserving amounts from the interest on the trust account available to us as working capital to cover the costs of dissolution and liquidation, distribute those assets solely to our public stockholders. Agreements with the existing stockholders do not permit them to participate in any liquidation distribution occurring upon our failure to consummate a business combination with respect to those shares of common stock acquired by them before this offering. They will participate in any liquidation distribution with respect to any shares of common stock acquired in connection with or following this offering. Title of each class of securities to be registered Amount to be registered Proposed maximum offering price per unit(1) Proposed maximum aggregate offering price Amount of registration fee(5) Units, each consisting of one share of Common Stock, $0.0001 par value, and one Warrant(2) 11,500,000 Units $8.00 $92,000,000 $9,844 Shares of Common Stock included as part of the Units(2) 11,500,000 Shares (3) Warrants included as part of the Units(2) 11,500,000 Warrants (3) Shares of Common Stock underlying the Warrants included as part of the Units(4) 11,500,000 Shares $5.00 $57,500,000 $6,153 Representatives Unit Purchase Option 1 $100 $100 (3) Units underlying the Representatives Unit Purchase Option ( Representatives Units )(4) 500,000 Units $10.00 $5,000,000 $535 Shares of Common Stock included as part of the Representatives Units(4) 500,000 Shares (3) Warrants included as part of the Representatives Units 500,000 Warrants (3) Shares of Common Stock underlying the Warrants included in the Representatives Units(4) 500,000 Shares $6.25 $3,125,000 $335 Total $157,625,100 $16,867 Table of Contents There will be no distribution from our trust account with respect to our warrants, and all rights with respect to our warrants will effectively cease upon our liquidation. Upon our dissolution we will be required to pay or make reasonable provision to pay all of our claims and obligations, including all contingent, conditional, or unmatured claims. These amounts must be paid or provided for before we make any distribution to our stockholders. While we intend to pay such amounts, if any, from the interest on the trust account available to us for working capital, we cannot assure you those funds will be sufficient to cover such claims and obligations. Under Delaware law, stockholders may be liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution, unless certain notice and waiting period requirements are satisfied. However, it is our intention to make liquidating distributions to our stockholders without complying with these provisions and therefore our public stockholders could be liable for any claims to the extent of distributions (but not more) received by them and any liability of our public stockholders may be for an extended period of time. While we will seek waivers from all target acquisitions, vendors and service providers to claims to amounts in the trust account, we cannot guarantee that we will be able to obtain any such waiver or that any such waiver will be held valid and enforceable. Bobba Venkatadri, our President and Chief Executive Officer and one of our directors, has agreed that he will be personally liable to cover claims made by such third parties, but only if, and to the extent, the claims reduce the amounts in the trust account available for payment to our stockholders in the event of a liquidation and the claims are made by a vendor for services rendered, or products sold, to us or by a prospective target business. However, Mr. Venkatadri will not have any personal liability as to any claimed amounts owed to a third party who executed a waiver, or as to any claims under our indemnity of the underwriters of this offering against certain liabilities, including liabilities under the Securities Act of 1933. Our other directors and officers have each agreed to be personally liable, severally, in accordance with his respective beneficial ownership interest in us, for ensuring that the proceeds in the trust account are not reduced by the claims of any vendor or service provider that is owed money by us for services rendered or products sold to us. However, we cannot assure you that our directors and officers will be able to satisfy those obligations. We estimate that in the event we liquidate the trust account, a public stockholder will receive approximately $7.82 per share, without taking into account interest earned on the trust account (net of taxes payable on interest income on the funds in the trust account and interest income of up to $2,300,000 on the trust account balance previously released to us to fund our working capital requirements, including the costs of our dissolution and liquidation), out of the (1) Estimated solely for the purpose of calculating the amount of the registration fee. (2) Includes Units and shares of Common Stock and Warrants underlying such Units that may be sold upon exercise of the underwriters over-allotment option, if any. (3) No registration fee payable pursuant to Rule 457(g). (4) Pursuant to Rule 416, there are also being registered such indeterminable additional securities as may be issued as a result of the anti-dilution provisions contained in the Warrants, the Representatives Unit Purchase Option and the Warrants included as part of the Representatives Units. (5) Amount previously paid. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall hereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Table of Contents funds in the trust account. We expect that all costs associated with implementing our plan of dissolution and liquidation will be funded from the interest available to us as working capital. For more information regarding the dissolution and liquidation procedures and the factors that may impair our ability to distribute our assets, including stockholder approval requirements and potential stockholder liability, or cause distributions to be less than $7.82 per share, please see the sections entitled Risk Factors Risks Associated with Our Business If we do not timely consummate a business combination, we will be required to dissolve, but such dissolution requires the approval of holders of a majority of our common stock in accordance with Delaware law. Without this shareholder approval, we will not be able to dissolve and liquidate and we will not distribute funds from our trust account to public stockholders, Risk Factors Risks Associated with Our Business If third parties bring claims against us, the proceeds held in trust could be reduced and the per-share conversion and liquidation price received by stockholders may be less than $7.82 per share, and Risk Factors Risks Associated with Our Business Upon distribution of the trust account, our public stockholders may be held liable for claims of third parties against us to the extent of distributions received by them. Escrow of existing stockholders securities: Upon consummation of this offering, all of our existing stockholders, including all of our officers and directors and their affiliates, our special advisor and Trans-India Investors Limited, will place the securities they own as of the date of this prospectus, including the private placement units, into an escrow account maintained by Continental Stock Transfer & Trust Company, acting as escrow agent. Subject to certain limited exceptions, such as transfers to family members and trusts for estate planning purposes and upon death, these securities will not be transferable during the escrow period and will not be released from escrow until consummation of a business combination. Risks In making your decision on whether or not to invest in our securities, you should take into account not only the backgrounds of our management team, but also the special risks we face as a blank check company, as well as the fact that, despite being a blank check company this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, and, therefore, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. Additionally, our existing stockholders initial equity investment is below that which is required under the guidelines of the North American Securities Administrators Association, Inc. You should carefully consider these and the other risks set forth in the section entitled Risk Factors beginning on page 13 of this prospectus. (1) Includes the $1,600,000 we will receive from the sale of the private placement units, which is conditional only upon the completion of this offering and which is otherwise an irrevocable commitment of the purchasers. Assumes the payment of the $3,200,000 deferred underwriting discounts and commissions and non-accountable expenses to the underwriters. The working capital in the Actual column excludes $140,784 of costs related to this offering and the private placements which were paid prior to November 30, 2006. These deferred offering costs have been recorded as a long-term asset and are reclassified against stockholders equity in the As Adjusted column. The working capital and total assets amounts in the As Adjusted column include the $75,000,000 being held in the trust account, which will be available to us only upon the consummation of a business combination within the time period described in this prospectus. If a business combination is not so consummated, our board of directors shall adopt a resolution, within 15 days after such time period finding our dissolution advisable and will provide notice as soon as possible thereafter of a special meeting of stockholders to vote on our dissolution in accordance with Delaware law. If our dissolution is approved by our stockholders, we will promptly adopt a plan of distribution in accordance with Delaware law, and then the proceeds then held in the trust account, (including the $3,200,000, or $3,680,000 if the over-allotment option is exercised, attributable to the deferred underwriting discounts and commissions and non-accountable expenses) will be distributed as soon as practicable solely to the public stockholders. In addition, such holders will be entitled to receive a pro rata portion of our remaining assets not held in trust, less amounts we pay, or reserve to pay, for all of our liabilities and obligations. These liabilities and obligations include our corporate expenses arising during our remaining existence, including the costs of our dissolution and liquidation. We will not proceed with a business combination if less than a majority of the votes cast by the public stockholders are voted in favor of the business combination or if public stockholders owning 25% or more of the aggregate shares sold in this offering both vote their shares against the business combination and exercise their conversion rights. Accordingly, we may effect a business combination if public stockholders owning up to approximately 24.99% of the shares sold in this offering exercise their conversion rights. If this occurred, we would be required to convert for cash up to approximately 24.99% of the 10,000,000 shares of common stock included in the units, or 2,499,000 shares of common stock, at a conversion price of $7.82 per share without taking into account any of the interest earned on the trust account (net of taxes payable). The actual per-share conversion price will be equal to: the amount in the trust account representing the offering net proceeds of $73,400,000, including all accrued interest (net of taxes payable and less up to $2,300,000 of interest earned on the trust account that may be released to us to fund our working capital), calculated as of the record date for determination of stockholders entitled to vote on the proposed business combination; plus the $3,200,000 of deferred underwriting discounts and commissions and non-accountable expenses; plus the gross proceeds of $1,600,000 from the private placements; and divided by the number of shares of common stock sold in this offering. Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. PROSPECTUS Subject to Completion Preliminary Prospectus dated January 29, 2007 $80,000,000 10,000,000 Units Trans-India Acquisition Corporation is a newly formed blank check company organized for the purpose of acquiring, through merger, capital stock exchange, asset acquisition or other similar business combination transaction, one or more target businesses with operations primarily in India. We intend to focus primarily on targets within the life sciences sector of the Indian economy. We have not identified or selected any prospective target business or had any discussions, formal or otherwise, with respect to such a transaction. This is our initial public offering of our securities. Each unit will be offered at a price of $8.00 and will consist of one share of our common stock and one warrant. Each warrant entitles the holder to purchase one share of our common stock at a price of $5.00. Each warrant will become exercisable on the later of our completion of a business combination or , 2008 [one year from the date of this prospectus], and will expire on , 2012 [five years from the date of this prospectus], or earlier upon redemption. We have granted I-Bankers Securities, Inc. and CRT Capital Group LLC, representatives of the underwriters, a 45-day option to purchase up to 1,500,000 additional units solely to cover over-allotments, if any. The over-allotment option will be used only to cover the net syndicate short position resulting from the initial distribution. Certain of our officers and directors and their affiliates, our special advisor and Trans-India Investors Limited have agreed to purchase an aggregate of 200,000 units at a purchase price of $8.00 per unit ($1,600,000 in the aggregate) in private placements that will occur immediately prior to this offering. Such units will be identical to the units sold in this offering except that they will not be registered. The purchasers in the private placements will not have any conversion rights or rights to any liquidation distributions with respect to the shares included in these units in the event we fail to consummate a business combination. There is presently no public market for our units, common stock or warrants. Our units have been approved for listing on the American Stock Exchange under the symbol TIL.U , subject to official notice of listing. The common stock and warrants comprising the units may trade separately on the 90th day after the date of this prospectus, unless I-Bankers Securities, Inc. determines that an earlier date is acceptable. Once the securities comprising the units begin separate trading, the common stock and warrants will be listed on the American Stock Exchange under the symbols TIL and TIL.WS , respectively. Investing in our securities involves a high degree of risk. See Risk Factors beginning on page 13 of this prospectus for a discussion of information that you should consider before investing in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Public Offering Price Table of Contents RISK FACTORS An investment in our securities involves a high degree of risk. You should consider carefully the risks described below before buying units in this offering. If any of the following risks actually occur, our business, financial condition and results of operations may be materially adversely affected. In that case, the trading price of our securities could decline, and you could lose all or part of your investment. Risks Associated with Our Business We are a development stage company with no operating history and, accordingly, you will not have any basis on which to evaluate our ability to achieve our business objective. We are a recently incorporated development stage company with no operating results to date. Therefore, our ability to begin operations is dependent upon obtaining financing through the public offering of our securities. Since we do not have an operating history, you will have no basis upon which to evaluate our ability to achieve our business objective, which is to acquire one or more operating businesses. We have not conducted any discussions and we have no plans, arrangements or understandings with any prospective acquisition targets. We will not generate any revenues until, at the earliest, after the consummation of a business combination. Investors must rely on our management with respect to the identification and selection of a prospective target business and we cannot assure you that any such acquisition will be successful. Although our management has broad discretion with respect to the specific application of the net proceeds, substantially all of the net proceeds of this offering are intended to be applied in connection with consummating a business combination in India. Management has virtually unrestricted flexibility in identifying and selecting a prospective target business. Investors must therefore rely on management s due diligence review and evaluation of potential acquisition targets. There can be no assurances that, if we complete an acquisition, such acquisition will be successful. We will be dependent upon limited funds outside of the trust account and interest earned on the trust account released to us to fund our search for a target company and consummation of a business combination. Of the net proceeds of this offering and the private placements, only approximately $190,240 is estimated to be available to us initially outside the trust account to fund our working capital requirements. We will be dependent upon sufficient interest being earned on the proceeds held in the trust account to provide us with the additional working capital to search for a target company and consummate a business combination. Based on interest rates as of the date of this prospectus for the permitted investments of the trust funds, we estimate that the funds held in the trust account will earn interest at a rate of approximately 5% per annum. While we are entitled to receive up to a maximum of $2,300,000 of the interest earned on the trust account for such purpose, if interest rates were to decline substantially, we may not have sufficient funds available to provide us with the working capital necessary to complete a business combination. In such event, we would need to obtain additional financing, either from our management or the existing stockholders or from third parties. We may not be able to obtain additional financing and our existing stockholders and management are not obligated to provide any additional financing. If we do not have sufficient proceeds and cannot find additional financing, we may be forced to dissolve and liquidate prior to consummating a business combination. Because there are numerous companies with business plans similar to ours seeking to effectuate business combinations, it may be more difficult for us to do so. Since August 2003, based upon publicly available information as of December 31, 2006, approximately 79 similarly structured blank check companies have completed initial public offerings and are currently looking for Underwriting Discounts and Commissions(1) Table of Contents targets, and numerous others have filed registration statements for initial public offerings. Of these companies, only 14 companies have consummated a business combination, while 26 other companies have announced they have entered into a definitive agreement for a business combination, but have not consummated such business combination. While, like us, some of those companies have specific industries in which they must complete a business combination, a number of them may consummate a business combination in any industry they choose. Moreover, we know of 4 blank check companies that have completed initial public offerings and seek to complete a business combination in India. None of these companies have consummated a business combination and none have announced they have entered into a definitive agreement for a business combination in India. We may, therefore, be subject to competition from these and other companies seeking to consummate a business plan similar to ours, which, as a result, would increase demand for companies to combine with companies structured similarly to ours. Further, the fact that only a few of such companies have completed a business combination or entered into a definitive agreement for a business combination, may be an indication that there are only a limited number of attractive target businesses available to such entities, or that many privately held or publicly held, target businesses may not be inclined to enter into business combinations with publicly held blank check companies like us. Three companies have failed to close proposed acquisitions and will be liquidated. We cannot assure you that we will be able to successfully compete for an attractive business combination. Additionally, because of this competition, we cannot assure you that we will be able to effectuate a business combination within the required time periods. If we are unable to find a suitable target business within such time periods, we will be forced to liquidate. Since we have not currently selected any target business with which to complete a business combination, investors in this offering are unable to currently ascertain the merits or risks of the target business operations. Since we have not yet identified a prospective target business, investors in this offering have no current basis to evaluate the possible merits or risks of the target business operations. To the extent we complete a business combination with a financially unstable company or an entity in its development stage, we may be affected by numerous risks inherent in the business operations of those entities. Although our management will endeavor to evaluate the risks inherent in a particular target business, we cannot assure you that we will properly ascertain or assess all of the significant risk factors. We also cannot assure you that an investment in our units will not ultimately prove to be less favorable to investors in this offering than a direct investment, if an opportunity were available, in a target business. For a more complete discussion of our selection of a target business, see the section entitled Proposed Business Effecting a Business Combination We have not identified a target business. If we do not timely consummate a business combination, we will be required to dissolve, but such dissolution requires the approval of holders of a majority of our common stock in accordance with Delaware law. Without this shareholder approval, we will not be able to dissolve and liquidate and we will not distribute funds from our trust account to public stockholders. If we do not complete a business combination within 18 months after the consummation of this offering (or within 24 months after the consummation of this offering if a letter of intent, agreement in principle or definitive agreement is executed within 18 months after the consummation of this offering and the business combination relating thereto is not consummated within such 18-month period), our certificate of incorporation (a) provides that our corporate powers will automatically thereafter be limited to acts and activities relating to dissolving and winding up our affairs, including liquidation, and we will not be able to engage in any other business activities, and (b) requires that our board of directors within 15 days adopt a resolution finding our dissolution advisable and provide notice as soon as possible thereafter of a special meeting of stockholders to vote on our dissolution. However, pursuant to Delaware law, our dissolution requires the affirmative vote of stockholders owning a majority of our then outstanding common stock. Soliciting the vote of our stockholders will require the preparation of preliminary and definitive proxy statements, which will need to be filed with the Securities and Exchange Commission and could be subject to their review. This review process could take up to several months. Proceeds, Before Expenses, to Us Table of Contents As a result, distribution of our assets to our public stockholders could be subject to a considerable delay. Furthermore, we may need to postpone the stockholders meeting, resolicit our stockholders, or amend our plan of dissolution and liquidation to obtain the required stockholder approval, all of which would further delay the distribution of our assets and result in increased costs. If we are not able to obtain approval from a majority of our stockholders, we will not be able to dissolve and liquidate and we will not be able to distribute funds from our trust account to holders of our common stock sold in this offering and these funds will not be available for any other corporate purpose. In the event we seek stockholder approval for a plan of dissolution and liquidation and do not obtain such approval, we will nonetheless continue to pursue stockholder approval for such a plan. However, we cannot assure you that our stockholders will approve our dissolution in a timely manner or will ever approve our dissolution. As a result, we cannot provide investors with assurances of a specific time frame for the liquidation and distribution. If our stockholders do not approve a plan of dissolution and liquidation and the funds remain in the trust account for an indeterminate amount of time, we may be considered to be an investment company. Please see the risk factor entitled Risks Associated with this Offering If we are deemed to be an investment company, we may be required to institute burdensome compliance requirements, and our activities may be restricted, which may make it difficult for us to consummate a business combination or operate over the near term or long term in our intended manner. Because the initial per share amount deposited in trust is $7.82 per share, if we are unable to timely complete a business combination and we receive stockholder approval to dissolve and distribute the funds held in trust, public stockholders may receive less than $8.00 per share upon distribution of the trust account and our redeemable warrants will expire worthless. Because the initial per share amount deposited in trust is $7.82 per share, if we are unable to complete a business combination and we receive stockholder approval to dissolve and distribute the funds held in the trust account to public stockholders, public stockholders may receive less than the $8.00 purchase price per unit as a result of the interest amounts on the trust account that may be released to us to fund working capital requirements, including expenses of this offering, our general and administrative expenses and the anticipated costs of seeking a business combination. Furthermore, we will be required to pay or make reasonable provision to pay claims of creditors which we intend to do from the funds not held in trust. In addition, there will be no distribution with respect to our outstanding warrants and, accordingly, the warrants will expire worthless if we liquidate before the completion of a business combination. After our business combination, we may be solely dependent on a single business and a limited number of products or services. Our business combination must be with a business with a fair market value of at least 80% of our net assets at the time of such acquisition, although this may entail the simultaneous acquisitions of several operating businesses at the same time. By consummating a business combination with only a single entity, our lack of diversification may subject us to numerous economic, competitive and regulatory developments. Further, we would not be able to diversify our operations or benefit from the possible spreading of risks or offsetting of losses, unlike other entities which may have the resources to complete several business combinations in different industries or different areas of a single industry. Accordingly, the prospects for our success may be: solely dependent upon the performance of a single business; or dependent upon the development or market acceptance of a single or limited number of products, processes or services. Alternatively, if our business combination entails the simultaneous acquisitions of several operating businesses at the same time from different sellers, we would face additional risks, including difficulties and expenses incurred in connection with the subsequent integration of the operations and services or products of the acquired companies into a single operating business. If we are unable to adequately address these risks, it could negatively impact our profitability and results of operations. Per unit $ 8.00 $ 0.60 $ 7.40 Total $ 80,000,000 $ 6,000,000 $ 74,000,000 Table of Contents Because of our limited resources and structure, we may not be able to consummate an attractive business combination. We expect to encounter intense competition from entities other than blank check companies having a business objective similar to ours, including venture capital funds, leveraged buyout funds and operating businesses competing for acquisitions. Many of these entities are well established and have extensive experience in identifying and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human and other resources than we do and our financial resources will be relatively limited when contrasted with those of many of these competitors. While we believe that there are numerous potential target businesses that we could acquire with the net proceeds of this offering, our ability to compete in acquiring certain sizable target businesses will be limited by our available financial resources. This inherent competitive limitation gives others an advantage in pursuing the acquisition of certain target businesses. Furthermore, the obligation we have to seek stockholder approval of a business combination may delay the consummation of a transaction. Additionally, our outstanding warrants, and the future dilution they potentially represent, may not be viewed favorably by certain target businesses. Any of these obligations may place us at a competitive disadvantage in successfully negotiating a business combination. Because only 43 of the 79 blank check companies that have gone public in the United States since August 2003 through December 31, 2006 have either consummated a business combination or entered into a definitive agreement for a business combination, it may indicate that there are fewer attractive target businesses available to such entities like our company or that many privately held target businesses are not inclined to enter into these types of transactions with publicly held blank check companies like ours. If we are unable to consummate a business combination with a target business within the prescribed time periods, we will be forced to liquidate. We may be unable to obtain additional financing, if required, to complete a business combination or to fund the operations and growth of the target business, which could compel us to restructure the transaction or abandon a particular business combination. Although we believe that the net proceeds of this offering and the private placements will be sufficient to allow us to consummate a business combination, as we have not yet identified any prospective target business, we cannot ascertain the capital requirements for any particular transaction. If the net proceeds of this offering and the private placements prove to be insufficient, either because of the size of the business combination or the depletion of the available net proceeds (including interest earned on the trust account released to us) in search of a target business, or because we become obligated to convert for cash a significant number of shares from dissenting stockholders, we will be required to seek additional financing. We cannot assure you that such financing would be available on acceptable terms, if at all. To the extent that additional financing proves to be unavailable when needed to consummate a particular business combination, we would be compelled to restructure the transaction or abandon that particular business combination and seek an alternative target business candidate. In addition, it is possible that we could use a portion of the funds not held in the trust account to make a deposit, down payment or fund a no-shop provision with respect to a particular proposed business combination, although we do not have any current intention to do so. In the event that we were ultimately required to forfeit such funds (whether as a result of our breach of the agreement relating to such payment or otherwise), we may not have a sufficient amount of working capital available outside of the trust account to conduct due diligence and pay other expenses related to finding a suitable business combination without securing additional financing. If we were unable to secure additional financing, we would most likely fail to consummate a business combination in the allotted time and would be forced to liquidate. In addition, if we consummate a business combination, we may require additional financing to fund the operations or growth of the target business. The failure to secure additional financing could limit the development or growth of the target business. None of our officers, directors or stockholders is required to provide any financing to us in connection with or after a business combination. You will not be entitled to protections normally afforded to investors of blank check companies. Since the net proceeds of this offering are intended to be used to complete a business combination with one or more target businesses that have not been identified, we may be deemed to be a blank check company under (1) Includes 4.0% of the gross proceeds attributable to the underwriting discounts and commissions and non-accountable expenses, or $0.32 per unit ($3,200,000 in total), which the representatives have agreed to deposit into the trust account until the earlier of the consummation of a business combination or the liquidation of the trust account and has also agreed to forfeit any rights to, or claims against, such deferred discounts and commissions and non-accountable expenses, including any interest thereon, unless we successfully consummate a business combination. Upon completion of this offering, $78,200,000, representing a portion of the net proceeds of this offering, the deferred underwriting discounts and commissions, the non-accountable expense allowance and the private placement gross proceeds, will be placed into a trust account at Morgan Stanley maintained by Continental Stock Transfer & Trust Company, acting as trustee. As a result, our public stockholders will receive approximately $7.82 per unit (plus interest earned on the trust account, net of taxes payable and up to $2,300,000 of interest, net of taxes, that may be released to us to fund working capital) in the event of a liquidation of our company prior to consummation of a business combination. We are offering the units for sale on a firm-commitment basis. I-Bankers Securities, Inc. and CRT Capital Group LLC, acting as representatives of the underwriters, expect to deliver our securities to investors in the offering on or about , 2007. The date of this prospectus is , 2007. Table of Contents the United States securities laws. However, since we will have net tangible assets in excess of $5,000,000 upon the successful consummation of this offering and will file a Current Report on Form 8-K with the Securities and Exchange Commission, or SEC, upon consummation of this offering, including an audited balance sheet demonstrating this fact, we will be exempt from rules promulgated by the SEC to protect investors of blank check companies, such as Rule 419. Accordingly, investors will not be afforded the benefits or protections of those rules. Because we believe we will not be subject to Rule 419, our units will be immediately tradable, and we will have a longer period of time to complete a business combination in certain circumstances. For a more detailed comparison of our offering to offerings under Rule 419, see the section entitled Proposed Business Comparison to Offerings of Blank Check Companies. If third parties bring claims against us, the proceeds held in trust could be reduced and the per-share conversion and liquidation price received by stockholders may be less than $7.82 per share. Our placing of funds in trust may not protect those funds from third party claims against us. Although we will seek to have vendors and service providers we engage and prospective target businesses we negotiate with, execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our public stockholders, there is no guarantee that they will execute such agreements or, even if they execute such agreements, that they would be prevented from bringing claims against the trust account. If any third party refused to execute an agreement waiving such claims to the monies held in the trust account, we would perform an analysis of the alternatives available to us and evaluate if such engagement would be in the best interest of our stockholders. Examples of possible instances where we may engage a third party that has refused to execute a waiver include the engagement of a third party consultant whose particular expertise or skills are believed by management to be significantly superior to those of other consultants that would agree to execute a waiver or in cases where management is unable to find a provider of required services willing to provide the waiver. Accordingly, the proceeds held in trust could be subject to claims which could take priority over the claims of our public stockholders and the per-share conversion and liquidation price could be less than $7.82, plus interest on the net proceeds held in trust (net of taxes payable and up to $2,300,000 of interest earned on the trust account that may be released to us to fund our working capital), due to claims of such creditors. If we are unable to complete a business combination and are forced to liquidate, Mr. Venkatadri has agreed that he will be personally liable to cover claims made by target acquisitions, vendors and service providers, but only if, and to the extent, the claims reduce the amounts in the trust account available for payment to our stockholders in the event of a liquidation and the claims are made by a vendor for services rendered, or products sold, to us or by a prospective target business. However, Mr. Venkatadri will not have any personal liability as to any claimed amounts owed to a third party who executed a waiver, or as to any claims under our indemnity of the underwriters of this offering against certain liabilities, including liabilities under the Securities Act of 1933. Our other officers and directors have each agreed to be personally liable, severally, in accordance with their respective beneficial ownership interests in us, to ensure that the proceeds in the trust account are not reduced by the claims of various vendors and service providers for services rendered or contracted for or products sold to us, but only to the extent necessary to ensure that such loss, liability, claim, damage or expense does not reduce the amount in the trust account. However, we cannot assure you that they will be able to satisfy those obligations. Further, they will not be personally liable to pay debts and obligations to prospective target businesses, if a business combination is not consummated with such prospective target businesses, or for claims from any entity other than vendors and service providers. Accordingly, the proceeds held in trust could be subject to claims which could take priority over the claims of our public stockholders and the per-share conversion and liquidation price could be less than approximately $7.82, plus interest on the net proceeds held in trust (net of taxes payable and up to $2,300,000 of interest earned on the trust account that may be released to us to fund our working capital), due to claims of such creditors. Additionally, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and subject to the claims of third parties with priority over the claims of our stockholders. To the extent any bankruptcy claims deplete the trust account, we cannot assure you we will be able to return to our public stockholders at least $7.82 per share. Table of Contents TABLE OF CONTENTS Page Table of Contents Upon distribution of the trust account, our public stockholders may be held liable for claims of third parties against us to the extent of distributions received by them. Under the Delaware General Corporation Law, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. If a corporation complies with certain statutory procedures set forth in Section 280 of the Delaware General Corporation Law intended to ensure that the corporation makes reasonable provision for all claims against it, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution. The procedures in Section 280 include a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions may be made to stockholders. However, it is our intention to make liquidating distributions to our stockholders as soon as reasonably possible after dissolution and, therefore, we do not intend to comply with those procedures. Because we will not be complying with those procedures, we are required, pursuant to Section 281 of the Delaware General Corporation Law, to adopt a plan that will provide for our payment, based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against us within the subsequent 10 years. Accordingly, we would be required to provide for any creditors known to us at that time prior to distributing the funds held in the trust account to stockholders. We cannot assure you that we will properly assess all claims that may be potentially brought against us. As such, our stockholders could potentially be liable for any claims to the extent of distributions (but not more) received by them in a dissolution and any liability of our stockholders may extend well beyond the third anniversary of such dissolution. For further information on the statutory dissolution procedures, see Proposed Business Effecting a Business Combination Liquidation if no business combination. Under Delaware law, the requirements and restrictions relating to this offering contained in our amended and restated certificate of incorporation may be amended, which could reduce or eliminate the protection afforded to our stockholders by such requirements and restrictions. Our amended and restated certificate of incorporation sets forth certain requirements and restrictions relating to this offering that shall apply to us until the consummation of a business combination. Specifically, our amended and restated certificate of incorporation provides, among other things, that: prior to the consummation of our initial business combination, we shall submit such business combination to our stockholders for approval; we may consummate our initial business combination if: (i) it is approved by a majority of the shares of common stock voted by public stockholders, and (ii) public stockholders owning less than 25% of the shares sold in this offering exercise their conversion rights; if our initial business combination is approved and consummated, public stockholders who voted against the business combination and exercised their conversion rights will receive their pro rata share of (i) the portion of the trust account representing the net proceeds of this offering, plus interest earned thereon not released to us, net of taxes; (ii) the deferred underwriting discounts and commissions, and (iii) the private placement proceeds; and if a business combination is not consummated or a letter of intent, an agreement in principle or a definitive agreement is not signed within the time periods specified in this prospectus, in accordance with our amended and restated certificate of incorporation: our corporate purposes and powers will immediately thereupon be limited to acts and activities relating to dissolving and winding up our affairs, including liquidation, and we will not be able to engage in any other business activities; our board of directors will be required to adopt, within 15 days thereafter, a resolution pursuant to Section 275(a) of the Delaware General Corporation Law finding our dissolution advisable and Table of Contents provide such notices to our stockholders as required by Section 275(a) as promptly thereafter as possible; and in the event stockholders owning a majority of our outstanding common stock approve our dissolution, we must promptly adopt a plan of distribution which provides that only the public stockholders shall be entitled to receive liquidating distributions. Our amended and restated certificate of incorporation prohibits the amendment of the above-described provisions, which shall automatically terminate upon the consummation of a business combination. However, the validity of provisions prohibiting amendment of the certificate of incorporation under Delaware law has not been settled. A court could conclude that the prohibition on amendment violates the stockholders implicit rights to amend the corporate charter. In that case, the above-described provisions would be amendable and any such amendment could reduce or eliminate the protection afforded to our stockholders. However, we view the foregoing provisions as obligations to our stockholders, and we will not take any actions to waive or amend any of these provisions. We may issue shares of our capital stock or convertible debt securities to complete a business combination, which would reduce the equity interest of our stockholders and likely cause a change in control of our ownership. Our amended and restated certificate of incorporation authorizes the issuance of up to 50,000,000 shares of common stock, par value $0.0001 per share, and 5,000,000 shares of blank check preferred stock, par value $0.0001 per share. Immediately after this offering (assuming exercise of the representatives unit purchase option, but no exercise of its over-allotment option, and after appropriate reservation for the issuance of shares of common stock underlying units and upon full exercise of outstanding warrants and warrants underlying units), there will be 26,100,000 authorized but unissued shares of our common stock available for issuance and all of the 5,000,000 shares of blank check preferred stock available for issuance. Although we have no commitments as of the date of this offering to issue our securities, we may issue a substantial number of additional shares of our common stock or blank check preferred stock, or a combination of common and blank check preferred stock, to complete a business combination. The issuance of additional shares of our common stock or any number of shares of our blank check preferred stock: may significantly reduce the equity interest of investors in this offering; will likely cause a change in control if a substantial number of our shares of common stock are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and most likely also result in the resignation or removal of our present officers and directors; may reduce or limit the voting power or other rights of holders of our common stock if we issue preferred stock with dividend, liquidation, compensation or other rights superior to the common stock; and may reduce the prevailing market prices for our common stock warrants and units. Similarly, if we issue debt securities, it could result in: default and foreclosure on our assets if our operating cash flow after a business combination were insufficient to pay our debt obligations; acceleration of our obligations to repay the indebtedness even if we have made all principal and interest payments when due if the debt security contained covenants that required the maintenance of certain financial ratios or reserves and any such covenant were breached without a waiver or renegotiation of that covenant; our immediate payment of all principal and accrued interest, if any, if the debt security was payable on demand; and our inability to obtain additional financing, if necessary, if the debt security contained covenants restricting our ability to obtain additional financing while such security was outstanding. For a more You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus or other date stated in this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date. Market and Industry Data Market data and industry statistics used throughout this prospectus are based on independent industry publications and other publicly available information. None of the sources cited in this prospectus has consented to the inclusion of any data from its reports, nor have we sought their consent. We have not independently verified any third-party information and cannot assure you of its accuracy or completeness. In addition, while we believe the market data and industry statistics included in this prospectus are generally reliable, such information is inherently imprecise. Such data involves risk and uncertainties and are subject to change based on various factors, including those discussed under the heading Risk Factors. Accordingly, investors should not place undue reliance on this information. Table of Contents complete discussion of the possible structure of a business combination, see the section entitled Proposed Business Effecting a business combination Selection of a target business and structuring of a business combination. Company resources could be wasted in pursuing acquisitions that are not consummated. We anticipate that the investigation of each specific target business and the negotiation, drafting, and execution of relevant agreements, disclosure documents, and other instruments will require substantial management time and attention. We could incur substantial costs for accountants, attorneys, and others payable from the funds not held in trust in connection with a business combination that is not completed and may be required to pay to the potential target business a deposit or down payment or to fund a no shop provision. Costs incurred prior to completion of a business combination, including any for any non-refundable deposit or down payment or to fund a no shop provision, may not be recoverable. Furthermore, even if an agreement is reached relating to a specific target business, we may fail to consummate the transaction for any number of reasons including those beyond our control such as that more than 24.99% of our stockholders vote against the transaction even if a majority of our stockholders approve the transaction. Any such event will result in a loss to us of the related costs incurred which could materially adversely affect subsequent attempts to locate and acquire or merge with another business. We may have limited ability to evaluate the management of the target business. Although we intend to closely scrutinize the management of a prospective target business in connection with evaluating the desirability of effecting a business combination, we cannot assure you that our assessment of the target businesses management will prove to be correct. These individuals may be unfamiliar with the requirements of operating a public company, including compliance with the Sarbanes-Oxley Act, maintaining internal controls or dealing with the public markets, which could cause us to expend time and resources helping them become familiar with such laws. This could be expensive and time consuming and could lead to various regulatory issues which may adversely affect our operations. Our officers and directors have limited or no experience in managing blank check companies which may have an adverse impact on our prospects. Although our officers and directors have experience in consummating acquisitions and managing public companies, our officers and directors do not have experience in managing blank check companies. Such limited experience may have an adverse impact on our ability to consummate a business combination. Our ability to successfully effect a business combination and to be successful thereafter will be totally dependent upon the efforts of our management, some of whom may join us following a business combination. Our ability to successfully effect a business combination will be totally dependent upon the efforts of our management. The future role of our management following a business combination, however, cannot presently be fully ascertained. Although we expect several of our management and other key personnel, particularly our President and Chief Executive Officer, to remain associated with us following a business combination, we may employ other personnel following the business combination. While we intend to closely scrutinize any additional individuals we engage after a business combination, we cannot assure you that our assessment of these individuals will prove to be correct. Moreover, our current management will only be able to remain with the combined company after the consummation of a business combination if they are able to negotiate the same as part of any such combination. If we acquired a target business in an all-cash transaction, it would be more likely that current members of management would remain with us if they chose to do so. If a business combination were structured as a merger whereby the stockholders of the target company were to control the combined company following a business combination, it may be less likely that management would remain with the Table of Contents combined company unless it was negotiated as part of the transaction via the acquisition agreement, an employment agreement or other arrangement. In making the determination as to whether current management should remain with us following the business combination, management will analyze the experience and skill set of the target business management and negotiate as part of the business combination that certain members of current management remain if it is believed that it is in the best interests of the combined company post-business combination. If management negotiates to be retained post-business combination as a condition to any potential business combination, such negotiations may result in a conflict of interest. While we intend to closely scrutinize any additional individuals we engage after a business combination, we cannot assure you that our assessment of these individuals will prove to be correct. These individuals may be unfamiliar with the requirements of operating a public company as well as United States securities laws which could cause us to have to expend time and resources helping them become familiar with such laws. This could be expensive and time-consuming and could lead to various regulatory issues which may adversely affect our operations. If our current officers and directors allocate their time to other businesses, thereby causing conflicts of interest in their determination as to how much time to devote to our affairs, our ability to consummate a business combination could be negatively impacted. Our current officers and directors are not required to commit their full time to our affairs, which may result in a conflict of interest in allocating their time between our operations and other businesses. We do not intend to have any full time employees prior to the consummation of a business combination. Each of our officers is engaged in several other business endeavors and are not obligated to contribute any specific number of hours per week to our affairs, although we expect our officers and directors and special advisor to balance their other affairs and devote sufficient time to our affairs as they deem necessary to achieve our business objective and consummate a business combination. Mr. Venkatadri serves as part-time President to a life sciences company and part-time as a General Partner to an India fund manager, and is the only officer of the company actively employed. Our directors and special advisor to the board of directors are all engaged in several other endeavors, including in financial, investment, advisor and principal capacities, but not as active employees in life sciences companies. For example, the agreement with our special advisor Rasheed Yar Khan acknowledges his other commitments, which include acting as a fund manager to the Saudi Economic Development Corporation. If our officers other business affairs require them to devote substantial amounts of time to such affairs, it could limit their ability to devote time to our affairs and could have a negative impact on our ability to consummate a business combination. For a complete discussion of occupations and business affairs of our officers, directors and special advisor and the potential conflicts of interest that you should be aware of, see the section below entitled Management. Our officers and directors may in the future become affiliated with entities engaged in business activities similar to those intended to be conducted by us and, accordingly, may have conflicts of interest in determining to which entity a particular business opportunity should be presented. Although none of our officers, directors or affiliates have previously been associated with any blank check companies, our officers and directors may in the future become affiliated with entities, including other blank check companies, engaged in business activities similar to those intended to be conducted by us. Additionally, our officers and directors may become aware of business opportunities which may be appropriate for presentation to us as well as the other entities with which they are or may be affiliated. Further, certain of our officers and directors are currently involved in venture capital fund businesses. Due to these existing affiliations, they may have fiduciary obligations to present potential business opportunities to those entities prior to presenting them to us which could cause additional conflicts of interest. Accordingly, they may have conflicts of interest in determining to which entity a particular business opportunity should be presented. For a complete discussion of our management s business affiliations and the potential conflicts of interest that you should be aware of, see the sections entitled Management Directors and Officers and Management Conflicts of Interest. We cannot assure you that these conflicts will be resolved in our favor. Table of Contents All of our officers and directors own shares of our common stock which will not participate in liquidation distributions and, therefore, they may have a conflict of interest in determining whether or not a particular target business is appropriate for a business combination. All of our officers and directors and their respective affiliates own shares of our common stock that were issued in connection with our formation as to which they have waived their right to receive distributions upon our liquidation or failure to complete a business combination. Additionally, certain of our officers and directors and their affiliates, our special advisor and Trans-India Investors Limited have agreed to purchase an aggregate of 200,000 units in private placements that will occur immediately prior to this offering and have waived their liquidation rights with respect to the shares included in such units. The securities owned by our officers and directors and their affiliates will be worthless if we do not consummate a business combination. The personal and financial interests of our officers and directors may influence their motivation in identifying and selecting a target business and completing a business combination in a timely manner. Consequently, our directors and officers discretion in identifying and selecting a suitable target business may result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination are appropriate and in our public stockholders best interest. Our officers and directors will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the available funds outside the trust account, unless the business combination is consummated and, therefore, they may have a conflict of interest in determining whether or not a particular target business is appropriate for a business combination and in the public stockholders best interest. Our officers and directors will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the available funds held outside the trust account and the portion of the interest earned on the trust account released to us (which, because interest rates are unknown, may be insufficient to fund all of our working capital requirements) unless the business combination is consummated. The personal and financial interests of our officers and directors could influence their motivation in selecting a target business and, thus, there may be a conflict of interest when determining whether or not a particular business combination is in the stockholders best interest. The representatives of the underwriters will have the right to acquire units pursuant to the representatives unit purchase option issuable upon consummation of this offering and I-Bankers Securities, Inc. may have a conflict of interest in determining whether or not to consent to our redemption of outstanding warrants. The representatives of the underwriters will be issued a unit purchase option to acquire 500,000 units (5% of the units being offered) in the aggregate, including 500,000 warrants, upon consummation of this offering. Since we may redeem the warrants only with the prior consent of I-Bankers Securities, Inc., as representative of the underwriters, which firm may also hold warrants subject to redemption, I-Bankers Securities, Inc. may have a conflict of interest in determining whether or not to consent to such redemption. We cannot assure you that I-Bankers Securities, Inc. will consent to such redemption if it is not in its best interest even if it is in our best interest. If we complete a business combination that involves a target business focused on pharmaceutical compounds or biotechnology therapeutics or diagnostics, we may not be able to commercialize our product candidates. Before obtaining regulatory approval for the sale of drug product candidates, pharmaceutical and biotechnology therapeutic and diagnostic companies must conduct, at their own expense, extensive preclinical tests and clinical trials to demonstrate the safety and efficacy in humans of their product candidates. Preclinical and clinical testing is expensive, is difficult to design and implement, necessarily involves substantial cooperation with and reliance on third parties, can take many years to complete and is uncertain as to outcome. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, Table of Contents and interim results of a clinical trial do not necessarily predict final results. A failure of one or more clinical trials can occur at any stage of testing. Our failure to obtain and maintain regulatory approval for a product candidate following a business combination will prevent us from commercializing it. Product candidates and the activities associated with their development and commercialization, including their testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, will be subject to comprehensive regulation by the United States Food and Drug Administration, or FDA, and other United States regulatory agencies and by comparable authorities in other countries. Securing approval requires the submission of extensive preclinical and clinical data, information about product manufacturing processes and inspection of facilities and supporting information for each therapeutic indication to establish the product candidate s safety and efficacy. Varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate. The process of obtaining and maintaining regulatory approvals may vary and involves substantial regulatory discretion, is expensive, and often takes many years, if approval is obtained at all. We may also have to rely on third parties for the production of clinical and commercial quantities of drug product candidates. There may be a limited number of manufacturers operating under the FDA s current Good Manufacturing Practices, or GMP, regulations that will be both capable of manufacturing our future products and willing to do so. These manufacturers will be subject to inspection to ensure strict compliance with GMP regulations and other governmental regulations and corresponding foreign standards. We can not be certain that our manufacturers will be able to comply with these regulations and standards and we will not control their compliance, while we will risk regulatory sanctions, liabilities and penalties if they fail to comply. Our dependence upon others for the manufacture of product candidates and products may adversely affect our future profits and our ability, on a timely and competitive basis, both to develop product candidates and to commercialize any products that receive regulatory approval. Following a business combination, we may be liable to our clients for damages caused by disclosure of confidential information or system failures. Following a business combination, we may have access to, or may be required to collect and store, confidential client and customer data in connection with the acquired business. Following a business combination, many of our client agreements may not limit our potential liability for breaches of confidentiality. If any person, including any of our employees, penetrates our network security or misappropriates sensitive data, we could be subject to significant liability from our clients or from our clients customers for breaching contractual confidentiality provisions or privacy laws. Following a business combination, unauthorized disclosure of sensitive or confidential client and customer data, whether through breach of our computer systems, systems failure or otherwise, could damage our reputation and cause us to lose clients. If our common stock becomes subject to the penny stock rules promulgated by the SEC, broker dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected. If at any time we have net tangible assets of $5,000,000 or less and our common stock has a market price per share of less than $5.00, transactions in our common stock may be subject to the penny stock rules promulgated by the SEC under the Securities Exchange Act of 1934, as amended. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must: make a special written suitability determination for the purchaser; receive the purchaser s written agreement to a transaction prior to sale; provide the purchaser with risk disclosure documents that identify certain risks associated with investing in penny stocks and which describe the market for these penny stocks as well as a purchaser s legal remedies; and Table of Contents obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a penny stock can be completed. If our common stock becomes subject to these rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected. As a result, the market price of our securities may be depressed, and you may find it more difficult to sell our securities. Risks Related to Operations in India Acquisitions of companies with operations in India entail special considerations and risks. If we are successful in acquiring a target business with operations in India, we will be subject to, and possibly adversely affected by, the following risks: Political, economic, social and other factors in India may adversely affect our ability to achieve our business objective. Our ability to achieve our business objectives may be adversely affected by political, economic, social and religious factors, changes in Indian law or regulations and the status of India s relations with other countries. In addition, the economy of India may differ favorably or unfavorably from the U.S. economy in such respects as the rate of growth of gross domestic product, the rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position. According to the World Factbook published by the U.S. Central Intelligence Agency (updated as of September 7, 2006), the Indian government has exercised and continues to exercise significant influence over many aspects of the economy, and privatization of government-owned industries proceeds at a slow pace. Accordingly, Indian government actions in the future could have a significant effect on the Indian economy, which could have a material adverse affect on our ability to achieve our business objective. According to a published lecture on April 27, 2005 by Shri Montek S. Ahluwalia, Deputy Chairman, Planning Commission of the High Commission of India, London, an agency of the Indian Government, India has seen major changes in economic policies over the past two decades, which will help it to perform more effectively in a globalising world. These policy changes have included the liberalization of the extensive government controls, which existed on private investment and technology and the easing of access to foreign technology and foreign investment. In addition, the Indian government has directed the lowering of import duties, removal of quantitative restrictions on imports and the liberalization of foreign direct investment. In the 1990s a process of financial reforms began, which were aimed at introducing greater competition and tightening prudential norms in the banking sector, stock exchanges and capital market institutions and the insurance sector. These reforms were accompanied by efforts to strengthen institutions appropriate for the functioning of a market economy, including an independent judiciary and the rule of law, the prevalence of acceptable accounting standards, functioning stock exchanges and corporate practices. While the government s policies have resulted in improved economic performance, we cannot assure you that the economic recovery will be sustained. Moreover, we cannot assure you that these economic reforms will persist, and that any newly elected government will continue the program of economic liberalization of previous governments. Any change may adversely affect Indian laws and policies with respect to foreign investment and currency exchange. Such changes in economic policies could negatively affect the general business and economic conditions in India, which could in turn affect us and our ability to achieve our business objective. According to the World Factbook, religious and border disputes persist in India and remain pressing problems. For example, India has from time to time experienced civil unrest and hostilities with neighboring countries such as Pakistan. The longstanding dispute with Pakistan over the border Indian states of Jammu and Kashmir, a majority of whose population is Muslim, remains unresolved. If the Indian government is unable to control the violence and disruption associated with these tensions, the results could destabilize the economy and, consequently, adversely affect us and our ability to achieve our business objective. Table of Contents Since early 2003, there have also been military hostilities and civil unrest in Afghanistan, Iraq and other nearby countries. These events could adversely influence the Indian economy and, as a result, negatively affect us and our ability to achieve our business objective. Exchange controls that exist in India may limit our ability to utilize our cash flow effectively following a business combination. Following a business combination, we will be subject to India s rules and regulations on currency conversion. In India, the Foreign Exchange Management Act or FEMA, regulates the conversion of the Indian rupee into foreign currencies. FEMA provisions previously imposed restrictions on locally incorporated companies with foreign equity holdings in excess of 40% known as FEMA companies. Following a business combination, we will likely be a FEMA company as a result of our ownership structure. However, comprehensive amendments have been made to FEMA to add strength to the liberalizations announced in their recent economic policies. Such companies are now permitted to operate in India without any special restrictions, effectively placing them on par with domestic Indian companies. In addition, foreign exchange controls have been substantially relaxed. The Indian foreign exchange market, however, is not yet fully developed and we cannot assure you that the Indian authorities will not revert back to regulating FEMA companies. FEMA may also impose new restrictions on the convertibility of the rupee. Any future restrictions on currency exchanges may limit our ability to use our cash flow for the distribution of dividends to our shareholders or to fund operations we may have outside of India. Returns on investment in Indian companies may be decreased by withholding and other taxes. Our investments in India will incur tax risk unique to investment in India and in developing economies in general. Income that might otherwise not be subject to withholding of local income tax under normal international conventions may be subject to withholding of Indian income tax. Under treaties with India and under local Indian income tax law, income is generally sourced in India and subject to Indian tax if paid from India. This is true whether or not the services or the earning of the income would normally be considered as from sources outside India in other contexts. Additionally, proof of payment of withholding taxes may be required as part of the remittance procedure. Any withholding taxes paid by us on income from our investments in India may or may not be creditable on our income tax returns. We intend to avail ourselves of income tax treaties with India following a business combination to seek to minimize any Indian withholding tax or local tax otherwise imposed. However, we cannot assure you that the Indian tax authorities will recognize application of such treaties to achieve a minimization of Indian tax. We may also elect to create one or more foreign subsidiaries to effect the business combination to attempt to limit the potential tax consequences of a business combination. Certain sectors of the Indian economy are subject to government regulations that limit foreign ownership, which may adversely affect our ability to achieve our business objective which is to acquire one or more operating businesses with primary operations in India. The Indian government prohibits investments in certain sectors and limits the ownership of entities in certain other sectors. We intend to avoid sectors in which foreign investment is disallowed. This could limit the possible number of acquisitions that are available. The Indian government also regulates investments in certain other sectors (e.g. banking) by increasing the required amount of Indian ownership over time. We will evaluate the risk associated with investments in sectors in which ownership is restricted. However, we cannot assure you that management will be correct in its assessment of political and policy risks associated with investments in general and in particular in sectors that are regulated by the Indian government. Any changes in policy could have an adverse impact on our ability to achieve our business objective. Table of Contents If the relevant Indian authorities find us or the target business with which we ultimately complete a business combination to be in violation of any existing or future Indian laws or regulations, they would have broad discretion in dealing with such a violation, including, without limitation: levying fines; revoking our business and other licenses; and requiring that we restructure our ownership or operations. Because the Indian judiciary will determine the scope and enforcement under Indian law of almost all of our target business material agreements, we may be unable to enforce our rights inside and outside of India. Indian law can be expected to govern almost all of our target business material agreements, some of which may be with Indian governmental agencies. We cannot assure you that the target business will be able to enforce any of their material agreements or that remedies will be available outside of India. The system of laws and the enforcement of existing laws in India may not be as certain in implementation and interpretation as in the United States. The Indian government may be inexperienced in enforcing corporate and commercial law, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss of business, business opportunities or capital. The commercial success of any products under development by a target business we acquire will depend upon product superiority and sales and marketing efforts that together successfully generate continuing market acceptance by physicians, patients, healthcare payors and others in the medical community. Any products or services that we bring to the market following a business combination may not gain market acceptance by physicians, patients, healthcare payors and others in the medical community, unless they offer superior therapeutic or diagnostic benefits and safety that are communicated through effective sales and marketing efforts. If we do not achieve such acceptance, we may not generate material new product revenues or profits. Moreover, the healthcare industry is intensely competitive, and we will face competition with respect to current and future products, such that any market acceptance we do achieve will be subject to continual threat, including from market participants with substantially greater resources. Wage pressures in India may prevent an acquired company from sustaining a competitive advantage and may reduce its profit margins. Wage costs in India have historically been significantly lower than wage costs in the United States and Europe for comparably skilled professionals, which we expect will be one of the competitive strengths of a company we acquire. However, if, following a business combination, wages for skilled professionals increase in India due to increasing competition, we may not be able to sustain this competitive advantage, which could negatively affect profit margins. In addition, we may need to increase the levels of an acquired company s employee compensation to remain competitive with other employers, or seek to recruit in other low labor cost areas to keep its wage costs low. Compensation increases may result in decreased profitability of a company we acquire. India has different corporate disclosure, governance and regulatory requirements than those in the United States which may make it more difficult or complex to consummate a business combination. Companies in India are subject to accounting, auditing, regulatory and financial standards and requirements that differ, in some cases significantly, from those applicable to public companies in the United States, which may make it more difficult or complex to consummate a business combination. In particular, the assets and Table of Contents profits appearing on the financial statements of an Indian company may not reflect its financial position or results of operations in the way they would be reflected had such financial statements been prepared in accordance with United States Generally Accepted Accounting Principals, or GAAP. Moreover, companies in India are subject to a different regulatory scheme than United States companies with respect to such matters as insider trading rules, tender offer regulation, shareholder proxy requirements and the timely disclosure of information. Accordingly, appropriate adjustments to the financial statements of an Indian company may be required in order to appropriately determine the underlying valuation of the Indian company. Legal principles relating to corporate affairs and the validity of corporate procedures, directors fiduciary duties and liabilities and shareholders rights for Indian corporations may differ from those that may apply in the United States, which may make the consummation of a business combination with an Indian company more difficult than a business combination with a company based in the United States. The requirement that Indian companies provide accounting statements that are in compliance with United States GAAP may limit the potential number of acquisition targets. To meet the requirements of the United States Federal securities laws, in order to seek stockholder approval of a business combination, a proposed target business will be required to have financial statements which are prepared in accordance with, or which can be reconciled to, GAAP and audited in accordance with United States Generally Accepted Auditing Standards, or GAAS. GAAP and GAAS compliance may limit the potential number of acquisition targets. Foreign currency fluctuations could cause a business combination to be more expensive. Because our business objective is to acquire one or more operating businesses with primary operations in India, changes in the U.S. dollar-Indian rupee exchange rate may affect our ability to achieve such objective. The exchange rate between the Indian rupee and the U.S. dollar has changed substantially in the last two decades and may fluctuate substantially in the future. If the U.S. dollar declines in value against the Indian rupee, any business combination will be more expensive and therefore more difficult to complete. Furthermore, we may incur costs in connection with conversions between United States dollars and Indian rupees, which may make it more difficult to consummate a business combination. If political relations between the United States and India weaken, it could make a target business operations less attractive. The relationship between the United States and India may deteriorate over time. Changes in political conditions in India and changes in the state of Indian-United States relations are difficult to predict and could result in restrictions on our future operations or cause potential target businesses to become less attractive. This could lead to a decline in our profitability following a business combination. The laws of India may not protect intellectual property rights to the same extent as those of the United States, and we may be unsuccessful in protecting intellectual property rights following a business combination and may also be subject to third party claims of intellectual property infringement. The one or more businesses we acquire will likely rely on a combination of patent, copyright, trademark and design laws, trade secrets, confidentiality procedures and contractual provisions to protect its intellectual property. However, the laws of India may not protect proprietary rights to the same extent as laws in the United States. Therefore, efforts to protect such intellectual property may not be adequate. Furthermore, competitors may independently develop similar technology or duplicate its products or services. Unauthorized parties may infringe upon or misappropriate its products, services or proprietary information. Table of Contents Risks Associated with this Offering Our existing stockholders paid an aggregate of $20,000, or approximately $0.008 per unit, for their initial common stock and warrants and, accordingly, you will experience immediate and substantial dilution from the purchase of our units. The difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering and the private placements constitutes the dilution to you and the other investors in this offering. The fact that our existing stockholders acquired their initial shares of common stock at a nominal price has significantly contributed to this dilution. Assuming the offering and the private placements are completed, you and the other new investors will incur an immediate and substantial dilution of approximately 31.8% or $2.54 per share (the difference between the pro forma net tangible book value per share of $5.46 and the initial offering price of $8.00 per unit). Our outstanding warrants may substantially reduce the market price of our common stock and make it more difficult to effect a business combination. In connection with this offering and the private placements, we will be issuing warrants to purchase shares of our common stock. Following the offering, there will be 10,200,000 warrants, or 11,700,000 warrants if the underwriters over-allotment option is exercised in full. To the extent we issue shares of common stock to effect a business combination, the potential for the issuance of substantial numbers of additional shares upon exercise of these warrants could make us a less attractive acquisition vehicle in the eyes of a target business as such securities, when exercised, will increase the number of issued and outstanding shares of our common stock and may reduce the value of the shares issued to complete the business combination. Accordingly, our warrants may make it more difficult to effectuate a business combination or increase the cost of the target business. Additionally, the sale, or even the possibility of sale, of the shares underlying the warrants could substantially reduce the market price for our securities or affect our ability to obtain future public financing. If and to the extent these warrants and options are exercised, you may experience dilution to your holdings. The warrants are redeemable upon short notice, which will require you to exercise the warrants or receive the redemption price of $0.01 per warrant. We have the ability to redeem outstanding warrants with the prior consent of I-Bankers Securities, Inc. upon 30 days prior notice at any time after they become exercisable and prior to their expiration, at a price of $0.01 per warrant, provided that the last reported sales price of the common stock equals or exceeds $11.50 per share for any 20 trading days within a 30 trading-day period ending on the third business day prior to proper notice of such redemption. Such redemption would force you to exercise your warrants on short notice or accept the redemption price of $0.01 per warrant. An effective registration statement or a current prospectus may not be in place when an investor desires to exercise warrants or the warrants are redeemed, thus precluding such investor from being able to exercise his, her or its warrants. No warrants will be exercisable and we will not be obligated to issue shares of common stock unless, at the time a holder seeks to exercise, we have registered with the SEC the shares of common stock issuable upon exercise of the warrants and a prospectus relating to the common stock issuable upon exercise of the warrants is current. Under the terms of the warrant agreement, we have agreed to use our reasonable best efforts to meet these conditions and to maintain a current prospectus relating to common stock issuable upon exercise of the warrants until the expiration of the warrants. However, we cannot assure you that we will be able to do so. Additionally, we have no obligation to settle the warrants for cash in the absence of an effective registration statement or under any other circumstances. The warrants may be deprived of any value, the market for the warrants may be limited and the holders of warrants may not be able to exercise their warrants if the common Table of Contents stock is not registered with the SEC or if the prospectus relating to the common stock issuable upon the exercise of the warrants is not current. Consequently, the warrants may expire unexercised or if redeemed at such time would be practically worthless. If our existing stockholders exercise their registration rights, it may substantially reduce the market price of our units, common stock and warrants, and the existence of these rights may make it more difficult to effect a business combination. Our existing stockholders are entitled to demand that we register the resale of their initial securities, including units, shares of common stock and warrants, and shares of common stock underlying such securities, at any time after the date on which their securities are released from escrow, which will be upon consummation of a business combination. If our existing stockholders exercise their registration rights with respect to all of their securities, then there would be up to an additional 2,900,000 shares of common stock (which amount includes 2,500,000 shares of our common stock, 200,000 shares of common stock underlying the private placement units and 200,000 shares of our common stock issuable upon exercise of the warrants included in such units) eligible for trading in the public market. The presence of this additional number of securities eligible for trading in the public market may substantially reduce the market price of our securities. In addition, the existence of these rights may make it more difficult to effectuate a business combination, or increase the cost of the target business, since the stockholders of the target business may be discouraged from entering into a business combination with us or request a higher price for their securities as a result of these registration rights, and the potential future effect their exercise may have on the trading market for our securities. There is currently no market for our securities, and a market for our securities may not develop, which could limit the liquidity and price of our securities. There is no market for our securities. Therefore, stockholders should be aware that they cannot benefit from information about prior market history as to their decisions to invest, which means they are at further risk if they invest. In addition, the price of the securities, after the offering, can vary due to general economic conditions and forecasts, our general business condition and the release of our financial reports. Furthermore, an active trading market for our securities may never develop or, if developed, it may not be maintained. Investors may be unable to sell their securities unless a market can be established or maintained. We have substantial discretion as to how to spend the proceeds of this offering which are outside of the trust. Our management has broad discretion as to how to spend the proceeds of this offering which are held outside of the trust account and any interest earned on the trust account released to us and may spend these proceeds in ways with which our stockholders may not agree. If we choose to invest some of the proceeds held outside of the trust account, we cannot predict that investment of the proceeds will yield a favorable return, if any. If we are deemed to be an investment company, we may be required to institute burdensome compliance requirements, and our activities may be restricted, which may make it more difficult for us to complete a business combination or operate over the near term or long term in our intended manner. If we are deemed to be an investment company under the Investment Company Act of 1940, our activities may be restricted, including: restrictions on the nature of our investments; and restrictions on the issuance of securities, which may make it difficult for us to complete a business combination. Table of Contents In addition, we may have imposed upon us burdensome requirements, including: registration as an investment company; adoption of a specific form of corporate structure; and reporting, record keeping, voting, proxy and disclosure requirements and other rules and regulations. We do not believe that our anticipated principal activities will subject us to the Investment Company Act of 1940. To this end, the proceeds held in trust may only be invested by the trustee in Treasury Bills issued by the United States with maturity dates of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940. However, this offering is not intended for persons who are seeking a return on investments in government securities. The escrow account and the purchase of government securities for the account is intended as a holding place for funds pending the earlier to occur of either (i) the consummation of our primary business objective, which is a business combination, or (ii) absent a business combination, our dissolution and return of the funds held in this account. In addition, if we do not complete a business combination within 18 months after the consummation of this offering, or within 24 months after the consummation of this offering if the extension criteria have been satisfied, our certificate of incorporation (a) provides that our corporate powers will automatically thereafter be limited to acts and activities relating to dissolving and winding up our affairs, including liquidation, and (b) requires that our board of directors within 15 days adopt a resolution finding our dissolution advisable and provide notice as soon as possible thereafter of a special meeting of stockholders to vote on our dissolution. Inasmuch as we cannot assure you that our stockholders will approve our dissolution in a timely manner or ever approve our dissolution so that we can liquidate and distribute the funds in the trust account to public stockholders, we may nevertheless be deemed to be an investment company. If we were deemed to be subject to that act, compliance with these additional regulatory burdens would require additional expense for which we have not budgeted. The American Stock Exchange may delist our securities from trading on its exchange which could limit investors ability to make transactions in our securities and subject us to additional trading restrictions. Our securities have been approved for listing on the American Stock Exchange, a national securities exchange, subject to official notice of listing. Once listed, we cannot assure you that our securities will continue to be listed on the American Stock Exchange in the future prior to a business combination. Additionally, in connection with our business combination, it is likely that the American Stock Exchange may require us to file a new initial listing application and meet its initial listing requirements as opposed to its more lenient continued listing requirements. We cannot assure you that we will be able to meet those initial listing requirements at that time. If the American Stock Exchange delists our securities from trading on its exchange, we could face significant material adverse consequences including: a limited availability of market quotations for our securities; a determination that our common stock is a penny stock which will require brokers trading in our common stock to adhere to more stringent rules and possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock; a limited amount of news and analyst coverage for our company; and a decreased ability to issue additional securities or obtain additional financing in the future. Our directors may not be considered independent under the policies of the North American Securities Administrators Association, Inc. No salary or other compensation will be paid to our directors for services rendered by them on our behalf prior to or in connection with a business combination. Accordingly, we believe our non-executive directors Table of Contents would be considered independent as that term is commonly used. However, under the policies of the North American Securities Administrators Association, Inc., an international organization devoted to investor protection, because each of our directors own shares of our securities and may receive reimbursement for out-of-pocket expenses incurred by them in connection with activities on our behalf (such as identifying potential target businesses and performing due diligence on suitable business combinations), state securities administrators could argue that all of such individuals are not independent. If this were the case, they would take the position that we would not have the benefit of any independent directors examining the propriety of expenses incurred on our behalf and subject to reimbursement. Additionally, there is no limit on the amount of out-of-pocket expenses that could be incurred and there will be no review of the reasonableness of the expenses by anyone other than our board of directors, which would include persons who may seek reimbursement, or a court of competent jurisdiction if such reimbursement is challenged. Although we believe that all actions taken by our directors on our behalf will be in our best interests, whether or not they are deemed to be independent, we cannot assure you that this will actually be the case. If actions are taken, or expenses are incurred that are actually not in our best interests, it could have a material adverse effect on our business and operations, and a material adverse effect on the prices of our securities held by public stockholders. Because our existing stockholders initial equity investment for their initial shares was only $20,000, our offering may be disallowed by state administrators that follow the North American Securities Administrators Association, Inc. Statement of Policy on development stage companies. Pursuant to the Statement of Policy Regarding Promoter s Equity Investment promulgated by The North American Securities Administrators Association, Inc., any state administrator may disallow an offering of a development stage company if the initial equity investment by a company s promoters does not equal a certain percentage of the aggregate public offering price. Our promoters initial investment of $20,000 for their initial shares is less than the required $2,110,000 minimum amount pursuant to this policy. Accordingly, a state administrator would have the discretion to disallow our offering if it wanted to. We cannot assure you that our offering would not be disallowed pursuant to this policy. Because after the consummation of a business combination a significant portion of our assets may be located outside of the United States, it may be difficult for investors to enforce their legal rights against such assets. After the consummation of a business combination, a significant portion of our assets may be located outside of the United States. As a result, it may not be possible for investors in the United States to enforce their legal rights, to effect service of process upon our directors or officers, or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties of our directors and officers under Federal securities laws. Table of Contents
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+PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering you should read the entire prospectus carefully including the risk factors and the financial statements and the related notes and schedules thereto. Unless otherwise stated in this prospectus, references to we, us, or our refer to Union Street Acquisition Corp. Unless we tell you otherwise, the information in this prospectus assumes that the underwriters have not exercised their over-allotment option. The term business combination as used in this prospectus means an acquisition by us through a merger, capital stock exchange, stock purchase, asset acquisition, or other similar business combination of one or more operating businesses in the business services industry. The term existing stockholders as used in this prospectus refers to those persons who owned shares of our common stock immediately prior to the completion of this offering and includes all of our executive officers and directors; and the term public stockholder as used in this prospectus refers to those persons who purchase securities offered by this prospectus in this offering and in the secondary market, including any of our existing stockholders. However, our existing stockholders status as a public stockholder shall exist only with respect to those securities offered pursuant to this prospectus. We are a recently organized blank check company formed for the purpose of acquiring, through a business combination, one or more operating businesses in the business services industry in North America. To date, our efforts have been limited solely to organizational activities. The business services industry, a subset of the services sector, encompasses companies that undertake the management, delivery or operation of one or more business processes or functions of other companies. Among the areas that we intend to focus on are marketing services, business information services, human capital management, facilities and logistics services and professional services. We do not have any specific business combination under consideration and we have not, nor has anyone on our behalf, contacted any prospective target business or had any discussions, formal or otherwise, with respect to such a transaction. We have not, nor have any of our agents or affiliates, been approached by any prospective target business, or representatives of any prospective target business, with respect to a possible business combination with our company. Additionally, we have not, nor has anyone on our behalf, taken any measure, directly or indirectly, to identify or locate a specific target business nor have we engaged or retained any agent or other representative to identify or locate a specific target business. We intend to direct our efforts on identifying target companies in the business services industry that have at least one of the following characteristics: a strong fundamental, under-capitalized business with the potential to further grow its services, products, brands and/or geographic reach; a valuable asset embedded in an underperforming business that would be more effectively utilized by improved management or technological or operational improvements; and a service or product offering that may be enhanced by one or more bolt on acquisitions to complete the service or product offering of a target company. We believe that the skills and experience of our executive officers will be crucial to consummating a successful business combination. Our executive officers and directors have over 140 years of collective experience and a proven track record of advising, acquiring, building, operating and selling public and private business services companies. Our team includes: A. Clayton Perfall, our Chairman, Chief Executive Officer and President, is Chief Executive Officer of AHL Services, Inc. and, for four years, was the Chief Financial Officer of Snyder Communications, Inc. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents He has served on the board of directors of companies sponsored by the Carlyle Group, Bain Capital and GTCR Golder Rauner. Brian H. Burke, our Chief Financial Officer, Treasurer and Director, was Chief Financial Officer of AHL Services Inc. and was Vice President of Corporate Development of Snyder Communications, Inc. He has been a business partner with Mr. Perfall for over 20 years. Matthew C. Fletchall, our Vice-President of Corporate Development and Secretary, was Vice President of Corporate Development of AHL Services, Inc. He has been a colleague of both Mr. Perfall and Mr. Burke since 1995. John T. Schwieters, our Director, as Vice Chairman of Perseus, LLC, is involved in sourcing, acquiring, operating and selling middle-market businesses. He is also a director of Manor Care Inc., Smithfield Foods, Danaher Corporation and Choice Hotels International and the former Managing Partner of Arthur Andersen s Mid-Atlantic region. Eran Broshy, our Director, is the Chairman and Chief Executive Officer of inVentiv Health, Inc. (Nasdaq: VTIV), a leading provider of outsourced clinical, communications and commercial services to the pharmaceutical and life sciences industry. InVentiv was recently ranked number 15 on FORTUNE Magazine s 100 Fastest-Growing Companies listing for 2006. David B. Kay, our Director, as Managing Director of Navigant Consulting, leads a practice that provides financial, accounting and operational consulting services to large, complex multinational companies. For additional information on the background of our executive officers, please see the sections in this prospectus entitled Proposed Business Experience of Our Executive Officers and Directors and Management . Our executive officers and directors have built and maintained extensive networks of relationships that we plan to use to identify and generate acquisition opportunities. These relationships include, among other sources, executives and board members at public and private companies, business brokers, private equity and venture capital firms, consultants, investment bankers, attorneys and accountants. Our executive officers currently intend to stay involved in our management following an initial business combination. The roles that they will assume will depend on the type of business with which we combine and the specific skills and depth of the target company s management. If one or more of our executive officers remain with our company, we may enter into employment or other compensation arrangements with them following an initial business combination, the terms of which have not yet been determined. While we may seek to consummate business combinations with more than one target business, our initial business combination must be with one or more operating businesses whose fair market value is at least equal to 80% of the balance in the trust account (less the deferred underwriting discounts and commissions and taxes payable) at the time of such acquisition. As a result, we expect that an initial public offering of $100,000,000 will enable us to consummate an initial business combination with a business whose fair market value is at least $75,840,000. The actual amount of consideration which we will be able to pay for the initial business combination will depend on whether we choose, or are able, to pay a portion of the initial business combination consideration with shares of our common stock or if we are able to finance a portion of the consideration with debt or equity financing. No financing arrangements have been entered into or contemplated with any third parties to raise any additional funds, whether through the sale of securities or otherwise, that we may need if we decide to consummate an initial business combination for consideration in excess of our available assets at the time of acquisition. Amendment No. 4 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents We were organized and sponsored by Union Street Capital Management, LLC, a Delaware limited liability company owned and controlled by our executive officers, which has as its members family trusts affiliated with A. Clayton Perfall and Brian H. Burke and Matthew C. Fletchall individually. Union Street Capital Management, LLC will provide administrative services to us, but otherwise has no business activities other than sponsoring us. We are a Delaware corporation formed on July 18, 2006. Our offices are located at 102 South Union Street, Alexandria, VA 22314 and our telephone number is (703) 682-0730. The Private Placement Union Street Capital Management, LLC has agreed to purchase an aggregate of 3,000,000 warrants from us at a price of $1.00 per warrant for an aggregate purchase price of $3,000,000 in a private placement immediately prior to the completion of this offering. The private placement warrants will be identical to the warrants underlying the units being offered by this prospectus, except that upon a redemption of warrants by us, Union Street Capital Management, LLC will have the right to exercise those private placement warrants on a cashless basis so long as such warrants are held by the original purchaser, its members or former members, members of their immediate families or their controlled affiliates. Exercising warrants on a cashless basis means that in lieu of paying the aggregate exercise price for the shares of common stock being purchased upon exercise of the warrant in cash, the holder will forfeit a number of shares underlying the warrants with a market value equal to such aggregate exercise price. Accordingly, we would not receive additional proceeds to the extent the warrants are exercised on a cashless basis. Warrants included in the units sold in this offering are not exercisable on a cashless basis, and the exercise price with respect to the warrants will be paid in cash directly to us. The private placement warrants will not be exercisable at any time when a registration statement is not effective and a prospectus is not available for use by the public warrant holders. Table of Contents The Offering Securities Offered: 12,500,000 units, at $8.00 per unit, each unit consisting of: one share of common stock; and one warrant. The units will begin trading on or promptly after the date of this prospectus. The common stock and warrants will begin trading separately 90 days after the earlier to occur of the expiration of the underwriters option to purchase up to 1,875,000 additional units to cover over-allotments or the exercise in full or in part of that option, unless the sole book-running manager determines that an earlier date is acceptable. In no event will separate trading of the common stock and warrants commence until we have filed an audited balance sheet reflecting our receipt of the gross proceeds of this offering and issued a press release announcing when separate trading will begin. We will file a Current Report on Form 8-K, including an audited balance sheet, promptly after the completion of this offering, which is anticipated to take place four business days after the date of this prospectus. The audited balance sheet will include proceeds we receive from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Current Report on Form 8-K and, if such over-allotment option is exercised after such time, we will file an additional Current Report on Form 8-K including a balance sheet reflecting our receipt of the gross proceeds from the exercise of the over-allotment. For more information, see the section in this prospectus entitled Description of Securities Units. Common Stock: Number of shares outstanding before the date of this prospectus: 3,125,000 shares Number of shares to be outstanding after completion of this offering: 15,625,000 shares Warrants: Number of warrants outstanding before the date of this prospectus: 0 warrants Number of warrants to be outstanding after completion of this offering and the private placement: 15,500,000 warrants Exercisability: Each warrant is exercisable for one share of common stock. Exercise price: $6.00 Exercise period: The warrants will become exercisable on the later of the consummation of an initial business combination on the terms described in this prospectus, or , 2007 unless we elect to redeem such warrants. 102 South Union Street Alexandria, VA 22314 (703) 682-0730 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant s Principal Executive Offices) Table of Contents The warrants will expire at 5:00 p.m., New York City time, on , 2011 or earlier, upon redemption by us; provided that if, during the period in which the warrants are exercisable, a registration statement under the Securities Act of 1933, as amended, which we refer to as the Securities Act, relating to the shares of common stock issuable upon exercise of the warrants is not effective, or a prospectus relating to the shares of common stock issuable upon exercise of the warrants is not available for use by the public warrant holders, the expiration date for the warrants will be extended by the number of days during which such a registration statement was not effective or such prospectus was not available for use. Private Placement: Union Street Capital Management, LLC has agreed to purchase an aggregate of 3,000,000 warrants from us at a price of $1.00 per warrant, for an aggregate purchase price of $3,000,000, in a private placement immediately prior to the completion of this offering. Redemption: We may redeem the outstanding warrants at any time after the warrants become exerciseable: in whole and not in part; at a price of $0.01 per warrant; upon a minimum of 30 days prior written notice; and only if the last sales price of our common stock on the American Stock Exchange, or other national securities exchange on which our common stock may be traded, equals or exceeds $11.50 per share for any 20 trading days within a 30-trading-day period ending three business days before we sent the notice of redemption, and a registration statement under the Securities Act relating to the shares of common stock issuable upon exercise of the warrants is effective and expected to remain effective to and including the redemption date and a prospectus relating to the shares of common stock issuable upon exercise of the warrants is available for use by the public warrant holders and expected to remain available for use to and including the redemption date. We established the last criterion to provide warrant holders with a premium to the initial warrant exercise price, as well as a degree of liquidity to cushion the market reaction, if any, to our election to redeem the warrants. If the above conditions are satisfied and we call the warrants for redemption, the warrant holders will then be entitled to exercise their warrants before the date scheduled for redemption. However, there can be no assurance that the price of the common stock will exceed $11.50 or the warrant exercise price after the redemption call is made. We do not need the consent of the underwriters or our stockholders to redeem the outstanding warrants. A. Clayton Perfall, Chief Executive Officer and President UNION STREET ACQUISITION CORP. 102 South Union Street Alexandria, VA 22314 (703) 682-0730 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) Table of Contents Union Street Capital Management, LLC or its permitted transferees will have the right to exercise the private placement warrants on a cashless basis, after delivery of a notice of redemption by us. Warrants included in the units issued in this offering are not exercisable on a cashless basis. Proposed American Stock Exchange symbols for our securities: Units: USQ-U Common Stock: USQ Warrants: USQ-W Offering proceeds to be held in the trust account: $98,500,000 of the proceeds from this offering and the private placement (approximately $7.88 per unit) will be placed in a trust account maintained by Continental Stock Transfer & Trust Company, acting as trustee, pursuant to an agreement to be signed prior to the date of this prospectus. Of the proceeds held in the trust account, $3,700,000, representing deferred underwriting discounts and commissions, will be paid to the underwriters upon consummation of an initial business combination (subject to a $0.296 per share reduction for public stockholders who vote against the initial business combination and exercise their conversion rights as described below). The proceeds held in the trust account will not be released until the earlier of (x) the consummation of an initial business combination on the terms described in this prospectus or (y) our dissolution and liquidation. There can be released to us from the trust account (i) interest income earned on the trust account balance to pay any income taxes on such interest and (ii) interest income earned, net of taxes payable, on the trust account of up to $1,500,000 to fund our working capital requirements, including, in such an event, the costs of our dissolution and liquidation. See Use of Proceeds. During the 12-month period following completion of the offering such amount will be limited to the greater of 50% of the interest income earned, net of taxes payable, and $1,250,000. All remaining interest earned on the trust account (net of taxes payable) will remain in the trust account for our use in consummating an initial business combination and for payment of the deferred underwriting compensation or released to the public stockholders upon their exercise of conversion rights or upon our dissolution and liquidation. Unless and until an initial business combination is consummated, the proceeds held in the trust account will not be available for our use for any expenses related to this offering or any expenses which we may incur related to the investigation and selection of a target business or the negotiation of an agreement to consummate an initial business combination, including to make a down payment or deposit or fund a lock-up or no-shop provision with respect to a potential business combination. These expenses Copies to: Kevin J. Lavin, Esq. ARNOLD & PORTER LLP 1600 Tysons Blvd., Suite 900 McLean, VA 22102 (703) 720-7000 Fax No.: (703) 720-7399 Jack I. Kantrowitz, Esq. SIDLEY AUSTIN LLP 787 Seventh Avenue New York, NY 10019 (212) 839-5300 Fax No.: (212) 839-5599 Table of Contents may be paid prior to an initial business combination only from the $500,000 of net proceeds from this offering not held in the trust account plus interest earned on the trust account of up to $1,500,000, after tax, as set forth above. None of the warrants may be exercised until after the consummation of an initial business combination. Thus, after the proceeds of the trust account have been disbursed, the warrant exercise price will be paid directly to us upon the exercise of any warrants. Payments to executive officers and directors and existing stockholders: There will be no compensation, fees or other payments paid to our executive officers, directors and existing stockholders or any of their respective affiliates prior to, or for any services they render in order to effectuate, the consummation of our initial business combination other than: repayment of a $200,000 interest-free loan made by Union Street Capital Management, LLC to cover expenses relating to the offering contemplated by this prospectus; payment to Union Street Capital Management, LLC or its assignee of a monthly fee of $7,500 for general and administrative services, including office space, utilities, and secretarial support. We believe that, based on rents and fees for similar services in Alexandria, Virginia, the fees charged by Union Street Capital Management, LLC are at least as favorable as we could have obtained from unaffiliated third parties; and reimbursement of out-of-pocket expenses incurred by our executive officers and directors in connection with activities on our behalf, such as identifying and investigating target businesses for our initial business combination. Escrow of existing stockholders shares and warrants: On the date of this prospectus, our existing stockholders, including all of our executive officers and directors, will place the shares and warrants they own before the completion of this offering, including the private placement warrants purchased, into an escrow account maintained by Continental Stock Transfer & Trust Company, acting as escrow agent pursuant to an escrow agreement. These shares and warrants will not be transferable during the escrow period (as defined below), except for transfers to our executive officers, our directors, certain controlled affiliates of our executive officers or directors and transfers of the shares to family members and trusts for estate planning purposes and upon death of the owner thereof. Any shares or warrants held by these transferees would remain subject to the escrow agreement. The shares will not be released from escrow until one year following our initial business combination, and the warrants will not be released from escrow until the consummation of our initial business combination, which we refer to as the escrow period, unless we were to complete a transaction after the consummation of the initial Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Table of Contents business combination which results in all of the stockholders of the combined entity having the right to exchange their shares of common stock for cash, securities or other property. The stockholders must approve our initial business combination: We will seek stockholder approval before we consummate our initial business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable state law. In connection with any vote required for our initial business combination, our executive officers, directors and existing stockholders have agreed to vote all of the shares of common stock owned by them prior to the completion of this offering with respect to an initial business combination in the same manner that the majority of the shares of common stock offered hereby are voted by our public stockholders other than our existing stockholders. Our executive officers, directors and existing stockholders also have agreed that if they acquire shares of common stock in or following completion of this offering, they will vote all such acquired shares in favor of our initial business combination. We will proceed with our initial business combination only if: a majority of the shares of common stock voted by the public stockholders are voted in favor of the initial business combination; and public stockholders owning fewer than 20% of the shares sold in this offering both vote against the initial business combination and exercise their conversion rights as described below. Voting against the initial business combination alone will not result in an election to exercise a stockholder s conversion rights. A stockholder must also affirmatively exercise such conversion rights at or prior to the time an initial business combination is voted upon by the stockholders. For more information, see the section entitled Proposed Business Consummating an Initial Business Combination Stockholder Approval of Our Initial Business Combination. Conversion rights for stockholders voting to reject our initial business combination: Public stockholders voting against our initial business combination will be entitled to convert their stock into a pro rata share of the aggregate amount then in the trust account (including the amount held in the trust account representing the deferred portion of the underwriters discounts and commissions), including any interest earned on their pro rata share (net of taxes payable on such interest income and after release of up to $1,500,000 of interest income, after tax, to fund working capital requirements), if the initial business combination is approved and consummated. Public stockholders who convert their stock into a pro rata share of the trust account will continue to have the right to exercise any warrants they may hold. Our existing stockholders will not have any conversion rights with Title of Each Class of Securities to be Registered Amount to be Registered Proposed Maximum Offering Price Per Unit Proposed Maximum Aggregate Offering Price(1) Amount of Registration Fee(4) Units, consisting of one share of Common Stock, $0.0001 par value, and one Warrant(2) 14,375,000 Units $8.00 $115,000,000 $12,305 Shares of Common Stock included as part of the Units(3) 14,375,000 Shares Warrants included as part of the Units(3) 14,375,000 Warrants Shares of Common Stock underlying the Warrants included in the Units(4) 14,375,000 Shares $6.00 $86,250,000 $9,229 Total $201,250,000 $21,534 Table of Contents respect to shares of common stock held by them prior to the completion of this offering or with respect to any of the shares sold in this offering that they may acquire. We view the procedures governing the approval of our initial business combination, each of which are set forth in our amended and restated certificate of incorporation, as obligations to our stockholders, and neither we nor our board of directors will propose, or seek stockholder approval of, any amendment of these procedures. Dissolution and Liquidation if no business combination: We have agreed with the trustee to promptly adopt a plan of dissolution and liquidation and initiate procedures for our dissolution and liquidation and the distribution of our assets, including the funds held in the trust account if we do not consummate an initial business combination within 18 months after completion of this offering (or within 24 months after the completion of this offering if a letter of intent, agreement in principle or definitive agreement has been executed within 18 months after completion of this offering and the initial business combination related thereto has not been consummated within such 18-month period). We cannot provide investors with assurances of a specific time frame for our dissolution and distribution of our assets to our creditors and stockholders. Pursuant to our amended and restated certificate of incorporation, upon the expiration of such time periods, our purpose and powers will be limited to acts and activities relating to dissolving, liquidating and winding up. As required under Delaware law, we will seek stockholder approval for any plan of dissolution and liquidation. Upon the approval by our stockholders of our plan of dissolution and liquidation, we will dissolve and liquidate our assets, including the trust account and, after reserving amounts sufficient to cover our liabilities and obligations to creditors and the costs of dissolution and liquidation, distribute those assets solely to our public stockholders. Our existing stockholders, including our executive officers and directors, have waived their rights to participate in any liquidating distributions occurring upon our failure to consummate an initial business combination with respect to shares of common stock acquired by them prior to this offering and have agreed to vote all of their shares in favor of any such plan of dissolution and liquidation. We estimate that, in the event we liquidate the trust account, a public stockholder will receive approximately $7.88 per share, without taking into account interest earned on the trust account that remains in the trust account at such time (net of taxes payable on such interest income and after release of up to $1,500,000 of interest income, after tax, to fund our working capital requirements, including the costs of our dissolution and liquidation). We expect that all costs associated with implementing our plan of dissolution and liquidation as well as payments to any creditors will be funded out of the proceeds of this offering not held in the trust account, but if we do not have sufficient funds outside of the trust account for those purposes or to cover our liabilities and (1) Estimated solely for the purpose of calculating the registration fee. (2) Includes 1,875,000 Units, consisting of 1,875,000 Shares of Common Stock and 1,875,000 Warrants, which may be issued upon exercise of a 30-day option granted to the underwriters to cover over-allotments, if any. (3) No fee required pursuant to Rule 457(g). (4) Fee previously paid. Table of Contents obligations, the amount distributed to our public stockholders could be less than $7.88 per share. We estimate that our total costs and expenses for implementing and completing our stockholder-approved plan of dissolution and liquidation will be in the range of $50,000 to $75,000. This amount includes all costs and expenses relating to filing of our dissolution in the State of Delaware, the winding up of our company and the costs of a proxy statement and meeting relating to the approval by our stockholders of our plan of dissolution and liquidation. We believe that there should be sufficient funds available from the proceeds not held in the trust account, plus interest earned on the trust account available to us as working capital, to fund these expenses, although we cannot give you assurances that these will be sufficient funds for such purposes. If these funds are insufficient to cover the costs of our dissolution and liquidation, Messrs. Perfall and Burke have agreed to indemnify us for our direct, out-of-pocket costs associated with such dissolution and liquidation, excluding any costs related to litigation, including litigation that would result from claimants disputing the validity of waivers that they have delivered, pertaining to such dissolution and liquidation. In addition, if we seek approval from our stockholders to consummate an initial business combination within 90 days of the expiration of 24 months after the completion of this offering (assuming that the period in which we need to consummate a business combination has been extended, as provided in our amended and restated certificate of incorporation), the proxy statement related to such business combination will also seek stockholder approval for our board of director s recommended plan of dissolution and liquidation in the event our stockholders do not approve such business combination. If the transaction that permitted us to extend the 18-month time period is not approved, we will seek dissolution and liquidation promptly, even if it is more than 90 days prior to the end of the 24-month period. If no proxy statement seeking the approval of our stockholders for an initial business combination has been filed 30 days prior to the date that is 24 months after the completion of this offering, our board will, prior to such date, convene, adopt and recommend to our stockholders a plan of dissolution and liquidation and, as promptly as practicable, file a proxy statement with the SEC seeking stockholder approval for such plan. For more information regarding the dissolution and liquidation procedures and the factors that may impair our ability to distribute our assets, including stockholder approval requirements, or cause distributions to be less than $7.88 per share, please see the sections entitled Risk Factors Risks Relating to the Company and the Offering If third parties bring claims against us, the proceeds held in the trust account could be reduced and the per share liquidation price received by our public stockholders would be less than approximately $7.88 per share, Risks Relating to the Company and the Offering Under Delaware law, our dissolution and liquidation requires the approval of the holders of a majority of our outstanding The Registrant hereby amends the Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Table of Contents common stock, without which we will not be able to dissolve and liquidate and distribute our assets to our public stockholders, Risks Relating to the Company and the Offering Our stockholders may be held liable for claims by third parties against us to the extent of distributions received by them in our dissolution, and Proposed Business Consummating an Initial Business Combination Dissolution and Liquidation if No Business Combination. Audit Committee: We have established and will maintain an Audit Committee which initially will be composed of a majority of independent directors and will be within one year composed entirely of independent directors to, among other things, monitor compliance with the terms described above and the other terms relating to this offering and review and approve any affiliated transactions involving our company. If any noncompliance is identified, then the Audit Committee will be charged with responsibility to immediately take all action necessary to rectify such noncompliance or otherwise to cause compliance with the terms of this offering. For more information, see the section entitled Management Committees of the Board of Directors Audit Committee. (1) Assumes full payment to the underwriters of the underwriters discount and commissions out of the gross proceeds of the proposed offering, including the $3,700,000 being held in the trust account ($4,255,000 if the underwriters over-allotment option is exercised in full). (2) Working capital (deficiency) excludes $541,387 of costs related to this offering that were paid or accrued prior to December 31, 2006. These deferred offering costs have been recorded as a long-term asset and are reclassified against stockholders equity in the As Adjusted column. (3) If the initial business combination is approved and consummated, public stockholders who voted against the combination will be entitled to convert their stock for cash of approximately $7.88 per share (or $19,699,992 in the aggregate), which amount represents approximately $7.584 per share (or $18,959,992 in the aggregate) representing the net proceeds of the offering and $0.296 per share (or $740,000 in the aggregate) representing the underwriters non-accountable expense allowance which the underwriters have agreed to deposit into the trust account and to forfeit to pay converting stockholders, and does not take into account interest earned on and retained in the trust account. The as adjusted information gives effect to the sale of the units we are offering pursuant to this prospectus and the sale of the private placement warrants, including the application of the estimated net proceeds. The working capital (as adjusted) and total assets (as adjusted) amounts include the $94,800,000 that will be held in the trust account following the completion of this offering and will be available to us only upon the consummation of a business combination within the time period described in this prospectus but exclude the deferred underwriting discounts and commissions of $3,700,000 ($4,255,000 if the underwriters over-allotment option is exercised in full) that will be held in trust and payable to the underwriters upon the consummation of an initial business combination, less $0.296 per share that the underwriters have agreed to forego with respect to shares public stockholders have elected to convert into cash pursuant to their conversion rights. If an initial business combination is not so consummated, we will be required to dissolve and liquidate and the proceeds held in the trust account will be distributed solely to our public stockholders after satisfaction of all our then outstanding liabilities. Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy these securities, in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED JANUARY 5, 2007 PROSPECTUS $100,000,000 UNION STREET ACQUISITION CORP. 12,500,000 Units Table of Contents We will not proceed with an initial business combination that has been approved by a majority of shares of common stock voted by our public stockholders if public stockholders owning 20% or more of the shares sold in this offering both vote against the business combination and exercise their conversion rights. We will not propose to our stockholders any transaction that is conditioned on less than 19.99% of the public stockholders exercising their conversion rights. Accordingly, we may consummate an initial business combination only if (i) a majority of the shares of common stock voted by the public stockholders are voted in favor of the initial business combination and (ii) public stockholders owning fewer than 20% of the shares sold in this offering both vote against the initial business combination and exercise their conversion rights. If this occurred, we would be required to convert to cash up to 2,499,999 of the 12,500,000 shares of common stock included in the units sold in this offering at an initial per share conversion price of approximately $7.88, without taking into account interest earned on the trust account remaining in the trust account at such time. The actual per share conversion price will be equal to the amount in the trust account, including all accrued interest income (net of taxes payable on such interest income and after release of up to $1,500,000 of interest income, after tax, to fund working capital requirements), as of two business days prior to the consummation of the initial business combination, divided by the number of shares of common stock sold in this offering. In connection with any vote required for our initial business combination, our existing stockholders, including our executive officers and directors, have agreed to vote all of the shares of common stock held by them prior to the completion of this offering either for or against a business combination in the same manner that the majority of the shares of common stock are voted by our public stockholders. Our existing stockholders will not have conversion rights with respect to those shares. Our executive officers, directors and existing stockholders also have agreed that if they acquire shares of common stock in or following the completion of this offering, they will vote all such acquired shares in favor of our initial business combination. By virtue of this agreement, our executive officers, directors and existing stockholders will not have any conversion rights in respect of those shares acquired in or following the completion of this offering. Union Street Acquisition Corp. is a blank check company recently formed for the purpose of acquiring through a merger, capital stock exchange, stock purchase, asset acquisition, or other similar business combination, an operating business in the business services industry. We do not have any specific business combination under consideration and we have not, nor has anyone on our behalf, contacted any prospective target business or had any discussions with respect to such a transaction or taken any direct or indirect measures to locate a specific target business or consummate a business combination. This is an initial public offering of our securities. Each unit will be offered at a price of $8.00 per unit and will consist of: one share of our common stock; and one warrant. Each warrant entitles the holder to purchase one share of our common stock at a price of $6.00. Each warrant will become exercisable on the later of our consummation of an initial business combination or , 2008 and will expire on , 2011 (subject to extension in the limited circumstances disclosed in this prospectus) or earlier, upon redemption by us. Union Street Capital Management, LLC, an entity owned and controlled by our executive officers, has agreed to purchase an aggregate of 3,000,000 warrants from us at a price of $1.00 per warrant for an aggregate purchase price of $3,000,000 in a private placement immediately prior to the completion of this offering. All of the proceeds we receive from this purchase will be placed in the trust fund described below. The private placement warrants to be purchased will be identical to the warrants underlying the units being offered by this prospectus except that the private placement warrants are exercisable on a cashless basis so long as they are held by the original purchaser or its affiliates. Union Street Capital Management, LLC has agreed that the private placement warrants will not be sold or transferred until after we have consummated an initial business combination. None of the shares purchased by Union Street Capital Management, LLC prior to the completion of this offering will have any right to liquidating distributions in the event we fail to consummate a business combination. The holders of our common stock on the date of this prospectus, whom we refer to as our existing stockholders, and our executive officers and directors have agreed that they will vote all shares of common stock owned by them prior to the completion of this offering with respect to a business combination in the same manner that the majority of the shares of common stock offered hereby are voted by our public stockholders, other than our existing stockholders, and they will not have any conversion rights with respect to such shares. We have granted the underwriters a 30-day option to purchase up to 1,875,000 additional units solely to cover over-allotments, if any (over and above the 12,500,000 units referred to above). The over-allotment option will be used only to cover the net short position resulting from the initial distribution. There is currently no public market for our units, common stock or warrants. We anticipate that the units will be listed on the American Stock Exchange under the symbol USQ-U on or promptly after the date of this prospectus. The common stock and warrants each will begin separate trading 90 days after the earlier to occur of the expiration of the underwriters over-allotment option or the exercise in full or in part by the underwriters of that option, unless the sole book-running manager determines that an earlier date is acceptable. Once the securities comprising the units begin separate trading, we anticipate that the common stock and warrants will be listed on the American Stock Exchange under the symbols USQ and USQ-W, respectively. We cannot assure you, however, that our securities will be or will continue to be listed on the American Stock Exchange. Table of Contents
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+summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements, and the notes and schedules related thereto. Unless otherwise stated in this prospectus, references to we, us or our refer to Community Pioneers, LLC. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer is not permitted. Unless the context indicates otherwise, numbers in this prospectus have been rounded and are, therefore, approximate. Community Pioneers, LLC We are a development stage limited liability company formed under the laws of Pennsylvania on March 1, 2006. We are a development stage holding company and intend to use the offering proceeds (1) to purchase ninety nine and ninety nine hundredths percent (99.99%) of the issued and outstanding equity interests of Crumb Rubber Granulator, LLC in exchange for 250,000 of the Series A preferred units offered by us in this offering, (2) to develop the business of Crumb Rubber Granulator, LLC, (3) for general corporate purposes and (4) to position us to execute our longer term strategy to purchase majority stakes in early-stage operating companies that present innovative products and technologies. While the proceeds of this offering will not be directly used to acquire businesses other than Crumb Rubber Granulator, LLC, we envision, once the business of Crumb Rubber Granulator, LLC develops self-sustaining revenues, engaging other investments or acquisitions in the future of (a) established early-stage companies that have already begun operating but may require additional capital to successfully develop their respective markets and business, (b) start-up companies with a product, market, technology, or concept, that presents a compelling opportunity, or (c) early-stage companies that present opportunities for economic growth and development and employment opportunities within Amish/Mennonite communities, other smaller or rural communities, and small city industrial brown zones throughout the United States. We intend to monitor and increase the value of our portfolio companies by providing strategic advice and management and operational input. We expect that future acquisitions will be financed with secondary offerings, loans and internally generated revenues. In the case that we are able to engage in investments and acquisitions other than Crumb Rubber Granulator, LLC, we will invest with a view towards capital appreciation by acquiring controlling stakes in our investments consistent with the requirements to avoid becoming a registered investment company under the Investment Company Act of 1940. The primary purposes of this offering will be to acquire all of the outstanding equity interest in Crumb Rubber Granulator, LLC and to develop the business of Crumb Rubber Granulator, LLC (currently a wholly owned subsidiary of Flintwood Metals, Inc.). Crumb Rubber Granulator, LLC, at the time of its acquisition by us, will own a patent for a comminution apparatus for refining various materials such as waste tires into smaller pieces of a desired size. We also would be buying the prototype machine relating to the patent with the purchase of Crumb Rubber Granulator, LLC and start-up inventory. Such prototype machine is currently operational. Crumb Rubber Granulator, LLC currently is not engaged in any operations. Our founder, John M. Sensenig, is a member of the Amish/Mennonite community, and has established us as a vehicle for allowing members of the community to fund and participate in, and providing opportunities for and promoting, economic development, business growth and employment opportunities in the community using investment vehicles and financing techniques that are widely used successfully in mainstream financial markets. Mr. Sensenig believes that the community will benefit significantly from the opportunities presented by an investment and development vehicle such as the company, and that the community will only be receptive to such a concept if it is led by a respected member of the community and is structured and functions as part of the community. Accordingly, investment in the company will generally be limited to members of the Amish/Mennonite community. Our executive offices are located at 987 Valley View Road, New Holland, Pennsylvania 17557, and our telephone number is (717) 445-7097. The Offering Securities Offered, Maximum 500,000 convertible preferred limited liability company units, which we refer to as the preferred units. Securities Offered, Minimum 262,500 preferred units (including the 250,000 preferred units that will be used to acquire Crumb Rubber Granulator, LLC). Best Efforts Offering The preferred units are being offered hereby on a best efforts basis by us. Preferred units many be purchased by delivering properly executed subscription documents as described under Plan of Distribution and will be subject to acceptance by us in our discretion. Description of Securities The preferred units represent a non-voting equity class (except as provided by the Limited Liability Company Act of 1994 of Pennsylvania) with a right to preference payments, preferred liquidation rights over common units and convertible into common units. At the expiration of the applicable holding period, you may request to sell back to us all or a portion of your preferred units. However, we may defer to purchase any preferred units tendered for repurchase if we determine that we do not have sufficient cash (as determined by the Board of Managers in its sole discretion) available to pay for such preferred units under the priority in the application of available cash in our Operating Agreement, or we are prohibited from making such purchases by our agreements or otherwise limited by applicable law. Our Operating Agreement prohibits us from repurchasing preferred units until such time that there are no accrued and unpaid preference payments. To the extent that we defer any repurchases of units, we will effect such repurchases in the order in which repurchase was requested (without regard to series of preferred units) when we determine that we have available cash and are permitted to do so under our Operating Agreement, other agreements by which we are bound and applicable law. The preferred units are convertible into common units. The common units represent the only class of voting ownership interest in our capital except as provided by the Limited Liability Company Act of 1994 of Pennsylvania. You may request to sell back to us all or a portion of your common units which we may defer for the same reasons that we may defer the repurchase of preferred units. Our Operating Agreement prohibits us from repurchasing common units until such time that there are no (i) accrued and unpaid preference payments and (ii) outstanding preferred units. We refer to the preferred units and the common units collectively as membership units or units. You should read the discussion under the heading Operating Agreement for more information regarding the order of payments if we defer any preferred or repurchase payments, but later we have the cash available to make such payments. Offering Price $20 per preferred unit in cash or non cash assets. Minimum Purchase If you purchase preferred units, you must purchase at least 50 preferred units in a given series at $1000. You may purchase any number of additional preferred units above the minimum required purchase amount. Method of Purchase Prior to your purchase of preferred units, you will be required to complete a subscription agreement that will set forth the amount of your investment, identify the number and series of preferred units being purchased, the holding period relating to the preferred units and certain other information regarding your ownership of the preferred units. The form of subscription agreement is filed as an exhibit to our registration statement as to which this prospectus is a part. We reserve the right to accept or reject any subscription agreement for any reason. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM S-1/A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 COMMUNITY PIONEERS, LLC (Exact name of registrant as specified in its charter) Pennsylvania 2820 20-4401393 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.) 987 Valley View Road New Holland, PA 17557 (717) 445-7097 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) John M. Sensenig Community Pioneers, LLC 987 Valley View Road New Holland, PA 17557 (717) 445-4669 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Andrew J. Sherman, Esq. Dickstein Shapiro LLP 1825 Eye Street, NW Washington, DC 20006-5403 (202) 420-2200 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. Denomination You may choose the denomination of the preferred units you purchase in any investment amount of $100 or more, including odd amounts subject to the requirement that you at least invest $1000. Up to the following amounts of each Series will be offered: Series A - 350,000 (250,000 will be sold to Flintwood Metal, Inc. in exchange for nearly all the issued and outstanding equity interests of Crumb Rubber Granulator, LLC once we reach $500,000 in cash subscriptions); Series B - 75,000; Series C - 50,000; Series D - 25,000. Holding Period and Preference Payment Rates Holding Period Preference Payment None 6% on an annual basis 6 months 7% on an annual basis 3 years 8% on an annual basis 5 years 9% on an annual basis Schedule of Payment of Preference Payments Holding Period Frequency of Preference Payments On Demand 6 months 6 months 6 months 3 years Annually 5 years Annually Payment Method When we make repurchase and preference payments, we will send a check to the mailing address you designate in the subscription agreement. Repurchase At any time after the expiration of the relevant holding period, you may tender all or a portion of your preferred units for repurchase by us as described above in this summary under Securities Offered. Optional Redemption At Any Time We reserve the right to redeem some or all of the preferred units plus accrued and unpaid preference payments at any time. Conversion Rights You may convert the preferred units into our common units at a conversion rate of 1 common unit for 1 preferred unit and 1 common unit for $20 of accrued but unpaid preference payments. You will not receive any cash payment or additional preference payments in the future after conversion of a preferred unit. CALCULATION OF REGISTRATION FEE Title of Each Class of Securities to be Registered Amount being Registered Proposed Maximum Offering Price Per Security(1) Proposed Maximum Aggregate Offering Price(1) Amount of Registration Fee Series A Convertible Preferred Membership Units 350,000 $ 20.00 $ 7,000,000.00 $ 749 Series B Convertible Preferred Membership Units 75,000 $ 20.00 $ 1,500,000.00 $ 160.50 Series C Convertible Preferred Membership Units 50,000 $ 20.00 $ 1,000,000.00 $ 107 Series D Convertible Preferred Membership Units 25,000 $ 20.00 $ 500,000.00 $ 53.50 Common Membership Units 500,000 $ 20.00 $ 0 $ 0 (2 ) (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. (2) No fee pursuant to Rule 457(i). The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. Upon surrender of your preferred units for conversion, we will deliver common units to you by book entry. You should read the discussion under the heading Capitalization for more information regarding our outstanding common units. Consolidation, Merger or Sale Upon our consolidation, merger or sale, we will either redeem all of the preferred units or our successor will be required to assume our obligations to pay the repurchase and preference payments on the preferred units. Security None. Ranking Upon a liquidation of the company, our creditors would be paid before any distribution to holders of our preferred units or common units. Each Series ranks equal in priority in relation to each other. Liquidation In the case of our liquidation, dissolution or winding up, after payment of all of our obligations to creditors, the preferred units generally shall have preferential rights in distributions, dividends or payments over the common units. Our available cash will be applied to the preferred units and common units in the following order of priority: First, to the accrued and unpaid preference payments on preferred units which we have been requested to repurchase, and if cash available for distribution is insufficient to pay all such amounts, we will make payments in account of such preferred units in the order of the date that such repurchases were requested (and ratably among such preferred units having the same date of repurchase request). Second, to the accrued and unpaid preference payments on those preferred units that had not been tendered for repurchase before the liquidation event, and if cash available for distribution is insufficient to pay all such amounts, ratably among such preferred units. Third, to the repurchase of the preferred units which we have been requested to repurchase, and if cash available for distribution is insufficient to pay all such amounts, we will make such distributions in the order of the date that such repurchases were requested, and ratably among preferred units having the same repurchase request date. Fourth to the repurchase of the preferred units that had not been tendered for repurchase before the liquidation event, and if cash available for distribution is insufficient to pay all such amounts, ratably among such preferred units. Fifth, to the repurchase of common units which we have been requested to repurchase, and if cash available for distribution is insufficient to pay all such amounts, we will make such distributions in the order of the date that such repurchases were requested, and ratably among common units, having the same repurchase request date. Sixth to the repurchase of the common units that had not been tendered for repurchase before the liquidation event, and if cash available for distribution is insufficient to pay such amounts, ratably among such common units. We intend to use the net proceeds of this offering for: To purchase ninety nine and ninety nine hundredths percent (99.99%) of the issued and outstanding equity interest(s) Crumb Rubber Granulator, LLC; working capital; general corporate purposes; and. position us to execute our longer term strategy to purchase majority stakes in early-stage operating companies that present innovative products and technologies. You should read the discussion under the heading Use of Proceeds for more information. Absence of Public Market and Restrictions on Transfer There is no existing market for the preferred units or the common units. We do not intend to make a market in either the preferred units or common units after the completion of this offering, and we do not anticipate that a secondary market will develop. We do not intend to apply for listing of the preferred units or the common units on any securities exchange or for quotation of the common units or preferred units in any automated dealer quotation system, including, without limitation, NASDAQ or any over-the-counter market. You will not be able to transfer or pledge the preferred units or common units except with our prior written consent and only in certain cases that are outlined in our Operating Agreement. Transferees that we consent to will generally be limited to members of the Amish/Mennonite community. Book Entry The preferred units and the common units will be issued in book entry or uncertificated form only, and the preferred units and the common units will not be evidenced by certificated securities or negotiable instruments. We will maintain a unit register that will be conclusive evidence of the record ownership of preferred units and common units. Audit Committee to monitor compliance: Promptly following completion of this offering, we intend to establish and maintain an audit committee composed of three members, including an independent member that will chair the audit committee (but will not be a member of the Board of Managers), in addition to the customary duties of an Audit Committee, monitor compliance on a quarterly basis with the terms described above and the other terms relating to this offering. If any noncompliance is identified, then the audit committee will have the responsibility to immediately take all action necessary to rectify such noncompliance or otherwise cause compliance with the terms of this offering. Offering Period This offering of preferred units will end no later than two years from the effective date of this prospectus. Minimum Purchase Unless we receive subscription for $250,000 in cash (12,500 in preferred units) acceptable to us prior to the completion of the offering period, no securities will be issued, the acquisition of Crumb Rubber Granulator, LLC will not be completed, and all funds received in connection with this offering will be promptly refunded to investors without interest. No investor in the preferred units shall become our member until the proceeds of this offering meet the minimum purchase threshold of $250,000 (12,500 preferred units) without regards to the $5,000,000 (250,000 Series A preferred units) that will be used to acquire Crumb Rubber Granulator, LLC. Closings The initial closing of the offering will be held after subscriptions for at least $250,000 in cash (12,500 preferred units) have been received by us at which time the acquisition of Crumb Rubber Granulator, LLC will be completed. At that time, subscribers for at least that number of preferred units may be admitted by us as members. After the initial closing, we intend to hold as many closings as necessary until the offering is completed or terminated. Cash and Non-cash Assets Once we have received subscriptions for $250,000 in cash, we intend to accept non-cash assets from investors as an investment currency to buy preferred units. The valuation of such non-cash assets will be completely within our discretion. Subscription You must fill out a Subscription Agreement in order to purchase preferred units. By signing the Subscription Agreement, you will be making the representations and warranties contained in the Subscription Agreement and you will be bound by all the terms of the Subscription Agreement and the Operating Agreement. Offering Expenses John M. Sensenig will contribute all the costs and expenses relating to this prospectus and offering. Risks You should carefully consider these and the other risks set forth in the section entitled Risk Factors beginning on page 8 of this prospectus. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Subject to Completion Preliminary Prospectus dated _____ __, 2007 PROSPECTUS COMMUNITY PIONEERS, LLC 500,000 Convertible Preferred Limited Liability Company Membership Units The Securities being offered by Community Pioneers, LLC are Convertible Preferred Limited Liability Company Membership Units and Common Limited Liability Company Membership Units. Offering Price: $20 per Unit Minimum Purchase Requirement: 50 Units ($1000) Additional Increments: One Unit ($20) We are offering up to 500,000 convertible preferred limited liability company membership units ( preferred units ) at $20 per preferred unit in Community Pioneers, LLC, a Pennsylvania limited liability company that are convertible into common limited liability company membership units ( common units ). We are a development stage holding company and intend to use the offering proceeds (1) to purchase ninety nine and ninety nine hundredths percent (99.99%) of the issued and outstanding equity interests of Crumb Rubber Granulator, LLC in exchange for 250,000 of the Series A preferred units offered by us in this offering, (2) to develop the business of Crumb Rubber Granulator, LLC, (3) for general corporate purposes and (4) to position us to execute our longer term strategy to purchase majority stakes in early-stage operating companies that present innovative products and technologies. Investors will be generally limited to members of the Amish/Mennonite community. Four different series of preferred units are being offered continuously for up to two (2) years: 375,000 Series A, 75,000 Series B, 50,000 Series C and 25,000 Series D preferred units. Each preferred unit represents a pro rata non-voting ownership interest in our capital and includes a right to receive a preference payment based on the terms of a particular series. We are selling units directly to investors on a minimum/maximum, best efforts basis without using an underwriter directly through our officers and managers. No commission or other compensation related to the sale of the units will be paid to our officers and managers. The proceeds of the offering will be placed and held in an escrow account at __________, ___________, ___________ Pennsylvania _________ until at least $250,000 in cash subscriptions are accepted by us from the sale of securities in this offering at which time the acquisition of Crumb Rubber Granulator, LLC will be completed. If we do not accept the $250,000 on or before two (2) years after the commencement of this offering, your investment will be promptly returned to you without interest and without any deductions. Once this offering is completed, we will not raise more funds in the securities markets until substantially all the funds raised in this offering are invested. (1) The as adjusted information gives effect to the sale of the preferred units in this offering and the application of the estimated net proceeds as described under Use of Proceeds in this prospectus. John M. Sensenig will fund and contribute to the company expenses of this offering, (expected to be approximately $400,000) and we expect all of the proceeds of this offering to be available to the company. Each series of preferred units includes a right to receive a preference payment that accrues at a different rate and requires a different holding period as follows: Series of units Preference Payment Rate Minimum Holding Period Series A 6% None Series B 7% 6 months Series C 8% 3 years Series D 9% 5 years Each series of preferred units may be purchased at $20 per unit with a minimum investment of $1000 for 50 units. Subject to the 50-unit ($1000) minimum, you may purchase additional preferred units for $20 each. The preferred units are non-voting except as required by law. Any time after the end of an applicable holding period, you will have the option to sell back to us all or a portion of such preferred units at $20 per unit (as long as we determine in our sole discretion that we have enough cash available to complete the repurchase and such repurchase does not violate any agreement or law to which we are subject) or you may convert all or a portion of such preferred units into common units at a 1-to-1 ratio. You also may choose whether part or all of your accrued preference payment is to be paid to you in cash or paid in additional preferred units or common units at the rate of one new preferred unit or common unit for each $20 of accrued preference payments. In the event that we do not have sufficient cash to repurchase units from time to time as we may determine in our sole discretion, we may elect to defer the repurchase payments and any accrued preference payments and make such payments at a later date in the order they are or were due irrespective of the series of preferred units until such time that we have cash (as determined by the Board of Managers in its sole discretion), and our agreements do not restrict us (as determined by the Board of Managers in its sole discretion) from effectuating repurchase payments or preference payments subject to any applicable law. You will have the option to convert any or all of your preferred units to common units at any time before or after the expiration of the applicable minimum holding period. In the event that we offer to repurchase any or all preferred units at any time before or after the minimum holding period for a specific series of preferred units, you will have thirty (30) days to reject our repurchase offer and instead convert those preferred units that are subject to the repurchase offer into common units. The 500,000 of preferred units offered hereby in the aggregate are convertible into 500,000 common units (excluding any accrued preference payments). There is no public market for the preferred units or the common units and we do not intend to apply for listing of either class of units on any securities exchange or for quotation of either class of units through any automated quotation system. The units are subject to restrictions on transfer imposed by our operating agreement, as well as applicable tax and securities laws. Investing in our securities involves a high degree of risk. See Risk Factors beginning on page 8 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Public Offering Price Underwriting Discount and Commission Proceeds, to us before expenses Per unit amount $ 20 $ 0 $ 20 Total minimum amount $ 5,250,000 $ 0 $ 5,250,000 Total maximum amount $ 10,000,000 $ 0 $ 10,000,000 The date of this prospectus is July __, 2007 RISK FACTORS You should carefully consider the risks described below before participating in this offering. If any of the following risks actually occur, our business, financial condition, operating results or cash flows could be materially harmed. As a result, the value of each of our preferred units and common units could decline, we may not be able to make payments on account of the preferred units, and you might lose all or part of your investment. Risks associated with the business of Crumb Rubber Granulator, LLC The crumb rubber produced by Crumb Rubber Granulator, LLC may not meet the requirements of its potential customers. Crumb rubber is the material produced by shredding tires or other rubber into granules while removing materials such as fiber and steel from the rubber. The value of the crumb rubber depends on the end use of the same. In North America, crumb rubber is believed to be used for asphalt modification, molded products, automotive parts, sport surfacing, rubber/plastic blends, construction, modification of surfaces, animal bedding among other end uses. If Crumb Rubber Granulator, LLC produces crumb rubber of a low quality relative to the end use required of any of its potential customers, such potential customers may not purchase its crumb rubber which could cause a material adverse effect on our business, financial condition, results of operation and cash flow. To the extent that the crumb rubber produced by Crumb Rubber Granulator, LLC does not meet any particular standard promoted by the American Society for Testing and Materials, Crumb Rubber Granulator, LLC may not be able to enter into contracts with government entities or other parties that require crumb rubber meeting a particular standard sanctioned by the American Society for Testing and Materials. According to Scrap Tire News Online, the American Society for Testing and Materials produces the largest voluntary standard development systems in the world. According to the American Society for Testing and Materials, a standard is a document that has been developed and established within the consensus of the American Society for Testing and Materials and meets approval requirements of American Society for Testing and Materials procedures and regulations. American Society for Testing and Materials standards are developed voluntarily and generally become legally binding when a government body makes them so or such standards are part of a contract. To the extent that Crumb Rubber Granulator, LLC cannot produce crumb rubber according to standards set by the American Society for Testing and Materials, Crumb Rubber Granulator, LLC may lose potential customers that demand a certain crumb rubber standard promoted by the American Society for Testing and Materials which could cause a material adverse effect on our business, financial condition, results of operation and cash flow. The pricing of crumb rubber in the market is affected by the price of virgin rubber and plastic resin. To the extent the pricing of virgin rubber or plastic resin is low compared to the cost of producing crumb rubber, the margins of Crumb Rubber Granulator, LLC may be compressed and it may not be able to be profitable. If the market price of virgin rubber or plastic resin is low or below the costs of producing crumb rubber, Crumb Rubber Granulator, LLC may suffer losses or a reduction in the margins relating to the sale of crumb rubber which could cause a material adverse effect on our business, financial condition, results of operation and cash flow. The crumb rubber granulating process of Crumb Rubber Granulator, LLC has not been proven on a production scale. Although the crumb rubber granulating process of Crumb Rubber Granulator, LLC has been successful on a smaller, laboratory scale and potential customers have expressed interest in purchasing the crumb rubber that has been produced by the prototype machine owned by Crumb Rubber Granulator, LLC, the crumb rubber granulating process has never been tested on a production scale. Crumb Rubber Granulator, LLC may experience unanticipated problems in maintaining the quality of the crumb rubber on a larger scale which may make the production uneconomic which could cause a material adverse effect on our business, financial condition, results of operation and cash flow. The length and depth of product and industry business cycles of the potential markets of Crumb Rubber Granulator, LLC including, without limitation, the automotive and construction industries, may result in reduced operating margins or in operating loses. Some of the markets in which the potential customers of Crumb Rubber Granulator, LLC participate, such as the automotive and construction industries, are cyclical in nature, thus posing a risk to Crumb Rubber Granulator, LLC which is beyond its control. These markets are highly competitive, to a large extent driven by end-use markets, and may experience overcapacity, all of which may affect demand for and pricing of crumb rubber that Crumb Rubber Granulator, LLC may attempt to sell which may result in reduced operating margins or in operating that may cause a material adverse effect on our business, financial condition, results of operation and cash flow. Failure to develop new products and production technologies or to implement productivity and cost reduction initiatives successfully may harm the competitive position of Crumb Rubber Granulator, LLC. Our operating results may depend significantly on the development of commercially viable new grades of crumb rubber as well as production technologies. If we are unsuccessful in developing new grades of crumb rubber and production technologies in the future, our competitive position and operating results may be negatively affected which could cause a material adverse effect on our business, financial condition, results of operation and cash flow. Environmental regulations and other obligations relating to environmental matters could subject Crumb Rubber Granulator, LLC to liability for fines, clean-ups and other damages, require Crumb Rubber Granulator, LLC to incur significant costs to modify our operations and increase our manufacturing and delivery costs. Costs related to our compliance with environmental laws concerning, and potential obligations with respect to, contaminated sites may have a significant negative impact on the operating results of Crumb Rubber Granulator, LLC. These include obligations related to sites that will be owned or operated by us and Crumb Rubber Granulator, LLC, or where waste from the operations of Crumb Rubber Granulator, LLC was disposed. Crumb Rubber Granulator, LLC s operations may be subject to extensive federal, state, local and other laws and regulations that govern environmental and health and safety matters. Crumb Rubber Granulator, LLC may incur substantial capital and other costs to comply with these requirements. If Crumb Rubber Granulator, LLC violates them, Crumb Rubber Granulator, LLC can be held liable for substantial fines and other sanctions, including limitations on its operations as a result of changes to or revocations of environmental permits involved. Stricter environmental, safety and health laws, regulations and enforcement policies could result in substantial costs and liabilities to Crumb Rubber Granulator, LLC or limitations on its operations and could subject its handling, manufacture, use, reuse or disposal of substances or pollutants to more rigorous scrutiny than at present. Consequently, compliance with these laws could result in significant capital expenditures as well as other costs and liabilities and the business and operating results of Crumb Rubber Granulator, LLC may be less favorable than expected. In exchange for $5 million of our Series A preferred units, we are buying ninety nine and ninety nine hundredths percent (99.99%) of the equity interests in Crumb Rubber Granulator, LLC. Crumb Rubber Granulator, LLC is a company that at the time of its acquisition by us will only have three assets, a patent, a prototype machine relating to such patent and start-up inventory, and no liabilities. Implicitly, we are valuing the patent and the prototype machine relating to such patent at least $5 million without the benefit of an appraiser. We are valuing the only three assets that will be owned by Crumb Rubber Granulator, LLC at the time of its acquisition at $5 million at least without the benefit of an appraisal. Therefore, our determination of the valuation of Crumb Rubber Granulator may have been made arbitrarily, and the market value of such patent and prototype machine may be far less than $5 million. If Crumb Rubber Granulator, LLC fails to adequately protect or enforce its intellectual property rights, the value of its intellectual property rights may diminish. Crumb Rubber Granulator, LLC s success, competitive position and future revenues may depend in part on its ability to obtain and maintain intellectual property protection for its products, methods, processes and other technologies, to preserve its trade secrets, to prevent third parties from infringing on its proprietary rights and to operate without infringing the proprietary rights of third parties. To date, Crumb Rubber Granulator, LLC holds one patent. Crumb Rubber Granulator, LLC anticipates seeking further intellectual property rights both in the United States and in other countries, as appropriate. However, we cannot predict: the degree and range of protection any copyright, patent or trademark will afford Crumb Rubber Granulator, LLC against competitors, including whether third parties will find ways to invalidate or otherwise circumvent Crumb Rubber Granulator, LLC s patent and other intellectual property; if and when copyrights, patents and trademarks will issue; whether or not others will obtain copyrights, patents and trademarks claiming aspects similar to those covered by our patent and other intellectual property; or whether Crumb Rubber Granulator, LLC will need to initiate litigation or administrative proceedings which may be costly whether it wins or loses. If any of Crumb Rubber Granulator, LLC s trade secrets, know-how or other proprietary information is disclosed, the value of Crumb Rubber Granulator, LLC s trade secrets, know-how and other proprietary rights may adversely affect our business, financial conditions, results of operations and cash flow. If we infringe the rights of third parties we could be forced to pay damages and defend against litigation. If Crumb Rubber Granulator, LLC s products, methods, processes and other technologies infringe the proprietary rights of other parties, Crumb Rubber Granulator LLC s could incur substantial costs and we may have to: obtain licenses, which may not be available on commercially reasonable terms, if at all; abandon certain intellectual property; redesign our products or processes to avoid infringement; pay damages; or defend litigation or administrative proceedings which may be costly whether we win or lose, and which could result in a substantial diversion of Crumb Rubber Granulator, LLC s valuable management resources. Any claim of infringement by Crumb Rubber Granulator, LLC s technology, whether or not successful, may adversely affect our business, financial conditions, results of operations and cash flow. Risks associated with our business We are a development stage company with no operating history and, accordingly, you will have no basis upon which to evaluate our ability to achieve our business objectives. We are a recently organized development stage limited liability company with no operating results to date. Since we do not have an operating history, you will have no basis upon which to evaluate our ability to acquire, operate and manage Crumb Rubber Granulator, LLC. We also have other longer term business objective such as making investments or acquisitions in start ups that have businesses that may be complimentary to Crumb Rubber Granulator, LLC. We will not generate any revenues (other than interest income on the proceeds of this offering) until, at the earliest, after the consummation of our acquisition of Crumb Rubber Granulator, LLC. We cannot assure you that any investment or acquisitions will occur. Investing in or acquiring companies in the start-up or early stages of their development such as Crumb Rubber Granulator, LLC carries a high degree of risk. Investments or acquisitions in operating companies in the start-up or early stages of their development such as Crumb Rubber Granulator, LLC carry a high degree of risk. Typically, operating companies in the early stages of development or start-ups have very limited operating histories, unproven technology, untested management, and unknown future capital requirements. The development of the business of Crumb Rubber Granulator, LLC entails the investment of capital for purposes of buying the machinery and equipment subject to the patent that granulates materials such as tires. We may face intense competition, often from established companies with much greater financial and technical resources, more marketing and service capabilities, and a greater number of qualified personnel. Operating companies in the early stages of their development and start-up companies such as Crumb Rubber Granulator, LLC often require capital infusions before reaching maturity that we may not be able to provide. Early stage companies such as Crumb Rubber Granulator, LLC often require several rounds of capital infusions before reaching maturity. If we do not have funds available to provide financing or participate in subsequent rounds of financing, that shortfall may have a significant negative impact in both Crumb Rubber Granulator, LLC and the value of any other investment. We can not assure that we will have all the resources required by Crumb Rubber Granulator, LLC or companies acquired or invested in by us. Your returns may depend on our ability to manage rapid growth of Crumb Rubber Granulator, LLC and other companies that we may either acquire or invest in. We expect Crumb Rubber Granulator, LLC will grow rapidly. Rapid growth often places considerable operational, managerial and financial strains on a company. To successfully manage rapid growth, the companies we invest in or acquire must, among other things, rapidly improve, upgrade and expand their business infrastructure, deliver services and products on a timely basis, maintain levels of service expected by clients and customers, and maintain adequate levels of liquidity. Our returns will suffer if we and the companies in which we invest in or acquire are unable to successfully manage their growth. Our portfolio of target companies including Crumb Rubber Granulator, LLC may not provide us with any cash flow from their operations and so we may have to rely on cash on hand, liquidity events, and our ability to generate cash from capital raising activities to finance our operations. We need capital to invest or acquire new companies, to make additional investments in, or advances to, our existing companies under management and to finance our corporate overhead. We will also need cash to make preference payments and repurchase our preferred units or common units. Crumb Rubber Granulator, LLC and other portfolio companies may not provide us with any cash flow from their operations. To the extent Crumb Rubber Granulator, LLC and other companies in our portfolio generates any cash from operations, they may need to retain the funds to develop their own businesses or may be prohibited by their financing or investment agreements from distributing such funds to us. As a result, we must rely on cash on hand, liquidity events and new capital raising activities to meet our cash needs. If we are unable to find ways of monetizing our investments or to raise additional capital on attractive terms, we may face liquidity issues that will require us to curtail our new business efforts, constrain our ability to execute our business strategy and limit our ability to provide financial support to our portfolio companies. We may be unable to obtain the additional financing necessary to fund the operations and growth of Crumb Rubber Granulator, LLC which could compel us to restructure or sell our equity interests in Crumb Rubber Granulator, LLC. Although we believe that the net proceeds of this offering will be sufficient to allow us to consummate the acquisition of nearly all of the equity interests of Crumb Rubber Granulator, LLC, we cannot ascertain its capital requirements in the near future. Our calculations relating to capital requirements may prove inaccurate. If the net proceeds of this offering prove to be insufficient, either because of the depletion of the available net proceeds or because we become obligated to convert into cash a significant number of the preferred units, we will be required to seek additional financing through the issuance of equity or debt securities or other financing arrangements. We cannot assure you that such financing would be available on acceptable terms, if at all. In addition, Crumb Rubber Granulator, LLC may seek alternative rounds of financing to fund its operations or growth. The failure to secure additional financing could have a material adverse effect on the continued development or growth of our business. None of our officers, managers or holders of preferred units or common units are required to provide any financing to us in connection with or after an investment or acquisition. Accounting conventions may require us to change the presentation of our financial statements. As part of our strategy, we may reevaluate our companies under management and alternate uses of capital. As such, depending on market conditions, growth prospects and other key factors, we may, at any time, change our strategic focus, liquidate our interests in any of our portfolio companies including Crumb Rubber Granulator, LLC or otherwise change the nature of our interests in our portfolio companies. As a result, the consolidated financial results may vary significantly from period to period based upon the portfolio companies that are included in our financial statements. If we are successful in acquiring nearly all of the equity interests of Crumb Rubber Granulator, LLC, Crumb Rubber Granulator, LLC will be the only company in our portfolio until such time as we are able to finance other acquisitions through internally generated revenues, a financing or other offerings. We may issue notes or other debt securities, or otherwise incur substantial debt, for working capital or to complete an investment or acquisition, which may adversely affect our leverage, financial condition, ability to make preference payments to the holders of the preferred units, and ability to make acquisitions or investments. Although we have no commitments as of the date of this offering to issue any notes or other debt securities, or to otherwise incur outstanding debt, we may choose to issue a substantial amount of notes or other debt securities, or a combination of both, to complete an investment, acquisition or to finance our operations. The issuance of notes or other debt securities: may lead to default and foreclosure on our assets if our distributions from portfolio companies or disposition proceeds are insufficient to service our debt obligations; may cause an acceleration of our obligations to repay the indebtedness even if we make all principal and interest payments when due if we breach the covenants contained in the terms of any debt instruments, such as covenants that require the satisfaction or maintenance of certain financial ratios or reserves, without a waiver or renegotiation of such covenants, which would require us to dispose of all or some of our portfolio companies or investments prior to our intended dispositions date and on terms that are favorable; may create an obligation to immediately repay all principal and accrued interest, if any, upon demand to the extent any debt instruments are payable on demand; and may hinder our ability to obtain additional financing, if necessary, to the extent any debt instruments contain covenants restricting our ability to obtain additional financing while such debt is outstanding, or to the extent our existing leverage discourages other potential investors. Such issuance of notes or debt instruments may include restrictions on our ability to make preference payments to the holders of the preferred units, and may impose restrictions on our ability to make acquisitions or investments. If we identify or select any additional prospective businesses for investment or acquisition, you will be unable to ascertain the merits or risks of any particular business operations. Although we do not intend to direct the proceeds of this offering for acquisitions other than Crumb Rubber Granulator, LLC we will have virtually unrestricted flexibility in identifying and selecting prospective investment and acquisition candidates. Accordingly, there is no basis for investors in this offering to evaluate the possible merits or risks of the particular industries in which we may ultimately invest in or operate an acquisition. Although generally we intend to seek out start-up and early stage businesses, our management will endeavor to evaluate the risks inherent in a particular business, and we cannot assure you that we will properly ascertain or assess all significant risk factors. Since we may select or approach any prospective businesses after the offering, you have no basis to evaluate the possible merits or risks of any particular business operations. To the extent we complete an investment or acquisition with a financially unstable company or an entity in its development stage, we may be affected by numerous risks inherent in the business operations of those companies. Although management will endeavor to evaluate the risks inherent in our industry or a particular business, we cannot assure you that we will properly ascertain or assess all of the significant risk factors, or that we will have adequate time to complete due diligence. We also cannot assure you that an investment in our units will not ultimately prove to be less favorable to investors in this offering than a direct investment, if an opportunity were available, in any particular business. We are not required to obtain an opinion from an unaffiliated third party as to the fair market value of investments or acquisitions or that the price we are paying for the businesses are fair to our investors. We are not required to obtain an opinion from an unaffiliated third party that in relation to our target acquisitions and investments including Crumb Rubber Granulator, LLC that the prices we are paying are fair to investors. If no opinions are obtained, our investors will be relying on the judgment of our Board of Managers, whose collective experience in business evaluations or in connection with operating a business such as ours may not be significant. The loss of key executives could adversely affect our ability to operate. As our most experienced member of the Board of Managers, and the member with the deepest roots in the Amish/Mennonite business community, our success depends on the continued service of John M. Sensenig. We cannot assure you that John M. Sensenig will remain with us for the immediate or foreseeable future. We do not have a long term employment agreement with Mr. Sensenig, but he has agreed not to engage in any activity that is competitive with or similar to the business of the company until such time that we have invested seventy percent (70%) of the proceeds raised in this offering. Given the Amish/Mennonite community focus of the Company, it may be difficult to replace Mr. Sensenig s combination of standing in the community, business acumen, management skills and entrepreneurial vision. Accordingly, the unexpected loss of the services of Mr. Sensenig would have a detrimental effect on us. We lack commitments from our managers and officers to stay with us, and may not provide sufficient incentives for our managers and officers to stay with us. We have not entered into long term employment agreements with any of our managers and officers. We also do not intend to pay any compensation to our managers and officers other than Carl L. Smith, and only John M. Sensenig will have a financial interest in us. As a result, we do not have the customary employment incentives for our managers and officers in relation to their duties to us and it may be difficult for us to retain the services of such individuals. The loss of any of our officers and managers could require us to replace them with persons who require more customary employment arrangements and the terms of such arrangements will likely result in material increases in our operating expenses and adversely affect our results of operations. Our success in managing our investments or acquisitions will be largely dependent upon the efforts of our key personnel, some of whom may join us following an investment or an acquisition and may be unfamiliar with the requirements of operating a public company. Our ability to successfully manage Crumb Rubber Granulator, LLC and other investment or acquisitions will be completely dependent upon the efforts of our key personnel. The members of our current management are not obligated to remain with us and may pursue other employment alternatives. In addition, we may seek to employ other personnel following an investment or acquisition. While we intend to closely scrutinize any additional individuals we engage after an investment or an acquisition, we cannot assure you that our assessment of these individuals will prove to be correct. These individuals may be unfamiliar with the requirements of operating a public company as well as United States securities laws which could cause us to have to expend time and resources helping them become familiar with such laws. This could be expensive and time consuming. Our managers do not have experience managing businesses together. Each of Ion Ramer and Wayne Hoover are son-in-laws of John M. Sensenig. Messrs. Sensenig, Ramer and Hoover constitute our entire Board of Managers. However, they have not previously worked together as a management team. Personality, family or other issues may adversely affect (i) their relationship with each other, and (ii) their ability to effectively manage the company collectively. To the extent that our managers and officers are not able to work together as a team, such failure will adversely affect our business, financial conditions, results of operation and cash flow. Our success may be dependent on the key personnel of companies under our management. We believe that our success will depend on continued employment by our portfolio companies of senior management and key personnel. If one or more senior management members of our companies were unable or unwilling to continue in their present positions, the business and operations of that company could be disrupted. The success of some of our companies also may depend on their having highly trained technical and marketing personnel. Our portfolio companies will need to continue to hire additional personnel as their businesses grow. A shortage in the number of trained technical and marketing personnel could limit the ability of our portfolio companies to increase sales of their existing products and services and launch new product offerings. Certain of our portfolio companies could face legal liabilities from claims made against their operations, products or work. The manufacture and sale of certain products of our portfolio companies including Crumb Rubber Granulator, LLC may entail inherent risks of product or environmental liability. There can be no assurance that they will be able to maintain or acquire adequate product liability or environmental insurance in the future and any product liability or environmental claim could have a material adverse effect on expenses and income of our portfolio companies under management. In addition, many of the products or services provided by our portfolio companies may be critical to the operation of their clients or customers' businesses. If our portfolio companies fail to meet their contractual obligations, they could be subject to legal liability, which could adversely affect their business, operating results and financial condition. Also, some of our portfolio companies may depend on their relationships with their clients and their reputation for quality products or services and integrity to retain and attract customers or clients. As a result, claims made against such companies may damage their reputation, which in turn, could impact their ability to compete for new work and negatively impact their revenues and profitability. Risks associated with this offering We are accepting non cash assets in lieu of cash as an investment currency in exchange for the preferred units we are selling in this offering. We do not intend to consult with any appraiser or third party in relation to the value of the non-cash assets we accept in exchange for units. Accordingly, our valuation of the non cash assets may be speculative, arbitrary and may not reflect what may be considered as the fair market value of such non cash assets. We intend to accept non-cash assets that we may deem useful for the Company from investors in this offering in exchange for preferred units. Our acceptance of the non-cash assets will be carried out without the benefit of an appraiser or a third party at the value and price we determine. Thus, our valuation of such non-cash assets may not reflect the value of such non-cash assets in the marketplace as our valuation will be determined arbitrarily. Compliance with the Sarbanes-Oxley Act of 2002 will require substantial financial and management resources and may increase the time and costs of completing an investment or acquisition. Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and report on our system of internal controls beginning with our Annual Report on Form 10-K for the year ending on December 31, 2007. If we fail to maintain the adequacy of our internal controls, we could be subject to regulatory scrutiny, civil or criminal penalties or members litigation. Any inability to provide reliable financial reports could harm our business by adversely affecting our access to capital and our ability to compete for acquisitions and investments, in addition to fines, penalties and restrictions on our activities that may be imposed by regulators. Further, our ability to meet our obligations in relation to our preferred units may be adversely affected. Section 404 of the Sarbanes-Oxley Act also requires that our independent registered public accounting firm report on managements evaluation of our system of internal controls. A target company may not be in compliance with the provisions of the Sarbanes-Oxley Act regarding adequacy of their internal controls. The development of the internal controls of any such entity to achieve compliance with the Sarbanes-Oxley Act may increase the time and costs necessary to complete any such acquisition. Furthermore, any failure to implement required new or improved controls, or difficulties encountered in the implementation of adequate controls over our financial processes and reporting in the future, could harm our operating results or cause us to fail to meet our reporting obligations. Inferior internal controls could also cause investors to lose confidence in our reported financial information. Our initial member controls a substantial interest in us and thus will influence certain actions requiring member vote. Our initial member, John M. Sensenig will own 1,999,999 of our issued and outstanding common units (assuming that investors in this offering do not choose to convert their preferred units into common units). Currently, we have 2,000,000 issued and outstanding common units. Assuming full conversion of the preferred units only, John M. Sensenig will still own over 79% of the common units. Accordingly, John M. Sensenig will be in a position to control the outcome on any issues requiring a vote of the members, including, but not limited to, controlling who sits in the Board of Managers, and any vote pertaining to a change in control. To the extent that you disagree with John M. Sensenig on any issue submitted to a vote of the members, you are likely to lose on that particular issue as John M. Sensenig will have majority ownership of the common units for the foreseeable future. The preferred units or the common units may not be a suitable investment for you. The preferred units or the common units may not be a suitable investment for you and we advise you to consult your investment, tax and other professional financial advisors prior to purchasing the preferred units or the common units. The characteristics of the preferred units or the common units, including, as it may apply, minimum holding periods, preference payments and lack of liquidity, may not satisfy your investment objectives. Each of the preferred units and the common units may not be a suitable investment for you based on your ability to withstand a loss of preference payment or investment or other aspects of your financial situation, including your income, net worth, financial needs, investment risk profile, return objectives, investment experience, and other factors. Prior to purchasing any preferred units or common units, you should consider your investment allocation with respect to the amount of your contemplated investment in the preferred units and common units in relation to your other investment holdings and the diversity of those holdings. We are not experienced in selling securities and no one has agreed to assist us on purchasing securities that we cannot sell ourselves, which may result in the
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+Prospectus Summary 1 Risk Factors 13 Forward-Looking Information 25 Use of Proceeds 27 Dividend Policy 28 Capitalization 29 Dilution 30 Selected Consolidated Historical Financial Data 31 Management s Discussion and Analysis of Financial Condition and Results of Operations 34 Business 48 Management 63 Compensation Discussion and Analysis 67 Certain Relationships and Related Person Transactions 76 Principal and Selling Stockholders 79 Description of Capital Stock 81 Shares Eligible for Future Sale 87 Material U.S. Federal Income Tax Considerations for Non-U.S. Holders 88 Underwriting 92 Validity of the Securities 96 Experts 96 Where You Can Find Additional Information 96 Glossary 97 Index to Consolidated Financial Statements F-1 Form of Purchase Agreement Consent of KPMG LLP You should rely only on the information contained in this prospectus or to which we have referred you. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date. Table of Contents PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read carefully this entire prospectus, especially the section entitled Risk Factors and the financial statements and the related notes included herein, before making a decision about whether to invest in our common stock. Unless the context requires otherwise or we specifically indicate otherwise, the terms Superior, our company, we, our, ours and us refer to Superior Offshore International, Inc., a newly formed Delaware corporation, and its subsidiaries, after giving effect to the reorganization transactions described under the caption Our History below. We refer to those transactions as the Reorganization. Unless the context requires otherwise or we specifically indicate otherwise, the information in this prospectus gives effect to the Reorganization and assumes no exercise of the underwriters overallotment option in this offering to purchase from the selling stockholders an aggregate of 1,300,000 shares of our common stock. Unless we specifically indicate otherwise, the term Subtech Diving and Marine refers to Subtech Diving (Pty) Ltd. and Subtech Marine (Pty) Ltd. We include a glossary of the terms used in this prospectus beginning on page 97. Our Business We are a leading provider of subsea construction and commercial diving services to the crude oil and natural gas exploration and production and gathering and transmission industries on the outer continental shelf of the Gulf of Mexico. Our subsea construction services include installation, upgrading and decommissioning of pipelines and production infrastructure, and our commercial diving services include recurring inspection, maintenance and repair services as well as support services for subsea construction and salvage operations. The versatility of our specialized fleet in combination with our experienced, highly trained diving personnel enables us to provide a comprehensive range of services to our customers at every stage of a crude oil or natural gas well s life cycle. We perform our services in both surface and saturation diving modes in water depths of up to 1,000 feet. We also operate a fabrication business that supports our subsea construction and commercial diving operations, increasing our ability to complete projects on a timely and cost-effective basis. Our track record has allowed us to develop a strong and loyal customer base and to capitalize on the increased demand for subsea construction and commercial diving services in our core market. The demand for our services has been driven by strong exploration and production capital spending levels, which are the result of favorable conditions in the crude oil and natural gas markets, and a substantial increase in construction, repair and salvage work following hurricanes in the Gulf of Mexico in 2004 and 2005. Our customers include most of the top 20 crude oil and natural gas producers and most of the top 20 gathering and transmission companies operating on the outer continental shelf of the Gulf of Mexico. We believe that we have one of the largest workforces of diving personnel dedicated to subsea construction and commercial diving activities in the U.S. Gulf of Mexico, with approximately 665 diving and marine personnel, including approximately 315 contract personnel, as of March 7, 2007. Our divers provide surface and saturation diving services from our vessels or may be contracted to provide these services and technical expertise to our customers vessels. Our fleet currently consists of four dynamically positioned, or DP, vessels and five four-point vessels. We also provide saturation diving services and technical resources on a contract basis to the Toisa Proteus, a DP vessel owned and operated by a third party, and have entered into a contract for the construction of the Superior Achiever, a 430-foot, DP III deepwater construction and dive support vessel, which we expect to place in service in the second half of 2008. DP and four-point vessels allow for the provision of a wider range of services than vessels with lesser technical capabilities, including subsea construction and repair work. In addition, these vessels can provide services in areas not located near existing infrastructure. DP vessels also allow for operations where mooring or anchoring is not feasible due to water depth, harsh conditions or congestion on the sea floor. All of our vessels are specifically equipped to provide a comprehensive range of services efficiently and reliably to our customers, resulting in higher dayrates, utilization rates and revenues per vessel. For example, all of our DP vessels are equipped with moon pool deployment capabilities and have sophisticated positioning and reference systems that allow each vessel the flexibility to operate in both saturation diving and remotely operated vehicle, or ROV, modes. In addition, following ongoing upgrades to Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Subject to Completion Preliminary Prospectus dated April 5, 2007 PROSPECTUS 8,666,667 Shares Common Stock We are selling 8,666,667 shares of our common stock. Prior to this offering, there has been no public market for our common stock. We have applied to list our common stock on the Nasdaq Global Market under the symbol DEEP. We expect the public offering price to be between $14.00 and $16.00 per share. Investing in our common stock involves risks. See Risk Factors beginning on page 13 of this prospectus. Per Share Total Public offering price $ $ Underwriting discount $ $ Proceeds, before expenses, to us $ $ The underwriters may also purchase up to an additional 1,300,000 shares from the selling stockholders at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover overallotments. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The shares will be ready for delivery on or about , 2007. Merrill Lynch Co. JPMorgan Howard Weil Incorporated Johnson Rice Company L.L.C. Simmons Company International The date of this prospectus is , 2007. Table of Contents Industry Information In this prospectus, we rely on and refer to information regarding our industry from the U.S. Minerals Management Service, or MMS, Spears Associates, Inc., Quest Offshore Resources, Inc. and Douglas-Westwood Ltd. These organizations are not affiliated with us, and the MMS is not aware of and has not consented to being named in this prospectus. We believe this information is accurate and reliable. In addition, in many cases we have made statements in this prospectus regarding our industry and our position in the industry based on our experience in the industry and our own evaluation of market conditions. Non-GAAP Financial Measures The body of accounting principles generally accepted in the United States is commonly referred to as GAAP. A non-GAAP financial measure is generally defined by the U.S. Securities and Exchange Commission, or SEC, as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measures. In this prospectus, we disclose EBITDA, a non-GAAP financial measure. EBITDA is calculated as net income (loss) before interest expense (income), provision for income taxes and depreciation and amortization. EBITDA is not a substitute for the GAAP measures of net income (loss) or cash flow. Limitation on Foreign Ownership of our Common Stock In order to preserve our ability to enjoy the benefits of U.S. domestic trade for certain of our vessels, we must maintain U.S. citizenship for U.S. coastwise trade purposes as defined in the Merchant Marine Act of 1936, the Shipping Act of 1916 and other federal laws that restrict domestic trade. In order to maintain U.S. citizenship for these purposes, our certificate of incorporation contains provisions that limit foreign ownership of our common stock. Applying the statutory requirements applicable today, our certificate of incorporation provides that no more than 20% of our outstanding common stock may be owned by non-U.S. citizens and establishes mechanisms to maintain compliance with these requirements. Our certificate of incorporation provides that any attempted or purported transfer of our common stock in violation of these restrictions will be ineffective to transfer such common stock. For additional information, please read Description of Capital Stock Certificate of Incorporation and Bylaws Foreign Ownership. Table of Contents the Superior Endeavour, three of our DP vessels will be equipped with hyperbaric rescue chambers and multi-chamber saturation diving systems that allow divers to work simultaneously at different depths in up to 1,000 feet of water. In addition, we own and operate one portable saturation diving system and are currently building two additional portable systems, which may be utilized on our own vessels and on third-party vessels along with our diving personnel. In addition to supporting our core operations, our fabrication business designs and manufactures crude oil and natural gas processing equipment, structural components and process piping for sale to our customers. We also offer work crews that provide topside offshore services, including platform restoration, riser installation, equipment hookup, structural repair and installation and platform maintenance. Our primary fabrication facility consists of 82,000 square feet of work space located on approximately 7.5 acres in Amelia, Louisiana, and employs approximately 100 personnel. We have grown our business by expanding our fleet to capitalize on strong market conditions in our core market and are expanding our operations into the deepwater Gulf of Mexico as well as select international markets. We have placed the Gulmar Falcon, the Gulf Diver V, the Gulf Diver VI, the American Salvor and the Adams Surveyor in service since the beginning of 2006, and we expect to place the Gulmar Condor in service in the second quarter of 2007 and the Superior Achiever in service in the second half of 2008. In addition, we recently purchased two newbuild work class ROVs and leased a third newbuild work class ROV under an agreement that grants to us an option to buy that ROV. Two of these ROVs became available for service in March 2007, and we expect to place the third ROV in service in the second quarter of 2007. These ROVs will be used in place of diving personnel to provide services in water depths up to 10,000 feet. The Superior Endeavour currently is undergoing scheduled upgrades, including the installation of a 50-ton crane and other equipment, that will allow the vessel to provide deepwater subsea construction support. The Superior Achiever, these ROVs and the upgrades to the Superior Endeavour will enable us to provide services in water depths up to 10,000 feet, operate in a broader range of regions and expand the breadth of services we offer to include subsea tree installation and tie backs. In addition, we may elect to purchase additional equipment for installation on the Superior Achiever that would enable it to provide most full-field development services, including deepwater small-diameter pipelay and umbilical installation. In December 2006, we began expanding our operations internationally by acquiring the subsea construction, commercial diving, offshore crude oil and natural gas logistical support and marine salvage businesses of South Africa-based Subtech Diving and Marine. We have experienced significant revenue growth over the last two years. This growth has resulted primarily from expanding our capacity by acquiring vessels, chartering vessels on both a short- and long-term basis and hiring diving and marine personnel during a period of increased demand for subsea construction and commercial diving services. During the same period, by virtue of our vessel acquisitions and charters, we have broadened the scope of the services we provide to include higher-margin subsea construction services. In the fiscal year ended December 31, 2006, we had revenues of $243.4 million and net income of $48.5 million compared with revenues of $82.4 million and net income of $14.0 million in the fiscal year ended December 31, 2005. Table of Contents Table of Contents Our Fleet The following table contains information regarding the vessels in our fleet as of March 31, 2007: Year Date Purchased Placed in Clear Deck Moon Pool Crane Own/ or Chartered Service by Length Space Accom- Launch/ Capacity Flag Charter by Superior Superior (feet)(1) (sq. feet) modations SAT Diving (tons) DP Vessels: Superior Endeavour Vanuatu Own 2004 (2) 10/2004 265 8,600 61 Yes (3) 45 (3) Gulmar Falcon Panama Charter(4) 2006 4/2006 220 9,235 73 Yes (5) 30 Gulmar Condor Panama Charter(6) 2006 341 10,764 128 Yes (5) 45 (7) Adams Surveyor Bahrain Charter(8) 2007 3/2007 228 5,084 54 No (9) 45 Four-Point Vessels: Gulf Diver III U.S. Own 2003 9/2003 165 1,034 36 No 10 Gulf Diver IV (10) U.S. Own 2005 168 2,880 43 No 15 Gulf Diver V U.S. Own 2005 3/2006 180 3,330 23 No 15 Gulf Diver VI U.S. Own 2006 9/2006 166 2,890 38 No 15 American Salvor U.S. Charter(11) 2006 1/2007 213 6,979 49 No 35 (1) We measure the length of each vessel from the tip of the bow to the farthest point on the stern. Other companies or regulatory bodies may measure vessel length differently than we do. (2) We chartered this vessel beginning in October 2004 and purchased this vessel in April 2005. (3) We placed this vessel in the shipyard in February 2007 for scheduled upgrades and expect to place this vessel back in service in the second quarter of 2007. Following these upgrades, the Superior Endeavour will be equipped with a 50-ton crane, a 12-man saturation diving system and a hyperbaric rescue chamber. (4) This charter expires in March 2008, subject to options to extend the charter for up to two additional six-month periods. (5) This vessel is equipped with a hyperbaric rescue chamber. (6) This charter expires in March 2009, subject to options to extend the charter for up to two additional six-month periods. We expect to place this vessel in service in the second quarter of 2007. (7) This vessel also will be equipped with a 120-ton/70-ton heave-compensated crane following scheduled upgrades. (8) This charter expires in February 2008, subject to options to extend the charter for up to two additional six-month periods. (9) This vessel does not currently have a saturation diving system, but has positioning and reference systems that allow the operation of either a saturation diving system or ROVs. (10) This vessel has been in the shipyard for upgrade and refurbishment since we acquired it in December 2005. We expect to place this vessel in service by the end of 2007. (11) This charter expires in May 2007, subject to options to extend the charter for up to an additional nine months. In addition to the vessels that we own or charter on a long-term basis, during periods of significant demand we charter vessels on a short-term basis under contracts of less than six months. We also provide diving personnel and technical expertise to vessels owned and operated by third parties. We are currently providing diving personnel and technical expertise to the Toisa Proteus, a 432-foot DP II vessel owned and operated by a third party, pursuant to an agreement that expires in May 2007. This agreement is subject to termination by our customer on 30 days notice. The Toisa Proteus is outfitted with a 441-ton crane and moon pool deployment capability, has clear deck space of 20,451 square feet and includes a 12-man saturation diving system rated for water depths of up to 1,000 feet. We also have entered into a contract for the construction of the Superior Achiever, a 430-foot, DP III deepwater construction and dive support vessel, which we expect to place in service in the second half of 2008. This vessel will be outfitted with a 300-ton heave-compensated abandonment and recovery winch, a 140-ton heave-compensated crane and a 160-ton crane. The Superior Achiever also will have both a diving moon pool and working moon pool and will be equipped with a 12-man, 1,000-foot rated, multichambered saturation diving system with hyperbaric rescue chamber, with the ability to support a 24-man, twin-bell system. Table of Contents Industry Trends Current business conditions are strong, and we believe the outlook for our business remains favorable based on the following industry trends: Increased offshore capital spending by crude oil and natural gas producers. Increased worldwide demand for energy and resulting high commodity prices have enabled crude oil and natural gas producers to increase significantly their spending on drilling and completions. According to Spears Associates, Inc., annual U.S. offshore drilling and completion spending has increased from $8.5 billion in 2000 to $14.2 billion in 2005, representing a compound annual growth rate of 10.8%, and is expected to increase at a compound annual growth rate of 6.4% between 2005 and 2010, reaching $19.4 billion in 2010. The amount of drilling and completion spending in offshore regions generally has served as a leading indicator of demand for subsea construction and commercial diving services. Significant demand for infrastructure repair projects in the U.S. Gulf of Mexico. Currently, demand for our services in the U.S. Gulf of Mexico is at a high level as a result of the damage to subsea pipelines and production platforms caused by Hurricane Ivan in 2004 and Hurricanes Katrina and Rita in 2005. In May 2006, the U.S. Minerals Management Service, or MMS, reported that over 450 pipelines were damaged and 113 platforms destroyed by Hurricanes Katrina and Rita. Hurricane-related repair projects include platform and pipeline assessments, repairs, salvage, tie backs of existing wells, well remediation and plugging and abandonment services. Due to the shortage of available diving personnel and equipment capable of performing these services, we anticipate that hurricane-related repair projects will continue for the next several years. Aging production infrastructure in the U.S. Gulf of Mexico. According to the MMS, there are nearly 4,000 crude oil and natural gas production platforms in the U.S. Gulf of Mexico, of which approximately 60% are more than 15 years old. Virtually all of the older platforms in the U.S. Gulf of Mexico lie in water depths of 1,000 feet or less. These structures generally are subject to extensive periodic inspections and require frequent maintenance as mandated by various regulatory agencies. In addition to routine maintenance, the MMS requires detailed inspections of each production platform at least once every five years. As the age of the offshore infrastructure in the U.S. Gulf of Mexico increases, we anticipate that demand for inspection and repair services and platform and pipeline decommissioning projects will continue to increase. Increasing subsea development work. In recent years, innovations in subsea completion and development technologies have made smaller offshore discoveries economically viable. Historically, the significant investment in production facilities and infrastructure required to develop and produce offshore reserves could be justified only for larger discoveries. Technological advancements in the industry have enabled crude oil and natural gas producers to develop smaller discoveries more economically using subsea completions with tie backs to existing infrastructure. According to Quest Offshore Resources, Inc., North American subsea production capital spending has increased from $191.6 million in 2000 to $397.8 million in 2005, representing a compound annual growth rate of 15.7%, and is expected to grow at a compound annual growth rate of 43.0% from 2005 through 2008, reaching $1.2 billion in 2008. We also expect subsea development to become more prevalent on the outer continental shelf of the Gulf of Mexico as producers elect to replace structures toppled by recent hurricanes with subsea production systems. Increasing deepwater activity. Crude oil and natural gas producers are increasingly focusing their efforts on more remote deepwater areas where geological formations have historically been less explored. Driven by technological innovations and an improved commodity price environment, deepwater activity has increased significantly in recent years. According to Douglas-Westwood Ltd., global spending in water depths greater than 500 meters has increased from $8.6 billion in 2002 to $14.7 billion in 2005, representing a compound annual growth rate of 19.6%, and is projected to grow by a compound annual growth rate of 9.2% from 2005 through 2010, reaching $22.8 billion in 2010. Table of Contents Rising international offshore activity. Many crude oil and natural gas producers have significant operations in international offshore regions with large untapped reserves, such as Southeast Asia, West Africa and the Middle East. In many international markets, significant production infrastructure work is required to develop new crude oil and natural gas discoveries. According to Spears Associates, Inc., international offshore drilling and completion spending accounts for 70% of worldwide offshore drilling and completion spending and has increased from $20.9 billion in 2000 to an estimated $36.7 billion in 2006, representing a compound annual growth rate of 9.8%, and is expected to increase by a compound annual growth rate of 9.7% between 2006 and 2009, reaching $48.4 billion in 2009. Our Strengths We believe our operations benefit from a number of competitive strengths, including the following: Large, highly trained and experienced diving workforce. We believe that we have one of the largest, most highly trained and experienced workforces of diving personnel dedicated to subsea construction and commercial diving activities in the U.S. Gulf of Mexico. Our ability to attract and retain experienced diving personnel has played an important role in growing our business. The availability of experienced divers is a significant factor currently limiting competition in the U.S. Gulf of Mexico. Highly specialized fleet. Our fleet of vessels is equipped specifically to perform a broad array of subsea construction and commercial diving services. We refurbish and upgrade each vessel that we purchase, and to the extent possible, augment each newly acquired vessel with technically advanced diving equipment. Strong customer relationships. Our ability to consistently provide high-quality, safe and reliable services has allowed us to develop a strong and loyal customer base, which we believe will benefit us as we pursue additional opportunities in the deepwater Gulf of Mexico and international markets. Experienced management team aligned with stockholders. Our senior management team, project managers and sales personnel have extensive experience in the subsea construction and commercial diving businesses in the U.S. Gulf of Mexico and a proven track record of growing our business through the acquisition of vessels and the expansion of our services. As a result of management s beneficial ownership of a significant portion of our common stock following this offering, we believe that our management s interests will be aligned with those of our stockholders. Our Strategies Our goal is to enhance our strong market position on the outer continental shelf of the Gulf of Mexico and to pursue deepwater and international growth opportunities. We intend to employ the following strategies to achieve our goal: Capitalize on strong market conditions in the U.S. Gulf of Mexico. We intend to continue capitalizing on the strong demand for our services related to increased crude oil and natural gas exploration and production activity and hurricane-related damage to pipelines and platforms in the U.S. Gulf of Mexico, which is expected to provide repair projects over the next several years. Expand our deepwater capabilities. We intend to expand our deepwater service capabilities and, with the addition of two new work class ROVs in March 2007 and a third in the second quarter of 2007, believe we are well-positioned to pursue subsea construction projects in the deepwater U.S. Gulf of Mexico. We recently were awarded two contracts to perform subsea construction services using ROVs in water depths ranging from 2,300 to 6,000 feet. Our deepwater capabilities will expand further following the refurbishment and upgrade of the Superior Endeavour. In addition, we expect to place the Superior Achiever in service in the second half of 2008. Table of Contents Expand breadth of services in core market. We intend to continue to upgrade our fleet and to identify and pursue joint venture and partnership opportunities that expand the services we offer on the outer continental shelf of the Gulf of Mexico. Pursue international growth opportunities. We intend to selectively pursue international growth opportunities, including acquisitions of complementary assets or companies that provide us a business platform in attractive new markets and increase our flexibility to pursue the highest-return business opportunities. Expand fabrication capabilities. We intend to expand our ability to fabricate larger equipment and systems, enabling us to reduce our reliance on third-party suppliers and increase our ability to complete projects on a timely and cost-effective basis. Risks Related to Our Business You should consider carefully the matters described under
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001372813_animal_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001372813_animal_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8ba299f315cfc59a506d6cc7db8691dba388a271
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001372813_animal_prospectus_summary.txt
@@ -0,0 +1 @@
+This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all the information you should consider before investing in our common stock. You should read the entire prospectus carefully, including Risk factors and our consolidated financial statements and notes to those consolidated financial statements, included elsewhere in this prospectus, before making an investment decision. We use Animal Health International, the Company, we, us and our in this prospectus to refer to Animal Health International, Inc. and its subsidiaries. Our fiscal year ends on June 30. Accordingly, a reference to fiscal 2006 means the 12-month period ended June 30, 2006. Unless otherwise indicated, all statistical information provided about our business in this prospectus speaks as of September 30, 2006. Our business Based upon net sales, we are one of the largest distributors of animal health products in the United States. We sell more than 35,000 products sourced from over 1,500 manufacturers to over 62,000 customers, as well as provide consultative services to our customers in the highly fragmented animal health products industry. Products we distribute include pharmaceuticals, vaccines, parasiticides, diagnostics, capital equipment, sanitizers, devices and supplies. Our principal customers are veterinarians, production animal operators and animal health product retailers. We believe our customers purchase from us due to our longstanding relationships with them, knowledge of their businesses, service and ability to assist them in their operations. We have a 278 person sales force, including 223 field sales representatives. We process daily shipments from our central replenishment and distribution facility in Memphis, Tennessee and 68 distribution locations strategically located across the United States and Canada. For our fiscal year ended June 30, 2006, our net sales, operating income and net income were $571.2 million, $24.2 million and $7.4 million, respectively. For the three months ended September 30, 2006, our net sales, operating income and net income were $145.7 million, $5.4 million and $0.9 million, respectively. Approximately 45% of our net sales were to veterinarians, with the remaining 55% principally to production animal operators and animal health product retailers. Our industry According to the Animal Health Institute, an industry group representing animal health products manufacturers, animal health product sales in the United States for 2005 totaled approximately $5.3 billion, an increase from approximately $4.8 billion in 2003, representing a compounded annual growth rate of approximately 5.5%. The animal health products market is divided into two markets: production animals and companion animals. The production animal market primarily consists of beef and dairy cattle, poultry and swine, while the companion animal market primarily consists of horses, dogs and cats. The Animal Health Institute estimates that in 2005 the market for production animal health products was approximately $2.4 billion and the market for companion animal health products was approximately $2.9 billion. Distributors are critical to the animal health products supply chain. They provide thousands of multi-product manufacturers with cost-effective access to millions of geographically diverse customers. Distributors also provide customers with access to a broad selection of products through a single channel, thereby helping them efficiently manage inventory levels. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Table of Contents Index to Financial Statements Our strengths We believe that our strengths include the following: Based upon net sales, we are one of the largest animal health products distributors in the United States. We believe that we add value to both customers seeking a single source solution for their product and service needs as well as manufacturers seeking cost-effective access to a fragmented and geographically dispersed customer base. We have developed longstanding strategic relationships with many of our customers and manufacturers. Members of our 278 person sales force have worked with us for an average of nine years and generally live in the local communities in which they serve and have a comprehensive understanding of our customers needs. We have spent approximately $19.0 million over the past five years developing a highly scaleable and customized information technology platform. We have an experienced management team with significant animal health products industry expertise. Our strategy Our mission is to become the leading worldwide provider of animal health products and services in the production animal and companion animal health products markets. Our strategy to achieve this mission includes the following: Continue to grow our business organically. Expand sales of proprietary products. Continue to improve operational efficiencies. Make selective acquisitions.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001372989_brookshire_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001372989_brookshire_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..f7ab126e1cbc597565b73f68ba99f3da68884218
--- /dev/null
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@@ -0,0 +1 @@
+S-1/A 1 y31695a8sv1za.htm FORM S-1/A S-1/A Table of Contents As filed with the Securities and Exchange Commission on September 21, 2007 Registration No. 333-136879 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 PRE-EFFECTIVE AMENDMENT NO. 8 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 BROOKSHIREtm RAW MATERIALS (U.S.) TRUST (a Delaware Statutory Trust) BROOKSHIREtm RAW MATERIALS (U.S.) CORE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) CORE CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) AGRICULTURE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) AGRICULTURE CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) METALS USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) METALS CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ENERGY USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ENERGY CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ACCELERATED CORE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ACCELERATED CORE CDN FUND SERIES (Exact Name of Registrant as Specified in its Charter) Delaware (State of Organization) 6221 (Primary Standard Industrial Classification Code Number) 20-540 7663 I.R.S. Employer Identification Number) Brookshiretm Raw Materials Management, LLC 1000 Hart Road Suite 210 Barrington, Illinois 60010 888-877-2719 (Address and telephone number of registrant s principal executive offices) Clyde Harrison Brookshiretm Raw Materials Management, LLC 1000 Hart Road Suite 210 Barrington, Illinois 60010 888-877-2719 (Name, address and telephone number of agent for service) Copies to: Robert G. Frucht, Esq. Crowell Moring LLP 153 E. 53rd Street, 31st Floor New York, New York 10022-4611 (212) 895-4229 Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. CALCULATION OF REGISTRATION FEE Maximum Aggregate Proposed Maximum Amount of Title of Each Series Number of Securities Aggregate Offering Registration of Securities to be Registered to be Offered Price* Fee** Brookshiretm Raw Materials (U.S.) Core USD Fund 17,500,000 $ 175,000,000 $ 18,725.00 Brookshiretm Raw Materials (U.S.) Core CDN Fund 7,500,000 $ 75,000,000 $ 8,025.00 Brookshiretm Raw Materials (U.S.) Agriculture USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Agriculture CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Metals USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Metals CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Energy USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Energy CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Accelerated Core USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Accelerated Core CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Total Units of Beneficial Interest 50,000,000 $ 500,000,000 $ 53,500.00 * The proposed maximum aggregate offering price has been calculated assuming that all Units were sold at the price of US$10 per Unit. ** The amount of the registration fee for each Fund of Units is calculated in reliance upon Rule 457(o) under the Securities Act and using the proposed maximum aggregate offering as described above. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with section 8(A) of the Securities act or until this Registration Statement shall become effective on such date as the commission, acting pursuant to said Section 8(A), may determine. Table of Contents COMMODITY FUTURES TRADING COMMISSION RISK DISCLOSURE STATEMENT YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED TO THIS POOL AT PAGES 62 THROUGH 65 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGES 34 THROUGH 36 FOR EACH INDIVIDUAL FUND. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001373025_liberty_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001373025_liberty_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d8925e53d19de99ae5c8b0d1691a7e1534403498
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001373025_liberty_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary only highlights selected information from this prospectus and may not contain all of the information that is important to you. You should carefully read the entire prospectus, financial statements, and attached exhibits before you decide whether to invest.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001373060_mindray_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001373060_mindray_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..86d4d0bac6dfcbfae684d0f6721fd22b3d7b30aa
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001373060_mindray_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements included elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our American depositary shares, or ADSs, discussed under
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001373424_powered_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001373424_powered_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e7dd27ef49e898fa08e3c66706aaf5259749c1e0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001373424_powered_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY Our name is Powered Corporation. This is our initial public offering. In this registration statement we refer to ourselves as Powered Corporation, Powered, We, Us and Our. We have no subsidiaries. We were incorporated in Texas in 1996. Our address is: Powered Corporation, 2925 Briarpark Dr, Suite 930, Houston, Texas 77042, voice: : 1-713-992-4755, fax: (281) 493-3444. Our CEO is James Jeffrey. Powered was formed to design, build and operate nuclear power plants and related infrastructure facilities in various countries. We also prepare and coordinate preliminary risk analysis and assessment studies for electric power generation facilities. Ultimately we hope to be a joint venture partner or hold an ownership position in power generation projects for which we conduct preliminary risk analysis and assessment studies. We also hope to take on the role of the builder of power generation projects. In 2006, Khalid Al-Sunaid, a Director, engaged us and paid us $25,000 to prepare a preliminary risk analysis and assessment study concerning a power generation project in the Republic of Yemen. We completed that preliminary risk analysis and assessment study in 2006. THE OFFERING Outstanding 41,364,000 shares outstanding as of July 13, 2007. Common Stock Before This Offering Common Stock 4,610,000 shares offered by selling stockholders. Offered Outstanding 41,364,000 shares of if all offered shares are sold. Common Stock After This Offering Offering Price Shares held by selling stockholders will be sold for a price to be determined at the time of sale by the Selling Stockholders. The Selling Stockholders are not required to sell any shares. Proceeds We will not receive proceeds from the sale of our shares by the Selling Stockholders. Risk Factors The securities offered hereby involve a high degree of risk. See "Risk Factors."
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001373476_hamilton_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001373476_hamilton_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..329dfd45de8fbd3c75d8e1f9bea9b67e3c450fd9
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001373476_hamilton_prospectus_summary.txt
@@ -0,0 +1 @@
+This summary of the information contained in this prospectus may not include all the information that is important to you. To understand fully and for a more complete description of the terms and conditions of the spin-off, you should read this prospectus, including the annexes, in its entirety and the documents to which you are referred. See Where You Can Find More Information (page 119). Page references have been included parenthetically to direct you to a more complete discussion of each topic presented in this summary. Information About Hamilton Beach (page 50) Hamilton Beach is a Delaware corporation and an indirect, wholly owned subsidiary of NACCO. Through our wholly owned subsidiary, HB/PS, we are a leading designer, marketer and distributor of small electric household appliances, as well as commercial products for restaurants, bars and hotels. Our well-known brands include Hamilton Beach , Hamilton Beach eclectrics , Proctor Silex , Traditions by ProctorSilex , TrueAir and Hamilton Beach Commercial. For more information about our business, including our competitive strengths, see Business of Hamilton Beach beginning on page 50. Hamilton Beach, Inc. 4421 Waterfront Drive Glen Allen, Virginia 23060 (804) 273-9777 Information About NACCO NACCO is an operating holding company that will continue to have three principal businesses after the spin-off: lift trucks, mining and specialty retailing. NACCO Materials Handling Group, Inc. designs, engineers, manufacturers, sells, services and leases a comprehensive line of lift trucks and aftermarket parts marketed globally under the Hyster and Yale brand names. The North American Coal Corporation mines and markets lignite coal primarily as fuel for power generation and provides selected value-added mining services for other natural resources companies. The Kitchen Collection, Inc., which is referred to as KCI, is a national specialty retailer of kitchenware and gourmet foods operating under the Kitchen Collection and Le Gourmet Chef store names in outlet and traditional malls throughout the United States. NACCO Industries, Inc. 5875 Landerbrook Drive Cleveland, Ohio 44124 (440) 449-9600 The Spin-Off (page 20) On [ ], 2007, the NACCO board of directors, which is referred to as the NACCO board, and the Hamilton Beach board of directors, which is referred to as our board, each approved the spin-off of Hamilton Beach, upon the terms and subject to the conditions contained in the amended and restated spin-off agreement among NACCO, Housewares Holding Company, HB/PS and us, which is referred to as the spin-off agreement. On May 31, 2007, we paid a special cash dividend of $110 million, which is referred to as the special dividend. For a more detailed description of the special dividend and the terms of the spin-off agreement, see The Spin-Off Agreement beginning on page 103. We encourage you to read the spin-off agreement, which is attached to this prospectus as Annex A, because it sets forth the terms of the spin-off. Table of Contents The information in this prospectus is not complete and may be changed. We may not distribute these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell securities, and it is not soliciting an offer to buy these securities, in any state where the offer or sale is not permitted. PROSPECTUS SUBJECT TO COMPLETION, DATED AUGUST 13, 2007 [ ] Shares of Class A Common Stock [ ] Shares of Class B Common Stock Hamilton Beach, Inc. PRELIMINARY COPY To the Stockholders of NACCO Industries, Inc.: We are pleased to inform you that the board of directors of NACCO Industries, Inc., which we refer to as NACCO, has approved the spin-off of Hamilton Beach, Inc., which we refer to as Hamilton Beach, to NACCO stockholders. Hamilton Beach is an indirect, wholly owned subsidiary of NACCO and constitutes a part of NACCO s housewares business. Immediately following the spin-off, Hamilton Beach will be an independent public company. To effect the spin-off, Housewares Holding Company, a wholly owned subsidiary of NACCO and parent of Hamilton Beach, will distribute to NACCO all of the outstanding shares of Hamilton Beach common stock, and NACCO will then make a distribution of all of the outstanding shares of Hamilton Beach common stock to holders of NACCO common stock as of the record date for the spin-off. The record date for the spin-off is [ ], 2007. For each share of NACCO Class A common stock held on the record date, NACCO will distribute one half of one share of Hamilton Beach Class A common stock and one half of one share of Hamilton Beach Class B common stock. Similarly, for each share of NACCO Class B common stock held on the record date, NACCO will distribute one half of one share of Hamilton Beach Class A common stock and one half of one share of Hamilton Beach Class B common stock. Hamilton Beach has applied to list the Hamilton Beach Class A common stock on the New York Stock Exchange, which we refer to as the NYSE, under the symbol HAB. The Hamilton Beach Class B common stock will not be listed on the NYSE or any other stock exchange. Each share of Hamilton Beach Class A common stock is entitled to one vote per share on matters submitted to a vote of the Hamilton Beach common stockholders. Each share of Hamilton Beach Class B common stock is entitled to ten votes per share on matters submitted to a vote of the Hamilton Beach common stockholders, is subject to transfer restrictions and is convertible into one share of Hamilton Beach Class A common stock at anytime without cost at the option of the holder. NACCO and Hamilton Beach believe that the spin-off will accomplish a number of important business objectives and is in the best interests of NACCO s stockholders. NACCO expects that Hamilton Beach, as an independent company, will be able to compete more successfully as the housewares industry consolidates by having the ability to offer its stock as consideration in connection with acquisitions. Furthermore, the spin-off will place Hamilton Beach in a better position to retain and attract talented management by providing it with the ability to issue incentive compensation awards that are related to the performance of Hamilton Beach Class A common stock. After the spin-off, NACCO will continue to own and operate its other principal businesses, which are NACCO Materials Handling Group, Inc., The North American Coal Corporation and The Kitchen Collection, Inc. You will not be required to pay for shares of Hamilton Beach common stock received in the spin-off or to surrender or exchange shares of NACCO common stock or take any other action to be entitled to receive your shares of Hamilton Beach common stock. We encourage you to read this prospectus carefully and in its entirety, particularly the risks described under the heading Risk Factors beginning on page 9. We expect that the spin-off will be tax free to you for U.S. federal income tax purposes. However, any cash that you receive in lieu of fractional shares will generally be taxable to you. We have not requested a private letter ruling from the Internal Revenue Service, which we refer to as the IRS, to confirm the tax-free status of the spin-off. The spin-off is subject to certain conditions, including the receipt by NACCO of an opinion from legal counsel to the effect that the spin-off will qualify as a tax-free spin-off under the Internal Revenue Code. We encourage you to read this prospectus, which describes the spin-off in detail and contains important business and financial information about Hamilton Beach. We believe the spin-off is a positive event for our businesses and NACCO stockholders, and we look forward to your continued support as a stockholder of NACCO and Hamilton Beach. We remain committed to working on your behalf to build long-term stockholder value. Sincerely, Sincerely, Alfred M. Rankin, Jr. Michael J. Morecroft Chairman, President and Chief Executive Officer Director, President and Chief Executive Officer NACCO Industries, Inc. Hamilton Beach, Inc. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. The date of this prospectus is , 2007. Table of Contents Stock Ownership of Hamilton Beach Directors and Executive Officers (page 54) The stock ownership of our directors and executive officers immediately after the spin-off is described under the heading Security Ownership of Certain Beneficial Owners and Management beginning on page 54. Ownership of Hamilton Beach after the Spin-Off (page 22) Immediately after the spin-off, NACCO stockholders as of the record date will hold all of the outstanding shares of our Class A common stock and our Class B common stock. Based on the number of shares of NACCO common stock outstanding on August 1, 2007, NACCO expects to distribute approximately four million shares of our Class A common stock and approximately four million shares of our Class B common stock in the spin-off. Operations of Hamilton Beach after the Spin-Off (page 23) We will continue to conduct business after completion of the spin-off under multiple brands and trade names. Our headquarters will continue to be located in Glen Allen, Virginia. Management of Hamilton Beach after the Spin-Off (page 23) After the spin-off, our executive officers will be the same as our executive officers immediately before the spin-off and will remain in office until their respective successors are duly elected or appointed and qualified in accordance with our amended and restated bylaws or as otherwise provided by law. After the spin-off, we will be led by: Dr. Michael J. Morecroft as President and Chief Executive Officer; Keith B. Burns as Vice President, Engineering and Product Development; Kathleen L. Diller as Vice President, General Counsel and Secretary; Gregory E. Salyers as Vice President, Operations; Paul C. Smith as Senior Vice President, Sales; James H. Taylor as Vice President, Chief Financial Officer and Treasurer; and Gregory H. Trepp as Vice President, Marketing. Hamilton Beach Board after the Spin-Off (page 23) After the spin-off, our directors will be the same as our directors immediately before the spin-off and will remain in office until their respective successors are duly elected or appointed and qualified in accordance with our amended and restated certificate of incorporation and our amended and restated bylaws or as otherwise provided by law. After the spin-off, our board will consist of Alfred M. Rankin, Jr., who will serve as the non-executive Chairman, June R. Aprille, David J. McKittrick, Curtis E. Moll, Dr. Michael J. Morecroft, Jan L. Murley, Thomas T. Rankin, Britton T. Taplin and [ ]. You should rely only on the information contained in this prospectus or any related prospectus supplement. Neither we nor NACCO has authorized anyone to provide you with different information. You should not assume that the information in this prospectus or any related prospectus supplement is accurate as of any date other than the date on the front of such document. TABLE OF CONTENTS Page Questions and Answers about the Spin-Off Q-1 Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001373506_highpoint_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001373506_highpoint_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e21d0a8b2faee5733f3b4beecbd49ad12f20bc4f
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001373506_highpoint_prospectus_summary.txt
@@ -0,0 +1 @@
+Prospectus Summary This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. Unless otherwise stated in this prospectus: references to we, us or our company refer to Highpoint Acquisition Corp.; initial shares refers to the 1,041,667 shares of our common stock outstanding as of March 6, 2007. Of the 1,079,167 shares of common stock that our initial stockholders originally purchased from us for $25,000 in July 2006, the initial stockholders agreed to cancel 37,500 shares of common stock. Such shares were cancelled as of March 6, 2007; insider warrants refers to the (i) 1,040,004 warrants we are selling privately to Harbor Healthcare Holding LLC, an affiliate of W. Thomas Lomax, our Chairman of the Board and Chief Financial Officer and Treasurer, J. Randall Williams, our Chief Executive Officer and a member of our Board of Directors, Bennett P. Lomax, our Secretary and a member of our Board of Directors and Walter P. Lomax, Jr., M.D., our Senior Advisor, at $0.75 per warrant and (ii) 159,996 warrants we are selling privately to Moreco Partners LLC, an affiliate of Robert Moreyra, our Executive Vice President and director, at $0.75 per warrant, immediately prior to the consummation of this offering; convertible loans refers to the loan made by Harbor Healthcare in the amount of $300,000 and the loan made by Moreco Partners in the amount of $500,000, each bearing interest at a rate of 4% per annum. These loans are convertible, after our completion of a business combination, into units at a rate of $6.00 per unit at the option of the maker of the convertible loan. In the event that the over-allotment option is exercised, Harbor Healthcare and Moreco Partners will loan up to an additional $120,000 in the aggregate. The convertible loans are to be repaid on the earlier to occur of (i) the closing of a business combination or (ii) our liquidation. If the convertible loans are to be repaid on a liquidation, such loans may be payable only out of funds not held in trust. Notwithstanding the foregoing, the convertible loans shall not be repaid from the first $700,000 released to us from the interest earned on the trust fund; the term public stockholders means the holders of the shares of common stock which are being sold as part of the units in this public offering, including any of our existing stockholders to the extent that they purchase such shares in this offering or in the open market following this offering; the information in this prospectus assumes that the underwriters will not exercise their over-allotment option; and unless otherwise indicated, information in the prospectus does not assume that the over-allotment option or the representative s unit purchase option has been exercised. Our Company We are a blank check company organized under the laws of the State of Delaware on March 15, 2006. We were formed with the purpose of effecting a merger, capital stock exchange, asset or stock acquisition or other similar business combination with an operating business. Our efforts to identify a prospective target business will not be limited to a particular industry. However, our management has significant experience and relationships in the healthcare industry, and we intend to focus initially on target businesses in this industry. To date, our efforts have been limited to organizational activities. According to the Centers for Medicare and Medicaid Services, or CMS, total U.S. healthcare spending surpassed $1.9 trillion in 2005 and is projected to increase at an annual growth rate of approximately 7%. According to CMS, U.S. healthcare spending represents approximately 16% of the total U.S. Gross Domestic Product, or GDP, and is projected to be more than 20% of GDP in 2015, according to the California HealthCare Foundation. As both a percentage of GDP, and on a per-capita basis, U.S. healthcare spending is greater than any other developed nation according to Plunkett s Health Care Industry Almanac, or PHCIA. Table of Contents According to PHCIA, U.S. per capita healthcare spending is twice the average of that of member countries of the Organization for Economic Cooperation and Development. Moreover, according to PHCIA, investors invested $6.9 billion in venture money into U.S. healthcare companies in 2004 alone. Within this industry we believe there are numerous niche sectors each with potential markets totaling in the hundreds of millions of dollars. While some of these sectors are serviced by large traditional healthcare institutions, we believe many opportunities exist for smaller companies with existing capital. We do not have any specific business combination under consideration and we have not, nor has anyone on our behalf, contacted any prospective target business or had any discussions, formal or otherwise, with respect to such a transaction. We have not, nor have any of our agents or affiliates, been approached by any candidates, or any representative of any candidates, with respect to a possible acquisition transaction with our company. Additionally, we have not, nor has anyone on our behalf, taken any measure, directly or indirectly, to identify or locate any suitable acquisition candidate, nor have we engaged or retained any agent or other representative to identify or locate any such acquisition candidate. While we may seek to effect business combinations with more than one target business, our initial business combination must be with a target business whose fair market value is at least equal to 80% of the balance in the trust fund (less the deferred underwriting discounts and commissions) at the time of such acquisition, although this may entail simultaneous acquisitions of several operating businesses. If we determine to acquire several businesses simultaneously and such businesses are owned by different sellers, we will need for each of such sellers to agree that our purchase of its business is contingent on the simultaneous closings of the other acquisitions. This requirement may make it more difficult for us, and delay our ability, to complete the business combination. With multiple acquisitions, we could also face additional risks, including additional burdens and costs with respect to possible multiple negotiations and due diligence investigations, if there are multiple sellers, and the additional risks associated with the subsequent integration of the operations and services or products of the acquired companies in a single operating business. The target business that we acquire may have a fair market value substantially in excess of 80% of the balance in the trust fund (less the deferred underwriting discounts and commissions). The fair market value of the target business will be determined by our board of directors based upon one or more standards generally accepted by the financial community (examples of which may include actual and potential sales, earnings and cash flow and book value). If our board is not able to independently determine that the target business has a sufficient fair market value, we will obtain an opinion from an unaffiliated, independent investment banking firm with respect to the satisfaction of such criteria. In order to consummate such an acquisition, we may issue a significant amount of our debt or equity securities to the sellers of such business and/or seek to raise additional funds through a private offering of debt or equity securities. Since we have no specific business combination under consideration, we have not entered into any such fundraising arrangement and have no current intention of doing so. If we are unable to consummate a business combination within the allotted time periods set forth in this prospectus, we will wind up our affairs and liquidate and distribute only to our public stockholders all of our assets, including the funds held in the trust fund, including interest earned on the trust fund, if any, less amounts of interest earned on the trust and previously distributed to us for working capital requirements, including payment of the monthly fee for office services to an affiliate, and repayment of amounts due under our convertible loans. In the event of our liquidation, investors may lose a portion of their investment in an amount between the $5.88 to be distributed from the trust fund and their initial investment. Upon our dissolution, third parties may bring claims against us. Therefore, we cannot assure you that the per share distribution from the trust fund, if we liquidate, will not be less than $5.88 per share, plus interest, net of taxes and expenses. Additionally, if we are forced to file for bankruptcy, or an involuntary bankruptcy case is filed against us, we cannot assure you that we will be able to return to our public shareholders at least $5.88 per share, as bankruptcy claims may have depleted all or a portion of the trust fund. You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. We will not update the information contained in this prospectus unless otherwise required by law. Table Of Contents Page Prospectus Summary 1
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001373746_ishares_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001373746_ishares_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b5934508fdd850cd3074e066e17f6205204c16a2
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001373746_ishares_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights some of the information contained in this prospectus. This summary does not contain all of the information you should consider before investing in the Shares. You should carefully read this entire prospectus, including Risk Factors beginning on page 12, before making a decision to invest in the Shares. This prospectus is intended to be used beginning , 2007. Structure of the Trust and the Investing Pool iShares S&P GSCI Energy Commodity-Indexed Trust, or the Trust, was formed as a Delaware statutory trust on , 2007. The Trust intends to continuously offer Shares to the public. Each Share represents a unit of fractional undivided beneficial interest in the net assets of the Trust. Substantially all of the assets of the Trust consist of its holdings of the limited liability company interests in the Investing Pool, called Investing Pool Interests, which are the only securities in which the Trust may invest. The term of the Trust is perpetual, unless it is earlier dissolved under the circumstances described under Description of the Shares, the Trust Agreement and the Investing Pool Agreement Amendment and Dissolution . The principal offices of the Trust are located at 45 Fremont Street, San Francisco, CA 94105, and the Trust s telephone number is (415) 597-2000. iShares S&P GSCI Energy Commodity-Indexed Investing Pool LLC, or the Investing Pool, was formed as a Delaware limited liability company on , 2007. The Investing Pool will issue Investing Pool Interests only to the Trust and to Barclays Global Investors International, Inc., the Manager of the Investing Pool. The Manager will maintain a limited equity interest in the Investing Pool with the balance of the Investing Pool owned by the Trust. Neither the Trust nor the Manager may transfer Investing Pool Interests to any other person. The Investing Pool will invest in long positions in futures contracts on the S&P GSCI Energy Excess Return Index, called CERFs, and post as margin cash or Short-Term Securities to collateralize its CERF positions. The term of the Investing Pool is perpetual, unless it is earlier terminated by judicial decree or the consent of its members. The principal offices of the Investing Pool are located at 45 Fremont Street, San Francisco, CA 94105, and the Investing Pool s telephone number is (415) 597-2000. Each of the Trust and the Investing Pool is a commodity pool as defined in the Commodity Exchange Act, or CEA, and the regulations of the Commodity Futures Trading Commission, or CFTC. Each entity is operated by Barclays Global Investors International, Inc., which is a commodity pool operator registered with the CFTC and is an indirect subsidiary of Barclays Bank PLC. The Advisor, Barclays Global Fund Advisors, which is an indirect subsidiary of Barclays Bank PLC, serves as the commodity trading advisor of the Investing Pool and is registered with the CFTC. The Trust will not have a separate commodity trading advisor. Neither the Trust nor the Investing Pool is an investment company registered under the Investment Company Act and neither is required to register under that Act. The material terms of the agreements governing the Trust and the Investing Pool are discussed in greater detail under Description of the Shares, the Trust Agreement and the Investing Pool Agreement . Creations and Redemptions The Trust will issue Shares only in one or more blocks of 50,000 Shares, called Baskets, in exchange for CERFs and cash (or, in the discretion of the Sponsor, Short-Term Securities in lieu of cash) in the Basket Amount. The Trust will redeem Shares only in Baskets in exchange for CERFs and cash (or, in the discretion of the Sponsor, Short-Term Securities in lieu of cash) in the Basket Amount. The Trust will not redeem individual Shares. The Trust will contribute to the Investing Pool all CERFs, cash and Short-Term Securities that it receives in exchange for issuing Baskets in return for an increase in its equity interest in the Investing Pool. The Trust will Table of Contents THE COMMODITY FUTURES MARKETS Futures contracts on physical commodities and commodity indices are traded on regulated futures exchanges, and physical commodities and other derivatives on physical commodities and commodity indices are traded in the over-the-counter market and on various types of physical and electronic trading facilities and markets. At present, all of the contracts included in the Index are exchange-traded futures contracts. An exchange-traded futures contract provides for the purchase and sale of a specified type and quantity of a commodity or financial instrument during a stated delivery month for a fixed price. A futures contract on an index of commodities provides for the payment and receipt of cash based on the level of the index at settlement or liquidation of the contract. A futures contract provides for a specified settlement month in which the cash settlement is made or in which the commodity or financial instrument is to be delivered by the seller (whose position is described as short ) and acquired by the purchaser (whose position is described as long ). There is no purchase price paid or received on the purchase or sale of a futures contract. Instead, an amount of cash or cash equivalents must be deposited with the broker as initial margin . This amount varies based on the requirements imposed by the exchange clearing houses, but may be lower than 7% of the value of the contract. This margin deposit provides collateral for the obligations of the parties to the futures contract. By depositing margin, which may vary in form depending on the exchange, with the clearing house or broker involved, a market participant may be able to earn interest on its margin funds, thereby increasing the total return that it may realize from an investment in futures contracts. The market participant normally makes to, and receives from, the broker subsequent daily payments as the price of the futures contract fluctuates. These payments are called variation margin and are made as the existing positions in the futures contract become more or less valuable, a process known as marking to the market . Futures contracts are traded on organized exchanges known as contract markets in the United States. At any time prior to the expiration of a futures contract, subject to the availability of a liquid secondary market, a trader may elect to close out its position by taking an opposite position on the exchange on which the trader obtained the position. This operates to terminate the position and fix the trader s profit or loss. Futures contracts are cleared through the facilities of a centralized clearing house and a brokerage firm, referred to as a futures commission merchant , which is a member of the clearing house. The clearing house guarantees the performance of each clearing member that is a party to a futures contract by, in effect, taking the opposite side of the transaction. Clearing houses do not guarantee the performance by clearing members of their obligations to their customers. Unlike equity securities, futures contracts, by their terms, have stated expirations and, at a specified point in time prior to expiration, trading in a futures contract for the current delivery month will cease. As a result, a market participant wishing to maintain its exposure to a futures contract on a particular commodity with the nearest expiration must close out its position in the expiring contract and establish a new position in the contract for the next delivery month, a process referred to as rolling . For example, a market participant with a long position in November crude oil futures that wishes to maintain a position in the nearest delivery month will, as the November contract nears expiration, sell November futures, which serves to close out the existing long position, and buy December futures. This will roll the November position into a December position, and, when the November contract expires, the market participant will still have a long position in the nearest delivery month. Futures exchanges and clearing houses in the United States are subject to regulation by the CFTC. Exchanges may adopt rules and take other actions that affect trading, including imposing speculative position limits, maximum price fluctuations and trading halts and suspensions and requiring liquidation of contracts in certain circumstances. See
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001373747_ishares_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001373747_ishares_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b5934508fdd850cd3074e066e17f6205204c16a2
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001373747_ishares_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights some of the information contained in this prospectus. This summary does not contain all of the information you should consider before investing in the Shares. You should carefully read this entire prospectus, including Risk Factors beginning on page 12, before making a decision to invest in the Shares. This prospectus is intended to be used beginning , 2007. Structure of the Trust and the Investing Pool iShares S&P GSCI Energy Commodity-Indexed Trust, or the Trust, was formed as a Delaware statutory trust on , 2007. The Trust intends to continuously offer Shares to the public. Each Share represents a unit of fractional undivided beneficial interest in the net assets of the Trust. Substantially all of the assets of the Trust consist of its holdings of the limited liability company interests in the Investing Pool, called Investing Pool Interests, which are the only securities in which the Trust may invest. The term of the Trust is perpetual, unless it is earlier dissolved under the circumstances described under Description of the Shares, the Trust Agreement and the Investing Pool Agreement Amendment and Dissolution . The principal offices of the Trust are located at 45 Fremont Street, San Francisco, CA 94105, and the Trust s telephone number is (415) 597-2000. iShares S&P GSCI Energy Commodity-Indexed Investing Pool LLC, or the Investing Pool, was formed as a Delaware limited liability company on , 2007. The Investing Pool will issue Investing Pool Interests only to the Trust and to Barclays Global Investors International, Inc., the Manager of the Investing Pool. The Manager will maintain a limited equity interest in the Investing Pool with the balance of the Investing Pool owned by the Trust. Neither the Trust nor the Manager may transfer Investing Pool Interests to any other person. The Investing Pool will invest in long positions in futures contracts on the S&P GSCI Energy Excess Return Index, called CERFs, and post as margin cash or Short-Term Securities to collateralize its CERF positions. The term of the Investing Pool is perpetual, unless it is earlier terminated by judicial decree or the consent of its members. The principal offices of the Investing Pool are located at 45 Fremont Street, San Francisco, CA 94105, and the Investing Pool s telephone number is (415) 597-2000. Each of the Trust and the Investing Pool is a commodity pool as defined in the Commodity Exchange Act, or CEA, and the regulations of the Commodity Futures Trading Commission, or CFTC. Each entity is operated by Barclays Global Investors International, Inc., which is a commodity pool operator registered with the CFTC and is an indirect subsidiary of Barclays Bank PLC. The Advisor, Barclays Global Fund Advisors, which is an indirect subsidiary of Barclays Bank PLC, serves as the commodity trading advisor of the Investing Pool and is registered with the CFTC. The Trust will not have a separate commodity trading advisor. Neither the Trust nor the Investing Pool is an investment company registered under the Investment Company Act and neither is required to register under that Act. The material terms of the agreements governing the Trust and the Investing Pool are discussed in greater detail under Description of the Shares, the Trust Agreement and the Investing Pool Agreement . Creations and Redemptions The Trust will issue Shares only in one or more blocks of 50,000 Shares, called Baskets, in exchange for CERFs and cash (or, in the discretion of the Sponsor, Short-Term Securities in lieu of cash) in the Basket Amount. The Trust will redeem Shares only in Baskets in exchange for CERFs and cash (or, in the discretion of the Sponsor, Short-Term Securities in lieu of cash) in the Basket Amount. The Trust will not redeem individual Shares. The Trust will contribute to the Investing Pool all CERFs, cash and Short-Term Securities that it receives in exchange for issuing Baskets in return for an increase in its equity interest in the Investing Pool. The Trust will Table of Contents THE COMMODITY FUTURES MARKETS Futures contracts on physical commodities and commodity indices are traded on regulated futures exchanges, and physical commodities and other derivatives on physical commodities and commodity indices are traded in the over-the-counter market and on various types of physical and electronic trading facilities and markets. At present, all of the contracts included in the Index are exchange-traded futures contracts. An exchange-traded futures contract provides for the purchase and sale of a specified type and quantity of a commodity or financial instrument during a stated delivery month for a fixed price. A futures contract on an index of commodities provides for the payment and receipt of cash based on the level of the index at settlement or liquidation of the contract. A futures contract provides for a specified settlement month in which the cash settlement is made or in which the commodity or financial instrument is to be delivered by the seller (whose position is described as short ) and acquired by the purchaser (whose position is described as long ). There is no purchase price paid or received on the purchase or sale of a futures contract. Instead, an amount of cash or cash equivalents must be deposited with the broker as initial margin . This amount varies based on the requirements imposed by the exchange clearing houses, but may be lower than 7% of the value of the contract. This margin deposit provides collateral for the obligations of the parties to the futures contract. By depositing margin, which may vary in form depending on the exchange, with the clearing house or broker involved, a market participant may be able to earn interest on its margin funds, thereby increasing the total return that it may realize from an investment in futures contracts. The market participant normally makes to, and receives from, the broker subsequent daily payments as the price of the futures contract fluctuates. These payments are called variation margin and are made as the existing positions in the futures contract become more or less valuable, a process known as marking to the market . Futures contracts are traded on organized exchanges known as contract markets in the United States. At any time prior to the expiration of a futures contract, subject to the availability of a liquid secondary market, a trader may elect to close out its position by taking an opposite position on the exchange on which the trader obtained the position. This operates to terminate the position and fix the trader s profit or loss. Futures contracts are cleared through the facilities of a centralized clearing house and a brokerage firm, referred to as a futures commission merchant , which is a member of the clearing house. The clearing house guarantees the performance of each clearing member that is a party to a futures contract by, in effect, taking the opposite side of the transaction. Clearing houses do not guarantee the performance by clearing members of their obligations to their customers. Unlike equity securities, futures contracts, by their terms, have stated expirations and, at a specified point in time prior to expiration, trading in a futures contract for the current delivery month will cease. As a result, a market participant wishing to maintain its exposure to a futures contract on a particular commodity with the nearest expiration must close out its position in the expiring contract and establish a new position in the contract for the next delivery month, a process referred to as rolling . For example, a market participant with a long position in November crude oil futures that wishes to maintain a position in the nearest delivery month will, as the November contract nears expiration, sell November futures, which serves to close out the existing long position, and buy December futures. This will roll the November position into a December position, and, when the November contract expires, the market participant will still have a long position in the nearest delivery month. Futures exchanges and clearing houses in the United States are subject to regulation by the CFTC. Exchanges may adopt rules and take other actions that affect trading, including imposing speculative position limits, maximum price fluctuations and trading halts and suspensions and requiring liquidation of contracts in certain circumstances. See
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001373752_ishares_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001373752_ishares_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5bb8b3923c8dddef37533981ede7a4a5f79e4c07
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001373752_ishares_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights some of the information contained in this prospectus. This summary does not contain all of the information you should consider before investing in the Shares. You should carefully read this entire prospectus, including Risk Factors beginning on page 12, before making a decision to invest in the Shares. This prospectus is intended to be used beginning , 2007. Structure of the Trust and the Investing Pool iShares S&P GSCI Natural Gas Commodity-Indexed Trust, or the Trust, was formed as a Delaware statutory trust on , 2007. The Trust intends to continuously offer Shares to the public. Each Share represents a unit of fractional undivided beneficial interest in the net assets of the Trust. Substantially all of the assets of the Trust consist of its holdings of the limited liability company interests in the Investing Pool, called Investing Pool Interests, which are the only securities in which the Trust may invest. The term of the Trust is perpetual, unless it is earlier dissolved under the circumstances described under Description of the Shares, the Trust Agreement and the Investing Pool Agreement Amendment and Dissolution . The principal offices of the Trust are located at 45 Fremont Street, San Francisco, CA 94105, and the Trust s telephone number is (415) 597-2000. iShares S&P GSCI Natural Gas Commodity-Indexed Investing Pool LLC, or the Investing Pool, was formed as a Delaware limited liability company on , 2007. The Investing Pool will issue Investing Pool Interests only to the Trust and to Barclays Global Investors International, Inc., the Manager of the Investing Pool. The Manager will maintain a limited equity interest in the Investing Pool with the balance of the Investing Pool owned by the Trust. Neither the Trust nor the Manager may transfer Investing Pool Interests to any other person. The Investing Pool will invest in long positions in futures contracts on the S&P GSCI Natural Gas Excess Return Index, called CERFs, and post as margin cash or Short-Term Securities to collateralize its CERF positions. The term of the Investing Pool is perpetual, unless it is earlier terminated by judicial decree or the consent of its members. The principal offices of the Investing Pool are located at 45 Fremont Street, San Francisco, CA 94105, and the Investing Pool s telephone number is (415) 597-2000. Each of the Trust and the Investing Pool is a commodity pool as defined in the Commodity Exchange Act, or CEA, and the regulations of the Commodity Futures Trading Commission, or CFTC. Each entity is operated by Barclays Global Investors International, Inc., which is a commodity pool operator registered with the CFTC and is an indirect subsidiary of Barclays Bank PLC. The Advisor, Barclays Global Fund Advisors, which is an indirect subsidiary of Barclays Bank PLC, serves as the commodity trading advisor of the Investing Pool and is registered with the CFTC. The Trust will not have a separate commodity trading advisor. Neither the Trust nor the Investing Pool is an investment company registered under the Investment Company Act and neither is required to register under that Act. The material terms of the agreements governing the Trust and the Investing Pool are discussed in greater detail under Description of the Shares, the Trust Agreement and the Investing Pool Agreement . Creations and Redemptions The Trust will issue Shares only in one or more blocks of 50,000 Shares, called Baskets, in exchange for CERFs and cash (or, in the discretion of the Sponsor, Short-Term Securities in lieu of cash) in the Basket Amount. The Trust will redeem Shares only in Baskets in exchange for CERFs and cash (or, in the discretion of the Sponsor, Short-Term Securities in lieu of cash) in the Basket Amount. The Trust will not redeem individual Shares. The Trust will contribute to the Investing Pool all CERFs, cash and Short-Term Securities that it receives in exchange for issuing Baskets in return for an increase in its equity interest in the Investing Pool. The Trust will obtain all CERFs, cash and Short-Term Securities that it uses to fulfill redemptions of Baskets through an in-kind redemption from the Investing Pool that will decrease the Trust s equity interest in the Investing Pool. Table of Contents THE COMMODITY FUTURES MARKETS Futures contracts on physical commodities and commodity indices are traded on regulated futures exchanges, and physical commodities and other derivatives on physical commodities and commodity indices are traded in the over-the-counter market and on various types of physical and electronic trading facilities and markets. At present, all of the contracts included in the Index are exchange-traded futures contracts. An exchange-traded futures contract provides for the purchase and sale of a specified type and quantity of a commodity or financial instrument during a stated delivery month for a fixed price. A futures contract on an index of commodities provides for the payment and receipt of cash based on the level of the index at settlement or liquidation of the contract. A futures contract provides for a specified settlement month in which the cash settlement is made or in which the commodity or financial instrument is to be delivered by the seller (whose position is described as short ) and acquired by the purchaser (whose position is described as long ). There is no purchase price paid or received on the purchase or sale of a futures contract. Instead, an amount of cash or cash equivalents must be deposited with the broker as initial margin . This amount varies based on the requirements imposed by the exchange clearing houses, but may be lower than 7% of the value of the contract. This margin deposit provides collateral for the obligations of the parties to the futures contract. By depositing margin, which may vary in form depending on the exchange, with the clearing house or broker involved, a market participant may be able to earn interest on its margin funds, thereby increasing the total return that it may realize from an investment in futures contracts. The market participant normally makes to, and receives from, the broker subsequent daily payments as the price of the futures contract fluctuates. These payments are called variation margin and are made as the existing positions in the futures contract become more or less valuable, a process known as marking to the market . Futures contracts are traded on organized exchanges known as contract markets in the United States. At any time prior to the expiration of a futures contract, subject to the availability of a liquid secondary market, a trader may elect to close out its position by taking an opposite position on the exchange on which the trader obtained the position. This operates to terminate the position and fix the trader s profit or loss. Futures contracts are cleared through the facilities of a centralized clearing house and a brokerage firm, referred to as a futures commission merchant , which is a member of the clearing house. The clearing house guarantees the performance of each clearing member that is a party to a futures contract by, in effect, taking the opposite side of the transaction. Clearing houses do not guarantee the performance by clearing members of their obligations to their customers. Unlike equity securities, futures contracts, by their terms, have stated expirations and, at a specified point in time prior to expiration, trading in a futures contract for the current delivery month will cease. As a result, a market participant wishing to maintain its exposure to a futures contract on a particular commodity with the nearest expiration must close out its position in the expiring contract and establish a new position in the contract for the next delivery month, a process referred to as rolling . For example, a market participant with a long position in November crude oil futures that wishes to maintain a position in the nearest delivery month will, as the November contract nears expiration, sell November futures, which serves to close out the existing long position, and buy December futures. This will roll the November position into a December position, and, when the November contract expires, the market participant will still have a long position in the nearest delivery month. Futures exchanges and clearing houses in the United States are subject to regulation by the CFTC. Exchanges may adopt rules and take other actions that affect trading, including imposing speculative position limits, maximum price fluctuations and trading halts and suspensions and requiring liquidation of contracts in certain circumstances. See
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001373755_ishares_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001373755_ishares_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5bb8b3923c8dddef37533981ede7a4a5f79e4c07
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001373755_ishares_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights some of the information contained in this prospectus. This summary does not contain all of the information you should consider before investing in the Shares. You should carefully read this entire prospectus, including Risk Factors beginning on page 12, before making a decision to invest in the Shares. This prospectus is intended to be used beginning , 2007. Structure of the Trust and the Investing Pool iShares S&P GSCI Natural Gas Commodity-Indexed Trust, or the Trust, was formed as a Delaware statutory trust on , 2007. The Trust intends to continuously offer Shares to the public. Each Share represents a unit of fractional undivided beneficial interest in the net assets of the Trust. Substantially all of the assets of the Trust consist of its holdings of the limited liability company interests in the Investing Pool, called Investing Pool Interests, which are the only securities in which the Trust may invest. The term of the Trust is perpetual, unless it is earlier dissolved under the circumstances described under Description of the Shares, the Trust Agreement and the Investing Pool Agreement Amendment and Dissolution . The principal offices of the Trust are located at 45 Fremont Street, San Francisco, CA 94105, and the Trust s telephone number is (415) 597-2000. iShares S&P GSCI Natural Gas Commodity-Indexed Investing Pool LLC, or the Investing Pool, was formed as a Delaware limited liability company on , 2007. The Investing Pool will issue Investing Pool Interests only to the Trust and to Barclays Global Investors International, Inc., the Manager of the Investing Pool. The Manager will maintain a limited equity interest in the Investing Pool with the balance of the Investing Pool owned by the Trust. Neither the Trust nor the Manager may transfer Investing Pool Interests to any other person. The Investing Pool will invest in long positions in futures contracts on the S&P GSCI Natural Gas Excess Return Index, called CERFs, and post as margin cash or Short-Term Securities to collateralize its CERF positions. The term of the Investing Pool is perpetual, unless it is earlier terminated by judicial decree or the consent of its members. The principal offices of the Investing Pool are located at 45 Fremont Street, San Francisco, CA 94105, and the Investing Pool s telephone number is (415) 597-2000. Each of the Trust and the Investing Pool is a commodity pool as defined in the Commodity Exchange Act, or CEA, and the regulations of the Commodity Futures Trading Commission, or CFTC. Each entity is operated by Barclays Global Investors International, Inc., which is a commodity pool operator registered with the CFTC and is an indirect subsidiary of Barclays Bank PLC. The Advisor, Barclays Global Fund Advisors, which is an indirect subsidiary of Barclays Bank PLC, serves as the commodity trading advisor of the Investing Pool and is registered with the CFTC. The Trust will not have a separate commodity trading advisor. Neither the Trust nor the Investing Pool is an investment company registered under the Investment Company Act and neither is required to register under that Act. The material terms of the agreements governing the Trust and the Investing Pool are discussed in greater detail under Description of the Shares, the Trust Agreement and the Investing Pool Agreement . Creations and Redemptions The Trust will issue Shares only in one or more blocks of 50,000 Shares, called Baskets, in exchange for CERFs and cash (or, in the discretion of the Sponsor, Short-Term Securities in lieu of cash) in the Basket Amount. The Trust will redeem Shares only in Baskets in exchange for CERFs and cash (or, in the discretion of the Sponsor, Short-Term Securities in lieu of cash) in the Basket Amount. The Trust will not redeem individual Shares. The Trust will contribute to the Investing Pool all CERFs, cash and Short-Term Securities that it receives in exchange for issuing Baskets in return for an increase in its equity interest in the Investing Pool. The Trust will obtain all CERFs, cash and Short-Term Securities that it uses to fulfill redemptions of Baskets through an in-kind redemption from the Investing Pool that will decrease the Trust s equity interest in the Investing Pool. Table of Contents THE COMMODITY FUTURES MARKETS Futures contracts on physical commodities and commodity indices are traded on regulated futures exchanges, and physical commodities and other derivatives on physical commodities and commodity indices are traded in the over-the-counter market and on various types of physical and electronic trading facilities and markets. At present, all of the contracts included in the Index are exchange-traded futures contracts. An exchange-traded futures contract provides for the purchase and sale of a specified type and quantity of a commodity or financial instrument during a stated delivery month for a fixed price. A futures contract on an index of commodities provides for the payment and receipt of cash based on the level of the index at settlement or liquidation of the contract. A futures contract provides for a specified settlement month in which the cash settlement is made or in which the commodity or financial instrument is to be delivered by the seller (whose position is described as short ) and acquired by the purchaser (whose position is described as long ). There is no purchase price paid or received on the purchase or sale of a futures contract. Instead, an amount of cash or cash equivalents must be deposited with the broker as initial margin . This amount varies based on the requirements imposed by the exchange clearing houses, but may be lower than 7% of the value of the contract. This margin deposit provides collateral for the obligations of the parties to the futures contract. By depositing margin, which may vary in form depending on the exchange, with the clearing house or broker involved, a market participant may be able to earn interest on its margin funds, thereby increasing the total return that it may realize from an investment in futures contracts. The market participant normally makes to, and receives from, the broker subsequent daily payments as the price of the futures contract fluctuates. These payments are called variation margin and are made as the existing positions in the futures contract become more or less valuable, a process known as marking to the market . Futures contracts are traded on organized exchanges known as contract markets in the United States. At any time prior to the expiration of a futures contract, subject to the availability of a liquid secondary market, a trader may elect to close out its position by taking an opposite position on the exchange on which the trader obtained the position. This operates to terminate the position and fix the trader s profit or loss. Futures contracts are cleared through the facilities of a centralized clearing house and a brokerage firm, referred to as a futures commission merchant , which is a member of the clearing house. The clearing house guarantees the performance of each clearing member that is a party to a futures contract by, in effect, taking the opposite side of the transaction. Clearing houses do not guarantee the performance by clearing members of their obligations to their customers. Unlike equity securities, futures contracts, by their terms, have stated expirations and, at a specified point in time prior to expiration, trading in a futures contract for the current delivery month will cease. As a result, a market participant wishing to maintain its exposure to a futures contract on a particular commodity with the nearest expiration must close out its position in the expiring contract and establish a new position in the contract for the next delivery month, a process referred to as rolling . For example, a market participant with a long position in November crude oil futures that wishes to maintain a position in the nearest delivery month will, as the November contract nears expiration, sell November futures, which serves to close out the existing long position, and buy December futures. This will roll the November position into a December position, and, when the November contract expires, the market participant will still have a long position in the nearest delivery month. Futures exchanges and clearing houses in the United States are subject to regulation by the CFTC. Exchanges may adopt rules and take other actions that affect trading, including imposing speculative position limits, maximum price fluctuations and trading halts and suspensions and requiring liquidation of contracts in certain circumstances. See
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+S-1/A 1 v067253s1a.htm As filed with the Securities and Exchange Commission on November __, 2006 As filed with the Securities and Exchange Commission on February 28, 2007 File No. 333-138452 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________ AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ______________ HYDE PARK ACQUISITION CORP. (Exact Name of Registrant as Specified in Its Charter) Delaware 6770 20-5415048 (State or Other Jurisdiction of Incorporation or Organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 461 Fifth Avenue, 25th Floor New York, New York 10017 212-644-3450 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant s Principal Executive Offices) ______________ Laurence S. Levy, Chairman and Chief Executive Officer 461 Fifth Avenue, 25th Floor New York, New York 10017 212-644-3450 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) ______________ Copies to: David Alan Miller, Esq. Graubard Miller The Chrysler Building 405 Lexington Avenue New York, New York 10174 (212) 818-8800 (212) 818-8881 Facsimile W. Mark Young, Esq. Andrews Kurth LLP 600 Travis Suite 4200 Houston, Texas 77002 (713) 220-4323 (713) 238-7111 Facsimile ______________ Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, FEBRUARY 28, 2007 $90,000,000 HYDE PARK ACQUISITION CORP. 11,250,000 units Hyde Park Acquisition Corp. is a newly formed blank check company organized for the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. Our efforts to identify a prospective target business will not be limited to a particular industry. We do not have any specific business combination under consideration and we have not (nor has anyone on our behalf) contacted any prospective target business or had any discussions, formal or otherwise, with respect to such a transaction. This is an initial public offering of our securities. Each unit that we are offering has a price of $8.00 and consists of one share of our common stock and one warrant. Each warrant entitles the holder to purchase one share of our common stock at a price of $5.00. Each warrant will become exercisable on the later of our completion of a business combination and ________, 2008 [one year from the date of this prospectus], and will expire on _________, 2011 [four years from the date of this prospectus], or earlier upon redemption. We have granted EarlyBirdCapital, Inc., the representative of the underwriters for this offering, a 45-day option to purchase up to 1,687,500 units (over and above the 11,250,000 units referred to above) solely to cover over-allotments, if any. The over-allotment will be used only to cover the net syndicate short position resulting from the initial distribution. We have also agreed to sell to EarlyBirdCapital, for $100, as additional compensation, an option to purchase up to a total of 600,000 units at $8.80 per unit. The units issuable upon exercise of this option are identical to those offered by this prospectus. The purchase option and its underlying securities have been registered under the registration statement of which this prospectus forms a part. Laurence S. Levy, our chairman of the board and chief executive officer, Edward Levy, our president and director, and Isaac Kier, one of our stockholders, have committed to purchase from us an aggregate of 1,500,000 warrants at $1.00 per warrant (for a total purchase price of $1,500,000). These purchases will take place on a private placement basis simultaneously with the consummation of this offering. All of the proceeds we receive from the purchases will be placed in the trust fund described below. The insider warrants to be purchased will be identical to the warrants underlying the units being offered by this prospectus except that if we call the warrants for redemption, the insider warrants may be exercisable on a cashless basis so long as they are held by these purchasers or their affiliates. The insider warrants have been registered for resale under the registration statement of which this prospectus forms a part, but the purchasers have agreed that the insider warrants will not be sold or transferred by them until after we have completed a business combination. There is presently no public market for our units, common stock or warrants. The units will be quoted on the OTC Bulletin Board under the symbol _______ on or promptly after the date of this prospectus. Once the securities comprising the units begin separate trading, the common stock and warrants will be quoted on the OTC Bulletin Board under the symbols _______ and, _______ respectively. We cannot assure you that our securities will continue to be quoted on the OTC Bulletin Board. Investing in our securities involves a high degree of risk. See Risk Factors beginning on page 10 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Public Offering Price Underwriting Discount and Commissions(1) Proceeds, Before Expenses, to Us Per unit $ 8.00 $ 0.48 $ 7.52 Total $ 90,000,000 $ 5,400,000 $ 84,600,000 (1) Includes a non-accountable expense allowance in the amount of 0.5% of the gross proceeds, or $0.04 per unit ($450,000 in total), payable to EarlyBirdCapital. The non-accountable expense allowance is not payable with respect to the units sold upon exercise of the over-allotment option. Of the underwriting discount and commissions, $1,350,000 ($0.12 per unit) is being deferred by the underwriters and will not be payable by us to the underwriters unless and until we consummate a business combination. $85,250,000 of the net proceeds of this offering (including $1,350,000 of underwriting discounts and commissions payable to the underwriters in this offering which is being deferred by them until we consummate a business combination), plus the additional aggregate $1,500,000 we will receive from the purchase of the insider warrants being made by our Laurence S. Levy, Edward Levy and Isaac Kier simultaneously with the consummation of this offering, for an aggregate of $86,750,000 (or approximately $7.71 per unit sold to the public in this offering), will be deposited into a trust account at _______, maintained by Continental Stock Transfer & Trust Company acting as trustee. These funds will not be released to us until the earlier of the completion of a business combination and our liquidation (which may not occur until __________, 2009 [twenty four months from the date of this prospectus]). We are offering the units for sale on a firm-commitment basis. EarlyBirdCapital, Inc., acting as representative of the underwriters, expects to deliver our securities to investors in the offering on or about ________, 2007. EarlyBirdCapital, Inc. Legend Merchant Group Inc. _______________, 2007 The target business that we acquire may have a fair market value substantially in excess of 80% of our net assets. In order to consummate such a business combination, we may issue a significant amount of our debt or equity securities to the sellers of such business and/or seek to raise additional funds through a private offering of debt or equity securities. There are no limitations on our ability to incur debt or issue securities in order to consummate a business combination. If we issue securities in order to consummate a business combination, our stockholders could end up owning a minority of the combined company as there is no requirement that our stockholders own a certain percentage of our company after our business combination. Since we have no specific business combination under consideration, we have not entered into any such arrangement to issue our debt or equity securities and have no current intention of doing so. Our principal executive offices are located at 461 Fifth Avenue, 25th Floor, New York, New York 10017 and our telephone number is (212) 644-3450. The Offering Securities offered 11,250,000 units, at $8.00 per unit, each unit consisting of: one share of common stock; and one warrant. The units will begin trading on or promptly after the date of this prospectus. Each of the common stock and warrants may trade separately on the 90th day after the date of this prospectus unless EarlyBirdCapital determines that an earlier date is acceptable (based upon its assessment of the relative strengths of the securities markets and small capitalization companies in general, and the trading pattern of, and demand for, our securities in particular). In no event will EarlyBirdCapital allow separate trading of the common stock and warrants until we file an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file a Current Report on Form 8-K with the Securities and Exchange Commission, including an audited balance sheet, upon the consummation of this offering, which is anticipated to take place three business days from the date the units commence trading. The audited balance sheet will reflect our receipt of the proceeds from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Form 8-K. If the over-allotment option is exercised after our initial filing of a Form 8-K, we will file an amendment to the Form 8-K to provide updated financial information to reflect the exercise of the over-allotment option. We will also include in this Form 8-K, or amendment thereto, or in a subsequent Form 8-K, information indicating if EarlyBirdCapital has allowed separate trading of the common stock and warrants prior to the 90th day after the date of this prospectus. The units will continue to trade along with the common stock and warrants after the units are separated. Holders will need to have their brokers contact our transfer agent in order to separate the units into common stock and warrants. Securities sold privately to insiders simultaneously with consummation of this offering 1,500,000 insider warrants at $1.00 per warrant (for an aggregate purchase price of $1,500,000) will be sold to Laurence S. Levy, Edward Levy and Isaac Kier, one of our stockholders, pursuant to letter agreements between us, EarlyBirdCapital and such individuals. These purchases will take place on a private placement basis simultaneously with the consummation of this offering. The insider warrants will be identical to the warrants underlying the units being offered by this prospectus except that if we call the warrants for redemption as described below, the insider warrants may be exercisable on a cashless basis so long as such warrants are held by these purchasers or their affiliates. Additionally, these purchasers have agreed, pursuant to the agreements, that the insider warrants will not be sold or transferred by them until after we have completed a business combination. EarlyBirdCapital has no intention of waiving this restriction. Common stock: Number outstanding before this offering 2,812,500 shares Number to be outstanding after this offering 14,062,500 shares Warrants: Number outstanding before this offering 0 warrants Number to be sold to insiders 1,500,000 warrants Number to be outstanding after this offering and sale to insiders 12,750,000 warrants Exercisability Each warrant is exercisable for one share of common stock. Exercise price $5.00 Exercise period The warrants will become exercisable on the later of: the completion of a business combination with a target business, and [________], 2008 [one year from the date of this prospectus]. The warrants will expire at 5:00 p.m., New York City time, on [________], 2011 [four years from the date of this prospectus] or earlier upon redemption. However, except with respect to the insider warrants, no warrant will be exercisable and we will not be obligated to issue shares of common stock unless at the time a holder seeks to exercise such warrant, a prospectus relating to the common stock issuable upon exercise of the warrant is current and the common stock has been qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Accordingly, such warrants could expire worthless if we fail to maintain an effective registration statement relating to the common stock issuable upon exercise of the warrants and fail to either qualify or obtain an exemption under the securities laws of the state of residence of the holder of the warrants. With respect to the insider warrants, we may be able to deliver unregistered shares of common stock to the holders of the insider warrants upon their exercise, notwithstanding our inability to have a prospectus relating to the common stock declared effective. Redemption We may redeem the outstanding warrants (including any of the insider warrants and any outstanding warrants issued upon exercise of the unit purchase option issued to EarlyBirdCapital), with the prior consent of EarlyBirdCapital: in whole and not in part, at a price of $.01 per warrant at any time while the warrants are exercisable (which will only occur if a registration statement relating to the shares of common stock issuable upon exercise of the warrants is effective and current), upon a minimum of 30 days prior written notice of redemption, and if, and only if, the last sales price of our common stock equals or exceeds $11.00 per share for any 20 trading days within a 30-trading day period ending three business days before we send the notice of redemption. The redemption criteria for our warrants have been established at a price which is intended to provide warrant holders a reasonable premium to the initial exercise price and provide a sufficient degree of liquidity to cushion the market reaction to our redemption call. PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. Unless otherwise stated in this prospectus: references to we, us or our company refer to Hyde Park Acquisition Corp.; initial shares refers to the 2,812,500 shares of common stock that our initial stockholders originally purchased from us for $25,000 in August 2006; insider warrants refers to the 1,500,000 warrants we are selling privately to Laurence S. Levy, our chairman of the board and chief executive officer, Edward Levy, our president and director, and Isaac Kier, one of our stockholders, upon consummation of this offering; the term public stockholders means the holders of the shares of common stock which are being sold as part of the units in this public offering (whether they are purchased in this public offering or in the aftermarket), including any of our existing stockholders to the extent that they purchase such shares; gives retroactive effect to a stock dividend of 0.5 shares of common stock for each outstanding share of common stock on February 2, 2007 and a stock dividend of 0.25 shares of common stock for each outstanding share of common stock on February 5, 2007; and the information in this prospectus assumes that the representative of the underwriters will not exercise its over-allotment option. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer is not permitted. We are a blank check company organized under the laws of the State of Delaware on August 21, 2006. We were formed with the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. Our efforts in identifying a prospective target business will not be limited to a particular industry or geographic location, although we intend to focus on companies in the United States operating in various industries including infrastructure, logistics and distribution and manufacturing. To date, our efforts have been limited to organizational activities. We do not have any specific business combination under consideration and we have not (nor has anyone on our behalf) contacted any prospective target business or had any discussions, formal or otherwise, with respect to such a transaction. We have not (nor have any of our agents or affiliates) been approached by any candidates (or representative of any candidates) with respect to a possible business combination with our company. Additionally, we have not, nor has anyone on our behalf, taken any measure, directly or indirectly, to identify or locate any suitable business combination candidate, nor have we engaged or retained any agent or other representative to identify or locate any such acquisition candidate. Our initial business combination must be with a target business or businesses whose fair market value is at least equal to 80% of our net assets, meaning all of our assets, including the funds held in the trust account, less our liabilities (but assuming for this purpose only that the deferred underwriting commissions are not liabilities) at the time of such business combination, although this may entail simultaneous business combinations with several operating businesses. The fair market value of the target will be determined by our board of directors based upon one or more standards generally accepted by the financial community (which may include actual and potential sales, earnings and cash flow or book value). We anticipate structuring a business combination to acquire 100% of the equity interests or assets of the target business. We may, however, structure a business combination to acquire less than 100% of such interests or assets of the target business but will not acquire less than a controlling interest (meaning not less than 50% of the voting securities of such target business). If we acquire only a controlling interest in a target business or businesses, the portion of such business that we acquire must have a fair market value equal to at least 80% of our net assets. If we determine to simultaneously acquire several businesses and such businesses are owned by different sellers, we will need for each of such sellers to agree that our purchase of its business is contingent on the simultaneous closings of the other business combinations, which may make it more difficult for us, and delay our ability, to complete the business combination. With multiple business combinations, we could also face additional risks, including additional burdens and costs with respect to possible multiple negotiations and due diligence investigations (if there are multiple sellers) and the additional risks associated with the subsequent integration of the operations and services or products of the combined companies in a single operating business. Since we may redeem the warrants only with the prior written consent of EarlyBirdCapital and EarlyBirdCapital may hold warrants subject to redemption, it may have a conflict of interest in determining whether or not to consent to such redemption. We cannot assure you that EarlyBirdCapital will consent to such redemption if it is not in EarlyBirdCapital s best interest even if it is in our best interest. If we call the warrants for redemption as described above, our management will have the option to require all holders that wish to exercise warrants to do so on a cashless basis. In such event, each holder would pay the exercise price by surrendering the warrants for that number of shares of common stock equal to the quotient obtained by dividing (x) the product of the number of shares of common stock underlying the warrants, multiplied by the difference between the exercise price of the warrants and the fair market value (defined below) by (y) the fair market value. The fair market value shall mean the average reported last sale price of the common stock for the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of warrants. If we call the warrants for redemption and our management does not take advantage of this option, our officers and directors would still be entitled to exercise their insider warrants as described above for cash or on a cashless basis using the same formula that other warrant holders would have been required to use had all warrant holders been required to exercise their warrants on a cashless basis. Proposed OTC Bulletin Board symbols for our: Units [______] Common stock [______] Warrants [______] Offering proceeds to be held in trust $85,250,000 of the proceeds of this offering plus the $1,500,000 we will receive from the sale of the insider warrants (for an aggregate of $86,750,000 or approximately $7.71 per unit sold to the public in this offering) will be placed in a trust account at ____________, maintained by Continental Stock Transfer & Trust Company, acting as trustee pursuant to an agreement to be signed on the date of this prospectus. This amount includes $1,350,000 of underwriting discounts and commissions payable to the underwriters in the offering. The underwriters have agreed that such amount will not be paid unless and until we consummate a business combination. Except as set forth below, these proceeds will not be released until the earlier of the completion of a business combination and our liquidation. This could take as long as twenty four months from the date of this prospectus (the time period in which we must complete a business combination or liquidate). Therefore, unless and until a business combination is consummated, the proceeds held in the trust account will not be available for our use for any expenses related to this offering or expenses which we may incur related to the investigation and selection of a target business and the negotiation of an agreement to acquire a target business. Notwithstanding the foregoing, there can be released to us, from time to time, interest earned on the funds in the trust account, up to an aggregate of $1,550,000, to fund expenses related to investigating and selecting a target business, income and other taxes and our other working capital requirements. With this exception, expenses incurred by us may be paid prior to a business combination only from the net proceeds of this offering not held in the trust account (initially, approximately $200,000). None of the warrants may be exercised until after the consummation of a business combination and, thus, after the proceeds of the trust account have been disbursed. Accordingly, the warrant exercise price will be paid directly to us and not placed in the trust account. Limited payments to insiders There will be no fees or other case payments paid to our existing stockholders, officers, directors, advisors or their affiliates prior to, or for any services they render in order to effectuate, the consummation of a business combination (regardless of the type of transaction that it is) other than: repayment of an aggregate of $125,000 non-interest bearing loans made by Laurence S. Levy, Edward Levy and Isaac Kier; payment of $7,500 per month to ProChannel Management LLC, affiliate of Laurence S. Levy, for office space and related services; and reimbursement of out-of-pocket expenses incurred by them in connection with certain activities on our behalf, such as identifying and investigating possible business targets and business combinations. Certificate of Incorporation As discussed below, there are specific provisions in our amended and restated certificate of incorporation that may not be amended prior to our consummation of a business combination, including our requirements to seek stockholder approval of such a business combination and to allow our stockholders to seek conversion of their shares if they do not approve of such a business combination. While we have been advised that such provisions limiting our ability to amend our certificate of incorporation may not be enforceable under Delaware law, we view these provisions, which are contained in Article Seventh of our amended and restated certificate of incorporation, as obligations to our stockholders and will not take any action to amend or waive these provisions. Our amended and restated certificate of incorporation also provides that we will continue in existence only until ___________, 2009 [twenty four months from the date of this prospectus]. If we have not consummated a business combination by such date, our corporate existence will cease except for the purposes of winding up our affairs and liquidating, pursuant to Section 278 of the Delaware General Corporation Law. This has the same effect as if our board of directors and stockholders had formally voted to approve our dissolution pursuant to Section 275 of the Delaware General Corporation Law. Accordingly, limiting our corporate existence to a specified date as permitted by Section 102(b)(5) of the Delaware General Corporation Law removes the necessity to comply with the formal procedures set forth in Section 275 (which would have required our board of directors and stockholders to formally vote to approve our dissolution and liquidation and to have filed a certificate of dissolution with the Delaware Secretary of State). In connection with any proposed business combination we submit to our stockholders for approval, we will also submit to stockholders a proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence, thereby removing this limitation on our corporate life. Any vote to extend our corporate life to continue perpetually following the consummation of a business combination will be taken only if the business combination is approved. We will only consummate a business combination if stockholders vote both in favor of such business combination and our amendment to provide for our perpetual existence. The approval of the proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence would require the affirmative vote of a majority of our outstanding shares of common stock. We view this provision terminating our corporate life by __________, 2009 [twenty four months from the date of this prospectus] as an obligation to our stockholders and will not take any action to amend or waive this provision to allow us to survive for a longer period of time except in connection with the consummation of a business combination. Stockholders must approve business combination Pursuant to our amended and restated certificate of incorporation, we will seek stockholder approval before we effect any business combination, even if the nature of the business combination would not ordinarily require stockholder approval under applicable state law. We view this requirement as an obligation to our stockholders and will not take any action to amend or waive this provision in our certificate of incorporation. We will publicly announce the record date for determining the stockholders entitled to vote at the meeting to approve our business combination at least two business days prior to such record date. In connection with the vote required for any business combination, all of our existing stockholders, including all of our officers and directors, have agreed to vote the shares of common stock owned by them immediately before this offering in accordance with the majority of the shares of common stock voted by the public stockholders. Pursuant to our amended and restated certificate of incorporation, we will proceed with a business combination only if (i) a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and (ii) public stockholders owning less than 20% of the shares sold in this offering exercise their conversion rights described below ( maximum conversion percentage ). We will not take any action to amend or waive this provision. We could, however, structure a business combination that would require us to pay the seller of the target business substantially all of the cash we have in the trust account. We could also negotiate a business combination with a target business that insisted on having access to almost all of the cash in our trust account as a condition of closing. With either of these two structures, we would have to lower the maximum conversion percentage in order to insure that there was sufficient cash available at the closing of the transaction. As a result, we would not be able to consummate such a business combination even if stockholders owning substantially less than 20% of the shares sold in this offering exercise their conversion rights. Accordingly, although we will never proceed with a business combination if public stockholders owning 20% or more of the shares sold in this offering exercise their conversion rights, it is possible we will not be able to proceed with a business combination if public stockholders owning a significantly lesser amount exercise their conversion rights. Conversion rights for stockholders voting to reject a business combination Pursuant to our amended and restated certificate of incorporation, public stockholders voting against a business combination will be entitled to convert their stock into a pro rata share of the trust account, including any interest earned on their portion of the trust account less any amount distributed to us, if the business combination is approved and completed. We view this requirement as an obligation to our stockholders and will not take any action to amend or waive this provision in our certificate of incorporation. Our existing stockholders will not have such conversion rights with respect to any shares of common stock owned by them, directly or indirectly, whether included in their initial shares or purchased by them in this offering or in the aftermarket (nor will they seek appraisal rights with respect to such shares if appraisal rights would be available to them). Public stockholders who convert their stock into their share of the trust fund will continue to have the right to exercise any warrants they may hold. Accordingly, they may be able to lower their overall basis for their investment in our stock. Investors in this offering who do not sell, or who receive less than $0.29 of net sales proceeds for, the warrant included in the units, and persons who purchase common stock in the aftermarket at a price in excess of $7.71 per share, may have a disincentive to exercise their conversion rights because the amount they would receive upon conversion could be less than their original or adjusted purchase price. Liquidation if no business combination As described above, if we have not consummated a business combination by ____________, 2009 [twenty four months from the date of this prospectus], our corporate existence will cease by operation of law and we will promptly distribute only to our public stockholders the amount in our trust account (including any accrued interest) plus any remaining net assets. At that time, pursuant to Section 281 of the Delaware General Corporation Law, we will adopt a plan that will provide for our payment, based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against us within the subsequent 10 years. Accordingly, we would be required to provide for any creditors known to us at that time as well as provide for any claims that we believe could potentially be brought against us within the subsequent 10 years prior to distributing the funds held in the trust to our public stockholders. We cannot assure you that we will properly assess all claims that may be potentially brought against us. As such, our stockholders could potentially be liable for any claims of creditors to the extent of distributions received by them (but no more). Furthermore, while we will seek to have all vendors and service providers (which would include any third parties we engaged to assist us in any way in connection with our search for a target business) and prospective target businesses execute agreements with us waiving any right, title, interest or claim of any kind they may have in or to any monies held in the trust account, there is no guarantee that they will execute such agreements. Nor is there any guarantee that, even if such entities execute such agreements with us, they will not seek recourse against the trust account or that a court would not conclude that such agreements are not legally enforceable. Our directors have agreed that they will be personally liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us. However, we cannot assure you that they will be able to satisfy those obligations, if they are required to do so. As a result, we cannot assure you that the per-share distribution from the trust fund, if we liquidate, will not be less than $7.71, plus interest then held in the trust fund. We anticipate the distribution of the funds in the trust account to our public stockholders will occur within 10 business days from the date our corporate existence ceases. Our existing stockholders have waived their rights to participate in any liquidation distribution with respect to their initial shares. We will pay the costs of liquidation from our remaining assets outside of the trust account. If such funds are insufficient, our initial stockholders have agreed to advance us the funds necessary to complete such liquidation (currently anticipated to be no more than approximately $15,000) and have agreed not to seek repayment for such expenses. Escrow of existing stockholders shares On the date of this prospectus, all of our existing stockholders, including all of our officers and directors, will place their initial shares into an escrow account maintained by Continental Stock Transfer & Trust Company, acting as escrow agent. Subject to certain limited exceptions (such as (i) transfers to an entity s members upon its liquidation, (ii) to relatives and trusts for estate planning purposes or (iii) by private sales made at or prior to the consummation of a business combination at prices no greater than the price at which the shares were originally purchased, in each case where the transferee agrees to the terms of the escrow agreement), these shares will not be transferable during the escrow period. These shares will not be released from escrow until one year after our consummation of a business combination or earlier if, following a business combination, we engage in a subsequent transaction resulting in our stockholders having the right to exchange their shares for cash or other securities. Risks In making your decision on whether to invest in our securities, you should take into account not only the backgrounds of our management team, but also the special risks we face as a blank check company. In addition, this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, and, therefore, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. Additionally, our initial security holders initial equity investment is below that which is required under the guidelines of the North American Securities Administrators Association, Inc. You should carefully consider these and the other risks set forth in the section entitled Risk Factors beginning on page 10 of this prospectus.
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+may subject us to numerous economic, competitive and regulatory developments, any or all of which may have a substantial adverse impact upon the particular industry in which we may operate subsequent to a business combination. In this case, we will not be able to diversify our operations or benefit from the possible spreading of risks or offsetting of losses, unlike other entities that may have the resources to complete several business combinations in different industries or different areas of a single industry so as to diversify risks and offset losses. Further, the prospects for our success may be entirely dependent upon the future performance of the initial target business we acquire, if any. The ability of our stockholders to exercise their conversion rights may not allow us to effectuate the most desirable business combination or optimize our capital structure. When we seek stockholder approval of any business combination, we will offer each public stockholder (but not our initial stockholders) the right to have his, her or its shares of common stock converted to cash if the stockholder votes against the business combination and the business combination is approved and completed. Such holder must both vote against such business combination and then exercise his, her or its conversion rights to receive a pro rata portion of the trust fund. Accordingly, if our business combination requires us to use substantially all of our cash to pay the purchase price, because we will not know how many stockholders may exercise such conversion rights, we may either need to reserve part of the trust fund for possible payment upon such conversion, or we may need to arrange third party financing to help fund our business combination in case a larger percentage of stockholders exercise their conversion rights than we ex pected. Therefore, we may not be able to consummate a business combination that requires us to use all of the funds held in the trust account as part of the purchase price, or we may end up having a leverage ratio that is not optimal for our business combination. This may limit our ability to effectuate the most attractive business combination available to us. We will be dependent upon interest earned on the trust account, net of taxes payable on such interest, to fund our search for a target company and consummation of a business combination. Only $380,000 of the net proceeds of this offering and the private placement are available to us to fund our working capital requirements. We will be dependent upon one-half of the interest earned on the trust account, net of taxes payable on such interest, up to a maximum of $2.0 million, and the $380,000 of proceeds held outside of the trust account, to provide us with the working capital we will need to search for a target company and consummate a business combination. If interest rates were to decline substantially, we may not have sufficient funds available to provide us with the working capital necessary to complete a business combination. In such event, we would need to raise additional equity capital or borrow funds from our existing stockholders, including officers and directors, or others or be forced to liquidate. We may be unable to obtain additional financing, if required, to complete a business combination or to fund the operations and growth of the target business, which could compel us to restructure or abandon a particular business combination. Although we believe that the net proceeds of this offering and the sale of the founder warrants, and one-half of the interest earned on the trust account, net of taxes payable on such interest, will be sufficient to allow us to consummate a business combination, in as much as we have not yet selected or approached any prospective target businesses, we cannot ascertain the capital requirements for any particular business combination. If the net proceeds of this offering and the sale of the founder warrants, and one-half of the interest earned on the trust account, net of taxes payable on such interest, prove to be insufficient, either because of the size of the business combination or the depletion of available funds in search of a target business, or because we become obligated to convert into cash a significant number of shares from dissenting stockholders as a result of the exercise of conversion rights, we will be required to seek additiona l financing through the issuance of equity or debt securities or other financing arrangements. We cannot assure you that such financing would be available on acceptable terms, if at all. To the extent that additional financing proves to be unavailable when needed to consummate a particular business combination, we would be compelled to re-negotiate or abandon that particular business combination and seek an alternative target business candidate. In addition, if we consummate a business combination, we may require additional financing to fund the operations or growth of the target business. The failure to secure additional financing could adversely affect the continued development or growth of the target business. None of our officers, directors or stockholders is required to provide any financing to us in connection with or after the consummation of a business combination. Our existing stockholders, directors and officers control a substantial interest in us and thus may influence certain actions requiring stockholder vote. Upon consummation of this offering, our existing stockholders, directors and officers will collectively own 20% of our issued and outstanding shares of common stock (assuming they do not purchase units in this offering). In addition, certain of our initial stockholders (specifically, M.O.T.A. Holdings Ltd.; FSGL Holdings Ltd; OLEV Holdings Ltd; Shrem, Fudim, Kelner Technologies Ltd.; Shrem, Fudim, Kelner & Co. Ltd.; and Elisha Yanay) have agreed to purchase 3,625,000 warrants from us in a private placement concurrently with the consummation of this offering. Any exercise of these warrants by our directors and officers would increase their ownership percentage. These holdings could allow the existing stockholders, directors and officers to influence the outcome of matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions after completion of our initial business comb ination. Our board of directors will be divided into three classes, each of which will generally serve for a term of three years with only one class of directors being elected in each year. It is unlikely that there will be an annual meeting of stockholders to elect new directors prior to the consummation of a business combination, in which case all of the current directors will continue in office at least until the consummation of the business combination. If there is an annual meeting, as a consequence of our staggered board of directors, only a minority of the board of directors will be considered for election and our existing stockholders, directors and officers, because of their ownership position, will have considerable influence regarding the outcome. Accordingly, our existing stockholders, directors and officers will continue to exert control at least until the consummation of a business combination and may continue to exercise subs tantial control after a business combination due to their significant ownership. In connection with the vote required for our initial business combination, all of our existing stockholders, directors and officers, have agreed to vote the shares of common stock then owned by them, including any shares of common stock purchased in or following this offering, in accordance with the majority of the shares of common stock voted by the public stockholders. However, the affiliates and relatives of our existing stockholders, directors and officers are not prohibited from purchasing units in this offering or shares in the aftermarket, and they will have full voting rights with respect to any shares of common stock they may acquire, either through this offering or in subsequent market transactions. If they do, we cannot assure you that our existing stockholders, directors and officers, through their affiliates and relatives, will not have considerable influence upon the vote in connection with a business combina tion. Our existing stockholders paid an aggregate of $25,000, or $0.004 per share, for their shares and, accordingly, you will experience immediate and substantial dilution in the net tangible book value of the common stock which you purchase as part of the units in this offering. The difference between the public offering price per share of our common stock, assuming no value is attributed to the warrants included in the units, and the pro forma net tangible book value per share of our common stock after this offering constitutes the dilution to you and the other investors in this offering. The fact that our existing stockholders acquired their shares of common stock at a nominal price has significantly contributed to this dilution. Assuming the offering is completed, you and the other new investors will incur an immediate and substantial dilution of 32.8%, or $2.62 per share (the difference between the pro forma net tangible book value per share of $5.38 and the initial offering price of $8.00 per unit). Our outstanding warrants may have an adverse effect on the market price of our common stock and make it more difficult to effect a business combination. In connection with this offering, as part of the units, we will be issuing warrants to purchase 18,750,000 shares of common stock. We will also sell a total of 3,625,000 warrants to M.O.T.A. Holdings Ltd.; FSGL Holdings Ltd; OLEV Holdings Ltd; Shrem, Fudim, Kelner Technologies Ltd.; Shrem, Fudim, Kelner & Co. Ltd.; and Elisha Yanay, certain of our initial stockholders, in a private placement concurrently with the consummation of this offering. To the extent we issue shares of common stock to effect a business combination, the potential for the issuance of substantial numbers of additional shares upon exercise of these warrants could make us a less attractive acquisition vehicle in the eyes of a target business as such securities, when exercised, will increase the number of issued and outstanding shares of our common stock and reduce the value of the shares issued to complete the business combination. Accordingly, our warrants may make it more difficult to effectuate a business combination or increase the acquisition cost of a target business. Additionally, the sale, or even the possibility of sale, of the shares underlying the warrants could have an adverse effect on the market price for our securities or on our ability to obtain future public financing. If and to the extent these warrants are exercised, you may experience dilution to your holdings. If our existing stockholders exercise their registration rights, it may have an adverse effect on the market price of our common stock and the existence of these rights may make it more difficult to effect a business combination. The majority of our existing stockholders are entitled to make up to two demands that we register the resale of their shares of common stock at any time after their shares are released from escrow. If the majority of our existing stockholders exercise their registration rights, then there could be an additional 4,687,500 shares of common stock (after giving effect to the forfeiture of 1,562,500 shares of common stock by certain of our initial stockholders in certain circumstances, as more fully described in Principal Stockholders ) eligible for trading in the public market. In addition, each of (a) the holder of the underwriters purchase option and (b) Shrem, Fudim, Kelner Technologies Ltd. and Shrem, Fudim, Kelner & Co. Ltd., acting together, will be entitled to one demand and unlimited piggy-back registration rights. The increase in the number of shares of common stock eligible for trading in the public market may have an adverse effect on the market price of our common stock. In addition, the existence of these rights may make it more difficult to effect a business combination or increase the acquisition cost of a target business, as the stockholders of a particular target business may be discouraged from entering into a business combination with us or will request a higher price for their securities as a result of these registration rights and the potential future effect their exercise may have on the trading market for our common stock. An effective registration statement may not be in place when an investor desires to exercise warrants, thus precluding such investor from being able to exercise his, her or its warrants and causing such warrants to be practically worthless. No warrant held by public stockholders or issuable upon exercise of the underwriters purchase option will be exercisable and we will not be obligated to issue shares of common stock unless at the time a holder seeks to exercise such warrant, a prospectus relating to the common stock issuable upon exercise of the warrant is current and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms of the warrant agreement, we have agreed to use our best efforts to maintain a current prospectus relating to the common stock issuable upon exercise of the warrants until the expiration of the warrants and to take such action as is necessary to qualify the common stock under the securities laws of the states in which the warrants are initially offered. However, we cannot assure you that we will be able to do so or that each such holder w ill be resident in a state in which the warrants are initially offered. If we do not maintain a current prospectus related to the common stock issuable upon exercise of the warrants, holders will be unable to exercise their warrants and we will not be required to settle any such warrant exercise. If the prospectus relating to the common stock issuable upon the exercise of the warrants is not current or if the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside, the warrants held by public stockholders or issuable upon exercise of the underwriters purchase option may have no value, the market for such warrants may be limited and such warrants may expire worthless. Even if the prospectus relating to the common stock issuable upon exercise of the warrants is not current, the founder warrants may be exercisable for unregistered shares of common stock. If we are deemed to be an investment company, we may be required to institute burdensome compliance requirements and our activities may be restricted, which may make it difficult for us to complete a business combination. In order not to be regulated as an investment company under the Investment Company Act of 1940, or the Investment Company Act, unless we can qualify for an exclusion, we must ensure that we are engaged primarily in a business other than investing, reinvesting or trading of securities and that our activities do not include investing, reinvesting, owning, holding or trading investment securities. Our business will be to identify and consummate a business combination and thereafter to operate the acquired business or businesses. We will invest the funds in the trust account only in treasury bills issued by the United States having a maturity of 180 days or less or money market funds meeting the criteria under Rule 2a-7 under the Investment Company Act until we use them to complete a business combination. By limiting the investment of the funds to these instruments, we believe that we will not be considered an investment company under the Investment Company Act. This offering is not intended for persons who are seeking a return on investments in these types of instruments. The trust account and the purchase of government securities for the trust account is intended as a holding place for funds pending the earlier to occur of either: (i) the consummation of our primary business objective, which is a business combination, or (ii) absent a business combination, our dissolution, liquidation and distribution of our assets, including the proceeds held in the trust account, as part of our plan of dissolution and liquidation. If we fail to invest the proceeds as described above or if we cease to be primarily engaged in our business as set forth above (for instance, if our stockholders do not approve a plan of dissolution and liquidation and the funds remain in the trust account for an indeterminable amount of time), we may be considere d to be an investment company and thus be required to comply with the Investment Company Act. If we are deemed to be an investment company under the Investment Company Act, our activities may be restricted, including: restrictions on the nature of our investments; restrictions on the issuance of securities; and which may make it difficult for us to complete a business combination; each of which may make it difficult for us to consummate a business combination. We would also become subject to burdensome regulatory requirements, including reporting, record keeping, voting, proxy and disclosure requirements and the costs of meeting these requirements would reduce the funds we have available outside the trust account to consummate a business combination. The American Stock Exchange may decline to list or may in the future delist our securities from quotation on its exchange which could limit investors' ability to make transactions in our securities and subject us to additional trading restrictions. We have applied to list our securities on the American Stock Exchange, a national securities exchange, upon consummation of this offering. Our listing application has not yet been approved by the American Stock Exchange and we cannot assure you that our securities will be listed or, if listed, will continue to be listed on the American Stock Exchange in the future. Additionally, in connection with our business combination, it is likely that the American Stock Exchange may require us to file a new initial listing application and meet its initial listing requirements as opposed to its more lenient continued listing requirements. We cannot assure you that we will be able to meet those initial listing requirements at that time. If the American Stock Exchange delists our securities from trading on its exchange, we could face significant material adverse consequences including: reduced liquidity with respect to our securities; a determination that our common stock is a "penny stock" which will require brokers trading in our common stock to adhere to more stringent rules and possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock; limited amount of news and analyst coverage for our company; and a decreased ability to issue additional securities or obtain additional financing in the future. In the event that our securities are not listed on the American Stock Exchange, we anticipate that our units, common stock and warrants will be quoted on the OTC Bulletin Board, but we cannot assure that our securities will be so quoted, or, if quoted, will continue to be quoted. Because any target business that we attempt to complete a business combination with will be required to provide our stockholders with financial statements prepared in accordance with and reconciled to United States generally accepted accounting principles, prospective target businesses may be limited. In accordance with requirements of United States federal securities laws, in order to seek stockholder approval of a business combination, a proposed target business will be required to have certain financial statements which are prepared in accordance with, or which can be reconciled to, United States generally accepted accounting principles and audited in accordance with United States generally accepted auditing standards. Many foreign companies do not have financial statements prepared in accordance with United States generally accepted accounting principles and would need to incur significant time and expense in order to obtain financial statements prepared in accordance with those principles. To the extent that a prospective target business does not have financial statements which have been prepared with, or which can be reconciled to, United States generally accepted accounting principles, and audited in accordance with United States generally accepted auditing standards, we will not be able to acquire such target business. We will enter into a business combination only with a target business that has such financial statements. These financial statement requirements may limit the pool of potential target businesses which we may acquire. If we determine to change domiciles in connection with a business combination, the new jurisdiction s laws will likely govern all of our material agreements relating to the operations of the target business and we may not be able to enforce our legal rights. In connection with a business combination, we may determine to relocate the home jurisdiction of our business from Delaware to a jurisdiction outside of the United States, including Israel. If we determine to do this, the new jurisdiction s corporate law will control our corporate governance requirements and will determine the rights of our shareholders. The new jurisdiction s corporate law may provide less protection to our shareholders than is afforded by Delaware law. Any such reincorporation will also likely subject us to foreign regulation, including foreign taxation. In addition, upon reincorporation, we may become a foreign private issuer for purposes of United States securities laws, which means that we may be subject to less stringent reporting requirements and that some provisions of the United States securities laws (such as the proxy rules and the short-swing trading rules) would not apply to us. Furthermore, whether or not we reincorporate outside the United States, the new jurisdiction s laws will likely govern all of our material agreements relating to the operations of the target business. We cannot assure you that the system of laws and the enforcement of existing laws in such jurisdiction would be as certain in implementation and interpretation as in the United States. The inability to enforce or obtain a remedy under any of our future agreements in a new jurisdiction could result in a significant loss of business, business opportunities or capital. Risks Associated With the Industry We rely on the experience and skills of our management team to identify future trends in the technology and technology-related industries, and to take advantage of these trends, but there is no guarantee that they will be able to do so. The process of predicting technological trends, especially in sectors developing as fast as the technology and technology-related sectors, is complex and uncertain. After our initial business combination, we may commit significant resources to developing new products before knowing whether our investments will result in products the market will accept. Furthermore, we may not execute successfully on our vision because of, among other things, errors in product planning or timing, technical hurdles that we fail to overcome in a timely fashion or a lack of appropriate resources. If we are unable to identify and take advantage of future trends in the technology and technology-related sectors, our business, financial condition and results of operations will be adversely affected. Our investments in one or more companies in the technology or technology-related industries may be extremely risky and we could lose all or part of our investments. An investment in companies in the technology or technology-related industries may be extremely risky relative to an investment in other businesses because, among other things, the companies we are likely to focus on: typically have limited operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors actions and market conditions, as well as general economic downturns; tend to be privately-owned and generally have little publicly available information and, as a result, we may not learn all of the material information we need to know regarding these businesses; are more likely to depend on the management talents and efforts of a small group of people; and, as a result, the death, disability, resignation or termination of one or more of these people could have an adverse impact on the operations of any company we may acquire; generally have less predictable operating results; may from time to time be parties to litigation; may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence; and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position. If we are unable to keep pace with changes in technology or consumer tastes and preferences, the products or services of any target business that we acquire could become obsolete. The technology and technology-related industries are generally characterized by intense, rapid technological changes, evolving industry standards and new product and service introductions, often resulting in product obsolescence or short product life cycles. Further, these sectors are very sensitive to changes in consumer tastes and preferences. Our ability to compete after the consummation of a business combination will be dependent upon our ability to develop and introduce products and services that keep pace with changes in technology and consumer tastes and preferences. The success of new products or services depends on several factors, including proper new product or service definition, low component costs, timely completion and introduction of the new product or service, differentiation of the new product or service from those of our competitors and market acceptance of the new product or service. There can be no assurance that we will s uccessfully identify new product or service opportunities, develop and bring new products and services to the market in a timely manner or achieve market acceptance of our products and services or that products, services and technologies developed by others will not render our products, services and technologies obsolete or noncompetitive. Our business, financial condition and results of operations following a business combination will depend on our ability to develop and introduce new products and services into existing and emerging markets and to reduce the costs of existing products and services. If we are unable to keep pace with these changes, our business, financial condition and results of operations will be adversely affected. Consolidation in the technology and technology-related industries may affect our ability to consummate a business combination and may result in increased competition following a business combination. There has been a trend toward consolidation in the technology and technology-related industries for several years. We expect this trend to continue as companies attempt to strengthen or hold their market positions in an evolving market and as companies are acquired or are unable to continue operations. The trend towards consolidation will increase demand for target businesses. Furthermore, we believe that industry consolidation will result in stronger competitors. Additionally, rapid industry consolidation will lead to fewer customers, with the effect that loss of a major customer could have a material impact on results not anticipated in a customer marketplace composed of many participants. This could lead to more variability in operating results and could adversely affect on our business, operating results and financial condition following a business combination. Companies in technology and technology-related industries require highly-skilled personnel and if we are unable to attract and retain key personnel following a business combination, we will be unable to effectively conduct our business. The market for technical, creative, marketing and other personnel essential to the development and marketing of technology and technology-related products and services and to the management of technology and technology-related businesses is extremely competitive. Further, companies that have been the target of an acquisition are often a prime target for recruiting of executives and key creative talent. If we cannot successfully recruit and retain the employees we need following consummation of our business combination, or replace key employees after their departure, our ability to develop and manage our businesses will be impaired. We may be unable to protect or enforce the intellectual property rights of any target business that we acquire or the target business may become subject to claims of intellectual property infringement. After completing a business combination, the procurement and protection of trademarks, copyrights, patents, domain names, trade dress and trade secrets may be critical to our success. We will likely rely on a combination of copyright, trademark, trade secret laws and contractual restrictions to protect any proprietary technology and rights that we may acquire. Despite our efforts to protect those proprietary technology and rights, we may not be able to prevent misappropriation of those proprietary rights or deter independent development of technologies that compete with the business we acquire. Furthermore, key aspects of networking technology are governed by industry-wide standards, which are usable by all market entrants. Our competitors may file patent applications or obtain patents and proprietary rights that block or compete with our patents. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others. It is also possible that third parties may claim we have infringed their patent, trademark, copyright or other proprietary rights. Claims or litigation, with or without merit, could result in substantial costs and diversions of resources, either of which could have an adverse effect on our competitive position and business. Further, depending on the target business or businesses that we acquire, it is likely that we will have to protect trademarks, patents, and do main names in an increasing number of jurisdictions, a process that is expensive and may not be successful in every location. With respect to certain proprietary rights of the target business or businesses that we acquire, such as trademarks and copyrighted materials, we expect that the target business or businesses will have licensed such rights to third parties in the past and we may continue to enter into such agreements in the future. These licensees may, unknowingly to us or the target business or businesses, take actions that diminish the value of the target business or businesses proprietary rights or cause harm to the target business or businesses reputation. Also, products of the target business or businesses may include software or other intellectual property licensed from third parties. It may be necessary in the future to seek or renew licenses relating to various aspects of these products. There can be no assurance that the necessary licenses would be available on acceptable terms, if at all. The inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could have an adverse effect on our business, operating results and financial condition following a business combination. Moreover, the inclusion in our products of software or other intellectual property licensed from third parties on a nonexclusive basis could limit our ability to protect our proprietary rights in our products. The technology and technology-related industries are highly cyclical, which may affect our future performance and ability to sell our products or services, and in turn, hurt our profitability. Technology and technology-related products and services tend to be relatively expensive and buyers tend to defer purchases during periods of economic weakness, opting instead to continue to use what they already own. Conversely, during periods of economic strength, sales of technology and technology-related products and services frequently exceed expectations. As a consequence, revenues and earnings for these companies may fluctuate more than those of less economically sensitive companies. Further, companies in the consumer segments of these industries are sensitive to a number of factors that influence the levels of consumer spending, including economic conditions such as the rate of unemployment, inflation, recessionary environments, the levels of disposable income, debt, interest rates and consumer confidence. Due to the cyclical nature of the technology and technology-related industries, inventories may not always be properly balanced, res ulting in lost sales when there are shortages or write-offs when there are excess inventories. This may adversely affect the business, financial condition and results of operations of any target businesses that we may acquire. Government regulation of certain technology or technology-related industries and the uncertainty over government regulation of the Internet could harm our operating results and future prospects. Certain technology or technology-related industries, including the telecommunications and media sectors, have historically been subject to substantial government regulation, both in the United States and overseas. If we consummate a business combination with a target business or businesses in these sectors, changes in telecommunications requirements in the United States or other countries could affect the sales of our products, limit the growth of the markets we serve or require costly alterations of current or future products. Future changes in tariffs by regulatory agencies or application of tariff requirements to currently untariffed services could affect the sales of our products for certain classes of customers. On the other hand, few laws or regulations currently apply directly to access of or commerce on the Internet. The growth of the technology and technology-related industries is closely tied to the growth of Internet use and new regulations governing the Internet and Internet commerce could have an adverse effect on our business, operating results and financial condition following a business combination. New regulations governing the Internet and Internet commerce could include matters such as changes in encryption requirements, sales taxes on Internet product sales and access charges for Internet service providers. Risks Related to Operations in Israel Acquisitions of companies with operations in Israel entail special considerations and risks. If we are successful in acquiring a target business with operations in Israel, we will be subject to, and possibly adversely affected by, the following risks: If there are significant shifts in the political, economic or military conditions in Israel, it could have a material adverse effect on our profitability. If we consummate a business combination with a target business in Israel, it will be directly influenced by the political, economic and military conditions affecting Israel at that time. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. A state of hostility, varying in degree and intensity, has caused security and economic problems in Israel. Since September 2000, there has been a marked increase in violence, civil unrest and hostility, including armed clashes, between the State of Israel and the Palestinians, primarily but not exclusively in the West Bank and Gaza Strip, and negotiations between the State of Israel and Palestinian representatives have effectively ceased. The election of representatives of the Hamas movement to a majority of seats in the Palestinian Legislative Council in January 2006 created additional unrest and uncertainty. In July and August of 2006, Israel was involved in a full-scale armed conflict with Hezbollah, a Lebanese Islamist Shiite militia group and political party, in southern Lebanon, which involved missile strikes against civilian targets in northern Israel that resulted in economic losses. On August 14, 2006, a ceasefire was declared relating to that armed conflict. Continued hostilities between Israel and its neighbors and any failure to settle the conflict could have a material adverse effect on the target business and its results of operations and financial condition. Further deterioration of the situation might require more widespread military reserve service by some of the target business s Israeli employees and might result in a significant downturn in the economic or financial condition of Israel. Israel is also a party to certain trade agreements with other countries, and material changes to these agreements could have an adverse effect on our business. Furthermore, several Arab countries still restrict busine ss with Israeli companies. The operations of the target business in Israel could be adversely affected by restrictive laws or policies directed towards Israel and Israeli businesses. In addition, the target business s insurance may not cover losses that may occur as a result of events associated with the security situation in the Middle East. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, there is no assurance that such government coverage will be maintained. Any of these factors could have a material adverse effect on the target business and on our results of operations and financial condition following a business combination with the target business. Our operations could be disrupted as a result of the obligation of personnel to perform military service. Generally, all nonexempt male adult citizens and permanent residents of Israel, including one of our officers and directors, are obligated to perform military reserve duty annually for extended periods of time through the age of 45 (or older for citizens with certain occupations), and are subject to being called to active duty at any time under emergency circumstances. Executive officers or key employees of a target business may also reside in Israel and be required to perform similar annual military reserve duty. In response to increases in terrorist activity and the recent armed conflict with Hezbollah, there have been periods of significant call-ups of military reservists. It is possible that there will be additional call-ups in the future. Our and the target business s operations could be disrupted by the absence for a significant period of one or more of these directors, officers or key employees due to military service. Any such dis ruption could adversely affect our operations and profitability. Because a substantial portion of many Israeli companies revenues is generated in dollars and euros, while a significant portion of their expenses is incurred in Israeli currency, the revenues of a target business may be reduced due to inflation in Israel and currency exchange rate fluctuations. A substantial portion of many Israeli companies revenues is generated in dollars and euros, while a significant portion of their expenses, principally salaries and related personnel expenses, are paid in Israeli currency. As a result, a target business will likely be exposed to the risk that the rate of inflation in Israel will exceed the rate of devaluation of Israeli currency in relation to the dollar or the euro, or that the timing of this devaluation will lag behind inflation in Israel. Because inflation has the effect of increasing the dollar and euro costs of an Israeli company s operations, it would therefore have an adverse effect on our dollar-measured results of operations following a business combination. The termination or reduction of tax and other incentives that the Israeli government provides to qualified domestic companies may increase the costs involved in operating a company in Israel. The Israeli government currently provides tax and capital investment incentives to qualified domestic companies. The availability of these tax benefits, however, is subject to certain requirements, including, among other things, making specified investments in fixed assets and equipment, financing a percentage of those investments with capital contributions by the entity receiving the tax benefits, compliance with a marketing program submitted to the Investment Center of Israel s Ministry of Industry, Trade and Labor, filing of certain reports with the Investment Center and compliance with Israeli intellectual property laws. Additionally, the Israeli government currently provides grant and loan programs relating to research and development, marketing and export activities. In recent years, the Israeli government has reduced the benefits available under these programs and Israeli governmental authorities have indicated that the government may in the future further reduce or eliminate the benefits of those programs. We cannot assure you that such benefits and programs would continue to be available to the target business following a business combination, or if available, to what extent. If such benefits and programs were terminated or further reduced, it could have an adverse effect on our results of operations following a business combination or make a specific business combination less attractive. Without limiting the foregoing, if the foregoing tax benefits were terminated or reduced, the amount of taxes payable by the target business would likely increase, which could adversely affect our results of operations. Any Israeli government grants received by the target business for research and development expenditures limit the ability of the target business to manufacture products and transfer know-how outside of Israel. In addition, our acquisition of the target business may be subject to the approval of certain Israeli governmental entities. The target business we may acquire may be receiving, or may receive following the business combination, grants from the government of Israel through the Office of the Chief Scientist of Israel s Ministry of Industry, Trade and Labor for the financing of a portion of its research and development expenditures in Israel. Upon our acquisition of such entity, the Office of Chief Scientist will determine whether the entity will be eligible to continue receiving grants following the business combination. When know-how or products are developed using Chief Scientist grants, the terms of these grants limit the transfer of the know-how out of Israel and the ability of the entity receiving such grants to manufacture products based on this know-how outside of Israel without the prior approval of the Office of the Chief Scientist. Any approval, if given, may be subject to additional obligations or limitations. If the target business fails to comply wi th the conditions imposed by the Office of the Chief Scientist, including the payment of royalties with respect to grants received, it may be required to refund any payments previously received, together with interest and penalties. The difficulties in obtaining the approval of the Office of the Chief Scientist for the transfer of manufacturing rights out of Israel could have a material adverse effect on strategic alliances or other transactions that we may wish the target business to enter into in the future that provide for such a transfer. In addition, our acquisition of a target business that shall have received, prior to such acquisition, any tax benefits from the Investment Center and/or research and development grants from the Office of the Chief Scientist, may be subject to the approval of such entities, which approval may be subject to, among other things, an undertaking to observe the law governing the grant programs of the Office of the Chief Scientist. The anti-takeover effects of Israeli laws may delay or deter a change of control of the target business. Under the Israeli Companies Law 1999, referred to as the Companies Law, a merger is generally required to be approved by the board of directors and, unless certain requirements described under the Companies Law are met, the shareholders of each of the merging companies. If the share capital of the company that will not be the surviving company is divided into different classes of shares, the approval of each class is also required. A court may disapprove or delay the consummation of a merger if it determines that there is a reasonable concern that the surviving company will be unable to satisfy the obligations of the company not surviving the merger. In addition, a merger may not be completed unless at least 50 days shall have passed from the date that a proposal for approval of the merger was filed by each merging company with the Israeli Registrar of Companies and 30 days have elapsed since shareholder approval of both me rging companies was obtained. The Israeli Companies Law provides that an acquisition of shares in an Israeli public company must be made by means of a special tender offer, if as a result of the acquisition, the purchaser would become a holder of 25% or more of the voting power at general meetings, and no other shareholder owns a 25% stake in the company. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of a special tender offer if, as a result of the acquisition, the purchaser would become a holder of 45% or more of the voting power at general meetings, unless someone else already holds 45% of the voting power. An acquisition from a 25% or 45% holder, which turns the purchaser into a 25% or 45% holder, respectively, does not require a tender offer. An exception to the tender offer requirement may also apply when the additional voting power is obtained by means of a private placement approved by the general meeting of shareholders (which approval shall also refer to the purchaser becoming a holder of 25% or 45%, as the case may be, of the voting power in the subject company). These rules also do not apply if the acquisition is made by way of a merger. The Companies Law also provides specific rules and procedures for the acquisition of shares held by minority shareholders, if the majority shareholder shall hold more than 90% of the outstanding shares. Such acquisition shall be made through a tender offer to all of the company s shareholders for the purchase of all of the issued and outstanding shares of the company. If the dissenting and non-responsive shareholders hold more than 5% of the issued and outstanding share capital of the company, the acquirer may not acquire additional shares of the company from shareholders who accepted the tender offer if following such acquisition the acquirer would then own over 90% of the company s issued and outstanding share capital. These laws may have the effect of delaying or deterring a change in control of an Israeli company, and should we desire to acquire control of a target business that is an Israeli company we may encounter difficulties achieving such control. We may be deemed to be effectively managed and controlled from Israel, and thus be treated as an Israeli entity for tax purposes. Although we were formed under Delaware law and are a U.S. corporation, our directors and officers are all Israeli residents, and shall be managing our affairs from Israel. Additionally, as we will be searching for a target business that has operations or facilities located in Israel, or that intends to establish operations or facilities in Israel, such as research and development, manufacturing or executive offices, following our initial business combination, most of our activities shall be in Israel. Therefore, we may be deemed to be effectively managed and controlled from Israel, and thus be treated as an Israeli entity for tax purposes, in which case we will be taxed according to Israeli law. Risks Relating to Enforcement of Legal Process Third parties are likely to have difficulty in enforcing judgments obtained in the United States against us, our officers or our directors. We, as well as each of our officers and directors, have appointed Corporation Service Company as our agent to receive service of process in any action against us in the United States. After the consummation of a business combination, it is possible that substantially all of our assets will be located outside of the United States. As a result, it may not be possible for investors in the United States to enforce their legal rights against us or to enforce judgments of United States courts given that substantially all of our assets may be located outside of the United States. Each of our directors and officers resides outside the United States. Each of our officers or directors has consented to service of process in the State of New York and to the jurisdiction of the courts of the State of New York or of the United States of America for the Southern District of New York. However, since most of our and such persons assets are outside the United States, any judgment obtained in the United States against us or such persons may not be collectible within the United States. Furthermore, there is substantial doubt as to the enforceability of civil liabilities under the Securities Act or the Exchange Act in original actions instituted in Israel, and the enforceability of a judgment obtained in the United States against us or our officers and directors may be difficult. USE OF PROCEEDS We estimate that the net proceeds of this offering will be used as set forth in the following table: No Exercise of Over-Allotment Option Full Exercise of Over-Allotment Option Gross proceeds:
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+If we are unable to favorably assess the effectiveness of our internal controls over financial reporting, or if our independent auditors are unable to provide an unqualified attestation report on our assessment, our share price could be adversely affected. Pursuant to Section 404 of Sarbanes-Oxley and beginning with our Annual Report on Form 10-K for our fiscal year ending December 31, 2008, our management will be required to report on, and our independent auditors to attest to, the effectiveness of our internal controls over financial reporting as of December 31, 2008. The rules governing the standards that must be met for management to assess our internal controls over financial reporting are new and complex, and require significant documentation, testing and remediation. Material weaknesses have been identified by our management and auditors, and we are currently in the process of remediating, implementing, reviewing, documenting and testing our internal controls over financial reporting. In connection with this effort, we will likely incur increased expenses and diversion of management's time and other internal resources. We may encounter problems or delays in completing the implementation of any changes necessary to make a favorable assessment of our internal controls over financial reporting, including remediating the material weaknesses identified by our independent auditors. In addition, in connection with the attestation process by our independent auditors, we may encounter problems or delays in completing the implementation of any requested improvements and receiving favorable attestation. If we cannot favorably assess the effectiveness of our internal controls over financial reporting, or if our independent auditors are unable to provide an unqualified attestation report on our assessment, investor confidence and our share price could be adversely affected. Risks Relating to an Investment in Our Class A Ordinary Shares Our Class A ordinary shares have no trading history, and our share price may trade below the public offering price. Prior to this offering, there has been no active market for our Class A ordinary shares. The offering price for our Class A ordinary shares in this offering will be determined by negotiations between us and the underwriters. Among the factors to be considered in determining the initial offering price of our Class A ordinary shares include: the prevailing market conditions; our financial information; the history and prospects for the industry in which we compete; an overall assessment of our management; estimates of our business potential and earning prospects; and the consideration of these factors in relation to market valuation of companies in related businesses. The initial public offering price of our Class A ordinary shares may bear no relationship to the price at which our Class A ordinary shares will trade upon the completion of this offering. You may not be able to resell your shares at or above the initial public offering price. We cannot be sure that an active public trading market will develop to provide liquidity for your investment. There can be no assurance that an established and liquid market for our Class A ordinary shares will develop on the Nasdaq Global Market, or that a market will continue if one does develop. The underwriters advised us that they intend to make a market in our Class A ordinary shares, however, they are not obligated to make a market in such shares, and any such market making may be discontinued at any time. In addition, we estimate that following this offering, approximately % of our outstanding ordinary shares will be owned by our executive officers, directors and Fox Paine, and that Fox Paine will hold Class B ordinary shares representing approximately % of our outstanding ordinary shares and % of the voting power of our outstanding ordinary shares. The substantial amount of our ordinary shares that is owned by our executive officers, directors and Fox Paine may adversely affect the development of an active and liquid trading market. Our share price could fluctuate significantly. The market for publicly traded shares of software companies has been volatile. Accordingly, a number of factors, many of which are beyond our control, may cause the market price of our Class A ordinary shares to fluctuate significantly once we are listed for trading, including: fluctuations in our quarterly revenues and earnings and those of our competitors; shortfalls in our operating results from the levels forecast by securities analysts and from the levels we announce from time to time as guidance to the investment community; public announcements concerning us or our competitors; changes in pricing policies by us or our competitors; market conditions in our industry; and the general state of the publicly traded securities market. We have no control over many of these matters, each of which may adversely affect the trading price of our Class A ordinary shares. In addition, trading in shares of companies listed on the Nasdaq Global Market and trading in shares of technology companies in particular have been subject to extreme price and volume fluctuations that in some cases have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may depress our share price, regardless of our actual operating results. The interests of our controlling shareholder may conflict with your interests as a holder of our Class A ordinary shares. After this offering and the application of the proceeds, Fox Paine will hold Class B ordinary shares representing approximately % of our outstanding ordinary shares and % of our total voting power. The percentage of our total voting power that Fox Paine may exercise is greater than the percentage of our total shares that Fox Paine holds because Fox Paine holds a large number of our Class B ordinary shares, which have five votes per share as opposed to our Class A ordinary shares, which have one vote per share. Our Class A ordinary shares and our Class B ordinary shares generally vote together as a single class on matters presented to our shareholders. As a result, Fox Paine will continue to have control over the outcome of certain matters requiring shareholder approval, including the power to, among other things: amend our articles of association; elect and remove our directors and control the appointment of our senior management; and prevent our ability to be acquired and complete other significant corporate transactions, each as more particularly described under "Description of Our Share Capital." We will be a "controlled company" within the meaning of the Nasdaq Global Market rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements that provide protection to shareholders of other companies. After the completion of this offering and the application of the proceeds, Fox Paine will hold approximately % of our total voting power and, therefore, we will be a "controlled company" under the Nasdaq Global Market corporate governance standards. As a controlled company, we intend to Foreign currency exchange differences $ (165 ) $ 327 Unrealized gains on marketable securities 38 (16 ) Other (11 ) utilize certain exemptions under the Nasdaq Global Market standards that free us from the obligation to comply with certain Nasdaq Global Market corporate governance requirements, including the requirements that: a majority of our Board of Directors consists of independent directors; we have a nominations committee that is composed entirely of independent directors with a written charter addressing the committee's purpose and responsibilities; and we have a compensation committee that is composed entirely of independent directors. As a result of our use of the controlled company exemptions, you will not have the same protection afforded to shareholders of companies that are subject to all of the Nasdaq Global Market corporate governance requirements. For example, because Fox Paine will have the ability to elect a majority of our Board of Directors, Fox Paine has the ability to control fundamental transactions, including the election of directors and a sale of our company. To the extent your interests differ from the interests of Fox Paine, the absence of such independent director requirements may have an adverse effect on your investment in our Class A ordinary shares. See "Management Composition of Our Board of Directors" for more information. Future sales of shares by existing shareholders may have an adverse impact on the market price of our Class A ordinary shares. Sales of a substantial number of our Class A ordinary shares in the public market following this offering, or the perception that large sales could occur, could cause the market price of our Class A ordinary shares to decline or limit our future ability to raise capital through an offering of equity securities. After completion of this offering and the application of the proceeds, we will have approximately Class A ordinary shares and Class B ordinary shares outstanding. All of our Class A ordinary shares sold in this offering will be freely tradable without restriction or further registration under the federal securities laws unless purchased by our "affiliates" within the meaning of Rule 144 under the Securities Act, which shares will be subject to resale limitations of Rule 144, or shares purchased under the directed share program, which shares will be subject to a 180 day lock-up period (subject to extension upon the occurrence of specified events). In addition, we, our directors, officers and shareholders, including Fox Paine, have agreed to enter into lock-up agreements generally providing, subject to limited exceptions, that they will not, without the prior written consent of the representatives of the underwriters, directly or indirectly, during the period ending 180 days (subject to extension upon the occurrence of specified events) after the date of this prospectus, offer to sell, or otherwise dispose of any of our ordinary shares. Following the closing of this offering, we also intend to file a registration statement on Form S-8 under the Securities Act covering the ordinary shares available to be issued under our stock option plan as of . Accordingly, subject to the exercise of options, which may be subject to certain vesting requirements, shares registered under that registration statement will be available for sale in the open market immediately after the lock-up period expires. In addition, holders of Paradigm B.V.'s ordinary shares will have the right to exchange those shares for shares of our ordinary shares, which can add to the number of our shares available for future sale upon the expiration of the lock-up period. We do not expect to pay cash dividends on any of our Class A ordinary shares. While we have declared dividends on certain of our ordinary shares in the past, we may not do so in the future. We intend to retain our earnings, if any, to support our operations and finance the growth and development of our business, and therefore we do not expect to pay any cash dividends on our Class A ordinary shares in the foreseeable future. See "Our Policy Regarding Dividends." As a (238 ) 356 LOSS BEFORE INCOME TAXES (3,068 ) (765 ) PROVISION (BENEFIT) FOR INCOME TAXES Provision (benefit) for income taxes $ Total tax provision $ result, capital appreciation, if any, in our Class A ordinary shares may be your sole source of gain for the foreseeable future. After completion of this offering, our management will continue to own a significant number of shares of our ordinary shares. After completion of this offering and the application of the proceeds, our directors and executive officers will beneficially own Class B ordinary shares representing approximately % of our outstanding ordinary shares and approximately % of our total voting power. In addition, Fox Paine, our directors and our executive officers together will beneficially own Class B ordinary shares representing approximately % of our outstanding ordinary shares and approximately % of our total voting power. See " The interests of our controlling shareholder may conflict with your interests as a holder of our Class A ordinary shares." As a result, in addition to their day-to-day management roles, our executive officers and directors will be able to exercise significant influence on our business as shareholders, including influence over the election of members of our Board of Directors and the authorization of other corporate actions requiring shareholder approval. You will experience immediate and substantial dilution in the net tangible book value of our Class A ordinary shares you purchase in this offering. The initial public offering price of our Class A ordinary shares is substantially higher than the book value per share of our outstanding Class A ordinary shares after this offering. Therefore, if you purchase any of our Class A ordinary shares in this offering, based on an initial public offering price per share of $ (the midpoint of the estimated offering range), you will suffer immediate and substantial dilution of approximately $ per share. If outstanding options to acquire our ordinary shares are exercised, you will experience additional dilution. See "Dilution." Our holding company structure makes us dependent on our subsidiaries for our cash flow and subordinates the rights of our shareholders to the rights of creditors of our subsidiaries in the event of an insolvency or liquidation of any of our subsidiaries. We are a holding company and, accordingly, substantially all of our operations are conducted through our subsidiaries. Our subsidiaries are separate and distinct legal entities. As a result, our cash flow depends upon the earnings of our subsidiaries and the ability of our subsidiaries to provide us with funds may be limited by other obligations, such as by the credit facility. In addition, we depend on the distribution of earnings, loans or other payments by our subsidiaries to us. Our subsidiaries have no obligation to provide us with funds for our payment obligations. If there is an insolvency, liquidation or other reorganization of any of our subsidiaries, our shareholders will have no right to proceed against their assets. Creditors of those subsidiaries will be entitled to payment in full from the sale or other disposal of the assets of those subsidiaries before we, as a shareholder, would be entitled to receive any distribution from that sale or disposal. Your Class A ordinary shares may be redeemed or repurchased in connection with a business combination transaction. Our articles of association provide that we may redeem or repurchase our Class A ordinary shares upon the approval by our Board of Directors of, and adoption by our shareholders of an ordinary resolution approving, an agreement relating to a business combination transaction involving us. Relevant business combinations would include those affected by stock purchase or any other means, after which any person or entity (other than Fox Paine) would have a majority of the voting power represented by our issued and outstanding shares. We have included this redemption provision in our articles of association to provide us with a flexible commercial framework for completing an acquisition or business combination. Cayman Islands law does not provide for statutory mergers but does provide for business combinations to be completed under a "scheme of arrangement." See "Description of Our Share Capital-Redemption" and "Description of Our Share Capital-Mergers and Similar Arrangements." Typically, schemes of arrangement are used by insolvent companies seeking to reach a court-sanctioned compromise with their creditors and require approval by 75% in value of each class of shares outstanding. Adopting the redemption provision in the articles allows us to complete an acquisition or business combination transaction without needing to rely upon the more complex and inflexible "scheme of arrangement" and, in particular, without requiring a proceeding before the Cayman Islands courts. Our articles of association do not specify the type or amount of consideration that you would receive in such a redemption or repurchase, and you will not have any appraisal or similar rights in such an event. The consideration to be received by holders of our Class A ordinary shares from such a redemption or repurchase due to a business combination transaction will be dependent upon the terms of the agreement that was approved by our Board of Directors and shareholders. These terms would be specified in the materials furnished to holders of our Class A ordinary shares under the proxy rules in connection with the shareholder approval necessary to affect such a business combination. Because Fox Paine has the ability to elect a majority of our Board of Directors and holds a majority of our total outstanding voting power, Fox Paine could cause your shares to be redeemed or repurchased without any action from any other shareholder. As a result, you could be forced to redeem or sell your Class A ordinary shares at a time when you have not elected to sell or for consideration that you consider to be inadequate. Holders of our Class A ordinary shares may face difficulties in protecting their interests because Cayman Islands laws are less protective of shareholder interests. Following this offering, our corporate affairs will be governed by our amended and restated memorandum and articles of association, by the Companies Law (2004 Revision) and by the common law of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established and developed as under statutes or judicial precedent in existence in jurisdictions in the United States. Therefore, you may have more difficulty in protecting your interests in the face of actions by our management, directors or controlling shareholder than would shareholders of a corporation incorporated in a jurisdiction in the United States. Unlike many jurisdictions in the United States, Cayman Islands law does not specifically provide for shareholder appraisal rights. This may make it more difficult for you to assess the value of any consideration you may receive in connection with a business combination transaction or require that the offeror give you additional consideration if you believe the consideration offered is insufficient. Shareholders of Cayman Islands exempted companies such as ourselves have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of our shareholders. Our Board of Directors has discretion under our articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, and is not obligated to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest. Subject to limited exceptions, under Cayman Islands law, a minority shareholder may not bring a derivative action against our Board of Directors. Provisions in our articles of association and Cayman Islands corporate law may impede a takeover, which could adversely affect the value of our Class A ordinary shares. Our articles of association permit our Board of Directors to issue preferred shares from time to time, with such rights and preferences as it considers appropriate. Our Board of Directors could authorize the issuance of preferred shares with terms and conditions and under circumstances that could have an effect of discouraging a takeover or other transaction. Unlike many jurisdictions in the United States, Cayman Islands law does not provide for mergers as that expression is understood under corporate law in the United States. However, Cayman Islands law does have statutory provisions that provide for the reconstruction and amalgamation of companies, which are commonly referred to in the Cayman Islands as "schemes of arrangement." The procedural and legal requirements necessary to consummate these transactions are more rigorous and take longer to complete than the procedures typically required to consummate a merger in the United States. Under Cayman Islands law and practice, a scheme of arrangement relating to a solvent Cayman Islands company must be approved at a shareholders' meeting by each class of shareholders. In each case, a majority of the number of holders of each class of a company's shares that are present and voting (either in person or by proxy) at such a meeting, which holders must also represent 75% in value of such class issued (excluding the shares owned by the parties to the scheme of arrangement), must approve the scheme of arrangement. The convening of these meetings and the terms of the amalgamation must also be sanctioned by the Grand Court of the Cayman Islands. Although there is no requirement to seek the consent of the creditors of the parties involved in the scheme of arrangement, the Grand Court typically seeks to ensure that the creditors have consented to the transfer of their liabilities to the surviving entity or that the scheme of arrangement does not otherwise materially adversely affect the creditors' interests. Furthermore, the Grand Court will only approve a scheme of arrangement if it is satisfied that: the statutory provisions as to majority vote have been complied with; the shareholders have been fairly represented at the meeting in question; the scheme of arrangement is such as a businessman would reasonably approve; and the scheme of arrangement is not one that would more properly be sanctioned under some other provision of Companies Law. As a United States holder of our Class A ordinary shares, you may have difficulty obtaining or enforcing a judgment against us because we are incorporated under the laws of the Cayman Islands. We are incorporated as an exempted company with limited liability under the laws of the Cayman Islands. A significant amount of our assets are located outside of the United States. As a result, it may be difficult for persons purchasing our Class A ordinary shares to effect service of process within the United States upon us or to enforce judgments against us or judgments obtained in United States courts. We have been advised by our Cayman Islands counsel, Walkers, that there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States. However, the Cayman Islands courts will recognize and enforce a foreign judgment of a court having jurisdiction over the defendant according to Cayman Islands conflict of law rules if such judgment is final, is for a liquidated sum, is not in respect of taxes or a fine or penalty, is not inconsistent with a Cayman Islands judgment in respect of the same matters, and was not obtained in a manner, and is not of a kind, the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands. There is doubt, however, as to whether the courts of the Cayman Islands will, in an action in the Cayman Islands, recognize or enforce judgments of United States courts predicated upon the civil liability provisions of the securities laws of the United States or any state of the United States on the grounds that such provisions are penal in nature. A Cayman Islands court may stay proceedings if concurrent proceedings are being brought elsewhere. SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA The following table summarizes year-end historical and unaudited pro forma consolidated financial data for Paradigm B.V., our predecessor, for the periods and as of the dates indicated. The historical financial data as of and for the three months ended March 31, 2006 and 2007 are derived from the unaudited interim financial statements of Paradigm B.V. that are included in this prospectus. Information for any interim period is not necessarily indicative of results that may be anticipated for the full year. The unaudited financial data presented in the table below include all adjustments that we consider necessary for a fair presentation of the financial position, cash flow and results of operations as of the dates and for the periods indicated. The pro forma consolidated financial data reflects the formation of our company as a Cayman Islands holding company and the Earth Decision acquisition. The pro forma as adjusted consolidated financial data reflects this offering and the use of proceeds therefrom. This summary information should be read in conjunction with "Selected Historical Consolidated Financial Data," "Unaudited Pro Forma Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes included elsewhere in this prospectus. Year ended December 31, Risks Related to Taxation We are a multinational organization faced with increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in various jurisdictions. As a multinational organization, we are subject to taxation in many jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our liquidity and results of operations. In addition, the authorities in these jurisdictions could review our tax returns and impose additional tax, interest and penalties, and the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us, our subsidiaries or our shareholders, any of which could have a material impact on us. Furthermore, in determining our global provision for taxes, we are required to exercise judgment. Regularly, we make estimates where the ultimate tax determination is uncertain in part because the specific countries in which we will earn our anticipated revenues for the year are not predictable, and the applicable tax rates vary significantly from country to country. While we believe our estimates are reasonable, we cannot assure you that the actual amount of our consolidated tax liability will not differ from these estimates, in which case our provision for income taxes could be materially impacted. Taxing authorities could reallocate our taxable income among our subsidiaries, which could increase our consolidated tax liability. We conduct operations world-wide through subsidiaries in various tax jurisdictions pursuant to transfer pricing arrangements between our subsidiaries. Transfer prices are prices that one company in a group of related companies charges to another member of the group for goods, services or the use of property. If two or more affiliated companies are located in different countries, the tax laws or regulations of each country generally will require that transfer prices be the same as those between unrelated companies dealing at arms' length and that contemporaneous documentation is maintained to support the transfer prices. While we believe that we operate in compliance with applicable transfer pricing laws and intend to continue to do so, our transfer pricing procedures are not binding on applicable tax authorities. If tax authorities in any of these countries were to successfully challenge our transfer prices as not reflecting arms' length transactions, they could require us to adjust our transfer prices and thereby reallocate our income to reflect these revised transfer prices. A reallocation of income from a lower tax jurisdiction to a higher tax jurisdiction would result in a higher tax liability to us. In addition, if the country from which the income is reallocated does not agree with the reallocation, both countries could tax the same income, resulting in double taxation. If tax authorities were to allocate income to a higher tax jurisdiction, subject our income to double taxation or assess penalties, it would increase our consolidated tax liability, which could adversely affect our financial condition, results of operations and cash flows. If we do not achieve increased tax benefits as a result of our planned corporate restructuring, our financial condition and operating results could be harmed. We are in the process of restructuring our corporate organization to be more closely aligned with the international nature of our business activities and to reduce our overall effective combined tax rate through changes in our development and use of our intellectual property and our cash management structure. This restructuring strategy may generate additional tax charges at the outset, but we currently anticipate achieving a reduction in our overall effective combined tax rate in the future. There can be no assurance that the taxing authorities of the jurisdictions in which we operate will not challenge the tax benefits that we expect to realize as a result of the restructuring or that taxing authorities would not assert that tax treaty benefits that we contemplated as part of our corporate restructuring are not available to us, our subsidiaries or our shareholders. If the intended tax treatment is not accepted by Three months ended March 31, our taxing authorities, we could fail to achieve the financial efficiencies that we anticipate as a result of the restructuring. See "Our Organizational Structure." We may be treated as a passive foreign investment company for United States tax purposes, which may subject United States shareholders to adverse tax consequences. If our passive income, or our assets that produce (or are held for the production of) passive income, exceed levels specified by United States federal income tax law for any taxable year, we may be characterized as a passive foreign investment company, or a PFIC, for such purposes. If we are treated as a PFIC, United States holders of our Class A ordinary shares would be subject to a disadvantageous United States federal income tax regime with respect to the distributions they receive and the gain, if any, they derive from the sale or other disposition of their Class A ordinary shares. As of the date of this Registration Statement, and based on the information available as of the date hereof, we believe that we will not be classified as a PFIC for the current year and expect that we will not become a PFIC in the foreseeable future. However, the determination of whether we are a PFIC for any particular year is based on, among other things, the type of income we and our subsidiaries receive, the value of our assets and the assets of our subsidiaries and the value of our shares, all of which are subject to change. Accordingly, there can be no assurance that we will not be considered a PFIC for the current year or any future years. If a United States shareholder acquires 10% or more of our Class A ordinary shares, it may be subject to increased United States taxation under the "controlled foreign corporation" rules. If a United States person acquires 10% or more of our Class A ordinary shares, it may be subject to increased United States taxation under the "controlled foreign corporation" rules. Each "10% United States Shareholder" of a foreign corporation that is a controlled foreign corporation, or CFC, that owns shares in the CFC directly or indirectly through foreign entities on the last day of the CFC's taxable year for an uninterrupted period of 30 days or more during a taxable year, may have to include on its United States federal income tax return for the year certain undistributed income of the CFC. Additionally, all or a portion of the gain on the sale of shares of the CFC may be taxed as dividend income rather than as capital gain. As a result of the attribution and constructive ownership rules for determining when a person is a "10% United States Shareholder," we believe that our company and our non-United States subsidiaries are CFCs. Pro Forma 2006(2) SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS We have made statements under the captions "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Our Business" and in other sections of this prospectus that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as "may," "might," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Except as required by applicable securities laws, we undertake no duty to update any of these forward-looking statements after the date of this prospectus to conform our prior statements to actual results or revised expectations. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. Such factors include, but are not limited to, the following: deterioration in the business environment of the oil and natural gas exploration and production industry; our ability to integrate companies and technologies that we acquire, including Earth Decision; the sufficiency of our intellectual property rights; loss of key members of management; effectiveness of our business strategy due to change in current or future market conditions; pricing and other competitive pressures; decreased level of demand for our solutions or increased competition; judicial decisions; the results of open governmental and regulatory matters; changes in regulations or tax laws applicable to us, our subsidiaries or customers; acceptance of our products and services, including new products and services; political stability of the areas in which we and our customers operate, including the Middle East; the material weaknesses identified in our internal controls; changes in accounting policies or practices; and any other statements, projections or assumptions that are not historical facts. You should also consider the numerous risks outlined under "Risk Factors" in this prospectus. These risks are not exhaustive. Other sections of this prospectus may include additional factors which could adversely impact our business and financial performance. Moreover, we operate in a highly competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Pro Forma As Adjusted 2007(2) USE OF PROCEEDS We estimate that our net proceeds from our sale of Class A ordinary shares in this offering (based on an assumed initial offering price of $ per share, the midpoint of the estimated offering range) will be approximately $ million, after deducting estimated offering expenses and underwriting discounts and commissions. If the underwriters exercise their over-allotment option in full, we anticipate that our net proceeds will be approximately $ million after deducting estimated offering expenses and underwriting discounts and commissions. A $1.00 increase (decrease) in the assumed initial public offering price of $ per Class A ordinary share would increase (decrease) the net proceeds to us from this offering by $ million, assuming the number of Class A ordinary shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated offering expenses and underwriting discounts and commissions payable by us. We intend to use $ million of the net proceeds from this offering to repurchase Class B ordinary shares from Fox Paine and our Chief Executive Officer, John W. Gibson, Jr., and shares of Paradigm B.V. from certain shareholders, including one of our directors, Eldad Weiss, at the same price per share as we will offer our Class A ordinary shares to the public in this offering, less any underwriting discounts and commissions; $ million to redeem some outstanding warrants to purchase shares of Paradigm B.V.; $ million to redeem all the outstanding convertible subordinated debentures; $ million to repay outstanding indebtedness under the term loan portion of the credit facility with The Governor and Company of the Bank of Scotland, as agent; and $ million to terminate the management agreement with Fox Paine. See "Certain Relationships and Related Party Transactions" and "Our Relationship with Fox Paine." The convertible subordinated debentures, which were issued by Paradigm B.V., do not have a maturity date. See "Certain Relationships and Related Transactions Reorganization and Related Transactions Redemption of Convertible Subordinated Debentures" for a discussion of the interest rate on the convertible subordinated debentures. Approximately $8.9 million aggregate principal amount of the outstanding convertible subordinated debentures were issued in 2006 as part of the consideration that we paid in connection with the acquisition of Earth Decision. See "Prospectus Summary Earth Decision Acquisition." As of March 31, 2007, the aggregate borrowings under The Governor and Company of the Bank of Scotland credit facility were approximately $55.5 million, all of which comprised a term loan with an interest rate of LIBOR + 2.5% per annum as there were no borrowings outstanding under the revolving loan at such time. The final maturity date for all borrowings under this credit facility is December 31, 2011. See "Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources." The precise amounts and timing of the application of the net proceeds from this offering depends upon many factors, including, but not limited to, the amount of any such proceeds, the required timing for the redemption of the outstanding convertible subordinated debentures and repayment of the outstanding indebtedness under the term loan with The Governor and Company of the Bank of Scotland and payment for termination of the management agreement with Fox Paine. If the underwriters exercise their over-allotment option, we intend to use those proceeds to repurchase additional Class B ordinary shares held by Fox Paine and Mr. Gibson; to purchase additional shares of Paradigm B.V. from the certain shareholders, including Mr. Weiss; and to redeem additional warrants to purchase shares of Paradigm B.V. See "Certain Relationships and Related Party Transactions Share Repurchase." 2004(1) OUR POLICY REGARDING DIVIDENDS Holders of our ordinary shares are entitled to receive dividends when, as and if declared by our Board of Directors out of funds legally available for that purpose. We currently do not intend to pay any cash dividends on either class of our ordinary shares in the foreseeable future. We anticipate that all of our earnings, if any, in the foreseeable future will be used for working capital, to support our operations and to finance the growth and development of our business. Any future determination to pay dividends will be made at the discretion of our Board of Directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospectus, regulatory and legal restrictions and other factors that our Board of Directors may deem relevant. In the event that we decide to pay dividends, there are a number of restrictions on our ability to do so. We are a holding company and have no direct operations. Our ability to pay dividends depends, in part, on the ability of our subsidiaries to make distributions to us. The credit facility with The Governor and Company of the Bank of Scotland contains financial covenants, which could limit our ability to receive dividends that we could distribute to our shareholders. A $1.00 increase (decrease) in the assumed initial public offering price of $ per Class A ordinary share would increase (decrease) our as adjusted pro forma net tangible book value by $ million, the as adjusted pro forma net tangible book value per Class A ordinary share after the offering by $ and the dilution per Class A ordinary share to the new investors purchasing our Class A ordinary shares in this offering by $ per Class A ordinary share, assuming that the number of Class A ordinary shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated offering expenses and underwriting discounts and commissions payable by us. The following table summarizes, as of March 31, 2007, the difference between the number of Class A ordinary shares purchased from us, after giving effect to (1) the application of the proceeds of this offering to redeem the outstanding convertible subordinated debentures of Paradigm B.V. and to repurchase a portion of our outstanding Class B ordinary shares and ordinary shares of Paradigm B.V., (2) the issuance of ordinary shares of Paradigm B.V. in connection with the Earth Decision earn-out arrangement, (3) the issuance of our Class B ordinary shares upon the exercise of exchange rights related to Paradigm B.V. ordinary shares and (4) the conversion of all of our Class B ordinary shares into our Class A ordinary shares on a one for one basis, the total cash consideration paid and the average cash price per share paid by our existing shareholders and to be paid by new investors A $1.00 increase (decrease) in the assumed initial public offering price of $ per Class A ordinary share would increase (decrease) total consideration by new investors by $ million, assuming that the number of Class A ordinary shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated offering expenses and underwriting discounts and commissions payable by us. The computations above exclude the following: up to 336,641 of our Class B ordinary shares issuable upon the exercise of all outstanding warrants and options of Earth Decision (as adjusted for the earn-out arrangement), including up to 86,141 Class B ordinary shares issuable in lieu of $0.8 million aggregate principal amount of convertible subordinated debentures, as of March 31, 2007, previously issuable upon exercise of such warrants and options of Earth Decision; 5,385,882 of our Class B ordinary shares issuable upon the exercise of stock options outstanding under Paradigm B.V. option plans as of March 31, 2007 at a weighted average exercise price of $5.70 per share. Our Class B ordinary shares described above, including those Class B ordinary shares outstanding; and of our Class B ordinary shares issuable upon the exercise of the outstanding warrant to purchase ordinary shares of Paradigm B.V. (1)A $1.00 increase (decrease) in the assumed public offering price of $ per Class A ordinary share would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total shareholders' equity and total capitalization by $ million, assuming that the number of Class A ordinary shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated offering expenses and underwriting discounts and commissions payable by us. (2)Long-term debt excludes current maturities of $7.0 million related to the credit facility and $1.9 million related to capital leases. (3)Paradigm B.V. share capital, par value $0.01 per share; 45,000,000 shares authorized; 18,055,252 shares issued and outstanding, actual. Paradigm Ltd. share capital, par value $0.0001 per share; 1,000,000,000 shares authorized; 15,125,573 Class B ordinary shares issued and outstanding after giving effect to our formation as a Cayman Islands holding company and the exchange transaction; Class A ordinary shares issued pro forma as adjusted and Class B ordinary shares issued pro forma as adjusted. The table above excludes the following: 3,838,958 of our Class B ordinary shares issuable upon the exercise of exchange rights of an equal number of Paradigm B.V.'s outstanding ordinary shares (of which 3,075,150 ordinary shares of Paradigm B.V. are held by former Earth Decision shareholders); 597,749 of our Class B ordinary shares issuable with respect to Paradigm B.V.'s outstanding ordinary shares held by former Earth Decision shareholders pursuant to an earn-out arrangement based on the achievement by Earth Decision of specified financial goals through December 31, 2006 (which was determined in March 2007 to be fully achieved), including 152,954 Class B ordinary shares issuable upon the conversion of $1.4 million aggregate principal amount of convertible subordinated debentures, as of March 31, 2007, issued pursuant to the earn-out arrangement; up to 336,641 of our Class B ordinary shares issuable upon the exercise of all outstanding warrants and options of Earth Decision (including up to an additional 33,664 Class B ordinary shares issuable pursuant to the earn-out arrangement), including up to 86,141 Class B ordinary shares issuable in lieu of $0.8 million aggregate principal amount of convertible subordinated debentures, as of March 31, 2007, previously issuable upon exercise of such warrants and options of Earth Decision; 5,385,882 of our Class B ordinary shares issuable upon the exercise of stock options outstanding under Paradigm B.V. option plans as of March 31, 2007 at a weighted average exercise price of $5.70 per share; and of our Class B ordinary shares issuable upon the exercise of the outstanding warrant to purchase ordinary shares of Paradigm B.V. % Long-lived assets United States $ 10,697 11 % $ 9,184 7 % Canada 12,849 13 11,775 9 LATAM 617 1 405 0 EAME 13,547 14 60,980 44 ASPAC 1,984 2 1,888 1 CIS 927 1 880 1 China 367 1 261 0 Corporate and other 54,416 57 53,058 (unaudited) (unaudited) (Dollars in thousands) Consolidated Statement of Operations Data: Revenue: Software licenses and products(3) $ 30,850 $ 36,444 $ 65,139 $ 74,003 $ 9,952 $ 13,653 Maintenance and support 30,312 34,429 46,875 55,121 9,104 15,670 Strategic consulting 27,758 27,813 32,489 32,489 6,975 7,091 OUR ORGANIZATIONAL STRUCTURE We are a Cayman Islands holding company with no material assets other than our indirect ownership of 79.8% of the outstanding ordinary shares of our subsidiary, Paradigm B.V., a Netherlands private limited liability company. As a result of our majority voting interest in Paradigm B.V., we control Paradigm B.V.'s management and operations and will consolidate Paradigm B.V.'s results in its financial statements. We operate our business through subsidiaries of Paradigm B.V. Prior to our transition to a Cayman Islands holding company, we operated our business through Paradigm B.V. In September 2006, existing shareholders of Paradigm B.V. formed Paradigm Ltd. to operate as an indirect holding company of Paradigm B.V. Because of the absence of a corporate level tax in the Cayman Islands, we believe that transitioning to this structure will enable us to redeploy our profits and cash more tax efficiently and, over time, to improve our worldwide effective tax rate. See "Risk Factors If we do not achieve increased tax benefits as a result of our planned corporate restructuring, our financial condition and operating results could be harmed." Furthermore, in the event that we elect to pay dividends in the future, such dividends would not be subject to a withholding tax under Cayman Islands law as they would be under Dutch law. We also believe that the Cayman Islands have an internationally recognized corporate legal code and well-established body of case law. Following the formation of Paradigm Ltd., Paradigm Geotechnology Holdings B.V. and three foundations affiliated with Fox Paine and other shareholders of Paradigm B.V., including six of our officers, entered into an agreement to exchange all of their shares of Paradigm B.V. for an equal number of our Class B ordinary shares. This exchange transaction is not conditioned upon the offering and is expected to close prior to the offering. In order to allow other shareholders of Paradigm B.V. to defer a taxable transaction in connection with the formation of the Cayman Islands holding company, in accordance with their rights under their existing shareholders agreement, the other shareholders of Paradigm B.V. that are accredited investors or non-United States persons will be given the right to exchange their Paradigm B.V. ordinary shares for shares of Paradigm Ltd.'s Class B ordinary shares. See "Exchange Transaction." Prior to the completion of this offering, we will contribute all of our shares of Paradigm B.V. to Paradigm Luxembourg Holdings S. .r.l., an entity that we formed in April 2007, in exchange for convertible preferred equity certificates of Paradigm Luxembourg Holdings S. .r.l., which will then be a wholly owned subsidiary of Paradigm Ltd. that we intend to use as a holding company for our existing and future non-U.S. subsidiaries. Luxembourg Holdings S. .r.l. will be a tax resident in Luxembourg, which we believe possesses a favorable tax treaty network that will allow dividends from our foreign operations to be distributed to us in a tax efficient manner. In addition, we plan to employ Luxembourg Holdings S. .r.l. as an intercompany financing vehicle through which we intend to centrally manage our worldwide cashflow. We expect Luxembourg Holdings S. .r.l. to loan available funds to foreign subsidiaries requiring funding and to potentially use excess cash to invest in or acquire additional operations. Although we do not currently intend to pay dividends, surplus cash may also be distributed to us by Luxembourg Holdings S. .r.l. for dividends to our shareholders. Our transition to a Cayman Islands holding company has been accounted for as a reorganization at carryover basis as there are no changes in the rights, obligations or economic interests of Paradigm B.V.'s shareholders upon the exchange of their Paradigm B.V. ordinary shares for shares in Paradigm Ltd. except for those applied consistently among those shareholders. The Paradigm B.V. ordinary shares held by Paradigm B.V.'s other shareholders will be treated as a minority interest in the consolidated financial statements of Paradigm Ltd. Fox Paine controlled Paradigm B.V. prior to the exchange transaction and will continue to control Paradigm Ltd. following the offering. Upon completion of this offering and the application of the proceeds, Fox Paine will hold ordinary shares representing approximately % of the voting power in Paradigm Ltd. Immediately following this offering, our public shareholders will own approximately % of the outstanding ordinary shares of Paradigm Ltd., and will own ordinary shares representing approximately % of the voting power in Paradigm Ltd. Our organizational structure immediately following our acquisition of Earth Decision was as reflected in the diagram below: *Based on outstanding shares. **Accredited investors and non-United States persons had the right to exchange shares of preferred stock of Earth Decision for 866,304 ordinary shares of Paradigm B.V. (of which 216,576 ordinary shares of Paradigm B.V. were issuable after the conversion of certain Earth Decision preferred stock into approximately $2.0 million aggregate principal amount of convertible subordinated debentures of Paradigm B.V. and the subsequent conversion of such convertible subordinated debentures into 216,576 ordinary shares of Paradigm B.V.). In addition, Paradigm B.V. was required to issue up to 607,500 of its ordinary shares upon the exercise of Earth Decision options and warrants (of which 151,875 ordinary shares of Paradigm B.V. were issuable after the exercise of certain Earth Decision options and warrants for approximately $1.4 million aggregate principal amount of convertible subordinated debentures of Paradigm B.V. and the subsequent conversion of such convertible subordinated debentures into 151,875 ordinary shares of Paradigm B.V.). Our organizational structure immediately following the offering and the application of the proceeds will be as shown in the diagram below: *Based on outstanding shares. **Upon the exchange of all of the outstanding ordinary shares of Paradigm B.V. for our Class B ordinary shares following the completion of this offering and the application of the proceeds, our Class B ordinary shares would represent % of our outstanding ordinary shares and our Class A ordinary shares would represent % of our outstanding ordinary shares. Assuming that all minority interests in our subsidiaries have been exchanged in this manner, upon the exercise of all outstanding options and warrants of Earth Decision and Paradigm B.V. and the exchange of those securities for our Class B ordinary shares following the completion of this offering and the application of the proceeds, our Class B ordinary shares would represent % of our outstanding ordinary shares and our Class A ordinary shares would represent % of our outstanding ordinary shares. ***Upon completion of this offering and the application of the proceeds, up to outstanding ordinary shares of Paradigm B.V. will be exchangeable for our Class B ordinary shares in accordance with rights under the existing Paradigm B.V. shareholders agreement. In addition, we may be required to issue 5,385,882 Class B ordinary shares upon the exercise of outstanding options by Paradigm B.V. optionholders. See "Exchange Transaction." ****We may be required to issue 336,641 Class B ordinary shares upon the exercise of all outstanding warrants and options of Earth Decision (as adjusted for the earn-out arrangement), including up to 86,141 Class B ordinary shares issuable in lieu of $0.8 million aggregate principal amount of convertible subordinated debentures, as of March 31, 2007, previously issuable upon exercise of such warrants and options of Earth Decision. EXCHANGE TRANSACTION In connection with our transition to a Cayman Islands holding company, we entered into an exchange agreement in September 2006 with Paradigm Geotechnology Holdings B.V. and three foundations affiliated with Fox Paine, six of our U.S. officers and the spouse of one officer. This agreement provides that, subject to the conditions described below, these shareholders of Paradigm B.V. will contribute an aggregate of 15,124,573 shares of Paradigm B.V. to us in exchange for an equal number of our Class B ordinary shares. We refer to this transaction as the "exchange transaction." The exchange transaction is not contingent on this offering. Our obligation to consummate the exchange transaction is conditioned upon our receipt of a tax ruling from the Luxembourg Tax Inspector with respect to matters related to the formation and capitalization of a newly-formed Luxembourg subsidiary. We have recently obtained this tax ruling. In addition, under the exchange agreement Paradigm Geotechnology Holdings B.V.'s obligation to consummate the exchange transaction is conditioned upon the negotiation of an agreement that is mutually acceptable to Paradigm Geotechnology Holdings B.V. and us with respect to matters described below. As a condition to the exchange transaction being tax free to them under U.S. tax law, certain indirect owners of Fox Paine must enter into an agreement with the U.S. Internal Revenue Service. Under the agreement with the U.S. Internal Revenue Service, the affected indirect owners of Fox Paine would agree to pay tax on their gain not taxed at the time of the exchange transaction, together with interest on such tax, if, on or before December 31, 2012, a "triggering event" occurs. A triggering event will be deemed to occur if we dispose of shares of Paradigm B.V. or if Paradigm B.V. disposes of substantially all its assets including in certain internal reorganizations, to the extent such indirect owners have not previously disposed of our shares in a taxable transaction. In connection with our contemplated agreement with Paradigm Geotechnology Holdings B.V., we will have to indemnify the affected indirect owners of Fox Paine for any incremental tax cost to them (including interest on tax) of any triggering event and such affected indirect owners will reimburse us for the incremental tax benefits, if any, realized by them as a result of a triggering event for which they were indemnified. A sale or other disposition by these indirect owners of our ordinary shares will not create an indemnity obligation. Furthermore, Mr. Gibson is also expected to enter into an agreement with the U.S. Internal Revenue Service regarding his exchange of ordinary shares of Paradigm B.V. for Class B ordinary shares, which agreement will be comparable to the agreement described above between certain indirect owners of Fox Paine and the U.S. Internal Revenue Service. While not a condition to the exchange transaction, we also intend to enter into an agreement pursuant to which we will agree to indemnify Mr. Gibson for any incremental tax cost to him (including interest on tax) resulting from any triggering event, and Mr. Gibson will agree to reimburse us for the incremental tax benefits, if any, realized by him as a result of a triggering event for which he was indemnified. We are still negotiating the terms of the agreement with Paradigm Geotechnology Holdings B.V. and with Mr. Gibson. As a result of the exchange transaction, we will hold 79.8% of the outstanding ordinary shares of Paradigm B.V. The obligation of the subscribers party to the exchange agreement besides Paradigm Geotechnology Holdings B.V. is not conditioned upon the negotiation of an agreement with Paradigm Geotechnology Holdings B.V. In accordance with Paradigm B.V.'s existing shareholders agreement, after completion of the exchange transaction, Paradigm B.V.'s shareholders that are accredited investors (as defined in Regulation D under the Securities Act) or non-United States persons that can acquire our shares in an offshore transaction pursuant to Regulation S under the Securities Act will be given the right to exchange their shares of Paradigm B.V. for our ordinary shares. After completion of the exchange transaction, Paradigm B.V.'s outstanding employee stock options will also be adjusted to provide for the optionholders to receive our ordinary shares upon exercise of the options and similar adjustments will be made to Paradigm B.V.'s outstanding warrants. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The following table summarizes the historical consolidated financial data for Paradigm B.V., and its predecessor for the periods and as of the dates indicated and should be read in conjunction with the audited financial statements of Paradigm B.V. and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected historical consolidated financial data as of December 31, 2005 and 2006 and for each of the three years ended December 31, 2006 is derived from the audited financial statements and related notes of Paradigm B.V. that are included in this prospectus. The historical consolidated financial data for the periods and dates prior to January 1, 2003 have been derived from the unaudited consolidated financial statements of Paradigm B.V., which have not been included herein. The historical financial data as of and for the three months ended March 31, 2006 and 2007 are derived from the unaudited interim financial statements of Paradigm B.V. that are included in this prospectus. Information for any interim period is not necessarily indicative of results that may be anticipated for the full year. The unaudited financial data presented in the table below include all adjustments that we consider necessary for a fair presentation of the financial position, cash flow and results of operations as of the dates and for the periods indicated. Consolidated Statement of Cash Flows Data: Net cash provided by (used in): Operating activities $ 6,641 $ (3,679 ) $ 11,766 $ 2,942 $ 10,266 $ 17,904 $ 4,453 $ 13,300 Investing activities (3,411 ) (78,677 ) (4,127 ) (24,904 ) (5,583 ) (3,647 ) (876 ) (2,156 ) Financing activities 183 89,678 (5,074 ) 19,269 (1,745 ) (8,624 ) (4,812 ) (1,575 ) (1)The predecessor periods relate to the period prior to the acquisition of Paradigm B.V. on August 13, 2002 by Fox Paine. (2)Amounts include the acquisitions of Reservoir Technology Division on April 22, 2004 (at a purchase price of $21.1 million), Petroleum Workbench on June 30, 2004 (at a purchase price of $2.5 million) and Earth Decision on August 11, 2006 (at a purchase price of $72.1 million) and the results of operations of those acquisitions since their respective acquisition dates. (3)Included in software licenses and products are sales of hardware and third-party software products provided to certain customers on a cost plus basis to facilitate the implementation. For the years 2003, 2004, 2005 and 2006 and the three months ended March 31, 2006 and 2007, sales of hardware and third-party software products totaled $1.5 million, $0.8 million, $1.5 million, $5.6 million, $0.1 million and zero, respectively. The cost of revenues related to the sale of hardware and third-party software products totaled $1.5 million, $0.8 million, $1.5 million, $5.6 million, $0.1 million and zero, for the years 2003, 2004, 2005 and 2006 and the three months ended March 31, 2006 and 2007, respectively. For the predecessor 2002 period and the period ended December 31, 2002, sales of hardware and third-party software totaled $1.0 million and $0.3 million, respectively. For the same periods, cost of revenues related to the sale of hardware and third-party software totaled $1.0 million and $0.3 million, respectively. (4)Includes a $1.5 million advisory fee paid to Fox Paine in connection with the amendment of the credit agreement. (5)Includes $1.6 million of employee termination and facility costs and $2.9 million of impairments of intangible assets for the year 2005. (6)Includes $21.1 million of distributions on convertible subordinated debentures following a distribution to Paradigm B.V.'s ordinary shareholders. If our shareholders receive a distribution, the terms of the convertible subordinated debentures provide for an additional payment to the debenture holders on a basis equal to what they would have received as a distribution to shareholders if they had converted to ordinary shares of Paradigm B.V. prior to the distribution. Total revenue 88,920 98,686 144,503 161,613 26,031 36,414 Cost of revenue: Software licenses and products(3) 2,761 2,923 8,016 9,269 123 1,082 Maintenance and support 10,561 12,690 16,791 19,858 3,167 5,948 Strategic consulting 23,222 28,154 31,375 31,375 7,318 8,035 UNAUDITED PRO FORMA FINANCIAL INFORMATION We derived the following unaudited pro forma consolidated statements of operations for the year ended December 31, 2006 by applying pro forma adjustments attributable to the acquisition of Earth Decision to the historical consolidated statements of operations of Paradigm B.V., which was audited for the year ended December 31, 2006 and unaudited for the Earth Decision period from January 1, 2006 through the acquisition date on August 11, 2006. The unaudited pro forma consolidated statements of operations for the year ended December 31, 2006 give effect to the acquisition of Earth Decision as described in the accompanying notes as if such event occurred on January 1, 2006. The results of operations of Earth Decision are included in the results of operations of Paradigm B.V. for all periods after August 11, 2006. In preparing the unaudited pro forma consolidated statements of operations for the year ended December 31, 2006 and for the three months ended March 31, 2007, we determined that no adjustments would be necessary for the formation of our company as a Cayman Islands holding company as described in "Our Organizational Structure" or for the completion of the exchange transaction had either such transaction occurred on January 1 of the period presented. We derived the following unaudited pro forma combined balance sheet by applying pro forma adjustments attributable to the completion of our exchange transaction to the historical audited consolidated balance sheet of our company and to the historical unaudited consolidated balance sheet of Paradigm B.V. The unaudited pro forma combined balance sheet gives effect to the consummation of the exchange transaction as described in the "Exchange Transaction" as if it occurred on March 31, 2007. The pro forma as adjusted financial statements reflect this offering and the use of proceeds therefrom in order to: repurchase some of our outstanding Class B ordinary shares and shares of Paradigm B.V.; redeem all of the outstanding convertible subordinated debentures of Paradigm B.V.; redeem outstanding warrants to purchase shares of Paradigm B.V.; repay indebtedness under the credit facility; and terminate the management agreement with Fox Paine. We describe the assumptions underlying the pro forma adjustments in the accompanying notes, which should be read in conjunction with the unaudited pro forma as adjusted consolidated financial statements, included elsewhere in this prospectus. This information and the accompanying notes should be read in conjunction with our historical financial statements and the related notes included elsewhere in this prospectus. The information presented is not necessarily indicative of the results of operations or financial position that might have occurred had the events described above actually taken place as of the dates specified or that may be expected to occur in the future. Class A ordinary shares (m): EARNINGS PER SHARE basic and diluted $ WEIGHTED-AVERAGE SHARES OUTSTANDING basic and diluted Class B ordinary shares (m): EARNINGS PER SHARE basic and diluted $ WEIGHTED-AVERAGE SHARES OUTSTANDING basic and diluted Property and equipment, net 14,262 14,262 Goodwill 102,630 102,630 Other intangible assets, net 36,436 36,436 Deferred offering costs 4,596 4,596 (l) Other long-term assets Total assets $ Total current liabilities Total liabilities and shareholders' deficit $ Class A ordinary shares (m): EARNINGS PER SHARE basic and diluted $ WEIGHTED AVERAGE SHARES OUTSTANDING basic and diluted Class B ordinary shares (m): EARNINGS PER SHARE basic and diluted $ WEIGHTED AVERAGE SHARES OUTSTANDING basic and diluted Expected tax benefit at U.S. federal statutory tax rate $ (405 ) $ (6,206 ) $ (8,352 ) Increase/(reduction) resulting from: Difference in foreign tax rates (1,351 ) 2,726 (796 ) Non-deductible interest (15 ) 1,219 34 Non-deductible impairment 1,122 Non-deductible branch losses 319 418 18 Non-deductible in-process research and development 5,636 Change in tax reserves 414 83 4,327 Change in valuation allowance 2,599 1,509 3,616 Other Current $ 34 $ Long-term debt, net of current maturities 49,718 49,718 (i) Capital lease obligations, net of current maturities 926 926 Other long-term liabilities 11,162 11,162 NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The unaudited pro forma consolidated financial statements are prepared in accordance with GAAP and include an unaudited pro forma combined statement of operations for the year ended December 31, 2006 that reflects the acquisition of Earth Decision for aggregate consideration of $72.1 million, including transaction fees and expenses of $5.5 million, as if it occurred on January 1, 2006. The results of operations of Earth Decision are included in the results of operations of Paradigm B.V. for all periods after August 11, 2006. In preparing the unaudited pro forma combined statements of operations for the year ended December 31, 2006 and for the three months ended March 31, 2007, we determined that no adjustments would be necessary for the formation of our company as a Cayman Islands holding company as described in "Our Organizational Structure" or for the completion of the exchange transaction had either such transaction occurred on January 1 of the periods presented. The unaudited pro forma combined financial statements should be read in conjunction with the historical audited consolidated financial statements and the related notes of Paradigm B.V. for the year ended December 31, 2006 and with the historical unaudited consolidated financial statements and the related notes of Paradigm B.V. as of and for the three months ended March 31, 2007, each of which is included in this prospectus. In the opinion of management, these unaudited pro forma consolidated financial statements include all adjustments necessary for a fair presentation. The unaudited pro forma combined financial statements may not necessarily be indicative of the financial position and results of operations that would have been achieved if the acquisition of Earth Decision had occurred on the date noted above. In preparing these unaudited pro forma combined financial statements, no adjustments have been made to reflect ongoing costs or savings that may result from the acquisition of Earth Decision. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies followed in preparing the unaudited pro forma consolidated financial statements are those used by Paradigm B.V. as set forth in its historical audited consolidated financial statements as of December 31, 2006 and its historical unaudited consolidated financial statements as of March 31, 2007. 3. PRO FORMA COMBINED ADJUSTMENTS The pro forma consolidated financial statements give pro forma effect to the following: (a)Reflects the results of operations of the Earth Decision business from January 1, 2006 through August 11, 2006. (b)Excludes a minority interest adjustment associated with a 19.9% interest in our subsidiary Paradigm B.V. that we do not own. The shareholders that own the remaining 19.9% interest in Paradigm B.V. have the right to exchange their shares in Paradigm B.V. for our Class B ordinary shares at any time. No minority interest adjustment is reflected since Paradigm B.V. has a total shareholders' deficit as of December 31, 2006. The existence of a shareholder's deficit precludes recognizing a minority interest. (c)Reflects the amortization of intangible assets acquired in connection with the acquisition of Earth Decision. The intangible assets are being amortized in accordance with their estimated useful lives, which range from 3 years to 10 years and represent a weighted-average life of 9.6 years. (d)Represents our write-off of acquired in-process research and development projects of Earth Decision where the technological feasibility of the acquired technology had not yet been established and the technology has no future alternative uses. (e)Represents the elimination of intercompany balances. (f)Represents a reclassification of share capital to additional paid-in capital to reflect the appropriate amount of share capital for Paradigm Ltd. Also, represents a reclassification of treasury stock to additional paid-in capital since Cayman Islands law applicable to a Cayman Islands holding company does not recognize treasury shares, rather it deems such shares as cancelled. 4. OFFERING ADJUSTMENTS The following adjustments reflect this offering and the use of proceeds therefrom. (g)Under the provisions of the management agreement with Fox Paine, upon completion of this offering, we will pay Fox Paine a $6.8 million fee plus unreimbursed expenses to terminate the management agreement. In connection with the assumed termination of the management agreement at the beginning of the period presented, the related party fees and expenses in the statement of operations of $1.1 million for the year ended December 31, 2006 and $0.3 million for the three months ended March 31, 2007 have been eliminated, as those expenses relate solely to expenses incurred under the management agreement being terminated and will not be incurred on a continuing basis. The $6.8 million termination payment will represent an additional charge that is non-recurring in nature and, as such, is not reflected as a pro forma adjustment. (h)In connection with the use of proceeds of this offering to prepay our term loan, this adjustment represents the elimination of the related recurring interest expense. The interest expense on the term loan was $4.3 million and $1.0 million for the year ended December 31, 2006 and the three months ended March 31, 2007, respectively. In connection with the prepayment of the term loan, we will also incur additional charges that are non-recurring in nature and, as such, are not reflected as pro forma adjustments, including: for the year ended December 31, 2006: (1) write-off of $1.3 million in unamortized debt issuance costs related to the term loan and (2) write-off of interest rate swap derivative assets of $0.6 million related to the term loan; and for the three months ended March 31, 2007: (1) write-off of $1.2 million in unamortizable debt issuance costs related to the term loan and (2) write-off of interest rate swap derivative assets of $0.5 million related to the term loan. (i)Represents assumed offering proceeds of $ million based on an initial public offering price per share of $ (which is the midpoint of the estimated offering range), net of transaction fees of $ , and net proceeds of $ million from the exercise of stock options from Mr. Gibson. Additionally, reflects the use of proceeds to repurchase some of our Class B ordinary shares and shares of Paradigm B.V. at a cost of $ million, redeem warrants to purchase shares of Paradigm B.V. at a cost of $ million, redeem $ million (aggregate principal amount) of convertible subordinated debentures at a cost of $ and prepay our term loan of $ million under the credit facility. Upon completion of this offering, we will have Class A ordinary shares and Class B ordinary shares outstanding. In connection with the repurchase of the shares of Paradigm B.V., we have applied purchase accounting to the repurchased shares representing shares held by minority interest shareholders. The application of purchase accounting resulted in the addition of $ million of goodwill, which represents the fair value of the purchase price in excess of the fair value of the minority interest. The purchase accounting did not result in any fair value adjustments. (j)Represents (1) the write-off of deferred loan costs and (2) the write-off of interest rate swap derivative assets, both of which are associated with the assumed prepayment of long-term debt Deferred tax assets: Accrued liabilities $ 37 $ 54 Net operating loss carryforwards 1,386 1,148 Tax credits 1,695 1,530 Other 47 from the proceeds of this offering. These write-offs are directly attributable to effects of this offering. (k)Represents the payment of a termination fee under the provisions of the management agreement with Fox Paine, whereby upon our initial public offering we will pay Fox Paine a $6.8 million fee plus unreimbursed expenses to terminate the management agreement. (l)Represents the reclassification of the following items to additional paid-in capital upon our initial public offering: Deferred offering costs of $4.6 million, which will be a reduction of equity representing the costs of the initial public offering. Par value of $0.2 associated with Paradigm B.V., which will be replaced with the par value of Paradigm Ltd. (m)Basic and diluted loss per Class A ordinary share includes the issuance of of our ordinary shares in this offering and excludes ordinary shares issued in this offering. The excluded ordinary shares represent ordinary shares associated with proceeds of the offering used for the repurchase of some of our Class B ordinary shares and shares of Paradigm B.V., along with proceeds used to reimburse us for offering expenses incurred for this offering. The exclusion of these ordinary shares from the calculation of pro forma loss per share is required, since the shares relate to proceeds that did not result in pro forma adjustments to the pro forma statements of operations. Basic and diluted loss per Class B ordinary share includes 15,125,573 of our ordinary shares outstanding after the completion of the exchange transaction. Additional Class A ordinary shares totaling 25,284,803 shares, which are convertible from the Class B ordinary shares (diluted), have been excluded from diluted loss per share because their effect would have been antidilutive. Additional Class B ordinary shares totaling 10,159,230 shares related to ordinary share equivalents have been excluded from diluted loss per share because their effect would have been antidilutive. These Class B ordinary share equivalents are comprised of the following: 3,838,958 of our Class B ordinary shares issuable upon the exercise of exchange rights of an equal number of Paradigm B.V.'s outstanding ordinary shares; 597,749 of our Class B ordinary shares issuable with respect to Paradigm B.V.'s outstanding ordinary shares held by former Earth Decision shareholders pursuant to an earn-out arrangement based on the achievement by Earth Decision of specified financial goals through December 31, 2006 (which was determined in March 2007 to be fully achieved), including 152,954 Class B ordinary shares issuable upon the conversion of $1.4 million aggregate principal amount of convertible subordinated debentures, as of March 31, 2007, issued pursuant to the earn-out arrangement; up to 336,641 of our Class B ordinary shares issuable upon the exercise of all outstanding warrants and options of Earth Decision (including up to an additional 33,664 Class B ordinary shares issuable pursuant to the earn-out arrangement), including up to 86,141 Class B ordinary shares issuable in lieu of $0.8 million aggregate principal amount of convertible subordinated debentures, as of March 31, 2007, previously issuable upon exercise of such warrants and options of Earth Decision; 5,385,882 of our Class B ordinary shares issuable upon the exercise of stock options outstanding under Paradigm B.V. option plans as of March 31, 2007 at a weighted average exercise price of $5.70 per share; and of our Class B ordinary shares issuable upon the exercise of the outstanding warrant to purchase ordinary shares of Paradigm B.V. Total cost of revenue 36,544 43,767 56,182 60,502 10,608 15,065 Gross profit 52,376 54,919 88,321 101,111 15,423 21,349 Operating expenses: Sales and marketing 16,215 18,016 27,913 32,013 4,740 8,005 Research and development 17,396 19,298 23,241 26,876 4,530 7,653 General and administrative 11,391 16,255 33,779 38,520 4,138 11,565 Amortization of intangibles 1,765 2,090 2,626 3,707 466 875 Related party fees and expenses 2,829 (4) 1,757 1,100 1,100 276 275 Goodwill impairment 4,899 Restructuring and impairment costs 993 4,491 (5) Acquired in-process research and development 16,100 16,100 As of March 31, 2007, we had approximately 500 customers, including multinational, national and independent oil companies and oil field services companies. We are not dependent on any single customer and no customer represents over 10% of our total revenues. The United States dollar is our functional currency. Approximately 75%, 77% and 74% of our revenues in 2005, 2006 and the three months ended March 31, 2007, respectively, were paid to us in United States dollars, or in currency tied to the United States dollar, and approximately 25%, 29% and 26% of our operating expenses during the same periods, respectively, were paid in United States dollars or in currency tied to the United States dollar. While the effect of fluctuations in currency exchange rates has had a minimal impact on our historical results of operations, our exposure to fluctuations in currency exchange rates could increase as we expand our international operations and receive revenues and expenses in foreign currencies not tied to the United States dollar. In September 2006, we were formed as a Cayman Islands company and have no material assets other than our indirect ownership of 79.8% of the outstanding shares of Paradigm B.V., which we will acquire through the exchange transaction. We will complete this corporate restructuring of our business to be a holding and finance company for our subsidiaries, enhance our international tax flexibility and to provide our shareholders with the benefits associated with a Cayman Islands company. Our management believes that the restructuring should have no material impact on our operations. Sources of Revenues We derive revenues principally from the sale of software licenses and products and related maintenance and support contracts and from providing strategic consulting services using our software applications. Software Licenses and Products. We derive our software licensing and product revenues primarily from licensing our software on a perpetual basis. Our perpetual licenses allow our customers the right to use our software indefinitely. We generally license our software for a single up-front fee that varies based on the number of concurrent users. Our average sales cycle for perpetual licenses is two to six months. We also sell term-based licenses that allow our customers to use our software, receive updates and upgrades to the licensed software and receive technical support for a specified period of time. We typically sell term-based licenses for one year and invoice the customers in advance with the revenues recognized ratably over the life of the arrangements. In 2006, we increased our emphasis on securing multi-year term-based licenses in order to diversify our revenue stream and generally provide us with greater revenue predictability in the long term. During 2007, we expect our installed license base to reflect an increasing percentage of term-based users as a result of expanding business with existing customers and new customers. As our sales of our term-based licenses increase, our recurring license revenues and deferred revenues will increase. Occasionally, our customers request an integrated and installed solution. In these cases, we recognize revenue from sales of third-party hardware and software in connection with our sale of software licenses. Maintenance and Support. We derive maintenance and support revenues from sales of maintenance and customer support contracts associated with the sale of our software licenses. We typically sell an annual maintenance and support contract in connection with the initial purchase of a software license and these contracts are typically renewed annually. These agreements provide for online and on-call services for issue prevention and resolution as well as software updates and upgrades. We typically invoice post contract support on an annual basis in advance of providing the service. Our maintenance renewal rate in 2006 was 92% on a revenue basis. Our maintenance and support revenues are also comprised of installation and user training support contracts and on-site support contracts. Strategic Consulting. We generate our strategic consulting revenues by providing services to our customers on a project basis. For each project, we define and agree upon deliverables and acceptance standards with our customers. These projects utilize our software applications and the expertise of our earth scientists and engineers to model, analyze and image our customers' data. A variation of the consulting projects may include providing assistance to customers in obtaining their specific modeling, analysis and imaging needs. In late 2005, following a strategic planning process, our management decided to strictly limit pursuit of price sensitive, compute intensive, outsourced, seismic data processing contracts that were the focus of the Reservoir Technology Division which we acquired in April 2004. These seismic data processing contracts represented approximately 15% and 14% of our 2005 and 2006 strategic consulting revenues, respectively. De-emphasizing the compute intensive contracts has resulted in a decline in the number of active contracts for such services from seven in 2006 to three during the three-month period ended March 31, 2007 and enabled management to focus on pursuing other strategic consulting engagements. Balance, beginning of year $ 2,638 $ 5,362 $ 2,729 Provision charged to expense 328 1,363 643 Write-offs charged against allowance (1,125 ) (3,996 ) (1,288 ) Allowance acquired in acquisitions 3,521 Balance, beginning of year $ 11 $ 54 Provision charged to expense Balance, end of year $ 54 $ Costs of Revenues We incur the following costs of revenue in connection with our sales of software licenses and products, maintenance and support and strategic consulting: Software Licenses and Products. Our costs related to our software licenses and product revenues are comprised of commissions, third-party software royalties and the cost for any third-party hardware and software sold to customers. Maintenance and Support. Our costs related to our maintenance and support revenues are comprised of personnel costs related to technical support staff, travel and lodging and commissions, along with the allocated depreciation, operation and maintenance of equipment, facilities and overhead. We periodically engage third-party consultants to supplement and complement our personnel with additional resources or discreet knowledge. Strategic Consulting. Our strategic consulting costs are comprised of personnel costs for the project staff associated with the consulting engagement, third-party consultants, computing services, travel and lodging, along with the depreciation, operation, and maintenance of equipment, allocated facilities and overhead. Operating Expenses Sales and Marketing Expenses. Our sales and marketing expenses consist primarily of personnel costs for our sales and marketing staff, in addition to commissions, travel and lodging, marketing programs and allocated facilities, depreciation and other related overhead. We pay commissions as we recognize revenue and collect receivables. Our marketing programs include advertising, trade shows, corporate communications, strengthening strategic alliances, building brand awareness and other product marketing expense. Research and Development. Our research and development expenses consist primarily of personnel costs and allocated facilities, depreciation and other related overhead. We expense research and development as costs for developing software enhancements and new applications because the cost and time between technological feasibility and release is short and the related amounts are not considered material. General and Administrative Expenses. Our general and administrative expenses consist of personnel costs for executive, finance and accounting, human resources, legal and management information systems, as well as, travel and lodging, accounting, legal and other professional fees, bad debt expense, other corporate expense and allocated facilities, depreciation and other related overhead. Beginning in 2006, our general and administrative costs increased as we prepared for this initial public offering. Following this offering, we will continue to incur additional general and administrative expense related to operating as a public company. We expect to incur between $5.5 million to $7.5 million of legal and accounting professional fees during 2007 in connection with our comprehensive internal review of compliance with certain U.S. laws. Amortization of Intangibles. Amortization of intangibles represents the amortization of intellectual property and other intangible assets arising from our purchases of other businesses. Related Party Fees and Expenses. Related party fees and expenses consist of amounts charged by Fox Paine under the terms of the management agreement. Pursuant to the management agreement with Fox Paine, we paid annual management fees of $1.1 million for ongoing financial and strategic consulting plus reimbursement of incidentals and third-party expenses. Management fees and related expenses to Fox Paine totaled $2.8 million, $1.8 million, $1.1 million and $0.3 million in 2004, 2005 and 2006 and the three months ended March 31, 2007, respectively. Included in the 2004 expense is a $1.5 million fee related to assistance provided to us in amending the credit facility. In connection with the acquisition of RTD in 2004 and Earth Decision in 2006, we paid Fox Paine an advisory fee of $1.5 million for each acquisition. These fees were treated as transaction costs of the acquisition. In September 2006, we agreed with Fox Paine to terminate the management agreement upon our initial public offering in exchange for a one time payment of $6.8 million plus unreimbursed expenses. See "Our Relationship with Fox Paine." Restructuring. Our restructuring expenses include costs associated with workforce reductions and consolidation of excess facilities. Workforce reduction charges include the cost of severance and related benefits of employees affected by the restructuring activities. Excess facility costs represent lease termination payments, net of sublease revenue, and other costs related to the closure of an office. Interest and Other Expense Interest Expense, Net. Interest expense, net consists of interest expense on the term loan and revolving credit facility, bank charges, amortization of deferred financing fees, fair value gains and losses on our interest rate swaps and interest income on cash and equivalents. We intend to repay the outstanding balance under the term loan with proceeds from the initial public offering, eliminating the related interest expense. See "Use of Proceeds." As of March 31, 2007, the principal balance of our term loan was $55.5 million. In addition, although we believe that we have adequate cash to meet our working capital needs, we anticipate retaining the revolving credit facility or securing an expanded line of credit to enhance available working capital. Minority interest in Earth Decision. Minority interest in Earth Decision relates to preferred shares of Earth Decision, which are included in the initial purchase price of Earth Decision, but remained outstanding as of December 31, 2006. Prior to the exchange of the preferred shares, we reflected the preferred shares as a minority interest in Earth Decision in our consolidated balance sheet included elsewhere in this prospectus. Because the preferred shares were exchanged for ordinary shares and convertible subordinated debentures of Paradigm B.V., the portion of the preferred shares related to the debentures is required to be adjusted to the redemption value of the underlying debentures. To increase the recorded value of the underlying debentures to their redemption price, we recorded an adjustment of $2.1 million during 2006 as an increase to minority interest liability in Earth Decision on our consolidated balance sheet and an increase in minority interest in Earth Decision on our consolidated statement of operations. In March 2007, we exercised our option under the shareholders agreement relating to the preferred shares to cause the exchange of the Earth Decision preferred shares for ordinary shares and convertible subordinary debentures of Paradigm B.V. Other Expense, Net. Other expense, net consists of foreign currency transaction gains and losses and minority interest expense. Other expense, net also includes the results of an entity in Kazakhstan that provides geophysical services, which is controlled by us. Although we have no ownership interest in the Kazakhstan entity, we have an irrevocable contractual 80% interest in the profits and loss of the entity. We have included the full accounts of the Kazakhstan entity in our consolidated financial statements. The remaining 20% interest represents a minority interest which is reflected in other expense, net. Income Taxes. Due to the international scope of our business, our income tax expense includes the tax obligations for the multiple tax jurisdictions in which we operate. The income tax expense is affected by the profitability of our operations in the jurisdictions in which we operate, the applicable tax rate for these jurisdictions, our tax policies such as transfer pricing and cross-border charges, and the impact of certain tax planning strategies which we have implemented. We make significant estimates in determining our consolidated income tax expense. If our actual amounts differ from these estimates, our provision for income taxes could be materially impacted. We have tax loss carryforwards in many jurisdictions in which we operate that are available to offset future taxable income, if any, in the jurisdictions in which the losses reside. While these losses have varying carryforward periods, we have not recorded a financial statement benefit for many of these carryforwards as we do not believe it is more likely than not that such losses will be utilized prior to their expirations. In light of our evolving business objectives and organizational structure, we have embarked on a tax restructuring strategy. The key objectives of this strategy are to achieve an efficient and sustainable tax structure, carry out a comprehensive evaluation of transfer pricing with respect to use of intangible assets and cross border charging, and achieve an efficient and flexible cash management structure. This restructuring strategy may result in additional tax charges in the short term. However, we believe that the tax restructuring will result in tax savings and have a positive impact on our effective tax rate in the medium and longer term. Accretion to Redemption Value on, and Distributions to Holders of, Convertible Subordinated Debentures These amounts consist of adjustments to recognize the convertible subordinated debentures at their redemption value and any distributions paid to the holders of the convertible subordinated debentures because such holders participate, on an as-converted basis, in any distributions paid to the ordinary shareholders of Paradigm B.V. Acquisitions We completed two acquisitions in 2004 that included: On April 22, 2004, our subsidiary acquired RTD a specialized geophysical and seismic data processing business that was part of Core Laboratories NV, for a total purchase price of $21.1 million in cash. On June 30, 2004, our subsidiary acquired the Petroleum Workbench business division, providing reservoir engineering software, from Baker Hughes Inc. for an aggregate purchase price of $2.5 million. Through a series of transactions between August 11, 2006 and September 12, 2006, our subsidiary completed an acquisition of Earth Decision, a leading provider of solid earth-modeling software. The total purchase price of $72.1 million included the fair value of 2,932,605 ordinary shares of Paradigm B.V., $2.7 million in cash, the fair value of $8.9 million aggregate principal amount of convertible subordinated debentures of Paradigm B.V., the fair value of Earth Decision preferred stock, options and warrants, and $5.5 million of transaction fees and expenses. Assuming the conversion of all outstanding preferred shares of Earth Decision and the exercise and exchange of all outstanding Earth Decision options and warrants as of December 31, 2006, Paradigm B.V. would issue approximately $3.4 million aggregate principal amount of convertible subordinated debentures and 1,105,353 of its ordinary shares. As determined in March 2007, an earn-out arrangement based on the achievement of specified financial goals by Earth Decision through December 31, 2006 was fully achieved. Based on outstanding shares, options and warrants held by former Earth Decision holders as of December 31, 2006, the earn-out results in the issuance of up to an additional 631,413 ordinary shares (including up to 161,569 ordinary shares issuable in lieu of $1.4 million aggregate principal amount of convertible subordinated debentures of Paradigm B.V.). We believe that the acquisition of Earth Decision has enhanced the breadth of our product portfolio and given us access to new opportunities and customers in our markets. The results of operations and financial position of Earth Decision are included in our financial statements beginning August 11, 2006. See "Unaudited Pro Forma Financial Information." Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt 241 1,453 Repayments of debt (114 ) (105 ) Payments on capital lease obligations (58 ) (60 ) Proceeds from the exercise of stock options Internal Review of Compliance with Certain U.S. Laws We recently discovered that certain of our subsidiaries, or personnel thereof, have engaged in business transactions involving Cuba and Iran, which may have violated regulations of the U.S. Department of Treasury and/or U.S. Department of Commerce. These findings are described in more detail below. Upon the discovery of the transactions involving Cuba, we commenced a comprehensive internal review of matters related to compliance with U.S. laws relating to export controls, economic sanctions, and foreign payments, recordkeeping, and related internal controls (including the FCPA), with the assistance of outside counsel. We and our outside counsel have concluded the investigatory phase of this internal review. With regard to both export controls and the FCPA, we have identified transactions that may not have complied with applicable regulations. There can be no assurance, however, that the review has identified all violations of applicable law. The revenue associated with, and the percentage of our consolidated revenues represented by, the transactions that we have identified as implicating the applicable laws and regulations was $0.3 million (or less than 1%) in 2002, $1.4 million (or 2%) in 2003, $2.0 million (or 2%) in 2004, $5.2 million (or 5%) in 2005, $8.5 million (or 6%) in 2006, and $2.5 million (or 7%) for the three months ended March 31, 2007. For export controls and FCPA, we have recorded a $2.7 million provision as of March 31, 2007. The provision is based on estimated penalties of $0.4 million for potential export control violations and $2.3 million (including $0.1 million of taxes) for disgorgement of profits and questionable payments. The disgorgement of profit is based on the estimated profits on each of the projects or contracts and reflects all costs to deliver such services or products. By year, these amounts are immaterial in 2002, $0.1 million in 2003, $0.3 million in 2004, $0.7 million in 2005, $0.9 million in 2006 and $0.2 million for the three months ended March 31, 2007. The provision of $2.7 million represents our current estimate of potential liabilities related to the matters that have been subject to our outside counsels' review. The ultimate resolution of this matter is dependent upon presentations to and discussions with pertinent government agencies. Associated liabilities, if any, could be different from the amount currently estimated. As with any estimate, there is uncertainty of predicting the outcome of discussions with pertinent government agencies that could cause actual costs to vary materially from current estimates. Due to this uncertainty, we cannot predict to what degree actual payments, if any, will exceed the recorded liabilities related to this internal review. Potential Export Control Violations Our Canadian subsidiary and our Venezuelan subsidiary separately engaged in two transactions between 2002 and 2005 to sell six software products and related services and training to a Cuban entity. In addition, our U.K. subsidiary, in 2003 and 2005, provided services to a Cuban entity for five projects. Our revenues from these transactions were approximately $0.9 million in the aggregate. Furthermore, in 2004, Earth Decision, a company that our subsidiary acquired in 2006, provided a demonstration version of its software to a Cuban entity. This did not result in a sale. We believe that these transactions may have violated the Cuba sanctions regulations administered by the U.S. Department of Treasury, OFAC, and/or export administration regulations administered by the U.S. Department of Commerce, BIS. When these historical transactions came to our attention, in December 2006, all our affiliates were immediately ordered not to engage in dealings with Cuba. Our U.K. subsidiary made a single shipment of four computer servers to Iran in 2005. Upon review, it has been determined that these servers were of U.S. origin and were subject to U.S. export controls. We believe that this shipment may have violated the Iran sanctions regulations administered by OFAC and/or export administration regulations administered by BIS. Our U.K. subsidiary has in the past shipped software to Iran, based on the understanding that such shipments were permissible because of de minimis U.S. content and the products' ECCN. In October 2006, our U.K. subsidiary ceased all new software sales to Iran and initiated a phase-out of its business in Iran. We have made contact with OFAC and BIS, as well as with the SEC and the DOJ, to advise them of the potential violations with respect to Cuba and Iran. We intend to cooperate with these agencies as they may request. To the extent we violated any regulations with respect to Cuba and/or Iran, we will be subject to fines or other sanctions, including possible civil and criminal penalties imposed on individuals or business entities, with related business consequences. If violations of the Cuban sanctions regulations were found, a person or entity found in violation could be subject to civil penalties of up to $65,000 per violation. If violations of the Iranian sanctions regulations and/or export administration regulations were found, a person or entity found in violation could be subject to civil penalties of up to $50,000 per violation. It is possible that both BIS and OFAC could assert that there have been multiple violations, which could lead to multiple fines. The amount of any civil penalties which could be assessed would depend on, among other factors, the nature of the products and services exported, the end-destination, and the level of cooperation provided to the government authorities. Other potential sanctions may include criminal penalties, the restriction, suspension or denial of export privileges, addition of foreign subsidiaries to the "denied persons" list (making it illegal for any U.S. person including us to export or re-export to the subsidiary), the restriction, suspension or denial of government contracting privileges and the seizure or forfeiture of assets. If BIS or OFAC determines that violations of U.S. law have occurred in connection with the above matters, sanctions may be imposed against us that could have a material adverse effect on our business, financial condition, results of operations, cash flow and/or future prospects. Potential Violations of Applicable Anti-Corruption Laws As stated above, our counsel has completed the investigative phase of our internal review. As a result certain conduct in connection with our business in several countries has been identified that may implicate the anti-bribery, record-keeping, and internal control provisions of the FCPA. Specifically, with regard to our business in China, the internal review has identified payments by one of our subsidiaries to certain employees of state oil companies with whom the subsidiary has business, and the provision of entertainment and gifts to certain employees of those companies by this subsidiary. Further, in Mexico, the internal review has identified entertainment and other benefits provided to employees of a state oil company with whom one of our subsidiaries has business. In Indonesia, the internal review has identified payments made to one or more employees of a state oil company with whom one of our subsidiaries has business. Further, in Nigeria, the internal review has identified evidence that one of our subsidiaries was contemplating making payments to one or more government employees in connection with obtaining a particular contract, which the subsidiary did not ultimately obtain. A payment was made, however, to the subsidiary's agent in that country. Finally, in Kazakhstan, the internal review has identified a contract as to which one of our subsidiaries engaged a third-party vendor suggested by one or more employees at the state oil company whose business the subsidiary was trying to obtain. Ostensibly, the purpose of hiring the vendor was to help the subsidiary prepare documentation in connection with a bid for the contract. The size and circumstance of the payment to the third-party, however, may suggest that the payment may not have been appropriate. In addition to the FCPA, the conduct under review may raise concerns under the laws of the countries in which it may have occurred, and the laws of other jurisdictions. With respect to several of our offices, we are taking action to address and resolve issues identified in the course of the internal review to safeguard against any improper conduct going forward. This includes evaluating and possibly revising, where appropriate, our governance policies and our internal control procedures. If violations of the FCPA were found, a person or entity found in violation could be subject to fines, civil penalties of up to $0.5 million per violation, equitable remedies, including disgorgement (if applicable) generally of profits, including prejudgment interest on such profits, causally connected to the violation, and injunctive relief. Criminal penalties could range up to the greater of $2.0 million per Total operating expenses 50,589 66,806 104,759 118,316 14,150 28,373 violation or twice the gross pecuniary gain or loss from the violation, which could be substantially greater than $2.0 million per violation. It is possible that both the SEC and the DOJ could assert that there have been multiple violations, which could lead to multiple fines. The amount of any fines or monetary penalties which could be assessed would depend on, among other factors, the findings regarding the amount, timing, nature and scope of any improper payments, whether any such payments were authorized by or made with our knowledge or the knowledge of our affiliates, the amount of gross pecuniary gain or loss involved, and the level of cooperation provided the government authorities. Agreed dispositions of these types of violations also may result in an acknowledgement of wrongdoing by the entity and the appointment of a monitor on terms negotiated with the SEC and the DOJ to examine current and future business practices, including the retention of agents, with the goal of assuring compliance with the FCPA. Other potential consequences could be significant and include suspension or debarment of our ability to contract with governmental agencies of the United States and of foreign countries. If the DOJ or SEC determines that violations of U.S. law have occurred, they could seek civil or criminal sanctions, including monetary penalties, against us or individuals, as well as changes to our business practices and compliance program and that could have a material adverse effect on our business, financial condition, results of operations, cash flows and future prospects. For the years ended December 31, 2004, 2005 and 2006 and for the three months ended March 31, 2007, our operations in China, Indonesia, Kazakhstan, Mexico and Nigeria provided revenues of approximately $19.7 million, $24.4 million, $31.5 million and $7.4 million, or approximately 22%, 25%, 22% and 20% of our total consolidated revenues, respectively. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on other assumptions that we believe are reasonable under the circumstances and we evaluate those estimates on an ongoing basis. In many instances, we could have reasonably used different accounting estimates and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Therefore, actual results may differ from these estimates under different assumptions or conditions. We refer to accounting estimates of this type as critical accounting policies and estimates, which are discussed further below. Revenue Recognition We recognize revenues in accordance with applicable accounting standards including Staff Accounting Bulletin (SAB) Nos. 101 and 104, "Revenue Recognition," Emerging Issues Task Force (EITF) Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables," and the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, "Software Revenue Recognition," as amended. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or service has been rendered, the fee is fixed and determinable, and collectibility is probable. We derive our revenues from three principal sources: software licenses and products; maintenance and support; and strategic consulting. We sell our software primarily through our direct sales force. Revenue may be generated from contractual arrangements that require significant revenue recognition judgments, particularly in the area of contracts with multiple deliverable elements (or multiple element arrangements). Where multiple elements exist in an arrangement, contract revenue is allocated to the different elements based upon and in proportion to verifiable objective evidence of the fair value of the various elements, as governed under EITF No. 00-21, and SAB Nos. 101 and 104. Multiple element arrangements primarily involve the sale of more than one of our three revenue sources in a combined contract. Revenue is recognized as each element is earned, namely upon delivery and acceptance of software licenses, provided that the fair value of the undelivered element(s) has been determined, the delivered element(s) has stand-alone value, there is no right of return on delivered element(s), and we are in control of the undelivered element(s). For arrangements that include service elements, including support and installation, for which verifiable objective evidence of fair value does not exist, revenue is deferred until such services are deemed complete, or until the time we can establish verifiable objective evidence. Provision for estimated losses on incomplete contracts are made in the period in which such losses are determined. We recognize software revenue in accordance with SOP 97-2. In accordance with these standards, revenue is recognized when persuasive evidence of an arrangement exists and delivery has occurred, the fee is deemed fixed or determinable and collection is deemed probable. In making these judgments, we evaluate these criteria as follows: Evidence of an arrangement. We consider a non-cancelable written agreement signed by us and the customer to be persuasive evidence of an arrangement. Delivery has occurred. We consider delivery to have occurred when a compact disc or other medium containing the licensed software is provided to a common carrier or in the case of electronic delivery, the customer is given electronic access to the licensed software. If an arrangement includes undelivered products or services that are essential to the functionality of the delivered product, delivery is not considered to have occurred until these products or services are delivered. Fixed or determinable fee. We consider the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within normal payment terms. If the fee is subject to refund or adjustment, we recognize revenue when the refund or adjustment right lapses or the return is estimable. For arrangements with extended payment terms, we recognize revenue as amounts become due and payable or as cash is collected. We do not grant a right of return to our customers. Collection is deemed probable. We conduct a credit review for all transactions at the inception of an arrangement to determine the creditworthiness of the customer. Collection is deemed probable if, based upon our evaluation, we expect that the customer will be able to pay amounts under the arrangement as payments become due. If we determine that collection is not probable, revenue is deferred and recognized upon cash collection. SOP 97-2 requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair value of the elements. Our Vendor Specific Objective Evidence, or VSOE, used to allocate the sales price to multiple elements is based on the prices charged when these elements are sold separately. VSOE of fair value is established by the price charged when that element is sold separately. For post contract support, VSOE of fair value is established by renewal rates. For training, installation and on-site support, VSOE of fair value is based on daily rates determined from our contracts for these services alone. SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions," requires that revenue be recognized under the "residual method" when (1) VSOE of fair value exists for all undelivered elements and no VSOE exists for the delivered elements and (2) all revenue recognition criteria of SOP 97-2, as amended, are satisfied. Under the residual method any discount in the arrangement is allocated to the delivered element. While the above noted accounting standards govern the basis for revenue recognition, judgment and the use of estimates are required in connection with the allocation of revenue between software license revenue and maintenance and support revenue, as well as the amount of deferred revenue to be recognized in each accounting period. Software License and Product Revenue We license our software on both a perpetual and term basis, as described below: Perpetual Licenses. Licenses to use our software in perpetuity are generally priced based on (a) either a customer's database size (including the number of contacts or channels) or a platform fee and (b) a specified number of users. Because implementation services for the software licenses are not deemed essential to the functionality of the related software, we recognize perpetual license revenue at the time of product delivery, provided all other revenue criteria have been met. Term Licenses. Term licenses are sold for a single fee, which includes the right to use our software, the updates and upgrades to the product and technical support for a specified period of time. Customers are invoiced in installments and billed in advance of the term license period. Revenues are recognized on a straight-line basis over the life of the term license. In conjunction with software license sales, we occasionally sell third-party hardware, software and related maintenance if the customer requests an integrated and installed arrangement. For these integrated arrangements, we report hardware and software revenue on a "gross" basis in compliance with EITF 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent," because we are the primary obligor in the relationship with the customer; are at risk for the customer's credit; install and integrate the third-party hardware and software with our software; and have involvement in the determination of third-party hardware and software specifications. Revenues associated with third-party hardware and software sales are reported in software license and product revenue and the related costs are reported in the corresponding cost of revenue category in the consolidated statements of operations. However, we act as more of an agent in the sale of maintenance contracts related to the third-party hardware and software. Accordingly, revenue and cost of revenue related to these maintenance contracts are reported on a "net" basis in maintenance and support revenues in the consolidated statements of operations. Deferred revenue arises from payments received or billings in advance of the culmination of the earnings process. Deferred revenue will be recognized as revenue in future periods when the applicable revenue recognition criteria have been met. Deferred revenue that is expected to be recognized within the next twelve months is classified as a current liability. For resellers that are not well capitalized or for which payment to us is linked to payment by the end user, we utilize the sell-through method. For those resellers that have strong financial capital and where payment is not linked to end user payment and we have good payment history, we recognize revenue at the time of delivery of the software to the reseller, provided that all of the criteria of SOP 97-2 have been met. Our standard warranty provides a limited warranty for our software products for a period of ninety days following the product delivery date. We only warrant that software will substantially conform to published documentation and source files and will be free from material defects in workmanship. Our sole responsibility and the customers' exclusive remedy for breach of that warranty is to correct or replace any part of the software product which does not so conform. We do not provide for a warranty provision based on historical claims experience. Maintenance and Support Revenue Maintenance and support revenues are generated from sales of maintenance and customer support associated with the sale of software licenses. Maintenance and support revenues consist of three types: Post contract support is provided by online and on-call services for problem prevention and resolution and includes delivery of software updates and upgrades. Post contract support is generally sold on an annual basis and collected in advance. Revenues are recognized ratably over the term of the agreement. Software installation and user training support contracts are generally priced on a time and materials basis. Revenues are recognized, and the customer is invoiced, when the services are performed. On-site support contracts are priced based on the day rate of the technical personnel and the time identified to support the customer. Revenues are recognized, and the customer is invoiced, on a monthly basis. Strategic Consulting Revenue Strategic consulting revenues include services provided on a project basis where we utilize certain of our software applications and the expertise of earth scientists and engineers to model, analyze and image our customers' data. We provide most of our strategic consulting on a fixed price basis determined by project. For each project, output measures are defined and agreed with the customer. Revenues are recognized on the proportional performance model, as services are rendered over the term of the contract, based on output measures or a reasonable surrogate to output measures. Goodwill, Other Intangible Assets and Long-Lived Assets The carrying value of goodwill and other intangible assets are reviewed for possible impairment in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." Our impairment review is based on a discounted cash flow approach that requires significant management judgment with respect to future sales and production volumes, revenue and expense growth rates, changes in working capital use and selection of an appropriate discount rate. Impairment occurs when the carrying value of a reporting unit exceeds the fair value of that reporting unit. An impairment charge is recorded for the difference between the carrying value and the net present value of estimated future cash flows, which represents the estimated fair value of the reporting unit. We have tested our intangible assets annually in the third quarter unless there are indications during an interim period that such assets may have become impaired. We use our judgment in assessing whether intangible assets may have become impaired between annual valuations. We completed the test during the third quarters of fiscal year 2004 and 2005 and did not record an impairment loss on goodwill. We completed the test during the fourth quarter of 2005 due to an indicator of impairment and concluded $4.9 million of goodwill was impaired. We determined that, beginning in 2006, annually testing our goodwill for impairment in the fourth quarter is more appropriate timing as it coincides with our annual business planning cycle which will provide more timely and reliable information to be used in the annual impairment assessment. We completed the test during the fourth quarter of fiscal 2006 and concluded that no events occurred which indicate potential for impairment of goodwill as of December 31, 2006. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we continually evaluate whether events or circumstances have occurred that indicate that the estimated remaining useful life of our long-lived assets, including intangible assets, may warrant revision or that the carrying value of these assets may be impaired. Such events or changes in circumstances include, but are not limited to, a significant decrease in the fair value of the underlying business or assets, a significant decrease in the benefits realized from the acquired business or asset, difficulties or delays in integrating the business, or a significant change in the operations of the acquired business or use of an asset. Recoverability of long-lived assets is measured by comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Significant management judgment is required in identifying a triggering event that arises from a change in circumstances; forecasting future operating results; and estimating the proceeds from the disposition of long-lived or intangible assets. Material impairment charges could be necessary should different conditions prevail or different judgments be made. There was no impairment of long-lived assets during 2004. In 2005, we recognized the impairment of long-lived assets of $2.9 million. We concluded that no events occurred that indicate potential for impairment of long-lived assets as of December 31, 2006. Share-Based Compensation Prior to January 1, 2005, we accounted for our share-based compensation under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" and the disclosures required by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." In accordance with APB Opinion No. 25, no share-based compensation cost was reflected in our results of operations prior to January 1, 2005, except to the extent stock options to employees were granted with an exercise price less than the market value of the stock on the measurement date. Effective January 1, 2005, we adopted the fair value recognition provisions of SFAS No. 123(R) using the modified prospective method. Under this method, compensation cost in 2005 includes the portion vesting in the period for (a) all share-based payments granted prior to, but not vested as of January 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and (b) all share based payments granted subsequent to January 1, 2005, based on the grant date fair value estimated using the Black-Scholes option pricing model. Our policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. The use of various models to determine the fair value of stock options is permitted and the variables used for the model are subjective. The use of different assumptions or a different model may have a material impact on our results of operations and related disclosures. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the expected stock price volatility. We use expected volatility rates, which are based on a benchmark historical range of comparable software and oil services firms. The weighted-average estimated life was determined using the average of the vesting and expiration periods and considering the post-vesting option forfeiture rate. The risk free rate considered the grant date and option term. Dividend yield was set at zero as we do not anticipate paying dividends. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our options. The fair value of the Paradigm B.V. ordinary shares underlying options granted and of the Paradigm B.V. ordinary shares issued during the twelve month period ended December 31, 2006 was originally estimated by the board of Paradigm B.V., with input from management, using the best information available to them on the dates of the grants and issuances. This information included (1) the financial and operating performance of Paradigm B.V., (2) estimated enterprise value, (3) the occurrence or lack of occurrence of significant events, (4) estimates of future performance, (5) market trends for technology stocks, (6) the existence of arms-length transactions involving the issuance of Paradigm B.V. ordinary shares, (7) estimates of the expected valuation of the ordinary shares that could be obtained in a liquidity event and (8) valuation discussions with our company's financial advisors. Based on a review and analysis of these factors, the board of Paradigm B.V. established the exercise price for the options being granted or shares being issued at a particular date. (2,945 ) (5,844 ) (7,426 ) (7,567 ) (1,141 ) (832 ) Loss before income taxes (1,158 ) (17,731 ) (23,864 ) (24,772 ) 132 (7,856 ) Provision for income taxes 1,609 786 5,518 4,310 80 (Dollars in thousands) Net income (loss) $ (18,517 ) $ (29,382 ) $ (7,921 ) Interest expense, net(a) 5,225 5,023 1,208 Provision for income taxes(b) 786 5,518 (695 ) (511 ) (1,979 ) (2,945 ) (5,844 ) (7,426 ) (1,141 ) (832 ) Loss before income taxes (15,400 ) (4,872 ) (5,006 ) (1,158 ) (17,731 ) (23,864 ) 132 (7,856 ) Provision for income taxes 898 550 1,057 1,609 786 5,518 80 (832 ) Income (loss) before income taxes (7,856 ) Provision for income taxes (in thousands) July - September 2006 3,232 $ 9.15 $ 11.12 $ 1.97 We have recorded additional share-based compensation for each stock option granted by Paradigm B.V. and Paradigm B.V. ordinary shares issued during the twelve months ended December 31, 2006 based upon the difference between the retrospectively determined fair value of the Paradigm B.V. ordinary shares at the relevant measurement date of the stock option grant or ordinary share issuance and the exercise price of the stock option or the issuance price of Paradigm B.V. ordinary shares. We amortize the unearned share-based compensation and record share-based compensation expense ratably over the vesting periods of the stock options. We recognized a share-based compensation charge of $0.3 million in 2006 related to the excess of the fair value over the issuance price of Paradigm B.V. ordinary shares. For each of its valuations, Empire employed a discounted cash flow method applied separately to (1) our strategic consulting and (2) our software licenses and products businesses. The discounted cash flow method applied appropriate discount rates to our estimated future free cash flows, which were based on management's forecasts of revenue and costs as of the date on which such valuation was being made and the comparison of those growth rate assumptions to comparable companies. The risks associated with achieving our forecasts were assessed in selecting the appropriate discount rate, which was based on our estimated weighted average cost of capital, or WACC. Separate WACC calculations were prepared for the market-based projections and our management projections with the estimated cash flows discounted by the resulting WACC. The resulting values from the market based projections (717 ) (310 ) (825 ) (1,093 ) (1,338 ) (1,769 ) (964 ) (1,773 ) (1,141 ) (1,218 ) (1,947 ) (3,120 ) (832 ) INCOME (LOSS) BEFORE INCOME TAXES (276 ) (306 ) (1,961 ) 1,385 (2,499 ) (2,015 ) (7,484 ) (5,733 ) 132 864 (18,538 ) (6,322 ) (7,856 ) PROVISION (BENEFIT) FOR INCOME TAXES 49 52 164 1,344 110 99 320 257 80 81 (161 ) 5,518 (1,141 ) (832 ) INCOME (LOSS) BEFORE INCOME TAXES 132 (7,856 ) PROVISION FOR INCOME TAXES 80 and the management projections of the two businesses were weighted to determine the resulting enterprise value of the two businesses. The two businesses were then summed to provide a controlling, marketable value of invested capital for our company. If different discount rates had been used, the resulting valuations would have been different. The resulting controlling, marketable value of invested capital was reconciled to a marketable equity value on a minority basis after the subtraction of debt and then the application of a minority discount. Debt was calculated as the sum of any interest bearing debt and the value of any convertible subordinated debentures valued on a binomial option-pricing model. The proceeds from the exercisable vested in-the-money options were then added to the minority marketable equity values to obtain fully diluted equity values. We then divided the fully diluted equity value by the number of ordinary share equivalents, excluding any ordinary shares that would result from converting the convertible subordinated debentures, to arrive at a per ordinary share value before the application of a marketability discount. To establish the fair value of Paradigm B.V. ordinary shares as a privately held company, an appropriate discount factor was then applied to account for the lack of marketability of Paradigm B.V. ordinary shares. The discount factor applied at each date was determined through an analysis of the restrictions on the transferability of the shares, the generally accepted range for such discount factors for privately held companies considering an initial public offering, our progress toward completing our initial public offering and the inherent risk that our offering would not be consummated. As we approached the consummation of our initial public offering, we reduced the discount factor related to lack of marketability. Specifically for the August 11, 2006 and the September 30, 2006 valuations, an additional valuation scenario was considered based upon our company completing an initial public offering. A market multiple was applied to the expected 2007 EBITDA from management's projections and from guideline companies' projections with the resulting values weighted on a 70/30 basis, respectively, to obtain an expected equity value. The rationale for the weighting was the higher than market growth rates and EBIDTA margins resulting, in part, from market participant synergies related to the Earth Decision acquisition included in management's projections but not present in the guideline companies' projections. The resulting fair value of a Paradigm B.V. ordinary share was then weighted based on probability of an initial public offering on the specific dates. Change in valuation per share between January 1, 2006 and March 31, 2006 Applying the foregoing methodology, the board of Paradigm B.V. determined that, between January 1, 2006 and March 31, 2006, the fair value of the ordinary shares increased from $7.11 to $8.44 per ordinary share of Paradigm B.V. In making this determination, the board noted that the senior management team had been strengthened through the appointment of a new Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and Executive Vice President of Research and Development over the course of mid-2005 through February 2006. The board attributed an improvement in financial performance to a strategic change in direction and new customer relationships initiated by the new management team, which the board believed positively reflected on management's forecasted future growth. Change in valuation per share between March 31, 2006 and August 11, 2006 In determining to increase the fair value of the Paradigm B.V. ordinary shares from $8.44 on March 31, 2006 to $11.12 on August 11, 2006, the board noted the improved financial performance over this period compared to comparable prior year periods and the acquisition of Earth Decision, which strengthened our product offerings. Change in valuation per share between August 11, 2006 and December 31, 2006 Utilizing management's projections and considering appropriate discount factors, industry methods and other available information, the board of Paradigm B.V. determined that the fair value of the Paradigm B.V. ordinary shares increased from $11.12 on August 11, 2006 to $25.00 on December 31, 2006. The board noted that following the acquisition of Earth Decision, we continued to demonstrate financial growth and improvement, some of which was attributable to the additional Earth Decision revenues. For example, our revenue and gross profit in the third quarter of 2006 increased 70% and 103%, respectively, as compared to the same quarter in the prior year. This improvement in revenue compares to a 51% year-over-year improvement during the second quarter. With an expanded, experienced management team in place, the addition of the Earth Decision business and the completion of another quarter showing solid performance, the board determined that we were on track to achieve our business plan and meet internal projections. At the time of the determination, management expected revenues for the full year of 2006 to increase 45% over the prior year while gross profit was expected to increase 58% in 2006 over 2005. The board also considered how the increased probability of an initial public offering as of December 31, 2006, increased the value of our ordinary shares, for which the Paradigm B.V. ordinary shares are exchangeable. Raising capital in the public market will improve our global visibility and branding efforts and the related funding will improve our ability to execute our business plan, recruit and retain staff and achieve our forecasts. Additionally, the increased liquidity of our ordinary shares due to the registration of such shares and the resulting access to a large pool of investors improves the value of our ordinary shares. Change in valuation per share between December 31, 2006 and March 31, 2007 Utilizing the same methodology employed to determine the fair value of the Paradigm B.V. ordinary shares at December 31, 2006, the board of Paradigm B.V. determined that the fair value of the ordinary shares remained at $25.00 per share as of March 31, 2007. In making this determination, the board noted that we continued to demonstrate growth in our business and considered the changes in management's projections for 2008 and in the multiples of our comparable company group as components in the valuation. Income Taxes We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," ("SFAS No. 109"). We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax bases of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when it is more likely than not that some portion of the deferred tax assets will not be realized. We provided a full valuation allowance against our net deferred tax assets at December 31, 2004 and 2005 for all jurisdictions except for Canada. In 2006, we re-evaluated the positive and negative evidence in deciding in which jurisdictions it was more likely than not that some part of the deferred tax assets will not be realized. While we have considered future taxable income and ongoing tax planning strategies in assessing the need for a valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the valuation allowance against our deferred tax assets would increase income in the period such determination was made. Although we believe that our tax estimates are reasonable, the ultimate tax determination CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (2,767 ) $ (18,517 ) $ (29,382 ) Adjustments to reconcile loss to net cash provided by operating activities: Depreciation and amortization 8,259 11,413 11,923 Provision for bad debts 328 1,363 786 Impairment of goodwill and other intangible assets 7,823 Acquired in-process research and development 16,100 Share-based compensation for employees and consultant 2,538 6,851 Amortization of debt issuance costs 440 928 380 Deferred taxes 609 (41 ) (2,145 ) (Gains) losses on interest rate swaps (53 ) (355 ) 22 Minority interest in Earth Decision 2,072 Changes in working capital accounts, net of effects from acquisitions: Decrease (increase) in trade receivables and unbilled trade receivables 918 679 (7,789 ) Decrease (increase) in prepaid and other current assets (542 ) (770 ) 1,950 Increase (decrease) in accounts payable and accrued liabilities (4,515 ) 4,697 15,447 Increase (decrease) in deferred revenues 198 545 (1,603 ) Increase (decrease) in accrued severance pay and other obligations involves significant judgment that could become subject to audit by tax authorities in the ordinary course of business. Compliance with income tax regulations requires us to make decisions relating to the transfer pricing of revenue and expenses among each of our legal entities that are located in several countries. Our determinations include many decisions based on our knowledge of the underlying assets of the business, the legal ownership of these assets and the ultimate transactions conducted with customers and other third-parties. To the extent that our decisions and assumptions and historical reporting are determined not to be compliant with applicable tax laws, we may be subject to adjustments in our reported income for tax purposes as well as interest and penalties. Research and Development and Software Development Costs Research and development expenditures are charged to operations as incurred. SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed," requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on our software development process, technological feasibility is established upon completion of a working model, which also requires certification and extensive testing. Historically, costs incurred by our company between completion of the working model and the point at which the product is ready for general release have been immaterial. Research and development costs incurred in the process of developing product improvements or new products are charged to expense as incurred, except for certain software development costs, as described below. Software development costs incurred prior to the establishment of technological feasibility are included in research and development expenses. We define establishment of technological feasibility as the completion of a working model. Software development costs incurred subsequent to the establishment of technological feasibility through the period of general market availability of the products are capitalized, if material. Litigation and Contingencies We are subject to various loss contingencies arising in the ordinary course of business. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted. We are involved in lawsuits with Landmark Graphic Corporation and Magic Earth, Inc. relating to claims involving patent infringement and other intellectual property matters. While we feel confident in our claims and defenses related to these lawsuits, the ultimate outcome of these lawsuits is not presently determinable, and as such, we are currently unable to estimate the potential range of gain or loss, if any, relating to these lawsuits. Accordingly, no provision for these matters has been made in the accompanying consolidated financial statements. Additional information regarding these matters is included under "Risk Factors" and "Our Business Legal Proceedings." We are also involved in other legal proceedings through the normal course of business. We believe that any unfavorable outcome related to these other proceedings will not have a material effect on our financial position, results of operations or cash flows. (1)Calculated as a percentage of its related revenues. Net cash provided by financing activities Results of Operations Three Months Ended March 31, 2007 Compared to the Three Months Ended March 31, 2006 Revenues Total revenues were $36.4 million for the three months ended March 31, 2007, representing an increase of $10.4 million, or 40%, as compared to $26.0 million for the three months ended March 31, 2006. Our acquisition of Earth Decision on August 11, 2006 contributed $5.4 million to the growth in revenues. Software Licenses and Products. For the three months ended March 31, 2007 software licenses and product revenues were $13.7 million representing an increase of $3.7 million, or 37%, as compared to $10.0 million for the three months ended March 31, 2006. Software licenses and product revenues comprised 38% of our total revenues for the three months ended March 31, 2007 and 38% of our total revenues for the three months ended March 31, 2006. Third-party hardware and software sales were immaterial during the three months ended March 31, 2007 and 2006. The increase of $3.7 million in software licenses and product revenues for the three months ended March 31, 2007 as compared to the three months ended March 31, 2006 were primarily attributable to increases of: $1.9 million of software license sales as a result of our acquisition of Earth Decision; and $1.8 million of software license sales to existing customers where we expanded their current use of our software to new production sites or introduced new software products to their organization. Increased sales in Latin America, China and Asia Pacific contributed to the overall growth, which was partially offset by a decline in sales in EAME. Maintenance and Support. Maintenance and support revenues were $15.7 million for the three months ended March 31, 2007, representing an increase of $6.6 million, or 72%, as compared to $9.1 million for the three months ended March 31, 2006. Maintenance and support revenues comprised 43% and 35% of our total revenues for the three months ended March 31, 2007 and 2006, respectively. The increase in maintenance revenues consists primarily of a $3.4 million increase resulting from our acquisition of Earth Decision, $2.8 million increase in post-contract support agreements primarily in the Latin American and Asia Pacific regions and a $0.3 million increase in on-site support revenues. Strategic Consulting. Strategic consulting revenues were $7.1 million for the three months ended March 31, 2007, representing an increase of $0.1 million, or 2%, as compared to $7.0 million for the three months ended March 31, 2006. Strategic consulting revenues comprised 19% of our total revenues in the first quarter of 2007 and 27% of our total revenues in the first quarter of 2006. The increase in strategic consulting revenues during the first quarter of 2007 as compared to the first quarter of 2006 resulted from an increase of $0.3 million from projects relating to customers outsourcing the processing of complex data, net of a decrease of $0.1 million from projects relating to interpreting attributes of sub-surface reservoirs and software hosting. An increase in strategic consulting revenues in CIS and Canada contributed to the growth, which was partially offset by declines in such revenues in Latin America and the United States. Cost of Revenues and Gross Margin Total cost of revenues were $15.1 million for the three months ended March 31, 2007, representing an increase of $4.5 million, or 42%, as compared to $10.6 million for the three months ended March 31, 2006. Our acquisition of Earth Decision resulted in an increase in cost of revenues of $2.5 million. Excluding the acquisition of Earth Decision, cost of revenues increased by $2.0 million, or 19%. Total gross margin was 59% for the three months ended March 31, 2007 and 2006. Software Licenses and Products. Cost of software licenses and product revenues were $1.1 million for the three months ended March 31, 2007, representing an increase of $1.0 million, as compared to $0.1 million for the three months ended March 31, 2006. This increase was primarily attributable to an increase in product royalties and agent commissions of $1.0 million, of which $0.3 million was attributable to the Earth Decision acquisition. Gross margin for software licenses and products was 93% and 99% for the three months ended March 31, 2007 and 2006, respectively. Maintenance and Support. Cost of maintenance and support revenues were $6.0 million for the three months ended March 31, 2007, representing an increase of $2.8 million, or 88%, as compared to $3.2 million for the three months ended March 31, 2006. Our acquisition of Earth Decision contributed $1.9 million to the increase in the cost of maintenance and support revenues which was mainly due to personnel costs. The additional $0.9 million increase was mainly attributable to an increase in personnel costs of $0.6 million to support training, installation and on-site support activities. Gross margin for maintenance and support for the three months ended March 31, 2007 was 62% compared to 65% for the three months ended March 31, 2006. Strategic Consulting. Cost of strategic consulting revenues were $8.0 million in the three months ended March 31, 2007, representing an increase of $0.7 million, or 10%, compared to $7.3 million in the three months ended March 31, 2006. The increase in costs of strategic consulting revenues was mainly due to an increase of $0.5 million for personnel expenses related to increased headcount, $0.4 million due to outsourced computer services for one project and $0.3 million related to infrastructure support. These increases were offset by reductions of $0.4 million and $0.2 million of depreciation expense and product distribution costs, respectively. Gross margin for strategic consulting was (13)% for the three months ended March 31, 2007 as compared to (5)% for the three months ended March 31, 2006. The decline in gross margin percentage is primarily attributable to costs incurred to expand and support our strategic consulting operations and infrastructure as it remains in transition from the traditional services processing business to a value-added proprietary technology consulting business. Operating Expense Sales and Marketing. Sales and marketing expense was $8.0 million for the three months ended March 31, 2007, representing an increase of $3.3 million, or 69%, as compared to $4.7 million for the three months ended March 31, 2006. The primary components of the increase were $1.4 million in increased salary expense primarily due to hiring additional sales professionals in the Latin America and Asia Pacific regions, $1.0 million related to additional personnel for Earth Decision, $0.3 million associated with travel expenses and marketing support and events for Earth Decision and $0.3 million in increased travel expenses. Research and Development. Research and development expense was $7.6 million for the three months ended March 31, 2007, representing an increase of $3.1 million, or 69%, as compared to $4.5 million for the three months ended March 31, 2006. The acquisition of Earth Decision contributed $2.3 million of the increase, which was mainly related to increased personnel costs of $1.6 million, third-party consulting of $0.2 million, higher depreciation of $0.2 million and travel and infrastructure cost increases of $0.3 million. The remaining increase of $0.8 million is related to increased personnel costs in our non-Earth Decision business. General and Administrative. General and administrative expense was $11.6 million for the three months ended March 31, 2007, representing an increase of $7.5 million, as compared to $4.1 million for the three months ended March 31, 2006. The increase in general and administrative expenses is primarily attributable to increases in: personnel and infrastructure costs of $1.9 million associated with our historic business and from the acquisition of Earth Decision, which reflects additional expense to support the growth of our business; professional fees of $1.7 million mainly for the audit of our financial statements, tax consulting, internal control support and human resources analysis; provision of $0.6 million for legal expenses and estimated settlements for ongoing litigation; and legal and related expenses of $3.1 million and a provision for disgorgement of profits of $0.2 million related to the internal review of compliance with certain U.S. laws. Amortization of Intangibles. Amortization of intangibles was $0.9 million for the three months ended March 31, 2007, representing an increase of $0.4 million, or 88%, as compared to $0.5 million for the three months ended March 31, 2006. This increase reflects the effects of recording amortizable intangible assets in 2006 totaling $14.8 million resulting from the Earth Decision acquisition. We expect amortization of intangibles will be approximately $3.4 million annually through 2008 and decreasing thereafter. Related Party Fees and Expenses. Related party fees and expenses were $0.3 million in both the three months ended March 31, 2007 and 2006 and reflect the contractual arrangements under our management agreement with Fox Paine. These fees will terminate upon the completion of our proposed initial public offering and upon a payment of a $6.8 million termination fee to terminate the management agreement, along with any unreimbursed expenses. Interest and Other Expense Interest Expense, Net. Interest expense, net was $1.2 million in the three months ended March 31, 2007, representing an increase of $0.1 million, or 8%, as compared to $1.1 million for the three months ended March 31, 2006. Interest expense on borrowings under our term loan was $1.1 million for the first quarter of 2007, representing no change compared to the first quarter of 2006. The increase in our average borrowing rates of 80 basis points on the variable rate term loans was offset by a reduction in average borrowings of $5.0 million under the credit facility. The net effect of our interest rate swaps, interest income and amortization of deferred financing fees in the three months ended March 31, 2007 was an increase in interest expense of $0.1 million compared to the three months ended March 31, 2006. We intend to repay the outstanding balance under the term loan with proceeds from this initial public offering, which will eliminate the interest expense on the term loan and the effects of the interest rate swap and reduce the amortization of deferred financing fees for the portion of the debt issuance costs associated with the term loan. We will incur expense in the period in which our initial public offering is completed from the write-off of unamortized debt issuance costs and interest rate swap derivative assets related to the term loan. Amortization of deferred financing fees will be insignificant after our initial public offering. See "Unaudited Pro Forma Financial Information." Minority Interest in Earth Decision. We recorded minority interest expense of $0.1 million in the three months ended March 31, 2007 related to the preferred shares of Earth Decision. Because the preferred shares partially exchange into convertible subordinated debentures, the recorded redemption value for the debentures underlying the preferred shares is required to be adjusted to the redemption price at each reporting period prior to the exchange of the preferred shares. The increased redemption value during the first quarter of 2007 resulted from the scheduled decrease in the conversion price of the underlying convertible subordinated debentures during the period. In late March 2007, the Provision for income taxes U.S. EBITDA (1,093 ) (6,918 ) (3,509 ) Related party fees and expenses(d) 1,757 1,100 275 Goodwill impairment(e) 4,899 Restructuring and impairment costs(f) 4,491 Share-based compensation(g) 2,538 6,851 817 Accounting services for financial audits(h) 2,100 Acquired in-process research and development(i) 16,100 Write-off of South American bad debt expense(j) 875 Minority interest in Earth Decision(k) 2,072 preferred shares were exchanged for ordinary shares and convertible subordinated debentures of Paradigm B.V. Other (Income) Expense, Net. Other (income) expense, net was $0.4 million in income for the three months ended March 31, 2007 and an immaterial amount in the three months ended March 31, 2006. The increase is related to $0.4 million associated with the delivery of software products under our investment agreement in a private software company. Provision for Income Taxes Income tax expense was $0.1 million in both the three months ended March 31, 2007 and 2006. The tax expense for the three months ended March 31, 2007 relates to amounts required to be accrued for interest expense under FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, or FIN 48. Our effective tax rate fluctuated due to the fact that we incurred tax expense in certain jurisdictions and tax losses in others which are not available to offset each other, as well as for the effect of reporting under FIN 48. We are currently reporting a year-to-date loss from operations and we are uncertain that any potential tax benefits from these losses will be recognized during the loss carryforward periods. As such, we continue to provide a full valuation allowance for our deferred tax assets. We adopted FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, we recognized a $4.1 million increase in the liability for unrecognized tax benefits and $1.1 million for penalties and interest, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings. The unrecognized tax benefits did not materially change as of March 31, 2007 from the date of adoption. Accretion to Redemption Value on, and Distributions to Holders of, Convertible Subordinated Debentures Accretion to redemption value on convertible subordinated debentures was $2.6 million for the three months ended March 31, 2007, as compared to $10.4 million for the three months ended March 31, 2006. The accretion to redemption value results from the automatic adjustment of the conversion price of the convertible subordinated debentures combined with the change in fair value of the ordinary shares of Paradigm B.V. The fair value of the Paradigm B.V. ordinary shares remained constant during the three months ended March 31, 2007 as compared to a 24% increase in the fair value of the Paradigm B.V. ordinary shares during the three months ended March 31, 2006. There were no distributions to holders of convertible subordinated debentures during the three months ended March 31, 2007 or 2006. Year Ended December 31, 2006 Compared to Year Ended December 31, 2005 Revenues Total revenues were $144.5 million for 2006, representing an increase of $45.8 million, or 46%, as compared to $98.7 million for 2005. Our acquisition of Earth Decision on August 11, 2006 contributed $13.4 million to the growth in revenues. Software Licenses and Products. Software licenses and product revenues were $65.1 million for 2006, representing an increase of $28.7 million, or 79%, compared to $36.4 million for 2005. Software licenses and product revenues, net of hardware and third-party software, increased by $24.6 million, or 70%, to $59.5 million for 2006, compared to $34.9 million for 2005. Software licenses and product revenues comprised 45% and 37% of our total revenues in 2006 and 2005, respectively. The increase of $28.7 million in software licenses and product revenues in 2006 as compared to 2005 was attributable to increases of: $14.7 million of software license sales to existing customers where we expanded their current use of our software to new production sites or introduced new software products to their organization. Sales in Latin America, Asia Pacific, China, Canada and the United States mainly contributed to this growth; $4.1 million of hardware and third-party software sales resulting from $5.6 million sold in 2006 as compared to $1.5 million sold in 2005; $7.6 million of software license sales as a result of our acquisition of Earth Decision; and $2.5 million of software license revenues related to price increases effective January 1, 2006 and September 1, 2006 for sales of new software licenses. Maintenance and Support. Maintenance and support revenues were $46.9 million for 2006, representing an increase of $12.5 million, or 36%, compared to $34.4 million for 2005. Maintenance and support revenues comprised 32% and 35% of our total revenues in 2006 and 2005, respectively. The increase in maintenance revenues consists of a $5.9 million increase resulting from our acquisition of Earth Decision, a $4.1 million increase in post contract support agreements from new software customers and renewal agreements purchased by existing software customers, a $1.7 million increase in software installation and training support revenues, and a $0.8 million increase in on-site support revenues. Increases in our maintenance and support revenues are dependent on our ability to increase the sales of our software licenses and on our ability to implement price increases for the renewal of maintenance contracts. We announced an increase in our maintenance rates from 18% to 20% of the license price, effective September 1, 2006, on all new and existing maintenance and support contracts that are renewed. As the major portion of our post-contract support agreements have January 1 renewal dates, we did not generate any significant revenues from the price increase on post-contract support agreements in 2006. Strategic Consulting. Strategic consulting revenues were $32.5 million for 2006, representing an increase of $4.7 million, or 17%, as compared to $27.8 million for 2005. Strategic consulting revenues comprised 23% of our total revenues in 2006 and 28% of our total revenues in 2005. CIS and Asia Pacific mainly contributed to the growth in strategic consulting revenues and the increase was substantially due to engagements with new customers in these regions, as well as a significant project awarded in India from an existing customer. The increase in strategic consulting revenues during 2006 as compared to 2005 resulted from engagements of $2.4 million from customers' outsourcing the processing of complex data, $1.7 million from interpreting attributes of sub-surface reservoirs and $0.6 million from a software hosting project. Cost of Revenues and Gross Margin Total cost of revenues was $56.2 million for 2006, representing an increase of $12.4 million, or 28%, as compared to $43.8 million for 2005. Total gross margin was 61% in 2006 as compared to 56% in the same period in 2005. Our acquisition of Earth Decision resulted in an increase in cost of revenues of $3.5 million. Total gross margin, net of hardware and third-party software, was 61% in the 2006 compared to 56% in 2005. Software Licenses and Products. Cost of software licenses and product revenues was $8.0 million in 2006, representing an increase of $5.1 million as compared to $2.9 million in 2005. The increase was substantially due to the incremental hardware and third-party software costs of $5.6 million incurred in 2006, as compared to $1.5 million in 2005. As a result of the Earth Decision acquisition, the cost of software licenses and product revenues increased by $0.7 million and the remaining increase of $0.3 million was due to additional royalty expense. Gross margin for software licenses and products, net of hardware and third-party software sales, was 96% for 2006 and 2005. Maintenance and Support. Cost of maintenance and support revenues was $16.8 million in 2006, representing an increase of $4.1 million, or 32%, as compared to $12.7 million for 2005. Our acquisition of Earth Decision contributed $2.7 million to the increase in the cost of maintenance and support revenues, mainly due to personnel costs. The additional $1.4 million increase was mainly attributable to an increase in personnel costs of $0.9 million and third-party consulting of $0.5 million to support in training and installation revenues. Gross margin for maintenance and support for 2006 was 64% compared to 63% for 2005. Strategic Consulting. Cost of strategic consulting revenues was $31.4 million in 2006, representing an increase of $3.2 million, or 11%, compared to $28.2 million in 2005. The increase in costs of strategic consulting revenues was mainly due to an increase of $2.0 million for third-party consultants, higher depreciation expenses of $0.7 million on computer equipment, an increase in computer services of $0.5 million and an increase of $0.4 million in infrastructure support, partially offset by a reduction in personnel costs of $0.2 million and travel of $0.2 million. The additional computer equipment and third-party consultants were required to support strategic consulting projects mainly in Canada, Asia Pacific and CIS while the additional computer services was related to projects in the United States. Gross margin for strategic consulting was 3% for 2006, as compared to a negative gross margin of 1% for 2005. The gross margin improvement reflects both the decision to sell less resource intensive strategic consulting projects and the completion in late 2005 of several low margin outsourced seismic data processing projects. Operating Expense Sales and Marketing. Sales and marketing expense was $27.9 million for 2006 representing an increase of $9.9 million, or 55%, as compared to $18.0 million for 2005. The acquisition of Earth Decision increased expenses by $3.6 million with $2.5 million from additional personnel and the remainder substantially associated with marketing support and events. Sales and marketing expense for our non-Earth Decision business increased in 2006 by $6.3 million due to hiring additional sales professionals in all of our geographic regions. The $6.3 million increase in personnel costs includes the one-time effect of $0.6 million of expense incurred to rationalize the sales and marketing management structure following the acquisition of Earth Decision and includes a reduction in depreciation costs of $0.3 million. Research and Development. Research and development expense was $23.2 million for 2006, representing an increase of $3.9 million, or 20%, as compared to $19.3 million for 2005. The acquisition of Earth Decision increased these expenses by $2.8 million, mainly due to increases in personnel costs of $2.3 million and in third-party consultant costs of $0.3 million. The additional $1.1 million increase was primarily due to increases in personnel, travel and infrastructure costs unrelated to our Earth Decision acquisition. General and Administrative. General and administrative expense was $33.8 million for 2006, representing an increase of $17.5 million, or 107%, as compared to $16.3 million for 2005. The increase in general and administrative expenses is attributable to increases in: personnel and infrastructure costs from the acquisition of Earth Decision amounting to $3.5 million; personnel and infrastructure costs of $3.0 million associated with our ongoing business and the additional support to sustain the growth of our business; accounting services of $2.4 million mainly for tax support and the audit of our financial statements and the Earth Decision financial statements covering 2003, 2004 and 2005, and human resources services of $0.7 million related to compensation and organizational structure studies; legal expenses of $3.8 million for legal services and estimated settlements for ongoing litigation, which includes $0.5 million of proceeds received in 2005 for litigation resolved to our benefit; share-based compensation expenses of $3.9 million, including a $3.0 million increase resulting from the adjustment to fair value of warrants issued in 2003. As a result of the Earth Decision acquisition, we determined the warrants should be reclassified from equity to current liabilities as we did not have a sufficient level of authorized ordinary shares to satisfy all outstanding instruments requiring issuance of ordinary shares. In March 2007, Paradigm B.V. increased the amount of authorized ordinary shares which will allow the warrants to be reclassified from current liabilities to equity; and provision for estimated penalties and disgorgement of profits of $2.4 million related to the internal review of compliance with certain U.S. laws. These increases were partially offset by reductions in bad debt expense totaling $0.7 million and a change of $1.8 million related to the reversal of $0.8 million during 2006 of a $1.0 million reserve for indirect taxes, which was originally recorded in 2005. Of the total increase in general and administrative expenses in 2006 compared to 2005, $5.9 million of the increase, attributable to accounting services of $2.1 million, incentive expense of $0.8 million and share based compensation expense of $3.0 million, is considered non-recurring. Amortization of Intangibles. Amortization of intangibles was $2.6 million for 2006, representing an increase of $0.5 million, or 24%, as compared to $2.1 million for 2005. This increase reflects the effects of recording amortization expense for amortizable intangible assets totaling $14.8 million acquired in the Earth Decision acquisition. We expect amortization of intangibles will be approximately $3.4 million annually through 2008 and decreasing thereafter. Related Party Fees and Expenses. Related party fees and expenses were $1.1 million in 2006 and $1.8 million in 2005. These amounts reflect the contractual arrangements under our amended management agreement with Fox Paine finalized in September 2006. These fees will terminate upon the completion of our proposed initial public offering and a payment of $6.8 million to terminate the amended management agreement, plus unreimbursed expenses. Goodwill Impairment. In connection with a goodwill impairment review triggered by a strategy change related to our strategic consulting services, we recognized $4.9 million of goodwill impairment expense in 2005. No goodwill impairment occurred in 2006. Restructuring and Impairment. Restructuring and other impairment costs were $4.5 million during 2005. Restructuring costs were $1.6 million in 2005. Management approved restructuring plans to align our cost structure with market conditions and create a more efficient organization. These charges include costs associated with workforce reductions, mainly impacting our corporate office and our United States operations. We paid $0.9 million of these restructuring costs in 2005 and paid the remaining $0.7 million in 2006. No restructuring activity occurred in 2006. In 2005, we identified other impairment costs amounting to $2.9 million related to certain intangible assets acquired. We expensed the remaining net book value of $2.4 million of the Petroleum Workbench intangibles upon determining the application was not part of our core technologies and we identified $0.5 million of expense related to customer relationships resulting from our goodwill impairment review. No impairments occurred in 2006. Acquired In-Process Research and Development. In connection with our acquisition of Earth Decision on August 11, 2006, we recognized a charge of $16.1 million for acquired in-process research and development. This amount represents projects acquired from Earth Decision that have not yet reached technological feasibility and have no future alternative use. Our in-process research and development projects focus on a new software technology approach to modeling the Earth's subsurface using a full three dimensional methodology that seeks to provide a more intuitive, faster, and accurate model construction compared with existing solutions that facilitate the precise identification of targets, reduce the risk of dry wells, and improve recovery factors during production. The projects were initiated in December 2004 by Earth Decision with a commercial release originally scheduled for mid 2006. As of the acquisition date, Earth Decision was developing and assessing two alternative methodologies for inclusion in the software in parallel. We completed this development and assessment process in January 2007, at which time we began to integrate the chosen method with current technology and to engineer the source code to be compatible with multiple platforms. We anticipate the first commercial version to be completed and ready for release late 2007 at which time we expect to start benefiting from the projects through positive net cash flow. The $16.1 million valuation of the projects was based on an income approach which discounts the estimated future net cash flows attributable to the projects to determine the current value and incorporates estimated costs to complete the project of $1.4 million. There was no evidence of a material variation between projected results at the acquisition date and actual results as of December 31, 2006. Interest and Other Expense Interest Expense, Net. Interest expense, net was $5.0 million in 2006 representing a decrease of $0.2 million, or 4%, as compared to $5.2 million for 2005. Interest expense on borrowings under our term loan was $4.6 million for 2006, representing an increase of $0.8 million, as compared to $3.8 million for 2005. The additional expense was due to an increase in our average borrowing rates of 188 basis points on the variable rate term loans, which was partially offset by a reduction in average borrowings of $4.7 million under the credit facility. The net effect of our interest rate swaps, interest income and amortization of deferred financing fees was a reduction of expense of $1.0 million for 2006 compared to 2005. We intend to repay the outstanding balance under the term loan with proceeds from this initial public offering which will eliminate the interest expense on the term loan, the effects of the interest rate swap and reduce the amortization of deferred financing fees for the portion of the debt issuance costs associated with the term loan. We will incur expense in the period in which our initial public offering is completed from the write-off of unamortized debt issuance costs and interest rate swap derivative assets related to the term loan. Amortization of deferred financing fees will be insignificant after our initial public offering. See "Unaudited Pro Forma Financial Information." Minority Interest in Earth Decision. We recorded minority interest expense of $2.1 million in 2006 related to the preferred shares of Earth Decision. Because the preferred shares partially exchange into convertible subordinated debentures, the recorded fair value for the debentures underlying the preferred shares is required to be adjusted to the redemption price at each reporting period. In March 2007, the preferred shares were exchanged for ordinary shares and convertible subordinated debentures of Paradigm B.V. and are no longer outstanding. Other Expense, Net. Other expense, net was $0.3 million in 2006 and consisted of $0.5 million of minority interest expense related to our Kazakhstan entity offset by $0.2 million of foreign currency gains. In 2005, other expense, net consisted of $0.2 million of minority interest expense related to our Kazakhstan entity and $0.4 million of foreign currency losses. Total operating expenses 57 68 72 54 Provision for Income Taxes Income tax expense was $5.5 million in 2006 and $0.8 million in 2005. Our effective tax rate increased in 2006 when compared to 2005. This increase was primarily due to non-deductible in-process research and development and an increase in tax reserves of $4.3 million for non-recurring income tax expense for withholding taxes and income tax exposures. Accretion to Redemption Value on, and Distributions to Holders of, Convertible Subordinated Debentures Accretion to redemption value on convertible subordinated debentures was $120.0 million in 2006 and $12.1 million in 2005. The $107.9 million increase relates to (1) the addition of an aggregate principal amount of $10.2 million in debentures that were issued and issuable for options, warrants and preferred shares of Earth Decision, in connection with the Earth Decision acquisition in 2006 and (2) the increase in the fair value of the Paradigm B.V. ordinary shares experienced during 2006. There were zero distributions to holders of convertible subordinated debentures during 2006 or 2005. Year Ended December 31, 2005 Compared to Year Ended December 31, 2004 Revenues Total revenues were $98.7 million for 2005, representing an increase of $9.8 million or 11%, as compared to $88.9 million for 2004. Software Licenses and Products. Software licenses and product revenues were $36.4 million in 2005, representing an increase of $5.5 million, or 18%, as compared to $30.9 million in 2004. Software licenses and product revenues, net of hardware and third-party software, increased by $4.8 million, or 16%, to $34.9 million for 2005 compared to $30.1 million for 2004. Software licenses and product revenues, net of hardware and third-party software, comprised 36% and 34% of our total revenues, net of hardware and third-party software, in 2005 and 2004, respectively. The increase of $5.5 million in software licenses and products revenues in 2005 as compared to 2004 was attributable to increases of: $4.7 million of software license sales to existing customers where we expanded their current use of our software to new production sites or introduced new software products to their organization. Sales in Canada, EAME, China, CIS and Asia Pacific mainly contributed to this growth; $0.7 million of third-party hardware and software resulting from $1.5 million sold in 2005 as compared to $0.8 million sold in 2004; and $0.2 million of software license sales to new customers. Maintenance and Support. Maintenance and support revenues were $34.4 million in 2005, representing an increase of $4.1 million, or 14%, as compared to $30.3 million in 2004. Maintenance revenues comprised 35% and 34% of our total revenues in 2005 and 2004, respectively. The increase in maintenance revenue consists of a $3.3 million increase in post contract support agreements from new software customers and renewal agreements purchased by existing software customers, a $0.5 million increase in software installation and training support revenues and a $0.3 million increase in on-site support revenues. Strategic Consulting. Strategic consulting revenues were $27.8 million in both 2005 and 2004. Strategic consulting revenues comprised 28% and 31% of our total revenues in 2005 and 2004, respectively. In the United States and Asia Pacific strategic consulting revenues declined, with an increase in revenues in CIS, in 2005 when compared to 2004. Strategic consulting revenues remained flat as a result of a decision of our prior management to commit available personnel and computing resources to the completion of outsourced seismic data processing projects rather than focus resources on selling new strategic consulting projects. Cost of Revenues and Gross Margin Total cost of revenues was $43.8 million for 2005, representing an increase of $7.3 million, or 20%, as compared to $36.5 million for 2004. Total gross margin was 56% in 2005 as compared to 59% for 2004. The effects of the costs of hardware and third-party software were immaterial. Software Licenses and Products. Cost of software licenses and product revenues was $2.9 million in 2005 compared to $2.8 million in 2004, reflecting a $0.1 million increase. Gross margin was 92% in 2005 as compared to 91% in 2004. Gross margin for software licenses and products, net of hardware and third-party software sales was 96% in 2005 as compared to 94% in 2004. Maintenance and Support. Cost of maintenance and support revenues was $12.7 million in 2005, representing an increase of $2.1 million, or 20%, as compared to $10.6 million in 2004. Gross margin in 2005 was 63% as compared to 65% in 2004. During 2005, personnel costs increased by $1.1 million as a result of a 17% increase in headcount to maintain the growing software installation base and related facilities and office overhead increased $0.4 million as a result of the increase in headcount. The remaining increases in costs of maintenance and support revenues were associated with software installation and training required to support new software licenses customers. Strategic Consulting. Cost of strategic consulting revenues was $28.2 million in 2005, representing an increase of $5.0 million, or 21%, as compared to $23.2 million in 2004. Overall, costs of strategic consulting revenues increased in 2005 as compared to 2004 as a result of the acquisition of RTD in April 2004. In addition to the impact of the RTD acquisition on increasing costs of strategic consulting revenues, we determined that the estimated useful life of certain computer and related equipment should be reduced based on a review of the historical patterns of retirement and disposal. In the third quarter of 2005, we reviewed and reduced the useful life of the equipment to three years from a range of four to six years resulting in additional depreciation expense of $1.1 million for 2005. Gross margin on strategic consulting was (1)% in 2005, compared to 16% in 2004. The decline in the gross margins from 2004 to 2005 is primarily the result of personnel and computing resource costs that were absorbed by us rather than passed on to customers in order to complete certain seismic data processing projects. Operating Expense Sales and Marketing. Sales and marketing expense was $18.0 million in 2005, representing an increase of $1.8 million, or 11%, as compared to $16.2 million in 2004. The increase in sales and marketing expense is principally due to a $1.0 million increase in personnel costs resulting from a 25% expansion in the number of sales staff in all of our geographic regions in late 2005 and the $0.3 million increase in personnel costs for stock based compensation expense. The remaining portion of the increase is attributable to additional travel expenses of $0.2 million and additional marketing and advertising expenses of $0.3 million in 2005 as compared to 2004. Research and Development. Research and development expense was $19.3 million in 2005, representing an increase of $1.9 million, or 11%, as compared to $17.4 million in 2004. The increase in research and development expense was due primarily to higher personnel costs of $1.7 million resulting from the implementation of an incentive compensation plan, the addition of new management personnel and the effects of recording stock-based compensation. Also, depreciation increased by $0.4 million in 2005 as compared to 2004 from higher capital expenditures for computer equipment. General and Administrative. General and administrative expense was $16.3 million in 2005, representing an increase of $4.9 million, or 43%, as compared to $11.4 million in 2004. This increase in 2005 was partially attributable to a $1.5 million increase in personnel costs resulting from a 7% increase in headcount, which includes the addition of several members of our new executive management team. Additional items recorded in 2005 were $1.7 million of expense resulting from recording stock based compensation, additional bad debt expenses of $1.0 million due to increased reserves for doubtful accounts relating to delinquent United States and Latin America accounts receivable and additional expense of $1.0 million to record a reserve for an indirect tax receivable in Latin America. These increases were partially offset by collection of $0.5 million in legal settlements. Amortization of Intangibles. Amortization of intangibles expense was $2.1 million for 2005, representing an increase of $0.3 million, or 18%, as compared to $1.8 million for 2004. This increase is primarily due to the effect of recording amortization of intangibles expense for assets acquired in 2004 partially offset by the amortization of the Petroleum Workbench intangibles that were written off in 2005. Related Party Fees and Expenses. Related party fees and expenses were $1.8 million for 2005, representing a decrease of $1.0 million as compared to $2.8 million for 2004. In 2004, a $1.5 million advisory fee was charged in connection with the amendment of the credit facility. This decrease was offset by an additional $0.7 million of reimbursement of expenses. Goodwill Impairment. Goodwill impairment was $4.9 million for 2005. In 2005, we identified goodwill impairment related to strategic consulting. The goodwill impairment was the result of lower operating profits and cash flows than expected due to low margin seismic data processing projects. There was no goodwill impairment recorded in 2004. Restructuring and Other Impairment Costs. Restructuring and other impairment costs were $4.5 million for 2005 as compared to $1.0 million for 2004. Restructuring costs were $1.6 million in 2005 compared to $1.0 million in 2004. Management approved the restructuring plans to align our cost structure with market conditions and to create a more efficient organization. These charges include costs associated with workforce reductions and consolidation of excess facilities. In 2005, the restructuring charges were primarily attributable to workforce reductions consisting of 19 positions from strategic consulting, sales and marketing and general and administrative functions, mainly in our corporate office and the United States region. In 2004, the restructuring charges included costs associated with workforce reductions of $0.4 million consisting of seven positions from strategic consulting, research and development, and sales and marketing mainly in the United States and expenses of $0.6 million associated with the consolidation of excess facilities in Canada related to the RTD acquisition. In 2005, we identified other impairment costs amounting to $2.9 million related to certain intangible assets acquired, primarily related to strategic consulting and Petroleum Workbench. For strategic consulting, we determined that $0.5 million of the customer relationships were impaired. The customer relationship impairment was the result of lower operating profits and cash flows than expected due to low margin seismic data processing projects. We expensed the remaining net book value of the Petroleum Workbench intangibles for a charge of $2.4 million upon determining the application was not part of our core technologies. No impairments were recorded in 2004. Interest and Other Expense Interest Expense, Net. Interest expense, net was $5.2 million for 2005, representing an increase of $2.6 million, or 98%, as compared to $2.6 million for 2004. The increase in interest expense, net during 2005 was primarily due to increased borrowings under the credit facility in conjunction with higher interest rates by an average of 132 basis points. Average borrowings were higher in 2005 by $36.6 million primarily to make payments to shareholders and debentures holders. See " Liquidity and Capital Resources Convertible Subordinated Debentures." These increased borrowings resulted in additional interest expense of $2.4 million in 2005 as compared to 2004. Amortization of deferred Net loss (2,767 ) (18,517 ) (29,382 ) (29,082 ) 52 (7,921 ) Accretion to redemption value on and distributions to holders of convertible subordinated debentures (23,683) (6) (12,095 ) (120,008 ) (120,008 ) (10,445 ) (2,584 ) financing fees increased $0.5 million in 2005 as compared to 2004 due to fees associated with the amendment of the credit facility in November 2004. Our interest rate swaps, which convert a portion of the long term loans to a fixed rate basis, do not qualify as a hedge resulting in an increase in the fair value gain of $0.3 million was recognized in interest expense, net. Other Expense, Net. Other expense, net was $0.6 million in 2005 and consisted of $0.4 million of foreign currency transaction losses and $0.2 million of minority interest. In 2004, other expense, net consisted of $0.3 million of foreign currency transaction losses. Provision for Income Taxes Income tax expense was $0.8 million in 2005 and $1.6 million in 2004. Our decrease in tax expense in 2005 when compared to 2004 was primarily due to a decrease in the level of pre-tax profit in jurisdictions where we incurred a current tax obligation. Our effective tax rate fluctuated in 2005 when compared to 2004 primarily due to the fact that we incurred tax expense in certain jurisdictions and tax losses in others which are not available to offset each other. A benefit has not been recorded for such losses. Accretion to Redemption Value on, and Distributions to Holders of, Convertible Subordinated Debentures Accretion to redemption value on convertible subordinated debentures was $12.1 million in 2005 and $23.7 million in 2004. The $11.6 million decrease primarily relates to a $21.1 million distribution in 2004 to the debenture holders of Paradigm B.V. for their participation in dividends paid to ordinary shareholders of Paradigm B.V., as compared to zero distributions during 2005. This decrease was partially offset by an increase in accretion to redemption value related to an increase in the fair value of the Paradigm B.V. ordinary shares experienced during 2005 relative to 2004. (1)Our cost of revenue for software licenses and products during the quarter ended June 30, 2005 includes an adjustment of $(556) to reduce provisions for royalties and indirect taxes. Seasonality We experience seasonality, with most of our revenues generally being generated during the second and fourth quarters. Our first quarter is typically affected by budget and spending decisions by our customers and our third quarter is typically affected by the global vacation and holiday schedules of our customers, which can delay purchase decision-making and the procurement process. Our fourth quarter generally contributes the greatest percentage of our annual revenues primarily due to year end budget utilization by our customers. We cannot accurately forecast many of these factors, nor can we estimate accurately the relative influence of any particular factor. As a result, there can be no assurance that historical patterns, if any, will continue in future periods. See "Risk Factors Our quarterly revenue and operating results may fluctuate significantly from period to period, and this may cause volatility in the price of our Class A ordinary shares." Liquidity and Capital Resources As of March 31, 2007, we had $25.8 million of cash and cash equivalents and $3.6 million availability of borrowing capacity on our available credit lines. Our primary capital resources are net cash flows from operations. We have utilized cash and cash equivalents and bank and capital lease financing to obtain capital resources and fund acquisitions in the past. Based on current plans, we believe that our existing capital resources will be sufficient to finance our operations and anticipated capital expenditures for at least the next twelve months. To the extent that our cash and cash equivalents, cash flow from operations, availability under the credit facility and net proceeds of this offering are insufficient to fund our future activities, we may need to raise funds through additional bank credit arrangements or equity or debt financing. There can be no assurance that such financings can be obtained on favorable terms, if at all. We make capital expenditures primarily to acquire computer and other equipment, software, furniture and leasehold improvements to support the growth of our business. We expect to spend between $10.0 million to $11.0 million in 2007 for investment in capital expenditures. Three Months Ended March 31, 2007 Compared to the Three Months Ended March 31, 2006 Net Cash Provided by Operating Activities. Net cash provided by operating activities was $13.3 million in the three months ended March 31, 2007, as compared to $4.5 million in the three months ended 2006. The $8.8 million increase in our cash flows from operations was due to a $8.0 million increase in our net loss offset by a $0.5 million increase in net adjustments for non-cash expenses such as depreciation and amortization and share based compensation and a $16.3 million increase in cash from changes in working capital in the three months ended March 31, 2007 as compared to the comparable period in 2006. The primary increase from changes in working capital results from a $9.3 million increase in cash flow related to deferred revenue, which mainly relates to an increased level of maintenance renewals. Additionally, there was a $7.0 million increase in the change in accounts payable and accrued liabilities, which was substantially related to costs incurred for our initial public offering process and our internal review of compliance with certain U.S. laws. Net Cash Used in Investing Activities. Net cash used in investing activities in the three months ended March 31, 2007 was $2.2 million, as compared to $0.9 million in the three months ended March 31, 2006. Capital expenditures were $2.1 million in the three months ended March 31, 2007, representing an increase of $1.2 million, as compared to $0.9 million in the three months ended March 31, 2006. This increase in capital expenditures was primarily attributable to the acquisition of computer equipment and software to support our business. Net Cash Used in Financing Activities. Net cash used in financing activities for the three months ended March 31, 2007 was $1.6 million, compared to $4.8 million in the three months ended March 31, 2006. The cash used in financing activities in the three months ended March 31, 2007 consists of $0.4 million in repayments of debt, $0.6 million in payments of capital lease obligations and $0.7 million in payments for deferred costs associated with our initial public offering. The cash used in financing activities in the three months ended March 31, 2006 consists of $4.1 million in repayment of debt and $0.7 million in payments of capital lease obligations. Year Ended December 31, 2006 Compared to Year Ended December 31, 2005 Net Cash Provided by Operating Activities. Net cash provided by operating activities was $17.9 million in 2006, as compared to $10.3 million in 2005. The $7.6 million increase in our cash flows from operations was due to a $10.9 million increase in our net loss offset by a $12.3 million increase in net adjustments for non-cash expenses such as depreciation and amortization, acquired in process research and development and share based compensation and a $6.2 million increase in cash from changes in working capital for 2006 as compared to 2005. Net Cash Used in Investing Activities. Net cash used in investing activities in 2006 was $3.7 million, as compared to $5.6 million in 2005. Capital expenditures were $3.9 million in 2006, as compared to $5.6 million in 2005, resulting in a decrease of $1.7 million. The capital expenditures in 2006 and in 2005 were mainly for computer equipment to support strategic consulting projects and the research and development initiatives. Net cash acquired as part of the Earth Decision acquisition was $0.7 million and a cash outlay of $0.5 million was made for an investment in Open Spirit Corporation. Net Cash Used in Financing Activities. Net cash used in financing activities for 2006 was $8.6 million, compared to $1.7 million in 2005. The cash used in financing activities in 2006 consisted primarily of $8.7 million in repayments of debt, $2.9 million in payments of capital lease obligations and $0.9 million in payments for deferred costs associated with our initial public offering. The cash provided by financing activities for 2006 was attributable to $2.7 million of proceeds from issuance of ordinary shares of Paradigm B.V. and $1.0 million from the repayment of a promissory note issued to an officer in consideration of shares purchased. The cash used in financing activities in 2005 consists of $4.5 million in repayment of debt, $1.8 million in payments of capital lease obligations and payment of debt issuance costs of $0.4 million offset by the borrowing of $4.0 million of short term bank loans. The cash provided by financing activities for 2005 was primarily attributable to $1.0 million of proceeds from issuance of ordinary shares. Year Ended December 31, 2005 Compared to Year Ended December 31, 2004 Net Cash Provided by Operating Activities. Net cash provided by operating activities was $10.3 million in 2005, as compared to $2.9 million in 2004. The $7.3 million increase in our cash flow from operations in 2005 compared to 2004 was the result of $15.7 million increase in our net loss, as adjusted for $14.1 million increase in non-cash expenses such as depreciation and amortization, impairment of assets, and share based compensation and the impact of $9.0 million increased cash from working capital fluctuations. Net Cash Used in Investing Activities. Net cash used in investing activities was $5.6 million in 2005, as compared to $24.9 million in 2004. Capital expenditures were $5.6 million in 2005, as compared to $3.6 million in 2004. During 2004, cash outlays of $21.3 million were made for the acquisition of RTD and Petroleum Workbench. Net Cash Used in Financing Activities. Cash used in financing activities was $1.7 million in 2005, as compared to cash provided by financing activities was $19.3 million in 2004. The cash used in financing activities consists of repayment of debt of $4.5 million in 2005 and $2.2 million in 2004; distribution to our shareholders and convertible subordinated debenture holders of $35.0 million in 2004; payment of capital lease obligations of $1.8 million in 2005 and $1.5 million in 2004; and payment of debt issuance costs of $0.4 million in 2005 and $1.1 million in 2004 related to the credit facility, which is offset by $4.0 million in 2005 and $59.1 million in 2004 in proceeds from the issuance of debt. Debt As of December 31, 2006, we had outstanding long-term debt of $60.5 million, including current maturities of $9.5 million. As discussed in "Use of Proceeds," the term loan and the convertible subordinated debentures (both discussed below), are expected to be fully paid with proceeds from this offering. Credit Facility In June 2003, Paradigm B.V. established a senior secured credit agreement with the Bank of Scotland. The credit facility, as amended in November 2004 and June 2006, provides for a $58.0 million term loan, which was decreased from $65.0 million as of December 31, 2005, and a $17.3 million multi-currency revolving credit facility. From the revolving facility, (1) an amount of up to $7.0 million may be utilized for short-term loans, letters of credit and guarantees and (2) an amount of $10.3 million may be used for automated banking facilities and credit cards. The credit facility terminates on December 31, 2011. Loans under the revolving facility bear interest at a rate equal to LIBOR plus a margin of 2.0% per annum (7.32% as of March 31, 2007). The loans may be repaid under the revolving facility at any time without premium or penalty, except in the event the loans are repaid by way of refinancing. The revolving facility requires a commitment fee of 1.0% per annum on the unused commitment amount of a $7.0 million multi-currency revolving credit facility and a letter of credit fee of 1.4% and a 2% fee for bank issued guarantees. As of March 31, 2007, $55.5 million in loans were outstanding and $3.4 million of letters of credit and other guarantees had been issued under the revolving facility. For each loan under the revolving facility, interest payments are due quarterly relative to the inception of each respective loan. The term loan under the credit facility bears interest at a rate equal to LIBOR plus a margin of 2.5% per annum (7.82% as of March 31, 2007). Principal payments are due every six months on June 30 and December 31, and the outstanding principal balance of the term loan is payable in full on December 31, 2011. We may prepay the term loan at any time without premium or penalty. We will, however, be subject to certain fees and penalty payments, if we prepay the term loan by way of refinancing. The fair value of the credit facility at year-end approximates its carrying value, due to the variable interest rates associated with these borrowings. Our obligations under the credit facility are secured by substantially all of our assets, including the assets of certain designated subsidiary companies. Certain of our subsidiaries guarantee our obligations under the agreement and have granted similar liens on substantially all of their assets. The credit facility contains financial covenants, which require us to maintain the following: a maximum ratio of total net debt to tangible net worth, evaluated quarterly, of 0.90 to 1 as of December 31, 2006, 0.75 to 1 beginning March 31, 2007 and 0.50 to 1 beginning December 31, 2007; a minimum ratio of total earnings before interest, taxes, depreciation and amortization to total debt costs, evaluated quarterly, of 3.50 to 1 as of December 31, 2006 and 4.0 to 1 beginning December 31, 2007; a minimum ratio of cash flow to total funding costs, as defined and evaluated quarterly, of 1.0 to 1; and a minimum total of earnings before interest, taxes, depreciation and amortization, as defined, of $11.3 million for the year ended December 31, 2006. Other covenants contained in the agreement restrict our ability to, among other things, repurchase equity interests, execute mergers and asset dispositions, pay dividends and distributions and other covenants customary in agreements of this type. As of March 31, 2007, we were in compliance with the covenants under the credit facility. In accordance with the credit facility, during July 2003 until July 2005 we entered into interest rate swaps with a total notional amount of $27.8 million as of March 31, 2007 with respect to a portion of the loans under the credit facility. Changes in the fair value of the swaps are recorded in interest expense, net, in the statement of operations. The swaps convert the LIBOR rate in the variable rate loans to a fixed rate of 2.44%, 3.25%, and 4.39% related to $2.3 million, $5.0 million and $20.5 million, respectively, for a period of five, seven and four years, respectively. Convertible Subordinated Debentures In August 2002, Paradigm B.V. issued to shareholders an aggregate principal amount of $51.1 million in convertible subordinated debentures, which we refer to as the "2002 Debentures." The 2002 Debentures have a perpetual term with no stated maturity date and participate equally and ratably with the holders of Paradigm B.V. ordinary shares in all dividends and distributions paid on Paradigm B.V. ordinary shares. As of December 31, 2005 and 2006 and March 31, 2007, aggregate outstanding principal of the 2002 Debentures totaled $24.8 million. At the option of the holder, the 2002 Debentures are convertible at any time into Paradigm B.V. ordinary shares at a price of $5.15 per share subject to the adjustments in accordance with the debenture agreement. On March 31, June 30, September 30 and December 31 of each calendar year, the conversion price is automatically adjusted such that the conversion price is reduced, on an annual basis, by approximately 5%. The per-share conversion price of the 2002 Debentures was $4.11 as of March 31, 2007. Accordingly, the 2002 Debentures were convertible into 6,038,447 ordinary shares of Paradigm B.V. as of March 31, 2007. At our option, the 2002 Debentures may be redeemed, in whole or in part, at any time. In the case of the 2002 Debentures, the aggregate redemption price equals, as of any date, the greater of (1) the sum of the principal amount outstanding and the aggregate accumulated premium calculated at a rate of 5% per annum, compounded quarterly and (2) fair market value of the debentures calculated on an as converted basis. The 2002 Debentures contain features of both debt and equity. The equity-like features include, but are not limited to, a perpetual term, no required principal payments, no stated interest, dividend participation and liquidation priority that ranks the same as any preferred shares. The debt-like features include, but are not limited to, creditor rights and no voting rights. We have determined that the 2002 Debentures are more characteristic of equity than debt. Because the holders of the 2002 Debentures are our controlling shareholders, the redemption of the 2002 Debentures can be outside the control of Paradigm B.V. As a result, EITF Topic D-98, Classification and Measurement of Redeemable Securities, requires the 2002 Debentures to be classified as temporary equity rather than permanent equity. Additionally, in accordance with EITF Topic D-98, the 2002 Debentures are required to be adjusted to their redemption price at each reporting period. The March 31, 2007 carrying value of $190.4 million includes the sum of the outstanding principal amount of the 2002 Debentures, plus the aggregate adjustment amount to reflect the redemption price as of March 31, 2007. The amount required to adjust for the redemption price at each reporting period is recorded as an increase to the convertible subordinated debentures and a decrease to additional paid-in capital. The aggregate adjustments recorded for 2004, 2005, 2006 and the three months ended March 31, 2007 totaled $2.6 million, $12.1 million, $120.0 million and $2.6 million, respectively, and are further reflected as a deduction to net loss to compute net loss available to ordinary shareholders in the Paradigm B.V. statements of operations. During 2003, Paradigm B.V. redeemed 2002 Debentures in a principal amount of $11.1 million, plus a redemption premium of $0.5 million. Concurrently, 2002 Debentures in the principal amount of $0.4 million were converted into 67,915 Paradigm B.V. ordinary shares that Paradigm B.V. repurchased at a price of $5.15 per share. These shares are presented as treasury shares in the Paradigm B.V. consolidated balance sheets. In November 2004, following a distribution made to Paradigm B.V. ordinary shareholders, Paradigm B.V. paid the holders of outstanding 2002 debentures an aggregate amount of $21.1 million related to dividend participation with dividends paid to Paradigm B.V. ordinary shareholders. In lieu of cash dividend participation of $0.8 million, certain debenture holders elected to receive an equivalent value of Paradigm B.V. ordinary shares (168,950 ordinary shares) that Paradigm B.V. repurchased at the conversion price of $5.15 per share, as calculated pursuant to the terms of the debentures. These shares are presented as treasury shares in the consolidated balance sheets. In December 2004, the debenture holders issued an irrevocable instruction to convert a principal amount of $35.0 million of the debentures, plus $1.8 million of distribution, into 6,113,591 Paradigm B.V. ordinary shares. The conversion consisted of $14.8 million principal amount of 2002 Debentures at a conversion price of $4.59 per share and $20.2 million principal amount of 2004 Debentures (as defined below) at a conversion price of $7.00 per share. Since the shares were not yet issued as of December 31, 2004, these debentures were presented in the Paradigm B.V. statement of shareholders' equity as subscriptions payable. During 2005, these Paradigm B.V. ordinary shares were issued to the debenture holders. In connection with the acquisition of Earth Decision in 2006, Paradigm B.V. issued an aggregate principal amount of $8.9 million in convertible subordinated debentures, which we refer to as the "2006 Debentures." Also, an additional aggregate principal amount of $1.4 million in 2006 Debentures has been recorded in temporary equity, representing debentures issuable to holders of outstanding options and warrants of Earth Decision. The 2006 Debentures have substantially the same terms as the 2002 Debentures, with two primary exceptions: (1) the initial conversion rate for the 2006 Debentures was $9.15 and (2) there is a mandatory conversion feature requiring conversion of a pro rata principal amount of 2006 Debentures for any conversions of the 2002 Debentures. As of December 31, 2006, the aggregate outstanding 2006 Debentures and those issuable for Earth Decision options and warrants had a carrying value of $28.5 million. The per-share conversion price of the 2006 Debentures was $8.87 as of March 31, 2007. Accordingly, the issued and issuable 2006 Debentures were convertible into 1,139,550 ordinary shares of Paradigm B.V. as of March 31, 2007. We intend to redeem all outstanding convertible subordinated debentures with the proceeds of this offering. Upon the closing of this offering, the outstanding warrants and options of Earth Decision become exercisable for 18 ordinary shares of Paradigm B.V. per share of Earth Decision that would have otherwise been issuable upon the exercise thereof, which is the amount of consideration that the holders of the options and warrants of Earth Decision would have received if they had exercised the right to exchange their Earth Decision warrants or options for a combination of ordinary shares of Paradigm B.V. and 2006 Debentures and subsequently converted the debentures at the initial conversion ratio of one ordinary share of Paradigm B.V. per $9.15 principal amount of debentures. Other Long-Term Debt During June 2005 and 2006, Earth Decision received French-government sponsored interest-free conditional research and development loans of $0.2 million and $0.2 million, respectively, under a contract to receive an aggregate of $0.6 million. These loans require us to spend the funds on specified research and development projects. The loan arrangement requires repayment of a minimum of $0.2 million (expected to be repaid during 2007 and 2008), which minimum may be increased if we generate revenues from such projects. The total $0.5 million loan balance has been recorded with our long term bank loans. During 2006, Earth Decision received $1.3 million from a French government agency that provides cash advances to companies for French research and development tax credits. The advance represents 80% of Earth Decision's total tax credit asset of $1.6 million, which is recorded in other long-term assets. The advance bears interest at 5.59% as of March 31, 2007, and does not require direct Net loss available to ordinary shareholders $ (26,450 ) $ (30,612 ) $ (149,390 ) $ (149,090 ) $ (10,393 ) $ (10,505 ) As of December 31, 2006, we had no unconditional purchase obligations to third parties for materials, goods or services. Additionally, with respect to our variable rate debt, we have calculated our future interest based on interest rates in effect as of December 31, 2006. Internal Controls Our management and our independent registered public accounting firm identified material weaknesses in our internal controls, as defined by the Public Company Accounting Oversight Board. The material weaknesses reported by our management and our independent registered public accounting firm in connection with the audit of our financial statements for 2004, 2005 and 2006 relate to our failure to maintain the following: adequate resources available for financial reporting with appropriate skills, training and experience to ensure our financial results were reported in a timely and accurate manner, in particular causing us to inappropriately apply revenue recognition to revenue transactions that involved extended payment terms for software licenses and products transactions or project milestones for strategic consulting services engagements; adequate supervision or oversight over the financial reporting process and the timely posting of entries; specifically resulting in account reconciliations and significant transactions not being subjected to appropriate reviews and approvals causing us to adjust the carrying value and interest expense for the convertible subordinated debentures and to adjust the purchase accounting for the acquisition of Earth Decision; adequate segregation of incompatible duties due to the limited number of financial and accounting personnel in many of our locations and our failure to implement appropriate compensating controls; adequate resources with tax knowledge to ensure the effectiveness of our indirect tax accounting, income tax provisions and related deferred tax accounts as well as our related financial statement disclosures in accordance with SFAS No. 109, requiring us to adjust amounts previously recorded for income, sales, and value added tax; formal documented procedures to guide our personnel in the completion of their duties resulting in significant inconsistencies in the manner that our personnel prepared records in our dispersed accounting centers; adequate policies and procedures for the use of cash and the documentation of transactions involving cash in China; and adequate policies and procedures for compliance with anti-corruption and export control laws in the jurisdictions in which we operate. See
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+Prospectus Summary This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read the entire prospectus carefully, especially the risks of investing in our common stock discussed under Risk factors and our consolidated financial statements and the related notes included elsewhere in this prospectus, before deciding to invest in our common stock. Unless otherwise specified and as the context requires, references to Vision-Ease, the company, we, us and our refer to (i) Insight Equity A.P. X, LP, a Texas limited partnership, for periods from November 1, 2004 until completion of the merger of that entity into the registrant, Vision-Ease Lens Corporation, a Delaware corporation, which merger will occur immediately prior to completion of this offering (ii) Vision-Ease Lens Corporation, a Delaware corporation, as of and after the completion of the merger of Insight Equity A.P. X, LP into the registrant and (iii) our predecessor for periods prior to November 1, 2004, which had been a subsidiary of BMC Industries, Inc., a Minnesota corporation, together in each case with our consolidated subsidiaries. Unless otherwise described, all industry data contained in this prospectus was obtained from Vision Council of America, or VCA, an industry trade group. Our business We are a technology focused designer, manufacturer and distributor of polycarbonate prescription lenses and lens treatments for the global spectacle lens market. We have produced prescription polycarbonate lenses for approximately 20 years and are a significant manufacturer of these lenses in the world. Polycarbonate lens sales grew at a compounded annual growth rate of 19.6% in the United States between 2001 and 2006 and comprised 46.6% of the U.S. market in 2006, making polycarbonate the fastest growing material widely used in the U.S. prescription spectacle lens market. Polycarbonate lenses offer higher impact resistance, lighter weight, inherent ultraviolet filtering and increased durability as compared to conventional plastic or glass lenses. Sales of polycarbonate lenses accounted for approximately 85.7% and 79.2% of our revenues in 2006 and 2005, respectively. We manufacture a broad line of polycarbonate and glass prescription lenses and we also distribute plastic prescription lenses for each primary corrective lens design in use today, namely single-vision, multifocal and progressive lenses. We strive to produce highly innovative products and we focus our product development on materials, corrective lens designs and treatments that we consider to be within the fastest growing market segments. We have leveraged our strong technology development platform and polycarbonate expertise to become a leader in high-end lens treatments such as polarized lenses, which block ultraviolet rays and reduce glare for the user. Polarized lens volume grew at a compounded annual growth rate of 20.3% in the United States between 2003 and 2005 and comprised 6.0% of all lenses sold in 2005. We invented a patented film technology for photochromic polycarbonate lenses, which darken when they are exposed to ultraviolet rays and remain clear in other light. Photochromic spectacle lens sales grew at a compounded annual growth rate of 13.5% in the United States between 2001 and 2006 and comprised 43.6% of all sales in 2006. We first launched our LifeRx polycarbonate photochromic product line to select customers in July of 2005. In December 2005, an independent laboratory validated our photochromic technology by confirming certain AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 superior performance characteristics of our new lenses relative to other major brands on the market and by February of 2006, we launched our full product line industry-wide. In November 2006, The Optical Laboratories Association, an international business association serving the optical laboratory industry, awarded us their 2006 Award of Excellence for Best in Lens Materials honoring our polycarbonate photochromic lenses. We have experienced strong interest in our new photochromic products across our customer base, including from LensCrafters , a subsidiary of Luxottica Group S.p.A. and the largest optical specialty retailer in the United States, which replaced competitive products they had been distributing with our new line. We consider our value-added offerings to be our polycarbonate and plastic photochromic, polarized and progressive lenses, which together accounted for 60.6% and 50.4% of our revenues during 2006 and 2005, respectively. While most industry participants discuss all polycarbonate lenses as an additional value-added offering, we exclude general polycarbonate lenses from this category because polycarbonate lenses account for the majority of all of our lens sales. By most industry standards, 87% of our revenues during the year ended December 31, 2006 were derived from value-added products, including polycarbonate lenses and plastic lenses with scratch-resistant, anti-reflective, polarized and photochromic treatments. We primarily market and sell our lenses in the United States, Latin America and Europe and we are pursuing long-term growth opportunities in Asia-Pacific driven by attractive demographics with increasing access to vision care. We strive to provide quality products, innovation and outstanding service. We periodically solicit feedback from our customers to determine whether we are meeting our goals. Our past efforts have been recognized by Luxottica Group as Supplier of the Year in 2003 and 2004, and by Wal-Mart, as an outstanding Supplier/Partner for the first quarter of 2004. Industry overview The size of the U.S. retail vision care market, consisting of spectacle frames and lenses, contact lenses, examinations, and over-the-counter reading glasses, was approximately $22.3 billion in 2005. The retail spectacle lens segment represented 34.0% or $7.6 billion of the U.S. retail vision care market. The size of the U.S. spectacle lens manufacturing market was approximately $1.1 billion in 2006. The U.S. lens manufacturing industry grew at a compounded annual growth rate of approximately 6.0% between 2001 and 2006, led by 19.6% compounded annual growth in polycarbonate lenses, 13.5% compounded annual growth in photochromic lenses and 9.0% compounded annual growth in progressive lenses. Based on our internal estimates, we believe the size of the global spectacle lens manufacturing market was approximately $3.3 billion in 2006. We believe the development of new lens technologies, favorable demographics and evolving retail strategies will continue to drive attractive growth in key market segments such as polycarbonate, progressive, photochromic, polarized, and anti-reflective lenses. Despite alternative vision correction treatments such as contact lenses, intraocular lenses, and laser surgery, we believe that spectacle lenses remain the dominant form of treatment for vision correction and that the alternatives have not had a major impact on the spectacle lens market due, in part, to their failure to adequately treat nearsightedness. Vision-Ease Lens Corporation (Exact name of registrant as specified in its charter) Delaware 3851 76-0837747 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number) 7000 Sunwood Drive NW Ramsey, Minnesota 55303 Telephone: (763) 506-9000 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Douglas C. Hepper Vision-Ease Lens Corporation 7000 Sunwood Drive NW Ramsey, Minnesota 55303 Telephone: (763) 506-9000 (Name, address, including zip code, and telephone number, including area code, of agent for service) Our competitive advantages We have developed a broad range of capabilities that we believe provide us with significant competitive advantages, including: Technological leadership. We strive to produce highly innovative products. Our research and development team has generated over 47 U.S. registered patents, 14 U.S. pending patents, 9 granted international patents, 21 international pending patents and a substantial amount of intellectual property consisting of trade secrets and manufacturing know-how. Significant manufacturer of polycarbonate lenses. We are a significant manufacturer of prescription polycarbonate lenses and we anticipate that polycarbonate will continue to gain market share from both conventional plastic and glass lenses in the United States and abroad. Value-added product expertise. Our strong research and development platform and polycarbonate expertise has enabled us to become a leading developer and provider of value-added spectacle lens products which has further enabled us to strengthen relationships with existing customers and attract new customers. Combination of low cost and complex manufacturing capabilities. We believe our combination of manufacturing capabilities located in Ramsey, Minnesota and Jakarta, Indonesia enables us to maximize quality, produce innovative new products, maintain very high order fill rates and safeguard our key intellectual property, all while driving improvements in cost efficiency and margins. Long-standing customer relationships. Capitalizing on our over 75 years of experience in our industry, we have established long-standing customer relationships with large and growing specialty retailers and mass merchants as well as independent eye doctors and wholesale laboratories. Strength in growing U.S. markets. The U.S. prescription spectacle lens market is characterized by an advanced medical infrastructure, a high standard of living, an educated consumer public that is receptive to improved corrective lens designs, materials and treatments and a fully developed distribution channel. We believe we hold a leading position in the U.S. polycarbonate, polarized and photochromic lens market. Strong and experienced management team. We have assembled an experienced management team that has focused on creating a growth oriented corporate culture and efficient work environment. Our strategy Our objective is to continue to grow our business by focusing on value-added product development, expanding our sales efforts, improving operating efficiencies and enhancing our position as a leading provider of prescription spectacle lenses through strategies that include: Leverage strength in technology. Product development is a cornerstone of our growth strategy as exemplified by our recent photochromic product line introduction and our longstanding polycarbonate and polarized expertise. We believe we are well positioned today Copies to: Ronald J. Lieberman Timothy A. Mack R. Cabell Morris Jr. Hunton & Williams LLP Hunton & Williams LLP Winston & Strawn LLP Bank of America Plaza, Suite 4100 Energy Plaza, 30th Floor 35 W. Wacker Drive 600 Peachtree Street, N.E. 1601 Bryan Street Chicago, Illinois 60601-9703 Atlanta, Georgia 30308-2216 Dallas, Texas 75201-3400 Telephone: (312) 558-5600 Telephone: (404) 888-4000 Telephone: (214) 979-3000 in several of the industry s fastest growing and technologically demanding segments and we intend to continue to expand our technology development platform. Capture opportunities presented by our new photochromic product. We have experienced strong interest in our new photochromic products across our customer base and believe these products will generate strong revenues, strengthen our relationships with existing customers, attract new customers and present us with opportunities to sell more of our other product lines to both new and existing customers. Leverage existing specialty retail and mass merchant channel relationships. Specialty retailers and mass merchants, such as LensCrafters and Wal-Mart, represent the fastest growing distribution channels in our industry and we believe our long-standing relationships and strong reputation with leading retailers, as well as our differentiated product offerings, provide significant opportunities for further expansion within this channel. Expand internationally. Given the population demographics, low current penetration of overall vision correction and the growing demand for polycarbonate lenses and treatments, we believe the Asia-Pacific and Latin American markets provide significant growth opportunities. We anticipate growing abroad both as a supplier to our existing retail customer base that is expanding internationally and by attracting local customers through directed sales efforts. Implement manufacturing efficiency initiatives. We intend to invest in additional capital improvements at our Ramsey and Jakarta manufacturing facilities to increase capacity and improve operating efficiencies. We also anticipate streamlining our manufacturing process for our recently launched photochromic product line over time and, as a result, we expect to realize increased efficiencies throughout our manufacturing operations with improved margins across our product lines. Business challenges To maintain our competitive position and successfully execute our strategic plan we will face several business challenges and risks. We are a relatively small participant in the highly competitive U.S. and global spectacle lens manufacturing markets, which were estimated to be $1.1 billion and $3.3 billion, respectively, in 2006. Competition in our industry could intensify as certain of our competitors are acquiring wholesale laboratories in order to create captive customers for their products. In addition, approximately 47% of our revenues during the year ended December 31, 2006 were derived from two customers, and these customers could seek to exert downward pressure on our product pricing. We have a limited operating history as a stand-alone company. Our equity sponsors will have significant influence over our business after this offering, and their interests may not coincide with your interests. Furthermore, our equity sponsors may acquire and hold interests in businesses that compete directly or indirectly with us or that may be complementary to our business. For a more detailed discussion of these and other challenges and
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001375476_power_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001375476_power_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary highlights selected information contained in this prospectus. Before making an investment decision, you should read the entire prospectus carefully, including the "Risk Factors" section, the financial statements and the notes to the financial statements. Unless otherwise noted, all dollar amounts disclosed are disclosed in Canadian dollars. References to the "Company," "we," our or "us" refer to Liberty Petroleum Inc. unless the context otherwise indicates. Our Company We were formed as a corporation under the Federal laws of Canada pursuant to the Canada Business Corporations Act on April 25, 2005 under the name Liberty Gold Corp. On June 23, 2006 at an annual general and special meeting of shareholders, a majority of the shareholders of the Company approved a change in business of the Company from mineral exploration to oil and gas exploration and extraction. At the same meeting, a majority of the shareholders of the Company approved a change in name of the Company to Liberty Petroleum Inc. On March 15, 2006, we entered into an agreement giving the Company the exclusive right and option to acquire a 100% interest in a mineral exploration property known as the GQ Property located in the Kamloops Mining District of British Columbia. The Company could have exercised its option by making cash payments totaling CDN $103,000 and incurring net expenditures on the property of at least CDN $110,000 by March 15, 2010. The Company paid the initial $3,000 deposit as required under the agreement but did not commence exploration. In relation to our decision to pursue opportunities in the oil and gas industry, the Company terminated the GQ Property option on May 31, 2006. The Company is now principally a company engaged in the acquisition and exploration of oil and gas properties. The Company entered into its first natural gas property lease agreement on June 14, 2006 through a Petroleum, Natural Gas and General Rights Conveyance with Stone Petroleums Ltd., Supernova Resources Ltd., 349385 Alberta Ltd., and Torland Ltd. (collectively, the Vendor ) whereby the Company acquired a 100% interest in a Petroleum and Natural Gas lease with the government of the Province of Alberta. The property to which the lease pertains is located in the Milk River area of Alberta. The lease provides to the Company the right to explore the property. The lease expires on July 14, 2010 but can be renewed. Upon signing of the agreement, the Company paid the Vendor CDN $7,500 and agreed to assume the underlying lease payments to the Province of Alberta of the greater of CDN$3.50 per hectare or CDN$50 per year. In addition, pursuant to a Royalty Agreement, dated June 14, 2006, between the Company and the Vendor, the Vendor is entitled to an overriding 5% royalty on all petroleum substances produced from the Milk River Property, if any. The Vendor is entitled to a first and paramount lien upon all of the petroleum substances produced or allocated to the Milk River Property to secure the payment of any amounts due and payable to the Vendor relating to the royalty. We are an oil and gas exploration company in the exploration stage and have only begun limited operations. We cannot give assurance that commercially viable deposits of oil or natural gas exist on our property. Extensive geological analysis of the property will be required before we can make an evaluation as to the economic feasibility of developing or finding valuable resources on these grounds. We have not, as yet, identified any oil and gas resources on the property. No commercially viable oil or natural gas resources may exist on our property. Our plan of operations is to carry out geological analysis of our lease in order to ascertain whether it possess oil or natural gas. We can provide no assurance to investors that our project contains a commercially viable oil or natural gas deposit until appropriate exploratory work is done and an evaluation based on that work concludes further work programs are justified. At this time, we definitely have no known reserves on our property. For the period from April 25, 2005 (inception) to December 31, 2006, we did not generate any revenue nor have we generated any revenue during fiscal 2007 through to, and including, the date of this prospectus. Our LIBERTY PETROLEUM INC. (Formerly Liberty Gold Corp.) (An Exploration Stage Company) FINACIAL STATEMENTS JUNE 30, 2007 (Stated in Canadian Dollars) (Unaudited) F - ____________________________ PROSPECTUS ____________________________ 46,359,750 COMMON SHARES LIBERTY PETROLEUM INC. We have not authorized any dealer, salesperson or any other person to give any information or to represent anything other than those contained in this prospectus in connection with the offer contained herein, and, if given or made, you should not rely upon such information or representations as having been authorized by Liberty Petroleum Inc. This prospectus does not constitute an offer of any securities other than those to which it relates or an offer to sell, or a solicitation of an offer to buy, those to which it relates in any state to any person to whom it is not lawful to make such offer in such state. The delivery of this prospectus at any time does not imply that the information herein is correct as of any time after the date of this prospectus. _______________, 2007 As filed with the Securities and Exchange Commission on October 8, 2007 Registration No. 333-137571 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 4 ON FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 LIBERTY PETROLEUM INC. (Exact name of Registrant as specified in its charter) Canada 1311 Not Applicable (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code) (I.R.S. Employer Identification No.) 4620 Manilla Road SE Calgary, Alberta, T2G 4B7 Tel: (604) 803-1344 (Address and telephone number of Registrant's principal executive offices) David Lubin & Associates, PLLC 26 E. Hawthorne Ave. Valley Stream, NY 11580 Tel: (516) 887-8200 Fax: (516) 887-8250 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies of all Correspondence to: David Lubin, Esq. David Lubin & Associates, PLLC 26 E. Hawthorne Avenue Valley Stream, NY 11580 Tel: (516) 887-8200 Facsimile No.: (516) 887-8250 Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this registration statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box: [x] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [ ] PROSPECTUS, SUBJECT TO COMPLETION, DATED ______, 2007 LIBERTY PETROLEUM INC. 46,359,750 COMMON SHARES This prospectus relates to the sale of up to 46,359,750 Common shares without par value by persons who are shareholders of Liberty Petroleum Inc. The shares registered in this prospectus include: 11,709,750 Common shares currently outstanding; and 11,550,000 Common shares issuable upon the exercise of Class A warrants with an exercise price of CDN $0.25 per share; and 11,550,000 Common shares issuable upon the exercise of Class B warrants with an exercise price of CDN $0.50 per share; and 11,550,000 Common shares issuable upon the exercise of Class C warrants with an exercise price of CDN $1.00 per share. There is no public market for our securities. After the date of this prospectus, we expect to have an application filed with the National Association of Securities Dealers, Inc. for our common shares to be eligible for trading on the OTC Bulletin Board. Until our common shares becomes eligible for trading on the OTC Bulletin Board, the selling stockholders will be offering our common shares at a price of $0.10 per share. We will not receive any of the proceeds from the sale of the shares by the selling securityholders; however, we may receive up to CDN $20,212,500 from the exercise of warrants for up to 34,650,000 Common shares if all of such warrants are exercised in full. All costs associated with this registration will be borne by us. Each of the selling stockholders may be deemed to be an "underwriter," as such term is defined in the Securities Act of 1933. The selling stockholders may sell the shares from time to time at the prevailing market price or in negotiated transactions. There has been no market for our securities and a public market may not develop, or, if any market does develop, it may not be sustained. As of October 8, 2007, we had 41,709,750 Common shares issued and outstanding. INVESTING IN OUR SECURITIES INVOLVES SIGNIFICANT RISKS. SEE RISK FACTORS BEGINNING ON PAGE 4. Each of the United States Securities and Exchange Commission, the British Columbia Securities Commission and state securities regulators has not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The information in this prospectus is not complete and may be changed. This prospectus is included in the registration statement that was filed by us with the Securities and Exchange Commission. The selling securityholders may not sell these securities until the registration statement becomes effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. The date of this prospectus is ______________, 2007. principal offices are located at 4620 Manilla Road SE, Calgary, Alberta, T2G 4B7; our telephone number is (403) 243-6333. We do not yet maintain an Internet address. The Offering Securities offered 46,359,750 Common shares. (1) Offering Price Until our common shares become eligible for trading on the OTC Bulletin Board, the selling stockholders will be offering our common shares at a price of $0.10 per share. The price of $0.10 was determined arbitrarily. Shares to be outstanding after the offering if none of the warrants are exercised 41,709,750 Common shares. (2) Shares to be outstanding after the offering if all of the warrants are exercised 76,359,750. (3) Use of Proceeds We will not receive any proceeds from the sale of the Common Shares by the selling stockholders; however, we may receive up to CDN $20,212,500 from the exercise of warrants for up to 34,650,000 Common shares of our common shares if all of such warrants are exercise in full. See Use of Proceeds." Plan of Distribution The offering of our common shares is being made by certain of our stockholders who wish to sell their shares. Sales of our common shares may be made by the selling stockholders in the open market or in privately negotiated transactions and at fixed or negotiated prices. Until our common shares become eligible for trading on the OTC Bulletin Board, the selling stockholders will be offering our common shares at a price of $0.10 per share Risk Factors There are substantial risk factors involved in investing in our company. For a discussion of certain factors you should consider before buying our common shares, see the section entitled "Risk Factors". Symbol Not listed (1) Includes (a) 11,709,750 Common shares currently outstanding, and (b) up to 34,650,000 Common shares issuable upon exercise of Class A warrants at an exercise price of CDN$0.25 per share, Class B warrants at an exercise price of CDN$0.50 per share and Class C warrants at an exercise price of CDN$1.00 per share. The warrants become exercisable on May 26, 2008 unless we accelerate the exercise date. The Class A warrants expire at the close of business on May 26 , 2010, the Class B warrants expire at the close of business on May 26, 2011 and the Class C warrants expire at the close of business on May 26, 2012. (2) Such figure does not include 34,650,000 Common shares issuable upon exercise of the Class A, Class B and Class C warrants. This amount represents the number of shares issued and outstanding as of October 8, 2007. (3) Such figure includes the 34,650,000 Common shares issuable upon exercise of the Class A, Class B and Class C warrants. Description of Financing Transactions On April 25, 2005 we issued an aggregate of 30,000,000 common shares at CDN$0.0001 per share, for gross proceeds of CDN $3,000, to the founders of the Company as follows: 16,000,000 common shares were issued to Paul Uppal, our Chairman, President, Chief Executive and Operating Officer and Secretary; and 14,000,000 common shares were issued to Greg Crowe, a director at that time. Pursuant to agreements entered into with Messrs. Uppal and Crowe on April 30, 2006, the Company holds an irrevocable right to repurchase all or a portion of these shares for a price of CDN$0.01 per share. This repurchase option is exercisable by us if, at any time on or before April 30, 2025, such stockholder ceases to be a director of the Company. Mr. Crowe has since resigned as our director, and, pursuant to a share purchase agreement dated August 17, 2006, he sold his 14,000,000 common shares LIBERTY PETROLEUM INC. (Formerly Liberty Gold Corp.) (An Exploration Stage Company) Balance Sheets June 30, 2007 (unaudited) and December 31, 2006 (Canadian Dollars) June 30 December 31 2007 2006 Assets Current Cash $ 1,648 $ 3,546 Short-term investment 71,008 90,673 Receivables 1,807 679 Prepaid expenses 1,644 1,912 Total current assets 76,107 96,810 Oil and gas property interests 9,334 8,438 Total Assets $ 85,441 $ 105,248 Liabilities Current Accounts payable and accrued liabilities $ 14,567 $ 14,415 Total Liabilities 14,567 14,415 Shareholders Equity Capital Stock Authorized Unlimited common shares without par value Unlimited preferred shares without par value Issued and outstanding 41,709,750 common shares without par value 134,475 134,475 Deficit Accumulated During the Exploration Stage (63,601 ) (43,642 ) Total Shareholders Equity 70,874 90,833 Total Liabilities and Shareholders Equity $ 85,441 $ 105,248 See note to financial statements. F - PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 6. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS Our By-laws provide that to the fullest extent permitted by the Canada BusinessCorporations Act, the Company shall indemnify a director or officer of the Company, a former director or officer of the Company, or a person who acts or has acted at the Company s request as a director or officer of a body corporate of which we are a shareholder or creditor. We believe that the indemnification provisions in our By-laws are necessary to attract and retain qualified persons as directors and officers. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted for directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. ITEM 7. RECENT SALES OF UNREGISTERED SECURITIES The following sets forth information regarding all sales of our unregistered securities during the past three years. Some of the holders of the shares issued below may have subsequently transferred or disposed of their shares and the list does not purport to be a current listing of the Company's stockholders. During the last year, we have issued unregistered securities to the persons, as described below. None of these transactions involved any underwriters, underwriting discounts or commissions, or any public offering, and all these transactions involved non-U.S. persons not citizens or residents in the United States. We believe that each transaction was exempt from the registration requirements of the Securities Act of 1933 by virtue of Regulation S promulgated thereunder. All recipients had adequate access, through their relationships with us, to information about us. In May, 2005, we issued 11,550,000 of our Units for $0.01 per Unit which consisted of one share of Common share and one Class A, Class B and Class C warrant to purchase Common shares. We believe this offering was deemed to be exempt under Regulation S of the Securities Act. No advertising or general solicitation was employed in offering the securities. The offers and sales were made to accredited investors. We believe that this transaction was exempt from the registration requirements of the Securities Act of 1933 by virtue of Regulation S promulgated thereunder. In April, 2005, we issued 16,000,000 Common shares to our founder and Chief Executive Officer, Paul Uppal. These shares were issued to our founder in relation to the establishment of the Company. We believe this offering was deemed to be exempt under Section 4(2) of the Securities Act and/or Regulation S promulgated under the Securities Act. In April, 2005, we issued 14,000,000 Common shares to our director and founder, Greg Crowe. These shares were issued to our founder in relation to the establishment of the Company. TABLE OF CONTENTS Page Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001375890_education_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001375890_education_prospectus_summary.txt
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+Prospectus Summary 1
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new file mode 100644
index 0000000000000000000000000000000000000000..a1f3e47c2af3f5be6bc3401dbc822f6821adba63
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+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001375892_mcm_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001375892_mcm_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..a1f3e47c2af3f5be6bc3401dbc822f6821adba63
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+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001375893_edmc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001375893_edmc_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a1f3e47c2af3f5be6bc3401dbc822f6821adba63
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@@ -0,0 +1 @@
+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001375894_edmc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001375894_edmc_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a1f3e47c2af3f5be6bc3401dbc822f6821adba63
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@@ -0,0 +1 @@
+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001375895_brown_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001375895_brown_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..a1f3e47c2af3f5be6bc3401dbc822f6821adba63
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@@ -0,0 +1 @@
+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001375896_connecting_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001375896_connecting_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..a1f3e47c2af3f5be6bc3401dbc822f6821adba63
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+Prospectus Summary 1
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+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001375898_aiim_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001375898_aiim_prospectus_summary.txt
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+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001375899_aih_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001375899_aih_prospectus_summary.txt
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+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001375900_aid_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001375900_aid_prospectus_summary.txt
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+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001375901_higher_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001375901_higher_prospectus_summary.txt
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+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001376110_china_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001376110_china_prospectus_summary.txt
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+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001376556_vaughan_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001376556_vaughan_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary provides a brief overview of key aspects of the offering. However, it is a summary and may not contain all of the information that is important to you. For a more complete understanding of this offering, we encourage you to read the entire prospectus, including our financial statements and the notes to those statements. All share information in this prospectus has been retroactively adjusted to reflect a stock dividend of 2,874 shares for each share of common stock (which increased our outstanding shares of common stock to 2,300,000 shares) and the related increase in our authorized shares approved in June 2006 and effective in September 2006. All information also gives retroactive effect (as if such acquisition had occurred before the date of such information) to our expected acquisition of Allison s Gourmet Kitchens, LP, a processor of refrigerated prepared salads, which we refer to as Allison s, including its recently acquired division, Wild About Food, a processor of freshly prepared soups and sauces. Allison s is currently owned by three of our officers and a director nominee who have agreed to contribute or sell their interests to us. The closing of the acquisition of Allison s is a condition to the closing of this offering. Vaughan Foods, Inc. Overview We process and package value-added, refrigerated foods which we distribute to our customers three or more times per week in our fleet of refrigerated trucks and trailers. Distribution is concentrated in the 12-state marketing area within a 500 mile radius of our plant in Moore, Oklahoma, a suburb of Oklahoma City, consisting of all or portions of the states of Arkansas, Colorado, Iowa, Kansas, Louisiana, Mississippi, Missouri, Nebraska, Oklahoma, New Mexico, Tennessee and Texas. Our marketing area is largely determined by the short shelf life of our products and, to a lesser extent, by the cost of refrigerated shipping. Our principal products fall into two categories: refrigerated prepared salads, such as chicken, tuna, bean and pasta salads, coleslaw and potato salad, and fresh-cut produce, primarily salads and salad mixes. However, until the end of 2002 our line consisted primarily of fresh-cut produce which we packaged and sold to food service customers. In 2002, we began to expand our operations into a more diverse line of refrigerated foods in order to provide opportunities for greater profit margins. First, we added a limited number of refrigerated prepared salads. In March 2003, three of our officers, together with Herb Grimes, a director nominee, co-founded Allison s Gourmet Kitchens, LP to process a line of refrigerated prepared salads for retail outlets, as well as our historical food service customers and restaurant chains. These refrigerated prepared salads generate higher gross profit margins than our fresh-cut produce. Allison s is integrated with our operations. It uses our production facility in Moore, Oklahoma and our distribution network, including our fleet of refrigerated tractors and trailers, and shares certain office, managerial and other personnel. Allison s also utilizes our fresh-cut produce in making its prepared salads. Also, since 2002 we have been expanding our fresh-cut line to include more salad mixes, packaged to better meet the needs of retail chain store accounts. These salad mixes for retailers also typically enjoy higher gross profit margins than produce sold to food service customers. We process approximately 1.4 to 1.7 million pounds of fresh-cut, ready-to-eat branded and private label salads every week and produce approximately 70 different salad products in a variety of food service and retail package sizes, including custom vegetable mixes and custom sized packages for our large volume customers. Salads and salad mixes are sold primarily to restaurant chains, food service businesses, institutional users and, to a lesser extent, retail chains while the bulk of our refrigerated prepared salads are sold to grocery store deli departments, food service distributors and regional restaurant chains. A substantial element of our growth plan is focused on our higher margin opportunities. In accordance with this plan, in June 2006, Allison s acquired Wild About Foods, Inc., a processor of soups, stews, sauces and side dishes. Competitive Strengths We believe we have a number of competitive strengths that in combination contribute to our ability to compete and achieve our growth plans: Frequent deliveries. We deliver our perishable and short shelf life products three or more times per week. Our frequent deliveries coupled with our assistance to customers on how to handle our products on a first in first out basis insure the freshness of our product to the ultimate consumer. AMENDMENT NO. 10 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Distribution capability. We maintain a fleet of 23 trucks and 28 fifty-three foot refrigerated trailers giving us rapid delivery capability and strong logistical control. Diverse and customized products. We offer a diverse range of ready-to-order quality products in convenient packaging types and sizes. We can also deliver customized cut-to-order fresh-cut produce to distributors in less than two days. Single source supplier. As a single source supplier of both packaged fresh-cut salads and refrigerated prepared salads, we allow customers the opportunity to consolidate their sources of supply. Diverse sources of supply. In 2006, we purchased ingredients from approximately 50 suppliers in five diverse growing regions (California, Arizona, Colorado, Florida and Mexico). This geographic diversity reduces our risk of shortfalls in supplies due to natural disasters, labor disruptions and other supply interruptions in any one area. Broad customer base. We currently have approximately 140 recurring end-user revenue accounts throughout the Plains States, Southwest and Southeast. Growth Plan We currently supply only a small part of the demand of our larger clients for our refrigerated prepared salads and fresh-cut salad and salad mixes. Our ability to supply our customers needs within our existing 12-state marketing area is constrained by the size limitations of our existing plant and the limitations of our product line. In order to supply the needs of these customers and potential new customers outside of our primary market area, we would need to create other new facilities. We believe that our existing customers would buy additional products that we add to our line. Accordingly, we plan to enlarge our business by taking the following steps, which are more fully described under Business - Growth Plan : Increase productive capacity for refrigerated prepared salads. Increase utilization of refrigerated delivery capacity. Broaden product line through internal growth and the acquisition of complementary businesses. We believe that the addition of these products as well as organic fruits and vegetables, side dishes, preservative free salad kits and other refrigerated products will enable us to more fully meet the needs of our existing restaurant chain and food service businesses. Broaden market reach. Many of our existing customers operate beyond our primary market area. We believe that we can broaden business with these customers and also add new customers, particularly in the Midwest, by building or acquiring new facilities in contiguous and other marketing areas. We believe that our reputation is known in some surrounding areas and that this should facilitate our geographic expansion. Strategic Acquisitions. Though much of our growth plan is based on internal growth, we also plan, where feasible, to add to our customer base, increase market share, increase our geographic reach, enhance our productive capacity and broaden our product line by acquisition of regional competitors. Our ability to achieve our growth plan depends upon our ability to avoid a number of risks including possible contamination or mislabling of our products and the resultant occurrence of product liability claims, product recalls or increased scrutiny by regulators; increases in agricultural commodity costs beyond our ability to recover them through increased prices; disruption at our processing plant; changes in consumer preferences for fresh cut produce or refrigerated prepared salads; and our inability to compete against large national processors with greater financial resources and, on occasion, cost benefits in purchasing produce. We may also prove to be unable to appropriately manage our growth or lose one or more of our existing larger customers. All of these factors are
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001376634_transtech_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001376634_transtech_prospectus_summary.txt
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+MANAGEMENT Executive Officers, Directors and Special Advisors Our current executive officers, directors and special advisors are as follows: Name Age Position Suresh Rajpal 63 Chief Executive Officer, President and Chairman of the Board LM Singh 41 Chief Financial Officer, Executive Vice President, Treasurer, Secretary and Director Graham Norton-Standen 50 Director of Strategy and Director Frederick Smithline 75 Director Hemant Sonawala 69 Director Chandru Jagwani 62 Special Advisor Pervez A. Ahmed 58 Special Advisor Suresh Rajpal has been our Chairman of the Board of Directors, Chief Executive Officer and President since our incorporation on August 16, 2006. Mr. Rajpal offers over 35 years of entrepreneurial and multinational work experience covering the United States, Japan, Hong Kong and India. He was the recipient of the Entrepreneur of the Year Award for companies started in the previous three years from Ernst & Young, India in 2000. In addition, he has received the U.S. Ambassador s Award for distinguished service in strengthening the relationship between the United States and India and for extraordinary service to American business in India as President of the American Business Council. Mr. Rajpal established Hewlett-Packard Company s India operations in 1989 and was its President and Chief Executive Officer since setting up the operations until 1999. From 1984 to 1988, Mr. Rajpal was the Director of Sales, Marketing & Support at Hewlett-Packard Company Asia with accounts generating revenue in excess of $1.6 billion. Mr. Rajpal s career with Hewlett-Packard Company spanned 29 years in several senior managerial positions in the United States, Canada, Asia and Latin America. Following Hewlett-Packard, Mr. Rajpal co-founded eCapital Solutions in April 1999, a company that owned intellectual properties in a number of different technology areas. Until April 2001, Mr. Rajpal was the President and Chief Executive Officer of Trigyn Technologies Limited which was formed through the merger of eCapital Solutions and Leading Edge Systems Ltd, a listed entity on the Bombay Stock Exchange in India. In September 2001, Mr. Rajpal co-founded Tecnova India, which provides consulting services to emerging growth companies in India. In July 2006, he founded Visnova Solutions, a focused software solutions and high-end KPO/BPO organization. Mr. Rajpal currently serves as a member of the board of directors of various public and privately held companies which include Chairman of the Board of Directors of Four Soft Ltd, an enterprise solutions company that develops software products, listed on the National Stock Exchange (NSE) India; GISIL Ltd., which specializes in designing and building device optimizing technologies for embedded computing devices and MAHLE Filter Systems India, an Indian subsidiary of the MAHLE Group, Germany, a leader in engine components worldwide. He is the Business Excellence advisor to the Anand Automotive Systems group of companies, a leading manufacturer of automotive components and systems in India, and chairs their IT committee. Mr. Rajpal is an Electrical Engineer from the Benaras Hindu University, India and earned his MBA from York University, Toronto, Canada. LM Singh has been our Chief Financial Officer, Executive Vice President, Secretary and Treasurer and a member of our Board of Directors since our incorporation. He has over 20 years experience in a global work environment covering private equity investments, corporate finance, buy-outs, capital markets, audit and control. Since January 2003, Mr. Singh has been the founder and managing partner of Lotus Capital Partners, LLC, New York, an investment advisory firm that specializes in cross-border transactions between the United States and India for companies primarily in the software and business services sector. In February 2005, Mr. Singh co-founded FiNoble Advisors Ltd, New Delhi, India, an investment and advisory firm providing investment banking, India entry, asset management services and since inception has been a partner in the firm s asset management practice, FiNoble Lotus Management Advisors Ltd. which specializes in creating alternative investment opportunities for overseas investors that seek to leverage India as an investment destination. From May 1995 to November 2002, Mr. Singh managed private equity investments, re-structuring and post merger integration activities and held several managerial positions at TAIB Bank E.C, and its affiliates, a boutique merchant bank headquartered in Bahrain pursuing investment activities across India, the United States, Europe and the Persian Gulf region. From August 2001 to November 2002, he served as President of TAIB Securities New York with countryhead responsibilities for TAIB Securities, London. From January 2000 to July 2001, Mr. Singh served as Group Executive Director and member of the board of directors for Mindteck, a global technology services provider, focused on IT applications and embedded systems. Mr. Singh graduated from Sri Ram College of Commerce, Delhi University, India, with a Bachelor in Commerce (Hons.) and qualified as a Chartered Accountant, training with Price Waterhouse, New Delhi, India. He is a member of the Institute of Chartered Accountants of India, Institute of Internal Auditors (USA) and the Information Systems Audit and Control Association (CISA) (USA). Graham Norton-Standen has been a director of our company and our Director of Strategy since September 25, 2006. Since 2002, Mr. Norton-Standen has been the Chairman and Chief Executive Officer of Applied Intelligence Group, a consulting firm focused on providing brokering, information technology, business transformation and structured investment services covering Europe, North America and Asia Pacific. From 1999 through 2002, as the Chief Executive Officer of Gartner International, a leading technology-related research and consulting service provider, Mr. Norton-Standen was responsible for all of the company s business outside the United States and was instrumental in restructuring the company. From 1995 through 1999, Mr. Norton-Standen served at various senior level positions at EDS, a Fortune 500 service provider, with a portfolio that includes information-technology, applications and business process services. He was President, Strategic Growth Market, EDS (1998-99), the Group Managing Director, Emerging Markets of EDS (1996 to 1998), Managing Director of the Wireless Division Europe (1995 to 1996) and the Managing Director of the EDS Communications and Media Division in 1995. Prior to joining EDS, Mr. Norton-Standen worked for Digital Equipment Corporation in the Energy and Utilities sector from 1987 to 1994. During this period, he became the head of business development, which included guiding a number of U.K., European and Asia Pacific utilities companies on IT issues in the critical run-up to privatization in 1989. From 1994 to 1995, he was Director of the Mega Deal Group. Mr. Norton-Standen has served as board member and/or corporate advisor to a number of professional and government bodies including the European Commission, the World Energy Council, the Centre for European Policy Studies and the Governments of Sweden and Australia in the run up to privatization of certain industries. He also served as a board member to the United States Trade and Investment Council based in Brussels. He is currently on the board of Educational Adventures Danger Rangers in the United States, a U.S. cartoon company, focused on child safety, E-Pocket, an electronic payments company, Global Sterling Payments Systems (Canada) & (UK) and is an Advisor to IntegraSP.UK, a provider of seamless technology integration solutions. Hemant S. Sonawala has been a director of our company since September 25, 2006. He was the recipient of the Dataquest Lifetime Achievement Award in 2005. Mr. Sonawala was Vice-Chairman of Digital GlobalSoft Ltd., India from January 1988 until April 2004, a leading software services company, listed on the Bombay Stock Exchange, India, which was subsequently acquired by Hewlett-Packard Company. From 1992 to 1999, Mr. Sonawala was Chairman of Hinditron Schiller Medical Instruments Ltd., a joint venture he formed with Schiller, a leading international manufacturer and supplier of electro cardio-graphs, spirometers, patient monitors and external defibrillators to make available Schiller s products in India. Mr. Sonawala was founder and Deputy Chairman of Hinditron Tektronix, later Chairman of Tektronix (India) Limited, from 1985 to 1996, a joint venture with Tektronix (a provider of test, measurement and monitoring solutions catering to design centers, laboratories and communications networks) to introduce Tektronix s vast array of patented products to India. Mr. Sonawala s current directorships include Exevo India Limited, a Knowledge Process Outsourcing company that provides market research globally with their end-to-end research and support processes, Spryance Inc. USA, a provider of medical transcription services and technologies to healthcare providers and NetAcross Holding and Investments Pvt. Ltd. Mr. Sonawala holds a bachelor s degree in Engineering from Gujarat, India and Master of Science in Electrical Engineering. from University of Washington, Seattle, Washington. Frederick E. Smithline has been a director of our company since September 25, 2006. Mr. Smithline has been practicing corporate law in New York City for over 40 years. After graduation from The Harvard Law School in 1955, Mr. Smithline served for two years in the U.S. Army Counterintelligence Corps in Germany. From 1957 to date, he has been practicing corporate and securities law in various law firms, except for the period from 1969 to 1973, when he was a principal in two Wall Street investment banking firms. From 1982 to the present, Mr. Smithline was a Partner and Counsel in Epstein, Becker and Green, Counsel to Fischbein, Badillo, Wagner & Harding and presently, Counsel to Eaton & Van Winkle. Mr. Smithline specializes in advising early stage companies on structure and finance. He has served on public boards including more than 20 years as a director and then Chairman of DVL, Inc., a publicly traded finance company (1982 to 2003) and the Hungarian Broadcast Company, a media Company (1998 to 2000). He was a co founder of International Isotopes, Inc., a publicly-traded company that is in the business of making radioactive isotopes for diagnostic and therapeutic purposes. Special Advisors Chandru Jagwani is a special advisor to our company. Mr. Jagwani has been the Founder, Chief Executive Officer and President of Diversified Impex Corp. since September 1972. Diversified Impex Corporation is involved in international trade finance and has clients in various industries. At Diversified Impex Corporation, Mr. Jagwani has been involved in the export of U.S. auto and off highway equipment parts to India, Latin America and the Middle East, including the export of spares of Gould, Clevite, Caterpillar Inc., Cummins Inc., Detroit Diesel Corp. and International Harvester. Mr. Jagwani also has extensive experience in international trade in auto parts, steel and engineering products from India, Taiwan and Singapore. Mr. Jagwani currently serves as a special advisor to Millennium India Acquisition Company Inc., a blank check public company traded on the American Stock Exchange and focusing on operations primarily in India (largely privately owned businesses within the financial services, healthcare, infrastructure and consumer, retail and hospitality sectors). Mr. Jagwani graduated with a degree in Electrical Engineering from Jodhpur University in India and subsequently received his MBA from the University of Bridgeport, Connecticut, in 1970. Dr. Pervez Ali Ahmed is a special advisor to our company. Dr. Ahmed has been the Assistant Professor of Clinical Medicine SUNY, Health Science Center Downstate since 1978 and is currently attending in Medicine, Cardiology and Critical Care at Brookdale Hospital Medical Center in Brooklyn New York and in Medicine at Lenox Hill, Kings Highway/Beth Israel. In 1987, Dr. Ahmed was co-Director of Escorts Heart Institute, New Delhi and along with Dr. Naresh Trehan, he helped establish one of India s earliest super specialty hospitals. Subsequently, he set up a multi physician Cardiology Group Practice in New York. Between 1999 and 2002, Dr. Ahmed was involved in planning, consulting and designing a new hospital in New Delhi and served as its Director. Since 2004, Dr. Ahmed has been a member of the Board of Directors of Max Healthcare in New Delhi, one of India s leading specialized healthcare service providers. Dr. Ahmed graduated with his M.B.B.S. from the Armed Forces Medical College, Pune in May 1970 and subsequently completed his Internal Medicine Residency in Internal Medicine in Cardiology. His post-graduate qualifications include: Diplomate American Board Internal Medicine, in June 1976, Diplomate ABIM, Cardiovascular Disease in October 1997 and Board Eligible ABIM, Critical Care Medicine. No Assurance of Future Services from Executive Officers or Board Members The future role of our management team and board members following a business combination is not currently known. Our executive officers and directors are not obligated to remain with us after a business combination. While we believe that one or more target businesses with which we may combine may find our executive officers and directors to be highly experienced and attractive candidates to fill post-combination officer and director positions, we cannot assure you that a combination agreement will call for the retention of our current management team. If the agreement does not, our executive officers and directors may not continue to serve in those capacities after we have completed a business combination. Number and Terms of Directors Our board of directors is comprised of five members, each of whom shall serve as director until his or her successor is duly elected and qualified at the next annual meeting of stockholders. Together with our special advisors, these individuals will play a key role in identifying and evaluating prospective acquisition candidates, selecting the target business and structuring, negotiating and consummating its acquisition. None of these individuals has been a principal of or affiliated with a blank check company, other than Chandru Jagwani, one of our special advisors. However, we believe that the skills and expertise of these individuals, their collective access to acquisition opportunities and ideas, their contacts, their familiarity with BPO and KPO service companies and their transaction expertise should enable them to successfully identify and effect an acquisition, although we cannot assure you that they will, in fact, be able to do so. Our company s management, including its special advisors, have strong local presence, significant experience in India s business process outsourcing sector, hands-on experience in offshoring U.S. operations to India and cross-border transactional experience. This combination of resources and experience positions the company to capitalize on the significant economic opportunities in India over the next several years, including strategic investments in Indian business processing outsourcing providers. Our management and our special advisors comprise seasoned professionals with substantial experience in private equity investing, operations, and restructuring of businesses, including the integration of mergers and acquisitions. Audit Committee Our board of directors intends to establish an audit committee within 90 days following the effective date of this offering, at which time our board intends to adopt an audit committee charter. Director Independence Our board of directors has determined that Hemant S. Sonawala and Frederick Smithline are independent directors within the meaning of Rule 10A-3 promulgated under the Exchange Act. We intend to locate and appoint additional independent directors to serve on the board of directors and audit committee from time to time to comply with applicable U.S. federal securities laws. Code of Ethics Prior to the effective date of this offering, we will adopt a code of ethics applicable to our principal executive officers in accordance with applicable U.S. federal securities laws. Executive Compensation No executive officer has received any cash compensation for services rendered and no compensation of any kind, including finder s and consulting fees, will be paid to any of our existing stockholders, officers, directors, special advisors or any of their respective affiliates. Moreover, none of our existing stockholders, officers, directors, special advisors or any of their respective affiliates will receive any cash compensation for services rendered prior to or in connection with a business combination. However, all of these individuals will be reimbursed for any out-of-pocket expenses incurred in connection with activities on our behalf, such as identifying potential target businesses and performing due diligence on suitable business combinations. Such individuals may be paid consulting, management or other fees from target businesses as a result of the business combination, with any and all amounts, to the extent then known, being fully disclosed to stockholders in the proxy solicitation materials furnished to the stockholders. It is unlikely the amount of such compensation will be known at the time of a stockholder meeting held to consider a business combination, as it will be up to the directors of the post-combination business to determine executive and director compensation. In this event, such compensation will be publicly disclosed at the time of its determination in a Form 8-K, as required by the SEC. We maintain offices at 445 Fifth Avenue, Suite 30H, New York, New York 10016. The cost for this space is included in the $7,500 per month fee paid to Lotus Capital LLC for general and administrative services. We believe that, based on rents and fees for similar services in the New York metropolitan area, the fee charged by Lotus Capital LLC is at least as favorable as we could have obtained from an unaffiliated third party. This agreement commences on the date of this prospectus and will continue until 18 months after completion of this offering (or 24 months after the completion of this offering if a letter of intent, agreement in principle or definitive agreement has been executed within 18 months after completion of this offering and the business combination related thereto has not been completed within such 18-month period). Conflicts of interest Potential investors should be aware of the following potential conflicts of interest: None of our officers and directors are required to commit their full time to our affairs and, accordingly, they will have conflicts of interest in allocating management time among various business activities. In the course of their other business activities, our officers and directors may become aware of investment and business opportunities which may be appropriate for presentation to our company as well as the other entities with which they are affiliated. They may have conflicts of interest in determining to which entity a particular business opportunity should be presented. For a complete description of our management s other affiliations, see the previous section entitled Directors, Executive Officers and Special Advisors. Our officers and directors may in the future become affiliated with entities, including other blank check companies, engaged in business activities similar to those intended to be conducted by our company. Certain of our officers and directors beneficially own shares of our common stock which will be released from escrow only in certain limited situations, will own shares with respect to which they are waiving their redemption and liquidation distribution rights and, with respect to certain securities owned by them, are subject to a lock-up agreement expiring upon the consummation of a business combination. Accordingly, such individuals may have a conflict of interest in determining whether a particular target business is appropriate to effect a business combination. The personal and financial interests of our directors and officers may influence their motivation in identifying and selecting a target business, completing a business combination timely and securing the release of their stock. In the event management were to make substantial loans to us in excess of the amount outside the trust account, they may look unfavorably upon or reject a business combination with a potential target whose owners refuse to pay such amounts. In general, officers and directors of a corporation incorporated under the laws of the State of Delaware are required to present business opportunities to a corporation if: the opportunity is within the corporation s line of business; it would not be fair to the corporation and its stockholders for the opportunity not to be brought to the corporation; and the corporation could financially undertake the opportunity. Accordingly, as a result of multiple business affiliations, our officers and directors may have similar legal obligations relating to presenting business opportunities meeting the above-listed criteria to multiple entities. In addition, conflicts of interest may arise when our board evaluates a particular business opportunity with respect to the above-listed criteria. We cannot assure you that any of the above mentioned conflicts will be resolved in our favor. In order to minimize potential conflicts of interest which may arise from multiple corporate affiliations, each of our officers and directors has agreed in principle, until the earlier of the consummation of a business combination, our liquidation or such time as he ceases to be an officer or director, to present to the company for its consideration, prior to presentation to any other entity, any business opportunity which may reasonably be required to be presented to us under Delaware law, subject to any pre-existing fiduciary obligations they might have. Each of our directors has, or may come to have following the consummation of this offering, to a certain degree, other fiduciary obligations. Each of our directors may have fiduciary obligations to those companies on whose board of directors they currently sit or may sit in the future. To the extent that they identify business opportunities that may be suitable for any of these other companies, they may have competing fiduciary obligations. Accordingly, they may not present opportunities to us that otherwise may be attractive to us unless these other companies and any successors to such entities has declined to accept such opportunities. Based upon the information provided to us by our management, other than the persons or entities disclosed in this prospectus, we are not aware of any pre-existing fiduciary duties owed by our members of management to any person or entity. In connection with the vote required for any business combination, all of our existing stockholders, including all of our officers and directors, have agreed to vote their respective founding shares in accordance with the vote of the public stockholders owning a majority of the shares of our common stock sold in this offering and have agreed to waive their rights to participate in any liquidation distribution occurring upon our failure to complete a business combination with respect to those shares of common stock. In addition, our existing stockholders have also agreed to vote all shares of common stock they acquire in this offering or in the aftermarket in favor of a business combination. To further minimize potential conflicts of interest, we have agreed not to consummate a business combination with an entity which is affiliated with any of our existing stockholders unless we obtain an opinion from an independent investment banking firm that the business combination is fair to our unaffiliated stockholders from a financial point of view. We currently do not anticipate entering into a business combination with an entity affiliated with any of our existing stockholders. Our officers, directors and special advisors will also receive reimbursement for out-of-pocket expenses incurred by them in connection with activities on our behalf, such as identifying potential target businesses and performing due diligence on suitable business combinations. There is no limit on the amount of these out-of-pocket expenses, but such expenses will be subject to the review and approval of our board of directors. Although we believe that all actions taken by our officers and directors on our behalf will be in our best interests, we cannot assure you that this will be the case. PRINCIPAL STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of our common stock after giving effect to a 3 for 4 reverse stock split of our outstanding shares of common stock which occurred on January 10, 2007 and a 0.972973 for 1 reverse stock split of our outstanding shares of common stock, which occurred on February 14, 2007, and adjusted to reflect the sale of our common stock included in the private warrants sold in the private placement and offered by this prospectus (assuming no purchase of units in this offering), by: each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock; each of our officers and directors; and all our officers and directors as a group. Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them. Name and Address of Beneficial Owner(1) Amount and Nature of Beneficial Ownership(2) Approximate Percentage of Outstanding Common Stock Before Offering After Offering(3) TSP Ltd.(4) c/o Canon s Court 22 Victoria Street Hamilton HM 12 Bermuda 533,919 47.5 % 9.5 % Suresh Rajpal(5) 789,324 70.2 % 14.0 % LM Singh(5) 716,352 63.7 % 12.7 % Graham Norton-Standen 0 Frederick Smithline(6) Three Park Avenue, 16th Floor New York, New York 10016 54,730 4.9 % 1.0 % Hemant Sonawala 69/A. L. Jagmohandas Marg. Bombay, India 400 006 0 Chandru Jagwani(7) 91,216 8.1 % 1.6 % All directors and executive officers as a group (5 individuals)(5)(6)(8) 1,026,487 91.2 % 18.2 % (1) Unless otherwise indicated, the business address of each of the individuals is 445 Fifth Avenue, Suite 30H, New York, New York 10016. (2) The share amount does not include the shares of common stock underlying the private warrants sold to TSP Ltd. in a private placement, prior to the effective date of this offering described elsewhere in this prospectus. (3) Assumes the sale of 4,500,000 units in this offering, but does not include (i) 4,500,000 shares of our common stock issuable upon exercise of the warrants sold as part of such units, (ii) 1,191,667 shares of our common stock issuable upon exercise of the private warrants, (iii) 281,250 shares of our common stock included in the representatives unit purchase option or (iv) 281,250 shares of our common stock issuable upon exercise of the warrants included in the representatives unit purchase option. (4) TSP Ltd., is a company formed under the laws of Bermuda, which is wholly-owned by Suresh Rajpal (57.5%) and LM Singh (42.5%). (5) Includes 533,919 shares of our common stock owned by TSP Ltd. and, with respect to LM Singh, 72,973 shares of our common stock owned by Lotus Capital LLC, a New York limited liability company, majority-owned by LM Singh. Mr. Rajpal disclaims beneficial ownership to 42.5% of the shares owned by TSP Ltd. Mr. Singh disclaims beneficial ownership to 57.5% of the shares owned by TSP Ltd. (6) Includes 27,365 shares of our common stock owned by Mr. Smithline s spouse, with respect to which Mr. Smithline disclaims beneficial ownership. (7) Includes 47,432 shares of our common stock owned by Canak Associates LLC, a New York limited liability company, 50%-owned by Chandru Jagwani. (8) Does not include a total of 98,513 shares of our common stock issued to special advisors. Upon completion of this offering, our existing stockholders (including special advisors) will collectively own approximately 20.0% (17.9%, if the underwriters over-allotment option is exercised in full) of our issued and outstanding shares of common stock, which could permit them to effectively influence the outcome of all matters requiring approval by our stockholders at such time, including the election of directors and approval of significant corporate transactions, following the completion of our initial business combination. Prior to offering, TSP Ltd. will purchase 1,191,667 private warrants from the company at a price of $1.20 per warrant which will entitle TSP Ltd. to acquire 1,191,667 of shares of our common stock at an exercise price of $5.00 per share. The warrants are identical to the warrants included in the units in this offering. The warrants are not exercisable until the later of: (i) the completion of a business combination with a target business or (ii) one year from the date of this prospectus. The warrants expire at 5:00 p.m., New York City time on [ ], 2011, four years following the date of this prospectus, unless previously redeemed by us. On the date of this prospectus, all of our existing stockholders will place the founding shares into an escrow account maintained by Continental Stock Transfer & Trust Company, acting as escrow agent. These shares and units will be released from escrow on the earlier of (i) [ ], 2010, three years following the date of this prospectus and (ii) one year following the completion of a business combination with a target business. During the escrow period, the holders of these securities will not be able to sell or transfer their securities except, individuals may transfer securities to an entity controlled by such individual or to family members and trusts for estate planning purposes or, upon death, to an estate or beneficiaries, and entities may transfer securities to persons or entities controlling, controlled by, or under common control with such entity, or otherwise as provided in the stock escrow agreement, but will retain all other rights as our stockholders, including, without limitation, the right to vote their shares of common stock and the right to receive cash dividends, if declared. If dividends are declared and payable in shares of common stock, such dividends will also be placed in escrow. If we are unable to effect a business combination and liquidate, none of our existing stockholders will receive any portion of the liquidation proceeds with respect to common stock owned by them prior to the date of this prospectus. Although the private warrants will not be placed in escrow, TSP Ltd. will enter into a lock-up agreement wherein it will agree that it will not sell or transfer any of such securities or the shares underlying such warrants until after we have completed a business combination, subject to the same exceptions described above with respect to the escrowed securities. We consider Suresh Rajpal and LM Singh to be our promoters, as these terms are defined under U.S. federal securities laws. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On September 14, 2006, we issued an aggregate of 1,125,000 shares of our common stock adjusted for a 3 for 4 reverse stock split and 0.972973 for 1 reverse stock split on January 10, 2007 and February 14, 2007, respectively to our existing stockholders, for an aggregate of $25,000 in cash, at a purchase price of $0.022 per share, as follows: Name Number of Shares Relationship to Us TSP Ltd. 533,919 Stockholder (wholly-owned by our sponsors) Suresh Rajpal 255,405 Chief Executive Officer, President and Chairman of the Board LM Singh 109,460 Chief Financial Officer, Executive Vice President, Treasurer, Secretary and Director Frederick Smithline 27,365 Director Susan Smithline 27,365 Stockholder (spouse of Frederick Smithline) Pervez Ahmed 7,297 Special Advisor Chandru Jagwani 43,784 Special Advisor Lotus Capital LLC 72,973 Stockholder (majority-owned by LM Singh) Canak Associates LLC 47,432 Stockholder (50%-owned by Chandru Jagwani) In addition, if we take advantage of increasing the size of the offering pursuant to Rule 462(b) under the Securities Act, we may effect a stock dividend in such amount to maintain the existing stockholders collective ownership at 20.0% of our issued and outstanding shares of common stock upon completion of the offering. If we reduce the size of the offering, we may effect a reverse stock split of our common stock in order to maintain the existing stockholders allocated ownership at 20.0% of our issued and outstanding common stock upon the completion of this offering and the private placement. No less than two days before the effectiveness of the registration statement of which this prospectus forms a part, TSP Ltd., an existing stockholder, will purchase from us an aggregate of 1,191,667 warrants at $1.20 per warrant or an aggregate of $1,430,000 in a private placement. Such warrants are identical to the warrants included in the units being sold in this offering. Each warrant is exercisable into one share of common stock at $5.00 and will become exercisable on the later of (i) the completion of a business combination with a target business or (ii) one year from the date of this prospectus. The warrants will be subject to a lock-up agreement. The holders of our 1,125,000 founding shares will be entitled to registration rights pursuant to an agreement to be signed prior to the effective date of this offering. The holders of the majority of these securities and their transferees are each entitled to make up to one demand that we register the securities owned by them. The holders of the majority of these securities can elect to exercise these registration rights at any time after the date on which the securities are released from escrow. In addition, these holders have certain piggy-back registration rights on registration statements filed subsequent to such date. Also, TSP Ltd. will be entitled to demand and piggy-back registration rights with respect to the private warrants and the shares of common stock underlying the private warrants at any time after we complete a business combination. Our existing stockholders have waived their rights to participate in any liquidation distribution with respect to their founding shares but not with respect to any shares of common stock acquired in connection with or following this offering. In connection with the vote required for our initial business combination, all of our existing stockholders have agreed to vote their respective founding shares in accordance with the majority of the shares of common stock voted by the public stockholders. Our existing stockholders have agreed to vote all the shares of our common stock acquired this offering or in the aftermarket in favor of a business combination. Our existing stockholders will not have any of the conversion rights attributable to their shares. Our sponsors loaned to us the principal sum of $125,000 in order to pay certain of the expenses associated with this offering. We will repay this loan, together with interest at the rate of 4% per annum, out of the proceeds from this offering. We will reimburse our officers, directors and special advisors for any out-of-pocket business expenses incurred by them in connection with certain activities on our behalf, such as identifying and investigating possible target businesses and business combinations. Subject to availability of proceeds not placed in the trust account and interest income, net of income taxes, available to us from the trust account, there is no limit on the amount of accountable out-of-pocket expenses reimbursable by us. We have agreed with the underwriters that our board of directors will review and approve all expense reimbursements made to our officers, directors and special advisors. We have agreed to pay Lotus Capital LLC a monthly fee of $7,500 for general and administrative services, including office space, utilities and secretarial support. We believe that, based on rents and fees for similar services in the New York metropolitan area, the fee charged by Lotus Capital LLC is at least as favorable as we could have obtained from an unaffiliated third party. This agreement commences on the date of this prospectus and will continue until 18 months after completion of this offering (or 24 months after the completion of this offering if a letter of intent, agreement in principle or definitive agreement has been executed within 18 months after completion of this offering and the business combination related thereto has not been completed within such 18-month period). Other than reimbursable out-of-pocket expenses payable to our officers, directors and special advisors, the general and administrative services arrangement with Lotus Capital LLC, no compensation or fees of any kind, including finder s and consulting fees, will be paid to any of our existing stockholders who owned our common stock prior to this offering, or to any of their respective affiliates for services rendered to us prior to or with respect to the business combination. All ongoing and future transactions between us and any of our officers, directors and existing stockholders or their respective affiliates, including loans by our officers, directors and existing stockholders, will be on terms believed by us to be no less favorable than are available from unaffiliated third parties, and such transactions or loans, including any forgiveness of loans, will require prior approval, in each instance, by a majority of our uninterested independent directors or the members of our board who do not have an interest in the transaction, in either case who have access, at our expense, to our attorneys or independent legal counsel. DESCRIPTION OF SECURITIES General We are authorized to issue 20,918,920 shares of common stock, par value $0.0001 per share, and 1,000,000 shares of preferred stock, par value $0.0001 per share. As of the date of this prospectus, 1,125,000 shares of common stock, after giving effect to our 3 for 4 reverse stock split and our 0.972973 for 1 reverse stock split, are outstanding, held by nine record holders. No shares of preferred stock are currently outstanding. Units Each unit consists of one share of common stock and one warrant. Each warrant entitles the holder to purchase one share of common stock. The units will continue to trade and the common stock and warrants comprising the units will begin separate trading five business days following the earlier to occur of the expiration of the underwriters over-allotment option or its exercise in full, subject to our filing a Current Report on Form 8-K with the Securities and Exchange Commission containing an audited balance sheet reflecting our receipt of the gross proceeds of this offering and issuing a press release announcing when such separate trading will begin. We will file a Current Report on Form 8-K which includes this audited balance sheet upon the completion of this offering. The audited balance sheet will reflect proceeds we receive from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Current Report on Form 8-K. Although we will not distribute copies of the Current Report on Form 8-K to individual unit holders, the Current Report will be available on the SEC s website after its filing. For more information on where you can find a copy of these and other of our filings, see the section appearing elsewhere in the prospectus titled Where You Can Find Additional Information. Common Stock Our stockholders are entitled to one vote for each share held of record on all matters to be voted on by stockholders. In connection with the vote required for any business combination, all of our existing stockholders including all of our officers and directors, have agreed to vote their respective founding shares in accordance with the majority of the public stockholders, and to vote any shares they acquire in this offering and the aftermarket in favor of any proposed business combination. Additionally, our officers, directors and existing stockholders will vote all of their shares in any manner they determine in their sole discretion with respect to any other items that come before a vote of our stockholders, except that they will be required to vote in favor of our dissolution and liquidation. Our existing stockholders have also agreed to waive their rights to participate in any liquidation occurring upon our failure to complete a business combination, but only with respect to the founding shares and shares acquired in the private placement. We will proceed with the business combination only if a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and public stockholders owning less than 20% of the shares sold in this offering exercise their conversion rights discussed below. All of the members of our board of directors are elected in each year. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors. If we are forced to dissolve and liquidate prior to a business combination, our public stockholders are entitled to share ratably in the trust fund, inclusive of any interest not previously released to us to fund working capital requirements, and net of any income taxes due on such interest, which income taxes, if any, shall be paid from the trust fund and after payment of claims and obligations of the company. If we do not complete an initial business combination and the trustee must distribute the balance of the trust account, the representatives have agreed that: (i) they will forfeit any rights or claims to their deferred underwriting discounts and commissions, including any accrued interest thereon, then in the trust account, and (ii) the deferred underwriting discounts and commissions will be distributed on a pro rata basis among the public stockholders, together with any accrued interest thereon and net of income taxes payable on such interest. Our existing stockholders have waived their rights to participate in any liquidating distributions occurring upon our failure to complete a business combination with respect to the founding shares, and have agreed to vote all of their shares in favor of any such plan of liquidation and dissolution. However, our existing stockholders will participate in any liquidating distributions with respect to any other shares of common stock acquired by them in connection with or following this offering. Our stockholders have no redemption, preemptive or other subscription rights, and there are no sinking fund or redemption provisions applicable to the common stock, except that public stockholders have the right to have their shares of common stock converted for cash equal to their pro rata share of the trust fund if they vote against the business combination and the business combination is approved and completed. Public stockholders who redeem their stock into their share of the trust fund still have the right to exercise the warrants that they received as part of the units which they have not previously sold. Preferred Stock Our certificate of incorporation authorizes the issuance of 1,000,000 shares of blank check preferred stock with such designations, rights and preferences as may be determined from time to time by our board of directors. No shares of preferred stock are being issued or registered in this offering. Accordingly, our board is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of common stock, although the underwriting agreement prohibits us, prior to a business combination, from issuing preferred stock which participates in any manner in the proceeds of the trust fund, or which votes as a class with the common stock on a business combination. We may issue some or all of the preferred stock to effect a business combination. In addition, the preferred stock could be utilized as a method of discouraging, delaying or preventing a change in control of us. Although we do not currently intend to issue any shares of preferred stock, we cannot assure you that we will not do so in the future. Warrants Warrants issued as part of this offering Each warrant issued in this offering entitles the registered holder to purchase one share of our common stock at a price of $5.00 per share, subject to adjustment as discussed below, at any time commencing on the later of: the completion of a business combination; or one year following the date of this prospectus. The warrants included in the units sold in the offering, will expire on the fourth anniversary of the date of this prospectus at 5:00 p.m., New York City time, unless previously redeemed by us. The units will continue to trade and the common stock and warrants comprising the units will begin separate trading five business days following the earlier to occur of the expiration of the underwriters over-allotment option or its exercise in full, subject to our filing a Current Report on Form 8-K with the Securities and Exchange Commission containing an audited balance sheet reflecting our receipt of the gross proceeds of this offering and issuing a press release announcing when such separate trading will begin. We will file a Current Report on Form 8-K which includes this audited balance sheet upon the completion of this offering. The audited balance sheet will reflect proceeds we receive from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Current Report on Form 8-K. Although we will not distribute copies of the Current Report on Form 8-K to individual unit holders, the Current Report will be available on the SEC s website after its filing. For more information on where you can find a copy of these and other of our filings, see the section appearing elsewhere in the prospectus titled Where You Can Find Additional Information. We may make a mandatory redemption of all of the warrants (including any warrants issued upon exercise of the representatives unit purchase option): in whole and not in part; at a price of $.01 per warrant at any time after the warrants become exercisable; upon not less than 30 days prior written notice of redemption to each warrant holder; and if, and only if, the reported last sale price of the common stock equals or exceeds $11.50 per share for any 20 trading days within a 30 trading day period ending on the third business day prior to the notice of redemption to warrant holders. We have established these criteria to provide public warrant holders with a reasonable premium to the initial warrant exercise price as well as a reasonable cushion against a negative market reaction, if any, to our redemption call. If the foregoing conditions are satisfied and we call the public warrants for redemption, each warrant holder shall then be entitled to exercise his, her or its warrants prior to the date scheduled for redemption, however; there can be no assurance that the price of the common stock will exceed the call trigger price or the warrant exercise price after the redemption call is made. The public warrants will be issued in registered form under a warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and us. You should review a copy of the warrant agreement, which has been filed as an exhibit to the registration statement of which this prospectus is a part, for a complete description of the terms and conditions applicable to the warrants. The exercise price and number of shares of common stock issuable on exercise of the warrants may be adjusted in certain circumstances, including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuances of common stock at a price below their exercise price. The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified check payable to us, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of common stock or any voting rights until they exercise their warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders. Holders of our warrants will be able to exercise the warrants only if (i) a current registration statement under the Securities Act of 1933 relating to the shares of our common stock underlying the warrants is then effective and (ii) such shares are qualified for sale or exempt from qualification under the applicable securities laws of the states in which the various holders of warrants reside. Although we have undertaken in a warrant agreement between Continental Stock Transfer & Trust Company and us, and therefore have a contractual obligation, to use our best efforts to maintain a current registration statement covering the shares underlying the warrants following completion of this offering to the extent required by federal securities laws, and we intend to comply with such undertaking, we cannot assure that we will be able to do so. In addition, we have agreed to use our reasonable efforts to register the shares underlying the warrants under the blue sky laws of the states of residence of the exercising warrantholders, to the extent an exemption is not available. The value of the warrants may be greatly reduced if a registration statement covering the shares issuable upon the exercise of the warrants is not kept current or if the securities are not qualified, or exempt from qualification, in the states in which the holders of warrants reside. Holders of warrants who reside in jurisdictions in which the shares underlying the warrants are not qualified and in which there is no exemption will be unable to exercise their warrants and would either have to sell their warrants in the open market or allow them to expire unexercised. If and when the warrants become redeemable by us, we may exercise our redemption right even if we are unable to qualify the underlying securities for sale under all applicable state securities laws. In no event will the registered holders of a warrant be entitled to receive a net-cash settlement in lieu of physical settlement in shares of our common stock. No fractional shares will be issued upon exercise of the warrants. If upon exercise of the warrants a holder would be entitled to receive a fractional interest in a share, we will round up to the nearest whole number the number of shares of common stock to be issued to the warrant holder. Private Warrants No less than two days before the effectiveness of the registration statement of which this prospectus forms a part, TSP Ltd., an existing stockholder wholly owned by our sponsors, will purchase from us an aggregate of 1,191,667 warrants at $1.20 per warrant ($1,430,000 in the aggregate) in a private placement. Such warrants are identical to the warrants included in the units in this offering. Each warrant is exercisable into one share of common stock at $5.00 per share and will become exercisable on the later of: (i) the completion of a business combination with a target business or (ii) one year from the date of this prospectus. The warrants will expire at 5:00 p.m., New York City time, on [ ], 2011, four years following the date of this prospectus, unless previously redeemed. All of the gross proceeds from the sale of the 1,191,667 warrants in the private placement, or $1,430,000, will be deposited into the trust account. The private placement warrants contain restrictions prohibiting their transfer until the earlier of the consummation of a business combination and our dissolution and liquidation and will be subject to a lock-up agreement until such time as the restrictions on transfer expire. Furthermore, in each case, these warrants may not be transferred other than in accordance with the Securities Act of 1933, as amended. Purchase Option We have agreed to sell to the representatives an option to purchase up to 281,250 units at $10.00 per unit. The units issuable upon exercise of this option are identical to those offered by this prospectus. For a more complete description of the purchase option, see the section below entitled Underwriting Purchase Option. Our Transfer Agent and Warrant Agent The transfer agent for our securities and warrant agent for our warrants is Continental Stock Transfer & Trust Company, New York, New York. Shares Eligible for Future Sale Immediately after this offering, we will have 5,625,000 shares of common stock outstanding, or 6,300,000 shares if the underwriters over-allotment option is exercised in full. Of these shares, the 4,500,000 shares sold in this offering, or 5,175,000 shares if the underwriters over-allotment option is exercised in full, will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by any of our affiliates within the meaning of Rule 144 under the Securities Act. All of the remaining 1,125,000 shares are restricted securities under Rule 144, in that they were issued in private transactions not involving a public offering. None of those will be eligible for sale under Rule 144. Notwithstanding this, 1,125,000 of those shares have been placed in escrow and will not be transferable until the earlier of (i) , 2010, three years following the date of this prospectus and (ii) one year following the completion of a business combination with a target business, subject to certain limited exceptions, such as transfers to affiliates or to family members and trusts for estate planning purposes and upon death, while in each case remaining subject to the escrow agreement, and will only be released prior to that date if we are forced to dissolve and liquidate, in which case the securities would be destroyed, or if we were to complete a transaction after the completion of a business combination which results in all of the stockholders of the combined entity having the right to exchange their shares of common stock for cash, securities or other property. Rule 144 In general, under Rule 144 as currently in effect, a person who has beneficially owned restricted shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of either of the following: 1% of the number of shares of common stock then outstanding, which will equal 56,250 shares immediately after this offering (63,000 if the underwriters exercise their over-allotment option in full); and the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales under Rule 144 are also limited by manner of sale provisions and notice requirements and to the availability of current public information about us. Rule 144(k) Under Rule 144(k), a person who is not deemed to have been one of our affiliates at the time of or at any time during the three months preceding a sale and who has beneficially owned the restricted shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell his or her shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. SEC Position on Rule 144 Sales The SEC has taken the position that promoters or affiliates of a blank check company and their transferees, both before and after a business combination, would act as an underwriter under the Securities Act when reselling the securities of that blank check company. Accordingly, Rule 144 may not be available for the resale of those securities despite technical compliance with the requirements of Rule 144, in which event the resale transactions would need to be made through a registered offering. Registration Rights The holders of our founding shares will be entitled to registration rights pursuant to an agreement to be signed prior to the effective date of this offering. The holders of the majority of these securities and their transferees are each entitled to make up to one demand that we register the securities owned by them. The holders of the majority of these securities can elect to exercise these registration rights at any time after the date on which the securities are released from escrow. In addition, these holders have certain piggy-back registration rights on registration statements filed subsequent to such date. Also, TSP Ltd. will be entitled to demand and piggy-back registration rights with respect to the private warrants and the shares of common stock underlying the private warrants at any time after we complete a business combination. In addition, the underwriters will be entitled to certain demand and piggy-back registration rights with respect to the shares, the warrants and the shares of common stock underlying the warrants included in units subject to the underwriters option. We will bear the expenses incurred in connection with any such registration statements other than underwriting discounts or commissions for shares not sold by us. Amendments to Our Certificate of Incorporation Our amended and restated certificate of incorporation filed with the State of Delaware contains provisions designed to provide certain rights and protections to our stockholders prior to the consummation of a business combination, including: upon completion of this offering, a certain amount of the net proceeds from the offering shall be placed into the trust account, together with the proceeds from the private placement, which proceeds may not be disbursed from the trust account except in connection with a business combination, upon our dissolution and liquidation, or as otherwise permitted in the amended and restated certificate of incorporation; prior to consummating a business combination, we must submit such business combination to our public stockholders for approval; we may complete the business combination if approved by the holders of a majority of the shares of common stock issued in this offering and public stockholders owning less than 20% of the shares sold in this offering exercise their conversion rights; if a business combination is approved and completed, public stockholders who voted against the business combination and who properly exercise their conversion rights will receive their pro rata share of the trust account, including a pro rata portion of all interest earned thereon; if a business combination is not completed or a letter of intent, an agreement in principle or a definitive agreement is not signed within the time periods specified in this prospectus, then our corporate purposes and powers will immediately thereupon be limited to acts and activities relating to dissolving and winding up our affairs, including liquidation of our assets (including funds in the trust account), and we will not be able to engage in any other business activities; and we may not complete any merger, acquisition, asset purchase or similar transaction other than a business combination that meets the conditions specified in the amended and restated certificate of incorporation, including the requirement that the business combination be with one or more operating businesses whose fair market value, collectively, is at least equal to 80% of our net assets (excluding the deferred underwriting discounts and commissions) at the time of such business combination. Under Delaware law, the foregoing requirements and restrictions may be amended if our board of directors adopts a resolution declaring the advisability of an amendment which is then approved by stockholders holding a majority of our outstanding shares. Such an amendment could reduce or eliminate the protection that such requirements and restrictions afford to our stockholders. However, pursuant to our amended and restated certificate of incorporation and the underwriting agreement, neither we nor the board of directors will propose or seek stockholder approval of any amendment of these provisions without the approval of stockholders holding 95% of our outstanding shares. DIVIDEND POLICY We have not paid any dividends on our common stock to date and will not pay cash dividends prior to the completion of a business combination. After we complete a business combination, if ever, the payment of dividends will depend on our revenues and earnings, if any, capital requirements and general financial condition. The payment of dividends after a business combination will be within the discretion of our then-board of directors. Our board currently intends to retain any earnings for use in our business operations and, accordingly, we do not anticipate the board declaring any dividends in the foreseeable future. UNDERWRITING We and the underwriters for the offering named below have entered into an underwriting agreement with respect to the Units being offered. Subject to the terms and conditions of the underwriting agreement, each underwriter has severally agreed to purchase from us the number of units set forth opposite its name below. Cowen and Company, LLC and Maxim Group LLC are the representatives of the underwriters. Underwriters Number of Units Cowen and Company, LLC Maxim Group LLC Total 4,500,000 The underwriting agreement provides that the obligations of the underwriters are conditional and may be terminated if any domestic or international event or act or occurrence has materially disrupted, or in the representatives sole opinion will in the immediate future materially disrupt, general securities markets in the United States. The obligations of the underwriters may also be terminated upon the occurrence of events specified in the underwriting agreement. The underwriters have agreed, severally and not jointly, to purchase all of the units sold under the underwriting agreement if any of the units are purchased, other than the units covered by the over-allotment option and the purchase option described below. If an underwriter defaults, the underwriting agreement provides that the purchase commitments of the non-defaulting underwriters may be increased or the underwriting agreement may be terminated. We have agreed to indemnify the underwriters against specified liabilities, including civil liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make in respect thereof. The underwriters are offering the units, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel and other conditions specified in the underwriting agreement. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part. State Blue Sky Information. We will offer and sell the units to retail customers only in Colorado, Delaware, the District of Columbia, Florida, Georgia, Hawaii, Illinois, Indiana, Louisiana, New York, Rhode Island and Wyoming. We have applied to have the units registered for sale, or we are relying on exemptions from registration in the states mentioned above. In states that require registration, we will not sell the units to retail customers in these states until such registration is effective in each of these states (including in Colorado, pursuant to 11-51-302(6) of the Colorado Revised Statutes). If you are not an institutional investor, you may purchase our securities in this offering only in the jurisdictions described directly above. Institutional investors in every state except in Idaho may purchase the units in this offering pursuant to exemptions provided to such entities under the Blue Sky laws of various states. The definition of an institutional investor varies from state to state but generally includes financial institutions, broker-dealers, banks, insurance companies and other qualified entities. The National Securities Markets Improvement Act of 1996 ( NSMIA ), which is a federal statute, prevents or preempts the states from regulating transactions in certain securities, which are referred to as covered securities . This federal statute does allow the states to investigate companies if there is a suspicion of fraud, and if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. State securities laws either require that a company s securities be registered for sale or that the securities themselves or the transaction under which they are issued, are exempt from registration. When a state law provides an exemption from registration, it is excusing an issuer from the general requirement to register securities before they may be sold in that state. States, may by rule or regulation, place conditions on the use of exemptions, so that certain companies may not be allowed to rely on the exemption for the sale of their securities. If an exemption is not available and the securities the company wishes to sell are not covered securities under the federal statute, then the company must register its securities for sale in the state in question. We will file periodic and annual reports under the Exchange Act. Therefore, under NSMIA, the states and territories of the United States are preempted from regulating the resale by stockholders of the units, from and after the effective date, and the common stock and warrants comprising the units, once they become separately transferable, because our securities will be covered securities. However, NSMIA does allow states and territories of the United States to require notice filings and collect fees with regard to these transactions and a state may suspend the offer and sale of securities within such state if any such required filing is not made or fee is not paid. As of the date of this prospectus, the following states do not require any notice filings or fee payments and stockholders may resell the units, and the common stock and warrants comprising the units, once they become separately transferable: Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Massachusetts, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Utah, Virginia, Virgin Islands, Washington, West Virginia, Wisconsin and Wyoming. Additionally, the stockholders may resell the units, and the common stock and warrants comprising the units, once they become separately transferable, if the proper notice filings have been made and fees paid in the following states: District of Columbia, Illinois, Maryland, Michigan, Montana, New Hampshire, North Dakota, Oregon, Puerto Rico, Rhode Island, Tennessee, Texas and Vermont. As of the date of this prospectus, we have not determined in which, if any, of these states we will submit the required filings or pay the required fee. Additionally, if any of the states that have not yet adopted a statute, rule or regulation relating to the National Securities Markets Improvement Act adopts such a statute in the future requiring a filing or fee or if any state amends its existing statutes, rules or regulations with respect to its requirements, we would need to comply with those new requirements in order for the securities to continue to be eligible for resale in those jurisdictions. In addition, we believe that the units, from and after the effective date, and the common stock and warrants comprising the units, once they become separately transferable, may be eligible for sale on a secondary market basis in various states, without any notice filings or fee payments, based upon the availability of an applicable exemption from the state s registration requirements: commencing 90 days after the date of this prospectus in Nevada; and commencing 180 days from the date of this prospectus in Alabama. Despite the exemption from state registration provided by the National Securities Markets Improvement Act described above, the state of Idaho has advised us that it does not recognize this act as a basis for exempting registration of resales therein of securities issued in blank check offerings. We do not intend to register the resale of the securities sold in this offering in these states. Over-Allotment Option to Purchase Additional Units. We have granted to the underwriters an option to purchase up to an aggregate of 675,000 additional units at the public offering price, less the underwriting discount. This option is exercisable for a period of 45 days. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the sale of units offered hereby. To the extent that the underwriters exercise this option, the underwriters will purchase additional units from us in approximately the same proportion as shown in the table above. Purchase Option. We have agreed to sell to the representatives for $100, an option to purchase up to 281,250 units at $10.00 per unit. The units issuable upon exercise of this option are identical to those offered by this prospectus. This option commences on the later of the consummation of a business combination or 180-days from the date of this prospectus and expiring three years from the date of this prospectus. The option and the 281,250 units, the 281,250 shares of common stock and the 281,250 warrants underlying such units, and the 281,250 shares of common stock underlying such warrants, have been deemed compensation by the NASD and are therefore subject to a 180-day lock-up pursuant to Rule 2710(g)(1) of the NASD Conduct Rules. Additionally, the option may not be sold, transferred, assigned, pledged or hypothecated for a 180-day period (including the foregoing 180-day period) following the date of this prospectus. However, the option may be transferred to any underwriter and selected dealer participating in the offering and their bona fide officers or partners. Thereafter, such units will be transferable provided such transfer is in accordance with the provisions of the Securities Act of 1933. Although the purchase option and its underlying securities have been registered under the registration statement of which this prospectus forms a part, the option grants to holders demand and piggy back rights for periods of five and seven years, respectively, from the date of this prospectus with respect to the registration under the Securities Act of 1933 of the securities directly and indirectly issuable upon exercise of the option. We will bear all fees and expenses attendant to registering the securities, other than underwriting commissions which will be paid for by the holders themselves. The exercise price and number of units issuable upon exercise of the option may be adjusted in certain circumstances including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. However, the option will not be adjusted for issuances of common stock at a price below its exercise price. We will set aside and at all times have available a sufficient number of shares of common stock to be issued upon exercise of such units. Discounts and Commissions. The following table shows the public offering price, underwriting discount and proceeds, before expenses, to us. These amounts are shown assuming both no exercise and full exercise of the underwriters option to purchase additional units We estimate that the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $450,000 and are payable by us. Per Unit Without Over-Allotment With Over-allotment Public offering price $ 8.00 $ 36,000,000 $ 41,400,000 Discount(1)(2) 0.30 1,350,000 1,525,500 Deferred underwriting compensation(1)(3) 0.26 1,170,000 1,372,500 Proceeds before expenses $ 7.44 $ 33,480,000 $ 38,502,000 (1) Does not include deferred underwriting compensation in the amount of 3.25% of the gross proceeds, or $0.26 per unit, or $1,170,000 (3.75% of the gross proceeds from the sale of the units pursuant to the underwriters over-allotment option, or $0.30 per unit, for the total deferred underwriting compensation of approximately $1,372,500 if the underwriters over-allotment option is exercised in full), payable to the representatives, with interest thereon, only upon completion of the initial business combination as described in this prospectus and then only with respect to those units as to which the component shares have not been converted; provided, however, that the interest earned on the deferred underwriting compensation and payable to the representatives shall not exceed $60,750. (2) No discount or commissions are payable with respect to the private warrants purchased in the private placement. (3) The representatives have agreed to forego their deferred underwriting compensation with respect to each share that we redeem for cash upon the consummation of a business combination. Discretionary Accounts. The underwriters do not intend to confirm sales of the units to any accounts over which they have discretionary authority. Pricing. Prior to this offering there has been no public market for any of our securities. The initial public offering price of the units and the terms of the warrants has been determined by negotiations between us and the representatives of the underwriters. Factors considered in determining the prices and terms of the units, including the common stock and warrants underlying the units, include: the history and prospects of companies whose principal business is the acquisition of other companies; prior offerings of those companies; our prospects for acquiring an operating business at attractive values; our capital structure; an assessment of our management and their experience in identifying operating companies; general conditions of the securities markets at the time of the offering; and other factors as were deemed relevant. However, although these factors were considered, the determination of our offering price is more arbitrary than the pricing of securities for an operating company in a particular industry since the underwriters are unable to compare our financial results and prospects with those of public companies operating in the same industry. An active trading market for the units and, after separation, the shares and the warrants, may not develop. It is also possible that after the offering, the units will not trade in the public market at or above the initial public offering price. We anticipate that the units will be quoted on the OTC Bulletin Board under the symbol _______ on or promptly after the date of this prospectus. Once the securities comprising the units begin separate trading, the common stock and warrants also will be quoted on the OTC Bulletin Board under the symbols ______ and ______, respectively. The common stock and warrants comprising the units will begin separate trading five business days following the earlier to occur of the expiration of the underwriters over-allotment option or its exercise in full, subject to our filing a Current Report on Form 8-K with the Securities and Exchange Commission containing an audited balance sheet reflecting our receipt of the gross proceeds of this offering and issuing a press release announcing when such separate trading will begin. We cannot assure you that our securities will continue to be quoted on the OTC Bulletin Board in the future. Stabilization. In connection with this offering, the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions, penalty bids and purchases to cover positions created by short sales. Stabilizing transactions permit bids to purchase shares of units so long as the stabilizing bids do not exceed a specified maximum, and are engaged in for the purpose of preventing or retarding a decline in the market price of the units while the offering is in progress. Overallotment transactions involve sales by the underwriters of units in excess of the number of units the underwriters are obligated to purchase. This creates a syndicate short position which may be either a covered short position or a naked short position. In a covered short position, the number of units over-allotted by the underwriters is not greater than the number of units that they may purchase in the over-allotment option. In a naked short position, the number of units involved is greater than the number of units in the over-allotment option. The underwriters may close out any short position by exercising their over-allotment option and/or purchasing units in the open market. Syndicate covering transactions involve purchases of units in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of units to close out the short position, the underwriters will consider, among other things, the price of units available for purchase in the open market as compared with the price at which they may purchase units through exercise of the over-allotment option. If the underwriters sell more units than could be covered by exercise of the over-allotment option and, therefore, have a naked short position, the position can be closed out only by buying units in the open market. A naked short position is more likely to be created if the underwriters are concerned that after pricing there could be downward pressure on the price of the units in the open market that could adversely affect investors who purchase in the offering. Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the units originally sold by that syndicate member is purchased in stabilizing or syndicate covering transactions to cover syndicate short positions. These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our shares of common stock or preventing or retarding a decline in the market price of our units. As a result, the price of our units in the open market may be higher than it would otherwise be in the absence of these transactions. Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the price of our units. These transactions may be effected in the over-the-counter market or otherwise and, if commenced, may be discontinued at any time. Lock-Up and Escrow Agreements. On or before the date of this prospectus, all of our existing stockholders, including all of our officers and directors, will place the shares they owned before the completion of this offering into an escrow account maintained by Continental Stock Transfer and Trust Company, acting as escrow agent. Subject to certain limited exceptions, such as transfers to family members and trusts for estate planning purposes and upon death while remaining subject to the escrow agreement, these shares will not be transferable for the earlier of (i) , 2010, three years following the date of this prospectus and (ii) one year following the completion of our initial business combination, unless we were to consummate a transaction after the consummation of our initial business combination that results in all of the stockholders of the combined entity having the right to exchange their shares of common stock and warrants for cash, securities or other property. In addition, pursuant to certain "lock-up" agreements, we and our executive officers, directors and our other existing stockholders, have agreed, subject to certain exceptions, not to offer, sell, contract to sell, announce any intention to sell, pledge or otherwise dispose of, enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of, directly or indirectly, or file with the SEC a registration statement under the Securities Act relating to, any shares of common stock or securities convertible into or exchangeable or exercisable for any shares of common stock, other than securities issued by us in connection with, and contemporaneously with, our initial business combination, without the prior written consent of the representatives, for a period ending on the later of the date of consummation of our initial business combination and the date 180 days after the date of the execution of the underwriting agreement. If our initial business combination occurs prior to the date 180 days after the execution of the underwriting agreement, the 180-day restricted period will be automatically extended if (i) during the last 17 days of the 180-day restricted period we issue an earnings release or material news or a material event relating to us occurs or (ii) prior to the expiration of the 180-day restricted period, we announce that we will release earnings results or become aware that material news or a material event will occur during the 16-day period beginning on the last day of the 180-day restricted period, in either of which case the restrictions described above will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event. This lock-up provision applies to shares of common stock and to securities convertible into or exchangeable or exercisable for or repayable with shares of common stock, including the private placement warrants purchased by our existing stockholders. It also applies to shares of common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition. The exceptions also permit us, among other things and subject to restrictions, to issue securities in connection with and contemporaneous with our initial business combination. The exceptions permit parties to the "lock-up" agreements, among other things and subject to restrictions, to: (a) participate in tenders involving the acquisition of a majority of our shares of common stock, (b) participate in transfers or exchanges involving shares of common stock or securities convertible into shares of common stock or (c) make certain gifts. In addition, the lock-up provision will not restrict broker-dealers from engaging in market making and similar activities conducted in the ordinary course of their business. Electronic Offer, Sale and Distribution of Shares. A prospectus in electronic format may be made available on the websites maintained by one or more of the underwriters or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The representatives may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations. Other than the prospectus in electronic format, the information on these websites is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved or endorsed by us or any underwriter in its capacity as underwriter, and should not be relied upon by investors. Other Relationships. Certain of the underwriters and their affiliates may provide, various investment banking, commercial banking and other financial services for our affiliates for which they received, and may in the future receive, customary fees. Foreign Regulatory Restrictions on Purchase of the Units We have not taken any action to permit a public offering of the units outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to this offering of units and the distribution of the prospectus outside the United States. Italy. This offering of the units has not been cleared by Consob, the Italian Stock Exchange s regulatory agency of public companies, pursuant to Italian securities legislation and, accordingly, no units may be offered, sold or delivered, nor may copies of this prospectus or of any other document relating to the units be distributed in Italy, except (1) to professional investors (operatori qualificati); or (2) in circumstances which are exempted from the rules on solicitation of investments pursuant to Decree No. 58 and Article 33, first paragraph, of Consob Regulation No. 11971 of May 14, 1999, as amended. Any offer, sale or delivery of the units or distribution of copies of this prospectus or any other document relating to the units in Italy under (1) or (2) above must be (i) made by an investment firm, bank or financial intermediary permitted to conduct such activities in Italy in accordance with the Decree No. 58 and Legislative Decree No. 385 of September 1, 1993, or the Banking Act; and (ii) in compliance with Article 129 of the Banking Act and the implementing guidelines of the Bank of Italy, as amended from time to time, pursuant to which the issue or the offer of securities in Italy may need to be preceded and followed by an appropriate notice to be filed with the Bank of Italy depending, inter alia, on the aggregate value of the securities issued or offered in Italy and their characteristics; and (iii) in compliance with any other applicable laws and regulations. Germany. The offering of the units is not a public offering in the Federal Republic of Germany. The units may only be acquired in accordance with the provisions of the Securities Sales Prospectus Act (Wertpapier-Verkaudfspropsektgestz), as amended, and any other applicable German law. No application has been made under German law to publicly market the units in or out of the Federal Republic of Germany. The units are not registered or authorized for distribution under the Securities Sales Prospectus Act and accordingly may not be, and are not being, offered or advertised publicly or by public promotion. Therefore, this prospectus is strictly for private use and the offering is only being made to recipients to whom the document is personally addressed and does not constitute an offer or advertisement to the public. The units will only be available to persons who, by profession, trade or business, buy or sell shares for their own or a third party s account. France. The units offered by this prospectus may not be offered or sold, directly or indirectly, to the public in France. This prospectus has not been or will not be submitted to the clearance procedure of the Autorit des March s Financiers, or the AMF, and may not be released or distributed to the public in France. Investors in France may only purchase the units offered by this prospectus for their own account and in accordance with articles L. 411-1, L. 441-2 and L. 412-1 of the Code Mon taire et Financier and decree no. 98-880 dated October 1, 1998, provided they are qualified investors within the meaning of said decree. Each French investor must represent in writing that it is a qualified investor within the meaning of the aforesaid decree. Any resale, directly or indirectly, to the public of the shares offered by this prospectus may be effected only in compliance with the above mentioned regulations. Les actions offertes par ce document d information ne peuvent pas tre, directement ou indirectement, offertes ou vendues au public en France. Ce document d information n a pas t ou ne sera pas soumis au visa de l Autorit des March s Financiers et ne peut tre diffus ou distribu au public en France. Les investisseurs en France ne peuvent acheter les actions offertes par ce document d information que pour leur compte propre et conform ment aux articles L. 411-1, L. 441-2 et L. 412-1 du Code Mon taire et Financier et du d cret no. 98-880 du 1 Octobre 1998, sous r serve qu ils soient des investisseurs qualifi s au sens du d cret susvis . Chaque investisseur doit d clarer par crit qu il est un investisseur qualifi au sens du d cret susvis . Toute revente, directe ou indirecte, des actions offertes par ce document d information au public ne peut tre effectu e que conform ment la r glementation susmentionn e. Switzerland. This prospectus may only be used by those persons to whom it has been directly handed out by the offeror or its designated distributors in connection with the offer described therein. The units are only offered to those persons and/or entities directly solicited by the offeror or its designated distributors, and are not offered to the public in Switzerland. This prospectus constitutes neither a public offer in Switzerland nor an issue prospectus in accordance with the respective Swiss legislation, in particular but not limited to Article 652A Swiss Code Obligations. Accordingly, this prospectus may not be used in connection with any other offer, whether private or public and shall in particular not be distributed to the public in Switzerland. United Kingdom. In the United Kingdom, the units offered by this prospectus are directed to and will only be available for purchase to a person who is an exempt person as referred to at paragraph (c) below and who warrants, represents and agrees that: (a) it has not offered or sold, will not offer or sell, any units offered by this prospectus to any person in the United Kingdom except in circumstances which do not constitute an offer to the public in the United Kingdom for the purposes of the section 85 of the Financial Services and Markets Act 2000 (as amended) ( FSMA ); and (b) it has complied and will comply with all applicable provisions of FSMA and the regulations made thereunder in respect of anything done by it in relation to the units offered by this prospectus in, from or otherwise involving the United Kingdom; and (c) it is a person who falls within the exemptions to Section 21 of the FSMA as set out in The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 ( the Order ), being either an investment professional as described under Article 19 or any body corporate (which itself has or a group undertaking has a called up share capital or net assets of not less than 500,000 (if more than 20 members) or otherwise 5 million) or an unincorporated association or partnership (with net assets of not less than 5 million) or is a trustee of a high value trust or any person acting in the capacity of director, officer or employee of such entities as defined under Article 49(2)(a) to (d) of the Order, or a person to whom the invitation or inducement may otherwise lawfully be communicated or cause to be communicated. The investment activity to which this document relates will only be available to and engaged in only with exempt persons referred to above. Persons who are not investment professionals and do not have professional experience in matters relating to investments or are not an exempt person as described above, should not review nor rely or act upon this document and should return this document immediately. It should be noted that this document is not a prospectus in the United Kingdom as defined in the Prospectus Regulations 2005 and has not been approved by the Financial Services Authority or any competent authority in the United Kingdom. Israel. The units offered by this prospectus have not been approved or disapproved by the Israeli Securities Authority (ISA). The units may not be offered or sold, directly or indirectly, to the public in Israel. The ISA has not issued permits, approvals or licenses in connection with the offering of the units or publishing the prospectus; nor has it authenticated the details included herein, confirmed their reliability or completeness, or rendered an opinion as to the quality of the units being offered. Any resale, directly or indirectly, to the public of the units offered by this prospectus is subject to restrictions on transferability and must be effected only in compliance with the Israeli securities laws and regulations. Sweden. Neither this prospectus nor the units offered hereunder have been registered with or approved by the Swedish Financial Supervisory Authority under the Swedish Financial Instruments Trading Act (1991:980) (as amended), nor will such registration or approval be sought. Accordingly, this prospectus may not be made available nor may the units offered hereunder be marketed or offered for sale in Sweden other than in circumstances which are deemed not to be an offer to the public in Sweden under the Financial Instruments Trading Act. This prospectus may not be distributed to the public in Sweden and a Swedish recipient of the prospectus may not in any way forward the prospectus to the public in Sweden. Norway. This prospectus has not been produced in accordance with the prospectus requirements laid down in the Norwegian Securities Trading Act 1997, as amended. This prospectus has not been approved or disapproved by, or registered with, either the Oslo Stock Exchange or the Norwegian Registry of Business Enterprises. This prospectus may not, either directly or indirectly be distributed to Norwegian potential investors. Denmark. This prospectus has not been prepared in the context of a public offering of securities in Denmark within the meaning of the Danish Securities Trading Act No. 171 of 17 March 2005, as amended from time to time, or any Executive Orders issued on the basis thereof and has not been and will not be filed with or approved by the Danish Financial Supervisory Authority or any other public authority in Denmark. The offering of units will only be made to persons pursuant to one or more of the exemptions set out in Executive Order No. 306 of 28 April 2005 on Prospectuses for Securities Admitted for Listing or Trade on a Regulated Market and on the First Public Offer of Securities exceeding EUR 2,500,000 or Executive Order No. 307 of 28 April 2005 on Prospectuses for the First Public Offer of Certain Securities between EUR 100,000 and EUR 2,500,000, as applicable. LEGAL MATTERS The validity of the securities offered in this prospectus are being passed upon for us by Katten Muchin Rosenman LLP, New York, New York. Sidley Austin LLP, New York, New York, and Ellenoff Grossman & Schole LLP, New York, New York, are acting as counsel for the underwriters in this offering.
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs discussed under Risk Factors, before deciding whether to buy our ADSs. Home Inns & Hotels Management Inc. Our Company We are a leading economy hotel chain in China, based on the number of our hotels and the number of our hotel rooms, as well as the geographic coverage of our hotel chain. We develop and operate economy hotels across China under our award-winning Home Inn brand. Since we commenced operations in 2002, we have become one of the best-known economy hotel brands in China. We offer a consistent product and high-quality services to primarily serve the fast growing population of value-conscious individual business and leisure travelers who demand clean, comfortable and convenient lodging. We have achieved our growth by utilizing two business models. We either lease real estate properties on which we develop and operate hotels, or we franchise our brand to hotel owners and manage these hotel properties. We refer to the former type of hotels as leased-and-operated hotels and to the latter type of hotels as franchised-and-managed hotels. As of March 31, 2007, our Home Inns hotel chain consisted of 97 leased-and-operated hotels in operation with an additional 36 leased-and-operated hotels under development and 48 franchised-and-managed hotels in operation and an additional 12 franchised-and-managed hotels under development, covering 53 cities in China. We have received many awards and accolades for our innovative, consistent and high-quality product and services across our hotel chain, including the 2006 Leading Brand in Economy Hotels in China from the China Hotel Association, the Golden Pillow Award for best brand in economy hotels in China in 2006 from the 21st Century Business Herald, a nationwide economic journal in China, and being named one of the 2006 Top 10 Leading Consumers Brands by the China Enterprise Culture Improvement Association. We have experienced substantial growth while maintaining profitability since 2003. Our Home Inns hotels in operation grew rapidly from 10 hotels in four cities as of the end of 2003 to 134 hotels in 39 cities as of the end of 2006, and our net income grew from RMB 1.5 million in 2003 to RMB 46.9 million (US$6.0 million) in 2006, representing a compound annual growth rate, or CAGR, of 215%. Industry Background China s lodging industry has expanded rapidly as a result of the substantial growth of the Chinese economy over the past several years. According to Euromonitor International, or Euromonitor, total sales in China s lodging industry grew from RMB 190 billion in 1999 to RMB 264 billion in 2004. While China s lodging industry continues to grow, it remains highly fragmented. According to Euromonitor, hotels accounted for only approximately 5% of total lodging outlets in China in 2004, with the remainder being guesthouses and other privately owned lodging outlets. Within the hotel sector of the lodging industry, the top ten brands accounted for an approximate 6% market share in 2004 in terms of sales. Economy hotel chains have emerged and expanded in China in recent years to primarily target value-conscious individual business and leisure travelers. The growth in demand for economy hotel chains in China is being driven by both general factors, including the growth of the Chinese economy and the growth of China s travel and lodging industry, as well as more specific factors, such as a rapid increase in the number of small- to medium-sized enterprises, or SMEs, the growth of domestic tourism, the expansion of urban business centers and the fragmentation of the lodging industry. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Table of Contents We believe the economy hotel market in China is still at an early stage of development. There are significant growth opportunities for economy hotel operators to develop new properties and convert existing lodging facilities. The ability of an economy hotel chain to compete in the current market is determined by the hotel chain s ability to provide a consistent product, high-quality services, an efficient reservation system and effective sales channels, as well as its brand-name recognition and geographic coverage. We believe economy hotel chains that have established a reputable brand and a nationwide network, such as our Home Inns hotel chain, are well-positioned to capture the opportunities presented by the continuing growth of the economy hotel market in China. Our Strengths, Strategies and Challenges We believe that the following competitive strengths contribute to our success and differentiate us from our competitors: scale and leadership in the economy hotel market in China, as measured by the number of our hotels and hotel rooms, as well as the geographic coverage of our hotel chain; innovative, distinctive and consistent product; outstanding track record, as evidenced by our ability to rapidly expand our hotel chain from ten hotels operating in four cities as of the end of 2003 to 134 hotels operating in 39 cities as of December 31, 2006, while having maintained profitability since 2003; efficient and integrated operational infrastructure and information systems; and experienced management team and motivated staff. Our goal is to become the leading economy hotel chain in China. We intend to achieve our goal by pursuing the following growth strategies: expand geographical coverage to capitalize on our early-mover advantage; increase penetration in existing markets; continue to build brand awareness and customer loyalty; increase our revenue per available room, or RevPAR, by optimizing customer channel mix and maximizing room rate growth; and further enhance our information and operational systems and human resources management. The successful execution of our strategies is subject to certain risks and uncertainties, including: risks associated with our limited operating history; uncertainties associated with our ability to continue our growth while maintaining our profitability; uncertainties in our ability to expand our operations while maintaining the consistent quality of our product and enhancing profitability; uncertainties in our ability to respond to competitive pressures; and uncertainties associated with factors typically affecting the lodging industry, including changes in economic conditions, natural disasters or outbreaks of serious contagious diseases in markets where we have a presence. Please see Risk Factors and other information included in this prospectus for a detailed discussion of these risks and uncertainties. Amendment No. 2 to FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents Corporate Information We incorporated Home Inns & Hotels Management (Hong Kong) Limited, or Home Inns Hong Kong, in May 2001 and commenced operations in July 2002 through Home Inns & Hotels Management (Beijing) Co, Ltd., or Home Inns Beijing, a company established in China, and its subsidiaries and affiliates. In May 2006, we established a holding company, Home Inns & Hotels Management Inc., under the laws of the Cayman Islands in preparation for our initial public offering, which was completed in October 2006. Our principal executive offices are located at No. 400 Tian Yao Qiao Road, Shanghai 200030, People s Republic of China. Our telephone number at this address is (8621) 6486-1818. Our registered office in the Cayman Islands is located at the offices of M&C Corporate Services Limited, P.O Box 309GT, Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands, British West Indies. In addition, we have two branch offices in China. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011. Investors should contact us for any inquiries through the address and telephone number of our principal executive offices. Our website is http://english.homeinns.com. The information contained on our website is not a part of this prospectus. HOME INNS & HOTELS MANAGEMENT INC. (Exact name of Registrant as specified in its charter) Not Applicable (Translation of Registrant s name into English) Cayman Islands 7011 Not Applicable (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) No. 400 Tian Yao Qiao Road Shanghai 200030, People s Republic of China (8621) 6486-1818 (Address, including zip code, and telephone number, including area code, of Registrant s principal executive offices) * Home Inns Shanghai owns 75% of one joint venture and 51% of each of the other three joint ventures. Home Inns Hong Kong was incorporated in Hong Kong in May 2001 by its individual founders and Ctrip.com International, Ltd., or Ctrip, a leading China-based travel consolidator. Through a series of transactions, Ctrip disposed of all of its ownership interest in Home Inns Hong Kong in August 2003 to focus on its core business of travel consolidation and to prepare for its initial public offering, which was completed in December 2003. In April 2002, Home Inns Hong Kong and Beijing Capital Travel International Hotel Group Co., Ltd., or Beijing Capital Travel, entered into a joint venture agreement to form Home Inns Beijing to operate branded economy hotels in China. Beijing Capital Travel is a subsidiary of Beijing Tourism Group, or BTG. Home Inns Hong Kong and BTG owned 55% and 45%, respectively, of Home Inns Beijing when it commenced operations in July 2002. Subsequently, Home Inns Hong Kong gradually increased its ownership interest in Home Inns Beijing by contributing additional funds to the registered capital of Home Inns Beijing. Home Inns Hong Kong s ownership interest in Home Inns Beijing was increased to 95.59% as of February 2005. We have been actively managing Home Inns Beijing since its inception. Home Inns Hong Kong s ownership in Home Inns Beijing was accounted for under the equity method since Home Inns Beijing s inception until April 2004 because, during this period of time, BTG had substantive participation rights that enabled it to CT Corporation System 111 Eighth Avenue New York, New York 10011 (212) 664-1666 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents veto significant decisions made by Home Inns Hong Kong. In April 2004, Home Inns Hong Kong and Beijing Capital Travel entered into a revised joint venture agreement, under which Home Inns Hong Kong obtained control of Home Inns Beijing. As a result, Home Inns Beijing has been our consolidated subsidiary since then. In May 2006, we incorporated Home Inns & Hotels Management Inc. in the Cayman Islands in preparation for our initial public offering. In June 2006, all of the then-existing shareholders of Home Inns Hong Kong exchanged their respective shares of Home Inns Hong Kong for an equivalent number of shares of Home Inns & Hotels Management Inc. of equivalent classes. As a result, Home Inns Hong Kong became our wholly owned subsidiary in June 2006. Our consolidated financial statements reflect the share exchange in June 2006 and have been prepared as if our current corporate structure had been in existence throughout the relevant periods. On October 31, 2006, we completed our initial public offering, in which we issued and sold 5,874,237 ADSs, representing 11,748,474 of our ordinary shares, and certain of our then shareholders sold 3,210,763 ADSs, representing 6,421,526 of our ordinary shares, in each case at a public offering price of US$13.80 per ADS. Copies to: David T. Zhang, Esq. Z. Julie Gao, Esq. Latham & Watkins LLP 41st Floor, One Exchange Square 8 Connaught Place, Central Hong Kong (852) 2522-7886 Leiming Chen, Esq. Simpson Thacher & Bartlett LLP 35th Floor, ICBC Tower 3 Garden Road, Central Hong Kong (852) 2514-7600 Table of Contents Conventions Which Apply to this Prospectus Unless we indicate otherwise, all information in this prospectus reflects no exercise by the underwriters of their option to purchase up to 221,724 additional ADSs representing 443,448 ordinary shares from us and up to 303,276 additional ADSs representing 606,552 ordinary shares from the selling shareholders. Except where the context otherwise requires and for purposes of this prospectus only: we, us, our company, our and Home Inns refer to Home Inns & Hotels Management Inc., a Cayman Islands company, and its predecessor entities and subsidiaries, except in the context of discussing our consolidated financial data for the periods prior to April 2004, where the reference excludes Home Inns Beijing and its subsidiaries; BTG refers to Beijing Tourism Group, a state-owned enterprise established in the PRC, and its predecessors and subsidiaries, including Beijing Capital Travel International Hotel Group Co., Ltd.; China or PRC refers to the People s Republic of China, excluding Taiwan, Hong Kong and Macau; Home Inns Beijing refers to Home Inns & Hotels Management (Beijing) Co., Ltd., and its subsidiaries, which have been our consolidated subsidiaries since April 2004; Home Inns Hong Kong refers to Home Inns & Hotels Management (Hong Kong) Limited; Home Inns Shanghai refers to Home Inns & Hotels Management (Shanghai) Co., Ltd.; our hotels refers, collectively, to our leased-and-operated and franchised-and-managed hotels; average daily rate refers to total hotel room revenues divided by the total number of occupied rooms in a given period; occupancy rate refers to the total number of occupied rooms divided by the total number of available rooms in a given period; RevPAR represents revenue per available room, which is calculated by dividing total hotel room revenues by the total number of available rooms in a given period, or by multiplying average daily rates and occupancy rates in a given period; shares or ordinary shares refers to our ordinary shares; preferred shares refers to our Series A convertible preferred shares, Series B convertible preferred shares and Series C convertible preferred shares, collectively, all of which were converted into an equal number of ordinary shares on October 31, 2006 upon the completion of our initial public offering; ADSs refers to our American depositary shares, each of which represents two ordinary shares, and ADRs refers to the American depositary receipts that evidence our ADSs; and RMB or Renminbi refers to the legal currency of China; $, dollars, US$ or U.S. dollars refers to the legal currency of the United States; and HK$ refers to the legal currency of Hong Kong. Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. Table of Contents THE OFFERING The following information assumes that the underwriters will not exercise their option to purchase additional ADSs in the offering, unless otherwise indicated. Offering price US$ per ADS. ADSs offered by us 1,478,155 ADSs. ADSs offered by the selling shareholders 2,021,845 ADSs. Total ADSs offered in this offering 3,500,000 ADSs. ADSs outstanding immediately after this offering 12,585,000 ADSs. Ordinary shares outstanding immediately after this offering 69,403,259 ordinary shares. ADS to ordinary share ratio One ADS represents two ordinary shares. The ADSs The ADSs will be evidenced by ADRs. The depositary will hold the ordinary shares underlying your ADSs. You will have rights as provided in the deposit agreement. If, however, we declare dividends on our ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our ordinary shares, after deducting its fees and expenses. You may turn in your ADSs to the depositary in exchange for ordinary shares. The depositary will charge you fees for any exchange. We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs, you agree to be bound by the deposit agreement as amended. To better understand the terms of the ADSs, you should carefully read the Description of American Depositary Shares section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus. Over-allotment option We and the selling shareholders have granted to the underwriters an option, which is exercisable within 30 days from the date of this prospectus, to purchase up to an aggregate of 525,000 additional ADSs. Use of proceeds We estimate that our net proceeds from this offering will be approximately US$44.2 million, based on the last trading price of our ADSs on April 24, 2007 of US$31.89 per ADS. We plan to use the net proceeds we receive from this offering to fund capital expenditures, improve our financial strength and flexibility, fund potential strategic acquisitions and for general corporate purposes. See Use of Proceeds for additional information. CALCULATION OF REGISTRATION FEE Title of each class of securities to be registered Amount to be registered Proposed maximum offering price per ordinary share Proposed maximum aggregate offering price Amount of registration fee Ordinary shares, par value US$0.005 per share (1) 8,050,000(2) US$ 16.275 (2) US$ 131,013,750(2)(3) US$ 4,023 (4) Table of Contents We will not receive any of the proceeds from the sale of ADSs by the selling shareholders. Lock-up We and the selling shareholders have agreed with the underwriters to a lock-up of shares for a period of 90 days after the date of this prospectus. In addition, our directors and officers have also agreed with the underwriters to a lock-up of shares for a period of 60 days after the date of this prospectus. Poly Victory Investments Limited, one of our principal shareholders, remains subject to a three-year lock-up period which commenced on October 25, 2006. See Underwriting. Listing Our ADSs are listed on the Nasdaq Global Market under the symbol HMIN. Our ordinary shares are not listed on any exchange or traded on any automated quotation system.
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+PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. Unless otherwise stated in this prospectus, references to we, us or our company refer to Pinpoint Advance Corp. The term public stockholders means the holders of common stock sold as part of the units in this offering or acquired in the aftermarket, including any existing stockholders to the extent they purchase or acquire such shares. The term public stockholders excludes certain of our officers and directors with respect to the shares owned by them immediately prior to this offering, since they have waived the redemption rights and liquidation rights in connection with a dissolution and liquidation with respect to these shares. Accordingly, as used in this prospectus, the term public stockholders means the holders of 2,500,000 shares of our common stock included in the units sold in this offering or acquired in the open market following this offering, including, other than as set forth in the immediately preceding sentence, existing stockholders to the extent they purchase or acquire shares in the offering or in the open market following the offering (2,875,000 shares of common stock if the underwriters over-allotment option is exercised in full). Unless otherwise stated, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option and that no stockholder exercises its right of redemption as described elsewhere in this prospectus. Additionally, the information in this prospectus has been adjusted to give effect to a 1.325 for 1 reverse stock split which occurred as of February 20, 2007. The Company We are a blank check company known as a Business Combination CompanyTM or BCCTM. We were organized under the laws of the State of Delaware on September 6, 2006. We were formed for the purpose of acquiring, merging with, engaging in a capital stock exchange with, purchasing all or substantially all of the assets of, or engaging in any other similar business combination with a business that has operations or facilities located in Israel, but will not be limited to pursuing acquisition opportunities only in Israel, and may pursue a company operating in Europe which management believes would benefit from establishing operations or facilities in Israel. Although the majority of our efforts will be spent on seeking an attractive Israeli company to acquire, our officers and directors have extensive contacts throughout the international business community and may be introduced to companies located throughout Europe that may be attractive targets. Our efforts in identifying a prospective target business will not be limited to a particular industry, although we intend to focus initially on target businesses in the technology industry. To date, our efforts have been limited to organizational activities and activities relating to this offering and we have not acquired any business operations. Further, we do not have any specific merger, capital stock exchange, asset acquisition or other business combination under consideration or contemplation and we have not, nor has anyone on our behalf, contacted any potential target business or had any discussions, formal or otherwise, with respect to such a transaction. In seeking a business combination, we intend to utilize cash derived from the proceeds of this offering and the private placement, as well as our capital stock, debt, or a combination of cash, capital stock and debt, and there is no limit on the issuance of capital stock or incurrence of debt we may undertake in effecting a business combination. In the event a business combination is consummated, all sums remaining in the trust account will be released to us immediately thereafter, and there will be no restriction on our use of such funds. We believe Israel represents an attractive environment for a target business for several reasons including, among others: Israel s highly educated and motivated population, including those with scientific, engineering and technical expertise; Israel s reputation as a major center for scientific and technological innovation; and favorable tax and other governmental plans to assist private sector growth. According to the Israel Venture Capital Research Center, from 1999 through 2004, $10 billion in venture capital was invested in Israel s high-tech industry alone, which funded over 1,500 high-tech companies. We believe the high degree of venture capital invested in Israel, when compared to other countries, makes Israel a favorable environment for making acquisitions, as there should be a number of prospective target businesses searching for liquidity events. Through our management team and directors, we believe we have extensive contacts and sources from which to generate acquisition opportunities in numerous industries throughout Israel. These contacts and sources include the owners of companies covering a wide spectrum of industries, private equity and venture capital funds, public and private companies, investment bankers, attorneys and accountants. To date, no such sources have been approached or have presented or identified potential targets to any of our officers or directors. We expect, from time to time, that these contacts or sources will advise either our management team or directors of the existence of one or more potential acquisition candidates or that potential acquisition candidates will become known to our management team or directors through their other business activities. Our management will evaluate these leads and determine whether to pursue discussions with any of these candidates. While we may seek to effect business combinations with more than one target business, our initial business combination must be with a target business or businesses whose fair market value is at least equal to 80% of the amount in our trust account (less deferred underwriting compensation of $750,000, or $862,500 if the over-allotment is exercised in full) at the time of such acquisition. Consequently, it is likely we will have the ability to effect only a single business combination. We currently have no restrictions on our ability to seek additional funds through the sale of securities or through loans. As a consequence, we could seek to acquire a target business that has a fair market value significantly in excess of 80% of the amount in our trust account (less deferred underwriting compensation of $750,000, or $862,500 if the over-allotment is exercised in full) or more than one target business at the same time. Although as of the date of this prospectus we have not engaged or retained, had any discussions with, or entered into any agreements with, any third party regarding any such potential financing transactions, we could seek to fund such business combinations by raising additional funds through the sale of our securities or through loan arrangements. However, if we were to seek such additional funds, any such arrangement would only be consummated simultaneously with our consummation of a business combination. It is possible we will have the ability to complete only a single business combination, although this may entail the simultaneous acquisitions of several assets or closely related operating businesses at the same time. However, should management elect to pursue more than one acquisition of target businesses simultaneously, management could encounter difficulties in consummating all or a portion of such acquisitions due to a lack of adequate resources, including the inability of management to devote sufficient time to the due diligence, negotiation and documentation of each acquisition. Furthermore, even if we complete the acquisition of more than one target business at the same time, there can be no assurance we will be able to integrate the operations of such target businesses. As used in this prospectus, a target business shall include assets or an operating business(es) located in Israel or a business operating outside of Israel, specifically in Europe, which management believes would benefit from establishing operations or facilities in Israel. Although the majority of our efforts will be spent on seeking an attractive Israeli company to acquire, our officers and directors have extensive contacts throughout the international business community and may be introduced to companies located throughout Europe with whom we may seek to consummate a business combination. As used in this prospectus, a business combination shall mean the acquisition by us of such assets or target business(es). We do not have any specific merger, capital stock exchange, asset acquisition or other business combination under consideration or contemplation and we have not, nor has anyone on our behalf, contacted any potential target business or had any discussions, formal or otherwise, with respect to such a transaction. Moreover, we have not engaged or retained any agent or other representative to identify or locate any suitable acquisition candidate for us. We will not enter into any business combination with any affiliates of our initial stockholders, officers or directors. If we are unable to consummate a business combination within the allotted time periods set forth in this prospectus, we will implement a plan of dissolution and liquidation which will include the liquidation of our trust account to our public stockholders. We have agreed to pay a monthly fee of $7,500 to New Pole Ltd., an affiliate of Ronen Zadok (our chief financial officer, secretary and a director), for general and administrative services, including but not limited to receptionist, secretarial and general office services. This agreement commences on the date of this prospectus and shall continue until the earliest to occur of: (i) consummation of a business combination, (ii) 18 months after the completion of this offering (or 24 months after the completion of this offering if a letter of intent, agreement in principle or a definitive agreement has been executed within 18 months after the completion of this offering and the business combination relating thereto has not yet been completed within such 18-month period) and (iii) the date on which we determine to dissolve and liquidate our trust account as part of our plan of dissolution and liquidation. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 PINPOINT ADVANCE CORP. (Exact name of registrant as specified in its charter) Delaware 6770 33-1144642 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 4 Maskit Street Herzeliya, Israel 46700 972 9-9500245 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Mr. Adiv Baruch Chief Executive Officer 4 Maskit Street Herzeliya, Israel 46700 972 9-9500245 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Douglas S. Ellenoff, Esq. Jody R. Samuels, Esq. Stuart Neuhauser, Esq. Richardson & Patel LLP Ellenoff Grossman & Schole LLP The Chrysler Building 370 Lexington Avenue, 19th Floor 405 Lexington Avenue, 26th Floor New York, New York 10017 New York, New York 10174 (212) 370-1300 (212) 907-6686 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Our officers and directors will not receive any compensation in this offering or for services rendered to us prior to, or in connection with, the consummation of a business combination. Our officers and directors will be entitled to reimbursement for out-of-pocket expenses incurred by them or their affiliates on our behalf. We maintain executive offices at 4 Maskit Street, Herzeliya, Israel 46700 and our telephone number is 972 9-9500245. Private Placement Prior to the closing of this offering, all of our officers and directors other than Jacob Perry, or entities wholly owned by them, will purchase equal amounts of an aggregate of 1,500,000 warrants from us at a price of $1.00 per warrant in a private placement. Each warrant is exercisable into one share of common stock at $7.50 and will become exercisable on the later of (i) the completion of a business combination with a target business or (ii) one year from the date of the prospectus, and expiring four years from the date of the prospectus. The insider warrants will not be subject to redemption and may be exercised on a cashless basis if held by the initial holder thereof or its permitted assigns. No commissions, fees or other compensation will be payable in connection with such private placement. Accordingly, all of the gross proceeds from the sale of the 1,500,000 warrants in the private placement, or $1,500,000, will be deposited into the trust account. These warrants contain restrictions prohibiting their exercise or transfer until the earlier of the consummation of a business combination or our liquidation. The Offering Securities offered: 2,500,000 units, at $10.00 per unit, each unit consisting of: one share of common stock; and one warrant The units will begin trading on or promptly after the date of this prospectus. Each of the common stock and warrants shall trade separately on the 90th day after the date of this prospectus unless Maxim Group LLC determines that an earlier date is acceptable, based on their assessment of the relative strengths of the securities markets and small capitalization companies in general, and the trading pattern of, and demand for, our securities in particular. However, Maxim Group LLC may decide to allow continued trading of the units following such separation. In no event will Maxim Group LLC allow separate trading of the common stock and warrants until (i) we file an audited balance sheet reflecting our receipt of the gross proceeds of this offering and the private placement, (ii) we file a Current Report on Form 8-K and issue a press release announcing when such separate trading will begin, and (iii) the business day following the earlier to occur of the expiration of the underwriters over-allotment option or its exercise in full. We will file a Current Report on Form 8-K, including an audited balance sheet, upon the consummation of this offering, which is anticipated to take place three business days from the date of this prospectus. The audited balance sheet will include proceeds we receive from the exercise of the over-allotment option if the over-allotment option is exercised on the date of this prospectus. If the over-allotment option is exercised following the date of this prospectus, an additional Current Report on Form 8-K will be filed to disclose the exercise and closing of the over-allotment option. If you are not an institutional investor, you may purchase securities in this offering only if you reside within the states in which we have applied to have the securities registered. We have registered the securities in: Colorado, Delaware, the District of Columbia, Florida, Georgia, Hawaii, Illinois, Indiana, Louisiana, New York, Rhode Island and Wyoming. Common stock: Number outstanding before this offering: 625,000 shares Number to be outstanding after this offering: 3,125,000 shares Warrants: Number outstanding before this offering and private placement: 0 (does not include the 125,000 warrants included in the representative s unit purchase option) Number to be outstanding after this offering and private placement: 4,000,000 warrants (does not include the 125,000 warrants included in the representative s unit purchase option) Exercisability: Each warrant is exercisable for one share of common stock. Exercise price: $7.50 per share Exercise period: The warrants will become exercisable on the later of: the completion of a business combination with a target business, or _______________, 2008 [one year from the date of this prospectus] The warrants will expire at 5:00 p.m., New York City time, on ______________, 2011 [four years from the date of this prospectus] or earlier upon redemption. Redemption: We may redeem the outstanding warrants (including any warrants issued upon exercise of Maxim Group LLC s unit purchase option): in whole and not in part, at a price of $0.01 per warrant at any time after the warrants become exercisable, upon a minimum of 30 days prior written notice of redemption, and if, and only if, the last closing sales price of our common stock equals or exceeds $14.25 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. We have established this last criterion to provide warrant holders with a premium to the initial warrant exercise price as well as a degree of liquidity to cushion the market reaction, if any, to our redemption call. The warrants which are issuable to the representative of the underwriters upon the exercise of the representative s option, are subject to the same redemption conditions. If the foregoing conditions are satisfied and we call the warrants for redemption, each warrant holder shall then be entitled to exercise his or her warrant prior to the date scheduled for redemption, however, there can be no assurance that the price of our common stock will exceed the call trigger price or the warrant exercise price after the redemption call is made and the price may, in fact, decline as a result of the limited liquidity following any such call for redemption. None of the warrants issued in the private placement are redeemable while held by the initial purchasers or their permitted assigns. Payments to Insiders: We have agreed to pay a monthly fee of $7,500 to New Pole Ltd., an affiliate of Ronen Zadok (our chief financial officer, secretary and a director), for general and administrative services, including but not limited to receptionist, secretarial and general office services. This agreement commences on the date of this prospectus and shall continue until the earliest to occur of: (i) a business combination, (ii) 18 months after the completion of this offering (or 24 months after the completion of this offering if a letter of intent, agreement in principle or a definitive agreement has been executed within 18 months after the completion of this offering and the business combination relating thereto has not yet been completed within such 18 month period) and (iii) the date on which we determine to dissolve and liquidate our trust account as part of our plan of dissolution and liquidation. Our officers and directors will not receive any compensation in this offering. Our officers and directors will be entitled to reimbursement for (i) out-of-pocket expenses incurred by them or their affiliates on our behalf, and (ii) expenses incurred by them incident to us finding a suitable business combination. Proposed OTC Bulletin Board symbols for our: Units: Common Stock: Warrants: _____ _____ _____ CALCULATION OF REGISTRATION FEE CHART Title of Each Class of Security to be Registered Amount to be Registered Proposed Maximum Offering Price Per Unit(1) Proposed Maximum Aggregate Offering Price(1) Amount of Registration Fee Units, each consisting of one share of Common Stock, $.0001 par value, and one Warrant(2) 2,875,000 $ 10.00 $ 28,750,000 $ 3,076.25 Shares of Common Stock included as part of the Units(2) 2,875,000 (3) Warrants included as part of the Units(2) 2,875,000 (3) Shares of Common Stock underlying the Warrants included in the Units(4) 2,875,000 $ 7.50 $ 21,562,500 $ 2,307.19 Representative s Unit Purchase Option 1 $ 100 $ 100 $ 0 Units underlying the Representative s Unit Purchase Option ( Representative s Units )(4) 125,000 $ 11.00 $ 1,375,000 $ 147.13 Shares of Common Stock included as part of the Representative s Units(4) 125,000 (3) Warrants included as part of the Representative s Units(4) 125,000 (3) Shares of Common Stock underlying the Warrants included in the Representative s Units(4) 125,000 $ 7.50 $ 937,500 $ 100.31 Total $ 52,625,000 $ 5,630.88 (5) Offering and private placement proceeds to be held in trust: $24,766,000 of the proceeds from this offering and the private placement will be placed in a trust account at Merrill Lynch maintained by American Stock Transfer & Trust Company, pursuant to an agreement to be signed on the date of this prospectus. Of this amount, up to $24,066,000 may be used by us for the purpose of effecting a business combination, and up to $750,000 will be paid to Maxim Group LLC if a business combination is consummated, but will be forfeited by Maxim Group LLC if a business combination is not consummated. These funds will not be released until the earlier of the completion of a business combination or implementation of a stockholder-approved plan of dissolution and liquidation; provided, however, that we plan to draw the following amounts from the interest accrued on the trust account prior to, or upon the consummation of, a business combination or our liquidation: (i) taxes payable on interest earned and (ii) up to $1,500,000 of interest income to fund our working capital. Therefore, unless and until a business combination is consummated, other than as described above, the funds held in the trust account will not be available for our use for any expenses related to this offering or expenses which we may incur related to the investigation and selection of a target business and the negotiation of an agreement to acquire a target business. The $750,000 of the funds attributable to Maxim Group LLC s deferred underwriting discount in connection with this offering will be released to Maxim Group LLC, less $0.30 per share to any public stockholders exercising their redemption rights, upon completion of a business combination on the terms described in this prospectus, or to our public stockholders upon liquidation of the trust account as part of our plan of dissolution and liquidation, but will in no event be available for use by us in a business combination. Expenses we may incur prior to consummation of a business combination may only be paid from the net proceeds of this offering and the private placement not held in the trust account, and any interest earned and released to us as provided above. There will be no fees, reimbursements or cash payments made to our existing stockholders and/or officers and directors other than (A) repayment of the $118,000 loan on the closing date and (B) reimbursement for any expenses incident to finding a suitable business combination. In the event a business combination is consummated, all sums remaining in the trust account will be released to us and there will be no restriction on our use of such funds, which shall be available for working capital to pay officer and director salaries, make change of control payments, pay fees to affiliates or for any other uses as we may determine. None of the warrants may be exercised until after the consummation of a business combination and, thus, after the proceeds of the trust account have been disbursed, the warrant exercise price will be paid directly to us. (1) Estimated solely for the purpose of calculating the registration fee. (2) Includes 375,000 Units, 375,000 shares of Common Stock and 375,000 Warrants underlying such Units which may be issued on exercise of a 45-day option granted to the Underwriters to cover over-allotments, if any. (3) No fee pursuant to Rule 457(g). (4) Pursuant to Rule 416, there are also being registered such indeterminable additional securities as may be issued to prevent dilution as a result of stock splits, stock dividends or similar transactions. (5) Previously paid. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Stockholders must approve business combination: We will seek stockholder approval before we effect any business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable state law. In connection with the vote required for any business combination, all of our existing stockholders, including all of our officers and directors, have agreed to vote the shares of common stock owned by them immediately before this offering in accordance with the majority of the shares of common stock voted by the public stockholders. Any shares acquired in this offering or in the aftermarket by existing stockholders and their designees will be voted in favor of the business combination. We will proceed with a business combination only if a majority of the shares of our common stock cast at the meeting are voted in favor of the business combination and public stockholders owning 29.99% or less of the shares sold in this offering exercise their redemption rights described below. Voting against the business combination alone will not result in redemption of a stockholder s shares into a pro rata share of the trust account. Such stockholder must have also exercised its redemption rights described below. Even if 29.99% or less of the stockholders, as described above, exercise their redemption rights, we may be unable to consummate a business combination if such redemption leaves us with funds less than a fair market value equal to at least 80% of the amount in our trust account (excluding any funds held for the benefit of any of the underwriters) at the time of such acquisition, which amount is required for our initial business combination. In such event we may be forced to either find additional financing to consummate such a business combination, consummate a different business combination or dissolve and liquidate our trust account pursuant to our stockholder-approved plan of dissolution and liquidation. In addition, if we seek approval from our stockholders to consummate a business combination within 90 days of the expiration of 24 months (assuming that the period in which to consummate a business combination has been extended, as provided in our certificate of incorporation) from the date of this offering, the proxy statement related to such business combination will also seek stockholder approval for our board s recommended plan of dissolution and liquidation in the event our stockholders do not approve such business combination. Redemption rights for stockholders voting to reject a business combination: Public stockholders voting against a business combination will be entitled to redeem their stock into a pro rata share of the trust account, plus interest net of taxes payable and less $1,500,000 of interest to be released to us ($9.91 per share). However, the ability of public stockholders to receive $9.91 per share is subject to any valid claims by our creditors which are not covered by amounts held in the trust account or the indemnities provided by our executive officers. Public stockholders that redeem their stock for their pro rata share of the trust account will continue to have the right to exercise any warrants they may hold. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, APRIL 19, 2007 $25,000,000 2,500,000 units Pinpoint Advance Corp. is a newly organized Business Combination CompanyTM, or BCCTM. A BCC is a blank check company formed for the purpose of acquiring, merging with, engaging in a capital stock exchange with, purchasing all or substantially all of the assets of, or engaging in any other similar business combination of an unidentified operating business. We intend to focus on identifying a prospective business with operations or facilities in Israel, but will not be limited to pursuing acquisition opportunities only in Israel, and may pursue a company operating in Europe which management believes would benefit from establishing operations or facilities in Israel. Our efforts in identifying a prospective target business will not be limited to a particular industry, although we intend to focus initially on target businesses in the technology industry. We do not have any specific merger, capital stock exchange, asset acquisition or other business combination under consideration or contemplation and we have not, nor has anyone on our behalf, contacted any potential target business or had any discussions, formal or otherwise, with respect to such a transaction. This is an initial public offering of our securities. Each unit is being sold at a purchase price of $10.00 per unit and consists of: one share of our common stock; and one warrant. Each warrant entitles the holder to purchase one share of our common stock at a price of $7.50. Each warrant will become exercisable on the later of our completion of a business combination or _____, 2008 [one year from the date of this prospectus], and will expire on, _____, 2011 [four years from the date of this prospectus], or earlier upon redemption. Prior to the closing of this offering, certain of our officers and directors, or entities wholly owned by them, will purchase an aggregate of 1,500,000 warrants, or insider warrants, from us at a price of $1.00 per warrant in a private placement made in accordance with Regulation S under the Securities Act of 1933, as amended. All of the proceeds received from the insider warrants (an aggregate of $1,500,000) will be placed in the trust account described below. The warrants may not be sold, assigned or transferred until we consummate a business combination. The purchasers in the private placement will not have any right to any liquidation distributions with respect to the warrants in the event we fail to consummate a business combination and the insider warrants will expire worthless. Furthermore, the insider warrants are subject to transfer restrictions which expire on the earlier of (i) a business combination or (ii) liquidation. The insider warrants will not be subject to redemption and may be exercised on a "cashless" basis if held by the initial holder thereof or its permitted assigns. We have granted the underwriters a 45-day option to purchase up to 375,000 additional units solely to cover over-allotments, if any (over and above the 2,500,000 units referred to above). We have also agreed to sell to Maxim Group LLC for $100, as additional compensation, an option to purchase up to 125,000 units at $11.00 per unit. The units issuable upon exercise of this option are identical to those offered by this prospectus. The purchase option and its underlying securities have been registered under the registration statement of which this prospectus forms a part. There is presently no public market for our units, common stock or warrants. We anticipate that our units will be quoted on the OTC Bulletin Board under the symbol [ ] on or promptly after the date of this prospectus. Each of the common stock and warrants shall trade separately on the 90th day after the date of this prospectus, unless Maxim Group LLC determines an earlier date is acceptable. Once the securities comprising the units begin separate trading, we expect that the common stock and warrants will be quoted on the OTC Bulletin Board under the symbols [ ] and [ ], respectively. We cannot assure you, however, that our securities will continue to be quoted on the OTC Bulletin Board in the future. Investing in our securities involves a high degree of risk. See Risk Factors beginning on page 15 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Public offering price Underwriting discount and commissions(1)(2) Proceeds, before expenses, to us Per unit $ 10.00 $ 0.40 $ 9.60 Total $ 25,000,000 $ 1,000,000 $ 24,000,000 Dissolution and liquidation if no business combination: Pursuant to the terms of the trust agreement by and between us and American Stock Transfer & Trust Company and applicable provisions of the Delaware General Corporation Law, we will as promptly as possible dissolve and liquidate and release only to our public stockholders, as part of our plan of dissolution and liquidation, the amount in our trust account if we do not effect a business combination within 18 months after consummation of this offering (or within 24 months from the consummation of this offering if a letter of intent, agreement in principle or definitive agreement has been executed within 18 months after consummation of this offering and the business combination contemplated by such letter of intent or definitive agreement has not yet been consummated within such 18 month period). We cannot provide investors with assurances of a specific timeframe for the dissolution and liquidation. Pursuant to our certificate of incorporation, upon the expiration of such time periods, our purpose and powers will be limited to dissolving, liquidating and winding up. Also contained in our certificate of incorporation is the agreement of our board to dissolve our company at that time. Consistent with such obligations, we will seek stockholder approval for any such plan of dissolution and liquidation, and our directors and executive officers have agreed to vote in favor of such dissolution and liquidation. Immediately upon the approval by our stockholders of our plan of dissolution and liquidation, we will liquidate our trust account to our public stockholders and pay, or reserve for payment in accordance therewith, from funds not held in trust including interest earned on the trust account, our liabilities and obligations. Our existing stockholders have agreed to waive their respective rights to participate in any liquidation as part of our plan of dissolution and liquidation occurring upon our failure to consummate a business combination, and to vote in favor of any such plan of dissolution and liquidation, with respect to those shares of common stock acquired by them prior to this offering. In addition, Maxim Group LLC has agreed to waive their rights to the $750,000 ($862,500 if the underwriters over-allotment option is exercised in full) of deferred compensation deposited in the trust account for their benefit if the business combination is not consummated. Accordingly, in the event we liquidate the trust account, our public stockholders will receive $9.91 per share (plus interest, if any, net of taxes payable and that portion of the earned interest previously released to us). However, the ability of stockholders to receive $9.91 per share is subject to any valid claims by our creditors which are not covered by amounts held in the trust account or the indemnities provided by our executive officers. We will pay the costs associated with our dissolution and liquidation from our remaining assets outside of the trust account, including interest earned on the trust account. In addition, if we seek approval from our stockholders to consummate a business combination within 90 days of the expiration of 24 months (assuming that the period in which to consummate a business combination has been extended, as provided in our certificate of incorporation) from the date of this offering, the proxy statement related to such business combination will also seek stockholder approval for our board s recommended plan of dissolution and liquidation in the event our stockholders do not approve such business combination. If no proxy statement seeking the approval of our stockholders for a business combination has been filed 30 days prior to the date which is 24 months from the date of this offering, our board will, prior to such date, convene, adopt and recommend to our stockholders a plan of dissolution and distribution, and on such date file a proxy statement with the Securities and Exchange Commission seeking stockholder approval for such plan. We expect all costs associated with the implementation and completion of our plan of dissolution and liquidation, as well as funds for payments to creditors, if any, will be funded by the interest earned on the trust account released to us, although we cannot give you assurances that there will be sufficient funds for such purposes. Certain of our executive officers have agreed to indemnify us for all claims of creditors to the extent we fail to obtain valid and enforceable waivers from such entities in order to protect the amounts held in trust. We estimate our total costs and expenses for implementing and completing our stockholder-approved plan of dissolution and liquidation will be between $50,000 and $75,000. This amount includes all costs and expenses relating to filing our dissolution in the State of Delaware, the winding up of our company and the costs of a proxy statement and meeting relating to the approval by our stockholders of our plan of dissolution and liquidation. We believe there should be sufficient funds available either outside of the trust account or made available to us out of the net interest earned on the trust account and released to us as working capital, to fund the costs and expenses of dissolution, although we cannot give any assurances thereof. In the event there are not available funds outside of the trust account sufficient to consummate our dissolution and liquidation, Mr. Zadok will provide the funds necessary to complete our dissolution and liquidation. In the event we seek stockholder approval for a plan of dissolution and liquidation and do not obtain such approval, we will nonetheless continue to pursue stockholder approval for our dissolution. Pursuant to the terms of our certificate of incorporation, our powers following the expiration of the permitted time periods for consummating a business combination will automatically thereafter be limited to acts and activities relating to dissolving and winding up our affairs, including liquidation. The funds held in our trust account may not be distributed except upon our dissolution and, unless and until such approval is obtained from our stockholders, the funds held in our trust account will not be released. Consequently, holders of a majority of our outstanding common stock must approve our dissolution in order to receive the funds held in our trust account and the funds will not be available for any other corporate purpose. Escrow of existing stockholders shares: On the date of this prospectus, all of our existing stockholders, including all of our officers and directors, will place the shares they owned before this offering into an escrow account maintained by American Stock Transfer & Trust Company, acting as escrow agent. Subject to certain limited exceptions, such as transfers to family members and trusts for estate planning purposes and upon death while remaining subject to the escrow agreement, these shares will not be transferable during the escrow period and will not be released from escrow until ______________, 2010 [three years from the date of this prospectus], unless we were to consummate a transaction after the consummation of the initial business combination which results in all of the stockholders of the combined entity having the right to exchange their shares of common stock for cash, securities or other property. If we are forced to dissolve and liquidate, these shares will be cancelled. Lockup of private placement warrants: The 1,500,000 warrants to be sold to certain of our officers and directors, or to entities wholly owned by them, in the private placement immediately prior to this offering, may not be sold, assigned or transferred until we consummate a business combination. Until such time, these warrants will be held in an account maintained by Maxim Group LLC. If we are forced to dissolve and liquidate, these warrants will be cancelled. TABLE OF CONTENTS Page Prospectus Summary 1
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+PROSPECTUS SUMMARY You should read the following summary together with the entire prospectus, including the more detailed information regarding us and the ADSs being sold in this offering and our financial statements and the related notes appearing elsewhere in this prospectus. You should carefully consider, among other things, the matters discussed in the section entitled Risk Factors beginning on page 9. ETELECARE GLOBAL SOLUTIONS, INC. We are a leading provider of business process outsourcing, or BPO, services focusing on the complex, voice-based segment of customer care services delivered from both onshore and offshore locations. We provide a range of services including technical support, financial advisory services, warranty support, customer service, sales, customer retention and marketing surveys and research. Our services are delivered from four delivery centers in the Philippines and seven delivery centers in the United States, with approximately 6,800 employees in the Philippines and approximately 3,000 employees in the United States as of December 31, 2006. Our largest clients in terms of revenue for the year ended December 31, 2006 were American Express Company, AOL LLC, Cingular Wireless LLC, Dell Inc., Intuit Inc., Sprint Nextel Corporation and Vonage Holdings Corp., together representing approximately 91% of our revenue. For the year ended December 31, 2006, our revenue was $195.1 million, our income from operations as a percentage of our revenue, which we refer to as our operating margin, was 9.9% and our net income was $12.2 million. For the year ended December 31, 2005, our revenue was $152.2 million, our operating margin was 2.7% and our net loss was $1.8 million. A Different Business Model We were founded in 1999 by alumni of the management consulting firm McKinsey Company, who implemented analytical tools and a focus on quantifiable value for the client in the customer care BPO market. Our business model has three key elements: a focus on delivering complex, voice-based BPO services via a multi-shore delivery platform; making significant investments in the quality of our people and processes; and entering into contracts that contain pricing terms that our clients agree are based on the value we create per dollar spent by the client, rather than a pricing model focused solely on being able to deliver the least expensive service offering, or a cost-based commodity pricing model, that we believe is most often emphasized in our industry. The first element of our business model is a focus on the complex, voice-based segment of the BPO market. Although we provide a wide range of services, we have specialized in more complex voice transactions, many of which require our customer service associates to have specialized skills, training and certifications, such as certification from the United States National Association of Securities Dealers, or the NASD. We provide our services via a multi-shore delivery platform consisting of delivery centers in the Philippines and the United States. We commenced our BPO operations in the Philippines, a former commonwealth of the United States, which we chose as our offshore location to benefit from the population s excellent American-accented English skills and cultural affinity for, and understanding of, the United States. We believe that our clients customers in the United States are comfortable speaking with our Philippine-based customer service associates. The second element of our business model is our belief that investing in the quality of our people and processes can lead to quantifiably superior results for our clients. We call this investing to outperform. We have high standards for employment and we make significant investments in all areas of our human capital, including training, quality assurance, coaching and our performance management system. We employ a scorecard system that uses objective metrics to review an employee s performance to provide clarity of purpose and to ensure accountability for individual results. This scorecard system is linked to a compensation structure for our employees that is heavily based on individual performance. As a result of our reliance on objective metrics in our performance management system, we have what we refer to as a metric-driven performance culture among our employees. The third element of our business model is our approach to clients with metric-driven performance standards that are designed to measure value created per dollar spent. Throughout the sales process, we work Table of Contents closely with our clients to understand what drives economic value for them and then we demonstrate how our performance on their programs will align with that value. After we initiate the client program, we measure our performance each quarter on key metrics that we have agreed upon with the client, such as first-time call resolution, the frequency with which a technician or equipment parts are required to be dispatched to resolve a customer s technical support issue, the rate at which we are successful in completing a sale on behalf of our client and customer satisfaction, and then convert our performance into quantifiable value. We then share this information with our clients to enable them to compare the quantifiable value we have delivered to the value they have received from their other BPO providers or their in-house operations. We believe that our ability to quantify value has allowed us in most cases to negotiate fixed pricing with our clients that reflects the greater value created per dollar spent we deliver rather than the cost-based commodity pricing model that we believe is most often emphasized in our industry. We believe that our focus on these three elements of our business model has led to strong relationships with our clients and recognition in our industry. As of December 31, 2006, we had 21 active clients for which we had performed 51 different programs since January 2006. As of December 31, 2006, our average number of programs per client was 2.0. We have also won numerous industry awards, including the Best Outsourcer at ICCM, the largest contact center convention in the world, for each of the last five years the award was presented; Employer of the Year in the Philippines in 2005 by the Personnel Management Association of the Philippines, the leading human resources professional organization in the Philippines, the first time a BPO company has won this award; ranked in approximately the top 5% out of approximately 900 outsourcing companies in the 50 Best Managed Global Outsourcing Vendors for 2006 by The Black Book of Outsourcing; and recognition in 2006 by NeoIT, an offshore outsourcing advisory and management firm, as one of the top ten offshore call center companies and a leader in human capital development. Service Offering and Client Base Business process outsourcing is the outsourcing by a business of a function or process, such as technical support for the business s customers, to a third party. We perform and manage customer care, technical support and sales functions or processes on behalf of our clients. Our customer care services are initiated primarily by unsolicited, or inbound, calls from customers of our clients on a wide range of topics including billing inquiries, account and service changes, product and service inquiries and warranty support. Our technical support services include handling troubleshooting calls initiated by customers regarding hardware and software issues with computer and other consumer electronic products. Our sales services include the handling of calls initiated by customers purchasing products and services from our clients and the initiation by us of sales calls, primarily to existing customers of our clients for retention and loyalty programs. As a result of the various services we provide, we often conduct multiple programs for a single client. For example, we perform two different warranty support programs and two different sales programs for a single client. As of December 31, 2006, we had 21 active clients for which we had performed 51 different programs since January 2006. We provide a variety of onshore and offshore BPO services across a range of industries, with a particular expertise in communications, technology and financial services. We also serve clients in the travel and hospitality, media and retail industries. In 2005, our five largest clients collectively represented 83% of our revenue, with Cingular representing 50% of our revenue and Dell representing 17% of our revenue. In 2006, our revenue became less concentrated, with our five largest clients collectively representing 80% of our revenue and our two largest clients, Cingular and Dell, representing 42% and 18% of our revenue, respectively. Thirty percent of our clients, including Cingular and Dell, have retained us to perform multiple programs under separate contractual arrangements, which we believe has the practical effect of further decreasing our revenue concentration. For example, we perform four separate programs for Cingular for two separate Cingular business units, and two separate programs for Dell for two separate Dell business units. TABLE OF CONTENTS Page Prospectus Summary 1
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+PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS CERTAIN INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. FOR A MORE COMPLETE UNDERSTANDING OF THIS OFFERING, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE RISK FACTORS AND THE FINANCIAL STATEMENTS. UNLESS OTHERWISE STATED IN THIS PROSPECTUS: o REFERENCES TO "WE," "US" OR "WESTERN UNITED" REFER TO WESTERN UNITED FINANCIAL CORPORATION; o REFERENCES TO OUR "PRIVATE STOCKHOLDERS" REFER TO WESTERN UNITED FUNDING, LLC AND OUR OFFICERS, DIRECTORS AND SPECIAL ADVISOR; o REFERENCES TO "BUSINESS COMBINATION" MEAN OUR INITIAL ACQUISITION OF ONE OR MORE OPERATING BUSINESSES OR ASSETS THROUGH A MERGER, CAPITAL STOCK EXCHANGE, ASSET OR STOCK ACQUISITION, EXCHANGEABLE SHARE TRANSACTION OR OTHER SIMILAR BUSINESS COMBINATION PURSUANT TO WHICH WE WILL REQUIRE THAT A MAJORITY OF THE SHARES OF COMMON STOCK VOTED BY THE PUBLIC STOCKHOLDERS ARE VOTED IN FAVOR OF THE ACQUISITION AND LESS THAN 20% OF THE PUBLIC STOCKHOLDERS BOTH VOTE AGAINST THE PROPOSED ACQUISITION AND EXERCISE THEIR CONVERSION RIGHTS; o THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS WILL NOT EXERCISE THEIR OVER-ALLOTMENT OPTION; AND o THE SHARE NUMBERS IN THIS PROSPECTUS ASSUME A 1.3 FOR TWO REVERSE STOCK SPLIT WE INTEND TO EFFECT PRIOR TO THE CONSUMMATION OF THIS OFFERING. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER IS NOT PERMITTED. OUR BUSINESS OVERVIEW We are a blank check development stage company organized under the laws of the State of Delaware on September 29, 2006. We were formed to acquire or acquire control of, through a merger, capital stock exchange, asset acquisition, exchangeable share transaction, stock purchase or other similar business combination, one or more banks, thrifts and their respective holding companies, which we refer to in this prospectus as "banking organizations," and other financial services organizations located in and around California. Currently, we intend to focus primarily on banking organizations in the attractive central and southern California banking market, including the counties of San Bernardino, Riverside, Orange, Los Angeles and Ventura, which we feel are characterized by strong economic and demographic trends. We intend to supplement such transactions with the acquisition of related financial services organizations, such as insurance brokers or wealth management companies. We do not currently have any specific business combination or specific target under consideration. Additionally, we have not engaged or retained any agent or other representative to identify or locate any suitable target, although we may do so following this offering. To date, our efforts have been limited to organizational activities, including the private placement of 1,300,000 shares of our common stock to our founders and management team, and activities related to this offering. We believe that our management team and board of directors have the industry knowledge and relationships to source and execute appropriate acquisitions. MARKET OPPORTUNITY We believe the five counties that we intend primarily to target offer some of the most attractive banking demographics in the U.S. These attractive attributes include: o POPULATION -- according to the U.S. Department of Commerce, Bureau of Census, in 2005 the five-county area had a total estimated population of 18 million, which was larger than all states except California, Texas and New York; o STRONG ECONOMIC BASE -- according to the Los Angeles County Economic Development Corporation, or LAEDC, and the California Department of Finance, for 2005 the five-county area had a gross product of $754.8 billion, or 6% of the entire U.S. gross product; o HIGH ECONOMIC GROWTH RATE -- according to the LAEDC and the California Department of Finance, for 2005 the five-county area showed a nominal (unadjusted for inflation) 7.4% year-on-year growth rate for gross product compared to the national average of 6.4%; o STRONG MANUFACTURING BASE -- according to the U.S. Department of Labor, Bureau of Labor Statistics, during the last 15 years including 2005, the five-county area ranked as a leading center for manufacturing, as measured by average employment and, according to the Los Angeles District Office of Small Business Administration, the Los Angeles District ranked as the number one market in the U.S. for Small Business Administration, or SBA, loans and grants; and o HIGH EMPLOYMENT -- according to the U.S. Department of Labor, Bureau of Labor Statistics, if viewed as a stand-alone state, the five-county area in 2005 had more manufacturing jobs than any other state in the U.S. except for California, Texas and Ohio. We believe there is an opportunity to create, through the acquisition of other financial institutions, a full-service regional commercial financial institution, whose mission is to provide "one-stop shopping" for the lending, insurance asset management and other financial service needs of small businesses, defined as businesses with less than 500 employees, and their owners--particularly those small businesses in the industrial and service sectors. We intend to serve this market through a staff offering a high level of personalized service, consistency and relationship management that we believe is not currently provided to small businesses by money center banks. We believe this opportunity is further enhanced by the following factors that are characteristic of the current market for California-based banking organizations: o A large number of relatively small banks, where for example, as of June 30, 2006, approximately 186, or 69% of the total, state or federally chartered commercial banks had less than $500 million in assets. o Bank consolidation that exceeds new bank formation, where for example, since 2000, a total of 86 banks have been chartered while 117 have been sold. o A narrow product line with a high concentration in real estate lending, particularly for smaller institutions, where for example, as of June 30, 2006, real estate loans approached 80% of gross loans for institutions with less than $1 billion in assets. o Financial performance of smaller banks that is substantially lower than that of large banks, where for example, as of June 30, 2006, return on average assets, or ROAA, and return on average equity, or ROAE, for institutions with less than $500 million in assets averaged 1.12% and 8.38%, respectively, compared to 1.49% and 15.12%, respectively, for their larger counterparts. We believe that these pressures, coupled with continued margin compression due to an ongoing flat or inverted yield curve and exacerbated by a softening economic and real estate environment, are triggering another cycle of community bank consolidation in California that will last several years. As a result, independent community banks, particularly the newer ones, will struggle to increase their revenue and become more efficient through traditional organic loan growth. These market dynamics, characterized by a very large and growing market for small businesses in our targeted regions of central and southern California, which are serviced by a large number of relatively small and young banks with limited service offerings and poor operating efficiencies, add to the opportunity for Western United. BUSINESS STRATEGY Western United was formed to take advantage of this market opportunity by creating a financial services organization that will acquire and integrate small community banking organizations and associated fee income businesses, such as registered investment advisors or insurance brokers. In doing so, we will endeavor to create scale and operating efficiencies, greater loan diversification (with emphasis on larger commercial and industrial portfolios, and increased lending to high net worth individuals) and improved fee income that could not be achieved as a small, stand-alone banking organization. In addition to the scale and product breadth advantages over our smaller competitors, we will attempt to differentiate ourselves from money center and larger regional bank competitors through our ability to deliver financial products with a significantly higher level of customer service than larger banks are able to provide. Our long-term goal is to create a diversified financial services company exceeding $2 billion in assets with a balanced and diversified loan portfolio and advisory services. We initially intend to focus on acquiring banking organizations with assets ranging from $100 million to $750 million in southern and central California. As of June 30, 2006, there were at least 79 banking organizations that fit those criteria. We intend to focus on three market segments: privately owned businesses in the lower end of the middle market; small and medium size real estate developers with an expertise in regional housing, condominium, shopping mall, apartment and office development; and specialty groups such as medical, legal, accounting, family offices, municipalities, not-for-profits and pension funds. These businesses have a variety of financial needs, from commercial and industrial and commercial real estate lending to insurance and investment advisory services. Our charter requires that our initial business combination be with one or more banks, thrifts and their respective holding companies and other financial services organizations. COMPETITIVE ADVANTAGES We believe that we will have several key advantages in executing our business strategy, including: an experienced and highly motivated Chief Executive Officer with a proven track record for executing a similar business strategy in southern California, a plan to carefully tailor our product line to fit current market opportunities, the flexibility to offer potential acquisition targets cash or stock consideration to meet their liquidity or estate planning needs, the willingness to buy underperforming or undervalued banking organizations or financial service organizations that are below the size or scale that would be attractive to most regional banks, and access to much greater capital resources than would typically be available for a community bank in California. Charles Jackson, our Chief Executive Officer, has over thirty years of management experience in commercial banking, private banking and wealth management. Dick Alston, our Chief Financial Officer, brings experience as both a commercial lender in Los Angeles and Chief Operating Officer of two mid-sized businesses in Los Angeles and Orange County. In addition to their acquisition and operational experience, Messrs. Jackson and Alston bring a commitment to the success of Western United as an operating company. Both have dedicated themselves full time to our success and have expressed their commitment to remain with us following a business combination. They intend to supplement their expertise by drawing upon the pool of talent they have identified over their many years in southern California, and believe they will be able to quickly leverage this talent in the management of the acquired banking organizations in order to implement our strategic vision and rapidly increase growth opportunities. BUSINESS COMBINATION While we may seek to consummate a business combination with more than one target, our initial business combination must be with a target or targets whose fair market value is at least equal to 80% of our net assets (excluding the amount held in the trust account representing a portion of the underwriters' discount) at the time of such acquisition. Consequently, it is possible that we will have the ability to consummate only a single business combination. However, we have no limitation on our ability to raise additional funds through the sale of securities or the incurrence of additional indebtedness that would enable us to consummate a business combination with an operating business having a fair market value in excess of 80% of our net assets (excluding the amount held in the trust account representing a portion of the underwriters' discount) at the time of such an acquisition. Since we have no specific business combination under consideration, we have not entered into any such fund raising agreement and have no current intention of doing so. None of our officers, directors or our special advisor will receive any compensation prior to the consummation of our initial business combination, except for reimbursement of out-of-pocket expenses incurred by them on our behalf and repayment of a loan for up to $200,000, plus interest, made by our Chief Financial Officer to fund a portion of the expenses owed by Western United to third parties relating to the offering contemplated by this prospectus. See "Use of Proceeds." Our executive offices are located at 70 South Lake Avenue, Suite 900, Pasadena, California 91101, and our telephone number is (626) 796-8366. THE OFFERING <TABLE> <S> <C> Securities offered ............ 6,375,000 units, at $8.00 per unit, each unit consisting of: o one share of common stock; and o one warrant. The units will begin trading on or promptly after the effective date of the registration statement. Each of the common stock and warrants, without any securityholder having to take any action, may trade separately from and after the 90th day after the effective date of the registration statement unless the representative of the underwriters determines that an earlier date is acceptable (based upon its assessment of the relative strengths of the securities markets and small capitalization companies in general, and the trading pattern of, and demand for, our securities in particular). In no event will the common stock and warrants trade separately until we file an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file a Current Report on Form 8-K with the SEC, including an audited balance sheet, promptly following the consummation of this offering. The audited balance sheet will include proceeds we receive from the exercise of the over-allotment option only if the over-allotment option is exercised prior to the filing of the Form 8-K. If the over-allotment option is exercised after our initial filing of a Form 8-K, we will file a subsequent Form 8-K to provide updated financial information to reflect the exercise of the over-allotment option. We also will include in a Form 8-K, or amendment thereto, information indicating if the underwriters have allowed separate trading of the common stock and warrants prior to the 90th day after the effective date of the registration statement. Following the date the common stock and warrants are eligible to trade separately, the units will continue to be listed for trading, and any securityholder may elect to break apart a unit and trade the common stock or warrants separately or as a unit. Even if the component parts of the units are broken apart and traded separately, the units will continue to be listed as a separate security, and consequently, any subsequent securityholder owning common stock and warrants may elect to combine them together and trade them as a unit. Securityholders will have the ability to trade our securities as units until such time as the warrants expire or are redeemed. 200,000 shares of common stock, at $7.90 per share. The 200,000 shares of common stock are being offered to Western United Funding, LLC, an entity affiliated with our directors, officers and special advisor. Prior to the consummation of this offering, Western United Funding, LLC will waive its right to receive distributions upon our dissolution and liquidation prior to a business combination with respect to these shares of common stock. </TABLE> <TABLE> <S> <C> Common stock: Number outstanding before this offering ....... 1,300,000 shares Number to be outstanding after this offering ........ 7,875,000 shares Warrants: Number outstanding before this offering ....... 0 warrants Number to be outstanding after this offering ........ 6,375,000 warrants Exercisability ................ Each warrant is exercisable for one share of common stock. Exercise price ................ $6.00, subject to adjustment Exercise period ............... The warrants will become exercisable on the later of: o the consummation of a business combination, and o , 2008 [one year from the effective date of the registration statement]. The warrants will expire at 5:00 p.m., New York City time, on , 2011 [four years from the effective date of the registration statement] or earlier upon redemption. The warrants may expire worthless if we fail to maintain an effective registration statement covering the shares of common stock underlying the warrants or if we are forced to dissolve and liquidate before the consummation of a business combination. Redemption .................... We may redeem the outstanding warrants: o in whole and not in part, o at a price of $0.01 per warrant at any time after the warrants become exercisable, o upon a minimum of 30 days' prior written notice of redemption, and o if, and only if, the last sales price of our common stock equals or exceeds $11.50 per share (subject to adjustment for splits, dividends, recapitalizations and other similar events) for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. In addition, we may not call the warrants unless the warrants and the shares of common stock underlying the warrants are covered by an effective registration statement from the beginning of the measurement period through the date fixed for redemption. If the foregoing conditions are satisfied and we call the warrants for redemption, each warrant holder shall then be entitled to exercise its warrants prior to the date scheduled for redemption. </TABLE> <TABLE> <S> <C> The redemption provisions for our warrants have been established at a price which is intended to provide warrant holders a premium to the initial exercise price. There can be no assurance, however, that the price of the common stock will exceed either the redemption trigger price of $11.50 or the warrant exercise price of $6.00 after we call the warrants for redemption. Proposed American Stock Exchange symbols for our: Units ...................... WNF.U Common stock ............... WNF Warrants ................... WNF.WS Offering proceeds to be held in trust ................. From the proceeds of this offering, including the offering of 200,000 shares of common stock to Western United Funding, LLC, $50,195,000 (approximately $7.87 per unit) will be placed in trust. This amount reflects the gross proceeds of $52,580,000 raised by us in this offering, including the offering of 200,000 shares of common stock to Western United Funding, LLC, less estimated offering expenses of $600,000 and the non-deferred portion of the underwriting discounts and non-accountable expense allowance of $1,785,000. The trust amount includes the underwriters' deferred discount of $1,785,000 ($0.28 per unit). The $50,195,000 trust amount will be held in an account maintained by Wells Fargo Bank, National Association, acting as trustee pursuant to an agreement to be signed on the effective date of the registration statement. We believe that the deferment of a portion of the underwriters' discount and the placement of such deferred discount in a trust account is a benefit to our public stockholders because such money is available for possible distribution to our public stockholders if a dissolution and liquidation of Western United occurs prior to the consummation of a business combination. These proceeds will not be released until the earlier of the consummation of a business combination or our dissolution and liquidation; provided, however, a portion of the interest earned on funds held in the trust account (net of taxes payable on such interest) will be released to us to cover our operating expenses. We will withdraw such interest no more frequently than monthly and in amounts not to exceed $125,000 per month, until a maximum of $1,500,000 of such interest has been released from the trust account. Therefore, unless and until a business combination is consummated, the remaining proceeds held in the trust account will not be available for our use for any expenses related to this offering (except as described above) or expenses which we may incur related to the investigation and selection of a target acquisition and the negotiation of an agreement to acquire a target acquisition. These expenses, related to and incurred prior to a possible business combination, will be paid by us from the $1,500,000 of interest earned and withdrawn by us from the trust account. The underwriters have agreed to defer $1,785,000 of their underwriting discount, equal to 3.5% of the gross proceeds </TABLE> <TABLE> <S> <C> of the public offering of units, until the consummation of a business combination. Upon the consummation of a business combination, such deferred discount shall be released to the underwriters out of the gross proceeds of this offering held in the trust account. The underwriters will not be entitled to any interest accrued on the deferred discount. None of the warrants may be exercised until after the consummation of our business combination and, thus, after the proceeds of the trust account have been disbursed. Accordingly, the warrant exercise price will be paid directly to us and not placed in the trust account. Stockholders must approve business combination .......... We will seek stockholder approval before we consummate our business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable state law. In connection with the vote required for our business combination, our private stockholders have agreed to vote the shares of common stock owned by them immediately before this offering and the 200,000 shares of common stock offered to Western United Funding, LLC in accordance with the majority of the shares of common stock voted by the public stockholders; however, they may cast votes with respect to any other shares of common stock acquired in or following this offering in any manner as they may determine in their sole discretion. As a result, a private stockholder who acquires shares in or after this offering (except for the 200,000 shares of common stock offered to Western United Funding, LLC), and is therefore a public stockholder with respect to such shares of common stock, may vote against the proposed business combination with respect to such shares, and retain the right to exercise the conversion rights attributable to such shares in the event that a business combination transaction is approved by a majority of our public stockholders. We will proceed with a business combination only if a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and public stockholders owning less than 20% of the shares sold in this offering exercise their conversion rights described below. Following the consummation of our initial business combination, unless required by Delaware law, the federal securities laws and the rules and regulations promulgated thereunder, or the rules and regulations of an exchange upon which our securities are listed, we do not presently intend to seek stockholder approval for any subsequent acquisitions. We will not enter into a business combination with any of our private stockholders, officers or directors, or any of their affiliates. </TABLE> <TABLE> <S> <C> Conversion rights for stockholders voting to reject a business combination ........ If our initial business combination is approved and consummated, public stockholders voting against our initial business combination will be entitled to convert their shares of common stock into a pro rata share of the aggregate amount then on deposit in the trust account, including interest income earned on the trust account, net of (1) interest amounts previously distributed to us, up to a maximum of $1,500,000, (2) income taxes payable on the interest income on the trust account and (3) the deferred underwriting discount. Our private stockholders will not have such conversion rights with respect to any shares of common stock owned by them, directly or indirectly, prior to this offering or with respect to the 200,000 shares of common stock being offered to Western United Funding, LLC. Public stockholders who convert their stock into their share of the trust account will continue to have the right to exercise any warrants they may hold. Dissolution and liquidation if no business combination .... If we do not consummate a business combination within 24 months after the consummation of this offering, our amended and restated certificate of incorporation provides that we will liquidate, and we will not be able to engage in any other business activities. Upon our dissolution, holders of our common stock sold in this offering (other than Western United Funding, LLC with respect to the 200,000 shares of common stock they are being offered) will be entitled to receive their proportionate share of the amount then in our trust account (which amount would not include the $1,500,000 of interest to be released to us), net of taxes. They also will be entitled to receive a pro rata portion of our remaining assets not held in trust, less amounts we pay, or reserve to pay, for all of our liabilities and obligations. Holders of our common stock sold in this offering may receive less than their proportional share of our trust account if and to the extent that creditors that have claims that cannot be satisfied by our remaining assets not held in trust reach into the trust account for settlement of their claims. In addition, such holders may be held liable for claims by creditors against us to the extent of distributions received by them in dissolution. While we will seek waivers from all target acquisitions, vendors and service providers to make claims against the trust account, we cannot guarantee that we will be able to obtain any such waiver or that any such waiver will be held valid and enforceable. We will set aside $100,000 to pay any such potential claims from vendors, target acquisitions or service providers, as well as to pay the costs of liquidation and dissolution, if necessary, as described below. In addition, Western United Funding, LLC has agreed that, if we dissolve and liquidate prior to a business combination, it will be liable to ensure that the proceeds in the trust account are not reduced by the claims of vendors for services rendered or products sold to us, as well as claims of </TABLE> <TABLE> <S> <C> prospective target acquisitions for fees and expenses of third parties that we agree in writing to pay in the event we do not consummate a combination with such business. However, there is no guarantee that the assets of Western United Funding, LLC will be sufficient to satisfy any such claims. Our private stockholders have agreed to vote the shares beneficially owned by them in favor of our dissolution in the event we are unable to timely consummate a business combination. Our private stockholders have waived their right to receive distributions upon our dissolution and liquidation prior to a business combination with respect to all shares owned by them prior to this offering and with respect to the 200,000 shares they intend to purchase from us in this offering. In addition, the underwriters have agreed to waive their rights to $1,785,000, or $2,052,750 if the over-allotment option is exercised in full, of deferred underwriting discounts deposited in the trust account in the event we dissolve prior to the consummation of a business combination. We will pay the costs of dissolution and liquidation, which we currently estimate to be approximately $50,000 to $75,000, from our remaining assets outside of the trust account. We will set aside $100,000 to pay such costs, as well as to pay potential claims from vendors, target acquisitions or service providers as described above. In addition, Western United Funding, LLC has agreed to pay the costs of dissolution and liquidation in the event our remaining assets outside of the trust account are insufficient to pay those costs; however, there is no guarantee that the assets of Western United Funding, LLC will be sufficient to satisfy our dissolution and liquidation expenses. Escrow of management and private stockholders' shares .. On the effective date of the registration statement, our officers, directors and special advisor will place the 1,300,000 shares of common stock they owned before this offering into an escrow account maintained by Wells Fargo Bank, National Association, acting as escrow agent. In connection with the closing of this offering, Western United Funding, LLC will place the 200,000 shares of common stock it intends to acquire in this offering into the escrow account with Wells Fargo Bank, National Association. Subject to certain limited exceptions (such as transfers to relatives and trusts for estate planning purposes, while remaining in escrow), none of the 1,300,000 shares issued to our private stockholders prior to this offering or the 200,000 shares offered to Western United Funding, LLC in this offering can be sold or transferred until one year following the consummation of our initial business combination. </TABLE> <TABLE> <S> <C> Underwriters' purchase option ........................ We have also agreed to sell to the underwriters for $100, as additional compensation, an option to purchase up to a total of 318,750 units at $10.00 per unit. The units issuable upon exercise of this option are identical to the other units offered by this prospectus except that the warrants included in the option have an exercise price of $7.50 per share (125% of the exercise price of the warrants included in the units sold in the offering). This option is exercisable at $10.00 per unit, commencing on the later of the consummation of a business combination and one year from the effective date of the registration statement and expiring four years from the effective date of the registration statement. The option may be exercised on a cashless basis, such that in lieu of paying the aggregate exercise price for the shares of common stock being purchased upon exercise of the warrant in cash, the holder will relinquish a number of shares underlying the warrant with a market value equal to such aggregate exercise price. Accordingly, we would not receive additional proceeds to the extent the warrants are exercised on a cashless basis and the exercise price, if any, with respect to the warrants will be paid directly to us. The option and the 318,750 units, the 318,750 shares of common stock and the 318,750 warrants underlying such units, and the 318,750 shares of common stock underlying such warrants, have been deemed compensation by the National Association of Securities Dealers, Inc., or NASD, and are therefore subject to a 180-day lock-up pursuant to Rule 2710(g)(1) of the NASD Conduct Rules. Additionally, the option may not be sold, transferred, assigned, pledged or hypothecated for a one-year period (including the foregoing 180-day period) following the effective date of the registration statement except to any underwriter and selected dealer participating in the offering and their bona fide officers or partners. The purchase option and its underlying securities have been registered under the registration statement of which this prospectus forms a part. The exercise price and number of units issuable upon exercise of the option may be adjusted in certain circumstances including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. However, the option will not be adjusted for issuances of common stock at a price below the exercise price of the warrants included in the option. </TABLE> RISKS IN MAKING YOUR DECISION ON WHETHER TO INVEST IN OUR SECURITIES, YOU SHOULD TAKE INTO ACCOUNT THE SPECIAL RISKS WE FACE AS A BLANK CHECK DEVELOPMENT STAGE COMPANY, AS WELL AS THE FACT THAT THIS OFFERING IS NOT BEING CONDUCTED IN COMPLIANCE WITH RULE 419 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND, THEREFORE, YOU WILL NOT BE ENTITLED TO PROTECTIONS NORMALLY AFFORDED TO INVESTORS IN RULE 419 BLANK CHECK OFFERINGS. YOU SHOULD CAREFULLY CONSIDER THESE AND THE OTHER RISKS SET FORTH IN THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 15 OF THIS PROSPECTUS. SOME OF OUR OTHER RISKS INCLUDE THE FOLLOWING: o WE ARE A DEVELOPMENT STAGE COMPANY WITH NO OPERATING HISTORY AND, ACCORDINGLY, YOU WILL NOT HAVE ANY BASIS ON WHICH TO EVALUATE OUR ABILITY TO ACHIEVE OUR BUSINESS OBJECTIVE. o OUR ABILITY TO CONTINUE AS A GOING CONCERN IS DEPENDENT ON US RAISING FUNDS IN THIS OFFERING. o IF WE ARE FORCED TO DISSOLVE AND LIQUIDATE BEFORE A BUSINESS COMBINATION AND DISTRIBUTE THE AMOUNTS HELD IN THE TRUST ACCOUNT, OUR PUBLIC STOCKHOLDERS WILL RECEIVE LESS THAN $8.00 PER SHARE AND OUR WARRANTS WILL EXPIRE WORTHLESS. o IF THIRD PARTIES BRING CLAIMS AGAINST US, THE PROCEEDS HELD IN TRUST COULD BE REDUCED AND THE PER-SHARE LIQUIDATION PRICE RECEIVED BY STOCKHOLDERS WILL BE LESS THAN THE APPROXIMATELY $7.87 PER SHARE HELD IN TRUST AT THE CLOSING OF THIS OFFERING. o SINCE WE HAVE NOT YET SELECTED ANY TARGET ACQUISITION WITH WHICH TO CONSUMMATE A BUSINESS COMBINATION, WE ARE UNABLE TO CURRENTLY ASCERTAIN THE MERITS OR RISKS OF THE BUSINESS' OPERATIONS. o OUR ABILITY TO SUCCESSFULLY CONSUMMATE A BUSINESS COMBINATION AND TO BE SUCCESSFUL THEREAFTER WILL BE LARGELY DEPENDENT UPON THE EFFORTS OF OUR OFFICERS. o INITIALLY, WE MAY ONLY BE ABLE TO CONSUMMATE ONE BUSINESS COMBINATION, WHICH MAY CAUSE US TO BE SOLELY DEPENDENT ON A SINGLE BUSINESS AND A LIMITED NUMBER OF PRODUCTS OR SERVICES. o THERE ARE SUBSTANTIAL REGULATORY LIMITATIONS ON INVESTMENTS IN BANKS AND THRIFTS THAT LIMIT INVESTOR CONTROL. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table is derived from and summarizes the relevant financial data for our business and should be read in conjunction with our audited financial statements and the related notes, which are included elsewhere in this prospectus. We have not had any significant operations to date; therefore, only balance sheet data are presented. <TABLE> <CAPTION> DECEMBER 31, 2006 ---------------------------- ACTUAL AS ADJUSTED (1) --------- --------------- <S> <C> <C> Balance Sheet Data: Working capital (deficit) .......................... $(459,870) $ 48,387,502 Total assets ....................................... $ 455,843 $ 48,387,502 Total liabilities (2) .............................. $ 478,341 $ -- Value of common stock which may be converted to cash (approximately $7.59 per share) ................. $ -- $ 9,677,242 Stockholders' equity (3) ........................... $ (22,498) $ 38,710,260 </TABLE> ---------- (1) Excludes the $100 purchase price for the purchase option issued to the underwriters. (2) Excludes deferred underwriting discounts equal to 3.5% of the gross proceeds of the public offering of the units that the underwriters have agreed to defer until the consummation of a business combination. (3) Excludes 1,274,999 shares of common stock, at an initial per-share conversion price of approximately $7.59, subject to possible conversion. The "as adjusted" information gives effect to the sale of the units we are offering to the public (other than pursuant to the underwriters' over-allotment option) and the offering of 200,000 shares of common stock to Western United Funding, LLC, including the application of the related gross proceeds. This also includes $1,785,000 of deferred underwriting discounts which are payable only upon the consummation of a business combination. The as adjusted working capital and total assets amounts include the $50,195,000 trust amount, which will be available to us only upon the consummation of a business combination within the time period described in this prospectus; provided, however, that the interest earned on funds held in the trust account, net of taxes payable on such interest, will be released to us monthly to cover our operating expenses. Such interest amounts released to us from the trust account will not exceed $125,000 per month and will not exceed in the aggregate $1,500,000. The $50,195,000 trust amount includes the $1,785,000 being held in the trust account representing the underwriters' deferred discount. If a business combination is not consummated within 24 months after the consummation of this offering, then our corporate existence will terminate and we will take all action necessary to dissolve. Upon dissolution, the proceeds then held in the trust account, including the deferred underwriting discounts, and interest thereon, net of income taxes on such interest and the $1,500,000 of such interest distributed to us for expenses, will be distributed as soon as practicable solely to our public stockholders. In addition, such holders will be entitled to receive a pro rata portion of our remaining assets not held in trust, less amounts we pay, or reserve to pay, for all of our liabilities and obligations. These liabilities and obligations include our corporate expenses arising during our remaining existence, including the costs of our dissolution and liquidation. Our private stockholders have agreed to waive their respective rights to participate in any liquidating distributions occurring upon our failure to consummate a business combination and subsequent dissolution with respect to the shares of common stock owned by them immediately prior to this offering and the 200,000 shares of common stock offered to Western United Funding, LLC. We will not proceed with a business combination if public stockholders owning 20% or more of the shares sold in this offering vote against the business combination and exercise their conversion rights. Each public stockholder will only be able to convert its shares if such holder elects to do so; voting against the business combination alone will not result in a pro rata distribution of the trust account. Accordingly, we may still consummate a business combination if public stockholders owning up to approximately 19.99% of the shares sold in this offering exercise their conversion rights. If this occurs and a business combination is consummated, we could be required to convert to cash from the trust account up to 19.99999% of the 6,375,000 shares sold in this offering, or 1,274,999 shares of common stock, at an initial per-share conversion price of approximately $7.59, without taking into account interest earned on the trust account or rights of creditors to funds held in the trust account, if any. The actual per-share conversion price will be equal to: o the amount in the trust account (excluding the amount held in the trust account representing a portion of the underwriters' discount), including interest (net of taxes payable and $1,500,000 of such interest distributed to us for expenses) earned on the trust account, as of two business days prior to the proposed consummation of the business combination, o divided by the number of shares of common stock sold in this offering.
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+S-1/A 1 v078201s1a.htm As filed with the Securities and Exchange Commission on November __, 2006 As filed with the Securities and Exchange Commission on June 21, 2007 File No. 333-138699 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________ AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ______________ ALYST ACQUISITION CORP. (Exact Name of Registrant as Specified in Its Charter) Delaware 6770 20-5385199 (State or Other Jurisdiction of Incorporation or Organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 233 East 69th Street, #6J New York, NY 10021 (646) 290-6104 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant s Principal Executive Offices) ______________ William Weksel, Chief Executive Officer 233 East 69th Street, #6J New York, NY 10021 (646) 290-6104 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) ______________ Copies to: David Alan Miller, Esq. Graubard Miller The Chrysler Building 405 Lexington Avenue New York, New York 10174 (212) 818-8800 (212) 818-8881 Facsimile Alan I. Annex, Esq. Greenberg Traurig, LLP Met Life Building 200 Park Avenue New York, New York 10166 (212) 801-9323 (212) 805-9323 Facsimile ______________ Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, JUNE 21, 2007 $56,000,000 ALYST ACQUISITION CORP. 7,000,000 units Alyst Acquisition Corp. is a newly formed blank check company organized for the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. Our efforts to identify a prospective target business will not be limited to a particular industry although we intend to focus our efforts on acquiring an operating business in the telecommunications industry. We do not have any specific business combination under consideration and we have not (nor has anyone on our behalf) contacted any prospective target business or had any discussions, formal or otherwise, with respect to such a transaction. This is an initial public offering of our securities. Each unit that we are offering has a price of $8.00 and consists of one share of our common stock and one warrant. Each warrant entitles the holder to purchase one share of our common stock at a price of $5.00. Each warrant will become exercisable on the later of our completion of a business combination , 2008 [one year from the date of this prospectus], and will expire on , 2011 [four years from the date of this prospectus], or earlier upon redemption. We have granted Ferris, Baker Watts Incorporated and Jesup & Lamont Securities Corporation, the representatives of the underwriters for this offering, a 45-day option to purchase up to 1,050,000 units (over and above the 7,000,000 units referred to above) solely to cover over-allotments, if any. The over-allotment will be used only to cover the net syndicate short position resulting from the initial distribution. We have also agreed to sell to Ferris, Baker Watts and Jesup & Lamont, for $100, as additional compensation, an option to purchase up to a total of 350,000 units at $10.00 per unit. The units issuable upon exercise of this option are identical to those offered by this prospectus, except that the exercise price of the underlying warrants will be $7.50 per share. The purchase option and its underlying securities have been registered under the registration statement of which this prospectus forms a part. Robert A. Schriesheim, our chairman of the board, Dr. William Weksel, our chief executive officer, Robert H. Davies, our chief strategist, Michael E. Weksel, our chief operating officer, chief financial officer, secretary and director, Paul Levy, one of our directors, and Ira Hollenberg IRA, Silverman Realty Group, Inc. Profit Sharing Plan (LCPSP), Norbert W. Strauss, David Strauss and Jonathan Strauss, each a stockholder of ours, have committed to purchase from us an aggregate of 1,820,000 warrants at $1.00 per warrant (for a total purchase price of $1,820,000). These purchases will take place on a private placement basis simultaneously with the consummation of this offering. All of the proceeds we receive from the purchases will be placed in the trust fund described below. The insider warrants to be purchased by these individuals will be identical to warrants underlying the units being offered by this prospectus except that if we call the warrants for redemption, the insider warrants will be exercisable on a cashless basis so long as they are still held by the purchasers or their affiliates. The insider warrants to be sold to these purchasers have been registered for resale under the registration statement of which this prospectus forms a part, but the purchasers have agreed that the insider warrants will not be sold or transferred by them until 90 days after we have completed a business combination. Accordingly, the insider warrants will be placed in escrow and will not be released until 90 days after the completion of our initial business combination. There is presently no public market for our units, common stock or warrants. We intend to apply to have the units listed on the American Stock Exchange. Assuming that the units are listed on the American Stock Exchange, the units will be listed under the symbol ___ on or promptly after the date of this prospectus. Assuming that the units are listed on the American Stock Exchange, once the securities comprising the units begin separate trading, the common stock and warrants will be listed on the American Stock Exchange under the symbols ___ and ___ , respectively. We cannot assure you that our securities will be listed or will continue to be listed on the American Stock Exchange. Investing in our securities involves a high degree of risk. See Risk Factors beginning on page 12 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Public Offering Price Underwriting Discount and Commissions(1) Proceeds, Before Expenses, to Us Per unit $ 8.00 $ 0.64 $ 7.36 Total $ 56,000,000 $ 4,480,000 $ 51,520,000 (1) Includes a non-accountable expense allowance in the amount of 1% of the gross proceeds, or $0.08 per unit ($560,000 in total), payable to Ferris, Baker Watts and Jesup & Lamont. The non-accountable expense allowance is not payable with respect to the units sold upon exercise of the over-allotment option. Of the underwriting discount and commissions, $2,240,000 ($0.32 per unit), including the non-accountable expense allowance, is being deferred by the underwriters and will not be payable by us to the underwriters unless and until we consummate a business combination. Additionally, Ferris, Baker Watts and Jesup & Lamont will be granted an option to purchase up to a total of 350,000 units at $10.00 per unit. We estimate the value of this option, based on the assumptions described elsewhere in this prospectus, to be approximately $1,085,000. $53,135,000 (or $61,378,250 of the over-allotment option is exercised in full) of the net proceeds of this offering (including the $2,240,000 or $0.32 per unit, or 2,111,250 if the over-allotment option is exercised in full of underwriting discounts and commissions payable to the underwriters in this offering which are being deferred by them until we consummate a business combination), plus the additional aggregate $1,820,000 we will receive from the purchase of the insider warrants by certain of our initial stockholders simultaneously with the consummation of this offering, for an aggregate of $54,955,000 (or $63,198,250 if the over-allotment option is exercised in full) (or approximately $7.85 per unit sold to the public in this offering), will be deposited into a trust account at Smith Barney, a division of Citigroup Global Markets, Inc., maintained by Continental Stock Transfer & Trust Company acting as trustee. These funds will not be released to us until the earlier of the completion of a business combination and our liquidation (which may not occur until __________, 2009 [twenty four months from the date of this prospectus]). We are offering the units for sale on a firm-commitment basis. Ferris, Baker Watts and Jesup & Lamont, acting as representatives of the underwriters, expect to deliver our securities to investors in the offering on or about , 2007. Ferris, Baker Watts Incorporated Jesup & Lamont Securities Corporation Maxim Group LLC _______________, 2007 we have not, nor has anyone on our behalf, taken any measure, directly or indirectly, to identify or locate any suitable acquisition candidate, nor have we engaged or retained any agent or other representative to identify or locate any such acquisition candidate. We will have until ___________, 2009 [twenty four months from the date of this prospectus] to consummate a business combination. We will proceed with a business combination only if (i) a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and (ii) public stockholders owning less than 30% of the shares sold in this offering both vote against the business combination and exercise their conversion rights described below. In connection with the vote required for any business combination, all of our existing stockholders, including all of our officers and directors, have agreed to vote their respective shares of common stock included in their initial shares in accordance with the majority of the shares of common stock voted by the public stockholders. This voting arrangement shall not apply to shares included in units purchased in this offering or purchased following this offering in the open market by any of our existing stockholders, officers and directors. Accordingly, they may vote these shares on a proposed business combination any way they choose. If we are unable to consummate a business combination by such date, our corporate existence will cease by operation of corporate law (except for the purposes of winding up our affairs and liquidating). Our initial business combination must be with a target business whose fair market value is at least equal to 80% of our net assets, meaning all of our assets, including the funds then held in the trust account, less our liabilities (but assuming for this purpose only that the deferred underwriting commissions are not liabilities) at the time of such acquisition, although this may entail simultaneous acquisitions of several operating businesses. The fair market value of the target will be determined by our board of directors based upon one or more standards generally accepted by the financial community (which may include actual and potential sales, earnings and cash flow or book value). We anticipate structuring a business combination to acquire 100% of the equity interests or assets of the target business. We may, however, structure a business combination to acquire less than 100% of such interests or assets of the target business but will not acquire less than a controlling interest (meaning not less than 50% of the voting securities of such target business). If we acquire only a controlling interest of a target business or businesses, the portion of such business that we acquire must have a fair market value equal to at least 80% of our net assets. If we determine to simultaneously acquire several businesses and such businesses are owned by different sellers, we will need for each of such sellers to agree that our purchase of its business is contingent on the simultaneous closings of the other acquisitions, which may make it more difficult for us, and delay our ability, to complete the business combination. With multiple acquisitions, we could also face additional risks, including additional burdens and costs with respect to possible multiple negotiations and due diligence investigations (if there are multiple sellers) and the additional risks associated with the subsequent integration of the operations and services or products of the acquired companies in a single operating business. The target business, or controlling interest thereof, that we acquire may have a fair market value substantially in excess of 80% of our net assets. In order to consummate such an acquisition, we may issue a significant amount of our debt or equity securities to the sellers of such business and/or seek to raise additional funds through a private offering of debt or equity securities. There are no limitations on our ability to incur debt or issue securities in order to consummate a business combination. Since we have no specific business combination under consideration, we have not entered into any such fund raising arrangement and have no current intention of doing so. Our principal executive offices are located at 233 East 69th Street, #6J, New York, New York 10021 and our telephone number is (646) 290-6104. The Offering Securities offered: 7,000,000 units, at $8.00 per unit, each unit consisting of: one share of common stock; and one warrant The units will begin trading on or promptly after the date of this prospectus. Each of the common stock and warrants may trade separately on the 90th day after the date of this prospectus unless Ferris, Baker Watts and Jesup & Lamont determine that an earlier date is acceptable (based upon their assessment of the relative strengths of the securities markets and small capitalization companies in general, and the trading pattern of, and demand for, our securities in particular). In no event will Ferris, Baker Watts and Jesup & Lamont allow separate trading of the common stock and warrants until we file an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file a Current Report on Form 8-K with the Securities and Exchange Commission, including an audited balance sheet, promptly upon the consummation of this offering, which is anticipated to take place three business days from the date the units commence trading. The audited balance sheet will reflect our receipt of the proceeds from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Form 8-K. If the over-allotment option is exercised after our initial filing of a Form 8-K, we will file an amendment to the Form 8-K to provide updated financial information to reflect the exercise of the over-allotment option. We will also include in this Form 8-K, or amendment thereto, or in a subsequent Form 8-K, information indicating if Ferris, Baker Watts or Jesup & Lamont has allowed separate trading of the common stock and warrants prior to the 90th day after the date of this prospectus. The units will continue to trade along with the common stock and warrants after the units are separated. Holders will need to have their brokers contact our transfer agent in order to separate the units into common stock and warrants. Securities to be sold to insiders: 1,820,000 insider warrants at $1.00 per warrant (for a total purchase price of approximately $1,820,000) will be sold to Robert A. Schriesheim, Dr. William Weksel, Robert H. Davies, Michael E. Weksel, Paul Levy, Ira Hollenberg IRA, Silverman Realty Group, Inc. Profit Sharing Plan (LCPSP), Norbert W. Strauss, David Strauss and Jonathan Strauss pursuant to letter agreements with us. These purchases will take place on a private placement basis simultaneously with the consummation of this offering. The insider warrants will be identical to the warrants underlying the units being offered by this prospectus except that if we call the warrants for redemption, the insider warrants will be exercisable on a cashless basis so long as they are still held by such purchasers or their affiliates. The purchasers have agreed, pursuant to the agreements, that the insider warrants will not be sold or transferred by them until 90 days after we have completed a business combination. Accordingly, the insider warrants will be placed in escrow and will not be released until 90 days after the completion of a business combination. Ferris, Baker Watts and Jesup & Lamont have no intention of waiving these restrictions. Common stock: Number outstanding before this offering 1,750,000 shares Number to be outstanding after this offering 8,750,000 shares Warrants: Number outstanding before this offering 0 Number to be sold to insiders 1,820,000 warrants PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. Unless otherwise stated in this prospectus: references to we, us or our company refer to Alyst Acquisition Corp.; initial stockholders or existing stockholders refers to all of our stockholders prior to this offering, including all of our officers and directors; initial shares refers to the 1,750,000 shares of common stock that our initial stockholders originally purchased from us for $25,000 in August 2006; insider warrants refers to the 1,820,000 warrants we are selling privately to Robert A. Schriesheim, Dr. William Weksel, Robert H. Davies, Michael E. Weksel, Paul Levy, Ira Hollenberg IRA, Silverman Realty Group, Inc. Profit Sharing Plan (LCPSP), Norbert W. Strauss, David Strauss and Jonathan Strauss upon consummation of this offering; the term public stockholders means the holders of the shares of common stock which are being sold as part of the units in this public offering (whether they are purchased in the public offering or in the aftermarket), including any of our existing stockholders to the extent that they purchase such shares; and the information in this prospectus assumes that the representatives of the underwriters will not exercise their over-allotment option. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer is not permitted. We are a blank check company organized under the laws of the State of Delaware on August 16, 2006. We were formed with the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. To date, our efforts have been limited to organizational activities. Our efforts in identifying a prospective target business will not be limited to a particular industry or geographical location, although we intend to focus our initial efforts on acquiring an operating business in the telecommunications industry because that is where our management has its most extensive experience. However, it is possible that a potential transaction outside of the telecommunications industry will be brought to the attention of our management that is in our best interests. If this were the case, we would not be restricted from pursuing such a transaction. The telecommunications industry encompasses those companies which create, develop, produce, deliver, own, distribute and/or market telecommunications-related products, software and/or services. These companies serve both domestic and international customers and, therefore, the operating businesses with which the company will seek to do a business combination may be located throughout the world. Among the areas of particular interest to us in the telecommunications industry are businesses engaged in: Wireline local and long-distance communications services; Application software for telecommunications management; Network equipment (both hardware and software); Application software and content delivered through telecommunications facilities; Satellite-based communications products and services; Wireless voice and data products and services; Telecommunications security products and services; and Information technology development and integration services. We do not have any specific business combination under consideration and we have not (nor has anyone on our behalf) contacted any prospective target business or had any discussions, formal or otherwise, with respect to such a transaction. We have not (nor have any of our agents or affiliates) been approached by any candidates (or representative of any candidates) with respect to a possible acquisition transaction with our company. Additionally, Number to be outstanding after this offering and sale to insiders 8,820,000 warrants Exercisability Each warrant is exercisable for one share of common stock. Exercise price $5.00 Exercise period The warrants will become exercisable on the later of: the completion of a business combination with a target business, or , 2008 [one year from the date of this prospectus] The warrants will expire at 5:00 p.m., New York City time, on , 2011 [four years from the date of this prospectus] or earlier upon redemption. However, except with respect to the insider warrants, no warrant will be exercisable and we will not be obligated to issue shares of common stock unless at the time a holder seeks to exercise such warrant, a prospectus relating to the common stock issuable upon exercise of the warrant is current and the common stock has been qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Accordingly, such warrants could expire worthless if we fail to maintain an effective registration statement relating to the common stock issuable upon exercise of the warrants and fail to either qualify or obtain an exemption under the securities laws of the state of residence of the holder of the warrants. With respect to the insider warrants, we may be able to deliver unregistered shares of common stock to the holders of the insider warrants upon their exercise, notwithstanding our inability to have a prospectus relating to the common stock declared effective. Redemption We may redeem the outstanding warrants (including any of the insider warrants and any outstanding warrants issued upon exercise of the unit purchase option issued to Ferris, Baker Watts and Jesup & Lamont), with the prior consent of Ferris, Baker Watts and Jesup & Lamont: in whole and not in part, at a price of $.01 per warrant at any time while the warrants are exercisable (which will occur only if a registration statement relating to the common stock issuable upon exercise of the warrants is effective and current), upon a minimum of 30 days prior written notice of redemption, and if, and only if, the last sales price of our common stock equals or exceeds $11.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. The redemption criteria for our warrants have been established at a price which is intended to provide warrantholders a reasonable premium to the initial exercise price and provide a sufficient differential between the then-prevailing common stock price and the warrant exercise price so that if the stock price declines as a result of our redemption call, the differential will provide protection against such decline. Since we may redeem the warrants only with the prior written consent of Ferris, Baker Watts and Jesup & Lamont and Ferris, Baker Watts and Jesup & Lamont may hold warrants subject to redemption, it may have a conflict of interest in determining whether or not to consent to such redemption. We cannot assure you that Ferris, Baker Watts and Jesup & Lamont will consent to such redemption if it is not in Ferris, Baker Watts s and Jesup & Lamont s best interest even if it is in our best interest. Redemption continued If we call our warrants for redemption, the purchasers of the insider warrants would still be entitled to exercise such warrants on a cashless basis. Proposed American Stock Exchange symbols for our: Units [ ] Common stock [ ] Warrants [ ] Offering proceeds to be held in trust: $53,135,000 of the net proceeds of this offering plus the $1,820,000 we will receive from the sale of the insider warrants (for an aggregate of $54,955,000 or approximately $7.85 per unit sold to the public in this offering) will be placed in a trust account at Smith Barney, a division of Citigroup Global Markets, Inc., maintained by Continental Stock Transfer & Trust Company, acting as trustee pursuant to an agreement to be signed on the date of this prospectus. This amount includes $2,240,000 (4%) of underwriting discounts and commissions, including the non-accountable expense allowance, payable to the underwriters in the offering that is being deferred. The underwriters have agreed that such amount will not be paid unless and until we consummate a business combination. Except as set forth below, these proceeds will not be released until the earlier of the completion of a business combination and our liquidation. Therefore, unless and until a business combination is consummated, the proceeds held in the trust account will not be available for our use for any deferred expenses related to this offering or expenses which we may incur related to the investigation and selection of a target business and the negotiation of an agreement to acquire a target business. Notwithstanding the foregoing, there can be released to us from the trust account interest earned on the funds in the trust account (i) up to an aggregate of $1,680,000 to fund expenses related to investigating and selecting a target business and our other working capital requirements and (ii) any amounts we may need to pay our income or other tax obligations. With these exceptions, expenses incurred by us may be paid prior to a business combination only from the net proceeds of this offering not held in the trust account (initially $100,000). None of the warrants may be exercised until after the consummation of a business combination and, thus, after the proceeds of the trust account have been disbursed. Accordingly, the warrant exercise price will be paid directly to us and not placed in the trust account. Limited payments to insiders: There will be no fees or other cash payments paid to our existing stockholders, officers, directors or their affiliates prior to, or for any services they render in order to effectuate, the consummation of a business combination (regardless of the type of transaction that it is) other than: repayment of an aggregate of $150,000 non-interest bearing loans made by Robert A. Schriesheim, our chairman of the board, Dr. William Weksel, our chief executive officer, Robert H. Davies, our chief strategist, and Michael E. Weksel, our chief operating officer, chief financial officer, secretary and director; and reimbursement of out-of-pocket expenses incurred by them in connection with certain activities on our behalf, such as identifying and investigating possible business targets and business combinations. Conflicts of Interest You should be aware of the following potential conflicts of interest: None of our officers and directors is required to commit their full time to our affairs and, accordingly, they may have conflicts of interest in allocating their time among various business activities. In the course of their other business activities, our officers and directors may become aware of investment and business opportunities which may be appropriate for presentation to our company as well as the other entities with which they are affiliated. Our management may have conflicts of interest in determining to which entity a particular business opportunity should be presented. The initial shares and insider warrants owned by our officers and directors will be worthless if a business combination is not consummated. These facts, along with the others detailed elsewhere in this prospectus, may cause our officers and directors to have conflicts of interest in determining whether to engage in a particular business combination. Certificate of Incorporation: As discussed below, there are specific provisions in our amended and restated certificate of incorporation that may not be amended prior to our consummation of a business combination, including our requirements to seek stockholder approval of such a business combination and to allow our stockholders to seek conversion of their shares if they do not approve of such a business combination. While we have been advised that such provisions limiting our ability to amend our certificate of incorporation may not be enforceable under Delaware law, we view these provisions, which are contained in Article Seventh of our amended and restated certificate of incorporation, as obligations to our stockholders and will not take any action to amend or waive these provisions. Our amended and restated certificate of incorporation also provides that we will continue in existence only until , 2009 [twenty four months from the date of this prospectus]. If we have not completed a business combination by such date, our corporate existence will cease except for the purposes of winding up our affairs and liquidating, pursuant to Section 278 of the Delaware General Corporation Law. This has the same effect as if our board of directors and stockholders had formally voted to approve our dissolution pursuant to Section 275 of the Delaware General Corporation Law. Accordingly, limiting our corporate existence to a specified date as permitted by Section 102(b)(5) of the Delaware General Corporation Law removes the necessity to comply with the formal procedures set forth in Section 275 (which would have required our board of directors and stockholders to formally vote to approve our dissolution and liquidation and to have filed a certificate of dissolution with the Delaware Secretary of State). In connection with any proposed business combination we submit to our stockholders for approval, we will also submit to stockholders a proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence, thereby removing this limitation on our corporate life. We will only consummate a business combination if stockholders vote both in favor of such business combination and our amendment to provide for our perpetual existence. The approval of the proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence would require the affirmative vote of a majority of our outstanding shares of common stock. We view this provision terminating our corporate life by , 2009 [twenty four Certificate of Incorporation continued: months from the date of this prospectus] as an obligation to our stockholders and will not take any action to amend or waive this provision to allow us to survive for a longer period of time except in connection with the consummation of a business combination. Public stockholders must approve Business combination: Pursuant to our amended and restated certificate of incorporation, we will seek stockholder approval before we effect any business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable state law. We view this requirement as an obligation to our stockholders and will not take any action to amend or waive this provision in our amended and restated certificate of incorporation. In connection with the vote required for any business combination, all of our initial stockholders, including all of our officers and directors, have agreed to vote the shares of common stock owned by them immediately before this offering in accordance with the majority of the shares of common stock voted by the public stockholders. We will proceed with a business combination only if (i) a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and (ii) public stockholders owning less than 30% of the shares sold in this offering both vote against the business combination and exercise their conversion rights described below. Conversion rights for stockholders voting to reject a business combination: Pursuant to our amended and restated certificate of incorporation, public stockholders voting against a business combination will be entitled to convert their stock into a pro rata share of the trust account (initially $7.85 per share, whether or not the over-allotment option is exercised plus any interest earned on their portion of the trust account but less the interest that may be released to us as described above to fund our working capital requirements and pay any of our tax obligations, if the business combination is approved and completed. We view this requirement as an obligation to our stockholders and will not take any action to amend or waive this provision in our amended and restated certificate of incorporation. Our existing stockholders will not have such conversion rights with respect to any shares of common stock owned by them, directly or indirectly, whether included in or underlying their initial shares or purchased by them in this offering or in the aftermarket (nor will they seek appraisal rights with respect to such shares if appraisal rights would be available to them). Public stockholders who convert their stock into their share of the trust fund will continue to have the right to exercise any warrants they may hold. An eligible stockholder may request conversion at any time after the mailing to our stockholders of the proxy statement and prior to the vote taken with respect to a proposed business combination at a meeting held for that purpose, but the request will not be granted unless the stockholder votes against the business combination and the business combination is approved and completed. Additionally, we may require public stockholders, whether they are a record holder or hold their shares in street name, to either tender their certificates to our transfer agent at any time through the vote on the business combination or to deliver their shares to the transfer agent electronically using Depository Trust Company s DWAC (Deposit/Withdrawal At Custodian) System, at the holder s option. There is a nominal cost associated with this tendering process and the act of certificating the shares or delivering them through the DWAC system. The transfer agent will typically charge the tendering broker $35 and it would be up to the broker whether or not to pass this cost on to the converting holder. The proxy solicitation materials that we will furnish to stockholders in connection with the vote for any proposed business combination will indicate whether we are requiring stockholders to satisfy such certification and delivery requirements. Accordingly, a stockholder would have from the time we send out our proxy statement through the vote on the business combination to deliver his shares if he wishes to seek to exercise his conversion rights. This time period varies depending on the specific facts of each transaction. However, as the delivery process can be accomplished by the stockholder, whether or not he is a record holder or his shares are held in street name, in a matter of hours by simply contacting the transfer agent or his broker and requesting delivery of his shares through the DWAC System, we believe this time period is sufficient for an average investor. Any request for conversion, once made, may be withdrawn at any time up to the date of the meeting. Furthermore, if a stockholder delivered his certificate for conversion and subsequently decided prior to the meeting not to elect conversion, he may simply request that the transfer agent return the certificate (physically or electronically). If a vote on our initial business combination is held and the business combination is not approved, we may continue to try to consummate a business combination with a different target until twenty four months from the date of this prospectus. If the initial business combination is not approved or completed for any reason, then public stockholders voting against our initial business combination who exercised their conversion rights would not be entitled to convert their shares of common stock into a pro rata share of the aggregate amount then on deposit in the trust account. In such case, if we have required public stockholders to deliver their certificates prior to the meeting, we will promptly return such certificates to the public stockholder. Investors in this offering who do not sell, or who receive less than an aggregate of approximately $0.15 of net sales proceeds for, the warrants included in the units, and persons who purchase common stock in the aftermarket at a price in excess of $7.85 per share, may have a disincentive to exercise their conversion rights because the amount they would receive upon conversion could be less than their original or adjusted purchase price. Liquidation if no business combination: As described above, if we have not consummated a business combination by , 2009 [twenty four months from the date of this prospectus], our corporate existence will cease by operation of law and we will promptly distribute only to our public stockholders the amount in our trust account (including any accrued interest then remaining in the trust account) plus any remaining net assets. We cannot assure you that the per-share distribution from the trust fund, if we liquidate, will not be less than $7.85, plus interest then held in the trust fund for the following reasons: Prior to liquidation, pursuant to Section 281 of the Delaware General Corporation Law, we will adopt a plan that will provide for our payment based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against us within the subsequent 10 years. Accordingly, we would be required to provide for any creditors known to us at that time as well as provide for any claims that we believe could potentially be brought against us within the subsequent 10 years prior to distributing the funds held in the trust to our public stockholders. We cannot assure you that we will properly assess all claims that may be potentially brought against us. As such, our stockholders Liquidation if no business combination: (continued) could potentially be liable for any claims of creditors to the extent of distributions received by them (but no more). Furthermore, while we will seek to have all vendors and service providers (which would include any third parties we engaged to assist us in any way in connection with our search for a target business) and prospective target businesses execute agreements with us waiving any right, title, interest or claim of any kind they may have in or to any monies held in the trust account, there is no guarantee that they will execute such agreements. Nor is there any guarantee that, even if such entities execute such agreements with us, they will not seek recourse against the trust account or that a court would not conclude that such agreements are not legally enforceable. Robert A. Schriesheim, our chairman of the board, Dr. William Weksel, our chief executive officer, Robert H. Davies, our chief strategist, and Michael E. Weksel, our chief operating officer, chief financial officer, secretary and director, have agreed that they will be personally liable, pro rata based on their respective ownership interest of our initial shares, to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us. However, we cannot assure you that they will be able to satisfy those obligations, if they are required to do so. We anticipate the distribution of the funds in the trust account to our public stockholders will occur by _________, 2009 [10 business days from the date our corporate existence ceases]. Our existing stockholders have waived their rights to participate in any liquidation distribution with respect to their initial shares. We will pay the costs of liquidation from our remaining assets outside of the trust account. If such funds are insufficient, Robert A. Schriesheim, Dr. William Weksel, Robert H. Davies, and Michael E. Weksel have contractually agreed to advance us the funds necessary to complete such liquidation (currently anticipated to be no more than approximately $15,000) and have contractually agreed not to seek repayment for such expenses. On the date of this prospectus, all of our existing stockholders, including all of our officers and directors, will place their initial shares into an escrow account maintained by Continental Stock Transfer & Trust Company, acting as escrow agent. Subject to certain limited exceptions, (such as transfers to relatives and trusts for estate planning purposes, while remaining in escrow), these shares will not be transferable during the escrow period and will not be released from escrow until one year after the consummation of a business combination, or earlier if, following a business combination, we engage in a subsequent transaction resulting in our stockholders having the right to exchange their shares for cash or other securities or if we liquidate and dissolve. Risks In making your decision on whether to invest in our securities, you should take into account not only the backgrounds of our management team, but also the special risks we face as a blank check company. In addition, you should consider the following risks: this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, and, therefore, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings; investors funds will be held in trust for 24 months in the event we are unable to consummate a business combination; if third parties bring claims against us, the proceeds held in trust could be reduced and the per share liquidation price may be less than $7.85 per share; stockholders may be held liable for claims by third parties against us to the extent of distributions received by them; an effective registration statement may not be in place when you desire to exercise your warrants, thereby potentially causing such warrants to be worthless; and there is no cash settlement option for any of our warrants. You should carefully consider these and the other risks which are set forth in detail in the section entitled Risk Factors beginning on page 12 of this prospectus.
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+PROSPECTUS SUMMARY The following summary highlights the material information from this prospectus and may not contain all the information that is important to you. You should read this entire document carefully, including the sections entitled Risk Factors and The Conversion and Offering and the consolidated financial statements and the notes to the consolidated financial statements, before making a decision to invest in our common stock. The Companies People s United Financial, Inc. People s United Financial is a newly-formed Delaware corporation and currently a wholly-owned subsidiary of People s Bank. People s United Financial was formed for the purpose of effectuating the conversion and offering described in this prospectus. In connection with those transactions, People s United Financial is registering shares of its common stock with the Securities and Exchange Commission and will be selling shares of its common stock to new stockholders and, as described in this prospectus, issuing shares of its common stock to existing stockholders of People s Bank in exchange for their shares of People s Bank common stock. People s United Financial currently does not have significant assets, but as a result of the conversion and offering, it will become the holding company of People s Bank. People s Bank. People s Bank is a federal stock savings bank and as a result of the conversion and offering will become the wholly-owned subsidiary of People s United Financial. People s Bank was organized in 1842 as a Connecticut mutual savings bank. In 1988, People s Bank reorganized into the mutual holding company structure, converted to a Connecticut-chartered stock savings bank and became the majority-owned subsidiary of People s Mutual Holdings, a Connecticut-chartered mutual holding company. Effective August 18, 2006, People s Bank converted to a federal stock savings bank regulated by the Office of Thrift Supervision. At September 30, 2006, People s Bank had total assets of $10.6 billion, total deposits of $9.0 billion and total stockholders equity of $1.4 billion. People s Mutual Holdings. People s Mutual Holdings is the federally-chartered mutual holding company of People s Bank. Its principal business is to own a majority of People s Bank s outstanding shares of common stock. As of September 30, 2006, People s Mutual Holdings owned 82,012,500 shares, equivalent to approximately 57.7%, of People s Bank common stock. At September 30, 2006, People s Mutual Holdings had $8.5 million of net assets, excluding the shares of People s Bank. As part of the conversion, People s Mutual Holdings will cease to exist as a separate entity. Our Business People s Bank offers a full range of financial services, primarily in the state of Connecticut, to individual, corporate, municipal and institutional customers. Its traditional banking activities include extending secured and unsecured commercial and consumer loans, originating mortgage loans secured by residential and commercial properties and accepting consumer, commercial and municipal deposits. In addition to traditional banking activities, People s Bank provides specialized services tailored to specific markets. Its operations are divided into two primary business lines that represent its core businesses: Commercial Banking. Commercial banking consists principally of commercial lending, commercial real estate lending and commercial deposit gathering activities. This business line also includes the equipment financing operations of People s Capital and Leasing Corp., People s Bank s wholly-owned subsidiary, as well as cash management, correspondent banking and municipal banking and finance. Retail Banking. Retail banking includes consumer deposit gathering activities, residential mortgage lending and home equity and other consumer lending. In addition to trust services, this business line also includes brokerage, financial advisory services, investment management services and life insurance provided by People s Securities, Inc. and other insurance services provided by R.C. Knox and Company, Inc., both wholly-owned subsidiaries of People s Bank. Table of Contents People s Bank Bridgeport Center 850 Main Street Bridgeport, Connecticut 06604 (203) 338-7171 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON April 5, 2007 NOTICE IS HEREBY GIVEN that a special meeting of stockholders of People s Bank (the Special Meeting ) will be held at The Klein Memorial Auditorium, 910 Fairfield Avenue, Bridgeport, Connecticut on Thursday, April 5, 2007 at 2:00 p.m., Eastern Time, to consider and vote upon: 1. The amended and restated agreement and plan of conversion and reorganization (the plan of conversion ) pursuant to which, among other things, People s United Financial, Inc. ( People s United Financial ) will offer for sale shares of its common stock and shares of common stock of People s Bank currently held by public stockholders will be exchanged for shares of People s United Financial. As a result, People s Mutual Holdings will no longer exist as a separate entity, and People s Bank will be a wholly-owned subsidiary of People s United Financial; 2. The establishment of The People s Community Foundation, a Delaware non-stock corporation dedicated to the promotion of charitable purposes within People s Bank s market area, and the funding of the charitable foundation with 2,000,000 shares of People s United Financial common stock and $20.0 million in cash from the offering proceeds; and 3. Any other matters that may properly come before the Special Meeting or any adjournment or postponement thereof. (Note: Management is not aware of any such other matters at this time.) The following informational proposals relating to People s United Financial s Certificate of Incorporation are also described in this proxy statement/prospectus, but, due to Office of Thrift Supervision regulations, are not subject to a vote of the People s Bank stockholders. People s Bank stockholders are not being asked to approve these informational proposals at the Special Meeting. 1. Increasing the amount of authorized common stock from 450,000,000 shares of common stock in People s Bank s Charter to 1.95 billion shares of common stock in People s United Financial s Certificate of Incorporation; 2. Including provisions governing business combinations with interested stockholders in People s United Financial s Certificate of Incorporation; 3. Precluding stockholder action without a meeting in People s United Financial s Certificate of Incorporation; 4. Including provisions in People s United Financial s Certificate of Incorporation that limit certain amendments to People s United Financial s Bylaws; 5. Including provisions in People s United Financial s Certificate of Incorporation that limit certain amendments to the Certificate of Incorporation; and 6. Including provisions in People s United Financial s Certificate of Incorporation that limit stockholders ability to remove directors. The Board of Directors has fixed February 5, 2007 as the record date for the determination of stockholders entitled to notice of and to vote at the Special Meeting and at any adjournment or postponement thereof. The following proxy statement/prospectus is a summary of information about People s Bank and the proposed conversion and offering. A copy of the plan of conversion is available for inspection at every People s Bank branch. By Order of the Board of Directors, John A. Klein Chairman, Chief Executive Officer and President Bridgeport, Connecticut February 23, 2007 Your prompt vote is very important. Failure to vote will have the same effect as voting against the plan of conversion and the establishment and funding of the charitable foundation. Without sufficient favorable votes, we cannot proceed with the conversion and offering and the establishment and funding of the charitable foundation. Table of Contents QUESTIONS AND ANSWERS FOR STOCKHOLDERS OF PEOPLE S BANK You should read this document for more information about the conversion and offering. The plan of conversion described herein has been conditionally approved by the Office of Thrift Supervision. The Proxy Vote Q. What are the proposals that our stockholders are being asked to approve? A. People s Bank stockholders as of February 5, 2007 are asked to vote on the plan of conversion. Under the plan of conversion, People s Mutual Holdings will convert from the mutual holding company form to a stock holding company, and as part of such conversion, People s United Financial will offer for sale, in the form of shares of its common stock, People s Mutual Holdings 57.7% ownership interest in People s Bank. In addition to the shares of common stock to be issued to those who purchase shares in the offering, public stockholders of People s Bank as of the completion of the conversion will receive shares of People s United Financial common stock in exchange for their existing shares. People s Bank stockholders as of February 5, 2007 are also asked to vote on the establishment and funding of The People s Community Foundation. As part of the conversion and offering, we will fund the charitable foundation with 2,000,000 shares of People s United Financial common stock and $20.0 million in cash from the offering proceeds. In addition, informational proposals relating to People s United Financial s Certificate of Incorporation are also described in this proxy statement/prospectus, but, due to Office of Thrift Supervision regulations, are not subject to a vote of the People s Bank stockholders. People s Bank stockholders are not being asked to approve these informational proposals at the Special Meeting. Q. What is the conversion? A. People s Bank and its parent, People s Mutual Holdings, are converting from a mutual holding company structure to a fully-public ownership structure. Currently, People s Mutual Holdings owns 57.7% of People s Bank s common stock. The remaining 42.3% of People s Bank s common stock is owned by public stockholders. As a result of the conversion, our newly formed company, called People s United Financial, Inc., will become the parent of People s Bank. Shares of common stock of People s United Financial, representing the 57.7% ownership interest of People s Mutual Holdings in People s Bank, are being offered for sale to eligible depositors and to the public. At the completion of the conversion and offering, current public stockholders of People s Bank will exchange their shares of People s Bank common stock for shares of common stock of People s United Financial. After the conversion and offering are completed, People s Bank will become a wholly-owned subsidiary of People s United Financial, and 100% of the common stock of People s United Financial will be owned by public stockholders. As a result of the conversion and offering, People s Mutual Holdings will cease to exist. See The Conversion and Offering beginning on page [ ] of this proxy statement/prospectus, for more information about the conversion. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents People s Bank s business model and broad product offerings allow it to meet the needs of a diverse customer base with varying demographic characteristics. People s Bank delivers its products and services through a network of 75 traditional branches, 73 branches located in Stop & Shop supermarkets, eight limited-service branches, 23 investment and brokerage offices (22 of which are located within branch offices), five wealth management and trust offices, nine People s Capital and Leasing offices (eight of which are located outside of Connecticut), seven commercial lending offices, and over 250 ATMs located in the state of Connecticut. People s Bank also originates residential mortgage and home equity loans in Connecticut and the contiguous markets of New York and Massachusetts. In addition, People s Bank maintains a loan production office in Massachusetts to support its commercial real estate lending initiatives in that state. Its distribution network includes fully integrated online banking and investment trading, a 24-hour telephone banking service and participation in a worldwide ATM network. During 2005, People s Bank opened seven new branches, three of which are traditional branches and four of which are located in Stop & Shop supermarkets. For the first nine months of 2006, People s Bank opened three new Stop & Shop branches. Our Market Area And Customer Base Connecticut is one of the most attractive banking markets in the United States with a total population of approximately 3.5 million and a median household income of $66,018 as of June 30, 2006, ranking second in the United States and well above the U.S. median household income of $51,546, according to estimates from SNL Securities. Fairfield County, where People s Bank is headquartered, is the wealthiest county in Connecticut, with a June 30, 2006 median household income of $81,678 according to estimates from SNL Securities. While People s Bank s primary market area is in the state of Connecticut, substantially all of the equipment financing activities of People s Capital and Leasing involve customers outside of Connecticut. In addition, People s Bank participates in certain loans that aggregate $20 million or more and are shared by three or more supervised financial institutions. These loans are generally referred to as shared national credits. People s Bank s shared national credits portfolio totaled $542 million at September 30, 2006, approximately 90% of which involved borrowers outside of Connecticut. People s Bank competes for deposits, loans and other services with commercial banks, savings institutions, commercial and consumer finance companies, mortgage banking companies, insurance companies, credit unions, and a variety of other institutional lenders and securities firms. Our Competitive Strengths We believe that the following strengths give us a competitive advantage in our markets: Market Position in Connecticut. As of September 30, 2006, People s Bank had 156 branches throughout the state of Connecticut. At June 30, 2006, People s Bank ranked third in deposit market share in Connecticut and first in Fairfield County, according to the Federal Deposit Insurance Corporation. Stop & Shop Relationship. People s Bank has exclusive branching rights in Stop & Shop supermarkets in the state of Connecticut. Stop & Shop is the leading grocery store chain in Connecticut, with nearly twice the market share of its closest competitor, according to Modern Grocer. We believe that the Connecticut market area, with its compact geographical size and high population density, presents a unique opportunity to operate successful supermarket bank branches that complement our traditional branches. Unlike many other supermarket bank branches, People s Bank s Stop & Shop branches are full-service facilities that provide our customers with the convenience of seven-day-a-week banking. During 2005, these branches originated 27% of People s Bank s home equity loans, 47% of its retail checking and savings accounts, and 34% of its commercial checking accounts. Approximately 40% of People s Bank s total branch transactions originate in its Stop & Shop branches. People s Bank generally is required to open a branch in each new Connecticut Stop & Shop supermarket that meets projected size and customer criteria until 2012, and has the option to extend its exclusive right to open branches in Connecticut Stop & Shop supermarkets until 2022. Strong Credit Culture. People s Bank s experienced credit risk professionals and conservative credit culture, combined with centralized processes and consistent underwriting standards across all business lines, have Table of Contents The Board of Directors recommends that you promptly vote the enclosed proxy card(s) in favor of the adoption of the plan of conversion and the establishment and funding of The People s Community Foundation. Proxy votes must be cast prior to the commencement of the Special Meeting. Voting a proxy card will not prevent you from voting in person at the Special Meeting. We have mailed a proxy card with this proxy statement/prospectus to each of our registered stockholders as of the record date. Table of Contents Q. What are the reasons for the conversion and offering? A. The conversion and offering are intended to provide us with significantly greater access to capital than is available to us under the mutual holding company structure and to significantly increase the liquidity of our common stock. In addition, the stock holding company structure will provide us with more flexibility in structuring mergers and acquisitions. The net proceeds raised in the offering will allow us to: finance de novo expansion and support organic growth both inside and outside of the state of Connecticut; acquire other financial institutions, branches of other financial institutions or other businesses related to banking (although there is no specific agreement with any institution or business at this time); increase lending to support continued growth in our commercial banking loan portfolios; establish and fund a charitable foundation to benefit the communities we serve; and use the additional capital for other general corporate purposes. Q. What is The People s Community Foundation? A. To continue our long-standing commitment to our local communities, we intend to establish a charitable foundation, The People s Community Foundation, to benefit the communities that we serve. We will fund the charitable foundation with 2,000,000 shares of People s United Financial common stock and $20.0 million in cash from the offering proceeds. The People s Community Foundation will make grants and donations to non-profit and community groups and projects within our market areas. We believe the charitable foundation will enhance the long-term value of our banking franchise. Q. Why should I vote? A. You are not required to vote, but your vote is very important. In order for us to implement the plan of conversion and establish and fund the charitable foundation, we must receive the affirmative vote of the holders of a majority of the outstanding shares of People s Bank common stock entitled to vote at the Special Meeting, excluding shares held by People s Mutual Holdings. YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PLAN OF CONVERSION AND THE ESTABLISHMENT AND FUNDING OF THE CHARITABLE FOUNDATION. Q. What happens if I don t vote? A. Your prompt vote is very important. Not voting will have the same effect as voting Against each of the proposals. Without sufficient favorable votes for the conversion and charitable foundation, we will not proceed with the conversion and offering or establish and fund the charitable foundation. Table of Contents allowed it to maintain a high level of asset quality. Over the last eight quarters through September 30, 2006, People s Bank s net charge-offs to average loans ratio has averaged 0.08%, compared to 0.22% for the top 50 U.S. banks and thrifts, according to SNL Securities. Highly Experienced Management Team with a Proven Track Record. As a group, our executive officers have an average of 24 years of experience in the banking industry and have successfully operated through various industry economic cycles. In addition, our management team has significant experience operating publicly-traded banking companies. A number of our executive officers, including our president and chief executive officer, have been members of our management team since our conversion from the mutual form of ownership and initial public offering in 1988. Our Business Strategy Our business strategy is to focus on those businesses in which we have proven competencies. We believe that this clear focus will enable us to continue to grow our franchise, both inside and outside of the state of Connecticut, while maintaining our commitment to the quality of our business, assets and customer service. The following are the key elements of our business strategy: Expand Our Geographic Reach. Our plans for geographic expansion are based upon both de novo branching and acquisitions of financial institutions and other businesses related to banking that are complementary to our current lines of business. De Novo Branching. As part of its strategy to broaden its footprint by entering markets similar to Connecticut, People s Bank plans to expand into the state of New York by opening at least 15 new branches in Westchester County over the next three years. People s Bank expects to open seven of these branches by the end of 2007. Westchester County is a contiguous market with comparable demographics to Fairfield County, Connecticut. As of June 30, 2006, the median household income in Westchester County was $80,686. The branches People s Bank opens in Westchester County will be traditional branches. Complementary Acquisitions. We believe that acquisition opportunities exist both inside and outside of our current market area. We will consider acquiring select banking and banking-related businesses initially in contiguous or near contiguous market areas that will afford us the opportunity to add complementary products to our existing business or to expand our franchise geographically. Optimize Our Balance Sheet Management and Net Interest Margin. People s Bank strives to maintain a balance between loan portfolio growth and core deposit funding. Approximately 95% of its assets are funded by low-cost core deposits and stockholders equity. People s Bank believes that, other than for deployment of excess core deposits or excess equity, a large securities portfolio provides limited economic value. During the third quarter of 2006, People s Bank sold approximately $810 million of debt securities and used a portion of the proceeds to pay down short-term borrowings and fund additional loan growth. These transactions were undertaken to better position People s Bank s balance sheet for the then current interest rate environment. At September 30, 2006, People s Bank had a securities portfolio of $202 million, or 2% of its assets, and wholesale borrowings of $14 million, or 0.1% of assets, ratios well below industry averages. This focused balance sheet management strategy has allowed People s Bank to increase its net interest margin by 42 basis points from 3.47% to 3.89% since the third quarter of 2004, compared to an average decline of 20 basis points for the top 50 U.S. banks and thrifts over the same time period, according to SNL Securities. Maintain a Diversified Loan Portfolio. People s Bank s loan portfolio is highly diversified with a balance of commercial, residential lending and consumer assets. As of September 30, 2006, 44% of its loan portfolio was comprised of commercial banking loans and 42% was comprised of residential mortgage loans while consumer loans, primarily home equity loans and lines of credit, made up the remainder. In addition, the commercial loan portfolio is diversified across many industries. Loans to the manufacturing industry, which constitute approximately 41% of People s Bank s commercial loan portfolio, are divided among more than 20 manufacturing industry segments. No single borrower or group of related borrowers represents more than 1% of People s Bank s loan portfolio. Table of Contents You should rely only on the information contained in this proxy statement/prospectus or to which we have referred you. We have not authorized anyone to provide you with information that is different. This proxy statement/prospectus does not constitute an offer to sell, or the solicitation of an offer to buy, any of the securities offered hereby to any person in any jurisdiction in which such offer or solicitation would be unlawful. The affairs of People s Mutual Holdings, People s United Financial, People s Bank and their subsidiaries may change after the date of this proxy statement/prospectus. Delivery of this proxy statement/prospectus and the exchange of shares of People s United Financial common stock made hereunder does not mean otherwise. TABLE OF CONTENTS QUESTIONS AND ANSWERS FOR STOCKHOLDERS OF PEOPLE S BANK 1 SUMMARY 5
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+PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements, and the notes and schedules related thereto. Unless otherwise stated in this prospectus, references to we, us or our refer to Platform Acquisition Corp. International. Unless we tell you otherwise, the information in this prospectus assumes that the underwriter has not exercised its over-allotment option. Unless we tell you otherwise, the term business combination as used in this prospectus means an acquisition, directly or through one or more subsidiaries, of (or of control of) one or more operating businesses through a merger, capital stock exchange, asset acquisition, stock purchase or other transaction. In addition, unless we tell you otherwise, the term initial stockholders as used in this prospectus refers to the individuals who hold 4,166,667 shares of our common stock, which constitute all of the issued and outstanding shares as of the date of this prospectus. Further, unless we tell you otherwise, the term public stockholders as used in this prospectus refers to those persons that purchase the securities offered by this prospectus. Our initial stockholders, the members of our management and the participants in the private placement will agree prior to the completion of this offering not to purchase any additional shares of our common stock or other securities, whether as part of this offering or otherwise, prior to the completion of a business combination. Unless the context indicates otherwise, numbers in this prospectus have been rounded and are, therefore, approximate. Our Company We are a blank check company incorporated under the laws of Delaware on May 1, 2006. We were formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase or other similar business combination, one or more operating businesses in the service delivery platform sector. By service delivery platform sector, we mean a company engaged in the business of improving the link between customers and the providers of services or products through better technology, logistics, information, or a combination of these. We have not identified or been provided with the identity of, or had any direct or indirect contact with, any target business. No person acting on our behalf has taken any direct or indirect measures to identify or contact a target business. We have not been approached by a third party offering any target business to us. Through the members of our management team and our directors, we have extensive contacts and sources from which to generate acquisition opportunities in the service delivery platform sector. These contacts and sources include private equity and venture capital funds, public and private companies, investment bankers, attorneys and accountants. The members of our management team intend to maintain relationships with a significant number of private equity and venture capital funds. While we may seek to effect business combinations with more than one target business, our initial business acquisition must be with one or more operating businesses whose fair market value is, either individually or collectively, equal to at least 80% of our net assets (excluding deferred underwriting discounts and commissions held in the trust account in the amount of $5,400,000, or $6,210,000 if the over-allotment option is exercised in full, and excluding the $2,500,000 loan) at the time of the execution of a definitive agreement for the acquisition. We expect one or more members of our current management team to continue to serve on our board of directors and to be involved in day-to-day operations following consummation of our initial business combination, subject to our specific needs and continued election by the stockholders. Our executive offices are located at 330 Primrose Road, Suite 300, Burlingame, California 94010, and our telephone number is (650) 696-3877. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 1 Controlled by Robert Mark, a private investor. 2 Owned in equal shares by Daniel Wild and Tim Schwenke, two of our directors. 3 Controlled by Bill Fisher, our Chairman of the Board. The common stock held by the initial stockholders will be subject to lock-up agreements restricting its sale or other transfer until one year after our initial business combination is completed. These lock-up agreements cannot be waived. These lock-up agreements do not prevent the natural persons who hold equity interests in Mark Capital Management, LLC and Tiburon S.A. from selling or transferring such interests. In addition, each of Mark Capital Management, LLC and Tiburon S.A. may issue additional equity interests to their existing equity holders or new equity holders.
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+S-1/A 1 h50179a2sv1za.htm AMENDMENT NO. 2 TO FORM S-1 - REGISTRATION NO. 333-146436 sv1za Table of Contents As filed with the Securities and Exchange Commission on October 17, 2007 Registration No. 333-146436 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amendment No. 2 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 TARGA RESOURCES PARTNERS LP (Exact name of registrant as specified in its charter) Delaware 4922 65-1295427 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 1000 Louisiana, Suite 4300 Houston, Texas 77002 (713) 584-1000 (Address, including zip code and telephone number, including area code, of registrant s principal executive offices) Rene R. Joyce Chief Executive Officer 1000 Louisiana, Suite 4300 Houston, Texas 77002 (713) 584-1000 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: David P. Oelman Christopher S. Collins Vinson Elkins LLP 1001 Fannin Street, Suite 2500 Houston, Texas 77002 (713) 758-2222 Douglass M. Rayburn Baker Botts L.L.P. 2001 Ross Avenue Dallas, Texas 75201 (214) 953-6500 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. Table of Contents TABLE OF CONTENTS Summary 1
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+Prospectus Summary 1 Risk Factors 12 Forward-Looking Statements 25 The Recapitalization 26 Use of Proceeds 28 Dividend Policy 28 Capitalization 29 Dilution 30 Selected Consolidated Financial Data 31 Management s Discussion and Analysis of Financial Condition and Results of Operations 33 Our Business 52 Management 66 Related Party Transactions 89 Principal and Selling Stockholders 92 Description of Capital Stock 94 Shares Eligible for Future Sale 98 Material United States Federal Tax Considerations for Non-United States Holders 101 Underwriting 104 Legal Matters 109 Experts 109 Where You Can Find More Information 109 Index of Financial Statements F-1 Exhibit 23.1 Exhibit 23.2 ABOUT THIS PROSPECTUS You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. You should assume that the information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of common stock. Our business, financial condition, results of operations and prospects may have changed since that date. The name AmWINS is a registered trademark of AmWINS Group, Inc. This prospectus also includes other registered and unregistered trademarks and service marks of AmWINS Group, Inc. and other persons, which are the property of their respective holders. Table of Contents PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. Because this is only a summary, it does not contain all of the information you should consider before buying shares of our common stock in this offering. To understand us and this offering fully, you should read the entire prospectus carefully, especially the information in the Risk Factors section beginning on page 12, and our financial statements and the accompanying notes included elsewhere in this prospectus. Except where the context otherwise requires, AmWINS , our company, we, us, and our refer to AmWINS Group, Inc., a Delaware corporation, and, where appropriate, its subsidiaries. Prior to our name change in November 2006, we conducted business under the name American Wholesale Insurance Group, Inc. All of the outstanding shares of our common stock currently are owned by American Wholesale Insurance Holding Company, LLC, a Delaware limited liability company (Holdings). Immediately prior to the completion of this offering, Holdings will distribute approximately % of the outstanding shares of our common stock to its members in proportion to their relative interests in Holdings. These members thereafter will own shares of our common stock directly. Certain members of Holdings own profits-only interests in Holdings, and the amount of shares distributable to Holdings members will depend on the aggregate value of the shares distributed, which will be determined based on the initial public offering price of our shares in this offering. Information in this prospectus with respect to the number of shares owned by our stockholders and their proportionate ownership interest of our outstanding shares is based on an assumed initial public offering price of $ (the mid-point of the price range set forth on the cover page of this prospectus). Unless the context otherwise requires or the text otherwise indicates, all information in this prospectus (1) gives effect to the distribution discussed above, (2) assumes no exercise of the underwriters overallotment option and (3) gives effect to a for stock split that will occur prior to the completion of this offering. AmWINS Group Overview We are a leading wholesale distributor of specialty insurance products and services in the United States. We distribute a wide range and diversified mix of property and casualty and group benefits insurance products from insurance carriers to retail insurance brokerage firms. We also offer value-added customized services to support some of these products, including policy underwriting for certain insurance carriers, premium and claims administration and actuarial services. In September 2006, we were recognized by Business Insurance as the largest wholesale insurance broker operating in the United States. We do not take any insurance underwriting risk in the operation of our business. Our business has grown substantially since January 1, 2003. Revenues for the years ended December 31, 2003, 2004, 2005 and 2006 have grown, period over period, by 63.9%, 45.4%, 68.2% and 30.2%, respectively. From 2003 to 2006, our operating income increased by $29.5 million, or 766%, from $3.8 million to $33.3 million. This growth was driven by both acquisitions and organic growth. Our organic revenue growth for the years ended December 31, 2003, 2004, 2005 and 2006 was 13.3%, 19.1%, 14.4% and 11.9%, respectively. Our management team has substantial experience with AmWINS and within the insurance industry. We have cultivated an entrepreneurial and decentralized sales culture that provides our brokers and underwriters with flexibility to react to opportunities in the marketplace and better serve the needs of insurance carriers and our retail insurance broker clients. At the same time, we have centralized substantially all of our finance, human resource, legal, licensing, compliance and risk management operations to allow us to effectively oversee our national operations. We believe our centralized infrastructure positions us to achieve synergies when we acquire businesses and add new brokers and offices. Table of Contents The information contained in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Subject to Completion Preliminary Prospectus Dated March 5, 2007 PROSPECTUS Shares Common Stock This is the initial public offering of common stock of AmWINS Group, Inc. We are offering shares of common stock, and the selling stockholders are offering shares of common stock. Prior to this offering, there has been no public market for our common stock. We expect the initial public offering price of our common stock will be between $ and $ per share. We have applied to list our common stock on the New York Stock Exchange under the symbol AGI. Investing in our common stock involves risks. See Risk Factors beginning on page 12. Per Share Total Public offering price $ $ Underwriting discounts $ $ Proceeds, before expenses, to us $ $ Proceeds, before expenses, to the selling stockholders $ $ The underwriters have a 30-day option to purchase up to a maximum of additional shares of common stock from us, and up to a maximum of additional shares of common stock from the selling stockholders, at the public offering price, less the underwriting discounts and commissions, to cover overallotments of shares, if any. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Delivery of the shares of common stock will be made on or about , 2007. Joint Book-Running Managers Merrill Lynch Co. Wachovia Securities Cochran Caronia Waller William Blair Company Piper Jaffray The date of this prospectus is , 2007. Table of Contents Wholesale distribution of insurance products is an integral part of the insurance industry. As a wholesale distributor, we are a critical intermediary between insurance carriers and retail insurance brokers, which deal directly with insured parties. Many specialty insurance carriers distribute products primarily through wholesale insurance brokers to avoid the cost and complexity of dealing directly with a large number of retail insurance firms. We provide insurance carriers with an efficient variable-cost distribution channel through our licensed brokers in all 50 states and our extensive relationships with retail insurance brokers. Our distribution structure enables the insurance carriers with which we do business to reach a large number of retail insurance brokers. We have extensive knowledge of the specialty insurance products that we distribute, which allows us to assist retail insurance brokers in placing business outside of their core expertise or capacity. Our size and strong relationships with insurance carriers enhance our ability to provide retail insurance brokers with broader access to the insurance markets. We have established relationships with over 100 insurance carriers, including property/casualty and health/life carriers owned by ACE Limited (ACE), AEGON USA (AEGON), Alleghany Insurance Holdings (Alleghany), American International Group, Inc. (AIG) and The Hartford Financial Services Group, Inc. (The Hartford). We also use our product expertise and relationships with insurance carriers to structure new insurance programs and products to respond to opportunities in the marketplace. We distribute insurance products and services through our three divisions: Property Casualty Brokerage. With most of its operations under the AmWINS Brokerage brand name, our Property Casualty Brokerage division distributes a broad range of property and casualty insurance products. We place a significant amount of insurance in the excess and surplus (E S) lines market for businesses and governmental entities that are unable to obtain coverage through standard insurance products because of their risk profile or the nature or size of the risk. In 2006, our Property Casualty Brokerage division represented approximately 70.3% of our total revenues. Specialty Underwriting. Our Specialty Underwriting division consists of a number of niche property and casualty insurance programs for which we act as a managing general underwriter (MGU). As an MGU, we act on behalf of insurance carriers who have given us the authority to underwrite and bind coverage for specified risks within prescribed limitations. Our Specialty Underwriting division currently administers a number of programs that offer commercial insurance for specific product lines or industry classes. In 2006, our Specialty Underwriting division represented approximately 9.4% of our total revenues. Group Benefits. Our Group Benefits division, which has experienced the most significant overall organic revenue growth of our three divisions since January 1, 2002, distributes group health and other benefit products and provides a full range of related administrative services. A substantial and growing part of this division s business involves the placement and administration of retiree medical and prescription drug programs for businesses and governmental entities that are trying to reduce, control or eliminate the increasing cost of providing retiree benefits. Through our call center, we offer insurance carriers and plan sponsors the ability to outsource plan administration. We currently administer retiree health plans for over 800 employer groups and 74 member groups. Additionally, we operate a third-party claims administrator with over 100,000 lives under management. We also offer pharmacy benefit management services and distribute an approved prescription drug plan under Part D of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Medicare Modernization Act). In addition, we act as the exclusive general agent for small employers, defined as employers with 50 or fewer employees, for Blue Cross Blue Shield of Rhode Island. In 2006, our Group Benefits division represented approximately 20.2% of our total revenues. Table of Contents Table of Contents Industry Trends We believe that we are well positioned to capitalize on many of the trends occurring in our markets, including: Trends Affecting the Property and Casualty Market Greater Opportunity with Large Retail Insurance Brokers. Until recently, Aon Corporation (Aon), Marsh McLennan Companies, Inc. (Marsh) and Willis North America Inc. (Willis), three of the largest retail insurance brokerage firms, owned their own wholesale insurance brokerage operations. During 2005, we acquired Willis wholesale insurance brokerage operations, and Aon and Marsh sold their wholesale insurance brokerage operations to private equity firms. Before these transactions, it generally was difficult for independent wholesale insurance brokers to conduct a significant amount of business with Aon, Marsh and Willis. Independent wholesale insurance brokers, such as AmWINS, now have greater opportunities to do business with these three firms. Additionally, we recently have observed that some large retail insurance brokerage firms have become more attentive to the number of wholesale insurance brokers they use and the compliance systems and financial position of these brokers. We believe this development may result in a reduction in the number of wholesale distributors used by these large retail insurance brokerage firms, which may benefit firms like us that have invested in and maintain compliance systems and procedures. Important Sustainable Market. The E S lines market is a growing part of the commercial property and casualty insurance marketplace. Based on information published by A.M. Best Company, Inc. (A.M. Best), direct premiums written for E S lines insurance policies in relation to total premiums for the commercial property and casualty lines market increased from approximately 6.4% in 1995 to approximately 12.7% in 2005, and premiums on E S property and casualty lines insurance increased from $9.2 billion in 1995 to $33.3 billion in 2005. Apart from a slight decline in 1996, the E S lines market has grown annually in terms of aggregate premium dollars written for the past 15 years for a variety of reasons, including the implementation of more conservative underwriting criteria and risk-selection techniques by standard insurance carriers, the elimination of non-core lines of business by standard insurance carriers and substantial losses resulting from the terrorist attacks on September 11, 2001 and natural disasters. Moreover, as reported by A.M. Best, a significant amount of capital has been invested in the E S market during the last five years to capitalize on favorable market conditions, as evidenced by an increase in the number of start-up companies entering the E S market, such as AXIS Capital Holdings Limited (AXIS), Allied World Assurance Company Holdings Limited (Allied World) and Endurance Specialty Holdings Limited (Endurance). Many insurance carriers operating in the E S market distribute their products primarily through wholesale insurance distributors. Trends Affecting the Group Benefits Market Rising Health Care Costs. In the United States, national expenditures on health care increased from $912.6 billion to approximately $2.0 trillion, or approximately 117.8%, from 1993 to 2006, and are projected to reach $4.1 trillion by 2016, according to the U.S. Department of Health and Human Services (HHS). On a per person basis, annual health care spending grew 49.5% during the seven-year period beginning January 1, 1999, reaching an estimated average of $6,683 per person in 2005, with spending projected to grow to approximately $12,357 per person by 2015, according to HHS and U.S. Census Bureau statistics. Aging Population. As a result of increases in life expectancy, the percentage of U.S. citizens age 65 and older is increasing in proportion to the overall U.S. population. Table of Contents According to the U.S. Census Bureau, the proportion of the population age 65 and older was 12.4%, or 36.8 million people, in 2005, and is expected to increase to 14.2%, or 46.4 million people, by 2015, and to 16.3%, or 54.6 million people, by 2020. The age 65 and over population accounts for a disproportionate percentage of total health care costs. According to data published in Age Estimates in National Health Accounts, Health Care Financing Review, in 1999, people age 65 and older spent, on average, four times more on health care than the average person under age 65. The combination of increasing post-retirement life spans and disproportionate benefit costs, coupled with the general rise in health care spending, have led employers to seek ways to manage the costs or shift the burden of providing health benefits to retirees. Accounting Changes. We believe that recent changes in accounting principles generally accepted in the United States of America (GAAP) have increased the level of attention given to the cost of providing retiree health care benefits. The Governmental Accounting Standards Board (GASB) recently promulgated Statement No. 45, Accounting and Financial Reporting by Employers for Post-Employment Benefits Other Than Pensions (GASB No. 45). GASB No. 45, which will be phased in beginning in 2007, will require state and local governmental entities either to fund the cost of retiree benefits or recognize this obligation as a liability on their financial statements, as opposed to the prior practice of recognizing these costs on a pay-as-you-go basis. We believe GASB No. 45 is prompting many governmental entities to focus on the costs of retiree benefits and to seek ways to reduce these costs. Medicare Part D. The Medicare Modernization Act, which created the federal Voluntary Prescription Drug Benefit Program under Part D of the Social Security Act, added a new entitlement for Medicare-eligible beneficiaries for prescription drug costs. Effective as of January 1, 2006, eligible Medicare beneficiaries are able to obtain prescription drug coverage under Part D by enrolling in a prescription drug plan or in a Medicare Advantage plan, which is also known as an MA-PD. Under the Medicare Modernization Act, employers that provide retiree prescription drug benefits now have a greater number of options, including the elimination of these benefits entirely, the establishment of company-sponsored plans that are eligible for a government subsidy, the adoption of a company-sponsored prescription drug plan and the establishment of plans designed to supplement the benefits available through a prescription drug plan or Medicare Advantage plan (MA-PD). As a result of the Medicare Modernization Act, insurance products that provide prescription drug benefits for Medicare-eligible individuals now compete with the entitlement program created under Part D. We believe the Medicare Modernization Act generally has resulted in the development of new insurance products available for employers that desire to provide greater benefits than are available through a prescription drug plan or Medicare Advantage plan (MA-PD). We also believe this trend has benefited insurance brokers that have developed the expertise and product distribution capabilities to assist employers in responding to these developments. Competitive Strengths We believe that our competitive strengths include: Extensive Relationships with Retail Insurance Brokers. We believe that our national operations, product expertise, extensive relationships with insurance carriers and focus on compliance make us an attractive business partner for retail insurance brokers. During 2006, we did business with over 4,500 retail insurance brokerage firms, including substantially all of the 100 largest U.S. retail insurance brokers as identified by Business Insurance in July 2006. We also work with small to mid-size retail insurance brokerage firms, which in many cases do not have direct access to certain of the insurance carriers with which we do business. Our extensive Table of Contents relationships with retail insurance brokers make us an attractive distribution channel for insurance carriers. Established Insurance Carrier Relationships. We have established relationships with over 100 insurance carriers. We believe that many insurance carriers view us as a valued customer because of our expertise, experienced brokers and underwriters and national platform, which enable us to produce a significant amount of business for them. Our access to insurance carriers is key to our business. Through years of experience in the insurance industry, our management has close relationships with the management teams of many insurance carriers at the most senior levels. We understand our insurance carriers underwriting preferences for particular lines of business and areas of geographic focus. We believe that the scope of our relationships with insurance carriers and our product knowledge allow us to better serve the needs of our retail insurance brokerage clients. Proven and Experienced Brokers and Underwriters. As of December 31, 2006, we employed 221 brokers and underwriters, many of whom have substantial experience in the insurance industry. Our brokers and underwriters typically specialize in either certain product lines or industry classes and have, in many cases, developed close relationships with the insurance carrier underwriters for these product lines and industry classes. We believe we have been able to use our size, diverse product knowledge and extensive relationships with insurance carriers to improve the productivity of our existing brokers and recruit new brokers who can leverage these resources to increase revenues. Seasoned Management Team. Our Chief Executive Officer and division presidents have substantial experience and long-standing relationships developed over an average of 21 years of service in the insurance industry. Our management team draws on its industry experience to identify opportunities to expand our business and collaborate with insurance carriers to help develop products to respond to market trends. Through their extensive relationships in the insurance industry, our management team has contributed to the successful recruitment of key brokers and underwriters to join AmWINS. Having completed nine acquisitions since January 1, 2002, our management team has a proven track record of successfully identifying and structuring acquisitions and integrating the businesses acquired. Business Diversification. The scope of our operations distinguishes us from traditional property and casualty wholesale insurance brokers. By operating in both the group benefits market and the property and casualty market, we believe we are better positioned to detect, analyze and capitalize on opportunities to expand our business than are companies with a more narrow market focus. In addition, our product diversity and ability to provide value-added underwriting, administrative and other services provide us with broader access to insurance carriers and enhance our ability to help retail insurance brokerage firms deliver products that meet the wide-ranging needs of their clients. Efficient Use of Information. We believe the way we collect and analyze information using AmLINK, our proprietary enterprise operating system, will improve the efficiency and productivity of our brokers and underwriters. For example, we can access our database to identify individual insurance carrier underwriters that typically underwrite a specific type of business, making it more likely we can place a particular risk for our customers. We also intentionally capture and store data for business we are unable to place so we can analyze missed opportunities and improve our chances to place this business in the future. We believe that AmLINK allows us to more effectively manage and control our operations. Table of Contents Business Challenges We face several challenges in conducting our business that are discussed in more detail in the section entitled Risk Factors, including, but not limited to, the following: Potential for Disintermediation. We act as an intermediary between retail insurance brokers and insurance carriers that, in some cases, will not transact business directly with retail insurance brokers. If insurance carriers change the way they conduct business and begin to transact business directly with retail insurance brokers, our role in the distribution of insurance products could be eliminated or significantly reduced. Business Concentration with Willis and AIG. In April 2005, we acquired Willis wholesale insurance brokerage operations, formerly operated under the name Stewart Smith Group. Willis accounted for approximately 15.0% and 12.8% of our revenues in 2005 and 2006, respectively. Our business would suffer if we lost Willis as a client or if there was a substantial reduction in the volume of business we do with Willis. In addition, approximately 11.5% and 9.3% of our revenues in 2005 and 2006, respectively, were derived from insurance policies provided by AIG. We would be required to incur additional expense and could lose market share if AIG terminated or significantly reduced the amount of business we do with it. Recruitment and Retention of Brokers/Underwriters and Executive Officers. Our future operating performance and success depend on our ability to recruit and retain highly qualified brokers, underwriters and key executive officers. Competition for these persons is intense. Our inability to recruit and retain these brokers, underwriters and officers could harm our business and operating performance. Changing Conditions in the Markets in Which We Operate. We may be negatively affected by changes in the markets in which we operate. Premium pricing within the commercial property and casualty insurance market historically has been cyclical based on the underwriting capacity of the insurance carriers operating in this market and also has been impacted by general economic conditions. These factors may affect the commissions we receive and fees we are able to charge for our services. Currently, we are encountering declining rates for the types of property and casualty insurance products we place, which we believe reflect additional capacity in these markets. In addition, federal and state sponsored health care programs as well as proposals to alter the level of spending under these programs could affect the market for the group health insurance products we distribute. In particular, as a result of the adoption of the Medicare Modernization Act, insurance products that provide prescription drug benefits to Medicare-eligible individuals now compete with the entitlement program under Part D of the Social Security Act. Competitive Markets. The wholesale insurance brokerage industry is highly competitive. A number of firms actively compete with us for clients and access to insurance carriers. Our ability to remain competitive will, in large part, determine our future success. Key Elements of Our Growth Strategy Our goal is to achieve superior long-term returns for our stockholders while establishing ourselves as the premier national wholesale distributor of insurance products and services. To accomplish this goal, we intend to focus on the following key areas: Increase Growth by Expanding Distribution. We strive to prudently grow our business by expanding our distribution channels. Since January 1, 2003, we have opened five new offices in our Property Casualty Brokerage division and hired 124 new brokers, excluding brokers hired in connection with acquisitions. We intend to continue pursuing opportunities to expand into new geographic markets and increase our presence in existing geographic markets. We also seek to expand our business by marketing our diverse product capabilities through targeted advertisements, client seminars and client marketing events. Table of Contents Access New Markets and Products. We are focused on expanding our access to new markets and products to better serve the needs of our retail insurance brokerage clients. For example, because certain admitted insurance carriers will not do business directly with small retail insurance brokerage firms, but will do business with us, we are developing our AmWINS Access platform to provide these brokerage firms with access to a greater variety of standard insurance products. We also are actively working to develop new MGU programs. In our Group Benefits division, we continue to explore opportunities to work with our insurance carrier partners to develop new products that help employers manage the rising cost of health care. Capitalize on Industry Changes. We believe that recent governmental investigations into the insurance industry caused many insurance carriers and large retail insurance brokerage firms to pay greater attention to the intermediaries they use. We believe these insurance carriers and brokerage firms increasingly are seeking to solidify their business relationships with financially stable intermediaries with acceptable reporting, compliance and other administrative systems. Aon, Marsh and Willis all recently sold their wholesale insurance brokerage firms, and we believe that we can use our national platform and organizational structure to build upon our relationships with these and other firms. In addition, we intend to pursue opportunities to distribute retiree health products to employer groups to help them better respond to rising health care costs, an aging U.S. population and changes in the way they are required to account for retiree benefits. Pursue Strategic Acquisitions. We plan to pursue strategic acquisitions that will complement our existing business or potentially expand into new wholesale distribution channels. We have substantial experience in selecting and integrating companies and are positioned to take advantage of acquisition opportunities that arise. We believe that our entrepreneurial culture and centralized administrative support system make us an attractive partner to acquisition targets. We believe this offering enhances our business profile and our ability to structure future acquisitions we decide to pursue. Risks Related to Our Business and Growth Strategy We are subject to numerous risks, which are described in greater
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+Prospectus Summary 1 Risk Factors 7 Cautionary Note Regarding Forward-Looking Statements and Market Data 23 Use of Proceeds 24 Dividend Policy 24 Capitalization 25 Dilution 26 Selected Consolidated Financial Data 28 Balance Sheet for IsoTis, Inc. 30 Management s Discussion and Analysis of Financial Condition and Results of Operations 31 Business 49 Management 70 Compensation Discussion and Analysis 76 Executive Compensation 80 Principal Stockholders 89 Description of Capital Stock 90 Shares Eligible for Future Sale 93 Material U.S. Federal Tax Consequences for Non-U.S. Holders of Common Stock 94 Underwriting 97 Legal Matters 99 Experts 99 Where You Can Find More Information 99 Index to Consolidated Financial Statements and Schedule F-1 Exhibit 10.2 EXHIBIT 10.15 EXHIBIT 10.20 EXHIBIT 21.1 EXHIBIT 23.1 EXHIBIT 23.2 EXHIBIT 23.3 You should rely on the information contained in this prospectus or in any free writing prospectus authorized by us. We have not, and the underwriters have not, authorized anyone to provide you with information different from that contained in this prospectus. Neither this prospectus nor any related free writing prospectus is an offer to sell, nor are they seeking an offer to buy, these securities in any state where the offer or solicitation is not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sales of the common stock. Our business, financial condition, results of operations and prospects may have changed since that date. Table of Contents PROSPECTUS SUMMARY This summary highlights selected information contained in greater detail elsewhere in this prospectus and does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, especially the risks of investing in our common
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. Before making an investment decision, you should read the entire prospectus carefully, including the section entitled Risk Factors and our consolidated financial statements and related notes included elsewhere in this prospectus. Unless we state otherwise, the terms we, us, our, HFF, and the Company, refer to HFF, Inc., a newly formed Delaware corporation, and its consolidated subsidiaries after giving effect to the reorganization transactions to be completed prior to the consummation of this offering as described in Organizational Structure ; prior to the reorganization transactions, these terms refer to HFF Holdings (as such term is defined below) and its consolidated subsidiaries. Unless the context otherwise requires, references to (1) HFF Holdings refer solely to HFF Holdings LLC, a Delaware limited liability company that is currently the holding company for our consolidated subsidiaries, and not to any of its subsidiaries, (2) HFF LP refer to Holliday Fenoglio Fowler, L.P., a Texas limited partnership, (3) HFF Securities refer to HFF Securities L.P., a Delaware limited partnership and registered broker-dealer, (4) Holliday GP refer to Holliday GP Corp., a Delaware corporation and the general partner of HFF LP and HFF Securities, (5) HoldCo LLC refer to HFF Partnership Holdings LLC, a Delaware limited liability company and a wholly-owned subsidiary of HFF, Inc. and (6) Holdings Sub refer to HFF LP Acquisition LLC, a Delaware limited liability company and wholly-owned subsidiary of HFF Holdings. Our business operations are conducted by HFF LP and HFF Securities which are sometimes referred to in this prospectus as the Operating Partnerships. Unless we state otherwise, the information in this prospectus gives effect to the reorganization transactions described in Organizational Structure. The term Predecessor refers to HFF LP prior to its acquisition from Lend Lease by HFF Holdings on June 16, 2003. The term Successor refers to HFF Holdings after the date of such acquisition. HFF We are a leading provider of commercial real estate and capital markets services to the U.S. commercial real estate industry based on transaction volume and are one of the largest private full-service commercial real estate financial intermediaries in the country. We operate out of 18 offices nationwide with more than 130 transaction professionals and approximately 270 support associates. In 2005, we advised on approximately $32 billion of completed commercial real estate transactions, more than a 40% increase compared to the approximately $22 billion of completed transactions we advised on in 2004. Our fully-integrated national capital markets platform, coupled with our knowledge of the commercial real estate markets, allows us to effectively act as a one-stop shop for our clients, providing a broad array of capital markets services including: Debt placement; Investment sales; Structured finance; Private equity, investment banking and advisory services; Note sale and note sales advisory services; and Commercial loan servicing. Substantially all of our revenues are in the form of capital market services fees collected from our clients, usually negotiated on a transaction-by-transaction basis. We believe that our multiple product offerings, diverse client mix, expertise in a wide range of property types and our national platform create a stable and diversified revenue stream. Furthermore, we believe our business mix, operational expertise and the leveragability of our platform have enabled us to achieve profit margins that are among the highest of our public company peers. Our revenues and net income were $205.8 million and $46.8 million, respectively, for the year ended December 31, 2005, compared to $143.7 million and $28.1 million, respectively, for the year ended December 31, 2004. For the Table of Contents The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED JANUARY 17, 2007 14,300,000 Shares Class A Common Stock This is an initial public offering of Class A common stock of HFF, Inc. All of the 14,300,000 shares of Class A common stock are being sold by HFF, Inc. Prior to this offering, there has been no market for our Class A common stock. It is currently estimated that the initial public offering price per share will be between $15.00 and $17.00 per share. We have applied to list our Class A common stock on the New York Stock Exchange under the symbol HF. See Underwriting for a discussion of the factors to be considered in determining the initial public offering price. Investing in our Class A common stock involves significant risks. See Risk Factors beginning on page 15 to read about factors you should consider before buying shares of our Class A common stock. Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. Per Share Total Initial public offering price $ $ Underwriting discount $ $ Proceeds, before expenses, to HFF, Inc. $ $ To the extent that the underwriters sell more than 14,300,000 shares of our Class A common stock, the underwriters have the option to purchase up to an additional 2,145,000 shares of Class A common stock from HFF, Inc. at the public offering price less the underwriting discount. The underwriters expect to deliver the shares of Class A common stock in New York, New York on , 2007. Goldman, Sachs Co. Morgan Stanley Banc of America Securities LLC Wachovia Securities JPMorgan Lehman Brothers Prospectus dated , 2007. Table of Contents nine months ended September 30, 2006, our revenues and net income were $156.5 million and $31.7 million, respectively. We have established strong relationships with our clients. Our clients are both users of capital, such as property owners, and providers of capital, such as lenders and equity investors. Many of our clients act as both users and providers of capital in different transactions, which enables us to leverage our existing relationships and execute multiple transactions across multiple services with the same clients. We believe we have a reputation for high ethical standards, dedicated teamwork and a strong focus on serving the interests of our clients. We take a long-term view of our business and client relationships, and our culture and philosophy are firmly centered on putting the client s interests first. Furthermore, through their ownership of HFF Holdings, approximately 40 of our senior transaction professionals will in the aggregate own a majority interest in the Operating Partnerships following this offering. We believe this further aligns their individual interests with those of the Company. Our Competitive Strengths We attribute our success and distinctiveness to our ability to leverage a number of key competitive strengths, including: People, Expertise and Culture. We and our predecessor companies have been in the commercial real estate business for over 25 years, and our transaction professionals have significant expertise and long-standing relationships with our clients. The transaction history accumulated among our transaction professionals ensures a high degree of market knowledge on a macro level, intimate knowledge of local commercial real estate markets, long-term relationships with the most active investors, and a comprehensive understanding of capital markets products. In addition, our culture is governed by our commitment to high ethical standards, putting the client s interest first and treating clients and our own associates fairly and with respect. Integrated Capital Markets Services Platform. In the increasingly competitive commercial real estate and capital markets industry, we believe our key differentiator is our ability to analyze all commercial real estate product types and markets as well as our ability to provide clients with comprehensive analysis, advice and execution expertise on all types of debt and equity capital markets solutions. Independent Objective Advice. Unlike many of our competitors, we do not currently offer services that compete with services provided by our clients such as leasing or property management, nor do we currently engage in principal capital investing activities. This allows us to offer independent objective advice to our clients. Extensive Cross-Selling Opportunities. As some participants in the commercial real estate market are frequently buyers, sellers, lenders and borrowers at various times, our relationships with these participants across all aspects of their business provides us with multiple revenue opportunities throughout the life cycle of their commercial real estate investments. In addition, we often provide more than one service in a particular transaction, such as in an investment sale or note sale assignment where we not only represent the seller of a commercial real estate investment but also represent the buyer in arranging acquisition financing. Broad and Deep Network of Relationships. We have developed broad and deep-standing relationships with the users and providers of capital in the industry and have completed multiple transactions for many of the top institutional commercial real estate investors in the U.S. Importantly, our transaction professionals, analysts and closing specialists foster relationships with their respective counterparts within each client s organization. This provides, in our opinion, a deeper relationship with our firm relative to our competitors. Proprietary Transaction Database. We believe that the extensive volume of commercial real estate transactions that we advise on throughout the U.S. and across multiple property types and capital market service lines provides our transaction professionals with valuable, real-time market information. We maintain a proprietary database on over 4,800 clients as well as databases that track key terms and provisions of all closed and pending transactions for which we are involved as well as historic and current Table of Contents flows and the pricing of debt, structured finance, investment sales, note sales and equity transactions. We believe this information strengthens our competitive position by enhancing the advice we provide to clients and improving the probability of successfully closing a transaction. Our Strategic Growth Plan We seek to improve our market position by focusing on the following strategic growth initiatives: Expand Our Geographic Footprint. We believe that opportunities exist to establish and increase our presence in several key domestic and, potentially, international markets. While our transaction professionals, located in 18 offices throughout the U.S., advised clients on transactions in 44 states (and the District of Columbia) and in more than 500 cities in 2005, there are a number of major metropolitan areas where we do not maintain an office, and we have no overseas offices. We expect to achieve future strategic geographic expansion through a combination of recruitment of key transaction professionals, organic growth and possible acquisitions of smaller local and regional firms across all services in both new and existing markets. However, in all cases our strategic growth will be focused on serving our clients interests and predicated on finding the most experienced professionals in the market who have the highest integrity, work ethic and reputation, while fitting into our culture and sharing our philosophy and the way we conduct our business. Increase Market Share Across Each of Our Services. We have achieved significant growth in each of the services we provide through our integrated capital markets platform. We believe that we have the opportunity to continue to increase our market share in each of the various services we provide to our clients by penetrating deeper into our national, regional and local client relationships. We also intend to increase our market share by selectively hiring transaction professionals in our existing offices and in new locations, predicated on finding the most experienced professionals in the market who have the highest integrity, work ethic and reputation, while fitting into our culture and sharing our philosophy and the way we conduct our business. Continue to Capitalize on Cross-Selling Opportunities. Participants in the commercial real estate market increasingly are buyers, sellers, lenders and borrowers at various times. We believe our relationships with all of these participants across all aspects of their businesses provide us with multiple revenue opportunities throughout the lifecycle of their commercial real estate investments. Our clients typically execute transactions throughout the U.S. utilizing the wide spectrum of our services. By maintaining close relationships with these clients, we intend to continue to generate significant repeat business across all of our business lines. Selected
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+PROSPECTUS SUMMARY This summary provides an overview of selected information contained elsewhere in this prospectus and does not contain all of the information you should consider before investing in our common stock. You should carefully read the prospectus and the registration statement of which this prospectus is a part in their entirety before investing in our common stock, including the information discussed under "Risk Factors" beginning on page 8 and our financial statements and notes thereto that appear elsewhere in this prospectus. As used in this prospectus, the terms "LifeWatch," we," "our," "us," or "the Company" refer to LifeWatch Corp. and its wholly owned subsidiaries, LifeWatch Services Inc. and LifeWatch Technologies Inc.; "Card Guard," "parent companies" and "Parent" refer to Card Guard AG and its subsidiaries, Card Guard Europe B.V. and Card Guard Scientific Survival Ltd; "LifeWatch Services" refers to LifeWatch Services Inc.; and "LifeWatch Technologies" refers to LifeWatch Technologies Inc., unless the context otherwise indicates. Unless otherwise stated, all the information in this prospectus assumes that the underwriters will not exercise their overallotment option. LIFEWATCH CORP. Our Company We are an integrated health care services and technology monitoring company. Our solution combines clinically validated, standardized monitoring services through our state-of-the-art call centers and access to technologically advanced monitoring devices to enable physicians to have remote oversight of their patients 24 hours a day, seven days a week, 365 days a year. To date, we have provided services and sold devices primarily related to ambulatory cardiac event monitoring, the related services of which constitute a majority of our revenues, as well as holter monitoring and pacemaker monitoring. We believe that we are a leading provider of ambulatory cardiac event and holter monitoring services among independent diagnostic testing facilities, or IDTFs, and a leading manufacturer and distributor of ambulatory cardiac event monitoring devices in the United States. We provide our services in conjunction with FDA-approved cardiac monitoring devices through our wholly owned subsidiary LifeWatch Services. In addition, we manufacture and distribute cardiac monitoring devices through our wholly owned subsidiary LifeWatch Technologies. According to a 2004 Frost & Sullivan report, in 2004 we held leading market share positions representing approximately 19.4% and 34.3% of the U.S. markets for ambulatory cardiac event monitoring services provided by IDTFs and for cardiac event monitoring device sales, respectively. We believe our existing platform can be extended to remotely monitor additional chronic illnesses as well as conditions related to age, personal safety and wellness. Our services are used by physicians to monitor electrocardiographic data, or cardiac events, for patients who are suspected of having heart rhythm disorders, or cardiac arrhythmias, that often precede serious complications associated with cardiovascular disease or other conditions. Our services are primarily used in conjunction with our, our parent companies, or another party's cardiac monitoring devices that capture specific cardiac events that are relied upon for the diagnosis of cardiac arrhythmias and allow physicians to provide appropriate treatment to their patients, thus saving patients from significant medical events, including death. In cases where it is determined that a patient requires immediate medical attention, we notify the patient's physician and the appropriate emergency response professionals. Our services are prescribed to patients by their physicians and, upon such prescription, patients receive the prescribed cardiac monitoring devices from their physicians or directly from us for a limited period of time, typically up to 30 days for cardiac event monitors, and return them to us at the end of the monitoring period for further processing. We receive payments for our monitoring services, including the use of cardiac monitoring devices, primarily through Medicare and private third party payors, such as insurance companies. We offer a comprehensive spectrum of remote cardiac monitoring services using cardiac monitoring devices, which include monitoring holters, traditional manual trigger looping and non-looping event recorders, the auto-detect LifeStar AF cardiac event monitor and Card Guard's newest auto-detect auto-send, or ADAS, LifeStar ACT cardiac event monitor, which we recently launched in the first quarter of 2007. We believe Card Guard's LifeStar ACT , which received U.S. Food and Drug Administration, or FDA, approval in August 2006, and for which we have exclusive rights in the United States through 2011, represents the latest advancement in the evolution of cardiac event monitoring because, among other things, it: (i) is remotely programmable; (ii) is the only ADAS cardiac event monitor that can operate on any mobile telephony protocol; and (iii) has a longer recording memory than existing cardiac event monitors. In addition, our LifeStar ACT related monitoring services would allow physicians to receive data about cardiac events that require physician notification, or clinically significant events, in the least amount of time, an ability that we refer to as diagnostic yield. Our and our parent companies' historical market leadership in cardiac event monitoring devices and the continued introduction, sale and distribution by us of technologically advanced products ensures that the physicians we serve have the ability to provide their patients with the most effective devices available. In March 2006, we, along with our ultimate parent company Card Guard AG, were selected as the recipient of Frost & Sullivan's 2006 Technology Innovation Award in the field of remote patient monitoring for focus on research, development and marketing to support future growth of the industry. We and our parent and predecessor companies have a long history of commercializing technologically advanced cardiac monitoring devices for patient use. Since the 1970s, our subsidiary LifeWatch Technologies and its predecessors have been manufacturing, selling and distributing a broad range of advanced cardiac monitoring devices, including its own cardiac monitoring devices, in the United States, to physicians, hospitals and other IDTFs who use them to provide their own monitoring services. Since 2001, LifeWatch Technologies has also been distributing Card Guard's cardiac monitoring devices in the United States. Our management team has recently implemented a series of strategic initiatives directed at launching new services and products, growing the number of our referring physicians, increasing the number of private third party payor contracts and the people covered under such contracts, increasing our sales force, focusing our marketing efforts, diversifying our product offerings to include wireless ambulatory vital signs monitoring and expanding our cardiac monitoring service offerings for clinical research. We believe that the foregoing initiatives, together with projected market expansion, will drive the growth of our business. Cardiac Event Monitoring Market Opportunity The ambulatory cardiac monitoring services and product market in the United States in 2004 was a $1.1 billion industry, composed of approximately $1.04 billion related to services and $74 million related to product sales. This industry encompasses ambulatory cardiac event monitoring, holter monitoring and pacemaker monitoring services. The majority of our revenues come from the ambulatory cardiac event monitoring services market. According to the 2004 Frost & Sullivan report, the ambulatory cardiac event monitoring services market was a $398 million market in 2004 and was expected to grow to $614 million by 2011. We believe that the market for ambulatory cardiac event monitoring services will grow over the foreseeable future as a result of an aging and growing population, the increase in a prevalence of health conditions such as obesity that increase the likelihood of heart related diseases and the increasing awareness of cardiac diseases. We provide our monitoring services, including our ambulatory cardiac event monitoring services, as an IDTF. An IDTF is defined by the U.S. Department of Health and Human Services' Centers for Medicare & Medicaid Services, or CMS, as an entity independent of a hospital or physician's office in which diagnostic tests are performed by licensed or certified nonphysician personnel under appropriate physician supervision. According to the 2004 Frost & Sullivan report, as of 2004 there were over 150 IDTFs, many of which were very small with minimal revenues. IDTFs provide monitoring services to UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 the patient's hospital or physician when they outsource the service as opposed to providing it themselves. As a result, our main competitors are other IDTFs who compete to provide these outsourced monitoring services. According to the 2004 Frost & Sullivan report, the overall cardiac monitoring services market addressed by IDTFs was $309 million in 2004, which includes ambulatory cardiac event monitoring, holter monitoring and pacemaker monitoring services. We believe that the portion of the overall ambulatory cardiac monitoring services market addressed by IDTFs is expected to grow as physicians and hospitals increasingly outsource monitoring services to IDTFs like ourselves, due to increased capital requirements and new technology, such as ADAS devices, including the LifeStar ACT , which are not available to hospitals or physicians. Ambulatory cardiac event monitoring services, which constitute the majority of our revenues, is divided into three components: the "hook-up" component; the monitoring component and the physician interpretation component. While physicians and hospitals provide all three components, currently IDTFs, including ourselves, primarily provide only the monitoring component of the services. In 2004, IDTFs held 32% of the overall ambulatory cardiac event monitoring services market. Because providing the monitoring component requires 24-hour attended monitoring, many physicians and hospitals resort to outsourcing this monitoring component to IDTFs, or at least the after hours monitoring component, even if they may have the appropriate monitoring equipment. IDTFs provide the monitoring component of the services either directly, in which case they receive payments directly from the patient's insurer, or on a sub-contracting basis for physicians, in which case the physician or hospital bills the insurance company and the IDTF just receives a payment from the physician or hospital. Based on Medicare reports, in 2006 IDTFs were responsible for approximately 93% of the claims made for Medicare payments for the monitoring component of cardiac event monitoring services, where payment for such component was sought separately. According to the American Heart Association, cardiac arrhythmias are responsible for over 850,000 hospitalizations every year. Cardiac arrhythmia is a temporary or sustained irregular heart rhythm that is caused by abnormal functioning of the system that administers electrical signals to the chambers of the heart. The most prevalent life-threatening cardiac arrhythmia is atrial fibrillation, or AF. According to a recent study, the lifetime risk of developing AF is one in four for men and women over the age of 40. In addition, the American Heart Association reports that AF affects approximately 5.1 million Americans and is responsible for 15% to 20% of all strokes, the third leading cause of death in the United States. Thus, while often benign, a cardiac arrhythmia may be a symptom of serious cardiovascular disease and if left untreated, can lead to stroke or other serious complications. Being able to diagnose and find the cause of a cardiac arrhythmia is therefore important both to treat those patients with serious cardiovascular diseases as well as to identify those patients that require no further medical attention. Cardiac arrhythmias may be diagnosed either in a physician's office or other health care facility or remotely by monitoring a patient's heart rhythm. Typically, physicians will initially administer a resting electrocardiogram, or ECG, or a stress test, both methods that monitor the electrical impulses in a patient's heart. If a physician determines that a patient needs to be monitored for a longer period of time to produce a diagnosis, they will typically prescribe an ambulatory cardiac monitoring device for their patients. The patient's cardiac events recorded by this monitoring device can then be received and reviewed by a physician, a hospital or by a service provider that is not affiliated with a physician or a hospital and is qualified as an IDTF, such as LifeWatch, which facilitates the physicians' ability to diagnose potentially life-threatening cardiac arrhythmias. The market for cardiac monitoring services is characterized by increasing demand, sophistication and costs of cardiac monitoring infrastructure and devices as well as compliance with a set of standards that must be complied with by IDTFs to maintain or obtain Medicare billing privileges. These standards relate to compliance with regulatory requirements, information on enrollment applications, facility maintenance, availability of diagnostic testing equipment, phone access, liability insurance, AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 patient solicitation, customer support, accessibility of standards for review by patients and the public, disclosure requirements, equipment maintenance, staff certifications and licensures, medical record storage and on site-inspections and accessibility. In addition, a 2002 Medicare decision requires that ambulatory cardiac event monitoring be provided continuously for 24 hours. These factors make it very difficult and expensive for physicians and clinics to provide monitoring services that meet such standards by themselves. Our Solution We believe that we offer a comprehensive range of cardiac monitoring services across the United States. We offer our services 24 hours a day, seven days a week, 365 days a year. We have an extensive network of physicians and private third party payors in the cardiac event monitoring market. We believe this network represents an important distribution channel, which creates an opportunity for us to provide additional services and products. As of March 31, 2007, we had 370 full-time and part-time employees, of which over 160 are certified cardiac technicians and registered nurses, are located in our three monitoring centers in Buffalo Grove, Illinois, Philadelphia, Pennsylvania and Boca Raton, Florida. We offer automatic call distribution with voice recording tracking as well as clinical, customer care and billing integrity with multi-lingual service. We also utilize what we believe is a comprehensive educational system with competency validation and a compliance program for our own employees. In 2006 we monitored over 275,000 patient enrollments, which were referred to us by over 3,900 cardiology groups, who we believe represent at least 17% of the cardiologists practicing in the United States. In 2006 our professionals handled over 1.5 million patient interactions. We have been accredited by the Joint Commission on Accreditation of Healthcare Organizations, or JCAHO, and we are a Medicare-certified IDTF provider of monitoring services as well as an FDA-approved medical device manufacturer and distributor. In addition, as of March 31, 2007 we had commercial contracts with 357 private third party payors, including major health insurance companies that we believe administer benefits for over 223 million people in the United States. Our Strategy Our initial objective is to expand our position as a leading provider of cardiac event and holter monitoring services and a leading manufacturer and distributor of cardiac event monitoring devices in the United States. We intend to accomplish this by capitalizing on our demonstrated ability of layering new technology-enabled services onto our existing delivery channels of payor contracts and physician relationships nationwide. Key elements of our strategy include: expanding our recently launched LifeStar ACT services; further expanding our network of physicians and payors; continuing to provide a broad range of cardiac event monitoring services and products; and pursuing potential opportunistic strategic acquisitions. In addition, we believe that the combination of our call center infrastructure, our relationship networks with physicians, our contracts with private third party payors and our access to our parent companies' technology constitute an ideal platform onto which we can layer additional services beyond those directly related to our core cardiac business, such as health maintenance and prevention services. In this respect, we intend to commercialize a wireless medical monitoring platform developed by Card Guard and recently approved by the FDA that would assist physicians in providing effective diagnosis, treatment and management of diabetes, cardiovascular disease and obesity. LifeWatch Corp. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 8099 (Primary standard industrial classification code number) 20-5925595 (I.R.S. employer identification number) 1351A Abbott Court Buffalo Grove, Illinois 60089 (877) 774-9846 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) Frederick J. Mindermann Chief Executive Officer LifeWatch Corp. 1351A Abbott Court Buffalo Grove, Illinois 60089 (877) 774-9846 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) Corporate Organization We operate our business through our two wholly owned subsidiaries LifeWatch Services (formerly, LifeWatch Holding Corporation) and LifeWatch Technologies (formerly, Card Guard Technologies, Inc.), the businesses of which were acquired in 2000 by our parent companies, Card Guard Europe B.V. and Card Guard Scientific Survival Ltd. Our parent companies are both wholly owned subsidiaries of Card Guard AG, a Swiss company publicly traded on the SWX Swiss Exchange. We expect that following the consummation of this offering, our parent companies will continue to retain a majority interest in our company. We were incorporated in Delaware on July 5, 2006 and on October 26, 2006 our parent companies contributed the shares of our subsidiaries to us in exchange for 9,000,000 of our common shares. We have entered into agreements with our parent companies that provide for exclusive distribution rights for some of their cardiac monitoring devices as well as exclusive rights to offer services using the LifeStar ACT in the United States through 2011, and non-exclusive rights through 2016. Recent Developments On August 23, 2006, the FDA approved for marketing the LifeStar ACT . The LifeStar ACT is a Card Guard device which uses automatic detection and automatic transmission technology which we believe is technologically superior to commercially available cardiac event devices. We have the exclusive right to offer services using the LifeStar ACT in the United States through 2011 and recently launched such services in the first quarter of 2007. This device is designed to allow physicians to more accurately and rapidly detect cardiac arrhythmias and provide physicians with greater diagnostic capability than existing devices. We believe that these new services will drive our future growth. We commenced offering our LifeStar ACT services in mid January 2007 and through March 31, 2007 we enrolled 675 patients for these services in 32 states that were referred to us by approximately 350 physicians. Since launching our LifeStar ACT services we have been seeking confirmation from private third party payors that they will provide coverage of, and payment for, such services at a rate that is significantly higher than the payments received for our other cardiac event monitoring services. To date we have received such confirmation from 12 private third party payors that we believe administer benefits for over 79 million people, and have received payments pursuant to existing agreements with such private third party payors with respect to a limited number of patients. To date we have not received the required authorizations that would allow us to obtain reimbursement from Medicare for our LifeStar ACT services. Risks Associated With Our Business Our business is subject to numerous risks as discussed more fully in the section entitled "Risk Factors" immediately following this prospectus summary. If we are unable to receive referrals from physicians, expand our third party payor relationships, receive adequate reimbursement from third party payors, maintain our relationship with our parent companies, continue to develop or access new services and products to compete effectively and successfully launch the LifeStar ACT , we will be unable to achieve our business objectives. Additional Information We were previously incorporated under the name Card Guard America Inc. On October 26, 2006, we changed our name to LifeWatch Corp. Our principal executive offices are located at 1351A Abbott Court, Buffalo Grove, Illinois and our telephone number is (877) 774-9846. Our website address is www.lifewatch.com. The information contained in, or that can be accessed through, our website is not part of this prospectus. Copies to: Jeffrey A. Horwitz Yuval Tal Proskauer Rose LLP 1585 Broadway New York, New York 10036 (212) 969-3000 Richard Truesdell, Jr. Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 (212) 450-4000 Our U.S. trademarks include "LifeWatch" and "Instromedix." All other service marks, trademarks, trade names and brand names referred to in this prospectus are the property of their respective owners. In this prospectus we refer on numerous occasions to the 2004 Frost & Sullivan report. We believe that this is the most recent, accurate and comprehensive source of information available on the markets for cardiac monitoring services and products and that it continues to be an excellent source for information about these markets. Except for reports and studies published by Frost & Sullivan that we have purchased in the past or may purchase in the future, we do not expect to make any future payments to them. Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. The number of shares of common stock that will be outstanding after this offering is based on 9,000,000 shares of common stock outstanding at March 31, 2007, and excludes: 600,000 shares of common stock issuable upon the exercise of options outstanding as of the date of this offering, at a weighted average exercise price of $7.22 per share; up to shares of common stock issuable upon the exercise of options that will be granted immediately upon consummation of this offering, with an exercise price equal to this offering price; and additional shares of common stock reserved under our equity incentive plan. Unless otherwise indicated, all information in this prospectus assumes no exercise by the underwriters of their right to purchase up to shares of common stock to cover overallotments. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Net income (loss) per common share: Basic $ 0.29 $ 0.87 $ 0.51 $ 0.06 $ (0.01 ) Diluted(5) $ 0.29 $ 0.86 $ 0.51 $ 0.06 $ (0.01 ) Weighted average number of shares outstanding: Basic 9,000,000 9,000,000 9,000,000 9,000,000 9,000,000 Diluted(5) 9,000,000 9,000,000 9,000,000 9,000,000 9,000,000 CALCULATION OF REGISTRATION FEE (1)On July 1, 2005, we adopted the modified provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment using the modified prospective method. Prior to that adoption, we followed the intrinsic value method in accordance with Accounting Principles Bulletin No. 25, Accounting for Stock Issued to Employees. (2)In 2006, we incurred restructuring and other costs associated with our formation, including legal and other consulting costs associated with the reorganization of our corporate structure as well as the cost of professional fees associated with tax advice and the audit of the Company's financial statements upon formation, and with the move of our manufacturing operations from San Diego, California to a new consolidated service and product facility in Rosemont, Illinois. (3)Interest expense includes interest charges on loans with our parent companies of $851, $618, $359, $118 and $74 for the years ended December 31, 2004, 2005 and 2006, and for the three months ended March 31, 2006 and 2007, respectively. (4)In the fourth quarter of 2005 and 2006, we determined that it was likely that deferred tax assets in our subsidiaries would be realized and we released valuation allowances of $6,045 and $4,064 on these assets, respectively. (5)The weighted average number of common and common share equivalents is calculated based upon our equity structure at formation in July 2006, and the issuance of shares to our parent companies in October 2006. For the diluted net income (loss) computation, in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share, we included the dilutive effect on net income from the impact of the outstanding options of our LifeWatch Services subsidiary, where the effect is not antidilutive. For the purposes of calculating diluted income (loss) per share, this statement requires us to reduce net income by the amount attributable to the minority shareholders who own stock options in LifeWatch Services. (6)Consolidated balance sheet data, at March 31, 2007, is presented on an actual basis, and pro forma as adjusted, to give effect to (i) the receipt of net proceeds from the sale of shares of common stock by us in the offering at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and (ii) the application of approximately $27,644 of the net proceeds from this offering to repay outstanding debt to our parent companies. (7)Working capital is calculated as current assets less current liabilities. (8)Total debt includes the current and long term portions of long-term obligations, the capital note from Card Guard and the revolving line of credit. The current portion of total debt is $5,689 at March 31, 2007. Total debt also includes accrued interest expenses of $2,906 at March 31, 2007. (9)The number of patient enrollments represents the number of prescriptions written by physicians for our cardiac monitoring services. A single patient may represent multiple patient enrollments during any period. In particular, patients with pacemakers typically require monitoring services four times a year, depending on the age and type of pacemaker and the age and condition of the patient. Title of Each Class of Securities to be Registered Proposed Maximum Aggregate Offering Price Amount Of Registration Fee RISK FACTORS Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below and all of the other information set forth in this prospectus before deciding to invest in shares of our common stock. If any of the events or developments described below occur, our business, financial condition or results of operations could be negatively affected. In that case, the trading price of our common stock could decline, and you could lose all or part of your investment in our common stock. Risks Related to Our Business and Industry Our business is dependent upon referrals from physicians; if we fail to maintain relationships and obtain those referrals, our revenues may decrease and our business may be adversely impacted. Our ability to provide our services is dependent upon referrals of patients by physicians, who practice in the communities served by their medical receiving centers. The loss of a significant number of patient referrals by physicians prescribing our cardiac monitoring services may have an adverse effect on our revenues from cardiac monitoring services, which could have a material adverse effect on our business, financial condition and results of operations. Our success in obtaining referrals will be directly influenced by our ability to develop and maintain relationships with physicians and physician groups in a manner consistent with government regulations affecting such relationships. Such relationships are subject to various federal and state anti-fraud and abuse laws that prohibit sales and marketing activities that are routinely accepted in other industries. If we are unable to maintain such relationships and create new relationships in compliance with applicable laws, referrals for our cardiac monitoring services will decline, which may have a material adverse effect on our revenues and our business, financial condition and results of operations. In addition, the failure of other service providers who use the products sold by us to maintain and increase their patient referrals may adversely affect such service providers' business, which may cause them to purchase less products from us, which may in turn have a material adverse effect on our revenues and our business, financial condition and results of operations. We are dependent upon reimbursement by third party payors; the absence or inadequacy of reimbursement from third party payors could cause our revenues to decrease, and adversely impact our financial condition. Our services business is highly dependent on reimbursement by third party payors. Such reimbursement may vary based on the particular service or device used in providing our services and is based on the identity of the third party payor. Our ability to maintain a leading position in the cardiac monitoring market depends on our relationships with private third party payors. Our contracts with private third party payors allow us to receive reimbursement from insurance companies for our monitoring fees. The loss of a significant number of private third party payor contracts may have an adverse effect on the revenues we derive from cardiac monitoring services, which could have a material adverse effect on our business, financial condition and results of operations. Over the past few years reimbursement rates from some of our third party payors have declined, in some cases significantly. There can be no assurance that this trend will not continue or apply to more third party payors. In addition, there is no assurance that third party payors' reimbursement will continue to cover our cardiac monitoring services at all, or, if covered, will reimburse them at commercially viable rates. In addition, private third party payors may not reimburse any new services offered by us or reimburse those new services at commercially viable rates. The failure to receive reimbursement at adequate levels for our existing or future services may adversely affect our revenues and our expected growth and our business, financial condition and results of operations. Common Stock, par value $0.01 per share $86,250,000(1)(2) $9,228.75(3) Reimbursement by government third party payment programs is highly regulated and subject to constant changes; our failure to comply with these regulations, or changes in the rules that result in limited reimbursement, could decrease our revenues and adversely impact our financial condition. Approximately 25% of our cardiac monitoring services revenues are currently received by us as reimbursement through Medicare. The Medicare program is administered on a federal level by the U.S. Department of Health and Human Services' Centers for Medicare & Medicaid Services, or CMS, which imposes extensive and detailed requirements on medical services providers, including but not limited to, rules that govern how we structure our relationships with physicians, how and when we submit claims, what qualifications the physicians and certified cardiac technicians must have, and where our services can be provided. While we have established policies and procedures that are designed to enable us to operate in compliance with the applicable Medicare rules, there can be no assurance that if reviewed by CMS, other applicable government agencies or the carriers, we will be found to be in compliance with every applicable rule. Failure to comply with applicable governmental payor rules could result in our inability to collect from the government payor, the requirement to return funds already paid to us, civil monetary penalties, criminal penalties and exclusion from the Medicare program. Further, future reimbursement to health care providers from Medicare is subject to statutory and regulatory changes, retroactive rate adjustments and administrative rulings, all of which could materially decrease the range of services covered or the reimbursement rates paid for our services in the future, including the expected reimbursement rates for the LifeStar ACT . CMS has recently proposed a declining schedule of reimbursement rates applicable for cardiac monitoring services, our primary source of revenues, whereby reimbursement rates would decrease by an average of 3% to 4% on a weighted average basis relating to our product mix in 2007. In addition, from 2008 to 2010, a declining rate on average of 3% has been proposed by CMS for cardiac event monitoring services. Some of our private third party payor contracts provide for rates that are linked to rates paid by Medicare. Any limitation or reduction in reimbursement rates for our cardiac monitoring services by such government payors, including the approval of CMS' proposed rates for 2008-2010, will cause such private third party insurers and may cause other private third party payors to limit or reduce the rates at which they are reimbursing our cardiac monitoring services. If our activities are challenged under these rules, if any penalties are imposed or if rule changes result in limitations or reductions in our payment rates, our business, financial condition and results of operations could be adversely affected. Failure to enroll in and service a significant number of patients with the more sophisticated monitoring devices used in providing our services may adversely affect our growth and our ability to increase our revenues. We expect physicians to prescribe a growing number of patients to the LifeStar ACT , which we expect would result in additional incremental revenues to us when compared to patients prescribed with the traditional devices used in providing our services. If physicians fail to prescribe the LifeStar ACT or patients do not use it for any other reason, our ability to increase our revenues shall be adversely affected. Specific reimbursement rates for LifeStar ACT have not yet been established nor has a specific applicable billing code been adopted by the American Medical Association, which generally oversees the adoption of billing codes. We do not expect such billing codes or reimbursement rates to be adopted prior to 2009. While we expect to receive reimbursement rates that are significantly higher than reimbursement rates currently received for our other cardiac event monitoring services based on a limited number of payments we have already received from a number of insurance company carriers and our knowledge of the industry, we cannot assure you what the ultimate reimbursement rates will (1)Estimated solely for the purpose of the registration fee for this offering in accordance with Rule 457(o) of the Securities Act of 1933, as amended. (2)Includes shares the underwriters have the option to purchase to cover over-allotments, if any. (3)Previously paid. be. The failure to receive a significantly higher rate of reimbursement from third party payors, including Medicare, who cover a significant number of potential patients for monitoring services related to the LifeStar ACT may adversely affect our revenues and our expected growth and our business, financial condition and results of operations. Since launching our LifeStar ACT services we have been seeking confirmations from private third party payors that they will provide coverage of, and payment for, such services at a rate that is significantly higher than the payments received for our other cardiac event monitoring services. To date, we have received such confirmations from 12 private third party payors that we believe administer benefits for over 79 million people, and have received payments pursuant to existing agreements with such private third party payors with respect to a limited number of patients. We continue to engage private third party payors in order to expand the number of private third party payors from whom we can receive such reimbursements. However, no assurance can be provided that we will reach such additional agreements or that if we reach such agreements, they will be reached in a timely manner or on terms that are acceptable to us. Failure to enter into such agreements or failure to enter into such agreements in a timely manner or on appropriate terms, may have a material adverse affect on our revenues from the LifeStar ACT related services and results of operations. We have applied to the local Medicare carrier in Pennsylvania (Highmark Medicare Services, or Highmark) for the enrollment of our facility in Philadelphia, Pennsylvania as an independent diagnostic testing facility, or IDTF, Medicare provider and for permission to provide our services including the use of a different and more highly reimbursed code (93799) for LifeStar ACT related services. To our knowledge, Highmark in Pennsylvania is the only Medicare carrier in the United States to have issued a local coverage decision to date that provides for enhanced payment for real time out-patient cardiac monitoring using an automated system that requires no patient intervention, which we believe applies to LifeStar ACT services. To our knowledge, Highmark in Pennsylvania is the only Medicare carrier in the United States to have issued a local coverage decision to date that provides for enhanced payment for real time out-patient cardiac monitoring using an automated system that requires no patient intervention, which we believe applies to LifeStar ACT services. Although Highmark approved our performing of services and billing to Medicare in Pennsylvania using the cardiac event monitoring codes and reimbursement rates that we currently use and receive, it has recently raised numerous issues in connection with approving our Pennsylvania facility as an IDTF and our request to bill for LifeStar ACT services using the 93799 code. We believe that we have taken the required actions and provided the documentation necessary to address the concerns raised by Highmark. Nevertheless, Highmark has not authorized our use of the 93799 code to date and has recently questioned whether we should be billing within Highmark's service area and whether our Pennsylvania facility may be approved as an IDTF. Based on our review of IDTF regulations, our experience as an IDTF in other states and our belief that we fit under the guidelines included in Highmark's applicable local coverage decision, we believe that our Pennsylvania facility qualifies as an IDTF and that we are entitled to use the 93799 code for LifeStar ACT services. However, no assurance can be provided that we will be qualified as an IDTF or that we will receive permission to use the 93799 code for our LifeStar ACT services. Failure to obtain such qualification and permission or failure to obtain it in a timely manner, may have a material adverse effect on our revenues from LifeStar ACT related services, and our results of operations. In addition, some private third party payors will not enter into agreements with us or reimburse us for our services until we receive a Medicare provider number. The market in which we participate is competitive and we expect competition to increase in the future, which will make it more difficult for us to sell our services and products and may result in reduced revenues and reduced market share. The market for cardiac monitoring services and devices is competitive and rapidly changing, and we expect competition to intensify in the future with the introduction of new technologies and market The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. entrants. In the cardiac monitoring services market, we compete primarily on the basis of the quality of services, access to clinically advanced technologies, reputation of service provider, network of referring physicians and private third party payors, quality of customer support and the sales and marketing capability of the service provider. We provide monitoring services to the patient's hospital or physician when they outsource the service as opposed to providing it themselves. As a result, we compete with other IDTFs to provide such outsourcing services. Our major competitors for cardiac event monitoring services are IDTFs including Raytel Medical Corporation, PDSHeart, Inc. and Cardionet, Inc. Our major competitors for holter monitoring services are IDTFs that include Raytel Cardiac Services, Health Monitoring Services of America and Biomedical Systems. Raytel Cardiac Services is also our main competitor for our pacemaker monitoring services. The competitive factors within the cardiac event monitoring device sales market include the quality of algorithms and analysis tools, price, ease of use, reliability, customer support and services provided after the sale of the device. Our major competitors in this market are medical device manufacturers including Aerotel Medical Systems, TZ Medical Inc., Philips Medical Systems and Del Mar Reynolds Medical. If we fail to compete effectively, our operating results will be harmed. If we fail to effectively differentiate our services and products, we may fail to increase or maintain our market share. In addition, increased competition could result in reduced revenues, reduced profits or the failure of our services to achieve or maintain more widespread market acceptance, any of which could harm our business. We currently rely primarily on Card Guard Scientific Survival Ltd., or Card Guard Scientific, which together with Card Guard Europe B.V. and Card Guard AG, we refer to as Card Guard, our parent companies or our Parent, for the development of new products, including the products that we use in providing our services. Although we have a right of first offer with respect to the distribution within the United States to health care providers of certain products developed by Card Guard, the right is non-exclusive and Card Guard is under no obligation to develop any such new products. In addition, our revenues constitute a significant majority of Card Guard's revenues. As a result, competitors that may, in the future through acquisitions or otherwise, develop or acquire greater financial, technical and other resources than Card Guard or larger companies that enter into the telemedicine markets with greater resources, may be able to respond more quickly to new or emerging technologies or devote greater resources to the development of product enhancements or new products, which may lead to reduced revenues and, ultimately, reduced market share. In addition, if one or more of our competitors were to merge or partner with another of our competitors, or if companies larger than us enter the market through internal expansion or acquisition of one of these competitors, the change in the competitive landscape could adversely affect our ability to compete effectively. On February 6, 2007, Cardionet, Inc. announced that it had entered into a definitive acquisition agreement with PDSHeart Inc. and on March 13, 2007, Cardionet, Inc. announced that it had successfully completed this transaction. Cardionet, Inc. and PDSHeart Inc. are two of our largest competitors in the cardiac event services market. This merged entity could develop, or larger companies entering our market or other mergers or partnerships between our competitors could result, in companies that have established customer relationships and greater financial, technical, sales, marketing and other resources than we have, and could be able to respond more quickly to new or emerging technologies or devote greater resources to the development, promotion and sale of their services. This competition could harm our ability to sell our services, which may lead to reduced revenues and, ultimately, reduced market share. We may be unable to successfully expand our services beyond cardiac monitoring services. To date, we have focused our business on providing cardiac monitoring services. Any efforts to expand beyond the cardiac monitoring services may not result in significant revenue growth for us. In addition, efforts to expand our services beyond cardiac monitoring services may divert management resources from existing operations and require us to commit significant financial resources to an unproven business, which may harm our business and operating results or impair our growth. We could be subject to medical liability or product liability claims which may not be covered by insurance and which could adversely affect our financial condition. Generally, health care companies are subject to claims alleging negligence, product liability, breach of warranty or malpractice that may involve large claims and significant defense costs whether or not such liability is imposed. These claims may be brought by individuals seeking relief for themselves, or increasingly, by groups seeking to represent a class. We provide information to health care providers and payors upon which determinations affecting medical care will be made, and claims could be made against us for liabilities resulting from adverse medical consequences to patients. In addition, we could have potential legal liability in the event that the devices used in our business fail to correctly record or transfer patient information or if we improperly respond in communications with patients using our services. Based on our experience and industry standards, we believe that we have insurance coverage which is adequate to cover claims generally experienced by companies engaged in our businesses. Our maximum coverage limit for a single event under our general and umbrella liability policies are $5 million for a medical liability claim and $10 million for a product liability claim. To date, we have not had any significant lawsuits relating to defaults in our products or services. Were we to suffer one or more significant claims in the future, or were we required to or elect to undertake certain actions in response to these claims, such as a product recall as a result of alleged product's defects, such claims or actions could have a material adverse effect on our business, financial condition and results of operations. We may be party to or target of lawsuits, investigations and proceedings arising out of such claims of medical liability or product liability. Such potential claims may be costly to defend, could consume management resources and could adversely affect our reputation and business. There is no guarantee that liability insurance will continue to be available in the future on terms acceptable to us, if at all. Moreover, a successful claim in excess of the limits of our insurance coverage could have a material adverse effect on our business, financial condition and results of operations. The handling of such claims, regardless of their merit or eventual outcome, could have a material adverse effect on our business and reputation. We are dependent upon Card Guard as the sole supplier of the LifeStar ACT and certain other devices we sell and which we use in providing our services. Card Guard is the sole supplier of certain of the devices we sell and which we use in providing our services, including the LifeWatch Explorer cardiac event recorder and the CarryAll pacemaker device. Card Guard is also the sole supplier of the LifeStar ACT , its newest auto-detect auto-send, or ADAS, cardiac monitoring device, which will be provided to us solely for the purpose of providing it to patients in connection with providing our monitoring services. We also distribute devices that are manufactured by another third party. Other than products incorporating any of the LifeStar ACT intellectual property, which we are required to purchase from our parent companies, and an obligation to purchase any products that are ancillary to the LifeStar ACT from our parent companies, unless they are offered on better terms, we are not prohibited from purchasing or distributing devices that are manufactured by third parties. We also have an obligation to give our parent companies 30 days to match any better terms offered by any other parties on such ancillary products. We expect that the percentage of revenues generated through our LifeStar ACT related services will increase in the future as a result of the expected increase in the services related to the LifeStar ACT . We obtain Card Guard's devices pursuant to a Distribution Agreement and an Exclusive Sales Agreement with Card Guard, the material terms of which are as follows: The Distribution Agreement grants us: (i) exclusive distribution rights in the United States and non-exclusive distribution rights in Canada and Mexico for the distribution of Card Guard's traditional cardiac event monitoring devices, which includes the LifeWatch Explorer and the LifeWatch ER ; (ii) non-exclusive distribution rights in the United States, Canada and Mexico for the distribution of Card Guard's vital signs monitoring devices to health care providers and employee health programs; and (iii) non-exclusive distribution rights in the United States, Canada and Mexico for the distribution of any other products upon which the parties may agree from time to time. The prices charged by Card Guard may be amended from time to time, provided that Card Guard reserves the right to change such prices (other than with respect to accepted orders) once a year to reflect the changes in the direct costs of manufacturing the products. The Exclusive Sales Agreement grants us the exclusive right to purchase and provide monitoring services with the LifeStar ACT in the United States through December 31, 2011, and a non-exclusive right to do so through December 31, 2016. To maintain exclusivity under the agreement we must purchase a minimum aggregate amount of $3 million of LifeStar ACT products per fiscal year. On July 1, 2006 we ordered LifeStar ACT devices in the amount of $1.5 million and have received all of these devices to date. In addition, in January 2007 we ordered LifeStar ACT devices in the amount of $4.5 million, which we expect to receive beginning in late March 2007. The price of the products shall be Card Guard's standard prices and prior to December 31, 2011 may only be increased with our consent. From January 1, 2012, Card Guard may charge product prices as is reasonably required by market demand. These agreements have initial terms that expire in 2016 but are subject to earlier termination by Card Guard if (i) we materially breach any of our obligations thereunder, including without limitation our minimum purchase obligations; (ii) certain bankruptcy or insolvency related events occur; or (iii) we become controlled by a competitor of Card Guard. Although the Distribution Agreement provides that we will be the exclusive distributor of Card Guard's traditional cardiac event monitoring devices, including the LifeWatch Explorer and the LifeWatch ER , in the United States through 2016, it does not obligate Card Guard to provide us with any minimum quantities of such products or specify the prices at which such devices will be supplied other than Card Guard's list price. Accordingly, while we have received adequate quantities of such devices to date, we cannot assure you that Card Guard will continue to make adequate quantities of such devices available at prices commercially acceptable to us or at all. The termination of these agreements or the inability or failure of Card Guard to provide us with adequate quantities of such devices on terms commercially acceptable to us could have a material adverse effect on our business, results of operations and financial condition. Card Guard owns a controlling interest in our company. The interests of Card Guard may conflict with those of our other stockholders, and other stockholders' voting power may be limited. After this offering, Card Guard will indirectly own approximately % of the outstanding shares of our common stock and will continue to have the ability to direct the election of all members of our board of directors and to exercise a controlling influence over our business and affairs, including any determinations with respect to mergers or other business combinations involving us, or acquisition or disposition of assets, the incurrence of indebtedness by us, the issuance of any additional common stock or other equity securities by us, the repurchase of common stock by us and the payment of dividends by us. Similarly, Card Guard will have the power to determine or significantly influence the outcome of matters submitted to a vote of our stockholders, including the power to prevent an acquisition or any The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted. PROSPECTUS (Subject to Completion) Dated May 10, 2007 other change in control of us. Because Card Guard's interests as our controlling stockholder may differ from your interests, actions taken by Card Guard with respect to us may not be favorable to you. Conflicts of interest may arise between Card Guard and us that could be resolved in a manner unfavorable to us. Questions relating to conflicts of interest may arise between Card Guard and us in a number of areas relating to our past and ongoing relationships. After this offering, two of our directors will continue to serve as directors of Card Guard, one of whom owns approximately 7% of the shares of Card Guard AG and one of our directors will continue to serve as the CFO of our parent company. Areas in which conflicts of interest between Card Guard and us could arise include, but are not limited to, the following: Distribution and licensing agreements. Card Guard is the sole supplier of some of the devices we sell or that we use in providing our services. We obtain these devices and related intellectual property pursuant to the Distribution Agreement and Exclusive Sales Agreement, the terms of which are not the result of arm's length negotiations. The Distribution Agreement permits Card Guard to change the prices of the devices once a year to reflect changes in material costs. In addition, conflicts could arise in the interpretations of or in any extension or renegotiation of these agreements after this offering. See "Certain Relationships and Related Party Transactions." Cross directorships and stock ownership. The ownership interests of some of our directors in the common stock of Card Guard AG or service as a director of both Card Guard AG and us or service of Card Guard's officers as our directors could create, or appear to create, conflicts of interest when directors are faced with decisions that could have different implications for the two companies. For example, these decisions could relate to (i) the nature, quality and cost of devices supplied to us by Card Guard, (ii) disagreement over the desirability of a potential acquisition opportunity, (iii) employee retention or recruiting or (iv) our dividend policy. Intercompany transactions. From time to time, Card Guard or its affiliates may enter into transactions with us or our subsidiaries or other affiliates. Although the terms of any such transactions will be established based upon negotiations between employees of Card Guard and us and, when appropriate, subject to the approval of the independent directors on our board or a committee of disinterested directors, the terms of any such transactions may not be as favorable to us or our affiliates as may otherwise be obtained in arm's length negotiations. Issuances of capital stock. After giving effect to this offering Card Guard will indirectly own approximately % of the outstanding shares of our common stock ( %, if the underwriters' overallotment option is exercised in full). To the extent that Card Guard desires to maintain ownership of a majority of our common stock to enable it to consolidate our results of operations for financial reporting purposes or otherwise, Card Guard may prevent future issuances of our common stock that would dilute their ownership position. This could limit our ability to effect acquisitions, raise capital to meet our liquidity needs, or incentivize employees with our equity incentive plans. If Card Guard engages in the same type of business we conduct or takes advantage of business opportunities that might be attractive to us, our ability to operate successfully and expand our business may be hampered. We and Card Guard are both engaged in the cardiac monitoring business. Although historically we have focused on different geographic areas and Card Guard has not engaged in providing monitoring services in any significant way, there can be no assurance that we will not directly compete in the future. Except for the restrictions imposed by the Distribution Agreement and Exclusive Sales Agreement on Card Guard's right to market certain devices in the United States during the term of the Shares Common Stock This is an initial public offering of shares of the common stock of LifeWatch Corp. We are offering shares of our common stock. Prior to this offering, there has been no public market for our common stock. We will apply for quotation of our common stock on the Nasdaq Global Market under the symbol "LIFE." We expect that the public offering price will be between $ and $ per share. Our business and an investment in our common stock involve significant risks. These risks are described under the caption "Risk Factors" beginning on page 10 of this prospectus. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. Distribution Agreement and restrictions on Card Guard selling the LifeStar ACT to any person in the United States for a period of five years, Card Guard will have no obligation to refrain from: engaging in the same or similar business activities or lines of business as us, or doing business with any of our clients, customers or vendors. In addition, if one of our directors, who also serves as a director or officer of Card Guard, learns of a potential transaction or matter that may be a corporate opportunity for both Card Guard and us, it may be unclear as to whether that officer or director has any duty to communicate or present that corporate opportunity to us or whether he or she would be liable to us or our stockholders for breach of fiduciary duty by reason of Card Guard's actions with respect to that corporate opportunity. Our ability to compete with Card Guard outside of the United States is particularly limited. Our Distribution Agreement and Exclusive Sales Agreement with Card Guard limit our rights to use and distribute Card Guard's products to the United States and, with respect to certain products, in Canada and Mexico. In addition, Card Guard currently engages in other businesses using the mark "LifeWatch" in certain jurisdictions outside of the United States. Enforcement of federal and state laws regarding privacy and security of patient information may adversely affect our business, financial condition or operations. The use and disclosure of certain health care information by health care providers and their business associates have come under increasing public scrutiny. Recent federal standards under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, establish rules concerning how individually-identifiable health information may be used, disclosed and protected. Historically, state law has governed confidentiality issues and HIPAA preserves these laws to the extent they are more protective of a patient's privacy or provide the patient with more access to his or her health information. As a result of the implementation of the HIPAA regulations, many states are considering revisions to their existing laws and regulations that may or may not be more stringent or burdensome than the federal HIPAA provisions. We must operate our businesses in a manner that complies with all applicable laws, both federal and state, and that does not jeopardize the ability of our customers to comply with all applicable laws. We believe that our operations are consistent with these legal standards. Nevertheless, these laws and regulations present risks for health care providers and their business associates that provide services to patients in multiple states. Because these laws and regulations are recent and few have been interpreted by government regulators or courts, our interpretations and activities may be challenged. If a challenge to our activities is successful, it could have an adverse effect on our operations, may require us to forgo relationships with customers in certain states and may restrict the territory available to us to expand our business. In addition, even if our interpretations of HIPAA and other federal and state laws and regulations are correct, we could be held liable for unauthorized uses or disclosures of patient information as a result of inadequate systems and controls to protect this information or as a result of the theft of information by unauthorized computer programmers who penetrate our network security. Enforcement of these laws against us could have a material adverse effect on our business, financial condition or operations. The requirements related to being a public company, including the reporting requirements of the Sarbanes-Oxley Act of 2002, will subject us to increased costs and may strain our resources and distract our management. If we do not comply with these requirements, we may be subject to penalties and investors may lose confidence in us. As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002 and the rules and regulations of the Nasdaq Global Market. As a result, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, these requirements and our anticipated growth are likely to place a Per Share considerable strain on our financial and management systems, processes and internal controls, as well as on our personnel. Accordingly, our management's attention may be diverted from other business concerns. We will be required to document and test our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, which will require us to document and possibly make significant changes to our internal control over financial reporting. We may be required to improve our financial and managerial controls, reporting systems and procedures, to incur significant expenses to make such improvements and to hire additional personnel. We also expect these new rules and regulations to make it more difficult and expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to obtain the same or similar coverage. We may not be able to complete our evaluation, testing and remediation actions required by Section 404 in a timely manner. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, we may be subject to sanctions or investigation by regulatory authorities, including the Securities and Exchange Commission or the Nasdaq Global Market. This type of action could adversely affect our financial results or investors' confidence in our company and our ability to access the capital markets. In addition, the controls and procedures that we implement may not comply with all of the relevant rules and regulations of the Securities and Exchange Commission and the Nasdaq Global Market. If we fail to develop and maintain adequate controls and procedures, we may be unable to provide the required financial information in a timely and reliable manner, which could cause a decline in our stock price and adversely affect our ability to raise capital. We have identified a material weakness and other significant deficiencies in the internal controls over financial reporting that require remediation. If we fail to remediate the material weakness or significant deficiencies, we could be unable to provide timely and reliable financial information, which could have a material adverse effect on our business, results of operations or financial condition. We have identified a material weakness and other significant deficiencies in our internal controls over financial reporting that require remediation. A material weakness, as defined under standards of the Public Company Accounting Oversight Board (United States), is a significant deficiency or combination of significant deficiencies, that results in a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. At December 31, 2006, we did not have a sufficient complement of personnel with appropriate levels of accounting knowledge, experience and training in the application of accounting principles generally accepted in the United States commensurate with our financial reporting requirements and the complexity of our operations and transactions. This deficiency constitutes a material weakness and could result in a misstatement of any or all accounts and disclosures which would result in material misstatement to our interim or annual consolidated financial statements that would not be prevented or detected. In addition, we have identified certain other significant deficiencies in our internal controls over financial reporting at December 31, 2006, including a lack of proper supervision and segregation of duties and a lack of general information technology computing controls. Although we are taking steps to address these deficiencies, including the hiring of key senior level financial personnel in 2006 and 2007, the use of temporary accounting resources and the active search for additional financial reporting and information system personnel, we cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. If we fail to achieve and maintain an effective system of internal controls over financial reporting, we may be unable to accurately report our financial results, prevent or detect fraud, or provide timely and reliable financial information, which could have a material adverse effect on our business, results of operations or financial condition. Total We may in the future become subject to intellectual property rights claims, which could harm our business and operating results. The information technology industry is characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. If a third party asserts that the technology used in our business violates that third-party's proprietary rights, or if a court holds that such technology violates the third-party's proprietary rights, we may be required to re-engineer such technology in an effort to avoid infringement (which may not be feasible), obtain licenses from third parties to continue using the technology without substantial re-engineering (which may not be available at reasonable cost or at all), or remove the infringing functionality or feature (which may adversely impact sales of our relevant products). In addition, we may incur substantial costs defending against any such claim, even if we are successful. If our business is found to violate a third-party's intellectual property rights, we may be subject to damage awards (potentially including treble damages) or an injunction against the provision of our services or sale of our products that incorporate allegedly infringed intellectual property or against the operation of our business as presently conducted, which could result in our having to stop the provision of our services or sale of some of our products, increase the costs of providing our services or selling some of our products, or cause damage to our reputation. The award of damages, including material royalty payments, or the entry of an injunction against the provision of our services or manufacture and sale of some or all of our products, could have a material adverse effect on our results of operations and ability to compete. We have registered the trademark "LifeWatch" in the United States. However, the name "LifeWatch" is used by Card Guard in certain jurisdictions outside of the United States. Our agreements with Card Guard do not include any restrictions on either party's rights to use the name "LifeWatch" inside or outside of the United States. The name "LifeWatch" is also used by numerous other unrelated companies doing business within and outside the United States. Some of these companies provide services or products in the United States that might be considered similar to the services we provide or the products we sell. Should it be determined that a third party has superior rights in the trademark "LifeWatch", we may be restricted or prohibited from using the name "LifeWatch" in that territory with respect to any of our existing or future services or products. In such a scenario, we may be required to pay damages to such third party as well as any related attorneys' fees and costs. We are dependent on our management team, and the loss of any key member of this team may prevent us from implementing our business plan in a timely manner. Our success depends largely upon the continued services of our executive officers, particularly our Chief Executive Officer, Frederick J. Mindermann, our Chief Financial Officer, Francis J. Leonard, and our Chief Operating Officer, Roger K. Richardson. The loss of these executive officers could have a material adverse effect on our business, financial condition, results of operations and the trading price of our common stock. In addition, the search for replacements could be time consuming and could distract our management team from the day-to-day operations of its business. Interruptions or delays in telecommunications systems or in network or related services could impair the delivery of our services and harm our business. The success of our services and devices is dependent upon our ability to store, retrieve, process and manage data and to maintain and upgrade our data processing and communication capabilities. We have implemented disaster recovery and business continuity plans which provide for redundant servers and call centers, hourly back-up and storage of our data. As we expand our commercial activities, an increased burden will be placed upon our telecommunications and data processing systems and the Public offering price $ $ Underwriting discounts $ $ Proceeds before expenses to LifeWatch Corp. $ $ The underwriters may also purchase up to an additional shares from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover overallotments. The underwriters expect to deliver the shares against payment in New York, New York on , 2007. equipment upon which they rely. Interruptions of telephone service for any extended length of time, loss of stored data or other computer problems could have a material adverse effect on our business, financial condition and results of operations. Any interruption in the availability of the network connections would reduce revenues and profits. Frequent or persistent interruptions in our services could cause permanent harm to our reputation and could cause current or potential users of our services to believe that our systems are unreliable, leading them to switch to our competitors. Such interruptions could result in liability, claims and litigation against us for damages or injuries resulting from the disruption in service. Although our systems have been designed around industry-standard information technology platforms to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks, computer viruses, break-ins, sabotage, and acts of vandalism. Despite any precautions, the occurrence of a natural disaster or other unanticipated problems could result in lengthy interruptions in these services. We do not carry business interruption insurance to protect against losses that may result from interruptions in service as a result of system failures. Moreover, the communications and information technology industries are subject to rapid and significant changes, and our ability to operate and compete is dependent in significant part on our ability to update and enhance the communication technologies used in our cardiac monitoring systems and services. Any failure to protect our intellectual property rights, or any failure of Card Guard to protect its intellectual property rights, could materially and adversely affect our business and financial condition. Our principal intellectual property assets include our brand, trademarks and patents covering some of our cardiac monitoring devices. We hold registered trademarks in the United States for "LifeWatch" and "Instromedix." Our success will depend in part on our ability to protect our intellectual property rights and the ability of Card Guard to protect its intellectual property rights, upon which we are dependent. We and Card Guard are each independently responsible for maintaining our own intellectual property rights and for prosecuting any infringements of such rights. We rely on a combination of trade secrets, copyrights, trademarks, patents and patent applications, licenses, employee and third-party nondisclosure agreements and other protective measures to protect our intellectual property rights. In particular, Card Guard has recently made an application for a patent for certain aspects of the LifeStar ACT . However, these protections may not be adequate to prevent our competitors from copying or reverse-engineering our devices and technologies. In addition, we or Card Guard may fail to receive any patent for which we have applied, any patent owned by us or issued to us or any patent owned by or issued to Card Guard with respect to which we have any rights could be challenged, invalidated, unenforceable, circumvented, or rights granted thereunder may not provide a competitive advantage to us. Our competitors may independently develop technologies that are substantially similar or superior to our technologies. To protect our trade secrets and other proprietary information, we generally require our employees, affiliated physicians, consultants, contractors and outside collaborators to enter into written nondisclosure agreements. These agreements may not provide meaningful protection to prevent any unauthorized use, misappropriation or disclosure of our trade secrets, know-how or other proprietary information. We also control access to software, documentation and other proprietary information. If we are unable to protect our intellectual property rights or Card Guard is unable to protect its intellectual property rights, upon which we are dependent, our business and financial condition could suffer materially. Cowen and Company Jefferies & Company Piper Jaffray , 2007 If we acquire any companies or technologies in the future, they could prove difficult to integrate and may disrupt our business, dilute stockholder value and adversely affect our operating results. As part of our strategy going forward, we intend to opportunistically pursue strategic acquisitions that are complementary to our business or offer us other strategic benefits. Acquisitions in which we may engage involve numerous risks, including difficulties in integrating operations, technologies, services and personnel, diversion of financial and management resources from existing operations, risk of entering new markets, potential write-offs of acquired assets, potential loss of key employees, and inability to generate sufficient revenues to offset acquisition costs. We may experience these difficulties as we integrate the operations of future companies we acquire into our operations. Further, consumer satisfaction or performance problems with an acquired business, technology, service or product could also have a material adverse effect on our reputation. In addition, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted which could affect the market price of our stock. Our management has limited experience in completing acquisitions and integrating acquired businesses with existing operations. Additionally, potential disputes with the seller of an acquired or invested business or its employees, suppliers or customers and amortization expenses related to goodwill and other intangible assets could adversely affect our business, operating results and financial condition. If we fail to properly evaluate and execute acquisitions, our business and prospects may be harmed. Our market is subject to rapid technological change and our ability to cope with such change could require extensive resources. The market for ambulatory cardiac monitoring services and products is characterized by rapid technological change, medical advances, changing consumer requirements, short device lifecycles and evolving industry standards. Any one of these factors could reduce the demand for our services and devices or require substantial resources and expenditures for research, design and development to avoid technological or market obsolescence. Our success will depend on our ability to enhance our current telemedicine services and systems and develop or acquire and market new technologies to keep pace with technological developments and evolving industry standards, while responding to changes in customer needs. A failure by us to adequately develop or acquire device enhancements or new devices that will address changing technologies and customer requirements adequately, or to introduce such devices on a timely basis, may have a material adverse effect on our business, financial condition and results of operations. We might have insufficient financial resources to improve existing devices, advance technologies and develop new devices at competitive prices. Technological advances by one or more competitors or future entrants into the field may result in our present services or devices becoming non-competitive or obsolete, which may decrease our revenues and profits and adversely affect our business and results of operations. If we fail to obtain and maintain necessary U.S. Food and Drug Administration, or FDA, approvals, our business would be harmed. FDA regulations govern manufacturing, labeling, promotion, distribution, importing, exporting, shipping and sale of cardiac monitoring devices. The FDA requires all companies involved in the production and distribution of medical devices intended for marketing or leasing (commercial distribution) in the United States to register with the FDA through a process known as establishment registration. LifeWatch Services Inc., or LifeWatch Services, and LifeWatch Technologies are both registered establishments with the FDA. LifeWatch Services' establishment registration includes designations as an initial distributor, remanufacturer, specification developer and repackager and relabeler. LifeWatch Technologies' establishment registration includes its designation as a distributor of medical devices. Most medical device establishments required to register with the FDA must also identify to the FDA the devices they have in commercial distribution including devices produced TABLE OF CONTENTS Page exclusively for export. This process is known as medical device listing and is a means of keeping the FDA advised of the generic categories of devices an establishment is manufacturing or marketing. LifeWatch Services and LifeWatch Technologies have identified those devices in listings filed with the FDA. Unless a medical device is exempt from FDA notification or approval processes pursuant to FDA regulations, each person who wants to market medical devices in the United States which are intended for human use, must submit either a premarket approval, or PMA, application to the FDA or a 510(k) premarket application to the FDA. FDA regulations specify which type of application, PMA or 510(k), is appropriate for which type of medical device under specified circumstances. A 510(k) is a premarket submission made to the FDA to demonstrate that the device to be marketed is at least as safe and effective, or substantially equivalent, to a legally marketed medical device, that is not subject to a PMA. To support a claim of substantial equivalency, a person submitting a 510(k) approval request application must compare its device to one or more similar legally marketed devices or, a predicate. A device is considered substantially equivalent, if in comparison to the predicate, it (i) has the same intended use and technological characteristics as the predicate, or (ii) has the same intended use and different technological characteristics, but the information submitted to the FDA does not raise any new questions of safety and effectiveness and demonstrates that the device is at least as safe and effective as the predicate. A person must make a 510(k) submission to the FDA at least 90 days before proposing to market the device in the United States. If approved, the person submitting a 510(k) application will receive an order, in the form of a letter, declaring the device substantially equivalent. This order gives the submitter immediate clearance to market the device in the United States. LifeWatch Technologies currently manufactures the LifeStar AF and King of Hearts cardiac event monitoring devices and has applied and received 510(k) approvals from the FDA for these devices. All other devices that we currently market and which we use to provide our services received 510(k) approval from the FDA through the FDA's 510(k) premarket notification process. Minor modifications to these devices do not require additional 510(k) approvals, but modifications that could significantly affect the safety or effectiveness of a device, or that could constitute a significant change in the intended use of a device would require a new 510(k) approval from the FDA. If we make minor changes to the devices we use, the FDA may determine that such changes were more significant than we anticipated, and may determine that we require FDA approval for such modifications. We may not be able to obtain such approvals from the FDA or obtain such approvals in a timely fashion. We are subject to continuing regulation by the FDA, including quality regulations applicable to the manufacture of our devices and various reporting regulations and regulations that govern the promotion and advertising of medical devices. We believe that we currently comply with such applicable FDA regulations and that our policies and procedures are designed to ensure continuing compliance. However, there can be no guarantee that upon close inspection, the FDA would not object to certain of our activities. Any new devices that we introduce in the United States market would need either 510(k) clearance or the lengthier premarket approval from the FDA, unless there is an applicable exemption. These approval processes can be expensive and time-consuming, and there can be no guarantee that we obtain such clearance or approvals from the FDA for any new devices. Depending upon the severity of our failure to comply with any applicable FDA regulations, we could be subject to enforcement actions by the FDA, including but not limited to: warning letters, fines, injunctions, consent decrees, civil monetary penalties, recalls or seizures of our devices, manufacturing restrictions, closure of our manufacturing plants, modifications or revocations of any 510(k) approvals that we already have, and/or criminal prosecution. If the FDA imposed any such sanctions against us, such sanctions could harm our reputation, and depending upon the severity, could have significant adverse impact upon our ability to provide our services and on our financial condition. Enforcement of state and federal anti-fraud and abuse laws may adversely affect our business, financial condition or operations. Various federal and state laws govern financial arrangements among health care providers. The federal anti-kickback law prohibits the knowing and willful offer, payment, solicitation or receipt of any form of remuneration in return for, or with the purpose to induce, the referral of Medicare, Medicaid or other federal health care program patients, or in return for, or with the purpose to induce, the purchase, lease or order of items or services that are covered by Medicare, Medicaid or other federal health care programs. Similarly, many state laws prohibit the same activities to induce the referral of patients in private as well as government programs. Violation of these anti-kickback laws may result in substantial civil or criminal penalties for individuals or entities and/or exclusion from participating in federal or state health care programs. These laws significantly impact and regulate the nature of our arrangement with referring physicians. We believe that we are operating in compliance with applicable laws and believe that our arrangements with providers would not be found to violate the anti-kickback laws. However, these laws could be interpreted in a manner inconsistent with our operations. The U.S. federal and state self-referral and anti-fraud and abuse laws and regulations are broadly written, and the possibility exists that our current or future operations may be deemed to violate the federal or state anti-fraud and abuse or self-referral prohibitions. Possible sanctions against us for violation of the federal anti-kickback law include civil monetary penalties, forfeiture of amounts collected in violation of such prohibitions, exclusion from Medicare and Medicaid programs, criminal penalties, and risk of liability under the federal False Claims Act (see discussion below), the violation of which could result in additional fines, plus penalties in the amount of three times the amount of damages sustained by the government. Imposition of penalties by some government payors, such as Medicare or Medicaid, may often lead to investigations by other payors and further adverse consequences to us. Although we believe that we are in compliance with anti-fraud and abuse laws and regulations, there can be no assurance that federal or state regulatory authorities will not challenge our past, current or future activities under these laws. If our activities are challenged under these laws, or if any such penalties are imposed, our business, financial condition and operations would be adversely affected. It is possible that a lawsuit could be brought against us under the federal False Claims Act or state false claims laws, and the outcome of any such lawsuit could have a material adverse effect on our business, financial condition and operations. The federal False Claims Act provides, in part, that the federal government may file a lawsuit against any person whom it believes has knowingly presented, or caused to be presented, a false or fraudulent request for payment from the federal government, or who has made a false statement or used a false record to get a claim approved. Accordingly, any claims for Medicare or Medicaid reimbursement that are determined to not comply with applicable reimbursement rules could be characterized as a false claim. Further, the government has taken the position that claims presented in violation of the federal anti-kickback law may be considered a violation of the False Claims Act. The False Claims Act further provides that a lawsuit brought under that act may be initiated by a private citizen acting as a whistleblower, and known as the relator. The relator receives between 15% and 30% of the proceeds of the action or settlement of the claim. Actions brought under the False Claims Act are sealed by the court at the time of filing. The only parties privy to the information contained in the complaint are the relator, the federal government and the court. Therefore, it is possible that lawsuits have been filed against us of which we are unaware. Penalties include fines ranging from $5,500 to $11,000 for each false claim, plus three times the amount of damages that the federal government sustained because of the act of the defendant. Further, the federal Deficit Reduction Act, signed in 2006, provides financial incentives for states to enact false claims laws, and therefore many states which do not currently have such laws may enact them in the near future. We believe that we are operating in compliance with the Medicare and Medicaid rules and regulations and applicable anti-fraud and abuse laws, and thus, the False Claims Act. However, if we were found to have violated certain rules and regulations and, as a result, submitted or caused physicians to submit allegedly false claims, any sanctions imposed under the federal False Claims Act or any similar state laws could result in substantial fines and penalties or exclusion from participation in federal and state health care programs, all of which could have a material adverse effect on our business, financial condition and operations. If our arrangements with physicians are found to violate state licensure laws or other state laws prohibiting the corporate practice of medicine or fee splitting, our business, financial condition and our ability to operate in those states could be adversely impacted. The practice of medicine and the provision of health care services, including the practice of cardiology, cardiac monitoring and telemedicine, are subject to state licensure laws, regulations and approvals. Physicians who provide professional medical services to a patient via a telemedicine system must, in some states and under specified circumstances, hold a valid license to practice medicine in the state in which the patient is located. In some states, companies which provide diagnostic medical services must be licensed under state law. Further, the laws of many states prohibit business entities from exercising control over the medical judgments or decisions of physicians and from engaging in certain financial arrangements, such as splitting professional fees with physicians. These laws and their interpretations vary from state to state and are enforced by state courts and regulatory authorities, each with broad discretion. Our facilities in Florida and Illinois have been approved as IDTFs, which are independent of a physician's office and provide medical testing services reimbursable by Medicare, and we have applied for our Pennsylvania facility to be approved as an IDTF. We enter into agreements with physicians pursuant to which the physicians render professional medical services. We structure relationships with physicians and with the IDTFs in a manner that we believe is in compliance with prohibitions against the corporate practice of medicine and fee splitting in those states in which we operate. Further, we believe that whenever we engage the physicians to provide monitoring services, the physicians are licensed to practice medicine in those states where they need to be licensed. Additionally, we believe that the IDTFs do not need to hold any state licensure in Florida, Pennsylvania or Illinois. While we have not received notification from any state regulatory or similar authorities asserting that we have violated any state facility licensure law, that the physicians have violated any state medical practice laws, that we are engaged in the corporate practice of medicine, or that the payment of service fees to us constitutes fee splitting, if any of such claims were made and were successful, we could be subject to penalties, the physicians could be subject to civil and criminal penalties and/or we could be required to restructure or terminate the applicable contractual arrangements. A determination that these arrangements violate state statutes or our inability to successfully restructure relationships with physicians to comply with these statutes could force us to stop servicing certain states, which would have a materially adverse effect on our business, financial condition and operations. Changes in the regulatory environment may constrain or require us to restructure our operations, which may harm our revenues and operating results. Health care laws and regulations change frequently and may change significantly in the future. We monitor legal and regulatory developments and we modify our operations from time to time as the regulatory environment changes. However, we may not be able to adapt our operations to address every new regulation, and new regulations may adversely affect our business. In addition, although we believe that we are operating in compliance with applicable federal and state laws, neither our current nor anticipated business operations have been scrutinized or assessed by judicial or regulatory agencies. We cannot assure you that a review of our business by courts or regulatory authorities would not result in a determination that adversely affects our revenues and operating results, or that the health care regulatory environment will not change in a way that restricts our operations. Changes in the health care industry or tort reform could reduce the number of cardiac monitoring services ordered by physicians, which could result in a decline in the demand for our services, pricing pressure and decreased revenues. Changes in the health care industry directed at controlling health care costs and perceived over-utilization of medical monitoring services could reduce the volume of monitoring services ordered. If more health care cost controls are broadly instituted throughout the health care industry, the volume of cardiac monitoring services could decrease, resulting in pricing pressure and declining demand for our services, which could harm our operating results. In addition, it has been alleged that some physicians order medical monitoring services even when the services may have limited clinical utility in large part to establish a record for defense in the event of a claim of medical malpractice against the physician. Changes in laws affecting medical malpractice cases, known as tort reform, could reduce the number of cardiac monitoring services ordered for this purpose and therefore reduce the total number of monitoring services performed each year, which could harm our operating results. Our operating results may be subject to seasonal fluctuation, which makes our results difficult to predict and could cause our performance to fall short of quarterly expectations. During the summer we have historically experienced relatively lower revenues than those experienced during the rest of the year. We may continue to experience this or other seasonality in the future. These seasonal factors may lead to unpredictable variations in our quarterly operating results and cause the trading price of our common stock to decline. Our dependence on a limited number of suppliers may prevent us from delivering an acceptable product on a timely basis. We currently rely on a limited number of suppliers for some of the devices we use in our business. Under the Distribution Agreement, Card Guard supplies us with certain cardiac monitoring devices, including the LifeWatch Explorer and the LifeWatch ER , which we distribute and may provide related services. In addition, we have an Exclusive Sales Agreement with Card Guard relating to our purchase of the LifeStar ACT , which are used in connection with our service offering. We also have a supply agreement with Philips Medical Systems relating to the supply of Digitrak Plus digital holters and related components which we use in our service offering. If these suppliers became unable to provide devices in the volumes needed or at an acceptable price, we would have to qualify acceptable replacements from alternative sources of supply. While there is no alternative source of supply for Card Guard's LifeStar ACT , we have identified other suppliers with respect to obtaining alternative sources of supply for holter and cardiac event monitors (other than the LifeStar ACT ) supplied by Card Guard and Philips Medical Systems, respectively, and we have developed contingency plans, including discussions and reviews with respect to the pricing and quality of their products, with these suppliers for acceptable replacement products in adequate quantities in the event that we experience delays or interruptions in the supply of products. While we believe these alternative suppliers would be capable of delivering adequate quantities of products to us within four to six weeks, these delays or interruptions in the supply of our requirements could limit or stop our ability to provide sufficient quantities of devices, on a timely basis, for us to supply all of our services, and could limit or stop commercial sales, which could have a material adverse effect on our revenues and our business and financial condition. Shares issuable upon the exercise of options could dilute stock holdings and adversely affect our earnings and our stock price. We have issued options to acquire common stock to our directors, employees and certain other persons at $7.22 per share which is, or may in the future be, at or below the market price of our stock. As of the date of this offering, we have outstanding options to purchase a total of 600,000 shares of our common stock. We also intend to issue options to acquire up to shares of our common stock to our employees, directors and certain other persons immediately after the consummation of this offering. If exercised, these options will cause immediate and possibly substantial dilution to our stockholders. After the additional issuances of options that we expect to grant immediately after this offering, we will have shares reserved for issuance in connection with awards granted pursuant to our 2006 Stock Incentive Plan. Future options issued under our 2006 Stock Incentive Plan may have further dilutive effects. Issuance of shares pursuant to the exercise of options, could lead to subsequent sales of such shares in the public market which could depress the market price of our stock by creating an excess supply of shares for sale. Issuance of these shares and sale of these shares in the public market could also impair our ability to raise capital by selling equity securities. In addition, as the options granted in December 2006 are contingent upon the consummation of the offering but commence vesting on the date they were granted, the results of the first quarter after the offering will reflect a catch-up of stock-based compensation expense for all vesting completed through the effective date of this offering (and not only for that quarter). Risks Related to this Offering The trading price of our common stock may be volatile, and you might not be able to sell your shares at or above the initial public offering price. The trading prices of many newly publicly-traded companies are highly volatile, particularly companies such as ours that have limited operating histories. Accordingly, the trading price of our common stock may be subject to wide fluctuations. Further, our common stock has no prior trading history. Factors affecting the trading price of our common stock will include: variations in our operating results; announcements of new services, strategic alliances or significant agreements by us or by our competitors; recruitment or departure of key personnel; changes in the estimates of our operating results or changes in recommendations by any securities analysts that follow our common stock; and market conditions in our industry, the industries of our customers and the economy as a whole. In addition, if the market for health care stocks or health care services or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. Failure to comply with the Nasdaq Global Market's requirements regarding the composition of our board of directors and audit committee could result in the delisting of our common stock from the Nasdaq Global Market and adversely affect the market for our common stock. In order for our common stock to continue to be listed on the Nasdaq Global Market, we must comply with listing standards regarding the independence of our board of directors and members of our audit committee. In particular, the Nasdaq Global Market's rules require that a majority of our directors and all of the members of our audit committee be "independent," as defined under the Nasdaq Global Market's rules, by no later than the first anniversary following the completion of this offering. We do not currently meet these requirements. If we are unable to change the composition of our board of directors and our board committees to comply with these requirements, our common stock may be delisted from the Nasdaq Global Market and the liquidity and trading price of common stock may be adversely affected. Future sales of shares by existing stockholders could cause our stock price to decline. After our initial public offering, our parent companies will be our principal stockholders and will hold over 50% of our common stock. After this offering, Card Guard may sell all or part of the shares of our common stock that it owns or distribute those shares to its stockholders, including pursuant to demand registration rights described herein. Card Guard is not subject to any contractual obligation that would prohibit it from selling, spinning off, splitting off or otherwise disposing of any shares of our common stock, except for the contractual lock-up agreements with the underwriters described in this prospectus. If Card Guard sells, or indicates an intent to sell, substantial amounts of our common stock in the public market after the 180-day contractual lock-up agreements (which may be extended by up to 34 days under certain conditions) and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline. Based on shares outstanding as of , 2007, upon completion of this offering, we will have outstanding shares of common stock. Of these shares, only the shares of common stock sold in this offering will be freely tradable, without restriction, in the public market as of the date of this offering. The underwriters may permit our officers, directors, employees and current stockholders who are subject to the 180-day contractual lock-up to sell shares prior to the expiration of the lock-up agreements. After the lock-up agreements pertaining to this offering expire, up to an additional shares will be immediately eligible for sale in the public market, of which are held by directors, executive officers and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, and various vesting agreements. In addition, the 600,000 shares that are subject to options outstanding as of the date of this offering under our equity incentive plan, the up to shares issuable upon the exercise of options that will be granted immediately upon consummation of the offering and the additional shares of common stock reserved under our equity incentive plan will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements, the lock-up agreements and Rules 144 and 701 under the Securities Act. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline. Our management will have broad discretion over the use of the proceeds to us from this offering and might not apply the proceeds of this offering in ways that increase the value of your investment. Our management will have broad discretion to use the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. They might not apply the net proceeds of this offering in ways that increase the value of your investment, and may not be able to yield a significant return, if any, on any investment of these net proceeds, in which case you will experience immediate and substantial dilution in the net tangible book value of the shares you purchase in this offering. $3.28 to $3.30 294 7.92 $ 3.24 151 7.22 $ 3.29 $4.20 to $4.63 51 7.78 $ 4.43 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect" and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in "Risk Factors." In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. In addition, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We are under no duty to update any of these forward-looking statements after the date of this prospectus to confirm these statements to actual results or revised expectations. You may rely only on the information contained in this prospectus. Neither we nor any of the underwriters have authorized anyone to provide information different from that contained in this prospectus. Neither the delivery of this prospectus, nor the sale of our common stock, means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or solicitation of an offer to buy shares of common stock in any circumstances under which the offer or solicitation is unlawful. Information contained in this prospectus concerning our industry and the historic growth rate of the markets in which we participate is based on industry publications, surveys and forecasts generated by Frost & Sullivan and other sources. Such industry publications, surveys and forecasts generally indicate that their information has been obtained from sources believed to be reliable, but do not guarantee the accuracy and completeness of their information. Although we believe that the reports are reliable, we have not independently verified their data. USE OF PROCEEDS We estimate that we will receive net proceeds of approximately $ million from our sale of the shares of common stock offered by us in this offering, based upon an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) the net proceeds to us from this offering by $ , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use up to $27.7 million of the net proceeds from this offering to repay outstanding debt to our parent companies ($5.1 million of which bears interest at rates between 3.25% and 8.5% and matures between September 2010 and October 2012, and $22.6 million of which does not bear interest, and has no fixed maturity date), approximately $10 to $15 million to support operations, and the balance for general corporate purposes, including potential opportunistic acquisitions of, or investments in, complementary products, technologies or companies. We have no current agreements or commitments with respect to any material future acquisitions or material investments. Of the $10 million to $15 million to support our operations, approximately $1.0 million of this offering's proceeds will be used to launch and market Card Guard's newest cardiac event monitoring device, LifeStar ACT , and enhance our existing device offerings. We plan to use approximately $5 million to $10 million to purchase cardiac monitoring devices, including the LifeStar ACT , which will be used in the delivery of our cardiac monitoring services. In November 2006, we entered into a lease for new facilities in Rosemont, Illinois, and, we expect to complete the relocation from our facilities in San Diego, California and Buffalo Grove, Illinois to the new facility in the second quarter of 2007. We expect the relocation to require a total of $1.5 million in capital expenditures, consisting of office furnishings, communications wiring, redundancy equipment and building signage. This is currently being financed by short-term bank debt and we expect to use the proceeds from this offering to fund this relocation. We also anticipate using approximately $1.4 million of the proceeds to upgrade and enhance our systems and application infrastructure to support our continued growth. Additional purposes of this offering are to create a public market for our common stock, to facilitate our future access to the public equity markets and to obtain additional capital. Except as set forth above, we currently have no specific plans for the use of the net proceeds of this offering and we anticipate that we will use any remaining balance of the net proceeds received by us from this offering for general corporate purposes, including further development and expansion of our service offerings. The amounts and timing of our actual expenditures may vary significantly depending upon numerous factors, including the timing and method of our launch of and commercialization efforts relating to the LifeStar ACT , and our operating costs and capital expenditures. We will retain broad discretion in the allocation of the net proceeds of this offering, and we reserve the right to change the specific allocation of use of these proceeds. Pending such uses, we plan to invest the remaining portion of the net proceeds in highly liquid, investment grade securities. We cannot predict whether the proceeds invested will yield favorable returns. We believe that our available cash and our cash flows from operations, together with the net proceeds of this offering, will be sufficient to meet our capital requirements for at least the next twelve months. DIVIDEND POLICY Other than the deemed dividend described below, we have never declared or paid any cash dividends on our capital stock and we do not currently anticipate declaring or paying cash dividends on our capital stock in the foreseeable future. We currently intend to retain future earnings and do not expect to pay any dividends in the foreseeable future. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions, future prospects, contractual restrictions and covenants and other factors that our board of directors may deem relevant. In November and December of 2006, we granted stock options to certain of our directors, executive officers and employees, and to certain directors and officers of our parent companies that are not our employees. Certain of these awards were granted in consideration for services to be provided to our parent companies and not to us. The value of such awards will be recorded as a dividend to our parent companies upon consummation of this offering.
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+this prospectus. As this is a summary, it does not contain all of the information that you should consider in making an investment decision. You should read this entire prospectus carefully, including the information under Risk Factors and our financial statements and the related notes included elsewhere in this prospectus, before investing. References in this prospectus to we, us or our company refer to GSC Acquisition Company, a Delaware corporation. References to public stockholders refer to purchasers in this offering or in the secondary market, including any of our officers or directors and their affiliates to the extent that they purchase or acquire shares in this offering or in the secondary market. Unless we tell you otherwise, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option. Except as otherwise specified, all information in this prospectus and all per-share information has been adjusted to reflect a recapitalization that was effected on May 29, 2007, in which we acquired from our founding stockholder 1,692,968 of our outstanding shares of common stock for retirement and a total of 25,782 of our outstanding shares of common stock from three of our directors, in each case for nominal consideration of $1.00 (the recapitalization ). This recapitalization was effected to ensure that the shares included in the units being sold to the public in this offering represent approximately 80% of our outstanding share capital following consummation of the offering. We are a blank check company organized under the laws of the State of Delaware on October 26, 2006. We were formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition or other similar business combination, one or more businesses or assets, which we refer to as our initial business combination. To date, our efforts have been limited to organizational activities as well as activities related to this offering. We have not, nor has anyone on our behalf, contacted any prospective target business or had any substantive discussion, formal or otherwise, with respect to such a transaction. Additionally, we have not sought, nor have we engaged or retained any agent or other representative, to identify or locate any suitable acquisition candidate, to conduct any research or take any measures, directly or indirectly, to locate or contact a target business. Our efforts in identifying a prospective target business will not be limited to a particular industry. Instead, we will focus on industries and target businesses in the United States and Europe that may provide significant opportunity for growth. We do not currently have any specific initial business combination under consideration. We will seek to capitalize on the significant investing experience and contacts of our Chairman, Alfred C. Eckert III, and our other executive officers. Mr. Eckert has over 20 years of experience investing in private equity, distressed debt and mezzanine lending. In addition, Peter R. Frank and Matthew C. Kaufman, our Chief Executive Officer and President, respectively, have more than 40 years of total experience in sourcing, evaluating, structuring and negotiating control investments and in owning businesses. Mr. Eckert founded GSC Group, which includes our founding stockholder, in 1999 and serves as GSC Group s Chairman and Chief Executive Officer. GSC Group is a manager of assets in niche markets and complex areas including distressed investing (predominantly control-oriented), corporate credit and real estate. GSC Group has over 170 employees and operates through a number of business entities substantially owned by their management and employees, which collectively do business as GSC Group, including our founding stockholder, GSC Secondary Interest Fund, LLC, and GSCP (NJ), L.P. GSCP (NJ), L.P. is a registered investment advisor with approximately $24.8 billion of assets under management (including leverage and warehouse assets) as of March 31, 2007. GSC Group has its headquarters in New Jersey and offices in New York, London and Los Angeles. GSC Group s senior officers, including our executive officers, and advisors are in many cases long-time colleagues who have worked together extensively at GSC Group and at other institutions, including private equity, distressed debt and investment banking firms. GSC Group operates in three main business lines: (i) the Equity and Distressed Investing Group which is comprised of 20 investment professionals who manage approximately $1.3 billion of assets in three control distressed debt funds and a long/short credit strategies hedge fund; (ii) the Corporate Credit Group which is comprised of 26 investment professionals who manage approximately $8.5 billion of assets (including leverage and warehouse assets) in leveraged loans, high yield bonds, and mezzanine debt with investments in more than 450 companies; and (iii) the Real Estate Group which is comprised of 17 investment professionals managing $15.0 billion of assets (including leverage and warehouse assets), including a privately-held mortgage REIT, various synthetic and hybrid collateralized debt obligation funds and a structured products hedge fund. GSC Group s over 70 investment professionals will be available to assist us in connection with sourcing an acquisition. Through their various investment activities, GSC Group professionals have an extensive network of private equity sponsor relationships, both in the United States and Europe, having been partners investing side-by-side with other private equity firms in transactions and lenders supporting leveraged buyouts through leveraged loans, subordinated debt and preferred equity investments. Since 1999, GSC Group has invested $1.6 billion in 34 control or shared-control situations. We believe we will benefit from the substantial transaction experience of GSC Group s employees, which will help us analyze, evaluate, structure and execute an initial business combination. This experience includes active participation on boards of directors, particularly in the areas of financial management, management oversight and compensation, and acquisitions and dispositions. GSC Group principals, including our executive officers, have extensive experience serving on the boards of directors of companies in which GSC Group has had substantial equity positions. GSC Group has a broad network of experienced operational executives and has developed a network of experts in diverse industries as well as those with various functional knowledge. In functional areas, GSC Group has retained executives with specific expertise, such as purchasing, insurance, or sourcing from/operating in China, to further support existing expertise within its portfolio companies. GSC Group maintains active relationships with its portfolio company management teams that we believe can help provide additional insights on a wide variety of companies and industries. Our investment philosophy will be based on the strategies employed by GSC Group which reflect the private equity and control distressed investing experience of its senior officers. While we do not intend to pursue an initial business combination with a distressed company, we believe that we can benefit from GSC Group s experience in control distressed investing, which involves buying control equity positions in companies through the purchase of distressed debt and the subsequent conversion of such interests to equity. We believe that the skills needed to make a successful control distressed debt investment due diligence, valuation, structuring, board participation, financial monitoring and management oversight will assist us in our efforts to enter into an initial business combination. We have identified certain criteria and guidelines that we believe are important in evaluating prospective target businesses. A company s ability to demonstrate stable and predictable cash flow will be a fundamental investment criterion, a factor which has historically attracted GSC Group to manufacturing and service companies. While we will not limit ourselves to a business combination of a company in these areas, it will be an area of attention given our principals broad knowledge and expertise owning and growing businesses in those sectors. Below are other criteria and guidelines that we intend to use in evaluating initial business combination opportunities. However, we may decide to enter into an initial business combination with a target business or businesses that do not meet some of these criteria and guidelines: Established companies with positive cash flow. We will target established businesses with solid historical financial performance. We will focus on companies with a history of profitability on an operating cash flow basis. We do not intend to acquire start-up companies, companies with speculative business plans or companies that are excessively leveraged. Ability for GSC Group to Add Value . We will target businesses where we believe GSC Group can add value by bringing resources to bear over and above a company s existing capabilities. Often middle market companies lack the depth of expertise across non-core functional areas. Sound business fundamentals. We will target businesses with dominant market positions, unique franchises, secure market niches or distinctive products or services. Experienced management team. We will target businesses that have experienced management teams with a proven track record for delivering top line growth and bottom line profits through strategic business management and effective team building. Diversified customer and supplier base. We will target businesses that have a diversified customer and UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________ AMENDMENT NO. 5 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ________________ GSC Acquisition Company (Exact name of registrant as specified in its charter) ________________ Delaware 6770 20-5779392 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) GSC Acquisition Company 500 Campus Drive, Suite 220 Florham Park, NJ 07932 (973) 437-1000 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Alfred C. Eckert III Chairman GSC Acquisition Company 500 Campus Drive, Suite 220 Florham Park, NJ 07932 (973) 437-1000 Fax: (973) 437-1037 (Name, address, including zip code, and telephone number, including area code, of agent for service) ________________ Copies to: Deanna L. Kirkpatrick, Esq. Davis Polk & Wardwell 450 Lexington Avenue New York, NY 10017 (212) 450-4000 Fax: (212) 450-4800 Ann F. Chamberlain, Esq. Bingham McCutchen LLP 399 Park Avenue New York, NY 10022 (212) 705-7196 Fax: (212) 752-5378 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. o If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o supplier base. Companies with a diversified customer and supplier base are generally better able to endure economic downturns, industry consolidation, changing business preferences and other factors that may negatively impact their customers, suppliers and competitors. We have entered into a business opportunity right of first review agreement with GSC Group s parent company, GSC Group, Inc., which we refer to as GSCG in this prospectus, that provides that from the effective date of the registration statement of which this prospectus forms a part until the earlier of the consummation of our initial business combination or our liquidation in the event we do not consummate an initial business combination, we will have a right of first review with respect to business combination opportunities of GSC Group with an enterprise value of $150 million or more that GSC Group first becomes aware of after the effective date. GSC Group will first offer any such business opportunity to us (subject to any fiduciary obligations it may have) and will not, and will cause each other business entity within the GSC Group and each fund and other investment vehicle managed by GSC Group not to, pursue such business opportunity unless and until our board of directors has determined for any reason that we will not pursue such opportunity. Decisions by us to release GSC Group to pursue any specific business opportunity will be made solely by a majority of our disinterested directors. This right of first review will not include: any investment opportunities in respect of companies in bankruptcy, or financially or operationally distressed companies, companies targeted for acquisition by any company in which an investment vehicle managed by GSC Group has an equity investment, and any entity in which any of our officers, directors or GSC Group or its affiliates has a financial interest. While we may seek to acquire more than one business or asset, which we refer to as our target business or target businesses, our initial business combination must involve one or more target businesses having a fair market value, individually or collectively, equal to at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions of $4.5 million, or $5.175 million if the underwriters over-allotment option is exercised in full). We will only consummate a business combination in which we become the controlling shareholder of the target. The key factors that we will rely on in determining controlling shareholder status would be our acquisition of at least 51% of the voting equity interests of the target company and control of the majority of any governing body of the target company. We will not consider any transaction that does not meet such criteria. In addition, we will not enter into our initial business combination with any entity in which any of our officers, directors or GSC Group or its affiliates has a financial interest. If we are unable to consummate a business combination within the allotted time periods set forth in this prospectus, we will implement our dissolution and liquidation plan, which we expect will include the distribution of the proceeds held in the trust account to our public stockholders in an amount we expect to be $9.80 per share of common stock held by them (or approximately $9.77 per share if the underwriters exercise their over-allotment option). Our founding stockholder has agreed with us to purchase 4,000,000 warrants at a price of $1.00 per warrant, prior to the closing of this offering. Our founding stockholder will pay for the initial founder s warrants in cash from available funds. The purchase of the warrants by our founding stockholder will be a condition to the completion of this offering pursuant to the underwriting agreement to be entered into by us with the underwriters. The $4 million of proceeds from this investment will be added to the proceeds of this offering and will be held in the trust account pending our completion of an initial business combination on the terms described in this prospectus. If we do not complete such a business combination, then the $4 million will be part of the liquidating distribution to our public stockholders, and the warrants will expire worthless. Our executive offices are located at 500 Campus Drive, Suite 220, Florham Park, New Jersey 07932 and our telephone number is (973) 437-1000. CALCULATION OF REGISTRATION FEE Title of Each Class of Security Being Registered Amount Being Registered Proposed Maximum Offering Price per Security (1) Proposed Maximum Aggregate Offering Price (1) Amount of Registration Fee (4) Units, each consisting of one share of Common Stock, $0.001 par value, and one Warrant (2) 17,250,000 Units $ 10.00 $ 172,500,000 $ 5,295.75 Common Stock included in the Units (2) 17,250,000 Shares (3) Warrants included in Units (2) 17,250,000 Warrants (3) Total $ 172,500,000 $ 5,295.75 ___________ (1) Estimated solely for the purpose of calculating the registration fee. (2) Includes 2,250,000 Units, consisting of 2,250,000 shares of Common Stock and 2,250,000 Warrants, which may be issued upon exercise of a 30-day option granted to the underwriters to cover over-allotments, if any. (3) No fee pursuant to Rule 457(g). (4) $5,295.75 has been previously paid. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. THE OFFERING In making your decision on whether to invest in our securities, you should take into account not only the background of the members of our management team, but also the special risks we face as a blank check company and the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended (the Securities Act ). You will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. You should carefully consider these and the other risks set forth under Risk Factors beginning on page 18 of this prospectus. Securities offered: 15,000,000 units, at $10.00 per unit, each unit consisting of: one share of common stock; and one warrant. Trading commencement and separation of common stock and warrants: The units will begin trading on or promptly after the date of this prospectus. The common stock and warrants comprising the units will begin separate trading five business days following the earlier to occur of the expiration of the underwriters over-allotment option or its exercise in full, subject to our having filed the Form 8-K described below and having issued a press release announcing when such separate trading will begin. Separate trading of the common stock and warrants is prohibited until: In no event will the common stock and warrants be traded separately until we have filed a current report on Form 8-K with the SEC containing an audited balance sheet reflecting our receipt of the gross proceeds of this offering and issued a press release announcing when such separate trading will begin. We will file the Form 8-K promptly after the consummation of this offering, which is anticipated to take place four business days from the date of this prospectus. The audited balance sheet will include proceeds we receive from the exercise of the over-allotment option if such option is exercised prior to the filing of the Form 8-K. If the over-allotment option is exercised following the initial filing of such Form 8-K, we will file a second or amended Form 8-K to provide updated financial information to reflect the exercise of the over-allotment option. Common stock: Number outstanding before this offering: 3,750,000 shares Number to be outstanding after this offering: 18,750,000 shares Of the 18,750,000 shares to be outstanding after this offering, 3,750,000 shares (20%) were purchased by our founding stockholder in a private placement on November 7, 2006 (after giving effect to the recapitalization), and 15,000,000 shares (80%) are contained in the units being offered by this prospectus. A total of 56,250 of the 3,750,000 initial founder s shares (after giving effect to the recapitalization) were subsequently sold by our founding stockholder to three of our directors, Messrs. Goodwin, McKinnon and Mueller, in private transactions in reliance on Section 4(1) of the Securities Act. Warrants: Number outstanding before this offering: 4,000,000 warrants (after giving effect to the purchase of the initial founder s warrants to be purchased immediately prior to the offering). Number to be outstanding after this 19,000,000 warrants offering: Of the 19,000,000 warrants to be outstanding after this offering, 4,000,000 warrants will be purchased by our founding stockholder in a private placement prior to the closing of this offering and 15,000,000 warrants are contained in the units being offered by this prospectus. Exercisability: Each warrant is exercisable for one share of common stock, subject to adjustment as described herein. Exercise price: $7.50. Holders of the warrants must pay the exercise price in full upon exercise of the warrants and will receive one share of common stock, subject to adjustment as described herein, per warrant. Holders will not be entitled to receive a net cash settlement upon exercise of the warrants. Exercise period for the warrants included in the units sold in this offering: The warrants included in the units sold in this offering will become exercisable on the later of: the completion of our initial business combination, or 13 months from the closing of this offering, provided in each case that we have an effective registration statement under the Securities Act covering the shares of common stock issuable upon exercise of the warrants. We have agreed to use our best efforts to have an effective registration statement covering shares of common stock issuable upon exercise of the warrants from the date the warrants become exercisable and to maintain a current prospectus relating to that common stock until the warrants expire or are redeemed. The warrants will expire at 5:00 p.m., New York time, on the date that is four years from the date of this prospectus or earlier upon redemption or liquidation of the trust account. Redemption: Once the warrants become exercisable, except as described below with respect to the initial founder s warrants (as defined below), we may redeem the outstanding warrants: in whole and not in part, at a price of $0.01 per warrant, upon a minimum of 30 days prior written notice of redemption, and if, and only if, the last sale price of our common stock equals or exceeds $14.25 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption, provided that on the date we give notice of redemption and during the entire period thereafter until the time we redeem the warrants, we have an effective registration statement covering the shares of common stock issuable upon exercise of the warrants and a current prospectus relating to them is available. Reasons for redemption limitations: We have established the above conditions to our exercise of redemption rights with the intent of: providing warrant holders with adequate notice of redemption, and allowing them to exercise their warrants prior to redemption at a time when there is a reasonable premium to the warrant exercise price; and The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED JUNE 7, 2007 PROSPECTUS $150,000,000 GSC Acquisition Company 15,000,000 Units ________________ GSC Acquisition Company is a newly organized blank check company formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or other similar business combination, one or more businesses or assets, which we refer to as our initial business combination. Our efforts in identifying a prospective target business will not be limited to a particular industry. Instead we will focus on industries and target businesses in the United States and Europe that may provide significant opportunity for growth. To date our efforts have been limited to organizational activities as well as activities related to this offering. We do not have any specific initial business combination under consideration. We have not, nor has anyone on our behalf, contacted any prospective target business or had any substantive discussions, formal or otherwise, with respect to such a transaction. This is an initial public offering of our securities. Each unit has an offering price of $10.00 and consists of one share of our common stock and one warrant. We are offering 15,000,000 units. We expect that the public offering price will be $10.00 per unit. Each warrant entitles the holder to purchase one share of our common stock at a price of $7.50, subject to adjustment as described herein. The warrants will become exercisable on the later of the completion of our initial business combination or 13 months from the closing of this offering, provided in each case that we have an effective registration statement covering the shares of common stock issuable upon exercise of the warrants and a current prospectus relating to them is available, and will expire four years from the date of this prospectus, unless earlier redeemed. We have also granted the underwriters a 30-day option to purchase up to 2,250,000 additional units to cover over-allotments, if any. GSC Secondary Interest Fund, LLC, a Delaware limited liability company, which we refer to as our founding stockholder, and three of our directors own an aggregate of 3,750,000 initial founder s shares of our common stock (after giving effect to our recapitalization as defined herein), which were originally purchased by our founding stockholder for a purchase price of $25,000. Our founding stockholder has agreed to purchase 4,000,000 initial founder s warrants for a purchase price of $4 million concurrently with the closing of this offering. We refer to the initial founder s shares and initial founder s warrants, each as defined herein, collectively as the founder s securities. Our founding stockholder and each such director has agreed (i) to vote the initial founder s shares in accordance with the majority of the shares of common stock voted by our public stockholders in connection with the vote on any initial business combination, and (ii) to waive any right to receive a liquidation distribution with respect to the initial founder s shares in the event we fail to consummate an initial business combination. The initial founder s warrants are identical to the warrants contained in the units being offered in this offering except that they are not redeemable while held by our founding stockholder or its permitted transferees. All of the founder s securities are subject to certain transfer restrictions. Currently, there is no public market for our units, common stock or warrants. We have applied to have the units listed on the American Stock Exchange under the symbol GGA.U on or promptly after the date of this prospectus. The common stock and warrants comprising the units will begin separate trading five business days following the earlier to occur of the expiration of the underwriters over-allotment option or its exercise in full, subject to our filing a current report on Form 8-K with the Securities and Exchange Commission containing an audited balance sheet reflecting our receipt of the gross proceeds of this offering and issuing a press release announcing when such separate trading will begin. We have applied to have the common stock and warrants listed on the American Stock Exchange under the symbols GGA and GGA.WS , respectively. Investing in our securities involves a high degree of risk. See Risk Factors beginning on page 18 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Per Unit Total Proceeds Public offering price $ 10.00 $ 150,000,000 Underwriting discounts and commissions (1) $ 0.70 $ 10,500,000 Proceeds, before expenses, to us $ 9.30 $ 139,500,000 _____________ (1) Includes $0.30 per unit, or $4.5 million in the aggregate ($5.175 million if the underwriters over-allotment option is exercised in full), payable to the underwriters for deferred underwriting discounts and commissions from the funds to be placed in a trust account at JPMorgan Chase Bank, N.A., to be maintained by American Stock Transfer & Trust Company, acting as trustee. Such funds will be released to the underwriters only upon completion of an initial business combination as described in this prospectus. The underwriters are offering the units on a firm commitment basis. The underwriters expect to deliver the units to purchasers on or about , 2007. Of the proceeds we receive from this offering and the sale of the initial founder s warrants as described in this prospectus, $9.80 per unit, or $146,975,000 in the aggregate (approximately $9.77 per unit or $168,575,000 if the underwriters over-allotment option is exercised in full) will be deposited into a trust account at JPMorgan Chase Bank, N.A., maintained by American Stock Transfer & Trust Company, acting as trustee. _______________________ Citi _______________________ Ladenburg Thalmann & Co. Inc. I-Bankers Securities, Inc. The date of this prospectus is , 2007 providing a sufficient differential between the then-prevailing common stock price and the warrant exercise price so there is a buffer to absorb any negative market reaction to our redemption of the warrants. If the foregoing conditions are satisfied and we issue a notice of redemption, warrant holders can exercise their warrants at any time prior to the scheduled redemption date. However, there is no guarantee that the price of the common stock will exceed the $14.25 trigger price or the warrant exercise price after the redemption notice is issued. Initial founder s shares: On November 7, 2006, our founding stockholder purchased 3,750,000 shares of our common stock (after giving effect to the recapitalization), which we refer to as the initial founder s shares throughout this prospectus, in a private placement for a purchase price of $25,000. A total of 56,250 of the 3,750,000 initial founder s shares (after giving effect to the recapitalization) were subsequently sold by our founding stockholder to three of our directors, Messrs. Goodwin, McKinnon and Mueller, in private transactions in reliance on Section 4(1) of the Securities Act. The initial founder s shares are identical to those included in the units being sold in this offering, except that our founding stockholder and each transferee has agreed: in connection with the stockholder vote required to approve our initial business combination, to vote the initial founder s shares in accordance with the majority of the shares of common stock voted by the public stockholders; and to waive its right to participate in any liquidation distribution with respect to the initial founder s shares if we fail to consummate an initial business combination. In addition, our founding stockholder and each of our officers and directors has also agreed that if it, he or she acquires shares of common stock in or following this offering, it, he or she will vote all such acquired shares in favor of our initial business combination. (Any such purchases of stock following this offering are expected to be effected through open market purchases or privately negotiated transactions.) As a result, neither our founding stockholder, nor any of our officers or directors will be able to exercise the conversion rights (as described below) with respect to any of our shares that it, he or she may acquire prior to, in or after this offering. If the number of units we offer to the public is increased or decreased from the number shown in this prospectus prior to the conclusion of the offering, then the initial founder s shares will be adjusted in the same proportion as the increase or decrease in the units offered hereby in order to maintain their percentage ownership. We will not make or receive any cash payment in respect of any such adjustment. Initial Founder s warrants: Our founding stockholder has agreed to purchase 4,000,000 warrants at a price of $1.00 per warrant, prior to the consummation of this offering. We refer to these warrants as the initial founder s warrants throughout this prospectus. The initial founder s warrants will be purchased separately and not in combination with common stock or in the form of units. The purchase price of the initial founder s warrants will be added to the proceeds from this offering to be held in the trust account at JPMorgan Chase Bank, N.A., to be maintained by American Stock Transfer & Trust Company pending our completion of an initial business combination. If we do not complete an initial business combination that meets the criteria described in this prospectus, then the $4 million purchase price of the initial founder s warrants will become part of the liquidation distribution to our public stockholders and the initial founder s warrants will expire worthless. The initial founder s warrants are identical to the warrants sold in this offering, except that they will be non-redeemable so long as they are held by our founding stockholder or its permitted transferees and the shares of common stock issued upon exercise of such initial founder s warrants by our founding stockholder or its permitted transferees will not be registered under the Securities Act. However, as set forth below, our founding stockholder and its permitted transferees will have the right to demand registration of the resale of such shares. The holders of the warrants purchased in this offering will not be able to exercise those warrants unless we have an effective registration statement covering the shares issuable upon their exercise and a related current prospectus available. Although the shares of common stock issuable pursuant to the initial founder s warrants will not be issued pursuant to a registration statement so long as they are held by our founding stockholder and its permitted transferees, the warrant agreement provides that the initial founder s warrants may not be exercised unless a registration statement relating to the common stock issuable upon exercise of the warrants purchased in this offering is effective and a related current prospectus is available. Transfer restrictions: Our founding stockholder and Messrs. Goodwin, McKinnon and Mueller have agreed not to sell or transfer the initial founder s shares for a period of three years from the date we consummate this offering and our founding stockholder has agreed not to sell or transfer the initial founder s warrants until after we complete our initial business combination, other than to permitted transferees. The permitted transferees will be our officers, directors and employees, and other persons or entities associated with GSC Group, provided that the transferees receiving such securities agree to be subject to the transfer restrictions and, in the case of the initial founder s shares, waive their right to participate in any liquidation distribution if we fail to consummate an initial business consummation and agree to vote in accordance with the majority of shares of common stock voted by the public stockholders in connection with our initial business combination. Any transfer to a permitted transferee will be in a private transaction exempt from registration under the Securities Act pursuant to Section 4(1) thereof. Please see Principal Stockholders Transfer Restrictions. Registration rights: Concurrently with the issuance and sale of the securities in this offering, we will enter into an agreement with our founding stockholder and Messrs. Goodwin, McKinnon and Mueller granting each of them and their permitted transferees the right to demand that we register the resale of the initial founder s shares. Also concurrently with the issuance and sale of the securities in this offering, we will enter into an agreement with our founding stockholder granting it and its permitted transferees the right to demand that we register the resale of the initial founder s warrants and the shares of common stock issuable upon exercise of the initial founder s warrants. The registration rights will be exercisable with respect to the shares at any time after the date on which they are no longer subject to the transfer restrictions described above and with respect to the warrants and the underlying shares of common stock, after the warrants become exercisable by their terms. We will bear the expenses incurred in connection with the filing of any such registration statements. Please see Description of Securities Securities Eligible for Future Sale Registration rights for more information. Right of first review: We have entered into a business opportunity right of first review agreement with GSCG which provides that from the effective date of the registration statement of which this prospectus forms a part until the earlier of the consummation of our initial business combination or our liquidation in the event we do not consummate an initial business combination, we will have a right of first review with respect to business combination opportunities of GSC Group with an enterprise value of $150 million or more that GSC Group first becomes aware of after the effective date. GSC Group will first offer any such business opportunity to us (subject to any fiduciary obligations it may have) and will not, and will cause each other business entity within the GSC Group and each fund and other investment vehicle managed by GSC Group not to, pursue such business opportunity unless and until our board of directors has determined for any reason that we will not pursue such opportunity. Decisions by us to release GSC Group to pursue any specific business opportunity will be made solely by a majority of our disinterested directors. This right of first review will not include any investment opportunities in respect of companies in bankruptcy, or financially or operationally distressed companies, companies targeted for acquisition by any company in which an investment vehicle managed by GSC Group has an equity investment, and any entity in which any of our officers, directors or GSC Group or its affiliates has a financial interest. Proposed American Stock Exchange symbols for our: Units: GGA.U Common stock: GGA Warrants: GGA.WS Offering and initial founder s warrants private placement proceeds to be held in trust account; amounts payable prior to trust account distribution or liquidation: $146,975,000, or $9.80 per unit (or approximately $9.77 per unit or $168,575,000, if the over-allotment option is exercised in full) of the proceeds of this offering and the sale of the founder s warrants will be placed in a trust account at JPMorgan Chase Bank, N.A., pursuant to the investment management trust agreement we will enter into with the trustee on the date of this prospectus. These proceeds include $4.5 million in deferred underwriting discounts and commissions (or $5.175 million if the underwriters over-allotment option is exercised in full). We believe that the inclusion in the trust account of the purchase price of the initial founder s warrants and the deferred underwriting discounts and commissions is a benefit to our stockholders because additional proceeds will be available for distribution to investors if a liquidation of our company occurs prior to our completing an initial business combination. Proceeds in the trust account will not be released until the earlier of completion of an initial business combination or our liquidation. Unless and until our initial business combination is consummated, proceeds held in the trust account will not be available for our use for any purpose, including the payment of expenses related to this offering or the investigation, selection and negotiation of an agreement with one or more target businesses, except that there may be released to us from the trust account (i) interest income earned on the trust account balance to pay any income taxes on such interest and (ii) interest income earned of up to $2.0 million on the trust account balance to fund our working capital requirements. With these exceptions, expenses incurred by us while seeking a business combination may be paid prior to an initial business combination only from $50,000 of the net proceeds of this offering not held in the trust account. Please see Use of Proceeds for additional information concerning the allocation of the proceeds of this offering. Warrant proceeds paid to us: None of the warrants or initial founder s warrants may be exercised until after the consummation of our initial business combination and, thus, after the proceeds of the trust account have been disbursed. Accordingly, the warrant exercise price for both the warrants and the initial founder s warrants will be paid directly to us and not placed in the trust account. This could provide an additional source of liquidity for us, although there can be no assurance when the warrants or initial founder s warrants will be exercised, if at all. Limited payments to insiders: There will be no finder s fees, reimbursements or cash payments made to our founding stockholder, officers, directors, GSC Group or our or their affiliates for services rendered to us prior to or in connection with the consummation of an initial business combination, other than: repayment of advances of up to $700,000 made to us by GSCP (NJ) Holdings, L.P., to cover offering-related and organizational expenses; a payment of an aggregate of $7,500 per month to GSCP (NJ) Holdings, L.P., an affiliate of our founding stockholder for office space, secretarial and administrative services; and reimbursement for any out-of-pocket expenses related to this offering and identifying, investigating and consummating an initial business combination. Our audit committee will review and approve all payments made to our founding stockholder, officers, directors or our or their affiliates, other than the $7,500 per month payment described above, and any payments made to members of our audit committee will be reviewed and approved by our board of directors, with any interested director abstaining from such review and approval. Release of amounts held in trust account at close of initial business combination: At the time we complete an initial business combination, following our payment of amounts due to any public stockholders who duly exercise their conversion rights (as described below), deferred underwriting discounts and commissions that are equal to 3.0% of the gross proceeds of this offering, or $4.5 million ($5.175 million if the over-allotment option is exercised in full) will be released to the underwriters from the trust account. The balance of the funds in the trust account will be released to us and may be used to pay all or a portion of the purchase price of our initial business combination. We may apply any funds released to us from the trust account not used to pay the purchase price for example, because we paid all or a portion of the purchase price for our initial business combination using stock or debt securities for general corporate purposes, including for maintenance or expansion of the operations of acquired business(es), the payment of principal or interest due on indebtedness incurred in consummating our initial business combination or to fund the purchase of other companies or for working capital. Stockholders must approve our initial business combination: We will seek stockholder approval before effecting our initial business combination, even if the business combination would not ordinarily require stockholder approval under applicable state law. In connection with the vote required for our initial business combination, a majority of our issued and outstanding common stock (whether or not held by public stockholders), present in person or by proxy, will constitute a quorum. In connection with the stockholder vote required to approve our initial business combination, our founding stockholder and Messrs. Goodwin, McKinnon and Mueller have agreed to vote the initial founder s shares in accordance with the majority of the shares of common stock voted by the public stockholders. Our founding stockholder and each of our officers and directors has also agreed that if it, he or she acquires shares of common stock in or following this offering, it, he or she will vote all such acquired shares in favor of our initial business combination. As a result, neither our founding stockholder, nor any of our officers and directors will be able to exercise the conversion rights described below with respect to any of our shares that it, he or she may acquire prior to, in or after this offering. Conditions to consummating our initial business combination: Our initial business combination must occur with one or more target businesses that have a fair market value of at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions of $4.5 million or $5.175 million if the over-allotment option is exercised in full) at the time of such business combination. If we acquire less than 100% of one or more target businesses in our initial business combination, the aggregate fair market value of the portion or portions we acquire must equal at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions as described above) at the time of such initial business combination. The fair market value of a portion of a target business will be calculated by multiplying the fair market value of the entire business by the percentage of the target business we acquire. We will only consummate a business combination in which we become the controlling shareholder of the target. The key factors that we will rely on in determining controlling shareholder status would be our acquisition of at least 51% of the voting equity interests of the target company and control of the majority of any governing body of the target company. We will not consider any transaction that does not meet such criteria. We will consummate our initial business combination only if a quorum is constituted as described above and, as required by our amended and restated certificate of incorporation, which we will file with the Secretary of State of Delaware immediately prior to the commencement of this offering, a majority of the shares of common stock voted by the public stockholders are voted, in person or by proxy, in favor of our initial business combination and public stockholders owning up to 20% of the shares (minus one share) sold in this offering vote against the business combination and exercise their conversion rights as described below. Under the terms of our amended and restated certificate of incorporation, this provision may not be amended without the unanimous consent of our stockholders prior to consummation of an initial business consummation. Even though the validity of unanimous consent provisions under Delaware law has not been settled, neither we nor our board of directors will propose any amendment to this 20% threshold, or support, endorse or recommend any proposal that stockholders amend this threshold (subject to any fiduciary obligations our management or board may have). In addition, we believe we have an obligation in every case to structure our initial business combination so that not less than 20% of the shares sold in this offering (minus one share) have the ability to be converted to cash by public stockholders exercising their conversion rights and the business combination will still go forward. Provided that a quorum is in attendance at the meeting, in person or by proxy, a failure to vote on the initial business combination at the stockholders meeting will have no effect on the outcome of the transaction. Conversion rights for stockholders voting to reject our initial business combination: If a vote on an initial business combination is held and the initial business combination is not approved, we may continue to try to consummate a business combination with a different target until 24 months from the date of this prospectus. Public stockholders voting against our initial business combination will be entitled to convert their shares of common stock into a pro rata share of the aggregate amount then on deposit in the trust account (before payment of deferred underwriting discounts and commissions and including interest earned on their pro rata portion of the trust account, net of income taxes payable on such interest and net of interest income of up to $2.0 million on the trust account balance previously released to us to fund our working capital requirements) if our initial business combination is approved and completed. If the initial business combination is not approved or completed for any reason, then public stockholders voting against our initial business combination who exercised their conversion rights would not be entitled to convert their shares of common stock into a pro rata share of the aggregate amount then on deposit in the trust account. Those public stockholders would be entitled to receive their pro rata share of the aggregate amount on deposit in the trust account only in the event that the business combination they voted against was duly approved and subsequently completed, or in connection with our dissolution and liquidation. Public stockholders who convert their common stock into a pro rata share of the trust account will be paid the conversion price on the closing date of our initial business combination and will continue to have the right to exercise any warrants they own. The initial per-share conversion price is expected to be $9.80 per share (or approximately $9.77 per share if the over-allotment option is exercised in full). Since this amount is less than the $10.00 per unit price in this offering and may be lower than the market price of the common stock on the date of conversion, there may be a disincentive on the part of public stockholders to exercise their conversion rights. Because converting stockholders will receive their proportionate share of the deferred underwriting compensation and the underwriters will be paid the full amount of the deferred underwriting compensation at the time of closing of our initial business combination, the non-converting stockholders will bear the financial effect of such payments to both the converting stockholders and the underwriters. This could have the effect of reducing the amount distributed to us from the trust account by up to approximately $0.9 million (assuming conversion of the maximum of 2,999,999 shares of common stock). Voting against our initial business combination alone will not result in conversion of your shares into a pro rata share of the trust account; to convert your shares, you must also exercise the conversion rights described above and follow the specific procedures for conversion that will be set forth in the proxy statement relating to the shareholder vote for a proposed initial business combination. In connection with a vote on our initial business combination, public stockholders may elect to vote a portion of their shares for and a portion of their shares against the initial business combination. If the initial business combination is approved and consummated, public stockholders who elected to convert the portion of their shares voted against the initial business combination will receive the conversion price with respect to those shares and may retain any other shares they own. Dissolution and liquidation if no business combination: If we are unable to complete a business combination by 24 months from the date of this prospectus, our existence will automatically terminate and as promptly as practicable thereafter adopt a plan of distribution in accordance with Section 281(b) of the Delaware General Corporation Law. Upon adoption of our plan of distribution, the trustee will commence liquidating the investments constituting the trust account and distribute the proceeds to our public stockholders. Section 278 of the Delaware General Corporation Law provides that even after we cease our business activities and distribute the balance of the trust account to our public stockholders, our existence will continue for at least three years after our expiration for the purpose of prosecuting and defending suits, whether civil, criminal or administrative, by or against us, and of enabling us gradually to settle and close our business, to dispose of and convey our property, to discharge our liabilities and to distribute to our stockholders any remaining assets, but not for the purpose of continuing the business for which we were organized. Our existence will continue automatically even beyond the three-year period for the purpose of completing the prosecution or defense of suits begun prior to the expiration of the three-year period, until such time as any judgments, orders or decrees resulting from such suits are fully executed. Section 281(b) will require us to pay or make reasonable provision for all then-existing claims and obligations, including all contingent, conditional, or unmatured contractual claims known to us, and to make such provision as will be reasonably likely to be sufficient to provide compensation for any then-pending claims and for claims that have not been made known to us or that have not arisen but that, based on facts known to us at the time, are likely to arise or to become known to us within 10 years after the date of dissolution. Under Section 281(b), the plan of distribution must provide for all of such claims to be paid in full or make provision for payments to be made in full, as applicable, if there are sufficient assets. If there are insufficient assets to provide for all such claims, the plan must provide that such claims and obligations be paid or provided for according to their priority and, among claims of equal priority, ratably to the extent of legally available assets. These claims must be paid or provided for before we make any distribution of our remaining assets to our stockholders. While we intend to pay such amounts, if any, from the $50,000 of proceeds held outside the trust account and from the $2.0 million of interest income earned on the trust account available to us for working capital, we cannot assure you those funds will be sufficient to pay or provide for all creditors claims. Although we will seek to have all third parties (including any vendors and any other entities with which we enter into a contractual relationship following consummation of this offering) and prospective target businesses enter into valid and enforceable agreements with us waiving any right, title, interest or claim of any kind in or to any assets held in the trust account, there is no guarantee that they will execute such agreements. We have not engaged any such third parties or asked for or obtained any such waiver agreements at this time. It is also possible that such waiver agreements would be held unenforceable, and there is no guarantee that the third parties would not otherwise challenge the agreements and later bring claims against the trust account for amounts owed them. In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with us and will not seek recourse against the trust account for any reason. Our founding stockholder has agreed that it will be liable to us if and to the extent any claims by a vendor for services rendered or products sold to us, a third party with which we entered into a contractual relationship following consummation of this offering or by a prospective target business reduce the amounts in the trust account available for distribution to our stockholders in the event of a liquidation, except (1) as to any claimed amounts owed to a third party who executed a valid and enforceable waiver, or (2) as to any claims under our indemnity of the underwriters of this offering against certain liabilities, including liabilities under the Securities Act. We expect that all costs and expenses associated with implementing our plan of distribution, as well as payments to any creditors, will be funded from amounts remaining out of the $50,000 of proceeds held outside the trust account and from the $2.0 million in interest income on the balance of the trust account that will be released to us to fund our working capital requirements. However, if those funds are not sufficient to cover the costs and expenses associated with implementing our plan of distribution, to the extent that there is any interest accrued in the trust account not required to pay income taxes on interest income earned on the trust account balance, we may request that the trustee release to us an additional amount of up to $75,000 of such accrued interest to pay those costs and expenses. Should there be no such interest available or should those funds still not be sufficient, our founding stockholder has agreed to reimburse us for our out-of-pocket costs associated with our dissolution and liquidation, excluding any special, indirect or consequential costs, such as litigation, pertaining to the dissolution and liquidation. Our founding stockholder and Messrs. Goodwin, McKinnon and Mueller have waived their right to participate in any liquidation distribution with respect to the initial founder s shares. Additionally, if we do not complete an initial business combination and the trustee must distribute the balance of the trust account, the underwriters have agreed to forfeit any rights or claims to their deferred underwriting discounts and commissions then in the trust account, and those funds will be included in the pro rata liquidation distribution to the public stockholders. There will be no distribution from the trust account with respect to any of our warrants, which will expire worthless if we are liquidated, and as a result purchasers of our units will have paid the full unit purchase price solely for the share of common stock included in each unit. If we are unable to conclude an initial business combination and we expend all of the net proceeds of this offering and the initial founder s investment other than the proceeds deposited in the trust account, without taking into account any interest earned on the trust account, we expect that the initial per-share liquidation price will be $9.80 (or approximately $9.77 per share if the over-allotment option is exercised in full), or approximately $0.20 less than the per-unit offering price of $10.00 (approximately $0.23 less if the over-allotment is exercised in full). The proceeds deposited in the trust account could, however, become subject to claims of our creditors that are in preference to the claims of our stockholders. In addition, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us that is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. Therefore, we cannot assure you that the actual per-share liquidation price will not be less than $9.80 (or approximately $9.77 per share if the over-allotment option is exercised in full). GSCG and Mr. Eckert, our Chairman, have entered into non-compete agreements with us: Commencing on the date of this prospectus and extending until the earlier of the closing of our initial business combination or our liquidation, neither GSC Group nor Mr. Eckert, our Chairman, will become affiliated with any other blank check company. Audit committee to monitor compliance: Our audit committee will monitor compliance on a quarterly basis with the terms of this offering and, if any noncompliance is identified, the audit committee is charged with the immediate responsibility to take all action necessary to rectify such noncompliance or otherwise cause compliance with the terms of this offering. Determination of offering amount: In determining the size of this offering, our management concluded, based on their collective experience, that an offering of this size, together with the proceeds of the private placement of the initial founder s warrants, would provide us with sufficient equity capital to execute our business plan. We believe that this amount of equity capital, plus our ability to finance an acquisition using stock or debt in addition to the cash held in the trust account, will give us substantial flexibility in selecting an acquisition target and structuring our initial business combination. This belief is not based on any research, analysis, evaluations, discussions, or compilations of information with respect to any particular investment or any such action undertaken in connection with our organization. We cannot assure you that our belief is correct, that we will be able to successfully identify acquisition candidates, that we will be able to obtain any necessary financing or that we will be able to consummate a transaction with one or more target businesses whose fair market value, collectively, is equal to at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions of approximately $4.5 million or approximately $5.175 million if the over-allotment option is exercised in full) at the time of the initial business combination. Risks We are a newly formed company that has conducted no operations and has generated no revenues. Until we complete our initial business combination, we will have no operations and will generate no operating revenues. In making your decision on whether to invest in our securities, you should take into account not only the background of our management team, but also the special risks we face as a blank check company. This offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act. Accordingly, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. For additional information concerning how Rule 419 blank check offerings differ from this offering, please see Proposed Business Comparison of This Offering to Those of Blank Check Companies Subject to Rule 419. You should carefully consider these and the other risks set forth in the section entitled Risk Factors beginning on page 18 of this prospectus. SUMMARY FINANCIAL DATA The following table summarizes relevant financial data for our company and should be read with our financial statements, which are included in this prospectus. The table does not give effect to the exercise of the underwriters over-allotment option. We have not had any significant operations to date, so only balance sheet data is presented. March 31, 2007 Actual As Adjusted(1) Balance Sheet Data: Working capital (deficiency) $ (610,169 ) $ 142,549,830 Total assets 510,328 142,549,830 Total liabilities 634,999 Value of common stock which may be converted to cash ($9.80 per share)(2) 29,394,990 Stockholders equity (124,671 ) 113,154,840 __________ (1) The as adjusted information gives effect to the sale of units in this offering including the application of the related gross proceeds and the payment of expenses and the receipt of $4 million from the sale of the initial founder s warrants. The as adjusted working capital and total assets exclude $4.5 million being held in the trust account ($5.175 million if the underwriters over-allotment option is exercised in full) representing deferred underwriting discounts and commissions. (2) Assumes no exercise of the over-allotment option. Assuming the over-allotment option is exercised in full, the value of common stock which may be converted to cash is $33,714,990. The total assets (as adjusted) amounts, combined with the $4.5 million of deferred underwriting discounts and commissions, include $146,975,000 to be held in the trust account, which will be distributed on the closing date of our initial business combination (i) to any public stockholders who exercise their conversion rights in an amount we expect to be $9.80 per share (or approximately $9.77 per share if the over-allotment option is exercised in full), (ii) to the underwriters in the amount of $4.5 million ($5.175 million if the underwriters over-allotment option is exercised in full) in payment of their deferred underwriting discounts and commissions and (iii) to us in the amount remaining in the trust account following the payment to any public stockholders who exercise their conversion rights and payment of deferred discounts and commission to the underwriters. All such proceeds will be distributed from the trust account only upon consummation of our initial business combination within the time period described in this prospectus. If our initial business combination is not so consummated, we will dissolve and the proceeds held in the trust account (including the deferred underwriting discounts and commission and all interest thereon, net of income taxes on such interest and net of interest income of up to $2.0 million on the trust account balance previously released to us to fund working capital requirements, as well as interest of up to $75,000 that may be released to us should we have no or insufficient working capital remaining to fund the costs and expenses of liquidation) and any net assets remaining outside the trust account will be distributed pro rata to our public stockholders. We will not proceed with our initial business combination if public stockholders owning 20% or more of the shares sold in this offering vote against the initial business combination and exercise their conversion rights. Accordingly, we will consummate our initial business combination only if a majority of the shares of common stock voted by the public stockholders are voted, in person or by proxy, in favor of our initial business combination and public stockholders owning up to 20% of the shares (minus one share) sold in this offering vote against the business combination and exercise their conversion rights. If this occurred, we would be required to convert to cash up to 2,999,999 shares of common stock (one share less than 20% of the aggregate number of shares of common stock sold in this offering), at an initial per-share conversion price of $9.80 (or up to 3,449,999 shares at approximately $9.77 per share if the over-allotment option is exercised in full). The actual per-share conversion price will be equal to the aggregate amount then on deposit in the trust account (before payment of deferred underwriting discounts and commissions and including accrued interest net of income taxes on such interest, after distribution of interest income on the trust account balance to us as described above) as of two business days prior to the proposed consummation of the initial business combination, divided by the number of shares of common stock in this offering. RISK FACTORS An investment in our securities involves a high degree of risk. You should consider carefully all of the material risks described below, together with the other information contained in this prospectus before making a decision to invest in our units. If any of the following events occur, our business, financial condition and operating results may be materially adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks described below. Risks associated with our business We are a development stage company with no operating history and no revenues, and you have no basis on which to evaluate our ability to achieve our business objective. We are a recently incorporated development stage company with no operating results, and we will not commence operations until we obtain funding through this offering. Because we lack an operating history, you have no basis on which to evaluate our ability to achieve our business objective of completing an initial business combination with one or more target businesses. We have no plans, arrangements or understandings with any prospective target businesses concerning an initial business combination and may be unable to complete an initial business combination. We will not generate any revenues from operating activities until, at the earliest, after completing an initial business combination. We cannot assure you as to when, or if, an initial business combination will occur. If we expend all of the $50,000 in proceeds from this offering not held in trust and interest income earned of up to $2.0 million on the balance of the trust account that may be released to us to fund our working capital requirements in seeking an initial business combination, but fail to complete such an initial combination, we may never generate any operating revenues. We may not be able to consummate our initial business combination within the required time frame, in which case we would be forced to dissolve and liquidate. We must complete our initial business combination with one or more target businesses that have a fair market value of at least 80% of the amount held in our trust account at the time of the initial business combination (excluding deferred underwriting discounts and commissions of $4.5 million, or $5.175 million if the over-allotment option is exercised in full) within 24 months after the consummation of this offering. If we fail to consummate a business combination within the required time frame, we will be forced to dissolve and liquidate. We may not be able to find suitable target businesses within the required time frame. In addition, our negotiating position and our ability to conduct adequate due diligence on any potential target may be reduced as we approach the deadline for the consummation of an initial business combination. We do not have any specific initial business combination under consideration and we have not, nor has anyone on our behalf, contacted any potential target business or had any substantive discussions, formal or otherwise, with respect to such a transaction. Additionally, we have not sought, nor have we engaged or retained any agent or other representative, to identify or locate any suitable acquisition candidate, to conduct any research or take any measures, directly or indirectly, to locate or contact a target business. In addition, because of the nature of GSC Group s business, executives associated with GSC Group, including Messrs. Eckert, Frank and Kaufman, occasionally receive unsolicited inquiries that identify companies that are potentially for sale. Management has not and will not respond to any such inquiries, nor will it pursue any potential targets that such unsolicited inquiries have identified prior to the completion of the IPO. Other than such inquiries, management has not received any inquiries regarding potential target businesses. Further, after completion of the IPO, we will not use information relating to specific target businesses that was known by GSC Group s investment professionals or any other affiliates prior to the completion of the IPO. If we liquidate before concluding an initial business combination, our public stockholders will receive less than $10.00 per share on distribution of trust account funds and our warrants will expire worthless. If we are unable to complete an initial business combination and must liquidate our assets, the per-share liquidation distribution will be less than $10.00 because of the expenses of this offering, our general and administrative expenses and the costs of seeking an initial business combination. Furthermore, our outstanding warrants are not entitled to participate in a liquidation distribution and the warrants will therefore expire worthless if we liquidate before completing an initial business combination; and as a result purchasers of our units will have paid the full unit purchase price solely for the share of common stock included in each unit, will realize less than $10.00 for each such share, and will not receive any money for such warrant. For a more complete discussion of the effects on our stockholders if we are unable to complete an initial business combination, please see Proposed Business Effecting a Business Combination Liquidation if no business combination. We may require stockholders who wish to convert their shares to comply with specific requirements for conversion that may make it more difficult for them to exercise their conversion rights prior to the deadline for exercising conversion rights. We may require public stockholders who wish to convert their shares to tender their certificates to our transfer agent prior to the shareholder meeting or to deliver their shares to the transfer agent electronically using the Depository Trust Company s DWAC (Deposit/Withdrawal At Custodian) System. In order to obtain a physical stock certificate, a stockholder s broker and/or clearing broker, DTC and our transfer agent will need to act to facilitate this request. It is our understanding that stockholders should generally allot at least two weeks to obtain physical certificates from the transfer agent. However, because we do not have any control over this process or over the brokers or DTC, it may take significantly longer than two weeks to obtain a physical stock certificate. If it takes longer than we anticipate to obtain a physical certificate, stockholders who wish to convert may be unable to obtain physical certificates by the deadline for exercising their conversion rights and thus will be unable to convert their shares. An effective registration statement must be in place in order for a warrant holder to be able to exercise the warrants, otherwise the warrants will expire worthless. No warrants will be exercisable and we will not be obligated to issue shares of common stock upon exercise of warrants by a holder unless, at the time of such exercise, we have an effective registration statement under the Securities Act covering the shares of common stock issuable upon exercise of the warrants and a current prospectus relating to them is available. Although we have undertaken in the warrant agreement, and therefore have a contractual obligation, to use our best efforts to have an effective registration statement covering shares of common stock issuable upon exercise of the warrants from the date the warrants become exercisable and to maintain a current prospectus relating to that common stock until the warrants expire or are redeemed, and we intend to comply with our undertaking, we cannot assure you that we will be able to do so or that we will be able to prevent the warrants from expiring worthless. Holders of warrants may not be able to exercise their warrants, the market for the warrants may be limited and the warrants may be deprived of any value if there is no effective registration statement covering the shares of common stock issuable upon exercise of the warrants or the prospectus relating to the common stock issuable upon the exercise of the warrants is not current. In such event, the holder of a unit will have paid the entire unit purchase price for the common stock contained in the unit as the warrant will be worthless. Holders of warrants will not be entitled to a cash settlement for their warrants if we fail to have an effective registration statement or a current prospectus available relating to the common stock issuable upon exercise of the warrants, and holders only remedies in such event will be those available if we are found by a court of law to have breached our contractual obligation to them by failing to do so. You will not be entitled to protections normally afforded to investors in blank check companies. Since the net proceeds of this offering are intended to be used to complete a business combination with a target business that has not been identified, we may be deemed a blank check company under the United States securities laws. However, on successful consummation of this offering we will have net tangible assets in excess of $5 million and will at that time file a Form 8-K with the SEC that includes an audited balance sheet demonstrating this fact. The SEC has taken the position that we are exempt from Rule 419 under the Securities Act, which is designed to protect investors in blank check companies. Accordingly, investors in this offering will not receive the benefits or protections of Rule 419. Among other things, this means our units will be immediately tradable and we will have a longer period of time to complete a business combination in some circumstances than do companies subject to Rule 419. Moreover, offerings subject to Rule 419 would prohibit the release of any interest earned on funds held in the trust account to us unless and until the funds in the trust account were released to us in connection with our consummation of an initial business combination. For a more detailed comparison of our offering to offerings that comply with Rule 419, please see Proposed Business Comparison of This Offering to Those of Blank Check Companies Subject to Rule 419. Under Delaware law, a court could invalidate the requirement that certain provisions of our amended and restated certificate of incorporation be amended only by unanimous consent of our stockholders; amendment of those provisions could reduce or eliminate the protections they afford to our stockholders. Our amended and restated certificate of incorporation contains certain requirements and restrictions relating to this offering that will apply to us until the consummation of our initial business combination. Specifically, our amended and restated certificate of incorporation provides, among other things, that: upon the consummation of this offering, $146,975,000, or $168,575,000 if the underwriters over-allotment option is exercised in full (comprising (i) $142,975,000 of the net proceeds of this offering, including $4.5 million of deferred underwriting discounts and commissions (or $164,575,000 if the underwriters over-allotment option is exercised in full, including $5.175 million of deferred underwriting discounts and commissions) and (ii) $4 million of the proceeds from the sale of the founder s warrants) shall be placed into the trust account; prior to the consummation of our initial business combination, we shall submit the initial business combination to our stockholders for approval; we may consummate our initial business combination if approved by a majority of the shares of common stock voted by our public stockholders at a duly held stockholders meeting, and public stockholders owning up to 20% of the shares (minus one share) sold in this offering have voted against the business combination and exercise their conversion rights; if a proposed initial business combination is approved and consummated, public stockholders who exercised their conversion rights and voted against the initial business combination may convert their shares into cash at the conversion price on the closing date of such initial business combination; if our initial business combination is not consummated within 24 months of the date of this prospectus, then our existence will terminate and we will distribute all amounts in the trust account (except for such amounts as are paid to creditors or reserved for payment to creditors in accordance with Delaware law) and any net assets remaining outside the trust account on a pro rata basis to all of our public stockholders; we may not consummate any other business combination, merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar transaction prior to our initial business combination; prior to our initial business combination, we may not issue additional stock that participates in any manner in the proceeds of the trust account, or that votes as a class with the common stock sold in this offering on a business combination; our audit committee shall monitor compliance on a quarterly basis with the terms of this offering and, if any noncompliance is identified, the audit committee is charged with the immediate responsibility to take all action necessary to rectify such noncompliance or otherwise cause compliance with the terms of this offering; the audit committee shall review and approve all payments made to our officers, directors and our and their affiliates, other than the payment of an aggregate of $7,500 per month to GSCP (NJ) Holdings, L.P. for office space, secretarial and administrative services, and any payments made to members of our audit committee will be reviewed and approved by our board of directors, with any interested director abstaining from such review and approval; and we will not enter into our initial business combination with any entity in which any of our officers, directors or GSC Group or its affiliates has a financial interest. Our amended and restated certificate of incorporation requires that prior to the consummation of our initial business combination we obtain unanimous consent of our stockholders to amend these provisions. However, the validity of unanimous consent provisions under Delaware law has not been settled. A court could conclude that the unanimous consent requirement constitutes a practical prohibition on amendment in violation of the stockholders statutory rights to amend the corporate charter. In that case, these provisions could be amended without unanimous consent, and any such amendment could reduce or eliminate the protection these provisions afford to our stockholders. However, we view all of the foregoing provisions as obligations to our stockholders. Neither we nor our board of directors will propose any amendment to these provisions, or support, endorse or recommend any proposal that stockholders amend any of these provisions at any time prior to the consummation of our initial business combination (subject to any fiduciary obligations our management or board may have). In addition, we believe we have an obligation in every case to structure our initial business combination so that not less than 20% of the shares sold in this offering (minus one share) have the ability to be converted to cash by public stockholders exercising their conversion rights and the business combination will still go forward. If third parties bring claims against us, or if we go bankrupt, the proceeds held in trust could be reduced and the per-share liquidation price received by you will be less than $9.80 per share (or approximately $9.77 per share if the over-allotment option is exercised in full). Our placing of funds in the trust account may not protect those funds from third-party claims against us. Although prior to completion of our initial business combination, we will seek to have all third parties (including any vendors and any other entities with which we enter into a contractual relationship following consummation of this offering) or any prospective target businesses enter into valid and enforceable agreements with us waiving any right, title, interest or claim of any kind in or to any assets held in the trust account, there is no guarantee that they will execute such agreements. We have not engaged any such third parties or asked for or obtained any such waiver agreements at this time. It is also possible that such waiver agreements would be held unenforceable and there is no guarantee that the third parties would not otherwise challenge the agreements and later bring claims against the trust account for amounts owed them. In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with us and will not seek recourse against the trust account for any reason. Further, we could be subject to claims from parties not in contract with us who have not executed a waiver, such as a third party claiming tortious interference as a result of our initial business combination. Accordingly, the proceeds held in trust could be subject to claims that would take priority over the claims of our public stockholders and, as a result, the per-share liquidation price could be less than $9.80 (or $9.77 per share if the over-allotment option is exercised in full). Our founding stockholder has agreed that it will be liable to the Company if and to the extent claims by third parties reduce the amounts in the trust account available for payment to our stockholders in the event of a liquidation and the claims are made by a vendor for services rendered or products sold to us, a third party with which we entered into a contractual relationship following consummation of this offering or any prospective target business. However, the agreement entered into by our founding stockholder specifically provides for two exceptions to the indemnity given: there will be no liability (1) as to any claimed amounts owed to a third party who executed a valid and enforceable waiver, or (2) as to any claims under our indemnity of the underwriters of this offering against certain liabilities, including liabilities under the Securities Act. Furthermore, there could be claims from parties other than vendors, third parties with which we entered into a contractual relationship or target businesses that would not be covered by the indemnity from our founding stockholder, such as shareholders and other claimants who are not parties in contract with us who file a claim for damages against us. Based on representations as to its status as an accredited investor (as such term is defined in Regulation D under the Securities Act) and that it has sufficient funds available to it to satisfy its obligations to indemnify us, we currently believe that our founding stockholder is capable of funding its indemnity obligations, even though we have not asked it to reserve for such an eventuality. We cannot assure you, however, that it would be able to satisfy those obligations. In addition, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us that is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. To the extent any bankruptcy claims deplete the trust account, we cannot assure you that we will be able to return at least $9.80 per share (or approximately $9.77 per share if the over-allotment option is exercised in full) to our public stockholders. Since we have not yet selected a particular industry or any target business with which to complete our initial business combination, you will be unable to currently ascertain the merits or risks of the industry or business in which we may ultimately operate. We may consummate an initial business combination with a company in any industry we choose and we are not limited to any particular industry or type of business. Accordingly, there is no current basis for you to evaluate the possible merits or risks of the particular industry in which we may ultimately operate or the target business or businesses with which we may ultimately enter an initial business combination. Although the members of our management team will evaluate the risks inherent in a particular target business, we cannot assure you that we will properly ascertain or assess all of the significant risks present in that target business. Even if we properly assess those risks, some of them may be outside of our control or ability to affect. We also cannot assure you that an investment in our units will not ultimately prove to be less favorable to investors in this offering than a direct investment, if an opportunity were available, in a target business. For a more complete discussion of our selection of a target business, please see Proposed Business Effecting a Business Combination. Our stockholders may be held liable for third parties claims against us to the extent of distributions received by them following our dissolution. Our amended and restated certificate of incorporation provides that we will continue in existence only until 24 months from the date of this prospectus. If we consummate our initial business combination prior to that date, we will seek to amend this provision to permit our continued existence. If we have not completed our initial business combination by that date, our corporate existence will cease except for the purposes of winding up our affairs and liquidating pursuant to Section 278 of the Delaware General Corporation Law. Under the Delaware General Corporation Law, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by those stockholders in a dissolution. However, if the corporation complies with certain procedures intended to ensure that it makes reasonable provision for all claims against it, the liability of stockholders with respect to any claim against the corporation is limited to the lesser of such stockholder s pro rata share of the claim or the amount distributed to the stockholder. In addition, if the corporation undertakes additional specified procedures, including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidation distributions are made to stockholders, any liability of stockholders would be barred with respect to any claim on which an action, suit or proceeding is not brought by the third anniversary of the dissolution (or such longer period directed by the Delaware Court of Chancery). While we intend to adopt a plan of distribution making reasonable provision for claims against the company in compliance with the Delaware General Corporation Law, we do not intend to comply with these additional procedures, as we instead intend to distribute the balance in the trust account to our public stockholders as promptly as practicable following termination of our corporate existence. Accordingly, any liability our stockholders may have could extend beyond the third anniversary of our dissolution. We cannot assure you that any reserves for claims and liabilities that we believe to be reasonably adequate when we adopt our plan of dissolution and distribution will suffice. If such reserves are insufficient, stockholders who receive liquidation distributions may subsequently be held liable for claims by creditors of the company to the extent of such distributions. We will depend on the limited funds available outside of the trust account and a portion of the interest earned on the trust account balance to fund our search for a target business or businesses and to complete our initial business combination. Of the net proceeds of this offering, $50,000 is available to us initially outside the trust account to fund our working capital requirements. We will depend on sufficient interest being earned on the proceeds held in the trust account to provide us with the additional working capital we will need to identify one or more target businesses and to complete our initial business combination. While we are entitled to have released to us for such purposes interest income of up to a maximum of $2.0 million, a substantial decline in interest rates may result in our having insufficient funds available with which to structure, negotiate or close an initial business combination. In such event, we could seek to borrow funds or raise additional investments from our officers and directors or others to operate, although our officers and directors are under no obligation to advance funds to, or to invest in, us. If we have insufficient funds available, we may be forced to liquidate. Because of our limited resources and the significant competition for business combination opportunities we may not be able to consummate an attractive initial business combination. We expect to encounter intense competition from other entities having a business objective similar to ours, including venture capital funds, leveraged buyout funds, private equity funds and public and private companies (including blank check companies like ours). Many of these entities are well established and have extensive experience in identifying and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human and other resources than we do and our financial resources will be relatively limited when contrasted with those of many of these competitors. While we believe that there are numerous potential target businesses that we could acquire, our ability to compete in acquiring certain sizable target businesses will be limited by our available financial resources. This inherent competitive limitation gives others an advantage in pursuing the acquisition of certain target businesses. In addition, the fact that only a limited number of blank check companies have completed a business combination may be an indication that there are only a limited number of attractive target businesses available to such entities or that many potential target businesses may not be inclined to enter into business combinations with publicly held blank check companies like ours. Further: our obligation to seek shareholder approval of a business combination may materially delay the consummation of a transaction; our obligation to convert into cash up to 20% of the shares of common stock held by public stockholders (minus one share) in certain instances may materially reduce the resources available for a business combination; and our outstanding warrants, and the future dilution they potentially represent, may not be viewed favorably by certain target businesses. Any of these obligations may place us at a competitive disadvantage in successfully negotiating a business combination. We cannot assure you that we will be able to successfully compete for an attractive business combination. Additionally, because of these factors, we cannot assure you that we will be able to effectuate a business combination within the required time periods. If we are unable to find a suitable target business within the required time periods, we will be forced to liquidate. We may face significant competition from numerous other companies with a business plan similar to ours seeking to effectuate a business combination. There are numerous other blank check companies that have recently completed initial public offerings or filed registration statements with the SEC seeking to go public. We believe that as of May 29, 2007, 53 of the blank check companies that completed initial public offerings were seeking targets for an initial business combination, and that 35 blank check companies were in registration and upon completion of their offering will be seeking targets for initial business combinations. While some of these blank check companies have specific industries in which they must complete a business combination, approximately 10 (of which, 2 were in registration as of May 29, 2007) may consummate a business combination in any industry they choose, as in our case. We may therefore be subject to competition from these companies, which will increase demand for potential target companies to combine with in an initial business combination. Further, the fact that only a limited number of blank check companies have completed a business combination may be an indication that there are limited attractive targets available to such companies or that many potential target businesses may not be inclined to enter into business combinations with publicly held blank check companies like us. We believe that approximately five blank check companies have completed initial public offerings and then dissolved or begun proceedings to dissolve as a result of being unable to complete an initial business combination within the required time. We cannot assure you that we will be able to successfully compete for an attractive business combination or that we will be able to effectuate a business combination within the required 24-month time period. If we are unable to find a suitable target business within such time period, we will be forced to liquidate. We also expect to face significant competition from companies other than blank check companies. See --Because of our limited resources and the significant competition for business combination opportunities we may not be able to consummate an attractive initial business combination. We may be unable to obtain additional financing if necessary to complete our initial business combination or to fund the operations and growth of a target business, which could compel us to restructure or abandon a particular business combination. We believe that the net proceeds of this offering and the private placement of the initial founder s warrants will be sufficient to allow us to consummate our initial business combination. However, because we have no oral or written agreements or letters of intent to engage in a business combination with any entity, we cannot assure you that we will be able to complete our initial business combination or that we will have sufficient capital with which to complete a combination with a particular target business. If the net proceeds of this offering and the private placement of the initial founder s warrants are not sufficient to facilitate a particular business combination because: of the size of the target business; the offering proceeds not in trust and funds available to us from interest earned on the trust account balance are insufficient to fund our search for and negotiations with a target business; or we must convert into cash a significant number of shares of common stock owned by public stockholders who elect to exercise their conversion rights, we will be required to seek additional financing. We cannot assure you that such financing will be available on acceptable terms, if at all. If additional financing is unavailable to consummate a particular business combination, we would be compelled to restructure or abandon the combination and seek an alternative target business. In addition, it is possible that we could use a portion of the funds not in the trust account (including amounts we borrowed, if any) to make a deposit, down payment or fund a no-shop provision with respect to a particular proposed business combination, although we do not have any current intention to do so. In the event that we were ultimately required to forfeit such funds, and we had already used up the funds allocated to due diligence and related expenses in connection with the aborted transaction, we could be left with insufficient funds to continue searching for, or conduct due diligence with respect to, other potential target businesses. Even if we do not need additional financing to consummate a business combination, we may require additional capital in the form of debt, equity, or a combination of both to operate or grow any potential business we may acquire. There can be no assurance that we will be able to obtain such additional capital if it is required. If we fail to secure such financing, this failure could have a material adverse effect on the operations or growth of the target business. None of our officers or directors or any other party is required to provide any financing to us in connection with, or following, our initial business combination. If we issue capital stock or convertible debt securities to complete our initial business combination, your equity interest in us could be reduced or there may be a change in control of our company. Our amended and restated certificate of incorporation authorizes the issuance of up to 200,000,000 shares of common stock, par value $0.001 per share, and 1,000,000 shares of preferred stock, par value $0.0001 per share. Immediately after this offering (assuming no exercise of the underwriters over-allotment option), there will be 162,250,000 authorized but unissued shares of our common stock available for issuance (after appropriate reservation for the issuance of shares upon full exercise of our outstanding warrants, including the initial founder s warrants), and all of the shares of preferred stock available for issuance. We have no commitments as of the date of this offering to issue any additional securities. We may issue a substantial number of additional shares of our common stock or may issue preferred stock, or a combination of both, including through convertible debt securities, to complete a business combination. Our issuance of additional shares of common stock or any preferred stock: may significantly reduce your equity interest in us; will likely cause a change in control if a substantial number of our shares of common stock are issued, which may among other things limit our ability to use any net operating loss carry forwards we have, and may result in the resignation or removal of our officers and directors; and may adversely affect the then-prevailing market price for our common stock. The value of your investment in us may decline if any of these events occur. If we issue debt securities to acquire or finance a target business, our liquidity may be adversely affected and the combined business may face significant interest expense. We may elect to enter into a business combination that requires us to issue debt securities as part of the purchase price for a target business. If we issue debt securities, such issuances may result in an increase in interest expense for the post-combination business and may adversely affect our liquidity in the event of: a default and foreclosure on our assets if our operating cash flow after a business combination were insufficient to pay principal and interest obligations on our debt; an acceleration, which could occur even if we are then current in our debt service obligations if the debt securities have covenants that require us to meet certain financial ratios or maintain designated reserves, and such covenants are breached without waiver or renegotiation; a required immediate payment of all principal and accrued interest, if any, if the debt securities are payable on demand; or our inability to obtain any additional financing, if necessary, if the debt securities contain covenants restricting our ability to incur indebtedness. For a more complete discussion of alternative structures for a business combination and the possibility that we may incur debt to finance our initial business combination, please see Proposed Business Effecting a Business Combination Selection of a target business and structuring of our initial business combination. Our founding stockholder will own approximately 20% of our shares of common stock and may influence certain actions requiring a stockholder vote. Our founding stockholder will own approximately 20% of our issued and outstanding shares of common stock (assuming it does not purchase our securities in this offering or in the open market) when this offering is completed. Our founding stockholder and Messrs. Goodwin, McKinnon, and Mueller have agreed, in connection with the stockholder vote required to approve our initial business combination, to vote the initial founder s shares in accordance with the majority of the shares of common stock voted by the public stockholders, and our founding stockholder and each of our officers and directors has also agreed that if it, he or she acquires shares of common stock in or following this offering, it, he or she will vote all such acquired shares in favor of our initial business combination. Accordingly, shares of common stock owned by our founding stockholder will not have the same voting or conversion rights as our public stockholders with respect to a potential business combination, and neither our founding stockholder, nor any of our officers or directors will be able to exercise the conversion rights with respect to any of our shares that it, he or she may acquire prior to, in or after this offering. Upon the consummation of this offering, our board of directors will be divided into three classes, each of which will generally serve for a term of three years, with only one class of directors being elected in each year. We may consummate an initial business combination before there is an annual meeting of stockholders to elect new directors, in which case all of the current directors will continue in office at least until the consummation of our initial business combination. If there is an annual meeting of stockholders, as a consequence of our staggered board of directors, only a minority of the board of directors will be considered for election and our founding stockholder will have considerable influence on the outcome of that election. Accordingly, our founding stockholder will continue to exert control at least until the consummation of the initial business combination. While our founding stockholder does not intend to purchase units in this offering, neither our founding stockholder nor any of its affiliates is prohibited from purchasing units in this offering or our common stock in the aftermarket. If they do so, our founding stockholder and its affiliates will have a greater influence on the vote taken in connection with our initial business combination. If our current directors remain after our initial business combination they may have conflicts of interest. Our ability to effect our initial business combination successfully will be largely dependent upon the efforts of our officers and directors. While Messrs. Frank and Kaufman will resign as officers following consummation of our initial business combination, Messrs. Eckert, Frank, Goodwin, Kaufman, McKinnon and Mueller may remain as directors of the combined entity. Since it is possible that a director may remain after a business combination, a director may have a conflict of interest if such director is more likely to remain as a director or receive an attractive compensation arrangement in connection with a combination with one potential target business versus another. Such interests, if any, may influence the selection of the ultimate target for our initial business combination. We may have only limited ability to evaluate the management of the target business. We may have only limited ability to evaluate the management of the target business. Although we intend to closely scrutinize the management of a prospective target business in connection with evaluating the desirability of effecting a business combination, we cannot assure you that our assessment of management will prove to be correct. These individuals may be unfamiliar with the requirements of operating a public company and the securities laws, which could increase the time and resources we must expend to assist them in becoming familiar with the complex disclosure and financial reporting requirements imposed on U.S. public companies. This could be expensive and time-consuming and could lead to various regulatory issues that may adversely affect the price of our stock. We may seek to effect our initial business combination with one or more privately held companies, which may present certain challenges to us, including the lack of available information about these companies. In pursuing our acquisition strategy, we may seek to effect our initial business combination with one or more privately held companies. By definition, very little public information exists about these companies, and we could be required to make our decision on whether to pursue a potential initial business combination on the basis of limited information. We may compete with investment vehicles of GSC Group for access to GSC Group. GSC Group has sponsored and currently manages various investment vehicles, and may in the future sponsor or manage additional investment vehicles which, in each case, could result in us competing for access to the benefits that we expect our relationship with GSC Group to provide to us. Upon completion of our initial business combination we may compete with one or more businesses in which GSC Group, its affiliates and/or our management have an interest, which could result in a conflict of interest that may adversely affect us. GSC Group entities, including our founding stockholder, acquire, hold and sell investments in businesses across a broad range of industries on behalf of managed funds and other investment vehicles. Upon completion of our initial business combination, if consummated, we may compete with one or more of these businesses in which GSC Group or its affiliates have an investment or other pecuniary interest, resulting in conflicts of interest. Conflicts of interest may also arise where our directors or other members of our management have affiliations with our competitors. In the case of any such conflicts, your interests may differ from those of the GSC Group entity or individual with the conflict, as such entity or individual may have a greater economic interest in our competitor than in us, or may believe that our competitor has better prospects than us. In such event, that entity or individual may devote more resources, including time and attention, to our competitor than to us, which may adversely affect our operations and financial condition and, ultimately, the value of your investment in us. We expect to rely upon our access to GSC Group investment professionals in completing an initial business combination. We expect that we will depend, to a significant extent, on our access to the investment professionals of GSC Group and the information and deal flow generated by GSC Group s investment professionals in the course of their investment and portfolio management activities to identify and complete our initial business combination. Consequently, the departure of a significant number of the investment professionals of GSC Group could have a material adverse effect on our ability to consummate an initial business combination. Members of our management team and our directors are and may in the future become affiliated with entities engaged in business activities similar to those intended to be conducted by us, and may have conflicts of interest in allocating their time and business opportunities. Although GSCG and Mr. Eckert, our Chairman, have entered into non-compete agreements with us providing that until the earlier of our initial business combination or our liquidation, neither GSC Group nor Mr. Eckert will become affiliated with any other blank check company, other members of our management and our directors may in the future become affiliated with other entities engaged in business activities similar to those intended to be conducted by us. As a result, members of our management team may become aware of business opportunities that may be appropriate for presentation to us as well as the other entities with which they are or may be affiliated. While we have entered into a business opportunity right of first review agreement with GSCG which provides that from the effective date of the registration statement which includes this prospectus until the earlier of the consummation of our initial business combination or our liquidation in the event we do not consummate an initial business combination, we will have a right of first review with respect to business combination opportunities of GSC Group with an enterprise value of $150 million or more that GSC Group first becomes aware of after the effective date (other than any investment opportunities in respect of companies in bankruptcy, or financially or operationally distressed companies; companies targeted for acquisition by any company in which an investment vehicle managed by GSC Group has an equity investment; and any entity in which any of our officers, directors or GSC Group or its affiliates has a financial interest), due to those existing and future affiliations, members of our management team and our directors may have fiduciary obligations to present potential business opportunities to those entities prior to presenting them to us which could cause additional conflicts of interest. Accordingly, members of our management team may have conflicts of interest in determining to which entity a particular business opportunity should be presented. Moreover, members of our management team are not obligated to expend a specific number of hours per week or month on our affairs. For a complete discussion of our management team s business affiliations and the potential conflicts of interest that you should be aware of, please see Management Directors and Executive Officers, Management Conflicts of Interest and Certain Transactions. We cannot assure you that these conflicts will be resolved in our favor. We may use resources in researching acquisitions that are not consummated, which could materially and adversely affect subsequent attempts to effect our initial business combination. We expect that the investigation of each specific target business and the negotiation, drafting, and execution of relevant agreements, disclosure documents, and other instruments will require substantial management time and attention and substantial costs for accountants, attorneys, and others. If a decision is made not to complete a specific business combination, the costs incurred up to that point for the proposed transaction likely would not be recoverable. Furthermore, even if an agreement is reached relating to a specific target business, we may fail to consummate the transaction for any number of reasons, including reasons beyond our control, such as that 20% or more of our public stockholders vote against the transaction and opt to convert their stock into a pro rata share of the trust account even if a majority of our stockholders approve the transaction. Any such event will result in a loss to us of the related costs incurred, which could materially and adversely affect subsequent attempts to consummate an initial business combination. Interest income from the trust account may not be sufficient to pay for dissolution and liquidation of the trust. We expect that all costs and expenses associated with implementing any plan of distribution, as well as payments to any creditors, would be funded from amounts remaining out of the $50,000 of proceeds held outside the trust account and from the $2.0 million in interest income on the balance of the trust account that may be released to us to fund our working capital requirements. However, if those funds were not sufficient to cover the costs and expenses associated with implementing any plan of distribution, to the extent that there was any interest accrued in the trust account not required to pay income taxes on interest income earned on the trust account balance, we could request that the trustee release to us an additional amount of up to $75,000 of such accrued interest to pay those costs and expenses. There can be no assurance that any such additional interest will be available, or if available, will be sufficient to cover the costs of our dissolution. While our founding stockholder has agreed to reimburse us for certain costs in such a case, such reimbursement excludes special, indirect or consequential costs, such as litigation, pertaining to the dissolution and liquidation. Because the initial founder s shares will not participate in liquidation distributions by us, our founding stockholder, directors and our management team may have a conflict of interest in deciding if a particular target business is a good candidate for a business combination. Holders of the initial founder s shares have waived their right to receive distributions with respect to the initial founder s shares if we liquidate because we fail to complete a business combination. Those shares of common stock and all of the warrants owned by our founding stockholder will be worthless if we do not consummate our initial business combination. Since Messrs. Eckert, Frank and Kaufman have an ownership interest in GSC Group and consequently an indirect ownership interest in us and Messrs. Goodwin, McKinnon and Mueller have a direct ownership interest in us, they may have a conflict of interest in determining whether a particular target business is appropriate for us and our stockholders. These ownership interests may influence their motivation in identifying and selecting a target business and timely completing an initial business combination. The exercise of discretion by our officers and directors in identifying and selecting one or more suitable target businesses may result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination are appropriate and in our stockholders best interest. Our officers and directors interests in obtaining reimbursement for any out-of-pocket expenses incurred by them may lead to a conflict of interest in determining whether a particular target business is appropriate for an initial business combination and in the public stockholders best interest. Unless we consummate our initial business combination, our officers and directors and GSC Group and its employees will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the amount of available proceeds not deposited in the trust account and the amount of interest income from the trust account up to a maximum of $2.0 million that may be released to us as working capital. These amounts are based on management s estimates of the funds needed to finance our operations for the next 24 months and to pay expenses in identifying and consummating our initial business combination. Those estimates may prove to be inaccurate, especially if a portion of the available proceeds is used to make a down payment in connection with our initial business combination or pay exclusivity or similar fees or if we expend a significant portion in pursuit of an initial business combination that is not consummated. Our officers and directors may, as part of any business combination, negotiate the repayment of some or all of any such expenses. If the target business s owners do not agree to such repayment, this could cause our management to view such potential business combination unfavorably, thereby resulting in a conflict of interest. The financial interest of our officers, directors or GSC Group or its affiliates could influence our officers and directors motivation in selecting a target business and therefore there may be a conflict of interest when determining whether a particular business combination is in the stockholders best interest. We will probably complete only one business combination with the proceeds of this offering and the private placement of the initial founder s warrants, meaning our operations will depend on a single business. The net proceeds from this offering and the sale of the initial founder s warrants will provide us with approximately $142,475,000 that we may use to complete a business combination. Our initial business combination must involve a target business or businesses with a fair market value of at least 80% of the amount held in our trust account at the time of such business combination (excluding deferred underwriting discounts and commissions of $4.5 million, or $5.175 million if the over-allotment option is exercised in full). We may not be able to acquire more than one target business because of various factors, including the existence of complex accounting issues and the requirement that we prepare and file pro forma financial statements with the SEC that present operating results and the financial condition of several target businesses as if they had been operated on a combined basis. Additionally, we may encounter numerous logistical issues if we pursue multiple target businesses, including the difficulty of coordinating the timing of negotiations, proxy statement disclosure and closings. We may also be exposed to the risk that our inability to satisfy conditions to closing with one or more target businesses would reduce the fair market value of the remaining target businesses in the combination below the required threshold of 80% of the amount held in our trust account (excluding deferred underwriting discounts and commissions of $4.5 million, or $5.175 million if the over-allotment option is exercised in full). Due to these added risks, we are more likely to choose a single target business with which to pursue a business combination than multiple target businesses. Unless we combine with a target business in a transaction in which the purchase price consists substantially of common stock and/or preferred stock, it is likely we will complete only our initial business combination with the proceeds of this offering and the private placement of the initial founder s warrants. Accordingly, the prospects for our success may depend solely on the performance of a single business. If this occurs, our operations will be highly concentrated and we will be exposed to higher risk than other entities that have the resources to complete several business combinations, or that operate in diversified industries or industry segments. If we do not conduct an adequate due diligence investigation of a target business with which we combine, we may be required subsequently to take write downs or write-offs, restructuring, and impairment or other charges that could have a significant negative effect on our financial condition, results of operations and our stock price, which could cause you to lose some or all of your investment. In order to meet our disclosure and financial reporting obligations under the federal securities laws, and in order to develop and seek to execute strategic plans for how we can increase the profitability of a target business, realize operating synergies or capitalize on market opportunities, we must conduct a due diligence investigation of one or more target businesses. Intensive due diligence is time consuming and expensive due to the operations, accounting, finance and legal professionals who must be involved in the due diligence process. We may have limited time to conduct such due diligence due to the requirement that we complete our initial business combination within 24 months after the consummation of this offering. Even if we conduct extensive due diligence on a target business with which we combine, we cannot assure you that this diligence will uncover all material issues relating to a particular target business, or that factors outside of the target business and outside of our control will not later arise. If our diligence fails to identify issues specific to a target business or the environment in which the target business operates, we may be forced to write-down or write-off assets, restructure our operations, or incur impairment or other charges that could result in our reporting losses. Even though these charges may be non-cash items and not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about us or our common stock. In addition, charges of this nature may cause us to violate net worth or other covenants to which we may be subject as a result of assuming pre-existing debt held by a target business or by virtue of our obtaining post-combination debt financing. You will experience immediate and substantial dilution from the purchase of our common stock. The difference between the public offering price per share of our common stock (assuming we allocate all of the unit purchase price to the common stock and none to the warrant included in the unit) and the pro forma net tangible book value per share of our common stock after this offering, constitutes dilution to you and other investors in this offering. The fact that our founding stockholder acquired the initial founder s shares at a significantly lower price than the price of the units being sold in this offering contributed to this dilution. Our founding stockholder acquired 3,750,000 initial founder s shares (after giving effect to the recapitalization) for a purchase price of $25,000, equivalent to a per-share price of approximately $.007. A total of 56,250 (after giving effect to the recapitalization) of the 3,750,000 initial founder s shares were subsequently sold by our founding stockholder to three of our directors, Messrs. Goodwin, McKinnon and Mueller, in private transactions. Assuming this offering is completed and no value is ascribed to the warrants included in the units, you and the other new investors will incur an immediate and substantial dilution of approximately 28.2%, or $2.82 per share (the difference between the pro forma net tangible book value per share after this offering of $7.18, and the initial offering price of $10.00 per unit). Please see Dilution for additional information. Our outstanding warrants may adversely affect the market price of our common stock and make it more difficult to effect our initial business combination. The units being sold in this offering include warrants to purchase 15,000,000 shares of common stock (or 17,250,000 shares of common stock if the over-allotment option is exercised in full). We will also sell to our founding stockholder warrants to purchase an aggregate of 4,000,000 shares of our common stock, prior to the closing of this offering. Such purchase will be a condition to the completion of this offering pursuant to the underwriting agreement to be entered into between the underwriters and us. If we issue common stock to complete our initial business combination, the potential issuance of additional shares of common stock on exercise of these warrants could make us a less attractive acquisition vehicle to some target businesses. This is because exercise of any warrants will increase the number of issued and outstanding shares of our common stock and reduce the value of the shares issued to complete our initial business combination. Our warrants may make it more difficult to complete our initial business combination or increase the purchase price sought by one or more target businesses. Additionally, the sale or possibility of the sale of the shares underlying the warrants could have an adverse effect on the market price for our common stock or our units, or on our ability to obtain other financing. If and to the extent these warrants are exercised, you may experience dilution to your holdings. The grant of registration rights to our founding stockholder and Messrs. Goodwin, McKinnon and Mueller may make it more difficult to complete our initial business combination, and the future exercise of such rights may adversely affect the market price of our common stock. Pursuant to an agreement to be entered into concurrently with the issuance and sale of the securities in this offering, our founding stockholder and Messrs. Goodwin, McKinnon and Mueller can demand that we register the resale of the initial founder s shares and our founding stockholder can demand that we register the initial founder s warrants and the shares of common stock issuable upon exercise of the initial founder s warrants. The registration rights will be exercisable with respect to the initial founder s shares at any time after the date on which the relevant securities are no longer subject to transfer restrictions, and with respect to the warrants and the underlying shares of common stock after the warrants become exercisable by their terms. We will bear the cost of registering these securities. If our founding stockholder and Messrs. Goodwin, McKinnon and Mueller exercise their registration rights in full, there will be an additional 3,750,000 shares of common stock and up to 4,000,000 shares of common stock issuable on exercise of the warrants eligible for trading in the public market. The registration and availability of such a significant number of securities for trading in the public market may have an adverse effect on the market price of our common stock. In addition, the existence of the registration rights may make our initial business combination more costly or difficult to conclude. This is because the stockholders of the target business may increase the equity stake they seek in the combined entity or ask for more cash consideration to offset the negative impact on the market price of our common stock that is expected when the securities owned by our founding stockholder or Messrs. Goodwin, McKinnon or Mueller are registered. If adjustments are made to the warrants, you may be deemed to receive a taxable distribution without the receipt of any cash. U.S. holders of units or warrants may, in certain circumstances, be deemed to have received distributions includible in income if adjustments are made to the warrants, even though holders would have not received any cash or property as a result of such adjustments. In certain circumstances, the failure to provide for such an adjustment may also result in a constructive distribution to you. In addition, non-U.S. holders of units or warrants may, in certain circumstances, be deemed to have received a distribution subject to U.S. federal withholding tax requirements. See Material U.S. Federal Income and Estate Tax Consequences for more detailed information. There is currently no market for our securities and a market for our securities may not develop, which would adversely affect the liquidity and price of our securities. There is currently no market for our securities. Investors therefore have no access to information about prior market history on which to base their investment decision. Following this offering, the price of our securities may vary significantly due to our reports of operating losses, one or more potential business combinations, the filing of periodic reports with the SEC, and general market or economic conditions. Furthermore, an active trading market for our securities may never develop or, if developed, it may not be sustained. You may be unable to sell your securities unless a market can be established and sustained. If we are deemed to be an investment company, we must meet burdensome compliance requirements and restrictions on our activities, which may increase the difficulty of completing a business combination. If we are deemed to be an investment company under the Investment Company Act of 1940 (the Investment Company Act ), the nature of our investments and the issuance of our securities may be subject to various restrictions. These restrictions may make it difficult for us to complete our initial business combination. In addition, we may be subject to burdensome compliance requirements and may have to: register as an investment company; adopt a specific form of corporate structure; and report, maintain records and adhere to voting, proxy, disclosure and other requirements. We do not believe that our planned principal activities will subject us to the Investment Company Act. In this regard, our agreement with the trustee states that proceeds in the trust account will be invested only in government securities and one or more money market funds, selected by us, which invest principally in either short-term securities issued or guaranteed by the United States having a rating in the highest investment category granted thereby by a recognized credit rating agency at the time of acquisition or tax exempt municipal bonds issued by governmental entities located within the United States or otherwise meeting certain requirements of the Investment Company Act. This investment restriction is intended to facilitate our not being considered an investment company under the Investment Company Act. If we are deemed to be subject to the Investment Company Act, compliance with these additional regulatory burdens would increase our operating expenses and could make our initial business combination more difficult to complete. The loss of Mr. Eckert could adversely affect our ability to complete our initial business combination. Our ability to consummate a business combination is dependent to a large degree upon Mr. Eckert. We believe that our success depends on his continued service to us, at least until we have consummated a business combination. As Chairman and Chief Executive Officer of GSC Group, Mr. Eckert has incentives to remain with us. Nevertheless, we do not have an employment agreement with him, or key-man insurance on his life. He may choose to devote his time to other affairs, or may become unavailable to us for reasons beyond his control, such as death or disability. The unexpected loss of his services for any reason could have a detrimental effect on us. An investor will only be able to exercise a warrant if the issuance of common stock upon such exercise has been registered or qualified or is deemed exempt under the securities laws of the state of residence of the holder of the warrants. No warrants will be exercisable and we will not be obligated to issue shares of common stock unless the common stock issuable upon such exercise has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Because the exemptions from qualification in certain states for resales of warrants and for issuances of common stock by the issuer upon exercise of a warrant may be different, a warrant may be held by a holder in a state where an exemption is not available for issuance of common stock upon an exercise and the holder will be precluded from exercise of the warrant. At the time that the warrants become exercisable (following our completion of an initial business combination), we expect to either continue to be listed on a national securities exchange, which would provide an exemption from registration in every state, or we would register the warrants in every state (or seek another exemption from registration in such states). Accordingly, we believe holders in every state will be able to exercise their warrants as long as our prospectus relating to the common stock issuable upon exercise of the warrants is current. However, we cannot assure you of this fact. As a result, the warrants may be deprived of any value, the market for the warrants may be limited and the holders of warrants may not be able to exercise their warrants and they may expire worthless if the common stock issuable upon such exercise is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside. The American Stock Exchange may delist our securities, which could limit investors ability to transact in our securities and subject us to additional trading restrictions. We will seek to have our securities approved for listing on the American Stock Exchange upon consummation of this offering. We cannot assure you that our securities will be listed and, if listed, will continue to be listed on the American Stock Exchange. Additionally, it is likely that the American Stock Exchange would require us to file a new initial listing application and meet its initial listing requirements, as opposed to its more lenient continued listing requirements, at the time of our initial business combination. We cannot assure you that we will be able to meet those initial listing requirements at that time. If the American Stock Exchange does not list our securities, or subsequently delists our securities from trading, we could face significant consequences, including: a limited availability for market quotations for our securities; reduced liquidity with respect to our securities; a determination that our common stock is a penny stock, which will require brokers trading in our common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our common stock; limited amount of news and analyst coverage for our company; and a decreased ability to issue additional securities or obtain additional financing in the future. In addition, we would no longer be subject to American Stock Exchange rules, including rules requiring us to have a certain number of independent directors and to meet other corporate governance standards. The determination of the offering price of our units is arbitrary. Prior to this offering, there was no public market for any of our securities. The public offering price of the units, the terms of the warrants, the aggregate proceeds we are raising and the amount to be placed in the trust account were the results of a negotiation between the underwriters and us. The determination of our per-unit offering price and aggregate proceeds was more arbitrary than would typically be the case if we were an operating company. In addition, because we have not identified any potential target businesses, management s assessment of the financial requirements necessary to complete our initial business combination may prove to be inaccurate, in which case we may not have sufficient funds to consummate our initial business combination and we would be forced to either find additional financing or liquidate, or we may have too great an amount in the trust account to identify a prospect having a fair market value of at least 80% of the amount held in our trust account. If we acquire a target business with operations located outside the United States, we may encounter risks specific to other countries in which such target business operates. If we acquire a company that has operations outside the United States, we will be exposed to risks that could negatively impact our future results of operations following our initial business combination. The additional risks we may be exposed to in these cases include, but are not limited to: tariffs and trade barriers; regulations related to customs and import/export matters; tax issues, such as tax law changes and variations in tax laws as compared to the U.S.; cultural and language differences; foreign exchange controls; crime, strikes, riots, civil disturbances, terrorist attacks and wars; deterioration of political relations with the United States; and new or more extensive environmental regulation. Foreign currency fluctuations could adversely affect our business and financial results. In addition, a target business with which we combine may do business and generate sales within other countries. Foreign currency fluctuations may affect the costs that we incur in such international operations. It is also possible that some or all of our operating expenses may be incurred in non-U.S. dollar currencies. The appreciation of non-U.S. dollar currencies in those countries where we have operations against the U.S. dollar would increase our costs and could harm our results of operations and financial condition. Because we must furnish our stockholders with target business financial statements prepared in accordance with and reconciled to U.S. generally accepted accounting principles, we will not be able to complete an initial business combination with some prospective target businesses unless their financial statements are first reconciled to U.S. generally accepted accounting principles. The federal securities laws require that a business combination meeting certain financial significance tests include historical and/or pro forma financial statement disclosure in periodic reports and proxy materials submitted to stockholders. Our initial business combination must be with a target business that has a fair market value of at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions of $4.5 million or $5.175 million if the over-allotment option is exercised in full) at the time of our initial business combination. We will be required to provide historical and/or pro forma financial information to our stockholders when seeking approval of a business combination with one or more target businesses. These financial statements must be prepared in accordance with, or be reconciled to, U.S. generally accepted accounting principles, or GAAP, and the historical financial statements must be audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), or PCAOB. If a proposed target business, including one located outside of the U.S., does not have financial statements that have been prepared in accordance with, or that can be reconciled to, U.S. GAAP and audited in accordance with the standards of the PCAOB, we will not be able to acquire that proposed target business. These financial statement requirements may limit the pool of potential target businesses with which we may combine. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS The statements contained in this prospectus that are not purely historical are forward-looking statements. Our forward-looking statements include, but are not limited to, statements regarding our or our management s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words anticipates, believe, continue, could, estimate, expect, intends, may, might, plan, possible, potential, predicts, project, should, would and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this prospectus may include, for example, statements about our: ability to complete our initial business combination; success in retaining or recruiting, or changes required in, our officers, key employees or directors following our initial business combination; officers and directors allocating their time to other businesses and potentially having conflicts of interest with our business or in approving our initial business combination, as a result of which they would then receive expense reimbursements; potential ability to obtain additional financing to complete a business combination; pool of prospective target businesses; the ability of our officers and directors to generate a number of potential investment opportunities; potential change in control if we acquire one or more target businesses for stock; our public securities potential liquidity and trading; listing or delisting of our securities from the American Stock Exchange or the ability to have our securities listed on the American Stock Exchange following our initial business combination; use of proceeds not held in the trust account or available to us from interest income on the trust account balance; or financial performance following this offering. The forward-looking statements contained in this prospectus are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading Risk Factors. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. USE OF PROCEEDS The net proceeds of this offering, together with our founding stockholder s $4 million investment in the founder s warrants that will be held in the trust account, will be used as set forth in the following table: Without Over-Allotment Option Over-Allotment Option Exercised Offering gross proceeds $ 150,000,000 $ 172,500,000 Initial founder s warrants 4,000,000 4,000,000 Total gross proceeds $ 154,000,000 $ 176,500,000 Offering expenses (1) Underwriting discount (7.0% of offering gross proceeds)(2) $ 10,500,000 $ 12,075,000 Legal fees and expenses 700,000 700,000 Printing and engraving expenses 60,000 60,000 Miscellaneous expenses 34,521 34,521 Accounting fees and expenses 68,320 68,320 SEC registration fee 21,534 21,534 NASD registration fee 20,625 20,625 American Stock Exchange fees 70,000 70,000 Total offering expenses $ 11,475,000 $ 13,050,000 Proceeds after offering expenses $ 142,525,000 $ 163,450,000 Net proceeds not held in trust account $ 50,000 $ 50,000 Net proceeds held in trust account $ 142,475,000 $ 163,400,000 Deferred underwriting discounts and commissions held in trust account(2) $ 4,500,000 $ 5,175,000 Total held in trust account(2) $ 146,975,000 $ 168,575,000 Amount Percent of net proceeds not in trust and interest income earned on the trust account Use of net proceeds not held in the trust account and up to $2.0 million of the interest income earned on the trust account that may be released to us to cover our working capital requirements Payment to GSCP (NJ) Holdings, L.P. for office space, administrative and support services (approximately $7,500 per month for up to two years) $ 180,000 8.8 % Working capital to cover miscellaneous expenses (potentially including deposits or down payments for a proposed initial business combination, legal, accounting and other expenses, including due diligence expenses and reimbursement of out-of-pocket expenses incurred in connection with the investigation, structuring and negotiation of our initial business combination, director and officer liability insurance premiums and reserves, legal and accounting fees relating to SEC reporting obligations, brokers retainer fees, consulting fees and finder s fees) $ 1,870,000 91.2 % Total $ 2,050,000 100.0 % ___________ (1) A portion of the offering expenses have been paid from advances we received from GSCP (NJ) Holdings, L.P. as described below. These advances will be repaid out of the proceeds of this offering not being placed in the trust account upon consummation of this offering. (2) The amount of underwriting discount and the amount held in the trust account include $4.5 million (or $5.175 million if the over-allotment option is exercised in full) that will be paid to the underwriters upon consummation of the initial business combination and will not be available to us. In the event that we do not consummate our initial business combination within the required time period, the underwriters will forfeit any right to that amount, which will be included in the liquidation distribution to our public stockholders. A total of approximately $146,975,000 (or approximately $168,575,000 if the underwriters over-allotment option is exercised in full), including $142,475,000 of the net proceeds from this offering and the sale of the initial founder s warrants (or $163,400,000 if the underwriters over-allotment option is exercised in full) and $4.5 million (or $5.175 million if the underwriters over-allotment option is exercised in full) of deferred underwriting discounts and commissions will be placed in a trust account at JPMorgan Chase Bank, N.A., with American Stock Transfer & Trust Company as trustee. Except for a portion of the interest income to be released to us (as described in more detail below), the proceeds held in trust will not be released from the trust account until the earlier of the completion of our initial business combination or our liquidation. In the event that we consummate an initial business combination, all amounts held in the trust account (excluding deferred underwriting discounts and commissions of $4.5 million (or $5.175 million if the over-allotment option is exercised in full), which will be paid to the underwriters) that are not (i) paid to public stockholders exercising their conversion rights or (ii) previously released to us as described below to pay income taxes or as working capital, will be released to us upon the closing of our initial business combination, which must involve one or more target businesses with a fair market value of at least 80% of the balance in the trust account at the time of such business combination. We will only consummate a business combination in which we become the controlling shareholder of the target. The key factors that we will rely on in determining controlling shareholder status would be our acquisition of at least 51% of the voting equity interests of the target company and control of the majority of any governing body of the target company. We will not consider any transaction that does not meet such criteria. The funds released to us may be used to pay all or a portion of the purchase price of our initial business combination. We may apply any funds released to us from the trust account not used to pay the purchase price for example, because we paid all or a portion of the purchase price for our initial business combination using stock or debt securities for general corporate purposes, including for maintenance or expansion of operations of an acquired business or businesses, the payment of principal or interest due on indebtedness incurred in consummating our initial business combination, to fund the purchase of other companies, or for working capital. We have allocated $50,000 of the offering proceeds to fund a portion of our working capital. We intend to fund the majority of our working capital requirements from a portion of the interest earned on the proceeds being held in the trust account. Under the terms of the investment management trust agreement, up to $2.0 million of interest may be released to us in such amounts and at such intervals as we request, subject to availability and to the maximum cap of $2.0 million. Although we do not know the rate of interest to be earned on the trust account and are unable to predict an exact amount of time it will take to complete an initial business combination, we believe that following the completion of this offering, it will take some time to find a prospective target and take all of the steps necessary to complete an initial business combination. We anticipate that, even at an interest rate of 3% per annum, the interest that will accrue on the trust account during the time it will take to identify a target and complete an acquisition will be sufficient to fund our working capital requirements. However, if interest payments are not sufficient to fund these requirements, or are not available to fund the expenses at the time we incur them, we may be required to seek additional capital from third parties. In such event, we might seek loans or additional investments from our officers or directors or other third parties. However, our officers and directors are under no obligation to advance funds to us or to invest in us. We expect that due diligence of prospective target businesses will be performed by some or all of our officers and directors, and GSC Group professionals, and also that it may include engaging market research firms or third-party consultants. No compensation of any kind (including finder s and consulting fees) will be paid to any of our officers or directors, or any of our or their affiliates, for services rendered to us prior to or in connection with the consummation of our initial business combination, including in connection with such due diligence activities. However, our officers and directors and GSC Group and its employees will receive reimbursement for any out-of-pocket expenses (such as travel expenses) incurred by them in connection with activities on our behalf, such as identifying potential target businesses and performing due diligence on a suitable initial business combination, and GSCP (NJ) Holdings, L.P. will be entitled to receive payments of an aggregate of $7,500 per month for office space, secretarial and administrative services. Our audit committee will review and approve all payments made to our officers, directors, GSC Group or our or their affiliates, other than the $7,500 per month payment described above, and any payments made to members of our audit committee will be reviewed and approved by our board of directors, with the interested director or directors abstaining from such review and approval. In addition, it is also possible that we could use a portion of the funds not in the trust account to pay finder s fees, consulting fees or other similar compensation, or make a deposit, down payment or fund a no-shop provision with respect to a particular proposed initial business combination, although we do not have any current intention to do so. In the event that we were ultimately required to forfeit such funds (whether as a result of our breach of the agreement relating to such payment or otherwise), if the amount were large enough and we had already used up the other funds available to us, we could be left with insufficient funds to continue searching for other potential target businesses or otherwise fund our business. In such case, if we were unable to secure additional financing, we would most likely fail to consummate an initial business combination in the allotted time and be forced to liquidate. We believe that amounts not held in trust as well as the interest income of up to $2.0 million earned on the trust account balance that may be released to us will be sufficient to pay the costs and expenses for which such proceeds have been allocated. This belief is based on the fact that in-depth due diligence will most likely be undertaken only after we have negotiated and signed a letter of intent or other preliminary agreement that addresses the terms of our initial business combination. However, if our estimate of the costs of undertaking in-depth due diligence and negotiating our initial business combination is less than the actual amount of such costs, we may be required to raise additional capital, the amount, availability and cost of which is currently unascertainable. To the extent that such expenses exceed the amounts not held in the trust account and the interest income of up to $2.0 million that may be released to us from the trust account, such out-of-pocket expenses could not be reimbursed by us unless we consummate an initial business combination. Since the role of present management after an initial business combination is uncertain, we have no current ability to determine what remuneration, if any, will be paid to present management after our initial business combination. Our officers and directors may, as part of any such combination, negotiate the repayment of some or all of the out-of-pocket expenses incurred by them that have not been reimbursed prior to the initial business combination s closing. If the target business s owners do not agree to such repayment, this could cause our officers and directors to view such potential initial business combination unfavorably and result in a conflict of interest. As of May 31, 2007, GSCP (NJ), L.P., on behalf of GSCP (NJ) Holdings, L.P., had advanced on our behalf a total of $124,075, which amount was used to pay a portion of the expenses of this offering referenced in the line items above including certain organizational expenses. This advance is non-interest bearing and unsecured and is due at the earlier of December 31, 2007, or the consummation of this offering. The advance will be repaid out of the proceeds of this offering not being placed in the trust account. These advances are made by GSCP (NJ) Holdings, L.P. because it regularly advances funds to our founding stockholder in connection with its cash requirements. GSCP (NJ) Holdings, L.P. is the sole owner and sole member of our founding stockholder. We have agreed to pay GSCP (NJ) Holdings, L.P., an affiliate of our founding stockholder, a total of $7,500 per month for office space, administrative services and secretarial support. We believe that such fees are at least as favorable as we could have obtained from an unaffiliated person. To the extent that our capital stock or debt financing is used in whole or in part as consideration to effect our initial business combination, any proceeds held in the trust account as well as any other net proceeds not expended will be used to finance the operations of the combined business. The net proceeds of this offering not held in the trust account and not immediately required for the purposes set forth above will be invested only in United States government securities (as such term is defined in the Investment Company Act) and one or more money market funds, selected by us, which invest principally in either short-term securities issued or guaranteed by the United States having a rating in the highest investment category granted thereby by a recognized credit rating agency at the time of acquisition or tax exempt municipal bonds issued by governmental entities located within the United States, so that we are not deemed to be an investment company under the Investment Company Act. A public stockholder will be entitled to receive funds from the trust account only in the event of our liquidation if we fail to complete our initial business combination within the allotted time or if the public stockholder converts such shares into cash in connection with an initial business combination that the public stockholder voted against and that we actually complete. In no other circumstances will a public stockholder have any right or interest of any kind in or to funds in the trust account. The funds a public stockholder will be entitled to receive from the trust account would include interest earned on his, her or its portion of the trust account, net of taxes payable with respect to such interest, and less interest income released to us from the trust account in the manner described above and, in the event of our liquidation for failure to consummate an initial business combination within the allotted time, interest of up to $75,000 that may be released to us should we have no or insufficient working capital to fund the costs and expenses of our dissolution and liquidation. Should there be no such interest available or should those funds still not be sufficient, our founding stockholder has agreed to reimburse us for our out-of-pocket costs associated with our dissolution and liquidation, excluding any special, indirect or consequential costs, such as litigation, pertaining to the dissolution and liquidation. On completion of an initial business combination, the underwriters will receive the deferred underwriters discounts and commissions held in the trust account. If we do not complete an initial business combination and the trustee must therefore distribute the balance in the trust account on our liquidation, the underwriters have agreed (i) to forfeit any rights or claims to the deferred underwriting discounts and commissions, together with any accrued interest thereon, in the trust account, and (ii) that the trustee is authorized to distribute the deferred underwriting discounts and commissions, together with any accrued interest thereon, net of income taxes payable on such interest, on a pro rata basis to the public stockholders. DIVIDEND POLICY We have not paid any dividends on our common stock to date and will not pay cash dividends prior to the completion of our initial business combination. After we complete our initial business combination, the payment of dividends will depend on our revenues and earnings, if any, our capital requirements and our general financial condition. The payment of dividends after our initial business combination will be within the discretion of our board of directors at that time. Our board of directors currently intends to retain any earnings for use in our business operations and, accordingly, we do not anticipate that our board will declare any dividends in the foreseeable future. DILUTION The difference between the public offering price per share of common stock, assuming no value is attributed to the warrants included in the units, and the pro forma net tangible book value per share of our common stock after this offering constitutes the dilution to investors in this offering. Net tangible book value per share is determined by dividing our net tangible book value, which is our total tangible assets less total liabilities (including the value of common stock which may be converted into cash), by the number of outstanding shares of our common stock. The information below assumes the payment in full of the underwriters discounts and commissions, including amounts held in the trust account, and no exercise of the over-allotment option. At March 31, 2007, our net tangible book value was a deficiency of ($610,169), or approximately $(0.16) per share of common stock (after giving effect to the recapitalization). After giving effect to the sale of 15,000,000 shares of common stock included in the units offered hereby (but excluding shares underlying the warrants included in the units) (including deferred underwriting discounts and commissions), after deduction of estimated expenses paid in advance of this offering, our pro forma net tangible book value (as decreased by the value of 2,999,999 shares of common stock which may be converted into cash) at March 31, 2007, would have been $113,154,840, or approximately $7.18 per share, representing an immediate increase in net tangible book value of approximately $7.34 per share to the holders of the founder s shares, and an immediate dilution of approximately $2.82 per share, or 28.2%, to new investors not exercising their conversion rights. For purposes of presentation, our pro forma net tangible book value after this offering is approximately $29,394,990 less than it otherwise would have been because if we effect our initial business combination, the conversion rights of the public stockholders may result in the conversion into cash of up to 20% of the aggregate number of the shares sold in this offering (minus one share) at a per-share conversion price equal to the amount in the trust account as of two business days prior to the proposed consummation of our initial business combination, inclusive of any interest, net of any taxes due on such interest and net of up to $2.0 million in interest income on the trust account balance previously released to us to fund working capital requirements, divided by the number of shares sold in this offering. The following table illustrates the dilution to the new investors on a per-share basis, assuming no value is attributed to the warrants included in the units: Public offering price $ 10.00 Net tangible book value before this offering $ (0.16 ) Increase attributable to new investors $ 7.34 Pro forma net tangible book value after this offering $ 7.18 Dilution to new investors $ (2.82 ) The following table sets forth information with respect to our founding stockholder and the new investors: Shares Purchased Total Consideration Average Price Number Percentage Amount Percentage Per Share Founding stockholder 3,750,000 20 % $ 25,000 .017 % $ 0.007 New investors 15,000,000 80 % 150,000,000 99.983 % 10.00 Total 18,750,000 100 % $ 150,025,000 100 % The pro forma net tangible book value per share after the offering is calculated as follows: Net tangible book value before the offering and sale of the initial founder s warrants $ (610,169 ) Net proceeds from this offering and sale of the initial founder s warrants (adjusted for $138,337 and $11,164 of expenses recognized for the periods ending 12/31/06 and 3/31/07, respectively) 142,674,501 Offering costs paid in advance and excluded from tangible book value before this offering 485,498 Less: proceeds held in trust account subject to conversion to cash (29,394,990 ) $ 113,154,840 Denominator: Shares
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+Prospectus Summary 1
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+S-1/A Table of Contents SUMMARY The following highlights certain information contained elsewhere in this Prospectus. It does not contain all the details concerning the exchange of exchangeable shares for shares of Company common stock, including information that may be important to you. You should carefully review this entire Prospectus including the section entitled
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001381697_imperium_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001381697_imperium_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information included elsewhere in this prospectus. This summary is not complete and does not contain all the information that may be important to you. You should carefully read the entire prospectus, especially the risks set forth under the heading Risk Factors and our financial statements and related notes included elsewhere in this prospectus, before making an investment decision. Unless the context requires otherwise, references in this prospectus to Imperium, we, us, and our refer to Imperium Renewables, Inc. and its subsidiaries and, as of dates and for periods on or prior to May 17, 2005, to our business while it was a part of Seattle Biodiesel LLC. When used in this prospectus, the term nameplate capacity means the annual production capacity of a biodiesel production facility for which it is designed and as certified by an independent design engineer. IMPERIUM RENEWABLES, INC. Overview We are the largest pure-play biodiesel producer in the U.S. based on nameplate capacity, according to the NBB. We design, develop, build, own and operate biodiesel production facilities that will be capable of consistently producing industrial-scale quantities of biodiesel from multiple feedstocks that exceed industry quality standards. We have built the first facility in the U.S. with a 100 million gallon per year, or MGY, nameplate capacity, and we are developing three additional production facilities that will expand our aggregate nameplate capacity to approximately 405 MGY by the end of the first quarter of 2009. We believe that we will be among the lowest-cost providers, if not the lowest-cost provider, of biodiesel in the U.S. due to the strategic locations of our production facilities, our proprietary process and technological innovations, our ability to utilize multiple feedstocks, and our internal project engineering expertise. Since 2005, we have been selling biodiesel directly and through distributors to a variety of users, including industrial users, fleet and marine operators, utilities, fuel distributors and blenders, and federal, state and local governments. We also have a contractual commitment from Royal Caribbean Cruises, Ltd. (NYSE: RCL), or RCCL, to purchase, at a minimum, approximately 15 million gallons of biodiesel in 2007 and thereafter approximately 18 million gallons of biodiesel annually for four years, which RCCL has the option to extend for three additional years. We believe this is the single largest long-term biodiesel sales contract to an end user in the U.S. Biodiesel is a biodegradable, nontoxic alternative fuel produced from multiple types of vegetable oil and other feedstocks. Biodiesel performs comparably to petroleum diesel, or diesel, in vehicle, marine, power generation and home heating oil applications. Biodiesel can be used as a direct replacement for diesel and can also be blended with diesel. Many industrial biodiesel consumers use B99, which is a blend containing 99% biodiesel and 1% diesel. In comparison to ethanol, which is used primarily as an oxygenate that typically replaces up to 10% of gasoline, biodiesel can be used as a direct replacement for diesel at levels up to 100%, which increases the potential penetration of biodiesel in the diesel market relative to the potential penetration of ethanol in the gasoline market. To use ethanol as a replacement fuel or in blends higher than 10% generally requires significant engine modification. Biodiesel represents less than 0.4% of the overall U.S. diesel market, based on 2006 figures. In the U.S., biodiesel consumption has grown from approximately 500,000 gallons in 1999 to more than an estimated 250 million gallons in 2006. Increased use of biodiesel not only reduces dependence on petroleum oil but also combats the environmental impact of petroleum-based fuels. Biodiesel emits fewer exhaust materials that are associated with smog, particulate pollution and global warming than diesel. According to the U.S. Environmental Protection Agency, or EPA, pure biodiesel, or B100, emits 78% less carbon dioxide, 67% fewer unburned hydrocarbons, 48% less carbon monoxide, and 47% fewer particulates, than diesel. Given these benefits, federal and state governments are mandating or encouraging the use of biodiesel. The federal government provides blenders with an excise tax credit of $0.01 per percentage point of biodiesel blended with diesel, up to $1.00 per gallon. For example, a blend UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents INDUSTRY AND MARKET DATA We obtained the industry, market and competitive position data used throughout this prospectus from industry journals and publications, data on websites maintained by private and public entities, including independent industry associations, general publications and other publicly available information. We believe that all of these sources are reliable, but we have not independently verified any of this information. In particular, we have based much of our discussion of the biodiesel industry, including biodiesel production capacity, additional capacity from facilities under construction, government regulation relevant to the industry and forecasted growth in demand, on information published by the National Biodiesel Board, or NBB, the national trade association for the U.S. biodiesel industry, and by the Energy Information Administration, which provides the official energy statistics for the U.S. government. Independent industry publications and surveys generally state that they have obtained information from sources believed to be reliable but do not guarantee the accuracy and completeness of such information. Further, because the NBB is a trade organization for the biodiesel industry, it may present information in a manner that is more favorable to that industry than would be presented by an independent source. Forecasts are particularly likely to be inaccurate, especially over long periods of time. Unless the context requires otherwise, references to diesel in the U.S. are to distillate fuel oil, which includes numbers 1, 2 and 4 distillates, and references to diesel in Europe are to gas diesel oil, which includes diesel used for compression ignition, light heating oil for industrial and commercial uses, and other heavy gas oils. Table of Contents of 20% biodiesel and 80% diesel, or B20, would entitle the blender to a $0.20 credit per gallon so blended. The 2005 Energy Policy Act includes national targets for renewable fuel as a percentage of the overall fuel supply. The States of Louisiana, Minnesota, New Mexico, Oregon and Washington, as well as the City of Portland, have also enacted renewable fuel standards mandating the use of biodiesel as a blend with diesel. Renewable fuel requirements, including requirements only applicable to government vehicles, have been enacted in at least 21 states. The production of biodiesel may also generate emissions credits, which can be traded on exchanges pursuant to the Kyoto Protocol and other efforts. We believe our biodiesel production process and technological innovations will enable us to produce biodiesel that exceeds industry quality standards with relatively lower capital expenditures and operating expenses than certain of our competitors. Although the process of making biodiesel is relatively simple, we believe we will be the first in the U.S. to efficiently and consistently produce high-quality biodiesel on an industrial-scale that can be transported long distances. We have optimized our biodiesel production process to incorporate new, internally-developed proprietary technology, and our production facilities are being designed and built to process biodiesel from multiple feedstocks simultaneously. This flexibility will allow us to shift into and out of feedstocks based on customer demand and market cost dynamics without hindering production or increasing our operating costs. In addition, our process recaptures methanol and does not create waste water, which reduces costs and environmental permitting requirements. We employ in-house engineering, design and project management personnel in the construction process, which we believe enables us to decrease our time to market and reduce our construction costs. For example, we constructed our Grays Harbor production facility in 11 months at a total cost of approximately $78 million, or $0.78 per gallon of nameplate capacity, including facility construction, all transportation infrastructure and on-site storage facilities costs. Excluding the transportation infrastructure and on-site storage facilities, the total cost to construct our Grays Harbor production facility was approximately $34 million, or $0.34 per gallon of nameplate capacity. We commenced operation of our first commercial biodiesel production facility in April 2005. While to date our cost of sales has exceeded related revenues, we will seek to achieve profitability by executing the business strategy described under Business Business Strategy, which involves expanding our operations to produce industrial-scale quantities of biodiesel from multiple feedstocks using efficient, proprietary technology at strategic locations. We completed construction of our second commercial production facility, located at Grays Harbor, Washington, in August 2007, the designs for which are certified at 100 MGY nameplate capacity. We are also developing three additional 100 MGY nameplate capacity facilities that are scheduled to be constructed by the end of the first quarter of 2009: one in Hawaii, one in Argentina and one on the U.S. East Coast. The U.S. production facilities will produce biodiesel primarily for the U.S. East and West Coast markets. The Argentina production facility will produce biodiesel primarily for export to Europe. Each of these production facilities will be based on the same technology, engineering and design that we are using at our Grays Harbor production facility. We expect to finance the construction of these three new facilities with the net proceeds we receive from this offering. We estimate the total construction costs for our Hawaii, Argentina and U.S. East Coast production facilities to be approximately $95 million, $65 million and $70 million, respectively. We are also evaluating several sites for additional new production facilities, both overseas and in the U.S., that we may develop after 2008. AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents The table below provides an overview, as of the date of this prospectus, of our biodiesel production facilities that are in operation or under development and expected to be constructed by the end of the first quarter of 2009. Facility Seattle Grays Harbor Hawaii Argentina U.S. East Coast Location Seattle, Washington Grays Harbor, Washington Oahu, Hawaii Santa Fe, Argentina Philadelphia, Pennsylvania Actual or expected construction completion date April 2005 August 2007 Q4 2008 Q4 2008 Q1 2009 Actual or expected nameplate capacity (MGY) 5 100 100 100 100 Primary target market Research and development and U.S. West Coast U.S. West Coast Hawaii Europe U.S. East Coast Current development status In operation In operation and commissioning In development In development In development Actual or expected ownership 100% 93%(1) 100% 100% 100% (1) We are contractually required to repurchase RCCL s 7% interest in Imperium Grays Harbor, LLC, our subsidiary that owns and operates the Grays Harbor production facility. We expect the interest repurchase to close no later than the closing of this offering. See Management s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Repurchase of Interest in Subsidiary, Modification of Contract for additional information concerning such repurchase. We have entered into a purchase agreement with RCCL to acquire RCCL s 7% interest in Imperium Grays Harbor, LLC, or IGH, our subsidiary that owns and operates our Grays Harbor production facility, for a purchase price of $10.0 million. The purchase price is payable in cash on the earlier of the closing of this offering, October 31, 2007, or the closing of the $41.2 million term loan under our credit facility described in Description of Certain Indebtedness Credit Facility, which is expected to occur in the third quarter of 2007. The purchase agreement allows RCCL to continue to appoint one of the managers to the board of managers of IGH for so long as the biodiesel purchase agreement with RCCL remains in effect. In August 2007, we also modified our biodiesel purchase agreement with RCCL to remove certain provisions that had restricted our operations, including certain biodiesel fuel specifications. In consideration for this modification, we have issued $14.0 million in promissory notes to RCCL, which we are contractually required to repay no later than the closing of this offering. For a description of some of the terms of our biodiesel purchase agreement with RCCL, see Business Customers. Competitive Strengths Our competitive strengths include: Industry-leading technology. We have developed our proprietary production technology and we will continue to invest in research and development. For example, we are able to convert more than 99% of the vegetable oil feedstock by volume into biodiesel and recapture approximately 99% of the unreacted methanol used in the biodiesel production process. We are continually evaluating new or improved feedstock sources and processing technologies in an effort to leverage our multi-feedstock capabilities and further reduce our production costs. Sustainable first mover advantage. We believe our construction time and cost structure, and growing industry-leading production capacity, give us a competitive advantage in securing high-volume customers, favorable supply and distribution agreements and strategic site locations. Superior logistics. We are locating our production facilities and distribution logistics in and around coastal deep water ports that provide us with multiple operating, cost and business model advantages compared to other industry participants. IMPERIUM RENEWABLES, INC. (Exact name of registrant as specified in its charter) Washington 2860 20-0852308 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification No.) 1741 First Avenue South, Third Floor Seattle, Washington 98134 (206) 254-0203 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Table of Contents Feedstock flexibility. Our production facilities are being designed to produce biodiesel simultaneously from multiple feedstocks, including canola, soybean, and palm oil, as well as jatropha, mustard and other feedstocks. This will allow us to shift into and out of different feedstocks based on customer demand and market cost dynamics without hindering our production process or substantially increasing our operating costs. In-house project management and engineering expertise. We have assembled an in-house project management and engineering staff that allows us to coordinate the design, engineering and construction of our production facilities. We believe our expertise and involvement in constructing and developing low-cost, large-scale production facilities will allow us to complete new construction more quickly than many of our competitors. Well-capitalized balance sheet. We believe that the proceeds of this offering, together with our other sources of financing, cash on hand and cash from operations, will allow us to complete commissioning of our Grays Harbor production facility, construction of three other new production facilities, and our business plan through at least the end of 2009. We believe our low leverage, strong cash position and strong credit profile will also allow us to pursue large-volume customers and enter into larger feedstock agreements at lower cost than our competitors. Experienced and proven management team. Our management team has extensive public company experience, is entrepreneurial and growth oriented, and has a proven ability to manage high-growth businesses in rapidly changing environments. Business Strategy Our objective is to grow our leading market position in the U.S. biodiesel industry and become the biodiesel provider of choice. Key elements of our strategy include: Establish strategically-located production facilities. We plan to capitalize on the growing U.S. and international demand for biodiesel by establishing our production facilities in strategic markets where there is strong demand for biodiesel and deep water port access to transport raw materials and biodiesel via barge. Establish a global distribution network. We plan to expand the reach of our production facilities by growing our global storage and distribution capacity in key U.S. and international markets. Build industrial-scale facilities. While much of the domestic biodiesel production capacity consists of facilities having a nameplate capacity of 10 MGY or less, we plan to continue building industrial-scale production facilities with a nameplate capacity of at least 100 MGY at each facility. Promote broad-based adoption of biodiesel. We plan to continue our efforts to promote the adoption of biodiesel through our lobbying and public relations efforts and will continue to explore new markets for biodiesel. Continually improve our technology. We will continue to use our in-house research and development and engineering expertise to evaluate new process designs and techniques, emerging product opportunities, and industry developments to maintain our leadership in the biodiesel industry. Manage feedstock costs. Feedstocks are the most expensive component of biodiesel, and we are implementing short and long-term strategies to minimize our feedstock costs. We believe that the execution of our business strategy will allow us to generate revenues that exceed our related cost of sales and other operating expenses. MARTIN G. TOBIAS Chief Executive Officer Imperium Renewables, Inc. 1741 First Avenue South, Third Floor Seattle, Washington 98134 (206) 254-0203 (Name, address, including zip code, and telephone number, including area code, of agent for service) It is respectfully requested that the Securities and Exchange Commission send copies of all notices, orders and communications to: MARK F. HOFFMAN, ESQ. STEVEN R. YENTZER, ESQ. TRENTON C. DYKES, ESQ. DLA Piper US LLP 701 Fifth Avenue, Suite 7000 Seattle, Washington 98104 (206) 839-4800 PAUL C. PRINGLE, ESQ. PRASHANT GUPTA, ESQ. Sidley Austin LLP 555 California Street, Suite 2000 San Francisco, California 94104 (415) 772-1200 Table of Contents
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+The following summary highlights selected information in this prospectus. It may not contain all the information that is important to you. For additional information, you should read this entire prospectus carefully, including the Consolidated Financial Statements and the notes to the Consolidated Financial Statements. ESSA Bank & Trust ESSA Bank & Trust was organized in 1916. ESSA Bank & Trust is a full-service, community-oriented savings association with total assets of $725.8 million, total net loans of $556.7 million, total deposits of $402.2 million and total equity of $58.3 million at September 30, 2006. We provide financial services to individuals, families and businesses through our 12 full-service banking offices, located in Monroe and Northampton Counties, Pennsylvania. ESSA Bank & Trust s business consists primarily of accepting deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in residential first mortgage loans (including construction mortgage loans), commercial real estate, home equity loans and lines of credit, commercial and consumer loans. In addition, we offer a variety of deposit accounts, including checking, savings and certificates of deposits. We offer asset management and trust services. We also offer investment services through our relationship with PRIMEVEST Financial Services, Inc., a third party broker/dealer and investment advisor. ESSA Bank & Trust s executive offices are located at 200 Palmer Street, Stroudsburg, Pennsylvania 18360. Our telephone number at this address is (570) 421-0531. Our website address is www.essabank.com. ESSA Bancorp, Inc. ESSA Bancorp, Inc. is a newly-formed Pennsylvania corporation that will own all of the outstanding shares of common stock of ESSA Bank & Trust upon completion of the mutual-to-stock conversion and the offering. ESSA Bancorp, Inc. has not engaged in any business to date. Our executive offices are located at 200 Palmer Street, Stroudsburg, Pennsylvania 18360. Our telephone number at this address is (570) 421-0531. Our Organizational Structure ESSA Bancorp, Inc., a Pennsylvania corporation, will own 100% of the outstanding shares of common stock of ESSA Bank & Trust. ESSA Bancorp, Inc., a Pennsylvania corporation, has not issued shares of stock to the public. Pursuant to the terms of ESSA Bank & Trust s plan of conversion, ESSA Bank & Trust will convert from a mutual savings association to a stock savings association operating in the holding company corporate structure. As part of the conversion, we are offering for sale in a UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 PRE-EFFECTIVE AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ESSA BANCORP, INC. (Exact Name of Registrant as Specified in Its Charter) Pennsylvania 6712 20-8023072 (State or Other Jurisdiction of Incorporation or Organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 200 Palmer Street Stroudsburg, Pennsylvania18360 (570) 421-0531 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant s Principal Executive Offices) Gary S. Olson 200 Palmer Street Stroudsburg, Pennsylvania18360 (570) 421-0531 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) Copies to: John J. Gorman, Esq. Marc P. Levy, Esq. Luse Gorman Pomerenk & Schick, P.C. 5335 Wisconsin Avenue, N.W., Suite 400 Washington, D.C. 20015 (202) 274-2000 Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: If the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: CALCULATION OF REGISTRATION FEE Title of each class of securities to be registered Amount to be registered Proposed maximum offering price per share Proposed maximum aggregate offering price Amount of registration fee Common Stock, $0.01 par value per share 16,980,900 shares (1) $10.00 $169,809,000 (2) $18,170 (3) Participation Interests 470,000 interests (1) Includes shares to be issued to the ESSA Bank & Trust Foundation, a private foundation. (2) Estimated solely for the purpose of calculating the registration fee. (3) Of which $16,656 was previously paid on December 7, 2006. (4) The securities of ESSA Bancorp, Inc. to be purchased by the ESSA Bank & Trust 401(k) Plan are included in the amount shown for common stock. However, pursuant to Rule 457(h) of the Securities Act of 1933, as amended, no separate fee is required for the participation interests. Pursuant to such rule, the amount being registered has been calculated on the basis of the number of shares of common stock that may be purchased with the current assets of such plan. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. Table of Contents subscription offering, and, if necessary, a community offering and a syndicated community offering, shares of common stock of ESSA Bancorp, Inc., a Pennsylvania corporation. Business Strategy Our business strategy is to grow and improve our profitability by: Increasing customer relationships through the offering of excellent service and the distribution of that service through effective delivery systems; Continuing to transform into a full service community bank by meeting the financial services needs of our customers; Continuing to develop into a high performing financial institution, in part by increasing interest revenue and fee income; Remaining within our risk management parameters; and Employing affordable technology to increase profitability and improve customer service. A full description of our products and services begins on page 64 of this prospectus. We believe that these strategies will guide our investment of the net proceeds of the offering. We intend to continue to pursue our business strategy after the conversion and the offering, subject to changes necessitated by future market conditions and other factors. We also intend to focus on the following: Increasing customer relationships through a continued commitment to service and enhancing products and delivery systems. We will continue to increase customer relationships by focusing on customer satisfaction with regards to service, products, systems and operations. We have upgraded and expanded certain of our facilities, including our Corporate Center, to provide additional capacity to manage future growth and expand our delivery systems. Continuing to transform into a full service community bank. We continue to transform from a traditional savings association into a full service community bank. During the last several years, we have begun to offer a wide variety of commercial loans and deposits, as well as trust and brokerage services. Continuing to develop into a high performing financial institution. We will continue to enhance profitability by focusing on increasing non-interest income as well as increasing commercial products, including our focus on commercial real estate lending, which often have a higher profit margin than more traditional products. We also will pursue lower-cost commercial deposits as part of this strategy. Remaining within our risk management parameters. We place significant emphasis on risk management and compliance training for all of our directors, officers and employees. We focus on establishing regulatory compliance Table of Contents programs to determine the degree of such compliance and to maintain the trust of our customers and community. Employing cost-effective technology to increase profitability and improve customer service. We will continue to upgrade our technology in an efficient manner. We have implemented new software for marketing purposes and have upgraded both our internal and external communication systems. Continuing our emphasis on commercial real estate lending to improve our overall performance. We intend to continue to emphasize the origination of higher interest rate margin commercial real estate loans as market conditions, regulations and other factors permit. We have expanded our commercial banking capabilities by adding experienced commercial bankers, and enhancing our direct marketing efforts to local businesses. Expanding our banking franchise through branching and acquisitions. We will attempt to use the net proceeds from the offering, as well as our new stock holding company structure, to expand our market footprint through de novo branching as well as through acquisitions of banks, savings institutions and other financial service providers in our primary market area. We will also consider establishing de novo branches or acquiring financial institutions in contiguous counties. We have received regulatory approval to open a new branch office in Tannersville, Pennsylvania which we anticipate opening in May 2007. The branch is being built pursuant to a build and lease agreement with ESSA Bank & Trust as tenant. As such, we are responsible for completing the interior finishes, furnishing and equipping this branch. The total estimated cost for these items is $600,000 of which $300,000 has been disbursed as of December 31, 2006. Funding for this project is expected to come from the Bank s primary sources of liquidity as described under the caption Management s Discussion and Analysis of Financial Condition and Results of Operations of ESSA Bancorp, Inc. There can be no assurance that we will be able to consummate any acquisitions or establish any additional new branches. We may explore acquisition opportunities involving other banks and thrifts, and possibly financial service companies, when and as they arise, as a means of supplementing internal growth, filling gaps in our current geographic market area and expanding our customer base, product lines and internal capabilities, although we have no current plans, arrangements, or understandings to make any acquisitions. Maintaining the quality of our loan portfolio. Maintaining the quality of our loan portfolio is a key factor in managing our growth. We will continue to use customary risk management techniques, such as internal and external loan reviews, risk-focused portfolio credit analysis and field inspections of collateral in overseeing the performance of our loan portfolio. See Management s Discussion and Analysis of Financial Condition and Results of Operations of ESSA Bancorp, Inc. Business Strategy for a further discussion of our business strategy. Table of Contents PROSPECTUS ESSA BANCORP, INC. (Proposed Holding Company for ESSA Bank & Trust) Up to 13,800,000 Shares of Common Stock ESSA Bancorp, Inc., a Pennsylvania corporation, is offering shares of common stock for sale in connection with the conversion of ESSA Bank & Trust, a Pennsylvania-chartered savings association, from the mutual to the stock form of organization. All shares of common stock are being offered for sale at a price of $10.00 per share. Shares of our common stock have been approved for trading on the Nasdaq Global Market under the symbol ESSA. There is currently no public market for the shares of our common stock. We also intend to contribute up to 7.0% of the shares of common stock of ESSA Bancorp, Inc. that will be sold in the offering, and up to $1.5 million in cash, to a charitable foundation established by ESSA Bank & Trust. We are offering up to 13,800,000 shares of common stock for sale on a best efforts basis. We may sell up to 15,870,000 shares of common stock because of demand for the shares, changes in market conditions or regulatory considerations without resoliciting subscribers. We must sell a minimum of 10,200,000 shares in order to complete the offering. We are offering the shares of common stock in a subscription offering in the following descending order of priority: First, to depositors of ESSA Bank & Trust with aggregate account balances of at least $50 as of the close of business on April 30, 2005. Second, to ESSA Bank & Trust s tax-qualified employee benefit plans. Third, to depositors of ESSA Bank & Trust with aggregate account balances of at least $50 as of the close of business on . Fourth, to depositors and borrowers of ESSA Bank & Trust as of . Shares of common stock not purchased in the subscription offering may be offered for sale to the general public in a community offering. We also may offer for sale shares of common stock not purchased in the subscription offering or community offering through a syndicated community offering managed by Ryan Beck & Co., Inc. The minimum number of shares of common stock you may order is 25 shares. The maximum number of shares of common stock that can be ordered through a single qualifying account is 35,000 shares. The offering is expected to expire at 12:00 Noon, Eastern time, on . We may extend this expiration date without notice to you until , unless the Office of Thrift Supervision approves a later date, which may not be beyond . Once submitted, orders are irrevocable unless the offering is terminated or is extended beyond , or the number of shares of common stock to be sold is increased to more than 15,870,000 shares or decreased to less than 10,200,000 shares. If the offering is extended beyond , or if the number of shares of common stock to be sold is increased to more than 15,870,000 shares or decreased to less than 10,200,000 shares, we will resolicit subscribers, giving them an opportunity to change or cancel their orders. Funds received during the offering will be held in a segregated account at ESSA Bank & Trust, or in our discretion at another insured depository institution, and will earn interest at our passbook savings rate, which is currently %. Ryan Beck & Co., Inc. will assist us in selling shares of our common stock on a best efforts basis. Ryan Beck & Co., Inc. is not required to purchase any shares of the common stock that are being offered for sale. Purchasers will not pay a commission to purchase shares of common stock in the offering. This investment involves a degree of risk, including the possible loss of your investment. Please read
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+PROSPECTUS SUMMARY This summary highlights certain information contained elsewhere in this prospectus. Because this is a summary, it may not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed under
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+Prospectus Summary 1
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+Prospectus summary This summary highlights selected information appearing elsewhere in this prospectus. You should read this entire prospectus, including the Risk factors and Forward-looking statements sections, and our consolidated financial statements and the notes appearing elsewhere in this prospectus. Unless otherwise indicated, references in this prospectus to our company, we, us, or our, or any like terms, are to 3SBio Inc. and its subsidiaries. References to China or PRC are to the People s Republic of China, excluding Hong Kong, Taiwan and Macau, and references to provinces of China are to the provinces and provincial-level municipalities and autonomous regions of China. All references to RMB or Renminbi are to the legal currency of China, and all references to U.S. dollars or US$ are to the legal currency of the United States of America. OVERVIEW We are a leading, fully integrated, profitable biotechnology company focused on researching, developing, manufacturing and marketing biopharmaceutical products primarily in China. Our recombinant, or genetically engineered, protein-based products and product candidates are designed to address large markets with significant unmet medical needs in nephrology, oncology, supportive cancer care, inflammation and infectious diseases. Our principal products are EPIAO ( ) and TPIAO ( ), and our legacy products are Intefen ( ) and Inleusin ( ). Our predecessor and PRC operating subsidiary, Shenyang Sunshine Pharmaceutical Company Limited, or Shenyang Sunshine, began operations in 1993. We believe we are now one of the leading biopharmaceutical companies in China in terms of growth and profitability. Our net revenues were RMB72.8 million in 2003, RMB77.2 million in 2004, and RMB102.0 million in 2005, representing an increase of 32.1% from 2004 to 2005. Our net income was RMB0.5 million in 2003, RMB6.6 million in 2004 and RMB16.1 million in 2005, representing an increase of 142.9% from 2004 to 2005. For the nine months ended September 30, 2006, our net revenues were RMB92.6 million and our net income was RMB23.4 million, compared to net revenues of RMB76.1 million and net income of RMB12.9 million for the nine months ended September 30, 2005. In addition to domestic sales, we also export a small portion of our products to certain developing countries, consisting of Egypt, Pakistan, Thailand, Brazil, Mexico and Trinidad and Tobago. Our principal marketed products EPIAO ( ) EPIAO, our flagship product, is an injectable recombinant human erythropoietin, or EPO, that is used to stimulate the production of red blood cells in patients with anemia and to reduce the need for blood transfusions. Anemia is a condition in which insufficient oxygen is delivered to the body s organs and tissues. EPIAO is a protein-based therapeutic comparable in structure and function to Amgen Inc. s Epogen and Kirin Brewery Company Limited s ESPO. According to IMS Health, an independent research firm, revenues from all EPO drug sales in China were estimated at over RMB300 million (US$37.5 million) in 2005, representing a 20% compound annual growth rate from 2003. EPIAO, as tracked by IMS Health, has been ranked as the number one EPO drug since 2002 in terms of both units sold and revenues among the foreign and domestic biopharmaceutical companies marketing EPO drugs in China. We have sold over 6.9 million vials of EPIAO since 1999. EPIAO is approved by the PRC State Food and Drug Administration, or the SFDA, for three distinct indications: anemia associated with chronic renal failure; red blood cell mobilization, which is the Income before minority interests 161 6,428 15,911 2,013 12,743 23,392 2,959 Minority interests, net of tax 349 182 144 18 153 Income before minority interests 161 6,428 15,911 2,013 12,743 23,392 2,959 Minority interests, net of tax 349 182 144 18 153 Income before minority interests 161 6,428 15,911 2,013 12,743 23,392 2,959 Minority interests, net of tax 349 182 144 18 153 Loan period Interest rate % 2004 2005 2005 2006 2006 RMB 000 RMB 000 US$ 000 RMB 000 US$ 000 (a) May 28, 2004 to February 2, 2005 5.841 % 174 26 3 (b) August 23, 2004 to May 18, 2005 5.841 % 105 110 14 (c) December 30, 2004 to November 29, 2005 6.435 % 7 1,171 148 (d) December 30, 2004 to December 29, 2005 6.234 % 7 1,240 157 (e) December 30, 2004 to November 29, 2005 6.138 % 3 502 64 (f) June 24, 2005 to March 23, 2006 6.138 % 161 20 68 9 (g) December 6, 2005 to November 5, 2006 6.138 % 39 5 413 52 (h) December 6, 2005 to November 5, 2006 6.138 % 22 3 230 29 (i) December 14, 2005 to November 13, 2006 6.138 % 61 8 928 117 (j) December 28, 2005 to December 27, 2006 6.138 % 13 2 928 117 (k) April 30, 2003 to April 29, 2006 6.039 % 1,812 1,812 229 588 76 (l) May 19, 2004 to April 15, 2005 5.841 % 417 168 21 (m) April 21, 2006 to April 20, 2007 6.138 % 137 17 (n) April 27, 2006 to January 31, 2007 6.138 % 264 33 (o) September 22, 2006 to March 22, 2008 6.930 % 34 4 (p) September 30, 2006 to March 29, 2008 6.930 % 2004 2005 2005 2006 2006 Note RMB 000 RMB 000 US$ 000 RMB 000 US$ 000 Due from Shenyang Keweier SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents process in which red blood cells are stimulated to proliferate, before, during, and after surgery; and anemia associated with chemotherapy in cancer patients with non-myeloid malignancies, which are cancers that do not originate in the bone marrow or involve myeloid cells, or non-lymphocyte white blood cells found in the bone marrow. We believe we are the only pharmaceutical company in China that has obtained approval from the SFDA for three indications of EPO drugs. We have exclusivity for the manufacturing and marketing of EPIAO for anemia associated with chemotherapy in cancer patients with non-myeloid malignancies under an administrative protection period through September 2007, during which other pharmaceutical companies are prohibited from manufacturing EPO drugs for the same indication pursuant to the relevant Chinese regulations. We plan to initiate in 2008 clinical trials for NuPIAO, our second-generation EPIAO product candidate. NuPIAO is designed to have a longer half-life relative to first-generation EPIAO. In addition, we are in late-stage clinical trials for a concentrated high dose (36,000 IU/vial) formulation of EPIAO, which is designed to allow for less frequent administration, benefiting both patients and doctors. We expect to apply for marketing approval of high-dose EPIAO in 2007. If approved, we believe it will be the highest EPO dosage formulation available in the Chinese market. TPIAO ( ) We launched TPIAO, our newest internally developed protein-based therapeutic product, in January 2006. This product is a recombinant human thrombopoietin, or TPO, indicated for the treatment of chemotherapy-induced thrombocytopenia, a deficiency of platelets. Platelets are disc-shaped cells in the blood that assist in coagulation and the arrest of bleeding by repairing the walls of blood vessels. TPIAO represents the first TPO-based therapeutic approved by the SFDA for thrombocytopenia in China. We believe TPIAO is the only TPO-based therapeutic available in the Chinese market to date. In addition, the SFDA has granted us a five year monitoring period for TPIAO through 2010, during which other pharmaceutical companies are prohibited from manufacturing or importing a similar drug, except those whose applications for clinical trials were approved by the relevant Chinese authority prior to May 2005 at the commencement of TPIAO s monitoring period. We are aware of at least one other Chinese pharmaceutical manufacturer whose application for clinical trials may have been approved by May 2005 and who may be in clinical trials for a TPO-based therapeutic. For the nine months ended September 30, 2006, our total revenues from TPIAO sales were RMB10.2 million, accounting for 11.0% of our overall revenues for this period. We are also conducting a late-stage clinical trial of TPIAO for the treatment of idiopathic thrombocytopenic purpura, or ITP, an immune system disorder in which the body perceives platelets as foreign and destroys them. Our legacy products In addition to EPIAO and TPIAO, we market two protein-based therapeutics that had historically been significant contributors to our overall revenues. Due to unfavorable pricing and increased competition, we refocused our sales and marketing efforts in early 2004, and our legacy products are now marketed primarily by distributors. Intefen ( ). Intefen is our recombinant interferon alpha-2a product. Intefen is indicated for the treatment of carcinomas of the lymphatic and hematopoietic systems, such as lymphoma and leukemia, and viral infectious diseases, such as hepatitis C. We launched Intefen in the Chinese market in 1995. Inleusin ( ). Inleusin is our recombinant human interleukin-2, or IL-2, product. Inleusin is indicated for the treatment of renal cell carcinoma, the most common form of kidney cancer, metastatic melanoma, a type of skin cancer, and thoratic fluid build-up caused by cancer and tuberculosis. Inleusin is designed to stimulate the immune system in order to fight cancer and infectious diseases. We launched Inleusin in the Chinese market in 1996. Sales revenue (RMB in thousands) % of sales revenues Xiamen International Economic & Trading Co., Ltd. 25,836 35 % Beijing Tianxingpuxin Bio-Med Co., Ltd. 6,118 8 % Wuhan Pharmaceutical Group Co., Ltd. 1,738 2 % Wuhan Ruipu Pharmaceutical Co., Ltd. 1,381 2 % Liaoning Pharmaceutical Foreign Trade Corp. 1,183 Balance as of January 1, 2006 62,974 15,167 2,266 (39,787 ) 40,620 Capital on incorporation 13(a) 1 Effect of reorganization 13(a) 100,000,997 80 (62,974 ) 62,974 80 Net income (restated) Amendment No. 1 to Form F-1 REGISTRATION STATEMENT Under The Securities Act of 1933 Table of Contents Our in-licensed products Tietai Iron Sucrose Supplement ( ). Tietai Iron Sucrose Supplement, an intravenously administered prescription drug that is designed to treat anemia associated with iron deficiency, is indicated for patients with end-stage renal disease requiring iron replacement therapy. We in-licensed five-year exclusive PRC distribution rights for this product from Shenyang Borui Pharmaceutical Company Limited in May 2006. Tietai Iron Sucrose Supplement was launched in China in 2005, and we believe it will be complementary to our EPIAO franchise. Baolijin ( ). Baolijin is our in-licensed recombinant granulocyte colony-stimulating factor, or G-CSF, product. G-CSF is a protein that stimulates production of white blood cells. For cancer patients undergoing chemotherapy, the ability to produce red blood cells, white blood cells and platelets is severely compromised. Baolijin is indicated for the treatment of neutropenia, a condition associated with chemotherapy and characterized by low levels of neutrophils, a type of white blood cell important for fighting infections. In August 2006, we in-licensed exclusive PRC distribution rights for Baolijin from Chengdu Biological Institute for a period of five years. We believe that the addition of Baolijin to our product portfolio will complement the marketing of EPIAO and TPIAO for treatment of cancer patients receiving chemotherapy. Licenses to the Tietai Iron Sucrose Supplement and to Baolijin are held by Liaoning Bio-Pharmaceutical Company Limited, or Liaoning Sunshine, our variable interest entity. Our product pipeline We focus our research and development efforts on both novel and validated protein-based therapeutics for the treatment of diseases in the areas of nephrology, oncology, supportive cancer care, inflammation and infectious diseases. Our product pipeline, which we expect will be a key contributor to our future growth, consists of six product candidates in various stages of development. We employ a market-driven approach to our research and development efforts, and our team utilizes the latest molecular biology and biochemical techniques and technologies to develop promising product candidates. Our diversified product pipeline includes a number of next-generation protein-based therapeutics including NuPIAO, our second-generation EPIAO product candidate; NuLeusin, our next-generation Inleusin product candidate; TPIAO for the treatment of ITP; a human papilloma virus, or HPV, vaccine for the prevention of cervical cancer; and an anti-TNF humanized monoclonal antibody product candidate for the treatment of rheumatoid arthritis and other autoimmune diseases. We believe that each of these product candidates, if successfully developed and approved, would address significant market opportunities. Our sales and marketing team We maintain a sales and marketing force in 18 provinces and major cities in China, including the municipalities of Beijing and Shanghai and the city of Guangzhou. Our principal products are marketed by our 143 sales and marketing professionals and sold by our network of approximately 80 distributors to healthcare providers including, based on our internal estimates, approximately 800 hospitals, clinics and dialysis centers. Our internal sales and marketing staff details our principal products to physicians and hospital administrators and, as required by PRC laws, our distributors are engaged to contract with our customers for the sale of our principal products to physicians and hospitals. In addition, our legacy products Intefen and Inleusin are marketed, as well as sold, by distributors. Our sales force in China benefits from over ten years of experience in marketing protein-based therapeutics. As a result of our history as a provider of therapeutics to the Chinese market, we believe our Shenyang Sunshine brand is widely recognized throughout the PRC for quality and reliability. Sales revenue (RMB in thousands) % of sales revenues Beijing Tianxingpuxin Bio-Med Co., Ltd. 7,662 10 % Xiamen International Economic & Trading Co., Ltd. 5,844 8 % Shanghai Pharmaceutical Co., Ltd. 5,450 7 % Shanghai Siful Medicine Co., Ltd. 2,951 4 % Nanjing Medical Co., Ltd. 2,734 3SBio Inc. (Exact Name of Registrant as Specified in its Charter) Cayman Islands 2834 Not Applicable (State or Other Jurisdiction of Incorporation or Organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) No. 3 A1, Road 10 Shenyang Economy & Technology Development Zone Shenyang 110027 The People s Republic of China Tel: (86-24) 2581-1820 (Address, including zip code, and telephone number, including area code of registrant s principal executive offices) Table of Contents Our manufacturing operations We conduct on-site bulk manufacturing activities for EPIAO, TPIAO, Intefen and Inleusin at our 3,000 square meter Shenyang, China facility. We also manufacture our product candidates for clinical trials at this facility. All fill, finish and packaging activities in relation to our domestic sales are conducted at our Shenyang facility. A portion of our exported products are packaged in Shenyang and the rest is shipped overseas in bulk format as concentrated solutions of recombinant human erythropoietin, interferon alpha-2a or interleukin-2 for packaging. Our Shenyang facility was re-certified in 2005 in accordance with Chinese current Good Manufacturing Practices, or cGMP, and our cGMP certificate is valid for five years, until 2010. We plan to expand our plant in Shenyang to increase our manufacturing capacity, improve our production yields and take further advantage of our relatively low cost of labor and raw materials. OUR COMPETITIVE STRENGTHS We believe that our principal competitive strengths include the following: Leading market share for EPO in China; Diverse portfolio of marketed products and product candidates targeting the nephrology and oncology markets; Proven research and development capabilities; Nationwide sales and marketing network; High-quality proprietary manufacturing processes with significant cost advantages; Operational efficiency and a track record of growth and profitability; and Experienced and market-oriented management team. OUR STRATEGY Our goal is to become the leader in the research, development, manufacture and commercialization of protein-based therapeutics in China and to continue to advance our drugs into international markets. The key elements of our strategy are to: Maximize sales of our flagship product, EPIAO, in the Chinese market; Maximize sales of our other existing products in the nephrology and oncology markets in China; Develop and commercialize candidates in our product pipeline and new products that address unmet medical needs in commercially attractive markets; Expand our sales and marketing network; Continue to expand beyond the Chinese domestic market; and Acquire or in-license new technologies, products or companies. RISK FACTORS Our business is subject to numerous risks, including: our dependence on our flagship product, EPIAO; limitations in our ability to successfully maintain the selling prices of our established products or to develop and commercialize new products; Sales revenue (RMB in thousands) % of sales revenues Beijing Tianxingpuxin Bio-Med Co., Ltd. 13,333 13 % Shanghai Pharmaceutical Co., Ltd. 8,867 9 % Shanghai Siful Medicine Co., Ltd. 4,831 5 % Nanjing Medical Co., Ltd. 4,359 4 % Guangdong Xiaoqiling Pharmacy Co., Ltd. 4,308 Sales revenue (RMB in thousands) % of sales revenues Beijing Tianxingpuxin Bio-Med Co., Ltd. 11,574 13 % Shanghai Pharmaceutical Co., Ltd. 7,769 8 % Shanghai Siful Medicine Co., Ltd. 6,144 7 % Sinopharm Medicine Holding Guangzhou Co., Ltd. 6,082 7 % Nanjing Medical Co., Ltd. 4,055 CT Corporation System, 111 Eighth Avenue, New York, NY 10011 Tel: (212) 894-8940 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents our ability to maintain and enhance the Shenyang Sunshine and EPIAO brands; our reliance on a limited number of suppliers and distributors; our dependence on senior management and key research and development personnel; our ability to access adequate working capital; our ability to protect our intellectual property; our ability to comply with U.S. public reporting requirements, including maintenance of an effective system of internal controls over financial reporting; and because of our reliance on revenues from sales in the PRC, adverse changes in political, economic and other policies of the Chinese government could materially harm our business. You should refer to Risk factors, beginning on page 12, for a more detailed discussion of the risks involved in investing in our ADSs. OUR CORPORATE STRUCTURE AND OTHER CORPORATE INFORMATION 3SBio Inc. was incorporated in the Cayman Islands in August 2006 as an exempted company with limited liability. We conduct our manufacturing and marketing activities through Shenyang Sunshine, a PRC wholly foreign owned enterprise. Shenyang Sunshine commenced business operations in 1993 and became our wholly owned subsidiary in September 2006. We conduct our distribution and logistics activities primarily through Liaoning Bio-Pharmaceutical Company Limited, or Liaoning Sunshine, and Beijing Sunshine Bio-product Sales Company, or Beijing Sunshine, both of which are variable interest entities, or VIEs, whose results are consolidated in our financial statements. Liaoning Sunshine and Beijing Sunshine are considered our VIEs because we, through contractual arrangements, bear the economic risks with respect to, and derive the economic benefits normally associated with, ownership of these entities. While we maintain contractual relationships with both Liaoning Sunshine and Beijing Sunshine, we do not hold any ownership stake in either of the entities. Please refer to Our corporate structure Our contractual arrangements with Liaoning Sunshine and Beijing Sunshine for a more detailed description of our relationships with Liaoning Sunshine and Beijing Sunshine. Our principal executive offices are located at No. 3 A1, Road 10, Shenyang Economy & Technology Development Zone, Shenyang 110027, the People s Republic of China, and our telephone number at that address is (86-24) 2581-1820. Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website is www.3sbio.com. The information on our website is not a part of this prospectus. Our agent for service of process in the United States is CT Corporation System located at 111 Eighth Avenue, New York, New York 10011. RECENT PRC REGULATORY DEVELOPMENTS On September 8, 2006, a new PRC regulation jointly promulgated by six PRC regulatory agencies became effective. See Risk factors The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with this offering under a recently adopted PRC regulation; any requirement to obtain CSRC approval could significantly delay this offering or could have a material adverse effect on our business, operating results, reputation and trading price of our ADSs, and may also create uncertainties for this offering. The regulation also establishes more complex procedures for acquisitions by foreign investors, which could make it more difficult to pursue growth through acquisitions and Regulations Regulation on overseas listings for more information regarding this new PRC regulation. Copies to: Gregory G. H. Miao Skadden, Arps, Slate, Meagher & Flom LLP 42/F Edinburgh Tower The Landmark 15 Queen s Road Central Hong Kong (852) 3740-4700 Donald J. Murray Dewey Ballantine LLP 1301 Avenue of the Americas New York, NY 10019 (212) 259-8000 Table of Contents RESTATEMENT OF FINANCIAL STATEMENTS Our consolidated financial statements as of and for the nine months ended September 30, 2006 have been restated to correct an error in the recognition of share-based compensation expenses. The error resulted in an understatement of our net income previously reported in our financial statements for the nine months ended September 30, 2006 by RMB 1,951,000 (US$247,000) and a corresponding overstatement of RMB 1,951,000 (US$247,000) in accrued expenses and other payables in our consolidated balance sheet as of September 30, 2006. For more details, please see Note 2 to our consolidated financial statements included elsewhere in this prospectus. CERTAIN CONVENTIONS THAT APPLY TO THIS PROSPECTUS Unless otherwise indicated, all translations from Renminbi to US dollars for financial data have been made at a rate of RMB7.904 to US$1.00, the noon buying rate as certified for customs purposes by the Federal Reserve Bank of New York on September 29, 2006, the last business day in September 2006. Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Table of Contents The offering ADSs offered by us 7,187,817 ADSs, representing 50,314,719 ordinary shares ADSs offered by the selling shareholders 512,183 ADSs, representing 3,585,281 ordinary shares Total 7,700,000 ADSs, representing 53,900,000 ordinary shares Offering price The initial public offering price per ADS is expected to be between US$12.00 and US$14.00. The ADSs Each ADS represents seven ordinary shares, par value US$0.0001 per share. The ADSs will be evidenced by American Depository Receipts, or ADRs. The depositary, JPMorgan Chase Bank, N.A., will be the holder of the ordinary shares underlying your ADSs. If we declare dividends on our ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our ordinary shares, after deducting its fees and expenses. You may turn in your ADSs to the depositary in exchange for ordinary shares underlying your ADSs. The depositary will charge you fees for exchanges. We may amend or terminate the deposit agreement without your consent, and if you continue to hold your ADSs, you agree to be bound by the deposit agreement as amended. To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled Description of American Depositary Shares. We also encourage you to read the deposit agreement, which is filed as an exhibit to the registration statement of which this prospectus is a part. ADSs outstanding immediately after this offering 7,700,000 ADSs Ordinary shares outstanding after the offering 150,315,717 ordinary shares, including 53,900,000 shares represented by ADSs CALCULATION OF REGISTRATION FEE Table of Contents Over-allotment option The underwriters have an option, exercisable within 30 days from the date of this prospectus, to purchase a maximum of 387,949 ADSs from us and 767,051 ADSs from the selling shareholders to cover over-allotments of ADSs. Use of proceeds We estimate that the net proceeds to us of this offering will be approximately US$81.9 million, or approximately US$86.6 million if the underwriters exercise the over-allotment option in full, assuming an initial public offering price of US$13.00 per ADS, the midpoint of the initial public offering price range as shown on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and expenses payable by us. We expect to use the net proceeds from this offering for general corporate purposes, including funding clinical trials, research and development and expanding and enhancing our manufacturing facilities and our sales and marketing network. We will not receive any of the proceeds from the sale of our ADSs by the selling shareholders. Dividend policy We do not anticipate paying any cash dividends on our ordinary shares in the foreseeable future. Risk factors You should carefully read and consider the information set forth under Risk factors and all other information set forth in this prospectus before investing in our ADSs. Listing We have applied to have our ADSs included for quotation on The Nasdaq Global Market. Our ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system. Proposed Nasdaq Global Market symbol SSRX Depositary JPMorgan Chase Bank, N.A. The number of ordinary shares outstanding after this offering is based on the 100,000,998 shares outstanding as of January 29, 2007 and does not include: 1,060,000 ordinary shares issuable upon the exercise of options outstanding as of January 29, 2007, having an exercise price of US$1.60 per share; 15,000 unvested shares granted to an executive of the Company on August 1, 2006; and 10,000,000 additional ordinary shares that are reserved for issuance under our 2006 Stock Incentive Plan. See Management Stock Option Plan. Depending on market conditions at the time of pricing of this offering and other considerations, we may sell fewer or more ADSs than the number set forth on the cover page of this prospectus. We will inform investors at or prior to the time of pricing of any change in the number of ADSs being sold. 2003 2004 2005 2005 RMB 000 % RMB 000 % RMB 000 % US$ 000 % Beijing Tianxingpuxin Bio-Medical Co., Ltd. 6,118 8 7,662 10 13,333 13 1,687 13 Xiamen International Economic & Trading Co., Ltd. 25,836 35 5,844 Title of Each Class of Securities to be Registered Proposed Maximum Aggregate Offering Price(2)(3)(4) Amount of Registration Fee Ordinary Shares, par value US$0.0001 per share(1) US$ 123,970,000 US$ 13,265 Table of Contents
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information in this prospectus, including the Risk Factors, our consolidated financial statements and the accompanying notes contained at the end of this prospectus. Unless otherwise mentioned or unless the context otherwise indicates, all references in this prospectus to we, us, our, our firm, JMP Group, or similar references mean JMP Group Inc. and its subsidiaries. Prior to the completion of this offering, we will complete a corporate reorganization so that JMP Group Inc. succeeds to the business historically operated by JMP Group LLC. Accordingly, unless otherwise specified, we describe the business in this prospectus as if it were our business, giving effect to the corporate reorganization as if it had been completed prior to this offering. JMP Group Inc. We are a full-service investment banking and asset management firm headquartered in San Francisco. We have a diversified business model with a focus on small and middle-market companies and provide: investment banking services, including corporate finance, mergers and acquisitions and other strategic advisory services, to corporate clients; sales and trading and related brokerage services to institutional investors; proprietary equity research related to our six target industries; and asset management products and services to institutional investors, high net-worth individuals and for our own account. We were founded in 1999 by senior professionals from Montgomery Securities, a leading investment bank serving growth companies during the 1980s and 1990s, which now operates as Banc of America Securities. We were formed to take advantage of a void in the marketplace created by the acquisition of established independent research boutiques by large commercial banks during the mid- and late-1990s. Like our research-driven predecessors, as a growth-oriented, entrepreneurial firm, we are dedicated to serving the needs of small and middle-market companies and the institutions that invest in them. We have attracted experienced, revenue-producing professionals who are knowledgeable about their industries and have longstanding relationships with successful companies in their sectors. As of December 31, 2006, we had 64 managing directors and 27 non-member directors who together represented nearly 50% of our total employees. We focus our efforts on clients in six growth industries: business services, consumer, financial services, healthcare, real estate, and technology. Our specialization in these industries has enabled us to develop recognized expertise and to cultivate extensive industry relationships. As a result, we have established our firm as a key advisor for our corporate clients, a trusted resource for institutional investors, and an effective investment manager for our asset management clients. We approach our work with the idea that expertise, intellectual capital and relationships cannot be commoditized. In our view, producing attractive returns for our investors and maintaining a strong balance sheet are essential in building a successful enterprise over the long term. As a result, we have sought to balance rapid growth with acceptable levels of profitability. We believe that we have constructed a successful operating model for serving growth industries, which will help us continue to grow our firm. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Table of Contents Since inception through December 31, 2006, we have: lead managed and co-managed 133 public securities offerings, including initial public, follow-on and preferred equity offerings, and 59 private securities offerings, including private investments in public equities, or PIPEs, Rule 144A private offerings, and trust preferred securities offerings, representing more than $21.5 billion of total gross proceeds; advised companies on 62 mergers and acquisitions, or M&A, transactions and other strategic advisory assignments representing approximately $5.3 billion of total transaction value; increased our daily trading volume of publicly traded equity securities to an average of 5.5 million shares for the year ended December 31, 2006, compared to 3.2 million shares for the year ended December 31, 2005 and 2.6 million shares for the year ended December 31, 2004; established a highly experienced equity research team, including 20 senior research analysts who publish independent fundamental research on 279 companies; and formed a family of five proprietary hedge funds, two funds of hedge funds, and an externally advised real estate investment trust, or REIT. We have achieved strong financial results since our inception, generating growth in revenues and earnings as well as diversifying our revenues by industry and product. This diversification has allowed us to be consistently profitable in a variety of economic and capital markets environments, including the three-year industry downturn following the bursting of the Internet and technology bubble. In our investment banking and brokerage businesses, we earn transaction fees for providing capital raising and financial advisory services to corporate clients and commissions for executing equity trades for institutional investors. In our asset management business, we earn management fees from the funds we manage and the REIT we advise based on the net assets under management, and we earn incentive fees if our investment returns exceed certain benchmarks. During the five years ended December 31, 2006, we increased annual revenues from $19.7 million to $86.8 million. Principal Business Lines We operate our business through two subsidiaries, JMP Securities LLC, a registered broker-dealer and JMP Asset Management LLC, a registered investment adviser. Through JMP Securities, we conduct our investment banking, sales and trading, and equity research businesses. Through JMP Asset Management, we manage hedge funds and other investment vehicles. Investment Banking. Our investment banking professionals provide capital raising, merger and acquisition and other strategic advisory services to corporate clients. Dedicated industry coverage groups serve each of our six targeted sectors, enabling our investment bankers to develop expertise in specific markets and to form close relationships with corporate executives, private equity investors, venture capitalists and other key industry participants. Sales and Trading. Our sales and trading professionals distribute our equity research products and communicate our proprietary investment recommendations to our client base of institutional investors. In addition, our sales and trading staff executes equity trades on behalf of our clients and sells the securities of companies for which we act as an underwriter. Equity Research. We believe that objective, fundamental analysis forms the basis for value-added equity research and we view our equity research as the foundation of our firm. Our research department consists of 20 senior research analysts, including 11 managing directors with an average AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents of 13 years of industry experience, and a total of 37 research professionals who publish investment recommendations on 279 primarily small and midsized public companies. Our research analysts develop proprietary investment themes and produce timely, action-oriented recommendations to assist our clients with their investment decisions. Asset Management. Our asset management group actively manages several funds for institutional and high-net-worth investors seeking alternative investment opportunities, in addition to committing our own capital to principal investments. The objective of our multiple fund strategies is to diversify both revenue and risk while maintaining the attractive business economics of the hedge fund model. To the extent that we invest for our own account, we commit a portion of our capital to a portfolio of equity securities managed by JMP Asset Management and also contribute capital as the general partner of the funds JMP Asset Management manages. In some cases, we co-invest alongside our institutional clients in private transactions originated by our investment banking business. We may also invest in private equity funds or other alternative investment vehicles managed by third parties, although we have done so infrequently in the past. Market Opportunity Since the mid-1990s, there have been more than 40 acquisitions of U.S. investment banking firms that we would have considered our direct peers or competitors. Most of these firms were acquired by larger financial institutions, including U.S. and international depository institutions, insurance companies and investment banking firms. This continued industry consolidation has led to: the tendency of major financial institutions and the firms acquired by them to focus on more mature industry segments, companies with larger market capitalizations, and larger transactions; the reduction of equity research coverage, specifically of small and middle-market growth companies; and restructuring and downsizing within the remaining consolidated investment banks, resulting in a further reduction of investment banking and brokerage resources allocated to small and middle-market companies and their investors. We believe that small and middle-market companies now receive less consistent attention from consolidated investment banking firms, which now pursue clients and transactions with larger market values. Due to our focus on small and middle-market companies within our six target industries, we believe that our extensive relationships and expertise in serving these companies provide us with a distinct competitive advantage. Competitive Strengths We believe that the following factors define our business model, establish our competitive position and distinguish us from other companies that participate in our businesses and markets: Experienced and Focused Owner-Managers. We are led by a highly skilled and experienced team of industry professionals. Before founding or joining our firm, many of our senior professionals held positions at leading investment banking and investment management firms. Our 64 managing directors average 16 years of industry experience and have each made a substantial financial commitment to our firm. Collectively, our managing directors owned approximately 76.7% of our equity prior to this offering and will own approximately 46.4% of our equity immediately after this offering. Diversified Business Model. The selection of our six target industries, the development of multiple products and the establishment of our three revenue-producing business lines investment banking, sales and trading, and asset management have created a diversified business model, especially when JMP Group Inc. (Exact name of registrant as specified in its charter) Table of Contents compared to that of our more specialized competitors. Historically, our six target industries have performed, in certain respects, counter-cyclically to one another and have yielded a large number of clients and business opportunities. Small Company and Middle-Market Specialization. We believe that we have established our firm as a leading advisor to small and middle-market companies within our six target industries. We view the experience and far-reaching relationships of our senior professionals, coupled with our proven ability to meet the special transactional and strategic needs of our clients, as significant competitive strengths for our firm. Our specialized client focus has enabled us to generate significant repeat business and typically has enabled us to earn more prominent roles in subsequent transactions. Independence. We are an independent firm owned by our employees and by outside investors. We are not a part of a larger, diversified financial institution with multiple business objectives. As a result, we are not subject to the same conflicts of interest that may challenge major financial services firms with goals that are at times contrary to those of their clients. Highly Regarded Equity Research Product. We believe that delivering differentiated, fundamental research to institutional investors that can impact their portfolio returns is one of the primary ways that we can distinguish ourselves in the marketplace. We are experts on the industries we cover and provide informed opinions and actionable investment ideas to our institutional brokerage clients about small and midsized public companies. Highly Scalable Asset Management Business. We believe that several of the funds we manage have produced historical returns that are attractive to investors. Our goal is to substantially increase client assets under management and to provide investors with favorable absolute returns. We currently have the capacity to manage additional assets without a substantial incremental investment in infrastructure. Strong Corporate Culture. Our corporate culture is characterized by an entrepreneurial spirit and a desire to build a firm that is widely recognized for its excellence. Our managing directors are directly and extensively involved in our daily operations. Our firm s culture has helped us attract seasoned professionals from other respected financial services firms and to maintain a low rate of attrition. Growth Strategy Our growth strategy is to stay focused on our core activities of investment banking, sales and trading, equity research and asset management while continuing to attract experienced revenue-producing professionals to our firm. We may also make investments in businesses or products that are complementary to our core businesses and may selectively pursue strategic acquisitions. We intend to continue to grow by: recruiting experienced professionals with established industry and client relationships, typically from well-known investment banking firms; increasing the frequency and extent of our participation in public and private securities offerings, in particular increasing our number of lead managed mandates as well as receiving larger economic roles as a co-manager in offerings in our targeted industries; increasing our participation as a financial advisor in mergers and acquisitions and other strategic corporate transactions; expanding the group of institutional investors to which we market our equity research and sales and trading products and services, and by increasing the frequency with which we do business with these investors; increasing the number and volume of securities in which we trade; Delaware 6211 20-1450327 (State or other Jurisdiction of Incorporation or Organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 600 Montgomery Street San Francisco, California 94111 (415) 835-8900 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Table of Contents increasing the number of companies under coverage by our equity research analysts; increasing assets under management and developing new asset management products; and building upon our investment banking experience to generate principal investment opportunities. Notwithstanding our competitive strengths and growth strategy, we face a number of risks. We focus our resources on a limited number of industries and depend on them to generate a significant portion of our revenues. If we are unable to originate or execute a sufficient number of transactions in these key industries, our revenues and net income will suffer. In addition, the timing of our investment banking transactions can be unpredictable, as are the related revenues. Consequently, our financial results may fluctuate substantially from quarter to quarter. With regard to our asset management business, our assets under management may decline during periods in which our hedge funds and other investment products generate unsatisfactory investment returns. Any principal investments or acquisitions we pursue may result in additional risks and uncertainties in our business, including the risk of capital loss. We face strong competition from larger firms, some of which have greater resources and name recognition and which offer a broader range of products and services. Additionally, we compete to attract qualified professionals with numerous firms in our businesses and other related businesses, such as hedge fund management, venture capital and private equity. A failure to hire highly skilled employees and to retain our existing employees could materially impede our growth and success. Why We Are Going Public We believe that this offering will allow us to better execute our growth strategy. We believe that as a public company we will have greater visibility with prospective clients and industry peers, increased access to capital, and additional currency with which to explore strategic opportunities as they arise. Finally, we expect that operating as a public company will provide us with increased brand recognition and will enhance our ability to attract and retain top professionals by enabling us to offer equity-based incentives linked directly to the long-term success of our business. General Information As of December 31, 2006, we had 187 employees, including 91 senior professionals, which are our managing directors and directors. Our headquarters is located at 600 Montgomery Street, Suite 1100, San Francisco, California 94111. We have additional offices in New York, New York; Boston, Massachusetts; and Chicago, Illinois. Our main office telephone number is (415) 835-8900. We maintain an Internet website at http://www.jmpsecurities.com. The information on our website is not part of this prospectus. Janet L. Tarkoff Chief Legal Officer JMP Group Inc. 600 Montgomery Street San Francisco, California 94111 Telephone: (415) 835-8900 Fax: (415) 835-8920 (Name, address, including zip code, and telephone number, including area code, of agent for service) (1) Based on 20,800,039 shares of common stock outstanding as of the completion of our offering. Does not include (i) an aggregate of 2,674,940 shares issuable upon the exercise of outstanding options to purchase shares of our common stock as of December 31, 2006, or (ii) the 1,931,060 shares of our common stock underlying restricted stock units that we intend to grant to certain of our employees effective as of the completion of this offering. Copies to: Bruce A. Mann, Esq. Andrew D. Thorpe, Esq. Morrison & Foerster LLP 425 Market Street San Francisco, California 94105 Telephone: (415) 268-7000 Fax: (415) 268-7522 Peter T. Healy, Esq. O Melveny & Myers LLP Embarcadero Center West 275 Battery Street, 26th Floor San Francisco, California 94111 Telephone: (415) 984-8700 Fax: (415) 984-8701 (1) Based on profits through the quarter ended March 31, 2007. (2) Includes pro rata share of (i) distributions of $10.0 million undistributed earnings for periods prior to 2006 and (ii) $4.4 million for estimated income tax obligations. (3) Related to membership interests owned by our directors. Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Table of Contents The Offering Common stock offered by JMP Group Inc. 6,000,000 shares Common stock offered by the selling stockholders 2,021,316 shares Shares of common stock to be outstanding after this offering 20,800,039 shares Overallotment option 1,203,197 shares to be sold by JMP Group Inc. Use of proceeds We estimate that our net proceeds from this offering will be approximately $61.7 million, after deducting the estimated underwriting discounts and commissions and estimated offering expenses. We intend to use the net proceeds from this offering for general corporate purposes, including expansion of our existing business activities, and to fund principal investments and strategic investments as such opportunities may arise in the future. We will not receive any of the net proceeds from the sale of shares of common stock by the selling stockholders. Dividend policy Following this offering and subject to legally available funds, we currently intend to declare a quarterly cash dividend on all outstanding shares of common stock. The first quarterly dividend will be for the second quarter of 2007 and will be prorated for the portion of that period subsequent to the completion of this offering. Our dividend policy permits the board of directors to exercise its discretion in determining the appropriate level and timing of dividend payments. We intend to pay dividends out of a portion of our current earnings for each quarter and do not intend to borrow funds in order to pay dividends. The amount of such dividends will be determined by our board of directors, who will take into account various factors, including, among others, our financial performance, earnings, liquidity and the operating performance of our segments as assessed by management. We do not intend to pay out all excess cash and we do not plan to pay dividends on unvested shares of restricted stock units or equity-based awards that we will issue prior to and in connection with this offering. However, no assurance can be given that any dividends, whether quarterly or otherwise, will or can be paid. JMP Group Inc. will be a holding company and our ability to pay dividends to our stockholders will be subject to the ability of JMP Group LLC to provide cash to us. Any distribution to us made by JMP Group LLC will be at the discretion of our board of directors and will depend on contractual, legal and regulatory restrictions on the payment of distributions by JMP Group LLC. In particular, JMP Group LLC s credit facility prohibits us from making any cash distributions if an event of default has occurred and is CALCULATION OF REGISTRATION FEE Title of Each Class of Securities to be Registered Amount to be Registered (1) Proposed Maximum Offering Price Per Share (2) Proposed Maximum Aggregate Offering Price Amount of Registration Fee (3) Common Stock, par value $0.001 per share 9,224,513 shares $ 12.50 $ 115,306,418 $ 11,171 (1) Includes common stock issuable upon exercise of underwriters over-allotment option, if any. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended. (3) Filing fees of $10,700 were previously paid in connection with the initial filing of this Registration Statement on February 14, 2007, and filing fees of $424 were previously paid in connection with Amendment No. 2 of this Registration Statement on April 19, 2007. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. Table of Contents continuing or would result from the cash distribution. Additionally, SEC regulations also provide that JMP Securities may not pay cash dividends to us if certain minimum net capital requirements are not met.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001384360_simcere_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001384360_simcere_prospectus_summary.txt
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+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001385145_cellcom_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001385145_cellcom_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before deciding to invest in our ordinary shares. You should read this entire prospectus carefully, including the
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001385187_covidien_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001385187_covidien_prospectus_summary.txt
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+This summary highlights information contained in this prospectus relating to Covidien and the notes we are offering. You should read the entire prospectus, including the risk factors, our historical combined financial statements, and our unaudited pro forma condensed combined financial statements and the respective notes to those historical and pro forma financial statements. Except as otherwise indicated or unless the context otherwise requires, the information included in this prospectus assumes the completion of the separation. The term "CIFSA" refers to Covidien International Finance S.A., the issuer of the notes. Except as otherwise indicated or unless the context otherwise requires, "Covidien," "we," "us" and "our" refer to Covidien Ltd. and its combined subsidiaries, including CIFSA "Tyco Electronics" refers to Tyco Electronics Ltd. and its combined subsidiaries and "Tyco International" refers to Tyco International Ltd. and its consolidated subsidiaries. When we intend to refer only to Covidien Ltd., a Bermuda corporation, without including its combined subsidiaries, we use the term "Covidien Ltd." Unless otherwise indicated, references in this prospectus to fiscal 2007, fiscal 2006, fiscal 2005 and fiscal 2004 are to Covidien's fiscal years ended September 28, 2007, September 29, 2006, September 30, 2005 and September 30, 2004. Our historical combined financial information has been prepared on a "carve-out" basis to reflect the operations, financial condition and cash flows specifically allocable to the Covidien component of Tyco International during all periods shown. Our pro forma combined financial information adjusts our historical combined financial information to give effect to our separation from Tyco International and any related financing. Our Company We are a global leader in developing, manufacturing and distributing medical devices and supplies, diagnostic imaging agents, pharmaceuticals and other healthcare products for use in clinical and home settings. Our products are found in almost every hospital in the United States, and we have a significant and growing presence in non-U.S. markets. Our portfolio of products, sold under well-known brand names such as United States Surgical, Autosuture, Valleylab, Mallinckrodt, Nellcor, Puritan Bennett and Kendall, serve healthcare needs in the operating room and other hospital settings, long-term care and other alternate care facilities, doctors' offices and the home. We believe that we hold market-leading positions in many of the major markets in which we compete. We conduct our business through five segments: Our Medical Devices segment develops, manufactures and sells surgical instruments and devices, respiratory and monitoring solutions and other clinician-preferred medical devices. We market these products primarily to physicians, nurses, materials managers, group purchasing organizations, or GPOs, and governmental healthcare authorities. Our Imaging Solutions segment develops, manufactures and markets contrast agents, contrast delivery systems and radiopharmaceuticals. We market these products primarily to physicians, technologists and purchasing administrators at hospitals, imaging centers, cardiology clinics and radiopharmacies. Our Pharmaceutical Products segment develops, manufactures and distributes active ingredients used in pharmaceuticals, dosage pharmaceuticals and specialty chemicals. We sell active pharmaceutical ingredients to major branded and generic pharmaceutical manufacturers and dosage products to major wholesalers and drug store chains. Our Medical Supplies segment develops, manufactures and markets a broad range of traditional wound care products, absorbent hygiene products and operating room kits and accessories, and also is an original equipment manufacturer, or OEM, of various medical supplies for a number of leading medical device companies. These products are primarily used in hospitals, surgi-centers and alternate care facilities and are marketed primarily to materials managers and GPOs. Revenue from sublease activity $ $ 397 Rental expense 514 General and administrative expense Funded status $ (128 ) $ (158 ) $ (111 ) $ (112 ) Unrecognized net actuarial loss 209 262 59 69 Unrecognized prior service cost 10 9 1 (3 ) Contributions after the measurement date 2 1 Funded status $ (187 ) $ (202 ) Unrecognized net loss 58 75 Unrecognized prior service benefit (40 ) (38 ) Contributions after the measurement date 1 Outstanding at September 29, 2006 158,979 22.45 2.2 $ Net sales $ Net sales $ Net sales $ WHERE YOU CAN FIND MORE INFORMATION After our separation from Tyco International, we will become subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended and, in accordance with the Exchange Act, we will file periodic reports, proxy statements and other information with the SEC. We maintain a website on the Internet at http://www.covidien.com. We will make available free of charge, on or through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as soon as reasonably practicable after such material is electronically filed with the SEC. This reference to our Internet address is for informational purposes only and shall not, under any circumstances, be deemed to incorporate the information available at such Internet address into this prospectus. Our Retail Products segment develops, manufactures and markets a variety of private label (also known as retail brand) absorbent hygiene products. We are the industry leader in North America for private label adult incontinence, feminine hygiene and infant care products. We sell these products primarily to mass merchandisers, food stores, dollar stores and drug stores. Strengths We believe that we have the following strengths: Scale, product diversity and reach. We are one of the largest global manufacturers and marketers in the healthcare industry. We offer products in many fields that we believe have higher growth opportunities due to prevailing healthcare trends, including laparoscopic surgery, electrosurgery, biosurgery, sleep therapy and pain management. Portfolio of leading brands. We believe that our brands are among the most well-known and respected in the healthcare marketplace. We have introduced key product innovations in a number of fields, including laparoscopic instrumentation and surgical staplers (Autosuture), pulse oximeters (Nellcor), mechanical devices to prevent deep-vein thrombosis (Kendall) and vessel sealing systems (LigaSure). Strong customer relationships and sales force. Our sales force of approximately 4,200 professionals is focused on developing and maintaining strong relationships with clinician decision makers. We also have well established relationships with GPOs and integrated delivery networks, or IDNs, non-U.S. healthcare authorities, retailers and other major purchasers of our products. Operational excellence. We have a history of developing and manufacturing high-quality products in a cost-effective manner. Strategy Our strategy is to enhance growth by increasing research and development initiatives, pursuing targeted external opportunities and enhancing our global commercialization infrastructure, including sales, marketing and distribution. We are committed to the following initiatives: Operating our business to focus on growth. We intend to continue developing industry-leading capabilities to translate healthcare provider and hospital insights into products that make our customers more successful. We also are implementing global initiatives throughout our businesses to generate opportunities for growth. We are increasing investments in our sales and marketing infrastructure to further strengthen our customer relationships and competitive position to capitalize on global healthcare needs and trends. Additionally, we are enhancing our business development function to better enable us to evaluate and execute external opportunities to expand and enhance our product portfolio. Commitment to innovation. We plan on broadening and enhancing our product offerings through an increased commitment to identify, obtain and develop new technologies through internal research and development initiatives, licensing and distribution transactions and selective acquisitions. We intend to focus these efforts primarily on product areas that are driven by clinician preference and technological innovation, which we believe will offer higher growth rates and margins. Increasing global market penetration. We believe that we have promising opportunities in non-U.S. markets to expand our market position. We have designed our post-separation organization and management structure to integrate U.S. and non-U.S. operations. We expect that our new focus on global management of our product lines should assist us in developing and commercializing new products that meet global needs. Assets Current Assets: Cash and cash equivalents $ 242 $ 141 Accounts receivable trade, less allowance for doubtful accounts of $42 and $58 1,542 1,448 Inventories 1,255 1,066 Prepaid expenses and other current assets 332 200 Income taxes receivable 91 51 Deferred income taxes 179 349 Assets held for sale Cash Flows From Investing Activities: Capital expenditures (432 ) (331 ) (251 ) Acquisitions, net of cash acquired (382 ) (66 ) Divestitures, net of cash retained 74 4 3 Increase in restricted cash (32 ) (8 ) Other (8 ) 14 Service cost $ 8 $ 8 $ 8 $ 15 $ 12 $ 13 Interest cost 33 33 34 12 12 11 Expected return on plan assets (37 ) (35 ) (27 ) (10 ) (8 ) (7 ) Amortization of prior service cost 1 1 1 Amortization of net actuarial loss 19 17 18 3 2 4 Plan settlements, curtailment and special termination benefits 2 Total assets: Medical Devices $ 9,531 $ 8,697 $ 8,760 Imaging Solutions 1,123 1,050 1,037 Pharmaceutical Products 1,522 1,449 1,469 Medical Supplies 631 599 608 Retail Products 817 784 829 Corporate(3) 482 931 867 Assets held for sale Assets Current Assets: Cash and cash equivalents $ $ 242 $ 242 Accounts receivable trade, net 1,542 1,542 Inventories 1,255 1,255 Prepaid expenses and other current assets 332 332 Income taxes receivable 91 91 Deferred income taxes 179 179 Assets held for sale 2 Cash Flows From Investing Activities: Capital expenditures (251 ) (251 ) Divestitures, net of cash retained 3 3 Increase in restricted cash (8 ) (8 ) Other 2 Assets Current Assets: Cash and cash equivalents $ $ $ 242 $ $ 242 Accounts receivable trade, net 1,542 1,542 Inventories 1,255 1,255 Intercompany receivable 1 5,079 (5,080 ) Prepaid expenses and other current assets 332 332 Income taxes receivable 91 91 Deferred income taxes 179 179 Assets held for sale 2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Managing our businesses with a disciplined financial perspective. We intend to increase our focus on maximizing return on invested capital by controlling manufacturing and logistical costs while continuing to strive for top-line revenue growth. Class Action Settlement On May 14, 2007, Tyco International entered into a memorandum of understanding with plaintiffs' counsel in connection with the settlement of 32 purported class action lawsuits. Under the terms of the memorandum of understanding, the plaintiffs have agreed to release all claims against Tyco International, the other settling defendants and ten other individuals in consideration for the payment of $2.975 billion to the certified class and assignment to the class of any net recovery of any claims possessed by Tyco International and the other settling defendants against Tyco International's former auditor, PricewaterhouseCoopers. Defendant PricewaterhouseCoopers is not a settling defendant and is not a party to the memorandum. Tyco International and the other settling defendants have denied and continue to deny any wrongdoing and legal liability arising from any of the facts or conduct alleged in the actions. Pursuant to the terms of the memorandum of understanding, L. Dennis Kozlowski, Mark H. Swartz and Frank E. Walsh, Jr., also are excluded from the settling defendants, and the class will assign to Tyco International all of their claims against defendants Kozlowski, Swartz and Walsh. In exchange, Tyco International will agree to pay to the certified class 50% of any net recovery against these defendants. In connection with the class action settlement, we will incur a charge of $1.249 billion in the third quarter of fiscal 2007 for which we do not expect to recognize any tax benefit. When the Separation and Distribution Agreement is entered into, we will record a $2.975 billion liability and a $1.726 billion receivable from Tyco International and Tyco Electronics for their portion of the liability. The memorandum of understanding does not address the following securities class actions, which remain outstanding: Stumpf v. Tyco International Ltd., New Jersey v. Tyco, Ballard v. Tyco International Ltd., Sciallo v. Tyco International Ltd., et al., Jasin v. Tyco International Ltd., et al., and Hall v. Kozlowski. The memorandum of understanding also does not address any consolidated ERISA litigation in which Tyco International and certain of its current and former employees, officers and directors have been named as defendants. Covidien International Finance S.A. Covidien International Finance S.A., or CIFSA, a Luxembourg company, is a wholly-owned subsidiary of Covidien Ltd. CIFSA's registered and principal offices are located at 17, Boulevard de la Grande Duchesse Charlotte, L-1331 Luxembourg. Its telephone number at that address is (352) 464-340-1. CIFSA is a newly-formed holding company established in connection with the separation of the healthcare business of Tyco International to directly and indirectly own all of the operating subsidiaries of Covidien, to issue the notes and to perform treasury operations for Covidien. Otherwise, it conducts no independent business. We have not included separate financial statements for CIFSA, which was formed in December 2006, in this prospectus because CIFSA was not formed until December 2006, its initial capitalization was not material and it will not have significant operations or assets until shortly before the separation. Covidien Ltd. Covidien Ltd. is a Bermuda corporation. Its registered and principal office is located at Second Floor, 90 Pitts Bay Road, Pembroke HM 08, Bermuda and its telephone number at that address is (441) 292-8674. Its executive office in the United States is located at 15 Hampshire Street, Mansfield, Massachusetts 02048 and its telephone number at that address is (508) 261-8000. Gross profit 2,348 47.1 2,188 46.5 Selling, general and administrative expenses 1,178 23.6 1,025 21.8 Research and development expenses 129 2.6 130 2.8 Restructuring charges 21 0.4 Gain on divestiture (46 ) (1.0 ) In-process research and development charges 8 0.2 Gross profit 2,348 2,188 Selling, general and administrative expenses 1,178 1,025 Research and development expenses 129 130 Restructuring charges 21 Gain on divestiture (46 ) In-process research and development charges 8 Current maturities of long-term debt: Due to Tyco International Ltd. and affiliates $ 266 $ 173 6.5% notes due November 2007 100 Capital lease obligations 20 18 Other 12 Gross profit 2,188 2,188 Selling, general and administrative expenses 1,025 1,025 Research and development expenses 130 130 Gain on divestiture (46 ) (46 ) In-process research and development charges 3 Net sales $ 9,641 $ $ 6 $ 9,647 Gross profit 4,480 6 4,486 Selling, general and administrative expenses 2,080 1 2,081 Operating income 2,123 5 2,128 Income from continuing operations before income taxes 1,969 5 1,974 Income taxes 513 (11 ) 2 504 Income from continuing operations 1,456 11 3 1,470 Net income 1,141 11 Short-term borrowings $ 75 Accounts payable 204 Accrued and other current liabilities 40 Other liabilities AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 COVIDIEN INTERNATIONAL FINANCE S.A.* (Exact name of registrant as specified in its charter) COVIDIEN LTD.** (Exact name of registrant as specified in its charter) Luxembourg (State or other jurisdiction of incorporation or organization) Bermuda (State or other jurisdiction of incorporation or organization) 3841 (Primary Standard Industrial Classification Code Number) 3841 (Primary Standard Industrial Classification Code Number) 98-0518567 (I.R.S. Employer Identification Number) 98-0518045 (I.R.S. Employer Identification Number) 17, Boulevard de la Grande Duchesse Charlotte L-1331 Luxembourg Telephone: (352) 464-340-1 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) 90 Pitts Bay Road, Second Floor Pembroke HM 08, Bermuda Telephone: (441) 292-8674 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) The Separation On January 13, 2006, Tyco International announced that its board of directors had approved a plan to separate Tyco International into three independent, publicly-traded companies: one for Tyco International's electronics businesses (Tyco Electronics), one for its healthcare businesses (Covidien) and one for its fire and security and engineered products and services businesses (Tyco International). Tyco International intends to accomplish this separation through distributions of common shares to Tyco International shareholders. Immediately following the separation of Tyco Electronics and Covidien, Tyco International's shareholders will own 100% of the equity in each of the three companies. We anticipate that the distribution will be tax-free for U.S. federal income tax purposes. On , 2007, the distribution date, each Tyco International shareholder will receive Covidien common shares and Tyco Electronics common shares for each common share of Tyco International held at the close of business on the record date. Immediately following the distributions, Tyco International's shareholders will own 100% of the common shares of Covidien and Tyco Electronics. Tyco International shareholders will not be required to make any payment, surrender or exchange their Tyco International common shares or take any other action to receive their common shares of Covidien and Tyco Electronics. Tyco International anticipates that on the distribution date it will effect a reverse share split, and as a result each Tyco International share will be converted into one-fourth of a share.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001385424_ldk-solar_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001385424_ldk-solar_prospectus_summary.txt
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+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001385544_horsehead_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001385544_horsehead_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..7f4f87953826325384bbf9fd11dc1330d6e7c12f
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+this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. You should carefully read this prospectus in its entirety, including the risks discussed in the Risk Factors section and the financial information contained herein, before making an investment decision. Unless otherwise indicated or required by the context, as used in this prospectus, the terms company, we, our and us refer to Horsehead Holding Corp. and all of its subsidiaries. Our historical financial performance, as set out in this prospectus, may not be indicative of our future performance. Our Business We are a leading U.S. producer of specialty zinc and zinc-based products with production and/or recycling operations at six facilities in five states. We also own and operate on our premises a 110 megawatt coal-fired power plant that provides us with a cost-competitive source of electricity and allows us to sell approximately one-third of its capacity into the Pennsylvania-New Jersey-Maryland electricity grid. Our products are used in a wide variety of applications, including in the galvanizing of fabricated steel products and as components in rubber tires, alkaline batteries, paint, chemicals and pharmaceuticals. We believe that we are the largest refiner of zinc oxide and Prime Western ( PW ) zinc metal, a grade of zinc containing a minimum of 98.5% zinc, in North America. We believe we are also the largest North American recycler of electric arc furnace ( EAF ) dust, a hazardous waste produced by the steel mini-mill manufacturing process. We, together with our predecessors, have been operating in the zinc industry for more than 150 years. While we vary our raw material inputs, or feedstocks, based on cost and availability, we generally produce our zinc products using nearly 100% recycled zinc, including zinc recovered from our four EAF dust recycling operations located in four states. We believe that our ability to convert recycled zinc into finished products results in lower feed costs than for smelters that rely primarily on zinc concentrates. Our four EAF dust recycling facilities also generate service fee revenue from steel mini-mills by providing a convenient and safe means for recycling their EAF dust. During 2006, we sold approximately 315.3 million pounds of zinc products, generally priced at amounts based on premiums to zinc prices on the London Metals Exchange ( LME ). For the year ended December 31, 2006, we generated sales and net income of $496.4 million and $54.5 million, respectively, and for the three months ended March 31, 2007, we generated sales and net income of $147.8 million and $26.9 million, respectively. Products and Services Zinc Metal (48.7% of 2006 sales). We manufacture a range of grades and sizes of zinc metal. Most of our zinc metal is produced as PW zinc and is used to coat or galvanize steel. Our PW zinc is produced primarily in ingot and slab form and we believe it offers superior coating properties to those of other forms of zinc metal used for galvanizing, including special high grade ( SHG ) zinc, a high-purity grade of zinc containing a minimum of 99.99% zinc, made by our competitors. Zinc Oxide (37.9% of 2006 sales). We produce over 50 grades of zinc oxide with varying purities, particle sizes and customer-specific formulations, as well as an array of post-production treatments. Our customers use zinc oxide in a variety of applications, including as components of tires, paint and pharmaceuticals. EAF Dust Recycling Services (10.2% of 2006 sales). We receive and recycle EAF dust generated by steel mini-mill operators, for which we receive a service fee. Other Products (3.2% of 2006 sales). Our other products include zinc and copper-based powders, primarily used in general chemical and metallurgical applications, zinc dust, primarily used in corrosion-resistant coatings and other chemical applications, iron-rich material, a co-product of the EAF dust recycling process that is used primarily in construction materials and water treatment, and excess power generated by Table of Contents our power plant. Our zinc and copper powders tend to command higher margins than our other zinc products and we expect they will account for an increasing percentage of our sales in the near future. We reassumed control of operations and maintenance responsibilities at our power plant in September 2006, which we believe will result in increased sales of excess power. Competitive Strengths Leading Market Positions and Strategically Located Recycling Facilities We believe that we are the largest refiner of zinc oxide and PW zinc metal in North America, based on volume, and we also believe that we are the largest North American recycler of EAF dust, and that we currently recycle more than half of all EAF dust generated in the United States. In addition, our four company-owned EAF dust recycling facilities are strategically located near major electric arc furnace operators, reducing transportation costs and enhancing our ability to compete effectively with other means of EAF dust disposal. Strong Relationships with Diverse Customer Base We believe that our superior product quality, reputation for on-time delivery and competitive pricing enable us to maintain strong relationships with a broad base of customers in each of our end markets. For example, we sell zinc oxide to over 200 producers of tire and rubber products, chemicals, paints, plastics and pharmaceuticals. We have supplied zinc oxide to eight of our current ten largest zinc oxide customers for over ten years, and we believe that we are the sole or primary supplier of zinc to most of our customers. In addition, the U.S. Environmental Protection Agency ( EPA ) has designated our recycling process as a Best Demonstrated Available Technology in the area of high-temperature metals recovery related to the processing of EAF dust. We are the only recycler of EAF dust in the U.S., and we now recycle EAF dust for seven of the world s ten largest electric arc furnace operators based on 2006 production volume. Low-Cost Feedstock Sources We believe that we are the only zinc producer in North America with the proven ability to refine zinc metal and zinc oxide using 100% recycled zinc feedstocks. Our use of large amounts of recycled feedstock reduces our exposure to increases in LME zinc prices and increases our operating margins during periods of high zinc prices on the LME. Proven, Proprietary Technology with Flexible Processes Since our recycling process converts EAF dust into saleable products, our customers generally face less exposure to environmental liabilities from EAF dust, which the EPA classifies as a listed hazardous waste, than if they disposed of their EAF dust in landfills. In addition, we believe our zinc smelter and refinery in Monaca, Pennsylvania is unique in its ability to refine zinc using almost any form of zinc-bearing feedstock, which allows us to vary our feedstock based on the LME price of zinc. Favorable Market Trends The LME price of zinc rose from $0.58 per pound on December 31, 2004 to $1.57 per pound on August 7, 2007. Current industry analysts forecast that continued growth in global demand and historically low zinc inventories will cause these favorable zinc market conditions to continue through 2008. In addition, we believe that steel mini-mill production, the principal source of EAF dust used in our recycling operations, will continue to grow by approximately 2-3% per year through 2010, further increasing both the market for our EAF dust recycling operations and our potential access to low-cost zinc feedstock. Strong, Experienced Management Team Our six-member senior management team collectively has over 150 years of experience in zinc- and metal-related industries. James M. Hensler, our Chief Executive Officer, joined us in early 2004, and has since established a culture of continuous improvement, safety and operational excellence, which has led to significant cost reductions and productivity improvements. Table of Contents Table of Contents Business Strategy Continue to Focus on Production Efficiencies and Operating Cost Reductions We have reduced our manufacturing costs by increasing our usage of low-cost feedstock, reducing our energy consumption, streamlining our organizational structure and implementing Six Sigma (a business process improvement methodology) initiatives, and we intend to continue to focus on these and similar initiatives in the future. We have also implemented initiatives that we believe will result in approximately $1.5 million of annual energy cost savings, at current energy prices. Expand EAF Dust Recycling Capacity We estimate that EAF dust generated by steel mini-mill producers will increase by approximately 2 3% annually through 2010, and we believe that steel mini-mill operators increasingly will rely on recyclers rather than landfills to manage this increased output. In order to meet this expected growth, we are building and intend to place into production by the end of 2007 a new kiln with an annual EAF dust recycling capacity of 80,000 tons. We are also planning to build an additional kiln that would further increase our recycling capacity. Expand Production Capacity for Existing Zinc Products We expect to increase our levels of zinc smelter production output on an annual basis from approximately 140,000 tons to 175,000 tons by the end of 2008 through a series of operational enhancements that involve capital expenditures of approximately $40 million in the aggregate. For example, we intend to begin construction of an additional smelter furnace, which we expect will further increase our overall smelter output and reduce overall per-ton zinc production costs, in future periods. We also intend to expand our capacity to produce zinc oxide and have recently expanded our capacity to produce Special Special High Grade ( SSHG ) zinc metal, a high-purity grade of zinc, by converting existing refining capacity at our Monaca facility. Our additional production capacity will allow us to capitalize on the expansion we are anticipating in the zinc oxide market. Continue to Reduce Exposure to Commodity Price Fluctuations We sourced approximately 56% of our zinc feedstock in 2006, representing approximately 24% (9%, net of EAF dust service fees, which are reflected as sales in our consolidated statements of income) of our 2006 operating costs, from our EAF dust recycling operations, which feedstock is not impacted by changes in LME prices. We will continue to evaluate our zinc price hedging alternatives for 2008 and years thereafter, considering the costs and benefits in light of the commodity price environment, hedging transaction costs, and the extent to which we are able to increase the percentage of zinc we acquire from our recycling operations. Pursue New Markets, Applications and Acquisition Opportunities We intend to continue to identify and pursue new markets and applications for our products. For example, we are currently testing new, higher-margin applications for iron-rich material, a co-product of EAF dust recycling, such as its potential use as a passive water-treatment medium at coal mining sites that have acidic mine drainage and as a daily cover or base material for municipal landfills to reduce ground water contamination. We are also evaluating new markets for our zinc powder, and we expect that our expanded EAF dust recycling capacity will allow us to enter new markets for the sale of crude zinc oxide ( CZO ) to other zinc smelters. We also intend to continue to identify and explore strategic acquisition opportunities. Our History We, together with the previous owners of our assets, have been operating in the zinc industry for more than 150 years. Horsehead Industries, Inc. ( HII ) was formed as a result of several purchases of assets and entities that substantially form our existing company. In 2002, record-low zinc prices, production inefficiencies, high operational costs and legacy environmental costs associated with prior owners/operators of Table of Contents our facilities caused HII to file for Chapter 11 bankruptcy protection. An affiliate of Sun Capital Partners, Inc. (together with its affiliates, Sun Capital ) purchased substantially all of the operating assets and assumed limited liabilities of HII in December 2003 pursuant to a sale order under Section 363 of the U.S. Bankruptcy Code. Sun Capital and its affiliates currently own less than 0.2% of our outstanding common stock. Sun Capital assisted us in hiring our current chief executive officer and chief financial officer in 2004, and since that time we have implemented significant operational improvements as well as experienced significantly improved industry conditions. In addition, since 2004 we have performed maintenance at our production facilities that was deferred by our predecessor due to its financial difficulties. We expect to continue to be required to perform additional maintenance at these facilities for the foreseeable future. Our Challenges In addition to our competitive strengths and business strategies, you should also consider the following challenges we face. Our industry is highly cyclical, and the prices of and demand for zinc metal and our zinc-based products are subject to wide fluctuations. In addition, many of the principal consumers of zinc metal and zinc-based products operate in industries that themselves are heavily dependent on general economic conditions, which could exacerbate these fluctuations in the prices of and demand for our products. Our zinc products also compete with other materials in many of their applications, and any reductions in long-term demand would slow our growth. We also face intense competition from regional, national and global providers of zinc metal and zinc-based products, and the growth of any of those competitors could reduce our market share and negatively impact our operating results. For additional information on these and other risks relating to our business and an investment in our common stock, see Risk Factors beginning on page 9. Recent Developments April Transactions On April 12, 2007, we completed the private placement of 13,973,862 shares of our common stock (including 1,822,678 shares pursuant to the exercise of an over-allotment option) at a price to investors of $13.50 per share. Friedman, Billings, Ramsey Co., Inc. ( FBR ) served as the initial purchaser and placement agent and received discounts and commissions of $0.95 per share. The aggregate net proceeds of the offering, after deducting aggregate discounts and commissions of $13,205,300, were $175,441,837. We used the net proceeds of the offering primarily to repurchase an aggregate of 6,213,076 shares of our common stock and to redeem outstanding warrants, all of which were fully exercisable, for 5,938,108 shares of our common stock, including warrants exercisable for fractional shares, in each case held by our pre-November 2006 stockholders, at a price equal to $12.55 per share, plus a portion of the interest that accrued in an escrow account established to hold the offering proceeds pending regulatory approval of the transaction, and less, in the case of warrants, the applicable exercise price. We refer to these transactions, collectively, as the April Transactions. We are subject to the jurisdiction of the U.S. Federal Energy Regulatory Commission ( FERC ) because of the interconnection facilities and wholesale sales of power from our Monaca power plant. FERC requires prior approval of any disposition of 100% of FERC-jurisdictional facilities, including through the sale of voting securities. We sold 15,812,500 shares of our common stock in a private placement transaction in November 2006 (the November Private Placement ). Because the November Private Placement did not include a disposition of 100% of FERC-jurisdictional facilities, we did not request FERC approval. Because of concerns that the FERC could view the April Transactions together with the November Private Placement, as such a disposition, out of an abundance of caution, we filed an application with the FERC requesting its approval of the use of our proceeds from the April Transactions to repurchase common stock and warrants from our original equityholders. On May 7, 2007, the FERC approved our application. We believe that the aggregate value of all of our FERC-jurisdictional facilities is less than $10 million. Table of Contents Underwritten Public Offering On July 2, 2007, we filed with the Securities and Exchange Commission (the SEC ) a registration statement on Form S-1, pursuant to which we intend to register an additional 4,867,000 shares of our common stock as part of an underwritten public offering. The initial public offering price for these shares will be $18.00 per share. We expect to use the net proceeds of this offering to fund capital expenditures and for general corporate purposes. We do not anticipate that FERC approval will be required in order to complete the underwritten public offering. The resale of shares covered by this shelf registration statement that are not sold as part of our underwritten public offering will be subject to resale restrictions for 60 days following the effective date of the registration statement filed in connection with our underwritten public offering. Preliminary Second Quarter Results Although our final financial statements for the three months ended June 30, 2007 are not yet available, the following information reflects our preliminary estimates of our results based on currently available information. The preparation of our consolidated financial statements for the three months ended June 30, 2007 is ongoing and subject to adjustments, which could result in changes to the financial results and figures set forth below. As a result, our financial results could differ materially from those indicated below. Our consolidated financial statements for the three months ended June 30, 2007 will not be available until after this offering is completed, and consequently will not be available to you prior to investing in this offering. Our sales for the three months ended June 30, 2007 were approximately $145 million, compared to $147.8 million during the three months ended March 31, 2007. We anticipate that our net income for the three months ended June 30, 2007 will be between $22 million and $23 million. Our zinc production for the three months ended June 30, 2007 was 32,345 tons, compared to 31,942 tons for the three months ended March 31, 2007. We shipped 38,427 tons of zinc products for an average realized sales price of $1.64 per pound during the three months ended June 30, 2007, compared to 38,791 tons at an average realized sales price of $1.68 per pound for the quarter ended March 31, 2007. EAF dust service fee revenue during the three months ended June 30, 2007 was based upon 115,653 tons, compared to 114,515 tons for the quarter ended March 31, 2007. As of June 30, 2007, our total debt, net of cash, was approximately $21 million. We made a voluntary prepayment of approximately $30 million on our second lien credit facility during the most recent fiscal quarter, paid all remaining amounts owing under this facility in July 2007 and terminated this facility. The financial results and figures set forth above are preliminary and have not been audited or reviewed, and, accordingly, may be subject to adjustments. Corporate Information Horsehead Holding Corp. is incorporated under the laws of the State of Delaware. Our principal executive offices are located at 300 Frankfort Road, Monaca, Pennsylvania 15061-2295, and our telephone number is (724) 774-1020. Our website is www.horsehead.net. The information on our website is not part of this prospectus. Table of Contents The Offering Issuer Horsehead Holding Corp. Common stock offered by the selling stockholders 29,860,436 shares Common stock to be outstanding after this offering, assuming completion of our concurrent underwritten public offering 34,043,671 shares Dividend policy We currently do not have any plans to declare or pay dividends following the completion of this offering, but we will continue to evaluate the possibility of declaring and paying one-time special cash dividends to our stockholders under appropriate circumstances. The declaration and payment of any future dividends will be at the discretion of our board of directors, subject to our actual future earnings and capital requirements, and contractual and legal restrictions. See Dividend Policy. Use of proceeds We will not receive any proceeds from the sale of shares of common stock by the selling stockholders. Trading Our common stock is listed on The NASDAQ Global Select Market ( NASDAQ ) under the symbol ZINC.
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+This summary highlights information contained in this prospectus relating to Covidien and the notes we are offering. You should read the entire prospectus, including the risk factors, our historical combined financial statements, and our unaudited pro forma condensed combined financial statements and the respective notes to those historical and pro forma financial statements. Except as otherwise indicated or unless the context otherwise requires, the information included in this prospectus assumes the completion of the separation. The term "CIFSA" refers to Covidien International Finance S.A., the issuer of the notes. Except as otherwise indicated or unless the context otherwise requires, "Covidien," "we," "us" and "our" refer to Covidien Ltd. and its combined subsidiaries, including CIFSA "Tyco Electronics" refers to Tyco Electronics Ltd. and its combined subsidiaries and "Tyco International" refers to Tyco International Ltd. and its consolidated subsidiaries. When we intend to refer only to Covidien Ltd., a Bermuda corporation, without including its combined subsidiaries, we use the term "Covidien Ltd." Unless otherwise indicated, references in this prospectus to fiscal 2007, fiscal 2006, fiscal 2005 and fiscal 2004 are to Covidien's fiscal years ended September 28, 2007, September 29, 2006, September 30, 2005 and September 30, 2004. Our historical combined financial information has been prepared on a "carve-out" basis to reflect the operations, financial condition and cash flows specifically allocable to the Covidien component of Tyco International during all periods shown. Our pro forma combined financial information adjusts our historical combined financial information to give effect to our separation from Tyco International and any related financing. Our Company We are a global leader in developing, manufacturing and distributing medical devices and supplies, diagnostic imaging agents, pharmaceuticals and other healthcare products for use in clinical and home settings. Our products are found in almost every hospital in the United States, and we have a significant and growing presence in non-U.S. markets. Our portfolio of products, sold under well-known brand names such as United States Surgical, Autosuture, Valleylab, Mallinckrodt, Nellcor, Puritan Bennett and Kendall, serve healthcare needs in the operating room and other hospital settings, long-term care and other alternate care facilities, doctors' offices and the home. We believe that we hold market-leading positions in many of the major markets in which we compete. We conduct our business through five segments: Our Medical Devices segment develops, manufactures and sells surgical instruments and devices, respiratory and monitoring solutions and other clinician-preferred medical devices. We market these products primarily to physicians, nurses, materials managers, group purchasing organizations, or GPOs, and governmental healthcare authorities. Our Imaging Solutions segment develops, manufactures and markets contrast agents, contrast delivery systems and radiopharmaceuticals. We market these products primarily to physicians, technologists and purchasing administrators at hospitals, imaging centers, cardiology clinics and radiopharmacies. Our Pharmaceutical Products segment develops, manufactures and distributes active ingredients used in pharmaceuticals, dosage pharmaceuticals and specialty chemicals. We sell active pharmaceutical ingredients to major branded and generic pharmaceutical manufacturers and dosage products to major wholesalers and drug store chains. Our Medical Supplies segment develops, manufactures and markets a broad range of traditional wound care products, absorbent hygiene products and operating room kits and accessories, and also is an original equipment manufacturer, or OEM, of various medical supplies for a number of leading medical device companies. These products are primarily used in hospitals, surgi-centers and alternate care facilities and are marketed primarily to materials managers and GPOs. Revenue from sublease activity $ $ 397 Rental expense 514 General and administrative expense Funded status $ (128 ) $ (158 ) $ (111 ) $ (112 ) Unrecognized net actuarial loss 209 262 59 69 Unrecognized prior service cost 10 9 1 (3 ) Contributions after the measurement date 2 1 Funded status $ (187 ) $ (202 ) Unrecognized net loss 58 75 Unrecognized prior service benefit (40 ) (38 ) Contributions after the measurement date 1 Outstanding at September 29, 2006 158,979 22.45 2.2 $ Net sales $ Net sales $ Net sales $ WHERE YOU CAN FIND MORE INFORMATION After our separation from Tyco International, we will become subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended and, in accordance with the Exchange Act, we will file periodic reports, proxy statements and other information with the SEC. We maintain a website on the Internet at http://www.covidien.com. We will make available free of charge, on or through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as soon as reasonably practicable after such material is electronically filed with the SEC. This reference to our Internet address is for informational purposes only and shall not, under any circumstances, be deemed to incorporate the information available at such Internet address into this prospectus. Our Retail Products segment develops, manufactures and markets a variety of private label (also known as retail brand) absorbent hygiene products. We are the industry leader in North America for private label adult incontinence, feminine hygiene and infant care products. We sell these products primarily to mass merchandisers, food stores, dollar stores and drug stores. Strengths We believe that we have the following strengths: Scale, product diversity and reach. We are one of the largest global manufacturers and marketers in the healthcare industry. We offer products in many fields that we believe have higher growth opportunities due to prevailing healthcare trends, including laparoscopic surgery, electrosurgery, biosurgery, sleep therapy and pain management. Portfolio of leading brands. We believe that our brands are among the most well-known and respected in the healthcare marketplace. We have introduced key product innovations in a number of fields, including laparoscopic instrumentation and surgical staplers (Autosuture), pulse oximeters (Nellcor), mechanical devices to prevent deep-vein thrombosis (Kendall) and vessel sealing systems (LigaSure). Strong customer relationships and sales force. Our sales force of approximately 4,200 professionals is focused on developing and maintaining strong relationships with clinician decision makers. We also have well established relationships with GPOs and integrated delivery networks, or IDNs, non-U.S. healthcare authorities, retailers and other major purchasers of our products. Operational excellence. We have a history of developing and manufacturing high-quality products in a cost-effective manner. Strategy Our strategy is to enhance growth by increasing research and development initiatives, pursuing targeted external opportunities and enhancing our global commercialization infrastructure, including sales, marketing and distribution. We are committed to the following initiatives: Operating our business to focus on growth. We intend to continue developing industry-leading capabilities to translate healthcare provider and hospital insights into products that make our customers more successful. We also are implementing global initiatives throughout our businesses to generate opportunities for growth. We are increasing investments in our sales and marketing infrastructure to further strengthen our customer relationships and competitive position to capitalize on global healthcare needs and trends. Additionally, we are enhancing our business development function to better enable us to evaluate and execute external opportunities to expand and enhance our product portfolio. Commitment to innovation. We plan on broadening and enhancing our product offerings through an increased commitment to identify, obtain and develop new technologies through internal research and development initiatives, licensing and distribution transactions and selective acquisitions. We intend to focus these efforts primarily on product areas that are driven by clinician preference and technological innovation, which we believe will offer higher growth rates and margins. Increasing global market penetration. We believe that we have promising opportunities in non-U.S. markets to expand our market position. We have designed our post-separation organization and management structure to integrate U.S. and non-U.S. operations. We expect that our new focus on global management of our product lines should assist us in developing and commercializing new products that meet global needs. Assets Current Assets: Cash and cash equivalents $ 242 $ 141 Accounts receivable trade, less allowance for doubtful accounts of $42 and $58 1,542 1,448 Inventories 1,255 1,066 Prepaid expenses and other current assets 332 200 Income taxes receivable 91 51 Deferred income taxes 179 349 Assets held for sale Cash Flows From Investing Activities: Capital expenditures (432 ) (331 ) (251 ) Acquisitions, net of cash acquired (382 ) (66 ) Divestitures, net of cash retained 74 4 3 Increase in restricted cash (32 ) (8 ) Other (8 ) 14 Service cost $ 8 $ 8 $ 8 $ 15 $ 12 $ 13 Interest cost 33 33 34 12 12 11 Expected return on plan assets (37 ) (35 ) (27 ) (10 ) (8 ) (7 ) Amortization of prior service cost 1 1 1 Amortization of net actuarial loss 19 17 18 3 2 4 Plan settlements, curtailment and special termination benefits 2 Total assets: Medical Devices $ 9,531 $ 8,697 $ 8,760 Imaging Solutions 1,123 1,050 1,037 Pharmaceutical Products 1,522 1,449 1,469 Medical Supplies 631 599 608 Retail Products 817 784 829 Corporate(3) 482 931 867 Assets held for sale Assets Current Assets: Cash and cash equivalents $ $ 242 $ 242 Accounts receivable trade, net 1,542 1,542 Inventories 1,255 1,255 Prepaid expenses and other current assets 332 332 Income taxes receivable 91 91 Deferred income taxes 179 179 Assets held for sale 2 Cash Flows From Investing Activities: Capital expenditures (251 ) (251 ) Divestitures, net of cash retained 3 3 Increase in restricted cash (8 ) (8 ) Other 2 Assets Current Assets: Cash and cash equivalents $ $ $ 242 $ $ 242 Accounts receivable trade, net 1,542 1,542 Inventories 1,255 1,255 Intercompany receivable 1 5,079 (5,080 ) Prepaid expenses and other current assets 332 332 Income taxes receivable 91 91 Deferred income taxes 179 179 Assets held for sale 2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Managing our businesses with a disciplined financial perspective. We intend to increase our focus on maximizing return on invested capital by controlling manufacturing and logistical costs while continuing to strive for top-line revenue growth. Class Action Settlement On May 14, 2007, Tyco International entered into a memorandum of understanding with plaintiffs' counsel in connection with the settlement of 32 purported class action lawsuits. Under the terms of the memorandum of understanding, the plaintiffs have agreed to release all claims against Tyco International, the other settling defendants and ten other individuals in consideration for the payment of $2.975 billion to the certified class and assignment to the class of any net recovery of any claims possessed by Tyco International and the other settling defendants against Tyco International's former auditor, PricewaterhouseCoopers. Defendant PricewaterhouseCoopers is not a settling defendant and is not a party to the memorandum. Tyco International and the other settling defendants have denied and continue to deny any wrongdoing and legal liability arising from any of the facts or conduct alleged in the actions. Pursuant to the terms of the memorandum of understanding, L. Dennis Kozlowski, Mark H. Swartz and Frank E. Walsh, Jr., also are excluded from the settling defendants, and the class will assign to Tyco International all of their claims against defendants Kozlowski, Swartz and Walsh. In exchange, Tyco International will agree to pay to the certified class 50% of any net recovery against these defendants. In connection with the class action settlement, we will incur a charge of $1.249 billion in the third quarter of fiscal 2007 for which we do not expect to recognize any tax benefit. When the Separation and Distribution Agreement is entered into, we will record a $2.975 billion liability and a $1.726 billion receivable from Tyco International and Tyco Electronics for their portion of the liability. The memorandum of understanding does not address the following securities class actions, which remain outstanding: Stumpf v. Tyco International Ltd., New Jersey v. Tyco, Ballard v. Tyco International Ltd., Sciallo v. Tyco International Ltd., et al., Jasin v. Tyco International Ltd., et al., and Hall v. Kozlowski. The memorandum of understanding also does not address any consolidated ERISA litigation in which Tyco International and certain of its current and former employees, officers and directors have been named as defendants. Covidien International Finance S.A. Covidien International Finance S.A., or CIFSA, a Luxembourg company, is a wholly-owned subsidiary of Covidien Ltd. CIFSA's registered and principal offices are located at 17, Boulevard de la Grande Duchesse Charlotte, L-1331 Luxembourg. Its telephone number at that address is (352) 464-340-1. CIFSA is a newly-formed holding company established in connection with the separation of the healthcare business of Tyco International to directly and indirectly own all of the operating subsidiaries of Covidien, to issue the notes and to perform treasury operations for Covidien. Otherwise, it conducts no independent business. We have not included separate financial statements for CIFSA, which was formed in December 2006, in this prospectus because CIFSA was not formed until December 2006, its initial capitalization was not material and it will not have significant operations or assets until shortly before the separation. Covidien Ltd. Covidien Ltd. is a Bermuda corporation. Its registered and principal office is located at Second Floor, 90 Pitts Bay Road, Pembroke HM 08, Bermuda and its telephone number at that address is (441) 292-8674. Its executive office in the United States is located at 15 Hampshire Street, Mansfield, Massachusetts 02048 and its telephone number at that address is (508) 261-8000. Gross profit 2,348 47.1 2,188 46.5 Selling, general and administrative expenses 1,178 23.6 1,025 21.8 Research and development expenses 129 2.6 130 2.8 Restructuring charges 21 0.4 Gain on divestiture (46 ) (1.0 ) In-process research and development charges 8 0.2 Gross profit 2,348 2,188 Selling, general and administrative expenses 1,178 1,025 Research and development expenses 129 130 Restructuring charges 21 Gain on divestiture (46 ) In-process research and development charges 8 Current maturities of long-term debt: Due to Tyco International Ltd. and affiliates $ 266 $ 173 6.5% notes due November 2007 100 Capital lease obligations 20 18 Other 12 Gross profit 2,188 2,188 Selling, general and administrative expenses 1,025 1,025 Research and development expenses 130 130 Gain on divestiture (46 ) (46 ) In-process research and development charges 3 Net sales $ 9,641 $ $ 6 $ 9,647 Gross profit 4,480 6 4,486 Selling, general and administrative expenses 2,080 1 2,081 Operating income 2,123 5 2,128 Income from continuing operations before income taxes 1,969 5 1,974 Income taxes 513 (11 ) 2 504 Income from continuing operations 1,456 11 3 1,470 Net income 1,141 11 Short-term borrowings $ 75 Accounts payable 204 Accrued and other current liabilities 40 Other liabilities AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 COVIDIEN INTERNATIONAL FINANCE S.A.* (Exact name of registrant as specified in its charter) COVIDIEN LTD.** (Exact name of registrant as specified in its charter) Luxembourg (State or other jurisdiction of incorporation or organization) Bermuda (State or other jurisdiction of incorporation or organization) 3841 (Primary Standard Industrial Classification Code Number) 3841 (Primary Standard Industrial Classification Code Number) 98-0518567 (I.R.S. Employer Identification Number) 98-0518045 (I.R.S. Employer Identification Number) 17, Boulevard de la Grande Duchesse Charlotte L-1331 Luxembourg Telephone: (352) 464-340-1 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) 90 Pitts Bay Road, Second Floor Pembroke HM 08, Bermuda Telephone: (441) 292-8674 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) The Separation On January 13, 2006, Tyco International announced that its board of directors had approved a plan to separate Tyco International into three independent, publicly-traded companies: one for Tyco International's electronics businesses (Tyco Electronics), one for its healthcare businesses (Covidien) and one for its fire and security and engineered products and services businesses (Tyco International). Tyco International intends to accomplish this separation through distributions of common shares to Tyco International shareholders. Immediately following the separation of Tyco Electronics and Covidien, Tyco International's shareholders will own 100% of the equity in each of the three companies. We anticipate that the distribution will be tax-free for U.S. federal income tax purposes. On , 2007, the distribution date, each Tyco International shareholder will receive Covidien common shares and Tyco Electronics common shares for each common share of Tyco International held at the close of business on the record date. Immediately following the distributions, Tyco International's shareholders will own 100% of the common shares of Covidien and Tyco Electronics. Tyco International shareholders will not be required to make any payment, surrender or exchange their Tyco International common shares or take any other action to receive their common shares of Covidien and Tyco Electronics. Tyco International anticipates that on the distribution date it will effect a reverse share split, and as a result each Tyco International share will be converted into one-fourth of a share.
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+This summary highlights information contained elsewhere in this prospectus or in the documents incorporated by reference. You should read the entire prospectus, including the risk factors, our historical and pro forma consolidated financial statements and the notes to those financial statements. In this prospectus, we use the term "Historical Tyco" to mean Tyco's historical businesses, including healthcare and electronics. The terms "we," "our," "us" and "Tyco International" refer to Tyco International Ltd. and its consolidated subsidiaries giving effect, as appropriate, to the spin-offs, and the term "TIFSA" refers to Tyco International Finance S.A. Unless otherwise indicated, references in this prospectus to fiscal 2007, fiscal 2006, fiscal 2005 and fiscal 2004 are to Tyco International's fiscal years ended September 28, 2007, September 29, 2006, September 30, 2005 and September 30, 2004, respectively. Our Company On January 13, 2006, we announced that our board of directors had approved a plan to separate Historical Tyco's portfolio of diverse businesses into three independent, publicly-traded companies: one for our healthcare businesses (Covidien), one for our electronics businesses (Tyco Electronics) and one for our fire and security and engineered products and services businesses (Tyco International). Following the completion of the spin-offs of our healthcare and electronics businesses, we will continue to be a leading provider of electronic security, fire and safety services and products, valves and controls and other industrial products. We also will continue manufacturing steel pipe and tubular products and providing services to infrastructure markets around the world. In connection with the spin-offs of Covidien and Tyco Electronics, we are realigning our operations and will conduct our business through five segments: ADT Worldwide designs, sells, installs, services and monitors electronic security systems to residential, commercial, industrial and governmental customers. Fire Protection Services designs, sells, installs and services fire detection and fire suppression systems to commercial, industrial and governmental customers. Flow Control designs, manufactures, sells and services valves, pipes, fittings, valve automation and heat tracing products for the water and wastewater markets, the oil and energy markets and other process industries. Safety Products designs, manufactures and sells fire protection, security and life safety products, including fire suppression products, breathing apparatus, intrusion security, access control and video management systems. In addition, Safety Products manufactures products installed and serviced by ADT Worldwide and Fire Protection Services. Electrical and Metal Products designs, manufactures and sells galvanized steel tubing and pipe products, as well as cable products, including pre-wired armored cable and flexible conduit products for commercial construction. We also provide general corporate services to our segments and, through our Infrastructure Services business, provide consulting, engineering, construction management and operating services for the water, wastewater, environmental, transportation and facilities markets. These operations are reported as Corporate and Other. Revenue from product sales $ 920 $ 901 Service revenue 2 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE Tyco International Finance S.A. and Tyco International Ltd. "incorporate by reference" information into this prospectus, which means that we disclose important information to you by referring you to other documents filed separately by Tyco International Ltd. (SEC File No. 001-13836) with the SEC. The information incorporated by reference is deemed to be part of this prospectus, except for any information superseded by information contained in this prospectus. This prospectus incorporates by reference the documents set forth below, which Tyco International Ltd. has filed with the SEC: Annual Report on Form 10-K for the fiscal year ended September 29, 2006, filed on December 11, 2006; Current Report on Form 8-K filed on November 15, 2006 (with respect to Item 8.01 only); Current Reports on Form 8-K filed on December 5, 2006; Current Report on Form 8-K filed on December 15, 2006; Competitive Strengths We believe that we have the following competitive strengths: Leading market positions and brands. We have leading market positions in each of our segments, and a number of well recognized brands. Global reach and significant scale of operations. We are a global company, in terms of sales, manufacturing and services. We conduct business in more than 60 countries, and 50% of our fiscal 2006 net revenue was generated outside the United States. Diverse portfolio of services and products. We offer a broad portfolio of services and products, which allows our customers to fulfill many of their needs by purchasing solely from us. Diverse customer base. Our customers operate in many different industries and countries, which allows us to leverage our skills and experience across many end markets. Favorable long-term growth opportunities. We operate businesses in a number of different markets that have attractive characteristics and solid growth prospects. Stable, recurring revenue base. Many of our ADT Worldwide customers have long-term agreements with us to provide ongoing monitoring, inspection and maintenance services, which generate predictable annual revenue in excess of $3.5 billion. In addition, we have a substantial amount of repeatable revenue from ongoing service and maintenance activities in our Fire Protection Services business. Strong cash flow. We historically have generated significant cash flow from our operations. Our cash flow provides us with the financial flexibility to invest in new products and acquisitions to enhance our market leading businesses. Experienced management team. Our executive officers have the proven track record and experience necessary to execute our business strategies. Strategy Our goal is to build upon our position as a leading provider of electronic security, fire and safety services and products, valves and controls and other industrial products. We operate in a number of highly fragmented markets where we believe we have a number one or two market position that translates into a relatively small market share. We believe we have opportunities to increase our market Operating income 2,336 (1,087 ) (897 ) 130 482 Interest income 80 (19 ) (29 ) 32 Interest expense (327 ) 78 118 (131 ) (c) Other income, net 9 (7 ) Net revenue 39,283 (9,543 ) (11,804 ) 17,936 Cost of product sales 20,804 (5,040 ) (8,465 ) 7,299 Cost of services 4,761 (32 ) (180 ) 4,549 Selling, general and administrative expenses 8,226 (2,108 ) (1,292 ) 4,826 (Gains) losses on divestitures (274 ) (5 ) 301 22 Restructuring and other charges, net 5 (3 ) 14 16 Impairment of long-lived assets 6 (3 ) (1 ) Operating income $ 482 $ 612 Interest income 32 28 Interest expense (131 ) (149 ) Other income, net Revenue from product sales $ 1,946 $ 1,795 $ 1,577 Service revenue 3 3 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Current Report on Form 8-K filed on January 8, 2007; Current Report on Form 8-K filed on January 10, 2007; Proxy Statement on Schedule 14A filed on January 19, 2007; Current Report on Form 8-K filed on January 17, 2007; Proxy Statement on Schedule 14A filed on January 30, 2007; Quarterly Report on Form 10-Q for the quarter ended December 29, 2006 filed on February 6, 2007; Current Report on Form 8-K filed on February 20, 2007; Current Reports on Form 8-K filed on March 21, 2007; Current Report on Form 8-K filed on April 12, 2007; Amended Annual Report on Form 10-K/A for the fiscal year ended September 29, 2006, filed on April 20, 2007; Amended Quarterly Report on Form 10-Q/A for the quarter ended December 29, 2006 filed on April 20, 2007; Current Reports on Form 8-K filed on April 27, 2007; Quarterly Report on Form 10-Q for the quarter ended March 30, 2007 filed on May 8, 2007; Current Report on Form 8-K filed on May 11, 2007; Current Reports on Form 8-K filed on May 15, 2007; Current Report on Form 8-K filed on May 17, 2007; and Current Report on Form 8-K filed on May 18, 2007. You may request a copy of these filings at no cost, by writing or calling us at the following address or telephone number: Tyco International Ltd. 90 Pitts Bay Road, Second Floor Pembroke HM 08, Bermuda (441) 292-8674 Exhibits to the filings will not be sent, however, unless those exhibits have specifically been incorporated by reference in this document. share and accelerate revenue growth by expanding our customer base and by generating new business from our existing customers. In addition, we believe we have opportunities to improve our margins. Our business strategy includes the following strategic priorities: Expand our customer base. We believe that we have significant opportunities to attract customers and increase our market share by focusing our sales and marketing efforts and our product development efforts on key vertical markets, such as retailer, banking, oil and gas and water. Generate new business from existing customers. We believe that our customer relationships, enhanced by targeted sales and marketing efforts that emphasize the breadth of our portfolio and that focus on product and service opportunities within each customer's industry, will enable us to increase our market penetration and generate increased sales and service revenue from existing customers. Improve productivity and efficiency. We intend to increase the profitability of our global portfolio of services and products by focusing on further improvements to our cost structure. We will continue to reduce our manufacturing costs by leveraging our purchasing power to reduce procurement costs and enhancing our manufacturing productivity through an emphasis on key metrics and processes such as Six Sigma. Pursue disciplined acquisition process. Our strong cash flows will enable us to fund acquisitions that strengthen our product offerings and market positions, as well as increase our revenues and profitability, with a particular focus on our security, flow control and safety products businesses. Class Action Settlement On May 14, 2007, we entered into a memorandum of understanding with plaintiffs' counsel in connection with the settlement of 32 purported class action lawsuits. Under the terms of the memorandum of understanding, the plaintiffs have agreed to release all claims against us, the other settling defendants and ten other individuals in consideration for the payment of $2.975 billion to the certified class and assignment to the class of any net recovery of any claims possessed by us and the other settling defendants against our former auditor, PricewaterhouseCoopers. Defendant PricewaterhouseCoopers is not a settling defendant and is not a party to the memorandum. We and the other settling defendants have denied and continue to deny any wrongdoing and legal liability arising from any of the facts or conduct alleged in the actions. Pursuant to the terms of the memorandum of understanding, L. Dennis Kozlowski, Mark H. Swartz and Frank E. Walsh, Jr., also are excluded from the settling defendants, and the class will assign to us all of their claims against defendants Kozlowski, Swartz and Walsh. In exchange, we will agree to pay to the certified class 50% of any net recovery against these defendants. The memorandum of understanding does not address the following securities class actions, which remain outstanding: Stumpf v. Tyco International Ltd., New Jersey v. Tyco, Ballard v. Tyco International Ltd., Sciallo v. Tyco International Ltd., et al., Jasin v. Tyco International Ltd., et al., and Hall v. Kozlowski. The memorandum of understanding also does not address any consolidated ERISA litigation in which we and certain of our current and former employees, officers and directors have been named as defendants. Tyco International Finance S.A. Tyco International Finance S.A., or TIFSA, a Luxembourg company, is a wholly-owned subsidiary of Tyco International Ltd. TIFSA's registered and principal offices are located at 17, Boulevard de la Grande Duchesse Charlotte, L-1331 Luxembourg. Its telephone number at that address is (352) 464-340-1. TIFSA is a newly-formed holding company established in connection with the spin-offs Income from continuing operations before income taxes and minority interest 2,098 (1,035 ) (808 ) 130 385 Income taxes (513 ) 230 254 (17 )(b) (46 ) (d) Minority interest (5 ) 1 Operating income 2,632 (1,152 ) (888 ) 20 612 Interest income 70 (17 ) (25 ) 28 Interest expense (376 ) 91 136 (149 ) Other expense, net (3 ) Income from continuing operations before income taxes and minority interest 2,323 (1,075 ) (777 ) 20 491 Income taxes (533 ) 238 174 (1 )(b) (126 ) (4 )(k) Minority interest (4 ) 1 AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 TYCO INTERNATIONAL FINANCE S.A.* (Exact name of registrant as specified in its charter) TYCO INTERNATIONAL LTD. (Exact name of registrant as specified in its charter) Luxembourg (State or other jurisdiction of incorporation or organization) Bermuda (State or other jurisdiction of incorporation or organization) 7382 (Primary Standard Industrial Classification Code Number) 7382 (Primary Standard Industrial Classification Code Number) 98-0518565 (I.R.S. Employer Identification Number) 98-0390500 (I.R.S. Employer Identification Number) 17, Boulevard de la Grande Duchesse Charlotte L-1331 Luxembourg Telephone: (352) 464-340-1 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) 90 Pitts Bay Road, Second Floor Pembroke HM 08, Bermuda Telephone: (441) 292-8674 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) of our healthcare and electronics businesses to directly and indirectly own substantially all of the operating subsidiaries of Tyco International Ltd., to issue the notes and to perform treasury operations for us. Otherwise, it conducts no independent business. We have not included separate financial statements for TIFSA, which was formed in December 2006, in this prospectus because its initial capitalization was not material and it will not have any significant operations or assets until shortly before the spin-offs. Tyco International Ltd. Tyco International Ltd. is a Bermuda corporation. Its registered and principal office is located at Second Floor, 90 Pitts Bay Road, Pembroke HM 08, Bermuda, and its telephone number at that address is (441) 292-8674. Our management office in the United States is located at 9 Roszel Road, Princeton, New Jersey 08540. The Spin-Offs On January 13, 2006, we announced that our board of directors had approved a plan to separate Historical Tyco's portfolio of diverse businesses into three independent, publicly-traded companies Covidien Ltd., a global leader in developing, manufacturing and distributing medical devices and supplies, diagnostic imaging agents and pharmaceuticals for use in clinical and home settings; Tyco Electronics Ltd., a leading global provider of engineered electronic components, network solutions and wireless systems; and Tyco International, which will be the combination of Tyco Fire & Security and Tyco Engineered Products & Services, a leading provider of electronic security, fire and safety services and products, valves and controls and other industrial products. The separation will occur through tax-free spin-offs of our healthcare and electronics businesses to our shareholders. We refer to these transactions as the "spin-offs." On , 2007, the distribution date, each Tyco International shareholder will receive Covidien common shares and Tyco Electronics common shares for each common share of Tyco International held at the close of business on the record date. Immediately following the distributions, Tyco International's shareholders will own 100% of the common shares of Covidien and Tyco Electronics. Tyco International shareholders will not be required to make any payment, surrender or exchange their Tyco International common shares or take any other action to receive their common shares of Covidien and Tyco Electronics. We anticipate that on the distribution date we will, if approved by our Board of Directors, execute a reverse share split, and as a result, each Tyco International share will be converted into one-fourth of a share. The notes offered hereby will be offered following the completion of the separation distributions. We do not anticipate offering these notes in the event that the separation distributions are not completed.
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+This summary highlights information contained in this prospectus relating to Tyco Electronics and the notes we are offering. The term TEGSA refers to Tyco Electronics Group S.A., the issuer of the notes. You should read the entire prospectus, including the risk factors, our historical combined financial statements, our unaudited pro forma combined financial statements and the respective notes to those historical and pro forma financial statements. Except as otherwise indicated or unless the context otherwise requires, the information included in this prospectus assumes the completion of the separation. Except as otherwise indicated or unless the context otherwise requires, "Tyco Electronics," "we," "us" and "our" refer to Tyco Electronics Ltd. and its combined subsidiaries, including TEGSA, "Covidien" refers to Covidien Ltd. and its combined subsidiaries and "Tyco International" refers to Tyco International Ltd. and its consolidated subsidiaries. When we intend to refer only to Tyco Electronics Ltd, a Bermuda corporation, without including its combined subsidiaries, we use the term "Tyco Electronics Ltd." Unless otherwise indicated, references in this prospectus to fiscal 2007, fiscal 2006, fiscal 2005 and fiscal 2004 are to Tyco Electronics' fiscal years ended September 28, 2007, September 29, 2006, September 30, 2005 and September 30, 2004. Our historical combined financial information has been prepared on a "carve-out" basis to reflect the operations, financial condition and cash flows specifically allocable to the Tyco Electronics component of Tyco International during all periods shown. Our pro forma combined financial information adjusts our historical combined financial information to give effect to our separation from Tyco International and any related financing. Our Company We are a leading global provider of engineered electronic components, network solutions and wireless systems. We design, manufacture and market products for customers in industries from automotive, appliances and aerospace and defense to telecommunications, computers and consumer electronics. With over 8,000 engineers and worldwide manufacturing, sales and customer service capabilities, Tyco Electronics' commitment is our customers' advantage. We conduct our business through four reporting segments: Our Electronic Components segment is one of the world's largest suppliers of passive electronic components, which includes connectors and interconnect systems, relays, switches, circuit protection devices, touchscreens, sensors, and wire and cable. The products sold by the Electronic Components segment are sold primarily to original equipment manufacturers, or OEMs, and their contract manufacturers in the automotive, computer, consumer electronics, communication equipment, appliance, aerospace and defense, industrial machinery, and instrumentation markets. Our Network Solutions segment is one of the world's largest suppliers of infrastructure components and systems for telecommunications and energy markets. These components include connectors, above-and below-ground enclosures, heat shrink tubing, cable accessories, surge arrestors, fiber optic cabling, copper cabling, and racks for copper and fiber networks. This segment also provides electronic systems for test access and intelligent cross-connect applications as well as integrated cabling solutions for cabling and building management. Our Wireless Systems segment is an innovator of wireless technology for critical communications, radar, and defense applications. The segment's products include radio frequency components and subassembly solutions such as silicon and gallium arsenide semiconductors, radar sensors, radio frequency identification components, microwave subsystems, and diodes and land mobile radios systems and related products. These products are sold primarily to the aerospace and defense, public safety, communication equipment, and automotive markets. Our Other segment designs, manufactures, distributes, and installs power systems and undersea telecommunication systems. ($ in millions) Power Utility $ 27 8.0 % $ 22 $ 49 14.2 % Communication Service Provider (30 ) (11.3 ) 12 (18 ) (6.7 ) Building Networks 31 18.4 7 38 22.6 Other (0.3 ) 1 (in millions) Restructuring and other charges, net: Cash charges $ 23 $ 9 Non-cash charges 2 (in millions) Fiscal 2007 Actions: Employee severance $ $ 22 $ $ $ $ 22 Facilities exit costs (1 ) Fiscal 2006 Actions: Employee severance 3 (2 ) 1 Facilities exit costs 2 (1 ) Net periodic benefit cost $ (1 ) $ (2 ) $ 43 $ 48 $ 2 $ Cash Flows From Investing Activities: Capital expenditures (610 ) (610 ) Proceeds from sale of property, plant, and equipment 35 35 Divestiture of businesses, net of cash retained by businesses sold 227 227 Increase in investments (3 ) (3 ) Other 1 Cash Flows From Investing Activities: Capital expenditures (610 ) (610 ) Proceeds from sale of property, plant, and equipment 35 35 Divestiture of businesses, net of cash retained by businesses sold 227 227 Increase in investments (3 ) (3 ) Decrease in intercompany loans 2,067 (2,067 ) Other 1 (in millions) Electronic Components $ 9 $ (1 ) $ 4 Network Solutions 9 2 2 Wireless Systems 5 (in millions) Restructuring and other charges (credits), net: Cash charges $ 13 $ 6 $ Fiscal 2004 Actions Employee severance 8 (3 ) (4 ) 1 Facilities exit costs 1 Fiscal 2004 Activity: Fiscal 2004 Actions Employee severance 11 (3 ) 8 Facilities exit costs 1 1 Other (in millions) Service cost $ 1 $ 1 $ 1 Interest cost 2 3 3 Amortization of prior service credit (1 ) (1 ) Amortization of net actuarial loss Funded status $ (45 ) $ (53 ) Unrecognized net actuarial loss 5 9 Unrecognized prior service cost 2 1 Contributions after the measurement date Income from operations 1,619 1,619 Interest income 33 33 Interest expense (344 ) (344 ) Other expense, net WHERE YOU CAN FIND MORE INFORMATION After our separation from Tyco International, we will become subject to the information and reporting requirements of the Exchange Act and, in accordance with the Exchange Act, we will file periodic reports, proxy statements and other information with the SEC. We maintain a website on the Internet at http://www.tycoelectronics.com. We will make available free of charge on or through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as soon as reasonably practicable after such material is filed with the SEC. This reference to our Internet address is for informational purposes only and shall not, under any circumstances, be deemed to incorporate the information available at such Internet address into this prospectus. Competitive Strengths We believe that we have the following competitive strengths: Global leader in passive components. With net sales of approximately $12.8 billion in fiscal 2006, we are significantly larger than many of our competitors. Strong customer relationships. As an industry leader, we have established close working relationships with our customers. These relationships allow us to anticipate and be responsive to customer needs when designing new products and new technical solutions. Process and product technology leadership. We employ over 8,000 engineers dedicated to product research, development and engineering. We invest over $600 million per year in product and process engineering and development so that we consistently provide innovative, high quality products with efficient manufacturing methods. Diverse product mix and customer base. We manufacture and sell a broad portfolio of products to customers in various industries. Balanced geographic sales mix. We have an established manufacturing presence in over 25 countries and our sales are global. Our global coverage positions us near our customers' locations and allows us to assist them in consolidating their supply base and lowering their production costs. Strong and experienced management team. We believe we have a management team that has the experience necessary to effectively execute our strategy and advance our product and technology leadership. Strategy Our goal is to be the world leader in providing custom-engineered electronic components and solutions for an increasingly connected world. Our business strategy is based upon the following priorities: Continue to focus our existing portfolio. We regularly review and will consider the divestiture of underperforming or non-strategic businesses to improve our operating results and better utilize our capital. Leverage our market leadership position to increase our market share. We are the global leader in many of the markets that we serve. We believe that we must continue to strengthen our leadership position in these markets. Achieve market leadership in attractive and under-penetrated industries. We plan to accelerate growth in end-user markets in which we do not have the number one market share but which we believe have attractive growth and profitability characteristics. Extend our leadership in key emerging markets. We seek to improve our market leadership position in emerging geographic regions, including China, Eastern Europe and India. We have been increasing our sales and marketing, engineering and manufacturing resources in these emerging regions in order to more fully capitalize on our skills and technologies. Supplement organic growth with strategic acquisitions. We will evaluate and selectively pursue strategic acquisitions that strengthen our market position, enhance our existing product offering, enable us to enter attractive markets, expand our technological capabilities and provide synergy opportunities. Improve operating margins. We intend to continue to increase our productivity and reduce our manufacturing costs in order to more than fully offset the impact of price erosion on our operating performance. Accelerate new product development through research and development excellence. We intend to focus our research, development, and engineering investment on next generation technologies and highly engineered products and platforms. Total restructuring and other charges, net 25 10 Cost of sales Total 5 (3 ) Accounts payable $ 37 Accrued and other current liabilities 17 Other liabilities Total amortizable $ 1,515 $ (506 ) $ 1,009 22 years $ 1,490 $ (464 ) $ 1,026 22 years Non-amortizable 1 1 2 (in millions) Fiscal 2006 Activity: Fiscal 2006 Actions Employee severance $ $ 12 $ (10 ) $ $ $ 1 $ 3 Facilities exit costs 2 Total Pre-Fiscal 2004 Actions Employee severance 2 (2 ) Facilities exit costs 70 (10 ) 1 5 66 Other Total 9 (3 ) (4 ) Pre-Fiscal 2004 Actions Employee severance 7 (5 ) 2 Facilities exit costs 42 (15 ) 4 39 70 Other 4 (2 ) (in millions) Balance at September 30, 2004 $ 5,980 $ 846 $ 635 $ 7,461 Purchase accounting adjustments(1) (30 ) (4 ) (34 ) Acquisitions 2 Total amortizable $ 1,490 $ (464 ) $ 1,026 22 years $ 1,460 $ (388 ) $ 1,072 22 years Non-amortizable 2 2 2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Class Action Settlement On May 14, 2007, Tyco International entered into a memorandum of understanding with plaintiffs' counsel in connection with the settlement of 32 purported class action lawsuits. Under the terms of the memorandum of understanding, the plaintiffs have agreed to release all claims against Tyco International, the other settling defendants and ten other individuals in consideration for the payment of $2.975 billion to the certified class and assignment to the class of any net recovery of any claims possessed by Tyco International and the other settling defendants against Tyco International's former auditor, PricewaterhouseCoopers. Defendant PricewaterhouseCoopers is not a settling defendant and is not a party to the memorandum. Tyco International and the other settling defendants have denied and continue to deny any wrongdoing and legal liability arising from any of the facts or conduct alleged in the actions. Pursuant to the terms of the memorandum of understanding, L. Dennis Kozlowski, Mark H. Swartz and Frank E. Walsh, Jr., also are excluded from the settling defendants, and the class will assign to Tyco International all of their claims against defendants Kozlowski, Swartz and Walsh. In exchange, Tyco International will agree to pay to the certified class 50% of any net recovery against these defendants. In connection with the class action settlement, we will incur a charge of $0.922 billion in the third quarter of fiscal 2007 for which we do not expect to recognize any tax benefit. When the Separation and Distribution Agreement is entered into, we will record a $2.975 billion liability and a $2.053 billion receivable from Tyco International and Covidien for their portion of the liability. The memorandum of understanding does not address the following securities class actions, which remain outstanding: Stumpf v. Tyco International Ltd., New Jersey v. Tyco, Ballard v. Tyco International Ltd., Sciallo v. Tyco International Ltd., et al., Jasin v. Tyco International Ltd., et al., and Hall v. Kozlowski. The memorandum of understanding also does not address any consolidated ERISA litigation in which Tyco International and certain of its current and former employees, officers and directors have been named as defendants. Tyco Electronics Group S.A. Tyco Electronics Group S.A., or TEGSA, a Luxembourg company, is a wholly-owned subsidiary of Tyco Electronics Ltd. TEGSA's registered and principal offices are located at 17, Boulevard de la Grande Duchesse Charlotte, L-1331 Luxembourg. Its telephone number at that address is (352) 464-340-1. TEGSA is a newly-formed holding company established in connection with the separation of the electronics business of Tyco International to directly and indirectly own all of the operating subsidiaries of Tyco Electronics to issue the notes and to perform treasury operations for Tyco Electronics. Otherwise, it conducts no independent business. We have not included separate financial statements for TEGSA, which was formed in December 2006, in this prospectus because its initial capitalization was not material and it will not have any significant operations or assets until shortly before the separation. Tyco Electronics Ltd. Tyco Electronics Ltd. is a Bermuda corporation. Its registered and principal office is located at Second Floor, 90 Pitts Bay Road, Pembroke HM 08, Bermuda, and its telephone number at that address is (441) 292-8674. Its executive office in the United States is located at 1050 Westlakes Drive, Berwyn, Pennsylvania 19312, and its telephone number at that address is (610) 893-9560. The Separation On January 13, 2006, Tyco International announced that its board of directors had approved a plan to separate Tyco International into three independent, publicly-traded companies: one for Tyco International's electronics businesses (Tyco Electronics), one for its healthcare businesses (Covidien) and one for its fire and security and engineered products and services businesses (Tyco International). Tyco International intends to accomplish this separation through distributions of common shares to Tyco International shareholders. Immediately following the separation of Tyco Electronics and Covidien, Tyco International's shareholders will own 100% of the equity in each of the three companies. We anticipate that the distribution will be tax-free for U.S. federal income tax purposes. Power Utility 45 % 43 % Communication Service Provider 28 33 Building Networks 24 21 Other 3 Net cash used in investing activities (548 ) (277 ) (375 ) Net cash (used in) provided by discontinued investing activities (91 ) (9 ) Net cash used in investing activities (375 ) (375 ) Net cash provided by discontinued investing activities 3 AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 On , 2007, the distribution date, each Tyco International shareholder will receive Covidien common shares and Tyco Electronics common shares for each common share of Tyco International held at the close of business on the record date. Immediately following the distributions, Tyco International's shareholders will own 100% of the common shares of Covidien and Tyco Electronics. Tyco International shareholders will not be required to make any payment, surrender or exchange their Tyco International common shares or take any other action to receive their common shares of Covidien and Tyco Electronics. Tyco International anticipates that on the distribution date it will effect a reverse share split, and as a result each Tyco International share will be converted into one-fourth of a share.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001385830_neurogesx_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001385830_neurogesx_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire
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index 0000000000000000000000000000000000000000..a1f3e47c2af3f5be6bc3401dbc822f6821adba63
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+Prospectus Summary 1
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+PROSPECTUS SUMMARY This summary highlights key aspects of the information contained elsewhere in this prospectus. Because it is a summary, it does not contain all of the information that you should consider before making an investment decision. You should read the entire prospectus carefully, including the Risk Factors section and the financial statements and the accompanying notes to those statements. The statistics relating to the China s pharmaceutical market and economy included in this prospectus are derived from various government and institute research publications. We have not independently verified such information and you should not unduly rely upon it. TONGJITANG CHINESE MEDICINES COMPANY Overview We are a vertically integrated and profitable specialty pharmaceutical company focusing on the development, manufacturing, marketing and selling of modernized traditional Chinese medicine. We believe that our flagship product, Xianling Gubao, is the leading traditional Chinese medicine for the treatment of osteoporosis in China as measured by sales in Renminbi amounts, according to a May 2006 report commissioned by us and prepared by China Southern Medicine Economy Research Institute, or SMERI, which is a research institute affiliated with the China State Food and Drug Administration, or the SFDA. Our product portfolio consists primarily of Xianling Gubao and three other SFDA-approved modernized traditional Chinese medicines designed to address large market opportunities. Our product development pipeline includes potential expanded uses of our existing products for additional medical indications and a number of new product candidates that are intended to address significant medical needs in China, primarily in the therapeutic areas of women s health, mental health and dermatology. We were founded in 1995 and have grown significantly in recent years. Our net revenues increased from RMB234.7 million in 2004 to RMB485.0 million (US$62.1 million) in 2006, representing a compound annual growth rate, or CAGR, of 43.8% during this period. Our net income increased from RMB11.4 million in 2004 to RMB134.3 million (US$17.2 million) in 2006, representing a CAGR of 243.2% during this period. Xianling Gubao was approved in 2002 by the SFDA as both a prescription medicine and an OTC medicine for the treatment of osteoporosis. Our prescription sales force, consisting of over 370 salespeople, targets physicians and hospital administrators. In 2004, 2005 and 2006, 1,602, 1,982 and 2,257 Chinese hospitals, respectively, included Xianling Gubao on their lists of approved prescription medicines, or formularies, in each case based on internal company data gathered during the last week of each of these periods. We refer to these hospitals as formulary hospitals. Under the PRC Ministry of Health hospital classification system, the best and largest hospitals in China are designated as Class 3 hospitals, followed by lower-ranked Class 2 and Class 1 hospitals. Of the formulary hospitals for Xianling Gubao, 361 in 2004 and 441 in 2005 were Class 3 hospitals, representing 38.7% and 46.6% of all Class 3 hospitals in China, respectively. The number of Class 3 formulary hospitals for Xianling Gubao increased to 488 in 2006. Since May 2004, we also have been marketing Xianling Gubao as an OTC medicine to retail pharmacies. Our OTC sales force, consisting of over 500 salespeople, targets retail pharmacies and consumers. In 2005 and 2006, over 20,000 and 37,000 retail pharmacies in China stocked Xianling Gubao, respectively, in each case based on internal company data gathered during the last week of each of the two periods. We refer to these pharmacies as stocking retail pharmacies. In September 2004, Xianling Gubao was added to the national medicine catalog of the National Medical Insurance Program, a government-administered medical insurance program, which is the largest in China. As of the end of 2006, the number of participants enrolled in this program was 157.4 million, according to a statement made on January 18, 2007 by the Ministry of Labor and Social Security, or the MLSS. According to a statement SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents Conventions That Apply to This Prospectus Unless otherwise indicated, references in this prospectus to: $, US$, USD and U.S. dollars are to the legal currency of the United States; ADSs are to our American depositary shares, each of which represents four ordinary shares; ADRs are to the American depositary receipts, which, if issued, evidence our ADSs; China and the PRC are to the People s Republic of China, excluding, for the purposes of this prospectus only, Taiwan and the special administrative regions of Hong Kong and Macau; ordinary shares are to our ordinary shares, par value US$0.001 per share; National Medical Insurance Program is to China s national medical insurance program; provinces are to 31 provincial level governments in China, including 22 provinces, four municipalities directly administered under the PRC central government (for example, Beijing and Shanghai) and five autonomous regions (for example, Guangxi and Tibet); RMB and Renminbi are to the legal currency of China; and Euro are to the legal currency of the European Union; and we, us, our company and our are to Tongjitang Chinese Medicines Company, its predecessor entities and its consolidated subsidiaries. Unless otherwise indicated, information in this prospectus assumes that the underwriters do not exercise their over-allotment option to purchase additional ADSs. This prospectus contains translations of certain Renminbi amounts into U.S. dollars at specified rates. Unless otherwise stated, all translations from Renminbi to U.S. dollars in this prospectus have been made at the rate of RMB7.8041 to US$1.00, which was the noon buying rate as of December 29, 2006 in The City of New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York. We make no representation that the Renminbi or dollar amounts referred to in this prospectus could have been or could be converted into dollars or Renminbi, as the case may be, at any particular rate or at all. See Risk Factors Risk Related to Doing Business in China Fluctuation in the value of the Renminbi may have a material adverse effect on your investment. On March 14, 2007, the noon buying rate was RMB7.7370 to US$1.00. Table of Contents made by the MLSS on February 21, 2006, the Chinese government intends to expand program enrollment to 300 million by the end of 2010. Although it is designated as a national program, the implementation of the National Medical Insurance Program is delegated to various provincial governments, each of which publishes its own medicine catalog by reference to the national medicine catalog and, to a limited extent, by applying its own selection criteria. Xianling Gubao is included in the provincial medicine catalog of every province, meaning that the National Medical Insurance Program participants in every province can be reimbursed for purchases of Xianling Gubao either as a prescription medicine or as an OTC medicine. Since its inclusion in the provincial catalogs, sales of Xianling Gubao have increased significantly. We have built and currently own and operate two manufacturing facilities with a combined floor space of 29,000 m2, which can support 12 production lines. We implement quality control procedures in compliance with standards for Good Manufacturing Practice, or GMP standards, and applicable SFDA regulations to ensure consistent quality in our products. Our extensive distribution network enables us to distribute our products in all provinces in China. In addition to Xianling Gubao, we manufacture and market a portfolio of 10 other modernized traditional Chinese medicines approved by the SFDA, including the following three principal products: Zaoren Anshen Capsules, an OTC medicine for treating insomnia, Moisturizing and Anti-Itching Capsules, an OTC medicine for treating inflammatory skin conditions, and Dianbaizhu Syrup, a prescription medicine for treating vertigo, or dizziness. We also manufacture 37 western medicines, although the contributions of these medicines to our net revenues are insignificant. We believe that the pharmaceutical market in China presents an attractive and rapidly growing opportunity, which is driven by a number of positive trends including, but not limited to, strong per capita GDP growth, government-backed healthcare reimbursement systems, and the size and growth of the country s aging population. Industry Background The rapid increase in the disposable income of Chinese urban residents and the increase in the number of elderly people in China in recent years have resulted in increasing spending on prescription and OTC medicines in China, including traditional Chinese medicine. According to the Chinese Medical Statistical Yearbook 2005, China s pharmaceutical market, based on both prescription and OTC medicines sales, amounted to RMB211.9 billion, RMB269.2 billion, and RMB547.3 billion (US$70.1 billion) in 2002, 2003 and 2004, respectively, representing a CAGR of 60.7%. Traditional Chinese medicines accounted for approximately 30% of the market in each of those years. We believe that China s aging population is a key contributor to the increased expenditures on medicines because elderly people on average spend more on healthcare than younger people. In China, each urban resident over age 60 on average spent approximately RMB984.0 (US$126.1) on medicines in 2000, five times the average spending by an urban resident below age 60 in the same year, according to the China Industry Development Report for the Pharmaceutical Industry 2004 published by the China National Information Center. The portion of the Chinese population aged 60 and above has increased in both absolute numbers and as a percentage of the total population, and this trend is likely to continue in the next few decades. According to two surveys conducted by the National Bureau of Statistics in 2000 and 2005, the number of people in China aged 60 and above was approximately 130.0 million in 2000, or 10.5% of China s entire population, and this number increased to approximately 144.1 million in 2005, representing 11.0% of the total population. The number of the AMENDMENT NO. 5 TO FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents Chinese aged 60 and above is projected to reach 171.0 million by 2010, which is expected to represent 12.6% of the total population, according to the PRC National Population and Family Planning Commission statistics. Traditional Chinese medicine has been widely used in China for thousands of years and is deeply ingrained in the Chinese culture. In recent decades, Chinese pharmaceutical manufacturers have applied modern production technologies to make traditional Chinese medicines in a variety of dosage forms, such as tablets, capsules and granules, which we refer to as modernized traditional Chinese medicines. The Chinese government is committed to supporting and promoting the development of modernized traditional Chinese medicine, as evidenced by the government formulating an industry development plan for the modernized traditional Chinese medicine sector and adding more modernized traditional Chinese medicines to the national medicine catalog of the National Medical Insurance Program. As a result, we believe that traditional Chinese medicine will remain as mainstream medicine in China, and that a majority of consumers in China will continue to give equal consideration to western and modernized traditional Chinese medicines when choosing a medicine. According to the Pathology Study Report on Osteoporosis in Certain Regions in China prepared in 2000 by the Medical Research Institute for Elderly Endemic Diseases, an institute affiliated with the Ministry of Health, the prevalence rate of osteoporosis in China was 22.6% among people over the age of 60 and over 50.0% among people over the age of 80. According to a report by Xinhua News Agency, the official news agency in China, the annual medical costs for osteoporosis in China amounted to at least RMB15 billion (US$1.9 billion) based on information released from an osteoporosis expert conference held in China in observance of October 20 as the World Osteoporosis Day on October 20, 2006. In China, in addition to calcium supplements and anti-resorptive and anabolic drugs, osteoporosis is also treated with a variety of SFDA-approved prescription and OTC traditional Chinese medicines. According to an August 2005 research report issued by Frost and Sullivan, an international market research firm, the costs of clinical trials in China for new medicines are approximately half of those in the United States or Western Europe due to China s lower labor and infrastructure costs. The lower costs of clinical trials enable China-based pharmaceutical companies, such as our company, to maximize value from their product development. Our Competitive Strengths We believe that our strong position in the traditional Chinese medicine sector is primarily attributable to the following strengths: market leader in modernized traditional Chinese medicine for the treatment of osteoporosis; strong science-based marketing efforts targeting physicians and hospital administrators; extensive OTC marketing efforts targeting retail pharmacies and consumers; inclusion in the national and provincial medicine catalogs under the National Medical Insurance Program; portfolio of SFDA-approved medicines with growth potential; and experienced management team and motivated staff. Our Strategies Our objectives are to maintain and strengthen the market leadership of Xianling Gubao in the osteoporosis medicine segment in China and to increase the sales of our other products. We are implementing, and will continue to implement, the following strategies: expand and enhance marketing of Xianling Gubao as a prescription medicine; Tongjitang Chinese Medicines Company (Exact name of registrant as specified in its charter) Not Applicable (Translation of Registrant s name into English) Cayman Islands 2834 Not Applicable (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 5th Floor, Block B Baiying Medical Device Park Nanhai Avenue South, Nanshan District Shenzhen, Guangdong Province 518067 People s Republic of China (86-755) 2689-1550 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Table of Contents expand and enhance marketing of Xianling Gubao as an OTC medicine; enhance marketing of our other SFDA-approved products; commercialize and continue to broaden our product pipeline; and pursue strategic acquisition and licensing opportunities. Our Challenges We believe that the following are some of the major risks and uncertainties that may materially affect us: our dependence on the sales of Xianling Gubao; failure to successfully market Xianling Gubao to hospitals as a prescription medicine or to retail pharmacies and consumers as an OTC medicine; failure to win the tendering process used for medicine purchases by state-owned hospitals; failure to obtain and maintain permits, licenses or regulatory approvals necessary to carry out our business and develop and commercialize our products; downgrading of our products included in, or removal of our products from, the national and provincial medicine catalogs of the National Medical Insurance Program; discovery of severe side effects or quality problems associated with our products; competition from western medicine manufacturers and other traditional Chinese medicine manufacturers; reduction in the retail prices of our principal products by the PRC price control authorities; failure to manage our expansion of operations effectively; adverse changes in the political and economic policies of the PRC government; uncertainties in the PRC legal system; and fluctuations in the value of the Renminbi. Corporate Structure We are a Cayman Islands-incorporated holding company that conducts its operations through subsidiaries in China. Our ultimate predecessor company, Guizhou Xianling Pharmaceutical Co., Ltd., or Guizhou Xianling, was incorporated in China as a limited liability company in December 1995. Following a series of name changes, acquisitions and corporate reorganizations, in March 2005 Guizhou Xianling became Guizhou Tongjitang Pharmaceutical Co., Ltd., or Tongjitang Pharmaceutical, a limited liability company incorporated in China. In June 2005, Unisources Enterprises Limited, a company incorporated in the British Virgin Islands, acquired all the equity interests in Tongjitang Pharmaceutical and converted Tongjitang Pharmaceutical into a limited liability company with foreign invested enterprise status under PRC law. In preparation for this initial public offering, we incorporated Tongjitang Chinese Medicines Company in the Cayman Islands on May 16, 2006. Tongjitang Chinese Medicines Company became our ultimate holding company when it issued shares to the existing shareholders of Unisources Enterprises Limited on June 19, 2006 in exchange for all of the shares of Unisources Enterprises Limited held by those shareholders. None of these acquisitions and corporate reorganization resulted in a change of control of Tongjiang Pharmaceutical, our principal operating company. We conduct substantially all of our operations through the following subsidiaries in China: Tongjitang Pharmaceutical, a wholly-owned subsidiary and our principal operating company, engaging in the business of developing, manufacturing, marketing and selling of medicines; CT Corporation System 111 Eighth Avenue New York, New York 10011 (212) 664-1666 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents Guizhou Tongjitang Pharmaceutical Distribution Co., Ltd., or Tongjitang Distribution, a 92.76%-owned subsidiary of Tongjitang Pharmaceutical, engaging in the business of wholesale distribution of medicines; Guizhou Tongjitang Pharmacy Chain Stores Co., Ltd., or Tongjitang Chain Stores, a 96%-owned subsidiary of Tongjitang Distribution, engaging in the business of retail sales of medicines; and Guizhou Tongjitang Chinese Medicines Planting Co., Ltd., or Tongjitang Planting, a 95%-owned subsidiary of Tongjitang Pharmaceutical, engaging in the business of cultivating medicinal herbs, primarily barrenwort, used in the production of our products. The following diagram illustrates our corporate structure and the ownership interests of our subsidiaries as of the date of this prospectus. Corporate Information Our principal executive offices are located at 5th Floor, Block B, Baiying Medical Device Park, Nanhai Avenue South, Nanshan District, Shenzhen, Guangdong Province 518067, People s Republic of China. Our telephone number at this address is (86-755) 2689-1550 and our fax number is (86-755) 2689-1530. Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website, www.tongjitang.com, is currently under construction. The information contained on our website is not part of this prospectus. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011. Table of Contents THE OFFERING American Depositary Shares offered: By us 8,350,000 ADSs By the selling shareholders 1,515,000 ADSs The ADSs Each ADS represents four ordinary shares, par value US$0.001 per share. The ADSs will be evidenced by ADRs. The depositary will hold the ordinary shares underlying your ADSs. You will have rights as provided in the deposit agreement. If, however, we declare dividends on our ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our ordinary shares, after deducting its fees and expenses. You may exchange your ADSs for ordinary shares through the depositary. The depositary will charge you fees for any exchange. We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs after the amendment, you agree to be bound by the deposit agreement as amended. To better understand the terms of the ADSs, you should carefully read the Description of American Depositary Shares section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus. ADSs outstanding immediately after the offering 9,865,000 ADSs. Ordinary shares outstanding immediately after the offering 133,693,008 shares, excluding ordinary shares reserved for future issuance under our 2006 share incentive plan. Use of proceeds Our net proceeds from this offering are expected to be approximately US$95.6 million. We plan to use the net proceeds we receive from this offering to enhance our marketing of Xianling Gubao and other products, to strengthen our research and development infrastructure and broaden and commercialize our product pipeline, to fund working capital, to fund strategic acquisitions, licensing and for other general corporate purposes. See Use of Proceeds for additional information. We will not receive any of the proceeds from the sales of the ADSs by the selling shareholders. Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering. Table of Contents
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+This summary only highlights the more detailed information appearing elsewhere in this prospectus. As this is a summary, it does not contain all of the information that you should consider in making an investment decision. You should read this entire prospectus carefully, including the information under Risk Factors and our financial statements and the related notes included elsewhere in this prospectus, before investing. References in this prospectus to we, us or our company refer to Victory Acquisition Corp. References in this prospectus to public stockholders refers to those persons that purchase the securities offered by this prospectus and any of our initial stockholders (as defined below) who purchase these securities either in this offering or afterwards, provided that our initial stockholders status as public stockholders shall only exist with respect to those securities so purchased. References in this prospectus to our management team refer to our officers and directors. Unless we tell you otherwise, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option. We are a blank check company formed under the laws of the State of Delaware on January 12, 2007. We were formed to acquire a currently unidentified operating business or several operating businesses through a merger, stock exchange, asset acquisition, reorganization or similar business combination, which we refer to throughout this prospectus as a business combination. To date, our efforts have been limited to organizational activities as well as activities related to this offering. We have not, nor has anyone on our behalf, contacted any potential target business or had any substantive discussions, formal or otherwise, with respect to such a transaction. We initially intend to focus our search for target businesses on service businesses in one of the following segments: business services; marketing services; consumer services; and distribution services. We will seek to acquire a business whose operations can be improved and enhanced with our capital resources and where there are substantial opportunities for both organic and acquisition growth. We intend to initially focus our search on service businesses in the segments listed above in the United States, but will also explore opportunities in international markets that are attractive to us. We will seek to capitalize on the significant investing experience of Eric Watson, our chairman of the board and treasurer, and Jonathan Ledecky, our president and secretary, each of whom has substantial experience in identifying, acquiring and operating a wide variety of service businesses. Together, they have been involved in the formation of over 25 companies and 400 acquisitions by these companies. Mr. Watson has been the chairman of, and interests associated with him own, Cullen Investments Limited, a private investment company which he founded in January 1995. Mr. Watson and his associated interests have a substantial portfolio comprising interests in the fashion retail, financial services, real estate, infrastructure maintenance, sports and entertainment sectors. Cullen Investments owns Bendon, an international manufacturer and retailer of women s lingerie whose brands include the licensed Elle Macpherson Intimates label. Another major investment held by interests associated with Mr. Watson is a 50% ownership of the Hanover Group, one of the largest privately owned financial service businesses in New Zealand with operations extending to the United States, the United Kingdom and Australia. Prior to founding Cullen Investments, Mr. Watson was the founding chairman and largest shareholder of Blue Star Group, a retail and distribution group he founded in January 1992. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents Since March 1999, Mr. Ledecky has served as chairman of Ironbound Partners Fund LLC, a private investment management fund. In October 1994, Mr. Ledecky founded U.S. Office Products and served as its chief executive officer until November 1997 and chairman until June 1998. During his tenure, U.S. Office Products completed over 260 acquisitions, and grew to a Fortune 500 company with over $2.6 billion in revenues. In February 1997, Mr. Ledecky founded Building One Services Corporation (originally Consolidation Capital Corporation), an entity formed to identify attractive consolidation opportunities which ultimately focused on the facilities management industry. In November 1997, Building One raised $552 million in an initial public offering. Mr. Ledecky served as Building One s chief executive officer from November 1997 through February 1999 and as its chairman from inception through its February 2000 merger with Group Maintenance America Corporation. During his tenure with Building One, it completed 46 acquisitions and grew to over $1.5 billion in revenues. Each of Messrs. Watson and Ledecky and Jay H. Nussbaum, Robert B. Hersov, Edward J. Mathias, Richard Y. Roberts and Kerry Kennedy, each of whom is a member of our board of directors, is also an officer and/or director of Endeavor Acquisition Corp., a blank check company formed in July 2005 for the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. Endeavor Acquisition Corp. consummated its initial public offering in December 2005 and raised gross proceeds of approximately $129.3 million at an offering price of $8.00 per unit. In December 2006, Endeavor Acquisition Corp. entered into a definitive agreement for a business combination to acquire American Apparel, Inc. and its affiliated companies. American Apparel is a leading provider of cotton leisure wear geared toward contemporary metropolitan adults and sold through company-owned retail locations and online. If the business combination between Endeavor Acquisition Corp. and American Apparel fails for any reason, Messrs. Watson, Ledecky, Nussbaum, Hersov, Mathias and Roberts and Ms. Kennedy have pre-existing fiduciary and contractual obligations to Endeavor Acquisition Corp. and will offer it all suitable business opportunities prior to offering it to us. Additionally, our officers and directors may become principals of future blank check companies formed to acquire one or more operating businesses in the franchising, financial services or healthcare industries. Accordingly, we are prohibited from seeking to acquire a target business in any of these industries so as to avoid any potential conflicts of interests that may arise between us and such other blank check companies. Our initial business combination must be with one or more target businesses whose fair market value, individually or collectively, is equal to at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions of $7.5 million, or approximately $8.6 million if the underwriters over-allotment option is exercised in full) at Continental Stock Transfer & Trust Company referenced on the cover of this prospectus at the time of such business combination. This may be accomplished by identifying and acquiring a single business or multiple operating businesses, which may or may not be related, contemporaneously. The future role of members of our management team, if any, in the target business cannot presently be stated with any certainty. While it is possible that one or more of our officers or directors will remain associated in some capacity with us following a business combination, it is unlikely that any of them will devote their full efforts to our affairs subsequent to a business combination. Moreover, we cannot assure you that members of our management team will have significant experience or knowledge relating to the operations of the particular target business. If we are unable to consummate a business combination within twenty four months from the date of this prospectus, we will liquidate and distribute the proceeds held in the trust account to our public stockholders in an amount we expect to be approximately $9.77 per share of common stock held by them (or approximately $9.75 per share if the underwriters exercise their over-allotment option in full), without taking into account any interest earned on such funds. AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents Private Placement Eric J. Watson, our chairman of the board and treasurer, and Jonathan J. Ledecky, our president and secretary, have agreed to purchase an aggregate of 5,000,000 warrants at a price of $1.00 per warrant ($5.0 million in the aggregate) in a private placement that will occur simultaneously with the consummation of this offering. The $5.0 million of proceeds from this investment will be added to the proceeds of this offering and will be held in the trust account pending our completion of an initial business combination on the terms described in this prospectus. If we do not complete such a business combination, then the $5.0 million will be part of the liquidating distribution to our public stockholders, and the warrants will expire worthless. The sponsors warrants will not be transferable or salable by the purchasers (subject to limited exceptions including the transferee agreeing to be bound to such transfer restrictions) until we complete a business combination, and will be non-redeemable so long as they are held by the purchasers or their affiliates. In addition, commencing on the date such warrants become exercisable, the sponsors warrants and the underlying common stock are entitled to registration rights under an agreement to be signed on or before the date of this prospectus. With those exceptions, the sponsors warrants have terms and provisions that are identical to those of the warrants being sold as part of the units in this offering. In addition, on January 12, 2007, we issued 6,250,000 shares of our common stock to our initial stockholders for an aggregate of $25,000 in cash, at a purchase price of $0.004 per share. We refer to the current holders of these shares of our common stock as the initial stockholders, and we refer to these outstanding shares of common stock as the founders common stock throughout this prospectus. Our executive offices are located at 7 Times Square, 17th Floor, New York, New York 10036, and our telephone number is (212) 683-5350. VICTORY ACQUISITION CORP. (Exact name of registrant as specified in its charter) Delaware 6770 20-8218483 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 7 Times Square, 17th Floor New York, New York 10036 (212) 683-5350 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Table of Contents The Offering In making your decision on whether to invest in our securities, you should take into account not only the backgrounds of the members of our management team, but also the special risks we face as a blank check company and the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended (the Securities Act ). You will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. You should carefully consider these and the other risks set forth in the section below entitled Risk Factors beginning on page 16 of this prospectus. Securities offered: 25,000,000 units, each unit consisting of: one share of common stock; and one warrant. Trading commencement and separation of common stock and warrants: The units will begin trading on or promptly after the date of this prospectus. The common stock and warrants comprising the units will begin separate trading five business days (or as soon as practicable thereafter) following the earlier to occur of the expiration of the underwriters over-allotment option or its exercise in full, subject to our having filed the Current Report on Form 8-K described below and having issued a press release announcing when such separate trading will begin. Separate trading of the common stock and warrants is initially prohibited: In no event will the common stock and warrants be traded separately until we have filed a Current Report on Form 8-K with the SEC containing an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file this Current Report on Form 8-K upon the consummation of this offering, which is anticipated to take place three business days from the date of this prospectus. If the over-allotment option is exercised following the initial filing of such Current Report on Form 8-K, a second or amended Current Report on Form 8-K will be filed to provide updated financial information to reflect the exercise and consummation of the over-allotment option. Units: Number outstanding before this offering: Number to be outstanding after this offering: 25,000,000 units Common stock: Number outstanding before this offering: 6,250,000 shares Number to be outstanding after this offering: 31,250,000 shares Jonathan J. Ledecky, President Victory Acquisition Corp. 7 Times Square, 17th Floor New York, New York 10036 (212) 683-5350 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents Warrants: Number outstanding before this offering: Number to be sold privately simultaneously with consummation of this offering: 5,000,000 warrants Number to be outstanding after this offering and private placement: 30,000,000 warrants Exercisability: Each warrant is exercisable to purchase one share of our common stock. Exercise price: $7.50 per share Exercise period: The warrants will become exercisable on the later of: the completion of our initial business combination, or fifteen months from the date of this prospectus; provided in each case that we have an effective registration statement under the Securities Act covering the shares of common stock issuable upon exercise of the warrants. We have agreed to use our best efforts to have an effective registration statement covering shares of common stock issuable upon exercise of the warrants from the date the warrants become exercisable and to maintain a current prospectus relating to that common stock until the warrants expire or are redeemed. The warrants will expire at 5:00 p.m., New York time, four years from the date of this prospectus or earlier upon redemption. On the exercise of any warrant, the warrant exercise price will be paid directly to us and not placed in the trust account. Redemption: At any time while the warrants are exercisable and there is an effective registration statement covering the shares of common stock issuable upon exercise of the warrants available and current, we may redeem the outstanding warrants (except as described below with respect to the sponsors warrants): in whole and not in part; at a price of $.01 per warrant; Copies to: David Alan Miller, Esq. Jeffrey M. Gallant, Esq. Graubard Miller The Chrysler Building 405 Lexington Avenue New York, New York 10174 (212) 818-8800 (212) 818-8881 Facsimile Bruce Mendelsohn, Esq. Akin Gump Strauss Hauer & Feld LLP 590 Madison Avenue New York, New York 10022 (212) 872-1000 (212) 872-1002 Facsimile Table of Contents upon a minimum of 30 days prior written notice of redemption (the 30-day redemption period ); and if, and only if, the last sale price of our common stock equals or exceeds $14.25 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. We will not redeem the warrants unless an effective registration statement covering the shares of common stock issuable upon exercise of the warrants is current and available throughout the 30-day redemption period. Reasons for redemption limitations: We have established the above conditions to our exercise of redemption rights to provide: warrant holders with adequate notice of exercise only after the then-prevailing common stock price is substantially above the warrant exercise price; and a sufficient differential between the then-prevailing common stock price and the warrant exercise price so there is a buffer to absorb the market reaction, if any, to our redemption of the warrants. If the foregoing conditions are satisfied and we issue a notice of redemption, each warrant holder can exercise his, her or its warrant prior to the scheduled redemption date. However, the price of the common stock may fall below the $14.25 trigger price as well as the $7.50 the warrant exercise price after the redemption notice is issued. Founders common stock: On January 12, 2007, our initial stockholders purchased 6,250,000 shares of our common stock for an aggregate purchase price of $25,000. The founders common stock is identical to those included in the units being sold in this offering, except that: the founders common stock is subject to the transfer restrictions described below; the initial stockholders have agreed to vote the founders common stock in the same manner as a majority of the public stockholders in connection with the vote required to approve our initial business combination; the initial stockholders will not be able to exercise conversion rights (as described below) with respect to the founders common stock; and the initial stockholders have agreed to waive their rights to participate in any liquidation distribution with respect to the founders common stock if we fail to consummate a business combination. The initial stockholders have agreed, subject to certain exceptions, not to sell or otherwise transfer any of the founders common stock until Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Table of Contents one year after the date of the completion of a business combination or earlier if, subsequent to our business combination, (i) the last sales price of our common stock equals or exceeds $20.00 per share for any 20 trading days within any 30-trading day period or (ii) we consummate a subsequent liquidation, merger, stock exchange or other similar transaction which results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property. We refer to such restrictions as the transfer restrictions throughout this prospectus. In addition, the initial stockholders are entitled to registration rights with respect to the founders common stock under an agreement to be signed on or before the date of this prospectus. Sponsors warrants purchased through private placement: Eric J. Watson, our chairman of the board and treasurer, and Jonathan J. Ledecky, our president and secretary, have entered into agreements with us to invest $5.0 million in us in the form of sponsors warrants to purchase 5,000,000 shares of our common stock at a price of $1.00 per warrant. The purchasers are obligated to purchase the sponsors warrants from us upon the consummation of this offering. The sponsors warrants will be purchased separately and not in combination with common stock or in the form of units. The purchase price of the sponsors warrants will be added to the proceeds from this offering to be held in the trust account pending the completion of our initial business combination. If we do not complete a business combination that meets the criteria described in this prospectus, then the $5.0 million purchase price of the sponsors warrants will become part of the liquidating distribution to our public stockholders and the sponsors warrants will expire worthless. The sponsors warrants will not be transferable or salable by the purchasers (subject to limited exceptions including the transferee agreeing to be bound to such transfer restrictions) until we complete a business combination, and will be non-redeemable so long as they are held by the purchasers or their affiliates. In addition, commencing on the date such warrants become exercisable, the sponsors warrants and the underlying common stock are entitled to registration rights under an agreement to be signed on or before the date of this prospectus. With those exceptions, the sponsors warrants have terms and provisions that are identical to those of the warrants being sold as part of the units in this offering. Proposed American Stock Exchange symbols for our: Units: VRY.U Common stock: VRY Warrants: VRY.WS The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Table of Contents Offering and sponsors warrants private placement proceeds to be held in trust account and amounts payable prior to trust account distribution or liquidation: $244,200,000, or approximately $9.77 per unit ($280,200,000, or approximately $9.75 per unit, if the underwriters over-allotment option is exercised in full) of the proceeds of this offering and the private placement of the sponsors warrants will be placed in a trust account at with Continental Stock Transfer & Trust Company as trustee, pursuant to an agreement to be signed on the date of this prospectus. These proceeds include $7.5 million in deferred underwriting discounts and commissions (or approximately $8.6 million if the over-allotment option is exercised in full). We believe that the inclusion in the trust account of the purchase price of the sponsors warrants and the deferred underwriting discounts and commissions is a benefit to our stockholders because additional proceeds will be available for distribution to investors if a liquidation of our company occurs prior to our completing an initial business combination. Except as described below, proceeds in the trust account will not be released until the earlier of completion of a business combination or our liquidation. Unless and until a business combination is consummated, proceeds held in the trust account will not be available for our use for any purpose, including the payment of expenses related to (i) this offering, and (ii) the investigation, selection and negotiation of an agreement with one or more target businesses, except there can be released to us from the trust account (i) interest income earned on the trust account balance to pay any income taxes on such interest and (ii) interest income earned of up to $3.0 million on the trust account balance to fund our working capital requirements, provided that after such release there remains in the trust account a sufficient amount of interest income previously earned on the trust account balance to pay any due and unpaid income taxes on such $3.0 million of interest income (which provision we refer to as the tax holdback). With these exceptions, expenses incurred by us while seeking a business combination may be paid prior to a business combination only from the net proceeds of this offering not held in the trust account (initially, approximately $100,000). Limited payments to insiders: There will be no fees, reimbursements or other cash payments paid to our existing stockholders, officers, directors or their affiliates prior to, or for any services they render in order to effectuate, the consummation of a business combination (regardless of the type of transaction that it is) other than: Repayment of a $175,000 loan that is non-interest bearing made to us by Eric J. Watson and Jonathan J. Ledecky to cover offering expenses; A payment of an aggregate of $7,500 per month to Ironbound Partners Fund LLC, an affiliate of Jonathan J. Ledecky, for office space, secretarial and administrative services; and Table of Contents Reimbursement for any expenses incident to this offering and identifying, investigating and consummating a business combination with one or more target businesses, none of which have been incurred to date. Our audit committee will review and approve all reimbursements made to our existing stockholders, officers, directors or their affiliates, and any reimbursements made to members of our audit committee will be reviewed and approved by our board of directors, with any interested director abstaining from such review and approval. All amounts held in the trust account that are not converted to cash, released to us in the form of interest income or payable to the underwriters for deferred discounts and commissions will be released to us on closing of our initial business combination: All amounts held in the trust account that are not converted to cash (as described below) or previously released to us as interest income will be released on closing of our initial business combination with one or more target businesses, subject to compliance with the conditions to consummating a business combination that are described below. We will use these funds to pay amounts due to any public stockholders who exercise their conversion rights and to pay the underwriters their deferred underwriting discounts and commissions that are equal to 3% of the gross proceeds of this offering, or $7.5 million (or approximately $8.6 million if the underwriters over-allotment option is exercised in full). Funds released from the trust account to us can be used to pay all or a portion of the purchase price of the business or businesses with which our initial combination occurs. If the business combination is paid for using stock or debt securities, we may apply the cash released to us from the trust account to general corporate purposes, including for maintenance or expansion of operations of acquired businesses, the payment of principal or interest due on indebtedness incurred in consummating our initial business combination or to fund the purchase of other companies or for working capital. Certificate of Incorporation: As discussed below, there are specific provisions in our amended and restated certificate of incorporation that may not be amended prior to our consummation of a business combination, including our requirements to seek stockholder approval of such a business combination and to allow our stockholders to seek conversion of their shares if they do not approve of such a business combination. While we have been advised that such provisions limiting our ability to amend our certificate of incorporation may not be enforceable under Delaware law, we view these provisions, which are contained in Article Seventh of our amended and restated certificate of incorporation, as obligations to our stockholders and will not take any action to amend or waive these provisions. Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED APRIL 13, 2007 P R O S P E C T U S $250,000,000 Victory Acquisition Corp. 25,000,000 Units Table of Contents Our amended and restated certificate of incorporation also provides that we will continue in existence only until twenty four months from the date of this prospectus. If we have not completed a business combination by such date, our corporate existence will cease except for the purposes of winding up our affairs and liquidating, pursuant to Section 278 of the Delaware General Corporation Law. This has the same effect as if our board of directors and stockholders had formally voted to approve our dissolution pursuant to Section 275 of the Delaware General Corporation Law. Accordingly, limiting our corporate existence to a specified date as permitted by Section 102(b)(5) of the Delaware General Corporation Law removes the necessity to comply with the formal procedures set forth in Section 275 (which would have required our board of directors and stockholders to formally vote to approve our dissolution and liquidation and to have filed a certificate of dissolution with the Delaware Secretary of State). In connection with any proposed business combination we submit to our stockholders for approval, we will also submit to stockholders a proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence, thereby removing this limitation on our corporate life. We will only consummate a business combination if stockholders vote both in favor of such business combination and our amendment to provide for our perpetual existence. The approval of the proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence would require the affirmative vote of a majority of our outstanding shares of common stock. We view this provision terminating our corporate life twenty four months from the date of this prospectus as an obligation to our stockholders and will not take any action to amend or waive this provision to allow us to survive for a longer period of time except in connection with the consummation of a business combination. Stockholders must approve initial business combination: We will seek stockholder approval before effecting our initial business combination, even if the business combination would not ordinarily require stockholder approval under applicable state law. In connection with the stockholder vote required to approve our initial business combination, the initial stockholders have agreed to vote the founders common stock in the same manner as a majority of the public stockholders who vote at the special or annual meeting called for the purpose of approving our initial business combination. The initial stockholders have also agreed to vote any shares acquired by them in or after this offering in favor of our initial business combination. Conditions to consummating our initial business combination: We will not enter into our initial business combination with an entity which is affiliated with any of our officers, directors or initial stockholders. Victory Acquisition Corp. is a newly organized blank check company formed for the purpose of acquiring through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination one or more operating businesses, which we refer to as our initial business combination. Our efforts in identifying a prospective target business will not be limited to a particular industry although we will not search for target businesses in the franchising, financial services or healthcare industries. To date, our efforts have been limited to organizational activities as well as activities related to this offering. We do not have any specific initial business combination under consideration. We have not, nor has anyone on our behalf, contacted any prospective target business or had any substantive discussions, formal or otherwise, with respect to such a transaction. This is an initial public offering of our securities. Each unit consists of one share of our common stock and one warrant. We are offering 25,000,000 units. We expect that the public offering price will be $10.00 per unit. Each warrant entitles the holder to purchase one share of our common stock at a price of $7.50. The warrants will become exercisable on the later of the completion of our initial business combination and fifteen months from the date of this prospectus, provided in each case that we have an effective registration statement covering the shares of common stock issuable upon exercise of the warrants and a current prospectus relating to them is available. The warrants will expire four years from the date of this prospectus, unless earlier redeemed. We have also granted the underwriters a 30-day option to purchase up to an additional 3,750,000 units to cover over-allotments, if any. Eric J. Watson, our chairman of the board and treasurer, and Jonathan J. Ledecky, our president and secretary, have agreed to purchase an aggregate of 5,000,000 warrants at a price of $1.00 per warrant ($5.0 million in the aggregate) in a private placement that will occur simultaneously with the consummation of this offering. We refer to these warrants as the sponsors warrants. The proceeds from the sale of the sponsors warrants in the private placement will be deposited into a trust account and be subject to a trust agreement, described below, and will be part of the funds distributed to our public stockholders in the event we are unable to complete a business combination. The sponsors warrants will be substantially similar to the warrants included in the units sold in this offering except that if we call the warrants for redemption, the sponsors warrants will not be redeemable by us so long as they are still held by these purchasers or their affiliates. The purchasers of the sponsors warrants have agreed not to transfer, assign or sell any of these warrants until we consummate a business combination. Currently, there is no public market for our units, common stock or warrants. We have applied to have the units listed on the American Stock Exchange. Assuming that the units are listed on the American Stock Exchange, the units will be listed under the symbol VRY.U on or promptly after the date of this prospectus. The common stock and warrants comprising the units will begin separate trading five business days following the earlier to occur of the expiration of the underwriters over-allotment option or its exercise in full, subject to our filing a Current Report on Form 8-K with the Securities and Exchange Commission containing an audited balance sheet reflecting our receipt of the gross proceeds of this offering and issuing a press release announcing when such separate trading will begin. Once the securities comprising the units begin separate trading, the common stock and warrants will be traded on the American Stock Exchange under the symbols VRY and VRY.WS, respectively. We cannot assure you, however, that our securities will continue to be listed on the American Stock Exchange. Table of Contents Our initial business combination must occur with one or more target businesses that collectively have a fair market value of at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions of $7.5 million, or approximately $8.6 million if the underwriters over-allotment option is exercised in full) at the time of such business combination. If we acquire less than 100% of a target business in our initial business combination, the aggregate fair market value of the portion we acquire must equal at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions as described above) at the time of such initial business combination. In no event, however, will we acquire less than a controlling interest of a target business (meaning not less than 50% of the voting securities of such target business). The fair market value of a portion of a target business will be calculated by multiplying the fair market value of the entire business by the percentage of the target we acquire. We may seek to consummate a business combination with an initial target business or businesses with a collective fair market value in excess of 80% of the balance in the trust account. However, we would likely need to obtain additional financing to consummate such a business combination and have not taken any steps to obtain any such financing. We will consummate our initial business combination only if a majority of the shares of common stock voted by the public stockholders are voted in favor of our initial business combination and not more than 20% of the shares sold in this offering are voted against the business combination and exercise their conversion rights described below. It is important to note that voting against our initial business combination alone will not result in conversion of a stockholder s shares into a pro rata share of the trust account, which only occurs when the stockholder exercises the conversion rights described below. Conversion rights for stockholders voting to reject our initial business combination: Public stockholders voting against our initial business combination will be entitled to convert their shares of common stock into a pro rata share of the aggregate amount then on deposit in the trust account, before payment of deferred underwriting discounts and commissions and including interest earned on their pro rata portion of the trust account, net of income taxes payable on such interest and net of interest income of up to $3.0 million on the trust account balance previously released to us to fund our working capital requirements, if our initial business combination is approved and completed. If the initial business combination is not approved or completed for any reason, then public stockholders voting against our initial business combination will not be entitled to convert their shares of common stock into a pro rata share of the aggregate amount then on deposit in the trust account. Such public stockholders would only be entitled to convert their shares of common stock into a pro rata Investing in our securities involves a high degree of risk. See
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+S-1/A You should rely only on the information contained in this prospectus and in any free writing prospectus. We have not, and the underwriters have not, authorized anyone to provide you with information that is different. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in this prospectus is complete and accurate only as of the date on the front cover of this prospectus, regardless of when this prospectus is delivered or any sale of our common stock occurs. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amendment No. 4 to FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 One Embarcadero Center Suite 2101 San Francisco, California 94111 (415) 788-0100 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Masaaki (John) Nishibori President and Chief Executive Officer CAI International, Inc. One Embarcadero Center Suite 2101 San Francisco, California 94111 (415) 788-0100 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Edward J. Wes, Jr. Bruce McNamara Sonny Allison Perkins Coie LLP 101 Jefferson Drive Menlo Park, California 94025 (650) 838-4300 Daniel G. Kelly, Jr. Davis Polk & Wardwell 1600 El Camino Real Menlo Park, California 94025 (650) 752-2000 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said section 8(a), may determine. Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. Subject to completion, dated May 11, 2007 5,800,000 Shares CAI INTERNATIONAL, INC. Common Stock $ per share CAI International, Inc. is offering 5,800,000 shares. We anticipate that the initial public offering price will be between $14.00 and $16.00 per share. This is our initial public offering and no public market currently exists for our shares. Trading symbol: New York Stock Exchange CAP This investment involves risk. See
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+Prospectus summary This summary highlights information contained elsewhere in this prospectus that we consider important. This summary does not contain all of the information you should consider before buying shares of our common stock. You should read the entire prospectus carefully, including the "Risk factors" section and our consolidated financial statements and the related notes included in this prospectus, before making an investment in our common stock. Sirtris Pharmaceuticals We are a biopharmaceutical company focused on discovering and developing proprietary, orally available, small molecule drugs with the potential to treat diseases associated with aging, including metabolic diseases such as Type 2 Diabetes. Our drug candidates are designed to mimic certain beneficial health effects of calorie restriction, without requiring a change in eating habits, by activating an enzyme called SIRT1, a member of a recently discovered class of enzymes called sirtuins. Over the past 70 years, scientists have shown that calorie restriction, or the reduction of normal calorie intake by at least 30-40%, extends lifespan in multiple species, including mice and rats. In addition, calorie restricted animals showed improvement in a number of factors associated with Type 2 Diabetes, including glucose levels, insulin levels and weight gain. Recently published animal studies, including articles in Cell and Nature in 2006, suggest that certain beneficial effects of calorie restriction are triggered by activation of SIRT1. Scientific literature suggests that resveratrol, a natural substance found in red wine and other plant products, activates SIRT1 and confers certain beneficial effects of calorie restriction without requiring a reduction in normal calorie intake. Our most advanced programs are focused on developing activators of SIRT1 and include SRT501, our proprietary formulation of resveratrol, that is in Phase 1b clinical trials for Type 2 Diabetes. We have also discovered several novel small molecules, structurally distinct from resveratrol, that activate SIRT1 in animal studies. We believe these novel small molecules may be attractive drug candidates although we have not yet tested them in humans. We believe we are the leading company focused on discovering and developing drug candidates that target sirtuins, and, in particular, drug candidates that mimic certain beneficial effects of calorie restriction by activating SIRT1. However, neither we nor any other company has received regulatory approval to market products that target sirtuins. Our scientific founder and members of our scientific advisory board include many of the leading researchers in the sirtuin field. We own or exclusively license over 100 patent applications pertaining to sirtuins and their role in diseases of aging. Members of our management have previously advanced more than 20 small molecule drugs into clinical trials and played key roles in developing several FDA-approved drugs. We are currently focused on the following programs targeting sirtuins and related pathways: The development of SRT501, a proprietary formulation of resveratrol. We believe that resveratrol lacks the stability and bioavailability necessary to produce optimal therapeutic effects. We are developing SRT501 as a stable and bioavailable formulation of resveratrol that we believe is suitable for pharmaceutical development. Using SRT501 in mice, we are able to achieve an average of almost four times the level of resveratrol in the blood compared with administration of unformulated resveratrol, after adjusting for differences in dosage levels. In animal models of Type 2 Diabetes, SRT501 reduces weight gain, fasted glucose levels, and fed insulin levels, although these results have not been shown, and may not be achieved, in humans. In 2006, we completed two Phase 1a studies in healthy male volunteers using SRT501, and, based upon favorable results, initiated two Phase 1b studies in Type 2 diabetics using SRT501. SRT501 has also demonstrated an ability to increase the function of intracellular structures called mitochondria in mouse skeletal muscle, and may be suitable as a therapy for rare mitochondrial diseases, such as MELAS. The discovery and development of proprietary new chemical entities, or NCEs, the next generation activators of SIRT1. We have discovered several novel orally-available, small molecules that are structurally distinct from resveratrol and that activate SIRT1 in animal studies. One of these small molecules, at one-tenth the dose, is as effective at reducing fasted glucose levels and fed insulin levels as SRT501 in an established animal model of Type 2 Diabetes, although these results have not been shown, and may not be achieved, in humans. We have successfully completed preclinical studies with NCEs that measure solubility and pharmacokinetics. If we successfully complete additional IND-enabling and other preclinical studies, we plan to advance one of these NCEs into human clinical trials by mid-2008. The discovery and development of novel small molecule modulators of other sirtuins and related pathways. In addition to SIRT1, there are six other enzymes in the sirtuin family of enzymes. Although substantially all of our efforts are currently focused on modulation of SIRT1, we believe these other enzymes and their related pathways may be attractive targets for future drug development in therapeutic areas including metabolic, neurological and cardiovascular diseases, and cancer. We are currently pursuing the discovery of small molecule modulators of additional sirtuins and their related pathways. Scientific background The link between diet and aging in mammals was established nearly 70 years ago when researchers at Cornell University discovered that restricting calorie intake in rats could significantly extend lifespan. Since then, calorie restriction has been shown to extend lifespan in numerous species. Beginning in the late 1990s, scientists discovered a set of enzymes, sirtuins, that appear to regulate certain beneficial effects of calorie restriction. A November 2006 Nature article showed that resveratrol extended lifespan in mice fed a high-fat diet, a model of Type 2 Diabetes, when compared with control mice that were fed the same high-fat diet without resveratrol. This study, together with a subsequently published study in Cell in December 2006, demonstrated other benefits associated with calorie restriction, including improved insulin sensitivity and an increased metabolic rate, when compared with control mice on a high-fat diet that were not given resveratrol. The Cell paper also highlighted that activation of SIRT1 is associated with an increase in the size, density and function of intracellular structures, called mitochondria, that convert food into energy usable by cells. Studies have shown that mitochondrial function in humans appears to gradually deteriorate with age. Patients with Type 2 Diabetes, formerly known as adult onset diabetes, frequently have impaired mitochondrial function that we believe is associated with an imbalance between mitochondrial activity and calorie intake. We are developing SRT501 and our NCEs as activators of SIRT1 because we believe that an improvement in mitochondrial Balance at December 31, 2006 10,000,000 4,959 21,666,667 12,958 33,750,000 26,912 19,700,892 21,984 1,344,963 1 916 22 (28,573 ) (27,634 ) Net loss (unaudited) (5,783 ) (5,783 ) Unrealized gain on investments (unaudited) 2 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 function through SIRT1 activation may be therapeutic for diseases of aging, including Type 2 Diabetes. In addition, there are numerous diseases caused by abnormal mitochondria, such as MELAS, a rare genetic disease, in which patients suffer from, among other things, muscular deterioration, impaired exercise tolerance, Type 2 Diabetes and a reduced lifespan. In the Cell paper, resveratrol was shown to increase the size, density and function of mitochondria in mice and to improve exercise performance. We are developing SRT501 and, potentially, our NCEs as therapies for MELAS because we believe that, by activating SIRT1, they will increase mitochondrial function in patients with this disease. Development programs SRT501 Resveratrol is unstable and is poorly absorbed in the gastrointestinal tract. We believe we are the first company to understand and address these limitations of resveratrol. We further believe that SRT501 creates the opportunity for a therapeutic version of resveratrol targeting diseases associated with aging such as Type 2 Diabetes. Type 2 Diabetes Type 2 Diabetes accounts for approximately 90% of all diagnosed diabetes patients. It is a disease associated with aging and is more prevalent in patients with a high percentage of body fat. Type 2 diabetics have decreased sensitivity to insulin and, as a result, high glucose levels. Typically, the first line of treatment is diet modification and exercise, which is rarely effective because it requires a substantial change in the patient's lifestyle. A number of classes of drugs are used to manage Type 2 Diabetes, many of which are orally available. However, many of these drugs are associated with side effects such as weight gain and hypoglycemia, and none treat what we believe to be an underlying cause of the disease, an imbalance between mitochondrial activity and calorie intake. Our studies have shown that SRT501 decreases fasted glucose levels and fed insulin levels and increases mitochondrial function, as measured by citrate synthase, in animal models of diabetes. We believe that SIRT1 activators such as SRT501 may prove useful in treating Type 2 Diabetes either alone or in combination with current therapies. In two Phase 1a human clinical studies, SRT501 was found to be well tolerated. In these studies, SRT501 was administered orally, once daily, to 85 healthy male volunteers for seven days, in order to evaluate safety, dose, tolerability and pharmacokinetics. The trial demonstrated dose proportional drug levels in the blood. All of the reported adverse events were reversible and none were serious. In the 85 subjects, the most common adverse events reported were altered blood lipids in six subjects, diarrhea in six subjects, and vomiting in five subjects. Based on these results and preclinical data, we initiated a Phase 1b study in October 2006 in patients with Type 2 Diabetes who were not on medication for their disease. The Phase 1b trial is designed to evaluate the safety and pharmacokinetics of SRT501 in 90 patients with Type 2 Diabetes using once daily oral administration of SRT501 for 28 days. We have also initiated a similar Phase 1b study with twice daily dosing. We expect data from the once daily study in the second half of 2007 and data from the twice daily study in the first half of 2008. Because we have only conducted limited clinical trials on SRT501, additional extensive clinical testing will be AMENDMENT NO. 7 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 required before we may be able to obtain regulatory approval, if such approval is obtained at all. MELAS MELAS (Mitochondrial Encephalopathy, Lactic Acidosis, and Stroke-like episodes), an inherited disorder, is caused by a mutation in the DNA of mitochondria. Given the association of SIRT1 activators with increased function of mitochondria, we are also developing SRT501 for the treatment of MELAS. MELAS is a disease that mainly affects muscles and nerves leading to reduced exercise capacity and eventually muscle failure. Patients with MELAS also develop Type 2 Diabetes. There is no known treatment, and the disease is progressive and fatal. A study of a Finnish population indicated that the incidence of MELAS in that population was 5.7 per 100,000. Although the incidence is unknown in the United States, we believe there are fewer than 20,000 MELAS patients. We plan to seek Orphan Drug status for SRT501 for MELAS in the United States and Europe. In the United States, Orphan Drug status, which confers certain benefits of market exclusivity, may be granted by the FDA for drugs intended to treat a rare disease or condition that generally affects fewer than 200,000 individuals in the United States. In the European Union, Orphan Drug status is available for a rare disease or condition that affects fewer than 5 in 10,000 individuals. We have filed an application with European regulatory authorities to commence a Phase 1b human clinical trial in MELAS using SRT501 and plan to initiate this trial by the end of 2007. Initial clinical strategy and regulatory status To date, all of our clinical studies have been conducted outside the United States. We believe that all such studies have been conducted under International Committee on Harmonization and Good Clinical Practices guidelines and, therefore, we believe that the data from all of these studies conducted outside of the U.S. can be used in future regulatory filings in the United States. In August 2006, we filed an Investigational New Drug Application, or IND, for SRT501 in order to conduct clinical studies of SRT501 in the United States. Currently, our IND is on hold with the FDA, and we cannot conduct clinical studies in the United States until we provide certain additional information to the FDA as described below and the FDA accepts our IND. In connection with the filing of our IND, the FDA requested clarification of possible adverse events in the two Phase 1a, normal volunteer, clinical studies that we completed in India. We provided to the FDA full clinical study reports of these Phase 1a clinical studies which were completed and collected by the clinical research organization we engaged in India. In February 2007, we received a favorable response to this information from the FDA. We have received no further questions with regards to these clinical studies from the FDA. Also in connection with our IND submission, the FDA has requested additional genotoxicity and other preclinical toxicity data regarding SRT501. We have successfully addressed the genotoxicity request and are currently in discussions with the FDA to address their request regarding preclinical toxicity studies. Although the FDA was satisfied with the safety profile from the 28 day toxicity study we completed in rodents, we did not show in a non-rodent species a dose level of SRT501 that produces toxicity as requested by the FDA in February 2007. We are now establishing, with the FDA, an appropriate species in order to test toxicity in a second animal species. We expect to complete that animal toxicity study by the end of 2007, and, if the FDA December 31, 2006 Commercial paper $ 33,980 $ 17 $ $ 33,997 Asset-backed securities 3,876 1 3,877 Corporate debt securities 4,619 SIRTRIS PHARMACEUTICALS, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 2834 (Primary Standard Industrial Classification Code Number) 20-1410189 (I.R.S. Employer Identification No.) 790 Memorial Drive, Cambridge, MA 02139 (617) 252-6920 (Address, including zip code and telephone number, including area code, of registrant's principal executive offices) Christoph Westphal Chief Executive Officer Sirtris Pharmaceuticals, Inc. 790 Memorial Drive Cambridge, MA 02139 (617) 252-6920 (Name, address, including zip code and telephone number, including area code, of agent for service) finds the data acceptable, we expect to be able to commence clinical studies of SRT501 in the United States by 2008. Any additional delay in acceptance by the FDA of the IND for SRT501 would delay the start of future clinical studies in the United States and the potential approval of SRT501 by the FDA. We currently expect that we will satisfactorily address all requests from the FDA in time to initiate clinical studies in the United States in 2008, but there can be no assurance that we will be able to initiate such studies at such time. Next generation SIRT1 activators We are pursuing a program to develop novel, orally available, small molecule NCEs that activate SIRT1 and have increased potency, specificity and bioavailability compared to SRT501. We have studied several of these next generation SIRT1 activators in a preclinical model of Type 2 Diabetes in mice. One of these NCEs, at one-tenth the dose, is as effective at reducing fasted glucose levels and fed insulin levels as SRT501, and we are continuing to evaluate other NCEs in this model. We have also shown increased mitochondrial activity in animals using this NCE. We have successfully completed preclinical studies of several of our NCEs that measure solubility and pharmacokinetics. We are continuing to evaluate a number of additional compounds as potential development candidates. If we successfully complete IND-enabling and other preclinical studies, we plan to advance at least one of these NCEs into a Phase 1a human clinical trial by the first half of 2008 and a Phase 1b study in the second half of 2008. We will have to successfully perform all activities necessary to initiate and complete clinical trials, and we will need to obtain regulatory approval, before commercializing any of our NCEs. Other programs We believe sirtuins and related pathways may be targets for drug development in areas including metabolic, cardiovascular and neurological diseases, and cancer. There are seven sirtuins, SIRT1 through SIRT7. We have screened for activators and inhibitors of sirtuins other than SIRT1, and we may seek to develop drugs that modulate these targets. Our strategy We believe we are the leader in the sirtuin field. Our goal is to successfully develop drugs for diseases of aging by modulating sirtuins and related pathways. Key elements of our strategy include: Advancing selected product candidates through clinical development. We plan to selectively advance product candidates through clinical trials, based on the results of preclinical testing, proof-of-concept clinical trials and our assessment of market potential. Some of our product candidates may target broadly prevalent diseases related to aging, such as Type 2 Diabetes, and we may elect to complete development and commercialize these product candidates through partnering and licensing arrangements. Our product candidates may also target rare diseases such as MELAS and, if successfully developed, we may elect to commercialize these products ourselves. Assembling the leading intellectual property portfolio in the sirtuin field. We own or exclusively license over 100 patent applications associated with the sirtuin field, with claims directed at mechanism of action, methods of treatment, formulation, composition of Copies to: Marc Rubenstein, Esq. Ropes & Gray LLP One International Place Boston, MA 02110-2624 Phone: (617) 951-7000 Fax: (617) 951-7050 Richard D. Truesdell, Jr., Esq. Davis Polk & Wardwell 450 Lexington Avenue New York, NY 10017 Phone: (212) 450-4000 Fax: (212) 450-4800 chemical matter, and enabling technology such as assays and biomarkers. We intend to continue to broaden our intellectual property position in the sirtuin field by seeking patent protection for our own additional intellectual property and actively pursuing third party licenses in this area. Continuing to build our position as the leading sirtuin-based drug development company. We plan to continue to utilize the unique expertise of our employees and our scientific advisors and to add additional experts, as appropriate. Risk related to our business We are an early stage company and the approach we are taking to discover and develop drugs is novel and unproven. We do not have any products approved for commercial sale, and we have not generated, and may never generate, any revenue from commercial sales of our products. Our potential product candidates are in early stages of development where failure is common. Neither we nor any other company has received regulatory approval to market drugs that target sirtuins or genes that control the aging process. We will have to complete extensive preclinical studies and clinical trials and receive regulatory approval before we can market our products. We do not expect any of our product candidates, if successfully developed, to receive regulatory approval for commercial sale for at least several years. Even if we receive approval for our product candidates, we may never become profitable. We have incurred operating losses since our inception, and, as of March 31, 2007, had an accumulated deficit of $34.4 million. We expect to incur substantial and increasing operating losses for the foreseeable future. See "Risk factors" beginning on page 10 for risks related to an investment in our common stock. Corporate information Sirtris Pharmaceuticals, Inc. was incorporated in Delaware in March 2004. Our principal executive office is located at 790 Memorial Drive, Suite 104, Cambridge, Massachusetts 02139 and our telephone number is 617-252-6920. Our internet address is www.sirtrispharma.com. The information on our website is not incorporated by reference into this prospectus and should not be considered to be a part of this prospectus. Our website address is included in this prospectus as an inactive technical reference only. Approximate date of commencement of proposed sale to public: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: Except as otherwise noted, we have presented the information in this prospectus based on the following assumptions: the issuance and sale of shares of our common stock in the offering at the initial public offering price of $10.00 per share; the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 20,287,131 shares of our common stock and the conversion of outstanding warrants to purchase 745,407 shares of our redeemable convertible preferred stock into warrants to purchase 141,982 of shares of our common stock upon the closing of this offering; CALCULATION OF REGISTRATION FEE no exercise by the underwriters of their over-allotment option to purchase additional shares of our common stock in the offering; the filing of our amended and restated certificate of incorporation with the Secretary of State of the State of Delaware and the adoption of our amended and restated by-laws immediately prior to the closing of the offering; and a 1-for-5.25 reverse stock split of our common stock effected on April 11, 2007. Title of Each Class of Securities to be Registered Amount to be Registered(1) Proposed Maximum Offering Price Per Share Proposed Maximum Aggregate Offering Price(2) Amount of Registration Fee(3) Common Stock, $.001 par value 5,750,000 $11.00 $63,250,000 $0
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+S-1/A 1 y29855a6sv1za.htm AMENDMENT #6 TO FORM S-1 AMENDMENT #6 TO FORM S-1 Table of Contents As filed with the Securities and Exchange Commission on May 18, 2007 Registration No. 333-140644 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amendment No. 6 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 RSC HOLDINGS INC. (Exact name of registrant as specified in its charter) Delaware 7359 22-1669012 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 6929 E. Greenway Parkway Scottsdale, AZ 85254 (480) 905-3300 (Address, including ZIP Code, and telephone number, including area code, of registrant s principal executive offices) Kevin J. Groman, Esq. Senior Vice President, General Counsel and Corporate Secretary RSC Holdings Inc. 6929 E. Greenway Parkway Scottsdale, AZ 85254 (480) 905-3300 (Name, address, including ZIP Code, and telephone number, including area code, of agent for service) With copies to: Matthew E. Kaplan, Esq. Jeffrey J. Rosen, Esq. Debevoise Plimpton LLP 919 Third Avenue New York, New York 10022 (212) 909-6000 William B. Gannett, Esq. Cahill Gordon Reindel LLP Eighty Pine Street New York, New York 10005 (212) 701-3000 Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities of an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Table of Contents SUMMARY This summary highlights information appearing elsewhere in this prospectus. You should carefully read the entire prospectus, including the section entitled Risk Factors, beginning on page 14 and our financial statements and notes to those financial statements included elsewhere in this prospectus before making any investment decision. Our Company We are one of the largest equipment rental providers in North America. As of March 31, 2007, we operate through a network of 459 rental locations across 10 regions in 39 U.S. states and four Canadian provinces. We believe we are the largest or second largest equipment rental provider in the majority of the regions in which we operate. During the eighteen months ended March 31, 2007, we serviced approximately 470,000 customers primarily in the non-residential construction and industrial markets. For the year ended December 31, 2006 and the three months ended March 31, 2007, we generated approximately 83% and 86%, respectively, of our revenues from equipment rentals, and we derived the remaining 17% and 14%, respectively, of our revenues from sales of used equipment and other related items. We believe our focus on high margin rental revenues, active fleet management and superior customer service has enabled us to achieve significant market share gains exclusively through organic growth while sustaining attractive returns on capital employed. Through March 31, 2007, we experienced 15 consecutive quarters of positive same store, year-over-year rental revenue growth, with same store rental revenue growth of approximately 12%, 18%, 19% and 13% and operating income growth of approximately 76%, 44%, 31% and 12% in 2004, 2005, 2006 and the three months ended March 31, 2007, respectively. We rent a broad selection of equipment, mainly to industrial and non-residential construction companies, ranging from large equipment such as backhoes, forklifts, air compressors, scissor lifts, booms and skid-steer loaders to smaller items such as pumps, generators, welders and electric hand tools. As of March 31, 2007, our rental fleet had an original equipment cost of $2.4 billion covering over 1,400 categories of equipment. We strive to differentiate our offerings through superior levels of equipment availability, reliability and service. The strength of our fleet lies in its age, condition and diversity. We believe our fleet is the youngest and best maintained in the industry among our key competitors, with an average fleet age of 25 months as of March 31, 2007. Our young fleet age provides us with significant operational flexibility, and we actively manage the condition of our fleet in order to provide customers with well maintained and reliable equipment and to support our premium pricing strategy. Our disciplined fleet management strategy enables us to maintain pricing discipline and optimize fleet utilization and capital expenditures. As a result, we have a high degree of equipment sharing and mobility within regions. This enables us to increase equipment utilization and react quickly by adjusting the fleet size in response to changes in customer demand. In addition to our equipment rental operations, we sell used equipment, parts, merchandise and supplies for maintenance, repair and operations. Industry Overview According to industry sources, the equipment rental market in the United States was a $34.8 billion industry in 2006 and experienced an 11% compound annual growth rate between 1990 and 2006. This market is expected to grow to $37.6 billion by the end of 2007. The equipment rental industry encompasses a wide range of equipment from small tools to heavy earthmoving equipment, and growth is largely driven by two key factors. First, there is an increasing trend towards renting versus purchasing equipment. The penetration rate for equipment rental in the United States has expanded in line with the increasing recognition of the benefits that equipment rental offers compared to equipment ownership. Industry sources Table of Contents The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. Subject to Completion, Dated May 18, 2007. 20,833,333 Shares RSC Holdings Inc. Common Stock This is an initial public offering of shares of common stock of RSC Holdings Inc., which we refer to in this prospectus as RSC Holdings. RSC Holdings is offering 12,500,000 shares to be sold in this offering. The selling stockholders identified in this prospectus are offering an additional 8,333,333 shares. RSC Holdings will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders. Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $23.00 and $25.00. RSC Holdings has been approved to list the common stock on the NYSE under the symbol RRR . Investing in our common stock involves risks. See Risk Factors beginning on page 14. Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. Per Share Total Initial public offering price $ $ Underwriting discount $ $ Proceeds, before expenses, to RSC Holdings $ $ Proceeds, before expenses, to the selling stockholders $ $ To the extent that the underwriters sell more than 20,833,333 shares of common stock, the underwriters have the option to purchase up to an additional 3,125,000 shares from the selling stockholders at the initial public offering price less the underwriting discount. The underwriters expect to deliver the shares against payment in New York, New York on , 2007. Deutsche Bank Securities Morgan Stanley Lehman Brothers Robert W. Baird Co. Banc of America Securities LLC CIBC World Markets Goldman, Sachs Co. JPMorgan Prospectus dated , 2007. Table of Contents estimate there has been an overall growth in rental industry penetration from 5% of total equipment deployed in 1993 to 35% in 2005. Second, the industry has experienced growth in its primary end-markets, which comprise the non-residential construction and industrial markets. The equipment rental industry remains highly fragmented, with large numbers of companies operating on a regional or local scale. The top 10 companies combined accounted for less than 30% of the market by 2005 rental revenues. We expect the larger rental companies to increase their market share by continuing to offer for rent a wide range of high quality and reliable equipment. The outlook for the equipment rental industry is expected to remain strong, due to positive macroeconomic factors such as: the continuing trend toward rental instead of ownership; continued growth in non-residential building construction spending, which is expected to grow 9.5% in 2007; and increased capital investment by industrial companies. Competitive Strengths We believe that the following strengths provide us with significant competitive advantages and the opportunity to achieve continued growth and profitability: Leading North American equipment rental provider with national footprint and significant scale. Our scale and strong national footprint enable us to effectively service our customers in multiple geographic locations as well as our customers with exclusively local needs. In addition, the depth and breadth of our offerings enable us to service the majority of the equipment rental needs of our customers across multiple market segments. We believe that our broad geographical footprint reduces the impact of regional economic downturns and seasonal fluctuations in demand, and enables us to take advantage of growth opportunities, including those arising from the fragmented nature of the U.S. equipment rental industry. In addition, we believe our size and market presence allow us to achieve economies of scale in capital investment. High quality rental fleet. We believe our diverse equipment fleet is the youngest, best maintained and most reliable in the industry among our key competitors. At March 31, 2007, our rental fleet had an original equipment cost of approximately $2.4 billion and an average fleet age of 25 months, compared to $1.7 billion and 44 months, respectively, at the end of 2003. We also employ a rigorous preventive maintenance and repair program to maximize the reliability, utilization and useful life of our fleet. We believe that our fleet s young age and condition support our premium pricing strategy and will enable us to broaden our customer base and, additionally, withstand cyclical downturns in our industry better than our competitors due to our ability to reduce capital expenditures on new equipment without any compromise in quality. Highly disciplined fleet management and procurement process. Our highly disciplined approach to acquiring, deploying, sharing, maintaining and divesting fleet is the main reason that we believe we lead the industry in profitability and return on invested capital. As of March 31, 2007, we invested approximately $2.2 billion in new fleet since the beginning of 2003 to meet customer demand and to optimize the diversity and condition of our fleet. Our fleet utilization increased from 61% for the year ended December 31, 2002 to 72% for the year ended December 31, 2006 and was 70% for the three months ended March 31, 2007. Our centralized fleet management strategy facilitates the fluid transfer of our fleet among regions to adjust to local customer demand. We base our equipment investment decisions on locally forecasted quarterly rental revenues, target utilization levels and targeted rental rates. We also seek to Table of Contents maintain a disciplined and consolidated approach to supplier vendor negotiations by avoiding long-term supply contracts and placing equipment orders on a monthly basis. Superior customer service. Senior management is committed to maintaining a customer focused culture. We spend significant time and resources to train our personnel to effectively service our customers. We utilize innovative service offerings and an in-house 24/7 call center, and regularly solicit feedback from our customers through focus groups and telephone surveys. We believe that these customer initiatives help support our premium pricing strategy, and we estimate that a substantial portion of our total revenues for the year ended December 31, 2006 and the three months ended March 31, 2007 was derived from existing customers. Diverse and stable customer base. We serviced approximately 470,000 customers during the eighteen months ended March 31, 2007, primarily in the non-residential construction and industrial markets, and customers from these markets accounted for 94% of our total revenues for both the year ended December 31, 2006 and the three months ended March 31, 2007. Our customers represent a wide variety of industries, such as non-residential construction, petrochemical, paper/pulp and food processing. We have long and stable relationships with most of our customers, including relationships in excess of 10 years with the majority of our top 20 customers. During both the year ended December 31, 2006 and the three months ended March 31, 2007, no one customer accounted for more than 1.4% of our total revenues. Additionally, our top 10 customers combined represented approximately 6.8% and 8.1% of our total revenues for the year ended December 31, 2006 and the three months ended March 31, 2007, respectively. Decentralized organizational structure drives local business. We believe our ability to respond quickly to our customers demands is a key to profitable growth. Our highly decentralized organizational structure facilitates our ability to effectively service our customers in each of our local markets. We are organized in three geographic divisions across the United States and parts of Canada and operate in 10 regions across those divisions. Compensation for our field managers is based on local results, meeting targeted operating margins and rental revenue growth. Accountability is maintained on a daily basis through our information systems, which provide real time data on key operational and financial metrics, and monthly reviews of financial performance. Since 2001, we have focused exclusively on organic growth, resulting in same store rental revenue growth of approximately 12% in 2004, 18% in 2005, 19% in 2006 and 13% in the three months ended March 31, 2007. Experienced and proven management team. Our senior and regional management team has significant experience operating businesses in capital intensive industries and a successful track record of delivering strong financial results and significant operational efficiencies. Since 2001, our management team has transformed our operational and financial performance by focusing on capital efficiency and returns, investments in human and capital resources, brand development and the redesign and implementation of significantly improved internal processes. Our current management team led the effort to decentralize the business, allowing regional leadership to take responsibility for regional profit and loss, thereby improving customer service and results. Under our management team s leadership, our operating income margins increased from 10.4% in 2003 to 25.4% in 2006 and were 24.0% in the three months ended March 31, 2007. Table of Contents Business Strategy Increase market share and pursue profitable growth. Through our high quality fleet, large scale and national footprint and superior customer service position, we intend to take advantage of the opportunities for profitable growth within the North American equipment rental market by: continuing to drive the profitability of existing stores and pursuing same store growth; continuing to invest in and maintain our high quality fleet to meet local customer demands; leveraging our reputation for superior customer service to increase our customer base; increasing our market penetration by opening new stores in targeted growth markets to leverage existing infrastructure and customer relationships; increasing our presence in complementary rental and service offerings to increase same store revenues, margins and return on investment; continuing to align incentives for local management teams with both profit and growth targets; and pursuing selected acquisitions in attractive markets, subject to economic conditions. Further drive profitability, cash flow and return on capital. We believe there are opportunities to further increase the profitability of our operations by continuing to: focus on the higher margin rental business; actively manage the quality, reliability and availability of our fleet and offer superior customer service, which supports our premium pricing strategy; evaluate each new investment in fleet based on strict return guidelines; deploy and allocate fleet among our operating regions based on pre-specified return thresholds to optimize utilization; and use our size and market presence to achieve economies of scale in capital investment. Further enhance our industry leading customer service. We believe that our position as a leading provider of rental equipment to our customers is driven in large part by our superior customer service and our reputation for such service. We intend to continue to provide superior customer service and maintain our reputation for such service. We believe this will allow us to further expand our customer base and increase our share of the fragmented U.S. equipment rental market. Risk Factors Our business is subject to numerous risks and uncertainties such as: the effect of an economic downturn or other factors resulting in a decline in non-residential construction and capital investment; increased competition from other companies in our industry and our inability to increase or maintain our prices; our ability to obtain equipment at competitive prices; changes in the attitude of our customers toward renting, as compared with purchasing, equipment; Table of Contents Holdings expects to enter into indemnification agreements with its directors and senior officers prior to completion of this offering providing the directors and senior officers contractual rights to indemnification, and expense advance and reimbursement, to the fullest extent permitted under the Delaware Corporation Law. Item 15. Recent Sale of Unregistered Securities On or around November 17, 2006, RSC Holdings Inc. offered certain of its officers and employees, or trusts of which its officers or employees were beneficiaries, the opportunity to purchase up to 987,022 shares of RSC Holdings common stock for an aggregate offering price of up to approximately $6,440,000. The officers, employees and trusts purchased all 987,022 shares that were offered for a total purchase price of approximately $6,440,000. The purchases of the shares closed as of December 4, 2006 and December 19, 2006. As of the closings of their respective purchases, the officers and employees were granted options to purchase, subject to vesting, up to, in the aggregate, 4,395,921 additional shares of RSC Holdings common stock in the future. The options are subject to vesting as well: one third of the options will vest over a five-year time period, subject to the officer s or employee s continued employment with RSC Holdings or its subsidiaries, and two thirds of the options will vest, or fail to vest, based on RSC Holdings financial performance. All options have an exercise price of $6.52. The shares were offered and sold and the options were granted under an exemption from registration provided by Rule 701 under the Securities Act and available exemptions under state law. Item 16. Exhibits and Financial Statement Schedules Exhibits The following exhibits are included as exhibits to this Registration Statement. Exhibit No. Description of Exhibit 1 .1** Form of Underwriting Agreement 2 .1** Recapitalization Agreement, dated as of October 6, 2006, by and among by and among Atlas Copco AB, Atlas Copco Finance S. .r.l., Atlas Copco North America Inc., RSC Acquisition LLC, RSC Acquisition II LLC, OHCP II RSC, LLC, OHCMP II RSC, LLC and OHCP II RSC COI, LLC 3 .1** Form of Amended and Restated Certificate of Incorporation of RSC Holdings Inc. 3 .2** Form of Amended and Restated By-Laws of RSC Holdings Inc. 4 .1** Indenture, dated as of November 27, 2006, by and among Rental Service Corporation, RSC Holdings III, LLC and Wells Fargo Bank, National Association 4 .2** Registration Rights Agreement, dated November 27, 2006, by and among Rental Service Corporation, RSC Holdings III, LLC, Deutsche Bank Securities Inc., Citigroup Global Markets Inc. and GE Capital Markets, Inc. 4 .3** U.S. Guarantee and Collateral Agreement, dated as of November 27, 2006, by and among RSC Holdings II, LLC, RSC Holdings III, LLC, Rental Service Corporation and certain domestic subsidiaries of RSC Holdings III, LLC that may become party thereto from time to time, Deutsche Bank AG, New York Branch, as collateral agent and administrative agent Table of Contents our ability to generate cash and/or incur additional indebtedness to finance equipment purchases; and heavy reliance on centralized information systems. You should carefully consider these factors as well as all of the information set forth in this prospectus and, in particular,
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+Prospectus summary You should read the following summary together with the entire prospectus, including the more detailed information regarding us, the ADSs being sold in this offering, and our financial statements and related notes appearing elsewhere in this prospectus. Overview We are a leading diversified media company in China. We have assembled and built a group of media assets and strategic partnerships that we believe will enable us to achieve best in class media and advertising services across various sectors of the media business in China. We have developed a unique, integrated platform that includes the creation and production of high-quality content that is distributed across nationwide television and print media outlets and radio in Beijing and Shanghai, and where advertising sales are supported by our own advertising agency. These outlets reach an estimated 210 million potential television viewers, a potential listening audience of 33 million people, and the readers of leading magazines and newspapers. In addition, our market research business enables our advertisers to analyze, understand and better reach their targeted consumers. Our content currently focuses on business and financial news as well as wealth management and affluent lifestyle programming. We focus on this programming because we believe it attracts the highest income audience in China. This audience is highly sought after by our target advertisers. Our business operates across five groups: Media production, which refers to our in-house production studios that create and produce a diverse array of high-quality programs, including business, entertainment, educational and animation shows; Broadcasting, which refers to the distribution of our programming through Inner Mongolia Satellite Television; our production and syndication of the Fortune China series of financial programs, including Fortune Morning 7 a.m., a popular financial news programs in China; and our production and distribution of bilingual content for China Radio International s EasyFM stations in Beijing and Shanghai; Print, which refers to our exclusive rights to sell advertising for and provide management and information consulting services to, Money Journal magazine and the Economic Observer newspaper; Advertising, which refers to our advertising agency that creates and places advertising for television, print media and campus billboards; and Research, which refers to our market research group that provides research services on products, advertisements and markets. We generate revenue principally by selling advertising on broadcast and print distribution platforms; selling advertising space on newspaper and magazine pages; selling produced television programs; providing advertisement production services; and providing research services. Table of Contents Our strengths We believe we have the following competitive strengths: We produce high-quality content using a commercial, ratings-driven approach, targeted at the affluent segment of the Chinese population. Our distribution channels are based on agreements with distributors, most of which are long-term in nature and give us the exclusive rights to sell advertising. Through this, we provide advertisers with an integrated platform to reach their target audience. We believe our services allow advertisers to more cost-effectively reach desirable consumers across multiple media platforms. We gain competitive advantage from sharing content among our subsidiaries, including affiliated entities, and with our parent company. Our management team has a mix of Chinese cultural experience and international media operational skills, and brings international standards to our content offerings. Our management has significant experience in identifying, executing and integrating acquisitions in China. Our strategies We intend to become the leading diversified media company targeting the rapidly growing affluent segment of the Chinese population. We intend to achieve this objective by implementing the following: We plan to expand our distribution assets and strategic partnerships in both traditional and new media. We are committed to producing high-quality programming based on our commercial, ratings-driven approach, targeting the affluent segment of the Chinese population. We plan to leverage our integrated platform to increase operational and cross-selling synergies. We plan to build our brands for both consumers and advertisers. We plan to pursue strategic acquisitions and relationships that fit with our current core competencies and brands. Our challenges Our ability to realize our business objectives and execute our strategies is subject to risks and uncertainties, such as the following: We rely on key contracts and business relationships, and if our business partners or contracting counterparties fail to perform or terminate their contractual arrangements with us or cease operations, it will have an adverse effect on our business. We are not a party to some of the key contracts on which we rely. Instead, we have contracts with companies, which in turn have these key contracts with third parties. If the Table of Contents Table of Contents third parties fail to perform or terminate these contracts or cease operations, we will not be able to enforce our rights in court. We may not be able to achieve the benefits we expect from recent and future acquisitions, and recent and future acquisitions may have an adverse effect on our ability to manage our business. Please see Risk factors and other information included in this prospectus for a discussion of these and other risks. Corporate structure We were incorporated on November 7, 2005 in the Cayman Islands. We acquired several companies from our parent, Xinhua Finance Limited, and continue to make acquisitions. To date, we have acquired eight businesses that form our five operating groups. For a detailed description of our acquisitions, see Management s discussion and analysis of financial condition and results of operations Acquisitions . Upon completion of this offering, we will be 36.9% owned by our parent, Xinhua Finance Limited, 7.5% owned by Patriarch Partners Media Holdings, LLC, and 5.8% owned by Fredy Bush, our Chief Executive Officer and the Chairman of our Board. We have several other significant shareholders, as described in Principal and selling shareholders . PRC laws and regulations currently impose different levels of restrictions or prohibitions on investment of private capital, including foreign capital, in the media industry, including television, radio, newspaper, magazine, advertising and media content production, and the market research industry. Our subsidiaries in China are limited in their abilities to engage in operations in the media, advertising and market research industries. Accordingly, we operate our businesses in China primarily through contractual arrangements with our affiliated entities and the contractual arrangements we and our affiliated entities have with third parties. We have entered into contractual arrangements with these affiliated entities and their shareholders, all PRC citizens, which enable us to: exercise effective control over these affiliated entities and their respective subsidiaries; in the case of Beijing Century Advertising Co., Ltd., to receive a substantial portion of the economic benefits from the affiliated entity and its subsidiaries in consideration for the services provided by our subsidiary, New China Media (Shanghai) Co., Ltd.; and have an exclusive option to purchase all or part of the equity interests in the various affiliated entities and certain of their subsidiaries in each case when and to the extent permitted by PRC law. Corporate information Our principal executive offices are located at Rooms 3905-3909, Tower 1, Grand Gateway, 1 Hongqiao Lu, Shanghai 200030, People s Republic of China. Our telephone number at this address is (86-21) 6113-5900 and our fax number is (86-21) 6448-4955. Our registered office in the Cayman Islands is at Cricket Square, Hutchins Drive, PO Box 2681, Grand Cayman KYI-1111, Cayman Islands. Table of Contents Table of Contents You should direct all inquiries to us at the address and telephone number of our principal executive offices set forth above. We and our strategic partners maintain various websites such as www.mjc.com.cn, www.econ-world.com, www.money-journal.com, www.eobserver.net, www.eobserver.com.cn, www.jingjiguanchabao.com and www.eeo.com.cn. Our corporate website is www.xinhuafinancemedia.com. The information contained on our or our strategic partners websites does not form part of this prospectus. Our agent for service of process in the United States is Law Debenture Corporate Services Inc., located at 400 Madison Avenue, 4th Floor, New York, New York 10017. Conventions that apply to this prospectus Unless the context otherwise requires, in this prospectus, we , us , our company , our , XFM and Xinhua Finance Media refer to Xinhua Finance Media Limited and its subsidiaries, including direct subsidiaries and affiliated entities, except where the context requires otherwise, such as in Regulation , where these terms refer to Xinhua Finance Media Limited and its direct subsidiaries, but not its affiliated entities; production of or to produce drama series refer to co-production with third parties who hold drama series production licenses or to cooperate with third parties who hold drama series production license to produce ; shares or common shares refers to our common shares; ADSs refers to our American depositary shares, each of which represents two common shares; China or PRC refers to the People s Republic of China, excluding Taiwan, Hong Kong and Macau; RMB or Renminbi refers to the legal currency of China, and $ , US$ or U.S. dollars, refers to the legal currency of the United States. Unless otherwise noted, all translations from Renminbi amounts into U.S. dollars were made at the noon buying rate in New York, New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York, or the noon buying rate, as of December 29, 2006, which was RMB 7.8041 to $1.00. We make no representation that the Renminbi amounts in this prospectus could have been or could be converted into U.S. dollars at any particular rate or at all. On March 2, 2007, the noon buying rate was RMB 7.7445 to $1.00. Subsidiaries may refer to both our direct subsidiaries and our affiliated entities, or may refer only to direct subsidiaries, as the context requires. Some names of companies given in this prospectus are translated or transliterated from Chinese if the original legal name is only in Chinese. The circulation data for Money Journal are compiled by BPA Worldwide while the circulation data for Beijing Review and the Economic Observer are derived from the internal records of each. Table of Contents The offering American depositary shares offered: By Xinhua Finance Media 17,307,923 ADSs By the selling shareholders 5,769,000 ADSs The ADSs Each ADS represents two common shares, par value $0.001 per share. The ADSs are evidenced by American depositary receipts issued by the depositary. Reserved ADSs At our request, the underwriters have reserved for sale, at the initial public offering price, up to an aggregate of 1,153,846 ADSs to certain directors, officers, employees and associates of our company through a directed share program. These reserved ADSs account for an aggregate of approximately 5% of the ADSs offered in the offering. ADSs outstanding immediately after the offering 23,076,923 ADSs Common shares outstanding immediately after the offering 135,821,273 common shares Use of proceeds We intend to use the net proceeds from this offering as follows: approximately $50 million to repay certain outstanding indebtedness to our parent and Xinhua Financial Network Limited. The indebtedness is due on demand and the interest rates are not specified. The indebtedness was to pay for the costs related to our acquisitions from our parent of equity interests our parent had held before March 31, 2006 in Xinhua Finance Advertising Limited, and the contractual control our parent had held before March 31, 2006 in Beijing Century Media Culture Co., Ltd., as well as the advances from our parent and Xinhua Financial Network enabling us to acquire 19.0% equity interests in Upper Step Holdings Limited and Accord Group Investments Limited; an undetermined amount for strategic acquisitions of complementary businesses. At this time we have not entered into advanced discussions or negotiations regarding potential acquisitions except for the acquisition of the remaining equity of Beijing Perspective; and the balance to fund working capital and for other general corporate purposes. Table of Contents The foregoing represents our current intentions to use and allocate the net proceeds of this offering based upon our present plans and business conditions. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering differently than as described in this prospectus. We will not receive any of the proceeds from the sale of ADSs by the selling shareholders. Depositary The Bank of New York Risk factors See Risk factors and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in the ADSs. Proposed Nasdaq Global Market symbol XFML The number of ADSs and common shares outstanding immediately after this offering excludes 10,698,141 class A common shares reserved for future issuance under our individual option agreements entered into in 2006 and 1,029,461 class A common shares for further share grants or individual option agreements and includes the conversion of 15,585,254 convertible preferred shares into 15,585,254 class A common shares and the conversion of the convertible loan with Patriarch Partners into 3,554,401 class A common shares. There are also class A common shares available for future issuance under our 2007 share option plan. Unless otherwise indicated, all information in this prospectus: assumes the issuance and sale by the company and sale by the selling shareholders of an aggregate of 23,076,923 ADSs in this offering at an initial public offering price of $13.00 per ADS, the midpoint of the estimated range of the initial public offering price; and assumes no exercise by the underwriters of their option to purchase up to 3,461,538 ADSs in this offering to cover over-allotments. Table of Contents
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+PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. Unless otherwise stated in this prospectus, references to we, us or our company refer to Inter-Atlantic Financial, Inc. The term public stockholders means the holders of common stock sold as part of the units in this offering or acquired in the aftermarket, including any existing stockholders to the extent they purchase or acquire such shares. Accordingly, as used in this prospectus, the term public stockholders means the holders of 7,500,000 shares of our common stock included in the units sold in this offering or acquired in the open market following this offering, including, other than as set forth in the immediately preceding sentence, existing stockholders to the extent they purchase or acquire shares in the offering or in the open market following the offering (8,625,000 shares of common stock if the underwriters over-allotment option is exercised in full). Discrepancies in tables included in this prospectus between totals and sums of the amounts listed are due to rounding. Unless otherwise stated, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option and that no stockholder exercises its right of redemption as described elsewhere in this prospectus. You should rely on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer is not permitted. The Company We are a blank check company organized under the laws of the State of Delaware. We were formed for the purpose of acquiring, through a merger, a capital stock exchange, asset acquisition, stock purchase or other similar business combination, an unidentified operating business in the financial services industry or businesses deriving a majority of their revenues from providing services to financial services companies, including for example, payment processing companies and technology providers. We believe we are qualified to select an attractive acquisition target because of our officers and directors over 150 years of aggregate experience with both public and private companies in the financial services industry. Our efforts in identifying a prospective target business will not be limited to a particular geographic location. We do not have any specific merger, capital stock exchange, asset acquisition, stock purchase or other similar business combination under consideration, and we have not, nor has anyone on our behalf, engaged in discussions with representatives of other companies, with respect to such a transaction. In addition, we have not been contacted nor have any of our officers, directors or affiliates been contacted by companies regarding a potential business combination, nor have we, or any of our officers, directors or affiliates, directly or indirectly, taken any steps in furtherance of a business combination. To date our efforts have been limited to organizational activities and activities relating to this offering and we have not acquired any business operations. According to the SPDR Index as of July 24, 2007, financial services companies comprised a weighted average of 20.0% of the S P 500 market capitalization. According to the U.S. Bureau of Economic Analysis, the financial services industry has been the leading contributor to the U.S. gross domestic product for more than a decade; the industry s contribution in 2006 was 20.8%. In addition, for the first quarter of 2007, the financial services sector accounted for approximately 34.2% of total corporate profits in the United States. The financial services sector is dominated by large, and in some cases, multi-national institutions. While dynamic industry trends are constantly shifting the demand for financial services products and other offerings, we believe that these types of institutions are often unwilling or unable to respond proactively to these emerging trends because they often find it difficult to quickly and efficiently embrace emerging industry trends without disrupting existing businesses. However, we believe that in this competitive industry there is a constant need for cost reduction, expansion of product lines and increased market share through innovative products and the application of technology. We believe that smaller companies have greater flexibility to more readily exploit industry trends in technology, legislation and other areas within particular financial services sectors. Table of Contents Technology has fundamentally changed how businesses in the financial services industry deliver their services and products. We believe that many areas of financial services have been impacted by the advancement and implementation of technology, especially the banking sector as transaction processing becomes faster and more efficient. Alternative distribution methods employed in the financial services industry have become extremely important. These product delivery methods include debit cards, smart cards, electronic payment systems, contactless payment devices, free-standing kiosks, mobile devices, automated teller machines and the Internet. We believe the evolution of payment technology will continue as cash and check transactions become increasingly replaced by next generation debit technologies including card, PIN and mobile. Within the universe of potential targets in the financial services industry, including service providers to the industry, we believe that companies in the financial technology sector are particularly attractive and financial technology companies will be an important focus of ours. As compared to traditional banks, these companies differ in many respects and typically are unregulated or less regulated, require lower capitalization levels and trade at higher valuation multiples. Areas within the financial technology sector that we may focus on include: payment processing; processors of transactions or information; financial data, analysis and content providers; banking, insurance and asset management software, security and outsourcing providers; brokerage, eFinance, and other web-oriented financial businesses; credit, debit and prepaid card technology and distribution; emerging technologies such as PIN, mobile and contactless payment delivery systems; and service providers supporting the consumer and commercial finance, servicing, asset management and insurance businesses. Although we may consider a target business in any segment of the financial services industry, including any area of the financial technology sector, an important area for us will be companies involved in the payments aspect of the financial services industry. Payments encompass the various mechanisms that consumers and businesses use to purchase and/or finance goods or services, pay bills and access and transfer funds. These companies may be involved in creating new mechanisms to enhance or replace existing payment methods including credit cards, debit cards, ATMs, cash, checks, stored value cards, electronic bill payments and other existing and emerging forms of payment. These companies may also be involved in products which often enable payment mechanisms through a complex web of payment devices, financial accounts, data networks, processing platforms, clearinghouses and banking and other relationships that link banks, card issuers, merchants, billers, non-bank financial institutions, corporations, government agencies, technology companies and specialized payment providers. We believe that payment technology is rapidly changing and that companies involved in this sector have substantial growth potential. According to a February 2006 Federal Reserve Board Discussion Paper, annual debit card transactions in the United States have been increasing at a rate of 20% per year and now exceed the number of credit card transactions. Furthermore, according to the Nilson Report, which compared 2005 with 2006, the number of Visa and MasterCard credit and debit cards in circulation increased globally by 11.2% to 2.4 billion and transactions utilizing these cards increased by 15.2% to 85.4 billion, with the total dollar volume increasing 14.5% to $6.7 trillion. In the United States alone, the number of these cards in circulation increased by 7.8% to 878.8 million, the number of purchase transactions increased by 12.4% to 34.0 billion and total dollar volume increased 11.7% to $2.5 trillion. While our primary focus will be on prospective target businesses in or related to the financial services industry in the United States, we may also consider these acquisition opportunities internationally. Table of Contents In evaluating a prospective target business, our management will consider, among other factors, the following: experience and skill of management and availability of additional personnel; financial condition, including profitability, cash flow, the recurrence of revenue and the results of operation; growth potential; competitive position and barriers to entry; ability to retain and grow the customer base; stage of development of the products, processes or services; proprietary features and degree of intellectual property or other protection of the products, processes or services; regulatory environment; costs, approvals and accounting impact associated with effecting the business combination; and relative valuations of similar publicly traded companies. In addition, banks and insurance companies generally are subject to rigorous capital requirements and may be examined on a regular basis for their general safety and soundness and compliance with various federal and state legal laws. Any debt used in the consummation of the business combination may adversely affect the potential target businesses ability to maintain capitalization requirements in certain regulated segments of the financial services industry. If we were to acquire businesses in segments of the financial services industry which are subject to maintaining capitalization requirements and ratios and subject to regulatory approvals and consents, the structure of the potential business combination, including our use of leverage, and the size of the potential business combination may be impacted, the potential pool of target businesses may be limited, and our ability to consummate a business combination within the requisite time period may be adversely affected. In seeking a business combination, we intend to utilize cash derived from the proceeds of this offering, as well as our capital stock, debt, or a combination of cash, capital stock and debt, and there is no limit on the issuance of capital stock or incurrence of debt we may undertake in effecting a business combination. In the event a business combination is consummated, all sums remaining in our trust account will be released to us immediately thereafter, and there will be no restriction on our use of such funds. While we may seek to effect business combinations with more than one target business, our initial business combination must be with a target business or businesses whose fair market value is at least equal to 80% of the amount in our trust account (less deferred underwriting compensation of $2,400,000, or $2,760,000 if the over-allotment is exercised in full and taxes payable) at the time of such acquisition. Consequently, it is likely we will have the ability to effect only a single business combination. If we acquire less than 100% of one or more target businesses in our initial business combination, the aggregate fair market value of the portion or portions we acquire must equal at least 80% of our net assets at the time of such initial business combination. In no instance will we acquire less than majority voting control of a target business. However, in the case of a reverse merger or other similar transaction in which we issue a substantial number of new shares, our stockholders immediately prior to such transaction may own less than a majority of our shares subsequent to such transaction. We currently have no restrictions on our ability to seek additional funds through the sale of securities or through loans. As a consequence, we could seek to acquire a target business that has a fair market value significantly in excess of 80% of the amount in our trust account (less deferred underwriting compensation of $2,400,000, or $2,760,000 if the over-allotment is exercised in full and taxes payable) or more than one target business at the same time. Although as of the date of this prospectus we have not engaged or retained, had any discussions with, or entered into any agreements with, any third party regarding any such potential financing transactions, we could seek to fund such business combinations by raising additional funds through the sale of our securities or through loan arrangements. In addition, we may pay for such business combinations, in part or in whole, by issuance of our securities. However, if we were to seek such additional funds, any such arrangement would only be consummated simultaneously with our consummation of a business combination. It is possible we will have the ability to complete only a single Table of Contents business combination, although this may entail the simultaneous acquisitions of several assets or closely related operating businesses at the same time. However, should management elect to pursue more than one acquisition of target businesses simultaneously, management could encounter difficulties in consummating all or a portion of such acquisitions due to a lack of adequate resources, including the inability of management to devote sufficient time to the due diligence, negotiation and documentation of each acquisition. Furthermore, even if we complete the acquisition of more than one target business at the same time, there can be no assurance we will be able to integrate the operations of such target businesses. We have agreed to pay a monthly fee of $7,500 to Inter-Atlantic Management Services LLC, an affiliate of certain of the officers and directors, for general and administrative services, including but not limited to receptionist, secretarial and general office services. Inter-Atlantic Management Services LLC, together with its affiliate companies, is referred to herein as Inter-Atlantic Group. This agreement commences on the date of this prospectus and shall continue until the earliest to occur of: the consummation of a business combination; 24 months after the completion of this offering; and the date on which we determine to dissolve and liquidate our trust account as part of our plan of dissolution and liquidation. Our officers and directors will not receive any compensation in this offering or for services rendered to us prior to, or in connection with, the consummation of a business combination. Our officers and directors will be entitled to reimbursement for out-of-pocket expenses incurred by them or their affiliates on our behalf. There is no limit on the amount of these out-of-pocket expenses and there will be no review of the reasonableness of the expenses by anyone other than independent and disinterested members of our board of directors, or a court of competent jurisdiction, if such reimbursement is challenged. Prior to the closing of this offering, our officers and directors will have collectively purchased a combined total of 2,100,000 warrants and one of our stockholders will have purchased 200,000 warrants, each at a price of $1.00 per warrant for a total of $2,300,000. Key Strengths We believe that our management and director team have several key strengths including: substantial investment experience in the financial services sector; substantial management experience in the financial services sector; strong industry reputation and track record; broad sector specific deal flow from our extensive sourcing network; and attractive proposition to target businesses. Investment Experience Our officers and directors have significant experience in investing in, and acquiring, financial services companies. In particular, Messrs. Lerner, Lichten and Baris were formerly investment bankers in the Financial Institutions Group of Smith Barney Inc. and Messrs. Lichten and Weinhoff were formerly investment bankers in the Financial Institutions Group of Lehman Brothers Inc. At Inter-Atlantic Group and Smith Barney, Mr. Lerner participated in the raising of equity capital for financial services companies, including investments on behalf of Inter-Atlantic Group s funds, and performed varying amounts of due diligence on privately-held financial services companies. Mr. Lichten was a Managing Director at Smith Barney and Lehman Brothers Inc., where he concentrated on raising capital and providing merger and acquisition advisory services to financial institutions. Mr. Baris primary role at Inter-Atlantic Group has been sourcing, analyzing, negotiating, structuring and monitoring its private equity investments. Mr. Weinhoff was a Managing Director at Lehman Brothers Inc. and head of the Financial Institutions Group for Schroder Co. Table of Contents Management Experience Certain of our officers and directors have been senior executives of major financial services companies. In particular Messrs. Galasso, Daras and Hammer have each served in senior executive roles with companies involved in the payments and banking sectors. Mr. Galasso was the Chairman and Chief Executive Officer of NetSpend Corporation, a prepaid payment solutions company, from 2001 to 2004 and led its efforts to become one of the leading processors and marketers of prepaid, re-loadable debit cards. Prior to his time at NetSpend Corporation, Mr. Galasso was the President and Chief Executive Officer of Bank of America National Association, Bank of America s credit card company. Mr. Daras served as Executive Vice President, Treasurer and Asset-Liability Committee Chairman of Dime Bancorp where he managed loan and securities portfolios and also oversaw the bank s cash management, money transfer, derivatives, funding and risk management operations. Prior to his service at Dime Bancorp, Mr. Daras was Chief Financial Officer of Cenlar Capital Corp., a privately held mortgage banking company. Mr. Hammer served as an Executive Vice President of The Chase Manhattan Bank, where he was responsible for the bank s global consumer activities including the retail branch network, credit card, consumer lending and deposit businesses. Strong Industry Expertise We believe that through their work experience, our officers and directors have acquired substantial knowledge about private financial services companies. Our officers and directors have not taken any steps toward identifying a target business, including identifying potential target criteria other than the criteria that is disclosed in this registration statement, and their general knowledge and experience with financial services companies will play a role in evaluating potential target businesses. Specifically, our officers and directors will be using their general industry expertise in evaluating potential target businesses subsequent to the initial public offering. Our officers and directors are not aware of any potential target businesses seeking a sale, seeking a change of control, seeking an initial public offering or seeking any similar transaction which would accomplish a similar purpose for the target, and in the event that any such entities subsequently come to the attention of our directors and officers prior to the initial public offering, we will not enter into a business combination with these entities after completion of the initial public offering. Our shareholders are not aware of any business opportunities that may be presented to our management after completion of the initial public offering. Broad Sector Specific Deal Flow From Our Extensive Sourcing Network We believe that the background, professional histories and experience of our officers and directors will enable us to have access to a broad spectrum of investment opportunities. We have a competitive advantage in that our officers and directors have 150 years of collective experience in successfully investing in and managing both public and private companies in the financial services industry. Based on the history of our officers and directors working within the financial services industry and their network of contacts, we believe we will have access to deal flow and the ability to locate an attractive initial business combination. Contacts of our officers and directors who may be a source for referral of potential target businesses include executives employed with and consultants engaged by, public and private businesses in our target industries, and consultants, investment bankers, attorneys, and accountants, among others, with knowledge of the financial services industry. Attractive Proposition to Target Business We believe that potential acquisition targets may favor us over some other potential purchasers of their businesses, including venture capital funds, leveraged buyout funds, private equity funds, operating businesses and other entities and individuals, both foreign and domestic, for the following reasons: Most of these funds have a finite life which generally requires the fund to effect a liquidity event, such as a sale, refinancing or public offering, for portfolio companies in order to return capital to investors. Our formation documents do not require us to effect a liquidity event at any particular time. We will not integrate the operations of our initial acquisition target into an existing environment and corporate culture with pre-existing methods of doing business, as we believe is common with acquisitions by large financial platforms. Table of Contents We have the flexibility to offer potential acquisition targets cash or stock consideration to meet their liquidity or estate planning needs. On the other hand, potential acquisition targets may not favor us over other potential purchasers because we will not benefit from typical merger synergies, such as cost reduction and cost avoidance through economies of scale, because we are not an operating company. The Management Team Messrs. Lerner, Lichten, Hammer, Baris and Daras are partners in Inter-Atlantic Group, a New York based private equity firm specializing in the financial services industry. Mr. Galasso is an independent consultant that conducts business with Inter-Atlantic Group from time to time. While each of these individuals is also a member of our management team, no voting arrangement exists among these individuals with respect to our securities. They have been integral in all investing activity, advisory activity, capital raising and strategic planning engaged in by Inter-Atlantic Group. Mr. Galasso has served as a senior executive officer in the payments industry including as Chairman and Chief Executive Officer of NetSpend Corporation, a former portfolio company of Inter-Atlantic Group. Inter-Atlantic Group generally refers to a collection of affiliated companies and partnerships, including two Bermuda-domiciled private equity funds, their general partners and Inter-Atlantic Management Services LLC, the main operating company. Prior to 2001, Inter-Atlantic Group served the financial services industry through mergers and acquisitions advisory services, capital raising, strategic planning and corporate restructuring for domestic and offshore companies. In 2001, the firm divested its broker-dealer subsidiary, Guggenheim Securities, LLC, in order to focus its efforts on making investments in the financial services sector. In addition, Inter-Atlantic Group has been a senior strategic advisor to a prominent insurance company for the past 12 years. The limited partners of the two private equity funds are a small group of prominent institutional investors. Inter-Atlantic Group s investment committee consists of Messrs. Lerner, Lichten, Hammer, Baris, and Michael P. Esposito Jr., a former employee of the firm who is currently a director and owner of the general partners of the Inter-Atlantic Group funds. Mr. Esposito is a well known financial services executive who serves as Chairman of the Boards of XL Capital Ltd. (NYSE:XL), Security Capital Assurance Ltd. (NYSE: SCA) and Primus Financial Ltd. (NYSE: PRS). Our existing stockholders consist of our officers, our board members, our advisors, and Mr. Esposito. We will not enter into a business combination with any company which Inter-Atlantic Group currently has or previously had a financial interest in. To minimize any conflicts, or the appearance of conflicts, subject to their respective fiduciary obligations, each of Inter-Atlantic Group and Messrs. Lerner, Daras, Baris, Lichten and Hammer has granted us a right of first refusal, effective upon the consummation of this offering, with respect to any company or business in or related to the financial services industry with a fair market value at least equal to 80% of the amount in our trust account (less deferred underwriting compensation of $2,400,000, or $2,760,000 if the over-allotment is exercised in full and taxes payable). Messrs. Galasso and Weinhoff will be responsible for enforcing this right of first refusal. We maintain executive offices at 400 Madison Avenue, New York, New York 10017 and our telephone number is (212) 581-2000. Pre-Offering Private Placement Our executive officers and directors have agreed to purchase in the aggregate 2,100,000 warrants and one of our stockholders has agreed to purchase 200,000 warrants, each prior to the closing of this offering at a price of $1.00 per warrant for a total of $2,300,000. The $1.00 purchase price per warrant is the result of negotiations between our executive officers and Morgan Joseph and is typical in private placements that are associated with offerings of this type. The Company does not believe that the sale of the warrants will result in a compensation expense because they will be sold at or above fair market value. All insider warrants issued in the private placement are identical to the warrants in the units being offered by this prospectus, except that: (i) subject to certain limited exceptions, none of the insider warrants will be transferable or salable until after we complete a business combination; (ii) the warrants are not subject to redemption if held by the initial Table of Contents holders thereof and (iii) may be exercised on a cashless basis. Neither these warrants, nor the underlying shares of common stock, are transferable until consummation of a business combination and they cannot be transferred in the public market unless registered under the Securities Act of 1933, as amended ( Act ). This is in contrast to the public warrants, which are transferable by the holders immediately upon separation of the units. Each of our officers and directors have agreed to participate in the private placement. We refer to these 2,300,000 warrants as the founders warrants throughout this prospectus. The founders warrants will be purchased separately and not as a part of units. The purchase price of the founders warrants will be added to the proceeds from this offering to be held in the trust account pending our completion of one or more business combinations. If we do not complete one or more business combinations that meet the criteria described in this prospectus, then the $2,300,000 purchase price of the founder s warrants will become part of the amount payable to our public stockholders upon our dissolution and the subsequent liquidation of the trust account and the founders warrants will expire worthless. The founders warrants will not be transferable (except in limited circumstances discussed below) or salable by the founders until we complete a business combination, and will be non-redeemable so long as the founder or the transferee holds such warrants. The founders warrants and the underlying shares of common stock will be entitled to registration rights under an agreement to be signed on or before the date of this prospectus to enable their resale commencing on the date such warrants become exercisable. We have elected to make the founders warrants non-redeemable in order to provide the founders a potentially longer exercise period for those warrants because the founders will bear a higher risk because they are required to hold such warrants until the consummation of the business combination and are unable to transfer the warrants (except in limited circumstances discussed below). In addition, after consummation of the business combination, the founders ability to sell our securities in the open market will be significantly limited. If they remain insiders, we will have policies in place that prohibit insiders from selling our securities except during specific periods of time. Even during such periods of time, an insider cannot trade in our securities if he is in possession of material non-public information. Accordingly, unlike public stockholders who could exercise their warrants and sell the shares of common stock received upon such exercise freely in the open market in order to recoup the cost of such exercise, the holders of the founder warrants could be significantly restricted from selling such securities. With those exceptions, the founders warrants have terms and provisions that are substantially identical to those of the warrants being sold as part of the units in this offering. The founders are only permitted to transfer such warrants in the following circumstances: transfers for estate planning purposes, by operation of law or upon death, and the transferees receiving such founders warrants will be subject to the same sale restrictions imposed on the founders. The founders warrants will be differentiated from warrants, if any, purchased in or following this offering by any holder of founders warrants through the legends contained on the certificates representing the founders warrants indicating the restrictions and rights specifically applicable to such warrants as are described in this prospectus. Table of Contents The Offering Securities offered: 7,500,000 units, at $8.00 per unit, each unit consisting of: one share of common stock; and one warrant The units will begin trading on or promptly after the date of this prospectus. Each of the common stock and warrants shall trade separately on the 90th day after the date of this prospectus unless Morgan Joseph Co. determines that an earlier date is acceptable, based on their assessment of the relative strengths of the securities markets and small capitalization companies in general, and the trading pattern of, and demand for, our securities in particular. However, Morgan Joseph Co. may decide to allow continued trading of the units following such separation. In no event will Morgan Joseph Co. allow separate trading of the common stock and warrants until we file an audited balance sheet reflecting our receipt of the gross proceeds of this offering and the underwriters over-allotment has either expired or been exercised. We will file a Current Report on Form 8-K, including an audited balance sheet, upon the consummation of this offering, which is anticipated to take place three business days from the date the units commence trading. The audited balance sheet will include proceeds we receive from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Form 8-K. We will file a separate Current Report on Form 8-K if the over-allotment option is exercised in whole or in part after the consummation of the offering. We will also include in this Form 8-K, or amendment thereto, or in a subsequent Form 8-K information indicating if the representative has allowed separate trading of shares and warrants prior to the 90th day after the date of this prospectus. Although we will not distribute copies of the Current Report on Form 8-K to individual unit holders, the Current Report on Form 8-K will be available on the Securities and Exchange Commission s, or SEC s, website after the filing. See the section appearing elsewhere in this prospectus entitled Where You Can Find Additional Information. Common stock: Number outstanding before this offering: 1,875,000 shares Number to be outstanding after this offering: 9,375,000 shares Warrants: Number outstanding before this offering and the pre-offering private placement: 0 Number to be outstanding after this offering and the pre-offering private placement: 9,800,000 warrants, including the 2,300,000 warrants to be purchased by the founders prior to the closing of this offering Exercisability: Each warrant is exercisable for one share of common stock. Exercise price: $4.50 per share Table of Contents Exercise period: The warrants will become exercisable on the later of: the completion of a business combination with a target business, or , 2008 [one year from the date of this prospectus] The warrants will expire at 5:00 p.m., New York City time, on , 2011 [four years from the date of this prospectus] or earlier upon redemption. Redemption: We may redeem the outstanding warrants (other than the founders warrants, as defined below, but including any warrants issued upon exercise of the underwriters unit purchase option): in whole and not in part, at a price of $0.01 per warrant at any time after the warrants become exercisable, upon a minimum of 30 days prior written notice of redemption, if, and only if, the last sale price of our common stock equals or exceeds $11.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption, and if there is an effective registration statement allowing for the resale of shares underlying the warrants. We have established these criteria to provide warrant holders with a reasonable premium to the initial warrant exercise price as well as to provide a degree of liquidity to cushion the market reaction, if any, to our redemption call. If the foregoing conditions are satisfied and we call the warrants for redemption, each warrant holder will then be entitled to exercise his or her warrant prior to the date scheduled for redemption by payment of the exercise price. However, there can be no assurance that the price of common stock will exceed the call trigger price or the warrant exercise price after the redemption call is made. Founders Warrants: Our officers and directors have collectively agreed to purchase a combined total of 2,100,000 warrants and one of our stockholders has agreed to purchase 200,000 warrants, each prior to the closing of this offering at a price of $1.00 per warrant for a total of $2,300,000. We refer to these 2,300,000 warrants as the founders warrants throughout this prospectus. The founders warrants will be purchased separately and not in combination with common stock in the form of units. The purchase price of the founders warrants will be added to the proceeds from this offering to be held in our trust account pending our completion of one or more business combinations. If we do not complete one or more business combinations that meet the criteria described in this prospectus, then the $2,300,000 purchase price of the founders warrants will become part of the amount payable to our public stockholders upon our automatic dissolution and subsequent liquidation of our trust account and the founders warrants will expire worthless. The founders warrants will not be transferable (except in limited circumstances) or saleable by the purchasers of the founders warrants until we complete a business combination, and will be non-redeemable so long as these persons hold such warrants. In addition, commencing on the date such warrants become Table of Contents exercisable, the founders warrants and the underlying common stock are entitled to registration rights under an agreement to be signed on or before the date of this prospectus. With those exceptions, the founders warrants have terms and provisions that are identical to those of the warrants being sold as part of the units in this offering. Until we complete a business combination, the purchasers of the founders warrants are only permitted to transfer such warrants for estate planning purposes, by operation of law, or upon death, and the transferees receiving such founders warrants will be subject to the same sale restrictions imposed on the persons who initially purchase these warrants from us. If any of the purchasers of the founders warrants acquire warrants for their own account in the open market, any such warrants will be redeemable. If our other outstanding warrants are redeemed (including the warrants subject to the underwriters unit purchase option) and the price of our common stock rises following such redemption, the holders of the founders warrants could potentially realize a larger gain on exercise or sale of those warrants than is available to other warrant holders, although there is no assurance the price of our shares would increase following a warrant redemption. We have elected to make the founders warrants non-redeemable in order to provide the purchasers of the founders warrants a potentially longer exercise period for those warrants because they will bear a higher risk while being required to hold such warrants until the consummation of a business combination. If our share price declines in periods subsequent to a warrant redemption and the purchasers of the founders warrants who initially acquired these warrants from us continue to hold the founders warrants, the value of those warrants still held by these persons may also decline. The founders warrants will be differentiated from warrants, if any, purchased in or following this offering by the founders and the other purchasers of the founders warrants through the legending of certificates representing the founders warrants indicating the restrictions and rights specifically applicable to such warrants as are described in this prospectus. Proposed American Stock Exchange symbols for our: Units: IAN.U Common Stock: IAN Warrants: IAN.W Offering proceeds to be held in trust: Including the proceeds of this offering, the entire proceeds from the pre-offering private placement of $2,300,000 payable for the founders warrants and the $2,400,000 deferred underwriters fee, $59,900,000 ($7.99 per unit) will be placed in a trust account at JPMorgan Chase maintained by American Stock Transfer Trust Company, acting as trustee, pursuant to an agreement to be signed on the date of this prospectus. These proceeds include $55,200,000 ($7.36 per unit) from the proceeds of this offering, $2,300,000 purchase price of the founders warrants ($0.31 per unit) and approximately $2,400,000 ($0.32 per unit) of deferred underwriting discounts and commissions. The total dollar amount to be held in Table of Contents trust represents 99.8% of the gross proceeds of this offering (or 99.5% in the event that the underwriters over-allotment option is exercised in full). We believe that the inclusion in our trust account of the purchase price of the founders warrants and the deferred underwriting discounts and commissions is a benefit to our stockholders because additional proceeds will be available for distributions to investors if an automatic dissolution and subsequent liquidation of our trust account occurs prior to our completing an initial business combination. These proceeds will not be released until the earlier of the completion of a business combination or upon liquidation of our trust account. If we are forced to dissolve and subsequently liquidate our trust account, the underwriters have agreed to waive any right they may have to the $2,400,000 of deferred underwriting discount held in our trust account, all of which shall be distributed to our public stockholders. Therefore, unless and until a business combination is consummated, the proceeds held in our trust account will not be available for our use for any expenses related to this offering or expenses that we may incur related to the investigation and selection of a target business and the negotiation of an agreement to acquire a target business, except that to the extent our trust account earns interest or we are deemed to have earned income in connection therewith, we will be permitted to use up to $1,100,000 of interest income (net of taxes payable) to fund working capital and to seek disbursements from our trust account to pay any federal, state or local tax obligations related thereto. Expenses incurred by us while seeking a business combination may be paid prior to a business combination only from the net proceeds of this offering not held in our trust account (initially, approximately $90,000 after the payment of the expenses relating to this offering). A portion of the funds not held in our trust account will be used to repay loans made to us by Inter-Atlantic Group, an affiliate of certain of the officers and directors, to cover offering related expenses. It is possible that we could use a portion of the funds not in our trust account to make a deposit, down payment or fund a no-shop provision with respect to a particular proposed business combination. In the event we were ultimately required to forfeit such funds (whether as a result of our breach of the agreement relating to such payment or otherwise), we may not have a sufficient amount of working capital available outside of our trust account to pay expenses related to finding a suitable business combination without securing additional financing. If we were unable to secure additional financing, we would most likely fail to consummate a business combination in the allotted time and would be forced to dissolve and subsequently liquidate our trust account. As used in this prospectus, a no-shop provision means a contractual provision that prohibits the parties in a business combination from engaging in certain actions such as soliciting better offers or other transactions prior to the completion of the business combination or the termination thereof and requires, in the event of a breach of such provision, the breaching party to make a monetary payment to the non-breaching party. In the case of a buyer of the business, such a provision can impose liquidated Table of Contents damages on the buyer if the buyer fails to consummate the business combination transaction in certain circumstances resulting in the forfeiture of any deposit. Disbursements from monies not held in trust: Prior to the completion of a business combination, there will be no fees, reimbursements or cash payments made to our existing stockholders and/or officers and directors other than: Repayment of a $250,000 interest free loan to be made by Inter-Atlantic Group to cover offering expenses and to be repaid at the closing of the offering; Repayment of up to $500,000 of loans that may be extended to us by Inter-Atlantic Group under a limited recourse revolving line of credit that will be made available to us upon the closing of the offering. Repayment of this revolving line of credit prior to the consummation of the business combination will be payable solely from the $1,100,000 of interest earned on the trust account which is available for working capital; Payment of up to $7,500 per month to affiliates of existing stockholders for office space and administrative services; and Reimbursement for any expenses incident to the offering and finding a suitable business combination. There is no limit on the amount of these out-of-pocket expenses and there will be no review of the reasonableness of the expenses by anyone other than independent and disinterested members of our board of directors, or a court of competent jurisdiction, if such reimbursement is challenged. Amended and Restated Certificate of Incorporation: Our amended and restated certificate of incorporation sets forth certain requirements and restrictions relating to this offering that shall apply to us until the consummation of a business combination. Specifically, it provides that: prior to the consummation of our initial business combination, we will submit such business combination to our stockholders for approval; we may consummate our initial business combination if: (i) approved by a majority of the shares of common stock voted by the public stockholders and (ii) public stockholders owning less than 30% of the shares of common stock purchased by the public stockholders in this offering exercise their redemption rights; if our initial business combination is approved and consummated, public stockholders who voted against the business combination and exercised their redemption rights will receive their pro rata share of the trust account; if a business combination is not consummated within 24 months from the date of this prospectus, then we will dissolve and distribute to all of our public stockholders their pro rata share of the trust account; and Table of Contents we may not initially consummate any other merger, capital stock exchange, stock purchase, asset acquisition or similar transaction other than a business combination that meets the conditions specified in this prospectus, including the requirement that such combination be with one or more operating businesses that have a fair market value, either individually or collectively, equal to at least 80% of our net assets at the time of such business combination. Our amended and restated certificate of incorporation prohibits the amendment of the above-described provisions without the affirmative vote of 95% of the shares issued in this offering. However, because the validity of a 95% supermajority provision restricting amendment of the amended and restated certificate of incorporation under Delaware law has not been settled, a court could conclude that it violates the stockholders implicit rights to amend the amended and restated certificate of incorporation. However, we view the foregoing provisions as obligations to our stockholders and we will not take any actions to waive or amend any of these provisions. Stockholders must approve business combination: We will seek stockholder approval before effecting any business combination, even if the business combination would not ordinarily require stockholder approval under applicable state law. In connection with the stockholder vote required to approve any business combination, all of our existing stockholders have agreed to vote the common stock owned by them prior to this offering in the same manner as a majority of common stock voted by the public stockholders. Our existing stockholders have also agreed that if they acquire common stock in or following this offering, they will vote such acquired common stock in favor of a business combination. We are not aware of any intention on the part of our existing shareholders, including our officers and directors, to make any purchases in this offering or in the aftermarket, although they are not prohibited from doing so. Although we do not know for certain the factors that would cause our existing stockholders to purchase our securities, we believe that some of the factors they would consider are: (i) the trading price of our securities, (ii) their aggregate investment in our securities, (iii) whether it appears that a substantial number of public stockholders are voting against a proposed business combination, and (iv) their interest in the target business once the target business has been identified. Any shares acquired by such individuals in this offering or in the aftermarket will be voted in favor of the business combination. Accordingly, any purchase of our shares by our officers and directors, including all of our existing shareholders, in this offering or in the aftermarket could influence the result of a vote submitted to our shareholders in connection with a business combination by making it more likely that a business combination would be approved. In addition, given the interest that our existing stockholders have in a business combination being consummated, it is possible that our existing stockholders will acquire securities from public stockholders who have elected to redeem their shares of our Table of Contents common stock (as described below) in order to change their vote and insure that the business combination will be approved (which could result in a business combination being approved even if, after the announcement of the business combination, 30% or more of our public stockholders would have elected their redemption rights, or 51% of our public stockholders would have voted against the business combination, but for the purchases made by our existing stockholders). We will proceed with a business combination only if a majority of the common stock voted by the public stockholders are voted in favor of the business combination and the number of shares owned by public stockholders that vote against the business combination and exercise their redemption rights is less than 29.99% of the aggregate number of shares in the units sold in this offering. Voting against the business combination alone will not result in redemption of a stockholder s shares into a pro rata share of our trust account. Such stockholder must also exercise its redemption rights described below. We will only structure or consummate a business combination in which all stockholders exercising their redemption rights, up to 29.99%, are entitled to receive their pro rata portion of our trust account (net of taxes payable). This redemption threshold is different from the traditional blank check company structure and makes it more likely the business combination will be approved, even if a significant number of shareholders do not approve the transaction. The Company has agreed not to lower the redemption threshold below 29.99% in connection with the negotiation of a business combination. Redemption rights for stockholders voting to reject a business combination: Public stockholders voting against a business combination will be entitled to redeem their shares into a pro rata share of our trust account, including the interest earned on their portion of our trust account (excluding up to $1,100,000 of interest earned which may be used to fund working capital and net of taxes payable), if the business combination is approved and completed. If a business combination is approved, stockholders that vote against the business combination and elect to redeem their shares to cash will be entitled to receive their pro-rata portion of the $2,400,000 ($0.32 per share) of deferred underwriting discount held in our trust account. Public stockholders that redeem their shares into their pro rata share of our trust account will continue to have the right to exercise any warrants they may hold. Stockholders will not be requested to tender their shares of common stock before a business combination is consummated. If a business combination is consummated, redeeming stockholders will be sent instructions on how to tender their shares of common stock and when they should expect to receive the redemption amount. In order to ensure accuracy in determining whether or not the redemption threshold has been met, each redeeming stockholder must continue to hold their shares of common stock until the consummation of the business combination. We will not charge redeeming stockholders any fees in connection with the tender of shares for redemption. Table of Contents Existing stockholders are not entitled to redeem any of their common stock acquired prior to this offering into a pro rata share of our trust account. However, existing stockholders who acquire common stock in connection with or after this offering will be entitled to a pro rata share of our trust account upon our dissolution and subsequent liquidation of our trust account upon our failure to consummate a business combination within the prescribed time period. Dissolution and liquidation if no business combination: Pursuant to the terms of the trust agreement by and between us and American Stock Transfer Trust Company and applicable provisions of the Delaware General Corporation Law, we will dissolve and liquidate and release only to our public stockholders, as part of our plan of dissolution and liquidation, the amount in our trust account if we do not effect a business combination within 24 months from the consummation of this offering. Pursuant to our amended and restated certificate of incorporation, or our certificate of incorporation, upon the expiration of such time period, our corporate existence will cease except for the purpose of winding up our affairs and liquidating. We chose this limited existence structure in order to reduce the time to distribute the funds in the trust account to our stockholders in the event that we are unable to complete a business combination in the required time frame. This automatic cessation of corporate existence has the same effect as if our board of directors and stockholders had formally voted to approve our dissolution pursuant to Section 275 of the Delaware General Corporation Law. Accordingly, limiting our corporate existence to a specified date as permitted by Section 102(b)(5) of the Delaware General Corporation Law removes the necessity to comply with the formal procedures set forth in Section 275 (which would have required our board of directors and stockholders to formally vote to approve our dissolution and liquidation and to have filed a certificate of dissolution with the Delaware Secretary of State). In connection with any proposed business combination we submit to our stockholders for approval, we will also submit to stockholders a proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence, thereby removing this limitation on our corporate life. We will only consummate a business combination if a majority of the common stock voted by the public stockholders is voted in favor of such business combination and our amendment to provide for our perpetual existence and the number of shares owned by public stockholders that vote against the business combination and exercise their redemption rights is less than 29.99% of the aggregate number of shares in the units sold in this offering (unlike the redemption threshold of 19.99% required in a traditional blank check company structure). The approval of the proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence in connection with a business combination would require the affirmative vote of a majority of our outstanding shares of common stock. Table of Contents At the expiration of the 24 month period, pursuant to Section 281 of the Delaware General Corporation Law, we will also adopt a plan that will provide for payment, based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may potentially be brought against us within the subsequent 10 years. We cannot assure you that we will properly assess all claims that may potentially be brought against us. As such, our stockholders could potentially be liable for any claims of creditors to the extent of distributions received by them (but no more). Furthermore, while we are obligated to have all entities providing goods or services to us in excess of $50,000, or as we refer to them throughout this prospectus, our significant vendors and service providers, and all prospective target businesses execute agreements with us waiving any right, title, interest or claim of any kind they may have in or to any monies held in the trust account, there is no guarantee that they will not seek recourse against the trust account or that a court would not conclude that such agreements are not legally enforceable. The determination of which vendors will be deemed significant will be made by our management but will include any investment bankers, legal advisors, accounting firms and business consultants we hire in connection with a business combination. Messrs. Lerner, Daras, Baris, Hammer and Lichten have agreed to indemnify us, jointly and severally pro rata according to their comparative beneficial interests in our company immediately prior to this offering, for any loss, liability, claim, damage and expense to the extent necessary to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us. However, we cannot assure you that they will be able to satisfy those obligations, if they are required to do so. As a result, we cannot assure you that the per-share distribution from the trust account, if we liquidate, will not be less than $7.99, plus interest (net of taxes) then held in the trust account. We anticipate that the distribution of the funds in the trust account to our public stockholders will occur within 10 business days from the date our corporate existence ceases. Our existing stockholders have agreed to waive their respective rights to participate in any liquidation as part of our plan of dissolution and liquidation occurring upon our failure to consummate a business combination with respect to those shares of common stock acquired by them prior to this offering. In addition, Morgan Joseph Co. has agreed to waive their rights to the $2,400,000 ($2,760,000 if the underwriters over-allotment option is exercised in full) of deferred compensation deposited in our trust account for their benefit if the business combination is not consummated. The repayment of the $500,000 limited recourse revolving line of credit prior to the consummation of the business combination will be payable solely from the $1,100,000 of interest earned on the trust account, which is available for working capital, solely to the extent that there is more than $7.99 per share in the trust account. Table of Contents This revolving line of credit will have no recourse against our trust account and will be used solely to fund working capital. The amounts drawn under the revolving line of credit shall bear interest at the federal funds target interest rate (4.75% as of September 21, 2007) and shall become due and payable upon the earlier of the consummation of a business combination, liquidation of the Company or two years after the consummation of the offering, or earlier solely from interest earned on the trust account. We estimate our total costs and expenses for implementing and completing our stockholder-approved plan of dissolution and liquidation would be approximately $15,000. This amount includes all costs and expenses relating to filing our dissolution in the State of Delaware and the winding up of our company. We believe there should be sufficient funds available, either outside of our trust account or made available to us out of the net interest earned on our trust account and released to us as working capital, to fund the costs and expenses of dissolution, although we cannot give any assurances thereof. To the extent sufficient funds are not available, Messrs. Lerner, Daras, Baris, Hammer and Lichten have agreed to indemnify us, however, we cannot assure you that they will be able to satisfy these obligations. Escrow of existing stockholders shares and founders warrants: On the date of this prospectus, all of our existing stockholders, including all of our officers and directors, will place the common stock they owned before this offering and their founders warrants into an escrow account maintained by American Stock Transfer Trust Company, acting as escrow agent. Except transfers for estate planning purposes, by operation of law, or upon death, while remaining subject to the escrow agreement (i) the common stock will not be transferable during the escrow period and will not be released from escrow until one year from the consummation of the business combination and (ii) the founders warrants will not be transferable during the escrow period and will not be released from escrow until the consummation of the business combination. Risks In making your decision on whether to invest in our securities, you should take into account not only the backgrounds of our management team, but also the special risks we face as a blank check company, as well as the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, and, therefore, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. Additionally, our initial security holders initial equity investment is below that which is required under the guidelines of the North American Securities Administrators Association, Inc. and we do not satisfy such association s policy regarding unsound financial condition. You should carefully consider these and the other risks set forth in the section entitled Risk Factors beginning on page 19 of this prospectus. Table of Contents SUMMARY FINANCIAL DATA The following table summarizes the relevant financial data for our business and should be read with our financial statements, which are included in this prospectus. We have not had any significant operations to date, so only balance sheet data is presented. June 15, 2007 Actual As Adjusted(1) Balance Sheet Data: Working capital $ (289,939 ) $ 57,606,712 Total assets 488,896 60,006,712 Total liabilities 472,184 2,400,000 Value of common stock which may be redeemed for cash(2) 17,964,010 Stockholders equity $ 16,712 39,642,702 (1) Excludes the $100 purchase price for the purchase option issued to Morgan Joseph Co. (2) Public stockholders voting against a business combination will be entitled to redeem their shares into a pro rata share of our trust account, including (i) $7.67 per share from the proceeds of this offering and the purchase price of the founders warrants, (ii) the interest earned on their portion of our trust account (excluding up to $1,100,000 of interest earned which may be used to fund working capital and net of taxes payable), and (iii) the $2,400,000 ($0.32 per share) of deferred underwriting discount held in our trust account. The as adjusted information gives effect to the sale of the units we are offering including the application of the related gross proceeds and the payment of the estimated remaining costs from such sale and the repayment of accrued and other liabilities to be made. The working capital and total assets amounts, as adjusted, include $57,500,000 from the proceeds of this offering (including the $2,300,000 purchase price of the founders warrants) to be held in our trust account for our benefit which will be available to us only upon the consummation of a business combination within the time period described in this prospectus. The total amount placed in trust will be $59,900,000 which amount includes the $2,400,000 ($0.32 per share) of deferred underwriting discounts and commissions. If a business combination is not so consummated, we will be dissolved and all of the proceeds held in our trust account will be distributed solely to our public stockholders. We will not proceed with a business combination if public stockholders owning 30% or more of the shares sold in this offering vote against the business combination and exercise their redemption rights. This redemption threshold is different from the traditional blank check company structure and makes it more likely the business combination will be approved. Accordingly, we may effect a business combination if public stockholders owning up to approximately 29.99% of the shares sold in this offering exercise their redemption rights. If this occurred, we would be required to redeem into cash up to approximately 29.99% of the 7,500,000 shares included in the units sold in this offering, or 2,249,250 shares of common stock, at an initial per-share redemption price of $7.99 (which includes $0.32 per share of deferred underwriters discounts and commissions which the underwriters have agreed to forfeit to pay redeeming stockholders), without taking into account interest earned on our trust account (net of up to $1,100,000 released to us and net of any taxes due on such interest, which taxes, if any, shall be paid from our trust account). The actual per-share redemption price will be equal to: the amount in our trust account before payment of deferred underwriting discounts and commissions and including all accrued interest (excluding up to $1,100,000 of interest income (net of taxes payable) which may be used to fund working capital), net of taxes payable, as of two business days prior to the proposed consummation of the business combination, divided by the number of shares of common stock sold in the offering. Table of Contents RISK FACTORS An investment in our securities involves a high degree of risk. You should consider carefully all of the material risks described below, together with the other information contained in this prospectus before making a decision to invest in our units. Risks Associated With Our Company And The Offering We are a newly formed company with no operating history and, accordingly, you will not have any basis on which to evaluate our ability to achieve our business objective. We are a recently formed company with no operating results to date. Therefore, our ability to begin operations is dependent upon obtaining financing through the public offering of our securities. Since we do not have any operations or an operating history, you will have no basis upon which to evaluate our ability to achieve our business objective, which is to acquire, merge with, engage in a capital stock exchange with, purchase all or substantially all of the assets of, or engage in any other similar business combination with a single domestic and/or foreign operating entity, or one or more related or unrelated operating entities in the financial services sector, or, possibly, a company operating in a different sector. We do not have any specific merger, capital stock exchange, asset acquisition or other business combination under consideration or contemplation and we have not, nor has anyone on our behalf, contacted any potential target business or had any discussions, formal or otherwise, with respect to such a transaction. In addition, we have not been contacted nor have any of our officers, directors or affiliates been contacted by companies regarding a potential business combination, nor have we, or any of our officers, directors or affiliates, directly or indirectly, taken any steps in furtherance of a business combination. Moreover, we have not engaged or retained any agent or other representative to identify or locate any suitable acquisition candidate for us. We will not generate any revenues or income until, at the earliest, after the consummation of a business combination. We cannot assure you as to when or if a business combination will occur. If we are forced to dissolve and liquidate before a business combination our warrants will expire worthless. If we are unable to complete a business combination and are forced to dissolve, liquidate and wind up, there will be no amount payable upon such liquidation with respect to our outstanding warrants and, accordingly, the warrants will expire worthless. As a result, you will have paid the full unit purchase price solely for the shares underlying the units. For a more complete discussion of the effects on our stockholders if we are unable to complete a business combination, see the section below entitled Effecting a business combination Dissolution and liquidation if no business combination. You will not be entitled to protections normally afforded to investors of blank check companies including the ability to receive all interest earned on the amount held in trust. Since the net proceeds of this offering are intended to be used to complete a business combination with a target business that has not been identified, we may be deemed to be a blank check company under the United States securities laws. However, since we will have net tangible assets in excess of $5,000,000 upon the consummation of this offering and will file a Current Report on Form 8-K with the SEC upon consummation of this offering, including audited financial statements demonstrating this fact, we are exempt from rules promulgated by the SEC to protect investors of blank check companies such as Rule 419. Accordingly, investors will not be afforded the benefits or protections of those rules, such as entitlement to all the interest earned on the funds deposited into our trust account. Because we are not subject to Rule 419, a significant amount of the interest earned on the funds deposited in our trust account will be released to us to fund our working capital and will not be available at all to those public stockholders redeeming in connection with a business combination and our units will be immediately tradable. For a more detailed comparison of our offering to offerings under Rule 419, see the section entitled Comparison to offerings of blank check companies below. Table of Contents Because there are numerous companies with a business plan similar to ours seeking to effectuate a business combination, it may be more difficult for us to complete a business combination. Based upon publicly available information, we have identified approximately 117 blank check companies that have completed initial public offerings since August 2003. Of these companies, only 34 have completed a business combination, while five have liquidated or will be liquidating. The remaining approximately 78 blank check companies have more than $8.0 billion in trust and are seeking to complete business acquisitions. Of these companies, only 28 have announced that they have entered into definitive agreements or letters of intent with respect to potential business combinations but have not yet consummated business combinations. In addition, there are 51 blank check companies with more than $7.5 billion in trust that have filed registration statements and will be seeking to complete business combinations. Furthermore, the fact that only 34 of such companies have completed business combinations and only 28 other of such companies have entered into definitive agreements or letters of intent for business combinations, and five have liquidated or will be liquidating, may be an indication that there are only a limited number of attractive targets available to such entities or that many targets are not inclined to enter into a transaction with a blank check company, and therefore we also may not be able to consummate a business combination within the prescribed time period. If we are unable to consummate a business combination within the prescribed time period, our purpose will be limited to dissolving, liquidating and winding up. The fact that we will proceed with the business combination if public stockholders holding less than 30% of the shares sold in this offering exercise their redemption rights, rather than the 20% threshold of most other blank check companies, may hinder our ability to consummate a business combination in the most efficient manner or to optimize our capital structure. Unlike most other blank check offerings which have a 20% redemption threshold, we will proceed with the business combination if public stockholders holding less than 30% of the shares sold in this offering exercise their redemption rights. As a result of our higher redemption threshold, we may have less cash available to complete a business combination. Because we will not know how many stockholders may exercise such redemption rights, we will need to structure a business combination meeting the 80% of our net assets test that requires less cash, or we may need to arrange third party financing to help fund the transaction in case a larger percentage of stockholders exercise their redemption rights than we expect. Alternatively, to compensate for the potential shortfall in cash, we may be required to structure the business combination, in whole or in part, using the issuance of our stock as consideration. Accordingly, this increase in redemption threshold to 30% may hinder our ability to consummate a business combination in the most efficient manner or to optimize our capital structure. The fact that we will proceed with the business combination if public stockholders holding less than 30% of the shares sold in this offering exercise their redemption rights, rather than the 20% threshold of most other blank check companies, will make it more likely that the business combination will be approved, even if a significant number of shareholders do not approve the transaction. Unlike most other blank check offerings which have a 20% redemption threshold, we will proceed with the business combination if public stockholders holding less than 30% of the shares sold in this offering exercise their redemption rights. As a result, this change in the redemption threshold makes it more likely that the business combination will be approved, even if a significant number of shareholders do not approve the transaction. The terms on which we may effect a business combination can be expected to become less favorable as we approach our 24 month deadline. Pursuant to our certificate of incorporation, if we do not effect a business combination within 24 months after the completion of this offering, our corporate existence will cease except for the purpose of winding up our affairs and liquidating. Table of Contents Any entity with which we negotiate, or attempt to negotiate, a business combination, will, in all likelihood, be aware of this time limitation and can be expected to negotiate accordingly. In such event, we may not be able to reach an agreement with any proposed target prior to such period and any agreement that is reached may be on terms less favorable to us than if we did not have the time period restriction set forth above. Additionally, as the 24 month time period draws closer, we may not have the desired amount of leverage in the event any new information comes to light after entering into definitive agreements with any proposed target but prior to consummation of a business transaction. If third parties bring claims against us, the proceeds held in trust could be reduced and the per-share liquidation price received by stockholders from our trust account as part of our stockholder-approved plan of dissolution and liquidation will be less than $7.99 per share. Our placing of funds in trust may not protect those funds from third party claims against us. Although we are obligated to have all significant vendors, prospective target businesses or other entities with which we execute agreements waive any and all right, title, interest or claim of any kind in or to any monies held in our trust account for the benefit of our public stockholders, there is no guarantee that if they execute such agreements that they would be prevented from bringing claims against our trust account including but not limited to fraudulent inducement, breach of fiduciary responsibility and other similar claims, as well as claims challenging the enforceability of the waiver, in each case in order to gain an advantage with a claim against our assets, including the funds held in our trust account. The determination of which vendors will be deemed significant will be made by our management but will include any investment bankers, legal advisors and accounting firms we hire in connection with a business combination. Accordingly, any creditor s claims against the trust account will take priority over the claims of our public stockholders and the per-share liquidation price could be less than the $7.99 per share held in our trust account, plus interest (net of any taxes due on such interest, which taxes, if any, shall be paid from our trust account and net of any amounts released to us as working capital, or to fund costs associated with our plan of dissolution and liquidation if we do not consummate a business combination). If we are unable to complete a business combination and are forced to dissolve and liquidate, Messrs. Lerner, Daras, Baris, Hammer and Lichten will be personally liable to ensure that the proceeds in our trust account are not reduced by the claims of various vendors, prospective target businesses or other entities that are owed money by us for any reason, including for services rendered or products sold to us, to the extent necessary to ensure that such claims do not reduce the amount in our trust account in order to preserve a $7.99 per-share liquidation price. We cannot assure you that these directors and executive officers will be able to satisfy those obligations. These indemnifying officers and directors have agreed to indemnify us for any and all claims to the extent necessary to ensure that the proceeds in the trust account are not reduced by the claims of vendors, service providers and prospective target businesses. Additionally, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, the funds held in our trust account will be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to claims of third parties with priority over the claims of our public stockholders. To the extent bankruptcy claims deplete our trust account, we cannot assure you we will be able to return to our public stockholders the liquidation amounts due them. Certain of our current officers and directors may resign (i) upon consummation of a business combination or (ii) if they are deemed to not be independent based upon the rules of the American Stock Exchange or the Securities and Exchange Act of 1934. As a result, management of the prospective target business may become in charge of our day-to-day operations. We cannot assure you that our assessment of these individuals will prove to be correct. Our ability to effect a business combination will be totally dependent upon the efforts of our officers and directors. The future role of our officers and directors in the target business, however, cannot presently be ascertained. Certain of our current officers and directors may resign (i) upon consummation of a business combination or (ii) if they are deemed to not be independent based upon the rules of the American Stock Exchange or the Securities and Exchange Act of 1934. Although it is possible that some of our officers and Table of Contents directors will remain associated with the target business following a business combination, it is likely that some or all of the management of the target business at the time of the business combination will remain in place. Although we intend to closely scrutinize the management of a prospective target business in connection with evaluating the desirability of effecting a business combination, we cannot assure you that our assessment of management will prove to be correct. Our management will only remain with the combined company after consummation of the business combination if, among other things, they are able to negotiate terms with the combined company as part of any such combination. While any or all members of our management have expressed a willingness to remain associated with us after consummation of the business combination, either as officers or directors, there is the possibility that no members of our management team will remain associated with us after the consummation of the business combination. In addition, there has not been any determination that any specific members of management will remain associated with the combined company post-business combination. It is more likely that some of our members of our management will remain as directors rather than officers post-business combination. However, we do not yet know which members of our management may remain associated with us after consummation of the business combination, and what their roles will be, because such a decision will be based on a variety of factors, including the experience and skill set of the target business management, the experience and skill set of each of our members of management as it relates to the target business, the industry and geographic location of the business post-business combination and the ability of members of our management to negotiate terms with the target business as part of any such business combination. If any members of our management negotiate to be retained post business combination as a condition to any potential business combination, such person s financial interests, including compensation arrangements, could influence such person s motivation in selecting, negotiating and structuring a transaction with a target business, and such negotiations may result in a conflict of interest. Our officers and directors may in the future become affiliated with entities engaged in business activities similar to those intended to be conducted by us and accordingly, may have conflicts of interest in determining which entity a particular business opportunity should be presented to. None of our officers or directors have ever been associated with a blank check company. However, our officers and directors may in the future become affiliated with entities, other than blank check companies, engaged in business activities similar to those intended to be conducted by us. Additionally, our officers and directors may become aware of business opportunities which may be appropriate for presentation to us as well as the other entities to which they owe fiduciary duties. Accordingly, they may have conflicts of interest in determining to which entity a particular business opportunity should be presented. For a more complete discussion of our management s affiliations and the potential conflicts of interest that you should be aware of, see the sections below entitled Management Directors and Executive Officers and Management Conflicts of Interest. We cannot assure you that these conflicts will be resolved in our favor. Our stockholders may be held liable for claims by third parties against us to the extent of distributions received by them. Our certificate of incorporation provides that we will continue in existence only until 24 months from the date of this prospectus. If we have not completed a business combination by such date and amended this provision in connection therewith, pursuant to the Delaware General Corporation Law, our corporate existence will cease except for the purposes of winding up our affairs and liquidating. Under Sections 280 through 282 of the Delaware General Corporation Law, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. If the corporation complies with certain procedures intended to ensure that it makes reasonable provision for all claims against it, including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary Table of Contents of the dissolution. However, it is our intention to make liquidating distributions to our stockholders within 10 business days after the 24 month period and, therefore, we do not intend to comply with those procedures. Because we will not be complying with these procedures, we are required, pursuant to Section 281(b) of the Delaware General Corporation Law, to adopt a plan that will provide for our payment, based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against us within the subsequent 10 years. However, because we are a blank check company, rather than an operating company, and our operations will be limited to searching for prospective target businesses to acquire, the only likely claims to arise would be from our vendors (such as accountants, lawyers, investment bankers) or potential target businesses. As described above, we intend to have all significant vendors, service providers and prospective target businesses execute agreements with us waiving any and all right, title, interest or claim of any kind in or to any monies held in our trust account. Based on representations made to us by our indemnifying officers and directors, we currently believe that they have substantial means to fund any shortfall in our trust account to satisfy their foreseeable indemnification obligations, but we have not asked them to reserve for such eventuality. The indemnification obligations may be substantially greater than our indemnifying officers and directors currently foresee or expect. Their financial resources may also deteriorate in the future. Hence, we cannot assure you that our officers and directors will be able to satisfy those obligations. In addition, because we will not be complying with Section 280, our public stockholders could potentially be liable for any claims to the extent of distributions received by them in a dissolution and any such liability of our stockholders will likely extend beyond the third anniversary of such dissolution. Accordingly, we cannot assure you that third parties will not seek to recover from our public stockholders amounts owed to them by us. We will dissolve and liquidate if we do not consummate a business combination. Pursuant to, among other documents, our certificate of incorporation, if we do not complete a business combination within 24 months after the consummation of this offering our corporate existence will cease except for purposes of winding-up our affairs and liquidating. We view this obligation to dissolve and liquidate as an obligation to our public stockholders and neither we nor our board of directors will take any action to amend or waive any provision of our certificate of incorporation to allow us to survive for a longer period of time if it does not appear we will be able to consummate a business combination within the foregoing time period. Upon dissolution, we will distribute to all of our public stockholders, in proportion to their respective equity interest, an aggregate sum equal to the amount in our trust account (net of taxes payable and that portion of the interest earned previously released to us). Our initial stockholders have waived their rights to participate in any liquidation distribution with respect to their initial shares and have agreed to vote in favor of any plan of dissolution and liquidation which we will present to our stockholders for vote. There will be no distribution from our trust account with respect to our warrants which will expire worthless. We will pay the costs of our dissolution and liquidation and we estimate such costs to be approximately $15,000. We believe there should be sufficient funds available either outside of our trust account or made available to us out of the net interest earned on our trust account and released to us as working capital, to fund this cost, although we cannot give any assurances thereof. To the extent sufficient funds are not available, Messrs. Lerner, Daras, Baris, Hammer and Lichten have agreed to indemnify us, however, we cannot assure you that they will be able to satisfy these obligations. Upon notice from us, the trustee of our trust account will liquidate the investments constituting our trust account and will turn over the proceeds to our transfer agent for distribution to our public stockholders as part of our stockholder-approved plan of dissolution and liquidation. Concurrently, we shall pay, or reserve for payment, from interest released to us from our trust account if available, our liabilities and obligations, although we cannot give you assurances that there will be sufficient funds for such purpose. The amounts held in our trust account may be subject to claims by third parties, such as vendors, prospective target business or other entities, if we do not obtain valid and enforceable waivers. Table of Contents We may choose to redeem our outstanding warrants at a time that is disadvantageous to our warrant holders. Subject to there being a current prospectus under the Securities Act of 1933 with respect to the shares of common stock issuable upon exercise of the warrants, we may redeem the warrants issued as a part of our units at any time after the warrants become exercisable in whole and not in part, at a price of $.01 per warrant, upon a minimum of 30 days prior written notice of redemption, if and only if, the last sales price of our common stock equals or exceeds $11.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. Redemption of the warrants could force the warrant holders (i) to exercise the warrants and pay the exercise price thereafter at a time when it may be disadvantageous for the holders to do so, (ii) to sell the warrants at the then current market price when they might otherwise wish to hold the warrants, or (iii) to accept the nominal redemption price which, at the time the warrants are called for redemption, is likely to be substantially less than the market value of the warrants. Although we are required to use our best efforts to have an effective registration statement covering the issuance of the shares underlying the warrants at the time that our warrant holders exercise their warrants, we cannot guarantee that a registration statement will be effective, in which case our warrant holders may not be able to exercise our warrants and the warrants may expire worthless. Holders of our warrants will be able to exercise the warrant only if (i) a current registration statement under the Securities Act of 1933 relating to the shares of our common stock underlying the warrants is then effective and (ii) such shares are qualified for sale or exempt from qualification under the applicable securities law of the states in which the various holders of warrants reside. Although we have undertaken in the warrant agreement, and therefore have a contractual obligation, to use our best efforts to maintain a current registration statement covering the shares underlying the warrants following completion of this offering to the extent required by federal securities law, and we intend to comply with such undertaking, we cannot assure you that we will be able to do so. In addition, we have agreed to use our reasonable efforts to register the shares underlying the warrants under the blue sky laws of the states of residence of the exercising warrant holders, to the extent an exemption is not available. The value of the warrants may be greatly reduced if a registration statement covering the shares issuable upon the exercise of the warrants is not kept current or if the securities are not qualified, or exempt from qualification, in the states in which the holders of warrants reside. Holders of warrants who reside in jurisdictions in which the shares underlying the warrants are not qualified and in which there is no exemption will be unable to exercise their warrants and would either have to sell their warrants in the open market or allow them to expire unexercised. We are not obligated to pay cash or other consideration to the holders of the warrants in such circumstances and the warrants can become, and later expire, worthless. If the warrants expire worthless, you will have paid the full unit purchase price solely for the shares underlying the units. If and when the warrants become redeemable by us, we may exercise our redemption right even if we are unable to qualify the underlying securities for sale under all applicable state securities laws. Existing shareholders who purchased warrants in the private placement may be able to exercise their warrants at a time when the purchasers in the initial public offering may not. Because the founders warrants sold in the pre-offering private placement were originally issued pursuant to an exemption from registration requirements under the federal securities laws, the founders warrants are exercisable even if, at the time of exercise, a prospectus relating to the common stock issuable upon exercise of such warrants is not current. As described above, the holders of the warrants purchased in this offering will not be able to exercise them unless we have a current registration statement covering the shares issuable upon their exercise. Table of Contents We may issue shares of our capital stock or debt securities to complete a business combination, which would reduce the equity interest of our stockholders and likely cause a change in control of our ownership. Our certificate of incorporation authorizes the issuance of up to 49,000,000 shares of common stock, par value $.0001 per share, and 1,000,000 shares of preferred stock, par value $.0001 per share. Immediately after this offering (assuming no exercise of the underwriters over-allotment option), there will be 28,775,000 authorized but unissued shares of our common stock available for issuance (after appropriate reservation for the issuance of shares upon full exercise of our outstanding warrants and the underwriters unit purchase option) and all of the 1,000,000 shares of preferred stock available for issuance. Although we have no commitments as of the date of this offering to issue our securities, we may issue a substantial number of additional shares of our common stock or preferred stock, or a combination of common and preferred stock, to complete a business combination. The issuance of additional shares of our common stock or any number of shares of our preferred stock: may significantly reduce the equity interest of investors in this offering; will likely cause a change in control if a substantial number of our shares of common stock are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and most likely also result in the resignation or removal of our present officers and directors; and may adversely affect prevailing market prices for our common stock. Additionally, parts of the financial services industry are capital intensive, traditionally using substantial amounts of indebtedness to finance acquisitions and working capital needs. If we finance the purchase of assets or operations through the issuance of debt securities, it could result in: default and foreclosure on our assets if our operating revenues after a business combination were insufficient to pay our debt obligations; acceleration of our obligations to repay the indebtedness even if we have made all principal and interest payments when due if the debt security contained covenants that required the maintenance of certain financial ratios or reserves and any such covenant were breached without a waiver or renegotiation of that covenant; our immediate payment of all principal and accrued interest, if any, if the debt security was payable on demand; and our inability to obtain additional financing, if necessary, if the debt security contained covenants restricting our ability to obtain additional financing while such security was outstanding. For a more complete discussion of the possible structure of a business combination, see the section below entitled Effecting a business combination Selection of a target business and structuring of a business combination. We may have insufficient resources to cover our operating expenses and the expenses of consummating a business combination. We have reserved approximately $90,000 (not including up to $500,000 which can be drawn from our limited recourse revolving line of credit at the federal funds target interest rate (4.75% as of September 21, 2007) and up to $1,100,000 of interest we may earn on funds in our trust account, which we are entitled to use in order to cover our operating expenses and our costs associated with a stockholder-approved plan of dissolution and liquidation if we do not consummate a business combination) from the proceeds of this offering and the pre-offering private placement of the founders warrants to cover our operating expenses for the next 24 months and to cover the expenses incurred in connection with a business combination. This amount is based on management s estimates of the costs needed to fund our operations for the next 24 months and consummate a business combination. Those estimates may prove inaccurate, especially if a portion of the available proceeds is used to make a down payment or pay exclusivity or similar fees in connection with a Table of Contents business combination or if we expend a significant portion of the available proceeds in pursuit of a business combination that is not consummated. If we do not have sufficient proceeds available to fund our expenses, we may be forced to obtain additional financing, either from our management or the existing stockholders or from third parties. We may not be able to obtain additional financing and our existing stockholders and management are not obligated to provide any additional financing. If we do not have sufficient proceeds and cannot find additional financing, we may be forced to dissolve and liquidate as part of our stockholder-approved plan of dissolution and liquidation prior to consummating a business combination. Our ability to effect a business combination and to execute any potential business plan afterwards will be dependent upon the efforts of our officers and directors some of whom may join us following a business combination and whom we would have only a limited ability to evaluate. Our ability to effect a business combination will be totally dependent upon the efforts of our officers and directors. While any or all members of our management may remain associated with us after consummation of the business combination, either as officers or directors, there is the possibility that no members of our management team will remain associated with us after the consummation of the business combination. In addition, there has not been any determination that any specific members of management will remain associated with the combined company post-business combination. It is more likely that some of our members of our management will remain as directors rather than officers post-business combination. However, we do not yet know which members of our management may remain associated with us after consummation of the business combination, and what their roles will be, because such a decision will be based on a variety of factors, including the experience and skill set of the target business management, the experience and skill set of each of our members of management as it relates to the target business, the industry and geographic location of the business post-business combination and the ability of members of our management to negotiate terms with the target business as part of any such business combination. In addition, we may employ other personnel following the business combination. While we intend to closely scrutinize any additional individuals we engage after a business combination, we cannot assure you that our assessment of these individuals will prove to be correct. Moreover, our current management will only be able to remain with the combined company after the consummation of a business combination if they are able to negotiate terms with the combined company as part of any such combination. If we acquired a target business in an all-cash transaction, it would be more likely that current members of management would remain with us if they chose to do so. If a business combination were structured as a merger whereby the stockholders of the target company were to control the combined company following a business combination, it may be less likely that our management would remain with the combined company unless it was negotiated as part of the transaction via the acquisition agreement, an employment or consulting agreement or other arrangement. The determination to remain as officers of the resulting business will be determined prior to the completion of the transaction and will depend upon the appropriateness or necessity of our current management to remain. In making the determination as to whether our current management should remain with us following the business combination, management will analyze the experience and skill set of the target business management and negotiate as part of the business combination that certain members of our current management remain if it is believed that it is in the best interests of the combined company post-business combination. If our management negotiates to be retained post-business combination as a condition to any potential business combination, such negotiations may result in a conflict of interest. If any of the underwriters or Scura, Rise Partners LLC provides services to us after this offering, we may pay them fair and reasonable fees that would be determined at that time in arm s length negotiations. Any such negotiations could result in a conflict of interest. Although we are not under any contractual obligation to engage any of the underwriters or Scura, Rise Partners LLC, a financial advisory firm, to provide any services for us after this offering, and have no present intent to do so, any of the underwriters or Scura, Rise Partners LLC may, among other things, introduce us to potential target businesses or assist us in raising additional capital, as needs may arise in the future. If any of the underwriters or Scura, Rise Partners LLC provide services to us after this offering, we may pay such entity fair and reasonable fees that would be determined at that time in arm s length negotiations. Any such negotiations could result in a conflict of interest. Table of Contents None of our officers or directors has ever been associated with a blank check company which could adversely affect our ability to consummate a business combination. None of our officers or directors has ever been associated with a blank check company. Accordingly, you may not have sufficient information with which to evaluate the ability of our management team to identify and complete a business combination using the proceeds of this offering and the pre-offering private placement of the founders warrants. Our management s lack of experience in operating a blank check company could adversely affect our ability to consummate a business combination and force us to dissolve and liquidate our trust account to our public stockholders as part of our stockholder-approved plan of dissolution and liquidation. Our officers and directors may allocate their time to other businesses thereby causing conflicts of interest in their determination as to how much time to devote to our affairs. This could have a negative impact on our ability to consummate a business combination. Our officers and directors are not required to commit their full time to our affairs, which may result in a conflict of interest in allocating their time between our operations and other businesses. We do not intend to have any full time employees prior to the consummation of a business combination. Each of our officers are engaged in several other business endeavors and are not obligated to contribute any specific number of hours per week to our affairs. If our officers other business affairs require them to devote more substantial amounts of time to such affairs, it could limit their ability to devote time to our affairs and could have a negative impact on our ability to consummate a business combination. For a discussion of potential conflicts of interest that you should be aware of, see the section below entitled Management Conflicts of Interest. We cannot assure you that these conflicts will be resolved in our favor. All of our directors own shares of our common stock which will not participate in the liquidation of our trust account as part of our stockholder-approved plan of dissolution and liquidation and therefore they may have a conflict of interest in determining whether a particular target business is appropriate for a business combination. All of our officers and directors own our stock and all of our officers and directors will own, either directly or indirectly, warrants purchased in a private placement consummated prior to this offering, but have waived their right to the liquidation of our trust account as part of our stockholder-approved plan of dissolution and liquidation with respect to those shares (including shares issuable upon exercise of the warrants) upon the liquidation of our trust account to our public stockholders if we are unable to complete a business combination. The shares and warrants owned by these persons (including our officers and directors) will be worthless if we do not consummate a business combination. The personal and financial interests of these directors may influence their motivation in identifying and selecting a target business and completing a business combination in a timely manner. Consequently, these directors discretion in identifying and selecting a suitable target business may result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination are appropriate and in our stockholders best interest. Our existing stockholders will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the amount available outside our trust account unless the business combination is consummated and therefore they may have a conflict of interest. Our existing stockholders will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the amount available outside our trust account, unless the business combination is consummated. The amount of available proceeds is based on management estimates of the capital needed to fund our operations for the next 24 months and to consummate a business combination. Those estimates may prove to be inaccurate, especially if a portion of the available proceeds is used to make a down payment or pay exclusivity or similar fees in connection with a business combination or if we expend a significant portion in pursuit of an acquisition that is not consummated. The financial interest of such persons could influence their motivation in selecting a target business and thus, there may be a conflict of interest when determining whether a particular business combination is in the stockholders best interest. Table of Contents If our common stock becomes subject to the Securities and Exchange Commission s penny stock rules, broker-dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected. If at any time we have net tangible assets of less than $5,000,000 and our common stock has a market price per share of less than $5.00, transactions in our common stock may be subject to the penny stock rules promulgated under the Securities Exchange Act of 1934, as amended. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must: make a special written suitability determination for the purchaser; receive the purchaser s written agreement to a transaction prior to sale; provide the purchaser with risk disclosure documents which identify certain risks associated with investing in penny stocks and which describe the market for these penny stocks as well as a purchaser s legal remedies; and obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a penny stock can be completed. If our common stock becomes subject to these rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected. As a result, the market price of our securities may be depressed, and you may find it more difficult to sell our securities. It is probable our initial business combination will be with a single target business, which may cause us to be solely dependent on a single business and a limited number of products or services. Additionally, we may face obstacles to completing simultaneous acquisitions. Our initial business combination must be with a business or businesses with a collective fair market value of at least 80% of the amount in our trust account (excluding $2,400,000 of deferred compensation (or $2,760,000 if the over-allotment option is exercised in full) to be held for the benefit of Morgan Joseph Co. and taxes payable) at the time of such acquisition, which amount is required as a condition to the consummation of our initial business combination. We may not be able to acquire more than one target business because of various factors, including the amount of funds available to consummate a business combination, possible complex accounting issues, which would include generating pro forma financial statements reflecting the operations of several target businesses as if they had been combined, and numerous logistical issues, which could include attempting to coordinate the timing of negotiations, proxy statement disclosure and closings with multiple target businesses. In addition, we may not have sufficient management, financial and other resources to effectively investigate the business and affairs of multiple acquisition candidates simultaneously or to negotiate the terms of multiple acquisition agreements at the same time which could result in a failure to properly evaluate multiple acquisitions. Further, we would also be exposed to the risk that conditions to closings with respect to the acquisition of one or more of the target businesses would not be satisfied bringing the fair market value of the initial business combination below the required fair market value of 80% of the amount in our trust account (excluding $2,400,000 of deferred compensation (or $2,760,000 if the over-allotment option is exercised in full) to be held for the benefit of Morgan Joseph Co. and taxes payable) threshold. Accordingly, while it is possible we may attempt to effect our initial business combination with more than one target business, we are more likely to choose a single target business if deciding between one target business meeting such 80% threshold and comparable multiple target business candidates collectively meeting the 80% threshold. Consequently, it is probable that, unless the purchase price consists substantially of our equity, we will have the ability to complete only the initial business combination Table of Contents with the proceeds of this offering and the pre-offering private placement of the founders warrants. Accordingly, the prospects for our success may be: solely dependent upon the performance of a single business; or dependent upon the development or market acceptance of a single or limited number of products or services. In this case, we will not be able to diversify our operations or benefit from the possible spreading of risks or offsetting of losses, unlike other entities which may have the resources to complete several business combinations in different industries or different areas of a single industry. The ability of our stockholders to exercise their redemption rights may not allow us to effectuate the most desirable business combination or optimize our capital structure. At the time we seek stockholder approval of any business combination, we will offer each public stockholder the right to have such stockholder s shares of common stock redeemed for cash if the stockholder votes against the business combination and the business combination is approved and completed. Accordingly, if our business combination requires us to use substantially all of our cash to pay the purchase price, because we will not know how many stockholders may exercise such redemption rights, we may either need to reserve part of our trust account for possible payment upon such redemption, or we may need to arrange third party financing to help fund our business combination in case a larger percentage of stockholders exercise their redemption rights than we expected. Therefore, we may not be able to consummate a business combination that requires us to use all of the funds held in our trust account as part of the purchase price, or we may end up having a leverage ratio that is not optimal for our business combination. This may limit our ability to effectuate the most attractive business combination available to us. We will not be required to obtain an opinion from an investment banking firm as to the fair market value of a proposed business combination if our board of directors independently determines that the target business has sufficient fair market value. The initial target business that we acquire must have a fair market value equal to at least 80% of the amount in our trust account (excluding $2,400,000 of deferred compensation (or $2,760,000 if the over-allotment is exercised in full) to be held for the benefit of Morgan Joseph Co. and taxes payable) at the time of such acquisition. There is no limitation on our ability to raise funds privately or through loans that would allow us to acquire a target business or businesses with a fair market value in an amount considerably greater than 80% of the amount in our trust account (excluding $2,400,000 of deferred compensation (or $2,760,000 if the over-allotment is exercised in full) to be held for the benefit of Morgan Joseph Co. and taxes payable) at the time of such acquisition. We have not had any preliminary discussions, or made any agreements or arrangements, with respect to financing arrangements with any third party. The fair market value of such business will be determined by our board of directors based upon standards generally accepted by the financial community, such as actual and potential sales, earnings and cash flow and book value, and the price for which comparable businesses have recently been sold. If our board is not able to independently determine that the target business has a sufficient fair market value, we will obtain an opinion from an unaffiliated, independent investment banking firm which is a member of the National Association of Securities Dealers, Inc., or NASD, with respect to the satisfaction of such criteria. We will not be required to obtain an opinion from an investment banking firm as to the fair market value of a proposed business combination if our board of directors independently determines that the target business has sufficient fair market value. Our initial business combination will be considerably larger than management s recent investment experience at Inter-Atlantic Group. Inter-Atlantic Group has not recently made investments in excess of $5 million. By comparison, our amended and restated certificate of incorporation requires that our initial business combination be with a business or businesses that have a fair market value at least equal to 80% of the balance in the trust account (less deferred underwriting compensation of $2,400,000, or $2,760,000 if the over-allotment is exercised in Table of Contents full and taxes payable). Based on the net offering proceeds of this offering and the sale of the founders warrants held in the trust account being $57,500,000, we would be required to effect an initial business combination with a business that has a fair market value of at least $46,000,000. As a result, management s recent investment experience at Inter-Atlantic Group may not be useful in analyzing our potential target businesses. We may be unable to obtain additional financing, if required, to complete a business combination or to fund the operations and growth of the target business, which could compel us to restructure the transaction or abandon a particular business combination. Although we believe that the net proceeds of this offering will be sufficient to allow us to consummate a business combination, in as much as we have not yet identified any prospective target business, we cannot ascertain the capital requirements for any particular transaction. If the net proceeds of this offering prove to be insufficient, either because of the size of the business combination or the depletion of the available net proceeds in search of a target business, or because we become obligated to redeem for cash a significant number of shares from dissenting stockholders (which in our case may be up to 30% of the shares held by public stockholders, rather than the 20% threshold of most other blank check companies), we will be required to seek additional financing. We cannot assure you that such financing would be available on acceptable terms, if at all. To the extent that additional financing proves to be unavailable when needed to consummate a particular business combination, we would be compelled to restructure the transaction or abandon that particular business combination and seek an alternative target business candidate. In addition, if we consummate a business combination, we may require additional financing to fund the operations or growth of the target business. The failure to secure additional financing could have a material adverse effect on the continued development or growth of the target business. None of our officers, directors or stockholders is required to provide any financing to us in connection with or after a business combination. Our existing stockholders, including our officers and directors, control a substantial interest in us and thus may influence certain actions requiring stockholder vote. Upon consummation of this offering, our existing stockholders (including all of our officers and directors) will collectively own 20% of our issued and outstanding shares of common stock if no overallotment is exercised. None of our other existing stockholders, officers and directors has indicated to us that they intend to purchase units in this offering, or units or warrants on the open market following the offering. For a more complete discussion, please see the section of this prospectus entitled Principal Stockholders. We will be dependent upon interest earned on our trust account and our subordinated revolving line of credit to fund our search for a target company and consummation of a business combination. Of the net proceeds of this offering, only $90,000 is estimated to be available to us initially outside our trust account to fund our working capital requirements. We will be dependent upon our $500,000 limited recourse revolving line of credit and up to $1,100,000 of interest earned on the proceeds held in our trust account (net of taxes payable) to provide us with the additional working capital we will need to search for a target company and consummate a business combination. While we are entitled to a portion of the interest earned on our trust account in excess of the amount necessary to allow for a $7.99 per share liquidation price to our public stockholders for such purpose, if interest rates were to decline substantially, we may not have sufficient funds available to complete a business combination. In such event, we would need to borrow funds from our insiders or others or be forced to dissolve, liquidate and wind up. Our existing stockholders paid an aggregate of $25,000, or approximately $.0133 per share, for their shares and, accordingly, you will experience immediate and substantial dilution from the purchase of our common stock. The difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering and the pre-offering private placement of the founders warrants constitute the dilution to you and the other investors in this offering. The fact that Table of Contents our existing stockholders acquired their shares of common stock at a nominal price has significantly contributed to this dilution. Assuming the offering and the pre-offering private placement of the founders warrants are completed, you and the other new investors will incur an immediate and substantial dilution of approximately 29.25% or $2.34 per share (the difference between the pro forma net tangible book value per share of $5.66, and the initial offering price of $8.00 per unit). Our founders warrants are non-redeemable provided they are held by the initial purchasers or their permitted transferees, which could provide such purchasers the ability to realize a larger gain than our public warrant holders. The warrants held by our public warrant holders (including the warrants subject to the underwriters unit purchase option) may be called for redemption at any time after the warrants become exercisable: in whole and not in part; at a price of $.01 per warrant; upon a minimum of 30 days prior written notice of redemption to each warrant holder; if, and only if, the last sale price of the shares equals or exceeds $11.50 per share, for any 20 trading days within a 30 trading day period ending on the third business day prior to the notice of redemption to warrant holders; and if there is an effective registration statement allowing for the resale of shares underlying the warrants. As a result of the founders warrants not being subject to the redemption features that our publicly-held warrants are subject to, holders of the founders warrants, or their permitted transferees, could realize a larger gain than our public warrant holders. Our outstanding warrants and unit purchase option may have an adverse effect on the market price of our shares and make it more difficult to effect a business combination. In connection with this offering, as part of the units (but not including any over-allotments issued to the underwriters), and in connection with the sale of 2,300,000 founders warrants, we will be issuing warrants to purchase 7,500,000 shares. We will also issue an option to purchase 525,000 units to Morgan Joseph Co. which, if exercised, will result in the issuance of an additional 525,000 shares and 525,000 warrants. To the extent we issue shares to effect a business combination, the potential for the issuance of substantial numbers of additional shares upon exercise of these warrants and option could make us a less attractive acquisition vehicle in the eyes of a target business as such securities, when exercised, will increase the number of issued and outstanding shares and reduce the value of the shares issued to complete the business combination. Accordingly, our warrants and Morgan Joseph Co. s unit purchase option may make it more difficult to effectuate a business combination or increase the cost of the target business. Additionally, the sale, or even the possibility of sale, of the shares underlying the warrants and unit purchase option could have an adverse effect on the market price for our securities or on our ability to obtain future public financing. If and to the extent these warrants and unit purchase option are exercised, you may experience dilution to your holdings. If our existing stockholders and purchasers of the founders warrants exercise their registration rights, it may have an adverse effect on the market price of our shares and the existence of these rights may make it more difficult to effect a business combination. Our existing stockholders are entitled to require us to register the resale of their shares at any time after the date on which their shares are released from escrow, which, except in limited circumstances, will not be before one year from the consummation of a business combination. In addition, the holders of the founders warrants can demand that we register those warrants and the underlying shares at anytime after the date on which their shares are released from escrow, which, except in limited circumstances, will not be before the consummation of a business combination. If our existing stockholders and the holders of the founders warrants exercise their registration rights with respect to all of their shares and warrants, then there will be an Table of Contents additional 1,875,000 shares and 2,300,000 warrants or up to 2,300,000 shares issued upon exercise of the founders warrants that will be eligible for trading in the public market. The presence of this additional number of securities eligible for trading in the public market may have an adverse effect on the market price of our shares. In addition, the existence of these rights may make it more difficult to effectuate a business combination or increase the cost of the target business, as the stockholders of the target business may be discouraged from entering into a business combination with us or will request a higher price for their securities as a result of these registration rights and the potential future effect their exercise may have on the trading market for our shares. In the event that our securities are listed on the American Stock Exchange, the American Stock Exchange may delist our securities from trading on its exchange, which could limit investors ability to effect transactions in our securities and subject us to additional trading restrictions. We anticipate that our securities will be listed on the American Stock Exchange, a national securities exchange, upon consummation of this offering. We cannot assure you that our securities, if listed, will continue to be listed on the American Stock Exchange in the future. In addition, in connection with a business combination, it is likely that the American Stock Exchange may require us to file a new listing application and meet its initial listing requirements, as opposed to its more lenient continued listing requirements. We cannot assure you that we will be able to meet those initial listing requirements at that time. If the American Stock Exchange delists our securities from trading on its exchange in the future, we could face significant material adverse consequences, including: a limited availability of market quotations for our securities; a determination that our common stock is a penny stock, which would require brokers trading in our common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock; a more limited amount of news and analyst coverage for our company; a decreased ability to issue additional securities or obtain additional financing in the future; a decreased ability of our securityholders to sell their securities in certain states; and restrictions on the nature of our investments. There is currently no market for our securities and a market for our securities may not develop, which could adversely affect the liquidity and price of our securities. As of the date of this prospectus there is no market for our securities. Therefore, stockholders should be aware that they cannot benefit from information about prior market history as to their decisions to invest which means they are at further risk if they invest. In addition, the price of the securities, after the offering, can vary due to general economic conditions and forecasts, our general business condition and the release of our financial reports. If we are deemed to be an investment company, we may be required to institute burdensome compliance requirements and our activities may be restricted, which may make it difficult for us to complete a business combination. We may be deemed to be an investment company, as defined under Sections 3(a)(1)(A) and (C) of the Investment Company Act of 1940, as amended, because, following the offering and prior to the consummation of a business combination, we may be viewed as engaging in the business of investing in securities (in this case United States government securities as described below) having a value exceeding 40% of our total assets. If we are deemed to be an investment company under the Investment Company Act of 1940, our Table of Contents activities may be restricted which, among other problems, may make it difficult for us to complete a business combination. Such restrictions include: restrictions on the nature of our investments; and restrictions on the issuance of securities. In addition, we may have imposed upon us burdensome requirements, including: registration as an investment company; adoption of a specific form of corporate structure; and reporting, record keeping, voting, proxy and disclosure requirements and other rules and regulations. However, we do not believe that our anticipated principal activities will subject us to the Investment Company Act of 1940. To this end, the proceeds held in trust may only be invested by the trust agent in government securities with specific maturity dates or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940, as amended, or the Investment Company Act. By restricting the investment of the proceeds to these instruments, we intend to avoid being deemed an investment company within the meaning of the Investment Company Act of 1940. This offering is not intended for persons who are seeking a return on investments in government securities. Our trust account and the purchase of government securities for our trust account is intended as a holding place for funds pending the earlier to occur of either: (i) the consummation of our primary business objective, which is a business combination, or (ii) absent a business combination, our dissolution and return of the funds held in this trust account to our public stockholders as part of our plan of dissolution and liquidation. Notwithstanding our belief that we are not required to comply with the requirements of such act, in the event that the stockholders do not approve a plan of dissolution and liquidation and the funds remain in our trust account for an indeterminable amount of time, we may be considered to be an investment company and thus required to comply with such act. If we were deemed to be subject to the act, compliance with these additional regulatory burdens would require additional expense that we have not allotted for. Since we have not currently selected a prospective target business with which to complete a business combination, investors in this offering are unable to currently ascertain the merits or risks of the target business operations. Since we have not yet identified a prospective target, investors in this offering have no current basis to evaluate the possible merits or risks of the target business operations. To the extent we complete a business combination with a financially unstable company, an entity in its development stage and/or an entity subject to unknown or unmanageable liabilities, we may be affected by numerous risks inherent in the business operations of those entities. Although our management will endeavor to evaluate the risks inherent in a particular target business, we cannot assure you that we will properly ascertain or assess all of the significant risk factors. We also cannot assure you that an investment in our units will not ultimately prove to be less favorable to investors in this offering than a direct investment, if an opportunity were available, in a target business. For a more complete discussion of our selection of a target business, see the section below entitled Effecting a business combination We have not identified a target business. Since we are not an operating company, the pricing of the units in this offering is relatively arbitrary. Prior to this offering there has been no public market for any of our securities. The public offering price of the units and the terms of the warrants were negotiated between us and Morgan Joseph Co. Factors considered in determining the prices and terms of the units, including the common stock and warrants underlying the units, include: the history and prospects of companies whose principal business is the acquisition of other companies; prior offerings of those companies; our prospects for acquiring an operating business at attractive values; Table of Contents our capital structure; an assessment of our management and their experience in identifying operating companies; general conditions of the securities markets at the time of the offering; and other factors as were deemed relevant. However, although these factors were considered, the determination of our offering price is more arbitrary than the pricing of securities for an operating company in a particular industry since the underwriters are unable to compare our financial results and prospects with those of public companies operating in the same industry. Since we are not an operating company, upon consummation of a business combination, we will not benefit from the synergies typically associated with many business combinations, and as a result, potential target companies may favor other potential purchasers over us. A benefit of many business combinations is economies of scale in which the acquiring company can reduce costs by eliminating redundant operations and utilizing the resources of both entities to run the combined company more efficiently. Because we are not an operating company, upon consummation of a business combination, we will not benefit from these and other synergies often associated with business combinations and, as a result, potential target companies may favor other potential purchasers over us. Risks Related To Select Financial Services Organizations As mentioned elsewhere herein, we were formed for the purpose of acquiring a company in the financial services industry or businesses deriving a majority of their revenues from providing services to financial services companies, including for example, payment processing companies and technology providers. We may be subject to significant regulatory requirements in connection with our efforts to acquire a financial services organizations. Acquisitions of financial services organizations are often subject to significant regulatory requirements and consents, and we will not be able to consummate a business combination with certain types of financial services organizations without complying with applicable laws and regulations and obtaining required governmental or client consents. For example, if we were to attempt to acquire or acquire control of an investment management firm, we would have to obtain consents of the firm s investment management clients or enter into new contracts with them, and there is no assurance that we would be able to obtain such consents or enter into new contracts. If our acquisition target were an insurance company, state insurance commissioners in the states where the insurance company does business would review an acquisition transaction and could prevent it by withholding their consent. The acquisition of a business in other sectors of the financial services industry may require similar approvals or consents. We may not receive any such required approvals or we may not receive them in a timely manner, including as a result of factors or matters beyond our control. Financial services organizations often face substantial on-going regulation and, after acquiring a financial services organization, we may face legal liability and reduced revenues and profitability if our services are not regarded as compliant or for other reasons. In addition to the regulatory requirements for banking organizations, many financial services organizations are subject to extensive regulation. Many regulators, including United States government agencies and self-regulatory organizations, as well as state securities commissions and attorneys general, are empowered to conduct administrative proceedings and investigations that can result in, among other things, censure, fine, the issuance of cease-and-desist orders, prohibitions against engaging in some lines of business or the suspension or expulsion of a broker-dealer or investment adviser. The requirements imposed by regulators are designed to ensure the integrity of the financial markets and to protect customers and other third parties who deal with financial services firms and are not designed to protect our stockholders. Table of Contents Governmental and self-regulatory organizations impose and enforce regulations on financial services companies. United States self-regulatory organizations adopt rules, subject to approval by the SEC, that govern aspects of the financial services industry and conduct periodic examinations of the operations of registered broker-dealers and investment advisors. This regulatory environment is also subject to modifications and further regulations. New laws or regulations or changes in the enforcement of existing laws or regulations applicable to us also may adversely affect our business, and our ability to function in this environment will depend on our ability to constantly monitor and react to these changes. After the consummation of a business combination, we may face strong competition from financial services firms, many of whom may have the ability to offer clients a wider range of products and services than we may be able to offer, which could lead to pricing pressures that could materially adversely affect our revenue and profitability. After consummation of a business combination in the financial services industry, we may compete with other firms both domestic and foreign in a number of areas, including the quality of our employees, transaction execution, our products and services, innovation, reputation and price. We may fail to attract new business and we may lose clients if, among other reasons, we are not able to compete effectively. We will also face significant competition as the result of consolidation in this industry. In the past several years, there has been substantial consolidation and convergence among companies in the financial services industry. In particular, a number of large commercial banks, insurance companies and other broad-based financial services firms have merged with other financial institutions. Many of these firms have the ability to offer a wide range of products such as loans, deposit-taking and insurance, brokerage, investment management and investment banking services, which may enhance their competitive position. They also have the ability to support investment banking with commercial banking, insurance and other financial services revenue in an effort to gain market share, which could result in pricing pressure on other businesses. The passage of the Gramm-Leach-Bliley Act in 1999 reduced barriers to large institutions providing a wide range of financial services products and services. We believe, in light of increasing industry consolidation and the regulatory overhaul of the financial services industry, that competition will continue to increase from providers of financial services products. Operational risks may disrupt our business, result in regulatory action against us or limit our growth. Financial services businesses are dependent on communications and information systems, including those of vendors. Any failure or interruption of these systems, whether caused by fire, other natural disaster, power or telecommunications failure, act of terrorism or war or otherwise, could materially adversely affect operating results. After the consummation of a business combination, we will need to continue to make investments in new and enhanced information systems. Interruption or loss of our information processing capabilities or adverse consequences from implementing new or enhanced systems could have a material adverse effect on our business and the price of our common stock and warrants. As our information system providers revise and upgrade their hardware, software and equipment technology, we may encounter difficulties in integrating these new technologies into our business. Additionally, our systems may be subject to infiltration by unauthorized persons. If our systems or facilities were infiltrated and damaged by unauthorized persons, our clients could experience data loss, financial loss and significant business interruption. If that were to occur, it could have a material adverse effect on our business, financial condition and results of operations. The financial services industry has inherent risks, which may affect our net income and revenues. The financial services business is, by its nature, subject to numerous and substantial risks. Consequently, our net income and revenues are likely to be subject to wide fluctuations, reflecting the effect of many factors, including: general economic conditions; market conditions; Table of Contents the level and volatility of interest rates and equity prices; competitive conditions; liquidity of global markets; international and regional political conditions; regulatory and legislative developments; monetary and fiscal policy; investor sentiment; availability and cost of capital; technological changes and events; outcome of legal proceedings; changes in currency values; natural disasters; inflation; credit ratings; and size, volume and timing of transactions. These and other factors could affect the stability and liquidity of the markets in which financial services businesses operate. Many financial services firms face credit risks which, if not properly managed, could cause revenues and net income to decrease. Many types of financial services firms, including banks and broker-dealers, lend funds to their customers. Among the risks all lenders face is the risk that some of their borrowers will not repay their loans. The ability of borrowers to repay their obligations may be adversely affected by factors beyond our control, including local and general economic and market conditions. A substantial portion of the loans may be secured by liens on real estate or securities. These same factors may adversely affect the value of real estate and securities as collateral. If we enter into a business combination with a firm that makes loans, we would maintain an allowance for loan losses to reflect the level of losses determined by management to be inherent in the loan portfolio. However, the level of the allowance and the amount of the provisions would only be estimates based on management s judgment, and actual losses incurred could materially exceed the amount of the allowance or require substantial additional provisions to the allowance, either of which would likely have a material adverse effect on our revenues and net income. Many financial services firms are subject to interest rate risk and variations in interest rates may negatively affect our financial performance. Changes in the interest rate environment may reduce our profits. Banks and other financial services firms realize income from the differential, or spread, between the interest earned on loans, securities and other interest earning assets, and interest paid on deposits, borrowings and other interest bearing liabilities. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest earning assets and interest bearing liabilities. In addition, loan volume and yields are affected by market interest rates on loans, and rising interest rates generally are associated with a lower volume of loan originations. Since June 30, 2004, the federal funds rate (5.25% as of July 25, 2007) and other short-term market interest rates, which are used to guide deposit pricing in most banking organizations, have increased, while intermediate- and long-term market interest rates, which are used by many banking organizations to guide loan pricing, have not increased proportionately. This has led to a flattening of the market yield curve, Table of Contents which has even inverted recently as short-term rates have exceeded long-term rates over an intermediate maturity horizon. The flat yield curve may hurt interest rate spread and net interest margin because the interest rates paid on deposits are likely to reprice upwards faster than the interest rates earned on loans and investments. If short-term interest rates continue to rise so that the yield curve remains relatively flat or inverts further, we would expect that net interest spread and net interest margin would continue to compress, which would hurt net interest income. We cannot assure you that we can minimize our interest rate risk. In addition, while an increase in the general level of interest rates may increase our net interest margins and loan yield, it may adversely affect the ability of certain borrowers with variable rate loans to pay the interest on and principal of their obligations. Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest spread, asset quality, loan origination volume and overall profitability. Risks Associated with Banking Regulation Below are some of the specific risks that we may face if we consummate a business combination with a financial services organization that is a bank. We may be subject to significant regulatory requirements in connection with our efforts to acquire a banking organization, which may result in our failure to consummate our initial acquisition within the required time frame and may force us to liquidate. Acquisitions of banking organizations are often subject to significant supervisory approval requirements, and we will not be able to consummate a business combination with a banking organization without complying with applicable laws and regulations. To acquire a banking organization we would be required to obtain approvals from one or more of the Board of Governors of the Federal Reserve System, or Federal Reserve, the Federal Deposit Insurance Corporation, or FDIC, the Office of the Comptroller of the Currency, or OCC, the Director of the Office of Thrift Supervision, or OTS, and/or state banking supervisors. Such approvals are time-consuming to obtain, require the submission of extensive information regarding investors, and are subject to considerations of safety and soundness and public convenience and needs, among others. We may not receive any such required approvals or we may not receive them in a timely manner, including as a result of factors or matters beyond our control. Satisfying any requirements of banking supervisors may delay the date of our completion of our initial business combination beyond the required time frame (24 months after the consummation of this offering). If we fail to consummate out initial business combination within the required time frame we may be forced to liquidate. We will be subject to significant government regulation if we acquire a banking organization. Following the acquisition of a banking organization, we will operate in a highly regulated environment and will be subject to supervision and regulation by a number of governmental agencies, including one or more of the Federal Reserve, the OCC, and the FDIC, the OTS and/or state banking supervisors. Regulations adopted by these agencies, which are generally intended to provide protection for depositors and customers rather than for the benefit of stockholders, govern a comprehensive range of matters relating to the ownership and control of stockholders, acquisition of other companies and businesses, permissible activities we may engage in, maintenance of adequate capital levels, sales practices, anti-money-laundering requirements, and other aspects of our operations. The appropriate banking supervisors will perform detailed examinations of us and our subsidiaries on a regular basis. Banking supervisors possess broad authority to prevent or remedy unsafe or unsound practices or violations of law and to require robust and detailed policies, procedures, and systems of risk management and legal compliance. Any failure of such policies, procedures, and systems (including actions by a banking organization prior to our acquisition of it), or any failure by us or our subsidiaries to maintain satisfactory examination ratings for any reason, could result in substantial penalties, requirements, and/or restrictions on our ability to conduct business. In addition, future legislation and government policy could adversely affect our results of operations. Table of Contents Certain financial services companies face substantial regulatory risks resulting from maintaining capital requirements and, if we consummate a business combination with one of these entities, we may face legal liability and reduced revenues and profitability if we do not comply with these capital requirements. The financial services industry is subject to extensive regulation. Many regulators, including U.S. and other government agencies and self-regulatory organizations, as well as state and provincial securities commissions, insurance regulators and attorneys general, are empowered to conduct administrative proceedings and investigations that can result in, among other things, censure, fine, the issuance of cease-and-desist orders, prohibitions against engaging in some lines of business, suspension or termination of licenses or the suspension or expulsion of a bank, investment adviser or insurance distributor. The requirements imposed by regulators are designed to ensure the integrity of the financial markets and to protect customers, policyholders and other third parties who deal with financial services firms and are not designed to protect our stockholders. Banks domiciled or operating in the United States and their holding companies are subject to extensive regulation and supervision by applicable federal and state banking agencies. Many of these regulations are intended to protect parties other than stockholders, such as depositors. If we were to acquire a bank, these regulations may limit our operations significantly and control the methods by which we conduct our business, including our lending practices, capital structure, investment practices and dividend policy. In addition, banks and their holding companies generally are subject to rigorous capital requirements and may be examined on a regular basis for their general safety and soundness and compliance with various federal and state legal regimes, including, but not limited to, the Community Reinvestment Act, the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate Settlement and Procedures Act, the Fair Credit Reporting Act and the Bank Secrecy Act, as amended by the USA PATRIOT Act. Similar capital requirements apply to insurance companies. In the United States, under laws adopted by individual states, insurers engaged in certain lines of business are subject to risk based capital requirements. Insurers having less total adjusted capital than that required under the risk based capital laws are subject to varying degrees of regulatory action, depending on the level of capital inadequacy. Maintaining appropriate levels of statutory surplus is also considered important by state insurance regulatory authorities. Failure by an insurance company to maintain certain levels of statutory surplus could result in increased regulatory scrutiny and enforcement. If we were to acquire businesses in segments of the financial services industry which are subject to maintaining capitalization requirements and ratios and subject to regulatory approvals and consents, the structure of the potential business combination, including our use of leverage, and the size of the potential business combination may be impacted, the pool of potential target businesses may be limited and our ability to consummate a business combination within the requisite time period may be adversely affected. Banks and insurance companies generally are subject to rigorous capital requirements. Any debt used in the consummation of the business combination may adversely affect the potential target businesses ability to maintain capitalization requirements in certain regulated segments of the financial services industry. If we were to acquire businesses in segments of the financial services industry which are subject to maintaining capitalization requirements and ratios and subject to regulatory approvals and consent, the structure of the potential business combination, including our use of leverage, and the size of the potential business combination may be impacted, the potential pool of target businesses may limited and our ability to consummate a business combination within the requisite time period may be adversely affected. Our ability to pay dividends or repurchase shares of our common stock will be subject to restrictions under applicable banking laws and regulations. Our ability to pay dividends or repurchase shares of our common stock will depend on the ability of any subsidiary banks or thrifts that we acquire to pay dividends to us. Banks and thrifts are subject to certain regulatory restrictions on the payment of dividends or repurchase of stock. A national bank or a thrift generally may pay dividends without regulatory approval in any calendar year to the extent of the total of its net profits for such year combined with its retained net profits for the preceding two years, less any required transfers to surplus. State banks or thrifts may be subject to similar limitations. The ability of a bank or thrift to pay dividends is also restricted by the requirement that it maintain adequate levels of regulatory capital. Table of Contents Federal bank regulatory agencies also have the authority to prohibit a bank or thrift from engaging in unsafe or unsound practices, and the payment of dividends or the repurchase of stock could be deemed an unsafe or unsound practice depending on the financial condition or supervisory status of the institution. Substantial regulatory limitations on investments in banks and thrifts may limit investors ability to purchase our stock. With limited exceptions, federal regulations require the approval of the appropriate federal banking supervisor before a person or company or a group of persons or companies deemed to be acting in concert may directly or indirectly acquire more than 10% (5% if the acquirer is a bank or thrift holding company) of any class of a banking organization s voting stock, or direct or indirectly obtain the ability to control in any manner the election of a majority of directors or otherwise direct the management or policies of a banking organization. Prospective investors must comply with these requirements, if applicable, in connection with any purchase of our units in this offering, any subsequent exercise of warrants, or any subsequent trading of units. These requirements may limit potential purchasers, and therefore the value, of our stock. Table of Contents USE OF PROCEEDS We estimate that the net proceeds of this offering and the pre-offering private placement of the founders warrants and our expected uses will be as set forth in the following table: Without Over- over Allotment Allotment Option Option Exercised Gross proceeds Proceeds from sale of founders warrants $ 2,300,000 $ 2,300,000 Public Offering 60,000,000 69,000,000 Total 62,300,000 71,300,000 Offering and private placement expenses(1) Underwriting discount(2) $ 4,200,000 $ 4,830,000 Legal fees and expenses (including blue sky services and expenses) 335,000 335,000 Miscellaneous expenses 2,766 2,766 Printing and engraving expenses 60,000 60,000 Accounting fees and expenses 30,000 30,000 AMEX application and listing fees 55,000 55,000 SEC registration fee 13,819 13,819 NASD registration fee 13,415 13,415 Total offering and placement expenses $ 4,710,000 $ 5,340,000 Net proceeds Net proceeds from offering and sale of founders warrants $ 57,590,000 $ 65,960,000 Net offering proceeds not held in trust 90,000 90,000 Net proceeds from offering and sale of founders warrants held in trust for our benefit $ 57,500,000 $ 65,870,000 Deferred underwriting discounts held in trust $ 2,400,000 $ 2,760,000 Total amount held in trust $ 59,900,000 $ 68,630,000 Estimated expenses related to a business combination paid from funds not held in trust, interest earned on our trust account that may be released to us and funds that may be drawn from our limited recourse line of credit Legal, accounting and other expenses attendant to the structuring and negotiation of a business combination $ 300,000 20.0 % Payment for administrative services and support ($7,500 per month for 24 months) $ 180,000 12.0 % Due diligence, identification and research of prospective target business and reimbursement of out of pocket due diligence expenses to management $ 400,000 26.7 % Legal and accounting fees relating to SEC reporting obligations $ 80,000 5.3 % Working capital to cover miscellaneous expenses (including finders fees, consulting fees or other similar compensation, potential deposits, down payments or funding of a no-shop provision with respect to a particular business combination, director and officer insurance, franchise taxes and dissolution obligations and reserves, if any) $ 540,000 36.0 % Total(3)(4) $ 1,500,000 100.0 % (1) A portion of the offering expenses, including the SEC registration fee and NASD filing fee, will be paid from the $250,000 non-interest bearing loan from our officers and directors, as further described below. Table of Contents We intend to repay these loans out of the net proceeds of this offering not being placed in trust upon consummation of this offering. (2) Consists of an underwriting discount of 7% of the gross proceeds of this offering (including any units sold to cover over-allotments) including 4.0%, or $2,400,000 to be held in trust ($2,760,000 if the underwriters over-allotment option is exercised in full) until consummation of a business transaction. (3) Up to $1,100,000 of interest earned on the funds, net of taxes payable, held in trust will be used to fund our working capital. (4) Upon the closing of the offering, we will have access to a $500,000 limited recourse revolving line of credit which will bear interest at the federal funds target interest rate (4.75% as of September 21, 2007) and will become due and payable at the consummation of the business combination, or earlier solely from the $1,100,000 of interest earned on the trust account which is available for working capital. The amount of $59,900,000, or $68,630,000 if the underwriters over-allotment option is exercised in full, of the net proceeds of this offering and the purchase of the founders warrants, will be placed in a trust account at JPMorgan Chase maintained by American Stock Transfer Trust Company, as trustee. The funds held in trust will be invested only in United States government securities or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act. The proceeds will not be released from our trust account until the earlier of the completion of a business combination or the liquidation of our trust account. The proceeds held in our trust account (exclusive of any taxes and any funds held for the benefit of the underwriters) may be used as consideration to pay the sellers of a target business with which we ultimately complete a business combination. Any amounts not paid as consideration to the sellers of the target business may be used to finance operations of the target business or to effect other acquisitions, as determined by our board of directors at that time. Because we do not have any specific business combination under consideration and have not (nor has anyone on our behalf) had any discussions, formal or otherwise, with respect to such a transaction, it is impossible at this time to determine specifically how we would, following a business combination, use any proceeds held in our trust account which are not used to consummate such business combination. We have agreed to pay Inter-Atlantic Group, an affiliate of certain of the officers and directors, up to $7,500 per month for office space, utilities, administrative, technology and secretarial services. This arrangement is being agreed to for our benefit and is not intended to provide director or officer compensation in lieu of salary. We believe, based on rents and fees for similar services in New York, New York, that such fees are at least as favorable as we could have obtained from an unaffiliated person. This arrangement will terminate upon completion of a business combination or the distribution of our trust account to our public stockholders. Regardless of whether the underwriters exercise their over-allotment option in full, the net proceeds available to us outside of our trust account for our search for a business combination will be approximately $1,600,000, or $100,000 in excess of our estimated expenses of $1,500,000. We intend to use the excess working capital (approximately $540,000) for director and officer liability insurance premiums (approximately $220,000), with the balance of $320,000 being held in reserve in the event due diligence, legal, accounting and other expenses of structuring and negotiating business combinations exceed our estimates, including for reimbursement of any out-of-pocket expenses incurred by any of our existing stockholders in connection with activities on our behalf (including possible payments to unaffiliated third-parties for their performance of due diligence). We believe that the excess working capital will be sufficient to cover the foregoing expenses and reimbursement costs. We could use a portion of the funds not being placed in trust to engage consultants to assist us with our search for a target business. We could also use a portion of the funds not being placed in trust as a down payment or to fund a no-shop provision with respect to a particular proposed business combination, although we do not have any current intention to do so. If we entered into such a letter of intent where we paid for the right to receive exclusivity from a target business, the amount that would be used as a down payment or to fund a no-shop provision would be determined based on the terms of the specific business combination and the amount of our available funds at the time. Our forfeiture of such funds (whether as a result of our breach Table of Contents or otherwise) could result in our not having sufficient funds to continue searching for, or conducting due diligence with respect to, potential target businesses. To the extent that our share capital is used in whole or in part as consideration to effect a business combination, the proceeds held in our trust account and other net proceeds not expended will be used to finance the operations of the target business. Inter-Atlantic Group has agreed to loan us a total of $250,000, which will be used to pay a portion of the expenses of this offering, such as transfer agent fees, SEC registration fees, NASD registration fees, American Stock Exchange application and listing fees, background investigation expenses, printing expenses, and legal and accounting fees and expenses. We intend to repay these loans from the proceeds of this offering not being placed in trust. The net proceeds of this offering not held in our trust account and not immediately required for the purposes set forth above will be invested only in United States government securities or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act so that we are not deemed to be an investment company under the Investment Company Act. By restricting the investment of the proceeds of this offering to these instruments, we intend to avoid being deemed to be an investment company within the meaning of the Investment Company Act. The interest income derived from investment of these net proceeds during this period will be used to defray our general and administrative expenses, as well as costs relating to compliance with securities laws and regulations, including associated professional fees, until a business combination is completed. We believe that, upon consummation of this offering, we will have sufficient available funds to operate for at least the next 24 months, assuming that a business combination is not consummated during that time. Our existing stockholders will receive reimbursement for any out-of-pocket expenses incurred by them in connection with activities on our behalf, such as identifying potential target businesses and performing due diligence on suitable business combinations (including possible payments to unaffiliated third parties for their performance of due diligence) and for out-of-pocket expenses incurred in connection with this offering. Reimbursement for such expenses will be paid by us out of the funds not held in trust. To the extent that such out-of-pocket expenses exceed the available proceeds not deposited in our trust account such out-of-pocket expenses would not be reimbursed by us unless we consummate a business combination, in which event this reimbursement obligation would in all likelihood be negotiated with the owners of a target business. Since the role of present management after a business combination is uncertain, we have no ability to determine what remuneration, if any, will be paid to those persons after a business combination. A public stockholder will be entitled to receive funds from our trust account (including interest earned on his, her or its portion of our trust account, excluding up to $1,100,000 of interest which may be used to fund the Company s working capital, net of taxes payable, which taxes, if any, shall be paid from our trust account) only in the event of our automatic dissolution and subsequent liquidation of our trust account upon our failure to complete a business combination or if that public stockholder were to redeem such shares into cash in connection with a business combination which the public stockholder voted against and which we actually consummate. In no other circumstances will a public stockholder have any right or interest of any kind to or in our trust account. Table of Contents DILUTION The difference between the public offering price per share of common stock, assuming no value is attributed to the warrants included in the units, and the pro forma net tangible book value per share of our common stock after this offering and the pre-offering private placement of the founders warrants constitutes the dilution to investors in this offering. Net tangible book value per share is determined by dividing our net tangible book value, which is our total tangible assets less total liabilities (including the value of common stock which may be redeemed for cash if voted against the business combination), by the number of outstanding shares of our common stock. At June 15, 2007, our net tangible book value was a deficiency of $289,939 or approximately $(0.15) per share of common stock. After giving effect to the sale of 7,500,000 shares of common stock included in the units sold in the offering (not including the exercise of the over-allotment option, if any) and the sale of the founders warrants, the deduction of underwriting discounts and estimated expenses of this offering, our pro forma net tangible book value at June 15, 2007 would have been $40,362,462 or $5.66 per share, representing an immediate increase in net tangible book value of $5.81 per share to the existing stockholders and an immediate dilution of $2.34 per share or 29.25% to new investors not exercising their redemption rights. For purposes of presentation, our pro forma net tangible book value after this offering is approximately $17,964,010 less than it otherwise would have been because if we effect a business combination, the redemption rights to the public stockholders may result in the redemption into cash of up to approximately 29.99% of the aggregate number of the shares sold in this offering at a per-share redemption price equal to the amount in our trust account (a portion of which is made up of $2,300,000 purchase price of the founders warrants and $2,400,000 in deferred underwriting discounts and commissions) as of two business days prior to the consummation of the proposed business combination, including the interest earned (excluding up to $1,100,000 of interest earned which may be used to fund working capital, net of taxes payable), divided by the number of shares sold in this offering. The following table illustrates the dilution to the new investors on a per-share basis, assuming no value is attributed to the warrants included in the units: Public offering price $ 8.00 Net tangible book value before this offering $ (0.15 ) Increase attributable to new investors $ 5.81 Pro forma net tangible book value after this offering $ 5.66 Dilution to new investors $ 2.34 The following table sets forth information with respect to our existing stockholders and the new investors: Shares Purchased Total Consideration Average Price Number Percentage Amount Percentage per Share Existing stockholders(1) 1,875,000 20.00 % $ 25,000 .04 % $ 0.0133 New investors(2) 7,500,000 80.00 % 60,000,000 99.96 % $ 8.0000 Total 9,375,000 100.00 % $ 60,025,000 100.00 % (1) Does not include shares underlying the 2,300,000 founders warrants to be purchased by the existing stockholders in a private placement prior to the consummation of the offering. (2) Assumes sale of 7,500,000 units in this offering, but not the exercise of 7,500,000 warrants to purchase shares sold as part of such units. Table of Contents The pro forma tangible book value after the offering is calculated as follows: Numerator: Net tangible book value before the offering $ (289,939 ) Net proceeds from this offering and the sale of founders warrants(1) $ 59,990,000 Offering costs excluded from tangible book value before this offering $ 306,651 Less: Deferred underwriters fee payable on consummation of a business combination(2) $ (1,680,240 ) Less: Proceeds held in trust subject to redemption for cash ($59,900,000 x 29.99%) $ (17,964,010 ) $ 40,362,462 Denominator: Shares of common stock outstanding prior to the offering 1,875,000 Shares of common stock included in the units offered 7,500,000 Less: Shares subject to redemption (7,500,000 x 29.99%) (2,249,250 ) 7,125,750 (1) Net of underwriters discounts and commissions (excluding $2,400,000 of deferred underwriting discounts and commissions) and other offering expenses. (2) For purposes of presentation, this table assumes that we have converted the maximum of 2,249,250 shares to cash in connection with our initial business combination, reducing the underwriters fee by $0.32 per share, or approximately $719,760. If no shares were converted to cash in connection with our initial business combination, our pro forma net tangible book value would be reduced by $2,400,000. Table of Contents CAPITALIZATION The following table sets forth our capitalization at June 15, 2007 and as adjusted to give effect to the sale of our units in this offering and the founders warrants and the application of the estimated net proceeds derived from the sale of our units: June 15, 2007 Actual As Adjusted(4) Notes payable(1) $ 250,000 $ Deferred underwriting discounts and commissions $ 2,400,000 Common stock, $.0001 par value, -0- and 2,249,250 shares which are subject to possible redemption, shares at redemption value(2) $ $ 17,964,010 Stockholders equity: Preferred stock, $.0001 par value, 1,000,000 shares authorized; none issued or outstanding $ $ Common stock, $.0001 par value, 49,000,000 shares authorized; 1,875,000 shares issued and outstanding; 7,125,750 shares issued and outstanding (excluding 2,249,250) shares subject to possible redemption), as adjusted $ 188 $ 713 Additional paid-in capital(3) $ 24,812 $ 39,650,277 Deficit accumulated during the development stage $ (8,288 ) $ (8,288 ) Total stockholders equity (deficit) $ 16,712 $ 39,642,702 Total capitalization $ 266,712 $ 60,006,712 (1) Notes payable are payable on the consummation of this offering with respect to the $250,000 loan from Inter-Atlantic Group. (2) If we consummate a business combination, the redemption rights afforded to our public stockholders may result in the redemption into cash of up to approximately 29.99% of the aggregate number of shares sold in this offering (unlike traditional blank check companies where the redemption threshold is 19.99%) at a per-share redemption price equal to the amount in our trust account, inclusive of any interest thereon (excluding up to $1,100,000 of interest income, net of taxes payable, which may be used to fund the Company s working capital), net of taxes payable, as of two business days prior to the proposed consummation of a business combination divided by the number of shares sold in this offering. (3) The as adjusted column includes $2,300,000 payable prior to the closing of this offering by our officers, directors and a stockholder in connection with the purchase of 2,300,000 founders warrants. (4) Excludes the $100 purchase option to Morgan Joseph Co. Table of Contents MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Inter-Atlantic Financial, Inc. is a newly organized blank check company formed for the purpose of acquiring, through a merger, a capital stock exchange, asset acquisition, stock purchase or other similar business combination of an unidentified domestic and/or foreign operating business in the financial services industry or businesses deriving a majority of their revenues from providing services to financial services companies, including for example, payment processing companies and technology providers. We intend to utilize cash derived from the proceeds of this offering, our capital stock, debt or a combination of cash, capital stock and debt, in effecting a business combination. The issuance of additional capital stock, including upon conversion of any convertible debt securities we may issue, or the incurrence of debt could have material consequences on our business and financial condition. The issuance of additional shares of our capital stock (including upon conversion of convertible debt securities): may significantly reduce the equity interest of our stockholders; will likely cause a change in control if a substantial number of our shares of common stock are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and may also result in the resignation or removal of one or more of our present officers and directors; and may adversely affect prevailing market prices for our common stock. Similarly, if we issued debt securities, it could result in: default and foreclosure on our assets if our operating revenues after a business combination were insufficient to pay our debt obligations; acceleration of our obligations to repay the indebtedness even if we have made all principal and interest payments when due if the debt security contained covenants that required the maintenance of certain financial ratios or reserves and any such covenant were breached without a waiver or renegotiation of that covenant; our immediate payment of all principal and accrued interest, if any, if the debt security was payable on demand; and our inability to obtain additional financing, if necessary, if the debt security contained covenants restricting our ability to obtain additional financing while such security was outstanding. We have neither engaged in any operations nor generated any revenues to date. Our entire activity since inception has been to prepare for our proposed fundraising through an offering of our equity securities. We estimate the net proceeds from the sale of the units in this offering and the sale of the founders warrants, will be $57,590,000 ($65,960,000 if the over-allotment option is exercised in full), after deducting offering expenses of approximately $2,310,000 ($2,580,000 if the over-allotment option is exercised in full) not including Morgan Joseph Co. s deferred fees. Of this amount, $57,500,000 ($65,870,000 if the over-allotment option is exercised in full) will be held in trust for our benefit and be available to consummate a business combination (after payment of Morgan Joseph Co. s deferred fees) and the remaining $90,000 (also $90,000 if the over-allotment option is exercised in full) will not be held in trust. We will use substantially all of the net proceeds of this offering, the pre-offering private placement of the founders warrants, as well as interest on the funds in our trust account released to us including those funds held in trust, to acquire a target business, including identifying and evaluating prospective acquisition candidates, selecting the target business, and structuring, negotiating and consummating the business combination. The proceeds held in our trust account (exclusive of any funds held for the benefit of the underwriters or used to pay public stockholders who have exercised their redemption rights) may be used as consideration to pay the sellers of a target business with which we ultimately complete a business combination or, if there is insufficient funds not held in trust, to pay other expenses relating to such transaction such as reimbursement to insiders for out-of-pocket expenses, third party due diligence expenses or potential finders fees, in each case only upon the consummation of a business combination. Any amounts not paid as Table of Contents consideration to the sellers of the target business may be used to finance operations of the target business or to effect other acquisitions, as determined by our board of directors at that time. To the extent our capital stock is used in whole or in part as consideration to effect a business combination, the proceeds held in our trust account as well as any other net proceeds not expended will be released to us and will be used to finance the operations of the target business. We believe that, upon consummation of this offering, we will have funds sufficient to allow us to operate for at least the next 24 months, including (i) $1,100,000 of the interest earned on funds in our trust account (net of taxes payable) which will be released to us, (ii) the funds available to us outside of our trust account and (iii) up to $500,000 from the Company s limited recourse revolving line of credit which will be repayable prior to the consummation of the business combination solely from the $1,100,000 of interest earned on the trust account which is available for working capital, assuming that a business combination is not consummated during that time. Over this time period, we anticipate approximately $300,000 of expenses for legal, accounting and other expenses attendant to the structuring and negotiating of a business combination, $400,000 of expenses for due diligence, identification and research of prospective target business combination and related expenses, $180,000 for administrative services and support payable to an affiliated third party ($7,500 per month for up to 24 months), $80,000 of expenses in legal and accounting fees relating to our SEC reporting obligations and $540,000 for general working capital that will be used for miscellaneous expenses and reserves. Up to $1,100,000 of the interest earned on our trust account (net of taxes payable) will be released to us to fund our working capital requirements and the costs associated with such plan of dissolution and liquidation (which we currently estimate to be between $50,000 and $75,000) if we do not consummate a business combination. Although the rate of interest to be earned on our trust account will fluctuate through the duration of our trust account, and although we are unable to state the exact amount of time it will take to complete a business combination, we anticipate the interest that will accrue on our trust account, even at an interest rate of 4% per annum, during the time it will take to identify a target and complete an acquisition will be sufficient to fund our working capital requirements. While we cannot assure you our trust account will yield this rate, we believe such rate is representative of that which we may receive. We believe there should be sufficient funds available either outside of our trust account or made available to us out of the net interest earned on our trust account and released to us as working capital, to fund the costs and expenses associated with a plan of dissolution and liquidation, although we cannot give any assurances thereof. We do not believe we will need to raise additional funds following this offering in order to meet the expenditures required for operating our business prior to a business combination. However, we may need to raise additional funds through a private offering of debt or equity securities if such funds are required to consummate a business combination that is presented to us. We would only consummate such a fund raising simultaneously with the consummation of a business combination. In seeking a business combination, we intend to utilize cash derived from the proceeds of this offering, as well as our capital stock or debt, or a combination of cash, capital stock and debt, and there is no limit on the issuance of capital stock or incurrence of debt we may undertake in effecting a business combination. In the event a business combination is consummated, all sums remaining in our trust account will be released to us immediately thereafter, and there will be no restriction on our use of such funds. Inter-Atlantic Group has loaned us a total of $250,000, which was used to pay a portion of the expenses of this offering, such as SEC registration fees, NASD registration fees, American Stock Exchange listing and application fees and certain legal and accounting fees and expenses. These loans will be payable without interest on the consummation of this offering. The loans will be repaid out of the net proceeds of this offering not being placed in trust. We have granted a purchase option to Morgan Joseph Co. to be issued upon the closing of this offering. If the offering does not close, the purchase option will not be issued. Based on Emerging Issues Task Force 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company s Own Stock, the purchase option will initially be measured at fair value and reported in permanent equity, and subsequent changes in fair value will not be recognized as long as the purchase option continues to be classified as an equity instrument. Accordingly, there will be no net impact on our financial position or results of operations except for recording of the $100 proceeds from the sale thereof. We estimate that the fair value of the purchase option at the date of issue will be approximately $2.61 per Table of Contents share or approximately $1,371,000 in the aggregate. If we do not consummate a business combination within the prescribed time period and we dissolve, liquidate and wind up, the purchase option will become worthless. We will seek stockholder approval before we effect any business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable state law. In connection with the vote required for any business combination, all of our existing stockholders, including all of our officers and directors, have agreed to vote the shares of common stock owned by them immediately before this offering in accordance with the majority of the shares of common stock voted by the public stockholders. Any shares acquired in the aftermarket by existing stockholders will be voted in favor of the business combination. We will proceed with a business combination only if a majority of the shares of common stock cast at the meeting are voted in favor of the business combination and public stockholders owning 29.99% or less of the shares sold in this offering exercise their redemption rights described below. This is different from the traditional blank check company structure and makes it more likely that the business combination may be approved. Voting against the business combination alone will not result in redemption of a stockholder s shares into a pro rata share of our trust account. Such stockholder must have also exercised its redemption rights described below. Even if 29.99% or less of the stockholders, as described above, exercise their redemption rights, we may be unable to consummate a business combination if such redemption leaves us with funds less than a fair market value equal to at least 80% of the amount in our trust account (excluding any funds held for the benefit of any of the underwriters and taxes payable) at the time of such acquisition which amount is required for our initial business combination. In such event, we may be forced to either find additional financing to consummate such a business combination, consummate a different business combination or dissolve, liquidate and wind up. The Company has agreed not to lower the redemption threshold below 29.99% in connection with the negotiation of a business combination. Table of Contents PROPOSED BUSINESS Introduction We are a blank check company organized under the laws of the State of Delaware. We were formed for the purpose of acquiring, through a merger, a capital stock exchange, asset acquisition, stock purchase or other similar business combination, an unidentified operating business in the financial services industry or businesses deriving a majority of their revenues from providing services to financial services companies including for example, payment processing companies and technology providers. We believe we are qualified to select an attractive acquisition target because of our officers and directors over 150 years of aggregate experience with both public and private companies in the financial services industry. Our efforts in identifying a prospective target business will not be limited to a particular geographic location. We do not have any specific merger, capital stock exchange, asset acquisition, stock purchase or other similar business combination under consideration, and we have not, nor has anyone on our behalf, engaged in discussions with representatives of other companies, with respect to such a transaction. In addition, we have not been contacted nor have any of our officers, directors or affiliates been contacted by companies regarding a potential business combination, nor have we, or any of our officers, directors or affiliates, directly or indirectly taken any steps in furtherance of a business combination. To date our efforts have been limited to organizational activities and activities relating to this offering and we have not acquired any business operations. According to the SPDR Index as of July 24, 2007, financial services companies comprised a weighted average of 20.0% of the S P 500 market capitalization. According to the U.S. Bureau of Economic Analysis, the financial services industry has been the leading contributor to the U.S. gross domestic product for more than a decade; the industry s contribution in 2006 was 20.8%. In addition, for the first quarter of 2007, the financial services sector accounted for approximately 34.2% of total corporate profits in the United States. The financial services sector is dominated by large, and in some cases, multi-national institutions. While dynamic industry trends are constantly shifting the demand for financial services products and other offerings, we believe that these types of institutions are often unwilling or unable to respond proactively to these emerging trends because they often find it difficult to quickly and efficiently embrace emerging industry trends without disrupting existing businesses. However, we believe that in this competitive industry there is a constant need for cost reduction, expansion of product lines and increased market share through innovative products and the application of technology. We believe that smaller companies have greater flexibility to more readily exploit industry trends in technology, legislation and other areas within particular financial services sectors. Technology has fundamentally changed how businesses in the financial services industry deliver their services and products. We believe that many areas of financial services have been impacted by the advancement and implementation of technology, especially the banking sector as transaction processing becomes faster and more efficient. Alternative distribution methods employed in the financial services industry have become extremely important. These product delivery methods include debit cards, smart cards, electronic payment systems, contactless payment devices, free-standing kiosks, mobile devices, automated teller machines and the Internet. We believe the evolution of payment technology will continue as cash and check transactions become increasingly replaced by next generation debit technologies including card, PIN and mobile. Within the universe of potential targets in the financial services industry, including service providers to the industry, we believe that companies in the financial technology sector are particularly attractive and financial technology companies will be an important focus of ours. As compared to traditional banks, these companies differ in many respects and typically are unregulated or less regulated, require lower capitalization levels and trade at higher valuation multiples. Areas within the financial technology sector that we may focus on include: payment processing; processors of transactions or information; Table of Contents financial data, analysis and content providers; banking, insurance and asset management software, security and outsourcing providers; brokerage, eFinance, and other web-oriented financial businesses; credit, debit and prepaid card technology and distribution; emerging technologies such as PIN, mobile and contactless payment delivery systems; and service providers supporting the consumer and commercial finance, servicing, asset management and insurance businesses. Although we may consider a target business in any segment of the financial services industry, including any area of the financial technology sector, an important area for us will be companies involved in the payments aspect of the financial services industry. Payments encompass the various mechanisms that consumers and businesses use to purchase and/or finance goods or services, pay bills and access and transfer funds. These companies may be involved in creating new mechanisms to enhance or replace existing payment methods including credit cards, debit cards, ATMs, cash, checks, stored value cards, electronic bill payments and other existing and emerging forms of payment. These companies may also be involved in products which often enable payment mechanisms through a complex web of payment devices, financial accounts, data networks, processing platforms, clearinghouses and banking and other relationships that link banks, card issuers, merchants, billers, non-bank financial institutions, corporations, government agencies, technology companies and specialized payment providers. We believe that payment technology is rapidly changing and that companies involved in this sector have enormous growth potential. According to a February 2006 Federal Reserve Board Discussion Paper, annual debit card transactions in the United States have been increasing at a rate of 20% per year and now exceed the number of credit card transactions. Furthermore, according to the Nilson Report, which compared 2005 with 2006, the number of Visa and MasterCard credit and debit cards in circulation increased globally by 11.2% to 2.4 billion and purchase transactions utilizing these cards increased by 15.2% to 85.4 billion, with the total dollar volume increasing 14.5% to $6.7 trillion. In the United States alone, the number of these cards in circulation increased by 7.8% to 878.8 million, the number of purchase transactions increased by 12.4% to 34.0 billion and total dollar volume increased 11.7% to $2.5 trillion. While our primary focus will be on prospective target businesses in or related to the financial services industry in the United States, we may also consider these acquisition opportunities internationally. In evaluating a prospective target business, our management will consider, among other factors, the following: experience and skill of management and availability of additional personnel; financial condition, including profitability, cash flow, the recurrence of revenue and the results of operation; growth potential; competitive position and barriers to entry; ability to retain and grow the customer base; stage of development of the products, processes or services; proprietary features and degree of intellectual property or other protection of the products, processes or services; regulatory environment; costs, approvals and accounting impact associated with effecting the business combination; and relative valuations of similar publicly traded companies. Table of Contents In seeking a business combination, we intend to utilize cash derived from the proceeds of this offering, as well as our capital stock, debt, or a combination of cash, capital stock and debt, and there is no limit on the issuance of capital stock or incurrence of debt we may undertake in effecting a business combination. In the event a business combination is consummated, all sums remaining in our trust account will be released to us immediately thereafter, and there will be no restriction on our use of such funds. While we may seek to effect business combinations with more than one target business, our initial business combination must be with a target business or businesses whose fair market value is at least equal to 80% of the amount in our trust account (less deferred underwriting compensation of $2,400,000, or $2,760,000 if the over-allotment is exercised in full and taxes payable) at the time of such acquisition. Consequently, it is likely we will have the ability to effect only a single business combination. We currently have no restrictions on our ability to seek additional funds through the sale of securities or through loans. As a consequence, we could seek to acquire a target business that has a fair market value significantly in excess of 80% of the amount in our trust account (less deferred underwriting compensation of $2,400,000, or $2,760,000 if the over-allotment is exercised in full and taxes payable) or more than one target business at the same time. Although as of the date of this prospectus we have not engaged or retained, had any discussions with, or entered into any agreements with, any third party regarding any such potential financing transactions, we could seek to fund such business combinations by raising additional funds through the sale of our securities or through loan arrangements. In addition, we may pay for such business combinations, in part or in whole, by issuance of our securities. However, if we were to seek such additional funds, any such arrangement would only be consummated simultaneously with our consummation of a business combination. It is possible we will have the ability to complete only a single business combination, although this may entail the simultaneous acquisitions of several assets or closely related operating businesses at the same time. However, should management elect to pursue more than one acquisition of target businesses simultaneously, management could encounter difficulties in consummating all or a portion of such acquisitions due to a lack of adequate resources, including the inability of management to devote sufficient time to the due diligence, negotiation and documentation of each acquisition. Furthermore, even if we complete the acquisition of more than one target business at the same time, there can be no assurance we will be able to integrate the operations of such target businesses. We have agreed to pay a monthly fee of $7,500 to Inter-Atlantic Management Services LLC, an affiliate of certain of the officers and directors, for general and administrative services, including but not limited to receptionist, secretarial and general office services. Inter-Atlantic Management Services LLC, together with its affiliate companies, is referred to herein as Inter-Atlantic Group. This agreement commences on the date of this prospectus and shall continue until the earliest to occur of: the consummation of a business combination; 24 months after the completion of this offering; and the date on which we determine to dissolve and liquidate our trust account as part of our plan of dissolution and liquidation. Our officers and directors will not receive any compensation in this offering or for services rendered to us prior to, or in connection with, the consummation of a business combination. Our officers and directors will be entitled to reimbursement for out-of-pocket expenses incurred by them or their affiliates on our behalf. Prior to the closing of this offering, our officers, directors and a shareholder will have collectively purchased a combined total of 2,300,000 warrants at a price of $1.00 per warrant for a total of $2,300,000. Key Strengths We believe that our management and director team have several key strengths including: substantial investment experience in the financial services sector; substantial management experience in the financial services sector; strong industry reputation and track record; Table of Contents broad sector specific deal flow from our extensive sourcing network; and attractive proposition to target businesses. Investment Experience Our officers and directors have significant experience in investing in, and acquiring, financial services companies. In particular, Messrs. Lerner, Lichten and Baris were formerly investment bankers in the Financial Institutions Group of Smith Barney Inc. and Messrs. Lichten and Weinhoff were formerly investment bankers in the Financial Institutions Group of Lehman Brothers Inc. At Inter-Atlantic Group and Smith Barney, Mr. Lerner participated in the raising of equity capital for financial services companies, including investments on behalf of Inter-Atlantic Group s funds, and has performed varying amounts of due diligence on privately-held financial services companies. Mr. Lichten was a Managing Director at Smith Barney and Lehman Brothers Inc., where he concentrated on raising capital and providing merger and acquisition advisory services to financial institutions. Mr. Baris primary role at Inter-Atlantic Group has been sourcing, analyzing, negotiating, structuring and monitoring its private equity investments. Mr. Weinhoff was a Managing Director of Lehman Brothers Inc. and head of the Financial Institutions Group for Schroder Co. Management Experience Certain of our officers and directors have been senior executives of major financial services companies. In particular Messrs. Galasso, Daras and Hammer have each served in senior executive roles with companies involved in the payments and banking sectors. Mr. Galasso was the Chairman and Chief Executive Officer of NetSpend Corporation, a prepaid payment solutions company, from 2001 to 2004 and led its efforts to become one of the leading processors and marketers of prepaid, re-loadable debit cards. Prior to his time at NetSpend Corporation, Mr. Galasso was the President and Chief Executive Officer of Bank of America National Association, Bank of America s credit card company. Mr. Daras served as Executive Vice President, Treasurer and Asset-Liability Committee Chairman of Dime Bancorp where he managed loan and securities portfolios and also oversaw the bank s cash management, money transfer, derivatives, funding and risk management operations. Prior to his service at Dime Bancorp, Mr. Daras was Chief Financial Officer of Cenlar Capital Corp., a privately held mortgage banking company. Mr. Hammer served as an Executive Vice President of The Chase Manhattan Bank, where he was responsible for the bank s global consumer activities including the retail branch network, credit card, consumer lending and deposit businesses. Strong Industry Expertise We believe that through their work experience, our officers and directors have acquired substantial knowledge about private financial services companies. Our officers and directors have not taken any steps toward identifying a target business, including identifying potential target criteria other than the criteria that is disclosed in this registration statement, and their general knowledge and experience with financial services companies will play a role in evaluating potential target businesses. Specifically, our officers and directors will be using their general industry expertise in evaluating potential target businesses subsequent to the initial public offering. Our officers and directors are not aware of any potential target businesses seeking a sale, seeking a change of control, seeking an initial public offering or seeking any similar transaction which would accomplish a similar purpose for the target, and in the event that any such entities subsequently come to the attention of our directors and officers prior to the initial public offering, we will not enter into a business combination with these entities after completion of the initial public offering. Our shareholders are not aware of any business opportunities that may be presented to our management after completion of the initial public offering. Broad Sector Specific Deal Flow From Our Extensive Sourcing Network We believe that the background, professional histories and experience of our officers and directors will enable us to have access to a broad spectrum of investment opportunities. We have a competitive advantage in that our officers and directors have 150 years of collective experience in successfully investing in and managing both public and private companies in the financial services industry. Based on the history of our officers and directors working within the financial services industry and their network of contacts, we believe we will have access to deal flow and the ability to locate an attractive initial business combination. Contacts Table of Contents of our officers and directors who may be a source for referral of potential target businesses include executives employed with and consultants engaged by, public and private businesses in our target industries, and consultants, investment bankers, attorneys, and accountants, among others, with knowledge of the financial services industry. Attractive Proposition to Target Business We believe that potential acquisition targets may favor us over some other potential purchasers of their businesses, including venture capital funds, leveraged buyout funds, private equity funds, operating businesses and other entities and individuals, both foreign and domestic, for the following reasons: Most of these funds have a finite life which generally requires the fund to effect a liquidity event, such as a sale, refinancing or public offering, for portfolio companies in order to return capital to investors. Our formation documents do not require us to effect a liquidity event at any particular time. We will not integrate the operations of our initial acquisition target into an existing environment and corporate culture with pre-existing methods of doing business, as we believe is common with acquisitions by large financial platforms. We have the flexibility to offer potential acquisition targets cash or stock consideration to meet their liquidity or estate planning needs. On the other hand, potential acquisition targets may not favor us over other potential purchasers because we will not benefit from typical merger synergies, such as cost reduction and cost avoidance through economies of scale, because we are not an operating company. Management Team Messrs. Lerner, Lichten, Hammer, Baris and Daras are partners in Inter-Atlantic Group, a New York based private equity firm specializing in the financial services industry. Mr. Galasso is an independent consultant that conducts business with Inter-Atlantic Group from time to time. While each of these individuals is also a member of our management team, no voting arrangement exists among these individuals with respect to our securities. They have been integral in all investing activity, advisory activity, capital raising and strategic planning engaged in by Inter-Atlantic Group. Mr. Galasso has served as a senior executive officer in the payments industry including as Chairman and Chief Executive Officer of NetSpend Corporation, a former portfolio company of Inter-Atlantic Group. Inter-Atlantic Group generally refers to a collection of affiliated companies and partnerships, including two Bermuda-domiciled private equity funds, their general partners and Inter-Atlantic Management Services LLC, the main operating company. Prior to 2001, Inter-Atlantic served the financial services industry through mergers and acquisitions advisory services, capital raising, strategic planning and corporate restructuring for domestic and offshore companies. In 2001, the firm divested its broker-dealer subsidiary, Guggenheim Securities, LLC, in order to focus its efforts on making investments in the financial services sector. In addition, Inter-Atlantic Group has been a senior strategic advisor to a prominent insurance company for the past 12 years. The limited partners of the two private equity funds are a small group of prominent institutional investors. Inter-Atlantic Group s investment committee consists of Messrs. Lerner, Lichten, Hammer, Baris, Daras and Michael P. Esposito Jr., a former employee of the firm who is currently a director and owner of the general partners of the Inter-Atlantic Group funds. Mr. Esposito is a well known financial services executive who serves as Chairman of the Boards of XL Capital Ltd. (NYSE:XL), Security Capital Assurance Ltd. (NYSE: SCA) and Primus Financial Ltd. (NYSE: PRS). Our existing stockholders consist of our officers, our board members, our advisors, and Mr. Esposito. Although both Inter-Atlantic Group and we intend to invest in companies in the financial services industry, there are differences in the size of such targeted investment and the type of companies in which the entities are focused on investing. Inter-Atlantic Group does not make investments in excess of $5 million. By comparison, our amended and restated certificate of incorporation requires that our initial business combination be with a business or business whose fair market value is at least equal to 80% of the balance in the trust account (less deferred underwriting compensation of $2,400,000, or $2,760,000 if the over-allotment is exercised in full and taxes Table of Contents payable). Based on the net offering proceeds of this offering and the sale of the founders warrants held in the trust account of $57,500,000, we would be required to effect an initial business combination with a business whose fair market value is at least $46,000,000. We will not enter into a business combination with any company which Inter-Atlantic Group currently has or previously had a financial interest in. To minimize any conflicts, or the appearance of conflicts, subject to their respective fiduciary obligations, each of Inter-Atlantic Group and Messrs. Lerner, Daras, Baris, Lichten and Hammer has granted us a right of first refusal with respect to any company or business in the financial services industry whose fair market value is at least equal to 80% of the balance of the trust account (less deferred underwriting compensation of $2,400,000, or $2,760,000 if the over-allotment is exercised in full and taxes payable), which we refer to as a Company Potential Target. Pursuant to this right of first refusal, subject to their respective fiduciary obligations, each of these persons and Inter-Atlantic Group has agreed that he or it will not enter into any agreement to acquire majority voting control of a Company Potential Target until our committee of independent directors has had a reasonable period of time to determine whether or not to pursue the opportunity. This right of first refusal will expire upon the earlier of (i) our consummation of an initial business combination or (ii) 24 months after the consummation of this offering. Messrs. Galasso and Weinhoff will be responsible for enforcing this right of first refusal. Our officers and directors are not aware of any potential target businesses seeking a sale, seeking a change of control, seeking an initial public offering or seeking any similar transaction which would accomplish a similar purpose for the target, and in the event that any such entities subsequently come to the attention of our directors and officers prior to the initial public offering, we will not enter into a business combination with these entities after completion of the initial public offering. In addition, the right of first refusal will commence after the consummation of the offering. Effecting a Business Combination General We are not presently engaged in, and we will not engage in, any substantive commercial business for an indefinite period of time following this offering. We intend to utilize cash derived from the proceeds of this offering, the sale of the founders warrants, our capital stock, debt or a combination of these in effecting a business combination. Although substantially all of the net proceeds of this offering are intended to be generally applied toward effecting a business combination as described in this prospectus, the proceeds are not otherwise being designated for any more specific purposes. Accordingly, prospective investors will invest in us without an opportunity to evaluate the specific merits or risks of any one or more business combinations. A business combination may involve the acquisition of, or merger with, a company which does not need substantial additional capital but which desires to establish a public trading market for its shares, while avoiding what it may deem to be adverse consequences of undertaking a public offering itself. These include time delays, significant expense, loss of voting control and compliance with various Federal and state securities laws. In the alternative, we may seek to consummate a business combination with a company that may be financially unstable or in its early stages of development or growth. We have not identified a target business To date, we have not selected any target business on which to concentrate our search for a business combination. None of our officers, directors, promoters or other affiliates have had any preliminary contact or discussions on our behalf with representatives of any prospective target business regarding the possibility of a potential merger, capital stock exchange, asset acquisition or other similar business combination with us. Neither we nor any of our agents or affiliates has yet taken any measure, directly or indirectly, to locate a target business. Finally, we note that there has been no diligence, discussions, negotiations and/or other similar activities undertaken, directly or indirectly, by us, our affiliates or representatives, or by any third party, with respect to a business combination transaction with us. Table of Contents Sources of target businesses We anticipate target business candidates will be brought to our attention from various unaffiliated sources, including investment bankers, attorneys, accountants, venture capital funds, private equity funds, leveraged buyout funds, management buyout funds, brokers, financial services industry executives and consultants and other members of the financial community. We expect sources to become aware that we are seeking a business combination candidate by a variety of means, such as publicly available information relating to this offering, public relations and marketing efforts and articles that may be published in industry trade papers discussing our intent on making acquisitions. Sources will be directly contacted by management following the completion of this offering. Our existing stockholders, officers and directors as well as their affiliates may also bring to our attention target business candidates. We have not yet identified any acquisition candidates, nor will we communicate with any sources of target businesses with respect to an acquisition until consummation of the offering. In addition, our officers, directors and existing stockholders have not had any discussions or communications regarding our Company with any potential sources. While our officers and directors make no commitment as to the amount of time they will spend trying to identify or investigate potential target businesses, they believe that the various relationships they have developed over their careers together with their direct inquiry of their contacts will generate a number of potential target businesses that will warrant further investigation. We may engage the services of professional firms that specialize in business acquisitions in the future, in which event we may pay a finder s fee or other compensation. The terms of any such arrangements will be negotiated with such persons on arm s length basis and disclosed to our stockholders in the proxy materials we provide in connection with any proposed business combination. In no event, however, will we pay any of our existing officers or directors or any entity with which they are affiliated any finder s fee or other compensation for services rendered to us prior to or in connection with the consummation of a business combination, nor will we enter into any business combination with any affiliates of our initial stockholders, officers or directors. In addition, none of our officers or directors will receive any finder s fee, consulting fees or any similar fees or other compensation in connection with any business combination other than any compensation or fees to be received for any services provided following such business combination. Although we are not under any contractual obligation to engage any of the underwriters or Scura, Rise Partners LLC, a financial advisory firm, to provide any services for us after this offering, and have no present intent to do so, any of the underwriters or Scura, Rise Partners LLC may, among other things, introduce us to potential target businesses or assist us in raising additional capital, as needs may arise in the future. However, neither the underwriters or Scura, Rise Partners have taken any steps, directly or indirectly, in the search for a target business and neither the underwriters or Scura, Rise Partners has had any contact or communications with potential sources or potential target businesses. If any of the underwriters or Scura, Rise Partners LLC provide services to us after this offering, we may pay such entity fair and reasonable fees that would be determined at that time in arm s length negotiations. In addition, we have not had any contact with professional firms, preliminary or otherwise, regarding engaging their services in searching for a target business. Selection of a target business and structuring of a business combination Subject to the requirement that our initial business combination must be with a target business with a fair market value that is at least 80% of the amount in our trust account (less deferred underwriting compensation of $2,400,000, or $2,760,000 if the over-allotment is exercised in full and taxes payable) at the time of such acquisition, our management will have virtually unrestricted flexibility in identifying and selecting a prospective target business. Prior to agreeing to a business combination, we will conduct an extensive due diligence review which will encompass, among other things, meetings with incumbent management, where applicable, and inspection of facilities, as well as review of financial and other information which will be made available to us. We will endeavor to structure a business combination so as to achieve the most favorable tax treatment to us, the target business and both companies stockholders. We cannot assure you, however, that the Internal Revenue Service or appropriate state tax authorities, as applicable, will agree with our tax treatment of the business combination. Table of Contents The time and costs required to select and evaluate a target business and to structure and complete the business combination cannot presently be ascertained with any degree of certainty. Any costs incurred with respect to the identification and evaluation of a prospective target business with which a business combination is not ultimately completed will result in a loss to us and reduce the amount of capital available to otherwise complete a business combination. While we may pay fees or compensation to third parties for their efforts in introducing us to a potential target business, in no event, however, will we pay any of our existing officers or directors or any entity with which they are affiliated any finder s fee or other compensation for services rendered to us prior to or in connection with the consummation of a business combination, other than the $7,500 payable monthly in the aggregate to Inter-Atlantic Group, an affiliate of certain of the officers and directors, for office space and certain general and administrative services. None of our officers or directors will receive any finder s fee, consulting fees or any similar fees in connection with any business combination involving us other than any compensation or fees that may be received for any services provided following such business combination. Fair Market Value of Target Business The initial target business that we acquire must have a fair market value equal to at least 80% of the amount in our trust account (less deferred underwriting compensation of $2,400,000, or $2,760,000 if the over-allotment is exercised in full and taxes payable) at the time of such acquisition. There is no limitation on our ability to raise funds privately or through loans that would allow us to acquire a target business or businesses with a fair market value in an amount considerably greater than 80% of the amount in our trust account (less deferred underwriting compensation of $2,400,000, or $2,760,000 if the over-allotment is exercised in full and taxes payable) at the time of acquisition. If we acquire less than 100% of one or more target businesses in our initial business combination, the aggregate fair market value of the portion or portions we acquire must equal at least 80% of our net assets at the time of such initial business combination. In no instance will we acquire less than majority voting control of a target business. However, in the case of a reverse merger or other similar transaction in which we issue a substantial number of new shares, our stockholders immediately prior to such transaction may own less than a majority of our shares subsequent to such transaction. We have not had any preliminary discussions, or made any agreements or arrangements, with respect to financing arrangements with any third party. The fair market value of such business will be determined by our board of directors based upon standards generally accepted by the financial community, such as actual and potential sales, earnings and cash flow and book value, and the price for which comparable businesses have recently been sold. If our board is not able to independently determine that the target business has a sufficient fair market value, we will obtain an opinion from an unaffiliated, independent investment banking firm which is a member of the National Association of Securities Dealers, Inc. with respect to the satisfaction of such criteria. We will not be required to obtain an opinion from an investment banking firm as to the fair market value of a proposed business combination if our board of directors independently determines that the target business has sufficient fair market value. Probable lack of business diversification While we may seek to effect business combinations with more than one target business, our initial business combination must be with a target business or target businesses which satisfy the minimum valuation standard at the time of such acquisition, as discussed above. Consequently, it is probable that we will have the ability to effect only a single business combination, although this may entail the simultaneous acquisition of several compatible operating businesses or assets. Unlike other entities which may have the resources to complete several business combinations of entities operating in multiple industries or multiple areas of a single industry, it is probable that we will not have the resources to diversify our operations or benefit from the possible spreading of risks or offsetting of losses. By consummating a business combination with only a limited number of entities, our lack of diversification may: leave us solely dependent upon the performance of a single business; and result in our dependency upon the development or market acceptance of a single or limited number of products or services. Table of Contents Additionally, since our business combination may entail the simultaneous acquisitions of several assets or operating businesses at the same time and may be with different sellers, we will need to convince such sellers to agree that the purchase of their assets or closely related businesses is contingent upon the simultaneous closings of the other acquisitions. Limited ability to evaluate the target business management If our officers and directors are to remain associated with us following a business combination, they may be involved in different capacities than at present, and we may employ other personnel following the business combination. Although we intend to closely scrutinize such individuals, we cannot assure you that our assessment will prove to be correct. In addition, we cannot assure you that new members that join our management following a business combination will have the necessary skills, qualifications or abilities to help manage a public company. Opportunity for stockholder approval of business combination Prior to the completion of a business combination, we will submit the transaction to our stockholders for approval, even if the nature of the acquisition is such as would not ordinarily require stockholder approval under applicable state law. In connection with seeking stockholder approval of a business combination, we will furnish our stockholders with proxy solicitation materials prepared in accordance with the Securities Exchange Act of 1934, which, among other matters, will include a description of the operations of the target business and certain required financial information regarding the business. In connection with the vote required for any business combination, all of our existing stockholders, including all of our officers and directors, have agreed to vote their respective shares of common stock owned by them immediately prior to this offering in accordance with the majority of the shares of common stock voted by the public stockholders. Existing stockholders who purchase shares of common in this offering or after this offering have agreed to vote such shares in favor of any proposed business combination. We are not aware of any intention on the part of our existing shareholders including our officers and directors, to make any purchases in this offering or in the aftermarket, although they are not prohibited from doing so. Although we do not know for certain the factors that would cause our existing stockholders to purchase our securities, we believe that some of the factors they would consider are: (i) the trading price of our securities, (ii) their aggregate investment in our securities, (iii) whether it appears that a substantial number of public stockholders are voting against a proposed business combination, and (iv) their interest in the target business once the target business has been identified. Any shares acquired by such individuals in this offering or in the aftermarket will be voted in favor of the business combination. Accordingly, any purchase of our shares by our officers and directors, including all of our existing shareholders, in this offering or in the aftermarket could influence the result of a vote submitted to our shareholders in connection with a business combination by making it more likely that a business combination would be approved. In addition, given the interest that our existing stockholders have in a business combination being consummated, it is possible that our existing stockholders will acquire securities from public stockholders who have elected to redeem their shares of our common stock (as described below) in order to change their vote and insure that the business combination will be approved (which could result in a business combination being approved even if, after the announcement of the business combination, 30% or more of our public stockholders would have elected their redemption rights, or 51% of our public stockholders would have voted against the business combination, but for the purchases made by our existing stockholders). We will proceed with the business combination only if a majority of the shares of common stock cast at the meeting are voted in favor of the business combination, and public stockholders owning 29.99% or less of the shares sold in this offering exercise their redemption rights. This is different than the traditional blank check company structure and makes it more likely that a business combination will be approved. Voting against the business combination alone will not result in redemption of a stockholder s shares into a pro rata share of our trust account. Such stockholder must have also exercised its redemption rights described below. As a result of our higher redemption threshold, we may have less cash available to complete a business combination. Because we will not know how many stockholders may exercise such redemption rights, we will need to structure a business combination that requires less cash, or we may Table of Contents need to arrange third party financing to help fund the transaction in case a larger percentage of stockholders exercise their redemption rights than we expect. Alternatively, to compensate for the potential shortfall in cash, we may be required to structure the business combination, in whole or in part, using the issuance of our stock as consideration. Accordingly, this increase in the customary redemption threshold may hinder our ability to consummate a business combination in the most efficient manner or to optimize our capital structure. Redemption rights At the time we seek stockholder approval of any business combination, we will offer each public stockholder (other than existing stockholders) the right to have such stockholder s shares of common stock redeemed for cash if the stockholder votes against the business combination and the business combination is approved and completed. The actual per-share redemption price will be equal to the quotient determined by dividing (i) the amount of our trust account (inclusive of any interest earned thereon, less (x) any amount necessary to pay accrued federal, state or local income tax on such interest, calculated as of two business days prior to the consummation of the business combination, and (y) up to an aggregate amount of $1,100,000 of the interest earned on our trust account, net of taxes payable, which will be released to us upon our demand, and (z) the deferred portion of the underwriters deferred discount), by (ii) the total number of shares of common stock outstanding at that date. An eligible stockholder may request redemption at any time after the mailing to our stockholders of the proxy statement and prior to the vote taken with respect to a proposed business combination at a meeting held for that purpose, but the request will not be granted unless the stockholder votes against the business combination and the business combination is approved and completed. Stockholders will not be requested to tender their shares of common stock before a business combination is consummated. If a business combination is consummated, redeeming stockholders will be sent instructions on how to tender their shares of common stock and when they should expect to receive the redemption amount. In order to ensure accuracy in determining whether or not the redemption threshold has been met, each redeeming stockholder must continue to hold their shares of common stock until the consummation of the business combination. We will not charge redeeming stockholders any fees in connection with the tender of shares for redemption. If a stockholder votes against the business combination but fails to properly exercise his or her redemption rights, such stockholder will not have his or her shares of common stock redeemed for his or her pro rata distribution of the trust account. Any request for redemption, once made, may be withdrawn at any time up to the date of the meeting. Public stockholders who redeem their stock into their share of our trust account still have the right to exercise the warrants that they received as part of the units. We will not complete any business combination if public stockholders, owning more than 29.99% of the shares sold in this offering, exercise their redemption rights. This is different than the traditional blank check company structure and makes it more likely that a business combination will be approved. Even if 29.99% or less of the stockholders, as described above, exercise their redemption rights, we may be unable to consummate a business combination if such redemption leaves us with funds less than a fair market value equal to at least 80% of the amount in our trust account (excluding any funds held for the benefit of any of the underwriters and taxes payable) at the time of such acquisition, which amount is required for our initial business combination. In such event we may be forced to either find additional financing to consummate such a business combination, consummate a different business combination or dissolve, liquidate and wind up. The Company has agreed not to lower the redemption threshold below 29.99% in connection with the negotiation of a business combination. Investors who choose to remain as stockholders and do not exercise their redemption rights will have assumed the entire cost of the offering, including the underwriters discount (but not including the deferred compensation owed to Morgan Joseph Co.). The additional cost per share allocable to such remaining stockholders would be $0 if none of the shares sold in the offering are redeemed, and approximately $0.90 per share if the maximum number of shares which may be redeemed are redeemed. Dissolution and liquidation if no business combination Our amended and restated certificate of incorporation provides that we will continue in existence only until , 2009. This provision may not be amended without the affirmative vote of 95% of the shares Table of Contents issued in this offering except in connection with the consummation of a business combination. If we have not completed a business combination by such date, our corporate existence will cease except for the purposes of winding up our affairs and liquidating, pursuant to Section 278 of the Delaware General Corporation Law. This has the same effect as if our board of directors and stockholders had formally voted to approve our dissolution pursuant to Section 275 of the Delaware General Corporation Law. Accordingly, limiting our corporate existence to a specified date as permitted by Section 102(b)(5) of the Delaware General Corporation Law removes the necessity to comply with the formal procedures set forth in Section 275 (which would have required our board of directors and stockholders to formally vote to approve our dissolution and liquidation and to have filed a certificate of dissolution with the Delaware Secretary of State). We view this provision terminating our corporate life by , 2009 as an obligation to our stockholders and will not take any action to amend or waive this provision to allow us to survive for a longer period of time except in connection with the consummation of a business combination. If we are unable to complete a business combination by , 2009, we will distribute to all of our public stockholders, in proportion to their respective equity interests, an aggregate sum equal to the amount in the trust account, inclusive of any interest, net of taxes, and up to $1,100,000 which may be used to fund our working capital requirements, plus any remaining net assets (subject to our obligations under Delaware law to provide for claims of creditors as described below). We anticipate notifying the trustee of the trust account to begin liquidating such assets promptly after such date and anticipate it will take no more than 10 business days to effectuate such distribution. Our existing stockholders have waived their rights to participate in any such distribution or any liquidation distribution with respect to their initial shares. In addition, Morgan Joseph Co. has agreed to waive their rights to the $2,400,000 ($2,760,000 if the underwriters over-allotment is exercised in full) of deferred underwriting compensation deposited in our trust account. There will be no distribution from the trust account or otherwise with respect to our warrants which will expire worthless. We will pay the costs of liquidation and dissolution (currently anticipated to be no more than approximately $15,000) from our remaining assets outside of the trust account. We believe there should be sufficient funds available, outside of the trust account as well as from interest earned on the trust account and released to us as working capital, in addition to monies available pursuant to the Company s limited recourse revolving line of credit, to fund the $15,000 in costs and expenses. To the extent sufficient funds are not available, Messrs. Lerner, Daras, Baris, Hammer and Lichten have agreed to indemnify us, however, we cannot assure you that they will be able to satisfy these obligations. Our public stockholders will be entitled to receive funds from the trust account only in the event of the liquidation of the trust account or if they seek to convert their respective shares into cash upon a business combination which the stockholder voted against and which is completed by us. In no other circumstances will a stockholder have any right or interest of any kind to or in the trust account. If we were to expend all of the net proceeds of this offering, other than the proceeds deposited in the trust account, and without taking into account interest, if any, earned on the trust account, the initial per-share liquidation price would be $7.99, or $0.01 less than the per-unit offering price of $8.00. Any creditor s claims against the trust account (which would include vendors and service providers we have engaged to assist us in any way in connection with our search for a target business and that are owed money by us, as well as target businesses themselves) will have higher priority than the claims of our public stockholders. Messrs. Lerner, Daras, Baris, Hammer and Lichten have agreed to indemnify us, jointly and severally pro rata according to their comparative beneficial interests in our company immediately prior to this offering, for our debts to vendors, or to any prospective target business, if we do not obtain a valid and enforceable waiver from that vendor or prospective target business of its rights or claims to the trust account and only to the extent necessary to ensure that such claims do not reduce the amount in the trust account. However, we cannot assure you that they will be able to satisfy those obligations, if they are required to do so. As a result, we cannot assure you that the per-share distribution from the trust account, if we liquidate, will not be less than $7.99, plus interest then held in the trust account. Table of Contents Additionally, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. To the extent any bankruptcy claims deplete the trust account, we cannot assure you we will be able to return to our public stockholders at least $7.99 per share. Under the Delaware General Corporation Law, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. If the corporation complies with certain procedures set forth in Section 280 of the Delaware General Corporation Law intended to ensure that it makes reasonable provision for all claims against it, including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution. However, as stated above, it is our intention to make liquidating distributions to our stockholders as soon as reasonably possible after , 2009 and, therefore, we do not intend to comply with those procedures. As such, our stockholders could potentially be liable for any claims to the extent of distributions received by them and any liability of our stockholders may extend well beyond the third anniversary of such date. Because we will not be complying with Section 280, Section 281(b) of the Delaware General Corporation Law requires us to adopt a plan of dissolution that will provide for our payment, based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against us within the subsequent 10 years. However, because we are a blank check company, rather than an operating company, and our operations will be limited to searching for prospective target businesses to acquire, the only likely claims to arise would be from our vendors and service providers (such as accountants, lawyers, investment bankers, etc.) and potential target businesses. As described above, we are obligated to have all significant vendors and service providers and all prospective target businesses execute agreements with us waiving any and all right, title, interest or claim of any kind they may have in or to any monies held in the trust account. The determination of which vendors will be deemed significant will be made by our management but will include any investment bankers, legal advisors, accounting firms and business consultants we hire in connection with a business combination. Based on representations made to us by our indemnifying officers and directors, we currently believe that they have substantial means to fund any shortfall in our trust account to satisfy their foreseeable indemnification obligations, but we have not asked them to reserve for such eventuality. The indemnification obligations may be substantially greater than our indemnifying officers and directors currently foresee or expect. Their financial resources may also deteriorate in the future. Hence, we cannot assure you that our officers and directors will be able to satisfy those obligations. Moreover, because we will obtain the waiver agreements described above, the funds held in trust should be excluded from the claims of any creditors who executed such agreements in connection with any bankruptcy proceeding. However, such agreements may or may not be enforceable. As such, our stockholders could potentially be liable for any claims to the extent of distributions received by them in a dissolution and any liability of our stockholders may extend beyond the third anniversary of such dissolution. If we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, any distributions received by stockholders could be viewed under applicable debtor/creditor and/or bankruptcy laws as either a preferential transfer or a fraudulent conveyance. As a result, a bankruptcy court could seek to recover all amounts received by our stockholders in our dissolution. Furthermore, because we intend to distribute the proceeds held in the trust account to our public stockholders promptly after , 2009, this may be viewed or interpreted as giving preference to our public stockholders over any potential creditors with respect to access to or distributions from our assets. Additionally, our board may be viewed as having breached their fiduciary duties to our creditors and/or may have acted in bad faith, and thereby exposing itself and our company to claims of punitive damages, by paying public stockholders from the trust account prior to addressing the claims of creditors. We cannot assure you that claims will not be brought against us for these reasons. Table of Contents Amended and restated certificate of incorporation Our amended and restated certificate of incorporation sets forth certain requirements and restrictions relating to this offering that shall apply to us until the consummation of a business combination. Specifically, it provides that: prior to the consummation of our initial business combination, we will submit such business combination to our stockholders for approval; we may consummate our initial business combination if: (i) approved by a majority of the shares of common stock voted by the public stockholders and (ii) public stockholders owning less than 30% of the shares of common stock purchased by the public stockholders in this offering exercise their redemption rights; if our initial business combination is approved and consummated, public stockholders who voted against the business combination and exercised their redemption rights will receive their pro rata share of the trust account; if a business combination is not consummated within 24 months from the date of this prospectus, then we will dissolve and distribute to all of our public stockholders their pro rata share of the trust account; and we may not initially consummate any other merger, capital stock exchange, stock purchase, asset acquisition or similar transaction other than a business combination that meets the conditions specified in this prospectus, including the requirement that such combination be with one or more operating businesses that have a fair market value, either individually or collectively, equal to at least 80% of our net assets at the time of such business combination. Our amended and restated certificate of incorporation requires that we obtain the affirmative vote of holders of 95% of the shares issued in this offering to amend certain provisions of our amended and restated certificate of incorporation. However, the validity of such supermajority voting provisions under Delaware law has not been settled. A court could conclude that such supermajority voting consent requirement constitutes a practical prohibition on amendment in violation of the stockholders implicit rights to amend the corporate charter. In that case, certain provisions of the amended and restated certificate of incorporation would be amendable without such supermajority consent and any such amendment could reduce or eliminate the protection afforded to our stockholders. However, we view the foregoing provisions as obligations to our stockholders, and we will not take any action to waive or amend any of these provisions. Competition for Target Businesses In identifying, evaluating and selecting a target business, we may encounter intense competition from other entities having a business objective similar to ours. Many of these entities are well established and have extensive experience identifying and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human and other resources than us and our financial resources will be relatively limited when contrasted with those of many of these competitors. While we believe there are numerous potential target businesses that we could acquire with the net proceeds of this offering, our ability to compete in acquiring certain sizable target businesses will be limited by our available financial resources. This inherent competitive limitation gives others an advantage in pursuing the acquisition of a target business. Further: our obligation to seek stockholder approval of a business combination or obtain the necessary financial information to be included in the proxy statement to be sent to stockholders in connection with such business combination may delay or prevent the completion of a transaction; our obligation to redeem for cash shares of common stock held by our public stockholders in certain instances may reduce the resources available to us for a business combination; Table of Contents our outstanding warrants, and the future dilution they potentially represent, may not be viewed favorably by certain target businesses; and the requirement to acquire assets or an operating business that has a fair market value equal to at least 80% of the amount in our trust account (less deferred underwriting compensation of $2,400,000, or $2,760,000 if the over-allotment is exercised in full and taxes payable) at the time of the acquisition could require us to acquire several assets or closely related operating businesses at the same time, all of which sales would be contingent on the closings of the other sales, which could make it more difficult to consummate the business combination. Additionally, we face competition from other blank-check companies which have formed recently, a number of which may consummate a business combination in any industry they choose. We may therefore be subject to competition from these companies, which are seeking to consummate a business plan similar to ours and which will, as a result, increase demand for privately-held companies to combine with companies structured similarly to ours. Further, it may be the case that there are only a limited number of attractive target businesses available to such entities or that many privately-held target businesses may not be inclined to enter into business combinations with publicly held blank check companies like us. Any of these factors may place us at a competitive disadvantage in negotiating a business combination. Our management believes, however, that our status as a public entity and potential access to the United States public equity markets may give us a competitive advantage over privately-held entities having a similar business objective as us in acquiring a target business with significant growth potential on favorable terms. If we effect a business combination, there will be, in all likelihood, intense competition from competitors of the target business. We cannot assure you that, subsequent to a business combination, we will have the resources or ability to compete effectively. Facilities We maintain executive offices at 400 Madison Avenue, New York, New York, 10017. The costs for this space is included in the $7,500 per-month fee Inter-Atlantic Group charges us for general and administrative services, including but not limited to receptionist, secretarial and general office services, pursuant to a letter agreement between us and Inter-Atlantic Group, an affiliate of certain of the officers and directors. This agreement commences on the date of this prospectus and shall continue until the earliest to occur of: (i) consummation of a business combination, (ii) 24 months after the completion of this offering and (iii) the date on which we determine to dissolve and liquidate our trust account as part of our plan of dissolution and liquidation. We believe, based on rents and fees for similar services in New York, New York, that the fee charged by Inter-Atlantic Group is at least as favorable as we could have obtained from an unaffiliated person. We consider our current office space adequate for our current operations. Employees We have four executive officers, three of whom are also members of our Board of Directors. These individuals are not obligated to contribute any specific number of hours per week and intend to devote only as much time as they deem necessary to our affairs. The amount of time they will devote in any time period will vary based on the availability of suitable target businesses to investigate. We do not intend to have any full time employees prior to the consummation of a business combination. Periodic Reporting and Financial Information We will register our units, common stock and warrants under the Securities Exchange Act of 1934, as amended, and have reporting obligations, including the requirement that we file annual and quarterly reports with the SEC. In accordance with the requirements of the Securities Exchange Act of 1934, our annual reports will contain financial statements audited and reported on by our independent accountants. We will not acquire an operating business if audited financial statements based on United States generally accepted accounting principles cannot be obtained for such target business. Alternatively, we will not acquire Table of Contents assets if the financial information called for by applicable law cannot be obtained for such assets. Additionally, our management will provide stockholders with the foregoing financial information as part of the proxy solicitation materials sent to stockholders to assist them in assessing each specific target business or assets we seek to acquire. Our management believes that the requirement of having available financial information for the target business or assets may limit the pool of potential target businesses or assets available for acquisition. Legal Proceedings To the knowledge of our management, there is no litigation currently pending or contemplated against us or any of our officers or directors in their capacity as such. Comparison to Offerings of Blank Check Companies The following table compares and contrasts the terms of our offering and the terms of an offering of blank check companies under Rule 419 promulgated by the SEC assuming that the gross proceeds, underwriting discounts and underwriting expenses for the Rule 419 offering are the same as this offering and that the underwriters will not exercise their over-allotment option. None of the terms of a Rule 419 offering will apply to this offering. Terms of Our Offering Terms Under a Rule 419 Offering Escrow of offering proceeds $59,900,000 of the net offering proceeds and the pre-offering private placement proceeds from the sale of the founders warrants, (including up to $2,400,000 of deferred underwriting commissions payable to Morgan Joseph Co. upon consummation of a business combination) will be deposited into a trust account at JP Morgan Chase maintained by American Stock Transfer Trust Company, leaving us with $57,500,000 with which to consummate the business combination. $50,220,000 would be required to be deposited into either an escrow account (not including the $2,400,000 of deferred underwriting commissions payable to Morgan Joseph Co. upon consummation of a business combination) with an insured depositary institution or in a separate bank account established by a broker- dealer in which the broker-dealer acts as trustee for persons having the beneficial interests in the account. Investment of net proceeds The $59,900,000 of net offering proceeds and the pre-offering private placement proceeds from the sale of the founders warrants held in trust will only be invested in U.S. government securities, defined as any Treasury Bill issued by the United States having a maturity of one hundred and eighty days or less or money market funds meeting certain criteria. Proceeds could be invested only in specified securities such as a money market fund meeting conditions of the Investment Company Act of 1940 or in securities that are direct obligations of, or obligations guaranteed as to principal or interest by, the United States. Limitation on fair value or net assets of target business The initial target business that we acquire must have a fair market value equal to at least 80% of the amount in our trust account (less deferred underwriting compensation of $2,400,000, or $2,760,000 if the over-allotment is exercised in full and taxes payable) at the time of such acquisition. We would be restricted from acquiring a target business unless the fair value of such business or net assets to be acquired represent at least 80% of the maximum offering proceeds. Table of Contents Terms of Our Offering Terms Under a Rule 419 Offering Trading of securities issued The units shall commence trading on or promptly after the date of this prospectus. The common stock and warrants comprising the units shall begin to trade separately on the 90th day after the date of this prospectus unless Morgan Joseph Co. informs us of its decision to allow earlier separate trading, provided (i) we have filed with the SEC a Current Report on Form 8-K, which includes an audited balance sheet reflecting our receipt of the proceeds of this offering, including any proceeds we receive from the exercise of the over-allotment option, if such option is exercised on the date of this prospectus, (ii) we file a Current Report on Form 8-K and issue a press release announcing when such separate trading will begin, and (iii) the date on which such separate trading begins is a business day following the earlier to occur of the expiration of the underwriters over- allotment option or its exercise in full. Morgan Joseph Co. may decide to allow continued trading of the units following such separation. No trading of the units or the underlying common stock and warrants would be permitted until the completion of a business combination. During this period, the securities would be held in the escrow or trust account. Exercise of the warrants The warrants cannot be exercised until the later of the completion of a business combination or one year from the date of this prospectus and, accordingly, will only be exercised after our trust account has been terminated and distributed. The warrants could be exercised prior to the completion of a business combination, but securities received and cash paid in connection with the exercise would be deposited in the escrow or trust account. Election to remain an investor We will give our stockholders the opportunity to vote on the business combination. In connection with seeking stockholder approval, we will send each stockholder a proxy statement containing information required by the SEC. A stockholder following the procedures described in this prospectus is given the right to redeem his or her shares for a pro rata share of the trust account. However, a stockholder who does not follow these procedures or a stockholder who does not take any action would not be entitled to the return of any funds. A prospectus containing information required by the SEC would be sent to each investor. Each investor would be given the opportunity to notify the company, in writing, within a period of no less than 20 business days and no more than 45 business days from the effective date of the post-effective amendment, to decide whether he or she elects to remain a stockholder of the company or require the return of his or her investment. If the company has not received the notification by the end of the 45th business day, funds and interest or dividends, if any, held Table of Contents Terms of Our Offering Terms Under a Rule 419 Offering in the trust or escrow account would automatically be returned to the stockholder. Unless a sufficient number of investors elect to remain investors, all of the deposited funds in the escrow account must be returned to all investors and none of the securities will be issued. Business combination deadline A business combination must occur within 24 months after the consummation of this offering. If a business combination does not occur within this time frame our corporate existence shall cease except for the purpose of winding up our affairs and liquidating. If an acquisition has not been consummated within 18 months after the effective date of the initial registration statement, funds held in the trust or escrow account would be returned to investors. Release of funds The proceeds held in our trust account will not be released until the earlier of the completion of a business combination or as part of any plan of dissolution and liquidation of our company approved by our stockholders upon our failure to effect a business combination within the allotted time. While we intend, in the event of our dissolution and liquidation, to distribute funds from our trust account to our public stockholders as promptly as possible pursuant to our stockholder approved plan of dissolution and liquidation, the actual time at which our public stockholders receive their funds will be longer than the 5 business days under a Rule 419 offering. For a detailed discussion of the timing involved in a return of funds from our trust account to our public stockholders as part of our plan of dissolution and liquidation, see Proposed Business Plan of Dissolution and Liquidation if No Business Combination. The proceeds held in our trust account, including all of the interest earned thereon (net of taxes payable) would not be released until the earlier of the completion of a business combination or the failure to effect a business combination within 18 months. See Risk Factors Risks Associated with Our Company and the Offering You will not be entitled to protections normally afforded to investors of blank check companies. In the event a business combination was not consummated within 18 months, proceeds held in our trust account would be returned within 5 business days of such date. Interest earned on funds in trust Interest earned on our trust account in excess of the dollar amount necessary to allow for a $7.99 per share liquidation distribution, subject to any valid claims by our creditors which are not covered by amounts in our trust account or indemnities provided by Messrs. Lerner, Daras, Baris, Hammer and Lichten to our The interest earned on proceeds held in trust (net of taxes payable) would be held for the sole benefit of investors, and we would be unable to access such interest for working capital purposes. Table of Contents Terms of Our Offering Terms Under a Rule 419 Offering public stockholders will be released to us to fund our working capital requirements, with such amount to be released for working capital purposes limited to an aggregate of $1,100,000. In addition, interest earned may be disbursed for the purposes of paying taxes on interest earned. Upon the dissolution and liquidation of our company as part of a plan of dissolution and liquidation approved by our stockholders such stockholders shall be entitled to a portion of the interest earned on funds held in trust, if any, not previously released to us to fund our working capital requirements or costs associated with a plan of dissolution and liquidation if we do not consummate a business combination, net of taxes payable on such funds held in trust. Table of Contents MANAGEMENT Directors and Executive Officers Our current directors and executive officers are listed below. None of such persons are, or have been, involved with any other blank check companies. Name Age Position Andrew S. Lerner 42 Chief Executive Officer and Director Stephen B. Galasso 59 Senior Strategic Officer and Director D. James Daras 53 Executive Vice President, Chief Financial Officer and Director Brett G. Baris 32 Executive Vice President Robert M. Lichten 67 Director Frederick S. Hammer 71 Director Samuel J. Weinhoff 57 Director Mr. Andrew S. Lerner has been our Chief Executive Officer and a Director since inception. Mr. Lerner is Managing Partner of Inter-Atlantic Group, where he has been employed since 1995. Mr. Lerner is responsible for the day-to-day activities of Inter-Atlantic Group, and is a member of Inter-Atlantic Group s investment committee. In 2000, he launched Inter-Atlantic Group s private equity business which is now the core activity of the organization. Mr. Lerner was also President and Managing Director of Guggenheim Securities, LLC, Inter-Atlantic Group s former NASD broker-dealer operation, until 2003. He was responsible for its day-to-day affairs including all supervisory, financial, regulatory, compliance and broker-dealer activities. Mr. Lerner is a Director of Higher One Inc. and Loan Servicing Solutions Holdings LLC and a Board Observer at Planet Payment, Inc. Higher One Inc., Loan Servicing Solutions Holdings LLC and Planet Payment, Inc. are portfolio companies of Inter-Atlantic Group. He is a former Director of several of Inter-Atlantic Group s current and past portfolio companies. Mr. Lerner has over 18 years of experience in the financial services industry. Prior to joining Inter-Atlantic Group, he served as an investment banker in the Financial Institutions Group of Smith Barney Inc. for four years and in its Mortgage and Asset Finance Group for two years. At Smith Barney, he concentrated on raising capital and providing merger and acquisition advisory services to financial institutions. Assignments included advising the parent corporation, now known as Citigroup Inc., on multiple financial services acquisitions. Also, since 1995, Inter-Atlantic Group has been a senior strategic advisor to a prominent insurance company and during the past 12 years Mr. Lerner has periodically led merger and acquisition advisory and other strategic assignments related thereto, including the divestiture of its credit card business. Mr. Lerner holds a B.S.E. in Electrical Engineering and Computer Science from Princeton University and an M.B.A. in Finance from The Wharton School, University of Pennsylvania. Mr. Stephen B. Galasso has been the Senior Strategic Officer and a Director since inception. Mr. Galasso is an independent consultant in the payments industry. Mr. Galasso has been a strategic advisor and independent board director to both Account Now, Inc. since 2007 and Advanced Payment Solutions since 2005. Advanced Payment Solutions is an early stage company that launched the UK s first prepaid bank card. Prior to joining Advanced Payment Solutions, Mr. Galasso was the Chairman and Chief Executive Officer of NetSpend Corporation, an Inter-Atlantic Group portfolio company that provides prepaid payment solutions, from November 2001 to April 2004. The company won the Portfolio Company of the Year Award in 2003 from the National Association of Small Business Investment Companies (NASBIC). In addition, Mr. Galasso helped pioneer the United States Office of the Comptroller of Currency and association (MasterCard) prepaid debit card rules and regulations. Mr. Galasso was also formerly the President and Chief Executive Officer of Universal Value Network, a payment card content and data management company, which he was instrumental in selling. Prior to this venture, Mr. Galasso was President and Chief Executive Officer of Bank of America National Association, Bank of America s credit card company. He also served as a member of Bank of America s Senior Management Council and as Executive Vice President of Marketing and Product Management at Bank of America Credit Cards. Prior to Bank of America, Mr. Galasso was Vice President of Marketing, Director of Communications, Strategic Planning and New Products for Citibank, VISA and Table of Contents MasterCard Products. Mr. Galasso holds a B.S. in Marketing from Fordham University and an M.B.A. from Fordham University Graduate School of Business. Mr. D. James Daras has been our Executive Vice President, Chief Financial Officer and a Director since inception. Mr. Daras has been a Partner of Inter-Atlantic Group since 2005. In addition, Mr. Daras is currently the Chief Executive Officer and Director of Loan Servicing Solutions Holdings, LLC, a portfolio company of Inter-Atlantic Group. From 2002-2005, Mr. Daras was Chief Executive Officer of JW Group, LLC, which provided advisory services to hedge funds investing in financial institutions and mortgage real estate investment trusts. During that time he was also an advisor to Franklin Madison Group, a boutique consulting firm specializing in performance enhancement for financial institutions in the areas of financial management, capital markets activities, risk management, information technology and operations. Mr. Daras has experience in bank restructuring, recapitalizing and merger and acquisitions having played a major role in those areas at Dime Bancorp. From 1991 through 2002, at Dime Bancorp, Mr. Daras managed loan and securities portfolios, and also oversaw the bank s cash management, money transfer, derivatives, funding and risk management operations. Mr. Daras previous positions include Executive Vice President, Treasurer and Asset-Liability Committee Chairman of Dime Bancorp, Chief Financial Officer of Cenlar Capital Corp., a mortgage banking company and Vice President of The Chase Manhattan Bank. Mr. Daras is a former Director of Inter-Atlantic Group portfolio company Red Vision Systems, Inc. Mr. Daras has authored or co-authored several papers on fixed income risk management techniques and asset-liability management at banks. He holds a B.B.A. from George Washington University and an M.B.A. from St. Johns University. Mr. Brett G. Baris has been an Executive Vice President of our company since inception. Mr. Baris is a Partner of Inter-Atlantic Group, where he has been employed since 1998. Mr. Baris is responsible for sourcing, analyzing, negotiating, structuring and monitoring private equity investments, and is a member of Inter-Atlantic Group s investment committee. Mr. Baris was a Vice President of Guggenheim Securities, LLC, Inter-Atlantic Group s former NASD broker-dealer operation, until 2003, and held series 7, series 24 and series 63 NASD licenses. Prior to joining Inter-Atlantic Group, Mr. Baris spent two years as an analyst in the Financial Institutions Group of Salomon Smith Barney Inc. At Salomon Smith Barney, Mr. Baris worked predominantly on collateralized debt offerings and securitizations in the student loan finance area. Mr. Baris is a Director of Avalon Healthcare Holdings, Inc., Homeowners of America Holding Corporation, US Fiduciary Inc. and Loan Servicing Solutions Holdings LLC, Inter-Atlantic Group portfolio companies. Mr. Baris holds a B.A. in Economics, magna cum laude, from Tufts University and an M.B.A. from Columbia Business School. He is a member of the Phi Beta Kappa National Honor Society and the Beta Gamma Sigma International Honor Society. Mr. Robert M. Lichten has been a Director since inception. Mr. Lichten has been Co-Chairman of Inter-Atlantic Group since 1994 and is a member of Inter-Atlantic Group s investment committee. He also served as Co-Chairman of Guggenheim Securities LLC, Inter-Atlantic Group s former NASD broker-dealer operation, until 2003. Previously, Mr. Lichten was Managing Director at both Smith Barney Inc. and Lehman Brothers Inc., where he concentrated on capital raising and providing merger and acquisition advisory services to financial institutions. Mr. Lichten was also formerly Executive Vice President of The Chase Manhattan Bank. During his 22 years at Chase he was a senior corporate banker and was in charge of worldwide capital planning. Mr. Lichten also served as Chief of Staff of the Asset-Liability Management Committee and President of The Chase Investment Bank. As President, he was responsible for all swap and derivative products, corporate finance, private placements, leasing, loan syndications and merger and acquisition activities. Mr. Lichten is a Director of Inter-Atlantic Group s portfolio companies SeaPass Solutions, Inc. and GovernanceMetrics International, Inc. a corporate governance rating agency and Loan Servicing Solutions Holdings LLC. In addition, he currently serves as a Director on the Board of Security Capital Assurance Ltd. and its subsidiaries XL Capital Assurance and XL Financial Assurance. He is a former trustee of Manhattan College, a former Director of Annuity Life Re (Holdings), Ltd. and a former Director and President of the Puerto Rico USA Foundation, a cooperative effort between the Commonwealth of Puerto Rico and numerous multi-national corporations. Mr. Lichten holds a B.S. in Chemical Engineering from Manhattan College and an M.B.A. from New York University. He served as a Lieutenant in the United States Air Force and received the Air Force Commendation Medal for his work in solid rocket propulsion systems. Table of Contents Mr. Frederick S. Hammer has been a Director since inception. Mr. Hammer has been Co-Chairman of Inter-Atlantic Group since 1994 and is a member of Inter-Atlantic Group s investment committee. He also served as Co-Chairman of Guggenheim Securities LLC, Inter-Atlantic Group s former NASD broker-dealer operation, until 2003. Mr. Hammer formerly served as Chairman, President and Chief Executive Officer of Mutual of America Capital Management Corporation. Previously, Mr. Hammer served as President of SEI Asset Management Group where he originated the multi-manager investment operations at the company. Mr. Hammer also served as Chairman and Chief Executive Officer of Meritor Financial Group; Executive Vice President of The Chase Manhattan Bank, where he was responsible for the bank s global consumer activities including the retail branch network, credit card, consumer lending and deposit businesses; Executive Vice President of Associates Corp. of North America; and Vice President of Bankers Trust Co. Mr. Hammer is a Director of Inter-Atlantic Group s portfolio companies E-Duction, Inc., Avalon Healthcare Holdings, Inc, Homeowners of America Holding Corporation and US Fiduciary Inc. In addition, he currently serves as a Director on the Boards of ING Clarion Realty Funds and Unicorn Financial Services, and is a former Director of several public and private companies, including VISA USA and VISA International. Mr. Hammer holds an A.B. degree in Mathematics, magna cum laude, from Colgate University and received his M.S. and Ph.D. degrees in Economics from Carnegie-Mellon University. He has taught Finance and Banking at The Wharton School, The University of Indiana, and New York University s Graduate School of Business Administration. Mr. Samuel J. Weinhoff has been a Director since July 2007. Mr. Weinhoff has served as a consultant to the insurance industry since 2000. Prior to this, Mr. Weinhoff was head of the Financial Institutions Group for Schroder Co. from 1997 until 2000. He was also a Managing Director at Lehman Brothers, where he worked from 1985 to 1997. Mr. Weinhoff had ten years prior experience at Home Insurance Company and the Reliance Insurance Company in a variety of positions, including excess casualty reinsurance treaty underwriter, investment department analyst, and head of corporate planning and reporting. Mr. Weinhoff is currently a member of the board of directors of Infinity Property and Casualty Corporation, where he is a member of both the Executive Committee and the Audit Committee, and a member of the board of directors of Allied World Assurance Company Holdings, Ltd., where he is a member of the Executive Committee, the Audit Committee and the Investment Committee. Advisors Mr. P. Carter Rise is a Founding Partner of Scura, Rise Partners, LLC, financial advisory firm. Prior to founding Scura, Rise Partners, LLC, Mr. Rise was Managing Director and Group Head of the Financial Services Group at Prudential Securities Incorporated from 1996 to 2000. Mr. Rise served on many of Prudential Securities governance and management committees, including the Operating Council, the Investment Banking and Fixed Income Business Review Committees and the Investment Committees for Roman Arch I and II investment funds. From 1993 to 1996, Mr. Rise managed Prudential Securities Private Placement Group. From 1987 to 1992, he was an Associate and a Vice President in the firm s High Yield and Private Placement Groups. Mr. Rise received his M.B.A. degree from the Wharton School at the University of Pennsylvania and a B.S. degree in Commerce from the McIntyre School of Commerce the University of Virginia. Mr. Matthew D. Vertin is a Managing Partner at Scura, Rise Partners, LLC, a financial advisory firm. Before joining Scura, Rise Partners, LLC, he was a Director and the Head of the Financial Technology Investment Banking Group at Prudential Securities where he worked with both public and private financial technology companies. Prior to heading the Financial Technology Group, he was in the Financial Institutions Group at Prudential Securities. After graduating from business school, Mr. Vertin worked for Gabelli Asset Management Company. Mr. Vertin has an M.B.A. degree from Columbia Business School and a B.S. degree from the United States Military Academy at West Point. Classified Board Our board of directors is divided into three classes with only one class of directors being elected in each year and each class serving a three-year term. The term of office of the first class of directors, consisting of Messrs. Daras and Hammer, will expire at our first annual meeting of stockholders. The term of office of the Table of Contents second class of directors, consisting of Messrs. Weinhoff and Galasso, will expire at the second annual meeting. The term of office of the third class of directors, consisting of Messrs. Lerner and Lichten, will expire at the third annual meeting. It is our policy that all of our board members attend our annual meetings. Director Independence Our board of directors has determined that Messrs. Hammer, Lichten and Weinhoff are independent directors within the meaning of Rule 121(A) of the American Stock Exchange Company Guide and Rule 10A-3 promulgated under the Securities and Exchange Act of 1934, as amended. We intend to have a majority of our board of directors be comprised of independent directors within one year of the completion of this offering. Board Committees On completion of this offering, our board of directors will have an audit committee and a nominating committee. Our board of directors has adopted a charter for these committees as well as a code of conduct and ethics that governs the conduct of our directors, officers and employees. Audit Committee Upon completion of this offering, our audit committee will consist of Messrs. Hammer, Lichten and Weinhoff. Mr. Lichten will serve as the Chairman of our Audit Committee. The independent directors we appoint to our audit committee are each independent , as defined by the rules of the SEC. Our board of directors has determined that Messrs. Lichten, Weinhoff and Hammer each qualify as an audit committee financial expert, as such term is defined by SEC rules. The audit committee will review the professional services and independence of our independent registered public accounting firm and our accounts, procedures and internal controls. The audit committee will also recommend the firm selected to be our independent registered public accounting firm, review and approve the scope of the annual audit, review and evaluate with the independent public accounting firm our annual audit and annual consolidated financial statements, review with management the status of internal accounting controls, evaluate problem areas having a potential financial impact on us that may be brought to the committee s attention by management, the independent registered public accounting firm or the board of directors, and evaluate all of our public financial reporting documents. Nominating Committee We have established a nominating committee of the board of directors, which consists of Messrs. Hammer, Lichten and Weinhoff, each of whom is an independent director as defined by the rules of the American Stock Exchange and the SEC. Mr. Hammer serves as the Chairman of our Nominating Committee. The nominating committee is responsible for overseeing the selection of persons to be nominated to serve on our board of directors. The nominating committee considers persons identified by its members, management, stockholders, investment bankers and others. The guidelines for selecting nominees, which are specified in the nominating committee charter, generally provide that persons to be nominated should be actively engaged in business endeavors, have an understanding of financial statements, corporate budgeting and capital structure, be familiar with the requirements of a publicly traded company, be familiar with industries relevant to our business endeavors, be willing to devote significant time to the oversight duties of the board of directors of a public company, and be able to promote a diversity of views based on the person s education, experience and professional employment. The nominating committee evaluates each individual in the context of the board as a whole, with the objective of recommending a group of persons that can best implement our business plan, perpetuate our business and represent stockholder interests. The nominating committee may require certain skills or attributes, such as financial or accounting experience, to meet specific board needs that arise from time to time. The nominating committee does not distinguish among nominees recommended by stockholders and other persons. Table of Contents We do not have a compensation or similar committee. The independent members of our Board of Directors perform the functions of a compensation committee including: reviewing and approving our overall compensation strategy and policies; reviewing and approving corporate performance goals and objectives relevant to the compensation of our executive officers and other senior management; determining the compensation and other terms of employment of our Chief Executive Officer; and reviewing and approving the compensation and other terms of employment of the other executive officers and senior management. Code of Conduct and Ethics We have adopted a code of conduct and ethics applicable to our directors, officers and employees in accordance with applicable federal securities laws and the rules of the American Stock Exchange. Executive Compensation No executive officer has received any cash or any other form of compensation for services rendered including but not limited to options, stock and non-equity incentives. Commencing on the effective date of this prospectus through the acquisition of a target business, we will pay Inter-Atlantic Group $7,500 per month for use of office space, utilities, administrative, technology and secretarial services. This arrangement is being agreed to by us for our benefit and is not intended to provide any director or officer with compensation in lieu of salary. We believe, based on rents and fees for similar services in New York, New York, that such fees are at least as favorable as we could have obtained from an unaffiliated third party. Other than this $7,500 per month fee, no compensation of any kind, including finder s and consulting fees, will be paid to any of our officers and directors, or any of their respective affiliates, for services rendered prior to or in connection with a business combination. However, these individuals will be reimbursed for any out-of-pocket expenses incurred in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations (including possible payments to unaffiliated third parties for their performance of due diligence). After a business combination, such individuals may be paid consulting, management or other fees from target businesses, with any and all amounts being fully disclosed to stockholders, to the extent known, in the proxy solicitation materials furnished to the stockholders. There is no limit on the amount of these out-of-pocket expenses, and there will be no review of the reasonableness of the expenses by anyone other than independent and disinterested members of our board of directors, which includes persons who may seek reimbursement, or a court of competent jurisdiction if such reimbursement is challenged. If none of our directors are deemed independent, we will not have the benefit of independent directors examining the propriety of expenses incurred on our behalf and subject to reimbursement. Conflicts of Interest Potential investors should be aware of the following potential conflicts of interest: None of our officers or directors is required to commit their full time to our affairs and, accordingly, they may have conflicts of interest in allocating management time among various business activities. In the course of their other business activities, our officers and directors may become aware of investment and business opportunities which may be appropriate for presentation to us as well as the other entities with which they are affiliated. They may have conflicts of interest in determining to which entity a particular business opportunity should be presented. In particular, several of our officers and directors are affiliated with Inter-Atlantic Group, a private equity firm specializing in financial services investments. Mr. Galasso is an independent consultant in the payments industry who conducts business with Inter-Atlantic Group and certain other firms. In addition, Mr. Weinhoff, one of our directors, serves on the board of directors of two insurance companies. Accordingly, such officers and directors may become subject to conflicts of interest regarding us and other business ventures in which they may be involved, which conflicts may have an adverse effect on our ability to consummate a business transaction. Table of Contents Our officers and directors may in the future become affiliated with entities engaged in business activities similar to those intended to be conducted by us. Since our officers and directors own shares of our common stock that will be released from escrow only if a business combination is completed and may own warrants that will expire worthless if a business combination is not consummated, these persons may have a conflict of interest in determining whether a particular target business is appropriate to effect a business combination. The personal and financial interests of our officers and directors may influence their motivation in identifying and selecting a target business and timely completing a business combination and securing release of their shares. If we were to make a deposit, down payment or fund a no shop provision in connection with a potential business combination, we may have insufficient funds available outside of the trust to pay for due diligence, legal, accounting and other expenses attendant to completing a business combination. In such event, our existing stockholders may have to incur such expenses in order to proceed with the proposed business combination. As part of any such combination, such existing stockholders may negotiate the repayment of some or all of any such expenses, including the $500,000 limited recourse revolving line of credit which bears interest at the federal funds target interest rate (4.75% as of September 21, 2007), which if not agreed to by the target business s management, could cause our management to view such potential business combination unfavorably, thereby resulting in a conflict of interest. Repayment of the line of credit is payable prior to the business combination solely from the $1,100,000 of interest earned on the trust account which is available for working capital, solely to the extent there is more than $7.99 per share in the trust account. While any or all members of our management may remain associated with us after consummation of the business combination, either as officers or directors, there is the possibility that no members of our management team will remain associated with us after the consummation of the business combination. In addition, there has not been any determination that any specific members of management will remain associated with the combined company post-business combination. It is more likely that some of our members of our management will remain as directors rather than officers post-business combination. However, we do not yet know which members of our management may remain associated with us after consummation of the business combination, and what their roles will be, because such a decision will be based on a variety of factors, including the experience and skill set of the target business management, the experience and skill set of each of our members of management as it relates to the target business, the industry and geographic location of the business post-business combination and the ability of members of our management to negotiate terms with the target business as part of any such business combination. If our management negotiates to be retained post business combination as a condition to any potential business combination, their financial interests, including compensation arrangements, could influence their motivation in selecting, negotiating and structuring a transaction with a target business, and such negotiations may result in a conflict of interest. All of our officers and directors paid less for their shares of common stock than public shareholders, and as a result, they may be able to profit on a business combination which would be unprofitable to our public shareholders. In general, officers and directors of a corporation incorporated under the laws of the State of Delaware are required to present business opportunities to a corporation if: the corporation could financially undertake the opportunity; the opportunity is within the corporation s line of business; and it would not be fair to the corporation and its stockholders for the opportunity not to be brought to the attention of the corporation. Accordingly, as a result of other business affiliations, our officers and directors may have similar legal obligations relating to presenting business opportunities meeting the above-listed criteria to multiple entities. In addition, conflicts of interest may arise when our board evaluates a particular business opportunity with respect to the above-listed criteria. We cannot assure you that any of the above mentioned conflicts will be resolved in our favor. Table of Contents Although we are not under any contractual obligation to engage any of the underwriters or Scura, Rise Partners LLC, a financial advisory firm, to provide any services for us after this offering, and have no present intent to do so, any of the underwriters or Scura, Rise Partners LLC may, among other things, introduce us to potential target businesses or assist us in raising additional capital, as needs may arise in the future. If any of the underwriters or Scura, Rise Partners LLC provide services to us after this offering, we may pay such entity fair and reasonable fees that would be determined at that time in arm s length negotiations. Any such negotiations could result in a conflict of interest. Each of our officers and directors has, or may come to have, to a certain degree, other fiduciary obligations. In addition all of our officers and directors have fiduciary obligations to those companies on whose board of directors they may sit. To the extent that they identify business opportunities that may be suitable for the entities to which they owe a fiduciary obligation, our officers and directors will honor those fiduciary obligations. Accordingly, they may not present opportunities to us that otherwise may be attractive to us unless the entities to which they owe a fiduciary obligation and any successors to such entities have declined to accept such opportunities. However, our officers and directors are not aware of any potential target businesses seeking a sale, seeking a change of control, seeking an initial public offering or seeking any similar transaction which would accomplish a similar purpose for the target, and in the event that any such entities subsequently come to the attention of our directors and officers prior to the initial public offering, we will not enter into a business combination with these entities after completion of the initial public offering. In addition, subject to these fiduciary duties, each of our officers and directors and Inter-Atlantic Group have granted us a right of first refusal with respect to a Company Potential Target (as defined below). Messrs. Lerner, Daras, Baris, Lichten and Hammer are affiliates of Inter-Atlantic Group, a private equity firm that invests in financial services companies. As a result, we believe that there is a substantial risk of a conflict between our operations and Inter-Atlantic Group s operations. To minimize any conflicts, or the appearance of conflicts, subject to their respective fiduciary obligations, each of Inter-Atlantic Group and Messrs. Lerner, Daras, Baris, Lichten and Hammer has granted us a right of first refusal with respect to any company or business in the financial services industry whose fair market value is at least equal to 80% of the balance of the trust account (less deferred underwriting compensation of $2,400,000, or $2,760,000 if the over-allotment is exercised in full and taxes payable), which we refer to as a Company Potential Target. Pursuant to this right of first refusal, subject to their respective fiduciary obligations, each of these persons and Inter-Atlantic Group has agreed that he or it will not enter into any agreement to acquire majority voting control of a Company Potential Target until our committee of independent directors has had a reasonable period of time to determine whether or not to pursue the opportunity. This right of first refusal will commence after the consummation of the offering and will expire upon the earlier of (i) our consummation of an initial business combination or (ii) 24 months after the consummation of this offering. Messrs. Galasso and Weinhoff will be responsible for enforcing this right of first refusal. Our officers and directors are not aware of any potential target businesses seeking a sale, seeking a change of control, seeking an initial public offering or seeking any similar transaction which would accomplish a similar purpose for the target, and in the event that any such entities subsequently come to the attention of cur directors and officers prior to the initial public offering, we will not enter into a business combination with these entities after completion of the initial public offering. Additionally, certain of our officers and directors are directors of companies, both public and private, which may perform business activities in the financial services industry similar to those which we may perform after consummating a business combination. For a complete description of our management s other affiliations, see the previous section entitled Directors and Executive Officers. In connection with the vote required for any business combination, all of our existing stockholders, including all of our officers and directors, have agreed to vote their respective shares of common stock in the same manner as a majority of the public stockholders who vote at the special or annual meeting called for the purpose of approving a business combination. In addition, all of our existing stockholders have agreed to waive their respective rights to participate in any liquidation of our trust account (except with respect to shares of our common stock acquired by them in connection with this offering or in the aftermarket) in connection with a dissolution occurring upon our failure to consummate a business combination as well as to vote any shares each owns for any plan of dissolution and liquidation submitted to our stockholders. Table of Contents We will not enter into a business combination with any company which Inter-Atlantic Group currently has or previously had a financial interest in. To further minimize potential conflicts of interest, we also have agreed not to consummate a business combination with an entity which is affiliated with any of our officers and directors. As a result, we will not enter into a business combination with any entity which members of our board of directors also serve on the board of directors of. In addition, our officers and directors have agreed not to become officers, directors or principal stockholders of other blank check companies, which are engaged in, or in the event of the business combination, will be engaged in business activities similar to those intended to be conducted by us until the earlier of completion of a business combination or dissolution of our company. We are obligated to have all significant vendors and service providers and all prospective target businesses execute agreements with us waiving any and all right, title, interest or claim of any kind they may have in or to any monies held in the trust account. Messrs. Lerner, Daras, Baris, Hammer and Lichten have agreed to indemnify us, jointly and severally pro rata according to their comparative beneficial interests in our company immediately prior to this offering, for any loss, liability, claim, damage and expense to the extent necessary to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us. However, because members of our management have agreed to this indemnification, they may be deterred from entering into agreements with certain vendors on our behalf where there is a significant potential indemnification obligation. In addition, members of management, due to their indemnification obligations, may be motivated to enter into a business combination with a potential target business which agrees to pay any outstanding obligations of our company. We cannot assure you these conflicts will be resolved in our favor. Table of Contents PRINCIPAL STOCKHOLDERS The following table sets forth information as of the date of this prospectus regarding the beneficial ownership of our common stock: (a) before the offering and (b) after the offering, to reflect the sale of our common stock included in the units offered by this prospectus for: each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock; each of our officers and directors; and all our officers and directors as a group. Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them. Amount Approximate Percentage of Outstanding and Nature Common Stock of Beneficial Before the After the Name and Address of Beneficial Owner(1) Ownership Offering Offering(2) Andrew S. Lerner(3) 469,060 25.0 % 5.0% Stephen B. Galasso(4) 263,109 14.0 % 2.8% Brett G. Baris 234,530 12.5 % 2.5% Robert M. Lichten 234,530 12.5 % 2.5% Frederick S. Hammer 234,530 12.5 % 2.5% Michael P. Esposito, Jr. 120,937 6.5 % 1.3% P. Carter Rise 111,821 6.0 % 1.2% Matthew D. Vertin 111,821 6.0 % 1.2% D. James Daras 90,276 4.8 % 1.0% Samuel J. Weinhoff 4,386 0.2 % 0.0% 1,875,000 100.0 % 20.0% * Less than 1% (1) The business address of each of the individuals is 400 Madison Avenue, New York, New York 10017, except for Mr. Rise and Mr. Vertin whose business address is 1211 Avenue of the Americas, New York, New York 10036. (2) Assumes only the sale of 7,500,000 units in this offering, but not: (a) the exercise of the 7,500,000 warrants to purchase shares of our common stock included in such units, (b) 525,000 shares of our common stock included in the representative unit purchase option, (c) 525,000 shares of common stock underlying warrants included in the representative s unit purchase option and (d) 2,300,000 shares of common stock underlying the founders warrants. (3) Includes 90,000 shares beneficially owned by Mr. Lerner s children and other family members. (4) The beneficial owner is the Stephen and Linda Galasso Family Trust. Our officers and directors have collectively agreed to purchase in a pre-offering private placement transaction a combined total of 2,100,000 warrants and Michael P. Esposito, Jr., one of our stockholders, has agreed to purchase 200,000 warrants, from us at a price of $1.00 per warrant. These warrants, which we collectively refer to as the founders warrants, will not be sold or transferred by the purchasers who initially purchase these warrants from us until the completion of our initial business combination. The $2,300,000 purchase price of the founders warrants will be added to the proceeds of this offering to be held in our trust account pending our completion of one or more business combinations. If we do not complete one or more business combinations that meet the criteria described in this prospectus and our certificate of incorporation, then the $2,300,000 purchase price of the founders warrants will become part of the liquidation distribution to the public stockholders and the founders warrants will expire worthless. Table of Contents Immediately after this offering, our existing stockholders, which include all of our officers and directors, collectively, will beneficially own approximately 20% of the then issued and outstanding shares of our common stock. Because of this ownership block, these stockholders may be able to effectively influence the outcome of all matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions other than approval of a business combination. In addition, if we take advantage of increasing the size of the offering pursuant to Rule 462(b) under the Securities Act, we may effect a stock dividend in such amount to maintain the existing stockholders collective ownership at 20% of our issued and outstanding shares of common stock upon consummation of the offering. All of the shares of our common stock outstanding prior to the date of this prospectus (as well as any shares received by our existing stockholders pursuant to a stock dividend completed in connection with an increase in the size of the offering) will be placed in escrow with American Stock Transfer Trust Company, as escrow agent, until one year following the consummation of the business combination. During the escrow period, the holders of these shares will not be able to sell or transfer their securities except to their spouses and children or trusts established for their benefit, but will retain all other rights as our stockholders including, without limitation, the right to vote their shares of common stock and the right to receive cash dividends, if declared. If dividends are declared and payable in shares of common stock, such dividends will also be placed in escrow. If we are unable to effect a business combination and liquidate, none of our existing stockholders will receive any portion of the liquidation proceeds with respect to common stock owned by them prior to the date of this prospectus. Messrs. Andrew Lerner, Stephen Galasso, James Daras, Brett Baris, Frederick Hammer, Samuel Weinhoff and Robert Lichten are deemed to be our parents and promoters as these terms are defined under the Federal securities laws. Table of Contents CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In January, 2007, we issued 1,875,000 shares of our common stock to the individuals set forth below for an aggregate amount of $25,000 in cash, at an average purchase price of approximately $0.0133 per share. These individuals currently own the following shares after taking into account resales of certain shares which occurred in July and September 2007. Number Name of Shares Relationship to Us Andrew S. Lerner 469,060 Chief Executive Officer and Director Stephen B. Galasso 263,109 Senior Strategic Officer and Director Brett G. Baris 234,530 Executive Vice President Frederick S. Hammer 234,530 Director Robert M. Lichten 234,530 Director Michael P. Esposito, Jr. 120,937 Stockholder P. Carter Rise 111,821 Advisor Matthew D. Vertin 111,821 Advisor D. James Daras 90,276 Executive Vice President, Chief Financial Officer and Director Samuel J. Weinhoff 4,386 Director In addition, if we take advantage of increasing the size of the offering pursuant to Rule 462(b) under the Securities Act, we may effect a stock dividend in such amount to maintain the existing stockholders collective ownership at 20% of our issued and outstanding shares of common stock upon consummation of the offering. Our officers and directors have collectively agreed that prior to the date of this Prospectus, such persons will purchase from us a combined total of 2,100,000 of our warrants and Michael Esposito, Jr., one of our stockholders, has agreed to purchase 200,000 warrants, each at a price of $1.00 per warrant. These warrants, which we collectively refer to as the founders warrants, will not be sold or transferred by the purchasers who initially purchase these warrants from us until the completion of our initial business combination. The $2,300,000 purchase price of the founders warrants will be added to the proceeds of this offering to be held in our trust account pending our completion of one or more business combinations. If we do not complete one or more business combinations that meet the criteria described in this prospectus, then the $2,300,000 purchase price of the founders warrants will become part of the liquidation distribution to our public stockholders and the founders warrants will expire worthless. The holders of the majority of the 1,875,000 shares, together with the holders of the founders warrants, will be entitled to require us, on up to two occasions, to register these shares and the 2,300,000 founders warrants and the 2,300,000 shares of common stock underlying the founders warrants, pursuant to an agreement to be signed prior to or on the date of this prospectus. The holders of the majority of these shares and the founders warrants may elect to exercise these registration rights at any time after the date on which these shares of common stock and founders warrants are released from escrow, which, except in limited circumstances, is not before the one year anniversary from the consummation of a business combination in the case of the common stock, and the consummation of a business combination in the case of the founders warrants. In addition, these stockholders and the holders of the founders warrants have certain piggy-back registration rights on registration statements filed subsequent to the date on which these shares are released from escrow or the founders warrants become exercisable, as the case may be. We will bear the expenses incurred in connection with the filing of any such registration statements. Because the founders warrants sold in the pre-offering private placement were originally issued pursuant to an exemption from registration requirements under the federal securities laws, founders warrants will be exercisable even if, at the time of exercise, a prospectus relating to the common stock issuable upon exercise of such warrants is not current. Inter-Atlantic Group, an affiliate of certain of the officers and directors, has agreed to provide us an interest-free loan of $250,000 which will be used to pay a portion of the expenses of this offering, such as Table of Contents SEC registration fees, NASD registration fees, American Stock Exchange listing and application fees and legal and accounting fees and expenses. The $250,000 loan from Inter-Atlantic Group will be payable without interest on the consummation of the offering. We intend to repay this loan from the proceeds of this offering not held in trust. Commencing on the effective date of this prospectus through the acquisition of the target business, we have agreed to pay Inter-Atlantic Group $7,500 per month for use of office space, utilities, administrative, technology and secretarial services. This arrangement is being agreed to by us for our benefit and is not intended to provide our officers or directors compensation in lieu of salary. We believe, based on rents and fees for similar services in New York, New York, that such fees are at least as favorable as we could have obtained from an unaffiliated person. This arrangement will terminate upon completion of a business combination or the distribution of our trust account to our public stockholders. Inter-Atlantic Management Services LLC also purchased 4,688 shares of our common stock in January 2007 as part of the 1,875,000 shares of common stock issued. These shares were subsequently purchased at cost by certain of our stockholders. Each of our officers and directors are deemed to be our parent and promoter, as these terms are defined under the Federal securities laws. We will reimburse our officers and directors for any reasonable out-of-pocket business expenses incurred by them in connection with certain activities on our behalf such as identifying and investigating possible target businesses and business combinations (including possible payments to unaffiliated third parties for their performance of due diligence). There is no limit on the amount of accountable out-of-pocket expenses reimbursable by us, which will be reviewed only by our board or a court of competent jurisdiction if such reimbursement is challenged. Accountable out-of-pocket expenses incurred by our officers and directors will not be repaid out of proceeds held in trust until these proceeds are released to us upon the completion of a business combination, provided there are sufficient funds available for reimbursement after such consummation. Other than the reimbursable out-of-pocket expenses payable to our officers and directors, no compensation or fees of any kind, including finders and consulting fees, will be paid to any of our officers or directors or to any of their respective affiliates for services rendered to us prior to or with respect to the business combination. Our officers and directors will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the amount held outside of our trust account unless the business combination is consummated and there are sufficient funds available for reimbursement after such consummation. The financial interest of such persons could influence their motivation in selecting a target business and thus, there may be a conflict of interest when determining whether a particular business combination is in the stockholders best interest. After the consummation of a business combination, if any, to the extent our management remains as officers of the resulting business, some of our officers and directors may enter into employment agreements, the terms of which shall be negotiated and which we expect to be comparable to employment agreements with other similarly-situated companies. Further, after the consummation of a business combination, if any, to the extent our directors remain as directors of the resulting business, we anticipate that they will receive compensation comparable to directors at other similarly-situated companies. All ongoing and future transactions between us and any of our officers and directors or their respective affiliates will be on terms believed by us at that time, based upon other similar arrangements known to us, to be no less favorable than are available from unaffiliated third parties and any transactions or loans, including any forgiveness of loans, will require prior approval in each instance by a majority of our uninterested independent directors (to the extent we have any) or the members of our board who do not have an interest in the transaction, in either case who had access, at our expense, to our attorneys or independent legal counsel. We will not enter into any such transaction unless our disinterested independent directors (or, if there are no independent directors, our disinterested directors) determine that the terms of such transaction are no less favorable to us than those that would be available to us with respect to such a transaction from unaffiliated third parties. Table of Contents DESCRIPTION OF SECURITIES General We are authorized to issue 49,000,000 shares of common stock, par value $.0001, and 1,000,000 shares of preferred stock, par value $.0001. As of the date of this prospectus, 1,875,000 shares of common stock are outstanding, held by nine record holders, excluding family members. No shares of preferred stock are currently outstanding. Units Each unit consists of one share of common stock and one warrant. Each warrant entitles the holder to purchase one share of common stock. The common stock and warrants shall begin to trade separately on the 90th day after the date of this prospectus unless Morgan Joseph Co. informs us of its decision to allow earlier separate trading, provided that in no event may the common stock and warrants be traded separately until (i) we have filed with the SEC a Current Report on Form 8-K which includes an audited balance sheet reflecting our receipt of the gross proceeds of this offering and the sale of the founders warrants, (ii) we file with the Securities and Exchange Commission a Current Report on Form 8-K and issue a press release announcing when such separate trading will begin, and (iii) the date on which such separate trading begins is a business day following the earlier to occur of the expiration of the underwriters over-allotment option or its exercise in full. Morgan Joseph Co. may decide to allow continued trading of the units following such separation. We will file a Current Report on Form 8-K which includes this audited balance sheet upon the consummation of this offering. The audited balance sheet will reflect proceeds we receive from the exercise of the over-allotment option, if the over-allotment option is exercised on the date of this prospectus. In the event all or any portion of the over-allotment option is exercised after the date of this prospectus, we will file an additional Current Report on Form 8-K to disclose our receipt of the net proceeds from any such exercise. Common Stock Our stockholders are entitled to one vote for each share held of record on all matters to be voted on by stockholders. In connection with the vote required for any business combination, all of our existing stockholders, including all of our officers and directors, have agreed to vote their respective shares of common stock owned by them immediately prior to this offering in accordance with the vote of the public stockholders owning a majority of the shares of our common stock sold in this offering. Our existing stockholders have agreed to vote all the shares of our common stock acquired in this offering or in the aftermarket in favor of any transaction our officers negotiate and present for approval to our stockholders. Our existing stockholders have also agreed to waive their rights to participate in any liquidation occurring upon our failure to consummate a business combination, but only with respect to those shares of common stock acquired by them prior to this offering. Our existing stockholders, officers and directors will vote all of their shares in any manner they determine, in their sole discretion, with respect to any other items that come before a vote of our stockholders. We will proceed with a business combination only if a majority of the shares of common stock cast at the meeting are voted in favor of the business combination, and public stockholders owning 29.99% or less of the shares sold in this offering exercise their redemption rights discussed below. This is different than the traditional blank check company structure and makes it more likely that a business combination will be approved. Voting against the business combination alone will not result in redemption of a stockholder s shares into a pro rata share of our trust account. Such stockholder must have also exercised its redemption rights described below. Even if 29.99% or less of the stockholders exercise their redemption rights, we may be unable to consummate a business combination if such redemption leaves us with funds less than a fair market value equal to at least 80% of the amount in our trust account (excluding any funds held for the benefit of any of the underwriters and taxes payable) at the time of such acquisition which amount is required for our initial business combination. In such event we may be forced to either find additional financing to consummate such a business combination, consummate a different business combination or dissolve and liquidate to our public stockholders our trust account as part of our plan of dissolution and liquidation. Table of Contents If we are forced to dissolve and liquidate our trust account to our public stockholders as part of our plan of dissolution and liquidation prior to a business combination, our public stockholders are entitled to share ratably in our trust account, inclusive of any interest, if any, not previously paid to us, net of taxes, if any. The term public stockholders means the holders of common stock sold as part of the units in this offering or acquired in the open market, but excludes our officers and directors or their nominees or designees with respect to the shares owned by them prior to this offering since they have waived their redemption right and right to liquidation distributions from our trust account in connection with our dissolution as part of our plan of dissolution and liquidation with respect to these shares. Our existing stockholders have also agreed to waive their respective rights to participate in any liquidation of our trust account in connection with our dissolution occurring upon our failure to consummate a business combination as well as to vote for any plan of dissolution and liquidation submitted to our stockholders with respect to those shares of common stock acquired by them prior to this offering. Our stockholders have no conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the common stock, except that public stockholders have the right to have their shares of common stock redeemed for cash equal to their pro rata share of our trust account if they vote against the business combination and the business combination is approved and completed. Public stockholders who redeem their shares of common stock into their share of our trust account still have the right to exercise the warrants that they received as part of the units. Due to the fact that we currently have 49,000,000 shares of common stock authorized, if we were to enter into a business combination, we may (depending on the terms of such a business combination) be required to increase the number of shares of common stock which we are authorized to issue at the same time as our stockholders vote on the business combination. Preferred Stock Our certificate of incorporation authorizes the issuance of 1,000,000 shares of blank check preferred stock with such designation, rights and preferences as may be determined from time to time by our board of directors. No shares of preferred stock are being issued or registered in this offering. Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of common stock, although the underwriting agreement prohibits us, prior to a business combination, from issuing preferred stock which participates in any manner in the proceeds of our trust account, or which votes as a class with the common stock on a business combination. We may issue some or all of the preferred stock to effect a business combination. In addition, the preferred stock could be utilized as a method of discouraging, delaying or preventing a change in control of us. Although we do not currently intend to issue any shares of preferred stock, we cannot assure you that we will not do so in the future. Warrants Except for the founders warrants to be issued prior to the closing of this offering, no warrants are currently outstanding. Each warrant included in the units sold in this offering entitles the registered holder to purchase one share of our common stock at a price of $4.50 per share, subject to adjustment as discussed below, at any time commencing on the later of: the completion of a business combination; or one year from the date of this prospectus. The warrants will expire on [ ], 2011 at 5:00 p.m., New York City time. The warrants may trade separately on the 90th trading day after the date of this prospectus, unless Morgan Joseph Co. agrees that an earlier date is acceptable; provided, however, that in no event may the common stock and warrants be traded separately until we have filed a Current Report on Form 8-K which includes an audited balance sheet reflecting our receipt of the proceeds of this offering and the sale of the Table of Contents founders warrants, including any proceeds we receive from the exercise of the over-allotment option if such option is exercised on the date of this prospectus. In the event all or any portion of the over-allotment option is exercised after the date of this prospectus, we will file an additional Current Report on Form 8-K to disclose our receipt of the net proceeds from any such exercise. We may call the warrants for redemption (including any warrants issued upon exercise of Morgan Joseph Co. s unit purchase option): in whole and not in part; at a price of $.01 per warrant at any time after the warrants become exercisable; upon not less than 30 days prior written notice of redemption to each warrant holder; and if, and only if, the last closing sales price of our Common Stock equals or exceeds $11.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. We have established this last criterion to provide warrant holders with a premium to the initial warrant exercise price as well as a degree of liquidity to cushion the market reaction, if any, to our redemption call. If the foregoing conditions are satisfied and we call the warrants for redemption, each warrant holder shall then be entitled to exercise his or her warrant prior to the date scheduled for redemption, however, there can be no assurance that the price of the common stock will exceed the call trigger price or the warrant exercise price after the redemption call is made. The warrants will be issued in registered form under a warrant agreement between American Stock Transfer Trust Company, as warrant agent, and us. You should review a copy of the warrant agreement, which has been filed as an exhibit to the registration statement of which this prospectus is a part, for a complete description of the terms and conditions applicable to the warrants. The exercise price and number of shares of common stock issuable on exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuances of common stock at a price below their respective exercise prices. The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified check payable to us, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of common stock or any voting rights until they exercise their warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders. No warrants will be exercisable unless at the time of exercise a prospectus relating to common stock issuable upon exercise of the warrants is current and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms of the warrant agreement, we have agreed to meet these conditions and use our best efforts to maintain a current prospectus relating to common stock issuable upon exercise of the warrants until the expiration of the warrants. If we are unable to maintain the effectiveness of such registration statement until the expiration of the warrants, and therefore are unable to deliver registered shares, the warrants may become worthless. Additionally, the market for the warrants may be limited if the prospectus relating to the common stock issuable upon the exercise of the warrants is not current or if the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside. In no event will the registered holders of a warrant be entitled to receive a net-cash settlement, stock or other consideration in lieu of physical settlement in shares of our common stock. Because the founders warrants sold in the pre-offering private placement were originally issued pursuant to an exemption from registration requirements under the federal securities laws, the founders warrants are Table of Contents exercisable even if, at the time of exercise, a prospectus relating to the common stock issuable upon exercise of such warrants is not current. As described above, the holders of the warrants purchased in this offering will not be able to exercise them unless we have a current registration statement covering the shares issuable upon their exercise. No fractional shares will be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round up to the nearest whole number the number of shares of common stock to be issued to the warrant holder. Our officers, directors and a stockholder have collectively agreed to purchase an aggregate of 2,300,000 of our warrants from us at a price of $1.00 per warrant prior to the closing of this offering. The founders warrants have terms and provisions that are identical to the warrants included in the units being sold in this offering, except that the founders warrants (i) will not be transferable or salable by the purchasers who initially purchase these warrants from us until we complete a business combination, (ii) will be non-redeemable so long as these persons hold such warrants, and (iii) are being purchased pursuant to an exemption from the registration requirements of the Securities Act and will become freely tradable only after they are registered pursuant to a registration rights agreement to be signed on or before the date of this prospectus, or if an exemption from registration is then available. The transfer restriction does not apply to transfers made pursuant to registration or an exemption that are occasioned by operation of law or for estate planning purposes. The non-redemption provision does not apply to warrants included in units or otherwise purchased in open market transactions, if any. The price of the warrants has been arbitrarily established by us and the representative of the underwriters after giving consideration to numerous factors, including but not limited to, the pricing of units in this offering, the pricing associated with warrants in other blank-check financings in both the public after-market and any pre-offering private placement, and the warrant purchase obligations of managers in similar type transactions. No particular weighting was given to any one aspect of those factors considered. We have not performed any method of valuation of the warrants. As part of the negotiations between the representative of the underwriters and our management, management agreed to purchase the warrants directly from us and not in open market transactions. By making a direct investment in us, the amount held in trust pending a business combination has been increased and the participating managers have committed to a specific amount of warrant purchases. The warrants owned by our officers and directors will be worthless if we do not consummate a business combination. The personal and financial interests of these individuals may influence their motivation in identifying and selecting a target business and completing a business combination in a timely manner. Consequently, our officers and directors discretion in identifying and selecting a suitable target business may result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination are appropriate and in our stockholders best interest. As a result of the founders warrants being non-redeemable, holders of the founders warrants, or their permitted transferees, could realize a larger gain than our public warrant holders. Purchase Option We have agreed to sell to Morgan Joseph Co. an option to purchase up to 525,000 units at $10.00 per unit. The units issuable upon exercise of this option are identical to those offered by this prospectus. For a more complete description of the purchase option, see the section below entitled Underwriting Purchase Option. Dividends We have not paid any dividends on our common stock to date and do not intend to pay dividends prior to the completion of a business combination. The payment of dividends in the future will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition subsequent to completion of a business combination. The payment of any dividends subsequent to a business combination will be within the discretion of our then board of directors. It is the present intention of our board of directors to retain all Table of Contents earnings, if any, for use in our business operations and, accordingly, our board does not anticipate declaring any dividends in the foreseeable future. Our Transfer Agent and Warrant Agent The transfer agent for our securities and warrant agent for our warrants is American Stock Transfer Trust Company, 59 Maiden Lane, Plaza Level, New York, New York 10038. Shares Eligible for Future Sale Immediately after this offering, we will have 9,375,000 shares of common stock outstanding, or 10,500,000 shares if the underwriters over-allotment option is exercised in full. Of these shares, the 7,500,000 shares sold in this offering, or 8,625,000 shares if the over-allotment option is exercised in full, will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by one of our affiliates within the meaning of Rule 144 under the Securities Act. All of the remaining 1,875,000 shares are restricted securities under Rule 144, in that they were issued in private transactions not involving a public offering, and will not be eligible for sale under Rule 144. Notwithstanding this, all of those shares have been placed in escrow and will not be transferable for a period of one year following the consummation of the business combination and will only be released prior to that date subject to certain limited exceptions such as our liquidation prior to a business combination (in which case the certificate representing such shares will be destroyed), and the consummation of a liquidation, merger, stock exchange or other similar transaction which results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property subsequent to our consummating a business combination with a target business. Rule 144 In general, under Rule 144 as currently in effect, a person who has beneficially owned restricted shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of either of the following: 1% of the number of shares of common stock then outstanding, which will equal 93,750 shares immediately after this offering (or 105,000 if the underwriters exercise their over-allotment option in full); and the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales under Rule 144 are also limited by manner of sale provisions and notice requirements and to the availability of current public information about us. Rule 144(k) Under Rule 144(k), a person who is not deemed to have been one of our affiliates at the time of or at any time during the three months preceding a sale, and who has beneficially owned the restricted shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell their shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Securities and Exchange Commission s Position on Rule 144 Sales The Securities and Exchange Commission has taken the position that promoters or affiliates of a blank check company and their transferees, both before and after a business combination, would act as an underwriter under the Securities Act when reselling the securities of a blank check company. Accordingly, the Securities and Exchange Commission believes that those securities can be resold only through a registered offering and that Rule 144 would not be available for those resale transactions despite technical compliance with the requirements of Rule 144. Table of Contents Registration Rights The holders of our 1,875,000 issued and outstanding shares of common stock on the date of this prospectus and the 2,300,000 founders warrants and the 2,300,000 shares of common stock underlying the founders warrants will be entitled to registration rights pursuant to an agreement to be signed prior to or on the effective date of this offering. The holders of the majority of these shares are entitled to require us, on up to two occasions, to register these shares. The holders of the majority of these shares can elect to exercise these registration rights at any time after the date on which these shares, or founders warrants as the case may be, are released from escrow. The holders of the founders warrants are also entitled to require us to register the resale of the shares underlying the founders warrants when such warrants become exercisable by their terms. In addition, these stockholders have certain piggy-back registration rights on registration statements filed subsequent to the date on which these shares are released from escrow. We will bear the expenses incurred in connection with the filing of any such registration statements. Shares Subject to Surrender and Cancellation We will not proceed with a business combination if public stockholders owning more than 29.99% of the shares sold in this offering (unlike a redemption threshold of 19.99% for a traditional blank check company) vote against the business combination and exercise their redemption rights. Accordingly, we may effect a business combination if stockholders owning 29.99% or less of the shares sold in this offering exercise their redemption rights. If this occurred, we would be required to redeem for cash up to approximately 2,249,250 shares of common stock, at an initial per-share redemption price of $7.99. Our Amended and Restated Certificate of Incorporation Our certificate of incorporation filed with the State of Delaware contains provisions designed to provide certain rights and protections to our stockholders prior to the consummation of a business combination, including: requirement that all proposed business combinations be presented to stockholders for approval regardless of whether or not Delaware law requires such a vote; prohibition against completing a business combination if 30% or more of our stockholders exercise their redemption rights in lieu of approving a business combination; the right of stockholders voting against a business combination to surrender their shares for a pro rata portion of our trust account in lieu of participating in a proposed business combination; a requirement that in the event we do not consummate a business combination within 24 months after the consummation of this offering, our corporate existence shall cease except for the purpose of dissolving, liquidating and winding up; provided, however, that we will reserve our rights under Section 278 of the Delaware General Corporation Law to bring or defend any action, suit or proceeding brought by or against us; and limitation on stockholders rights to receive a portion of our trust account so that they may only receive a portion of our trust account upon liquidation of our trust account to our public stockholders as part of our plan of dissolution and liquidation or upon the exercise of their redemption rights. Our certificate of incorporation prohibits the amendment or modification of any of the foregoing provisions prior to the consummation of a business combination without the approval of holders of 95% of the shares issued in this offering. While these rights and protections have been established for the purchasers of units in this offering, it is nevertheless possible that the prohibition against amending or modifying these rights and protections at any time prior to the consummation of the business combination could be challenged as unenforceable under Delaware law, although pursuant to the underwriting agreement we are prohibited from amending or modifying these rights and protections at any time prior to the consummation of the business combination. We have not sought an unqualified opinion regarding the enforceability of the prohibition on amendment or modification of such provisions because we view these provisions as fundamental terms of this offering. We believe these provisions to be obligations of us to our stockholders and that investors will make an investment in us relying, at least in part, on the enforceability of the rights and obligations set forth in these provisions including, without limitation, the prohibition on any amendment or modification of such provisions without the vote of holders of 95% of the shares issued in this offering. Table of Contents UNDERWRITING In accordance with the terms and conditions contained in the underwriting agreement, we have agreed to sell to each of the underwriters named below, and each of the underwriters, for which Morgan Joseph Co. is acting as representative, have severally, and not jointly, agreed to purchase on a firm commitment basis the number of units offered in this offering set forth opposite their respective names below: Underwriters Number of Units Morgan Joseph Co. Sandler O Neill + Partners, L.P. Legend Merchant Group GunnAllen Financial Total 7,500,000 A copy of the underwriting agreement has been filed as an exhibit to the registration statement of which this prospectus forms a part. Pricing of Securities We have been advised by the representative that the underwriters propose to offer the units to the public at the initial offering price set forth on the cover page of this prospectus. It may allow some dealers concessions not in excess of $ per unit. Prior to this offering there has been no public market for any of our securities. The public offering price of the units and the terms of the warrants were negotiated between us and the representative. Factors considered in determining the prices and terms of the units, including the shares and warrants underlying the units, include: the history and prospects of companies whose principal business is the acquisition of other companies; prior offerings of those companies; our prospects for acquiring an operating business at attractive values; our capital structure; an assessment of our management and their experience in identifying operating companies; general conditions of the securities markets at the time of the offering; and other factors as were deemed relevant. Although these factors were considered, the determination of our offering price is more arbitrary than the pricing of securities for an operating company in a particular industry since the underwriters are unable to compare our financial results and prospects with those of public companies operating in the same industry. Over-Allotment Option We have granted to the representative of the underwriters an option, exercisable during the 45-day period commencing on the date of this prospectus, to purchase from us at the offering price, less underwriting discounts, up to an aggregate of 1,125,000 additional units for the sole purpose of covering over-allotments, if any. The over-allotment option will only be used to cover the net syndicate short position resulting from the initial distribution. The representative of the underwriters may exercise the over-allotment option if the underwriters sell more units than the total number set forth in the table above. Table of Contents Commissions and Discounts The following table shows the public offering price, underwriting discount to be paid by us to the underwriters and the proceeds, before expenses, to us. This information assumes either no exercise or full exercise by the underwriters of their over-allotment option. Without Per Unit Option With Option Public Offering Price 8.00 $ 60,000,000 $ 69,000,000 Discount(1) 0.24 1,800,000 2,070,000 Deferred Underwriting discount(2) 0.32 2,400,000 2,760,000 Proceeds before expenses(3) 7.44 55,800,000 64,170,000 (1) Based upon the underwriters discount of 3.0% per unit. Does not include an additional 4.0% of the gross proceeds from the sale of the 7,500,000 units in this offering ($2,400,000 or $2,760,000 if the over-allotment is exercised in full) that will be paid to the underwriters only upon the consummation of a business combination (and then only with respect to those units as to which the component shares have not been redeemed into cash) which amounts are reflected in this table as deferred underwriting discount. If a business combination is not consummated and we automatically dissolve and subsequently liquidate our trust account, such amounts will not be paid to the underwriters, but rather will be distributed among our public stockholders. (2) The underwriters have agreed to forfeit their deferred underwriting discount with respect to those units as to which the underlying shares are redeemed into cash by those stockholders who voted against the business combination and exercised their redemption rights upon consummation of a business combination. (3) The offering expenses are estimated at $510,000. We have agreed to reimburse Morgan Joseph Co. Inc. for up to $5,000 of expenses incurred by it in connection with the investigative background search for each officer as part of its due diligence of our management, which expense reimbursement will be deemed additional compensation under NASD Rule 2710. The underwriters will initially offer the units to be sold in this offering directly to the public at the initial public offering price set forth on the cover of this prospectus and to selected dealers at the initial public offering price less a selling concession not in excess of $ per unit. The underwriters may allow, and the selected dealers may reallow, a concession not in excess of $ per unit on sales to brokers and dealers. After the offering, the underwriters may change the offering price and other selling terms; provided, however that upon execution of the underwriting agreement, there will be no changes to the price and terms of the sale between the underwriters and the Company. No change in those terms will change the amount of proceeds to be received by us as set forth on the cover of this prospectus. Purchase Option We have agreed to sell to the representative, for $100, an option to purchase up to a total of 525,000 units. The units issuable upon exercise of this option are identical to those offered by this prospectus. This option is exercisable on a cashless basis at $10.00 per unit commencing on the later of the consummation of a business combination and one year from the date of this prospectus, and expiring five years from the date of this prospectus. The option and the 525,000 units, the 525,000 shares and the 525,000 warrants underlying such units, and the 525,000 shares underlying such warrants, have been deemed to be underwriting compensation by the NASD and are therefore subject to a 180-day lock-up pursuant to Rule 2710(g)(1) of the NASD Conduct Rules. Morgan Joseph Co. Inc. will not sell, transfer, assign, pledge, or hypothecate this option or the securities underlying this option, nor will it engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of this option or the underlying securities for a period of 180 days from the effective date of this prospectus. Table of Contents Additionally, the option may not be sold, transferred, assigned, pledged or hypothecated for a one-year period (including the foregoing 180 day period) following the date of this prospectus except to any underwriter and selected dealer participating in the offering and their bona fide officers or partners. Although the purchase option and its underlying securities have been registered on the registration statement of which this prospectus forms a part, the option grants holders demand and piggy back registration rights for periods of five and seven years, respectively, from the date of this prospectus. These rights apply to all of the securities directly and indirectly issuable upon exercise of the option. We will bear all fees and expenses attendant to registering the securities issuable on exercise of the option, other than underwriting commissions incurred and payable by the holders. The exercise price and number of units issuable upon exercise of the option may be adjusted in certain circumstances including in the event of a share dividend, or our recapitalization, reorganization or consolidation. However, the option exercise price or underlying units will not be adjusted for issuances of shares at a price below the option exercise price. The sale of the option will be accounted for as a cost attributable to the proposed offering. Accordingly, there will be no net impact on our financial position or results of operations, except for the recording of the $100 proceeds from the sale. We have estimated, based upon a Black-Scholes model, that the fair value of the option on the date of sale would be approximately $1,371,000 using an expected life of five years, volatility of 36.2%, and a risk-free rate of 5.2%, based on the five year United States Treasury rate. However, because our units do not have a trading history, the volatility assumption is based on information currently available to management. We believe the volatility estimate calculated is a reasonable benchmark to use in estimating the expected volatility of our units. The volatility calculation is based on the average of the volatilities using daily historical prices over the past five years of each of the 15 smallest financial services companies drawn from the Standard Poor s Smallcap 600 Exchange Composite Index. Although an expected life of five years was used in the calculation, if we do not consummate a business combination within the prescribed time period and we automatically dissolve and subsequently liquidate our trust account, the option will become worthless. Regulatory Restrictions on Purchase of Securities Rules of the SEC may limit the ability of the underwriters to bid for or purchase our securities before the distribution of the securities is completed. However, the underwriters may engage in the following activities in accordance with the rules: Stabilizing Transactions. The underwriters may make bids or purchases for the purpose of pegging, fixing or maintaining the price of our securities, as long as stabilizing bids do not exceed the maximum price specified in Regulation M, which generally requires, among other things, that no stabilizing bid shall be initiated at or increased to a price higher than the lower of the offering price or the highest independent bid for the security on the principal trading market for the security. Over-Allotments and Syndicate Coverage Transactions. The underwriters may create a short position in our securities by selling more of our securities than are set forth on the cover page of this prospectus. If the underwriters create a short position during the offering, the representative may engage in syndicate covering transactions by purchasing our securities in the open market. The representative may also elect to reduce any short position by exercising all or part of the over-allotment option. Penalty Bids. The representative may reclaim a selling concession from a syndicate member when the units originally sold by the syndicate member are purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. Stabilization and syndicate covering transactions may cause the price of the securities to be higher than they would be in the absence of these transactions. The imposition of a penalty bid may also have an effect on the prices of the securities if it discourages resales. Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the prices of the securities. These transactions may occur on the Table of Contents American Stock Exchange, in the over-the-counter market or on any trading market. If any of these transactions are commenced, they may be discontinued without notice at any time. The distribution of our securities will end upon the underwriters cessation of selling efforts and stabilization activities, provided, however, in the event that the underwriters were to exercise their over-allotment option to purchase securities in excess of their actual syndicate short position, then the distribution will not be deemed to have been completed until all of the securities have been sold. In connection with this offering, the underwriters may distribute prospectuses electronically. No forms of prospectus other than printed prospectuses and electronically distributed prospectuses that are printable in Adobe PDF format will be used in connection with this offering. Other Terms We have granted to Morgan Joseph Co. Inc., the right to have an observer present at all meetings of our board of directors until we consummate a business combination. The observer will be entitled to the same notices and communications sent by us to our directors and to attend directors meetings, but will not have voting rights. Morgan Joseph Co. Inc. has not named its observer as of the date of this prospectus. Although they are not obligated to do so, any of the underwriters may introduce us to potential target businesses or assist us in raising additional capital, as needs may arise in the future, but there are no preliminary agreements or understandings between any of the underwriters and any potential targets. We are not under any contractual obligation (oral or written) and have no agreement or understanding to engage any of the underwriters to provide any services for us after this offering, but if we do engage any of them in the future, we may pay the underwriters a finder s fee or advisory fee for services that would be determined at that time in an arm s length negotiation where the terms would be fair and reasonable to each of the interested parties; provided that no agreement will be entered into and no fee will be paid within 90 days following the date of this prospectus. We have also paid each of our advisors, Matthew Vertin and P. Carter Rise, $25,000 in connection with advisory services related to the selection of the underwriter for this offering. We have retained Messrs. Vertin and Rise, individually, and not in their respective capacities as principals of Scura, Rise Partners, LLC, a financial advisory firm. We have no other contractual obligations with them, no other monies are owed to them and they have not assisted us in any other manner. In addition, we have not retained Scura, Rise Partners, formally or informally, in any capacity following the initial public offering. Indemnification We have agreed to indemnify the underwriters against some liabilities, including civil liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in this respect. LEGAL MATTERS The validity of the securities offered in this prospectus is being passed upon for us by DLA Piper US LLP, New York, New York. Morrison Foerster LLP, New York, New York, is acting as counsel for the underwriters in this offering. EXPERTS The financial statements of Inter-Atlantic Financial, Inc. for the period from January 12, 2007 (date of inception) through June 15, 2007 appearing in this prospectus and in the registration statement have been included herein in reliance upon the report of Rothstein Kass Company P.C., independent registered public accounting firm, given on the authority of such firm as experts in accounting and auditing. Table of Contents WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the SEC a registration statement on Form S-1, which includes exhibits, schedules and amendments, under the Securities Act, with respect to this offering of our securities. Although this prospectus, which forms a part of the registration statement, contains all material information included in the registration statement, parts of the registration statement have been omitted as permitted by rules and regulations of the SEC. We refer you to the registration statement and its exhibits for further information about us, our securities and this offering. The registration statement and its exhibits, as well as our other reports filed with the SEC, can be inspected and copied at the SEC s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information about the operation of the public reference room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a web site at http://www.sec.gov which contains the Form S-1 and other reports, proxy and information statements and information regarding issuers that file electronically with the SEC. Table of Contents PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The estimated expenses payable by us in connection with the offering described in this registration statement (other than the underwriting discount and commissions) will be as follows: Initial Trustees fee $ 1,000 (1) SEC Registration Fee 13,819 NASD filing fee 13,415 Accounting fees and expenses 30,000 Printing and engraving expenses 60,000 Legal fees and expenses 335,000 AMEX listing and application fees 55,000 Miscellaneous 1,766 (2) Total $ 510,000 (1) In addition to the initial acceptance fee that is charged by American Stock Transfer Trust Company, as trustee following the offering, the registrant will be required to pay to American Stock Transfer Trust Company annual fees of approximately $3,000 for acting as trustee, approximately $4,800 for acting as transfer agent of the registrant s common stock, approximately $2,400 for acting as warrant agent for the registrant s warrants and approximately $1,800 for acting as escrow agent. (2) This amount represents additional expenses that may be incurred by us in connection with the offering over and above those specifically listed above, including distribution and mailing costs. Item 14. Indemnification of Officers and Directors. Our certificate of incorporation provides that all of our directors, officers, employees and agents shall be entitled to be indemnified by us to the fullest extent permitted by Section 145 of the Delaware General Corporation Law. Section 145 of the Delaware General Corporation Law concerning indemnification of officers, directors, employees and agents is set forth below. Section 145. Indemnification of officers, directors, employees and agents; insurance. (a) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the person s conduct was unlawful. (b) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including II-1 Table of Contents attorneys fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys fees) actually and reasonably incurred by such person in connection therewith. (d) Any indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in subsections (a) and (b) of this section. Such determination shall be made, with respect to a person who is a director or officer at the time of such determination, (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders. (e) Expenses (including attorneys fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including attorneys fees) incurred by former officers and directors or other employees and agents may be so paid upon such terms and conditions, if any, as the corporation deems appropriate. (f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person s official capacity and as to action in another capacity while holding such office. (g) A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person s status as such, whether or not the corporation would have the power to indemnify such person against such liability under this section. (h) For purposes of this section, references to the corporation shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. (i) For purposes of this section, references to other enterprises shall include employee benefit plans; references to fines shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to serving at the request of the corporation shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, II-2 Table of Contents officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner not opposed to the best interests of the corporation as referred to in this section. (j) The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (k) The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. The Court of Chancery may summarily determine a corporation s obligation to advance expenses (including attorneys fees). Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers, and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment of expenses incurred or paid by a director, officer or controlling person in a successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to the court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. Paragraph B of Article Eighth of our certificate of incorporation provides: The Corporation, to the full extent permitted by Section 145 of the GCL, as amended from time to time, shall indemnify all persons whom it may indemnify pursuant thereto. Expenses (including attorneys fees) incurred by an officer or director in defending any civil, criminal, administrative, or investigative action, suit or proceeding for which such officer or director may be entitled to indemnification hereunder shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized hereby. Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement, we have agreed to indemnify the underwriters, and the underwriters have agreed to indemnify us, against certain civil liabilities that may be incurred in connection with this offering, including certain liabilities under the Securities Act. Item 15. Recent Sales of Unregistered Securities. (a) During the past three years, we sold the following shares of common stock without registration under the Securities Act: Stockholders Number of Shares(1) Andrew S. Lerner(2) 450,000 Stephen B. Galasso(3) 281,250 D. James Daras 225,000 Brett G. Baris 225,000 Robert M. Lichten 225,000 Frederick S. Hammer 225,000 P. Carter Rise 119,531 Matthew D. Vertin 119,531 Inter-Atlantic Management Services LLC(4) 4,688 Total 1,875,000 II-3 Table of Contents (1) Does not reflect certain resales of our common shares which occurred in July 2007 and September 2007. (2) Includes 90,000 shares beneficially owned by Mr. Lerner s children and other family members. (3) The beneficial owner is the Stephen and Linda Galasso Family Trust. (4) These shares were subsequently sold by Inter-Atlantic Management Services LLC to Samuel J. Weinhoff, our director, at cost. Such shares were issued on January 31, 2007 in connection with our organization pursuant to the exemption from registration contained in Section 4(2) of the Securities Act. The shares issued to the individuals and entities above were sold for an aggregate offering price of $25,000 at an average purchase price of approximately $0.013 per share. No underwriting discounts or commissions were paid with respect to such sales. In addition, if we take advantage of increasing the size of the offering pursuant to Rule 462(b) under the Securities Act, we may effect a stock dividend in such amount to maintain the existing stockholders collective ownership at 20% of our issued and outstanding shares of common stock upon consummation of the offering. If we decrease the size of the offering we will effect a reverse split of our common stock in such amount to maintain the existing stockholders allocated ownership at 20% of our issued and outstanding common stock upon the consummation of this offering. Prior to the closing of this offering, our officers and directors, will have collectively purchased a combined total of 2,100,000 warrants and one of our stockholders will have purchased 200,000 warrants, each at a price of $1.00 per warrant for a total of $2,300,000. The warrants will be sold pursuant to the exemption from registration contained in Section 4(2) of the Securities Act. II-4 Table of Contents Item 16. Exhibits and Financial Statement Schedules. (a) The following exhibits are filed as part of this Registration Statement: Exhibit No. Description 1 .1 Form of Underwriting Agreement.** 1 .2 Form of Selected Dealer Agreement.** 3 .1 Amended and Restated Certificate of Incorporation.** 3 .2 By-laws.** 4 .1 Specimen Unit Certificate.** 4 .2 Specimen Common Stock Certificate.** 4 .3 Specimen Warrant Certificate.** 4 .4 Form of Warrant Agreement between American Stock Transfer Trust Company and the Registrant.** 4 .5 Form of Unit Option Purchase Agreement between the Registrant and Morgan Joseph Co.** 5 .1 Opinion of DLA Piper US LLP.** 10 .1 Letter Agreement among the Registrant, Morgan Joseph Co. and Andrew Lerner.** 10 .2 Letter Agreement among the Registrant, Morgan Joseph Co. and Stephen Galasso.** 10 .3 Letter Agreement among the Registrant, Morgan Joseph Co. and D. James Daras.** 10 .4 Letter Agreement among the Registrant, Morgan Joseph Co. and Robert M. Lichten.** 10 .5 Letter Agreement among the Registrant, Morgan Joseph Co. and Frederick Hammer.** 10 .6 Letter Agreement among the Registrant, Morgan Joseph Co. and Brett G. Baris.** 10 .7 Letter Agreement among the Registrant, Morgan Joseph Co. and Samuel J. Weinhoff.** 10 .8 Form of Investment Management Trust Agreement between American Stock Transfer Trust Company and the Registrant.** 10 .9 Form of Securities Escrow Agreement between the Registrant, American Stock Transfer Trust. Company and the Initial Stockholders.** 10 .10 Form of Registration Rights Agreement among the Registrant and the Initial Stockholders.** 10 .11 Office Services Agreement dated , 2007 by and among the Registrant and Inter-Atlantic Management Services LLC.** 10 .12 Warrant Purchase Agreement between the Registrant and the Existing Stockholders.** 10 .13 Form of Promissory Note, dated January 31, 2007, issued to Inter-Atlantic Management Services LLC in the amount of $250,000.** 10 .14 Revolving Line of Credit Agreement.** 14 .1 Code of Ethics.** 23 .1 Consent of Rothstein Kass Company P.C. 23 .2 Consent of DLA Piper US LLP (included in Exhibit 5.1).** 24 Power of Attorney (included on the signature page of the Registration Statements filed on February 13, 2007 and July 30, 2007). 99 .1 Audit Committee Charter.** 99 .2 Nominating Committee Charter.** ** Previously filed Item 17. Undertakings. (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: i. To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; ii. To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the II-5 Table of Contents form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the Calculation of Registration Fee table in the effective registration statement. iii. To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser: i. If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. (4) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: i. Any preliminary prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; ii. Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; iii. The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and iv. Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. (5) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) The undersigned hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event II-6 Table of Contents that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (d) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (e) The undersigned registrant hereby undertakes to supplement the prospectus, after the expiration of the subscription period, to set forth the results of the subscription offer, the transactions by the underwriters during the subscription period, the amount of unsubscribed securities to be purchased by the underwriters, and the terms of any subsequent reoffering thereof. If any public offering by the underwriters is to be made on terms differing from those set forth on the cover page of the prospectus, a post-effective amendment will be filed to set forth the terms of such offering. II-7 Table of Contents SIGNATURE Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in New York, New York on the 1st day of October, 2007. INTER-ATLANTIC FINANCIAL, INC. By: /s/ Andrew Lerner Andrew Lerner Chief Executive Officer and Director (Principal Executive Officer) Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Name Position Date /s/ Andrew Lerner Andrew Lerner Chief Executive Officer and Director (Principal Executive Officer) October 1, 2007 /s/ Stephen B. Galasso* Stephen B. Galasso Senior Strategic Officer and Director October 1, 2007 /s/ D. James Daras* D. James Daras Executive Vice President, Chief Financial Officer and Director (Principal Financial and Accounting Officer) October 1, 2007 /s/ Robert M. Lichten* Robert M. Lichten Director October 1, 2007 /s/ Frederick S. Hammer* Frederick S. Hammer Director October 1, 2007 /s/ Samuel J. Weinhoff* Samuel J. Weinhoff Director October 1, 2007 *By /s/ Andrew Lerner Andrew Lerner Attorney-in-fact October 1, 2007 II-8 Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, October , 2007 PRELIMINARY PROSPECTUS $60,000,000 INTER-ATLANTIC FINANCIAL, INC. 7,500,000 units Inter-Atlantic Financial, Inc. is a newly organized blank check company formed for the purpose of acquiring, through a merger, a capital stock exchange, asset acquisition, stock purchase or other similar business combination, an unidentified domestic and/or foreign operating business in the financial services industry or businesses deriving a majority of their revenues from providing services to financial services companies, including for example, payment processing companies and technology providers. We do not have any specific merger, capital stock exchange, asset acquisition or other business combination under consideration or contemplation and we have not, nor has anyone on our behalf, contacted any potential target business or had any discussions, formal or otherwise, with respect to such a transaction. This is an initial public offering of our securities. Each unit is being sold at a purchase price of $8.00 per unit and consists of: one share of our common stock; and one warrant. Each warrant entitles the holder to purchase one share of our common stock at a price of $4.50. Each warrant will become exercisable on the later of our completion of a business combination or , 2008 [one year from the date of this prospectus], and will expire on , 2011 [four years from the date of this prospectus], or earlier upon redemption. Our executive officers and directors have agreed to purchase from us in a private placement prior to the completion of this offering an aggregate of 2,100,000 warrants and one of our stockholders has agreed to purchase 200,000 warrants, each at a price of $1.00 per warrant for an aggregate purchase price of $2,300,000. The warrants purchased in the private placement will be substantially identical to those sold in this offering but may not be sold or otherwise transferred until after we complete a business combination and may not be subject to redemption. For a more complete discussion of such private placement, see the section appearing elsewhere in this prospectus entitled Prospectus Summary Pre-Offering Private Placement. We have granted the underwriters a 45-day option to purchase up to 1,125,000 additional units solely to cover over-allotments, if any (over and above the 7,500,000 units referred to above). We have also agreed to sell to Morgan Joseph Co. Inc. for $100, as additional compensation, an option to purchase up to a total of 525,000 units at $10.00 per unit. The units issuable upon exercise of this option are identical to those offered by this prospectus. The purchase option and its underlying securities have been registered under the registration statement of which this prospectus forms a part. There is presently no public market for our units, common stock or warrants. We anticipate that our units will be quoted on the American Stock Exchange, or AMEX, under the symbol IAN.U on or promptly after the date of this prospectus. Each of the common stock and warrants shall trade separately on the 90th day after the date of this prospectus, unless Morgan Joseph Co. Inc. determines an earlier date is acceptable. Once the securities comprising the units begin separate trading, we expect that the common stock and warrants will be quoted on the American Stock Exchange under the symbols IAN and IAN.W , respectively. We cannot assure you, however, that our securities will continue to be quoted on the American Stock Exchange in the future. Investing in our securities involves a high degree of risk. See Risk Factors beginning on page 19 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Underwriting Public Discount and Proceeds, Before Offering Price Commissions(1)(2) Expenses, to Us Per unit $ 8.00 $ 0.24 $ 7.76 Total(3) $ 60,000,000 $ 1,800,000 $ 58,200,000 (1) Excludes deferred underwriting discounts and compensation in the amount of 4.0% of the gross proceeds, or $0.32 per unit (up to $2,400,000 or up to $2,760,000 if the underwriters over-allotment option is exercised in full) payable to Morgan Joseph Co. Inc. only upon consummation of a business combination and then only with respect to those units as to which the component shares have not been redeemed into cash by those stockholders who voted against the business combination and exercised their redemption rights. (2) Of the net proceeds we receive from this offering, and the sale of the founding director and officer warrants that are described in this prospectus, $59,900,000 ($7.99 per unit) will be deposited into a trust account (not including the proceeds of the underwriters over-allotment option, if any), of which $2,400,000 is attributable to the deferred underwriters discounts and commissions, at JP Morgan Chase, maintained by American Stock Transfer Trust Company, acting as a trustee. If we are forced to dissolve, the underwriters have agreed to waive any right they may have to the deferred underwriting discount held in our trust account. (3) The underwriters have a 45-day option to purchase up to 1,125,000 additional units of the Company at the public offering price, less the underwriting discount and commission, to cover any over-allotments. If the underwriters exercise this option in full, the total public offering price, underwriting discount and commission and proceeds, before expenses to us, will be $69,000,000, $2,070,000 (excluding deferred underwriting fees of $2,760,000 equal to 4% of the gross offering proceeds) and $66,930,000, respectively. For a more complete discussion of the over-allotment option, see the section appearing elsewhere in this prospectus entitled Underwriting . We are offering the units for sale on a firm-commitment basis. Morgan Joseph Co., Inc. acting as representative of the underwriters, expects to deliver our securities to investors in the offering on or about , 2007. Sandler O Neill + Partners, L.P. Legend Merchant Group GunnAllen Financial , Until [ ], 2007, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. No dealer, salesperson or any other person is authorized to give any information or make any representations in connection with this offering other than those contained in this prospectus and, if given or made, the information or representations must not be relied upon as having been authorized by us. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the securities offered by this prospectus, or an offer to sell or a solicitation of an offer to buy any securities by anyone in any jurisdiction in which the offer or solicitation is not authorized or is unlawful. 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+PROSPECTUS SUMMARY The following summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all the information that may be important to you. You should read this entire prospectus carefully before deciding to invest in our common shares. Unless otherwise indicated, all dollar amounts included herein are recorded in United States dollars. Canadian dollars are expressed as CAD$. Our Business We are a biopharmaceutical company developing hormone therapies for the treatment and prevention of breast cancer and endocrine-related disorders, especially those affecting postmenopausal women and aging men. We are developing late-stage product candidates for the treatment and prevention of breast cancer and a variety of conditions affecting postmenopausal women. We plan to commence three Phase III clinical trials in the next twelve months. We are also supporting a Phase III clinical trial being conducted in collaboration with an academic research institution evaluating one of our compounds. We anticipate that the net proceeds from this offering will be sufficient to fund two of our product development programs through the completion of currently planned Phase III clinical trials and, if data from these trials are positive, the filing of New Drug Applications, or NDAs, in the United States. Assuming favorable clinical trial results, we anticipate filing an NDA for one of these product candidates in 2008 and for the other in 2009. We are developing acolbifene, our lead product candidate, for the treatment and prevention of breast cancer. Acolbifene belongs to a class of compounds known as selective estrogen receptor modulators, or SERMs. SERMs inhibit the stimulatory effect that the female sex hormone estrogen has on the growth of breast and uterine cancer. We believe acolbifene is particularly effective in blocking estrogens in both the mammary gland and uterus and offers other advantages over currently marketed breast cancer treatments. Many currently marketed estrogen inhibitors are associated with an increased risk of uterine cancer or bone loss and fractures. We intend to commence in the second half of 2007 a Phase III clinical trial with acolbifene for the treatment of advanced-stage breast cancer in women who have previously failed current hormone therapy. If data from this trial are positive, we intend to submit an NDA in the United States in 2009 for acolbifene as a second-line therapy for advanced-stage breast cancer. If additional financing is available, we anticipate commencing in the first half of 2009 a Phase III clinical trial treating women with advanced-stage breast cancer who have not previously been treated with hormone therapy at the advanced stage. We also intend to conduct a collaborative Phase II study with acolbifene for the prevention of breast cancer. According to Frost & Sullivan, total worldwide sales of products for the treatment of breast cancer were approximately $6 billion in 2005. Our second product candidate is dehydroepiandrosterone, known as DHEA. DHEA is a naturally occurring compound that is needed for the formation of both estrogens, or female hormones, and androgens, which are male hormones also present in women. We are developing DHEA for medical indications frequently affecting postmenopausal women. Upon completion of this offering, we will have license rights to nine U.S. patents and one U.S. patent application for the use of DHEA for a variety of indications in cancer and women s health. We intend to commence in 2007 a Phase III clinical trial with DHEA for the treatment of vaginal atrophy. If data from this trial are positive, we intend to submit an NDA in the United States in the first half of 2008 for DHEA as treatment for vaginal atrophy. This disorder, which affects at least 50% of postmenopausal women, is characterized by vaginal dryness, burning, itching, inflammation, irritation and pain during intercourse, leading to decreased libido and sexual dysfunction. Vaginal atrophy is typically treated with hormone replacement therapies, including estrogen-based therapies. According to Frost & Sullivan, United States sales of hormone replacement therapies for menopausal symptoms were $1.9 billion in 2004. We are also currently supporting a Phase III clinical trial for the use of DHEA in the treatment of loss of libido and sexual dysfunction in postmenopausal women being performed at Monash University in Australia. Loss from operations (3,240 ) (964 ) (4,503 ) Other income (expense): Interest income (note 10) 59 54 120 Foreign exchange loss (31 ) (13 ) (117 ) Gain on disposal of equipment UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents We are also developing acolbifene and DHEA in combination to treat a variety of conditions afflicting postmenopausal women. This product candidate is designed to be an alternative to traditional hormone replacement therapy, or HRT, which replaces both estrogen and progestin, and estrogen replacement therapy, or ERT, which replaces estrogen alone. These postmenopausal conditions include vaginal atrophy, loss of muscle mass and strength, type II diabetes, obesity, high cholesterol and bone loss and are believed to result from the decrease in both estrogen and androgen secretion associated with menopause and aging. Historically, these conditions have been treated with HRT, which generally uses estrogen replacement products. However, traditional HRT or ERT results in unwanted estrogen activity in other areas of the woman s body, sometimes leading to serious side effects. Two recent studies, the Women s Health Initiative and the Million Women Study, established that traditional HRT significantly increases a woman s risk of breast cancer. Traditional HRT or ERT also does not compensate for the significant decrease in androgen levels experienced by women beginning in their thirties, which we believe is a cause of additional health problems in postmenopausal women. We believe that this combination therapy, which we call acolbifene + DHEA, will be active only in those tissues in which a therapeutic effect is desired, avoiding the side effects often caused by traditional HRT products. We expect to commence in the second half of 2007 a Phase III clinical trial using acolbifene + DHEA for treatment of vaginal atrophy. Following this trial, and subject to the availability of additional financing, we intend to commence a Phase III uterine safety study in 2009. If the uterine safety study is successful, we intend to submit an NDA in the United States in 2010 for acolbifene + DHEA as a tissue-specific HRT, or TS-HRT, for treatment of vaginal atrophy. According to Frost & Sullivan, the United States market for HRT was approximately $1.9 billion in 2004. We plan to use the proceeds from this offering to fund one on-going Phase III clinical trial as well as three additional Phase III trials that we plan to commence in the next twelve months. These trials include use of acolbifene for treatment of breast cancer in women with advanced-stage breast cancer who have previously failed current hormone therapy and each of DHEA and acolbifene + DHEA for treatment of vaginal atrophy. If we obtain additional financing, we also plan to commence in 2009 a Phase III uterine safety study of acolbifene + DHEA with secondary indications including various postmenopausal symptoms, such as loss of muscle mass and strength, type II diabetes, obesity, high cholesterol and bone loss. We are designing each of our Phase III clinical trials to support submissions for regulatory approval of our product candidates in the United States, Europe, Canada and other major markets. We intend to submit to the FDA Investigational New Drug applications, or INDs, for our three planned Phase III clinical trials. Previous clinical trials involving acolbifene were conducted pursuant to INDs filed by Schering in the United States and by the CHUL Research Center in Canada. Assuming the successful completion of these trials, we intend to submit NDAs to the FDA in the United States and make similar submissions in other jurisdictions to obtain marketing approval. We anticipate the expected proceeds from this offering will be sufficient to fund our development of acolbifene and DHEA through our intended submission of NDAs for acolbifene as a second-line therapy for advanced-stage breast cancer and DHEA for treatment of vaginal atrophy. However, this expectation is based on a variety of assumptions, such as concurrence by the FDA with our clinical protocols and favorable data from planned clinical trials. Many of these assumptions are beyond our ability to control. Despite our plans and intentions, our product candidates might not successfully complete the development process on our anticipated timeline, or at all. Our product candidates may never gain the required regulatory approvals in the United States, Europe or any other jurisdiction. Our pipeline also includes preclinical compounds for the treatment of a variety of endocrine-related disorders, including acne, oily skin, male pattern baldness, prostate cancer and benign prostate enlargement. These product candidates act by blocking the access of androgens to the androgen receptors with an antiandrogen compound. Our pipeline also includes a preclinical-stage selective androgen receptor modulator, or SARM, for the treatment of muscle atrophy and bone loss in aging men and women. Upon completion of this offering we will hold an exclusive, irrevocable worldwide, royalty-free license to 36 issued patents and 21 pending patent applications in the United States and corresponding issued patents and pending patent applications (including non-United States patents or applications claiming a common priority document as one of the United States patents or applications) in over 38 countries throughout the world relating 3,832 (3,331 ) 501 (501 ) Advances from shareholder 1,062 1,062 (950 )2(b) 112 Shareholders equity: Share capital 4,863 (4,863 )2(a) 40,320 2(b) 40,320 Contributed surplus 635 (635 )2(a) Deficit (4,641 ) 4,583 2(a) (58 ) (4,730 )2(b) (4,788 ) Cumulative translation adjustment 1,463 (1,461 )2(a) 2 Amendment No. 6 to FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents to our product candidates. When we refer to our proprietary rights in intellectual property, we are referring to our rights under this license. Our Collaborative Agreement with Schering The Schering Corporation and Schering-Plough Ltd., or collectively Schering, have an option to manufacture, market and distribute acolbifene for breast cancer treatment and prevention and other indications, alone or in combination with other products. If Schering exercises its option, we will be entitled to reimbursement from Schering for all of our development costs related to acolbifene and to potential future milestone payments and royalties on net sales of that candidate worldwide, except in Canada where we retain marketing rights. There can be no assurance that Schering will exercise its option. Our Competitive Strengths We believe that our key competitive strengths include: Significant Drug Development Experience. Dr. Fernand Labrie, our President, Chief Executive Officer and Chief Scientific Officer, has extensive experience developing hormone therapies for the treatment of cancer. In 1977, he discovered that a class of compounds known as GnRH agonists can achieve chemical castration for the treatment of prostate cancer. In addition, he also developed combined androgen blockade, leading to the first treatment for prostate cancer shown to prolong life. These methods of treatment are now the standard of care in hormone therapy for prostate cancer worldwide. We intend to utilize Dr. Labrie s experience in guiding our development process and collaboration strategy. Three Late-Stage Product Candidates. We are currently developing three late-stage product candidates for the treatment of multiple conditions affecting postmenopausal women. Using the expected proceeds from this offering, we plan to commence in the next twelve months three Phase III clinical trials, involving use of each of DHEA and acolbifene + DHEA for treatment of vaginal atrophy in postmenopausal women and use of acolbifene for treatment of women with advanced-stage breast cancer who have previously failed current hormone therapy. If we obtain sufficient additional funding, we plan to commence two additional Phase III clinical trials in the first half of 2009. The first trial is a uterine safety study of acolbifene + DHEA with secondary indications including various postmenopausal symptoms such as loss of muscle mass and strength, type II diabetes, obesity, high cholesterol and bone loss. The second trial would evaluate the use of acolbifene for treatment of women with advanced-stage breast cancer not previously treated with hormone therapy at the advanced stage. As a result, we believe that we have multiple opportunities to advance one or more of our product candidates to the NDA stage, although there can be no assurance that we will do so. We estimate that the total costs required to conduct the first three Phase III clinical trials, through submission of NDAs for two of these product candidates, together with supporting the on-going collaborative Phase III clinical trial with Monash University in Australia, will be approximately $32.3 million, comprised of approximately $21 million in direct costs and approximately $11.3 million in related infrastructure and supporting costs. We estimate total costs required to conduct the subsequent two Phase III clinical trials, which we expect to commence in 2009, will be approximately $49.1 million, comprised of approximately $35.4 million in direct costs and approximately $13.7 million in related infrastructure and supporting costs. We plan to fund the first four trials with proceeds from this offering and the subsequent two with the proceeds from public or private equity offerings, debt financings and corporate collaboration and licensing arrangements. We may not be able to obtain additional financing. Large Market Opportunities. Our late-stage product candidates target breast cancer, vaginal atrophy and postmenopausal conditions. These are large markets offering significant opportunities for sales of our product candidates if approved for marketing by the FDA. However, our products may not be approved, and if approved, may not be commercially successful. ENDOCEUTICS, INC. (Exact Name of Registrant as Specified in Its Charter) Canada Not Applicable (State or Other Jurisdiction of Incorporation or Organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) Table of Contents Favorable Compound Profiles. We believe that the tissue specific characteristics associated with our product candidate DHEA has the advantage of permitting replacement of estrogens and androgens in only the tissues in need of those hormones, without the systemic risk associated with traditional HRT or ERT. We also believe that our product candidate acolbifene is the most potent and most tissue-specific blocker of estrogen activity of all known SERMs and has a favorable safety and tolerability profile compared to existing marketed therapies. Existing therapies are associated with an increased risk of uterine cancer or bone loss and fractures. We believe that DHEA s localized affect and acolbifene s combination of potency and favorable safety profile positions these product candidates to become the standard of care in their respective treatment areas, if approved. We need to be cautious, however, since we have not yet shown in clinical studies that either DHEA or acolbifene is sufficiently safe and effective to support marketing approval. Our Strategy We intend to: Focus on local DHEA for vaginal atrophy. Following this offering, we intend to commence a three-month Phase III clinical trial using DHEA for treatment of vaginal atrophy. If data from such clinical trial are positive, we expect to submit an NDA in the United States and its equivalent in Canada and other countries in 2008. Develop acolbifene for breast cancer. After this offering, we also intend to commence a Phase III clinical trial to evaluate acolbifene as a hormone therapy for breast cancer in patients who have previously failed hormone therapy. If data from this trial are positive, we intend to submit an NDA in the United States, Canada and other countries in 2009 for acolbifene as a second-line therapy for advanced-stage breast cancer using the proceeds from this offering. If additional financing is available, we intend to commence in 2009 a Phase III clinical trial to evaluate acolbifene for treatment of breast cancer patients who have never received hormone therapy for advanced-stage breast cancer. Assuming positive data from this trial, we could submit an NDA for this indication as early as 2011. We also intend to support a collaborative Phase II clinical trial scheduled to commence in the second half of 2007 to evaluate the use of acolbifene in the prevention of breast cancer. Acquire or license additional therapies. We know of additional compounds that would complement our current development pipeline. We may seek to acquire or license complementary product candidates or technologies. We are not currently party to any material acquisition agreements, though, and we may not be able to acquire additional products or technologies. Leverage the services of opinion leaders in cancer, women s health and aging. Our Board of Directors and Scientific Advisory Board include respected members in the field of cancer research, women s health, aging and drug development. We will seek to leverage their expertise and relationships to guide our development process and optimize our strategy. Risks Associated with Our Business Our business is subject to numerous risks, as more fully described in the section entitled Risk Factors immediately following this prospectus summary. Some of these business risks include: We expect to incur operating losses for the foreseeable future in connection with the continued development of our product candidates, and we may never achieve or maintain profitability; Our success depends largely on the successful further development and commercialization of acolbifene, DHEA, and the two in combination for treating the various diseases and conditions indicated in this prospectus, and we may fail in our development and commercialization efforts; Our clinical trials may not demonstrate sufficient safety and efficacy in humans, which could impair our ability to develop, obtain regulatory approval for, and commercialize acolbifene and our other product candidates; 28 41 Assets Current assets: Cash $ 553 $ (501 )2(a) $ 52 $ 35,590 2(b) $ 35,642 Term deposit 23 (23 )2(a) Accounts receivable 650 (650 )2(a) Research and development tax credits receivable 2,436 (2,436 )2(a) Prepaid expenses 54 (50 )2(a) 4 2989, de la Promenade Quebec (Quebec), G1W 2J5 Canada (418) 652-0197 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant s Principal Executive Offices) Table of Contents A prior Phase III clinical trial with acolbifene in patients who had failed treatment with tamoxifen was terminated following an interim analysis indicating that acolbifene was unlikely to show superiority to anastrozole (a drug used to treat breast cancer) in this category of advanced-stage cancer patients who had previously failed hormone therapy; We are highly dependent upon the continued services of Dr. Fernand Labrie, our President, Chief Executive Officer, Chief Scientific Officer and a member of our board of directors; We do not intend to commercialize our drug products ourselves, to develop manufacturing capabilities or to maintain a sales force; We currently only have one full-time employee, our Chief Executive Officer, and three additional employees under contract, effective upon completion of this offering, and intend to rely on third-party contractors to perform a variety of our operations, including research and development activities, manufacturing, marketing and sale of our products. Through our collaborative agreement with the CHUL Research Center, upon the completion of this offering approximately fifty staff members of the CHUL Research Center will be dedicated to our projects, and their compensation shall be expensed. We currently expect to be treated as a passive foreign investment company, or PFIC, for each of 2007 and 2008 and possibly our subsequent fiscal years as well, in which years those U.S. persons holding our common shares who do not elect to make certain elections in the way they treat their investment in us will incur significant and adverse U.S. Federal income tax consequences, such as having gains realized upon sale of common shares held subject to a higher rate of taxation and losing preferential rate applicable to any dividends received on common shares held. We are organized under the laws of Canada, and your rights as a shareholder are different than if we were a U.S. corporation. Related Party Arrangements Dr. Labrie has controlling ownership interests in EndoResearch Inc., our parent company and, among other things, the licensor of the intellectual property pertaining to our product candidates. Dr. Labrie also serves in a management position at EndoResearch. Our research arrangement with the CHUL (Le Centre Hospitalier de L Universite Laval) Research Center, a research facility affiliated with Laval University in Quebec City, Canada, provides for management of the proposed research projects by Dr. Claude Labrie, a head researcher at the CHUL Research Center and the son of Dr. Fernand Labrie of our company. Our Company Information We were founded June 20, 2006 as a wholly-owned subsidiary of EndoResearch, a private drug discovery company located in Quebec City, Canada. EndoResearch was founded in 1985 and is controlled by Dr. Fernand Labrie. We were formed by EndoResearch to finance, plan and execute the development of our product candidates. Upon completion of this offering, EndoResearch will own 68.5% of our issued and outstanding common shares. We will enter into an agreement with EndoResearch effective upon the completion of this offering that includes an irrevocable royalty-free license granting us exclusive worldwide rights to EndoResearch s patents, patent applications, technology and know-how, to the extent of the research and development programs described in this prospectus. Our proposed agreement with EndoResearch also includes an assignment to us of all of EndoResearch s rights in its agreements with Schering, as well as rights in certain collaboration research agreements to which EndoResearch is a party. Our principal executive offices are located at 2989, de la Promenade, Quebec (Quebec), G1W 2J5, Canada, and our telephone number at that address is (418) 652-0197. Fernand Labrie, Chief Executive Officer EndoCeutics, Inc. 2989, de la Promenade Quebec (Quebec), G1W 2J5 Canada (418) 652-0197 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) Table of Contents The Offering Common shares we are offering 5,750,000 shares (6,612,500 shares if the underwriters over-allotment option is fully exercised) Common shares to be outstanding immediately after this offering 18,250,000 shares (19,112,500 shares if the underwriters over-allotment option is fully exercised) Use of proceeds We intend to use the net proceeds to pay to EndoResearch the cash portion of the consideration for the transfer to us of rights in our product candidates, to further develop our product candidates, to fund our continuing research and development activities, and for general corporate purposes, including working capital needs. See Use of Proceeds and Management s Discussion and Analysis of Financial Condition and Results of Operations Our Operations Plan and Funding Requirements. Trading Symbol ENCX The number of our common shares to be outstanding after this offering is based on 100 common shares outstanding as of January 31, 2007. Summary Pro Forma Financial Data The following summary balance sheet data and statement of operations data are derived from our pro forma financial statements and notes thereto included elsewhere in this prospectus. The summary pro forma financial data set forth below is only a summary and should be read together with the financial statements, the related notes and other financial information and the information under Management s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this prospectus. Our company was incorporated under the laws of Canada by EndoResearch on June 20, 2006. We have to date engaged in only limited operations related to this offering. EndoResearch is considered, for accounting purposes, to be our predecessor. In accordance with requirements of the U.S. Securities and Exchange Commission, or SEC, we have included in this prospectus the historical financial statements and notes thereto, and financial data derived therefrom, of EndoResearch. We have also included pro forma financial information derived from historical EndoResearch financial statements, adjusted to, among other things, eliminate assets, liabilities, revenues and expenses other than those historically associated with operations EndoResearch will transfer to us upon the completion of this offering. Because the scope of our operations following this offering will be substantially different from those conducted by EndoResearch as of the dates and for the periods for which financial statements are included in this prospectus, you should not view those financial statements or any financial data derived therefrom, whether historical or pro forma, as predictive of our future financial position or results of operations. A detailed description of our operations plan, and related financial considerations, are set forth under Management s Discussion and Analysis of Financial Condition and Results of Operations. You should read that section of this prospectus carefully. The financial statements, notes thereto and financial data derived therefrom contained in this prospectus have been prepared in accordance with Canadian GAAP. The notes to the financial statements of EndoResearch and to the balance sheets of our company included in this prospectus include a reconciliation of the significant Cumulative translation adjustment in accordance with Canadian GAAP $ 1,463 $ 1,521 Adjustment for other comprehensive income: Shares of a public company at fair market value: Current year (1 ) Cumulative effect of prior years 6 Copies to: J. Russell Bulkeley, Esq. Eaton & Van Winkle LLP 3 Park Avenue New York, New York 10016 Telephone: (212) 779-9910 Donald Murray, Esq. Dewey Ballantine LLP 1301 Avenue of the Americas New York, New York 10019 Telephone: (212) 259-8000 (1) Our product candidates have not been approved for marketing, and we generate no revenue from sales of any product. There are no tangible assets associated with the operations of EndoResearch to be transferred to us, and we are not assuming any liabilities of EndoResearch. We are only acquiring those future obligations relating to contracts to be assigned to us. Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date hereof. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Table of Contents
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+PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. Unless otherwise stated in this prospectus, references to we, us or our company refer to Stone Tan China Acquisition Corp., a Delaware corporation, the term public stockholders refers to those persons that acquire our common stock in this offering as part of the units or in the aftermarket, including any existing stockholders to the extent that they acquire such shares. Unless otherwise specified, references to China or PRC refer to the People s Republic of China as well as the Hong Kong Special Administrative Region, or Hong Kong SAR, and the Macau Special Administrative Region, or Macau SAR, but does not include Taiwan. All references to RMB or Renminbi are to the legal currency of China and all references to U.S. dollars and $ are to the legal currency of the United States (the U.S. ). Discrepancies in tables included in this prospectus between totals and sums of the amounts listed are due to rounding. Unless otherwise specified, all references to private placement refer to our private placement of 6,200,000 warrants at a price of $1.00 per warrant to our founding stockholders, which will occur prior to the completion of this offering. Unless we tell you otherwise, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option. All share and per share information gives effect to a 2-for-one stock split in the form of a dividend effected in April 2007, a 1.15-for-one stock split in the form of a dividend effected in May 2007, a 3-for-one stock split in the form of a dividend effected in July 2007 and a two-for-three reverse stock split effected in October 2007. Introduction We are a blank check company organized under the laws of the State of Delaware on January 24, 2007. We were formed to acquire, through a merger, asset acquisition, stock exchange or other similar business combination, or control through contractual arrangements, an operating business having its primary operations in the People s Republic of China. To date, our efforts have been limited to organizational activities. We do not have any specific merger, capital stock exchange, asset or stock acquisition or other business combination or contractual arrangements under consideration. Although certain persons employed by Pacific Millennium Holdings Corporation or its subsidiaries, on our behalf, contacted five potential target businesses (which operate in the following areas: consumer appliances, mining, communications and alternative fuels) several months prior to our incorporation, our management team has agreed not to propose the approval of a business combination with any of those entities to our stockholders. We believe that we possess the relationships, experience and skills necessary to locate potential target businesses, evaluate those businesses and execute business combinations. Roger Stone, our Non-Executive Chairman of the Board, has prior experience with a blank check company. In addition, he has extensive experience in building and managing businesses, both through internal growth and through acquisitions. Richard Tan, our Chief Executive Officer, President and a director, has experience in both investing in and operating businesses in China. Roger Stone is currently the Chairman of the Board and Chief Executive Officer of KapStone Paper and Packaging Corporation (formerly Stone Arcade Acquisition Corporation), a producer of kraft paper. As the Chairman of the Board and Chief Executive Officer of Stone Arcade Corporation, a blank check company formed in order to acquire a business in the paper products industry, Mr. Stone successfully acquired International Paper Company s kraft papers business in January 2007. Richard Tan is the founder and President of Pacific Millennium Holdings Corporation, a group of companies that traces its roots back to 1977. Under Mr. Tan s leadership, Pacific Millennium built one of the largest pulp and paper distribution companies in Asia. He was one of the first entrepreneurs in China to establish joint ventures with companies such as International Paper, Smurfit Stone Container Corp. and Willamette Industries. Through these partnerships, Pacific Millennium built 10 box plants and one paper CALCULATION OF REGISTRATION FEE Title of Each Class Of Security Being Registered Amount Being Registered(1) Proposed Maximum Offering Price Per Security(2) Proposed Maximum Aggregate Offering Price(2) Amount Of Registration Fee Units, each consisting of one share of common stock, $0.0001 par value, and one warrant(3) 28,750,000 $ 8.00 $ 230,000,000 $ 7,291 Common stocks included as part of the units(3) 28,750,000 0 (4) Warrants included as part of the units(3) 28,750,000 0 (4) Shares of common stock underlying the warrants included in the units 28,750,000 $ 5.50 $ 158,125,000 $ 5,013 Representative s Unit Purchase Option 1 $ 100.00 $ 100 0 (4) Units underlying Representative s Unit Purchase Option 2,500,000 $ 10.00 $ 25,000,000 $ 793 Shares of common stock included as part of the units underlying the Representative s Unit Purchase Option 2,500,000 0 (4) Warrants included as part of the units underlying the Representative s Unit Purchase Option 2,500,000 0 (4) Shares of common stock underlying warrants included as part of the units underlying the Representative s Unit Purchase Option 2,500,000 $ 7.00 $ 17,500,000 $ 537 Total $ 430,625,100 $ 13,634 (5) (1) Pursuant to Rule 416, there are also being registered such number of additional securities as may be issued as a result of stock splits, stock dividends or similar transactions. (2) Estimated solely for the purpose of calculating the registration fee. (3) Includes 3,750,000 units, and 3,750,000 shares of common stock and 3,750,000 warrants underlying such units, which may be issued on exercise of a 45-day option granted to the Underwriters to cover over-allotments, if any. (4) No fee pursuant to Rule 457(g). (5) Previously paid. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. mill in Asia. In August 2005, Mr. Tan successfully sold Pacific Millennium s paper trading operations and a portion of its paper manufacturing operations to International Paper. Mr. Tan also has an extensive network of contacts via his involvement in a variety of trade organizations in China. His activities include being the Vice Chairman of the Shanghai International Chamber of Commerce, Vice Chairman of China Chamber of Promotion for International Trade (Shanghai), Advisor of the Shanghai Modern Management Center, Business Advisor of Chongqing Municipality and Elected Member of the Anhui Province Political Consultative Committee and he is a former President of the Hong Kong Chamber of Commerce Paper Industries. We will not pursue a business combination with any company that is currently a portfolio company of, or otherwise affiliated with, or has received a financial investment from, any of the companies with which our existing stockholders, executive officer or directors are affiliated. For example, we would not be able to acquire companies in which our executive officer or director are currently passive investors, companies of which our officer and directors are currently officers or directors or companies in which our officer and directors are currently invested through an investment vehicle controlled by them. On the other hand, while we do not intend to pursue such a transaction with respect to any future portfolio or affiliated companies, we are not prohibited from pursuing such a transaction. In the event that we seek to complete a business combination with such a company, we would obtain an opinion from an independent investment banking firm that such business combination is fair to our stockholders from a financial point of view. Such opinion would be included in our proxy statement relating to the business combination. Although management has not consulted with any investment banker in connection with such an opinion, it is possible that the opinion would only be able to be relied upon by our board of directors and not by our stockholders. We will need to consider the cost in making a determination as to whether to hire an investment bank that will allow our stockholders to rely on its opinion, and will do so unless the cost is substantially (approximately $50,000) in excess of what it would be otherwise. In the event that we obtain an opinion that we and the investment banker believe cannot be relied on by our stockholders, we will include disclosure in the proxy statement providing support for that belief. While our stockholders might not have legal recourse against the investment banking firm in such case, the fact that an independent expert has evaluated, and passed upon, the fairness of the transaction is a factor our stockholders may consider in determining whether or not to vote in favor of the potential business combination. Pursuant to our amended and restated certificate of incorporation, the business combination must be a transaction with one or more operating businesses in which the collective fair market value of the target business, at the time of the business combination, is at least 80% of our net assets at the time of the business combination. If we acquire less than 100% of one or more target businesses in our initial business combination, the aggregate fair market value of the portion or portions we acquire must equal at least 80% of our net assets at the time of such initial business combination. In no instance will we acquire less than majority voting control of a target business. However, in the case of a reverse merger or other similar transaction in which we issue a substantial number of new shares, our stockholders immediately prior to such transaction may own less than a majority of our shares subsequent to such transaction. Subject to their respective existing fiduciary obligations, each of Messrs. Stone and Tan are obligated to present to us for our consideration any company or business having its primary operations in the PRC whose fair market value is at least equal to 80% of the balance of the trust account (less deferred underwriting compensation of $7,000,000, or $8,050,000 if the over-allotment is exercised in full and taxes payable). This obligation will expire upon the earlier of (i) our consummation of an initial business combination or (ii) 24 months after the consummation of this offering. Our executive officers are situated at Suite 1A, 11th Floor, Tower 1, China Hong Kong City, 33 Canton Road, Kowloon, Hong Kong and our telephone number is 852-27355493. Pre-Offering Private Placement Our founding stockholders, which include our Chairman and an entity affiliated with our Chief Executive Officer, have collectively agreed to purchase a combined total of 6,200,000 warrants prior to the closing of this offering at a price of $1.00 per warrant for a total of $6,200,000. We refer to these 6,200,000 warrants as the founder warrants throughout this prospectus. The founder warrants will be purchased separately and not as a part of units. The purchase price of the founder warrants will be added to the proceeds from this offering to be held in the trust account pending our completion of one or more business combinations. If we do not complete one or more business combinations that meet the criteria described in this prospectus, then the $6,200,000 purchase price of the founder warrants will become part of the amount payable to redeeming stockholders if we complete a business combination or to all of our public stockholders upon our dissolution and the subsequent liquidation of the trust account, in which event the founder warrants will expire worthless. The founder warrants will not be transferable (except in limited circumstances described below) or salable by the purchasers until we complete a business combination, will be exercisable on a cashless basis and will be non-redeemable so long as these persons hold such warrants. The founder warrants and the underlying shares of common stock will be entitled to registration rights under an agreement to be signed on or before the date of this prospectus to enable their resale commencing on the date such warrants become exercisable. With those exceptions, the founder warrants have terms and provisions that are substantially identical to those of the warrants being sold as part of the units in this offering. We have elected to make the founder warrants non-redeemable in order to provide the purchasers a potentially longer exercise period for those warrants because they will bear a higher risk while being required to hold such warrants until the consummation of a business combination. Furthermore, we have agreed that the founder warrants may be exercised on a cashless basis so long as they are held by the initial purchasers or their affiliates because it is not known at this time whether they will be affiliated with us following a business combination. If they are, their ability to sell our securities in the open market will be significantly limited. If they remain insiders, we will have policies in place that prohibit insiders from selling our securities except during specific periods of time. Even during such periods of time, an insider cannot trade in our securities if he is in possession of material non-public information. Accordingly, unlike public stockholders who could exercise their warrants and sell the shares of common stock received upon such exercise freely in the open market in order to recoup the cost of such exercise, the holders of the founder warrants could be significantly restricted from selling such securities. The purchasers of the founder warrants are permitted to transfer such warrants (i) in transfers resulting from death, (ii) by operation of law, (iii) for estate planning purposes to persons immediately related to the transferor by blood, marriage or adoption, or (iv) to any trust solely for the benefit of such transferor and/or the persons described in the preceding clause, but the transferees receiving such founder warrants will be subject to the same sale restrictions imposed on the persons who initially purchase these warrants from us. If any of the purchasers acquire warrants for their own account in the open market, any such warrants will be redeemable. If our other outstanding warrants are redeemed (including the warrants subject to the underwriters unit purchase option) and the market price of a share of our common stock rises following such redemption, the holders of the founder warrants could potentially realize a larger gain on exercise or sale of those warrants than is available to other warrant holders, although we do not know if the price of our common stock would increase following a warrant redemption. If our share price declines in periods subsequent to a warrant redemption and the purchasers who initially acquired these warrants from us continue to hold the founder warrants, the value of those warrants still held by these persons may also decline. The founder warrants will be differentiated from warrants, if any, purchased in or following this offering by the founding stockholders through the legends contained on the certificates representing the founder warrants indicating the restrictions and rights specifically applicable to such warrants as are described in this prospectus. Preliminary Prospectus Subject To Completion. October 15, 2007 The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. PROSPECTUS STONE TAN CHINA ACQUISITION CORP. $200,000,000 25,000,000 Units Stone Tan China Acquisition Corp. is a Delaware blank check company recently formed for the purpose of acquiring, through a merger, stock exchange, asset acquisition or other similar business combination, or control through contractual arrangements, an operating business having its primary operations in the People s Republic of China. As used in this prospectus business combination shall mean the initial acquisition by us of a target business. Our efforts in identifying a prospective target business will not be limited to a particular industry. We do not have any specific merger, capital stock exchange, asset or stock acquisition or other business combination or contractual arrangements under consideration. Although certain persons employed by businesses owned directly or indirectly by our Chief Executive Officer, on our behalf, contacted five potential target businesses several months prior to our incorporation, our management team has agreed not to propose the approval of a business combination with any of those entities to our stockholders. This is an initial public offering of our securities. Each unit is being sold at a purchase price of $8.00 and consists of: one share of common stock; and one warrant. Each warrant entitles the holder to purchase one share of common stock at a price of $5.50. Each warrant will become exercisable on the later of our completion of a business combination or , 2008 [one year anniversary of the date of this prospectus], and will expire on , 2011 [four year anniversary of the date of this prospectus], or earlier upon redemption. Our founding stockholders have agreed to purchase from us in a private placement prior to the completion of this offering an aggregate of 6,200,000 warrants at a price of $1.00 per warrant for an aggregate purchase price of $6,200,000. The warrants purchased in the pre-offering private placement will be substantially identical to those sold in this offering but may not be sold or otherwise transferred until after we complete a business combination, will be exercisable on a cashless basis and may not be subject to redemption, as more fully described in this prospectus. We have granted the underwriters a 45-day option to purchase up to 3,750,000 additional units solely to cover over-allotments, if any (over and above the 25,000,000 units referred to above). The option will be used only to cover the net syndicate short position resulting from the initial distribution. We have also agreed to sell to Morgan Joseph & Co. Inc., the representative of the underwriters, for $100, as additional compensation, an option to purchase up to a total of 2,500,000 units at a per-unit offering price of $10.00. The units issuable upon exercise of this option are identical to those offered by this prospectus, except that the exercise price of the warrants underlying the units is $7.00. The purchase option and its underlying securities have been registered under the registration statement of which this prospectus forms a part. There is presently no public market for our units, common stock or warrants. We anticipate that the units will be quoted on the OTC Bulletin Board under the symbol on or promptly after the date of this prospectus. Once the securities comprising the units begin separate trading, we anticipate that the common stock and warrants will be traded on the OTC Bulletin Board under the symbols and , respectively. We cannot assure you that our securities will continue to be quoted on the OTC Bulletin Board. We have registered our securities, or have obtained an exemption from registration, in Colorado, Delaware, the District of Columbia, Florida, Georgia, Hawaii, Illinois, Indiana, Louisiana, Nevada, New York and Rhode Island. To purchase securities in this offering, you must be a resident of these jurisdictions or an institutional investor. Investing in our securities involves a high degree of risk. See Risk Factors beginning on page 17 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Public offering price Underwriting discount and commissions(1) Proceeds, before expenses, to us Per unit $ 8.00 $ .56 $ 7.44 Total $ 200,000,000 $14,000,000 $ 186,000,000 Additional Purchases by Our Founding Stockholders Our founding stockholders, our Chairman and an entity affiliated with our Chief Executive Officer, have entered into an agreement with the representative of the underwriters pursuant to which they will place limit orders to purchase up to an aggregate $10,000,000 of our common stock in the open market commencing 10 business days after we file our Current Report on Form 8-K announcing our execution of a definitive agreement for a business combination and ending on the business day immediately preceding the date of the meeting of stockholders at which such business combination is to be approved. Such open market purchases will be made in accordance with Rules 10b-18 and 10b5-1 under the Securities Exchange Act of 1934, as amended, at a price per share of not more than the per share amount held in the trust account (i.e., the initial amount of $7.93 plus interest earned on such amount, less taxes paid or payable and interest released to us for working capital) as reported in such 8-K. The purchases will be made by a broker-dealer mutually agreed upon by our founding stockholders and the representative of the underwriters in such amounts and at such times as such broker-dealer may determine, in its sole discretion, so long as the purchase price does not exceed the above-referenced per share purchase price. Our founding stockholders have agreed to vote any such shares of common stock purchased in the open market in favor of our initial business combination, representing a possible maximum aggregate of 4.0% of the public shares entitled to vote on the business combination. They have agreed not to sell such shares unless a business combination is approved by our stockholders; however, they will be entitled to participate in any liquidating distributions with respect to the shares purchased in the open market if the business combination is not completed and we dissolve. In the event purchases of $10,000,000 of our common stock cannot be completed through the open market purchases described above, our founding stockholders have agreed to purchase from us, in a private placement, units identical to the units offered hereby at a purchase price of $8.00 per unit until they have spent an aggregate of $10,000,000 in the open market purchases described above and this private purchase. If, for example, the per share amount in the trust account reported in the 8-K announcing our execution of a definitive agreement for a business combination (which is the maximum amount our founding stockholders are required to pay for their open market purchases) is $7.96, and our common stock trades above $7.96 during the period commencing 10 business days after we file such 8-K and ending on the business day immediately preceding the date of the meeting of stockholders at which the business combination is to be approved, our founding stockholders will not be able to complete their purchases in the open market, and will be required to purchase units from us at $8.00 per unit. We refer to this possible purchase of units as the co-investment throughout this prospectus. This co-investment will occur immediately prior to our consummation of a business combination, which will not occur until after the signing of a definitive business combination agreement and the approval of that business combination by a majority of our public stockholders. The proceeds from the sale of any co-investment units could be used to pay a portion of the purchase price for the business combination or used as working capital for the combined company. The warrants included in the co-investment units will be exercisable on a cashless basis. There are no circumstances under which our founding stockholders will not be required to purchase the additional $10,000,000 of securities described above other than our failure to announce the execution of a definitive agreement for a business combination. In addition, while they have not indicated any intention to do so, there is no agreement which would prevent them from purchasing additional securities of the Company in the open market. (1) This amount includes $7,000,000 of the underwriting discount ($0.28 per unit), equal to 3.5% of the gross proceeds of this offering (or $8,050,000 if the underwriters over-allotment option is exercised in full) which the underwriters have agreed will be deferred until consummation of a business combination. If a business combination is not consummated, such deferred discount will be forfeited by the underwriters. The underwriters will not be entitled to any interest accrued on the deferred underwriting discount. Upon completion of the pre-offering private placement and this offering, $198,215,000 ($7.93 per unit) will be deposited into a trust account at JPMorgan Chase NY Bank maintained by Continental Stock Transfer & Trust Company acting as trustee. This amount includes $7,000,000 ($0.28 per unit) of deferred underwriting compensation which will be forfeited if a business combination is not consummated and $6,200,000 from the sale to our founding stockholders of warrants to purchase 6,200,000 shares of our common stock. We are offering the units for sale on a firm-commitment basis. Morgan Joseph & Co. Inc., acting as representative of the underwriters, expects to deliver our securities to investors in the offering on or about , 2007. SOUTHWEST SECURITIES LEGEND MERCHANT GROUP GUNNALLEN FINANCIAL MAXIM GROUP LLC , 2007 (1) Includes 937,500 shares held by our founding stockholders which are subject to redemption to the extent the underwriters' over-allotment is not exercised. (2) Assumes no exercise of the underwriters' over-allotment option and, therefore, that we redeem 937,500 shares held by our founding stockholders. , 2008 [one year anniversary of the date of this prospectus]. The warrants will expire at 5:00 p.m., New York City time, on , 2011 [four year anniversary of the date of this prospectus] or earlier upon redemption. Redemption: We may redeem the outstanding warrants (including any warrants issued upon exercise of the representative s unit purchase option): in whole and not in part, at a price of $.01 per warrant at any time after the warrants become exercisable, upon a minimum of 30 days prior written notice of redemption, if, and only if, the last sales price of our common stock equals or exceeds $11.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. We have established these criteria to provide warrant holders with a reasonable premium to the initial warrant exercise price as well as to provide a degree of liquidity to cushion the market reaction, if any, to a redemption call. If the foregoing conditions are satisfied and we call the warrants for redemption, each warrant holder will then be entitled to exercise his or her warrant prior to the date scheduled for redemption; however, there can be no assurance that the price of the common stock will exceed $11.50 or the warrant exercise price after the redemption call is made. In the event that the common stock issuable upon exercise of the warrants has not been registered, qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants, we will not have the right to redeem the warrants. Pre-offering private placement: Our founding stockholders have agreed to purchase 6,200,000 founder warrants prior to the closing of this offering at a price of $1.00 per warrant for a total of $6,200,000. The founder warrants will be purchased separately and not as a part of units. The purchase price of the founder warrants will be added to the proceeds from this offering to be held in the trust account pending our completion of one or more business combinations. If we do not complete one or more business combinations that meet the criteria described in this prospectus, the $6,200,000 purchase price of the founder warrants will become part of the amount payable to our public stockholders upon our dissolution and the subsequent liquidation of the trust account and the founder warrants will expire worthless. Additional purchases by our founding stockholders Our founding stockholders have entered into an agreement with the representative of the underwriters pursuant to which they will place limit orders to purchase up to an aggregate of $10,000,000 of our common stock in the open market commencing 10 business days after we file our Current Report on Form 8-K announcing our execution of a definitive agreement for a business combination and ending on the business day immediately preceding the date of the meeting of stockholders at which a business combination is to be approved. Such open market purchases will be made in accordance with Rules 10b-18 and 10b5-1 under the Securities Exchange Act of 1934, as amended, at a price per share of not more than the per share amount held in the trust account (less taxes payable) as reported in such 8-K and will be made by a broker-dealer mutually agreed upon by our founding stockholders and the representative of the underwriters in such amounts and at such times as such broker-dealer may determine, in its sole discretion, so long as the purchase price does not exceed the above-referenced per share purchase price. Our founding stockholders have agreed to vote any such shares of common stock purchased in the open market in favor of our initial business combination, representing a possible maximum aggregate of 3.9% of the public shares entitled to vote on the business combination. They have agreed not to sell such shares unless a business combination is approved by our stockholders; however, they will be entitled to participate in any liquidating distributions with respect to the shares purchased in the open market if the business combination is not completed and we dissolve. In the event purchases of $10,000,000 of our common stock cannot be completed through the open market purchases described above, our founding stockholders have agreed to purchase from us in a private placement, units identical to the units offered hereby at a purchase price of $8.00 per unit until it has spent an aggregate of $10,000,000 in the open market purchases described above and this private purchase. The purchase of the co-investment units will occur immediately prior to our consummation of a business combination, which will not occur until after the signing of a definitive business combination agreement and the approval of that business combination by a majority of our public stockholders. The warrants included in the co-investment units will be exercisable on a cashless basis. Proposed OTC Bulletin Board symbols for our: Units: [ ] Common stock: [ ] Warrants: [ ] Offering and pre-offering private placement proceeds to be held in trust: $198,215,000 ($7.93 per unit) of the proceeds of this offering and the pre-offering private placement will be placed in a trust account at JPMorgan Chase NY Bank maintained by Continental Stock Transfer & Trust Company, pursuant to an agreement to be signed on the date of this prospectus. Of this amount, up to $191,215,000 ($7.65 per unit) may be used by us for the purpose of effecting a business combination and $7,000,000 ($0.28 per unit) will be paid to the underwriters if a business combination is consummated (less $0.28 for each share redeemed for cash in connection with our business combination). We believe that the inclusion in the trust account of (i) the deferred underwriting discount and (ii) the $6,200,000 of proceeds from the sale of the founder warrants in the pre-offering private placement benefit our stockholders because additional proceeds will be available for distribution to investors if a liquidation of our company occurs prior to our completing an initial business combination. These proceeds will not be released until the earlier of the completion of a business combination or our liquidation. However, up to $3,300,000 of the interest earned on the trust account may be released to us to fund our working capital requirements as set forth in the Investment Management Trust Agreement. Therefore, unless and until a business combination is consummated, the proceeds held in the trust account (other than up to $3,300,000 of the interest earned) will not be available for our use for any expenses related to this offering or expenses which we may incur related to the investigation and selection of a target business and the negotiation of an agreement to acquire a target business. None of the warrants may be exercised until after the consummation of a business combination and, thus, after the proceeds of the trust account have been disbursed, the warrant exercise price will be paid directly to us. Limited payments to insiders: Prior to the consummation of a business combination, there will be no fees, reimbursements or cash payments made to our existing stockholders, officer or directors or their respective affiliates other than: Repayment of a $500,000 loan bearing interest at the rate of 4% per annum made by the SPAC Trust, an affiliate of Richard Tan, our executive officer, to fund organizational and offering expenses; Payment of $7,500 per month to Pacific Millennium Investment Corporation, or Pacific Millennium, an affiliate of our Chief Executive Officer, for office space and administrative services; and Reimbursement for any expenses related to the offering and completing a suitable business combination. There is no limit on the amount of reimbursable expenses relating to the offering and the completion of a business combination (except that reimbursement may not be made using funds in the trust account unless and until a business combination is consummated). Amended and Restated Certificate of Incorporation: Our amended and restated certificate of incorporation sets forth certain requirements and restrictions relating to this offering that shall apply to us until the consummation of a business combination. Specifically, it provides that: prior to the consummation of our initial business combination, we shall submit such business combination to our stockholders for approval; we may consummate our initial business combination if: (i) approved by a majority of the shares of common stock voted by the public stockholders and (ii) public stockholders owning less than 30% of the shares of common stock purchased by the public stockholders in this offering exercise their redemption rights; if our initial business combination is approved and consummated, public stockholders who voted against the business combination and exercised their redemption rights will receive their pro rata share of the trust account; if a business combination is not consummated within 24 months from the date of this prospectus, then we will dissolve and distribute to all of our public stockholders their pro rata share of the trust account; and we may not initially consummate any other merger, capital stock exchange, stock purchase, asset acquisition or similar transaction other than a business combination that meets the conditions specified in this prospectus, including the requirement that such combination be with one or more operating businesses whose fair market value, either individually or collectively, is equal to at least 80% of our net assets at the time of such business combination. Our amended and restated certificate of incorporation prohibits the amendment of the above-described provisions without the affirmative vote of 95% of the shares issued in this offering. However, because the validity of a 95% supermajority provision restricting amendment of the amended and restated certificate of incorporation under Delaware law has not been settled, a court could conclude that it violates the stockholders implicit rights to amend the amended and restated certificate of incorporation. However, we view the foregoing provisions as obligations to our stockholders and we will not take any actions to waive or amend any of these provisions. The Offering Securities offered: 25,000,000 units, at $8.00 per unit, each unit consisting of: one share of common stock; and one warrant. The units are expected to begin trading on or promptly after the date of this prospectus. Each of the shares of common stock and warrants may trade separately on the 90th day after the date of this prospectus unless the representative of the underwriters determines that an earlier date is acceptable. In no event will the representative of the underwriters allow separate trading of the shares of common stock and warrants until we file an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file a Current Report on Form 8-K, including an audited balance sheet, as soon as practicable after the consummation of this offering, which is anticipated to take place three business days from the date of this prospectus. The audited balance sheet will include proceeds we receive from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Form 8-K. Common Stock: Number outstanding before this offering: 7,187,500 shares(1) Number to be outstanding after this offering: 31,250,000 shares(2) Warrants: Number outstanding before this offering and the pre-offering private placement: 0 warrants Number to be outstanding after this offering and the pre-offering private placement: 31,200,000 warrants (which includes 6,200,000 founder warrants purchased by our founding stockholders immediately prior to this offering) Exercisability: Each warrant is exercisable for one share of common stock. Exercise price: $5.50 Exercise period: The warrants will become exercisable on the later of: the completion of a business combination with a target business, or Stockholders must approve business combination: We are required to seek stockholder approval before we effect our initial business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable state law. In connection with the vote required for such business combination, all of our existing stockholders, including our executive officer and directors, have agreed to vote the shares of common stock owned by them prior to this offering in accordance with the majority of the shares of common stock voted by the public stockholders; however, any shares acquired in this offering or in the aftermarket will be voted in favor of any business combination negotiated by our executive officer. Assuming the $10,000,000 of common stock are purchased by our founding stockholders in the open market at a price equal to the initial per share amount in the trust account, our existing stockholders, collectively, will beneficially own 24.0% of the then issued and outstanding shares of common stock, with only 4.0% of such shares voting in favor of the business combination and the remaining 20% voting in accordance with the majority of the shares voted by the public stockholders. For a more complete discussion, please see the section of this prospectus entitled Principal Stockholders. We will proceed with a business combination only if a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and public stockholders owning less than 30% of the shares sold in this offering exercise their redemption rights described below. Our threshold for redemption rights has been established at 30% in order for this offering to be similar to other offerings by blank check companies currently in the market. However, historically, a 20% threshold has been more typical in offerings of this type. We have selected the higher threshold to reduce the risk of a small group of stockholders exercising undue influence on the stockholder approval process and make it easier for us to receive stockholder approval of a business combination. However, the 30% threshold entails certain risks described under the heading Risk Factors The fact that we will proceed with the business combination if public stockholders holding less than 30% of the shares sold in this offering exercise their redemption rights, rather than the 20% threshold of most other blank check companies, may hinder our ability to consummate a business combination in the most efficient manner or to optimize our capital structure. Voting against the business combination alone will not result in redemption of a stockholder s shares for a pro rata portion of the trust account. Such stockholder must also have exercised its redemption rights described below. Redemption rights for stockholders voting to reject a business combination: Public stockholders voting against a business combination will be entitled to redeem their shares for a pro rata share of the trust account, including $0.28 per share being held in the trust account attributable to the deferred underwriting discount and any interest earned on their portion of the trust account, (excluding, net of taxes, up to $3,300,000 of interest and payments for franchise taxes previously released to us) if the business combination is approved and completed. Public stockholders will not be requested to tender their shares of common stock before a business combination is consummated. If a business combination is consummated, redeeming stockholders will be sent instructions on how to tender their shares of common stock and when they should expect to receive the redemption amount. In order to ensure accuracy in determining whether or not the redemption threshold has been met, each redeeming stockholder must continue to hold their shares of common stock until the consummation of the business combination. We will not charge redeeming stockholders any fees in connection with the tender of shares for redemption. Stockholders who redeem their shares of common stock for a pro rata share of the trust account will continue to have the right to exercise any warrants they own. Because our existing stockholders have agreed to vote any shares acquired by them in this offering or the aftermarket in favor of a business combination negotiated by our executive officer, they are not entitled to redemption rights with respect to any such shares. Limited corporate existence: Our amended and restated certificate of incorporation provides that we will continue in existence only until , 2009. If we have not completed a business combination by such date, our corporate existence will cease except for the purposes of winding up our affairs and liquidating, pursuant to Section 278 of the Delaware General Corporation Law. We chose this limited existence structure in order to reduce the time to distribute the funds in the trust account to our stockholders in the event that we are unable to complete a business combination in the required time frame. This automatic cessation of corporate existence has the same effect as if our board of directors and stockholders had formally voted to approve our dissolution pursuant to Section 275 of the Delaware General Corporation Law. Accordingly, limiting our corporate existence to a specified date as permitted by Section 102(b)(5) of the Delaware General Corporation Law removes the necessity to comply with the formal procedures set forth in Section 275 (which would have required our board of directors and stockholders to formally vote to approve our dissolution and liquidation and to have filed a certificate of dissolution with the Delaware Secretary of State). In connection with any proposed business combination we submit to our stockholders for approval, we will also submit to stockholders a proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence, thereby removing this limitation on our corporate life. We will only consummate a business combination if stockholders vote both in favor of such business combination and our amendment to provide for our perpetual existence. The approval of the proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence in connection with a business combination would require the affirmative vote of a majority of our outstanding shares of common stock. Liquidation if no business combination: As described above, if we have not consummated a business combination by , 2009, our corporate existence will cease by operation of law and we will promptly distribute only to our public stockholders the amount in our trust account (including any accrued interest) plus any remaining net assets. We expect to make liquidating distributions to our stockholders by , 2009, 10 business days after our corporate existence ceases. At that time, pursuant to Section 281 of the Delaware General Corporation Law, we will also adopt a plan that will provide for payment, based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may potentially be brought against us within the subsequent 10 years. We cannot assure you that we will properly assess all claims that may potentially be brought against us. As such, our stockholders could potentially be liable for any claims of creditors to the extent of distributions received by them (but no more). Furthermore, although we will seek to have all significant vendors, prospective target businesses or other entities with which we execute agreements waive any and all right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our public stockholders, there is no guarantee that they will execute such agreements, or even if they execute such agreements that they would be prevented from bringing claims against the trust account including, but not limited to, claims alleging fraudulent inducement, breach of fiduciary responsibility or other similar claims, as well as claims challenging the enforceability of the waiver, in each case in order to gain an advantage with a claim against our assets, including the funds held in the trust account. If any third party refused to execute an agreement waiving such claims to the monies held in the trust account, we would perform an analysis of the alternatives available to us if we chose not to engage such third party and evaluate if such engagement would be in the best interest of our stockholders if such third party refused to waive such claims. Our management would only enter into an agreement with a third party that did not execute a waiver if management believed that such third party s engagement would be significantly more beneficial to us than any alternative. In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with us and not seek recourse against the trust account for any reason. Our executive officer and directors have agreed to indemnify us, jointly and severally pro rata according to their beneficial interest in our company immediately prior to this offering, for any loss, liability, claim, damage and expense to the extent necessary to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us. In the event that our board of directors determines that it is in our best interest to bring a claim against our executive officer and directors to enforce our right to obtain indemnification from them, we will have a fiduciary obligation to bring such a claim (it may not be in our best interests to do so if the cost to bring the claim would be greater than the anticipated amount that we would receive if we successfully prosecuted the claim). However, we cannot assure you that Messrs. Stone and Tan will satisfy those obligations, if they are required to do so. As a result, we cannot assure you that the per-share distribution from the trust account, if we liquidate, will not be less than $7.93, plus interest (net of taxes) then held in the trust account. Escrow of existing stockholders securities: On the date of this prospectus, all of our existing stockholders, including our non-executive chairman and an entity affiliated with our executive officer, will place the common stock they owned before this offering into an escrow account maintained by Continental Stock Transfer & Trust Company, acting as escrow agent. Subject to certain limited exceptions for transfers, such as transfers to family members and trusts for estate planning purposes, and the possible forfeiture of shares for cancellation by us discussed below, these shares will not be transferable during the escrow period and will not be released from escrow until one year after the consummation of a business combination. Any transfer of securities will be subject to the same restrictions imposed on the existing stockholders. The shares of common stock held in the escrow account will only be released prior to this date if following a business combination we engage in a subsequent transaction resulting in all stockholders having a right to exchange their shares for cash or other consideration. Additionally, on the date of this prospectus, the founder warrants will be placed into the escrow account maintained by Continental Stock Transfer & Trust Company, acting as escrow agent. Subject to certain limited exceptions, (such as transfers for estate planning purposes, while remaining in escrow), the founder warrants will not be transferable during the escrow period and will not be released from escrow until 30 days after the completion of our business combination. We will redeem, for no consideration, that number of shares held by our existing stockholders, up to a maximum of 937,500 shares, necessary to ensure that the number of shares they hold prior to this offering, exclusive of shares underlying the founder warrants, equals 20% of the outstanding shares of common stock after this offering and the exercise, if any, of the underwriters over-allotment option. If holders of more than 20% of the shares sold in this offering vote against a proposed business combination and seek to exercise their redemption rights and such business combination is consummated, our existing stockholders have agreed to forfeit, on a pro rata basis, and return to us for cancellation, a number of shares so that the number of shares owned by the existing stockholders prior to this offering will collectively be no more than 23.81% of our outstanding common stock immediately prior to the consummation of such business combination (without regard to any open market purchases or private purchases of units directly from us, as set forth elsewhere herein). Determination of offering amount The size of this offering and the amount to be held in the trust account were determined through discussions between us and the representative of the underwriters based, in part, on the representative s judgment as to the expected receptivity to the offering by investors given current market conditions. Our executive officer and directors and our underwriters have concluded, based on their collective experience, that an offering of this size, together with the proceeds of the founder warrants, would provide us with sufficient equity capital to consummate a business combination and that the reduction in the offering size during the registration process will not result in any material changes to the size or nature of potential target companies. This belief is not based on any research, analysis, evaluations, discussions or compilations of information with respect to any particular investment or any such action undertaken in connection with our organization and we cannot assure you that our belief is correct. Risks We are a newly-formed company and until we complete a business combination, we will have no operations and will generate no operating revenues. In making your decision on whether to invest in our securities, you should take into account not only the backgrounds of our management team, but also the special risks we face as a blank check company, as well as the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, and, therefore, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. You should carefully consider these and the other risks set forth in the section entitled Risk Factors beginning on page 17 of this prospectus. (1) The as adjusted information gives effect to the sale of the units we are offering including the application of the related gross proceeds for the payment of our liabilities and the payment of the estimated remaining costs from such sale. (2) If we consummate a business combination, the redemption rights afforded to our public stockholders may result in the redemption into cash of up to approximately 29.99% of the aggregate number of shares of common stock sold, or 7,499,999 shares, in this offering at a per share redemption price equal to the amount in the trust account. The actual per share redemption amount would consist of $7.65 held in trust for our benefit and $0.28 per share held in the trust account attributable to the underwriters discount and any accrued interest earned not previously distributed to us, as of two business days prior to the proposed consummation of a business combination, divided by the number of shares of common stock sold in this offering. The amount of $57,364,492 ($7.65 per share) represents the possible cash redemption of 7,499,999 shares, and, if redeemed will result in a reduction of our as adjusted stockholders equity to $134,005,838. However, the amount our public stockholders may receive pursuant to the exercise of redemption rights afforded to such stockholders is subject to any valid claims by our creditors which are not covered by amounts held in the trust account or the indemnities provided by our executive officer and directors. The working capital and total assets amounts, as adjusted, include $191,215,000 ($7.65 per share) from the proceeds of this offering and the pre-offering private placement to be held in the trust account for our benefit which will be available to us only upon the consummation of a business combination within the time period described in this prospectus. The total amount placed in trust will be $198,215,000 ($7.93 per share), which includes the $7,000,000 ($0.28 per share) of deferred underwriting discounts and equals approximately 99% of the total gross proceeds of this offering. If a business combination is not consummated, all of the proceeds held in the trust account ($7.93 per share) and any interest, net of taxes and up to $3,300,000 of working capital, will be distributed to our public stockholders (subject to our obligations under Delaware law to provide for claims of creditors). We will not proceed with a business combination if public stockholders owning 30% or more of the shares of common stock sold in this offering vote against the business combination and exercise their redemption rights. Accordingly, we may effect a business combination if public stockholders owning up to approximately 29.99% of the shares of common stock sold in this offering exercise their redemption rights. If this occurred, we would be required to redeem for cash up to approximately 29.99% of the 25,000,000 shares of common stock sold in this offering, or 7,499,999 shares of common stock, at an initial per share redemption price of $7.93, without taking into account interest earned on the trust account or taxes payable on such interest. This redemption obligation with respect to up to 7,499,999 of the shares of common stock sold in this offering will exist regardless of how a business combination is structured. The actual per share redemption price will be equal to: the initial amount in the trust account ($7.93 per share), which includes the proceeds of the pre-offering private placement ($0.25 per share) and the amount attributable to the deferred underwriting discount ($0.28 per share), and all accrued interest not previously released to us to fund working capital requirements (net of taxes payable), as of two business days prior to the proposed consummation of the business combination, divided by the number of shares of common stock sold in the offering. However, the amount our public stockholders may receive pursuant to the exercise of redemption rights afforded to such stockholders is subject to any valid claims by our creditors which are not covered by amounts held in the trust account or the indemnities provided by our executive officer and directors. In the event that holders of more than 20% of the shares of common stock sold in this offering elect to redeem their shares, our existing stockholders have agreed to forfeit that number of shares (up to a maximum of 781,250) that will result in the number of shares owned by them prior to this offering collectively being no more than 23.81% of our outstanding common stock immediately prior to the consummation of such business combination after giving effect to the redemption (without regard to any open market purchases or private purchases of units directly from us, as set forth elsewhere herein). RISK FACTORS An investment in our securities involves a high degree of risk. You should consider carefully all of the material risks described below, together with the other information contained in this prospectus before making a decision to invest in our securities. Risks associated with our business We are a development stage company with no operating history and, accordingly, you will not have any basis on which to evaluate our ability to achieve our business objective. We are a recently formed development stage company with no operating results to date. Therefore, our ability to begin operations is dependent upon obtaining financing through the public offering of our securities. Since we do not have an operating history, you will have no basis upon which to evaluate our ability to achieve our business objective, which is to acquire an operating business. We have not conducted any negotiations regarding acquisitions and we have no plans, arrangements or understandings with any prospective acquisition candidates. We will not generate any operating revenues until, at the earliest, after the consummation of a business combination. We cannot assure you that an initial business combination will occur. If we are unable to complete a business combination and are forced to liquidate, our public stockholders will receive less than $8.00 per share upon distribution of the trust account and our warrants will expire worthless. If we are unable to complete a business combination within 24 months from the date of this prospectus and are forced to liquidate our assets, the per share liquidation will likely be less than $8.00 because of the expenses of this offering, our general and administrative expenses and the anticipated costs of seeking a business combination (although the per share liquidation price could be $8.00 or more as a result of interest earned on the trust account). The liquidation value will be $7.93 per share, plus interest earned thereon (net of amounts released to us and net of taxes payable thereon), which includes the net proceeds of this offering and the pre-offering private placement of the founder warrants and $7,000,000 ($0.28 per share) of deferred underwriting discounts and commissions. While we will pay, or reserve for payment, from funds not held in trust, our liabilities and obligations, and our executive officer and directors have agreed to indemnify us under certain circumstances for such liabilities and obligations, we cannot assure you, where it is subsequently determined that the reserve for liabilities is insufficient, that stockholders will not be liable for such amounts to creditors. Furthermore, there will be no distribution with respect to our outstanding warrants and, accordingly, the warrants will expire worthless if we liquidate before the completion of a business combination. For a more complete discussion of the effects on our stockholders if we are unable to complete a business combination, see the section below entitled Effecting a Business Combination Liquidation if no business combination. If third parties bring claims against us, the proceeds held in trust could be reduced and the per share liquidation amount receivable by our public stockholders from the trust account as part of our plan of dissolution and liquidation will likely be less than $7.93 per share. Our placing of funds in trust may not protect those funds from third party claims against us. Although we will seek to have all significant vendors, prospective target businesses or other entities with which we execute agreements waive any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our public stockholders, there is no guarantee that they will execute such agreements, or even if they execute such agreements that they would be prevented from bringing claims against the trust account including, but not limited to, claims alleging fraudulent inducement, breach of fiduciary responsibility or other similar claims, as well as claims challenging the enforceability of the waiver, in each case in order to gain an advantage with a claim against our assets, including the funds held in the trust account. If any third party refused to execute an agreement waiving such claims to the monies held in the trust account, we would perform an analysis of the alternatives available to us if we chose not to engage such third party and evaluate if such engagement would be in the best interest of our stockholders if such third party refused to waive such claims. Examples of possible instances where we may engage a third party that refused to execute a waiver include the engagement of a third party consultant whose particular expertise or skills are believed by management to be significantly superior to those of other consultants that would agree to execute a waiver or in cases where management is unable to find a provider of required services willing to provide the waiver. In any event, our management would enter into an agreement with a third party that did not execute a waiver if management believed that such third party s engagement would be significantly more beneficial to us than any alternative. In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with us and not seek recourse against the trust account for any reason. Accordingly, the proceeds held in trust could be subject to claims that could take priority over the claims of our public stockholders and the per share liquidation amount receivable by our public stockholders could be less than the $7.93 per share held in the trust account due to claims of such creditors. If we are unable to complete a business combination and dissolve the company, our executive officer and directors will be personally liable to the extent of their pro rata beneficial interest in our company immediately prior to this offering, if we did not obtain a valid and enforceable waiver from any vendor, prospective target business or other entity of any rights or claims by such creditors to the trust account, to ensure that the proceeds in the trust account are not reduced by the claims of various vendors, prospective target businesses or other entities that are owed money by us for services rendered or products sold to us, to the extent necessary to ensure that such claims do not reduce the amount in the trust account. Prior to this offering, our directors and executive officer collectively own on a beneficial basis all of our outstanding shares of common stock. Our directors and executive officer are of substantial means and capable of funding any shortfall in our trust account, even though we have not asked them to reserve for such an eventuality. However, we cannot assure you that they will satisfy those obligations. We believe that we will limit the chances that our officer and directors will have to indemnify the trust account because we will endeavor to have all significant vendors and prospective target businesses as well as other entities execute agreements with us waiving any right, title, interest or claim of any kind in or to monies held in the trust account. We also will have access to any funds available outside the trust account or released to us to fund working capital requirements with which to pay any such potential claims (including costs and expenses incurred in connection with our plan of dissolution and liquidation, currently estimated at approximately $25,000). The indemnification provisions are set forth in the insider letters, dated as of October 4, 2007 and filed herein as exhibits 10.1 and 10.2, executed by our executive officer and directors and which relate to certain obligations that they have with respect to us. The insider letters specifically set forth that in the event we obtain a valid and enforceable waiver of any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our stockholders from a vendor, prospective target business or other entity, the indemnification will not be available. In the event that a plan of dissolution and liquidation adopted by us is subsequently determined to have insufficient reserves for claims and liabilities, stockholders who received a return of funds from our trust account as part of its liquidation could be liable for claims made by creditors. Additionally, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, the funds held in our trust account will be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. To the extent any bankruptcy claims deplete the trust account we cannot assure you we will be able to return to our public stockholders the liquidation amounts due them. The fact that we will proceed with the business combination if public stockholders holding less than 30% of the shares sold in this offering exercise their redemption rights, rather than the 20% threshold of most other blank check companies, may hinder our ability to consummate a business combination in the most efficient manner or to optimize our capital structure. Unlike most other blank check offerings, which have a 20% redemption threshold, we will proceed with the business combination if public stockholders holding less than 30% of the shares sold in this offering exercise their redemption rights, which may make it easier for us to complete a business combination if we receive the required stockholder approval. As a result of our higher redemption threshold, we may have less cash available to complete a business combination. Because we will not know how many stockholders may exercise such redemption rights, we will need to structure a business combination meeting the 80% of our net assets test that requires less cash, or we may need to arrange third party financing to help fund the transaction in case a larger percentage of stockholders exercise their redemption rights than we expect. Alternatively, to compensate for the potential shortfall in cash, we may be required to structure the business combination, in whole or in part, using the issuance of our stock as consideration. Accordingly, this increase in redemption threshold to 30% may hinder our ability to consummate a business combination in the most efficient manner or to optimize our capital structure. Furthermore, ownership by our founding stockholders of $10,000,000 worth of common stock purchased on the open market would represent 4.0% of the voting securities, assuming the maximum of such open market purchases at the initial per share amount in the trust account, all of which will be voted in favor of the business combination, further increases the likelihood the business combination will be approved. You will not be entitled to protections normally afforded to investors of blank check companies under the U.S. securities laws. Since the net proceeds of this offering are intended to be used to complete a business combination with a target business that has not been identified, we may be deemed to be a blank check company under the U.S. securities laws. However, since we will have net tangible assets in excess of $5,000,000 upon the successful consummation of this offering and will file a Report on Form 8-K with the SEC upon consummation of this offering, including an audited balance sheet demonstrating this fact, we are exempt from rules promulgated by the SEC to protect investors of blank check companies, such as Rule 419. Accordingly, investors will not be afforded the benefits or protections of those rules. Because we are not subject to Rule 419, our units will be immediately tradable and we have a longer period of time to complete a business combination in certain circumstances. For a more detailed comparison of our offering to offerings under Rule 419, see the section entitled Comparison to Offerings of Blank Check Companies below. Our stockholders may be held liable for claims of third parties against us to the extent of distributions received by them in connection with the liquidation of the trust account. Our amended and restated certificate of incorporation provides that we will continue in existence only until 24 months from the date of this prospectus. If we have not completed a business combination by such date and amended this provision in connection therewith pursuant to the Delaware General Corporation Law, our corporate existence will cease except for the purposes of winding up our affairs and liquidating. Under Sections 280 through 282 of the Delaware General Corporation Law, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. If the corporation complies with certain procedures intended to ensure that it makes reasonable provision for all claims against it, including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution. However, it is our intention to make liquidating distributions to our stockholders within 10 business days after our corporate expiration date and, therefore, we do not intend to comply with those procedures. Because we will not be complying with those procedures, we are required, pursuant to Section 281 of the Delaware General Corporation Law, to adopt a plan that will provide for our payment, based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against us within the subsequent 10 years. Accordingly, we would be required to provide for any creditors known to us at that time or those that we believe could be potentially brought against us within the subsequent 10 years prior to distributing the funds held in the trust to stockholders. We cannot assure you that we will properly assess all claims that may be potentially brought against us. As such, our stockholders could potentially be liable for any claims to the extent of distributions received by them and any liability of our stockholders may extend well beyond the third anniversary of such dissolution. Accordingly, we cannot assure you that third parties will not seek to recover from our stockholders amounts owed to them by us. Additionally, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, any distributions received by stockholders could be viewed under applicable debtor/creditor and/or bankruptcy laws as either a preferential transfer or a fraudulent conveyance. As a result, a bankruptcy court could seek to recover all amounts received by our stockholders in our dissolution. Furthermore, because we intend to distribute the proceeds held in the trust account to our public stockholders within 10 business days after our corporate existence ceases, this may be viewed or interpreted as giving preference to our public stockholders over any potential creditors with respect to access to or distributions from our assets. Additionally, our board may be viewed as having breached their fiduciary duties to our creditors and/or may have acted in bad faith, and thereby exposing itself and our company to claims of punitive damages, by paying public stockholders from the trust account prior to addressing the claims of creditors. We cannot assure you that claims will not be brought against us for these reasons. Since we have not currently selected a particular industry or prospective target business with which to complete a business combination, investors in this offering are unable to currently ascertain the merits or risks of the industry or target business in which we may ultimately operate. We may consummate a business combination with a company in any industry we choose and are not limited to any particular industry or type of business. Accordingly, there is no current basis for you to evaluate the possible merits or risks of the particular industry in which we may ultimately operate or the target business which we may ultimately acquire. To the extent we complete a business combination with a financially unstable company or an entity in its development stage, we may be affected by numerous risks inherent in the business operations of those entities. If we complete a business combination with an entity in an industry characterized by a high level of risk, we may be affected by the currently unascertainable risks of that industry. For example, if we complete a business combination with a business in a regulated industry, we may be subject to various regulatory risks associated with that industry. Although our management will endeavor to evaluate the risks inherent in a particular industry or target business, we cannot assure you that we will properly ascertain or assess all of the significant risk factors. We also cannot assure you that an investment in our units will not ultimately prove to be less favorable to investors in this offering than a direct investment, if an opportunity were available, in a target business. For a more complete discussion of our selection of a target business, see the section below entitled Effecting a Business Combination We have not identified a target business or target industry. PRINCIPAL STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of our common stock as of October 4, 2007, and as adjusted to reflect the sale of our common stock included in the units offered by this prospectus (assuming no purchase of units in this offering), by: each person known by us to be the beneficial owner of more than 5% of our outstanding common stock; each of our executive officer and directors; and all our executive officers and directors as a group. Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them. Approximate Percentage of Outstanding Common Stock Name and Address of Beneficial Owner Amount and Nature of Beneficial Ownership Before Offering After Offering Roger Stone(1) 2,500,000 40 % 8 % Richard Tan(2) 3,750,000 60 % 12 % Chih-Chun Tan(2) 3,750,000 60 % 12 % All directors and executive officers as a group (two individuals) 6,250,000 (3) 100 % SUMMARY FINANCIAL DATA The following table summarizes the relevant financial data for our business and should be read with our financial statements, which are included in this prospectus. The actual balance sheet data as of September 30, 2007 is derived from our audited financial statements. The as adjusted balance sheet data is unaudited. We have not had any significant operations to date, so only balance sheet data is presented. September 30, 2007 Actual As Adjusted(1) Working capital (deficiency) $ (604,573 ) $ 191,370,330 Total assets 650,254 198,370,330 Total liabilities(2) 645,024 7,000,000 Value of common stock which may be redeemed for an interest in the trust fund, as adjusted(2) 57,364,492 Stockholders equity $ 5,230 $ 134,005,838 Because there are numerous companies with a business plan similar to ours seeking to effectuate a business combination, it may be more difficult for us to do so. Based upon publicly-available information, as of October 2, 2007, we have identified approximately 120 blank check companies that have gone public since August 2003. Of these companies, only 34 have completed a business combination, while five have liquidated or will be liquidating. The remaining approximately 81 blank check companies have more than $9.2 billion in trust and are seeking to complete business acquisitions. Of these companies, only 29 have announced that they have entered into definitive agreements or letters of intent with respect to potential business combinations but have not yet consummated business combinations. In addition, there are 50 blank check companies with more than $7.3 billion in trust that have filed registration statements and will be seeking to complete business combinations. Furthermore, the fact that only 34 of such companies have completed business combinations and only 29 other of such companies have entered into definitive agreements or letters of intent for business combinations, and five have liquidated or will be liquidating, may be an indication that there are only a limited number of attractive targets available to such entities or that many targets are not inclined to enter into a transaction with a blank check company, and therefore we also may not be able to consummate a business combination within the prescribed time period. If we are unable to consummate a business combination within the prescribed time period, our purpose will be limited to dissolving, liquidating and winding up. Based upon publicly-available information, as of October 2, 2007, approximately 17 similarly structured blank check companies focusing on doing a business combination in China and/or Asia have completed initial public offerings since August 2003. Of these companies, only four companies have consummated a business combination, while three other companies have announced they have entered into a definitive agreement for a business combination, but have not consummated such business combination and one has liquidated. Accordingly, there are approximately 9 blank check companies with approximately $381 million in trust that are seeking to carry out a business plan similar to our business plan. In addition, there are approximately seven other similarly structured blank check companies focusing on doing a business combination in China and/or Asia with a planned $728 million of gross proceeds currently in registration and waiting to complete initial public offerings. Our determination of the offering price of our units and of the aggregate amount of proceeds we are raising in this offering was more arbitrary than would typically be the case if we were an operating company rather than a blank check company. There was no public market for any of our securities prior to this offering. The public offering price of the units, the terms of the warrants, the aggregate proceeds we are raising and the amount to be placed in trust were the products of a negotiation between the underwriters and us. The factors that were considered in making these determinations included: management s perceptions of the number of potential competitors that exist to acquire businesses in the PRC, the financial resources of those potential competitors and, therefore, the potential target size of the businesses they may seek to acquire and management s belief as to the capital required to facilitate a combination with one or more viable target businesses with sufficient scale to operate as a stand-alone public entity in the PRC. However, although these factors were considered, the determination of our per unit offering price and the aggregate proceeds we are raising in this offering is more arbitrary than the pricing of securities for an operating company in a particular industry since we have no historical operations or financial results to compare them to. Therefore, it is possible that management will have raised too much or too little money in this offering to consummate a business combination that satisfies the requirements of our organizational documents. In such event, management might not be able to consummate a business combination and we may be forced to liquidate. We may issue shares of our capital stock or debt securities to complete a business combination, which would reduce the equity interest of our stockholders and likely cause a change in control of our ownership. Our amended and restated certificate of incorporation authorizes the issuance of up to 139,000,000 shares of common stock, par value $0.0001 per share, and 1,000,000 preferred shares, par value $0.0001 per share. Immediately after this offering (assuming no exercise of the underwriters over-allotment option), there will be 77,750,000 authorized but unissued shares of common stock available for issuance (after appropriate reservation for the issuance of common stock upon full exercise of our outstanding warrants and the unit purchase option granted to Morgan Joseph & Co. Inc., the representative of the underwriters) and all of the 1,000,000 preferred shares available for issuance. Although we have no commitments as of the date of this offering to issue our securities, we may issue a substantial number of additional shares of common stock or preferred shares, or a combination of common stock and preferred shares, to complete a business combination. The issuance of additional common stock or preferred shares: may significantly reduce the equity interest of investors in this offering; could cause a change in control if a substantial number of our shares of common stock are issued and in the event of a change of control would most likely result in the resignation or removal of our present executive officer and directors; may subordinate the rights of our common stock if preferred stock with rights senior to that of the common stock is issued; and may adversely affect prevailing market prices for our securities. Similarly, if we issued debt securities, it could result in: default and foreclosure on our assets if our operating cash flow after a business combination were insufficient to pay our debt obligations; acceleration of our obligations to repay the indebtedness even if we have made all principal and interest payments when due if the debt security contained covenants that required the maintenance of certain financial ratios or reserves and any such covenant were breached without a waiver or renegotiation of that covenant; our immediate payment of all principal and accrued interest, if any, if the debt security was payable on demand; covenants that limit our ability to acquire capital assets or make additional acquisitions; and our inability to obtain additional financing, if necessary, if the debt security contained covenants restricting our ability to obtain additional financing while such security was outstanding. For a more complete discussion of the possible structure of a business combination, see the section below entitled Effecting a Business Combination Selection of a target business and structuring of a business combination. Our ability to successfully effect a business combination and to be successful afterwards will be totally dependent upon the efforts of our key personnel, some of whom may join us following a business combination and whom we would have only a limited ability to evaluate. Our ability to successfully effect a business combination will be totally dependent upon the efforts of our management. We can give you no assurance that our executive officer or our directors will remain with us until we complete a business combination. In addition, the future role of these individuals following a business combination cannot presently be fully ascertained. It is likely that we may employ other personnel following the business combination. While we intend to closely scrutinize any additional individuals we engage after a business combination, we cannot assure you that our assessment of these individuals will prove to be correct. These individuals may be unfamiliar with the requirements of operating a public company as well as U.S. securities laws which could cause us to have to expend time and resources helping them become familiar with such laws. This could be expensive and time-consuming and could lead to various regulatory issues which may adversely affect our operations. Moreover, our current management will only remain with the combined company if they negotiate to to do so in connection with the negotiation of the business combination. Our executive officer and directors may allocate their time to other businesses thereby causing conflicts of interest in their determination as to how much time to devote to our affairs, hampering our ability to consummate a business combination. Our executive officer and directors are not required to commit their full time to our affairs, which may result in a conflict of interest in allocating their time between our operations and other businesses. Our executive officer is engaged in several other business endeavors and is not obligated to contribute any specific number of hours per week to our affairs. If our executive officer s other business affairs require him to devote more substantial amounts of time to such affairs, it could limit his ability to devote time to our affairs and could have a negative impact on our ability to consummate a business combination. We cannot assure you that these conflicts will be resolved in our favor. For a discussion of the potential conflicts of interest that you should be aware of, see the section below entitled Management Conflicts of Interest. Our executive officer and directors may be involved or in the future may become affiliated with other businesses, including other blank check companies, which could cause a conflict of interest as to which business they may present a viable acquisition opportunity. Our executive officer and directors may be involved or in the future may become affiliated with entities, including other blank check companies, engaged in business activities similar to those intended to be conducted by us. For example, Mr. Stone is the Chairman and Chief Executive Officer of KapStone Paper and Packaging Corporation (formerly Stone Arcade Acquisition Corporation, a blank check company) and Mr. Tan is the founder and Chief Executive Officer of Pacific Millennium. In addition, Mr. Stone sits on the board of directors of McDonalds Corporation and Mr. Tan sits on the boards of Domtar, Inc., Samling Global Limited and a number of Pacific Millennium subsidiaries and portfolio companies. Due to these existing affiliations, they may have conflicting fiduciary obligations with regard to presenting certain potential business opportunities to those entities that may be of interest to us. For example, our executive officer and directors may become aware of business opportunities that may be appropriate for presentation to us as well as the other entities with which they are or become affiliated (which would include companies for whom either of them served as officers or directors or of which they were the controlling stockholder, either directly or through a company controlled by them, but would not include companies of which they were merely stockholders). If appropriate, opportunities must first be presented by such individuals to the entities, other than us, with which they are affiliated as executive officers or directors, which currently are those listed above. Accordingly, there may be potential opportunities that would be attractive to us that would need to be presented to, and rejected by, one or more of these entities before they can be presented to us. Other than the agreements of Messrs. Stone and Tan to present to us, subject to their respective fiduciary obligations, opportunities meeting our criteria and requirements, we have no written policies covering potential conflicts. See Management Prior Involvement of Principals in Blank Check Companies. Our executive officer and directors, or their respective affiliates, own shares of common stock which will not participate in liquidation distributions and therefore they may have a conflict of interest in determining whether a particular target business is appropriate for a business combination. Our executive officer and directors, or their respective affiliates, as applicable, have waived the right to receive distributions upon our liquidation upon our failure to complete a business combination with respect to shares of common stock they purchased prior to this offering. Additionally, these individuals have collectively agreed with the representative of the underwriters that they and certain of their affiliates or designees will purchase the founder warrants in a private placement immediately prior to the closing of this offering. The shares of common stock and warrants owned by our executive officer and directors prior to this offering and their affiliates will be worthless if we do not consummate a business combination. The personal and financial interests of our executive officer and directors may influence their motivation in identifying and selecting a target business and completing a business combination on a timely basis. Consequently, our executive officer s and directors discretion in identifying and selecting a suitable target business may result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination are appropriate and in our stockholders best interest. Our existing stockholders interests in obtaining reimbursement for any out-of-pocket expenses incurred by them may lead to a conflict of interest in determining whether a particular target business is appropriate for a business combination and in the public stockholders best interest. Our existing stockholders, which includes our executive officer and directors, will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the available proceeds not deposited in the trust account unless the business combination is consummated. The amount of available proceeds is based on management estimates of the funds needed for operations and to consummate a business combination, and those estimates may prove to be inaccurate. The financial interest of our executive officer and directors could influence their motivation in selecting a target business as certain business combinations may involve the repayment of expenses while others may not. For instance, our executive officer and directors may, as part of any such combination, negotiate the repayment of some or all of their out-of-pocket expenses in excess of the amount in the trust account, which if not agreed to by the target business owners, could cause our executive officer and directors to view such potential business combination unfavorably, thereby resulting in a conflict of interest. As a result, our executive officer and directors may have a potential conflict of interest when determining whether or not a particular business combination is in the stockholders best interest. It is possible that we will only be able to complete one business combination with the proceeds of this offering and the pre-offering private placement, which will cause us to be solely dependent on a single business. The net proceeds from this offering and the pre-offering private placement will provide us with approximately $191,215,000, which we may use to complete a business combination. Our management will have virtually unrestricted flexibility in identifying and selecting a prospective target business, except that our initial business combination must be a transaction in which the fair market value of the target business or businesses acquired simultaneously at the time of the business combination is at least 80% of our net assets at the time of the business combination. While we may be able to purchase more than one target business using our equity securities as consideration for the acquisition or raising additional funds through the sale of our securities or through loan arrangements, we have no agreements or arrangements for such additional funding. We therefore believe that it is most likely that we will have the ability to effect only a single business combination. However, should our management elect to pursue more than one acquisition of target businesses simultaneously, our management could encounter difficulties in consummating all or a portion of such acquisitions due to a lack of adequate resources, including the inability of management to devote sufficient time to the due diligence, negotiation and documentation of each acquisition. 10.10 Form of Securities Purchase Agreement among the Registrant, Morgan Joseph & Co. Inc., SPAC Trust and Roger Stone* 23.1 Consent of Loeb & Loeb LLP (included in Exhibit 5.1)* 23.2 Consent of Gumbiner Savett Inc. Exhibit Index Exhibit No. Description 1.1 Form of Underwriting Agreement* 1.2 Form of Selected Dealers Agreement* 3.1 Form of Amended and Restated Certificate of Incorporation* 3.2 By-laws* 4.1 Specimen Unit Certificate* 4.2 Specimen Common Stock Certificate* 4.3 Specimen Warrant Certificate* 4.4 Form of Warrant Agreement between Continental Stock Transfer & Trust Company and the Registrant* 4.5 Form of Unit Purchase Option to be granted to Representative* 5.1 Opinion of Loeb & Loeb LLP* 10.1 Letter Agreement dated October 4, 2007 among the Registrant, Morgan Joseph & Co. Inc. and Richard Tan* 10.2 Letter Agreement dated October 4, 2007 among the Registrant, Morgan Joseph & Co. Inc. and Roger Stone* 10.3 Letter Agreements among the Registrant, Morgan Joseph & Co. Inc. and each of SPAC Trust and Stone 2007 Family Trust* 10.4 Form of Investment Management Trust Agreement between Continental Stock Transfer & Trust Company and the Registrant* 10.5 Form of Securities Escrow Agreement between the Registrant, Continental Stock Transfer & Trust Company and the initial stockholders* 10.6 Services Agreement with Pacific Millennium Investment Corporation* 10.7 Form of Registration Rights Agreement among the Registrant, Morgan Joseph & Co. Inc. and the initial stockholders* 10.8 Form of Warrant Purchase Agreement between Richard Tan, Roger Stone and the Registrant* 10.9 Promissory Note, dated February 27, 2007, issued to SPAC Trust* 10.10 Form of Securities Purchase Agreement among the Registrant, Morgan Joseph & Co. Inc., SPAC Trust and Roger Stone* 23.1 Consent of Loeb & Loeb LLP (included in Exhibit 5.1)* 23.2 Consent of Gumbiner Savett Inc. Furthermore, even if we complete the acquisition of more than one target business at substantially the same time, there can be no assurance that we will be able to integrate the operations of such target businesses. Accordingly, the prospects for our ability to effect our business strategy may be: solely dependent upon the performance of a single business; or dependent upon the development or market acceptance of a single or limited number of products, processes or services. In the event we acquire a single target business, we will not be able to diversify our operations or benefit from the possible spreading of risks or offsetting of losses, unlike other entities that may have the resources to complete several business combinations. See Effecting a Business Combination Probable lack of business diversification. We will be dependent upon interest earned on the trust account to fund our search for a target company and consummation of a business combination. Of the net proceeds of this offering, only $150,000 is estimated to be available to us initially outside the trust account to fund our working capital requirements. We will be dependent upon sufficient interest being earned on the proceeds held in the trust account to provide us with the additional working capital we will need to search for a target company and consummate a business combination. While we are entitled to up to $3,300,000 of the interest earned on the trust account (net of taxes), if interest rates were to decline substantially, we may not have sufficient funds available to complete a business combination. In such event, we would need to borrow funds from our insiders or others or be forced to liquidate. Because of our limited resources and the significant competition for business combination opportunities, we may not be able to consummate an attractive business combination. We expect to encounter intense competition from other entities having a business objective similar to ours, including venture capital funds, leveraged buyout funds and operating businesses competing for acquisitions. Many of these entities are well established and have extensive experience in identifying and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human and other resources than we do and our financial resources will be relatively limited when contrasted with those of many of these competitors. Our ability to compete in acquiring certain sizable target businesses will be limited by our available financial resources. This inherent competitive limitation gives others an advantage in pursuing the acquisition of certain target businesses. Further, the obligation we have to seek stockholder approval of a business combination may delay the consummation of a transaction, and our obligation to redeem for cash the shares of common stock held by public stockholders in certain instances may reduce the resources available for a business combination. Additionally, our outstanding warrants, and the future dilution they potentially represent, may not be viewed favorably by certain target businesses. Any of these obligations may place us at a competitive disadvantage in successfully negotiating a business combination. We may be unable to obtain additional financing, if required, to complete a business combination or to fund the operations and growth of the target business, which could compel us to restructure the transaction or abandon a particular business combination. Although we believe that the net proceeds of this offering and the pre-offering private placement will be sufficient to allow us to consummate a business combination, since we have not yet identified any prospective target business, we cannot ascertain the capital requirements for any particular transaction. If the net proceeds of this offering and the pre-offering private placement prove to be insufficient, either because of the size of the business combination or the depletion of the available net proceeds in search of a target business, or because we become obligated to redeem into cash a significant number of shares from dissenting stockholders (which in our case may be up to 30% of the shares held by public stockholders, rather than the 20% threshold of most other blank check companies, which may make is easier for us to receive stockholder approval of a business combination), we will be required to seek additional financing. We cannot assure you that such financing would be available on acceptable terms, if at all. To the extent that additional financing proves to be unavailable when needed to consummate a particular business combination, we would be compelled to restructure the transaction or abandon that particular business combination and seek an alternative target business candidate. If we were unable to secure additional financing, we would most likely fail to consummate a business combination in the allotted time and would dissolve and liquidate the trust. In addition, if we consummate a business combination, we may require additional financing to fund the operations or growth of the target business. The failure to secure additional financing could have a material adverse effect on the continued development or growth of the target business. None of our executive officer, directors or stockholders is required to provide any financing to us in connection with or after a business combination. We currently do not have an audit committee perform an independent review our financial statements. Our board of directors does not have independent directors within the meaning of Rule 10A-3 promulgated under the Securities Exchange Act of 1934 and does not have a separately designated audit committee. Therefore, the entire board of directors acts as our audit committee and there will be no independent review of our financial statements by anyone other than our auditors. Our existing stockholders, including our executive officer and directors, control a substantial interest in us and thus may influence certain actions requiring stockholder vote. Upon consummation of our offering and the pre-offering private placement, our existing stockholders (including our executive officer and directors) will collectively beneficially own 20% of our issued and outstanding shares of common stock. Assuming $10,000,000 of common stock is purchased by our founding stockholders in the open market at a price equal to the initial per share amount in the trust account, our existing stockholders, collectively, will beneficially own an additional 4.0% of the voting securities. Any shares of common stock acquired by existing stockholders in this offering or by existing stockholders in the open market after this offering will be considered as part of the holding of the public stockholders and will have the same voting rights as other public stockholders with respect to a potential business combination, except that our executive officer and directors have agreed to vote such shares in favor of any business combination we propose to our stockholders. Accordingly, these purchases will have the effect of increasing the percentage of shares owned by our existing stockholders and make it more likely the stockholder vote to approve the business combination or amend or waive any provision of our amended certificate of incorporation, or any other matter for which stockholder approval is sought, will be successful. Our board of directors is divided into three classes, each of which will generally serve for a term of three years with only one class of directors being elected in each year. Since we currently have only two directors, one of the classes does not currently have any directors in it. It is unlikely that there will be an annual meeting of stockholders to elect new directors prior to the consummation of a business combination, in which case all of the current directors will continue in office at least until the consummation of the business combination. If there is an annual meeting, as a consequence of our staggered board of directors, only a minority of the board of directors will be considered for election and our existing stockholders, because of their ownership position, will have considerable influence regarding the outcome. Accordingly, our existing stockholders will continue to exert control at least until the consummation of a business combination. In addition, our existing stockholders and their affiliates and relatives are not prohibited from purchasing more units in this offering or from purchasing additional securities in the open market. If they do, we cannot assure you that our existing stockholders will not have considerable influence upon the vote in connection with a business combination. Risks associated with our acquisition of a target business in the PRC After a business combination, substantially all of our assets could be located in China and substantially all of our revenue will be derived from our operations in China. Accordingly, our results of operations and prospects will be subject, to a significant extent, to the economic, political and legal developments in China. The PRC s economic, political and social conditions, as well as government policies, could affect our business. The PRC economy differs from the economies of most developed countries in many respects. Since 1978, China has been one of the world s fastest-growing economies in terms of gross domestic product, or GDP, growth. We cannot assure you, however, that such growth will be sustained in the future. Moreover, the recent slowdown in the economies of the European Union and certain Asian countries may adversely affect economic growth in China. If, in the future, China s economy experiences a downturn or grows at a slower rate than expected, there may be less demand for spending in certain industries. A decrease in demand for spending in certain industries could materially and adversely affect our ability to find an attractive target business with which to consummate a business combination and if we make an acquisition, the ability of that target business to become profitable. Our ability to find an attractive target business with which to consummate a business combination is based on the assumption that the Chinese economy will continue to grow. The PRC s economic growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us, depending on the industry in which we engage in a business combination. For example, our business, prospects, financial condition and results of operations may be materially adversely affected by PRC government control over capital investments or changes in tax regulations that are applicable to a potential target business and a business combination. The PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the PRC government has implemented measures emphasizing the use of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. It also exercises significant control over PRC economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. We cannot assure you that China s economic, political or legal systems will not develop in a way that becomes detrimental to our business, prospects, financial conditions and results of operations. Many industries in China are subject to government regulations that limit or prohibit foreign investments in such industries, which may limit the potential number of acquisition candidates. The Chinese government has imposed regulations in various industries that would limit foreign investors equity ownership or prohibit foreign investments altogether in companies that operate in such industries. As a result, the number of potential acquisition candidates available to us may be limited. If the PRC enacts regulations in more industry segments which forbid or restrict foreign investment, our ability to consummate a business combination could be severely impaired. Many of the rules and regulations that companies face in China are not explicitly communicated. If new laws or regulations forbid foreign investment in industries in which we want to complete a business combination, they could severely impair our choice of candidate pool of potential target businesses. Additionally, if the relevant Chinese authorities find us or the target business with which we ultimately complete a business combination to be in violation of any existing or future Chinese laws or regulations, they would have broad discretion in dealing with such a violation, including, without limitation: levying fines; revoking our business and other licenses; requiring that we restructure our ownership or operations; and/or requiring that we discontinue any portion or all of our business. If we acquire a target business through contractual arrangements with one or more operating businesses in China, such contracts may not be as effective in providing operational control as direct ownership of such businesses and may be difficult to enforce. The government of the PRC has restricted or limited foreign ownership of certain kinds of assets and companies operating in a wide variety of industries, including certain aspects of telecommunications, advertising, food production, and heavy equipment manufacturers. The PRC may apply these restrictions in other industries in the future. To comply with applicable Chinese regulations, we may effect a business combination by paying consideration to the owners of the target business and then making contractual arrangements between our company, or a subsidiary or an affiliate we form, and Chinese companies holding the licenses required to engage in the specific industry of the target business and its stockholders. In that case, the target business would be owned by Chinese residents (most likely designated by our company) rather than directly by our company. If we choose to effect this type of business combination, we would expect to negotiate agreements that are designed to give us effective control of the target s operations and management. However, these contractual arrangements may not be as effective in providing us with the same economic benefits or control over a target business as direct ownership would. For example, our ability to control the operations of the entity may be hampered by our inability to elect a majority of directors or to appoint management or replace directors and management. This lack of control may result in our inability to change the direction of the entity if we were in disagreement with the direction it was taking. In addition, if the target business or any other entity fails to perform its obligations under these contractual arrangements, we may have to incur substantial costs and expend substantial resources to enforce such arrangements, and rely on legal remedies under Chinese law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be sufficient to off-set the cost of enforcement and may adversely affect the benefits we expect to receive from the acquisition. Moreover, we expect that the contractual arrangements upon which we would be relying would be governed by Chinese law and would be the only basis of providing resolution of disputes which may arise through either arbitration or litigation in China. Accordingly, these contracts would be interpreted in accordance with Chinese law and any disputes would be resolved in accordance with Chinese legal procedures. Uncertainties in the Chinese legal system could limit our ability to enforce these contractual arrangements. In the event we are unable to enforce these contractual arrangements, we may not be able to exert the effective level of control over the target business. Deterioration of China s political relations with the U.S., Europe, or other Asian nations could make Chinese businesses less attractive to Western investors. The relationship between the U.S. and China is subject to sudden fluctuation and periodic tension. Changes in political conditions in China and changes in the state of foreign relations are difficult to predict and could materially adversely affect our operations or cause potential target businesses or services to become less attractive. This could lead to a decline in our profitability. Any weakening of relations between the U.S., Europe, or other Asian nations and China could have a material adverse effect on our operations even after the successful completion of a business combination. If the PRC imposes restrictions to reduce inflation, future economic growth in the PRC could be severely curtailed which could lead to a significant decrease in our profitability following a business combination. While the economy of the PRC has experienced rapid growth, this growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the supply of money and rising inflation. In order to control inflation in the past, the PRC has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. If similar restrictions are imposed, it may lead to a slowing of economic growth and decrease the interest in the services or products we may ultimately offer leading to a decline in our profitability. Because Chinese law will govern almost all of any target business material agreements, we may not be able to enforce our rights within the PRC or elsewhere, which could result in a significant loss of business, business opportunities or capital. We believe that it is highly likely that Chinese law will govern almost all of our target business material agreements, some or many of which could be with Chinese governmental agencies. We cannot assure you that the target business will be able to enforce any of its material agreements or that remedies will be available outside of the PRC. The Chinese legal system is similar to a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. Although legislation in China over the past 25 years has significantly improved the protection afforded to various forms of foreign investment and contractual arrangements in China, these laws, regulations and legal requirements are relatively new and their interpretation and enforcement involve uncertainties, which could limit the legal protection available to us, and foreign investors, including you. The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss of business, business opportunities or capital and could have a material adverse impact on our business, prospects, financial condition, and results of operations. Because any target business with which we attempt to complete a business combination will be required to provide our stockholders with financial statements prepared in accordance with, or reconciled to, U.S. generally accepted accounting principles, prospective target businesses may be limited. In accordance with requirements of U.S. federal securities laws, in order to seek stockholder approval of a business combination, a proposed target business will be required to have certain financial statements which are prepared in accordance with, or which are reconciled to, U.S. generally accepted accounting principles, or GAAP. To the extent that a proposed target business does not have financial statements which have been prepared with, or which can be reconciled to, U.S. GAAP, we will not be able to acquire that proposed target business. These financial statements may limit the pool of potential target businesses which we may acquire. Restrictions on currency exchange may limit our ability to utilize our cash flow effectively following a business combination. Following a business combination, we will be subject to China s rules and regulations on currency conversion. In China, the State Administration for Foreign Exchange ( SAFE ) regulates the conversion of the Chinese Renminbi into foreign currencies. Currently, foreign investment enterprises ( FIEs ) are required to apply to the SAFE for Foreign Exchange Registration Certificates for FIEs. Following a business combination, the entity in which we invest in China will likely be a FIE as a result of our ownership structure. FIEs holding such registration certificates, which must be renewed annually, are allowed to open foreign currency accounts including a basic account and capital account. Currency translation within the scope of the basic account, such as remittance of foreign currencies for payment of dividends, can be effected without requiring the approval of the SAFE. However, conversion of currency in the capital account, including capital items such as direct investments, loans, and securities, require approval of the SAFE. We cannot assure you that the Chinese regulatory authorities will not impose further restrictions on the convertibility of the Chinese Renminbi. In addition, in the event that we require approval from the SAFE following the consummation of a business combination, we cannot assure you that we will be able to obtain such approval in a timely manner, if at all. Any future restrictions on currency exchanges may limit our ability to use our cash flow for the distribution of dividends to our stockholders or to fund operations we may have outside of China. If any dividend is declared in the future and paid in a foreign currency, you may be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive. If you are a U.S. holder, you will be taxed on the U.S. dollar value of your dividends at the time you receive them, even if you actually receive a smaller amount of U.S. dollars when the payment is in fact converted into U.S. dollars. Specifically, if a dividend is declared and paid in a foreign currency, the amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the payments made in the foreign currency, determined at the spot rate of the foreign currency to the U.S. dollar on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Thus, if the value of the foreign currency decreases before you actually convert the currency into U.S. dollars, you will be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive. We have not sought a tax opinion regarding taxation of dividends. Recent changes in the PRC s currency policies may cause a target business ability to succeed in the international markets to be diminished. Historically, the PRC pegged its currency to the United States dollar. This meant that each unit of Chinese currency had a set ratio for which it could be exchanged for United States currency, as opposed to having a floating value like other countries currencies. Many countries argued that this system of keeping the Chinese currency low when compared to other countries gave Chinese companies an unfair price advantage over foreign companies. Due to mounting pressure from outside countries, the PRC recently reformed its economic policies to establish a floating value. As a result of this policy reform, target companies may no longer have the competitive advantages that existed as a result of the former policies. Fluctuations in the value of the Renminbi relative to foreign currencies could affect our operating results. We will prepare our financial statements in U.S. dollars, but payroll and other costs of non-U.S. operations will be payable in foreign currencies, primarily Renminbi. To the extent future revenue is denominated in non-U.S. currencies, we would be subject to increased risks relating to foreign currency exchange rate fluctuations that could have a material adverse affect on our business, prospects, financial condition and results of operations. The value of Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China s political and economic conditions. As our operations will be primarily in China, any significant revaluation of the Renminbi may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert U.S. dollars into Chinese Renminbi for our operations, appreciation of this currency against the U.S. dollar could have a material adverse effect on our business, prospects, financial condition and results of operations. Conversely, if we decide to convert our Renminbi into U.S. dollars for other business purposes and the U.S. dollar appreciates against this currency, the U.S. dollar equivalent of the Renminbi we convert would be reduced. The Chinese government recently announced that it is pegging the exchange rate of the Renminbi against a number of currencies, rather than just the U.S. dollar. Fluctuations in the Renminbi exchange rate could adversely affect our ability to find an attractive target business with which to consummate a business combination and to operate our business after a business combination. Recent regulations relating to offshore investment activities by PRC residents may increase the administrative burden we face and create regulatory uncertainties that may limit or adversely effect our ability to acquire PRC companies. Regulations were issued on January 24, 2005, on April 8, 2005 and on October 21, 2005, by the SAFE, that will require approvals from, and registrations with, PRC government authorities in connection with direct or indirect offshore investment activities by PRC residents and PRC corporate entities; however, there has been a recent announcement that such regulations may be partially reversed. The SAFE regulations retroactively require approval and registration of direct or indirect investments previously made by PRC residents in offshore companies. In the event that a PRC stockholder with a direct or indirect stake in an offshore parent company fails to obtain the required SAFE approval and make the required registration, the PRC subsidiaries of such offshore parent company may be prohibited from making distributions of profit to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries. Further, failure to comply with the various SAFE approval and registration requirements described above, as currently drafted, could result in liability under PRC law for foreign exchange evasion. More recently, however, new regulations have been drafted that would partially reverse the policy that requires Chinese companies to obtain permission from SAFE to own overseas corporate entities. As a result of the lack of implementing rules, the uncertainty as to when the new draft regulations will take effect, and uncertainty concerning the reconciliation of the new regulations with other approval requirements, it remains unclear how these existing regulations, and any future legislation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. We are committed to complying with the relevant rules. As a result of the foregoing, we cannot assure you that we or the owners of the target business we intend to acquire, as the case may be, will be able to complete the necessary approval, filings and registrations for a proposed business combination. This may restrict our ability to implement our acquisition strategy and adversely affect our operations. See Government Regulations Regulation of foreign exchange in certain onshore and offshore transactions . If certain exemptions within the PRC regarding withholding taxes are removed we may be required to deduct Chinese corporate withholding taxes from dividends we may pay to our shareholders following a business combination. Under the PRC s current tax laws, regulations and rulings, companies are exempt from paying withholding taxes with respect dividends paid to shareholders outside of the PRC. However, if the foregoing exemption is removed in the future following a business combination, we may be required to deduct certain amounts from dividends we may pay to our shareholders to pay corporate withholding taxes. The current rate imposed on corporate withholding taxes is 20%, or 10% for individuals and entities for those countries, such as the U.S., that entered into the Protocol of Avoidance of Double Taxation within the PRC. We have not sought an opinion of tax counsel with respect to such regulations and rulings. After we consummate a business combination, our operating company in China will be subject to restrictions on dividend payments. After we consummate a business combination, we may rely on dividends and other distributions from our operating company to provide us with cash flow and to meet our other obligations. Current regulations in China would permit our operating company in China to pay dividends to us only out of its accumulated distributable profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, our operating company in China will be required to set aside at least 10% (up to an aggregate amount equal to half of its registered capital) of its accumulated profits each year. Such cash reserve may not be distributed as cash dividends. Regulations relating to the transfer of state-owned property rights in enterprises may increase the cost of our acquisitions and impose an additional administrative burden on us. The legislation governing the acquisition of a PRC state-owned company contains stringent governmental regulation including the Provisional Regulations on Using Foreign Investment to Reorganize State-owned Enterprises promulgated by SAIC and SAFE on 8 November 2002, effective from 1 January 2003 and the Provisional Measures on the Administration of the Transfer of State-Owned Property Rights in Enterprises promulgated by the SASAC and the Ministry of Finance, or MOF, on 31 December 2003, effective from 1 February 2004. The transfer of state-owned property rights in enterprises must take place through a government approved state-owned asset exchange , and the value of the transferred property rights must be evaluated by those Chinese appraisal firms qualified to do state-owned assets evaluation . The final price must not be less than 90% of the appraisal price. Additionally, bidding/auction procedures would be essential in the event that there is more than one potential transferee. In the case of an acquisition by foreign investors of state-owned enterprises, the acquirer and the seller must make a resettlement plan to properly resettle the employees, and the resettlement plan must be approved by the Employees Representative Congress. The seller would be required to pay all unpaid wages and social welfare payments from the existing assets of the target company to the employees. Risks associated with this offering Our existing stockholders paid an aggregate of $25,000, or approximately $0.003 per share, for their shares purchased prior to this offering and the pre-offering private placement and, accordingly, you will experience immediate and substantial dilution from the purchase of our common stock. The difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering constitutes the dilution to you and the other investors in this offering. The fact that our existing stockholders acquired their shares of common stock at a nominal price has contributed significantly to this dilution. Assuming the offering is completed, you and the other new investors will incur an immediate and substantial dilution of approximately 29.5% or $2.36 per share (the difference between the pro forma net tangible book value per share of $5.64, and the initial offering price of $8.00 per unit). We may choose to redeem our outstanding warrants at a time that is disadvantageous to our warrant holders. Subject to there being a current prospectus under the Securities Act of 1933 with respect to the shares of common stock issuable upon exercise of the warrants, we may redeem the warrants issued as a part of our units at any time after the warrants become exercisable in whole and not in part, at a price of $.01 per warrant, upon a minimum of 30 days prior written notice of redemption, if and only if, the last sales price of our common stock equals or exceeds $11.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. Redemption of the warrants could force the warrant holders (i) to exercise the warrants and pay the exercise price therefore at a time when it may be disadvantageous for the holders to do so, (ii) to sell the warrants at the then current market price when they might otherwise wish to hold the warrants, or (iii) to accept the nominal redemption price which, at the time the warrants are called for redemption, is likely to be substantially less than the market value of the warrants. The founder warrants are not subject to redemption so long as the initial purchasers hold such warrants and, accordingly, will not be subject to these risks. The ability of our stockholders to exercise their redemption rights may not allow us to effectuate the most desirable business combination or optimize our capital structure. When we seek stockholder approval of any business combination, we will offer each public stockholder the right to have such stockholder s shares of common stock redeemed for cash if the stockholder votes against the business combination and the business combination is approved and completed. Accordingly, if our business combination requires us to use substantially all of our cash to pay the purchase price, because we will not know how many stockholders may exercise such redemption rights, we may either need to reserve part of the trust account for possible payment upon such redemption, or we may need to arrange third party financing to help fund our business combination in case a larger percentage of stockholders exercise their redemption rights than we expect. Therefore, we may not be able to consummate a business combination that requires us to use all of the funds held in the trust account as part of the purchase price, or we may end up having a leverage ratio that is not optimal for our business combination. This may limit our ability to effectuate the most attractive business combination available to us. Although we are required to use our best efforts to have an effective registration statement covering the issuance of the shares underlying the warrants at the time that our warrant holders exercise their warrants, we cannot guarantee that a registration statement will be effective, in which case our warrant holders may not be able to exercise our warrants and the warrants may expire worthless. Holders of our warrants will be able to exercise the warrants only if (i) a current registration statement under the Securities Act of 1933 relating to the shares of our common stock underlying the warrants is then effective and (ii) such shares are qualified for sale or exempt from qualification under the applicable securities laws of the states in which the various holders of warrants reside. Although we have undertaken in the Warrant Agreement, and therefore have a contractual obligation, to use our best efforts to maintain a current registration statement covering the shares underlying the warrants following completion of this offering to the extent required by federal securities laws, and we intend to comply with such undertaking, we cannot assure you that we will be able to do so. The value of the warrants may be greatly reduced if a registration statement covering the shares issuable upon the exercise of the warrants is not kept current. We are not obligated to pay cash or other consideration to the holders of the warrants in such circumstances and the warrants can become, and later expire, worthless. In such event, holders who acquired their warrants as part of a purchase of units will have paid the full unit purchase price solely for the shares underlying the units. Because the founder warrants sold in the pre-offering private placement were originally issued pursuant to an exemption from registration requirements under the federal securities laws, the holder of these warrants will be able to exercise its warrants even if, at the time of exercise, a prospectus relating to the common stock issuable upon exercise of such warrants is not current. As a result, the holder of the founder warrants purchased in the pre-offering private placement will not have any restrictions with respect to the exercise of its warrants. We cannot guarantee that we will be able to register the shares underlying the warrants under the applicable state securities laws, in which case the holders of such securities may not be able to exercise them. We have agreed to use our reasonable efforts to register the shares underlying the warrants under the blue sky laws of the states of residence of the exercising warrant holders, to the extent an exemption is not available and if permitted by the blue sky laws of such jurisdictions. However, some states may not permit us to register the shares issuable upon exercise of our warrants for sale. The value of the warrants will be greatly reduced if the securities are not qualified, or exempt from qualification, in the states in which the holders of warrants reside. We have no obligation to issue, cash, securities or other compensation in exchange for the warrants in the event that we are unable register the shares underlying the warrants under applicable state securities laws, and the warrants may expire unexercised and unredeemed. Holders of warrants who reside in jurisdictions in which the shares underlying the warrants are not qualified and in which there is no exemption will be unable to exercise their warrants and would either have to sell their warrants in the open market or allow them to expire unexercised. In such event, holders who acquired their warrants as part of a purchase of units will have paid the full unit purchase price solely for the shares underlying the units. If and when the warrants become redeemable by us, we may exercise our redemption right even if we are unable to qualify the underlying securities for sale under all applicable state securities laws. Our outstanding warrants may have an adverse effect on the market price of our common stock and make it more difficult to effect a business combination. In connection with this offering, as part of the units, we will be issuing warrants to purchase 25,000,000 shares of common stock. We will also issue an option to purchase 2,500,000 units to the representative of the underwriters which, if exercised, will result in the issuance of an additional 2,500,000 warrants. In addition, our founding stockholders will purchase founder warrants to purchase an aggregate of 6,200,000 shares of common stock in the pre-offering private placement and if any co-investment units are purchased we will issue additional warrants to the founding stockholders as part of such co-investment units. To the extent we issue common stock to effect a business combination, the potential for the issuance of substantial numbers of additional shares upon exercise of these warrants could make us a less attractive acquisition vehicle in the eyes of a target business as such securities, when exercised, will increase the number of our issued and outstanding common stock and potentially dilute the value of the shares issued to complete the business combination. Accordingly, our warrants and, if we undertake to do so, any options we issue, may make it more difficult to effectuate a business combination or increase the cost of the target business. Additionally, the sale, or even the possibility of sale, of the common stock underlying the warrants could have an adverse effect on the market price for our securities or on our ability to obtain future public financing. If and to the extent these warrants and options are exercised, you may experience dilution to your holdings. Any exercise by our existing stockholders of their registration rights may have an adverse effect on the market price of our common stock, and the existence of these rights may make it more difficult to effect a business combination. Our existing stockholders are entitled to require us to register the resale of their shares of common stock at any time after the date on which their shares are released from escrow, which, except in limited circumstances, will not be before one year from the consummation of a business combination. In addition, the holder of the founder warrants can require us to register those warrants and the underlying shares of common stock at anytime after the founder warrants become exercisable by their terms. If our existing stockholders and the holder of the founder warrants exercise their registration rights with respect to all of their shares of common stock and warrants, then there will be an additional 7,187,500 shares of common stock (6,250,000 assuming forfeiture of shares if the over-allotment option is not exercised) and 6,200,000 warrants and/or up to 6,200,000 shares of common stock issued upon exercise of the founder warrants that will be eligible for trading in the public market. The presence of this additional number of securities eligible for trading in the public market may have an adverse effect on the market price of our common stock. In addition, the existence of these rights may make it more difficult to effectuate a business combination or increase the cost of the target business, as the stockholders of the target business may be discouraged from entering into a business combination with us or will request a higher price for their securities as a result of these registration rights and the potential future effect their exercise may have on the trading market for our securities. There is currently no market for our securities and a market for our securities may not develop, which could adversely affect the liquidity and price of our securities. There is no market for our securities. Therefore, stockholders should be aware that they cannot benefit from information about prior market history as to their decisions to invest which means they are at further risk if they invest. In addition, the price of our securities after the offering can vary due to general economic conditions and forecasts, our general business condition and the release of our financial reports. Furthermore, an active trading market for our securities may never develop or, if developed, it may not be maintained. Investors may be unable to sell their securities unless a market can be established or maintained. If we are deemed to be an investment company, we may be required to institute burdensome compliance requirements and our activities may be restricted, which may make it difficult for us to complete a business combination. If we are deemed to be an investment company under the Investment Company Act of 1940, our activities may be restricted, including: restrictions on the nature of our investments; and restrictions on the issuance of securities, which may make it difficult for us to complete a business combination. In addition, we may have imposed upon us burdensome requirements, including: registration as an investment company; adoption of a specific form of corporate structure; and reporting, record keeping, voting, proxy and disclosure requirements and other rules and regulations. We do not believe that our anticipated principal activities will subject us to the Investment Company Act of 1940. To this end, the proceeds held in trust may only be invested by the trust agent in government securities within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 having a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940. By restricting the investment of the proceeds to these instruments, we intend to meet the requirements for the exemption provided in Rule 3a-1 promulgated under the Investment Company Act of 1940. If we were deemed to be subject to the act, compliance with these additional regulatory burdens would require additional expenses that we have not budgeted. Because we may be deemed to have no independent directors, actions taken and expenses incurred by our executive officers and directors on our behalf will generally not be subject to independent review. Each of our directors, directly or through affiliated entities, owns our common stock and, although no compensation will be paid to them for services rendered prior to or in connection with a business combination, they may receive reimbursement for out-of-pocket expenses incurred by them in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations and for out-of-pocket expenses incurred in connection with this offering. There is no limit on the amount of these out-of-pocket expenses and there will be no review of the reasonableness of the expenses by anyone other than our board of directors, which includes persons who may seek reimbursement, or a court of competent jurisdiction if such reimbursement is challenged. Because none of our directors will be deemed independent, we will generally not have the benefit of independent directors examining the propriety of expenses incurred on our behalf and subject to reimbursement. Although we believe that all actions taken by our directors on our behalf will be in our best interests, we cannot assure you that this will be the case. If actions are taken, or expenses are incurred, that are not in our best interests, it could have a material adverse effect on our business and operations and the price of our common stock held by the public stockholders. Because our initial stockholders initial equity investment was only $25,000, our offering may be disallowed by state administrators that follow the North American Securities Administrators Association, Inc. Statement of Policy on development stage companies. Pursuant to the Statement of Policy Regarding Promoter s Equity Investment promulgated by The North American Securities Administrators Association, Inc., an international organization devoted to investor protection, any state administrator may disallow an offering of a development stage company if the initial equity investment by a company s promoters does not equal a certain percentage of the aggregate public offering price. Our promoters initial investment of $25,000 is less than the required $5,110,000 minimum amount pursuant to this policy. Accordingly, a state administrator would have the discretion to disallow our offering if it wanted to. We cannot assure you that our offering would not be disallowed pursuant to this policy. If the offering were disallowed in the state where you reside, and you acquired our securities (for example, if you previously lived in a state that allowed the offering but moved to one where it was disallowed), you might not be able to resell your securities. In addition, even if you do not reside in the state where the offering of our securities were disallowed, you would not be able to sell the securities to persons in states where the offering was disallowed, reducing the potential number of persons you would be able to sell to. Additionally, the initial equity investment made by the initial stockholders may not adequately protect investors. If you are a retail investor rather than an institutional investor, you may purchase our securities in this offering only if you reside within Colorado, Delaware, the District of Columbia, Florida, Georgia, Hawaii, Illinois, Indiana, Louisiana, Nevada, New York and Rhode Island and may engage in resale transactions only in those states and a limited number of other jurisdictions. We have registered our securities, or have obtained an exemption from registration, in Colorado, Delaware, the District of Columbia, Florida, Georgia, Hawaii, Illinois, Indiana, Louisiana, Nevada, New York and Rhode Island. If you are not an institutional investor, you must be a resident of these jurisdictions to purchase our securities in the offering. Retail investors from other states are not permitted to purchase units in this offering. The definition of an institutional investor varies from state to state but generally includes financial institutions, broker-dealers, banks, insurance companies and other qualified entities. You will not be able to acquire our securities in the after market or resell our securities if you reside in Alaska, Arizona, Idaho, Ohio, Oregon, Utah and Washington and resales may be limited in certain other states if we fail to make required notice filings. The National Securities Markets Improvement Act promulgated under the Securities Act of 1933, or NSMIA, effectively preempts state jurisdiction over registration of brokerage transactions in which the issuer is not a party. Nevertheless, the following states, regardless of whether they require a filing to be made or fee to be paid, have advised us that they do not recognize NSMIA as a basis for exempting the registration of resales in their states of securities issued in blank check offerings: Alaska, Arizona, Idaho, Ohio, Oregon, Utah and Washington. You will not be able to acquire in the after market or resell our securities if you reside in one of the jurisdictions listed above. Additionally, the following states permit the resale of the units and the shares of common stock and warrants comprising the units, once they become separately transferable, if the proper notice filings have been made and fees paid: Colorado, District of Columbia, Florida, Georgia, Hawaii, Illinois, Indiana, Louisiana, New York and Rhode Island. If we do not make such notice filings, you may not be able to resell our securities if you reside in one of the jurisdictions listed above. These restrictions on resale may limit your ability to resell the securities purchased in this offering and may impact the price of our securities. For a more complete discussion of the Blue Sky state securities laws and registrations affecting this offering, please see the section entitled State Blue Sky Information appearing elsewhere in this prospectus. We intend to have our securities quoted on the OTC Bulletin Board, which will limit the liquidity and price of our securities more than if our securities were quoted or listed on The Nasdaq Stock Market or a national exchange. Our securities will be traded in the over-the-counter market. It is anticipated that they will be quoted on the OTC Bulletin Board, an NASD-sponsored and operated inter-dealer automated quotation system for equity securities not included on The Nasdaq Stock Market. Quotation of our securities on the OTC Bulletin Board will limit the liquidity and price of our securities more than if our securities were quoted or listed on The Nasdaq Stock Market or a national exchange. If we seek a business combination with a target business affiliated with our directors or executive officer, our directors and executive officer will have conflicting fiduciary duties. Although we will not pursue a business combination with any company that is currently a portfolio company of, or otherwise affiliated with, or has received a financial investment from, any of the companies with which our existing stockholders, executive officers or directors are affiliated, and while we do not intend to do so with respect to any such future portfolio or affiliated companies, we are not prohibited from pursuing such a transaction with a future portfolio or affiliated company. Our existing officer, directors and stockholders (in their respective capacities, individually or pursuant to their activities for another entity with which they are affiliated) are not currently aware of any specific opportunities to consummate a business combination with any entities with which they are affiliated, whether by virtue of the sale of assets, spin-off, divestiture or otherwise, and there have been no preliminary discussions or indications of interest with any such entity or entities. If, after the offering, we became aware of and pursued an opportunity to seek a business combination with a target business with which one or more of our existing stockholders may be affiliated (provided that they were not affiliated with such entity before this offering), conflicts of interest could arise in connection with negotiating the terms of and completing the business combination. Accordingly, such officers and directors may become subject to conflicts of interest regarding us and other business ventures in which they may be involved, which conflicts may have an adverse effect on our ability to consummate a business combination. For a complete discussion of our management s business affiliations and the potential conflicts of interest that you should be aware of, see the sections below entitled Management Directors and Executive Officers and Management Conflicts of Interest. We cannot assure you that these conflicts will be resolved in our favor. After we consummate a business combination, our operating company in China will be subject to restrictions on dividend payments. After we consummate a business combination, we may rely on dividends and other distributions from our operating company to provide us with cash flow and to meet our other obligations. Current regulations in China would permit our operating company in China to pay dividends to us only out of its accumulated distributable profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, our operating company in China will be required to set aside at least 10% (up to an aggregate amount equal to half of its registered capital) of its accumulated profits each year. Such cash reserve may not be distributed as cash dividends. In addition, if our operating company in China incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. (1) As of September 30, 2007, $476,724 of the offering expenses have already been paid from a loan to us described below, including the SEC registration fee, the NASD registration fee and legal and auditing expenses. In addition, as of September 30, 2007, management has incurred approximately $76,515 in reimbursable offering expenses that will be reimbursed by us following completion of this offering for items such as travel, translation costs, and administrative expenses. (2) Represents 3.5% of the gross proceeds from the sale of the units in this offering. (3) Represents 3.5% of the gross proceeds from the sale of the units in this offering that will be paid to the underwriters only upon consummation of a business combination, less $0.28 for each share redeemed for cash in connection with our business combination. If a business combination is not consummated and we are liquidated, such amounts will be distributed among our public stockholders. (4) These amounts are expected to be paid to legal, accounting and other outside professional firms to assist in negotiating, structuring, and documenting a business combination and the preparation and filing of the related proxy statement. $198,215,000, or $227,165,000 if the underwriters over-allotment option is exercised in full, of net proceeds, including the proceeds of the pre-offering private placement, will be placed in a trust account at JPMorgan Chase NY Bank maintained by Continental Stock Transfer & Trust Company, New York, New York, as trustee. Of this amount, $7,000,000 ($8,050,000 if the underwriters over-allotment option is exercised in full) will be paid to the underwriters if and only if a business combination is consummated, less $0.28 for each share converted to cash in connection with our business combination. Except as set forth below, the proceeds will not be released from the trust account until the earlier of the completion of a business combination or our liquidation. The proceeds held in the trust account (exclusive of any funds held for the benefit of the underwriters or used to pay stockholders who exercised their redemption rights) may be used as consideration to pay the sellers of a target business with which we ultimately complete a business combination. Any amounts not paid as consideration to the sellers of the target business may be used to finance operations of the target business or to effect other acquisitions, as determined by our board of directors at that time. Because we do not have any specific business combination under consideration, it is impossible at this time to determine specifically how we would, following a business combination, use any proceeds held in the trust account which are not used to consummate such business combination. However, we may not use all of the funds remaining in the trust account in connection with a business combination, either because the consideration for the business combination is less than the proceeds in the trust account or because we finance a portion of the consideration with our capital stock or debt securities. In that event, the remaining proceeds held in the trust account, as well as any other net proceeds not expended, will constitute working capital for our business after the business combination and will be available for use as determined by our board of directors at that time. While it is difficult to determine what the specific operating expenses of our business after completion of a business combination may be, we expect that they may include some or all of the following: capital expenditures, general ongoing expenses including overhead and payroll, costs involved in expanding markets and in developing strategic acquisitions or alliances. In addition, we may use any remaining proceeds held in the trust account to satisfy any unpaid reimbursable out-of-pocket expenses incurred by our officers and directors in connection with identifying or completing the business combination, as well as any unpaid finder s fees or similar fees or compensation to the extent such expenses, fees, or compensation exceed the available proceeds not deposited in the trust account. Under the terms of our investment management trust agreement we are permitted, at our discretion, from time to time as interest is earned and funds become available, to draw the following amounts from the interest accrued on the trust account: (i) taxes payable on interest earned, (ii) the amount of any franchise taxes payable by us, and (iii) up to $3,300,000 to fund our working capital. The remaining proceeds held in trust will not be released from the trust account until the earlier of the completion of a business combination or the liquidation of the trust account as part of any plan of dissolution and liquidation. We have agreed to pay Pacific Millennium, an affiliate of Richard Tan, our Chief Executive Officer, $7,500 per month for office space and general and administrative services including secretarial support. We believe that such fee is at least as favorable as we could have obtained from an unaffiliated person. Upon completion of a business combination or our liquidation, we will no longer be required to pay these monthly fees. We intend to use the excess working capital shown above for director and officer liability insurance premiums, with the balance being held in reserve in the event due diligence, legal, accounting and other expenses of structuring and negotiating business combinations exceed our estimates, as well as for reimbursement of any out-of-pocket expenses incurred by our existing stockholders in connection with activities on our behalf as described below. We believe that the excess working capital will be sufficient to cover the foregoing expenses and reimbursement costs. To the extent that our securities are used in whole or in part as consideration to effect a business combination, the proceeds held in the trust account as well as any other net proceeds not expended will be used to finance the operations of the target business. The SPAC Trust, an affiliate of Richard Tan, loaned us $500,000 pursuant to a promissory note. The proceeds of the loan evidenced by the note are being used to pay a portion of the expenses related to this offering. The note bears simple interest at the rate of 4% per annum with both interest and principal being due and payable on the earlier of February 26, 2008 or the consummation of this offering. The net proceeds of this offering not held in the trust account and not immediately required for the purposes set forth above, should we choose to hold such amounts in a non-cash form, will be invested only in U.S. government securities, defined as any Treasury Bill issued by the U.S. having a maturity of 180 days or less or money market funds so that we are not deemed to be an investment company under the Investment Company Act. Up to $3,300,000 of the interest income, net of taxes, derived from investment of these net proceeds during this period may be used to defray our general and administrative expenses, as well as to pay costs relating to compliance with securities laws and regulations, including associated professional fees, until a business combination is completed and additional amounts may be used to pay franchise taxes. We may use a portion of the working capital, including any interest released to us from the trust account, to make a deposit, down payment or fund a no shop provision with respect to a business combination, although we do not have any current intention to do so. If we are ultimately required to forfeit such funds, we would have less funds available to us to conduct due diligence and pay other expenses related to finding another suitable business combination without borrowing funds. If we were unable to secure additional financing, we would most likely fail to consummate a business combination in the allotted time and would be forced to liquidate. We believe that, upon consummation of this offering, we will have sufficient available funds to operate for at least the next 24 months, assuming that a business combination is not consummated during that time. Other than the $7,500 aggregate per month administrative fees described above, no compensation will be paid to our executive officer, directors and advisors, or any of their affiliates, for services rendered to us prior to or in connection with the consummation of the business combination. However, our existing stockholders will receive reimbursement for any out-of-pocket expenses incurred by them in connection with activities on our behalf, such as identifying potential target businesses and performing due diligence on suitable business combinations and for out-of-pocket expenses incurred in connection with this offering. Reimbursement for such expenses will be paid by us out of the funds not held in trust and currently allocated in the above table Working capital to cover miscellaneous expenses, D&O insurance and reserves. In addition, reimbursement for such expenses will also be paid by us out of the interest on funds held in the trust account and distributable to us each calendar month. To the extent that such out-of-pocket expenses exceed the available proceeds not deposited in the trust account or other funds available to us, such out-of-pocket expenses would not be reimbursed by us unless we consummate a business combination, in which event this reimbursement obligation would in all likelihood be negotiated with the owners of a target business. Since the role of present management after a business combination is uncertain, we have no ability to determine what remuneration, if any, will be paid to those persons after a business combination. However, although it is our current belief that current management will remain associated with us following a business combination, their ability to do so is not expected to be a factor in determining which business combination to pursue. A public stockholder will be entitled to receive funds from the trust account (including interest earned on his, her or its portion of the trust account not previously released to us) only in the event of our liquidation upon our failure to complete a business combination within the allotted time or if that public stockholder were to seek to redeem such shares for cash in connection with a business combination which the public stockholder voted against and which we actually consummate. In no other circumstances will a public stockholder have any right or interest of any kind to or in the trust account. (1) Does not include (i) shares underlying the 6,200,000 founder warrants to be purchased in the pre-offering private placement or (ii) 937,500 shares that we will redeem on a pro rata basis to the extent that the underwriters do not exercise their over-allotment option. (2) Inclusive of the 937,500 shares that are subject to redemption. (1) This amount is net of all offering expenses including the deferred portion of the underwriting compensation. (2) This amount includes the deferred underwriting compensation of $0.28 per share. (3) Does not include the maximum of 937,500 shares we will redeem, as necessary, from our founding stockholders to ensure that the number of shares they hold prior to this offering, exclusive of shares underlying the founder warrants, equals 20% of the outstanding shares of common stock after this offering and the exercise, if any, of the underwriters over-allotment option if the underwriters do not exercise their over-allotment option. (4) Does not reflect the possible forfeiture of up to 781,250 shares by our founding stockholders in the event, and to the extent, that holders of more than 20% of the shares sold in this offering exercise their redemption rights. (1) Amounts loaned pursuant to the promissory note issued to our existing stockholders are due on the earlier of February 26, 2008 or the consummation of this offering. (2) Excludes $2,100,000 of deferred underwriting compensation that is subject to forfeiture in the event of a 29.99% redemption. (3) If we consummate a business combination, the redemption rights afforded to our public stockholders may result in the redemption into cash of up to approximately 29.99% of the aggregate number of shares of common stock sold, or 7,499,999 shares, in this offering at a per share redemption price equal to the amount in the trust account, inclusive of any accrued interest earned on their portion of the trust account not previously distributed to us (net of taxes payable), as of two business days prior to the proposed consummation of a business combination divided by the number of shares of common stock sold in this offering. In the event that holders of more than 20% of the shares of common stock sold in this offering elect to redeem their shares, our existing stockholders have agreed to forfeit that number of shares (up to a maximum of 781,250) that will result in the number of shares owned by them prior to this offering collectively being no more than 23.81% of our outstanding common stock immediately prior to the consummation of such business combination after giving effect to the redemption (without regard to any open market purchases or private purchase of units directly from us, as set forth elsewhere herein). The As Adjusted number assumes the underwriters have not exercised their over-allotment option and that 937,500 of the currently outstanding shares have been redeemed. (4) This as adjusted amount includes the $6,200,000 to be paid by our founding stockholders in connection with the purchase of the founder warrants. USE OF PROCEEDS We estimate that the net proceeds of this offering and the pre-offering private placement will be as set forth in the following table: Without Over-Allotment Option Over-Allotment Option Exercised Gross proceeds Gross proceeds from units offered to the public $ 200,000,000 $ 230,000,000 Gross proceeds from warrants offered in the pre-offering private placement 6,200,000 6,200,000 Total 206,200,000 236,200,000 Offering expenses(1) Underwriting discount(2) 7,000,000 8,050,000 Deferred underwriting discount(3) 7,000,000 8,050,000 Legal fees and expenses (including blue sky fees and expenses) 375,000 375,000 Printing and engraving expenses 125,000 125,000 Accounting fees and expenses 150,000 150,000 SEC registration fee 20,493 20,493 NASD registration fee 67,250 67,250 Miscellaneous expenses 97,257 97,257 Total offering and placement expenses from the offering and the pre-offering private placement 14,835,000 16,935,000 Net proceeds Net proceeds not held in trust 150,000 150,000 Net proceeds held in trust for our benefit 191,215,000 219,115,000 Total net proceeds 191,365,000 219,265,000 Deferred underwriting discount held in trust(3) 7,000,000 8,050,000 Total amount held in trust $ 198,215,000 $ 227,165,000 Amount Percentage of Total Use of net proceeds not held in trust and up to $3,300,000 of after tax interest earned on the trust account that may be released to us Legal, accounting and other expenses attendant to the structuring and negotiation of a business combination(4) $ 1,400,000 40.6 % Due diligence, identification and research of prospective target businesses and reimbursement for out-of-pocket expenses of management 900,000 26.1 % Payment for office space to Pacific Millennium and for administrative and support services ($7,500 per month for two years) 180,000 5.2 % Legal and accounting fees relating to SEC reporting obligations 150,000 4.3 % Working capital to cover miscellaneous expenses, D&O insurance and reserves 820,000 23.8 % Total $ 3,450,000 100.0 % MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We were formed on January 24, 2007, to serve as a vehicle to effect a merger, stock exchange, asset acquisition or other similar business combination with, or to obtain control through contractual arrangements of, an operating business. We intend to utilize cash derived from the proceeds of this offering and the pre-offering private placement, our capital stock, debt or a combination of cash, capital stock and debt, in effecting a business combination. The issuance of additional shares of our capital stock: may significantly reduce the equity interest of our stockholders; may subordinate the rights of holders of common stock if preferred stock is issued with rights senior to those afforded to our common stock; could cause a change in control if a substantial number of our shares of common stock are issued and, in the event of a change of control, may also result in the resignation or removal of one or more of our present executive officer and directors; and may adversely affect prevailing market prices for our securities. Similarly, if we issued debt securities, it could result in: default and foreclosure on our assets if our operating revenues after a business combination were insufficient to pay our debt obligations; acceleration of our obligations to repay the indebtedness even if we have made all principal and interest payments when due if the debt security contained covenants that required the maintenance of certain financial ratios or reserves and any such covenant were breached without a waiver or renegotiation of that covenant; our immediate payment of all principal and accrued interest, if any, if the debt security was payable on demand; and our inability to obtain additional financing, if necessary, if the debt security contained covenants restricting our ability to obtain additional financing while such security was outstanding. We have neither engaged in any operations nor generated any revenues to date. Our entire activity since inception has been to prepare for our proposed fundraising through an offering of our equity securities. We estimate that the net proceeds from the sale of the units in this offering and the sale of warrants in the pre-offering private placement, after deducting offering expenses of approximately $14,835,000 (or $16,935,000 if the underwriters over-allotment option is exercised in full) including underwriting discounts of $14,000,000 (or $16,100,000 if the underwriters over-allotment option is exercised in full), will be approximately $191,365,000 (or $219,265,000 if the underwriters over-allotment option is exercised in full). Of this amount, $191,215,000 (or $219,115,000 if the underwriters over-allotment option is exercised in full) will be held in trust and the remaining $150,000, will not be held in trust. The size of this offering was determined through negotiation between our management and the underwriters and was principally determined based on the amount that the underwriters believe that they can raise on our behalf. The amount to be held in trust was determined through negotiation between our management and the underwriters and was principally determined based on what would be acceptable to the market. We will use substantially all of the net proceeds of this offering to acquire a target business, including identifying and evaluating prospective acquisition candidates, selecting the target business, and structuring, negotiating and consummating the business combination, including the payment of legal and accounting expenses and advisory and investment banking fees payable in connection with the business combination. In addition, the underwriters have agreed to defer $7,000,000 ($8,050,000 if the underwriters exercise their over-allotment option in full) of their commissions and discounts. Such deferred compensation will also be placed into the trust account and paid to our stockholders on a pro rata basis in the event some stockholders exercise their redemption rights in the event of a business combination or in the event of our liquidation. The underwriters will only receive the deferred underwriting compensation if a business combination is consummated (as such amount would be reduced by payments made to redeeming stockholders). Funds held in the trust account for our benefit net of taxes would only be used to pay such expenses and fees upon the consummation of a business combination, and, except for up to $3,300,000 of interest earned on the trust account that may be released to us to fund our working capital requirements and amounts released to us to pay any taxes payable on interest earned on the trust account or franchise taxes payable by us to the State of Delaware, would not otherwise be available to us. To the extent that our securities are used in whole or in part as consideration to effect a business combination, the proceeds held in the trust account (excluding the deferred fee to be paid to the underwriters upon consummation of a business combination, amounts payable to any stockholders who exercise their redemption rights and expenses associated with the business combination that are in excess of the amounts not held in trust), will be available for use as determined by our board of directors at that time. While it is difficult to determine what the specific operating expenses of our business after completion of a business combination may be, we expect that they may include some or all of the following: capital expenditures, general ongoing expenses including overhead and payroll, costs involved in expanding markets and in developing strategic acquisitions or alliances. In addition, we may use any remaining proceeds held in the trust account to satisfy any unpaid reimbursable out-of-pocket expenses incurred by our officers and directors in connection with identifying or completing the business combination, as well as any unpaid finder s fees or similar fees or compensation to the extent such expenses, fees, or compensation exceed the available proceeds not deposited in the trust account. Our founding stockholders, which include our Chairman and an entity affiliated with our Chief Executive Officer, have collectively agreed to purchase a combined total of 6,200,000 warrants prior to the closing of this offering at a price of $1.00 per warrant for a total of $6,200,000. We have determined, based on a review of the trading price of the public warrants of other blank check companies similar to us, that the purchase price of $1.00 per founder warrant would be not less than the approximate fair value of such warrants on the date of issuance. Therefore, we will not record compensation expense upon the sale of the founder warrants. To the extent we complete this offering, we have agreed to sell to the representative of the underwriters, for $100, an option to purchase up to a total 2,500,000 units. The units issuable upon exercise of this option are identical to those being sold in this offering, except that the exercise price of the warrants underlying the units is $7.00. The representative s unit purchase option is exercisable for cash or on a cashless basis at $10.00 per unit commencing one year from the date of the prospectus and it expires five years from the date of the prospectus. The option may only be exercised by the option holder and cannot be redeemed for cash by us or the option holder. The sale of the option will be accounted for as a cost attributable to the proposed offering. Accordingly, there will be no net impact on our financial position or results of operations, except for the recording of the $100 proceeds from the sale. We have estimated, based upon a Black-Scholes model, that the fair value of the option on the date of sale would be approximately $7,689,369, using an expected life of five years, volatility of 45.3%, and a risk-free rate of 4.2%. However, because our units do not have a trading history, the volatility assumption is based on information currently available to management. We believe the volatility estimate calculated is a reasonable benchmark to use in estimating the expected volatility of our units. This calculation was based on information available with respect to Chinese companies trading on the Shenzhen and Shanghai Stock Exchanges with market capitalizations of $200 million to $400 million. Although an expected life of five years was used in the calculation, if we do not consummate a business combination within the prescribed time period and we automatically dissolve and subsequently liquidate our trust account, the option will become worthless. Because we do not have any specific business combination under consideration, it is impossible at this time to determine specifically how we would, following a business combination, use any proceeds held in the trust account which are not used to consummate such business combination. Although certain persons employed by businesses owned by our Chief Executive Officer, on our behalf, contacted certain potential target businesses prior to our incorporation, our management team has agreed not to propose the approval of a business combination with any of those entities to our stockholders. We believe that, upon consummation of this offering, the funds available to us outside of the trust account, including the interest income to be distributed to us to fund our working capital, will be sufficient to allow us to operate for at least the next 24 months, assuming that a business combination is not consummated during that time. Over this time period, we anticipate approximately $1,400,000 of expenses for legal, accounting and other expenses attendant to the structuring and negotiating of a business combination, $900,000 for due diligence, identification and research of prospective target businesses and reimbursement for out-of-pocket expenses to management, $180,000 for administrative services and support (up to $7,500 per month for 24 months), $150,000 of expenses in legal and accounting fees relating to our SEC reporting obligations and $820,000 for general working capital that will be used for miscellaneous expenses and reserves, including director and officer liability insurance premiums. We do not believe we will need to raise additional funds following this offering in order to meet the expenditures required for operating our business. However, we may need to raise additional funds through a private offering of debt or equity securities if such funds are required to consummate a business combination that is presented to us. We would only consummate such a fundraising simultaneously with the consummation of a business combination. On February 27, 2007, the SPAC Trust, an affiliate of Richard Tan, loaned us $500,000 evidenced by a 4% promissory note. The note is payable on the earlier of February 26, 2008 or the date this offering is consummated. The proceeds of this loan will be used to pay a portion of the expenses related to this offering. We intend to repay this loan from the proceeds of this offering. PROPOSED BUSINESS Introduction We are a recently organized Delaware blank check company formed to serve as a vehicle for the acquisition of an operating business that has its primary operations in the PRC. We are not presently engaged in, and we will not engage in, any substantive commercial business for an indefinite period of time following this offering, and other than attempting to locate a target business after the completion of this offering we have no plan of operation for the remainder of 2007. We intend to utilize cash derived from the proceeds of this offering and the pre-offering private placement, our capital stock, debt or a combination of these in effecting a business combination. Our management has broad discretion with respect to the specific application of the net proceeds of this offering and, as a result, this offering can be characterized as a blank check offering. We do not currently have a business combination under consideration or contemplated, and although certain persons employed by Pacific Millennium Holdings Corporation or its subsidiaries, of which our Chief Executive Officer is the founder and president, on our behalf, contacted certain potential target businesses prior to our incorporation, our management team has agreed not to propose the approval of a business combination with any of those entities to our stockholders. Pursuant to our certificate of incorporation, the initial business combination must be a transaction with one or more operating businesses in which the collective fair market value of the target business, at the time of the business combination, is at least 80% of our net assets at the time of the business combination. Our initial business combination may involve the simultaneous acquisition or merger of more than one target business. We believe that opportunities for market expansion have emerged for businesses with operations in the PRC due to certain changes in the PRC s political, economic and social policies, as well as certain fundamental changes affecting the PRC and its neighboring countries and regions. We believe that the PRC represents both a favorable environment for making acquisitions and an attractive operating environment for a target business for several reasons, including: the existence of a prolonged economic expansion within the PRC, with gross domestic product growth of approximately 9.4% on average since 1988 and growth of 9.9% for 2005, according to the International Monetary Fund s Report on World Economic Outlook, dated April 2006; increased government focus within the PRC on privatizing assets, improving foreign trade and encouraging business and economic activity; access to a highly trained and educated workforce as well as favorable labor rates and efficient, low-cost manufacturing capabilities; and attractive valuations for target businesses within the PRC. Competitive Advantages We believe that we possess the relationships, experience and skills necessary to locate potential target businesses, evaluate those businesses and execute business combinations. Roger Stone, our Non-Executive Chairman of the Board, has prior experience with a blank check company. In addition, he has extensive experience in building and managing businesses, both through internal growth and through acquisitions. Richard Tan, our Chief Executive Officer, President and director, has experience in both investing in and operating businesses in China. Roger Stone is currently the Chairman of the Board and Chief Executive Officer of KapStone Paper and Packaging Corporation (formerly Stone Arcade Acquisition Corporation), a producer of kraft paper. As the Chairman of the Board and Chief Executive Officer of Stone Arcade Acquisition Corporation, a blank check company formed in order to acquire a business in the paper products industry, Mr. Stone successfully acquired International Paper Company s kraft papers business in January 2007. Mr. Stone has over 25 years of experience developing companies as a principal investor and operator. He was the Chief Executive Officer of Smurfit Stone Container Corp. one of the nation s largest paper and packaging companies according to Standard and Poor s (October 2004) and Datamonitor Industry Market Research (November 2004), and was Chief Executive Officer of Stone Container Corp. prior to its acquisition by Jefferson Smurfit Corporation. Subsequently, Mr. Stone served as the Chief Executive Officer of Box USA Holdings Inc., a large independent converter of corrugated packaging materials which he sold to International Paper Company in July 2004. Richard Tan is the founder and President of Pacific Millennium Holdings Corporation, a group of companies that traces its roots back to 1977. Pacific Millennium companies are currently active in different industry sectors, such as packaging, information technology, environmental, cemetery and funeral services, and investment services. Under Mr. Tan s leadership, Pacific Millennium built one of the largest pulp and paper distribution companies in Asia. He was one of the first entrepreneurs in China to establish joint ventures with companies such as International Paper, Smurfit Stone Container Corp. and Willamette Industries. Through these partnerships, Pacific Millennium built 10 box plants and one paper mill in Asia. In August 2005, Mr. Tan successfully sold Pacific Millennium s paper trading operations and a portion of its paper manufacturing operations to International Paper. Mr. Tan is also Co-Chairman of Energy Systems International ( ESI ), which is 60.2% owned by Pacific Millennium. ESI is a leading Clean Development Mechanism ( CDM ) project developer and consultant in China. ESI develops CDM projects in China, utilizing a variety of technologies which capture greenhouse gases in order to generate Certified Emission Reduction Credits, which can be sold to Kyoto Protocol participants all over the world to help them meet their compliance requirements. Mr. Tan also has an extensive network of contacts via his involvement in a variety of trade organizations in China. His activities include being the Vice Chairman of the Shanghai International Chamber of Commerce, Vice Chairman of China Chamber of Promotion for International Trade (Shanghai), Advisor of the Shanghai Modern Management Center, Business Advisor of Chongqing Municipality and Elected Member of the Anhui Province Political Consultative Committee and he is a former President of the Hong Kong Chamber of Commerce Paper Industries. Mr. Stone has advised us that KapStone Paper and Packaging Corporation is not seeking acquisition of any entities in China and Mr. Tan has advised us that Pacific Millennium is focused exclusively on its current portfolio companies and investments. However, if this changes and either of these entities were to begin pursuing new acquisitions or investments in China, Messrs. Stone and Tan have a fiduciary obligation to these companies that take priority over us. There may be potential opportunities that would be attractive to us that would need to be presented to, and rejected by, one or more of the entities for which Messrs. Stone and Tan serve as officers or directors, before they can be presented to us. Subject to their respective existing fiduciary obligations, each of Messrs. Stone and Tan are obligated to present to us for our consideration any company or business having its primary operations in the PRC whose fair market value is at least equal to 80% of the balance of the trust account (less deferred underwriting compensation of $7,000,000, or $8,050,000 if the over-allotment is exercised in full and taxes payable). This obligation will expire upon the earlier of (i) our consummation of an initial business combination or (ii) 24 months after the consummation of this offering. Although Messrs. Tan and Stone have investments in entities other then those described above, they do not have any control or fiduciary obligations to these other entities and, therefore, their affiliations with these entities do not present a conflict of interest. Government Regulations Regulation of foreign currency exchange and dividend distribution Foreign currency exchange. Foreign currency exchange in China is governed by a series of regulations, including the Foreign Currency Administrative Rules (1996), as amended, and the Administrative Regulations Regarding Settlement, Sale and Payment of Foreign Exchange (1996), as amended. Under DILUTION The difference between the public offering price per share of our common stock, assuming no value is attributed to the warrants included in the units, and the pro forma net tangible book value per share of our common stock after this offering constitutes the dilution to investors in this offering. Net tangible book value per share of common stock is determined by dividing our net tangible book value, which is our total tangible assets less total liabilities (including the value of common stock which may be redeemed for an interest in the trust fund), by the number of shares of outstanding common stock (assuming no exercise of the underwriters over-allotment option and the resulting redemption of the 937,500 shares). At September 30, 2007, our net tangible book value was a deficiency of $604,573, or approximately $0.10 per share of common stock. After giving effect to the sale of 25,000,000 shares of common stock included in the units, and the deduction of underwriting discounts and estimated expenses of this offering, our pro forma net tangible book value (as decreased by the value of 7,499,999 shares of common stock which may be redeemed for an interest in the trust account) at September 30, 2007 would be $134,005,838 or $5.64 per share of common stock, representing an immediate increase in net tangible book value of $5.74 per share of common stock to the existing stockholders and an immediate dilution of $2.36 per share of common stock or 29.5% to new investors not exercising their redemption rights. For purposes of presentation, our pro forma net tangible book value after this offering is approximately $57,364,492 less than it otherwise would have been because if we effect a business combination, the redemption rights to the public stockholders may result in the redemption for an interest in the trust fund of up to approximately 29.99% of the aggregate number of the shares of common stock sold in this offering at a per share redemption price equal to the amount in the trust account as of the record date for the determination of stockholders entitled to vote on the business combination, inclusive of any interest, divided by the number of shares of common stock sold in this offering. The following table illustrates the dilution to the new investors on a per share basis, assuming no value is attributed to the warrants included in the units: Public offering price $ 8.00 Net tangible book value before this offering(1) $ (0.10 ) Increase attributable to new investors 5.74 Pro forma net tangible book value after this offering 5.64 Dilution to new investors $ 2.36 The following table sets forth information with respect to our existing stockholders and the new investors: Shares Purchased Total Consideration Average Price Per Share Number Percentage Amount Percentage Existing stockholders 6,250,000 (1) 20.0 % $ 25,000 .01 % $ 0.003 (2) New investors 25,000,000 80.0 % $ 200,000,000 99.99 % $ 8.00 31,250,000 100.0 % $ 200,025,000 100.00 % these regulations, the Renminbi is freely convertible for trade and service-related foreign exchange transactions, but not for direct investment, loans or investments in securities outside China without the prior approval of the SAFE. Pursuant to the Administrative Regulations Regarding Settlement, Sale and Payment of Foreign Exchange, foreign-invested enterprises in China may purchase foreign exchange without the approval of SAFE for trade and service-related foreign exchange transactions by providing commercial documents evidencing these transactions. They may also retain foreign exchange, subject to a cap approved by SAFE, to satisfy foreign exchange liabilities or to pay dividends. However, the relevant Chinese government authorities may limit or eliminate the ability of foreign-invested enterprises to purchase and retain foreign currencies in the future. In addition, foreign exchange transactions for direct investment, loan and investment in securities outside China are still subject to limitations and require approvals from SAFE. Regulation of foreign exchange in certain onshore and offshore transactions. Pursuant to recent regulations issued by the SAFE, PRC residents are required to register with and receive approvals from SAFE in connection with offshore investment activities. SAFE has stated that the purpose of these regulations is to ensure the proper balance of foreign exchange and the standardization of the cross-border flow of funds. On January 24, 2005, SAFE issued a regulation stating that SAFE approval is required for any sale or transfer by the PRC residents of a PRC company s assets or equity interests to foreign entities in exchange for the equity interests or assets of the foreign entities. The regulation also states that, when registering with the foreign exchange authorities, a PRC company acquired by an offshore company must clarify whether the offshore company is controlled or owned by PRC residents and whether there is any share or asset link between or among the parties to the acquisition transaction. On April 8, 2005, SAFE issued another regulation further explaining and expanding upon the January regulation. The April regulation clarified that, where a PRC company is acquired by an offshore company in which PRC residents directly or indirectly hold shares, such PRC residents must (i) register with the local SAFE regarding their respective ownership interests in the offshore company, even if the transaction occurred prior to the January regulation, and (ii) file amendments to such registration concerning any material events of the offshore company, such as changes in share capital and share transfers. The April regulation also expanded the statutory definition of the term foreign acquisition , making the regulations applicable to any transaction that results in PRC residents directly or indirectly holding shares in the offshore company that has an ownership interest in a PRC company. The April regulation also provides that failure to comply with the registration procedures set forth therein may result in the imposition of restrictions on the PRC company s foreign exchange activities and its ability to distribute profits to its offshore parent company. On October 21, 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice 75, which became effective as of November 1, 2005. Notice 75 replaced the two rules issued by SAFE in January and April 2005 mentioned above. According to Notice 75: prior to establishing or assuming control of an offshore company for the purpose of financing that offshore company with assets or equity interests in an onshore enterprise in the PRC, each PRC resident, whether a natural or legal person, must complete the overseas investment foreign exchange registration procedures with the relevant local SAFE branch; an amendment to the registration with the local SAFE branch is required to be filed by any PRC resident that directly or indirectly holds interests in that offshore company upon either (1) the injection of equity interests or assets of an onshore enterprise to the offshore company, or (2) the completion of any overseas fund raising by such offshore company; and an amendment to the registration with the local SAFE branch is also required to be filed by such PRC resident when there is any material change involving a change in the capital of the offshore company, such as (1) an increase or decrease in its capital, (2) a transfer or swap of shares, (3) a merger or division, (4) a long term equity or debt investment, or (5) the creation of any security interests over the relevant assets located in China. Moreover, Notice 75 applies retroactively. As a result, PRC residents who have established or acquired control of offshore companies that have made onshore investments in the PRC in the past are required to complete the relevant overseas investment foreign exchange registration procedures by March 31, 2006. Under the relevant rules, failure to comply with the registration procedures set forth in Notice 75 may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including the payment of dividends and other distributions to its offshore parent or affiliate and the capital inflow from the offshore entity, and may also subject relevant PRC residents to penalties under PRC foreign exchange administration regulations. As a Delaware company, and therefore a foreign entity, if we purchase the assets or equity interest of a PRC company owned by PRC residents, such PRC residents will be subject to the registration procedures described in the regulations as currently drafted. Moreover, PRC residents who are beneficial holders of our shares are required to register with SAFE in connection with their investment in us. As a result of the lack of implementing rules, other uncertainties concerning how the existing SAFE regulations will be interpreted or implemented, and uncertainty as to when the new regulations will take effect, we cannot predict how they will affect our business operations following a business combination. For example, our ability to conduct foreign exchange activities following a business combination, such as remittance of dividends and foreign-currency-denominated borrowings, may be subject to compliance with the SAFE registration requirements by such PRC residents, over whom we have no control. In addition, we cannot assure you that such PRC residents will be able to complete the necessary approval and registration procedures required by the SAFE regulations. We will require all our stockholders, following a business combination, who are PRC residents to comply with any SAFE registration requirements, although we have no control over either our stockholders or the outcome of such registration procedures. Such uncertainties may restrict our ability to implement our acquisition strategy and adversely affect our business and prospects following a business combination. Dividend distribution. The principal laws and regulations in China governing distribution of dividends by foreign-invested companies include: The Sino-foreign Equity Joint Venture Law (1979), as amended; The Regulations for the Implementation of the Sino-foreign Equity Joint Venture Law (1983), as amended; The Sino-foreign Cooperative Enterprise Law (1988), as amended; The Detailed Rules for the Implementation of the Sino-foreign Cooperative Enterprise Law (1995), as amended; The Foreign Investment Enterprise Law (1986), as amended; and The Regulations of Implementation of the Foreign Investment Enterprise Law (1990), as amended. Under these regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, wholly foreign-owned enterprises in China are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds unless such reserve funds have reached 50% of their respective registered capital. These reserves are not distributable as cash dividends. The pro forma net tangible book value after the offering is calculated as follows: Numerator: Net tangible book value before the offering $ (604,573 ) Net proceeds from this offering and the pre-offering private placement(1) 191,365,000 Offering costs accrued for or paid in advance and excluded from tangible book value before this offering 609,803 Proceeds from option sold to underwriter 100 Deferred underwriting compensation included in proceeds held in trust subject to redemption for cash 2,100,000 Less: Proceeds held in trust subject to redemption for cash(2) (59,464,492 ) $ 134,005,838 Denominator: Shares of common stock outstanding prior to the offering(3) 6,250,000 Shares of common stock included in the units offered in this offering 25,000,000 Less: Shares subject to redemption(4) (7,499,999 ) 23,750,001 Regulation of foreign investors merging Chinese enterprises On August 8, 2006, the Ministry of Commerce, the State-owned Assets Supervision and Administration Commission, State Administration of Taxation, State Administration for Industry and Commerce, China Securities Regulatory Commission and State Administration of Foreign Exchange jointly promulgated the Provisions for Foreign Investors to Merge Domestic Enterprises, which will take effect from September 8, 2006, replacing the Interim Provisions for Foreign Investors to Merge Domestic Enterprises issued in March 2003 by four authorities, the Ministry of Foreign Trade and Economic Cooperation, State Administration of Taxation, State Administration for Industry and Commerce and State Administration of Foreign Exchange. The State-owned Assets Supervision and Administration Commission and China Securities Regulatory Commission newly join the regulation promulgation. The requirements and approval procedures for the Equity Acquisition and Assets Acquisition remains unchanged as those in the interim regulation. The new regulation adds one chapter on the acquisition with equity as the consideration including one section on the special purpose company. This chapter stipulated the relevant conditions and approval procedures in detail making such acquisitions workable. The currently mandatory requirement for the submission of fund remittance into China will be changed. The Anti-monopoly Chapter in the new regulation is essentially the same as the existing interim regulation, although Chinese government is recently tightening such control. For example, the recent proposed takeover of China s top machinery maker, Xugong Group Construction Machinery, by a United States private equity firm was halted due to this regulation. We cannot predict how such regulations especially the anti-monopoly examination will affect our future completion of a business combination. However, we are confident our strong government and industrial connections and in-depth understanding of the Chinese market would help us minimize the negative impacts. Government regulations relating to foreign exchange controls The principal regulation governing foreign exchange in China is the Foreign Currency Administration Rules (IPPS), as amended. Under these rules, the Renminbi, China s currency, is freely convertible for trade and service related foreign exchange transactions, but not for direct investment, loan or investment in securities outside of China unless the prior approval of SAFE is obtained. FIEs are required to apply to the SAFE for Foreign Exchange Registration Certificates for FIEs. Following a business combination, we will likely be an FIE as a result of our ownership structure. With such registration certificates, which need to be renewed annually, FIEs are allowed to open foreign currency accounts including a basic account and capital account. Currency translation within the scope of the basic account, such as remittance of foreign currencies for payment of dividends, can be effected without requiring the approval of the SAFE. However, conversion of currency in the capital account, including capital items such as direct investment, loans and securities, still require approval of the SAFE. This prior approval may delay or impair our ability to operate following a business combination. Government regulations relating to taxation According to the PRC income Tax Law of Foreign Investment Enterprises and Foreign Enterprises and the Implementation Rules for the Income Tax Law, the standard Enterprise Income Tax, or EIT, rate of FIEs is 33%, reduced or exempted in some cases under any applicable laws or regulations. Income such as dividends and profits derived from the PRC by a foreign enterprise which has no establishment in the PRC is subject to a 20% withholding tax, unless reduced or exempted by any applicable laws or regulations. The profit derived by a foreign investor from a FIE is currently exempted from EIT. However, if this exemption were to be removed in the future, we might be required to deduct certain amounts from dividends we may pay to our shareholders following a business combination to pay corporate withholding taxes. On March 16, 2007, the National People s Congress approved and promulgated a new tax law Enterprise Income Tax Law which will take effect beginning January 1, 2008. Under this new Enterprise Income Tax Law, FIEs and domestic companies are subject to a uniform tax rate of 25%. The new tax law provides a five-year transition period starting from its effective date for those enterprises which were established before the promulgation date of the new tax law and which were entitled to a preferential lower tax rate under the then effective tax laws or regulations. In accordance with regulations issued by the state council, the tax rate of such enterprises may gradually transition to the uniform tax rate within the transition period. For those enterprises which are enjoying tax holidays, such tax holidays may continue until their expiration in accordance with the regulations issued by the state council, but where the tax holiday has not yet started because of losses, such tax holiday shall be deemed to commence from the first effective year of the new tax law. While the new tax law equalizes the tax rates for FIEs and domestic companies, preferential tax treatment would continue to be given to companies in certain encouraged sectors and to entities classified as high-technology companies supported by the PRC government, whether FIEs or domestic companies. According to the new tax law, entities that qualify as high-technology companies especially supported by the PRC government are expected to benefit from a tax rate of 15% as compared to the uniform tax rate of 25%. The new tax law provides only a framework of the enterprise tax provisions, leaving many details on the definitions of numerous terms as well as the interpretation and specific application of various provisions unclear and unspecified. Regulation of Mergers and Acquisitions The 2006 Acquisition Provisions revised the Tentative Provisions on Acquisition of Domestic Enterprises by Foreign Investors enacted by MOFCOM, SAT, SAIC and SAFE on 7 March 2003 which became effective on 12 April 2003, or the 2003 Acquisition Provisions. As with the 2003 Acquisition Provisions, the 2006 Acquisition Provisions require Chinese regulatory approvals for mergers with or acquisitions of the equity ownership or assets of Chinese domestic companies. Additionally, the 2006 Acquisition Provisions deprive companies incorporated or controlled overseas that are established by Chinese domestic companies, enterprises or natural persons and are merging with or acquiring Chinese domestic affiliated companies of the tax preferential treatments granted to FIEs, unless the overseas companies will bring a certain amount of additional capital to the Chinese company. The 2006 Acquisition Provisions also create new layers of Chinese regulatory approvals affecting offshore special purpose companies set up by Chinese domestic companies, enterprises or natural persons, and the in-bound investment made by such special purpose companies . The 2006 Acquisition Provisions require that the parties to a merger or acquisition shall disclose to the PRC approval authority and elaborate on whether the parties are affiliates; if there are two parties who belong to the same actual controlling party, the parties concerned must disclose the actual controlling party to the PRC approval authority and explain the purpose of the merger or acquisition and whether the price agreed conforms to fair market value. The 2006 Acquisition Provisions define a special purpose company as a foreign company directly or indirectly controlled by Chinese domestic companies or natural persons for the purpose of listing in an overseas market the equity interests in a Chinese domestic company actually held by them. This definition is slightly different from that in Decree No. 75 of 2005. A Chinese domestic company that is to set up a special purpose company overseas must obtain approval from MOFCOM and disclose to MOFCOM certain information including the business plan with regard to the listing of the special purpose company in the overseas market and the appraisal report issued by a consultant with regard to the stock offering price for any future listing of the special purpose company on an overseas market. The overseas listing of the special purpose company is subject to the approval of CSRC. Additionally, the financing of the special purpose company from its overseas listing must be repatriated to China according to the repatriation plan filed with SAFE. The profits, dividends and foreign CAPITALIZATION The following table sets forth our capitalization at September 30, 2007 and as adjusted to give effect to the pre-offering private placement, the sale of our units and the application of the estimated net proceeds derived from the sale of our units in this offering and the founder warrants in the pre-offering private placement. The actual stockholders equity data as of September 30, 2007 is derived from our audited financial statements. The as adjusted stockholders equity data is unaudited. September 30, 2007 Actual As Adjusted Note payable to stockholders(1) $ 500,000 $ Deferred underwriting discount ($0.28 per share)(2) 7,000,000 Value of common stock which may be redeemed for an interest in the trust fund, as adjusted ($7.65 per share)(3) 57,364,492 Stockholders equity: Preferred shares, $0.0001 par value, 1,000,000 shares authorized; none issued or outstanding Common stock, $0.0001 par value, 39,000,000 shares authorized; 7,187,500 shares issued and outstanding; 31,250,000 shares issued and outstanding (including 7,499,999 shares subject to possible redemption), as adjusted(3) 719 3,125 Additional paid-in capital(4) 24,281 134,022,483 Deficit accumulated during the development stage (19,770 ) (19,770 ) Total stockholders equity $ 5,230 $ 134,005,838 Total capitalization $ 505,230 $ 198,370,330 exchange income obtained as a result of capital variation, which are received by the Chinese domestic companies or natural persons from their special purpose companies, must be repatriated to China within six months from the day on which they are received. With regard to the tax treatments granted to FIEs established by Chinese domestic companies, enterprises or natural persons by way of merger with or acquisition of Chinese domestic affiliated companies in the name of their companies duly incorporated or controlled overseas, the 2006 Acquisition Provisions explicitly state that such FIEs are not eligible for the preferential treatments granted by the PRC government to FIEs, unless such overseas companies subscribe to the capital increase of the target Chinese domestic companies or contribute additional capital to the post-acquisition Chinese domestic company and the amount of the capital subscribed or contributed accounts for 25% or more of the post-acquisition registered capital of the Chinese company. The 2006 Acquisition Provisions require that if the merger or acquisition of a Chinese domestic company by foreign investors and their obtaining controlling rights (i) involves key industries, (ii) has any factor that impacts or may impact the economic security of China, or (iii) leads to a shift of controlling rights over a Chinese domestic company that possesses famous brands or traditional Chinese trade names , then the parties concerned shall file an application in respect of such issues with MOFCOM. The 2006 Acquisition Provisions emphasize that mergers with or acquisitions of Chinese domestic companies by foreign investors must not result in a loss on the sale of state-owned assets and if the merger or acquisition involves such matters as the transfer of state-owned property rights in companies or management of state-owned equity rights in listed companies the relevant provisions regarding the administration of State-owned assets must be complied with (see below). Regulation on State-owned Property Rights The acquisition of a PRC state-owned company is subject to stringent governmental regulation. The governing legislation is the Provisional Regulations on Using Foreign Investment to Reorganize State-owned Enterprises promulgated by SAIC and SAFE on 8 November 2002, effective from 1 January 2003 and the Provisional Measures on the Administration of the Transfer of State-Owned Property Rights in Enterprises promulgated by the SASAC and the MOF on 31 December 2003, effective from 1 February 2004. As a matter of principle, the transfer of state-owned property rights in enterprises must take place through a government approved state-owned asset exchange , and the value of the transferred property rights must be evaluated by those Chinese appraisal firms qualified to do state-owned assets evaluation . The final price must not be less than 90% of the appraisal price. Additionally, bidding/auction procedures are essential in the event that there is more than one potential transferee. In the case of an acquisition by foreign investors of state-owned enterprises, the acquirer and the seller must make a resettlement plan to properly resettle the employees, and the resettlement plan must be approved by the Employees Representative Congress. The seller must pay all unpaid wages and social welfare payments from the existing assets of the target company to the employees. Regulation of wholly-owned foreign enterprises (WOFE) Generally speaking, under the current Chinese legal regime regulating foreign direct investment in China, the following forms of FIEs are available to foreign investors: Sino-foreign equity joint ventures ( EJV ); Sino-foreign co-operative joint ventures ( CJV ); and Wholly-owned foreign enterprises ( WOFE ). A WOFE is a company with limited liability and legal person status. There are only foreign investors and no Chinese partners. Unlike an EJV or CJV, articles of association are sufficient to establish a WOFE, and there is no need to draw up a joint venture contract even if there are two or more foreign investors in the WOFE. Like an EJV or CJV, the articles of association must be approved by the Chinese government. Foreign investors may prefer WOFEs to EJVs/CJVs because in the case of a WOFE (1) there is a straightforward management structure which is not dependent on the interests of a local partner; (2) it is easy to terminate compared to an EJV or CJV; and (3) intellectual property is usually better protected. Without a local partner, the foreign investor lacks local support and proper access to resources (such as connections with governmental authorities) and access to the markets of China s unique economy. While it is an issue under Chinese law whether WOFEs are allowed in certain Chinese industries, foreign investors are allowed to incorporate WOFEs in certain industries. Effecting a Business Combination General We are not presently engaged in, and we will not engage in, any substantive commercial business for an indefinite period of time following this offering. We intend to utilize cash derived from the proceeds of this offering and the pre-offering private placement, our capital stock, debt or a combination of these in effecting a business combination. Although substantially all of the net proceeds of this offering and the pre-offering private placement are intended to be generally applied toward effecting a business combination as described in this prospectus, the proceeds are not otherwise being designated for any more specific purposes. Accordingly, prospective investors will invest in us without an opportunity to evaluate the specific merits or risks of any one or more business combinations. A business combination may involve the acquisition of a company which does not need substantial additional capital but which desires to establish a public trading market for its shares, while avoiding what it may deem to be adverse consequences of undertaking a public offering itself. These include time delays, significant expense, loss of voting control and compliance with various federal and state securities laws. In the alternative, we may seek to consummate a business combination with a company that may be financially unstable or in its early stages of development or growth. We have not identified a target business or target industry To date, we have not selected any target business or target industry on which to concentrate our search for a business combination. Although certain persons employed by businesses owned by our Chief Executive Officer, on our behalf, contacted certain potential target businesses prior to our incorporation, our management team has agreed not to propose the approval of a business combination with any of those entities to our stockholders. We have not engaged or retained any agent or other representative to identify or locate any suitable acquisition candidate. Finally, there has been no diligence, discussions, negotiations and/or other similar activities undertaken, directly or indirectly, by us, our affiliates or representatives, or by any third party, with respect to a business combination transaction with us. Subject to the limitations that the initial business combination must be a transaction with one or more operating businesses having primary business operations located in the PRC and in which the collective fair market value of the target business or businesses is at least 80% of our net assets at the time of the business combination, as described below in more detail, we will have virtually unrestricted flexibility in identifying and selecting a prospective acquisition candidate. We have not established any other specific attributes or criteria (financial or otherwise) for prospective target businesses. Accordingly, there is no basis for investors in this offering to evaluate the possible merits or risks of the target business with which we may ultimately complete a business combination. To the extent we effect a business combination with a financially unstable company or an entity in its early stage of development or growth, including entities without established records of sales or earnings, we may be affected by numerous risks inherent in the business and operations of financially unstable and early stage or potential emerging growth companies. Although our management will endeavor to evaluate the risks inherent in a particular target business, we cannot assure you that we will properly ascertain or assess all significant risk factors. Sources of target businesses After the consummation of this offering, we anticipate that target business candidates will be brought to our attention from various unaffiliated sources, including investment bankers, venture capital funds, private equity funds, leveraged buyout funds, management buyout funds and other members of the financial community. We expect sources to become aware that we are seeking a business combination candidate by a variety of means, such as publicly available information relating to this offering, and public relations and marketing efforts. Sources will be contacted directly by management following completion of the offering. Our existing stockholders, officers and directors as well as their affiliates may also bring to our attention target business candidates. While we do not presently have any arrangements with professional firms that specialize in business acquisitions on any formal basis, we may engage these firms in the future, in which event we may pay a finder s fee, retainer or other compensation. In no event, however, will we or any target company pay any of our existing executive officer or directors or any entity with which they are affiliated any finder s fee or other compensation for services rendered to us prior to or in connection with the consummation of a business combination. Contractual arrangements The government of the PRC has restricted or limited foreign ownership of certain kinds of assets and companies operating in a wide variety of industries, including certain aspects of telecommunications, advertising, food production, and heavy equipment manufacturers. The PRC may apply these restrictions in other industries in the future. In addition, there can be restrictions on the foreign ownership of businesses that are determined from time to time to be in important industries that may affect the national economic security or having famous Chinese brand names or well established Chinese brand names. Subject to the review requirements of the Ministry of Commerce and other relevant agencies as discussed elsewhere for acquisitions of assets and companies in the PRC and subject to the various percentage ownership limitations that exist from time to time, acquisitions involving foreign investors and parties in the various restricted categories of assets and industries may nonetheless sometimes be consummated using contractual arrangements with permitted Chinese parties. To the extent that such agreements are employed, they may be for control of specific assets such as intellectual property or control of blocks of the equity ownership interests of a company. The agreements would be designed to provide our company with the economic benefits of and control over the subject assets or equity interests similar to the rights of full ownership, while leaving the technical ownership in the hands of Chinese parties who would likely be designated by our company. For example, these contracts could result in a structure where, in exchange for our payment of the acquisition consideration, (i) the target company would be majority owned by Chinese residents whom we designate and the target company would continue to hold the requisite licenses for the target business, and (ii) we would establish a new subsidiary in China which would provide technology, technical support, consulting and related services to the target company in exchange for fees, which would transfer to us substantially all of the economic benefits of ownership of the target company. These contractual arrangements would be designed to provide the following: Our exercise of effective control over the target company; A substantial portion of the economic benefits of the target company would be transferred to us; and We, or our designee, would have an exclusive option to purchase all or part of the equity interests in the target company owned by the Chinese residents whom we designate, or all or part of the assets of the target company, in each case when and to the extent permitted by Chinese regulations. While we cannot predict the terms of any such contract that we will be able to negotiate, at a minimum, any contractual arrangement would need to provide us with (i) effective control over the target s operations and management either directly through board control or through affirmative and/or negative covenants and veto rights with respect to matters such as entry into material agreements, management changes and issuance of debt or equity securities, among other potential control provisions and (ii) a sufficient level of economic interest to ensure that we satisfy the 80% net asset test required for our initial business combination. We have not, however, established specific provisions which must be in an agreement in order to meet the definition of business combination. We would obtain an independent appraisal from an investment bank or industry expert for the purpose of determining the fair value of any contractual arrangement. These agreements likely also would provide for increased ownership or full ownership and control by us when and if permitted under PRC law and regulation. If we choose to effect a business combination that employs the use of these types of control arrangements, we may have difficulty in enforcing our rights. Therefore these contractual arrangements may not be as effective in providing us with the same economic benefits, accounting consolidation or control over a target business as would direct ownership through a merger or stock exchange. For example, if the target business or any other entity fails to perform its obligations under these contractual arrangements, we may have to incur substantial costs and expend substantial resources to enforce such arrangements, and rely on legal remedies under Chinese law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure will be sufficient to off-set the cost of enforcement and may adversely affect the benefits we expect to receive from the business combination. Moreover, we expect that the contractual arrangements upon which we would be relying would be governed by Chinese law and would be the only basis of providing resolution of disputes which may arise through either arbitration or litigation in China. Accordingly, these contracts would be interpreted in accordance with Chinese law and any disputes would be resolved in accordance with Chinese legal procedures. Uncertainties in the Chinese legal system could limit our ability to enforce these contractual arrangements. In the event we are unable to enforce these contractual arrangements, we may not be able to exert the effective level of control over the target business. We have not selected any target business or target industry on which to concentrate our search for a business combination and we are, therefore, unable to determine at this time what form an acquisition of a target business will take. Selection of a target business and structuring of a business combination In evaluating a prospective target business, our management will consider, among other factors, the following: financial condition and results of operation; growth potential; experience and skill of management and availability of additional personnel; capital requirements; competitive position; barriers to entry into other industries; stage of development of the products, processes or services; degree of current or potential market acceptance of the products, processes or services; proprietary features and degree of intellectual property or other protection of the products, processes or services; regulatory environment of the industry; and costs associated with effecting the business combination. These criteria are not intended to be exhaustive. Any evaluation relating to the merits of a particular business combination will be based, to the extent relevant, on the above factors as well as other considerations deemed relevant by our management in effecting a business combination consistent with our business objective. In evaluating a prospective target business, we will conduct an extensive due diligence review which will encompass, among other things, meetings with incumbent management, where applicable, and inspection of facilities, as well as review of financial and other information which will be made available to us. Nevertheless, upon the completion of such due diligence, we may consummate a business combination with a business target which does not possess the foregoing characteristics. The circumstances that would lead management to consider entering into a business combination with a target business that does not meet the foregoing criteria would include management s judgment that positive mitigating or offsetting factors are present. For example, we may choose to complete a business combination with a business that has not had recent positive or reliable cash flow, but that has undergone a restructuring or other transformation (such as a major new product line or key customer acquisition) that we determine is likely to lead to positive and reliable cash flow in the near future. Similarly, we could consider a business combination with a business that is deficient in management if we believe we can readily supplement existing management. The time and costs required to select and evaluate a target business and to structure and complete the business combination cannot presently be ascertained with any degree of certainty. Any costs incurred with respect to the identification and evaluation of a prospective target business with which a business combination is not ultimately completed will result in a loss to us and reduce the amount of capital available to otherwise complete a business combination. However, we will not pay any finders or consulting fees to our existing officer, directors and advisors, or any of their respective affiliates, for services rendered to or in connection with a business combination. Fair market value of business combination Our management will have virtually unrestricted flexibility in identifying and selecting a prospective target business, except that our initial business combination must be a transaction in which the fair market value of the target business or businesses acquired simultaneously is at least equal to 80% of our net assets at the time of the business combination. In the event we determine to simultaneously acquire several businesses and such businesses are owned by different sellers, and one or more the businesses do not, on a stand-alone basis meet the 80% test, we may need one or more of such sellers to agree that our purchase of its business is contingent on the simultaneous closings of one or more acquisitions, which may make it more difficult for us, and delay our ability to complete the business combination. With multiple acquisitions, we could also face additional risks, including additional burdens and costs with respect to possible multiple negotiations and due diligence investigations (if there are multiple sellers) and the additional risks associated with the subsequent assimilation of the operations and services or products of the acquired companies in a single operating business. We may further seek to acquire a target business that has a fair market value in excess of 80% of our net assets by raising additional funds through the sale of our securities, through loans or a combination of both. The fair market value of any such business or businesses will be determined by our board of directors based upon standards generally accepted by the financial community, such as actual and potential sales, earnings and cash flow and book value. If our board is not able to independently determine that the target business has a sufficient fair market value, we will obtain an opinion from an independent investment banking firm with respect to the satisfaction of such criteria. Such opinion would be included in our proxy statement relating to the business combination. Although management has not consulted with any investment banker in connection with such an opinion, it is possible that the opinion would only be able to be relied upon by our board of directors and not by our stockholders. We will need to consider the cost in making a determination as to whether to hire an investment bank that will allow our stockholders to rely on its opinion, and will do so unless the cost is substantially (approximately $50,000) in excess of what it would be otherwise. In the event that we obtain an opinion that we and the investment banker believe cannot be relied on by our stockholders, we will include disclosure in the proxy statement providing support for that belief. While our stockholders might not have legal recourse against the investment banking firm in such case, the fact that an independent expert has evaluated, and passed upon, the fairness of the transaction is a factor our stockholders may consider in determining whether or not to vote in favor of the potential business combination. Possible lack of business diversification While we may seek to effect business combinations with more than one target business, our initial business combination must be with a target business which satisfies the minimum valuation standard at the time of such acquisition, as discussed above. Consequently, it is possible that we will have the ability to effect only a single business combination. Accordingly, the prospects for our success may be dependent upon the future performance of a single business. Unlike other entities which may have the resources to complete several business combinations of entities operating in multiple industries or multiple areas of a single industry, it is probable that we will not have the resources to diversify our operations or benefit from the possible spreading of risks or offsetting of losses. If we are able to consummate only a single business combination, our lack of diversification may: subject us to numerous economic, competitive and regulatory developments, any or all of which may have a substantial adverse impact upon the particular industry in which we may operate subsequent to a business combination, and result in our dependency upon the development or market acceptance of a single or limited number of products, processes or services. Limited ability to evaluate the target business management Although we intend to closely scrutinize the management of a prospective target business when evaluating the desirability of effecting a business combination, we cannot assure you that our assessment of the target business management will prove to be correct. In addition, we cannot assure you that the future management will have the necessary skills, qualifications or abilities to manage a public company. Furthermore, the future role of our executive officer, directors and advisors, if any, in the target business cannot presently be stated with any certainty. While it is possible that one or more of our directors will remain associated in some capacity with us following a business combination, it is unlikely that any of them will devote their full efforts to our affairs subsequent to a business combination. Although it is our current belief that current management will remain associated with us following a business combination, their ability to do so is not expected to be a factor in determining which business combination to pursue. Moreover, we cannot assure you that our executive officer, directors and advisors will have significant experience or knowledge relating to the operations of the particular target business that we may acquire. Following a business combination, we may seek to recruit additional managers to supplement the incumbent management of the target business. We cannot assure you that we will have the ability to recruit additional managers, or that additional managers will have the requisite skills, knowledge or experience necessary to enhance the incumbent management. Opportunity for stockholder approval of business combination Prior to the completion of a business combination, we will submit the transaction to our stockholders for approval, even if the nature of the acquisition is such as would not ordinarily require stockholder approval under applicable law. In connection with seeking stockholder approval of a business combination, we will also submit to our stockholders for approval a proposal to amend our amended and restated certificate of incorporation to provide for our corporate life to continue perpetually following the consummation of such business combination. Any vote to extend the corporate life to continue perpetually following the consummation of a business combination will be taken only if the business combination is approved. We will only consummate a business combination if stockholders vote both in favor of such business combination and our amendment to extend our corporate life. In connection with seeking stockholder approval of a business combination we will furnish our stockholders with proxy solicitation materials prepared in accordance with the Securities Exchange Act of 1934, which, among other matters, will include a description of the operations of the target business and certain audited historical financial statements of the business. In connection with the vote required for any business combination, all of our existing stockholders, including our executive officer and directors, have agreed to vote their respective shares of common stock owned by them immediately prior to this offering and the pre-offering private placement in accordance with the majority of the shares of common stock voted by the public stockholders. This voting arrangement shall not apply to shares of common stock included in units purchased by any of our existing stockholders in this offering or following this offering in the open market. Our existing stockholders have agreed to vote any such shares they purchase in favor of any business combination negotiated by our executive officer. We will proceed with the business combination only if a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and public stockholders owning less than 30% of the shares of common stock sold in this offering exercise their redemption rights. Our threshold for redemption has been established at 30% in order for this offering to be similar to other blank check company offerings currently in the market. However, to date a 20% threshold has been more typical for offerings of this type. We have increased the threshold to reduce the risk of a small group of stockholders exercising undue influence on the approval process. Voting against the business combination alone will not result in redemption of a stockholder s shares into a pro rata share of the trust account. To do so, a stockholder must have also exercised the redemption rights described below. As a result of our higher redemption threshold, we may have less cash available to complete a business combination. Because we will not know how many stockholders may exercise such redemption rights, we will need to structure a business combination that requires less cash, or we may need to arrange third party financing to help fund the transaction in case a larger percentage of stockholders exercise their redemption rights than we expect. Alternatively, to compensate for the potential shortfall in cash, we may be required to structure the business combination, in whole or in part, using the issuance of our stock as consideration. Accordingly, this increase in the customary redemption threshold may hinder our ability to consummate a business combination in the most efficient manner or to optimize our capital structure. In the event that holders of more than 20% of the shares of common stock sold in this offering elect to redeem their shares, our existing stockholders have agreed to forfeit that number of shares (up to a maximum of 781,250) that will result in the number of shares owned by them prior to this offering collectively being no more than 23.81% of our outstanding common stock immediately prior to the consummation of such business combination after giving effect to the redemption. Redemption rights At the time we seek stockholder approval of any business combination, we will offer each public stockholder the right to have such stockholder s shares of common stock redeemed for cash if the stockholder votes against the business combination and the business combination is approved and completed. The actual per share redemption price will be equal to the aggregate amount then on deposit in the trust account, including a pro rata share of the deferred underwriting being held in the trust account attributable to the underwriters discount and any interest earned on the trust account, net of income taxes payable on such interest and after release of up to $3,300,000 of interest income earned on the trust account, after tax, to fund working capital requirements (calculated as of two business days prior to the consummation of the proposed business combination), divided by the number of shares of common stock sold in this offering. Without taking into any account interest earned on the trust account, the initial per share redemption price would be $7.93, which includes $0.28 being held in the trust account attributable to the deferred underwriting discount, or $0.07 less than the per unit offering price of $8.00. The amount initially held in trust (and, therefore, the original redemption amount per share) was determined through negotiation between our management and the underwriters and was principally determined based on what would be acceptable to the market. An eligible stockholder may request redemption at any time after the mailing to our stockholders of the proxy statement and prior to the vote taken with respect to a proposed business combination at a meeting held for that purpose, but the request will not be granted unless the stockholder votes against the business combination and the business combination is approved and completed. Stockholders will not be requested to tender their shares of common stock before a business combination is consummated. If a business combination is consummated, redeeming stockholders will be sent instructions on how to tender their shares of common stock and when they should expect to receive the redemption amount. In order to ensure accuracy in determining whether or not the redemption threshold has been met, each redeeming stockholder must continue to hold their shares of common stock until the consummation of the business combination. We will not charge redeeming stockholders any fees in connection with the tender of shares for redemption. If a stockholder votes against the business combination but fails to properly exercise his or her redemption rights, such stockholder will not have his or her shares of common stock redeemed for his or her pro rata distribution of the trust account. Any request for redemption, once made, may be withdrawn at any time up to the date of the meeting. It is anticipated that the funds to be distributed to stockholders entitled to redeem their shares of common stock who elect redemption will be distributed promptly after completion of a business combination. Public stockholders who redeem their shares of common stock into their share of the trust account still have the right to exercise the warrants that they received as part of the units. We will not complete any business combination if public stockholders owning 30% or more of the shares of common stock sold in this offering exercise their redemption rights. Our existing stockholders are not entitled to redeem any shares of common stock held by them whether acquired by them prior to, as part of or after this offering, into a pro rata share of the trust account in connection with a business combination. Liquidation if no business combination Our amended and restated certificate of incorporation provides that we will continue in existence only until , 2009. This provision may not be amended without the affirmative vote of 95% of the shares issued in this offering except in connection with the consummation of a business combination. If we have not completed a business combination by such date, our corporate existence will cease except for the purposes of winding up our affairs and liquidating, pursuant to Section 278 of the Delaware General Corporation Law. This has the same effect as if our board of directors and stockholders had formally voted to approve our dissolution pursuant to Section 275 of the Delaware General Corporation Law. Accordingly, limiting our corporate existence to a specified date as permitted by Section 102(b)(5) of the Delaware General Corporation Law removes the necessity to comply with the formal procedures set forth in Section 275 (which would have required our board of directors and stockholders to formally vote to approve our dissolution and liquidation and to have filed a certificate of dissolution with the Delaware Secretary of State). We view this provision terminating our corporate life by , 2009 as an obligation to our stockholders and will not take any action to amend or waive this provision to allow us to survive for a longer period of time except in connection with the consummation of a business combination. If we are unable to complete a business combination by , 2009, we will distribute to all of our public stockholders, in proportion to their respective equity interests, an aggregate sum equal to the amount in the trust account, inclusive of any interest net of taxes and up to $3,300,000 which may be used to fund our working capital requirements, plus any remaining net assets (subject to our obligations under Delaware law to provide for claims of creditors as described below). We will notify the trustee of the trust account to begin liquidating such assets promptly after such date and anticipate it will take no more than 10 business days to effectuate such distribution. Our existing stockholders have waived their rights to participate in any such distribution or any liquidation distribution with respect to their initial shares. There will be no distribution from the trust account or otherwise with respect to our warrants which will expire worthless. We will pay the costs of liquidation and dissolution from our remaining assets outside of the trust account. Based on consultation with Delaware counsel, we believe liquidation costs will be approximately $25,000. Section 281(b) of the Delaware General Corporation Law requires that the corporation, or any successor entity, adopt a plan of distribution under which the dissolved corporation: (i) pays, or makes reasonable provision to pay all claims and obligations, including contingent, conditional, or unmatured contractual claims known to the corporation or successor entity; (ii) makes provisions which are reasonably sufficient to provide compensation for any claim against the corporation which is the subject of a pending action, suit or proceeding to which the corporation is a party; and (iii) makes provision for compensation for claims that have not been made against the corporation, but based on facts known to the corporation or successor entity are likely to arise within 10 years after the date of dissolution. The plan of dissolution must provide that all claims will be paid in full. If there are insufficient assets to satisfy such claims the plan must indicate that claims shall be paid, or provided for according to their priority and, among claims of equal priority, ratably to the extent there are assets legally available. Any remaining assets shall be distributed to the stockholders of the dissolved corporation. Our public stockholders will be entitled to receive funds from the trust account only in the event of the liquidation of the trust account or if they seek to convert their respective shares into cash upon a business combination which the stockholder voted against and which is completed by us. In no other circumstances will a stockholder have any right or interest of any kind to or in the trust account. If we were to expend all of the net proceeds of this offering, other than the proceeds deposited in the trust account, and without taking into account interest, if any, earned on the trust account, the initial per-share liquidation price would be $7.93, or $0.07 less than the per-unit offering price of $8.00. The proceeds deposited in the trust account could, however, become subject to the claims of our creditors (which could include vendors and service providers we have engaged to assist us in any way in connection with our search for a target business and that are owed money by us, as well as target businesses themselves) which could have higher priority than the claims of our public stockholders. Our executive officers and directors have agreed to indemnify us, jointly and severally pro rata according to their beneficial interest in our company immediately prior to this offering, for our debts to vendors, or to any prospective target business, if we do not obtain a valid and enforceable waiver from that vendor or prospective target business of its rights or claims to the trust account and only to the extent necessary to ensure that such claims do not reduce the amount in the trust account. Our directors and executive officer are of substantial means and capable of funding any shortfall in our trust account, even though we have not asked them to reserve for such an eventuality. In the event that our board of directors determines that it is in our best interest to bring a claim against our executive officer and directors to enforce our right to obtain indemnification from them, we will have a fiduciary obligation to bring such a claim (it may not be in our best interests to do so if the cost to bring the claim would be greater than the anticipated amount that we would receive if we successfully prosecuted the claim). However, we cannot assure you that they will satisfy those obligations, if they are required to do so. As a result, we cannot assure you that the per-share distribution from the trust account, if we liquidate, will not be less than $7.93, plus interest then held in the trust account. Additionally, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. To the extent any bankruptcy claims deplete the trust account, we cannot assure you we will be able to return to our public stockholders at least $7.93 per share. Under the Delaware General Corporation Law, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. If the corporation complies with certain procedures set forth in Section 280 of the Delaware General Corporation Law intended to ensure that it makes reasonable provision for all claims against it, including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution. However, as stated above, it is our intention to make liquidating distributions to our stockholders as soon as reasonably possible after , 2009 and, therefore, we do not intend to comply with those procedures. As such, our stockholders could potentially be liable for any claims to the extent of distributions received by them and any liability of our stockholders may extend well beyond the third anniversary of such date. Because we will not be complying with Section 280, Section 281(b) of the Delaware General Corporation Law requires us to adopt a plan of dissolution that will provide for our payment, based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against us within the subsequent 10 years. However, because we are a blank check company, rather than an operating company, and our operations will be limited to searching for prospective target businesses to acquire, the only likely claims to arise would be from our vendors and service providers (such as accountants, lawyers, investment bankers, etc.) and potential target businesses. Although we will seek to have all significant vendors, prospective target businesses or other entities with which we execute agreements waive any and all right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our public stockholders, there is no guarantee that they will execute such agreements, or even if they execute such agreements that they would be prevented from bringing claims against the trust account including, but not limited to, claims alleging fraudulent inducement, breach of fiduciary responsibility or other similar claims, as well as claims challenging the enforceability of the waiver, in each case in order to gain an advantage with a claim against our assets, including the funds held in the trust account. If any third party refused to execute an agreement waiving such claims to the monies held in the trust account, we would perform an analysis of the alternatives available to us if we chose not to engage such third party and evaluate if such engagement would be in the best interest of our stockholders if such third party refused to waive such claims. Examples of possible instances where we may engage a third party that refused to execute a waiver include the engagement of a third party consultant whose particular expertise or skills are believed by management to be significantly superior to those of other consultants that would agree to execute a waiver or in cases where management is unable to find a provider of required services willing to provide the waiver. In any event, our management would perform an analysis of the alternatives available to it and would only enter into an agreement with a third party that did not execute a waiver if management believed that such third party s engagement would be significantly more beneficial to us than any alternative. In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with us and not seek recourse against the trust account for any reason. If we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, any distributions received by stockholders could be viewed under applicable debtor/creditor and/or bankruptcy laws as either a preferential transfer or a fraudulent conveyance. As a result, a bankruptcy court could seek to recover all amounts received by our stockholders in our dissolution. Furthermore, because we intend to distribute the proceeds held in the trust account to our public stockholders promptly after , 2009, this may be viewed or interpreted as giving preference to our public stockholders over any potential creditors with respect to access to or distributions from our assets. Additionally, our board may be viewed as having breached their fiduciary duties to our creditors and/or may have acted in bad faith, and thereby exposing itself and our company to claims of punitive damages, by paying public stockholders from the trust account prior to addressing the claims of creditors. We cannot assure you that claims will not be brought against us for these reasons. Amended and restated certificate of incorporation Our amended and restated certificate of incorporation requires that we obtain the affirmative vote of holders of 95% of the shares issued in this offering to amend certain provisions of our amended and restated certificate of incorporation. However, the validity of such supermajority voting provisions under Delaware law has not been settled. A court could conclude that such supermajority voting consent requirement constitutes a practical prohibition on amendment in violation of the stockholders implicit rights to amend the corporate charter. In that case, certain provisions of the amended and restated certificate of incorporation would be amendable without such supermajority consent and any such amendment could reduce or eliminate the protection afforded to our stockholders. However, we view the foregoing provisions as obligations to our stockholders, and we will not take any action to waive or amend any of these provisions. Competition In identifying, evaluating and selecting a target business, we may encounter intense competition from other entities having a business objective similar to ours. Currently, there are approximately 81 blank check companies with more than $9.2 billion in trust that are seeking to carry out a business plan similar to our business plan and there are likely to be more blank check companies filing registration statements for initial public offerings after the date of this prospectus and prior to our completion of a business combination. Additionally, we may be subject to competition from other companies looking to expand their operations through the acquisition of a target business. Many of these entities are well established and have extensive experience identifying and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human and other resources than us and our financial resources will be relatively limited when contrasted with those of many of these competitors. While we believe there are numerous potential target businesses that we could acquire with the net proceeds of this offering, our ability to compete in acquiring certain sizable target businesses will be limited by our available financial resources. This inherent competitive limitation gives others an advantage in pursuing the acquisition of a target business. Further: our obligation to seek stockholder approval of a business combination or obtain the necessary financial information to be included in the proxy statement to be sent to stockholders in connection with such business combination may delay or prevent the completion of a transaction; our obligation to redeem into cash shares of common stock held by our public stockholders in certain instances may reduce the resources available to us for a business combination; and our outstanding warrants and options, and the future dilution they potentially represent, may not be viewed favorably by certain target businesses. Any of these factors may place us at a competitive disadvantage in successfully negotiating a business combination. Our management believes, however, that to the extent that our target business is a privately held entity, our status as a public entity may give us a competitive advantage over entities having a similar business objective as ours in acquiring a target business with significant growth potential on favorable terms. If we succeed in effecting a business combination, there will be, in all likelihood, intense competition from competitors of the target business. We cannot assure you that, subsequent to a business combination, we will have the resources or ability to compete effectively. Facilities We maintain our executive offices at Suite 1A, 11th Floor, Tower 1, China Hong Kong City, 33 Canton Road, Kowloon, Hong Kong. The cost for this space, which is provided by Pacific Millennium, an affiliate of Mr. Tan, our Chief Executive Officer, is $7,500 per month and includes certain other additional services provided by Pacific Millennium pursuant to a letter agreement between us and Pacific Millennium. We believe that based on rents and fees for similar services in the San Diego, California area, that the fee charged by Pacific Millennium is at least as favorable as we could have obtained from an unaffiliated person. We consider our current office space adequate for our current operations. Officers and Employees We have one executive officer who is also a member of our board of directors. This individual is not obligated to contribute any specific number of hours per week and intend to devote only as much time as he deems necessary to our affairs. The amount of time he will devote in any time period will vary based on the availability of suitable target businesses to investigate. Periodic Reporting and Financial Information We will register our units, common stock and warrants under the Securities Exchange Act of 1934, as amended, and will have reporting obligations, including the requirement that we file annual reports and quarterly reports with the SEC. In accordance with the requirements of the Securities Exchange Act of 1934, our annual reports will contain financial statements audited and reported on by our independent registered public accounting firm. We will not acquire a target business if audited financial statements based on U.S. generally accepted accounting principles cannot be obtained for such target business. Additionally, our management will provide stockholders with the foregoing financial information as part of the proxy solicitation materials sent to stockholders to assist them in assessing each specific target business we seek to acquire. Our management believes that the requirement of having available financial information for the target business may limit the pool of potential target businesses available for acquisition. We may be required to comply with the internal control requirements of the Sarbanes-Oxley Act for the fiscal year ending on or after December 31, 2007. A target business may not be in compliance with the provisions of the Sarbanes-Oxley Act regarding adequacy of their internal controls. The development of the internal controls of any such entity to achieve compliance with the Sarbanes-Oxley Act may increase the time and costs necessary to complete any such acquisition. Legal Proceedings To the knowledge of management, there is no litigation currently pending or contemplated against us or our executive officer or directors in their capacity as such. Comparison to Offerings of Blank Check Companies The following table compares and contrasts the terms of our offering and the terms of an offering of blank check companies under Rule 419 promulgated by the SEC assuming that the gross proceeds, underwriting discounts and underwriting expenses for the Rule 419 offering are the same as this offering and the pre-offering private placement and that the underwriters will not exercise their over-allotment option. None of the terms of a Rule 419 offering will apply to this offering. Terms of Our Offering Terms Under a Rule 419 Offering Escrow of offering proceeds $198,215,000 of the offering and pre-offering private placement proceeds, including the deferred underwriting discount, will be deposited into a trust account at JPMorgan Chase NY Bank maintained by Continental Stock Transfer & Trust Company. $167,400,000 of the offering proceeds would be required to be deposited into either an escrow account with an insured depositary institution or in a separate bank account established by a broker-dealer in which the broker-dealer acts as trustee for persons having the beneficial interests in the account. Investment of net proceeds The $198,215,000 of the offering and pre-offering private placement proceeds held in trust will only be invested in U.S. government securities, within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 with a maturity of 180 days or less or money market funds. Proceeds could be invested only in specified securities such as a money market fund meeting conditions of the Investment Company Act of 1940 or in securities that are direct obligations of, or obligations guaranteed as to principal or interest by, the U.S. Limitation on fair value or net assets of target business The initial target business or businesses that we acquire must have a fair market value, equal to at least 80% of our net assets at the time of such acquisition. We would be restricted from acquiring a target business unless the fair value of such business or net assets to be acquired represent at least 80% of the maximum offering proceeds. Trading of securities issued The units may commence trading on or promptly after the date of this prospectus. The shares of common stock and warrants comprising the units will begin to trade separately on the 90th day after the date of this prospectus unless the representative of the underwriters informs us of its decision to allow earlier separate trading, provided we have filed with the SEC a Report on Form 8-K, which includes an audited balance sheet reflecting our receipt of the proceeds of this offering, including any proceeds we receive from the exercise of the over-allotment option, if such option is exercised prior to the filing of the Form 8-K. No trading of the units or the underlying shares of common stock and warrants would be permitted until the completion of a business combination. During this period, the securities would be held in the escrow or trust account. Exercise of the warrants The warrants cannot be exercised until the later of the completion of a business combination or one year from the date of this prospectus and, accordingly, will only be exercised after the trust account has been terminated and distributed. The warrants could be exercised prior to the completion of a business combination, but securities received and cash paid in connection with the exercise would be deposited in the escrow or trust account. Election to remain an investor We will give our stockholders the opportunity to vote on the business combination. In connection with seeking stockholder approval, we will send each stockholder a proxy statement containing information required by the SEC. A stockholder following the procedures described in this prospectus is given the right to redeem his or her shares of common stock into his or her pro rata share of the trust account. However, a stockholder who does not follow these procedures or a stockholder who does not take any action would not be entitled to the return of any funds. A prospectus containing information required by the SEC would be sent to each investor. Each investor would be given the opportunity to notify the company, in writing, within a period of no less than 20 business days and no more than 45 business days from the effective date of the post-effective amendment, to decide whether he or she elects to remain a stockholder of the company or require the return of his or her investment. If the company has not received the notification by the end of the 45th business day, funds and interest or dividends, if any, held in the trust or escrow account would automatically be returned to the stockholder. Unless a sufficient number of investors elect to remain investors, all of the deposited funds in the escrow account must be returned to all investors and none of the securities will be issued. Business combination deadline A business combination must occur within 24 months after the date of this prospectus. If a business combination does not occur in such timeframe, we will liquidate and return the amounts in trust to our public shareholders. If an acquisition has not been consummated within 18 months after the effective date of the initial registration statement, funds held in the trust or escrow account would be returned to investors. Release of funds The proceeds held in the trust account will not be released until the earlier of the completion of a business combination or upon our failure to effect a business combination within the allotted time except that to the extent the trust account earns interest we are permitted from time to time to receive disbursements of that interest for the purposes of (i) paying franchise taxes and taxes on interest earned and (ii) funding working capital up to $3,300,000. The proceeds held in the escrow account would not be released until the earlier of the completion of a business combination or the failure to effect a business combination within the allotted time. Interest payment Up to $3,300,000 interest earned on the trust account may be released to us to fund our working capital requirements. In addition, interest earned may be disbursed for the purposes of (i) paying taxes on interest earned and (ii) paying our franchise taxes. Interest earned on proceeds held in the trust account would be held in the trust account for the sole benefit of the stockholders and would not be released until the earlier of the completion of a business combination or the failure to effect a business combination within the allotted time. In the event a business combination was not consummated within 18 months, proceeds held in the trust account would be returned within 5 business days of such date. MANAGEMENT Directors and Executive Officer Our current directors and executive officer are as follows: Name Age Position Richard Tan 51 Chief Executive Officer, President and Director Roger W. Stone 72 Non-Executive Chairman of the Board Richard Tan has been our Chief Executive Officer since our inception. Mr. Tan has served as the President and Chief Executive Officer of Pacific Millennium Holdings Corporation, an investment and operating group involved over the years in various industries including pulp and paper, forest plantation, information technology, and development and global joint ventures in Asia, since he founded such company in 1977. Mr. Tan has been a member of the board of directors of Samling Global Limited, a Hong Kong public company, and Domtar Inc., a public company in U.S. and Canada, since March 2007. Mr. Tan received a B.S. in Civil and Mechanical Engineering from San Diego State University, an M.B.A. from the University of Southern California and participated in Stanford University s Executive Program. Roger W. Stone has been our non-executive Chairman of the Board since our inception. Mr. Stone has been the Chairman and Chief Executive Officer of KapStone Paper and Packaging Corporation (formerly known as Stone Arcade Acquisition Corporation) since April 2005. Stone Arcade was incorporated in April 2005 as a blank check company formed to acquire a business in the paper, packaging, forest products and related industries. In January 2007, Stone Arcade acquired a division of International Paper and changed its name to KapStone Paper and Packaging Corporation. Mr. Stone has been Manager of Stone-Kaplan Investments, LLC, a private investment company (which is no longer operating) since July 2004. He was Chairman and Chief Executive Officer of Box USA Holdings, Inc., a corrugated box manufacturer, from July 2000 until the sale of that company in July 2004. Mr. Stone was Chairman, President and Chief Executive Officer of Stone Container Corporation, a multinational paper company primarily producing and selling pulp, paper and packaging products, from March 1987 to November 1998 when Stone Container Corporation merged with Jefferson Smurfit Corporation, at which time he became President and Chief Executive Officer of Smurfit-Stone Container Corporation until March 1999. Mr. Stone has served on the board of directors of McDonald s Corporation since 1989. Mr. Stone received a B.S. in Economics from the Wharton School at the University of Pennsylvania. Prior to a business combination, Mr. Tan will be involved in our day-to-day business operation and actively involved in locating target businesses, while Mr. Stone, who is a major stockholder and our Chairman, will be involved in the analysis of any potential business combination and the business strategy of our operations. Both Messrs. Stone and Tan have business, financial and indemnification obligations to us that are described elsewhere in this prospectus. It is unclear what role Messrs. Stone and Tan will play in our operations post-business combination. Depending on the target business and other factors at the time of the business combination, it is possible that neither Mr. Stone nor Mr. Tan will have any responsibilities with respect to our operations post-business combination, although we expect that each will have at least some role in our management. Advisors We also currently have three advisors with expertise in commerce and finance in China as well as broad business experience. Although we do not intend to rely substantially on these advisors in order to accomplish our business purpose, we anticipate that they will advise us concerning our acquisition of a target business. Our advisors are employed by or affiliated with organizations other than us and have other commitments that may conflict or compete with our interests. We do not have any written agreements with our advisors, and, therefore, they are not obligated to render any advice or assistance to us and there are no arrangements regarding compensation to our advisors other than the understanding that they will be reimbursed for out-of-pocket expenses incurred on behalf of us. Each of our advisors has a long-standing business or personal relationship with the Tan family, and they have expressed their intention to act in an advisory capacity for us. Their biographies are set forth below: Daojiong Zhou has been our advisor since March 1, 2007. Mr. Zhou has been the vice chairman of the China Pacific Economic Cooperation Council since August 2000. Mr. Zhou served as the Chairman of the supervisory committee of the China Construction Bank Committee from April 1994 to August 2000. Prior to that time, he served as the Chairman of China Securities Regulatory Committee from May 1995 to June 1997. Mr. Zhou also holds several honorable positions at prominent Chinese financial institutions and academies, including Honorable Chairman of the China Society of Urban Economy, Chairman of the China Taoxingzhi Fund, Honorary Director of the China Investment Society, Advisor of the China Finance Academy, and Executive Director of the China Macro Economic Academy. Mr. Zhou received a degree in Finance from the Central Communist Party School in 1983. Guangsheng Zhang has been our advisor since December 1, 2006. Mr. Zhang is currently a researcher for Shanghai Pudong Development Bank. Mr. Zhang was the Chairman of the Board of Shanghai Pudong Development Bank from October 2000 to October 2005. From March 1996 to October 2000, he was the director of the Shanghai Commerce Commission. Mr. Zhang holds many honorable positions including being a board member of Fudan University and being an honorary director of the Shanghai Circulating Economics Institute. He has published articles on commerce, finance and business reforms and was awarded the 2003/2004 Mundell World Manager Achievement Award by World Manager Weekly Magazine. Mr. Zhang received his EMBA from Arizona State University in 2005. He also received his Bachelor degree in Industrial Merchandising from Heilongjiang Business College in 1964. Dawei Xia has been our advisor since March 16, 2007. He has been the President of Shanghai National Accounting Institute since 2000, the Deputy Chief and a consultant at China Association of Industrial Economics Research and Development since September 2006, the Vice President of the China Accounting Society since June 2006 and a member of and consultant at the Research Council for Listed Companies of the Shanghai Stock Exchange Committee since October 2001. Mr. Xia was the Executive Vice President of Shanghai University of Finance and Economics from October 1998 to October 2000. Mr. Xia received his Master degree in Economics from the Shanghai University of Finance and Economics in 1985 and his Bachelor degree in Engineering from the Changchun University of Technology in 1982. Prior Involvement of Principals in Blank Check Companies Roger W. Stone, our non-executive Chairman, is the only individual affiliated with us that has been affiliated with another company that has completed an offering similar to this offering. Mr. Stone was the Chairman and Chief Executive Officer of KapStone Paper and Packaging Corporation (formerly Stone Arcade Acquisition Corporation) which completed its initial public offering on August 19, 2005, raising total gross proceeds of $120,000,000 at an offering price of $6.00 per unit. In June 2006, KapStone announced its intention to acquire the kraft papers business of International Paper Company for $155 million in cash, subject to certain post-closing adjustments, plus two contingent earn-out payments, (A) of up to $35 million and (B) $25 million, based on the target s annual earnings before interest, income taxes, depreciation and amortization during the five year period immediately following the acquisition. The business employs approximately 700 people and has annual revenues of approximately $250 million. Of the 23,661,853 votes cast at the meeting (representing 94.6% of the company s total outstanding shares), 99.8% voted in favor of the acquisition. Holders of 40,000 shares voted against the acquisition and elected to have such shares redeemed. In January 2007, the acquisition was completed and such company acquired a division of International Paper Company and changed its name to KapStone Paper and Packaging Corporation. Mr. Stone has remained the Chairman and Chief Executive Officer of KapStone Paper and Packaging Corporation. Mr. Stone did not receive a salary for his service to KapStone Paper and Packaging Corporation prior to the acquisition. Executive Compensation No officer has received any compensation for services rendered. Commencing on the effective date of this prospectus through the acquisition of a target business, we will pay Pacific Millennium, an affiliate of Mr. Tan, our Chief Executive Officer, $7,500 per month for office space and general and administrative services including secretarial support. This arrangement is being agreed to by Pacific Millennium for our benefit and is not intended to provide Mr. Tan compensation in lieu of a salary. We believe that such fees are at least as favorable as we could have obtained from an unaffiliated person. Our other director does not have a relationship with or interest in Pacific Millennium. Other than this $7,500 per-month fee, no compensation of any kind, including finder s and consulting fees, will be paid to any of our existing executive officer, directors, advisors or any of their respective affiliates, for services rendered prior to or in connection with a business combination. However, our existing stockholders will be reimbursed for any out-of-pocket expenses incurred in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations and for out-of-pocket expenses incurred in connection with this offering. There is no limit on the amount of these out-of-pocket expenses and there will be no review of the reasonableness of the expenses by anyone other than our board of directors, which includes persons who may seek reimbursement, or a court of competent jurisdiction if such reimbursement is challenged. Because none of our directors will be deemed independent, we will generally not have the benefit of independent directors examining the propriety of expenses incurred on our behalf and subject to reimbursement. Since we do not currently have an operating business, our officer does not receive any compensation for his service to us and we have no other employees, we do not have any compensation policies, procedures, objectives or programs in place. The determination of the compensation policies, procedures, objectives or programs we adopt after a business combination will depend on the business we acquire, the management team of the target business and the needs of the target business. Therefore, we do not know and cannot reasonably determine what our compensation policies, procedures, objectives and programs will be until after we acquire a target business. Classified Board Our amended and restated certificate of incorporation provides for our board to be divided into three classes: Class A, Class B and Class C. The number of directors in each class shall be as nearly equal as possible. The directors in Class A shall be elected for a term expiring at the first annual meeting of stockholders, the directors in Class B shall be elected for a term expiring at the second annual meeting of stockholders and the directors in Class C shall be elected for a term expiring at the third annual meeting of stockholders. Currently, Messrs. Tan and Stone, our only directors, serve as the Class A and Class B directors, respectively. Commencing at the first annual meeting of stockholders, and at each annual meeting thereafter, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election. Audit Committee Our board of directors intends to establish an audit committee after the consummation of the business combination. Until such time, our board of directors will act as our audit committee and will review and discuss the audited financial statements with management and the independent auditors, discuss with the independent auditors the matters required to be discussed by Statement of Auditing Standards No. 61, as currently in effect, receive written disclosures and the letter from the independent auditors required by Independence Standard Board Standard No. 1, Independence Discussions with Audit Committees, as currently in effect, considers whether the provision of non-audit services by the independent auditors to us is compatible with maintaining the auditor s independence and discuss with the auditors the auditors independence. Since we are a blank check company, our financial statements are not complicated and, therefore, we do not have a financial expert as defined in federal securities laws and regulation on our board of directors. Compensation Committee Our board of directors intends to establish a compensation committee after the consummation of the business combination and none of our officers receive or will receive compensation for services rendered to us prior to a business combination (except for reimbursement for out of pocket expenses incurred by the officers in connection with activities on our behalf, and the monthly payment of $7,500 for office space and general and administrative services), we do not feel it is necessary to establish a compensation committee prior to a business combination. Nominating Committee Our board of directors intends to establish a nominating committee after the consummation of the business combination, Since it is unlikely that we will have an election of directors prior to a business combination, we do not feel it is necessary to establish a nominating committee prior to a business combination and we do not have any policies in place regarding the nomination of directors. Director Independence Our board of directors does not have independent directors within the meaning of Rule 10A-3 promulgated under the Exchange Act. After the consummation of the business combination, we intend to locate and appoint independent directors to serve on the board of directors and audit committee to comply with applicable U.S. federal securities laws. Code of Ethics Our board of directors intends to adopt a code of ethics applicable to our principal executive officers in accordance with applicable U.S. federal securities laws after the consummation of the business combination. Conflicts of Interest Potential investors should be aware of the following potential conflicts of interest: Our executive officer, directors and advisors are not required to commit their full time to our affairs and, accordingly, they will have conflicts of interest in allocating management time among various business activities. In the course of their other business activities, our executive officer, directors and advisors may become aware of investment and business opportunities which may be appropriate for presentation to us as well as the other entities with which they are affiliated. They may have conflicts of interest in determining to which entity a particular business opportunity should be presented. For a complete description of our management s other affiliations, see the previous section entitled Directors and Executive Officer. Our executive officer, directors and advisors may in the future become affiliated with entities, including other blank check companies, engaged in business activities similar to those intended to be conducted by us. Since our executive officer, directors and advisors beneficially own shares of common stock which will be released from escrow only in certain limited situations, and own warrants which will expire worthless if a business combination is not consummated, our board may have a conflict of interest in determining whether a particular target business is appropriate to effect a business combination. The personal and financial interests of our directors, executive officer and advisors may influence their motivation in identifying and selecting a target business, completing a business combination timely and securing the release of their stock. If we were to make a deposit, down payment or fund a no shop provision in connection with a potential business combination, we may have insufficient funds available outside of the trust to pay for due diligence, legal, accounting and other expenses attendant to completing a business combination. In such event, our existing stockholders may have to incur such expenses in order to proceed with the proposed business combination. As part of any such combination, such existing stockholders may negotiate the repayment of some or all of any such expenses, without interest or other compensation, which if not agreed to by the target business s management, could cause our management to view such potential business combination unfavorably, thereby resulting in a conflict of interest. If our management negotiates to be retained post business combination as a condition to any potential business combination, their financial interests, including compensation arrangements, could influence their motivation in selecting, negotiating and structuring a transaction with a target business, and such negotiations may result in a conflict of interest. Our founding stockholders have agreed to purchase $10,000,000 of our securities in the open market or in a private placement from us, which purchases, assuming all the purchases are made in the open market at a purchase price equal to the initial amount held in the trust account, will result in their having an approximately 24.0% ownership interest in us. Our executive officer and directors will therefore have a great deal of influence in stockholder votes due to this ownership interest. With respect to potential conflicts relating to potential business combinations, in general, prior to availing themselves personally of a business opportunity, officers and directors of a corporation incorporated under the laws of the State of Delaware are required to present business opportunities to the subject corporation if: the corporation could financially undertake the opportunity; the opportunity is within the corporation s line of business; and it would not be fair to the corporation and its stockholders for the opportunity not to be brought to the attention of the corporation. In addition, conflicts of interest may arise when our board evaluates a particular business opportunity with respect to the above-listed criteria. While a director with such a conflict may decide to recuse himself, we cannot assure you that any of the above mentioned conflicts will be resolved in our favor. We will not pursue a business combination with any company that is currently a portfolio company of or otherwise affiliated with, or has received a financial investment from, any of the companies with which our existing stockholders, executive officers or directors are affiliated. For example, we would not be able to acquire companies in which our executive officer or director are currently passive investors, companies of which our officer and directors are currently officers or directors or companies in which our officer and directors are currently invested through an investment vehicle controlled by them. On the other hand, while we do not intend to pursue such a transaction with respect to any future portfolio or affiliated companies, we are not prohibited from pursuing such a transaction. In the event that we seek to complete a business combination with an entity which is affiliated with any of our existing stockholders, we would obtain an opinion from an independent investment banking firm that such business combination is fair to our stockholders from a financial point of view. Such opinion would be included in our proxy statement relating to the business combination. Although management has not consulted with any investment banker in connection with such an opinion, it is possible that the opinion would only be able to be relied upon by our board of directors and not by our stockholders. We will need to consider the cost in making a determination as to whether to hire an investment bank that will allow our stockholders to rely on its opinion, and will do so unless the cost is substantially (approximately $50,000) in excess of what it would be otherwise. In the event that we obtain an opinion that we and the investment banker believe cannot be relied on by our stockholders, we will include disclosure in the proxy statement providing support for that belief. While our stockholders might not have legal recourse against the investment banking firm in such case, the fact that an independent expert has evaluated, and passed upon, the fairness of the transaction is a factor our stockholders may consider in determining whether or not to vote in favor of the potential business combination. Each of our directors and our current advisor has, or may come to have, to a certain degree, other fiduciary obligations. Mr. Stone has fiduciary obligations to Kap Stone Paper and Packaging Corporation and McDonald s Corporation and Mr. Tan has fiduciary obligations to Pacific Millennium, Samling Global Limited and Domtar Inc. To the extent that they identify business opportunities that may be suitable for companies on whose board of directors they may sit or for which they may serve as officers, they will honor those fiduciary obligations. Accordingly, they may not present opportunities to us that otherwise may be attractive to us, unless the companies on whose board of directors they may sit or for which they may serve as officers have declined to accept such opportunities. Below is a table summarizing the companies to which our officer and directors owe fiduciary obligations, all of which would have to (i) be presented appropriate potential target businesses by our officer and directors, and (ii) reject the opportunity to acquire such potential target business, prior to their presentation of such target business to us: Individual Entity Affiliation Roger W. Stone KapStone Paper and Packaging Chairman and Chief Executive Officer Roger W. Stone McDonald s Director Richard Tan Pacific Millennium President and Chief Executive Officer Richard Tan Shanghai Fu Shou Garden Industry Development Co., Ltd. (Pacific Millennium portfolio company) Director Richard Tan Stone Millennium China Holdings (Pacific Millennium subsidiary) Director Richard Tan Samling Global Director Richard Tan Domtar Director Richard Tan Energy Systems International (Pacific Millennium subsidiary) Co-Chairman and Director These individuals have no other fiduciary obligations that would take priority with respect to the fiduciary obligations they owe to us. Mr. Stone has advised us that KapStone Paper and Packaging Corporation is not looking at any entities in China and Mr. Tan has advised us that Pacific Millennium is focused exclusively on its current portfolio companies and investments. However, if this changes and either of these entities were to begin pursuing new acquisitions or investments in China, Messrs. Stone and Tan have a fiduciary obligation to these companies that take priority over us. Furthermore, Messrs. Stone and Tan have advised us that in their role as outside directors they are not involved in identifying or pursuing new business opportunities for McDonalds or Domtar, Inc., Samling Global Limited or any Pacific Millennium subsidiary or portfolio company, respectively. Although Messrs. Tan and Stone have investments in entities other then those described above, they do not have any control or fiduciary obligations to these other entities and, therefore, their affiliations with these entities do not present a conflict of interest. After presenting potential target businesses to the other entities they owe fiduciary obligations to, if appropriate opportunity for such entity, and each of such entities reject the opportunity, each of Messrs. Stone and Tan are obligated to present to us for our consideration any company or business having its primary operations in the PRC whose fair market value is at least equal to 80% of the balance of the trust account (less deferred underwriting compensation of $7,000,000, or $8,050,000 if the over-allotment is exercised in full and taxes payable). This obligation will expire upon the earlier of (i) our consummation of an initial business combination or (ii) 24 months after the consummation of this offering. However, we do not have any other written policies covering potential conflicts. In connection with the vote required for any business combination, all of our existing stockholders, including our executive officer, directors and advisors, have agreed to vote their respective shares of common stock which were owned prior to this offering in accordance with the vote of the public stockholders owning a majority of the shares of common stock sold in this offering and all the shares of common stock they acquire in this offering in favor of any business combination that they present to our stockholders. As used in this prospectus, in accordance with the majority means that such existing stockholders will vote the entirety of their shares of common stock owned by them immediately before this offering either for or against a business combination, as determined by the totality of the public stockholder vote. This voting arrangement shall not apply to shares included in units purchased in this offering by any of our existing stockholders or purchased following this offering in the open market by any of our existing stockholders. In addition, they have agreed to waive their respective rights to participate in any liquidation distribution occurring upon our failure to consummate a business combination but only with respect to those shares of common stock acquired by them prior to this offering. (1) Includes shares held by the Stone 2007 Family Trust. Mr. Stone has voting and dispositive control over the shares held by the trust. (2) The 3,750,000 shares beneficially owned by Richard Tan and Chih-Chun Tan are owned by SPAC Trust, a family trust formed for personal financial and estate planning purposes. Chih-Chun Tan (Richard Tan s father) is settlor and Richard Tan is Trustee of the trust. Chih-Chun Tan will not have any active role in regard to our company. (3) Does not include 937,500 shares we will redeem if the underwriters do not exercise their over-allotment option. We will redeem, for no consideration, that number of shares held by our founding stockholders, up to a maximum of 937,500 shares, necessary to ensure that the number of shares they hold prior to this offering, exclusive of shares underlying the founder warrants, equals 20% of the outstanding shares of common stock after this offering and the exercise, if any, of the underwriters over-allotment option. Our founding stockholders have entered into an agreement with the representative of the underwriters pursuant to which they will place limit orders to purchase up to an aggregate of $10,000,000 of our common stock in the open market commencing 10 business days after we file our Current Report on Form 8-K announcing our execution of a definitive agreement for a business combination and ending on the business day immediately preceding the date of the meeting of stockholders at which a business combination is to be approved. Such open market purchases will be made in accordance with Rules 10b-18 and 10b5-1 under the Securities Exchange Act of 1934, as amended, at a price per share of not more than the per share amount held in the trust account (less taxes payable) as reported in such 8-K. Assuming the $10,000,000 of common stock are purchased by our founding stockholders in the open market at a price equal to the initial per share amount in the trust account, our existing stockholders, collectively, will beneficially own 24.0% of the then issued and outstanding shares of common stock. Accordingly, our executive officer and directors may be able to effectively influence the outcome of all matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions other than approval of a business combination. If holders of more than 20% of the shares sold in this offering vote against a proposed business combination and seek to exercise their redemption rights and such business combination is consummated, our existing stockholders have agreed to forfeit, on a pro rata basis, and return to us for cancellation, a number of shares, up to a maximum of 781,250 shares, that will result in the number of shares owned by them prior to this offering collectively being no more than 23.81% of our outstanding common stock immediately prior to the consummation of such business combination after giving effect to the redemption. Subject to the possible forfeiture of shares described above, all of the shares of common stock outstanding prior to the pre-offering private placement will be placed in escrow with Continental Stock Transfer & Trust Company, as escrow agent, until the earlier of: one year following the date of our consummation of our initial business combination; our liquidation, and the consummation of a stock exchange or other similar transaction which results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property subsequent to our consummating a business combination with a target business. During the escrow period, the holders of these shares of common stock will not be able to sell or transfer their securities except to their spouses and children or trusts established for their, or his own benefit, or companies they or such trusts control, but will retain all other rights as our stockholders, including, without limitation, the right to vote their shares of common stock and the right to receive cash dividends, if declared. If dividends are declared and payable in shares of common stock or other property, such dividends will also be placed in escrow. If we are unable to effect a business combination and liquidate, none of our existing stockholders will receive any portion of the liquidation proceeds with respect to shares of common stock owned by them prior to the date of this prospectus. The common stock and warrants may trade separately on the 90th day after the date of this prospectus unless the representative of the underwriters determines that an earlier date is acceptable, based upon its assessment of the relative strengths of the securities markets and small capitalization companies in general, and the trading pattern of, and demand for, our securities in particular. In no event will the representative of the underwriters permit separate trading of the common stock and warrants until the business day following the earlier to occur of the expiration of the underwriters over-allotment option or its exercise in full. In no event will the representative of the underwriters allow separate trading of the common stock and warrants until we file a Current Report on Form 8-K which includes an audited balance sheet reflecting our receipt of the proceeds of this offering including any proceeds we receive from the exercise of the over-allotment option if such option is exercised prior to our filing of the Form 8-K. We consider Richard Tan and Roger Stone to be our parents and promoters, as these terms are defined under the federal securities laws. (1) As a result of a stock split effected in May 2007, Roger Stone, together with a family trust, and the SPAC Trust currently hold 2,875,000 and 4,312,500 shares, respectively, which include the 937,500 shares that we will redeem if the underwriters do not exercise their over-allotment option. The holders of the majority of the aggregate of these shares of common stock and the shares underlying the founder warrants and the unit purchase option to be issued to the underwriters will be entitled to make up to two demands that we register these shares pursuant to an agreement to be signed prior to or on the date of this prospectus. They may elect to exercise these registration rights at any time after the date on which these shares of common stock are released from escrow, which, except in limited circumstances, is not before one year after the consummation of a business combination. In addition, these stockholders have unlimited piggy-back registration rights on registration statements filed subsequent to the date on which these shares of common stock are released from escrow. We will bear the expenses incurred in connection with the filing of any such registration statements. Our founding stockholders have collectively agreed to purchase a combined total of 6,200,000 founder warrants prior to the closing of this offering at a price of $1.00 per warrant for a total of $6,200,000. The founder warrants will be purchased separately and not as a part of units. The purchase price of the founder warrants will be added to the proceeds from this offering to be held in the trust account pending our completion of one or more business combinations. If we do not complete one or more business combinations that meet the criteria described in this prospectus, then the $6,200,000 purchase price of the founder warrants will become part of the amount payable to our public stockholders upon our dissolution and the subsequent liquidation of the trust account and the founder warrants will expire worthless. The founder warrants will not be transferable (except in limited circumstances) or salable by the purchasers until we complete a business combination and will be exercisable on a cashless basis and non-redeemable so long as these persons hold such warrants. Commencing on the date such warrants become exercisable, the founder warrants and the underlying shares of common stock will be entitled to registration rights under an agreement to be signed on or before the date of this prospectus. With those exceptions, the founder warrants have terms and provisions that are identical to those of the warrants being sold as part of the units in this offering. The purchasers of the founder warrants are permitted to transfer such warrants in certain limited circumstances, such as for estate planning purposes or by will in the event of death, but the transferees receiving such founder warrants will be subject to the same sale restrictions imposed on the persons who initially purchase these warrants from us. If any of the purchasers acquire warrants for their own account in the open market, any such warrants will be redeemable. Our founding stockholders have entered into an agreement with the representative of the underwriters pursuant to which they will place limit orders to purchase up to an aggregate of $10,000,000 of our common stock in the open market commencing 10 business days after we file our Current Report on Form 8-K announcing our execution of a definitive agreement for a business combination and ending on the business day immediately preceding the date of the meeting of stockholders at which a business combination is to be approved. Such open market purchases will be made in accordance with Rules 10b-18 and 10b5-1 under the Securities Exchange Act of 1934, as amended, at a price per share of not more than the per share amount held in the trust account (i.e., the initial amount of $7.93 plus interest earned on such amount, less taxes paid or payable and interest released to us for working capital) as reported in such 8-K. The purchases will be made by a broker-dealer mutually agreed upon by our founding stockholders and the representative of the underwriters in such amounts and at such times as such broker-dealer may determine, in its sole discretion, so long as the purchase price does not exceed the above-referenced per share purchase price. Our founding stockholders have agreed to vote any such shares of common stock purchased in the open market in favor of our initial business combination, representing a possible maximum aggregate of 4.0% of the public shares entitled to vote on the business combination. They have agreed not to sell such shares unless a business combination is approved by our stockholders; however, they will be entitled to participate in any liquidating distributions with respect to the shares purchased in the open market if the business combination is not completed and we dissolve. In the event purchases of $10,000,000 of our common stock cannot be completed through the open market purchases described above, our founding stockholders have agreed to purchase from us, in a private placement, units identical to the units offered hereby at a purchase price of $8.00 per unit until they have spent an aggregate of $10,000,000 in the open market purchases described above and this private purchase. If, for example, the per share amount in the trust account reported in the 8-K announcing our execution of a definitive agreement for a business combination (which is the maximum amount our founding stockholders are required to pay for their open market purchases) is $7.96, and our common stock trades above $7.96 during the period commencing 10 business days after we file such 8-K and ending on the business day immediately preceding the date of the meeting of stockholders at which the business combination is to be approved, our founding stockholders will not be able to complete their purchases in the open market, and will be required to purchase units from us at $8.00 per unit. The purchase of co-investment units will occur immediately prior to our consummation of a business combination, which will not occur until after the signing of a definitive business combination agreement and the approval of that business combination by a majority of our public stockholders. The proceeds from the sale of any co-investment units could be used to pay a portion of the purchase price for the business combination or used as working capital for the combined company. The warrants included in the co-investment units will be exercisable on a cashless basis. We have elected to make the founder warrants non-redeemable in order to provide the purchasers a potentially longer exercise period for those warrants because they will bear a higher risk while being required to hold such warrants until the consummation of a business combination. If our other outstanding warrants are redeemed (including the warrants subject to the underwriters unit purchase option) and the market price of a share of our common stock rises following such redemption, the holders of the founder warrants could potentially realize a larger gain on exercise or sale of those warrants than is available to other warrant holders, although we do not know if the price of our common stock would increase following a warrant redemption. If our share price declines in periods subsequent to a warrant redemption and the purchasers who initially acquired these warrants from us continue to hold the founder warrants, the value of those warrants still held by these persons may also decline. The founder warrants will be differentiated from warrants, if any, purchased in or following this offering by the founding stockholders and the other purchasers through the legends contained on the certificates representing the founder warrants indicating the restrictions and rights specifically applicable to such warrants as are described in this prospectus. We have agreed to pay Pacific Millennium, an affiliate of Mr. Tan, our Chief Executive Officer, $7,500 per month for office space and general and administrative services. This arrangement is being agreed to by Pacific Millennium, for our benefit and is not intended to provide Mr. Tan compensation in lieu of a salary. We believe that such fees are at least as favorable as we could have obtained from an unaffiliated person. However, as our directors may not be deemed independent, we did not have the benefit of disinterested directors approving these transactions. On February 27, 2007, the SPAC Trust, an affiliate of Richard Tan, loaned us $500,000 evidenced by a promissory note. The proceeds of the loan evidenced by the note are being used to pay a portion of the expenses related to this offering. The note bears simple interest at the rate of 4% per annum with both interest and principal being due and payable on the earlier of February 26, 2008 or the consummation of this offering. We will reimburse our executive officer, directors and advisors for any reasonable out-of-pocket business expenses incurred by them in connection with certain activities on our behalf such as identifying and investigating possible target businesses and business combinations although they will not be reimbursed for any out-of-pocket expenses incurred by them to the extent such expenses exceed the amount not held in trust unless the business combination is consummated. There is no limit on the amount of accountable out-of-pocket expenses reimbursable by us, which will be reviewed only by our board or a court of competent jurisdiction if such reimbursement is challenged. Other than the $7,500 aggregate per month administrative fees and reimbursable out-of-pocket expenses described above, no compensation or fees of any kind, including finders and consulting fees, will be paid to our existing executive officer, directors or advisors, or any of their affiliates, for services rendered to us prior to or in connection with the consummation of the business combination. All ongoing and future transactions between us and our executive officer and directors or their respective affiliates, including loans by our executive officer and directors, will be on terms believed by us to be no less favorable than are available from unaffiliated third parties and such transactions or loans, including any forgiveness of loans, will require prior approval in each instance by a majority of our uninterested independent directors (to the extent we have any) or the members of our board who do not have an interest in the transaction, in either case who had access, at our expense, to our attorneys or independent legal counsel. DESCRIPTION OF SECURITIES General We are authorized to issue 139,000,000 shares of common stock, par value $0.0001 per share, and 1,000,000 shares of preferred stock, par value $0.0001 per share. As of the date of this prospectus there are 6,250,000 shares of common stock outstanding, or 7,187,500 shares if the over-allotment option is exercised in full, held by three record holders. There are no preferred shares outstanding. Units Each unit consists of one share of common stock and one warrant. Each warrant entitles the holder to purchase one share of common stock. The shares of common stock and warrants will begin to trade separately on the 90th day after the date of this prospectus unless the representative of the underwriters inform us of their decision to allow earlier separate trading, provided that in no event may the shares of common stock and warrants be traded separately until we have filed with the SEC a Report on Form 8-K which includes an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file a Report on Form 8-K which includes this audited balance sheet upon the consummation of this offering. The audited balance sheet will reflect proceeds we receive from the exercise of the over-allotment option, if the over-allotment option is exercised prior to the filing of the Form 8-K. Common Stock Our common stockholders are entitled to one vote for each share held of record on all matters to be voted on by stockholders. In connection with the vote required for any business combination, all of our existing stockholders, including our executive officer and directors, have agreed to vote their respective shares of common stock owned by them immediately prior to this offering and the pre-offering private placement in the same manner as a majority of the public stockholders who vote for the purpose of approving a business combination. Our existing stockholders have also agreed to vote all the shares of our common stock acquired in this offering or in the aftermarket in favor of any transaction our executive officer negotiate and present for approval to our stockholders. Our existing stockholders have also agreed to waive their rights to participate in any liquidation occurring upon our failure to consummate a business combination, but only with respect to those shares of common stock acquired by them prior to this offering. However, our existing stockholders, executive officer and directors will vote all of their shares in any manner they determine, in their sole discretion, with respect to any other items that come before a vote of our stockholders. We will proceed with the business combination only if a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and public stockholders owning less than 30% of the shares sold in this offering exercise their redemption rights discussed below. Our threshold for redemption has been established at 30% in order for our offering to be similar to other blank check company offerings currently in the market. However, to date a 20% threshold has been more typical for offerings of this type. We have selected the higher threshold to reduce the risk of a small group of stockholders exercising undue influence on the stockholder approval process and make it easier for us to receive stockholder approval of a business combination. In the event that holders of more than 20% of the shares of common stock sold in this offering elect to redeem their shares, our existing stockholders have agreed to forfeit that number of shares (up to a maximum of 781,250) that will result in the number of shares owned by them prior to this offering collectively being no more than 23.81% of our outstanding common stock immediately prior to the consummation of such business combination after giving effect to the redemption. Even if less than 30% of the stockholders exercise their redemption rights, we may be unable to consummate a business combination if such redemption leaves us with funds insufficient to acquire or merge with a business with a fair market value greater than 80% of our net assets at the time of such acquisition which would be in violation of a condition to the consummation of our initial business combination, and as a consequence we may be forced to find additional financing to consummate such a business combination, consummate a different business combination or liquidate. Pursuant to our amended and restated certificate of incorporation, if we do not consummate a business combination by , 2009 [twenty four months from the date of this prospectus], our corporate existence will cease except for the purposes of winding-up our affairs and liquidating. If we are forced to liquidate prior to a business combination, our public stockholders are entitled to share ratably in the trust account, inclusive of any interest (net of taxes payable), and any net assets remaining available for distribution to them after payment of liabilities. Our existing stockholders have agreed to waive their rights to share in any distribution with respect to common stock owned by them prior to the offering if we are forced to liquidate. Our stockholders have no redemption, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the common stock, except that public stockholders have the right to have their shares of common stock redeemed for cash equal to their pro rata share of the trust account if they vote against the business combination and the business combination is approved and completed. Public stockholders who redeem their stock into their share of the trust account still have the right to exercise the warrants that they received as part of the units, which they have not previously sold. Preferred Stock Our amended and restated certificate of incorporation authorizes the issuance of 1,000,000 shares of blank check preferred stock with such designation, rights and preferences as may be determined from time to time by our board of directors. No shares of preferred stock are being issued or registered in this offering. Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of common stock, although the underwriting agreement prohibits us, prior to a business combination, from issuing preferred stock which participates in any manner in the proceeds of the trust account, or which votes as a class with the common stock on a business combination. We may issue some or all of the preferred stock to effect a business combination. In addition, the preferred stock could be utilized as a method of discouraging, delaying or preventing a change in control of us. Although we do not currently intend to issue any shares of preferred stock, we cannot assure you that we will not do so in the future. Warrants No warrants are currently outstanding. Each warrant entitles the registered holder to purchase one share of common stock at a price of $5.50 per share, subject to adjustment as discussed below, at any time commencing on the later of: the completion of a business combination; or one year from the date of this prospectus. The warrants will expire four years from the date of this prospectus at 5:00 p.m., New York City time. The warrants may trade separately on the 90th day after the date of this prospectus unless Morgan Joseph & Co. Inc. determines that an earlier date is acceptable, based upon its assessment of the relative strengths of the securities markets and small capitalization companies in general, and the trading pattern of, and demand for, our securities in particular. In no event will Morgan Joseph & Co. Inc. allow separate trading of the common stock and warrants until the underwriters over-allotment option has either expired or been terminated or exercised and we file a Current Report on Form 8-K which includes an audited balance sheet reflecting our receipt of the proceeds of this offering, including any proceeds we receive from the exercise of the over-allotment option if such option is exercised prior to our filing of the Current Report on Form 8-K. Provided a current registration statement covering the underlying shares is in effect, we may call the warrants for redemption (including any warrants issued upon exercise of the unit purchase option sold to Morgan Joseph & Co. Inc.), in whole and not in part, at a price of $.01 per warrant at any time after the warrants become exercisable, upon not less than 30 days prior written notice of redemption to each warrant holder, and if, and only if, the reported last sale price of our common stock equals or exceeds $11.50 per share, for any 20 trading days within a 30 trading day period ending on the third business day prior to the notice of redemption to warrant holders. We have established these criteria to provide warrant holders with a reasonable premium to the initial warrant exercise price as well as a degree of liquidity to cushion against a negative market reaction, if any, to our redemption call. If the foregoing conditions are satisfied and we call the warrants for redemption, each warrant holder will then be entitled to exercise his or her warrant prior to the date scheduled for redemption, however, there can be no assurance that the price of the common stock will exceed the call trigger price or the warrant exercise price after the redemption call is made. The warrants will be issued in registered form under a warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and us. You should review a copy of the warrant agreement, which has been filed as an exhibit to the registration statement of which this prospectus is a part, for a complete description of the terms and conditions applicable to the warrants. The exercise price and number of shares of common stock issuable on exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, or our recapitalization or reorganization. However, the warrants will not be adjusted for issuances of common stock at a price below the warrants respective exercise prices. The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified check payable to us, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of common stock and any voting rights until they exercise their warrants and receive common stock. After the issuance of common stock upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders. No warrants will be exercisable unless at the time of exercise a prospectus relating to common stock issuable upon exercise of the warrants is current and the shares of common stock have been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms of the warrant agreement, we have agreed to meet these conditions and use our best efforts to maintain a current prospectus relating to common stock issuable upon exercise of the warrants until the expiration of the warrants. However, we cannot assure you that we will be able to do so. The warrants may be deprived of any value and the market for the warrants may be limited if the prospectus relating to the common stock issuable upon the exercise of the warrants is not current or if the shares of common stock are not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside. In no event will the registered holders of a warrant be entitled to receive a net-cash settlement, stock, or other consideration in lieu of physical settlement in shares of our common stock. No fractional shares will be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round up to the nearest whole number the number of shares of common stock to be issued to the warrant holder. Our founding stockholders, have collectively agreed to purchase an aggregate of 6,200,000 of our warrants from us at a price of $1.00 per warrant prior to the closing of this offering. The founder warrants have terms and provisions that are identical to the warrants included in the units being sold in this offering, except that the founder warrants (i) will not be transferable or salable by the purchasers who initially purchase these warrants from us until we complete a business combination, (ii) will be exercisable on a cashless basis and will be nonredeemable so long as these persons hold such warrants, and (iii) are being purchased pursuant to an exemption from the registration requirements of the Securities Act and will become freely tradable only after they are registered pursuant to a registration rights agreement to be signed on or before the date of this prospectus, or if an exemption from registration is then available. The transfer restriction does not apply to transfers made pursuant to registration or an exemption that are occasioned by operation of law or for estate planning purposes. The non-redemption provision does not apply to warrants included in units or otherwise purchased in open market transactions, if any. The price of the founder warrants has been arbitrarily established by us and the representative of the underwriters after giving consideration to numerous factors, including but not limited to, the pricing of units in this offering, the pricing associated with warrants in other blank-check financings in both the public after-market and any pre-offering private placement, and the warrant purchase obligations of managers in similar type transactions. No particular weighting was given to any one aspect of those factors considered. We have not performed any method of valuation of the founder warrants. As part of the negotiations between the representative of the underwriters and our management, management agreed to purchase the founder warrants directly from us and not in open market transactions. By making a direct investment in us, the amount held in trust pending a business combination has been increased. The warrants beneficially owned by our executive officer and directors will be worthless if we do not consummate a business combination. The personal and financial interests of these individuals may influence their motivation in identifying and selecting a target business and completing a business combination in a timely manner. Consequently, our executive officer s and directors discretion in identifying and selecting a suitable target business may result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination are appropriate and in our stockholders best interest. As a result of the founder warrants being non-redeemable, holders of the founder warrants, or their permitted transferees, could realize a larger gain than our public warrant holders. Purchase Option We have agreed to sell to the representative of the underwriters an option to purchase up to a total of 2,500,000 units at a per-unit price of $10.00. The units issuable upon exercise of this option are identical to those offered by this prospectus, except that the exercise price of the warrants underlying the units is $7.00. For a more complete description of the purchase option, see the section below entitled Underwriting Purchase Option. Directors The directors will be divided into three classes, as nearly equal in number as the then total number of directors permits. Each class of directors is elected for a three-year term in alternating years. If the number of directors changes, any increase or decrease will be apportioned among the classes so as to maintain the number of directors in each class as nearly as possible. Any additional directors of a class elected to fill a vacancy resulting from an increase in such class will hold office for a term that coincides with the remaining term of that class. Decreases in the number of directors will not shorten the term of any incumbent director. These provisions could make it more difficult for third parties to gain control of our company by making it difficult to replace members of the board. General Meetings of Stockholders The directors may, in their discretion, convene the annual general meeting and/or other stockholders meetings as they think fit, so long as they provide at least 10 days advance notice of such meeting, as required by our certificate of incorporation. Our Transfer Agent and Warrant Agent The transfer agent for our securities and warrant agent for our warrants is Continental Stock Transfer & Trust Company, 17 Battery Place, New York, New York 10004. Our Amended and Restated Certificate of Incorporation Our amended and restated certificate of incorporation contains provisions designed to provide certain rights and protections to our stockholders prior to the consummation of a business combination, including: a requirement that all proposed initial business combinations be presented to stockholders for approval regardless of whether or not State of Delaware law requires such a vote; a prohibition against completing a business combination if 30% or more of the holders of the total number of shares of common stock sold in this offering exercise their redemption rights in lieu of approving a business combination; the right of stockholders voting against a business combination to surrender their shares for a pro rata portion of the trust account in lieu of participating in a proposed business combination; a requirement that we liquidate if we have not consummated a business combination by the date which is 24 months after this offering is completed; a limitation on stockholders rights to receive a portion of the trust account so that they may only receive a portion of the trust account upon dissolution and liquidation of us or upon the exercise of their redemption rights; and the division of our board of directors into three classes and the establishment of related procedures regarding the standing and election of such directors. Our amended and restated certificate of incorporation prohibits the amendment or modification of any of the foregoing provisions prior to the consummation of a business combination without the approval of holders of 95% of the shares issued in this offering. While these rights and protections have been established for the purchasers of units in this offering, it is nevertheless possible that the prohibition against amending or modifying these rights and protections at any time prior to the consummation of the business combination could be challenged as unenforceable under Delaware law, although pursuant to the underwriting agreement we are prohibited from amending or modifying these rights and protections at any time prior to the consummation of the business combination. We have not sought an unqualified opinion regarding the enforceability of the prohibition on amendment or modification of such provisions because we view these provisions as fundamental terms of this offering. We believe these provisions to be obligations of us to our stockholders and that investors will make an investment in us relying, at least in part, on the enforceability of the rights and obligations set forth in these provisions including, without limitation, the prohibition on any amendment or modification of such provisions without the vote of holders of 95% of the shares issued in this offering. SHARES ELIGIBLE FOR FUTURE SALE Immediately after this offering, we will have 31,250,000 shares of common stock outstanding, or 35,937,500 shares if the underwriters over-allotment option is exercised in full. Of these shares, the 25,000,000 shares sold in this offering, or 28,750,000 shares if the over-allotment option is exercised, will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by one of our affiliates within the meaning of Rule 144 under the Securities Act. All of the remaining 6,250,000 shares, or 7,187,500 shares if the over-allotment option is exercised in full, are restricted securities under Rule 144, in that they were issued in private transactions not involving a public offering. Since these shares are owned by our founding stockholders, these shares may only be resold pursuant to an effective registration statement or in a transaction exempt from the registration requirements of the securities act. Notwithstanding this, all of those shares have been placed in escrow and will not be transferable, subject to certain limited exceptions for transfers to spouses, children and controlled trusts or companies, until one year after the consummation of a business combination. The shares of common stock held in the escrow account will only be released prior to this date subject to certain limited exceptions. Rule 144 In general, under Rule 144 as currently in effect, a person who has beneficially owned restricted shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of either of the following: 1% of the number of shares of common stock then outstanding, which will equal 312,500 shares immediately after this offering (or 359,375 if the underwriters exercise their over-allotment option); and the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales under Rule 144 are also limited by manner of sale provisions and notice requirements and to the availability of current public information about us. Rule 144(k) Under Rule 144(k), a person who is not deemed to have been one of our affiliates at the time of or at any time during the three months preceding a sale, and who has beneficially owned the restricted shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell their shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. SEC Position on Rule 144 Sales The Securities and Exchange Commission has taken the position that promoters or affiliates of a blank check company and their transferees, both before and after a business combination, would act as an underwriter under the Securities Act when reselling the securities of a blank check company. Accordingly, the Securities and Exchange Commission believes that those securities can be resold only through a registered offering and that Rule 144 would not be available for those resale transactions despite technical compliance with the requirements of Rule 144. Registration Rights The holders of our 6,250,000 issued and outstanding shares of common stock immediately prior to the completion of this offering (7,187,500 shares if the over-allotment option is exercised in full), and the holders of the warrants to purchase 6,200,000 shares of common stock underlying the founder warrants sold in the pre-offering private placement and any co-investment units will be entitled to registration rights covering the resale of their shares and the resale of their warrants and shares acquired upon exercise of their warrants. The holders of the majority of these shares are entitled to make up to two demands that we register their shares, warrants and shares that they are entitled to acquire upon the exercise of warrants. The holders of the majority of these shares can elect to exercise these registration rights at any time after one year from the date of the consummation of our initial business combination, subject to the transfer restrictions imposed by the lock-up agreements. The holders of the founders warrants are also entitled to require to register for resale of the shares underlying the founders warrants when such warrants become exercisable by their terms. In addition, these stockholders have certain piggy-back registration rights on registration statements filed subsequent to the date on which these securities are released from the restrictions imposed by the lock-up agreements. We will bear the expenses incurred in connection with the filing of any such registration statements. UNDERWRITING In accordance with the terms and conditions contained in the underwriting agreement, we have agreed to sell to each of the underwriters named below, and each of the underwriters, for which Morgan Joseph & Co. Inc. is acting as representative, have severally, and not jointly, agreed to purchase on a firm commitment basis the number of units offered in this offering set forth opposite their respective names below: Underwriters Number of Units Morgan Joseph & Co. Inc. Southwest Securities, Inc. Legend Merchant Group GunnAllen Financial, Inc. Maxim Group LLC Total 25,000,000 A copy of the underwriting agreement has been filed as an exhibit to the registration statement of which this prospectus forms a part. The underwriters may deliver prospectuses via e-mail both as a PDF document and by a link to the Commission s website and websites hosted by the underwriters and other parties, and the prospectus may also be made available on websites maintained by selected dealers and selling group members participating in this offering. The underwriters may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions may be allocated by the representative to underwriters and selling group members that may make Internet distributions on the same basis as other allocations. State Blue Sky Information We are not making any offer of these securities in any jurisdiction where the offer is not permitted. We will offer and sell the units to retail customers only in Colorado, Delaware, the District of Columbia, Florida, Georgia, Hawaii, Illinois, Indiana, Louisiana, Nevada, New York and Rhode Island. In New York and Hawaii, where we have relied on exemptions from the state registration requirements for transactions between an issuer and an underwriter involving a firm-commitment underwritten offering. In the other states, we have applied to have the units registered for sale and will not sell the units in these states until such registration is effective (including in Colorado, pursuant to 11-51-302(6) of the Colorado Revised Statutes). If you are not an institutional investor, you may purchase our securities in this offering only in the jurisdictions described directly above. Institutional investors in every state may purchase the units in this offering pursuant to exemptions provided to such entities under the Blue Sky laws of various states. The definition of an institutional investor varies from state to state but generally includes financial institutions, broker-dealers, banks, insurance companies and other qualified entities. In each of these states, in which our initial public offering is permitted, the units and the shares of common stock and warrants comprising the units, once they become separately transferable, may be purchased, sold and resold without limitation for a one year period. The National Securities Markets Improvement Act of 1996 promulgated under the Securities Act of 1933, or NSMIA, effectively preempts state jurisdiction over registration of brokerage transactions in which the issuer is not a party. Under NSMIA, the resale in brokerage transactions of the units, from and after the date of this prospectus, and the common stock and warrants comprising the units, once they become separately transferable, are not subject to state registration requirements because we will file periodic and annual reports under the Securities Exchange Act of 1934. However, states are permitted to require notice filings and collect fees with regard to these transactions. As of the date of this prospectus, the following states require notice filings or fee payments to permit the resale in brokerage transactions of the units, and the common stock and warrants comprising the units, once they become separately transferable: District of Columbia, Illinois, Montana, New Hampshire, North Dakota, Puerto Rico, South Carolina, Texas, Vermont and Virginia. With the exception of the District of Columbia and Illinois, where current registrations permit the sale and resale without limitation for a one year period, as of the date of this prospectus, we have not determined in which, if any, of the remaining states we will submit the required filings or pay the required fee. Additionally, if any of these states that has not yet adopted a statute relating to NSMIA adopts such a statute in the future requiring a filing or fee or if any state amends its existing statutes with respect to its requirements, we would need to comply with those new requirements for the securities to continue to be eligible for resale in those jurisdictions. Despite the preemption from state registration provided by NSMIA described above, the following states and territory, regardless of whether they require a filing to be made or fee to be paid, have advised us that they do not recognize the preemption provisions of NSMIA as a basis for avoiding the registration in their states of brokerage transactions involving securities of blank check issuers: Alaska, Arizona, Idaho, Ohio, Oregon, Utah and Washington. We do not intend to register the resale of the securities sold in this offering in these states. Accordingly, you will not be able to acquire or resell our securities in brokerage transactions if you reside in one of the jurisdictions listed above. However, we believe that the units, from and after the effective date and the common stock and warrants comprising the units, once they become separately transferable, will be eligible for sale on a secondary market basis in each of the following states, without any notice filings or fee payments based upon the registration of the units, common stock and warrants in these states or the availability of another applicable exemption from the state s registration requirements: immediately in Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New York, North Carolina, Oklahoma, Pennsylvania, South Dakota, Tennessee, West Virginia, Wisconsin and Wyoming. commencing 90 days after the date of this prospectus in Nevada, New Jersey, New Mexico and Rhode Island; and commencing 180 days from the date of this prospectus in Alabama. Pricing of Securities We have been advised by the representative that the underwriters propose to offer the units to the public at the initial offering price set forth on the cover page of this prospectus. It may allow some dealers concessions not in excess of $ per unit. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On January 31, 2007, we issued to the following directors and our executive officer (or their respective affiliates) the number of shares of common stock set forth opposite their respective names for consideration of $0.008 per share. Name Number of Shares Relationship to Us Roger Stone 2,500,000 Non-Executive Chairman and Director SPAC Trust 3,750,000 Richard Tan is the trustee of SPAC Trust, a family trust (1) Based upon the underwriters discount of 3.5% per unit. Does not include an additional 3.5% of the gross proceeds from the sale of the units in this offering that will be paid to the underwriters only upon the consummation of a business combination (and then only with respect to those units as to which the component shares have not been redeemed into cash) which amounts are reflected in this table as deferred discount. If a business combination is not consummated and we automatically dissolve and subsequently liquidate our trust account, such amounts will not be paid to the underwriters, but rather will be distributed among our public stockholders. (2) The underwriters have agreed to forfeit their deferred underwriting discount with respect to those units as to which the underlying shares are redeemed into cash by those stockholders who voted against the business combination and exercised their redemption rights upon consummation of a business combination. (3) The offering expenses are estimated at $835,000. The underwriters will initially offer the units to be sold in this offering directly to the public at the initial public offering price set forth on the cover of this prospectus and to selected dealers at the initial public offering price less a selling concession not in excess of $ per unit. The underwriters may allow, and the selected dealers may reallow, a concession not in excess of $ per unit on sales to brokers and dealers. After the offering, the underwriters may change the offering price and other selling terms, provided, however that upon execution of the underwriting agreement, there will be no changes to the price and terms of the sale between the underwriters and us. No change in those terms will change the amount of proceeds to be received by us as set forth on the cover of this prospectus. Purchase Option We have agreed to sell to the representative, for $100, an option to purchase up to a total of 2,500,000 units. The units issuable upon exercise of this option are identical to those offered by this prospectus, except that the exercise price of the warrants underlying the units is $7.00. This option is exercisable for cash or on a cashless basis at $10.00 per unit commencing on the later of the consummation of a business combination and one year from the date of this prospectus, and expiring five years from the date of this prospectus. Since the warrants underlying the option are the same as the units sold in this offering and expire four years after the date of this prospectus, if the option is exercised after such four year period, the holders of the option will only receive the common stock component of the units. The option may not be sold, transferred, assigned, pledged or hypothecated for a one-year period following the date of this prospectus except to any underwriter and selected dealer participating in the offering and their bona fide officers or partners. Although the purchase option and its underlying securities have been registered on the registration statement of which this prospectus forms a part, the option grants holders demand and piggy back registration rights for periods of five and seven years, respectively, from the date of this prospectus. These rights apply to all of the securities directly and indirectly issuable upon exercise of the option. We will bear all fees and expenses attendant to registering the securities issuable on exercise of the option, other than underwriting commissions incurred and payable by the holders. The exercise price and number of units issuable upon exercise of the option may be adjusted in certain circumstances including in the event of a share dividend, or our recapitalization, reorganization or consolidation. However, the option exercise price or underlying units will not be adjusted for issuances of shares of common stock at a price below the option exercise price. The options may become worthless if there is not an effective registration statement at the time of exercise. We have estimated, based upon a Black-Scholes model, that the fair value of the option on the date of sale would be approximately $7,689,369, using an expected life of five years, volatility of 45.3%, and a risk-free rate of 4.2%. However, because our units do not have a trading history, the volatility assumption is based on information currently available to management. We believe the volatility estimate calculated is a reasonable benchmark to use in estimating the expected volatility of our units. Although an expected life of five years was used in the calculation, if we do not consummate a business combination within the prescribed time period and we automatically dissolve and subsequently liquidate our trust account, the option will become worthless. Regulatory Restrictions on Purchase of Securities Rules of the SEC may limit the ability of the underwriters to bid for or purchase our securities before the distribution of the securities is completed. However, the underwriters may engage in the following activities in accordance with the rules: Stabilizing Transactions. The underwriters may make bids or purchases for the purpose of pegging, fixing or maintaining the price of our securities. Over-Allotments and Syndicate Coverage Transactions. The underwriters may create a short position in our securities by selling more of our securities than are set forth on the cover page of this prospectus. If the underwriters create a short position during the offering, the representative may engage in syndicate covering transactions by purchasing our securities in the open market. The representative may also elect to reduce any short position by exercising all or part of the over-allotment option. Penalty Bids. The representative may reclaim a selling concession from a syndicate member when the units originally sold by the syndicate member are purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. Stabilization and syndicate covering transactions may cause the price of the securities to be higher than they would be in the absence of these transactions. The imposition of a penalty bid may also have an effect on the prices of the securities if it discourages resales. Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the prices of the securities. These transactions may occur on the OTC Bulletin Board, in the over-the-counter market or on any trading market. If any of these transactions are commenced, they may be discontinued without notice at any time. The distribution of our securities will end upon the underwriters cessation of selling efforts and stabilization activities, provided, however, in the event that the underwriters were to exercise their over-allotment option to purchase securities in excess of their actual syndicate short position, then the distribution will not be deemed to have been completed until all of the securities have been sold. In connection with this offering, the underwriters may distribute prospectuses electronically. No forms of prospectus other than printed prospectuses and electronically distributed prospectuses that are printable in Adobe PDF format will be used in connection with this offering. Other Terms We have granted to Morgan Joseph & Co. Inc., the right to have an observer present at all meetings of our board of directors until we consummate a business combination. The observer will be entitled to the same notices and communications sent by us to our directors and to attend directors meetings, but will not have voting rights. Morgan Joseph & Co. Inc. has not named its observer as of the date of this prospectus. Although we are not under any contractual obligation to engage any of the underwriters to provide services for us after this offering, any of the underwriters may, among other things, introduce us to potential target businesses or assist us in raising additional capital, as needs may arise in the future. If any of the underwriters provide services to us after the offering we may pay such underwriter fair and reasonable fees that would be determined in an arm s length negotiation. Although they are not obligated to do so, any of the underwriters may introduce us to potential target businesses or assist us in raising additional capital, as needs may arise in the future, but there are no preliminary agreements or understandings between any of the underwriters and any potential targets. We are not under any contractual obligation (oral or written) and have no agreement or understanding to engage any of the underwriters or any other party to provide any services for us after this offering, but if we do engage any of them in the future we may pay the underwriters a finder s fee or advisory fee for services that would be determined at that time in an arm s length negotiation where the terms would be fair and reasonable to each of the interested parties; provided that no agreement will be entered into and no fee will be paid within 90 days following the date of this prospectus. Indemnification We have agreed to indemnify the underwriters against some liabilities, including civil liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in this respect. LEGAL MATTERS The validity of the securities offered in this prospectus are being passed upon for us by Loeb & Loeb LLP, New York, New York. DLA Piper US LLP is acting as counsel for the underwriters in this offering. EXPERTS The financial statements of Stone Tan China Acquisition Corp. at September 30, 2007 and for the period January 24, 2007 (date of inception ) through September 30, 2007 appearing in the registration statement and the prospectus have been included herein in reliance upon the report of Gumbiner Savett Inc., independent registered public accountants, given on the authority of such firm as experts in auditing and accounting. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the SEC a registration statement on Form S-1, which includes exhibits, schedules and amendments, under the Securities Act, with respect to this offering of our securities. Although this prospectus, which forms a part of the registration statement, contains all material information included in the registration statement, parts of the registration statement have been omitted as permitted by rules and regulations of the SEC. We refer you to the registration statement and its exhibits for further information about us, our securities and this offering. The registration statement and its exhibits, as well as our other reports filed with the SEC, can be inspected and copied at the SEC s public reference room at 100 F Street, N.E., Washington, D.C. 20549-1004. The public may obtain information about the operation of the public reference room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a web site at http://www.sec.gov which contains the Form S-1 and other reports, proxy and information statements and information regarding issuers that file electronically with the SEC. Prior to this offering there has been no public market for any of our securities. The public offering price of the units and the terms of the warrants were negotiated between us and the representative. Factors considered in determining the prices and terms of the units, including the common stock and warrants underlying the units, include: the history and prospects of companies whose principal business is the acquisition of other companies; prior offerings of those companies; our prospects for acquiring an operating business at attractive values; our capital structure; an assessment of our management and their experience in identifying operating companies; general conditions of the securities markets at the time of the offering; and other factors as were deemed relevant. However, although these factors were considered, the determination of our offering price is more arbitrary than the pricing of securities for an operating company in a particular industry since the underwriters are unable to compare our financial results and prospects with those of public companies operating in the same industry. Over-Allotment Option We have granted to the representative of the underwriters an option, exercisable during the 45-day period commencing on the date of this prospectus, to purchase from us at the offering price, less underwriting discounts, up to an aggregate of 3,750,000 additional units for the sole purpose of covering over-allotments, if any. The over-allotment option will only be used to cover the net syndicate short position resulting from the initial distribution. The representative of the underwriters may exercise the over-allotment option if the underwriters sell more units than the total number set forth in the table above. Commissions and Discounts The following table shows the public offering price, underwriting discount to be paid by us to the underwriters and the proceeds, before expenses, to us. This information assumes either no exercise or full exercise by the underwriters of their over-allotment option. This information does not reflect the pre-offering private placement proceeds to be received by us. Per Unit Without Option With Option Public offering price $ 8.00 $ 200,000,000 $ 230,000,000 Discount(1) $ 0.28 $ 7,000,000 $ 8,050,000 Deferred underwriting compensation(2) $ 0.28 $ 7,000,000 $ 8,050,000 Proceeds before expenses(3) $ 7.44 $ 186,000,000 $213,900,000 Until , 2007, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. No dealer, salesperson or any other person is authorized to give any information or make any representations in connection with this offering other than those contained in this prospectus and, if given or made, the information or representations must not be relied upon as having been authorized by us. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the securities offered by this prospectus, or an offer to sell or a solicitation of an offer to buy any securities by anyone in any jurisdiction in which the offer or solicitation is not authorized or is unlawful. TABLE OF CONTENTS Page PROSPECTUS SUMMARY 1
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+PROSPECTUS SUMMARY 1 SUMMARY FINANCIAL DATA 15 RISK FACTORS 16 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 38 USE OF PROCEEDS 39 DILUTION 44 CAPITALIZATION 46 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 47 PROPOSED BUSINESS 50 MANAGEMENT 72 PRINCIPAL SHAREHOLDERS 81 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 83 DESCRIPTION OF SECURITIES 85 MARSHALL ISLANDS COMPANY CONSIDERATIONS 91 TAXATION 94 UNDERWRITING 103 LEGAL MATTERS 108 EXPERTS 108 WHERE YOU CAN FIND ADDITIONAL INFORMATION 109 FINANCIAL STATEMENTS F-1 EX-8.1: OPINION OF LOEB & LOEB LLP EX-23.1: CONSENT OF WEINBERG & COMPANY, P.A. You should rely only on the information contained or incorporated by reference in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer is not permitted. We obtained statistical data, market data and other industry data and forecasts used throughout this prospectus from publicly available information. While we believe that the statistical data, industry data, forecasts and market research are reliable, we have not independently verified the data, and we do not make any representation as to the accuracy of the information. This prospectus contains forward-looking statements that involve substantial risks and uncertainties as they are not based on historical facts, but rather are based on current expectations, estimates and projections about our industry, our beliefs, and our assumptions. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. You should not place undue reliance on any forward-looking statements, which apply only as of the date of this prospectus. Business Combination Company tm and BCC tm are service marks of Maxim Group LLC. Table of Contents PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. Unless otherwise stated in this prospectus, references to we, us or our company refer to Seanergy Maritime Corp.; the term public shareholders means the holders of common stock sold as part of the units in this offering or acquired in the aftermarket, including any existing shareholders to the extent that they purchase or acquire such shares; the term private placement refers to the purchase by our executive officers, in a private placement that will conclude prior to the effective date of this offering, of an aggregate of 14,961,111 warrants, at $0.90 per warrant; and the term insider warrants refers to the 14,961,111 warrants being purchased by our executive officers in the private placement. Unless we tell you otherwise, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option and that no shareholder exercises its right of redemption described elsewhere in this prospectus. All share and per share information in this prospectus gives retroactive effect to (i) a one and one-half-for-one stock split in the form of a stock dividend effective as of July 6, 2007 and (ii) a one and one-third-for-one stock split in the form of a stock dividend effective as of August 6, 2007. The Company We are a blank check company, also known as a Business Combination Company, or BCCtm, organized as a corporation under the laws of the Marshall Islands on August 15, 2006. We were formed to acquire, through a merger, capital stock exchange, asset acquisition or other similar business combination, one or more businesses or assets in the maritime shipping industry, but will not be limited to pursuing acquisition opportunities only within that industry. To date, our efforts have been limited to organizational activities. We do not have any specific business combination under consideration, nor have we had any discussions with any target business regarding a possible business combination. In addition, our officers, directors and shareholders have not had discussions among themselves relating to a possible transaction with any entity affiliated with any of our officers, directors or shareholders. The maritime shipping industry provides a practical and cost-effective means of transporting large volumes of cargoes. This is accomplished predominantly by the dry bulk and tanker sectors and other related sectors, which tend to be specialized. The dry bulk sector involves the transportation of dry bulk and general cargoes, including, among other products, coal, minerals, ore, steel products, forest products, agricultural products, construction materials and heavy equipment, machinery and spare parts via dry bulk cargo vessels. The tanker sector involves the transportation of wet products such as crude oil, refined petroleum cargoes and liquid chemicals via different types of tankers. Related sectors comprise, but are not limited to, the operation of vessels such as containerships, feeder vessels, liquefied gas carriers, offshore supply and anchor-handling vessels or other specialized carriers. We may seek to acquire vessels, a company that has entered into agreements to purchase individual vessels that were not yet owned by such target company (in such a case, our shareholders would only vote on the proposed business combination with such target company, and not on the individual agreements the target company entered into), a company with a fleet of vessels, a number of such companies as a group, or an entity, which provides commercial management, operational and technical management or other services to one or more segments of the shipping industry, including port, storage and terminal operation. To the extent that we acquire one or more vessels, it is possible that the proxy statement that we would send to shareholders to approve a business combination would not contain audited or unaudited historical financial information with respect to the vessels and, therefore, shareholders voting on a proposed transaction would not have the benefit of financial statements of past operations. The reason that we may not be required to provide audited historical information is because the business combination would be viewed as an Table of Contents CALCULATION OF REGISTRATION FEE CHART Proposed Maximum Proposed Offering Maximum Title of Each Class of Security Amount Being Price Per Aggregate Amount of Being Registered Registered Security(1) Offering Price(1) Registration Fee Units, each consisting of one share of Common Stock, $0.0001 par value, and one Warrant(2) 23,000,000 $10.00 $230,000,000 $7,061 Shares of Common Stock included as part of the Units(2) 23,000,000 Shares Warrants included as part of the Units(2) 23,000,000 Warrants Shares of Common Stock underlying the Warrants included in the Units(2)(4) 23,000,000 Shares $6.50 $149,500,000 $4,590 Representative s Unit Purchase Option 1 Option $100.00 $100.00 (3) Units underlying the Representative s Unit Purchase Option ( Representative s Units )(4) 1,000,000 Units $12.50 $12,500,000 $384 Shares of Common Stock included as part of the Representative s Units(4) 1,000,000 Shares (3) Warrants included as part of the Representative s Units(4) 1,000,000 Warrants (3) Shares of Common Stock underlying the Warrants included in the Representative s Units(4) 1,000,000 Shares $6.50 $6,500,000 $200 Total $398,500,100 $12,235(5) (1) Estimated solely for the purpose of calculating the registration fee. (2) Includes 3,000,000 Units and 3,000,000 shares of Common Stock, 3,000,000 Warrants and 3,000,000 shares of Common Stock underlying the Warrants included in such Units which may be issued on exercise of a 45-day option granted to the Underwriters to cover over-allotments, if any. (3) No fee pursuant to Rule 457(g). (4) Pursuant to Rule 416, there are also being registered such indeterminable number of additional shares of common stock as may be issued to prevent dilution resulting from stock splits, stock dividends or similar transactions. (5) Previously paid. Table of Contents ENFORCEABILITY OF CIVIL LIABILITIES Seanergy Maritime Corp. is a Marshall Islands corporation and our executive offices are located outside of the United States in Athens, Greece. All of our directors and officers and some of the experts named in this prospectus reside outside the United States. The proceeds we receive from this offering and the private placement will be held in U.S. Dollars and deposited in a trust account at Deutsche Bank Trust Company Americas, maintained by Continental Stock Transfer Trust Company, as trustee, both located in New York, New York. The trust account will be governed by an Investment Management Trust Agreement between the Company and Continental Stock Transfer Trust Company, which will be governed by and construed and enforced in accordance with the laws of the State of New York. A portion of our assets and the assets of our directors, officers and experts are located outside of the United States. As a result, you may have difficulty serving legal process within the United States upon us or any of these persons. You may also have difficulty enforcing, both in and outside the United States, judgments you may obtain in U.S. courts against us or these persons in any action, including actions based upon the civil liability provisions of U.S. Federal or state securities laws. Furthermore, there is substantial doubt that the courts of the Marshall Islands or Greece would enter judgments in original actions brought in those courts predicated on U.S. federal or state securities laws. Table of Contents acquisition of assets instead of an acquisition of a business. It is consistent with shipping industry precedent in that audited historical financials would not be required. However, whether an acquisition is actually deemed to be that of assets (instead of a business) is based on an analysis of the facts and circumstances involved, taking to consideration a number of variables that generally would reflect upon whether there is sufficient continuity of the acquired entity s operations prior to and after the acquisition so that the disclosure of the historical information is material to the understanding of future operations. We are unable to predict the facts, circumstances and structure surrounding any possible future acquisition of vessels (whether the acquisition will be structured as an acquisition of assets or an operating business), and accordingly cannot provide assurances with respect to the provision of audited historical financial information. If however, we determined that such audited historical financial information was not required, instead of audited or unaudited historical financial statements, the proxy statement we would send to our shareholders would contain the same information that would typically be provided in the prospectus for an initial public offering of a start-up shipping company, such as: (i) historical and prevailing market rates for vessels on the basis of type, age and proposed deployment; (ii) our expectations of future market trends and proposed strategy for employment of the vessels; (iii) our anticipated operational (overhead) expenses; and (iv) the valuation of the vessels as assets generally (i.e., whether they are new or second-hand and the type of vessel), all of which, in turn, depend on the sector of the shipping industry in which we consummate such a business combination. See Risk Factors Risks Associated With Our Acquisition of a Target Business in the Maritime Shipping Industry If we were to acquire vessels or a company with agreements to purchase individual vessels, it is highly unlikely that proxy materials provided to our shareholders would include historical financial statements and, accordingly, investors will not have historical financial statements on which to rely in making their decision whether to vote for the acquisition. To the extent that financial information is not available with respect to vessels we may acquire, we expect to evaluate the fair value of the assets, based on the advice of our ship broker and financial advisors, consistent with industry practice. Such valuation would factor in, among other things, the revenue stream generated from ongoing charter arrangements, to the extent that the vessels have any charter arrangements that will continue after the business combination, and future forward rates, as quoted on the International Maritime Exchange (Imarex). In the event it was determined that we are in fact acquiring a business (as opposed to assets) we anticipate that we would provide audited annual financial statements and unaudited interim statements as required in such circumstances. Our executive officers and directors have extensive experience in the maritime shipping industry as managers, principals or directors of worldwide shipping companies, with more than 100 years of total experience in negotiating and structuring transactions in the maritime shipping industry. While we intend to focus on potential acquisition targets in the maritime shipping industry, we may also pursue opportunities in other industries. Because our executive officers and directors have considerable experience in other sectors, such as general transportation, commercial and retail trading and real estate, we believe we are qualified to evaluate opportunities in industries other than the maritime shipping industry. We intend to leverage the experience of our executive officers and directors, including their extensive contacts and relationships, by focusing our efforts on identifying a prospective target business or businesses. If an attractive acquisition opportunity is identified in another industry prior to the time we identify an acquisition opportunity in the maritime shipping industry, we may pursue such other opportunity. There is no time or date certain or monetary milestone associated with when we may begin looking for acquisition opportunities outside of the maritime shipping industry. While we may seek to effect business combinations with more than one target business, our initial business combination must be with a target business or businesses whose collective fair market value is at least equal to 80.0% of the amount in the trust account (exclusive of Maxim Group LLC s deferred underwriting compensation plus interest thereon held in the trust account) at the time of such acquisition. If we acquire less than 100.0% of one or more target businesses in our initial business combination, the aggregate fair market value of the interest or assets we acquire must equal at least 80.0% of the amount held in the trust account (exclusive of Maxim Group LLC s deferred underwriting compensation plus interest thereon held in the trust account) at the time of such initial business combination. We do not intend to acquire less than a majority voting control of a target business. However, we could pursue a transaction in which we issue a substantial number of new shares. As a result, our shareholders immediately prior to such transaction could own substantially less than a majority of our outstanding shares subsequent to such transaction (if, for example, we issued an additional 125,000,000 shares in connection with a Table of Contents business combination, our stockholders prior to the business combination would own less than 17% of the post business combination company). In either case, although our stockholders prior to the business combination might own less than a majority interest post business combination, we will not purchase a minority or passive interest in a target, as would subject us to the Investment Company Act of 1940. We currently estimate that, assuming we use the maximum allowable time under our articles of incorporation, it will cost between $1,500,000 and $1,700,000 to identify and negotiate a business combination (which includes between $400,000 and $600,000 for the payment of an investment advisor, between $200,000 and $300,000 for due diligence, and between $200,000 and $250,000 for consultants we will hire to assist us in evaluating potential business combinations). As used in this prospectus, a target business shall include an operating business or assets, or a combination thereof, and a business combination shall mean the acquisition by us of such a target business. We have not, nor has anyone on our behalf, either directly or indirectly, contacted any potential target businesses or their representatives or had any discussions, formal or otherwise, with respect to effecting any potential business combination with our company. Moreover, we have not engaged or retained any agent or other representative to identify or locate any suitable acquisition candidate for us. Neither we nor any of our agents or affiliates has yet taken any measure, directly or indirectly, to locate a target business. If we are unable to consummate a business combination within the allotted time periods set forth in this prospectus, we will implement a plan of dissolution and liquidation which will include the liquidation of our trust account to our public shareholders. Our offices are located at c/o Balthellas Chartering S.A., 10, Amfitheas Avenue, 175 64 P. Faliro, Athens, Greece, and our telephone number is 30 210 9406900. Private Placement Prior to the effective date of this offering, all of our executive officers will purchase from us an aggregate of 14,961,111 warrants at $0.90 per warrant in a private placement in accordance with Regulation S under the Securities Act of 1933. Such purchase price was the result of negotiations between our executive officers and Maxim Group LLC. The $0.90 purchase price per warrant is less than the $1.00 purchase price per warrant more typical in private placements that are associated with offerings of this type based on the belief that the aggregate purchase price in the private placement reflects a larger percentage of the overall offering than other comparable offerings. The Company does not believe that the sale of the warrants will result in a compensation expense because they will be sold at approximately fair market value. All insider warrants issued in the private placement will be identical to the warrants in the units being offered by this prospectus, except that: (i) subject to certain limited exceptions, none of the insider warrants will be transferable or salable until after we complete a business combination; (ii) the warrants are not subject to redemption if held by the initial holders thereof and (iii) may be exercised on a cashless basis. Part of the proceeds from the sale of these insider warrants will be added to the portion of the proceeds from this offering to be held in the trust account pending the completion of our initial business combination with the balance to be held outside our trust account to be used for working capital purposes. Although the insider warrants are not subject to a formal escrow agreement, they will be subject to a lock-up agreement that will expire upon the consummation of a business combination and will be held in an account established by each of our executive officers with Maxim Group LLC until such time as we consummate a business combination. Our executive officers will not ask for, and Maxim Group LLC will not grant, any waiver of the lock-up agreement. No placement fees will be payable on the warrants sold in the private placement. Table of Contents Prior to the effective date of this offering, all of our executive officers will have purchased an aggregate of 14,961,111 warrants, which we refer to as insider warrants, from us at a price of $0.90 per warrant ($13,465,000 in the aggregate) in a private placement made in accordance with Regulation S under the Securities Act of 1933. All of the insider warrants to be purchased by our executive officers will be identical to the warrants in the units being offered by this prospectus except that none of the insider warrants will be transferable or salable until after we complete a business combination, are not subject to redemption if held by the initial holders thereof or their permitted assigns and may be exercised on a cashless basis if held by the insiders or their designees. We have granted the underwriters a 45-day option to purchase up to 3,000,000 additional units solely to cover over-allotments, if any (over and above the 20,000,000 units referred to above). The over-allotment option will be used only to cover the net syndicate short position resulting from the initial distribution. We have also agreed to sell to Maxim Group LLC, the representative of the underwriters, for $100, as additional compensation, an option to purchase up to a total of 1,000,000 units at $12.50 per unit. The units issuable upon exercise of this option are identical to those underlying the units offered by this prospectus. Table of Contents THE OFFERING Securities offered: 20,000,000 units, at $10.00 per unit, each unit consisting of: one share of common stock; and one warrant. The units will begin trading on or promptly after the date of this prospectus. Each of the common stock and warrants may trade separately beginning on the 10th business day following the earlier to occur of: (i) the expiration of the underwriters over-allotment option or (ii) its exercise in full. In no event will Maxim Group LLC allow separate trading of the common stock and warrants until we file an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file a Current Report on Form 8-K, including an audited balance sheet, upon the consummation of this offering, which is anticipated to take place three business days from the consummation of this offering. The audited balance sheet will include proceeds we receive from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Form 8-K. If the over-allotment is exercised following the initial filing of the Form 8-K, an amended Form 8-K will be filed to provide updated financial information reflecting the exercise of the over-allotment option. For more information, see Description of Securities Units. Common stock: Number outstanding before this offering: 5,000,000 shares Number to be outstanding after this offering: 25,000,000 shares Warrants: Number outstanding before this offering: 14,961,111 warrants Number to be outstanding after this offering: 34,961,111 warrants Exercisability: Each warrant is exercisable into one share of common stock. Exercise price: $6.50 per share Exercise period: The warrants will become exercisable on the later of: the completion of a business combination, or [ ], 2008 [one year from the date of this prospectus]. The warrants will expire at 5:00 p.m., New York City time, on [ ], 2011 [four years from the date of this prospectus] or earlier upon redemption. Redemption: We may redeem the outstanding warrants (including any warrants issued upon exercise of Maxim Group LLC s Unit Purchase Option): in whole and not in part, at a price of $0.01 per warrant at any time after the warrants become exercisable, upon a minimum of 30 days prior written notice of redemption, and Table of Contents if, and only if, the last sale price of our common stock equals or exceeds $14.25 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption; provided that a current registration statement under the Securities Act of 1933 relating to the shares of common stock issuable upon exercise of the warrants is then effective. We have established the above criteria to provide warrant holders with (i) adequate notice of exercise only after the then prevailing common stock price is substantially above the warrant exercise price and (ii) a sufficient differential between the then prevailing common stock price and the warrant exercise price so there is a reasonable cushion to absorb a negative market reaction, if any, to our redemption call. However, there can be no assurance that the price of the common stock will exceed the call trigger price or the warrant exercise price after the redemption call is made and the price may, in fact decline as a result of the limited liquidity following any such call for redemption. None of the warrants issued in the private placement are redeemable while held by the initial holders or their permitted assigns. Proposed American Stock Exchange symbols for our: Units: SRGU Common stock: SRG Warrants: SRGW Offering proceeds to be held in trust: $200,000,000 of the proceeds from this offering and the private placement will be placed in a trust account at Deutsche Bank Trust Company Americas maintained by Continental Stock Transfer Trust Company, pursuant to an investment management trust agreement to be signed on the date of this prospectus. Of this amount, up to $195,500,000 may be used by us for the purpose of effecting a business combination, and up to $4,500,000 will be paid to Maxim Group LLC if a business combination is consummated, but will be forfeited by Maxim Group LLC if a business combination is not consummated. Except as set forth below, the funds in the trust account will not be released to us until the earlier of the completion of a business combination or our liquidation. Therefore, unless and until a business combination is consummated, any expenses that we incur may only be paid from the proceeds of the private placement not held in the trust account (initially $3,000,000). The funds held in the trust account will not be available to us for the payment of any expenses related to this offering, expenses we may incur related to the investigation and selection of a target business, the negotiation of an agreement to acquire a target business, or otherwise; provided, however, that we plan to draw up to an aggregate of $675,000 of the interest earned on proceeds in the trust account in the event the over-allotment option is exercised, to replace costs and expenses associated with the exercise of the over-allotment option, which will be paid from funds outside our trust account. This is in order to provide that there is a minimum of $10.00 per share held in the trust account. If less than the full over-allotment is exercised, the amount of interest income on the proceeds in the trust account that we draw to replace the associated costs and expenses will be calculated on a pro-rata basis. Table of Contents The $4,500,000 of the funds attributable to Maxim Group LLC s deferred underwriting compensation in connection with this offering and interest accrued thereon will be released to Maxim Group LLC, and any shareholders exercising their redemption rights, upon completion of a business combination on the terms described in this prospectus, or to our public shareholders upon liquidation of the trust account as part of our plan of liquidation, but will in no event be available for use by us in a business combination. Distribution of interest earned on our trust account to public shareholders: Although we are formed as a corporation under the laws of the Republic of the Marshall Islands, for United States federal income tax purposes, we elected to be classified as a partnership, and not as a corporation. Because we have elected to be treated as a partnership for U.S. federal income tax purposes, U.S. investors may be subject to U.S. federal income tax on their distributive shares of our taxable income or gain (whether or not distributed). As a means to pass down to our public shareholders the benefit of the interest that is earned on the trust account, our Second Amended and Restated Articles of Incorporation requires that we distribute the interest earned on the trust account to our public shareholders, and that we make quarterly distributions (which are intended to be at least equal to any such tax liability) in US dollars of interest income earned on the trust account (less any taxes payable by us and exclusive of (i) up to $420,000 of interest earned on Maxim Group LLC s deferred underwriting compensation and (ii) up to an aggregate of $675,000 of interest income on the proceeds in the trust account that we may draw in the event the over-allotment option is exercised in full) on a pro-rata basis to our public shareholders until the earlier of the consummation of a business combination or our liquidation. This is atypical of other offerings of this type, where a significant portion, if not all, of the interest earned on the trust account pending the consummation of a business combination is added to the funds held in the trust account and either disbursed as payment for part of the purchase price for a business combination, or maintained for working capital purposes to be used following the consummation of a business combination. Pursuant to our Second Amended and Restated Articles of Incorporation, distributions will be made on a quarterly basis within 15 days of the end of the prior quarter to shareholders of record on a date to be determined by our Board of Directors which we expect to be on or shortly following the fifth business day following the end of the prior quarter. The first distribution will be made following the end of the December 31, 2007 quarter and will include interest which accrues during the period commencing on the closing of the offering through December 31, 2007. We expect that within three business days following the end of each fiscal quarter (commencing with the quarter ending December 31, 2007), our accounting consultants will have sufficient opportunity to review our monthly investment account statements and to calculate the amount to be distributed to each of our public shareholders, our board of directors will meet to officially fix the record date with respect to the distribution of dividends earned during the immediately preceding quarter (or, in the Table of Contents case of the first distribution, the period commencing on the closing of the offering through December 31, 2007) and we will announce the record date and distribution to the public by means of a press release and/or a Current Report on Form 8-K. We expect the record date to be on or shortly following the fifth business day following the end of the prior quarter and, as provided in our Second Amended and Restated Articles of Incorporation, to make the distributions to record date public shareholders within 15 days of the end of the prior quarter, which in any event will be in accordance with our bylaws and the Marshall Islands Business Corporations Act, which requires that a record date not be more than sixty days prior to the date we make such distribution. In accordance with our instructions, our transfer agent, Continental Stock Transfer Trust Company, will identify the shareholders of record on the designated record date and act as paying agent in delivering quarterly interest payments to the then shareholders of record. We expect the costs incurred in connection with the above-described quarterly interest distributions to be in the range of $10,000 to $15,000 per year. Such expenses will be paid from funds available to us outside the trust account for working capital purposes. Our board of directors will make a quarterly distribution of all interest income available to be distributed (less taxes payable and exclusive of (i) up to $420,000 of interest earned on Maxim Group LLC s deferred underwriting compensation and (ii) up to an aggregate of $675,000 of interest income on the proceeds in the trust account that we may draw in the event the over-allotment option is exercised in full) with no discretion to reduce or modify the distributions. The distributions on a quarterly basis in the amounts and as further described above is mandated by our Second Amended and Restated Articles of Incorporation. This provision may be amended or removed only by a vote of our Board of Directors and the approval by the holders of a majority of our outstanding common stock. Accordingly without such Board of Directors and shareholder approval, under no circumstance will we determine to reduce (other than reductions described above) or not make a quarterly distribution. Our shareholders prior to this offering have agreed to waive any rights to such distributions. In the event of the exercise of the over-allotment option, the first interest distribution to our public shareholders will be reduced by up to $675,000 (in proportion to the portion of the over-allotment option exercised) in the aggregate reflecting interest income on the trust account we will be permitted to draw to replace up to $675,000 of the costs and expenses associated with the exercise of the over-allotment option, which will be paid from funds outside our trust account on the consummation of the over-allotment option. These costs and expenses will be paid from funds held outside the trust account because there will not be sufficient gross proceeds from exercise of the over-allotment option to cover all attendant costs. This is to ensure that at all times there will be a minimum of $10.00 per unit held in the trust account. If less than the full over-allotment is exercised, the amount of additional costs and expenses will be calculated on a pro-rata basis. In accordance with applicable law we will provide each of our U.S. shareholders with sufficient tax information concerning our company to enable our U.S. shareholders to file their U.S. federal income tax returns. Related administrative costs with respect to the provision of Table of Contents such information will be paid for by us out of our working capital held outside the trust account. Assuming a conservative interest rate assumption of 3.75% per annum, we expect that the trust fund will generate approximately an aggregate of in interest quarterly on the corpus of the trust account generating a quarterly distribution of approximately $ per share to our public shareholders for the first distribution period ending December 31, 2007, and then approximately $0.09 per share ($1,832,812 in the aggregate per quarter), for each subsequent full quarter (exclusive of the interest earned on Maxim Group LLC s deferred underwriting compensation, up to $420,000, and not assuming the exercise of the over-allotment option, in both cases). We have assumed a 3.75% per annum interest rate because following this offering, the funds held in the trust account will be invested principally in United States tax exempt money market funds and to a lesser extent in United States government securities, defined as any Treasury Bills issued by the United States having a maturity of 180 days or less. During the six month period ended August 31, 2007, the average annual return on several tax exempt money market funds meeting our investment criteria was approximately 3.5% and U.S. Treasury Bills with six month maturities were yielding approximately 4.8% per annum. The 3.75% assumed interest rate has been applied for the purpose of the above calculation because we believe it represents a conservative estimate calculated based on the above described yields. While we cannot assure you the balance of the trust account will be invested to yield these rates, we believe such rates are representative of those we may receive on the balance of the trust account. The interest that we intend to distribute to our shareholders until the earlier of the consummation of our business combination or our liquidation would have otherwise been allocated towards the purchase price associated with a business acquisition, or otherwise used for working capital purposes. Limited payments to insiders: There will be no fees, reimbursements or cash payments made to our existing shareholders and/or officers and directors other than: repayment of loans aggregating $450,986 made to us by our executive officers, together with interest thereon at the rate of 4.0% per annum, out of the proceeds of this offering, which loans were made to fund expenses associated with this offering and the reimbursement of approximately $80,000 to our officers and directors for expenses incurred in connection with this offering; payment of $7,500 per month to Balthellas Chartering S.A., a company controlled by Panagiotis Zafet and Simon Zafet, our Chief Executive Officer and Chief Operating Officer, respectively, and each a director of the Company, for office space and related services; and reimbursement for any expenses incident to the finding and completing a suitable business combination. Given the amount of time it may take to identify a prospective target and take all the steps necessary to consummate a business combination, and the fact that a prospective target is not limited to any particular geographic region, we cannot predict at this time with any degree of certainty the amount Table of Contents of expenses to be incurred by our officers and directors in connection with a business combination that we will ultimately reimburse. None of the warrants may be exercised until after the consummation of a business combination and, thus, after the proceeds of the trust account have been disbursed. Accordingly, the warrant exercise price will be paid directly to us and not placed in the trust account. Second Amended and Restated Articles of Incorporation: As discussed below, there are specific provisions in Article Sixth of our Second Amended and Restated Articles of Incorporation that may not be amended prior to our consummation of a business combination without the prior consent of holders of 95.0% of our outstanding common stock, including our requirements to seek shareholder approval of such a business combination and to allow our shareholders to seek redemption of their shares if they do not approve of such a business combination. Although these provisions make it difficult for us to amend our Second Amended and Restated Articles of Incorporation, they are intended to protect our shareholders by requiring a supermajority of our shareholders to vote in favor of such a change in order for it to become effective. However, the Republic of the Marshall Islands, the country in which we are incorporated, does not have a well-developed body of corporate law, so its is not as certain how effective these protective provisions will be as compared to Delaware corporate law. Although they are alterable, neither we nor our board of directors will propose, or seek shareholder approval of, any amendment of these provisions. We view these provisions as obligations to our shareholders and will not take any action to amend or waive these provisions. In addition, Article Eighth of our Second Amended and Restated Articles of Incorporation provides that we will continue in existence only until , 2009 [twenty four months from the consummation of this offering]. This provision may only be amended in connection with, and upon the consummation of, a business combination. In connection with any proposed business combination we submit to our shareholders for approval, we may also submit to shareholders a proposal to amend our Second Amended and Restated Articles of Incorporation to provide for our perpetual existence, thereby removing this limitation on our corporate life. However, we may elect to form a foreign subsidiary in connection with a proposed business combination, which may be used to make the acquisition. In the event we choose to complete our initial business combination using a foreign subsidiary, we may choose not to amend our Second Amended and Restated Articles of Incorporation to provide for perpetual existence. In that event, we would either merge into such foreign subsidiary (with the foreign subsidiary being the surviving entity) or we would dissolve and liquidate our assets to our shareholders, which would include the equity securities we own in the foreign subsidiary. In the event that we do choose to merge into such a foreign subsidiary or dissolve and liquidate and distribute our ownership of such foreign subsidiary to our shareholders, the agreement relating to the transaction would provide (i) for each issued and outstanding share of our common stock to be converted into a similar right to receive shares of common stock in the subsidiary and (ii) that each of our outstanding warrants will be assumed by the subsidiary with the Table of Contents same terms and restrictions, except that they will be exercisable for common stock of the subsidiary. This alternative is discussed in greater detail in the section Taxation United States Income Taxation U.S. Holders Tax and Reporting Issues as to Formation of Foreign Subsidiary. If we do submit a proposal to shareholders to provide for our perpetual existence, we will only consummate a business combination if shareholders vote both in favor of the proposed business combination and our amendment to provide for our perpetual existence. This will require the affirmative vote of a majority of the shares of common stock voted at the meeting by our public shareholders. If we have not completed a business combination by the date specified above, our corporate existence will cease except for the purpose of winding up our affairs and liquidating, pursuant to Section 105 of the Marshall Islands Business Corporations Act. As a result, no vote would be required from our Board of Directors or shareholders to commence a dissolution and liquidation. We view this provision terminating our corporate life by , 2009 [twenty four months from the consummation of this offering] as an obligation to our shareholders and will not take any action to amend or waive this provision to allow us to survive for a longer period of time except in connection with the consummation of a business combination. Shareholders must approve business combination: We will seek shareholder approval before we effect any business combination, even if the nature of the acquisition would not ordinarily require shareholder approval under applicable law of the Marshall Islands. In connection with the vote required for any business combination, all of our existing shareholders have agreed to vote the shares of common stock owned by them prior to this offering in accordance with the vote of the majority of the public shareholders. We are not aware of any intention on the part of our officers and directors, including all of our existing shareholders, to make any purchases in this offering or in the aftermarket, although they are not prohibited from doing so. Although we do not know for certain the factors that would cause our existing stockholders to purchase our securities, we believe that some of the factors they would consider are: (i) the trading price of our securities, (ii) their aggregate investment in our securities, (iii) whether it appears that a substantial number of public stockholders are voting against a proposed business combination, and (iv) their interest in the target business once the target business has been identified. Any shares acquired by such individuals in this offering or in the aftermarket will be voted in favor of the business combination. Accordingly, any purchase of our shares by our officers and directors, including all of our existing shareholders, in this offering or in the aftermarket could influence the result of a vote submitted to our shareholders in connection with a business combination by making it more likely that a business combination would be approved. In addition, given the interest that our existing stockholders have in a business combination being consummated, it is possible that our existing stockholders will acquire securities from public stockholders who have elected to redeem their shares of our common stock (as described below) in order to change their vote and insure that the business combination will be approved (which could result in a business Table of Contents Item 8. Exhibits and Financial Statement Schedules. (a) The following exhibits are filed as part of this Registration Statement: Exhibit No. Description 1 .1 Form of Underwriting Agreement* 3 .1 Form of Second Amended and Restated Articles of Incorporation* 3 .2 By-laws* 3 .3 Amendment No. 1 to the Bylaws of Seanergy Maritime Corp.* 4 .1 Specimen Unit Certificate* 4 .2 Specimen Common Stock Certificate* 4 .3 Specimen Public Warrant Certificate* 4 .4 Specimen Private Warrant Certificate* 4 .5 Form of Warrant Agreement between Continental Stock Transfer Trust Company and the Registrant* 4 .6 Form of Unit Purchase Option to be granted to the Representative* 5 .1 Opinion of Reeder Simpson P.C., Marshall Islands counsel to the Registrant* 5 .2 Opinion of Loeb Loeb LLP, Special Counsel to the Registant* 8 .1 Opinion of Loeb Loeb LLP, special counsel to the Registrant, relating to tax matters 10 .1 Letter Agreement by Panagiotis Zafet* 10 .2 Letter Agreement by Georgios Koutsolioutsos* 10 .3 Letter Agreement by Simon Zafet* 10 .4 Letter Agreement by Alexis Komninos* 10 .5 Letter Agreement by Ioannis Tsigounakis* 10 .6 Letter Agreement by George Hamawi* 10 .7 Letter Agreement by Roland Beberniss* 10 .8 Letter Agreement by Elias M. Culucundis* 10 .9 Investment Management Trust Agreement between Continental Stock Transfer Trust Company and the Registrant* 10 .10 Form of Stock Escrow Agreement between the Registrant, Continental Stock Transfer Trust Company and the Initial shareholders* 10 .11 Form of Services Agreement between the Registrant and Diadochi Chi Alvertou Zafet S.A.* 10 .12 Stock Surrender Agreement dated as of February 20, 2007 among the Registrant and each of the individuals listed on Schedule A thereto* 10 .13 Form of Registration Rights Agreement among the Registrant and the Initial Shareholders* 10 .14 Form of Subscription Agreement between Registrant and Executive Officers of the Company* 10 .15 Promissory Note dated December 14, 2006 issued to Alexis Komninos* 10 .16 Promissory Note dated December 14, 2006 issued to Georgios Koutsolioutsos* 10 .17 Promissory Note dated December 14, 2006 issued to Ioannis Tsigkounakis* 10 .18 Promissory Note dated December 14, 2006 issued to Panagiotis Zafet* 10 .19 Promissory Note dated December 14, 2006 issued to Simon Zafet* 10 .20 Promissory Note dated January 12, 2007 issued to Georgios Koutsolioutsos* 10 .21 Promissory Note dated January 12, 2007 issued to Simon Zafet* 10 .22 Promissory Note dated January 12, 2007 issued to Panagiotis Zafet* 10 .23 Form of Side Letter with Initial Shareholders* 10 .24 Right of First Refusal and Corporate Opportunities Agreement by and between Balthellas Chartering SA and the Registrant* 10 .25 Right of First Refusal and Corporate Opportunities Agreement by and between Hellasco Shipping Ltd. and the Registrant* Table of Contents combination being approved even if, after the announcement of the business combination, 35% or more of our public stockholders would have elected their redemption rights, or 51% of our public stockholders would have voted against the business combination, but for the purchases made by our existing stockholders). We will proceed with a business combination only if a majority of the shares of common stock voted by the holders in this offering are voted in favor of the business combination and public shareholders owning less than 35.0% of the total number of shares sold in this offering exercise their redemption rights described below. Our threshold for redemption rights has been established at 35.0% to reduce the risk of a small group of shareholders exercising undue influence on the approval process. However, a 20.0% threshold is more typical in offerings of this type and such lower threshold permits the holders of a smaller number of shares to prevent a transaction they deem to be undesirable from being consummated (and therefore makes it easier for a proposed business combination to be approved as compared to other offerings of this type with a lower threshold). In addition, permitting redemption above the typical 20.0% threshold may require us to secure additional financing to fund a proposed business combination. The 35.0% threshold entails certain risks described under the headings, Risk Factors Unlike most other blank check offerings, we allow our public shareholders holding up to one share less than 35.0% of our shares of common stock sold in this offering to exercise their redemption rights. This higher threshold will make it easier for us to consummate a business combination with which you may not agree and Unlike most other blank check offerings, we allow our public shareholders holding up to one share less than 35.0% of our shares of common stock sold in this offering to exercise their redemption rights. The ability of a larger number of our shareholders to exercise their redemption rights may not allow us to consummate the most desirable business combination or optimize our capital structure. Our officers and directors do not currently intend to purchase any of our securities in this offering or in the after-market. Even if less than 35.0% of the public shareholders exercise their redemption rights, we may be unable to consummate a business combination if such redemption leaves us with funds less than a fair market value at least equal to 80.0% of the amount in the trust account (exclusive of Maxim Group LLC s deferred underwriting compensation plus interest thereon held in the trust account) at the time of such acquisition which amount is required as a condition to the consummation of our initial business combination. In such event, we may be forced to find additional financing to consummate such a business combination, consummate a different business combination or liquidate. The shares sold prior to this offering do not have redemption rights. Redemption rights for shareholders voting to reject a business combination: Public shareholders voting against a business combination that is approved will be entitled to redeem their common stock for $10.00 per share. However, the ability of shareholders to receive $10.00 per share is subject to any valid claims by our creditors that are not covered by amounts held in the trust account or the indemnities provided by our executive officers. Public shareholders who redeem their common Table of Contents stock for a share of the trust account will continue to have the right to exercise any warrants they may hold. These redemption provisions, which are contained in our Second Amended and Restated Articles of Incorporation, cannot be amended without the affirmative vote of 95.0% of our outstanding common stock. In order to exercise this redemption right, the shareholders must make an affirmative election. Voting against the business combination alone will not result in redemption of a shareholder s shares for a pro rata share of the trust account. Such shareholder must have also exercised his, her or its redemption rights by affirmatively requesting redemption in accordance with the instructions provided in the proxy statement. Shareholders will not be requested to tender their shares of common stock before the business combination is consummated. If the business combination is consummated, redeeming shareholders will be sent instructions on how to tender their share of common stock and when they should expect to receive the redemption amount. As our existing shareholders have agreed to vote all shares owned by them in favor of the business combination and the only way for a shareholder to exercise redemption rights is to vote against a business combination that is subsequently consummated, our existing shareholders will not have any redemption rights in connection with our consummation of business combination. Dissolution and liquidation if no business combination: As described above, if we have not consummated a business combination by , 2009 [twenty four months from the consummation of this offering], our corporate existence will cease by operation of law and we will promptly distribute only to our public shareholders the full purchase price of $10.00 per share (plus a portion of the interest income on the trust account not previously distributed to our public shareholders (less any taxes payable by us), and a pro rata share of any remaining net assets (subject to our provision for creditors)). Under Marshall Islands law, shareholders might, in certain circumstances, be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. If we complied with the procedures set forth in Section 106 of the Marshall Islands Business Corporations Act, which are intended to ensure that we make reasonable provision for all claims against us, including a six month notice period during which any third-party claims can be brought against us before any liquidating distributions are made to shareholders, any liability of a shareholder with respect to a liquidating distribution should be limited to the lesser of such shareholder s pro rata share of the claim or the amount distributed to the shareholder, and any liability of the shareholder should be barred after the period set forth in such notice. However, it is our intention to make liquidating distributions to our shareholders as soon as reasonably possible after dissolution. As such, our shareholders could potentially be liable for any claims to the extent of distributions received by them in a dissolution and any such liability of our shareholders will likely extend beyond the third anniversary of such dissolution. Accordingly, we cannot assure you that third parties will not seek to recover from our shareholders amounts owed to them by us. Table of Contents Furthermore, while we will seek to have all vendors and service providers (which would include any third parties we engaged to assist us in any way in connection with our search for a target business) and prospective target businesses execute agreements with us waiving any right, title, interest or claim of any kind they may have in or to any monies held in the trust account, there is no guarantee that they will execute such agreements. Nor is there any guarantee that, even if such entities execute such agreements with us, they will not seek recourse against the trust account or that a court would not conclude that such agreements are not legally enforceable. Each of our executive officers has agreed that he will be personally liable to the extent of his pro rata beneficial interest in our company immediately prior to this offering to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us. However, we cannot assure you that our executive officers will be able to satisfy those obligations, if they are required to do so. As a result, we cannot assure you that the per-share distribution from the trust fund, if we liquidate, will not be less than $10.00 plus interest then held in the trust fund. We anticipate the distribution of the funds in the trust account to our public shareholders will occur within 10 business days from the date our corporate existence ceases. Our existing shareholders have agreed to waive their respective rights to participate in any liquidation distribution occurring upon our failure to consummate a business combination with respect to those shares of common stock acquired by them prior to this offering. In addition, if we liquidate, Maxim Group LLC has agreed to waive its right to the $4,500,000 ($5,625,000 if the underwriters over-allotment option is exercised in full) of deferred underwriting compensation plus up to $420,000 of interest earned thereon held in the trust account for their benefit. We will pay the costs of liquidation from our remaining assets outside of the trust account. If such funds are insufficient, each of our executive officers have agreed to advance us the entire amount of the funds necessary to complete such liquidation (currently anticipated to be no more than approximately $15,000) and have agreed not to seek repayment for such expenses. Escrow of existing shareholders shares and lock-up of private placement warrants: On the consummation of this offering, all of our existing shareholders, including all of our officers will place the shares they owned before this offering into an escrow account maintained by Continental Stock Transfer Trust Company, acting as escrow agent. Subject to certain limited exceptions, such as transfers to family members and trusts for estate planning purposes and upon death, while remaining subject to the escrow agreement, these shares will not be transferable during the escrow period and will not be released from escrow until 12 months after the consummation of a business combination, unless we were to consummate a transaction after the consummation of the initial business combination which results in all of the shareholders of the combined entity having the right to exchange their shares of common stock for cash, securities or other property. Although the insider warrants are not subject to a formal escrow agreement, they will be Table of Contents subject to a lock-up agreement that will expire upon the consummation of a business combination and will be held in an account established by each of our executive officers with Maxim Group LLC until such time as we consummate a business combination. Our executive officers will not ask for, and Maxim Group LLC will not grant, any waiver of the lock-up agreement. If we are forced to liquidate, all of the existing shareholders shares will be cancelled. Any shares purchased by our existing shareholders in the open market will not be placed in escrow. Although they are not prohibited from purchasing shares in the open market after our initial public offering, we are not aware of any intention on the part of our current shareholders or officers to make any such purchases. Determination of offering amount: The size of this offering was based on our belief as to the capital required to facilitate our combination with one or more viable target businesses with sufficient scale to operate as a stand-alone public entity and determined through negotiations between us and the representative of the underwriters. Factors used in such determination included: (1) our management s assessment of the amount of funds necessary to complete an acquisition; (2) the history and prospects of companies whose principal business is the acquisition of other companies; (3) the actual and proposed offerings of those companies, including the structure and size of the offerings; (4) our capital structure; (5) an assessment by our management team of the maritime shipping industry and other industries and their experience in identifying acquisition targets and structuring acquisitions; (6) general conditions of the capital markets at the time of the offering; (7) the likely competition for acquisition targets; and (8) the likely number of potential targets. We believe that raising the amount described in this offering will offer us a variety of potential target businesses possessing the scale of operations and developed infrastructure that will allow us to execute a business plan that will leverage our skills and resources. We believe that possessing an equity base equivalent to the net proceeds of this offering will provide us the capital to combine with viable target businesses with established platforms and demonstrated business plans. The determination of the offering price of our units and the valuation accorded to our company is more arbitrary than the pricing of securities for or valuation of, operating companies in or related to the maritime shipping industry. Risks In making your decision on whether to invest in our securities, you should take into account not only the backgrounds of our management team, but also the special risks we face as a blank check company, as well as the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, and, therefore, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. You should carefully consider these and the other risks set forth in the section entitled Risk Factors beginning on page 16 of this prospectus. Table of Contents SUMMARY FINANCIAL DATA The following table summarizes the relevant financial data for our business and should be read with our financial statements, which are included in this prospectus. We have not had any significant operations to date, so only balance sheet data is presented. December 31, 2006 Actual As Adjusted(1) Balance Sheet Data: Working capital/(deficiency) $ (235,625 ) $ 198,520,728 Total assets 632,191 203,020,728 Total liabilities 611,563 4,500,000 Value of common stock which may be redeemed for cash(2) 68,424,990 (1) The as adjusted information gives effect to (i) the sale of the units in this offering and the sale of the insider warrants in the private placement, including the application of the related gross proceeds and the payment of the estimated remaining costs from such transactions, and (ii) the repayment of loans in the aggregate principal amount of $450,986, plus accrued interest of $824 made by all of our executive officers prior to the consummation of this offering. (2) If the business combination is approved and completed, public shareholders who voted against the business combination will be entitled to redeem their shares of common stock for $10.00 per share, which includes $0.225 per share of deferred underwriting compensation. However, the ability of shareholders to receive $10.00 per share is subject to any valid claims by our creditors which are not covered by amounts held in the trust account or the indemnities provided by our executive officers. See Risk Factors Risks associated with our business If third parties bring claims against us, the proceeds held in trust could be reduced and the per-share liquidation price received by shareholders could be less than $10.00 per share and Proposed Business Effecting a business combination Liquidation if no business combination. The total asset amount includes $195,500,000 being held in the trust account for our benefit, which will be available to us only upon the consummation of a business combination within the time period described in this prospectus. If a business combination is not so consummated, all of the funds held in the trust account (including Maxim Group LLC s deferred underwriting compensation plus up to $420,000 of interest earned thereon held in the trust account), plus all other accrued interest not previously distributed (less any taxes payable by us), will be distributed solely to our public shareholders, subject to any valid claims by our creditors that are not covered by amounts in the trust account or indemnities provided by our executive officers. We will not proceed with a business combination if public shareholders owning 35.0% or more of the shares sold in this offering vote against the business combination and exercise their redemption rights. Accordingly, we may effect a business combination if public shareholders owning up to one share less than 35.0% of the aggregate shares sold in this offering exercise their redemption rights. If this occurs, we would be required to redeem for cash up to 6,999,999 of the 20,000,000 shares of common stock included in the units at an expected initial per-share redemption price of $10.00. However, the ability of shareholders to receive $10.00 per unit is subject to any valid claims by our creditors which are not covered by amounts held outside the trust account or the indemnities provided by our officers. The expected redemption price per share is greater than each shareholder s initial pro rata share of the trust account of $9.775. Of the excess redemption price, $0.225 per share represents a portion of the contingent fee of Maxim Group LLC, which it has agreed to forego for each share that is redeemed. Accordingly, the total deferred underwriting compensation payable to Maxim Group LLC in the event of a business combination will be reduced by $0.225 for each share that is redeemed. The balance will be paid from proceeds held in the trust account which are payable to us upon consummation of the business combination. Even if less than 35.0% of the shareholders exercise their redemption rights, we may be unable to consummate a business combination if such redemption leaves us with funds less than a fair market value at least equal to 80.0% of the amount in the trust account (exclusive of Maxim Group LLC s deferred underwriting compensation plus up to $420,000 of interest earned thereon held in the trust account) at the time of such acquisition which amount is required as a condition to the consummation of our initial business combination, and we may be forced to find additional financing to consummate such a business combination, consummate a different business combination or liquidate. Table of Contents RISK FACTORS An investment in our securities involves a high degree of risk. You should consider carefully all of the material risks described below, together with the other information contained in this prospectus before making a decision to invest in our units. Unless otherwise stated in this prospectus, references to we, us or our company refer to Seanergy Maritime Corp. Risks Associated With Our Current Business We are a development-stage company with no operating history and, accordingly, you will not have any basis on which to evaluate our ability to achieve our business objective. We are a recently incorporated development-stage company with no operating results to date. Therefore, our ability to begin operations is dependent upon obtaining financing through the public offering of our securities. Since we do not have an operating history, you will have no basis upon which to evaluate our ability to achieve our business objective, which is to acquire an operating business. We have not conducted any discussions and we have no plans, arrangements or understandings with any prospective acquisition candidates. We will not generate any revenues until, at the earliest, after the consummation of a business combination. Our determination of the offering price of our units and of the aggregate amount of proceeds we are raising in this offering was more arbitrary than would typically be the case if we were an operating company rather than an acquisition vehicle. Prior to this offering there has been no public market for any of our securities. The public offering price of the units, the terms of the warrants, the aggregate proceeds we are raising and the amount to be placed in trust were the results of a negotiation between the underwriters and us. The factors that were considered in making these determinations included: the history and prospects of similarly structured blank check companies; our management and their experience in the industry; the actual and proposed offerings of those companies, including the structure and size of the offerings; our capital structure; the general conditions of the securities markets at the time of the offering; an assessment by management of the funds necessary to complete an acquisition in the shipping or shipping related industries; and other factors deemed relevant. Although these factors were considered, the determination of our per unit offering price and aggregate proceeds was more arbitrary than would typically be the case if we were an operating company. In addition, because we have not identified any potential target businesses, management s assessment of the financial requirements necessary to complete a business combination may prove to be inaccurate, in which case we may not have sufficient funds to consummate a business combination and we would be forced to either find additional financing or liquidate, or we may have too great an amount in the trust account to identify a prospect having a fair market value of at least 80.0% of the amount held in our trust account. If we are forced to liquidate before a business combination, our warrants will expire worthless. If we are unable to complete a business combination and are forced to liquidate the trust account, there will be no distribution with respect to our outstanding warrants and, accordingly, the warrants will expire worthless. For a more complete discussion of the effects on our shareholders if we are unable to complete a business combination, see the section below entitled Effecting a business combination Liquidation if no business combination. Table of Contents Unlike many other blank check offerings, we allow our public shareholders holding up to one share less than 35.0% of shares of common stock sold in this offering to exercise their redemption rights. This higher threshold will make it easier for us to consummate a business combination with which you may not agree. When we seek shareholder approval of a business combination, we will offer each public shareholder the right to have his, her or its shares of common stock redeemed for cash if the shareholder votes against the business combination and the business combination is approved and consummated. We will consummate the initial business combination only if the following two conditions are met: (i) a majority of the shares of common stock voted by our public shareholders vote in favor of the business combination and (ii) public shareholders owning 35.0% or more of the shares sold in this offering do not vote against the business combination and exercise their redemption rights. Most other blank check companies have a redemption threshold of 20.0%, which makes it more difficult for such companies to consummate their initial business combination. Thus, because we permit a larger number of shareholders to exercise their redemption rights, it will be easier for us to consummate an initial business combination with a target business which you may believe is not suitable for us. Unlike many other blank check offerings, we allow our public shareholders holding up to one share less than 35.0% of our shares of common stock sold in this offering to exercise their redemption rights. The ability of a larger number of our shareholders to exercise their redemption rights may not allow us to consummate the most desirable business combination or optimize our capital structure. Unlike most other blank check offerings which have a 20.0% threshold, we allow shareholders holding up to one share less than 35.0% of the shares of common stock sold in this offering to exercise their redemption rights and the business combination to go forward, however, we still must acquire a business or assets with a fair market value equal to at least 80.0% of the amount held in the trust account (exclusive of Maxim Group LLC s deferred underwriting compensation plus interest thereon held in the trust account) at the time of such initial business combination. Accordingly, if our business combination requires us to use 80.0% or more of the funds available to us to pay the purchase price, because we will not know how many shareholders may exercise such redemption rights, we may need to arrange third party financing to help fund our business combination in case a larger percentage of shareholders exercise their redemption rights than we expect. In the event that the acquisition involves the issuance of our stock as consideration, we may be required to issue a higher percentage of our stock to make up for a shortfall in funds. Raising additional funds to cover any shortfall may involve dilutive equity financing or incurring indebtedness at higher than desirable levels. This may limit our ability to effectuate the most attractive business combination available to us. Some potential investors may choose to not invest in us because of the 35.0% threshold. Traditionally, blank check offerings have permitted a business combination to be consummated only if less than 20.0% of the shares of common stock issued in the offering exercise their redemption rights. Since our redemption threshold is 35.0%, some potential investors may choose to not invest in us because of the greater potential amount that may be redeemed by shareholders in the event of a business combination. Therefore, our stock price and trading volume may be lower than similar companies with a lower threshold percentage. If we are unable to consummate a business combination, our public shareholders will be forced to wait the full 24 months before receiving liquidation distributions. We have 24 months in which to complete a business combination. We have no obligation to return funds to investors prior to such date unless we consummate a business combination prior thereto. Only after the expiration of this full time period will public shareholders be entitled to liquidation distributions if we are unable to complete a business combination. Accordingly, investors funds may be unavailable to them until such date. You will not be entitled to protections normally afforded to investors of blank check companies. Since the net proceeds of this offering are intended to be used to complete a business combination with a target business that has not been identified, we may be deemed to be a blank check company under the United States Table of Contents securities laws. However, since we will have net tangible assets in excess of $5,000,000 upon the successful consummation of this offering and will file a Current Report on Form 8-K with the SEC, including an audited balance sheet demonstrating this fact, upon consummation of this offering, we are exempt from rules promulgated by the SEC to protect investors in blank check companies, such as Rule 419. Accordingly, investors will not be afforded the benefits or protections of those rules, such as entitlement to all the interest earned on the funds deposited into the trust account. Because we are not subject to Rule 419, a certain portion of the interest earned on the funds deposited in the trust account will be released to us to fund our working capital, our units will be immediately tradable and we have a longer period of time to complete a business combination. For a more detailed comparison of our offering to offerings under Rule 419, see the section entitled Comparison to offerings of blank check companies below. If third parties bring claims against us, the proceeds held in trust could be reduced and the per-share liquidation value receivable by our public shareholders from the trust account as part of our plan of dissolution and liquidation may be less than $10.00 per share. Our placing of funds in the trust account may not protect those funds from third party claims against us. Although we will seek to have all significant vendors and service providers and all prospective target businesses waive any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our public shareholders, they would not be prevented from bringing claims against the trust account including, but not limited to, fraudulent inducement, breach of fiduciary responsibility or other similar claims, as well as claims challenging the enforceability of the waiver, in each case in order to gain an advantage with a claim against our assets, including the funds held in the trust account. Accordingly, the proceeds held in the trust account could be subject to claims that could take priority over the claims of our public shareholders and due to claims of such creditors, the per share liquidation price could be less than $10.00 per share. If we are unable to complete a business combination and are forced to liquidate, each of our executive officers has agreed that he will be personally liable to the extent of his pro rata beneficial interest in our company immediately prior to this offering, if we did not obtain a valid and enforceable waiver from any prospective target business, vendor or other service provider of any rights or claims to the trust account and only the extent necessary to ensure that the proceeds in the trust account are not reduced by the claims of such parties. Prior to this offering, all five of our executive officers collectively own on a beneficial basis all of our outstanding shares of common stock. We have not independently verified whether such persons have sufficient funds to satisfy their indemnity obligations and, therefore, we cannot assure you that our executive officers will be able to satisfy those obligations. We believe the likelihood of our executive officers having to indemnify the trust account is minimal, because we will endeavor to have all vendors and prospective target businesses as well as other entities execute agreements with us waiving any right, title, interest or claim of any kind in or to monies held in the trust account. If any of such executive officers refused to satisfy their indemnification obligations, we would be required to bring a claim against them to enforce our indemnification rights. Additionally, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, the funds held in our trust account will be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our shareholders. To the extent any bankruptcy claims deplete the trust account we cannot assure you we will be able to return to our public shareholders the liquidation amounts due them. An involuntary bankruptcy proceeding can be filed in the United States as long as the trust funds are maintained within the United States. Otherwise, because the Company has no other assets in the United States and is formed off-shore, any bankruptcy claim would have to be initiated elsewhere. The Marshall Islands has no bankruptcy act. It does have a little-used device pursuant to which, at the request of a judgment creditor, a court can appoint a receiver to either run or wind up the affairs of a corporation. A court can also appoint a trustee if the corporation files for dissolution to wind up the affairs. Finally, it would be possible for a Marshall Islands court to apply the law of any jurisdiction with laws similar to that of the Marshall Islands, such as those of the United States. Table of Contents We will dissolve and liquidate if we do not consummate a business combination and our shareholders may be held liable for claims by third parties against us to the extent of distributions received by them. Our Second Amended and Restated Articles of Incorporation provides that we will continue in existence only until 24 months from the consummation of this offering. If we have not completed a business combination by such date, and amended this provision in connection thereto, pursuant to the Marshall Islands Business Corporations Act, our corporate existence will cease except for the purposes of winding up our affairs and liquidating. Under Marshall Islands law, shareholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. If we complied with the procedures set forth in Section 106 of the Business Corporations Act, which are intended to ensure that we make reasonable provision for all claims against us, including a six month notice period during which any third-party claims can be brought against us before any liquidating distributions are made to shareholders, any liability of a shareholder with respect to a liquidating distribution is limited to the lesser of such shareholder s pro rata share of the claim or the amount distributed to the shareholder, and any liability of the shareholder would be barred after the period set forth in such notice. However, it is our intention to make liquidating distributions to our shareholders as soon as reasonably possible after dissolution and we do not intend to comply with the six month notice period (which would result in our executive officers being liable for claims for which we did not provide). As such, to the extent our executive officers cannot cover such liabilities, our shareholders could potentially be liable for any claims to the extent of distributions received by them in a dissolution and any such liability of our shareholders will likely extend beyond the third anniversary of such dissolution. Accordingly, we cannot assure you that third parties will not seek to recover from our shareholders amounts owed to them by us. If we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us, which is not dismissed, any distributions received by shareholders could be viewed under applicable debtor/creditor and/or bankruptcy laws as either a preferential transfer or a fraudulent conveyance. As a result, a bankruptcy court could seek to recover all amounts received by our shareholders. Furthermore, because we intend to distribute the proceeds held in the trust account to our public shareholders promptly after , 2009 [twenty four months from the consummation of this offering], this may be viewed or interpreted as giving preference to our public shareholders over any potential creditors with respect to access to or distributions from our assets, Furthermore, our board of directors may be viewed as having breached their fiduciary duties to our creditors and/or may have acted in bad faith, thereby exposing itself and our company to claims of punitive damages, by paying public shareholders from the trust account prior to addressing the claims of creditors and/or complying with certain provisions of the Marshall Islands Business Corporations Act with respect to our dissolution and liquidation. We cannot assure you that claims will not be brought against us for these reasons. We may choose to redeem our outstanding warrants at a time that is disadvantageous to our warrant holders. We may redeem the warrants issued as a part of our units at any time after the warrants become exercisable in whole and not in part, at a price of $0.01 per warrant, upon a minimum of 30 days prior written notice of redemption, if and only if, the last sales price of our common stock equals or exceeds $14.25 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption, provided, however, a current registration statement under the Securities Act of 1933 relating to the shares of our common stock underlying the warrants is then effective. Redemption of the warrants could force the warrant holders (i) to exercise the warrants and pay the exercise price therefore at a time when it may be disadvantageous for the holders to do so, (ii) to sell the warrants at the then current market price when they might otherwise wish to hold the warrants, or (iii) to accept the nominal redemption price which, at the time the warrants are called for redemption, is likely to be substantially less than the market value of the warrants. Table of Contents Although we are required to use our best efforts to have an effective registration statement covering the issuance of the shares underlying the warrants at the time that our warrant holders exercise their warrants, we cannot guarantee that a registration statement will be effective, in which case our warrant holders may not be able to exercise our warrants, rendering them practically worthless. Holders of our warrants will be able to exercise the warrants only if (i) a current registration statement under the Securities Act of 1933 relating to the shares of our common stock underlying the warrants is then effective and (ii) such shares are qualified for sale or exempt from qualification under the applicable securities laws of the states in which the various holders of warrants reside. Although we have undertaken and intend to use our best efforts to maintain a current registration statement covering the shares underlying the warrants following completion of this offering to the extent required by federal securities laws, we cannot assure that we will be able to do so. If we are not able to do so, holders will be unable to exercise their warrants and we will not be required to net-cash settle any such warrant exercise. Further, if the prospectus relating to the common stock issuable upon the exercise of the warrants is not current or if the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside, the warrants may have no value, the market for the warrants may be limited and the warrants may expire worthless and unredeemed, as described in the risk factor above. Holders of warrants who reside in jurisdictions in which the shares underlying the warrant are not qualified and in which there is no exemption will be unable to exercise their warrants and would either have to sell their warrants in the open market or allow them to expire unexercised. In the event the warrants expire worthless or we choose to redeem the warrants at a time when the holders of such warrants are unable to exercise the warrants, the purchasers of units will have effectively paid the full purchase price of the units solely for the common stock underlying such units. If and when the warrants become redeemable by us, we may exercise our redemption right even if we are unable to qualify the underlying securities for sale under all applicable state securities laws. Because the warrants sold in the private placement were originally issued pursuant to an exemption from registration requirements under the federal securities laws, the holders of such warrants will be able to exercise their warrants even if, at the time of exercise, a prospectus relating to the common stock issuable upon exercise of such warrants is not current. As a result, the holders of the warrants purchased in the private placement will not have any restrictions with respect to the exercise of their warrants. As described above, the holders of the warrants purchased in this offering will not be able to exercise them unless we have a current registration statement covering the shares issuable upon their exercise. We may consummate a business combination with a company in the maritime shipping industry, but will not be limited to pursuing acquisition opportunities only within that industry. As we have not currently selected any target business with which to complete a business combination, investors in this offering are unable to currently ascertain the merits or risks of the industry or target business operations. We may consummate a business combination with a company in the maritime shipping industry, but will not be limited to pursuing acquisition opportunities only within that industry. Accordingly, there is no current basis for you to evaluate the possible merits or risks of the particular industry in which we may ultimately consummate a business combination. As we have not yet identified a prospective target business, investors in this offering have no current basis to evaluate the possible merits or risks of the target business operations. To the extent we complete a business combination with a financially unstable company or an entity in its development stage, we may be affected by numerous risks inherent in the business operations of those entities. Although our management will endeavor to evaluate the risks inherent in a particular target business, we cannot assure you that we will properly ascertain or assess all of the significant risk factors. We also cannot assure you that an investment in our units will not ultimately prove to be less favorable to investors in this offering than a direct investment, if an opportunity were available, in a target business. For a more complete discussion of our selection of a target business, see the section below entitled Effecting a business combination We have not identified a target business. Because there are numerous companies with a business plan similar to ours seeking to effectuate a business combination, it may be more difficult for us to do so. Based upon publicly available information, we have identified 113 blank check companies which have gone public in the United States since August 2003, of which 28 have completed a business combination, while five have Table of Contents liquidated or will be liquidating. The remaining 80 blank check companies have more than $7.5 billion in trust and are seeking to complete business combinations. Of these companies, only 25 companies have announced that they have entered into either a definitive agreement or a letter of intent for a business combination but not yet consummated them. Furthermore, we have identified approximately 35 additional offerings for blank check companies in the United States, that are still in the registration process but have not completed initial public offerings, and there are likely to be more blank check companies filing registration statements for initial public offerings after the consummation of this offering and prior to our completion of a business combination. We have identified 1 blank check company that is seeking to compete a business combination in the maritime shipping industry. In addition, a number of blank check companies may consummate their business combinations in any industry they choose. This, compounded with the fact that we consider business combinations in other sectors, will subject us to competition from a considerable number of other companies seeking to consummate a business combination. We cannot assure you that we will be able to successfully compete for an attractive business combination. Additionally, because of this competition, we cannot assure you that we will be able to effectuate a business combination within the required time period. We may issue shares of our capital stock or debt securities to complete a business combination, which would reduce the equity interest of our shareholders and likely cause a change in control of our ownership. Our Second Amended and Restated Articles of Incorporation authorizes the issuance of up to 89,000,000 shares of common stock, par value $0.0001 per share, and 1,000,000 shares of preferred stock, par value $0.0001 per share. Immediately after this offering (assuming no exercise of the underwriters over-allotment option), there will be 27,038,889 authorized but unissued shares of our common stock available for issuance (after giving effect to the appropriate reservation for the issuance of shares issuable upon full exercise of our outstanding warrants (including warrants sold in the private placement) or the representative s option to purchase 1,000,000 units). Although we have no commitments as of the date of this offering to issue our securities, we may issue a substantial number of additional shares of our common stock or preferred stock, or a combination of common and preferred stock, to complete a business combination. The issuance of additional shares of our common stock or any number of shares of our preferred stock: may significantly reduce the equity interest of investors in this offering; will likely cause a change in control if a substantial number of our shares of common stock are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and most likely also result in the resignation or removal of our present officers and directors; and may adversely affect prevailing market prices for our common stock. Additionally, the maritime shipping industry is capital intensive, traditionally using substantial amounts of indebtedness to finance acquisitions, capital expenditures and working capital needs. If we finance any acquisitions through the issuance of debt securities, it could result in: default and foreclosure on our assets if our operating cash flow after a business combination were insufficient to pay our debt obligations; acceleration of our obligations to repay the indebtedness even if we have made all principal and interest payments when due if the debt security contained covenants that required the maintenance of certain financial ratios or reserves and any such covenant were breached without a waiver or renegotiation of that covenant; our immediate payment of all principal and accrued interest, if any, if the debt security was payable on demand; and our inability to obtain additional financing, if necessary, if the debt security contained covenants restricting our ability to obtain additional financing while such security was outstanding. For a more complete discussion of the possible structure of a business combination, see the section below entitled Effecting a business combination Selection of a target business and structuring of a business combination. Table of Contents Our existing shareholders control a substantial interest in us and thus may influence certain actions requiring shareholder vote following the consummation of our initial business combination. Upon consummation of our offering, our existing shareholders (a group made up of all of our executive officers) will collectively own approximately 20.0% of our issued and outstanding shares of common stock (not including the 14,961,111 shares of common stock underlying the insider warrants purchased in a private placement by such executive officers), which could permit them to effectively influence the outcome of all matters requiring approval by our shareholders, including the election of directors and approval of significant corporate transactions, following the consummation of our initial business combination. Furthermore, our board of directors is divided into three classes, each of which will generally serve for a term of three years with only one class of directors being elected in each year. It is unlikely that there will be an annual meeting of shareholders to elect new directors prior to the consummation of a business combination, in which case all of the current directors will continue in office at least until the consummation of the business combination. If there is an annual meeting, as a consequence of our staggered board of directors, only a minority of the board of directors will be considered for election and our existing shareholders, because of their ownership position, will have considerable influence regarding the outcome. Accordingly, our existing shareholders will continue to exert control at least until the consummation of a business combination. Our ability to effect a business combination and to be successful afterward will be totally dependent upon the efforts of our key personnel, some of whom may join us following a business combination and whom we would have only a limited ability to evaluate. It is also possible that our current officers and directors will resign upon the consummation of a business combination. Our ability to effect a business combination will be totally dependent upon the efforts of our key personnel. The future role of our key personnel following a business combination, however, cannot presently be fully ascertained. Although we expect several of our management and other key personnel, particularly, Georgios Koutsolioutsos, our President and Co-Chairman of the Board of Directors, and Panagiotis Zafet, our Chief Executive Officer and Co-Chairman of the Board of Directors, to remain associated with us following a business combination, we may employ other personnel following the business combination. Moreover, our current management will only be able to remain with the combined company after the consummation of a business combination if they are able to negotiate and agree to mutually acceptable employment terms as part of any such combination, which terms would be disclosed to shareholders in any proxy statement relating to such transaction. If we acquired a target business in an all-cash transaction, it would be more likely that current members of management would remain with the combined company if they chose to do so. If a business combination were structured as a merger whereby the shareholders of the target company were to control the combined company following a business combination, it may be less likely that our current management would remain with the combined company unless it was negotiated as part of the transaction via the acquisition agreement, an employment agreement or other arrangement. In making the determination as to whether current management should remain with us following the business combination, management will analyze the experience and skill set of the target business management and negotiate as part of the business combination that certain members of current management remain if it is believed that it is in the best interests of the combined company post-business combination. If management negotiates such retention as a condition to any potential business combination, management may look unfavorably upon or reject a business combination with a potential target business whose owners refuse to retain members of our management post-business combination, thereby resulting in a conflict of interest. While we intend to closely scrutinize any additional individuals we engage after a business combination, we cannot assure you that our assessment of these individuals will prove to be correct. These individuals may be unfamiliar with the requirements of operating a public company as well as United States securities laws which could cause us to have to expend time and resources helping them become familiar with such laws. This could be expensive and time-consuming and could lead to various regulatory issues which may adversely affect our operations. Table of Contents None of our officers or directors has ever been associated with a blank check company, which could adversely affect our ability to consummate a business combination. None of our officers or directors has ever been associated with a blank check company. Accordingly, you may not have sufficient information with which to evaluate the ability of our management team to identify and complete a business combination using the proceeds of this offering and the private placement. Our management s lack of experience in operating a blank check company could adversely affect our ability to consummate a business combination and force us to liquidate. Our officers and directors may allocate their time to other businesses thereby causing conflicts of interest in their determination as to how much time to devote to our affairs. This could have a negative impact on our ability to consummate a business combination. Our officers and directors are not required to commit their full time to our affairs, which may result in a conflict of interest in allocating their time between our operations and other businesses. We do not intend to have any full time employees prior to the consummation of a business combination. All of our executive officers are engaged in several other business endeavors and are not obligated to contribute any specific number of hours per week to our affairs. If our executive officers other business affairs require them to devote more substantial amounts of time to such affairs, it could limit their ability to devote time to our affairs and could have a negative impact on our ability to consummate a business combination. For a complete discussion of the potential conflicts of interest that you should be aware of, see the section below entitled, Management Conflicts of Interest. We cannot assure you that these conflicts will be resolved in our favor. Our officers and directors may in the future become affiliated with entities engaged in business activities similar to those intended to be conducted by us and accordingly, may have conflicts of interest in determining to which entity a particular business opportunity should be presented. None of our officers, directors or their affiliates has been or currently is a principal of, or affiliated or associated with, a blank check company. However, Panagiotis Zafet, Simon Zafet, Roland Beberniss and Ioannis Tsigkounakis are affiliated with entities in the maritime shipping industry. They and our other officers and directors may become aware of business opportunities that may be appropriate for presentation to us as well as the other entities with which they are or may be affiliated. Even though these entities have however entered into Right of First Refusal and Business Opportunity Agreements granting us a right of first refusal, which we believe ensures that we will be presented with all business combinations first, there can be no assurance that they will be complied with. For a complete discussion of our management s business affiliations and the potential conflicts of interest that you should be aware of, see the sections below entitled Management Directors and Executive Officers and Management Conflicts of Interest. We cannot assure you that any of the described conflicts will be resolved in our favor. All of our existing shareholders beneficially own shares of our common stock which will not participate in liquidation distributions and therefore they may have a conflict of interest in determining whether a particular target business is appropriate for a business combination. Our existing shareholders (a group made up of all of our executive officers) have waived their right to receive distributions with respect to those shares upon our liquidation if we fail to complete a business combination. The shares and insider warrants owned by such officers and directors will be worthless if we do not consummate a business combination. Accordingly, the personal and financial interests of our executive officers who own our shares may influence their motivation in identifying and selecting a target business and completing a business combination timely. Consequently, the discretion of those executive officers in identifying and selecting a suitable target business may result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination are appropriate and in our shareholders best interest. Table of Contents Since our existing shareholder will lose their entire investment in us if a business combination is not consummated and may be required to pay costs associated with our liquidation, our existing shareholders may purchase shares of our common stock from shareholders who would otherwise choose to vote against a proposed business combination or exercise their redemption rights in connection with such business combination. Each of our existing shareholders owns shares of our common stock (which were purchased for an aggregate of $25,000) which will be worthless if we do not consummate a business combination. In addition, each of our existing shareholders will purchase warrants exercisable for our common stock (for an aggregate of $13,465,000), which will also be worthless if we do not consummate a business combination. We believe the current equity value for the shares owned by our existing shareholders is significantly lower than the $50,000,000 total value calculated at the $10.00 per unit offering price because the unit offering includes a warrant which the officers and directors did not receive, the offering may not succeed and even if it does succeed, the holders of these shares will not be able to sell or transfer them while such shares remain in escrow, except in certain limited circumstances (such as transfers to relatives and trusts for estate planning purposes) and these shares are not entitled to any proceeds in case we liquidate if we do not consummate a business combination. In addition, in the event we are forced to liquidate, each of our executive officers have agreed to advance us the entire amount of the funds necessary to complete such liquidation (currently anticipated to be no more than approximately $15,000) and have agreed not to seek repayment for such expenses. Given the interest that our existing shareholders have in a business combination being consummated, it is possible that our existing shareholders will acquire securities from public shareholders who have elected to redeem their shares of our common stock in order to change their vote and insure that the business combination will be approved (which could result in a business combination being approved even if, after the announcement of the business combination, 35% or more of our public shareholders would have elected their redemption rights, or 51% of our public shareholders would have voted against the business combination, but for the purchases made by our existing shareholders). Our existing shareholders will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the amount outside of the trust account unless the business combination is consummated and therefore they may have a conflict of interest in determining whether a particular target business is appropriate for a business combination and in the public shareholders best interest. Our officers and directors will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the available proceeds not deposited in the trust account and the portion of the interest on the trust account released to us (which, because interest rates are unknown, may be insufficient to fund all of our working capital requirements) unless the business combination is consummated. The financial interest of our officers and directors could influence their motivation in selecting a target business and thus, there may be a conflict of interest when determining whether a particular business combination is in the shareholders best interest. For instance, our officers and directors may, as part of any such combination, negotiate the repayment of some or all of their out-of-pocket expenses in excess of the amount not placed in the trust account, which if not agreed to by the target business owners, could cause our management to view such potential business combination unfavorably, thereby resulting in a conflict of interest. Because all our directors and officers reside outside of the United States and, after the consummation of a business combination, substantially all of our assets may be located outside of the United States, it may be difficult for investors to enforce their legal rights against such individuals. All of our directors and officers reside outside of the United States and, after the consummation of a business combination, substantially all of our assets may be located outside of the United States. As a result, it may not be possible for investors in the United States to enforce their legal rights, to effect service of process upon all of our directors or officers or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties of such directors and officers under federal securities laws. Table of Contents It is probable that our initial business combination will be with a single target business, which may cause us to be solely dependent on a single business and a limited number of services. Our initial business combination must be with a business or businesses with a collective fair market value of at least 80.0% of the amount held in the trust account (exclusive of Maxim Group LLC s deferred underwriting compensation plus up to $420,000 of interest earned thereon held in the trust account) at the time of such acquisition. We may not be able to acquire more than one target business because of various factors, including possible complex accounting issues, which would include generating pro forma financial statements reflecting the operations of several target businesses as if they had been combined, and numerous logistical issues, which could include attempting to coordinate the timing of negotiations, proxy statement disclosure and closings with multiple target businesses. In addition, we would also be exposed to the risk that conditions to closings with respect to the acquisition of one or more of the target businesses would not be satisfied, bringing the fair market value of the initial business combination below the required fair market value of 80.0% of the amount in the trust account threshold. Accordingly, while it is possible that we may attempt to effect our initial business combination with more than one target business, we are more likely to choose a single target business if deciding between one target business meeting such 80.0% threshold and comparable multiple target business candidates collectively meeting the 80.0% threshold. Consequently, it is probable that, unless the purchase price consists substantially of our equity, we will have the ability to complete only the initial business combination with the proceeds of this offering and the private placement. Accordingly, the prospects for our success may be: solely dependent upon the performance of a single business, or dependent upon the development or market acceptance of a single or limited number of processes or services. In this case, we will not be able to diversify our operations or benefit from the possible spreading of risks or offsetting of losses, unlike other entities which may have the resources to complete several business combinations in different industries or different areas of a single industry. Because of our limited resources and the significant competition for business combination opportunities, we may not be able to consummate an attractive business combination. We expect to encounter intense competition from other entities having a business objective similar to ours, including venture capital funds, leveraged buyout funds and operating businesses competing for acquisitions. Many of these entities are well established and have extensive experience in identifying and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human and other resources than we do and our financial resources will be relatively limited when contrasted with those of many of these competitors. While we believe that there are numerous potential target businesses that we could acquire with the net proceeds of this offering, our ability to compete in acquiring certain sizable target businesses will be limited by our available financial resources. This inherent competitive limitation gives others an advantage in pursuing the acquisition of certain target businesses. Further, the obligation we have to seek shareholder approval of a business combination may delay the consummation of a transaction, and our obligation to redeem for cash up to one share less than 35.0% of the total number of shares of common stock sold in this offering in certain instances will limit the manner in which we can structure a business combination (i.e. we will not be able to undertake an all cash acquisition) and may reduce the resources available to us for such purpose, as well as for funding a target company s business. Additionally, our outstanding warrants, and the future dilution they potentially represent, may not be viewed favorably by certain target businesses. Any of these obligations may place us at a competitive disadvantage in successfully negotiating a business combination. We may be unable to obtain additional financing, if required, to complete a business combination or to fund the operations and growth of the target business, which could compel us to restructure the transaction or abandon a particular business combination. As we have not yet identified any prospective target business, we cannot ascertain the capital requirements for any particular transaction. If the net proceeds of this offering prove to be insufficient, either because of the size of the business combination or the depletion of the available net proceeds not held in trust (including interest earned on Table of Contents the trust account released to us) in search of a target business, or because we become obligated to redeem for cash a significant number of shares from dissenting shareholders, we will be required to seek additional financing. We cannot assure you that such financing would be available on acceptable terms, if at all. To the extent that additional financing proves to be unavailable when needed to consummate a particular business combination, we would be compelled to restructure the transaction or abandon that particular business combination and seek an alternative target business candidate. In addition, it is possible that we could use a portion of the funds not in the trust account (including amounts we borrowed, if any) to make a deposit, down payment or fund a no-shop provision with respect to a particular proposed business combination, although we do not have any current intention to do so. In the event that we were ultimately required to forfeit such funds, if such payment was large enough and we had already used up the funds allocated to due diligence and related expenses in connection with the aborted transaction, we could be left with insufficient funds to continue searching for, or conduct due diligence with respect to, other potential target businesses. If we were unable to secure additional financing, we would most likely fail to consummate a business combination in the allotted time and would dissolve and liquidate the trust account as part of our plan of dissolution and liquidation. In addition, if we consummate a business combination, we may require additional financing to fund the operations or growth of the target business. The failure to secure additional financing could have a material adverse effect on the continued development or growth of the target business. None of our officers, directors or existing shareholders is required to provide any financing to us in connection with or after a business combination. Risks Associated With Our Acquisition of a Target Business in the Maritime Shipping Industry If charter rates fluctuate and the maritime shipping industry continues to undergo cyclical turns, it may have a negative impact on our profitability and operations. The maritime shipping business, including the dry cargo market, has been cyclical in varying degrees, experiencing fluctuations in charter rates, profitability and, consequently, vessel values. A significant contraction in demand for imported commodities, such as iron ore or coal, as a result of economic downturns or changes in government policies in certain regional markets could have a material adverse impact on dry cargo freight rates, as well as the demand, in general for vessels. For instance, a downturn in the economy of countries such as China, which has experienced substantial global economic growth during the past few years, could negatively affect the shipping industry. The demand for dry cargo vessels is also greatly affected by the demand for consumer goods and perishable foods, dry bulk commodities and bagged and finished products, as well as commodity prices, environmental concerns and competition. The supply of maritime shipping capacity is also a function of the delivery of new vessels and the number of older vessels scrapped, in lay-up, converted to other uses, reactivated or removed from active service. Supply may also be affected by maritime transportation and other types of governmental regulation, including that of international authorities. These and other factors may cause a decrease in the demand for the services we may ultimately provide. As a result, the operations of any prospective target business we may ultimately complete a business combination with may be adversely affected. Changes in the maritime shipping industry may reduce the demand for the types of vessels we seek to acquire or the services we may ultimately provide and thereby reduce our profitability. The future demand for vessels in the markets in which we may ultimately operate will be dependent, in large part, upon economic growth in the global economy, seasonal and regional changes in demand and changes to the capacity of the world fleet. Adverse economic, political, social or other negative developments could have a material adverse effect on the business that we may ultimately complete a business combination with. Many of the markets in which dry cargo vessels operate have been characterized by oversupply. This is frequently the result of an overestimated growth in demand for these vessels in the applicable shipping markets. For example, an oversupply of vessels carrying bulk cargo may be due to, among other factors, an overestimation in the demand for imports of bulk commodities like grain, sugar, iron ore or coal. While it is our intention to complete a business combination with a target business that operates in a market that will afford the greatest value for the vessels that we ultimately own and operate, we cannot assure you that we will be able to successfully acquire a business that provides the valuable market that we seek, or that the value of the vessels that we ultimately acquire will maintain their value in any of these markets. Operating results may be subject to seasonal fluctuations. Table of Contents The maritime shipping industry has historically exhibited seasonal variations in demand and, as a result, in charter hire rates. This seasonality may result in quarter-to-quarter volatility in our operating results. The dry bulk carrier market is typically stronger in the fall and winter months in anticipation of increased consumption of coal and other raw materials in the northern hemisphere during the winter months. In addition, unpredictable weather patterns in these months tend to disrupt vessel scheduling and supplies of certain commodities. As a result, revenues are typically weaker during the fiscal quarters ended June 30 and September 30, and, conversely, typically stronger in fiscal quarters ended December 31 and March 31. If we were to acquire vessels or a company with agreements to purchase individual vessels, it is highly unlikely that proxy materials provided to our shareholders would include historical financial statements and, accordingly, investors will not have historical financial statements on which to rely in making their decision whether to vote for the acquisition. If we were to acquire vessels or a company with agreements to purchase individual vessels, it is possible that the proxy statement we would send to shareholders would, unless otherwise required by applicable law and regulations, not contain audited or unaudited historical financial statements with respect to the such vessels. Although we would provide such audited or unaudited historical financial statement if required by applicable law or regulations, such historical financial statements are not often required, and, therefore, shareholders voting on a proposed transaction would not have the benefit of financial statements of past operations. The reason that we may not be required to provide audited historical information is because the business combination would be viewed as an acquisition of assets instead of an acquisition of a business. It is consistent with shipping industry precedent in that audited historical financials would not be required, because typically the acquiring company would not have access to such information. However, whether an acquisition is actually deemed to be that of assets (instead of a business) is based on an analysis of the facts and circumstances involved, taking to consideration a number of variables that generally would reflect upon whether there is sufficient continuity of the acquired entity s operations prior to and after the acquisition so that the disclosure of the historical information is material to the understanding of future operations. Some of these factors would include whether new charter agreements will be entered into, if the vessel s flag will change, or whether existing crew will continue and if so under pre-existing or new contracts. We are unable to predict the facts and circumstances surrounding any possible future acquisition of vessels (whether the acquisition will be structured as an acquisition of assets or an operating business), and accordingly cannot provide assurances with respect to the provision of audited historical financial information. If however, we determined that such audited historical financial information was not required, in the proxy statement, we would send to our shareholders would contain the same information that would typically be provided in the prospectus for an initial public offering of a start-up shipping company, such as: (i) historical and prevailing market rates for vessels on the basis of type, age and proposed employment; (ii) our expectations of future market trends and proposed strategy for employment of the vessels; (iii) our anticipated operational (overhead) expenses; and (iv) the valuation of the vessels as assets generally (i.e., whether they are new buildings or second-hand and the type of vessel), all of which, in turn, depend on the sector of the shipping industry in which we consummate such a business combination. Thus, you would not necessarily be able to rely on historical financial statements when deciding whether to approve a business combination involving the acquisition of vessels or a company with agreements to purchase individual vessels. To the extent that our business combination consists of the acquisition of assets that do not have historical financial information, and they are ocean-going motor vessels, we will determine whether such business combination has a fair market value of at least 80.0% of the amount in our trust account (exclusive of Maxim Group LLC s deferred underwriting compensation plus interest thereon held in the trust account) based on the value of the assets, as determined by the advice of our ship broker and financial advisors consistent with industry practice. Such valuation will factor in, among other things, the revenue stream generated from ongoing charter arrangements, to the extent that the vessels have any charter arrangements that will continue after the business combination, and future forward rates, as quoted on the International Maritime Exchange (Imarex). Table of Contents If a business combination involves the ownership of vessels, such vessels could be arrested by maritime claimants, which could result in the interruption of business and have an adverse effect on revenue and profitability. Crew members, tort claimants, claimants for breach of certain maritime contracts, vessel mortgagees, suppliers of goods and services to a vessel, shippers of cargo and other persons may be entitled to a maritime lien against a vessel for unsatisfied debts, claims or damages, and in many circumstances a maritime lien holder may enforce its lien by arresting a vessel through court processes. Additionally, in certain jurisdictions, such as South Africa, under the sister ship theory of liability, a claimant may arrest not only the vessel with respect to which the claimant s lien has arisen, but also any associated vessel owned or controlled by the legal or beneficial owner of that vessel. If any vessel ultimately owned and operated by us is arrested , this could result in a material loss of revenues, or require us to pay substantial amounts to have the arrest lifted. The ownership and operation of vessels in international trade is susceptible to world events, which could be detrimental to our financial condition and operating performance. Terrorist attacks such as the attacks on the United States on September 11, 2001 and the continuing response of the United States to these attacks, as well the threat of future terrorist attacks in the United States or elsewhere, continue to cause uncertainty in the world financial markets and may affect our business, operating results and financial condition. The continuing conflict in Iraq may lead to additional acts of terrorism and armed conflict around the world, which may contribute to further economic instability in the global financial markets. In the past, political conflicts have also resulted in attacks on vessels, mining of waterways and other efforts to disrupt international shipping, particularly in the Persian Gulf region. Acts of terrorism and piracy have also affected vessels trading in regions such as the South China Sea and the Indian Ocean off the Somalian Coast. Any of theses occurrences could impair our operating results. Governments could requisition vessels of a target company during a period of war or emergency, resulting in a loss of earnings. If we consummate a business combination with a target company in the transportation business, a government could requisition our vessels for title or hire. Requisition for title occurs when a government takes control of a vessel and becomes her owner, while requisition for hire occurs when a government takes control of a vessel and effectively becomes her charter at dictated charter rates. Generally, requisitions occur during periods of war or emergency, although governments may elect to requisition vessels in other circumstances. Although a target company would be entitled to compensation in the event of a requisition of any of its vessels, the amount and timing of payment would be uncertain. If we experience a catastrophic loss and our insurance is not adequate to cover such loss, it could have a material adverse affect on our operations. If we consummate a business combination in the shipping related industry and acquire ownership and operation of vessels, storage facilities and refineries our business could be affected by a number of risks, including mechanical failure, personal injury, loss or damage, business interruption due to political conditions in foreign countries, hostilities, labor strikes, adverse weather conditions and catastrophic disasters, including environmental accidents. All of these risks could result in liability, loss of revenues, increased costs and loss of reputation. We intend to maintain insurance, consistent with industry standards, against these risks on business assets we may acquire upon completion of a business combination. However, we cannot assure you that we will be able to adequately insure against all risks, that any particular claim will be paid out of our insurance, or that we will be able to procure adequate insurance coverage at commercially reasonable rates in the future. Our insurers will also require us to pay certain deductible amounts, before they will pay claims, and insurance policies may contain limitations and exclusions, which, although we believe will be standard for the shipping industry, may nevertheless increase our costs and lower our profitability. Additionally, any increase in environmental and other regulations may also result in increased costs for, or the lack of availability of, insurance against the risks of environmental damage, pollution and other claims for damages that may be asserted against us. Our inability to obtain insurance sufficient to cover Table of Contents potential claims or the failure of insurers to pay any significant claims, could have a material adverse effect on our profitability and operations. We may incur significant costs in complying with environmental, safety and other governmental or European Union regulations and our failure to comply with these regulations could result in the imposition of penalties, fines and restrictions on our operations. The shipping industry is subject to extensive and changing environmental protection, safety and other federal, state and local laws, rules, regulations and treaties, and other regulations imposed by the European Union, compliance with which may entail significant expense, including expenses associated with changes in operating procedures. We cannot assure you that we will be able to comply with all laws, rules, regulations and treaties following a business combination. If we are unable to adhere to these requirements, it could result in the imposition of penalties and fines against us, and could also result in the imposition of restrictions on our business and operations. Furthermore, the costs of compliance also could have a material adverse effect on our profitability and operations. Inherent in our operations are hazards which require continual oversight and control. If we consummate a business combination, we may be engaged in transporting and refining materials with potential toxicity in the course of our business. There is a risk of loss of containment of hydrocarbons and other hazardous material at operating sites and during transportation. If operational risks materialized it could result in loss of life, damage to the environment or loss of production. Political instability could harm our business. We may target businesses that have operations in developing countries where political, economic and social transition is taking place. Some countries have experienced political instability, expropriation or nationalization of property, civil strife, strikes, acts of war and insurrections. Any of these conditions occurring could disrupt or terminate our operations, causing our operations to be curtailed or terminated in these areas or our production to decline and could cause us to incur additional costs. Our business is subject to foreign currency risks. If we consummate a business combination with a target business with operations outside of the United States, our business will be subject to foreign currency risks. These risks include difficulty in converting local currencies to U.S. dollars; and the market for conversion of local currency into other currencies may deteriorate or cease to exist. Fluctuation in exchange rates can therefore give rise to foreign exchange exposures. A foreign subsidiary that we may form may become subject to United States federal income taxation on its United States source shipping income. Prior to the announcement of a potential business combination, we may form a foreign (non-U.S.) subsidiary (the Foreign Subsidiary ), which will be treated as a corporation for U.S. federal income tax purposes, to negotiate, and if shareholder approval is obtained, ultimately complete, the acquisition of a target business. In such event, we will attempt to have the Foreign Subsidiary qualify under Section 883 of the U.S. Internal Revenue Code of 1986, as amended, for an exemption from United States federal income tax on substantially all of its United States source shipping income. We can give no assurance that the Foreign Subsidiary will qualify for the Section 883 exemption. If the Foreign Subsidiary does not qualify for an exemption pursuant to Section 883, it will be subject to United States federal income tax, likely imposed on a gross basis at 4.0%, on its United States source shipping income, which should constitute not more than 50.0% of its gross shipping income, and its net income and cash flow will be reduced by the amount of such tax. Table of Contents If we acquire a business that charters vessels on the spot market, it may increase our risk of doing business following the business combination. We may complete a business combination with a business that involves the chartering of vessels on a spot charter basis, either on voyage charters or short-term time charters of less than 12 months duration. Although dependence on spot charters is not unusual in the shipping industry, the spot charter market is highly competitive and spot charter rates are subject to significant fluctuations based upon available charters and the supply of and demand for seaborne shipping capacity. Although our focus on the spot charter market may enable us to benefit from strengthening industry conditions should they occur, to do so we may be required to consistently procure spot charter business. We cannot assure you that spot charters will be available at rates that will be sufficient to enable us to operate our business profitably. If a target company has or obtains a vessel that is of second-hand or older nature, it could increase our costs and decrease our profitability. We believe that competition for employment of second-hand vessels may be intense in the dry cargo market. Additionally, second-hand vessels may carry no warranties from sellers with respect to their condition as compared to warranties from shipyards available for newly-constructed vessels, and may be subject to problems created by the use of their original owners. If we purchase any second-hand vessels, we may incur additional expenditures as a result of these risks, which may reduce our profitability. While it will be our intention if we acquire a target business in this area to sell or retire our vessels before they are considered older vessels, under shipping standards, in the rare case where we continue to own and operate a vessel for a longer period, we could be faced with the additional expenditures necessary to maintain a vessel in good operating condition as the age of a vessel increases. Moreover, port-state authorities in certain jurisdictions may demand that repairs be made to this type of vessel before allowing it to berth at or depart a particular port, even though that vessel may be in class and in compliance with all relevant international maritime conventions. Should any of these types of problems or changes develop, income may be lost if a vessel goes off-hire and additional unforeseen and unbudgeted expenses may be incurred. If we choose to maintain any vessels past the age that we have planned, we cannot assure you that market conditions will justify expenditures with respect to any of the foregoing or enable us to operate these vessels profitably. Management services relating to a target company s vessels may be performed by management companies that are affiliates of our officers and directors which could result in potential conflicts of interest. Panagiotis Zafet is the managing director of Balthellas Chartering S.A., a private company engaged in ship management and ship broking. Simon Zafet is the Chief Executive Officer of Hellasco Shipping Ltd., a private shipping company. Elias M. Culucundis is the President, Chief Executive Officer and Director of Equity Shipping Company Ltd., a company specializing in the startup, management and operation of commercial and technical shipping projects. Roland Beberniss is the founder and managing director of RBB Shipping GmbH. If we complete a business combination that involves the acquisition of vessels, we may consider engaging the services of one or more management companies to provide technical and management services, relating to the operation of such vessels. Whether or not members of existing management remain our officers or directors post business combination, it is possible that these management services will be performed by management companies that are controlled by one or more of our existing shareholders, officers or directors (for example, by acting as our fleet s technical managers and performing all commercial management functions). The management companies may receive fees and commissions on gross revenue received by us in respect of each vessel managed, a commission on the gross sale or purchase price of vessels which we purchase or sell, and a commission on all insurance placed. If members of our existing management remain as members of management following a business combination, the relationships between our officers and directors and the applicable management companies may give rise to conflicts of interest between us on the one hand and the management companies on the other. In addition, as some of our officers and directors hold senior management positions with the management companies described above, these individuals may experience conflicts of interest in selecting between our interests and those of the applicable management companies. Table of Contents Because certain financial information will be required to be provided to our shareholders in connection with a proposed business combination, prospective target businesses may be limited. In order to seek shareholder approval of a business combination with an operating business in the shipping industry, the proposed target business will be required to have certain financial statements which are prepared in accordance with, or which can be reconciled to, U.S. generally accepted accounting principles and audited in accordance with the standards of the United States Public Company Accounting Oversight Board. Some of the businesses in the shipping industry may not keep financial statements in accordance with, or that can be reconciled with, U.S. generally accepted accounting principles. To the extent that the required financial statements or information cannot be prepared or obtained, we will not be able to complete a business combination with such entities. Accordingly, these financial information requirements may limit the pool of potential target businesses which we may acquire. Risks Associated With This Offering Our determination of the offering price of our units and of the aggregate amount of proceeds we are raising in this offering was more arbitrary than would typically be the case if we were an operating company rather than an acquisition vehicle. Before this offering there has been no public market for any of our securities. The public offering price of the units, the terms of the public warrants and the aggregate proceeds we are raising and the amount to be placed in the trust account were negotiated between us and the representative of the underwriters. Among the factors considered in making these determinations were: our management s assessment of the amount of funds necessary to complete an acquisition in the maritime shipping industry; the history and prospects of other blank check companies whose principal business is the acquisition of other companies; the actual and proposed offerings of those companies, including the structure and size of the offerings; an assessment of our management team and its experience in identifying acquisition targets and structuring acquisitions; our capital structure; the general conditions of the capital markets that we expect to prevail at the time of the offering; the likely competition for acquisition targets; and the likely number of potential targets. Furthermore, since we do not have an operating history or financial results and we have not begun to investigate potential target businesses whose operations could be evaluated, the underwriters were unable to compare our financial results and prospects with those of public companies operating in the same maritime shipping industry, nor could they determine the accuracy of our estimate of the amount needed to fund our operations for the next 24 months. In addition, because we have not identified any potential target businesses, our assessment of the financial resources necessary to complete a business combination may prove to be inaccurate, in which case we may not have sufficient funds to consummate a business combination and we would be forced to either seek additional financing or liquidate. Our founding shareholders paid an aggregate of $25,000, or approximately $0.0038 per share for their shares and, accordingly, you will experience immediate and substantial dilution from the purchase of our common stock. The difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering and the private placement constitutes the dilution to Table of Contents you in this offering. (Pro forma net tangible book value is computed by subtracting our total liabilities (including the value of common stock which may be redeemed for cash) from our total tangible assets and dividing that amount by the number of outstanding shares of our common stock.) After giving effect to the offering and the private placement, you will incur an immediate and substantial dilution of approximately 27.7% or $2.77 per share. This means that although the initial offering price was $10.00 per unit, the pro forma net tangible book value per share following this offering will be only $7.23. The fact that our founding shareholders acquired their initial shares of common stock at a price of approximately $0.0038 per share will contribute significantly to this dilution. Our outstanding warrants may have an adverse effect on the market price of common stock and make it more difficult to effect a business combination. Following the offering we will have issued warrants to purchase 34,961,111 shares of common stock (which includes the warrants sold in the private placement). We will also sell upon the consummation of this offering an option for $100, to purchase 1,000,000 units to Maxim Group LLC, the representative of the underwriters, which, if exercised, will result in the issuance of 1,000,000 shares of common stock and additional warrants to purchase 1,000,000 shares of common stock. To the extent we issue shares of common stock to effect a business combination, the potential for the issuance of substantial numbers of additional shares upon exercise or conversion of these warrants could make us a less attractive acquisition vehicle in the eyes of a target business as such securities, when exercised or converted, will increase the number of issued and outstanding shares of our common stock and reduce the value of the shares issued to complete the business combination. Accordingly, our warrants may make it more difficult to effectuate a business combination or increase the cost of the target business. Additionally, the sale, or even the possibility of sale, of the shares underlying the warrants could have an adverse effect on the market price for our securities or on our ability to obtain future public financing. If and to the extent these warrants are exercised, you may experience dilution to your holdings. If our existing shareholders exercise their registration rights, it may have an adverse effect on the market price of our common stock and the existence of these rights may make it more difficult to effect a business combination. Our existing shareholders are entitled to demand that we register the resale of the shares of common stock they acquired prior to this offering at any time after the date on which their shares are released from escrow, which, except in limited circumstances, will not be before 12 months after the date of our business combination. Furthermore, we have agreed to grant demand registration rights with respect to the 14,961,111 insider warrants purchased in the private placement and the 14,961,111 shares of common stock underlying the insider warrants at any time after we have completed a business combination. If our existing shareholders exercise their registration rights with respect to all of their shares of common stock, then there will be up to an additional 5,000,000 shares of common stock and 14,961,111 warrants and/or up to 14,961,111 shares of common stock issued on exercise of the insider warrants eligible for trading in the public market. The presence of this additional number of shares of common stock eligible for trading in the public market may have an adverse effect on the market price of our common stock. In addition, the existence of these rights may make it more difficult to effectuate a business combination or increase the cost of the target business, as the shareholders of the target business may be discouraged from entering into a business combination with us or request a higher price for their securities as a result of these registration rights and the potential future effect the exercise may have on the trading market for our common stock. There is currently no market for our securities and a market for our securities may not develop, which could adversely affect the liquidity and price of our securities. As of the consummation of this offering there is no market for our securities. Therefore, shareholders should be aware that they cannot benefit from information about prior market history as to their decisions to invest which means they are at further risk if they invest. In addition, the price of the securities, after the offering, can vary due to general economic conditions and forecasts, our general business condition and the release of our financial reports. Table of Contents The American Stock Exchange may delist our securities from quotation on its exchange which could limit investors ability to make transactions in our securities and subject us to additional trading restrictions. We intend to apply to have our securities listed on the American Stock Exchange, a national securities exchange, upon consummation of this offering. We cannot assure you that our securities will continue to be listed on the American Stock Exchange in the future prior to, or following, a business combination. Additionally, in connection with our business combination, it is likely that the American Stock Exchange may require us to file a new initial listing application and meet its initial listing requirements as opposed to its more lenient continued listing requirements. We cannot assure you that we will be able to meet those initial listing requirements at that time. If the American Stock Exchange delists our securities from trading on its exchange, we could face significant material adverse consequences including: a limited availability of market quotations for our securities; a determination that our common stock is a penny stock which will require brokers trading in our common stock to adhere to more stringent rules and possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock; a limited amount of news and analyst coverage for our company; and a decreased ability to issue additional securities or obtain additional financing in the future. U.S. tax authorities could treat the Foreign Subsidiary as a passive foreign investment company, which could have adverse U.S. federal income tax consequences to U.S. investors. In the event we form the Foreign Subsidiary, and such subsidiary were determined to be a passive foreign investment company, known as a PFIC , U.S. Holders (as defined in the section of this prospectus captioned Taxation United States Federal Income Taxation General ) could be subject to adverse United States federal income tax consequences. Specifically, if the Foreign Subsidiary were determined to be a PFIC for any taxable year, each U.S. Holder may be subject to increased U.S. federal tax income tax liability and may be subject to additional reporting requirements. In general, the Foreign Subsidiary will be classified as a PFIC for any taxable year in which either (1) at least 75.0% of its gross income is passive income or (2) at least 50.0% of the value (determined on the basis of a quarterly average) of its assets is attributable to assets that produce or are held for the production of passive income. For purposes of these tests, cash, including working capital, and investments are considered assets that produce or are held for the production of passive income. We cannot assure you that the Foreign Subsidiary will not be a PFIC. We urge U.S. investors to consult their own tax advisors regarding the possible application of the PFIC rules. For a more detailed explanation of the tax consequences of PFIC classification to U.S. Holders, see the section of this prospectus captioned Taxation United States Federal Income Taxation U.S. Holders Passive Foreign Investment Company Rules. A U.S. Holder of a warrant may have adverse U.S. federal income tax consequences if its warrant becomes exercisable into shares of the Foreign Subsidiary and the Foreign Subsidiary were to be classified as a PFIC. As discussed in the section of this prospectus captioned Taxation United States Federal Income Taxation U.S. Holders Passive Foreign Investment Company Rules, if a warrant held by a U.S. Holder becomes exercisable into shares of the Foreign Subsidiary, and the Foreign Subsidiary were to be classified as a PFIC, the U.S. Holder of the warrant generally will be subject to adverse U.S. federal income tax consequences. Unlike a U.S. Holder of our common stock (who will be deemed to own a portion of the shares of the Foreign Subsidiary), a U.S. Holder of a warrant generally will not be able to mitigate these adverse tax consequences by making a qualified electing fund ( QEF ) election with respect to its warrants. A U.S. Holder of a warrant is urged to consult its own tax advisor concerning the adverse tax consequences that may result to such holder by reason of the application of the PFIC rules to a warrant under such holder s particular circumstances. Table of Contents An investment in this offering may involve adverse U.S. federal income tax consequences because the redemption or liquidation price per share is greater than an investor s initial tax basis in our common stock. There is a risk that an investor s entitlement to receive payments in excess of the investor s initial tax basis in our common stock (see Taxation United States Federal Income Taxation Allocation of Purchase Price Between Common Stock and Warrants ) upon exercise of the investor s redemption right or upon our liquidation will result in constructive income to the investor, which could affect the timing and character of income recognition and result in an immediate U.S. federal income tax liability to the investor without the investor s receipt of cash from us. Prospective investors are urged to consult their own tax advisors with respect to these tax risks, as well as the specific tax consequences to them of purchasing, holding or disposing of our units. As we have made an election to be classified as a partnership for U.S. federal income tax purposes, U.S. investors may have taxable income in advance of their receipt of cash. We have made an election to be classified as a partnership, and not as an association taxable as a corporation, for U.S. federal income tax purposes. As a result of such election, and subject to our meeting the qualifying income test described below, a U.S. Holder of an Interest (as such term is defined in the section of this prospectus captioned Taxation United States Federal Income Taxation Allocation of Purchase Price Between Common Stock and Warrants ) generally will be subject to U.S. federal income tax on such holder s distributive share of our taxable income or gain (which, however, in general, will not include the income from any tax-exempt money market accounts in which we invest), regardless of whether such U.S. Holder receives any distribution from us. Thus, in any year, such U.S. Holder s distributive share of taxable income from us (and, possibly, the taxes imposed on that income) could exceed the amount, if any, that such holder receives as a distribution from us. U.S. investors may be subject to adverse tax consequences if we fail to be treated as a partnership for U.S. federal income tax purposes As discussed in Taxation United States Federal Income Taxation Classification as a Partnership, even though we may constitute a publicly traded partnership, we expect that we will continue to be treated as a partnership for U.S. federal income tax purposes for each taxable year that we meet a qualifying income test (i.e., at least 90.0% of our gross income consists of qualifying income, such as interest, dividends, and gains from the sale or other taxable disposition of capital assets held for the production of such income). If we fail to meet the qualifying income test in any taxable year, then from and after the beginning of that tax year, we will be treated as a foreign corporation, and not a partnership, for U.S. federal income tax purposes. In such case, U.S. Holders may be subject to certain adverse tax and reporting issues. In particular, if we are treated as a foreign corporation, and not a partnership, for U.S. federal income tax purposes, we may be classified as a PFIC, as defined above, in which case a U.S. Holder may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements. In addition, as a corporation for U.S. federal income tax purposes, our income, gain, loss, deduction, credit and tax preference items would not be passed through to U.S. Holders (as described under Taxation United States Federal Income Taxation U.S. Holders Taxation of Operations and Distributions ), and subject to the PFIC rules, distributions to U.S. Holders generally would be taxable as dividends for U.S. federal income tax purposes. U.S. investors may recognize gain for U.S. federal income tax purposes on the actual or deemed transfer of our assets to a foreign corporation. In the event we form the Foreign Subsidiary and transfer all or substantially all of our assets to it, or we otherwise are deemed to have been converted to a foreign corporation for U.S. federal income tax purposes, U.S. Holders may recognize gain (but not loss) to the extent of their share of any appreciation in the value of our assets at the time of such deemed or actual transfers and may also be subject to certain reporting obligations. U.S. Holders are urged to consult their own tax advisors concerning the tax consequences of such transactions, including any reporting requirements with respect thereto. Table of Contents A U.S. Holder of a warrant may have adverse U.S. federal income tax consequences if we were to liquidate pursuant to a shareholder vote following the formation of and the transfer of our assets to the Foreign Subsidiary. As discussed in the section of this prospectus captioned Taxation United States Federal Income Taxation U.S. Holders Tax and Reporting Issues as to Formation of Foreign Subsidiary, in the event we form and transfer all or substantially all of our assets to the Foreign Subsidiary in connection with a proposed business combination, under certain circumstances (particularly if we were to then liquidate our company or merge our company into the Foreign Subsidiary pursuant to a separate shareholder vote in which the warrant holders would not participate), the Foreign Subsidiary will assume our obligations under the warrants, and a U.S. Holder of a warrant will have the right, under certain conditions, to exercise the warrant for shares in the Foreign Subsidiary (and not for an Interest in us). While we expect that this assumption and right (which is provided for under the original terms of the warrant) should not result in a taxable event to a U.S. Holder of a warrant, such U.S. Holder should nevertheless consult its own tax advisor concerning the tax consequences of such transaction under such holder s particular circumstances. An investor may be subject to adverse U.S. federal income tax consequences in the event the Internal Revenue Service ( IRS ) were to disagree with the U.S. federal income tax consequences described herein. As described in the section of this prospectus captioned Taxation United States Federal Income Taxation General, we have not sought a ruling from the IRS as to any U.S. federal income tax consequences described herein. The IRS may disagree with the descriptions of U.S. federal income tax consequences contained herein, and its determination may be upheld by a court. Any such determination could subject an investor or our company to adverse U.S. federal income tax consequences that would be different than those described herein. Accordingly, each prospective investor is urged to consult a tax advisor with respect to the specific tax consequences of the acquisition, ownership and disposition of our common stock and warrants, including the applicability and effect of state, local or non-U.S. tax laws, as well as U.S. federal tax laws. If we are deemed to be an investment company, we may be required to institute burdensome compliance requirements and our activities may be restricted, which may make it difficult for us to complete a business combination. We may be deemed to be an investment company, as defined under Sections 3(a)(1)(A) and (C) of the Investment Company Act of 1940 because, following the offering and prior to the consummation of a business combination, we may be viewed as engaging in the business of investing in securities and we will own investment securities having a value exceeding forty percent of our total assets. If we are deemed to be an investment company under the Investment Company Act of 1940, our activities may be restricted, including: restrictions on the nature of our investments; and restrictions on the issuance of securities; which may make it difficult for us to complete a business combination. In addition, we may have imposed upon us burdensome requirements, including: registration as an investment company; adoption of a specific form of corporate structure; and reporting, record keeping, voting, proxy and disclosure requirements and other rules and regulations. However, we do not believe that our anticipated principal activities will subject us to the Investment Company Act of 1940. To this end, the proceeds held in trust may only be invested by the trustee in Treasury Bills issued by the United States with maturity dates of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940. By restricting the investment of the proceeds to these instruments, we intend to avoid being deemed an investment company within the meaning of the Investment Table of Contents Company Act of 1940. This offering is not intended for persons who are seeking a return on investments in government securities. The trust account and the purchase of government securities for the trust account is intended as a holding place for funds pending the earlier to occur of either: (i) the consummation of our primary business objective, which is a business combination, or (ii) absent a business combination, our dissolution and return of the funds held in this trust account to our public shareholders as part of our plan of dissolution and liquidation. If we were deemed to be subject to the act, compliance with these additional regulatory burdens would require additional expense that we have not allotted for. Our directors may not be considered independent under the policies of the North American Securities Administrators Association, Inc. Under the policies of the North American Securities Administrators Association, Inc., an international organization devoted to investor protection, because each of our directors owns shares of our securities and may receive reimbursement for out-of-pocket expenses incurred by them in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations, state securities administrators could take the position that such individuals are not independent. If this were the case, they would take the position that we would not have the benefit of independent directors examining the propriety of expenses incurred on our behalf and subject to reimbursement. Additionally, there is no limit on the amount of out- of-pocket expenses that could be incurred and there will be no review of the reasonableness of the expenses by anyone other than our board of directors, which would include persons who may seek reimbursement, or a court of competent jurisdiction if such reimbursement is challenged. To the extent such out-of-pocket expenses exceed the available proceeds not deposited in the trust account, such out-of-pocket expenses would not be reimbursed by us unless we consummate a business combination, in which event this reimbursement obligation would in all likelihood be negotiated with the owners of a target business. Although we believe that all actions taken by our directors on our behalf will be in our best interests, whether or not they are deemed to be independent under the policies of the North American Securities Administrator Association, we cannot assure you that this will actually be the case. If actions are taken, or expenses are incurred that are actually not in our best interests, it could have a material adverse effect on our business and operations and the price of our stock held by the public shareholders. Because we may acquire a company located outside of the United States, we may be subject to various risks of the foreign jurisdiction in which we ultimately operate. If we acquire a company that has sales or operations outside the United States, we could be exposed to risks that negatively impact our future sales or profitability following a business combination, especially if the acquired company is in a developing country or a country that is not fully market-oriented. If we were to acquire a business that operates in such a country, our operations might not develop in the same way or at the same rate as might be expected in the United States or another country with an economy similar to the market-oriented economies of member countries which are members of the Organization for Economic Cooperation and Development, or the OECD (an international organization helping governments through the economic, social and governance challenges of a globalized economy). We are incorporated in the Republic of the Marshall Islands, which does not have a well-developed body of corporate law, causing our public shareholders to have more difficulty in protecting their interests. Our corporate affairs are governed by our Second Amended and Restated Articles of Incorporation and By-laws and by the Marshall Islands Business Corporations Act, or BCA. The provisions of the BCA resemble provisions of the corporation laws of a number of states in the United States. However, there have been few judicial cases in the Republic of the Marshall Islands interpreting the BCA. The rights and fiduciary responsibilities of directors under the law of the Republic of the Marshall Islands are not as clearly established as the rights and fiduciary responsibilities of directors under statutes or judicial precedent in existence in certain United States jurisdictions. Shareholder rights may differ as well. While the BCA does specifically incorporate the non-statutory law, or judicial case law, of the State of Delaware and other states with substantially similar legislative provisions, our public shareholders may have more difficulty in protecting their interests in the face of actions by the management, directors or controlling shareholders than would shareholders of a corporation incorporated in a Table of Contents United States jurisdiction. For more information with respect to how shareholder rights under Marshall Islands law compares with shareholder rights under Delaware law, please see the section entitled Marshall Islands Company Considerations. If our common stock becomes subject to the SEC s penny stock rules, broker-dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected. If at any time we have net tangible assets of $5,000,000 or less and our common stock has a market price per share of less than $5.00, transactions in our common stock may be subject to the penny stock rules promulgated under the Securities Exchange Act of 1934, as amended. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must: make a special written suitability determination for the purchaser; receive the purchaser s written agreement to a transaction prior to sale; provide the purchaser with risk disclosure documents which identify certain risks associated with investing in penny stocks and which describe the market for these penny stocks as well as a purchaser s legal remedies; and obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a penny stock can be completed. If our common stock becomes subject to these rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected. As a result, the market price of our securities might be depressed, and you might find it more difficult to sell our securities. Table of Contents CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS The statements contained in this prospectus that are not purely historical are forward-looking statements. Our forward-looking statements include, but are not limited to, statements regarding our or our management s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words anticipates, believe, continue, could, estimate, expect, intends, may, might, plan, possible, potential, predicts, project, should, would and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this prospectus may include, for example, statements about our: ability to complete a combination with one or more target businesses; success in retaining or recruiting, or changes required in, our officers, key employees or directors following a business combination; executive officers and directors allocating their time to other businesses and potentially having conflicts of interest with our business or in approving a business combination, as a result of which they would then receive expense reimbursements and their shares of common stock would become eligible for later release from escrow; potential inability to obtain additional financing to complete a business combination; limited pool of prospective target businesses; securities ownership being concentrated; potential change in control if we acquire one or more target businesses for stock; risks associated with operating in the shipping industry; public securities limited liquidity and trading, as well as the current lack of a trading market; delisting of our securities from the American Stock Exchange or an inability to have our securities quoted on the American Stock Exchange following a business combination; or use of proceeds not in trust or available to us from interest income, net of income taxes, on the trust account balance, and our financial performance following this offering. The forward-looking statements contained in this prospectus are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading Risk Factors. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws and/ or if and when management knows or has a reasonable basis on which to conclude that previously disclosed projections are no longer reasonably attainable. Table of Contents USE OF PROCEEDS We estimate that the net proceeds of this offering and the private placement will be as set forth in the following table: Without Over-Allotment Over-Allotment Option Option Exercised Gross proceeds(1) Private placement $ 13,465,000 $ 13,465,000 Offering 200,000,000 230,000,000 Total $ 213,465,000 $ 243,465,000 Offering and private placement expenses(2) Underwriting discount(3) 7,500,000 8,175,000 Underwriting non-accountable expense allowance (1.0% of gross proceeds) 2,000,000 2,000,000 Deferred underwriting compensation(4) 4,500,000 5,625,000 Legal fees and expenses 650,000 650,000 Amex listing fees and expenses 80,000 80,000 Miscellaneous expenses 17,415 17,415 Printing and engraving expenses 100,000 100,000 Accounting fees and expenses 65,000 65,000 SEC registration fee 12,235 12,235 NASD registration fee 40,350 40,350 Total offering expenses $ 14,965,000 $ 16,765,000 Net proceeds Not held in trust(5) $ 3,000,000 $ 2,325,000 Held in trust for our benefit 195,500,000 224,375,000 Total net proceeds $ 198,500,000 $ 226,700,000 Adjustments Deferred underwriting compensation to be held in trust(3)(4) 4,500,000 5,625,000 Total held in trust $10.00 per unit (100.0%) $ 200,000,000 $ 230,000,000 (1) Excludes the payment of $100 from Maxim Group LLC for its purchase option, proceeds from the sale of units under the unit purchase option and proceeds from the exercise of any warrants. (2) A portion of the offering expenses, including SEC registration fees, NASD filing fees, AMEX filing fees and legal and accounting fees, have been paid from the loans aggregating $450,986 from five of our officers and directors, which loans shall be repaid upon the consummation of this offering out of the proceeds of this offering not placed in trust. (3) Represents 3.75% of the gross proceeds from the sale of the 20,000,000 units in this offering ($7,500,000) and 2.25% of the gross proceeds from the sale of the 3,000,000 units subject to the underwriters over-allotment option (an additional $675,000 for a total of $8,175,000). (4) Represents 2.25% of the gross proceeds from the sale of the 20,000,000 units in this offering ($4,500,000) and 3.75% of the gross proceeds from the sale of the 3,000,000 units subject to the underwriters over-allotment option (an additional $1,125,000 for a total of $5,625,000) that will be deposited into the trust account and paid to Maxim Group LLC only upon consummation of a business combination and then only with respect to those units as to which the component shares have not been redeemed. If a business combination is not consummated and we are liquidated, such amounts will be distributed among our public shareholders. In addition, in the event Table of Contents of a business combination the amount of deferred underwriting compensation payable to Maxim Group LLC will have priority over other claims to the trust account. (5) Not held in trust for over-allotment exercise. Gives effect to payment of up to $675,000 of the costs and expenses associated with the exercise of the over-allotment option from funds outside the trust account upon closing of the exercise of the over-allotment option. We are permitted to draw up to $675,000 of interest earned on the trust account to replace $675,000 used to pay certain of the costs and expenses associated with the over-allotment option. Amount Percentage Estimated expenses related to a business combination to be paid from $3,000,000 outside of the trust account allocated for working capital purposes) Legal, accounting and other expenses attendant to the structuring and negotiation of a business combination $ 600,000 20.0 % Due Diligence, identification and research of prospective target business and reimbursement of out of pocket due diligence expenses to management 700,000 23.33 % Working capital and reserves (including finders fees, consulting fees or other similar compensation, potential deposits, down payments, franchise taxes (if any), funding of a no-shop provision with respect to a particular business combination and dissolution obligations and reserves, if any) 670,000 22.33 % Expenses incurred in connection with quarterly interest distributions to our public stockholders and related administrative and professional costs in connection with election to be classified as a partnership for United States Federal income tax purposes 630,000 21.0 % Payment for office space and administrative and support services ($7,500 per month for up to 2 years) 180,000 6.00 % Legal and accounting fees relating to SEC reporting obligations 70,000 2.33 % Directors and Officers Liability Insurance 150,000 5.00 % Total estimated expenses related to a business combination(6) $ 3,000,000 100.0 % (6) Does not reflect $675,000 additional costs and expenses associated with the exercise of the over-allotment option, to be paid from funds held outside of the trust account and replaced with interest earned on the trust account. Such amount shall be adjusted ratably, to the extent the over-allotment option is not exercised in full. On the closing date of this offering, $200,000,000, or $230,000,000 if the underwriters over-allotment option is exercised in full, will be placed in a trust account at Deutsche Bank Trust Company Americas maintained by Continental Stock Transfer Trust Company, New York, New York, as trustee. This amount includes the net proceeds of this offering and a portion of the proceeds from the private placement, and $4,500,000 ($5,625,000 if the underwriters over-allotment option is exercised in full) of deferred underwriting compensation to be paid to Maxim Group LLC if and only if, a business combination is consummated. The proceeds held in trust will not be released from the trust account until the earlier of the completion of a business combination or the liquidation of the trust account in the event we do not consummate a business combination. The proceeds held in the trust account (exclusive of Maxim Group LLC s deferred underwriting compensation plus up to $420,000 of interest earned thereon held in the trust account) may be used as consideration to pay the sellers of a target business with which we ultimately complete a business combination. Any amounts not paid as consideration to the sellers of the target business (other than amounts paid for finders or professional fees or amounts paid for any fees or costs incurred in connection with any debt or equity financing made in connection with the business combination) may be used to finance operations of the target business. Table of Contents We expect to allocate the $3,000,000 funds identified for working capital as follows: Allocation of Working Capital(1) Amount Legal, accounting and other expenses attendant to the structuring and negotiation of a business combination $ 600,000 Due diligence, identification and research of prospective target business and reimbursement of out of pocket due diligence expenses to management 700,000 Working capital and reserves (including finders fees, consulting fees or other similar compensation, potential deposits, down payments, franchise taxes (if any), funding of a no-shop provision with respect to a particular business combination and dissolution obligations and reserves, if necessary(2)) 670,000 Expenses incurred in connection with quarterly interest distributions to our public stockholders and related administrative and professional costs in connection with election to be classified as a partnership for United States Federal income tax purposes(3) 630,000 Payment for office space and administrative and support services ($7,500 per month for up to 2 years) 180,000 Legal and accounting fees relating to SEC reporting obligations 70,000 Directors and Officers Liability Insurance 150,000 Total $ 3,000,000 (1) The allocation below is an estimate and may not prove to be accurate. (2) We currently estimate that we would require approximately $15,000 to implement our plan of dissolution in the event we do not consummate a business combination. (3) Consists of two years of fees in connection with the quarterly payment of interest earned on the trust account (approximately $10,000 to $15,000 annually) and administrative costs associated with our election to be treated as a partnership for United States Federal income tax purposes (approximately $250,000 to $300,000 annually). We expect that due diligence of prospective target businesses will be performed by some or all of our officers and directors, but is expected to include engaging market research firms and/or third party consultants. Our officers and directors will not receive any compensation for their due diligence of prospective target businesses, but will be reimbursed for any out-of-pocket expenses (such as travel expenses) incurred in connection with such due diligence activities. It is also possible that we could use a portion of our working capital to make a deposit, down payment or fund a no-shop provision with respect to a particular proposed business combination, although we do not have any current intention to do so. In the event that we were ultimately required to forfeit such funds (whether as a result of our breach of the agreement relating to such payment or otherwise), if such payment was large enough and we had already used up the funds available for due diligence and related expenses in connection with the aborted transaction, we could be left with insufficient funds to continue searching for, or conduct due diligence with respect to, other potential target businesses. Thus, if we were unable to secure additional financing, we would most likely fail to consummate a business combination in the allotted time and would be forced to liquidate. It is possible that our existing shareholders could advance us the additional required funds, thereby increasing the amount of excess out-of-pocket expenses to be reimbursed following a business combination. To the extent that our capital stock is used in whole or in part as consideration to effect a business combination, the proceeds held in the trust account as well as any other net proceeds not expended will be used to finance the operations of the target business. We believe that the amount allocated to working capital will be sufficient to cover the costs related to the acquisition of a target business and reimbursement costs, even if the costs of due diligence, legal, accounting and other expenses of structuring and negotiating a business combination exceed our estimates. As of the consummation of this offering, our executive officers have advanced to us a total of $450,986, which was used to pay a portion of the expenses of this offering referenced in the line items above for SEC registration fee, NASD registration fee, AMEX Listing fees, legal fees and expenses and an advance on Maxim s non accountable expense allowance. Such loan will be payable with 4.0% annual interest on the closing of this offering. The loan will be repaid out of the proceeds of this offering not being placed in trust. Table of Contents The funds held in the trust account will be invested only in United States government securities, defined as any Treasury Bills issued by the United States having a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940, as amended. By restricting the investment of the proceeds of this offering to these instruments, we intend to avoid being deemed an investment company within the meaning of the Investment Company Act. We believe that, upon consummation of this offering, we will have sufficient available funds to operate for at least the next 24 months, assuming that a business combination is not consummated during that time. No compensation of any kind (including finder s and consulting fees) will be paid to any of our existing shareholders, officers or directors, or any of their affiliates, from us or from any other party for any services rendered to us prior to or in connection with the consummation of the business combination. Our existing shareholders, officers and directors, will only be entitled to receive reimbursement for any out-of-pocket expenses incurred by them in connection with activities on our behalf. To the extent that such out-of-pocket expenses exceed the available proceeds not deposited in the trust account, such out-of-pocket expenses would not be reimbursed by us unless we consummate a business combination, in which event this reimbursement obligation would in all likelihood be negotiated with the owners of a target business. Since the role of present management after a business combination is uncertain, we have no ability to determine what remuneration, if any, will be paid to those persons after a business combination. Although we are formed as a corporation under the laws of the Republic of the Marshall Islands, for United States federal income tax purposes, we elected to be classified as a partnership, and not as a corporation. Because we have elected to be treated as a partnership for U.S. federal income tax purposes, U.S. investors may be subject to U.S. federal income tax on their distributive shares of our taxable income or gain (whether or not distributed). As a means to pass down to our public shareholders the benefit of the interest that is earned on the trust account, our Second Amended and Restated Articles of Incorporation requires that we distribute the interest earned on the trust account to our public shareholders, and that we make quarterly distributions (which are intended to be at least equal to any such tax liability) in US dollars of interest income earned on the trust account (less any taxes payable by us and exclusive of (i) up to $420,000 of interest earned on Maxim Group LLC s deferred underwriting compensation held in the trust account and (ii) up to an aggregate of $675,000 of interest income on the proceeds in the trust account that we may draw in the event the over-allotment option is exercised in full) on a pro-rata basis to our public shareholders until the earlier of the consummation of a business combination or our liquidation. This is atypical of other offerings of this type, where a significant portion, if not all, of the interest earned on the trust account pending the consummation of a business combination is added to the funds held in the trust account and either disbursed as payment for part of the purchase price for a business combination, or maintained for working capital purposes to be used following the consummation of a business combination. Pursuant to our Second Amended and Restated Articles of Incorporation, distributions will be made on a quarterly basis within 15 days of the end of the prior quarter to shareholders of record on a date to be determined by our Board of Directors which we expect to be on or shortly following the fifth business day following the end of the prior quarter. The first distribution will be made following the end of the December 31, 2007 quarter and will include interest which accrues during the period commencing on the close of the offering through December 31, 2007. We expect that within three business days following the end of each fiscal quarter (commencing with the quarter ending December 31, 2007), our accounting consultants will have sufficient opportunity to review our monthly investment account statements and to calculate the amount to be distributed to each of our public shareholders, our board of directors will meet to officially fix the record date with respect to the distribution of dividends earned during the immediately preceding quarter (or, in the case of the first distribution, the period commencing on the closing of the offering through December 31, 2007) and we will announce the record date and distribution to the public by means of a press release and/or a Current Report on Form 8-K. We expect the record date to be on or shortly following the fifth business day following the end of the prior quarter and, as provided in our Second Amended and Restated Articles of Incorporation, to make the distributions to record date public shareholders within 15 days of the end of the prior quarter, which in any event will be in accordance with our bylaws and the Marshall Islands Business Corporations Act, which requires that a record date not be more than sixty days prior to the date we make such distribution. In accordance with our instructions, our transfer agent, Continental Stock Transfer Trust Company, Table of Contents will identify the shareholders of record on the designated record date and act as paying agent in delivering quarterly interest payments to the then shareholders of record. We expect the costs incurred in connection with the above-described quarterly interest distributions to be in the range of $10,000 to $15,000 per year. Such expenses will be paid from funds available to us outside the trust account for working capital purposes. Our board of directors will make a quarterly distribution of all interest income available to be distributed (less taxes payable and exclusive of (i) up to $420,000 of interest earned on Maxim Group LLC s deferred underwriting compensation and (ii) up to an aggregate of $675,000, as described above) with no discretion to reduce or modify the distributions. Our shareholders prior to this offering have agreed to waive any rights to such distributions. In the event of the exercise of the over-allotment option, the first interest distribution to our public shareholders will be reduced by up to $675,000 (in proportion to the portion of the over-allotment option exercised) in the aggregate reflecting interest income on the trust account we will be permitted to draw to replace certain of the costs and expenses associated with the exercise of the over-allotment option, which will be paid from funds outside our trust account on the consummation of the over-allotment option. These costs and expenses will be paid from funds held outside the trust account because there will not be sufficient gross proceeds from exercise of the over-allotment option to cover all attendant costs. This is to ensure that at all times there will be a minimum of $10.00 per unit held in the trust account. If less than the full over-allotment is exercised, the amount of additional costs and expenses will be calculated on a pro-rata basis. The cost for the administration of the quarterly distributions will be paid for by us out of our working capital held outside the trust account. Other than the quarterly distribution of interest, as described above, a public shareholder will be entitled to receive funds from the trust account only (i) in the event of the liquidation upon our failure to complete a business combination within the allotted time, in such case, including interest earned on his, her or its portion of the trust account which has not been previously distributed and net of taxes payable, subject to any valid claim by our creditors that are not covered by amounts in the trust account or indemnities provided by our executive officers, or (ii) if that public shareholder were to seek to redeem such shares for cash in connection with a business combination which the public shareholder voted against and which we actually consummate, in such case not including interest earned on his, her or its portion of the trust account. In no other circumstances will a public shareholder have any right or interest of any kind to or in the trust account. Table of Contents DILUTION The difference between the public offering price per share of common stock, assuming no value is attributed to the warrants included in the units, and the pro forma net tangible book value per share of our common stock after this offering and the private placement constitutes the dilution to investors in this offering and the private placement. Net tangible book value per share is determined by dividing our net tangible book value, which is our total tangible assets less total liabilities (including the value of common stock which may be redeemed for cash), by the number of outstanding shares of our common stock. At December 31, 2006, our net tangible book value was a deficiency of $235,625, or approximately $0.05 per share of common stock. After giving effect to the sale of 20,000,000 shares of common stock included in the units to be sold in this offering and the 14,961,111 warrants to be sold in the private placement, and the deduction of underwriting discounts and estimated expenses of this offering and the private placement, our pro forma net tangible book value (as decreased by the value of 6,999,999 shares of common stock which may be redeemed for cash) at December 31, 2006 would have been $130,095,738 or approximately $7.23 per share, representing an immediate increase in net tangible book value of $7.28 per share to the existing shareholders and an immediate dilution of $2.77 per share, or 27.7% to new investors not exercising their redemption rights. For purposes of presentation, our pro forma net tangible book value after this offering is approximately $68,424,990 less than it otherwise would have been because if we effect a business combination, the redemption rights to the public shareholders may result in the redemption for cash of up to one share less than 35.0% of the aggregate number of the shares sold in this offering at a per-share redemption price equal to $9.775, plus $0.225 per share of deferred underwriting compensation that Maxim Group LLC has agreed to forfeit for the benefit of redeeming shareholders. The following table illustrates the dilution to the new investors on a per-share basis, assuming no value is attributed to the warrants included in the units: Public offering price $ 10.00 Net tangible book value before this offering(2) $ (0.05 ) Increase attributable to new investor 7.28 Pro forma net tangible book value after this offering 7.23 Dilution to new investors $ 2.77 The following table sets forth information with respect to our existing shareholders prior to and after the private placement and the new investors: Average Shares Purchased(1) Total Consideration Price Number Percentage Amount Percentage Per Share Existing shareholders 5,000,000 20.00 % $ 25,000 .01 % $ .005 New investors 20,000,000 80.00 % $ 200,000,000 99.99 % $ 10.000 25,000,000 100.00 % $ 200,025,000 100.00 % (1) Does not include shares issuable upon exercise of the warrants included as a part of the units sold in this offering or the insider warrants. (2) Reflects the surrender for cancellation of an aggregate 1,604,448 shares of common stock by our shareholders on February 20, 2007, as adjusted for a one and one-half-for-one stock split in the form of a stock dividend on July 6, 2007, and a one and one-third-for-one stock split in the form of a stock dividend on August 6, 2007. Table of Contents The pro forma net tangible book value after the offering is calculated as follows: Numerator: Net tangible book value before the offering and private placement $ (235,625 ) Net Proceeds from this offering and the private placement 198,500,000 Offering costs accrued for or paid in advance and excluded from tangible book value before this offering 256,253 Proceeds from option sold to underwriter 100 Deferred underwriting compensation included in proceeds held in trust subject to redemption for cash (6,999,999 $0.225) 1,575,000 Less: Proceeds held in trust subject to redemption for cash (6,999,999 $10.00)(1) (69,999,990 ) $ 130,095,738 Denominator: Shares of common stock outstanding prior to the offering and the private placement(2) 5,000,000 Shares of common stock included in the units offered 20,000,000 Less: Shares subject to redemption (20,000,000 34.99999%) (6,999,999 ) 18,000,001 (1) Includes deferred underwriting compensation held in trust for redemption of shares for cash at $0.225 per share, or $1,575,000. (2) Reflects the surrender for cancellation of an aggregate 1,604,448 shares of common stock by our shareholders on February 20, 2007, as adjusted for a one and one-half-for-one stock split in the form of a stock dividend on July 6, 2007, and a one and one-third-for-one stock split in the form of a stock dividend on August 6, 2007. Table of Contents CAPITALIZATION The following table sets forth our capitalization at December 31, 2006 and as adjusted to give effect to the sale of our units in this offering and the insider warrants in the private placement and the application of the estimated net proceeds derived from the sale of our units: December 31, 2006 As Actual Adjusted(1)(2)(3) Note payable to and advances from shareholders $ 425,986 -0- Value of common stock which may be redeemed for an interest in the trust fund, as adjusted ($9.775 per share)(1) $ $ 68,424,990 Shareholders equity: Preferred stock, $0.0001 par value, 1,000,000 shares authorized; none issued or outstanding $ $ Common stock, $0.0001 par value, 89,000,000 shares authorized; 6,604,448 shares issued and outstanding; 25,000,000 shares issued and outstanding (including 6,999,999 shares subject to possible redemption), as adjusted 660 2,500 Additional paid-in capital 24,340 130,097,610 Deficit accumulated during the development stage (4,372 ) (4,372 ) Total shareholders equity $ 20,628 130,095,738 Total capitalization $ 446,614 $ 198,520,728 (1) If we consummate a business combination, the redemption rights afforded to our public shareholders may result in the redemption for cash of up to one share less than 35.0% of the aggregate number of shares sold in this offering at a per-share redemption price equal to $9.775 plus $0.225 per share of deferred underwriting compensation. (2) Reflects the surrender for cancellation of an aggregate of 1,604,448 shares of common stock by our existing shareholders on February 20, 2007, as adjusted for a one and one-half-for-one stock split in the form of a stock dividend on July 6, 2007, and a one and one-third-for-one stock split in the form of a stock dividend on August 6, 2007. (3) Gives effect to the repayment of loans in the aggregate principal amount of $350,000, plus accrued interest in the amount of $824 made to us by our founding shareholders in December 2006, and an advance from shareholders of $75,986 as of December 31, 2006. Table of Contents MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We were formed on August 15, 2006, to serve as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination in the maritime shipping, but will not be limited to pursuing acquisition opportunities only within that industry. We intend to utilize cash derived from the proceeds of this offering and the private placement, our capital stock, debt or a combination of cash, capital stock and debt, in effecting a business combination. The issuance of additional shares of our capital stock: may significantly reduce the equity interest of our shareholders; will likely cause a change in control if a substantial number of our shares of common stock are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and may also result in the resignation or removal of one or more of our present officers and directors; and may adversely affect prevailing market prices for our common stock. Similarly, if we issued debt securities, it could result in: default and foreclosure on our assets if our operating revenues after a business combination were insufficient to pay our debt obligations; acceleration of our obligations to repay the indebtedness even if we have made all principal and interest payments when due if the debt security contained covenants that required the maintenance of certain financial ratios or reserves and any such covenant were breached without a waiver or renegotiation of that covenant; our immediate payment of all principal and accrued interest, if any, if the debt security was payable on demand; and our inability to obtain additional financing, if necessary, if the debt security contained covenants restricting our ability to obtain additional financing while such security was outstanding. We have neither engaged in any operations nor generated any revenues to date. Our entire activity since inception has been to prepare for our proposed fundraising through an offering of our equity securities. We estimate that the net proceeds from the sale of the units in this offering and the insider warrants in the private placement will be $198,500,000 (or $226,700,000 if the underwriters over-allotment option is exercised in full), after deducting offering expenses of $14,965,000 ($16,765,000 if the over-allotment option is exercised in full). See Use of Proceeds for a detailed breakdown of the offering expenses. Of this amount, $195,500,000 (or $224,375,000 if the underwriters over-allotment option is exercised in full), will be held in trust for our benefit, and the remaining approximately $3,000,000 will not be held in trust. In addition to the net proceeds from the sale of the units in this offering and the insider warrants in private placement, on the closing date of this offering, the trust account will include $4,500,000 ($5,625,000 if the underwriters over-allotment option is exercised in full) of deferred underwriting compensation, plus up to $420,000 of interest thereon, to be paid to Maxim Group LLC, if and only if, a business combination is consummated. Accordingly, on the closing date of this offering, a total of $200,000,000, plus interest thereon, or $230,000,000 plus interest thereon, if the underwriters over-allotment option is exercised in full, will be in the trust account. We will use substantially all of the net proceeds of this offering available for our use to acquire a target business, including identifying and evaluating prospective acquisition candidates, selecting the target business, and structuring, negotiating and consummating the business combination. To the extent that our capital stock is used in whole or in part as consideration to effect a business combination, the proceeds held in the trust account as well as any other net proceeds not expended will be used to finance the operations of the target business. As of the date of this prospectus, all of our executive officers have provided loans to us in the aggregate principal amount of $450,986. Such loans bear interest at 4.0% per annum and are due on the closing date of this offering. Following the consummation of the offering, we will have an aggregate of $3,000,000 available to us outside of the trust account for working capital purposes. In the event of the exercise of the over-allotment option, up to $675,000 of such amount will be used to pay certain costs and expenses associated with the exercise of the over- Table of Contents allotment option. Such $675,000 will be replaced by $675,000 of interest earned on the proceeds being held in trust account that we will be permitted to draw from the trust account. We believe that the funds available to us outside of the trust account will be sufficient to allow us to operate for at least the next 24 months, assuming that a business combination is not consummated during that time. Over this time, we have estimated that the $3,000,000 of working capital and reserves shall be allocated as follows: finders fees, consulting fees or other similar compensation, potential deposits, down payments, franchise taxes or funding of a no-shop provision with respect to a particular business combination and the costs of dissolution, if any (which we currently estimate to be approximately $15,000), of $670,000; $180,000 for administrative services and support payable to an affiliated third party (up to $7,500 per month for 24 months); $600,000 for legal, accounting and other expenses attendant to the structuring and negotiation of a business combination; $70,000 of expenses in legal and accounting fees relating to our SEC reporting obligations; $700,000 for due diligence, $670,000 for expenses incurred in connection with quarterly interest distributions to our public stockholders and related administrative and professional costs, identification and research of prospective target business and reimbursement of out of pocket due diligence expenses to management; and approximately $150,000 for director and officer liability insurance premiums. We currently estimate that, assuming we use the maximum allowable time under our articles of incorporation, it will cost between $1,500,000 and $1,700,000 to identify and negotiate a business combination (which includes between $400,000 and $600,000 for the payment of an investment advisor, between $200,000 and $300,000 for due diligence, and between $200,000 and $250,000 for consultants we will hire to assist us in evaluating potential business combinations). Although we are formed as a corporation under the laws of the Republic of the Marshall Islands, for United States federal income tax purposes, we elected to be classified as a partnership, and not as a corporation. Because we have elected to be treated as a partnership for U.S. federal income tax purposes, U.S. investors may be subject to U.S. federal income tax on their distributive shares of our taxable income or gain (whether or not distributed). As a means to pass down to our public shareholders the benefit of the interest that is earned on the trust account, our Second Amended and Restated Articles of Incorporation requires that we distribute the interest earned on the trust account to our public shareholders, and that we make quarterly distributions (which are intended to be at least equal to any such tax liability) in US dollars of interest income earned on the trust account (less any taxes payable by us and exclusive of (i) up to $420,000 of interest earned on the $4,500,000 of the funds attributable to Maxim Group LLC s deferred underwriting compensation and (ii) up to an aggregate of $675,000 of interest income on the proceeds in the trust account that we may draw in the event the overallotment option is exercised in full) on a pro-rata basis to our public shareholders until the earlier of the consummation of a business combination or our liquidation. Pursuant to our Second Amended and Restated Articles of Incorporation, distributions will be made on a quarterly basis within 15 days of the end of the prior quarter to shareholders of record on a date to be determined by our Board of Directors which we expect to be on or shortly following the fifth business day following the end of the prior quarter. The first distribution will be made following the end of the December 31, 2007 quarter and will include interest which accrues during the period commencing on the closing of the offering through December 31, 2007. We expect that within three business days following the end of each fiscal quarter (commencing with the quarter ending December 31, 2007), our accounting consultants will have sufficient opportunity to review our monthly investment account statements and to calculate the amount to be distributed to each of our public shareholders, our board of directors will meet to officially fix the record date with respect to the distribution of dividends earned during the immediately preceding quarter (or, in the case of the first distribution, the period commencing on the closing of the offering through December 31, 2007) and we will announce the record date and distribution to the public by means of a press release and/or a Current Report on Form 8-K. We expect the record date to be on or shortly following the fifth business day following the end of the prior quarter and, as provided in our Second Amended and Restated Articles of Incorporation, to make the distributions to record date public shareholders within 15 days of the end of the prior quarter, which in any event will be in accordance with our bylaws and the Marshall Islands Business Corporations Act, which requires that a record date not be more than sixty days prior to the date we make such distribution. In accordance with our instructions, our transfer agent, Continental Stock Transfer Trust Company, will identify the shareholders of record on the designated record date and act as paying agent in delivering quarterly Table of Contents interest payments to the then shareholders of record. We expect the costs incurred in connection with the above-described quarterly interest distributions to be in the range of $10,000 to $15,000 per year. Such expenses will be paid from funds available to us outside the trust account for working capital purposes. Our board of directors will make a quarterly distribution of all interest income available to be distributed (less taxes payable and exclusive of (i) up to $420,000 of interest earned on Maxim Group LLC s deferred underwriting compensation and (ii) up to an aggregate of $675,000 of interest income on the proceeds in the trust account that we may draw in the event the over-allotment option is exercised in full) with no discretion to reduce or modify the distributions. Our shareholders prior to this offering have agreed to waive any rights to such distributions. In the event of the exercise of the over-allotment option, the first distribution to our public shareholders will be reduced by up to $675,000 (in proportion to the portion of the over-allotment option exercised) in the aggregate reflecting interest income on the trust account we will be permitted to draw to replace up to $675,000 of the costs and expenses associated with the exercise of the over-allotment option, which will be paid from funds outside our trust account on the consummation of the over-allotment option. These costs and expenses will be paid from funds held outside the trust account because there will not be sufficient gross proceeds from exercise of the over-allotment option to cover all attendant costs. This is to ensure that at all times there will be a minimum of $10.00 per unit held in the trust account. If less than the full over-allotment is exercised, the amount of additional costs and expenses will be calculated on a pro-rata basis. The cost for the administration of the quarterly distributions will be paid for by us out of our working capital held outside the trust account. The distributions on a quarterly basis as described above is mandated by our Second Amended and Restated Articles of Incorporation. This provision may be amended or removed by a vote of our Board of Directors and the approval by the holders of a majority of our outstanding common stock. Upon the consummation of this offering, we have agreed to sell to Maxim Group LLC, the representative of the underwriters, for $100, an option to purchase up to a total of 1,000,000 units at an exercise price of $12.50 per unit. The units issuable upon exercise of this option are identical to those underlying the units offered by this prospectus except with respect to the exercise price. This option will also contain a cashless exercise feature that allows the holders of the option to convert the value in the option (the fair market value of our common stock minus the exercise price of the option) into shares of common stock. The fair market value of our common stock will be determined using the average reported last sales price of the common stock for the 10 trading days ending on the third day prior to exercise of the option. use the appreciated value of the option to exercise the option without paying cash. This option will be valued at the date of issuance; however, for illustrative purposes, at August 7, 2007, we estimate that the fair value of this option is approximately $7,390,000 ($7.39 per unit underlying such option) using a Black Scholes option pricing model. The fair value of the option granted is estimated as of the date of grant using the following assumptions: (1) expected volatility of 100.0%; (2) risk free interest rate of 5.0% and (3) expected life of five years. For additional information on this purchase option, see the section entitled Underwriting Purchase Option. Prior to the effective date of this offering, all of our executive officers will purchase from us an aggregate of 14,961,111 warrants at $0.90 per warrant in a private placement in accordance with Regulation S under the Securities Act of 1933. We do not believe we will need to raise additional funds following this offering in order to meet the expenditures required for operating our business. However, we may need to raise additional funds through a private offering of debt or equity securities if such funds are required to consummate a business combination that is presented to us. We would only consummate such a fund raising simultaneously with the consummation of a business combination. If we were unable to secure additional financing, we would most likely fail to consummate a business combination in the allotted time and will liquidate, dissolve and wind up. Table of Contents PROPOSED BUSINESS Introduction We are a BCCtm incorporated under the laws of the Marshall Islands on August 15, 2006. We were formed to acquire, through a merger, capital stock exchange, asset acquisition or other similar business combination, one or more operating businesses or assets in the maritime shipping industry, but will not be limited to pursuing acquisition opportunities only within that industry. To date, our efforts have been limited to organizational activities. We do not have any specific business combination under consideration, nor have we had any discussions with any target business regarding a possible business combination. In addition, our officers, directors and shareholders have not had discussions among themselves relating to a possible transaction with any entity affiliated with any of our officers, directors or shareholders. The maritime shipping industry provides a practical and cost-effective means of transporting large volumes of cargoes. This is accomplished predominantly by the dry bulk and tanker sectors, while other related sectors tend to be specialized. The dry bulk sector involves the transportation of dry bulk and general cargoes, including, among other products, coal, minerals, ore, steel products, forest products, agricultural products, construction materials and heavy equipment, machinery and spare parts via dry bulk cargo vessels. The tanker sector involves the transportation of wet products such as crude oil, refined petroleum cargoes and liquid chemicals via different types of tankers. Related sectors comprise, but are not limited to, the operation of vessels such as containerships, feeder vessels, liquefied gas carriers, offshore supply and anchor-handling vessels or other specialized carriers. We may seek to acquire vessels, a company that has entered into agreements to purchase individual vessels that were not yet owned by such target company (in such a case, our shareholders would only vote on the proposed business combination with such target company, and not on the individual agreements the target company entered into), a company with a fleet of vessels, a number of such companies as a group, or an entity, which provides commercial management, operational and technical management or other services to one or more segments of the shipping industry, including port, storage and terminal operation. We believe that acquisition or investment in more than one sector of the shipping industry may provide a hedge against cyclical risks associated with a company that only owns vessels. A target company might be a holding company, the sole assets of which are one or more agreements to acquire individual vessels or other assets. If a company we acquire is a holding company, rather than an operating company, we will need to retain current management, seek to retain new management or outsource the commercial and technical management of the vessels by contracting with a shipping company engaged in this business. Prices for individual vessels vary widely depending on the type, quality, age and discounted future earnings. While we intend to focus on potential acquisition targets in the maritime shipping industry, we may also pursue opportunities in other industries. If an attractive acquisition opportunity is identified in another industry prior to the time we identify an acquisition opportunity in the maritime shipping industry, we may pursue such other opportunity. There is no time or date certain or monetary milestone associated with when we may begin looking for acquisition opportunities outside of the maritime shipping industry. Dry Bulk Sector Overview Dry bulk vessels are used to transport commodities such as iron ore, minerals, grains, forest products, fertilizers, coking and steam coal. The dry bulk sector can be divided into four major vessel categories with reference to size. We may explore acquisitions of either one or more vessels and/or operating companies that are focused on these segments of the dry bulk sector, including: Capesize and Post Panamax. The largest of the dry bulk carrier vessels, with typical cargo capacity over 80,000 dead weight tons, or dwt. Capesize vessels are used primarily for one-way voyages with cargoes consisting of iron ore and coal. Due to the size of the vessels, there are only a few ports around the world that have the infrastructure to accommodate them. Capesize vessels cannot traverse through the Panama Canal due to their size. Table of Contents Panamax. The second largest of the dry bulk vessels, with cargo capacity typically between 60,000 and 80,000 dwt. Panamax vessels are used for various long distance trade routes, including those that traverse through the Panama Canal. These vessels typically carry cargoes consisting of coal, grains, fertilizers, steel and forest products. Handymax. Versatile vessels that are dispersed in various geographic locations throughout the world. Handymax vessels typically have cargo capacity of 35,000 to 60,000 dwt, and are primarily used to transport grains, forest products and fertilizers. These vessels are equipped with onboard cranes which allow for the loading and unloading of cargo. Handysize. The smallest of the dry bulk carrier vessels with cargo capacity up to 35,000 dwt. These vessels are used mainly for regional voyages, are extremely versatile and can be used in smaller ports that lack infrastructure. Like Handymax vessels, Handysize vessels are also equipped with onboard cranes. Prices for individual vessels vary widely depending on the type, quality, age and discounted future earnings. Tanker Sector Overview The world tanker fleet is divided into two primary categories, crude oil and product tankers. Tanker charterers of wet cargoes will typically charter the appropriate sized tanker based on the length of journey, cargo size and port and canal restrictions. Crude oil tankers are typically larger than product tankers. The four major tanker categories with reference to size are: Very Large Crude Carriers, or VLCCs. Tanker vessels that are used to transport crude oil with cargo capacity typically 200,000 to 320,000 dwt that are more than 300 meters in length. VLCCs are highly automated and their advanced computer systems allow for a minimal crew. The majority of the world s crude oil is transported via VLCCs. Suezmax. Tanker vessels with cargo capacity typically 120,000 to 200,000 dwt. These vessels are used in some of the fastest growing oil producing regions of the world, including oil emanating from the Caspian Sea and West Africa. Suezmax tankers are the largest ships able to transit the Suez Canal with a full payload and are capable of both long and short haul voyages. Aframax. Tanker vessels with cargo capacity typically 80,000 to 120,000 dwt. These tankers carry crude oil and serve various trade routes from short to medium distances mainly in the North Sea and Venezuela. These vessels are able to enter a larger number of ports throughout the world as compare to the larger crude oil tankers. Product. Tanker vessels with cargo capacity typically less than 60,000 dwt. Product tankers are capable of carrying refined petroleum products, such as fuel oils, gasoline and jet fuel, as well as various edible oils, such as vegetable and palm oil. Chemicals, including ethanol and biofuels are carried in the smaller sizes of these vessels. Prices for individual vessels vary widely depending on the type, quality, age and discounted future earnings. Container Sector Overview Container vessels transport finished goods that are shipped in large containers and sized according to the number of containers that they can carry and whether the vessels can traverse the Panama Canal. We may explore acquisitions of vessels and/or operating companies that operate container vessels that can ship products regionally and/or globally. We intend to seek opportunities in feeder vessels, which are ships that cater to the needs of larger container vessels and liner services main hubs and service smaller ports and volumes where larger container vessels cannot enter due to port restrictions, as well as economical reasons and/or the absence of infrastructure. There is a general increase in the number and capacity of the larger container vessels. However, there is not a corresponding increase in the number of feeder vessels (smaller container ships) that service the larger Container Vessel and Liner Services. Because of this, we believe the demand for feeder vessels will increase, if only to service the larger container vessels now on order by the large operators. Table of Contents Between January 2000 and January 2006, the TEU capacity deployed by the liner trades has increased by 77.4% according to the BRS Alpha Liner Service, which is attributed to Liner Companies increasing capacity with larger vessels. We believe the demand for feeders will rise since the operators will require more feeders to support the larger vessels and to service destinations with limited port infrastructure and small volumes. Furthermore, the availability of ships for charter indicate that a shortage of ships of 800-1200 TEU, noticeably the ones with heavy gear, is projected. Demand is high for this size and range of vessels and several regional services have been launched, and are now being launched in Asia and the West Coast of the Americas for such type of ships. We believe such new services will continue to increase the demand for feeders in the traditionally strong Mediterranean and South-East Asia routes, including the Inter-China feeder business, which already absorbs a large number of feeder vessels. This assessment is further supported by the fact that a considerable number of multi-purpose vessels of the same size, which usually service non-containerized cargo, are now deployed in the container sector. Specialized Carriers We might seek a business combination with a company with agreements to purchase timber carriers or a fleet of timber carriers with the highest ice class features for trading with forest products. Certain forest products can be processed to produce biofuels, which are becoming extremely popular in Northern Europe as an alternative to gas and oil produced energy sources. Climate change is potentially the greatest and most important environmental challenge of our time. There is a growing consensus among climate researchers that the emissions of greenhouse gases need to be reduced in an effort to protect the earth s climate system. Biofuel is any fuel that derives from biomass, recently living organisms, or their metabolic by-products. It is a renewable source of energy which unlike fossil fuels, limits the amount of carbon dioxide released into the atmosphere. Governments are therefore eager to use Biofuel to replace non-renewable sources of energy. For example, according to an E.U. Energy Tax Directive, biofuels should amount to 5.75 percent of petrol and diesel by the year 2010, and Sweden has set its target even higher by adopting a policy by which Sweden is to be the first country which will be 100 percent non-dependant on fuel oil by the year 2020. Agricultural products are also specifically grown for use as biofuels. Waste from industry, agriculture, forestry, including straw, lumber, manure, sewage and garbage can all be used for the production of bioenergy. Furthermore, research into more efficient methods of converting biofuels and other fuels into electricity utilizing fuel cells is now a field of high activity. According to the Swedish Forest Industries Association, bioenergy currently covers about 15 percent of the world s energy consumption. The demand for biofuel has in turn developed an upsurge in the requirement for transportation of woodchips and residues from the forest product plants to energy producing plants. This is further emphasized by the increased need for transportation of residues from forest industry plants world-wide and the need of sophisticated, ice classed tonnage able to meet the needs of the growing industry. We may also consider supply vessels, service vessels and anchor handlers that perform various functions related to the supply and maintenance of offshore oil rigs. Additionally, we will also be looking at multipurpose vessels with heavy gear capacity to service containers and specialty cargoes such as for shipyards, oil refineries, modification requirements and the full range of steel products. Port, Storage and Terminal Operation We may also seek to acquire service businesses engaged in, among other activities, the development of the infrastructure of ports and specialized private berths, ware-housing and logistic services and regulatory matters, including compliance with customs formalities. We believe that the rapidly growing markets in China and other countries in the Far East and Asia, such as Vietnam, the Philippines, Indonesia, Cambodia and India require investment in ports and facilities infrastructure with a high degree of specialization and sophistication. New ports and terminals are being developed in an effort to Table of Contents keep pace with the ongoing trade growth and in this respect local governmental agencies and municipal authorities are seeking foreign investments and fresh injection of capital and know-how. The Management Sector Other related sectors include operational management, brokerage, maintenance and technical support. A service business we may seek to acquire would typically be engaged in: Commercial management services, such as finding employment for vessels, vessel acquisition and disposition, freight and charter hire collection, accounts control, appointment of agents, bunkering and cargo claims handling and settlements; Technical management services, such as crew retention and training, maintenance, repair, capital expenditures, drydocking, payment of vessel tonnage tax, maintaining insurance and other vessel operating activities; or Port, storage and terminal operation management services. Experience of Management Certain of our officers and directors have significant experience in the maritime shipping industry, including management, financing, acquisition, and operation of multi-purpose and tanker vessels and bulk carriers. Panagiotis Zafet, our Chief Executive Officer and Co-Chairman of the Board and Simon Zafet, our Chief Operating Officer and a director, are owners and officers of Balthellas Chartering S.A., Hellasco Shipping Ltd., and Hellasco Transport Ltd., each of which is involved in the shipping or related industries. Each of Panagiotis Zafet and Simon Zafet has significant experience in the purchase, sale and chartering of vessels and in management and operations of maritime shipping companies. Additionally, Roland Beberniss, one of our directors, is the founder and managing director of RBB Shipping GmbH, a private shipping company. Mr. Beberniss has extensive experience in maritime shipping acquisitions and operations. While we intend to focus on potential acquisition targets in the maritime shipping industry, we may also pursue opportunities in other industries. In addition to their experience in the maritime shipping industry, certain of our executive officers and directors have considerable experience in other sectors, such as general transportation, consumer goods and retail and commercial real estate. Set forth below are descriptions of types of business transactions and activities that certain of our officers and directors have been involved in within the general transportation, consumer goods and commercial real estate industries that we believe reflects their business experience in areas other than the maritime shipping industry. Mr. Koutsolioutsos is the Vice President and an executive member of the Board of Directors of Folli Follie S.A., a retail company with over 280 points of sale in over 20 countries with a market capitalization on the Athens Stock Exchange of over 1 billion. Mr. Koutsolioutsos is involved in all aspects of Folli Follie s real estate interests, including assisting in the determination of where to open retail locations and the negotiation of its leases for its retail locations. Messrs. Koutsolioutsos, Tsigkounakis and Culucundis are each directors of Hellenic Duty Free Shops S.A., one of the top 15 duty-free operators worldwide with market capitalization of approximately $1 billion, which operates 82 retail stores in Greece. Mr. Beberniss was the manager of Enso Nord, a subsidiary of Stora Enso, a company listed on the New York Stock Exchange with a market capitalization of $14 billion. Enso Nord provided for the world-wide transportation of raw materials for paper mills. Certain of our officers and directors have also engaged in a number of transactions that provided them with the necessary experience to locate a suitable target business, negotiate the terms of the transaction and consummate the business combination and are transactions that, although may not in certain cases be within the intended industry of a business combination target, do represent the size and complexity of a potential business combination transaction. Table of Contents Also, descriptions set forth below are intended to reflect types of transactions requiring business skills and experience that we believe would be applicable in the context of a business combination in any industry. Mr. Koutsolioutsos led the team that identified, negotiated, performed due diligence and eventually acquired Hellenic Duty Free S.A. in 1999. The total transaction cost was $540 million. Mr. Koutsolioutsos led the team that identified, negotiated, performed due diligence and eventually acquired Links of London in 2006. The total transaction cost was $81 million. Mr. Panagiotis Zafet located, performed due diligence and acquired eighteen vessels between 1996 and 2006 for Balthellas Chartering S.A., with an approximate average value for each vessel of $13 million. Mr. Zafet was more specifically involved with the acquisition of a fleet of three vessels in 2000 with a purchase price of $16 million and has also been involved in a series of transactions consisting of the purchase of two vessels with the purchase price ranging at the time of purchase between $7 and $10 million. Taking into account the appreciation of the market value of vessels since such acquisitions, management believes that such fleets would have a current market value of $40 million for the fleet of 3 vessels and be in the range of $10 million and $25 million for each of the purchases of two vessels. Balthellas Chartering S.A. currently owns a fleet of vessels having a market value of $82 million. Although Mr. Zafet has had experience identifying, negotiating and purchasing more than one vessel at one time, he has not had direct experience in purchasing a fleet of the size contemplated by this offering. Mr. Culucundis, in positions from Technical Director to Chief Executive Officer located, performed due diligence and acquired 40 vessels between 1981 and 1995 for Kassos Maritime Enterprises Ltd., with an approximate average value for each vessel of 6 million. Specifically, Mr. Culucundis has been involved with transactions involving the acquisition of fleets of vessels. In 1988 in two such transactions, a fleet of 4 and a fleet of 3 bulk carriers were acquired with total acquisition costs of $60 million and $45 million, respectively. Taking into account the appreciation of the market value of vessels since such acquisitions, management believes that based on today s market, such fleets would have a current market value of $152 million and $90 million, respectively. In addition, in 1999, Mr. Culucundis was involved in the acquisition of a fleet of four vessels with an acquisition cost $60 million. Based on today s market, management believes that such fleet would have a market value of $160 million. Mr. Tsigkounakis was co-leading counsel in the negotiation and structuring of the $140 million controlling interest in Proton Bank of Greece by IRF European Finance Investments Ltd. in May 2006. Mr. Tsigkounakis was also lead counsel in the negotiation and structuring of a $280 million bond loan to Folli Follie S.A. in June 2006. The above-described experience of our officers and directors is not a full and complete list of all transactions that they have been involved with. They also have been involved in other transactions of lesser size and complexity, and, therefore there can be no assurance that management s previous involvement in such representative large and complex transaction will be indicative of the consummation of a business combination or our future success of the company. Information that may be Contained in the Proxy Statement To the extent that we acquire one or more vessels, it is possible that the proxy statement that we would send to shareholders would not contain audited historical financial information with respect to the vessels and, therefore, shareholders voting on a proposed transaction would not contain audited or unaudited financial information with respect to the vessels. The reason that we may not be required to provide audited historical information is because the business combination would be viewed as an acquisition of assets instead of an acquisition of a business. It is consistent with shipping industry precedent in that audited historical financials would not be required, because typically the acquiring company would not have access to such information. However, whether an acquisition is actually deemed to be that of assets (instead of a business) is based on an analysis of the facts and circumstances involved, taking to consideration a number of variables that generally would reflect upon whether there is sufficient continuity of the acquired entity s operations prior to and after the acquisition so that the disclosure of the historical information is material to the understanding of future operations. Some of these factors would include whether new charter agreements will be entered into, if the vessel s flag will change, or whether existing crew will continue and if so under pre-existing or new contracts. We are unable to predict the facts and circumstances surrounding any Table of Contents possible future acquisition of vessels (whether the acquisition will be structured as an acquisition of assets or an operating business), and accordingly cannot provide assurances with respect to the provision of audited historical financial information. If however, we determined that such audited historical financial information was not required, instead of audited financial statements, the proxy statement we would send to our shareholders would contain the same information that would typically be provided in the prospectus for an initial public offering of a start-up shipping company, such as: (i) historical and prevailing market rates for vessels on the basis of type, age and proposed employment; (ii) our expectations of future market trends and proposed strategy for employment of the vessels; (iii) our anticipated operational (overhead) expenses; and (iv) the valuation of the vessels as assets generally (i.e., whether they are new or second-hand and the type of vessel), all of which, in turn, depend on the sector of the shipping industry in which we consummate such a business combination. See Risk Factors Risks Associated With Our Acquisition of a Target Business in the Maritime Shipping Industry If we were to acquire vessels or a company with agreements to purchase individual vessels, it is highly unlikely that proxy materials provided to our shareholders would include historical financial statements and, accordingly, investors will not have historical financial statements on which to rely in making their decision whether to vote for the acquisition. To the extent that financial information is not available with respect to vessels we may acquire, we expect to evaluate the fair value of the assets, based on the advice of our ship broker and financial advisors, consistent with industry practice. Such valuation would factor in, among other things, the revenue stream generated from ongoing charter arrangements, to the extent that the vessels have any charter arrangements that will continue after the business combination, and future forward rates, as quoted on the International Maritime Exchange (Imarex). In the event it was determined that we are in fact acquiring a business (as opposed to assets) we anticipate that we would provide audited annual financial statements and unaudited interim statement as required in such circumstances. Government Regulations Government or European Union regulations significantly affect the ownership and operation of vessels including international conventions, national, state and local laws and regulations in force in the countries in which vessels may operate or are registered. A variety of governmental and private entities subject vessels to both scheduled and unscheduled inspections. These entities include the local port authorities (V.S. Coast Guard, harbor master or equivalent), classification societies, flag state administration (country of registry) and charterers, particularly terminal operators. Certain of these entities require vessel owners to obtain permits, licenses and certificates for the operation of their vessels. Failure to maintain necessary permits or approvals could require a vessel owner to incur substantial costs or temporarily suspend operation of one or more of its vessels. We believe that the heightened level of environmental and quality concerns among insurance underwriters, regulators and charterers is leading to greater inspection and safety requirements on all vessels and may accelerate the scrapping of older vessels throughout the industry. Increasing environmental concerns have created a demand for vessels that conform to the stricter environmental standards. Vessel owners are required to maintain operating standards for all vessels that will emphasize operational safety, quality maintenance, continuous training of officers and crews and compliance with United States and international regulations. Because these laws and regulations are frequently changed and may impose increasingly stricter requirements, we cannot predict the ultimate cost of complying with these requirements, or the impact of these requirements on our proposed business. Environmental Regulation The International Maritime Organization or IMO , has negotiated international conventions that impose liability for oil pollution in international waters and a signatory s territorial waters. In September 1997, the IMO adopted Annex VI to the International Convention for the Prevention of Pollution from Ships, which was ratified on May 18, 2005, and became effective on May 19, 2005. Annex VI sets limits on sulfur oxide and nitrogen oxide emissions from ship exhausts and prohibits deliberate emissions of ozone depleting substances, such as chlorofluorocarbons. Annex VI also includes a global cap on the sulfur content of fuel oil and allows for special areas to be established with more stringent controls on sulfur emissions. Annex VI and new conventions, laws and regulations that may be adopted, in the future, could adversely affect our ability to manage vessels we acquire or operate. Table of Contents Under the International Safety Management Code or ISM Code , promulgated by the IMO, the party with operational control of a vessel is required to develop an extensive safety management system that includes, among other things, the adoption of a safety and environmental protection policy setting forth instructions and procedures for operating its vessels safely and describing procedures for responding to emergencies. The ISM Code requires that vessel operators obtain a safety management certificate for each vessel they operate. This certificate evidences compliance by a vessel s management with code requirements for a safety management system. No vessel can obtain a certificate unless its manager has been awarded a document of compliance, issued by the respective flag state for the vessel, under the ISM Code. Non compliance with the ISM Code and other IMO regulations may subject a ship owner to increased liability, may lead to decreases in available insurance coverage for affected vessels and may result in the denial of access to, or detention in, some ports. For example, the United States Coast Guard and European Union authorities have indicated that vessels not in compliance with the ISM Code will be prohibited from trading in ports in the United States and European Union. The United States Oil Pollution Act of 1990 The United States Oil Pollution Act of 1990, or OPA, established an extensive regulatory and liability regime for the protection and cleanup of the environment from oil spills. OPA affects all owners and operators whose vessels trade in the United States, its territories and possessions or whose vessels operate in United States waters, which includes the United States territorial sea and its two hundred nautical mile exclusive economic zone. Under OPA, vessel owners, operators and bareboat charterers are responsible parties and are jointly, severally and strictly liable (unless the spill results solely from the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and other damages arising from discharges or threatened discharges of oil from their vessels. OPA defines these other damages broadly to include: Natural resources damages and the costs of assessment thereof; Real and personal property damages; Net loss of taxes, royalties, rents fees and other lost revenues; Lost profits or impairment of earning capacity due to property or natural resources damage; and Net cost of public services necessitated by a spill response, such as protection from fire, safety or health hazards and loss of subsistence use of natural resources. OPA limits the liability of responsible parties to the greater of $600 per gross ton or $500,000 per dry bulk vessel that is over 300 gross tons (subject to possible adjustment for inflation). These limits of liability do not apply if an incident was directly caused by violation of applicable United States federal safety, construction or operating regulations or by a responsible party s gross negligence or willful misconduct, or if the responsible party fails or refuses to report the incident or to cooperate and assist in connection with oil removal activities. OPA requires owners and operators of vessels to establish and maintain with the U.S. Coast Guard evidence of financial responsibility sufficient to meet their potential liabilities under OP A. In December 1994, the U .S. Coast Guard implemented regulations requiring evidence of financial responsibility in the amount of $1,500 per gross ton, which includes the OPA limitation on liability of $1,200 per gross ton and the United States Comprehensive Environmental Response, Compensation, and Liability Act liability limit of $300 per gross ton. Under the regulations, vessel owners and operators may evidence their financial responsibility by showing proof of insurance, surety bond, self-insurance or guaranty. Under OPA, an owner or operator of a fleet of vessels is required only to demonstrate evidence of financial responsibility in an amount sufficient to cover the vessels in the fleet having the greatest maximum liability under OPA. The United States Coast Guard s regulations concerning certificates of financial responsibility provide, in accordance with OPA, that claimants may bring suit directly against an insurer or guarantor that furnishes certificates of financial responsibility. In the event that such insurer or guarantor is sued directly, it is prohibited from asserting any contractual defense that it may have had against the responsible party and is limited to asserting Table of Contents those defenses available to the responsible party and the defense that the incident was caused by the willful misconduct of the responsible party. Certain organizations, which had typically provided certificates of financial responsibility under pre-OPA laws, including the major protection and indemnity organizations, have declined to furnish evidence of insurance for vessel owners and operators if they are subject to direct actions or required to waive insurance policy defenses. The United States Coast Guard s financial responsibility regulations may also be satisfied by evidence of surety bond, guaranty or by self-insurance. Under the self-insurance provisions, the vessel owner or operator must have a net worth and working capital, measured in assets located in the United States against liabilities located anywhere in the world, that exceeds the applicable amount of financial responsibility. OPA specifically permits individual states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries, and some states have enacted legislation providing for unlimited liability for oil spills. Some states, which have enacted such legislation, have not yet issued implementing regulations defining vessels owners responsibilities under these laws. Other Environmental Initiatives The European Union is considering legislation that will affect the operation of vessels and the liability of owners for oil pollution. It is difficult to predict what legislation, if any, may be promulgated by the European Union or any other country or authority. Although the United States is not a party thereto, many countries have ratified and follow the liability scheme adopted by the IMO and set out in the International Convention on Civil Liability for Oil Pollution Damage, 1969, as amended, or the CLC, and the Convention for the Establishment of an International Fund for Oil Pollution of 1971, as amended. Under these conventions, a vessel s registered owner is strictly liable for pollution damage caused on the territorial waters of a contracting state by discharge of persistent oil, subject to certain complete defenses. Many of the countries that have ratified the CLC have increased the liability limits through a 1992 Protocol to the CLC. The liability limits in the countries that have ratified this Protocol are currently approximately $4 million plus approximately $566 per gross registered ton above 5,000 gross tons with an approximate maximum of$80.5 million per vessel, with the exact amount tied to a unit of account which varies according to a basket of currencies. The right to limit liability is forfeited under the CLC where the spill is caused by the owner s actual fault or privity and, under the 1992 Protocol, where the spill is caused by the owner s intentional or reckless conduct. Vessels trading to contracting states must provide evidence of insurance covering the limited liability of the owner. In jurisdictions where the CLC has not been adopted, various legislative schemes or common law govern, and liability is imposed either on the basis of fault or in a manner similar to the CLC. Security Regulation Since the terrorist attacks of September 11, 2001, there have been a variety of initiatives intended to enhance vessel security. On November 25, 2002, the Maritime Transportation Security Act of 2002, or MTSA; came into effect. To implement certain portions of the MTSA, in July 2003, the United States Coast Guard issued regulations requiring the implementation of certain security requirements aboard vessels operating in waters subject to the jurisdiction of the United States. Similarly, in December 2002, amendments to the International Convention for the Safety of Life at Sea or SOLAS, created a new chapter of the convention dealing specifically with maritime security. The new chapter went into effect on July 1,2004 and imposes various detailed security obligations on vessels and port authorities, most of which are contained in the newly created International Ship and Port Facilities Security, or ISPS Code. Among the various requirements are: on-board installation of automatic information systems, or AIS, to enhance vessel-to-vessel and vessel-to-shore communications; on-board installation of ship security alert systems; the development of vessel security plans; and compliance with flag state security certification requirements. Table of Contents The United States Coast Guard regulations, which are intended to align with international maritime security standards, exempt non-U.S. vessels from MTSA vessel security measures provided such vessels have on board, by July 1, 2004, a valid International Ship Security Certificate, or ISSC, that attests to the vessel s compliance with SOLAS security requirements and the ISPS Code. Effecting a Business Combination General We are not presently engaged in, and we will not engage in, any substantive commercial business for an indefinite period of time following this offering. We intend to utilize cash derived from the proceeds of this offering, the private placement (excluding any funds held for the benefit of Maxim Group LLC or redeeming shareholders), our capital stock, debt or a combination of these in effecting a business combination. Although substantially all of the net proceeds of this offering and the private placement are intended to be generally applied toward effecting a business combination as described in this prospectus, the proceeds are not otherwise being designated for any more specific purposes. Accordingly, prospective investors will invest in us without an opportunity to evaluate the specific merits or risks of any one or more business combinations. A business combination may involve the acquisition of, or merger with, a company which does not need substantial additional capital but which desires to establish a public trading market for its shares, while avoiding what it may deem to be adverse consequences of undertaking a public offering itself. These include time delays, significant expense, loss of voting control and compliance with various Federal and state securities laws. In the alternative, we may seek to consummate a business combination with a company that may be financially unstable or in its early stages of development or growth. While we may seek to effect business combinations with more than one target business, it is likely that we will have the ability to initially complete only a single business combination, although this may entail the simultaneous acquisitions of several operating businesses and/or assets in the shipping industry at the same time. Notwithstanding a business combination with of one or more operating businesses, or assets in the shipping industry, or a combination thereof, our initial business combination will be with a target business or businesses with a collective fair market value that is at least 80.0% of the amount in the trust account (exclusive of Maxim Group LLC s deferred compensation being held in the trust account) at the time of such acquisition. We have not identified a target business To date, we have not taken any action to select any target industry or business with which to seek a business combination. None of our officers, directors, promoters or other affiliates has taken any action to identify or contact a potential business combination candidate or is currently engaged in discussions on our behalf with representatives of other companies regarding the possibility of a potential merger, capital stock exchange, asset acquisition or other similar business combination with us nor have we, nor any of our agents of affiliates, been approached by any candidates (or representative of any candidates) with respect to a possible acquisition transaction with our company. Additionally, we have not engaged or retained any agent or other representative to identify or locate any suitable acquisition candidate. We have not established any other specific attributes or criteria (financial or otherwise) for prospective target businesses. Finally, we note that there has been no diligence, discussions, negotiations and/or other similar activities undertaken, directly or indirectly, by us, our affiliates or representatives, or by any third party, with respect to a business combination transaction with us. Subject to the limitation that a target business have a fair market value of at least 80.0% of the amount in the trust account (exclusive of Maxim Group LLC s deferred compensation plus interest thereon held in the trust account) at the time of the acquisition, as described below in more detail, we will have virtually unrestricted flexibility in identifying and selecting a prospective acquisition candidate. Accordingly, there is no basis for investors in this offering to evaluate the possible merits or risks of the target business with which we may ultimately complete a business combination. Furthermore, there is no limitation on our ability to raise funds privately or through loans that would allow us to acquire a target business or businesses. However, we have no current plans or agreements to enter into any such financing arrangements. To the extent we effect a business combination with a financially unstable company or an entity in its early stage of development or growth, including entities without established records of sales or earnings, we may be affected by numerous risks inherent in the business and operations of financially unstable and early stage or potential emerging growth companies. Although we believe Table of Contents that our management has the appropriate experience in the shipping industry to identify appropriate target businesses and also has operational experience applicable post business combination, we cannot assure you that we will adequately ascertain or assess all significant risks attendant to a business combination. Sources of target businesses We anticipate that target business candidates will be brought to our attention from various unaffiliated sources, including investment bankers, venture capital funds, private equity funds, leveraged buyout funds, management buyout funds and other members of the financial community who are aware that we are seeking a business combination partner via public relations and marketing efforts, direct contact by management or other similar efforts, who may present solicited or unsolicited proposals. Any finder or broker would only be paid a fee upon the consummation of a business combination. The fee to be paid to such persons would be a percentage of the fair market value of the transaction with the percentage to be determined in an arm s length negotiation between the finder or broker and us based on market conditions at the time we enter into an agreement with such finder or broker. While we do not presently anticipate engaging the services of professional firms that specialize in acquisitions on any formal basis, we may decide to engage such firms in the future or we may be approached on an unsolicited basis, in which event their compensation (which would be equal to a percentage of the fair market value of the transaction as agreed upon at the time of such engagement or agreement with a party that brings us an unsolicited proposal, as the case may be) may be paid from the offering proceeds not held in trust. Our officers and directors as well as their affiliates may also bring to our attention target business candidates that they become aware of through their business contacts. While our officers and directors make no commitment as to the amount of time they will spend trying to identify or investigate potential target businesses, they believe that the various relationships they have developed over their careers together with their direct inquiry, will generate a number of potential target businesses that will warrant further investigation. In no event will we pay any of our existing officers, directors or shareholders or any entity with which they are affiliated any finder s fee or other compensation in any form for services rendered to us prior to or in connection with the consummation of a business combination. In addition, none of our officers, directors or existing shareholders will receive any finder s fee, consulting fees or any similar fees in any form from any person or entity in connection with any business combination involving us other than any compensation or fees that may be received for any services provided following such business combination. Selection of a target business and structuring of a business combination Subject to the requirement that our initial business combination must be with a target business or businesses with a collective fair market value that is at least 80.0% of the amount in the trust account (exclusive of Maxim Group LLC s deferred compensation plus interest thereon held in the trust account) at the time of such acquisition, our management will have virtually unrestricted flexibility in identifying and selecting a prospective target business. We have not conducted any specific research on the shipping or shipping related industries to date nor have we conducted any research with respect to identifying the number and characteristics of the potential acquisition candidates or the likelihood or probability of success of any proposed business combination. Since we have not yet analyzed the businesses available for acquisition and have not identified a target business, we have not established any specific attributes or criteria (financial or otherwise) for the evaluation of prospective target businesses. In evaluating a prospective target business, our management will conduct the necessary business, legal and accounting due diligence on such target business and will consider, among other factors, the following: earnings and growth potential; experience and skill of management and availability of additional personnel; growth potential; capital requirements; competitive position; financial condition and results of operation; barriers to entry into the shipping and related industries; Table of Contents stage of development of the products, processes or services; breadth of services offered; degree of current or potential market acceptance of the services; regulatory environment of the shipping industry; and costs associated with effecting the business combination. These criteria are not intended to be exhaustive. Any evaluation relating to the merits of a particular business combination will be based, to the extent relevant, on the above factors as well as other considerations deemed relevant by our management in effecting a business combination consistent with our business objective. In evaluating a prospective target business, we will conduct an extensive due diligence review which will encompass, among other things, meetings with incumbent management, where applicable, and inspection of facilities, as well as review of financial and other information which will be made available to us. In structuring the transaction, we may elect to form a foreign subsidiary in connection with a proposed business combination, which may be used to make the acquisition. In that event, we would either merge into such foreign subsidiary (with the foreign subsidiary being the surviving entity) or we would dissolve and liquidate our assets to our shareholders, which would include the equity securities we own in the foreign subsidiary. In the event that we do choose to merge into such a foreign subsidiary or dissolve and liquidate and distribute our ownership of such foreign subsidiary to our shareholders, the agreement relating to the transaction would provide (i) for each issued and outstanding share of our common stock to be converted into a similar right to receive shares of common stock in the subsidiary and (ii) that each of our outstanding warrants will be assumed by the subsidiary with the same terms and restrictions, except that they will be exercisable for common stock of the subsidiary. This alternative is discussed in greater detail in the section Taxation Tax and Reporting Issues as to Formation of Foreign Subsidiary. The time and costs required to select and evaluate a target business and to structure and complete the business combination cannot presently be ascertained with any degree of certainty. Any costs incurred with respect to the identification and evaluation of a prospective target business with which a business combination is not ultimately completed will result in a loss to us and reduce the amount of capital available to otherwise complete a business combination. However, we will not pay any finders or consulting fees to our existing shareholders, or any of their respective affiliates, for services rendered to us or in connection with a business combination. In addition, we will not make any other payment to them out of the proceeds of this offering (or the funds held in trust) other than reimbursement for out-of-pocket expenses they may incur in conducting due diligence. Fair market value of target business The initial target business or businesses that we acquire must have a collective fair market value equal to at least 80.0% of the amount in the trust account (exclusive of Maxim Group LLC s deferred underwriting compensation plus interest thereon held in the trust account), at the time of such acquisition. Furthermore, there is no limitation on our ability to raise funds privately or through loans that would allow us to acquire a target business or businesses. However, we have no current plans or agreements to enter into any such financing arrangements. The fair market value of such business will be determined by our board of directors based upon standards generally accepted by the financial community, such as actual and potential sales, earnings and cash flow and book value. To the extent that our business combination consists of the acquisition of assets that do not have historical financial information, and they are ocean-going motor vessels, we will determine whether such business combination has a fair market value of at least 80.0% of the amount in our trust account based on the value of the assets, as determined by the advice of our ship broking and financial advisors consistent with industry practice. Such valuation will factor in, among other things, the revenue stream generated from ongoing charter arrangements, to the extent that the vessels have any charter arrangements that will continue after the business combination, and future forward rates, as quoted on the International Maritime Exchange (Imarex). If our board is not able to independently determine that the target business has a sufficient fair market value (for example, if one of the members of our board of directors is affiliated with the target business or if the financial Table of Contents analysis is too complicated for our board of directors to perform on their own), we will obtain an opinion from an unaffiliated, independent investment banking firm which is a member of the National Association of Securities Dealers, Inc. with respect to the satisfaction of such criteria. Since any opinion, if obtained, would merely state that fair market value meets the 80.0% of the amount in the trust account threshold, it is not anticipated that copies of such opinion would be distributed to our shareholders, although copies will be provided to shareholders who request it. If we do obtain the opinion of an investment banking firm, a summary of the opinion will be contained in the proxy statement that will be mailed to shareholders in connection with obtaining approval of the business combination, and the investment banking firm will consent to the inclusion of their report in our proxy statement. In addition, information about how shareholders will be able to obtain a copy of the opinion from us will be contained in the proxy statement. We will not be required to obtain an opinion from an investment banking firm as to the fair market value if our board of directors independently determines that the target business has sufficient fair market value. Possible lack of business diversification While we may seek to effect business combinations with more than one target business, our initial business combination must be with a target business which satisfies the minimum valuation standard at the time of such acquisition, as discussed above. Consequently, it is likely that we will have the ability to effect only one, or perhaps, two business combinations, although this may entail simultaneous acquisitions of several entities at the same time. We may not be able to acquire more than one target business because of various factors, including possible complex domestic or international accounting issues, which would include generating pro forma financial statements reflecting the operations of several target businesses as if they had been combined, and numerous logistical issues, which could include attempting to coordinate the timing of negotiations, proxy statement disclosure and other legal issues and closings with multiple target businesses. In addition, we would also be exposed to the risks that conditions to closings with respect to the acquisition of one or more of the target businesses would not be satisfied bringing the fair market value of the initial business combination below the required fair market value of 80.0% of the amount in the trust account (exclusive of Maxim Group LLC s deferred underwriting compensation plus interest thereon held in the trust account). Accordingly, for an indefinite period of time, the prospects for our future viability may be entirely dependent upon the future performance of a single business. Unlike other entities which may have the resources to complete several business combinations of entities operating in multiple industries or multiple areas of a single industry, it is probable that we will not have the resources to diversify our operations or benefit from the possible spreading of risks or offsetting of losses. By consummating a business combination with only a single entity, our lack of diversification may: subject us to numerous economic, competitive and regulatory developments, any or all of which may have a substantial adverse impact upon the particular industry in which we may operate subsequent to a business combination; and result in our dependency upon the development or market acceptance of a single or limited number of products, processes or services. Additionally, since our business combination may entail the simultaneous acquisitions of several entities at the same time and may be with different sellers, we will need to convince such sellers to agree that the purchase of their entities is contingent upon the simultaneous closings of the other acquisitions. Limited ability to evaluate the target business management Although we expect certain of our management, particularly Georgios Koutsolioutsos, our President and Co-Chairman of board of directors, and Panagiotis Zafet, our Chief Executive Officer and Co-Chairman of board of directors to remain associated with us following a business combination, it is likely that the management of the target business at the time of the business combination will remain in place, and we may employ other personnel following the business combination. Although we intend to closely scrutinize the management of a prospective target business when evaluating the desirability of effecting a business combination, we cannot assure you that our assessment of the target business management will prove to be correct. In addition, we cannot assure you that the future management will have the necessary skills, qualifications or abilities to manage a public company. Table of Contents Furthermore, the future role of our officers and directors, if any, in the target business cannot presently be stated with any certainty. Moreover, our current management will only be able to remain with the combined company after the consummation of a business combination if they are able to negotiate and agree to mutually acceptable employment terms in connection with any such combination, which terms would be disclosed to shareholders in any proxy statement relating to such transaction. While it is possible that one or more of our directors will remain associated in some capacity with us following a business combination, it is unlikely that any of them will devote their full efforts to our affairs subsequent to a business combination. Following a business combination, we may seek to recruit additional managers to supplement the incumbent management of the target business. We cannot assure you that we will have the ability to recruit additional managers, or that additional managers will have the requisite skills, knowledge or experience necessary to enhance the incumbent management. Opportunity for shareholder approval of business combination Prior to the completion of a business combination, we will submit the transaction to our shareholders for approval, even if the nature of the acquisition is such as would not ordinarily require shareholder approval under applicable state law. In connection with seeking shareholder approval of a business combination, we will also submit to our shareholders for approval a proposal to amend our Second Amended and Restated Articles of Incorporation to provide for our corporate life to continue perpetually following the consummation of such business combination. Any vote to extend the corporate life to continue perpetually following the consummation of a business combination will be taken only if the business combination is approved. We will only consummate a business combination if shareholders vote both in favor of such business combination and our amendment to extend our corporate life. In connection with seeking shareholder approval of a business combination we will furnish our shareholders with proxy solicitation materials prepared in accordance with the Securities Exchange Act of 1934, which, among other matters, will include a description of the operations of the target business. We expect that the proxy statement that we would send to shareholders would not contain historical financial information with respect to the vessels and, therefore, shareholders voting on a proposed transaction would not have the benefit of financial statements of past operations. Rather, instead of financial statements, the proxy statement we would send to our shareholders would contain the same information that would typically be provided in the prospectus for an initial public offering of a start-up shipping company, such as: (i) historical and prevailing market rates for vessels on the basis of type, age and proposed deployment; (ii) our expectations of future market trends and proposed strategy for employment of the vessels; (iii) our anticipated operational (overhead) expenses; and (iv) the valuation of the vessels as assets generally (i.e., whether they are new or second-hand and the type of vessel), all of which, in turn, depend on the sector of the shipping industry in which we consummate such a business combination. See Risk Factors Risks Associated With Our Acquisition of a Target Business in the Maritime Shipping Industry If we were to acquire vessels or a company with agreements to purchase individual vessels, it is highly unlikely that proxy materials provided to our shareholders would include historical financial statements and, accordingly, investors will not have historical financial statements on which to rely in making their decision whether to vote for the acquisition. In connection with the vote required for any business combination, all of our existing shareholders have agreed to vote the shares of common stock owned by them prior to this offering in accordance with the vote of the majority of the public shareholders. We are not aware of any intention on the part of our officers and directors, including all of our existing shareholders, to make any purchases in this offering or in the aftermarket, although they are not prohibited from doing so. Although we do not know for certain the factors that would cause our existing stockholders to purchase our securities, we believe that some of the factors they would consider are: (i) the trading price of our securities, (ii) their aggregate investment in our securities, (iii) whether it appears that a substantial number of public stockholders are voting against a proposed business combination, and (iv) their interest in the target business once the target business has been identified. Any shares acquired by such individuals in this offering or in the aftermarket will be voted in favor of the business combination. Accordingly, any purchase of our shares by our officers and directors, including all of our existing shareholders, in this offering or in the aftermarket could influence the result of a vote submitted to our shareholders in connection with a business combination by making it more likely that a business combination would be approved. In addition, given the interest that our Table of Contents existing stockholders have in a business combination being consummated, it is possible that our existing stockholders will acquire securities from public stockholders who have elected to redeem their shares of our common stock (as described below) in order to change their vote and insure that the business combination will be approved (which could result in a business combination being approved even if, after the announcement of the business combination, 35% or more of our public stockholders would have elected their redemption rights, or 51% of our public stockholders would have voted against the business combination, but for the purchases made by our existing stockholders). We will proceed with the business combination only if a majority of the shares of common stock voted by the holders of the common stock included in the units offered by this prospectus are voted in favor of the business combination and public shareholders owning less than 35.0% of the shares sold in this offering exercise their redemption rights. Our threshold for redemption has been established at 35.0% to reduce the risk of a small group of shareholders exercising undue influence on the approval process. However, a 20.0% threshold is more typical in offerings of this type and such lower threshold permits the holders of a smaller number of shares to prevent a transaction they deem to be undesirable from being consummated (and therefore makes it easier for a proposed business combination to be approved as compared to other offerings of this type with a lower threshold). In addition, permitting redemption above the typical 20.0% threshold may require us to secure additional financing to fund a proposed business combination. Voting against the business combination alone will not result in redemption of a shareholder s shares into a pro rata share of the trust account. To do so, a shareholder must have also exercised the redemption rights described below. As a result of our higher redemption threshold, we may have less cash available to complete a business combination. Because we will not know how many shareholders may exercise such redemption rights, we will need to structure a business combination that requires less cash, or we may need to arrange third party financing to help fund the transaction in case a larger percentage of shareholders exercise their redemption rights than we expect. Alternatively, to compensate for the potential shortfall in cash, we may be required to structure the business combination, in whole or in part, using the issuance of our stock as consideration. Accordingly, this increase in the customary redemption threshold may hinder our ability to consummate a business combination in the most efficient manner or to optimize our capital structure. Redemption rights At the time we seek shareholder approval of any business combination, we will offer each public shareholder the right to have such shareholder s shares of common stock redeemed for cash if the shareholder votes against the business combination and the business combination is approved and completed. The actual redemption price will be equal to $10.00 per share. An eligible shareholder may request redemption at any time after the mailing to our shareholders of the proxy statement and prior to the vote taken with respect to a proposed business combination at a meeting held for that purpose, but the request will not be granted unless the shareholder votes against the business combination and the business combination is approved and completed. If a shareholder votes against the business combination but fails to properly exercise its redemption rights, such shareholder will not have its shares of common stock redeemed. Any request for redemption, once made, may be withdrawn at any time up to the date of the meeting. It is anticipated that the funds to be distributed to shareholders entitled to redeem their shares who elect redemption will be distributed promptly after completion of a business combination. Public shareholders who redeem their common stock for their share of the trust account still have the right to exercise the warrants that they received as part of the units. We will not complete any business combination if public shareholders owning 35.0% or more of the total number of shares sold in this offering exercise their redemption rights. Shareholders who exercise their redemption rights will no longer be able to bring a derivative action against us. Even if less than 35.0% of the shareholders exercise their redemption rights, we may be unable to consummate a business combination if such redemption leaves us with funds less than a fair market value equal to 80.0% of the amount in the trust account (exclusive of Maxim Group LLC s deferred underwriting compensation held in the trust account and up to $420,000 of interest earned thereon) at the time of such acquisition which amount is required as a condition to the consummation of our initial business combination, and we may be forced to find additional financing to consummate such a business combination, consummate a different business combination or liquidate. Investors who choose to remain as shareholders and do not exercise their redemption rights will be effectively diluted as the number of public shares decreases (thereby decreasing the total number of share outstanding) and the number of shares held by our existing shareholders remains the same. Table of Contents The shares sold prior to this offering do not have redemption rights. However, our existing shareholders have significant influence over matters requiring shareholder approval. See the section entitled, Risk Factors Risks Associated With Our Current Business Our existing shareholders control a substantial interest in us and thus may influence certain actions requiring shareholder vote. Dissolution and liquidation if no business combination Our Second Amended and Restated Articles of Incorporation provide that we will continue in existence only until , 2009 [twenty four months from the consummation of this offering]. This provision may not be amended except in connection with the consummation of a business combination. If we have not completed a business combination by such date, our corporate existence will cease except for the purposes of winding up our affairs and liquidating, pursuant to Section 106 of the Marshall Islands Business Corporations Act. This has the same effect as if our board of directors and shareholders had formally voted to approve our dissolution. As a result, no vote would be required from our board of directors or shareholders to commence such a dissolution and liquidation. We view this provision terminating our corporate life by , 2009 [twenty four months from the consummation of this offering] as an obligation to our shareholders and will not take any action to amend or waive this provision to allow us to survive for a longer period of time except in connection with the consummation of a business combination. Once we are dissolved, shareholders will no longer be able to bring derivative actions against us. If we are unable to complete a business combination by , 2009 [twenty four months from the consummation of this offering], we will distribute to all of our public shareholders, in proportion to their respective equity interests, an aggregate sum equal to the amount in the trust account, inclusive of any interest not previously distributed. We anticipate notifying the trustee of the trust account to begin liquidating such assets promptly after such date and anticipate it will take no more than 10 business days to effect such distribution. Our existing shareholders have waived their rights to participate in any liquidation distribution with respect to shares of common stock owned by them prior to this offering. In addition Maxim Group LLC has agreed to waive its rights to the $4,500,000 ($5,625,000 if the over-allotment option is exercised in full) of deferred underwriting compensation (including up to $420,000 of interest earned thereon) held in the trust account for its benefit. There will be no distribution from the trust account with respect to our warrants, which will expire worthless. We will pay the costs of liquidation from our remaining assets outside of the trust fund. If such funds are insufficient, our officers have agreed to advance us the funds necessary to complete such liquidation (currently anticipated to be no more than approximately $15,000) and have agreed not to seek repayment of such expenses. If we were to expend all of the net proceeds of the private placement held outside the trust account (initially $3,000,000), and without taking into account interest, if any, earned on the trust account not previously distributed (less any taxes payable by us), we expect the initial per-share liquidation price to holders of the 20,000,000 shares (23,000,000 if the underwriters over-allotment option is exercised in full) entitled to participate in liquidation distributions to be equal to the $10.00 per share. The proceeds deposited in the trust account could, however, become subject to the claims of our creditors, which could be prior to the claims of our public shareholders. In such event, we cannot assure you that the actual per-share liquidation price will not be less than $10.00 due to claims of creditors. Although we will seek to have all prospective target businesses, vendors or other service providers execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our public shareholders, there is no guarantee that they will execute such agreements. Nor is there any guarantee that, even if such entities execute such agreements with us, they will not seek recourse against the trust account. A court could also conclude that such agreements are not enforceable. Accordingly, the proceeds held in the trust account could be subject to claims, which could take priority over those of our public shareholders. If any third party refused to execute an agreement waiving such claims to the monies held in the trust account, we would perform an analysis of the alternatives available to us if we chose not to engage such third party and evaluate if such engagement would be in the best interest of our shareholders if such third party refused to waive such claims. Examples of possible instances where we may engage a third party that refused to execute a waiver include the engagement of a third party consultant whose particular expertise or skills are believed by management to be significantly superior to those of other consultants that would agree to execute a waiver or in cases where management is unable to find a provider of required services willing to provide the waiver. In order to protect the Table of Contents amounts held in trust each of our officers has agreed that he will be personally liable to the extent of his pro rata beneficial ownership in our company immediately prior to this offering, if we did not obtain valid and enforceable waivers from such prospective target businesses, vendors or other entities. We have not independently verified whether such persons have sufficient funds to satisfy their indemnity obligations and, therefore, we cannot assure you that they would be able to satisfy those obligations. We believe the likelihood of our officers having to indemnify the trust account is limited because we will endeavor to have all vendors and prospective target businesses as well as other entities execute agreements with us waiving any right, title, interest or claim of any kind in or to monies held in the trust account. We also will have access to any funds available outside the trust account or released to us to fund working capital requirements with which to pay any such potential claims (including costs and expenses incurred in connection with our liquidation currently estimated at approximately $15,000). The indemnification provisions are set forth in the insider letters, executed by each of our officers. The insider letters provide that, in the event we obtain a valid and enforceable waiver of any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our shareholders from a vendor, prospective target business or other entity, the indemnification will not be available. The insider letters executed by each of our officers are exhibits to the registration statement of which this prospectus forms a part. Under the Business Corporations Act of the Republic of the Marshall Islands, shareholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. If we complied with certain procedures set forth in Section 106 of the Business Corporations Act of the Marshall Islands intended to ensure that we make reasonable provision for all claims against us, including a minimum 6-month notice period during which any third-party claims can be brought against us, any liability of shareholders with respect to a liquidating distribution is limited to the lesser of such shareholder s pro rata share of the claim or the amount distributed to the shareholder, and any liability of the shareholder would be barred after the expiration of the period specified in the notice. However, it is our intention to make liquidating distributions to our public shareholders as soon as reasonably possible after dissolution and, therefore, we do not intend to comply with those procedures. As such, to the extent not covered by the indemnities provided by our executive officers, our shareholders could potentially be liable for any claims to the extent of distributions received by them in a dissolution and any such liability of our shareholders may extend beyond the third anniversary of such dissolution. Accordingly, we cannot assure you that third parties will not seek to recover from our shareholders amounts owed to them by us. Additionally, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, the funds held in our trust account will be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our shareholders. To the extent any bankruptcy claims deplete the trust account we cannot assure you we will be able to return to our public shareholders the liquidation amounts due them. Additionally, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, any distributions received by shareholders could be viewed under applicable debtor/creditor and/or bankruptcy laws as either a preferential transfer or a fraudulent conveyance. As a result, a bankruptcy court could seek to recover all amounts received by our shareholders. Furthermore, because we intend to distribute the proceeds held in the trust account to our public shareholders promptly after , 2009 [twenty four months from the consummation of this offering], this may be viewed or interpreted as giving preference to our public shareholders over any potential creditors with respect to access to or distributions from our assets. Furthermore, our board may be viewed as having breached their fiduciary duties to our creditors and/or may have acted in bad faith, and thereby exposing itself and our company to claims of punitive damages, by paying public shareholders from the trust account prior to addressing the claims of creditors and/or complying with certain provisions of the Business Corporations Act of the Marshall Islands with respect to our dissolution and liquidation. We cannot assure you that claims will not be brought against us for these reasons. Our public shareholders shall be entitled to receive funds from the trust account only in the event of liquidation or if the shareholders seek to redeem their respective shares for cash upon a business combination which the shareholder voted against and which is actually completed by us. In no other circumstances shall a shareholder have any right or interest of any kind to or in the trust account. Table of Contents Investment Management Trust Agreement On the date of this prospectus we will enter into an Investment Management Trust Agreement with Continental Stock Transfer Trust Company, which will serve as the trustee of the trust account. Our shareholders will be third party beneficiaries of this agreement. You should review a copy of the Investment Management Trust Agreement, which has been filed as an exhibit to the registration statement of which this prospectus forms a part, for a complete description of its terms and conditions. Except for the release of the funds in the trust account, in the event of a consummation of a business combination or liquidation, the limited distribution of the funds in the trust account shall include: (i) disbursing to the Company or the Internal Revenue Service the amount required to pay income taxes for any income tax obligation related to the offering proceeds held in the trust account; (ii) disbursing to the Company an aggregate of $675,000 of the interest earned on proceeds in the trust account to pay costs and expenses associated with the exercise of the underwriters over-allotment option; (iii) quarterly distributions to the public shareholders of interest earned on proceeds in the trust account until the earlier of the consummation of a business combination or the Company s liquidation; and (iv) disbursing to the Company the amount of actual expenses incurred or imminently to be incurred by the Company in connection with its dissolution and distribution and any amounts due to pay creditors or required to reserve for payment to creditors. Competition In identifying, evaluating and selecting a target business, we may encounter intense competition from other entities having a business objective similar to ours. Since August 2003, based upon publicly available information, approximately 113 similarly structured blank check companies have completed initial public offerings and 35 others have filed registration statements with the SEC seeking to go public. (We have identified 1 blank check company that is seeking to compete a business combination in the maritime shipping industry.) Of these companies, only 28 companies have consummated a business combination, while 25 other companies have announced they have entered into a definitive agreement for a business combination, but have not consummated such business combination and five companies have liquidated or are in liquidation. Accordingly, there are approximately 55 blank check companies with more than $5.0 billion in trust that are seeking to carry out a business plan similar to our business plan. Like us, some of those companies have specific industries that they must complete a business combination in, a number of them may consummate a business combination in any industry they choose. We also expect to encounter intense competition from other entities having a business objective similar to ours, including venture capital funds, leveraged buyout funds and operating businesses competing for acquisitions. In addition to possessing greater technical, human and other resources than us, many of these entities are well established and have extensive experience in identifying and effecting business combinations directly or through affiliates. As compared to these established companies, our financial resources will be relatively limited, which may limit our ability to compete in acquiring certain sizable target businesses. We may, therefore, be subject to competition from both established companies and other companies seeking to consummate a business plan similar to ours, which will, as a result, increase demand for privately-held companies to combine with companies structured similarly to ours. Accordingly, such competition may have a negative impact upon our negotiating position and the total consideration we may be required to pay in order to consummate a business combination. Further, the fact that only 28 of such companies have completed a business combination and 25 of such companies have entered into a definitive agreement for a business combination may be an indication that there are only a limited number of attractive target businesses available to such entities or that many privately-held target businesses may not be inclined to enter into business combinations with publicly held blank check companies like us. Further: our obligation to seek shareholder approval of a business combination or obtain the necessary financial information to be included in the proxy statement to be sent to shareholders in connection with such business combination may delay or prevent the completion of a transaction; our obligation to redeem for cash up to one share less than 35.0% of the shares of common stock held by our public shareholders in certain instances will limit the manner in which we may structure a business combination (i.e., we will not be able to undertake an all cash acquisition transaction) and may reduce the resources available to us for this purpose, as well as for funding a target company s business; Table of Contents our outstanding warrants, and the future dilution they potentially represent, may not be viewed favorably by certain target businesses; and the requirement to acquire either an operating business or assets, or a combination thereof, that has a fair market value equal to at least 80.0% of the trust account (exclusive of Maxim Group LLC s deferred underwriting compensation plus interest thereon held in the trust account) at the time of the acquisition could require us to acquire several companies, or closely related operating businesses and/or assets from different parties at the same time, all of which sales would be contingent on the closings of the other sales, which could make it more difficult to consummate the business combination. Any of these factors may place us at a competitive disadvantage in successfully negotiating a business combination. Our management believes, however, that to the extent that our target business is a privately held entity, our status as a well-financed public entity may give us a competitive advantage over entities having a similar business objective as ours in acquiring a target business with significant growth potential on favorable terms. See the section entitled Risk Factors Risks Associated With Our Current Business Because there are numerous companies with a business plan similar to ours seeking to effect a business combination, it may be more difficult for us to do so. If we succeed in effecting a business combination, there will be, in all likelihood, intense competition from competitors of the target business. We cannot assure you that, subsequent to a business combination, we will have the resources or ability to compete effectively. Facilities We maintain our executive offices at 10, Amfitheas Avenue, 175 64 P. Faliro, Athens, Greece provided by Balthellas Chartering S.A., a company controlled by Panagiotis Zafet and Simon Zafet, our Chief Executive Officer and Chief Operating Officer, respectively, and each a director of the Company. Such company has agreed to provide us with certain administrative, technological and secretarial services, as well as the use of certain limited office space at this location, at a cost of $7,500 per month pursuant to a letter agreement. We believe, based on rents and fees for similar services in Athens, that the $7,500 fee is at least as favorable as we could have obtained from an unaffiliated party. We consider our current office space adequate for our current needs. Employees We have five officers, all of whom are also members of our board of directors. These individuals are not obligated to contribute any specific number of hours per week and intend to devote only as much time as they deem necessary to our affairs. The amount of time they will devote in any time period will vary based on the availability of suitable target businesses to investigate, although we expect Mr. Georgios Koutsolioutsos, our President and Co-Chairman of the Board and Mr. Panagiotis Zafet, Chief Executive Officer and Co-Chairman of the Board, to devote a certain amount of time per week to our business. We do not intend to have any full time employees prior to the consummation of a business combination. Periodic reporting and financial information We have registered our units, common stock and warrants under the Securities Exchange Act of 1934, as amended, and have reporting obligations, including the requirement that we file annual reports with the SEC. In accordance with the requirements of the Securities Exchange Act of 1934, our annual reports will contain financial statements audited and reported on by our independent accountants. We will not acquire a target business if audited financial statements based on United States generally accepted accounting principles cannot be obtained for such target business. Additionally, our management will provide shareholders with the foregoing financial information as part of the proxy solicitation materials sent to shareholders to assist them in assessing each specific target business we seek to acquire. Our management believes that the requirement of having available financial information for the target business may limit the pool of potential target businesses available for acquisition. Table of Contents We will be required to comply with the internal control requirements of the Sarbanes-Oxley Act for the fiscal year ending December 31, 2008. A target company may not be in compliance with the provisions of the Sarbanes-Oxley Act regarding adequacy of their internal controls. The development of the internal controls of any such entity to achieve compliance with the Sarbanes-Oxley Act may increase the time and costs necessary to complete any such acquisition. Legal proceedings To the knowledge of management, there is no litigation currently pending or contemplated against us or any of our officers or directors in their capacity as such. Comparison to offerings of blank check companies The following table compares and contrasts the terms of our offering and the terms of an offering of blank check companies under Rule 419 promulgated by the SEC assuming that the gross proceeds, underwriting discounts and underwriting expenses for the Rule 419 offering are the same as this offering and that the underwriters will not exercise their over-allotment option. None of the terms of a Rule 419 offering will apply to this offering. Terms of Our Offering Terms Under a Rule 419 Offering Escrow of offering proceeds $200,000,000 of the proceeds of this offering and the private placement (including up to $4,500,000 payable to Maxim Group LLC upon consummation of a business combination) will be deposited into a trust account at Deutsche Bank Trust Company, maintained by Continental Stock Transfer Trust Company. Approximately $167,400,000 of the offering proceeds would be required to be deposited into either an escrow account with an insured depositary institution or in a separate bank account established by a broker-dealer in which the broker-dealer acts as trustee for persons having the beneficial interests in the account. Investment of net proceeds The $200,000,000 held in trust will only be invested in U.S. government securities, defined as any Treasury Bill issued by the United States having a maturity of one hundred and eighty days or less or money market funds meeting certain criteria. Proceeds could be invested only in specified securities such as a money market fund meeting conditions of the Investment Company Act of 1940 or in securities that are direct obligations of, or obligations guaranteed as to principal or interest by, the United States. Limitation on fair value or net assets of target business The initial target business that we acquire must have a fair market value equal to at least 80.0% of the amount in the trust account (exclusive of Maxim Group LLC s deferred underwriting compensation plus up to $420,000 of interest earned thereon held in the trust account) at the time of such acquisition. We would be restricted from acquiring a target business unless the fair value of such business or net assets to be acquired represent at least 80.0% of the maximum offering proceeds. Trading of securities issued The units will begin trading on or promptly after the date of this No trading of the units or the underlying common stock and Table of Contents Terms of Our Offering Terms Under a Rule 419 Offering prospectus. Each of the common stock and warrants may trade separately beginning on the 10th business day following the earlier to occur of: (i) the expiration of the underwriters over- allotment option or (ii) its exercise in full. In no event will Maxim Group LLC allow separate trading of common stock and warrants until we file an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file a Current Report on Form 8-K, including an audited balance sheet, upon the consummation of this offering, which is anticipated to take place three business days from the consummation of this offering. The audited balance sheet will include proceeds we receive from the exercise of the over-allotment option if the over- allotment option is exercised prior to the filing of the Form 8-K. If the over-allotment is exercised following the initial filing of the Form 8-K, an amended Form 8-K will be filed to provide updated financial information reflecting the exercise of the over-allotment option. warrants would be permitted until the completion of a business combination. During this period, the securities would be held in the escrow or trust account. Exercise of the warrants The warrants cannot be exercised until the later of the completion of a business combination or one year from the date of this prospectus and, accordingly, will only be exercised after the trust account has been terminated and distributed. The warrants could be exercised prior to the completion of a business combination, but securities received and cash paid in connection with the exercise would be deposited in the escrow or trust account. Election to remain an investor We will give our shareholders the opportunity to vote on the business combination. In connection with seeking shareholder approval, we will send each shareholder a proxy statement containing information required by the SEC. A shareholder following the procedures described in this A prospectus containing information required by the SEC would be filed as part of a post-effective amendment to the original registration statement filed in connection with the offering and would be sent to each investor. Each investor would be given the opportunity to notify the company, Table of Contents Terms of Our Offering Terms Under a Rule 419 Offering prospectus is given the right to redeem his or her shares for $10.00 per share. However, a shareholder who does not follow these procedures or a shareholder who does not take any action would not be entitled to the return of any funds. in writing, within a period of no less than 20 business days and no more than 45 business days from the effective date of the post-effective amendment, to decide whether he or she elects to remain a shareholder of the company or require the return of his or her investment. If the company has not received the notification by the end of the 45th business day, funds and interest or dividends, if any, held in the trust or escrow account would automatically be returned to the shareholder. Unless a sufficient number of investors elect to remain investors, all of the deposited funds in the escrow account must be returned to all investors and none of the securities will be issued. Business combination deadline Pursuant to our Second Amended and Restated Articles of Incorporation, our corporate existence will cease 24 months from the consummation of this offering except for the purposes of winding up our affairs and liquidating. However, in connection with the shareholder vote to approve a business combination, we will submit to shareholders a proposal amending our Second Amended and Restated Articles of Incorporation to allow for our perpetual existence following such business combination. If an acquisition has not been consummated within 18 months after the effective date of the initial registration statement, funds held in the trust or escrow account would be returned to investors. Release of funds The proceeds held in the trust account will not be released until the earlier of the completion of a business combination or as part of any plan of dissolution and liquidation of our company upon our failure to effect a business combination within the allotted time except that, to the extent the trust account earns interest, we are permitted to receive disbursements The proceeds held in the escrow account, including all of the interest earned thereon (net of taxes payable), would not be released until the earlier of the completion of a business combination or the failure to effect a business combination within 18 months. See Risk Factors Risks associated with our business You will not be Table of Contents Terms of Our Offering Terms Under a Rule 419 Offering (i) to pay tax obligations and (ii) of up to $675,000 of such interest income in the event of the exercise of the over- allotment option. entitled to protections normally afforded to investors of blank check companies. Distributions Interest earned on the trust account in excess of the amount necessary to allow for a $10.00 per share liquidation distribution, subject to any valid claims by our creditors that are not covered by amounts in the trust account or indemnities provided by our executive officers, will be distributed to our public shareholders on a quarterly basis, net of any taxes payable by us and up to $675,000 of such interest in the event of exercise of the over-allotment option and up to $420,000 of interest earned on Maxim Group LLC s deferred underwriting compensation held in the trust account. Interest earned on proceeds held in the trust account would be held in the trust account for the sole benefit of the shareholders and would not be released until the earlier of the completion of a business combination or the failure to effect a business combination within the allotted time. In the event a business combination was not consummated within 18 months, proceeds held in the trust account would be returned within 5 business days of such date. Second Amended and Restated Articles of Incorporation Our Second Amended and Restated Articles of Incorporation requires that we obtain the vote of holders of 95.0% of our outstanding common stock to amend Article Sixth of our Second Amended and Restated Articles of Incorporation. However, the validity of such supermajority voting provisions under Marshall Islands law, which follows Delaware law, has not been settled. A court could conclude that such supermajority voting consent requirement constitutes a practical prohibition on amendment in violation of the shareholders implicit rights to amend the corporate charter. In that case, certain provisions of the articles would be amendable without such supermajority consent and any such amendment could reduce or eliminate the protection afforded to our shareholders. However, we view the foregoing provisions as obligations to our shareholders, and we will not take any action to waive or amend any of these provisions. Table of Contents MANAGEMENT Directors and Executive Officers Our current directors and executive officers, none of which reside in the United States, are as follows: Name Age Position Georgios Koutsolioutsos 37 President and Co-Chairman of the Board of Directors Panagiotis Zafet 41 Chief Executive Officer and Co-Chairman of the Board of Directors Simon Zafet 44 Chief Operating Officer and Director Alexios Komninos 41 Chief Financial Officer, Treasurer and Director Ioannis Tsigkounakis 41 Secretary and Director Elias M. Culucundis 64 Director Roland Beberniss 65 Director George Hamawi 67 Director Georgios Koutsolioutsos has been our President and Co-Chairman of the Board of Directors since inception. Mr. Koutsolioutsos has significant experience in the management and operations of public companies. He began his career at Folli Follie S.A. (ATSE: FOLLI), in 1992. Folli Follie is an international company with a multinational luxury goods brand and over three hundred points of sale (POS). Mr. Koutsolioutsos, who is currently the Vice-President and an executive member of the Board of Directors, has assisted with the growth of Folli Follie S.A. to a market capitalization of over $1.1 billion with revenues of over $500 million in 2006. Additionally, in 1997, Folli Follie SA was listed on the Athens Stock Exchange following an initial public offering conducted under his management. Mr. Koutsolioutsos also has extensive knowledge of business operations in the Asian markets where, for more than a decade, Folli Follie has had a presence. Furthermore, since 2002, Folli Follie was among the first companies in mainland China to obtain a full retail license. In 1999, Mr. Koutsolioutsos became a member of the Board of Directors of Hellenic Duty Free Shops S.A. ( HDFS (ATSE: HDF)) and subsequently, as of May 2006, became the Chairman of the Board of Directors. HDFS is the exclusive duty free operator in Greece, one of the top fifteen duty free operators worldwide and has a market capitalization of approximately $1 billion. In 2003, Mr. Koutsolioutsos was awarded Manager of the Year in Greece. Mr. Georgios Koutsolioutsos received his B.Sc. in business and marketing from the University of Hartford, Connecticut, USA. He is fluent in five languages. Panagiotis Zafet has been our Chief Executive Officer and Co-Chairman of the Board of Directors since inception. Mr. Zafet has extensive experience in the management of operations in the maritime shipping industry, as well as the purchase, sale and charter of vessels. Mr. Zafet started in the liner shipping industry in 1986 at Hellasco Shipping Ltd., of which he is a co-owner. Hellasco Shipping Ltd. is active in the trade of timber products and the regular service of vessels trading between Scandinavia, Greece and Cyprus. In 1991, he founded Balthellas Chartering S.A., a ship management and shipbroking company with 2006 revenues of approximately $25 million, where he currently serves as managing director. Under his leadership, Balthellas Chartering expanded its business from the commercial management of vessels into the full-scale management of multipurpose vessels of the highest ice class, container ships, timber carriers and dry cargo ships. The fleet is trading worldwide with a strong presence in ice bound navigational waters such as the Baltic Sea, White Sea and the Sea of Azov. The Company also specializes in feeder container services offering mostly service in places with limited port infrastructures, such as in the East Mediterranean, North and West African ports, the Caribbean, Indian Ocean and the Far East. Mr. Zafet is also a co-owner and managing director of Hellasco Transport Ltd. Mr. Zafet has a law degree from the Aristotelio University of Thessaloniki and is fluent in three languages. He is a member of the Piraeus Marine Club and the Hellenic Shipbrokers Association. Simon Zafet has been our Chief Operating Officer and a director since inception. Mr. Zafet has extensive experience in the management of operations in the maritime shipping industry, as well as the purchase, sale and charter of vessels. He worked at Adams and Porter New York Insurance Brokers from 1994 to 1995 and Harley Mullion shipping brokers in London from 1995 to 1996. In May 1996, he joined Hellasco Shipping Ltd. as Chief Table of Contents Executive Officer, developing and creating an elaborate network of shipping contacts that included all of Scandinavia and the Eastern Mediterranean. Under his leadership, Hellasco Shipping Ltd. increased the transportation of its main forest products and expanded its liner business with the formation of a door-to-door shipping company, which runs high volumes and becoming the only and better alternative to a container for this part of the world. Mr. Zafet currently maintains the position of Chief Executive Officer at Hellasco Shipping Ltd. Mr. Zafet is also a co-owner of Hellasco Transport Ltd. He is an active member of the Greek-Finnish Commerce Association, the Swedish Commerce Association of Athens and the Baltic Exchange. Mr. Zafet received an undergraduate degree in Economics, Marketing and Computer Science from Boston University in Massachusetts in 1984 and a Master s degree, with honors, in Shipping Trade and Finance from the London City University in 1998. Alexios Komninos has been our Chief Financial Officer and a director since inception. Since 1991, he has been a major shareholder and chief operating officer of N. Komninos Securities SA, one of the oldest members of the Athens Stock Exchange and member of the Athens Derivatives Exchange, with total revenues of approximately $40 million in 2006. Mr. Komninos has extensive experience with respect to the review and assessment of companies financial positions as well as experience with respect to analysis of potential acquisitions. He has been involved in more than twenty successful initial public offerings and secondary offerings of companies listed on the Athens Stock Exchange, including Rokkas Energy S.A. (ATSE: ROKKA), a windmill parks company, Folli Follie S.A. (ATSE: FOLLI), a luxury goods company, Flexopack S.A. (ATSE: FLEXO), a packaging company, Eurobrokers S.A. (ATSE: EUBRK), an insurance broking company, and Edrasi S.A. (ATSE: EDRA), a specialized construction company. Mr. Komninos is primarily engaged in the business of securities portfolio management and currently manages a portfolio exceeding $450 million. Throughout 2004 and 2005, he was a financial adviser to Capital Maritime Trading Corp., a holding company with revenues of approximately $188 million in 2004. Mr. Komninos also advises numerous other public companies in Greece on capital restructuring, mergers and acquisitions and buy-out projects. Mr. Komninos received his B.Sc. in economics from the University of Sussex in the United Kingdom and his M.Sc. in Shipping Trade and Finance from the City University Business School in London. Ioannis Tsigkounakis has been our Secretary and a director since inception. Since 1992, he has been a practicing lawyer specializing in Shipping and Capital Markets law. In that capacity he has gained significant experience with respect to the negotiation of acquisitions and in all aspects of legal due diligence. In 1994 he joined the law firm of Vgenopoulos Partners, one of the largest international practice firms in Greece. Mr. Tsigkounakis advises Greek issuers, brokers, investment firms and banking institutions on capital markets and investment banking matters. He has been involved in capital finance transactions, mergers and acquisitions, take-overs and buy-outs, both in Greece and abroad, including: (i) the acquisition through the Athens Exchange of a controlling interest in Proton Bank of Greece by IRF European Finance Investments Ltd., in May 2006, a company listed on the Alternative Investment Market of the London Stock Exchange (AIM), (ii) the public tender offer made by Laiki Bank Public Co. Ltd. of Cyprus to Egnatia Bank and Marfin Holdings of Greece, in September 2006, (iii) the acquisition of Links of London Ltd., in July 2006, and (iv) the issuance of a bond loan by HSBC, Alfa Bank, Piraeus Bank, BNP Paribas and National Bank of Greece, of $280 million for Folli Follie S.A., in June 2006. Since 2002, he has been a member of the Board of Directors of Aspropirgos Maritime Ltd., a company that owns a crude oil tanker owning and is a subsidiary of Paradise Tankers Corp., a large tanker carrier group with 2006 revenues of approximately $48M. Between 2003 and 2004, he was also a non-executive member of the Board of Directors of Marfin Bank Private Fund, a fund with $225 million under management. He is currently an executive member of the Board of Directors of Hellenic Duty Free Shops, a company listed on the Athens Exchange (ATSE: HDF). Mr. Tsigkounakis received his law degree from the National University of Athens and a master s degree (DEA) in International and Banking Law from the University of Pantheon, Sorbonne I, France. Since 2005, he has been a member of the Greek Legal Society of Banking and Capital Markets Law. Elias M. Culucundis has been a director of our company since inception. Mr. Culucundis has experience in the negotiation of acquisitions, as well as the oversight of due diligence. Since 2002, Mr. Culucundis has been a member of the Board of Directors of Folli Follie S.A. and since 2006 an executive member of the Board of Directors of Hellenic Duty Free Shops S.A. Since 1999, Mr. Culucundis has been President, Chief Executive Officer and Director of Equity Shipping Company Ltd., a company specializing in starting, managing and operating commercial and technical shipping projects the value of which exceeded 100 million as of the end of 2006. Additionally, Table of Contents from 1996 to 2000, he was a director of Kassian Maritime Shipping Agency Ltd., a ship management company operating a fleet of ten bulk carriers with revenues of approximately $180M, in 2006. During this time, Mr. Culucundis was also a director of Point Clear Navigation Agency Ltd, a marine project company instrumental in opening the Chinese shipbuilding market to Greek shipping. Point Clear Navigation Agency Ltd. aided in technically and commercially structuring the first panamax bulk carrier and the first panamax tanker to be built in Shanghai, China that subsequently became the prototype for over 50 subsequent orders for Greek shipping. From 1981 to 1995, Mr. Culucundis was a director of Kassos Maritime Enterprises Ltd., a company engaged in ship management. While at Kassos, he was initially a Technical Director and eventually ascended to the position of Chief Executive Officer, overseeing a large fleet of panamax, aframax and VLCC tankers, as well as overseeing new building contracts, specifications and the construction of new buildings. From 1971 to 1980, Mr. Culucundis was a director and the Chief Executive Officer of Off Shore Consultants Inc. and Naval Engineering Dynamics Ltd. Off Shore Consultants Inc. was a pioneer in FPSO (Floating Production, Storage and Offloading vessel, FPSO ) design and construction and responsible for the technical and commercial supervision of a pentagon-type drilling rig utilized by Royal Dutch Shell plc. Seven FPSO s were designed and constructed that were subsequently utilized by Pertamina, ARCO, Total and Elf-Aquitaine. Naval Engineering Dynamics Ltd. was responsible for purchasing, re-building and operating vessels that had suffered major damage. From 1966 to 1971, Mr. Culucundis was employed as a Naval Architect for A.G. Pappadakis Co. Ltd., London, responsible for tanker and bulk carrier new buildings and supervising the technical operation of the company fleet. He is a graduate of Kings College, Durham University, Great Britain, with a degree in Naval Architecture and Shipbuilding. He is a member of several industry organizations, including the Council of the Union of Greek Shipowners and American Bureau of Shipping. Mr. Culucundis is a fellow of the Royal Institute of Naval Architects and a Chartered Engineer. Roland Beberniss has been a director of our company since inception. Mr. Beberniss has extensive experience in maritime shipping acquisitions and operations. In 1976, he became manager of Lubisch Hanseatische Schiffahrtsgesellschaft, a cargo handling company in the ports of Hamburg, Jedda and Jubail in Saudi Arabia. From 1980 to 1986, he was employed by Hamburg Port Consultant, during which time he was involved in several studies concerning the working procedures and logistic processes for companies such as Daimler Benz, Hamburger Hafen und Lagerhaus Gesellschaft and the Ministry of Transport in Saudi Arabia. In 1991, he became manager of Lubecker Hafen Gesellschaft, a cargo handling company in the port of Lubeck, and under his leadership, the port capacity was increased by approximately 40.0% and new shipping lines were acquired. From 1994 to 2006, Mr. Beberniss served as manager of Enso Nord, a subsidiary of Stora Enso (NYSE: SEO), a company with a market cap of $14 billion, where he organized and optimized the transport of paper products from Finland, Sweden and Germany to various customers in Europe. In 2005, he founded RBB Shipping GmbH. Mr. Beberniss is a graduate of the Naval School of Hamburg, Germany and a graduate of the University of Hamburg with a degree in business administration. George Hamawi has been a director of our company since inception. Mr. Hamawi has been a practicing lawyer for over 40 years, during which time he has gained extensive knowledge of the maritime shipping industry, particularly with respect to assessing legal issues related to potential acquisition opportunities. From 1964 to 1975, Mr. Hamawi practiced law in Ethiopia at the firm of Hamawi Hamawi, specializing in commercial ventures, insurance, labor and taxation. In 1974, he also served as a legal consultant to the Andre Family of Lausanne, which had two farming projects in Ethiopia, and as a consultant to Continental Homes, an American Housing project to build and sell 1000 homes in the outskirts of the city of Addis Ababa. From 1975 to 1977, he served as Secretary of the Hellenic United Shipowners Mutual Defense Association (HUSMA). Additionally, in 1986, he founded the shipping consulting firm of Mercantile Marine Ltd., with clients fleets ranging from 2 ships to 40 ships. In 1992, through Mercantile Marine, Mr. Hamawi consulted on the shipbuilding contracts for 12 handy-sized vessels in Japan and for seven panamax vessels in Romania. He is a graduate of the University of Ethiopia with a BA in Political Science and a graduate of McGill University in Montreal, Canada with a Post Graduate Degree in Civil Law. Mr. Hamawi is presently working as a legal consultant. Family Relationships Panagiotis Zafet and Simon Zafet are brothers. No other family relationship exists between any of the directors and officers of the Company. Table of Contents Director Independence Our board of directors has determined that Elias M. Culucundis, George Hamawi and Roland Beberniss are independent directors within the meaning of Rule 121(A) of the American Stock Exchange Company Guide and Rule 10 promulgated under the Exchange Act of 1934. We intend to locate and appoint at least three additional independent directors to serve on the board of directors. Board Committees On completion of this offering, our board of directors will have an audit committee, a nominating committee and a compensation committee. Our board of directors has adopted a charter for the audit committee as well as a code of conduct and ethics that governs the conduct of our directors, officers and employees. Upon completion of this offering, our audit committee will consist of Elias M. Culucundis and George Hamawi. Each member of our audit committee is financially literate under the current listing standards of the American Stock Exchange. The audit committee will review the professional services and independence of our independent registered public accounting firm and our accounts, procedures and internal controls. The audit committee will also select our independent registered public accounting firm, review and approve the scope of the annual audit, review and evaluate with the independent public accounting firm our annual audit and annual consolidated financial statements, review with management the status of internal accounting controls, evaluate problem areas having a potential financial impact on us that may be brought to the committee s attention by management, the independent registered public accounting firm or the board of directors, and evaluate all of our public financial reporting documents. Our nominating committee consists of Elias M. Culucundis and George Hamawi. The compensation of our chief executive officer and other officers will be determined by a majority of our independent directors in accordance with Section 805 of the American Stock Exchange Company Guide. We have granted Maxim Group LLC, the representative of the underwriters, the right to have its designee present at all meetings of our board of directors for a period of two years from the consummation of this offering. The designee will be entitled to the same notices and communications sent by us to our directors and to attend directors meetings, but will not have voting rights. During such two-year period, we have further agreed to hold board meetings at least once every quarter and to notify the representative of any proposed acquisitions, mergers, reorganizations or other similar transactions. The representative has not named a designee as of the consummation of this offering. Code of conduct and ethics We have adopted a code of conduct and ethics applicable to our directors, officers and employees in accordance with applicable federal securities laws and the rules of the American Stock Exchange. Certain Reporting Obligations As a foreign private issuer, we are exempt from the rules under the Securities Exchange Act of 1934, as amended, prescribing the furnishing and content of proxy statements. In addition, we will not be required under the Exchange Act to file current reports with the SEC as frequently or as promptly as United States companies whose securities are registered under the Exchange Act. However, we have agreed, as a condition to our listing on the American Stock Exchange, that for the period commencing with the date of this prospectus and ending on the consummation of a business combination, we will comply with the rules under the Exchange Act with respect to the furnishing and content of our proxy statement related to the business combination (a proxy statement with respect to a business combination is already required pursuant to our Second Amended and Restated Certificate of Incorporation). Consistent with the American Stock Exchange s policy with respect to foreign formed blank check companies, we have been orally advised by the American Stock Exchange that, as a condition to our listing on the American Stock Exchange, for the period commencing with the date of this prospectus and ending on the consummation of a business combination, we must comply with the rules and regulations under the Exchange Act prescribing the requirements and filing deadlines for current reports on Form 8-K and will file reports on Form 6-K complying with those rules and regulations. Any failure to comply with such undertakings could result in the Table of Contents American Stock Exchange taking action to delist our securities from trading on its exchange. If the American Stock Exchange delists our securities from trading on its exchange, it could result in: a limited availability of market quotations for our securities; a determination that our common stock is a penny stock which will require brokers trading in our common stock to adhere to more stringent rules and possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock; a limited amount of news and analyst coverage for our company; and a decreased ability to issue additional securities or obtain additional financing in the future. We expect to hold an annual meeting of stockholders within 12 months after this offering is consummated. Executive compensation No officer, director or shareholder has received any cash compensation for services rendered and no compensation of any kind, including finder s and consulting fees, will be paid to any such individuals, or any of their respective affiliates, for services rendered to us prior to or in connection with a business combination. However, these individuals will be reimbursed for any out-of-pocket expenses incurred in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations. In the event any of our officers and directors continue to serve us following a business combination, such individuals may be paid consulting, management or other fees from target businesses as a result of the business combination, with any and all amounts being fully disclosed to shareholders, to the extent then known, in the proxy solicitation materials furnished to the shareholders. There is no specified limit on the amount of these out-of-pocket expenses. Our board of directors has designated Mr. Komninos, our Chief Financial Officer, to pass upon the reasonableness of any reimbursable expenses incurred by members of our management that exceed $1,000. To the extent that Mr. Komninos seeks reimbursement of expenses he has incurred in excess of $1,000, such reimbursement will be reviewed by our board of directors with Mr. Komninos abstaining. Other than through this review process, there will be no other review of the reasonableness of these expenses. Conflicts of interest Potential investors should be aware of the following potential conflicts of interest: None of our officers and directors are required to commit their full time to our affairs and, accordingly, they will have conflicts of interest in allocating management time among various business activities. In the course of their other business activities, our officers and directors may become aware of investment and business opportunities which may be appropriate for presentation to our company as well as the other entities with which they are affiliated. Although certain of our officers and directors have entered into a business opportunity and right of first refusal agreement with respect to companies that they own and control, they may have other conflicts of interest in determining to which entity a particular business opportunity should be presented. Our officers and directors may in the future become affiliated with entities, including other blank check companies, engaged in business activities similar to those intended to be conducted by our company. In addition, certain of our officers and directors may have a conflict of interest in determining whether a particular target business is appropriate to effect a business combination. Their personal and financial interests may influence their motivation in identifying and selecting a target business, completing a business combination for the following reasons: All of our executive officers own shares of our common stock which will be released from escrow only in certain limited situations and will own shares with respect to which they are waiving their redemption and liquidation distribution rights. Table of Contents In addition, our executive officers will purchase warrants to purchase on aggregate of 14,961,111 shares of our common stock, which will be identical to the warrants in the units being offered by this prospectus, except that: (i) subject to certain limited exceptions, none of the insider warrants will be transferable or salable until after we complete a business combination; (ii) the warrants are not subject to redemption if held by the initial holders thereof and (iii) the warrants may be exercised on a cashless basis. If management negotiates their retention as a condition to any potential business combination, management may look unfavourably upon or reject a business combination with a potential target business whose owners refuse to retain members of our management post-business combination. In the event management were to make substantial loans to us in excess of the amount outside the trust account, they may look unfavourably upon or reject a business combination with a potential target whose owners refuse to pay such amounts. In general, officers and directors of a corporation incorporated under the laws of the Marshall Islands are required to present business opportunities to a corporation if: the opportunity is within the corporation s line of business; it would not be fair to the corporation and its shareholders for the opportunity not to be brought to the corporation; and the corporation could financially undertake the opportunity. Accordingly, as a result of multiple business affiliations, our officers and directors may have similar legal obligations relating to presenting business opportunities meeting the above-listed criteria to multiple entities. In addition, conflicts of interest may arise when our board evaluates a particular business opportunity. We cannot assure you that any of the above mentioned conflicts will be resolved in our favour. In order to minimize potential conflicts of interest which may arise from multiple corporate affiliations, each of our officers and directors has agreed in principle, until the earlier of a business combination, our liquidation or such time as he ceases to be an officer or director, to present to the company for its consideration, prior to presentation to any other entity, any business opportunity which may reasonably be required to be presented to us under Marshall Islands law, subject to any pre-existing fiduciary obligations they might have. As described on page 77, each of Balthellas Chartering SA, Hellasco Shipping Ltd., Hellasco Transport Ltd., RBB Shipping GmbH and Equity Shipping Ltd. which represent all of the privately held companies owned and or controlled by Messrs. Panagiotis Zafet, Simon Zafet, Roland Beberniss and Elias Culucundis, has entered into a Right of First Refusal and Corporate Opportunities Agreement which provides that, commencing on the date of this prospectus and extending until the earlier of the closing of our initial business combination, or our liquidation, we will have the first opportunity to consider any business opportunity within any industry, including the maritime shipping industry. Accordingly, the Right of First Refusal and Corporate Opportunity Agreements supersede the pre-existing fiduciary obligations that are excluded from the agreements in principle provided by the corresponding officers and directors. Each of our directors has, or may come to have following the consummation of this offering, to a certain degree, other fiduciary obligations. Each of our directors may have fiduciary obligations to those companies on whose board of directors they currently sit or may sit in the future. To the extent that they identify business opportunities that may be suitable for any of these other companies, they may have competing fiduciary obligations. Accordingly, they may not present opportunities to us that otherwise may be attractive to us unless these other companies and any successors to such entities has declined to accept such opportunities. Based upon the information provided to us by our officers and directors, other than the persons or entities specified below, we are not aware of any pre-existing fiduciary duties owed by our officers and directors to any person or entity. Georgios Koutsolioutsos, our President and Co-chairman of the Board, is a Vice President and one of four executive members of the Board of Directors of Folli Follie S.A., which is listed on the Athens Stock Exchange. Folli Follie sells under its brand name affordable priced jewelry, watches, leather goods and other fashionable or trendy accessories marketed to a target customer ranging in age from 20-40 years old in 20 countries with over 280 points of sale. Folli Follie owns Links of London which sells a mix of men s and women s jewelry in sterling silver and 18 karat gold. Mr. Koutsolioutsos is also the Chairman of the Board of Directors of Hellenic Duty Free Shops Table of Contents ( Hellenic ), a company which has an exclusive license in Greece to operate a network of duty free shops. Hellenic is listed on the Athens Stock Exchange. In addition, Ioannis Tsigkounakis our Secretary, and a Director, is a member of the Board of Directors of Hellenic, and Elias Culucundis, a director, is a member of the Board of Directors of both Folli Follie and Hellenic. As these companies are involved in industries other than the maritime shipping industry, it is unlikely that there would be a conflict of interest between either Folli Follie, Links of London or Hellenic, on the one hand and our Company on the other hand. Moreover, in the event that we were to pursue a business combination in the retail industry, we have decided that, in order to avoid the possibility of any conflicts, we will not pursue a business combination in the jewelry and accessories market in which Folli Follie and Links of London compete, or the duty free industry within Greece. However, in the event a conflict did arise, because such individuals have a pre-existing relationship with both Folli Follie, Links of London and Hellenic, it is likely that such a conflict would be resolved in favor of those companies. In addition, certain of our officers and directors have fiduciary obligations to companies in the maritime shipping and related industries. In particular, Panagiotis Zafet is the managing director of Balthellas Chartering S.A., a private company engaged in ship management and ship broking and co-owner of Hellasco Shipping Ltd., which is active in the trade of timber products and the regular service of vessels between Scandinavia, Greece and Cyprus and Hellasco Shipping. Simon Zafet is the Chief Executive Officer of Hellasco Shipping Ltd., and co-owner of Hellasco Transport. Furthermore, Roland Beberniss is the founder and managing director of RBB Shipping GmbH and Elias Culucundis is the President, Chief Executive Officer and Director of Equity Shipping Ltd., a company specializing in the startup, management and operation of commercial and technical shipping projects. Each of Balthellas Chartering SA, Hellasco Shipping Ltd., Hellasco Transport Ltd., RBB Shipping GmbH and Equity Shipping Ltd. which represent all of the privately held companies owned and or controlled by Messrs. Panagiotis Zafet, Simon Zafet, Roland Beberniss and Elias Culucundis, has entered into a Right of First Refusal and Corporate Opportunities Agreement which provides that, commencing on the date of this prospectus and extending until the earlier of the closing of our initial business combination, or our liquidation, we will have the first opportunity to consider any business opportunity within any industry, including the maritime shipping industry. Each of the members of our Board of Directors has a fiduciary obligation to our shareholders to enforce the Company s rights under each of the Right of First Refusal Agreements. As such they have no basis upon which to waive any of the Company s rights under such agreements. In addition, any decision by the Company to release any entity to pursue any corporate opportunity would require the vote of a majority of the Company s disinterested directors. As provided in such agreements none of such agreements can be amended to accelerate its termination or waived without the approval of holders of a majority of the Company s outstanding Common Stock. Ioannis Tsigkounakis is a member of the Board of Directors of Aspropirgos Maritime Ltd., a company that owns a crude oil tanker and is a subsidiary of Paradise Tankers Corp., a large tanker carrier group. Aspropirgos is a single-vessel owning company and, as such, is not in the business of purchasing other vessels, and it is therefore unlikely that there would be a conflict of interest between Aspropirgos and our Company. However, in the event a conflict did arise, because Mr. Tsigkounakis has a pre-existing relationship with Aspropirgos Maritime Ltd., it is likely that such a conflict would be resolved in favor of such company. George Hamawi is an independent legal consultant and Alexios Komninos is involved in the securities portfolio management business. As neither Mr. Hamawi or Mr. Komninos are employed by entities involved in the maritime shipping industry or that may seek to make acquisitions in the maritime shipping industry or other industries, no conflicts of interest are expected to arise involving Hamawi or Mr. Komninos. Set forth below is a table summarizing the business affiliations of our officers and directors and our analysis as to whether an actual conflict exists, as described in further detail above: Name Name of Affiliated Entity and Position/Relationship Conflict Analysis Georgios Koutsolioutsos, President and Co-Chairman of the Board of Directors Folli Follie S.A., Vice-President and executive member of the Board of Directors Jewelry and accessories business is outside the scope of Seanergy s intended Business Combination, therefore presenting no conflict Table of Contents Name Name of Affiliated Entity and Position/Relationship Conflict Analysis Links of London (owned by Folli Follie S.A.) Jewelry and accessories business is outside the scope of Seanergy s intended Business Combination, therefore presenting no conflict Hellenic Duty Free Shops S.A., Chairman of the Board of Directors Exclusive license in Greece to operate a network of duty-free shops is outside the scope of Seanergy s intended Business Combination, therefore presenting no conflict Panagiotis Zafet, Chief Executive Officer and Co-Chairman of the Board of Directors Hellasco Shipping Ltd., co-owner Right of First Refusal in favor of Seanergy Granting Priority Balthellas Chartering, S.A., founder and managing director Right of First Refusal in favor of Seanergy Granting Priority Hellasco Transport Ltd., co-owner and managing director Right of First Refusal Granted to Seanergy Granting Priority Simon Zafet, Chief Financial Officer and Director Hellasco Shipping Ltd., Chief Executive Officer Right of First Refusal Granted to Seanergy Granting Priority Hellasco Transport Ltd., co-owner Right of First Refusal Granted to Seanergy Granting Priority Alexios Komninos, Chief Operating Officer and Director N. Komninos Securities SA, Chief Operating Officer As a member of the Athens Stock Exchange and Athens Derivatives Exchange, its business is outside of scope of Seanergy s intended Business Combination Ioannis Tsigkounakis, Secretary and Director Aspropirgos Maritime Ltd., member of the Board of Directors A single vessel owning company not in the business of purchasing vessels and therefore presenting no conflict Hellenic Duty Free Shops S.A., executive member of the Board of Directors Exclusive license in Greece to operate a network of duty free shops is outside of scope of Seanergy s intended Business Combination Elias M. Culucundis, Director Folli Follie S.A., member of the Board of Directors Jewelry or accessories business is outside of scope of Seanergy s intended Business Combination Links of London (owned by Folli Follie S.A.) Jewelry or accessories business is outside of scope of Seanergy s intended Business Combination Hellenic Duty Free Shops S.A., executive member of the Board of Directors Exclusive license in Greece to operate a network of duty-free shops is outside the scope of Seanergy s intended Business Combination, therefore presenting no conflict Equity Shipping Company, Ltd., President, Chief Executive Officer and Director Right of First Refusal Granted to Seanergy Granting Priority Table of Contents Name Name of Affiliated Entity and Position/Relationship Conflict Analysis Roland Beberniss, Director RBB Shipping GmbH Right of First Refusal Granted to Seanergy Granting Priority George Hamawi, Director Practicing Lawyer None Many of our officers and directors are currently or were previously involved with many of the same companies and therefore know each other well. In addition, the following relationships exist among our officers and directors: Messrs. Koutsolioutsos, Tsigkounakis and Culucundis are each directors of Hellenic Duty Free Shops S.A. Mr. Koutsolioutsos is the Vice President and General Manager of Folli Follie S.A. and Mr. Culucundis is a director of Folli Follie. In addition, Mr. Komninos was involved in an offering of securities by Folli Follie on the Athens Stock Exchange and Mr. Tsigkounakis was involved in a financing transaction for Folli Follie. Mr. Simon Zafet is the Chief Executive Officer of Hellasco Shipping Ltd. and Mr. Panagiotas Zafet is a director of Hellasco Shipping. In addition, each of them is a co-owner of Hellasco Transport Ltd. Mr. Simon Zafet and Mr. Panagiotas Zafet are also brothers. Although it may be beneficial to us that the members of our management team know each other and work together, these previous and/or existing relationships may influence the roles taken by our officers and directors with respect to us. For example, one of our directors or officers may be less likely to object to a course of action with respect o our activities because it may jeopardize their relationships in another enterprise. Therefore, such persons may not protect our interests as strenuously as would persons who had no pervious relationship with each other. Neither we nor the members of our management team or Board of Directors have established any procedures or the criteria to evaluate contacts or discussions related to potential target businesses if such potential target businesses created a conflict of interest situation. In connection with the vote required for any business combination, all of our existing shareholders, including all of our officers and directors, have agreed to vote their respective shares of common stock which were owned prior to this offering in accordance with the vote of the public shareholders owning a majority of the shares of our common stock sold in this offering. Our existing shareholders have also agreed to vote any shares of common stock acquired by them in this offering or in the after market in favor of any business combination presented to shareholders. In addition, they have agreed to waive their respective rights to participate in any liquidation distribution occurring upon our failure to consummate a business combination with respect to those shares of common stock acquired by them prior to this offering. Each of our executive officers (all whom are also directors) owns shares of our common stock and, although no salary or other compensation will be paid to them for services rendered prior to or in connection with a business combination, they may receive reimbursement for out-of-pocket expenses incurred by them in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations. There is no specified limit on the amount of these out-of-pocket expenses. Our board of directors has designated Mr. Komninos, our Chief Financial Officer, to pass upon the reasonableness of any reimbursable expenses incurred by members of our management that exceed $1,000. To the extent that Mr. Komninos seeks reimbursement of expenses he has incurred in excess of $1,000, such reimbursement will be reviewed by our board of directors with Mr. Komninos abstaining. Other than through this review process, or the review of a court of competent jurisdiction if such reimbursement is challenged, there will be no other review of the reasonableness of these expenses. Although we believe that all actions taken by our directors on our behalf will be in our best interests, we cannot assure you that this will be the case. To further minimize potential conflicts of interest, we have agreed not to consummate a business combination with an entity which is affiliated with any of our existing shareholders unless we obtain an opinion from an independent investment banking firm that the business combination is fair to our shareholders from a financial point of view. As of the consummation of this offering, to our knowledge, none of our directors or officers are affiliated with any other blank check company. See the section entitled, Risk Factors Risks Associated With Our Current Business None of our officers or directors has ever been associated with a blank check company which could adversely affect our ability to consummate a business combination. Table of Contents PRINCIPAL SHAREHOLDERS The following table sets forth information regarding the beneficial ownership of our common stock as of the date of this prospectus, and as adjusted to reflect the sale of our common stock included in the units offered by this prospectus and the private placement (assuming no purchase of units in this offering), by: each person known by us to be the beneficial owner of more than 5.0% of our outstanding shares of common stock; each of our officers and directors; and all our officers and directors as a group. Unless otherwise indicated, we believe that all persons named in the table below have sole voting and investment power with respect to all shares of common stock beneficially owned by them. Approximate Percentage of Outstanding Amount and Common Stock Nature of After Beneficial Before Offering and Name and Address of Beneficial Owner(1) Ownership(2) Offering Placement Georgios Koutsolioutsos 2,100,000 42.0% 8.4% Panagiotis Zafet 1,250,000 25.0% 5.0% Simon Zafet 1,250,000 25.0% 5.0% Alexios Komninos 275,000 5.5% 1.1% Ioannis Tsigkounakis 125,000 2.5% .5% George Hamawi 0 * * Roland Beberniss 0 * * Elias M. Culucundis 0 * * All directors and executive officers as a group (8 individuals) 5,000,000 100.0% 20.0% * less than one (1.0%) percent. (1) Unless otherwise indicated, the business address of each of the individuals is 10, Amfitheas Avenue, 175 64 P. Faliro, Athens, Greece. (2) Gives effect to the surrender for cancellation of an aggregate of 1,604,448 shares of common stock by our shareholders on February 20, 2007, as adjusted for a one and one-half-for-one stock split in the form of a stock dividend on July 6, 2007, and a one and one-third-for-one stock split in the form of a stock dividend on August 6, 2007. Immediately after this offering, our existing shareholders and their nominees, collectively will beneficially own 20.0% of the then issued and outstanding shares of our common stock. In the event that our current shareholders acquire share in the aftermarket, as they are permitted to do, their percentage ownership interest in us will increase. Because any shares acquired by our existing shareholders in this offering or in the aftermarket will be voted in favor of a business combination, any such purchases would influence the result of a vote submitted to our shareholders in connection with a business combination and make it more likely that a business combination would be approved. We are not aware of any intention on the part of our current shareholders or officers to make any such purchases. Because of this ownership block, these shareholders may be able to effectively influence the outcome of all matters requiring approval by our shareholders, including the election of directors and approval of significant corporate transactions other than approval of a business combination. In addition, if we take advantage of increasing the size of the offering pursuant to Rule 462(b) under the Securities Act, we may effect a stock dividend in such amount to maintain the existing shareholders collective ownership at 20.0% of our issued and outstanding shares of common stock upon consummation of the offering. If we decrease the size of the offering we will effect a reverse split of our common stock in such amount to maintain Table of Contents the existing shareholders allocated ownership at 20.0% of our issued and outstanding common stock upon the consummation of this offering. All of the shares of our common stock outstanding prior to the consummation of this offering (which does not include any of our securities purchased by our existing shareholders in this offering or in the open market, which our existing shareholders are permitted to do), will be placed in escrow with Continental Stock Transfer Trust Company, as escrow agent, until the earliest of: 12 months after the date of a business combination; our liquidation; or the consummation of a merger, stock exchange or other similar transaction which results in all of our shareholders having the right to exchange their shares of common stock for cash, securities or other property subsequent to our consummating a business combination with a target business. During the escrow period, the holders of these shares will not be able to sell or transfer their securities except (i) to their spouses and children or trusts established for their benefit, (ii) by virtue of the laws of descent and distribution upon a shareholder s death, or (iii) pursuant to a qualified domestic relations order, but will retain all other rights as our shareholders, including, without limitation, the right to vote their shares of common stock and the right to receive cash dividends, if declared. If dividends are declared and payable in shares of common stock, such dividends will also be placed in escrow. If we are unable to effect a business combination and liquidate, none of our existing shareholders will receive any portion of the liquidation proceeds with respect to common stock owned by them prior to the consummation of this offering. All of our executive officers have agreed to purchase 14,961,111 warrants from us at a purchase price of $0.90 per warrant in a private placement in accordance with Regulation S under the Securities Act of 1933. We will grant the holders of such warrants demand and piggyback registration rights with respect to the 14,961,111 warrants and the 14,961,111 shares underlying the warrants at any time commencing on the date the shares are released from escrow. The demand registration may be exercised by the holders of a majority of such warrants. We will bear the expenses incurred in connection with the filing of any such registration statements. The insider warrants to be purchased by all of our executive officers in the private placement will contain restrictions prohibiting their transfer until the earlier of a business combination or our liquidation, subject to certain exceptions. Although the insider warrants are not subject to a formal escrow agreement, they will be subject to a lock-up agreement that will expire upon the consummation of a business combination and will be held in an account established by each of our executive officers with Maxim Group LLC until such time as we consummate a business combination. Our executive officers will not ask for, and Maxim Group LLC will not grant, any waiver of the lock-up agreement. Messrs. Georgios Koutsolioutsos and Panagiotis Zafet are deemed to be our parent and promoters as these terms are defined under the federal securities laws. Table of Contents CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On November 27, 2006, we issued an aggregate of 5,000,000 shares of our common stock to the individuals set forth below for $25,000 in cash, at a purchase price of $0.005 per share, as follows: Number of Name Shares(1) Relationship to Us Georgios Koutsolioutsos 2,100,000 President and Co-Chairman of the Board Panagiotis Zafet 1,250,000 Chief Executive Officer and Co-Chairman of the Board Simon Zafet 1,250,000 Chief Operating Officer and Director Alexios Komninos 275,000 Chief Financial Officer, Treasurer and Director Ioannis Tsigkounakis 125,000 Secretary and Director (1) All such numbers give retroactive effect to the surrender for cancellation of an aggregate 1,604,448 shares of common stock by our shareholders on February 20, 2007, as adjusted for a one and one-half-for-one stock split in the form of a stock dividend on July 6, 2007, and a one and one-third-for-one stock split in the form of a stock dividend on August 6, 2007. In addition, if we take advantage of increasing the size of the offering pursuant to Rule 462(b) under the Securities Act, we may effect a stock dividend in such amount to maintain the existing shareholders collective ownership at 20.0% of our issued and outstanding shares of common stock upon consummation of the offering. If we reduce the size of the offering we may effect a reverse stock split of our common stock in order to maintain the existing shareholders allocated ownership at 20.0% of our issued and outstanding common stock upon the consummation of this offering. The holders of the majority of these shares will be entitled to make up to two demands that we register these shares pursuant to an agreement to be signed prior to or on the consummation of this offering. The holders of the majority of these shares may elect to exercise these registration rights at any time after the date on which these shares of common stock are released from escrow, which, except in limited circumstances, is not before 12 months after the consummation of a business combination. In addition, these shareholders have certain piggy-back registration rights on registration statements filed subsequent to the date on which these shares of common stock are released from escrow. We will bear the expenses incurred in connection with the filing of any such registration statements. All of our executive officers have agreed to purchase an aggregate of 14,961,111 warrants from us at a purchase price of $0.90 per warrant in a private placement in accordance with Regulation S under the Securities Act of 1933. We will grant the holders of such warrants demand and piggyback registration rights with respect to the 14,961,111 warrants and the 14,961,111 shares underlying the warrants at any time commencing on the date the shares are released from escrow. The demand registration may be exercised by the holders of a majority of such warrants. We will bear the expenses incurred in connection with the filing of any such registration statements. Because the warrants sold in the private placement were originally issued pursuant to an exemption from the registration requirements under the federal securities laws, the holders of such warrants will be able to exercise their warrants even if, at the time of exercise, a prospectus relating to the common stock issuable upon exercise of such warrants is not current. The warrants purchased in the private placement will contain restrictions prohibiting their transfer (except that holders of the insider warrants may transfer them to family members and trusts for estate planning purposes or, upon death, to an estate or beneficiaries) and will be non-redeemable so long as our officers and directors and/or their permitted transferees hold such warrants. Although the insider warrants are not subject to a formal escrow agreement, they will be subject to a lock-up agreement that will expire upon the consummation of a business combination and will be held in an account established by each of our executive officers with Maxim Group LLC until such time as we consummate a business combination. Our executive officers will not ask for, and Maxim Group LLC will not grant, any waiver of the lock-up agreement. With those exceptions, the insider warrants have terms and provisions that are identical to those of the warrants being sold as part of the units in this offering. Table of Contents Pursuant to promissory notes dated December 14, 2006, Messrs. Georgios Koutsolioutsos, Panagiotis Zafet, Simon Zafet, Alexios Komninos and Ioannis Tsigkounakis loaned a total of $350,000 and pursuant to promissory notes dated January 12, 2007, Messrs. Georgios Koutsolioutsos, Panagiotis Zafet and Simon Zafet loaned a total of $100,986 to us to cover expenses related to this offering, which loans, plus accrued interest, will be repaid from the proceeds of this offering. We are obligated on the date of this prospectus to pay to Balthellas Chartering S.A., a company controlled by Panagiotis Zafet and Simon Zafet, our Chief Executive Officer and Chief Operating Officer, respectively, and each a director of the Company, a monthly fee of $7,500 for administrative, technology and secretarial services, as well as the use of limited office space in Athens, Greece. We believe that based on rents and fees for similar services in Athens, the fee charged by Balthellas Chartering S.A. is at least as favorable as we could have obtained from an unaffiliated party. We will reimburse our officers and directors for any reasonable out-of-pocket business expenses incurred by them in connection with certain activities on our behalf such as identifying and investigating possible target businesses and business combinations. There is no limit on the amount of accountable out-of-pocket expenses reimbursable by us. Our board of directors has designated Mr. Komninos, our Chief Financial Officer, to pass upon the reasonableness of any reimbursable expenses incurred by members of our management that exceed $1,000. To the extent that Mr. Komninos seeks reimbursement of expenses he has incurred in excess of $1,000, such reimbursement will be reviewed by our board of directors with Mr. Komninos abstaining. Other than through this review process, or the review of a court of competent jurisdiction if such reimbursement is challenged, there will be no other review of the reasonableness of these expenses. Although we believe that all actions taken by our directors on our behalf will be in our best interests, we cannot assure you that this will be the case. Please see Risk Factors If we seek to effect a business combination with an entity that is directly or indirectly affiliated with one or more of our officers, directors or existing shareholders, conflicts of interest could arise, Our officers and directors may allocate their time to other businesses thereby causing conflicts of interest in their determination as to how much time to devote to our affairs. This could have a negative impact on our ability to consummate a business combination and Our officers and directors may in the future become affiliated with entities engaged in business activities similar to those intended to be conducted by us and accordingly, may have conflicts of interest in determining to which entity a particular business opportunity should be presented. Other than amounts paid to Balthellas Chartering S.A. and reimbursable out-of-pocket expenses payable to our officers and directors, no compensation or fees of any kind, including finders and consulting fees, will be paid to any of our existing shareholders, officers or directors who owned our common stock prior to this offering, or to any of their respective affiliates for services rendered to us prior to or with respect to the business combination. Table of Contents DESCRIPTION OF SECURITIES General We are authorized to issue 89,000,000 shares of common stock, par value $0.0001, and 1,000,000 shares of preferred stock, par value $0.0001. As of the date of this prospectus, 5,000,000 shares of common stock are outstanding, held by five recordholders. In addition, as of the date of this prospectus, 14,961,111 warrants sold in the private placement in accordance with Regulation S are outstanding. No shares of preferred stock are currently outstanding. Units Each unit consists of one share of common stock and one warrant. Each warrant entitles the holder to purchase one share of common stock. The common stock and warrants comprising the units will begin to trade separately on the 10th business days following the earlier to occur of: (i) the expiration of the underwriters over-allotment option or (ii) its exercise in full. In no event will Maxim Group LLC allow separate trading of the common stock and warrants until we have filed with the SEC a Current Report on Form 8-K that includes an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file a Current Report on Form 8-K which includes this audited balance sheet upon the consummation of this offering. The audited balance sheet will reflect proceeds we receive from the exercise of the over-allotment option, if the over-allotment option is exercised prior to the filing of the Form 8-K. If the over-allotment is exercised following the initial filing of the Form 8-K, an amended Form 8-K will be filed to provide updated financial information reflecting the exercise of the over-allotment. Common Stock Our shareholders are entitled to one vote for each share held of record on all matters to be voted on by shareholders. In connection with the vote required for any business combination, all of our existing shareholders, have agreed to vote their respective shares of common stock owned by them immediately prior to this offering in accordance with the vote of the public shareholders. Our directors and officers have agreed to vote all the shares of our common stock acquired in this offering, or in the aftermarket in favor of any transaction our officers negotiate and present for approval to our shareholders. Our existing shareholders have also agreed to waive their rights to participate in any liquidation occurring upon our failure to consummate a business combination, but only with respect to those shares of common stock acquired by them prior to this offering. However, our existing shareholders, officers and directors will vote all of their shares in any manner they determine, in their sole discretion, with respect to any other items that come before a vote of our shareholders. We will proceed with the business combination only if a majority of the shares of common stock held by the public shareholders are voted in favor of the business combination and public shareholders owning less than 35.0% of the shares sold in this offering exercise their redemption rights discussed below. Our threshold for redemption has been established at 35.0% in order for our offering to be competitive with other blank check company offerings. However, to date a 20.0% threshold has been more typical for offerings of this type. We have selected the higher threshold to reduce the risk of a small group of shareholders exercising undue influence on the shareholder approval process. Even if less than 35.0% of the public shareholders exercise their redemption rights, we may be unable to consummate a business combination if such redemption leaves us with funds less than a fair market value at least equal to 80.0% of the amount in the trust account (exclusive of Maxim Group LLC s deferred underwriting compensation plus up to $420,000 of interest earned thereon held in the trust account) at the time of such acquisition which amount is required as a condition to the consummation of our initial business combination, and we may be forced to find additional financing to consummate such a business combination, consummate a different business combination or liquidate. Pursuant to our Second Amended and Restated Articles of Incorporation, if we do not consummate a business combination by , 2009 [twenty four months from the consummation of this offering], our corporate existence will cease except for the purposes of winding-up our affairs and liquidating. If we are forced to liquidate prior to a business combination, our public shareholders are entitled to share ratably in the trust account, inclusive of any interest (net of taxes payable and any interest previously distributed), and any net assets remaining available for Table of Contents distribution to them after payment of liabilities. Our existing shareholders have agreed to waive their rights to share in any distribution with respect to common stock owned by them prior to the offering if we are forced to liquidate. Our shareholders have no redemption, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the common stock, except that public shareholders have the right to have their shares of common stock redeemed for cash equal to their pro rata share of the trust account if they vote against the business combination that is approved and they exercise their redemption rights. Public shareholders who redeem their stock into their share of the trust account still have the right to exercise the warrants that they received as part of the units, which they have not previously sold. Preferred Stock Our Second Amended and Restated Articles of Incorporation authorizes the issuance of 1,000,000 shares of blank check preferred stock with such designation, rights and preferences as may be determined from time to time by our board of directors. No shares of preferred stock are being issued or registered in this offering. Accordingly, our board of directors is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of common stock, although the underwriting agreement prohibits us, prior to a business combination, from issuing preferred stock which participates in any manner in the proceeds of the trust account, or which votes as a class with the common stock on a business combination. We may issue some or all of the preferred stock to effect a business combination. In addition, the preferred stock could be utilized as a method of discouraging, delaying or preventing a change in control of us. Although we do not currently intend to issue any shares of preferred stock, we cannot assure you that we will not do so in the future. Warrants Each warrant entitles the registered holder to purchase one share of our common stock at a price of $6.50 per share, subject to adjustment as discussed below, at any time commencing on the later of: the completion of a business combination; or one year from the date of this prospectus. The warrants will expire on the fourth anniversary of the consummation of this offering at 5:00 p.m., New York City time. The warrants may trade separately on the 10th business day following the earlier to occur of (i) the expiration of the underwriters over-allotment option or (ii) the exercise in full of the underwriters over-allotment option; provided, however, that no event may the common stock and warrants be traded separately until we have filed a Current Report on Form 8-K which includes an audited balance sheet reflecting our receipt of the proceeds of this offering, including any proceeds we receive from the exercise of the over-allotment option if such option is exercised prior to our filing of the Form 8-K. We may call the warrants for redemption (including any warrants issued upon exercise of the unit purchase option to be granted to Maxim Group LLC): in whole and not in part; at a price of $0.01 per warrant at any time after the warrants become exercisable; upon not less than 30 days prior written notice of redemption to each warrant holder; and if, and only if, the reported last sale price of the common stock equals or exceeds $14.50 per share, for any 20 trading days within a 30 trading day period ending on the third business day prior to the notice of redemption to warrant holders; provided that a current registration statement under the Securities Act of 1933 relating to the shares of common stock issuable upon exercise of the warrants is then effective. We have established this criteria to provide warrant holders with a reasonable premium to the initial warrant exercise price as well as a reasonable cushion against a negative market reaction, if any, to our redemption call. The warrants issued in the private placement may not be redeemed if held by the initial holders or their permitted assigns. Table of Contents The warrants will be issued in registered form under a warrant agreement between Continental Stock Transfer Trust Company, as warrant agent, and us. You should review a copy of the warrant agreement, which has been filed as an exhibit to the registration statement of which this prospectus is a part, for a complete description of the terms and conditions applicable to the warrants. The exercise price and number of shares of common stock issuable on exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuances of common stock at a price below their exercise price. The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified check payable to us, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of common stock and any voting rights until they exercise their warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by shareholders. No warrants will be exercisable unless at the time of exercise a prospectus relating to common stock issuable upon exercise of the warrants is current and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms of the warrant agreement, we have agreed to meet these conditions and use our best efforts to maintain a current prospectus relating to common stock issuable upon exercise of the warrants until the expiration of the warrants. If we are unable to maintain the effectiveness of such registration statement until the expiration of the warrants, and therefore are unable to deliver registered shares, the warrants may become worthless and we will not be required to net-cash settle the warrants. In such a case, the purchasers of units will have paid the full purchase price of the units solely for the common stock underlying such units. Additionally, the market for the warrants may be limited if the prospectus relating to the common stock issuable upon the exercise of the warrants is not current or if the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside. In no event will the registered holders of a warrant be entitled to receive a net-cash settlement, stock, or other consideration in lieu of physical settlement in shares of our common stock. In the event we elect to form a foreign subsidiary in connection with a proposed business combination, the foreign subsidiary will assume our obligations under the warrants in the event that we liquidate or merge into the foreign subsidiary, as provided in Section 4.4 of the Company s warrant agreement, a form of which is filed as exhibit 4.5 to this Registration Statement and a holder of warrant will have the right, under certain conditions, to exercise the warrant for shares in the foreign subsidiary. Because the warrants sold in the private placement were originally issued pursuant to an exemption from the registration requirements under the federal securities laws, the holders of such warrants will be able to exercise their warrants even if, at the time of exercise, a prospectus relating to the common stock issuable upon exercise of such warrants is not current. As described above, the holders of the warrants purchased in this offering will not be able to exercise them unless we have a current registration statement covering the shares issuable upon their exercise. No fractional shares will be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round up to the nearest whole number the number of shares of common stock to be issued to the warrant holder. Purchase Option We have agreed to sell to Maxim Group LLC for $100 an option to purchase up to a total of 1,000,000 units at a per-unit price of $12.50. The units issuable upon exercise of this option are identical to those offered by this prospectus. The purchase option will contain a cashless exercise feature. For a more complete description of the purchase option, see the section entitled Underwriting Purchase Option. Table of Contents Dividends We have not paid any cash dividends on our common stock to date and, other than our quarterly distributions, we do not intend to pay dividends prior to the completion of a business combination. The payment of dividends in the future will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition subsequent to completion of a business combination. The payment of any dividends subsequent to a business combination will be within the discretion of our then board of directors. After a business combination, we expect to retain all earnings, if any, for use in our business operations and, accordingly, our board does not anticipate declaring any dividends in the foreseeable future. Quarterly distribution of interest earned on the trust account Although we are formed as a corporation under the laws of the Republic of the Marshall Islands, for United States federal income tax purposes, we elected to be classified as a partnership, and not as a corporation. Because we have elected to be treated as a partnership for U.S. federal income tax purposes, U.S. investors may be subject to U.S. federal income tax on their distributive shares of our taxable income or gain (whether or not distributed). As a means to pass down to our public shareholders the benefit of the interest that is earned on the trust account, our Second Amended and Restated Articles of Incorporation requires that we distribute the interest earned on the trust account to our public shareholders, and that we make quarterly distributions (which are intended to be at least equal to any such tax liability) in US dollars of interest income earned on the trust account (less any taxes payable by us and exclusive of (i) up to $420,000 of interest earned on Maxim Group LLC s deferred underwriting compensation and (ii) up to an aggregate of $675,000 of interest income on the proceeds in the trust account that we may draw in the event the over-allotment option is exercised in full) on a pro-rata basis to our public shareholders until the earlier of the consummation of a business combination or our liquidation. The first distribution will be made following the end of the December 31, 2007 quarter and will include interest which accrues during the period commencing on the closing of the offering through December 31, 2007. We expect that within three business days following the end of each fiscal quarter (commencing with the quarter ending December 31, 2007), our accounting consultants will have sufficient opportunity to review our monthly investment account statements and to calculate the amount to be distributed to each of our public shareholders, our board of directors will meet to officially fix the record date with respect to the distribution of dividends earned during the immediately preceding quarter (or, in the case of the first distribution, the period commencing on the closing of the offering through December 31, 2007) and we will announce the record date and distribution to the public by means of a press release and/or a Current Report on Form 8-K. We expect the record date to be on or shortly following the fifth business day following the end of the prior quarter, and to make the distributions within 15 days of the end of the prior quarter, which in any event will be in accordance with our bylaws and the Marshall Islands Business Corporations Act, which requires that a record date not be more than sixty days prior to the date we make such distribution. In accordance with our instructions, our transfer agent, Continental Stock Transfer Trust Company, will identify the shareholders of record on the designated record date and act as paying agent in delivering quarterly interest payments to the then shareholders of record. We expect the costs incurred in connection with the above-described quarterly interest distributions to be in the range of $10,000 to $15,000 per year. Such expenses will be paid from funds available to us outside the trust account for working capital purposes. Our board of directors will make a quarterly distribution of all interest income available to be distributed (less taxes payable and exclusive of (i) up to $420,000 of interest earned on Maxim Group LLC s deferred underwriting compensation and (ii) up to an aggregate of $675,000 of interest income on the proceeds in the trust account that we may draw in the event the over-allotment is exercised in full) with no discretion to reduce or modify the distributions. Our shareholders prior to this offering have agreed to waive any rights to such distributions. In the event of the exercise of the over-allotment option, the first quarterly distributions to our public shareholders will be reduced by up to $675,000 (in proportion to the portion of the over-allocated option exercised) in the aggregate reflecting interest income on the trust account we will be permitted to draw to replace up to $675,000 of the costs and expenses associated with the exercise of the over-allotment option, which will be paid from funds outside our trust account on the consummation of the over-allotment option. These costs and expenses will be paid from funds held outside the trust account because there will not be sufficient gross proceeds from exercise of the over-allotment option to cover all attendant costs. This is to ensure that at all times there will be a minimum of $10.00 per unit held in the trust account. If less than the full over-allotment is exercised, the amount of additional costs and expenses will be calculated on a pro-rata basis. The cost for the administration of the quarterly distributions will be paid for by us out of our working capital held outside the trust account. Table of Contents The distributions on a quarterly basis as described above is mandated by our Second Amended and Restated Articles of Incorporation. This provision may be amended or removed by a vote of our Board of Directors and the approval by the holders of a majority of our outstanding common stock. Our transfer agent and warrant agent The transfer agent for our units and common stock and warrant agent for our warrants is Continental Stock Transfer Trust Company. Shares eligible for future sale Immediately after this offering, we will have 25,000,000 shares of common stock outstanding, or 28,000,000 shares if the underwriters over-allotment option is exercised in full. Of these shares, the 20,000,000 shares sold in this offering, or 23,000,000 shares if the over-allotment option is exercised, will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by one of our affiliates within the meaning of Rule 144 under the Securities Act. Since these 5,000,000 shares are owned by our officers, directors and affiliates, such shares may not be resold pursuant to Rule 144 and may only be resold pursuant to an effective registration statement or in a transaction that is exempt from the registration requirements of the Securities Act. Notwithstanding this, all of such shares have been placed in escrow and will not be transferable until 12 months after the date of our business combination, subject to certain limited exceptions, such as transfers to family members and trusts for estate planning purposes and upon death, while in each case remaining subject to the escrow agreement, and will only be released prior to that date if we are forced to liquidate, in which case the shares would be destroyed, or if we were to consummate a transaction after the consummation of a business combination which results in all of the shareholders of the combined entity having the right to exchange their shares of common stock for cash, securities or other property. The warrants to be purchased by all of our executive officers in the private placement will contain restrictions prohibiting their transfer until the earlier of a business combination or our liquidation, subject to certain exceptions. Rule 144 In general, under Rule 144 as currently in effect, a person who has beneficially owned restricted shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of either of the following: 1.0% of the number of shares of common stock then outstanding, which will equal 250,000 shares immediately after this offering (or 280,000 if the underwriters exercise their over-allotment option); and the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales under Rule 144 are also limited by manner of sale provisions and notice requirements and to the availability of current public information about us. Rule 144(k) Under Rule 144(k), a person who is not deemed to have been one of our affiliates at the time of or at any time during the three months preceding a sale, and who has beneficially owned the restricted shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell their shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. SEC Position on Rule 144 Sales The Securities and Exchange Commission has taken the position that promoters or affiliates of a blank check company and their transferees, both before and after a business combination, would act as an underwriter under the Securities Act when reselling the securities of a blank check company. Accordingly, Rule 144 may not be Table of Contents available for the resale of those securities despite technical compliance with the requirements of Rule 144, in which event the resale transactions would need to be made through a registered offering. Registration Rights The holders of our 5,000,000 issued and outstanding shares of common stock prior to the consummation of this offering, will be entitled to registration rights pursuant to an agreement to be signed prior to or on the effective date of this offering. The holders of the majority of these shares are entitled to make up to two demands that we register these shares. The holders of the majority of these shares can elect to exercise these registration rights at any time after the date on which these shares of common stock are released from escrow. In addition, these shareholders have certain piggyback registration rights on registration statements filed subsequent to the date on which these shares of common stock are released from escrow. We will grant the holders of the 14,961,111 insider warrants purchased in the private placement demand and piggyback registrations rights with respect to the warrants and the shares underlying the warrants at any time commencing on the date on which the insider warrants are released from escrow. The demand registration may be exercised by the holders of a majority of such warrants. We will bear the expenses incurred in connection with the filing of any of the foregoing registration statements. Amendments to Our Amended and Restated Articles of Incorporation Our Second Amended and Restated Articles of Incorporation filed on [ ], 2007 contains provisions designed to provide certain rights and protections to our shareholders prior to the consummation of a business combination, including: a requirement that all proposed business combinations be presented to shareholders for approval regardless of whether or not Marshall Islands law requires such a vote; a prohibition against completing a business combination if 35.0% or more of the public holders of the total number of shares of common stock sold in this offering exercise their redemption rights in lieu of approving a business combination; the right of shareholders voting against a business combination to surrender their shares for a pro rata portion of the trust account in lieu of participating in a proposed business combination; a limitation on shareholders rights to receive a portion of the trust account so that they may only receive a portion of the trust account upon our quarterly payment of interest, earned on the trust account or upon dissolution and liquidation of us or upon the exercise of their redemption rights; and the division of our board of directors into three classes and the establishment of related procedures regarding the standing and election of such directors. Our Second Amended and Restated Articles of Incorporation and the underwriting agreement between us and the underwriters of this offering prohibit the amendment or modification of any of the foregoing provisions prior to the consummation of a business combination without the approval of holders of 95.0% of our outstanding common stock. While these rights and protections have been established for the purchasers of units in this offering, it is nevertheless possible that the prohibition against amending or modifying these rights and protections at any time prior to the consummation of the business combination could be challenged as unenforceable under Marshall Islands law, although pursuant to the underwriting agreement we are prohibited from amending or modifying these rights and protections at any time prior to the consummation of the business combination. We have not sought an unqualified opinion regarding the enforceability of the prohibition on amendment or modification of such provisions because we view these provisions as fundamental terms of this offering. We believe these provisions to be obligations of us to our shareholders and that investors will make an investment in us relying, at least in part, on the enforceability of the rights and obligations set forth in these provisions including, without limitation, the prohibition on any amendment or modification of such provisions without the vote of holders of 95.0% of our outstanding common stock. Table of Contents MARSHALL ISLANDS COMPANY CONSIDERATIONS Our corporate affairs are governed by our Second Amended and Restated Articles of Incorporation and by-laws and by the Business Corporation Act of the Republic of the Marshall Islands, or BCA. The provisions of the BCA resemble provisions of the corporation laws of a number of states in the United States. For example, the BCA allows the adoption of various anti-takeover measures such as shareholder rights plans. While the BCA also provides that it is to be interpreted according to the laws of the State of Delaware and other states with substantially similar legislative provisions, there have been few, if any, court cases interpreting the BCA in the Marshall Islands, and we can not predict whether Marshall Islands courts would reach the same conclusions as U.S. courts. Thus, you may have more difficulty in protecting your interests in the face of actions by the management, directors or controlling shareholders than would shareholders of a corporation incorporated in a United States jurisdiction which has developed a substantial body of case law. The following table provides a comparison between the statutory provisions of the BCA and the Delaware General Corporation Law relating to shareholders rights. Marshall Islands Delaware Shareholder Meetings Held at a time and place as designated in the by-laws May be held at such time or place as designated in the certificate of incorporation or the by-laws, or if not so designated, as determined by the board of directors May be held within or without the Marshall Islands May be held within or without Delaware Notice: Whenever shareholders are required to take action at a meeting, written notice shall state the place, date and hour of the meeting and indicate that it is being issued by or at the direction of the person calling the meeting Notice: Whenever shareholders are required to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, if any, date and hour of the meeting, and the means of remote communication, if any A copy of the notice of any meeting shall be given personally or sent by mail not less than 15 nor more than 60 days before the meeting Written notice shall be given not less than 10 nor more than 60 days before the meeting Shareholders Voting Rights Any action required to be taken by meeting of shareholders may be taken without meeting if consent is in writing and is signed by all the shareholders entitled to vote Any action required to be taken by meeting of shareholders may be taken without meeting if consent is in writing and is signed by all the shareholders entitled to vote Any person authorized to vote may authorize another person or persons to act for him by proxy Any person authorized to vote may authorize another person or persons to act for him by proxy Unless otherwise provided in the Second Amended and Restated Articles of Incorporation, a majority of shares entitled to vote constitutes a quorum. In no event shall a quorum consist of fewer than one-third of the shares entitled to vote at a meeting For stock corporations, certificate of incorporation or by-laws may specify the number to constitute a quorum but in no event shall a quorum consist of less than one-third of shares entitled to vote at a meeting. In the absence of such specifications, a majority of shares entitled to vote shall constitute a quorum Table of Contents Marshall Islands Delaware The Articles of Incorporation may provide for cumulative voting in the election of directors For non-stock companies, certificate of incorporation or by-laws may specify the number of members to constitute a quorum. In the absence of this, one-third of the members shall constitute a quorum The certificate of incorporation may provide for cumulative voting Directors Board must consist of at least one member Board must consist of at least one member Number of members can be changed by an amendment to the by-laws, by the shareholders, or by action of the board under the specific provisions of a by-law Number of board members shall be fixed by the by-laws, unless the certificate of incorporation fixes the number of directors, in which case a change in the number shall be made only by amendment of the certificate If the board is authorized to change the number of directors, it can only do so by an absolute majority (majority of the entire board) Fiduciary Duties Directors and officers must discharge their respective duties in good faith and with that degree of diligence, care and skill which an ordinarily prudent person would exercise under similar circumstances in like positions. Directors and officers must act in good faith, with the care of a prudent person, and in the best interest of the corporation. Although there are no specific statutes or cases relating to self-dealing, corporate opportunities and improper personal benefits under Marshall Island law, based on statute, in the absence of conflict with the statutes and case law of the Marshall Islands, the laws (including non-statutory law) of Delaware and other U.S. states with substantially similar statutory provisions would likely be used in determining the obligations of the directors of a Marshall Islands corporation. Therefore, the director of a Marshall Islands corporation could be subject to the same prohibitions relating to self-dealing, usurping corporate opportunities and improper personal benefit as a Delaware corporation. Directors and officers must refrain from self-dealing, usurping corporate opportunities and receiving improper personal benefits. Decisions made by directors and officers on an informed basis, in good faith and in the honest belief that the action was taken in the best interest of the corporation will be protected by the business judgment rule. Shareholders Derivative Actions An action may be brought in the right of a corporation to procure a judgment in its favor, by a holder of shares or of voting trust certificates or of a beneficial interest in such shares or certificates. It In any derivative suit instituted by a shareholder of a corporation, it shall be averred in the complaint that the plaintiff was a shareholder of the corporation at the time of the transaction of which Table of Contents Marshall Islands Delaware shall be made to appear that the plaintiff is such a holder at the time of bringing the action and that he was such a holder at the time of the transaction of which he complains, or that his shares or his interest therein devolved upon him by operation of law he complains or that such shareholder s stock thereafter devolved upon such shareholder by operation of law. Complaint shall set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reasons for not making such effort Complaint shall set forth with particularity the efforts of the plaintiff to obtain the action by the board or the reasons for not making such effort Such action shall not be discontinued, compromised or settled, without the approval of the High Court of the Republic Such action shall not be dismissed or compromised without the approval of the Chancery Court Attorney s fees may be awarded if the action is successful If we were a Delaware corporation, a shareholder that redeemed his, her or its shares of our common stock, or whose shares were canceled in connection with our dissolution, would not be able to bring a derivative action against us after the shares have been redeemed or canceled. Corporation may require a plaintiff bringing a derivative suit to give security for reasonable expenses if the plaintiff owns less than 5.0% of any class of stock and the shares have a value of less than $50,000. A shareholder that has redeemed his, her or its shares of our common stock, or whose shares have been canceled in connection with our dissolution may not bring a derivative action against us after the shares have been redeemed or canceled. Table of Contents TAXATION United States Federal Income Taxation General In the opinion of Loeb Loeb LLP, the following are the material U.S. federal income tax consequences of the acquisition, ownership, and disposition of our common stock and warrants issued pursuant to this offering. The discussion below of the U.S. federal income tax consequences to U.S. Holders will apply if you are a beneficial owner of common stock or warrants and you are for U.S. federal income tax purposes: an individual who is a citizen or resident of the United States; a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) that is created or organized (or treated as created or organized) in or under the laws of the United States, any state thereof or the District of Columbia; an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or a trust if (i) a U.S. court can exercise primary supervision over the trust s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust, or (ii) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. If you are not described as a U.S. Holder and are not an entity treated as a partnership or other pass-through entity for U.S. federal income tax purposes, you will be considered a Non-U.S. Holder. The U.S. federal income tax consequences applicable to Non-U.S. Holders is described below under the heading Non-U.S. Holders. This summary is based on the Internal Revenue Code of 1986, as amended (the Code ), its legislative history, existing and proposed Treasury regulations promulgated thereunder, published rulings and court decisions, all as currently in effect. These authorities are subject to change or differing interpretations, possibly on a retroactive basis. This summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a person s decision to purchase our common stock and warrants. This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular holder based on such holder s individual circumstances, and this discussion addresses only persons that acquire our common stock and warrants as part of units upon their original issuance pursuant to this offering and assumes that each of our common stock and warrants trade separately. In particular, this discussion considers only holders that will own our common stock and warrants as capital assets and does not address the potential application of the alternative minimum tax or the U.S. federal income tax consequences to holders that are subject to special rules, including: financial institutions or financial services entities; broker-dealers; taxpayers who have elected mark-to-market accounting; tax-exempt entities; insurance companies; regulated investment companies; certain expatriates or former long-term residents of the United States; persons that actually or constructively own 10.0% or more of our common stock; persons that hold our common stock or warrants as part of a straddle, constructive sale, hedging, conversion or other integrated transaction; or persons whose functional currency is not the U.S. dollar. Table of Contents This discussion does not address any aspect of U.S. federal non-income tax laws, such as gift or estate tax laws, or state, local or non-U.S. tax laws. Additionally, the discussion does not consider the tax treatment of partnerships or other pass-through entities or persons who hold our common stock or warrants through such entities. If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of our common stock and warrants, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. We have not sought, and will not seek, a ruling from the Internal Revenue Service ( IRS ) as to any U.S. federal income tax consequence described below. The IRS may disagree with the description herein, and its determination may be upheld by a court. BECAUSE OF THE COMPLEXITY OF THE TAX LAWS AND BECAUSE THE TAX CONSEQUENCES TO ANY PARTICULAR INVESTOR MAY BE AFFECTED BY MATTERS NOT DISCUSSED HEREIN, EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT WITH ITS TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK AND WARRANTS, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS. Classification as a Partnership As discussed above (see Prospectus Summary Distribution of interest earned on our trust account to public shareholders ), prior to the closing of this offering, we made an election to be classified as a partnership, and not as an association taxable as a corporation, for U.S. federal income tax purposes, effective on January 1, 2007, and the IRS approved such election. The tax consequences of such election are discussed below. Notwithstanding our election to be treated as a partnership for U.S. federal income tax purposes, a publicly traded partnership is nevertheless generally treated as a corporation for U.S. federal income tax purposes, unless at least 90.0% of the gross income of such partnership for the current taxable year and each preceding taxable year during which it was a publicly traded partnership consists of qualifying income (which generally includes interest, dividends and gains from the sale or other taxable disposition of capital assets held for the production of such income). Any such change in tax status generally would be effective as of the beginning of the first tax year for which the qualifying income test is not met. Based on the foregoing, even though we may constitute a publicly traded partnership, we expect that we will continue to be treated as a partnership for U.S. federal income tax purposes for each taxable year that we meet this qualifying income test. For each taxable year prior to a business combination, we expect that at least 90.0% of our gross income will constitute qualifying income and, thus, that we will meet this test. In addition, we anticipate that we will complete a business combination either through a purchase of stock of a foreign corporation and/or through a Foreign Subsidiary (as discussed below). Accordingly, we expect that we will continue to meet this qualifying income test even after a business combination because, in such case, our income will likely consist solely of interest, dividends (including from the foreign corporation or Foreign Subsidiary) or gains from the disposition of stocks or securities. The U.S. federal income tax consequences of any business combination, liquidation or merger will be described more fully in the proxy that we will submit to our shareholders in connection with the approval of any such transaction. If we fail to meet the qualifying income test in any taxable year, then from and after the beginning of that tax year, we will be treated as a foreign corporation, and not a partnership, for U.S. federal income tax purposes. In such case, U.S. Holders may be subject to certain adverse tax and reporting issues. In particular, if we are treated as a foreign corporation, and not a partnership, for U.S. federal income tax purposes, we may be classified as a passive foreign investment company ( PFIC ), as defined below, in which case a U.S. Holder may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements. A U.S. Holder also may recognize gain and be subject to other reporting obligations on our deemed conversion to a foreign corporation. In addition, as a corporation for U.S. federal income tax purposes, our income, gain, loss, deduction, credit and tax preference items would not be passed through to U.S. Holders (as described below under U.S. Holders Taxation of Operations and Distributions ), and subject to the PFIC rules described below, distributions to U.S. Holders generally would be taxable as dividends for U.S. federal income tax purposes. Table of Contents The balance of this discussion assumes that we will be treated as a partnership, and not an association taxable as a corporation, for U.S. federal income tax purposes. Allocation of Purchase Price Between Common Stock and Warrants For U.S. federal income tax purposes, an investor generally must allocate the purchase price of a unit between the share of common stock and the warrant that comprise the unit based on the relative fair market value of each. The price allocated to each share of common stock and each warrant generally will be the investor s tax basis in such share or warrant, as the case may be. The amount initially allocated to a share of common stock will be treated as an amount allocated to an interest in a partnership (sometimes referred to as an Interest ) for U.S. federal income tax purposes. Following the closing, we will advise each investor of our allocation of the purchase price for a unit between the common stock and warrant components. While uncertain, the IRS, by analogy to rules relating to the allocation of the purchase price to components of a unit consisting of debt and equity, may take the position that our allocation of the purchase price will be binding on an investor of a unit, unless the investor explicitly discloses in a statement attached to the investor s timely filed U.S. federal income tax return for the taxable year that includes the acquisition date of the unit that the investor s allocation of the purchase price between the Interest and the warrant that comprise the unit is different than our allocation. Our allocation is not, however, binding on the IRS. Each investor is advised to consult such holder s own tax advisor with respect to the risks associated with an allocation of the purchase price between the Interest and the warrant that comprise a unit that is inconsistent with our allocation of the purchase price. U.S. Holders Taxation of Operations and Distributions As a partnership for U.S. federal income tax purposes, our company generally is not itself subject to U.S. federal income tax. Instead, each U.S. Holder of an Interest generally will be required to report on its U.S. federal income tax return its distributive share of our income, gain, loss, deduction, credit and tax preference items, and to include such items in computing such U.S. Holder s U.S. federal income tax liability. See Taxation of Distributions Paid by Foreign Subsidiary, below for certain tax issues relating to distributions paid to us by a foreign corporate subsidiary that we may form. We will endeavor to provide each such U.S. Holder with the information relating to our company that is necessary for the U.S. Holder to file its U.S. federal income tax return. Each U.S. Holder of an Interest generally will be subject to U.S. federal income tax on its distributive share of our taxable income or gain (which, however, in general, will not include the income from any tax-exempt money market accounts in which we invest), regardless of whether such U.S. Holder receives any distribution from us. Thus, in any year, such U.S. Holder s distributive share of taxable income from us (and, possibly, the taxes imposed on that income) could exceed the amount, if any, that such holder receives as a distribution from us. In addition, there may be limitations on such U.S. Holder s ability to deduct its share of our losses or expenses for U.S. federal income tax purposes. Cash distributions (other than in complete liquidation of a U.S. Holder s Interest), to the extent they do not exceed a U.S. Holder s tax basis in its Interest, should not result in taxable income to the U.S. Holder, but will reduce the U.S. Holder s tax basis in its Interest by the amount distributed. A U.S. Holder s tax basis in its Interest generally will be equal to the amount initially paid for the Interest, plus prior allocations of income from us, including tax-exempt income, and less any prior allocations of losses from us, and prior cash distributions received from us and the tax basis of any prior property distributions from us. Subject to PFIC rules discussed below (which, in general, will apply only if we form or acquire a foreign corporate subsidiary that constitutes a PFIC, as described below), cash distributed to a U.S. Holder in excess of the tax basis in its Interest generally would be taxable as capital gain. A distribution of property other than cash generally will not result in taxable income or loss to the U.S. Holder to whom it is distributed or to us. The U.S. Holder s tax basis in such property received generally will be equal to our tax basis in the property immediately before the distribution. Table of Contents Under the Code, certain distributions of marketable securities will be treated as distributions of cash under the above rules. However, distributions of marketable securities will not be treated as cash distributions if made by an investment partnership, which has never engaged in a trade or business and substantially all of whose assets consist of investment-type assets (including money, stock and evidences of indebtedness), to a partner whose contribution to the partnership consisted only of such investment-type assets. We expect that we will qualify for this investment partnership exception and, therefore, any distributions of marketable securities by us to a U.S. Holder in respect of its Interest should not be treated as cash distributions to such holder for U.S. federal income tax purposes. Tax Elections; Tax Audits All tax decisions and elections for us generally will be made by our board of directors or by an appropriate officer designated by our board of directors. Our board will also designate a person to act as our Tax Matters Partner. The Tax Matters Partner will have considerable authority to make decisions affecting the tax treatment and procedural rights of all U.S. Holders. Liquidation of Our Company or of a U.S. Holder s Interest Generally, subject to the PFIC rules discussed below, upon a liquidation of our company or of a U.S. Holder s Interest (including pursuant to the exercise by such holder of its right to have its Interest redeemed by us), any gain or loss recognized by a U.S. Holder by reason of a distribution to the U.S. Holder will be considered as capital gain or loss from the sale or exchange of its Interest. Such gain will be recognized to the extent any money distributed (or deemed distributed) exceeds the U.S. Holder s tax basis for its Interest. In general, a loss will be recognized only if the U.S. Holder receives no property from us other than money and only to the extent the U.S. Holder s tax basis for its Interest exceeds the money distributed (or deemed distributed) to such holder in the liquidation. Generally, a U.S. Holder s tax basis in any property (other than cash) received in liquidation of its Interest would be equal to the tax basis in its Interest, reduced by any money received (or deemed received) in the liquidation. Any capital gain or loss recognized by a U.S. Holder in connection with the liquidation of its Interest generally will be treated in the same manner as discussed below under the caption Taxation on the Disposition of Interests and Warrants. Taxation on the Disposition of Interests and Warrants Upon a sale or other taxable disposition of an Interest (other than in connection with a complete liquidation of an Interest, as discussed above) or of warrants to acquire an Interest, and subject to the PFIC rules discussed below, a U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized and the U.S. Holder s tax basis in the Interest or warrants, as the case may be. See Exercise or Lapse of a Warrant below for a discussion regarding a U.S. Holder s tax basis in the Interest acquired pursuant to the exercise of a warrant. Capital gains recognized by a U.S. Holder generally are subject to U.S. federal income tax at the same rate as ordinary income, except that long-term capital gains recognized by non-corporate U.S. Holders are generally subject to U.S. federal income tax at a maximum rate of 15.0% for taxable years beginning before January 1, 2011, and 20.0% thereafter. Capital gain or loss will constitute long-term capital gain or loss if the U.S. Holder s holding period for the property sold exceeds one year. The deductibility of capital losses is subject to various limitations. Capital gain or loss recognized by a U.S. Holder upon a disposition of Interest or warrants generally will constitute income or loss from sources within the United States for foreign tax credit limitation purposes. Exercise or Lapse of a Warrant Subject to the discussion of the PFIC rules below, a U.S. Holder generally will not recognize gain or loss upon the exercise of a warrant. An Interest acquired pursuant to the exercise of a warrant for cash will have a tax basis equal to the U.S. Holder s tax basis in the warrant, increased by the amount paid to exercise the warrant. The holding period of such Interest generally will begin on the day after the date of exercise of the warrant. If a warrant is allowed to lapse unexercised, a U.S. Holder generally will recognize a capital loss equal to such holder s tax basis in the warrant. U.S. Table of Contents Holders who are permitted to and do elect to exercise a warrant other than by paying the exercise price in cash should consult their own tax advisors regarding the tax treatment of such an exercise, which may vary from that described above. Upon the lapse of a warrant, we generally will recognize income equal to the amount received by our company for the warrant. Under current law, it is not entirely clear whether such income should be treated as capital gain or ordinary income, or if it is capital gain, whether such gain will be short-term or long-term. While we currently intend to take the position that such income would be capital gain and not ordinary income for U.S. federal income tax purposes, each U.S. Holder is urged to consult with its own tax advisor concerning the tax consequences in connection with a lapse of our warrants. Foreign Partnership Reporting Requirements Certain U.S. Holders will be required to file IRS Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships) reporting transfers of cash or other property to us and information relating to us, including information relating to the U.S. Holder s ownership interest in us and, in certain circumstances, the names and addresses of certain of the other U.S. Holders. Substantial penalties may be imposed upon a U.S. Holder that fails to comply with these reporting requirements. Each U.S. Holder is urged to consult with its own tax advisor regarding these reporting requirements. Tax Shelter Reporting and Recordkeeping Requirements The Code contains certain provisions relating to reportable transactions. If applicable to our company (or any of the transactions undertaken by us, such as our investments), these provisions may require U.S. Holders that are required to file U.S. federal income tax returns (and in some cases, certain direct and indirect interest holders of certain U.S. Holders) to disclose to the IRS information relating to us and our transactions (or any of such transactions), and to retain certain documents and other records related thereto. These provisions may also require certain advisors to us to disclose the existence of a reportable transaction. Although we do not believe that the subscription for an investment in us is a reportable transaction, there can be no assurance that the IRS will not take a contrary position. In addition, there can be no assurance that an investment in us will not become a reportable transaction for U.S. Holders in the future, for example, if we generate certain types of losses that exceed prescribed thresholds. It is also possible that a transaction undertaken by us will be a reportable transaction for U.S. Holders. Substantial penalties may be imposed on taxpayers who fail to comply with these provisions. U.S. Holders should consult with their own tax advisors concerning the application of these reporting obligations. Tax and Reporting Issues as to Formation of Foreign Subsidiary At some time prior to the announcement of a potential business combination, we may form a foreign (non-U.S.) subsidiary (the Foreign Subsidiary ), which will be treated as a corporation for U.S. federal income tax purposes. Also, at some time prior to, or in connection with, a business combination, we may make one or more transfers of all or substantially all of our assets to the Foreign Subsidiary. In connection with each such transfer, for U.S. federal income tax purposes, a U.S. Holder of an Interest generally will be deemed to have transferred a proportionate share of our assets transferred to the Foreign Subsidiary and will recognize a proportionate share of any gain (but not loss) to the extent of any appreciation in any of such assets (i.e., the excess of the fair market value of an asset over our tax basis in such asset) at the time of the transfer. In addition, certain U.S. Holders may be required to file an IRS Form 926 (Return of a U.S. Transferor of Property to a Foreign Corporation) to report the deemed transfers of assets. Substantial penalties may be imposed on a U.S. Holder that fails to comply with this reporting requirement. Following the formation of and transfers to the Foreign Subsidiary, if we were to then liquidate our company or merge our company into the Foreign Subsidiary, as provided in the warrant agreements, the Foreign Subsidiary will assume our obligations under the warrants (see Description of Securities Warrants ), and a U.S. Holder of a warrant will have the right, under certain conditions, to exercise the warrant for shares in the Foreign Subsidiary (and not for an Interest in us). While not free from doubt, we believe that this assumption and right (which is provided for under the original terms of the warrant) should not result in a taxable event to such U.S. Holder or to our company. Such U.S. Holder, however, may then be subject to the PFIC rules in respect to such warrant, as discussed below. Table of Contents At this time, while we do not expect that a material amount of gain would be recognized by U.S. Holders in connection with the formation of and transfers to the Foreign Subsidiary (due to the type of assets in which we will likely invest pending the formation of and transfers to the Foreign Subsidiary), this result cannot be assured, as it is dependent upon (among other things) the timing of the transactions and the nature and value of our assets at that time. We will notify U.S. Holders of the formation of and transfers to the Foreign Subsidiary, but all U.S. Holders are urged to consult their own tax advisors concerning the tax consequences of such transactions, including any reporting requirements with respect thereto. The balance of this discussion assumes that we will form and make transfers to the Foreign Subsidiary in the manner described above. Taxation of Distributions Paid by Foreign Subsidiary After the formation of and transfers to the Foreign Subsidiary, and subject to the PFIC rules discussed below, a U.S. Holder of an Interest must report, in addition to other tax items (see Taxation of Operations and Distributions, above), such holder s distributive share of the gross amount of any dividend paid to us by the Foreign Subsidiary out of its current or accumulated earnings and profits (as determined for U.S. federal income tax purposes). Such dividend generally will be ordinary income and will constitute foreign source passive income for foreign tax credit purposes. Such dividend also will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations. In addition, it is not expected that such dividend will qualify for the reduced rate of tax applicable to certain qualified dividends received (or allocable) to certain non-corporate U.S. Holders for taxable years beginning before January 1, 2011. Distributions by the Foreign Subsidiary in excess of its earnings and profits generally will be applied against and reduce our tax basis in the shares of the Foreign Subsidiary and, to the extent in excess of such basis, will be treated as gain from the sale or exchange of such shares. Passive Foreign Investment Company Rules As long as we are classified as a partnership, and not a corporation, for U.S. federal income tax purposes, we will not be treated as a PFIC. However, after we form the Foreign Subsidiary, the Foreign Subsidiary may be considered a PFIC, in which case, a U.S. Holder may be subject to certain adverse U.S. federal income tax consequences, as described below. As discussed below, however, because this determination is based on future events, the actual PFIC status of the Foreign Subsidiary cannot be determined at this time. A foreign corporation will be a PFIC if at least 75.0% of its gross income in a taxable year, including its pro rata share of the gross income of any company in which it is considered to own at least 25.0% of the shares by value, is passive income. Alternatively, a foreign corporation will be a PFIC if at least 50.0% of its assets in a taxable year, ordinarily determined based on fair market value and averaged quarterly over the year, including its pro rata share of the assets of any company in which it is considered to own at least 25.0% of the shares by value, are held for the production of, or produce, passive income. Passive income generally includes dividends, interest, rents, royalties, and gains from the disposition of passive assets. Because the Foreign Subsidiary (after its formation and prior to a business combination) will likely have only passive assets and income, with no current active business, it is possible that the Foreign Subsidiary will meet the PFIC asset or income test for its initial taxable year. However, pursuant to a start-up exception, a corporation will not be a PFIC for the first taxable year the corporation has gross income, if (1) no predecessor of the corporation was a PFIC; (2) the corporation satisfies the IRS that it will not be a PFIC for either of the first two taxable years following the start-up year; and (3) the corporation is not in fact a PFIC for either of those years. The applicability of the start-up exception to the Foreign Subsidiary is uncertain. After acquisition of a company or assets in a business combination, the Foreign Subsidiary may still meet one of the PFIC tests depending on the timing of the acquisition and the passive income and assets of the acquired business. If the company that the Foreign Subsidiary acquires in a business combination is a PFIC, then the Foreign Subsidiary will likely not qualify for the start-up exception and will be a PFIC for its start-up year. The actual PFIC status of the Foreign Subsidiary for any taxable year will not be determinable until after the end of its taxable year, and accordingly, there can be no assurance that the Foreign Subsidiary will not be considered a PFIC for its start-up year or any future taxable year. Table of Contents If the Foreign Subsidiary were not a PFIC, the adverse tax consequences described below with respect to PFICs would not apply. If the Foreign Subsidiary were a PFIC for any taxable year during which a U.S. Holder held an Interest, the U.S. Holder generally will be deemed to own a portion of the shares of the Foreign Subsidiary (in accordance with such holder s proportionate interest in us) from the date of such deemed ownership. As a result, if the U.S. Holder does not make a timely qualified electing fund ( QEF ) election for the first taxable year of its deemed holding period for such shares, as described below, such holder will be subject to special rules with respect to: any gain recognized (or deemed recognized) by the U.S. Holder on the sale or other taxable disposition of its Interest, to the extent such disposition results in a reduction or termination of such holder s indirect interest in the Foreign Subsidiary (or such holder s share of any gain we recognize on a sale or other taxable disposition of our shares in the Foreign Subsidiary); and the U.S. Holder s share of any excess distribution received by us and deemed received by such holder (generally, any distributions deemed received by the U.S. Holder during a taxable year that are greater than 125.0% of the average annual distributions deemed received by such holder in respect of the shares in the Foreign Subsidiary during the three preceding taxable years or, if shorter, such holder s deemed holding period for the shares). Under these rules, the U.S. Holder s gain or excess distribution will be allocated ratably over the U.S. Holder s deemed holding period for the shares; the amount allocated to the taxable year in which the U.S. Holder recognized (or were deemed to recognize) the gain or excess distribution will be taxed as ordinary income; the amount allocated to each prior year, with certain exceptions, will be taxed at the highest tax rate in effect for that year and applicable to the U.S. Holder, and the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such year. In addition, if the Foreign Subsidiary were a PFIC, certain other transactions that result in a reduction of a U.S. Holder s indirect ownership interest in the Foreign Subsidiary (such as our issuance of additional Interests, including pursuant to the exercise of any of the warrants) generally will be treated for the purposes of the PFIC rules as a deemed disposition, to the extent of such reduction, of a portion of the shares of the Foreign Subsidiary deemed owned by the U.S. Holder. The PFIC rules discussed above also generally will apply to a U.S. Holder with respect to its warrants if such warrants become exercisable into shares of the Foreign Subsidiary. As a result, if a U.S. Holder sells or otherwise disposes of such warrant (other than upon exercise of the warrant), any gain recognized generally will be subject to the special tax and interest charge rules treating the gain as an excess distribution, as described above, if the Foreign Subsidiary were a PFIC at any time during the period the U.S. Holder held the warrant. A U.S. Holder may not make a QEF election with respect to its warrants. Accordingly, if a U.S. Holder that exercises such warrants properly makes a QEF election with respect to the newly acquired shares of the Foreign Subsidiary (or has previously made a QEF election with respect to shares of the Foreign Subsidiary), the QEF election will apply to the newly acquired shares, but the adverse tax consequences relating to PFIC shares will continue to apply to such shares (which generally will be deemed to have a holding period for the purposes of the PFIC rules that includes the period the U.S. Holder held the warrants), unless the U.S. Holder makes a purging election. The purging election creates a deemed sale of such shares at their fair market value. The gain recognized by the purging election will be subject to the special tax and interest charge rules, as described above. As a result of the purging election, the U.S. Holder will have a new basis and holding period in the shares acquired upon the exercise of the warrants for purposes of the PFIC rules. In general, a U.S. Holder of an Interest may avoid the PFIC tax consequences described above in respect to its share of the stock of the Foreign Subsidiary by making a timely QEF election to include in income its pro rata share Table of Contents of the Foreign Subsidiary s net capital gains (as long-term capital gain) and other earnings and profits (as ordinary income), on a current basis, in each case whether or not distributed. Such U.S. Holder may make a separate election to defer the payment of taxes on undistributed income inclusions under the QEF rules, but if deferred, any such taxes will be subject to an interest charge. The QEF election is made on a shareholder-by-shareholder basis and, once made, can be revoked only with the consent of the IRS. A U.S. Holder of an Interest generally makes a QEF election by attaching a completed IRS Form 8621 (Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund), including the information provided in a PFIC annual information statement, to a timely filed U.S. federal income tax return for the tax year to which the election relates. Retroactive QEF elections generally may be made only by filing a protective statement with such return and if certain other conditions are met or with the consent of the IRS. In order to comply with the requirements of a QEF election, a U.S. Holder of an Interest must receive certain information from the Foreign Subsidiary. Upon request from such a U.S. Holder, we will endeavor to cause the Foreign Subsidiary to provide to the U.S. Holder no later than 90 days after the request the information that may be required to make or maintain a QEF election with respect to the Foreign Subsidiary. However, there is no assurance that we will have timely knowledge of the Foreign Subsidiary s status as a PFIC in the future or of the required information to be provided. If a U.S. Holder has elected the application of the QEF rules in respect of its PFIC shares, and the special tax and interest charge rules do not apply to such shares (because of a timely QEF election for the first tax year of the U.S. Holder s deemed holding period for such shares or a purge of the PFIC taint pursuant to a purging election), any gain recognized attributable to the appreciation of the PFIC shares generally will be taxable as capital gain and no interest charge will be imposed. As discussed above, U.S. Holders of a QEF are currently taxed on their pro rata shares of its earnings and profits, whether or not distributed. In such case, a subsequent distribution of such earnings and profits that were previously included in income generally will not be a dividend. The tax basis of a U.S. Holder s shares in a QEF will be increased by amounts that are included in income, and decreased by amounts distributed but not taxed as dividends, under the above rules. Similar basis adjustments will apply to property (such as an Interest) if by reason of holding such property the U.S. Holder is treated under the applicable attribution rules as owning shares in a QEF. Although a determination as to the Foreign Subsidiary s PFIC status will be made annually, an initial determination that it is a PFIC will generally apply for subsequent years, whether or not it meets the test for PFIC status in those years. A U.S. Holder who makes the QEF election discussed above for first tax year of the Foreign Subsidiary in which the U.S. Holder holds (or is deemed to hold) its shares and for which it is determined to be a PFIC, however, will not be subject to the PFIC tax and interest charge rules discussed above in respect to such shares. In addition, such U.S. Holder will not be subject to the QEF inclusion regime with respect to such shares for the tax years in which the Foreign Subsidiary is not a PFIC. On the other hand, if the QEF election is not effective for each of its tax years in which it is a PFIC and the U.S. Holder holds (or is deemed to hold) its stock, the PFIC rules discussed above will continue to apply to such shares unless the holder makes a purging election and pays the tax and interest charge with respect to the gain inherent in such shares attributable to the pre-QEF election period. If a U.S. Holder owns (or is deemed to own) shares during any year in a PFIC, such holder may have to file an IRS Form 8621 (whether or not a QEF election is made). The rules dealing with PFICs and with the QEF election are very complex and are affected by various factors, including our ownership of any non-U.S. subsidiaries. Accordingly, U.S. Holders should consult their own tax advisors concerning the application of the PFIC rules under their particular circumstances. Non-U.S. Holders In general, certain types of U.S. source income received by us could be subject to withholding of U.S. federal income tax at a rate of 30.0% (or a lower applicable tax treaty rate), to the extent allocable to Non-U.S. Holders. We anticipate, however, that any U.S. source income received by us will not be of the type that will be subject to such U.S. withholding tax, provided that (in certain circumstances) the Non-U.S. Holder certifies as to its foreign status, under penalties of perjury, on a duly executed applicable IRS Form W-8 or otherwise establishes an exemption. Table of Contents In addition, a Non-U.S. Holder generally will not be subject to U.S. federal income tax on any gain attributable to a sale or other disposition of an Interest or warrants to acquire an Interest, unless such gain is effectively connected with the Non-U.S. Holder s conduct of a trade or business in the United States (and, if an income tax treaty applies, is attributable to a permanent establishment or fixed base that such holder maintains in the United States) or the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of sale or other disposition and certain other conditions are met (in which case, such gain from U.S. sources generally is subject to tax at a 30.0% rate or a lower applicable tax treaty rate). In general, gains that are effectively connected with the Non-U.S. Holder s conduct of a trade or business in the United States (and, if applicable, attributable to a permanent establishment or fixed base in the United States) will be subject to tax in the same manner as for a U.S. Holder. Effectively connected gains recognized by a corporate Non-U.S. Holder may also be subject to an additional branch profits tax at a 30.0% rate or a lower applicable tax treaty rate. Backup Withholding and Information Reporting In general, information reporting for U.S. federal income tax purposes will apply to sales and other dispositions of an Interest or warrants to acquire an Interest (or stock in the Foreign Subsidiary) to or through a U.S. office of a broker by a non-corporate U.S. Holder. Sales and other dispositions effected at an office outside the United States will be subject to information reporting in limited circumstances. In addition, backup withholding of U.S. federal income tax, currently at a rate of 28.0%, generally will apply to such sales and other dispositions by a non-corporate U.S. Holder who: fails to provide an accurate taxpayer identification number; is notified by the IRS that backup withholding is required; or in certain circumstances, fails to comply with applicable certification requirements. A Non-U.S. Holder generally may eliminate the requirement for information reporting and backup withholding by providing certification of its foreign status, under penalties of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption. Backup withholding is not an additional tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. Holder s or a Non-U.S. Holder s U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely furnished to the IRS. Marshall Islands Tax Considerations The following are the material Marshall Islands tax consequences of our activities to us and to our shareholders and warrant holders of investing in our common stock and warrants. We are incorporated in the Marshall Islands. Under current Marshall Islands law, we are not subject to tax on income or capital gains, and no Marshall Islands withholding tax or income tax will be imposed upon payments of dividends by us to our shareholders or proceeds from the disposition of our common stock and warrants, provided such shareholders or warrant holders, as the case may be, are not residents in the Marshall Islands. There is no tax treaty between the United States and the Republic of the Marshall Islands. Table of Contents UNDERWRITING In accordance with the terms and conditions contained in the underwriting agreement, we have agreed to sell to each of the underwriters named below, and each of the underwriters, for which Maxim Group LLC is acting as representative, have severally, and not jointly, agreed to purchase on a firm commitment basis the number of units offered in this offering set forth opposite their respective names below: Underwriters Number of Units Maxim Group LLC Total 20,000,000 A copy of the underwriting agreement has been filed as an exhibit to the registration statement of which this prospectus forms a part. Pricing Of Securities We have been advised by the representative that the underwriters propose to offer the units to the public at the initial offering price set forth on the cover page of this prospectus. They may allow some dealers concessions not in excess of $ per unit and the dealers may re-allow a concession not in excess of $ per unit to other dealers. Prior to this offering there has been no public market for any of our securities. The public offering price of the units and the terms of the warrants were negotiated between us and the representative. Factors considered in determining the prices and terms of the units, including the common stock and warrants underlying the units, include: our management s assessment of the amount of funds necessary to complete an acquisition in the maritime shipping industry; the history and prospects of other blank check companies whose principal business is the acquisition of other companies; the actual and proposed offerings of those companies, including the structure and size of the offerings; an assessment of our management team and its experience in identifying acquisition targets and structuring acquisitions; our capital structure; the general conditions of the capital markets that we expect to prevail at the time of the offering; the likely competition for acquisition targets; and the likely number of potential targets. However, although these factors were considered, the determination of our offering price is more arbitrary than the pricing of securities for an operating company in a particular industry since the underwriters are unable to compare our financial results and prospects with those of public companies operating in the same industry. The purchase price of the warrants sold to our officers in the private placement was negotiated between us and Maxim Group, LLC, the representative of the underwriters. Factors considered in determining the price and terms of the insider warrants include the actual and proposed private placements of other blank check companies whose principal business is the acquisition of other companies. Nonetheless, the determination of the purchase price of the insider warrants is more arbitrary than the pricing of securities for an operating company in a particular industry since underwriters are unable to compare our financial results and prospects with those of public operating companies in the same industry. No commission was paid with respect to the sale of such warrants. Over-Allotment Option We have also granted to the underwriters an option, exercisable during the 45-day period commencing on the date of this prospectus, to purchase from us at the offering price, less underwriting discounts, up to an aggregate of Table of Contents 3,000,000 additional units for the sole purpose of covering over-allotments, if any. The over-allotment option will only be used to cover the net syndicate short position resulting from the initial distribution. The underwriters may exercise that option if the underwriters sell more units than the total number set forth in the table above. If any units underlying the option are purchased, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. Commissions And Discounts The following table shows the public offering price, underwriting discount to be paid by us to the underwriters and the proceeds, before expenses, to us. This information assumes either no exercise or full exercise by the underwriters of their over-allotment option. Upon consummation of the offering, the underwriters compensation shall be payable from the proceeds of the offering. In the event the over-allotment option is exercised in full, up to $675,000 of the cost and expenses associated with the exercises of the over-allotment option, shall be payable from funds held outside of the trust account. This is in order to ensure that there is a minimum of $10.00 per share in the trust account. We plan to draw up to $675,000 of interest income on the trust account to replace the funds held outside the trust account. Without With Over-Allotment Over-Allotment Per Unit Option Option Public offering price $ 10.00 $ 200,000,000 $ 230,000,000 Discount(1)(2) $ 0.375 $ 7,500,000 $ 8,175,000 Non-accountable expense allowance(3) $ 0.10 $ 2,000,000 $ 2,000,000 Deferred underwriting compensation(2)(4) $ 0.225 $ 4,500,000 $ 5,625,000 Proceeds before other expenses(5) $ 9.30 $ 186,000,000 $ 213,900,000 (1) Does not include an additional 2.25% of the gross proceeds from the sale of the 20,000,000 units in this offering ($4,500,000) and 3.75% of the gross proceeds from the sale of the 3,000,000 units subject to the underwriters over-allotment option ($1,125,000) that will be paid to Maxim Group LLC, with interest accrued thereon, only upon consummation of a business combination (and then only with respect to those units as to which the component shares have not been redeemed) which amounts are reflected in this table as deferred underwriting compensation; provided, however, that the interest earned on the deferred underwriting compensation and payable to Maxim Group LLC shall not exceed $420,000. (2) The per unit compensation with respect to units sold generally and as part of the over-allotment option is equal. However, Maxim Group LLC has agreed to defer a larger portion of the underwriting compensation earned with respect to the units sold as part of the over-allotment option (2.25% deferred with respect to units sold generally as compared to 3.75% deferred with respect to units sold as part of over-allotment option) in order to ensure that there is $10.00 per share in the trust account, which is beneficial to our shareholders. (3) The 1.0% non-accountable expense allowance payable to Maxim Group LLC is not payable with respect to the units sold upon exercise of the underwriters over-allotment option. (4) The per unit deferred underwriting compensation is $0.225 with respect to units sold in the offering and is $0.375 per unit with respect to units sold pursuant to the underwriters over-allotment option. Maxim Group LLC has agreed to forego their deferred underwriting compensation with respect to each share that we redeem for cash upon the consummation of a business combination. If a business combination is not consummated and we are liquidated, such amounts will not be paid to the underwriters, but rather will be distributed among our public shareholders. (5) The expenses of this offering and the private placement are estimated to be approximately $965,000. Warrant Solicitation Fee We have engaged Maxim Group LLC, the representative of the underwriters, on a non-exclusive basis, as our agent for the solicitation of the exercise of the warrants. To the extent not inconsistent with the guidelines of the NASD and the rules and regulations of the SEC, we have agreed to pay the representative for bona fide services Table of Contents rendered a commission equal to 5.0% of the exercise price for each warrant exercised more than one year after the consummation of this offering if the exercise was solicited by the underwriters. In addition to soliciting, either orally or in writing, the exercise of the warrants, the representative s services may also include disseminating information, either orally or in writing, to warrant holders about us or the market for our securities, and assisting in the processing of the exercise of the warrants. No compensation will be paid to the representative upon the exercise of the warrants if: the market price of the underlying shares of common stock is lower than the exercise price; the holder of the warrants has not confirmed in writing that the representative solicited the exercise; the warrants are held in a discretionary account; the warrants are exercised in an unsolicited transaction; or the arrangement to pay the commission is not disclosed in the prospectus provided to warrant holders at the time of exercise. Purchase Option Upon completion of this offering, we have agreed to sell to Maxim Group LLC, the representative of the underwriters, for $100, an option to purchase up to a total of 1,000,000 units. The units issuable upon exercise of this option are identical to those offered by this prospectus, except with respect to the exercise price. This option is exercisable at $12.50 per unit commencing on the sixth month from the consummation of this offering and expiring five years from the consummation of this offering. The option and the 1,000,000 units, the 1,000,000 shares of common stock and the 1,000,000 warrants underlying such units, and the 1,000,000 shares of common stock underlying such warrants, have been deemed compensation by the NASD and are therefore subject to a 180-day lock-up under to Rule 2710(g)(1) of the NASD Conduct Rules, pursuant to which such securities may not be sold, transferred, assigned, pledged or hypothecated for a period of 180 days immediately following the consummation of this offering, except to any underwriter and selected dealer participating in the offering and their bona fide officers or partners. However, the option may be transferred to any underwriter and selected dealer participating in the offering and their bona fide officers or partners. Although the purchase option and its underlying securities have been registered under the registration statement of which this prospectus forms a part, the option grants to holders demand and piggy back rights for periods of five and seven years, respectively, from the consummation of this offering with respect to the registration under the Securities Act of the securities directly and indirectly issuable upon exercise of the option. This option will also contain a cashless exercise feature that allows the holder or holders of the option to convert the value in the option (the fair market value of our common stock minus the exercise price of the option) into shares of common stock. The fair market value of our common stock will be determined using the average reported last sales price of the common stock for the 10 trading days ending on the third day prior to exercise of the option. We will bear all fees and expenses attendant to registering the securities, other than underwriting commissions which will be paid for by the holders themselves. The exercise price and number of units issuable upon exercise of the option may be adjusted in certain circumstances, including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. However, the option will not be adjusted for issuances of common stock at a price below its exercise price. Regulatory Restrictions On Purchase Of Securities Rules of the SEC may limit the ability of the underwriters to bid for or purchase our securities before the distribution of the securities is completed. The Restricted Period under Regulation M for this offering will have ended when (i) all of the Units have been sold, (ii) there are no more selling efforts, (iii) there is no more stabilization, and (iv) the overallotment option has been exercised or has expired. However, the underwriters may engage in the following activities in accordance with the rules: Stabilizing Transactions. The underwriters may make bids or purchases for the purpose of pegging, fixing or maintaining the price of our securities, so long as stabilizing bids do not exceed the maximum price specified in Regulation M of the SEC, which generally requires, among other things, that no stabilizing bid Table of Contents shall be initiated at or increased to a price higher than the lower of the offering price or the highest independent bid for the security on the principal trading market for the security. Over-Allotments and Syndicate Coverage Transactions. The underwriters may create a short position in our securities by selling more of our securities than are set forth on the cover page of this prospectus. If the underwriters create a short position during the offering, the representative may engage in syndicate covering transactions by purchasing our securities in the open market. The representative may also elect to reduce any short position by exercising all or part of the over-allotment option. Penalty Bids. The representative may reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. Stabilization and syndicate covering transactions may cause the price of the securities to be higher than they would be in the absence of these transactions. The imposition of a penalty bid might also have an effect on the prices of the securities if it discourages resales of the securities. Neither we nor the underwriters makes any representation or prediction as to the effect that the transactions described above may have on the prices of the securities. These transactions may occur on the American Stock Exchange in the over-the-counter market or on any trading market. If any of these transactions are commenced, they may be discontinued without notice at any time. In connection with this offering, the underwriters may distribute prospectuses electronically. No forms of prospectus other than printed prospectuses and electronically distributed prospectuses that are printable in Adobe PDF format will be used in connection with this offering. Foreign Regulatory Restrictions on Purchase of the Units We have not taken any action to permit a public offering of the units outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to this offering of units and the distribution of the prospectus outside the United States. Italy. This offering of the units has not been cleared by Consob, the Italian Stock Exchange s regulatory agency of public companies, pursuant to Italian securities legislation and, accordingly, no units may be offered, sold or delivered, nor may copies of this prospectus or of any other document relating to the units be distributed in Italy, except (1) to professional investors (operatori qualfcati); or (2) in circumstances which are exempted from the rules on solicitation of investments pursuant to Decree No. 58 and Article 33, first paragraph, of Consob Regulation No. 11971 of May 14, 1999, as amended. Any offer, sale or delivery of the units or distribution of copies of this prospectus or any other document relating to the units in Italy under (1) or (2) above must be (i) made by an investment firm, bank or financial intermediary permitted to conduct such activities in Italy in accordance with the Decree No. 58 and Legislative Decree No. 385 of September 1, 1993, or the Banking Act; and (ii) in compliance with Article 129 of the Banking Act and the implementing guidelines of the Bank of Italy, as amended from time to time, pursuant to which the issue or the offer of securities in Italy may need to be preceded and followed by an appropriate notice to be filed with the Bank of Italy depending, inter alia, on the aggregate value of the securities issued or offered in Italy and their characteristics; and (iii) in compliance with any other applicable laws and regulations. Germany. The offering of the units is not a public offering in the Federal Republic of Germany, units may only be acquired in accordance with the provisions of the Securities Sales Prospectus Act (Wertpapier-Verkaufspropsektgestz), as amended, and any other applicable German law. No application has been made under German law to publicly market the units in or out of the Federal Republic of Germany. The units are not registered or authorized for distribution under the Securities Sales Prospectus Act and accordingly may not be, and are not being, offered or advertised publicly or by public promotion. Therefore, this prospectus is strictly for private use and the offering is only being made to recipients to whom the document is personally addressed and does not constitute an offer or advertisement to the public. The units will only be available to persons who, by profession, trade or business, buy or sell shares for their own or a third party s account. Table of Contents France. The units offered by this prospectus may not be offered or sold, directly or indirectly, to the public in France. This prospectus has not been or will not be submitted to the clearance procedure of the Autorite des Marches Financiers, or the AMF, and may not be released or distributed to the public in France. Investors in France may only purchase the units offered by this prospectus for their own account and in accordance with articles L. 411-1, L. 441-2 and L. 412-1 of the Code Monetaire et Financier and decree no. 98-880 dated October 1, 1998, provided they are qualified investors within the meaning of said decree. Each French investor must represent in writing that it is a qualified investor within the meaning of the aforesaid decree. Any resale, directly or indirectly, to the public of the units offered by this prospectus may be effected only in compliance with the above mentioned regulations. Les actions offertes par ce document d information ne peuvent pas etre, directement ou indirectement, offertes ou vendues au public en France. Ce document d information n a pas ete ou ne sera pas soumis au visa de 1 Autorite des Marches Financiers et ne peut etre diffuse ou distribue au public en France. Les investisseurs en France ne peuvent acheter les actions offertes par ce document d information que pour leur compte propre et conformement aux articles L. 411-1, L. 441-2 et L. 412-1 du Code Monetaire et Financier et du decret no. 98-880 du 1 octobre 1998, sous reserve qu ils soient des investisseurs qualifies au sens du decret susvise. Chaque investisseur doit declarer par ecrit qu il est un investisseur qualifie au sens du decret susvise. Toute revente, directe ou indirecte, des actions offertes par ce document d information au public ne peut etre effectuee que conformement a la reglementation susmentionnee. Switzerland. This prospectus may only be used by those persons to whom it has been directly handed out by the offeror or its designated distributors in connection with the offer described therein. The units are only offered to those persons and/or entities directly solicited by the offeror or its designated distributors, and are not offered to the public in Switzerland. This prospectus constitutes neither a public offer in Switzerland nor an issue prospectus in accordance with the respective Swiss legislation, in particular but not limited to Article 652A Swiss Code Obligations. Accordingly, this prospectus may not be used in connection with any other offer, whether private or public and shall in particular not be distributed to the public in Switzerland. United Kingdom. In the United Kingdom, the units offered by this prospectus are directed to and will only be available for purchase to a person who is an exempt person as referred to at (c) below and who warrants, represents and agrees that: (a) it has not offered or sold, will not offer or sell, any units offered by this prospectus to any person in the United Kingdom except in circumstances which do not constitute an offer to the public in the United Kingdom for the purposes of section 85 of the Financial Services and Markets Act 2000 (as amended) ( FSMA ); (b) it has complied and will comply with all applicable provisions of FSMA and the regulations made thereunder in respect of anything done by it in relation to the units offered by this prospectus in, from or otherwise involving the United Kingdom; and (c) it is a person who falls within the exemptions to Section 21 of FSMA as set out in The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 ( the Order ), being either an investment professional as described under Article 19 or any body corporate (which itself has or a group undertaking has a called up share capital or net assets of not less than 500,000 (if more than 20 members) or otherwise 5 million) or an unincorporated association or partnership (with net assets of not less than 5 million) or is a trustee of a high value trust or any person acting in the capacity of director, officer or employee of such entities as defined under Article 49(2)(a) to (d) of the Order, or to whom the invitation or inducement may otherwise lawfully be communicated or cause to be communicated. The investment activity to which this document relates will only be available to and engaged in only with exempt persons referred to above. Persons who are not investment professionals and do not have professional experience in matters relating to investments or are not an exempt person as described above, should not review nor rely or act upon this document and should return this document immediately. It should be noted that this document is not a prospectus in the United Kingdom as defined in the Prospectus Regulations 2005 and has not been approved by the Financial Services Authority or any competent authority in the United Kingdom. Israel. The units offered by this prospectus have not been approved or disapproved by the Israeli Securities Authority (ISA). The units may not be offered or sold, directly or indirectly, to the public in Israel. The ISA has not issued permits, approvals or licenses in connection with the offering of the units or publishing the prospectus; nor has it authenticated the details included herein, confirmed their reliability or completeness, or rendered an opinion as to the quality of the units being offered. Any resale, directly or indirectly, to the public of the units offered by this prospectus is subject to restrictions on transferability and must be effected only in compliance with the Israeli securities laws and regulations. Table of Contents Sweden. Neither this prospectus nor the units offered hereunder have been registered with or approved by the Swedish Financial Supervisory Authority under the Swedish Financial Instruments Trading Act (1991:980) (as amended), nor will such registration or approval be sought. Accordingly, this prospectus may not be made available nor may the units offered hereunder be marketed or offered for sale in Sweden other than in circumstances which are deemed not to be an offer to the public in Sweden under the Financial Instruments Trading Act. This prospectus may not be distributed to the public in Sweden and a Swedish recipient of the prospectus may not in any way forward the prospectus to the public in Sweden. Norway. This prospectus has not been produced in accordance with the prospectus requirements laid down in the Norwegian Securities Trading Act 1997, as amended. This prospectus has not been approved or disapproved by, or registered with, either the Oslo Stock Exchange or the Norwegian Registry of Business Enterprises. This prospectus may not, either directly or indirectly be distributed to Norwegian potential investors. Denmark. This prospectus has not been prepared in the context of a public offering of securities in Denmark within the meaning of the Danish Securities Trading Act No. 171 of 17 Mark 2005, as amended from time to time, or any Executive Orders issued on the basis thereof and has not been and will not be filed with or approved by the Danish Financial Supervisory Authority or any other public authority in Denmark. The offering of units will only be made to persons pursuant to one or more of the exemptions set out in Executive Order No 306 or 28 April 2005 on Prospectuses for Securities Admitted for Listing or Trade on a Regulated Market and on the First Public Offer of Securities exceeding EUR 2,500,000 or Executive Order No 307 of 28 April 2005 on Prospectuses for the First Public Offer of Certain Securities between EUR 100,000 and EUR 2,500,000, as applicable. Other Terms We have granted the representative the right to have its designee present at all meetings of our board of directors for a period of two years from the consummation of this offering. The designee will be entitled to the same notices and communications sent by us to our directors and to attend directors meetings, but will not have voting rights. The representative has not named a designee as of the consummation of this offering. During such two-year period, we have further agreed to hold board meetings at least once every quarter and to notify the representative of any proposed acquisitions, mergers, reorganizations or other similar transactions. The representative has not named a designee as of the consummation of this offering. Although we are not under any contractual obligation to engage any of the underwriters to provide any services for us after this offering, and have no present intent to do so, any of the underwriters may, among other things, introduce us to potential target businesses or assist us in raising additional capital, as needs may arise in the future. If any of the underwriters provide services to us after this offering, we may pay such underwriter fair and reasonable fees that would be determined at that time in an arm s length negotiations. Indemnification We have agreed to indemnify the underwriters against some liabilities, including civil liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in this respect. LEGAL MATTERS The validity of the securities offered in this prospectus are being passed upon for us by Reeder Simpson, P.C., Piraeus, Greece. Ellenoff Grossman Schole LLP, New York, New York, has acted as counsel for the underwriters in this offering. Loeb Loeb LLP, as special United States counsel, has provided an opinion relating to the tax disclosure under the caption Taxation United States Federal Income Taxation. EXPERTS The financial statements included in this prospectus and in the registration statement have been audited by Weinberg Company, P.A., independent registered public accounting firm, to the extent and for the period set forth in their report appearing elsewhere in this prospectus and in the registration statement. The financial statements and the report of Weinberg Company, P.A. are included in reliance upon their report given upon the authority of Weinberg Company, P.A. as experts in auditing and accounting. Table of Contents WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the SEC a registration statement on Form F-1, which includes exhibits, schedules and amendments, under the Securities Act, with respect to this offering of our securities. Although this prospectus, which forms a part of the registration statement, contains all material information included in the registration statement, parts of the registration statement have been omitted as permitted by rules and regulations of the SEC. We refer you to the registration statement and its exhibits for further information about us, our securities and this offering. The registration statement and its exhibits, as well as our other reports filed with the SEC, can be inspected and copied at the SEC s public reference room at 100 F Street, N.E., Washington, D.C. 20549-1004. The public may obtain information about the operation of the public reference room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a web site at http://www.sec.gov which contains the Form F-1 and other reports, proxy and information statements and information regarding issuers that file electronically with the SEC. Table of Contents PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 6. Indemnification of Directors and Officers. Under the Second Amended and Restated Articles of Incorporation, our By-laws and under Section 60 of the Marshall Islands Business Corporations Act ( BCA ), we may indemnify anyone who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than an action by or in the right of the corporation) whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise. A limitation on the foregoing is the statutory proviso (also found in our By-laws) that, in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful. Further, under Section 60 of the BCA and our By-laws, the termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of no contest, or its equivalent, does not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. In addition, under Section 60 of the BCA and under our By-laws, a corporation may indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending, or completed action or suit by or in the right of the corporation to procure judgment in its favor by reason of the fact that he is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise. Such indemnification may be made against expenses (including attorneys fees) actually and reasonably incurred such person or in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation. Again, this is provided that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Further, and as provided by both our By-laws and Section 60 of the BCA, when a director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in the foregoing instances, or in the defense of a related claim, issue or matter, he will be indemnified against expenses (including attorneys fees) actually and reasonably incurred by him in connection with such matter. Likewise, pursuant to our By-laws and Section 60 of the BCA, expenses (our By-laws specifically includes attorneys fees in expenses) incurred in defending a civil or criminal action, suit or proceeding by an officer or director may be paid in advance of the final disposition of the action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it is ultimately determined that he is not entitled to indemnification. The By-laws further provide that with respect to other employees, such expenses may be paid on the terms and conditions, if any, as the Board may deem appropriate. Both Section 60 of the BCA and our By-laws further provided that the foregoing indemnification and advancement of expenses are not exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his official capacity and/or as to action in another capacity while holding office. II-1 Table of Contents Under both Section 60 of the BCA and our By-laws, we also have the power to purchase and maintain insurance on behalf of any person who is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director or officer against any liability asserted against him and incurred by him in such capacity regardless of whether the corporation would have the power to indemnify him against such liability under the foregoing. Under Section 60 of the BCA (and as provided in our By-laws), the indemnification and advancement of expenses provided by, or granted under the foregoing continue with regard to a person who has ceased to be a director, officer, employee or agent and inure to the benefit of his heirs, executors and administrators unless otherwise provided when authorized or ratified. Additionally, under Section 60 of the BCA and our Bylaws, the indemnification and advancement of expenses provided by, or granted under the foregoing continue with regard to a person who has ceased to be a director, officer, employee or agent and inure to the benefit of his heirs, executors and administrators unless otherwise provided when authorized or ratified. In addition to the above, our By-laws provide that references to us includes constituent corporations, and defines other enterprises to include employee benefit plans, fines to include excise taxes imposed on a person with respect to an employee benefit plan, and further defines the term serving at the request of the corporation. Our Second Amended and Restated Articles of Incorporation set out a much abbreviated version of the foregoing and make reference to the provisions of the By-laws. Such limitation of liability and indemnification does not affect the availability of equitable remedies. In addition, we have been advised that in the opinion of the SEC, indemnification for liabilities arising under the Securities Act is against public policy as expressed in the Securities Act and is therefore unenforceable. Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement, we have agreed to indemnify the Underwriters and the Underwriters have agreed to indemnify us against certain civil liabilities that may be incurred in connection with this offering, including certain liabilities under the Securities Act. Item 7. Recent Sales of Unregistered Securities. (a) During the past three years, we sold the following shares of common stock without registration under the Securities Act: Number of Shareholders Shares(1) Georgios Koutsolioutsos 2,100,000 Panagiotis Zafet 1,250,000 Simon Zafet 1,250,000 Alexios Komninos 275,000 Ioannis Tsigkounakis 125,000 (1) All such numbers give retroactive effect to the surrender for cancellation of an aggregate 1,604,448 shares of common stock by our shareholders on February 20, 2007, as adjusted for a one and one-half-for-one stock split in the form of a stock dividend on July 6, 2007, and a one and one-third-for-one stock split in the form of a stock dividend on August 6, 2007. Such shares were issued on November 27, 2006 in connection with our organization pursuant to the exemption from registration contained in Section 4(2) as they were sold to sophisticated, wealthy individuals and such shares were issued to these individuals and entities above at an aggregate offering price of $25,000, or $0.005 per share, giving effect to the stock dividends. No underwriting discounts or commissions were paid with respect to such sales. All of our executive officers also entered into a binding subscription agreement to purchase 14,961,111 warrants prior to the consummation of our initial public offering in a private placement pursuant to, and in accordance with, Regulation S under the Securities Act of 1933, at $0.90 per warrant. No underwriting discounts or commissions will be payable with respect to the insider warrants sold in the private placement. II-2 Table of Contents Exhibit No. Description 10 .27 Right of First Refusal and Corporate Opportunities Agreement by and between RBB Shipping GmbH and the Registrant* 10 .28 Right of First Refusal and Corporate Opportunities Agreement by and between Equity Shipping Ltd. and the Registrant* 14 Code of Business Conduct and Ethics* 23 .1 Consent of Weinberg Company, P.A. 23 .2 Consent of Reeder Simpson P.C., Marshall Islands counsel to the Registrant (included in Exhibit 5.1)* 23 .3 Consent of Loeb Loeb LLP, Special Counsel to the Registrant (included in Exhibits 5.2* and 8.1) 24 Power of Attorney (included on the signature page).* * Previously filed Item 9. Undertakings. (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: i. To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; ii. To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the Calculation of Registration Fee table in the effective registration statement. iii. To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) If the registrant is a foreign private issuer, to file a post-effective amendment to the registration statement to include any financial statements required by Item 8.A. of Form 20-F at the start of any delayed offering or throughout a continuous offering. Financial statements and information otherwise required by Section 10(a)(3) of the Act need not be furnished, provided that the registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (a)(4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements. Notwithstanding the foregoing, with respect to registration statements on Form F-3, a post-effective amendment need not be filed to include financial statements and information required by Section 10(a)(3) of the Act or Rule 3-19 of this chapter if such financial statements and information are contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Form F-3. II-4 Table of Contents (5) That for the purpose of determining any liability under the Securities Act of 1933 in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: (i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; (ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; (iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and (iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser (b) The undersigned hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (d) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 Table of Contents SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in New York City, New York, United States of America on September 24, 2007. SEANERGY MARITIME CORP. By: /s/ Panagiotis Zafet Panagiotis Zafet Chief Executive Officer and Co-Chairman of the Board of Directors (principal executive officer) Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities held on the dates indicated. Signature Title Date /s/ Panagiotis Zafet Panagiotis Zafet Chief Executive Officer and Co-Chairman of the Board of Directors (principal executive officer) September 24, 2007 * Alexis Komninos Chief Financial Officer, Treasurer and Director (principal financial and accounting officer) September 24, 2007 * Simon Zafet Chief Operating Officer and Director September 24, 2007 * Georgios Koutsolioutsos President and Co-Chairman of the Board of Directors September 24, 2007 * Ioannis Tsigkounakis Secretary and Director September 24, 2007 * George Hamawi Director September 24, 2007 * Roland Beberniss Director September 24, 2007 * Elias M. Culucundis Director September 24, 2007 /s/ Panagiotis Zafet Name: Panagiotis Zafet Title: Attorney-in-fact II-6 Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, SEPTEMBER 24, 2007 PRELIMINARY PROSPECTUS $200,000,000 Seanergy Maritime Corp. 20,000,000 units Seanergy Maritime Corp. is a newly organized Business Combination Companytm, or BCCtm. A BCCtm is a blank check company formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition or other similar business combination, one or more businesses or assets in the maritime shipping industry, but will not be limited to pursuing acquisition opportunities only within that industry. We do not have any specific merger, capital stock exchange, asset acquisition or other similar business combination under consideration and have not contacted any prospective target business or had any discussion, formal or otherwise, with respect to such a transaction. This is an initial public offering of our units at an offering price of $10.00 per unit. Each unit consists of: one share of our common stock; and one warrant. Each warrant entitles the holder to purchase one share of our common stock at a price of $6.50. Each warrant will become exercisable on the later of our completion of a business combination or , 2008 [the first anniversary of the date of this prospectus], and will expire on , 2011 [the fourth anniversary of the date of this prospectus], or earlier upon redemption. For United States federal income tax purposes, we have made an election to be classified as a partnership, and not as an association taxable as a corporation. We plan to make quarterly distributions in US dollars of interest income earned on the trust account on a pro rata basis to our public shareholders until the earlier of the consummation of a business combination or our liquidation. There is presently no public market for our units, common stock or warrants. We intend to apply to have the units listed on the American Stock Exchange under the symbol SRGU on or promptly after the consummation of this offering. Once the securities comprising the units begin separate trading, we expect that the common stock and warrants will be traded on the American Stock Exchange under the symbols SRG and SRGW , respectively. Investing in our securities involves a high degree of risk. See Risk Factors beginning on page 16 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Underwriting Public Discount and Proceeds, Before Offering Price Commissions(1)(2) Expenses, to us Per unit $ 10.00 $ 0.375 $ 9.625 Total $ 200,000,000 $ 7,500,000 $ 192,500,000 (1) Does not include a non-accountable expense allowance in the amount of 1.0% of the gross proceeds, or $0.10 per unit ($2,000,000 in total), payable to Maxim Group LLC. (2) Does not include deferred underwriting compensation in the amount of 2.25% of the gross proceeds, or $0.225 per unit (up to $4,500,000), payable to Maxim Group LLC only upon consummation of a business combination and then only with respect to those units as to which the component shares have not been redeemed. The deferred underwriting compensation will be equal to 3.75% of any of the gross proceeds from the sale of units acquired pursuant to the exercise of the underwriters over-allotment option, or $0.375 per unit, for total deferred underwriting compensation of up to $5,625,000 if the over-allotment option is exercised in full. Of the proceeds we receive from this offering and the private placement, $200,000,000 will be deposited into a trust account at Deutsche Bank Trust Company Americas maintained by Continental Stock Transfer Trust Company acting as trustee. This amount includes up to $4,500,000 ($0.375 per unit) which will be paid to Maxim Group LLC if a business combination is consummated, but which will be forfeited by Maxim Group LLC if a business combination is not consummated. As a result, our public shareholders will receive, subject to any valid claims by our creditors that are not covered by amounts in the trust account or indemnities provided by our executive officers, $10.00 per share of common stock, plus any interest earned on the trust account and not previously distributed to shareholders (net of taxes payable and up to $3,000,000 held outside of trust to fund our working capital requirements), in the event of our dissolution and liquidation, if we fail to consummate a business combination. We are offering the units for sale on a firm-commitment basis. Maxim Group LLC, acting as representative of the underwriters, expects to deliver our securities to investors in the offering on or about , 2007. Maxim Group LLC The date of this prospectus is , Table of Contents Until , 2007, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. No dealer, salesperson or any other person is authorized to give any information or make any representations in connection with this offering other than those contained in this prospectus and, if given or made, the information or representations must not be relied upon as having been authorized by us. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the securities offered by this prospectus, or an offer to sell or a solicitation of an offer to buy any securities by anyone in any jurisdiction in which the offer or solicitation is not authorized or is unlawful. TABLE OF CONTENTS Page Enforceability of Civil Liabilities ii Prospectus Summary 1
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. Before deciding whether to buy shares of our common stock, you should read this summary and the more detailed information in this prospectus, including our financial statements and related notes, and especially the discussion of the risks of investing in our common stock under the heading
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+PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. Unless otherwise stated in this prospectus: references to we, us or our company refer to Aldabra 2 Acquisition Corp.; initial stockholders or existing stockholders refers to all of our stockholders prior to this offering, including all of our officers and directors; initial shares refers to the 8,625,000 shares of common stock that our initial stockholders originally purchased from us for $25,000 in February 2007; insider warrants refers to the 3,000,000 warrants we are selling privately to Nathan Leight and Jason Weiss upon consummation of this offering; the term public stockholders means the holders of the shares of common stock which are being sold as part of the units in this public offering (whether they are purchased in the public offering or in the aftermarket), including any of our existing stockholders to the extent that they purchase such shares; the information in this prospectus assumes that the representative of the underwriters will not exercise its over-allotment option; and gives retroactive effect to a stock dividend of 0.5 shares of common stock for each outstanding share of common stock on June 12, 2007. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We have applied to have our securities listed on the American Stock Exchange, thereby providing a state blue sky exemption in every state. However, notwithstanding the foregoing, we are not making an offer of these securities in any jurisdiction where the offer is not permitted. We are a blank check company organized under the laws of the State of Delaware on February 1, 2007. We were formed with the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. To date, our efforts have been limited to organizational activities. Our efforts in identifying a prospective target business will not be limited to a particular industry, although we intend to focus our efforts on seeking a business combination with a portfolio company currently held by a private equity firm specializing in either leveraged buyouts or venture capital. We do not have any specific business combination under consideration. Our officers and directors have neither individually identified or considered a target business nor have they had any discussions regarding possible target businesses amongst themselves or with our underwriters or other advisors. We have not (nor has anyone on our behalf) contacted any prospective target business or had any discussions, formal or otherwise, with respect to a business combination transaction. We have not (nor have any of our agents or affiliates) been approached by any candidates (or representative of any candidates) with respect to a possible acquisition transaction with our company. Additionally, we have not, nor has anyone on our behalf, taken any measure, directly or indirectly, to identify or locate any suitable acquisition candidate, nor have we engaged or retained any agent or other representative to identify or locate any such acquisition candidate. We will have until , 2009 [twenty four months from the date of this prospectus] to consummate a business combination. If we are unable to consummate a business combination by such date, our corporate existence will cease by operation of corporate law (except for the purposes of winding up our affairs and liquidating). Our initial business combination must be with a target business or businesses whose collective fair market value is at least equal to 80% of our net assets (all of our assets, including the funds held in the trust account, less our liabilities) at the time of such acquisition, although this may entail simultaneous acquisitions of several operating businesses. The fair market value of the target will be determined by our board of directors based upon one or more standards generally accepted by the financial Table of Contents community (which may include actual and potential sales, earnings, cash flow and/or book value). If our board is not able to independently determine that the target business has a sufficient fair market value, we will obtain an opinion from an unaffiliated, independent investment banking firm with respect to the satisfaction of such criteria. We anticipate structuring a business combination to acquire 100% of the equity interests or assets of the target business. We may, however, structure a business combination to acquire less than 100% of such interests or assets of the target business but will not acquire less than a controlling interest (which would be at least 50% of the voting securities of the target business). If we acquire only a controlling interest in a target business or businesses, the portion of such business that we acquire must have a fair market value equal to at least 80% of our net assets. If we determine to simultaneously acquire several businesses and such businesses are owned by different sellers, we will need for each of such sellers to agree that our purchase of its business is contingent on the simultaneous closings of the other acquisitions, which may make it more difficult for us, and delay our ability, to complete the business combination. With multiple acquisitions, we could also face additional risks, including additional burdens and costs with respect to possible multiple negotiations and due diligence investigations (if there are multiple sellers) and the additional risks associated with the subsequent assimilation of the operations and services or products of the acquired companies in a single operating business. The target business or businesses that we acquire may have a collective fair market value substantially in excess of 80% of our net assets. In order to consummate such a business combination, we may issue a significant amount of our debt or equity securities to the sellers of such business and/or seek to raise additional funds through a private offering of debt or equity securities. There are no limitations on our ability to incur debt or issue securities in order to consummate a business combination. If we issue securities in order to consummate a business combination, our stockholders could end up owning a minority of the combined company as there is no requirement that our stockholders own a certain percentage of our company after our business combination. Since we have no specific business combination under consideration, we have not entered into any such arrangement to issue our debt or equity securities and have no current intention of doing so. Our executive offices are located at c/o Terrapin Partners LLC, 540 Madison Avenue, 17th Floor, New York, New York 10022 and our telephone number is (212) 710-4100. Table of Contents THE OFFERING Securities offered 30,000,000 units, at $10.00 per unit, each unit consisting of: one share of common stock; and one warrant. The units will begin trading on or promptly after the date of this prospectus. Each of the common stock and warrants may trade separately on the 90th day after the date of this prospectus unless Lazard Capital Markets determines that an earlier date is acceptable. In no event will Lazard Capital Markets allow separate trading of the common stock and warrants until we file an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file a Current Report on Form 8-K with the Securities and Exchange Commission, including an audited balance sheet, promptly upon the consummation of this offering, which is anticipated to take place three business days from the date the units commence trading. The audited balance sheet will reflect our receipt of the proceeds from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Form 8-K. If the over-allotment option is exercised after our initial filing of a Form 8-K, we will file an amendment to the Form 8-K to provide updated financial information to reflect the exercise and consummation of the over-allotment option. We will also include in this Form 8-K, or amendment thereto, or in a subsequent Form 8-K, information indicating if Lazard Capital Markets has allowed separate trading of the common stock and warrants prior to the 90th day after the date of this prospectus. The units will continue to trade along with the common stock and warrants after the units are separated. Holders will need to have their brokers contact our transfer agent in order to separate the units into common stock and warrants. Securities to be sold to insiders 3,000,000 insider warrants at $1.00 per warrant (for a total purchase price of $3,000,000) will be sold to Nathan Leight and Jason Weiss pursuant to letter agreements among us, Lazard Capital Markets and such purchasers. These purchases will take place on a private placement basis simultaneously with the consummation of this offering. The insider warrants will be identical to the warrants underlying the units being offered by this prospectus except that the insider warrants (i) will be exercisable on a cashless basis, (ii) may be exercised whether or not a registration statement relating to the common stock issuable upon exercise of the warrants is effective and current and (iii) will not be redeemable by us so long as they are still held by the purchasers or their affiliates. The purchasers have agreed, pursuant to the agreements, that the insider warrants will not be sold or transferred by them (except to employees of Terrapin Partners LLC, an affiliate of theirs, or to our directors at the same cost per warrant originally paid by them) until the later of , 2008 [one year from the date of this prospectus] and 60 days after the consummation of our business combination. Lazard Capital Markets has no intention of waiving these Table of Contents restrictions. In the event of a liquidation prior to our initial business combination, the insider warrants will expire worthless. Common stock: Number outstanding before this offering 8,625,000 shares1 Number to be outstanding after this offering 37,500,000 shares2 Warrants: Number outstanding before this offering 0 warrants Number to be sold to insiders 3,000,000 warrants Number to be outstanding after this offering and sale to insiders 33,000,000 warrants Exercisability Each warrant is exercisable for one share of common stock. Exercise price $7.50 Exercise period The warrants will become exercisable on the later of: the completion of a business combination with a target business, and , 2008 [one year from the date of this prospectus]. However, the warrants held by public stockholders will only be exercisable if a registration statement relating to the common stock issuable upon exercise of the warrants is effective and current. The warrants will expire at 5:00 p.m., New York City time, on , 2011 [four years from the date of this prospectus] or earlier upon redemption. Redemption We may redeem the outstanding warrants (excluding any insider warrants held by the initial purchasers or their affiliates) without the prior consent of the underwriters: in whole and not in part, at a price of $.01 per warrant at any time while the warrants are exercisable, upon a minimum of 30 days prior written notice of redemption, and if, and only if, the last sales price of our common stock equals or exceeds $14.25 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. 1 This number includes an aggregate of 1,125,000 shares of common stock that are subject to forfeiture by our initial stockholders if the over-allotment option is not exercised by the underwriters. 2 Assumes the over-allotment option has not been exercised and an aggregate of 1,125,000 shares of common stock have been forfeited by our initial stockholders. Table of Contents If the foregoing conditions are satisfied and we issue a notice of redemption, each warrant holder can exercise his, her or its warrant prior to the scheduled redemption date. However, the price of the common stock may fall below the $14.25 trigger price as well as the $7.50 warrant exercise price after the redemption notice is issued. The redemption criteria for our warrants have been established at a price which is intended to provide warrant holders a reasonable premium to the initial exercise price and provide a sufficient differential between the then-prevailing common stock price and the warrant exercise price so that if the stock price declines as a result of our redemption call, the redemption will not cause the stock price to drop below the exercise price of the warrants. Proposed American Stock Exchange symbols for our: Units AII.U Common stock AII Warrants AII.WS Offering proceeds to be held in trust $287,060,000 of the net proceeds of this offering plus the $3,000,000 we will receive from the sale of the insider warrants (for an aggregate of $290,060,000 or approximately $9.67 per unit sold to the public in this offering) will be placed in a trust account at Wells Fargo, maintained by Continental Stock Transfer Trust Company, acting as trustee pursuant to an agreement to be signed on the date of this prospectus. This amount includes $9,000,000 of underwriting discounts and commissions payable to the underwriters in the offering that is being deferred. The underwriters have agreed that such amount will not be paid unless and until we consummate a business combination. Upon the consummation of our initial business combination, the deferred underwriting discounts and commissions shall be released to the underwriters out of the gross proceeds of this offering held in the trust account. Except as set forth below, these proceeds will not be released until the earlier of the completion of a business combination and our liquidation. Therefore, unless and until a business combination is consummated, the proceeds held in the trust account will not be available for our use for any expenses related to this offering or expenses which we may incur related to the investigation and selection of a target business and the negotiation of an agreement to acquire a target business. Notwithstanding the foregoing, there can be released to us from the trust account interest earned on the funds in the trust account (i) up to an aggregate of $3,100,000 to fund expenses related to investigating and selecting a target business and our other working capital requirements and (ii) any amounts we may need to pay our income or other tax obligations. With these exceptions, expenses incurred by us may be paid prior to a business combination only from the net proceeds of this offering not held in the trust account (initially $200,000). Table of Contents None of the warrants may be exercised until after the consummation of a business combination and, thus, after the proceeds of the trust account have been disbursed. Accordingly, the warrant exercise price will be paid directly to us and not placed in the trust account. Anticipated expenses and funding sources We believe that, upon consummation of this offering, the $200,000 of net proceeds not held in the trust account, plus the up to $3,100,000 of interest earned on the trust account balance that may be released to us as well as amounts necessary to pay our tax obligations, will be sufficient to allow us to operate for the next 24 months, assuming that a business combination is not consummated during that time. Over this time period, we will be using these funds for identifying and evaluating prospective acquisition candidates, performing business due diligence on prospective target businesses, traveling to and from the offices, plants or similar locations of prospective target businesses or their representatives or owners, reviewing corporate documents and material agreements of prospective target businesses, selecting the target business to acquire and structuring, negotiating and consummating the business combination. We could use a portion of the funds not being placed in trust to pay commitment fees for financing, fees to consultants to assist us with our search for a target business or as a down payment or to fund a no-shop provision (a provision in letters of intent designed to keep target businesses from shopping around for transactions with other companies on terms more favorable to such target businesses) with respect to a particular proposed business combination, although we do not have any current intention to do so. If we entered into a letter of intent where we paid for the right to receive exclusivity from a target business, the amount that would be used as a down payment or to fund a no-shop provision would be determined based on the terms of the specific business combination and the amount of our available funds at the time. Our forfeiture of such funds (whether as a result of our breach or otherwise) could result in our not having sufficient funds to continue searching for, or conducting due diligence with respect to, potential target businesses. We anticipate that we will incur approximately: $1,000,000 of expenses for the search for target businesses and for the legal, accounting and other third-party expenses attendant to the due diligence investigations, structuring and negotiating of a business combination; $250,000 of expenses for the due diligence and investigation of a target business by our officers, directors and existing stockholders; $200,000 of expenses in legal and accounting fees relating to our SEC reporting obligations; Table of Contents $180,000 for the administrative fee payable to Terrapin Partners LLC ($7,500 per month for twenty four months); and $1,670,000 for general working capital that will be used for miscellaneous expenses and reserves, including approximately $120,000 for director and officer liability insurance premiums. If we are unable to complete a business combination within 24 months from the date of this prospectus and are forced to liquidate, we will pay the costs of liquidation from our remaining assets outside of the trust account. If such funds are insufficient, Nathan Leight and Jason Weiss have agreed to advance us the funds necessary to complete such liquidation (currently anticipated to be no more than approximately $15,000) and have agreed not to seek repayment for such expenses. Limited payments to insiders There will be no fees or other cash payments paid to our existing stockholders, officers, directors or their affiliates prior to, or for any services they render in order to effectuate, the consummation of a business combination (regardless of the type of transaction that it is) other than: repayment of an aggregate of $125,000 non-interest bearing loans made by Nathan Leight, our chairman of the board, and Jason Weiss, our chief executive officer; payment of $7,500 per month to Terrapin Partners LLC, an affiliate of Nathan Leight and Jason Weiss, for certain administrative, technology and secretarial services, as well as the use of certain limited office space, including a conference room, in New York City; and reimbursement of out-of-pocket expenses incurred by them in connection with certain activities on our behalf, such as identifying and investigating possible business targets and business combinations. Certificate of Incorporation As discussed below, there are specific provisions in our amended and restated certificate of incorporation that may not be amended prior to our consummation of a business combination, including our requirements to seek stockholder approval of such a business combination and to allow our stockholders to seek conversion of their shares if they do not approve of such a business combination. While we have been advised that such provisions limiting our ability to amend our certificate of incorporation may not be enforceable under Delaware law, we view these provisions, which are contained in Article Seventh of our amended and restated certificate of incorporation, as obligations to our stockholders and will not take any action to amend or waive these provisions. Our amended and restated certificate of incorporation also provides that we will continue in existence only until , 2009 [twenty four months from the date of this prospectus]. If we have not completed a business combination by such date, our corporate existence will cease except for the purposes of winding up our affairs and liquidating, pursuant to Section 278 of the Delaware General Corporation Law. This has the same effect as if our board Table of Contents of directors and stockholders had formally voted to approve our dissolution pursuant to Section 275 of the Delaware General Corporation Law. Accordingly, limiting our corporate existence to a specified date as permitted by Section 102(b)(5) of the Delaware General Corporation Law removes the necessity to comply with the formal procedures set forth in Section 275 (which would have required our board of directors and stockholders to formally vote to approve our dissolution and liquidation and to have filed a certificate of dissolution with the Delaware Secretary of State). In connection with any proposed business combination we submit to our stockholders for approval, we will also submit to stockholders a proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence, thereby removing this limitation on our corporate life. We will only consummate a business combination if stockholders vote both in favor of such business combination and our amendment to provide for our perpetual existence. Accordingly, if stockholders approved a proposed business combination as set forth below but did not approve the proposal to provide for our perpetual existence, we would not be able to consummate such business combination. The approval of the proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence would require the affirmative vote of a majority of our outstanding shares of common stock. We view this provision terminating our corporate life by , 2009 [twenty four months from the date of this prospectus] as an obligation to our stockholders and will not take any action to amend or waive this provision to allow us to survive for a longer period of time except in connection with the consummation of a business combination. Stockholders must approve business combination Pursuant to our amended and restated certificate of incorporation, we will seek stockholder approval before we effect any business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable state law. We view this requirement as an obligation to our stockholders and will not take any action to amend or waive this provision in our amended and restated certificate of incorporation. In connection with the vote required for any business combination, all of our existing stockholders, including all of our officers and directors, have agreed to vote the shares of common stock owned by them immediately before this offering in accordance with the majority of the shares of common stock voted by the public stockholders. We will proceed with a business combination only if (i) a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and (ii) public stockholders owning less than 40% of the shares sold in this offering exercise their conversion rights described below. Accordingly, it is our understanding and intention in every case to structure and consummate a business combination in which approximately 39.99% of the public stockholders may exercise their conversion rights and the business combination will still go forward. Table of Contents Conversion rights for stockholders voting to reject a business combination Pursuant to our amended and restated certificate of incorporation, public stockholders voting against a business combination will be entitled to convert their stock into a pro rata share of the trust account (initially approximately $9.67 per share, or approximately $9.66 per share if the over-allotment option is exercised), plus any interest earned on their portion of the trust account but less any interest that has been released to us as described above to fund our working capital requirements and pay any of our tax obligations, if the business combination is approved and completed. We view this requirement as an obligation to our stockholders and will not take any action to amend or waive this provision in our amended and restated certificate of incorporation. Our existing stockholders will not have such conversion rights with respect to any shares of common stock owned by them, directly or indirectly, whether included in or underlying their initial shares or purchased by them in this offering or in the aftermarket. Public stockholders who convert their stock into their share of the trust account will continue to have the right to exercise any warrants they may hold. An eligible stockholder may request conversion at any time after the mailing to our stockholders of the proxy statement and prior to the vote taken with respect to a proposed business combination at a meeting held for that purpose, but the request will not be granted unless the stockholder votes against the business combination and the business combination is approved and completed. Additionally, we may require public stockholders, whether they are a record holder or hold their shares in street name, to either tender their certificates to our transfer agent at any time through the vote on the business combination or to deliver their shares to the transfer agent electronically using Depository Trust Company s DWAC (Deposit/Withdrawal At Custodian) System, at the holder s option. There is a nominal cost associated with this tendering process and the act of certificating the shares or delivering them through the DWAC system. The transfer agent will typically charge the tendering broker $35 and it would be up to the broker whether or not to pass this cost on to the converting holder. The proxy solicitation materials that we will furnish to stockholders in connection with the vote for any proposed business combination will indicate whether we are requiring stockholders to satisfy such certification and delivery requirements. Accordingly, a stockholder would have from the time we send out our proxy statement through the vote on the business combination to deliver his shares if he wishes to seek to exercise his conversion rights. This time period varies depending on the specific facts of each transaction. However, as the delivery process can be accomplished by the stockholder, whether or not he is a record holder or his shares are held in street name, in a matter of hours by simply contacting the transfer agent or his broker and requesting delivery of his shares through the DWAC System, we believe this time period is sufficient for an average investor. Table of Contents Any request for conversion, once made, may be withdrawn at any time up to the date of the meeting. Furthermore, if a stockholder delivered his certificate for conversion and subsequently decided prior to the meeting not to elect conversion, he may simply request that the transfer agent return the certificate (physically or electronically). If a vote on our initial business combination is held and the business combination is not approved, we may continue to try to consummate a business combination with a different target until twenty four months from the date of this prospectus. If the initial business combination is not approved or completed for any reason, then public stockholders voting against our initial business combination who exercised their conversion rights would not be entitled to convert their shares of common stock into a pro rata share of the aggregate amount then on deposit in the trust account. In such case, if we have required public stockholders to deliver their certificates prior to the meeting, we will promptly return such certificates to the public stockholder. Investors in this offering who do not sell, or who receive less than an aggregate of approximately $0.33 of net sales proceeds for, the warrants included in the units, and persons who purchase common stock in the aftermarket at a price in excess of $9.67 per share, may have a disincentive to exercise their conversion rights because the amount they would receive upon conversion could be less than their original or adjusted purchase price. Because converting stockholders will receive their proportionate share of the deferred underwriting discounts and commissions and the underwriters will be paid the full amount of their deferred underwriting compensation at the time of the consummation of our initial business combination, we (and, therefore, the non-converting stockholders) will bear the financial effect of such payments to both the converting stockholders and the underwriters. Liquidation if no business combination As described above, if we have not consummated a business combination by , 2009 [twenty four months from the date of this prospectus], our corporate existence will cease by operation of law and we will promptly distribute only to our public stockholders (including our initial stockholders to the extent they have purchased shares in this offering or in the aftermarket) the amount in our trust account (including any accrued interest then remaining in the trust account) plus any remaining net assets. We cannot assure you that the per-share distribution from the trust account, if we liquidate, will not be less than $9.67, plus interest then held in the trust account, for the following reasons: Prior to liquidation, pursuant to Section 281 of the Delaware General Corporation Law, we will adopt a plan that will provide for our payment, based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against us within the subsequent 10 years. Accordingly, we would be required to provide for any Table of Contents creditors known to us at that time as well as provide for any claims that we believe could potentially be brought against us within the subsequent 10 years prior to distributing the funds held in the trust to our public stockholders. We cannot assure you that we will properly assess all claims that may be potentially brought against us. As such, our stockholders could potentially be liable for any claims of creditors to the extent of distributions received by them (but no more). While we will seek to have all vendors and service providers (which would include any third parties we engaged to assist us in any way in connection with our search for a target business) and prospective target businesses execute agreements with us waiving any right, title, interest or claim of any kind they may have in or to any monies held in the trust account, there is no guarantee that they will execute such agreements. Nor is there any guarantee that, even if such entities execute such agreements with us, they will not seek recourse against the trust account or that a court would not conclude that such agreements are not legally enforceable. Nathan Leight and Jason Weiss have agreed that they will be personally liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us. However, we cannot assure you that they will be able to satisfy those obligations, if they are required to do so. Furthermore, Messrs. Leight and Weiss will not have any personal liability as to any claimed amounts owed to a third party who executed a waiver (including a prospective target business). Additionally, in the case of a prospective target business that did not execute a waiver, such liability will be only in an amount necessary to ensure that public stockholders receive no less than $10.00 per share upon liquidation. We anticipate the distribution of the funds in the trust account to our public stockholders will occur by , 2009 [10 business days from the date our corporate existence ceases], subject to our obligations under Delaware law to provide for claims of creditors. Our existing stockholders have waived their rights to participate in any liquidation distribution with respect to their initial shares. We will pay the costs of liquidation from our remaining assets outside of the trust account. If such funds are insufficient, Nathan Leight and Jason Weiss have agreed to advance us the funds necessary to complete such liquidation (currently anticipated to be no more than approximately $15,000) and have agreed not to seek repayment for such expenses. Escrow of existing stockholders shares On the date of this prospectus, all of our existing stockholders, including all of our officers and directors, will place their initial shares into an escrow account maintained by Continental Stock Transfer Trust Company, acting as escrow agent. Subject to certain limited exceptions (such as transfers (i) to an entity s members upon its liquidation, (ii) to relatives and trusts for estate planning Table of Contents purposes or (iii) by private sales made at or prior to the consummation of a business combination at prices no greater than the price at which the shares were originally purchased, in each case where the transferee agrees to the terms of the escrow agreement), these shares will not be transferable during the escrow period and will not be released from escrow until one year after the consummation of our initial business combination or earlier if, following a business combination, (i) the last sales price of our common stock equals or exceeds $18.00 per share for any 20 trading days within any 30-trading day period or (ii) we consummate a subsequent liquidation, merger, stock exchange or other similar transaction which results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property. RISKS In making your decision on whether to invest in our securities, you should take into account not only the backgrounds of our management team, but also the special risks we face as a blank check company, as well as the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, and, therefore, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. You should carefully consider these and the other risks set forth in the section entitled Risk Factors beginning on page 14 of this prospectus. Table of Contents
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all the information you should consider before buying our common stock. You should read the following summary together with the more detailed information appearing in this prospectus, including our consolidated financial statements and related notes, and our risk factors beginning on page 7, before deciding whether to purchase shares of our common stock. Unless the context otherwise requires, we use the terms Data Domain, the company, we, us and our in this prospectus to refer to Data Domain, Inc. and its subsidiaries on a consolidated basis. DATA DOMAIN Overview Data Domain is a leading provider of deduplication storage appliances for disk-based backup and network-based disaster recovery. Our appliances reduce the storage of redundant copies of data and associated storage costs within enterprises and are an alternative to tape-based protection storage systems. Our storage solutions address protection storage requirements with low operating costs, ease of use, high performance, reliability and compatibility with leading enterprise backup software applications. We sell our appliances through a network of channel partners and our direct sales force. We have over 100 channel partners and our appliances have been purchased by approximately 1,200 customers worldwide. Our disk-based appliances combine our Global Compression technology with industry standard components to enable dramatic reductions in the amount of stored backup data. Global Compression technology incorporates a process called data deduplication, which avoids storing redundant copies of data while writing data to disk. When used to deduplicate a single data set over 20 weeks of regular backup storage events, our appliances are designed to achieve a range of data compression of approximately 10x to 30x. The actual range of data compression obtained by our customers depends on the frequency of full backup events, the length of time backup data is retained and the redundancy of the backup data. Through deduplication, our appliances enable enterprises to cost-effectively utilize WAN vaulting, a process by which enterprises replicate backup data offsite using a wide area network, or WAN. Our appliances also provide advanced levels of data protection that are designed to ensure that backup data is accurate and recoverable. Industry Background The amount of data stored by enterprises is growing rapidly. As data is created, shared and stored, extra copies are made by multiple users across an enterprise s network and in multiple storage systems, requiring dramatically greater storage capacity and resulting in significantly increased costs. This problem is particularly pronounced for backup and disaster recovery storage, which is also referred to as protection storage, because backup systems routinely make complete, redundant copies of largely identical files even if only minimal changes have occurred since the last backup event. Even enterprises using leading backup software experience this problem. With enterprises typically performing backup events on a regular basis, redundant data is multiplied, further increasing storage requirements and associated costs. Backup data has traditionally been stored on tape-based systems because of their relatively low upfront cost. Tape-based systems store all data copied in a backup event and therefore contribute to the problem of increasing data redundancy. The operation of tape-based systems also suffers from numerous limitations, including high operating costs, cumbersome handling, poor performance and unreliability. Disk-based systems have higher performance than tape-based systems but traditionally have not been cost-competitive for backup storage. We believe that our Global Compression technology, combined with recent developments in hard disk drive UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents technology and industry standard components, provide us with a significant opportunity to displace tape-based systems and other less efficient disk-based solutions with deduplication storage appliances that dramatically reduce the amount of redundant data stored in the backup process. Deduplication storage appliances allow enterprises to make more efficient use of their storage capacity and enable disk-based systems to become a cost-effective alternative for protection storage. The 451 Group, an industry research firm, has stated in a June 2007 report that it expects the market for data deduplication to reach $260 million in 2007 and that, at historical growth rates, the market for data deduplication is set to be $1 billion by 2009. The Data Domain Deduplication Storage Solution Our deduplication storage appliances for disk-based backup and network-based disaster recovery provide an alternative to tape-based protection storage systems. Our appliances provide customers with the following benefits: Cost-Effectiveness Our disk-based appliances enable enterprises to avoid many of the operating costs associated with the labor-intensive handling and transportation processes required by tape-based systems. In addition, because our appliances enable enterprises to dramatically reduce the storage capacity required for backup data, our appliances can be deployed at an upfront cost comparable to that of tape-based systems; Ease of Use Our appliances are designed to integrate seamlessly with our customers existing storage infrastructures and are easy to install and operate. Our appliances also enable customers to avoid many of the manual collection, transportation and other physical processes associated with tape-based systems; High Performance Our appliances utilize hard disk drives to provide our customers with faster access to data. In addition, through our Global Compression technology and data replication software, data sets can be dramatically compressed, thereby enabling customers to utilize WAN vaulting cost-effectively; Reliability Our appliances provide advanced levels of data protection by incorporating technology that performs continuous verification to help ensure that backup data is accurate and recoverable; and Compatibility with Existing Backup Software Our appliances are compatible with the leading enterprise backup software available in the market today, including products offered by CommVault Systems, Inc., EMC Corporation, International Business Machines Corporation and Symantec Corporation. Our Strategy Our goal is to be the leader in the deduplication storage market. Key elements of our strategy include: Continue to focus our sales efforts in the protection storage market, which we believe represents the greatest initial opportunity for the sale of our appliances; Grow our network of channel partners and our direct sales organization to improve penetration of the protection storage market in the United States and to continue to grow sales internationally; Continue to invest in research and development to enhance the capacity, performance and breadth of application support of our appliances; Broaden our relationships with existing technology partners and establish new partnerships with additional technology partners to enhance the interoperability of our appliances with products from multiple vendors and to extend our marketing reach; and Deploy our systems in other sectors of the storage market, beyond protection storage, which we believe will benefit from deduplication storage systems. AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents Corporate Information We were incorporated in Delaware in October 2001. Our corporate headquarters is located at 2300 Central Expressway, Santa Clara, California 95050. Our telephone number is (408) 980-4800. Our website address is www.datadomain.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website to be part of this prospectus or in deciding whether to purchase shares of our common stock. Data Domain, Global Compression and other trademarks of Data Domain appearing in this prospectus are the property of Data Domain. This prospectus contains additional trade names and trademarks of ours and of other companies. We do not intend our use or display of other companies trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, these other companies. DATA DOMAIN, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 3572 94-3412175 (State or Other Jurisdiction of Incorporation or Organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 2300 Central Expressway Santa Clara, CA 95050 (408) 980-4800 (Address, including zip code and telephone number, including area code, of registrant s principal executive offices) Table of Contents THE OFFERING Common stock offered by Data Domain 2,800,000 shares Common stock offered by the selling stockholders 3,200,000 shares Common stock to be outstanding after this offering 56,221,271 shares Use of proceeds We intend to use the net proceeds from this offering for working capital and other general corporate purposes. We may also use a portion of the net proceeds to acquire other businesses, products or technologies. We do not have agreements or commitments for any specific acquisitions at this time. We will not receive any proceeds from the shares sold by the selling stockholders. See Use of Proceeds. Dividend policy Currently, we do not anticipate paying cash dividends.
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+PROSPECTUS SUMMARY This summary highlights information appearing elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before making an investment decision. You should carefully read the entire prospectus, including the section entitled Risk Factors beginning on page 14 and our financial statements and notes to those financial statements included elsewhere in this prospectus before making any investment decision. Unless the context otherwise requires, in this prospectus, BWAY Holding means BWAY Holding Company, our top-level holding company, and BWAY means BWAY Corporation and its consolidated subsidiaries. BWAY is our primary operating company and a direct wholly owned subsidiary of BWAY Holding. We, us and our mean BWAY Holding and its consolidated subsidiaries, including BWAY. On February 7, 2003, BWAY Holding acquired BWAY and BWAY became a wholly owned subsidiary of BWAY Holding. Upon completion of the acquisition, BWAY became a private company and its common stock was delisted from the New York Stock Exchange. We refer to the acquisition of BWAY pursuant to the merger agreement as the Transaction. Our Company We are a leading North American manufacturer of general line rigid metal and plastic containers, and we estimate that we have a number one U.S. market share in plastic pails, steel paint cans, steel specialty cans, ammunition boxes, plastic tight-head containers and plastic paint bottles, and a number one Canadian market share in steel pails and plastic pails. These products together represented approximately 78% of our fiscal 2006 net sales. In fiscal 2006, our total net sales were $918.5 million, of which 60.2% were in our metal packaging segment and 39.8% were in our plastics packaging segment. On a pro forma basis for our acquisition of substantially all of the assets of Industrial Containers Ltd., or ICL, in July 2006, our fiscal 2006 net sales were $968.9 million, of which 58.5% were in our metal packaging segment, which includes aerosol cans, and 41.5% were in our plastics packaging segment. We believe that our metal and plastic products, which we manufacture in our 22 strategically located facilities across the United States and in Canada, are complementary and often serve the same customers. Our products include: Metal Containers. General line rigid metal containers made from steel, including paint cans and components, aerosol cans, pails, oblong cans, a variety of other specialty cans and ammunition boxes that our customers use to package paint, household and personal care products, automotive after-market products, paint thinners, driveway and deck sealants and other end-use products; and Plastic Containers. Injection-molded plastic pails and blow-molded tight-head containers, bottles and drums that our customers use to package petroleum products, pharmaceuticals, agricultural chemicals, other chemical applications, paint, ink, edible oils, high-tech coatings, high-solid coatings, roofing mastic and adhesives and driveway sealants. Based on management s knowledge of the general line rigid metal and rigid plastic container industries, we estimate that in 2006 general line rigid metal and rigid plastic container industry revenues in North America were approximately $1.4 billion and $2.0 billion, respectively. Based on long-term growth data for the broader packaging industry, we estimate that 2006 growth rates for the general line rigid metal container and rigid plastic container markets in North America were approximately 0.5% and 3.5%, respectively. We believe that our end markets have historically exhibited stable demand and pricing characteristics, with little cyclicality and a relatively broad customer base. Metal containers are attractive to many of our customers based on steel s strength and non-permeability, its ability to hold highly volatile and solvent-based liquids and its fire safety characteristics. Aerosol cans, which are a type of metal container, provide an effective system of delivery for a controlled spray pattern and are the preferred packaging for certain products. As a result of expansion of our production capacity in recent years, our aerosol can business grew significantly faster, at 11.0% in fiscal 2006, than UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents the aerosol can market as a whole, which grew at 2.5% in 2006. In addition, plastic continues to prove adaptable to a wide variety of container end markets including the paint and building industry, non-retail food services, janitorial and chemical, agriculture, oil and petroleum, inks and other general industry. Plastic containers are attractive to many of our customers based on plastic s durability, weight and corrosion resistance. Competitive Strengths Market Leadership Across Products We have established leading market positions in most of our major product lines and estimate that we hold the number one market position in products that together represented approximately 78% of our fiscal 2006 net sales. We believe that, on a pro forma basis for the ICL acquisition in fiscal 2006, we hold the number one U.S. market position in metal paint cans, specialty metal cans, ammunition boxes, plastic pails, tight-head containers and paint bottles and the number one Canadian market position in steel and plastic pails. We also believe that we hold a leading U.S. market position in steel pails and aerosol cans. Diversified Product Offering Servicing Customers on a National Basis We believe that we are the only company in North America with the ability to service our customers needs on a national basis in both general line rigid metal and plastic packaging. This is important because we believe that our large customers generally prefer to deal with a few large, capable suppliers. The close proximity of our facilities to our customers reduces transportation, handling and spoilage costs and facilitates just-in-time inventory management for our customers. The following table provides for fiscal 2006, on a pro forma basis for the ICL acquisition, the percentage of our net sales generated by each of our major products: Our Diverse Product Offering Pro forma fiscal 2006 net sales by product Attractive and Stable End Markets The markets we serve are characterized by attractive demand and pricing characteristics. We attribute this to steady growth in our end markets and the fact that our markets are highly fragmented with generally smaller competitors. In addition, we face little competition from outside of North America, including from markets with lower labor costs, as products we manufacture cannot be shipped internationally in a cost-effective manner. Amendment No. 6 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 BWAY HOLDING COMPANY (Exact name of registrant as specified in its charter) (See table of additional registrants on following page.) Delaware 3411 55-0800054 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 8607 Roberts Drive, Suite 250 Atlanta, Georgia 30350 (770) 645-4800 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Table of Contents Longstanding Relationships with a Diversified Base of Nationally Recognized, Market-Leading Customers Our customers include many of the world s leading industrial and consumer products companies. This diverse customer mix covers a wide variety of industries. We believe we are the primary supplier for each of our top 10 customers and are the sole source supplier for many of our largest customers. The average length of our relationships with our top 10 customers exceeds 15 years, and in fiscal 2006 net sales to our top 10 customers represented approximately 35% and 33% of our total net sales on a historical and pro forma basis for the ICL acquisition, respectively. Strong Sales Growth Since fiscal 2000, we have pursued a balanced strategy of organic growth and strategic acquisitions. Our net sales have increased from $479.8 million in fiscal 2000 to $918.5 million in fiscal 2006, or $968.9 million on a pro forma basis for the ICL acquisition. Our organic growth initiatives have included cross-selling to existing customers, improving product quality and customer service, leveraging our national manufacturing platform and distributor network and initiatives to convert second-source customers to primary-source customers and to increase our overall market share. Proven Record of Successful Strategic Acquisitions We have a proven history of successful strategic acquisitions. As a result of the four acquisitions we completed over the past five years and our organic growth, we have significantly diversified our product mix from solely rigid metal containers to a mix of rigid metal and plastic containers in order to increase our presence in the growing rigid plastic container market. We have also expanded our geographic footprint to include Canadian manufacturing and distribution capabilities. Strong Free Cash Flow For fiscal 2006, net cash provided by operating activities was $60.9 million and capital expenditures were $25.0 million. For the three-year period ended October 1, 2006, cumulative net cash provided by operating activities was $170.4 million and capital expenditures were $64.4 million, a comparatively low level of capital expenditures compared to other markets in the overall packaging industry due to the limited reinvestments required at our general line rigid metal container facilities. Most of our supply agreements allow us to pass along increases in raw material costs for steel and plastic resin to our customers, reducing the exposure of our cash flows to fluctuations in commodity prices. Proven Management Team We have assembled a strong management team at both the corporate and the operating levels. Our senior management team has an average of over 20 years experience in the packaging industry with extensive manufacturing, marketing and management experience. Since fiscal 2000, our current management team has implemented productivity improvements, including initiatives to improve raw materials purchasing effectiveness and plant consolidations, achieved organic sales growth in key markets and expanded our business into plastic packaging through acquisitions. We believe that our management s significant equity stake in our company as well as our stock incentive plans align the interests of our management team with those of our stockholders. Our Strategy Continue to Pursue Opportunities in Areas with Higher Growth We intend to leverage our national manufacturing platform and distribution network, our existing customer relationships and strategic acquisition opportunities to increase our share of the growing markets for aerosol cans, injection molded plastic containers and blow-molded plastic containers. Kevin C. Kern Chief Financial Officer and Vice President of Administration BWAY Holding Company 8607 Roberts Drive, Suite 250 Atlanta, Georgia 30350 (770) 645-4800 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents Expand Sales to Existing Customers We intend to expand our relationships with our customers by focusing on continued improvements to quality and overall customer service as well as by cross-selling products to provide our customers with the efficiencies of one-stop shopping. We believe our ability to offer our customers a service-oriented, high-quality and competitive source from which to purchase metal and plastic packaging products along with our flexible manufacturing capacity effectively positions us to develop cross-selling opportunities. Continue Development of Innovative Customer-Focused Products We plan to continue to work actively with customers to improve existing products and to design new packaging features to meet the changing requirements of our customers end markets through cost-effective product solutions. We believe that these innovative customer-focused products will help us to increase our share of key product markets. Pursue Strategic Acquisitions We will continue to pursue a balanced strategy of organic growth and growth through acquisitions, building on our history of successfully executing and integrating acquisitions in core and complementary product lines. We intend to continue to evaluate and selectively pursue acquisitions that we believe are strategically important to us. Maintain Low-Cost Position in Metals While Seeking Profitability Improvements in Plastics We are continuing to implement operating improvements at our facilities to further strengthen our low-cost position in this business. In addition, we intend to lower costs and enhance operating efficiencies in our rigid plastic container business by maximizing facility scale, product standardization and capacity utilization as well as making focused capital investments in equipment and technology to improve productivity. We also intend to leverage our purchasing power to reduce our costs for steel, resin and other raw materials. Utilize and Manage Leverage to Support Growth and Increase Shareholder Value We intend to continue using leverage, supported by our strong free cash flow, to make value-enhancing acquisitions. In the absence of attractive acquisition opportunities, we intend to use available cash to repay indebtedness or for other permitted purposes that we believe will enhance long-term shareholder value. * * * * Management Bonus As soon as practicable after, and conditioned upon consummation of, this offering, we will pay a bonus in the aggregate amount of $10.0 million to our employees on the closing date who are also participants in our stock incentive plan, to be allocated as shall be determined by the Compensation Committee of our board of directors. Our named executive officers, Messrs. Jean-Pierre M. Ergas, Kenneth M. Roessler, Kevin C. Kern, Jeffrey M. O Connell and Thomas K. Linton will receive approximately $750,000, $3.68 million, $1.42 million, $805,000 and $972,000 of this amount, respectively. The management bonus is to reward management for its contributions in improving sales and earnings performance that are expected to enable us to successfully complete the offering contemplated by this prospectus. * * * * With copies to: Steven J. Slutzky Robert E. Buckholz, Jr. Debevoise & Plimpton LLP Sullivan & Cromwell LLP 919 Third Avenue 125 Broad Street New York, New York 10022 New York, New York 10004 (212) 909-6000 (212) 558-4000 Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement. Table of Contents Principal and Selling Stockholders Investment funds affiliated with Kelso & Company, L.P., or the Kelso affiliates, own approximately 85.8% of our outstanding common stock, and will own approximately 39.4% following the completion of this offering. Kelso & Company, L.P., or Kelso, is a New York-based investment firm founded in 1971. Since 1980, Kelso has acquired 92 companies requiring total capital at closing of more than $27.0 billion. Of the six members of our board of directors, two are principals of Kelso. In connection with the Transaction, BWAY entered into an agreement pursuant to which BWAY agreed to pay Kelso annual financial advisory fees of $495,000, to reimburse Kelso and certain of its affiliates in connection with any services to be provided by Kelso or any such affiliates to BWAY, and to indemnify Kelso and certain of its affiliates with respect to any services to be provided by Kelso or any such affiliates to BWAY. Upon completion of this offering, we will make a one-time payment to Kelso of $5.0 million in consideration for termination of payment of the annual financial advisory fees. * * * * BWAY Holding is incorporated under the laws of the state of Delaware. Our corporate headquarters are located at 8607 Roberts Drive, Suite 250, Atlanta, Georgia 30350. Our telephone number is (770) 645-4800. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities of an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Table of Contents The Offering Common stock offered 11,764,706 shares of common stock, par value $0.01 per share, of BWAY Holding, or our common stock. Shares of common stock offered by the selling stockholders 11,764,706 shares of our common stock. Option to purchase additional shares of common stock Certain selling stockholders have granted the underwriters a 30-day option to purchase up to 1,764,705 shares of our common stock. Use of proceeds All of the shares of common stock offered by this prospectus are being sold by the selling stockholders. We will not receive any proceeds from the sale of our common stock by the selling stockholders. Dividend policy We do not expect to pay dividends on our common stock for the foreseeable future. Proposed New York Stock Exchange symbol BWY Unless we specifically state otherwise, all information in this prospectus: assumes no exercise of the underwriters option to purchase additional shares from certain selling stockholders; reflects a stock split of 1.87081603410564 for one of our common stock by means of a stock dividend in the amount of 0.87081603410564 shares of common stock for each outstanding share of common stock effected May 25, 2007; excludes 6,663,111 shares of common stock issuable upon the exercise of outstanding stock options at a weighted average exercise price of $5.55 per share; and reflects the change of the name of our company on March 23, 2007 from BCO Holding Company to BWAY Holding Company. There will be 21,709,669 shares of our common stock outstanding after this offering, giving effect to the exercise of options to purchase 1,139,579 shares of our common stock and the sale of the underlying shares in the offering contemplated by this prospectus.
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+Prospectus summary This summary only highlights the more detailed information appearing elsewhere in this prospectus. As this is a summary, it does not contain all of the information that you should consider in making an investment decision. You should read this entire prospectus carefully, including the information under , ' ': , ' ': Risk Factors and our financial statements and the related notes included elsewhere in this prospectus, before investing. References in this prospectus to , ' ': , ' ': we, , ' ': , ' ': us or , ' ': , ' ': our company refer to SP Acquisition Holdings, Inc., a Delaware corporation. References to , ' ': , ' ': public stockholders refer to purchasers in this offering or in the secondary market, including any of our officers or directors and their affiliates to the extent that they purchase or acquire shares in this offering or in the secondary market. Unless we tell you otherwise, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option. Except as otherwise specified, all information in this prospectus and all per share information has been adjusted to reflect a unit dividend of 0.15 units for each outstanding share of common stock effected on August 8, 2007 as well as a unit dividend of one-third of a unit for each outstanding share of common stock effected on September 4, 2007. We are a blank check company organized under the laws of the State of Delaware on February 14, 2007. We were formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition or other similar business combination, one or more businesses or assets, which we refer to as our , ' ': , ' ': initial business combination. To date, our efforts have been limited to organizational activities as well as activities related to this offering. We have not, nor has anyone on our behalf, contacted any prospective target business or had any substantive discussion, formal or otherwise, with respect to such a transaction. Additionally, we have not engaged or retained any agent or representative to identify or locate any suitable acquisition candidate, to conduct any research or take any measures, directly or indirectly, to locate or contact a target business. Our efforts in identifying a prospective target business will not be limited to a particular industry. Instead, we will focus on industries and target businesses internationally, with a focus on the United States, Europe and Asia that may provide significant opportunity for growth. We do not currently have any specific initial business combination under consideration. We will seek to capitalize on the significant investing experience and contacts of our Chairman, President and Chief Executive Officer, Warren G. Lichtenstein and our other directors and executive officers. Mr. Lichtenstein has over 19 years of experience investing globally in public and private companies including debt and equity securities, and serving on boards of directors. In addition, Jack Howard our Chief Operating Officer and Secretary has more than 22 years of experience in sourcing, evaluating, structuring and managing investments, and serving on boards of directors. James Henderson, our Executive Vice President, has more than 26 years of experience as an operating executive in various companies, including serving in senior executive capacities and on boards of directors. Mr. Lichtenstein founded Steel Partners Group (as hereinafter defined) in 1990 and serves as Chief Executive Officer and Portfolio Manager of various of its business entities. Steel Partners Group, operating through Steel Partners, Ltd. and various other business entities, manages approximately $6.76 billion of assets as of June 30, 2007 invested in public and private debt and equity investments in companies with market capitalizations of up to $10 billion in the United States, Asia and Europe. Steel Partners Group s main investment fund is Steel Partners II, L.P., which invests globally with approximately $2.65 billion under management as of June 30, 2007. Steel Partners Group also co-manages Steel Partners Japan Strategic Fund (Offshore), L.P., which invests in Japan with $4.17 billion under management as of June 30, 2007 and Steel Partners China Access I L.P., which invests in China with approximately $250 million of committed capital as of June 30, 2007. Steel Partners II, L.P. is also a significant investor in Steel Partners Japan Strategic Fund (Offshore), L.P. and Steel Partners China Access I L.P., which serve as Steel Partner Group s primary vehicles for investing in Japan and China respectively. Steel Partners Group currently has more than 35 employees, with offices in New York, Los Angeles, London, Tokyo, Hong Kong and Beijing. They have extensive investment, trading, restructuring, accounting, mergers and acquisitions, financing, tax, operating and legal experience, including active participation on boards of directors, particularly in the areas of financial management, management oversight and compensation, and acquisitions The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. PRELIMINARY PROSPECTUS Subject to Completion October 5, 2007 $400,000,000 SP ACQUISITION HOLDINGS, INC. 40,000,000 Units SP Acquisition Holdings, Inc. is a newly organized blank check company organized under the laws of the State of Delaware on February 14, 2007. SP Acquisition Holdings, Inc. was formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition or other similar business combination, one or more businesses or assets, which we refer to as our , ' ': , ' ': initial business combination. Our efforts in identifying a prospective target business will not be limited to a particular industry. Instead we will focus on industries and target businesses internationally, with a focus on the United States, Europe and Asia, that may provide significant opportunity for growth. To date, our efforts have been limited to organizational activities as well as activities related to this offering. We have not, nor has anyone on our behalf, contacted any prospective target business or had any substantive discussion, formal or otherwise, with respect to such a transaction. Additionally, we have not engaged or retained any agent or representative to identify or locate any suitable acquisition candidate, to conduct any research or take any measures, directly or indirectly, to locate or contact a target business. We do not currently have any specific initial business combination under consideration. This is an initial public offering of our securities. Each unit has an offering price of $10.00 per unit and consists of one share of our common stock and one warrant. We are offering 40,000,000 units. We expect that the public offering price will be $10.00 per unit. Each warrant entitles the holder to purchase one share of our common stock at a price of $7.50, subject to adjustment as described herein. The warrants will become exercisable on the later of the completion of our initial business combination or 12 months from the closing of this offering, provided in each case that we have an effective registration statement covering the shares of common stock issuable upon exercise of the warrants and a current prospectus relating to them is available, and will expire five years from the date of this prospectus, unless earlier redeemed. We have also granted the underwriters a 30-day option to purchase up to 6,000,000 additional units to cover over-allotments, if any. SP Acq LLC, a Delaware limited liability company, purchased in a private placement 11,500,000 of our units (after giving effect to dividends of units) for a purchase price of $25,000. Each unit consists of one share of common stock and one warrant. We refer to these units as the founder s units. The founder s units include up to 1,500,000 units that have been placed in escrow and are subject to forfeiture by SP Acq LLC to the extent that the underwriters over-allotment option is not exercised or is exercised in part so that the holders of our founder s units will collectively own 20% of our units after consummation of this offering and exercise or expiration of the over-allotment option (assuming none of them purchase units in this offering). SP Acq LLC has sold a total of 500,000 founder s units to Anthony Bergamo, Ronald LaBow, Howard M. Lorber, Leonard Toboroff and S. Nicholas Walker, each a director of our company, and has agreed to sell 662,791 founder s units (subject to adjustment if the over-allotment option is exercised or if additional founder s units are transferred to directors) to Steel Partners II, L.P., an affiliate of SP Acq LLC. SP Acq LLC has also agreed to purchase an aggregate of 7,000,000 warrants at a price of $1.00 per warrant ($7.0 million in the aggregate) in a private placement that will occur immediately prior to this offering. We refer to these warrants as the additional founder s warrants. Subsequent to the initial agreement, Messrs. Bergamo, LaBow, Lorber, Toboroff and Walker agreed that they would purchase a total of 500,000 of the additional founder s warrants from SP Acq LLC. The proceeds from the sale of the additional founder s warrants will be deposited into a trust account and subject to a trust agreement, described below, and will be part of the funds distributed to our public stockholders in the event we are unable to complete our initial business combination. In addition, Steel Partners II, L.P. has entered into an agreement with us requiring it to purchase 3,000,000 of our units, which we refer to as the co-investment units, from us at a price of $10.00 per unit ($30.0 million in the aggregate) in a private placement that will occur immediately prior to our consummation of our initial business combination. These co-investment units will be identical to the units sold in this offering, except that they will be subject to certain transfer restrictions. Currently, there is no public market for our units, common stock or warrants. We have applied to have the units listed on the American Stock Exchange under the symbol , ' ': , ' ': DSP.U on or promptly after the date of this prospectus. The common stock and warrants comprising the units will begin separate trading five business days following the earlier to occur of the expiration of the underwriters over-allotment option, its exercise in full, or the announcement by the underwriters of their intention not to exercise all or any remaining portion of the over-allotment option, subject to our filing a current report on Form 8-K with the Securities and Exchange Commission containing an audited balance sheet reflecting our receipt of the gross proceeds of this offering and issuing a press release announcing when such separate trading will begin. We have applied to have the common stock and warrants listed on the American Stock Exchange under the symbols , ' ': , ' ': DSP and , ' ': , ' ': DSP.WS, respectively. Investing in our securities involves a high degree of risk. See , ' ': , ' ': Risk Factors beginning on page 25 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Per Unit Total Proceeds Public offering price $ 10.00 $ 400,000,000 Underwriting discounts and commissions(1) $ 0.70 $ 28,000,000 Proceeds, before expenses, to us $ 9.30 $ 372,000,000 (1) Includes $0.40 per unit, or $16.0 million in the aggregate ($18.4 million if the underwriters over-allotment option is exercised in full), payable to the underwriters for deferred underwriting discounts and commissions from the funds to be placed in a trust account at JPMorgan Chase Bank, N.A., to be maintained by Continental Stock Transfer & Trust Company, acting as trustee. Such funds will be released to the underwriters only upon completion of an initial business combination as described in this prospectus. The underwriters are offering the units on a firm commitment basis. The underwriters expect to deliver the units to purchasers on or about , 2007. Of the proceeds we receive from this offering and the sale of the additional founder s warrants approximately $9.85 per unit, or $394,000,000 in the aggregate (approximately $9.83 per unit or $452,200,000 if the underwriters over-allotment option is exercised in full) will be deposited into a trust account at JPMorgan Chase Bank, N.A., maintained by Continental Stock Transfer & Trust Company, acting as trustee. Joint Book-Running Managers UBS Investment Bank Ladenburg Thalmann & Co. Inc. Jefferies & Company The date of this prospectus is , 2007 and dispositions. Steel Partners Group also has three operating partners who have experience in operating and improving businesses. Employees of Steel Partners Group, including our executive officers, have significant experience serving on the board of directors of portfolio companies of Steel Partners Group and working with management teams to create value. Currently, nine Steel Partners Group professionals sit on 15 boards globally. Steel Partners Group has built a network of relationships including private equity sponsors, management teams of public and private companies, investment bankers, commercial bankers, brokers, attorneys, accountants and investors throughout the United States, Asia and Europe. We believe that through our access to the combined experience of Steel Partners Group professionals based in New York, Los Angeles and London, and the broad capabilities of Steel Partners Group, we will be able to identify an attractive acquisition opportunity. Our efforts in identifying a prospective acquisition target will not be limited to a particular industry. Instead, we will focus on industries and target businesses in the United States, Europe, and Asia, excluding China, that may provide significant opportunity for value creation. Our investment philosophy will be based on the strategies employed by Steel Partners Group, which reflect a value-orientation and investment discipline that are the result of having investments in public and private debt and equity, as well as distressed debt over 17 years in a diverse range of industries. This includes investments where Steel Partners Group has exercised control over the portfolio company. Steel Partners Group focuses on maintaining discipline with respect to purchase price, analyzing the business based on long-term value creation that can be achieved, extensive business and financial analysis and utilizing numerous resources to maximize value post-acquisition. Similar to those strategies employed by Steel Partners Group, we have identified certain criteria and guidelines that we believe are important in evaluating prospective target businesses. However, we may decide to enter into an initial business combination with a target business or businesses that do not meet all of these criteria and guidelines. We intend to benefit from the investment criteria employed by Steel Partners Group. We will seek to acquire established businesses that are easy to understand. Additionally, we will target businesses that we believe are fundamentally sound but potentially in need of certain financial, operational, strategic or managerial redirection to maximize value. We do not intend to acquire start-up companies, companies with speculative business plans or companies that are excessively leveraged. We have entered into a business opportunity right of first review agreement with Mr. Lichtenstein and Steel Partners, L.L.C. that provides that from the date of this prospectus until the earlier of the consummation of our initial business combination or our liquidation in the event we do not consummate an initial business combination, we will have a right of first review with respect to business combination opportunities of Steel Partners Group relating to companies that are not publicly traded on a stock exchange or over-the-counter market with an enterprise value of between $300 million and $1.5 billion. Steel Partners Group will first offer any such business opportunity to us and Mr. Lichtenstein and Steel Partners, L.L.C. will not, and will cause each other business entity within Steel Partners Group not to, pursue such business opportunity unless and until our board of directors has determined for any reason that we will not pursue such opportunity. Decisions by us to release Steel Partners Group to pursue any specific business opportunity will be made solely by a majority of our disinterested directors. This right of first review will not include: companies targeted for acquisition by any business in which Steel Partners II, L.P. directly or indirectly has an investment (including Steel Partners Japan Strategic Fund (Offshore), L.P.); or businesses headquartered in or organized under the laws of China. While we may seek to acquire more than one business or asset, which we refer to as our , ' ': , ' ': target business or , ' ': , ' ': target businesses, our initial business combination must involve one or more target businesses having a fair market value, individually or collectively, equal to at least 80% of the sum of the balance in the trust account (excluding deferred underwriting discounts and commissions of $16.0 million, or $18.4 million if the underwriters over-allotment option is exercised in full) plus the proceeds of the co-investment. We will only consummate a business combination in which we become the controlling shareholder of the target. The key factors that we will rely on in determining controlling shareholder status would be our acquisition of at least 51% of the voting equity interests of the target company and control of the majority of any governing body of the target company. We will not consider any transaction that does not meet such criteria. In addition, we will not enter into our initial business combination with any entity in which any of our officers, directors or Steel Partners Group or its affiliates has a financial interest. If we are unable to consummate a business combination within the allotted time periods set forth in this prospectus, we will implement our dissolution and liquidation plan, which we expect will include the distribution of the proceeds held in the trust account to our public stockholders in an amount we expect to be approximately $9.85 per share of common stock held by them (or approximately $9.83 per share if the underwriters exercise their over-allotment option). On March 22, 2007, SP Acq LLC entered into an agreement with us to purchase 5,250,000 warrants at a price of $1.00 per warrant, concurrently with the closing of this offering. SP Acq LLC will pay for the additional founder s warrants in cash from available funds. Subsequent to this agreement, Messrs. Bergamo, LaBow, Lorber, Toboroff and Walker agreed that they would purchase a total of 500,000 of the additional founder s warrants from SP Acq LLC. On October 4, 2007, SP Acq LLC agreed to purchase an additional 1,750,000 additional founder s warrants at a price of $1.00 per warrant immediately prior to this offering resulting in an aggregate purchase of 7,000,000 additional founder s warrants. The $7.0 million of proceeds from this investment will be added to the proceeds of this offering and will be held in the trust account pending our completion of an initial business combination on the terms described in this prospectus. If we do not complete such a business combination, then the $7.0 million will be part of the liquidating distribution to our public stockholders, and the warrants will expire worthless. Steel Partners II, L.P. has entered into an agreement with us requiring it to purchase an aggregate of 3,000,000 units, which we refer to as the co-investment units, directly from us at a price of $10.00 per unit ($30.0 million in the aggregate) in a private placement that will occur immediately prior to our consummation of our initial business combination, which will not occur until after the approval of the initial business combination by a majority of our public stockholders. These co-investment units will be identical to the units sold in this offering, except that they will be subject to certain transfer restrictions. As the proceeds from the sale of the co-investment units will not be received by us until immediately prior to our consummation of our initial business combination, these proceeds will not be deposited into the trust account and will not be available for distribution to our public stockholders in the event of a liquidating distribution. Steel Partners II, L.P. has agreed to provide our audit committee, on a quarterly basis, with evidence that it has sufficient net liquid assets available to consummate the co-investment. In the event that Steel Partners II, L.P. is unable to consummate the co-investment when required to do so, SP Acq LLC, Steel Partners II, L.P., Messrs. Bergamo, LaBow, Lorber, Toboroff and Walker have agreed to surrender and forfeit their founder s units to us; provided that such surrender and forfeiture will not be required if SP Acq LLC purchases such co-investment units. The proceeds from the sale of the co-investment units will provide us with additional equity capital to fund a business combination. In addition, we believe that the commitment of significant capital on the same terms as our public stockholders demonstrates Steel Partners Group s commitment to us and helps differentiate us from other similar companies. However, we may need to raise additional funds, in addition to the co-investment, through a private offering of debt or equity securities if such funds were required to consummate our initial business combination. Subject to compliance with applicable securities laws, we would only consummate such financing simultaneously with the consummation of our initial business combination. In this prospectus, with respect to the right of first review agreement between us and Mr. Lichtenstein and Steel Partners, L.L.C., the term Steel Partners Group refers only to Steel Partners, II, L.P., Steel Partners Offshore Fund, Ltd., Steel Partners, Ltd., Steel Partners, L.L.C., Steel Partners (UK) Limited and all other entities that may be deemed to be wholly-controlled by Mr. Lichtenstein. With respect to all other uses in this Prospectus, the term Steel Partners Group shall refer to the entities listed in the preceding sentence as well as Steel Partners China Access I L.P., Steel Partners Japan Strategic Fund (Offshore), L.P. and certain other entities affiliated with Steel Partners China Access I L.P. and Steel Partners Japan Strategic Fund (Offshore), L.P., which entities will not be subject to the right of first review or non-compete. Our executive offices are located at 590 Madison Avenue, 32nd Floor, New York, New York 10022 and our telephone number is (212) 520-2300.
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+S-1/A person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys fees) actually and reasonably incurred by such person in connection therewith. (d) Any indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in subsections (a) and (b) of this section. Such determination shall be made, with respect to a person who is a director or officer at the time of such determination, (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders. (e) Expenses (including attorneys fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including attorneys fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the corporation deems appropriate. (f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person s official capacity and as to action in another capacity while holding such office. (g) A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person s status as such, whether or not the corporation would have the power to indemnify such person against such liability under this section. (h) For purposes of this section, references to the corporation shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amendment No. 5 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Alternative Asset Management Acquisition Corp. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 6770 (Primary Standard Industrial Classification Code Number) 20-8450938 (I.R.S. Employer Identification Number) 590 Madison Avenue, 35th Floor New York, New York 10022 (212) 409-2434 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) MARK D. KLEIN Chief Executive Officer Alternative Asset Management Acquisition Corp. 590 Madison Avenue, 35th Floor New York, New York 10022 (212) 409-2434 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: BRUCE S. MENDELSOHN, Esq. Akin Gump Strauss Hauer & Feld LLP 590 Madison Avenue New York, New York 10022 (212) 872-1000 (212) 872-1002 Facsimile DEANNA L. KIRKPATRICK, Esq. Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 (212) 450-4000 (212) 450-4800 Facsimile Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. |_| If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| CALCULATION OF REGISTRATION FEE Title of each Class of Security being registered Amount being Registered Proposed Maximum Offering Price Per Security(1) Proposed Maximum Aggregate Offering Price(1) Amount of Registration Fee Units, each consisting of one share of Common Stock, $.0001 par value, and one Warrant(2) 34,500,000 Units $10.00 $345,000,000 $10,592 (3) Shares of Common Stock included as part of the Units(2) 34,500,000 Shares (4) Warrants included as part of the Units(2) 34,500,000 Warrants (4) Total $345,000,000 $10,592 (1) Estimated solely for the purpose of calculating the registration fee. (2) Includes 4,500,000 Units, consisting of 4,500,000 shares of Common Stock and 4,500,000 Warrants, which may be issued on exercise of a 30-day option granted to the underwriters to cover over-allotments, if any. (3) The Registrant previously paid $7,061 of such amount, with the balance of $3,531 being paid herewith. (4) No fee pursuant to Rule 457(g). The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED JULY 27, 2007 PROSPECTUS $300,000,000 Alternative Asset Management Acquisition Corp. 30,000,000 Units Alternative Asset Management Acquisition Corp. is a newly organized blank check company formed for the purpose of acquiring through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination, one or more businesses or assets, which we refer to as our initial business combination in the alternative asset management sector or a related business. To date, our efforts have been limited to organizational activities as well as activities related to this offering. We do not have any specific initial business combination under consideration. We have not, nor has anyone on our behalf, contacted any prospective target business or had any substantive discussions, formal or otherwise, with respect to such a transaction. This is an initial public offering of our securities. Each unit consists of one share of our common stock and one warrant. We are offering 30,000,000 units. The public offering price will be $10.00 per unit. Each warrant entitles the holder to purchase one share of our common stock at a price of $7.50. The warrants will become exercisable on the later of the completion of our initial business combination and fifteen months from the date of this prospectus, provided in each case that we have an effective registration statement covering the shares of common stock issuable upon exercise of the warrants and a current prospectus relating to them is available. The warrants will expire five years from the date of this prospectus, unless earlier redeemed. We have also granted the underwriters a 30-day option to purchase up to an additional 4,500,000 units to cover over-allotments, if any. In transactions occurring in February, March and July of 2007, Hanover Overseas Limited, STC Investment Holdings LLC, Solar Capital, LLC, Jakal Investments LLC, Mark Klein, David Hawkins, Steven Shenfeld, Bradford Peck and Frederick Kraegel, whom we refer to as initial stockholders, purchased 8,625,000 shares of our common stock (after giving effect to our stock dividends) for an aggregate purchase price of $25,000. This includes an aggregate of 1,125,000 shares of common stock subject to forfeiture by our initial stockholders to the extent that the underwriters over-allotment option is not exercised in full so that our initial stockholders will collectively own 20% of our issued and outstanding shares after this offering (assuming none of them purchase units in this offering). We refer to these outstanding shares of common stock as the founders common stock throughout this prospectus. Each of the initial stockholders has agreed to (i) waive any right to receive a liquidation distribution with respect to the founders common stock in the event we fail to consummate an initial business combination and (ii) vote the founders common stock in accordance with the majority of the shares of common stock voted by our public stockholders in connection with the vote on any initial business combination. The founders common stock is subject to certain transfer restrictions described in more detail below. Hanover Overseas Limited, STC Investment Holdings LLC, Solar Capital, LLC, Jakal Investments LLC, Mark Klein and Steven Shenfeld have agreed to purchase an aggregate of 4,625,000 warrants at a price of $1.00 per warrant ($4.625 million in the aggregate) in a private placement that will occur simultaneously with the consummation of this offering. We refer to the purchasers of these securities as the sponsors, and we refer to these warrants as the sponsors warrants throughout this prospectus. The proceeds from the sale of the sponsors warrants in the private placement will be deposited into a trust account and subject to a trust agreement, described below, and will be part of the funds distributed to our public stockholders in the event we are unable to complete an initial business combination. The sponsors warrants are identical to the warrants included in the units being sold in this offering, except that (i) the sponsors warrants are non-redeemable so long as they are held by any of the sponsors or their permitted transferees and (ii) will not be exercisable while they are subject to certain transfer restrictions described in more detail below. In addition, the Hanover Group or one of its affiliates, STC Investment Holdings LLC and Solar Capital, LLC, have entered into agreements with Citigroup Global Markets Inc., pursuant to which they will each place limit orders for up to $10.0 million of our common stock, or $30.0 million in the aggregate, commencing on the later of ten business days after we file our Current Report on Form 8-K announcing our execution of a definitive agreement for an initial business combination and 60 days after termination of the restricted period in connection with this offering under Regulation M of the Exchange Act and ending on the business day immediately preceding the record date for the meeting of stockholders at which such initial business combination is to be approved (the Buyback Period ). These limit orders will require the stockholders to purchase any of our shares of common stock offered for sale (and not purchased by another investor) at or below a price equal to the per share amount held in our trust account as reported in such Form 8-K, until the earlier of the expiration of the Buyback Period or until such purchases reach $30.0 million in total. The purchase of such shares will be made by Citigroup Global Markets Inc. or another broker dealer mutually agreed upon by Citigroup Global Markets Inc. and these stockholders. It is intended that such purchases will comply with Rule 10b-18 under the Exchange Act and the broker s purchase obligation is otherwise subject to applicable law. Each of these stockholders may vote these shares in any way they choose at the stockholders meeting to approve our initial business combination. As a result, the Hanover Group, STC Investment Holdings LLC and Solar Capital, LLC may be able to influence the outcome of our initial business combination. However, these stockholders will not be permitted to exercise conversion rights in the event they vote against an initial business combination that is approved; provided that these stockholders will participate in any liquidation distributions with respect to any shares of common stock purchased by them following consummation of the offering, including shares purchased pursuant to such limit orders, in the event we fail to complete an initial business combination. In addition, these stockholders have agreed that they will not sell or transfer any shares of common stock purchased by them pursuant to these agreements until one year after we have completed an initial business combination. Currently, there is no public market for our units, common stock or warrants. The units have been approved for listing on the American Stock Exchange under the symbol AMV.U upon consummation of this offering. The common stock and warrants comprising the units will begin separate trading five business days following the earlier to occur of the expiration of the underwriters over-allotment option or its exercise in full, subject to our filing a Current Report on Form 8-K with the Securities and Exchange Commission containing an audited balance sheet reflecting our receipt of the gross proceeds of this offering and issuing a press release announcing when such separate trading will begin. Once the securities comprising the units begin separate trading, the common stock and warrants will be traded on the American Stock Exchange under the symbols AMV and AMV.WS, respectively. We cannot assure you, however, that our securities will continue to be listed on the American Stock Exchange. Investing in our securities involves a high degree of risk. See Risk Factors beginning on page 18 for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Per Unit Total Proceeds Public offering price $10.00 $300,000,000 Underwriting discounts and commissions(1) $ 0.70 $ 21,000,000 Proceeds to us (before expenses) $ 9.30 $279,000,000 (1) Includes $0.325 per unit or $9.75 million in the aggregate (approximately $11.2 million if the underwriters over-allotment option is exercised in full), payable to the underwriters for deferred underwriting discounts and commissions to be placed in the trust account described below. Such funds will be released to the underwriters only on completion of an initial business combination, as described in this prospectus. The underwriters are offering the units on a firm commitment basis. The underwriters expect to deliver the units to purchasers on or about , 2007. Of the proceeds we receive from this offering and the sale of the sponsors warrants described in this prospectus, approximately $9.76 per unit, or approximately $292.75 million in the aggregate (approximately $9.74 per unit, or approximately $336.1 million in the aggregate if the underwriters over-allotment option is exercised in full), will be deposited into a trust account, at , with Continental Stock Transfer & Trust Company as trustee. These funds will not be released to us until the earlier of the completion of our initial business combination or our liquidation (which may not occur until twenty-four months from the date of this prospectus) as described in this prospectus. Citi Lazard Capital Markets ________, 2007 (unaudited) Balance Sheet Data: Working capital (deficiency) $ (65,811 ) $283,049,000 Total assets $215,000 $283,049,000 Total liabilities $191,000 $ -0- Value of common stock which may be converted to cash $ $ 87,824,990 Stockholders equity $ 24,000 $195,224,010 The as adjusted information gives effect to the sale of the units we are offering including the application of the related gross proceeds, the receipt of $4.625 million from the sale of the sponsors warrants and the payment of the estimated remaining expenses of this offering. The as adjusted working capital and as adjusted total assets is net of $9.75 million being held in the trust account (or approximately $11.2 million if the underwriters over-allotment option is exercised in full) representing deferred underwriting discounts and commissions. The as adjusted working capital and total assets amounts include approximately $283.0 million (which is net of deferred underwriting discounts and commissions of approximately $9.75 million) to be held in the trust account, which will be distributed to us on completion of our initial business combination. We will use the initial trust amount of $292.75 million to pay amounts owed to (i) any public stockholders who exercise their conversion rights and (ii) the underwriters in the amount of $9.75 million (or approximately $11.2 million if the underwriters over-allotment option is exercised in full) in payment of their deferred underwriting discounts and commissions if a business combination is consummated. All such proceeds will be distributed to us from the trust account only upon the consummation of an initial business combination within 24 months from the date of this prospectus. If an initial business combination is not so consummated, the proceeds held in the trust account, including the deferred underwriting discounts and commissions and all interest thereon, net of income taxes on such interest and interest income of up to $3.0 million on the trust account balance previously released to us to fund our working capital requirements, will be distributed solely to our public stockholders as part of our liquidation. We will not consummate an initial business combination if public stockholders owning 30% or more of the shares sold in this offering vote against the initial business combination and exercise their conversion rights. Accordingly, we may effect an initial business combination if public stockholders owning up to 30% of the shares (minus one share) sold in this offering vote against the initial business combination and exercise their conversion rights. If this occurs, we would be required to convert to cash up to approximately 8,999,999 shares of common stock (or 10,349,999 shares of common stock if the underwriters exercise their over-allotment option in full) at an initial per-share conversion price of approximately $9.76 for approximately $87,824,990 in the aggregate (or approximately $9.74 per share for approximately $100,818,740 in the aggregate if the underwriters exercise their over-allotment option in full). The actual per-share conversion price will be equal to: the aggregate amount then on deposit in the trust account, before payment of deferred underwriting discounts and commissions and including accrued interest, net of income taxes on such interest and net of interest income on the trust account balance released to us as described above, as of two business days prior to the proposed consummation of the initial business combination, divided by the number of shares of common stock sold in this offering.
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+PROSPECTUS SUMMARY This summary highlights information about Yingli Green Energy Holding Company Limited, or Yingli Green Energy, and Baoding Tianwei Yingli New Energy Resources Co., Ltd., or Tianwei Yingli, our principal operating subsidiary and about the offering contained elsewhere in this prospectus, and is qualified in its entirety by the more detailed information and financial statements contained elsewhere in this prospectus. You should carefully read the entire prospectus before making an investment decision, especially the information presented under the heading Risk Factors and the consolidated financial statements and notes included elsewhere in this prospectus. Yingli Green Energy was incorporated on August 7, 2006. On September 5, 2006, Yingli Group, an entity controlled by Mr. Liansheng Miao, the chairperson of the board of directors and chief executive officer of Yingli Green Energy who also controls our controlling shareholder, Yingli Power Holding Company Ltd., or Yingli Power, transferred its 51% equity interest in Tianwei Yingli to Yingli Green Energy. As Yingli Group and Yingli Green Energy were entities under common control at the time of the transfer, the 51% equity interest in Tianwei Yingli was recorded by us at the historical cost to Yingli Group, which approximated the historical carrying values of the assets and liabilities of Tianwei Yingli. For financial statements reporting purposes, Tianwei Yingli was deemed to be our predecessor for periods prior to September 5, 2006. In our discussions of the nine-month period ended September 30, 2006 and the year ended December 31, 2006, we refer to certain line items in the financial statements as combined for comparative purposes. These unaudited combined amounts represent the addition of the amounts for certain financial statement line items or captions of Tianwei Yingli, our predecessor, for the period from January 1, 2006 through September 4, 2006, and the amounts for the corresponding financial statement line items or captions of Yingli Green Energy, for the period from August 7, 2006 (date of inception) through September 30 or December 31, 2006, as applicable. For the period from August 7, 2006 through September 4, 2006, during which the financial statements of the predecessor and those of Yingli Green Energy overlap, Yingli Green Energy did not engage in any business or operations. The unaudited combined financial data for the nine-month period ended September 30, 2006 and the year ended December 31, 2006 do not comply with accounting principles generally accepted in the United States, or U.S. GAAP. We are including these unaudited combined amounts to supplementally provide information that we believe will be helpful to gaining a better understanding of our results of operations and improve the comparative period-to-period analysis. These unaudited combined amounts do not purport to represent what our financial condition, results of operations or cash flows would have been in such period if Yingli Group had transferred its 51% equity interest in Tianwei Yingli to us on January 1, 2006. In this prospectus, except as otherwise indicated or as the context may otherwise require, all references to Yingli Green Energy , we , the Company , us and our refer to Yingli Green Energy Holding Company Limited and, unless otherwise indicated or as the context may otherwise require, to our predecessor, Tianwei Yingli, and its consolidated subsidiaries. Overview We are one of the leading vertically integrated photovoltaic, or PV, product manufacturers in China. We design, manufacture and sell PV modules, and design, assemble, sell and install PV systems that are connected to an electricity transmission grid or those that operate on a stand-alone basis. With an annual production capacity of 200 megawatts for each of polysilicon ingots and wafers, PV cells and PV modules as of the date of this prospectus, we believe we are currently one of the largest manufacturers of PV products in China as measured by annual production capacity. Except for the production of polysilicon materials that are used to manufacture polysilicon ingots and wafers, our products and services substantially cover the entire PV industry value chain from the manufacture of multicrystalline polysilicon ingots and wafers, PV cells and PV modules to PV systems and PV system installation. We believe we are one of the few large-scale PV companies in China to have adopted a vertically integrated business model. Our end-products include PV modules and PV systems in different sizes and power outputs. We sell PV modules under our own brand name, Yingli, to PV Table of Contents The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. Subject to Completion. Dated December 10, 2007 Preliminary Prospectus Yingli Green Energy Holding Company Limited 7,000,000 American Depositary Shares Representing 7,000,000 Ordinary Shares and US$150,000,000 Zero Coupon Convertible Senior Notes due 2012 The selling shareholders identified in this prospectus are offering an aggregate of 7,000,000 American Depositary shares, or ADSs. Concurrently, Yingli Green Energy Holding Company Limited is offering US$150,000,000 aggregate principal amount of its zero coupon convertible senior notes due 2012, or the notes. Each ADS represents one ordinary share, par value US$0.01 per share. The ADSs are evidenced by American depositary receipts, or ADRs. We will not receive any proceeds from the ADSs sold by the selling shareholders. Our ADSs are listed on the New York Stock Exchange under the symbol YGE . On December 7, 2007, the last reported trading price for our ADSs was US$31.91 per ADS. We do not intend to list the notes on any securities exchange or automated quotation system. See Risk Factors beginning on page 18 to read about risks you should consider before buying our ADSs or the notes. Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. Per Total Total convertible (convertible Per ADS (ADS offering) note note offering) Public offering price US$ US$ 100 % US$ Underwriting discount US$ US$ % US$ Proceeds, before expenses, to us % US$ Proceeds, before expenses, to the selling shareholders US$ US$ To the extent that the underwriters sell more than 7,000,000 ADSs, the underwriters have an option to purchase up to an aggregate of 1,050,000 additional ADSs from the selling shareholders at the public offering price for the ADSs less the underwriting discount. In addition, to the extent that the underwriters sell more than US$150,000,000 aggregate principal amount of the notes, the underwriters have an option to purchase up to an aggregate of an additional US$22,500,000 aggregate principal amount of the notes from us at the public offering price for the notes less the underwriting discount. The underwriters expect to deliver the ADSs evidenced by the ADRs against payment in U.S. dollars in New York, New York on , 2007 and the notes against payment in U.S. dollars in New York, New York on , 2007. Credit Suisse Goldman Sachs (Asia) L.L.C. Merrill Lynch Co. Piper Jaffray Prospectus dated , 2007. Table of Contents system integrators and distributors located in various markets around the world, including Germany, Spain, Italy, China and the United States. In 2002, we began producing PV modules with an initial annual production capacity of three megawatts and have significantly expanded production capacities of our PV products in the past five years to the current level. In April 2006, we launched a new expansion project in Baoding, China to increase our annual production capacity of our PV products. We currently plan to gradually expand annual production capacity of each of polysilicon ingots and wafers, PV cells and PV modules to 400 megawatts by the end of 2008 and to 600 megawatts by the end of 2009. Historically, we have sold and installed PV systems in the western regions of China where substantial government-subsidized, rural electrification projects are underway. We also sell PV systems to mobile communications service providers in China for use across China and plan to export our PV systems into major international markets such as Germany, Spain, Italy and the United States. In order to promote the export of our PV systems, we have participated in the design and installation of large PV system projects undertaken by our customers overseas. For example, we cooperated with Solar-Energiedach GmbH NL in the design and installation of a one-megawatt PV system covering the roof of the Kaiserslautern soccer stadium in Germany, one of the FIFA World Cup 2006 venues. We have also been cooperating with Acciona Energia S.A. in connection with a large PV system installation project to be installed in Moura, Portugal, for which we will provide PV modules. Historically, sales of PV systems by us have not been significant. We expect our sales of PV systems to increase, although we expect such sales to remain relatively insignificant as a percentage of our net revenues in the near term. Our net revenues increased from RMB 120.5 million in 2004 to RMB 361.8 million in 2005 and on a combined basis, to RMB 1,638.8 million (US$218.7 million) in 2006, and increased from RMB 1,096.2 million in the nine-month period ended September 30, 2006 on a combined basis to RMB 2,606.2 million (US$347.8 million) in the nine-month period ended September 30, 2007. Our income from operations increased from RMB 13.7 million in 2004 to RMB 83.7 million in 2005 and, on a combined basis, to RMB 366.9 million (US$49.0 million) in 2006, and increased from RMB 285.9 million in the nine-month period ended September 30, 2006 on a combined basis to RMB 412.6 million (US$55.1 million) in the nine-month period ended September 30, 2007, representing operating profit margins of 11.4%, 23.1%, 22.4%, 26.1% and 15.8%, respectively. Our net income was RMB 6.1 million in 2004, RMB 66.0 million in 2005, RMB 186.2 million in the period from January 1, 2006 through September 4, 2006, RMB 30.0 million (US$4.0 million) for the period from August 7, 2006 (date of inception) through December 31, 2006, RMB 19.1 million (US$2.5 million) for the period from August 7, 2006 (date of inception) through September 30, 2006 and RMB 250.6 million (US$33.4 million) in the nine-month period ended September 30, 2007, representing net profit margins of 5.1%, 18.2%, 21.1%, 4.0%, 9.0% and 9.6%, respectively. Industry Background Solar power has recently emerged as one of the most rapidly growing renewable energy sources. Through a process known as the PV effect, electricity is generated by PV cells that convert sunlight into electricity. PV modules, which are panels composed of interconnected PV cells, are mounted in areas with direct exposure to the sun to generate electricity from sunlight. PV systems, which are composed of PV modules, related power electronics and other components, are used in residential, commercial and industrial applications and for customers who have no or limited access to an electricity transmission grid. Although PV technology has been used for several decades, the PV market grew significantly only in the past several years. According to Solarbuzz, an independent solar energy research and consulting firm, the global PV market, as measured by annual PV system installation, increased from 345 megawatts in 2001 to 1,744 megawatts in 2006. Solarbuzz s Balanced Energy forecast scenario Table of Contents forecasted global PV industry revenues and PV system installations to be US$18.6 billion and 4,177 megawatts in 2011, respectively. We believe the following factors will continue to drive the demand in the global solar power industry, including the demand for our products and services: government subsidies and economic incentives; advances in technologies making solar power more cost-efficient; rising demand for and increasing costs of fossil energy resources; increasing environmental concerns over conventional energy; and narrowing cost differentials between solar and conventional energy sources. We believe the following are the key challenges presently facing the solar power industry, including us: continuing reliance on government subsidies and economic incentives; need for further cost-competitiveness; raw materials supply shortage and the increasing costs of polysilicon; and aesthetic concern. Our Competitive Strengths We believe that our following strengths enable us to compete effectively and to capitalize on the rapid growth of the global PV market: vertically integrated business model; high-quality products and growing brand recognition; established customer and supplier relationships; cost-effective and efficient manufacturing process; steadily improving research and development capability; and experienced management team. Our Strategies We seek to continue to be a leader in the development and manufacture of PV products by taking advantage of our high degree of vertical integration in the PV production process, which yields economies of scale and cost savings. More specifically, we plan to focus on the following areas: expand global reach for our products; expand PV system sales to overseas markets; increase production capacity; secure and strengthen stable and long-term relationships with polysilicon suppliers; achieve technological advances through dedicated and continuous research and development efforts; and expand market share in China. Table of Contents Our Challenges The successful execution of our strategies is subject to certain risks, uncertainties and challenges, including: risks associated with our ability to obtain sufficient quantities of quality silicon raw materials in a timely manner; risks associated with the increasing price of polysilicon and its adverse effect on our profitability; risks associated with the potential reduction in or discontinuation of government subsidies and economic incentives for solar energy applications which could reduce demand for our products and, in turn, our revenues; uncertainties associated with responding effectively to competition in the PV modules and PV systems markets as well as from conventional energy and other renewable energy sources, including other solar energy systems; risks associated with our ability to expand our operations and manage such expansion effectively; risks associated with our ability to successfully implement our overseas expansion; risks associated with our ability to improve manufacturing efficiency or yield commercially viable new products; and uncertainties associated with our ability to establish and maintain an effective internal control system and procedures. Please see Risk Factors and other information included in this prospectus for a detailed discussion of these and other risks, uncertainties and challenges. Corporate Structure We were incorporated on August 7, 2006 in the Cayman Islands as part of a restructuring of the equity interest in our predecessor, Tianwei Yingli, to facilitate investments in Tianwei Yingli by foreign financial investors and the listing of our shares on an overseas stock market to achieve such investors investment goal and exit and liquidity strategies. As a result of the restructuring and subsequent private equity investments described in Restructuring : Yingli Power Holding Company Ltd., or Yingli Power, became our controlling shareholder, holding 59.58% of our issued and outstanding share capital on an as-converted, fully diluted basis immediately prior to our initial public offering; on September 5, 2006, Yingli Group, an entity controlled by Mr. Liansheng Miao, our chairperson and chief executive officer, who also controls our controlling shareholder, Yingli Power, transferred to us its 51% controlling equity interest in Tianwei Yingli. As a result of such transfer, Tianwei Yingli became our subsidiary. For financial statements reporting purposes, Tianwei Yingli is deemed to be our predecessor; Tianwei Yingli became a Sino-foreign equity joint venture enterprise established under PRC law and subject to certain PRC laws and regulations as described in PRC Government Regulations Equity Joint Ventures ; certain investors became holders of our Series A preferred shares, Series B preferred shares, warrants to purchase our ordinary shares and mandatory convertible bonds convertible into our ordinary shares, which represented on an aggregate basis 40.42% of our issued and outstanding share capital on an as-converted, fully diluted basis immediately prior to our initial public offering; our equity interest in Tianwei Yingli increased to 62.13% in December 2006 and further increased to 70.11% in June 2007 upon the completion of relevant PRC registration procedures for the additional equity contribution into Tianwei Yingli which was funded by the Table of Contents YINGLI GREEN ENERGY HOLDING COMPANY LIMITED EXHIBIT INDEX Exhibit Number Description of Document 1 .1 Form of Underwriting Agreement relating to the ADS Offering 1 .2 Form of Underwriting Agreement relating to the Convertible Note Offering 3 .1** Third Amended and Restated Memorandum and Articles of Association of the Registrant 4 .1* Form of Registrant s American Depositary Receipt (included in Exhibit 4.3) 4 .2* Registrant s Specimen Certificate for Ordinary Shares 4 .3* Form of Deposit Agreement among the Registrant, the depositary and Owners and Beneficial Owners of the American Depositary Shares issued thereunder 4 .4* Series A Preferred Share Purchase Agreement, dated as of September 20, 2006, among the Registrant and Inspiration Partners Limited, Yingli Power Holding Company Ltd. and Liansheng Miao 4 .5* Series A Preferred Shareholders Agreement, dated as of September 20, 2006, among the Registrant and Inspiration Partners Limited, Yingli Power Holding Company Ltd. and Liansheng Miao 4 .6* Amendment Agreement, dated as of September 28, 2006, among the Registrant and the parties thereto, amending the Series A Preferred Shares Purchase Agreement and the Series A Preferred Shareholders Agreement 4 .7* Ordinary Shares Purchase Warrant, dated as of September 28, 2006, issued to TB Management Ltd. 4 .8* Trust Deed, dated as of November 13, 2006, between the Registrant and DB Trustees (Hong Kong) Limited, as trustee 4 .9* Subscription Agreement, dated as of November 13, 2006, between the Registrant and Yingli Power Holding Company Ltd. 4 .10* Amended and Restated Series B Preferred Share Purchase Agreement, dated as of December 15, 2006 by and among the Registrant, Yingli Power Holding Company Ltd., Liansheng Miao and the investors listed on Schedule I thereto 4 .11* Second Amended and Restated Shareholders Agreement, dated as of December 15, 2006 by and among the Registrant, Liansheng Miao, Yingli Power Holding Company Ltd., Inspiration Partners Limited and the investors listed on Schedule I thereto 4 .12* Warrant Side Letter, dated December 20, 2006, by and between the Registrant and Baytree Investments (Mauritius) Pte Ltd 4 .13* Form of Ordinary Shares Purchase Warrant issued to certain Series B preferred shareholders 4 .14* Ordinary Shares Purchase Warrant, dated as of December 29, 2006, issued to China Sunshine Investment Co., Ltd. 4 .15* Amendment No. 1 to the Amended and Restated Series B Preferred Share Purchase Agreement and Warrant Side Letter, dated as of March 9, 2007, by and among the Registrant, Yingli Power Holding Company Ltd., Liansheng Miao and Baytree Investments (Mauritius) Pte Ltd 4 .16* Agreement, dated May 21, 2007, among the Registrant, Yingli Power, Mr. Liansheng Miao and Baytree Investments (Mauritius) Pte Ltd Table of Contents issuance of the Series B preferred shares and other financings. Pursuant to the latest amendment to our joint venture contract with Tianwei Baobian and, upon obtaining requisite approval by relevant PRC authority, we expect to make an additional equity contribution into Tianwei Yingli, which would increase our equity interest to 74.01%. See History and Restructuring Private Equity Investments and Other Financings Following the Restructuring ; In June 2007, we completed our initial public offering and listing of our ADSs on the New York Stock Exchange. Upon completion of our initial public offering, we sold 26,550,000 ordinary shares in the form of ADSs, raising US$274,527,000 in proceeds, before expenses to us, and Yingli Power sold 2,450,000 ordinary shares in the form of ADSs; and Upon our initial public offering, all of our Series A and Series B preferred shares were converted into our ordinary shares on a one-for-one basis. Upon the exercise of the underwriters option to purchase additional ADSs, certain of our Series A and Series B shareholders sold 500,000 ordinary shares in the form of ADSs. As a result of the completion of our initial public offering, our Series A and Series B shareholders and other shareholders in the aggregate own 31.00% of our issued and outstanding share capital immediately prior to this offering. Our predecessor, Tianwei Yingli, was established as a PRC limited liability company in August 1998 to manufacture multicrystalline silicon ingots and wafers, PV cells, PV modules and PV systems. Tianwei Yingli holds a 100% equity interest in Chengdu Yingli New Energy Resources Co., Ltd., or Chengdu Yingli, a PRC limited liability company in Sichuan, China, which sells PV modules and PV systems. In addition, Tianwei Yingli holds a 50% equity interest in Tibet Tianwei Yingli New Energy Resources Co., Ltd., or Tibetan Yingli, a company established in Tibet, which sells PV systems. In July 2007, we acquired a 30% equity interest in Baoding Dongfa Tianying New Energy Resources Company Limited, or Dongfa Tianying, which manufactures and sells tempered glass and related accessories. In August 2007, we established Yingli Green Energy (International) Holding Company Limited, or Yingli International, a British Virgin Islands company limited by shares as our wholly-owned subsidiary. Yingli International is primarily engaged in the sales and marketing of PV products and relevant accessories and investment in renewable energy projects. In October 2007, we established Yingli Energy (China) Company Ltd., or Yingli China, a PRC limited liability company, as our indirectly wholly-owned subsidiary. Yingli China is primarily engaged in the research, manufacturing, sale and installation of renewable energy products. We intend to make an equity contribution to Yingli China from part of the proceeds from the convertible note offering. See Use of Proceeds . In November 2007, we established Yingli Green Energy Europe GmbH, or Yingli Europe, a German limited liability company, as our indirectly wholly-owned subsidiary. Yingli Europe is primarily engaged in the sale and marketing of PV products and relevant accessories in Europe. Table of Contents Our Shareholding and Corporate Structure The following chart sets forth our main operational and shareholding structure immediately prior to this offering. Notes: (1) The family trust of Mr. Liansheng Miao, our chairperson and chief executive officer, owns all of the issued and outstanding share capital of Yingli Power. Mr. Miao is also vice chairperson and chief executive officer of Tianwei Yingli. The principal business of Yingli Power is holding of investment securities in Yingli Green Energy. Mr. Miao beneficially owns 100% equity interest in Yingli Group, which transferred its controlling equity interest in Tianwei Yingli to us as part of the restructuring. See History and Restructuring Restructuring . (2) Indicates jurisdiction of incorporation. (3) Includes Inspiration Partners Limited, Baytree Investments (Mauritius) Pte Ltd, an affiliate of Temasek Holdings (Private) Limited, and a number of other investors who were holders of our Series A and Series B preferred shares or holders of the mandatory exchangeable notes issued by Yingli Power prior to our initial public offering. See History and Restructuring Private Equity Investments and Other Financings Following the Restructuring and Principal and Selling Shareholders . (4) The principal business of Tianwei Baobian is the manufacture of large electricity transformers. The common shares of Tianwei Baobian are listed on the Shanghai Stock Exchange. Tianwei Baobian is controlled and 51.1% owned by Baoding Tianwei Group Co., Ltd., or Tianwei Group, a wholly state-owned limited liability company established in the PRC, which is in turn controlled by the State-owned Assets Supervision and Administration Commission of the Baoding Municipal Government in Hebei Province of the PRC, or Baoding SASAC. In September 2007, Baoding Table of Contents SASAC has entered into an agreement to transfer its equity interest in Tianwei Group to China South Industries Group Corporation, or China South, subject to government approvals. (5) Indicates the percentage as of the date of this prospectus. Pursuant to the latest amendment to our joint venture contract with Tianwei Baobian and upon obtaining requisite approval by relevant PRC authority, we expect to make an additional equity contribution into Tianwei Yingli, which would increase our equity interest to 74.01%, with Tianwei Baobian holding the remaining 25.99% of equity interest in Tianwei Yingli. (6) The principal business of Yingli International is the sale and marketing of PV products and relevant accessories and investments in renewable energy projects. (7) The principal business of Tianwei Yingli is the design, manufacture and sale of PV modules and the design, assembly, sale and installation of PV systems. See Business Overview . (8) The principal business of Yingli China is the research, manufacture, sale and installation of renewable energy products. (9) The principal business of Chengdu Yingli is the sale of PV modules and PV systems. (10) The principal business of Tibetan Yingli is assembly of PV modules and sale and installation of PV systems. The remaining 50% equity interest of Tibetan Yingli is owned, as to 30%, by Weiping Yu, vice chairperson of Tibetan Yingli and, as to the other 20%, by Tibetan Energy Demonstration Center, an entity wholly owned by the Tibetan Bureau of Technology, a Tibetan government agency. Tibetan Yingli was initially established as a joint venture enterprise with the Tibetan Bureau of Technology, through the Tibetan Energy Demonstration Center, in order to comply with a mandate of the Tibetan government to foster regulated competition in its solar energy industry. Neither Mr. Yu nor Tibetan Energy Demonstration Center is otherwise affiliated with us. (11) The principal business of Dongfa Tianying is the manufacture and sale of tempered glass and related accessories. (12) The principal business of Tibet Keguang is the assembly of PV modules. (13) The principal business of Yingli Europe is the sale and marketing of PV products and relevant accessories in Europe. (14) The principal business of Yingli Beijing is the sale and manufacture of PV modules and PV systems. Corporate Information Our principal executive offices are located at No. 3055 Middle Fuxing Road, Baoding, Hebei Province, People s Republic of China. Our telephone number at this address is (86 312) 3100-500 and our fax number is (86 312) 3151-881. Our agent for service of process in the United States is Law Debenture Corporate Services Inc., located at 400 Madison Avenue, New York, New York 10017. Our registered office in the Cayman Islands is located at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KY1-1111, Cayman Islands. Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website is www.yinglisolar.com. The information contained on our website is not part of this prospectus. Table of Contents CONVENTIONS THAT APPLY TO THIS PROSPECTUS Unless otherwise indicated or the context otherwise requires, references in this prospectus to: and Euro are to the legal currency of the member states of the European Union that adopted such currency as their single currency in accordance with the Treaty Establishing the European Community (signed in Rome on March 25, 1957), as amended by the Treaty on European Union (signed in Maastricht on February 7, 1992); $ , US$ and U.S. dollars are to the legal currency of the United States; China and the PRC are to the People s Republic of China, excluding, for the purposes of this prospectus, Taiwan and the special administrative regions of Hong Kong and Macau; RMB and Renminbi are to the legal currency of the PRC; and this offering are to the concurrent offering of ADSs by the selling shareholders and the notes by us. Unless otherwise indicated, information in this prospectus assumes that the underwriters do not exercise their options to purchase additional ADSs and notes. In addition, unless otherwise indicated, ordinary shares outstanding and ownership percentage in us does not take into account an aggregate of 2,621,060 issued but unvested restricted shares, which have been issued to DBS Trustees Limited in connection with restricted stock awards granted under our 2006 stock incentive plan. See Management 2006 Stock Incentive Plan Restricted Shares . This prospectus contains translations of certain Renminbi amounts into U.S. dollar amounts at specified rates. All translations from Renminbi amounts to U.S. dollar amounts were made at the noon buying rate in The City of New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise stated, the translation of Renminbi amounts into U.S. dollar amounts has been made at the noon buying rate in effect on September 28, 2007, which was RMB 7.4928 to US$1.00. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. See Risk Factors Risks Related to Doing Business in China Fluctuation in the value of the Renminbi may have a material adverse effect on your investment . On December 7, 2007, the noon buying rate was RMB 7.4070 to US$1.00. You should rely only on the information contained in this prospectus or to which we have referred you. We have not authorized anyone to provide you with information that is different from that contained in this prospectus. The selling shareholders are offering to sell, and are seeking offers to buy, the ADSs, and we are offering to sell, and are seeking offers to buy, the notes only in jurisdictions where such offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the ADSs or the notes. We have not undertaken any efforts to qualify this offering for offers to individual investors in any jurisdiction outside the United States. Therefore, individual investors located outside the United States should not expect to be eligible to participate in this offering. Table of Contents THE OFFERINGS The offerings described in this prospectus consist of the ADS offering and the convertible note offering. The closing of one offering is not conditional upon the closing of the other offering. The ADS Offering Securities offered by the selling shareholders 7,000,000 ADSs Price per ADS US$ per ADS Option to purchase additional ADSs The selling shareholders have granted to the underwriters an option, exercisable for 30 days after the date of this prospectus, to purchase from the selling shareholders up to an aggregate of 1,050,000 additional ADSs at the public offering price for the ADSs listed on the cover page of this prospectus, less underwriting discount. Tianwei Baobian s subscription right If Tianwei Baobian, which holds a minority equity interest in Tianwei Yingli, exercises the right we granted to it under a PRC law-governed joint venture contract between us and Tianwei Baobian, we will be obligated to issue, after our initial public offering, a number of our ordinary shares to Tianwei Baobian in exchange for all but not part of its equity interest in Tianwei Yingli at the time of the exercise according to a pre-agreed formula. The number of our ordinary shares to be newly issued upon the exercise of Tianwei Baobian s subscription right will be substantial, and upon such exercise, the equity interest in our company held by you in the form of ADSs will be substantially diluted. See History and Restructuring Joint Venture Contract Subscription Right . The ADSs Each ADS represents one ordinary share, par value US$0.01 per share. The ADSs will be evidenced by American Depositary Receipts, or ADRs. The depositary will be the holder of the ordinary shares underlying the ADSs and you will have the rights of an ADR holder as provided in the deposit agreement among us, the depositary and owners and beneficial owners of ADSs from time to time. You may surrender your ADSs to the depositary to withdraw the ordinary shares underlying your ADSs. The depositary will charge you a fee for such an exchange. We may amend or terminate the deposit agreement for any reason without your consent. If an amendment becomes effective, you will be bound by the deposit agreement as amended if you continue to hold your ADSs. To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled Description of American Depositary Shares . We also encourage you to read the deposit agreement, which is an exhibit to the registration statement that includes this prospectus. Table of Contents Use of proceeds We will not receive any of the proceeds from the sale of the ADSs by the selling shareholders.
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that may be important to you in making your investment decision. You should read this entire prospectus, including the financial data and related notes and section entitled Risk Factors, before making an investment decision. Unless the context otherwise indicates, as used in this prospectus, the terms SunGard, we, our, us and the company and similar terms refer to SunGard Data Systems Inc. and its subsidiaries on a consolidated basis. Our Company We are one of the world s leading software and IT services companies. We provide software and processing solutions to institutions throughout the financial services industry, higher education, and the public sector; and we help enterprises of all types to maintain the continuity of their business through information availability services. We operate our business in three segments: Financial Systems ( FS ), Higher Education and Public Sector Systems ( HEPS ) and Availability Services ( AS ). Our FS segment primarily serves financial services companies, corporate and government treasury departments and energy companies. Our HEPS segment primarily serves higher education institutions, state and local governments and not-for-profit organizations. Our AS segment serves information-dependent companies across virtually all industries. Our company supports more than 25,000 customers in over 50 countries, including the world s 50 largest financial services companies. We seek to establish long-term customer relationships by negotiating multi-year contracts and by emphasizing customer support and product quality and integration. We believe that we are one of the most efficient operators of mission-critical information technology, or IT, solutions as a result of the economies of scale we derive from serving multiple customers on shared platforms. Our revenue is highly diversified by customer and product, with no single customer accounting for more than 3% of our total revenue during any of the past three fiscal years. We estimate that approximately 89% of our revenue for the past three fiscal years was recurring in nature. From fiscal year 1990 through fiscal year 2006, we increased both revenue and EBITDA at a compound annual rate of approximately 20%. We were acquired on August 11, 2005 by a consortium of private equity investment funds associated with Bain Capital Partners, The Blackstone Group, Goldman Sachs & Co., Kohlberg Kravis Roberts & Co., Providence Equity Partners, Silver Lake and Texas Pacific Group. The transaction was accomplished through the merger of Solar Capital Corp. into SunGard Data Systems Inc., with SunGard Data Systems Inc. being the surviving company. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (1) Segment EBITDA excludes $147 million of corporate level expenses of SunGard Data Systems Inc. Total EBITDA for the year ended December 31, 2006 was
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that may be important to you in making your investment decision. You should read this entire prospectus, including the financial data and related notes and section entitled Risk Factors, before making an investment decision. Unless the context otherwise indicates, as used in this prospectus, the terms SunGard, we, our, us and the company and similar terms refer to SunGard Data Systems Inc. and its subsidiaries on a consolidated basis. Our Company We are one of the world s leading software and IT services companies. We provide software and processing solutions to institutions throughout the financial services industry, higher education, and the public sector; and we help enterprises of all types to maintain the continuity of their business through information availability services. We operate our business in three segments: Financial Systems ( FS ), Higher Education and Public Sector Systems ( HEPS ) and Availability Services ( AS ). Our FS segment primarily serves financial services companies, corporate and government treasury departments and energy companies. Our HEPS segment primarily serves higher education institutions, state and local governments and not-for-profit organizations. Our AS segment serves information-dependent companies across virtually all industries. Our company supports more than 25,000 customers in over 50 countries, including the world s 50 largest financial services companies. We seek to establish long-term customer relationships by negotiating multi-year contracts and by emphasizing customer support and product quality and integration. We believe that we are one of the most efficient operators of mission-critical information technology, or IT, solutions as a result of the economies of scale we derive from serving multiple customers on shared platforms. Our revenue is highly diversified by customer and product, with no single customer accounting for more than 3% of our total revenue during any of the past three fiscal years. We estimate that approximately 89% of our revenue for the past three fiscal years was recurring in nature. From fiscal year 1990 through fiscal year 2006, we increased both revenue and EBITDA at a compound annual rate of approximately 20%. We were acquired on August 11, 2005 by a consortium of private equity investment funds associated with Bain Capital Partners, The Blackstone Group, Goldman Sachs & Co., Kohlberg Kravis Roberts & Co., Providence Equity Partners, Silver Lake and Texas Pacific Group. The transaction was accomplished through the merger of Solar Capital Corp. into SunGard Data Systems Inc., with SunGard Data Systems Inc. being the surviving company. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (1) Segment EBITDA excludes $147 million of corporate level expenses of SunGard Data Systems Inc. Total EBITDA for the year ended December 31, 2006 was
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001394175_automated_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001394175_automated_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that may be important to you in making your investment decision. You should read this entire prospectus, including the financial data and related notes and section entitled Risk Factors, before making an investment decision. Unless the context otherwise indicates, as used in this prospectus, the terms SunGard, we, our, us and the company and similar terms refer to SunGard Data Systems Inc. and its subsidiaries on a consolidated basis. Our Company We are one of the world s leading software and IT services companies. We provide software and processing solutions to institutions throughout the financial services industry, higher education, and the public sector; and we help enterprises of all types to maintain the continuity of their business through information availability services. We operate our business in three segments: Financial Systems ( FS ), Higher Education and Public Sector Systems ( HEPS ) and Availability Services ( AS ). Our FS segment primarily serves financial services companies, corporate and government treasury departments and energy companies. Our HEPS segment primarily serves higher education institutions, state and local governments and not-for-profit organizations. Our AS segment serves information-dependent companies across virtually all industries. Our company supports more than 25,000 customers in over 50 countries, including the world s 50 largest financial services companies. We seek to establish long-term customer relationships by negotiating multi-year contracts and by emphasizing customer support and product quality and integration. We believe that we are one of the most efficient operators of mission-critical information technology, or IT, solutions as a result of the economies of scale we derive from serving multiple customers on shared platforms. Our revenue is highly diversified by customer and product, with no single customer accounting for more than 3% of our total revenue during any of the past three fiscal years. We estimate that approximately 89% of our revenue for the past three fiscal years was recurring in nature. From fiscal year 1990 through fiscal year 2006, we increased both revenue and EBITDA at a compound annual rate of approximately 20%. We were acquired on August 11, 2005 by a consortium of private equity investment funds associated with Bain Capital Partners, The Blackstone Group, Goldman Sachs & Co., Kohlberg Kravis Roberts & Co., Providence Equity Partners, Silver Lake and Texas Pacific Group. The transaction was accomplished through the merger of Solar Capital Corp. into SunGard Data Systems Inc., with SunGard Data Systems Inc. being the surviving company. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (1) Segment EBITDA excludes $147 million of corporate level expenses of SunGard Data Systems Inc. Total EBITDA for the year ended December 31, 2006 was
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001394409_merrion_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001394409_merrion_prospectus_summary.txt
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+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001395000_nanodynami_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001395000_nanodynami_prospectus_summary.txt
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+Prospectus Summary 1 Risk Factors 7 Cautionary Note Regarding Forward-Looking Statements 20 Use of Proceeds 21 Dividend Policy 22 Capitalization 23 Dilution 25 Selected Consolidated Financial Data 27 Management s Discussion and Analysis of Financial Condition and Results of Operations 28 Business 42 Management 60 Principal Stockholders 74 Certain Relationships and Related-Party Transactions 75 Description of Capital Stock 76 Shares Eligible for Future Sale 79 Material United States Federal Income Tax Consequences to Non-United States Holders 81 Underwriting 84 Notice to Investors 88 Legal Matters 89 Experts 89 Where You Can Find Additional Information 89 Index to Consolidated Financial Statements F-1 EX-1.1: FORM OF UNDERWRITING AGREEMENT EX-5.1: OPINION OF LOEB & LOEB LLP EX-23.2: CONSENT OF DELOITTE & TOUCHE LLP NanoDynamics , ND and NDMX are registered trademarks that we own. Revolutiontm, Cell-Poretm, NanoPuritytm and TechBanktm are additional trademarks we use in our business. Other trademarks, trade names and service marks used in this prospectus are the property of their respective owners. Table of Contents PROSPECTUS SUMMARY This summary highlights information about NanoDynamics, Inc. and the offering contained elsewhere in this prospectus. Because it is a summary, it does not contain all of the information that you should consider before investing in our common stock. You should carefully read the entire prospectus before making an investment decision, including the information presented under the heading Risk Factors and in the consolidated financial statements and notes thereto included elsewhere in this prospectus. In this prospectus, except as otherwise indicated or as the context may otherwise require, all references to NanoDynamics, we, us and our refer to NanoDynamics, Inc., a Delaware corporation, and its wholly-owned subsidiaries. Our Company We develop and market products, advanced materials and process technologies that provide clean technology solutions for today s global challenges. We focus principally on the energy, environmental and infrastructure markets. We are capitalizing on the increasing demand for cleaner energy and water, and the emphasis on sustainable renewable resources. We are leveraging our extensive intellectual property portfolio and process and design engineering expertise to deliver value-added products, advanced materials and solutions to our customers in our targeted markets. We have multiple core products with near-term commercialization opportunities that we are pursuing through collaborative relationships with strategic partners and potential customers. These core products include: Revolutiontm Solid Oxide Fuel Cells We have developed fuel cells that have many advantages over existing technologies with broad application in portable, residential and distributed power generation. Our fuel cells offer high efficiency, quick start times, fuel flexibility and very high power densities. We have recently begun to sell our Revolutiontm 50 solid oxide fuel cell to customers on a limited basis. These customers will assist us with feedback to validate our designs while we complete the applicable certification and documentation process for full commercial production. We are also developing larger fuel cell systems, including a 250 watt version that we expect to launch as a commercial product in 2008 and a one kilowatt version for residential applications that we will seek to introduce within the next two years, and have recently entered into separate non-binding memoranda of understanding with two cities in the Ukraine regarding projects for the potential use of our fuel cell technology in the reconstruction of their respective residential municipal heating systems. Water Filters We have developed proprietary filter products with up to 1,000 times the active surface area of conventional sand bed filters, making them highly effective in removing contaminants from drinking water. Our Cell-Poretm product line has been commercially manufactured and sold into the aquaculture market for several years. Our nano-enhanced Cell-Poretm filter, which we have trademarked NanoPuritytm, is currently being evaluated by outside laboratories, universities and potential customers for municipal, industrial and residential applications. In addition, our recently-formed joint venture with a subsidiary of a private investment fund majority-owned by Royal Dutch Shell plc will be pursuing value-added applications of this technology in the oil and gas industry. We anticipate first commercial sales of this product in 2008. Advanced Materials We produce a broad range of advanced materials, including nano-sized metal and ceramic powders, carbon nanotubes, nanostructured steel and nanocement. We are pursuing several applications for the integration of our advanced materials, including hygienic (antibacterial, antimicrobial and antifungal) surfaces, high strength composites and building materials, and advanced energy systems such as lithium-ion batteries, thermoelectric systems and photovoltaic modules. We have been selling certain of our advanced materials products since 2004, including sales of our ND Silver, copper, carbon nanotubes, and nanoceramic powders. In the first six months of 2007, we fulfilled approximately 200 requests for nanomaterials, of which nearly half were paid for by customers and the balance of which were samples we provided for qualification purposes. In addition, through our recently-formed joint venture, we will be pursuing applications of nanocement for down-hole drilling applications and our nanoceramic coatings to extend the useful life of operating machinery both above and below ground. Our portfolio of advanced materials is in various stages of development, qualification and commercial production and sale. Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED JULY 18, 2007 6,600,000 Shares Common Stock We are offering 6,600,000 shares of our common stock. This is our initial public offering and no public market currently exists for our shares. We have applied to list our shares of common stock on the Nasdaq Global Market under the symbol NDMX. We anticipate that the initial public offering price will be between $12.00 and $14.00 per share. Investing in our common stock involves risks. See Risk Factors beginning on page 7. Per Share Total Public Offering Price $ $ Underwriting Discounts and Commissions $ $ Proceeds to Us, Before Expenses $ $ Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. We have granted the underwriters a 30-day option to purchase up to an additional 990,000 shares of common stock to cover over-allotments. The underwriters expect to deliver shares of common stock to purchasers on or about , 2007. Jefferies Company Canaccord Adams Pacific Growth Equities, LLC The date of this prospectus is , 2007. Table of Contents Process Intensification Technologies We have developed process intensification technologies that reduce energy consumption, decrease use of hazardous chemicals and solvents, improve throughput rates and lower capital investment requirements, thereby offering significant advantages over conventional chemical processing techniques and biofuel synthesis. Our rotating tube reactor equipment for process intensification is currently in beta testing at Eastman Kodak Company. We have completed construction of one operating system that we are using for demonstrations to potential customers and two additional units are being built. As we receive feedback from beta testers and potential customers, we expect to modify the design and operational characteristics of the system to be more functional for specific applications. Market Opportunity Clean technology refers to the application of innovative technologies to optimize the use of limited natural resources, offering a cleaner or less wasteful alternative to conventional energy, traditional products, materials and processes while adding economic value. We believe that the clean technology sector has experienced significant growth and is expected to continue to grow. Factors impacting the clean technology trends in our target markets energy, environmental and infrastructure are as follows: Energy The growing demand for energy, concerns over the level and volatility of energy prices, uncertainty regarding security of energy supplies and concerns over the environmental consequences of current industrial and consumer practices are driving demand for efficiency gains and alternative resources throughout the global energy sector. These demands have led to the adoption of significant policy initiatives and incentive programs in Japan, Germany, Spain, France, Italy, Greece and a number of states in the United States, as well as the implementation of international treaties such as the Kyoto Protocol, aimed, in part, at optimizing the use of natural resources to offer cleaner or less wasteful alternatives to traditional products, materials and processes. We believe that companies capable of offering significant efficiency gains or cost-effective, environmentally-friendly alternatives to conventional energy are poised for substantial growth. Environment and Water Heightened awareness over environmental problems we face today, such as greenhouse gases, air pollution and water and soil contamination, has led to an increase in demand for innovative and viable processes and technologies to create greener manufacturing facilities. Furthermore, an increase in the awareness of the potential health consequences associated with a variety of contaminants in drinking water, such as arsenic and lead, has resulted in the increased government scrutiny of the public water supply and the implementation of ever more stringent water-quality standards in the United States, as well as countries such as India and China where increases in chemical contaminants in the water supply are creating serious health hazards. Companies that can meet the growing demand for new materials, products and technologies that can satisfy these regulatory requirements will benefit from these trends. Infrastructure Significant investment in the infrastructure sector continues as emerging countries spend heavily on new projects and developed countries update their infrastructure. The production of cement, a fundamental building material used throughout the world, accounts for a significant percentage of carbon dioxide emissions globally, thereby contributing to significant green-house gas emissions. Companies with products or capabilities that (1) reduce the amount of cement or other materials used in, (2) reduce the energy consumption required by, or (3) lower the overall cost of, a building project are poised to benefit from the continuing growth in infrastructure investment. Furthermore, recent focus on the health and financial impact of the proliferation of mold and other microbial organisms on building materials in residential and commercial spaces has led to a growing demand for improved building materials that contain antimicrobial and antibacterial properties to prevent the onset of mold. Our Approach Our objective is to identify, develop and commercialize solutions to address the global challenges faced primarily in the energy, environment and infrastructure markets by leveraging our broad portfolio of proprietary technologies, advanced materials and process design expertise in commercially relevant ways. Our management Table of Contents NanoDynamics Table of Contents and technical team, relying on their industrial experience and extensive technical expertise, take an opportunistic approach to maximizing stockholder value by matching the properties and characteristics of our proprietary technologies with market needs and customer demands. We seek to capitalize on our opportunities at multiple points in the value chain based on our assessment of a number of factors, including capital requirements, time to market, distribution and sales channels and the regulatory environment. Working alone or in collaboration with others, we will sell manufactured products to end users, provide materials or components to other companies for use in the manufacture of their products, or enter into license arrangements. Our goal is to leverage our materials and process and design engineering expertise to become a leading provider of clean technology products and solutions. The key elements of our strategy are as follows: Provide economical clean technology solutions to our customers and partners. As government regulations become increasingly stringent and environmental issues are brought to the forefront of corporate responsibility and consumer focus, it is vital that our products, materials and process technologies provide effective and economical solutions for our customers and collaborative partners. We are therefore focused on offering highly effective clean technology solutions that offer significant cost savings and efficiency advantages. Focus on high-value products, advanced materials and processes with clear near-term commercial opportunities. Utilizing our advanced, proprietary processing technologies, we are creating solutions offering customers significant value beyond what is available with conventional products, materials and processes. All of our initiatives are analyzed and evaluated for near-term commercial viability, market size and potential customer interest before we invest our resources in research and development. Expand and leverage our strategic and business alliances for market penetration. We are pursuing the expansion of our domestic and international strategic and business alliances, which may take the form of joint ventures, strategic partnerships, cost savings agreements or distribution and marketing arrangements in order to accelerate our penetration into both domestic and international energy, environmental and infrastructure markets. For example, we recently established a joint venture with a subsidiary of Shell Technology Ventures Fund 1 B.V., or Shell Technology Ventures, a private investment fund majority-owned by Royal Dutch Shell plc, to pursue value-added applications of our technologies in the fields of oil, gas and hydrocarbon exploration, production, transmission and processing and solar energy. Leverage our intellectual property portfolio. We are pursuing opportunities to leverage our extensive patent portfolio, trade secrets and technical know-how to develop new products, advanced materials and process technologies for our own use, as well as for our partners and customers. Pursue growth through selected acquisitions. We are pursuing additional growth through the selective acquisition of businesses, products or intellectual property that serve strategic business and technology purposes, such as (1) expanding our market share in existing products, (2) increasing our product offering and revenue base in complementary markets or applications, (3) accelerating the integration and use of our products, advanced materials and process technologies into existing business lines, or (4) accelerating our channels to market. Competitive Strengths We believe we are well positioned to become a leader in the clean technology sector given our competitive strengths, which include the following: Strong intellectual property and scientific leadership position that serve as high barriers to entry. We have an extensive and growing patent portfolio, including 19 issued U.S. patents and over 35 U.S. patent applications, and continually seek opportunities to acquire intellectual property that we believe will lead to commercial applications. Cost-advantaged, high-quality design capabilities and proprietary processes. We believe, based upon the substantial industry experience of our management and our key technical personnel, that our design and process capabilities enable us to achieve superior product quality more efficiently and more Table of Contents economically than conventional methods, thereby meeting today s government and industry requirements and consumer demands. Valuable strategic and business alliances. We have established strategic and business alliances with multiple large global enterprises, including Shell Technology Ventures, Otsuka Chemical Co., Ltd., Tata Chemicals Limited and Kodak, that are enabling us to assess the commercial potential of our products and technologies, define our market opportunities earlier in the development process, identify our customer base and access our markets more quickly. Focused research and development relationships. We have established research and development relationships with academic and scientific institutions, including Clarkson University, Purdue University, The Ohio State University and the U.S. Naval Research Laboratories, to strengthen or expand our existing technology base. Proven management and technical team with relevant and extensive commercial experience. We have assembled a multi-disciplinary management and technical team with extensive experience in manufacturing operations and advanced materials science, with the ability and relevant experience to bring products from the applied development stage through commercialization and full-scale production. Diverse potential end markets. Our products, advanced materials and process technologies have potential application in a wide variety of end markets including electronics, semiconductors, consumer products, military and defense, biomedical and life sciences and transportation. We believe this diversity of markets provides us with numerous opportunities to create revenue streams and avoid reliance on a limited number of customers or applications. Risks We Face To date, we have derived most of our revenues from research and development services, with approximately 89% of our revenue during the year ended December 31, 2006 coming from government contracts. Our commercialization efforts are at an early stage and we have derived only limited revenue from the sales of three of our four core products. During the year ended December 31, 2006 and the three months ended March 31, 2007, such sales accounted for only 1.2% and 2.2% of our revenues, respectively. We are subject to numerous risks that may adversely impact our ability to implement our business plan and compete successfully for a share of the clean technology market, including the following: We face significant competition from companies with substantially greater financial resources, manufacturing capacity and sales and marketing capabilities, including those with established distribution channels; Our ability to commercialize our products, advanced materials and process technologies will depend, in large part, on our ability to establish and maintain collaborative arrangements that will enable us to leverage the capabilities of third parties; We have limited manufacturing experience and may not be successful in developing large-scale commercial manufacturing capabilities; and We may be unable to protect our intellectual property. For more information regarding these and other risks we face, see Risk Factors commencing on page 7. Corporate Information We were incorporated in Delaware on March 15, 2002. Our principal offices are located at 901 Fuhrmann Boulevard, Buffalo, New York 14203. Our telephone number is (716) 853-4900 and our website address is www.nanodynamics.com. Information contained on or accessible through our website is not a part of this prospectus. Table of Contents The Offering Common stock offered by us 6,600,000 shares Common stock to be outstanding after this offering 26,480,052 shares Use of proceeds We intend to use a portion of the net proceeds of this offering for capital equipment and expansion of our manufacturing capabilities, research and development, and sales and marketing activities. The remaining net proceeds will be used for general corporate purposes, including working capital and the possible in-licensing or acquisition of products or businesses that are complementary to ours. Over-allotment option We have granted the underwriters an option to purchase up to an additional 990,000 shares solely to cover over-allotments.
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+PROSPECTUS SUMMARY The following summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus, including Risk Factors and our consolidated financial statements and related notes, before making a decision to invest in our ordinary shares. Any decision to invest in our ordinary shares should be based on a consideration of this prospectus as a whole. Unless indicated otherwise, the information included in this prospectus assumes (i) the common stock to be sold in this offering will be sold at $ per share, which is the midpoint of the price range set forth on the front cover of this prospectus, and (ii) no exercise by the underwriters of their option to purchase additional ordinary shares to cover over-allotments, if any. Overview We are a specialty finance holding company that provides our shareholders with returns derived primarily from our structured finance subsidiaries, commonly known as collateralized debt obligations issuers, or CDOs. We are jointly managed and advised by our managers, Bear Stearns Asset Management Inc., or BSAM, and Stone Tower Debt Advisors LLC, or Stone Tower. Relying on the structured finance expertise of our managers, our objective is to create, structure and own CDOs and other structured finance assets that will provide attractive risk-adjusted returns to us and our shareholders. We generate earnings primarily through a diversified portfolio of CDOs in which we beneficially own all or a majority of the equity. Our CDOs are special purpose vehicles that hold a range of cash-generating financial assets, such as corporate leveraged loans, asset-backed securities and securities issued by other CDOs. To finance the acquisition of these assets, our CDOs typically issue multiple tranches of securities, ranging from highly rated senior debt securities, which are secured or collateralized by these assets, to unrated equity tranches. As the sole or principal equity owner in our CDO subsidiaries, we are entitled to all or a portion of any cash flow, which is typically paid quarterly, generated by the underlying financial assets, after deducting the interest and required principal payments made to holders of CDO debt securities and other expenses. We expect to continue to increase our holdings of CDOs, primarily through the formation and acquisition of additional CDO subsidiaries in which we plan to hold all or a majority of the equity. To a lesser extent, we also acquire and hold minority equity positions in CDOs. We expect to form and hold CDOs structured by our managers as well as to help structure and opportunistically acquire CDOs sponsored by third parties where we believe we can do so on attractive terms. We may also form or hold, from time to time, other structured finance assets. We expect to allocate capital primarily to creating and owning two types of CDOs: (i) corporate credit CDOs, or CLOs, that primarily hold corporate leveraged loans and high-yield bonds, and (ii) asset-backed securities CDOs, or ABS CDOs, which hold asset-backed securities, including residential mortgage-backed securities and commercial mortgage-backed securities. These two types of CDOs include cash CDOs, which hold an underlying portfolio of cash-generating assets, and synthetic CDOs, which enter into total return swaps, credit default swaps or other derivative instruments designed to replicate the economic consequences of holding a referenced portfolio of assets. A synthetic CDO may generally be structured more rapidly to capitalize on favorable market conditions. As of December 31, 2006, our paid-in capital had been fully employed, and we owned a seasoned portfolio of CDOs and related assets with an aggregate fair value of $719.7 million. We believe that our holdings are diversified by asset type and structure. Our managers have substantial expertise in evaluating, structuring and managing CDOs and other structured finance assets. BSAM, which was founded in 1985, managed over $29.0 billion in structured credit assets as of December 31, 2006, including approximately $14.0 billion of CDOs managed since 2003. As of December 31, 2006, the team of investment professionals at BSAM responsible for managing our business, which we refer to as the BSAM Team, had managed seven CDOs, excluding Parapet CDO, which are described in Our Management and Corporate Governance Managers Personnel and Track Record BSAM s Track Record, and had purchased for vehicles it manages equity tranches in Table of Contents CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains certain forward-looking statements that are subject to various risks and uncertainties, including, without limitation, statements relating to the operating performance of our assets and financing needs. Forward-looking statements are generally identifiable by the use of forward-looking terminology such as may, will, should, potential, intend, expect, endeavor, seek, anticipate, estimate, overestimate, underestimate, believe, could, project, predict, continue or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition, or state other forward-looking information. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to: our lack of operating history; our inability to find suitable opportunities to form or acquire new CDO subsidiaries or to source assets for these CDO subsidiaries; changes in the markets in which our CDO subsidiaries expect to invest, interest rates or economic conditions generally; the inability of our financial models to forecast adequately the actual performance results of our CDO subsidiaries due to the variance of the default, loss severity, prepayment, reinvestment spread and other assumptions used in our models from actual performance of the assets held by our CDO subsidiaries; our dependence on the CEOs and the managers and our inability to find suitable replacements if the CEOs were to terminate their position with us, or if the managers were to terminate their management agreements with us; the existence of conflicts of interests in our relationship with BSAM and/or its affiliates and with Stone Tower and/or its affiliates, which could result in decisions that are not in the best interests of our shareholders; limitations imposed on our business by our exemptions from the Investment Company Act of 1940, as amended, or the 1940 Act; changes in our business strategy; general volatility of the securities markets and the market price of the ordinary shares; availability of qualified personnel; the inability of our due diligence or surveillance to reveal all relevant information regarding assets or corporate credits held by our CDO subsidiaries; the degree and nature of our competition; and changes in governmental regulations, tax laws and tax rates and other similar matters that may affect us and holders of our ordinary shares. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this prospectus. Readers are cautioned about relying on any of these forward-looking statements, which reflect our management s views as of the date of this prospectus. The Risk Factors and other factors noted throughout this prospectus could cause our actual results to differ significantly from those contained in any forward-looking statement. We cannot guarantee future results, levels of activity, performance or achievements. We undertake no duty to update any of the forward-looking statements after the date of this prospectus to conform these statements to actual results, except as may be required by law. Table of Contents 18 CDOs managed by third parties, which are described in Our Management and Corporate Governance Managers Personnel and Track Record BSAM s Track Record. As of December 31, 2006, the weighted average annualized cash return of the seven CDOs managed by the BSAM Team was 12.3%, net of management fees, or 19.9%, on an adjusted gross basis before deducting management fees, and the weighted average annualized cash return of the 17 CDO equity tranches it purchased that have made at least one quarterly distribution was 24.5%. Stone Tower, which was founded in 2001, managed over $7.7 billion in structured credit assets as of December 31, 2006, including approximately $6.2 billion in CLOs and over $1.5 billion in assets in credit hedge funds. Stone Tower focuses on managing non-investment-grade credit and credit-related assets. Stone Tower s structured funds have the objective of generating consistent, low volatility returns, and Stone Tower has developed a reputation among market participants as one of the leading cash flow CLO managers in North America. As of December 31, 2006, the weighted average annualized cash return of the nine CDOs sponsored by Stone Tower that have made at least one quarterly distribution, which are described in Our Management and Corporate Governance Managers Personnel and Track Record Stone Tower s Track Record, was 14.0%, net of management fees, or 18.3%, before deducting management fees. As demonstrated by their track records, we believe that BSAM s and Stone Tower s market positions, expertise and long-standing and productive relationships with a broad range of CDO market participants, including leading commercial and investment banks and third-party collateral managers, will help us to identify, evaluate and source attractive opportunities with the best relative value. Our CDOs As of December 31, 2006, our CDO holdings consisted of 19 CDOs, including 11 CDOs in which we own all or a majority of the equity, one in which we own 50% of the equity and seven in which we own a minority interest. In addition, at that date, our largest CDO subsidiary, Parapet CDO, a CDO of CDO securities, held a portfolio consisting of preference share or income note tranches of 15 CDOs and mezzanine debt securities of 22 CDOs. The aggregate fair value of our CDO and related holdings as of that date was $719.7 million. The following charts illustrate the diversification of our portfolio by CDO type and manager as of December 31, 2006: Everquest Assets by Type(1) Everquest Assets by Manager(1) (1) The percentages of assets presented, both by type and by manager, have been apportioned by fair value. For purposes of this presentation, the aggregate percentage attributable to Parapet CDO of 53% has been further apportioned among the specified asset classes on a pro rata basis based on the fair value of each asset class as a percentage of Parapet CDO s total assets. Subsequent to December 31, 2006, and through March 31, 2007, we have acquired equity tranches in three additional CDOs for a total purchase price of $32.9 million. See Our Company CDO Holdings Acquired after December 31, 2006. In addition, we continue to actively evaluate multiple opportunities, some of which may be material in relation to our size. We believe the growth in CDO issuance will continue to provide attractive opportunities to expand our asset base. Table of Contents We currently own equity, which may consist of subordinated securities, income notes, preference or ordinary shares, common stock and/or other equity securities, in the following primary types of CDOs: Corporate Credit CDOs (or CLOs). CDOs that invest primarily in corporate credits, such as loans or bonds, are referred to as collateralized loan obligations, or CLOs, or corporate credit CDOs. As of December 31, 2006, CLOs, not including those held through Parapet CDO, accounted for approximately 27.6% of our total CDO and related assets, which includes holdings in CDOs, warehouse agreements and swaps, and, for the period then ended, approximately 24.1% of our revenue. Our CLOs invest directly or synthetically in the following primary asset classes: corporate leveraged loans, which currently constitute a substantial majority of the assets held by our corporate credit CDOs; and high-yield bonds. Asset-Backed Securities CDOs (or ABS CDOs). CDOs that invest primarily in asset-backed securities are referred to as asset-backed securities CDOs, or ABS CDOs. As of December 31, 2006, ABS CDOs, not including those held through Parapet CDO, accounted for approximately 16.2% of our total CDO and related assets and, for the period then ended, approximately 18.3% of our revenue. Our ABS CDOs directly or synthetically invest primarily in: residential mortgage-backed securities, or RMBS, rated in the range of A2 to Ba2, which currently constitute a substantial majority of the assets held by our ABS CDOs; commercial mortgage-backed securities, or CMBS; other asset-backed securities, or ABS; and securities issued by other CDOs. Parapet CDO. Our CDO subsidiary, Parapet CDO, which is a CDO of CDO securities, accounted for approximately 53.0% of our total CDO and related assets as of December 31, 2006 and, for the period then ended, approximately 57.6% of our revenue. As of December 31, 2006, Parapet CDO had $136.9 million in AA/Aa3 rated debt outstanding that was held by the BSHG Funds and which was collateralized by and has a prior claim upon the assets held in Parapet CDO. Parapet CDO holds the following types of CDO securities: mezzanine debt tranches of CDOs, which constituted approximately 38.6% of the total CDO assets of Parapet CDO as of December 31, 2006; and preference share and income note tranches of CDOs, which constituted approximately 61.4% of the total CDO assets of Parapet CDO as of December 31, 2006, of which the preference share and income note tranches of CLOs and ABS CDOs constituted approximately 18.6% and 42.8%, respectively, of the total CDO assets of Parapet CDO as of December 31, 2006. As of December 31, 2006, we held approximately $22.0 million in deposits in warehouse agreements, which provide short-term CDO financing prior to a permanent CDO securitization, and approximately $0.7 million of hedging contracts. These deposits and hedging contracts accounted for approximately 3.2% of our total CDO and related assets. Our Market Opportunity We believe that the size and dynamics of the CDO market create an attractive environment for Everquest. We believe the CDO market is characterized by the following trends: Significant Growth in the CDO Market. The volume of CDO issuance has grown significantly in recent years. According to Moody s Quarterly Review, the annual volume of CDO issuances rated by Moody s has Table of Contents increased from approximately $14 billion in 1996 to approximately $158 billion in 2006, representing a compound annual growth rate, or CAGR, of approximately 31%. We believe the growth in the sector has been driven by strong collateral performance, attractive asset and liability spreads when compared to alternatives and the value of structural considerations such as diversification, subordination, increasingly experienced collateral managers and the benefits of a maturing and more sophisticated market. We also believe that the rapid growth in the CDO market has been driven in part by a strong demand for fixed-income assets, particularly rated debt securities. The demand by large investors, such as pension funds and insurance companies, for rated income-producing investments has significantly outstripped the supply of new corporate debt and ABS in recent years. This imbalance has accelerated a trend by commercial banks, investment banks and other financial intermediaries to securitize or re-securitize existing financial assets in order to create additional supply. For example, loans have been repackaged into CLOs, and ABS, RMBS and CMBS have been repackaged into ABS CDOs. In connection with these repackagings, senior tranches of debt securities issued by the CDO can be sold to satisfy the ongoing demand for rated debt securities. Initially, such repackagings took the form of CDOs that aggregated actual cash-generating loans or securities. Therefore, cash loans or securities had to be acquired in the market before they could be securitized into a CDO. The development of market-standard documentation for credit default swaps and total return swaps, however, has made it practicable to create CLOs and ABS CDOs synthetically, eliminating the requirement to source cash assets, which in turn reduces the time required to create these structures and enables them to be sized more flexibly. We believe the demand for rated CDO debt securities will provide us with attractive opportunities to create and structure new CDO subsidiaries. Market Developments Favoring CDO Equity and Other Subordinated Tranches. We believe that the dynamics of the CDO market have led to increased cash flows to certain CDO equity and other subordinated tranches, which in turn produce higher current yields relative to other fixed income opportunities. Specifically, we believe the increase in demand for rated debt securities issued by CDOs described above has had the effect of increasing the positive interest rate spreads between assets and liabilities of CDOs, creating an attractive arbitrage opportunity for the equity owner of CDOs. We expect this trend, to the extent it continues, to provide us with opportunities to form or acquire new CDO subsidiaries with favorable risk-adjusted return profiles, and to leverage our market position to gain access to opportunities not available to the wider market. Robust Leveraged Buyout Activity. A strong and steady flow of leveraged buyout, or LBO, transactions in the market over the past year, combined with a move towards larger LBO transaction sizes, has contributed to the continued sizeable supply of leveraged loans, high-yield bonds and other fixed-income assets targeted by our business strategy. According to Thomson Venture Expert, as of 2006 there were over 1,800 private equity funds in existence globally. Private equity funds, which are a key driver for the recent growth in LBO transactions, have experienced significant inflows of capital recently, with over $220.0 billion of capital raised in the United States in 2006, according to Thomson Venture Expert. According to Standard Poors Leveraged Buyout Review, total LBO volume in the United States increased from $19.5 billion in 2001 to $223.0 billion in 2006, representing a CAGR of 64%, and the average size of LBO transactions, as measured by total sources of funding, increased from $388.6 million in 2001 to $1,308.8 million in 2006. We expect this trend, to the extent it continues, to enhance the managers ability to source assets for future corporate credit CDOs. We believe we are well positioned to benefit from these market opportunities and create attractive current income and long-term capital appreciation for our ordinary shareholders. Competitive Advantages We believe that we enjoy the following competitive advantages: Fully Employed Paid-in Capital and Diversified Portfolio of CDOs. We have fully employed our paid-in capital to date in a seasoned portfolio of CDOs diversified by manager, collateral type, vintage and duration. As of December 31, 2006, our CDO holdings consisted of 19 CDOs, including 11 in which we own all or a majority of the equity, one in which we own 50% of the equity and seven in which we own a minority interest. In addition, at that date, our largest CDO subsidiary, Parapet CDO, held a portfolio consisting of preference Table of Contents share and income note tranches of 15 CDOs and mezzanine debt securities of 22 CDOs. As of December 31, 2006, five of the CDOs in which we hold equity securities were managed by our managers. We believe that this diversification reduces our exposure to individual market sectors or credit events. Management Expertise. Our co-chief executive officers, Ralph R. Cioffi and Michael J. Levitt, have a combined total of more than 54 years of experience in structured finance, non-investment-grade debt investing, leveraged finance and private equity. Mr. Cioffi joined Bear Stearns in 1985, and founded the BSHG Funds in March 2003. He was instrumental in the creation of the structured credit effort at Bear Stearns, which is a leading underwriter and secondary trader in structured credit securities. Mr. Levitt founded Stone Tower Capital LLC, or STC, in 2001. Before that, he was instrumental in building the leveraged finance business at Morgan Stanley and subsequently at Smith Barney (a Citigroup predecessor). Mr. Levitt was also a managing partner of the New York office of the private equity firm of Hicks, Muse Tate Furst Incorporated. Messrs. Cioffi and Levitt will have principal management responsibility for Everquest. We believe that their experience, together with the experience of the other investment professionals at BSAM and Stone Tower in investing in debt and equity securities and managing investments in structured credit securities, will afford us a competitive advantage in identifying and creating new CDO opportunities with the potential to generate attractive returns. Strengths of Our Managers. We believe that we will be able to leverage the strengths of our managers, which include the following: Strong Track Record. We believe BSAM has a strong track record of developing transaction structures, managing structured vehicles and selecting vehicles managed by third parties. In particular, BSAM has developed innovative transaction structures that increase the efficiency with which pools of structured securities can be funded. For example, BSAM designed and marketed the Klio series of CDOs, which use commercial paper as a funding mechanism for highly rated structured finance assets and which BSAM believes were the first transactions of their kind. BSAM often takes an active role in structuring the securities it buys on issue from third parties, and from time to time restructures them to increase their funding efficiency. As of December 31, 2006, the BSAM Team had managed seven CDOs, excluding Parapet CDO, which are described in Our Management and Corporate Governance Managers Personnel and Track Record BSAM s Track Record, and had purchased for vehicles it manages equity tranches in 18 CDOs managed by third parties, which are described in Our Management and Corporate Governance Managers Personnel and Track Record BSAM s Track Record. As of December 31, 2006, the weighted average annualized cash return of the seven CDOs managed by the BSAM Team was 12.3%, net of management fees, or 19.9%, on an adjusted gross basis before deducting management fees, and the weighted average annualized cash return of the 17 CDO equity tranches it purchased that have made at least one quarterly distribution was 24.5%. Stone Tower has developed a reputation among market participants as one of the leading cash flow CLO managers in North America. As of December 31, 2006, the weighted average annualized cash return of the nine CDOs sponsored by Stone Tower that have made at least one quarterly distribution, which are described in Our Management and Corporate Governance Managers Personnel and Track Record Stone Tower s Track Record, was 14.0%, net of management fees, or 18.3%, before deducting management fees. Complementary Expertise. We believe that one of our competitive strengths is the extensive and complementary expertise of each of our managers. BSAM generally invests in a range of structured finance assets, with particular expertise in ABS CDOs, and Stone Tower focuses on non-investment-grade corporate credit assets. We believe that the complementary expertise of our managers will help us form new CDOs and allocate our capital among either ABS CDOs or CLOs and related asset classes where we believe we can achieve the best relative value, in light of prevailing market conditions. History of Cooperation. BSAM and Stone Tower have worked together for more than four years in a variety of capacities. They have jointly identified and evaluated potential opportunities, including Table of Contents collateral portfolios, based on each entity s particular expertise. They also have acted as subadvisor for funds managed by each other and jointly structured and managed CDOs. Currently, BSAM and Stone Tower jointly manage two CDOs, portions of the equity of which are held by us and by Parapet CDO. They have also jointly established three CDOs that were structured by them with assets selected by them and in which funds they manage have invested. We believe their history of cooperation will enable them to work together effectively on our behalf. Access to Proprietary and High-Quality Deal Flow. We believe BSAM and Stone Tower s market position, expertise and long-standing relationships with a broad range of market participants have provided and will continue to provide us with the opportunity to evaluate a pipeline of attractive opportunities before they become available to the wider market. These opportunities include the ability to source high-quality collateral for CDOs that may be structured by our managers, including potentially CDOs of CDOs, as well as the ability to structure and acquire equity in CDOs managed by third parties on attractive terms. High-Quality Risk Management Systems. We believe the strong track record to date of our managers is due, among other things, to the surveillance and risk management systems they utilize. We believe that access to those systems is a significant competitive advantage. The proprietary and third-party surveillance systems used by BSAM were designed to ensure that all assets are reviewed real time and those showing signs of potential credit deterioration or poor performance are designated for further review. BSAM s surveillance systems track over 80,000 securities on a daily basis and monitor the performance of all of our CDO holdings as well as perform in-depth analysis on all the underlying collateral backing such holdings. We believe our managers systems enhance our ability to quickly identify, and where possible, sell or otherwise hedge potentially credit-impaired assets before significant credit deterioration begins or rating downgrades occur. We benefit from these systems not only in the case of CDOs managed by our managers but also with respect to those managed by third parties. With respect to CDOs managed by third parties, we integrate the underlying credits into our surveillance systems so that they can be monitored in the same way as CDOs managed by our managers. When we identify a potential credit-impaired asset in a third party managed CDO, we notify the manager and work with the manager to sell or hedge the asset. If the asset is not sold, we attempt to hedge our exposure to the asset. Additionally, Stone Tower performs daily surveillance on all loans underlying each of our CLO investments. Both BSAM and Stone Tower monitor assets in real time with systems that are designed to be early warning in nature, as opposed to systems that provide alerts only after an asset begins to deteriorate. Access to BSAM and Stone Tower Investment Professionals and Infrastructure. We also believe we have a significant competitive advantage through our access to BSAM s and Stone Tower s structured finance professionals, who are supported by an established operational infrastructure. As of December 31, 2006, the combined BSAM Team and Stone Tower team responsible for Everquest included a total of approximately 52 professionals, consisting of portfolio managers, research analysts and other professionals. In addition, Everquest has access to the broader operational infrastructure of BSAM and Stone Tower, including information technology, legal, administrative and other back office operational infrastructure. As of December 31, 2006, BSAM and Stone Tower had more than 440 employees in the aggregate. Strong Alignment of Interest among Everquest, BSAM and Stone Tower. The interests of BSAM and Stone Tower are strongly aligned with ours. The BSHG Funds, which are managed by BSAM, owned approximately 67.0% of our ordinary shares as of December 31, 2006, and are expected to own approximately % of our ordinary shares after this offering. I/ST, a fund managed by an affiliate of Stone Tower, owned approximately 8.4% of our ordinary shares as of December 31, 2006, and is expected to own approximately % of our ordinary shares after this offering. In addition, as a result of this offering each of BSAM and Stone Tower, or their designees, will be entitled to receive share grants representing 2.5% (or together an aggregate of 5.0%) of our ordinary shares outstanding upon completion of this offering. Table of Contents Our Business Strategy We intend to continue to grow our holdings in CDOs and other structured finance assets. We seek to generate attractive returns by leveraging the strengths of our managers to: evaluate and source attractive opportunities with the best relative value in varying market environments, through both CDOs we structure ourselves and opportunities presented to us by third parties; select high quality assets to be held by the CDOs that are managed by our managers and in which we hold interests, and actively participate in the structuring of, and asset selection for, CDOs that are managed by third parties and in which we hold interests; maximize the yield on the underlying assets relative to our cost of financing their acquisition; achieve a level of diversification in our overall portfolio in terms of asset type and manager to minimize the effect of negative credit events; employ and develop innovative strategies, including synthetic techniques, to improve the quality, execution and performance of our CDO assets; actively monitor through proprietary and third-party surveillance systems the performance and management of assets held by the CDOs in which we hold interests, including those managed by third parties; and utilize credit default swaps to manage risks of credit events relating to our assets and other hedging techniques to manage interest rate risks. Our Managers Founded in 1923, The Bear Stearns Companies Inc. (NYSE: BSC), a holding company that, through its broker-dealer and international bank subsidiaries, principally Bear, Stearns Co. Inc., Bear, Stearns Securities Corp. Bear, Stearns International Limited and Bear Stearns Bank plc, is a leading investment banking, securities and derivatives trading, clearance and brokerage firm serving corporations, governments and institutional and individual investors worldwide. Headquartered in New York City, Bear Stearns has approximately 13,500 employees worldwide. BSAM is an asset management subsidiary of The Bear Stearns Companies Inc. BSAM, established in 1985, is an SEC-registered investment advisor and provides investment management services to corporations, trusts, employee benefit plans, public authorities, foundations, endowments, religious organizations, high net worth individuals, mutual funds, Taft-Hartley plans, private investment funds, venture capital funds and issuers of collateralized bond and loan obligations and other structured securities products. BSAM offers investment expertise across a wide spectrum of investment strategies, including: hedge funds; private equity; large, small and mid-cap domestic equities; corporate, government, municipal and high-yield bonds; balanced portfolio management; mortgage-backed and mortgage derivative securities and systematic equity and collateralized loan accounts. BearMeasurisk, an affiliate of BSAM, provides performance and risk analytics for institutional clients. BSAM employed approximately 409 individuals as of December 31, 2006, of which approximately 150 are classified as investment professionals and 259 are administrative personnel. The investment professionals total is comprised of approximately 42 portfolio managers, 53 research analysts and 55 other professionals, a category that includes traders, hedge fund administrators and private equity professionals. The majority of BSAM s business, including portfolio management, research, administration and operations, is conducted at Bear Stearns world headquarters in New York City, although BSAM also has an investment management presence in San Francisco. The Marketing and Client Service Group is headquartered in the New York City office, but is represented through branch offices in Chicago and San Francisco. Internationally, the firm is represented through offices in London and Tokyo. Stone Tower is an affiliate of STC, which was founded in 2001 as an alternative investment firm focused on credit and credit-related assets. Through its affiliates, Stone Tower managed, as of December 31, 2006, Table of Contents approximately $7.7 billion in leveraged finance-related assets across several structured finance and hedge fund vehicles as described in Our Management and Corporate Governance Manager s Personnel and Track Record Stone Towers Track Record. As of December 31, 2006, Stone Tower had 37 employees, which included 19 investment professionals. Stone Tower s objective is to generate stable and consistent returns for its investors, which include domestic and international banking institutions, insurance companies, pension funds, institutional money management firms, family offices and high net worth individuals. Our CEOs Our co-chief executive officers are Ralph R. Cioffi, a senior managing director at Bear Stearns, and Michael J. Levitt, chairman of Stone Tower. Mr. Cioffi is a senior managing director of Bear Stearns, where he has worked since 1985, and is a member of BSAM s board of directors. From 1985 through 1991, Mr. Cioffi worked in institutional fixed income sales, where he specialized in structured finance products. He served as the New York head of fixed income sales from 1989 through 1991. From 1991 through 1994, Mr. Cioffi served as global product and sales manager for high-grade credit products. He was involved in the creation of the structured credit effort at Bear Stearns and was a principal force behind Bear Stearns position as a leading underwriter and secondary trader of structured finance securities, specifically CDOs and esoteric asset-backed securities. Mr. Cioffi founded and has been managing the BSHG Funds since March 2003. Mr. Levitt founded Stone Tower Capital LLC in 2001. He is also the chairman and chief investment officer of Stone Tower. Mr. Levitt has spent his entire 25-year career managing or advising non-investment-grade companies and investing in non-investment-grade assets. Previously, Mr. Levitt served as a partner in the New York office of the private equity firm of Hicks, Muse, Tate Furst Incorporated, where he was responsible for originating, structuring, executing and monitoring many of the firm s investments in the consumer products, media and broadcasting industries. Additionally, he managed and maintained many of the firm s relationships with investment and commercial banking firms. Previously, Mr. Levitt served as the co-head of the investment banking division of Smith Barney Inc. with management responsibility for the advisory and leveraged finance activities of the firm. Mr. Levitt began his investment banking career at, and ultimately served as a managing director of, Morgan Stanley Co., Inc. While there, he oversaw the firm s businesses related to private equity firms and non-investment-grade companies. Our Formation Everquest Financial Ltd. is a recently formed holding company, incorporated as a Cayman Islands exempted company with limited liability. On September 28, 2006: the BSHG Funds, which are managed by BSAM, agreed to transfer to us equity in 10 CDOs, including Parapet CDO, for a purchase price of approximately $548.8 million. In consideration, we agreed to issue 16,000,000 of our shares, at $25 per share, and pay approximately $148.8 million in cash. HY II Investments, L.L.C. and EGI-Fund (05-07) Investors, L.L.C., or collectively, HY, affiliates of a Stone Tower investor, agreed to transfer to us equity in two CDOs with an NAV of approximately $6.4 million and cash in the amount of approximately $18.6 million in exchange for 1,000,000 of our shares, at $25 per share. Other investors paid cash of approximately $137.5 million, or $25 per share, in exchange for 5,500,100 of our shares. As a result of these transactions, which closed on October 5, 2006, we received CDO equity of approximately $555.2 million and cash of approximately $7.3 million, net of the cash consideration paid to the BSHG Funds. We valued the equity interests in the CDOs we acquired in connection with our formation at their fair value as of the date we agreed to acquire these interests, taking into account a number of factors, including the projected cash flows we expected to be generated by these interests and valuation information provided by third-party market participants. Table of Contents As part of the assets we purchased from the BSHG Funds, the BSHG Funds transferred to us 100% of the equity of Parapet CDO, which equity was then valued at approximately $369.8 million. Subsequent to October 5, 2006, institutions and sophisticated investors paid approximately $97.3 million in aggregate to purchase additional shares in further private-round financings. The proceeds of these financings have been used to purchase additional CDO equity or pay down outstanding amounts under an existing secured credit facility. The shares received by the BSHG Funds, HY and other initial and private-round investors consisted of nonvoting participating shares, which we expect will become ordinary shares in connection with the offering. Risk Factors An investment in the ordinary shares being offered hereby involves various material risks. You should consider carefully the risks discussed under Risk Factors before purchasing the ordinary shares. 1940 Act Exclusion We conduct our operations so that we are not required to register as an investment company under the 1940 Act. Pursuant to Section 3(a)(1)(C) of the 1940 Act, any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis will be deemed to be an investment company. Excluded from the term investment securities, among other things, are securities issued by majority owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company provided by Section 3(c)(1) or Section 3(c)(7) of the 1940 Act. We believe that more than 60% of our assets consist of CDO subsidiaries that are themselves not investment companies as a result of the exception for structured finance companies, Rule 3a-7, rather than in reliance on Section 3(c)(1) or Section 3(c)(7) of the 1940 Act. Accordingly, we do not own or propose to acquire investment securities having a value in excess of 40% of the value of our total assets on an unconsolidated basis, and are therefore not required to register as an investment company. If it were determined that one or more of our CDO subsidiaries could not rely on the exclusion from investment company status under the 1940 Act for structured finance companies, these CDO subsidiaries would have to restructure their operations in order to rely on that exclusion. If they could not restructure their operations to comply with the exclusion, then we could have to register as investment companies under the 1940 Act, either of which could materially and adversely affect our earnings. Tax Matters U.S. persons may be subject to certain adverse U.S. federal income tax consequences relating to the ownership and disposition of our shares. See Certain Tax Considerations U.S. Federal Income Tax Considerations. Table of Contents Our Organizational Structure The following chart illustrates our expected corporate structure and ownership upon the closing of this offering. All percentages reflect anticipated actual ownership. (1) We hold 100% of the voting securities of Parapet CDO. (2) At December 31, 2006, we held all or a majority of the voting securities in five CDO subsidiaries, including Parapet CDO, which accounted for 71.0% of our total assets. (3) Also includes, but is not limited to, CDOs in which we hold all or a majority of the equity securities, but not the voting securities. (4) Calculated on a basis similar to management and incentive fees, subject to the availability of profits for distribution; management and incentive fees do not duplicate amounts distributable in respect of the profits interests. Table of Contents Our Management Structure and Corporate Governance Everquest is a holding company incorporated as a Cayman Islands exempted company with limited liability. Our board of directors consists of seven directors, a majority of whom meet the independence standards of the New York Stock Exchange, or NYSE. Our CEOs and managers manage the business and affairs of our company under the supervision of our board of directors. The memorandum and articles of association of the company require that our board of directors will consist of not fewer than seven or more than 12 directors. The current directors include each of our CEOs, an additional director designated by BSAM, and four members who meet the independence standards of the NYSE. Shareholders elect our directors, except the BSAM and Stone Tower designated directors. Special voting share classes granted to BSAM and Stone Tower entitle each to elect one director so long as the relevant management agreement remains in effect, or the relevant manager or its affiliates has over $50 million invested in Everquest, and in the case of BSAM entitle BSAM to elect one additional director so long as the BSAM-affiliated investment in Everquest is over $100 million. Independent directors may be removed for cause at any time by the vote of two-thirds of the ordinary shares. BSAM and Stone Tower may remove any director they are entitled to designate, and a director who is a BSAM or Stone Tower designee may also be removed for cause by a two-thirds vote of the independent directors. Any vacancy of a BSAM or Stone Tower designated director will be filled by BSAM or Stone Tower, and any other vacancy will be filled by majority vote of the remaining directors. Our board of directors has formed a nominating and corporate governance committee, an audit committee and a compensation committee. The nominating and corporate governance committee is required to recommend a slate of nominees for election as independent directors. Management Agreements We and each of BSAM and Stone Tower are parties to management agreements, pursuant to which the managers, subject to applicable law and our organizational documents and in accordance with the policies and control of our operating committee and, in certain circumstances, subject to our board of directors approval: (i) perform diligence, structure on our behalf our CDO subsidiaries and oversee the purchase and sale of assets (which purchases or sales may be from affiliates of either or both of the managers); (ii) monitor and manage our assets and financial activities (including through the use of leverage and our hedging policies); (iii) provide us with certain advisory services, (iv) are responsible for the day-to-day activities relating to our assets, with such allocation of responsibilities as between the managers as determined by our board of directors; and (v) such other matters as our board of directors and the managers may agree upon from time to time. See The Management Agreements. In general, the managers receive the following compensation and incentive allocation in connection with the management services provided to us. The compensation comes in two forms: a profits interest in Everquest LLC, and fees paid by Everquest to the extent that the managers are managing Everquest assets not held directly or indirectly by Everquest LLC. Amounts distributable to the managers in respect of the profits interests in Everquest LLC are calculated on a basis similar to the management and incentive fees described below, subject to the availability of profits for distribution. The management and incentive fees do not duplicate the amounts distributable in respect of the profits interests. Fee Summary Description and Method of Computation Base Management Fee As compensation for their services, the managers are entitled to a management fee, or Base Fee, payable quarterly in arrears, equal to (i) 1.75% on an annualized basis of the company s net assets up to $2 billion, plus (ii) 1.50% on an annualized basis of the company s net assets over $2 billion and up to $3 billion, plus (iii) 1.25% on an annualized basis of the company s net assets over $3 billion and up to $4 billion, plus (iv) 1% on an annualized basis of the company s net assets over $4 billion. For purposes of calculating the Base Fee, the company s net assets will be adjusted to exclude special one-time costs pursuant to changes in GAAP, and non-cash charges. Table of Contents Such adjustments will be made only after discussion between the company and the independent directors on our board of directors and approval by a majority of the independent directors. Incentive Fee In addition, the managers are entitled to an incentive fee, or Incentive Fee, payable quarterly in arrears, equal to (i) 25% of the dollar amount by which (a) the quarterly net increase in net assets resulting from operations of the company, as determined in accordance with GAAP, before accounting for the Incentive Fee, per weighted average ordinary share, exceeds (b) an amount equal to the weighted average of the price per ordinary share for all issuances of ordinary shares, after deducting any underwriting discounts and commissions and other costs and expenses related to such issuances, multiplied by the greater of 2.00% per quarter or 0.50% plus one-fourth of the U.S. Ten Year Treasury Rate for such quarter, multiplied by (ii) the weighted average number of shares outstanding during the quarter. The Incentive Fee will be adjusted to exclude special one-time events pursuant to changes in GAAP and non-cash charges. Such adjustments will be made only after discussion between the company and the independent directors on our board of directors and approval by a majority of the independent directors. Certain Reduction in Fees To the extent we have purchased after September 28, 2006, or in the future purchase, a stake in a CDO or other structured finance issuer sponsored by BSAM or Stone Tower, the fees payable by us under the management agreements will be reduced by the portion of any management or incentive fees received by BSAM or Stone Tower as manager of the CDO or other issuer that is allocable to our stake in such CDO or other issuer, to the extent such fees are not otherwise waived by BSAM or Stone Tower. The foregoing fee reduction provision does not apply to our initial portfolio of CDOs that we acquired in our formation transactions. In addition, no management or incentive fees are paid by Parapet CDO to BSAM or Stone Tower, although BSAM and Stone Tower may be entitled to investment management fees with regard to certain of Parapet CDO s underlying CDO assets. Fee Allocation The compensation paid to the managers will be allocated between them as follows: (i) compensation relating to the first $562.0 million of book capital of our ordinary shares outstanding at the time of determination of such compensation will be allocated 80%/20% between BSAM and Stone Tower, respectively, and (ii) compensation relating to book capital of our ordinary shares in excess of $562.0 million will be allocated 60%/40% between BSAM and Stone Tower, respectively. Reimbursement of Expenses The managers are entitled to be reimbursed by the company for certain expenses incurred by the managers or their affiliates on behalf of the company or in connection with the provision of certain services under the management agreement. Term, Termination and Termination Payment Each management agreement has a term of one year and will be automatically renewed at the stated expiration for additional one-year periods, unless either the company or the respective manager gives 30 days prior written notice that the related management agreement will not be renewed. Table of Contents Neither management agreement will be renewed if, upon the affirmative vote of at least two-thirds of the independent directors, or a vote of at least two-thirds of the ordinary shares held by disinterested shareholders, it is determined there has been (i) unsatisfactory performance that is materially detrimental to us, or (ii) the compensation payable to a manager is unfair. If the company gives a notice of nonrenewal of a management agreement (other than for cause), the applicable manager will be entitled to certain potentially significant termination fees. The applicable manager may waive payment of any such fees to it. Conflicts of Interest Conflicts with BSAM and Stone Tower We are subject to conflicts of interest relating to BSAM and its affiliates, including Bear, Stearns Co. Inc., which is one of the underwriters of this offering, and Stone Tower and its affiliates, including, among others, the following: Each of our CEOs also serves as an executive officer of BSAM or Stone Tower. As a result of these relationships, these persons have a conflict of interest with respect to our agreements and arrangements with our managers, which were not negotiated at arm s length, and the terms of which may not be as favorable to us as if they had been negotiated with an unaffiliated third party. Substantially all of our initial CDO holdings were contributed by the BSHG Funds, which are managed by BSAM. Thus, the consideration given by us in exchange for these assets was not negotiated at arm s length and may exceed the values that could be achieved upon the sale or other disposition of these assets to third parties. In addition, the performance of the CDO holdings retained by the BSHG Funds may differ from the performance of those initially contributed to us. BSAM, Stone Tower and/or their affiliates currently advise, sponsor or act as manager to other business ventures or clients that have investment objectives that overlap with our business plan and strategies and therefore compete with us for asset acquisition, investment and other opportunities and may create additional vehicles in the future that compete for such opportunities. We will therefore face conflicts of interests with the managers and/or their affiliates with respect to the allocation of asset acquisition, investment and other opportunities. We may purchase assets from, finance the assets of or make co-purchases alongside BSAM or Stone Tower, their affiliates and/or business ventures or clients that they manage, including assets of CDOs structured by BSAM or Stone Tower. These transactions will not be the result of arm s length negotiations and will involve conflicts between our interests and the interests of BSAM or Stone Tower and/or their affiliates in obtaining favorable terms and conditions. In structuring our CDO subsidiaries, our managers may have conflicts between us and other entities managed by them that purchase debt securities in our CDOs with regard to setting subordination levels, determining interest rates, pricing the securities, providing for divesting or deferring distributions that would otherwise be made to CDO equity, or otherwise setting the amounts and priorities of distributions to the holders of debt and equity interests in the CDOs. Not all of the CDO equity assets of the BSHG Funds were contributed to us. The retained assets include CDO equity interests in CDOs in which we acquired an interest, which may result in the BSHG Funds having an interest that conflicts with ours. We may also compete with BSAM s and Stone Tower s current and future business ventures or clients for access to management time, resources, services and functions. The managers are only required to devote as much of their time and resources to our business as they deem necessary and appropriate to fulfill their obligations under their respective management agreements, and neither CEO is required to devote a specific amount of time to our affairs. Table of Contents Ralph R. Cioffi, one of our CEOs, is a director of BSAM, the founder of the BSHG Funds and beneficially owns equity in the BSHG Funds and in Bear Stearns. Affiliates of Bear Stearns, including the BSHG Funds and other BSAM-managed funds, may compete with us for asset acquisitions and CDO investments either directly or as brokers, dealers or underwriters of CDO securities or the assets underlying such securities. Michael J. Levitt, one of our CEOs, is the founder of and beneficially owns equity interests in Stone Tower. Affiliates of Stone Tower may compete with us for asset acquisition and CDO investments. Therefore, he has interests in our relationship with Stone Tower that are different from the interests of our shareholders. Subject to certain conditions, BSAM and Stone Tower are entitled to elect two and one of our directors, respectively. Although all of our directors will owe fiduciary duties to all shareholders, the directors elected by our managers may have interests different from those of our independent directors and aligned with the interests of our managers. Each of BSAM and Stone Tower manage funds or are affiliated with funds that are significant shareholders of Everquest. Each of our CEOs has beneficial interests in their related funds. BSAM and Stone Tower may enter into transactions at the shareholder level, such as transactions that hedge exposures to Everquest s assets, which provide benefits to these shareholders that are not provided to Everquest or our other shareholders. Affiliates of HY have significant beneficial interests in Stone Tower. As a contributor (in exchange for shares in the company) of two of our initial CDO holdings and as a holder of an indirect economic interest in Stone Tower, these affiliates may have interests that are not aligned with those of other shareholders. I/ST, an entity controlled by Michael J. Levitt, beneficially owned approximately 8.4% of our shares as of December 31, 2006. In exercising his management discretion on behalf of I/ST, Mr. Levitt may take actions, or refrain from taking actions, which would not benefit us or our other shareholders. BSAM and Stone Tower, through their activities on behalf of other clients or entities, may acquire confidential or material non-public information or be restricted by internal policies from initiating transactions in certain securities. These restrictions may prevent us from managing our assets in a manner that is otherwise in our best interests. We may purchase assets that are senior or junior to, or have rights and interests different from or adverse to, assets held by other accounts or funds managed by BSAM or Stone Tower. Our interests in such assets may conflict with the interests of such other accounts in related investments at the time of origination or in the event of a default or restructuring of a company, property or other asset. We purchase additional assets from third parties in negotiated transactions. Some of the asset sellers may be entities with which BSAM or Stone Tower or their affiliates has engaged in other commercial transactions, are clients of BSAM or Stone Tower or their affiliates or have other business relationships and may include shareholders. Such relationships could influence the purchase price for the additional assets. Although both our company and our managers are expected to benefit from the ability to jointly develop relationships with dealers, sponsors, originators and other participants in the CDO markets, there may be instances in which our managers receive greater benefits in these relationships by reason of their roles with us. We will benefit from reduced fees payable to our managers to the extent they receive fees from third parties in transactions in which we invest; the degree of this benefit will depend in part on the manner in which our managers allocate investments between us and third parties. Bear, Stearns Co. Inc., one of the underwriters of this offering and an affiliate of BSAM, may in the future execute trades with us or on our behalf, perform valuation services for BSAM on our behalf, extend or arrange debt financing to us or on our behalf, assist with structuring and placing securities of our CDO subsidiaries and perform other services for us. Table of Contents Conflicts Relating to the Management Agreements We are subject to conflicts of interests relating to our managers roles under the management agreements, including, among others, the following: Although our management agreements are subject to annual renewal, failure by us to renew the management agreements in certain circumstances and at certain times may result in our incurring additional costs. Upon termination of a management agreement other than for cause, we are required to pay the manager a termination fee if the termination occurs before September 2009. Our managers liability is limited under the management agreements. Except under certain circumstances, we have agreed to indemnify our managers and their affiliates to the fullest extent permitted by law against all liabilities and expenses arising from acts or omissions of any such indemnified party arising from, or in connection with, the provision of services by BSAM and Stone Tower, or on behalf of BSAM and Stone Tower, under the management agreements. The amounts payable to our managers were not approved by our independent directors and may be higher than the company could achieve on an arm s length basis with third parties. The Incentive Fee, which is based upon the company s achievement of targeted levels of net increase in net assets resulting from operations, may lead our managers to place undue emphasis on the maximization of net increase in net assets resulting from operations at the expense of other criteria, such as preservation of capital, maintaining sufficient liquidity and/or management of credit risk or market risk, in order to achieve higher incentive compensation. The Base Fee, which is based on the amount of our net assets (as defined in the management agreements), is generally payable regardless of our operating performance. The Base Fee may reduce our managers incentive to devote the time and effort of their professionals to seeking profitable opportunities for our portfolio. The Base Fee and Incentive Fee are based on the value of our net assets. The value of our net assets is based on highly subjective assumptions by our managers, who also receive the Base Fee and Incentive Fee. No members of the BSAM Team or Stone Tower, including the CEOs, have entered into contracts with us requiring them to provide us or the managers with their services. Consequently, members of the BSAM Team and Stone Tower may devote a significant amount of time managing other BSAM or Stone Tower-managed vehicles and may not be available to our managers to provide services pursuant to our management agreements. Resolution of Potential Conflicts of Interest; Equitable Allocation of Investment Opportunities The management services to be provided by our managers under the management agreements are not exclusive to us and our subsidiaries. Our managers and/or their affiliates engage in a broad spectrum of activities, including investment advisory activities, and have extensive investment activities that are independent from, and may conflict or compete with, our business plan and strategies. BSAM, Stone Tower and/or their affiliates currently advise, sponsor or act as manager to other business ventures or clients that have investment objectives that overlap with our business plan and therefore compete with us for asset acquisition, development and structuring opportunities. Each of BSAM, Stone Tower and/or their affiliates sponsor or manage structured products funds, hedge funds, CDOs and separate accounts that invest in CDO equity, asset-backed securities, corporate debt securities and other structured fixed income securities. We will therefore face a number of conflicts of interest with our managers and/or their affiliates with respect to the allocation of asset acquisition opportunities. In addition, our managers may raise new investment funds whose investment objectives overlap with our business plan, which may further compound these conflicts. Our managers are required to act in a manner that they consider fair and equitable in the allocation of business opportunities, and each of the managers internally oversees conflicts in a manner designed to prevent any client from receiving unduly favorable treatment over time. However, because the decision to offer any Table of Contents business opportunity to us lies within the discretion of the managers, it is possible that we may not be given the opportunity to participate in certain opportunities that meet our business objectives and that are made available to other clients or affiliates of the managers. Each manager intends to allocate asset acquisition opportunities among us, on the one hand, and the investment management accounts managed or advised by it, on the other, in accordance with its asset allocation policies and procedures. Under these policies and procedures, the respective manager will use its reasonable best judgment and act in a manner which it considers fair and reasonable in allocating asset acquisition opportunities. When it is determined that it would be appropriate for us or one of our subsidiaries and one or more of such other investment management accounts to participate together in an acquisition opportunity, the respective manager will seek to allocate opportunities for all of the participating entities, including us, on an equitable basis, taking into account, among other things, such factors as the relative amounts of capital available for new purchases, the financing available in respect of an asset, legal restrictions, the size, liquidity and anticipated duration of the proposed asset acquisition, and the respective business objectives and policies and asset portfolios of us and the other entities for which participation is appropriate. Accordingly, we may not be given the opportunity to participate at all in certain acquisitions made by such other investment management accounts that meet our business objectives, but we expect over time to receive a fair allocation of such opportunities. To further address potential conflicts arising out of transactions between us, on the one hand, and our managers and/or their affiliates, on the other, a majority of the members of our board of directors are directors who are unaffiliated with either BSAM or Stone Tower and/or their affiliates and satisfy the NYSE independence standard. Our policies state that certain transactions involving our managers and/or their affiliates or directors who are not independent must be approved by a majority of our disinterested directors. We co-purchase assets alongside affiliates of our managers, including purchases of assets from, and interests in loans to, unaffiliated third parties. In addition, we may acquire interests in unaffiliated third parties where an affiliate of one of our managers has acquired, is concurrently acquiring, or intends to acquire a different interest in the same counterparty. In such instances, our interest may be senior or junior to, or have rights different from or adverse to, the interest owned by the manager s affiliates. These acquisitions will be in compliance with applicable law and the manager s internal procedures. Our managers may determine, in light of differing business objectives of an affiliate that has an interest in a transaction in which we also have a financial interest and other factors applicable to the specific situation, to dispose of all or a portion of an asset on our behalf at the same time as such asset or portion thereof or a related asset is being retained by such affiliate. Conversely, the managers may determine to retain all or a portion of an asset on our behalf where such asset or a related instrument is being disposed of on behalf of such affiliate. Each of these determinations may present an actual or potential conflict of interest that is subject to either of the managers internal procedures. Under the management agreements, there are no limits on the percentage of our total assets that may be comprised of assets of the type described above. Assets of the type described above may not be the result of arm s length negotiations and may involve actual or potential conflicts between our interests and the interests of other affiliates of our managers. In addition, where we co-purchase assets with another affiliate of our managers, our returns on these assets may differ, in some cases materially, from our managers affiliates returns as a result of a variety of factors, including differences in the rates at which we are able to finance our assets as compared to the managers affiliates and differences in the timing of our disposition of such asset as compared with the managers affiliates. Table of Contents Summary Financial and Other Data In the table below, we provide you with summary consolidated financial and other data of the company. We have prepared this information for the period from September 28, 2006 (commencement of operations) to December 31, 2006 using our audited consolidated financial statements for the period from September 28, 2006 (commencement of operations) to December 31, 2006. Results for the period from September 28, 2006 (commencement of operations) to December 31, 2006 are not necessarily indicative of results that may be expected for an entire year. The company s fiscal year will end on December 31 of each calendar year. When you read this summary consolidated financial and other data, it is important that you read along with it the consolidated financial statements and related notes, as well as the section titled Management s Discussion and Analysis of Financial Condition and Results of Operations, which are included in this prospectus. For the Period September 28, 2006 (Commencement of operations) through December 31, 2006 ($ in thousands, except per share data) Statement of Income Data: Total revenue $ 25,024 Total expenses 10,672 Net investment income 14,352 Net realized and unrealized gain on investment transactions 7,600 Net increase in net assets resulting from operations $ 21,952 Per Share Data: Net asset value $ 25.93 Net increase in net assets resulting from operations 0.94 Balance Sheet Data: Total assets $ 726,215 Total liabilities 106,761 Total net assets $ 619,454 Other Data: Net investment income ratio(1) 12.25 % Weighted average yield(2) 17.68 % Cash distributions received from investments $ 11,976,102 Return on equity(3) 15.10 % (1) Annualized. (2) The weighted average of the bond equivalent yields of securities specified in the consolidated schedule of investments contained in the consolidated financial statements included in this prospectus, weighted by amortized cost. (3) Return on equity, also known as total return, is an annualized rate based on daily compounding and is equal to the net increase in net assets from operations divided by the weighted average of the net asset value since commencement of operations. Table of Contents The Offering Shares offered in the offering ordinary shares. Option to purchase additional ordinary shares The underwriters have the option to purchase up to an additional ordinary shares from us at the public offering price, less the underwriting discounts and commissions, within 30 days from the date of this prospectus, solely to cover over-allotments, if any. Ordinary shares to be outstanding immediately after the offering ordinary shares, or ordinary shares if the underwriters exercise in full their option to purchase additional ordinary shares solely to cover over-allotments. Use of proceeds We estimate that the net proceeds we will receive from the sale of ordinary shares in this offering will be approximately $ , or approximately $ if the underwriters fully exercise their over-allotment option, in each case assuming an initial offering price of $ per share, which is the midpoint of the price range set forth on the front cover of this prospectus, after deducting underwriting discounts and commissions, and estimated offering expenses of approximately $ payable by us. We expect to use the proceeds from this offering: to repay our debt under our existing secured credit facility; to create or acquire additional CDOs and other structured finance assets; and for general corporate purposes. Initial offering price $ per ordinary share. Our Corporate Information Our principal executive offices are located at 152 West 57th Street, New York, New York 10019. Our telephone number is (212) 457-0220. Table of Contents RISK FACTORS An investment in our ordinary shares involves a high degree of risk. You should carefully consider the following information, together with the other information contained in this prospectus, before investing in our ordinary shares. In connection with the forward-looking statements that appear in this prospectus, you should also carefully review the cautionary statement referred to under Cautionary Statement Regarding Forward-Looking Statements. Risks Related to Our Business We have a limited operating history and, accordingly, it is difficult to evaluate an investment in our ordinary shares. We were recently formed and have a limited operating history. Consequently, it is difficult to evaluate our future prospects and an investment in our ordinary shares. We will be subject to the risks generally associated with the formation of any new business such as our lack of established operating procedures as well as BSAM s and Stone Tower s relative inexperience with the management of a public entity. We cannot assure you that we will be able to operate our business successfully or implement our operating policies and strategies described in this prospectus. We are subject to all of the business risks and uncertainties associated with any new business, including the risk that we will not achieve our investment objectives and that the value of your investment could decline substantially. We may not generate sufficient revenue from operations to pay our expenses and make or sustain distributions to shareholders. Our financial performance is sensitive to changes in overall economic conditions and may affect our ability to pay dividends on our shares. We own primarily ABS CDOs and CLOs. Our ABS CDOs hold primarily RMBS and to a lesser extent CMBS, synthetic asset-backed securities and other asset-backed securities. A downturn in overall economic conditions could lead to an increase in the default rates of residential or commercial mortgages, which would have a negative effect on the quality of the assets collateralizing these securities. For example, the majority of the RMBS held by our CDOs are backed by collateral pools comprised of subprime mortgages. Subprime mortgages have experienced increased default rates in recent periods. A deterioration in the assets collateralizing the asset-backed securities held by our CDOs could negatively affect the cash flows of the CDOs, and consequently our ability to receive dividends or distributions from these CDOs and pay dividends or distributions to our shareholders. See Risks Related to Our Assets Subprime mortgage loans backing RMBS held by our CDOs are subject to additional risks. Our CLOs invest primarily in corporate leveraged loans and high-yield bonds that are rated below investment-grade. Non-investment-grade assets have greater credit and liquidity risk than investment-grade securities. The lower rating of these assets reflects a greater possibility that adverse changes in the financial condition of the issuer of these non-investment-grade assets or in general economic conditions, or both, may negatively affect the cash flows of the CDOs in which we hold equity interests. In addition, issuers of below-investment-grade debt obligations may be highly leveraged and may not have available to them more traditional methods of financing. During an economic downturn, a sustained period of rising interest rates or a period of fluctuating exchange rates (in respect of those issuers located in non-U.S. countries), such issuers may be more likely to experience financial stress and may be unable to meet their debt obligations due to the issuers inability to meet specific projected business forecasts or the unavailability of financing. While the results to date of our CLO holdings reflect that default rates for below-investment-grade debt obligations have been low relative to prior years, default rates may increase, perhaps significantly, in the future. Fluctuations and changes in interest rates may cause losses and negatively affect our financial condition and results of operations, and can have a negative effect on our share price. Changes in interest rates can affect our CDO subsidiaries net interest income, which is the difference between the interest received on interest-earning assets and the interest paid on interest-bearing liabilities. Changes in the level of interest rates also can affect, among other things, prepayment rates, yield spreads Table of Contents during periods when our CDOs may be required to reinvest principal payments on underlying assets, our ability to acquire new assets and create new CDOs, and the value of the assets we hold. In the event of a rising interest rate environment, corporate loan defaults may increase and result in credit losses that would affect the operating results of our CDOs. Increases in interest rates may also increase our cost of borrowing, which may restrict our ability or the ability of our future CDOs to obtain future debt financings. In addition, if market interest rates increase, prospective investors may desire a higher distribution or dividend rate on our ordinary shares or seek to invest in other securities paying higher distributions or dividends. As a result, interest rate fluctuations and capital market conditions can affect the market value of our ordinary shares. For instance, if interest rates rise, the market price of our ordinary shares may decrease because potential investors may require a higher yield on our ordinary shares. Our CDOs are complex and operate with a high degree of leverage, which may adversely affect the returns we earn on our assets and may reduce our cash available for distribution. Our CDOs are complex and operate on a highly leveraged basis through collateralized financings, including potentially private or public offerings of debt, warehouse facilities, bank credit facilities, repurchase agreements and other borrowings. Although our CDOs actual use of leverage may vary depending on their ability to obtain credit facilities and the lenders and rating agencies estimate of the stability of their cash flows, our policies do not limit the amount of leverage we or any of our CDOs may incur. The cash flows of our CDOs may be reduced to the extent that changes in market conditions cause the cost of these financings to increase relative to the income that can be derived from the assets acquired. Defaults and lower than expected recoveries as well as delays in recoveries on the assets held by our subsidiaries could rapidly erode our equity in our CDOs. Increased debt service payments that are not offset by increased cash flow from underlying CDO assets would reduce cash flow available for distributions by our CDOs to us and, in turn, by us to our shareholders. Increased leverage increases the risk that our CDOs will not be able to meet their debt service obligations. See Risks Related to Our Assets The equity issued by our CDO subsidiaries is subject to substantial risks. Holdings in our CDO subsidiaries or other CDO equity holdings are carried at estimated fair value, which is a highly subjective determination based predominately on management assumptions, including assumptions based on estimated future cash flow. The value of our shares could be adversely affected if our determinations regarding the fair value of our CDO equity or other holdings are materially higher than the values that we ultimately realize upon their disposal. Holdings in our CDO subsidiaries and other CDO equity holdings are carried at estimated fair value, with unrealized gains and losses reported as a component of a net increase or decrease in net assets from operations in our consolidated statement of operations. However, there is no liquid public trading market for CDO equity upon which the value of our holdings may be readily determinable. The fair value of each holding is initially based on our cost. Upon each balance sheet date thereafter, fair value is estimated using the discounted cash flow technique. Accordingly, fair value is highly sensitive to our estimates of future cash flows attributable to our CDO equity holdings. Our estimates of future cash flows are in turn highly subjective and sensitive to a number of assumptions we must make regarding the collateral underlying each CDO, including assumptions as to forecasted default, recovery, reinvestment and prepay or call rates of the underlying CDO collateral as of the balance sheet date, and may also fluctuate over short periods of time. Our determinations of fair value may differ materially from the values that would have been used if a ready market for these investments existed. Our net asset value could be adversely affected if our determinations regarding the fair value of our holdings are materially higher than the values that we ultimately realize upon these holdings. Declines in the credit quality of our CDOs assets may adversely affect periodic reported results, which may reduce earnings and, in turn, cash available for distribution to us and our shareholders. The credit quality of our CDOs assets may decline for a number of reasons, such as poor operating results of borrowers, declines in the value of the collateral supporting debt they hold and increases in defaults. A decline in the credit quality of our CDOs assets may force our subsidiaries to sell certain assets at a loss, Table of Contents or retain certain assets with unrealized losses or write downs, which in either instance, may reduce their earnings and, in turn, cash available for distribution to us and our shareholders. Substantially all of our CDO holdings are illiquid in nature, and, accordingly, there can be no assurances that we will be able to realize the value at which many of our assets are carried if we are required to dispose of them. Substantially all of our assets consisting of equity in CDOs are highly illiquid and are not publicly traded or readily marketable. As a result, we can provide no assurance that any given asset could be sold at a price equal to the amount ascribed to such asset, which may result in unexpected losses if we are required to sell such assets. Furthermore, because of applicable securities law and 1940 Act transfer restrictions, the equity securities we hold in our CDO subsidiaries that are excluded from the registration requirements of the 1940 Act by virtue of Rule 3a-7 thereunder may be less liquid than securities issued by other CDOs. Substantially all of our initial CDO holdings were contributed by hedge funds managed by BSAM. Thus, the consideration given by us in exchange for these assets was not negotiated at arm s length and may exceed the values that could be achieved upon the sale of such assets. Substantially all of our initial CDO holdings were purchased from the BSHG Funds which are managed by BSAM. These assets are difficult to value. The values of the assets transferred to us were determined based on certain models, assumptions and methods and not by any arm s length negotiation, and do not necessarily reflect the values that could be achieved by us upon the sale or other disposition of such assets. Performance of these assets is expected to differ, and may differ materially, from that used in the valuation models that were used. Small variations in one or more of the assumptions used to value the initial assets could result in large variations in the value of our initial CDO holdings. Failure to procure adequate capital and funding would adversely affect our ability to pay distributions to our shareholders and, in turn, negatively affect the dividend yield and market price of our ordinary shares. We depend upon the availability of adequate funding and capital for our operations. Our dividend policy is to distribute over time approximately 90% of our net investment income out of assets legally available for distribution. Therefore, we will not retain a substantial portion of our earnings and will have to rely on outside sources of funding for new investments. See Dividend Policy. We cannot assure you that any, or sufficient, funding or capital will be available to us in the future on terms that are acceptable to us. In the event that we cannot obtain sufficient funding on acceptable terms, we may lower our distributions to shareholders, which may have a negative impact on the dividend yield and market price of our ordinary shares. Maintenance of our 1940 Act exclusions imposes limits on our operations, and a failure to maintain our 1940 Act exclusions could cause us to restructure our business or register as an investment company, each of which could negatively affect our financial condition and results of operations. We are a holding company that indirectly engages in various businesses through majority-owned CDO subsidiaries, most of which rely on various exclusions or exemptions from the 1940 Act and engage in the businesses described herein. More than 60% of our assets by value consist of interests in majority-owned CDO subsidiaries, including Parapet CDO, that rely on the exemption provided to certain structured financing vehicles by Rule 3a-7 of the 1940 Act. Rule 3a-7 imposes limitations on the ability of a CDO issuer to purchase or sell assets, including prohibiting the issuer from purchasing or selling assets for the primary purpose of recognizing gains or decreasing losses resulting from market value changes. Thus, provisions in the indentures that govern our CDO subsidiaries, including Parapet CDO, restrict them from purchasing and selling assets in circumstances in which it may otherwise be advantageous for them to do so. As a practical result, the issuers may not acquire or dispose of assets primarily to enhance returns to the holder of the CDO equity. Table of Contents Depending on the anticipated asset mix and liability structure of a particular CDO subsidiary, compliance with Rule 3a-7 could require us to place additional limitations and prohibitions on the circumstances under which a CDO may sell assets, on the type of assets the subsidiary may acquire out of the proceeds of assets that mature, are refinanced or otherwise sold, on the period of time during which such transactions may occur, on the level of transactions that may occur or on other provisions of the indentures that govern the operation of those subsidiaries. We must monitor the activities of our subsidiaries, including those assets managed by third parties, to ensure that we meet these tests, which will limit the types and nature of business and assets in which we may engage indirectly through our Rule 3a-7 subsidiaries. If we were to determine that one or more of our CDO subsidiaries could not rely on Rule 3a-7, these CDO subsidiaries would have to rely on another 1940 Act exemption, which could require them to restructure their operations and, thus, adversely affect our earnings. In addition, we have a limited operating history and accordingly have only recently begun to implement procedures for maintaining appropriate qualifying assets levels to maintain exemption under the 1940 Act. If we cannot rely on any exemption, exception or other exclusion from registration as an investment company, we could, among other things, be required either to (i) substantially change the manner in which we conduct our operations to avoid being required to register as an investment company or (ii) register as an investment company, either of which could have an adverse effect on us and the market price of our ordinary shares. If we were required to register as an investment company under the 1940 Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the 1940 Act), portfolio composition (including restrictions with respect to diversification and industry concentration) and other matters. As opposed to Section 3(c)(7) of the 1940 Act, compliance with Rule 3a-7 imposes limitations on our CDO subsidiaries ability to purchase and sell assets. Compliance with the Rule 3a-7 restrictions may result in our CDOs generating less yield than Section 3(c)(7) CDOs, which could result in lower earnings and distributions for holders of our ordinary shares relative to owners of Section 3(c)(7) CDOs. Most CDO issuers are excluded from status as investment companies under the 1940 Act by reason of their compliance with Section 3(c)(7) thereunder. Section 3(c)(7) essentially requires such issuers to engage in private offerings made only to qualified purchasers (as defined in the 1940 Act), but places no limitations on the ability of the issuers to purchase or sell assets or otherwise trade the underlying portfolio of securities. Rule 3a-7, on the other hand, imposes limitations on the ability of a CDO issuer to purchase or sell assets, including prohibiting the issuer from purchasing or selling assets for the primary purpose of recognizing gains or decreasing losses resulting from market value changes. Thus, as described above, provisions in the indentures that govern our CDO subsidiaries, including Parapet CDO, restrict them from purchasing and selling assets in circumstances in which it may otherwise be advantageous for them to do so. Rule 3a-7 CDOs provide the manager with less opportunity to manage portfolio assets than Section 3(c)(7) CDOs. This may result in Rule 3a-7 CDOs being less liquid and generating less yield than Section 3(c)(7) CDOs, which would result in lower earnings and distributions for our shareholders. BSAM s and Stone Tower s track record information may not be indicative of their or our future performance. BSAM and Stone Tower s track record information contained in this prospectus may not be representative of the performance of CDOs currently held by us or CDOs we hold in the future and we caution you that our future returns may be substantially lower than those achieved in the past, including for the following reasons: the historical track records include performance of instruments during earlier periods that may have been influenced by different economic, market or interest rate conditions or by various other factors that could cause future results to vary from historical results. For example, we are currently in a low default rate environment conducive to producing the returns demonstrated in BSAM s and Stone Tower s track record. There can be no assurance of similar returns in other market environments. For an Table of Contents additional description of these factors, see Cautionary Statement Regarding Forward-Looking Statements ; the historical track records set out the cash return of holdings in CDO equity. These returns, while reflecting the actual cash received by an equity holder, may differ significantly from the yields that may be accrued in respect of these holdings in our financial statements in accordance with GAAP. Cash flows to CDO equity can be expected to decline over time as the CDO debt is amortized (thereby de-levering the equity) or if the underlying collateral pool experiences defaults. Under GAAP, the yield reflects an accrual of the aggregate projected cash flows to the CDO equity, with any excess cash flows deemed to amortize the underlying asset. Consequently, cash returns to CDO equity in the early accounting periods will generally exceed the yields of such equity as reflected in the financial statements of the holder for such accounting periods; the annualized cash returns in most cases relate to CDOs that are still outstanding or that may have operated for only a limited period of time, and therefore their results to date or during earlier periods in their life cycle may not be reflective of the future or final results that will be achieved by those CDOs; and the CDOs used for calculating the track record were structured in nearly all cases to comply with the 1940 Act exemption provided by Section 3(c)(7) thereunder, whereas most, by fair value, of the CDO subsidiaries we own will be structured to comply with the 1940 Act exemption provided by Rule 3a-7 thereunder. As described above, the regulatory requirements of Rule 3a-7 impose limitations on the CDO manager with respect to trading and other operations. As a result, the returns of the CDOs used for purposes of calculating the track record may not be comparable to most of the CDOs proposed for us. Our holding company structure may limit our ability to make regular distributions to our shareholders because we rely on distributions from our subsidiaries and other companies in which our subsidiaries hold assets, which may face constraints in making such distributions. We are a holding company with no operations. Therefore, we are dependent upon the ability of our subsidiaries and their businesses and assets to generate earnings and cash flows and distribute them to us in the form of dividends or distributions to enable us to meet our expenses and to make distributions to our shareholders. The ability of our subsidiaries and the businesses in which they hold assets to make distributions or pay dividends depend on their respective operating results and may be subject to limitations, including, among other things, laws limiting the amount of funds available for the payment of dividends or distributions, and the terms and covenants of any present or future outstanding indebtedness, contract or agreement. If, as a consequence of these various limitations and restrictions, we are unable to generate sufficient funds for distributions from our subsidiaries and their businesses and assets, we may not be able to make or may have to delay distributions or dividends on our ordinary shares. We are highly dependent on the information systems of BSAM, Stone Tower and third parties, and system failures could significantly disrupt our business, which may, in turn, negatively affect the value of our ordinary shares. Our business is highly dependent on communications and information systems. We also depend on sophisticated software and access to information to derive expected cash flows of our investments. Any failure or interruption of our systems could cause delays or other problems in our activities, which could have a material adverse effect on our operating results and negatively affect the value of our shares and our ability to pay dividends or distributions on our ordinary shares. Hedging transactions may limit our income or result in losses and will not completely insulate us from certain risks. We engage, and will continue to engage in the future, in certain hedging transactions at the company or CDO subsidiary level to seek to limit our exposure to changes in credit default risks, changes in interest rates, changes in currency exchange rates and other financial market changes and therefore may expose ourselves to risks associated with such transactions. For instance, our subsidiaries may utilize instruments such as puts and Table of Contents calls on securities or indices of securities, futures contracts and options on such contracts, interest rate swaps and/or swaptions to seek to hedge against mismatches between the cash flows on their assets and the interest payments on their liabilities or fluctuations in the relative values of their portfolio positions, in each case resulting from changes in relevant market rates. In addition, we may enter into credit default swaps to manage the risks of credit-related events. Our hedging may not limit the exposures or manage the risks in the manner intended. Hedging does not eliminate the possibility of fluctuations or prevent losses. For example, we may enter into certain hedging strategies in subprime mortgage loans relating to exposure to tranches of RMBS held by certain of our CDO subsidiaries. Our hedging transactions may not completely insulate us from subprime risk. Although hedging can establish other positions designed to benefit from those same developments, thereby offsetting the declines, hedging transactions may also limit the opportunity for income or gain if rates change favorably. Moreover, it may not be possible to hedge against a rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable price. The success of our hedging transactions depends on the managers ability to correctly predict movements of relevant market rates. Therefore, while we may enter into such transactions to seek to reduce relevant market rate risks, unanticipated changes may result in an overall investment performance below that which we would have obtained if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and the price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to the risk of loss. We are also exposed to the credit risk of the counterparty with respect to payments under derivative instruments. We operate in a highly competitive market for business opportunities. We are subject to significant competition in seeking business opportunities. Some of our competitors may have greater resources than we do and we may not be able to compete successfully for assets. Furthermore, competition for assets of the types and classes which our subsidiaries intend to acquire may lead to the price of such assets increasing, which may further limit our ability to generate our desired returns. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive business opportunities from time to time, and we or our CDO subsidiaries may not be able to identify and acquire assets that are consistent with our business objective. Moreover, other companies and funds may be formed to compete with us in pursuing a strategy similar to ours. We may change our business strategy and operational policies without shareholder consent, which may result in a determination to pursue riskier business activities. We may change our business strategy at any time without the consent of our shareholders, which could result in our acquiring subsidiaries or assets that are different from, and possibly riskier than, the strategy described in this prospectus. Our board of directors will determine our operational policies and may amend or revise our policies, including our policies with respect to our asset acquisitions, operations, indebtedness, capitalization and distributions, or approve transactions that deviate from these policies, without a vote of, or notice to, our shareholders. Operational policy changes could adversely affect the market price of our ordinary shares and our ability to make distributions to our shareholders. Our due diligence may not reveal all of an entity s liabilities and may not reveal other weaknesses in its business. Before purchasing assets held in CDOs managed by our managers or before acquiring equity in CDOs sponsored by third parties, the managers assess the value of the underlying assets and other factors that they believe will determine the CDO s success. In making the assessment and otherwise conducting customary due Table of Contents diligence, the managers rely on the resources available to them and, in some cases, an investigation by third parties. This process is particularly important and subjective with respect to newly organized entities because there may be little or no information publicly available or little or no historical information at all. Against this background, the managers due diligence processes may not uncover all relevant facts and any purchase may not be successful. Non-U.S. assets may involve risks that are not present with U.S. assets, such as currency rate exposure and uncertainty of non-U.S. laws and markets. Our CDO subsidiaries may in the future invest in debt obligations and other assets denominated in non-U.S. currencies. Non-U.S. debt obligations involve risks relating to political, social and economic developments abroad, as well as risks resulting from the differences between the regulations to which U.S. and non-U.S. obligors and markets are subject. These risks may include: seizure by the government of non-U.S. assets held by debt obligors, excessive taxation, withholding taxes on dividends and interest, limitations on the use or transfer of our non-U.S. assets, and political or social instability; enforcing legal rights may be difficult, costly and slow in non-U.S. countries, and there may be special problems enforcing claims against non-U.S. governments; non-U.S. obligors may not be subject to accounting standards or governmental supervision comparable to U.S. companies, and there may be less public information about their operations; non-U.S. markets may be less liquid and more volatile than U.S. markets; and costs of buying, selling and holding non-U.S. debt obligations, including brokerage, tax and custody costs, may be higher than those involved in domestic transactions. In addition, non-U.S. assets denominated in currencies other than the U.S. dollar are subject to additional risks. Changes in currency exchange rates will affect the value of non-U.S. assets, the value of dividends and interest earned, and gains and losses realized on the sale of non-U.S. securities. An increase in the strength of the U.S. dollar relative to these other currencies may cause the value of our non-U.S. assets to decline. Certain non-U.S. currencies may be particularly volatile, and non-U.S. governments may intervene in the currency markets, causing a decline in value or liquidity of our securities holdings. Although we may hedge our non-U.S. currency risk, we may not be able to do so successfully and may incur losses in these assets as a result of exchange rate fluctuations. We may experience fluctuations in our quarterly results. We could experience fluctuations in our quarterly operating results and cash distributions due to a number of factors including the difference in actual cash received and expected cash, the timing of cash flows, changes in assumptions, such as default and prepayment risk, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains and losses and general market conditions. As a result of these factors, results of any period should not be relied upon as being indicative of performance in future periods. Terrorist attacks may negatively affect our financial condition and results of operations. Terrorist attacks across the globe, as well as events occurring in response to or in connection with them, may adversely affect our financial condition and results of operations. A terrorist attack could have a material adverse effect on the assets held by our CDO subsidiaries and therefore on our financial condition and results of operations. Furthermore, terrorist attacks of significant scale could cause volatility in the financial markets and uncertainty in the economies of the areas where they occur, and even possibly the global economy. Table of Contents Risks Related to Our Managers Our performance is dependent on BSAM and Stone Tower and certain of their key personnel, and we may not find a suitable replacement if either of the management agreements is terminated or such key personnel are no longer available to us. All of our executive officers and other senior personnel responsible for our day-to-day operations, other than our chief financial officer, are also employees or officers of either BSAM or Stone Tower and will not spend all of their time managing our activities. We depend on the diligence, skill and network of business contacts of the employees of BSAM and Stone Tower and our CEOs, our board of directors and our investment committee. BSAM and Stone Tower evaluate, negotiate, and monitor our holdings. Our future success will depend on the continued services of the management team of BSAM and Stone Tower. The continued services of the management team of BSAM and Stone Tower are not guaranteed because the management agreements do not require that any particular individual s services be made available to us. However, we can not renew the management agreements with either of our managers during the 90-day period following the death, disability or voluntary resignation of the related CEO. If any such event occurs and we terminate the related management agreement, we have no assurance that a suitable replacement CEO or manager may be identified or, if identified, could be engaged on terms as favorable as those with our current CEOs and managers. We do not carry any key-man life insurance policies covering either of our CEOs. We are also dependent on BSAM and Stone Tower for certain services, including administrative and business advice. The departure of either of our CEOs or any of the other senior members of the management team at BSAM or Stone Tower could have a material adverse effect on our ability to achieve our business objectives. We are subject to the risk that BSAM and/or Stone Tower will terminate their respective management agreement and that no suitable replacement will be found. The base management fee payable to our managers is payable regardless of the performance of our portfolio. We will pay our managers substantial management fees, based in part on our equity capital (as defined in the management agreements), regardless of the performance of our portfolio, with certain exceptions. The management fee is based, among other things, on our net assets. The value of our net assets is based on highly subjective management assumptions, including assumptions to arrive at estimated future cash flows from our CDO and our CDOs asset values. Our managers entitlement to nonperformance-based compensation as a portion of the total compensation might reduce their incentive to devote the time and effort of their professionals to seeking profitable opportunities for our portfolio, which could result in a lower performance of our portfolio and negatively affect our ability to pay distributions to our shareholders. The incentive fee payable to our managers may induce BSAM and Stone Tower to engage in riskier activities than they otherwise would. The management incentive allocation structure that we have agreed to with BSAM and Stone Tower may cause BSAM and Stone Tower to purchase high-risk assets or take other risks. In addition to the base management fee, BSAM and Stone Tower or their respective affiliates are entitled to receive an incentive fee and corresponding distribution from the company based upon the company s achievement of targeted levels of net increase in net assets resulting from operations. In evaluating acquisitions and other management strategies, the opportunity to earn an incentive fee based on net increase in net assets resulting from operations may lead BSAM and Stone Tower to place undue emphasis on the maximization of net increase in net assets resulting from operations at the expense of other criteria, such as preservation of capital, maintaining sufficient liquidity, and/or management of credit risk or market risk, in order to achieve a higher incentive fee. Assets with higher yield potential are generally riskier or more speculative. This could result in increased risk to the value of our assets. Table of Contents Although our board of directors may approve broad business guidelines for our managers, our board of directors does not approve each business decision made by our managers. Our managers are authorized to follow a very broad business approach on our behalf. We cannot predict with any certainty the percentage of our assets that will be in each asset category. We may change our business strategy and policies without a vote of shareholders. Our board of directors will periodically review our business approach and our assets. However, our board of directors is not required to review every proposed purchase or disposition of assets. Furthermore, even though a majority of our board of directors consists of independent directors, there is no assurance that our board of directors will provide effective oversight over the activities of our managers. Each of our managers has broad operational latitude, and even if either of the managers finds a business opportunity that is appropriate for us, it may allocate, in its discretion, some or all of such opportunity to other accounts managed by it and its affiliates. As registered investment advisors, each of our managers is required to allocate opportunities equitably among its clients. However, each manager has broad operational latitude in allocating opportunities, and we may not be given the opportunity to participate at all in certain acquisitions made by such other clients that meet our business objectives. We may compete with BSAM s and Stone Tower s or their affiliates current and future investment vehicles for access to capital and assets. The management services to be provided by the managers under the management agreements are not exclusive to us and our subsidiaries. The managers and/or their affiliates engage in a broad spectrum of activities, including investment advisory activities, and have extensive investment activities that are independent from, and may from time to time conflict with, our business activities and strategies. The managers and/or their affiliates may advise, sponsor or act as manager to other investment funds, portfolio companies of private equity investments and other persons or entities (including prospective investors in the ordinary shares) that have investment objectives that overlap with our business plan and that may, therefore, compete with us for asset acquisition opportunities. We will therefore face a number of conflicts of interest with the managers and/or their affiliates with respect to the allocation of asset acquisition opportunities. In addition, the managers may raise new investment funds with investment objectives that overlap with our business plan, which may further compound these conflicts. We may compete with BSAM s and Stone Tower s current and future business ventures or clients for access to management time, services and functions. BSAM and Stone Tower will devote as much of their time to our business as they deem necessary or appropriate to fulfill their obligation under their respective management agreement. However, they are currently committed to and expect to be committed in the future to providing investment advisory services and securities research and brokerage services for other clients, including other funds that they manage, and engage in other business ventures in which we have no interest. Furthermore, neither of the Co-CEOs is required to devote a specific amount of time to our affairs. As a result of these separate business activities, the managers will have conflicts of interest in allocating management time, services and functions between us and other business ventures or clients. BSAM and Stone Tower may acquire confidential or material non-public information that may prevent them from initiating certain transactions for us that they otherwise might have initiated. BSAM and Stone Tower, through their activities on behalf of other clients or entities, may acquire confidential or material non-public information or be restricted by internal policies from initiating transactions in certain securities. The managers will not be free to divulge, or to act upon, any such confidential or material non-public information and, due to these restrictions, may not be able to initiate certain types of Table of Contents transactions in certain securities or instruments for us that they otherwise might have initiated. We may be frozen in an investment position that we otherwise might have liquidated or closed out. We were established by BSAM and Stone Tower and as such our arrangements may contain terms that are less favorable to us than those which otherwise might have been obtained from unrelated parties. Our management agreements, governance documents and other arrangements with BSAM and Stone Tower, including with respect to our initial holdings, were negotiated in the context of an affiliated relationship. Our independent directors were not then appointed and did not participate in the negotiation of such terms and did not approve the arrangements on our behalf. Because these arrangements were negotiated between related parties, their terms, including terms relating to compensation, contractual or fiduciary duties, conflicts of interest and the ability of BSAM and Stone Tower to engage in outside activities, including activities that compete with us, our activities and limitations on liability and indemnification, may be less favorable than otherwise might have resulted if the negotiations had involved unrelated parties. We may purchase assets from BSAM or Stone Tower or their affiliates, make co-purchases alongside BSAM or Stone Tower or their affiliates or otherwise participate in asset acquisitions in which BSAM or Stone Tower or their respective affiliates have an interest, which could result in conflicts of interest. We may purchase assets from, finance the assets of or make co-purchases alongside BSAM or Stone Tower, their affiliates and/or business ventures or clients that they manage, including assets of CDOs structured by BSAM or Stone Tower. These transactions will not be the result of arm s length negotiations and will involve conflicts between our interests and the interest of BSAM or Stone Tower and/or their affiliates in obtaining favorable terms and conditions. Accordingly, certain of these transactions may require approval by the disinterested directors. There can be no assurance that any procedural protections, such as obtaining the approval of the disinterested directors, will be sufficient to assure that these transactions will be made on terms that will be at least as favorable to us as those that would have been obtained in an arm s length transaction. We may purchase assets in situations where our interests conflict with those of BSAM or Stone Tower or their respective affiliates. We may purchase assets that are senior or junior to, or have rights and interests different from or adverse to, assets held by other accounts or funds managed by BSAM or Stone Tower. Certain of these transactions may require approval by our disinterested directors. Our interests in such assets may conflict with the interests of such other accounts in related investments at the time of origination or in the event of a default or restructuring of a company, property or other asset. In addition, in structuring our CDO subsidiaries, the managers may have conflicts between us and other entities managed by them that purchase debt securities in our CDOs with regard to setting subordination levels, determining interest rates, providing for divesting or deferring distributions that would otherwise be made to CDO equity or otherwise setting the amounts and priorities of distributions to the holders of debt and equity interests in the CDO. We depend on BSAM and Stone Tower in pricing asset purchases, and BSAM and Stone Tower may have business relationships that affect asset purchases. We purchase additional assets from third parties in negotiated transactions. The prices at which the additional assets are purchased will be influenced by many economic, market and other factors using price modeling by BSAM and Stone Tower that is based on various assumptions and estimates. Accordingly, the purchase price for the additional assets will depend upon the ability of BSAM and Stone Tower to effectively price such additional assets in the then-current lending, interest rate and securitization markets. The expected future cash flow and the discount rates used in determining the purchase price of such additional assets will also be affected by BSAM s and Stone Tower s estimates of the performance of the underlying assets. Some of the asset sellers may be entities with which BSAM or Stone Tower has engaged in other commercial transactions, are clients of BSAM or Stone Tower or have other business relationships and may Table of Contents include shareholders. Such relationships could influence the purchase price for the additional assets or the proceeds realized from the offering of securities in the securitizations. Accordingly, the purchase prices for such additional assets may not reflect the best prices achievable for us absent such conflicts. BSAM and Stone Tower affiliates are able to exercise substantial influence over important matters coming before our shareholders and board of directors regarding our business and affairs. After the offering, funds managed by or affiliated with BSAM and Stone Tower are expected to hold % and %, respectively, of our ordinary shares and accordingly will have significant influence over shareholder voting, including independent director elections. Additionally, the special voting share classes granted to BSAM and Stone Tower entitle each to elect one director. These special voting shares remain valid so long as the relevant management agreement remains in effect, or the relevant manager or its affiliates have over $50 million invested in Everquest. BSAM s special voting shares entitle it to designate one additional director so long as the BSAM-affiliated investment in Everquest is over $100 million. Due to operation of these special voting share classes, currently three of our seven directors are affiliated with BSAM and Stone Tower. As a result, BSAM and Stone Tower will be able to substantially influence our company s decisions. BSAM s and Stone Tower s liability is limited, and we have agreed to indemnify them under the management agreements. BSAM and Stone Tower will manage our operations pursuant to the management agreements. The management agreements provide that BSAM, Stone Tower and their affiliates and their respective legal and other representatives will not be liable to us, any of our subsidiaries, our directors, our shareholders or any of our subsidiary s shareholders for any acts or omissions or any errors of judgment by any of the foregoing or losses suffered by us arising from, or in connection with the provision of services by BSAM or Stone Tower, or on behalf of BSAM or Stone Tower, under the management agreements, except those resulting from the willful misconduct, fraud, criminal misconduct or gross negligence of the managers or by reason of the managers reckless disregard of their obligations and duties. We have agreed to indemnify BSAM and Stone Tower and their affiliates and their respective legal and other representatives to the fullest extent permitted by law against all liabilities and expenses arising from acts or omissions of any such indemnified party arising from, or in connection with, the provision of services by BSAM and Stone Tower, or on behalf of BSAM and Stone Tower, under the management agreements, except those resulting from the willful misconduct, fraud, criminal misconduct or gross negligence or reckless disregard in performance of their obligations and duties. The management agreements may be difficult and costly to terminate. The management agreements may be difficult and costly to terminate. The term of each management agreement is one year from its commencement, and will be renewed automatically for a one-year term on each anniversary date after the initial one-year term unless we or a manager party to such management agreement terminates such management agreement by providing a termination notice to the other party. If we deliver a termination notice to a manager, other than with respect to a termination for cause, such manager will be entitled to a termination payment in an amount equal to between one and three times the average annual fees paid to the manager in prior years, depending on the timing and circumstances of the termination. These provisions may increase the effective cost to us of terminating the management agreements. Risks Related to Our Assets We may not realize gains or income from our CDO and other assets. We seek to generate both current income and capital appreciation. However, the securities we invest in may not appreciate in value and, in fact, may decline in value. In addition, collateral assets underlying our CDOs may default on interest and/or principal payments. Accordingly, we may not be able to realize gains or income from our CDOs. Any gains that we do realize may not be sufficient to offset any other losses we experience. Any income that we realize may not be sufficient to offset our expenses. Table of Contents An increase in the rate of default on the assets purchased and held by the CDOs we hold could decrease the distributions we receive from such CDOs and, therefore, reduce our earnings and decrease our ability to make distributions to our shareholders. To the extent that the rate of default with respect to assets held by any of our CDO holdings increases, the amount available to be paid to us as an equity holder decreases as does the value of our equity in that CDO holding. Additionally, we may have to record an asset-impairment charge in our financial statements relating to our CDO assets experiencing increased defaults. Because our holdings of CDO equity typically represent a leveraged investment, the occurrence of defaults with respect to only a small portion of the assets could result in the substantial or complete loss of our holding in the CDO equity. Subprime mortgage loans backing RMBS held by our CDOs are subject to additional risks. The substantial majority of the asset-backed CDOs in which we hold equity have invested in RMBS, including primarily RMBS backed by collateral pools of subprime residential mortgage loans. Subprime mortgage loans refer to mortgage loans that have been originated using underwriting standards that are less restrictive than the underwriting requirements used as standards for other first and junior lien mortgage loan purchase programs, such as the programs of Fannie Mae and Freddie Mac. These lower standards include mortgage loans made to borrowers having imperfect or impaired credit histories (including outstanding judgments or prior bankruptcies), mortgage loans where the amount of the loan at origination is 80% or more of the value of the mortgaged property, mortgage loans made to borrowers with low credit scores, mortgage loans made to borrowers who have other debt that represents a large portion of their income and mortgage loans made to borrowers whose income is not required to be disclosed or verified. Additionally, some of the mortgage loans backing the RMBS held by some of our CDOs are non-conforming loans and are not eligible for purchase by Fannie Mae or Freddie Mac due to either credit characteristics of the related mortgagor or documentation standards in connection with the underwriting of the related mortgage loan that do not meet the Fannie Mae or Freddie Mac underwriting guidelines for A credit mortgagors. These credit characteristics include mortgagors whose creditworthiness and repayment ability do not satisfy such Fannie Mae or Freddie Mac underwriting guidelines and mortgagors who may have a record of credit write-offs, outstanding judgments, prior bankruptcies and other credit items that do not satisfy such Fannie Mae or Freddie Mac underwriting guidelines. These documentation standards may include mortgagors who provide limited or no documentation in connection with the underwriting of the related mortgage loan. In addition, certain mortgage loans may fail to conform to the underwriting standards of the related originators. Due to economic conditions, including increased interest rates and lower home prices, as well as aggressive lending practices, subprime mortgage loans have in recent periods experienced increased rates of delinquency, foreclosure, bankruptcy and loss, and they are likely to continue to experience rates that are higher, and that may be substantially higher, than those experienced by mortgage loans underwritten in a more traditional manner. Thus, because of the higher delinquency rates and losses associated with subprime mortgage loans, the performance of RMBS backed by collateral pools with a significant subprime component could be correspondingly adversely affected, which, in turn, would adversely affect the performance of CDOs containing such RMBS in their collateral pools. The CDOs we hold may not be able to reinvest proceeds from matured, prepaid or sold assets in other assets with similar or higher yields, and therefore net income available to be distributed to us from those CDOs may decline. The income that a CDO is capable of earning and distributing to us will decrease to the extent that during its applicable reinvestment period it is unable to reinvest the proceeds it receives from matured, prepaid, sold or called CDO assets into similar or higher yielding instruments. The ability of a collateral manager of a CDO to reinvest proceeds in similar or higher yielding instruments will depend on a variety of factors, including the general interest rate environment and the availability of investments satisfying the investment policies of the collateral manager or the requirements of the applicable indentures. A decline in net income earned by our CDOs resulting from a failure to reinvest proceeds at similar or higher yields will decrease the distributions we receive from those CDOs. Table of Contents The equity issued by our CDO subsidiaries is subject to substantial risks. Our largest CDO subsidiary, Parapet CDO, also holds preference shares and income notes in CDOs. These equity securities are subject to substantial risks, including the following: Leveraged Investment. CDO equity securities represent leveraged investments in the underlying assets held by the CDO. This leverage arises from the debt securities issued by the CDO, which will increase the cash flow available to equity holders as compared with the cash flow that would be available for a comparable investment in a non-leveraged transaction. This increased cash flow will directly affect the yield on the CDO equity securities. However, the use of leverage also creates risk for the holders of CDO equity, like us, because the leverage increases their exposure to losses with respect to the underlying assets. This is particularly true of the equity securities issued by Parapet CDO, because both the equity securities issued by Parapet CDO, as well as the CDO securities constituting the assets held by Parapet CDO, represent leveraged investments. As a result, the occurrence of defaults with respect to only a small portion of the collateral could result in the substantial or complete loss of the investment in the CDO equity we hold in our subsidiaries. Due to the existence of leverage, changes in the market value of the CDO equity we hold or the CDO equity held by Parapet CDO could be greater than the changes in the values of the underlying assets of the relevant issuer, which itself may be subject to, among other things, credit and liquidity risk. You should consider with particular care the risks of leverage because it increases substantially the risk that the holders of the CDO equity securities could lose their entire investment if the pool of assets is adversely affected. Limited Assets to Pay Dividends and Other Distributions on the CDO Equity Securities. CDO equity securities represent equity interests in the relevant CDO issuer only. Like other securities issued by CDOs, they are payable solely from and to the extent of the available proceeds from the underlying assets held by the issuer. The CDO equity securities are part of the issued share capital of the issuer and are not secured. Except for the issuer, no person is obligated to pay dividends or any other amounts with respect to the CDO equity. Consequently, holders of the CDO equity must rely solely upon distributions on the underlying assets. If distributions on the underlying assets are insufficient to pay required fees and expenses, to make payments on the debt securities of the issuer or to pay dividends or other distributions on the CDO equity, all in accordance with the applicable priority of payments, no other assets of the CDO issuer or any other person will be available for the payment of the deficiency. Once all proceeds of the underlying assets have been applied, no funds will be available for payment of dividends or other distributions on the CDO equity. Therefore, whether holders of the CDO equity receive a return equivalent to or greater than the purchase price paid for the CDO equity by holders of the CDO equity will depend upon the aggregate amount of dividends and other distributions paid on the CDO equity prior to any final redemption date and the amount of available funds on the final redemption date available for distribution to holders of the CDO equity. Subordination of the CDO Equity. CDO equity receives distributions from the CDO only if the CDO generates enough income to first pay the holders of the CDO debt securities and related CDO expenses. Payments of principal of and interest on debt issued by CDOs, and dividends and other distributions on CDO equity securities, are subject to priority of payments. CDO equity is subordinated to the prior payment of all obligations under debt securities. Furthermore, in the event of default under any debt securities issued by a CDO, holders of the CDO equity generally have no right to determine the remedies to be exercised. To the extent that any elimination, deferral or reduction in payments on debt securities occurs, such elimination will be borne first by the CDO equity and then by the debt securities in reverse order of seniority. Thus, the greatest risk of loss relating to defaults on the collateral held by CDOs is borne by the CDO equity. To the extent that a default occurs with respect to any collateral and the trustee sells or otherwise disposes of such collateral, it is likely that the proceeds of such sale or other disposition will be less than the unpaid principal and interest on such collateral. Excess funds available for distribution to the CDO equity will be reduced by losses occurring on the collateral, and returns on the CDO equity will be adversely affected. Equity Status of the CDO Equity. The CDO equity securities represent equity in the applicable issuer and are not secured by the underlying assets held by the issuer, which generally secures the classes of debt securities issued by the issuer. As such, the holders of the CDO equity securities will rank behind all of the Table of Contents creditors, whether secured or unsecured and known or unknown, of the issuer, including, without limitation, the holders of all the classes of debt securities issued by the CDO. Payments in respect of preference shares and other equity securities are also subject to certain requirements imposed by the relevant jurisdiction of a CDO. Payments to holders of preference shares, other than payments made on the final redemption date, and the other equity securities will generally be paid as dividends in accordance with the corporate law of the issuer. Under Cayman Islands law, for example, any amounts paid as dividends or other distributions on equity securities will be payable only if the issuer has sufficient distributable profits and/or share premium and meets any other application restrictions imposed on the issuer. In addition, such distributions (including any distribution upon redemption of preference shares) will be payable only to the extent that the issuer is and remains solvent after such distributions are paid. Under Cayman Islands law, for example, a company is generally deemed to be solvent if it is able to pay its debts in the ordinary course of its business as they come due. To the extent the requirements under the applicable law are not met, amounts otherwise payable to the holders of equity securities may be delayed or altogether precluded. Yield, Maturity, Distributions and Other Performance Considerations. The amount of distributions on the CDO equity will be affected by, among other things, the timing of purchases of underlying assets, the rates of repayment of or distributions on the underlying assets, the timing of reinvestment in substitute underlying assets and the interest rates available at the time of reinvestment. The longer the period of time before reinvestment of cash in underlying assets, the greater the adverse impact may be on the aggregate interest collected, thereby lowering yields and otherwise affecting performance of the CDO equity. The amount of distributions on CDO equity may also be affected by rates of delinquencies and defaults on and liquidations of the underlying assets, sales of underlying assets and purchases of underlying assets having different payment characteristics. The yield and other measures of performance may be adversely affected to the extent that the issuer incurs any significant unexpected expenses. The different asset classes held by our CDO subsidiaries will subject us to specific risks as described below that could adversely affect our operating results and the value of our assets. In addition to the risks relating to CDO equity securities issued by CDOs described above, our CDO subsidiaries will invest in a range of asset classes, which will subject us to further risks, including, among others, credit risks, liquidity risks, interest rate and other market risks, operational risks, structural risks and other legal risks. Some, but not all, of these additional asset classes and certain related risks are described below. Corporate Leveraged Loans. Our CDO subsidiaries may hold interests in corporate leveraged loans originated by banks and other financial institutions (as well as in some cases by affiliates of the managers). These loans will be term loans and revolving loans, may pay interest at a fixed or floating rate, may be senior or subordinated and may be secured or unsecured. These loans may be illiquid. To the extent that they are non-investment-grade, they may also bear risks associated with high-yield bonds described below. Our CDO subsidiaries may acquire interests in corporate leveraged loans either directly (by way of sale or assignment) or indirectly (by way of participation). The purchaser of an assignment typically succeeds to all the rights and obligations of the assigning institution and becomes a lender under the credit agreement with respect to the debt obligation; however, its rights can be more restricted than those of the assigning institution. Participation interests in a portion of a debt obligation typically result in a contractual relationship only with the institution participating out the interest, not with the borrower. In purchasing participations, our CDO subsidiaries generally will have no right to enforce compliance by the borrower with the terms of the credit agreement, or any rights of set-off against the borrower, and our CDO subsidiaries may not directly benefit from the collateral supporting the debt obligation in which it has purchased the participation. As a result, our CDO subsidiaries will assume the credit risk of both the borrower and the institution selling the participation. High-Yield Bonds. Many of the high-yield bonds our CDO subsidiaries may acquire are rated below-investment-grade by one or more nationally recognized statistical rating organizations or are unrated but of comparably low credit quality, and have greater credit and liquidity risk than more highly rated bonds. Table of Contents High-yield bonds may be unsecured, and may be subordinate to other obligations of the obligor. The lower rating of high-yield bonds (or lack of a rating) reflects a greater possibility that adverse changes in the financial condition of the obligor or in general economic conditions (including, for example, a substantial period of rising interest rates or declining earnings or both) may impair the ability of the obligor to make payment of principal and interest. Many issuers of high-yield bonds are highly leveraged, and their relatively high debt-to-equity ratios create increased risks that their operations might not generate sufficient cash flow to service their debt obligations. Overall declines in the below-investment-grade bond and other markets may adversely affect such issuers by inhibiting their ability to refinance their debt at maturity. High-yield bonds are often less liquid than higher rated bonds. High-yield bonds are often issued in connection with leveraged acquisitions or recapitalizations in which the issuers incur a substantially higher amount of indebtedness than the level at which they had previously operated. High-yield bonds have historically experienced greater default rates than investment-grade bonds. Mortgage-backed Securities. RMBS and CMBS held by our CDOs bear various risks, including credit, market, interest rate, structural and legal risks. Risks affecting the underlying real estate investments of an RMBS or CMBS include general economic conditions, the condition of financial markets, political events, developments or trends in any particular industry and changes in prevailing interest rates. The cyclicality and leverage associated with real estate-related instruments have historically resulted in periods, including significant periods, of adverse performance, including performance that may be materially more adverse than the performance associated with other instruments. Prepayment rates could negatively affect the value of our mortgage-backed securities, including RMBS and CMBS, which could result in reduced earnings or losses and negatively affect the cash available for distribution to our shareholders. Volatility in prepayment rates may affect our ability to maintain targeted amounts of leverage on our mortgage-backed securities portfolio and may result in reduced earnings or losses for us and negatively affect the cash available for distribution to our shareholders. RMBS. At any time, a portfolio of RMBS held by a CDO may be backed by residential mortgage loans with disproportionately large aggregate principal amounts secured by properties in only a few states or regions. As a result, the residential mortgage loans may be more susceptible to geographic risks relating to such areas, such as adverse economic conditions, adverse events affecting industries located in such areas and natural hazards affecting such areas, than would be the case for a pool of mortgage loans having more diverse property locations. In addition, the residential mortgage loans may include so-called jumbo mortgage loans having original principal balances that are higher than is generally the case for residential mortgage loans. As a result, a portfolio of RMBS may experience increased losses. See also Subprime mortgage loans backing RMBS held by our CDOs are subject to additional risks above for a description of additional risks relating to subprime RMBS. CMBS. In addition, commercial mortgage loans generally lack standardized terms, tend to have shorter maturities than residential mortgage loans and may provide for the payment of all or substantially all of the principal only at maturity. Additional risks may be presented by the type and use of a particular commercial property. Commercial properties tend to be unique and are more difficult to value than single-family residential properties. Commercial lending is generally viewed as exposing a lender to a greater risk of loss than residential one-to-four family lending since it typically involves larger loans to a single borrower than residential one-to-four family lending. CDO Debt Securities. Our CDOs may hold debt securities issued by other CDOs. These CDO debt securities rely on distributions of the CDO s underlying assets. Interest payments on the CDO debt securities (other than the most senior tranche or tranches of a given issue) are generally subject to deferral, without causing an event of default or permitting exercise of remedies by the holders thereof. If distributions on the collateral of the CDO or proceeds of such collateral are insufficient to make payments on the CDO debt securities held by our CDO subsidiaries, no other assets will be available for payment of the deficiency. CDO securities are generally privately placed and offer less liquidity than other investment-grade or high-yield corporate debt. Table of Contents Total Return Swaps. Our CDO subsidiaries may enter into total return swaps. Total return swaps are subject to risks related to changes in interest rates, credit spreads, credit quality and expected recovery rates of the underlying credit instrument as well as renewal risks. A total return swap agreement is a two-party contract to exchange returns from predetermined investments or instruments. Total return swaps allow investors to gain exposure to an underlying credit instrument without actually owning the credit instrument. In these swaps, the total return (fixed interest fees and capital gains/losses on an underlying credit instrument) is paid to an investor in exchange for a floating rate payment. The investor pays a fraction of the value of the total amount of the credit instrument that is referenced in the swap as collateral posted with the swap counterparty. The total return swap, therefore, is a leveraged investment in the underlying credit instrument. The gross returns to be exchanged or swapped between the parties are calculated based on a notional amount, which is valued monthly to determine each party s obligation under the contract. We are charged a finance cost by counterparties with respect to each agreement. Because swap maturities may not correspond with the maturities of the credit instruments underlying the swap, we may wish to renew many of the swaps as they mature. However, there is a limited number of providers of such swaps, and there is no assurance the initial swap providers will choose to renew the swaps, and, if they do not renew, that we would be able to obtain suitable replacement providers. Credit Default Swaps. We may own credit default swaps. Credit default swaps are subject to risks related to changes in interest rates, credit spreads, credit quality and expected recovery rates of the underlying credit obligations referenced in the credit default swap. A credit default swap is a contract in which the contract buyer pays a periodic premium until the contract expires or a credit default occurs. In return for this premium, the contract seller makes a payment to the buyer if there is a credit default or other specified credit event with respect to the issuer of the underlying credit instrument referenced in the credit default swap. We may act as a buyer and seller of credit default swaps by entering into contracts that reference CDOs from cash and synthetic structures backed by pools of corporate, consumer or structured finance debt. The change in fair value resulting from movements in interest rates, credit spreads, changes in credit quality and expected recovery rates is unrealized as credit default swaps are not traded to realize this value. The valuation of credit default swaps may require management to make certain assumptions and estimates and actual experience may materially differ from the estimates reflected in our subsequent financial statements. Our investments in synthetic CDOs are subject to a number of risks that could adversely affect our returns. We hold synthetic CDOs and we expect to invest in similar assets in the future. Synthetic CDOs enter into credit default swaps and total return swaps which entail the risks described above. In addition, synthetic CDOs are subject to a number of risks, including the following: The individual reference obligations referenced in the credit default swaps may be static. Therefore, no additions, removals, substitutions or modifications to the credit default swap portfolio will be effected in response to any changes in the market conditions applicable to the reference obligations. Our underlying CDOs that invest in credit default swaps rely on the creditworthiness of the credit default swap counterparty. Consequently, in addition to relying upon the creditworthiness of the reference entities, the issuer is also relying upon the creditworthiness of the credit default swap counterparty to perform its obligations under the credit default swaps and of the issuers of or obligors with respect to the other eligible investments. Under the credit default swaps, the issuer has a contractual relationship only with the credit default swap counterparty. Consequently, the issuer has no legal or beneficial interest in any reference obligation or any other obligation of any reference entity. The issuer has no right directly to enforce compliance by the obligor under any reference obligation with the terms thereof, does not have any rights of set-off against such obligor, does not have any voting rights with respect to such reference obligation, does not directly benefit from any collateral supporting such reference obligation and does not have the benefit of the remedies that would normally be available to a holder of such reference obligation. Table of Contents The CDO subsidiaries that we form internally may not be able to acquire eligible collateral securities for a future CDO issuance, or may not be able to issue future CDO debt securities on attractive terms that closely match the duration of the assets and liabilities, which may require our CDO subsidiaries to seek more-costly financing for these assets or cause us to lose the opportunity to create a CDO subsidiary. We operate primarily through ownership of our CDO subsidiaries. To the extent we form new CDO subsidiaries internally, relatively short-term credit facilities may be used to finance the acquisition of securities for new CDO subsidiaries until a sufficient quantity of securities is accumulated, at which time the assets are refinanced through a securitization, such as a CDO issuance, or other long-term financing. As a result, we are subject to the risk that a CDO subsidiary will not be able to acquire, during the period that the short-term facilities are available, a sufficient amount of eligible securities to create a new CDO subsidiary that will increase our earnings potential. We also bear the risk that our future CDO subsidiaries we form will not be able to obtain such short-term credit facilities or may not be able to renew any short-term credit facilities after they expire should it be necessary to obtain extensions for such short-term credit facilities to allow more time to seek and acquire the necessary eligible instruments for a long-term financing. Inability to renew or extend these short-term credit facilities may cause a CDO subsidiary to seek more-costly financing for these assets or to lose the ability to utilize them in connection with the creation of a CDO issuance. In addition, conditions in the capital markets may make the creation of a CDO issuance less attractive to us when a sufficient pool of collateral is available. We, through our subsidiaries, may also participate in the equity of CDO entities established by third parties with respect to which we will assume all or a portion of the risk of losses prior to completion of a securitization by such CDO entity. Although participation in such equity may result in attractive yields during the warehouse period prior to securitization, default on the underlying assets and changes in market conditions can lessen or eliminate our expected yield or could result in the partial or total loss of our investment. We may enter into warehouse agreements in connection with CDOs we create or in connection with CDOs to be formed by or on behalf of third parties, under which we will assume all or a portion of the risk of losses prior to completion of a securitization by the CDO. In the normal course of business, we may enter into an agreement which requires a deposit for the purpose of covering all or a portion of any losses or costs associated with the accumulation of securities under a warehouse agreement. If the CDO transaction is not consummated, the warehouse securities could be liquidated and we could bear losses to the extent the original purchase price of the securities exceeds its sale price, subject to negotiated caps, if any, on our exposure. In addition, regardless of whether the CDO transaction is consummated, if any of the warehoused securities is sold before the consummation, we could be required to bear all or a portion of any resulting loss on the sale. In certain cases, we could be required to acquire the equity of the CDO. The use of CDO financings with over-collateralization requirements may have a negative impact on our cash flow. The indentures governing our CDOs generally provide that the principal amount of assets must exceed the principal balance of the related bonds by a certain amount, commonly referred to as over-collateralization. The CDO terms provide that, if certain delinquencies and/or losses exceed the specified levels based on the analysis by the rating agencies (or any financial guaranty insurer) of the characteristics of the assets collateralizing the bonds, the required level of over-collateralization may be increased or may be prevented from decreasing as would otherwise be permitted if losses or delinquencies did not exceed those levels. Other tests (based on delinquency levels or other criteria) may restrict our ability, as holders of the CDO s equity interests, to receive cash flow from these investments. While completing the long-term financing of CDOs, we will be engaged in negotiations with the rating agencies or other key transaction parties on future CDO financings regarding the CDO delinquency tests, over-collateralization terms, cash flow release mechanisms or other significant factors regarding the release of cash flow to us by our CDOs. Failure to obtain favorable terms with regard to these matters may materially and adversely affect our cash flows, liquidity and the value of our equity interests. If assets held by our CDO subsidiaries fail to perform as anticipated, their Table of Contents over-collateralization or other credit enhancement expense will increase, resulting in a reduction in our income and cash flow from these investments. Risks Related to the Offering Pending our identification and acquisition of assets meeting our investment objectives, we may deploy the portion of the net proceeds of this offering that is not used to repay our existing $200 million secured credit facility in short-term instruments, which are likely to produce an initial return on your investment that may be lower than when we have fully employed the proceeds of the offering in securities meeting our investment objectives. We plan to deploy the portion of net proceeds of this offering that is not used to repay our existing $200 million secured credit facility in accordance with our investment objectives described in this prospectus. We intend initially to invest a substantial portion of the net proceeds in short-term investments which may be lower-yielding than our targeted assets. We expect to deploy this portion of the net proceeds from this offering in our targeted asset classes as soon as practicable depending on the availability of appropriate investment opportunities. However, we cannot assure you that any particular class of investments will be available when we begin to invest the proceeds from this offering. We may issue additional securities that dilute existing holders of shares or that have rights and privileges that are more favorable than the rights and privileges of holders of our shares. Under our memorandum and articles of association, we may issue additional securities, including ordinary shares, and options or other rights to purchase ordinary shares for such consideration and on such terms and conditions as our board of directors may determine with the approval of a majority of our independent directors. Our board of directors is able to determine the class, designations, preferences, rights, powers and duties of any additional corporate securities, including any rights to share in our profits, losses and distributions, any rights to receive corporate assets upon a dissolution or liquidation of the company and any redemption, conversion and exchange rights. We may use such authority to issue additional ordinary shares, which could dilute existing holders of ordinary shares, or to issue securities with rights and privileges that are more favorable than those of our ordinary shares. You will not have any right to consent to or otherwise approve the issuance of any such securities or the terms on which any such securities may be issued. If you purchase ordinary shares in the offering, you may experience immediate dilution in the net tangible book value per share. We expect the initial public offering price of our ordinary shares to be higher than the net asset value per share of our outstanding ordinary shares immediately after the offering. If you purchase our ordinary shares in the offering, you will incur immediate dilution of approximately in the net asset value per share of our ordinary shares from the price you pay for our ordinary shares in the offering. Our ordinary shares have never been publicly traded, and an active and liquid trading market for our ordinary shares may not develop. If our share price fluctuates after this offering, you could lose all or a significant part of your investment. Prior to the offering, there has not been a market for our ordinary shares. After the offering, we expect that the principal trading market for our ordinary shares will be on a U.S. exchange. We cannot predict the extent to which investor interest will lead to the development of an active and liquid trading market for our ordinary shares or, if such a market develops, whether it will be maintained. The underwriters may sell a substantial amount of our ordinary shares to a limited number of investors, which, together with the effect of certain of our ordinary shares being subject to lock-up agreements and other restrictions on transfer, could impact the development of an active and liquid market for our ordinary shares. We cannot predict the effects on the price of our ordinary shares if a liquid and active trading market for our ordinary shares does not develop. In addition, if such a market does not develop, relatively small sales Table of Contents may have a significant negative impact on the price of our ordinary shares. For example, sales of a significant number of ordinary shares may be difficult to execute at a stable price. Even if an active trading market develops, the market price of our ordinary shares may be highly volatile and could be subject to wide fluctuations after this offering. Some of the factors that could negatively affect our share price include: actual or anticipated variations in our quarterly results; negative developments in the asset classes held by our CDO subsidiaries; changes in our earnings estimates or publication of research reports about us or our industry; increases in market interest rates that may lead purchasers of our shares to demand a higher yield; changes in market valuations of similar companies; adverse market reaction to any increased indebtedness we incur in the future; additions or departures of our managers key personnel or other changes in management; changes in accounting rules that affect our earnings; speculation in the press or investment community; and general market and economic conditions. As a result of these factors, investors in our ordinary shares may not be able to resell their shares at or above the initial public offering price. The market price of our ordinary shares could be adversely affected by sales or the possibility of sales of substantial amounts of those securities. Upon completion of the offering, we expect to have ordinary shares outstanding, including the ordinary shares that we are selling in the offering, assuming that the underwriters do not exercise their option to purchase additional ordinary shares to cover over-allotments. We have agreed to make a shelf registration statement available for the benefit of the holders of the shares issued in connection with our formation and our private-round financing to have the resale of their shares registered under the Securities Act. Upon registration and following the termination of any applicable lock-up period, these ordinary shares will be eligible for sale into the market. We may also issue from time to time additional ordinary shares in connection with the acquisition of investments, and we may grant demand or piggyback registration rights in connection with such issuances. Of the ordinary shares outstanding following the offering and related transactions, approximately ordinary shares will be held by affiliates of the managers and will be subject to resale restrictions under lock-up agreements with the underwriters of the offering. We cannot assure you that the holders of any of our ordinary shares that are subject to lock-up restrictions will not sell substantial amounts of their ordinary shares upon any waiver, expiration or termination of the restrictions. The occurrence of any such sales, or the perception that such sales might occur, could have a material adverse effect on the price of our ordinary shares and could impair our ability to obtain capital through an offering of equity securities. We will be subject to the requirements of the Sarbanes-Oxley Act. After becoming a public company, management will be required to deliver a report that assesses the effectiveness of our internal controls over financial reporting, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act requires our auditors to deliver an attestation report on management s assessment of, and the operating effectiveness of, our internal controls over financial reporting in conjunction with their opinion on our audited financial statements as of December 31 subsequent to the year in which our registration becomes effective. As permitted by SEC release 2006-136, compliance with Section 404 of the Sarbanes-Oxley Act is likely to be deferred until after we have filed one annual report with the SEC. Substantial work on our part is required to implement appropriate processes, document the system of internal control over key processes, assess their design, remediate any deficiencies identified and test their operation. We cannot give any assurances that material weaknesses will not be identified in the future in Table of Contents connection with our compliance with the provisions of Sections 302 and 404 of the Sarbanes-Oxley Act. The existence of any material weakness described above would preclude a conclusion by management and our independent registered public accounting firm that we maintained effective internal control over financial reporting. We will incur increased costs as a result of being a public company. Following the offering, as a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. We will incur costs associated with our public company reporting requirements. We also anticipate that we will incur costs associated with recently adopted corporate governance requirements, including requirements under the Sarbanes-Oxley Act. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We also expect that these new rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. We are currently evaluating these new rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. The ordinary shares are equity of the company and hence dividend and other distributions will only be payable from distributable profits and/or share premium of the company. The ordinary shares are equity of the company. Any amounts paid by the company as dividends or other distributions on the ordinary shares will be payable only to the extent of the company s distributable profits and/or share premium (determined in accordance with Cayman Islands law). In addition, such distributions will be payable only to the extent that the company is solvent on the applicable distribution date and the company will not be insolvent after such distributions are paid. Under Cayman Islands law, a company is generally deemed to be solvent if it is able to pay its debts as they fall due. Tax Risks Our status as a Passive Foreign Investment Company may result in significant additional tax costs for shareholders who are U.S. taxpayers. Each of Everquest and its non-US corporate subsidiaries is and will likely remain a passive foreign investment company, or a PFIC, for U.S. federal income tax purposes. There are potentially adverse U.S. federal income tax consequences of investing in a PFIC for a shareholder who is a U.S. taxpayer. These consequences include the following: if a shareholder makes a Qualified Electing Fund, or a QEF, election with respect to the company and its subsidiaries (or a QEF election applies to those subsidiaries), the shareholder will have to include annually in his, her or its taxable income an amount reflecting an allocable share of the earnings, as calculated for U.S. federal income tax purposes, income of the company and such subsidiaries, regardless of whether dividends are paid to the shareholder; if a shareholder is permitted to make and makes a mark-to-market election with respect to the company, the shareholder will have to include annually in his, her or its taxable income an amount reflecting any year-end increases in the price of our ordinary shares, regardless of whether dividends are paid by the company to the shareholder (and it is unclear how such an election would affect the shareholder with respect to our subsidiaries); and if a shareholder does not make a mark-to-market election (and, with respect to clauses (ii) and (iii) below, even if a shareholder does make a mark-to-market election) or a QEF election which is valid with respect to us and our subsidiaries for such shareholder s entire holding period, such shareholder may incur significant additional U.S. federal income taxes with respect to (i) distributions on, or gain from the sale or other disposition of, our ordinary shares; (ii) distributions from our subsidiaries; or (iii) our gain on any sale or other disposition of interests in our subsidiaries. Table of Contents In this regard, prospective purchasers should be aware that it is possible that a significant amount of our earnings, as calculated for U.S. federal income tax purposes, will not be distributed on a current basis, resulting in phantom income subject to tax. The PFIC rules are very complex, there are uncertainties as to the application of the PFIC rules to us, and the tax reporting with respect to multiple PFICs is complicated. In particular, we believe that the better view appears to be that QEF elections made by our shareholders with respect to Everquest Financial Ltd. and Everquest Cayman Ltd., in conjunction with QEF elections made by Everquest LLC with respect to its PFIC subsidiaries, should be sufficient to enable the shareholders to report their share of our earnings and the earnings of our subsidiaries under the QEF regime. We intend to report our earnings, as calculated for U.S. federal income tax purposes, to you on this basis should you choose to make a QEF election with respect to Everquest Financial Ltd. and Everquest Cayman Ltd. However, substantial uncertainty exists concerning this view because of the absence of any judicial decisions or Internal Revenue Service, or IRS, guidance directly on point, and we cannot provide any assurance that the IRS will not treat the QEF elections made by Everquest LLC as invalid with respect to you on the basis that you should have made QEF elections with respect to each of our subsidiaries as well. We will use our reasonable best efforts to obtain and provide separate information for each of our PFIC subsidiaries to enable you to make separate QEF elections for such subsidiaries if you specifically request such information. However, we cannot assure you that such information will be available for all of our PFIC subsidiaries. Potential investors are therefore urged to consult their tax advisors regarding the advisability of making protective or actual QEF elections with respect to our subsidiaries and the consequences to them of not having valid QEF elections in effect for their and our entire holding period with respect to our subsidiaries and being subject to the Excess Distribution Rules (described under Certain Tax Considerations U.S. Federal Income Tax considerations Tax Consequences of Our PFIC Status to U.S. Holders of Ordinary Shares If no QEF or Mark-to-Market Election is in Effect ) if the IRS were to take a contrary position. In addition, we cannot be sure that we will be able to provide you with all the information necessary for you to file your tax returns on a timely basis (without taking into account any available extensions). Moreover, the amounts reported under separate QEF elections for Everquest and each of its direct and indirect subsidiaries may differ from the amounts we report to you with respect to QEF elections you make for Everquest and Everquest Cayman Ltd. (which take into account QEF elections made by Everquest LLC). Because we may not distribute to you all amounts includible under the QEF elections, the amount of capital gain you derive on a disposition of our shares may be less, and the amount of capital loss greater, than if we distributed all of our earnings currently. Also, with respect to some of our subsidiaries, a QEF election may not avoid the application of the Excess Distribution Rules with respect to those shares. See Certain Tax Considerations U.S. Federal Income Tax Considerations Tax Consequences of Our PFIC Status to U.S. Holders of Ordinary Shares. Certain subsidiaries of Everquest LLC may also be controlled foreign corporations, or CFCs, for U.S. federal income tax purposes, and, thus will have inclusions of gross income from such subsidiaries under the rules applicable to CFCs, including rules which treat the pledge of stock in such subsidiaries as creating additional income to the extent there are untaxed accumulated earnings in such subsidiaries. You are urged to consult your own tax advisors concerning your particular circumstances and the U.S. federal, state, local and non-U.S. tax consequences to you of owning and disposing of our ordinary shares. If we are found to be engaged in a U.S. trade or business, we may be liable for significant U.S. taxes. We believe that the company, both directly and through its subsidiaries, generally operates its businesses in a manner that should not result in it being treated as engaged in a trade or business within the United States. Consequently, we do not pay U.S. corporate income or branch profits tax on our income. However, we may determine in the future that it would be advantageous to acquire certain assets or engage in certain activities which could give rise to U.S. corporate income tax or branch profits tax. Under such circumstances, we intend to acquire such assets or engage in such activities in a corporate subsidiary and in a manner such that only the income from such assets or activities are subject to U.S. tax (and not all of our income). In Table of Contents addition, because the determination of whether a foreign corporation is engaged in a trade or business in the United States is inherently factual and there are no definitive standards for making such a determination, there can be no assurance that the IRS will not contend successfully that we or our subsidiaries are engaged in a trade or business in the United States. See Certain Tax Considerations U.S. Federal Income Tax Considerations Taxation of Everquest and Its Subsidiaries. We expect that payments received by us from our subsidiaries as well as payments received by our subsidiaries on their investments generally will not be subject to withholding or other taxes imposed by the United States or reduced by withholding or other taxes imposed by other countries from which such payments are sourced. Such payments, however, might become subject to U.S. or other withholding or other tax due to a change in law or other causes. The imposition of unanticipated withholding taxes, tax on our income or other tax could materially impair our ability to make distributions to you. Under current U.S. federal income tax law, the treatment of synthetic securities in the form of credit default swaps is unclear. Certain possible tax characterizations of a credit default swap, if adopted by the IRS and if applied to credit default swaps to which we are a party, could subject payments received by us under such swaps to U.S. withholding or excise tax. While it is not expected, it is also possible that because of such tax characterizations, based on all the facts and circumstances, we could be treated as engaging in a trade or business in the United States and therefore subject to net income tax. We may not be entitled to a full gross-up on such taxes under the terms of the synthetic securities. The imposition of such unanticipated taxes could materially impair our ability to make distributions to you. Legislation recently proposed in the United States Senate would, for tax years beginning at least two years after its enactment, tax a corporation as a domestic corporation for U.S. federal income tax purposes if the equity of that corporation is regularly traded on an established securities market and the management and control of the corporation occurs primarily within the United States. If this legislation caused us to be taxed as a domestic corporation, we would be subject to United States net income tax. However, it is unknown whether this proposal will be enacted in its current form and, if enacted, whether we would be subject to its provisions. Table of Contents USE OF PROCEEDS We estimate that the net proceeds we will receive from the sale of ordinary shares in the offering will be approximately $ , or approximately $ if the underwriters fully exercise their over-allotment option, in each case assuming an initial offering price of $ per share, after deducting underwriting discounts and commissions, and estimated offering expenses of approximately $ payable by us. We expect to use the proceeds from this offering: to repay $ of our debt under our existing $200 million secured credit facility; to create or acquire additional CDOs and other structured finance assets; and for general corporate purposes. Under the terms of our existing secured credit facility, we are required to repay any outstanding amounts under the facility with the proceeds of this offering. This credit facility bears an annual interest rate of the applicable three-month LIBOR plus 2.00% on all amounts drawn. The proceeds of this facility were used to purchase CDO equity. In connection with the offering, we expect to enter into a new credit facility upon which we may draw to make additional acquisitions of CDO subsidiaries. See Management s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources. Table of Contents DIVIDEND POLICY We intend to distribute quarterly dividends to our shareholders. We intend to distribute over time approximately 90% of our net investment income out of assets legally available for distribution. All distributions will be made at the discretion of our board of directors, and will depend on a number of factors such as: our financial condition; general business conditions; actual results of operations; the timing of the deployment of our equity capital; our and our subsidiaries debt service requirements; the availability of cash distributions from our subsidiaries; our operating expenses; any contractual, legal and regulatory restrictions on the payment of distributions by us to our shareholders or by our subsidiaries to us; and other factors our board of directors in its discretion deems relevant. At a minimum, to the extent we have available cash resources (including cash of Everquest LLC that may be distributed in accordance with applicable law and subject to the priorities set forth in its limited liability company agreement) in excess of reasonable reserves and our reasonably foreseeable business needs, we intend (although we are not obligated) to distribute annually in the aggregate an amount sufficient to cover the taxes payable by the ordinary shareholders to pay their taxes resulting from a QEF election made by them with respect to Everquest or Everquest Cayman Ltd., assuming they are subject to the highest marginal statutory combined federal, state and local tax rate prescribed for an individual living in New York, New York. We are a holding company with no operations and are dependent upon the ability of our subsidiaries to generate and distribute dividends to us. In January 2007, we declared a dividend of $14,352,016, or $0.61 per ordinary share, for the fourth quarter of 2006, which we paid on March 31, 2007 to shareholders of record on December 31, 2006. Table of Contents CAPITALIZATION The following table sets forth (i) our actual cash and net assets as of December 31, 2006, (ii) our pro forma cash, debt and net assets to reflect drawings under our existing secured credit facility and shares issued in the private-round financings we completed in January and February 2007, and (iii) our pro forma cash, debt and net assets as adjusted to reflect the effects of the sale of our ordinary shares in the offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and the application of the net proceeds as described in Use of Proceeds. You should read this table together with Use of Proceeds, Management s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and notes thereto included elsewhere in this prospectus. As of December 31, 2006 Pro Forma Actual Pro Forma As Adjusted ($ in thousands, except per share data) Cash and cash equivalents $ 2,618 $ $ Debt(1) Existing secured credit facility 25,650 Net Assets Share capital 24 Additional paid-in capital 597,479 Undistributed net investment income 14,352 Net realized loss on investment (1,838 ) Net unrealized appreciation on investments 9,437 Net assets $ 619,454 $ $ Net asset value per share $ 25.93 $ $ (1) Under the terms of our existing $200 million secured credit facility, we are required to repay any debt outstanding under the credit facility with the proceeds of the offering. In connection with the offering, we expect to enter into a new credit facility, upon which we may draw to make additional acquisitions of CDO subsidiaries. See Management s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources. Table of Contents DILUTION Purchasers of ordinary shares offered in this prospectus will experience immediate and substantial dilution of the net asset value of their ordinary shares from the offering price. Our net asset value as of December 31, 2006 was approximately $619.5 million, or $25.93 per share. After giving effect to the sale of ordinary shares in the offering at an assumed offering price of $ per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our as adjusted net asset value on December 31, 2006 would have been approximately $ million, or $ per share. This amount represents an immediate dilution in net asset value of $ per share to new investors who purchase our ordinary shares in the offering at an assumed offering price per share of $ . The following table shows this immediate per share dilution: Offering price per share $ Net asset value per share on December 31, 2006, before giving effect to the offering 25.93 Dilution in net asset value per share attributable to the offering As adjusted net asset value per share on December 31, 2006, after giving effect to the offering Dilution in as adjusted net asset value per share to new investors $ The following table summarizes, as of December 31, 2006, the differences between the average price per share paid by our existing shareholders and by new investors purchasing ordinary shares in the offering at the offering price of $ per share, before deducting underwriting discounts and commissions and estimated offering expenses payable by us in the offering: Average Shares Purchased Total Consideration Price Per Number Percent Amount Percent Share Existing shareholders(1) % $ % $ New investors in this offering(2) Total % $ % $ (1) Also includes shares sold in our private placements completed in January and February 2007. Average price per share is a weighted average. (2) Assumes no exercise of the underwriters option to cover over allotments. If the underwriters fully exercise their over allotment option, the number of ordinary shares held by existing holders will be decreased to % of the aggregate number of ordinary shares outstanding after the offering, and the number of ordinary shares held by new investors will be increased to %, of the aggregate number of ordinary shares outstanding after the offering. Table of Contents SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA In the table below, we provide you with selected consolidated financial and other data of the company. We have prepared this information for the period from September 28, 2006 (commencement of operations) to December 31, 2006 using our audited consolidated financial statements for the period from September 28, 2006 (commencement of operations) to December 31, 2006. Results for the period from September 28, 2006 (commencement of operations) to December 31, 2006 are not necessarily indicative of results that may be expected for an entire year. When you read this selected consolidated financial and other data, it is important that you read along with it the consolidated financial statements and related notes, as well as the section titled Management s Discussion and Analysis of Financial Condition and Results of Operations which are included in this prospectus. As of December 31, Consolidated Statement of Assets and Liabilities Data 2006 ($ in thousands, except per share data) Assets Cash and cash equivalents $ 2,618 Affiliated investments in securities, at fair value (amortized cost $437,357) 443,247 Nonaffiliated investments in securities, at fair value (amortized cost $250,862) 253,709 Credit default swaps, at fair value 701 Deposits in CDO warehouses, at fair value 22,000 Due from affiliates 207 Due from brokers 3,512 Prepaid directors and officers insurance 220 Total assets $ 726,215 Liabilities Due to affiliates 790 Due to brokers 72,393 Management fees payable to affiliates 2,827 Incentive fees payable to affiliates 3,784 Other liabilities 26,967 Total liabilities $ 106,761 Net Assets Common stock 24 Additional paid-in-capital 597,479 Undistributed net investment income 14,352 Net realized loss on investments (1,838 ) Net unrealized appreciation on investments 9,437 Net assets $ 619,454 Net asset value per share $ 25.93 Table of Contents Period from September 28, 2006 (commencement of operations) to Consolidated Statement of Operations Data December 31, 2006 ($ in thousands, except share data) Revenue Interest income affiliated $ 15,383 Interest income nonaffiliated 9,641 Total revenue 25,024 Operating expenses Management fees to affiliates 2,827 Incentive fees to affiliates 3,784 Organization fees 2,231 Professional fees 1,142 Other expenses 688 Total expenses 10,672 Net investment income 14,352 Realized and unrealized gain (loss) on investment transactions Net realized gain (loss) on investment transactions (1,838 ) Net unrealized appreciation on investments 8,736 Net unrealized appreciation on credit default swaps 701 Net realized and unrealized gain on investment transactions 7,600 Net increase in net assets resulting from operations $ 21,952 Net increase in net assets resulting from operations per share $ 0.94 Weighted average number of shares outstanding 23,390,146 Other Data Net investment income ratio(1) 12.25 % Weighted average yield(2) 17.68 % Cash distributions received from investments $ 11,976,102 Return on equity(3) 15.10 % (1) Annualized. (2) The weighted average of the bond equivalent yields of securities specified in the consolidated schedule of investments contained in the consolidated financial statements included in this prospectus, weighted by amortized cost. (3) Return on equity, also known as total return, is an annualized rate based on daily compounding and is equal to the net increase in net assets from operations divided by the weighted average of the net asset value since commencement of operations. Table of Contents MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. Formation We are a newly formed company. We commenced operations on September 28, 2006. On that date: the BSHG Funds, which are managed by BSAM, transferred to us equity in 10 CDOs, including Parapet CDO, for a purchase price of approximately $548.8 million. In consideration, we issued 16,000,000 of our shares, at $25 per share, and paid approximately $148.8 million in cash. HY II Investments, L.L.C. and EGI-Fund (05-07) Investors, L.L.C., or collectively, HY, affiliates of an entity that has an economic interest in Stone Tower, transfered to us equity in two CDOs with a purchase price of approximately $6.4 million and approximately $18.6 million in cash in exchange for 1,000,000 of our shares, at $25 per share. Other investors paid cash of approximately $137.5 million, or $25 per share, in exchange for 5,500,100 of our shares. As a result of these transactions, at the initial closing, we received approximately $555.2 million of CDO equity and approximately $7.3 million in cash, net of the cash consideration we paid to the BSHG Funds and HY. We valued the equity interests in the CDOs we acquired in connection with our formation at their fair value as of the initial closing date, taking into account a number of factors, including the projected cash flows we expected to be generated by these interests and valuation information provided by third-party market participants. As of December 31, 2006, our CDO holdings, which includes equity tranches in 19 CDOs, had an aggregate fair value of $719.7 million. Subsequent to December 31, 2006, and through March 31, 2007, we acquired equity tranches of an additional three CDOs for a purchase price of $32.9 million. In addition, we continue to actively evaluate multiple opportunities, some of which may be material in relation to our size. We believe that the growth in CDO issuance will continue to provide attractive opportunities to expand our portfolio. We expect to use the net proceeds from this offering primarily to repay amounts outstanding under our existing $200 million secured credit facility, which were previously used to finance the acquisition of CDO equity. We also intend to use a portion of the remaining proceeds to form or make additional acquisitions of CDO equity. See Use of Proceeds. We may also employ leverage under a new secured credit facility to finance the acquisition of additional CDO equity. Key Factors that Affect Our Ability to Generate Cash Flow We generate cash flow primarily through distributions we receive as an equity holder in our CDO subsidiaries. To a lesser extent, we may generate earnings through minority holdings in CDO equity. We may also receive distributions from assets maintained in short-term warehouse facilities in which we share the risk of loss and that are utilized to finance the purchase of assets prior to permanent CDO securitizations. As an equity holder in CDOs, we anticipate that distributions to us will be made, typically quarterly, out of the returns received by our subsidiaries from their underlying cash generating assets, but only after they pay their operating and other expenses and make any required debt service payments to the holders of the debt tranches. In addition, our CDOs are typically subject to a series of collateral tests that are designed to protect the holders of, and to maintain the credit ratings associated with, the senior debt tranches. At times, these tests require that distributions on the equity tranches be deferred or diverted (without triggering an event of default) which would prevent our subsidiaries, even if they are generating profits, from making distributions of these profits to us. Table of Contents The following factors also affect the distributions to us from our CDO subsidiaries or other CDOs in which we hold equity: Factor How it affects CDO results Default and recovery rates If the rates of defaults and delinquencies on underlying assets increases, the cash generated by those assets through principal and interest payments decreases. If the recovery rate following a default, bankruptcy or liquidation decreases, the cash generated decreases. The average time lag between a default and recovery will also affect the present value of future recoveries. Prepayment or redemption rates and reinvestment rates If the underlying assets are prepaid or redeemed for cash prior to maturity, this cash must be reinvested in comparable assets during a permitted reinvestment period in order to maintain the same level of cash generation. The timing of reinvestment in substitute collateral and the interest rates available at the time of reinvestment will affect the amount of distributions. The inability to reinvest, due to restrictions under the CDOs governing documents or the unavailability of comparable assets, would also reduce overall returns. Interest rate trends Our CDO subsidiaries operate on a leveraged basis. Their returns will be affected by changes in interest rates that cause changes in the costs of their financing to increase relative to the income that can be derived from their underlying assets. Expenses Yield and other measures of performance may be adversely affected to the extent that the CDO issuer incurs any significant unexpected expenses. In addition, a variety of factors relating to our business may also impact our overall financial condition and operating performance. These factors include: our amount of outstanding debt and interest rates thereon; our access to funding and borrowing capacity for new CDOs; our ability to continuously form or acquire additional CDO subsidiaries as existing CDO holdings amortize; our hedging activities; changes in markets affecting the market value of our existing CDO holdings; and the requirements to qualify for an exemption from regulation under the 1940 Act. Trends and Uncertainties As described more fully in Summary Our Market Opportunity, we noted the following market trends: significant growth in the CDO market; market developments favoring CDO equity tranches, such as increased demand for rated debt securities issued by CDOs and reduced interest rate spreads for the higher-rated debt securities issued by CDOs; and robust leveraged buyout activity that generates collateral assets for CLOs. Table of Contents While corporate credit default rates are at historically low levels, there is uncertainty as to whether these default rates will remain at current levels. While we continue to monitor and manage credit risk as part of our risk management process, an increase in corporate credit default rates, with all other factors remaining the same, would have a negative effect on our results of operations which, depending on the extent of the increase, could be material. We may seek to hedge our exposure if default rates increase significantly and if hedges are available on attractive terms. Furthermore, a substantial majority of the ABS CDOs in which we hold equity have invested primarily in RMBS backed by collateral pools of subprime residential mortgages. The value and returns of these RMBS may be affected by general economic conditions in some geographic regions, including increased interest rates and lower housing prices, which have negatively affected collateral pools of subprime residential mortgages that underlie certain RMBS. Generally, our ABS CDOs hold RMBS rated in the range of A2 to Ba2 which, because of their higher position within the RMBS structure, are less susceptible to loss than the equity or lower-rated tranches of RMBS. Nevertheless, increased losses within the underlying collateral pools of subprime mortgages could also cause the higher-rated RMBS to suffer losses, which could be material. For a description of steps we have taken to manage these risks, see Credit Risk. For a discussion of additional risks relating to our business see Risk Factors and Quantitative and Qualitative Disclosures about Market Risk. Critical Accounting Policies and Estimates Our consolidated financial statements were prepared by management in accordance with accounting principles generally accepted in the United States of America, or GAAP. Although we conduct our operations so that we are not required to register as an investment company under the 1940 Act, for financial reporting purposes we follow the AICPA Audit and Accounting Guide for Investment Companies, or the Guide. Our significant accounting policies are fundamental to understanding our financial condition and results of operations because some of those policies require that we make significant estimates and assumptions that may affect the value of our assets or liabilities and our financial results. Principles of Consolidation Our consolidated financial statements contained elsewhere in this prospectus include the accounts of Everquest Financial Ltd. and its subsidiaries, Everquest LLC and Everquest Cayman, Ltd. We have eliminated all intercompany accounts and transactions. On December 24, 2003, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities, or FIN 46(R), to clarify the application of Accounting Research Bulletin ( ARB ) No. 51, Consolidated Financial Statements, as amended by FASB Statement No. 94, Consolidation of All Majority-Owned Subsidiaries. The effective date of FIN 46(R) has been deferred for investment companies (including nonregistered investment companies) that are accounting for investments in accordance with the Guide. For accounting purposes, we have evaluated all CDO equity investments, including Parapet 2006, Ltd., under a control based model in accordance with ARB No. 51 and have not consolidated any of our CDO equity investments. As required by the Guide, all investments are reported at fair value. Valuation We use the discounted cash flow valuation technique to estimate the fair value of our equity in a CDO. Our methodology is a three step process which includes the following: Forecast expected cash flow. We generally use INTEX, a third party vendor of CDO analytical software, which is a widely used industry tool, to forecast, based on assumptions we provide, the timing and amount of expected cash flows we receive as an equity owner in our CDOs. While INTEX itself renders an objective analysis, management is required to provide assumptions, based on observable market parameters and standard Table of Contents industry practice, such as default and recovery scenarios, prepayment, reinvestment spread, future interest rates, and call optionality. Generally, there is a three to six month delay between when a CDO closes and the time it is modeled on INTEX. Until the deal is modeled on INTEX, we use either the CDO underwriter s cash flow model or the collateral manager s model. There are also instances when a CDO equity holding may never be modeled on INTEX and in such instances we will continue to use either the CDO underwriter s cash flow model or its collateral manager s model. When we form or acquire CDO equity, the assumptions initially used are typically based on those made by the CDO underwriter. These are market conventions that are found in the standard marketing literature, which we review in making our own determination as to the assumptions to use. As part of ongoing surveillance and portfolio management, the assumptions we use are constantly tested in relation to the market parameters and actual performance of the underlying collateral. As a result, our assumptions may change. Calculate the discount rate. The initial discount rate we use in valuing each CDO is determined by reference to the internal rate of return (IRR), which is calculated based on the estimated future cash flows and our initial investment or cost. In subsequent periods we continue to use a discount rate to revalue the assets using our best estimate of the rate market participants would use to value a similar asset, based on actual performance of the underlying collateral, the surveillance results or other market parameters. Calculate the fair value of our equity in the CDO. The fair value of our equity in a CDO is the net present value of the expected future cash flows calculated using our current assumptions and the applicable discount rate. We revalue our CDO equity on a monthly basis based on newly generated cash flow estimates using our current assumptions and discount rate. The current and future characteristics of the underlying CDO portfolio, the interest rate environment, market parameters and all other assumptions are continuously monitored. As part of the valuation, we currently carry out the following process: first, each quarter our managers value the investments; second, preliminary valuation conclusions are documented and discussed with our senior management; and third, any changes to the discount rate or cash flow assumptions used to value assets are approved by our senior management and the BSAM pricing committee, which includes an Everquest board member and BSAM s Head of Risk Management, CFO, Head of Compliance, CIO, the General Counsel and Chief Strategist. Because of the methodology described above, fair value is highly sensitive to both the discount rate we select and our estimates of future cash flows attributable to our CDO equity ownership. Our estimates of future cash flows are, in turn, highly subjective and sensitive to the assumptions we make, which require considerable judgment and knowledge of market factors. The actual items set forth in our assumptions and therefore the actual future cash flows attributable to our CDO equity ownership may vary materially from our current assumptions and estimated cash flows. Due to uncertainty inherent in the valuation process, our estimates of fair value may differ materially from the values that would have been used had a more developed market for the CDO holding existed. Additionally, changes in the market environment and other events that may occur over the life of a CDO may cause the gains and losses ultimately realized on these CDOs to be different from the valuations currently assigned. Table of Contents Interest and Unrealized Gains and Losses Amortized Cost. For accounting purposes, equity in CDOs is treated as a debt-like instrument accounted for under the principles of Emerging Issues Task Force Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets, or EITF 99-20. We recognize interest and realized gains and losses in accordance with EITF 99-20. Under EITF 99-20, at any balance sheet date, the amortized cost of the investment is equal to (1) the initial investment plus (2) the yield accreted to date less (3) all cash received to date regardless of whether labeled interest or principal less (4) any write downs for impairment. Accretion of periodic interest. As of the purchase date, the excess of the estimated future cash flows over the initial investment is the accretable yield, which is recognized as interest income over the life of the CDO using the effective yield method. On a quarterly basis, if estimated cash flows generated from the CDOs differ from the cash flows previously estimated, revised yields are calculated based on the current amortized cost of the CDO and the revised estimated cash flows. The revised yields are then applied prospectively to recognize interest income. The revised yield is determined by solving for the IRR which equates those future cash flows back to the amount of the amortized cost. As is the case with our valuation methodology described above, the amount of accretion of interest is based on our estimates of future cash flows attributable to our CDO equity ownership and is therefore highly subjective and sensitive to the assumptions we make, which require considerable judgment and knowledge of market factors. Our actual yield and cash flows may vary materially from those estimated. Unrealized Gains and Losses and Realized Losses. Any difference between the fair value and the amortized cost is reflected as unrealized gain or loss. The difference in the amortized cost and the fair value is caused primarily by changes in the future expected cash flows and variations in actual cash flows compared to previously expected cash flows. Determining realized loss. The rules under EITF 99-20 requires a specific impairment analysis to be done on a security by security basis to determine if there has been an other-than-temporary change to a CDO holding. We evaluate securities for impairment as of each calendar quarter end, or more frequently if we become aware of any material information that would lead us to believe that our equity in a CDO may be impaired. If the fair value of the CDO holdings is less than amortized cost and the fair value based on the current yield and revised cash flows is less than the fair value based on the current yield and original cash flows, then an other-than-temporary impairment must be recognized. The recognized impairment will equal the difference between the current fair value and the amortized cost. The amortized cost of the CDO is written down by the recognized impairment which will impact future accretion of income. Results of Operations for the Period September 28, 2006 (commencement of operations) to December 31, 2006 Summary Our net increase in net assets resulting from operations for the period was $22.0 million, or $0.94 per weighted average number of shares outstanding. This result reflects interest income accrued during the period on our fully invested portfolio of CDO equity, after deducting operating expenses, which included in significant part organizational fees which under GAAP are required to be expensed in total. Table of Contents Set forth below are certain ratios for the period, which are calculated by dividing the specified items for the period by the average of total monthly net assets. The net investment income ratio and total expense ratio includes accrued incentive fees. Ratio* Net investment income 12.25 % Total expenses before incentive, interest and organizational fees 3.00 % Incentive fees 0.64 % Interest expense 0.03 % Organizational fees 0.38 % Total expenses 4.05 % * Annualized, except for incentive and organizational fees. Revenue Total revenue for the period was $25.0 million, which consists primarily of interest income earned from our holdings in CDO equity. Operating Expenses and Net Investment Income Operating expenses for the period totaled $10.7 million, which includes one-time organizational fees of $2.2 million, management and incentive fees of $6.6 million and professional fees payable of $1.1 million, and which resulted in net investment income of $14.3 million. Realized and Unrealized Gain/Loss on Investment Transactions During the period from September 28, 2006 through December 31, 2006, we realized a net loss of $1,837,691, of which $2,157,691 related to losses taken as a result of other than temporary impairment on investments and $320,000 pertained to realized gains. Unrealized gains for the period from September 28, 2006 through December 31, 2006 were $9,437,212. Net Increase in Net Assets Resulting from Operations As a result of the foregoing, net increase in net assets resulting from operations was $22.0 million. Financial Condition Assets As of December 31, 2006 our share capital (including additional paid-in capital) was fully invested in our holdings of CDO equity, consisting primarily of CDOs where we held all or a majority of the equity. At that date, our total assets of $726.2 million included affiliated investments in securities, at fair value of $443.2 million, which primarily represented our holdings in our subsidiary Parapet CDO, and nonaffiliated investments in securities, at a fair value of $253.7 million, which represented our holding in CDOs where the collateral manager was an unrelated third party. Liabilities As of December 31, 2006 we had total liabilities of approximately $106.8 million, of which $72.4 million consisted of amounts due to brokers, relating to acquisitions of CDO equity that had not settled as of the balance sheet date, and $25.6 million consisted of loans incurred under our secured credit facility. See Liquidity and Capital Resources below for a description of liabilities entered into subsequent to the balance sheet date. Table of Contents Net Assets As of December 31, 2006, we had net assets of approximately $619.5 million, consisting almost entirely of share capital (including additional paid-in-capital), representing a net asset value per share of $25.93. Subsequent to December 31, 2006, we raised additional share capital as described below under Liquidity and Capital Resources. See also Dilution. Liquidity and Capital Resources We held cash and cash equivalents of approximately $2.6 million as of December 31, 2006. We used approximately $214.1 million of net cash and cash equivalents in operating activities for the period September 28, 2006 (commencement of operations) to December 31, 2006, primarily reflecting $307.5 million of cost of securities purchased offset by an increase of liabilities due to brokers of $72.4 million. These securities purchased include the equity tranches in CDOs, other than Parapet CDO, acquired in connection with our formation as well as subsequent acquisitions of CDO equity contracted for but not closed between our formation and December 31, 2006. These subsequent acquisitions resulted in the due to brokers liability of $72.4 million and were settled after the balance sheet date with cash generated by private-round financings and amounts drawn under our secured credit line. Cash flows from financing activities were approximately $216.7 million, reflecting the proceeds from issuances of our ordinary shares in connection with our formation. On December 15, 2006 we entered a $200 million credit facility for a term of one year with Citigroup Financial Products Inc., or CFPI, secured by a first-priority perfected security interest on 100% of our assets. This facility has been drawn upon and is available to fund investments, pre-approved by CFPI, prior to an initial public offering, or IPO. At December 31, 2006, there was approximately $174.4 million of availability under this facility. We are required to repay any outstanding amounts under the facility with proceeds of our initial public offering. See Use of Proceeds. Subsequent to December 31, 2006, and through March 31, 2007, we received an additional $62.3 million of private-round financing. The proceeds of this financing have been used in part to pay down certain amounts outstanding under the CFPI credit facility and in part to purchase additional CDO equity. The offering will provide additional estimated net proceeds of approximately $ million. See Use of Proceeds. In connection with the offering, we expect to enter into a new credit facility of approximately $ million. We expect that the proceeds of a new credit facility would be used to finance the formation or acquisition of additional CDO subsidiaries. We believe cash generated by our CDO holdings, together with cash available from the offering and under the new credit facility, will permit us to satisfy our liquidity needs during the foreseeable future. If, in the future, we need additional capital we would expect to raise funds primarily through additional equity offerings, although we may not be able to obtain additional equity financing on attractive terms or at all. We expect that any new CDO subsidiaries will finance their operations in the ordinary course through the issuance of CDO debt to third parties. Pending permanent CDO financing, to the extent we form new CDO subsidiaries we would expect to use traditional financing techniques such as warehousing facilities (through which third parties, typically large banks, hold the underlying assets funded with warehousing facility borrowings), or repurchase agreements. Contractual Obligations and Commitments As of September 28, 2006, we entered into a management agreement with each of BSAM and Stone Tower whereby we will pay to the managers a base management fee quarterly in arrears in an amount equal to (i) 1.75% on an annualized basis of the company s net assets up to $2 billion, plus (ii) 1.50% on an annualized basis of the company s equity over $2 billion and up to $3 billion, plus (iii) 1.25% on an annualized basis of Table of Contents the company s net asset over $3 billion and up to $4 billion, plus (iv) 1% on an annualized basis of the company s net asset over $4 billion. Each manager uses its management fee in part to pay compensation to its officers and employees who, notwithstanding that certain of them also are our officers, receive no cash compensation directly from us. For purposes of calculating the management fee, the company s net assets will be adjusted to exclude special one-time events pursuant to changes in GAAP, as well as noncash charges after discussion between the company and the independent directors on our board of directors and approval by a majority of the independent directors. In addition to the management fee, the managers are entitled to receive a quarterly incentive allocation in an amount equal to 25% of the amount by which the company s net increase in net assets resulting from operations, as calculated prior the incentive allocation and excluding noncash charges and special one-time events pursuant to changes in GAAP, exceeds the greater of 2.0%, or 0.50% plus one-fourth of the U.S. Ten Year Treasury Rate of the company s capital at the beginning of the quarter. As of December 31, 2006 the incentive allocation accrued was approximately $3.8 million. As described in Use of Proceeds, we are required to repay outstanding amounts under our existing secured credit facility. Off-Balance Sheet Arrangements Swaps In the normal course of business, we may enter into swap agreements, or Swaps, for investment, financing or hedging purposes. The Swaps are utilized to structure and hedge CDO holdings and to economically meet our objectives and help us manage risk. We may enter into total return, credit default, interest rate and currency swap agreements. Swaps are contractual agreements between a company and a third party to exchange a series of cash flows. Total return swaps are agreements where one party receives equity returns based on reference pools of assets in exchange for short term floating rate payments based on notional amounts. Credit default swaps, are agreements in which one party pays fixed periodic payments to a counterparty in consideration for a guarantee from the counterparty to make specific payment should a negative credit event take place. Risks arise from the possible inability of counterparties to meet the terms of their contracts. See Credit Risk. As of December 31, 2006, Everquest had four credit default swaps valued at $701,117 in its portfolio. Deposits in Warehouse Agreements In the normal course of business, we may enter into an agreement which requires a deposit for the purpose of covering a portion of any losses or cost associated with the accumulation of securities under a warehouse agreement. Such a deposit of cash allows for notional participation in the income, or the carry, generated by the assets acquired within the warehouse arrangement, after deducting the notional debt cost. At the termination of the agreement, depending on the performance of the collateral securities accumulated in the warehouse, we have the potential to either lose our deposit or earn a residual carry and LIBOR based interest along with the return of our deposit. We are obligated to acquire 100% of the equity of the CDO should the CDO closing fail to occur and the existing collateral manager is replaced by BSAM. These agreements are treated as derivatives for accounting purposes and are reported at fair value. As of December 31, 2006, Everquest had deposited $22.0 million in two such warehouses which also represents the fair value. Credit Risk Credit risk is the principal form of risk that we face. Substantially all of the assets held by our CDOs are credit-related assets. Credit risk represents the maximum potential loss we face if a counterparty fails to Table of Contents perform pursuant to the terms of the applicable agreement or instrument. We face credit risk at multiple levels within our structure. Within our CDOs, we face the risk that the counterparties to the underlying debt instruments held by our CDOs, such as corporate borrowers in the case of loans or the issuer in the case of RMBS or other asset-backed securities, fail to make interest or principal payments on their obligations. As a holder of CDO equity, or the so-called first-loss tranche of a CDO, our cash flow will decrease for any failure on the part of an obligor to pay its obligations that we are unable to recover subsequently. As a result, all of our equity holdings in CDOs are sensitive to changes in the credit quality of the borrowers of corporate credits or the issuers of the asset-backed securities, including changes in the forecasted default rates and any declines in the anticipated recovery rates. In periods of increasing default rates or decreasing recovery rates, our cash flows from our CDOs would be reduced. Our financial exposure is limited to its investments in the equity interests in the CDOs. The asset-backed securities held by our asset-backed CDO subsidiaries are themselves also subject to credit risk. For example, RMBS are collaterized by pools of residential mortgages, where the cash flow depends on homeowners making payments of principal and interest on their residential mortgages. Because of the credit risk we face, we are required to monitor continually the overall credit quality of the underlying collateral. See Our Company Risk Management Monitoring and Surveillance. We also monitor whether the collateral managers of the structures in which we hold equity manage the underlying collateral in accordance with the criteria established in the collateral management agreements. We seek to manage credit risk in various ways. We may seek to sell credit impaired assets or if we are not the collateral manager recommend to the collateral manager that it sell the asset. We also seek to manage our risk by monitoring our exposure to any one issuer or corporate borrower. We may also seek to hedge our exposure to an issuer, borrower or credit (including, for example, tranches of subprime RMBS held by our CDO subsidiaries) by entering into credit default swaps, total return swaps or similar hedging techniques. Prior to and since our formation, our manager BSAM has hedged exposures to certain tranches of ABS held by some of our CDOs, particularly RMBS with a high degree of exposure to sub-prime residential mortgage loans. These hedging transactions were originally entered into between the BSHG Funds and third parties and were not initially transferred to us pending our entry into relevant International Swaps and Derivatives Association, or ISDA, master agreements or other appropriate documentation with the third-party counterparties to the swaps. On May 8, 2007, the BSHG Funds transferred to us their interests in credit default swaps that reference 48 tranches of ABS securities held by our CDOs with a notional amount of approximately $201 million. We have agreed to pay the BSHG Funds approximately $4.4 million, representing accrued premiums on the swaps from the date of our formation or the effective date of the swaps, if later, through May 8, 2007 and, in the case of swaps in existence at the time of our formation, the fair value of such swaps as of that date. As a result of these transfers, we bear the risk of any decrease in value, and benefit from any gain or payments, with respect to these credit default swap contracts from May 8, 2007. We are also required to pay the ongoing premiums relating to the contracts. The consideration we paid for the swaps was less than their fair value as of the date of transfer, which BSAM estimated to be approximately $21.6 million as of that date, and was designed to represent the amount we would have paid if the swaps that were in existence at the time of our formation had been transferred to us at that time and if we had otherwise directly entered into the swaps that were entered into after our formation. As a result, to the extent the fair value continues to exceed the amount we paid, we would expect our second quarter results to include a gain relating to the recognition of the swaps on our balance sheet as of the transfer date. While the BSHG Funds as principal shareholders will continue to benefit from the swaps they transferred to us to the extent of their equity ownership in us, we have been advised that BSAM has agreed to compensate the BSHG Funds for the decrease in their net asset value resulting from the transfer of their interests in the swaps to us. The hedges will not cover all our exposure to RMBS held by our CDOs that are backed primarily by sub-prime residential mortgage loans. Our CDOs may experience negative credit events relating to RMBS tranches that are not hedged. However, the contracts were designed to hedge tranches that our manager BSAM believed were appropriate in light of exposures to sub-prime residential mortgage loans. Prior to their expiration, the fair value of these credit default swaps may increase or decrease in ways that may not ultimately be reflected Table of Contents by the amounts actually received under these hedges, if any. Further, decreases in the fair value of our CDOs relating to their sub-prime residential loan exposure may not necessarily be offset in whole by increases in the fair value of these credit default swaps. Similarly, any increases in the fair value of our CDOs relating to favorable developments relating to the RMBS held by our CDOs that are backed by sub-prime residential mortgage loans could be more than offset by decreases in the fair value of these credit default swaps as a result of the same developments. Market Risk Interest Rate Risk. With respect to our consolidated entities, the borrowings under our $200 million credit facility will be repaid upon the closing of the offering. We expect to have a new facility in place upon closing of the offering, which will similarly be sensitive to interest rate risk. At December 31, 2006, we had $25.6 million outstanding on our current facility, which bears interest at a floating rate. Based on this amount outstanding, an increase in interest rates of 1% held over the course of a year, with all other factors remaining the same, would increase our consolidated interest expense by approximately $0.26 million. Our other assets, which consist almost entirely of our equity ownership in our CDOs, which are not consolidated, are not per se market rate sensitive instruments, but the cash flows we derive by virtue of our ownership of our CDOs primarily result from the difference between earnings of the assets our CDOs hold, which consist generally of a portfolio of assets that typically bear interest at floating rates or other CDO equity securities, and the financing costs associated with the multiple tranches of debt issued by the CDOs, which also typically bear interest at floating rates. Generally, the assets and liabilities of the CDO are matched so that the CDO and our equity interest therein are not per se highly sensitive to changes in interest rates, i.e. an increase in floating rates, with all other things being equal, would typically result in an increase in the interest expense associated with the CDO s debt tranches, but would be offset depending on the match by increased earnings on the floating rate assets. However, in managing asset and liabilities in a CDO, reinvestment risk and yield spread risk arise, as further described below. Reinvestment Risk. We intend to continue to fund a substantial portion of our investments with borrowings that, after the effect of hedging, have interest rates based on indices and repricing terms similar to, but of somewhat longer maturities than, the interest rate indices and repricing terms of our assets. Thus, we anticipate that in most cases the interest rate indices and repricing terms of our assets and our funding sources will not be identical, thereby creating a reinvestment risk on a significant portion of our portfolio. During periods of changing interest rates, such reinvestment risk could impact our financial condition, cash flows and results of operations. Yield Spread Risk. Most of our investments are also subject to yield spread risk. For a majority of these securities, value is based on a market credit spread over the rate payable to LIBOR or U.S. Treasuries of like maturity. An excessive supply of these securities combined with reduced demand will generally cause the market to require a higher spread on these securities, resulting in the use of a higher or wider spread over the benchmark rate to value these securities. Under these conditions, the value of our securities portfolio would tend to decrease. Conversely, if the spread used to value these securities were to decrease or tighten, the value of our securities would tend to increase. Such changes in the market value of our securities portfolio may affect our net equity or cash flow either directly through their impact on unrealized gains or losses on available-for-sale securities by diminishing our ability to realize gains on such securities, or indirectly through their impact on our ability to borrow, access capital or receive structured product flows. Our analysis of risks is based on management s experience, estimates, models and assumptions. These analyses rely on models that utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or the implementation of investment decisions by our management may produce results that differ significantly from the estimates and assumptions used in our models and the projected results shown in this prospectus. In respect of floating rate syndicated bank loans, we enter into a contractual relationship directly with the corporate borrower, and as such we are exposed to certain degrees of risk, including interest rate, market risk and the potential nonpayment of principal and interest, including the default or bankruptcy of the corporate borrower or early payment by the corporate borrower. Table of Contents CDO MARKET OVERVIEW In general, CDOs are bankruptcy remote, special purpose investment vehicles formed to acquire, monitor and, to varying degrees, manage a pool of fixed-income or other cash-generating assets. CDOs are financing vehicles that allow owners of financial assets to obtain long-term funding, manage refinancing and maturity risks, and secure a fixed cost of funds over an underlying market interest rate. Issuers have different motivations for creating or sponsoring CDOs. Investment advisory firms create and sponsor CDOs as a means of maximizing for the CDO equity holders the spread between the cost of borrowings and the return profile of the CDOs underlying collateral. This type of CDO is commonly referred to as an arbitrage CDO. CDOs are also created by commercial banks and other financial institutions to efficiently finance and transfer the risk of owning fixed-income assets. Commercial banks and other financial institutions usually structure this type of CDO for the purpose of addressing regulatory capital and balance sheet considerations. This type of CDO is commonly referred to as a balance sheet CDO. The CDO market can be further divided into two major sectors based on the types of fixed-income assets that comprise their underlying collateral pool: (i) asset-backed CDOs and (ii) corporate credit CDOs, or CLOs. The following chart contains estimates of the approximate percentage of total CDO issuance volume for the year ended December 31, 2006 in each of the two major CDO categories, as well as for other CDOs that do not fall into either of the two major CDO categories. 2006 Global CDO Issuance Volume and Underlying Collateral Total Issuance Volume: $329.3 billion Source: Moody s Quarterly Review According to Moody s Quarterly Review, the annual volume of CDO issuances rated by Moody s has increased from approximately $14 billion in 1996 to approximately $158 billion in 2006, representing a compound annual growth rate, or CAGR, of approximately 27%. We believe the growth in the sector has been driven by the continued search for returns by CDO equity investors and that investors in general have been attracted to the market by strong collateral performance, attractive asset and liability spreads when compared to alternatives, and the value of structural considerations such as diversification, subordination, increasingly experienced collateral managers and the benefits of a maturing and more sophisticated market. We believe the Table of Contents combination of these factors has provided investors with consistent returns, improved liquidity and transparency in a variety of market and economic conditions. Structure Overview A CDO issues different classes of securities, the repayment of which is linked to the performance of the underlying collateral. The securities issued by a CDO are tranched into rated and unrated classes. The rating of each class is determined by a variety of factors, including but not limited to the priority of the claim on the cash flows generated by the underlying collateral. The following is a brief description of each CDO tranche: The senior notes issued by a CDO are typically rated by one or more rating agencies in one of the two highest rating categories (e.g., Double A or above), may pay interest at a fixed or a floating rate and have the highest priority claim on cash flows. The mezzanine debt classes issued by a CDO are typically rated by one or more rating agencies in the third or lower rating categories (e.g., Single A and below), may pay interest at a fixed or floating rate, may be required to defer and capitalize interest payments and have a claim on the cash flows subordinate to that of the senior notes. CDO equity, the most junior tranche of securities issued by a CDO, commonly structured as preferred shares, income notes or subordinated notes, is generally unrated and represents the first loss position in a CDO. The holders of CDO equity receive a payment from any residual interest proceeds or principal proceeds generated by the underlying collateral, after the payment of debt service and expenses on the securities that rank senior to the CDO equity. In a typical CDO, a substantial portion of the capital is represented by CDO debt, which normally can be raised at a low cost in the debt markets relative to the yield earned on the collateral purchased since most of the CDO debt is highly rated. Ownership of the CDO equity represents a leveraged exposure primarily to the credit performance of the underlying collateral, and is characterized by a combination of expected significant current cash flow as well as the opportunity for positive returns through long-term appreciation of the underlying portfolio due primarily to credit improvement. However, due to the level of payment subordination of CDO equity, these securities usually receive lower ratings or no ratings at all. CDO securities representing the tranches in a CDO capital structure generally are limited recourse obligations of the CDO, payable solely from the underlying assets of the CDO or proceeds thereof. Consequently, holders of CDO securities must rely solely on distributions on the underlying collateral or proceeds thereof for payments. If distributions on the underlying collateral are insufficient to make payments on the CDO securities, no other assets will be available for payment of the deficiency, and following realization or liquidation of the underlying assets, the obligations of the issuer to pay such deficiency will be extinguished. As an additional credit enhancement, many CDOs provide for the deferral of interest on all but the most senior tranches. The subordinate tranches of many CDOs provide that a deferral of interest does not constitute an event of default that would provide holders of such tranches with associated default remedies. During periods of nonpayment, deferred interest will generally be capitalized and added to the outstanding principal balance of the related security. Any such deferral will reduce the amount of current payments made on such securities. Synthetic vs. Asset Purchase Structure CDOs do not always own their underlying collateral outright, but rather achieve collateral exposure synthetically by entering into total return and/or credit default swaps. In a total return swap, the CDO receives the total return (interest, fees and capital gains/losses on underlying securities) in exchange for a fixed rate of interest payment. The CDO may also be required to pay a fraction of the value of the total amount of the securities that are referenced in the swap as collateral posted with the swap counterparty. The total return swap, therefore, is a leveraged investment in the underlying securities portfolio. By contrast, in a credit default swap, the CDO receives periodic payments from a counterparty that seeks protection against the default of a Table of Contents referenced fixed-income asset. In return for this payment, the CDO must pay the protection buyer default losses on the referenced assets if the obligor of the referenced assets defaults. A CDO may have a few synthetic exposures or be comprised entirely of synthetic exposures. Typical CDO Terms The terms of a typical CDO may vary depending on the type of underlying collateral, prevailing market and economic conditions, and the quality of the portfolio manager. As discussed in detail below, most of our CDOs rely on a different exclusion from the 1940 Act than the majority of CDOs in the marketplace. The following summarizes certain of the material terms of a typical CDO and some of the areas in which our CDOs will differ. Ramp-up Period At closing, a cash CDO typically will have purchased approximately 50-75% of its targeted assets and is given an additional period, known as the ramp-up period, to complete the purchase of its remaining targeted assets. This ramp-up period typically ranges from 90 to 180 days. A synthetic CDO, which purchases some or all of its assets in swap form, may have a significantly shorter ramp-up period. Maturity The maturity date of a CDO refers to the last date on which any remaining CDO debt must be repaid. In general, CDO debt matures between 12 to 40 years from the closing date. Duration Duration measures the price sensitivity of a CDO and is calculated based on the weighted average of the present values for all anticipated cash flows over its expected life. CDO equity often has a relatively short expected duration (usually less than 10 years), as a typical CDO distributes excess cash flows quarterly or semi-annually concurrent with the payment of interest on its liabilities subject to compliance with overall collateral quality tests and other performance criteria. Trading Baskets Most CDOs allow the portfolio manager to trade fixed-income assets, subject to compliance with selected collateral tests and annual volume limitations, which typically allow trading of up to 15% of the aggregate par amount of non-credit-impaired assets, or free trading basket, and unlimited trading with regard to credit-impaired and credit-improved assets. By contrast, most of our CDOs that are structured to comply with Rule 3a-7 are limited by the terms of their indentures with respect to trading fixed-income assets. The indentures of such CDOs generally do not contain any free trading basket and generally do not permit trading with regard to credit-improved assets. However, the managers may substitute for or sell assets that are credit-impaired or may substitute for or sell other assets in order to cause, maintain or restore compliance with a collateral coverage test, collateral quality test or eligibility criteria set forth in the related indentures that would not be satisfied in the absence of such substitution. In no event will any dispositions or acquisitions be permitted for the primary purpose of recognizing gains or decreasing losses resulting from market value changes. Reinvestment Period Since many of the fixed-income assets held by a CDO represent debt obligations, which may mature or be prepaid during its life, many CDOs are structured to allow the portfolio manager, at its discretion, to reinvest the principal payments, subject to certain restrictions. The reinvestment period for a typical CDO commences on the closing date and extends for a period of three to seven years, subject to earlier termination in the event of a default. Table of Contents Reinvestment Criteria Generally, the portfolio manager is required to reinvest principal payments received during the reinvestment period in accordance with specified investment guidelines that are designed to preserve or enhance the credit ratings assigned to the CDO debt. The primary difference between a typical CDO and our CDOs that will be structured to comply with Rule 3a-7 with respect to reinvestment criteria is that the indentures of our CDOs will contain prohibitions against disposing of assets or acquiring new assets for the primary purpose of recognizing gains or decreasing losses due to changes in market value. Collateral Tests CDOs typically are subject to a number of collateral tests that are designed to protect the holders of, and to maintain the credit ratings associated with, CDO debt, including the following: Collateral Coverage Tests Collateral coverage tests exist to ensure that the collateral securing the underlying assets of a CDO is sufficient to pay CDO debt in case of defaults on the underlying assets. The two main collateral coverage tests are the over-collateralization test and the interest coverage test. Additionally, some CDOs utilize a ratings-based test. Collateral coverage tests can divert cash flows from subordinated tranches, prevent reinvestment in new CDO assets and cause senior tranches to be paid down before payments to subordinated tranches. Collateral Quality Tests Collateral quality tests ensure that the type of collateral securing the underlying assets of a CDO are of a sufficient quality such that the collateral may be used to pay CDO debt upon the default of the underlying assets. These tests restrict portfolio trading, and may include objective measures of portfolio diversity, average rating, average life, prospective average recovery and minimum weighted average coupon or spread. Diversity Score A diversity score is a rating agency s index of a portfolio s diversification, which generally focuses on the number of credits, the number of industries, geographical diversity and the asset categories of the underlying collateral. The purpose of the diversity score is to measure the potential collateral effects that a default on some of the assets underlying the CDO will have on the other assets underlying the CDO. Concentration Tests Concentration tests address the presence in the portfolio of single issuers, the percentage of the collateral represented by loan participations, non-U.S. obligors, triple-C credits, deferred interest instruments and other factors. Like the diversity score, concentration tests are utilized to prevent the concentration of the underlying assets of a CDO in a particular asset type. Fees The portfolio manager in a typical CDO is entitled to receive senior and subordinate management fees periodically. In addition, portfolio managers may be entitled to receive incentive fees periodically. Redemption CDO debt is typically subject to a right of redemption at the direction of at least a majority of the CDO equity generally after a three- to five-year non-call period and subject, in many cases, to the payment of a make-whole premium. The exercise of this right is typically also conditioned on the availability of sufficient funds to satisfy the redemption obligation, including any make-whole premium. CDO debt is also typically subject to special redemption in the event that during the reinvestment period the portfolio manager is unable to reinvest principal payments in additional qualifying collateral. In addition, CDO debt will be mandatorily redeemed, subject to the availability of sufficient funds, in the event of a collateral coverage test failure. Table of Contents 1940 Act Exclusion Most CDO issuers are excluded from the registration requirements of investment companies under the 1940 Act by reason of their compliance with Section 3(c)(7). Section 3(c)(7) essentially requires such issuers to engage in private offerings made only to qualified purchasers (as defined in the 1940 Act), but places no limitations on the ability of the issuer to purchase or sell assets or otherwise trade the underlying portfolio of securities. However, CDOs may also be structured to be excluded from investment company status under Rule 3a-7. Rule 3a-7 does not have restrictions on the manner of offering. Instead, Rule 3a-7 excludes from treatment as investment companies issuers engaged in the business of purchasing, or otherwise acquiring, and holding eligible assets (as defined in Rule 3a-7), including financial assets that by their terms convert into cash within a finite period of time, and in activities related or incidental thereto, and who do not issue redeemable securities. Rule 3a-7 imposes certain restrictions on the activities of such issuers, including the following: (i) the issuer issues securities that entitle holders thereof to receive payments that depend primarily on the cash flow from such eligible assets; (ii) the securities sold are fixed-income securities rated investment-grade by at least one nationally recognized statistical rating agency (fixed-income securities that are unrated or rated below-investment-grade may be sold to institutional accredited investors and any securities may be sold to qualified institutional buyers and to persons involved in the organization or operation of the issuer); (iii) the issuer acquires and disposes of eligible assets only if: done in accordance with the agreements pursuant to which the securities are issued; the acquisition or disposition does not result in a downgrading in the rating of the issuer s fixed-income securities; the eligible assets are not acquired or disposed of for the primary purpose of recognizing gains or decreasing losses resulting from market value changes; and (iv) unless the issuer is issuing only commercial paper, the issuer appoints an independent trustee, takes reasonable steps to transfer to the trustee an ownership or perfected security interest in the eligible assets, and meets rating agency requirements for commingling of cash flows. Compliance by our CDO subsidiaries with Rule 3a-7 may be viewed as requiring that the indenture governing a CDO subsidiary include limitations on the types of assets the CDO subsidiary may sell or acquire out of the proceeds of assets that mature, are refinanced or otherwise sold, on the period of time during which such transactions may occur, on the overall level of transactions that may occur or on other provisions of the indentures that govern the operation of the particular CDO subsidiary. It is intended that the indentures of our CDO subsidiaries will contain these types of provisions. Most of our CDO subsidiaries are excluded from investment company status under Rule 3a-7. Some of our CDO subsidiaries may also be structured to be excluded from investment company status under Section 3(c)(7), which excludes from investment company status issuers that are engaged in private offerings made only to qualified purchasers (as defined in the 1940 Act). Table of Contents OUR COMPANY Overview We are a specialty finance holding company that provides our shareholders with returns derived primarily from our structured finance subsidiaries, commonly known as collateralized debt obligations issuers, or CDOs. We are jointly managed and advised by our managers, Bear Stearns Asset Management Inc., or BSAM, and Stone Tower Debt Advisors LLC, or Stone Tower. Relying on the structured finance expertise of our managers, our objective is to create, structure and own CDOs and other structured finance assets that will provide attractive risk-adjusted returns to us and our shareholders. We generate earnings primarily through a diversified portfolio of CDOs in which we beneficially own all or a majority of the equity. Our CDOs are special purpose vehicles that hold a range of cash-generating financial assets, such as corporate leveraged loans, asset-backed securities and securities issued by other CDOs. To finance the acquisition of these assets, our CDOs typically issue multiple tranches of securities, ranging from highly rated senior debt securities, which are secured or collateralized by these assets, to unrated equity tranches. As the sole or principal equity owner in our CDO subsidiaries, we are entitled to all or a portion of any cash flow, which is typically paid quarterly, generated by the underlying financial assets, after deducting the interest and required principal payments made to holders of CDO debt securities and other expenses. We expect to continue to increase our holdings of CDOs, primarily through the formation and acquisition of additional CDO subsidiaries in which we plan to hold all or a majority of the equity. To a lesser extent, we also acquire and hold minority equity positions in CDOs. We expect to form and hold CDOs structured by our managers as well as to help structure and opportunistically acquire CDOs sponsored by third parties where we believe we can do so on attractive terms. We may also form or hold, from time to time, other structured finance assets. We expect to allocate capital primarily to creating and owning two types of CDOs: (i) corporate credit CDOs, or CLOs, that primarily hold corporate leveraged loans and high-yield bonds, and (ii) asset-backed securities CDOs, or ABS CDOs, which hold asset-backed securities, including residential mortgage-backed securities and commercial mortgage-backed securities. These two types of CDOs include cash CDOs, which hold an underlying portfolio of cash-generating assets, and synthetic CDOs, which enter into total return swaps, credit default swaps or other derivative instruments designed to replicate the economic consequences of holding a referenced portfolio of assets. A synthetic CDO may generally be structured more rapidly to capitalize on favorable market conditions. Competitive Advantages We believe that we enjoy the following competitive advantages: Fully Employed Paid-in Capital and Diversified Portfolio of CDOs. We have fully employed our paid-in capital to date in a seasoned portfolio of CDOs diversified by manager, collateral type, vintage and duration. As of December 31, 2006, our CDO holdings consisted of 19 CDOs, including 11 CDOs in which we own all or a majority of the equity tranches, one of which we own 50% of the equity and seven in which we own a minority interest. In addition, at that date, our largest CDO subsidiary, Parapet CDO, held a portfolio consisting of preference share and income note tranches of 15 CDOs and mezzanine debt securities of 22 CDOs. As of December 31, 2006, five of the CDOs in which we hold equity securities were managed by our managers. We believe that this diversification reduces our exposure to individual market sectors or credit events. Management Expertise. Our co-chief executive officers, Ralph R. Cioffi and Michael J. Levitt, have a combined total of more than 54 years of experience in structured finance, non-investment-grade debt investing, leveraged finance and private equity. Mr. Cioffi joined Bear Stearns in 1985, and founded the BSHG Funds in March 2003. He was instrumental in the creation of the structured credit effort at Bear Stearns, which is a leading underwriter and secondary trader in structured credit securities. Mr. Levitt founded Stone Tower Table of Contents Capital LLC, or STC, in 2001. Before that, he was instrumental in building the leveraged finance business at Morgan Stanley and subsequently at Smith Barney (a Citigroup predecessor). Mr. Levitt was also a managing partner of the New York office of the private equity firm of Hicks, Muse Tate Furst Incorporated. Messrs. Cioffi and Levitt will have principal management responsibility for Everquest. We believe that their experience, together with the experience of the other investment professionals at BSAM and Stone Tower in investing in debt and equity securities and managing investments in structured credit securities, will afford us a competitive advantage in identifying and creating new CDO opportunities with the potential to generate attractive returns. Strengths of Our Managers. We believe that we will be able to leverage the strengths of our managers, which include the following: Strong Track Record. We believe BSAM has a strong track record of developing transaction structures, managing structured vehicles and selecting vehicles managed by third parties. In particular, BSAM has developed innovative transaction structures that increase the efficiency with which pools of structured securities can be funded. For example, BSAM designed and marketed the Klio series of CDOs, which use commercial paper as a funding mechanism for highly rated structured finance assets and which BSAM believes were the first transactions of their kind. BSAM often takes an active role in structuring the securities it buys on issue from third parties, and from time to time restructures them to increase their funding efficiency. As of December 31, 2006, the BSAM Team had managed seven CDOs, excluding Parapet CDO, which are described in Our Management and Corporate Governance Managers Personnel and Track Record BSAM s Track Record, and had purchased for funds it manages equity tranches in 18 CDOs managed by third parties, which are described in Our Management and Corporate Governance Managers Personnel and Track Record BSAM s Track Record. As of December 31, 2006, the weighted average annualized cash return of the seven CDOs managed by the BSAM Team was 12.3%, net of management fees, or 19.9%, on an adjusted gross basis before deducting management fees, and the weighted average annualized cash return of the 17 CDO equity tranches it purchased that have made at least one quarterly distribution was 24.5%. Stone Tower has developed a reputation among market participants as one of the leading cash flow CLO managers in North America. As of December 31, 2006, the weighted average annualized cash return of the nine CDOs sponsored by Stone Tower that have made at least one quarterly distribution, which are described in Our Management and Corporate Governance Managers Personnel and Track Record Stone Tower s Track Record, was 14.0%, net of management fees, or 18.3%, before deducting management fees. Complementary Expertise. We believe that one of our competitive strengths is the extensive and complementary expertise of each of our managers. BSAM generally invests in a range of structured finance assets, with particular expertise in ABS CDOs, and Stone Tower focuses on non-investment-grade corporate credit assets. We believe that the complementary expertise of our managers will help us form new CDOs and allocate our capital among either ABS CDOs or CLOs and related asset classes where we believe we can achieve the best relative value, in light of prevailing market conditions. History of Cooperation. BSAM and Stone Tower have worked together for more than four years in a variety of capacities. They have jointly identified and evaluated potential opportunities, including collateral portfolios, based on each entity s particular expertise. They also have acted as subadvisor for funds managed by each other and jointly structured and managed CDOs. Currently, BSAM and Stone Tower jointly manage two CDOs, portions of the equity of which are held by us and by Parapet CDO. They have also jointly established three CDOs that were structured by them with assets selected by them and in which funds they manage have invested. We believe their history of cooperation will enable them to work together effectively on our behalf. Access to Proprietary and High-Quality Deal Flow. We believe BSAM and Stone Tower s market position, expertise and long-standing relationships with a broad range of market participants have provided and Table of Contents will continue to provide us with the opportunity to evaluate a pipeline of attractive opportunities before they become available to the wider market. These opportunities include the ability to source high-quality collateral for CDOs that may be structured by our managers, including potentially CDOs of CDOs, as well as the ability to structure and acquire equity in CDOs managed by third parties on attractive terms. High-Quality Risk Management Systems. We believe the strong track record to date of our managers is due, among other things, to the surveillance and risk management systems they utilize. We believe that access to those systems is a significant competitive advantage. The proprietary and third-party surveillance systems used by BSAM were designed to ensure that all assets are reviewed real time and those showing signs of potential credit deterioration or poor performance are designated for further review. BSAM s surveillance systems track over 80,000 securities on a daily basis and monitor the performance of all of our CDO holdings as well as perform in-depth analysis on all the underlying collateral backing such holdings. We believe our managers systems enhance our ability to quickly identify, and where possible, sell or otherwise hedge potentially credit-impaired assets before significant credit deterioration begins or rating downgrades occur. We benefit from these systems not only in the case of CDOs managed by our managers but also with respect to those managed by third parties. With respect to CDOs managed by third parties, we integrate the underlying credits into our surveillance systems so that they can be monitored in the same way as CDOs managed by our managers. When we identify a potential credit-impaired asset in a third party managed CDO, we notify the manager and work with the manager to sell or hedge the asset. If the asset is not sold, we attempt to hedge our exposure to the asset. Additionally, Stone Tower performs daily surveillance on all loans underlying each of our CLO investments. Both BSAM and Stone Tower monitor assets in real time with systems that are designed to be early warning in nature, as opposed to systems that provide alerts only after an asset begins to deteriorate. Access to BSAM and Stone Tower Investment Professionals and Infrastructure. We also believe we have a significant competitive advantage through our access to BSAM s and Stone Tower s structured finance professionals, who are supported by an established operational infrastructure. As of December 31, 2006 the combined BSAM Team and Stone Tower team responsible for Everquest included a total of approximately 52 professionals, consisting of portfolio managers, research analysts and other professionals. In addition, Everquest has access to the broader operational infrastructure of BSAM and Stone Tower, including information technology, legal, administrative and other back office operational infrastructure. As of December 31, 2006, BSAM and Stone Tower had more than 440 employees in the aggregate. Strong Alignment of Interest among Everquest, BSAM and Stone Tower. The interests of BSAM and Stone Tower are strongly aligned with ours. The BSHG Funds, which are managed by BSAM, owned approximately 67.0% of our ordinary shares as of December 31, 2006, and are expected to own approximately % of our ordinary shares after this offering. I/ST, a fund managed by an affiliate of Stone Tower, owned approximately 8.4% of our ordinary shares as of December 31, 2006, and is expected to own approximately % of our ordinary shares after this offering. In addition, as a result of this offering each of BSAM and Stone Tower, or their designees, will be entitled to receive share grants representing 2.5% (or together an aggregate of 5.0%) of our ordinary shares outstanding upon completion of this offering. Our Business Strategy We intend to continue to grow our holdings in CDOs and other structured finance assets. We seek to generate attractive returns by leveraging the strengths of our managers to: evaluate and source attractive opportunities with the best relative value in varying market environments, through both CDOs we structure ourselves and opportunities presented to us by third parties; select high quality assets to be held by the CDOs that are managed by our managers and in which we hold interests, and actively participate in the structuring of, and asset selection for, CDOs that are managed by third parties and in which we hold interests managed by third parties; maximize the yield on the underlying assets relative to our cost of financing their acquisition; Table of Contents achieve a level of diversification in our overall portfolio in terms of asset type and manager to minimize the effect of negative credit events; employ and develop innovative strategies, including synthetic techniques, to improve the quality, execution and performance of our CDO assets; actively monitor through proprietary and third-party surveillance systems the performance and management of assets held by the CDOs in which we hold interests, including those managed by third parties; and utilize credit default swaps to manage risks of credit events relating to our assets and other hedging techniques to manage interest rate risks. Our Corporate Credit CDO Subsidiaries (CLOs) Our CLO subsidiaries primarily acquire corporate leveraged loans and high-yield bonds. Most of the assets held by our CLO subsidiaries are rated below-investment-grade by one or more of the rating agencies. The composition of each CLO is generally governed by the specific asset limitations provided in each CLO and the rating criteria attributed to a particular CLO. Corporate Leveraged Loans Corporate leveraged loans are debt obligations of highly leveraged corporations, partnerships and other entities in the form of first and second lien loans, participations in corporate leveraged loans, commercial real estate mezzanine loans and bridge facilities. Given the high proportion of debt that is typically found in the capital structure of this type of borrower, these debt obligations are referred to as leveraged loans. Our CLO subsidiaries may acquire leveraged loans that are (i) widely syndicated, (ii) middle-market loans, which are not widely syndicated, (iii) U.S. dollar-denominated, and (iv) euro-denominated. Our CLOs, to the extent allowed by a CLO indenture, may also hold the second lien loans and commercial real estate mezzanine loans of certain issuers. A second lien loan is a loan in which the holder of such loan is subordinated in its right to receive principal and interest payments from the borrower to the rights of the holder of the senior loan. Commercial real estate mezzanine loans are loans that are subordinated to a first mortgage loan on the same property, and are typically secured by pledges of ownership interests in the property and/or property owner. High-Yield Bonds High-yield bonds are below-investment-grade debt obligations of corporations and other non-governmental entities. These bonds could be secured by a borrowers assets or unsecured, and could have an interest-only payment schedule, with the principal amount remaining outstanding and at risk until the bond matures. Our Asset-Backed CDO Subsidiaries Our asset-backed CDO subsidiaries primarily acquire RMBS, CMBS, diverse consumer and commercial ABS and debt tranches of other asset-backed CDOs. Residential Mortgage-Backed Securities (RMBS) RMBS represent interests in pools of residential mortgage loans secured by one- to four-family residential mortgage loans in which payments of both principal and interest are generally made monthly, net of any fees paid to the issuer, servicer or guarantor of the securities. The RMBS held by our CDOs are principally collateralized by adjustable rate RMBS, fixed rate RMBS, hybrid adjustable rate RMBS and agency-backed RMBS. A majority of the RMBS held by our CDOs consist of non-agency adjustable rate and three- and five-year hybrid adjustable rate mortgage-backed securities. Most of the RMBS held by our CDOs are rated investment-grade by one or more rating agencies. Table of Contents RMBS include: Residential A Mortgage-Backed Securities (Residential A MBS). Residential A MBS entitle the holders thereof to receive payments that depend on the cash flow from prime residential mortgage loans secured, on a first priority basis, by residential real estate (single or multifamily properties) the proceeds of which are used to purchase real estate and purchase or construct dwellings thereon (or to refinance indebtedness previously so used). Residential B/C Mortgage-Backed Securities (Residential B/C MBS). Residential B/C MBS entitle the holders thereof to receive payments that depend on the cash flow from subprime residential mortgage loans secured, on a first priority basis, by residential real estate (single or multi-family properties) the proceeds of which are used to purchase real estate and purchase or construct dwellings thereon (or to refinance indebtedness previously so used). The subprime residential mortgage loans backing Residential B/C MBS are originated using underwriting standards that are less restrictive than the underwriting requirements used as standards for other first and junior lien mortgage loan purchase programs, including the programs of Fannie Mae and Freddie Mac. These lower standards include mortgage loans made to borrowers having imperfect or impaired credit histories, mortgage loans where the amount of the loan at origination is 80% or more of the value of the mortgaged property, mortgage loans made to borrowers with low credit scores, mortgage loans made to borrowers who have other debt that represents a large portion of his or her income and mortgage loans made to borrowers whose income is not required to be disclosed or verified. Additionally, some of the subprime residential mortgage loans backing Residential B/C MBS are non-conforming loans and are not eligible for purchase by Fannie Mae or Freddie Mac due to either credit characteristics of the related mortgagor or documentation standards in connection with the underwriting of the related mortgage loan that do not meet the Fannie Mae or Freddie Mac underwriting guidelines for A credit mortgagors. These credit characteristics include mortgagors whose creditworthiness and repayment ability do not satisfy such Fannie Mae or Freddie Mac underwriting guidelines and mortgagors who may have a record of credit write-offs, outstanding judgments, prior bankruptcies and other credit items that do not satisfy such Fannie Mae or Freddie Mac underwriting guidelines. These documentation standards may include mortgagors who provide limited or no documentation in connection with the underwriting of the related mortgage loan. In addition, certain mortgage loans may fail to conform to the underwriting standards of the related originators. The substantial majority of the asset-backed CDOs in which we hold equity have invested in RMBS, including primarily RMBS backed by collateral pools of subprime residential mortgages. The value and returns of these RMBS may be affected by general economic conditions in some geographic regions, including increased interest rates and lower housing prices, which have negatively affected collateral pools of subprime residential mortgages that underlie certain RMBS. Generally, our asset-backed CDOs hold RMBS rated in the range of A2 to Ba2, which because of their higher position within the RMBS structure are less susceptible to loss than the equity or lower-rated tranches of RMBS. Nevertheless, increased losses within the underlying collateral pools of subprime mortgages could also cause the higher rated RMBS to suffer losses, which could be material. For a description of steps we have taken to manage these risks, see Management s Discussion and Analysis of Financial Condition and Results of Operations Credit Risk. Home Equity Loan Securities (HEL). HEL entitle the holders thereof to receive payments that depend on the cash flow from balances (including revolving balances) outstanding under lines of credit secured by (but not, upon origination, by a first priority lien on) residential real estate (single or multifamily properties) the proceeds of which lines of credit are not used to purchase such real estate or to purchase or construct dwellings thereon (or to refinance indebtedness previously so used). Table of Contents Commercial Mortgage-Backed Securities (CMBS) CMBS are securities backed by obligations (including certificates of participation in obligations) that are principally secured by mortgages on real property or interests therein having a multifamily or commercial use, such as regional malls, other retail space, office buildings, industrial or warehouse properties, hotels, nursing homes and senior living centers. These securities may be senior, subordinate, investment-grade or non-investment-grade securities. The majority of the CMBS assets that our CDOs acquire are rated between A2 Baa2 and A BBB by Moody s and S P, respectively. The majority of these CMBS assets consist of securities that are part of a capital structure or securitization where the rights of such class to receive principal and interest are subordinate to senior classes but senior to the rights of lower-rated classes of securities. Our CDOs acquire CMBS with high-yield current interest income and where we consider the return of principal to be likely. Our CDOs acquire CMBS from private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage bankers, commercial banks, finance companies, investment banks and other entities. Other Asset-Backed Securities (ABS) ABS are securities backed by either consumer or commercial receivables in sectors such as auto, credit cards, student loans and equipment. Our CDO subsidiaries acquire investment-grade and non-investment-grade ABS. The structure of an asset-backed security and the terms of the investors interest in the collateral can vary widely depending on the type of collateral, the desires of investors and the use of credit enhancements. ABS issuers are special-purpose entities owned or sponsored by banks and finance companies, captive finance subsidiaries of nonfinancial corporations or specialized originators such as credit card lenders. Most of the asset-backed securities that we acquire are rated between A2 Baa2 and A BBB by Moody s and S P, respectively. CDO Debt Securities CDO debt securities consist of the senior and mezzanine debt securities of CDOs. Our CDO subsidiaries acquire the debt tranches of CDOs sponsored by third parties as well as by the managers. We believe that CDO debt represents a potentially attractive acquisition opportunity for our CDO subsidiaries. Most of the CDO debt tranches that we acquire are rated between A2 Baa2 and A BBB by Moody s and S P, respectively. Other To a lesser extent, our CDO subsidiaries also invest in commercial real estate subordinated loans, or B Notes, mezzanine loans and trust preferred securities. B Notes are loans that are (i) secured by a first mortgage on a single large commercial property or group of related properties, and (i) subordinated to an A Note secured by the same first mortgage on the same property. Mezzanine loans are loans that are subordinated to a first mortgage loan on a commercial property and are senior to the borrower s equity in the property. Mezzanine loans are typically secured by pledges of ownership interests in the property and/or property owner. Trust preferred securities are hybrid instruments that have characteristics of debt and equity securities. Table of Contents Our CDOs The following summarizes our CDO holdings, as of December 31, 2006, including asset type and value: Our CDO Holdings Everquest Portfolio Total Total Equity Equity % of Closing Implied Capitalization(3) Amount(4) Amount Class Fair Value Date Issuer/Tranche Manager CDO Type Collateral Type(1) Rating(2) ($) ($) ($) Held ($) Parapet CDO 10/2006 Parapet 2006, Ltd. BSAM Static CDO of CDOs CDO debt and CDO equity Baa1/BBB+ 507,260,000 369,759,613 369,759,613 100 381,576,484 Corporate Credit CDOs (CLOs) 12/2004 Stone Tower CDO Ltd. Stone Tower Managed Cashflow CDO of CLOs Corporate leveraged loans and CDO debt Ba1/BB+ 306,000,000 33,000,000 4,095,000 12 3,899,395 03/2006 Stone Tower CLO IV Ltd. Stone Tower Managed Cashflow CLO Corporate leveraged loans B1/B+ 750,000,000 60,000,000 2,475,000 4 2,460,931 06/2006 Comstock Funding Ltd. 2006-1A Silvermine Capital Management LLC Managed Cashflow CLO Corporate leveraged loans and CDO debt B1/B+ 466,500,000 37,500,000 36,340,000 97 37,790,971 07/2006 Aimco 2006-AA Allstate Investment Management Company Managed Cashflow CLO Corporate leveraged loans and high yield bonds B1/B+ 410,000,000 32,000,000 3,000,000 9 3,107,471 08/2006 Tiers Beach Street 2006-4 F2 None Static Synthetic CLO Synthetic corporate leveraged loans B1/B+ 500,000,000 36,000,000 5,800,000 16 5,684,378 10/2006 Beach Street None Static Synthetic CLO Synthetic corporate leveraged loans Ba3/BB- 1,028,500,000 52,781,250 52,781,250 100 52,114,421 12/2006 ACA CLO 2006-2 ACA Management Managed Cashflow CLO Corporate leveraged loans B1/B+ 307,800,000 24,600,000 5,000,000 20 4,136,594 11/2006 Cannington Funding Ltd. Silvermine Capital Management Managed Cashflow CLO Corporate leveraged loans B1/B+ 465,500,000 42,000,000 36,820,000 88 34,978,438 11/2006 Rampart CLO 2006-I Ltd. Stone Tower Managed Cashflow CLO Corporate leveraged loans B1/B+ 613,000,000 48,000,000 48,000,000 100 48,806,245 11/2006 Primus CLO I, Ltd. Primus Asset Management Managed Cashflow CLO Corporate leveraged loans B1/B+ 400,000,000 26,000,000 7,000,000 27 5,642,799 198,621,643 Asset-Backed CDOs 02/2006 Montauk Point Ltd. 2006 Preferred Fortis Investment Management USA, Inc. Managed Synthetic/ Cash CDO RMBS, CDO debt, CMBS Baa2/BBB 401,800,000 13,000,000 9,800,000 75 8,653,913 05/2006 Class V Funding II Ltd. Credit Suisse Alternative Capital, Inc. (BSAM as sub-advisor) Managed Cashflow CDO of CDOs CDO debt and CDO equity Baa2/BBB 300,000,000 18,000,000 12,000,000 67 12,118,108 05/2006 Vertical Ltd. Vertical Capital, LLC Managed Cashflow CDO CMBS, CDO debt, Mezzanine Loan, B-Note NA 306,600,000 18,100,000 12,300,000 68 11,845,243 06/2006 IXCBO 2006-1X IXIS Securities North America Inc. Managed Synthetic/Cash CDO RMBS, CDO debt Baa2/BBB 506,500,000 20,000,000 11,000,000 55 10,112,393 07/2006 Cherry Creek Ltd. Surge Capital Management, LLC Managed Cashflow CDO RMBS, CDO debt, CMBS Baa2/BBB 300,000,000 14,000,000 14,000,000 100 12,100,344 Table of Contents Our CDO Holdings Everquest Portfolio Total Total Equity Equity % of Closing Implied Capitalization(3) Amount(4) Amount Class Fair Value Date Issuer/Tranche Manager CDO Type Collateral Type(1) Rating(2) ($) ($) ($) Held ($) 08/2006 Strata Trust None Static Synthetic CLO Synthetic senior secured assets NA 30,000,000 30,000,000 30,000,000 100 30,578,814 12/2006 Hudson Mezzanine Funding 2006-1A None Static Synthetic CDO Mid-grade asset-backed securities Baa2/BBB 837,000,000 60,000,000 30,000,000 50 24,844,995 12/2006 Tallships Funding Ltd. BSAM Managed Cashflow Mezz ABS CDO RMBS Baa2/BBB 589,000,000 46,500,000 9,625,000 21 6,503,809 116,757,619 Total 696,955,746 (1) Collateral type refers to the primary holdings of each issuer. (2) Portfolio Implied Rating refers to the weighted average rating factor, or WARF, of the issuer. WARF is a measure that considers a portfolio as a single security, and assigns it a single rating. Data is based on (i) the closing documents for the transaction or (ii) the most recent monthly report issued on or prior to December 31, 2006. (3) Total initial face or notional amount of all debt and equity securities issued. (4) Total initial face or notional amount of equity shares issued. NR not rated WR withdrawn rating Table of Contents Parapet 2006, Ltd. Our subsidiary, Parapet CDO, is a CDO of CDO securities which holds CDO mezzanine securities and preference share and income notes tranches. All of Parapet CDO s assets, including the preference share and income note tranches, by their terms convert into cash within a finite time period. Parapet CDO has issued an AA/Aa3-rated tranche of Class A floating rate notes that as of December 31, 2006, had an aggregate principal amount of $136.9 million, as well as a tranche of preference shares and ordinary shares. We acquired all the outstanding preference shares and ordinary shares of Parapet CDO from the BSHG Funds in connection with our formation. The Class A floating rate notes were retained by the BSHG Funds. The following summarizes the assets in Parapet CDO, as of December 31, 2006, including asset type and value: Parapet CDO Portfolio Par Credit Rating Mezzanine Tranches Amount of Mezzanine Portfolio Closing Held Tranches(2)(3) Implied Fair Value Date Issuer/Tranche Manager CDO Type Collateral Type(1) ($) Coupon(2) Moody s S P Rating(2)(4) $ Maturity 03/2004 Vertical CDO Ltd. 2004-1A Vertical Capital, LLC Managed Cashflow CDO of CDOs Senior Tranches of CDO debt 3,000,000 3ML + 4.5 Baa1 NR/WR Aaa/AAA 3,002,507 09/10/2042 10/2004 High Grade Structured Credit 2004-1 E BSAM Managed Synthetic CDO of CDOs RMBS 4,000,000 1ML + 2.75 A1 NR A2/A 4,054,315 10/15/2044 10/2004 High Grade Structured Credit 2004-1 F BSAM Managed Synthetic CDO of CDOs RMBS 10,000,000 1ML +3.00 A3 NR/WR A2/A 10,114,092 10/15/2044 10/2004 Klio Funding Ltd. 2004 2-A BSAM Managed Cashflow CDO RMBS, CDO debt, CMBS, ABS 18,922,035 3ML + 1.50 A3 A- Aa2/AA 19,181,562 10/29/2039 10/2004 Klio Funding Ltd. 2004-2A BSAM Managed Cashflow CDO RMBS, CDO debt, CMBS, ABS 30,000,000 3ML + 2.00 Baa2 BBB Aa2/AA 28,670,345 10/29/2039 10/2004 Merrill Lynch Mortgage Investors Trust 2004-WMC5 None Static CDO RMBS 6,000,000 1ML + 1.85 Baa1 AA- NA 6,060,949 7/25/2035 10/2004 Structured Asset Investment Loan Trust, Series 2004-10 None Static CDO CDO debt 2,000,000 1ML + 2.35 NR/WR A- NA 2,017,419 11/25/2034 10/2004 Structured Asset Investment Loan Trust, Series 2004-BNC2 None Static CDO CDO debt 8,943,000 1ML + 2.00 NR/WR A NA 9,078,977 12/25/2034 12/2004 Stone Tower CDO Ltd. 2004 1A Stone Tower Managed Cashflow CDO of CLOs Corporate leveraged loans, CDO debt 17,000,000 3ML + 1.75 A2 A Ba1/BB+ 17,140,267 01/29/2040 12/2004 Stone Tower CDO Ltd. 2004 1A Stone Tower Managed Cashflow CDO of CLOs Corporate leveraged loans, CDO debt 918,196 3ML + 2.75 Baa2 BBB Ba1/BB+ 925,849 01/29/2040 (1) Collateral type refers to the primary holdings of each issuer. (2) Data based on the most recent monthly report issued on or prior to December 31, 2006. 1ML and 3ML refer to the one month LIBOR rate and three month LIBOR rate, respectively. (3) The ratings in the Credit Rating column pertain to the specific tranche identified. (4) Portfolio Implied Rating refers to the WARF of the issuer. NR not rated WR withdrawn rating Table of Contents Parapet CDO Portfolio Par Credit Rating Mezzanine Tranches Amount of Mezzanine Portfolio Closing Held Tranches(2)(3) Implied Fair Value Date Issuer/Tranche Manager CDO Type Collateral Type(1) ($) Coupon(2) Moody s S P Rating(2)(4) ($) Maturity 01/2005 Synthetic Residential Asset Hybrid CDO 2004-10AC None Static Synthetic CDO Synthetic RMBS 7,875,000 1ML + 1.95 NR/WR A NA 7,826,321 01/27/2040 01/2005 Synthetic Residential Asset Hybrid CDO 2004-10AD None Static Synthetic CDO Synthetic RMBS 11,404,800 1ML + 4.00 NR/WR BBB NA 11,249,236 01/27/2040 03/2005 Stack 2005-1A TCW Asset Management Managed Synthetic CDO RMBS 15,000,000 1ML + 3.50 NR/WR BBB Baa2/BBB 14,787,073 03/27/2040 03/2005 North Street Referenced Linked Notes 2005-7A UBS Principal Finance Managed Synthetic CDO Synthetic, CDO debt, CMBS, ABS 10,000,000 3ML + 5.00 NR/WR B A2/A 9,776,063 04/14/2039 07/2005 Klio Structured Investments BSAM Managed Cashflow CDO High-grade asset-backed securities 14,040,000 3ML + 2.75 Baa2 BBB Aa2/AA 14,045,325 04/23/2039 09/2005 Endeavor Funding Ltd. 2005-1A Silvermine Capital Management Managed Synthetic CLO Corporate leveraged loans 3,000,000 3ML + 1.80 Baa2 BBB B1/B+ 3,012,800 11/15/2019 11/2005 Klio Funding, Ltd. 2005-3A BSAM Managed Cashflow CDO RMBS, CDO debt, ABS 4,834,149 3ML + 2.60 Baa2 BBB Aa2/AA 4,766,200 11/01/2040 12/2005 Liberty CLO Ltd. 2005-1A Highland Capital Management Managed Cashflow CLO RMBS, CDO debt, ABS, Trust Preferred Securities 3,400,000 3ML + 1.90 Baa2 BBB B2/B 3,430,809 11/01/2017 12/2005 Marathon CLO Ltd. 2005-2A Marathon Asset Management Managed Cashflow CLO Corporate leveraged loans, ABS 9,500,000 3ML + 1.80 Baa2 BBB B1/B+ 9,546,274 12/20/2019 12/2005 North Cove CDO Ltd. 2005-1A None Static Synthetic CDO RMBS 6,858,526 3ML + 3.00 Baa2 BBB Baa2/BBB 6,785,872 11/11/2042 01/2006 Tabs 2005-4A Tricadia CDO Management Managed Cashflow CDO RMBS, CMBS, CDO debt, ABS 4,000,000 3ML + 4.25 Baa2 BBB Baa3/BBB- 4,110,333 08/30/2045 03/2006 Long Hill, Ltd. 2006-1A Alliance Capital Management Managed Synthetic/Cash CDO RMBS, CDO debt, ABS 6,456,319 3ML + 3.75 Baa2 BBB Baa2/BBB 6,505,009 10/07/2045 Total 196,087,597 NR not rated WR withdrawn rating Table of Contents Parapet CDO Portfolio Total Parapet CDO Preference Preference Preference Shares and Income Notes Portfolio Total Share Share % of Closing Implied Capitalization(3) Amount(4) Amount Class Fair Value Date Issuer/Tranche Manager CDO Type Collateral Type(1) Rating(2) ($) ($) ($) Held $ Corporate CDOs (CLOs) 07/2005 North Street Referenced Linked Notes, 2005-9AG UBS Principal Finance Managed Synthetic CDO Corporate leveraged loans Ba3/BB- 309,600,000 40,000,000 35,000,000 88 40,332,756 07/2005 North Street Referenced Linked Notes, 2005-9AH UBS Principal Finance Managed Synthetic CDO Corporate leveraged loans Ba3/BB- 309,600,000 10,400,000 8,000,000 77 9,187,251 09/2005 Endeavor Funding Ltd. 2005-1X Silvermine Capital Management Managed Synthetic CLO Corporate leveraged loans B1/B+ 140,600,000 42,600,000 13,800,000 32 13,538,106 11/2005 Symphony CLO Ltd. 2005-1X Symphony Asset Management Managed Cashflow CLO Corporate leveraged loans B1/B+ 412,900,000 31,400,000 8,500,000 27 8,456,910 05/2006 Mt. Wilson CLO Ltd. 2006-1X Western Asset Management Co. Managed Cashflow CLO Corporate leveraged loans B1/B+ 307,000,000 24,500,000 23,500,000 96 23,181,772 94,696,795 Asset-Backed CDOs 03/2002 North Street Referenced Linked Notes 2002-4A UBS Principal Finance Managed Synthetic CDO RMBS, CMBS, ABS, corporate leveraged loans Baa1/BBB+ 574,000,000 49,000,000 11,000,000 22 10,364,101 10/2004 Klio II Funding Ltd. 2004-2A BSAM Managed Cashflow CDO High-grade asset-backed securities Aa2/AA 5,048,750,000 86,250,000 86,250,000 100 99,007,285 12/2004 Stone Tower CDO Ltd. Stone Tower Managed Cashflow CDO of CLOs Corporate leveraged loans, CDO debt Ba1/BB+ 306,000,000 33,000,000 8,250,000 25 7,748,447 01/2005 Neptune CDO 2004-1A Fund America Management Corp Managed Synthetic/ Cashflow CDO RMBS, CDO debt, CMBS Baa2/BBB 405,075,000 17,600,000 2,500,000 14 2,438,045 03/2005 North Street Referenced Linked Notes, 2005-7A UBS Principal Finance Managed Synthetic CDO RMBS A2/A 228,000,000 10,000,000 9,500,000 95 11,534,845 07/2005 Klio Structured Investments 2005-1 BSAM Managed Cashflow CDO High-grade asset-backed securities Aa2/AA 57,440,000 38,400,000 38,400,000 100 41,017,834 07/2005 North Cove CDO Ltd. 250 Capital LLC of Merrill Lynch Co. Static Synthetic CDO Synthetic RMBS, CMBS, CDO debt, ABS Baa2/BBB 151,800,000 16,695,000 16,695,000 100 12,486,513 10/2005 Stone Tower CDO II Ltd. Stone Tower and BSAM Managed Cashflow CDO of CDOs Corporate leveraged loans, CDO debt Ba2/BB 307,500,000 22,500,000 14,850,000 66 14,563,658 11/2005 Duke Funding, Ltd. 2005-9A Duke Funding Management Managed Synthetic/ Cashflow CDO RMBS, CMBS Baa3/BBB 2,500,000,000 118,750,000 9,100,000 8 8,962,167 01/2006 Static Residential Trust 2005-CX None Static Synthetic CDO RMBS Baa2/BBB 500,000,000 21,000,000 10,000,000 48 9,286,434 217,409,329 Total 508,193,721 (1) Collateral type refers to the primary holdings of each issuer. (2) Portfolio Implied Rating refers to the WARF of the issuer. Data are based on the most recent monthly report issued on or prior to December 31, 2006. (3) Total initial face as notional amount of all debt and equity securities issued. (4) Total initial face as notional amount of preference share and income notes issued. NR not rated WR withdrawn rating Table of Contents CDO Holdings Acquired after December 31, 2006 The following summarizes our CDO holdings acquired subsequent to December 31, 2006 and through March 31, 2007(1): Total Portfolio Total Equity Purchase Closing Collateral Implied Capitalization(4) Amount(5) % of Price Date Issuer/Tranche Manager CDO Type Type(2) Rating(3) ($) ($) Class Held ($) 3/2007 Octonion CDO, Ltd. Income Notes Harding Advisory LLC Mezzanine ABS CDO RMBS, CMBS, ABS Baa2/BBB $ 1,040,250,000 $ 24,000,000 48 $ 13,200,000 3/2007 Premier Funding CLO SE Note Citigroup Global Markets Realty Corp. Managed Synthetic CLO Middle market corporate loans N/A $ 288,266,475 $ 12,106,106 75 $ 12,106,106 3/2007 Stone Tower CLO VI Ltd. Stone Tower Managed Cashflow CLO Corporate leveraged loans B1/B+ $ 1,000,000,000 $ 8,000,000 10 $ 7,600,000 Total $ 32,906,106 (1) Does not include investment in short-term warehousing facilities. (2) Collateral type refers to the primary holdings of each issuer. (3) Portfolio Implied Rating refers to the WARF of the issuer. Data is based on the closing documents for the transactions. (4) Total initial face as notional amount of all debt and equity securities issued. (5) Total initial face as notional amount of equity securities issued. NR not rated WR withdrawn rating Table of Contents Business Operations Our significant business operations include the following principal activities: CDO formation and acquisition; asset sourcing; and risk management, including asset monitoring, surveillance and hedging. Currently, our managers act as collateral manager for the majority of our CDO subsidiaries. Whether our CDO subsidiaries are managed by the managers or by third parties, we actively participate in and oversee each key aspect of our CDO subsidiaries operations. Operating Committee Our day-to-day operations are supervised by our operating committee, which is composed of our CEOs, Ralph R. Cioffi and Michael J. Levitt, our CFO and certain other BSAM and Stone Tower investment professionals. Our operating committee meets regularly to discuss business opportunities, review the performance of our CDO holdings and oversees our business operations. The operating committee considers, among other things: investments in our existing portfolio; our deal flow pipeline (including investments and rejections); the performance of our CDO subsidiaries; securities on our surveillance list; our cash status (including amounts currently available, projections and financing); compliance with regulations; the valuation of our assets; and the returns on our previous and current investments. All of our investments must be approved by our operating committee, which requires the unanimous approval of both CEOs. The operating committee operates pursuant to general policies, procedures and guidelines established by our board of directors. Under these guidelines, the operating committee is required to seek board approval for investments that meet certain amount thresholds and in cases where certain conflicts of interest have been identified. CDO Formation and Acquisition To meet our business objectives, we are continually seeking opportunities to form or acquire additional CDO subsidiaries. Through our managers we have the opportunity to form new CDO subsidiaries. We also believe that the ability of the managers to identify and work with high-quality third-party CDO collateral managers is important to our success, and gives us a competitive advantage over our competitors. In either case, in forming and acquiring new CDO subsidiaries we take an active role in structuring the overall CDO, determining the rights and conditions attaching to our equity interests, negotiating the management fee if a third party is retained, negotiating the underwriting fees charged by the underwriter in connection with the financing of the CDO, and negotiating and determining the overall return profile and other economic characteristics of our equity interests. Portfolio Construction and Asset Sourcing The portfolio of each CDO subsidiary is constructed utilizing strict sector and asset diversification parameters within the managers rigorous credit processes, focusing on principal preservation. Each portfolio is constructed based on the specific business parameters of the CDO s indenture and working within rating Table of Contents agency constraints. The CDO indentures contain numerous criteria for their portfolios relating to credit quality, type of instrument, maturity, industry, issuer, and other diversification and credit quality parameters. The managers overall goals in portfolio construction, executed within the portfolio guidelines and the constraints of the indenture, are (i) to maximize relative value based on its credit views and (ii) to maximize diversification in order to minimize the effect of isolated credit events on the overall portfolio. The managers currently source many of the assets they manage through close relationships with a large and diverse group of financial intermediaries, including investment banks, financial sponsors, specialty dealers and brokerage firms. The managers also capitalize on their relationships in the financial community through their management of multiple CDOs and their involvement in a vast number of credit positions. We also rely on the relationships that the managers asset management professionals have developed in their many years of involvement in the financial services industry. A primary function of the managers asset management professionals is to maintain relationships with these institutions and maximize the managers asset sourcing capabilities. We also rely, where applicable, on the asset sourcing capability of third-party collateral managers. In such cases, we also advise and oversee the asset selection process carried out by the collateral manager. Asset Allocation/Diversification One of the major steps in constructing the portfolio for a CDO is to achieve the levels of diversification among credit quality, type of instrument, industries, issuers and other parameters that are necessary in order to obtain the desired ratings of the CDO debt. The CDO is then required to maintain compliance with various tests in order to protect these ratings and the cash flow expected to be available to the holders of the CDO equity. This process requires identifying and acquiring a wide variety of fixed-income instruments, each of which plays a role in achieving on a portfolio-wide basis the levels of diversification required under the indenture. In the managers experience, a typical ABS CDO will own approximately 100 different credit assets. We view our access to a large number and variety of assets through the managers and/or their affiliates and through the high-quality collateral managers with whom we have relationships as a critical component of our ability to achieve these asset allocation and diversification requirements. Asset Sourcing The following summarizes some features of the credit process employed by the managers with respect to our CDO assets and the ABS and corporate credit assets underlying the CDOs. CDOs Deal Structure. The managers CDO credit process begins with understanding the CDO s structure. The CDO type and size are studied and reviewed to determine if the deal is static or has a reinvestment period. They also analyze the CDO s amortization schedules and payment structure as well as interest rate hedges. Pricing of the CDO tranches is also analyzed. Manager Review. The managers conduct an in-depth review of the CDO manager, focusing on the manager s CDO experience, organization staffing and stability and past CDO performance. Finally, the managers examine the manager s ownership of CDO equity and liabilities, assets under management and CDOs under management. Documentation Review. The documentation of a CDO deal, including the CDO indenture, is reviewed by the managers, with particular attention to hedge agreements on high-grade ABS transactions, manager removal provisions, amendment procedures and trading restrictions. Transaction Parties. In addition to a manager review, the managers analyze the other parties to a CDO deal, including the underwriter, trustee and rating agencies participating in the transaction. Collateral/Trigger Analysis. The managers also analyze the collateral coverage tests, collateral quality tests and eligibility criteria that are incorporated into each CDO deal. In particular the managers analysis Table of Contents focuses on the senior securities over-collateralization requirements, the subordinate securities over-collateralization requirements, the WARF of the collateral portfolio, the portfolio diversity score and asset correlation, obligor and sector concentrations and minimum coupon and spread requirements. Structure Default Analysis. The managers apply a structure default analysis to each CDO it reviews. The equity return profile of the CDO is an especially important component of this analysis, as are any special features of the cash flow waterfall. The managers also examine the possibility of early redemption of the CDO as a result of the exercise of any optional redemption right or clean-up or auction call mechanism. Break-even Analysis. The managers also perform a customized break-even analysis on each CDO. This analysis examines the CDO s constant default rate, recovery rate and cumulative default loss, as well as payment speed and reinvestment rates. In addition, we may also perform customized default analysis where return profiles are measured by varying the timing and severity of loss for the default of specific assets within the portfolio. ABS Knowing the Originator and Servicer. Knowing the originator and servicer of ABS, particularly RMBS servicers, is paramount to the managers ABS credit process. The managers regularly meet with originators and servicers. The managers review the origination channels and analyze the originators underwriting philosophies and processes. The managers also review the originators and services track records. Understanding Collateral and Enhancement. The managers also focus on understanding the underlying collateral and the credit enhancement provisions of ABS assets. The managers utilize proprietary and third-party surveillance and risk management systems in assessing ABS assets. The managers develop tailored loan stratifications, review geographic exposures and apply their adjusted FICO score analysis to ABS assets. With respect to geographic exposures, BSAM has developed and maintains a proprietary system that provides analysis of the demographics of metropolitan structural areas such as employment, population, industry and the distribution of income. We believe this is a valuable tool in assessing the credit quality of the underlying collateral pool of RMBS, which are the principal assets in which our ABS CDOs invest. Through this examination, the managers are able to understand and minimize layered risks within ABS assets. Generating Stress Runs and Cash Flow Analysis. The managers apply stress runs and cash flow analysis to each ABS asset. The managers generate customized default vectors and analyze standard default scenarios, which includes reviewing the available funds cap risk of ABS assets. Finally, the managers subject ABS assets to a loss coverage multiple test to determine the suitability of each asset. Corporate Credit Asset Review Process. The managers review individual credits in the CDO issuers portfolios and assess the cash flow generation capability and enterprise value of the underlying corporate credit assets, a process which seeks to minimize risk of default and maximize recoveries in the event of a default. When evaluating corporate credit assets, the managers generally endeavor to, among other things: (i) conduct credit-based research and analysis; (ii) assess the fair market value of the enterprise of the borrower s business and avoid making investments where the face value of all of the debt of the business exceeds the managers view of the enterprise value; and (iii) avoid making investments in companies that do not generate free cash flow from business operations or, based on our proprietary financial models, will not be able to meet debt service on a timely basis. The managers credit-based research and analysis considers, among other things: (i) an assessment of the default probability of the borrower; (ii) an analysis of the relative value of the investment compared to other comparable investment opportunities; (iii) the nature, adequacy and value of the collateral, if applicable; and (iv) the creditworthiness of a borrower s business, including, but not limited to, its cash flows, capital structure and future prospects. Table of Contents Risk Management The risk management and operational oversight functions for our CDOs are supervised by the managers asset management and compliance professionals, particularly their specialized credit and structuring professionals. Monitoring and Surveillance In order to achieve appropriate diversification in our portfolio and to manage credit risks, we use our proprietary and third-party surveillance and risk management systems. Our systems utilize a specialized database designed specifically for structured credit products and their underlying portfolios. The surveillance system aggregates data from vendors (including INTEX, Bloomberg and Loan Performance), trustees, servicers and rating agencies in order to generate frequent alerts and collateral management reports. Our managers portfolio managers and credit analysts evaluate these alerts and reports, using analytic tools including INTEX, Bear Stearns BondStudio, Salomon Yield Book, Bloomberg and proprietary models. The monitoring and surveillance process enables effective portfolio construction, monitoring and management by helping the managers identify suspect assets before the occurrence of credit deterioration or ratings downgrades. Individual portfolio holdings of each CDO managed by each manager are continually monitored by specific portfolio managers. The extent of monitoring or intervention is generally determined by the degree of credit stress that a given underlying asset is experiencing. The managers conduct monthly portfolio monitoring meetings. At these meetings, the portfolio managers provide updated credit reviews, discuss outlooks for their respective sectors, and defend and justify portfolio holdings. The following summarizes some features of the monitoring and surveillance process employed by the managers with respect to their CDO assets and the ABS and corporate credit assets underlying CDOs: CDOs Our proprietary and third-party surveillance system assist our managers in: summarizing each CDO s current and historical collateral test compliance as well as portfolio characteristics. comparing collateral performance against historical and projected performance. reviewing trading activity within a CDO, which provides insight into a CDO manager s view of the market and can help predict future performance. reviewing a CDO s cashflow structure to determine early signs of structural problems in a deal. Our managers also: perform a manual review of troubled credit assets in a deal, particularly in the more-troubled asset classes; and conduct periodic conference calls and/or visits with managers to review operations, including staffing, specific credits and future CDO plans. ABS Using a proprietary surveillance system, all assets are reviewed monthly and those showing signs of future credit deterioration or poor performance are flagged for further review. Certain parameters that would cause an asset to be flagged include: For RMBS, changes in delinquencies, cumulative loss, initial and current credit enhancement and CPR rates over time. For CDOs, changes in all coverage ratios and the weighted average portfolio rating over time, CCC buckets, loss and defaulted securities. Table of Contents Our CDO, RMBS, ABS and corporate portfolio managers and credit analysts evaluate the reported statistics on flagged positions and perform additional analysis when necessary. All comments are passed on to the senior portfolio managers and logged in the surveillance system. Hedging Once our managers detect that our assets are subject to potential credit deterioration, they may from time to time utilize derivative financial instruments to hedge all or a portion of the credit risks of such assets. Our managers may use credit default swaps to hedge this risk. In a credit default swap, the investor receives periodic payments from a counterparty that seeks protection against the default of a referenced fixed-income asset. In return for this payment, the investor must pay the protection buyer default losses on the referenced assets if the obligor of the referenced assets defaults. Asset Replacement We substitute assets that are credit impaired or in order to cause, maintain or restore compliance with a collateral coverage test, collateral quality test or eligibility criteria set forth in the related indentures that would not be satisfied in the absence of such substitution. However, pursuant to Rule 3a-7 of the 1940 Act, an asset may not be sold if the primary purpose of sale is to realize gain or minimize loss resulting from market value changes. We generally expect to hold most of the assets in our CDO subsidiaries to maturity and, accordingly, do not expect to engage in a significant volume of asset replacements. The proceeds of payoffs at maturity and principal prepayments may also be redeployed to purchase replacement assets during the reinvestment period provided by the indenture. Replacement assets are selected strictly in accordance with the terms of the indenture through the same process as the construction of the initial portfolio. The manager s goal is to minimize defaults and to the extent defaults do occur, maximize recoveries. 1940 Act Exclusion We conduct our operations so that we are not required to register as an investment company under the 1940 Act. Pursuant to Section 3(a)(1)(C) of the 1940 Act, any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis will be deemed to be an investment company. Excluded from the term investment securities, among other things, are securities issued by majority owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company provided by Section 3(c)(1) or Section 3(c)(7) of the 1940 Act. We believe that more than 60% of our assets consist of CDO subsidiaries that are themselves not investment companies as a result of the exception for structured finance companies, Rule 3a-7, rather than in reliance on Section 3(c)(1) or Section 3(c)(7) of the 1940 Act. Accordingly, we do not own or propose to acquire investment securities having a value in excess of 40% of the value of our total assets on an unconsolidated basis, and are therefore not required to register as an investment company. If it were determined that one or more of our CDO subsidiaries could not rely on the exclusion from investment company status under the 1940 Act for structured finance companies, these CDO subsidiaries would have to restructure their operations in order to rely on that exclusion. If they could not restructure their operations to comply with the exclusion, then we could have to register as investment companies under the 1940 Act, either of which could adversely affect our earnings. Competition We are subject to significant competition in seeking business opportunities. A number of entities compete with us to make the types of assets that we or our CDOs seek to acquire, including REITs, financial and insurance companies, commercial and investment banks, commercial finance companies, public and private investment funds and other investors. A number of our competitors have greater resources than we do and we may not be able to compete successfully for assets. Table of Contents Staffing The management, operation and policy of the company is vested exclusively in our board of directors. Our board of directors, however, has the power to delegate to either of the CEOs or the managers any of its responsibility for the management and operation of the company. Our CEOs are employees of the managers or one or more of their affiliates. Legal Proceedings We and the managers are not currently subject to any material legal proceedings. Our Corporate Information Our principal executive offices are located at 152 West 57th Street, New York, New York 10019. Our telephone number is (212) 457-0220. Table of Contents THE MANAGEMENT AGREEMENTS The Management Agreements Services We are party to a management agreement with each manager, pursuant to which the managers monitor and manage our assets and financial activities. Pursuant to each management agreement and subject to the policies and control of our operating committee and, in certain instances, our board of directors, the managers, among other things, (i) perform diligence, structure on our behalf our CDO subsidiaries and oversee the purchase and sale of assets (which purchases may be from affiliates of either or both of the managers) on behalf of our CDO subsidiaries, (ii) monitor and manage our assets and financial activities (including through the use of leverage and our hedging policies), (iii) provide us with certain advisory services, (iv) are responsible for the day-to-day activities relating to its assets, with such allocation of responsibilities as between the managers as determined by our board of directors, and (v) such other matters as our board of directors and the managers may agree upon from time to time. We believe our managers have well respected and established management resources for each of our subsidiaries targeted asset classes and a mature infrastructure supporting those resources. We benefit from the managers finance and administrative capabilities for certain legal, compliance and other operational matters, including the allocation and execution of purchases and sales of assets, securities valuation, risk management and information technology services. Each management agreement provides that the respective manager will not be liable to us, our affiliates or representatives for any acts or omissions or any errors of judgment or any loss suffered by us. However, each manager will be liable for losses resulting from its willful misconduct, fraud, criminal misconduct or gross negligence or by reason of its reckless disregard of its obligations and duties under its management agreement. Each management agreement requires the respective manager to manage our business affairs in conformity with the policies and controls of our operating committee, and in certain instances subject to the approval of our board of directors. The managers, in conjunction with the CEOs, are responsible for the day-to-day management of our assets and financial activities and perform (or cause to be performed) such services and activities relating to our assets and financial activities as may be appropriate, which may include the following: serving as our consultant with respect to the structuring of CDO subsidiaries, making acquisitions and dispositions of assets for our CDO subsidiaries prior to putting in place long-term financing, determining the capitalization and borrowings of our CDO subsidiaries, and developing such policies, procedures and guidelines as our board of directors determines are useful to the management of our business; assisting us in developing criteria for asset purchase commitments and programs that are specifically tailored to our business objectives and making available to us their knowledge and experience; investigating, analyzing, selecting and executing acquisition, disposition and hedging opportunities (including accumulating assets for us, participating in the warehouse equity in CDO entities sponsored by third parties and making short-term investments of excess cash); conducting negotiations with sellers and purchasers and their respective agents, representatives and investment bankers with respect to prospective acquisitions and dispositions of assets by us; engaging and supervising, on our behalf and at our expense, independent contractors (which may include affiliates of a manager) that provide investment banking, securities brokerage, back office and other financial services, and such other services as may be required relating to our assets; coordinating and managing operations of any joint venture, asset acquisition programs, warehousing equity participations or co-purchased interests held by us; providing executive and administrative personnel, office space and office services required in rendering services to us, to the extent that we have not developed internally administrative capability to handle our day-to-day business and operations; Table of Contents administering and servicing our day-to-day operations, assisting and supporting the CEOs and our chief financial officer with respect to financial, bookkeeping, accounting and disclosure matters and such other administrative service functions necessary to manage us and which are mutually agreed, including in connection with the collection of revenues, the payment of our obligations, the maintenance of appropriate computer services and the production on a timely basis of information, reports and accounts and other assistance to us relating to financial bookkeeping, accounting and disclosure matters to assist us in timely satisfying any filing obligations under the Securities Exchange Act of 1934, or Exchange Act, as amended; communicating on our behalf with the holders of any of our equity or debt securities and helping us to maintain effective relations with such holders; counseling us in complying with all regulatory requirements applicable to us in respect of our business activities, including, where applicable, the maintenance of our exclusions or exemptions from the 1940 Act and monitoring compliance with the requirements for maintaining same; monitoring the operating performance of our assets, providing periodic reports with respect thereto to our operating committee and board of directors (including comparative information with respect to such operating performance and budgeted or projected operating results), and furnishing reports and statistical and economic research regarding the services performed for us by the managers; advising us as to our capital structure and capital raising; assisting us in retaining qualified accountants and legal counsel, as applicable, to assist in the conduct of our business; assisting and counseling us regarding the development of an annual budget and periodically monitoring our performance against such budget; advising us with respect to obtaining appropriate warehouse or other financings; assisting us and our service providers in making required tax filings and reports; advising us with respect to structuring long-term financing vehicles for our assets, and with respect to offering and selling securities publicly or privately in connection with any structured financings; and performing such other services as may be required from time to time for management and other activities relating to our assets and our business and operations as our board of directors shall reasonably request or the managers deem appropriate under the particular circumstances. The managers will not be required to provide services that would require them to make any certification pursuant to the Sarbanes-Oxley Act, although they will provide support and assistance, to the extent necessary, to enable our CEOs and chief financial officer to provide such certifications. In addition, the managers will not knowingly take any actions or conduct themselves in a manner that would cause us to be engaged in a U.S. trade or business within the meaning of Section 864 of the U.S. Internal Revenue Code of 1986, as amended. In fulfilling these obligations, the managers may rely on opinions of tax counsel and on our operating guidelines. Indemnification We have agreed to indemnify each manager, its affiliates and their respective legal or other representatives to the fullest extent permitted by law against all losses, liabilities, damages, expenses or costs suffered, incurred or sustained by reason of the fact that they were in such roles with respect to the company. However, we will not indemnify them for matters resulting from their willful misconduct, fraud, criminal misconduct or gross negligence or their reckless disregard in the performance of their obligations and duties. Furthermore, the managers may consult with legal counsel and accountants in respect of our and our subsidiaries affairs and will be fully protected and justified in any action or inaction taken in accordance with the advice or opinion of such counsel or accountants, provided that such legal counsel or accountants were selected with reasonable care. Table of Contents Term Each management agreement is effective until September 28, 2007 and will be automatically extended for one-year terms unless either party gives 30 days prior written notice that it elects to not renew the management agreement at the end of the one-year term. In the event we elect to not renew a management agreement without cause (that is, unless the non-renewal is because the manager or the related CEO is finally adjudicated to have engaged in fraud, willful misconduct or gross negligence with respect to the company s assets or business), the manager will be entitled to the payment of a termination fee. In such case, the termination fee will be equal to the base fees and incentive fees that would have been payable to the manager by us and our subsidiary, Everquest LLC, for either two full years (based on the average annual fees paid to such manager in prior years) if such non-renewal occurs on or prior to September 28, 2009 or one full year of such fees if the non-renewal occurs after September 28, 2009. An additional termination fee is payable if the manager is so not renewed prior to September 28, 2007 so that three full years of fees are received by the manager. In the event that we do not renew a management agreement for cause or a manager does not renew its management agreement, the manager will receive from us an amount equal to the base management fees and incentive fees through the end of the then-current annual term. If either CEO voluntarily ceases to be a CEO of our company, dies or becomes disabled, we may not renew the related management agreement during the 90-day period following such event and pay the related manager one full year s base and incentive fees, calculated as described above. The managers will also provide management services to Everquest LLC on substantially the same terms and conditions as they provide to the company pursuant to the management agreements. Either manager may waive or defer the right to payment of fees to it, and such fees may be paid by the company, Everquest LLC, or both (without duplication). Each management agreement will be governed by the laws of the State of New York. Management Fees, Expenses and Incentive Allocation Base Fee We pay the managers a base management fee, quarterly in arrears, in an amount equal to (i) 1.75% on an annualized basis of the company s net assets up to $2 billion, plus (ii) 1.50% on an annualized basis of the company s net assets over $2 billion and up to $3 billion, plus (iii) 1.25% on an annualized basis of the company s net assets over $3 billion and up to $4 billion, plus (iv) 1% on an annualized basis of the company s net assets over $4 billion. For purposes of calculating the base fee, the company s net assets will be adjusted to exclude special one-time events pursuant to changes in GAAP and non-cash charges. Such adjustments will be made only after discussion between the company and the independent directors on our board of directors and approval by a majority of the independent directors. To the extent we have purchased after September 28, 2006, or in the future purchase, an equity stake in a CDO or other structured finance interest sponsored by BSAM or Stone Tower or our managers are able to obtain any fee rebates for deals in which we and other vehicles they manage invest (but, excluding secondary purchases or other purchases after completion of an offering), the fees payable by us under the management agreements will be reduced by the portion of any management or incentive fees received by BSAM or Stone Tower as manager of the CDO or other issuer that is allocable to our stake in such CDO or other issuer, to the extent such fees are not otherwise waived by BSAM or Stone Tower. The foregoing fee reduction provision does not apply to our initial portfolio of CDOs that we acquired in our formation transactions. No management or incentive fees are paid by Parapet CDO to BSAM or Stone Tower, although BSAM and Stone Tower may be entitled to investment management fees with regard to certain of Parapet CDO s underlying CDO assets. The managers use their management fee in part to pay compensation to their officers and employees. Table of Contents Incentive Allocation In addition to the base fee, the managers receive a quarterly incentive allocation from Everquest LLC and cash distribution from us in an aggregate amount equal to: (i) 25% of the dollar amount by which: (a) the company s quarterly net increase in net assets resulting from operations (as determined in accordance with GAAP before non-cash equity compensation expense), before accounting for the incentive allocation and distribution, per weighted average company ordinary shares for such quarter, exceeds (b) an amount equal to (A) the weighted average of the price per ordinary share for all issuances of company ordinary shares, after deducting any underwriting discounts and commissions and other costs and expenses relating to such issuances, multiplied by (B) the greater of 2.00% per quarter (or 8% annually) and 0.50% plus one-fourth of the U.S. Ten-Year Treasury Rate for such quarter, multiplied by (ii) the weighted average number of ordinary shares outstanding during such quarter. The foregoing calculation and cash distribution of the incentive allocation is adjusted to exclude special one-time events pursuant to changes in GAAP and non-cash charges. Such adjustments are made only after discussion between the managers and the independent directors on our board of directors and approval by a majority of the independent directors on our board of directors. The incentive allocation calculation and associated incentive distribution is made quarterly in arrears. Furthermore, to the extent that Everquest LLC does not have any net increase in net assets resulting from operations, as calculated for federal tax purposes during any particular taxable year, no amounts will be allocated to the manager in respect of their profits interests. The compensation paid to the managers is allocated between them as follows: (i) compensation relating to the first $562.0 million of book capital of the ordinary shares of the company outstanding at the time of the determination of such compensation will be allocated 80%/20% between BSAM and Stone Tower, respectively, and (ii) compensation relating to the book capital of the ordinary shares in excess of $562.0 million will be allocated 60%/40% between BSAM and Stone Tower, respectively. Reimbursement of Expenses We will reimburse the managers for any expenses incurred on our behalf as set forth in the management agreements, including asset purchase and sale expenses (i.e., expenses that the managers reasonably determine to be related to the purchase of our assets), such as brokerage commissions, custodial fees, bank service fees, interest expenses and expenses related to any proposed acquisition of assets that was not consummated the costs associated with the establishment of any credit facilities and other indebtedness of ours (including commitment fees, legal fees, closing costs and other costs); the costs of preparing, printing, delivering and filing any notices, proxy materials, reports and filings to any person, and other expenses connected with communications to such persons; reasonable travel and other out-of-pocket expenses incurred by officers, employees and agents of the managers and their affiliates in connection with the purchase, financing, hedging, refinancing, sale or disposition of assets and proposed assets; hedging expenses; legal expenses; professional fees (including, without limitation, expenses of consultants and experts); internal and external accounting expenses (including costs associated with any computer software or hardware used by us); accounting, auditing and tax preparation expenses; the costs and expenses of rendering financial assistance to or arranging for financing for any assets; entity-level taxes; our tax-related litigation expenses, including our attorney s fees; expenses of any registrar, custodian and transfer agent; our organizational expenses; administrative fees and expenses related to third-party asset valuation services; other expense categories approved by our board of directors; our winding-up costs, and all other expenses actually incurred by the managers and their affiliates that are reasonably necessary for the performance by the managers of their functions, duties and obligations under the management agreements. Table of Contents OUR MANAGEMENT AND CORPORATE GOVERNANCE The management, operation and policy making functions of the company are vested exclusively in our board of directors. Our board of directors, however, has the power to delegate to either of the CEOs or the managers any of its responsibility for the management and operation of the company. Our board of directors consists of the CEOs, an additional director designated by BSAM and four independent directors as determined by our board using the standards for independence established by the NYSE. Directors and Executive Officers The following table presents certain information concerning our board of directors and the individuals who serve as our CEOs and other executive officers. Name Age Position James S. Gilmore, III 57 Chairman of the Board of Directors and Independent Director Ralph R. Cioffi 51 Co-Chief Executive Officer and Director Michael J. Levitt 48 Co-Chief Executive Officer and Director Gary Cohen 64 Independent Director John W. Geissinger 47 Director Jay M. Green 60 Independent Director Gregory J. Parseghian 46 Independent Director Smita Conjeevaram 46 Chief Financial Officer Set forth below is biographical information for our CEOs, chief financial officer and directors. James S. Gilmore, III. Mr. Gilmore is the chairman of the board of directors. Mr. Gilmore has been a partner at the law firm of Kelley Drye Warren LLP since 2002, where he practices corporate and technology law and provides advice to clients on homeland security issues in the areas of public relations, information technology and international relations. He also currently serves as chairman of the National Council on Readiness and Preparedness, a nonprofit community-based organization. From 1998 to 2002, he was Governor of the Commonwealth of Virginia and was Attorney General of the Commonwealth of Virginia in 1993. Previously, he served in various public and private legal positions, as well as in the U.S. Army. Mr. Gilmore serves as a director of Atlas Air, Inc., Barr Pharmaceuticals, Inc. and Cypress Telecommunications Corp. Mr. Gilmore received a B.A. in Foreign Affairs from the University of Virginia, and a J.D. from the University of Virginia Law School. Ralph R. Cioffi. Mr. Cioffi is a co-chief executive officer and a director of the company. Mr. Cioffi is a senior managing director at BSAM, has been with Bear Stearns since 1985 and is a member of BSAM s board of directors. From 1985 through 1991 Mr. Cioffi worked in institutional fixed-income sales where he specialized in structured finance products. He served as the N.Y. head of fixed-income sales from 1989 through 1991. From 1991 through 1994 Mr. Cioffi served as global product and sales manager for high-grade credit products. He was involved in the creation of the structured credit effort at Bear Stearns and was a principal force behind Bear Stearns position as a leading underwriter and secondary trader of structured finance securities, specifically CDOs and esoteric ABS. Mr. Cioffi founded and has been managing the High Grade Structured Credit Strategies Fund since March 2003. He holds a B.S. degree in Business Administration with distinction from Saint Michael s College, Vermont, and is a member of the international business management and administration honor society, Sigma Beta Delta. Michael J. Levitt. Mr. Levitt is a co-chief executive officer and a director of the company. Mr. Levitt founded Stone Tower Capital LLC, or STC, in 2001. He is responsible for the overall strategic direction of STC and the development of the firm s investment philosophies. He also serves as Chairman and Chief Executive Officer of I/ST and Chairman of Hanover-STC. He has spent his entire twenty-five year career managing or advising non-investment-grade companies and investing in non-investment-grade assets. Previously, Mr. Levitt worked as a partner in the New York office of Hicks, Muse, Tate Furst Incorporated, where he was involved in many of the firm s investments. Additionally, he managed the firm s relationships with Table of Contents banking firms. Prior thereto, Mr. Levitt served as the Co-Head of the Investment Banking Division of Smith Barney Inc. with responsibility for the advisory, private equity sponsor and leveraged finance activities of the firm. Mr. Levitt began his investment banking career at, and ultimately served as a Managing Director of, Morgan Stanley Co., Inc. Mr. Levitt oversaw the firm s corporate finance and advisory businesses related to private equity firms and non-investment-grade companies. Mr. Levitt has a B.B.A. from the University of Michigan and a J.D. from the University of Michigan Law School. Mr. Levitt serves on the University s Investment Advisory Board. Gary Cohen. Mr. Cohen is a director of the company. He currently teaches classes at various graduate business schools and serves as a consultant to start-up hedge funds. From 2001 to 2003, he was chief investment officer and chief operating officer for the Americas at Deutsche Bank s Deutsche Asset Management. From 1973 to 2000, Mr. Cohen served in various positions at Citibank and Citigroup, eventually becoming a senior managing director at Citi Alternative Investment Strategies and global chief investment officer at Citigroup Alternative Investments. Previously, he served as a U.S. Army officer. Mr. Cohen holds a B.S. in Social Science Education from Indiana University of Pennsylvania, and an M.B.A. in Finance and Operations Research from Syracuse University. John W. Geissinger. Mr. Geissinger is a director of the company. He joined BSAM in 1998, and is currently the chief investment officer of BSAM. Prior to joining BSAM, he served as managing director and head of investment-grade fixed income at Chancellor LGT Asset Management. From 1986 to 1993, Mr. Geissinger was senior vice president and senior portfolio manager at Putnam Investments. Prior to that, he was director of quantitative fixed income research at Aetna Life and Casualty from 1983 to 1986. Mr. Geissinger received a B.S. in Mathematics and Economics from Wake Forest University and an M.B.A. in Statistics from New York University. Mr. Geissinger is a member of the Fixed Income Analyst Society and is a CFA charterholder. Jay M. Green. Mr. Green is a director of the company. Mr. Green has been a private investor since 1998. Mr. Green was executive vice president and chief financial officer of General Cigar Holdings, Inc. and its predecessor parent, Culbro Corporation, from 1988 to 1998, which at the time were NYSE-listed companies. From 1981 to 1988, he served in various leadership positions at Columbia Pictures and its then parent, The Coca-Cola Company. From 1969 through 1981, Mr. Green was with Price Waterhouse where he supervised audit examinations of large domestic and international companies. Mr. Green has previously served as a director of the following entities: The Smith Wollensky Restaurant Group; The Walter Reade Organization; The Burbank Studios; Fedcap Rehabilitation Services, Inc.; and Griffin Gaming and Entertainment. Mr. Green graduated with a B.S. from Boston University in 1969 and is a Certified Public Accountant. Gregory J. Parseghian. Mr. Parseghian is a director of the company. He is the founder and chief executive officer of Parseghian Investment Advisors, LLC, an independent consultant to investment managers. From 1996 to 2003, Mr. Parseghian was employed by the Freddie Mac Corporation, serving first as Chief Investment Officer and subsequently from June to December 2003 as President and Chief Executive Officer. Previously, Mr. Parseghian was a managing director of Salomon Brothers and Credit Suisse First Boston and a partner in BlackRock Financial Management. Mr. Parseghian graduated from the Wharton School of the University of Pennsylvania with a B.S. in Economics and an M.B.A. in Finance. Smita Conjeevaram. Ms. Conjeevaram is the chief financial officer of the company. Ms. Conjeevaram has been actively involved in the hedge fund industry for over 15 years and has held senior positions at several large hedge funds. From September 2005 to August 2006; Ms. Conjeevaram was the COO/CFO of a newly launched private equity fund, SC Capital. Prior to SC Capital, Ms. Conjeevaram was a Partner and CFO of Strategic Value Partners, a distressed debt fund, from July 2004 to September 2005. From March 2003 to May 2004 Ms. Conjeevaram was the CFO of ESL Investments, a hedge fund. From 1999 to 2002 Ms. Conjeevaram was a Principal of Sentinel Advisors, LLC. Prior to joining Sentinel Advisors, Ms. Conjeevaram was a Tax Manager at Long Term Capital Management, L.P. beginning in 1994. Ms. Conjeevaram served as Tax Manager at Price Waterhouse from l987 to l994. Her education includes a B.S. in Accounting from Butler University, Indiana and a B.A. in Economics from Ethiraj College, Madras, India. Ms. Conjeevaram is a Certified Public Accountant. Table of Contents Corporate Governance The structure, practices and committees of our board of directors, including matters relating to the size, independence and composition of our board of directors, the election and removal of directors, requirements relating to board of directors action, the powers delegated to board of directors committees and the appointment of executive officers, are governed by our memorandum and articles of association. The following is a summary of certain provisions of our memorandum and articles of association that affect our corporate governance. This summary is qualified in its entirety by reference to all of the provisions of the memorandum and articles of association. Because this description is only a summary of our memorandum and articles of association, it does not necessarily contain all of the information that you may find useful. We therefore urge you to review our memorandum and articles of association in their entirety. During the preceding five years, none of our directors, the CEOs or our chief financial officer has been convicted of any fraudulent offenses, served as an officer or director of any company subject to a bankruptcy proceeding, receivership or liquidation, been the subject of sanctions by a regulatory authority or been disqualified by any court of competent jurisdiction from acting as a member of the administrative, management or supervisory body of any issuer or from participating in the management or conduct of the affairs of any issuer. Size, Independence and Composition of Our Board of Directors Our board of directors, which currently has seven members, may consist of between seven and 12 directors. At least a majority of the directors holding office must be independent, as determined by the full board of directors using the standards for independence established by the NYSE. If the death, resignation or removal of an independent director results in our board of directors consisting of less than a majority of independent directors, the vacancy must be filled promptly with another independent director appointed by majority vote of the remaining directors. Pending the filling of such vacancy, our board of directors may temporarily consist of less than a majority of independent directors. Election and Removal of Directors Shareholders elect all our directors, except the BSAM and Stone Tower designated directors. The special voting share classes granted to BSAM and Stone Tower entitle each to elect one director. These special voting shares remain valid so long as the relevant management agreement remains in effect, or the relevant manager or its affiliates have over $50 million invested in our company. BSAM s special voting shares entitle it to designate one additional director so long as the BSAM-affiliated investment in our company is over $100 million. Independent directors may be removed for cause at any time by the vote of holders of two-thirds of our outstanding shares. BSAM and Stone Tower may remove any director they are entitled to designate. A director who is a BSAM or Stone Tower designee may also be removed for cause by the two-thirds vote of the independent directors. Any vacancy of a BSAM or Stone Tower designated director will be filled by BSAM or Stone Tower, and any other vacancy will be filled by majority vote of the remaining directors. Action by Our Board of Directors Members of our board of directors may take action in a meeting in which a quorum is present or by a written resolution signed by all directors then holding office. A quorum of our board of directors consists of a majority of our board of directors, which includes a majority of the independent directors. Our board of directors generally acts by majority vote. Under our management agreements, our board of directors has delegated to the managers substantial authority for carrying out the day-to-day management and operations of our business, including making specific investment decisions. Transactions in Which a Director Has an Interest A director who directly or indirectly has an interest in a contract, transaction or arrangement with us or certain of our affiliates is required to disclose the nature of his or her interest to the full board of directors. Such disclosure may generally take the form of a general notice given to our board of directors to the effect Table of Contents that the director has an interest in a specified company or firm and is to be regarded as interested in any contract, transaction or arrangement entered into by the company. A director may participate in any meeting called to discuss or any vote called to approve the transaction in which the director has an interest, and any transaction approved by our board of directors will not be void or voidable solely because the director was present at or participates in the meeting in which the approval was given, provided that our board of directors or a committee of the board of directors authorizes the transaction in good faith after the director s interest has been disclosed or the transaction is fair to us. Audit Committee The audit committee consists solely of independent directors, and all members are financially literate. In addition, at least one member of the audit committee has accounting or related financial management expertise. The audit committee presently consists of each independent director. We consider Messrs. Green, Parseghian, Gilmore and Cohen to be financially literate, and Messrs. Green, Parseghian and Cohen to have accounting or related financial management expertise. The audit committee is responsible for assisting and advising our board of directors with matters relating to: our accounting and financial reporting processes; the integrity and audits of our financial statements; our compliance with legal and regulatory requirements; the compliance of the investments selected by the managers with our investment policies and procedures; the review of the managers performance under the management agreements; the qualifications, performance and independence of our independent registered public accounting firm; and the qualifications, performance and independence of any third party that provides valuations for our investments. The audit committee will also be responsible for engaging our independent registered public accounting firm, reviewing the plans and results of each audit engagement with our independent registered public accounting firm, approving professional services provided by our independent registered public accounting firm, considering the range of audit and nonaudit fees charged by our independent registered public accounting firm and reviewing the adequacy of our internal accounting controls. Nominating and Corporate Governance Committee Our board of directors is required to establish and maintain a nominating and corporate governance committee at all times. The nominating and corporate governance committee is required to consist only of directors who are independent directors. Currently, the nominating and corporate governance committee shall be required to recommend a slate of nominees for election as directors. It also reviews and makes recommendations on matters involving the general operation of the board of directors and our corporate governance, and annually recommends to the board of directors nominees for each committee of the board of directors. In addition, the nominating and corporate governance committee annually facilitates the assessment of the board of directors performance as a whole and of the individual directors and reports thereon to the full board of directors. Compensation Committee Our board of directors is required to establish and maintain a compensation committee at all times. The compensation committee is required to consist of only directors who are independent directors. Currently, the compensation committee shall be required to set the salary of our chief financial officer. Table of Contents Code of Business Conduct and Ethics We have adopted a corporate code of business conduct and ethics relating to the conduct of our business by our employees, officers and directors. We intend to maintain the highest standards of ethical business practices and compliance with all laws and regulations applicable to our business. Director Compensation Each independent director will receive an annual fee of $50,000. The chairman of the board of directors and the co-chairmen of the audit committee will receive an additional $25,000 annually. Each independent director will also receive $1,000 for each board of directors or committee meeting attended, whether in person or telephonically, plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board of directors or committee meeting. Independent directors each additionally receive an annual grant of 4,000 restricted shares. In December 2006, the independent directors each earned $1,000 plus expenses as compensation for attending one board of directors meeting. Executive Compensation We have not paid, and do not intend to pay, any annual cash compensation to the company s executive officers for their services as executive officers, other than the chief financial officer. Our other executives are employees of the managers and are compensated by the managers or their affiliates. The managers fees are set forth in the respective management agreements. During 2006, our chief financial officer Ms. Conjeevaram, who was appointed to her position in September 2006, received salary of $83,333 and bonus of $150,000, totaling $233,333, pursuant to her compensation arrangements set forth in her employment agreement described in Employment Agreements. Compensation Discussion and Analysis We have not paid, and do not intend to pay, any compensation to the company s executive officers for their services as executive officers, other than the chief financial officer. Our other executives are employees of the managers and are compensated by the managers or their affiliates. The managers fees are set forth in the management agreements, which were entered into in connection with our formation. We do not have any influence over the compensation our managers pay to our executive officers. Our chief financial officer is paid pursuant to an employment agreement entered into prior to our formation as a private company. Her compensation was set through negotiation that took into account her past experience, the compensation of similarly senior financial company officers and the start-up nature of our business. The policies and principles upon which our chief financial officer s compensation will be set in future periods not covered by her employment agreement will be established by our compensation committee following its formation. Equity Incentive Plan We do not have in place an equity incentive plan. As a result of the offering, each of BSAM and Stone Tower will be entitled to receive share grants representing 2.5% (or together an aggregate of 5.0%) of our ordinary shares outstanding after giving effect to the issuance of shares in our initial public offering. Employment Agreements The CEOs and directors of the company have not entered into any employment agreements with us and are not entitled to any benefits upon the termination of their respective offices. We have entered into an employment agreement with Ms. Conjeevaram, pursuant to which she will be given the title of Chief Financial Officer of the company and will receive an initial annual salary of $250,000 Table of Contents (subject to proration in the event her employment is terminated prior to September 2007). She is also eligible to receive an annual bonus based on the success of the company and her contribution thereto as determined by the CEOs. Ms. Conjeevaram s bonus for the year ended August 31, 2007 will be $350,000 so long as she is an employee in good standing on the date on which the bonus is paid in September 2007 (subject to proration in the event her employment is terminated prior to September 2007 other than for cause). Contingent on the closing of this offering, Ms. Conjeevaram will be granted restricted shares in an amount equal to 0.25% of the fully diluted equity of the company at the closing of the offering. Such restricted shares will be subject to a plan approved by our board of directors that is expected to provide that one-third of such stock will vest on each of the first three anniversaries of the grant thereof, provided that she is employed by the company on the vesting dates. Ms. Conjeevaram will also be eligible to participate in any employee benefit plans, policies or programs established by the company for similarly situated employees. She has agreed to adhere to the terms of the company s employee policy manual, code of ethics or other policies that may be adopted by the company. Except as provided above, her employment by the company is at will. Indemnification and Limitations on Liability Our Memorandum and Articles of Association Cayman Islands law does not limit the extent to which a company s articles of association may provide for the indemnification of officers and directors, except to the extent that any such provision may be held by Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. The company s memorandum and articles of association permit us to indemnify officers and directors for losses, damages, costs and expenses incurred in their capacities as such, other than in relation to acts or failure to act which are finally adjudicated to have been grossly negligent or fraudulent or which resulted from willful misconduct or criminal misconduct. If the director or officer is found liable by the court, we may indemnify him or her only if the court determines that the director or officer is fairly and reasonably entitled to indemnity. Insofar as indemnification for liabilities arising under the U.S. Securities Act may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the U.S. Securities Act and is therefore unenforceable as a matter of U.S. law. Insurance We currently maintain an insurance policy under which our directors and officers are insured, subject to the limits of the policy, against certain losses arising from claims made against such directors and officers by reason of any acts or omissions covered under the policy in their respective capacities as directors or officers of the company, including certain liabilities under securities laws. Compliance with Cayman Islands Corporate Governance Requirements We comply in all material respects with the corporate governance requirements that are applicable to the company under Cayman Islands law. Our chief financial officer is paid pursuant to an employment agreement entered into prior to our formation as a private company. Table of Contents Managers Personnel and Track Record BSAM s Personnel The following table summarizes the organizational structure of the BSAM team as of December 31, 2006. We will use the resources of BSAM. Certain information regarding some of BSAM s professionals who will be most directly involved with managing Everquest is set forth below. Ralph R. Cioffi. Mr. Cioffi is senior managing director at BSAM. See Directors and Executive Officers for more biographical information. Matthew Tannin. Mr. Tannin is the chief operating officer of the BSHG Funds and a senior managing director at BSAM. Mr. Tannin has been with Bear Stearns since 1994. In 2003 he and Mr. Cioffi started the Bear Stearns High-Grade Structured Credit Strategies Fund. Prior to this, he spent seven years on the Table of Contents collateralized debt obligation structuring desk focusing on emerging markets, high-grade and market value transactions. From June 2001 through February 2003 he followed the CDO market as a Bear Stearns CDO research analyst in the asset-backed research group. Mr. Tannin has a J.D. from the University of San Francisco, was a law clerk on the California Court of Appeal and a Preston Warren scholar in philosophy at Bucknell University. He is a registered investment advisor. Raymond McGarrigal. Mr. McGarrigal is a senior managing director and senior portfolio manager at BSAM. Mr. McGarrigal started his Wall Street career with Bear Stearns in 1991 in the Financial Analytics and Structured Transactions (F. A.S.T.) group as an analyst. He moved to UBS in 1993 and worked as a CMO structurer and CMO floater trader until 1995. Following his time at UBS, Mr. McGarrigal was a member of the New York Mercantile Exchange, where he traded options on energy futures as a local. He returned to Bear Stearns in 1997 and has structured a wide variety of fixed-income structured products in the F. A.S.T. group. His product specialties include all types of CDOs, RMBS and structured credit derivatives. He brings to BSAM an in-depth understanding of structure, risk, the ratings process and relative value analysis across a wide range of fixed-income structured credit products. Mr. McGarrigal holds an M.B.A. in Finance from New York University and a B.S. in Mathematics and Business Economics from the State University College at Oneonta. James Crystal. Mr. Crystal is a senior managing director and senior portfolio manager at BSAM with 18 years of derivatives, investment banking and portfolio management experience. From 2004 to 2005 Mr. Crystal was a managing director at Silverback Asset Management, a hedge fund specializing in convertible arbitrage and structured credit investments. Prior to joining Silverback, he was a senior managing director at Bear Stearns, in the investment banking department and in the asset-backed investments department. Before joining Bear Stearns in 1997, Mr. Crystal worked for nine years at predecessor companies to UBS Investment Bank (S.G. Warburg Securities, S.G. Warburg Co. and SBC Warburg), in Tokyo, London and New York. Mr. Crystal holds a B.A., magna cum laude, from Yale University and an A.M. in Regional Studies East Asia from Harvard University. Stuart Rothenberg. Mr. Rothenberg is a managing director, portfolio management and surveillance at BSAM. Mr. Rothenberg joined BSAM in November of 2005. He is currently responsible for structuring, analysis and surveillance of CDOs issued by BSAM as well as the CDO investments of the BSHG Funds. Prior to joining BSAM, he spent six years at S P, where he was a director in the CDO group. Prior to S P, he was the product manager of structured finance trust services at IBJ Schroder. Mr. Rothenberg holds an M.B.A. in Finance Investments from Baruch College and B.S. degree in Business Administration from the State University of New York at Oswego. Andrew Lipton. Mr. Lipton is a managing director, portfolio management and surveillance at BSAM. Prior to joining BSAM, Mr. Lipton was vice president and senior credit officer in the structured finance group at Moody s Investors Service. Mr. Lipton analyzed and wrote about many asset-backed and mortgage-backed securitizations at Moody s, involving numerous asset classes. His background in mortgage-related assets includes the prime and subprime sectors, Alt-A mortgages, home equity, HELOCs, high LTV, seasoned mortgages, tax liens and timeshares. Mr. Lipton was as an attorney with the Department of Housing Preservation and Development of the City of New York before going to Moody s. Mr. Lipton obtained his J.D. from Hofstra Law School and his B.A. from Queens College. Steven Van Solkema. Mr. Van Solkema is a managing director, portfolio management and surveillance, at BSAM. Mr. Van Solkema has worked for BSAM since 2003. He is currently responsible for structuring, analysis and surveillance of CDOs issued by BSAM as well as the CDO investments of the Bear Stearns High-Grade Structured Credit Strategies Funds. Prior to that, he spent five years at Goldman Sachs as a performance and risk analyst, specializing in attribution analysis of leveraged fixed income accounts. He holds an M.B.A. in Finance from New York University, and a B.B.A. in Finance and Investments from Baruch College, where he was Solon E. Summerfield Scholar. Mr. Van Solkema is a CFA charterholder. Dhruv Mohindra. Mr. Mohindra is an associate director, portfolio management and surveillance, at BSAM. Mr. Mohindra joined BSAM in 2005 as research analyst responsible for the analysis and trading of residential and commercial mortgage-backed securities. Prior to joining BSAM, Mr. Mohindra worked at Table of Contents Moody s Investors Service as a residential mortgage-backed analyst and prior to that worked in structured product sales at Deutsche Bank in London. Prior to attending business school Mr. Mohindra worked at Goldman, Sachs Co., initially in a risk management capacity and subsequently in equity sales. Mr. Mohindra holds an M.B.A. in Finance from New York University and undergraduate degrees in Economics as well as Business Administration from Boston University, which he attended on a full academic scholarship. In addition, he is a CFA charterholder and a Licensed Real Estate Broker. Jamie Karper. Mr Karper is an associate director, portfolio management and surveillance, at BSAM. Mr. Karper has been with Bear Stearns since 2001. He is presently an analyst focusing on sub-prime and residential mortgage-backed securities. Prior to joining BSAM, he was a trader on the Institutional Futures Agency Desk covering financial and energy products for Asia/Pacific hours. Mr. Karper received his B.A. in History from Hobart and William Smith College in 1998. BSAM s Track Record Founded in 1923, The Bear Stearns Companies Inc. (NYSE: BSC) is a holding company that, through its broker-dealer and international bank subsidiaries, principally Bear, Stearns Co. Inc., Bear, Stearns Securities Corp., or BSSC, Bear, Stearns International Limited and Bear Stearns Bank plc, is a leading investment banking, securities and derivatives trading, clearance and brokerage firm serving corporations, governments, institutional and individual investors worldwide. Through BSSC, it offers financing, securities lending, clearing and technology solutions. Headquartered in New York City, the company has approximately 13,000 employees worldwide. BSAM is the asset management subsidiary of The Bear Stearns Companies Inc. BSAM was incorporated in the State of New York on March 15, 1985. BSAM is a registered investment advisor with the SEC, and provides investment management services to corporations, trusts, employee benefit plans, public authorities, foundations, endowments, religious organizations, high net worth individuals, mutual funds, private investment funds, venture capital funds and issuers of collateralized bond and loan obligations and other structured securities products. BSAM offers investment expertise across a wide spectrum of investment strategies, including: hedge funds; private equity; large, small and mid-cap domestic equities; corporate, government, municipal and high-yield bonds; balanced portfolio management; mortgage-backed and mortgage derivative securities; and systematic equity and collateralized loan accounts. BearMeasurisk, an affiliate of BSAM, provides performance and risk analysis for institutional clients. BSAM employed approximately 409 individuals at December 31, 2006, of which approximately 150 were classified as investment professionals and 259 as administrative personnel. The investment professionals total is comprised of approximately 42 portfolio managers, 53 research analysts and 55 other professionals a category that includes traders, hedge fund administrators and private equity professionals. The majority of BSAM s business, including portfolio management, research, administration and operations, is conducted at Bear Stearns world headquarters in New York City, although BSAM also has an investment management presence in San Francisco. The Marketing and Client Service Group is headquartered in the New York City office, but is represented through branch offices in Chicago and San Francisco. Internationally, the firm is represented through offices in London and Tokyo. Table of Contents When considering the track record information contained below, you should take note of the fact that the historical track record information may not be representative of the performance of CDOs currently held by us or CDOs we hold in the future, including for the reasons described in Risk Factors Risks Relating to Our Business BSAM s and Stone Tower s track record information may not be indicative of their or our future performance. The following table sets forth certain information as of December 31, 2006, for the seven CDOs, excluding Parapet CDO, managed by the BSAM Team and all or a portion of the equity of which BSAM retained for funds it manages. Managed Deals (Excluding Parapet CDO) Annualized Original Cumulative Cash Return(5) (%) Closing Total Total Investment Distributions Adjusted Date Entity Name Capitalization(1) Equity(2) in Equity(3) Made(4) Gross Gross Net ($ in millions) ($ in millions) ($ in millions) ($ in millions) 04/2004 Klio Funding, Ltd. 2,423.24 38.40 (6) 38.40 13.3677 20 .8 15 .7 12 .2 10/2004 Klio II Funding, Ltd.** 5,048.75 86.25 (7) 86.25 23.0215 22 .5 17 .5 13 .9 12/2004 Kirkwood CDO, Ltd. 2004-1 550.80 9.25 9.25 4.8913 30 .4 30 .4 30 .4 12/2004 Stone Tower CDO Ltd.* 306.00 33.00 8.25 2.0233 20 .1 16 .9 13 .9 04/2005 High Grade Structured Credit CDO, Ltd. 2005-1 811.90 19.25 14.25 1.6610 13 .5 13 .5 7 .3 10/2005 Stone Tower CDO II Ltd.** 307.50 22.50 14.85 1.7796 22 .4 19 .2 12 .1 11/2005 Klio III Funding, Ltd.** 4,030.00 60.00 60.00 4.3832 14 .9 12 .4 8 .1 Weighted Average 19 .9 % 16 .2 % 12 .3 % (1) Total initial face or notional amount of all debt and equity securities issued. (2) Total initial face or notional amount of equity securities issued. (3) Total notional investment in equity securities acquired by BSAM managed funds. (4) Cumulative actual cash distributed to the BSAM managed funds in respect of equity securities held by them. (5) Annualized cash return is calculated as the cumulative cash distributions paid through the last distribution date as a percentage of the total purchase price of the equity investment amount divided by the number of years from the closing date, assuming a 365-day year. Adjusted gross returns reflect annualized cash returns, including (i) any collateral management fees paid to BSAM which may include a proportionate share of fees on equity held by third parties; and (ii) certain cash flows which would, in transactions of this kind, typically be paid to the equityholders, but where the priority of payments of each transaction indicated above diverts either to (a) amortize the highest-cost debt in the transaction; or (b) purchase additional collateral. It has been the practice of the BSAM Team to structure the priority of payments in this way in each transaction managed by it. Gross returns reflect annualized cash returns including (i) and excluding (ii) above. Net returns reflect annualized cash returns excluding (i) and (ii) above. Due to the timing of cash payments received by CDO equity holders and other factors, the annualized cash returns on outstanding CDOs to date may not be reflective of the final annualized cash returns ultimately received. See
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+PROSPECTUS SUMMARY You should read the following summary together with the entire prospectus, including the more detailed information regarding us, the ADSs being sold in this offering, and our financial statements and related notes appearing elsewhere in this prospectus. Overview We are a leading manufacturer of solar cell products in China as measured by production capacity. We manufacture our solar cells from silicon wafers utilizing crystalline silicon solar cell technology to convert sunlight directly into electricity through a process known as the photovoltaic effect. We sell our solar cell products to Chinese and overseas module manufacturers and system integrators, who assemble our solar cells into solar modules and solar power systems for use in various markets. Since we commenced business operations in August 2004, our management s operational expertise and execution capability, coupled with our strong research and development capabilities, have allowed us to rapidly install five solar cell manufacturing lines and expand our annual manufacturing capacity by 160 megawatts, or MW, in 2006. As of December 2006, we had six solar cell manufacturing lines with an aggregate production capacity of 192 MW per year, assuming the use of 156-millimeter monocrystalline silicon wafers. We plan to increase our annual production capacity to approximately 390 MW by the second quarter of 2008, with twelve manufacturing lines in total. Our research and development team is led by three solar power researchers, each with over 10 years of experience and established credentials in the solar power industry. Our research and development efforts focus on continually enhancing our solar cell conversion efficiencies, which measure the ability of solar power products to convert sunlight into electricity, and improving our manufacturing operations. We are currently developing selective emitter cells, an improved version of the P-type solar cells that most solar cell manufacturers produce. Using our experimental manufacturing line, we have manufactured selective emitter cells with an average conversion efficiency rate of 17.6% on a trial basis, and we expect to commence commercial production in 2007. In addition, we are focusing on the development of advanced process technologies for manufacturing new products, such as N-type solar cells, which generally have higher conversion efficiencies than those of P-type solar cells. We also plan to develop passivated emitter and rear cells in the future. We have experienced significant sales and revenue growth since we commenced operations. We sold 4.4 MW and 46.4 MW of solar cells in 2005 and 2006, respectively. Our net revenues increased from $13.7 million in 2005 to $149.5 million in 2006. We turned a net loss of $0.3 million in 2005 into a net income of $11.8 million in 2006. Industry Background The solar power market has grown rapidly in the past several years. According to Solarbuzz LLC, or Solarbuzz, an independent solar energy research firm, the global solar power market, as measured by annual solar power system installed capacities, increased from 427 MW in 2002 to 1,744 MW in 2006, representing a compound annual growth rate, or CAGR, of 42%. Under the lowest of three different projections, Solarbuzz expects annual solar power system installed capacities to further increase to 4,177 MW in 2011. Solar power industry revenue is expected to increase from $10.6 billion in 2006 to $18.6 billion in 2011, representing a CAGR of 12%. Currently, the majority of installed solar systems employ crystalline silicon technology. Most solar cell manufacturers apply crystalline silicon technology to manufacture P-type solar cells, while only a few manufacturers produce, on a commercial scale, N-type solar cells, which generally have higher conversion efficiencies than P-type solar cells. The solar cell production industry is currently dominated by a small number of manufacturers. According to Solarbuzz, the top 10 solar cell manufacturers together accounted for 75% of the solar cell production worldwide in 2006. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents Conventions That Apply to This Prospectus Unless the context otherwise requires, in this prospectus: we, us, our company, our, Sunergy and China Sunergy refer to China Sunergy Co., Ltd. incorporated in the Cayman Islands, its predecessor entities and its subsidiaries; shares or ordinary shares refers to our ordinary shares, ADSs refers to our American depositary shares, each of which represents six ordinary shares, and ADRs refers to the American depositary receipts that evidence our ADSs; China or PRC refers to the People s Republic of China, excluding the Hong Kong Special Administrative Region, the Macau Special Administrative Region and Taiwan; RMB or Renminbi refers to the legal currency of China; $ or U.S. dollars refers to the legal currency of the United States; and Euro or refers to the legal currency of the European Union; passivated emitter and rear cell refers a solar cell which uses oxide on its front and rear surfaces, and of which the rear surface is contacted by metal only at certain regions; and selective emitter cell refers to a solar cell, where the regions under the front metal contact and the rest of the front surface areas are separately diffused and optimized. This prospectus contains translations of certain RMB amounts into U.S. dollar amounts at specified rates. All translations from RMB to U.S. dollars were made at the noon buying rate in The City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise stated, the translations of RMB into U.S. dollars have been made at the noon buying rate in effect on March 30, 2007, which was RMB7.7232 to $1.00. We make no representation that the RMB or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or RMB, as the case may be, at any particular rate or at all. On May 11, 2007, the noon buying rate was RMB7.6835 to $1.00. Unless otherwise indicated, all historical share information and per-share information contained in our audited financial statements, consolidated statement of operations data, the Capitalization and the Dilution sections in this prospectus has been retroactively adjusted to reflect a 100-for-one share split that became effective on April 24, 2007. Table of Contents We believe the solar power market will continue to experience growth as a result of the following factors: Government policies to drive adoption of solar power. Various governmental bodies globally have implemented financial incentives to further accelerate the development and adoption of solar power. These incentives include feed-in tariffs, capital cost rebates, net metering, tax credits and low-interest loans; Growing demand for electricity and supply constraints of traditional energy sources. Electric power demand is expected to increase from 16.1 trillion kilowatt hours in 2002 to 31.7 trillion kilowatt hours by 2030 globally. Meanwhile the generation of electric power is capacity constrained and dependent upon fossil fuel feedstock. Further, for national security reasons many governments seek to further develop domestic sources of energy, particularly solar power and other renewable energy sources; and Growing awareness of the advantages of solar power. Solar power offers a variety of advantages over other sources of power, including an absence of the need for fuel, environmental cleanliness, location-based energy production, greater efficiency during peak demand periods, high reliability and modularity. Our Competitive Strengths We believe that the following strengths enable us to compete effectively and to capitalize on the projected growth in the global solar power market: proven track record of capacity expansion and scalable operations; strong research and development capabilities; production in a low-cost manufacturing region; well-balanced and experienced management team; and existing relationships with established solar power industry participants. Our Strategies Our objective is to be a global leader in the innovation, development and manufacture of solar cells. We intend to pursue the following strategies to enhance our competitiveness and to increase our market share: continue our focus on solar cell manufacturing; enhance our technological competitiveness through continued research and development; further expand our production capacity; further optimize raw material supply sources and enhance business relationships with key raw material suppliers; achieve a diversified customer base; and continue to pursue a proactive marketing strategy and establish a global sales network. Our Challenges We believe that the following are some of the major risks and uncertainties that may materially affect us: our limited operating history may not serve as an adequate measure of our future prospects and results of operations; AMENDMENT NO. 2 TO FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents the current industry-wide shortage of silicon raw materials may constrain our revenue growth and decrease our gross margins and profitability; our dependence on a limited number of suppliers for key raw materials and customized manufacturing equipment could result in order cancellation and decreased revenues; our quarterly operating results may fluctuate from period to period in the future; the reduction or elimination of government subsidies and economic incentives for on-grid solar energy applications could cause a reduction in demand for our products and a reduction in our revenues; if solar power technology is not suitable for widespread adoption, or if sufficient demand for solar power products does not develop or takes longer to develop than we anticipate, our sales may not continue to increase or may even decline, and we may be unable to achieve or sustain profitability; we face competition from both renewable and conventional energy sources and products; we may not be successful in the commercial production of N-type solar cells, selective emitter cells or other new products; and we may be unable to manage our growth and expansion effectively. Corporate Structure Our operating subsidiary, CEEG (Nanjing) PV-Tech Co. Ltd., or Nanjing PV, was incorporated in August 2004 in Nanjing, China. China Sunergy Co., Ltd., or Sunergy BVI, our holding company incorporated in the British Virgin Islands, acquired all of the equity interests in Nanjing PV in April 2006 through a series of transactions that have been accounted for as a legal reorganization. As part of a restructuring in anticipation of our initial public offering, we incorporated China Sunergy Co., Ltd., or Sunergy, in the Cayman Islands on August 4, 2006. Sunergy became our ultimate holding company upon its issuance of shares to the existing shareholders of Sunergy BVI on August 30, 2006 in exchange for all shares of equivalent classes that these shareholders previously held in Sunergy BVI. We conduct substantially all of our operations through Nanjing PV. Corporate Information Our principal executive offices are located at No. 123 Focheng West Road, Jiangning Economic & Technical Development Zone, Nanjing, Jiangsu 211100, People s Republic of China. Our telephone number at this address is (86-25) 5276-6688 and our fax number is (86-25) 5276-6882. You should direct all inquiries to us at the address and telephone number of our principal executive offices set forth above. Our website is www.n-pv.com. The information contained on our website does not form part of this prospectus. Our agent for service of process in the United States is CT Corporation System located at 111 Eighth Avenue, New York, New York 10011. China Sunergy Co., Ltd. (Exact name of registrant as specified in its charter) Not Applicable (Translation of Registrant s name into English) Cayman Islands 3674 Not Applicable (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) No. 123 Focheng West Road Jiangning Economic & Technical Development Zone Nanjing, Jiangsu 211100, People s Republic of China (86 25) 5276 6688 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Table of Contents The Offering American depositary shares offered: By Sunergy 8,500,000 ADSs Offering price We currently estimate that the initial public offering price will be between $8.00 and $10.00 per ADS. The ADSs Each ADS represents six ordinary shares, par value $0.0001 per share. The ADS will be evidenced by ADRs. To understand the terms of the ADSs, you should carefully read the section in this prospectus entitled Description of American Depositary Shares. We also encourage you to read the deposit agreement, which has been filed as an exhibit to the registration statement that includes this prospectus. ADSs outstanding immediately after the offering 8,500,000 ADSs Ordinary shares outstanding immediately after the offering 229,676,773 ordinary shares (or 237,326,773 ordinary shares if the underwriters exercise the over-allotment option in full.) Over-allotment option We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 1,275,000 additional ADSs at the initial public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions, solely for the purpose of covering over-allotments. Reserved ADSs At our request, the underwriters have reserved for sale, at the initial public offering price, up to an aggregate of 425,000 ADSs to certain directors, officers, employees and associates of our company through a directed share program. These reserved ADSs account for an aggregate of approximately 5% of the ADSs offered in the offering. Use of proceeds We intend to use the proceeds of this offering for the following purposes: to purchase or prepay for raw materials; and to expand our solar cell manufacturing facilities. Depositary JPMorgan Chase Bank, N.A.
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+PROSPECTUS SUMMARY This summary highlights material information contained elsewhere in this prospectus but does not contain all of the information you need to consider in making your decision to invest in our common stock. This summary is qualified in its entirety by the more detailed information and consolidated financial statements and notes thereto included in this prospectus. You should read carefully this entire prospectus and should consider, among other things, the matters set forth in the section entitled Risk Factors before deciding to invest in our common stock. Unless otherwise indicated, Issuer refers solely to hhgregg, Inc., Gregg Appliances refers solely to Gregg Appliances, Inc. and we, us and our refer to hhgregg, Inc. and its subsidiaries, including Gregg Appliances. Unless otherwise indicated, the information contained in this prospectus assumes the completion of the IPO reorganization as described below. All references to our fiscal year refer to our fiscal year ended March 31 for each respective year. We present EBITDA, Adjusted EBITDA and four-wall EBITDA margin to help us describe our operating and financial performance. EBITDA, Adjusted EBITDA and four-wall EBITDA margin are non-GAAP financial measures commonly used in our industry and should not be construed as an alternative to net income, cash flows from operating activities and other income or cash flow statement data (as determined in accordance with generally accepted accounting principles in the United States, or GAAP), as a better indicator of operating performance or as a measure of liquidity. EBITDA and Adjusted EBITDA as defined by us may not be comparable to similar non-GAAP measures presented by other issuers. Please refer to notes (7) and (8) to Summary Historical and Pro Forma Consolidated Financial and Other Data for a reconciliation of our net income to, and the limitations of, EBITDA and Adjusted EBITDA and a more thorough discussion of our use of EBITDA and Adjusted EBITDA in this prospectus. We define four-wall EBITDA as store-level operating income before depreciation, including store wages, rent, net advertising, distribution costs and other store operating expenses, adjusted to exclude corporate overhead expense. Our four-wall EBITDA margin represents our Adjusted EBITDA margin as a percentage of sales, adjusted to exclude corporate overhead expense (defined as headquarter-level operating expenses including wages, professional fees, information system expenses and other non-store operating expenses). Our Company We are a leading specialty retailer of premium video products, brand name appliances, audio products and accessories. We offer a comprehensive selection of digital televisions and appliances, which we sell at competitive prices. We focus on providing our customers with a superior purchase experience from the time they first enter our stores to the delivery and installation of products in their homes. We distinguish ourselves from our competitors by employing an extensively trained, commissioned sales force that serves our customers with a consultative and educational sales approach. We also differentiate ourselves by offering same-day delivery of virtually all of our products. We currently operate 79 stores in Ohio, Indiana, Georgia, Tennessee, Kentucky, North Carolina, South Carolina and Alabama. Our typical store, which averages 30,000 square feet, is designed to be visually appealing to our customers and to highlight our premium selection of consumer electronics and appliances. Our store layout showcases our broad selection of over 100 models of flat panel televisions and 400 models of appliances utilizing LCD and plasma television display walls, extensive appliance displays and digital product centers. We have a proven track record of growth and profitability led by a seasoned management team. Over the last four fiscal years, we have opened 31 new stores and have grown our net sales and Adjusted EBITDA (a non-GAAP financial measure) at a compound annual rate of 12.0% and 19.1%, respectively, while significantly investing in corporate infrastructure to support further expansion. For the fiscal year ended March 31, 2007, we generated net sales of $1.1 billion and Adjusted EBITDA (a non-GAAP financial measure) of $65.5 million, representing growth of 17.7% and 46.8%, respectively, over the prior fiscal year. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 Table of Contents Competitive Strengths We believe the following strengths contribute significantly to our success and position us for growth: Superior customer purchase experience. We believe our in-store experience, high level of customer service and delivery and installation capabilities result in a superior customer purchase experience, which drives loyalty, referrals and repeat business. Our extensively trained, commissioned sales force enables us to educate our customers on the features and benefits of the products we offer. We believe that when fully informed, customers frequently purchase higher-end, feature rich products. Our same-day delivery for virtually all of our products and quality in-home installation services significantly enhance our ability to sell large, more complex products. Balanced mix of premium video products and appliances. We have an extensive product and brand offering of premium video products and home appliances. Our television and video products contribute significantly to our growth in sales and profitability while our appliance business provides us with additional financial stability and strong cash flow generation. As a result of our balanced merchandise mix of video products and appliances, our cash flow tends to be less seasonal and more stable over the long term relative to our consumer electronics-focused competitors. Proven ability to successfully penetrate new markets. Since 1999, we have successfully opened or acquired stores in seven new metropolitan markets, adding 65 stores, most recently in the Atlanta, Charlotte, Knoxville and Birmingham markets. Our strategy is to initially open multiple stores in a market to leverage our advertising spending, regional management and delivery and distribution infrastructure, followed by additional store openings spread over time to fill out the market. This strategy allows us to capture strong market share in each of our markets. Superior store economics. Our stores deliver compelling returns on investment and we believe these returns are superior to those of our major consumer electronics competitors. During fiscal 2006 and 2007, our stores averaged net sales of $14.4 million and provided an average four-wall EBITDA margin (a non-GAAP financial measure) of approximately 8.0%. During this same period, our new stores required average net capital expenditures of $0.7 million and average initial net-owned inventory investments of $1.0 million. Our stores typically generate positive cash flow within three months of opening and provide a cash payback in less than two years. All of our retail stores produce positive four-wall EBITDA, which combined with our strong inventory management, generate significant free cash flow to internally fund our growth. Experienced management team. Our senior management team has an average of 24 years of relevant industry experience and an average of over 13 years of experience with us. We believe our management s depth of experience has enabled us to grow our store base at a compound annual growth rate of 18.3% since fiscal 1998, enter seven metropolitan markets and anticipate and respond effectively to industry trends and competitive dynamics. Key Growth Initiatives We believe the following are key elements to our growth strategy: Open stores in new and existing markets. We believe our proven business model and exceptional store economics will allow us to continue to expand into new high growth markets while continuing to build out our store base in existing markets. In fiscal 2008, we plan to open approximately 13 to 15 new stores, primarily by entering the Raleigh/Durham and Birmingham markets and in fiscal 2009, we intend to enter the highly attractive Florida market. Over the next several years we intend to continue to grow our store count from internally generated funds at a compound annual rate of approximately 15% to 18%. We believe, based upon our new-store site selection criteria, that there are substantial opportunities to add stores in new and existing markets with a long-term potential for more than 400 hhgregg stores in the United States. AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents Capitalize on strong demand for premium product offerings. We are well positioned to benefit from the expected strong demand for premium video products as well as the continued stability of the appliances market. As a result of positive industry trends, including larger flat-panel screen sizes, continued product innovation, and price declines in flat-panel televisions, digital television sales are expected to grow at a compound annual rate of 12.7% through 2010, according to Display Search, a wholly owned subsidiary of the Consumer Electronics Association, or the CEA. We expect to continue to gain market share in our appliance business due to our extensive product and brand assortment and our superior customer purchase experience. We believe that there are a limited number of specialty retailers offering as broad a selection of appliances as we do. Selectively introduce complementary merchandise. We plan to exploit growing niches in the consumer electronics and appliance categories while strategically introducing higher margin merchandise and traffic driving products. This strategy includes the expansion of our Fine Lines appliance department in select existing and new stores. Our Fine Lines department, focuses on ultra premium appliances such as Sub-Zero, Wolf and Thermador, and helps drive sales of higher margin appliances in our core product assortments. Additionally, we intend to bolster our market position in portable personal electronics categories while evaluating the addition of new merchandise categories. Drive operating and working capital efficiencies. We believe we can further drive returns on investment as we grow our store base by leveraging our increased size, operating efficiencies and financial position. As we penetrate new metropolitan markets, we expect to increase our purchase volumes, achieve distribution efficiencies and strengthen our relationships with our key vendors. We also expect our increased store base and higher net sales to further leverage our existing corporate and regional infrastructure and to enable us to negotiate more favorable lease terms for our stores. Risks Facing our Company Our business is subject to numerous risks that are described more fully in the section entitled Risk Factors immediately following this prospectus summary. Competition from national and regional consumer electronics and appliance retailers is the principal challenge we face. As we pursue our growth strategy, we intend to establish our brand in markets where other leading competitors already have a strong customer base. As part of this growth strategy, we will need to identify and acquire suitable store sites, negotiate acceptable leases for these sites, and obtain government approvals, licenses and permits in a timely manner. We may need to adapt to customer preferences that are different from the preferences of customers in our existing markets. In addition, as we enter new markets, we will need to gain sufficient market penetration in order to efficiently leverage our distribution network and advertising expenditures. We face additional challenges that may impact our growth strategy and our ability to compete with national and regional consumer electronics and appliance retailers. We depend to a significant degree on relationships with key suppliers for the success of our business and our growth strategy. Any disruption in our relationships with, or in the operations of, any of our key suppliers could cause our net sales and profitability to decline. Another key component of our competitive strategy is to provide expertise to our customers through our extensively trained, commissioned sales associates. If we are unable to attract and retain highly qualified personnel and store managers, our level of customer service may decline, which may decrease our net sales and profitability. We are a Delaware corporation and the address of our principal executive offices is 4151 East 96th Street, Indianapolis, Indiana 46240. Our telephone number is 317-848-8710 and our website is www.hhgregg.com. Please note that any references to www.hhgregg.com in the registration statement and this prospectus are inactive textual references only and that the information contained in hhgregg s website is neither incorporated by reference into this registration statement or prospectus nor intended to be used in connection with this offering. 4151 East 96th Street Indianapolis, Indiana 46240 317-848-8710 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Table of Contents The Offering Common stock offered by us 3,125,000 shares Common stock offered by the selling stockholders 6,250,000 shares Common stock to be outstanding after this offering 31,616,600 shares Underwriters over-allotment option to purchase additional common stock from the selling stockholders 1,406,250 shares Directed share program We have reserved up to 5% of the common stock offered in this prospectus for sale to certain of our employees, vendors and other persons related to us or the selling stockholders. See Underwriting for more information. Proposed NYSE Symbol HGG The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of June 15, 2007. This number does not include, as of June 15, 2007: 3,978,666 shares of common stock subject to options outstanding, at a weighted average exercise price of $6.78 per share; and 3,000,000 shares of common stock reserved for future grant or issuance under our new equity incentive plan pursuant to which 590,000 options to purchase our common stock will be granted immediately upon the consummation of this offering with an exercise price equal to the offering price. On June 14, 2007, the Company s board of directors approved a two-for-one stock split for the issued and outstanding common stock of the Company effective June 29, 2007. Unless we otherwise indicate, all share information included in the prospectus reflects the stock split. Except as otherwise indicated, all information in this prospectus assumes no exercise of the underwriters over-allotment option.
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+PROSPECTUS SUMMARY This summary highlights selected information in this prospectus, but it may not contain all of the information that you should consider before deciding to invest in our Class A common stock. You should read this entire prospectus carefully, including the Risk Factors section and the financial statements, which are included elsewhere in this prospectus. Unless we state otherwise or the context otherwise requires the terms (1) we, us, our, VMU, and the Company, refer to Virgin Mobile USA, Inc., a newly formed Delaware corporation, and its consolidated subsidiaries after giving effect to the reorganization transactions to be completed prior to the consummation of this offering as described in Organizational Structure; prior to the reorganization transactions, these terms refer to Virgin Mobile USA, LLC, a Delaware limited liability company through which we are currently conducting our operations; (2) Sprint and Sprint Nextel refer to Sprint Nextel Corporation, a Kansas corporation, and its affiliated entities; and (3) the Virgin Group refers to Virgin Group Holdings Limited, a British Virgin Islands limited company, and its affiliated entities. See Basis of Presentation for a description of additional defined terms used in this prospectus. Our Company We are a leading national provider of wireless communications services, offering prepaid, or pay-as-you-go, services targeted at the youth market. Our customers are attracted to our products and services because of our flexible monthly terms, easy to understand pricing structures, stylish handsets offered at affordable prices and relevant mobile data and entertainment content. We believe that the appeal of our brand and products and services extends beyond our target audience and estimate that approximately half of our current customers are ages 35 and over. We offer our products and services on a flat per-minute basis and on a monthly basis for specified quantities, or buckets, of minutes purchased in advance in each case without requiring our customers to enter into long-term contracts or commitments. We were founded as a joint venture between Sprint Nextel and the Virgin Group and launched our service nationally in July 2002, reaching one million customers in November 2003, within eighteen months of our national launch. We have continued to grow our customer base rapidly and, as of December 31, 2006, we served approximately 4.57 million customers, which we estimate represented approximately a 15% share of the pay-as-you-go market and a 19.0% increase over the 3.84 million customers we served as of December 31, 2005. As of June 30, 2007, we served approximately 4.83 million customers. Our revenues and net loss for the year ended December 31, 2006 were approximately $1.1 billion and $(36.7) million, respectively. Our revenues and net income for the six months ended June 30, 2007 were approximately $666.9 million and $26.5 million, respectively. As of June 30, 2007 and December 31, 2006, our members accumulated deficit was approximately $(614.4) million and $(643.9) million, respectively. We market our products and services under the Virgin Mobile brand, which enjoys strong brand awareness and in 2004 was rated as one of the top trendsetting brands in any sector by The Intelligence Group s Cassandra Report, which tracks youth trends in the United States. We have exclusive rights to use the Virgin Mobile brand for mobile voice and data services through 2027 in the United States, Puerto Rico and the U.S. Virgin Islands through our trademark license agreement with the Virgin Group. We provide our services using the nationwide Sprint PCS network. We purchase wireless network services at a price based on Sprint Nextel s cost of providing these services plus a specified margin under an agreement which runs through 2027. As a result, we are able to dedicate our resources to acquiring and servicing customers rather than to acquiring spectrum or building and maintaining a wireless network. We believe that two key factors distinguish us from many of our competitors: our focus on the youth and pay-as-you-go segments of the U.S. wireless market and our mobile virtual network operator, or MVNO, SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Table of Contents business model. Our focus on the youth and pay-as-you-go segments of the U.S. wireless market allows us to tailor our products and services, advertising, customer care, distribution network and overall operations to the needs and desires of our target market, which we believe is underserved by wireless providers. We control our customers experience and all customer touch points, including brand image, pricing, mobile content, marketing, distribution and customer care. As an MVNO, however, we do not own or operate a physical network, which frees us from related capital expenditures and allows us to focus our resources and compete effectively against the major national wireless providers in our target market. Competitive Strengths We believe that the following key strengths enable us to compete effectively in the wireless telecommunications market: Differentiated Market Approach. We have been pioneers in the U.S. wireless industry, offering innovative, youth-oriented pay-as-you-go plans without long-term contracts or commitments. Our service plans, which include both flat per-minute rates and hybrid plans with monthly buckets of minutes purchased in advance, are attractive alternatives to traditional postpaid plans. Our stylish and affordable handsets and our voice and data service offerings are designed to make Virgin Mobile particularly appealing to the youth market. Strong Brand. Virgin Mobile is the number one brand for prepaid wireless services in the United States in awareness and purchase consideration among 14-34 year-olds, according to Gallagher Lee Brand Tracking (fourth quarter 2006), and was rated as one of the top ten trendsetting brands in any sector in the United States by the Cassandra Report in 2004. We believe that our customers identify with brands and products that reflect their values and our marketing efforts focus on leveraging the popular attributes of the Virgin brand: fun, style, good value and social responsibility. We have exclusive rights to use the Virgin Mobile brand through 2027 for mobile voice and data services in the United States, U.S. Virgin Islands and Puerto Rico through our trademark license agreement with the Virgin Group. Extensive and Efficient Distribution. Our nationwide distribution network is comprised of 130,000 third party retail stores that offer account replenishment, or Top-Up cards, including more than 35,000 retail locations that also sell our handsets. We distribute our products through leading national retailers, including Wal-Mart, Best Buy, RadioShack and Target, and generally receive favorable product positioning in their retail locations. Our products are designed to require minimal sales assistance, which enables us to distribute them cost-effectively through third party channels and eliminates the need to expend capital to build and operate our own retail stores. Award-winning Customer Service. Our award-winning customer service program, Virgin Mobile At Your Service, provides user-friendly and effective customer service through our call centers and our website. Our high quality of customer service helps us to retain customers. As a result, we believe that our churn is among the lowest in the prepaid segment of the wireless industry. We consistently receive high ratings in customer satisfaction surveys. In both 2006 and 2007, we were the sole recipient of the J.D. Power and Associates Award for wireless prepaid customer satisfaction. Capital Efficient Business. Our mobile virtual network operator, or MVNO, business model, easy-to-understand products and services, cost-efficient distribution channels and focused marketing strategy have made us one of the lowest cost operators in the wireless industry. As an MVNO, we have substantially lower capital expenditures than those of wireless service providers that own their networks. While we expect to continue to subsidize our handsets in order to acquire additional customers, we do not operate our own retail stores, which saves us substantial sales and distribution costs. In addition, we pay Sprint Nextel for wireless services only to the extent of our customers usage. As a result, we have a highly variable cost structure, which we believe has allowed us to reach profitability faster than if we were to maintain our own network. Amendment No. 7 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents Proven and Committed Management Team. We are led by a highly experienced management team, which has significant expertise in the telecommunications, Internet and e-commerce, media and entertainment, consumer products and retail industries. Many members of our management team have been with us since before our national launch and have been instrumental in developing and implementing our business model. Business Strategy We believe the following components of our business strategy will allow us to continue our growth and improve our profitability: Focus on Fast-growing Segments of U.S. Wireless Market. We focus on two fast-growing segments of the U.S. wireless market: youth and pay-as-you-go. We believe there is substantial demand in the United States for our straightforward and fun wireless communication services. According to the Yankee Group, in 2006, there were approximately 29.5 million pay-as-you-go wireless customers in the United States and such number is expected to grow to approximately 53.0 million by 2011, representing a 12.4% compound annual growth rate over the same period. We plan to continue to penetrate the youth segment and grow our market share by continuing to tailor our products, services and advertising message to this market, leveraging our brand through new and existing distribution channels and utilizing select youth-oriented media channels that specifically resonate with our target market, such as MTV, Vice, Facebook.com, MySpace.com and outdoor billboards and postings in key trendsetting neighborhoods. Continue Product and Service Innovation. We have a proven ability to innovate and adapt to our customers needs. For example, in 2006 we launched a suite of new service plans that were designed to be more attractive to higher-usage customers. These monthly bucket plans include anytime and night and weekend minutes without long-term contracts or commitments. At the same time, we launched mobile social networking and Sugar Mama, an innovative new program that enables our customers to earn minutes by viewing and rating advertisements online. We intend to continue our efforts to address our market s evolving needs and to offer innovative and popular products and services ahead of our competitors. Enhance our Brand Strength. We aim to maintain and strengthen a vibrant brand image that resonates with our customers and distinguishes us from other wireless service providers. Our goal is to attract and retain customers through our youth-oriented marketing message and service offerings that are straightforward, flexible and a good value. For example, our marketing events in 2007 included the Virgin Festival by Virgin Mobile, a two-day event that drew approximately 72,000 fans to see major performing artists. We will continue to enhance our brand through targeted marketing, advertising, product packaging, point-of-sale materials and innovative services. Leverage Our Scale and Infrastructure to Drive Profitable Growth. As of June 30, 2007, in five years since our national launch, we had grown our customer base to approximately 4.83 million. We have built the infrastructure to support future growth in customers and usage while leveraging the advantages of our predominantly variable cost structure. As we continue to scale the business, we expect our growing customer base to translate into improved cost economies without the need for substantial capital investment. Principal Owners A substantial majority of our equity interests are presently owned by two well established companies Sprint Nextel, which is the third largest wireless operator in the United States as measured by subscribers, and the Virgin Group, whose brand is globally recognized and whose branded companies generate approximately $20 billion in annual revenues. Upon completion of this offering and assuming that the underwriters do not exercise their over-allotment option to purchase additional shares, Sprint Nextel and the Virgin Group together will continue to hold interests representing a majority of our outstanding voting power and will continue to control us. About Sprint Nextel. Sprint Nextel offers a comprehensive range of wireless and wireline communications services bringing the freedom of mobility to consumers, businesses and government users. Sprint Nextel is Virgin Mobile USA, Inc. (Exact name of registrant as specified in its charter) Table of Contents widely recognized for developing, engineering and deploying innovative technologies, including two robust wireless networks serving more than 54 million subscribers at the end of the second quarter 2007; industry-leading mobile data services; instant national and international walkie-talkie capabilities; and a global Tier 1 Internet backbone. About the Virgin Group. Founded by entrepreneur Sir Richard Branson in 1970, the Virgin Group is a global organization active in seven main areas: media and telecommunications, transport and tourism, leisure and entertainment, financial services, retail, health and wellness, and renewable energy. The Virgin brand is one of the most well-known and well-respected in Britain. Worldwide, Virgin-branded companies together employ more than 35,000 people and generate revenues of approximately $20 billion annually. The Virgin Group is one of the leading MVNO operators worldwide and there are currently Virgin Mobile businesses operating in the U.K., Canada, Australia, France and South Africa which operate independently of VMU. The Virgin Group periodically organizes global forums for the management teams of the Virgin Mobile entities to share technical, product development and marketing best practices and learn from the experiences of other Virgin Mobile entities worldwide. Selected Risk Factors and Potential Conflicts of Interest We face a number of competitive challenges, risks and potential conflicts of interest. Investing in our common stock includes substantial risk. See Risk Factors, Certain Relationships and Related Transactions and Underwriting for a discussion of the factors you should consider before buying shares of our Class A common stock. Some of the more significant challenges, risks and potential conflicts include: Short operating history. We have a limited operating and financial history and cannot be certain that our MVNO business model will be profitable or competitive. We have experienced, and may continue to experience, operating losses and significant fluctuations in our revenues and cash flows. If our revenues and earnings growth are not sustainable, we may not be able to generate the earnings necessary to fund our operations, continue to grow our business, satisfy our debt covenants or repay our debt obligations. Competition in the wireless industry. The wireless communications market is extremely competitive, and competition for customers is increasing. We compete with (i) facilities-based wireless communications providers and their prepaid affiliates or brands, including Sprint Nextel and its Boost product; and (ii) other MVNOs. We also may face competition from providers of various emerging technologies. Most of our competitors have substantially greater resources and a larger market share than we have, and we may not be able to compete successfully with them. Competitive pressure to reduce prices for our products and services. To remain competitive with existing and future competitors, we may be compelled to offer greater subsidies for our handsets, reduce the prices for our services or increase the available minutes that we offer under our prepaid monthly, or hybrid, service plans. The prices we charge our customers for services do not affect the amounts we pay to Sprint Nextel under the PCS services agreement, which is based on Sprint Nextel s costs plus a margin on the services we purchase. As a result, any further subsidies or price reductions that we offer in order to remain competitive may reduce our margins and revenues, and may adversely affect our profitability and cash flows. New service offerings. We cannot be certain that our new service offerings will be profitable or successful. In addition, our services currently depend on the nationwide Sprint PCS network, and we cannot guarantee that Sprint Nextel will make the necessary capital outlays or have sufficient spectrum capacity to deploy new services on that network. In addition, we may not be able to meet our customers demands for new services. Customer turnover. Our rate of customer turnover, or churn, may be affected by several factors, including network coverage and connection quality; handset and network reliability issues; pricing; the ability to roam on wireless networks of other carriers; and customer care performance. We do not require long-term service We were incorporated in Delaware on April 11, 2007. Our principal executive offices are located at 10 Independence Boulevard, Warren, NJ 07059 and our main telephone number is (908) 607-4000. Our principal website is virginmobileusa.com. Information contained on our website or that can be accessed through our website is not incorporated by reference in this prospectus. 10 Independence Boulevard Warren, NJ 07059 (908) 607-4000 (Address, including zip code, and telephone number, including area code, of registrants principal executive offices) Peter Lurie, Esq. General Counsel and Secretary 10 Independence Boulevard Warren, NJ 07059 (908) 607-4000 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents Organizational Structure Prior to the closing of this offering, we will effect the reorganization described in Organizational Structure beginning on page 42. Current Organizational Structure Our operations are presently conducted by Virgin Mobile USA, LLC, a Delaware limited liability company owned by Sprint Nextel, the Virgin Group and two minority investors. The following diagram depicts our current organizational structure. With copies to: Alan M. Klein, Esq. Joseph H. Kaufman, Esq. Simpson Thacher & Bartlett LLP 425 Lexington Avenue New York, NY 10017 (212) 455-2000 Phyllis G. Korff, Esq. Skadden, Arps, Slate, Meagher & Flom LLP 4 Times Square New York, NY 10036 (212) 735-3000 Table of Contents Post-IPO Organizational Structure Virgin Mobile USA, Inc. was formed in April 2007 for the purposes of this offering. Virgin Mobile USA, Inc. has not engaged in any business or other activities except in connection with its formation and the reorganization transactions which were effected for the purpose of tax efficiency, described under Organizational Structure. Following the reorganization transactions and this offering, Virgin Mobile USA, Inc. will be a holding company and will hold, directly and indirectly through Bluebottle USA Investments L.P. and Bluebottle USA Holdings L.P., partnership units in the Operating Partnership and all of the outstanding limited liability company interests of VMU GP, LLC. As an indirect owner of VMU GP1, LLC, the sole general partner of the Operating Partnership, Virgin Mobile USA, Inc. will operate and control all of the business and affairs of the Operating Partnership. Virgin Mobile USA, Inc. will consolidate the financial results of the Operating Partnership, and the ownership interest of Sprint Nextel in the Operating Partnership will be treated as a minority interest in our consolidated financial statements. Virgin Mobile USA, Inc., directly and through Holdings and its subsidiaries, and Sprint Nextel will be the only partners of the Operating Partnership after the reorganization transactions and this offering. The diagram below depicts our organizational structure immediately following the reorganization transactions and this offering. Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective. If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. CALCULATION OF REGISTRATION FEE Title of Each Class of Securities to Be Registered Amount to be Registered(1) Proposed Maximum Offering Price Per Share Proposed Maximum Aggregate Offering Price(1)(2) Amount of Registration Fee(2)(3) Class A common stock, par value $.01 per share 31,625,000 shares $17.00 $537,625,000 $16,505.09 (1) Includes 4,125,000 shares subject to the underwriters option to purchase additional shares, if any. (2) Estimated solely for the purpose of calculating the registration fee under Rule 457(a) of the Securities Act of 1933, as amended (the Securities Act ). (3) Previously paid. Table of Contents The Offering Class A common stock offered by Virgin Mobile 25,550,493 shares Class A common stock offered by selling stockholders 1,949,507 shares Total 27,500,000 shares Class A common stock to be outstanding after this offering 53,026,302 shares (or 64,209,573 shares if Sprint Nextel exchanges all of its partnership units in the Operating Partnership for shares of Class A common stock and the Virgin Group converts all of its shares of Class C common stock into shares of Class A common stock) Class B common stock to be outstanding after this offering one share Class C common stock to be outstanding after this offering 115,062 shares Use of proceeds We estimate that the net proceeds to us from this offering, based on an assumed initial public offering price per share of $16.00 (which is the midpoint of the estimated price range shown on the cover of this prospectus), after deducting underwriting discounts and estimated offering expenses, will be approximately $375.6 million. We will not receive any of the proceeds from the sale of shares by the selling stockholders and Virgin Mobile USA, Inc. will not retain any of the proceeds from this offering. See Use of Proceeds. Based on this assumed offering price: We will use approximately $160.8 million of the net proceeds to us from this offering to pay Sprint Nextel for limited liability company interests representing approximately 16.7% of Virgin Mobile USA, LLC (which consideration will be based on the amount Sprint Nextel would have received had it converted such limited liability company interests into shares of our Class A common stock and sold such shares in this offering). Virgin Mobile USA, Inc. will contribute a small part of its interest in Virgin Mobile USA, LLC to a newly formed entity, VMU GP1, LLC, in exchange for all of the interests in VMU GP1, LLC. We will contribute the remaining net proceeds, along with the majority of our remaining portion of such limited liability company interests in Virgin Mobile USA, LLC (once such interests have been converted to limited partnership interests in the Operating Partnership), to Investments, which in turn will contribute such proceeds and interests to Holdings. Holdings will use such proceeds to purchase from the Operating Partnership additional limited partnership units representing approximately 23.1% of the Operating Partnership. The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Table of Contents The Operating Partnership will use the sale proceeds (1) to repay a $150 million portion of the term loan outstanding under our senior secured credit facility, (2) to repay approximately $45 million of indebtedness owed to Sprint Nextel under the terms of our subordinated secured revolving credit facility and (3) for general corporate and other purposes. Affiliates of Merrill Lynch and Bear Stearns are lenders under our senior secured credit facility and, based on an assumed initial public offering price per share of $16.00 (which is the midpoint of the estimated price range shown on the cover of this prospectus) will receive approximately 8.9% and 11.1%, respectively, of the proceeds to us of this offering used to repay those borrowings. See Underwriting NASD Regulations and Certain Relationships. Voting Rights Each share of our Class A common stock will entitle its holder to one vote on all matters to be voted on by stockholders generally. Sprint Nextel will be issued 1,250,000 shares of our Class A common stock (which will be sold in this offering) and one share of our Class B common stock. Class B common stock has no economic rights but will entitle the holder to a number of votes that is equal to the total number of shares of Class A common stock for which the partnership units that such holder holds in the Operating Partnership, as of the relevant record date for the VMU stockholder action, are exchangeable. Based on an assumed initial offering price per share of $16.00, we expect that immediately following this offering, such Class B common stock will entitle Sprint Nextel to 11,068,209 votes. The Operating Partnership units held by Sprint Nextel are convertible into Class A common stock at any time and are mandatorily convertible upon any transfer of such interests by Sprint Nextel, except to certain permitted transfers. The Virgin Group will be issued 22,791,533 shares of our Class A common stock and 115,062 shares of our Class C common stock. Except for the convertibility of Class C common stock into Class A common stock, shares of Class A common stock and shares of Class C common stock will be identical, including with respect to voting rights. The shares of Class C common stock may be converted into shares of Class A common stock at any time at the option of the holder and will automatically convert into shares of Class A common stock upon any transfer of shares of Class C common stock by the Virgin Group, except certain permitted transfers. See Description of Capital Stock. Dividend Policy We do not intend to pay any cash dividends on our common stock going forward, and instead intend to retain earnings, if any, for future operations and expansion. See Dividend Policy. Table of Contents Proposed New York Stock Exchange symbol VM Unless we specifically state otherwise, the information in this prospectus does not give effect to: any exercise by the underwriters of their over-allotment option to purchase an additional 4,125,000 shares of our Class A common stock from Sprint Nextel; 5,321,295 shares of our Class A common stock that underlie awards under our equity-based incentive plans anticipated to be outstanding at the time of this offering, including the Virgin Mobile USA 2007 Omnibus Stock Incentive Plan, or Omnibus Share Plan. See Management Compensation Discussion and Analysis Equity-based Incentive Arrangements; and 1,892,519 additional shares of our Class A common stock expected to be available for future grant under our proposed Omnibus Share Plan after the consummation of this offering. See Management Compensation Discussion and Analysis Equity-based Incentive Arrangements. Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Subject to Completion, dated October 10, 2007 PROSPECTUS 27,500,000 Shares Class A Common Stock Table of Contents SUMMARY FINANCIAL AND OTHER DATA The following table sets forth the summary historical and other data for Virgin Mobile USA, LLC and pro forma financial data for Virgin Mobile USA, Inc. as of the dates and for the periods indicated. Virgin Mobile USA, Inc. is a recently formed holding company which has not engaged in any business or other activities except in connection with its formation and the reorganization transactions described elsewhere in this prospectus. Accordingly, all financial and other information herein relating to periods prior to the completion of the reorganization transactions is that of Virgin Mobile USA, LLC. The summary balance sheet data as of December 31, 2005 and 2006 and the statement of operations data for each of the years ended December 31, 2004, 2005 and 2006 have been derived from Virgin Mobile USA, LLC s audited financial statements included elsewhere in this prospectus. The summary balance sheet data as of June 30, 2007 and the statement of operations data for the six months ended June 30, 2006 and 2007 have been derived from Virgin Mobile USA, LLC s unaudited financial statements included elsewhere in this prospectus. The summary balance sheet data as of December 31, 2004 has been derived from Virgin Mobile USA, LLC s audited financial statements not included in this prospectus. The summary balance sheet data as of June 30, 2006 has been derived from Virgin Mobile USA, LLC s unaudited financial statements not included in this prospectus. The summary unaudited pro forma financial information has been developed by application of pro forma adjustments to the historical consolidated financial statements appearing elsewhere in this prospectus. The summary unaudited pro forma financial information for the year ended December 31, 2006 and as of and for the six months ended June 30, 2007 gives effect, in the manner described under Unaudited Pro Forma Financial Information and the notes thereto to (i) the reorganization transactions together with the related equity-based awards, and (ii) this offering of Class A common stock by us and the use of proceeds therefrom, as if all such events occurred as of January 1, 2006 in the case of the unaudited pro forma condensed consolidated statement of operations data, and as if they had occurred on June 30, 2007, in the case of the unaudited pro forma condensed consolidated balance sheet data. The unaudited pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable under the circumstances. The summary unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of and does not purport to represent what our financial position or results of operations would actually have been had the transactions been consummated as of the dates indicated. In addition, the summary unaudited pro forma financial information is not necessarily indicative of our future financial condition or results of operations. You should read the information contained in this table in conjunction with Unaudited Pro Forma Financial Information, Selected Historical Financial and Other Data, Capitalization, Management s Discussion and Analysis of Financial Condition and Results of Operations, and our historical audited financial statements and the accompanying notes and our interim financial statements and the accompanying notes included elsewhere in this prospectus. This is an initial public offering by Virgin Mobile USA, Inc. We are offering 25,550,493 shares of Class A common stock to be sold in this offering. The selling stockholders identified in this prospectus are offering an additional 1,949,507 shares of Class A common stock. We will not receive any of the proceeds from the sale of the shares being sold in this offering by the selling stockholders. We have three classes of authorized common stock. Sprint Nextel and the Virgin Group, our principal stockholders, will hold the other two classes of our common stock and immediately following the consummation of this offering will be able to exercise control over our management and affairs and all matters requiring stockholder approval. See Description of Capital Stock . No public market currently exists for our Class A common stock. After pricing of this offering, we expect that the shares of Class A common stock will be listed on the New York Stock Exchange under the symbol VM. We expect the initial public offering price to be between $15.00 and $17.00 per share. Investing in our Class A common stock involves risks. See
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+This summary highlights information appearing elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before making your investment decision. You should carefully read this summary together with the entire prospectus, including the information presented under the section
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001396650_menu_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001396650_menu_prospectus_summary.txt
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+This summary highlights information appearing elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before making your investment decision. You should carefully read this summary together with the entire prospectus, including the information presented under the section
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001396838_dolan-co_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001396838_dolan-co_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information more fully described elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common stock. You should read the entire
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+PROSPECTUS SUMMARY 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001397087_ccs_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001397087_ccs_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read the entire prospectus carefully, including Risk Factors and our consolidated financial statements and notes to those consolidated financial statements, included elsewhere in this prospectus, before making an investment decision. We use CCS Medical, our company, we, us and our in this prospectus to refer to CCS Medical Holdings, Inc. and its subsidiaries and predecessors. Our Business We are a leading medical supply management company delivering products and value-added services to individuals living with select chronic medical conditions, including diabetes, urological and ostomy-related disorders, chronic wounds, incontinence, respiratory conditions and other illnesses. We employ a differentiated marketing approach using a nationwide field-based sales force that targets healthcare professionals who focus on chronic conditions to expand our extensive relationship-based network. In an effort to promote proper patient compliance with physician prescribed protocols, our medical supply programs educate and counsel patients on disease states and complex clinical regimens, assume responsibility for the patients billing and collecting from government programs and third-party payors, and deliver products to patients homes through the mail. Our primary product focus is on diabetes, a large and fast growing component of the chronic care market. Products we distribute in the diabetes market include blood glucose testing supplies, insulin pumps and related supplies, and prescription medications. Our target markets are large, growing at epidemic levels and being serviced more frequently by mail. According to a Johns Hopkins University study, nearly one-half of Americans are living with at least one chronic condition and approximately one in four Americans lives with two or more of these conditions. Diabetes is among the most common chronic conditions in the United States and accounts for an estimated 10% of direct and indirect healthcare costs. The American Diabetes Association, or ADA, estimated the total direct and indirect costs of diabetes at approximately $132 billion in 2002. This includes approximately $17.5 billion of outpatient medication and supplies, including $10.5 billion for medication and oral agents, and $7.0 billion for insulin and delivery supplies costs. According to Frost Sullivan, a healthcare industry research firm, the number of individuals diagnosed with diabetes in the United States is expected to grow 5.1% annually between 2005 to 2012. We believe that mail-order distribution is becoming more prevalent in servicing growing chronic care needs. For example, the share of diabetic test strips distributed through the mail is estimated to have increased from approximately 28% in 2001 to approximately 33% in 2006. The Department of Health and Human Services estimates that 60% of Medicare expenditures for diabetic supplies are for items furnished by mail-order suppliers. Our platform, value-added services, and direct mail capabilities combined with our relationships with healthcare professionals, managed care organizations, and manufacturers uniquely position us to capitalize on these market opportunities. We believe our customized medical supply management programs add value for patients, healthcare professionals and payors. Patients benefit from the convenience and privacy of home delivery, our processing claims on their behalf, and their ability to defer out-of-pocket expenses. Healthcare professionals benefit from our assistance with improved patient compliance and our practice of filling prescriptions as written. Payors benefit from lower overall medical costs as patient complications and comorbidities decline due to increased compliance with treatment regimens. We estimate that the patients we serve are on average three times more compliant to the physician-recommended care protocol than patients serviced by retail networks. Improved patient compliance benefits the patients we serve and our business relationships as it can lead to improved medical outcomes and reduced medical costs. We employ a highly targeted relationship-based marketing approach. Our nationwide field-based sales force regularly calls upon healthcare professionals, including endocrinologists, internists, general practitioners, certified diabetic educators and nurse specialists. Our approach has enabled us to develop a large network of relationships which results in the potential for ongoing referrals, a lower patient acquisition cost, increased patient retention, and a recurring revenue stream. We also market our services to managed care companies, emphasizing our ability to help reduce the overall cost of care. Lastly, we have developed relationships with many manufacturers in the Table of Contents industry, such as LifeScan, Inc., a Johnson Johnson company, Medtronic MiniMed, Inc., Roche Diagnostics Corporation and Bayer Corporation. These relationships have led to coordinated marketing opportunities which have led to increased sales and an enhanced market position. Our Competitive Strengths We are a leading medical supply management company delivering products and value-added services to individuals living with select chronic medical conditions. We believe our customized medical supply management programs provide value to patients, healthcare professionals and payors. We believe our competitive strengths include: Nationwide Sales Force Focused on Healthcare Professionals We employ a differentiated sales and marketing approach relative to our competitors using a field-based sales force that primarily targets healthcare professionals who focus on chronic conditions. We believe this is a more effective and cost efficient means of patient procurement and that our cost per patient acquisition is considerably lower than that of a strictly direct-to-consumer approach. As of June 30, 2007, we employed approximately 200 sales professionals nationwide. Comprehensive Medical Supply and Service Offerings We offer the patients we serve a comprehensive, single-source solution for medical supplies, prescriptions and chronic care management services. We routinely interact with the patients we serve by proactively managing their supply needs, such as scheduling reminders to reorder products to ensure compliance with their prescription regimens, and by providing responsive patient service. Proprietary Technology Platform and Operating Systems We utilize proprietary information technologies and a custom designed operating system that differentiates us from our competitors and provides a scalable platform for future growth. We manage our operations through an internally developed Oracle-based Patient Information Management System, or PIMS, which increases our administrative efficiency and reduces our organizational costs by allowing us to capture more accurate patient information, facilitate easier enrollment of patients, process claims more effectively, manage compliance with regulatory requirements, and manage inventories and the distribution of supplies to the patients we serve. Central Position in the Chronic Care Value Chain We believe our sales force, product and service offerings, and technology platform allow us to occupy an influential position with patients, healthcare professionals and other industry participants. By developing these relationships, and leveraging our central position, we believe we can influence patient behavior. Experienced Management Team We are led by Joseph H. Capper, our Chief Executive Officer, who was previously the Director of Sales at Bayer Corporation s Diabetic Diagnostics Division. As Chief Executive Officer, Mr. Capper led the integration of Chronic Care Solutions, Inc. and MPTC Holdings, Inc. Mr. Capper leads an experienced management team with substantial healthcare distribution, manufacturing and service experience. Our Chief Financial Officer, Stephen M. Saft, was previously the Chief Financial Officer at Priority Healthcare Corporation. Our executive management team has, on average, 14 years of experience in the industry. Our Growth Strategy Our objective is to become the leading medical supply management company serving patients that are living with one or more chronic conditions and increase our revenue and profitability at a rate faster than the market TABLE OF CONTENTS Page Prospectus Summary 1 Risk Factors 11 Special Note Regarding Forward-Looking Statements 23 Use of Proceeds 24 Dividend Policy 24 Capitalization 25 Dilution 27 Selected Historical Consolidated Financial Data 28 Management s Discussion and Analysis of Financial Condition and Results of Operations 31 Industry 57 Business 61 Management 79 Compensation Discussion and Analysis 83 Certain Relationships and Related Person Transactions 93 Principal Stockholders 95 Description of Capital Stock 97 Shares Eligible for Future Sale 100 Certain U.S. Tax Considerations for Non-U.S. Holders 102 Underwriting 104 Legal Matters 110 Experts 110 Where You Can Find More Information 110 EX-1.1: FORM OF UNDERWRITING AGREEMENT EX-4.1: FORM OF STOCK CERTIFICATE EX-5.1: OPINION OF WILLKIE FARR & GALLAGHER LLP EX-23.1: CONSENT OF ERNST & YOUNG LLP EX-23.2: CONSENT OF PRICEWATERHOUSECOOPERS LLP EX-23.3: CONSENT OF KPMG LLP EX-23.5: CONSENT OF MARSHALL & STEVENS INCORPORATED You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with information that is different from that contained in this prospectus. This prospectus may only be used where it is legal to sell these securities. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date. Through and including , 2007 (the 25th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. Table of Contents average. In furtherance of this objective, we have adopted a diversified growth plan, highlighted by the following strategic elements: Strengthen our Professional Referral Network by Increasing the Size and Effectiveness of our Sales Force We utilize our nationwide field-based sales force to target healthcare professionals who focus on chronic conditions in order to encourage them to recommend our service to their patients. In order to gain greater penetration and build relationships with our selected healthcare professional market segments, we plan to hire additional sales personnel on an ongoing basis. With expanded sales reach and call frequency, combined with a successful track record of service, we expect continued referral growth both from securing new healthcare professionals as referral sources and from receiving additional referrals from healthcare professionals who are already recommending our services. Increase our Patient Base by Expanding our Managed Care Relationships We currently have relationships with approximately 500 managed care organizations and employ a specialized sales team to compete for new contracts that could offer us access to a greater number of patients. While we can, in certain cases, offer savings on product costs, our primary proposition in the managed care market is one of long-term cost containment. For new managed care plans, our objective is to contract as an authorized, or preferred, provider and execute a series of marketing initiatives, such as call campaigns, mailings and educational seminars, designed to attract additional patients into our program. Leverage and Expand our Position within the Chronic Care Value Chain We believe that our relationships with customers, healthcare professionals, manufacturers and payors position us favorably in the chronic care value chain. We believe that we have built a sales, marketing and patient service infrastructure that differentiates us from our competitors. We have developed relationships with, and we believe we are often viewed as the supplier of choice for select coordinated marketing arrangements with, many of the leading medical product manufacturers, including LifeScan, Inc., Medtronic MiniMed, Inc., Roche Diagnostics Corporation and Bayer Corporation. We believe these relationships provide us with a competitive advantage on which we intend to capitalize by consistently aiming to be among the first suppliers to bring new and innovative products to the marketplace. By leveraging our relationships with physicians, patients, manufacturers and payors, we believe we can gain preferred access to opportunities which will allow us to expand our product base and compete more effectively for new patients. Cross-Sell Additional Products and Services to Patients We believe there is significant opportunity to provide additional products and services to patients we currently serve for their chronic care and other comorbid disease conditions. We intend to expand communication efforts to eligible patients as to the availability of the other products we offer and to cross-sell when clinically appropriate. Expand Chronic Conditions Served and Pursue Strategic Acquisitions We intend to pursue acquisitions that will enable us to accelerate the implementation of our strategic plan and to grow the number of patients we serve. We will evaluate acquisitions that diversify or complement our product offering, payor mix and referral sources. Based on our management team s experience with merging diverse operations, systems and cultures, we believe we can efficiently integrate new operations, disease states, products and services into our current business platform. Our Field Sales Team We believe our sales and marketing approach differentiates us from our competitors. While most mail-order companies in the industry use direct-to-consumer marketing, such as direct mail and TV advertising, we market our products through a dedicated field-based sales force that targets healthcare professionals, primarily physicians and certified diabetic educators and managed care accounts, for new patient referrals. Table of Contents We employ a detailed and focused approach that educates the healthcare professionals on the benefits and value that our customers may receive from our services, which encourages healthcare professionals to recommend us to their patients. By targeting healthcare professionals, we believe we build relationships with the key influencing agents for patient-related purchasing decisions while reducing the potential for patient attrition given the credibility of the referral source. We believe healthcare professionals are assured their patients will receive top quality products from trusted manufacturers and up-to-date education regarding their disease and therapy. Additionally, our emphasis on healthcare professionals allows members of our sales force to interact on a meaningful and consistent basis with this referral source. We believe this interaction drives greater affinity to the products we distribute and the services we provide. Our Products We offer a comprehensive line of products targeted at the chronic care patient population. We have contracts with most major manufacturers of medical supplies and pharmaceutical products used by individuals living with select chronic conditions we serve. Such supplies and products include test strips, insulin pumps and related supplies, ostomy supplies, wound care products and urological and incontinence products. We offer a wide range of products to patients in all 50 states, Washington, D.C. and Puerto Rico. We believe our patient support representatives are trained to offer products that most appropriately address the physicians orders and the patients needs. We believe that the breadth of our product offerings, which include products manufactured by LifeScan, Inc., Medtronic MiniMed, Inc., Roche Diagnostics Corporation and Bayer Corporation, is a significant competitive advantage in serving healthcare professionals and managed care accounts. Diabetes related products, including diabetic supplies, insulin pumps and pump related supplies and pharmacy, comprised approximately 67% and 70% of net revenue for the year ended December 31, 2006 and the six months ended June 30, 2007, respectively. Risks Associated with Our Business Our business is subject to numerous risks, as more fully
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+PROSPECTUS SUMMARY The summary highlights information contained in other parts of this prospectus. You should read the entire prospectus carefully, especially the matters discussed under Risk Factors and the financial statements and related notes included in this prospectus, before deciding to invest in shares of our common stock. References in this prospectus to Cross Match, our company, our, we or us are to Cross Match Technologies, Inc. and its consolidated subsidiaries, unless the context otherwise requires. Our Business We are a global provider of biometric technologies designed to protect people, property and privacy. Our customers include systems integrators, governments, law enforcement agencies and businesses around the world that use our products in identity management systems. Our products include fingerprint, palm and full-hand scanning devices, commonly known in the industry as Livescan devices, document readers and proprietary software, such as criminal booking, civil identification and facial recognition applications. We offer customized products to meet individual customer needs by combining our proprietary software applications with our biometric devices and third-party technologies. In addition, we provide maintenance and installation and training services. We believe our products are recognized for their quality, reliability, performance, ease-of-use and functionality, which we believe positions us well in the rapidly growing biometrics market and security industry. Our total revenue has grown at a compound annual growth rate, or CAGR, of 33% from 2002 to 2006. For 2006, our total revenue was $76.9 million. Our product offerings are built around our proprietary technologies that are used to capture and process the unique physiological characteristics of individuals for the purposes of establishing and verifying identity. Our fingerprint, palm and full-hand scanning devices incorporate our patented optical component designs, advanced image-capturing and image-processing technologies and self-calibration functionality to collect and process biometric data. Our document readers use many of the same proprietary technologies as our fingerprint devices to authenticate and verify documents. Our proprietary software applications enable the capture, processing, analysis, matching and electronic submission of biometric and other data to searchable databases. The interoperable architecture of our products enables customers to easily upgrade devices and systems and to enhance features and functionality of existing infrastructure. The deployments of our products range from single-site installations to large-scale government initiatives. Uses of our products include identity verification at national borders, consulates and other checkpoints; registration and verification for drivers licenses, passports, voting and other civil identification and benefits programs; criminal booking applications; prevention of identity fraud; and background checks for job applicants. As of June 30, 2007, we had deployed more than 100,000 products to more than 5,000 customers in over 80 countries. We sell our products directly and through leading systems integrators, such as Motorola, Northrop Grumman and Sagem Morpho, and other strategic partners. Our hardware and software products have been integrated into large-scale identity management projects, such as the U.S. Department of Homeland Security s US-VISIT program and IDENT1 in the United Kingdom. We believe that our history of internal product development and strategic acquisitions provides us with the experience, technology and global scope to address the evolving biometric-enabled identity management needs of our customers. We have a long track record of being the first to market with leading biometric products that meet evolving customer needs and comply with industry standards. Our continuing focus on innovation has resulted in more than 80 current patent registrations and more than UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Table of Contents 80 pending patent applications worldwide. Our acquisitions of Smiths Heimann Biometrics GmbH and C-Vis Computer Vision and Automation GmbH have expanded our international presence, strengthened our manufacturing, engineering and research and development capabilities and added critical facial recognition technology to our current offerings. We will continue our commitment to research and development and follow a disciplined acquisition strategy as we seek to enhance our product offerings, increase our customer base and expand our scope of operations. Our Market Opportunity We believe that the international biometrics market is large, growing and evolving rapidly. According to the International Biometric Group, or IBG, an independent market research firm, the biometrics market is estimated to be $3.0 billion in 2007, with the fingerprint-related segment representing a majority of this market. IBG projects the overall biometrics market to grow to approximately $7.4 billion by 2012, representing a CAGR of approximately 20%. More stringent security requirements, an increasingly global economy and more mobile populations have given rise to greater demand for technologies that offer a reliable and efficient means to verify identity. Biometrics, with its focus on uniquely individual characteristics, addresses the limitations inherent in traditional identification and authentication processes, such as paper credentials, passwords, PIN codes and magnetic access cards. Biometrics provides a dynamic solution for a broad range of applications, including border management, national identification programs, immigration control, identity theft and critical infrastructure applications such as employee verification, access control and information systems protection. We believe that government and commercial entities will increasingly adopt biometric-enabled solutions to address these limitations and vulnerabilities. Among the factors we believe will contribute to growth of the biometrics industry are: Heightened security concerns. Increasing threats to personal security encountered in areas such as transportation and identity theft. Increased government adoption. Government-mandated implementation of biometric identification for employees, citizens and foreign nationals in national security-oriented applications. Emerging standards. Evolving industry standards that promote interoperability across devices, software and systems, enabling a broader range of deployments. Growing acceptance of biometrics. Increasing acceptance of biometrics that facilitates widespread incorporation of biometric technology into everyday use. Our Competitive Strengths We believe that the following competitive strengths will continue to enhance our leadership position in the biometrics industry and contribute to our growth in the future: Superior product performance and reliability. Based on feedback from our customers, we believe that many of our products are among the most user-friendly, efficient, durable and reliable in our industry. As a result, our products are often deployed in harsh environments and high-traffic areas. Strength in research and development. We focus our research and development efforts on delivering technologically advanced and innovative products to remain at the forefront of our industry. Our investment in research and development has enabled us to deliver industry-leading technologies that meet, and often exceed, changing customer requirements. AMENDMENT NO. 8 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents Large installed base and brand recognition. As of June 30, 2007, we had deployed more than 100,000 products to more than 5,000 customers worldwide. Our broad and growing installed base contributes to our strong brand image and industry-wide name recognition and also provides opportunities for new and repeat business. Global platform. Our products are installed in over 80 countries around the world, which we believe represents a broader international presence than any of our primary competitors. We believe our European operations provide us with a strong platform to continue to expand our international presence. Standards-based, interoperable products. We provide strong leadership in the development of national and international standards for biometric devices. We design our products to meet these standards and to facilitate interoperability of our products across the identity management industry. This offers our customers significant flexibility in deploying biometric programs by using our solutions with existing or third-party components. Experienced management team. We continue to emphasize the importance of attracting and retaining the most highly qualified personnel in our industry. Our management team has a mix of government and private sector experience across different geographies and industries, and holds leadership positions with various international standards-setting bodies and industry groups. Our Growth Strategy Our strategy is to capitalize on our leadership position in the rapidly growing biometrics industry. As part of our growth strategy, we seek to: Capitalize on growth in the biometrics industry. We intend to use our market leadership, broad customer base, established strategic and customer relationships and recognized brand to capitalize on the growth of the biometrics industry. Further penetrate markets with our existing products. We seek to increase penetration of our markets by continuing to expand our installed products base in U.S. and non-U.S. government markets and in commercial sectors. Maintain leadership in biometric technology. We intend to maintain our technology leadership by continuing to improve our existing technologies, expanding the features and functionality of our existing products and adding new product offerings. Leverage manufacturing, technology and operational expertise to produce efficiencies. We believe our technology and international operations provide us significant economies of scale and our manufacturing capacity at existing facilities can be significantly increased with limited incremental capital expenditures. Supplement our internal growth through acquisitions and strategic relationships. We will continue to pursue acquisitions of, and strategic relationships with, businesses that complement our existing technologies, enhance our product offerings and expand our customer base. Our Products and Services We offer a broad range of biometric hardware, software and services: Hardware. Our hardware products include fingerprint, palm and full-hand scanning devices and document readers. Our fingerprint scanning devices incorporate our proprietary optical Table of Contents systems and software algorithms to capture fingerprint and associated data in real time and generate electronic fingerprint transmission files, or EFTs, suitable for submission to searchable databases such as the FBI s integrated automated fingerprint identification system, or IAFIS. We use similar optical technologies in our document readers, which are capable of recognizing and authenticating various types of documents by inspecting security features and capturing information from the scanned document. Software. Our software products facilitate the use of our scanning devices in a variety of deployments. Products range from basic enabling software, such as device drivers, to advanced software, such as criminal booking, civil identification and facial recognition applications. We also offer market-specific solutions that combine our advanced software applications and enabling hardware. Services. We provide our customers with maintenance and implementation and training services. Post-warranty maintenance accounts for the majority of our service revenue. Implementation and training services are either priced separately from our products or as part of a bundled offering. Risk Associated With Our Business Our business is subject to numerous risks, including, but not limited to, the following: History of operating losses. We have had a history of operating losses and may not succeed in achieving or sustaining profitable operations. At June 30, 2007, we had an accumulated deficit of approximately $54.5 million. Growth in the biometrics market. If the biometrics market does not experience significant growth or if our products do not achieve wide market acceptance, we may not be able to execute our growth strategy. Reliance on fingerprint based products for substantially all of our revenue. Our historical dependence on sales of fingerprint based biometric products for substantially all of our revenue could adversely affect our business if other biometric methodologies supplant the fingerprint based products currently utilized by our customers and we are unable to successfully expand our offerings into other biometric technologies. Historical dependence on government customers and our key systems integrators. When combined, sales to various branches of the U.S. government accounted for approximately 31%, 21% and 31% of revenue in 2005 and 2006 and the six months ended June 30, 2007, respectively. Our dependence on government customers and a small group of systems integrators makes us vulnerable to political, budgetary, purchasing and delivery constraints that may affect the timing of orders and could adversely affect our operating results. Although no single customer accounted for 10% or more of our revenue in 2005, 15% of our revenue was derived from a single systems integrator in 2006 and 16% of our revenue was derived from a single systems integrator in the six months ended June 30, 2007. The loss of this customer or another key systems integrator could reduce our revenue and gross profit in any given year. These and other risks related to our business or this offering are discussed more fully in the section of this prospectus entitled Risk Factors beginning on page 10. 3950 RCA Boulevard, Suite 5001 Palm Beach Gardens, Florida 33410 (561) 622-1650 (Address, including zip code and telephone number, including area code, of registrant s principal executive offices) Table of Contents Other Information Company Information Cross Match was organized under the laws of the State of Florida in 1996. In 2002, we reincorporated under the laws of the State of Delaware. Our principal executive offices are located at 3950 RCA Boulevard, Suite 5001, Palm Beach Gardens, Florida 33410, and our main telephone number at that address is (561) 622-1650. Our corporate website address is www.crossmatch.com. The contents of our website are not a part of this prospectus. Trademarks We own, or claim ownership rights to, a variety of trade names, service marks and trademarks for use in our business, including Cross Match , Cross Match stylized logo appearing on the cover page of this prospectus, L SCAN , L SCAN Guardian and D SCAN in the United States and, where appropriate, in other countries. This prospectus also includes product names and other trade names and service marks owned by us and other companies. The trade names and service marks of other companies are the property of those other companies. William A. Smith II, Esq. Senior Vice President, General Counsel and Secretary Cross Match Technologies, Inc. 3950 RCA Boulevard, Suite 5001 Palm Beach Gardens, Florida 33410 (561) 622-1650 (Name, address, including zip code and telephone number, including area code, of agent for service) Table of Contents The Offering Common stock offered by Cross Match 8,333,334 shares Common stock outstanding after the offering 28,996,999 shares Proposed NASDAQ Global Market symbol . CROS Use of proceeds We estimate that our net proceeds from the offering will be approximately $91.8 million, based on the midpoint of the price range set forth on the cover page of this prospectus. We intend to use the net proceeds for working capital and other general corporate purposes as well as funding for possible acquisitions. We also intend to repay in full the $4.0 million outstanding as of September 30, 2007 under our term loan from Silicon Valley Bank. The amounts we actually spend in these areas will depend on a variety of factors, including our future revenue. The number of shares of our common stock to be outstanding immediately after the offering excludes: 3,208,368 shares of our common stock reserved for issuance under our new 2007 Omnibus Incentive Plan; 6,475,469 shares of common stock issuable upon the exercise of outstanding stock options; and 1,377,466 shares of common stock issuable upon the exercise of outstanding warrants. Unless we indicate otherwise, the information in this prospectus: reflects a 1-for-2 reverse split of our outstanding common stock that was approved by our board of directors on July 13, 2007; reflects the conversion of all of our outstanding Series A preferred stock into 461,244 shares of common stock upon completion of this offering; the filing of our restated certificate of incorporation and the adoption of our amended and restated bylaws immediately before the completion of this offering; assumes that the initial public offering price of our common stock will be $12 per share, which is the midpoint of the price range set forth on the cover page of this prospectus; and assumes that the underwriters will not exercise their over-allotment option. This offering is being made through the OpenIPO process, in which the allocation of shares and the public offering price are primarily based on an auction in which prospective purchasers are required to bid for the shares. This process is described under Plan of Distribution beginning on page 117. Commitments and contingent Liabilities. See Note 13. Liabilities and shareholders equity 1.12, 13 Current liabilities: Accounts payable, trade 622,366 Related party debt 12 2,394,262 Deferred revenue 427,894 Accrued liabilities Net loss per share, basic and diluted(3) $ (0.48 ) $ (0.39 ) $ (0.60 ) $ (0.26 ) $ (0.02 ) Weighted average shares outstanding, basic and diluted 9,718,771 13,180,223 19,399,345 19,023,832 19,844,298 Pro forma net loss per share, basic and diluted(4) $ (0.57 ) $ (0.02 ) Pro forma weighted average shares outstanding, basic and diluted 19,860,589 20,305,542 Other Data: Adjusted EBITDA(5) $ (2,528 ) $ (518 ) $ 130 $ 776 $ 4,957 Depreciation and amortization(6) 1,116 1,491 2,363 1,015 1,525 Amortization of intangible assets(6) 977 2,535 1,208 1,375 Capital expenditures 889 1,802 2,915 1,489 1,289 Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. (4) On a pro forma basis to reflect the automatic conversion of all of our outstanding Series A preferred stock into 461,244 shares of common stock upon completion of this offering and the termination of the put option held by Smiths Group Holdings Netherlands B.V. in connection with the acquisition of Smith Heimann Biometrics GmbH. See Note 16 to our Consolidated Financial Statements, which appear elsewhere in this prospectus. (5) EBITDA and Adjusted EBITDA are not measures of performance under United States generally accepted accounting principles. EBITDA is defined as net loss before interest (income) expense, provision for income taxes and depreciation and amortization. Adjusted EBITDA is defined as EBITDA as further adjusted to eliminate the following non-recurring expenses, none of which management views as relevant to the assessment of our core operating performance: (a) research and development expenses attributable to Authorizer Technologies, Inc., or ATI, a wholly-owned subsidiary we spun-off to our stockholders in June 2006, (b) expenses we incurred in connection with the spin-off of ATI, and (c) expenses we incurred in connection with the design and implementation of our accounting, administration and compliance infrastructure associated with our preparations for becoming a public company. We believe that the presentation of EBITDA and Adjusted EBITDA included in this prospectus provides useful information to investors regarding our results of operations because it assists in analyzing and benchmarking the performance of our business over the periods presented. We believe that these measures are useful because they exclude items described above that are not directly related to the operating performance of our business. These measures also provide an assessment of controllable ongoing operating expenses and are used by management to assess and make decisions regarding our financial performance. Furthermore, they also are used by management to determine whether capital assets are being allocated efficiently. In addition, we believe EBITDA is used by securities analysts, investors and other interested parties in evaluating companies, many of which present an EBITDA measure when reporting their results. EBITDA and Adjusted EBITDA as presented in this prospectus may differ from and may not be comparable to similarly titled measures by other companies. Although we use EBITDA and Adjusted EBITDA as financial measures to assess the performance of our business, their use is limited because they do not include certain material expenses, such as depreciation, amortization and interest. We disclose the reconciliation between EBITDA (and Adjusted EBITDA) and net loss below to compensate for this limitation. While we use net loss as a significant measure of financial performance, we also believe that EBITDA and Adjusted EBITDA, when presented along with net loss, provide balanced disclosure which, for the reasons set forth above, is useful to investors in evaluating our operating performance. Accumulated amortization: Technology and know-how 372 1,461 2,040 Customer relationships 588 2,248 3,118 Supply agreement 20 37 Non-compete agreement 4 (unaudited) Balance at beginning of period $ 40 $ 40 $ 295 $ 404 Acquired CMTG obligations 205 Warranty expense 72 365 506 193 Closed warranty claims (72 ) (310 ) (362 ) (113 ) Other (5 ) (35 ) CALCULATION OF REGISTRATION FEE (6) Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the assets. (7) On a pro forma as adjusted basis to reflect (i) the sale of 8,333,334 shares of common stock offered by us at an assumed initial public offering price of $12 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and the application of the net proceeds from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, to repay amounts outstanding under our term loan from Silicon Valley Bank (ii) the automatic conversion of all of our outstanding Series A preferred stock into 461,244 shares of common stock upon completion of this offering, and (iii) the termination of the put option held by Smiths Group Holdings Netherlands B.V. in connection with the acquisition of Smith Heimann Biometrics GmbH. See Note 16 to our Consolidated Financial Statements, which appear elsewhere in this prospectus. (8) Working capital is calculated by subtracting total current liabilities from total current assets. Title of each Class of Securities to be Registered Proposed Maximum Aggregate Offering Price(1) Amount of Registration Fee(2) Common Stock, $0.01 par value $ 124,583,342 $ 3,825 Table of Contents
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+S-1/A TABLE OF CONTENTS Page Map of Our Market Area ii Summary 1 Risk Factors 16 Selected Consolidated Financial and Other Data 22 Recent Developments of Abington Community Bancorp 24 How Our Net Proceeds Will be Used 28 We Intend to Continue to Pay Quarterly Cash Dividends 29 Market for Our Common Stock 29 Abington Bank Meets All of Its Regulatory Capital Requirements 31 Our Capitalization 32 Pro Forma Data 34 Management s Discussion and Analysis of Financial Condition and Results of Operations 38 Business 57 Regulation 80 Taxation 88 Management 89 Beneficial Ownership of Common Stock 108 Proposed Management Purchases 110 The Conversion and Offering 111 Restrictions on Acquisitions of Abington Bancorp and Abington Bank and Related Anti-Takeover Provisions 133 Description of Our Capital Stock 141 Experts 142 Legal and Tax Opinions 143 Registration Requirements 143 Where You Can Find Additional Information 143 Index to Financial Statements 144 SUMMARY This summary highlights material information from this document and may not contain all the information that is important to you. To understand the stock offering fully, you should read this entire document carefully, including the financial statements and the notes to the financial statements of Abington Community Bancorp. Abington Bancorp, Inc. Abington Bancorp, Inc. is a newly formed Pennsylvania corporation. Abington Bancorp, Inc. is conducting this stock offering in connection with the conversion of Abington Mutual Holding Company from the mutual to the stock form of organization. The shares of common stock of Abington Bancorp, Inc. to be sold represent the 57.1% ownership interest in Abington Community Bancorp, Inc., the mid-tier stock holding company, that is currently owned by Abington Mutual Holding Company. The remaining 42.9% ownership interest in Abington Community Bancorp, Inc. is currently owned by other shareholders (who are sometimes referred to as the public shareholders ) and will be exchanged for shares of Abington Bancorp s common stock based on an exchange ratio of 1.55811 to 2.10804 . The exchange ratio may be increased to as much as 2.42424 in the event the maximum of the offering range is increased by 15%. The actual exchange ratio will be determined at the closing of the offering and will depend on the number of shares of Abington Bancorp s common stock sold in the stock offering. The executive offices of Abington Bancorp, Inc. are located at 180 Old York Road, Jenkintown, Pennsylvania 19046, and its telephone number is (215) 886-8280. Abington Bank Abington Bank is a Pennsylvania chartered stock-form savings bank originally organized in 1867. The bank reorganized into the mutual holding company format in December 2004. While the bank s legal name is Abington Savings Bank, we conduct business under the Abington Bank name. Abington Bank s headquarters and main office are located in Jenkintown, Pennsylvania and we have a loan processing office as well as nine additional full service branch offices and five limited service banking offices located in Montgomery, Bucks and Delaware Counties, Pennsylvania. Abington Bank s business primarily consists of attracting deposits from the general public and using those funds to originate loans and invest in securities. Our market area is located in Montgomery, Bucks and Delaware Counties, Pennsylvania, which are suburbs of Philadelphia. In addition, particularly with respect to commercial and construction lending, we also make loans in Philadelphia and Chester Counties, Pennsylvania, and contiguous counties in New Jersey and Delaware. This area is referred to as the Delaware Valley region. Since its mutual holding company reorganization in 2004, the bank has added two additional full service and one limited service banking office. We plan to open two additional full service banking offices by mid-2007. We also plan to add two additional de novo full service branch offices in Montgomery and Bucks Counties in 2008 and two more in 2009 as well as two or three limited service offices by the end of 2009. At December 31, 2006 compared to September 30, 2004 (the quarter-end prior to its mutual holding company reorganization), Abington Bank s total deposits have increased by $197.9 million or 50.9% and its net loans receivable have increased by $209.1 million or 52.8%. We expect to continue to grow Abington Bank s franchise through additional de novo branch offices and, if prudent opportunities are available, through acquisitions. Abington Bank currently is regulated by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation. As part of the conversion and reorganization, Abington Bank is electing, pursuant to Section 10(l) of the Home Owners Loan Act, to be treated as a savings association. As a result, Abington Bancorp, Inc. will be a registered savings and loan holding company subject to regulation of the Office of Thrift Supervision. Abington Bank will continue to be regulated by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation will continue as the bank s primary Federal banking regulator. Abington Mutual Holding Company Abington Mutual Holding Company currently is the mutual holding company parent of Abington Community Bancorp. The principal business purpose of Abington Mutual Holding Company is owning more than a majority of the outstanding shares of common stock of Abington Community Bancorp. Abington Mutual Holding Company currently owns 57.1% of the outstanding shares of Abington Community Bancorp. Abington Mutual Holding Company will no longer exist upon completion of the conversion and reorganization. REFERENCE TO ADDITIONAL INFORMATION This proxy statement/prospectus incorporates important business and financial information about Abington Community Bancorp, Abington Bancorp and Abington Bank from other documents that are not included in, or delivered with, this proxy statement/prospectus, including the plan of conversion. This information is available to you without charge upon your written or oral request. You can obtain these documents relating to Abington Community Bancorp, Abington Bancorp, Abington Bank or Abington Mutual Holding Company by requesting them in writing or by telephone from: Abington Community Bancorp 180 Old York Road Jenkintown, Pennsylvania 19041 Attention: Investor Relations (215) 886-8280 If you would like to request documents, you must do so no later than [______], 2007 in order to receive them before Abington Community Bancorp s special meeting of shareholders. You will not be charged for any of these documents that you request. For additional information, please see the section entitled Where You Can Find Additional Information beginning on page [__] of this proxy statement/prospectus. A copy of the plan of conversion is available for inspection at each of Abington Bank s branches. For information on submitting your proxy, please refer to the instructions on the enclosed proxy card. QUESTIONS AND ANSWERS FOR SHAREHOLDERS OF ABINGTON COMMUNITY BANCORP, INC. You should read this document and the Plan of Conversion for more information about the conversion and stock offering. The Plan of Conversion has been conditionally approved by our regulators. Q. What are shareholders being asked to approve? A. Abington Community Bancorp shareholders as of May 9 , 2007 are asked to vote on the Plan of Conversion. Under the Plan of Conversion, Abington Mutual Holding Company will convert from the mutual holding company form to a stock holding company, and as part of such conversion, a new company, Abington Bancorp will offer for sale, in the form of shares of it common stock, Abington Mutual Holding Company s 57.1% ownership interest in Abington Community Bancorp. In addition to the shares of common stock to be issued to those who purchase shares in the stock offering, public shareholders of Abington Community Bancorp as of the completion of the conversion, will receive shares of Abington Bancorp common stock in exchange for their existing shares. In addition, informational proposals relating to Abington Bancorp s articles of incorporation are also described in this proxy statement/prospectus, but, due to Office of Thrift Supervision regulations, are not subject to a vote of the Abington Community Bancorp s shareholders. Abington Community Bancorp s shareholders are not being asked to approve these informational proposals at the special meeting. Q. What is the conversion? A. Abington Bank, Abington Community Bancorp and Abington Mutual Holding Company are converting from a mutual holding company structure to a fully- public ownership structure. Currently, Abington Mutual Holding Company owns 57.1% of Abington Community Bancorp s common stock. The remaining 42.9% of common stock is owned by public shareholders. As a result of the conversion, our newly formed company, called Abington Bancorp, Inc. will become the parent of Abington Bank. Shares of common stock of Abington Bancorp, representing the current 57.1% ownership interest of Abington Mutual Holding Company in Abington Community Bancorp, are being offered for sale to eligible depositors and to the public. At the completion of the conversion and offering, current public shareholders of Abington Community Bancorp will exchange their shares of Abington Community Bancorp common stock for shares of common stock of Abington Bancorp. After the conversion and offering are completed, Abington Bank will become a wholly-owned subsidiary of Abington Bancorp, and 100% of the common stock of Abington Bancorp will be owned by public shareholders. As a result of the conversion and offering, Abington Mutual Holding Company and Abington Community Bancorp will cease to exist. See The Conversion and Offering beginning on page [_________] of this proxy statement/prospectus, for more information about the conversion. Q. What will shareholders receive for their existing Abington Community Bancorp shares? A. As more fully described in the section entitled The Conversion And Offering, depending on the number of shares sold in the stock offering, each share of common stock that you own upon completion of the conversion and stock offering will be exchanged for between 1.55811 new shares at the minimum and 2.10804 new shares at the maximum of the offering range (cash will be paid in lieu of fractional shares). For example, if you own 100 shares of Abington Community Bancorp common stock and the exchange ratio is 2.10804, after the conversion you will receive 210 shares of Abington Bancorp common stock and $8.04 in cash, the value of the fractional share, based on the $10.00 per share offering price. Shareholders who hold shares in street-name at a brokerage firm will receive these funds in their brokerage account. Shareholders who have stock certificates will receive checks. The number of shares you will get will depend on the number of shares sold in the offering and will be based on an exchange ratio determined as of the closing of the conversion. Abington Bank Office Locations Abington Community Bancorp, Inc. Abington Community Bancorp, Inc. is a Pennsylvania corporation which currently is the mid-tier stock holding company for Abington Bank. The common stock of Abington Community Bancorp is registered under the Securities Exchange Act of 1934, as amended, and is publicly traded on the Nasdaq Global Market. At the conclusion of the stock offering and the conversion of Abington Mutual Holding Company, Abington Community Bancorp will no longer exist. The existing public shareholders of Abington Community Bancorp will have their shares converted into 1.55811 to 2.10804 shares of Abington Bancorp common stock. As of December 31, 2006, Abington Community Bancorp had $925.2 million in total assets and $114.1 million in stockholders equity. The following chart shows our current ownership structure which is commonly referred to as the two-tier mutual holding company structure: Following our conversion and this offering, our ownership structure will be as follows: You should rely only on the information contained in this proxy statement/prospectus or to which we have referred you. We have not authorized anyone to provide you with information that is different. This proxy statement/prospectus does not constitute an offer to sell, or the solicitation of an offer to buy, any of the securities offered hereby to any person in any jurisdiction in which such offer or solicitation would be unlawful. The affairs of Abington Community Bancorp, Abington Mutual Holding Company, Abington Bancorp and Abington Bank and their subsidiaries may change after the date of this proxy statement/prospectus. Delivery of this proxy statement/prospectus and the exchange of shares of Abington Bancorp common stock made hereunder does not mean otherwise. TABLE OF CONTENTS Questions and Answers for Shareholders of Abington Community Bancorp 1 Summary 4
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001398090_power_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001398090_power_prospectus_summary.txt
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+Prospectus Summary This summary highlights information about Power Medical Interventions, Inc. and the offering contained elsewhere in this prospectus. Because it is a summary, it does not contain all of the information that you should consider before investing in our common stock. You should carefully read the entire prospectus before making an investment decision, including the information presented under the heading "Risk Factors" and in the financial statements and notes thereto included elsewhere in this prospectus. In this prospectus, except as otherwise indicated or as the context may otherwise require, all references to "Power Medical," "PMI," "we," "us" and "our" refer to Power Medical Interventions, Inc., a Delaware corporation, and its subsidiaries. Overview We are a medical device company that has developed and commercialized our SurgASSIST platform of Intelligent Surgical Instruments , a suite of computer-assisted, power-actuated endomechanical instruments. Surgeons use our Intelligent Surgical Instruments for cutting, stapling and tissue manipulation in a variety of procedures in open surgery and minimally invasive surgery, or MIS, including the emerging field of natural orifice translumenal endoscopic surgery, or NOTES. We believe that compared to conventional endomechanical devices, our Intelligent Surgical Instruments offer greater precision and consistency, superior compressive force, improved access to anatomical sites and enhanced ease of use. We also believe our Intelligent Surgical Instruments can provide a significant cost benefit in comparison to existing devices, by reducing both procedure cost and time. To our knowledge, our Intelligent Surgical Instruments are the first and only endomechanical instruments to incorporate digital technology. Our SurgASSIST system has been used in an estimated 30,000 surgical procedures in more than 350 hospitals and medical institutions worldwide. Endomechanical cutters and stapling devices are used in millions of surgical procedures each year to cut tissue, close wounds and reconnect tubular anatomical structures. However, we believe that conventional, manually-operated endomechanical cutters and staplers have inherent shortcomings that can limit their efficacy and adversely affect clinical outcomes. Our Intelligent Surgical Instruments are designed to address these shortcomings. By employing proprietary micro-robotic and digital technologies, our SurgASSIST system enables the remote application of powerful and consistent cutting and stapling force under precise computer-assisted control. Our suite of Intelligent Surgical Instruments currently includes both disposable, single-patient devices and reusable, multiple-patient instruments that use our disposable reload cartridges. Our strategy is to migrate our SurgASSIST platform from single-patient devices towards reusable, reloadable multiple-patient instruments. Since introducing our SurgASSIST system in 2001, we have released 15 new Intelligent Surgical Instruments. In the near future we plan to introduce our next-generation products, a line of self-contained, untethered instruments that will provide enhanced dexterity and access to anatomy. Longer term, we will continue to incorporate new technologies into our Intelligent Surgical Instruments to further enable the use of MIS and NOTES techniques. The first of our next generation products is a hand held articulating linear stapler, which we refer to as our i60 linear stapler. We expect that our i60 instrument will offer the precise control and powerful, consistent cutting and stapling action of our existing line of Intelligent Surgical Instruments, along with important new articulation capabilities, in a compact, hand held form factor. We believe these key technology improvements will allow for more flexible manipulation, enhanced dexterity and increased ease of use of our Intelligent Surgical Instruments. We received 510(k) marketing clearance for our i60 product from the United States Food and Drug Administration in September 2007 and expect to introduce it during the fourth quarter of 2007. We currently focus our marketing and sales efforts on selected surgical procedures in minimally invasive colorectal, bariatric and thoracic surgery. In 2006, 574,400 procedures were performed in these areas of clinical focus in the United States alone, according to Medtech Insight, a Division of Windhover Information, Inc. In the longer term, we intend to promote the use of our SurgASSIST system in other MIS specialties, as well as to enable existing surgical procedures to be performed using MIS and NOTES techniques. We are currently collaborating with prominent surgeons and institutions in the clinical development of MIS and NOTES procedures enabled by our Intelligent Surgical Instruments. We currently hold 24 issued United States patents, three granted European patents, more than 100 pending United States and foreign patent applications and two licensed patents that cover key aspects of our technology. For the year ended December 31, 2006, our sales were $7.9 million and our net loss was $28.3 million. For the six months ended June 30, 2007, our sales were $4.2 million and our net loss was $13.8 million. Development of Surgical Technology Over the past thirty years, surgery has undergone significant change as technological innovations such as enhanced imaging have led to improved diagnosis and as advanced instruments have facilitated both visualization and surgical access through smaller incisions. This trend toward minimally invasive surgery has allowed surgeons to reduce patient trauma and morbidity, while also improving recovery times and cosmetic results. This evolution has both been enabled by, and created opportunities for, the development of new categories of surgical devices. Minimally invasive surgery replaces the large incision that is typically required for open surgery with small abdominal openings and ports that provide access to the organs on which the surgeon wishes to operate. The surgeon uses an endoscope to view the anatomy and inserts specialized instruments through the ports to carry out the procedure. More recently, clinicians and medical device companies have begun working together to develop a new, even less invasive, surgical approach known as NOTES that enables surgery to be performed through natural openings such as the mouth or anus. We believe that realization of the full potential of minimally invasive surgery or the emerging NOTES approach will depend upon the availability of surgical instruments that address the unique requirements of these procedures by offering more advanced capabilities, improved access and flexibility, better ergonomics and greater ease of use than are provided by currently available endomechanical devices. Market Opportunity Surgical cutting and stapling products are used in a wide variety of open and endoscopic procedures as an alternative to hand suturing. Endomechanical cutters and staplers are necessities in minimally invasive surgery, where limited access makes it difficult to achieve effective hemostasis, or the stoppage of bleeding, through hand suturing. Although manually operated staplers have been used in surgery for over a century, we believe there has been little fundamental innovation in conventional surgical stapler design in the last 15 years. We believe that conventional surgical staplers adapted for use in MIS have inherent shortcomings which can contribute to inconsistent clinical outcomes such as inadequate wound closure and poor hemostasis, as well as a high procedure cost associated with the purchase and disposal of these single-use instruments. Although we believe our SurgASSIST platform has broad application in many surgical disciplines, we have focused our initial marketing and sales efforts on select procedures in three surgical specialties in which we believe the limitations of existing cutting and stapling technologies are most acute, where the number of procedures performed is growing rapidly and where the benefits of our UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Intelligent Surgical Instruments have been immediately apparent to clinicians. Our current areas of clinical focus include colorectal, bariatric and thoracic surgery. In 2006, the total number of these procedures performed in the United States alone was 574,400 and is expected to grow to 697,300 by 2010, based on data from Medtech Insight. Overall market growth is being driven by demographic trends, including the increasing incidence of disease within the growing and aging worldwide population, as well as the development of new surgical techniques for treating these conditions. Our Solution Key benefits of our Intelligent Surgical Instruments include: Powerful and consistent cutting and stapling force. Our SurgASSIST system enables the application of powerful and consistent cutting and stapling force under precise computer-assisted control, which provides consistent staple placement and formation. Enhanced dexterity and flexibility. Our SurgASSIST system provides enhanced dexterity, flexibility and ease of use, making it easier for clinicians to accurately position our Intelligent Surgical Instruments in locations and orientations that maximize access to difficult-to-reach anatomy. Enhanced reliability and ease of use through digital control and communication. Because our SurgASSIST system operates under computer-assisted control, tasks that would require a sequence of discrete manual operations using a conventional stapler are performed automatically, within consistent and repeatable parameters. This facilitates procedures where access and visualization are difficult and instruments must be operated remotely. Reduced healthcare costs and improved efficiency of hospital operations. Some of our Intelligent Surgical Instruments are available in a reusable, autoclavable format which can be fired up to 500 times, using reload cartridges in a range of staple sizes. We believe that this multiple-patient capability reduces the average cost per procedure when compared to competitive single-use endomechanical devices. We also believe the automation provided by our SurgASSIST system can reduce procedure times, permitting more efficient utilization of surgeons' time and operating room resources. Our SurgASSIST platform incorporates a number of proprietary technologies, including core electromechanical technologies common to all of our instruments, as well as specific improvements related to particular instruments and procedures. These core technologies include: Power transfer technology. Our power transfer technology allows actuating force to be delivered through a flexible shaft, facilitating access to difficult-to-reach anatomy in a way that we believe cannot be duplicated by conventional endomechanical devices. Further, our power transfer technology and push button digital control eliminate the need to apply manual force to the handle of the instrument in order to actuate it and thus reduce the potential for undesired movement of the instrument. Micro-robotic technology. Our micro-robotic technology, combined with our proprietary power transfer technology, enables our Intelligent Surgical Instruments to apply consistent, precise and powerful compressive force at a remote site within the body. Conventional endomechanical devices, which use mechanical linkages to transfer force created by manually squeezing the instrument handle, cannot match the power or precision of our Intelligent Surgical Instruments. Unlike conventional devices, our Intelligent Surgical Instruments control the actions of tissue compression and staple formation independently, applying clamping force that is appropriate for each operation. Amendment No. 4 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Articulation technology. We have developed an innovative method to provide computer-assisted, power-actuated articulation of an endomechanical device. The micro-robotic technology incorporated in the articulated joint enables the instrument to be manipulated in three dimensions and to be positioned, locked into place and fired at any point within its range of motion, all by remote control, without compromising the precision or compressive force of the stapling operation. The first Intelligent Surgical Instrument to incorporate our new articulation technology will be our i60 self-contained hand held articulating liner stapler, which we plan to introduce in the fourth quarter of 2007. Digital intelligence. Each micro-robotic action of our Intelligent Surgical Instruments is controlled by a microprocessor using our proprietary software and digital control technology. This digital intelligence is a key attribute of our SurgASSIST platform and provides computer-controlled precision and consistency, automation, feedback to clinicians and data collection capabilities. Our Strategy Our objective is to become a leading worldwide supplier of intelligent surgical instruments used to enable MIS and NOTES procedures. To attain this objective, we intend to employ the following key strategies: extend our technology leadership; increase our installed base of multiple-use devices to grow recurring revenue from sales of reload cartridges; leverage relationships with key institutions and leading clinicians; maintain clinical focus to accelerate adoption of our SurgASSIST platform; expand our direct sales capabilities worldwide; and enhance operational integration and improve manufacturing efficiencies. Risks Associated with Our Business Our business is subject to numerous risks which may prevent us from successfully implementing our business strategy. These risks are more fully described under "Risk Factors" beginning on page 10. Among these risks are the following: we have a limited operating history and have sustained net losses in each year since our inception, including a net loss of $28.3 million for the year ended December 31, 2006, and a net loss of $13.8 million for the six months ended June 30, 2007, which are likely to continue at least through 2008 as we continue to invest in the development of our business; we must increase our sales significantly in order to become profitable and are dependent in doing so on the success of our SurgASSIST platform; we cannot be certain that our SurgASSIST platform will achieve the broad market acceptance necessary to develop a sustainable and profitable business; to successfully implement our business strategy, we will be required to develop and release new products and to enhance our existing products on a timely basis, and in the past, we have experienced delays in releasing new products and any future product development delays could adversely affect our results of operations; Power Medical Interventions, Inc. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 3841 (Primary Standard Industrial Classification Code Number) 23-3011410 (I.R.S. Employer Identification Number) 2021 Cabot Boulevard Langhorne, Pennsylvania 19047 (267) 775-8100 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) we have limited manufacturing experience and have encountered significant manufacturing difficulties in the recent past, and we may not be able to increase our production to provide an adequate supply of our products to customers; in order to achieve and sustain profitability, we must substantially improve our gross margins, and we cannot assure you that we will be able to achieve sufficient cost reductions in the manufacture of our products to achieve profitability; and we need to make significant improvements in our regulatory compliance operations and in our internal control over financial reporting as well as other improvements to our management, finance, technical and regulatory personnel, systems and facilities in order to support our expected growth. Power Medical Interventions, Inc., a Delaware corporation, was incorporated in Pennsylvania on August 2, 1999 and reincorporated in Delaware on August 7, 2003. Our corporate headquarters are located at 2021 Cabot Boulevard, Langhorne, Pennsylvania 19047 and our telephone number is 1-866-POWERMED (1-866-769-3763). We maintain a website at http://www.pmi2.com. Information contained on or linked to our website is not a part of this prospectus. Michael P. Whitman Chief Executive Officer Power Medical Interventions, Inc. 2021 Cabot Boulevard Langhorne, Pennsylvania 19047 (267) 775-8100 (Name, address, including zip code, and telephone number, including area code, of agent for service)
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed under Risk Factors beginning on page 10, and the consolidated financial statements and notes to those consolidated financial statements, before making an investment decision. Overview Our Company We are a biopharmaceutical company focused on the development and commercialization of innovative antibiotics for serious infections treated or acquired in hospitals and other institutional settings. We are developing oritavancin, a novel intravenous antibiotic, for the treatment of serious gram-positive bacterial infections, including complicated skin and skin structure infections, or cSSSI, and bacteremia, an infection caused by bacteria in the bloodstream. Gram-positive bacteria have evolved into strains that are highly resistant to many currently available antibiotics, creating an ever-evolving need for novel antibiotics that employ different mechanisms to control them. According to IMS Health, antibiotics designed to treat serious infections caused by resistant gram-positive bacteria accounted for approximately $945 million in United States sales in 2006 and this market is rapidly growing. We expect to submit a new drug application (or NDA) with the United States Food and Drug Administration (or the FDA) seeking to commercialize oritavancin for the treatment of cSSSI in the first quarter of 2008 and hope to receive FDA regulatory approval in late 2008 in the United States and thereafter receive regulatory approval in Europe. We plan on commercializing oritavancin through our own direct sales force in the United States and in select other countries, and to out-license oritavancin to, or collaborate with, third parties in other countries as we deem appropriate. In addition to oritavancin, we have discovered another antibiotic that is currently in pre-clinical development for the treatment of the bacterial infection causing osteomyelitis (an inflammation in the bone). We continually evaluate opportunities for potential in-licensing of other antibiotics for the treatment of hospital-based infections. We acquired worldwide rights to oritavancin from InterMune, Inc. in late 2005, and believe that, since then, we have greatly improved its commercial and economic prospects by resolving several important issues with the FDA and by substantially lowering the royalty rate that may be payable to Eli Lilly and Company, the original discoverer of oritavancin. Our strategy is to capitalize on the unique attributes of oritavancin to develop it into a leading therapy worldwide for the treatment of serious gram-positive infections, initially for cSSSI and subsequently for other indications. Our Lead Product: Oritavancin Oritavancin is a novel semi-synthetic glycopeptide antibiotic for the treatment of serious gram-positive infections. Bacteria are broadly characterized as gram-positive or gram-negative based on the structure of the bacterial envelope. Gram-positive bacteria possess a single membrane and a thick cell wall, whereas gram-negative bacteria possess a double membrane with a thin cell wall. Oritavancin has completed two Phase 3 studies for the treatment of cSSSI in which the primary end points were successfully met. In addition, oritavancin has completed two Phase 2 trials for the treatment of bacteremia with successful outcomes. Oritavancin is synthetically modified from a naturally occurring compound, and was originally discovered and developed by Lilly to combat a broad spectrum of gram-positive pathogens in response to the emergence of pathogens resistant to vancomycin, the most commonly prescribed antibiotic for resistant gram-positive infections. Oritavancin is UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Table of Contents protected by intellectual property rights that we licensed from Lilly. The issued oritavancin patents and pending patent applications are part of an extensive world-wide patent estate that includes a composition of matter patent that runs in the United States through November 24, 2015, and, with the potential for obtaining extension of patent protection available under the Hatch-Waxman Act, we believe may run for up to an additional five years. As a glycopeptide antibiotic (which is a short chain of amino acids with attached sugar molecules), oritavancin shares certain properties with other members of the glycopeptide class of antibiotics, which includes vancomycin, the current standard of care for serious gram-positive infections in the United States and Europe, as well as telavancin, for which an NDA was submitted in 2006 by Theravance, Inc. However, we believe that oritavancin has advantages compared to other glycopeptides and other classes of gram-positive antibiotics, including the following: Rapidly Bactericidal and Potentially Less Likely to Engender Resistance. Similar to other glycopeptides, including vancomycin, oritavancin disrupts cell wall synthesis in bacteria by inhibiting the enzyme used for cell wall elongation. However, oritavancin inhibits two separate enzyme functions involved in cell wall synthesis while most other glycopeptides, including vancomycin, inhibit only a single enzyme function. Moreover, oritavancin also causes the rapid rupture of bacterial membranes, leading to significantly faster killing of the bacteria (known as bactericidal activity) as compared to vancomycin and other antibiotics. Taken together, these multiple mechanisms of action may reduce the potential for the emergence of strains of bacteria that are resistant to oritavancin as compared with other antibiotics. To date, no strains resistant to oritavancin have been observed in any clinical trials for oritavancin, and laboratory efforts to cultivate oritavancin-resistant bacteria have proved much less successful than has been the case historically with most non-glycopeptide antibiotics. Broad Spectrum Against Gram-Positive Bacteria. In-vitro testing indicates that, compared to other antibiotics, oritavancin treats the broadest spectrum of gram-positive pathogens, including organisms resistant to vancomycin and other antibiotics such as linezolid and daptomycin. Unlike vancomycin, in addition to killing actively dividing bacteria, oritavancin has been shown to kill quiescent or non-dividing bacteria, such as those found in biofilm, suggesting potential utility in treating endocarditis, as well as device and catheter related infections. Superior In-Vitro Potency. We have performed in-vitro tests on over 8,000 recent bacterial clinical isolates, employing an assay accepted by both the FDA and the Clinical Laboratory Standards Institute (or CLSI), a national standards-developing organization. These tests show that the potency of oritavancin is up to 32 times greater than demonstrated in earlier testing done by Lilly and InterMune and that oritavancin has superior potency against a broad spectrum of gram-positive pathogens compared with tests conducted by us or published data on the potency of other antibiotics. Lower Incidence of Adverse Events. Oritavancin has been shown in clinical trials to have a lower rate of adverse events than vancomycin, and its published adverse events rates compare favorably against those published for other antibiotics against resistant gram-positive infections. Unlike other glycopeptides, including vancomycin, telavancin and dalbavancin, oritavancin has not required, in clinical trials to date, monitoring for the purpose of adjusting the blood level of the glycopeptide due to hepatic or renal insufficiency. Further, unlike certain other antibiotics for gram-positive infections, oritavancin did not elevate muscle enzymes, and did not significantly prolong QT interval or cause other electrophysiological changes associated with side effects involving the heart. Favorable Elimination Profile. Unlike many other antibiotics, oritavancin is not metabolized and is slowly eliminated from the body as unchanged drug, substantially reducing the potential for adverse events such as renal toxicity or delayed hypersensitivity that might result from the presence of reactive metabolites. Table of Contents staphylococci, enterococci and streptococci, regardless of resistance to other antimicrobial classes. The following table shows the antibacterial activities of oritavancin in this study, compared with studies we performed on vancomycin, linezolid and daptomycin, as well as published studies on linezolid, daptomycin, dalbavancin and telavancin. The MIC90 value shown in the table is the minimum concentration of drug required to inhibit growth of 90% of the bacterial isolates within a given population. The lower the MIC90 value for a given drug, the more potent the drug is against that specific type of bacteria. In these studies, oritavancin was shown to be the most potent antibiotic against virtually every gram-positive organism evaluated. Collectively, we believe these data indicate the potent activity of oritavancin against important and serious pathogens. Activity of oritavancin by broth microdilution Phenotype* MIC90 or MIC range ( g/mL) Organism Oritavancin Vancomycin Linezolid Daptomycin Dalbavancin Telavancin S. aureus MSSA 0.12 1 2 0.5 0.06-0.5 0.5 MRSA 0.25 1 2 0.5 0.06-1 0.5 CA-MRSA 0.06-0.12 0.5 2 0.25 0.06 0.5 VISA 1 8 2 4 1-2 2 VRSA 0.12-0.5 64 1-2 0.25-0.5 2 2-4 E. faecalis VAN S 0.06 2 2 2 0.06 1 VAN R 1 >256 2 2 32 16 E. faecium VAN S 0.015 1 2 4 0.12 0.25 VAN R 0.25 >256 2 4 32 8 S. pneumoniae PEN S 0.004 0.25 2 0.5 0.016-0.06 0.03 PEN R 0.008 0.5 Amendment No. 5 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents Long Half-Life. The in-vivo half-life of oritavancin is significantly longer than the half-lives of most potential competitors. This enables oritavancin to be administered daily, or potentially less frequently. Oritavancin s Phase 3 trials in cSSSI, for example, tested the compound in a regimen of one dose per day for only three to seven days, substantially less than the labeled or tested regimens of other antibiotics against gram-positive infections. We also believe that a higher dose of the drug may prove effective in treating cSSSI using a single administration, which may be useful in non-hospital institutional settings such as nursing homes, or for patients being discharged from hospitals. In September 2007, we commenced a Phase 2 study, entitled Single or Infrequent Doses for the Treatment of Complicated Skin and Skin Structure Infections or SIMPLIFI, and plan to begin a Phase 3 study in 2009, to evaluate a single dose regimen of oritavancin for cSSSI. We believe that azithromycin, a long-acting antibiotic, has demonstrated that a long-acting antibiotic can be commercially successful once clinicians are convinced of its safety. Potential Efficacy in Bacteremia. Oritavancin has completed two Phase 2 studies in bacteremia with successful outcomes, including a Phase 2 study where it was compared to vancomycin. Based on these results, we plan to begin another Phase 2 bacteremia study in 2008. Many other antibiotics used against gram-positive pathogens are ineffective against bacteremia or have toxicities that may limit their use for longer durations. As a result of these advantages, we believe that oritavancin could provide physicians with an efficacious and novel antibiotic for the treatment of serious gram-positive infections while providing significant pharmoeconomic benefits by reducing the need for patient monitoring and shortening hospital stays. Oritavancin has been tested in over 1,500 patients and has completed two Phase 3 trials conducted by Lilly and InterMune for the indication of cSSSI. We believe that the results from our completed Phase 3 trials, along with the other information in our NDA submission should be sufficient for FDA approval of oritavancin for cSSSI due to the following: Efficacy. Each Phase 3 clinical trial used a non-inferiority trial design and met the primary endpoint of non-inferiority, which is currently accepted by the FDA as the appropriate trial design for antibiotics that treat serious gram-positive infections. These trials compared oritavancin to an active control arm of vancomycin followed by cephalexin (an antibiotic in the cephalosporin family) and showed that oritavancin was effective in an average of 5.3 days compared to 10.9 days for vancomycin / cephalexin. Safety. In each of these Phase 3 trials, oritavancin was well tolerated and, compared to the control arms, exhibited a favorable safety profile and a lower discontinuation rate due to adverse events. Favorable FDA Interactions. The FDA confirmed to us in writing in March 2007 that the non-inferiority design using an active control that was employed in both Phase 3 trials was appropriate for cSSSI. In addition, in three separate meetings, including our pre-NDA meeting on January 31, 2007 in which we specifically discussed the Phase 3 trials, the FDA has not requested that we perform additional clinical trials to demonstrate efficacy in cSSSI. Since the FDA s accepted delta (difference in cure rates) for non-inferiority trials for antibiotics that treat serious infections like cSSSI (using a comparator like vancomycin) is now 10%, the FDA has requested that we provide justification, as part of our NDA, for the choice of the 15% non-inferiority delta previously accepted by the FDA for the first of these two Phase 3 trials. As part of this analysis, the FDA has requested that we provide information on the non-inferiority margin both in terms of the benefit of oritavancin as compared to historical vancomycin and placebo cure rates and in terms of acceptable loss of treatment effect relative to historical vancomycin and placebo cure rates (in a population as similar as possible to the population enrolled in these Phase 3 clinical trials). The FDA has indicated that this analysis will be critical to approval of our NDA. While the FDA evaluates each drug candidate on the basis of its own benefits and risks, and one approval decision by the FDA should not be considered a precedent for decisions on other drug candidates, we believe that the FDA has recently approved antibiotics for the treatment of cSSSI with non-inferiority deltas in excess of 10%. Table of Contents Accomplishments Since We Acquired Oritavancin We believe that we have greatly improved the commercial and economic prospects for oritavancin since we acquired worldwide rights to it in late 2005 from InterMune because of actions we have taken that include: Regulatory. We have resolved certain outstanding regulatory issues for oritavancin. We submitted data to the FDA regarding a previous concern that, in two Phase 1 studies conducted by InterMune in 2003, oritavancin had an increased rate of injection-site phlebitis (or vascular inflammation). In January 2007, the FDA accepted our assessment of the data we had submitted and agreed to lift the voluntary clinical hold originally requested by InterMune in 2004. Further, the FDA did not object to our plan to file our NDA or our initiation of the SIMPLIFI trial. Potency. We have performed in-vitro potency tests on more than 8,000 recent bacterial isolates, employing an assay that has been accepted recently by the FDA and the national standards-developing organization CLSI. These tests show that oritavancin is as much as 32 times more potent than previously shown by Lilly and InterMune and has superior potency against a broad spectrum of gram-positive bacteria compared with tests conducted by us or published data on the potency of other antibiotics. Economic. We were able to negotiate a substantially lower royalty obligation to Lilly than would have been payable to Lilly by InterMune, oritavancin s previous licensee. The Gram-Positive Antibiotic Market There is a growing need for novel antibiotics because bacteria mutate quickly and often develop resistance to existing antibiotics. According to a July 2004 publication by the Infectious Diseases Society of America, approximately 70% of all bacterial infections resulting in hospitalization are now resistant to some form of antibiotic. According to IMS Health, antibiotics designed to treat serious infections caused by resistant gram-positive bacteria accounted for approximately $945 million in United States sales in 2006. According to IMS Health, the predominant treatment for resistant gram-positive bacteria is vancomycin, which currently accounts for approximately 85% of courses of therapy in the United States for antibiotic-resistant gram-positive pathogens. Use of vancomycin, a generic drug, has been declining in recent years due to its decreasing efficacy against resistant strains of gram-positive bacteria and the emergence of more attractive treatment options. Two other antibiotics comprise the majority of remaining sales in the resistant gram-positive market: Zyvox , which is known generically as linezolid and marketed by Pfizer; and Cubicin , which is known generically as daptomycin and marketed by Cubist Pharmaceuticals. However, bacterial resistance has already emerged to both of these drugs. Based on recent market research we performed, we believe that significant unmet needs remain in the treatment of gram-positive infections. Based on this research, we learned that infectious disease physicians most desired greater efficacy, fewer side effects, fewer treatment issues and shorter hospital stays. We believe that oritavancin has advantages in all of these categories. Our Strategy We hold the worldwide rights to oritavancin and our strategy is to develop oritavancin into a leading therapy worldwide for the treatment of serious gram-positive infections, initially for the treatment of cSSSI and subsequently for other indications. Specifically, we plan to: Obtain regulatory approval for oritavancin for the treatment of cSSSI in the United States; Build a hospital-directed sales force to commercialize oritavancin in the United States; Pursue clinical development of oritavancin in other dosing regimens and for additional indications; Submit a marketing authorization application for oritavancin in the European Union (or the EU) and evaluate the potential for a blended commercialization strategy composed of proprietary sales and partnerships with third parties; Table of Contents relating to the securities offered therein and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) For the purpose of determining liability of the Registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities, in a primary offering of securities of the Registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the Registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: (i) any preliminary prospectus or prospectus of the Registrant relating to the offering required to be filed pursuant to Rule 424; (ii) any free writing prospectus relating to the offering prepared by on or behalf of the Registrant or used or referred to by the Registrant; (iii) the portion of any other free writing prospectus relating to the offering containing material information about the Registrant or its securities provided by on or behalf of the Registrant; and 222 Third Street, Suite 2300 Cambridge, MA 02142-1122 (617) 577-9020 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant s Principal Executive Offices) Table of Contents Out-license oritavancin to third parties for commercialization in key Asian countries; and Pursue the development of other innovative antibiotics for the hospital market, either through in-licensing or internal development. Risks Related to Our Business Our ability to implement our current business strategy is subject to numerous risks, as more fully described in the section entitled Risk Factors immediately following this prospectus summary. These risks include, among others, our dependence on the success of oritavancin; delays in obtaining, or a failure to obtain, regulatory approval for our product candidates; failure of any approved product to achieve significant commercial acceptance in the medical community or receive reimbursement by third-party payors; unfavorable clinical trial results; our dependence upon third parties under our licensing, contract research and manufacturing agreements; delays in product launch; failure to maintain and protect our proprietary intellectual property assets; and failure to avoid infringing the intellectual property rights of others. All of our product candidates are subject to regulatory approval by the FDA and comparable agencies in other countries. Oritavancin is our only product candidate presently in clinical development and has not yet received regulatory approval. We cannot give any assurance that it, or any other product candidates we may develop or acquire, will receive regulatory approval or be successfully commercialized. We have not generated any revenue to date from product sales and have incurred significant operating losses since our inception in 1997. We incurred net losses of approximately $5.8 million and $5.3 million in fiscal years ended May 31, 2004 and 2005, respectively, $15.6 million for the seven months ended December 31, 2005, $30.1 million for the year ended December 31, 2006, and $30.8 million for the six months ended June 30, 2007. As of June 30, 2007, we had a deficit accumulated during the development stage of approximately $94.4 million and we expect to incur losses for the foreseeable future. We are unable to predict the extent of future losses or when we will become profitable, if at all. Even if we succeed in developing and commercializing one or more of our product candidates, we may never generate sufficient revenue to achieve and sustain profitability. Corporate Information We are incorporated as a Delaware corporation, effective December 6, 2005, with two subsidiaries in Canada and we initiated operations through our Canadian subsidiary in May 1997 in Montreal, Qu bec. In 2006, we relocated our principal executive offices to 222 Third Street, Suite 2300, Cambridge, Massachusetts 02142, where our telephone number is (617) 577-9020. We have additional sites in Indianapolis, Indiana; Montreal, Qu bec; and Toronto, Ontario. Our web site address is http://www.targanta.com. The information contained in, or that can be accessed through, our website is not part of this prospectus and should not be considered part of this prospectus. * MSSA, methicillin-sensitive S. aureus (which is S. aureus that responds well to methicillin); MRSA, methicillin-resistant S. aureus; CA-MRSA, community-acquired MRSA; VISA, vancomycin-intermediate S. aureus; VRSA, vancomycin-resistant S. aureus; VAN S, vancomycin-sensitive; VAN R, vancomycin-resistant; PEN S, penicillin-sensitive; PEN R, penicillin-resistant. Activity of oritavancin against important resistance phenotypes Oritavancin maintains strong activity against organisms that have acquired resistance to other antibiotics. Taken together, the potency of oritavancin is, as demonstrated in the following table, as good as or better than all competitors against bacteria with acquired resistance phenotypes. MIC90 (ug/ml) (or range*) Type of Resistance Number of Strains Tested Oritavancin Vancomycin Daptomycin Linezolid Daptomycin resistant S. aureus 16 1 8 4 2 Linezolid resistant S. aureus 13 0.25 2 1 >8 VISA 13 1 8 4 2 VRSA Mark Leuchtenberger President and Chief Executive Officer Targanta Therapeutics Corporation 222 Third Street, Suite 2300 Cambridge, MA 02142-1122 (617) 577-9020 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service) Unless otherwise indicated, the share information in this prospectus has been adjusted to reflect or assume the following: a 1.25-for-1 forward stock split of our common stock, paid in the form of a stock dividend, effected on September 24, 2007; the issuance and sale of 5,750,000 shares of our common stock in the offering at an assumed initial public offering price of $13.00 per share; Copies to: William B. Asher, Esq. Brian P. Lenihan, Esq. Lee S. Feldman, Esq. Choate Hall & Stewart LLP Two International Place Boston, Massachusetts 02110 (617) 248-5000 Donald J. Murray, Esq. Dewey & LeBoeuf LLP 1301 Avenue of the Americas New York, NY 10019 (212) 259-8000 Table of Contents the exchange of all outstanding exchangeable shares held by investors in our two Canadian subsidiaries into 3,578,396 shares of common stock of the Company, which exchange shall be effected upon the closing of this offering; the automatic conversion of all outstanding shares of our preferred stock, including preferred exchangeable shares of our two Canadian subsidiaries, which shares will be exchanged into shares of our preferred stock immediately prior to the closing of this offering, into an aggregate of 15,193,892 shares of our common stock and the conversion of outstanding warrants to purchase shares of our preferred stock into warrants to purchase 850,290 shares of our common stock upon the closing of this offering; no exercise by the underwriters of their over-allotment option to purchase additional shares of our common stock in the offering; and the filing of our amended and restated certificate of incorporation with the Secretary of State of the State of Delaware and the adoption of our amended and restated by-laws immediately prior to the closing of the offering. Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Table of Contents SUMMARY CONSOLIDATED FINANCIAL INFORMATION The following tables present a summary of our historical financial information and pro forma net loss per common share. You should read the following summary financial data in conjunction with Selected consolidated financial data, Management s discussion and analysis of financial condition and results of operations and our consolidated financial statements and related notes, all included elsewhere in this prospectus. Pro forma basic and diluted net loss per common share is calculated assuming the automatic conversion of all outstanding shares of our convertible preferred stock, redeemable convertible preferred stock and convertible debt as of December 31, 2006 into an aggregate of 478,791 shares of our common stock and as of June 30, 2007 into an aggregate of 14,296,898 shares of our common stock. In 2005, we changed our fiscal year end from May 31 to December 31. For a discussion of the effects of any additional stock-based compensation expense that we may record, you should read Management s discussion and analysis of financial condition and results of operations stock-based compensation, included elsewhere in this prospectus. Year Ended May 31, 2004 Year Ended May 31, 2005 Seven Months Ended December 31, 2005 Year Ended December 31, 2006 Six Months Ended June 30, For the Period from May 20, 1997 (date of inception) through June 30, 2007 2006 2007 (unaudited) (unaudited) (in thousands, except share and per share data) Statement of operations data: Operating expenses Research and development $ 5,198 $ 4,503 $ 2,319 $ 11,456 $ 4,813 $ 14,844 $ 45,591 Acquired in-process research and development 11,847 9,500 21,348 General and administrative 1,506 1,388 2,108 3,352 1,261 4,782 15,911 Total operating expenses 6,704 5,891 16,274 14,808 6,074 29,126 82,850 Other income (expense) Interest income 125 78 31 280 175 1,014 1,929 Interest expense (41 ) (211 ) (852 ) (14,968 ) (8,169 ) (1,937 ) (18,162 ) Foreign exchange gain (loss) 15 (214 ) (293 ) (853 ) (1,052 ) Gain on disposal of property and equipment 47 Other income (expense), net 84 (133 ) (806 ) (14,902 ) (8,287 ) (1,776 ) (17,238 ) Loss before income tax (expense) benefit (6,620 ) (6,024 ) (17,080 ) (29,710 ) (14,361 ) (30,902 ) (100,088 ) Income tax (expense) benefit 776 759 1,491 (431 ) (212 ) 54 5,656 Net loss $ (5,844 ) $ (5,265 ) $ (15,589 ) $ (30,141 ) $ (14,573 ) $ (30,848 ) $ (94,432 ) Net loss per share basic and diluted $ (275.39 ) $ (244.31 ) $ (633.31 ) $ (1,266.55 ) $ (614.06 ) $ (1,229.07 ) Weighted average number of common shares used in net loss per share basic and diluted 25,256 25,265 25,282 25,282 25,282 25,282 Unaudited Pro forma net loss per share basic and diluted $ (98.29 ) $ (3.09 ) Shares used in computing pro forma net loss per share basic and diluted 373,639 12,183,808 CALCULATION OF REGISTRATION FEE Title of Each Class of Securities to be Registered Proposed Maximum Aggregate Offering Price(1) Amount of Registration Fee(2) Common Stock, $.0001 par value $ 92,575,000.00 $ 2,842.05 (1) Calculated pursuant to Rule 457(o) of the Securities Act of 1933, as amended, based on an estimate of the proposed maximum offering price and includes the offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any. (2) The registration fee was paid previously based on an estimate of the aggregate offering price. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), shall determine. Table of Contents The pro forma balance sheet data as of June 30, 2007 gives effect to the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 14,296,898 shares of our common stock upon the closing of this offering. The pro forma as adjusted balance sheet data as of June 30, 2007 also gives effect to the sale of 5,750,000 shares of common stock offered by this prospectus at the assumed initial public offering price of $13.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses. As of June 30, 2007 (unaudited) Actual Pro forma Pro forma as adjusted (in thousands) Balance sheet data: Cash, cash equivalents and short-term investments $ 49,858 $ 49,858 $ 117,775 Working capital 35,780 35,780 103,697 Total assets 54,335 54,335 122,252 Total debt 8,503 8,503 8,503 Deficit accumulated during the development stage (94,432 ) (94,432 ) (94,432 ) Total stockholders equity 37,166 37,854 105,771 On September 24, 2007, we consummated a debt financing transaction with Merrill Lynch Capital and two other lenders, as more fully described in Note 19 to our consolidated financial statements included elsewhere in this prospectus. Had that debt financing been completed on June 30, 2007, our cash, cash equivalents and short-term investments and our total debt would have been $59.9 million and $20.0 million, respectively. Table of Contents
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+PROSPECTUS SUMMARY This summary highlights certain information about us and this offering. This summary may not contain all of the information that may be important to you. You should read this entire prospectus carefully, including Risk Factors and the financial statements and the related notes and other financial information contained in this prospectus, before you decide to invest in our common stock. In this prospectus, references to NNN Realty Advisors, we, us and our refer to NNN Realty Advisors, Inc., a Delaware corporation, and its subsidiaries, including Triple Net Properties, LLC, a Virginia limited liability company, Triple Net Properties Realty, Inc., a California corporation, and NNN Capital Corp., a California corporation, unless otherwise stated or the context indicates otherwise. Our Company NNN Realty Advisors is a full-service commercial real estate asset management and services firm. We sponsor real estate investment programs to provide investors with the opportunity to engage in tax-deferred exchanges of real property and to invest in other real estate investment vehicles. We raise capital for these programs through an extensive network of broker-dealer relationships. We also structure, acquire, manage and dispose of real estate for these programs, earning fees for each of these services. We are one of the largest sponsors of tenant in common, or TIC, programs marketed as securities and we also sponsor and advise public non-traded real estate investment trusts, or REITs, and real estate investment funds. At December 31, 2006, we provided management services for a diverse portfolio of 152 properties, encompassing over 32 million square feet of office, healthcare office, multi-family and retail properties in 28 states that were purchased for more than $4.3 billion in the aggregate. Since our inception in 1998, we have raised over $2.4 billion of equity capital for our programs from approximately 24,000 investors. For the year ended December 31, 2006, we generated pro forma revenue of $135.4 million, pro forma income from continuing operations of $10.6 million, and pro forma basic and diluted earnings per share of our common stock of $0.25. These pro forma earnings per diluted share reflects pro forma historical income from continuing operations divided by shares outstanding as of December 31, 2006. Our TIC programs are structured in reliance on Section 1031 of the Internal Revenue Code, which allows for the deferral of gain recognition on the sale of investment or business property if a number of conditions are satisfied. The tax that would otherwise be recognized in a taxable sale is deferred until the replacement property is sold in a taxable transaction. A public non-traded REIT is an SEC-registered REIT that does not list its common stock on a national securities exchange. We register our REIT offerings with the SEC so that we can sell to a large number of investors. We divide our services into three business segments, transaction services, management services and dealer-manager services. Transaction services. Our transaction services consist of providing acquisition, financing and disposition services to our programs. Management services. Our management services operations consist of managing the properties owned by the programs we sponsor. We also assist our programs in entity-level management services. Dealer-manager services. We facilitate capital raising transactions for our programs through NNN Capital Corp., our NASD-registered broker-dealer, which we refer to as Capital Corp. We act as a dealer-manager exclusively for our programs and do not provide securities services to any third party. Company Strengths Established and recognizable brand name in the TIC industry. Our Chairman, Anthony W. Thompson, who founded the company in 1998, began structuring securitized TIC transactions in 1994. A securitized TIC transaction is an offering of real estate interests marketed as securities. We believe that we have completed over 13.6% of the securitized TIC transactions in the United States in 2006, based on the amount of equity raised by us compared to statistics available for the industry as a whole. Relationships with a nationwide network of securities broker-dealers. We work with a nationwide network of securities broker-dealers in raising capital for our various programs. For the year ended Table of Contents The information in this prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and the selling stockholders are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED MAY 7, 2007 SHARES NNN Realty Advisors, Inc. COMMON STOCK This prospectus relates to the offer and sale from time to time of up to shares of our outstanding common stock by selling shareholders. The prices at which the selling stockholders may sell the shares in this offering will be determined by the prevailing market prices at the time of such sales or by negotiated transactions. We will not receive any proceeds from the sale of the shares. Prior to this offering, there has been no public market for our common stock. We intend to apply to list our common stock on under the symbol . Investing in our common stock involves risks. See Risk Factors on page 5. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this prospectus is , 2007. Table of Contents December 31, 2006, we signed over 1,300 selling agreements with 138 different broker-dealers to market our programs. We believe that this depth of access to investor capital is a valuable resource that facilitates the capital raises needed for the programs we sponsor. Proven acquisition track record. We have a long track record in sourcing new investment opportunities and completing acquisitions in a competitive capital environment. Our established acquisition process enables us to target, review and acquire properties efficiently. As of December 31, 2006, we have acquired 214 properties for our investors with an aggregate acquisition purchase price of approximately $5.8 billion. Proven investor return track record. We believe that our ability to retain current investors as well as attract new investors depends on our ability to provide positive returns in our programs. For example, as of March 31, 2007, we have had 37 TIC programs and four other private programs go full cycle by selling their properties. Thirty-nine of these 41 programs yielded positive returns to investors, and the aggregate portfolio internal rate of return to investors on all 41 programs was approximately 18.6%. Experienced management team. We have a seasoned executive management team with significant experience in senior management of SEC-registered companies. Our Chairman and largest stockholder has over 30 years experience in originating and structuring real estate transactions, including raising capital, and in asset and property management. Ability to generate fees at each stage of our services. We provide our programs with a full range of real estate services, and we generate fees for each of these services based on a percentage of the equity or debt raised, the acquisition or disposition price of a property, or gross rental income. Strong capital base. As a result of our operating history, significant transaction volume and leading market share, we historically have had access to financing that we believe may not be available to smaller, less-developed sponsors. In addition, we have recently raised additional cash in a 144A private equity offering. Broad variety of asset expertise and geographic diversification. As of December 31, 2006, we provided management services for a diverse portfolio of 152 properties, encompassing over 32 million square feet of commercial real estate that were purchased for more than $4.3 billion in the aggregate. We manage properties for our programs in 28 states. We believe that asset and geographic diversification makes us less susceptible to the cyclicality of any one specific real estate segment or geographic area. Business Strategies Create a portfolio of REITs. We are currently raising capital for two recently registered public non-traded REIT offerings: NNN Healthcare/Office REIT, Inc. and NNN Apartment REIT, Inc. We plan to create one or more REITs that will invest in additional asset classes. We intend to use our experience in a broad range of asset classes, including office, healthcare office, multi-family and retail properties, to identify new investment opportunities for our programs. Provide short-term financing and warehouse properties. We intend to provide short-term financing to some of our programs if such financing facilitates the closing of an offering. We may directly acquire properties and warehouse them until they can be acquired by our programs. Initiate an institutional investment fund. We are in the process of marketing Strategic Office Fund I, L.P., an institutional real estate fund to raise $500 million in equity capital pursuant to which we would co-invest with institutional investors. We have hired Wachovia Securities as our placement agent for purposes of assisting in the raise of this equity capital. Increase our dedicated sales force and leverage our network of broker-dealer relationships. Our selling broker-dealer relationships are managed by a dedicated sales force. We currently have a dedicated sales force of 51 persons, which has increased from 27 persons at December 31, 2005. Industry Overview Our real estate transaction and management services are primarily provided to our securitized TIC programs and public non-traded REITs. According to Omni Brokerage, Inc., securitized TIC programs raised approximately $3.2 billion of equity in 2005 and approximately $3.7 billion in 2006. We are one of the largest TABLE OF CONTENTS Page PROSPECTUS SUMMARY 1 RISK FACTORS 6 CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS 21 USE OF PROCEEDS 22 DIVIDEND POLICY 22 SELECTED CONSOLIDATED FINANCIAL DATA 23 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 24 UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS 41 BUSINESS 49 MANAGEMENT 64 EXECUTIVE COMPENSATION 70 DESCRIPTION OF INDEBTEDNESS 88 RELATED PARTY TRANSACTIONS 89 PRINCIPAL AND SELLING STOCKHOLDERS 92 DESCRIPTION OF CAPITAL STOCK 94 SHARES ELIGIBLE FOR FUTURE SALE 97 U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS 100 PLAN OF DISTRIBUTION 103 LEGAL MATTERS 105 EXPERTS 105 WHERE YOU CAN FIND MORE INFORMATION 105 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1 EXHIBIT 23.1 EXHIBIT 23.2 You should rely only on the information contained in this document and any prospectus supplement that may be provided to you in connection with this offering. We have not authorized anyone to provide you with information that is different. Neither we nor the selling stockholders are making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Table of Contents U.S. sponsors of securitized TIC programs, having raised approximately $504 million of TIC equity that was invested in 33 properties in 2006. According to The Stanger Report, in each of 2004, 2005 and 2006, active public non-traded REIT programs raised approximately $6.3 billion, $5.8 billion and $6.7 billion in equity, respectively, and approximately $2.9 billion in the first quarter of 2007. The 29 active public non-traded REITs that raised $6.7 billion of equity in 2006 were focused on asset classes including office, healthcare, industrial, retail, multi-family and hotels. Capital raising volumes are, in part, driven by the number of programs active in any given year. As of April 30, 2007, we believe that we are the only public non-traded REIT sponsor raising equity to purchase healthcare and multi-family assets. Risks Related to Our Business and Strategy You should carefully consider the risks and other factors discussed in Risk Factors prior to deciding whether to invest in shares of our common stock. These risks and other factors include: our dependence on the success of our real estate investment programs for generating revenue and raising new capital; our dependence on third-party securities broker-dealers to raise the capital to fund our programs; a change or revocation of the applicable tax code which provides for the current TIC structure and benefits; a failure to satisfy requirements for favorable tax treatment of our programs; fluctuation in our cash flow or earnings as a result of any co-investments, especially in the event we are required to make future capital contributions; our reliance on our Chairman and largest stockholder as well as our other key executive officers; conflicts of interest in transactions or arrangements between us or our directors, officers and affiliates, and our programs, and among our programs; risks related to the real estate industry in general, including risks related to potential increases in interests rates and tenant defaults and declines in real estate values and rental and occupancy rates; lack of geographic diversification which could expose us to regional economic downturns that may not necessarily affect the real estate industry generally; our failure to hold all real estate licenses that may be required in connection with the acquisition, disposition, management or leasing of properties for our programs; our failure to comply with applicable securities laws; our dependence on third-party financing for the properties in our programs; termination or cancellation of our advisory agreements with our public non-traded REIT programs; and volatility of the capital real estate markets. Recent Developments In February 2007, we entered into a $25.0 million revolving line of credit with LaSalle Bank, N.A. to cover working capital needs and earnest money deposits. This facility bears interest at either the prime rate or London Interbank Offered Rate (LIBOR) plus 1.50%, at our option on each drawdown, and matures in February 2010. This facility replaces the $10.0 million revolving line of credit facility that we entered into with LaSalle Bank, N.A. in September 2006. NNN Realty Advisors was organized as a corporation in the State of Delaware in September 2006. Our fiscal year ends December 31. We were formed to acquire each of Triple Net Properties, LLC, Triple Net Properties Realty, Inc., or Realty, and Capital Corp., to bring the businesses conducted by those companies under one corporate umbrella and to facilitate a 144A private placement offering of our common stock, which took place in November 2006. We sold 16 million shares of our common stock at $10.00 per share in this offering and raised $160 million in gross proceeds. Table of Contents Corporate Information Our corporate headquarters are located at 1551 North Tustin Avenue, Suite 300, Santa Ana, California, 92705. Our telephone number is (714) 667-8252 or (877) 477-1031. Our registered office in the State of Delaware is National Registered Agents, Inc., located at 160 Greentree Drive, Suite 101, Dover, Kent County, Delaware 19904. Table of Contents SUMMARY OF SELECTED FINANCIAL DATA Year Ended December 31, 2006 Pro Forma Condensed (In thousands) Combined(1) 2006(2) 2005(3) 2004(3) 2003(3) 2002(3) Consolidated Statement of Operations Data: Total services revenue $ 123,235 $ 96,251 $ 87,125 $ 64,900 $ 34,426 $ 14,547 Total revenue 135,414 108,306 92,859 67,211 36,700 15,514 Total compensation costs 59,831 49,449 29,873 19,717 9,964 5,740 Total operating expense 118,951 97,334 74,215 51,082 28,681 11,788 Operating income 16,463 10,972 18,644 16,129 8,019 3,726 Income from continuing operations 10,597 16,098 18,124 16,247 8,543 (4) 3,903 Net income to stockholders $ 16,094 $ 18,124 $ 16,247 $ 8,291 $ 3,872 Basic earnings per share Income from continuing operations $ 0.25 $ 0.72 $ 0.93 $ 0.82 $ 0.45 $ 0.23 Net income $ 0.72 $ 0.93 $ 0.82 $ 0.45 $ 0.23 Diluted earnings per share Income from continuing operations $ 0.25 $ 0.72 $ 0.93 $ 0.82 $ 0.43 $ 0.23 Net income $ 0.72 $ 0.93 $ 0.82 $ 0.43 $ 0.23 Shares used in computing basic earnings per share 41,751 22,365 19,546 19,781 19,081 17,143 Shares used in computing diluted earnings per share 41,854 22,379 19,546 19,781 19,081 17,143 Dividends declared per share $ 0.09 Consolidated Statement of Cash Flow Data: Net cash provided by operating activities $ 15,201 $ 23,536 $ 17,214 $ 10,941 $ 3,411 Net cash (used in) investing activities (57,112 ) (35,183 ) (13,046 ) (1,851 ) (4,071 ) Net cash provided by (used in) financing activities $ 143,589 $ 10,251 $ (7,647 ) $ (4,662 ) $ 1,381 December 31, 2006 Pro Forma (In thousands) Combined 2006 2005 2004 2003 2002 Consolidated Balance Sheet Data: Total assets $ 457,434 328,043 $ 86,336 $ 42,911 $ 31,380 $ 22,674 Line of credit 8,500 3,545 2,535 1,150 Notes payable 4,933 4,933 17,242 19 991 Participating notes 10,263 10,263 2,300 4,845 6,345 7,300 Redeemable preferred liability 6,077 5,717 5,564 Members and stockholders equity $ 222,146 221,944 $ 28,777 $ 16,783 $ 7,154 $ 5,024 (1) The unaudited pro forma condensed combined statement of operations data is based on our historical consolidated financial statements assuming the acquisition of Realty and Capital Corp., on January 1, 2006. The unaudited pro forma combined balance sheet data is based on our historical consolidated balance sheet and the estimated balance sheets for the acquired properties as of December 31, 2006. This information is presented for information purposes only and does not purport to represent what our results of operations or financial position actually would have been had the acquisitions and the related transactions in fact occurred on the dates specified, nor does the information purport to project our results of operations or financial position for any future period or at any future date. All pro forma adjustments are based on preliminary estimates and assumptions and are subject to revision upon finalization of the purchase accounting for the acquisitions and the related transactions. (2) Includes a full year of operating results of Triple Net Properties, one and one-half months of Realty (acquired on November 16, 2006) and one-half month of Capital Corp. (acquired on December 14, 2006). (3) Includes operating results of Triple Net Properties. (4) Income from continuing operations before cumulative effect of change in accounting principle. Table of Contents RISK FACTORS Investing in our common stock will be subject to risks, including risks inherent in our business. The value of your investment may decline and could result in a loss. You should carefully consider the following factors as well as other information contained in this prospectus before deciding to invest in our common stock. Additional risks and uncertainties not presently known to us, or not identified below, may also materially adversely affect our business, liquidity, financial condition and results of operations. Risks Related to Our Business We currently provide our transaction and management services primarily to our programs. Our revenue depends on the number of our programs, on the price of the properties acquired or disposed of by these programs, and on the revenue generated by the properties under our management. We derive fees for transaction services based on a percentage of the price of the properties acquired or disposed of by our programs and for management services based on a percentage of the rental amounts of the properties in our programs. We are responsible for the management of all of the properties owned by our programs, but as of December 31, 2006 we had subcontracted the property management of 38.7% of our programs office, healthcare office and retail properties (based on square footage) and all of our programs multi-family properties to third parties. As a result, if any of our programs are unsuccessful, both our transaction services and management services fees will be reduced, if any are paid at all. In addition, failures of our programs to provide competitive investment returns could significantly impair our ability to market future programs. Our inability to spread risk among a large number of programs could cause us to be over-reliant on a limited number of programs for our revenues. We cannot assure you that we will maintain current levels of transaction and management services for our programs properties. We may be unable to grow our programs, which would cause us to fail to satisfy our business strategy. A significant element of our business strategy is the growth in the number of our programs. The consummation of any future program will be subject to raising adequate capital for the investment, identifying appropriate assets for acquisition and effectively and efficiently closing the transactions. We cannot assure you that we will be able to identify and invest in additional properties or will be able to raise adequate capital for new programs in the future. If we are unable to consummate new programs in the future, we will not be able to continue to grow the revenue we receive from either transaction or management services. The inability to access investors for our programs through broker-dealers or other intermediaries could have a material adverse effect on our business. Our ability to source capital for our programs depends significantly on access to the client base of securities broker-dealers and other financial investment intermediaries that may offer competing investment products. We believe that our future success in developing our business and maintaining a competitive position will depend in large part on our ability to continue to maintain these relationships as well as finding additional securities broker-dealers to facilitate offerings by our programs or to find investors for our TIC programs. We cannot be sure that we will continue to gain access to these channels. In addition, competition for capital is intense, and we may not be able to obtain the capital required to complete a program. The inability to have this access could have a material adverse effect on our business and results of operations. The termination of any of our broker-dealer relationships, especially given the limited number of key broker-dealers, could have a material adverse effect on our business. Our securities programs are sold through third-party broker-dealers who are members of our selling group. While we have established relationships with our selling group, we are required to enter into a new agreement with each member of the selling group for each new program we offer. In addition, our programs may be removed from a selling broker-dealer s approved program list at any time for any reason. We cannot assure you of the continued participation of existing members of our selling group nor can we assure you that our selling group will expand. While we continue to diversify and add new investment channels for our Table of Contents programs, a significant portion of the growth in recent years in the number of TIC programs we sponsor and in our REITs has been as a result of capital raised by a relatively limited number of broker-dealers. Loss of any of these key broker-dealer relationships, or the failure to develop new relationships to cover our expanding business through new investment channels, could have a material adverse effect on our business and results of operations. Misconduct by third-party selling broker-dealers or our sales force, could have a material adverse effect on our business. We rely on selling broker-dealers and our sales force to properly offer our securities programs to customers in compliance with our selling agreements and with applicable regulatory requirements. While these persons are responsible for their activities as registered broker-dealers, their actions may nonetheless result in complaints or legal or regulatory action against us. A significant amount of our revenue is derived from fees earned through the transaction structuring and property management of our TIC programs, which programs rely primarily on Section 1031 of the Internal Revenue Code to provide for deferral of capital gains taxes to make these programs attractive. A change in this tax code section or a complete revocation of this section as it relates specifically to TICs could result in a loss of a significant part of our business and as a result a significant amount of revenue. Section 1031 of the Internal Revenue Code provides for the deferral of capital gains taxes which would ordinarily arise from the sale of real estate through a tax-deferred exchange of property, which defers the recognition of capital gains tax until such time as the replacement property is sold in a taxable transaction. These transactions are referred to as 1031 exchanges. In 2002, the Internal Revenue Service, or IRS, issued advance ruling guidelines outlining the requirements for properly structured TIC arrangements, which we believe validate the TIC structure generally and as we employ it. However, as recently as May 2006, the Senate Finance Committee proposed a bill in the negotiations over the budget reconciliation tax-cutting package to modify Section 1031 treatment for TICs as a way to raise additional tax revenue. The proposal was unsuccessful, but we cannot assure you that in the future there will not be attempts to limit or disallow the tax deferral benefits for TIC transactions. If we were no longer able to structure TIC programs as 1031 exchanges for our investors, we would lose a significant amount of revenue in the future, which would materially affect our results of operations. Moreover, any attempt to limit or disallow the tax deferral benefits of the 1031 exchange generally would have a material adverse effect on the real estate industry generally and on our business and results of operations. A significant amount of our programs are structured to provide favorable tax treatment to investors or REITs. If a program fails to satisfy the requirements necessary to permit this favorable tax treatment, we could be subject to claims by investors and our reputation for structuring these transactions would be negatively affected, which would have an adverse effect on our financial condition and results of operations. We structure TIC programs and public non-traded REITs to provide favorable tax treatment to investors. For example, our TIC investors are able to defer the recognition of gain on sale of investment or business property if they enter into a 1031 exchange. Similarly, qualified REITs generally are not subject to federal income tax at corporate rates, which permits REITs to make larger distributions to investors (i.e. without reduction for federal income tax imposed at the corporate level). If we fail to properly structure a TIC transaction or if a REIT fails to satisfy the complex requirements for qualification and taxation as a REIT under the Internal Revenue Code, we could be subject to claims by investors as a result of additional tax they may be required to pay or because they are unable to receive the distributions they expected at the time they made their investment. In addition, any failure to satisfy applicable tax regulations in structuring our programs would negatively affect our reputation, which would in turn affect our ability to earn additional fees from new programs. Claims by investors could lead to losses and any reduction in our fees would have a material adverse effect on our revenues. Table of Contents If the properties that we manage fail to perform, then the fees we receive from them will be reduced or may cease and our financial condition and results of operations would be harmed. Our success depends significantly upon the performance of the properties we manage. The revenue we generate from our management services business is generally a percentage of gross rental income from the properties. The performance of these properties will depend upon the following factors, among others, many of which are partially or completely outside of our control: our ability to attract and retain creditworthy tenants; the magnitude of defaults by tenants under their respective leases; our ability to control operating expenses; present and future governmental regulations, local rent control or stabilization ordinances; various uninsurable risks, such as earthquakes and hurricanes; financial conditions prevailing generally and in the areas in which these properties are located; the nature and extent of competitive properties; and the real estate industry in general, including potential increases in interest rates and tenant defaults and declines in real estate values and rental and occupancy rates. Any future co-investment activities we undertake could subject us to real estate investment risks which could lead to the need for substantial capital contributions, which may impact our cash flows and financial condition and, if we are unable to make them, could damage our reputation and result in adverse consequences to our holdings. We may from time to time invest our capital in certain real estate investments with other real estate firms or with institutional investors such as pension plans. Any co-investment will generally require us to make initial capital contributions, and some co-investment entities may request additional capital from us and our subsidiaries holding investments in those assets. These contributions could adversely impact our cash flows and financial condition. Moreover, the failure to provide these contributions could have adverse consequences to our interests in these investments. These adverse consequences could include damage to our reputation with our co-investment partners as well as dilution of ownership and the necessity of obtaining alternative funding from other sources that may be on disadvantageous terms, if available at all. If we are unable to retain our Chairman and key employees, their replacements may not manage our company as effectively. We depend on the services of our Chairman and largest stockholder, Anthony W. Thompson, as well as our other key executive officers: Scott D. Peters, Andrea R. Biller, Francene LaPoint and Jeffrey T. Hanson. We have obtained key person insurance for Mr. Thompson. However, the loss of any or all of these executives, and our inability to find, or any delay in finding, a replacement with equivalent skill and experience, could adversely impact our ability to facilitate the structuring of transactions, acquisitions, property management and dispositions. Lack of broad geographic diversity may expose our programs to regional economic downturns that could adversely impact their operations and as a result the fees we are able to generate from them, including fees on disposition of the properties as we may be limited in our ability to dispose of properties in a challenging real estate market. Our programs generally focus on acquiring assets satisfying particular investment criteria, such as type or quality of tenants. There is generally no or little focus on the geographic location of a particular property. We cannot guarantee, however, that our programs will have or, will be able to maintain, a significant amount of geographic diversity. As of December 31, 2006, a majority of our programs properties (by square footage) were located in Texas, California, Florida and Colorado. Geographic concentration of properties exposes our Table of Contents programs to economic downturns in the areas where the properties are located. A regional recession or other major, localized economic disruption in a region, such as earthquakes and hurricanes, in any of these areas could adversely affect our programs ability to generate or increase their operating revenues, attract new tenants or dispose of unproductive properties. Any reduction in program revenues would effectively reduce the fees we generate from them, which would adversely affect our results of operations and financial condition. The failure of Triple Net Properties and Realty to hold the required real estate licenses may subject us to penalties, such as fines, restitution payments and termination of management agreements, and to the suspension or revocation of Realty s broker licenses. Although Realty was required to have real estate licenses in states in which it acted as a broker for our programs and received real estate commissions, Realty did not hold a license in certain of those states when it earned fees for those services. In addition, almost all of Triple Net Properties revenue was based on an arrangement with Realty to share fees from our programs. Triple Net Properties did not hold a real estate license in any state, although most states in which properties of our programs were located may have required Triple Net Properties to hold a license in order to share fees. As a result, we may be subject to penalties, such as fines (which could be a multiple of the amount received), restitution payments and termination of management agreements, and to the suspension or revocation of Realty s real estate broker licenses. If third-party managers providing property management services for our programs office, healthcare office, retail and multi-family properties are negligent in their performance of, or default on, their management obligations, the tenants may not renew their leases or we may become subject to unforeseen liabilities. If this occurs, it could have an adverse effect on our financial condition and operating results. We have entered into agreements with third-party management companies to provide property management services for a significant number of our programs properties, and we expect to enter into similar third-party management agreements with respect to properties our programs acquire in the future. We do not supervise these third-party managers and their personnel on a day-to-day basis and we cannot assure you that they will manage our programs properties in a manner that is consistent with their obligations under our agreements, that they will not be negligent in their performance or engage in other criminal or fraudulent activity, or that these managers will not otherwise default on their management obligations to us. If any of the foregoing occurs, the relationships with our programs tenants could be damaged, which may cause the tenants not to renew their leases, and we could incur liabilities resulting from loss or injury to the properties or to persons at the properties. If we are unable to lease the properties or we become subject to significant liabilities as a result of third-party management performance issues, our operating results and financial condition could be substantially harmed. To execute our business strategy, we or our new programs may be required to incur indebtedness to raise sufficient funds to purchase properties. One of our business strategies is to develop new programs. The development of a new program requires the identification and subsequent acquisition of properties when the opportunity arises. In some instances, in order to effectively and efficiently complete a program, we may provide deposits for the acquisition of property or actually purchase the property and warehouse it temporarily for the program. If we do not have cash on hand available to pay these deposits or fund an acquisition, we or our programs may be required to incur additional indebtedness, which indebtedness may not be available on acceptable terms. If we incur substantial debt, we could lose our interests in any properties that have been provided as collateral for any secured borrowing, or we could lose our assets if the debt is recourse to us. In addition, our cash flow from operations may not be sufficient to repay these obligations upon their maturity, making it necessary for us to raise additional capital or dispose of some of our assets. We cannot assure you that we will be able to borrow additional debt on satisfactory terms, or at all. Table of Contents We may be required to repay loans we guaranteed that were used to finance properties acquired by our programs. From time to time we provide certain guarantees of loans for properties under management. As of December 31, 2006, there were 107 loans for properties under management that were guaranteed, with approximately $2.4 billion in total principal outstanding secured by properties with a total aggregate purchase price of approximately $3.4 billion. Substantially all of the approximate $2.4 billion total principal outstanding guaranteed was non-recourse/carve-out guarantees, and of this amount, $26.4 million was in the form of mezzanine debt and $28.7 million was other full/partial recourse guarantees. If we are called upon to satisfy a substantial portion of these guarantees, our operating results and financial condition could be materially harmed. The revenue streams from our management services may be subject to limitation or cancellation. The agreements under which we provide advisory and management services to public non-traded REITs may generally be terminated by each REIT following a notice period, with or without cause. We cannot assure you that these agreements will not be terminated. In addition, if we have a significant amount of TIC programs selling their properties or public non-traded REITs liquidating in the same period, our revenues would decrease unless we are able to find replacement programs to generate new fees. We are currently in the process of liquidating two of our public non-traded REITs and, as a result, our management fees from these REITs have been reduced due to the number of properties that have been sold. Any decrease in our fees, as a result of termination of a contract or customary close out or liquidation of a program, could have a material adverse effect on our business, results of operations and financial condition. Our revenue is subject to volatility in capital raising efforts by us. The potential growth in revenue from our transaction and management services depends in large part on future capital raising in existing or future programs, as well as on our ability to make resultant acquisitions on behalf of our programs, both of which are subject to uncertainty, including uncertainty with respect to capital market and real estate market conditions. This uncertainty can create volatility in our earnings because of the resulting increased volatility in transaction and management services revenues. Our revenue may be negatively affected by factors that include not only our inability to increase our portfolio of properties under management, but also changes in valuation of those properties and sales (through planned liquidation or otherwise) of properties. Prior waivers and credits of fees for certain of our TIC programs could result in claims by some of the investors in those programs. Historically, we have on occasion reduced the investment cost for some, but not all, investors in the same TIC program by waiving or crediting all or a portion of our fees for the real estate acquisition or financing for the TIC program, and we may do so again in the future. Our purpose in doing so has been to improve projected investment returns and attract TIC investors. As a result of these waivers and credits, in some of our TIC programs investors have different investment costs per percentage ownership interest in the relevant property. While our offering materials for prior TIC programs disclosed the possibility that we might offer waivers and credits for specific types of fees on a selective basis to some, but not all, TIC investors, they did not disclose all of the categories of fees for which we actually provided credits. Consequently, investors in these programs who did not receive the waivers or credits could bring claims against us. We have modified the disclosure in our offering materials for current and future TIC programs to make clear that we may waive or credit any or all categories of our fees in a program on a selective basis to some, but not all, TIC investors in the same program; that these waivers and credits may be made on a disproportionate basis; and that the waiver or credit provided to a particular investor may exceed the fees allocated to that investor. Table of Contents ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The following is a summary of our transactions since our inception in September 2006, involving sales of our securities that were not registered under the Securities Act of 1933, as amended: (1) In November 2006, we issued 16 million shares of common stock to various investors in our 144A private equity offering at an offering price of $10 per share. Friedman, Billings, Ramsey Co., Inc. acted as initial purchaser / placement agent in connection with this offering. (2) From November 2006 to January 2006, we granted options to purchase an aggregate of 903,000 shares of common stock to our employees (including our executive officers) under our 2006 Long-Term Incentive Plan at an exercise price of $10 per share. In November 2006, we also granted 615,000 shares of restricted stock to our executive officers and non-employee directors. (3) In November 2006 we acquired Triple Net Properties, LLC and Triple Net Properties Realty, Inc. and in December 2006 we acquired NNN Capital Corp., each through contribution agreements that we entered into with the holders of outstanding stock or membership units of each of these entities. Pursuant to the contribution agreements, we issued shares of our common stock in exchange for shares of common stock or membership units held by the existing holders, except that, with respect to Triple Net Properties, LLC, we cashed out the unaccredited investor members in lieu of issuing shares of our common stock and with respect to one executive officer, we issued cash in lieu of shares for a portion of his ownership. In connection with these transactions, we issued an aggregate of 25,751,407 shares of our common stock. The issuances of securities in the transactions described in paragraph 1 above were effected without registration under the Securities Act in reliance on Section 4(2) thereof or Rule 506 of Regulation D thereunder based on the status of each investor as an accredited investor as defined under the Securities Act. The issuances of securities in the transactions described in paragraph 2 above were effected without registration under the Securities Act in reliance on Section 4(2) thereof or Rule 701 thereunder as transactions pursuant to compensatory benefit plans and contracts relating to compensation. The issuances of securities in the transactions described in paragraph 3 above were effected without registration under the Securities Act in reliance on Section 3(a)(9) or Section 4(2) thereof as transactions based on the status of each investor as an accredited investor as defined under the Securities Act and the fact that the shares were issued in exchange for existing equity. None of the foregoing transactions was effected using any form of general advertising or general solicitation as such terms are used in Regulation D under the Securities Act. The recipients of securities in each such transaction either received adequate information about us or had access, through their relationships with us, to such information. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits. Exhibit No. Description 3 .1* Certificate of Incorporation of NNN Realty Advisors, Inc., as currently in effect 3 .2* Amendment to Certificate of Incorporation of NNN Realty Advisors, Inc. 3 .3* Amended and Restated Bylaws of NNN Realty Advisors, Inc., as currently in effect 4 .1* Specimen common stock certificate 5 .1* Opinion of Latham Watkins LLP 10 .1 * NNN Realty Advisors, Inc. 2006 Long Term Incentive Plan 10 .2 * Employment Agreement between NNN Realty Advisors, Inc. and Scott D. Peters 10 .3 * Employment Agreement between NNN Realty Advisors, Inc. and Louis J. Rogers 10 .4 * Employment Agreement between NNN Realty Advisors, Inc. and Andrea R. Biller 10 .5 * Employment Agreement between NNN Realty Advisors, Inc. and Francene LaPoint 10 .6 * Employment Agreement between NNN Realty Advisors, Inc. and Jeffrey T. Hanson Table of Contents We experienced weaknesses in certain internal controls over financial reporting and insufficient disclosure and real estate regulatory oversight that we will need to strengthen. In 2006, we experienced material weaknesses and significant deficiencies in our internal control over financial reporting. Ensuring that we have adequate financial and accounting controls to produce accurate financial statements on a timely basis and sufficient legal compliance oversight are costly and time-consuming efforts that need to be evaluated frequently. Failure to achieve and maintain effective controls and procedures for financial reporting may result in our inability to provide timely and accurate financial information. Future pressures to lower, waive or credit back our fees could reduce our revenue and profitability. We have on occasion waived or credited our fees for real estate acquisitions and financings for our TIC programs to improve projected investment returns and attract TIC investors. There has also been a trend toward lower fees in some segments of the third-party asset management business, and fees paid for the management of properties in our TIC programs or public non-traded REITs could follow these trends. In order for us to maintain our fee structure in a competitive environment, we must be able to provide clients with investment returns and service that will encourage them to be willing to pay such fees. We cannot assure you that we will be able to maintain our current fee structures. Fee reductions on existing or future new business could have a material adverse impact on our revenue and profitability. If we fail to comply with laws and regulations applicable to real estate brokerage, we may incur significant financial penalties. Due to the geographic scope of our operations and various real estate services we provide, we are subject to numerous federal, state and local laws and regulations specific to the services performed. For example, the brokerage of real estate sales and leasing transactions requires us to maintain brokerage licenses in each state in which we operate. If we fail to maintain our licenses or conduct brokerage activities without a license, we may be required to pay fines or return commissions received or have licenses suspended. In addition, because the size and scope of real estate sales transactions have increased significantly during the past several years, both the difficulty of ensuring compliance with the numerous state licensing regimes and the possible loss resulting from non-compliance have increased. Furthermore, the laws and regulations applicable to our business also may change in ways that increase the costs of compliance. Regulatory uncertainties related to our dealer-manager services could harm our business. The securities industry in the United States is subject to extensive regulation under both federal and state laws. Broker-dealers are subject to regulations covering all aspects of the securities business. The Securities and Exchange Commission, or SEC, the National Association of Securities Dealers, or the NASD, and other self-regulatory organizations and state securities commissions can censure, fine, issue cease-and-desist orders to, suspend or expel a broker-dealer or any of its officers or employees. The ability to comply with applicable laws and rules is largely dependent on an internal system to ensure compliance, as well as the ability to attract and retain qualified compliance personnel. We could be subject to disciplinary or other actions in the future due to claimed noncompliance with these securities regulations, which could have a material adverse effect on our operations and profitability. Our failure to manage future growth effectively may have a material adverse effect on our financial condition and results of operations. We may experience continued rapid growth in our operations, which may place a significant strain on our management, administrative, operational and financial infrastructure. Our success will depend in part upon the ability of our executive officers to manage growth effectively. Our ability to grow also depends upon our ability to successfully hire, train, supervise and manage new employees, obtain financing for our capital needs, expand our systems effectively, allocate our human resources optimally, maintain clear lines of communication between our transactional and management functions and our finance and accounting functions and manage the pressures on our management and our administrative, operational and financial infrastructure. We also Table of Contents cannot assure you that we will be able to accurately anticipate and respond to the changing demands we will face as we continue to expand our operations, and we may not be able to manage growth effectively or to achieve growth at all. Any failure to manage our future growth effectively could have a material adverse effect on our business, financial condition and results of operations. We depend upon our programs tenants to pay rent, and their inability to pay rent may substantially reduce the fees we receive which are based on gross rental amounts. Our programs are subject to varying degrees of risk that generally arise from the ownership of real estate. For example, the income we are able to generate from management fees is derived from the gross rental income on the properties in our programs. The rental income depends upon the ability of the tenants of our programs properties to generate enough income to make their lease payments to us. Changes beyond our control may adversely affect the tenants ability to make lease payments or could require them to terminate their leases. Either an inability to make lease payments or a termination of one or more leases could reduce the management fees we receive. These changes include, among others, the following: downturns in national or regional economic conditions where our programs properties are located, which generally will negatively impact the demand and rental rates; changes in local market conditions such as an oversupply of properties, including space available by sublease or new construction, or a reduction in demand for properties in our programs, making it more difficult for our programs to lease space at attractive rental rates or at all; competition from other available properties, which could cause our programs to lose current or prospective tenants or cause them to reduce rental rates; and changes in federal, state or local regulations and controls affecting rents, prices of goods, interest rates, fuel and energy consumption. Due to these changes, among others, tenants and lease guarantors, if any, may be unable to make their lease payments. Defaults by tenants or the failure of any guarantors of tenants guarantor to fulfill their obligations, or other early termination of a lease could, depending upon the size of the leased premises and our ability as property manager to successfully find a substitute tenant, have a material adverse effect on our revenue. Conflicts of interest inherent in transactions between our programs and us, and among our programs, could create liability for us that could have a material adverse effect on our results of operations and financial condition. These conflicts include but are not limited to the following: we experience conflicts of interests with certain of our directors, officers and affiliates from time to time with regard to any of our investments, transactions and agreements in which they hold a direct or indirect pecuniary interest; since we receive both management fees and acquisition and disposition fees for our programs properties we could be in conflict with our programs over whether their properties should be sold or held by the program and we may make decisions or take actions based on factors other than in the best interest of investors of a particular sponsored investor program; a component of the compensation of certain of our executives is based on the performance of particular programs, which could cause the executives to favor those programs over others; we may face conflicts of interests as to how we allocate property acquisition opportunities or prospective tenants among competing programs; we may face conflicts of interests if programs sell properties to each other or invest in each other; Table of Contents all agreements and arrangements, including those relating to compensation, among us and our programs, are generally not the result of arm s-length negotiations; and our executive officers will devote only as much of their time to a program as they determine is reasonably required, which may be substantially less than their full time; during times of intense activity in other programs, these officers may devote less time and fewer resources to a program than are necessary or appropriate to manage the program s business. We cannot assure you that one or more of these conflicts will not result in claims by investors in our programs, which could have a material adverse effect on our results of operations and financial condition. Increased competition relating to the services we provide could lead to a material adverse effect on our financial condition and results of operations. We believe there are only limited barriers to entry in our business. Current and future competitors may have more resources than we have. In transaction services, we face competition with other real estate firms in the acquisition and disposition of properties, and we also compete with other sponsors of real estate investor programs for investors to provide the capital to allow us to make these investments. We also compete against other real estate companies who may be chosen by a broker-dealer as an investment platform instead of us. In management services, we compete with other property managers for viable tenants for our programs properties. We face competition from institutions that provide or arrange for other types of financing through private or public offerings of equity or debt and from traditional bank financings. The number and activities of our competitors could have a material adverse effect on our financial condition and results of operations. The ongoing SEC investigation of Triple Net Properties and its affiliates could adversely impact our ability to conduct our real estate investment programs. On September 16, 2004, Triple Net Properties learned that the SEC Los Angeles Enforcement Division, or the SEC Staff, is conducting an investigation referred to as In the matter of Triple Net Properties, LLC. The SEC requested information from Triple Net Properties relating to disclosure in public and private securities offerings sponsored by Triple Net Properties and its affiliates prior to 2005, or the Triple Net securities offerings. The SEC Staff also requested information from Capital Corp., the dealer-manager for the Triple Net securities offerings. The SEC Staff requested financial and other information regarding the Triple Net securities offerings and the disclosures included in the related offering documents from each of Triple Net Properties and Capital Corp. Triple Net Properties and Capital Corp. are engaged in settlement negotiations with the SEC staff regarding this matter. Based on these negotiations, we believe that the conclusion to this matter will not result in a material adverse affect to our results of operations, financial condition or ability to conduct our business. The settlement negotiations are continuing, and any settlement negotiated with the SEC Staff must be approved by the Commission. Since the matter is not concluded, it remains subject to the risk that the SEC may seek additional remedies, including substantial fines and injunctive relief that, if obtained, could materially adversely affect our ability to conduct our program offerings. Additionally, any resolution of this matter that reflects negatively on our reputation could materially and adversely affect the willingness of our existing programs to continue to use our management services and of potential investors to invest in our future programs. The matters that are the subject of this investigation could also give rise to claims against us by investors in our programs. At this time, we cannot assess how or when the outcome of the matter will be ultimately determined. Table of Contents The offerings conducted to raise capital for our TIC programs are done in reliance on exemptions from the registration requirements of the Securities Act. A failure to satisfy the requirements for the appropriate exemption could void the offering or, if it is already completed, provide the investors with rescission rights, either of which would have a material adverse effect on our reputation and as a result our business and results of operations. The securities of our TIC programs are offered and sold in reliance upon a private placement offering exemption from registration under the Securities Act and applicable state securities laws. If we or our dealer-manager failed to comply with the requirements of the relevant exemption and an offering were in process, we may have to terminate the offering. If an offering was completed, the investors may have the right, if they so desired, to rescind their purchase of the securities. A rescission offer could also be required under applicable state securities laws and regulations in states where any securities were offered without registration or qualification pursuant to a private offering or other exemption. If a number of holders sought rescission at one time, the applicable program would be required to make significant payments which could adversely affect its business and as a result, the fees generated by us from such program. If one of our programs was forced to terminate an offering before it was completed or to make a rescission offer, our reputation would also likely be significantly harmed. Any reduction in fees as a result of a rescission offer or a loss of reputation would have a material adverse effect on our business and results of operations. Risks Related to the Real Estate Market A downturn in the general economy or the real estate market would harm our business. Our business is negatively impacted by periods of economic slowdown or recession, rising interest rates and declining demand for real estate. These economic conditions could have a number of effects, which could have a material adverse impact on certain segments of our business, including a decline in: acquisition and disposition activity, with a corresponding reduction in fees from these services; the supply of capital invested in commercial real estate or in commercial real estate investor programs; the value of real estate, which would cause us to realize lower revenue from property management fees, which in certain cases are calculated as a percentage of the revenue of the property under management; and rental or occupancy rates or increase in tenant defaults. The real estate market tends to be cyclical and related to the condition of the economy and to the perceptions of investors and users as to the economic outlook. A downturn in the economy or the real estate market could have a material adverse effect on our business, financial condition or results of operations. An increase in interest rates may negatively affect the equity value of our programs or cause us to lose potential investors to alternative investments, causing the fees we receive for transaction and management services to be reduced. In the last two years, interest rates in the United States have generally increased. If interest rates were to continue to rise, our financing costs would likely rise and our net yield to investors may decline. This downward pressure on net yields to investors in our programs could compare poorly to rising yields on alternative investments. Additionally, as interest rates rise, valuations of commercial real estate properties typically decline. A decrease in both the attractiveness of our programs and the value of assets held by these programs could cause a decrease in both transaction and management services revenues, which would have an adverse effect on our results of operations. Table of Contents Increasing competition for the acquisition of real estate may impede our ability to make future acquisitions which would reduce the fees we generate from these programs and could adversely affect our operating results and financial condition. The commercial real estate industry is highly competitive on an international, national and regional level. Our programs face competition from REITs, institutional pension plans, and other public and private real estate companies and private real estate investors for the acquisition of properties and for raising capital to create programs to make these acquisitions. Competition may prevent our programs from acquiring desirable properties or increase the price they must pay for real estate. In addition, the number of entities and the amount of funds competing for suitable investment properties may increase, resulting in increased demand and increased prices paid for these properties. If our programs pay higher prices for properties, investors may experience a lower return on investment and be less inclined to invest in our next program which may decrease our profitability. Increased competition for properties may also preclude our programs from acquiring properties that would generate the most attractive returns to investors or may reduce the number of properties our programs could acquire, which could have an adverse effect on our business. Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our programs properties and harm our financial condition. Because real estate investments are relatively illiquid, our ability to promptly facilitate a sale of one or more properties or investments in our programs in response to changing economic, financial and investment conditions may be limited. In particular, these risks could arise from weakness in the market for a property, changes in the financial condition or prospects of prospective purchasers, changes in regional, national or international economic conditions, and changes in laws, regulations or fiscal policies of jurisdictions in which the property is located. Fees from the disposition of properties would be materially affected if we were unable to facilitate a significant number of property dispositions for our programs. Uninsured and underinsured losses may adversely affect operations. We carry commercial general liability, fire and extended coverage insurance with respect to our programs properties. We obtain coverage that has policy specifications and insured limits that we believe are customarily carried for similar properties. We cannot assure you, however, that particular risks that are currently insurable will continue to be insurable on an economic basis or that current levels of coverage will continue to be available. In addition, we generally do not obtain insurance against certain risks, such as floods. Should a property sustain damage or an occupant sustain an injury, we may incur losses due to insurance deductibles, co-payments on insured losses or uninsured losses. In the event of a substantial property loss or personal injury, the insurance coverage may not be sufficient to pay the full damages. In the event of an uninsured loss, we could lose some or all of our capital investment, cash flow and anticipated profits related to one or more properties. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it not feasible to use insurance proceeds to replace a property after it has been damaged or destroyed. Under these circumstances, the insurance proceeds we receive, if any, might not be adequate to restore our economic position with respect to the property. In the event of a significant loss at one or more of the properties in our programs, the remaining insurance under the applicable policy, if any, could be insufficient to adequately insure the remaining properties. In this event, securing additional insurance, if possible, could be significantly more expensive than the current policy. A loss at any of these properties or an increase in premium as a result of a loss could decrease the income from or value of properties under management in our programs, which in turn would reduce the fees we receive from these programs. Any decrease or loss in fees could have a material adverse effect on our financial condition or results of operations. Environmental regulations may adversely impact our business or cause us to incur costs for cleanup of hazardous substances or wastes or other environmental liabilities. Federal, state and local laws and regulations impose various environmental zoning restrictions, use controls, and disclosure obligations which impact the management, development, use, and/or sale of real Table of Contents estate. These laws and regulations tend to discourage sales activities with respect to some properties, and by decreasing or delaying those transactions may adversely affect the results of operations and financial condition of our business. In addition, a failure by us or one of our programs to disclose environmental concerns in connection with a real estate disposition may subject us to liability to a buyer or lessee of property. In addition, in our role as a property manager, we could incur liability under environmental laws for the investigation or remediation of hazardous or toxic substances or wastes at properties we currently or formerly managed, or at off-site locations where wastes from such properties were disposed. This liability can be imposed without regard for the lawfulness of the original disposal activity, or our knowledge of, or fault for, the release or contamination. Further, liability under some of these laws may be joint and several, meaning that one liable party could be held responsible for all costs related to a contaminated site. We could also be held liable for property damage or personal injury claims alleged to result from environmental contamination, or from asbestos-containing materials, mold or lead-based paint present at the properties we manage. Similarly, we are obliged, under the debt financing arrangements on the properties owned by our TIC programs, to provide an indemnity to the lenders for environmental liabilities and to remediate any environmental problems that might arise. Insurance for these matters may not be available. Certain requirements governing the removal or encapsulation of asbestos-containing materials, as well as recently enacted local ordinances obligating property managers to inspect for and remove lead-based paint in certain buildings, could increase our costs of legal compliance and potentially subject us to violations or claims. Further, mold contamination has been linked to a number of health problems, which has resulted in litigation from tenants seeking various remedies. There can be no assurance that our programs will not be subject to litigation relating to asbestos mold contamination or that any claims would be covered by our insurance policy. Risks Relating to the Offering and Our Common Stock Being a public company will increase our expenses and administrative workload. As a public company, we will be required to comply with certain additional laws, regulations and requirements, including provisions of the Sarbanes-Oxley Act of 2002, as amended, regulations of the Securities and Exchange Commission and requirements of the exchange on which our shares are listed, with which we are not required to comply as private company. As a result, we will incur significant legal, accounting and other expenses that we did not incur as a private company. Complying with these statutes, regulations and requirements will occupy a significant amount of time of our board of directors and management and may make some activities more difficult, time consuming and costly. We will need to: institute a more comprehensive compliance function; establish new internal policies, such as those relating to disclosure controls and procedures and insider trading; design, establish, evaluate and maintain a system of internal controls over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board; prepare and distribute periodic reports in compliance with our obligations under the federal securities laws; involve and retain to a greater degree outside counsel and accountants in the above activities; and establish an investors relations function. If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies could be impaired. If our finance and accounting personnel insufficiently support us in fulfilling these public-company compliance obligations, or if we are unable to hire adequate finance and accounting personnel, we could face significant legal liability, which could have a material adverse effect on our financial condition and results of Table of Contents operations. Furthermore, if we identify any issues in complying with those requirements (for example, if we or our independent registered public accountants identified a material weakness or significant deficiency in our internal control over financial reporting), we could incur additional costs rectifying those issues, and the existence of those issues could adversely affect us, our reputation or investor perceptions of us. In addition, we also expect that being a public company subject to these rules and regulations will require us to modify our director and officer liability insurance, and we may be required to accept reduced policy limits or incur substantially higher costs to obtain the same or similar coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers. If we fail to maintain an effective system of internal control over financial reporting or fail to comply with Section 404 of the Sarbanes-Oxley Act, we may not be able to accurately report our financial results or to prevent fraud, and our stock price could decline. As a public company, we will be required to evaluate, document and test our internal control over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, or Section 404. Beginning with our Annual Report on Form 10-K for the year ending December 31, 2008, Section 404 requires us to evaluate and report on our internal control over financial reporting and have our independent registered public accountants attest to our evaluation. Such report will contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of the year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weakness in our internal control over financial reporting identified by management. The report will also contain a statement that our independent registered public accountants have issued an attestation report on management s assessment of internal controls. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation to meet the detailed standards under the rules. In addition, if we identify one or more significant deficiencies or material weaknesses in our internal control over financial reporting, and if we cannot remediate in time to meet a deadline for compliance with Section 404, we will be unable to assert that such internal controls are effective. We have prepared an internal plan of action for compliance with Section 404 and for strengthening and testing our system of internal control to provide the basis for our report, but we cannot assure you that this plan of action will be sufficient to meet the rigorous requirements of Section 404. In addition, our independent registered public accountants may issue an adverse opinion regarding management s assessment of Section 404 compliance. It is also possible that our independent registered public accountants may not be in a position to adequately assess our compliance with Section 404 on a timely basis, which could lead to our inability to comply with our reporting requirements under the Securities Exchange Act of 1934, as amended. If we are unable to conclude that we have effective internal control over financial reporting or our independent registered public accountants are unable to provide us with an unqualified report, investors could lose confidence in our reported financial information and our company, which could result in a decline in the market price of our common stock, and cause us to fail to meet our reporting obligations in the future, which in turn could impact our ability to raise additional financing if needed in the future. Our failure to comply with Section 404 or our reporting requirements could also subject us to a variety of administrative sanctions, including the suspension or delisting of our common stock from any exchange on which our common stock may become listed and the inability of registered broker-dealers to make a market in our common stock. Our common stock has no prior public market, and it is not possible to predict how our stock will perform after this offering. There has not been a public market for our common stock. An active trading market for our common stock may not develop following this offering. You may not be able to sell your shares quickly or at the market price if trading in our common stock is not active. The initial public offering price for the shares may not be indicative of prices that will prevail in the trading market. Table of Contents If our stock price is volatile, purchasers of our common stock could incur substantial losses. Even if an active trading market for our common stock develops, the market price for our common stock may be highly volatile and could be subject to wide fluctuations. The stock market in general often experiences substantial volatility that is seemingly unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. As a result of this volatility, investors may not be able to sell their common stock at or above the initial public offering price. The price for our common stock will be determined in the marketplace and may be influenced by many factors, including: the depth and liquidity of the market for our common stock; developments generally affecting the healthcare industry; investor perceptions of us and our business; actions by institutional or other large stockholders; strategic action, such as acquisitions or restructurings, or the introduction of new services by us or our competitors; new laws or regulations or new interpretations of existing laws or regulations applicable to our business; litigation and governmental investigations; changes in accounting standards, policies, guidance, interpretations or principles; adverse condition in the financial market or general economic conditions, including those resulting from war, incidents of terrorism and responses to such events; sales of common stock by us or members of our management team; additions or departures of key personnel; and our results of operations, financial performance and future prospects. These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending or settling the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business. If securities or industry analysts do not publish research or reports about our business, if they change their recommendations regarding our stock adversely or if our operating results do not meet their expectations, our stock price and trading volume could decline. The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock or if our operating results do not meet their expectations, our stock price could decline. Table of Contents Our Chairman and other key executive officers own a significant amount of our outstanding common stock and may significantly influence the management and policies of our company, in ways with which you may disagree. As of December 31, 2006, Anthony W. Thompson, our Chairman of the Board and largest stockholder, beneficially owned or controlled 25.9% of the outstanding shares of our common stock. In addition, Scott D. Peters, Andrea R. Biller, Francene LaPoint and Jeffrey T. Hanson, our key executive officers, beneficially owned or controlled in the aggregate approximately 2.0% of the outstanding shares of our common stock. As a result, Mr. Thompson and our other key executive officers will be able to exercise significant influence over the election of our directors, and therefore, our management and policies, through their collective voting power and may vote their shares of our common stock in ways with which you may disagree or which may be adverse to your interests as a stockholder. This voting concentration may discourage, delay or prevent a change in control or acquisition of our company, even one that you believe is beneficial to you as a stockholder. This voting concentration may also adversely affect the trading price of our common stock due to investors perception that conflicts of interest may exist or arise. You may experience dilution of your ownership interests due to the future issuance of additional shares of our common stock. We may in the future issue our previously authorized and unissued securities, resulting in the dilution of the ownership interests of our present stockholders and purchasers of common stock offered hereby. We are currently authorized to issue 95,000,000 shares of common stock and 5,000,000 shares of preferred stock with preferences and rights as determined by our board of directors. As of December 31, 2006, 42,366,407 shares of common stock were issued and outstanding. Pursuant to our 2006 Long-term Incentive Plan, we reserved 2,339,200 shares of our common stock for issuance as restricted stock, stock options and/or other equity based grants to employees and directors. Of the reserved shares, 1,436,200 may be awarded as restricted stock and 903,000 may be awarded as stock options and/or other equity based grants. As of March 31, 2007, we have issued 615,000 shares of common stock, as restricted stock, to our initial four independent directors and certain executive officers and employees. Additionally, we have granted to certain executive officers and employees options to purchase up to 903,000 of our shares of our common stock with an option exercise price equal to $10.00 per share. The potential issuance of additional shares of common stock may create downward pressure on the trading price of our common stock. We may also issue additional shares of our common stock or other securities that are convertible into or exercisable for common stock in connection with the hiring of personnel, future acquisitions, future private placements of our securities for capital raising purposes, or for other business purposes. Future sales of shares of our common stock could have an adverse effect on our stock price. As of December 31, 2006, Anthony W. Thompson, our Chairman of the Board and largest stockholder, beneficially owned or controlled 25.9% of the outstanding shares of our common stock. In addition, Scott D. Peters, Andrea R. Biller, Francene LaPoint and Jeffrey T. Hanson, our key executive officers, beneficially owned or controlled in the aggregate approximately 2.0% of the outstanding shares of our common stock. We initially reserved 2,339,200 shares of our common stock for issuance to our officers, non-employee directors, employees, and consultants in the form of restricted stock or options to purchase shares of our common stock pursuant to our 2006 Long-term Incentive Plan. Of the reserved shares, we currently have 821,200 shares of common stock, as restricted stock, available for future issuance. Future sales of substantial amounts of our common stock, or the perception that sales could occur, could have a material adverse effect on the price of our common stock. Table of Contents We may not be able to obtain additional financing when we need it or on acceptable terms, and any such financing may adversely affect the market price of our common stock. There can be no assurance that the anticipated cash flow from operations will be sufficient to meet all of our cash requirements. We intend to continue to make investments to support our business growth and may required additional funds to respond to business challenges. Accordingly, we may need to complete additional equity or debt financings to secure additional funds. We cannot assure you that further equity or debt financing will be available on acceptable terms, if at all. In addition, the terms of any debt financing may restrict our financial and operating flexibility. If we raise additional funds through further issuances of equity or debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders or our common stock, including share of common stock sold in this offering. Our inability to obtain any needed financing, or the terms on which it may be available, could have a material adverse effect on our business. Although we intend to declare quarterly dividends, we cannot assure you when or whether we will declare future dividends or the amount of any dividends that may be declared in the future. Although our management has recommended to our board of directors that it declare quarterly dividends, future cash dividends will depend upon our results of operations, financial condition, capital requirements, general business conditions and other factors that our board of directors may deem relevant. Also, there can be no assurance we will pay dividends even if the necessary financial conditions are met and sufficient cash is available for distribution. Provisions under Delaware law, our certificate of incorporation and bylaws could delay or prevent a change in control of our company, which could adversely affect the price of our common stock. The existence of some provisions under Delaware law, our certificate of incorporation and bylaws could delay or prevent a change in control, which could adversely affect the price of our common stock. Delaware law imposes restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. Table of Contents CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS We are including the following discussion to inform you of some of the risks and uncertainties that can affect our company. Various statements contained in this prospectus, including those that express a belief, expectation, or intention, as well as those that are not statements of historical fact, are forward-looking statements. We use words such as believe, intend, expect, anticipate, plan, may, will, should and similar expressions to identify forward-looking statements. The forward-looking statements in this prospectus speak only as of the date of this prospectus; we disclaim any obligation to update these statements unless required by applicable securities laws, and we caution you not to rely on them unduly. You are further cautioned that any forward-looking statements are not guarantees of future performance. Our beliefs, expectations and intentions can change as a result of many possible events or factors, not all of which are known to us or are within our control, and a number of risks and uncertainties could cause actual results to differ materially from those anticipated in the forward-looking statements. Such factors, risks and uncertainties include, but are not limited to: our dependence on the success of real estate investment programs for generating revenue and raising new capital; our dependence on third-party securities broker-dealers to raise the capital to fund our programs; a change or revocation of the applicable tax code which provides for the current TIC structure and benefits; a failure to satisfy requirements for favorable tax treatment of our programs; fluctuation in our cash flow or earnings as a result of any co-investments, especially in the event we are required to make future capital contributions; our reliance on our Chairman and largest stockholder as well as our other key executive officers; conflicts of interest in transactions and arrangements between us, or our directors, officers and affiliates, and our programs, and among our programs; risks related to the real estate industry in general, including risks related to potential increases in interest rates and tenant defaults and declines in real estate values and rental and occupancy rates; and the other risks identified in this prospectus including, without
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+PROSPECTUS SUMMARY You should rely only upon the information contained in this prospectus. We have not, and the selling shareholders have not, authorized anyone to provide you with information which is different from that contained in this prospectus. The selling shareholders are offering to sell shares of common stock and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. SUMMARY INFORMATION AND RISK FACTORS. The following summary contains basic information about our company and this offering. It does not contain all of the information which is important to you in making an investment decision. You should read this prospectus summary together with the entire prospectus, including the more detailed information in our financial statements and accompanying notes appearing elsewhere in this prospectus. Unless otherwise indicated, all information contained in this prospectus relating to our shares of common stock is based upon information as of August 29 2007. OUR BUSINESS Madison Venture Capital Group, Inc. ( we , us , our ) was incorporated under the laws of the State of Delaware on August 17, 2006. Since our inception we have been engaged in developmental stage activities and organizational efforts, including obtaining initial financing. Based upon proposed business activities, we are a "blank check" company. The SEC defines those companies as "any development stage company that is issuing a penny stock, within the meaning of Section 3 (a)(51) of the Securities Exchange Act of 1934, as amended (the Exchange Act ), and that has no specific business plan or purpose, or has indicated that its business plan is to merge with an unidentified company or companies." Many states have enacted statutes, rules and regulations limiting the sale of securities of "blank check" companies in their respective jurisdictions. We are, as defined in Rule 12b-2 under the Exchange Act, also a shell company, defined as a company with no or nominal assets (other than cash) and no or nominal operations. We intend to comply with the periodic reporting requirements of the Exchange Act for as long as we are subject to those requirements. Our business purpose is to seek the acquisition of, or merger with, an existing company. The acquisition of a business opportunity may be made by purchase, merger, exchange of stock, or otherwise, and may encompass assets or a business entity, such as a corporation, joint venture, or partnership. We have very limited capital, and it is unlikely that we will be able to take advantage of more than one such business opportunity. We intend to seek opportunities demonstrating the potential of long-term growth as opposed to short-term earnings. We will not restrict potential candidate target companies to any specific business, industry or geographical location and, thus, may acquire any type of business. As of the date hereof, we have made no efforts to identify a possible business combination including, but not limited to, not conducting negotiations or entering into a letter of intent with respect to any target business and we have not entered into a letter of intent or any definitive agreement with respect to any target business. The analysis of new business opportunities has and will be undertaken by or under the supervision of our officers and directors. We have unrestricted flexibility in seeking, analyzing and participating in potential business opportunities. In its efforts to analyze potential acquisition targets, we will consider the following kinds of factors: (a) Potential for growth, indicated by new technology, anticipated market expansion or new products; (b) Competitive position as compared to other firms of similar size and experience within the industry segment as well as within the industry as a whole; and (c) Strength and diversity of management, either in place or scheduled for recruitment. Michael Zaroff serves as President and as a Director. Frederick M. Mintz serves as Chairman of the Board, and as a Director. Alan P. Fraade was our original incorporator and presently serves as Vice President, Secretary and as a Director. We have not been involved in any bankruptcy, receivership or similar proceeding. We have not been involved in any material reclassification, merger consolidation, or purchase or sale of any assets. THE OFFERING Securities Offered We are registering common shares on behalf of twenty one (21) selling security holders. In the aggregate, the selling stockholders are offering up to 210,000 shares of common stock, $.001 par value per share. The aggregate amount of shares we are registering for the selling security holders represents 6.5%.of the issued and outstanding shares of our common stock and .42% of the total authorized shares of our common stock. See Selling Security Holders. Plan of Distribution Up to 210,000 shares of common stock may be offered and sold by the selling stockholders through agents or brokers, acting as principal, agent in transactions, which may involve block transactions, on the Electronic Bulletin Board, over-the-counter market or on other exchanges on which the shares are then listed, pursuant to the rules of the applicable exchanges or in the over-the-counter market, or otherwise, at market prices or at fixed prices; through brokers or agents in private sales at negotiated prices; or by any other legally available means. Offering Price At prevailing market prices on the Electronic Bulletin Board or on other exchanges on which the shares are then listed or at negotiated prices. Use of Proceeds We will not receive any cash or other proceeds from the selling security holders sales of their respective shares. Securities Outstanding We are authorized to issue up to an aggregate of 50,000,000 shares of common stock and 5,000,000 of preferred stock of which 3,210,000 common shares and 0 preferred shares were issued and outstanding as of August 29, 2007. Rule 419 This offering is being conducted pursuant to Rule 419 of the Securities Act. Accordingly, if and when any sale of securities is made by a selling shareholder prior to our entry into a merger, acquisition, or similar transaction (hereinafter collectively referred to as a Business Combination Transaction ), the securities being sold and the purchase price for the securities being sold (the purchasers of those shares are hereinafter referred to as the Purchasers ) shall be placed into escrow with an insured depository institution. When we have entered into an agreement for a Business Combination Transaction with one or more businesses (the Targets ), we shall file an amendment to this registration statement and send the Purchasers extensive information with respect to the Targets including, but not limited to, audited financial statements, and each Purchaser shall have a period (to be determined by us) of not less than twenty (20) and not more than forty five (45) business days after the effective date of that amendment (the end of such period, the Deadline ) in which to inform us if he, she or it wishes to remain an investor in our company subsequent to the closing of the Business Combination Transaction. If a Purchaser informs us on, or prior to, the Deadline that he, she or it wishes to remain an investor in our company subsequent to the closing of the Business Combination Transaction, we shall release the shares purchased by him, her or it to him, her or it and release from escrow the funds he, she or it paid for such shares, plus any interest or dividends which have been paid thereon during the period while such funds were held in escrow, to the selling shareholder from whom he, she or it purchased those shares. If a Purchaser fails to inform us on, or prior to, the Deadline that he, she or it wishes to remain an investor in our company subsequent to the closing of the Business Combination Transaction, his, her or its escrow funds, plus any interest or dividends thereon, shall be returned to him, her or it within five (5) business days after the forty fifth (45th) business day following the effective date of that amendment, and his, her or its shares shall be returned to the selling shareholder from whom he, she or it purchased his, her or its shares. If any selling shareholders sold any shares to Purchasers, and we have not consummated a Business Combination Transaction within eighteen (18) months after the effective date of this registration statement, all escrow funds shall be returned to the Purchasers, and all of the shares held in escrow shall be returned to the selling shareholders from whom those Purchasers purchased them. In view of the fact that the escrow funds shall either be released to the selling shareholders or returned to the Purchasers, we shall not receive any funds from this offering. If there are no sales of securities pursuant to this offering, no funds or securities shall be placed in escrow, and we shall not file an amendment to this registration statement. If there are no sales pursuant to this offering, we may enter into a Business Combination Transaction at any time, regardless of whether prior to, or subsequent to, eighteen (18) months after the effective date of this registration statement. If there are no sales pursuant to this offering, then after we consummate a Business Combination Transaction, we shall file an 8-K form with the Securities and Exchange Commission containing extensive information as required by SEC regulations with respect to the Target(s), including, but not limited to, audited financial statements. Subsequent to consummating such Business Combination Transaction, we would no longer be deemed to be a shell company, and the provisions of Rule 419 with respect to escrow of funds, and purchasers opportunity to receive a return of their investment funds if they did not approve of the acquisition would not be applicable. Risk Factors An investment in our shares is highly speculative and purchasers may suffer substantial dilution per common share compared to the purchase price. We may need additional funding. No individual should invest in our common shares who cannot afford to risk the loss of his or her entire investment. See Risk Factors immediately following this provision. RISK FACTORS An investment in the Shares being registered pursuant to this prospectus involves a high degree of risk. Any statements with respect to future events contained in this prospectus are based upon circumstances and events which have not yet occurred, and upon assumptions which may not materialize. The actual results which are achieved by us may vary materially from those discussed in this prospectus. In addition, this prospectus contains forward-looking statements which involve risks and uncertainties. Forward-looking statements are based upon the beliefs of our management, as well as assumptions made by and information currently available to our management. When used in this prospectus, the words estimate, project, believe, anticipate, intend, expect and similar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are subject to risks and uncertainties which may cause our actual results to differ materially from those contemplated in our forward-looking statements. We caution you not to place undue reliance upon such forward-looking statements, as our results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors section and elsewhere in this prospectus. Any such statements are representative only as of the date of this prospectus. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances subsequent to the date of this prospectus or to reflect the occurrence of unanticipated events. Accordingly, prospective investors should consider carefully the following risk factors, in addition to the other information with respect to our business contained in this prospectus, before purchasing Shares pursuant to this prospectus. There is uncertainty as to our ability to continue as a going concern. Our financial statements for the period ended December 31, 2006, which are included in our Financial Statements which are attached to and made a part of this prospectus and this Registration Statement, on Form S-1/A, as well as the report of our independent public accounting firm on our financial statements, questions our ability to operate as a going concern. This conclusion is based upon our limited cash holdings and the uncertainty with respect to our ability to secure additional financing if needed for continued operations. We have raised capital which we believe will be sufficient until we consummate a merger or other business combination. If not, we will either cease operations or we will need to raise additional capital through the issuance of additional shares or through debt. There is no existing commitment to provide additional capital. There can be no assurance that we shall be able to receive additional financing. There may be conflicts of interest between our management and our non-management stockholders. Conflicts of interest create the risk that management may have an incentive to act adversely to the interests of other stockholders. A conflict of interest may arise between our management's personal pecuniary interests and their fiduciary duty to our stockholders. Further, our management's own pecuniary interest may at some point compromise its fiduciary duty to our stockholders. In addition, our officers and directors are currently and in the future shall be involved with other blank check companies and conflicts may arise in the pursuit of business combinations with such other blank check companies with which they are and may in the future be affiliated. In the future, after the close of a transaction, we do not anticipate that our current officers and directors will perform services in their current capacity. Management has adopted a policy that we will not seek a merger with, or acquisition of, any entity in which management serves as officers, directors or partners, or in which they or their family members own or hold any ownership interest. We have established no other binding guidelines or procedures for resolving potential conflicts of interest. Failure by management to resolve conflicts of interest in our favor could result in liability of management to us. Our business is difficult to evaluate because we have no operating history. As we have no operating history or revenue and only minimal assets, there is a risk that we will be unable to continue as a going concern and consummate a business combination. We have no operating history nor any revenues or earnings from operations since inception. We have no significant assets or financial resources. We will, in all likelihood, sustain operating expenses without corresponding revenues, at least until the consummation of a business combination. This may result in our incurring a net operating loss which will increase continuously until we can consummate a business combination with a profitable business opportunity There can be no assurance that we will be able to identify a suitable business opportunity and consummate a business combination. There is competition for those private companies suitable for a merger transaction of the type contemplated by management. We are in a highly competitive market for a small number of business opportunities which could reduce the likelihood of consummating a successful business combination. We are and will continue to be an insignificant participant in the business of seeking mergers with, joint ventures with and acquisitions of, small private and public entities. A large number of established and well-financed entities, including small public companies and venture capital firms, are active in mergers and acquisitions of companies which may be desirable target candidates for us. Virtually all of these entities have significantly greater financial resources, technical expertise and managerial capabilities than we do; consequently, we will be at a competitive disadvantage in identifying possible business opportunities and successfully completing a business combination. These competitive factors may reduce the likelihood of our identifying and consummating a successful business combination. Our future success is highly dependent upon the ability of management to locate and attract a suitable acquisition. The nature of our operations is highly speculative and there is a consequent risk of loss with respect to the purchase of shares. The success of our plan of operation will depend to a great extent upon the operations, financial condition and management of the identified business opportunity. Although management intends to seek business combination(s) with entities having established operating histories, there can be no assurance that we will be successful in locating candidates meeting that criterion. If we complete a business combination, the success of our operations may be dependent upon management of the successor firm or venture partner firm and numerous other factors beyond our control. We have no existing agreement for a business combination or other transaction. We have no arrangement, agreement or understanding with respect to engaging in a merger with, joint venture with or acquisition of, a private or public entity. There can be no assurance that we will successfully identify and evaluate suitable business opportunities or that we will conclude a business combination. Management has not identified any particular industry or specific business within an industry for evaluation. We cannot guarantee that we will be able to negotiate a business combination upon favorable terms, and there is consequently a risk that funds allocated to the purchase of our shares will not be invested in a company with active business operations. Management intends to devote only a limited amount of time to seeking a target company which may adversely impact our ability to identify a suitable acquisition candidate. While seeking a business combination, management anticipates devoting no more than a few hours per week to our business and affairs. Our officers have not entered into written employment agreements with us and are not expected to do so in the foreseeable future. This limited commitment may adversely impact our ability to identify and consummate a successful business combination. The time and cost of preparing a private company to become a public reporting company may preclude us from entering into a merger or acquisition with the most attractive private companies. Target companies which fail to comply with SEC reporting requirements may delay or preclude acquisition. Sections 13 and 15(d) of the Exchange Act require reporting companies to provide certain information about significant acquisitions, including certified financial statements for the company acquired, covering one, two, or three years, depending on the relative size of the acquisition. The time and additional costs which may be incurred by some target entities to prepare these statements may significantly delay or essentially preclude consummation of an acquisition. Otherwise suitable acquisition prospects which do not have or are unable to obtain the required audited statements may be inappropriate for acquisition as long as the reporting requirements of the Exchange Act are applicable. We may be subject to further government regulation which would adversely affect our operations. Although we will be subject to the reporting requirements pursuant to the Exchange Act, management believes we will not be subject to regulation pursuant to the Investment Company Act of 1940, as amended (the "Investment Company Act"), in view of the fact that we will not be engaged in the business of investing or trading in securities. If we engage in business combinations which result in our holding passive investment interests in a number of entities, we could be subject to regulation pursuant to the Investment Company Act. If so, we would be required to register as an investment company and could be expected to incur significant registration and compliance costs. We have obtained no formal determination from the SEC as to our status pursuant to the Investment Company Act and, consequently, violation of the Investment Company Act could subject us to material adverse consequences. Our business will have no revenues unless and until we merge with or acquire an operating business. We are a development stage company and have had no revenues from operations. We may not realize any revenues unless and until we successfully merge with, or acquire, an operating business. We intend to issue more shares in a merger or acquisition, which will result in substantial dilution to our stockholders. Our Certificate of Incorporation authorizes the issuance of a maximum of 50,000,000 shares of Common Stock and a maximum of 5,000,000 shares of Preferred Stock. Any merger or acquisition effected by us may result in substantial dilution in the percentage of our Common Stock held by our then existing stockholders. Although to date we have not issued any Preferred Stock, any merger or business combination effected by us which includes the issuance of Preferred Stock may result in a substantial dilution in the rights of holders of Common Stock or Preferred Stock held by our then existing shareholders. Moreover, the Common Stock issued in any such merger or acquisition transaction may be valued on an arbitrary or non-arm's-length basis by our management, resulting in an additional reduction in the percentage of Common Stock held by our then existing stockholders. To the extent that additional shares of Common Stock or Preferred Stock are issued in connection with a business combination or otherwise, dilution of the interests of our stockholders will occur and the rights of the holders of Common Stock might be materially adversely affected. We have conducted no market research or identification of business opportunities, which may affect our ability to identify a business to merge with or acquire. We have neither conducted nor have others made available to us results of market research with respect to prospective business opportunities. Therefore, there can be no assurance that market demand exists for a merger or acquisition as contemplated by us. Our management has not identified any specific business combination or other transactions for formal evaluation by us, such that it may be expected that any such target business or transaction will present such a level of risk that conventional private or public offerings of securities or conventional bank financing will not be available. There can be no assurance that we will be able to acquire a business opportunity upon terms favorable to us. Decisions as to which business opportunity to participate in will be unilaterally made by our management, which may act without the consent, vote or approval of our stockholders. We are likely seeking to complete a business combination through a "reverse merger". Following such a transaction we may not be able to attract the attention of major brokerage firms. Additional risks may exist because we will assist a privately held business to become public through a reverse merger. Securities analysts of major brokerage firms may not provide coverage of our Company because there is no incentive to brokerage firms to recommend the purchase of our common stock. No assurance can be given that brokerage firms will want to conduct any secondary offerings on behalf of our post-merger company in the future. There can be no assurance that our common stock will ever be listed on NASDAQ, the New York Stock Exchange, the American Stock Exchange, or one of the other national securities exchanges or markets. Until such time as our common stock is listed upon any of the several NASDAQ markets, the New York Stock Exchange, the American Stock Exchange, or one of the other national securities exchanges or markets, of which there can be no assurance, accurate quotations as to the market value of our securities may not be possible. Sellers of our securities are likely to have more difficulty disposing of their securities than sellers of securities which are listed upon any of the several NASDAQ markets, the New York Stock Exchange, the American Stock Exchange, or one of the other national securities exchanges or markets. There is no public market for our Common Stock. There is no public trading market for our Common Stock and none is expected to develop in the foreseeable future unless and until we complete a business combination with an operating business and such business files a prospectus pursuant to the Securities Act. We have never paid dividends on our Common Stock. We have never paid dividends on our common stock, and there can be no assurance that that we will have sufficient earnings to pay any dividends with respect to the common stock. Moreover, even if we have sufficient earnings, we are not obligated to declare dividends with respect to the common stock. The future declaration of any cash or stock dividends will be in the sole and absolute discretion of the Board of Directors and will depend upon our earnings, capital requirements, financial position, general economic conditions and other pertinent factors. It is also possible that the terms of any future debt financing may restrict the payment of dividends. We presently intend to retain earnings, if any, for the development and expansion of its business. Our directors and officers will have substantial influence over our operations and control substantially all business matters. As indicated elsewhere herein, because management consists of only three persons, while seeking a business combination, our officers and directors will be the only persons responsible for conducting our day-to-day operations. We do not benefit from multiple judgments that a greater number of directors or officers may provide, and we will rely completely upon the judgment of our officers and directors when selecting a target company. Further, Michael Zaroff, Frederick M. Mintz, and Alan P. Fraade anticipate devoting a limited amount of time per month to our business and do not anticipate commencing any significant services at any time including after this prospectus has been cleared by the Commission. Messrs. Zaroff, Mintz and Fraade have not entered into written employment agreements with us and are not expected to do so. We have not obtained key man life insurance on any of our officers or directors. The loss of the services of Michael Zaroff, Frederick M. Mintz, or Alan P. Fraade would adversely affect the development of our business and our likelihood of continuing operations. There can be no assurance that following a business combination with an operating business, our common stock will not be subject to the penny stock regulations, which would likely make it more difficult to transfer or resale. To the extent that we consummate a business combination and our common stock becomes listed for trading on a quotation service, our common stock may constitute a penny stock, which generally is a stock trading under $5.00 and which is not registered on national securities exchanges or quoted on one of the higher NASDAQ tiers. The SEC has adopted rules which regulate broker-dealer practices in connection with transactions in penny stocks. This regulation generally has the result of reducing trading in such stocks, restricting the pool of potential investors for such stocks, and making it more difficult for investors to sell their shares. Prior to a transaction in a penny stock, a broker-dealer is required to: deliver a standardized risk disclosure document which provides information about penny stocks and the nature and level of risks in the penny stock market; provide the customer with current bid and offer quotations for the penny stock; explain the compensation of the broker-dealer and its salesperson in the transaction; provide monthly account statements showing the market value of each penny stock held in the customer s account; and make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser s written agreement to the transaction. These requirements may have the effect of reducing the level of trading activity in the secondary market for a stock which is subject to the penny stock rules. To the extent that our common stock becomes subject to the penny stock rules, investors in our common stock may find it more difficult to sell their shares. We may be subject to further government regulation which may delay or preclude acquisition. Pursuant to the requirements of Section 13 of the Exchange Act, we are required to provide certain information about significant acquisitions including audited financial statements of the acquired company. Such audited financial statements must be furnished within 75 days following the effective date of a business combination. Obtaining audited financial statements are the economic responsibility of the target company. The additional time and costs which may be incurred by some potential target companies to prepare such financial statements may significantly delay or essentially preclude consummation of an otherwise desirable acquisition by us. Acquisition prospects which do not have or are unable to obtain the required audited statements may not be appropriate for acquisition so long as the reporting requirements of the Exchange Act are applicable. Notwithstanding a target company's agreement to obtain audited financial statements within the required time frame, such audited financials may not be available to us at the time of effecting a business combination. In cases where audited financials are unavailable, we will have to rely upon unaudited information which has not been verified by outside auditors in making its decision to engage in a transaction with the business entity. This risk increases the prospect that a business combination with such a business entity might prove to be an unfavorable for us. We may be subject to the Securities and Exchange Commission's "penny stock" rules if our common stock sells below $5.00 per share. If, after our common stock begins to trade, the trading price of our common stock is below $5.00 per share, trading in our securities would be subject to the requirements of the Securities and Exchange Commission's rules with respect to securities trading below $5.00, which are referred to as "penny stocks". These rules require the delivery prior to any transaction of a disclosure schedule explaining the penny stock market and all associated risks and impose various sales practice requirements on broker-dealers who sell "penny stocks" to persons other than established customers and accredited investors, which are generally defined as institutions or an investor individually or with their spouse, who has a net worth exceeding $1,000,000 or annual income, individually exceeding $200,000 or, with their spouse, exceeding $300,000. For these types of transactions the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to the sale. In addition, broker-dealers must disclose commissions payable to both the broker-dealer and the registered representative and current quotations for the securities they offer. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our common stock which could severely limit its market price and liquidity. A business combination is likely to result in a change of control and a change of management. In conjunction with completion of a business acquisition, it is anticipated that we will issue an amount of our authorized but unissued common stock which represents the majority of the voting power and equity of our common stock, which will, in all likelihood, result in stockholders of a target company obtaining a controlling interest in us. As a condition of the business combination agreement, our current stockholders may agree to sell or transfer all or a portion of our common stock as to provide the target company with all or majority control. The resulting change in control will likely result in removal of our present officers and directors and a corresponding reduction in or elimination of their participation in any future affairs. Our Directors have the right to authorize the issuance of Preferred Stock. Our directors, without further action by our shareholders, have the authority to issue Shares of Preferred Stock from time to time in one or more series and to fix the number of Shares, the relative rights, conversion rights, voting rights, terms of redemption, liquidation preferences and any other preferences, special rights and qualifications of any such series. Any issuance of Preferred Stock would adversely affect the rights of holders of Common Stock. Our directors and officers will have substantial influence over our operations and control substantially all business matters. In view of the fact that management consists of only three persons, who indirectly own majority interest in us, our officers and directors will be the only persons responsible for conducting our day-to-day operations. We do not benefit from multiple judgments that a greater number of directors or officers may provide, and we will rely completely upon the judgment of our officers and directors when selecting a target company. We may be subject to additional risks associated with doing business in a foreign country. We may effectuate a business combination with a merger target whose business operations or even headquarters, place of formation or primary place of business are located outside the United States of America. In such event, we may face significant additional risks associated with doing business in that country. In addition to the language barriers, different presentations of financial information, different business practices, and other cultural differences and barriers which may make it difficult to evaluate such a merger target, ongoing business risks result from the international political situation, uncertain legal systems and applications of law, prejudice against foreigners, corrupt practices, uncertain economic policies and potential political and economic instability which may be exacerbated in various foreign countries. In doing business with a foreign target we may also be subject to such risks, including, but not limited to, currency fluctuations, regulatory problems, punitive tariffs, unstable local tax policies, trade embargoes, risks related to shipment of raw materials and finished goods across national borders and cultural and language differences. Foreign economies may differ favorably or unfavorably from the United States economy in growth of gross national product, rate of inflation, market development, rate of savings, and capital investment, resource self-sufficiency and balance of payments positions, and in other respects. We could be subject to various taxes which may have an adverse effect upon us. Federal and state tax consequences will, in all likelihood, be major considerations in any business combination which we may undertake. Currently, such transactions may be structured so as to result in tax-free treatment to both companies, pursuant to various federal and state tax provisions to minimize the federal and state tax consequences to both us and the target entity. There can be no assurance that such business combination will meet the statutory requirements of a tax-free reorganization or that the parties will obtain the intended tax-free treatment upon a transfer of stock or assets. A non-qualifying reorganization could result in the imposition of both federal and state taxes, which may have an adverse effect upon both parties to the transaction. There can be no assurance that we will be able to complete a Business Combination Transaction with a suitable entity during the 18 month period set forth in Rule 419, and if we do not complete such a transaction, all funds held in escrow will be returned to the purchasers of shares from selling shareholders pursuant to this offering, and the shares purchased pursuant to this offering will be returned to the selling shareholders pursuant to this offering. If there are no sales pursuant to this offering, there will be no funds and no shares held in escrow, and we will not be required to take any action, but we may enter into a business combination at any time, whether prior to, or subsequent to, said 18 month period. We are conducting this offering pursuant to Rule 419. Pursuant to that rule, if a Business Combination Transaction is not completed within 18 months after the effective date of this Registration Statement, we will be required to return all funds held in escrow to the purchasers of shares from selling shareholders pursuant to this offering. There can be no assurance that we will find a suitable entity with which to enter into such transaction during said 18 month period. Even if we do identify a suitable entity for such transaction, there can be no assurance that such entity would enter into such a transaction, or that the transaction could be completed within said 18 month period. If there are no sales pursuant to this offering, there will be no funds and no shares held in escrow, and we will not be required to take any action, but we may enter into a business combination at any time, whether prior to, or subsequent to, said 18 month period. In view of the fact that there are numerous other ways in which private companies can become public or raise capital, and because of the availability of blank check companies for Business Combination Transactions, there can be no assurance that the terms of a potential Business Combination Transaction would be favorable to us. Even if we find a suitable entity for a Business Combination Transaction during the 18 month period, and that entity is willing to enter into such a transaction, there can be no assurance that we would be able to complete that transaction on terms which would be favorable to us. Private companies seeking to become public have many options other than a business combination with a blank check company, such as initial public offerings, direct public offerings, Regulation A offerings, public offerings on foreign exchanges, and business combinations with defunct public companies, and have many other options for access to capital other than becoming public, such as private offerings, Regulation S offerings, venture capital, and private equity transactions. The wide range of options available to such companies may result in those companies being able to require favorable terms from a blank check company in a Business Combination Transaction, and may reduce the potential profitability to us of such a Business Combination Transaction. In addition, there are a large number of blank check companies seeking to engage in Business Combination Transactions, and the availability of such companies may result in private companies being able to require favorable terms from any particular blank check company in a Business Combination Transaction, which may reduce the potential profitability to us of such a Business Combination Transaction. If we are unable to complete a Business Combination Transaction during the 18 month period, we will be required to return all funds held in escrow, and any investors purchasing shares pursuant to this offering would be unable to benefit from any subsequent transaction consummated by our company. If we are unable to complete a Business Combination Transaction during the 18 month period, we will be required to return all funds held in escrow, and any investors purchasing shares pursuant to this offering would be unable to benefit from any subsequent transaction consummated by our company; if subsequent to that 18 month period, we complete a Business Combination Transaction which is highly profitable for all of our shareholders, any investors purchasing shares pursuant to this offering would have had their escrow funds returned at the end of the 18 month period, would not have remained holders of our shares subsequent to the 18 month period, and would not have benefited from that transaction. Shares purchased pursuant to this offering will be held in escrow pending the completion of a Business Combination Transaction and the purchasers confirmation that they wish to remain investors in our company subsequent to such transaction, and purchasers are prohibited from selling shares purchased pursuant to this offering or entering into contracts for sale to be satisfied by the delivery of the shares purchased pursuant to this offering until after such Business Combination Transaction is completed and the shares are released from escrow to them pursuant to such confirmation. Shares purchased pursuant to this offering will be held in escrow, and will only be released to purchasers subsequent to the completion of a Business Combination Transaction, and subsequent to those purchasers confirmation that they wish to remain investors in our company subsequent to such transaction. Pursuant to Rule 15g-8 of the Exchange Act, it is unlawful for any person to sell or offer to sell securities (or any interest in or related to the securities) held in a Rule 419 escrow account other than pursuant to (A) a qualified domestic relations order issued by a court in connection with divorce proceedings or (B) Title I under the Employee Retirement Income Security Act (ERISA). As a result, sales of the shares held in escrow, or contracts for sale to be satisfied by delivery of the shares held in escrow (e.g. contracts for sale on a when, as, and if issued basis) will be prohibited. Such rule prohibits sales of other interests in the shares held in escrow, including, but not limited to, derivative securities with respect to those shares, whether or not physical delivery is required. Therefore, investors will not be able to realize any return on their investment for the period of the escrow, which may be up to 18 months after the effective date of this Registration Statement. If there are any sales pursuant to this offering, the selling shareholders will not have access to their funds during the period the funds are held in escrow, and the Purchasers will not receive shares during the period of the escrow. The funds from your purchase shall be held in escrow until the sooner of (A) we enter into an agreement for a Business Combination Transaction and you decline to confirm that you wish to remain an investor in the company and (B) the date which is eighteen (18) months after the effective date of this registration statement. If you purchase shares from selling shareholders pursuant to this offering and we do not enter into a Business Combination Transaction for whatever reason, you will have to wait until eighteen (18) months after the effective date of this registration statement before your proportionate portion of the escrow funds are returned to you, which escrow funds shall include any interest and dividends which have been paid thereon during the period while such funds were held in escrow. You will be offered the return of your proportionate portion of the escrow funds only upon the execution of an agreement for a Business Combination Transaction or upon the expiration of said eighteen (18) month period. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Forward-looking statements are based upon the beliefs of our management, as well as assumptions made by and information currently available to our management. When used in this prospectus, the words estimate, project, believe, anticipate, intend, expect and similar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are subject to risks and uncertainties which may cause our actual results to differ materially from those contemplated in our forward-looking statements. We caution you not to place undue reliance upon such forward-looking statements, as our results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors section and elsewhere in this prospectus. Any such statements are representative only as of the date of this prospectus. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances subsequent to the date of this prospectus or to reflect the occurrence of unanticipated events. USE OF PROCEEDS This prospectus relates to shares of our common stock which may be offered and sold from time to time by the selling stockholders. We will not receive any proceeds from the sale of shares of common stock in this offering. This offering is being conducted pursuant to Rule 419 of the Securities Act. Accordingly, if and when any sale of securities is made by a selling shareholder prior to our entry into a merger, acquisition, or similar transaction (hereinafter collectively referred to as a Business Combination Transaction ), the securities being sold and the purchase price for the securities being sold (the purchasers of those shares are hereinafter referred to as the Purchasers ) shall be placed into escrow with an insured depository institution. When we have entered into an agreement for a Business Combination Transaction with one or more businesses (the Targets ), we shall file an amendment to this registration statement and send the Purchasers extensive information with respect to the Targets including, but not limited to, audited financial statements, and each Purchaser shall have a period (to be determined by us) of not less than twenty (20) and not more than forty five (45) business days after the effective date of that amendment (the end of such period, the Deadline ) in which to inform us if he, she or it wishes to remain an investor in our company subsequent to the closing of the Business Combination Transaction. If a Purchaser informs us on, or prior to, the Deadline that he, she or it wishes to remain an investor in our company subsequent to the closing of the Business Combination Transaction, we shall release the shares purchased by him, her or it to him, her or it and release from escrow the funds he, she or it paid for such shares, plus any interest or dividends which have been paid thereon during the period while such funds were held in escrow, to the selling shareholder from whom he, she or it purchased those shares. If a Purchaser fails to inform us on, or prior to, the Deadline that he, she or it wishes to remain an investor in our company subsequent to the closing of the Business Combination Transaction, his, her or its escrow funds, plus any interest or dividends thereon, shall be returned to him, her or it within five (5) business days after the forty fifth (45th) business day following the effective date of that amendment, and his, her or its shares shall be returned to the selling shareholder from whom he, she or it purchased his, her or its shares. If any selling shareholders sold any shares to Purchasers, and we have not consummated a Business Combination Transaction within eighteen (18) months after the effective date of this registration statement, all escrow funds shall be returned to the Purchasers, and all of the shares held in escrow shall be returned to the selling shareholders from whom those Purchasers purchased them. In view of the fact that the escrow funds shall either be released to the selling shareholders or returned to the Purchasers, we shall not receive any funds from this offering. If there are no sales of securities pursuant to this offering, no funds or securities shall be placed in escrow, and we shall not file an amendment to this registration statement. If there are no sales pursuant to this offering, we may enter into a Business Combination Transaction at any time, regardless of whether prior to, or subsequent to, eighteen (18) months after the effective date of this registration statement. If there are no sales pursuant to this offering, then after we consummate a Business Combination Transaction, we shall file an 8-K form with the Securities and Exchange Commission containing extensive information as required by SEC regulations with respect to the Target(s), including, but not limited to, audited financial statements. Subsequent to consummating such Business Combination Transaction, we would no longer be deemed to be a shell company, and the provisions of Rule 419 with respect to escrow of funds, and purchasers opportunity to receive a return of their investment funds if they did not approve of the acquisition would not be applicable. DETERMINATION OF OFFERING PRICE The selling shareholders will determine at what price they may sell the offered shares, and such sales may be made at prevailing market prices, or at privately negotiated prices. DILUTION In view of the fact that the selling shareholders are offering for sale shares our common stock which are already issued and outstanding, the sale by the selling shareholders of their shares of our common stock pursuant to this prospectus will not result in any dilution to our shareholders. CAPITALIZATION The following table sets forth our capitalization as of the six month period ended June 2007. June 30, 2007 Stockholders Equity Common Stock, $.001 Par Value, 50 Million Authorized, 3,210,000 issued and outstanding $ 3,210 Additional Paid in Capital $ 17,790 Preferred stock, $.001 par value, 5 Million authorized, none issue of outstanding - Deficit accumulated during the development stage ($6,494 ) Total stockholders equity (deficiency) $ 14,506 Total capitalization $ 14,506 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our Common Stock is not presently trading on any stock exchange. We are not aware of any market active in our stock since inception through the date of this filing. We intend to apply and will use our best efforts for a listing of our common stock on the OTC Bulletin Board, but have not yet done so. There can be no assurance that a trading market will ever develop, or if developed, that it will be sustained. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. We were organized as a vehicle to investigate and, if such investigation warrants, merge or acquire a target company or business seeking the perceived advantages of being a publicly held corporation. As of the date of this prospectus, we have no particular acquisitions in mind and have not entered into any negotiations with respect to the possibility of a merger or acquisition between us and such other company. We will use our best efforts and anticipate that our common stock will be eligible to trade on the OTC Bulletin Board (the OTCBB ). If we consummate a business combination, we may seek the listing of our common stock on any of the several NASDAQ markets or the American Stock Exchange, either immediately or sometime in the future. There can be no assurance that we will be quoted on the OTCBB or be able to meet the initial listing standards of any stock exchange or quotation service, or that we will be able to maintain a listing of our common stock on any of those or any other stock exchange or quotation service. Our principal business objective for the next twelve (12) months and beyond such time will be to achieve long-term growth potential through a combination with a business rather than immediate, short-term earnings. We will not restrict our potential candidate target companies to any specific business, industry or geographical location and, thus, may acquire any type of business. We do not currently engage in any business activities. We do not currently have any cash flow. The costs of investigating and analyzing business combinations for the next twelve (12) months and beyond such time will be paid with money in our treasury or will be loaned to or invested in us by our stockholders, management or other investors. There can be no assurance that we will be able to obtain any additional money for our treasury should it become necessary. We have raised capital which we believe will be sufficient until we consummate a merger or other business combination. If not, we will either cease operations or will need to raise additional capital through the issuance of additional shares or through debt. There is no existing commitment to provide additional capital, and there can be no assurance that we shall be able to receive additional financing. During the next twelve (12) months we anticipate incurring costs related to: (i) filing of Exchange Act reports, and (ii) costs relating to consummating a merger or acquisition. We may consider a business which has recently commenced operations, is a developing company in need of additional funds for expansion into new products or markets, is seeking to develop a new product or service, or is an established business which may be experiencing financial or operating difficulties and is in need of additional capital. In the alternative, a business combination may involve the acquisition of, or merger with, a company which does not need substantial additional capital, but which desires to establish a public trading market for its shares, while avoiding, among other things, the time delays, significant expense, and loss of voting control which may occur in a public offering. None of our officers or directors has had any preliminary contact or discussions with any representative of any other entity regarding a business combination with us. Any target business which is selected by us may be a financially unstable company or an entity in its early stages of development or growth, including entities without established records of revenues or earnings. In that event, we will be subject to numerous risks inherent in the business and operations of financially unstable and early stage or potential emerging growth companies. In addition, we may effect a business combination with an entity in an industry characterized by a high level of risk, and, although our management will endeavor to evaluate the risks inherent in a particular target business, there can be no assurance that we will properly ascertain or assess all significant risks. Our management anticipates that it will likely be able to effect only one business combination, due primarily to our limited financing, and the dilution of interest for present and prospective stockholders, which is likely to occur as a result of our management's plan to offer a controlling interest to a target business in order to achieve a tax free reorganization. This lack of diversification should be considered a substantial risk in investing in us, because it will not permit us to offset potential losses from one venture against gains from another. We intend to seek to carry out our business plan as discussed herein. In order to do so, we need to pay ongoing expenses, including particularly accounting fees incurred in conjunction with preparation and filing of this prospectus, and in conjunction with future compliance with its on-going reporting obligations. Although we have raised capital pursuant to a private offering to pay these anticipated expenses, we may not have sufficient funds to pay all or a portion of such expenses. If we fail to pay such expenses, we have not identified any alternative sources. There is substantial doubt about our ability to continue as a going concern. We have raised capital which we believe will be sufficient until we consummate a merger or other business combination. If not, we will either cease operations or we will need to raise additional capital through the issuance of additional shares or through debt. There is no existing commitment to provide additional capital. There can be no assurance that we shall be able to receive additional financing We do not intend to make any loans to any prospective merger or acquisition candidates or unaffiliated third parties. We have adopted a policy that we will not seek an acquisition or merger with any entity in which any of our officers, directors, and controlling stockholders or any affiliate or associate serves as an officer or director or holds any ownership interest. We anticipate that the selection of a business combination will be complex and extremely risky. Because of general economic conditions, rapid technological advances being made in some industries and shortages of available capital, our management believes that there are numerous firms seeking the perceived benefits of becoming a publicly traded corporation. Such perceived benefits of becoming a publicly traded corporation include, among other things, facilitating or improving the terms on which additional equity financing may be obtained, providing liquidity for the principals of and investors in a business, creating a means for providing incentive stock options or similar benefits to key employees, and offering greater flexibility in structuring acquisitions, joint ventures and the like through the issuance of stock. Potentially available business combinations may occur in many different industries and at various stages of development, all of which will make the task of comparative investigation and analysis of such business opportunities extremely difficult and complex. We do not currently intend to retain any entity to act as a finder to identify and analyze the merits of potential target businesses. However, we presently contemplate that Michael Zaroff, one of our officers, directors and controlling stockholders, may introduce potential business combinations to us. No finder s fees will be paid to Mr. Zaroff. After this prospectus is cleared by the Commission, our officers and directors intend to contact a number of registered broker-dealers to advise them of our existence and to determine if any companies or businesses they represent have an interest in considering a merger or acquisition with us. Business opportunities may also come to our attention from various sources, including professional advisers such as attorneys and accountants, venture capitalists, members of the financial community, and others who may present unsolicited proposals. If such person is not a registered broker-dealer, we will not pay any fees unless legally permitted to do so. All securities transactions effected in connection with our business plan as described in this prospectus will be conducted through or effected by a registered broker-dealer. As to date there have been no discussions, agreements or understandings with any broker-dealers or finders regarding our search for business opportunities. Our management is not affiliated with any broker-dealers, and has not in the past retained a broker-dealer to search for business opportunities. In the event of a successful acquisition or merger, we may pay a finder's fee, in the form of cash or common stock in the merged entity retained by us, to individuals or entities legally authorized to do so, if such payments are permitted under applicable federal and state securities law. The amount of any finder's fee will be subject to negotiation, and cannot be estimated at this time, but is expected to be comparable to consideration normally paid in like transactions. Management believes that such fees are customarily between 1% and 5% of the size of the transaction, based upon a sliding scale of the amount involved. Such fees are typically in the range of 5% on a $1,000,000 transaction ratably down to 1% in a $4,000,000 transaction. Any cash finder's fee earned will need to be paid by the prospective merger or acquisition candidate, because we do not have sufficient cash assets with which to pay any such obligation. If we are required pursuant to applicable federal or state securities laws, any finder retained by us will be a registered broker-dealer, who shall be compensated solely in accordance with the NASD regulations. No fees of any kind will be paid by us to our promoters and management or to our associates or affiliates. We may merge with a company which has retained one or more consultants or outside advisors. In such situation, we expect that the business opportunity will compensate the consultant or outside advisor. As of the date of this filing, there have been no discussions, agreements or understandings with any third-parties or with any representatives of the owners of any business or company regarding the possibility of a merger or acquisition between us and such other company. Consequently, we are unable to predict how the amount of such compensation will be calculated at this time. It is anticipated that any finder which the target company retains would likely be a registered broker-dealer. We will not restrict our search to any specific kind of firm, but may acquire a venture which is in its preliminary or development stage, one which is already in operation, or in a more mature stage of its corporate existence. The acquired business may desire to have its shares publicly traded, or may seek other perceived advantages which we may be able offer. There are no existing loan arrangements or arrangements for any financing whatsoever relating to any business opportunities. This offering is being conducted pursuant to Rule 419 of the Securities Act. Accordingly, if and when any sale of securities is made by a selling shareholder prior to our entry into a merger, acquisition, or similar transaction (hereinafter collectively referred to as a Business Combination Transaction ), the securities being sold and the purchase price for the securities being sold (the purchasers of those shares are hereinafter referred to as the Purchasers ) shall be placed into escrow with an insured depository institution. When we have entered into an agreement for a Business Combination Transaction with one or more businesses (the Targets ), we shall file an amendment to this registration statement and send the Purchasers extensive information with respect to the Targets including, but not limited to, audited financial statements, and each Purchaser shall have a period (to be determined by us) of not less than twenty (20) and not more than forty five (45) business days after the effective date of that amendment (the end of such period, the Deadline ) in which to inform us if he, she or it wishes to remain an investor in our company subsequent to the closing of the Business Combination Transaction. If a Purchaser informs us on, or prior to, the Deadline that he, she or it wishes to remain an investor in our company subsequent to the closing of the Business Combination Transaction, we shall release the shares purchased by him, her or it to him, her or it and release from escrow the funds he, she or it paid for such shares, plus any interest or dividends which have been paid thereon during the period while such funds were held in escrow, to the selling shareholder from whom he, she or it purchased those shares. If a Purchaser fails to inform us on, or prior to, the Deadline that he, she or it wishes to remain an investor in our company subsequent to the closing of the Business Combination Transaction, his, her or its escrow funds, plus any interest or dividends thereon, shall be returned to him, her or it within five (5) business days after the forty fifth (45th) business day following the effective date of that amendment, and his, her or its shares shall be returned to the selling shareholder from whom he, she or it purchased his, her or its shares. If any selling shareholders sold any shares to Purchasers, and we have not consummated a Business Combination Transaction within eighteen (18) months after the effective date of this registration statement, all escrow funds shall be returned to the Purchasers, and all of the shares held in escrow shall be returned to the selling shareholders from whom those Purchasers purchased them. In view of the fact that the escrow funds shall either be released to the selling shareholders or returned to the Purchasers, we shall not receive any funds from this offering. If there are no sales of securities pursuant to this offering, no funds or securities shall be placed in escrow, and we shall not file an amendment to this registration statement. If there are no sales pursuant to this offering, we may enter into a Business Combination Transaction at any time, regardless of whether prior to, or subsequent to, eighteen (18) months after the effective date of this registration statement. If there are no sales pursuant to this offering, then after we consummate a Business Combination Transaction, we shall file an 8-K form with the Securities and Exchange Commission containing extensive information as required by SEC regulations with respect to the Target(s), including, but not limited to, audited financial statements. Subsequent to consummating such Business Combination Transaction, we would no longer be deemed to be a shell company, and the provisions of Rule 419 with respect to escrow of funds, and purchasers opportunity to receive a return of their investment funds if they did not approve of the acquisition would not be applicable. If any shares are sold pursuant to this offering, the funds from those sales would be received by the selling shareholders if the Purchasers of those shares approve of a Business Combination Transaction completed prior to eighteen (18) months after the effective date of this registration statement. Such funds would be returned to the Purchasers either if they do not approve of the Business Combination Transaction or if we do not complete a Business Combination Transaction within such eighteen (18) month period. In view of the fact that we will not receive any funds from this offering regardless of (A) the number of shares sold pursuant to this offering or (B) if shares are sold pursuant to this offering, regardless of whether any or all Purchasers of shares approve of a Business Combination Transaction which we enter into within such eighteen (18) month period, if any or all Purchasers fail to approve such transaction or if there are few or no sales pursuant to this offering, we would not be prevented from entering into or completing such transaction, and would then return the funds held in escrow to any Purchasers who failed to approve such transaction. Our ability to enter into and complete a Business Combination Transaction will depend upon factors including (A) our status as a public company, and (B) our ability to become quoted on quotation services such as the OTC Bulletin Board and will not be affected by the number of shares sold pursuant to this offering or by Purchasers decisions to remain investors in our company subsequent to a Business Combination Transaction or to seek the return of their escrow funds. The funds raised from any sales pursuant to this offering when released from escrow would be paid to the selling shareholders and not to us. Therefore, the return of any funds to the purchasers of shares pursuant to this offering would not affect us, because we would never receive such funds in any case. PLAN OF OPERATIONS Results of Operations Because we currently do not have any business operations, we have not had any revenues during the initial fiscal year ended December 31, 2006 or the six months ended June 30, 2007. Total expenses for the period ended December 31, 2006 were $1,710. Total expenses for the quarter ended June 30, 2007 and the six months ended June 2007 were $3,984 and $4,784 respectively. These expenses constituted organizational fees and costs of incorporation. We currently have no material commitments for capital expenditures. Our future growth is dependent upon our ability to identify suitable candidates for acquisitions. While we believe that our currently available working capital, after receiving the aggregate proceeds of the sale of common stock, should be adequate to sustain our operations at our current levels through at least the next twelve months, there can be no assurance that current capital will be sufficient to meet our needs until the consummation of a merger or business combination. We have raised capital which we believe will be sufficient until we consummate a merger or other business combination. If not, we will either cease operations or we will need to raise additional capital through the issuance of additional shares or through debt. There is no existing commitment to provide additional capital. There can be no assurance that we shall be able to receive additional financing We believe that our currently available working capital, should be adequate to sustain our operations at our current levels through at least the next twelve months. LIQUIDITY AND CAPITAL RESOURCES We do not have any revenues from operations and, absent a merger or other combination with an operating company, or a public or private sale of our equity or debt securities, the occurrence of either of which cannot be assured, we will be dependent upon future loans or equity investments from our present stockholders or management, for which there is no existing commitment. During the period from November 1, 2006 through December 31, 2006, $12,000 was raised by selling Common Stock. As of December 31, 2006, we had a cash balance of $10,290 and working capital of $10,290. During the six months ended June 30, 2007, $9000 was raised by selling Common Stock. As of June 30, 2007 we had a cash balance of $17,581, and working capital of $14,506 As of June 30, 2007, we had liabilities in the amount of $3,075, which was subsequently paid. We have raised capital which we believe will be sufficient until we consummate a merger or other business combination. If not, we will either cease operations or we will need to raise additional capital through the issuance of additional shares or through debt. There is no existing commitment to provide additional capital. There can be no assurance that we shall be able to receive additional financing Commitments We do not have any commitments which are required to be disclosed in tabular form as of June 30, 2007. Off-Balance Sheet Arrangements We are not currently a party to, or otherwise involved with, any off-balance sheet arrangements which have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. SEASONALITY Given the nature of our business, we do not anticipate any material variations in revenues and operating costs due to seasonality. DESCRIPTION OF BUSINESS Business of Issuer Based upon our proposed business activities, we are a "blank check" company. The U.S. Securities and Exchange Commission (the "SEC") defines those companies as "any development stage company that is issuing a penny stock, within the meaning of Section 3 (a)(51) of the Exchange Act of 1934, as amended, (the "Exchange Act") and that has no specific business plan or purpose, or has indicated that its business plan is to merge with an unidentified company or companies." Many states have enacted statutes, rules and regulations limiting the sale of securities of "blank check" companies in their respective jurisdictions. Our officers and directors have expressed their intention not to sell their respective shares of our common stock except in connection with or following a business combination which results in our no longer being classified as a blank check company. We intend to comply with the periodic reporting requirements of the Exchange Act for as long as we are subject to those requirements. We were organized as a vehicle to investigate and, if such investigation warrants, acquire a target company or business seeking the perceived advantages of being a publicly held corporation. Our principal business objective for the next 12 months and beyond such time will be to achieve long-term growth potential through a combination with a business rather than immediate, short-term earnings. We will not restrict our potential candidate target companies to any specific business, industry or geographical location and, thus, may acquire any type of business. The analysis of new business opportunities has and will be undertaken by or under the supervision of our officers and directors. We have not yet considered potential acquisition transactions with any companies, nor, as of this date, have we entered into any definitive agreement with any party. We have unrestricted flexibility in seeking, analyzing and participating in potential business opportunities. Notwithstanding this flexibility, we shall have no duty or obligation to analyze and investigate more than one business opportunity. In our efforts to analyze potential acquisition targets, we will consider a number of factors including, but not limited to, the following: (A) Competitive position as compared to other firms of similar size and experience within the industry segment as well as within the industry as a whole; (B) Potential for growth, indicated by new technology, anticipated market expansion or new products; (C) Capital requirements and anticipated availability of required funds, to be provided by the target business or from operations, through the sale of additional securities, through joint ventures or similar arrangements or from other sources; (D) Strength and diversity of management, either in place or scheduled for recruitment; (E) The cost of participation by us as compared to the perceived tangible and intangible values and potentials; (F) The accessibility of required management expertise, personnel, raw materials, services, professional assistance and other required items; and (G) The extent to which the business opportunity can be advanced; In applying the foregoing factors, no one of which will be controlling, management will attempt to analyze all facts and circumstances and make a determination based upon reasonable investigative measures and available data. Management intends to meet personally with management and key personnel of the target business entity as part of its investigation and to utilize written reports and personal investigation in order to evaluate each of the above factors. Potentially available business opportunities may occur in many different industries, and at various stages of development, all of which will make the task of comparative investigation and analysis of such business opportunities extremely difficult and complex. Due to the limited capital available for investigation, we may not discover or adequately evaluate adverse facts about the opportunity to be acquired. Our plans are in the conceptual stage only. There is no relationship between our particular name and our intended business plan. If successful in completing a merger or acquisition, we expect that our name would change to reflect the marketing goals of the business combination. Form of Acquisition The manner in which we participate in an opportunity will depend upon the nature of the opportunity, the respective needs and desires of the parties and the promoters of the opportunity, and our relative negotiating strength and that of such promoters. It is likely that we will acquire our participation in a business opportunity through the issuance of our Common Stock or other securities. Although the terms of any such transaction cannot be predicted, it should be noted that in certain circumstances the criteria for determining whether or not an acquisition is a so-called "tax free reorganization pursuant to Section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the "Code"), depends upon whether the owners of the acquired business own 80% or more of the voting stock of the surviving entity. If a transaction were structured to take advantage of these provisions rather than other "tax free" provisions provided pursuant to the Code, all prior stockholders would in such circumstances retain 20% or less of the total issued and outstanding shares of the surviving entity. Under other circumstances, depending upon the relative negotiating strength of the parties, prior stockholders may retain substantially less than 20% of the total issued and outstanding shares of the surviving entity. The result of the foregoing could result in substantial additional dilution to the equity of those who were our stockholders prior to such reorganization. Our present stockholders will likely not have control of a majority of the voting shares following a reorganization transaction. As part of such a transaction, all or a majority of our directors are likely to resign and new directors may be appointed without any vote by stockholders. In the event of an acquisition, the transaction shall be approved by vote or consent by our stockholders. In the event of a statutory merger or consolidation directly involving us, we shall obtain the written consent of the holders of a majority of our outstanding shares, which vote can be accomplished by our current management, or pursuant to a stockholders' meeting to obtain such approval. Any such transaction shall require Management to obtain stockholder approval. It should be noted that in view of the fact that our management indirectly controls a majority of our shares, no consent of any stockholders other than Mintz & Fraade Enterprises, LLC and Sierra Grey Capital, LLC shall be required. It is anticipated that the investigation of specific business opportunities and the negotiation, drafting and execution of relevant agreements, disclosure documents and other instruments will require substantial management time and attention and substantial cost for the services of accountants, attorneys and others. If a decision is made not to participate in a specific business opportunity, the costs which are incurred in the related investigation would not be recoverable. Furthermore, even if an agreement is reached for the participation in a specific business opportunity, the failure to consummate that transaction may result in the loss to us of the related costs incurred. We presently have no employees, and do not expect to hire any employees. Our officers and directors are engaged in outside business activities and anticipate
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+This summary only highlights the more detailed information appearing elsewhere in this prospectus. As this is a summary, it does not contain all of the information that you should consider in making an investment decision. You should read this entire prospectus carefully, including the information under , ' ': , ' ': Risk Factors and our financial statements and the related notes included elsewhere in this prospectus, before investing. References in this prospectus to , ' ': , ' ': we, , ' ': , ' ': us or , ' ': , ' ': our company refer to Highlands Acquisition Corp. References in this prospectus to , ' ': , ' ': public stockholders refers to those persons that purchase the securities offered by this prospectus and any of our officers, directors and founders (as defined below) who purchase these securities either in this offering or afterwards, provided that such individuals status as , ' ': , ' ': public stockholders shall only exist with respect to those securities so purchased. References in this prospectus to our , ' ': , ' ': management team refer to our officers and directors. Unless we tell you otherwise, the information in this prospectus (i) assumes that Kanders & Company will purchase 500,000 units directly from the underwriters in this offering, (ii) assumes that the underwriters will not exercise their over-allotment option and (iii) gives retroactive effect to a unit dividend of 0.15 units for each outstanding unit on July 16, 2007. We are a blank check company formed under the laws of the State of Delaware on April 26, 2007. We were formed to acquire a currently unidentified operating business or several operating businesses through a merger, stock exchange, asset acquisition, reorganization or similar business combination, which we refer to throughout this prospectus as a business combination. To date, our efforts have been limited to organizational activities as well as activities related to this offering. No evaluations of, or discussions with, any potential acquisition candidates occurred prior to our formation, nor did any of our principals have any direct or indirect contact with any potential acquisition candidate prior to our formation. We do not have any specific initial business combination under consideration. Furthermore, we have not, nor has anyone on our behalf, contacted any prospective target business or had any substantive discussions, formal or otherwise, with respect to such a transaction. Our efforts in identifying a prospective target business will not be limited to a particular industry, although we initially intend to focus our search for a target business in the healthcare industry. Accordingly, although our management s expertise is primarily in the healthcare industry, if we are presented with an opportunity in another industry that would be in our stockholders best interests, we may pursue that opportunity. We have not established any specific time or monetary amounts that would cause us to shift our focus from the healthcare industry. Rather, we will consider all potentially attractive business opportunities that we locate or are presented to us. The healthcare industry encompasses all healthcare service companies, including among others, managed care companies, hospitals, healthcare system companies, physician groups, diagnostic service companies, medical device companies and other healthcare-related entities. We believe the healthcare industry represents an attractive environment for our management team to complete a business combination which may serve as a platform for future growth. According to publicly available information from the Centers for Medicare and Medicaid Services, or CMS, spending on healthcare in the United States was approximately $2.0 trillion in 2005, or approximately 16.0% of the 2005 United States gross domestic product, or GDP. The primary categories driving 2005 spending were hospital and nursing home care, physician and clinical services and prescription drug spending (as reported by CMS, Office of the Actuary, National Health Statistics Group, , ' ': , ' ': National Health Expenditure Projections 2006-2016 ). This report indicates that national healthcare spending is projected to grow on average 6.9% per year through 2015, when it is expected to reach nearly $4.0 trillion, or $12,320 per person. As evidenced by the projected increase in healthcare spending as a percentage of GDP from 16.0% in 2005 to an expected 19.2% in 2015 (set forth in the same report), we anticipate that the United States will continue to spend substantially, and at an accelerated rate, on healthcare products and services, driven largely by demographic trends and rapid advancement in technology. Our management team possesses a substantial level of healthcare industry public market, private equity and capital raising experience as investors, operators and managers. Collectively, our officers The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED SEPTEMBER 27, 2007 PROSPECTUS $100,000,000 Highlands Acquisition Corp. 10,000,000 Units Highlands Acquisition Corp. is a newly organized blank check company formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination, one or more operating businesses, which we refer to as our initial business combination. Our efforts in identifying a prospective target business will not be limited to a particular industry although we initially intend to focus our search for a target business in the healthcare industry. We will have no more than 24 months to consummate a business combination. If we fail to do so, we will liquidate and distribute the proceeds held in the trust account to our public stockholders. To date, our efforts have been limited to organizational activities as well as activities related to this offering. We do not have any specific initial business combination under consideration. We have not, nor has anyone on our behalf, contacted any prospective target business or had any substantive discussions, formal or otherwise, with respect to such a transaction. This is an initial public offering of our securities. Each unit consists of one share of our common stock and one warrant. We are offering 10,000,000 units. We expect that the public offering price will be $10.00 per unit. Each warrant entitles the holder to purchase one share of our common stock at a price of $7.50. The warrants will become exercisable on the later of the completion of our initial business combination and 15 months from the date of this prospectus, provided in each case that we have an effective registration statement covering the shares of common stock issuable upon exercise of the warrants and a current prospectus relating to them is available. The warrants will expire five years from the date of this prospectus, unless earlier redeemed. We have also granted the underwriters a 30-day option to purchase up to an additional 1,500,000 units to cover over-allotments, if any. Kanders & Company, an affiliate of each of Warren B. Kanders, a member of our Board of Directors, Philip A. Baratelli, our Chief Financial Officer, and Gary M. Julien, our Vice President of Corporate Development, and Robert W. Pangia, our Chief Executive Officer, Ivy Healthcare Capital II, L.P., an affiliate of Mr. Pangia, and Dennis W. O Dowd, Virgilio Rene Veloso and Fieldpoint Capital, LLC, each a stockholder of ours, have agreed to purchase an aggregate of 3,250,000 warrants at a price of $1.00 per warrant ($3.25 million in the aggregate) in a private placement that will occur simultaneously with the consummation of this offering. We refer to these warrants as the , ' ': , ' ': sponsors warrants. The proceeds from the sale of the sponsors warrants in the private placement will be deposited into the trust account and be subject to a trust agreement, described below, and will be part of the funds distributed to our public stockholders in the event we are unable to complete a business combination. The sponsors warrants will be substantially similar to the warrants included in the units sold in this offering except that if we call the warrants for redemption, the sponsors warrants will not be redeemable by us so long as they are still held by these purchasers or their permitted transferees. The purchasers of the sponsors warrants have agreed not to transfer, assign or sell any of these warrants (subject to limited exceptions) until after we consummate our initial business combination. In addition, Kanders & Company, Robert W. Pangia, Ivy Healthcare Capital II, L.P., Dennis W. O Dowd, Virgilio Rene Veloso and Fieldpoint Capital LLC have agreed to purchase an aggregate of 1,000,000 units at a price of $10.00 per unit ($10.0 million in the aggregate) in a private placement that will occur immediately prior to the consummation of our initial business combination. We refer to this private placement as the co-investment and these private placement units, shares of common stock and warrants as the , ' ': , ' ': co-investment units, , ' ': , ' ': co-investment common stock and , ' ': , ' ': co-investment warrants, respectively, throughout this prospectus. These co-investment units will be substantially similar to the units sold in this offering except that the purchasers have agreed not to transfer, assign or sell any of these co-investment units or the co-investment common stock or co-investment warrants (including the common stock to be issued upon exercise of the co-investment warrants), subject to limited exceptions, until one year after the consummation of such business combination. Currently, there is no public market for our units, common stock or warrants. We have applied to have the units listed on the American Stock Exchange. Assuming that the units are listed on the American Stock Exchange, the units will be listed under the symbol , ' ': , ' ': HIA.U on or promptly after the date of this prospectus. Each of the common stock and warrants will trade separately on the 45th day after the date of this prospectus unless Citigroup Global Markets Inc. determines that an earlier date is acceptable. Once the securities comprising the units begin separate trading, we expect the common stock and warrants will be traded on the American Stock Exchange under the symbols , ' ': , ' ': HIA and , ' ': , ' ': HIA.WS, respectively. We cannot assure you, however, that our securities will be listed or will continue to be listed on the American Stock Exchange. Investing in our securities involves a high degree of risk. See , ' ': , ' ': Risk Factors beginning on page 24 for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Kanders & Company has indicated that it intends to purchase 500,000 units directly from the underwriters at a price equal to the public offering price of $10.00 per unit (for an aggregate purchase price of $5.0 million). If Kanders & Company purchases such units, we will receive the entire aggregate gross proceeds from this purchase and the underwriters will not receive any underwriting discounts or commissions on these units. If Kanders & Company does not purchase such units, they will be sold to the public. The following table assumes that Kanders & Company will purchase such units. Per Unit Total Public Offering Price $ 10.00 $ 95,000,000 Underwriting Discount(1) $ 0.70 $ 6,650,000 Proceeds to Highlands Acquisition Corp. (before expenses) $ 9.30 $ 88,350,000 (1) Includes $0.30 per unit or approximately $2.85 million in the aggregate ($3.3 million if the underwriters over-allotment option is exercised in full), payable to the underwriters for deferred underwriting discounts and commissions to be placed in the trust account described below. Such funds will be released to the underwriters only on completion of our initial business combination, as described in this prospectus. The underwriters are offering the units on a firm commitment basis. The underwriters expect to deliver the units to purchasers on or about , 2007. Of the proceeds we receive from this offering and the sale of the sponsors warrants described in this prospectus, approximately $9.83 per share, or $98,250,000 in the aggregate (approximately $9.80 per share, or $112,650,000 in the aggregate if the underwriters over-allotment option is exercised in full), will be deposited into the trust account, at Morgan Stanley, with Continental Stock Transfer & Trust Company as trustee. These funds will not be released until the earlier of the completion of our initial business combination and our liquidation (which may not occur until 24 months from the date of this prospectus). Citi Wm Smith & Co. The date of this prospectus is , 2007 Table of Contents and directors have over 100 years of experience in structuring, negotiating, managing and consummating mergers and acquisitions. We intend to identify acquisition candidates by leveraging our management team s relationships and experience. Ivy Capital Partners, the General Partner of Ivy Healthcare Capital, L.P. and Ivy Healthcare Capital II, L.P., which we refer to collectively as Ivy Capital Partners, an affiliate of each of Robert W. Pangia, our Chief Executive Officer, Russell F. Warren, M.D., our Chairman of the Board of Directors, and Russell F. Warren, Jr., a member of our Board of Directors, is a healthcare-focused private equity firm based in Montvale, New Jersey, that invests in companies, and manages such companies as a result of its officers and directors board positions with such companies, within the medical device, life sciences and healthcare services sectors, with particular experience in the orthopedic industry (which encompasses all companies that provide orthopedic services and products including orthopedic implants and prostheses). Ivy Capital Partners utilizes its broad network of industry contacts and investment, operations and clinical expertise to identify and build strong growth-oriented healthcare companies. Kanders & Company, an affiliate of each of Warren B. Kanders, a member of our Board of Directors, Philip A. Baratelli, our Chief Financial Officer, and Gary M. Julien, our Vice President of Corporate Development, is a private investment firm based in Stamford, Connecticut, that utilizes a private equity approach to building public companies. The firm s public market investment strategy provides public and private companies, either entire entities or divisions thereof, with strategic insights and capital for enhancing operating discipline and catalyzing long-term growth, both organically and via carefully selected acquisition opportunities. The firm s principals believe that the public markets provide an optimal forum to support growth initiatives for operating businesses. The firm has significant experience building public companies within a variety of industries including healthcare, aerospace and defense, industrial manufacturing and consumer markets through its mergers and acquisitions, corporate development and capital markets expertise. Our management team has built and maintained broad networks of relationships that we plan to utilize to identify and generate acquisition opportunities. These relationships include, among others, healthcare industry entrepreneurs, executives and board members at public and private healthcare companies, business brokers, private equity and venture capital firms, consultants, investment bankers, attorneys, accountants and prominent physicians and researchers at leading U.S. hospitals and private practices. We believe this network will be of significant assistance in helping us identify potential business combination targets. However, in each of these cases, our ability to benefit from these extensive relationships will be limited because our officers and non-independent directors have agreed until the earliest of our consummation of a business combination, our liquidation or until such time as he ceases to be an officer or director of us to present to us for our consideration, prior to presentation to any other person or entity, any business opportunity to acquire a privately held operating business, if, and only if, (i) the target entity has a fair market value between 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions) and $500 million, the target entity s principal business operations are in the healthcare industry and the opportunity is to acquire substantially all of the assets or 50.1% or greater of the voting securities of the target entity or (ii) the target entity s principal business operations are outside of the healthcare industry and the opportunity to acquire such target entity is presented by a third party to one of our officers or non-independent directors expressly for consideration by us. With respect to all business opportunities, including those described in clause (i), but excluding those described in clause (ii) above, the obligation of our officers and non-independent directors to present a business opportunity to us which may be reasonably required to be presented to us under Delaware law is subject to any pre-existing fiduciary or other obligations the officer or non-independent director may owe to another entity. These pre-existing fiduciary or other obligations include obligations to Clarus Corporation, a publicly-held company with no current operating business, net operating loss carryforwards of approximately $223 million and approximately $85 million of cash and cash equivalents that is seeking a business combination, and to Ivy Capital Partners. Our Board of Directors has adopted resolutions renouncing any interest in or expectancy to be presented any business opportunity outside of those described in clauses (i) and (ii) above (as qualified by the immediately preceding sentence) that comes to the attention of any of our Table of Contents officers or non-independent directors. Neither this agreement by our officers and non-independent directors nor the resolutions may be amended or rescinded in any way except upon prior approval by the holders of a majority of our outstanding shares of common stock. For a full description of these conflicts of interest, see the section titled , ' ': , ' ': Management – Conflicts of Interest appearing elsewhere in this prospectus. In addition, although we do not expect our independent directors to present business opportunities to us, they may become aware of business opportunities that may be appropriate for presentation to us. In such instances they may determine to present these business opportunities to other entities with which they are or may be affiliated, in addition to, or instead of, presenting them to us. We will seek to acquire a business whose operations can be improved and enhanced with our capital and intellectual resources and where there are significant opportunities for growth both organically and through a targeted acquisition program. However, we anticipate that our key personnel will be able to remain with the company after the consummation of a business combination only if they are able to negotiate employment or consulting agreements in connection with the business combination. There is no assurance that this will occur. Furthermore, while it is possible that one or more of our officers or directors will remain associated in some capacity with us following a business combination, we cannot assure you that any of them will devote their full efforts to our affairs subsequent to a business combination. We intend to focus our search primarily in the United States, although we will also evaluate international investment opportunities should we find such opportunities attractive. We have identified the following criteria and guidelines that we believe are important in evaluating prospective target businesses. We will use these criteria and guidelines in evaluating acquisition opportunities. However, we may decide to enter into a business combination with a target business that does not meet these criteria and guidelines: An experienced management team with a proven track record of executing on its business plan, driving revenue growth and enhancing profitability; An established company with a history of strong operating and financial results; A high-quality product offering which is or has the potential to become the standard of care in a large, underserved and growing market; A compelling business model with clearly defined performance execution milestones; A leading market provider with sustainable competitive advantages that cannot be easily replicated (e.g. strong patent and trade secret positions or lowest-cost and highest quality service providers); Strong free cash flow generation with recurring revenue streams; A diversified customer and supplier base; Viable opportunities for targeted industry consolidation; and Significant potential for returns in excess of our cost of capital on our acquisition investment. Our initial business combination must be with one or more target businesses whose fair market value, individually or collectively, is equal to at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions of approximately $2.85 million, or $3.3 million if the underwriters over-allotment option is exercised in full) at the time of such business combination. This may be accomplished by identifying and acquiring a single business or multiple operating businesses, which may or may not be related, contemporaneously. We do not anticipate consummating a business combination with an entity that is affiliated with any of our officers, directors or founders and have not given any consideration towards entering into such a transaction. We also do not anticipate consummating a business combination with any entity that our management has had discussions with regarding a possible business combination through Table of Contents their other business activities or with an entity that is either a portfolio company of, or has otherwise received a financial investment from, an investment banking firm (or an affiliate thereof) that is affiliated with our management team. However, we are not restricted from entering into such transactions and may do so if we determine that such a transaction is in our stockholders best interests. If we determine to enter into such a transaction, we would only do so if we obtain an opinion from an independent investment banking firm that is a member of the Financial Industry Regulatory Authority, or FINRA, indicating that the business combination is fair to our public stockholders from a financial point of view. If we are unable to consummate a business combination within 24 months from the date of this prospectus, we will liquidate and distribute the proceeds held in the trust account to our public stockholders in an amount we expect to be approximately $9.83 per share of common stock held by them (or approximately $9.80 per share if the underwriters exercise their over-allotment option in full), without taking into account any interest earned on such funds. Private Placements Effective May 1, 2007, we issued 2,875,000 of our units to our founders for an aggregate of $25,000 in cash, at a purchase price of approximately $0.01 per unit. This includes an aggregate of up to 375,000 units that are subject to forfeiture by our founders to the extent that the over-allotment option is not exercised by the underwriters in full or in part. The founders will be required to forfeit only a number of units necessary to maintain their 20% ownership interest in our common stock after giving effect to the offering and exercise, if any, of the underwriters over-allotment option. We refer to the current holders of these units as the , ' ': , ' ': founders, and we refer to these outstanding units, shares of common stock and warrants as the , ' ': , ' ': founders units , , ' ': , ' ': founders common stock and , ' ': , ' ': founders warrants throughout this prospectus. In addition, each of Robert W. Pangia, Ivy Healthcare Capital II, L.P., Dennis W. O Dowd, Virgilio Rene Veloso and Fieldpoint Capital LLC, (collectively referred to as the , ' ': , ' ': Ivy Affiliates ) and Kanders & Company have agreed to purchase an aggregate of 3,250,000 warrants at a price of $1.00 per warrant ($3.25 million in the aggregate) in a private placement that will occur simultaneously with the consummation of this offering. The $3.25 million of proceeds from this investment will be added to the proceeds of this offering and will be held in the trust account pending our completion of an initial business combination on the terms described in this prospectus. If we do not complete an initial business combination, then the $3.25 million will be part of the liquidating distribution to our public stockholders, and the sponsors warrants will expire worthless. The sponsors warrants (including the common stock to be issued upon exercise of the sponsors warrants) will not be transferable or salable by the purchasers (subject to limited exceptions including the transferee agreeing to be bound to such transfer restrictions) until after we complete a business combination, and will be non-redeemable so long as they are held by the purchasers or their permitted transferees. In addition, commencing 30 days after the consummation of our initial business combination, the sponsors warrants and the underlying common stock are entitled to registration rights under an agreement to be signed on or before the date of this prospectus. With the exception of the terms noted above, the sponsors warrants have terms and provisions that are identical to those of the warrants being sold as part of the units in this offering. In addition, Kanders & Company and the Ivy Affiliates are obligated to purchase an aggregate of 1,000,000 co-investment units at a price of $10.00 per unit ($10.0 million in the aggregate) in a private placement that will occur immediately prior to the consummation of our initial business combination. These co-investment units will be identical to the units sold in this offering, except that the purchasers have agreed not to transfer, assign or sell any of these co-investment units or the co-investment common stock or co-investment warrants included in these units (including the common stock to be issued upon exercise of the co-investment warrants), until one year after the consummation of such business combination (subject to limited exceptions including the transferee agreeing to be bound to such transfer restrictions). The proceeds from the sale of the co-investment units will provide us with additional equity capital to fund a business combination. Alternatively, the Table of Contents funds could be used as additional working capital for the target business to expand its operations, for strategic acquisitions and for marketing, research and development of existing or new products. Pursuant to a registration rights agreement, the holders of our co-investment units (and underlying securities) will be entitled to certain registration rights commencing 30 days after the consummation of a business combination. Warren B. Kanders, Russell F. Warren and our founders have entered into a stockholders agreement. Pursuant to the agreement, which will continue to be in effect for a period of three years after the consummation of our initial business combination, if a party to the agreement or one of their affiliates is nominated to serve on our Board of Directors, all parties to the agreement have agreed to vote in favor of the nominee. Additionally, the parties to the agreement have agreed that if any party proposes to sell their shares of common stock, they must first obtain the consent of the other parties (subject to limited exceptions). Our executive offices are located at One Paragon Drive, Suite 125, Montvale, New Jersey 07645, and our telephone number is (201) 573-8400. The Offering In making your decision on whether to invest in our securities, you should take into account not only the backgrounds of the members of our management team, but also the special risks we face as a blank check company and the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended (the , ' ': , ' ': Securities Act ). You will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. You should carefully consider these and the other risks set forth in the section below entitled , ' ': , ' ': Risk Factors beginning on page 24 of this prospectus. Securities offered: 10,000,000 units, each unit consisting of: one share of common stock; and one warrant. Of the 10,000,000 units being offered by this prospectus, Kanders & Company has indicated that it intends to purchase 500,000 units directly from the underwriters. Trading commencement and separation of common stock and warrants: The units will begin trading on or promptly after the date of this prospectus. Each of the common stock and warrants will trade separately on the 45th day after the date of this prospectus unless Citigroup Global Markets Inc. determines that an earlier date is acceptable. In no event will Citigroup Global Markets Inc. allow separate trading of the common stock and warrants until we file an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file a Current Report on Form 8-K with the Securities and Exchange Commission, including an audited balance sheet, promptly upon the consummation of this offering, which is anticipated to take place three business days from the date the units commence trading. The audited balance sheet will reflect our receipt of the proceeds from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Form 8-K. If the over-allotment option is exercised after our initial filing of a Form 8-K, we will file an amendment to the Form 8-K to provide updated financial information to reflect the exercise and consummation of the over-allotment option. Table of Contents We will also include in this Form 8-K, or amendment thereto, or in a subsequent Form 8-K, information indicating if Citigroup Global Markets Inc. has allowed separate trading of the common stock and warrants prior to the 45th day after the date of this prospectus. Units: Number outstanding before this offering: 2,875,000 units(1) (1) This number includes an aggregate of 375,000 units representing 375,000 shares of common stock and 375,000 warrants that are subject to forfeiture by our founders to the extent that the over-allotment option is not exercised by the underwriters. Only a number of shares and a corresponding number of warrants necessary for our founders to maintain their collective 20% ownership interest in our common stock after the consummation of this offering and the expiration of the over-allotment option or its exercise will be forfeited. Number to be outstanding after this offering: 12,500,000 units(2) Common stock: Number outstanding before this offering: 2,875,000 shares(1) Number to be outstanding after this offering: 12,500,000 shares(2) Warrants: Number outstanding before this offering: 2,875,000 warrants(1) Number to be sold privately simultaneously with consummation of this offering: 3,250,000 warrants Number to be outstanding after this offering and private placement: 15,750,000 warrants(2) Exercisability: Each warrant is exercisable to purchase one share of our common stock. Exercise price: $7.50 per share Exercise period: The warrants (except the founders warrants) will become exercisable on the later of: the completion of our initial business combination, or 15 months from the date of this prospectus; provided in each case that we have an effective registration statement under the Securities Act covering the shares of common stock issuable upon exercise of the warrants. The founders warrants, sponsors warrants and co-investment warrants are subject to the same 15 month waiting period as the public stockholders warrants so that they cannot be Table of Contents exercised prior to the time public stockholders may exercise their warrants. We have agreed to use our best efforts to have an effective registration statement covering the shares of common stock issuable upon exercise of the warrants as of the date the warrants become exercisable and to maintain a current prospectus relating to those shares of common stock until the warrants expire or are redeemed. (1) This number includes an aggregate of 375,000 units representing 375,000 shares of common stock and 375,000 warrants that are subject to forfeiture by our founders to the extent that the over-allotment option is not exercised by the underwriters. Only a number of shares and a corresponding number of warrants necessary for our founders to maintain their collective 20% ownership interest in our common stock after the consummation of this offering and the expiration of the over-allotment option or its exercise will be forfeited. (2) Assumes the over-allotment option has not been exercised and an aggregate of 375,000 units representing 375,000 shares of common stock and 375,000 warrants have been forfeited by our founders. The warrants will expire at 5:00 p.m., New York time, five years from the date of this prospectus or earlier upon redemption. On the exercise of any warrant, the warrant exercise price will be paid directly to us and not placed in the trust account. Redemption: At any time while the warrants are exercisable and there is an effective registration statement covering the shares of common stock issuable upon exercise of the warrants available and current, we may redeem the outstanding warrants (except as described below with respect to the founders warrants and sponsors warrants): in whole and not in part; at a price of $.01 per warrant; upon a minimum of 30 days prior written notice of redemption (the , ' ': , ' ': 30-day redemption period ); and if, and only if, the last sale price of our common stock equals or exceeds $14.25 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. We will not redeem the warrants unless an effective registration statement covering the shares of common stock issuable upon exercise of the warrants is current and available throughout the 30-day redemption period. Reasons for redemption limitations: We have established the above conditions to our exercise of redemption rights to provide: warrant holders with adequate notice of exercise only after the then-prevailing common stock price is substantially above the warrant exercise price; and a sufficient differential between the then-prevailing common stock price and the warrant exercise price so Table of Contents there is a buffer to absorb the market reaction, if any, to our redemption of the warrants. If the foregoing conditions are satisfied and we issue a notice of redemption, each warrant holder can exercise his, her or its warrant prior to the scheduled redemption date. However, the price of the common stock may fall below the $14.25 trigger price as well as the $7.50 warrant exercise price after the redemption notice is issued. Proposed American Stock Exchange symbols for our: Units: , ' ': , ' ': HIA.U Common stock: , ' ': , ' ': HIA Warrants: , ' ': , ' ': HIA.WS Founders units: Effective May 1, 2007, our founders purchased 2,875,000 of our units for an aggregate purchase price of $25,000. The founders units are identical to the units being sold in this offering, except that: up to an aggregate of 375,000 founders units are subject to forfeiture by our founders to the extent that the over-allotment option is not exercised in full or in part by the underwriters; the founders common stock and founders warrants are subject to the transfer restrictions described below; the founders warrants will become exercisable after the public stockholders warrants become exercisable if and when (i) the last sales price of our common stock exceeds $14.25 per share for any 20 trading days within any 30-trading day period beginning 90 days after the business combination and (ii) there is an effective registration statement covering the shares of common stock issuable upon exercise of the founders warrants; the founders warrants will not be redeemable by us as long as they are held by the founders or their permitted transferees; the founders have agreed to vote the founders common stock in the same manner as the majority of shares cast by public stockholders in connection with the vote required to approve our initial business combination and for the proposal to amend our certificate of incorporation to provide for our perpetual existence; the founders will not be able to exercise conversion rights (as described below) with respect to the founders common stock; and Table of Contents the founders have agreed to waive their rights to participate in any liquidation distribution with respect to the founders common stock if we fail to consummate a business combination. All of the founders units will be placed in escrow with Continental Stock Transfer & Trust Company, as escrow agent. Subject to the limited exceptions described below, the founders common stock will be held in escrow until one year after the consummation of our initial business combination and the founders warrants will remain in escrow until they become exercisable. A portion of the securities will be released from escrow earlier than as described above if, and to the extent the underwriters over-allotment is not exercised in full in order to maintain a collective 20% ownership interest by the founders. All of the founders common stock and founders warrants will be released from escrow earlier than described above if, subsequent to our initial business combination, (i) the last sales price of our common stock equals or exceeds $20.00 per share for any 20 trading days within any 30-trading day period beginning 90 days after our initial business combination or (ii) we consummate a subsequent liquidation, merger, stock exchange or other similar transaction which results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property. The founders have agreed, subject to certain exceptions, not to sell or otherwise transfer any of the founders common stock or founders warrants until they are released from escrow. We refer to these restrictions as the , ' ': , ' ': transfer restrictions throughout this prospectus. Furthermore, the interest holders of any founder that is an entity have agreed not to transfer their ownership interests in such entity to anyone other than another founder or an entity of which the founders are the beneficial owners, or beneficiaries of, until termination of the transfer restrictions. In addition, the founders are entitled to registration rights with respect to the founders common stock and founders warrants under an agreement to be signed on or before the date of this prospectus. Sponsors warrants purchased through private placement: Kanders & Company and the Ivy Affiliates have entered into agreements with us to purchase an aggregate of 3,250,000 sponsors warrants at a price of $1.00 per warrant ($3.25 million in the aggregate). The purchasers are obligated to purchase the sponsors warrants from us simultaneously with the consummation of this offering. The sponsors warrants will be purchased separately and not in combination with common stock or in the form of units. The purchase price of the sponsors warrants will be added Table of Contents to the proceeds from this offering to be held in the trust account pending the completion of our initial business combination. If we do not complete a business combination that meets the criteria described in this prospectus and are forced to liquidate, then the $3.25 million purchase price of the sponsors warrants will become part of the distribution to our public stockholders and the sponsors warrants will expire worthless. The sponsors warrants will not be transferable or salable by the purchasers (subject to limited exceptions including the transferee agreeing to be bound to such transfer restrictions) until after we complete a business combination, and will be non-redeemable so long as they are held by the purchasers or their permitted transferees. In addition, commencing 30 days after the consummation of our initial business combination, the sponsors warrants and the underlying common stock are entitled to registration rights under an agreement to be signed on or before the date of this prospectus. With the exception of the terms noted above, the sponsors warrants have terms and provisions that are identical to those of the warrants being sold as part of the units in this offering. Co-Investment units purchased through private placement: Kanders & Company and the Ivy Affiliates have agreed to purchase an aggregate of 1,000,000 co-investment units at a price of $10.00 per unit, for an aggregate purchase price of $10.0 million, from us in a private placement that will occur immediately prior to our consummation of a business combination. This will not occur until after the signing of a definitive business combination agreement and the approval of that business combination by a majority of the shares voted by our public stockholders and an amendment to our certificate of incorporation to provide for our perpetual existence. With the exception of the terms noted below, the co-investment units will be identical to the units sold in this offering. However, as the proceeds from the sale of the co-investment units will not be received by us until immediately prior to our consummation of a business combination, these proceeds will not be deposited into the trust account and will not be available for distribution to our public stockholders in the event of a liquidating distribution. Pursuant to a registration rights agreement, the holders of our co-investment units (and underlying securities) will be entitled to certain registration rights commencing 30 days after the consummation of a business combination. Each of the purchasers has agreed not to transfer, assign or sell any of its co-investment units, the co-investment Table of Contents common stock or co-investment warrants (including the common stock to be issued upon exercise of the co-investment warrants) until one year after the consummation of our business combination (subject to certain exceptions, including the transferees receiving such securities being subject to the same agreement as the purchasers); provided, however, that if, subsequent to our initial business combination, (i) the last sales price of our common stock equals or exceeds $20.00 per share for any 20 trading days within any 30-trading day period beginning 90 days after the consummation of our business combination or (ii) we consummate a subsequent liquidation, merger, stock exchange or other similar transaction which results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property, these transfer restrictions will be removed. Each of the purchasers has agreed to provide our audit committee, on a quarterly basis, with evidence that such purchaser has, or has access to, sufficient net liquid assets available to consummate the co-investment. In the event that a purchaser does not consummate all or any portion of his or its co-investment when required to do so, the other purchasers will have the ability, but not the obligation, to satisfy the defaulting purchaser s co-investment obligation (and if they do, then the defaulting purchaser will sell all or a proportionate amount of his founders units to the other purchasers at their original cost). If a co-investment obligation is not satisfied in full, the purchasers have agreed to sell and we have agreed to purchase the defaulting purchaser s founders units for the same purchase price originally paid for them. Potential conflicts of interest: In order to minimize potential conflicts of interest which may arise from multiple affiliations, our officers and non-independent directors have agreed, until the earliest of our consummation of a business combination, our liquidation or until such time as he ceases to be an officer or director of us, to present to us for our consideration, prior to presentation to any other person or entity, any business opportunity to acquire a privately held operating business, if, and only if (i) the target entity has a fair market value between 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions) and $500 million, the target entity s principal business operations are in the healthcare industry and the opportunity is to acquire substantially all of the assets or 50.1% or greater of the voting securities of the target entity or (ii) the target entity s principal business operations are outside of the healthcare industry and the opportunity to acquire such target entity is presented by a third party to Table of Contents one of our officers or non-independent directors expressly for consideration by us. With respect to all business opportunities, including those described in clause (i), but excluding those described in clause (ii) above, the obligation of our officers and non-independent directors to present a business opportunity to us which may be reasonably required to be presented to us under Delaware law is subject to any pre-existing fiduciary or other obligations our officers or non-independent directors may owe to another entity. Our Board of Directors has adopted resolutions renouncing any interest in or expectancy to be presented any business opportunity outside of those described in clauses (i) and (ii) above (as qualified by the immediately preceding sentence) that comes to the attention of any of our officers or non-independent directors. Neither this agreement by our officers and non-independent directors nor the resolutions may be amended or rescinded in any way except upon prior approval by the holders of a majority of our outstanding shares of common stock. Certain of our officers and non-independent directors are executive officers and/or directors of other companies. As a result, with respect to all business opportunities, including those described in clause (i), but excluding those described in clause (ii) above, the obligation of our officers and non-independent directors to present a business opportunity to us which may be reasonably required to be presented to us under Delaware law is subject to any pre-existing fiduciary or other obligations that our officers and non-independent directors may owe to such other companies. Each of Messrs. Baratelli and Julien is an executive officer of, and Mr. Kanders is a director of, and each has a pre-existing fiduciary duty to, Clarus Corporation, a publicly-held company with no current operating business, net operating loss carryforwards of approximately $223 million and approximately $85 million of cash and cash equivalents. Clarus Corporation is not focusing on any particular industry in which to acquire a target business and is seeking a transaction target with an experienced management team, significant market share and strong free cash flow generation. Additionally, Clarus Corporation is seeking to partner with the existing management of an acquisition target to grow the business over a long-term time horizon. Accordingly, to the extent that Messrs. Baratelli, Julien or Kanders may initially identify a suitable business opportunity, each will honor his pre-existing fiduciary obligation to Clarus Corporation. As a result, each of Messrs. Baratelli, Julien or Kanders will not present opportunities to us unless he has first presented the opportunity to Clarus Corporation and Clarus Corporation Table of Contents has rejected it. However, as a result of Clarus Corporation s investment criteria (which generally includes companies with a transaction value of between $200 million to over $500 million with levels of earnings before income, taxes, depreciation and amortization of approximately $25 million or greater so as to utilize its available net operating losses), we believe this potential conflict of interest is lessened. Warren B. Kanders, through Kanders & Company, presently intends to, subject to, among other things, market conditions, sponsor a new blank check company, which has been formed and provided with initial start-up funding. It is anticipated that such new blank check company, in connection with a potential business combination, may seek a target business that is engaged in any industry; provided, however, it will not seek a target business in the healthcare industry unless and until we have completed our initial business combination or have liquidated. In addition, Mr. Kanders has been named a director of, and Messrs. Baratelli and Julien have been named officers of, such new blank check company. The ability of Messrs. Kanders, Baratelli and Julien to present business opportunities to such new blank check company will be subject to their pre-existing obligations to present to us certain business combination opportunities in accordance with the criteria set forth in this prospectus. Additionally, Messrs. Pangia and Warren and Dr. Warren are affiliated with, and have pre-existing fiduciary obligations to, Ivy Capital Partners, a private equity firm dedicated to investing in companies within the medical device, life sciences and healthcare services sectors, with a particular expertise in the orthopedic industry. Ivy Capital Partners is the General Partner of both Ivy Healthcare Capital, L.P. and Ivy Healthcare Capital II, L.P., two healthcare-focused private equity funds. Ivy Capital Partners is controlled by Fieldpoint Capital, LLC and Hyde Circle, LLC, a partnership controlled by Robert W. Pangia. Each of Ivy Healthcare Capital, L.P. and Ivy Healthcare Capital II, L.P. have more than 60 investors. Ivy Healthcare Capital, L.P. currently has nine investments in its portfolio and is fully committed. Ivy Healthcare Capital II, L.P. currently has three investments in its portfolio and aims to invest in commercially attractive healthcare enterprises within the musculoskeletal sector. While Ivy Healthcare Capital II, L.P. may make investments in companies at various stages of development and financing, we have been informed that many of Ivy Healthcare Capital II, L.P. s investments will be in venture stage private rounds. Table of Contents To the extent that Messrs. Pangia and Warren or Dr. Warren may initially identify a suitable business opportunity that may fit the acquisition criteria of Ivy Capital Partners, each will honor their pre-existing fiduciary obligations to Ivy Capital Partners. As a result, there may be circumstances where Messrs. Pangia, Warren and Dr. Warren may not be in a position to present opportunities to us unless Ivy Capital Partners has declined to accept such opportunities. However, the investment focus of the funds managed by Ivy Capital Partners is on acquiring non-controlling interests of companies, investing not more than 20% of its capital in a single entity. For Ivy Healthcare Capital L.P., which is fully committed, the largest investment in a single entity was approximately $5 million. The targeted aggregate capital of Ivy Healthcare Capital II L.P. is $100 million, and therefore, the maximum Ivy Healthcare Capital II, L.P. could invest in any single entity would be approximately $20 million. As a result, we believe this potential conflict of interest is lessened. Although we do not expect our independent directors to present investment and business opportunities to us, they may become aware of business opportunities that may be appropriate for presentation to us. In such instances they may determine to present these business opportunities to other entities with which they are or may be affiliated, in addition to, or instead of, presenting them to us. Offering and sponsors warrants private placement proceeds to be held in trust account and amounts payable prior to trust account distribution or liquidation: $98,250,000, or approximately $9.83 per unit ($112,650,000, or approximately $9.80 per unit, if the underwriters over-allotment option is exercised in full) of the proceeds of this offering and the private placement of the sponsors warrants will be placed in the trust account at Morgan Stanley with Continental Stock Transfer & Trust Company as trustee, pursuant to an agreement to be signed on the date of this prospectus. These proceeds include approximately $2.85 million in deferred underwriting discounts and commissions (or $3.3 million if the underwriters over-allotment option is exercised in full). We believe that the inclusion in the trust account of the purchase price of the sponsors warrants and the deferred underwriting discounts and commissions is a benefit to our public stockholders because additional proceeds will be available for distribution to them if a liquidation of our company occurs prior to the consummation of our initial business combination. Except as described below, proceeds in the trust account will not be released until the earlier of the consummation of our initial business combination or our liquidation. Unless and until our initial business Table of Contents combination is consummated, proceeds held in the trust account will not be available for our use for any purpose, including the payment of expenses related to this offering and the investigation, selection and negotiation of an agreement with one or more target businesses, except that there can be released to us from the trust account (i) interest income earned on the trust account balance to pay our tax obligations and (ii) interest income earned of up to $1.75 million on the trust account balance to fund our working capital requirements, provided that after such release there remains in the trust account a sufficient amount of interest income previously earned on the trust account balance to pay any due and unpaid income taxes on such $1.75 million of interest income. With these exceptions, expenses incurred by us while seeking a business combination may be paid prior to a business combination only from the net proceeds of this offering not held in the trust account (initially, approximately $600,000). Limited payments to insiders: There will be no fees, reimbursements or other cash payments paid to our founders, officers, directors or their affiliates prior to, or for any services they render in order to effectuate, the consummation of a business combination other than: Repayment of non-interest bearing loans totaling $100,000 in the aggregate made to us by (i) Kanders & Company, an affiliate of each of Warren B. Kanders, a member of our Board of Directors, Philip A Baratelli, our Chief Financial Officer, and Gary Julien, our Vice President of Corporate Development, and (ii) Ivy Capital Partners Management, LLC, an affiliate of each of Robert W. Pangia, our Chief Executive Officer, Russell F. Warren M.D., our Chairman of the Board of Directors, and Russell F. Warren, Jr., a member of our Board of Directors, to cover offering expenses; Payments of $5,000 per month, or an aggregate of $10,000, to each of Kanders & Company and Ivy Capital Partners Management, LLC for office space, secretarial and administrative services; and Reimbursement for any expenses incident to this offering and identifying, investigating and consummating a business combination with one or more target businesses, none of which have been incurred to date. Table of Contents All amounts held in the trust account that are not paid to converting stockholders, released to us in the form of interest income or payable to the underwriters for deferred discounts and commissions will be released to us on closing of our initial business combination: All amounts held in the trust account that are not distributed to public stockholders who exercise their conversion rights (as described below) or previously released to us from the interest income for our working capital requirements and tax obligations will be released on closing of our initial business combination with one or more target businesses, subject to compliance with the conditions to consummating a business combination that are described below. We will use these funds to pay amounts due to any public stockholders who exercise their conversion rights and to pay the underwriters their deferred underwriting discounts and commissions that are equal to 3% of the gross proceeds of this offering, or approximately $2.85 million (or $3.3 million if the underwriters over-allotment option is exercised in full). Funds released from the trust account to us can be used to pay all or a portion of the purchase price of the business or businesses with which our initial combination occurs. If our initial business combination is paid for using stock or debt securities, we may apply the cash released to us from the trust account to general corporate purposes, including for maintenance or expansion of operations of the acquired businesses, the payment of principal or interest due on indebtedness incurred in consummating our initial business combination, to fund the purchase of other companies or for working capital. Certificate of Incorporation: As discussed below, there are specific provisions in our amended and restated certificate of incorporation that may not be amended prior to the consummation of our initial business combination, including the requirements to seek stockholder approval of a business combination and to allow our stockholders to seek conversion of their shares if they do not approve of a business combination. While we have been advised that such provisions limiting our ability to amend our certificate of incorporation may not be enforceable under Delaware law, we view these provisions, which are contained in Article Seventh of our amended and restated certificate of incorporation, as obligations to our stockholders and will not take any action to amend or waive these provisions. Our amended and restated certificate of incorporation also provides that we will continue in existence only until 24 months from the date of this prospectus. If we have not Table of Contents completed a business combination by such date, our corporate existence will cease except for the purposes of winding up our affairs and liquidating, pursuant to Section 278 of the Delaware General Corporation Law. This has the same effect as if our Board of Directors and stockholders had formally voted to approve our dissolution pursuant to Section 275 of the Delaware General Corporation Law. Accordingly, limiting our corporate existence to a specified date as permitted by Section 102(b)(5) of the Delaware General Corporation Law removes the necessity to comply with the formal procedures set forth in Section 275 (which would have required our Board of Directors and stockholders to formally vote to approve our dissolution and liquidation and to have filed a certificate of dissolution with the Delaware Secretary of State). In connection with any proposed business combination we submit to our stockholders for approval, we will also submit to stockholders a proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence, thereby removing this limitation on our corporate life. We will only consummate our initial business combination if stockholders vote both in favor of such business combination and our amendment to provide for our perpetual existence. The approval of the proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence would require the affirmative vote of a majority of our outstanding shares of common stock. We view this provision terminating our corporate life 24 months from the date of this prospectus as an obligation to our stockholders and will not take any action to amend or waive this provision to allow us to survive for a longer period of time except in connection with the consummation of our initial business combination. Stockholders must approve initial business combination: We will seek stockholder approval before effecting our initial business combination, even if such business combination would not ordinarily require stockholder approval under applicable state law. We will proceed with the business combination only if a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination, the amendment to our certificate of incorporation to provide for our perpetual existence is approved by the holders of a majority of our outstanding shares and public stockholders owning less than 30% of the shares sold in this offering both vote against the business combination and exercise their conversion rights. If a proposed business combination is not consummated and we still have sufficient time remaining before our corporate life expires, we may seek Table of Contents another target business with which to effect our initial business combination. In connection with the stockholder vote required to approve our initial business combination, the founders have agreed to vote the founders common stock in the same manner as the majority of shares voted by the public stockholders at the special or annual meeting called for the purpose of approving our initial business combination. The founders have also agreed to vote any shares acquired by them in or after this offering in favor of our initial business combination. Conditions to consummating our initial business combination: Our initial business combination must occur with one or more target businesses that collectively have a fair market value of at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions of approximately $2.85 million, or $3.3 million if the underwriters over-allotment option is exercised in full) at the time of the business combination. If we acquire less than 100% of a target business or businesses in our initial business combination, the aggregate fair market value of the portion or portions we acquire must equal at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions as described above) at the time of the initial business combination. In no event, however, will we acquire less than a controlling interest of a target business (meaning not less than 50% of the voting securities of the target business). We may seek to consummate a business combination with an initial target business or businesses with a collective fair market value in excess of 80% of the balance in the trust account. We will consummate our initial business combination only if a majority of the shares of common stock voted by the public stockholders are voted in favor of our initial business combination and the proposal to amend our certificate of incorporation to provide for our perpetual existence is approved and public stockholders owning less than 30% of the shares sold in this offering vote against the business combination and exercise their conversion rights described below. It is important to note that voting against our initial business combination alone will not result in conversion of a stockholder s shares into a pro rata share of the trust account, which only occurs when the stockholder also exercises the conversion rights described below. Conversion rights for stockholders voting to reject our initial business combination: If our initial business combination is approved and completed, public stockholders voting against our initial Table of Contents business combination will be entitled to convert their shares of common stock into a pro rata share of the aggregate amount then on deposit in the trust account, before payment of deferred underwriting discounts and commissions and including interest earned on their pro rata portion of the trust account, net of interest income on the trust account balance previously released to us to pay our tax obligations and net of interest income of up to $1.75 million on the trust account balance previously released to us to fund our working capital requirements. If our initial business combination is not approved or completed for any reason, then public stockholders voting against our initial business combination will not be entitled to convert their shares of common stock into a pro rata share of the aggregate amount then on deposit in the trust account. The founders will not be able to exercise conversion rights with respect to any of our shares that they may acquire prior to, in or after this offering under any circumstances. Public stockholders who convert their common stock into a pro rata share of the trust account will be paid their conversion price promptly following the consummation of our initial business combination and will continue to have the right to exercise any warrants they own. The initial per share conversion price is approximately $9.83 per share (or approximately $9.80 per share if the underwriters over-allotment option is exercised in full), without taking into account any interest earned on such funds. Since this amount is less than the $10.00 per unit price in this offering and may be lower than the market price of the common stock on the date of conversion, there may be a disincentive on the part of public stockholders to exercise their conversion rights. Because converting stockholders will receive their proportionate share of deferred underwriting compensation and the underwriters will be paid the full amount of the deferred underwriting compensation at the time of closing of our initial business combination, the non-converting stockholders will bear the financial effect of the payments to both the converting stockholders and the underwriters. Voting against our initial business combination alone will not result in conversion of a public stockholders shares into a pro rata portion of the trust account. To convert shares, a public stockholder must also exercise the conversion rights described above and follow the specific procedures for conversion that will be set forth in the proxy statement relating to the stockholder vote for a proposed initial business combination. Table of Contents Liquidation if no business combination: If we are unable to complete a business combination by 24 months from the date of this prospectus, our corporate existence will cease except for the purposes of winding up our affairs and liquidating pursuant to Section 278 of the Delaware General Corporation Law, in which case we will as promptly as practicable thereafter adopt a plan of distribution in accordance with Section 281(b) of the Delaware General Corporation Law. Section 278 provides that our existence will continue for at least three years after its expiration for the purpose of prosecuting and defending suits, whether civil, criminal or administrative, by or against us, and of enabling us gradually to settle and close our business, to dispose of and convey our property, to discharge our liabilities and to distribute to our stockholders any remaining assets, but not for the purpose of continuing the business for which we were organized. Our existence will continue automatically even beyond the three-year period for the purpose of completing the prosecution or defense of suits begun prior to the expiration of the three-year period, until such time as any judgments, orders or decrees resulting from such suits are fully executed. Section 281(b) will require us to pay or make reasonable provision for all then-existing claims and obligations, including all contingent, conditional, or unmatured contractual claims known to us, and to make such provision as will be reasonably likely to be sufficient to provide compensation for any then-pending claims and for claims that have not been made known to us or that have not arisen but that, based on facts known to us at the time, are likely to arise or to become known to us within 10 years after the date of dissolution. Under Section 281(b), the plan of distribution must provide for all of such claims to be paid in full or make provision for payments to be made in full, as applicable, if there are sufficient assets. If there are insufficient assets to provide for all such claims, the plan must provide that such claims and obligations be paid or provided for according to their priority and, among claims of equal priority, ratably to the extent of legally available assets. These claims must be paid or provided for before we make any distribution of our remaining assets to our stockholders. We cannot assure you those funds will be sufficient to pay or provide for all creditors claims. Although we will seek to have all third parties (including any vendors or other entities we engage after this offering) and any prospective target businesses enter into valid and enforceable agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the trust account, there is no guarantee that they will execute such agreements. We have not engaged any third parties or asked for or obtained any waiver agreements at this time. There is no guarantee that Table of Contents the third parties would not challenge the enforceability of these waivers and bring claims against the trust account for monies owed them. In addition, there is no guarantee that a third party or prospective target business will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with us and will not seek recourse against the trust account for any reason. Kanders & Company and Ivy Capital Partners have agreed that they will be liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us, but only if such a vendor or prospective target business does not execute a valid and enforceable waiver. However, we cannot assure you that Kanders & Company and Ivy Capital Partners will be able to satisfy those obligations, if they are required to do so. Our founders have waived their rights to participate in any liquidation distribution with respect to the founders common stock. We will pay the costs of liquidation from our remaining assets outside of the trust account. If such funds are insufficient, Kanders & Company and Ivy Capital Partners have agreed to advance us the funds necessary to complete such liquidation (currently anticipated to be no more than approximately $15,000) and have agreed not to seek repayment for such expenses. If we are unable to conclude an initial business combination and we expend all of the net proceeds of this offering and the founders investment other than the proceeds deposited in the trust account, without taking into account any interest earned on the trust account, we expect that the initial per-share liquidation price will be approximately $9.83 (or approximately $9.80 per share if the underwriters over-allotment option is exercised in full), or $0.17 less than the per-unit offering price of $10.00 ($0.20 less if the underwriters over-allotment is exercised in full). The proceeds deposited in the trust account could, however, become subject to claims of our creditors that are in preference to the claims of our stockholders. In addition, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us that is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. Therefore, we cannot assure you that the actual per-share liquidation price will not be less than approximately $9.83 (or approximately $9.80 per share if the underwriters over-allotment option is exercised in full). Table of Contents Audit committee to monitor compliance: Effective upon consummation of this offering, we will establish, and will maintain, an audit committee to, among other things, monitor compliance on a quarterly basis with the terms described above and the other terms relating to this offering. If any noncompliance is identified, then the audit committee will be charged with the responsibility to immediately take all action necessary to rectify such noncompliance or otherwise cause compliance with the terms of this offering. Our audit committee will also review and approve all reimbursements made to our founders, officers, directors or their affiliates, and any reimbursements made to members of our audit committee will be reviewed and approved by our Board of Directors, with any interested director abstaining from such review and approval. Determination of offering amount: We determined the size of this offering, and the trust account value, based on the prior transactional experience of our management, as well as our estimate of the capital required to facilitate our initial business combination with one or more viable target businesses with sufficient scale to operate as a stand-alone public entity. We intend to utilize the cash proceeds of this offering and the private placement of the sponsor s warrants, our capital stock, debt or a combination of these as the consideration to be paid in an initial business combination. Based on the experience of our management team, we believe that there should be an ample number of potential target businesses to acquire. This belief is not based on any research, analysis, evaluations, discussions or compilations of information with respect to any particular investment or any such action undertaken in connection with our organization. We cannot assure you that our belief that we will be able to successfully identify acquisition candidates, obtain any necessary financing, and consummate a transaction with one or more target businesses will be correct. Risks We are a newly formed company that has conducted no operations and has generated no revenues. Until we complete a business combination, we will have no operations and will generate no operating revenues. In making your decision on whether to invest in our securities, you should take into account not only the background of our management team, but also the special risks we face as a blank check company. This offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act. Accordingly, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. You should carefully consider these and the other risks set forth in the section entitled , ' ': , ' ': Risk Factors beginning on page 24 of this prospectus. Table of Contents SUMMARY FINANCIAL DATA The following table summarizes the relevant financial data for our business and should be read with our financial statements, which are included in this prospectus. We have not had any significant operations to date, so only balance sheet data is presented. August 31, 2007 Actual As Adjusted Balance Sheet Data: Working capital (deficiency) $ (125,572 ) $ 96,023,593 Total assets $ 214,454 $ 98,873,593 Total liabilities $ 190,861 $ 2,850,000 Value of common stock which may be converted to cash $ — $ 29,474,990 Stockholders equity $ 23,593 $ 66,548,603 The , ' ': , ' ': as adjusted information gives effect to the sale of the units we are offering including the application of the related gross proceeds, the receipt of $3.25 million from the sale of the sponsors warrants and the payment of the estimated remaining expenses of this offering. The , ' ': , ' ': as adjusted working capital and , ' ': , ' ': as adjusted total assets is net of approximately $2.85 million being held in the trust account ($3.3 million if the underwriters over-allotment option is exercised in full) representing deferred underwriting discounts and commissions. The , ' ': , ' ': as adjusted working capital and total assets amounts include approximately $98,250,000 (which includes deferred underwriting discounts and commissions of approximately $2.85 million) to be held in the trust account, which will be distributed to us upon the consummation of our initial business combination. We will use such funds to pay amounts owed to (i) any public stockholders who vote against a proposed business combination and exercise their conversion rights and (ii) the underwriters in the amount of approximately $2.85 million (or $3.3 million if the underwriters over-allotment option is exercised in full) in payment of their deferred underwriting discounts and commissions. All such proceeds will be distributed to us from the trust account only upon the consummation of a business combination within 24 months from the date of this prospectus. If a business combination is not so consummated, any net assets outside of the trust account and the proceeds held in the trust account, including the deferred underwriting discounts and commission and all interest thereon, net of interest income on the trust account balance previously released to us to pay our tax obligations and interest income of up to $1.75 million on the trust account balance previously released to us to fund our working capital requirements, will be distributed solely to our public stockholders as part of our liquidation. We will not consummate a business combination if public stockholders owning 30% or more of the shares of common stock sold in this offering vote against the business combination and exercise their conversion rights. Accordingly, we may effect a business combination if public stockholders owning up to 2,999,999 of the 10,000,000 shares of common stock sold in this offering exercise their conversion rights. If this occurred, we would be required to convert to cash up to 2,999,999 of the shares of common stock sold in this offering (or 3,449,999 shares of common stock if the underwriters exercise their over-allotment option in full) at an initial per-share conversion price of approximately $9.83 or up to approximately $29,474,990 in the aggregate (or approximately $9.80 per share or up to approximately $33,794,990 in the aggregate if the underwriters exercise their over-allotment option in full). The actual per-share conversion price will be equal to: the aggregate amount then on deposit in the trust account, before payment of deferred underwriting discounts and commissions and including accrued interest, net of any amounts previously released to us as described above, as of two business days prior to the proposed consummation of the business combination, divided by the number of shares of common stock sold in this offering. Table of Contents
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+The following summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus, including the information under Risk Factors, before making a decision to invest in our common shares. In this prospectus, unless the context suggests otherwise, references to we, us, our and Golub Capital Partners refer collectively to Golub Capital Partners LLC, a Delaware limited liability company, and its consolidated subsidiaries; references to Golub Capital Advisor or our Manager means Golub Capital Advisor LLC, a Delaware limited liability company; reference to GC SPV Holdings means Golub Capital SPV Holdings, Ltd., a Cayman Islands exempted company with limited liability; references to GC Co-Investment Holdings means Golub Capital Co-Investment Holdings, Ltd., a Cayman Islands exempted company with limited liability; and references to GC Funding means Golub Capital Warehouse Funding, LLC, a Delaware limited liability company. Golub Capital Advisor is an affiliate of each of Golub Capital Incorporated, a Delaware corporation; Golub Capital International Management LLC, a Delaware limited liability company; and Golub Capital Management LLC, a Delaware limited liability company (we refer to these entities, collectively, as Golub Capital in this prospectus). References to common shares mean the common shares of Golub Capital Partners. Unless indicated otherwise, the information included in this prospectus assumes no exercise by the underwriter of its option to purchase an additional common shares to cover over-allotments. Overview Golub Capital Partners is a holding company formed in April 2007 to continue the middle market finance business currently being conducted by Golub Capital through three separate companies, Golub Capital Partners IV, L.P., a Delaware limited partnership ( Golub IV ), Golub Capital Partners V, L.P., a Delaware limited partnership ( Golub V ), and Golub Capital International Ltd., a Cayman Islands exempted company with limited liability ( Golub International ). Our objective is to provide our shareholders with a high level of current income from our leveraged credit subsidiaries and other assets. We will be externally managed by our Manager, Golub Capital Advisor, an affiliate of Golub Capital, which is a leading investor in, and manager of, securities issued by middle market companies. In this prospectus, the term middle market generally refers to companies having earnings before interest, taxes, depreciation and amortization (or EBITDA ) of between $5 million and $40 million annually. Our leveraged credit subsidiaries will be organized primarily as special purpose securitization vehicles commonly known as collateralized debt obligation issuers, or CDOs. Our strategy is to utilize the extensive leveraged finance origination infrastructure of Golub Capital to enable our subsidiaries to acquire first-lien senior secured loans, second-lien secured loans and subordinated loans issued by middle market companies. We understand that it is Golub Capital s current strategy for us to be its primary investment vehicle. Our subsidiaries may also acquire assets directly or indirectly through purchases of debt or equity securities issued by CDOs, including CDOs established by Golub Capital and its affiliates. In addition, our subsidiaries may purchase, directly or indirectly through CDOs, interests in high yield bonds, distressed debt instruments and non-controlling equity positions in public or private companies, including equity issued in connection with leveraged buy-out transactions. Our subsidiaries will generally target assets that range in size from $5 million to $50 million. Our subsidiaries may also selectively purchase larger positions of some issuances, and we generally expect that the size of our larger positions will increase in proportion to the size of our capital base. Our subsidiaries will seek to finance their activities through the issuance of senior and junior notes collateralized by their underlying credit assets, as well as using equity provided by us. Prior to or concurrently with the closing of this offering, we will acquire, in exchange for an aggregate of 40,000,000 of our common shares, equity interests in three CDOs previously sponsored by Golub Capital UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents and an indirect majority voting and 49% economic interest in GC Funding Warehouse Corp., a Delaware corporation ( GCFW Corp. ), which in turn holds an interest in Golub Capital CP Funding LLC, a Delaware limited liability company ( GCF ), which is a party to a $300 million pre-securitization warehouse facility. The three CDOs include: Golub Capital Loan Trust 2005-1 ( Golub CDO-1 ), Golub International Loan Ltd. I ( Golub CDO-2 ), and Golub Capital Partners Funding 2007-1 Ltd. ( Golub CDO-3 ). The acquisition of the equity interests in these CDOs, together with our interest in the warehouse facility, will give us immediate exposure to approximately $1.0 billion of credit assets, comprised of approximately 18% one-stop loans, 60% first-lien senior secured loans, 9% second-lien loans and 13% subordinated debt. The weighted average yield on the contributed portfolio was 11.0% at December 31, 2006. In this prospectus, we refer to a loan that combines the characteristics of a traditional first-lien senior secured loan and a traditional second-lien or subordinated loan as a one-stop loan. We intend to finance the acquisition of assets by our leveraged credit subsidiaries initially through warehouse financings undertaken by GC Funding. We believe these warehouse financings will permit our subsidiaries to acquire assets using relatively short-term, low cost funding. When the aggregate value of such assets reaches an appropriate level, GC Funding intends to refinance them through a securitization transaction, including the issuance of debt and non-voting preferred equity securities, to repay short-term warehouse debt. We believe that these securitization transactions will provide our leveraged credit subsidiaries with efficient low cost funding that will enable us to lock in our financing terms on a long-term basis while minimizing refinancing risks. We are organized as a Delaware limited liability company and expect to be treated as a partnership for U.S. federal income tax purposes and not as an association or a publicly traded partnership taxable as a corporation. As a result, we do not expect to pay or incur U.S. federal income tax arising out of most of our operations. Instead, holders of our common shares will be subject to U.S. federal income taxation and, in some cases, state, local and foreign income taxation on their share of our taxable income. Our U.S. corporate subsidiaries will, however, be subject to U.S. federal tax on their income. About Golub Capital Founded in 1994, Golub Capital is a leading provider of debt to middle market borrowers controlled by private equity firms, with proven expertise in sourcing, evaluating, structuring, financing, managing, monitoring and harvesting such investments. As of May 10, 2007, Golub Capital employed 55 experienced origination, credit underwriting, credit monitoring, finance, operations and administrative professionals in offices in New York, Atlanta, Chicago and San Francisco. In its origination activities, Golub Capital focuses on identifying and procuring loans and equity investments that meet strict risk and return parameters, emphasizing risk avoidance and capital preservation. Golub Capital originates a large proportion of its transactions directly from private equity firms and also targets other leading middle market lenders, financial intermediaries and corporate executives in its origination efforts. We believe that Golub Capital s practice of originating investments directly from borrowers and financial intermediaries provides it with a broad range of investment opportunities from which to choose. We believe this direct origination model affords Golub Capital substantial benefits, including in some cases, direct access to management teams, enhanced due diligence opportunities, significant participation in structuring decisions and an ability to negotiate directly the pricing and other terms of financing transactions. We believe the quality of Golub Capital s professionals, their ability to tailor creative solutions for clients and the firm s efficient yet disciplined credit approval process position it as a preferred partner for private equity firms and other middle market lenders. Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents Golub Capital is organized into three complementary lending groups: Sponsor Finance, Club Deal Lending and Large Liquid Loans. In each area, Golub Capital seeks opportunities to invest in one-stop loans, first-lien senior secured loans, second-lien loans and subordinated loans, as well as co-investment equity positions. Golub Capital holds its assets principally through securitization vehicles. As of December 31, 2006, Golub Capital had assets under management of $1.4 billion, including unfunded commitments of $175 million. The composition of Golub Capital s assets under management as of December 31, 2006 was 16% one-stop loans, 54% first-lien senior secured loans, 9% second-lien loans, 17% subordinated debt and 4% equity stakes acquired through co-investing alongside private equity sponsors. In 2006, Golub Capital invested over $1.0 billion in approximately 100 companies. About Golub Capital Advisor We are party to a management agreement with Golub Capital Advisor, an affiliate of Golub Capital. Under this agreement, Golub Capital Advisor manages our day-to-day operations and those of our subsidiaries and makes final asset purchase and sale decisions on behalf of our subsidiaries. Golub Capital Advisor will have access to the resources and expertise of Golub Capital s 55 employees as of May 10, 2007, led by Golub Capital s Chief Executive Officer, Lawrence Golub, and its President, David Golub. Affiliates of Golub Capital are entering into a services agreement with our Manager. Under the services agreement, these affiliates have agreed to provide our Manager access to their senior investment professionals and operational infrastructure, including capabilities in accounting, operations, finance, legal, business development, marketing, human resources, compliance and information technology. We believe this agreement will provide our Manager with access to Golub Capital s investment professionals and the use of Golub Capital s established infrastructure upon request. Competitive Strengths Access to proprietary deal flow. Since January 1, 2005, Golub Capital has originated over $1.8 billion of loans and, as of December 31, 2006, had a portfolio of over $1.4 billion in loans and loan commitments. We believe that our Manager s ability, through its access to Golub Capital, to identify attractive opportunities will be important to our success and will distinguish us from many of our competitors. We expect to benefit from Golub Capital s established brand name, its reputation for partnering, rather than competing with clients in the buy-out fund and financial intermediary industries, and from its track record of closing deals on time and as proposed. Deep, experienced management team. We will be managed by Golub Capital Advisor, which will have access to the resources and expertise of Golub Capital s 55 employees, led by Golub Capital s Chief Executive Officer, Lawrence Golub, and its President, David Golub. Each of the 19 senior investment professionals of Golub Capital has, on average, over 15 years of investment experience and is supported by the entire investment team of Golub Capital, who possess a broad range of transactional, financial, managerial and investment skills. In 2005 and 2006, Golub Capital was named a finalist by Buyouts magazine as Small Lender of the Year. In 2003, 2004 and 2005, Golub Capital was the winner or a finalist for Financing Firm of the Year in the Middle Market M&A and Finance Industry Category, as awarded by M&A Advisor. In addition, Golub Capital s employees, their families and related trusts currently have capital commitments to Golub IV, Golub V and Golub International in excess of $25 million. On a pro forma basis immediately following this offering, it is expected that Golub Capital and its affiliates will own, collectively, % of our common shares. Disciplined investment process. Our Manager intends to utilize the proven, efficient and reliable investment process of Golub Capital in reviewing lending opportunities, structuring transactions and monitoring investments. This underwriting process seeks to answer the following organizing questions: What could go wrong for the borrower? Golub Capital Partners LLC (Exact name of registrant as specified in its charter) Delaware 6199 41-2237965 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 551 Madison Avenue, 6th Floor New York, NY 10022 (212) 750-6060 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Table of Contents How badly affected would the borrower likely be as a result of such an event? If the borrower were substantially affected, would there likely be a buyer interested in the borrower in its weakened condition at a price sufficient to pay off our loan? Under Golub Capital s analytical approach to lending, credit considerations dominate pricing considerations, and we seek at all times to incur very low credit losses through effective underwriting, due diligence, structuring and covenants. Regimented credit monitoring. Following each investment, our Manager implements a regimented credit monitoring system to observe developments in our borrower s business. We believe this careful approach often enables us to identify problems early and (particularly in respect of loans to middle market borrowers) to assist borrowers before they face difficult liquidity constraints. If necessary, our Manager can assume the role of deal sponsor in a work-out situation and has extensive restructuring experience both in and out of bankruptcy. We believe in the need to prepare for possible negative contingencies in order to allow us to be prepared should they arise. Access to established, proven infrastructure. We believe our Manager s access to Golub Capital s established infrastructure provides us with a significant competitive advantage. As of March 31, 2007, Golub Capital had 19 senior investment professionals, supported by an established infrastructure, including capability in accounting, operations, finance, legal, business development, marketing, human resources, compliance and information technology. Additionally, our Manager will have access to more than 10,000 deal sources, which it can manage through Golub Capital s proprietary customer relationship management database. Business Strategy Our business strategy is to continue to identify and invest in attractive debt and equity securities, to diversify our holdings across a range of obligors, security types and industries, and then to structure our investments into capital efficient vehicles to improve returns on invested capital. We intend to implement this strategy by: Growing our loan portfolio. We expect to continue to grow our loan portfolio by way of our Manager s access to the new investment activity of Golub Capital. Golub Capital s level of new investment activity has grown steadily since 2001. This growth has enabled us to benefit from broader diversification, facilitates larger individual investments and spreads our fixed costs over more assets and net investment income. In 2006, Golub Capital completed investments totaling in excess of $1 billion. In the first quarter of 2007, Golub Capital acquired in excess of $340 million of assets, compared to approximately $150 million in the same period of 2006. Maintaining an efficient, disciplined credit culture. In conjunction with growth in assets and personnel, Golub Capital is focused on sustaining its reliable, efficient and disciplined credit culture. We believe this focus will help our Manager sustain the quality of its credit decisions. Optimizing financing sources and costs. We intend to use leverage at the subsidiary level to increase the earnings of our shareholders. In general, we expect to maintain an overall ratio of debt to equity of between three-to-one and four-to-one, which is consistent with the past practice of Golub Capital in managing Golub IV, Golub V and Golub International. We will use leverage primarily for the purpose of financing and not as a means by which to speculate on changes in interest rates. Adjusting asset acquisition mix based on market conditions. As economic conditions change, we intend to adjust our subsidiaries acquisitions of new assets opportunistically. In the past three years, Golub Capital has increased the proportion of its loan portfolio invested in first-lien loans and one-stop loans as a result of Lawrence E. Golub Chief Executive Officer Golub Capital Partners LLC 551 Madison Avenue, 6th Floor New York, NY 10022 (212) 750-6060 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents its belief that the risk-reward profile of such loans is attractive relative to other loans. In a credit environment with higher default rates and higher credit spreads, we may increase subordinated debt investments, a strategy which could increase our risks and returns. Selectively pursuing growth opportunities. We believe that our Manager s access to Golub Capital s expertise will allow us to pursue attractive growth opportunities. In the past three years, Golub Capital has expanded successfully by creating teams dedicated to originating, underwriting and managing first-lien middle market loans and large liquid loans. We anticipate that investing in stressed and distressed middle market companies may represent an attractive growth opportunity for us in the next credit cycle. As we grow, we expect our subsidiaries will originate additional CDOs. Golub Capital has become a regular originator of CDOs, with issuances to date in excess of $1 billion. We anticipate that we will benefit from the reputation that Golub Capital has built among buyers of securitized debt. Composition of Assets As of December 31, 2006, our leveraged credit subsidiaries held, on a pro forma percentage basis by asset type, 18% of one-stop loans, 60% of first-lien debt, 9% of second-lien debt and 13% of subordinated debt. On an industry-wide basis, we expect that the largest portion of the assets held by our leveraged credit subsidiaries will be in Healthcare, Education and Childcare (12%), Diversified / Conglomerate Service (10%), Home and Office Furnishings, Housewares and Consumer Products (7%) and Building and Real Estate (7%). Assets by Type of Loan Assets by Industry Distribution Policy We seek to provide our shareholders with a high level of current income. Based on a policy established by our board of directors, we intend to distribute our net income on a quarterly basis in the form of dividends to our shareholders. Over time, the amount distributed in any particular year may be more or less than all of our net income due to a variety of factors, including timing differences between the recognition of net income and the receipt of cash. We currently expect our board of directors to declare a cash distribution with respect to the period commencing on the completion of this offering and ending , 2007, based on a distribution of $ per share for a full quarter. On an annualized basis, this would equal $ per share, or an annual distribution rate of approximately %, based on the midpoint of the initial public offering price range of the common shares shown on the cover of this prospectus. See Distribution Policy. Copies to: Thomas J. Friedmann Jack W. Murphy Dechert LLP 1775 I Street, N.W. Washington, DC 20006 (202) 261-3300 Jay L. Bernstein Richard I. Horowitz Clifford Chance US LLP 31 West 52nd Street New York, New York 10019 (212) 878-8000 Table of Contents Material Tax Considerations We believe that we have been organized and intend to operate so that we will qualify to be treated for U.S. federal income tax purposes as a partnership, and not as an association or a publicly traded partnership taxable as a corporation. As a holder of common shares, you will be required to take into account your allocable share of items of our income, gain, loss, deduction and credit for our taxable year ending within or concurrently with your taxable year. As discussed in Material U.S. Federal Income Tax Considerations beginning on page 105, our ability to qualify to be treated as a partnership will depend on our ability to satisfy certain income and other tests on an ongoing basis. Moreover, we believe that, as a result of our qualifications as a partnership for U.S. federal income tax purposes, distributions to non-U.S. persons who hold common shares will generally not result in taxation, except with respect to dividend distributions we receive from investments in U.S. corporations, if any. See Material U.S. Federal Income Tax Considerations Nature of the LLC s Business Activities Non-U.S Persons. You are urged to consult your tax advisor regarding the specific U.S. federal, state, local and foreign tax consequences to you, in light of your particular investment or tax circumstances, of acquiring, holding, exchanging or otherwise disposing of our common shares. Our board of directors will supervise our Manager in implementing the business policies established by the board, including general policies, procedures and guidelines to govern our operations. These guidelines include avoiding activities, such as the acquisition of certain assets, that would (i) cause us or any of our CDO subsidiaries to be treated as being engaged in a trade or business within the United States, (ii) cause us to fail to be treated as a partnership for U.S. federal income tax purposes or (iii) cause our shareholders to recognize unrelated business taxable income. Formation Transactions Golub Capital Partners was formed as a holding company in April 2007 to continue the middle market finance business currently being conducted by Golub Capital through three companies, Golub IV, Golub V and Golub International. Prior to or concurrently with the closing of this offering, we will engage in a series of transactions, which we refer to as the Formation Transactions, that will, among other matters, result in the transfer of a substantial portion of the assets, subject to outstanding indebtedness, of Golub IV, Golub V and Golub International to subsidiaries of our company in exchange for our common shares. In particular, (i) Golub IV will contribute to us for contribution to GC SPV Holdings all of the outstanding equity interests in Golub CDO-1; (ii) Golub International will contribute to us for contribution to GC SPV Holdings all of the outstanding equity interests in Golub CDO-2; (iii) Golub IV and Golub V will contribute to us for contribution to GC SPV Holdings all of the outstanding equity interests in Golub CDO-3; and (iv) GC Funding will acquire a majority voting interest and a 49% economic interest in GCFW Corp., which, in turn, will hold GCF. See Formation Transactions and Organizational Structure. Approximate date of commencement of proposed sale to the public: As soon as practicable after the registration statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. CALCULATION OF REGISTRATION FEE (1) We expect GC Co-Investment Holdings to hold minority equity interests in non-pass through vehicles. It is not expected to have any holdings at the close of this offering. (2) GC Funding has majority voting control of, and a 49% economic interest in, GCFW Corp. 1940 Act Exclusion Golub Capital Partners has been structured, and we intend to conduct our operations in a manner, so that we are not required to register as an investment company under the 1940 Act. Section 3(a)(1)(C) of the 1940 Act ( Section 3(a)(1)(C) ) defines as an investment company any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns, or proposes to acquire, investment securities having a value exceeding 40% of the value of the issuer s total assets (exclusive of government securities and cash items) on an unconsolidated basis. Excluded from the term investment securities are securities issued by majority-owned subsidiaries of the issuer that are not themselves investment companies as defined by the 1940 Act or required to rely on the exception from the definition of investment company provided by Section 3(c)(1) or Section 3(c)(7) of the 1940 Act. We expect that most of our CDO subsidiaries will not be investment companies as a result of certain statutory or regulatory exceptions or exemptions provided to structured finance companies that meet specified requirements, and that our interests in these subsidiaries will constitute a substantial majority of our assets. Specifically, each of our existing CDO subsidiaries is organized and managed to comply with Rule 3a-7 under the 1940 Act. Accordingly, we will not own, nor do we propose to acquire, investment securities having a value in excess of 40% of the value of our total assets on an unconsolidated basis. Our Management Structure and Corporate Governance Our corporate governance structure is substantially similar to that of a traditional holding company formed as a Delaware corporation. We are managed by our board of directors, a majority of whose members are independent. Our shareholders have the authority (with the requisite minimum number of votes) to (i) consent to amendments to our limited liability company agreement, or LLC Agreement, (which is analogous to a corporate charter) and (ii) take certain other actions and exercise certain other rights. Our directors will owe substantially similar fiduciary duties to us and our shareholders as the directors of a Delaware corporation would owe to the corporation and its shareholders. The directors supervise our activities Title of Each Class of Securities to be Registered Proposed Maximum Aggregate Public Offering Price Amount of Registration Fee Common Shares $ 150,000,000 $ 4,605 Table of Contents and the activities of our subsidiaries, including through adoption of guidelines and mandates to Golub Capital Advisor, our Manager. In general we are not permitted, without the approval of holders of at least a majority of our outstanding common shares, to take any action that a Delaware corporation could not take under the mandatory provisions of the Delaware Business Corporation Law without obtaining the approval of its shareholders. Our directors have established various board committees, including an audit committee, a compensation committee and a nominating and corporate governance committee, to assist them in supervising our activities and the activities of our subsidiaries. All of the members of these committees are independent of us and of our Manager. Management Agreement We are party to a management agreement with Golub Capital Advisor, as Manager, pursuant to which, subject to the supervision and oversight of our board, Golub Capital Advisor is responsible for structuring and determining the asset composition of our subsidiaries and supervising their activities pursuant to the guidelines and mandates adopted by our board of directors. Our Manager also assists in obtaining and coordinating appropriate administration services for our day-to-day operations. Golub Capital Advisor may at any time assign or delegate its duties, or its rights and obligations, under the management agreement to any affiliate of Golub Capital Advisor at the time of assignment. However, Golub Capital Advisor will remain liable to us for all acts or omissions of any such assignee following an assignment. In addition, for as long as Golub Capital Advisor remains our Manager, our initial directors or their designees shall continue to serve as directors or have the right to designate two directors. See Golub Capital Advisor and the Management Agreement. Golub Capital Advisor receives the following compensation and incentive allocation in connection with the management services provided to us: Fee Summary Description and Method of Computation Base Management Fee Payable quarterly in advance in an annual amount equal to (i) 0.5% (0.125% per quarter) of the fair value of our investments in large liquid loan assets and (ii) 1.25% (0.3125% per quarter) of the fair value of our investments in all other assets. This fee will be reduced by an amount equal to management fees, if any, paid to Golub Capital Advisor or its affiliates by any of our subsidiaries. In this prospectus, large liquid loan means any loan that is (a) secured by a first-lien on the underlying collateral (which may include a pledge of common equity); (b) issued as part of a loan facility with an original size (including any first-lien and second-lien loans included in such facility) greater than $250 million, including for purposes of this definition the maximum available amount of commitments under revolving loans and delayed draw term loans; and (c) rated at least B- and B3 as determined by Standard & Poor s Ratings Services ( S&P ) and Moody s Investors Service ( Moody s ), respectively. Incentive Allocation During the term of our management agreement, Golub Capital Advisor will receive an annual incentive allocation in an amount equal to 10% of our net income (as determined by generally accepted accounting principles in the United States, or GAAP), before deducting the incentive allocation. We will adjust this amount, which we refer to as our pre-incentive net income, to exclude special one-time events resulting from changes in GAAP, as well as non-cash charges, in each case as agreed by Golub Capital Advisor and a majority of our independent directors. Our incentive allocation will be made annually in the event our pre-incentive net income exceeds a hurdle rate of 8% and will be calculated using The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on the date as the Commission, acting pursuant to said Section 8(a), may determine. Table of Contents Fee Summary Description and Method of Computation a catch-up provision. Under this catch-up provision, in any given year we will pay our Manager: (i) no incentive allocation if our pre-incentive net income does not exceed 8% of our invested capital; (ii) 100% of our pre-incentive net income with respect to that portion of our pre-incentive net income, if any, that exceeds 8% and is less than 8.88% of our invested capital; and (iii) 10% of the amount, if any, by which our pre-incentive net income exceeds 8.88% in any year Profit Participation Shares In connection with the Formation Transactions, an affiliate of Golub Capital Advisor will be issued profit participation shares equal to 11% of our outstanding common shares and profit participation shares following this offering and any subsequent offering of our common shares. Initially, each profit participation share will have a minimal capital account. Dividend distributions and income allocations on each profit participation share will be the same as those made on our common shares. Profit participation shares may be converted to common shares based on the capital accounts of the profit participation shares and common shares at the time of conversion, and to the extent a profit participation share has a capital account less than that of a common share, the holder may contribute cash to us and exchange a profit participation share for a common share on a one-for-one basis. A profit participation share will be entitled to a distribution upon our liquidation equal to the capital account balance of the profit participation share as of such time. Profit participation shares will also participate in distributions with respect to such common shares on an equal basis with our common shares. Reimbursement of Expenses We will reimburse Golub Capital Advisor for specified expenses incurred by it or its affiliates on behalf of, or in connection with, the provision of services under the management agreement. See Golub Capital Advisor and the Management Agreement Management Fees, Expenses and Incentive Allocation Reimbursement of Expenses. Term and Termination The initial term of the management agreement is three years from its commencement upon the closing of this offering. The management agreement will be automatically renewed for a rolling two-year term on each anniversary date of the closing of this offering unless all of the independent directors on our board of directors or holders representing at least two-thirds of our outstanding common shares determine by resolution that there has been unsatisfactory performance by Golub Capital Partners that is materially detrimental to us. Our board of directors may also terminate the management agreement at any time for cause (as that term is defined in the management agreement). See Golub Capital Advisor and the Management Agreement The Management Agreement Term and Termination. Termination Payment Unless we terminate Golub Capital Advisor as Manager for cause, and even if we terminate the Management Agreement on an anniversary of the closing of this offering, Golub Capital Advisor or its affiliate, as the case may be, will be entitled to a payment equal to three and one-half times the management fee and incentive allocation earned by it or its affiliates, as the case may be, during the 24-month period preceding such termination divided by two. In each case, the relevant 24-month period will be calculated as of the end of the most recently completed fiscal quarter prior to the date of termination. Table of Contents Fee Summary Description and Method of Computation Double Counting of Fees Under the management agreement, any third party fees earned by our Manager or its affiliates in respect of the equity we retain in any of our subsidiaries will be credited against the base management fee. Conflicts of Interest The services provided by Golub Capital Advisor under the management agreement are not exclusive to us. Golub Capital has historically managed accounts with similar or overlapping investment strategies and has a conflict-resolution system in place so that we may share investment opportunities, particularly those involving a security with limited supply that may be suitable for our company and such other client accounts, fairly with other Golub Capital Advisor client accounts. This system also includes other controls designed to prevent any client account receiving unduly favorable treatment over time.
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the historical and pro forma financial statements and the notes to those financial statements. The information presented in this prospectus assumes an initial public offering price of $21.00 per common unit and, unless otherwise noted, that the underwriters option to purchase additional common units is not exercised. You should read Risk Factors beginning on page 20 for information about important factors that you should consider carefully before buying our common units. We include a glossary of some of the terms used in this prospectus in Appendix B. Encore Energy Partners LP We are a growth-oriented Delaware limited partnership formed on February 13, 2007 by Encore Acquisition Company (NYSE: EAC) to acquire, exploit and develop oil and natural gas properties and to acquire, own and operate related assets. Our assets consist primarily of producing and non-producing oil and natural gas properties in the Elk Basin of Wyoming and Montana and the Permian Basin of West Texas. As of December 31, 2006, on a pro forma basis after giving effect to the acquisition of the Elk Basin assets from subsidiaries of Anadarko Petroleum Corporation, our total estimated proved reserves were 21.4 MMBOE, 68% of which were oil and 86% of which were proved developed. Our primary business objective is to make quarterly cash distributions to our unitholders at our initial distribution rate and, over time, increase our quarterly cash distributions. We believe our properties are well suited for our partnership because they have predictable production profiles based on a long history of production, a 5.5% average decline rate, an average reserve-to-production ratio of 13.1 years and forecasted maintenance capital requirements of only $8.7 million for the twelve months ending September 30, 2008. The following table summarizes information about our oil and natural gas reserves as of December 31, 2006 and our net production for 2006 on a pro forma basis to reflect the Elk Basin acquisition: Average Estimated Estimated Net Proved Reserves Reserve-to- Production at December 31, 2006(1) 2006 Net Production Production Decline Developed Undeveloped Total Oil Natural Gas Total Ratio(2) Rate(3) (MBOE) (MBbls) (MMcf) (MBOE) (Years) Elk Basin 13,285 1,806 15,091 1,266 362 1,326 11.4 4.4 % Permian Basin 5,125 1,163 6,288 7 1,796 306 20.5 10.0 % Total 18,410 2,969 21,379 1,273 2,158 1,632 13.1 5.5 % (1) Our proved oil and natural gas reserves were estimated by Miller and Lents, Ltd., independent petroleum engineers. Miller and Lents, Ltd. performed their evaluations using unescalated prices, operating expenses, and capital expenditures provided by us. Their evaluation was a full determination, which included reviewing and forecasting 100% of the properties. Proved reserves and future net revenues were estimated in accordance with SEC rules. (2) The average reserve-to-production ratio is calculated by dividing estimated net proved reserves as of December 31, 2006 by pro forma net production for 2006. (3) Represents percentage decrease in production from our proved developed producing properties from 2007 to 2008 as estimated by Miller and Lents, Ltd. Our Properties Elk Basin Properties Our assets in the Elk Basin were acquired from subsidiaries of Anadarko Petroleum Corporation in March 2007 for approximately $329.4 million, including estimated transaction costs of approximately $1.0 million. For the year ended December 31, 2006, production from our Elk Basin properties was approximately 3,633 BOE/D, of which approximately 95% was oil and 5% was natural gas. From the date of acquisition through June 30, 2007, production from our Elk Basin properties was approximately 3,591 BOE/D, Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. SUBJECT TO COMPLETION DATED AUGUST 28, 2007 PROSPECTUS Encore Energy Partners LP 9,000,000 Common Units Representing Limited Partner Interests We are a growth-oriented Delaware limited partnership formed on February 13, 2007 by Encore Acquisition Company to acquire, exploit and develop oil and natural gas properties and to acquire, own and operate related assets. This is the initial public offering of our common units. No public market currently exists for our common units. We expect the initial public offering price to be between $20.00 and $22.00 per common unit. Our common units have been approved for listing on the New York Stock Exchange under the symbol ENP. Investing in our common units involves risks. Please read Risk Factors beginning on page 20. These risks include the following: We may not have sufficient cash flow from operations to pay the initial quarterly distribution on our common units following establishment of cash reserves and payment of fees and expenses, including reimbursement of expenses to our general partner and Encore Operating, L.P. Our oil and natural gas reserves naturally decline, and we will be unable to sustain distributions at the level of our estimated initial quarterly distribution without making accretive acquisitions or substantial capital expenditures that maintain or grow our asset base. Oil and natural gas prices are very volatile. A decline in commodity prices will cause a decline in our cash flow from operations, which may force us to reduce our distributions or cease paying distributions altogether. We may incur substantial additional debt to enable us to pay our quarterly distributions, which may negatively affect our ability to execute our business plan and pay future distributions. Our general partner and its affiliates own a controlling interest in us and may have conflicts of interest with us and limited fiduciary duties to us, which may permit them to favor their own interests to your detriment. You will experience immediate and substantial dilution of $8.83 per common unit. You may be required to pay taxes on your share of our income even if you do not receive any cash distributions from us. In order to comply with certain U.S. laws relating to the ownership of interests in oil and natural gas leases on federal lands, we require an owner of our units to be an Eligible Holder. If you are not an Eligible Holder, you will not be entitled to receive distributions or allocations of income or loss on your common units and your common units will be subject to redemption. Please read The Partnership Agreement Non-Eligible Holders; Redemption. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. Per Common Unit Total Public Offering Price $ $ Underwriting Discount(1) $ $ Net Proceeds, before expenses, to
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+PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. Unless otherwise stated in this prospectus: references to we, us or our company refer to TM Entertainment and Media, Inc.; existing stockholders refers to all of our stockholders prior to this offering, including all of our officers and directors; management stockholders refers to Theodore S. Green and Malcolm Bird; initial shares refers to the 2,250,000 shares of common stock that our existing stockholders originally purchased from us for $25,000 on May 1, 2007; insider warrants refers to the 2,100,000 warrants we are selling privately to our management stockholders upon consummation of this offering; the term public stockholders means the holders of the shares of common stock which are being sold as part of the units in this public offering (whether they are purchased in the public offering or in the aftermarket), including any of our existing stockholders to the extent that they purchase such shares; and the information in this prospectus assumes that the representative of the underwriters will not exercise its over-allotment option. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer is not permitted. We are a blank check company organized under the laws of the State of Delaware on May 1, 2007. We were formed with the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with a domestic or foreign operating business in the entertainment, media, digital or communications industries. To date, our efforts have been limited to organizational activities. The entertainment, media, digital and communications industries encompass those companies which create, produce, deliver, own, distribute or market entertainment and information content, products and services. These companies serve both domestic and international audiences and, therefore, the operating businesses with which the company will seek to do a business combination are located throughout the world. Among the areas of particular interest to the company are businesses engaged in: broadcast television; cable, satellite and terrestrial television content delivery; motion picture, television, DVD and video content production and distribution; advanced communications networks and devices; user-generated media; newspaper, book, magazine, and specialty publishing; motion picture exhibition and related services; radio services via broadcast and satellite; video game production and distribution; broadband network operations; Internet service providers; Internet media production and distribution; interactive commerce and e-commerce; voice, video and data transmission platforms and services; content distribution systems, networks and services; content production and aggregation services; Table of Contents media portability products and services; interactive television products and services; advertising agencies and other advertising services; direct marketing and promotional services; media and marketing services; advertising based directories; recorded music and other audio content production and distribution; theme park attractions; toy development and distribution; trading cards; intellectual property licensing, merchandising and exploitation; and live event entertainment and venue management. Our management team has extensive experience in the entertainment, media, digital and communications industries as senior executives, business consultants or entrepreneurs. See Management . We intend to leverage the industry experience of our executive officers by focusing our efforts on identifying a prospective target business in the entertainment, media, digital or communications industries. We believe that companies involved in these industries represent attractive acquisition targets for a number of reasons, including a favorable economic environment for these industries, potentially attractive valuations and the large number of middle market acquisition candidates. We believe, based solely on our management s collective business experience, that there are numerous business opportunities in the entertainment, media, digital and communications industries. However, we cannot assure you that we will be able to locate a target business in such industries or that we will be able to engage in a business combination with a target business on favorable terms. We do not have any specific business combination under consideration and we have not (nor has anyone on our behalf) contacted any prospective target business or had any discussions, formal or otherwise, with respect to such a transaction. We have not (nor have any of our agents or affiliates) been approached by any candidates (or representative of any candidates) with respect to a possible acquisition transaction with our company. Additionally, we have not, nor has anyone on our behalf, taken any measure, directly or indirectly, to identify or locate any suitable acquisition candidate, nor have we engaged or retained any agent or other representative to identify or locate any such acquisition candidate. Although we have no present intention to do so and no such companies have been considered, we may consider any affiliates of our officers, directors, and stockholders as potential business combination targets. We will have until , 2009 [twenty four months from the date of this prospectus] to consummate a business combination. If we are unable to consummate a business combination by such date, our corporate existence will cease by operation of corporate law (except for the purposes of winding up our affairs and liquidating). Our initial business combination must be with a target business or businesses whose collective fair market value is at least equal to 80% of our net assets (all of our assets, including the funds held in the trust account, less our liabilities) at the time of such acquisition, although this may entail simultaneous acquisitions of several operating businesses. The fair market value of the target will be determined by our board of directors based upon one or more standards generally accepted by the financial community (which may include actual and potential sales, earnings, cash flow or book value). We anticipate structuring a business combination to acquire 100% of the equity interests or assets of the target business. We may, however, structure a business combination to acquire less than 100% of such interests or assets of the target business, but will not acquire less than a controlling interest (which would be at least 50% of the voting securities of the target business). If we acquire only a controlling interest in a target business or businesses, the portion of such business that we acquire must have a fair market value equal to at least 80% of our net assets. If we determine to simultaneously acquire several businesses and such businesses are owned by different sellers, we will need for each of such sellers to agree that our purchase of its business is contingent on the simultaneous closings of the other acquisitions, which may make it more difficult for us, and delay our ability, to complete the business combination. With multiple acquisitions, we could also face additional risks, including additional burdens and costs with respect to possible multiple negotiations and due diligence investigations (if there are multiple sellers) and the additional risks associated with the subsequent assimilation of the operations and services or products of the acquired companies in a single operating business. Table of Contents The target business or businesses that we acquire may have a collective fair market value substantially in excess of 80% of our net assets. In order to consummate such a business combination, we may issue a significant amount of our debt or equity securities to the sellers of such business or seek to raise additional funds through a private offering of debt or equity securities. There are no limitations on our ability to incur debt or issue securities in order to consummate a business combination. If we issue securities in order to consummate a business combination, our stockholders could end up owning a minority of the combined company as there is no requirement that our stockholders own a certain percentage of our company after our business combination. Since we have no specific business combination under consideration, we have not entered into any such arrangement to issue our debt or equity securities and have no current intention of doing so. The fair market value of the target business will be determined by our board of directors based upon one or more standards generally accepted by the financial community (such as actual and potential sales, earnings and cash flow or book value). If our board is not able to independently determine that the target business has a sufficient fair market value, we will obtain an opinion from an unaffiliated, independent investment banking firm with respect to the satisfaction of such criteria. Such investment banking firm will be a member of the National Association of Securities Dealers, Inc. reasonably acceptable to the representative of the underwriters, and our stockholders may or may not be entitled to rely on such opinion, depending on circumstances at the time. While we will consider whether such an opinion may be relied on by our stockholders, it will not be dispositive as to which investment bank we seek a fairness opinion from. Other factors contributing to such a determination are expected to include, among others: reputation of the independent investment bank, specifically their knowledge in our particular industry, timing and cost of providing the opinion. Our executive offices are located at 307 East 87th Street, New York, NY 10128 and our telephone number is (212) 289-6942. Table of Contents THE OFFERING Securities offered 9,000,000 units, at $8.00 per unit, each unit consisting of: one share of common stock; and one warrant. Trading commencement and separation of common stock and warrants The units will begin trading on or promptly after the date of this prospectus. Each of the common stock and warrants may trade separately on the 90th day after the date of this prospectus unless Pali Capital, Inc., as representative of the underwriters, determines that an earlier date is acceptable. In no event will Pali Capital, Inc. allow separate trading of the common stock and warrants until we file an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file a Current Report on Form 8-K with the Securities and Exchange Commission, including an audited balance sheet, promptly upon the consummation of this offering, which is anticipated to take place three business days from the date the units commence trading. The audited balance sheet will reflect our receipt of the proceeds from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Form 8-K. If the over-allotment option is exercised after our initial filing of a Form 8-K, we will file an amendment to the Form 8-K to provide updated financial information to reflect the exercise and consummation of the over-allotment option. We will also include in this Form 8-K, or amendment thereto, or in a subsequent Form 8-K, information indicating if Pali Capital, Inc. has allowed separate trading of the common stock and warrants prior to the 90th day after the date of this prospectus. The units will continue to trade along with the common stock and warrants after the units are separated. Holders will need to have their brokers contact our transfer agent in order to separate the units into common stock and warrants. Private placement of warrants to be sold to insiders We will sell 2,100,000 insider warrants at a purchase price of $1.00 per warrant (for a total purchase price of $2,100,000) to our existing stockholders pursuant to private placement purchase agreements between us and such purchasers. The existing stockholders have entered into these agreements prior to the filing of the registration statement of which this prospectus forms a part. These purchases will take place in a private placement that will occur simultaneously with the consummation of this offering. We do not believe the sale of the warrants will result in a compensation expense because they are being sold at or above fair market value. The insider warrants will be identical to the warrants underlying the units being offered by this prospectus except that the insider warrants will be exercisable on a cashless basis and will not be redeemable by us so long as they are still held by the purchasers or their affiliates. Each of the purchasers have agreed, pursuant to the agreements, that he will not sell or transfer the insider warrants (except to an affiliate of such purchaser, to relatives and trusts for estate planning purposes, or to our directors at the same cost per warrant originally paid by them) until the later of , 2008 [one year from the date of this prospectus] and 60 days after the consummation of our business combination. Pali Capital, Inc. has no intention of waiving these restrictions. In the event of a liquidation prior to our initial business combination, the insider warrants will expire worthless. Common stock: Number outstanding before this offering 2,250,000 shares Number to be outstanding after this offering 11,250,000 shares Table of Contents Paragraph B of Article Ninth of our amended and restated certificate of incorporation provides: The Corporation, to the full extent permitted by Section 145 of the GCL, as amended from time to time, shall indemnify all persons whom it may indemnify pursuant thereto. Expenses (including attorneys fees) incurred by an officer or director in defending any civil, criminal, administrative, or investigative action, suit or proceeding for which such officer or director may be entitled to indemnification hereunder shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized hereby. Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement, we have agreed to indemnify the Underwriters and the Underwriters have agreed to indemnify us against certain civil liabilities that may be incurred in connection with this offering, including certain liabilities under the Securities Act. Item 15. Recent Sales of Unregistered Securities. (a) During the past three years, we sold the following shares of common stock without registration under the Securities Act: Number of Stockholders Shares Theodore S. Green 1,375,000 Malcolm Bird 875,000 Such shares were issued on May 1, 2007 in connection with our organization pursuant to the exemption from registration contained in Section 4(2) of the Securities Act as they were sold to sophisticated, accredited individuals. The shares issued to the individuals above were sold for an aggregate offering price of $25,000 at an average purchase price of approximately $0.01 per share. On June 14, 2007, Mr. Green sold to each of the Trusts established for the benefit of his daughters 187,500 shares of common stock for a purchase price of approximately $0.01 per share, the price that Mr. Green paid for the shares. On August 29, 2007, Mr. Green sold to each of Mr. Miller and the John W. Hyde Living Trust 68,750 shares of common stock and Mr. Bird sold to each of Mr. Miller and the John W. Hyde Living Trust 43,750 shares of common stock, in each case for a purchase price of approximately $0.01 per share, the price that Mr. Green and Mr. Bird paid for the shares. These sales were contemplated when the shares were initially issued but were not consummated until Messrs. Hyde and Miller agreed to serve on our board of directors. In addition, our existing stockholders have committed to purchase from us 2,100,000 warrants at a purchase price of $1.00 per warrant (for an aggregate purchase price of $2,100,000). These purchases will take place in a private placement that will occur simultaneously with the consummation of our initial public offering. These issuances will be made pursuant to the exemption from registration contained in Section 4(2) of the Securities Act. The obligation to purchase the warrants undertaken by the above individuals was made pursuant to Private Placement Purchase Agreements, dated as of June 18, 2007 (which were filed as Exhibits and 10.13 and 10.14 to the Registration Statement on Form S-1). Such obligation was made prior to the filing of the Registration Statement, and the only conditions to the obligation undertaken by such individuals are conditions outside of the investors control. Consequently, the investment decision relating to the purchase of the warrants was made prior to the filing of the Registration Statement relating to the public offering and therefore constitutes a completed private placement. No underwriting discounts or commissions were paid with respect to such sales. Item 16. Exhibits and Financial Statement Schedules. (a) The following exhibits are filed as part of this Registration Statement: Exhibit No. Description 1 .1 Form of Underwriting Agreement. 3 .1 Form of Amended and Restated Certificate of Incorporation.* 3 .2 By-laws.* 4 .1 Specimen Unit Certificate.* 4 .2 Specimen Common Stock Certificate.* 4 .3 Specimen Warrant Certificate.* 4 .4 Form of Warrant Agreement between Continental Stock Transfer Trust Company and the Registrant.* Table of Contents Warrants: Number outstanding before this offering 0 warrants Number to be sold to insiders 2,100,000 warrants Number to be outstanding after this offering and sale to insiders 11,100,000 warrants Exercisability Each warrant is exercisable for one share of common stock. Exercise price $5.50 Exercise period The warrants will become exercisable on the later of: the completion of a business combination with a target business, and , 2008 [one year from the date of this prospectus]. However, the warrants held by public stockholders will only be exercisable if a registration statement relating to the common stock issuable upon exercise of the warrants is effective and current. The warrants will expire at 6:00 p.m., New York City time, on , 2011 [four years from the date of this prospectus] or earlier upon redemption. Redemption We may redeem the outstanding warrants (including any warrants held by the underwriters as a result of the exercise of their option, but excluding any insider warrants held by the initial purchasers or their affiliates) without the consent of Pali Capital, Inc.: in whole and not in part, at a price of $0.01 per warrant at any time while the warrants are exercisable, upon a minimum of 30 days prior written notice of redemption, and if, and only if, the last sales price of our common stock equals or exceeds $11.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. If the foregoing conditions are satisfied and we issue a notice of redemption, each warrant holder can exercise his, her or its warrant prior to the scheduled redemption date. However, the price of the common stock may fall below the $11.50 trigger price as well as the $5.50 warrant exercise price after the redemption notice is issued. In the event that the common stock issuable upon exercise of the warrants has not been registered, qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants, we will not have the right to redeem the warrants owned by such holder. The redemption criteria for our warrants have been established at a price which is intended to provide warrant holders a reasonable premium to the initial exercise price and provide a sufficient differential between the then-prevailing common stock price and the warrant exercise price so that if the stock price declines as a result of our redemption call, the redemption will not cause the stock price to drop below the exercise price of the warrants. The insider warrants are non-redeemable so long as such warrants are held by our existing stockholders. Proposed American Stock Exchange symbols for our: Units TMI.U Common stock TMI Warrants TMI.WS Table of Contents Offering proceeds to be held in trust $69,140,000 of the net proceeds of this offering plus the $2,100,000 we will receive from the sale of the insider warrants (for an aggregate of $71,240,000 or approximately $7.92 per unit sold to the public in this offering) will be placed in a trust account at HSBC Bank USA, N.A., maintained by Continental Stock Transfer Trust Company, acting as trustee pursuant to an agreement to be signed on the date of this prospectus. This amount includes $2,880,000 of underwriting discounts and commissions payable to the underwriters in the offering that is being deferred. The underwriters have agreed that such amount will not be paid unless and until we consummate a business combination. Upon the consummation of our initial business combination, the deferred underwriting discounts and commissions shall be released to the underwriters out of the gross proceeds of this offering held in the trust account. Except as set forth below, these proceeds will not be released until the earlier of the completion of a business combination and our liquidation. Therefore, unless and until a business combination is consummated, the proceeds held in the trust account will not be available for our use for any expenses related to this offering or expenses which we may incur related to the investigation and selection of a target business and the negotiation of an agreement to acquire a target business. Notwithstanding the foregoing, there can be released to us from the trust account interest earned on the funds in the trust account (i) up to an aggregate of $1,500,000 to fund expenses related to investigating and selecting a target business and our other working capital requirements and (ii) any amounts we may need to pay our income or other tax obligations. With these exceptions, expenses incurred by us may be paid prior to a business combination only from the net proceeds of this offering not held in the trust account (initially $100,000). None of the warrants may be exercised until after the consummation of a business combination and, thus, after the proceeds of the trust account have been disbursed. Accordingly, the warrant exercise price will be paid directly to us and not placed in the trust account. Limited payments to insiders There will be no fees, reimbursements, cash payments or any other form of compensation paid to our existing stockholders, officers, directors, or their affiliates prior to, or for any services they render in order to effectuate, the consummation of a business combination (regardless of the type of transaction that it is) other than: repayment of a $100,000 loan, plus interest at the rate of 5% per annum, compounded semi-annually, made by Theodore S. Green, our Chairman and Co-Chief Executive Officer, to us; payment of $7,500 per month to our management stockholders, an affiliate of our management stockholders or third parties, for certain administrative, technology and secretarial services, as well as the use of certain limited office space; and reimbursement of out-of-pocket expenses incurred by our existing stockholders in connection with certain activities on our behalf, such as identifying and investigating possible business targets and business combinations, with no limit as to such reimbursement. Amended and Restated Certificate of Incorporation As discussed below, there are specific provisions in our amended and restated certificate of incorporation that may not be amended prior to our consummation of a business combination, including our requirements to seek stockholder approval of such a business combination and to allow our stockholders to seek conversion of their shares if they do not approve of such a business combination. While we have been advised that such provisions limiting our ability to amend our certificate of incorporation may not be enforceable under Delaware law, we view these provisions, which are contained in Article Seventh of our Table of Contents amended and restated certificate of incorporation, as obligations to our stockholders and will not take any action to amend or waive these provisions. Our amended and restated certificate of incorporation also provides that we will continue in existence only until , 2009 [twenty four months from the date of this prospectus]. If we have not completed a business combination by such date, our corporate existence will cease except for the purposes of winding up our affairs and liquidating, pursuant to Section 278 of the Delaware General Corporation Law. This has the same effect as if our board of directors and stockholders had formally voted to approve our dissolution pursuant to Section 275 of the Delaware General Corporation Law. Accordingly, limiting our corporate existence to a specified date as permitted by Section 102(b)(5) of the Delaware General Corporation Law removes the necessity to comply with the formal procedures set forth in Section 275 (which would have required our board of directors and stockholders to formally vote to approve our dissolution and liquidation and to have filed a certificate of dissolution with the Delaware Secretary of State). In connection with any proposed business combination we submit to our stockholders for approval, we will also submit to stockholders a proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence, thereby removing this limitation on our corporate life. We will only consummate a business combination if stockholders vote both in favor of such business combination and our amendment to provide for our perpetual existence. The approval of the proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence would require the affirmative vote of a majority of our outstanding shares of common stock. We view this provision terminating our corporate life by , 2009 [twenty four months from the date of this prospectus] as an obligation to our stockholders and will not take any action to amend or waive this provision to allow us to survive for a longer period of time except in connection with the consummation of a business combination. Stockholders must approve business combination Pursuant to our amended and restated certificate of incorporation, we will seek stockholder approval before we effect any business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable state law. We view this requirement as an obligation to our stockholders and will not take any action to amend or waive this provision in our amended and restated certificate of incorporation. In connection with the vote required for any business combination, all of our existing stockholders, including all of our officers and directors, have agreed to vote the shares of common stock owned by them immediately before this offering in accordance with the majority of the shares of common stock voted by the public stockholders. We will proceed with a business combination only if (i) a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination, (ii) a majority of the outstanding shares of common stock vote in favor of an amendment to our certificate of incorporation to provide for our perpetual existence and (iii) public stockholders owning less than 30% of the shares sold in this offering exercise their conversion rights described below. Accordingly, it is our understanding and intention in every case to structure and consummate a business combination in which 29.99% of the public stockholders may exercise their conversion rights and the business combination will still go forward. If a significant number of stockholders vote, or indicate their intention to vote, against a proposed business combination, our officers, directors, stockholders and their affiliates could seek to purchase units or shares of common stock in the open market or in private transactions in order to influence the vote. However, they have no present intention to do so. Table of Contents Conversion rights of stockholders voting to reject a business combination Pursuant to our amended and restated certificate of incorporation, public stockholders voting against a business combination will be entitled to convert their stock into a pro rata share of the trust account (initially approximately $7.92 per share, or approximately $7.90 per share if the over-allotment option is exercised), plus any interest earned on their portion of the trust account but less any interest that has been released to us as described above to fund our working capital requirements and pay any of our tax obligations, if the business combination is approved and completed. We view this requirement as an obligation to our stockholders and will not take any action to amend or waive this provision in our amended and restated certificate of incorporation. Our existing stockholders will not have such conversion rights with respect to the initial shares, but will have such conversion rights with respect to any shares they purchase in this offering or in the aftermarket. Public stockholders who convert their stock into their share of the trust account will continue to have the right to exercise any warrants they may hold. An eligible stockholder may request conversion at any time after the mailing to our stockholders of the proxy statement and prior to the vote taken with respect to a proposed business combination at a meeting held for that purpose, but the request will not be granted unless the stockholder votes against the business combination and the business combination is approved and completed. Additionally, we may require public stockholders, whether they are a record holder or hold their shares in street name, to either tender their certificates to our transfer agent at any time through the vote on the business combination or to deliver their shares to the transfer agent electronically using Depository Trust Company s DWAC (Deposit/Withdrawal At Custodian) System, at the holder s option. There is a nominal cost associated with this tendering process and the act of certificating the shares or delivering them through the DWAC system. The transfer agent will typically charge the tendering broker $35 and it would be up to the broker whether or not to pass this cost on to the converting holder. The proxy solicitation materials that we will furnish to stockholders in connection with the vote for any proposed business combination will indicate whether we are requiring stockholders to satisfy such certification and delivery requirements. Accordingly, a stockholder would have from the time we send out our proxy statement through the vote on the business combination to deliver his shares if he wishes to seek to exercise his conversion rights. This time period varies depending on the specific facts of each transaction. However, as the delivery process can be accomplished by the stockholder, whether or not he is a record holder or his shares are held in street name, in a matter of hours by simply contacting the transfer agent or his broker and requesting delivery of his shares through the DWAC System, we believe this time period is sufficient for an average investor. Any request for conversion, once made, may be withdrawn at any time up to the date of the meeting. Furthermore, if a stockholder delivered his certificate for conversion and subsequently decided prior to the meeting not to elect conversion, he may simply request that the transfer agent return the certificate (physically or electronically). If a vote on our initial business combination is held and the business combination is not approved, we may continue to try to consummate a business combination with a different target until twenty four months from the date of this prospectus. If the initial business combination is not approved or completed for any reason, then public stockholders voting against our initial business combination who exercised their conversion rights would not be entitled to convert their shares of common stock into a pro rata share of the aggregate Table of Contents amount then on deposit in the trust account. In such case, if we have required public stockholders to deliver their certificates prior to the meeting, we will promptly return such certificates to the public stockholder. Investors in this offering who do not sell, or who receive less than an aggregate of approximately $0.08 of net sales proceeds for, the warrants included in the units, and persons who purchase common stock in the aftermarket at a price in excess of $7.92 per share, may have a disincentive to exercise their conversion rights because the amount they would receive upon conversion could be less than their original or adjusted purchase price. Because converting stockholders will receive their proportionate share of the deferred underwriting discounts and commissions and the underwriters will be paid the full amount of their deferred underwriting compensation at the time of the consummation of our initial business combination, the company (and, therefore, the non-converting stockholders) will bear the financial effect of such payments to both the converting stockholders and the underwriters. Liquidation if no business combination As described above, if we have not consummated a business combination by , 2009 [twenty four months from the date of this prospectus], our corporate existence will cease by operation of law and we will promptly distribute only to our public stockholders (including our existing stockholders to the extent they have purchased shares in this offering or in the aftermarket) the amount in our trust account (including any accrued interest then remaining in the trust account) plus any remaining net assets. We cannot assure you that the per-share distribution from the trust account, if we liquidate, will not be less than $7.92, plus interest then held in the trust account, for the following reasons: prior to liquidation, pursuant to Section 281 of the Delaware General Corporation Law, we will adopt a plan that will provide for our payment, based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against us within the subsequent 10 years. Accordingly, we would be required to provide for any creditors known to us at that time as well as provide for any claims that we believe could potentially be brought against us within the subsequent 10 years prior to distributing the funds held in the trust to our public stockholders. We cannot assure you that we will properly assess all claims that may be potentially brought against us. As such, our stockholders could potentially be liable for any claims of creditors to the extent of distributions received by them (but no more); and while we will seek to have all vendors and service providers (which would include any third parties we engaged to assist us in any way in connection with our search for a target business) and prospective target businesses execute agreements with us waiving any right, title, interest or claim of any kind they may have in or to any monies held in the trust account, there is no guarantee that they will execute such agreements. Nor is there any guarantee that, even if such entities execute such agreements with us, they will not seek recourse against the trust account or that a court would not conclude that such agreements are not legally enforceable. To date, we do not have waiver agreements in place with respect to any party that is currently providing services to us; however, prior to the consummation of the offering, we expect to receive the written waiver of our outside legal counsel, auditors, the representative and the representative s outside legal counsel. Our management stockholders have agreed that they will be personally liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us. Although we have a fiduciary obligation to pursue our management stockholders to enforce their indemnification obligations, and intend to pursue such actions Table of Contents as and when we deem appropriate, there can be no assurance they will be able to satisfy those obligations, if required to do so. The only obligations not covered by such indemnity are with respect to claims of creditors, vendors, service providers and target businesses that have executed a valid and binding waiver of their right to seek payment of amounts due to them out of the trust account. Furthermore, our management stockholders will not have any personal liability as to any claimed amounts owed to a third party who executed a valid and enforceable waiver (including a prospective target business). Additionally, in the case of a prospective target business that did not execute a waiver, such liability will only be in an amount necessary to ensure that public stockholders receive no less than $7.92 per share upon liquidation. We anticipate the distribution of the funds in the trust account to our public stockholders will occur by , 2009 [10 business days from the date our corporate existence ceases]. Our existing stockholders have waived their rights to participate in any liquidation distribution with respect to their initial shares. We will pay the costs of liquidation from our remaining assets outside of the trust account. If such funds are insufficient, our existing stockholders have agreed to advance us the funds necessary to complete such liquidation (currently anticipated to be no more than approximately $15,000) and have agreed not to seek repayment for such expenses. Escrow of existing stockholders securities On the date of this prospectus, all of our existing stockholders, including all of our officers and directors, will place their initial shares into an escrow account maintained by Continental Stock Transfer Trust Company, acting as escrow agent. Subject to certain limited exceptions (such as transfers (i) to an entity s members upon its liquidation, (ii) to relatives and trusts for estate planning purposes or (iii) by private sales made at or prior to the consummation of a business combination at prices no greater than the price at which the shares were originally purchased, in each case where the transferee agrees to the terms of the escrow agreement), these shares will not be transferable during the escrow period and will not be released from escrow until one year after the consummation of our initial business combination or earlier if, following a business combination, (a) the last sales price of our common stock equals or exceeds $11.50 per share for any 20 trading days within any 30-trading day period or (b) we consummate a subsequent liquidation, merger, stock exchange or other similar transaction which results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property. Private sales will be permitted in order to allow our existing stockholders to transfer shares of our common stock to officers and directors who may be hired or appointed after the date of this prospectus. These transfers were contemplated prior to the sale of the initial shares to our existing stockholders. Additionally, on the date of this prospectus, the insider warrants will be placed into the escrow account maintained with Continental Stock Transfer Trust Company, acting as escrow agent. Subject to certain limited exceptions, the insider warrants will not be transferable during the escrow period and will not be released from escrow until the later of , 2008 [one year from the date of this prospectus] and 60 days after the consummation of our business combination. Risks In making your decision on whether to invest in our securities, you should take into account not only the backgrounds of our management team, but also the special risks we face as a blank check company, as well as the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, and, therefore, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. You should carefully consider these and the other risks set forth in the section entitled Risk Factors beginning on page 12 of this prospectus. Table of Contents SUMMARY FINANCIAL DATA The following table summarizes the relevant financial data for our business and should be read with our financial statements, which are included in this prospectus. We have not had any significant operations to date, so only balance sheet data are presented. September 30, 2007 Actual As Adjusted(1) Balance Sheet Data: Working capital (deficiency) $ (335,379 ) $ 68,453,000 Total assets 334,618 71,333,000 Total liabilities 341,618 2,880,000 (2) Value of common stock which may be converted to cash 21,364,876 Stockholders equity (7,000 ) 47,088,124 (1) Includes the $2,100,000 we will receive from the sale of the insider warrants. (2) Includes the $2,880,000 deferred underwriters discounts and commissions payable to the underwriters upon completion of the business combination. The as adjusted information gives effect to the sale of the units we are offering, including the application of the related gross proceeds and the payment of the estimated remaining costs from such sale and the repayment of the accrued and other liabilities required to be repaid. The working capital deficiency excludes $328,379 of costs related to this offering which were paid or accrued prior to September 30, 2007. These deferred offering costs have been recorded as a long-term asset and are reclassified against stockholders equity in the as adjusted information. The as adjusted total assets amounts include the $71,240,000 to be held in the trust account, which will be available to us only upon the consummation of a business combination within the time period described in this prospectus. This trust amount includes $2,880,000 (or approximately $0.32 per share) of deferred underwriting discounts and commissions payable to the underwriters in the offering only if we consummate a business combination. If a business combination is not so consummated, the trust account totaling $71,240,000 of net proceeds from the offering, including $2,100,000 of proceeds from the private placement of the insider warrants, and all accrued interest earned thereon less (i) up to $1,500,000 that may be released to us to fund our expenses and other working capital requirements and (ii) any amounts released to us to pay our income or other tax obligations, will be distributed solely to our public stockholders (subject to our obligations under Delaware law to provide for claims of creditors). We will not proceed with a business combination if public stockholders owning 30% or more of the shares sold in this offering vote against the business combination and exercise their conversion rights. Accordingly, we may effect a business combination if public stockholders owning up to 29.99% of the shares sold in this offering exercise their conversion rights. If this occurred, we would be required to convert to cash up to 29.99% of the 9,000,000 shares sold in this offering, or 2,699,100 shares of common stock, for an initial per-share conversion price of approximately $7.92 (for an aggregate maximum conversion price of approximately $21.4 million), without taking into account interest earned on the trust account. The actual per-share conversion price will be equal to: the amount in the trust account, including all accrued interest after distribution of interest income on the trust account balance to us as described above, as of two business days prior to the proposed consummation of the business combination, divided by the number of shares of common stock sold in the offering. Because converting stockholders will receive their proportionate share of the deferred underwriting discounts and commissions and the underwriters will be paid the full amount of their deferred underwriting compensation at the time of the consummation of our initial business combination, we (and, therefore, the non-converting stockholders) will bear the financial effect of such payments to both the converting stockholders and the underwriters. Table of Contents RISK FACTORS An investment in our securities involves a high degree of risk. You should consider carefully the material risks described below, which we believe represent all the material risks related to the offering, together with the other information contained in this prospectus, before making a decision to invest in our units. Risks associated with our business We are a development stage company with no operating history and, accordingly, you will not have any basis on which to evaluate our ability to achieve our business objective. We are a recently incorporated development stage company with no operating results to date. Therefore, our ability to commence operations is dependent upon obtaining financing through the public offering of our securities. Since we do not have an operating history, you will have no basis upon which to evaluate our ability to achieve our business objective, which is to acquire an operating business. We have not conducted any discussions and we have no plans, arrangements or understandings with any prospective acquisition candidates. We will not generate any revenues until, at the earliest, after the consummation of a business combination. If we are forced to liquidate before a business combination and distribute the trust account, our public stockholders may receive less than $8.00 per share and our warrants will expire worthless. If we are unable to complete a business combination within the prescribed time frames and are forced to liquidate our assets, the per-share liquidation distribution may be less than $8.00 because of the expenses of this offering, our general and administrative expenses and the anticipated costs of seeking a business combination. Furthermore, there will be no distribution with respect to our outstanding warrants which will expire worthless if we liquidate before the completion of a business combination. If we are unable to consummate a business combination, our public stockholders will be forced to wait the full 24 months before receiving liquidation distributions. We have 24 months in which to complete a business combination. We have no obligation to return funds to investors prior to such date unless we consummate a business combination prior thereto and only then in cases where investors have sought conversion of their shares. Only after the expiration of this full time period will public stockholders be entitled to liquidation distributions if we are unable to complete a business combination. Accordingly, investors funds may be unavailable to them until such date. You will not be entitled to protections normally afforded to investors of blank check companies. Since the net proceeds of this offering are intended to be used to complete a business combination with a target business that has not been identified, we may be deemed to be a blank check company under the United States securities laws. However, since our securities will be listed on the American Stock Exchange, a national securities exchange, and we will have net tangible assets in excess of $5,000,000 upon the successful consummation of this offering and will file a Current Report on Form 8-K, including an audited balance sheet demonstrating this fact, we are exempt from rules promulgated by the SEC to protect investors of blank check companies such as Rule 419. Accordingly, investors will not be afforded the benefits or protections of those rules. Because we are not subject to Rule 419, our units will be immediately tradable and we have a longer period of time to complete a business combination in certain circumstances than we would if we were subject to such rule. Unlike many other blank check offerings, we allow up to 29.99% of our public stockholders to exercise their conversion rights. This higher threshold will make it easier for us to consummate a business combination with which you may not agree, and you may not receive the full amount of your original investment upon exercise of your conversion rights. When we seek stockholder approval of a business combination, we will offer each public stockholder (other than our existing stockholders) the right to have his, her or its shares of common stock converted to cash if the stockholder votes against the business combination and the business combination is approved and consummated. We will consummate the initial business combination only if the following two conditions are met: (i) a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and (ii) public stockholders owning 30% or more of the shares sold in this offering do not vote against the business combination and exercise their conversion rights. We believe that most other blank check companies have a conversion threshold of 20%, which makes it more difficult for such companies to consummate their initial business combination. Thus, because we permit a larger number of stockholders to exercise their conversion rights, it will be easier for us to consummate an initial business combination with a target business Table of Contents which you may believe is not suitable for us, and you may not receive the full amount of your original investment upon exercise of your conversion rights. Exercise of conversion rights must be effected pursuant to a specific process which may take time to complete and may result in the expenditure of funds by stockholders seeking conversion. A stockholder requesting conversion of his, her or its common stock into cash may do so at any time after the mailing to our stockholders of the proxy statement and prior to the vote taken with respect to a proposed business combination. A stockholder would have from the time we send out our proxy statement through the vote on the business combination to tender (either electronically or through the delivery of physical stock certificates) his, her or its shares of common stock if he, she or it wishes to seek to exercise his, her or its conversion rights, a period which is expected to be not less than 10 nor more than 60 days. There is a nominal cost associated with the above-referenced tendering process and the act of certificating the shares or delivering them through the DWAC system. The transfer agent will typically charge the tendering broker $35 and it would be the broker s decision whether or not to pass this cost on to the converting holder. There may be additional mailing and other nominal charges depending on the particular process used to tender common stock. Although we believe the time period, costs and other potential burdens associated with the tendering process are not onerous for an average investor, this process may result in additional burdens for stockholders, including mis-delivery or any other defect in the tendering process. Additionally, if a vote on our initial business combination is held and the business combination is not approved, we may continue to try to consummate a business combination with a different target until twenty four months from the date of this prospectus. If the initial business combination is not approved or completed for any reason, public stockholders voting against our initial business combination who exercised their conversion rights would not be entitled to convert their shares of common stock into a pro rata share of the aggregate amount then on deposit in the trust account. In such case, if we have required public stockholders to tender their certificates prior to the meeting, we will promptly return such certificates to the tendering public stockholder. In such case, they would then have to comply with the tendering process again for any vote against a subsequent business combination. Because there are numerous companies with a business plan similar to ours seeking to effectuate a business combination, it may be more difficult for us to do so. Since 2003, based upon publicly available information, approximately 117 similarly structured blank check companies have completed initial public offerings in the United States. Of these companies, only 31 companies have consummated a business combination, while 28 other companies have announced they have entered into a definitive agreement for a business combination, but have not consummated such business combination, and 6 companies have failed to complete business combinations and have either dissolved or announced their intention to dissolve and return trust proceeds to their stockholders. Accordingly, there are approximately 52 blank check companies with more than $6.3 billion in trust that are seeking to carry out a business plan similar to our business plan. Of these, there are 7 blank check companies which collectively have more than $600 million in trust that are focused on the entertainment, media, digital and communications industries. Furthermore, there are a number of additional offerings for blank check companies that are still in the registration process but have not completed initial public offerings and there are likely to be more blank check companies filing registration statements for initial public offerings after the date of this prospectus and prior to our completion of a business combination. While some of those companies must complete a business combination in specific industries, a number of them may consummate a business combination in any industry they choose. Therefore, we may be subject to competition from these and other companies seeking to consummate a business plan similar to ours. Because of this competition, we cannot assure you that we will be able to effectuate a business combination within the required time periods. If the net proceeds of this offering not being held in trust are insufficient to allow us to operate for at least the next 24 months, we may be unable to complete a business combination. We believe that, upon consummation of this offering, the funds available to us outside of the trust account, plus the interest earned on the funds held in the trust account that may be available to us, will be sufficient to allow us to operate for at least the next 24 months, assuming that a business combination is not consummated during that time. However, we cannot assure you that our estimates will be accurate. We could use a portion of the funds available to us to pay fees to consultants to assist us with our search for a target business. We could also use a portion of the funds as a down payment or to fund a no-shop provision (a provision in letters of intent designed to keep target businesses from shopping around for transactions with other companies on terms more favorable to such target businesses) with respect to a particular proposed business combination, although we do not have any current intention to do so. If we entered into a letter of intent where we paid for the right to receive exclusivity from a target business and were subsequently required to forfeit such funds (whether as a result of our breach or otherwise), we might not have sufficient funds to continue searching for, or conduct due diligence with respect to, a target business. Table of Contents A decline in interest rates could limit the amount available to fund our search for a target business or businesses and complete a business combination since we will depend on interest earned on the trust account to fund our search, to pay our tax obligations and to complete our initial business combination. Of the net proceeds of this offering, only $100,000 will be available to us initially outside the trust account to fund our working capital requirements. We will depend on sufficient interest being earned on the proceeds held in the trust account to provide us with additional working capital we will need to identify one or more target businesses and to complete our initial business combination, as well as to pay any tax obligations that we may owe. While we are entitled to have released to us for such purposes up to $1.5 million of interest earned on the funds in the trust account, a substantial decline in interest rates may result in our having insufficient funds available with which to structure, negotiate or close an initial business combination. In such event, we would need to borrow funds from our existing stockholders to operate or may be forced to liquidate. Our existing stockholders are under no obligation to advance funds in such circumstances. If third parties bring claims against us, the proceeds held in trust could be reduced and the per-share liquidation price received by stockholders will be less than approximately $7.92 per share. Our placing of funds in trust may not protect those funds from third party claims against us. Although we will seek to have all vendors and service providers we engage and prospective target businesses we negotiate with, execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our public stockholders, there is no guarantee that they will execute such agreements. Furthermore, there is no guarantee that, even if such entities execute such agreements with us, they will not seek recourse against the trust account. Nor is there any guarantee that a court would uphold the validity of such agreements. Accordingly, the proceeds held in trust could be subject to claims which could take priority over those of our public stockholders. If we liquidate before the completion of a business combination and distribute the proceeds held in trust to our public stockholders, our management stockholders have agreed that they will be personally liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us. Based on representations made to us by our management stockholders, we currently believe that they are capable of funding a shortfall in our trust account to satisfy their foreseeable indemnification obligations. However, we have not asked them to reserve for such an eventuality. Although we have a fiduciary obligation to pursue our management stockholders to enforce their indemnification obligations, and intend to pursue such actions as and when we deem appropriate, there can be no assurance they will be able to satisfy those obligations, if required to do so or that the proceeds in the trust account will not be reduced by such claims. Furthermore, our management stockholders will not have any personal liability as to any claimed amounts owed to a third party who executed a valid and enforceable waiver (including a prospective target business). Additionally, in the case of a prospective target business that did not execute a waiver, such liability will only be in an amount necessary to ensure that public stockholders receive no less than $7.92 per share upon liquidation. Additionally, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. To the extent any bankruptcy claims deplete the trust account, we cannot assure you we will be able to return to our public stockholders at least $7.92 per share. Our stockholders may be held liable for claims by third parties against us to the extent of distributions received by them. Our amended and restated certificate of incorporation provides that we will continue in existence only until 24 months from the date of this prospectus. If we have not completed a business combination by such date and amended this provision in connection thereto, pursuant to the Delaware General Corporation Law, our corporate existence will cease except for the purposes of winding up our affairs and liquidating. Under Sections 280 through 282 of the Delaware General Corporation Law, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. If the corporation complies with certain procedures set forth in Section 280 of the Delaware General Corporation Law intended to ensure that it makes reasonable provision for all claims against it, including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution. However, it is our intention to make liquidating distributions to our stockholders as soon as reasonably possible after the expiration of the twenty four month period and, therefore, we do not intend to comply with those procedures. Because we will not be complying with those procedures, we are required, pursuant to Section 281 of the Delaware General Corporation Law, to adopt a plan that will provide for our payment, based on facts Table of Contents known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against us within the subsequent 10 years. Accordingly, we would be required to provide for any creditors known to us at that time or those that we believe could be potentially brought against us within the subsequent 10 years prior to distributing the funds held in the trust to stockholders. We cannot assure you that we will properly assess all claims that may be potentially brought against us. As such, our stockholders could potentially be liable for any claims to the extent of distributions received by them (but no more) and any liability of our stockholders may extend well beyond the third anniversary of the date of distribution. Accordingly, we cannot assure you that third parties will not seek to recover from our stockholders amounts owed to them by us. If we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, any distributions received by stockholders could be viewed under applicable debtor/creditor or bankruptcy laws as either a preferential transfer or a fraudulent conveyance. As a result, a bankruptcy court could seek to recover all amounts received by our stockholders. Furthermore, because we intend to distribute the proceeds held in the trust account to our public stockholders promptly after , 2009 [twenty four months from the date of this prospectus], this may be viewed or interpreted as giving preference to our public stockholders over any potential creditors with respect to access to or distributions from our assets. Furthermore, our board may be viewed as having breached their fiduciary duties to our creditors or may have acted in bad faith, thereby exposing itself and our company to claims of punitive damages, by paying public stockholders from the trust account prior to addressing the claims of creditors. We cannot assure you that claims will not be brought against us for these reasons. An effective registration statement may not be in place when an investor desires to exercise warrants, thus precluding such investor from being able to exercise his, her or its warrants and causing such warrants to be practically worthless. No warrant held by public stockholders will be exercisable and we will not be obligated to issue shares of common stock unless at the time such holder seeks to exercise such warrant, a registration statement relating to the common stock issuable upon exercise of the warrant is effective and current and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms of the warrant agreement, we have agreed to use our best efforts to meet these conditions and to maintain a current prospectus relating to the common stock issuable upon exercise of the warrants until the expiration of the warrants. However, we cannot assure you that we will be able to do so, and if we do not maintain a current prospectus related to the common stock issuable upon exercise of the warrants, holders will be unable to exercise their warrants and we will not be required to settle any such warrant exercise. In no event will we be required to net cash settle any warrant exercise. If the prospectus relating to the common stock issuable upon the exercise of the warrants is not current, the warrants held by public stockholders may have no value, the market for such warrants may be limited and such warrants may expire worthless. As a result, a purchaser of a unit may pay the full unit purchase price solely for the shares underlying the unit. Notwithstanding the foregoing, the insider warrants may be exercisable for unregistered shares of common stock even if no registration relating to the common stock issuable upon exercise of the warrants is effective and current. An investor will only be able to exercise a warrant if the issuance of common stock upon such exercise has been registered or qualified or is deemed exempt under the securities laws of the state of residence of the holder of the warrants. No warrants will be exercisable and we will not be obligated to issue shares of common stock unless the common stock issuable upon such exercise has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Because the exemptions from qualification in certain states for resales of warrants and for issuances of common stock by the issuer upon exercise of a warrant may be different, a warrant may be held by a holder in a state where an exemption is not available for issuance of common stock upon an exercise and the holder will be precluded from exercise of the warrant. At the time that the warrants become exercisable (following our completion of a business combination), we expect to either continue to be listed on the American Stock Exchange, which would provide an exemption from registration in every state, or we would register the warrants in every state (or seek another exemption from registration in such states). Accordingly, we believe holders in every state will be able to exercise their warrants as long as our prospectus relating to the common stock issuable upon exercise of the warrants is current. However, we cannot assure you of this fact. As a result, the warrants may be deprived of any value, the market for the warrants may be limited and the holders of warrants may not be able to exercise their warrants if the common stock issuable upon such exercise is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside. Table of Contents Since we have not yet selected a target business with which to complete a business combination, we are unable to currently ascertain the particular merits or risks of the business in which we may ultimately operate. Although we intend to focus our efforts on the entertainment, media, digital and communications industries, there is no current basis for you to evaluate the possible merits or risks of the particular target business which we may ultimately acquire. To the extent we complete a business combination with a financially unstable company or an entity in its development stage, we may be affected by numerous risks inherent in the business operations of those entities. Although our management will endeavor to evaluate the risks inherent in our industry or a particular target business, we cannot assure you that we will properly ascertain or assess all of the significant risk factors. We also cannot assure you that an investment in our units will not ultimately prove to be less favorable to investors in this offering than a direct investment, if an opportunity were available, in a target business. For a more complete discussion of our selection of a target business, see the section appearing elsewhere in this prospectus entitled Proposed Business Effecting a business combination We have not identified a target business. We may not obtain an opinion from an unaffiliated third party as to the fair market value of the target acquisition or that the price we are paying for the business is fair to our stockholders. We are not required to obtain an opinion from an unaffiliated third party that either the target acquisition we select has a fair market value in excess of 80% of our net assets held in the trust account (net of taxes and amounts disbursed for working capital purposes and excluding the amount held in the trust account representing a portion of the underwriters discount) or that the price we are paying is fair to stockholders unless (i) our board is not able to independently determine that a target acquisition has a sufficient market value or (ii) there is a conflict of interest with respect to the transaction. If no opinion is obtained, our stockholders will be relying on the judgment or our board of directors. We may issue shares of our capital stock or debt securities to complete a business combination, which would reduce the equity interest of our stockholders and likely cause a change in control of our ownership. Our certificate of incorporation authorizes the issuance of up to 40,000,000 shares of common stock, par value $0.001 per share, and 1,000,000 shares of preferred stock, par value $0.001 per share. Immediately after this offering and the purchase of the insider warrants (assuming no exercise of the underwriters over-allotment option), there will be 16,250,000 authorized but unissued shares of our common stock available for issuance (after appropriate reservation for the issuance of the shares upon full exercise of our outstanding warrants and the purchase option granted to the underwriters) and all of the 1,000,000 shares of preferred stock available for issuance. Although we have no commitment as of the date of this offering, we may issue a substantial number of additional shares of our common or preferred stock, or a combination of common and preferred stock, to complete a business combination. The issuance of additional shares of our common stock or any number of shares of our preferred stock: may significantly reduce the equity interest of investors in this offering; may subordinate the rights of holders of common stock if we issue preferred stock with rights senior to those afforded to our common stock; may cause a change in control if a substantial number of our shares of common stock are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and could result in the resignation or removal of our present officers and directors; and may adversely affect prevailing market prices for our common stock. Similarly, if we issue debt securities, it could result in: default and foreclosure on our assets if our operating revenues after a business combination are insufficient to repay our debt obligations; acceleration of our obligations to repay the indebtedness even if we make all principal and interest payments when due if we breach certain covenants that require the maintenance of certain financial ratios or reserves without a waiver or renegotiation of that covenant; our immediate payment of all principal and accrued interest, if any, if the debt security is payable on demand; and our inability to obtain necessary additional financing if the debt security contains covenants restricting our ability to obtain such financing while the debt security is outstanding. Table of Contents Our ability to successfully effect a business combination and to be successful thereafter will be totally dependent upon the efforts of our key personnel, some of whom may join us following a business combination. Our ability to successfully effect a business combination is dependent upon the efforts of our key personnel. The role of our key personnel in the target business, however, cannot presently be ascertained. Although some of our key personnel may remain with the target business in senior management or advisory positions following a business combination, it is likely that some or all of the management of the target business will remain in place. While we intend to closely scrutinize any individuals we engage after a business combination, we cannot assure you that our assessment of these individuals will prove to be correct. These individuals may be unfamiliar with the requirements of operating a public company which could cause us to have to expend time and resources helping them become familiar with such requirements. This could be expensive and time-consuming and could lead to various regulatory issues which may adversely affect our operations. Our key personnel may negotiate employment or consulting agreements with a target business in connection with a particular business combination. These agreements may provide for them to receive compensation following a business combination and as a result, may cause them to have conflicts of interest in determining whether a particular business combination is the most advantageous. Our key personnel will be able to remain with the company after the consummation of a business combination only if they are able to negotiate employment or consulting agreements in connection with the business combination. Such negotiations would take place simultaneously with the negotiation of the business combination and could provide for such individuals to receive compensation in the form of cash payments or our securities for services they would render to the company after the consummation of the business combination. The personal and financial interests of such individuals may influence their motivation in identifying and selecting a target business. However, we believe the ability of such individuals to remain with the company after the consummation of a business combination will not be the determining factor in our decision as to whether or not we will proceed with any potential business combination. Our officers and directors will allocate their time to other businesses thereby causing conflicts of interest in their determination as to how much time to devote to our affairs. This conflict of interest could have a negative impact on our ability to consummate a business combination. Our officers and directors are not required to commit their full time to our affairs, which could create a conflict of interest when allocating their time between our operations and their other commitments. We do not intend to have any full time employees prior to the consummation of a business combination. All of our executive officers are engaged in several other business endeavors and are not obligated to devote any specific number of hours to our affairs. If our officers and directors other business affairs require them to devote more substantial amounts of time to such affairs, it could limit their ability to devote time to our affairs and could have a negative impact on our ability to consummate a business combination. We cannot assure you that these conflicts will be resolved in our favor. As a result, a potential target business may be presented to another entity prior to its presentation to us and we may miss out on a potential transaction. We may engage in a business combination with one or more target businesses that have relationships with our existing stockholders, officers or, directors, which may raise potential conflicts of interest. In light of our existing stockholders , officers and directors involvement with other entertainment, media, digital and communications companies and our intent to complete a business combination with one or more operating businesses in the same industry, we may decide to acquire one or more businesses affiliated with our existing stockholders, officers or, directors. Our officers, directors and stockholders may have conflicting fiduciary duties in determining to which entity a particular business opportunity should be presented. Also, the completion of a business combination between us and an entity owned by a business in which one of our officers, directors or stockholders has an interest could enhance their prospects for future business from such entity or lead to consulting or other arrangements with such entity. Despite our agreement to obtain an opinion from an independent investment banking firm regarding the fairness to our public stockholders from a financial point of view of a business combination with a business affiliated with our existing stockholders, officers or, directors, potential conflicts of interest still may exist. As a result, the terms of the business combination may not be as advantageous to our public stockholders as they would be absent any conflicts of interest. For example, the purchase price of such a business combination may be higher than the purchase price for similar business combinations. Our officers, directors and stockholders, and their affiliates may in the future become affiliated with entities engaged in business activities similar to those intended to be conducted by us and accordingly, may have conflicts of interest in determining to which entity a particular business opportunity should be presented. Our officers, directors and stockholders may be, or may in the future become, affiliated with entities, including other blank check companies, engaged in business activities similar to those intended to be conducted by us. Additionally, our officers, directors and stockholders may become aware of business opportunities which may be appropriate for presentation Table of Contents to us and the other entities to which they owe fiduciary duties. Accordingly, they may have conflicts of interest in determining to which entity a particular business opportunity should be presented. We cannot assure you that these conflicts will be resolved in our favor. As a result, a potential target business may be presented to another entity prior to its presentation to us and we may miss out on a potential transaction. All of our officers and directors own shares of our common stock issued prior to the offering and some of them will own warrants following this offering. These shares and warrants will not participate in liquidation distributions and, therefore, our officers and directors may have a conflict of interest in determining whether a particular target business is appropriate for a business combination. All of our officers and directors own shares of our common stock that were issued prior to this offering. Additionally, certain of our officers and directors are purchasing insider warrants upon consummation of this offering. Such individuals have waived their right to receive distributions with respect to their initial shares upon our liquidation if we are unable to consummate a business combination. Accordingly, the shares acquired prior to this offering, as well as the insider warrants, and any warrants purchased by our officers or directors in this offering or in the aftermarket will be worthless if we do not consummate a business combination. The personal and financial interests of our directors and officers may influence their motivation in timely identifying and selecting a target business and completing a business combination. Consequently, our directors and officers discretion in identifying and selecting a suitable target business may result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination are appropriate and in our stockholders best interest. The American Stock Exchange may delist our securities from quotation on its exchange which could limit investors ability to make transactions in our securities and subject us to additional trading restrictions. Our securities have been approved for listing on the American Stock Exchange, a national securities exchange, upon consummation of this offering. We cannot assure you that our securities will continue to be listed on the American Stock Exchange in the future prior to a business combination. Additionally, in connection with our business combination, it is likely that the American Stock Exchange will require us to file a new initial listing application and meet its initial listing requirements as opposed to its more lenient continued listing requirements. We cannot assure you that we will be able to meet those initial listing requirements at that time. If the American Stock Exchange delists our securities from trading on its exchange, we could face significant material adverse consequences, including: a limited availability of market quotations for our securities; a determination that our common stock is a penny stock which will require brokers trading in our common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock; a limited amount of news and analyst coverage for our company; and a decreased ability to issue additional securities or obtain additional financing in the future. We may only be able to complete one business combination with the proceeds of this offering, which will cause us to be solely dependent on a single business which may have a limited number of products or services. Our business combination must be with a business with a fair market value of at least 80% of our net assets at the time of such acquisition, although this may entail the simultaneous acquisitions of several operating businesses at the same time. By consummating a business combination with only a single entity, our lack of diversification may subject us to numerous economic, competitive and regulatory developments. Further, we would not be able to diversify our operations or benefit from the possible spreading of risks or offsetting of losses, unlike other entities which may have the resources to complete several business combinations in different industries or different areas of a single industry. Accordingly, the prospects for our success may be: solely dependent upon the performance of a single business, or dependent upon the development or market acceptance of a single or limited number of products, processes or services. This lack of diversification may subject us to numerous economic, competitive and regulatory developments, any or all of which may have a substantial adverse impact upon the particular industry in which we may operate subsequent to a business combination. Alternatively, if we determine to simultaneously acquire several businesses and such businesses are owned by different sellers, we will need for each of such sellers to agree that our purchase of its business is contingent on the simultaneous Table of Contents closings of the other business combinations, which may make it more difficult for us, and delay our ability, to complete the business combination. With multiple business combinations, we could also face additional risks, including additional burdens and costs with respect to possible multiple negotiations and due diligence investigations (if there are multiple sellers) and the additional risks associated with the subsequent assimilation of the operations and services or products of the acquired companies in a single operating business. If we are unable to adequately address these risks, it could negatively impact our profitability and results of operations. The ability of our stockholders to exercise their conversion rights may not allow us to effectuate the most desirable business combination or optimize our capital structure. When we seek stockholder approval of any business combination, we will offer each public stockholder (but not our existing stockholders) the right to have his, her or its shares of common stock converted to cash if the stockholder votes against the business combination and the business combination is approved and completed. Such holder must both vote against such business combination and then exercise his, her or its conversion rights to receive a pro rata portion of the trust account. Accordingly, if our business combination requires us to use substantially all of our cash to pay the purchase price, because we will not know how many stockholders may exercise such conversion rights, we may either need to reserve part of the trust account for possible payment upon such conversion, or we may need to arrange third party financing to help fund our business combination in case a larger percentage of stockholders exercise their conversion rights than we expect. Since we have no specific business combination under consideration, we have not taken any steps to secure third party financing. Therefore, we may not be able to consummate a business combination that requires us to use all of the funds held in the trust account as part of the purchase price, or we may end up having a leverage ratio that is not optimal for our business combination. This may limit our ability to effectuate the most attractive business combination available to us. Because of our limited resources and structure, we may not be able to consummate an attractive business combination. We expect to encounter intense competition from entities other than blank check companies having a business objective similar to ours, including venture capital funds, leveraged buyout funds and operating businesses competing for acquisitions. Many of these entities are well established and have extensive experience in identifying and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human and other resources than we do and our financial resources will be relatively limited when contrasted with those of many of these competitors. While we believe that there are numerous potential target businesses that we could acquire with the net proceeds of this offering, our ability to compete in acquiring certain sizable target businesses will be limited by our available financial resources. This inherent competitive limitation gives others an advantage in pursuing the acquisition of certain target businesses. Furthermore, the obligation we have to seek stockholder approval of a business combination may delay the consummation of a transaction. Additionally, our outstanding warrants, and the future dilution they potentially represent, may not be viewed favorably by certain target businesses. Any of these obligations may place us at a competitive disadvantage in successfully negotiating a business combination. Because only 59 of the 117 blank check companies that have gone public in the United States since 2003 have either consummated a business combination or entered into a definitive agreement for a business combination, it may indicate that there are fewer attractive target businesses available to such entities like our company or that many privately held target businesses are not inclined to enter into these types of transactions with publicly held blank check companies like ours. If we are unable to consummate a business combination with a target business within the prescribed time periods, we will be forced to liquidate. We may be unable to obtain additional financing, if required, to complete a business combination or to fund the operations and growth of the target business, which could compel us to restructure or abandon a particular business combination. Although we believe that the net proceeds of this offering will be sufficient to allow us to consummate a business combination, because we have not yet identified any prospective target business, we cannot ascertain the capital requirements for any particular transaction. If the net proceeds of this offering prove to be insufficient, either because of the size of the business combination, the depletion of the available net proceeds in search of a target business, or the obligation to convert into cash a significant number of shares from dissenting stockholders, we will be required to seek additional financing. We cannot assure you that such financing will be available on acceptable terms, if at all. To the extent that additional financing proves to be unavailable when needed to consummate a particular business combination, we would be compelled to either restructure the transaction or abandon that particular business combination and seek an alternative target business candidate. In addition, if we consummate a business combination, we may require additional financing to fund the operations or growth of the target business. The failure to secure additional financing could have a material adverse effect on the continued development or growth of the target business. None of our officers, directors or stockholders is required to provide any financing to us in connection with or after a business combination. Table of Contents Our existing stockholders, including our officers and directors, control a substantial interest in us and thus may influence certain actions requiring a stockholder vote. Upon consummation of our offering, our existing stockholders (including all of our officers and directors) will collectively own 20% of our issued and outstanding shares of common stock (assuming they do not purchase any units in this offering). None of our officers, directors or stockholders or their affiliates has indicated any intention to purchase units in this offering or to purchase units or shares of common stock in the open market or in private transactions. However, if a significant number of stockholders vote, or indicate an intention to vote, against a proposed business combination, our officers, directors and stockholders and their affiliates could make such purchases in the open market or in private transactions in order to influence the vote. Our board of directors is and will be divided into three classes, each of which will generally serve for a term of three years with only one class of directors being elected in each year. It is unlikely that there will be an annual meeting of stockholders to elect new directors prior to the consummation of a business combination, in which case all of the current directors will continue in office until at least the consummation of the business combination. If there is an annual meeting, as a consequence of our staggered board of directors, only a minority of the board of directors will be considered for election and our existing stockholders, because of their ownership position, will have considerable influence regarding the outcome. Accordingly, our existing stockholders will continue to exert control at least until the consummation of a business combination. Our existing stockholders paid an aggregate of $25,000, or approximately $0.01 per share, for their shares and, accordingly, you will experience immediate and substantial dilution from the purchase of our common stock. The difference between the public offering price per share and the pro forma net tangible book value per share of our common stock after this offering constitutes the dilution to the investors in this offering. Our existing stockholders acquired their initial shares of common stock at a nominal price, significantly contributing to this dilution. Upon consummation of this offering, you and the other new investors will incur an immediate and substantial dilution of approximately 31.1% or $2.49 per share (the difference between the pro forma net tangible book value per share of $5.51, and the initial offering price of $8.00 per unit). Our outstanding warrants may have an adverse effect on the market price of our common stock and make it more difficult to effect a business combination. We will be issuing warrants to purchase 9,000,000 shares of common stock as part of the units offered by this prospectus and the insider warrants to purchase 2,100,000 shares of common stock. We will also issue an option to purchase 700,000 units to Pali Capital, Inc., which, if exercised, will result in the issuance of an additional 700,000 shares of common stock and 700,000 warrants. To the extent we issue shares of common stock to effect a business combination, the potential for the issuance of a substantial number of additional shares upon exercise of these warrants and option could make us a less attractive acquisition vehicle in the eyes of a target business. Such securities, when exercised, will increase the number of issued and outstanding shares of our common stock and reduce the value of any shares issued to complete the business combination. Accordingly, our warrants may make it more difficult to effectuate a business combination or increase the cost of acquiring the target business. Additionally, the sale, or even the possibility of sale, of the shares underlying the warrants could have an adverse effect on the market price for our securities or on our ability to obtain future financing. If and to the extent these warrants are exercised, you may experience dilution to your holdings. If our existing stockholders or the purchasers of the insider warrants exercise their registration rights with respect to their initial shares or insider warrants and underlying securities, it may have an adverse effect on the market price of our common stock and the existence of these rights may make it more difficult to effect a business combination. Our existing stockholders are entitled to make a demand that we register the resale of their initial shares at any time commencing on the date on which their shares are released from escrow. Additionally, the purchasers of the insider warrants are entitled to demand that we register the resale of their insider warrants and underlying shares of common stock at any time after we consummate a business combination. If such individuals exercise their registration rights with respect to all of their securities, then there will be an additional 2,250,000 shares of common stock and 2,100,000 warrants (as well as 2,100,000 shares of common stock underlying the warrants) eligible for trading in the public market. The presence of these additional shares of common stock trading in the public market may have an adverse effect on the market price of our common stock. In addition, the existence of these rights may make it more difficult to effectuate a business combination or increase the cost of acquiring the target business, as the stockholders of the target business may be discouraged from entering into a business combination with us or may request a higher price for their securities because of the potential effect the exercise of such rights may have on the trading market for our common stock. Table of Contents If we are deemed to be an investment company, we may be required to institute burdensome compliance requirements and our activities may be restricted, which may make it difficult for us to complete a business combination. A company that, among other things, is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, owning, trading or holding certain types of securities would be deemed an investment company under the Investment Company Act of 1940. Since we will invest the proceeds held in the trust account, it is possible that we could be deemed an investment company. Notwithstanding the foregoing, we do not believe that our anticipated principal activities will subject us to the Investment Company Act of 1940. To this end, the proceeds held in trust may be invested by the trustee only in United States government securities within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 having a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940. By restricting the investment of the proceeds to these instruments, we intend to meet the requirements for the exemption provided in Rule 3a-1 promulgated under the Investment Company Act of 1940. If we are nevertheless deemed to be an investment company under the Investment Company Act of 1940, we may be subject to certain restrictions that may make it more difficult for us to complete a business combination, including: restrictions on the nature of our investments; and restrictions on the issuance of securities. In addition, we may have imposed upon us certain burdensome requirements, including: registration as an investment company; adoption of a specific form of corporate structure; and reporting, record keeping, voting, proxy, compliance policies and procedures and disclosure requirements and other rules and regulations. Compliance with these additional regulatory burdens would require additional expense for which we have not allotted funds. The determination of the offering price of our units and insider warrants is more arbitrary compared with the pricing of securities for an operating company in a particular industry. Prior to this offering there has been no public market for any of our securities. The public offering price of the units and the terms of the warrants, as well as the price of the insider warrants, were negotiated between us and the representative of the underwriters. Factors considered in determining the prices and terms of the units, including the common stock and warrants underlying the units, and the insider warrants include: the history and prospects of companies whose principal business is the acquisition of other companies; prior offerings of those companies; our prospects for acquiring an operating business at attractive values; our capital structure; an assessment of our management and their experience in identifying operating companies; our belief that the aggregate gross proceeds raised in this offering will be sufficient to complete a desirable acquisition; general conditions of the securities markets at the time of the offering; and other factors as were deemed relevant. In consultation with our underwriters, we determined the size of this offering based on our beliefs concerning the capital that could be successfully raised given market conditions, our company s business, our management team and other factors. With an equity base equivalent to the net proceeds of this offering and the private placement, we believe we will have the ability to consider a broad range of potential target businesses possessing the scale of operations and developed infrastructure that will allow us to execute a business plan which will leverage our skills and resources. The determination of the offering price of our units and the valuation accorded to our company is more arbitrary than the pricing of securities for, or valuation of, operating companies in general. Table of Contents If we effect a business combination with a company located outside of the United States, we would be subject to a variety of additional risks that may negatively impact our operations. We may effect a business combination with a company located outside of the United States. If we did, we would be subject to any special considerations or risks associated with companies operating in the target business home jurisdiction, including any of the following: tariffs and trade barriers; regulations related to customs and import/export matters; longer payment cycles; tax issues, such as tax law changes and variations in tax laws as compared to the United States; currency fluctuations; challenges in collecting accounts receivable; cultural and language differences; and employment regulations. We cannot assure you that we would be able to adequately address these additional risks. If we were unable to do so, our operations might suffer. If we effect a business combination with a company located outside of the United States, the laws applicable to such company will likely govern all of our material agreements and we may not be able to enforce our legal rights. If we effect a business combination with a company located outside of the United States, the laws of the country in which such company operates will govern almost all of the material agreements relating to its operations. We cannot assure you that the target business will be able to enforce any of its material agreements or that remedies will be available in this new jurisdiction. The system of laws and the enforcement of existing laws in such jurisdiction may not be as certain in implementation and interpretation as in the United States. The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss of business, business opportunities or capital. Additionally, if we acquire a company located outside of the United States, it is likely that substantially all of our assets would be located outside of the United States and some of our officers and directors might reside outside of the United States. As a result, it may not be possible for investors in the United States to enforce their legal rights, to effect service of process upon our directors or officers or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties against our directors and officers under Federal securities laws. Foreign Currency fluctuations could adversely affect our business and financial results. A target business with which we combine may do business and generate sales within other countries. Foreign currency fluctuations may affect the costs that we incur in such international operations. It is also possible that some or all of our operating expenses may be incurred in non-U.S. dollar currencies. The appreciation of non-U.S. dollar currencies in those countries where we have operations against the U.S. dollar would increase our costs and could harm our results of operations and financial condition. Risks Associated with the Entertainment, Media, Digital and Communications Industries We will focus our search on target businesses in the entertainment, media, digital or communications industries. We believe that the following risks will apply to us following the completion of a business combination with a target business in the entertainment, media, digital or communications industries. The speculative nature of the entertainment, media, digital and communications industries may negatively impact our results of operations. Certain segments of the entertainment, media, digital and communications industries are highly speculative and historically have involved a substantial degree of risk. For example, the success of a particular video game, program or series or recreational attraction depends upon unpredictable and changing factors, including the success of promotional efforts, the availability of alternative forms of entertainment and leisure time activities, general economic conditions, public acceptance and other tangible and intangible factors, many of which are beyond our control. If we complete a business combination with a target business in such a segment, our operations may be adversely affected. Table of Contents If we are unable to protect our patents, trademarks, copyrights and other intellectual property rights following a business combination, competitors may be able to use our technology or intellectual property rights, which could weaken our competitive position. If we are successful in acquiring a target business and the target business is the owner of patents, trademarks, copyrights and other intellectual property, our success will depend in part on our ability to obtain and enforce intellectual property rights for those assets, both in the United States and in other countries. In those circumstances, we may file applications for patents, copyrights and trademarks as our management deems appropriate. We cannot assure you that these applications, if filed, will be approved, or that we will have the financial and other resources necessary to enforce our proprietary rights against infringement by others. Additionally, we cannot assure you that any patent, trademark or copyright obtained by us will not be challenged, invalidated or circumvented. If we are alleged to have infringed on the intellectual property or other rights of third parties, it could subject us to significant liability for damages and may invalidate our proprietary rights. If, following a business combination, third parties allege that we have infringed on their intellectual property rights, privacy rights or publicity rights or have defamed them, we could become a party to litigation. These claims and any resulting lawsuits could subject us to significant liability for damages and could invalidate our proprietary rights or restrict our ability to publish and distribute the infringing or defaming content. We may not be able to comply with government regulations that may be adopted with respect to the entertainment, media, digital and communications industries. Certain segments of the entertainment, media, digital and communications industries, including broadcast networks, cable networks and radio stations, have historically been subject to substantial regulation at the Federal, state and local levels. In the past, the regulatory environment, particularly with respect to the television and radio industry, has been fairly rigid. We cannot assure you that regulations currently in effect or adopted in the future will not cause us to modify or cease any of the operations then being conducted by a target business that we acquire. Table of Contents USE OF PROCEEDS We estimate that the net proceeds of this offering, in addition to the funds we will receive from the sale of the insider warrants (all of which will be deposited into the trust account), will be as set forth in the following table: Without Over-Allotment Over-Allotment Option Option Exercised Gross proceeds From offering $ 72,000,000 $ 82,800,000 From private placement 2,100,000 2,100,000 Total gross proceeds $ 74,100,000 $ 84,900,000 Offering expenses(1) Underwriting discount (7% of gross proceeds from offering, 3% of which is payable at closing and 4% of which is payable upon consummation of a business combination)(2) $ 2,160,000 $ 2,484,000 Legal fees and expenses 250,000 250,000 Miscellaneous expenses 131,942 131,942 Printing and engraving expenses 50,000 50,000 American Stock Exchange filing and listing fee 80,000 80,000 Accounting fees and expenses 65,000 65,000 SEC registration fee 5,300 5,300 NASD filing fee 17,758 17,758 Total offering expenses $ 2,760,000 $ 3,084,000 Net proceeds(3) Held in trust $ 71,240,000 $ 81,716,000 Not held in trust 100,000 100,000 Total net proceeds $ 71,340,000 $ 81,816,000 Use of net proceeds not held in trust and up to $1,500,000 available from interest income earned on the trust account(4)(5) Legal, accounting and other third party expenses attendant to the search for target businesses and to the due diligence investigation, structuring and negotiation of a business combination $ 620,000 $ 620,000 Due diligence of prospective target businesses by officers, directors and existing stockholders 150,000 150,000 Legal and accounting fees relating to SEC reporting obligations 200,000 200,000 Payment of administrative fee ($7,500 per month for two years) 180,000 180,000 Working capital to cover deposits, down payments, exclusivity fees, finder s fees, road show expenses, D O insurance, general corporate purposes, reserves, including for costs of dissolution and liquidation, if necessary, and other miscellaneous expenses 450,000 450,000 Total $ 1,600,00 $ 1,600,00 (1) Approximately $100,000 of the offering expenses have been or will be paid from loans we have received or will receive from Mr. Green. These loans will be repaid out of the proceeds of this offering available to us. (2) No discounts or commissions will be paid with respect to the purchase of the insider warrants. For purposes of presentation, the underwriting discounts are reflected as the amount payable to the underwriters upon consummation of the offering. An additional $2,880,000, all of which will be deposited in trust following the consummation of the offering, is payable to the underwriters only if and when we consummate a business combination. (3) Includes $2,880,000 held in trust for the benefit of the underwriters in the event we consummate a business combination. (4) The amount of proceeds not held in trust will remain constant at $100,000 even if the over-allotment option is exercised. In addition, $1,500,000 of interest income earned on the amounts held in the trust account will be available to us to pay for our working capital requirements. For purposes of presentation, the full amount available to us is shown as the total amount of net proceeds available to us immediately following the offering. Table of Contents (5) These are estimates only. Our actual expenditures for some or all of these items may differ from the estimates set forth herein. For example, we may incur greater legal and accounting expenses than our current estimates in connection with negotiating and structuring a business combination based upon the level of complexity of that business combination. We do not anticipate any change in our intended use of proceeds, other than fluctuations among the current categories of allocated expenses, which fluctuations, to the extent they exceed current estimates for any specific category of expenses, would be deducted from our excess working capital. In addition to the offering of units by this prospectus, our existing stockholders have committed to purchase the insider warrants (for an aggregate purchase price of $2,100,000) from us. These purchases will take place in a private placement that will occur simultaneously with the consummation of this offering. We will not pay any discounts or commissions with respect to the purchase of the insider warrants. All of the proceeds we receive from this purchase will be placed in the trust account described below. $69,140,000, or $79,616,000 if the over-allotment option is exercised in full, of net proceeds of this offering, plus the $2,100,000 we will receive from the sale of the insider warrants, will be placed in a trust account at HSBC Bank USA, N.A., maintained by Continental Stock Transfer Trust Company, New York, New York, as trustee. This amount includes a portion of the underwriting discounts and commissions payable to the underwriters in this offering. The underwriters have agreed that such amount will not be paid unless and until we consummate a business combination and have waived their right to receive such payment upon our liquidation if we are unable to complete a business combination. The funds held in trust will be invested only in United States government securities within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 having a maturity of 180 days or less, or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940, so that we are not deemed to be an investment company under the Investment Company Act. Except with respect to interest income that may be released to us of (i) up to $1,500,000 to fund expenses related to investigating and selecting a target business and our other working capital requirements and (ii) any additional amounts we may need to pay our income or other tax obligations, the proceeds will not be released from the trust account until the earlier of the completion of a business combination or our liquidation. The proceeds held in the trust account may be used as consideration to pay the sellers of a target business with which we complete a business combination. Any amounts not paid as consideration to the sellers of the target business may be used to finance operations of the target business. The payment to our management stockholders, an affiliate of our management stockholders or third parties of a monthly fee of $7,500 is for certain administrative, technology and secretarial services, as well as the use of certain limited office space. This arrangement is being agreed to for our benefit and is not intended to provide our management stockholders compensation in lieu of a salary. We believe, based on rents and fees for similar services in the New York City metropolitan area identified by our management stockholders, that the fee charged is at least as favorable as we could have obtained from an unaffiliated person. Although we have not yet identified office space, we may rent office space in a facility shared with other companies. This arrangement will terminate upon completion of a business combination or the distribution of the trust account to our public stockholders. Other than the $7,500 per month fee, no compensation of any kind (including finder s, consulting or other similar fees) will be paid to any of our existing officers, directors, stockholders, or any of their affiliates, prior to, or for any services they render in order to effectuate, the consummation of the business combination (regardless of the type of transaction that it is). However, such individuals will receive reimbursement for any out-of-pocket expenses incurred by them in connection with activities on our behalf, such as searching for and identifying potential target businesses, performing business due diligence on suitable target businesses and business combinations as well as traveling to and from the offices, plants or similar locations of prospective target businesses to examine their operations or meet with their representatives or owners. Reimbursement for such expenses will be paid by us out of the funds not held in trust and currently allocated to Legal, accounting and other third-party expenses attendant to the search for target businesses and to the due diligence investigation, structuring and negotiation of a business combination, Due diligence of prospective target businesses by our officers, directors and existing stockholders and Working capital to cover miscellaneous expenses, D O insurance, general corporate purposes, liquidation obligations and reserves. Since the role of present management after a business combination is uncertain, we have no ability to determine what remuneration, if any, will be paid to those persons after a business combination. Regardless of whether the over-allotment option is exercised in full, the net proceeds from this offering available to us out of trust for our search for a business combination will be $100,000. In addition, interest earned on the funds held in the trust account, up to $1,500,000, may be released to us to fund our working capital requirements. We will also be entitled to have interest earned on the funds held in the trust account released to us to pay any tax obligations that we may owe. We intend to use the excess working capital (approximately $450,000) for director and officer liability insurance premiums (approximately $127,500), with the balance of $322,500 being held in reserve in the event due diligence, legal, accounting and other expenses of structuring and negotiating business combinations exceed our estimates, as well as for reimbursement of any out-of-pocket expenses incurred by our existing stockholders in connection with activities on our behalf. We believe Table of Contents these funds will be sufficient to cover the foregoing expenses and reimbursement costs. We could use a portion of the funds not being placed in trust to pay fees to consultants to assist us with our search for a target business or as a down payment or to fund a no-shop provision (a provision in letters of intent designed to keep target businesses from shopping around for transactions with other companies on terms more favorable to such target businesses) with respect to a particular proposed business combination, although we do not have any current intention to do so. If we entered into a letter of intent where we paid for the right to receive exclusivity from a target business, the amount that would be used as a down payment or to fund a no-shop provision would be determined based on the terms of the specific business combination and the amount of our available funds at the time. Our forfeiture of such funds (whether as a result of our breach or otherwise) could result in our not having sufficient funds to continue searching for, or conducting due diligence with respect to, potential target businesses. The allocation of the net proceeds available to us outside of the trust account, along with the available interest earned on the funds held in the trust account, represents our best estimate of the intended uses of these funds. In the event that our assumptions prove to be inaccurate, we may reallocate some of such proceeds within the above described categories. We will likely use substantially all of the net proceeds of this offering, including the funds held in the trust account, to acquire a target business and to pay our expenses relating thereto. To the extent that our capital stock is used in whole or in part as consideration to effect a business combination, the proceeds held in the trust account which are not used to consummate a business combination will be disbursed to the combined company and will, along with any other net proceeds not expended, be used as working capital to finance the operations of the target business. Such working capital funds could be used in a variety of ways including continuing or expanding the target business operations, for strategic acquisitions and for marketing, research and development of existing or new products. Such funds could also be used to repay any operating expenses or finders fees which we had incurred prior to the completion of our business combination if the funds available to us outside of the trust account were insufficient to cover such expenses. Further, we may seek to acquire a target business with a fair market value significantly in excess of 80% of our net assets held in the trust account. In order to do so, we may seek to raise additional funds through a private offering of debt or equity securities, and we may effect a business combination using the proceeds of such offering rather than using the amounts held in the trust account. There are no prohibitions on our ability to raise funds privately or through loans that would allow us to acquire a company with a fair market value in an amount greater than 80% of the net assets held in the trust account at the time of the acquisition. At this time, we are not a party to any arrangement or understanding with any third party with respect to raising any additional funds through the sale of securities or otherwise. Our 30% conversion threshold is 20% in most similar blank check companies. See Risk-Factors Unlike many other blank check offerings, we allow up to 29.99% of our public stockholders to exercise their conversion rights. To the extent we are unable to consummate a business combination, we will pay the costs of liquidation from our remaining assets outside of the trust account. If such funds are insufficient, our existing stockholders have agreed to advance us the funds necessary to complete such liquidation (currently anticipated to be no more than approximately $15,000) and have agreed not to seek repayment of such expenses. Theodore S. Green, our Chairman and Co-Chief Executive Officer, has advanced to us $100,000, which was used to pay a portion of the expenses of this offering referenced in the line items above for SEC registration fee, NASD filing fee, the non-refundable portion of the American Stock Exchange listing fee, and a portion of the legal and audit fees and expenses. The loan bears interest at the rate of 5% per annum, compounded semi-annually, and will be payable on the earlier of May 21, 2008 or the consummation of this offering. The loan will be repaid out of the proceeds of this offering available to us for payment of offering expenses. We believe that, upon consummation of this offering, we will have sufficient available funds (which includes amounts that may be released to us from the trust account) to operate for the next 24 months, assuming that a business combination is not consummated during that time. A public stockholder will be entitled to receive funds from the trust account (including interest earned on his, her or its portion of the trust account) only in the event of our liquidation or if that public stockholder converts such shares into cash in connection with a business combination which the public stockholder voted against and which we consummate. In no other circumstances will a public stockholder have any right or interest of any kind to or in the trust account. Upon the consummation of our initial business combination, the underwriters will be entitled to receive the portion of the proceeds held in the trust account attributable to the underwriters discounts and commissions held in the trust account. Table of Contents DILUTION The difference between the public offering price per share of common stock, assuming no value is attributed to the warrants included in the units we are offering by this prospectus and the insider warrants, and the pro forma net tangible book value per share of our common stock after this offering constitutes the dilution to investors in this offering. Such calculation does not reflect any dilution associated with the sale and exercise of warrants, including the insider warrants. Net tangible book value per share is determined by dividing our net tangible book value, which is our total tangible assets less total liabilities (including the value of common stock which may be converted into cash), by the number of outstanding shares of our common stock. At September 30, 2007, our net tangible book value was a deficiency of $(335,379), or approximately $(0.15) per share of common stock. After giving effect to the sale of 9,000,000 shares of common stock included in the units we are offering by this prospectus, and the deduction of underwriting discounts and estimated expenses of this offering, and the sale of the insider warrants, our pro forma net tangible book value at September 30, 2007 would have been $47,088,124 or $5.51 per share, representing an immediate increase in net tangible book value of $5.66 per share to the existing stockholders and an immediate dilution of $2.49 per share to new investors not exercising their conversion rights. For purposes of presentation, our pro forma net tangible book value after this offering is approximately $21,364,876 less than it otherwise would have been because if we effect a business combination, the conversion rights of the public stockholders (but not our existing stockholders) may result in the conversion into cash of up to 29.99% of the aggregate number of the shares sold in this offering at a per-share conversion price equal to the amount in the trust account (a portion of which is made up of $2,880,000 in deferred underwriting discounts and commissions) as of two business days prior to the consummation of the proposed business combination, inclusive of any interest, divided by the number of shares sold in this offering. The following table illustrates the dilution to the new investors on a per-share basis, assuming no value is attributed to the warrants included in the units and the insider warrants (actual dilution to investors may be significantly higher as a result of the exercise of the warrants): Public offering price $ 8.00 Net tangible book value before this offering $ (0.15 ) Increase attributable to new investors and private sales 5.66 Pro forma net tangible book value after this offering 5.51 Dilution to new investors $ 2.49 The following table sets forth information with respect to our existing stockholders and the new investors: Shares Purchased Total Consideration Average Price Number Percentage Amount Percentage per Share Existing stockholders 2,250,000 20 % $ 25,000 0.03 % $ 0.01 New Investors 9,000,000 80 % $ 72,000,000 99.97 % $ 8.00 Total 11,250,000 100 % $ 72,025,000 100.00 % The pro forma net tangible book value per share after the offering is calculated as follows: Numerator: Net tangible book value before this offering $ (335,379 ) Net proceeds from this offering and private placement 71,340,000 Offering costs incurred and excluded from net tangible book value before this offering 328,379 Less: deferred underwriters discounts and commissions payable on consummation of a business combination (2,880,000 ) Less: Proceeds held in trust subject to conversion to cash ($71,240,000 29.99%) (21,364,876 ) $ 47,088,124 Denominator: Shares of common stock outstanding prior to this offering 2,250,000 Shares of common stock included in the units offered 9,000,000 Less: Shares subject to conversion (9,000,000 29.99%) (2,699,100 ) 8,550,900 Table of Contents CAPITALIZATION The following table sets forth our capitalization at September 30, 2007 and as adjusted to give effect to the sale of our units and the insider warrants and the application of the estimated net proceeds derived from the sale of such securities: September 30, 2007 Actual As Adjusted Note payable to Theodore S. Green $ 100,000 $ Deferred underwriter discounts and commissions(1) $ 2,880,000 Common stock, $0.001 par value, -0- and 2,699,100 shares which are subject to possible conversion, shares at conversion value $ $ 21,364,876 Stockholders equity: Preferred stock, $0.001 par value, 1,000,000 shares authorized; none issued or outstanding Common stock,$0.001 par value, 40,000,000 shares authorized; 2,250,000 shares issued and outstanding, actual; 8,550,900 shares issued and outstanding (excluding 2,699,100 shares subject to possible conversion), as adjusted $ 2,250 $ 8,551 Additional paid-in capital 22,750 47,111,573 Deficit accumulated during the development stage (32,000 ) (32,000 ) Total stockholders equity (7,000 ) 47,088,124 Total capitalization $ 93,000 $ 71,333,000 (1) Represents the $2,880,000 deferred underwriters discounts and commissions payable to the underwriters upon completion of the business combination. If we consummate a business combination, the conversion rights afforded to our public stockholders (but not our existing stockholders) may result in the conversion into cash of up to 29.99% of the aggregate number of shares sold in this offering at a per-share conversion price equal to the amount in the trust account (a portion of which is made up of $2,880,000 in deferred underwriting discounts and commissions), inclusive of any interest thereon not previously released to us for working capital requirements and tax obligations, as of two business days prior to the proposed consummation of a business combination, divided by the number of shares sold in this offering. Because converting stockholders will receive their proportionate share of the deferred underwriting discounts and commissions and the underwriters will be paid the full amount of their deferred underwriting compensation at the time of the consummation of our initial business combination, the Company (and, therefore, the non-converting stockholders) will bear the financial effect of such payments to both the converting stockholders and the underwriters. Table of Contents MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We were formed on May 1, 2007 to serve as a vehicle to effect an acquisition of a domestic or foreign operating business in the entertainment, media, digital and communications industries. We intend to utilize cash derived from the proceeds of this offering, our capital stock, debt or a combination of cash, capital stock and debt, in effecting a business combination. The issuance of additional shares of our capital stock: may significantly reduce the equity interest of our stockholders; may subordinate the rights of holders of common stock if we issue preferred stock with rights senior to those afforded to our common stock; will likely cause a change in control if a substantial number of our shares of common stock are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and most likely will also result in the resignation or removal of our present officers and directors; and may adversely affect prevailing market prices for our common stock. Similarly, if we issue debt, it could result in: default and foreclosure on our assets if our operating revenues after a business combination are insufficient to pay our debt obligations; acceleration of our obligations to repay the indebtedness even if we have made all principal and interest payments when due if the debt contains covenants that require the maintenance of certain financial ratios or reserves and we breach any such covenant without a waiver or renegotiation of that covenant; our immediate payment of all principal and accrued interest, if any, if the debt is payable on demand; and our inability to obtain additional financing, if necessary, if the debt contains covenants restricting our ability to obtain additional financing while such debt is outstanding. We have neither engaged in any operations nor generated any revenues to date. Our entire activity since inception has been to prepare for our proposed fundraising through an offering of our equity securities. We estimate that the net proceeds from the sale of the units, after deducting offering expenses of approximately $600,000 and underwriting discounts of approximately $5,040,000, or $5,796,000 if the over-allotment option is exercised in full, will be approximately $66,360,000, or $76,404,000 if the underwriters over-allotment option is exercised in full. However, the underwriters have agreed that $0.32 per unit of the underwriting discounts and commissions will be deferred and will not be payable unless and until we consummate a business combination. Accordingly, $69,140,000, or $79,616,000 if the over-allotment option is exercised in full, plus the $2,100,000 we will receive from the sale of the insider warrants, will be held in trust and the remaining $100,000 in either event, will not be held in trust. We intend to use substantially all of the net proceeds of this offering, including the funds held in the trust account (excluding deferred underwriting discounts and commissions), to acquire a target business and to pay our expenses relating thereto. To the extent that our capital stock is used in whole or in part as consideration to effect a business combination, the remaining proceeds held in the trust account as well as any other net proceeds not expended will be used as working capital to finance the operations of the target business. Such working capital funds could be used in a variety of ways including continuing or expanding the target business operations, for strategic acquisitions and for marketing, research and development of existing or new products. Such funds could also be used to repay any operating expenses or finders fees which we had incurred prior to the completion of our business combination if the funds available to us outside of the trust account were insufficient to cover such expenses. We believe that, upon consummation of this offering, the $100,000 of net proceeds not held in the trust account, plus the up to $1,500,000 of interest earned on the trust account balance that may be released to us as well as amounts necessary for our tax obligations, will be sufficient to allow us to operate for at least the next 24 months, assuming that a business combination is not consummated during that time. Over this time period, we will be using these funds for identifying and evaluating prospective acquisition candidates, performing business due diligence on prospective target businesses, traveling to and from the offices, plants or similar locations of prospective target businesses or their representatives or owners, reviewing corporate documents and material agreements of prospective target businesses, selecting the target business to acquire and structuring, negotiating and consummating the business combination. We anticipate that we will incur approximately: $620,000 of expenses for the search for target businesses and for the legal, accounting and other third-party expenses attendant to the due diligence investigations, structuring and negotiating of a business combination; Table of Contents $150,000 of expenses for the due diligence and investigation of a target business by our officers, directors and existing stockholders; $200,000 of expenses in legal and accounting fees relating to our SEC reporting obligations; $180,000 for the administrative fee ($7,500 per month for twenty four months); $450,000 for general working capital that will be used for miscellaneous expenses, taxes and reserves, including approximately $127,500 for director and officer liability insurance premiums. We have agreed to sell to Pali Capital, Inc., as representative of the underwriters, for $100, an option to purchase up to a total of 700,000 units at $10.00 per unit. The units issuable upon exercise of this option are identical to those offered by this prospectus. This option is exercisable at $10.00 per unit, and may be exercised on a cashless basis, commencing on the later of the consummation of a business combination and one year from the date of this prospectus and expiring five years from the date of this prospectus. We estimate that the fair value of this option is approximately $2,205,000 ($3.15 per unit underlying such option) using a Black-Scholes option-pricing model. The fair value of the option granted to the representative of the underwriters is estimated as of the date of grant using the following assumptions: (1) expected volatility of 45.2%, (2) risk-free discount rate of 4.95% (3) expected life of five years and (4) dividend rate of zero. For a more complete description of the purchase option, see the section appearing elsewhere in this prospectus entitled Underwriting Purchase Option. We do not believe we will need to raise additional funds following this offering in order to meet the expenditures required for operating our business. However, we may need to raise additional funds through a private offering of debt or equity securities if such funds are required to consummate a business combination that is presented to us, although we have not entered into any such arrangement and have no current intention of doing so. We are obligated, commencing on the date of this prospectus, to pay to our management stockholders, an affiliate of our management stockholders or third parties a monthly fee of $7,500 for general and administrative services. On May 21, 2007, Theodore S. Green, our Chairman and Co-Chief Executive Officer, advanced $100,000 to us for payment of offering expenses on our behalf. The loan bears interest at the rate of 5% per annum, compounded semi-annually, and will be payable on the earlier of May 21, 2008 or the consummation of this offering. The loan will be repaid out of the proceeds of this offering not being placed in trust. Our existing stockholders have committed to purchase an aggregate of 2,100,000 warrants at a purchase price of $1.00 per warrant (for a total purchase price of $2,100,000) from us. These purchases will take place in a private placement that will occur simultaneously with the consummation of this offering. We do not believe the sale of the warrants will result in a compensation expense because they are being sold at or above fair market value. In connection therewith, Mr. Green and Mr. Bird have entered into an agreement pursuant to which Mr. Bird has agreed to reimburse Mr. Green $300,000 of the amount that Mr. Green will pay for such warrants in the event we do not consummate a business combination by [ ], 2009 [twenty four months from the date of this prospectus] and are dissolved. Table of Contents PROPOSED BUSINESS Introduction We are a Delaware blank check company incorporated on May 1, 2007 in order to serve as a vehicle for the acquisition of an operating business in the entertainment, media, digital and communications industries and to seek out opportunities both domestically and internationally to take advantage of our management team s experience in these markets. The entertainment, media, digital and communications industries encompass those companies which create, produce, deliver, own, distribute or market entertainment and information content, products and services and include among others: broadcast television; cable, satellite and terrestrial television content delivery; motion picture, television, DVD and video content production and distribution; advanced communications networks and devices; user-generated media; newspaper, book, magazine, and specialty publishing; motion picture exhibition and related services; radio services via broadcast and satellite; video game production and distribution; broadband network operations; Internet service providers; Internet media production and distribution; interactive commerce and e-commerce; voice, video and data transmission platforms and services; content distribution systems, networks and services; content production and aggregation services; media portability products and services; interactive television products and services; advertising agencies and other advertising services; direct marketing and promotional services; media and marketing services; advertising based directories; recorded music and other audio content production and distribution; theme park attractions; toy development and distribution; trading cards; intellectual property licensing, merchandising and exploitation; and live event entertainment and venue management. Our management team has extensive experience in the entertainment, media, digital and communications industries as senior executives, business consultants or entrepreneurs. See Management . We intend to leverage the industry experience of our executive officers by focusing our efforts on identifying a prospective target business in the entertainment, media, digital and communications industries. We believe that companies involved in these industries represent attractive acquisition targets for a number of reasons, including a favorable economic environment for these industries, potentially attractive valuations and the large number of middle market acquisition candidates. Table of Contents We believe, based solely on our management s collective business experience, that there are numerous business opportunities in the entertainment, media, digital and communications industries. However, we cannot assure you that we will be able to locate a target business in such industries or that we will be able to engage in a business combination with a target business on favorable terms. Growth in this industry has historically been driven by the introduction of new technologies and the expansion of domestic and international markets. The latter part of the 20th century witnessed the introduction and consumer acceptance of cable television, home video, video games and compact discs. The 1990s witnessed the emergence of additional products and improved delivery systems such as interactive multimedia entertainment software, simulator and virtual reality attractions and fiber optic cable. The beginning of the 21st century has witnessed even greater expansion as the emergence of next-generation technologies has significantly strengthened growth opportunities for television distribution through direct broadcast satellite and digital cable, video games, Internet access and home video. The emergence of the DVD and CD-ROM formats has further increased this expansion. Effecting a business combination General We are not presently engaged in, and we will not engage in, any substantive commercial business for an indefinite period of time following this offering. We intend to utilize cash derived from the proceeds of this offering, our capital stock, debt or a combination of these in effecting a business combination. Although substantially all of the net proceeds of this offering are intended to be applied generally toward effecting a business combination as described in this prospectus, the proceeds are not otherwise being designated for any more specific purposes. Accordingly, investors in this offering are investing without first having an opportunity to evaluate the specific merits or risks of any one or more business combinations. A business combination may involve the acquisition of, or merger with, a company which does not need substantial additional capital but which desires to establish a public trading market for its shares, while avoiding what it may deem to be adverse consequences of undertaking a public offering itself. These include time delays, significant expense, loss of voting control and compliance with various Federal and state securities laws. In the alternative, we may seek to consummate a business combination with a company that may be financially unstable or in its early stages of development or growth. While we may seek to effect simultaneous business combinations with more than one target business, we will probably have the ability, as a result of our limited resources, to effect only a single business combination. We have not identified a target business We do not have any specific merger, capital stock exchange, asset acquisition or other business combination under consideration, and we have not, nor has anyone on our behalf, either directly or indirectly, contacted any potential target businesses or their representatives or had any discussions, formal or otherwise, with respect to such a transaction. We have not (nor have any of our agents, representatives or affiliates) been approached by any candidates (or representatives of any candidates) with respect to a possible transaction with our company. Moreover, we have not engaged or retained any agent or other representative to identify or locate any acquisition candidate for us. Neither we nor any of our agents, representatives or affiliates have taken any measures, directly or indirectly, to contact a target business. We have not established any other specific attributes or criteria (financial or otherwise) for prospective target businesses. Finally, we note that there has been no due diligence, evaluations, discussions (formal or informal), negotiations or other similar activities undertaken, directly or indirectly, by us, our affiliates or representatives, or by any unrelated third party, with respect to a business combination transaction involving our company. Subject to the limitation that a target business has a fair market value of at least 80% of our net assets at the time of the acquisition, as described below in more detail, we will have virtually unrestricted flexibility in identifying and selecting a prospective acquisition candidate. Accordingly, there is no basis for investors in this offering to evaluate the possible merits or risks of the target business with which we may ultimately complete a business combination. Although our management will endeavor to evaluate the risks inherent in a particular target business, we cannot assure you that we will properly ascertain or assess all significant risk factors. Sources of target businesses We anticipate that our officers and directors as well as their affiliates will bring to our attention target business candidates. While our officers and directors make no commitment as to the amount of time they will spend trying to identify or investigate potential target businesses, they believe that the various relationships they have developed over their careers, together with their direct inquiry, will generate a number of potential target businesses that will warrant further investigation. As senior executives, business consultants and entrepreneurs in the entertainment, media, digital and communications industries, members of our management team have been, and are likely to continue to be, presented with proposals and offers Table of Contents of many varieties with respect to prospective investments and transactions. They may also become aware of potential transaction opportunities by attending entertainment, media, digital and communications conferences or conventions. However, they have not yet been presented with any proposals with respect to prospective transactions for us. They have also not performed any due diligence, evaluation or other similar activities with respect to a potential business combination for our company. Moreover, they will not entertain any proposals with respect to a prospective transaction, nor will they perform any due diligence, evaluation or other similar activities with respect to a potential business combination, until after we complete our initial public offering. Although we have no present intention to do so and no such companies have been considered, we may consider any affiliates of our officers, directors, and stockholders as potential business combination targets. Target business candidates may also be brought to our attention from various unaffiliated sources, including investment bankers, venture capital funds, leveraged buyout funds, hedge funds, management buyout funds and other members of the financial community who are aware that we are seeking a business combination partner via public relations and marketing efforts, direct contact by management or other similar efforts and who may present solicited or unsolicited proposals. To date, no unaffiliated sources have brought any potential target businesses to our attention. We may pay finders fees or compensation to third parties for their efforts in introducing us to potential target businesses which we would negotiate at the time. Such payments, which are typically based on the dollar value of the transaction, could be paid to entities we engage for this purpose or ones that approach us on an unsolicited basis. In no event, however, will we pay any of our existing officers, directors, or stockholders or any entity with which they are affiliated any finder s fee or other compensation for services rendered to us prior to or in connection with the consummation of a business combination. In addition, none of our officers, directors, or existing stockholders will receive any finder s fee, consulting fees or any similar fees from any person or entity (including a target company) in connection with any business combination involving us other than any compensation or fees that may be received for any services provided following such business combination. A prohibition on such fees is contained in our Code of Ethics. Any compensation or fees that our officers and directors receive from a target company following a business combination will be customary for a transaction of this type, including compensation as either an employee or consultant and director fees. Although our officers and directors may take compensation or fees into consideration as one of the factors in determining which acquisition transaction to pursue, such compensation and fees will not be the determining factor. Selection of a target business and structuring of a business combination Subject to the requirement that our initial business combination must be with a target business with a fair market value that is at least 80% of our net assets at the time of such acquisition, our management will have virtually unrestricted flexibility in identifying and selecting a prospective target business. We have not established any other specific attributes or criteria (financial or otherwise) for prospective target businesses. In evaluating a prospective target business, our management may consider a variety of factors, including one or more of the following: financial condition and results of operation; growth potential; experience and skill of management and availability of additional personnel; capital requirements; competitive position; barriers to entry; stage of development of the products, processes or services; degree of current or potential market acceptance of the products, processes or services; proprietary features and degree of intellectual property or other protection of the products, processes or services; regulatory environment of the industry; and costs associated with effecting the business combination. These criteria are not intended to be exhaustive. Any evaluation relating to the merits of a particular business combination will be based, to the extent relevant, on the above factors as well as other considerations deemed relevant by our management in effecting a business combination consistent with our business objective. In evaluating a prospective target business, we will conduct an extensive due diligence review which will encompass, among other things, meetings with incumbent management and inspection of facilities, as well as review of financial and other information which is made available to us. This due diligence review will be conducted either by our management or by unaffiliated third parties we may Table of Contents engage, although we have no current intention to engage any such third parties. We intend to have all prospective target businesses execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the trust account. If any prospective target business refused to execute such agreement, it is unlikely we would continue negotiations with such target business. However, in no event will we enter into a definitive agreement for a business combination with a target business unless such entity executes a waiver agreement. The time and costs required to select and evaluate a target business and to structure and complete the business combination cannot presently be ascertained with any degree of certainty. Any costs incurred with respect to the identification and evaluation of a prospective target business with which a business combination is not ultimately completed will result in a loss to us and reduce the amount of capital available to otherwise complete a business combination. Fair market value of target business The target business or businesses that we acquire must collectively have a fair market value equal to at least 80% of our net assets at the time of such acquisition, although we may acquire a target business whose fair market value significantly exceeds 80% of our net assets. We anticipate structuring a business combination to acquire 100% of the equity interests or assets of the target business. We may, however, structure a business combination to acquire less than 100% of such interests or assets of the target business but will not acquire less than a controlling interest (which would be at least 50% of the voting securities of the target business). If we acquire only a controlling interest in a target business or businesses, the portion of such business that we acquire must have a fair market value equal to at least 80% of our net assets. In order to consummate such an acquisition, we may issue a significant amount of our debt or equity securities to the sellers of such businesses or seek to raise additional funds through a private offering of debt or equity securities. Since we have no specific business combination under consideration, we have not entered into any such fund raising arrangement and have no current intention of doing so. The fair market value of the target will be determined by our board of directors based upon one or more standards generally accepted by the financial community (such as actual and potential sales, earnings and cash flow or book value). If our board is not able to independently determine that the target business has a sufficient fair market value, we will obtain an opinion from an unaffiliated, independent investment banking firm with respect to the satisfaction of such criteria. Since any opinion, if obtained, would merely state that fair market value meets the 80% of net assets threshold, it is not anticipated that copies of such opinion would be distributed to our stockholders, although copies will be provided to stockholders who request it. We will not be required to obtain an opinion from an investment banking firm as to the fair market value if our board of directors independently determines that the target business complies with the 80% threshold. Such investment banking firm will be a member of the National Association of Securities Dealers, Inc. reasonably acceptable to the representative of the underwriters, and our stockholders may or may not be entitled to rely on such opinion, depending on circumstances at the time. While we will consider whether such an opinion may be relied on by our stockholders, it will not be dispositive as to which investment bank we seek a fairness opinion from. Other factors contributing to such a determination are expected to include, among others: reputation of the independent investment bank, specifically their knowledge in our particular industry, timing and cost of providing the opinion. Lack of business diversification Our business combination must be with a target business or businesses that collectively satisfy the minimum valuation standard at the time of such acquisition, as discussed above, although this process may entail the simultaneous acquisitions of several operating businesses at the same time. Therefore, at least initially, the prospects for our success may be entirely dependent upon the future performance of a single business. Unlike other entities which may have the resources to complete several business combinations of entities operating in multiple industries or multiple areas of a single industry, it is probable that we will not have the resources to diversify our operations or benefit from the possible spreading of risks or offsetting of losses. By consummating a business combination with only a single entity, our lack of diversification may: subject us to numerous economic, competitive and regulatory developments, any or all of which may have a substantial adverse impact upon the particular industry in which we may operate subsequent to a business combination, and result in our dependency upon the performance of a single operating business or the development or market acceptance of a single or limited number of products, processes or services. If we determine to simultaneously acquire several businesses and such businesses are owned by different sellers, we will need for each of such sellers to agree that our purchase of its business is contingent on the simultaneous closings of the other acquisitions, which may make it more difficult for us, and delay our ability, to complete the business combination. With multiple acquisitions, we could also face additional risks, including additional burdens and costs with respect to possible multiple negotiations and due diligence investigations (if there are multiple sellers) and the additional risks associated with the subsequent assimilation of the operations and services or products of the acquired companies in a single operating business. Table of Contents Limited ability to evaluate the target business management Although we intend to scrutinize the management of a prospective target business when evaluating the desirability of effecting a business combination, we cannot assure you that our assessment of the target business management will prove to be correct. In addition, we cannot assure you that the future management will have the necessary skills, qualifications or abilities to manage a public company. Furthermore, the future role of our officers and directors, if any, in the target business following a business combination cannot presently be stated with any certainty. While it is possible that some of our key personnel will remain associated in senior management or advisory positions with us following a business combination, it is unlikely that they will devote their full time efforts to our affairs subsequent to a business combination. Moreover, they would only be able to remain with the company after the consummation of a business combination if they are able to negotiate employment or consulting agreements in connection with the business combination. Such negotiations would take place simultaneously with the negotiation of the business combination and could provide for them to receive compensation in the form of cash payments or our securities for services they would render to the company after the consummation of the business combination. While the personal and financial interests of our key personnel may influence their motivation in identifying and selecting a target business, their ability to remain with the company after the consummation of a business combination will not be the determining factor in our decision as to whether or not we will proceed with any potential business combination. Additionally, we cannot assure you that our officers and directors will have significant experience or knowledge relating to the operations of the particular target business. Following a business combination, we may seek to recruit additional managers to supplement the incumbent management of the target business. We cannot assure you that we will have the ability to recruit additional managers, or that any such additional managers we do recruit will have the requisite skills, knowledge or experience necessary to enhance the incumbent management. Opportunity for stockholder approval of business combination Prior to the completion of a business combination, we will submit the transaction to our stockholders for approval, even if the nature of the acquisition is such as would not ordinarily require stockholder approval under applicable state law. In connection with any such transaction, we will also submit to our stockholders for approval a proposal to amend our amended and restated certificate of incorporation to provide for our corporate life to continue perpetually following the consummation of such business combination. Any vote to extend our corporate life to continue perpetually following the consummation of a business combination will be taken only if the business combination is approved. We will only consummate a business combination if stockholders vote both in favor of such business combination and our amendment to extend our corporate life. In connection with seeking stockholder approval of a business combination, we will furnish our stockholders with proxy solicitation materials prepared in accordance with the Securities Exchange Act of 1934, as amended, which, among other matters, will include a description of the operations of the target business and audited historical financial statements of the business. In connection with the vote required for any business combination, all of our existing stockholders, including all of our officers and directors, have agreed to vote their respective initial shares in accordance with the majority of the shares of common stock voted by the public stockholders. If the majority of public stockholders voting at the meeting, regardless of percent, vote to approve the business combination, our existing stockholders will vote all shares owned by them prior to this offering in favor of the business combination. Similarly, if the majority of public stockholders voting at the meeting, regardless of percent, vote against the business combination, our existing stockholders will vote all shares owned by them prior to this offering against the business combination. This voting arrangement shall not apply to shares included in units purchased in this offering or purchased following this offering in the open market by any of our existing stockholders, officers and directors. Accordingly, they may vote these shares on a proposed business combination any way they choose. We will proceed with the business combination only if a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and public stockholders owning less than 30% of the shares sold in this offering both exercise their conversion rights and vote against the business combination. Our threshold for conversion rights has been established at 29.99% in order for our offering to be competitive with other offerings by blank check companies currently in the market. However, a 20% threshold is more typical in offerings of this type. We have increased the conversion threshold from 20% to 30% to reduce the likelihood that a small group of investors holding a large block of our stock will exercise undue influence on the approval process and be able to stop us from completing a business combination that is otherwise approved by a large majority of our public stockholders. Conversion rights At the time we seek stockholder approval of any business combination, we will offer each public stockholder the right to have such stockholder s shares of common stock converted to cash if the stockholder votes against the business combination Table of Contents and the business combination is approved and completed. Our existing stockholders will not have such conversion rights with respect to the initial shares, but will have such conversion rights with respect to any shares they purchase in this offering or in the aftermarket. The actual per-share conversion price will be equal to the amount in the trust account, inclusive of any interest (calculated as of two business days prior to the consummation of the proposed business combination), divided by the number of shares sold in this offering. Without taking into account any interest earned on the trust account, the initial per-share conversion price would be approximately $7.92. An eligible stockholder may request conversion at any time after the mailing to our stockholders of the proxy statement and prior to the vote taken with respect to a proposed business combination at a meeting held for that purpose, but the request will not be granted unless the stockholder votes against the business combination and the business combination is approved and completed. Additionally, we may require public stockholders, whether they are a record holder or hold their shares in street name, to either tender their certificates to our transfer agent at any time through the vote on the business combination or to deliver their shares to the transfer agent electronically using Depository Trust Company s DWAC (Deposit/Withdrawal At Custodian) System, at the holder s option. The proxy solicitation materials that we will furnish to stockholders in connection with the vote for any proposed business combination will indicate whether we are requiring stockholders to satisfy such certification and delivery requirements. Accordingly, a stockholder would have from the time we send out our proxy statement through the vote on the business combination to tender his shares if he wishes to seek to exercise his conversion rights, a period that will not be less than 10, nor more than 60, days. This time period varies depending on the specific facts of each transaction. However, as the delivery process can be accomplished by the stockholder, whether or not he is a record holder or his shares are held in street name, in a matter of hours (because the transfer is made electronically once final instruction is given to Depository Trust Company) by simply contacting the transfer agent or his broker and requesting delivery of his shares through the DWAC System, we believe this time period is sufficient for an average investor. However, because we do not have any control over this process, it may take significantly longer than we anticipated. Additionally, if the shares of common stock cannot be transferred through the DWAC system, the process may take such number of days required to complete the proper paperwork, obtain the necessary authorizations and consents and to locate and deliver physical stock certificates, if any. Traditionally, in order to perfect conversion rights in connection with a blank check company s business combination, a holder could simply vote against a proposed business combination and check a box on the proxy card indicating such holder was seeking to convert. After the business combination was approved, the company would contact such stockholder to arrange for him to deliver his certificate to verify ownership. As a result, the stockholder then had an option window after the consummation of the business combination during which he could monitor the price of the stock in the market. If the price rose above the conversion price, he could sell his shares in the open market before actually delivering his shares to the company for cancellation. Thus, the conversion right, to which stockholders were aware they needed to commit before the stockholder meeting, would become a right of conversion surviving past the consummation of the business combination and which we would be obligated to honor until the converting holder delivered his certificate. The requirement for physical or electronic delivery prior to the meeting ensures that a converting holder s election to convert is irrevocable once the business combination is approved. There is a nominal cost associated with the above-referenced tendering process and the act of certificating the shares or delivering them through the DWAC system. The transfer agent will typically charge the tendering broker $35 and it would be up to the broker whether or not to pass this cost on to the converting holder. This fee would be incurred regardless of whether or not we require holders seeking to exercise conversion rights to tender their shares prior to the meeting. The need to deliver shares is a requirement of conversion regardless of the timing of when such delivery must be effectuated. Accordingly, this would not result in any increased cost to shareholders when compared to the traditional process; however, in the event a stockholder elects conversion of their shares of common stock but the proposed business combination is not approved, a stockholder will have paid $35 to elect conversion but would not actually have their shares of common stock converted. Further, it is possible this tendering process will be cost-prohibitive for stockholders in the event their aggregate holdings of our shares of common stock do not exceed $35. Any request for conversion, once made, may be withdrawn at any time up to the vote taken with respect to the proposed business combination. Furthermore, if a stockholder delivered his certificate for conversion and subsequently decided prior to the meeting not to elect conversion, he may simply request that the transfer agent return the certificate (physically or electronically). It is anticipated that the funds to be distributed to stockholders entitled to convert their shares who elect conversion will be distributed promptly after completion of a business combination. Public stockholders who convert their stock into their share of the trust account still have the right to exercise any warrants they still hold. If a vote on our initial business combination is held and the business combination is not approved, we may continue to try to consummate a business combination with a different target until twenty four months from the date of this prospectus. If the initial business combination is not approved or completed for any reason, then public stockholders voting against our initial business combination who exercised their conversion rights would not be entitled to convert their shares of common stock into a pro rata share of the aggregate amount then on deposit in the trust account. In such case, if we have required public stockholders to tender their certificates prior to the meeting, we will promptly return such certificates to the tendering public stockholder. Public stockholders would be entitled to receive their pro rata share of the aggregate amount on deposit in Table of Contents the trust account only in the event that the initial business combination they voted against was duly approved and subsequently completed, or in connection with our liquidation. We will not complete any business combination if public stockholders, owning 30% or more of the shares sold in this offering, both exercise their conversion rights and vote against the business combination. Accordingly, it is our understanding and intention in every case to structure and consummate a business combination in which public stockholders owning 29.99% of the shares sold in this offering may exercise their conversion rights and the business combination will still go forward. If our business combination requires us to use substantially all of our cash to pay the purchase price, because we will not know how many stockholders may exercise their conversion rights, we may either need to reserve part of the trust account for possible payment upon such conversion, or we may need to arrange third party financing to help fund our business combination in case a larger percentage of stockholders exercise their conversion rights than we expect. Therefore, we may not be able to consummate a business combination that requires us to use all of the funds held in the trust account as part of the purchase price, or we may end up having to adjust the ratio of cash to stock used as consideration or arrange for third party financing. Investors in this offering who do not sell, or who receive less than an aggregate of approximately $0.08 of net sales proceeds for, the warrants included in the units, or persons who purchase common stock in the aftermarket at a price in excess of $7.92 per share, may have a disincentive to exercise their conversion rights because the amount they would receive upon conversion could be less than their original or adjusted purchase price. Liquidation if no business combination Our amended and restated certificate of incorporation provides that we will continue in existence only until , 2009 [twenty four months from the date of this prospectus]. This provision may not be amended except in connection with the consummation of a business combination. If we have not completed a business combination by such date, our corporate existence will cease except for the purposes of winding up our affairs and liquidating, pursuant to Section 278 of the Delaware General Corporation Law. This has the same effect as if our board of directors and stockholders had formally voted to approve our dissolution pursuant to Section 275 of the Delaware General Corporation Law. Accordingly, limiting our corporate existence to a specified date as permitted by Section 102(b)(5) of the Delaware General Corporation Law removes the necessity to comply with the formal procedures set forth in Section 275 (which would have required our board of directors and stockholders to formally vote to approve our dissolution and liquidation and to have filed a certificate of dissolution with the Delaware Secretary of State). We view this provision terminating our corporate life by , 2009 [twenty four months from the date of this prospectus] as an obligation to our stockholders and will not take any action to amend or waive this provision to allow us to survive for a longer period of time except in connection with the consummation of a business combination. If we are unable to complete a business combination by , 2009 [twenty four months from the date of this prospectus], we will distribute to all of our public stockholders, in proportion to their respective equity interests, an aggregate sum equal to the amount in the trust account, inclusive of any interest, plus any remaining net assets (subject to our obligations under Delaware law to provide for claims of creditors as described below). We anticipate notifying the trustee of the trust account to begin liquidating such assets promptly after such date and anticipate it will take no more than 10 business days to effectuate such distribution. Our existing stockholders have waived their rights to participate in any liquidation distribution with respect to their initial shares. There will be no distribution from the trust account with respect to our warrants, which will expire worthless. We will pay the costs of liquidation from our remaining assets outside of the trust account. If such funds are insufficient, our existing stockholders have agreed to advance us the funds necessary to complete such liquidation (currently anticipated to be no more than approximately $15,000) and have agreed not to seek repayment of such expenses. If we were to expend all of the net proceeds of this offering, other than the proceeds deposited in the trust account, and without taking into account interest, if any, earned on the trust account, the initial per-share liquidation price would be approximately $7.92. The proceeds deposited in the trust account could, however, become subject to the claims of our creditors (which could include vendors and service providers we have engaged to assist us in any way in connection with our search for a target business and that are owed money by us, as well as target businesses themselves) which could have higher priority than the claims of our public stockholders. Our management stockholders have personally agreed, pursuant to agreements with us and Pali Capital, Inc. that, if we liquidate prior to the consummation of a business combination, they will be personally liable to pay debts and obligations to target businesses or vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us in excess of the net proceeds of this offering not held in the trust account, but only if, and to the extent, the claims reduce the amounts in the trust account. Although we have a fiduciary obligation to pursue our management stockholders to enforce their indemnification obligations, and intend to pursue such Table of Contents actions as and when we deem appropriate, there can be no assurance they will be able to satisfy those obligations, if required to do so. Furthermore, our management stockholders will not have any personal liability as to any claimed amounts owed to a third party (including target businesses) who executed a valid and enforceable waiver. Accordingly, the actual per-share liquidation price could be less than approximately $7.92, plus interest, due to claims of creditors. Additionally, in the case of a prospective target business that did not execute a waiver, such liability will only be in an amount necessary to ensure that public stockholders receive no less than $8.00 per share upon liquidation. Furthermore, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. To the extent any bankruptcy claims deplete the trust account, we cannot assure you we will be able to return to our public stockholders at least approximately $7.92 per share. Our public stockholders will be entitled to receive funds from the trust account only in the event of the expiration of our corporate existence and our liquidation or if they seek to convert their respective shares into cash upon a business combination which the stockholder voted against and which is completed by us. In no other circumstances will a stockholder have any right or interest of any kind to or in the trust account. Under the Delaware General Corporation Law, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. If the corporation complies with certain procedures set forth in Section 280 of the Delaware General Corporation Law intended to ensure that it makes reasonable provision for all claims against it, including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution. However, as stated above, it is our intention to make liquidating distributions to our stockholders as soon as reasonably possible after , 2009 [twenty four months from the date of this prospectus] and, therefore, we do not intend to comply with those procedures. As such, our stockholders could potentially be liable for any claims to the extent of distributions received by them (but no more) and any liability of our stockholders may extend well beyond the third anniversary of such date. Because we will not be complying with Section 280, Section 281(b) of the Delaware General Corporation Law requires us to adopt a plan that will provide for our payment, based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against us within the subsequent 10 years. Accordingly, we would be required to provide for any claims of creditors known to us at that time or those that we believe could be potentially brought against us within the subsequent 10 years prior to our distributing the funds in the trust account to our public stockholders. However, because we are a blank check company, rather than an operating company, and our operations will be limited to searching for prospective target businesses to acquire, the only likely claims to arise would be from our vendors and service providers (such as accountants, lawyers, investment bankers, etc.) and potential target businesses. As described above, pursuant to the obligation contained in our underwriting agreement, we will seek to have all vendors, service providers and prospective target businesses execute agreements with us waiving any right, title, interest or claim of any kind they may have in or to any monies held in the trust account. As a result, the claims that could be made against us will be limited, thereby lessening the likelihood that any claim would result in any liability extending to the trust. We therefore believe that any necessary provision for creditors will be reduced and should not have a significant impact on our ability to distribute the funds in the trust account to our public stockholders. Nevertheless, we cannot assure you of this fact as there is no guarantee that vendors, service providers and prospective target businesses will execute such agreements. Nor is there any guarantee that, even if they execute such agreements with us, they will not seek recourse against the trust account. A court could also conclude that such agreements are not legally enforceable. As a result, if we liquidate, the per-share distribution from the trust account could be less than approximately $7.92 due to claims or potential claims of creditors. If we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, any distributions received by stockholders could be viewed under applicable debtor/creditor or bankruptcy laws as either a preferential transfer or a fraudulent conveyance. As a result, a bankruptcy court could seek to recover all amounts received by our stockholders. Furthermore, because we intend to distribute the proceeds held in the trust account to our public stockholders promptly after , 2009 [twenty four months from the date of this prospectus], this may be viewed or interpreted as giving preference to our public stockholders over any potential creditors with respect to access to or distributions from our assets. Furthermore, our board may be viewed as having breached their fiduciary duties to our creditors or may have acted in bad faith, and thereby exposing itself and our company to claims of punitive damages, by paying public stockholders from the trust account prior to addressing the claims of creditors. We cannot assure you that claims will not be brought against us for these reasons. Table of Contents Competition In identifying, evaluating and selecting a target business, we may encounter intense competition from other entities having a business objective similar to ours. There are approximately 52 blank check companies that have completed initial public offerings in the United States that have not announced or completed a business combination with more than $6.3 billion in trust that are seeking to carry out a business plan similar to our business plan. Furthermore, there are a number of additional offerings for blank check companies that are still in the registration process but have not completed initial public offerings and there are likely to be more blank check companies filing registration statements for initial public offerings after the date of this prospectus and prior to our completion of a business combination. Additionally, we may be subject to competition from entities other than blank check companies having a business objective similar to ours, including venture capital firms, leverage buyout firms and operating businesses looking to expand their operations through the acquisition of a target business. Many of these entities are well established and have extensive experience identifying and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human and other resources than us and our financial resources will be relatively limited when contrasted with those of many of these competitors. While we believe there may be numerous potential target businesses that we could acquire with the net proceeds of this offering, our ability to compete in acquiring certain sizable target businesses will be limited by our available financial resources. This inherent competitive limitation gives others an advantage in pursuing the acquisition of a target business. Further, the following may not be viewed favorably by certain target businesses: our obligation to seek stockholder approval of a business combination may delay the completion of a transaction; our obligation to convert into cash shares of common stock held by our public stockholders to such holders that both vote against the business combination and exercise their conversion rights may reduce the resources available to us for a business combination; and our outstanding warrants, and the potential future dilution they represent. Any of these factors may place us at a competitive disadvantage in successfully negotiating a business combination. Our management believes, however, that our status as a public entity and potential access to the United States public equity markets may give us a competitive advantage over privately-held entities having a similar business objective as ours in acquiring a target business with significant growth potential on favorable terms. If we succeed in effecting a business combination, there will be, in all likelihood, intense competition from competitors of the target business. We cannot assure you that, subsequent to a business combination, we will have the resources or ability to compete effectively. Facilities We maintain our executive offices at 307 East 87th Street, New York, NY 10128 and our telephone number is (212) 289-6942. Our management stockholders have agreed to provide us with, or to arrange for third parties to provide, certain administrative, technology and secretarial services, as well as the use of certain limited office space, at this location or another location pursuant to letter agreements between us and our management stockholders. The cost for the foregoing services to be provided to us is $7,500 per month. We believe, based on rents and fees for similar services in the New York City metropolitan area, that the fee charged is at least as favorable as we could have obtained from an unaffiliated person. We consider our current office space adequate for our current operations. Employees We have two executive officers. These individuals are not obligated to devote any specific number of hours to our matters and intend to devote only as much time as they deem necessary to our affairs. The amount of time they will devote in any time period will vary based on whether a target business has been selected for the business combination and the stage of the business combination process the company is in. Accordingly, once management locates a suitable target business to acquire, they will spend more time investigating such target business and negotiating and processing the business combination (and consequently devote more time to our affairs) than they would prior to locating a suitable target business. We presently expect each of our executive officers to devote an average of approximately 40 hours per week to our business. We do not intend to have any full time employees prior to the consummation of a business combination. Periodic Reporting and Audited Financial Statements We have registered our units, common stock and warrants under the Securities Exchange Act of 1934, as amended, and have reporting obligations, including the requirement that we file annual, quarterly and current reports with the SEC. In accordance with the requirements of the Securities Exchange Act of 1934, our annual reports will contain financial statements audited and reported on by our independent registered public accountants. Table of Contents We will provide stockholders with audited financial statements of the prospective target business as part of the proxy solicitation materials sent to stockholders to assist them in assessing the target business. In all likelihood, these financial statements will need to be prepared in accordance with United States generally accepted accounting principles. We cannot assure you that any particular target business identified by us as a potential acquisition candidate will have financial statements prepared in accordance with United States generally accepted accounting principles or that the potential target business will be able to prepare its financial statements in accordance with United States generally accepted accounting principles. To the extent that this requirement cannot be met, we may not be able to acquire the proposed target business. While this may limit the pool of potential acquisition candidates, we do not believe that this limitation will be material. We will be required to comply with the internal control requirements of the Sarbanes-Oxley Act for the fiscal year ending December 31, 2008. A target company may not be in compliance with the provisions of the Sarbanes-Oxley Act regarding adequacy of their internal controls. The development of the internal controls of any such entity to achieve compliance with the Sarbanes-Oxley Act may increase the time and costs necessary to complete any such acquisition. Legal Proceedings To the knowledge of management, there is no litigation currently pending or contemplated against us or any of our officers or directors in their capacity as such. Comparison to offerings of blank check companies The following table compares and contrasts the terms of our offering and the terms of an offering of blank check companies under Rule 419 promulgated by the SEC assuming that the gross proceeds, underwriting discounts and underwriting expenses for the Rule 419 offering are the same as this offering and that the underwriters will not exercise their over-allotment option. None of the terms of a Rule 419 offering will apply to this offering. Terms of Our Offering Terms Under a Rule 419 Offering Escrow of offering proceeds $69,140,000 of the net offering proceeds plus the $2,100,000 we will receive from the sale of the insider warrants will be deposited into a trust account at HSBC Bank USA, N.A., maintained by Continental Stock Transfer Trust Company, acting as trustee. $60,264,000 of the offering proceeds would be required to be deposited into either an escrow account with an insured depositary institution or in a separate bank account established by a broker-dealer in which the broker-dealer acts as trustee for persons having the beneficial interests in the account. Investment of net proceeds The $69,140,000 of net offering proceeds plus the $2,100,000 we will receive from the sale of the insider warrants held in trust will only be invested in United States government securities within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 with a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940. Proceeds could be invested only in specified securities such as a money market fund meeting conditions of the Investment Company Act of 1940 or in securities that are direct obligations of, or obligations guaranteed as to principal or interest by, the United States. Limitation on Fair Value or Net Assets of Target Business The initial target business that we acquire must have a fair market value equal to at least 80% of our net assets at the time of such acquisition. We would be restricted from acquiring a target business unless the fair value of such business or net assets to be acquired represent at least 80% of the maximum offering proceeds. Table of Contents Terms of Our Offering Terms Under a Rule 419 Offering Trading of securities issued The units may commence trading on or promptly after the date of this prospectus. The common stock and warrants comprising the units will begin to trade separately on the 90th day after the date of this prospectus unless Pali Capital, Inc. informs us of its decision to allow earlier separate trading, provided we have filed with the SEC a Current Report on Form 8-K, which includes an audited balance sheet reflecting our receipt of the proceeds of this offering, including any proceeds we receive from the exercise of the over-allotment option, if such option is exercised prior to the filing of the Current Report on Form 8-K and having issued a press release announcing when such separate trading will begin. Following the date the common stock and warrants are eligible to trade separately, the units will continue to be listed for trading on the American Stock Exchange and any stockholder may elect to trade the common stock or warrants separately or as a unit. If the over-allotment option is exercised after our initial filing of a Form 8-K, we will file an amendment to the Form 8-K to provide updated financial information to reflect the exercise and consummation of the over-allotment option. We will also include in this Form 8-K, an amendment thereto, or in a subsequent Form 8-K, information indicating if Pali Capital, Inc. has allowed separate trading of the common stock and warrants prior to the 90th day after the date of this prospectus. No trading of the units or the underlying common stock and warrants would be permitted until the completion of a business combination. During this period, the securities would be held in the escrow or trust account. Exercise of the warrants The warrants cannot be exercised until the later of the completion of a business combination and one year from the date of this prospectus and, accordingly, will be exercised only after the trust account has been terminated and distributed. The warrants could be exercised prior to the completion of a business combination, but securities received and cash paid in connection with the exercise would be deposited in the escrow or trust account. Table of Contents Terms of Our Offering Terms Under a Rule 419 Offering Election to remain an investor We will give our stockholders the opportunity to vote on the business combination. In connection with seeking stockholder approval, we will send each stockholder a proxy statement containing information required by the SEC. A stockholder following the procedures described in this prospectus is given the right to convert his or her shares into his or her pro rata share of the trust account. However, a stockholder who does not follow these procedures or a stockholder who does not take any action would not be entitled to the return of any funds. A prospectus containing information required by the SEC would be sent to each investor. Each investor would be given the opportunity to notify the company, in writing, within a period of no less than 20 business days and no more than 45 business days from the effective date of the post-effective amendment, to decide whether he or she elects to remain a stockholder of the company or require the return of his or her investment. If the company has not received the notification by the end of the 45th business day, funds and interest or dividends, if any, held in the trust or escrow account would automatically be returned to the stockholder. Unless a sufficient number of investors elect to remain investors, all of the deposited funds in the escrow account must be returned to all investors and none of the securities will be issued. Business combination deadline Pursuant to our amended and restated certificate of incorporation, our corporate existence will cease 24 months from the date of this prospectus except for the purposes of winding up our affairs and we will liquidate. However, if we complete a business combination within this time period, we will amend this provision to allow for our perpetual existence following such business combination. If an acquisition has not been consummated within 18 months after the effective date of the initial registration statement, funds held in the trust or escrow account would be returned to investors. Interest earned on the funds in the trust account There can be released to us, from time to time, interest earned on the funds in the trust account (i) up to an aggregate of $1,500,000 to fund expenses related to investigating and selecting a target business and our other working capital requirements and (ii) any amounts necessary to pay our tax obligations. The remaining interest earned on the funds in the trust account will not be released until the earlier of the completion of a business combination and our liquidation upon failure to effect a business combination within the allotted time. All interest earned on the funds in the trust account will be held in trust for the benefit of public stockholders until the earlier of the completion of a business combination and our liquidation upon failure to effect a business combination within the allotted time. In the event a business combination was not consummated with 18 months, proceeds held in the trust account would be returned within 5 business days of such date. Table of Contents Terms of Our Offering Terms Under a Rule 419 Offering Release of funds Except for (i) up to $1,500,000 we may need to fund expenses related to investigating and selecting a target business and our other working capital requirements and (ii) any amounts that we may need to pay our tax obligations that may be released to us from the interest earned on the trust account balance, the proceeds held in the trust account will not be released until the earlier of the completion of a business combination and our liquidation upon failure to effect a business combination within the allotted time. The proceeds held in the escrow account would not be released until the earlier of the completion of a business combination or the failure to effect a business combination within the allotted time. Table of Contents MANAGEMENT Directors and Executive Officers Our current directors and executive officers are as follows: Name Age Position Theodore S. Green 54 Chairman, Co-Chief Executive Officer, interim Chief Financial Officer and Director Malcolm Bird 39 Co-Chief Executive Officer and Director John W. Hyde 66 Director Jonathan F. Miller 50 Director Theodore S. Green Theodore (Ted) S. Green has served as our Chairman, Co-Chief Executive Officer, interim Chief Financial Officer and a director since our inception. From 2003 to 2006, Mr. Green was the Chief Executive Officer of Anchor Bay Entertainment, which at such time was the subsidiary of IDT Entertainment, Inc. that focused on the production, marketing and distribution of various media. Mr. Green began serving as Chief Executive Officer, with the acquisition of Anchor Bay from The Handleman Co. Mr. Green had full operating authority over the marketing, financial, sales, products, operations, legal, business and corporate resources departments. Prior to that, in 2001, Mr. Green established Greenlight Consulting Inc., a project-based consulting practice focused on the media and entertainment industry. Greenlight Consulting s clients include Sony Music and Vivendi-Universal as well as numerous other regional media organizations. Prior to founding Greenlight Consulting, in 2000, Mr. Green was President and Chief Operating Officer of MaMaMedia, Inc., an Internet company that creates activity-based learning products for children and their families. From 1992 to 2000, Mr. Green was the founder and President of Sony Wonder, the division of Sony BMG Music Entertainment responsible for the production and distribution of media geared toward youthful audiences and also for all home video distribution. Mr. Green was responsible for all creative, production, operations, finance, marketing and business efforts. Beginning in 1989, Mr. Green was the Executive Vice President of Administration and Operations for ATCO Records, a music industry label co-owned with The Warner Music Group. Mr. Green was responsible for all business, legal and financial operations. From 1982 until 1989, Mr. Green served as the Senior Vice President of Polygram Records, overseeing the Business Affairs and Music Publishing divisions of the company. Mr. Green was responsible for negotiations, administration, rights and contracts. Mr. Green s career in the entertainment industry began first in the legal department and thereafter as the Director of Business Affairs for CBS Records. Prior to that Mr. Green practiced general entertainment law at the firm of Moses Singer. Mr. Green holds a BS from Cornell University and received his JD from Columbia University School of Law. Malcolm Bird Malcolm Bird has served as our Co-Chief Executive Officer and a director since our inception. Mr. Bird has worked in the entertainment industry for the past 25 years. Mr. Bird served as senior vice president of kids and teens for AOL from December 2002 through his resignation in March 2007. Mr. Bird was responsible for strategy, development, instigation, sales, staffing, business development, marketing, and public relations. From 1995 to 1997 Mr. Bird was Director of International Programming at Hanna-Barbera Studio responsible for program development, negotiation with international broadcasters, production, licensing development, liaison with International Cartoon Network and branding for Europe, Asia Pacific and Latin America. From 1997 to 1999, Mr. Bird was head of youth programming at USA Broadcasting. Working with the senior management team, (Jon Miller and Barry Diller), Mr. Bird was responsible for 20 hours of Barry Diller s new CityVision network, WAMI. From 1999 to 2002, Mr. Bird was President of Craftsman Productions, Inc., a company he co-founded in 1995 to develop and produce innovative programs for television. Mr. Bird created, developed and sold into broadcast and cable networks programming. Mr. Bird has been involved in publishing, marketing, public relations, radio, television development, television production, international business (overseeing operations in Europe, Asia Pacific, and Latin America for a Hollywood studio), and multi-platform business development. Mr. Bird has received two Emmy awards and two Telly awards. Mr. Bird sits on the executive board of directors of the National Children s Museum in Washington, D.C. Jonathan F. Miller Jonathan (Jon) F. Miller has served as a director since June 15, 2007. Mr. Miller is an advisor to General Atlantic LLC with respect to its Media and Consumer sector and a founder of Velocity Investment Group. From 2002 to 2006, Mr. Miller served as Chairman and Chief Executive Officer of AOL Inc. and AOL LLC. From 2000 to 2002, Mr. Miller was Chief Executive Officer and President of USA Information and Services, now IACI and Expedia (the company split in two in Table of Contents 2005). In this period, Mr. Miller acted as a corporate officer and served on four public boards of related entities. Mr. Miller joined USA in 1997 as Chief Executive Officer and President of USA Broadcasting. Prior to USA, from 1993 to 1997, Mr. Miller was Managing Director of Nickelodeon International, a unit of Viacom s MTV Networks. During this period, Mr. Miller also acted as Chief Executive Officer of several Nickelodeon and Paramount Pictures channels that were joint ventures with such partners as BSkyB in the UK and Foxtel in Australia. Under Mr. Miller s guidance, program distribution was extended to over 100 territories including sales to the BBC, ITV, Channel 4, ARD (Germany), ABC (Australia), and RAI (Italy). From 1987 to 1993, Mr. Miller was Vice-President, Programming and Co-General Manager of NBA Entertainment. In this capacity, Mr. Miller worked with NBA sponsors in fashioning and executing their sports marketing programs across electronic media, print and retail. Previous positions included positions at WGBH in Boston, MA (PBS) in educational programming and in various advertising and video production roles in Boston. Mr. Miller is on the Board of Directors of Idearc Inc., Next New Networks, Mahalo.com Incorporated, Kosmix Corporation and Hanley Wood, LLC. Mr. Miller is also on the Board of the American Film Institute, a trustee of Emerson College, and of WNYC Public Radio in NY. John W. Hyde John W. Hyde has served as a director since October 1, 2007. Mr. Hyde has served as the Vice Chairman of Starz Media, LLC since January, 2007. Mr. Hyde was responsible for integrating the IDT Entertainment operations into Starz. From January 2004 to January 2007, Mr. Hyde was the Chief Operating Officer of IDT Entertainment and Chief Executive Officer of IDTE Productions and New Ark Entertainment. In those roles, Mr. Hyde oversaw all of IDT Entertainment s operations. Mr. Hyde was responsible for running the day to day operations of IDTE s production and distribution companies. From 2000 to 2006, Mr. Hyde was the Chief Executive Officer of Film Roman responsible for running the animation company producing The Simpsons and King of the Hill . Mr. Hyde was Chief Executive Officer of Crossroads V Communications from 1996 to 2000. Mr. Hyde was responsible for running the entertainment, music, and consulting company he founded. From 1996 to 2000, Mr. Hyde was the Chief Executive Officer and Trustee for Riklis Broadcasting, which was sold on behalf of its creditors, in 1999. From 1990 through 1995, Mr. Hyde was Chief Executive Officer of MCEG Sterling, a public production and distribution company, which he reorganized and merged into Orion Pictures. Mr. Hyde has divided his career between production, distribution, entertainment executive, and industry management consultant. He has overseen the domestic and foreign distribution of nearly 125 motion pictures and television shows. His production credits include Short Circuit, The Simpsons, Flight Of The Navigator, King of the Hill, 8 Million Ways To Die, NeverEnding Story, Mighty Mouse, Homicide: Life On The Streets, 91/2 Weeks, UHF, and the award-winning Das Boot. As an industry management consultant Mr. Hyde oversaw the restructuring or reorganization of Avenue Entertainment, Filmstar, MCEG, Cannon Films, Hemdale Entertainment, Reeves Entertainment, Peregrine Entertainment, Orion, AME Video, Fires Entertainment, and Riklis Broadcasting (KADY/KADE TV). Mr. Hyde is a member of both the Academy of Motion Picture Arts Sciences and the Academy of Television Arts Sciences where he has been nominated for five Emmys, winning one. He is a former officer and director of The Cousteau Society. He was also a founding member, as well as Vice Chairman and board member, of the American Film Market. Hyde graduated from New York University with additional international economic studies at Leiden University in Holland. These individuals will play a key role in identifying and evaluating prospective acquisition candidates, selecting the target business, and structuring, negotiating and consummating its acquisition. We believe that the skills and expertise of these individuals, their collective access to acquisition opportunities and ideas, their contacts, and their transactional expertise should enable them to successfully identify and effect an acquisition. Our board of directors is divided into three classes with only one class of directors being elected in each year and each class serving a three-year term. The term of office of the first class of directors, consisting of Mr. Miller, will expire at our first annual meeting of stockholders. The term of office of the second class of directors, consisting of Mr. Bird, will expire at the second annual meeting. The term of the third class of directors, consisting of Mr. Green and Mr. Hyde, will expire at the third annual meeting. Prior Involvement of Principals in Blank Check Companies None of our directors or officers has been or currently is a principal of, or affiliated with, entities, including other blank check companies, engaged in business activities similar to those intended to be conducted by us. Executive Compensation No executive officer has received any cash compensation for services rendered to us. Commencing on the date of this prospectus through the acquisition of a target business, we will pay our management stockholders, an affiliate of our management stockholders or third parties a fee of $7,500 per month for providing us with certain administrative, technology and secretarial services, as well as the use of certain limited office space. However, this arrangement is solely for our benefit and is not intended to provide our management stockholders compensation in lieu of a salary. Other than the $7,500 per Table of Contents month administrative fee, no compensation of any kind, including finders, consulting or other similar fees, will be paid to any of our management stockholders, including our directors, or any of their respective affiliates, prior to, or for any services they render in order to effectuate, the consummation of a business combination. However, our existing stockholders will be reimbursed for any out-of-pocket expenses incurred in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations. There is no limit on the amount of these out-of-pocket expenses and there will be no review of the reasonableness of the expenses by anyone other than our board of directors, which includes persons who may seek reimbursement, or a court of competent jurisdiction if such reimbursement is challenged. Director Independence The American Stock Exchange requires that a majority of our board must be composed of independent directors, which is defined generally as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the company s board of directors would interfere with the director s exercise of independent judgment in carrying out the responsibilities of a director. Upon consummation of this offering, Mr. Miller and Mr. Hyde will be our independent directors. Our independent directors will have regularly scheduled meetings at which only independent directors are present. Any affiliated transactions will be on terms no less favorable to us than could be obtained from independent parties. Any affiliated transactions must be approved by a majority of our independent and disinterested directors. Committees of the Board of Directors Audit Committee Effective upon consummation of this offering, we will establish an audit committee of the board of directors, which will consist of Messrs. Miller, Green and Hyde. Mr. Miller and Mr. Hyde are independent directors under the American Stock Exchange s listing standards. The audit committee s duties, which are specified in our Audit Committee Charter, include, but are not limited to: reviewing and discussing with management and the independent auditor the annual audited financial statements, and recommending to the board whether the audited financial statements should be included in our Form 10-K; discussing with management and the independent auditor significant financial reporting issues and judgments made in connection with the preparation of our financial statements; discussing with management major risk assessment and risk management policies; monitoring the independence of the independent auditor; verifying the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law; reviewing and approving all related-party transactions; inquiring and discussing with management our compliance with applicable laws and regulations; pre-approving all audit services and permitted non-audit services to be performed by our independent auditor, including the fees and terms of the services to be performed; appointing or replacing the independent auditor; determining the compensation and oversight of the work of the independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work; and establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or reports which raise material issues regarding our financial statements or accounting policies. Financial Experts on Audit Committee The audit committee will at all times be composed exclusively of independent directors who are financially literate as defined under the American Stock Exchange listing standards. The American Stock Exchange listing standards define financially literate as being able to read and understand fundamental financial statements, including a company s balance sheet, income statement and cash flow statement. In addition, we must certify within one year from the date of this offering to the American Stock Exchange that the committee has, and will continue to have, at least one member who has past employment experience in finance or accounting, Table of Contents requisite professional certification in accounting, or other comparable experience or background that results in the individual s financial sophistication. The board of directors will appoint an additional director who satisfies the American Stock Exchange s definition of financial sophistication and also qualifies as an audit committee financial expert, as defined under rules and regulations of the SEC as promptly as practical following this offering. Nominating Committee Effective upon consummation of this offering, we will establish a nominating committee of the board of directors, which will consist of Messrs. Miller and Hyde. Messrs. Miller and Hyde are independent directors under the American Stock Exchange s listing standards. The nominating committee is responsible for overseeing the selection of persons to be nominated to serve on our board of directors. The nominating committee considers persons identified by its members, management, shareholders, investment bankers and others. Guidelines for Selecting Director Nominees The guidelines for selecting nominees, which are specified in the Nominating Committee Charter, generally provide that persons to be nominated: should have demonstrated notable or significant achievements in business, education or public service; should possess the requisite intelligence, education and experience to make a significant contribution to the board of directors and bring a range of skills, diverse perspectives and backgrounds to its deliberations; and should have the highest ethical standards, a strong sense of professionalism and intense dedication to serving the interests of the stockholders. The nominating committee will consider a number of qualifications relating to management and leadership experience, background and integrity and professionalism in evaluating a person s candidacy for membership on the board of directors. The nominating committee may require certain skills or attributes, such as financial or accounting experience, to meet specific board needs that arise from time to time. The nominating committee does not distinguish among nominees recommended by shareholders and other persons. Compensation Committee Our board of directors intends to establish a compensation committee which initially will be comprised of Messrs. Miller and Hyde. Messrs. Miller and Hyde are independent directors under the American Stock Exchange listing standards. The compensation committee s duties, which are specified in our Compensation Committee Charter, include, but are not limited to: evaluating the performance of our named executive officers and approve their compensation; preparing an annual report on executive compensation for inclusion in our proxy statement; reviewing and approving compensation plans, policies and programs, considering their design and competitiveness; administering and reviewing changes to our equity incentive plans pursuant to the terms of the plans; and reviewing our non-employee independent director compensation levels and practices and recommending changes as appropriate. The compensation committee will review and approve corporate goals and objectives relevant to our Chief Executive Officers compensation, evaluate our Chief Executive Officers performance in light of those goals and objectives, and recommend to the board our Chief Executive Officers compensation levels based on its evaluation. Other Corporate Governance Matters Code of Ethics Effective upon consummation of this offering, we will adopt a code of ethics that applies to all of our executive officers, directors and employees. The code of ethics codifies the business and ethical principles that govern all aspects of our business. Conflicts of Interest Potential investors should be aware of the following potential conflicts of interest: none of our officers and directors is required to commit their full time to our affairs and, accordingly, they may have conflicts of interest in allocating their time among various business activities; Table of Contents in the course of their other business activities, our officers and directors may become aware of investment and business opportunities which may be appropriate for presentation to our company as well as the other entities with which they are affiliated. Our management may have conflicts of interest in determining to which entity a particular business opportunity should be presented. Mr. Miller has a pre-existing fiduciary obligation to each of Idearc Inc., Next New Networks, Mahalo.com Incorporated, Kosmix Corporation, and Hanley Wood, LLC as a director of such entities. Accordingly, due to this affiliation, he may have a fiduciary obligation to present potential business opportunities to such entities in addition to presenting them to us which could cause additional conflicts of interest. No other officers or directors have a fiduciary obligation to present potential business opportunities to affiliated entities: our officers and directors may in the future become affiliated with entities, including other blank check companies, engaged in business activities similar to those intended to be conducted by our company; the initial shares owned by our officers and directors will be released from escrow only if a business combination is successfully completed, and the insider warrants purchased by our officers and directors and any warrants which they may purchase in this offering or in the aftermarket will expire worthless if a business combination is not consummated. Additionally, our officers and directors will not receive liquidation distributions with respect to any of their initial shares. The purchasers of the insider warrants have agreed that such securities will not be sold or transferred by them (except to an affiliate of such purchaser, to relatives and trusts for estate planning purposes, or to our directors at the same cost per warrant originally paid by them) until the later of , 2008 [one year from the date of this prospectus] and 60 days after the consummation of our business combination. For the foregoing reasons, our board may have a conflict of interest in determining whether a particular target business is appropriate to effect a business combination with; and our directors and officers may purchase shares of common stock as part of this offering or in the open market. If they did, they would be entitled to vote such shares as they choose on a proposal to approve a business combination. In general, officers and directors of a corporation incorporated under the laws of the State of Delaware are required to present business opportunities to a corporation if: the corporation could financially undertake the opportunity; the opportunity is within the corporation s line of business; and it would not be fair to the corporation and its stockholders for the opportunity not to be brought to the attention of the corporation. Accordingly, as a result of multiple business affiliations, our officers and directors may have similar legal obligations relating to presenting business opportunities meeting the above-listed criteria to multiple entities. In addition, conflicts of interest may arise when our board evaluates a particular business opportunity with respect to the above-listed criteria. We cannot assure you that any of the above mentioned conflicts will be resolved in our favor. In order to minimize potential conflicts of interest which may arise from multiple corporate affiliations, each of our management stockholders has agreed, until the earliest of a business combination, our liquidation or such time as he or she ceases to be a management stockholder, to present to our company for our consideration, prior to presentation to any other entity, any business opportunity which may reasonably be required to be presented to us under Delaware law, subject to any pre-existing fiduciary or contractual obligations he might have. In connection with the vote required for any business combination, all of our existing stockholders, including all of our officers and directors, have agreed to vote their respective initial shares in accordance with the vote of the public stockholders owning a majority of the shares of our common stock sold in this offering. In addition, they have agreed to waive their respective rights to participate in any liquidation distribution with respect to those shares of common stock acquired by them prior to this offering. Any common stock acquired by existing stockholders in the offering or aftermarket will be considered part of the holdings of the public stockholders. Except with respect to the conversion rights afforded to public stockholders, these existing stockholders will have the same rights as other public stockholders with respect to such shares, including voting rights in connection with a potential business combination. Accordingly, they may vote such shares on a proposed business combination any way they choose. To further minimize potential conflicts of interest, we have agreed not to consummate a business combination with an entity which is affiliated with any of our existing stockholders unless we obtain an opinion from an independent investment banking firm that the business combination is fair to our unaffiliated stockholders from a financial point of view. Although we currently do not anticipate doing so, we may enter into a business combination with an entity affiliated with any of our officers, directors, or existing stockholders. Furthermore, in no event will any of our existing officers, directors, stockholders, or any entity with which they are affiliated, be paid any finder s fee, consulting fee or other compensation prior to, or for any services they render in order to effectuate, the consummation of a business combination. Table of Contents PRINCIPAL STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of our common stock as of September 30, 2007 and as adjusted to reflect the sale of our common stock included in the units offered by this prospectus (assuming none of the individuals listed purchase units in this offering), by: each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock; each of our officers and directors; and all our officers and directors as a group. Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them. Prior to Offering After Offering(2) Amount and Approximate Amount and Approximate Nature of Percentage of Nature of Percentage of Beneficial Outstanding Beneficial Outstanding Name and Address of Beneficial Owner(1) Ownership Common Stock Ownership(3) Common Stock Theodore S. Green(4) 1,237,500 55 % 1,237,500 11 % Malcolm Bird 787,500 35 % 787,500 7 % John W. Hyde(5) 112,500 5 % 112,500 1 % Jonathan F. Miller 112,500 5 % 112,500 1 % All directors and executive officers as a group (four individuals) 2,250,000 100 % 2,250,000 20 % (1) The business address of each of the individuals is c/o TM Entertainment and Media, Inc., 307 East 87th Street, New York, NY 10128. (2) Assumes the sale of 9,000,000 units in this offering but not the exercise of the 9,000,000 warrants to purchase common stock included in such units or the over-allotment option. (3) Does not include an aggregate of 2,100,000 shares of common stock issuable upon exercise of the insider warrants to be issued to our existing stockholders in a private placement. (4) Includes an aggregate of 375,000 shares of common stock owned by two trusts established for the benefit of Mr. Green s daughters. Effective upon consummation of this offering, Mr. Green and the trustee of the Trusts will enter into a voting agreement under which Mr. Green will have the right to vote the shares owned by the Trusts on all matters that come before the shareholders of the company, and accordingly Mr. Green has beneficial ownership of such shares. Mr. Green disclaims any other beneficial or pecuniary interest in such shares. (5) Includes 112,500 shares of common stock owned by the John W. Hyde Living Trust. On June 14, 2007, Mr. Green sold to each of the Trusts established for the benefit of his daughters 187,500 shares of common stock for a purchase price of approximately $0.01 per share, the price that Mr. Green paid for the shares. On August 29, 2007, Mr. Green sold to each of Mr. Miller and the John W. Hyde Living Trust 68,750 shares of common stock and Mr. Bird sold to each of Mr. Miller and the John W. Hyde Living Trust 43,750 shares of common stock, in each case for a purchase price of approximately $0.01 per share, the price that Mr. Green and Mr. Bird paid for the shares. These sales were contemplated when the shares were initially issued but were not consummated until Messrs. Hyde and Miller agreed to serve on our board of directors. Immediately after this offering, our existing stockholders, which include all of our officers and directors, collectively, will beneficially own 20% of the then issued and outstanding shares of our common stock (assuming none of them purchase any units offered by this prospectus). None of our existing stockholders, officers and directors has indicated to us that he intends to purchase our securities in the offering. Because of the ownership block held by our existing stockholders, such individuals may be able to effectively exercise control over all matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions other than approval of our initial business combination. All of the initial shares outstanding prior to the date of this prospectus will be placed in escrow with Continental Stock Transfer Trust Company, as escrow agent, until one year after the consummation of our initial business combination. The Table of Contents initial shares may be released from escrow earlier than this date if, within the first year after we consummate a business combination: the last sales price of our common stock equals or exceeds $11.50 per share for any 20 trading days within any 30-trading day period; or we consummate a subsequent liquidation, merger, stock exchange or other similar transaction which results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property. During the escrow period, the holders of these shares will not be able to sell or transfer their securities except (i) to an entity s members upon its liquidation, (ii) to relatives and trusts for estate planning purposes or (iii) by private sales made at or prior to the consummation of a business combination at prices no greater than the price at which the shares were originally purchased, in each case where the transferee agrees to the terms of the escrow agreement, but will retain all other rights as our stockholders, including, without limitation, the right to vote their shares of common stock and the right to receive cash dividends, if declared. If dividends are declared and payable in shares of common stock, such dividends will also be placed in escrow. If we are unable to effect a business combination and liquidate, none of our existing stockholders will receive any portion of the liquidation proceeds with respect to their initial shares. Our existing stockholders have committed to purchase the insider warrants (for a total purchase price of $2,100,000) from us. These purchases will take place in a private placement that will occur simultaneously with the consummation of this offering. The insider warrants will be identical to warrants underlying the units being offered by this prospectus except that the insider warrants will be exercisable on a cashless basis and will not be redeemable by us so long as they are still held by the purchasers or their affiliates. Each of the purchasers have agreed, pursuant to the agreements, that he will not sell or transfer the insider warrants (except to an affiliate of such purchaser, to relatives and trusts for estate planning purposes, or to our officers and directors at the same cost per warrant originally paid by them) until the later of , 2008 [one year from the date of this prospectus] and 60 days after the consummation of our initial business combination. Messrs. Green and Bird are our promoters, as that term is defined under the Federal securities laws. Table of Contents CERTAIN TRANSACTIONS On May 1, 2007, we issued 2,250,000 shares of our common stock to the individuals set forth below for $25,000 in cash, at a purchase price of approximately $0.01 share, as follows: Number of Name Shares Relationship to Us Theodore S. Green(1) 1,375,000 Chairman, Co-Chief Executive Officer, interim Chief Financial Officer and Director Malcolm Bird 875,000 Co-Chief Executive Officer and Director (1) Includes an aggregate of 375,000 shares of common stock owned by two trusts established for the benefit of Mr. Green s daughters. Effective upon consummation of this offering, Mr. Green and the trustee of the Trusts will enter into a voting agreement under which Mr. Green will have the right to vote the shares owned by the Trusts on all matters that come before the shareholders of the company, and accordingly Mr. Green has beneficial ownership of such shares. Mr. Green disclaims any other beneficial or pecuniary interest in such shares. On June 14, 2007, Mr. Green sold to each of the Trusts established for the benefit of his daughters 187,500 shares of common stock for a purchase price of approximately $0.01 per share, the price that Mr. Green paid for the shares. On August 29, 2007, Mr. Green sold to each of Mr. Miller and the John W. Hyde Living Trust 68,750 shares of common stock and Mr. Bird sold to each of Mr. Miller and the John W. Hyde Living Trust 43,750 shares of common stock, in each case for a purchase price of approximately $0.01 per share, the price that Mr. Green and Mr. Bird paid for the shares. These sales were contemplated when the shares were initially issued but were not consummated until Messrs. Hyde and Miller agreed to serve on our board of directors. If the underwriters determine the size of the offering should be increased or decreased, a stock dividend or a contribution back to capital, as applicable, would be effectuated in order to maintain our existing stockholders ownership at a percentage of the number of shares to be sold in this offering. The holders of the majority of these shares will be entitled to make up to two demands that we register these shares pursuant to an agreement to be signed prior to or on the date of this prospectus. The holders of the majority of these shares may elect to exercise these registration rights at any time commencing on the date on which these shares of common stock are released from escrow. In addition, these stockholders have certain piggy-back registration rights with respect to registration statements filed subsequent to the date on which these shares of common stock are released from escrow. We will bear the expenses incurred in connection with the filing of any such registration statements. Our existing stockholders have committed, pursuant to private placement purchase agreements with us to purchase the 2,100,000 insider warrants (for a total purchase price of $2,100,000) from us. These purchases will take place in a private placement that will occur simultaneously with the consummation of this offering. In connection therewith, Mr. Green and Mr. Bird have entered into an agreement pursuant to which Mr. Bird has agreed to reimburse Mr. Green $300,000 of the amount that Mr. Green will pay for such warrants in the event we do not consummate a business combination by [ ], 2009 [twenty four months from the date of this prospectus] and are dissolved. The purchase price for the insider warrants will be delivered to Continental Stock Transfer Trust Company, who will also be acting solely as escrow agent in connection with the private sale of insider warrants, at least 24 hours prior to the date of this prospectus to hold in an account until we consummate this offering. The insider warrants will be identical to warrants underlying the units being offered by this prospectus except that the insider warrants will be exercisable on a cashless basis and will not be redeemable by us so long as they are still held by the purchasers or their affiliates. Each of the purchasers have agreed, pursuant to the agreements, that he will not sell or transfer the insider warrants (except to an affiliate of such purchaser, to relatives and trusts for estate planning purposes, or to our directors at the same cost per warrant originally paid by them) until the later of , 2008 [one year from the date of this prospectus] and 60 days after the consummation of our business combination. The holders of the majority of these insider warrants (or underlying shares) will be entitled to demand that we register these securities pursuant to an agreement to be signed prior to or on the date of this prospectus. The holders of the majority of these securities may elect to exercise these registration rights with respect to such securities at any time after we consummate a business combination. In addition, these holders have certain piggy-back registration rights with respect to registration statements filed subsequent to such date. We will bear the expenses incurred in connection with the filing of any such registration statements. Our management stockholders have agreed that, commencing on the effective date of this prospectus through the acquisition of a target business, they will make available to us certain administrative, technology and secretarial services, as well as the use of certain limited office space. We have agreed to pay to our management stockholders, an affiliate of our management stockholders or third parties $7,500 per month for these services. Accordingly, they will benefit from the Table of Contents transaction. However, this arrangement is solely for our benefit and is not intended to provide our management stockholders compensation in lieu of a salary. We believe, based on rents and fees for similar services in the New York City metropolitan area, that the fee charged is at least as favorable as we could have obtained from an unaffiliated person. However, as our directors may not be deemed independent, we did not have the benefit of disinterested directors approving this transaction. As of the date of this prospectus, Theodore S. Green has advanced to us $100,000 to cover expenses related to this offering. The loan bears interest at the rate of 5% per annum, compounded semi-annually, and will be payable on the earlier of May 21, 2008 or the consummation of this offering. We intend to repay these loans from the proceeds of this offering not being placed in trust. We will reimburse our officers and directors for any reasonable out-of-pocket business expenses incurred by them in connection with certain activities on our behalf such as identifying and investigating possible target businesses and business combinations. There is no limit on the amount of out-of-pocket expenses reimbursable by us, which will be reviewed only by our board or a court of competent jurisdiction if such reimbursement is challenged. Other than the $7,500 per-month administrative fee and reimbursable out-of-pocket expenses payable to our officers and directors, no compensation or fees of any kind, including finder s fees, consulting fees or other similar compensation, will be paid to any of our existing stockholders, officers or directors who owned our common stock prior to this offering, or to any of their respective affiliates, prior to or with respect to the business combination (regardless of the type of transaction that it is). All ongoing and future transactions between us and any of our officers and directors or their respective affiliates, including loans by our officers and directors, will be on terms believed by us to be no less favorable to us than are available from unaffiliated third parties. Such transactions or loans, including any forgiveness of loans, will require prior approval by a majority of our uninterested independent directors (to the extent we have any) or the members of our board who do not have an interest in the transaction, in either case who had access, at our expense, to our attorneys or independent legal counsel. We will not enter into any such transaction unless our disinterested independent directors (or, if there are no independent directors, our disinterested directors) determine that the terms of such transaction are no less favorable to us than those that would be available to us with respect to such a transaction from unaffiliated third parties. Table of Contents DESCRIPTION OF SECURITIES General We are authorized to issue 40,000,000 shares of common stock, par value $0.001, and 1,000,000 shares of preferred stock, par value $0.001. As of the date of this prospectus, 2,250,000 shares of common stock are outstanding, held by two stockholders of record. No shares of preferred stock are currently outstanding. Units Each unit consists of one share of common stock and one warrant. Each warrant entitles the holder to purchase one share of common stock. The common stock and warrants will begin to trade separately on the 90th day after the date of this prospectus unless Pali Capital, Inc. informs us of its decision to allow earlier separate trading, provided that in no event may the common stock and warrants be traded separately until we have filed with the SEC a Current Report on Form 8-K which includes an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file a Current Report on Form 8-K which includes this audited balance sheet promptly upon the consummation of this offering. The audited balance sheet will reflect proceeds we receive from the exercise of the over-allotment option, if the over-allotment option is exercised prior to the filing of the Form 8-K. If the over-allotment option is exercised after our initial filing of a Form 8-K, we will file an amendment to the Form 8-K to provide updated financial information to reflect the exercise of the over-allotment option. We will also include in this Form 8-K, an amendment thereto, or in a subsequent Form 8-K information indicating if Pali Capital, Inc. has allowed separate trading of the common stock and warrants prior to the 90th day after the date of this prospectus. Common stock Our stockholders of record are entitled to one vote for each share held on all matters to be voted on by stockholders. In connection with the vote required for any business combination, all of our existing stockholders, including all of our officers and directors, have agreed to vote their respective shares of common stock owned by them immediately prior to this offering in accordance with the majority of the shares of our common stock voted by our public stockholders. This voting arrangement shall not apply to shares included in units purchased in this offering or purchased following this offering in the open market by any of our existing stockholders, officers and directors. Our existing stockholders, officers and directors will vote all of their shares in any manner they determine, in their sole discretion, with respect to any other items that come before a vote of our stockholders. We will proceed with the business combination only if a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and public stockholders owning less than 30% of the shares sold in this offering both exercise their conversion rights discussed below and vote against the business combination. Our board of directors is divided into three classes, each of which will generally serve for a term of three years with only one class of directors being elected in each year. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares eligible to vote for the election of directors can elect all of the directors. Pursuant to our amended and restated certificate of incorporation, if we do not consummate a business combination by , 2009 [twenty four months from the date of this prospectus], our corporate existence will cease except for the purposes of winding up our affairs and liquidating. If we are forced to liquidate prior to a business combination, our public stockholders are entitled to share ratably in the trust fund, including any interest, and any net assets remaining available for distribution to them after payment of liabilities. Our existing stockholders have agreed to waive their rights to share in any distribution with respect to their initial shares. Our stockholders have no conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the common stock, except that public stockholders have the right to have their shares of common stock converted to cash equal to their pro rata share of the trust account if they vote against the business combination and the business combination is approved and completed. Public stockholders who convert their stock into their share of the trust account still have the right to exercise the warrants that they received as part of the units. Preferred stock Our certificate of incorporation authorizes the issuance of 1,000,000 shares of blank check preferred stock with such designation, rights and preferences as may be determined from time to time by our board of directors. No shares of preferred stock are being issued or registered in this offering. Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect Table of Contents the voting power or other rights of the holders of common stock. However, the underwriting agreement prohibits us, prior to a business combination, from issuing preferred stock which participates in any manner in the proceeds of the trust account, or which votes as a class with the common stock on a business combination. We may issue some or all of the preferred stock to effect a business combination. In addition, the preferred stock could be utilized as a method of discouraging, delaying or preventing a change in control of us. Although we do not currently intend to issue any shares of preferred stock, we cannot assure you that we will not do so in the future. Warrants No warrants are currently outstanding. The material terms of the warrants are set forth herein. Each warrant entitles the registered holder to purchase one share of our common stock at a price of $5.50 per share, subject to adjustment as discussed below, at any time commencing on the later of: the completion of a business combination; and one year from the date of this prospectus. However, the warrants will be exercisable only if a registration statement relating to the common stock issuable upon exercise of the warrants is effective and current. The warrants will expire four years from the date of this prospectus at 6:00 p.m., New York City time. We may call the warrants for redemption (including any warrants held by the underwriters as a result of the exercise of their option, but excluding any insider warrants held by our existing stockholders or their affiliates), without the consent of Pali Capital, Inc.: in whole and not in part, at a price of $0.01 per warrant at any time after the warrants become exercisable, upon not less than 30 days prior written notice of redemption to each warrant holder, and if, and only if, the reported last sale price of the common stock equals or exceeds $11.50 per share, for any 20 trading days within a 30 trading day period ending on the third business day prior to the notice of redemption to warrant holders. The right to exercise will be forfeited unless they are exercised prior to the date specified in the notice of redemption. On and after the redemption date, a record holder of a warrant will have no further rights except to receive the redemption price for such holder s warrant upon surrender of such warrant. The redemption criteria for our warrants have been established at a price which is intended to provide warrant holders a reasonable premium to the initial exercise price and provide a sufficient differential between the then-prevailing common stock price and the warrant exercise price so that if the stock price declines as a result of our redemption call, the redemption will not cause the stock price to drop below the exercise price of the warrants. We have agreed that the insider warrants may be exercised on a cashless basis and will not be redeemable by us so long as they are held by the initial purchasers or their affiliates. The reason that we have agreed to this is because it is not known at this time whether they will be affiliated with us following a business combination. If they are, their ability to sell our securities in the open market will be significantly limited. If they remain insiders, we will have policies in place that prohibit insiders from selling our securities except during specific periods of time. Even during such periods of time, an insider cannot trade in our securities if he or she is in possession of material non-public information. Accordingly, unlike public stockholders who could exercise their warrants and sell the shares of common stock received upon such exercise freely in the open market in order to recoup the cost of such exercise, the insiders could be significantly restricted from selling such securities. As a result, we believe that allowing the holders to exercise such warrants on a cashless basis or restrict our ability to redeem such warrants is appropriate. The warrants will be issued in registered form under a warrant agreement between Continental Stock Transfer Trust Company, as warrant agent, and us. Although the material provisions of the warrants are set forth herein, a copy of the warrant agreement has been filed as an exhibit to the registration statement of which this prospectus is a part. The exercise price and number of shares of common stock issuable on exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuances of common stock at a price below their respective exercise prices. The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, Table of Contents accompanied by full payment of the exercise price, by certified or official bank check payable to us, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of common stock and any voting rights until they exercise their warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders. No warrants held by public stockholders will be exercisable and we will not be obligated to issue shares of common stock unless at the time a holder seeks to exercise such warrant, a registration statement relating to the common stock issuable upon exercise of the warrants is effective and current and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms of the warrant agreement, we have agreed to use our best efforts to meet these conditions and to maintain a current prospectus relating to the common stock issuable upon exercise of the warrants until the expiration of the warrants. However, we cannot assure you that we will be able to do so and, if we do not maintain a current prospectus relating to the common stock issuable upon exercise of the warrants, holders will be unable to exercise their warrants and we will not be required to settle any such warrant exercise. If the prospectus relating to the common stock issuable upon the exercise of the warrants is not current or if the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside, we will not be required to net cash settle or cash settle the warrant exercise, the warrants may have no value, the market for the warrants may be limited and the warrants may expire worthless. No fractional shares will be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round up or down to the nearest whole number the number of shares of common stock to be issued to the warrant holder. Insider Warrants We anticipate that simultaneously with the consummation of this offering we will privately sell an aggregate of 2,100,000 warrants to our existing stockholders at a purchase price of $1.00 per warrant, for an aggregate purchase price of $2,100,000. All of the proceeds we receive from these purchases will be placed in the trust account. The insider warrants will be identical to the warrants underlying the units being offered by this prospectus except that the insider warrants will be exercisable on a cashless basis and will not redeemable by us so long as they are still held by the purchasers or their affiliates. Each of the purchasers have agreed, pursuant to the agreements, that he will not sell or transfer the insider warrants (except to an affiliate of such purchaser, to relatives and trusts for estate planning purposes, or to our directors at the same cost per warrant originally paid by them) until the later of , 2008 [one year from the date of this prospectus] and 60 days after the consummation of our business combination. The price per share for the insider warrants was determined based on a survey of recently completed initial public offerings of blank check companies in which management of the issuers were purchasing warrants or units simultaneously with the completion of the offering in a private placement. Purchase Option We have agreed to sell to the representative of the underwriters an option for $100 to purchase up to a total of 700,000 units at a per unit price of $10.00. The units issuable upon exercise of this option are identical to those offered by this prospectus. For a more complete description of the purchase option, see the section below entitled Underwriting Purchase Option. In no event will we be required to net cash settle this option or the underlying warrants. Dividends We have not paid any cash dividends on our common stock to date and do not intend to pay cash dividends prior to the completion of a business combination. The payment of cash dividends in the future will be dependent upon our revenues and earnings, if any, capital requirements and general financial condition subsequent to completion of a business combination. The payment of any dividends subsequent to a business combination will be within the discretion of our then board of directors. It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, our board does not anticipate declaring any dividends in the foreseeable future. Our Transfer Agent and Warrant Agent The transfer agent for our securities and warrant agent for our warrants is Continental Stock Transfer Trust Company. Table of Contents American Stock Exchange Listing There is presently no public market for our units, common stock or warrants. The units have been approved for listing on the American Stock Exchange under the symbol TMI.U on or promptly after the date of this prospectus. Once the securities comprising the units begin separate trading, we anticipate that the common stock and warrants will be listed on the American Stock Exchange under the symbols TMI and TMI.WS, respectively. Shares Eligible for Future Sale Immediately after this offering, we will have 11,250,000 shares of common stock outstanding, or 12,600,000 shares if the over-allotment option is exercised in full. Of these shares, the 9,000,000 shares sold in this offering, or 10,350,000 shares if the over-allotment option is exercised, will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by one of our affiliates within the meaning of Rule 144 under the Securities Act. All of the remaining shares are restricted securities under Rule 144, in that they were issued in private transactions not involving a public offering. None of those shares would be eligible for sale under Rule 144 prior to [ ], 2008. However, as described below, the Securities and Exchange Commission has taken the position that these securities would not be eligible for transfer under Rule 144. Furthermore, all of those shares have been placed in escrow and will not be transferable for a period of one year from the consummation of our initial business combination and will be released prior to that date only if, following a business combination, (i) the last sales price of our common stock equals or exceeds $11.50 per share for any 20 trading days within any 30-trading day period or (ii) we consummate a subsequent liquidation, merger, stock exchange or other similar transaction which results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property. Rule 144 In general, under Rule 144 as currently in effect, a person who has beneficially owned restricted shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of either of the following: 1% of the number of shares of common stock then outstanding, which will equal 112,500 shares immediately after this offering (or 126,000 if the over-allotment option is exercised in full); and the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales under Rule 144 are also limited by manner of sale provisions and notice requirements and to the availability of current public information about us. Rule 144(k) Under Rule 144(k), a person who is not deemed to have been one of our affiliates at the time of or at any time during the three months preceding a sale, and who has beneficially owned the restricted shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell their shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. SEC Position on Rule 144 Sales The Securities and Exchange Commission has taken the position that promoters or affiliates of a blank check company and their transferees, both before and after a business combination act as underwriters under the Securities Act when reselling the securities of a blank check company acquired prior to the consummation of its initial public offering. Accordingly, the Securities and Exchange Commission believes that those securities can be resold only through a registered offering and that Rule 144 would not be available for those resale transactions despite technical compliance with the requirements of Rule 144. Table of Contents Registration Rights The holders of our initial shares issued and outstanding on the date of this prospectus, as well as the holders of the insider warrants (and underlying securities), will be entitled to registration rights pursuant to an agreement to be signed prior to or on the effective date of this offering. The holders of the majority of these securities are entitled to make up to two demands that we register such securities. The holders of the majority of the initial shares can elect to exercise these registration rights at any time commencing on the date on which these shares of common stock are to be released from escrow. The holders of a majority of the insider warrants (or underlying securities) can elect to exercise these registration rights at any time after we consummate a business combination. In addition, the holders have certain piggy-back registration rights with respect to registration statements filed subsequent to our consummation of a business combination. We will bear the expenses incurred in connection with the filing of any such registration statements. Table of Contents UNDERWRITING In accordance with the terms and conditions contained in the underwriting agreement, we have agreed to sell to each of the underwriters named below, and each of the underwriters, for which Pali Capital, Inc. is acting as representative, has individually agreed to purchase on a firm commitment basis the number of units set forth opposite its name below: Number of Underwriter Units Pali Capital, Inc. Maxim Group LLC Total 9,000,000 A copy of the underwriting agreement has been filed as an exhibit to the registration statement of which this prospectus forms a part. Pricing of Securities We have been advised by the representative that the underwriters propose to offer the units to the public at the offering price set forth on the cover page of this prospectus. They may allow some dealers concessions not in excess of $[ ] per unit. Prior to this offering there has been no public market for any of our securities. The public offering price of the units and insider warrants and the terms of the warrants were negotiated between us and the representative. Factors considered in determining the prices and terms of the units, including the common stock and warrants underlying the units, and the insider warrants include: the history and prospects of companies whose principal business is the acquisition of other companies; prior offerings of those companies; our prospects for acquiring an operating business at attractive values; our capital structure; an assessment of our management and their experience in identifying operating companies; our belief that the aggregate gross proceeds raised in this offering will be sufficient to complete a desirable acquisition; general conditions of the securities markets at the time of the offering; and other factors as were deemed relevant. In consultation with our underwriters, we determined the size of this offering based on our beliefs concerning the capital that could be successfully raised given market conditions, our company s business, our management team and other factors. With an equity base equivalent to the net proceeds of this offering and the private placement, and with access to the revolving line of credit, we believe we will have the ability to consider a broad range of potential target businesses possessing the scale of operations and developed infrastructure that will allow us to execute a business plan which will leverage our skills and resources. The determination of the offering price of our units and the valuation accorded to our company is more arbitrary than the pricing of securities for or valuation of, operating companies in general since the underwriters are unable to compare our financial results and prospects with those of public companies operating in the same industry. Over-Allotment Option We have granted to the representative an option, exercisable during the 45-day period commencing on the date of this prospectus, to purchase from us at the offering price, less underwriting discounts, up to an aggregate of 1,350,000 additional units for the sole purpose of covering over-allotments, if any. The over-allotment option will only be used to cover the net syndicate short position resulting from the initial distribution. The representative may exercise the over-allotment option if the underwriters sell more units than the total number set forth in the table above. Purchase Option We have agreed to sell to the representative of the underwriters, for $100, an option to purchase up to a total of 700,000 units. The units issuable upon exercise of this option are identical to those offered by this prospectus. This option is exercisable at $10.00 per unit, and may be exercised on a cashless basis, commencing on the later of the consummation of a business combination and one year from the date of this prospectus and expiring five years from the date of this prospectus. Table of Contents The option and the 700,000 units, the 700,000 shares of common stock and the 700,000 warrants underlying such units, and the 700,000 shares of common stock underlying such warrants, have been deemed compensation by the NASD and are therefore subject to a 180-day lock-up pursuant to Rule 2710(g)(1) of the NASD Conduct Rules. The underwriters will not sell, transfer, assign, pledge, or hypothecate this option or the securities underlying this option, nor will they engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of this option or the underlying securities for a period of 360 days from the effective date of this prospectus. We estimate that the value of the representative s unit purchase option is $2,205,000 using a Black-Scholes option pricing model. The fair value of the representative s unit purchase option is estimated as of the date of the grant using the following assumptions: (1) expected volatility of 45.2%, (2) risk-free discount rate of 4.95%, (3) contractual life of five years and (4) dividend rate of zero. Additionally, the option may not be sold, transferred, assigned, pledged or hypothecated for a one-year period (including the foregoing 180-day period) following the date of this prospectus except to any underwriter and selected dealers participating in the offering and their bona fide officers or partners. Although the purchase option and its underlying securities have been registered under the registration statement of which this prospectus forms a part, the option grants to holders demand and piggy back rights for periods of five and seven years, respectively, from the date of this prospectus with respect to the registration under the Securities Act of the securities directly and indirectly issuable upon exercise of the option. We will bear all fees and expenses attendant to registering the securities, other than underwriting commissions which will be paid for by the holders themselves. The exercise price and number of units issuable upon exercise of the option may be adjusted in certain circumstances including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. However, the option will not be adjusted for issuances of common stock at a price below its exercise price. Commissions and Discounts The following table shows the public offering price, underwriting discount to be paid by us to the underwriters and the proceeds, before expenses, to us. This information assumes either no exercise or full exercise by the representative of the underwriters of its over-allotment option. Per Without With Unit Option Option Public offering price $ 8.00 $ 72,000,000 $ 82,800,000 Discount $ 0.56 $ 5,040,000 $ 5,796,000 Proceeds before expenses $ 7.44 $ 66,960,000 $ 77,004,000 No discounts or commissions will be paid on the sale of the insider warrants. The above table does not include the fair value of the unit purchase option we have agreed to sell to the representative, which, based upon a Black Scholes model, on the date of sale would be approximately $2,205,000 using an expected life of five years, volatility of 45.2% and a risk-free interest rate of 4.95%. We have agreed to reimburse the underwriters for up to $10,000 of expenses incurred by them in connection with the investigative background search as part of their due diligence of our management. This expense reimbursement will be deemed additional compensation under NASD Rule 2710. Regulatory Restrictions on Purchase of Securities Rules of the SEC may limit the ability of the underwriters to bid for or purchase our units before the distribution of the units is completed. However, the underwriters may engage in the following activities in accordance with the rules: Stabilizing Transactions. The underwriters may make bids or purchases for the purpose of preventing or retarding a decline in the price of our units, as long as stabilizing bids do not exceed the offering price of $8.00. Over-Allotments and Syndicate Coverage Transactions. The underwriters may create a short position in our units by selling more of our units than are set forth on the cover page of this prospectus. If the underwriters create a short position during the offering, the representative may engage in syndicate covering transactions by purchasing our units in the open market. The representative may also elect to reduce any short position by exercising all or part of the over-allotment option. Penalty Bids. The representative may reclaim a selling concession from a syndicate member when the units originally sold by the syndicate member are purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. Stabilization and syndicate covering transactions may cause the price of our securities to be higher than they would be in the absence of these transactions. The imposition of a penalty bid might also have an effect on the prices of our securities if it discourages resales of our securities. Table of Contents Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the price of our securities. These transactions may occur on the American Stock Exchange, in the over-the-counter market or on any trading market. If any of these transactions are commenced, they may be discontinued without notice at any time. The restricted period under Regulation M for this offering will have ended when all of the units have been distributed and after any over-allotment and stabilization arrangements and trading restrictions in connection with the offering have been terminated. Other Terms Although we are not under any contractual obligation to engage the underwriters to provide any services for us after this offering, and have no present intent to do so, the underwriters may, among other things, introduce us to potential target businesses or assist us in raising additional capital, as needs may arise in the future. If the underwriters provide services to us after this offering, we may pay such underwriters fair and reasonable fees that would be determined at that time in an arm s length negotiation; provided that no agreement will be entered into with the underwriters and no fees for such services will be paid to the underwriters prior to the date which is 90 days after the date of this prospectus, unless the National Association of Securities Dealers determines that such payment would not be deemed underwriter s compensation in connection with this offering. Indemnification We have agreed to indemnify the underwriters against some liabilities, including civil liabilities under the Securities Act, or to contribute to payments the underwriter may be required to make in this respect. LEGAL MATTERS Morrison Cohen LLP, New York, New York, is acting as counsel in connection with the registration of our securities under the Securities Act of 1933, and as such, will pass upon the validity of the securities offered in this prospectus. Kramer Levin Naftalis Frankel LLP, New York, New York, is acting as counsel for the underwriters in this offering. EXPERTS The financial statements as of May 31, 2007 and for the period then ended included in this prospectus and in the registration statement have been audited by Goldstein Golub Kessler LLP, an independent registered public accounting firm, to the extent and for the period set forth in their report appearing elsewhere in this prospectus and in the registration statement. The financial statements and the report of Goldstein Golub Kessler LLP are included in reliance upon their report given upon the authority of Goldstein Golub Kessler LLP as experts in auditing and accounting. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the SEC a registration statement on Form S-1, which includes exhibits, schedules and amendments, under the Securities Act, with respect to this offering of our securities. Although this prospectus, which forms a part of the registration statement, contains all material information included in the registration statement, parts of the registration statement have been omitted as permitted by rules and regulations of the SEC. We refer you to the registration statement and its exhibits for further information about us, our securities and this offering. The registration statement and its exhibits, as well as our other reports filed with the SEC, can be inspected and copied at the SEC s public reference room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information about the operation of the public reference room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a web site at http://www.sec.gov which contains the Form S-1 and other reports, proxy and information statements and information regarding issuers that file electronically with the SEC. Table of Contents PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The estimated expenses payable by us in connection with the offering described in this registration statement (other than the underwriting discount and commissions) will be as follows: SEC Registration Fee 5,300 NASD filing fee 17,758 American Stock Exchange filing and listing fee 80,000 Accounting fees and expenses 65,000 Printing and engraving expenses 50,000 Legal fees and expenses 250,000 Miscellaneous 131,942 Total $ 600,000 Item 14. Indemnification of Directors and Officers. Our certificate of incorporation provides that all directors, officers, employees and agents of the registrant shall be entitled to be indemnified by us to the fullest extent permitted by Section 145 of the Delaware General Corporation Law. Section 145 of the Delaware General Corporation Law concerning indemnification of officers, directors, employees and agents is set forth below. Section 145. Indemnification of officers, directors, employees and agents; insurance. (a) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the person s conduct was unlawful. (b) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys fees) actually and reasonably incurred by such person in connection therewith. (d) Any indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth II-1 Table of Contents in subsections (a) and (b) of this section. Such determination shall be made, with respect to a person who is a director or officer at the time of such determination, (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders. (e) Expenses (including attorneys fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including attorneys fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the corporation deems appropriate. (f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person s official capacity and as to action in another capacity while holding such office. (g) A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person s status as such, whether or not the corporation would have the power to indemnify such person against such liability under this section. (h) For purposes of this section, references to the corporation shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. (i) For purposes of this section, references to other enterprises shall include employee benefit plans; references to fines shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to serving at the request of the corporation shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner not opposed to the best interests of the corporation as referred to in this section. (j) The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (k) The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. The Court of Chancery may summarily determine a corporation s obligation to advance expenses (including attorneys fees). Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers, and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment of expenses incurred or paid by a director, officer or controlling person in a successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to the court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-2 Table of Contents Exhibit No. Description 5 .1 Form of Opinion of Morrison Cohen LLP.* 10 .1 Form of Letter Agreement among the Registrant, Pali Capital, Inc. and Theodore S. Green.* 10 .2 Form of Letter Agreement among the Registrant, Pali Capital, Inc. and Malcolm Bird.* 10 .3 Form of Letter Agreement among the Registrant, Pali Capital, Inc. and Jonathan F. Miller.* 10 .4 Form of Letter Agreement among the Registrant, Pali Capital, Inc. and John W. Hyde.* 10 .5 Form of Letter Agreement among the Registrant, Pali Capital, Inc., the Sara Green 2007 GST Trust and Jeffrey Bolson, as Trustee.* 10 .6 Form of Letter Agreement among the Registrant, Pali Capital, Inc., the Blair Green 2007 GST Trust and Jeffrey Bolson, as Trustee.* 10 .7 Form of Letter Agreement among the Registrant, Pali Capital, Inc. and the John W. Hyde Living Trust.* 10 .8 Form of Investment Management Trust Agreement between Continental Stock Transfer Trust Company and the Registrant.* 10 .9 Form of Securities Escrow Agreement between the Registrant, Continental Stock Transfer Trust Company and the Existing Stockholders.* 10 .10 Form of Administrative Service Agreement among Theodore S. Green, Malcolm Bird and the Registrant.* 10 .11 Promissory Note issued to Theodore S. Green.* 10 .12 Form of Registration Rights Agreement among the Registrant and the Existing Stockholders.* 10 .13 Private Placement Purchase Agreement between the Registrant and Theodore S. Green.* 10 .14 Private Placement Purchase Agreement between the Registrant and Malcolm Bird.* 10 .15 Private Placement Purchase Agreement between the Registrant and Jonathan F. Miller.* 10 .16 Private Placement Purchase Agreement between the Registrant and the John W. Hyde Living Trust.* 10 .17 Form of Agreement between Theodore S. Green and Malcolm Bird.* 14 Form of Code of Ethics.* 23 .1 Consent of Goldstein Golub Kessler LLP. 23 .2 Consent of Morrison Cohen LLP (included in Exhibit 5.1).* 99 .1 Form of Audit Committee Charter.* 99 .2 Form of Nominating Committee Charter.* 99 .3 Form of Compensation Committee Charter.* * Previously filed. Item 17. Undertakings. (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the Calculation of Registration Fee table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 Table of Contents (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) That for the purpose of determining any liability under the Securities Act of 1933 in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: (i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; (ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; (iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and (iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. (b) The undersigned hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (d) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 Table of Contents SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 12th day of October, 2007. TM ENTERTAINMENT AND MEDIA, INC. By: /s/ Theodore S. Green Name: Theodore S. Green Title: Chairman, Co-Chief Executive Officer and interim Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Name Position Date /s/ Theodore S. Green Theodore S. Green Chairman, Co-Chief Executive Officer, interim Chief Financial Officer and Director (principal executive officer and principal financial and accounting officer) October 12, 2007 /s/ Malcolm Bird* Malcolm Bird Co-Chief Executive Officer and Director (principal executive officer) October 12, 2007 /s/ Jonathan F. Miller* Jonathan F. Miller Director October 12, 2007 /s/ John W. Hyde* John W. Hyde Director October 12, 2007 * Executed by Theodore S. Green as attorney in fact. II-6 Table of Contents The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, October 12, 2007 Preliminary Prospectus $72,000,000 TM ENTERTAINMENT AND MEDIA, INC. 9,000,000 Units TM Entertainment and Media, Inc. is a newly formed blank check company organized for the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with a domestic or foreign operating business in the entertainment, media, digital or communications industries. We do not have any specific business combination under consideration and we have not (nor has anyone on our behalf) contacted any prospective target business or had any discussions, formal or otherwise, with respect to such a transaction. This is an initial public offering of our securities. Each unit that we are offering has a price of $8.00 and consists of one share of our common stock and one warrant. Each warrant entitles the holder to purchase one share of our common stock at a price of $5.50. Each warrant will become exercisable on the later of our completion of a business combination and , 2008 [one year from the date of this prospectus], and will expire on , 2011 [four years from the date of this prospectus], or earlier upon redemption. We have granted Pali Capital, Inc., the representative of the underwriters, a 45-day option to purchase up to 1,350,000 units (over and above the 9,000,000 units referred to above) solely to cover over-allotments, if any. The over-allotment option will be used only to cover the net syndicate short position resulting from the initial distribution. We have also agreed to sell to Pali Capital, Inc. for $100, as additional compensation, an option to purchase up to a total of 700,000 units at $10.00 per unit. The units issuable upon exercise of this option are identical to those offered by this prospectus. The purchase option and its underlying securities have been registered under the registration statement of which this prospectus forms a part. Our existing stockholders have committed to purchase from us an aggregate of 2,100,000 warrants at a purchase price of $1.00 per warrant (for a total purchase price of $2,100,000) in a private placement that will occur simultaneously with the consummation of this offering. All of the proceeds we receive from the private placement will be placed in the trust account described below. The insider warrants to be purchased by these individuals will be identical to warrants underlying the units being offered by this prospectus except that the insider warrants will be exercisable on a cashless basis and will not be redeemable by us so long as they are still held by the purchasers or their affiliates. The purchasers of the insider warrants have agreed that they will not sell or transfer the insider warrants (except in certain cases) until the later of , 2008 [one year from the date of this prospectus] and 60 days after the consummation of our business combination. There is presently no public market for our units, common stock or warrants. We have been approved for listing on the American Stock Exchange. The units will be listed under the symbol TMI.U on or promptly after the date of this prospectus. Once the securities comprising the units begin separate trading, the common stock and warrants will be listed on the American Stock Exchange under the symbols TMI and TMI.WS, respectively. We cannot assure you that our securities will continue to be listed on the American Stock Exchange. Investing in our securities involves a high degree of risk. See Risk Factors beginning on page 12 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Underwriting Public Discount and Proceeds, Before Offering Price Commissions(1) Expenses, to Us Per Unit $ 8.00 $ 0.56 $ 7.44 Total $ 72,000,000 $ 5,040,000 $ 66,960,000 (1) Of the underwriting discount and commissions, $2,880,000 ($0.32 per unit) is being deferred by the underwriters and will not be payable by us to the underwriters unless and until we consummate a business combination. $69,140,000 of the net proceeds of this offering (including the $2,880,000, or $0.32 per unit, of underwriting discounts and commissions payable to the underwriters in this offering which are being deferred by them until we consummate a business combination), plus the additional aggregate $2,100,000 we will receive from the purchase of the insider warrants simultaneously with the consummation of this offering, for an aggregate of $71,240,000 (or approximately $7.92 per unit sold to the public in this offering), will be deposited into a trust account at HSBC Bank USA, N.A., maintained by Continental Stock Transfer Trust Company acting as trustee. These funds will not be released to us until the earlier of the completion of a business combination and our liquidation (which may not occur until , 2009 [twenty four months from the date of this prospectus]). We are offering the units for sale on a firm-commitment basis. Pali Capital, Inc., the representative of the underwriters, expects to deliver our securities to investors in the offering on or about [ ], 2007. Pali Capital, Inc. Maxim Group LLC , Until [ ], 2007, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. No dealer, salesperson or any other person is authorized to give any information or make any representations in connection with this offering other than those contained in this prospectus and, if given or made, the information or representations must not be relied upon as having been authorized by us. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the securities offered by this prospectus, or an offer to sell or a solicitation of an offer to buy any securities by anyone in any jurisdiction in which the offer or solicitation is not authorized or is unlawful. Table Of Contents Page Prospectus Summary 1
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all the information you should consider before buying our common stock. You should read the following summary together with the more detailed information appearing in this prospectus, including our consolidated financial statements and related notes. You should carefully consider, among other things, the matters discussed in
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+Table of Contents
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+multi-family real estate and commercial business loans are generated by referrals from accountants and other professional contacts. Most of our one- to four-family residential mortgage loan, consumer loan and home equity loan originations are generated by referrals from brokers and automobile dealers participating in our indirect auto loan program, walk-in business and from our internet website. We also advertise extensively throughout our market areas. We decide whether to retain the loans that we originate or sell loans in the secondary market after evaluating current and projected market interest rates, our interest rate risk objectives, our liquidity needs and other factors. We sold $559,000 of residential mortgage loans (all fixed-rate loans, with terms of 15 years or longer) during the year ended December 31, 2006. No loans were sold during the three months ended March 31, 2007. There were no loans held for sale in the secondary market at March 31, 2007. At March 31, 2007, we were servicing loans owned by others with a principal balance of $4.8 million. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent borrowers, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. We retain a portion of the interest paid by the borrower on the loans we service as consideration for our servicing activities. Loan Approval Procedures and Authority. Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by Beacon Federal s Board of Directors. The loan approval process is intended to assess the borrower s ability to repay the loan and value of the property that will secure the loan. To assess the borrower s ability to repay, we review the borrower s employment and credit history and information on the historical and projected income and expenses of the borrower. Beacon Federal s policies and loan approval limits are established by the Board of Directors. Aggregate lending relationships in amounts up to $500,000 that are secured by real estate and in amounts up to $200,000 if unsecured may be approved by specified loan officers. All loans in excess of the individual officer limits must be approved by the Officers Loan Committee, consisting of Beacon Federal s Chief Executive Officer, Senior Vice President and Senior Loan Officer. All loans in excess of the Officers Loan Committee limit ($500,000) must be approved by the Executive Committee of the Board of Directors. All loans that are approved by individual loan officers are reported to the Board of Directors upon closing. We require appraisals by independent, licensed, third-party appraisers of all real property securing loans. All appraisers are approved by the Board of Directors annually. Non-performing and Problem Assets When a loan is 15 days past due, we send the borrower a late charge notice. When the loan is 30 days past due, we mail the borrower a letter reminding the borrower of the delinquency, and we attempt to contact the borrower personally to determine the reason for the delinquency in order to ensure that the borrower understands the terms of the loan and the importance of making payments on or before the due date. If necessary, subsequent late charges and delinquency notices are issued and the account will be monitored on a regular basis thereafter. By the 90th day of delinquency, we will send the borrower a final demand for payment and we may recommend foreclosure. Any of our officers can shorten these time frames in consultation with certain of our executive officers. A summary report of all loans 30 days or more past due is provided to the Board of Directors of Beacon Federal. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 PRE-EFFECTIVE AMENDMENT NO. 2 TO THE FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 BEACON FEDERAL BANCORP, INC. (Exact Name of Registrant as Specified in Its Charter) Maryland 6712 Being applied for (State or Other Jurisdiction of Incorporation or Organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 5000 Brittonfield Parkway East Syracuse, New York 13057 (315) 433-0111 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant s Principal Executive Offices) Mr. Ross J. Prossner President and Chief Executive Officer 5000 Brittonfield Parkway East Syracuse, New York 13057 (315) 433-0111 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) Copies to: Robert B. Pomerenk, Esq. Jonathan H. Talcott, Esq. Robert I. Lipsher, Esq. Lawrence D. Kaplan, Esq. Luse Gorman Pomerenk & Schick, P.C. Nelson Mullins Riley & Scarborough LLP 5335 Wisconsin Avenue, N.W., Suite 400 101 Constitution Avenue, N.W., Suite 900 Washington, D.C. 20015 Washington, D.C. 20001 (202) 274-2000 (202) 712-2806 Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: :x If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o CALCULATION OF REGISTRATION FEE Title of each class of securities to be registered Amount to be registered Proposed maximum offering price per share Proposed maximum aggregate offering price Amount of registration fee SUMMARY 1
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+Prospectus summary This summary highlights selected information contained elsewhere in this prospectus. Because this section is only a summary, it does not contain all of the information that may be important to you or that you should consider before making an investment decision. Before making an investment decision, you should read this entire prospectus, including the information contained in the section entitled Risk Factors. You should read the following summary together with the more detailed information and the consolidated financial statements and the notes thereto included elsewhere in this prospectus. Except as otherwise indicated or required by the context, references in this prospectus to we, us, our, Global Energy or the company refer to the combined businesses of Global Energy, Inc. and its subsidiaries. Our company We are an environmentally focused alternative energy company pursuing clean energy solutions based on gasification technologies. We are utilizing our ownership and operating experience to develop, construct, own and operate gasification facilities, certain of which will employ Integrated Gasification Combined Cycle (IGCC) technology. Gasification facilities cost-effectively convert low-value, solid carbon fuel sources, such as coal, petroleum coke (petcoke) and renewables, into higher value, environmentally cleaner energy sources such as synthetic gas or synthetic natural gas, which is virtually identical to natural gas. IGCC facilities use the SG that is produced through gasification to efficiently produce electricity. Gasification and IGCC technologies represent emerging segments of the energy market. Based on our experience of owning and operating a gasification facility (the Wabash River facility discussed below) and our portfolio of active development projects, we believe that we are the leading gasification and IGCC company in the U.S. and in the U.K. With three major near-term projects in active development, we believe that we have the most advanced portfolio of gasification and IGCC projects in the U.S. and U.K. energy markets. We are one of the first companies in the U.S. to receive the permits necessary to begin construction work on an IGCC facility, which is located in Lima, Ohio. We believe that our Wabash SNG Export project, which is under development at the Wabash River gasification facility in West Terre Haute, Indiana (the Wabash River facility), will be the first new gasification project in the U.S. since 1984 to produce synthetic natural gas from coal for delivery through the natural gas pipeline system. We also believe that our proposed expansion project at the Westfield Development Centre in Fife, Scotland will be one of the first solid feedstock conversion gasification facilities in the U.K. to produce synthetic natural gas and electricity. Upon completion of these three gasification projects as designed, we would have gasification production capacity of approximately 940 MW (a unit equivalent to one million watts of electrical power and used to describe the generating capacity and output of power plants) net of electricity and 63 BCF (a standard measure equivalent to one billion standard cubic feet used to measure the flow of gas, such as synthetic natural gas) per year of synthetic natural gas, which would give us the largest gasification capacity in each of the U.S. and the U.K. based on current production levels. We believe that our prior ownership and operation of the Wabash River facility in the U.S. gives us the unique expertise required for developing, constructing, owning and operating gasification facilities. We have assembled a management team with a combined experience of over 300 years UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents Industry data and other statistical information relating to the energy industry used in this prospectus are based on independent publications, government publications, reports by market research firms or other published independent sources. Some data are also based on our good faith estimates, derived from our review of internal surveys and the independent sources listed above. Unless otherwise indicated, any projections and any information contained in this prospectus relating to or based upon the market prices of commodities, production levels and items of a similar nature are based upon prevailing market prices for such commodities in effect as of the date of this prospectus. A glossary of certain terms used in this prospectus appears beginning on page 162 of this prospectus. Table of Contents in the development, construction, ownership and operation of gasification and other energy facilities. From January 2000 through January 2005, we owned and operated the Wabash River facility, one of only two IGCC facilities in the U.S. according to the U.S. Department of Energy (DOE), and, since that time, we have shared ownership of that facility through a joint venture. During the period that we owned and operated the Wabash River facility, we demonstrated an ability to reduce operating costs, produce clean synthetic gas at competitive costs compared to prevailing market prices for natural gas and increase reliability at the Wabash River facility. The Wabash River facility is one of the world s cleanest coal-based power stations according to the DOE. We also own a gasification demonstration facility in Fife, Scotland at the Westfield Development Centre, which our employees previously operated on behalf of British Gas. We intend to commence commercial operations within the next four years at our three major projects currently in active development: Lima Energy IGCC. Our project in Lima, Ohio is being designed to produce 540 MW net of electricity, 26 BCF per year of synthetic natural gas and six million SCF (a standard unit for natural gas deliveries that refers to a quantity of gas that is one cubic foot by volume) per day of hydrogen. The total annual synthetic gas anticipated output of this facility, if converted on a British thermal unit (Btu) basis to barrels of oil equivalent (BOE), would equal approximately 11 million BOE per year. We refer to this project as the Lima project or Lima Energy IGCC. The Lima project is located on a 63-acre site which we intend to acquire from the City of Lima and will consist of three operating gasifiers and one connected spare gasifier. We expect that approximately half the gasification capacity will produce synthetic gas that will be used as fuel in General Electric (GE) gas turbines to generate electricity while the remaining half of the gasification capacity will produce synthetic gas that will be converted to pipeline quality synthetic natural gas and hydrogen products. We have entered into a ten-year synthetic natural gas purchase and sale agreement with The Procter & Gamble Paper Products Company (P&G), a subsidiary of The Procter & Gamble Company, for six million MMBtu (a measure of heat meaning one million Btus and used to describe output of a particularly large number of Btus such as in the context of the production of synthetic natural gas) of annual synthetic natural gas production at the Lima project. We began construction on the Lima project in October 2005. After we completed the engineering and design work on, and construction of a portion of, the fuel handling facility at the Lima project, on-site construction activities at the facility were paused in October 2006, until we obtain further financing for the Lima project. We expect to restart construction once full financing is in place, which we anticipate will be in the fourth quarter of 2007. Based on the price and completion date set forth in our engineering, procurement and construction (EPC) agreements relating to the Lima project, the Lima project is expected to have project costs of approximately $1.01 billion and is expected to commence commercial operations in the fourth quarter of 2010. Wabash SNG Export. At the Wabash River facility, located in West Terre Haute, Indiana, we have the right to expand and commence commercial operations of an existing gasifier to produce pipeline quality synthetic natural gas. We refer to this project as the Wabash River project or Wabash SNG Export. We have entered into a ten-year agreement with Eagle Energy Partners I, L.P. for the sale of all of the synthetic natural gas that will be produced by Wabash SNG Export. Wabash SNG Export is expected to produce 14 BCF of synthetic natural gas per year. The total annual synthetic gas anticipated output of this facility, if converted on a Btu Amendment No. 3 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents basis to BOE, would equal approximately three million BOE per year. When Wabash SNG Export is operational, we plan to use coal from our own Indiana coal deposits, located approximately two miles from the Wabash River facility, to produce pipeline quality synthetic natural gas. We currently expect to begin construction work on Wabash SNG Export in the fourth quarter of 2007. We have entered into a fast-track EPC contract with a third party which will allow work to progress under a general services arrangement on a time and materials contract basis for Wabash SNG Export and allows us to agree the terms of a fixed price EPC contract with such third party. Based upon our internal estimates with respect to anticipated costs and timing for completion, Wabash SNG Export is expected to have project costs of approximately $280 million and is expected to commence commercial operations in the first quarter of 2010. Westfield project. At the Westfield Development Centre, located in Fife, Scotland, we plan to start operations in two phases consisting of two gasification projects (Fife gasification) and one electric project (Fife electric). We refer to these three phases collectively as the Westfield project. In the first phase, which focuses on Fife gasification, we have begun the design work necessary to recommission our existing gasifier and to add new related equipment and site services. We expect that this gasifier will provide fuel to a gas turbine owned by a third party at the Westfield Development Centre to generate electricity. The second phase, consisting of the further development and completion of Fife gasification and the development of Fife electric, is expected to add seven new gasifiers, each utilizing coal and renewable feedstock, and a new 400 MW net IGCC facility at the site. The Westfield project is expected to produce 23 BCF of synthetic natural gas per year. The total annual synthetic gas anticipated output of the Westfield project, if converted on a Btu basis to BOE, would equal approximately ten million BOE per year. We expect that the gas turbines to be used by Fife electric will be fueled by the synthetic gas produced by the increased gasification capacity resulting from the installation of the seven new gasifiers in connection with Fife gasification. The Westfield project is expected to have project costs of approximately $890 million. We have entered into a fast-track EPC contract with a third party which will allow work to progress under a general services arrangement on a time and materials contract basis for the Westfield project and allows us to agree the terms of a fixed price EPC contract with such third party. Based upon our internal estimates with respect to anticipated costs and timing for completion, the two gasification projects are expected to commence commercial operations following completion of the first and second phases in the third quarter of 2008 and the second quarter of 2010, respectively. In addition, following the completion of these three major projects, we intend to complete the development and construction of a second, large gasification facility in the Lima, Ohio area and the development and construction of a large gasification facility to be located near a 712 million in-place ton coal deposit in Wyoming to which we acquired the rights pursuant to the assignment of several leases from the State of Wyoming in 2005 and 2007. To support our development and construction plans, we have developed several strategic alliances including the following: Shaw/Stone & Webster (SS&W), who will be our preferred provider of EPC services for projects where we do not provide our own EPC services and pipes/vessels to our facilities, as well as our partner in developing future gasification technologies; Table of Contents Oxbow Carbon & Minerals (Oxbow), who will be our preferred provider of petcoke and other feedstock to our facilities; HTC Purenergy, who will provide carbon dioxide (CO2) management advisory services, including CO2 sequestration and enhanced oil recovery services at our facilities, to offset emissions through storage of CO2 in underground formations in commercial proximity to these facilities; and Porvair Filtration Group (Porvair), from whom we expect to purchase all of our requirements for synthetic gas filters for certain entrained flow gasification technology projects and any filter-related equipment required with respect to such synthetic gas filters that Porvair or its affiliates manufacture and agree to supply. Gasification and IGCC technologies Gasification and IGCC are well-established technologies that represent emerging alternative technologies for the natural gas, electricity and transportation fuels markets. Gasification has been in commercial use for more than 50 years around the world, according to the National Energy Technology Laboratory. We believe that gasification products, such as synthetic gas or synthetic natural gas, represent attractive economic alternatives to the historically high and volatile costs of liquid and gas-based fuel sources, particularly natural gas. In addition to this economic advantage, we believe that synthetic gas and synthetic natural gas are alternative energy products that address the current environmental concerns associated with traditional carbon-based fuel sources, particularly coal. Gasification technology is flexible and has consistently been able to efficiently convert several different low value hydrocarbon fuel sources, such as coal, petcoke and renewables, into various higher value fuels including synthetic gas, synthetic natural gas, transportation fuels and hydrogen, which are environmentally superior fuel sources compared to the original hydrocarbon fuels. We believe that the most significant application of gasification is the conversion of coal and petcoke into synthetic gas or synthetic natural gas at costs that compare favorably to current market prices for natural gas. The price of solid hydrocarbons such as coal, on a Btu basis, has historically been considerably lower and less volatile than the price of natural gas. We believe that the conversion of coal into synthetic gas to produce electricity provides cost advantages over electricity generated by natural gas and will be cost competitive with traditionally sourced coal-fired power generation, especially low-sulfur coal. The environmental benefits of gasification result from the capability to produce energy with extremely low sulfur oxides (SOx), nitrogen oxides (NOx) and particulate emissions compared to burning coal and other solid fuels. In addition, we believe that the ability to convert coal into synthetic natural gas in the gasification process results in a fuel source with the environmental qualities of natural gas. Gasification by definition is a closed system with minimal air emissions during normal operation. We believe that gasification offers a further potential environmental advantage in addressing current concerns over the atmospheric buildup of greenhouse gases such as CO2. Using the gasification process, CO2 can be separated and captured efficiently for use in enhanced oil recovery (EOR) projects or carbon sequestration, when commercially proven techniques for carbon sequestration are fully developed by research programs. The 2004 World Gasification Survey indicates that existing world gasification capacity grew to 45,001 MWth of synthetic gas output in 2004. This capacity is equivalent to more than 25,000 312 Walnut Street, Suite 2300 Cincinnati, Ohio 45202 (513) 621-0077 (Address, including zip code, and telephone number, including area code, of Registrant s principal executive office) Table of Contents MW net of electricity according to the DOE. The DOE also states, The reason for this long-term and continuing growth is clear: modern, high temperature slagging gasifiers have the ability to convert low value feedstocks into higher value products chemicals, fuels and electricity while meeting the most demanding environmental standards for air emissions, solids, water use and CO2 removal from the product gas. We also believe that gasification will benefit from the abundant supply of coal and other feedstock around the world and can serve as a large-scale energy supply solution. We believe that due to gasification s broad and dynamic matrix of potential inputs and outputs, flexibility to use worldwide abundant feedstock, potential environmental benefits compared to other energy production methods and status as a proven and established process, we will be provided with a wide range of business opportunities and the flexibility to maximize value in an environment of high and volatile commodity prices. Our markets We intend to sell synthetic natural gas into the natural gas market and electricity into the power market. Natural gas is used primarily as a fuel to produce chemicals, to generate electricity and to heat buildings. In recent years, the U.S. natural gas industry has been characterized by a steady increase in demand and consumption coupled with a widening gap between production and consumption, which has resulted in increased importation of natural gas into the U.S. The U.S. Energy Information Administration (EIA) estimates that consumption of natural gas in the U.S. will increase from approximately 22.0 trillion cubic feet (tcf) per year in 2005 to a peak of approximately 26.3 tcf per year in 2020, while production will only increase from approximately 18.3 tcf per year to approximately 20.9 tcf per year over the same period. In addition, according to the EIA, total electricity consumption in the U.S. is projected to grow by 43% from approximately 3,821 billion kilowatt hours in 2005 to approximately 5,478 billion kilowatt hours in 2030. Furthermore, according to the EIA s International Energy Outlook 2007, worldwide marketed energy consumption is projected to increase by 57% from 2004 to 2030. Within this projection, worldwide natural gas consumption is anticipated to grow 64% from 2004 to 2030 from 99.6 tcf per year in 2004 to 163.2 tcf per year in 2030, and worldwide net electricity generation is anticipated to increase 85% from 2004 to 2030 from approximately 16,424 billion kilowatt hours in 2004 to approximately 30,364 billion kilowatt hours in 2030. We believe that this anticipated growth in demand requires significant investment in additional facilities for power generation and supplies of natural gas, including gasification and IGCC facilities. In the U.S., in order to meet this increasing demand, the EIA anticipates that 156 gigawatts of coal-fired power plants will be required from 2005 through 2030, including an anticipated 67 gigawatts of newly constructed IGCC facilities. We believe that additional demand for clean, cost-effective power generation, including renewable power and other technologies, will result from clean air legislation, environmental regulations and concerns about rising levels of greenhouse gases. H. H. Graves President and Chief Executive Officer 312 Walnut Street, Suite 2300 Cincinnati, Ohio 45202 (513) 621-0077 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents Our competitive strengths We believe the gasification and IGCC technologies we intend to employ and our operational experience, technical expertise and strategic alliances give us several potential competitive strengths in the natural gas and electricity markets, including the following: Our management team has significant expertise in the ownership and operation of gasification facilities, has been instrumental in the advancement of gasification and IGCC technologies and has over 300 years of combined experience in the development, construction, ownership and operation of gasification and other energy facilities. We have an advanced portfolio of gasification and IGCC projects in the U.S. and the U.K. We are one of the first companies in the U.S. to receive the permits necessary to begin construction work on an IGCC facility (Lima Energy IGCC). Our gasification and IGCC facilities will use proven technologies. Our gasification facilities are being designed to produce synthetic natural gas that we believe will provide cost advantages over traditionally sourced natural gas. Our IGCC facilities are being designed to produce electricity at costs that we expect will be advantageous compared with the costs of electricity generated by natural gas-fired plants and competitive with the costs of electricity produced by coal-fired plants. Our gasification facilities are being designed to produce environmentally superior fuels (synthetic gas and synthetic natural gas) compared to coal, while our IGCC facilities are being designed to significantly reduce emissions of pollutants and control those pollutants that our facilities do emit. Our gasification and IGCC facilities are being designed to flexibly convert a broad and dynamic range of fuel sources, including renewables, into a variety of different fuel outputs. Our gasification and IGCC facilities are being designed to run on a variety of abundant global resources, such as coal, petcoke and renewables. Our gasification and IGCC facilities are being designed to have a total annual synthetic gas anticipated output equal to approximately 112 million BOE if converted on a Btu basis. We currently have mineral rights to approximately 783 million in-place tons of coal deposits in Wyoming and Indiana. We have entered into several strategic alliances that will support our development and construction plans. Our projects are being designed to allow us in the future to implement technology to separate and isolate carbon dioxide (CO2). While U.S. federal government regulation is supportive of gasification and IGCC technology, we do not anticipate requiring government subsidies to execute our business strategy. Copies to: Jonathan B. Abram, Esq. Dorsey & Whitney LLP 50 South Sixth Street Minneapolis, Minnesota 55402 (612) 340-2600 Fax: (612) 340-2868 Jeffrey J. Delaney, Esq. Pillsbury Winthrop Shaw Pittman LLP 1540 Broadway New York, New York 10036 (212) 858-1292 Fax: (212) 858-1500 Table of Contents Our business strategy Our goal is to be the worldwide leader in the development, construction, ownership and operation of environmentally responsible gasification and IGCC facilities. In order to achieve this goal, we are pursuing the following business strategies: We intend to operate our facilities in an environmentally responsible manner. We intend to focus on the completion of the three major gasification projects currently in active development, which we intend to begin operating within the next four years. We plan to finance each of our projects through a mix of equity and debt, which will consist primarily of project-specific non-recourse debt using the assets of our projects to secure such debt. We plan to enter into long-term offtake agreements (agreements for the purchase of a product by a customer from a producer and particularly common in the energy industry where power and gas are bought and sold) for a sufficient portion of the output from each project to support project-specific debt while selling the remainder of the output, if any, in retail and wholesale markets to take advantage of prevailing energy commodity prices. We intend to leverage the energy facility expertise of our management team to efficiently bring our projects to commercial operation. We intend to leverage our fuel sourcing capabilities to efficiently capitalize on the fuel flexibility of our projects. We intend to expand our product offerings over time to capitalize on the conversion flexibility of our gasification facilities. We intend to expand our existing strategic alliances and enter into new strategic alliances to support our capabilities in areas such as development, construction, fuel sourcing and product marketing. In the long term, we intend to develop, construct, own and operate additional gasification and IGCC facilities, including large scale gasification facilities to produce synthetic natural gas, electricity and other products. Risks affecting us In operating our business we have faced and will continue to face significant challenges. Our ability to successfully operate our business, and execute our development and construction plan, is subject to numerous risks, as discussed more fully in the section entitled Risk Factors. Among the risks and uncertainties that face our business are the following: we have a limited history of operations and we do not currently directly operate a gasification facility; we may be unable to complete our projects presently under development and construction; we may not be able to achieve our planned schedules and budgets for our projects presently under development; we may be unable to produce our currently anticipated output at our proposed gasification and IGCC projects; Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Table of Contents we have incurred operating losses and negative cash flows since our inception, we anticipate that we will continue to incur increasing losses for the foreseeable future and in its report on our consolidated financial statements, our independent registered public accounting firm has included an explanatory paragraph describing conditions that raise substantial doubt about our ability to continue as a going concern; we may be unable to raise the substantial additional capital required by our development and construction plan; we or our project companies may be unable to meet the debt service requirements of the financing arrangements used to finance our projects; we are subject to increased construction risk as a result of our wholly-owned subsidiary acting as our main EPC contractor with respect to EPC arrangements at Lima Energy IGCC; we may be unable to obtain or maintain the regulatory permits, approvals and consents required to construct and commence commercial operations at our projects; we may be unable to obtain feedstock for our projects at acceptable prices; we may be unable to enter into acceptable offtake agreements due to fluctuations in natural gas prices and other energy commodity prices; we may be unable to sell our end-products at favorable prices or at all if market acceptance of gasification and IGCC technologies and processes does not continue to increase or the price of natural gas decreases; we may be unable to protect the confidentiality of sensitive information and know-how; we will need to hire, retain and integrate key executive officers and skilled technical and field personnel; and we may be adversely affected by existing and future U.S. and U.K. governmental regulation and energy policies. Any of the above risks could have a material adverse effect on our business, financial condition, prospects and results of operations. An investment in our common stock involves risks. You should read and consider the information set forth in the section entitled Risk factors and all other information set forth in this prospectus before investing in our common stock. Our corporate information We were incorporated in Ohio in October 1988. Our principal executive offices are located at 312 Walnut Street, Suite 2300, Cincinnati, Ohio, 45202, and our telephone number is (513) 621-0077. Our website address is www.globalenergyinc.com. The information on, or that may be accessed through, our website is not incorporated by reference into this prospectus and should not be considered a part of this prospectus. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Table of Contents The offering Common stock offered by Global Energy shares Common stock to be outstanding immediately after this offering shares Over-allotment option shares Use of proceeds We expect to receive net proceeds from this offering of approximately $ million (or approximately $ million assuming exercise of the underwriters over-allotment option in full). We intend to use, (1) approximately $ million to repay indebtedness, including certain indebtedness that is currently overdue, and additional interest and certain remaining accrued interest on indebtedness repaid late, (2) approximately $ million of the net proceeds to pay accrued salaries, wages and bonuses to certain members of our senior management team, (3) approximately $ million to fund the purchase price of certain shares of our common stock which we expect to be required to purchase upon the closing of this offering from one of our shareholders, (4) approximately $ million of the net proceeds to fund project costs and (5) the remainder of the net proceeds for the addition of new employees and services to meet the demands of growth in a public company environment, working capital and general corporate purposes, including future gasification and IGCC projects. See Use of proceeds. Proposed Nasdaq Global Market symbol GEGT
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider in making your investment decision. You should read this summary together with the more detailed information, including our financial statements and the related notes, elsewhere in this prospectus.
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+This summary only highlights the more detailed information appearing elsewhere in this prospectus. As this is a summary, it does not contain all of the information that you should consider in making an investment decision. You should read this entire prospectus carefully, including the information under "Risk Factors" and our financial statements and the related notes included elsewhere in this prospectus, before investing. References in this prospectus to "we," "us" or "our company" refer to Hicks Acquisition Company I, Inc. References in this prospectus to "public stockholders" refer to those persons that purchase the securities offered by this prospectus and our initial stockholders (as defined below) to the extent our initial stockholders purchase these securities either in this offering or afterwards, provided that each initial stockholder's status as a "public stockholder" shall only exist with respect to those securities so purchased in this offering. References in this prospectus to our "management" or our "management team" refer to our officers and directors and references to our "sponsor" refer to HH-HACI, L.P., a Delaware limited partnership. References to our "initial stockholders" refer to our sponsor, William H. Cunningham, William A. Montgomery, Brian Mulroney and William F. Quinn. Unless we tell you otherwise, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option. General We are a newly organized blank check company formed under the General Corporation Law of the State of Delaware, for the purpose of acquiring, or acquiring control of, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination one or more businesses or assets. We have not identified any acquisition target and we have not, nor has anyone on our behalf, initiated any substantive discussions with an entity that we will acquire in our initial business combination. Our efforts in identifying prospective target businesses will not be limited to a particular industry, but we will not enter into a business combination with any entity engaged in the energy industry as its principal business or whose principal business operations are conducted outside of the United States or Canada. We will seek to capitalize on the significant investing experience of our management team, including the 35 years of private equity expertise of Thomas O. Hicks, our founder and chairman of the board. Since 2005, Mr. Hicks has served as the chairman of Hicks Holdings LLC, a holding company for sports, real estate and private equity investments of Mr. Hicks and his family, including the National Hockey League's Dallas Stars, purchased in December 1995, Major League Baseball's Texas Rangers, acquired in June 1998, and a 50% interest in the English Premier League's Liverpool Football Club, acquired in March 2007. Hicks Holdings is also the controlling shareholder of Latrobe Specialty Steel Company, a specialty steel manufacturer. Its other corporate holdings include DirecPath, a company that provides bundled DIRECTV programming, broadband voice and data services, security and other locally based services to multiple dwelling units across the United States, Ocular LCD, a designer, manufacturer and marketer of high-performance liquid crystal displays, modules and systems, Berkshire Resources, a gas and oil exploration company, Grupo Pilar, an animal and pet food company in Argentina, SafeMed, a provider of decision support systems for healthcare professionals and River City Landscape Supply, a provider of bulk and bagged mulches, soils and decorative rocks. Hicks Holdings also holds approximately 20% of the equity of Greatwide Logistics Services, a U.S. non-asset based provider of dedicated transportation, third-party logistics, warehouse/distribution and truckload brokerage solutions. Mr. Hicks co-founded Hicks, Muse, Tate & Furst, a nationally prominent private equity firm in the United States that specialized in leveraged acquisitions, and served as chairman from 1989 through 2004. During Mr. Hicks' tenure as Chairman, Hicks Muse raised over $12 billion of private equity funds, consummated over $50 billion of leveraged acquisitions, and was one of the most active private investment firms in the country. Mr. Hicks also co-founded and served as co-chief executive officer of the leveraged buyout firm, Hicks & Haas, from 1984 to 1989. Subject to the requirements that our initial business combination have a fair market value of at least 80% of the initial amount held in a trust account at JP Morgan Chase, N.A. with Continental Stock Transfer & Trust Company, as trustee (excluding deferred underwriting commissions of $12.6 million or approximately $14.5 million if the underwriters' over-allotment option is exercised in full), our management will have virtually unrestricted flexibility in identifying and selecting one or more prospective target businesses. We will only consummate our initial business combination if we will become the controlling stockholder of the target. The key factor we will rely on in determining controlling stockholder status would be our acquisition of more than half of the voting equity interests of the target company. We will not consider any transaction that does not meet such criteria. We have identified the following general criteria and guidelines that we believe are important in evaluating prospective target businesses. We will use these criteria and guidelines in evaluating acquisition opportunities. However, we may decide to enter into a business combination with a target business that does not meet these criteria and guidelines. Established Companies with Proven Track Records. We will seek to acquire established companies with sound historical financial performance. We will typically focus on companies with a history of strong operating and financial results. We do not intend to acquire start-up companies. Companies with Strong Free Cash Flow Characteristics. We will seek to acquire companies that have a history of strong, stable free cash flow generation. We will focus on companies that have predictable, recurring revenue streams and an emphasis on low working capital and capital expenditure requirements. Strong Competitive Industry Position. We will seek to acquire businesses that operate within industries that have strong fundamentals. The factors we will consider include growth prospects, competitive dynamics, level of consolidation, need for capital investment and barriers to entry. Within these industries, we will focus on companies that have a leading or niche market position. We will analyze the strengths and weaknesses of target businesses relative to their competitors, focusing on product quality, customer loyalty, cost impediments associated with customers switching to competitors, patent protection and brand positioning. We will seek to acquire businesses that demonstrate advantages when compared to their competitors, which may help to protect their market position and profitability and deliver strong free cash flow. Experienced Management Team. We will seek to acquire businesses that have strong, experienced management teams. We will focus on management teams with a proven track record of driving revenue growth, enhancing profitability and generating strong free cash flow. We believe that the operating expertise of our officers and directors will complement, not replace, the target's management team. Diversified Customer and Supplier Base. We will seek to acquire businesses that have a diversified customer and supplier base. Companies with a diversified customer and supplier base are generally better able to endure economic downturns, industry consolidation, changing business preferences and other factors that may negatively impact their customers, suppliers and competitors. We anticipate that target business candidates will be brought to our attention from various unaffiliated sources, including investment bankers, venture capital funds, private equity funds, leveraged buyout funds, management buyout funds and other members of the financial community. Target businesses may be brought to our attention by such unaffiliated sources as a result of being solicited by us through calls or mailings. These sources may also introduce us to target businesses they think we may be interested in on an unsolicited basis, since many of these sources will have read this prospectus and know what types of businesses we are targeting. Our officers and directors, as well as their affiliates, may also bring to our attention target business candidates that they become aware of through UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 their business contacts as a result of formal or informal inquiries or discussions they may have, as well as by attending trade shows or conventions. In addition, we expect to receive a number of proprietary deal flow opportunities that would not otherwise necessarily be available to us as a result of the track record and business relationships of Mr. Hicks, our founder and chairman of the board. We have not established any other specific attributes or criteria (financial or otherwise) for prospective target businesses. In evaluating a prospective target business, our management may consider a variety of factors, including one or more of the following: financial condition and results of operations; growth potential; brand recognition and potential; experience and skill of management and availability of additional personnel; capital requirements; stage of development of the business and its products or services; existing distribution arrangements and the potential for expansion; degree of current or potential market acceptance of the products or services; proprietary aspects of products and the extent of intellectual property or other protection for products or formulas; impact of regulation on the business; regulatory environment of the industry; seasonal sales fluctuations and the ability to offset these fluctuations through other business combinations, introduction of new products, or product line extensions; costs associated with effecting the business combination; industry leadership, sustainability of market share and attractiveness of market sectors in which a target business participates; and macro competitive dynamics in the industry within which the company competes. These criteria are not intended to be exhaustive. Any evaluation relating to the merits of a particular initial business combination may be based, to the extent relevant, on the above factors as well as other considerations, factors and criteria our management deems relevant to our business objective. In evaluating a prospective target business, we expect to conduct an extensive due diligence review which will encompass, among other things, meetings with incumbent management and employees, document reviews, interviews of customers and suppliers, inspection of facilities, as well as review of financial and other information which will be made available to us. In order to minimize potential conflicts of interest which may arise from multiple corporate affiliations, each of our officers has agreed, pursuant to a written agreement with us, that until the earliest of our initial business combination, our liquidation or such time as he or she ceases to be an officer, to present to our company for our consideration, prior to presentation to any other entity, any business opportunity with a fair market value of $200 million or more, subject to any pre-existing fiduciary or contractual obligations he or she might have. As more fully discussed in "Management Conflicts of Interest" on page 85, in the event that any of our officers becomes aware of a business combination opportunity that falls within the line of business of any entity to which he or she has pre-existing fiduciary or contractual obligations, he or she may be required to present such business combination opportunity to such entity prior to presenting such business combination opportunity to us. AMENDMENT NO. 4 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Each of our officers, other than Thomas O. Hicks, Jr. and Mack Hicks, currently have certain relevant fiduciary duties or contractual obligations which may take priority over their duties to us. If we do not complete our initial business combination within 24 months after the date of this prospectus and expend all of the net proceeds of this offering, other than the proceeds deposited in the trust account, and without taking into account interest, if any, earned on the trust account, the initial per-share liquidation price would be $9.75, or $0.25 less than the per-unit offering price of $10.00. The per share liquidation price includes approximately $12.6 million in deferred underwriting commissions (or approximately $14.5 million if the underwriters' over-allotment option is exercised in full) that would also be distributable to our public stockholders. Private Placements and Future Purchases of Units On March 1, 2007, our sponsor purchased an aggregate of 10,000,000 units (which were increased to 11,500,000 units as a result of a stock split approved by our board of directors in July 2007), which we refer to as the founder's units throughout this prospectus, for an aggregate purchase price of $25,000, or $0.0025 per unit. Each founder's unit consists of one share of our common stock, which we refer to as a founder's share, and one warrant to purchase one share of our common stock, which we refer to as a founder's warrant. In August 2007, our sponsor transferred an aggregate of 230,000 founder's units to William H. Cunningham, William A. Montgomery, Brian Mulroney and William F. Quinn, each of whom has agreed to serve on our board of directors upon the closing of this offering. We refer to our sponsor and Messrs. Cunningham, Montgomery, Mulroney and Quinn as our initial stockholders throughout this prospectus. The founder's units held by our initial stockholders include an aggregate of 1,500,000 units subject to forfeiture by our initial stockholders to the extent that the underwriters' over-allotment option is not exercised in full, so that our initial stockholders will collectively own 20% of our issued and outstanding shares after this offering (assuming none of our initial stockholders purchase units in this offering). The founder's shares are identical to the shares of common stock included in the units being sold in the offering, except that: (i) the founder's shares will be subject to certain transfer restrictions as described in more detail below, (ii) each of the initial stockholders has agreed to vote the founder's shares in the same manner as the majority of the shares of common stock sold in this offering and voted by our public stockholders in connection with any vote required to approve our initial business combination, (iii) each of the initial stockholders has agreed to vote the founder's shares in favor of an amendment to our amended and restated certificate of incorporation to provide for our perpetual existence in connection with a vote to approve our initial business combination, (iv) each of the initial stockholders has agreed to waive any right to receive a liquidation distribution with respect to the founder's shares in the event we fail to consummate an initial business combination, and (v) our initial stockholders will not be able to exercise conversion rights, as described in this prospectus, with respect to the founder's shares. The founder's warrants are identical to the warrants included in the units being sold in the offering, except that the founder's warrants: (i) will be subject to certain transfer restrictions as described in more detail below, (ii) may not be exercised unless and until the last sale price of our common stock equals or exceeds $13.75 for any 20 days within any 30 trading day period beginning 90 days after our initial business combination and there is an effective registration statement covering the shares of common stock issuable upon exercise of the warrants, (iii) will not be redeemable by us so long as they are held by our initial stockholders or any of their permitted transferees and (iv) may be exercised for cash or on a cashless basis, as described in this prospectus. Our initial stockholders have agreed not to transfer, assign or sell any of the founder's shares or founder's warrants, including the common stock issuable upon exercise of the founder's warrants (except as described below under "Principal Stockholders Transfers of Common Stock and Warrants HICKS ACQUISITION COMPANY I, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 6770 (Primary Standard Industrial Classification Code Number) 20-8521842 (I.R.S. Employer Identification Number) 100 Crescent Court, Suite 1200 Dallas, TX 75201 (214) 615-2300 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) by Our Initial Stockholders and Mr. Hicks"), until 180 days after the completion of our initial business combination. Our sponsor has agreed to purchase an aggregate of 7,000,000 sponsor warrants from us at a price of $1.00 per warrant ($7 million in the aggregate) in a private placement that will occur simultaneously with the consummation of this offering. The $7 million proceeds from the private placement will be added to the proceeds of this offering and placed in a trust account at JP Morgan Chase, N.A. with Continental Stock Transfer & Trust Company as trustee. If we do not complete an initial business combination within 24 months after the date of this prospectus, the $7 million proceeds from the sale of the sponsor warrants will be part of the liquidating distribution to our public stockholders and the sponsor warrants will expire worthless. The sponsor warrants are identical to the warrants included in the units sold in this offering except that the sponsor warrants: (i) will not be redeemable by us so long as they are held by our sponsor or any of its permitted transferees, (ii) will be subject to certain transfer restrictions described in more detail below and (iii) may be exercised for cash or on a cashless basis, as described in this prospectus. Our sponsor has agreed not to transfer, assign or sell any of the sponsor warrants, including the common stock issuable upon exercise of the sponsor warrants (except as described below under "Principal Stockholders Transfers of Common Stock and Warrants by Our Initial Stockholders and Mr. Hicks"), until 180 days after the completion of our initial business combination. Thomas O. Hicks, our founder and chairman of the board, has agreed to purchase, directly or through a controlled affiliate, in a private placement that will occur immediately prior to the consummation of our initial business combination, 2,000,000 units, which we refer to throughout this prospectus as the co-investment units, at a purchase price of $10.00 per unit ($20 million in the aggregate). Each co-investment unit consists of one share of our common stock, which we refer to as a co-investment share, and one warrant to purchase one share of our common stock, which we refer to as a co-investment warrant. The proceeds of the sale of the co-investment units will not be deposited into the trust account and will not be available for distribution to our public stockholders in the event of a liquidation of the trust account or upon conversion of shares held by public stockholders. If Mr. Hicks elects to make the co-investment through an entity, he will, directly or indirectly, control such entity. The co-investment shares and co-investment warrants will be identical to the shares of common stock and warrants included in the units being offered in this offering, except that (i) the co-investment warrants will not be redeemable by us so long as they are held by Mr. Hicks or any relevant controlled affiliate of Mr. Hicks who purchases the co-investment units and (ii) the co-investment shares and the co-investment warrants, including the including the common stock issuable upon exercise of the co-investment warrants, may not be transferred, assigned or sold (except as described below under "Principal Stockholders Transfers of Common Stock and Warrants by Our Initial Stockholders and Mr. Hicks"), until 180 days after the completion of our initial business combination. If the underwriters determine the size of this offering should be increased it could result in a proportionate increase in the amount of interest we may withdraw from the trust account. Assuming a 20% increase in the size of this offering, the per-share conversion or liquidation rate could decrease by as much as approximately $0.02. Our executive offices are located at 100 Crescent Court, Suite 1200, Dallas, Texas, 75201, and our telephone number is (214) 615-2300. Joseph B. Armes c/o Hicks Acquisition Company I, Inc. 100 Crescent Court, Suite 1200 Dallas, TX 75201 (214) 615-2300 (Name, address, including zip code, and telephone number, including area code, of agent for service) (1)This number includes an aggregate of 1,500,000 founder's units held by our initial stockholders (each unit consisting of one share of common stock and one warrant to purchase one share of common stock) that are subject to forfeiture to the extent that the over-allotment option is not exercised by the underwriters. (2)Assumes no exercise of the over-allotment option and the resulting forfeiture of 1,500,000 founder's units (each unit consisting of one share of common stock and one warrant to purchase one share of common stock) held by our initial stockholders. Copies to: Bruce Mendelsohn Akin Gump Strauss Hauer & Feld LLP 590 Madison Avenue New York, New York 10022 (212) 872-1000 (212) 872-1002 Facsimile Floyd I. Wittlin Ann F. Chamberlain Bingham McCutchen LLP 399 Park Avenue New York, NY 10022-4689 (212) 705-7700 (212) 702-3604 Facsimile (1)This number includes an aggregate of 1,500,000 founder's units held by our initial stockholders (each unit consisting of one share of common stock and one warrant to purchase one share of common stock) that are subject to forfeiture to the extent that the over-allotment option is not exercised by the underwriters. (2)Assumes no exercise of the over-allotment option and the resulting forfeiture of 1,500,000 founder's units (each unit consisting of one share of common stock and one warrant to purchase one share of common stock) held by our initial stockholders. Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Redemption Once the warrants become exercisable we may redeem the outstanding warrants (except as described below with respect to the founder's warrants, sponsor warrants, and co-investment warrants): in whole and not in part; at a price of $.01 per warrant; upon a minimum of 30 days' prior written notice of redemption (the "30-day redemption period"); and if, and only if, the last sale price of our common stock equals or exceeds $13.75 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption to the warrant holders. We will not redeem the warrants unless an effective registration statement covering the shares of common stock issuable upon exercise of the warrants is current and available throughout the 30-day redemption period. If we call the warrants for redemption as described above, our management will have the option to require all holders that wish to exercise warrants to do so on a "cashless basis." In such event, each holder would pay the exercise price by surrendering the warrants for that number of shares of common stock equal to the quotient obtained by dividing (x) the product of the number of shares of common stock underlying the warrants, multiplied by the difference between the exercise price of the warrants and the "fair market value" (defined below) by (y) the fair market value. The "fair market value" shall mean the average reported last sale price of the common stock for the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of warrants. None of the founder's warrants will be redeemable by us so long as they are held by our initial stockholders or their permitted transferees, none of the sponsor warrants will be redeemable by us so long as they are held by the sponsor or its permitted transferees, and none of the co-investment warrants will be redeemable by us so long as they are held by Thomas O. Hicks, any relevant controlled affiliate of Mr. Hicks that purchases the co-investment units, or their permitted transferees. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Reasons for redemption limitations We have established the above conditions to our exercise of redemption rights to: provide warrant holders with adequate notice of redemption; permit redemption only after the then-prevailing common stock price is substantially above the warrant exercise price; and ensure a sufficient differential between the then-prevailing common stock price and the warrant exercise price so there is a buffer to absorb the market reaction, if any, to our redemption of the warrants. If the foregoing conditions are satisfied and we issue a notice of redemption, each warrant holder can exercise his, her or its warrant prior to the scheduled redemption date. However, the price of the common stock may fall below the $13.75 trigger price as well as the $7.50 warrant exercise price after the redemption notice is issued. Proposed American Stock Exchange symbols Units: "TOH.U" Common Stock: "TOH" Warrants: "TOH.WS" Founder's units In March 2007 our sponsor purchased an aggregate of 11,500,000 founder's units (after giving effect to a stock split that occurred in July 2007) for an aggregate purchase price of $25,000, or $0.0025 per unit, 230,000 of which were transferred to William H. Cunningham, William A. Montgomery, Brian Mulroney and William F. Quinn in August 2007. This includes an aggregate of 1,500,000 founder's units subject to forfeiture by our initial stockholders to the extent that the underwriters' over-allotment option is not exercised in full so that our initial stockholders will collectively own 20% of our issued and outstanding shares after this offering (assuming none of them purchase units in this offering). Each founder's unit consists of one founder's share and one founder's warrant. Founder's shares The founder's shares are identical to the shares of common stock included in the units being sold in this offering, except that: the founder's shares are subject to the transfer restrictions described below; our initial stockholders have agreed to vote the founder's shares in the same manner as a majority of the outstanding shares of common stock sold in this offering and held by the public stockholders are cast in connection with the vote required to approve our initial business combination; our initial stockholders have agreed to vote the founder's shares in favor of an amendment to our amended and restated certificate of incorporation to provide for our perpetual existence in connection with a vote to approve our initial business combination; our initial stockholders will not be able to exercise conversion rights (as described below) with respect to the founder's shares; and our initial stockholders have agreed to waive their rights to participate in any liquidation distribution with respect to the founder's shares if we fail to consummate a business combination. Founder's warrants The founder's warrants are identical to those included in the units being sold in this offering, except that: the founder's warrants are subject to the transfer restrictions described below; the founder's warrants may not be exercised unless and until (i) the last sale price of our common stock equals or exceeds $13.75 for any 20 days within any 30 trading day period beginning 90 days after our initial business combination and (ii) there is an effective registration statement covering the shares of common stock issuable upon exercise of the warrants; the founder's warrants will not be redeemable by us as long as they are held by our initial stockholders or their permitted transferees; and the founder's warrants may be exercised by the holders on a cashless basis. If the founder's warrants are held by holders other than our initial stockholders or their permitted transferees, the founder's warrants will be redeemable by us and exercisable by the holders on the same basis as the warrants included in the units being sold in this offering. Transfer restrictions on founder's shares and founder's warrants Our initial stockholders have agreed not to transfer, assign or sell any of the founder's shares or founder's warrants, including the common stock issuable upon exercise of the founder's warrants (except as described below under "Principal Stockholders Transfers of Common Stock and Warrants by Our Initial Stockholders and Mr. Hicks") until 180 days after the completion of our initial business combination. Sponsor warrants Our sponsor will purchase sponsor warrants exercisable to purchase 7,000,000 shares of our common stock for $7 million ($1.00 per warrant) upon the closing of this offering. The purchase price of the sponsor warrants will be added to the proceeds from this offering to be held in the trust account. If we do not complete a business combination within 24 months after the date of this prospectus, the proceeds of the sale of the sponsor warrants will become part of the distribution of the trust account to our public stockholders and the sponsor warrants will expire worthless. Transfer restrictions on sponsor warrants The sponsor warrants (including the common stock issuable upon exercise of the sponsor warrants) will not be transferable, assignable or salable (except as described below under "Principal Stockholders Transfers of Common Stock and Warrants by Our Initial Stockholders and Mr. Hicks") until 180 days after the completion of our initial business combination and they will be non-redeemable so long as they are held by the sponsor or its permitted transferees. If the sponsor warrants are held by holders other than the sponsor or its permitted transferees, the sponsor warrants will be redeemable by us and exercisable by the holders on the same basis as the warrants included in the units being sold in this offering. Otherwise, the sponsor warrants have terms and provisions that are identical to those of the warrants being sold as part of the units in this offering, except that such warrants may be exercised by the holders on a cashless basis. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED SEPTEMBER 27, 2007 PROSPECTUS $400,000,000 HICKS ACQUISITION COMPANY I, INC. 40,000,000 Units Exercise of founder's warrants and sponsor warrants Our initial stockholders and their permitted transferees will be entitled to exercise the founder's warrants as described above for cash or on a cashless basis using the same formula that would apply to other warrant holders if they were required to exercise their warrants on a cashless basis. Our sponsor and its permitted transferees will be entitled to exercise the sponsor warrants as described above for cash or on a cashless basis using the same formula that would apply to other warrant holders if they were required to exercise their warrants on a cashless basis. Co-investment units Thomas O. Hicks, our founder and chairman of the board, is required to purchase from us, pursuant to a written agreement with us, directly or through a controlled affiliate, 2,000,000 co-investment units at a price of $10.00 per unit for an aggregate purchase price of $20 million in a private placement that will occur immediately prior to our consummation of the initial business combination, which will not occur until after the signing of a definitive business combination agreement and the approval of the initial business combination and an amendment to our amended and restated certificate of incorporation to provide for our perpetual existence by holders of a majority of our outstanding shares of common stock sold in this offering; provided that holders owning no more than 30% (minus one share) of our outstanding shares of common stock sold in this offering exercise their conversion rights, as described in this prospectus. If Mr. Hicks elects to make the co-investment through an entity, he will, directly or indirectly, control such entity. Hicks Acquisition Company I, Inc. is a newly organized blank check company formed for the purpose of acquiring, or acquiring control of, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination one or more businesses or assets, which we refer to as our initial business combination. Our efforts in identifying a prospective target business will not be limited to a particular industry, but we will not complete a business combination with any entity engaged in the energy industry as its principal business or whose principal business operations are conducted outside of the United States or Canada. We have not identified any acquisition target and we have not, nor has anyone on our behalf, initiated any substantive discussions with an entity that we will acquire in our initial business combination. This is an initial public offering of our securities. We are offering 40,000,000 units. Each unit has an offering price of $10.00 and consists of one share of our common stock and one warrant. Each warrant entitles the holder to purchase one share of our common stock at a price of $7.50, subject to adjustment as described in this prospectus. The warrants will become exercisable on the later of the completion of our initial business combination or twelve months from the closing of this offering, provided in each case that we have an effective registration statement covering the shares of common stock issuable upon exercise of the warrants and a current prospectus relating to them is available, and will expire four years from the date of this prospectus, unless earlier redeemed. We have also granted the underwriters a 30-day option to purchase up to an additional 6,000,000 units to cover over-allotments, if any. HH-HACI, L.P., which we refer to throughout this prospectus as our sponsor, has agreed to purchase an aggregate of 7,000,000 warrants at a price of $1.00 per warrant ($7 million in the aggregate) in a private placement that will occur simultaneously with the consummation of this offering. We refer to these warrants throughout this prospectus as the sponsor warrants. The proceeds from the sale of the sponsor warrants in the private placement will be deposited into a trust account and be subject to a trust agreement, described below, and will be part of the funds distributed to our public stockholders in the event we are unable to complete an initial business combination. Each of the sponsor warrants will be substantially similar to the warrants included in the units sold in this offering except that the sponsor warrants: (i) will not be redeemable by us so long as they are held by our sponsor or its permitted transferees, (ii) will be subject to certain transfer restrictions described in more detail in this prospectus and (iii) may be exercised for cash or on a cashless basis, as described in this prospectus. Currently, there is no public market for our units, common stock or warrants. We have applied to have the units listed on the American Stock Exchange. Assuming that the units are listed on the American Stock Exchange, the units will be listed under the symbol TOH.U on or promptly after the date of this prospectus. The common stock and warrants comprising the units will begin separate trading on the 45th day following the date of this prospectus unless Citigroup Global Markets Inc. informs us of its decision to allow earlier separate trading, subject to our filing a Current Report on Form 8-K with the Securities and Exchange Commission containing an audited balance sheet reflecting our receipt of the gross proceeds of this offering and issuing a press release announcing when such separate trading will begin. Once the securities comprising the units begin separate trading, the common stock and warrants will be traded on the American Stock Exchange under the symbols "TOH" and "TOH.WS," respectively. Investing in our securities involves a high degree of risk. See "Risk Factors" beginning on page 27 for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Per Unit The co-investment units will be identical to the units sold in this offering, except that (i) the co-investment warrants will not be redeemable by us so long as they are held by Thomas O. Hicks, the relevant controlled affiliate or their permitted transferees and (ii) with limited exceptions, the co-investment shares and co-investment warrants (including the common stock issuable upon exercise of the co-investment warrants) may not be transferred, assigned or sold until 180 days after the completion of our initial business combination. The proceeds of the sale of the co-investment units will not be deposited into the trust account and will not be available for distribution to our public stockholders in the event of a liquidation of the trust account, or upon conversion of shares held by public stockholders. The business purpose of the co-investment is to provide additional capital to us and demonstrate Mr. Hicks' further commitment to our completion of an advantageous business combination. In the event that the co-investment units are not purchased immediately prior to our consummation of our initial business combination, our sponsor has agreed to sell, and we have agreed to purchase, its founder's shares and founder's warrants for an aggregate repurchase price of $1,000 pursuant to a written agreement between Mr. Hicks, our sponsor and us. The purpose of this agreement is to augment Mr. Hick's contractual commitment to purchase the co-investment units with an additional incentive to make the co-investment. Registration rights Concurrently with the issuance and sale of securities in this offering, we will enter into a registration rights agreement with our initial stockholders with respect to securities held by them from time to time and the purchaser of the co-investment shares and co-investment warrants. The registration rights agreement will provide that, in certain instances, these holders may require us to register any of our securities held by them on a registration statement filed under the Securities Act, provided that such registration statement would not become effective until termination of the applicable lock-up period, which occurs 180 days after the completion of our initial business combination. We will bear the expenses incurred in connection with filing any such registration statement. Total Proceeds Proceeds to be held in trust account $390 million, or approximately $9.75 per unit of the proceeds of this offering and the private placement of the sponsor warrants ($447.7 million, or approximately $9.73 per unit, if the underwriters' over-allotment option is exercised in full) will be placed in a segregated trust account at J.P. Morgan Chase, N.A., maintained by Continental Stock Transfer & Trust Company, as trustee. These proceeds include $12.6 million (or approximately $14.5 million if the underwriters' over-allotment option is exercised in full) in deferred underwriting commissions. The funds in the trust account will only be released to be used in connection with our initial business combination or to fund the exercise of conversion rights by the public stockholders. Unless and until the completion of our initial business combination, no proceeds held in the trust account, other than up to $4.75 million, subject to adjustment, of the interest earned on the trust account (net of taxes payable on such interest), will be available for our use and we may pay our expenses only from: the net proceeds of this offering not held in the trust account, which will be $250,000 in working capital after the payment of approximately $1.35 million in expenses relating to this offering; and up to $4.75 million, subject to adjustment, of interest (net of taxes payable on such interest) on the trust proceeds that may be released to us for working capital purposes. 1.1 Form of Underwriting Agreement.# 3.1 Form of Amended and Restated Certificate of Incorporation.* 3.2 Form of Amended and Restated By-laws.# 4.1 Specimen Unit Certificate.* 4.2 Specimen Common Stock Certificate.# 4.3 Specimen Warrant Certificate.* 4.4 Form of Warrant Agreement between Continental Stock Transfer & Trust Company and the Registrant.* 5.1 Opinion of Akin Gump Strauss Hauer & Feld LLP.# 10.1 Promissory Note, dated March 1, 2007, issued to Thomas O. Hicks.# 10.2 Letter Agreement, dated as of September 26, 2007, among the Registrant, Citigroup Global Markets Inc., HH-HACI, L.P. and Thomas O. Hicks.* 10.3 Form of Letter Agreement among the Registrant, Citigroup Global Markets Inc. and each executive officer and director.* 10.4 Form of Investment Management Trust Agreement between Continental Stock Transfer & Trust Company and the Registrant.# 10.5 Letter Agreement between Hicks Holdings Operating LLC and Registrant regarding administrative support.# 10.6 Registration Rights Agreement, dated as of September 26, 2007, among the Registrant, HH-HACI, L.P., Thomas O. Hicks, William H. Cunningham, William A. Montgomery, Brian Mulroney and William F. Quinn* 10.7 Securities Purchase Agreement, effective as of March 1, 2007, between the Registrant and HH-HACI, L.P.# 10.8 Sponsor Warrants Purchase Agreement, dated as of September 26, 2007, between the Registrant and HH-HACI, L.P.* 10.9 Co-Investment Securities Purchase Agreement, dated as of September 26, 2007, between the Registrant and Thomas O. Hicks.* 10.10 Form of Indemnity Agreement.# 10.11 Securities Assignment Agreement, dated as of August 30, 2007 between the Registrant, HH-HACI, L.P., William H. Cunningham, William A. Montgomery, Brian Mulroney and William F. Quinn.# Public offering price $ 10.00 $ 400,000,000 Underwriting discounts and commissions(1) $ 0.70 $ 28,000,000 Proceeds, before expenses, to us $ 9.30 $ 372,000,000 Stockholders must approve our initial business combination Our initial business combination must occur with one or more target businesses that collectively have a fair market value of at least 80% of the initial amount held in the trust account (excluding deferred underwriting commissions of $12.6 million or approximately $14.5 million if the underwriters' over-allotment option is exercised in full). If we acquire less than 100% of one or more target businesses, the aggregate fair market value of the portion or portions we acquire must equal at least 80% of this amount. In no event, however, will we acquire less than a controlling interest of a target business (that is, not less than 50% of the voting equity interests of the target business). Until we have consummated our initial business combination, we will seek approval of our public stockholders before we consummate any business combination, even if the business combination would not ordinarily require stockholder approval under applicable law. In connection with the vote required for consummating our initial business combination, our initial stockholders will vote the founder's shares in accordance with the votes constituting the majority of the votes cast by our public stockholders and will vote any shares acquired by them in the offering or the after market in favor of our initial business combination. Our initial stockholders will also vote all shares of the company's common stock owned by them in favor of an amendment to our amended and restated certificate of incorporation to provide for our perpetual existence in connection with a vote to approve our initial business combination. (1)Includes $0.315 per unit, or $12.6 million in the aggregate (approximately $14.5 million if the underwriters' over-allotment option is exercised in full), payable to the underwriters for deferred underwriting commissions to be placed in the trust account described below. Such funds will be released to the underwriters only on completion of an initial business combination, as described in this prospectus. The underwriters are offering the units on a firm commitment basis. The underwriters expect to deliver the units to purchasers on or about , 2007. Of the proceeds we receive from this offering and the sale of the sponsor warrants described in this prospectus, approximately $9.75 per unit, or $390 million in the aggregate (approximately $9.73 per unit or $447.7 million if the underwriters' over-allotment option is exercised in full) will be deposited into a trust account at JP Morgan Chase, N.A. with Continental Stock Transfer & Trust Company as trustee. These funds will not be released to us until the earlier of the completion of our initial business combination or our liquidation. We will proceed with our initial business combination only if (i) the initial business combination is approved by a majority of votes cast by our public stockholders at a duly held stockholders meeting, (ii) an amendment to our amended and restated certificate of incorporation to provide for our perpetual existence is approved by holders of a majority of our outstanding shares of common stock, and (iii) public stockholders owning no more than 30% (minus one share) of our outstanding shares of common stock sold in this offering both vote against the business combination and exercise their conversion rights. If a proposed business combination is not consummated and we still have sufficient time remaining before our corporate life expires, we may seek another target business with which to effect our initial business combination. Conversion rights for public stockholders voting against our initial business combination Conversion rights are the rights of each public stockholder to convert its shares of common stock into a pro rata share of the aggregate amount then on deposit in the trust account (including deferred underwriting commissions and including interest earned on the trust account, net of income taxes payable on such interest and net of interest income of up to $4.75 million, subject to adjustment, on the trust account released to us to fund our working capital requirements) if our initial business combination is approved and completed. The amount payable in respect of each share of common stock on the exercise of conversion rights in connection with the initial business combination will be the per share amount of $9.75 initially deposited in the trust account (plus any interest earned on the proceeds in the trust account in excess of the amount released to us for working capital purposes, net of taxes payable on such interest, on such amount per share). If our initial business combination is approved and completed, public stockholders who vote against the business combination will be entitled to exercise their conversion rights or to maintain their interest in us. Citi A public stockholder who wishes to exercise its conversion rights will be required to notify us of its election to convert in accordance with the procedures described in this prospectus. Such election to convert will not be valid unless the public stockholder votes against our initial business combination, the initial business combination is approved and completed, the public stockholder holds its shares through the closing of the business combination and the public stockholder follows the specific procedures for conversion that will be set forth in the proxy statement relating to the proposed initial business combination. We may require public stockholders to tender their certificates to our transfer agent prior to the meeting or to deliver their shares to the transfer agent electronically using the Depository Trust Company's DWAC (Deposit/Withdrawal At Custodian) System. We will notify investors on a current report on Form 8-K and in our proxy statement related to the initial business combination if we impose this requirement. The foregoing is different from the procedures used by many blank check companies. Traditionally, in order to perfect conversion rights in connection with a blank check company's business combination, a holder could simply vote against a proposed business combination and check a box on the proxy card indicating such holder was seeking to exercise its conversion rights. After the business combination was approved, the company would contact such stockholder to arrange for him to deliver his certificate to verify ownership. As a result, the stockholder then had an "option window" after the consummation of the business combination during which he could monitor the price of the stock in the market. If the price rose above the conversion price, he could sell his shares in the open market before actually delivering his shares to the company for cancellation in consideration for the conversion price. Thus, the conversion right, to which stockholders were aware they needed to commit to before the stockholder meeting, would become a "put" right surviving past the consummation of the business combination until the converting holder delivered his certificate. The requirement for physical or electronic delivery prior to the meeting ensures that a converting holder's election to convert is irrevocable once the business combination is approved. Lazard Capital Markets Ladenburg Thalmann & Co. Inc. , 2007 Public stockholders who exercise their conversion rights will continue to retain all rights to the warrants they received as part of the units purchased in this offering to the extent that such rights have not been otherwise transferred or sold by such public stockholder. There will be no conversion rights in connection with the founder's shares purchased prior to the offering, nor will there be conversion rights with respect to the 2,000,000 co-investment units. Right of first review In order to minimize potential conflicts of interest which may arise from multiple corporate affiliations, each of our officers has agreed, until the earliest of our initial business combination, our liquidation or such time as he or she ceases to be an officer, to present to our company for our consideration, prior to presentation to any other entity, any business opportunity with a fair market value of $200 million or more, subject to any pre-existing fiduciary or contractual obligations he or she might have. In the event that any of our officers or directors becomes aware of a business combination opportunity that falls within the line of business of any entity to which he or she has pre-existing fiduciary or contractual obligations, he or she may be required to present such business combination opportunity to such entity prior to presenting such business combination opportunity to us. Each of our officers, other than Thomas O. Hicks, Jr. and Mack Hicks, currently have certain relevant fiduciary duties or contractual obligations which may take priority over their duties to us, as more fully discussed in "Management Conflicts of Interest" on page 85. You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with different information. We are not, and the underwriters are not, making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus. The information may be required to be updated at a later date. TABLE OF CONTENTS Page Release of funds in trust account on closing of our initial business combination On the closing of our initial business combination, all amounts held in the trust account will be released to us. We will use these funds to pay amounts due to any public stockholders who exercise their conversion rights and to pay the underwriters their deferred underwriting commissions. Funds released from the trust account to us can be used to pay all or a portion of the purchase price of the business or businesses we acquire in our initial business combination. If the initial business combination is paid for using stock or debt securities, we may apply the cash released to us from the trust account for general corporate purposes, including for maintenance or expansion of operations of acquired businesses, the payment of principal or interest due on indebtedness incurred in consummating the initial business combination, to fund the purchase of other companies or for working capital. Liquidation if no initial business combination If we are unable to complete a business combination prior to the date that is 24 months after the date of this prospectus, our existence will automatically terminate and as promptly as practicable thereafter we will adopt a plan of distribution in accordance with Section 281(b) of the Delaware General Corporation Law. Upon adoption of our plan of distribution, the trustee will commence liquidating the investments constituting the trust account and distribute the proceeds to our public stockholders. Section 278 of the Delaware General Corporation Law provides that even after we cease our business activities and distribute the balance of the trust account to our public stockholders, our existence will continue for at least three years after our expiration for the purpose of prosecuting and defending suits, whether civil, criminal or administrative, by or against us, and of enabling us gradually to settle and close our business, to dispose of and convey our property, to discharge our liabilities and to distribute to our stockholders any remaining assets, but not for the purpose of continuing the business for which we were organized. Our existence will continue automatically even beyond the three-year period for the purpose of completing the prosecution or defense of suits begun prior to the expiration of the three-year period, until such time as any judgments, orders or decrees resulting from such suits are fully executed. Section 281(b) will require us to pay or make reasonable provision for all then-existing claims and obligations, including all contingent, conditional, or unmatured contractual claims known to us, and to make such provision as will be reasonably likely to be sufficient to provide compensation for any then-pending claims and for claims that have not been made known to us or that have not arisen but that, based on facts known to us at the time, are likely to arise or to become known to us within 10 years after the date of dissolution. Under Section 281(b), the plan of distribution must provide for all of such claims to be paid in full or make provision for payments to be made in full, as applicable, if there are sufficient assets. If there are insufficient assets to provide for all such claims, the plan must provide that such claims and obligations be paid or provided for according to their priority and, among claims of equal priority, ratably to the extent of legally available assets. These claims must be paid or provided for before we make any distribution of our remaining assets to our stockholders. While we intend to pay such amounts, if any, from the $250,000 of proceeds held outside the trust account and from the up to $4.75 million, subject to adjustment, of interest income earned on the trust account available to us for working capital, we cannot assure you those funds will be sufficient to pay or provide for all creditors' claims. Although we will seek to have all third parties (including any vendors and any other entities with which we enter into a contractual relationship following consummation of this offering) and prospective target businesses enter into agreements with us waiving any right, title, interest or claim of any kind in or to any assets held in the trust account, there is no guarantee that they will execute such agreements. It is also possible that such waiver agreements would be held unenforceable, and there is no guarantee that the third parties would not otherwise challenge the agreements and later bring claims against the trust account for amounts owed them. In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with us and will not seek recourse against the trust account for any reason. Mr. Hicks, our founder and chairman of the board, has agreed that he will be liable to us if and to the extent any claims by a vendor for services rendered or products sold to us, or a prospective target business reduce the amounts in the trust account available for distribution to our stockholders in the event of a liquidation, except as to any claims by a third party who executed a waiver of any and all rights to seek access to the trust account. In the event that this indemnity obligation arose and Mr. Hicks did not comply with such obligation, we believe that we would have an obligation to seek enforcement of the obligation and that our board of directors would have a fiduciary duty to seek enforcement of such obligation on our behalf. We expect that all costs and expenses associated with implementing our plan of distribution, as well as payments to any creditors, will be funded from amounts remaining out of the $250,000 of proceeds held outside the trust account and from the up to $4.75 million, subject to adjustment, in interest income on the balance of the trust account that will be released to us to fund our working capital requirements. However, if those funds are not sufficient to cover the costs and expenses associated with implementing our plan of distribution, to the extent that there is any interest accrued in the trust account not required to pay income taxes on interest income earned on the trust account balance, we may request that the trustee release to us an additional amount of up to $75,000 of such accrued interest to pay those costs and expenses. At the time we submit our proposed initial business combination to our stockholders for approval, we will also submit to them a proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence, thereby removing this limitation on our corporate existence. We will only consummate our initial business combination if (i) the initial business combination is approved by a majority of votes cast by our public stockholders at a duly held stockholders meeting, (ii) an amendment to our amended and restated certificate of incorporation to provide for our perpetual existence is approved by holders of a majority of our outstanding shares of common stock, and (iii) holders owning no more than 30% (minus one share) of our outstanding shares of common stock sold in this offering exercise their conversion rights. The underwriters have agreed to waive their rights to their deferred underwriting commission held in the trust account in the event we do not consummate a business combination within 24 months after the date of this prospectus and in such event such amounts will be included within the funds held in the trust account that will be available for distribution to the public stockholders. Our initial stockholders have agreed to waive their rights to participate in any distribution of the funds held in the trust account if we fail to consummate a business combination within such 24 month period but only with respect to the founder's shares, and in such event their founder's warrants and, in the case of the sponsor, sponsor warrants, will expire worthless. If we are unable to conclude an initial business combination and we expend all of the net proceeds of this offering and the initial founder's investment other than the proceeds deposited in the trust account, without taking into account any interest earned on the trust account, we expect that the initial per-share liquidation price will be approximately $9.75 (or approximately $9.73 per share if the over-allotment option is exercised in full), or approximately $0.25 less than the per-unit offering price of $10.00 (approximately $0.27 less if the over-allotment is exercised in full). The proceeds deposited in the trust account could, however, become subject to claims of our creditors that are in preference to the claims of our stockholders. In addition, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us that is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. Therefore, we cannot assure you that the actual per-share liquidation price will not be less than approximately $9.75 (or approximately $9.73 per share if the over-allotment option is exercised in full). Amended and Restated Certificate of Incorporation Our amended and restated certificate of incorporation, which we intend to adopt prior to the closing of this offering, contains several provisions relating to this offering that will apply to us until the consummation of our initial business combination. Those provisions may only be amended with the unanimous consent of our stockholders. While we have been advised that the validity of unanimous consent provisions under Delaware law has not been settled, we view these provisions as obligations to our stockholders and will not take any action to amend or waive those provisions. Limited payments to insiders There will be no finder's fees, reimbursements or cash payments made to our sponsor, officers, directors, or our or their affiliates for services rendered to us prior to or in connection with the consummation of our initial business combination, other than: Repayment of advances of up to $225,000 made to us by Mr. Hicks to cover offering-related and organizational expenses; A payment of an aggregate of $10,000 per month to Hicks Holdings Operating LLC, an affiliate of Mr. Hicks, for office space, secretarial and administrative services; and Reimbursement for any out-of-pocket expenses related to identifying, investigating and consummating an initial business combination. Our audit committee will review and approve all payments made to our sponsor, officers, directors or our or their affiliates, other than the $10,000 per month payment described above, and any payments made to members of our audit committee will be reviewed and approved by our board of directors, with any interested director abstaining from such review and approval. Audit committee to monitor compliance Our audit committee will monitor compliance on a quarterly basis with the terms of this offering and, if any noncompliance is identified, the audit committee is charged with the immediate responsibility to take all action necessary to rectify such noncompliance or otherwise cause compliance with the terms of this offering. Determination of offering amount In determining the size of this offering, our management concluded, based on their collective experience, that an offering of this size, together with the proceeds of the sponsor warrants, would provide us with sufficient equity capital to execute our business plan. We believe that this amount of equity capital, plus our ability to finance an acquisition using stock or debt in addition to the cash held in the trust account, will give us substantial flexibility in selecting an acquisition target and structuring our initial business combination. This belief is not based on any research, analysis, evaluations, discussions, or compilations of information with respect to any particular investment or any such action undertaken in connection with our organization. We cannot assure you that our belief is correct, that we will be able to successfully identify acquisition candidates, that we will be able to obtain any necessary financing or that we will be able to consummate a transaction with one or more target businesses whose fair market value, collectively, is equal to at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions of approximately $12.6 million or approximately $14.5 million if the over-allotment option is exercised in full) at the time of the initial business combination. Risks We are a newly formed company that has conducted no operations and has generated no revenues. Until we complete our initial business combination, we will have no operations and will generate no operating revenues. In making your decision on whether to invest in our securities, you should take into account not only the background of our management team, but also the special risks we face as a blank check company. This offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act. Accordingly, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. For additional information concerning how Rule 419 black check offerings differ from this offering, please see "Proposed Business Comparison of This Offering to Those of Blank Check Companies Subject to Rule 419." You should carefully consider these and the other risks set forth in the section entitled "Risk Factors" beginning on page 27 of this prospectus. THE OFFERING In making your decision on whether to invest in our securities, you should take into account not only the backgrounds of the members of our management team, but also the special risks we face as a blank check company and the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended (the "Securities Act"). You will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. You should carefully consider these and the other risks set forth in the section below entitled "Risk Factors" beginning on page 27 of this prospectus. Securities offered 40,000,000 units, at $10.00 per unit, each unit consisting of: one share of common stock; and one warrant. Trading commencement and separation of common stock and warrants The units will begin trading on or promptly after the date of this prospectus. The common stock and warrants comprising the units will begin separate trading on the 45th day following the date of this prospectus unless Citigroup Global Markets Inc. informs us of its decision to allow earlier separate trading, subject to our having filed the Current Report on Form 8-K described below and having issued a press release announcing when such separate trading will begin. Separate trading of the common stock and warrants is prohibited until we have filed a Current Report on Form 8-K In no event will the common stock and warrants be traded separately until we have filed a Current Report on Form 8-K with the Securities and Exchange Commission containing an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file the Current Report on Form 8-K upon the consummation of this offering, which is anticipated to take place three business days from the date of this prospectus. If the over-allotment option is exercised following the initial filing of such Current Report on Form 8-K, a second or amended Current Report on Form 8-K will be filed to provide updated financial information to reflect the exercise of the over-allotment option. Units: Number outstanding before this offering 11,500,000(1) Number outstanding after this offering 50,000,000(2) Common stock: Number outstanding before this offering 11,500,000(1) (1)If we consummate our initial business combination, the conversion rights afforded to our public stockholders may result in the conversion into cash of up to 30% (minus one share) of the aggregate number of shares sold in this offering at a per-share conversion price equal to the aggregate amount then on deposit in the trust account (initially approximately $9.75 per share (or approximately $9.73 per share if the underwriters' over-allotment option is exercised in full)), before payment of deferred underwriting discounts and commissions and including accrued interest, net of any income taxes due on such interest, which income taxes, if any, shall be paid from the trust account, and net of interest income previously released to us for working capital requirements, as of two business days prior to the proposed consummation of our initial business combination, divided by the number of shares sold in this offering. We will not consummate any business combination if holders owning more than 30% (minus one share) of our outstanding shares of common stock sold in this offering exercise their conversion rights. The "as adjusted" information gives effect to the sale of the units in this offering, the sale of the sponsor warrants, repayment of the $225,000 loan made to us by Mr. Hicks, our founder and chairman of the board, and the payment of the estimated expenses of this offering. The "as adjusted" working capital and "as adjusted" total assets include $12.6 million being held in the trust account (approximately $14.5 million if the underwriters' over-allotment option is exercised in full) representing deferred underwriting commissions. The "as adjusted" working capital and total assets amounts include approximately $390 million to be held in the trust account, including $12.6 million being held in the trust account (approximately $14.5 million if the underwriters' over-allotment option is exercised in full) representing deferred underwriting commissions, which will be available to us as described in this prospectus. If no initial business combination is consummated, the proceeds held in the trust account, including the deferred underwriting commissions and all interest thereon, net of income taxes on such interest and interest income of up to $4.75 million, subject to adjustment, on the trust account balance released to us to fund our working capital requirements, will be distributed solely to our public stockholders as part of a plan of distribution upon termination of our corporate existence.
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs discussed under Risk Factors, before deciding whether to buy our ADSs. Our Company We are a leading online game developer and operator in China as measured by the popularity of our games in China in 2006, according to a report published by International Data Corporation, or IDC, a leading market research firm. We primarily develop three-dimensional, or 3D, online games based on our proprietary Angelica 3D game engine and game development platform. Our strong technology and creative game design capabilities, combined with our extensive local knowledge and experience, enable us to frequently and rapidly introduce popular games designed to cater to changing customer preferences and market trends in China. In 2006, we launched our first three self-developed 3D massively multiplayer online role playing games, or MMORPGs, namely, Perfect World, Legend of Martial Arts and Perfect World II. In the first quarter of 2007, these games recorded approximately 237,000 average concurrent users in China. We launched a new self-developed 3D MMORPG, Zhu Xian, in late May 2007. Our core technology capabilities consist of our proprietary 3D game engine, game development platform and real-time anti-cheating expertise, all developed and built by our experienced development team. In particular, our game engine enables us to create superior 3D graphics with impressive visual effects and provides the technical foundation for realizing innovative features in the game environment. Our game development platform is built on modularized functions which allow us to shorten the development cycle of our 3D MMORPGs to approximately six months for our most recent games and to update our games frequently with new features. We have achieved an impressive game development track record. Our Perfect World and Legend of Martial Arts games were the two most popular domestically developed 3D online games in China in 2006 according to IDC. Perfect World was a winner of the Best 3D Online Games award, and Legend of Martial Arts was a winner of the Best Self-Developed Online Games award, in 2006 at the China Digital Entertainment Exposition and Conference, or ChinaJoy, a leading Chinese online game industry convention. Legend of Martial Arts was awarded as the Most Favorite Brand Game among College Students from the Education Management Information Center of the Ministry of Education in 2006. We expect to launch two additional 3D MMORPGs and one casual game, which is a game that can be played to a conclusion within a short period of time, in 2007 and early 2008. We plan to develop more online games, with a variety of themes, cultural characteristics and features that appeal to different segments of the online game player community. We use a time-based revenue model for our first game, Perfect World, under which we charge players based on the time they spend playing the game. We use an item-based revenue model for Legend of Martial Arts, Perfect World II and Zhu Xian, under which players can play the games for free, but they are charged for purchases of in-game items, such as performance-enhancing items, clothing, accessories and pets. In 2006 and the first quarter of 2007, 46.9% and 86.5%, respectively, of our online game operation revenues were generated through this item-based model. We will continue to explore new and innovative business models to maximize our revenues and profit. We distribute our physical and virtual prepaid game cards to players in China through a variety of channels, consisting primarily of a network of 27 third-party distributors of our physical cards and one national distributor of our virtual cards. We also sell online points through our proprietary E-sales system and our own website. Although most of our revenues are generated in China, we have licensed our games, Perfect World II and Legend of Martial Arts, to leading game operators in 11 and seven countries and regions, respectively, SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Table of Contents including Japan and Taiwan, and we plan to license our games to more countries and regions. We have grown significantly since our inception, and generated revenues of RMB99.4 million (US$12.9 million) and RMB87.2 million (US$11.3 million) in 2006 and the first quarter of 2007, respectively. We incurred net losses from our inception in 2004 through the end of 2006. Our net loss of RMB27.9 million (US$3.6 million) in 2006 included one-time share-based compensation charges in the amount of RMB37.8 million (US$4.9 million) incurred in the year. We achieved net income of RMB40.0 million (US$5.2 million) in the first quarter of 2007. Industry Background Online games are electronic games played over the Internet. They can be played individually or in large groups of players simultaneously in the same game who interact in a game world. China is a key online game market in the Asia-Pacific region and has substantial growth potential. According to IDC, China s online game revenues reached US$816 million in 2006, representing a 73.5% increase over 2005. IDC predicts that China s online game revenues will reach US$3.0 billion by 2011, representing a compound annual growth rate, or CAGR, of 30.2% from 2006 to 2011. Many factors have supported and we believe are likely to continue to drive the growth in the online game market in China, including the following: increasing Internet, broadband and PC penetration; online games as an attractive form of entertainment relative to other forms of entertainment; low entry cost and convenience of play for users; and high degree of user loyalty. Many players in China view online games as an attractive form of entertainment and desire to have more personalized, customizable and interactive game experiences. In addition, there has been a noticeable trend towards development and operation of 3D online games in China, as 3D games provide a more realistic representation of real-life objects and can depict more complex activities. Domestically developed online games have shown strong competitive advantages in China. According to IDC, in 2006, revenues generated from domestically developed online games reached RMB4.2 billion (US$0.5 billion), accounting for 64.8% of the total online game revenues in China. Our Strengths We believe that the following competitive strengths contribute to our success and differentiate us from our competitors: leading market position in 3D online games in China; powerful technology capabilities, consisting of our proprietary Angelica 3D game engine, powerful game development platform, flexible hardware requirements and anti-cheating expertise; creative utilization of extensive local knowledge and experience to design, market and distribute games; strong and consistent operations; and experienced management team and game development personnel. AMENDMENT NO.2 TO FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents Our Strategies Our goal is to become one of the leading online game companies in the world. Our primary growth strategies include: further expand and diversify our game portfolio; enhance user experience to increase monetization of our games; increase our focus on international expansion; strengthen leading-edge technology through continuous research and development; and pursue strategic acquisitions, partnerships and alliances. Our Challenges The successful execution of our strategies is subject to certain risks and uncertainties, including those relating to: our limited operating history; our dependence on three MMORPGs for substantially all of our revenues; our ability to develop and operate new games that are commercially successful; the growth of the online game market and the continuing market acceptance of our games and in-game items in China and elsewhere; our ability to protect our intellectual property rights; our ability to respond to competitive pressure, including competition that arises from new games introduced by our competitors and other forms of entertainment; our ability to maintain an effective system of internal control over financial reporting; and regulatory environment in China. Please see Risk Factors and other information included in this prospectus for a detailed discussion of these risks and uncertainties. Corporate History and Structure We commenced operations through Beijing Perfect World Network Technology Co., Ltd., or PW Network, a limited liability company established in China in 2004. To enable us to raise equity capital from international investors, our holding company, Perfect World Co., Ltd., or Perfect World, was incorporated under the laws of the Cayman Islands in June 2006. In August 2006, we formed Beijing Perfect World Software Co., Ltd., or PW Software, our wholly-owned subsidiary in China. In September 2006, PW Software entered into contractual agreements with PW Network and its shareholders, pursuant to which PW Network transferred certain fixed assets and certain personnel to PW Software and PW Software provides technical support and research and development services to PW Network. Through these contractual arrangements, we have the ability to effectively control PW Network s daily operations and financial affairs, appoint senior executives and decide on all matters subject to shareholders approval. As a result of these contractual arrangements, we are considered to be the primary beneficiary of PW Network and PW Network is a variable interest entity, or VIE, of our company under generally accepted accounting principles in the United States, or U.S. GAAP. Accordingly, we consolidate PW Network s results of operations, assets and liabilities in our financial statements. PW Network is considered as our predecessor company. Since both we and PW Network are under common control, our consolidated financial PERFECT WORLD CO., LTD. (Exact name of Registrant as specified in its charter) Not Applicable (Translation of Registrant s name into English) Cayman Islands 7389 Not Applicable (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 8th Floor, Huakong Building, No. 1 Shangdi East Road, Haidian District Beijing 100085, People s Republic of China (86-10) 5885-8555 (Address, including zip code, and telephone number, including area code, of Registrant s principal executive offices) Table of Contents statements reflect this reorganization as a transaction between entities under common control and have been prepared as if the reorganized corporate structure had been in existence throughout all the periods presented. See Corporate History and Structure for a description of the contractual arrangements among PW Software, PW Network and its equity owners. If PW Network and/or its equity owners breach the contractual arrangements with us, we may not be able to continue to effectively control PW Network s operations and remain to be its primary beneficiary. For example, PW Network may distribute dividends to its equity owners who may decide not to remit these dividends to us in accordance with the existing contractual arrangements. In such case, we would have to rely on legal remedies under PRC law, which may not always be effective, particularly in light of uncertainties in the PRC legal system. See Risk Factors Risks Related to Doing Business in China Uncertainties with respect to the PRC legal system could adversely affect us. CT Corporation System 111 Eighth Avenue New York, New York 10011 (212) 664-1666 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents The following diagram illustrates our corporate structure. Beneficial Interest --- Contractual arrangements including an Exclusive Technology Support and Service Agreement, a Development Cooperation Agreement, a Business Operation Agreement, a Call Option Agreement and an Equity Pledge Agreement. For a description of these agreements, see Corporate History and Structure. Contractual arrangements including a Call Option Agreement, an Equity Pledge Agreement and a Power of Attorney. For a description of these agreements, see Corporate History and Structure. * Beijing Shiji Xiangshu Technology Co., Ltd. is 88.03% owned by Mr. Michael Yufeng Chi, the founder, chairman and chief executive officer of our company and an ultimate owner of our ordinary shares, 6.38% owned by Mr. Tongyan Wang, who is a holder of our ordinary shares, and 5.59% owned by Mr. Di He, our vice president and chief technology officer and a holder of our ordinary shares. ** Beijing Jiuzhou Tianyuan Investment Management Co., Ltd. is 60% owned by Mr. Huan Su and 35.72% owned by Mr. Furui Chen, both of whom are ultimate owners of our ordinary shares, and 4.28% owned by Mr. Di He, our vice president and chief technology officer and a holder of our ordinary shares. See Principal and Selling Shareholders. Corporate Information Our principal executive offices are located at 8th floor, Huakong Building, No. 1 Shangdi East Road, Haidian District, Beijing 100085, People s Republic of China. Our telephone number at this address is (8610) 5885-8555. Our registered office in the Cayman Islands is located at the offices of M&C Corporate Copies to: David T. Zhang, Esq. Z. Julie Gao, Esq. Latham & Watkins LLP 41st Floor, One Exchange Square 8 Connaught Place, Central, Hong Kong (852) 2522-7886 W. Clayton Johnson, Esq. Cleary Gottlieb Steen & Hamilton LLP Bank of China Tower One Garden Road Central, Hong Kong (852) 2521-4122 Table of Contents Services Limited, P.O. Box 309GT, Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands, British West Indies. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011. Investors should contact us for any inquiries through the address and telephone number of our principal executive offices. Our principal website is http://www.wanmei.com. The information contained on this website and our other websites is not a part of this prospectus. Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Table of Contents Conventions Which Apply to this Prospectus Unless we indicate otherwise, all information in this prospectus reflects the following: no exercise by the underwriters of their option to purchase up to 1,770,000 additional ADSs representing 8,850,000 Class B ordinary shares; conversion of all outstanding Series A convertible preferred shares into 64,000,000 Class B ordinary shares and 16,000,000 Class A ordinary shares immediately prior to the closing of this offering; and all share and per share data have been adjusted to reflect a 10-for-1 share split that became effective on June 19, 2007. Except where the context otherwise requires and for purposes of this prospectus only: we, us, our company, our and Perfect World refer to Perfect World Co., Ltd., a Cayman Islands company, and its subsidiaries, and, in the context of describing our operations, risk factors and financial results, also include PW Network, a variable interest entity of our company; see Corporate History and Structure; China or PRC refers to the People s Republic of China, excluding, for the purpose of this prospectus only, Taiwan, Hong Kong and Macau; PW Software refers to Beijing Perfect World Software Co., Ltd.; PW Network refers to Beijing Perfect World Network Technology Co., Ltd.; SAIF refers to SB Asia Investment Fund II L.P., a holder of our Series A convertible preferred shares, and its affiliates; monthly average concurrent users, or ACU, of any of our games operated in China is determined as follows: we first determine the number of users logged on to the game at 5-minute intervals, then average that data over the course of a day to derive the daily average; the daily average data are averaged over the monthly period to derive the monthly average concurrent users; quarterly average concurrent users, or ACU, of any of our games operated in China is the average of monthly average concurrent users of such game during the quarterly period; quarterly active paying customers, or APC, is the aggregate number of accounts for our games operated in China under the item-based revenue model that have been charged at least once during the quarterly period; quarterly average revenue per user, or ARPU, is our total online game operation revenues derived from operating in China our online games that use the item-based revenue model during the quarterly period divided by the quarterly active paying customers of these games during the quarterly period; our definition of ARPU may not be comparable to similarly titled measures presented by other online game companies; shares or ordinary shares refers to our ordinary shares, par value US$0.0001 per share, which include both Class A ordinary shares and Class B ordinary shares; ADSs refers to our American depositary shares, each of which represents five Class B ordinary shares, and ADRs refers to the American depositary receipts that evidence our ADSs; and all references to RMB or Renminbi refer to the legal currency of China; all references to US$, dollars and U.S. dollars refer to the legal currency of the United States. CALCULATION OF REGISTRATION FEE Table of Contents THE OFFERING Offering price We currently estimate that the initial public offering price will be between US$12.00 and US$14.00 per ADS. ADSs offered by us 9,000,000 ADSs. ADSs offered by the selling shareholders 2,800,000 ADSs. ADSs outstanding immediately after this offering 11,800,000 ADSs (or 13,570,000 ADSs if the underwriters exercise their over-allotment option in full). Ordinary shares outstanding immediately after this offering 279,285,720 shares, comprised of (i) 91,309,730 Class A ordinary shares, par value US$0.0001 per share, and (ii) 187,975,990 Class B ordinary shares, par value US$0.0001 per share. (1) Ordinary shares Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Each Class A ordinary share is entitled to 10 votes on all matters subject to shareholders vote, and each Class B ordinary share is entitled to one vote on all matters subject to shareholders vote. Each Class A ordinary share is convertible into one Class B ordinary share at any time by the holder thereof. Class B ordinary shares are not convertible into Class A ordinary shares under any circumstances. Upon any transfer of Class A ordinary shares by a holder thereof to any person or entity which is not an affiliate of such holder, such Class A ordinary shares shall be automatically and immediately converted into an equal number of Class B ordinary shares. The ADSs Each ADS represents five of our Class B ordinary shares, par value US$0.0001 per share. The ADSs will be evidenced by American depositary receipts, or ADRs. The depositary will hold the shares underlying your ADSs. You will have rights as provided in the deposit agreement. If, however, we declare dividends on our ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our ordinary shares, after deducting its fees and expenses. You may turn in your ADSs to the depositary in exchange for ordinary shares. The depositary will charge you fees for any exchange. We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs, you agree to be bound by the deposit agreement as amended. Title of each class of securities to be registered Amount to be registered(3) Proposed maximum offering price per share Proposed maximum aggregate offering price(1) Amount of registration fee(2) Class B ordinary shares, par value US$0.0001 per share(4) 67,850,000 US$2.80 US$189,980,000 US$ 5,833 (1) The number of ordinary shares that will be outstanding immediately after this offering: assumes the conversion of all outstanding Series A convertible preferred shares into 64,000,000 Class B ordinary shares and 16,000,000 Class A ordinary shares immediately prior to the completion of this offering; excludes 16,986,620 Class B ordinary shares issuable upon the exercise of options outstanding as of July 11, 2007, at a weighted average exercise price of US$0.26 per share; and excludes 15,158,380 Class B ordinary shares reserved for future issuances under our share incentive plan. (1) Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended. (2) Paid previously. (3) Includes ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public, and also includes ordinary shares that may be purchased by the underwriters pursuant to an over-allotment option. These ordinary shares are not being registered for the purpose of sales outside the United States. (4) American depositary shares issuable upon deposit of the ordinary shares registered hereby will be registered under a separate registration statement on Form F-6 (Registration No.333-144296). Each American depositary share represents five ordinary shares. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine. Table of Contents Our Summary Consolidated Financial and Operating Data The following summary consolidated statement of operations data and cash flow data for the period from March 10, 2004 (date of inception) to December 31, 2004, and for the years ended December 31, 2005 and 2006 and the summary consolidated balance sheet data as of December 31, 2006 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statement of operations data and cash flow data for the three months ended March 31, 2006 and 2007 and the summary consolidated balance sheet data as of March 31, 2007 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited consolidated financial information on the same basis as our audited consolidated financial statements. The unaudited financial information includes all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the periods presented. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP, and reflect our current corporate structure as if it had been in existence throughout the relevant periods. The historical results are not necessarily indicative of results to be expected in any future period. In addition, our unaudited results for the three months ended March 31, 2007 may not be indicative of our results for the full year ending December 31, 2007. You should read the following information in conjunction with our consolidated financial statements and related notes, Selected Consolidated Financial Data and Management s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this prospectus. (1) Included share-based compensation expenses of RMB38,180,653 (US$4,943,631) for the year ended December 31, 2006, of which RMB30,300,487 (US$3,923,307) was a one-time share-based compensation charge in connection with a founder s ordinary shares becoming subject to restrictions and the subsequent elimination of these restrictions in 2006, and RMB7,508,775 (US$972,236) was a one-time share-based compensation charge in connection with our issuance of Series A convertible preferred shares to a founding shareholder at par value in 2006. Table of Contents The information in this prospectus is not complete and may be changed. Neither we nor the selling shareholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted. Subject to Completion Preliminary Prospectus Dated , 2007 11,800,000 American Depositary Shares Perfect World Co., Ltd. Representing 59,000,000 Class B Ordinary Shares (1) Consist of aggregate data from our online game operations in China with respect to all of our games. (2) Consist of aggregate data from our online game operations in China with respect to all of our games that use the item-based revenue model. (3) Consist of aggregate data from our online game operations in China with respect to all of our games that use the item-based revenue model. Our total online game operation revenues derived from operating in China our online games using the item-based revenue model, which are used to calculate ARPU, are RMB0.3 million (US$39 thousand), RMB45.8 million (US$5.9 million) and RMB66.3 million (US$8.6 million), respectively, for the quarters ended September 30, 2006, December 31, 2006 and March 31, 2007. This is an initial public offering of American depositary shares, or ADSs, of Perfect World Co., Ltd., or Perfect World. We are offering 9,000,000 ADSs, and the selling shareholders disclosed in this prospectus are offering 2,800,000 ADSs. Each ADS represents five Class B ordinary shares, par value US$0.0001 per share. The ADSs are evidenced by American depositary receipts, or ADRs. We will not receive any of the proceeds from the sale of ADSs by the selling shareholders. Prior to this offering, there has been no public market for our ADSs or shares. We anticipate the initial public offering price of the ADSs will be between US$12.00 and US$14.00 per ADS. The ADSs have been approved for listing on the Nasdaq Global Market under the symbol PWRD. See Risk Factors beginning on page 16 to read about risks you should consider before buying the ADSs. Table of Contents
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+S-1/A 1 y31695a8sv1za.htm FORM S-1/A S-1/A Table of Contents As filed with the Securities and Exchange Commission on September 21, 2007 Registration No. 333-136879 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 PRE-EFFECTIVE AMENDMENT NO. 8 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 BROOKSHIREtm RAW MATERIALS (U.S.) TRUST (a Delaware Statutory Trust) BROOKSHIREtm RAW MATERIALS (U.S.) CORE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) CORE CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) AGRICULTURE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) AGRICULTURE CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) METALS USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) METALS CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ENERGY USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ENERGY CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ACCELERATED CORE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ACCELERATED CORE CDN FUND SERIES (Exact Name of Registrant as Specified in its Charter) Delaware (State of Organization) 6221 (Primary Standard Industrial Classification Code Number) 20-540 7663 I.R.S. Employer Identification Number) Brookshiretm Raw Materials Management, LLC 1000 Hart Road Suite 210 Barrington, Illinois 60010 888-877-2719 (Address and telephone number of registrant s principal executive offices) Clyde Harrison Brookshiretm Raw Materials Management, LLC 1000 Hart Road Suite 210 Barrington, Illinois 60010 888-877-2719 (Name, address and telephone number of agent for service) Copies to: Robert G. Frucht, Esq. Crowell Moring LLP 153 E. 53rd Street, 31st Floor New York, New York 10022-4611 (212) 895-4229 Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. CALCULATION OF REGISTRATION FEE Maximum Aggregate Proposed Maximum Amount of Title of Each Series Number of Securities Aggregate Offering Registration of Securities to be Registered to be Offered Price* Fee** Brookshiretm Raw Materials (U.S.) Core USD Fund 17,500,000 $ 175,000,000 $ 18,725.00 Brookshiretm Raw Materials (U.S.) Core CDN Fund 7,500,000 $ 75,000,000 $ 8,025.00 Brookshiretm Raw Materials (U.S.) Agriculture USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Agriculture CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Metals USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Metals CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Energy USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Energy CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Accelerated Core USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Accelerated Core CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Total Units of Beneficial Interest 50,000,000 $ 500,000,000 $ 53,500.00 * The proposed maximum aggregate offering price has been calculated assuming that all Units were sold at the price of US$10 per Unit. ** The amount of the registration fee for each Fund of Units is calculated in reliance upon Rule 457(o) under the Securities Act and using the proposed maximum aggregate offering as described above. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with section 8(A) of the Securities act or until this Registration Statement shall become effective on such date as the commission, acting pursuant to said Section 8(A), may determine. Table of Contents COMMODITY FUTURES TRADING COMMISSION RISK DISCLOSURE STATEMENT YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED TO THIS POOL AT PAGES 62 THROUGH 65 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGES 34 THROUGH 36 FOR EACH INDIVIDUAL FUND. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE
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+S-1/A 1 y31695a8sv1za.htm FORM S-1/A S-1/A Table of Contents As filed with the Securities and Exchange Commission on September 21, 2007 Registration No. 333-136879 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 PRE-EFFECTIVE AMENDMENT NO. 8 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 BROOKSHIREtm RAW MATERIALS (U.S.) TRUST (a Delaware Statutory Trust) BROOKSHIREtm RAW MATERIALS (U.S.) CORE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) CORE CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) AGRICULTURE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) AGRICULTURE CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) METALS USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) METALS CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ENERGY USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ENERGY CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ACCELERATED CORE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ACCELERATED CORE CDN FUND SERIES (Exact Name of Registrant as Specified in its Charter) Delaware (State of Organization) 6221 (Primary Standard Industrial Classification Code Number) 20-540 7663 I.R.S. Employer Identification Number) Brookshiretm Raw Materials Management, LLC 1000 Hart Road Suite 210 Barrington, Illinois 60010 888-877-2719 (Address and telephone number of registrant s principal executive offices) Clyde Harrison Brookshiretm Raw Materials Management, LLC 1000 Hart Road Suite 210 Barrington, Illinois 60010 888-877-2719 (Name, address and telephone number of agent for service) Copies to: Robert G. Frucht, Esq. Crowell Moring LLP 153 E. 53rd Street, 31st Floor New York, New York 10022-4611 (212) 895-4229 Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. CALCULATION OF REGISTRATION FEE Maximum Aggregate Proposed Maximum Amount of Title of Each Series Number of Securities Aggregate Offering Registration of Securities to be Registered to be Offered Price* Fee** Brookshiretm Raw Materials (U.S.) Core USD Fund 17,500,000 $ 175,000,000 $ 18,725.00 Brookshiretm Raw Materials (U.S.) Core CDN Fund 7,500,000 $ 75,000,000 $ 8,025.00 Brookshiretm Raw Materials (U.S.) Agriculture USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Agriculture CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Metals USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Metals CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Energy USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Energy CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Accelerated Core USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Accelerated Core CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Total Units of Beneficial Interest 50,000,000 $ 500,000,000 $ 53,500.00 * The proposed maximum aggregate offering price has been calculated assuming that all Units were sold at the price of US$10 per Unit. ** The amount of the registration fee for each Fund of Units is calculated in reliance upon Rule 457(o) under the Securities Act and using the proposed maximum aggregate offering as described above. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with section 8(A) of the Securities act or until this Registration Statement shall become effective on such date as the commission, acting pursuant to said Section 8(A), may determine. Table of Contents COMMODITY FUTURES TRADING COMMISSION RISK DISCLOSURE STATEMENT YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED TO THIS POOL AT PAGES 62 THROUGH 65 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGES 34 THROUGH 36 FOR EACH INDIVIDUAL FUND. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001404180_brookshire_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001404180_brookshire_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f7ab126e1cbc597565b73f68ba99f3da68884218
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001404180_brookshire_prospectus_summary.txt
@@ -0,0 +1 @@
+S-1/A 1 y31695a8sv1za.htm FORM S-1/A S-1/A Table of Contents As filed with the Securities and Exchange Commission on September 21, 2007 Registration No. 333-136879 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 PRE-EFFECTIVE AMENDMENT NO. 8 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 BROOKSHIREtm RAW MATERIALS (U.S.) TRUST (a Delaware Statutory Trust) BROOKSHIREtm RAW MATERIALS (U.S.) CORE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) CORE CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) AGRICULTURE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) AGRICULTURE CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) METALS USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) METALS CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ENERGY USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ENERGY CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ACCELERATED CORE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ACCELERATED CORE CDN FUND SERIES (Exact Name of Registrant as Specified in its Charter) Delaware (State of Organization) 6221 (Primary Standard Industrial Classification Code Number) 20-540 7663 I.R.S. Employer Identification Number) Brookshiretm Raw Materials Management, LLC 1000 Hart Road Suite 210 Barrington, Illinois 60010 888-877-2719 (Address and telephone number of registrant s principal executive offices) Clyde Harrison Brookshiretm Raw Materials Management, LLC 1000 Hart Road Suite 210 Barrington, Illinois 60010 888-877-2719 (Name, address and telephone number of agent for service) Copies to: Robert G. Frucht, Esq. Crowell Moring LLP 153 E. 53rd Street, 31st Floor New York, New York 10022-4611 (212) 895-4229 Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. CALCULATION OF REGISTRATION FEE Maximum Aggregate Proposed Maximum Amount of Title of Each Series Number of Securities Aggregate Offering Registration of Securities to be Registered to be Offered Price* Fee** Brookshiretm Raw Materials (U.S.) Core USD Fund 17,500,000 $ 175,000,000 $ 18,725.00 Brookshiretm Raw Materials (U.S.) Core CDN Fund 7,500,000 $ 75,000,000 $ 8,025.00 Brookshiretm Raw Materials (U.S.) Agriculture USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Agriculture CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Metals USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Metals CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Energy USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Energy CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Accelerated Core USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Accelerated Core CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Total Units of Beneficial Interest 50,000,000 $ 500,000,000 $ 53,500.00 * The proposed maximum aggregate offering price has been calculated assuming that all Units were sold at the price of US$10 per Unit. ** The amount of the registration fee for each Fund of Units is calculated in reliance upon Rule 457(o) under the Securities Act and using the proposed maximum aggregate offering as described above. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with section 8(A) of the Securities act or until this Registration Statement shall become effective on such date as the commission, acting pursuant to said Section 8(A), may determine. Table of Contents COMMODITY FUTURES TRADING COMMISSION RISK DISCLOSURE STATEMENT YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED TO THIS POOL AT PAGES 62 THROUGH 65 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGES 34 THROUGH 36 FOR EACH INDIVIDUAL FUND. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001404182_brookshire_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001404182_brookshire_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f7ab126e1cbc597565b73f68ba99f3da68884218
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001404182_brookshire_prospectus_summary.txt
@@ -0,0 +1 @@
+S-1/A 1 y31695a8sv1za.htm FORM S-1/A S-1/A Table of Contents As filed with the Securities and Exchange Commission on September 21, 2007 Registration No. 333-136879 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 PRE-EFFECTIVE AMENDMENT NO. 8 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 BROOKSHIREtm RAW MATERIALS (U.S.) TRUST (a Delaware Statutory Trust) BROOKSHIREtm RAW MATERIALS (U.S.) CORE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) CORE CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) AGRICULTURE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) AGRICULTURE CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) METALS USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) METALS CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ENERGY USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ENERGY CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ACCELERATED CORE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ACCELERATED CORE CDN FUND SERIES (Exact Name of Registrant as Specified in its Charter) Delaware (State of Organization) 6221 (Primary Standard Industrial Classification Code Number) 20-540 7663 I.R.S. Employer Identification Number) Brookshiretm Raw Materials Management, LLC 1000 Hart Road Suite 210 Barrington, Illinois 60010 888-877-2719 (Address and telephone number of registrant s principal executive offices) Clyde Harrison Brookshiretm Raw Materials Management, LLC 1000 Hart Road Suite 210 Barrington, Illinois 60010 888-877-2719 (Name, address and telephone number of agent for service) Copies to: Robert G. Frucht, Esq. Crowell Moring LLP 153 E. 53rd Street, 31st Floor New York, New York 10022-4611 (212) 895-4229 Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. CALCULATION OF REGISTRATION FEE Maximum Aggregate Proposed Maximum Amount of Title of Each Series Number of Securities Aggregate Offering Registration of Securities to be Registered to be Offered Price* Fee** Brookshiretm Raw Materials (U.S.) Core USD Fund 17,500,000 $ 175,000,000 $ 18,725.00 Brookshiretm Raw Materials (U.S.) Core CDN Fund 7,500,000 $ 75,000,000 $ 8,025.00 Brookshiretm Raw Materials (U.S.) Agriculture USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Agriculture CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Metals USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Metals CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Energy USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Energy CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Accelerated Core USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Accelerated Core CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Total Units of Beneficial Interest 50,000,000 $ 500,000,000 $ 53,500.00 * The proposed maximum aggregate offering price has been calculated assuming that all Units were sold at the price of US$10 per Unit. ** The amount of the registration fee for each Fund of Units is calculated in reliance upon Rule 457(o) under the Securities Act and using the proposed maximum aggregate offering as described above. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with section 8(A) of the Securities act or until this Registration Statement shall become effective on such date as the commission, acting pursuant to said Section 8(A), may determine. Table of Contents COMMODITY FUTURES TRADING COMMISSION RISK DISCLOSURE STATEMENT YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED TO THIS POOL AT PAGES 62 THROUGH 65 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGES 34 THROUGH 36 FOR EACH INDIVIDUAL FUND. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001404183_brookshire_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001404183_brookshire_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f7ab126e1cbc597565b73f68ba99f3da68884218
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001404183_brookshire_prospectus_summary.txt
@@ -0,0 +1 @@
+S-1/A 1 y31695a8sv1za.htm FORM S-1/A S-1/A Table of Contents As filed with the Securities and Exchange Commission on September 21, 2007 Registration No. 333-136879 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 PRE-EFFECTIVE AMENDMENT NO. 8 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 BROOKSHIREtm RAW MATERIALS (U.S.) TRUST (a Delaware Statutory Trust) BROOKSHIREtm RAW MATERIALS (U.S.) CORE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) CORE CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) AGRICULTURE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) AGRICULTURE CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) METALS USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) METALS CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ENERGY USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ENERGY CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ACCELERATED CORE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ACCELERATED CORE CDN FUND SERIES (Exact Name of Registrant as Specified in its Charter) Delaware (State of Organization) 6221 (Primary Standard Industrial Classification Code Number) 20-540 7663 I.R.S. Employer Identification Number) Brookshiretm Raw Materials Management, LLC 1000 Hart Road Suite 210 Barrington, Illinois 60010 888-877-2719 (Address and telephone number of registrant s principal executive offices) Clyde Harrison Brookshiretm Raw Materials Management, LLC 1000 Hart Road Suite 210 Barrington, Illinois 60010 888-877-2719 (Name, address and telephone number of agent for service) Copies to: Robert G. Frucht, Esq. Crowell Moring LLP 153 E. 53rd Street, 31st Floor New York, New York 10022-4611 (212) 895-4229 Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. CALCULATION OF REGISTRATION FEE Maximum Aggregate Proposed Maximum Amount of Title of Each Series Number of Securities Aggregate Offering Registration of Securities to be Registered to be Offered Price* Fee** Brookshiretm Raw Materials (U.S.) Core USD Fund 17,500,000 $ 175,000,000 $ 18,725.00 Brookshiretm Raw Materials (U.S.) Core CDN Fund 7,500,000 $ 75,000,000 $ 8,025.00 Brookshiretm Raw Materials (U.S.) Agriculture USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Agriculture CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Metals USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Metals CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Energy USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Energy CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Accelerated Core USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Accelerated Core CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Total Units of Beneficial Interest 50,000,000 $ 500,000,000 $ 53,500.00 * The proposed maximum aggregate offering price has been calculated assuming that all Units were sold at the price of US$10 per Unit. ** The amount of the registration fee for each Fund of Units is calculated in reliance upon Rule 457(o) under the Securities Act and using the proposed maximum aggregate offering as described above. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with section 8(A) of the Securities act or until this Registration Statement shall become effective on such date as the commission, acting pursuant to said Section 8(A), may determine. Table of Contents COMMODITY FUTURES TRADING COMMISSION RISK DISCLOSURE STATEMENT YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED TO THIS POOL AT PAGES 62 THROUGH 65 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGES 34 THROUGH 36 FOR EACH INDIVIDUAL FUND. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001404185_brookshire_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001404185_brookshire_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f7ab126e1cbc597565b73f68ba99f3da68884218
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001404185_brookshire_prospectus_summary.txt
@@ -0,0 +1 @@
+S-1/A 1 y31695a8sv1za.htm FORM S-1/A S-1/A Table of Contents As filed with the Securities and Exchange Commission on September 21, 2007 Registration No. 333-136879 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 PRE-EFFECTIVE AMENDMENT NO. 8 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 BROOKSHIREtm RAW MATERIALS (U.S.) TRUST (a Delaware Statutory Trust) BROOKSHIREtm RAW MATERIALS (U.S.) CORE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) CORE CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) AGRICULTURE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) AGRICULTURE CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) METALS USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) METALS CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ENERGY USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ENERGY CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ACCELERATED CORE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ACCELERATED CORE CDN FUND SERIES (Exact Name of Registrant as Specified in its Charter) Delaware (State of Organization) 6221 (Primary Standard Industrial Classification Code Number) 20-540 7663 I.R.S. Employer Identification Number) Brookshiretm Raw Materials Management, LLC 1000 Hart Road Suite 210 Barrington, Illinois 60010 888-877-2719 (Address and telephone number of registrant s principal executive offices) Clyde Harrison Brookshiretm Raw Materials Management, LLC 1000 Hart Road Suite 210 Barrington, Illinois 60010 888-877-2719 (Name, address and telephone number of agent for service) Copies to: Robert G. Frucht, Esq. Crowell Moring LLP 153 E. 53rd Street, 31st Floor New York, New York 10022-4611 (212) 895-4229 Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. CALCULATION OF REGISTRATION FEE Maximum Aggregate Proposed Maximum Amount of Title of Each Series Number of Securities Aggregate Offering Registration of Securities to be Registered to be Offered Price* Fee** Brookshiretm Raw Materials (U.S.) Core USD Fund 17,500,000 $ 175,000,000 $ 18,725.00 Brookshiretm Raw Materials (U.S.) Core CDN Fund 7,500,000 $ 75,000,000 $ 8,025.00 Brookshiretm Raw Materials (U.S.) Agriculture USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Agriculture CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Metals USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Metals CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Energy USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Energy CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Accelerated Core USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Accelerated Core CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Total Units of Beneficial Interest 50,000,000 $ 500,000,000 $ 53,500.00 * The proposed maximum aggregate offering price has been calculated assuming that all Units were sold at the price of US$10 per Unit. ** The amount of the registration fee for each Fund of Units is calculated in reliance upon Rule 457(o) under the Securities Act and using the proposed maximum aggregate offering as described above. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with section 8(A) of the Securities act or until this Registration Statement shall become effective on such date as the commission, acting pursuant to said Section 8(A), may determine. Table of Contents COMMODITY FUTURES TRADING COMMISSION RISK DISCLOSURE STATEMENT YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED TO THIS POOL AT PAGES 62 THROUGH 65 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGES 34 THROUGH 36 FOR EACH INDIVIDUAL FUND. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001404187_brookshire_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001404187_brookshire_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f7ab126e1cbc597565b73f68ba99f3da68884218
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001404187_brookshire_prospectus_summary.txt
@@ -0,0 +1 @@
+S-1/A 1 y31695a8sv1za.htm FORM S-1/A S-1/A Table of Contents As filed with the Securities and Exchange Commission on September 21, 2007 Registration No. 333-136879 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 PRE-EFFECTIVE AMENDMENT NO. 8 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 BROOKSHIREtm RAW MATERIALS (U.S.) TRUST (a Delaware Statutory Trust) BROOKSHIREtm RAW MATERIALS (U.S.) CORE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) CORE CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) AGRICULTURE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) AGRICULTURE CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) METALS USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) METALS CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ENERGY USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ENERGY CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ACCELERATED CORE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ACCELERATED CORE CDN FUND SERIES (Exact Name of Registrant as Specified in its Charter) Delaware (State of Organization) 6221 (Primary Standard Industrial Classification Code Number) 20-540 7663 I.R.S. Employer Identification Number) Brookshiretm Raw Materials Management, LLC 1000 Hart Road Suite 210 Barrington, Illinois 60010 888-877-2719 (Address and telephone number of registrant s principal executive offices) Clyde Harrison Brookshiretm Raw Materials Management, LLC 1000 Hart Road Suite 210 Barrington, Illinois 60010 888-877-2719 (Name, address and telephone number of agent for service) Copies to: Robert G. Frucht, Esq. Crowell Moring LLP 153 E. 53rd Street, 31st Floor New York, New York 10022-4611 (212) 895-4229 Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. CALCULATION OF REGISTRATION FEE Maximum Aggregate Proposed Maximum Amount of Title of Each Series Number of Securities Aggregate Offering Registration of Securities to be Registered to be Offered Price* Fee** Brookshiretm Raw Materials (U.S.) Core USD Fund 17,500,000 $ 175,000,000 $ 18,725.00 Brookshiretm Raw Materials (U.S.) Core CDN Fund 7,500,000 $ 75,000,000 $ 8,025.00 Brookshiretm Raw Materials (U.S.) Agriculture USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Agriculture CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Metals USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Metals CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Energy USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Energy CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Accelerated Core USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Accelerated Core CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Total Units of Beneficial Interest 50,000,000 $ 500,000,000 $ 53,500.00 * The proposed maximum aggregate offering price has been calculated assuming that all Units were sold at the price of US$10 per Unit. ** The amount of the registration fee for each Fund of Units is calculated in reliance upon Rule 457(o) under the Securities Act and using the proposed maximum aggregate offering as described above. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with section 8(A) of the Securities act or until this Registration Statement shall become effective on such date as the commission, acting pursuant to said Section 8(A), may determine. Table of Contents COMMODITY FUTURES TRADING COMMISSION RISK DISCLOSURE STATEMENT YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED TO THIS POOL AT PAGES 62 THROUGH 65 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGES 34 THROUGH 36 FOR EACH INDIVIDUAL FUND. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001404189_brookshire_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001404189_brookshire_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f7ab126e1cbc597565b73f68ba99f3da68884218
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001404189_brookshire_prospectus_summary.txt
@@ -0,0 +1 @@
+S-1/A 1 y31695a8sv1za.htm FORM S-1/A S-1/A Table of Contents As filed with the Securities and Exchange Commission on September 21, 2007 Registration No. 333-136879 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 PRE-EFFECTIVE AMENDMENT NO. 8 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 BROOKSHIREtm RAW MATERIALS (U.S.) TRUST (a Delaware Statutory Trust) BROOKSHIREtm RAW MATERIALS (U.S.) CORE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) CORE CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) AGRICULTURE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) AGRICULTURE CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) METALS USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) METALS CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ENERGY USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ENERGY CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ACCELERATED CORE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ACCELERATED CORE CDN FUND SERIES (Exact Name of Registrant as Specified in its Charter) Delaware (State of Organization) 6221 (Primary Standard Industrial Classification Code Number) 20-540 7663 I.R.S. Employer Identification Number) Brookshiretm Raw Materials Management, LLC 1000 Hart Road Suite 210 Barrington, Illinois 60010 888-877-2719 (Address and telephone number of registrant s principal executive offices) Clyde Harrison Brookshiretm Raw Materials Management, LLC 1000 Hart Road Suite 210 Barrington, Illinois 60010 888-877-2719 (Name, address and telephone number of agent for service) Copies to: Robert G. Frucht, Esq. Crowell Moring LLP 153 E. 53rd Street, 31st Floor New York, New York 10022-4611 (212) 895-4229 Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. CALCULATION OF REGISTRATION FEE Maximum Aggregate Proposed Maximum Amount of Title of Each Series Number of Securities Aggregate Offering Registration of Securities to be Registered to be Offered Price* Fee** Brookshiretm Raw Materials (U.S.) Core USD Fund 17,500,000 $ 175,000,000 $ 18,725.00 Brookshiretm Raw Materials (U.S.) Core CDN Fund 7,500,000 $ 75,000,000 $ 8,025.00 Brookshiretm Raw Materials (U.S.) Agriculture USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Agriculture CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Metals USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Metals CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Energy USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Energy CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Accelerated Core USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Accelerated Core CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Total Units of Beneficial Interest 50,000,000 $ 500,000,000 $ 53,500.00 * The proposed maximum aggregate offering price has been calculated assuming that all Units were sold at the price of US$10 per Unit. ** The amount of the registration fee for each Fund of Units is calculated in reliance upon Rule 457(o) under the Securities Act and using the proposed maximum aggregate offering as described above. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with section 8(A) of the Securities act or until this Registration Statement shall become effective on such date as the commission, acting pursuant to said Section 8(A), may determine. Table of Contents COMMODITY FUTURES TRADING COMMISSION RISK DISCLOSURE STATEMENT YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED TO THIS POOL AT PAGES 62 THROUGH 65 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGES 34 THROUGH 36 FOR EACH INDIVIDUAL FUND. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001404191_brookshire_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001404191_brookshire_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f7ab126e1cbc597565b73f68ba99f3da68884218
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001404191_brookshire_prospectus_summary.txt
@@ -0,0 +1 @@
+S-1/A 1 y31695a8sv1za.htm FORM S-1/A S-1/A Table of Contents As filed with the Securities and Exchange Commission on September 21, 2007 Registration No. 333-136879 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 PRE-EFFECTIVE AMENDMENT NO. 8 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 BROOKSHIREtm RAW MATERIALS (U.S.) TRUST (a Delaware Statutory Trust) BROOKSHIREtm RAW MATERIALS (U.S.) CORE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) CORE CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) AGRICULTURE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) AGRICULTURE CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) METALS USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) METALS CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ENERGY USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ENERGY CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ACCELERATED CORE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ACCELERATED CORE CDN FUND SERIES (Exact Name of Registrant as Specified in its Charter) Delaware (State of Organization) 6221 (Primary Standard Industrial Classification Code Number) 20-540 7663 I.R.S. Employer Identification Number) Brookshiretm Raw Materials Management, LLC 1000 Hart Road Suite 210 Barrington, Illinois 60010 888-877-2719 (Address and telephone number of registrant s principal executive offices) Clyde Harrison Brookshiretm Raw Materials Management, LLC 1000 Hart Road Suite 210 Barrington, Illinois 60010 888-877-2719 (Name, address and telephone number of agent for service) Copies to: Robert G. Frucht, Esq. Crowell Moring LLP 153 E. 53rd Street, 31st Floor New York, New York 10022-4611 (212) 895-4229 Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. CALCULATION OF REGISTRATION FEE Maximum Aggregate Proposed Maximum Amount of Title of Each Series Number of Securities Aggregate Offering Registration of Securities to be Registered to be Offered Price* Fee** Brookshiretm Raw Materials (U.S.) Core USD Fund 17,500,000 $ 175,000,000 $ 18,725.00 Brookshiretm Raw Materials (U.S.) Core CDN Fund 7,500,000 $ 75,000,000 $ 8,025.00 Brookshiretm Raw Materials (U.S.) Agriculture USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Agriculture CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Metals USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Metals CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Energy USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Energy CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Accelerated Core USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Accelerated Core CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Total Units of Beneficial Interest 50,000,000 $ 500,000,000 $ 53,500.00 * The proposed maximum aggregate offering price has been calculated assuming that all Units were sold at the price of US$10 per Unit. ** The amount of the registration fee for each Fund of Units is calculated in reliance upon Rule 457(o) under the Securities Act and using the proposed maximum aggregate offering as described above. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with section 8(A) of the Securities act or until this Registration Statement shall become effective on such date as the commission, acting pursuant to said Section 8(A), may determine. Table of Contents COMMODITY FUTURES TRADING COMMISSION RISK DISCLOSURE STATEMENT YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED TO THIS POOL AT PAGES 62 THROUGH 65 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGES 34 THROUGH 36 FOR EACH INDIVIDUAL FUND. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/2007/CIK0001404193_brookshire_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001404193_brookshire_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f7ab126e1cbc597565b73f68ba99f3da68884218
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001404193_brookshire_prospectus_summary.txt
@@ -0,0 +1 @@
+S-1/A 1 y31695a8sv1za.htm FORM S-1/A S-1/A Table of Contents As filed with the Securities and Exchange Commission on September 21, 2007 Registration No. 333-136879 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 PRE-EFFECTIVE AMENDMENT NO. 8 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 BROOKSHIREtm RAW MATERIALS (U.S.) TRUST (a Delaware Statutory Trust) BROOKSHIREtm RAW MATERIALS (U.S.) CORE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) CORE CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) AGRICULTURE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) AGRICULTURE CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) METALS USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) METALS CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ENERGY USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ENERGY CDN FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ACCELERATED CORE USD FUND SERIES; BROOKSHIREtm RAW MATERIALS (U.S.) ACCELERATED CORE CDN FUND SERIES (Exact Name of Registrant as Specified in its Charter) Delaware (State of Organization) 6221 (Primary Standard Industrial Classification Code Number) 20-540 7663 I.R.S. Employer Identification Number) Brookshiretm Raw Materials Management, LLC 1000 Hart Road Suite 210 Barrington, Illinois 60010 888-877-2719 (Address and telephone number of registrant s principal executive offices) Clyde Harrison Brookshiretm Raw Materials Management, LLC 1000 Hart Road Suite 210 Barrington, Illinois 60010 888-877-2719 (Name, address and telephone number of agent for service) Copies to: Robert G. Frucht, Esq. Crowell Moring LLP 153 E. 53rd Street, 31st Floor New York, New York 10022-4611 (212) 895-4229 Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. CALCULATION OF REGISTRATION FEE Maximum Aggregate Proposed Maximum Amount of Title of Each Series Number of Securities Aggregate Offering Registration of Securities to be Registered to be Offered Price* Fee** Brookshiretm Raw Materials (U.S.) Core USD Fund 17,500,000 $ 175,000,000 $ 18,725.00 Brookshiretm Raw Materials (U.S.) Core CDN Fund 7,500,000 $ 75,000,000 $ 8,025.00 Brookshiretm Raw Materials (U.S.) Agriculture USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Agriculture CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Metals USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Metals CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Energy USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Energy CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Brookshiretm Raw Materials (U.S.) Accelerated Core USD Fund 4,375,000 $ 43,750,000 $ 4,681.25 Brookshiretm Raw Materials (U.S.) Accelerated Core CDN Fund 1,875,000 $ 18,750,000 $ 2,006.25 Total Units of Beneficial Interest 50,000,000 $ 500,000,000 $ 53,500.00 * The proposed maximum aggregate offering price has been calculated assuming that all Units were sold at the price of US$10 per Unit. ** The amount of the registration fee for each Fund of Units is calculated in reliance upon Rule 457(o) under the Securities Act and using the proposed maximum aggregate offering as described above. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with section 8(A) of the Securities act or until this Registration Statement shall become effective on such date as the commission, acting pursuant to said Section 8(A), may determine. Table of Contents COMMODITY FUTURES TRADING COMMISSION RISK DISCLOSURE STATEMENT YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED TO THIS POOL AT PAGES 62 THROUGH 65 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGES 34 THROUGH 36 FOR EACH INDIVIDUAL FUND. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE
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+PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. Unless otherwise stated in this prospectus: references to we, us, our, company or our company refer to United Refining Energy Corp.; references to business combination mean our initial acquisition of one or more assets or operating businesses with a fair market value of at least 80.0% of our net assets held in the trust account (exclusive of the underwriters deferred underwriting compensation plus interest thereon held in the trust account) at the time of the acquisition through a merger, capital stock exchange, asset or stock acquisition, exchangeable share transaction, joint venture or other similar business combination, pursuant to which we will require that a majority of the shares of common stock voted by the public stockholders are voted in favor of the acquisition and one share less than 40.0% of the public stockholders both exercise their redemption rights and vote against the proposed acquisition; references to existing stockholder are to our sole stockholder before this offering, which is also our sponsor, United Refining, Inc.; references to private placement are to the sale of 17,250,000 warrants to our sponsor at a price of $1.00 per warrant, for an aggregate purchase price of $17,250,000, in a private placement that will occur immediately prior to the consummation of this offering; references to public stockholders are to the holders of common stock sold as part of the units in this offering or acquired in the aftermarket, including any existing stockholder to the extent they acquire such shares (and solely with respect to such shares); references to our sponsor are to United Refining, Inc., a Delaware corporation which is a wholly-owned subsidiary of United Acquisition Corp., a Delaware corporation, which in turn is a wholly-owned subsidiary of Red Apple Group, Inc., a Delaware corporation wholly-owned by John A. Catsimatidis, Chairman of our board of directors and our Chief Executive Officer; references to insider warrants are to the warrants to purchase an aggregate of 17,250,000 shares of our common stock being purchased by our sponsor in the private placement; references to sponsor warrants are to the warrants to purchase an aggregate of 2,500,000 shares of our common stock granted to our sponsor, which may be exercised at $12.50 per share; references to a target business are to one or more operating businesses which, after completion of this offering, we may target for a potential business combination; and unless expressly stated to the contrary, the information in this prospectus assumes that the underwriters will not exercise its over-allotment option. All share and per share information in this prospectus gives retroactive effect to a .625-for-one reverse stock split effective as of September 6, 2007 and a 2.3-for-one stock dividend effective as of November 30, 2007. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amendment No. 7 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 UNITED REFINING ENERGY CORP. (Exact name of registrant as specified in its charter) Delaware 6770 42-1732420 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 823 Eleventh Avenue New York, New York 10019 (212) 956-5803 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) John Catsimatidis Chairman of the Board and Chief Executive Officer 823 Eleventh Avenue New York, New York 10019 (212) 956-5803 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Douglas S. Ellenoff, Esq. Martin R. Bring, Esq. Stuart Neuhauser, Esq. Ellenoff Grossman & Schole LLP 370 Lexington Avenue New York, NY 10017 (212) 370-1300 (212) 370-7889 Facsimile Steven M. Skolnick, Esq. Lowenstein Sandler PC 65 Livingston Avenue Roseland, New Jersey 07068 (973) 597-2500 (973) 597-2400 Facsimile Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of the registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. CALCULATION OF REGISTRATION FEE Title of Each Class of Securities to be Registered Amount to be Registered (1) Proposed Maximum Offering Price per Unit (1) Proposed Maximum Aggregate Offering Unit (1) Amount of Registration Fee Units, each consisting of one share of Common Stock, $.0001 par value, and one Warrant (2) 57,500,000 $10.00 $575,000,000 $17,652.50 Shares of Common Stock included as part of the Units (2) 57,500,000 (3) Warrants included as part of the Units (2) 57,500,000 (3) Shares of Common Stock underlying the Warrants included in the Units (2)(4) 57,500,000 $7.00 $402,500,000 $12,356.75 Total $977,500,000 $30,009.25(4) (1) Estimated solely for the purpose of calculating the registration fee. (2) Includes 7,500,000 units, and 7,500,000 shares of common stock and 7,500,000 warrants underlying such units, which may be issued on exercise of a 45-day option granted to the underwriters to cover over-allotments, if any. (3) No fee pursuant to Rule 457(g). (4) $31,505.88 previously paid. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Table of Contents Our Business We are a newly organized Business Combination CompanyTM, or BCCTM. A BCCTM is a blank check company formed for the purpose of acquiring, merging with, engaging in a capital stock exchange with, purchasing all or substantially all of the assets of, or engaging in any other similar business combination of an unidentified operating business. We intend to focus on identifying a prospective target business in the energy industry throughout the world, with a particular focus on businesses or assets involved in the refining of petroleum and specialized products (such as petrochemicals) and services to the energy industry but our efforts in identifying a prospective target business will not be limited to the energy industry. We do not have any specific merger, capital stock exchange, asset acquisition or other business combination under consideration or contemplation and we have not, nor has anyone on our behalf, contacted any potential target business or had any discussions, formal or otherwise, with respect to such a transaction. To consummate our business combination, we may target refining, distribution and marketing companies, including the production of petroleum and other related products but our efforts in identifying a prospective target business will not be limited to such industries. As we evaluate initial business combinations, we may consider various factors such as market pricing, quality and the availability of various grades of crude oil, in addition to considering environmental factors and refinery maintenance. The combination of the above factors will be enhanced by the ability of the business to efficiently select the most profitable feedstock and product mix. We do not have a primary geographic focus, and we may seek to acquire refineries or interests in any market in which we believe we could be competitive. We may also seek to capitalize on the cost advantages of using heavy, sour crude oil rather than light, sweet crude oil as a raw material to manufacture refined products. In implementing our business plan, we intend to leverage the extensive contacts and relationships of our officers and directors, who together have over 105 years of experience in the energy industry, to source, evaluate and manage potential investment opportunities. Our Chairman and Chief Executive Officer, John A. Catsimatidis, is the Chairman of the Board and Chief Executive Officer of Red Apple Group, Inc., a diversified holding company with interests in the energy industry, supermarkets, airplanes and finance. Mr. Catsimatidis founded Red Apple Supermarkets, a single neighborhood grocery store in 1968. Through internal growth and a series of acquisitions, Mr. Catsimatidis has grown the operation, under the brand name Gristedes, into Manhattan s largest supermarket chain. Mr. Catsimatidis is also currently the Chairman of the Board and Chief Executive Officer of United Refining Company, a wholly-owned subsidiary of our sponsor and an integrated refiner and marketer of petroleum products in western New York and northwestern Pennsylvania with revenues for the fiscal year ending August 31, 2007 in excess of $2.4 billion. Mr. Catsimatidis has held these positions for over 20 years, when his wholly-owned company, United Acquisition Corp., purchased United Refining Company s parent, United Refining, Inc., which is our sponsor, while United Refining Company was in bankruptcy proceedings. Mr. Catsimatidis negotiated a plan of reorganization paying creditors 100% of their proven claims plus post-petition interest. Additionally, he served as President of United Refining Company from February 1986 until September 1996. Our President and a director of our company, Myron L. Turfitt, is currently President and Chief Operating Officer of United Refining Company, and has held these positions since September 1996, and has held several executive positions at United Refining Company since 1981. Mr. Turfitt is a CPA with over 30 years of financial and operations experience in all phases of the petroleum business including exploration and production, refining and retail marketing. His experience covers both fully-integrated major oil companies and large independents. Our Chief Financial Officer, James E. Murphy, is currently Chief Financial Officer of United Refining Company and has held this position since 1997. He has held other accounting and internal auditing Table of Contents positions with United Refining Company, including Vice President Finance and Director of Internal Auditing. Mr. Murphy is a CPA, and prior to joining United Refining Company, had over 15 years experience in accounting and auditing with banking, public accounting and manufacturing companies. Our Secretary, John R. Wagner, is currently the Vice President, General Counsel and Secretary to each of United Refining Company, United Acquisition Corp., and to certain of its subsidiaries, and has held these positions since 1997. Prior to joining United Refining Company, Mr. Wagner served as Counsel to Dollar Bank, F.S.B. from 1988 to 1997. Our director, Theodore P. Nikolis, has been a director since July 2007. He is currently Senior Counsel to The Royal Bank of Scotland (LSE: RBS), and has held this position since 2005. Approximately 20 years ago, Mr. Nikolis began his involvement in the electric power sector as a project finance attorney at the firm of Chadbourne & Parke. From January 2000 to October 2005, Mr. Nikolis was a principal of Nikolis & Associates, LLC, a consulting firm focused on distressed debt providing turnaround strategies, debt restructuring, collateral sales and bankruptcy options for the maximization of asset and/or collateral value in distressed situations. From January 2003 to October 2005, Mr. Nikolis was also a member of Odysseus Energy Inc., a private equity group targeting distressed electric generating facilities. From March 1998 to January 2000, Mr. Nikolis managed the closure of Coutts & Co. s New York office, the private banking subsidiary of NatWest. Mr. Nikolis previously managed the short term operation, financial restructuring and ultimate liquidation of over $1 billion of distressed co-generation and independent power production facilities. Our director, Michael Bilirakis, has been a director since September 2007. In January 2007, Mr. Bilirakis returned to the practice of law, which he previously engaged in from 1968 to 1984, and established the Bilirakis Law Group. From January 1983 until his retirement in January 2007, Mr. Bilirakis served in the U.S. House of Representatives, where he represented the Ninth District of Florida. During his tenure, Mr. Bilirakis served on the House Energy and Commerce Committee for 22 years. From 1992 to 2006, Mr. Bilirakis served as a member of the North Atlantic Treat Organization (NATO) Parliamentary Assembly, which brings together members of the U.S. Congress with members of parliaments throughout NATO to facilitate awareness and understanding of key security issues and to provide transparency of NATO policies. Our officers and directors have extensive relationships in the energy industry and our management team has substantial expertise in energy industry operations, as well as in identifying, negotiating, financing and structuring energy industry-related acquisitions. While we intend to focus on potential acquisition targets in the energy industry, we may also pursue opportunities in other industries involving businesses outside of management s expertise. The discussion in this prospectus relating to the energy industry may be irrelevant if we pursue acquisition opportunities outside of this industry. Our Sponsor Our sponsor is United Refining, Inc., a Delaware corporation, which is a wholly-owned subsidiary of United Acquisition Corp., a Delaware corporation, which in turn is a wholly-owned subsidiary of Red Apple Group, Inc., a Delaware corporation. Red Apple Group, Inc. is wholly-owned by John A. Catsimatidis, Chairman of our board of directors and our Chief Executive Officer. Red Apple Group, Inc. is a diversified company with a wide variety of operations in the refining industry. In addition, Red Apple Group, Inc., through certain of its subsidiaries and affiliates, also operates supermarkets including Gristede s in New York, has substantial real estate holdings, operates an airplane leasing company and publishes the Hellenic Times, the largest Greek American newspaper printed in the United States. Below is a depiction of the relationships between some of these companies and us. Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Subject To Completion, Dated December 11, 2007 PRELIMINARY PROSPECTUS United Refining Energy Corp. $500,000,000 50,000,000 units United Refining Energy Corp. is a newly organized Business Combination Company , or BCC . A BCC is a blank check company formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition or any other similar business combination, an unidentified operating business or assets. We intend to focus on identifying a prospective target business in the energy industry, with a particular focus on businesses or assets involved in the refining of petroleum products, but will not be limited to pursuing acquisition opportunities only within that industry. If we have entered into a definitive agreement but anticipate that we will not be able to consummate a business combination within 24 months of the date of this prospectus, we shall seek stockholder approval to extend the period of time to consummate a business combination by an additional six (6) months for the purpose of consummating such business combination. In order to extend the period of time to 30 months, (i) a majority of our outstanding shares of common stock and a majority of the shares of common stock voted by the public stockholders must approve an amendment to our amended and restated certificate of incorporation extending our corporate life to 30 months from the date of this prospectus and (ii) public stockholders owning no more than one share less than 40.0% of the shares of common stock sold in this offering may have voted against the proposed amendment and exercised their redemption rights, as described in this prospectus. The 30 month period will be referred to throughout this prospectus as the extended period and the proposal to so amend our amended and restated certificate will be referred to throughout this prospectus as a proposal to approve the extended period. We do not have any specific merger, capital stock exchange, asset acquisition or other similar business combination under consideration and have not, nor has anyone on our behalf, contacted any prospective target business or had any discussions, formal or otherwise, with respect to such a transaction. This is an initial public offering of our securities. Each unit is being sold at a purchase price of $10.00 per unit and consists of: one share of our common stock; and one warrant. Each warrant entitles the holder to purchase one share of our common stock at a price of $7.00. Each warrant will become exercisable on the later of our completion of a business combination or , 2008 [one year from the date of this prospectus], and will expire on , 2011 [four years from the date of this prospectus], or earlier upon redemption. We were formed and organized by United Refining, Inc., our initial stockholder and to which we refer as our sponsor, a wholly-owned subsidiary of United Acquisition Corp., a Delaware corporation, which in turn is a wholly-owned subsidiary of Red Apple Group, Inc., a Delaware corporation controlled and wholly-owned by John A. Catsimatidis, our Chairman and Chief Executive Officer. United Refining, Inc. is also the parent of United Refining Company, a Pennsylvania corporation, which is the leading integrated refiner and marketer of petroleum products in western New York and northwestern Pennsylvania with revenues for the fiscal year ended August 31, 2007 in excess of $2.4 billion. United Refining Company owns and operates a medium complexity 70,000 barrel per day, or bpd, petroleum refinery in Warren, Pennsylvania where it produces a variety of products, including various grades of gasoline, ultra low sulfur diesel fuel, kerosene, No. 2 heating oil and asphalt. Operations of United Refining Company are organized into two business segments: wholesale and retail. The wholesale segment is responsible for the acquisition of crude oil, petroleum refining, supplying petroleum products to the retail segment and the marketing of petroleum products to wholesale and industrial customers. The retail segment sells petroleum products under the Kwik Fill , Citgo , and Keystone brand names at a network of 371 company-operated retail units and convenience and grocery items through company-owned gasoline stations and convenience stores under the Red Apple Food Mart and Country Fair brand names. There is presently no public market for our units, common stock or warrants. We anticipate that the units will be listed on the American Stock Exchange under the symbol on or promptly after the date of this prospectus. Once the securities comprising the units begin separate trading , the units will continue to trade under the symbol and the common stock and warrants will be listed on the American Stock Exchange under the symbols and , respectively. The common stock and warrants comprising the units will begin separate trading ten days following the earlier to occur of the expiration of the underwriters over-allotment option or its exercise in full, subject to our filing of a Current Report on form 8-K with the Securities and Exchange Commission containing an audited balance sheet reflecting our receipt of the gross proceeds of this offering and issuing a press release announcing when such separate trading will begin. We cannot assure you that our securities will continue to be listed on the American Stock Exchange in the future. Investing in our securities involves a high degree of risk. See Risk Factors beginning on page 29 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. Per Unit Total Public offering price $10.00 $500,000,000 Underwriting discounts and commissions (1) $0.35 $17,500,000 Proceeds, before expenses, to us (1) $9.65 $482,500,000 Table of Contents We were established by United Refining, Inc. because it perceives our company as an attractive investment opportunity that allows it to explore a larger number of opportunities in the energy industry than would otherwise be available to United Refining, Inc. and in a manner that would not entail substantial changes to its capital structure. United Refining, Inc. has decided to establish, invest in (such as the private placement of 17,250,000 warrants at a price of $1.00 per warrant immediately prior to this offering, and dedicate resources (such as office space, utilities, administrative services and loans in the aggregate principal amount of $300,000 in payment of initial transaction expenses) to us because United Refining, Inc. believes that we will allow it to participate in acquisitions in the energy industry in a non-dilutive and debt-free manner to United Refining, Inc. Conflicts Our directors and officers may have similar legal obligations relating to presenting business opportunities to multiple entities as a result of the directors and officers multiple affiliations. In addition, conflicts of interest may arise when our board evaluates a particular business opportunity. We cannot assure you that any of the conflicts mentioned herein will be resolved in our favor. Each of our directors and officers have, or may come to have, to a certain degree, other fiduciary obligations. Messrs. Catsimatidis, Turfitt, Murphy and Wagner are officers of both our sponsor, United Refining, Inc., and its wholly-owned subsidiary, United Refining Company, which operates a refinery in Warren, Pennsylvania, and our company. Mr. Catsimatidis also serves as a member of the board of directors of United Refining, Inc., United Refining Company and our company. Under Delaware law, each of these individuals may have fiduciary duties to us and to the other companies. These fiduciary duties include the duty of loyalty, which requires that an officer or director must exercise his or her powers in good faith in the best interests of the corporation he or she serves and not in the director s or officer s own interest or in the interest of another person or an organization with which the officer or director is associated. As a result of our sponsor s significant (1) Does not include deferred underwriting compensation in the amount of $17,500,000 ($0.35 per unit), or $20,125,000 if the underwriters over-allotment option is exercised in full, payable to the underwriters, only upon consummation of a business combination and then only with respect to those units as to which the component shares have not been redeemed into cash by those stockholders who voted against the business combination and exercised their redemption rights. If a business combination is not consummated, such deferred underwriting compensation will be forfeited by the underwriters. Table of Contents ownership stake in us and our common management, there are certain potential conflicts of interest, including potential competition as to acquisition targets and, after an acquisition has been consummated, potential competition and business relationships with each other. As set forth below, we will have the first opportunity to consider our initial business combination meeting our 80.0% threshold requirements in any industry or business except with respect to transactions primarily involving the purchase of retail operations or the sale or lease of real estate in connection therewith. The discretion of our officers and directors, some of whom are also officers and/or directors of other companies, including our sponsor, in identifying and selecting a suitable target business may result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination are appropriate and in our stockholders best interest. Investors should be aware of the following potential conflicts of interest: None of our officers and directors are required to commit their full time to our affairs and, accordingly, they will have conflicts of interest in allocating management time among their various business activities, including those related to United Refining, Inc. In addition to his business activities, Mr. Catsimatidis is involved, and may increase his involvement, in various charitable, civic and political activities, including his considering whether to become a possible candidate for the mayor of New York City in November 2009. These activities could further limit his ability to devote time to our affairs and could affect our ability to consummate a business combination. Our officers and directors may, in the future, become affiliated with entities, including other blank check companies, engaged in business activities similar to those intended to be conducted by our company. In the course of their business activities for United Refining, Inc. or any of the other companies diagramed above, our common officers and directors may become aware of investment and business opportunities which may be appropriate for presentation to our company as well as to such other company. They may have conflicts of interest in determining to which entity a particular business opportunity should be presented. For this reason, we have entered into a business opportunity right of first refusal agreement with each of such companies, the terms of which are discussed further below. Other than with respect to the business combination, we have not adopted a policy that expressly prohibits our directors, officers, securityholders or affiliates from having a direct or indirect pecuniary interest in any investment to be acquired or disposed or by us in any transaction to which we are a party or have an interest. Nor do we have a policy that expressly prohibits any such persons from engaging for their own account in business activities of the types conducted by us. Accordingly, such parties may have an interest in certain transactions in which we are involved, and may compete with us. Since United Refining, Inc. owns shares of our common stock, insider warrants and sponsor warrants that will be released from escrow only if a business combination is successfully completed and owns warrants which will expire worthless if a business combination is not consummated, our board of directors may have a conflict of interest in determining whether a particular target business is appropriate to effect a business combination. The financial interests of United Refining, Inc. may influence the motivation of our common officers and directors in identifying and selecting a target business, timely completing a business combination and securing the release of United Refining, Inc. s stock from escrow. Approximately $17,275,000 of United Refining, Inc. s investment in us will be lost if we do not consummate a business combination. This amount is comprised of consideration paid for the founding shares (which do not have liquidation rights) and insider warrants. These amounts are in addition to (i) a maximum of $15,000 in fees and expenses for our dissolution and liquidation, which United Refining, Inc. has agreed to pay in the event we do not have sufficient funds outside of the trust account to pay for such expenses, and (ii) claims made against the trust account by creditors who have not executed waivers of claims. Deutsche Bank Securities Maxim Group LLC The date of this prospectus is , 2007. Table of Contents Because it is possible that our chairman and one or more of our independent directors may continue to serve on our board of directors after the consummation of our initial business combination, and such individuals may be paid fees for their services, the financial interest of such individuals may influence their motivation when determining whether a particular business combination is on our shareholders best interest and securing payment of such fees. Upon consummation of the offering, United Refining, Inc. will own 20.0% of our common stock, which significant ownership interest may dissuade potential acquirers from seeking control of us after we complete our initial business combination and buying our common stock at a price that our stockholders may deem beneficial. Right of First Refusal Commencing on the date of this prospectus and extending until the earlier of the closing of our initial business combination or our dissolution and liquidation, we have agreed with each of Red Apple Group, Inc., a company owned and controlled by John A. Catsimatidis, Chairman of our board of directors and our Chief Executive Officer, its wholly-owned subsidiary United Acquisition Corp., its wholly-owned subsidiary and our existing stockholder and sponsor, United Refining, Inc. and its wholly-owned subsidiary, United Refining Company, to share business opportunities as follows: We will have the first opportunity to consider any business opportunities meeting our 80.0% threshold requirements in any industry or business except with respect to transactions primarily involving the purchase of retail operations or the sale or lease of real estate in connection therewith. United Refining, Inc. Red Apple Group, Inc., United Acquisition Corp. and United Refining Company will have the first opportunity to consider any business opportunities with respect to transactions primarily involving the purchase of retail operations or the sale or lease of real estate in connection therewith. Decisions by us to release any of the above-named companies to pursue any specific business opportunity other than with respect to transaction primarily involving the purchase of retail operations or the sale or lease of real estate in connection therewith will be made by a majority of our independent directors. We have entered into the business opportunity right of first refusal agreement in order to (i) provide greater certainty to the process by which we manage any potential conflict of interest and (ii) provide each of our and each of the other companies management with guidelines to permit each of them to fully and properly discharge their respective duties to each of us and the other companies. United Refining, Inc., Red Apple Group, Inc., United Acquisition Corp. and United Refining Company have further agreed, for the period commencing on the date of this prospectus and extending until the earlier of the closing of our initial business combination or our liquidation, that they will not form, invest in or become affiliated with a blank check or blind pool company operating in or intended to acquire a business in the energy industry as well as other industries. We do not have any specific business combination under consideration and we have not (nor has anyone on our behalf) contacted any prospective target business or had any discussions, formal or otherwise, with respect to such a transaction. From the period prior to our formation through the date of this prospectus, there have been no communications or discussions between any of our officers and directors or our sponsor and any of their potential contacts or relationships regarding a potential business combination. Additionally, we have not, nor has anyone on our behalf, taken any measure, directly or indirectly, to identify or locate any suitable acquisition candidate, nor have we engaged or retained any agent or other representative to identify or locate any such acquisition candidate. While we intend to focus on potential acquisition targets in the energy industry, with a particular focus on businesses or assets involved in the refining of petroleum products, we may also pursue opportunities in other industries. If an attractive acquisition opportunity is identified in another industry prior to Table of Contents Of the proceeds we receive from this offering and the private placement to be made to our sponsor prior to the consummation of this offering, $498,550,000 ($9.97 per unit) will be deposited into the trust account at Banc of America Investment Services, Inc. maintained by Continental Stock Transfer & Trust Company acting as trustee. This amount includes deferred underwriting compensation in the amount of $17,500,000 ($0.35 per unit), or $20,125,000 if the underwriters over-allotment option is exercised in full, payable to the underwriters, only upon consummation of a business combination and then only with respect to those units as to which the component shares have not been redeemed by those public stockholders who voted against the business combination and exercised their redemption rights. As a result, our public stockholders will receive, subject to any valid claims by our creditors that are not covered by amounts in the trust account or indemnities provided by our sponsor, $9.97 per unit (plus a portion of the interest earned on the trust account), but net of: (i) taxes payable on interest income earned on the trust account and State of Delaware franchise taxes and (ii) up to $3,700,000 of interest income earned on the trust account released to us to fund our working capital and dissolution and liquidation expenses if we fail to consummate a business combination; provided, however, if the over-allotment option is exercised in full, we will not be permitted to draw such amounts until $2,407,500 (or a lesser amount if less than the fully over-allotment option is exercised, pro rata based on the amount of the over-allotment option exercised) of interest shall have been earned on the trust account with the resulting effect that there shall be a minimum of $9.97 per unit held in the trust account. Under Delaware law, claims of our creditors will have priority over the distribution to our stockholders of amounts held in the trust account. We are offering the units for sale on a firm-commitment basis. Deutsche Bank Securities Inc. and Maxim Group LLC, are acting as joint bookrunning managers of the offering and are acting as the joint representatives of the underwriters, expect to deliver our securities to investors in the offering on or about [ ], 2007. Our sponsor, United Refining, Inc. has agreed to purchase 17,250,000 warrants, or insider warrants, from us at a price of $1.00 per warrant in a private placement to be completed immediately prior to this offering. All of the proceeds received from the sale of the insider warrants (an aggregate of $17,250,000) will be placed in the trust account described below. The insider warrants will be identical to those sold in this offering except that none of the insider warrants will be transferable or salable until after we complete a business combination, are not subject to redemption if held by our sponsor or its permitted assigns and may be exercised on a cashless basis at any time after they become exercisable if held by our sponsor or its permitted assigns. The holder of insider warrants will not have any right to any liquidation distributions with respect to the shares underlying such insider warrants in the event we fail to consummate a business combination, in which event the insider warrants will expire worthless. We have granted the underwriters, a 45-day option to purchase up to 7,500,000 additional units (over and above the 50,000,000 units referred to above) solely to cover over-allotments, if any. Table of Contents the time we identify an acquisition opportunity in the energy industry, we may pursue such other opportunity. There is no time or date certain or monetary milestone associated with when we may begin looking for acquisition opportunities outside of the energy industry. If we are unable to consummate a business combination within the allotted time periods set forth in this prospectus and in our amended and restated certificate of incorporation, we will liquidate our trust account and any other assets to our public stockholders. While we may seek to effect business combinations with more than one target business, our initial business combination must be with a target business (or businesses) whose fair market value is at least equal to 80.0% of our net assets held in the trust account (exclusive of the underwriters deferred underwriting compensation plus interest thereon, net of taxes payable, held in the trust account) at the time of such acquisition. If we acquire less than 100.0% of one or more target businesses in our initial business combination, the aggregate fair market value of the interest or assets we acquire must equal at least 80.0% of our assets held in the trust account (exclusive of the underwriters deferred underwriting compensation plus interest thereon held in the trust account) at the time of such acquisition. Consequently, initially we may have the ability to complete only a single business combination, although this may entail our acquisition of one or more individual assets, properties or entities. While we do not intend to pursue a business combination with any company that is affiliated with our existing stockholder, executive officers or directors, we are not prohibited from pursuing such a transaction. In the event we seek to complete a business combination with such a company, we would obtain an opinion from an independent investment banking firm which is a member of the Financial Industry Regulatory Authority, or FINRA, and is reasonably acceptable to the representatives of the underwriters, that such a business combination is fair to our stockholders from a financial point of view. Generally, such opinion is rendered to a company s board of directors and investment banking firms may take the view that stockholders may not rely on the opinion. Such view will not impact our decision on which investment banking firm to hire. In the event we ultimately determine to simultaneously acquire several assets or properties and such assets or properties are owned by different sellers, we may need for each of such sellers to agree that our purchase is contingent on the simultaneous closings of the other acquisitions, which may make it more difficult for us, and delay our ability, to complete the business combination. With multiple acquisitions, we could also face additional risks, including additional burdens and costs with respect to possible multiple negotiations and due diligence investigations (if there are multiple sellers) and the additional risks associated with the subsequent integration of the multiple assets or properties into a single operating entity. Our business combination may take the form of a joint venture wherein we acquire less than a 100.0% ownership interest in certain properties, assets or entities. We intend to pursue a transaction in which our stockholders would continue to own a controlling interest of our company. However, we could pursue a transaction, such as a reverse merger or other similar transaction, in which we issue a substantial number of new shares and, as a result, our stockholders immediately prior to such transaction could own less than a majority of our outstanding shares subsequent to such transaction. In such case, the remaining ownership interest may be held by third parties who may or may not have been involved with the properties, assets or entities prior to our acquisition of such ownership interest. With a joint venture, we will face additional risks, including the additional costs and time required to investigate and otherwise conduct due diligence on potential joint venture partners and to negotiate joint venture agreements. Moreover, the subsequent management and control of a joint venture will entail risks associated with multiple owners and decision makers. We may further seek to acquire a target business that has a fair market value significantly in excess of 80.0% of our net assets held in the trust account (exclusive of the underwriters deferred underwriting compensation plus interest thereon, net of taxes payable, held in the trust account). In order to do so, we may seek to raise additional funds through a private offering of debt or equity securities, and the Company may effect a business combination using the proceeds of such offering rather than using the amounts held in the trust Table of Contents You should rely only on the information contained in this registration statement of which this prospectus forms a part. We have not, and the underwriters have not, authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer is not permitted. We obtained statistical data, market data and other industry data and forecasts used throughout this prospectus from publicly available information. While we believe that the statistical data, industry data, forecasts and market research are reliable, we have not independently verified the data and we do not make any representation as to the accuracy of the information. This prospectus contains forward-looking statements that involve substantial risks and uncertainties as they are not based on historical facts, but rather are based on current expectations, estimates and projections about our industry, our beliefs, and our assumptions. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. You should not place undue reliance on any forward-looking statements, which apply only as of the date of this prospectus. Business Combination Company TM and BCC TM are service marks of Maxim Group LLC. Table of Contents account. In the case of a business combination funded with assets other than the trust account assets, the proxy materials disclosing the business combination for which we would seek stockholder approval would disclose the terms of the financing as well and, if required by law, regulation or a rule of the American Stock Exchange, we would seek stockholder approval of such financing. In the absence of a requirement by law, regulation or a rule of the American Stock Exchange, we would not seek separate stockholder approval of such financing inasmuch as the financing portion of any business combination would be disclosed in the proxy materials and would be a consideration of the stockholder approval process for the business combination under consideration. There are no prohibitions on our ability to raise funds privately or through loans that would allow us to acquire a company with a fair market value in an amount greater than 80.0% of our net assets held in the trust account (exclusive of the underwriters deferred underwriting compensation plus interest thereon, net of taxes payable, held in the trust account) at the time of the acquisition. At this time, we are not a party to any arrangement or understanding with any third party with respect to raising any additional funds through the sale of securities or otherwise. Private Placement Prior to the date of this prospectus, our sponsor will purchase an aggregate of 17,250,000 warrants, which we refer to as the insider warrants, from us at a price of $1.00 per warrant in a private placement pursuant to Regulation D of the Securities Act of 1933, as amended. The insider warrants will be identical to those sold in this offering, except that: (i) the insider warrants will not have a claim to the funds held in the trust account, (ii) the insider warrants are being purchased pursuant to an exemption from the registration requirements of the Securities Act and will become freely tradable only after they are registered pursuant to a registration rights agreement to be signed on or before the date of this prospectus, (iii) the insider warrants will be nonredeemable so long as they are held by our sponsor or its permitted assigns and (iv) the insider warrants are exercisable (a) on a cashless basis at any time after they become exercisable, if held by our sponsor or its permitted assigns and (b) in the absence of an effective registration statement covering the shares of common stock underlying the warrants. All of the gross proceeds from the sale of the 17,250,000 warrants in the private placement, or $17,250,000, will be deposited into the trust account. Until the day following consummation of a business combination, the insider warrants may only be transferred in certain limited circumstances, and the transferees receiving such insider warrants will be subject to the same sale restrictions imposed on the initial purchaser and its member transferees. Our executive offices are located at 823 Eleventh Avenue, New York, New York, 10019, and our telephone number at that location is (212) 956-5803. Sponsor s Warrants On November 30, 2007, we granted to our sponsor warrants to purchase up to 2,500,000 shares of our common stock, which we refer to as the sponsor warrants. Such warrants were granted to the sponsor in order to induce it to increase its investment in the private placement preceding this offering by an additional $5,000,000 (and such warrants will be delivered upon the closing of the private placement) and will be treated as a compensation expense for accounting purposes. The sponsor warrants are identical to the warrants sold in this offering, except that: (i) the sponsor warrants are exercisable at 12.50 per share, (ii) the sponsor warrants will be nonredeemable so long as they are held by our sponsor or its permitted assigns and (iii) the sponsor warrants expire five years from the date of this prospectus. Until the later of the day following the consummation of a business combination and one year from the date of this prospectus, the sponsor warrants may only be transferred in certain limited circumstances and the transferees receiving such warrants will be subject to the same sale restrictions. Table of Contents The Offering Securities offered: 50,000,000 units, at $10.00 per unit, each unit consisting of: one share of common stock; and one warrant. Trading commencement and separation of common stock and warrants: The units will begin trading on or promptly after the date of this prospectus. Each of the common stock and warrants shall trade separately on the 10th day following the earlier to occur of: (i) the expiration of the underwriters over-allotment option or (ii) its exercise in full. In no event will the common stock and warrants begin to trade separately until we have filed a Current Report on Form 8-K with the Securities and Exchange Commission, or SEC, containing an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file this Current Report on Form 8-K after the consummation of this offering, which is anticipated to take place three business days from the date of this prospectus. The audited balance sheet will include proceeds we receive from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Current Report on Form 8-K. If the over-allotment option is exercised following the initial filing of such Form 8-K, a second or amended Form 8-K will be filed to provide updated information reflecting the exercise of the over-allotment option. For more information, see Description of Securities Units. Following the date that the common stock and warrants are eligible to trade separately, the units will continue to be listed for trading, and any securityholder may elect to break apart a unit and trade the common stock or warrants separately or as a unit. Even if the component parts of the units are broken apart and traded separately, the units will continue to be listed as a separate security, and consequently, any subsequent securityholder owning common stock and warrants may elect to combine them together and trade them as a unit. Securityholders will have the ability to trade our securities as units until such time as the warrants expire or are redeemed. Common stock: Number outstanding before this offering: 14,375,000 shares (includes 1,875,000 shares sold to our sponsor that are subject to forfeiture to the extent the underwriters do not exercise their over-allotment option in order for our sponsor to maintain ownership of 20.0% of our outstanding shares of common stock) Number to be outstanding after this offering: 62,500,000 (assumes no exercise of the underwriters over-allotment option and forfeiture of 1,875,000 shares by our sponsor) Warrants: Number outstanding before this offering and private placement: 2,500,000 warrants Table of Contents Number to be outstanding after this offering and private placement: 69,750,000 warrants Exercisability: Each warrant is exercisable for one share of common stock. Exercise price: $7.00 None of the warrants may be exercised until after the consummation of our business combination and, thus, after the funds in the trust account have been disbursed. Accordingly, the warrant exercise price will be paid directly to us and not placed in the trust account. Exercise period: The warrants will be exercisable only if we provide for an effective registration statement covering the shares of common stock underlying the warrants. The warrants will become exercisable on the later of: the completion of a business combination , or [ ], 2008 [one year from the effective date of the registration statement] The warrants will expire at 5:00 p.m., New York City time, on [ ], 2011 [four years from the effective date of the registration statement] or, in the event our stockholders approve the extended period, on , 2012 [four years and six months from the effective date of the registration statement] or earlier upon redemption. The sponsor warrants are identical to the warrants except that they are exercisable at $12.50 per share and expire five years from the date of the prospectus. Redemption: We may redeem the outstanding warrants without the consent of the representative or any third party: in whole and not in part, at a price of $0.01 per warrant at any time after the warrants become exercisable, upon not less than 30 days prior written notice of redemption, and if, and only if, the last sales price of our common stock equals or exceeds $14.25 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. The redemption provisions for our warrants have been established at a price which is intended to provide warrant holders a premium to the initial warrant exercise price and to provide a degree of liquidity to cushion the market reaction, if any, to our redemption call. There can be no assurance, however, that the price of the common stock will exceed $14.25 or the warrant exercise price of $7.00 after we call the warrants for redemption and the price may in fact decline as a result of the limited liquidity following any such call for redemption. None of the insider warrants or the sponsor warrants are redeemable while held by the initial stockholder or its permitted assigns. Table of Contents Private Placement and Grant of Sponsor Warrants: Our sponsor has agreed to purchase 17,250,000 warrants, or insider warrants, prior to the consummation of the offering at the price of $1.00 per warrant for a total of $17,250,000, all of which are to be financed from the sponsor s funds and not from borrowed funds. The purchase price of the insider warrants will be added to the proceeds from this offering to be held in the trust account pending our completion of a business combination. We do not believe the sale of the warrants will result in a compensation expense because they are being sold at or above fair market value. If we do not complete a business combination that meets the criteria described in this prospectus, then the $17,250,000 purchase price of the insider warrants will become part of the amount payable to our public stockholders upon the liquidation of our trust account and the insider warrants will become worthless. See Proposed Business Effecting a business combination Liquidation if no business combination below. The insider warrants have terms and provisions that are identical to the warrants being sold in this offering, respectively, except that (i) the insider warrants will not have a claim to the funds held in the trust account, (ii) the insider warrants are being purchased pursuant to an exemption from the registration requirements of the Securities Act and will become freely tradable only after they are registered pursuant to a registration rights agreement to be signed on or before the date of this prospectus, (iii) the insider warrants will be nonredeemable so long as they are held by our sponsor or its permitted assigns and (iv) the insider warrants are exercisable on a cashless basis at any time after they become exercisable if held by our sponsor or its permitted assigns. The transfer restriction does not apply to transfers made pursuant to registration or an exemption that are occasioned by operation of law or for estate planning purposes, while remaining in escrow. On November 30, 2007, we granted to our sponsor warrants to purchase up to 2,500,000 shares of our common stock. Such warrants were granted to the sponsor in order to induce it to increase its investment in the private placement preceding this offering by an additional $5,000,000 and will be treated as a compensation expense for accounting purposes. The sponsor warrants are identical to the warrants sold in this offering, except that: (i) the sponsor warrant are exercisable at 12.50 per share, (ii) the sponsor warrants will be nonredeemable so long as they are held by our sponsor or its permitted assigns and (iii) the sponsor warrants expire five years from the date of this prospectus. If any of our officers or directors or our sponsor acquire units or warrants for their own account in the open market, any such warrants or the warrants included in those units will be redeemable. If our other outstanding warrants are redeemed and the price of our common stock rises following such redemption, the holder of the insider warrants could potentially realize a larger gain on exercise or sale of those warrants than is available to other warrant holders, although Table of Contents there is no assurance the price of our common stock would increase following a warrant redemption. We have elected to make the insider warrants non-redeemable in order to provide the sponsor a potentially longer exercise period for those warrants because it will bear a higher risk than that of public due to the fact the insider warrants are subject to transfer restrictions and to a longer holding period than that of the public warrantholders, and also to loss of investment upon liquidation, as described in the preceding paragraph. If the price of our common stock declines in periods subsequent to a warrant redemption and the sponsor who initially acquired these insider warrants from us continues to hold the insider warrants, the value of those insider warrants still held by the sponsor may also decline. Proposed AMEX symbols for our: Units: Common stock: Warrants: Offering proceeds to be held in trust: Of the proceeds we receive from this offering and the private placement to be made prior to the consummation of this offering to our sponsor, $498,550,000 ($9.97 per unit), or $573,332,500 if the over-allotment option is exercised in full, will be deposited into the trust account at Banc of America Investment Services, Inc. maintained by Continental Stock Transfer & Trust Company acting as trustee. Of this amount, up to $481,050,000 ($553,207,500 if the underwriters over-allotment option is exercised in full) may be used by us for the purpose of effecting a business combination and up to $17,500,000 ($0.35 per unit), or $20,125,000 if the underwriters over-allotment option is exercised in full, will be payable to the underwriters if a business combination is consummated and then only with respect to those units as to which the component shares have not been redeemed by those stockholders who voted against the business combination and exercised their redemption rights. We believe that the inclusion in the trust account of the underwriters deferred underwriting compensation and the proceeds of the private placement in the trust account is a benefit to our public stockholders because additional proceeds will be available for distributions to investors if we liquidate our trust account prior to our completing a business combination. The proceeds held in the trust account will not be released to us until the earlier of the completion of our business combination or our dissolution liquidation; provided, however, we plan to draw the following amounts from the interest income earned on the trust account prior to, or upon consummation of, a business combination or our dissolution and liquidation: (i) taxes payable on interest income earned on the trust account and State of Delaware franchise taxes and (ii) up to an aggregate of $3,700,000 of interest income for working capital purposes. However, to the extent the underwriters over-allotment option is exercised in full and funds held in trust are less that $9.97 per share, we will not be permitted to draw Table of Contents such amounts until $2,407,500 (or a lesser amount if less than the full over-allotment option is exercised, pro rata based on the amount of the over-allotment exercise) of interest shall have been earned on the trust account with the result effect that there shall be a minimum of $9.97 per unit held in the trust account. Unless and until a business combination is consummated, the proceeds held in the trust account will not be available for our use for any expenses related to this offering or expenses which we may incur related to the investigation and selection of a target business and the negotiation of an agreement to acquire a target business. Expenses incurred by us while seeking a business combination may be paid prior to a business combination only from the net proceeds of this offering not held in the trust account (initially, approximately $150,000 after the payment of the expenses relating to this offering) plus up to $3,700,000 of interest income earned on the trust account and released to us to fund our working capital. It is possible that we could use a portion of the funds not in the trust account to make a deposit or down payment to fund a no-shop provision with respect to a particular proposed business combination. In the event we were ultimately required to forfeit such funds (whether as a result of our breach of the agreement relating to such payment or otherwise), we may not have a sufficient amount of working capital available outside of the trust account to pay expenses related to finding a suitable business combination without securing additional financing. If we were unable to secure additional financing, we would most likely fail to consummate a business combination in the allotted time and would liquidate the company and liquidate our trust account. Limited payments to insiders: Prior to the completion of a business combination, there will be no fees, reimbursements, cash payments or compensation of any kind, including the issuance of any securities of the company, made to our sponsor or our officers and directors other than: repayment of an aggregate of $300,000 in loans bearing no interest made by our sponsor to cover offering expenses; reimbursement for any expenses incident to the offering and finding a suitable business combination. Given the amount of time it may take to identify a prospective target and take all the steps necessary to consummate a business combination and the fact that a prospective target is not limited to any particular geographic region, we cannot predict at this time with any degree of certainty the amount of expenses to be incurred by our officers and directors in connection with a business combination that we will ultimately reimburse; and payment to United Refining, Inc., our sponsor, of $7,500 per month for office space and certain general and administrative services, including but not limited to receptionist, secretarial and general office services. Our sponsor and certain of its affiliates share office space and share the cost of secretarial, reception, Table of Contents telecommunication, equipment, supplies, and such other office- related items as they deem appropriate at a cost of approximately $80,000 per month. As we expect our activities in seeking and consummating a business combination will require use of a portion of the office space and these various services, we have agreed to pay 9.4% of such cost, or $7,500 per month, with the balance being the obligation of our sponsor or such affiliates. Our sponsor has entered into a business opportunity right of first refusal agreement with us: Commencing on the date of this prospectus and extending until the earlier of the closing of our initial business combination or our dissolution and liquidation, we have agreed with each of Red Apple Group, Inc., a company owned and controlled by John A. Catsimatidis, Chairman of our board of directors and our Chief Executive Officer, its wholly-owned subsidiary United Acquisition Corp., its wholly-owned subsidiary and our existing stockholder and sponsor, United Refining, Inc. and its wholly-owned subsidiary, United Refining Company, to share business opportunities as follows: We will have the first opportunity to consider any business opportunities meeting our 80.0% threshold requirements in any industry or business except with respect to transactions primarily involving the purchase of retail operations or the sale or lease of real estate in connection therewith. Red Apple Group, Inc., United Acquisition Corp., United Refining, Inc. and United Refining Company will have the first opportunity to consider any business opportunities with respect to transactions primarily involving the purchase of retail operations or the sale or lease of real estate in connection therewith. Decisions by us to release any of the above-named companies to pursue any specific business opportunity other than with respect to transaction primarily involving the purchase of retail operations or the sale or lease of real estate in connection therewith will be made by a majority of our independent directors. We have entered into a business opportunity right of first refusal agreement in order to (i) provide greater certainty to the process by which we manage any potential conflict of interest and (ii) provide each of our and each of the other companies management with guidelines to permit each of them to fully and properly discharge their respective duties to each of us and the other companies. Stockholders must approve business combination: We will seek stockholder approval before we effect our business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable state law. In connection with the vote required to approve the extended period or the initial business combination, our initial stockholder has agreed to vote the shares of common stock owned by it immediately prior this offering in accordance with the majority of the shares of common stock voted by the public stockholders. In addition, our existing stockholder, Table of Contents directors and executive officers have agreed to vote any shares of common stock acquired in this offering or in the aftermarket in favor of the extended period and a business combination submitted to our stockholders for approval. Accordingly, our initial stockholder will not be able to exercise redemption rights with respect to any potential business combination. We are not aware of any present intention on the part of our sponsor, officers or directors to make any purchases in this offering or in the aftermarket. Although we do not know for certain the factors that would cause our sponsor, officers or directors to purchase our securities, we believe that some of the factors they would consider are: (i) the trading price of our securities, (ii) their aggregate investment in our securities, (iii) whether it appears that a substantial number of public stockholders are voting against a proposed business combination, and (iv) their interest in the target business once the target business has been identified. Although our sponsor, officers and directors have no current intentions to make such purchases, the sponsor and directors and officers are not prohibited from purchasing shares of our common stock in the open market and/or in privately negotiated transactions. Any such privately negotiated transaction with a stockholder would include a contractual acknowledgement that such stockholder, although still a holder of record of our common stock, is no longer the beneficial owner thereof and therefore agrees to vote such shares of common stock as directed by the sponsor, directors or officers, as the case may be. In the event the sponsor, directors or officers purchase shares in privately negotiated transactions from stockholders who have already cast votes against a proposal to approve the extended period or the proposed acquisition, as the case may be, and requested redemption of their shares, such selling stockholders would be required to revoke their prior votes against the proposal to approve the extended period or the proposed acquisition, as the case may be, and to revoke their prior elections to redeem their shares and to cast new votes in favor of the proposal to approve the extended period or the proposed acquisition, as the case may be. The revocation of prior negative votes and substitution therefor of votes in favor of the proposal to approve the extended period or the proposed acquisition, as the case may be, would have the effect of reducing redemptions and increasing votes in favor of the proposal to approve the extended period or the proposed acquisition, as the case may be, thereby making it more likely that the proposal to approve the extended period or a proposed business combination, as the case may be, would be approved. We will proceed with a business combination only if a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and public stockholders owning no more than one share less than 40.0% of the shares of common stock sold in this offering both vote against the business combination and exercise their redemption rights on a cumulative basis with the Table of Contents stockholders who previously exercised their redemption rights in connection with the stockholder vote required to approve the extended period. In addition, we will not proceed with a business combination unless the proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence in connection with a business combination is approved by a majority of our outstanding shares of common stock. Voting against the proposal to approve the extended period or the business combination alone will not result in redemption of a stockholder s shares of common stock into a pro rata share of the trust account. Such stockholder must also exercise its redemption rights described below. Our threshold for redemption rights has been established at 40.0% in order for our offering to be competitive with the recent trend of other blank check companies currently in the market to increase the threshold for redemption rights, although historically blank check companies have used a 20.0% threshold. We have increased the threshold to reduce the risk of a small group of stockholders exercising undue influence on the approval process. This increase in the threshold for redemption rights is consistent with many other current filings with the SEC and it will increase the likelihood of an approval of any proposed business combination by making it easier for us to consummate a business combination with which public stockholders may not agree. We have increased the threshold to 40.0% to also provide for the fact that there are two possible redemption periods: one if our stockholders are asked to consider extending the period in which we must consummate a business combination from 24 months to 30 months and the second when stockholders are asked to consider the proposed business combination. However, the 40.0% threshold entails certain risks described under the headings, Risk Factors Unlike most other blank check offerings, we allow our public stockholders holding one share less than 40.0% of the shares of common stock sold in this offering to exercise their redemption rights. This higher threshold will make it easier for us to consummate a business combination with which you may not agree, and you may not receive the full amount of your original investment upon exercise of your redemption rights and Unlike most other blank check offerings, we allow our public stockholders holding up to one share less than 40.0% of the shares of common stock sold in this offering to exercise their redemption rights. The ability of a larger number of our public stockholders to exercise their redemption rights may not allow us to consummate the most desirable business combination or optimize our capital structure. For more information, see the section entitled Proposed Business Effecting a Business Combination Opportunity for stockholder approval of a business combination. For purposes of seeking approval of the majority of the shares of common stock voted by the public stockholders, non-votes will have no effect on the proposal to approve the extended period or approval of a business combination once a quorum is obtained. We intend to Table of Contents give prior written notice of any meeting at which a vote shall be taken to approve the extended period or business combination during a period of not less than 10 days nor more than 60 days prior to such meeting. Even if less than 40.0% of the public stockholders exercise their redemption rights on a cumulative basis, we may be unable to consummate a business combination if such redemption leaves us with funds less than a fair market value at least equal to 80.0% of our assets held in the trust account (exclusive of the underwriters deferred underwriting compensation plus interest thereon, net of taxes payable, held in the trust account) at the time of such acquisition, which amount is required as a condition to the consummation of our initial business combination. In such event, we may be forced to find additional financing to consummate such business combination, consummate a different business combination or dissolve and liquidate. This may limit our ability to effectuate the most attractive business combination available to us. Possible extension of time to consummate a business combination to 30 months: Unlike other blank check companies, if we have entered into a definitive agreement but anticipate that we will be unable to consummate a business combination within 24 months from the date of this prospectus, we shall seek to extend the time period within which we must complete our business combination to avoid being required to liquidate to 30 months, by calling a special meeting of our stockholders for the purpose of soliciting their approval for such extension. If holders of 40.0% or more of the shares of common stock sold in this offering vote against the proposed extension to 30 months and elect to redeem their shares for a pro rata share of the trust account, we will not extend the date before which we must complete our business combination beyond 24 months. In such event, if we cannot complete the initial business combination within such 24 month period, we will be required to liquidate with the amount remaining in the trust account returned to all public stockholders. Subject to the foregoing, approval of the extension to 30 months will require the affirmative vote of the majority of our outstanding shares of common stock and a majority of our public stockholders. If we receive stockholder approval for the extended period and holders of 40.0% or more of the shares of common stock sold in this offering do not vote against the extended period and choose to redeem in connection with the vote for the extended period, we will then have an additional six (6) months in which to complete the initial business combination. As a result of an approval of the extension, we may be able to hold your funds in the trust account for up to 30 months. A stockholder s election to redeem his shares of common stock will only be honored if the extended period is approved. Stockholders who vote against the extended period and exercise their redemption rights Table of Contents will not be able to vote on the initial business combination. All other stockholders will be able to vote on the initial business combination. If at the end of such 30 month period we have not effected a business combination, we will dissolve as promptly as practicable and liquidate the proceeds of the trust account as set forth in this prospectus. Redemption rights for stockholders voting to reject the extended period or a business combination Public stockholders voting against a proposal to approve the extended period (which proposal is approved) or a business combination that is approved will be entitled to redeem their common stock for $9.97 (plus a portion of the interest earned on the trust account) but net of: (i) taxes payable on interest income earned on the trust account and State of Delaware franchise taxes and (ii) up to $3,700,000 of interest income released to us to fund our working capital; provided, however, if the underwriters over-allotment option is exercised in full, we will not be permitted to draw such amounts until $2,407,500 (or a lesser amount if less than the full over-allotment option is exercised, pro rata based on the amount of the over-allotment option exercised) of interest income shall have been earned on the trust account with the resulting effect that there shall be a minimum of $9.97 per share held in the trust account. If a proposal to approve the extended period or a business combination, as the case may be, is approved, stockholders that vote against the proposal to approve the extended period or a business combination and elect to redeem their shares of common stock to cash will be entitled to receive their pro-rata portion of the $17,500,000 ($0.35 per share) of deferred underwriting discount held in the trust account along with interest accrued thereon. However, the ability of stockholders to receive $9.97 per share is subject to any valid claims by our creditors not covered by amounts held in the trust account or the indemnity provided by our sponsor. Public stockholders will not be entitled to their pro rata share of the trust account simply by voting against the proposal to approve the extended period or the business combination; each stockholder must also affirmatively exercise its redemption rights in order to receive its pro rata share of the trust account. However, if public stockholders of 40.0% or more of our shares of common stock on a cumulative basis vote against the proposal to approve the extended period or the business combination and elect to redeem their shares of common stock, our corporate life will not be extended and we will not proceed with such business combination, as the case may be. Public stockholders that redeem their stock into their pro rata share of the trust account will continue to have the right to exercise any warrants they may hold. Whether the redemption threshold is exceeded will be determined by adding the percentage of public stockholders that redeem their shares of common stock in connection with the approval of the extended Table of Contents period to the percentage of public stockholders that redeem their shares of common stock in connection with a proposed business combination. In the event that 40.0% or more of the public stockholders vote against a proposal to approve the extended period and exercise their redemption rights, our corporate life will not be extended and our company s existence will be terminated if we cannot consummate a business combination within 24 months from the date of this prospectus. If the extended period is approved and less than 40.0% of our public stockholders vote against the extended period and exercise their redemption rights (or if we never solicit stockholder approval of an extended period), then we shall proceed with a business combination if, in addition to other necessary approvals discussed elsewhere in this prospectus, the number of public stockholders voting against the proposed business combination and exercising their redemption rights does not exceed 40.0% of the number of shares sold in this offering on a cumulative basis with the stockholders who previously exercised their redemption rights in connection with the proposal to approve the extended period, if applicable. An eligible stockholder may request redemption at any time after the mailing to our stockholders of the proxy statement prior to the vote taken with respect to a proposal to approve the extended period or a proposed business combination at a meeting held for that purpose, but the request will not be granted unless the stockholder votes against the proposal to approve the extended period or the business combination and the amendment to our amended and restated certificate of incorporation is approved and filed with the Secretary of State of Delaware or the business combination is approved and completed. Additionally, we may require public stockholders, whether they are a record holder or hold their shares in street name, to either tender their certificates to our transfer agent at any time through the vote on the proposal to approve the extended period or the business combination or to deliver their shares to the transfer agent electronically using Depository Trust Company s DWAC (Deposit/Withdrawal At Custodian) System, at the holder s option. The proxy solicitation materials that we will furnish to stockholders in connection with the vote for any proposal to approve the extended period or a proposed business combination will indicate whether we are requiring stockholders to satisfy such certification and delivery requirements. Accordingly, a stockholder would have from the time we send out our proxy statement through the vote on the extended period or the business combination to tender his shares if he wishes to seek to exercise his redemption rights. This time period varies depending on the specific facts of each transaction. However, as the delivery process can be accomplished by the stockholder, whether or not he is a record holder or his shares are held in street name, in a matter of hours by simply contacting the transfer agent or his broker and requesting delivery of his shares through the DWAC System, we believe this time period is sufficient for an average investor. Table of Contents However, because we do not have any control over this process, it may take significantly longer than we anticipated. Traditionally, in order to perfect redemption rights in connection with a blank check company s business combination, a holder could simply vote against a proposed business combination and check a box on the proxy card indicating such holder was seeking to redeem. After the business combination was approved, the company would contact such stockholder to arrange for him to deliver his certificate to verify ownership. As a result, the stockholder then had an option window after the consummation of the business combination during which he could monitor the price of the stock in the market. If the price rose above the redemption price, he could sell his shares in the open market before actually delivering his shares to the company for cancellation. The requirement for physical or electronic delivery prior to the meeting ensures that a redeeming holder s election to redeem is irrevocable once the extended period or the business combination is approved. There is a nominal cost associated with the above-referenced tendering process and the act of certificating the shares or delivering them through the DWAC system. The transfer agent will typically charge the tendering broker $35.00 and it would be up to the broker whether or not to pass this cost on to the redeeming holder. However, this fee would be incurred regardless of whether or not we require holders seeking to exercise redemption rights to tender their shares prior to the meeting. The need to deliver shares is a requirement of redemption regardless of the timing of when such delivery must be effectuated. However, in the event we require holders seeking to exercise redemption rights to tender their shares prior to the meeting and the proposal to approve the extended period or the proposed business combination is not consummated (and therefore we would not be obligated to redeem the tendered shares), this may result in an increased cost to stockholders when compared to the traditional process if the tendering broker passes the cost on to the redeeming holder. Any request for redemption, once made, may be withdrawn at any time up to the date of the meeting. Furthermore, if a stockholder delivered his certificate for redemption and subsequently decided prior to the meeting not to elect redemption, he may simply request that the transfer agent return the certificate (physically or electronically). It is anticipated that the funds to be distributed to stockholders entitled to redeem their shares who elect redemption will be distributed promptly after the filing of the amendment to our amended and restated certificate of incorporation with the Secretary of State of Delaware or the completion of a business combination. Public stockholders who redeem their stock into their share of the trust account still have the right to exercise any warrants they still hold. If a vote on our initial business combination is held and the business combination is not approved, we may continue to try to consummate a business combination with a different target until 24 months from Table of Contents the date of this prospectus unless a proposal to approve the extended period is approved, in which case we will have 30 months from the date of this prospectus. If the initial business combination is not approved or completed for any reason, then public stockholders voting against our initial business combination who exercised their redemption rights with respect to a proposed business combination would not be entitled to redeem their shares of common stock for a pro rata share of the aggregate amount then on deposit in the trust account. In such case, if we have required public stockholders to tender their certificates prior to the meeting, we will promptly return such certificates to the tendering public stockholder. Our existing stockholder is not entitled to redeem any of its shares of common stock acquired prior to this offering into a pro rata share of the trust account. However, if our existing stockholder acquires shares of common stock in or after this offering it will be entitled to a pro rata share of the trust account upon our dissolution and liquidation in the event we do not consummate a business combination within the required time period. The existing stockholder will waive its right to receive any share of the trust account upon such liquidation of the trust account with respect to the shares of common stock owned by it immediately prior to this offering, including the shares of common stock underlying the insider warrants and sponsor warrants. Dissolution and liquidation if no business combination: If we have not consummated a business combination by , 2009 [24 months from the date of this prospectus], or , 2010 [30 months from the date of this prospectus], in the event our stockholders approve the extended period our corporate existence will cease as a matter of law except for the purposes of winding up our affairs and liquidating pursuant to Section 278 of the Delaware General Corporation Law, in which case we will as promptly as practicable thereafter adopt a plan of dissolution in accordance with Section 281(b) of the Delaware General Corporation Law and promptly distribute only to our public stockholders $9.97 per share (plus a portion of the interest earned on the trust account) but net of: (i) taxes payable on interest income earned on the trust account and State of Delaware franchise taxes and (ii) up to $3,700,000 of interest income released to us to fund our working capital and dissolution and liquidation expenses and a pro rata share of any remaining assets, subject to any valid claims by our creditors that are not covered by amounts held in the trust account or the indemnity provided by our sponsor. Section 278 provides that our existence will continue for at least three years after its expiration for the purpose of prosecuting and defending suits, whether civil, criminal or administrative, by or against us, and of enabling us gradually to settle and close our business, to dispose of and convey our property, to discharge our liabilities and to distribute to our stockholders any remaining assets, but not for the purpose of continuing the business for which we were organized. Our existence Table of Contents will continue automatically even beyond the three-year period for the purpose of completing the prosecution or defense of suits begun prior to the expiration of the three-year period, until such time as any judgments, orders or decrees resulting from such suits are fully executed. Section 281 of the Delaware General Corporation Law will require us to adopt a plan that will provide for our payment, based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against us within the subsequent 10 years. Accordingly, we would be required to provide for any creditors known to us at that time as well as provide for any claims that we believe could potentially be brought against us within the subsequent 10 years prior to distributing the funds held in the trust account to our public stockholders. We have not assumed that we will have to provide for payment on any claims that may potentially be brought against us within the subsequent 10 years due to the speculative nature of such an assumption. We cannot assure you that we will properly assess all claims that may be potentially brought against us. As such, our stockholders could potentially be liable for any claims of creditors to the extent of distributions received by them (but no more). Furthermore, while we will seek to have all vendors and service providers (which would include any third parties we engaged to assist us in any way in connection with our search for a target business) and prospective target businesses execute agreements with us waiving any right, title, interest or claim of any kind they may have in or to any monies held in the trust account, there is no guarantee that they will execute such agreements. Nor is there any guarantee that, even if such entities execute such agreements with us, they will not seek recourse against the trust account or that a court would not conclude that such agreements are not legally enforceable. To date, we do not have waiver agreements in place with respect to any party that is currently providing services to us; however, prior to or after the consummation of this offering, we expect to receive the written waiver from our outside legal counsel, the representative, the representative s outside legal counsel and other service providers. In order to protect the amounts held in the trust account, our sponsor has agreed to indemnify us for claims of creditors, vendors, service providers and target businesses that have not executed a valid and binding waiver of their right to seek payment of amounts due to them out of the trust account. The only obligations not covered by such indemnity are with respect to claims of creditors, vendors, service providers and target businesses that have executed a valid and binding waiver of their right to seek payment of amounts due to them out of the trust account. Despite these obligations, we cannot assure you the sponsor will be able to satisfy those obligations, if required to do so. In the event the proceeds held in the trust account Table of Contents are reduced and our sponsor asserts that it is unable to satisfy its obligations or that it has no indemnification obligations related to a particular claim, our independent directors would determine whether we would take legal action against our sponsor to enforce its indemnification obligations. While we currently expect that our independent directors would take action on our behalf against our sponsor to enforce its indemnification obligations to us as and when we deem appropriate, it is possible that our independent directors in exercising their business judgment may choose not to do so in any particular instance. Accordingly, we cannot assure you that the per-share distribution from the trust account, if we liquidate, will not be less than $9.97, plus interest then held in the trust account. We anticipate the distribution of the funds in the trust account to our public stockholders will occur within 10 business days from the date our corporate existence ceases. Our sponsor and existing stockholder, United Refining, Inc., has waived its rights to participate in any liquidation distribution with respect to all shares of common stock owned by it prior to this offering, including the common stock underlying the insider warrants. In addition, if we liquidate, the underwriters have agreed to waive their rights to the $17,500,000 of deferred underwriting compensation plus interest earned thereon deposited in the trust account held for their benefit. We will pay the costs of liquidation from our remaining assets outside of the trust account. If such funds are insufficient, our sponsor has agreed to advance us the funds necessary to complete such liquidation (currently anticipated to be no more than approximately $15,000) and has agreed not to seek repayment for such expenses. Amended and restated certificate of incorporation: As discussed below, there are specific provisions in our amended and restated certificate of incorporation that may not be amended (without the affirmative vote of at least 95.0% of our outstanding common stock) prior to our consummation of a business combination, including our requirements to seek stockholder approval of such a business combination and to allow our stockholders to seek redemption of their shares if they do not approve of the extended period or of a business combination. While we have been advised that such provisions limiting our ability to amend our amended and restated certificate of incorporation may not be enforceable under Delaware law, they are intended to protect our stockholders by requiring a supermajority vote in favor of such a change in order for it to become effective. We view these provisions, which are contained in Article Sixth of our amended and restated certificate of incorporation, as obligations to our stockholders and our officers and directors have agreed they will not propose, or vote in favor of, any amendment to these provisions other than in connection with a business combination. Our amended and restated certificate of incorporation also provides that we will continue in existence only until , 2009 [24 months from the date of this prospectus] or, if our stockholders have approved the extended period, by , 2010 [30 Table of Contents months from the date of this prospectus]. If we have not completed a business combination by such date, our corporate existence will cease except for the purposes of winding up our affairs and liquidating, pursuant to Section 278 of the Delaware General Corporation Law. This has the same effect as if our board of directors and stockholders had formally voted to approve our dissolution pursuant to Section 275 of the Delaware General Corporation Law. Accordingly, limiting our corporate existence to a specified date as permitted by Section 102(b)(5) of the Delaware General Corporation Law removes the necessity to comply with the formal procedures set forth in Section 275 (which would have required our board of directors and stockholders to formally vote to approve our dissolution and liquidation and to have filed a certificate of dissolution with the Delaware Secretary of State). In connection with any proposed business combination we submit to our stockholders for approval, we will also submit to stockholders a proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence, thereby removing this limitation on our corporate life. Under Delaware law, the approval of the proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence in connection with a business combination would require the affirmative vote of a majority of the shares of common stock outstanding. We will only consummate a business combination if stockholders vote both in favor of such business combination and our amendment to provide for our perpetual existence. Any vote to extend our corporate life to continue perpetually in connection with a business combination will be effective only if the business combination is approved. We view this provision terminating our corporate existence on , 2009 [24 months from the date of this prospectus] or, if our stockholders approve the extended period, by , 2010 [30 months from the date of this prospectus] as an obligation to our stockholders and our officers and directors have agreed they will not propose, or vote in favor of, any amendment to this provision other than in connection with the proposal to approve the extended period or in connection with a business combination. Escrow of existing stockholder s shares, private placement warrants and sponsor warrants: On the consummation of this offering, our existing stockholder will place the shares of common stock it owned prior to this offering, the insider warrants purchased in the private placement and the sponsor warrants into an escrow account maintained by Continental Stock Transfer & Trust Company, acting as escrow agent. Subject to certain limited exceptions (such as transfers to family members and trusts for estate planning purposes, while remaining subject to the escrow agreement), the shares of common stock will not be transferable during the escrow period and will not be released from escrow until the earlier of one year after the consummation of a business combination or three years from the date of this prospectus (but in no event less than one year after the consummation of a business combination), unless we were to engage in a transaction after the initial business combination that results in all of the stockholders of the combined entity having the right to exchange their shares of Table of Contents Exhibit Index Exhibit No. Description 1.1 Form of Underwriting Agreement.* 3.1 Certificate of Incorporation.* 3.2 Form of Amended and Restated Certificate of Incorporation.* 3.3 Bylaws.* 4.1 Specimen Unit Certificate.* 4.2 Specimen Common Stock Certificate.* 4.3 Specimen Warrant Certificate.* 4.4 Form of Warrant Agreement between American Stock Transfer & Trust Company and the Registrant.* 5.1 Opinion of Ellenoff Grossman & Schole LLP.* 10.1 Form of Investment Management Trust Account Agreement between American Stock Transfer & Trust Company and the Registrant.* 10.2 Form of Securities Escrow Agreement among the Registrant, American Stock Transfer & Trust Company, and the Existing Stockholder.* 10.3 Form of Registration Rights Agreement among the Registrant and the Existing Stockholder.* 10.4 Form of Letter Agreement by and between the Registrant and the Sponsor.* 10.5 Form of Letter Agreement by and between the Registrant and John A. Catsimatidis.* 10.6 Form of Letter Agreement by and between the Registrant and Myron L. Turfitt.* 10.7 Form of Letter Agreement by and between the Registrant and James E. Murphy.* 10.8 Form of Letter Agreement by and between the Registrant and John R. Wagner.* 10.9 Form of Letter Agreement by and between the Registrant and Theodore P. Nikolis.* 10.10 Administrative Services Agreement between the Registrant and Sponsor.* 10.11 Amended and Restated Subscription Agreement between the Registrant and the Sponsor.* 10.12 Promissory Note, dated June 25, 2007, issued to Sponsor in the amount of $200,000.* 10.13 Right of First Refusal Agreement by and among United Refining Energy Corp., Red Apple Group, Inc., United Acquisition Corp., United Refining, Inc. and United Refining Company.* 10.14 Form of Letter Agreement by and between the Registrant and Michael Bilirakis.* 10.15 Promissory Note, dated September 18, 2007, issued to Sponsor in the amount of $100,000.* 10.16 Form of Warrant granted to Sponsor.* 14 Code of Business Conduct and Ethics.* 23.1 Consent of BDO Seidman, LLP. 23.2 Consent of Ellenoff Grossman & Schole LLP (included in Exhibit 5.1).* Table of Contents common stock for cash, securities or other property. Subject to certain limited exceptions (such as transfers to family members and trusts for estate planning purposes, while remaining subject to the escrow agreement), the insider warrants will not be transferable during the escrow period and will not be released from escrow until one day after the consummation of a business combination. Subject to certain limited exceptions (such as transfers to family members and trusts for estate planning purposes, while remaining subject to the escrow agreement), the sponsor warrants will not be transferable during the escrow period and will not be released from escrow until the later of one day after the consummation of a business combination or one year from the date of this prospectus. If we are forced to liquidate, all of the existing stockholder s shares will be cancelled. For more information, see the section entitled Principal Stockholders. Determination of Offering Amount: In consultation with our underwriters, we determined the size of this offering based on our beliefs concerning the capital that could be successfully raised given market conditions. Based upon the net proceeds of this offering and the private placement, we believe we will have the ability to consider a broad range of potential target businesses possessing the scale of operations and developed infrastructure that will allow us to execute a business plan which will leverage our skills and resources. In addition, we currently have no restrictions on our ability to seek additional funds through the sale of our securities or through loans. As a consequence, we could seek to acquire a target business that has a fair market value significantly in excess of 80.0% of our net assets held in the trust account (exclusive of the underwriters deferred underwriting compensation plus interest thereon, net of taxes payable, held in the trust account) at the time of the acquisition. The determination of the offering price of our units and the valuation accorded to our company is more arbitrary than the pricing of securities for, or valuation of, operating companies in general. Table of Contents Risks In making your decision on whether to invest in our securities, you should take into account the special risks we face as a blank check company, as well as the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, and, therefore, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. You should carefully consider these and the other risks set forth in the section entitled Risk Factors beginning on page 29 of this prospectus. Some of our other risks include the following: We are a recently incorporated development stage company with no operating results to date. Since we do not have an operating history, you will have no basis upon which to evaluate our ability to achieve our business objective, which is to effect a business combination. We have no available cash and working capital and our sponsor has only committed to advance us funds necessary to complete this offering. Our ability to continue as a going concern is thus dependent on funds raised in this offering. The discretion of our officers and directors in identifying and selecting a suitable target business may result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination are appropriate and in our stockholders best interest. If we are unable to find a suitable target business that would result in a business combination, the funds being held in the trust account may not be returned to you until after , 2009 [24 months from the date of this prospectus] or , 2010 [30 months from the date of this prospectus] in the event you vote in favor of a proposal to approve the extended period. If we are forced to liquidate before a business combination and distribute the trust account in liquidation, our public stockholders may receive significantly less than $9.97 per share and our warrants will expire worthless. If third parties bring claims against us, the proceeds held in the trust account could be reduced and the per-share liquidation price received by stockholders will be less than the approximately $9.97 per share held in trust. Our ability to effect a business combination and to be successful thereafter will be totally dependent upon the efforts of our officers, directors and others, who may not continue with us following a business combination. Our officers, directors and their affiliates currently are, and may in the future become affiliated with additional entities that are, engaged in business activities similar to those intended to be conducted by us and accordingly, may have conflicts of interest in determining to which entity a particular business opportunity should be presented. Initially, we may only be able to complete one business combination, which may cause us to be solely dependent on a single asset or operation. By consummating a business combination with only a single asset or operation, our lack of diversification may subject us to numerous economic and competitive developments. Investors in this offering have no basis to evaluate the merits or risks of a business combination as we have not yet selected any target business with which to complete a business combination. We are not required to use all or any of the amount in the trust account for our initial business combination as long as we consummate an initial business combination with one or more target businesses with a fair market value equal to at least 80.0% of our net assets held in the trust account (exclusive of the underwriters deferred underwriting compensation plus interest thereon, net of taxes payable, held in the trust account) at the time of the acquisition. We may use any remaining proceeds held in the trust account for working capital, including director and officer compensation, change-in-control payments or payments to affiliates, to finance the operations of the target business, make other acquisitions and pursue our growth strategy. (1) The as adjusted information gives effect to: (i) the sale of units in this offering including the application of the related gross proceeds, the sale of the additional insider warrants and the payment of expenses related to these transactions and (ii) the repayment of loans in the aggregate principal amount of $200,000 made by our sponsor prior to the consummation of this offering. The as adjusted working capital includes $17,500,000 being held in the trust account, net of $6,999,999 due to possible common stock redemption, representing net deferred underwriting compensation. (2) If the business combination is consummated, public stockholders who voted against the business combination and exercised their redemption rights, up to one share less than 40.0% of the aggregate number of shares of common stock sold in this offering (19,999,999 shares) would be entitled to receive $9.97 per share (plus a portion of the interest accrued on the trust account) but net of: (i) taxes payable on interest income earned on the trust account and State of Delaware franchise taxes and (ii) up to $3,700,000 of interest income released to us to fund our working capital. However, the ability of stockholders to receive $9.97 per share is subject to any valid claims by our creditors not covered by amounts held in our trust account or the indemnity provided by our sponsor. The as adjusted working capital and total assets amounts include the $498,550,000 held in the trust account for our benefit, which will be available to us only upon the consummation of a business combination within the time period described in this prospectus. If we have not consummated a business combination by , 2009 [24 months from the date of this prospectus] or, if our stockholders approve the extended period, by , 2010 [30 months from the date of this prospectus], our corporate existence will cease by operation of law and we will promptly distribute only to our public stockholders the amount in our trust account (including an additional $17,500,000 representing the underwriters deferred underwriting compensation plus interest thereon held in the trust account, plus all other accrued interest, net of taxes payable on the interest income and State of Delaware franchise taxes and amounts disbursed for working capital purposes) plus any remaining net assets, subject to our obligations under Delaware law to provide for claims of creditors. Our existing stockholder has agreed to waive its rights to participate in any liquidating distributions occurring upon our failure to consummate a business combination and subsequent liquidation with respect to the shares of common stock owned by them immediately prior to this offering, including the shares of common stock underlying the insider warrants and the sponsor warrants. We will not proceed with a business combination if public stockholders owning 40.0% or more of the shares of common stock sold in this offering on a cumulative basis vote against the proposal to approve the extended period and the business combination and exercise their redemption rights. Accordingly, we may effect a business combination if public stockholders owning up to one share less than 40.0% of the shares of common stock sold in this offering on a cumulative basis exercise their redemption rights. If this occurred and a business combination Table of Contents is completed, we could be required to redeem to cash from the trust account up to approximately 19,999,999 shares of common stock, at an initial per-share redemption price of approximately $9.97 plus a portion of the interest accrued on the trust account (net of: (i) taxes payable on interest income earned on the trust account and State of Delaware franchise taxes and (ii) up to $3,700,000 of interest income released to us to fund our working capital, including a pro rata share of the accrued interest earned on the underwriters deferred underwriting compensation; provided, however, if the underwriters over-allotment option is exercised in full, we will not be permitted to draw such amounts until $2,407,500 (or a lesser amount if less than the full over-allotment option is exercised, pro rata based on the amount of the over-allotment option exercised) of interest shall have been earned on the trust account). The expected redemption price per share is greater than each stockholder s initial pro rata share of the trust account of $9.97, which amount does not include $0.35 per share that represents the portion of the deferred underwriting compensation the underwriters have agreed to forego for each share of common stock that is redeemed. Accordingly, the total deferred underwriting compensation payable to the underwriters in the event of a business combination will be reduced by $0.35 for each share that is redeemed. The balance of the expected redemption price will be paid from proceeds held in the trust account which are payable to us upon the consummation of a business combination. Even if less than 40.0% of the public stockholders exercise their redemption rights on a cumulative basis, we may be unable consummate a business combination if such redemption leaves us with funds less than a fair market value equal to at least 80.0% of our net assets in the trust account (exclusive of the underwriters deferred underwriting compensation plus interest thereon, net of taxes payable, held in the trust account) at the time of the acquisition. Table of Contents RISK FACTORS Investing in our securities involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before making a decision to invest in our units. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us. If any of the following risks occur, our business, financial conditions or results of operating may be materially and adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment. Risks Related to Our Current Business We are a development stage company with no operating history and, accordingly, you will not have any basis on which to evaluate our ability to achieve our business objective. We are a recently incorporated development stage company with no operating results to date. Therefore, our ability to begin operations is dependent upon obtaining financing through the public offering of our securities. Since we do not have any operations or an operating history, you will have no basis upon which to evaluate our ability to achieve our business objective, which is to acquire one or more operating businesses or assets with a particular focus on businesses or assets involved in the refining of petroleum products, but will not be limited to pursuing acquisition opportunities only within that industry. We have not conducted any discussions and we have no plans, arrangements or understandings with any prospective target business with respect to a business combination. We will not generate any revenues or income until, at the earliest, after the consummation of a business combination. We cannot assure you as to when or if a business combination will occur. We have no present revenue and will not generate any revenues until, at the earliest, after the completion of a business combination. The report of our independent registered public accountants on our financial statements includes an explanatory paragraph stating that our ability to continue as a going concern is dependent on the consummation of this offering. The financial statements do not include any adjustments that might result from our inability to consummate this offering or our ability to continue as a going concern. Our determination of the offering price of our units and of the aggregate amount of proceeds we are raising in this offering was more arbitrary than would typically be the case if we were an operating company rather than an acquisition vehicle. Prior to this offering there has been no public market for our securities. The public offering price of the units, the terms of the warrants, the aggregate proceeds we are raising and the amount to be placed in trust were the result of a negotiation between the underwriters and us. The factors that were considered in making these determinations include: the history and prospects of similarly structured blank check companies; our management and their experience in the industry; the actual and proposed offering of those companies, including the structure and size of the offerings; our capital structure; the general conditions of the securities markets at the time of the offering; an assessment by management of the funds necessary to complete an acquisition in the energy industry with a particular focus on operating businesses or assets involved in the refining of petroleum products; and other factors deemed relevant. Table of Contents Although these factors were considered, the determination of our per unit offering price and aggregate proceeds was more arbitrary than would typically be the case if we were an operating company. In addition, because we have not identified any potential target businesses, management s assessment of the financial requirements necessary to complete a business combination may prove inaccurate, in which case we may not have sufficient funds to consummate a business combination and we would be forced to either find additional financing or liquidate or we many have too great an amount in the trust account to identify a prospect having a fair market value of at least 80.0% of our net assets held in the trust account (exclusive of the underwriters deferred underwriting compensation plus interest thereon, net of taxes payable, held in the trust account). We may not be able to consummate a business combination within the required timeframe, in which case, we will be forced to liquidate. Pursuant to our amended and restated certificate of incorporation, we will continue in existence only until 24 months from the consummation of this offering or, in the event our stockholders approve the extended period, then only until 30 months from the consummation of this offering. If we fail to consummate a business combination within the required time frame, our corporate existence will, in accordance with our amended and restated certificate of incorporation, cease except for the purposes of winding up our affairs and liquidating. We may not be able to find a suitable target business within the required time frame. In addition, our negotiating position and our ability to conduct adequate due diligence on any potential target may be reduced as we approach the deadline for the consummation of a business combination. We do not have any specific business combination under consideration, and neither we, nor any representative acting on our behalf, has had any contacts with any target businesses regarding a business combination, nor taken any direct or indirect actions to locate or search for a target business. We view these provisions as obligations to our stockholders and our officers and directors have agreed they will not propose, or vote in favor of, any amendment to this provision other than in connection with the proposal to approve the extended period or in connection with a business combination. In addition, we will not support, directly or indirectly, or in any way endorse or recommend, that stockholders approve an amendment or modification to such provision if it does not appear we will be able to consummate a business combination within the foregoing time periods. Our existing stockholder has waived its rights to participate in any liquidation distribution with respect to the shares of common stock owned by them prior to this offering, including the shares of common stock underlying the insider warrants. There will be no distribution from the trust account with respect to our warrants which will expire worthless. We will pay the costs of liquidation, which we currently estimate to be up to $15,000, from our remaining assets outside of the trust account. In addition, our sponsor has agreed to indemnify us for all claims of creditors to the extent that we fail to obtain valid and enforceable waivers from vendors, service providers, prospective target business or other entities in order to protect the amounts held in trust. Unlike other blank check companies, we are permitted, pursuant to our amended and restated certificate of incorporation, to seek to extend the date before which we must complete an initial business combination to 30 months. As a result, your funds may be held in the trust account for up to thirty months. Unlike other blank check companies, if we have entered into a definitive agreement but anticipate that we will not be able to consummate a business combination within 24 months of the date of this prospectus, we shall seek to extend the date before which we must complete our business combination, to avoid being required to liquidate, beyond the 24 months to 30 months by calling a special meeting of our stockholders for the purpose of soliciting their approval for such extension. If the proposal for the extension to 30 months is approved by our stockholders, we will have an additional 6 months within which to complete our initial business combination. As a result we may be able to hold your funds in the trust account for up to 30 months and thus delay the receipt by you of your funds from the trust account on redemption in connection with a proposed business combination or liquidation. Table of Contents You will not have any rights or interest in funds from the trust account, except under certain limited circumstances. Our public stockholders will be entitled to receive funds from the trust account only in the event of our liquidation or if they seek to redeem their respective shares of common stock into cash upon the approval of the extended period the stockholder voted against and the filing of an amendment to our amended and restated certificate of incorporation with the Secretary of State of Delaware or upon a business combination which the stockholder voted against and which is completed by us. In no other circumstances will a stockholder have any right or interest of any kind in the trust account. If we are forced to liquidate before the completion of a business combination and distribute the trust account, our public stockholders may receive significantly less than $9.97 per share. Our placing of funds in the trust account may not protect those funds from third party claims against us. Although we will seek to have all vendors, target businesses, prospective target businesses or other entities we engage execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our public stockholders, there is no guarantee that they will execute such agreements, or even if they execute such agreements that they would be prevented from bringing claims against the trust account including, but not limited to, fraudulent inducement, breach of fiduciary responsibility or other similar claims, as well as claims challenging the enforceability of the waiver, in each case in order to gain advantage with a claim against our assets, including the funds held in the trust account. If any third party refused to execute an agreement waiving such claims to the monies held in the trust account, we would perform an analysis of the alternatives available to us if we chose not to engage such third party and evaluate if such engagement would be in the best interest of our stockholders if such third party refused to waive such claims. Examples of possible instances where we may engage a third party that refused to execute a waiver include the engagement of a third party consultant whose particular expertise or skills are believed by management to be significantly superior to those of other consultants that would agree to execute a waiver or in cases where management is unable to find a provider of required services willing to provide the waiver. In any event, our management would perform an analysis of the alternatives available to it and would only enter into an agreement with a third party that did not execute a waiver if management believed that such third party s engagement would be significantly more beneficial to us than any alternative. In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with us and not seek recourse against the trust account for any reason. Accordingly, the proceeds held in the trust account could be subject to claims that could take priority over the claims of our public stockholders and the per-share liquidation price could be less than the $9.97 per share held in the trust account, plus interest (net of any taxes due on such interest and franchise taxes payable to the State of Delaware, which taxes shall be paid from the trust account, and any other amounts released to us described elsewhere in this prospectus), due to claims of such creditors. Our sponsor has agreed to indemnify and hold us harmless against liabilities, claims, damages and expenses to which we may become subject as a result of any claim by any target business, prospective target business, vendor or other entity owed money by us for services rendered or products sold to us to the extent necessary to ensure that such claims do not reduce the amount in the trust account. We cannot assure you that our sponsor will be able to satisfy those obligations. The indemnification provisions are set forth in the insider letter executed by our sponsor. Additionally, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, the funds held in our trust account will be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. To the extent any bankruptcy claims deplete the trust account we cannot assure you we will be able to return to our public stockholders the liquidation amounts due them. Table of Contents Our disinterested independent directors may decide not to enforce the indemnification obligations of our sponsor, resulting in a reduction in the amount of funds in the trust account available for distribution to our public stockholders. Our sponsor has agreed to indemnify and hold us harmless against liabilities, claims, damages and expenses to which we may become subject as a result of any claim by any target business, prospective target business, vendor or other entity owed money by us for services rendered or products sold to us to the extent necessary to ensure that such claims do not reduce the amount in the trust account. In the event that the proceeds in the trust account are reduced and our sponsor asserts that it is unable to satisfy its obligations or that it has no indemnification obligations related to a particular claim, our independent directors would determine whether we would take legal action against our sponsor to enforce its indemnification obligations. While we currently expect that our independent directors would take action on our behalf against our sponsor to enforce its indemnification obligations, it is possible that our independent directors in exercising their business judgment may choose not to do so in a particular instance. If our independent directors choose not to enforce the indemnification obligations of our sponsor, the amount of funds in the trust account available for distribution to our public stockholders may be reduced and the per share liquidation distribution could be less that the initial $9.97 per share. If we are forced to liquidate before a business combination, our warrants will expire worthless. If we are unable to complete a business combination and are forced to liquidate the trust account, there will be no distribution with respect to our outstanding warrants and, accordingly, the warrants ill expire worthless. For a more complete discussion of the effects on our stockholders if we are unable to complete a business combination, see the section below entitled Effecting a business combination Liquidation if no business combination. If we are unable to consummate a business combination, our public stockholders will be forced to wait the full 24 months or, if a public stockholder approves the extended period, then the full 30 months, before receiving liquidation distributions. We have 24 months or, in the event our stockholders approve the extended period, we have 30 months in which to complete a business combination. We have no obligation to return funds to investors prior to such date unless we consummate a business combination prior thereto and only then in cases where investors have sought redemption of their shares. Only after the expiration of this full time period will public stockholders be entitled to liquidation distributions if we are unable to complete a business combination. Accordingly, investors funds may be unavailable to them until such date. We may choose to redeem our outstanding warrants at a time that is disadvantageous to our warrant holders. Subject to there being a current prospectus under the Securities Act of 1933 with respect to the common stock issuable upon exercise of the warrants, we may redeem the warrants issued as a part of our units at any time after the warrants become exercisable in whole and not in part, at a price of $.01 per warrant, upon a minimum of 30 days prior written notice of redemption, if and only if, the last sales price of our common stock equals or exceeds $14.25 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. In addition, we may not redeem the warrants unless the warrants comprising the units sold in this offering and the shares of common stock underlying those warrants are covered by an effective registration statement from the beginning of the measurement period through the date fixed for the redemption. Redemption of the warrants could force the warrant holders (i) to exercise the warrants and pay the exercise price at a time when it may be disadvantageous for the holders to do so, (ii) to sell the warrants at the then current market price when they might otherwise wish to hold the warrants, or (iii) to accept the nominal redemption price which, at the time the warrants are called for redemption, is likely to be substantially less than the market value Table of Contents of the warrants. We expect most purchasers of our warrants will hold their securities through one or more intermediaries and consequently you are unlikely to receive notice directly from us that the warrants are being redeemed. If you fail to receive notice of redemption from a third party and your warrants are redeemed for nominal value, you will not have recourse to us. Although we are required to use our best efforts to have an effective registration statement covering the issuance of the shares of common stock underlying the warrants at the time that our warrant holders exercise their warrants, we cannot guarantee that a registration statement will be effective, in which case our warrant holders may not be able to exercise our warrants and therefore the warrants could expire worthless. Holders of our warrants will be able to exercise the warrants only if (i) a current registration statement under the Securities Act of 1933 relating to the shares of our common stock underlying the warrants is then effective and (ii) such shares of common stock are qualified for sale or exempt from qualification under the applicable securities laws of the states in which the various holders of warrants reside. Although we have undertaken in the Warrant Agreement, and therefore have a contractual obligation, to use our best efforts to maintain a current registration statement covering the shares of common stock underlying the warrants following completion of this offering to the extent required by federal securities laws, and we intend to comply with our undertaking, we cannot assure that we will be able to do so. If we are not able to do so, holders will be unable to exercise their warrants and we will not be required to net-cash settle any such warrant exercise and therefore the warrants could expire worthless. Such expiration would result in each holder paying the full unit purchase price solely for the shares of common stock underlying the unit. In addition, we have agreed to use our reasonable efforts to register the shares of common stock underlying the warrants under the blue sky laws of the states of residence of the existing warrantholders, to the extent an exemption is not available. The value of the warrants may be greatly reduced if a registration statement covering the shares of common stock issuable upon the exercise of the warrants is not kept current or if the securities are not qualified, or exempt from qualification, in the states in which the holders of warrants reside. Holders of warrants who reside in jurisdictions in which the shares of common stock underlying the warrants are not qualified and in which there is no exemption will be unable to exercise their warrants and would either have to sell their warrants in the open market or allow them to expire unexercised. If and when the warrants become redeemable by us, we may exercise our redemption right even if we are unable to qualify the underlying securities for sale under all applicable state securities laws. Unlike other blank check offerings, we allow our public stockholders holding up to one share less than 40.0% of the shares sold in this offering on a cumulative basis to exercise their redemption rights if they vote against a proposed business combination presented to stockholders for their approval. This higher threshold will make it easier for us to consummate a business combination with which you may not agree. When we seek stockholder approval of the extended period or a business combination, we will offer each public stockholder (but not our existing stockholder with respect to any shares it owned prior to the consummation of this offering) the right to have his, her or its shares of common stock redeemed for cash if the stockholder votes against the business combination (on a cumulative basis with the stockholders who previously exercised their redemption rights in connection with the stockholder vote required to approve the extended period) and the business combination is approved and consummated. We will consummate the initial business combination only if the following two conditions are met: (i) a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and (ii) public stockholders owning 40.0% or more of the shares sold in this offering do not vote against the business combination and exercise their redemption rights on a cumulative basis with the stockholders who previously exercised their redemption rights in connection with the stockholder vote required to approve the extended period. Most other blank check companies have a redemption threshold of 20.0%, which makes it more difficult for such companies to consummate their initial business combination. Thus, because we permit a larger number of stockholders to exercise their redemption rights, it will be easier for us to consummate an initial business combination with a target business which you may believe is not suitable for us. Table of Contents Unlike other blank check offerings, we allow our public stockholders holding up to one share less than 40.0% of shares of common stock sold in this offering on a cumulative basis to exercise their redemption rights if they vote against a proposed business combination presented to stockholders for their approval. The ability of a larger number of our stockholders to exercise their redemption rights may not allow us to consummate the most desirable business combination or optimize our capital structure. Unlike other blank check offerings which have a 20.0% threshold, we allow our public stockholders holding up to one share less than 40.0% of the shares sold in this offering to exercise their redemption rights (on a cumulative basis with the stockholders who previously exercised their redemption rights in connection with the stockholder vote required to approve the extended period). However, we still must acquire a business or assets with a fair market value equal to at least 80.0% of our net assets held in the trust account (exclusive of the underwriters deferred underwriting compensation plus interest accrued thereon held, net of taxes payable, in the trust account). Accordingly, if our business combination requires us to use substantially all of our cash to pay the purchase price, because we will not know how many stockholders may exercise such redemption rights, we may either need to reserve part of the trust account for possible payment upon such redemption, or we may need to arrange third party financing to help fund our business combination in case a larger percentage of stockholders exercise their redemption rights than we expect. In the event that the acquisition involves the issuance of our stock as consideration, we may be required to issue a higher percentage of our stock to make up for a shortfall in funds. Raising additional funds to cover any shortfall may involve dilutive equity financing or incurring indebtedness at higher than desirable levels. This may limit our ability to effectuate the most attractive business combination available to us. Exercise of redemption rights must be effected pursuant to a specific process which may take time to complete and may result in the expenditure of funds by stockholders seeking redemption. A stockholder requesting redemption of his, her or its shares of common stock for cash may do so at any time after the mailing to our stockholders of the proxy statement and prior to the vote taken with respect to a proposal to approve the extended period or a proposed business combination. A stockholder would have from the time we send out our proxy statement through the vote on a proposal to approve the extended period or the business combination to tender (either electronically or through the delivery of physical stock certificates) his shares of common stock if he, she or it wishes to seek to exercise his, her or its redemption rights, a period which is expected to be not less than 10 days nor more than 60 days. There is a nominal cost associated with the above-referenced tendering process and the act of certificating the shares or delivering them through the DWAC system. The transfer agent will typically charge the tendering broker $35.00 and it would be up to the broker whether or not to pass this cost on to the redeeming holder. There may be additional mailing and other nominal charges depending on the particular process used to tender common stock. Although we believe the time period, costs and other potential burdens associated with the tendering process are not onerous for an average investor, this process may result in additional burdens for stockholders, including mis-delivery or any other defect in the tendering process. Additionally, if a vote on our initial business combination is held and the business combination is not approved, we may continue to try to consummate a business combination with a different target until twenty four months from the date of this prospectus or until thirty months from the date of this prospectus in the event our stockholders approve the extended period. If the extended period or the initial business combination is not approved or completed for any reason, public stockholders voting against such extended period or our initial business combination, as the case may be, who exercised their redemption rights would not be entitled to redeem their shares of common stock into a pro rata share of the aggregate amount then on deposit in the trust account. In such case, if we have required public stockholders to tender their certificates prior to the meeting, we will promptly return such certificates to the tendering public stockholder. In such case, they would then have to comply with the tendering process again for any vote against a subsequent business combination. Our stockholders may be held liable for claims by third parties against us to the extent of distributions received by them. Our amended and restated certificate of incorporation provides that we will continue in existence only until 24 months from the date of this prospectus (or by 30 months from the date of this prospectus in the event our Table of Contents
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+S-1/A Table of Contents Table of Contents REFERENCE TO ADDITIONAL INFORMATION For additional information, please see the section entitled Where You Can Find More Information beginning on page [__] of this proxy statement/prospectus. A copy of the plan of conversion is available for inspection at each of United Bank s branches. For information on submitting your proxy, please refer to the instructions on the enclosed proxy card. You should rely only on the information contained in this proxy statement/prospectus or to which we have referred you. We have not authorized anyone to provide you with information that is different. This proxy statement/prospectus does not constitute an offer to sell, or the solicitation of an offer to buy, any of the securities offered hereby to any person in any jurisdiction in which such offer or solicitation would be unlawful. The affairs of United Financial-Federal, United Mutual Holding Company, United Financial-Maryland and United Bank and their subsidiaries may change after the date of this proxy statement/prospectus. Delivery of this proxy statement/prospectus and the exchange of shares of United Financial-Maryland common stock made hereunder does not mean otherwise. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Table of Contents Office Locations: Headquarters: 95 Elm Street, West Springfield, MA 01089 Branch Locations: 115 State Street 1325 Springfield Street Springfield, MA 01103 Feeding Hills, MA 01030 1077 St. James Avenue 180 Main Street Springfield, MA 01104 Northampton, MA 01060 459 Main Street 10 Elm Street Indian Orchard, MA 01151 Westfield, MA 01085 528 Center Street 14 Russell Road Ludlow, MA 01056 Huntington, MA 01050 1930 Wilbraham Road 168 Southampton Road Springfield, MA 01129 Westfield, MA 01085 670 Bliss Road 1830 Northampton Street Longmeadow, MA 01106 Holyoke, MA 01040 Other Facilities: 52 Van Deene Avenue 33 Westfield Street West Springfield, MA 01089 West Springfield, MA 01089 140 Main Street Northampton, MA 01060 Table of Contents Bank completed its conversion to a federal savings bank and, in April 2004, reorganized into the two-tier mutual holding company structure. In July 2005, United Bank completed a minority public stock offering through its holding company, United Financial-Federal. United Bank s principal business consists of attracting retail deposits from the general public in the areas surrounding its main office in West Springfield, Massachusetts, and its twelve branch offices located in Feeding Hills, Holyoke, Huntington, Indian Orchard, Longmeadow, Ludlow, Springfield, Northampton and Westfield, Massachusetts, and investing those deposits, together with funds generated from operations, in one-to four-family residential mortgage loans as well as in home equity loans and lines of credit, commercial real estate loans, construction loans, commercial and industrial loans, automobile loans, other consumer loans, and investment securities. United Bank originates loans almost exclusively for investment. Occasionally, United Bank will enter into loan participations. United Bank s revenues are derived principally from interest on loans and securities. United Bank also generates revenues from fees and service charges and other income. United Bank emphasizes exceptional personal service for its customers. United Bank is subject to comprehensive regulation and examination by the Office of Thrift Supervision. United Bank s executive offices are located at 95 Elm Street, West Springfield, Massachusetts 01089. Its telephone number at this address is (413) 787-1700 and its website address is www.bankatunited.com. Information on this website is not and should not be considered a part of this prospectus. Our Organizational Structure In 2004, United Bank s mutual predecessor reorganized into the mutual holding company form of organization and United Bank formed United Financial-Federal as its mid-tier stock holding company. The majority of the outstanding shares of common stock of United Financial-Federal is owned by United Mutual Holding Company, which is a mutual holding company with no stockholders. United Financial-Federal owns 100% of the outstanding shares of common stock of United Bank. Pursuant to the terms of United Mutual Holding Company s plan of conversion and reorganization, United Mutual Holding Company will convert from the mutual holding company to the stock holding company corporate structure. As part of the conversion, we are offering for sale in a subscription offering and possibly in a community offering and syndicated community offering the majority ownership interest of United Financial-Federal that is currently held by United Mutual Holding Company. Upon the completion of the conversion and offering, United Mutual Holding Company will cease to exist, and we will complete the transition from partial to full public stock ownership. Upon completion of the conversion, existing public stockholders of United Financial-Federal will receive shares of common stock of United Financial-Maryland in exchange for their existing shares of United Financial-Federal. Table of Contents TABLE OF CONTENTS Questions and Answers for Stockholders of United Financial-Federal Summary
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+Prospectus summary 1
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+This summary only highlights the more detailed information appearing elsewhere in this prospectus. As this is a summary, it does not contain all of the information that you should consider in making an investment decision. You should read this entire prospectus carefully, including the information under Risk Factors and our financial statements and the related notes included elsewhere in this prospectus, before investing. References in this prospectus to we, us or our company refer to Triplecrown Acquisition Corp. References in this prospectus to public stockholders refers to those persons that purchase the securities offered by this prospectus and any of our officers, directors and founders (as defined below) who purchase these securities either in this offering or afterwards, provided that such individuals status as public stockholders shall only exist with respect to those securities so purchased. References in this prospectus to our management team refer to our officers and directors. The information in this prospectus gives retroactive effect to reflect the effect of a warrant dividend issued to our founding stockholders of one warrant to purchase one share of common stock for each outstanding share of founders common stock which was declared on September 19, 2007. Such transaction has effectively recapitalized the initial stockholders investment and has created founders units which is discussed throughout this prospectus. Unless we tell you otherwise, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option. We are a blank check company formed under the laws of the State of Delaware on June 8, 2007. We were formed to acquire a currently unidentified operating business or several operating businesses in the financial services industry through a merger, stock exchange, asset acquisition, reorganization or similar business combination, which we refer to throughout this prospectus as a business combination. To date, our efforts have been limited to organizational activities as well as activities related to this offering. We have not, nor has anyone on our behalf, contacted or been contacted by any potential target business or had any substantive discussions, formal or otherwise, with respect to such a transaction. Additionally, we have not, nor have we engaged or retained any agent or other representative, to conduct any research or take any steps to identify, locate or contact any suitable acquisition candidate. The financial services industry includes entities of various types which provide a broad array of financial services to their customers, including among others, private equity firms, hedge funds, investment management firms, money management firms, funds of funds firms, brokerage firms, investment banks, commercial banks, registered investment advisor firms, investment management consulting companies, insurance companies, specialty finance companies, business development companies, commercial credit companies, mortgage brokers and mortgage lending companies, consumer finance companies, non-bank lending companies, reinsurance companies, venture capital companies, small business investment companies and businesses which provide support services for financial service companies. Such support services include cash management, trade finance, liquidity management, custody and fund services, clearing services, depository and agency/trust services, transaction and payment processing, credit, debit and prepaid card processing, ATM and point-of-sale processing, check verification and guarantee and prepaid card services. We will seek to capitalize on the significant investing experience of Eric Watson, our chairman of the board and treasurer, and Jonathan Ledecky, our president and secretary, each of whom has substantial experience in identifying, acquiring and operating a wide variety of service businesses. Together, they have been personally involved in the formation of over 25 companies and such companies have made over 400 acquisitions. Mr. Watson has been the chairman of, and interests associated with him own, Cullen Investments Limited, a private investment company which he founded in January 1995. Mr. Watson and his associated interests have a substantial portfolio comprising interests in the fashion retail, financial services, real estate, infrastructure maintenance, sports and entertainment sectors. Cullen Investments owns Bendon, an international manufacturer and retailer of women s lingerie whose brands include the licensed Elle Macpherson Intimates label. Another major investment held by interests associated with Mr. Watson is a 50% ownership of the Hanover Group, one of UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents the largest privately owned financial service businesses in New Zealand with operations extending to the United States, the United Kingdom and Australia. Prior to founding Cullen Investments, Mr. Watson was the founding chairman and largest stockholder of Blue Star Group, a retail and distribution group he founded in January 1992. Since March 1999, Mr. Ledecky has served as chairman of Ironbound Partners Fund LLC, a private investment management fund. In October 1994, Mr. Ledecky founded U.S. Office Products and served as its chief executive officer until November 1997 and chairman until June 1998. During his tenure, U.S. Office Products completed over 260 acquisitions, and grew to a Fortune 500 company with over $2.6 billion in revenues. In February 1997, Mr. Ledecky founded Building One Services Corporation (originally Consolidation Capital Corporation), an entity formed to identify attractive consolidation opportunities which ultimately focused on the facilities management industry. In November 1997, Building One raised $552 million in an initial public offering. Mr. Ledecky served as Building One s chief executive officer from November 1997 through February 1999 and as its chairman from inception through its February 2000 merger with Group Maintenance America Corporation. During his tenure with Building One, it completed 46 acquisitions and grew to over $1.5 billion in revenues. Each of Messrs. Watson and Ledecky and Robert B. Hersov, Edward J. Mathias, Kerry Kennedy, Richard Y. Roberts and Jay H. Nussbaum, each of whom is a member of our board of directors, is also an officer and/or director of Endeavor Acquisition Corp., a blank check company formed in July 2005 for the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. Endeavor Acquisition Corp. consummated its initial public offering in December 2005 and raised gross proceeds of approximately $129.3 million at an offering price of $8.00 per unit. In December 2006, Endeavor Acquisition Corp. entered into a definitive agreement for a business combination to acquire American Apparel, Inc. and its affiliated companies. American Apparel is a leading provider of cotton leisure wear geared toward contemporary metropolitan adults and sold through company-owned retail locations and online. Additionally, each of Messrs. Watson, Ledecky, Hersov, Mathias, Kennedy, Roberts and Nussbaum and Jimmie Lee Solomon, Jr. is also an officer and/or director of Victory Acquisition Corp., a blank check company formed in January 2007 for the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. Victory Acquisition Corp. consummated its initial public offering in April 2007 and raised gross proceeds of $330 million at an offering price of $10.00 per unit. However, Victory Acquisition Corp. is prohibited from consummating a business combination with an operating business in the financial services industry. Accordingly, we do not believe these affiliations will cause any conflicts of interest. The past experience of our management and members of our board of directors does not guarantee that we will be successful in consummating a business combination. There are numerous risks and uncertainties detailed elsewhere in this prospectus that could impact our ability to consummate a business combination outside of the control of such individuals. Furthermore, our management has been involved with companies that have been forced to file for bankruptcy following their involvement with such companies, including U.S. Office Products. As a result, we cannot assure you that we will be able to consummate a business combination at all or on terms favorable to us, nor can we guarantee that we will be successful following the consummation of a business combination. Our initial business combination must be with one or more target businesses whose fair market value, individually or collectively, is equal to at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions of $14.0 million, or $16.1 million if the underwriters over-allotment option is exercised in full) at the time of such business combination. This may be accomplished by identifying and acquiring a single business or multiple operating businesses, which may or may not be related, contemporaneously. However, we will always acquire at least a controlling interest in a target business (meaning more than 50% of the voting securities of the target business). The future role of members of our management AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents team, if any, in the target business cannot presently be stated with any certainty. While it is possible that one or more of our officers or directors will remain associated in some capacity with us following a business combination, it is unlikely that any of them will devote their full efforts to our affairs subsequent to a business combination. Moreover, we cannot assure you that members of our management team will have significant experience or knowledge relating to the operations of the particular target business. The target business or businesses that we acquire may have a collective fair market value substantially in excess of 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions). In order to consummate such a business combination, we may issue a significant amount of our debt or equity securities to the sellers of such business and/or seek to raise additional funds through a private offering of debt or equity securities. There are no limitations on our ability to incur debt or issue securities in order to consummate a business combination regardless of whether or not we acquire a target business or businesses having a collective fair market value substantially in excess of 80% of the balance in the trust account. If we issue securities in order to consummate a business combination, our shareholders could end up owning a minority of the combined company s voting securities as there is no requirement that our shareholders own a certain percentage of our company after our business combination. Since we have no specific business combination under consideration, we have not entered into any such arrangement to issue our debt or equity securities and have no current intention of doing so. If we are unable to consummate a business combination within 24 months from the date of this prospectus, we will liquidate and distribute the proceeds held in the trust account to our public stockholders in an amount we expect to be approximately $9.76 per share of common stock held by them (or approximately $9.74 per share if the underwriters exercise their over-allotment option in full), without taking into account any interest earned on such funds. Private Placements Effective June 8, 2007, we issued 11,500,000 units to our founders for an aggregate of $25,000 in cash, at a purchase price of approximately $0.002 per unit (after giving retroactive effect to our warrant dividend of one warrant issued per share of outstanding founders common stock that was declared on September 19, 2007). Each unit includes one share of common stock and one warrant. Each warrant entitles the holder to purchase one share of common stock. This includes an aggregate of 1,500,000 units that are subject to forfeiture by our founders to the extent that the over-allotment option is not exercised by the underwriters. These holders will be required to forfeit to us, at no cost to us, a number of units necessary to maintain their collective 20% ownership interest in our securities after giving effect to the offering and exercise, if any, of the underwriters over-allotment option. We refer to the current holders of these units as the founders, and we refer to these outstanding units, shares of common stock and warrants as the founders units, founders common stock and founders warrants throughout this prospectus. The founders units are identical to the units being sold in this offering, except that: up to an aggregate of 1,500,000 founders units are subject to forfeiture by our founders to the extent that the over-allotment option is not exercised in full or in part by the underwriters; the founders units will be placed in escrow and the founders common stock and founders warrants are subject to the transfer restrictions and registration rights described below; the founders warrants will become exercisable after the consummation of our initial business combination if and when the last sales price of our common stock exceeds $13.75 per share for any 20 trading days within any 30-trading day period beginning 90 days after the initial business combination; the founders warrants will be exercisable on a cashless basis and will not be redeemable by us, in each case, as long as they are held by the founders or their permitted transferees; the founders have agreed to vote the founders common stock in the same manner as the majority of shares voted by the public stockholders at the special or annual meeting called for the purpose of approving our initial business combination; TRIPLECROWN ACQUISITION CORP. (Exact name of registrant as specified in its charter) Delaware 6770 20-0333311 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 970 West Broadway PMB 402 Jackson, Wyoming 83001 (307) 633-2831 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Table of Contents the founders will not be able to exercise conversion rights (as described below) with respect to the founders common stock; and the founders have agreed to waive their rights to participate in any liquidation distribution with respect to the founders common stock if we fail to consummate an initial business combination. In addition, Eric J. Watson and Jonathan J. Ledecky have agreed to purchase an aggregate of 5,000,000 warrants at a price of $1.00 per warrant ($5.0 million in the aggregate) in a private placement that will occur simultaneously with the consummation of this offering. The $5.0 million of proceeds from this investment will be added to the proceeds of this offering and will be held in the trust account pending our completion of an initial business combination on the terms described in this prospectus. If we do not complete such a business combination, then the $5.0 million will be part of the liquidating distribution to our public stockholders, and the warrants will expire worthless. The sponsors warrants will not be transferable or salable by the purchasers (subject to limited exceptions including the transferee agreeing to be bound to such transfer restrictions) until we complete a business combination, and will be exercisable on a cashless basis and will be non-redeemable by us so long as they are held by the purchasers or their affiliates. In addition, commencing on the date they become exercisable, the sponsors warrants and the underlying shares of common stock are entitled to registration rights under an agreement to be signed on or before the date of this prospectus. With the exception of the terms noted above, the sponsors warrants have terms and provisions that are identical to those of the warrants being sold as part of the units in this offering. Our executive offices are located at 970 West Broadway, PMB 402, Jackson, Wyoming 83001, and our telephone number is (307) 633-2831. Jonathan J. Ledecky, President and Secretary Triplecrown Acquisition Corp. 970 West Broadway PMB 402 Jackson, Wyoming 83001 (307) 633-2831 (Name, address, including zip code, and telephone number, including area code, of agent for service) 1 This number includes an aggregate of 1,500,000 founders units, representing 1,500,000 shares of common stock and 1,500,000 warrants that are subject to forfeiture by our founders if the over-allotment option is not exercised in full by the underwriters. Only a number of units, shares and warrants necessary for our founders to maintain their collective 20% ownership interest in our securities will be forfeited upon consummation of this offering. 2 Assumes the over-allotment option has not been exercised and an aggregate of 1,500,000 founders units, representing 1,500,000 shares of common stock and 1,500,000 warrants have been forfeited by our founding stockholders. Copies to: David Alan Miller, Esq. Jeffrey M. Gallant, Esq. Graubard Miller The Chrysler Building 405 Lexington Avenue New York, New York 10174 (212) 818-8800 (212) 818-8881 - Facsimile Bruce S. Mendelsohn, Esq. Akin Gump Strauss Hauer & Feld LLP 590 Madison Avenue New York, New York 10022 (212) 872-1000 (212) 872-1002 - Facsimile 1 Assumes an aggregate of 1,500,000 founders units, representing 1,500,000 shares of common stock and 1,500,000 warrants that are subject to forfeiture by our founders if the over-allotment option is not exercised in full by the underwriters. Only a number of units, shares and warrants necessary for our founders to maintain their collective 20% ownership interest in our securities will be forfeited upon consummation of this offering. 2 Assumes the over-allotment option has not been exercised and an aggregate of 1,500,000 founders units, representing 1,500,000 shares of common stock and 1,500,000 warrants have been forfeited by our founding stockholders. Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Table of Contents Redemption: At any time while the warrants are exercisable and there is an effective and current registration statement covering the shares of common stock issuable upon exercise of the warrants, we may redeem the outstanding warrants (except as described below with respect to the sponsors warrants): in whole and not in part; at a price of $.01 per warrant; upon a minimum of 30 days prior written notice of redemption (the 30-day redemption period ); and if, and only if, the last sale price of our common stock equals or exceeds $13.75 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. We will not redeem the warrants unless an effective and current registration statement covering the shares of common stock issuable upon exercise of the warrants throughout the 30-day redemption period. The underwriters do not have any consent rights in connection with our exercise of our redemption rights. If we call the warrants for redemption, we will have the option to require all holders that wish to exercise warrants to do so on a cashless basis, though the public stockholders are not eligible to do so at their own option. In such event, each holder would pay the exercise price by surrendering the warrants for that number of shares of common stock equal to the quotient obtained by dividing (x) the product of the number of shares of common stock underlying the warrants, multiplied by the difference between the exercise price of the warrants and the fair market value (defined below) by (y) the fair market value. The fair market value shall mean the average reported last sale price of the common stock for the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of warrants. Reasons for redemption limitations: We have established the above conditions to our exercise of redemption rights to provide: warrant holders with adequate notice of exercise only after the then-prevailing common stock price is substantially above the warrant exercise price; and a sufficient differential between the then-prevailing common stock price and the warrant exercise price so there is a buffer to absorb the market reaction, if any, to our redemption of the warrants. If the foregoing conditions are satisfied and we issue a notice of redemption, each warrant holder can exercise his, her or its warrant prior to the scheduled redemption date. However, the price of the common stock may fall below the $13.75 trigger price as well as the $7.50 warrant exercise price after the redemption notice is issued. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Table of Contents Proposed American Stock Exchange symbols for our: Units: TCW.U Common stock: TCW Warrants: TCW.WS Founders units: Effective June 8, 2007, our founders purchased 11,500,000 founders units for an aggregate purchase price of $25,000 (after giving retroactive effect to our warrant dividend of one warrant per share of outstanding common stock that was declared on September 19, 2007). This includes an aggregate of 1,500,000 founders units that are subject to forfeiture by our founders to the extent that the over-allotment option is not exercised by the underwriters. These holders will be required to forfeit only a number of founders units necessary to maintain their collective 20% ownership interest in our securities after giving effect to the offering and exercise, if any, of the underwriters over-allotment option. The founders units are identical to the units being sold in this offering, except that: the founders units will be placed in escrow and the founders common stock and founders warrants are subject to the transfer restrictions and registration rights described below; the founders warrants will become exercisable after the consummation of our initial business combination if and when the last sales price of our common stock exceeds $13.75 per share for any 20 trading days within any 30-trading day period beginning 90 days after the initial business combination; the founders warrants will be exercisable on a cashless basis and will not be redeemable by us, in each case, as long as they are held by the founders or their permitted transferees; the founders have agreed to vote the founders common stock in the same manner as the majority of shares voted by the public stockholders in connection with the vote required to approve our initial business combination; the founders will not be able to exercise conversion rights (as described below) with respect to the founders common stock; and the founders have agreed to waive their rights to participate in any liquidation distribution with respect to the founders common stock if we fail to consummate an initial business combination. All of the founders units will be placed in escrow with Continental Stock Transfer & Trust Company, as escrow agent. The founders have agreed, subject to certain exceptions, not to sell or otherwise transfer any of the founders units and underlying securities until one year after the date of the completion of a business combination or earlier if, subsequent to our business combination, (i) the last sales price of our units equals or exceeds $13.75 per unit for any 20 trading days within any 30-trading day period commencing 90 days after our Table of Contents initial business combination or (ii) we consummate a subsequent liquidation, merger, stock exchange or other similar transaction which results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property. We refer to such restrictions as the transfer restrictions throughout this prospectus. In addition, the founders are entitled to registration rights with respect to the founders units under an agreement to be signed on or before the date of this prospectus. The holders of the majority of these shares may elect to exercise these registration rights at any time commencing the earlier of (i) nine months after the consummation of our initial business combination or (ii) the date the founders units are released from escrow. Sponsors warrants purchased through private placement: Eric J. Watson and Jonathan J. Ledecky have entered into agreements with us to purchase an aggregate of 5,000,000 sponsors warrants at a price of $1.00 per warrant ($5.0 million in the aggregate). The purchasers are obligated to purchase the sponsors warrants from us simultaneously with the consummation of this offering. The sponsors warrants will be purchased separately and not in combination with common stock or in the form of units. The purchase price of the sponsors warrants will be added to the proceeds from this offering to be held in the trust account pending the completion of our initial business combination. If we do not complete a business combination that meets the criteria described in this prospectus and are forced to liquidate, then the $5.0 million purchase price of the sponsors warrants will become part of the distribution to our public stockholders and the sponsors warrants will expire worthless. The sponsors warrants will not be transferable or salable by the purchasers (subject to limited exceptions including the transferee agreeing to be bound to such transfer restrictions) until we complete a business combination, will be exercisable on a cashless basis and will be non-redeemable by us so long as they are held by the purchasers or their affiliates. In addition, commencing 90 days after the consummation of our initial business combination, the sponsors warrants and the underlying common stock are entitled to registration rights under an agreement to be signed on or before the date of this prospectus. With the exception of the terms noted above, the sponsors warrants have terms and provisions that are identical to those of the warrants being sold as part of the units in this offering. Offering and sponsors warrants private placement proceeds to be held in trust account and amounts payable prior to trust account distribution or liquidation: $390,250,000, or approximately $9.76 per unit ($448,150,000, or approximately $9.74 per unit, if the underwriters over-allotment option is exercised in full) of the proceeds of this offering and the private placement of the sponsors warrants will be placed in the trust account at with Continental Stock Transfer & Trust Company as trustee, pursuant to an agreement to be signed on the date of this prospectus. These proceeds include $14.0 million in deferred Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED OCTOBER 19, 2007 P R O S P E C T U S $400,000,000 Triplecrown Acquisition Corp. 40,000,000 Units Table of Contents underwriting discounts and commissions (or $16.1 million if the underwriters over-allotment option is exercised in full). We believe that the inclusion in the trust account of the purchase price of the sponsors warrants and the deferred underwriting discounts and commissions is a benefit to our public stockholders because additional proceeds will be available for distribution to them if a liquidation of our company occurs prior to the consummation of our initial business combination. Except as described below, proceeds in the trust account will not be released until the earlier of our consummation of our initial business combination or our liquidation. Unless and until our initial business combination is consummated, proceeds held in the trust account will not be available for our use for any purpose, including the payment of expenses related to (i) this offering, and (ii) the investigation, selection and negotiation of an agreement with one or more target businesses, except that there can be released to us from the trust account (a) interest income earned on the trust account balance to pay our tax obligations and (b) interest income earned of up to $5.0 million on the trust account balance to fund our working capital requirements; provided, however, that we will not be allowed to withdraw interest income earned on the trust account for our working capital requirements unless we have sufficient funds available to us to pay our tax obligations on such interest income or otherwise then due at that time. With these exceptions, expenses incurred by us while seeking a business combination may be paid prior to a business combination only from the net proceeds of this offering not held in the trust account (initially, approximately $50,000). Limited payments to insiders: There will be no fees, reimbursements or other cash payments paid or awarded by us or a target business to or earned by our founders, officers, directors or their affiliates prior to, or for any services they render in order to effectuate, the consummation of a business combination (regardless of the type of transaction that it is) other than: Repayment of non-interest bearing loans totaling $112,500 in the aggregate made to us by Eric J. Watson and Jonathan J. Ledecky to cover offering expenses; and Reimbursement for any expenses incident to this offering and identifying, investigating and consummating a business combination with one or more target businesses, none of which have been incurred to date. There is no limit on the amount of out-of-pocket expenses that could be incurred; provided, however, that to the extent such out-of-pocket expenses exceed the available proceeds not deposited in the trust account and interest income of up to $5.0 million on the balance in the trust account, such out-of-pocket expenses would not be reimbursed by us unless we consummate an initial business combination. Our audit committee will review and approve all reimbursements made to our existing stockholders, officers, directors or their affiliates, and any reimbursements made to members of our audit committee will be reviewed and approved by our board of directors, with any interested director abstaining from such review and approval. Triplecrown Acquisition Corp. is a newly organized blank check company formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination, one or more operating businesses in the financial services industry, which we refer to as our initial business combination. If we are unable to consummate a business combination within 24 months from the date of this prospectus, we will liquidate and distribute the proceeds held in the trust account to our public stockholders. To date, our efforts have been limited to organizational activities as well as activities related to this offering. We do not have any specific initial business combination under consideration. We have not, nor has anyone on our behalf, contacted or been contacted by any prospective target business or had any substantive discussions, formal or otherwise, with respect to such a transaction. This is an initial public offering of our securities. Each unit consists of one share of common stock and one warrant. We are offering 40,000,000 units. The public offering price will be $10.00 per unit. Each warrant entitles the holder to purchase one share of common stock at a price of $7.50. The warrants will become exercisable on the later of the completion of our initial business combination and one year from the date of this prospectus, provided in each case that we have an effective registration statement covering the shares of common stock issuable upon exercise of the warrants and a current prospectus relating to them is available. The warrants will expire five years from the date of this prospectus, unless earlier redeemed. We have also granted the underwriters a 30-day option to purchase up to an additional 6,000,000 units to cover over-allotments, if any. Eric J. Watson, our chairman of the board and treasurer, and Jonathan J. Ledecky, our president and secretary, have agreed to purchase an aggregate of 5,000,000 warrants at a price of $1.00 per warrant ($5.0 million in the aggregate) in a private placement that will occur simultaneously with the consummation of this offering. We refer to these warrants as the sponsors warrants. The proceeds from the sale of the sponsors warrants in the private placement will be deposited into a trust account and be subject to a trust agreement, described below, and will be part of the funds distributed to our public stockholders in the event we are unable to complete a business combination. The sponsors warrants will be substantially similar to the warrants included in the units sold in this offering except that if we call the warrants for redemption, the sponsors warrants will be exercisable on a cashless basis and will not be redeemable by us so long as they are still held by these purchasers or their affiliates. The purchasers of the sponsors warrants have agreed not to transfer, assign or sell any of these warrants until we consummate our initial business combination. Currently, there is no public market for our units, common stock or warrants. We have applied to have the units listed on the American Stock Exchange. Assuming that the units are listed on the American Stock Exchange, the units will be listed under the symbol TCW.U on or promptly after the date of this prospectus. The common stock and warrants will begin separate trading on the 35th day after the date of this prospectus unless Citigroup Global Markets Inc. informs us of its decision to allow earlier separate trading. Once the securities comprising the units begin separate trading, the common stock and warrants will be traded on the American Stock Exchange under the symbols TCW and TCW.WS, respectively. We cannot assure you, however, that our securities will continue to be listed on the American Stock Exchange. Investing in our securities involves a high degree of risk. See
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+PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. Unless otherwise stated in this prospectus: references to we, us, our , company or our company refer to Global BPO Services Corp.; references to our founding stockholders refer to our officers, directors and members of our strategic advisory council who have purchased, as of the date of this prospectus, shares of common stock and/or who will have purchased founder warrants in the private placement which will close on or prior to the date of this prospectus; references to our founder warrants refer to the 7,500,000 warrants to be purchased by our founding stockholders in the private placement which will close on or prior to the date of this prospectus at the price of $1.00 per warrant; references to business combination mean our initial acquisition through a merger, capital stock exchange, asset or stock acquisition, exchangeable share transaction or other similar business combination of at least majority ownership of one or more domestic or international operating businesses in the business process outsourcing industry, having a fair market value of at least 80% of our net assets held in trust (net of taxes and amounts permitted to be disbursed for working capital purposes and excluding the amount held in the trust account representing the underwriters deferred discount) at the time of such acquisition, pursuant to which we will require that a majority of the outstanding shares of common stock issued in this offering are voted in favor of the business combination and public stockholders owning less than 30% of the shares of common stock issued in this offering both exercise their conversion rights and vote against the proposed business combination; references to public stockholders refer to holders of common stock sold as part of the units in this offering or in the public market and include, unless otherwise indicated, any founding stockholders to the extent that they purchase or acquire such shares of common stock in this offering or in the public market; references to outsourcing in this prospectus refer to corporate outsourcing and not electronics manufacturing outsourcing; references to our officers refer to executive officers and non-executive officers of Global BPO Services Corp.; and unless expressly stated to the contrary, the information in this prospectus assumes that the representative of the underwriters will not exercise its over-allotment option. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer is not permitted. Our Business We are a blank check company organized under the laws of the State of Delaware on June 26, 2007 and our operations will initially be limited to searching for prospective target businesses to acquire. We were formed to acquire, through a merger, capital stock exchange, UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents asset or stock acquisition, exchangeable share transaction or other similar business combination one or more domestic or international operating businesses. We plan to target acquisitions in the business process outsourcing, or BPO, industry. BPO typically involves the transfer of responsibility for ongoing management and execution of a business activity, process or functional areas to an external service provider to gain efficiencies and improve performance. BPO can also be characterized as involving the transfer of management and execution of one or more complete business processes or entire business functions to the BPO provider. The BPO provider is typically part of the decision-making structure surrounding that outsourced business function, and performance objectives are primarily tied to specific measures, such as customer service, customer experience and overall business value. Business value is recognized through such results as, among others, increased productivity, new business opportunities, revenue generation, customer retention, cost reduction, integration of assets and business strategies and the opportunity to improve shareholder value for the client. BPO can include extensive data management, reporting and analysis. Our officers and certain of our directors have extensive BPO industry experience, which will be valuable in sourcing, evaluating and executing a business combination. In addition, our officers have extensive experience in managing large scale services operations and in improving their performance through operating techniques and the use of technology, among other initiatives. Our founder, Chairman of the Board of Directors, President and Chief Executive Officer, R. Scott Murray, has over 20 years of experience in BPO and related sectors and has been an executive officer with companies that have raised approximately $1.5 billion in various debt and equity financings. Mr. Murray has been a leader in identifying, negotiating and closing over 30 acquisitions and divestitures in various companies with which he has been associated. As Chief Executive Officer of Modus Media, Inc., a privately held business process outsourcer in the global supply chain and hosting services sector, Mr. Murray was instrumental in identifying, negotiating and closing the merger of Modus Media, Inc. with CMGI, Inc. in 2004. As President and Chief Operating Officer of Stream International, Inc., an outsource provider of global technical support and call center services, Mr. Murray played a leading role in negotiating and closing its acquisition by Solectron Global Services, Inc. in 2001. From 1994 through 1999, Mr. Murray served as the Executive Vice President and Chief Financial Officer of The Learning Company, or TLC, a publicly-traded consumer software company, whose revenues grew during his tenure from $233 million in 1994 to $839 million in 1998. The TLC management team, which included both Mr. Murray and our director, Kevin O Leary, oversaw the growth of TLC into a leading consolidator in the consumer software industry, raising over $1 billion in debt and equity financing, and acquiring and integrating more than 25 companies culminating with the acquisition of TLC for $4.2 billion in stock and assumption of net debt by Mattel, Inc. in May 1999. Mr. Murray also has significant experience in conducting business offshore in countries such as India and China from his past employment at Stream International, Inc., Modus Media, Inc. and 3Com Corporation. Although we may consider a target business in any segment of the outsourcing industry, we intend to focus our search for a business with services or functions that can be applied across clients of different sizes and categories, regardless of industry vertical market or geographic region. Such activities often focus on hiring and training employees, managing daily operations and finances, servicing customers and delivering goods and services to customers. We believe businesses worldwide are choosing to outsource a growing proportion of their business processes. According to International Data Corporation, or IDC, a subsidiary of Amendment No. 4 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents International Data Group, worldwide spending on BPO services totaled approximately $420.7 billion in 2006. IDC projects that this market will increase to $677.2 billion in 2011, representing a five-year compound annual growth rate of 10%. We believe that our management team, strategic advisors and board of directors will be able to utilize their extensive industry experience, knowledge and contacts to source and execute an acquisition. We may engage in a business combination with one or more target businesses that have relationships or are affiliated with our directors or officers or any other founding stockholders. Some of the business functions on which we intend to focus our efforts include the following BPO segments: human resource services; finance and accounting services; customer care and technical support services; procurement services; sales and marketing; training; logistics; warranty management services; claims processing services; billing support services/operations support systems services; conferencing and collaboration application services; accounts receivable management services; document management and electronic document storage services; and other emerging BPO services. Our founding stockholders have collectively agreed to purchase an aggregate of 7,500,000 founder warrants on or prior to the date of this prospectus at the price of $1.00 per warrant for a total of $7,500,000, all of which is to be financed from the personal funds of the founding stockholders. The founder warrants will be purchased separately and not in combination with common stock in the form of units. The purchase price of the founder warrants will be added to the proceeds from this offering to be held in the trust account pending our completion of one or more business combinations. If we do not complete one or more business combinations that meet the criteria described in this prospectus, then the $7,500,000 purchase price of the founder warrants will become part of the amount payable to our public stockholders upon the liquidation of our trust account and the founder warrants will become worthless. The initial target acquisition that we acquire must have a fair market value of at least 80% of our net assets held in trust (net of taxes and amounts permitted to be disbursed for working capital purposes and excluding the amount held in the trust account representing the underwriters deferred discount) at the time of such acquisition, although we may acquire a target acquisition whose fair market value significantly exceeds 80% of our net assets held in GLOBAL BPO SERVICES CORP. (Exact name of registrant as specified in its charter) Table of Contents trust (net of taxes and amounts permitted to be disbursed for working capital purposes and excluding the amount held in the trust account representing the underwriters deferred discount) at the time of such acquisition. The fair market value of a target acquisition will be determined by our board of directors based upon the financial standards generally accepted by the financial community, such as actual and potential sales, earnings and cash flow and book value. We anticipate structuring a business combination to acquire 100% of the equity interests or assets of the target business. We may, however, structure a business combination to acquire less than 100% of such interests or assets of the target business, but we will not acquire less than a majority interest (meaning not less than a majority of the voting securities of such target business). If we acquire a majority interest of a target business or businesses, but less than a 100% interest, the business that we acquire must have a fair market value of at least 80% of our net assets held in trust (net of taxes and amounts permitted to be disbursed for working capital purposes and excluding the amount held in the trust account representing the underwriters deferred discount) at the time of such acquisition. To accomplish acquiring a target acquisition whose fair market value significantly exceeds 80% of our net assets held in trust (net of taxes and amounts permitted to be disbursed for working capital purposes and excluding the amount held in the trust account representing the underwriters deferred discount) at the time of such acquisition, we may seek to raise additional funds through debt financing or a private offering of equity securities if such funds are required to consummate such a business combination, although we have not entered into any such fund raising arrangement and do not currently anticipate effecting such a financing other than in connection with the consummation of the business combination. Our principal executive offices are located at 177 Beacon Street, Unit 4, Boston, MA 02116. Delaware 6770 26-0420454 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 177 Beacon Street, Unit 4 Boston, MA 02116 (781) 210-2271 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) R. Scott Murray Chief Executive Officer 177 Beacon Street, Unit 4 Boston, MA 02116 (781) 210-2271 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Mark G. Borden, Esq. Gregg A. Noel, Esq. Brian B. Margolis, Esq. Thomas J. Ivey, Esq. Wilmer Cutler Pickering Hale and Dorr LLP Skadden, Arps, Slate, Meagher & Flom LLP 60 State Street 300 South Grand Avenue Boston, MA 02109 Los Angeles, California 90071 (617) 526-6000 (213) 687-5000 (617) 526-5000 Facsimile (213) 687-5600 Facsimile Table of Contents The Offering Securities offered 31,250,000 units, at $8.00 per unit, each unit consisting of: one share of common stock; and one warrant. Trading commencement and separation of common stock and warrants The units will begin trading on or promptly after the date of this prospectus. The common stock and warrants comprising the units will begin separate trading five business days (or as soon as practicable thereafter) following the earlier to occur of (1) the expiration or termination of the underwriters over-allotment option and (2) its exercise in full, subject in either case to our having filed the Current Report on Form 8-K described below and having issued a press release announcing when such separate trading will begin. In no event will the common stock and warrants begin to trade separately until we have filed a Current Report on Form 8-K with the Securities and Exchange Commission, or SEC, containing an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file this Form 8-K promptly after the consummation of this offering, which is anticipated to take place three business days from the date of this prospectus. If the underwriters over-allotment option is exercised following the initial filing of such Form 8-K, a second or amended Form 8-K will be filed to provide information to reflect the exercise of the underwriters over-allotment option. Following the date the common stock and warrants are eligible to trade separately, the units will continue to be listed for trading, and any security holder may elect to break apart a unit and trade the common stock or warrants separately or as a unit. Even if the component parts of the units are broken apart and traded separately, the units will continue to be listed as a separate security, and consequently, any subsequent security holder owning common stock and warrants may elect to combine them together and trade them as a unit. Security holders will have the ability to trade our securities as units until such time as the warrants expire or are redeemed. Although we will not distribute copies of the Current Report on Form 8-K to individual unit holders, the Current Report on Form 8-K will be available on the SEC s website after the filing. See the section appearing elsewhere in this prospectus entitled Where You Can Find Additional Information. Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of the registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. (1) Assumes no exercise of the underwriters over-allotment option and the redemption of 1,171,874 shares of common stock previously purchased by our founding stockholders. (2) Assumes no exercise of the underwriters over-allotment option. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Table of Contents upon a minimum of 30 days prior written notice of redemption, and if, and only if, the last sales price of our common stock equals or exceeds $11.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. In addition, we may not redeem the warrants unless the warrants comprising the units sold in this offering and the shares of common stock underlying those warrants are covered by an effective registration statement from the beginning of the measurement period through the date fixed for the redemption. If the foregoing conditions are satisfied and we call the warrants for redemption, each warrant holder shall then be entitled to exercise their warrants prior to the date scheduled for redemption. The redemption provisions for our warrants have been established at a price which is intended to provide warrant holders a premium to the initial exercise price. There can be no assurance, however, that the price of the common stock will exceed either the redemption price of $11.50 or the warrant exercise price of $6.00 after we call the warrants for redemption. Private Placement Our founding stockholders have collectively agreed to purchase an aggregate of 7,500,000 founder warrants on or prior to the date of this prospectus at the price of $1.00 per warrant for a total of $7,500,000, all of which is to be financed from the personal funds of the founding stockholders. The founder warrants will be purchased separately and not in combination with common stock in the form of units. The purchase price of the founder warrants will be added to the proceeds from this offering to be held in the trust account pending our completion of one or more business combinations. If we do not complete one or more business combinations that meet the criteria described in this prospectus, then the $7,500,000 purchase price of the founder warrants will become part of the amount payable to our public stockholders upon the liquidation of our trust account and the founder warrants will become worthless. See Proposed Business Effecting a Business Combination Liquidation if no business combination below. The founder warrants have terms and provisions that are identical to the warrants being sold in this offering, except Table of Contents that (i) such founder warrants will be placed in escrow and not released before, except in limited circumstances, one year from the consummation of a business combination, (ii) such founder warrants will be non-redeemable as long as the founding stockholders hold them, (iii) such founder warrants are exercisable in the absence of an effective registration statement covering the shares of common stock underlying the warrants, (iv) such founder warrants may be exercised on a cashless basis and (v) such founder warrants are being purchased pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, or the Securities Act, and will become freely tradable only after they are registered pursuant to a registration rights agreement to be signed upon or prior to the consummation of this offering. The transfer restriction does not apply to transfers made pursuant to registration or an exemption that are occasioned by operation of law or for estate planning purposes, while remaining in escrow. If any of the founding stockholders acquire warrants for their own account in the open market, any such warrants will be redeemable. If our other outstanding warrants are redeemed and the price of our common stock rises following such redemption, the holders of the founder warrants could potentially realize a larger gain on exercise or sale of those warrants than is available to other warrant holders, although there is no assurance the price of our common stock would increase following a warrant redemption. We have elected to make the founder warrants non-redeemable in order to provide the purchasers a potentially longer exercise period for those warrants because they will bear a higher risk than that of public warrant holders due to the fact the founder warrants are subject to transfer restrictions and to a longer holding period than that of the public warrant holders, and also to loss of investment upon liquidation, as described in the preceding paragraph. If our stock price declines in periods subsequent to a warrant redemption and the purchasers who initially acquired these warrants from us continue to hold the founder warrants, the value of those warrants still held by these persons may also decline. Proposed AMEX symbols for our: Units OOO.U Common stock OOO Warrants OOO.WS Offering proceeds to be held in trust Of the proceeds of this offering, $246,300,000 ($7.88 per unit), which includes the underwriters deferred discount of Table of Contents The information in this preliminary prospectus is not complete and will be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is declared effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Subject to Completion, Dated October 12, 2007 PRELIMINARY PROSPECTUS $250,000,000 31,250,000 Units Global BPO Services Corp. is a newly organized blank check company organized for the purpose of effecting a merger, capital stock exchange, asset or stock acquisition, exchangeable share transaction or other similar business combination of one or more domestic or international operating businesses. We plan to target acquisitions in the business process outsourcing industry. We do not have any specific business combination under consideration and we have not (nor has anyone on our behalf) contacted any prospective acquisition candidate or had any discussions, formal or otherwise, with respect to such a transaction. This is an initial public offering of our securities. Each unit has an offering price of $8.00 and consists of: one share of our common stock; and one warrant. Each warrant entitles the holder to purchase one share of our common stock at a price of $6.00. Each warrant will become exercisable on the later of our completion of a business combination and , 2008 [one year from the date of this prospectus], and will expire on , 2011 [four years from the date of this prospectus], or earlier upon redemption. We have granted our underwriters a 30-day option to purchase up to 4,687,500 additional units solely to cover over-allotments, if any (over and above the 31,250,000 units referred to above). The over-allotment option will be used only to cover the net syndicate short position resulting from the initial distribution. We have also agreed to sell to our underwriters for $100, as additional compensation, an option to purchase up to a total of 1,562,500 units at $9.60 per unit. The units issuable upon exercise of this option are identical to those offered by this prospectus, except that the warrants included in the option have an exercise price of $7.20 (120% of the exercise price of the warrants included in the units sold in the offering). The unit purchase option and its underlying securities have been registered under the registration statement of which this prospectus forms a part. There is presently no public market for our units, common stock or warrants. We have applied to have our units listed on the American Stock Exchange under the symbol OOO.U on or promptly after the date of this prospectus. The common stock and warrants comprising the units will begin separate trading five business days (or as soon as practicable thereafter) following the earlier to occur of (1) the expiration or termination of the underwriters over-allotment option and (2) its exercise in full, subject in either case to our having filed a Current Report on Form 8-K with the Securities and Exchange Commission, containing an audited balance sheet reflecting our receipt of the gross proceeds of this offering and issuing a press release announcing when such separate trading will begin. Once the securities comprising the units begin separate trading, we anticipate that the common stock and warrants will be traded on the American Stock Exchange under the symbols OOO and OOO.WS , respectively. We cannot assure you that our securities will be or continue to be listed on the American Stock Exchange. Investing in our securities involves risk. See Risk Factors beginning on page 23 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities, including, but not limited to the fact that investors will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. Public Offering Price Underwriting Discount and Commissions(1) Proceeds, Before Expenses Per Unit $ 8.00 $ 0.56 $ 7.44 Total $ 250,000,000 $ 17,500,000 $ 232,500,000 (1) Includes the underwriters deferred discount of 3% of the gross proceeds, or $0.24 per unit ($7,500,000), payable to the underwriters only upon consummation of a business combination. Of the net proceeds from this offering and the private placement of the founder warrants that are described in this prospectus, $246,300,000 ($7.88 per unit) will be deposited into a trust account (of which $7,500,000 or $0.24 per unit is attributable to the underwriters deferred discount) at Bank of America, N.A., maintained by Continental Stock Transfer & Trust Company, acting as trustee. The underwriters will not be entitled to any interest accrued on the deferred fees. All of the funds held in trust (net of taxes and amounts permitted to be disbursed for working capital purposes) will not be released from the trust account until the earlier of the completion of a business combination or our liquidation. In accordance with Delaware law, we will liquidate as promptly as possible and distribute only to our public stockholders on a pro rata basis the amount, subject to any valid claims by our creditors which are not covered by amounts in the trust account or indemnities provided by our officers, in our trust account (including any accrued interest) plus any remaining net assets if we do not effect a business combination by , 2009 [24 months from the date of this prospectus]. We are offering the units for sale on a firm-commitment basis. Deutsche Bank Securities Inc., acting as representative of the underwriters, expects to deliver our securities to investors in the offering on or about , 2007. Deutsche Bank Securities Robert W. Baird & Co. The date of this prospectus is , 2007. Table of Contents $7,500,000 ($0.24 per unit), plus the proceeds from our private placement of founder warrants of $7,500,000 ($0.24 per unit), will be placed in a trust account at Bank of America, N.A., maintained by Continental Stock Transfer & Trust Company, acting as trustee pursuant to an agreement to be signed on the effective date of the registration statement. We believe that the underwriters deferred discount along with the placement of the underwriters deferred discount and our founding stockholders purchase price of the founder warrants in a trust account is a benefit to our public stockholders because additional proceeds will be available for distributions to investors if we liquidate our trust account prior to our completing an initial business combination. The proceeds held in a trust will not be released until the earlier of the completion of our business combination (with a target acquisition (or acquisitions)) having a fair market value of at least 80% of our net assets held in trust (net of taxes and amounts permitted to be disbursed for working capital purposes and excluding the amount held in the trust account representing the underwriters deferred discount) at the time of such acquisition (or acquisitions) or liquidation of the company. Unless and until a business combination is consummated, the proceeds held in the trust account will not be available for our use for any expenses related to this offering or expenses which we may incur related to the investigation and selection of a target business combination and the negotiation of an agreement to acquire a business combination; provided, however, except that to the extent the trust account earns interest or we are deemed to have earned income therewith, we will be permitted to seek disbursements from the trust account to pay any federal, state or local tax obligations related thereto, and to seek disbursements of net interest income up to an aggregate of $3,250,000, for working capital purposes. Expenses incurred by us while seeking a business combination may be paid prior to a business combination only from the net proceeds of this offering not held in the trust account (initially, approximately $250,000 after the payment of the expenses relating to this offering). The $250,000 initially not held in the trust account will be used for working capital purposes. The underwriters have agreed to defer $7,500,000 of their underwriting discount, equal to 3% of the gross proceeds of the 31,250,000 units being offered to the public, until the consummation of a business combination. Upon the consummation of a business combination, the underwriters deferred discount, reduced pro-ratably by the exercise of stockholder conversion rights, shall be released to the underwriters out of the gross proceeds of this offering held in the trust account. Table of Contents The underwriters will not be entitled to any interest accrued on the deferred discount. If we liquidate the trust account, the underwriters have agreed to waive any right they may have to the $7,500,000 of the underwriters deferred discount held in the trust account, all of which shall be distributed to our public stockholders on a pro rata basis. A portion of the funds not held in the trust account, including up to $3,250,000 in interest earned on the amounts held in the trust account, will be used to repay a loan made to us by certain of our officers and directors to cover offering related expenses. It is possible that we could use a portion of the funds not in the trust account to make a deposit or down payment to fund a no-shop provision with respect to a particular proposed business combination. In the event we were ultimately required to forfeit such funds (whether as a result of our breach of the agreement relating to such payment or otherwise), we may not have a sufficient amount of working capital available outside of the trust account to pay expenses related to finding a suitable business combination without securing additional financing. If we are unable to secure additional financing, we would most likely fail to consummate a business combination in the allotted time and would liquidate our trust account. Prior to the completion of a business combination, there will be no fees or cash payments made to our founding stockholders other than: Repayment of a $200,000 loan bearing interest at an annual rate of 5% compounded semi-annually, which principal amount may be increased by an aggregate amount of $50,000 at our request, made by certain of our officers and directors to cover offering expenses and other start-up costs; and Payment of up to $10,000 per month to Trillium Capital LLC, an affiliate of our Chairman of the Board of Directors, President and Chief Executive Officer, for office space and administrative services. None of the warrants may be exercised until after the consummation of our business combination and, thus, after the funds in the trust account have been disbursed. Accordingly, the warrant exercise price will be paid directly to us and not placed in the trust account. Stockholders must approve business combination We will seek stockholder approval before we effect our business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under Table of Contents applicable state law. Public stockholders, which for this purpose does not include founding stockholders, may vote against a business combination and exercise their conversion rights described below. In connection with the vote required for our business combination, our founding stockholders have agreed to vote all shares of common stock then owned by them in the same manner as a majority of the outstanding shares of common stock issued in this offering, other than the shares of common stock owned by the founding stockholders. We will proceed with a business combination only if a majority of the outstanding shares of common stock issued in this offering are voted in favor of the business combination and public stockholders owning less than 30% of the shares of common stock issued in this offering both exercise their conversion rights described below and vote against the proposed business combination. We will not propose a business combination to our stockholders that is conditioned on less than 30% of the public stockholders exercising their conversion rights. Voting against the proposed business combination alone will not result in conversion of a stockholder s shares of common stock into a pro rata share of the trust account. Such stockholder must also exercise its conversion rights described below. Our founding stockholders will not have such conversion rights with respect to any shares of common stock owned by them. Our threshold for conversion rights has been established at 30% although historically blank check companies have used a 20% threshold. This structural change is consistent with many other current filings with the SEC and it will increase the likelihood of an approval of any proposed business combination by making it easier for us to consummate a business combination with which public stockholders may not agree. However, the 30% threshold entails certain risks described under the headings, Risk Factors Although historically blank check companies have used a 20% threshold for conversion rights, we allow up to approximately 29.99% of our public stockholders to exercise their conversion rights. This higher threshold will make it easier for us to consummate a business combination with which you may not agree, and you may not receive the full amount of your original investment upon exercise of your conversion rights and The ability of a larger number of our stockholders to exercise their conversion rights may not allow us to consummate the most desirable business combination or optimize our Table of Contents capital structure. For more information, see the section entitled Proposed Business Effecting a Business Combination Opportunity for stockholder approval of a business combination. For purposes of seeking approval of the majority of the outstanding shares of common stock issued in this offering, non-votes will have no effect on the approval of a business combination once a quorum is obtained. We intend to give approximately 30 (but not less than 10 nor more than 60) days prior written notice of any meeting at which a vote shall be taken to approve a business combination. Upon the completion of our business combination, unless required by Delaware law, the federal securities laws and the rules and regulations promulgated thereunder, or the rules and regulations of an exchange upon which our securities are listed, we do not presently intend to seek stockholder approval for any subsequent acquisitions. Conversion rights for stockholders voting to reject a business combination Public stockholders, other than our founding stockholders, voting against a business combination will be entitled to convert their stock into a pro rata share of the trust account, plus interest earned on their portion of the trust account (net of taxes payable and amounts permitted to be disbursed for working capital purposes) subject to the availability of lawful funds therefor, if the business combination is approved and completed. If a business combination is approved, stockholders that vote against the business combination and elect to convert their shares of common stock to cash will be entitled to receive their pro-rata portion of the $7,500,000 ($0.24 per share) of the underwriters deferred discount held in the trust account. Public stockholders will not be entitled to their pro rata share of the trust account simply by voting against the business combination; each stockholder must also affirmatively exercise its conversion rights in order to receive its pro rata share of the trust account. However, if public stockholders of 30% or more in interest of our shares of common stock issued in this offering vote against the proposed business combination and elect to convert their shares of common stock, we will not proceed with such business combination. Public stockholders that convert their stock into their pro rata share of the trust account will continue to have the right to exercise any warrants they may hold. Our founding stockholders are not entitled to convert any of their shares of common stock into a pro rata share of the trust account. However, founding stockholders who acquire shares of common Table of Contents stock in or after this offering will be entitled to a pro rata share of the trust account upon the liquidation of the trust account in the event we do not consummate a business combination within the required time period. Our founding stockholders will waive their respective rights to receive any share of the trust account upon such liquidation of the trust account with respect to the shares of common stock owned by them prior to this offering, including the shares of common stock underlying the founder warrants. Liquidation if no business combination If we have not consummated a business combination by , 2009 [24 months from the date of this prospectus], our corporate existence will cease except for the purposes of winding up our affairs and liquidating pursuant to Section 278 of the Delaware General Corporation Law, in which case we will as promptly as practicable thereafter adopt a plan of distribution in accordance with Section 281(b) of the Delaware General Corporation Law. Section 278 provides that our existence will continue for at least three years after its expiration for the purpose of prosecuting and defending suits, whether civil, criminal or administrative, by or against us, and of enabling us gradually to settle and close our business, to dispose of and convey our property, to discharge our liabilities and to distribute to our stockholders on a pro rata basis any remaining assets, but not for the purpose of continuing the business for which we were organized. Our existence will continue automatically even beyond the three-year period for the purpose of completing the prosecution or defense of suits begun prior to the expiration of the three-year period, until such time as any judgments, orders or decrees resulting from such suits are fully executed. Section 281 of the Delaware General Corporation Law will require us to adopt a plan that will provide for our payment, based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against us within the subsequent 10 years. Accordingly, we would be required to provide for any claims of creditors known to us at that time or those we believe could be potentially brought against us within the subsequent 10 years prior to distributing the funds held in the trust to our public stockholders. We have not assumed that we will have to provide for payment on any claims that may potentially be brought against us within the subsequent 10 years due to the speculative nature of such an assumption. We cannot assure you that we will properly assess all claims that may be potentially brought against us. As such, our stockholders could potentially be liable for any claims of Table of Contents creditors to the extent of distributions received by them (but no more). However, because we are a blank check company, rather than an operating company, and our operations will be limited to searching for prospective target businesses to acquire, the only likely claims to arise would be from our vendors, service providers (such as accountants, lawyers, investment bankers, etc.) and prospective target businesses. While we will seek to have all vendors, service providers (which would include any third parties we engaged to assist us in any way in connection with our search for a target business), prospective target businesses or other entities that are owed money by us for services rendered or contracted for or products sold to us execute agreements with us waiving any right, title, interest or claim of any kind they may have in or to any monies held in the trust account for the benefit of our public stockholders, there is no guarantee that they will execute such agreements. Nor is there any guarantee that, even if such entities execute such agreements with us, they will not seek recourse against the trust account or that a court would not conclude that such agreements are not legally enforceable. Our officers have agreed that they will be jointly and severally liable to ensure that the proceeds in the trust account are not reduced by the claims of vendors, service providers or other entities that are owed money by us for services rendered or contracted for or products sold to us, or by claims of prospective target businesses for fees and expenses of third parties that we agree in writing to pay in the event we do not consummate a combination with such target business. We will not reimburse our officers for payments made by them to ensure that the proceeds in the trust account are not reduced. We believe that the board of directors would be obligated to pursue a potential claim for reimbursement from our officers pursuant to the terms of their agreements with us if it would be in the best interest of our stockholders to pursue such a claim. Such a decision would be made by a majority of our disinterested directors based on the facts and circumstances at the time. However, we will have no recourse against our officers if any liability occurs with respect to a claim other than a claim by a vendor, service provider, prospective target business or other entity that is owed money by us for services rendered or contracted for or products sold to us, as well as claims of prospective target businesses for fees and expenses of third parties that we agree in writing to pay in the event we do not consummate a combination with such target business. We cannot assure you that our officers will be able to satisfy their obligations, if they are required to do so. Further, our officers are liable only to the extent necessary to ensure Table of Contents Common stock: Number outstanding before this offering and private placement 7,812,500 shares(1) Number to be outstanding after this offering and private placement 39,062,500 shares(1) Warrants: Number outstanding before this offering and private placement 0 warrants Number to be outstanding after this offering and private placement 38,750,000 warrants(2) Exercisability Each warrant is exercisable for one share of common stock. Exercise price $6.00 The exercise price and number of shares of common stock issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, extraordinary dividend or our recapitalization, reorganization, merger or consolidation. Exercise period The warrants will be exercisable only if we provide for an effective registration statement covering the shares of common stock underlying the warrants. The warrants will become exercisable on the later of: the completion of a business combination, and [ ], 2008 [one year from the date of this prospectus]. The warrants will expire at 5:00 p.m., New York City time, on [ ], 2011 [four years from the date of this prospectus] or earlier upon redemption. Redemption We may redeem the outstanding warrants (other than the warrants included in and underlying the founder warrants): in whole and not in part, at a price of $0.01 per warrant at any time after the warrants become exercisable, Table of Contents that the amounts in the trust fund are not reduced. As a result, we cannot assure you that the per-share distribution from the trust fund, if we liquidate, will not be less than $7.88, plus interest then held in the trust fund. We anticipate the distribution of the funds in the trust account to our public stockholders will occur within 10 business days from the date our corporate existence ceases. Our founding stockholders have waived their respective rights to participate in any liquidation distribution occurring upon our failure to consummate a business combination and subsequent liquidation, with respect to the shares of common stock owned by them prior to this offering, including the common stock underlying the founder warrants. In addition, the underwriters have agreed to waive their rights to the $7,500,000 of the underwriters deferred discount deposited in the trust account in the event we liquidate prior to the completion of a business combination. We will pay the costs of liquidation from our remaining assets outside of the trust fund. If such funds are insufficient, the officers have agreed to advance us the necessary funds (currently anticipated to be no more than approximately $50,000) and have agreed not to seek repayment for such expenses. Second Amended and Restated Certificate of Incorporation As discussed below, there are specific provisions in our second amended and restated certificate of incorporation that may not be amended (without the affirmative vote cast at a meeting of stockholders of at least 95% of the common stock issued in the offering) prior to our consummation of a business combination, including our requirements to seek stockholder approval of such a business combination and to allow our stockholders to seek conversion of their shares if they do not approve of such a business combination. While we have been advised that such provisions limiting our ability to amend our second amended and restated certificate of incorporation may not be enforceable under Delaware law, we view these provisions, which are contained in Article Sixth of our second amended and restated certificate of incorporation, as obligations to our stockholders and we presume that investors will make an investment decision, relying, at least in part, on this provision. In addition, we will not support, directly or indirectly, or in any way endorse or recommend, that stockholders approve an amendment or modification to this provision and are contractually obligated not to amend or waive this provision pursuant to the underwriting agreement that we will enter into with the underwriters in connection with this offering. Table of Contents Our second amended and restated certificate of incorporation also provides that we will continue in existence only until , 2009 [24 months from the date of this prospectus]. If we have not completed a business combination by such date, our corporate existence will cease except for the purposes of winding up our affairs and liquidating, pursuant to Section 278 of the Delaware General Corporation Law. This has the same effect as if our board of directors and stockholders had formally voted to approve our dissolution pursuant to Section 275 of the Delaware General Corporation Law. Accordingly, limiting our corporate existence to a specified date as permitted by Section 102(b)(5) of the Delaware General Corporation Law removes the necessity to comply with the formal procedures set forth in Section 275 (which would have required our board of directors and stockholders to formally vote to approve our dissolution and liquidation and to have filed a certificate of dissolution with the Delaware Secretary of State). We will, nevertheless, continue for a term of three years from the time our existence ceases, or for such longer period as the Delaware Court of Chancery shall in its discretion direct, for the purpose of prosecuting and defending suits, whether civil, criminal or administrative, by or against us and of enabling us to gradually settle and close our business, to dispose of and convey our property, to discharge our liabilities and to distribute to our stockholders on a pro rata basis any remaining assets, but not for the purpose of continuing the business for which we were organized. We cannot assure you that we will properly assess all liabilities with which we may potentially be charged. As such, our stockholders could potentially be liable for any of our obligations to the extent of distributions received by them (but no more). However, because we are a blank check company, rather than an operating company, and our operations will be limited to searching for prospective target businesses to acquire, the only likely liabilities to arise would be from our vendors and service providers (such as accountants, lawyers, investment bankers, etc.) and prospective target businesses. In connection with any proposed business combination we submit to our stockholders for approval, we will also submit to stockholders a proposal to amend our second amended and restated certificate of incorporation to provide for our perpetual existence, thereby removing this limitation on our corporate life. We will only consummate a business combination if stockholders vote both in favor of such business combination and our amendment to provide for our perpetual existence. Any vote to extend our Table of Contents corporate life to continue perpetually in connection with a business combination will be effective only if the business combination is approved. The approval of the proposal to amend our second amended and restated certificate of incorporation to provide for our perpetual existence in connection with a proposal to approve a business combination would require the affirmative vote of a majority of our outstanding shares of common stock issued in this offering. Otherwise any amendment would require the affirmative vote of 95% of the common stock issued in the offering. We view this provision terminating our corporate existence on , 2009 [24 months from the date of this prospectus] as an obligation to our stockholders and we presume that investors will make an investment decision, relying, at least in part, on this provision. In addition, we will not support, directly or indirectly, or in any way endorse or recommend, that stockholders approve an amendment or modification to this provision and we are contractually obligated not to amend or waive this provision pursuant to the underwriting agreement that we will enter into with the underwriters in connection with this offering. Escrow of founding stockholders shares On the effective date of the registration statement, all of our founding stockholders will place the common stock and warrants that they owned immediately before this offering or acquired in the private placement into an escrow account maintained by Continental Stock Transfer & Trust Company, acting as escrow agent. Subject to certain limited exceptions (such as transfers to relatives and trusts for estate planning purposes, while remaining in escrow) and except for up to 1,171,874 shares of common stock owned by our founding stockholders which may be redeemed by us at cost if the underwriters do not exercise their over-allotment option, these shares of common stock will not be transferable until one year after the consummation of a business combination at which time such shares of common stock will be released from escrow, unless we were to engage in a transaction after the consummation of the initial business combination that results in all of the stockholders of the combined entity having the right to exchange their shares of common stock for cash, securities or other property. Table of Contents Underwriters unit purchase option We have also agreed to sell to our underwriters for $100, as additional compensation, an option to purchase up to a total of 1,562,500 units at $9.60 per unit, with the warrants issued as part of such units exercisable at $7.20 per share. The units issuable upon exercise of this option are identical to the other units offered by this prospectus except that the warrants included in the option have an exercise price of $7.20 per share (120% of the exercise price of the warrants included in the units sold in the offering). This option is exercisable at $9.60 per unit, commencing on the later of the consummation of a business combination and one year from the date of this prospectus and expiring four years from the date of this prospectus. The exercise price and the number of units issuable upon exercise of the option may be adjusted in certain circumstances. The purpose of this option is to compensate the underwriters for the underwriters deferred discount that will be placed into the trust account and therefore is at risk of loss. The fair value of the unit purchase option we have agreed to sell to the underwriters is based on a Black-Scholes model on the date of sale and would be approximately $4.6 million using an expected life of four years, volatility of 48.6% and a risk-free interest rate of 4.1%. The option and the 1,562,500 units, the 1,562,500 shares of common stock, the 1,562,500 warrants underlying such units and the 1,562,500 shares of common stock underlying such warrants, have been deemed underwriting compensation by The Financial Industry Regulatory Authority (the FINRA ), and are therefore subject to a 180-day lock-up pursuant to Rule 2710(g)(1) of the National Association of Securities Dealers, Inc. (the NASD Conduct Rules ). Table of Contents Risks In making your decision on whether to invest in our securities, you should take into account the special risks we face as a blank check company, as well as the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act, and, therefore, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. You should carefully consider these and the other risks set forth in the section entitled Risk Factors beginning on page 23 of this prospectus. Some of our other risks include the following: We are a recently incorporated development stage company with no operating results to date. Since we do not have an operating history, you will have no basis upon which to evaluate our ability to achieve our business objective, which is to effect a business combination. We have a very limited amount of available cash and working capital, and our ability to have sufficient funds to complete this offering is dependent upon loans to be made to us by certain of our officers and directors. Our ability to continue as a going concern is thus dependent on funds raised in this offering. The discretion of our officers and directors in identifying and selecting a suitable target acquisition may result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination are appropriate and in our stockholders best interest. If we are unable to find a suitable target acquisition that would result in a business combination, the funds being held in trust may not be returned to you until , 2009 [24 months from the date of this prospectus]. If we are forced to liquidate before a business combination and distribute the trust account in liquidation, our public stockholders may receive less than $8.00 per share and our warrants will expire worthless. If third parties bring claims against us, the proceeds held in trust could be reduced and the per-share liquidation price received by stockholders will be less than the approximately $7.88 per share held in trust. Our ability to effect a business combination and to be successful thereafter will be largely dependent upon the efforts of our officers, directors and others, who may not continue with us following a business combination. Our directors or officers or any other founding stockholders and their affiliates currently are, and may in the future become, affiliated with additional entities that are engaged in business activities similar to those intended to be conducted by us and, accordingly, may have conflicts of interest in determining to which entity a particular business opportunity should be presented. Initially, we may only be able to complete one business combination, which may cause us to be solely dependent on a single asset or operation. By consummating a business combination with only a single asset or operation, our lack of diversification may subject us to numerous economic and competitive developments. Investors in this offering have no basis to evaluate the merits or risks of a business combination as we have not yet selected any target acquisition with which to complete a business combination. Table of Contents We are not required to use all or any of the amount in the trust account for our initial business combination as long as we consummate an initial business combination with one or more target acquisitions having a fair market value of at least 80% of our net assets held in trust (net of taxes and amounts permitted to be disbursed for working capital purposes and excluding the amount held in the trust account representing the underwriters deferred discount) at the time of such acquisition. We may use any remaining proceeds held in the trust account for working capital, including director and officer compensation, change-in-control payments or payments to affiliates, to finance the operations of the target acquisition, make other acquisitions and pursue our growth strategy. (1) If the business combination is consummated, public stockholders, other than our founding stockholders, who voted against the business combination and exercised their conversion rights would be entitled to receive approximately $7.88 per share, which amount represents the net proceeds of this offering and the purchase price of the founder warrants. The as adjusted information gives effect to the sale of the units we are offering (other than pursuant to the underwriters over-allotment option), including the application of the related gross proceeds and the payment of the estimated remaining costs from such sale and the repayment of the accrued and other liabilities to be made. The as adjusted working capital and total assets amounts include the $238,800,000 from the proceeds of the offering and the $7,500,000 purchase price of the founder warrants to be held in the trust account, which will be available to us only upon the consummation of a business combination within the time period described in this prospectus. The adjusted working capital amount does not include the $7,500,000 being held in the trust account ($8,625,000 if the underwriters over-allotment option is exercised) representing the underwriters deferred discount. If we have not consummated a business combination by , 2009 [24 months from the date of this prospectus], our corporate existence will cease and we will promptly distribute only to our public stockholders on a pro rata basis the amount in our trust account (including the amounts representing the underwriters deferred discount, any accrued interest, net of taxes payable and amounts permitted to be disbursed for working capital purposes, which taxes, if any, shall be paid from the trust account) plus any remaining net assets, subject to our obligations under Delaware law to provide for claims of creditors. Our founding stockholders have waived their respective rights to participate in any liquidation distribution occurring upon our failure to consummate a business combination and subsequent liquidation with respect to the shares of common stock owned by them prior to this offering, including the shares of common stock underlying the founder warrants. We will not proceed with a business combination if public stockholders owning 30% or more of the shares of common stock issued in this offering vote against the proposed business combination and exercise their conversion rights. Our founding stockholders will not have such conversion rights with respect to any shares of common stock owned by them. Accordingly, we may effect a business combination if public stockholders owning up to approximately 29.99% of the shares of common stock issued in this offering exercise their conversion rights. If this occurred and a business combination is completed, we could be required to convert to cash Table of Contents from the trust account up to approximately 29.99% of the 31,250,000 shares of common stock issued in this offering, or 9,374,999 shares of common stock, at an initial per-share conversion price of approximately $7.88, without taking into account interest earned on the trust account (net of any taxes due on such interest, which taxes, if any, shall be paid from the trust account). The actual per-share conversion price will be equal to: the amount in the trust account, inclusive of any interest thereon (net of any taxes payable and amounts permitted to be disbursed for working capital purposes and calculated as of two business days prior to the proposed consummation of the business combination), divided by the number of shares of common stock issued in the offering. Table of Contents RISK FACTORS Investing in our securities involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before making a decision to invest in our units. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us. If any of the following risks occur, our business, financial conditions or results of operating may be materially and adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment. Risks Related to Our Business We are a development stage company with no operating history and, accordingly, you will not have any basis on which to evaluate our ability to achieve our business objective. We are a recently incorporated development stage company with no operating results to date. Therefore, our ability to begin operations is dependent upon obtaining financing through the public offering of our securities. Since we do not have any operations or an operating history, you will have no basis upon which to evaluate our ability to achieve our business objective, which is to acquire one or more domestic or international operating businesses in the business process outsourcing industry. We have not conducted any discussions and we have no plans, arrangements or understandings with any prospective target business with respect to a business combination. We will not generate any revenues or income until, at the earliest, after the consummation of a business combination. We will liquidate if we do not consummate a business combination. Pursuant to our second amended and restated certificate of incorporation, we have until , 2009 [24 months from the date of this prospectus] in which to complete a business combination. If we fail to consummate a business combination within the required time frame, our corporate existence will, in accordance with our second amended and restated certificate of incorporation, cease except for the purposes of winding up our affairs and liquidating. We may not be able to find suitable target businesses within the required time frame. In addition, our negotiating position and our ability to conduct adequate due diligence on any potential target may be reduced as we approach the deadline for the consummation of a business combination. We do not have any specific business combination under consideration, and neither we, nor any representative acting on our behalf, has had any contacts with any target businesses regarding a business combination, nor taken any direct or indirect actions to locate or search for a target business. We view this obligation to liquidate as an obligation to our stockholders and we presume that investors will make an investment decision, relying, at least in part, on this provision. Thus, without the affirmative vote cast at a meeting of stockholders of at least 95% of the common stock issued in the offering, neither we nor our board of directors will take any action to amend or waive any provision of our second amended and restated certificate of incorporation to allow us to survive for a longer period of time, except in connection with the consummation of a business combination. Notwithstanding the foregoing, we will not support, directly or indirectly, or in any way endorse or recommend, that stockholders approve an amendment or modification to such provision if it does not appear we will be able to consummate a business combination within the foregoing time period. In addition, we are contractually obligated not to amend or waive this provision pursuant to the underwriting agreement that we will enter into with the underwriters in connection with this Table of Contents offering. Our founding stockholders have waived their respective rights to participate in any liquidation distribution occurring upon our failure to consummate a business combination with respect to the shares of common stock owned by them prior to this offering, including the shares of common stock underlying the founder warrants. There will be no distribution from the trust account with respect to our warrants which will expire worthless. We will pay the costs of liquidation, which we currently estimate to be up to $50,000, from our remaining assets outside of the trust account. In addition, our officers have agreed to jointly and severally reimburse us to the extent that we fail to obtain valid and enforceable waivers from vendors, service providers, prospective target businesses or other entities that are owed money by us for services rendered or contracted for or products sold to us, as well as for claims of prospective target businesses for fees and expenses of third parties that we agree in writing to pay in the event we do not consummate a combination with such target business in order to protect the amounts held in trust. We cannot assure you that certain provisions of our second amended and restated certificate of incorporation will not be amended other than in connection with the consummation of a business combination. We believe that a vote to amend or waive any provision of our second amended and restated certificate of incorporation would likely take place only to allow additional time to consummate a pending business combination. We view these provisions to be obligations to our stockholders and we presume that investors will make an investment decision relying, at least in part, on this provision. Although we are contractually obligated not to amend or waive this provision pursuant to the underwriting agreement that we will enter into with the underwriters in connection with this offering, we cannot assure you that other provisions of our second amended and restated certificate of incorporation will not be amended or waived by the affirmative vote cast at a meeting of stockholders of at least 95% of the common stock issued in the offering. You will not have any rights or interest in funds from the trust account, except under certain limited circumstances. Our public stockholders will be entitled to receive funds from the trust account only in the event of our liquidation or if they seek to convert their respective shares of common stock into cash upon a business combination which the stockholder voted against and which is completed by us. Our founding stockholders will not have such conversion rights with respect to any shares of common stock owned by them. In no other circumstances will a stockholder have any right or interest of any kind in the trust account. If we are forced to liquidate before the completion of a business combination and distribute the trust account, our public stockholders may receive significantly less than $7.88 per share and our warrants will expire worthless. We must complete a business combination having a fair market value of at least 80% of our net assets held in trust (net of taxes and amounts permitted to be disbursed for working capital purposes and excluding the amount held in the trust account representing the underwriters deferred discount) at the time of such acquisition by , 2009 [24 months from the date of this prospectus]. If we are unable to complete a business combination within the prescribed time frame and are forced to liquidate the trust account, the per-share liquidation price received by our public stockholders from the trust account may be less than $8.00 because of the expenses of this offering, our general and administrative expenses and the anticipated costs of seeking a business combination. Upon the liquidation of the trust account, public stockholders Table of Contents Exhibit No. Description 1.1 Form of Underwriting Agreement. 3.1 Amended and Restated Certificate of Incorporation. 3.2 Form of Second Amended and Restated Certificate of Incorporation. 3.3 By-laws. 3.4 Form of Amended and Restated By-laws. 4.1 Specimen Unit Certificate. 4.2 Specimen Common Stock Certificate. 4.3 Specimen Warrant Certificate. 4.4 Form of Unit Purchase Agreement to be granted to the Underwriters. 4.5 Form of Warrant Agreement between Continental Stock Transfer & Trust Company and the Registrant. 5.1 Opinion of Wilmer Cutler Pickering Hale and Dorr LLP. 10.1 Form of Investment Management Trust Agreement between Continental Stock Transfer & Trust Company and the Registrant. 10.2 Form of Securities Escrow Agreement among the Registrant, Continental Stock Transfer & Trust Company, and the Founding Stockholders. 10.3 Form of Registration Rights Agreement among the Registrant and the Founding Stockholders. 10.4 Form of Letter Agreement by Trillium Capital LLC. 10.5 Form of Letter Agreement by R. Scott Murray. 10.6 Form of Letter Agreement by M. Benjamin Howe. 10.7 Form of Letter Agreement by Kevin T. O Leary. 10.8 Form of Letter Agreement by Stephen D. R. Moore. 10.9 Form of Letter Agreement by Lloyd R. Linnell. 10.10 Form of Letter Agreement by Sheila M. Flaherty. 10.11 Form of Letter Agreement by G. Drew Conway. 10.12 Form of Letter Agreement by Charles F. Kane. 10.13 Common Stock Subscription Agreement between the Registrant and the Founding Stockholders. 10.14 Promissory Note, dated June 29, 2007, issued to R. Scott Murray in the amount of $50,000. 10.15 Promissory Note, dated June 29, 2007, issued to Lloyd Linnell in the amount of $50,000. 10.16 Promissory Note, dated June 29, 2007, issued to Kevin T. O Leary in the amount of $50,000. 10.17 Promissory Note, dated June 29, 2007, issued to Paul G. Joubert in the amount of $50,000. 10.18 Loan Call Agreement, dated June 29, 2007, among the Registrant, R. Scott Murray, Lloyd Linnell, Kevin T. O Leary and Paul G. Joubert. 10.19 Warrant Subscription Agreement between the Registrant and the Founding Stockholders. 10.20 Charter of the Audit Committee of the Board of Directors. 10.21 Charter of the Nominating Committee of the Board of Directors. 10.22 Form of Letter Agreement by Robert Wadsworth. 10.23 Form of Letter Agreement by Paul G. Joubert. 10.24 Form of Letter Agreement by Deborah Keeman. 10.25 Administrative Services Agreement, by and between the Company and Trillium Capital LLC, dated as of August 21, 2007. 14 Code of Business Conduct and Ethics. 23.1 Consent of BDO Seidman, LLP. 23.2 Consent of Wilmer Cutler Pickering Hale and Dorr LLP (included in Exhibit 5.1). 23.3 Consent of Paul G. Joubert. Table of Contents will be entitled to receive (unless there are claims not otherwise satisfied by the amount not held in the trust account or the indemnification provided by our officers) approximately $7.88 per share plus interest earned on their pro rata portion of the trust account (net of taxes payable and amounts permitted to be disbursed for working capital purposes), which includes $7,500,000 ($0.24 per unit) of the underwriters deferred discount and $7,500,000 ($0.24 per unit) of the purchase price of the founder warrants. Our officers have agreed jointly and severally to reimburse us to the extent we do not obtain valid and enforceable waivers from vendors, service providers, prospective target businesses or other entities that are owed money by us for services rendered or contracted for or products sold to us, as well as for claims of prospective target businesses for fees and expenses of third parties that we agree in writing to pay in the event we do not consummate a combination with such target business in order to protect the amounts held in the trust account. In the event that we liquidate and it is subsequently determined that the reserve for claims and liabilities is insufficient, stockholders who received a return of funds from the liquidation of our trust account could be liable for claims made by our creditors. Furthermore, there will be no distribution with respect to our outstanding warrants which will expire worthless if we liquidate the trust account in the event we do not complete a business combination within the prescribed time period. For a more complete discussion of the effects on our stockholders if we are unable to complete a business combination, see the section below entitled Proposed Business Effecting a Business Combination Liquidation if no business combination. If we are unable to consummate a business combination, our public stockholders will be forced to wait the full 24 months before receiving liquidation distributions. We have until , 2009 [24 months from the date of this prospectus] in which to complete a business combination. We have no obligation to return funds to investors prior to such date unless we consummate a business combination prior thereto and only then in cases where investors have sought conversion of their shares. Only after the expiration of this 24-month period will public stockholders be entitled to liquidation distributions if we are unable to complete a business combination. Accordingly, investors funds may be unavailable to them until such date. We may choose to redeem our outstanding warrants at a time that is disadvantageous to our warrant holders. Subject to there being a current prospectus under the Securities Act with respect to the common stock issuable upon exercise of the warrants, we may redeem the warrants issued as a part of our units at any time after the warrants become exercisable in whole and not in part, at a price of $0.01 per warrant, upon a minimum of 30 days prior written notice of redemption, if and only if, the last sales price of our common stock equals or exceeds $11.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. In addition, we may not redeem the warrants unless the warrants comprising the units sold in this offering and the shares of common stock underlying those warrants are covered by an effective registration statement from the beginning of the measurement period through the date fixed for the redemption. Redemption of the warrants could force the warrant holders (i) to exercise the warrants and pay the exercise price at a time when it may be disadvantageous for the holders to do so, (ii) to sell the warrants at the then current market price when they might otherwise wish to hold the warrants, or (iii) to accept the nominal redemption price which, at the time the warrants are called for redemption, is likely to be substantially less than the market value of the warrants. Table of Contents Certain warrant holders are unlikely to receive direct notice of redemption of our warrants. We expect most purchasers of our warrants will hold their securities through one or more intermediaries and consequently you are unlikely to receive notice directly from us that the warrants are being redeemed. If you fail to receive notice of redemption from a third party and your warrants are redeemed for nominal value, you will not have recourse against us. Although we are required to use our best efforts to have an effective registration statement covering the issuance of the shares of common stock underlying the warrants at the time that our warrant holders exercise their warrants, we cannot guarantee that a registration statement will be effective, in which case our warrant holders may not be able to exercise our warrants and therefore the warrants could expire worthless. Holders of our warrants will be able to exercise the warrants only if (i) a current registration statement under the Securities Act relating to the shares of our common stock underlying the warrants is then effective and (ii) such shares of common stock are qualified for sale or exempt from qualification under the applicable securities laws of the states in which the various holders of warrants reside. Although we have undertaken in the Warrant Agreement, and therefore have a contractual obligation, to use our best efforts to maintain a current registration statement covering the shares of common stock underlying the warrants following completion of this offering to the extent required by federal securities laws, and we intend to comply with our undertaking, we cannot assure that we will be able to do so and therefore the warrants could expire worthless. Such expiration would result in each holder paying the full unit purchase price solely for the shares of common stock underlying the unit. In addition, we have agreed to use our reasonable efforts to register the shares of common stock underlying the warrants under the blue sky laws of the states of residence of the existing warrant holders, to the extent an exemption is not available. The value of the warrants may be greatly reduced if a registration statement covering the shares of common stock issuable upon the exercise of the warrants is not kept current or if the securities are not qualified, or exempt from qualification, in the states in which the holders of warrants reside. Holders of warrants who reside in jurisdictions in which the shares of common stock underlying the warrants are not qualified and in which there is no exemption will be unable to exercise their warrants and would either have to sell their warrants in the open market or allow them to expire unexercised. In no event will the registered holders of a warrant be entitled to receive a net cash settlement, stock, or other consideration in lieu of physical settlement in shares of our common stock. If and when the warrants become redeemable by us, we may exercise our redemption right even if we are unable to qualify the underlying securities for sale under all applicable state securities laws. Although historically blank check companies have used a 20% threshold for conversion rights, we allow up to approximately 29.99% of our public stockholders to exercise their conversion rights. This higher threshold will make it easier for us to consummate a business combination with which you may not agree, and you may not receive the full amount of your original investment upon exercise of your conversion rights. We will consummate the initial business combination only if the following two conditions are met: (i) a majority of the outstanding shares of common stock sold in this offering voted by the public stockholders are voted in favor of the business combination and (ii) public stockholders owning 30% or more of the shares of common stock sold in this offering do not vote against the business combination and exercise their conversion rights. Our founding stockholders will not have such conversion rights with respect to any shares of common stock owned by them. Historically, blank check companies have had a conversion threshold of 20%, Table of Contents which makes it more difficult for such companies to consummate their initial business combination. Thus, because we permit a larger number of stockholders to exercise their conversion rights, it will be easier for us to consummate an initial business combination with a target business which you may believe is not suitable for us, and you may not receive the full amount of your original investment upon exercise of your conversion rights. The ability of a larger number of our stockholders to exercise their conversion rights may not allow us to consummate the most desirable business combination or optimize our capital structure. When we seek stockholder approval of a business combination, we will offer each public stockholder, other than our founding stockholders, the right to have his, her or its shares of common stock converted to cash if the stockholder votes against the business combination and the business combination is approved and consummated. Such holder must both vote against such business combination and then exercise his, her or its conversion rights to receive a pro rata share of the trust account. We allow up to approximately 29.99% of our public stockholders to exercise their conversion rights. Accordingly, if our business combination requires us to use substantially all of our cash to pay the purchase price, because we will not know how many stockholders may exercise such conversion rights, we may either need to reserve part of the trust account for possible payment upon such conversion, or we may need to arrange third party financing to help fund our business combination in case a larger percentage of stockholders exercise their conversion rights than we expect. In the event that the acquisition involves the issuance of our stock as consideration, we may be required to issue a higher percentage of our stock to make up for a shortfall in funds. Raising additional funds to cover any shortfall may involve dilutive equity financing or incurring indebtedness at higher than desirable levels. This may limit our ability to effectuate the most attractive business combination available to us. Our stockholders may be held liable for claims by third parties against us to the extent of distributions received by them. Our second amended and restated certificate of incorporation provides that we will continue in existence only until , 2009 [24 months from the date of this prospectus]. If we have not completed a business combination by such date and amended this provision in connection therewith, pursuant to the Delaware General Corporation Law, our corporate existence will cease except for the purposes of winding up our affairs and liquidating. Under Section 282 of the Delaware General Corporation Law, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. If the corporation complies with certain procedures set forth in Section 280 of the Delaware General Corporation Law intended to ensure that it makes reasonable provision for all claims against it, including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution. However, it is our intention to make liquidating distributions to our stockholders as soon as reasonably possible after our corporate existence terminates and, therefore, we do not intend to comply with those procedures. Because we will not be complying with those procedures, we are required, pursuant to Section 281 of the Delaware General Corporation Law, to adopt a plan that will provide for our payment, based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be Table of Contents potentially brought against us within the subsequent 10 years. Accordingly, we would be required to provide for any claims of creditors known to us at that time or those that we believe could be potentially brought against us within the subsequent 10 years prior to distributing the funds held in the trust to stockholders. We cannot assure you that we will properly assess all claims that may be potentially brought against us. As such, our stockholders could potentially be liable for any claims to the extent of distributions received by them and any liability of our stockholders may extend well beyond the third anniversary of such date. Accordingly, we cannot assure you that third parties will not seek to recover from our stockholders amounts owed to them by us. In the event of our liquidation, we may have to adopt a plan to provide for the payment of claims that may potentially be brought against us, which could result in the per-share liquidation amount to our stockholders being significantly less than $7.88. If third parties bring claims against us, the proceeds held in the trust account could be reduced and the per share liquidation price received by stockholders from the trust account as part of our plan of distribution will be less than $7.88 per share. Our placing of funds in trust may not protect those funds from third-party claims against us. Third-party claims may include contingent or conditional claims and claims of directors and officers entitled to indemnification under our second amended and restated certificate of incorporation. We intend to pay any claims, to the extent sufficient to do so, from our funds not held in trust. Although we will seek to have all vendors, service providers and prospective target businesses or other entities that are owed money by us for services rendered or contracted for or products sold to us waive any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our public stockholders, there is no guarantee that they will execute such agreements. Even if they execute such agreements, they could bring claims against the trust account including but not limited to fraudulent inducement, breach of fiduciary responsibility or other similar claims, as well as claims challenging the enforceability of the waiver, in each case in order to gain an advantage with a claim against our assets, including the funds held in the trust account. If any third party refused to execute an agreement waiving such claims to the monies held in the trust account, we would perform an analysis of the alternatives available to us if we chose not to engage such third party and evaluate if such engagement would be in the best interest of our stockholders if such third party refused to waive such claims. Examples of possible instances where we may engage a third party that refused to execute a waiver include the engagement of a third party consultant whose particular expertise or skills are believed by management to be significantly superior to those of other consultants that would agree to execute a waiver or in cases where management is unable to find a provider of required services willing to provide the waiver. In any event, our management would perform an analysis of the alternatives available to it and would only enter into an agreement with a third party that did not execute a waiver if management believed that such third party s engagement would be significantly more beneficial to us than any alternative. In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with us and not seek recourse against the trust account for any reason. Accordingly, the proceeds held in trust could be subject to claims that could take priority over the claims of our public stockholders and the per-share liquidation price could be less than the $7.88 per share held in the trust account, plus interest (net of any taxes due on such interest, which taxes, if any, shall be paid from the trust account), due to claims of such creditors. If we are unable to complete a business combination and liquidate the company, our officers will be jointly and severally liable to ensure that the proceeds in the trust account are not reduced if we did not obtain a valid and enforceable waiver from vendors, service providers, or other entities that are owed money by us for services Table of Contents rendered or contracted for or products sold to us, as well as any prospective target businesses for fees and expenses of third parties that we agree in writing to pay in the event we do not consummate a combination with such target business. We cannot assure you that our officers will be able to satisfy those obligations. The indemnification provisions are set forth in an insider letter executed by each of our officers. The insider letter specifically sets forth that in the event we obtain a valid and enforceable waiver of any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our stockholders from a vendor, service provider, prospective target business or other entity that is owed money by us for services rendered or contracted for or products sold to us, the indemnification from officers will not be available. Additionally, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, the funds held in our trust account will be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. To the extent any bankruptcy claims deplete the trust account we cannot assure you we will be able to return to our public stockholders the liquidation amounts due them. Claims for indemnification by our officers and directors may reduce the funds available to satisfy successful third-party claims against us and may reduce the amount of money in the trust account. Under our second amended and restated certificate of incorporation, we have agreed to indemnify our officers and directors against a variety of expenses (including attorneys fees) to the fullest extent permitted under Delaware law. If indemnification payments are made to our officers and directors pursuant to our second amended and restated certificate of incorporation, the amount of the money in the trust account may be reduced. As described above, we will seek to have all vendors, service providers and prospective target businesses or other entities with which we execute agreements waive any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our public stockholders. However, there is no guarantee that such entities will agree to waive any claims they may have in the future or, even if such entities agree to waive such claims, that such waiver would be enforceable. Accordingly, the proceeds held in trust could be subject to claims that could take priority over the claims of our public stockholders. Our officers have agreed, in the event we are unable to complete a business combination and liquidate the company, to be jointly and severally liable to ensure that the proceeds in the trust account are not reduced if we did not obtain a valid and enforceable waiver from such vendors, service providers, or other entities that are owed money by us for services rendered or contracted for or products sold to us, or if we agreed in writing with any prospective target businesses to pay for fees and expenses of third parties in the event we do not consummate a combination with such target business. However, we will not indemnify our officers for payments made by them to ensure that the proceeds in the trust account are not so reduced. In certain circumstances, our board of directors may be viewed as having breached their fiduciary duties to our creditors, thereby exposing itself and our company to claims of punitive damages. If we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, any distributions received by stockholders could be viewed under Table of Contents applicable debtor/creditor and/or bankruptcy laws as either a preferential transfer or a fraudulent conveyance. As a result, a bankruptcy court could seek to recover all amounts received by our stockholders. Furthermore, because we intend to distribute the proceeds held in the trust account to our public stockholders on a pro rata basis promptly after the termination of our existence by operation of law, this may be viewed or interpreted as giving preference to our public stockholders over any potential creditors with respect to access to or distributions from our assets. Furthermore, our board of directors may be viewed as having breached its fiduciary duty to our creditors and/or may have acted in bad faith, thereby exposing itself and our company to claims of punitive damages, by paying public stockholders from the trust account prior to addressing the claims of creditors. We cannot assure you that claims will not be brought against us for these reasons. If the net proceeds of this offering not being placed in trust together with interest earned on the trust account available to us are insufficient to allow us to operate for at least the next 24 months, we may not be able to complete a business combination. We currently believe that, upon consummation of this offering, the funds available to us outside of the trust account together with up to $3,250,000 of interest earned on the trust account that may be released to us will be sufficient to allow us to operate for at least the next 24 months, assuming that a business combination is not consummated during that time. However, we cannot assure you that our estimates will be accurate. The $250,000 initially not held in the trust account will be used for working capital purposes. We could use a portion of the funds not being placed in trust to pay due diligence costs in connection with a potential business combination or to pay fees to consultants to assist us with our search for a target acquisition. We could also use a portion of these funds as a down payment, reverse break-up fee (a provision in a merger agreement which requires a payment to the target company if the financing for an acquisition is not obtained), or to fund a no-shop provision (a provision in letters of intent designed to keep target acquisitions from shopping around for transactions with others on terms more favorable to such target acquisitions) with respect to a particular proposed business combination, although we do not have any current intention to do so. If we entered into such a letter of intent where we paid for the right to receive exclusivity from a target acquisition and were subsequently required to forfeit such funds (whether as a result of our breach or otherwise) or if we agree to a reverse break-up fee and subsequently were required to pay such fee as a result of our breach of the acquisition agreement, we might not have sufficient funds to continue searching for, or conduct due diligence with respect to any other potential target acquisitions. In such event, we would need to obtain additional funds from our founding stockholders or another source to continue operations. Our ability to continue as a going concern is dependent on us raising funds in this offering. We have no present revenue and will not generate any revenue until, at the earliest, after the consummation of a business combination. We have a very limited amount of available cash and working capital. The report of our independent registered public accountants on our financial statements includes an explanatory paragraph stating that our ability to continue as a going concern is dependent on the consummation of this offering. The financial statements do not include any adjustments that might result from our inability to consummate this offering or our ability to continue as a going concern. There may be tax consequences associated with our acquisition, holding and disposition of target companies and assets. We may incur significant taxes in connection with effecting acquisitions; holding, receiving payments from, and operating target companies and assets; and disposing of target companies and assets. Table of Contents
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+Prospectus Summary 1
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in the prospectus. This summary does not contain all of the information you should consider before investing in our ADSs. You should read the entire prospectus carefully. Unless the context otherwise requires, information contained in this prospectus assumes that the underwriters do not exercise their over-allotment option. All references to CDTV Holding, we, us or our include China Digital TV Holding Co., Ltd., its subsidiaries, the businesses acquired from Novel-Tongfang Information Engineering Co., Ltd., or N-T Information Engineering, and, in the context of describing our operations and consolidated financial information, also include Beijing Novel-Tongfang Digital TV Technology Co., Ltd., or N-T Digital TV. All references to and statements regarding China and the People s Republic of China, or the PRC, in this prospectus do not apply to Hong Kong, Macau or Taiwan. All references to RMB or Renminbi are to the legal currency of China and all references to U.S. dollars and $ are to the legal currency of the United States. Except as context would otherwise require, all references to the number of the ordinary shares and the number of the Series A convertible redeemable shares, or Series A preferred shares, of our wholly owned subsidiary, China Digital TV Technology Co., Ltd., or CDTV BVI, take into account a 40-for-1 share split executed by CDTV BVI in May 2007. Our Business We are the leading provider of conditional access, or CA, systems to the PRC s rapidly growing digital television market. Our CA systems, which consist of (i) smart cards that are inserted into set-top boxes at the subscriber s end, or terminal end, (ii) software installed at the digital television network operator s transmission point, or head end, and (iii) software for set-top boxes, enable digital television network operators to control the distribution of content and value-added services to their subscribers and block unauthorized access to their networks. As of June 30, 2007, we had installed CA systems at 130 digital television network operators in 26 of the 32 provinces, autonomous regions and centrally administered municipalities in the PRC. We were the leading vendor of smart cards for CA systems in terms of smart cards shipped in the PRC for each of the first and second quarters of 2007, with a market share of approximately 44% in each quarter, according to Analysys International, a Beijing-based market research firm. We derive a substantial majority of our revenues from sales of our smart cards, which accounted for 85.6% and 87.9% of our total revenues in 2006 and in the six months ended June 30, 2007, respectively. We expect that the sales of our smart cards will continue to constitute the majority of our revenues in the near future. In addition, we license our set-top box design to set-top box manufacturers and sell advanced digital television application software such as electronic program guides and subscriber management systems to digital television network operators. PRC television network operators are in the early stages of switching from analog to digital transmissions, and the PRC government has set a target of 2015 for operators nationwide to complete the digital transition. We are a primary beneficiary of this transition because CA systems are an essential component of any pay-television platform. We sell our CA systems and digital television application software to PRC television network operators including cable, satellite and terrestrial television network operators and enterprises that maintain private cable television networks within their facilities. Our top five customers, in terms of revenues in 2006, were Jiangsu Qingda Science and Technology Industries Co., Ltd., or Jiangsu Qingda, Dalian Tiantu Cable Network Stock Co., Ltd., Zibo Guangdian Tianwang Shixun Co., Ltd., Taiyuan Cable Television Network Co., Ltd., and Zunyi Municipal Radio and Television Information Network Center. China Central Television, the largest television broadcaster in the PRC, also uses our CA systems, as well as those from other vendors, to encrypt its programs for distribution to local digital television operators, although it is not a major contributor to our revenue. We were founded in 2004 by Dr. Zengxiang Lu and Mr. Jianhua Zhu, who had worked together from 2001 at N-T Information Engineering, one of the PRC s earliest CA systems vendors. We purchased N-T Information Engineering s CA systems business in 2004 and continued to build upon the strong reputation that business had achieved. We sold 0.2 million, 1.5 million and 3.9 million smart cards in 2004, 2005 and 2006, respectively, and we SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents sold 2.8 million smart cards in the six months ended June 30, 2007, compared to 1.3 million in the same period of 2006. Our net revenues increased from $3.6 million in 2004 to $13.1 million in 2005 and $30.4 million in 2006. Our net revenues increased from $10.4 million in the six months ended June 30, 2006 to $21.6 million in the same period of 2007. Our net income increased from $4.5 million in 2005 to $13.0 million in 2006 and from $3.4 million in the six months ended June 30, 2006 to $12.2 million in the six months ended June 30, 2007. Our Industry The PRC has the largest television viewing market in the world, with televisions in 362 million households, of which 139 million households subscribed to cable television, as of December 31, 2006, according to Analysys International. The commercial potential of the PRC cable television industry, however, has yet to be fully developed. The PRC cable television industry has the following characteristics: state ownership of television network operators; highly fragmented market; high degree of government regulation with respect to program content, advertising and business operations; low penetration of cable television and digital television; low average revenues per subscriber; and lack of unique content and value-added services. Digital television offers a range of advantages over analog television, including enhanced picture quality, more efficient use of bandwidth, improved content protection and the opportunity to offer value-added services to viewers. The transition from analog to digital television services in the PRC introduces significant opportunities in the PRC cable television industry. This transition is being driven by the following key factors: Strong government support. In 2003, the PRC State Administration of Radio, Film and Television, or the SARFT, announced a target of 2010 for all television broadcasts to be made in digital format (in addition to any parallel transmissions in analog format) and a target of 2015 for cable television networks to switch off all analog transmissions. In February 2007, the SARFT ordered cable television network operators nationwide to continue to provide at least six analog television channels for the indefinite future for the benefit of those unable or unwilling to subscribe to digital television services. Mandatory migration of analog subscribers to digital subscriptions. Once the conversion to digital service is approved by a public hearing within a given municipality in the PRC, the municipal authority typically sets a timetable of one to three years for the completion of system-wide implementation. Because there are currently few alternative services, such as terrestrial or satellite broadcasting, that transmit programming beyond six analog channels to those neighborhoods affected by the conversion, a substantial majority of television viewers have been willing to subscribe to the new digital services despite, in many cases, increased subscription fees. Availability of funds for digitalization. The SARFT has authorized cable television network operators to apply for rate increases to cover the costs associated with digitalization. The improved revenue prospects of the cable network operators have, in turn, encouraged banks to provide them with loans to finance the initial rollout. Potential for higher revenues per household. Digital television offers network operators a range of potential new revenue sources. In addition to basic monthly subscription fees, network operators may charge extra for premium programs and value-added services. In addition, as each television requires its own set-top box in order to unscramble the digital signals, network operators can charge separate subscription fees for each television set within a single household. Amendment No. 3 to FORM F-1 REGISTRATION STATEMENT Under The Securities Act of 1933 Table of Contents Ease of enforcing payment. Operators that transmit scrambled digital signals can enforce payment by sending instructions to the set-top boxes of non-paying viewers to stop unscrambling their transmission signals, without needing to physically disconnect the cable, as generally has been the case with PRC operators transmitting unscrambled analog signals. CA systems are an essential component of any digital television platform. The CA systems industry in the PRC has expanded along with the growth of digital television networks. Most CA systems vendors in the PRC do not produce set-top boxes, and there is intense competition among both software and hardware vendors. As a result, vendors of CA systems whose products are compatible with a wide range of set-top boxes have a competitive advantage. According to Analysys International, the shipment of smart cards associated with CA systems in the PRC will grow from 8.7 million in 2006 to 45.9 million in 2010, representing a compound annual growth rate of 51.6%. Our Strengths As one of the pioneers in the PRC digital cable television market, we have moved quickly to identify market trends and develop technology, products and services that address the evolving needs of television network operators throughout the PRC. Drawing on our early-mover advantage, strong market position and advanced technological capabilities, we believe we are well-situated to capture the opportunities presented by a fragmented and highly dynamic market with demands that vary from customer to customer. In particular, we consider our core competitive strengths to be as follows: leading market position in the PRC s fast-growing CA systems market; knowledge of and strong relationships in local cable television markets across the PRC; consistent, high-quality customer service; extensive relationships with set-top box manufacturers and players in the cable television industry; proprietary CA systems technology tailored to the PRC market; and experienced and market-savvy leadership team. Our Strategies Our goal is to extend our leading position in the digital television market and enter other content-protection markets in the PRC by pursuing the following strategies: leveraging our leading market position and strong reputation to win new customers; developing new business from existing customers; cooperating with cable television network operators to provide value-added services; augmenting our strong commitment to research and development; developing new markets in content protection for other terminal devices; and selectively acquiring businesses that enhance our product portfolio and proprietary technology. Risks and Uncertainties Our ability to realize our business objectives and execute our strategies is subject to risks and uncertainties, including, without limitation, the following: the willingness of television viewers in the PRC to pay for digital television programs or value-added services; our ability to continue to attract customers who are installing new CA systems or to develop a significant source of recurring revenues; China Digital TV Holding Co., Ltd. (Exact Name of Registrant as Specified in Its Charter) Table of Contents our ability and the ability of our customers to respond effectively to technological and commercial challenges in the television broadcasting industry; the intense competition that we face in the rapidly evolving PRC market for digital television CA systems; uncertainties and changes in the regulatory environment of, and government policies towards, the PRC television broadcasting industry; the potential for a breach of the security provided by our CA systems and products; uncertainties and changes in other PRC laws, regulations or government policies, including those relating to encryption products, that could materially and adversely affect the development of our business; and our ability to diversify our business and expand our sources of revenue. See Risk Factors beginning on page 13 for a more detailed discussion of these and other risks that we face. Corporate Structure We are a Cayman Islands holding company and conduct substantially all of our business through Beijing Super TV Co., Ltd., or Super TV, our operating subsidiary in the PRC, and through N-T Digital TV, a PRC company that we control through contractual arrangements. We own 100% of the equity interest of CDTV BVI, a British Virgin Islands holding company that, in turn, directly owns 100% of the equity interest of Super TV. In light of the PRC regulatory environment relating to the CA systems industry, we have established N-T Digital TV, which is wholly owned by PRC citizens, to produce and sell our CA systems in the PRC. We do not have any equity interests in N-T Digital TV, but have entered into a series of contractual arrangements with N-T Digital TV and its shareholders, which enable us to: exercise substantive control over N-T Digital TV; enjoy the economic benefits derived from N-T Digital TV; and have a security interest over, and an exclusive and irrevocable option to purchase all or part of, the equity interests in N-T Digital TV. See Our Corporate Structure beginning on page 42 and Related Party Transactions beginning on page 116 for a more detailed discussion of these contractual arrangements. Cayman Islands 7372 98-0536440 (State or Other Jurisdiction of Incorporation or Organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification No.) Jingmeng High-Tech Building B, 4th Floor No. 5 Shangdi East Road Haidian District, Beijing 100085 People s Republic of China ( 86-10) 6297-1199 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) (1) Ms. Wei Gao is a PRC citizen employed by an affiliated company of SB Asia Infrastructure Fund L.P., or SAIF, a principal shareholder of our company. (2) N-T Information Engineering is (i) 10% owned by Mr. Hong Zhou, who is a brother-in-law of Mr. Hua Guo, one of our directors and (ii) 90% owned by Beijing Shi Xun Hu Lian Technology Co., Ltd., a PRC company, which is, in turn, (a) 40% owned by Mr. Wangzhi Chen, who is a brother-in-law of Mr. Yuk Shing Wong, a principal shareholder of our company, (b) 40% owned by Ms. Jingxiu Tan, who is the mother of Mr. Jianhua Zhu, our chief executive officer and one of our directors, and (c) 20% owned by Mr. Hong Zhou. All the owners of N-T Information Engineering are PRC citizens. (3) Three of our directors, Dr. Zengxiang Lu, Mr. Jianhua Zhu and Mr. Hua Guo, are also directors of N-T Digital TV. In March 2004, CDTV BVI was incorporated as a holding company in the British Virgin Islands, or BVI. Following the establishment of CDTV BVI, we restructured our operations, in connection with an investment by SAIF, by establishing Super TV, a wholly owned subsidiary of CDTV BVI, on May 31, 2004. On the same day, N-T Information Engineering and Ms. Li Yang, a PRC citizen employed by SAIF, established N-T Digital TV. In June 2004, N-T Digital TV acquired from N-T Information Engineering its smart card and CA systems business and, in August 2006, N-T Digital TV acquired from N-T Information Engineering its set-top box design business. CT Corporation System 111 Eighth Avenue New York, New York 10011 ( 1-212) 590-9200 (Name, address, including zip code, and telephone number, including area code, of agent for service) We present our historical consolidated financial statements in U.S. dollars. In addition, solely for the convenience of the reader, certain pricing information is presented in U.S. dollars and certain contractual amounts that are in Renminbi include a U.S. dollar equivalent. Except as otherwise specified, this pricing information and those contractual amounts are translated at $1.00 to RMB7.6120, the noon buying rate in The City of New York for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New York on June 29, 2007. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. See Risk Factors Risks Relating to the People s Republic of China Fluctuations in exchange rates could result in foreign currency exchange losses. On October 2, 2007, the noon buying rate was RMB7.5093 to $1.00. Copies to: Chun Wei Sullivan & Cromwell LLP 28th Floor Nine Queen s Road Central Hong Kong ( 852) 2826-8688 Matthew Bersani Shearman & Sterling LLP 12th Floor Gloucester Tower The Landmark 15 Queen s Road Central Hong Kong ( 852) 2978-8000 Table of Contents
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. Because this is only a summary, it does not contain all of the information you should consider before investing in our common stock. You should carefully read the entire prospectus, especially the risks set forth under the heading "Risk Factors" and our consolidated financial statements and condensed consolidated financial statements and related notes included elsewhere in this prospectus, before making an investment decision. References in this prospectus to "REG," "we," "us" and "our" refer to Renewable Energy Group, Inc. and its subsidiaries and its predecessors during the period presented unless the context requires otherwise. References in this prospectus to "our predecessors" refer to the biodiesel operations of West Central Cooperative, InterWest L.C. and REG, LLC unless the context requires otherwise. RENEWABLE ENERGY GROUP, INC. Overview We believe we are the largest operator, marketer and distributor of biodiesel in the U.S. We have played a leading role in defining the U.S. biodiesel industry for the past ten years. This experience has enabled us to develop expertise in operations, procurement, marketing, production, logistics, risk management and biodiesel facility construction management. During 2006, we marketed approximately 78 million gallons of biodiesel, representing approximately 27% of U.S. biodiesel sales. Most of this biodiesel is marketed under our SoyPOWER brand, which we have been selling for more than a decade. We operate a 132 million gallon network of biodiesel production facilities, currently consisting of one facility wholly-owned by us and four facilities owned by third parties, for which we manage facility operations, input procurement, quality control, marketing and distribution logistics, as well as assist with risk management. We believe the network of biodiesel production facilities that we operate is the largest producer of biodiesel in the U.S. We also provide new facility construction management services to third parties and have used our construction expertise and design technology to become a leading builder of biodiesel facilities in the U.S. We believe our vertically integrated approach of constructing, owning, operating and marketing biodiesel production strongly positions us to capitalize on multiple aspects of the biodiesel industry's growth potential. We are in the process of developing a national network of biodiesel production facilities. In addition to the 132 mmgy of production capacity currently in our network, we recently commenced construction of two wholly-owned facilities: one 60 mmgy production capacity facility in St. Rose, Louisiana, which we refer to as our New Orleans facility, and one 60 mmgy production capacity facility in Emporia, Kansas. In the third quarter of 2007, we expect to begin construction of a 60 mmgy production capacity facility in Cairo, Illinois. With the construction of these three facilities, we expect to own four operating facilities with aggregate production capacity of approximately 192 mmgy by the end of 2008. In addition, we currently are managing the construction of two member-owned biodiesel production facilities with aggregate production capacity of 90 mmgy, each of which is expected to be completed by the end of 2007. Each of these member-owned facilities under construction is expected to become part of our network, as we have agreed to manage their operations following construction and sell their finished biodiesel product under our SoyPOWER brand for the account of the owner. By the end of 2008, we expect to have approximately 492 mmgy of production capacity in our network. We have established strategic relationships with industry leading participants to assist us with feedstock supply, distribution and risk management. These parties, which are also investors in our company, include Bunge North America, Inc., or Bunge, a subsidiary of one of the world's largest oilseed processors, E D & F Man Netherlands BV, or E D & F Man, a large bulk liquids transportation and storage and commodity trading company, and West Central Cooperative, or West Central, a large grain, agronomy and soybean processing company. BALANCE, December 31, 2006 $ $ 1 $ 51,786 $ INDUSTRY AND MARKET DATA This prospectus contains statistical data that we obtained from industry publications and reports. These industry publications generally indicate that they have obtained their information from sources believed to be reliable, but do not guarantee the accuracy and completeness of their information. Although we believe that the publications are reliable, we have not independently verified their data. In particular, we have referenced information published by the National Biodiesel Board, or the NBB, regarding existing biodiesel production capacity and additional production capacity from facilities under construction. These figures are based on questionnaires that are completed by facility owners or developers and represent only the NBB's compilation of this information. The NBB does not independently verify the existence of any facilities, facility production capacity, or construction activity. Further, the NBB has not published data reporting actual production by these facilities, which we believe is significantly less than the production capacity that facility operators or developers self-report to the NBB. Because the NBB is a trade organization for the biodiesel industry, it may present information in a manner that is more favorable to the biodiesel industry than would be presented by an independent source. One of our executive officers has been elected by the members of the NBB to serve on its governing board, a position for which he does not receive any compensation. Unless the context requires otherwise, references to diesel fuel in the U.S. are to distillate fuel, which is a general classification for one of the petroleum fractions that includes diesel fuels known as Diesel No. 1, No. 2 and No. 4, used in on-road diesel engines, such as those in trucks and automobiles, as well as off-road engines, such as those in railroad locomotives and agricultural machinery, and fuel oils No. 1, No. 2 and No. 4, used primarily for space heating and electric power generation. References to diesel fuel in Europe are to gas diesel oil, which includes diesel fuel used for compression ignition, light heating oil for industrial and commercial uses, and other heavy gas oils. (1)For third-party owned facilities that we classify as "in development," we have entered into agreements with the facility owner to perform, and are in the process of performing, preconstruction services such as providing architectural and civil drawings, assisting with governmental permitting, finalizing documentation and pricing, and placing orders for equipment. For wholly-owned facilities that we classify as "in development," we are engaged in the same activities for our own account. We also have an agreement with Peter Cremer North America, LP, or PCNA, to purchase at least 32 million gallons of finished biodiesel each year through September 2008 produced at an independently owned and operated facility in Cincinnati, Ohio. For the year ended December 31, 2006, our total revenues were approximately $211.0 million and our net income was approximately $5.2 million, each on a pro forma basis to reflect our acquisition of REG, LLC as of January 1, 2006. For the quarter ended March 31, 2007, our total revenues were approximately $55.5 million and our net loss was approximately $1.6 million. We operate in two principal segments, Biodiesel and Services. Through our Biodiesel operations, which represented approximately 58% of our revenues in 2006 or approximately 49% on a pro forma basis, we operate our wholly-owned biodiesel production facilities, currently consisting of our 12 mmgy capacity production facility in Ralston, Iowa, and we purchase and resell biodiesel produced by third parties. Through our Services operations, which represented approximately 42% of our revenues in 2006, or approximately 51% on a pro forma basis, we provide construction management services, whereby we act as general contractor for the construction of biodiesel production facilities, and facility management and operational services, whereby we provide day-to-day management and operational services to biodiesel production facilities that, together with our wholly-owned facility, form our network. We expect that our Biodiesel segment as a percentage of revenues will increase over time as a result of our plans to add significant wholly-owned production capacity. Industry Overview Biodiesel is a biodegradable engine fuel produced from renewable sources such as vegetable oils or animal fats. In the U.S., biodiesel is generally blended with petroleum diesel, though it is also used in its pure form. Although biodiesel's physical and chemical properties are similar to petroleum-based diesel fuel, biodiesel has beneficial environmental and lubrication characteristics. Biodiesel also is non-toxic, so it is safe to handle, store, and transport. Annual biodiesel production in the U.S. has expanded from approximately 15 million gallons for the 12 months ended September 2002 to approximately 250 million gallons for the 12 months ended September 2006, according to data compiled by the National Biodiesel Board, or NBB. Annual biodiesel production in the U.S. increased to 288 million gallons for the calendar year ended December 2006, according to the NBB. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form S-1 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 RENEWABLE ENERGY GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 2860 20-5009074 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification No.) 406 First Street Ralston, Iowa 51549 (712) 667-3500 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Jeffrey Stroburg Chief Executive Officer 406 First Street Ralston, Iowa 51549 (712) 667-3500 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Blair W. White, Esq. Jennifer M. Lurie, Esq. Heidi E. Mayon, Esq. Pillsbury Winthrop Shaw Pittman LLP P.O. Box 7880 San Francisco, CA 94120 (415) 983-1000 (415) 983-1200 facsimile John J. Sabl, Esq. Michael P. Heinz, Esq. Rikkisha L. Candler, Esq. Sidley Austin LLP One South Dearborn Chicago, Illinois 60603 (312) 853-7437 (312) 853-7036 facsimile Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. CALCULATION OF REGISTRATION FEE We believe the biodiesel industry is well positioned for continued growth as an alternative fuel because it: reduces dependence on imported oil and extends diesel fuel supplies, particularly in the U.S., which imports more crude oil and other fuel supplies than it exports; is more environmentally friendly than petroleum-based diesel fuel as biodiesel has been shown to reduce greenhouse gas, carbon monoxide, particulate matter and hydrocarbon emissions; has excellent engine lubrication characteristics, even when blended with diesel fuel at low blend rates such as 1% or 2%, which is increasingly important as mandates for reduced sulfur diesel fuel are being phased in; can be used in existing diesel engines generally with no or minor engine modifications; is compatible with the existing diesel fuel distribution infrastructure; can be produced to meet ASTM D6751 specifications from a wide variety of renewable feedstocks; and enjoys numerous incentives from the federal and more than 40 state governments designed to encourage the production, use and distribution of biodiesel. Competitive Strengths The following competitive strengths have contributed to our market leadership positions and we expect these strengths to continue to support our leadership positions and growth in the future: Biodiesel industry leadership. For more than ten years, we have played a leading role in defining the biodiesel marketplace in the U.S. We have developed proven expertise in operating and managing the construction of biodiesel production facilities that produce high quality biodiesel fuel consistently, and marketing and distributing biodiesel fuel. During this time we have also established strategic relationships with key industry participants to help us build new facilities, procure feedstock, distribute finished biodiesel and manage financial risk. Vertically integrated biodiesel offering. We participate in multiple aspects of the biodiesel industry from managing construction and operating biodiesel production facilities to marketing and selling finished biodiesel. We believe this allows us to add capacity, grow our network, improve production technology and biodiesel quality, and distribute large quantities of biodiesel consistently and efficiently. Moreover, our vertically integrated approach helps us to diversify and grow our revenues across the biodiesel industry. Leading sales, marketing and distribution capabilities. We have worked to create a national distribution system for our network of biodiesel production facilities, with truck, rail and barge access and terminal storage capabilities, in order to provide market access for SoyPOWER brand ASTM D6751-certified biodiesel. We have sold our SoyPOWER brand biodiesel in more than 35 U.S. states. Efficient facility design and operation. We design and operate efficient, high capacity, continuous flow biodiesel production facilities. Our facility design technology allows for high production volumes due to fewer system interruptions and reduced input requirements. Expertise and relationships to rapidly add production capacity. We have extensive experience designing and managing the construction of biodiesel production facilities. We have established relationships with construction firms, Todd & Sargent, Inc. and TSW, LLC, and a process engineering firm, Crown Iron Works Company. Together we have constructed five operational NET CHANGE IN CASH AND CASH EQUIVALENTS Title of each class of securities to be registered Proposed maximum aggregate offering price(1)(2) Amount of registration fee biodiesel production facilities, and are currently working on the construction of four additional facilities. Experienced management team. Our management team has extensive experience in the biodiesel industry and in related agricultural businesses. Risk management expertise. We have extensive experience in managing risk for our own account and advising the member-owned facilities that we manage. We also receive input from others with risk management expertise and utilize research conducted by outside firms to provide additional market information in forming our risk management strategies. Business Strategy Our objective is to build on our leading market positions in the U.S. biodiesel industry and to continue to capitalize on the substantial growth potential of the industry. Key elements of our strategy include the following: Add efficient and technologically advanced owned biodiesel production capacity. We intend to capitalize on the growing U.S. demand for biodiesel by using our facility construction management and operations expertise to rapidly expand our owned production capacity over the next several years. Select strategic site locations for our wholly-owned facilities. We intend to continue to select sites that are strategic to our ability to favorably secure our key input, feedstocks, and distribute our principal product, biodiesel. We intend to select sites for our facilities that reduce our feedstock costs, focusing on sites that are co-located with oilseed or other feedstock producers or that are near domestic and international feedstock distribution points, and that improve the efficiency with which we can distribute biodiesel to both domestic and international markets. Expand market demand for biodiesel and our SoyPOWER product. We plan to create additional demand for biodiesel by continuing to produce and market high quality biodiesel and expand the brand awareness associated with our SoyPOWER branded biodiesel product. In 2006, we marketed approximately 78 million gallons of ASTM D6751-quality biodiesel, accounting for 27% of U.S. biodiesel sales. Diversify our feedstocks. Building on the success of our multiple-feedstock technologies, we designed the Wall Lake, Iowa facility and most of our network facilities under construction and in development to produce ASTM D6751-quality biodiesel utilizing one or more feedstocks in addition to refined vegetable oils, such as crude or crude degummed soybean oil, animal fats or palm, corn or canola (rapeseed) oils. We are also investigating the use of other feedstocks over time. Provide a full suite of construction management services to third parties. We intend to continue to offer a full suite of design, construction management, facility operations and marketing services under multi-year agreements with entities funding new facility development. We believe this integrated services approach allows us to capitalize on multiple aspects of the biodiesel industry's growth potential. Pursue strategic investment opportunities. We believe that opportunities for expansion of our business through industry acquisitions and investments will arise as the biodiesel industry continues to grow. We will continue to evaluate opportunities to acquire or invest in additional biodiesel production and distribution facilities or biodiesel or other renewable energy production and design technologies in the U.S. and internationally. Common Stock, $0.0001 par value per share $150,000,000 $4,605
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+PROSPECTUS SUMMARY This summary highlights material information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the information under Risk Factors and our financial statements and the related notes included elsewhere in this prospectus. Unless otherwise stated in this prospectus: references to we, us or our company refer to Enterprise Acquisition Corp.; initial shares refers to the 7,187,500 shares of common stock that our initial stockholders originally purchased from us for $25,000; initial stockholders refers to Staton Bell Blank Check LLC, Stewart J. Paperin, Richard Steiner and Jordan Zimmerman, each of whom purchased and beneficially owns initial shares; insider warrants refers to the 7,500,000 warrants we are selling privately to Staton Bell Blank Check LLC simultaneously with the consummation of this offering; management team refers to our officers and directors; public stockholders means the holders of the shares of common stock which are being sold as part of the units in this public offering, including any of our initial stockholders solely to the extent that they purchase such shares either in this offering or afterwards; and the information in this prospectus assumes that the underwriters will not exercise their over-allotment option. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We have applied to have our securities listed on the American Stock Exchange, thereby providing a state blue sky exemption in every state. However, notwithstanding the foregoing, we are not making an offer of these securities in any jurisdiction where the offer is not permitted. Our Business We are a blank check company organized under the laws of the State of Delaware on July 9, 2007. We were formed with the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. Our efforts in identifying a prospective target business will not be limited to a particular industry. To date, our efforts have been limited to organizational activities. We do not have any specific business combination under consideration. Our officers and directors have neither individually identified or considered a target business nor have they had any discussions regarding possible target businesses amongst themselves or with our underwriters or other advisors. We have not (nor has anyone on our behalf) contacted any prospective target business or had any discussions, formal or otherwise, with respect to a business combination transaction. We have not (nor have any of our agents or affiliates) been approached by any candidates (or representative of any candidates) with respect to a possible acquisition transaction with our company. Additionally, we have not, nor has anyone on our behalf, taken any measure, directly or indirectly, to identify or locate any suitable acquisition candidate, nor have we engaged or retained any agent or other representative to identify or locate any such acquisition candidate. We will seek to capitalize on the significant management, investment and public corporation experience of Daniel C. Staton, President, Chief Executive Officer and Director; Marc H. Bell, Chairman of the Board and Treasurer as well as our other Executive Officers and Directors. Mr. Staton has served as Managing Director of Staton Capital LLC, a private investment firm, since 2003 and as President of The Walnut Group, a private investment firm that has made over 20 private equity and venture capital investments, from 1997 to January 2007. Mr. Staton previously served as General Manager and partner of Duke Associates from 1981 to 1993 and with its initial public offering, he became Chief Operating Officer Table of Contents and a director of Duke Realty Investments, Inc. (NYSE: DRE), a real estate investment trust, from 1993 to 1997. Mr. Staton also has served as Chairman of the Board of Directors of Storage Trust Realty, a real estate investment trust, from 1997 until he led its merger with Public Storage (NYSE: PSA) in 1999, where he continues to serve on the Board of Directors. Mr. Bell has served as Managing Director of Marc Bell Capital Partners LLC, an investment firm which invests in media and entertainment ventures, real estate, and distressed assets, since 2003. Mr. Bell has also served as Chairman of the Board of Globix Corporation, President and CEO of Penthouse Media Group, Inc. and as a member of the Board of Directors of EDGAR Online, Inc. In addition, we will seek to capitalize on the business experience and relationships of our Board of Directors, the other members of which are Stewart J. Paperin, Executive Vice President of the Soros Foundation, Richard Steiner, a Tony Award winning Broadway theatrical producer and Jordan Zimmerman, Founder and Chairman of Zimmerman Advertising. We will have until __________, 2009 [twenty-four months from the date of this prospectus] to consummate a business combination. If we are unable to consummate a business combination by such date, our corporate existence will cease by operation of corporate law (except for the purposes of winding up our affairs and liquidating). Our initial business combination must be with a target business or businesses whose collective fair market value is at least equal to 80% of our net assets (all of our assets, including the funds held in the trust account, less our liabilities) at the time of such acquisition, although this may entail simultaneous acquisitions of several operating businesses. The fair market value of the target will be determined by our board of directors based upon one or more standards generally accepted by the financial community (which may include actual and potential sales, earnings, cash flow and/or book value). If our board is not able to independently determine that the target business has a sufficient fair market value, we will obtain an opinion from an unaffiliated, independent investment banking firm with respect to the satisfaction of such criteria. We anticipate structuring a business combination to acquire 100% of the equity interests or assets of the target business. We may, however, structure a business combination to acquire less than 100% of such interests or assets of the target business but will not acquire less than a controlling interest (which would be at least 50% of the voting securities of the target business). If we acquire only a controlling interest in a target business or businesses, the portion of such business that we acquire must have a fair market value equal to at least 80% of our net assets. If we determine to simultaneously acquire several businesses and such businesses are owned by different sellers, we will need for each of such sellers to agree that our purchase of its business is contingent on the simultaneous closings of the other acquisitions, which may make it more difficult for us, and delay our ability, to complete the business combination. With multiple acquisitions, we could also face additional risks, including additional burdens and costs with respect to possible multiple negotiations and due diligence investigations (if there are multiple sellers) and the additional risks associated with the subsequent assimilation of the operations and services or products of the acquired companies in a single operating business. The target business or businesses that we acquire may have a collective fair market value substantially in excess of 80% of our net assets. In order to consummate such a business combination, we may issue a significant amount of debt or equity securities to the sellers of such business and/or seek to raise additional funds through a private offering of debt or equity securities. There are no limitations on our ability to incur debt or issue securities in order to consummate a business combination. If we issue securities in order to consummate a business combination, our stockholders could end up owning a minority of the combined company as there is no requirement that our stockholders own a certain percentage of our company after our business combination. Since we have no specific business combination under consideration, we have not entered into any such arrangement to issue our debt or equity securities and have no current intention of doing so. Our executive offices are located at 6800 Broken Sound Parkway, Boca Raton, Florida 33487 and our telephone number is (561) 988-1700. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amendment No. 2 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ENTERPRISE ACQUISITION CORP. (Exact name of registrant as specified in its charter) Delaware 6770 33-1171386 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 6800 Broken Sound Parkway, Boca Raton, Florida 33487, (561) 988-1700 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Table of Contents The Offering Securities offered 25,000,000 units, at $10.00 per unit, each unit consisting of: one share of common stock; and one warrant. The units will begin trading on or promptly after the date of this prospectus. Each of the common stock and warrants may trade separately on the 90th day after the date of this prospectus unless the underwriters determine that an earlier date is acceptable. In no event will the underwriters allow separate trading of the common stock and warrants until we file an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file a Current Report on Form 8-K with the Securities and Exchange Commission, including an audited balance sheet, promptly upon the consummation of this offering, which is anticipated to take place three business days from the date the units commence trading. The audited balance sheet will reflect our receipt of the proceeds from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Form 8-K. If the over-allotment option is exercised after our initial filing of a Form 8-K, we will file an amendment to the Form 8-K to provide updated financial information to reflect the exercise and consummation of the over-allotment option. We will also include in this Form 8-K, or amendment thereto, or in a subsequent Form 8-K, information indicating if the underwriters have allowed separate trading of the common stock and warrants prior to the 90th day after the date of this prospectus. The units will continue to trade along with the common stock and warrants after the units are separated. Holders will need to have their brokers contact our transfer agent in order to separate the units into common stock and warrants. Securities to be purchased by one of our initial stockholders 7,500,000 insider warrants at $1.00 per warrant (for a total purchase price of $7,500,000) will be sold to Staton Bell Blank Check LLC, one of our initial stockholders, pursuant to a letter agreement among us, the underwriters and Staton Bell Blank Check LLC. This purchase will take place on a private placement basis simultaneously with the consummation of this offering. These insider warrants will be identical to the warrants underlying the units being offered by this prospectus except that the insider warrants (i) will be exercisable on a cashless basis and (ii) will not be redeemable by us so long as they are still held by the purchasers or their affiliates. Staton Bell Blank Check LLC has agreed that the insider warrants will not be sold or transferred by it until 30 days after the consummation of our business combination. The underwriters have no intention of waiving these restrictions. In the event of a liquidation prior to our initial business combination, the insider warrants will expire worthless. Staton Bell Blank Check LLC Daniel C. Staton, President and Chief Executive Officer Enterprise Acquisition Corp. 6800 Broken Sound Parkway, Boca Raton, Florida 33487, (561) 988-1700 (Name, address, including zip code, and telephone number, including area code, of agent for service) (1) Includes an aggregate of 937,500 shares of common stock that are subject to forfeiture by Staton Bell Blank Check LLC if the over-allotment option is not exercised by the underwriters. (2) Assumes the over-allotment option has not been exercised and an aggregate of 937,500 shares have been forfeited by Staton Bell Blank Check LLC. Copies to: Bradley D. Houser, Esq. Akerman Senterfitt One Southeast Third Avenue, 25th Floor Miami, Florida 33131 (305) 374-5600 (305) 374-5095 Facsimile Alejandro E. Camacho, Esq. Clifford Chance US LLP 31 West 52nd Street New York, New York 10019 (212) 878-8000 (212) 878-8375 Facsimile Table of Contents Exercise period The warrants will become exercisable on the later of: the completion of a business combination with a target business, and __________, 2008 [one year from the date of this prospectus]. However, the warrants will only be exercisable if a registration statement relating to the common stock issuable upon exercise of the warrants is effective and current. The warrants will expire at 5:00 p.m., New York City time, on __________, 2011 [four years from the date of this prospectus] or earlier upon redemption. Redemption We may redeem the outstanding warrants (excluding any insider warrants held by Staton Bell Blank Check LLC or its affiliates) without the prior consent of the underwriters: in whole and not in part, at a price of $.01 per warrant at any time while the warrants are exercisable, upon a minimum of 30 days prior written notice of redemption, and if, and only if, the last sales price of our common stock equals or exceeds $14.25 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. We will not redeem the warrants unless we have an effective registration statement under the Securities Act covering the shares of common stock issuable upon exercise of the warrants and a current prospectus relating to them is available for use throughout the 30-day redemption period. If the foregoing conditions are satisfied and we issue a notice of redemption, each warrant holder can exercise his, her or its warrant prior to the scheduled redemption date. However, the price of the common stock may fall below the $14.25 trigger price as well as the $7.50 warrant exercise price after the redemption notice is issued. The redemption criteria for our warrants have been established at a price which is intended to provide warrant holders a reasonable premium to the initial exercise price and provide a sufficient differential between the then-prevailing common stock price and the warrant exercise price so that if the stock price declines as a result of our redemption call, the redemption will not cause the stock price to drop below the exercise price of the warrants. Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Table of Contents Proposed American Stock Exchange symbols for our: Units EST.U Common stock EST Warrants EST.WS Offering proceeds to be held in trust $240,075,000 of the net proceeds of this offering plus the $7,500,000 we will receive from the sale of the insider warrants (for an aggregate of $247,575,000 or approximately $9.90 per unit sold to the public in this offering) will be placed in a trust account at Smith Barney, maintained by Continental Stock Transfer & Trust Company, acting as trustee pursuant to an agreement to be signed on the date of this prospectus. This amount includes $8,375,000 (or $9,631,250 if the underwriters over-allotment option is exercised in full) of underwriting discounts and commissions payable to the underwriters in the offering that is being deferred. The underwriters have agreed that such amount will not be paid unless and until we consummate a business combination. Upon the consummation of our initial business combination, the deferred underwriting discounts and commissions shall be released to the underwriters out of the gross proceeds of this offering held in the trust account. Except as set forth below, these proceeds will not be released until the earlier of the completion of a business combination or our liquidation. Therefore, unless and until a business combination is consummated, the proceeds held in the trust account will not be available for our use for any expenses related to this offering or expenses which we may incur related to the investigation and selection of a target business and the negotiation of an agreement to acquire a target business. Notwithstanding the foregoing, there can be released to us from the trust account interest earned on the funds in the trust account (i) up to an aggregate of $2,450,000 to fund expenses related to investigating and selecting a target business and our other working capital requirements and (ii) any amounts we may need to pay our income or other tax obligations. With these exceptions, expenses incurred by us may be paid prior to a business combination only from the net proceeds of this offering not held in the trust account (initially estimated to be no more than $50,000). None of the warrants may be exercised until after the consummation of a business combination and, thus, after the proceeds of the trust account have been disbursed. Accordingly, the warrant exercise price will be paid directly to us and not placed in the trust account. Table of Contents Anticipated expenses and funding sources We believe that, upon consummation of this offering, the estimated $50,000 of net proceeds not held in the trust account, plus the up to $2,450,000 of interest earned on the trust account balance, as well as amounts necessary to pay our tax obligations, that may be released to us, will be sufficient to allow us to operate for the next 24 months, assuming that a business combination is not consummated during that time. Over this time period, we will be using these funds for identifying and evaluating prospective acquisition candidates, performing business due diligence on prospective target businesses, traveling to and from the offices, plants or similar locations of prospective target businesses or their representatives or owners, reviewing corporate documents and material agreements of prospective target businesses, selecting the target business to acquire and structuring, negotiating and consummating the business combination. We could use a portion of the funds not being placed in trust to pay commitment fees for financing, fees to consultants to assist us with our search for a target business or as a down payment or to fund a no-shop provision (a provision in letters of intent designed to keep target businesses from shopping around for transactions with other companies on terms more favorable to such target businesses) with respect to a particular proposed business combination, although we do not have any current intention to do so. If we entered into a letter of intent where we paid for the right to receive exclusivity from a target business, the amount that would be used as a down payment or to fund a no-shop provision would be determined based on the terms of the specific business combination and the amount of our available funds at the time. Our forfeiture of such funds (whether as a result of our breach or otherwise) could result in our not having sufficient funds to continue searching for, or conducting due diligence with respect to, potential target businesses. We anticipate that we will incur approximately: $1,000,000 of expenses for the search for target businesses and for the legal, accounting and other third-party expenses attendant to the due diligence investigations, structuring and negotiating of a business combination; $250,000 of expenses for the due diligence and investigation of a target business by our officers, directors and existing stockholders; $200,000 of expenses in legal and accounting fees relating to our SEC reporting obligations; Table of Contents $180,000 for the administrative fee payable to Bell & Staton, Inc., an affiliate of Daniel C. Staton and Marc H. Bell, for office space and related services ($7,500 per month for twenty-four months); and $870,000 for general working capital that will be used for miscellaneous expenses and reserves, including director and officer liability insurance premiums. If we are unable to complete a business combination within 24 months from the date of this prospectus and are forced to liquidate, we will pay the costs of liquidation from our remaining assets outside of the trust account. If such funds are insufficient, Staton Bell Blank Check LLC has agreed to advance us the funds necessary to complete such liquidation (currently anticipated to be no more than approximately $15,000) and has agreed not to seek repayment for such expenses. If Staton Bell Blank Check LLC is unable to satisfy the foregoing obligations, Daniel C. Staton, Marc H. Bell and Maria Balodimas Staton have agreed to be personally liable in its place. We have questioned each of these individuals on their financial net worth and reviewed their financial information and believe that they will be able to satisfy any indemnification obligations that may arise. However, we cannot assure you that they will be able to satisfy these obligations if they are required to do so. Limited payments to insiders There will be no fees or other cash payments paid to our initial stockholders, officers, directors or their affiliates prior to, or for any services they render in order to effectuate, the consummation of a business combination (regardless of the type of transaction that it is) other than: repayment of an aggregate of $350,000 non-interest bearing loan made by Staton Bell Blank Check LLC; payment of $7,500 per month to Bell & Staton, Inc. office space and related services; and reimbursement of out-of-pocket expenses incurred by them in connection with certain activities on our behalf, such as identifying and investigating possible business targets and business combinations. Certificate of Incorporation As discussed below, there are specific provisions in our amended and restated certificate of incorporation that may not be amended prior to our consummation of a business combination, including our requirements to seek stockholder approval of such a business combination and to allow our stockholders to seek conversion of their shares if they do not approve of such a business combination. While we have been advised that such provisions limiting our ability to amend our certificate of incorporation may not be enforceable under Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED OCTOBER 23, 2007 PRELIMINARY PROSPECTUS $250,000,000 ENTERPRISE ACQUISITION CORP. 25,000,000 units Enterprise Acquisition Corp. is a newly organized blank check company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with one or more operating businesses. Our efforts in identifying a prospective target business will not be limited to a particular industry. We do not have any specific business combination under consideration and we have not (nor has anyone on our behalf) contacted any prospective target business or had any discussions, formal or otherwise, with respect to such a transaction. This is an initial public offering of our securities. Each unit that we are offering has a price of $10.00 and consists of one share of our common stock and one warrant. Each warrant entitles the holder to purchase one share of our common stock at a price of $7.50. Each warrant will become exercisable on the later of our completion of a business combination and ______, 2008 [one year from the date of this prospectus], and will expire on ______, 2011 [four years from the date of this prospectus], or earlier upon redemption. We have granted the underwriters a 30-day option to purchase up to 3,750,000 units (over and above the 25,000,000 units referred to above) solely to cover over-allotments, if any. The over-allotment will be used only to cover the net syndicate short position resulting from the initial distribution. Staton Bell Blank Check LLC, an entity owned directly or indirectly by Daniel C. Staton, our President and Chief Executive Officer, Marc H. Bell, our Chairman of the Board and Treasurer, and Maria Balodimas Staton, our Corporate Secretary, has committed to purchase from us an aggregate of 7,500,000 warrants at $1.00 per warrant (for a total purchase price of $7,500,000). These purchases will take place on a private placement basis simultaneously with the consummation of this offering. All of the proceeds we receive from the purchases will be placed in the trust account described below. The insider warrants to be purchased by Staton Bell Blank Check LLC will be identical to warrants underlying the units being offered by this prospectus except that the insider warrants (i) will be exercisable on a cashless basis and (ii) will not be redeemable by us so long as they are still held by the purchaser or its affiliates. Staton Bell Blank Check LLC has agreed that the insider warrants will not be sold or transferred by it (except in certain cases) until 30 days after the consummation of our business combination. There is presently no public market for our units, common stock or warrants. We intend to apply to have the units listed on the American Stock Exchange. Assuming that the units are listed on the American Stock Exchange, the units will be listed under the symbol EST.U on or promptly after the date of this prospectus. Assuming that the units are listed on the American Stock Exchange, once the securities comprising the units begin separate trading, the common stock and warrants will be listed on the American Stock Exchange under the symbols EST and EST.WS, respectively. We cannot assure you that our securities will be listed or will continue to be listed on the American Stock Exchange. Investing in our securities involves a high degree of risk. See Risk Factors beginning on page 17 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Public Offering Price Table of Contents Delaware law, we view these provisions, which are contained in Article Seventh of our amended and restated certificate of incorporation, as obligations to our stockholders and will not take any action to amend or waive these provisions. Our amended and restated certificate of incorporation, which we will file with the Secretary of State of Delaware immediately prior to the consummation of this offering, also provides that we will continue in existence only until __________, 2009 [twenty-four months from the date of this prospectus]. If we have not completed a business combination by such date, our corporate existence will cease except for the purposes of winding up our affairs and liquidating, pursuant to Section 278 of the Delaware General Corporation Law. This has the same effect as if our board of directors and stockholders had formally voted to approve our dissolution pursuant to Section 275 of the Delaware General Corporation Law. Accordingly, limiting our corporate existence to a specified date as permitted by Section 102(b)(5) of the Delaware General Corporation Law removes the necessity to comply with the formal procedures set forth in Section 275 (which would have required our board of directors and stockholders to formally vote to approve our dissolution and liquidation and to have filed a certificate of dissolution with the Delaware Secretary of State). In connection with any proposed business combination we submit to our stockholders for approval, we will also submit to stockholders a proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence, thereby removing this limitation on our corporate life. We will only consummate a business combination if stockholders vote both in favor of such business combination and our amendment to provide for our perpetual existence. Accordingly, if stockholders approved a proposed business combination as set forth below but did not approve the proposal to provide for our perpetual existence, we would not be able to consummate such business combination. The approval of the proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence would require the affirmative vote of a majority of our outstanding shares of common stock. We view this provision terminating our corporate life by __________, 2009 [twenty-four months from the date of this prospectus] as an obligation to our stockholders and will not take any action to amend or waive this provision to allow us to survive for a longer period of time except in connection with the consummation of a business combination. Underwriting Discount and Commissions(1) Table of Contents Stockholders must approve business combination Pursuant to our amended and restated certificate of incorporation, we will seek stockholder approval before we effect any business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable state law. We view this requirement as an obligation to our stockholders and will not take any action to amend or waive this provision in our amended and restated certificate of incorporation. In connection with the vote required for any business combination, all of our initial stockholders, including all of our officers and directors, have agreed to vote the shares of common stock owned by them immediately before this offering in accordance with the majority of the shares of common stock voted by the public stockholders. We will proceed with a business combination only if (i) a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and (ii) public stockholders owning less than 30% of the shares sold in this offering exercise their conversion rights described below. Accordingly, it is our understanding and intention in every case to structure and consummate a business combination in which up to but not including 30% of the public stockholders may exercise their conversion rights and the business combination will still go forward. Conversion rights for stockholders voting to reject a business combination Pursuant to our amended and restated certificate of incorporation, public stockholders voting against a business combination will be entitled to convert their stock into a pro rata share of the trust account (initially approximately $9.90 per share, or approximately $9.87 per share if the over-allotment option is exercised), plus any interest earned on their portion of the trust account but less any interest that has been released to us as described above to fund our working capital requirements and pay any of our tax obligations, if the business combination is approved and completed. We view this requirement as an obligation to our stockholders and will not take any action to amend or waive this provision in our amended and restated certificate of incorporation. Our initial stockholders will not have such conversion rights with respect to any shares of common stock owned by them, directly or indirectly, whether included in or underlying their initial shares or purchased by them in this offering or in the aftermarket. Public stockholders who convert their stock into their share of the trust account will continue to have the right to exercise any warrants they may hold. Proceeds, Before Expenses, to Us Table of Contents An eligible stockholder may request conversion at any time after the mailing to our stockholders of the proxy statement and prior to the vote taken with respect to a proposed business combination at a meeting held for that purpose, but the request will not be granted unless the stockholder votes against the business combination and the business combination is approved and completed. Additionally, we may require public stockholders, whether they are a record holder or hold their shares in street name, to either tender their certificates to our transfer agent at any time through the vote on the business combination or to deliver their shares to the transfer agent electronically using Depository Trust Company s DWAC (Deposit/Withdrawal At Custodian) System, at the holder s option. There is a nominal cost associated with this tendering process and the act of certificating the shares or delivering them through the DWAC system. The transfer agent will typically charge the tendering broker $35 and it would be up to the broker whether or not to pass this cost on to the converting holder. The proxy solicitation materials that we will furnish to stockholders in connection with the vote for any proposed business combination will indicate whether we are requiring stockholders to satisfy such certification and delivery requirements. Accordingly, a stockholder would have from the time we send out our proxy statement through the vote on the business combination to deliver his shares if he wishes to seek to exercise his conversion rights. This time period varies depending on the specific facts of each transaction. However, as the delivery process can be accomplished by the stockholder, whether or not he is a record holder or his shares are held in street name, in a matter of hours by simply contacting the transfer agent or his broker and requesting delivery of his shares through the DWAC System, we believe this time period is sufficient for an average investor. However, because we do not have any control over this process, it may take significantly longer than we anticipated and investors may not be able to seek conversion in time. Accordingly, we will only require stockholders to deliver their certificates prior to the vote if we give stockholders at least two weeks between the mailing of the proxy solicitation materials and the meeting date. Any request for conversion, once made, may be withdrawn at any time up to the date of the meeting. Furthermore, if a stockholder delivered his certificate for conversion and subsequently decided prior to the meeting not to elect conversion, he may simply request that the transfer agent return the certificate (physically or electronically). Per unit $ 10.00 $ 0.70 $ 9.30 Total $ 250,000,000 $ 17,500,000 $ 232,500,000 Table of Contents If a vote on our initial business combination is held and the business combination is not approved, we may continue to try to consummate a business combination with a different target until twenty-four months from the date of this prospectus. If the initial business combination is not approved or completed for any reason, then public stockholders voting against our initial business combination who exercised their conversion rights would not be entitled to convert their shares of common stock into a pro rata share of the aggregate amount then on deposit in the trust account. In such case, if we have required public stockholders to deliver their certificates prior to the meeting, we will promptly return such certificates to the public stockholder. Investors in this offering who do not sell, or who receive less than an aggregate of approximately $0.10 of net sales proceeds for, the warrants included in the units, and persons who purchase common stock in the aftermarket at a price in excess of $9.90 per share, may have a disincentive to exercise their conversion rights because the amount they would receive upon conversion could be less than their original or adjusted purchase price. Because converting stockholders will receive their proportionate share of the deferred underwriting discounts and commissions and the underwriters will be paid the full amount of their deferred underwriting compensation at the time of the consummation of our initial business combination, we (and, therefore, the non-converting stockholders) will bear the financial effect of such payments to both the converting stockholders and the underwriters. Liquidation if no business combination As described above, if we have not consummated a business combination by __________, 2009 [twenty-four months from the date of this prospectus], our corporate existence will cease by operation of law and we will promptly distribute only to our public stockholders (including our initial stockholders to the extent they have purchased shares in this offering or in the aftermarket) the amount in our trust account (including any accrued interest then remaining in the trust account) plus any remaining net assets. We cannot assure you that the per-share distribution from the trust account, if we liquidate, will not be less than $9.90, plus interest then held in the trust account, for the following reasons: (1) Of the underwriting discounts and commissions, $8,375,000 ($0.335 per unit) is being deferred by the underwriters and will be placed in the trust account described below. Such funds will be released to the underwriters only upon our completion of a business combination, as described in this prospectus. $240,075,000 of the net proceeds of this offering (including the $8,375,000, or $0.335 per unit, of underwriting discounts and commissions payable to the underwriters in this offering which are being deferred by them until we consummate a business combination), plus the additional aggregate $7,500,000 we will receive from the purchase of the insider warrants simultaneously with the consummation of this offering, for an aggregate of $247,575,000 (or approximately $9.90 per unit sold to the public in this offering), will be deposited into a trust account at Smith Barney, maintained by Continental Stock Transfer & Trust Company acting as trustee. These funds will not be released to us until the earlier of the completion of a business combination or our liquidation (which may not occur until _________, 2009 [twenty-four months from the date of this prospectus]). We are offering the units for sale on a firm-commitment basis. The underwriters expect to deliver our securities to investors in the offering on or about ______, 2007. Joint Bookrunning Managers UBS Investment Bank LADENBURG THALMANN & CO. INC. Table of Contents Prior to liquidation, pursuant to Section 281 of the Delaware General Corporation Law, we will adopt a plan that will provide for our payment, based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against us within the subsequent 10 years. Accordingly, we would be required to provide for any creditors known to us at that time as well as provide for any claims that we believe could potentially be brought against us within the subsequent 10 years prior to distributing the funds held in the trust to our public stockholders. We cannot assure you that we will properly assess all claims that may be potentially brought against us. As such, our stockholders could potentially be liable for any claims of creditors to the extent of distributions received by them (but no more). While we will seek to have all vendors and service providers (which would include any third parties we engaged to assist us in any way in connection with our search for a target business) and prospective target businesses execute agreements with us waiving any right, title, interest or claim of any kind they may have in or to any monies held in the trust account, there is no guarantee that they will execute such agreements. Nor is there any guarantee that, even if such entities execute such agreements with us, they will not seek recourse against the trust account or that a court would not conclude that such agreements are not legally enforceable. Staton Bell Blank Check LLC has agreed that it will be liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us. If Staton Bell Blank Check LLC is unable to satisfy the foregoing obligations, Daniel C. Staton, Marc H. Bell and Maria Balodimas Staton have agreed to be personally liable in its place. We have questioned each of these individuals on their financial net worth and reviewed their financial information and believe that they will be able to satisfy any indemnification obligations that may arise. However, we cannot assure you that it or they will be able to satisfy those obligations, if it or they are required to do so. I-Bankers Securities, Inc. The date of this prospectus is _________, 2007 Table of Contents We anticipate the distribution of the funds in the trust account to our public stockholders will occur within 10 business days from the date our corporate existence ceases, subject to our obligations under Delaware law to provide for claims of creditors. Our initial stockholders have waived their rights to participate in any liquidation distribution with respect to their initial shares. We will pay the costs of liquidation from our remaining assets outside of the trust account. If such funds are insufficient, Staton Bell Blank Check LLC has agreed to advance us the funds necessary to complete such liquidation (currently anticipated to be no more than approximately $15,000) and has agreed not to seek repayment for such expenses. If Staton Bell Blank Check LLC is unable to satisfy the foregoing obligations, Daniel C. Staton, Marc H. Bell and Maria Balodimas Staton have agreed to be personally liable in its place. Escrow of initial stockholders shares On the date of this prospectus, all of our initial stockholders, including all of our officers and directors, will place their initial shares into an escrow account maintained by Continental Stock Transfer & Trust Company, acting as escrow agent. Subject to certain limited exceptions (such as transfers (i) to an entity s members upon its liquidation, (ii) to relatives and trusts for estate planning purposes or (iii) by private sales made at or prior to the consummation of a business combination at prices no greater than the price at which the shares were originally purchased, in each case where the transferee agrees to the terms of the escrow agreement), these shares will not be transferable during the escrow period and will not be released from escrow until one year after the consummation of our initial business combination, or earlier if the over-allotment option is not exercised in full or in part in order to have up to 937,500 shares of common stock cancelled as described above or if, subsequent to our initial business combination we consummate a subsequent liquidation, merger, stock exchange or other similar transaction which results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property. Additional transfer restrictions In addition to the restrictions described in Escrow of initial stockholders shares above, we, all of our initial stockholders and our officers and directors have agreed that, for a period of 180 days from the date of this prospectus, we and they will not, without the prior written consent of the underwriters, offer, sell, contract to sell, transfer, pledge, dispose of, hedge or otherwise dispose of, or enter into any transaction which is designed to, or could be expected to, result in the disposition, directly or indirectly, any of our units, warrants, shares or other securities convertible into or exercisable, or exchangeable for shares of our common stock, or publicly announce an intention to effect any such transaction. Table of Contents TABLE OF CONTENTS Page Table of Contents Risks In making your decision on whether to invest in our securities, you should take into account not only the backgrounds of our management team, but also the special risks we face as a blank check company, as well as the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, and, therefore, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. You should carefully consider these and the other risks set forth in the section entitled Risk Factors beginning on page 17 of this prospectus. (1) Includes the $7,500,000 we will receive from the sale of the insider warrants. The working capital excludes $72,500 of costs related to this offering which were paid or accrued prior to July 18, 2007. These deferred offering costs have been recorded as a long-term asset and are reclassified against stockholders equity in the as adjusted information. The as adjusted working capital and total assets amounts include the $247,575,000 to be held in the trust account, which will be available to us only upon the consummation of a business combination within the time period described in this prospectus. The total amount to be placed in trust also includes $8,375,000 (or approximately $0.335 per share) of deferred underwriting discounts and commissions payable to the underwriters in the offering only if we consummate a business combination. If a business combination is not so consummated, the trust account totaling $247,575,000 of net proceeds from the offering, including $7,500,000 of proceeds from the private placement of the insider warrants, and all accrued interest earned thereon less (i) up to $2,450,000 that may be released to us to fund our expenses and other working capital requirements and (ii) any amounts released to us to pay our income or other tax obligations, will be distributed solely to our public stockholders (subject to our obligations under Delaware law to provide for claims of creditors). We will not proceed with a business combination if public stockholders owning 30% or more of the shares sold in this offering vote against the business combination and exercise their conversion rights. Accordingly, we may effect a business combination if public stockholders owning up to but not including 30% of the shares sold in this offering exercise their conversion rights. If this occurred, we would be required to convert to cash up to but not including 30% of the 25,000,000 shares sold in this offering, or 7,499,999 shares of common stock, at an initial per-share conversion price of approximately $9.90, without taking into account interest earned on the trust account. The actual per-share conversion price will be equal to: the amount in the trust account, including all accrued interest after distribution of interest income on the trust account balance to us as described above, as of two business days prior to the proposed consummation of the business combination. divided by the number of shares of common stock sold in the offering. Because converting stockholders will receive their proportionate share of the deferred underwriting discounts and commissions and the underwriters will be paid the full amount of their deferred underwriting compensation at the time of the consummation of our initial business combination, the Company (and, therefore, the non-converting stockholders) will bear the financial effect of such payments to both the converting stockholders and the underwriters. Table of Contents
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+PROSPECTUS SUMMARY This summary provides a brief overview of key aspects of the offering. However, it is a summary and may not contain all of the information that is important to you. For a more complete understanding of this offering, we encourage you to read this entire prospectus, including the financial statements included in this prospectus and the notes to those statements. Overview Syngence Corporation was formed to acquire and carry on the business of Syngence, LLC, a technological leader in the development of software tools and applications that enable the automated search of large document collections most often associated with the discovery phase of complex litigation and the analysis of their contents. These applications are designed to improve the thoroughness and accuracy of document review while simultaneously reducing review time and cost. A team of experienced software and technology industry professionals led the acquisition, which was completed in May 2007, in order to recapitalize a business which had historically been undercapitalized, but whose technology had been well received in the litigation support marketplace. Our goal was to stabilize the company's current operations, augment marketing and sales resources, strengthen senior management, and better position the business in a highly fragmented market to exploit its strengths and to stimulate both organic and strategic growth. Traditional Internet search technology is adequate for finding information on the Internet but is not expected or required to provide a complete set of relevant results. Internet search engines also deliver results that are ranked by popularity of the identified document or site, not necessarily by its relevance to the search terms. In contrast, litigation and enterprise applications often require that no relevant document be missed and that the most relevant documents be highlighted. Syngence's Synthetix software, based on our patented linguistic pattern-matching technology, delivers a comprehensive set of results, scored and listed in order of relevance. Our principal customers have historically been law firms for which we provide processing services and for which we bill according to the volume of data processed. While continuing to provide these services, we recently began to license our software to larger, established providers of document management services in order to meet growing demand and to more rapidly scale the business. Our initial proprietary Synthetix Search application products allow the customer, through the familiar interface of its existing case management software, to search, navigate and analyze the full text content of the document collection. In early 2007, we released our first two licensed products, Syndex and Synthetix Search. A new product, SynthetixND, is currently being used on a services basis for key customers with very encouraging results. A licensable version of SynthetixND is expected to be released before the end of 2007. During the four quarters ended September 30, 2007, the business generated revenue of $3.2 million, a reversal of the declining revenue trends of the prior three years during which the business was constrained by lack of capital and lack of strategic focus. The business generated revenue of $2.8 million in the first nine months of 2007, an increase of almost 24% over the revenue generated in the first nine months of 2006. The Enterprise Search and Electronic Discovery Markets The market for search and content management solutions is large and growing rapidly. Corporations, law firms and government agencies spend more than $5 billion annually on litigation support tools and compliance and electronic content management technology. Forrester Research, EDDix and Oracle Corporation expect that this number could double by 2010. Sarbanes-Oxley compliance rules, HIPAA and other legislation may catalyze the growth in these markets by imposing requirements that can only be met by effective document management. Forrester Research estimated that 2006 spending in the area of internal compliance was $600 million and expects it to grow to $1.3 billion by 2012. Companies can also use electronic search techniques as a part of an enterprise content management (ECM) program. According to Oracle Corporation, the ECM market, portions of which are potentially addressable by our technology, is a $3.6 billion market with a 13% growth rate. Electronic Discovery Document production and discovery in litigation have evolved to require sophisticated electronic search solutions. Recent examples of companies that paid penalties related to discovery include Phillip Morris USA ($2.75 million for non-compliance with eDiscovery requests), Morgan Stanley ($15 million for failing to provide certain emails), and UBS AG (suffered an adverse judgment for $29 million). In December 2006, Congress amended the Federal Rules of Civil Procedure by adding new rules that reduce the time allowed for companies to produce documents for discovery and by imposing new standards for the quality of data to be produced and new penalties for companies that fail to comply. Our products are designed to provide these sophisticated electronic search solutions. Syngence Solutions and Linguistic Pattern Matching Technology Our Synthetix linguistic pattern matching technology is designed to allow users to: search with plain language sentences or expressions without complex logic operators; enter or select lengthy passages as search expressions; deliver results from millions of pages quickly and efficiently; retrieve results promptly without significant increases in computing power or storage; deliver a complete set of results ranked by relevance, without requiring the repetition of multiple variations of a query; deliver results that omit extraneous information while providing confidence that relevant results are not being missed; and automate more complex content analytics such as management of "near duplicate" documents. Mission and Strategy Our mission is to become a market leader by developing search technology that allows people to identify precisely the documents they need, quickly and intuitively, from any amount of data, the first time. Our immediate growth strategy is focused on three areas: to continue to grow in the litigation support market by: developing a network of licensed service provider channel partners; augmenting our direct sales force and channel development team; continuing to enhance and add new products to our software suite; and enhancing our marketing and business development activities. to expand our market by addressing enterprise customers with existing products; and to develop and deliver new products based on our core search platform that target enterprise customers. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Since completing the acquisition, we have: began the process of recapitalizing the business; augmented senior management with a new CEO, CFO, and business development and marketing professionals; added experienced software sales account managers to the sales force; introduced our near duplicate technology, SynthetixND; and created a new visual identity and re-branded the Company. Corporate Information Syngence Corporation was incorporated in Delaware on February 27, 2007 under the name Krona Acquisition Corporation to acquire the business and assets of Syngence, LLC, a Texas limited liability company. On May 29, 2007, following that acquisition, we changed our name to Syngence Corporation. Unless the context indicates otherwise, references to "Syngence," "we," "us," the "Company" or words of like import are to Syngence Corporation and its predecessor, Syngence, LLC. Our principal executive office is located at 5151 Belt Line Rd., Suite 1100, Dallas, Texas 75254 and our telephone number is (214) 269-2900. Our web address is www.syngence.com. None of the information on our website is part of this prospectus. We hold rights to the following common law trademarks: "Syndex," "SPS," "Marginalia," "Syngence Processing Software," and "SynthetixND." We also own six federal trademark registrations: "Syngence," "Synthetix," "Synthetic Document," "Think it... Find It!," "Synthorg," and "Blue Trace." Balances at September 30, 2007 1,774,998 $ 30 $ (6 ) $ Note 8. Lease Commitment The Company leases office equipment and facilities under noncancellable operating leases. The Company incurred rent expense of $58 for the nine months ended September 30, 2007. Future minimum lease payments amount to the following: Three months ended December 31, 2007 $ 24 Year ended December 31, 2008 97 Year ended December 31, 2009 58 Year ended December 31, 2010 Syngence Corporation (Exact name of Registrant as specified in its charter) Delaware (State or Other Jurisdiction of Incorporation or Organization) 5045 (Primary Standard Industrial Classification Code Number) 20-8620385 (I.R.S. Employer Identification No.) Syngence Corporation 5151 Belt Line Rd., Suite 1100 Dallas, Texas 75254 (214) 269-2900 (214) 269-2901 Facsimile (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) The Offering Securities offered 2,000,000 units, each unit consisting of one share of common stock and one Class A redeemable common stock purchase warrant. Initially, only the units will trade. Shares of common stock to be outstanding after this offering 4,385,907 Warrants Number of Class A warrants to be outstanding after this offering 2,000,000 Exercise terms Each Class A warrant entitles its holder to purchase one share of common stock at an exercise price equal to 150% of the initial unit offering price at any time after the warrants become separately tradable. Expiration date , 2013 Redemption We may redeem some or all of the Class A warrants at any time after six months from the date of this prospectus, at a price of $0.25 per warrant, on 30 days' notice to the holders, only if our common stock has closed at 200% or more of the initial public offering price of the units on five consecutive trading days. Proposed Nasdaq Capital Market Symbol Units: Common Stock: Class A Warrant: Use of Proceeds We intend to use the net proceeds from this offering to repay outstanding indebtedness and for general corporate purposes, including working capital, expansion or changes in operations, and investments in product development, new products or technology.
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+This summary only highlights the more detailed information appearing elsewhere in this prospectus. As this is a summary, it does not contain all of the information that you should consider in making an investment decision. You should read this entire prospectus carefully, including the information under Risk Factors and our financial statements and the related notes included elsewhere in this prospectus, before investing. References in this prospectus to we, us or our company refer to Capitol Acquisition Corp. References in this prospectus to public stockholders refers to those persons that purchase the securities offered by this prospectus and any of our officers, directors and founders (as defined below) who purchase these securities either in this offering or afterwards, provided that such individuals status as public stockholders shall only exist with respect to those securities so purchased. References in this prospectus to our management team refer to our officers and directors. Unless we tell you otherwise, the information in this prospectus (i) assumes that the underwriters will not exercise their over-allotment option and (ii) gives retroactive effect to a stock dividend of 0.25 shares of common stock for each outstanding share of common stock on October 12, 2007. We are a blank check company formed under the laws of the State of Delaware on June 26, 2007. We were formed to acquire a currently unidentified operating business or asset or several operating businesses or assets, which we refer to as our target business or target businesses, through a merger, stock exchange, asset acquisition, reorganization or similar business combination, which we refer to throughout this prospectus as our initial business combination. To date, our efforts have been limited to organizational activities as well as activities related to this offering. We have not, nor has anyone on our behalf, contacted any potential target business or had any substantive discussions, formal or otherwise, with respect to such a transaction. Additionally, we have not undertaken, nor have we engaged or retained any agent or other representative to undertake, any research, diligence, evaluations or similar activities to identify, locate or contact any suitable acquisition candidate. We intend to focus our search on businesses that may provide significant opportunities for growth. These prospective target businesses will not be limited to a particular industry, however, we plan to leverage our collective investing and operational experience in high growth areas such as the technology, media and communications sectors as well as industries that support or enable such businesses. We will seek to capitalize on the 15 years of private equity and venture capital investing experience and significant contacts of our Chief Executive Officer, Mark D. Ein, as well as the significant experience and contacts of our Board of Directors and special advisors. Although we have no formal arrangement or agreement with our special advisors to provide services to us and accordingly, they have no contractual or fiduciary obligations to present business opportunities to us, we believe with their business background and extensive contacts, they will be helpful to our search for a target business and our consummation of an initial business combination. Mr. Ein is the founder and Chief Executive Officer of Venturehouse Group, LLC, a holding company that creates, invests in, grows and builds technology, communications and related business services companies. Venturehouse was founded in 1999 to work closely with a small number of portfolio companies at any one time and to provide operational, strategic, and financing support throughout their lifecycle. Prior to forming Venturehouse, Mr. Ein was a Principal with The Carlyle Group, a leading global private equity firm with approximately $59 billion of assets under management. From 1992 to 1999, Mr. Ein led many of Carlyle s technology and telecommunications private equity investment activities totaling more than $300 million. Earlier in his career, from 1989 to 1990, Mr. Ein worked for Brentwood Associates, a leading West Coast growth-focused private equity firm with over $750 million of assets under management, and from 1986 to 1989 for Goldman, Sachs & Co. Mr. Ein has a long relationship with our Board of Directors and special advisors who share a similar growth-oriented investment philosophy. Most of them have previously invested together with Mr. Ein and several of them have invested together in multiple companies. Although none of our officers, directors or special advisors is currently, or has been, associated with other specified purpose acquisition companies or other entities with business plans similar to ours, we believe the complementary perspectives and successful working history of our UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents team provides us with an advantage in identifying target businesses where we believe we can unlock and create significant value over time. We will employ a pro-active acquisition strategy focused on companies that have demonstrated a potential for future growth or companies for which our team believes we can be the catalyst to accelerating the target business growth. Our acquisition selection process will also leverage our team s extensive network of industry, private equity and venture capital sponsor relationships as well as relationships with management teams of public and private companies, investment bankers, attorneys and accountants that we believe should provide us with significant business combination opportunities. We have identified the following criteria and guidelines that we believe are important in evaluating prospective target businesses. We will seek to acquire companies that we believe: Will experience substantial growth post-acquisition. We believe that we are well-positioned to evaluate a company s current growth prospects and opportunities to enhance growth post-acquisition. Have developed leading positions within industries that exhibit strong fundamentals. We will evaluate each industry and the target businesses within those industries based on several factors including growth characteristics, competitive positioning, profitability margins and sustainability. Exhibit unseen value or other characteristics that have been disregarded by the marketplace. We intend to leverage the operational experience and financial acumen of our team to focus on unlocking value others may have overlooked post closing. Will offer an attractive risk-adjusted return on investment for our shareholders. We will seek to acquire the target on attractive terms. Financial returns will be evaluated based on both organic cash flow growth potential and an ability to create value through new initiatives. Potential upside from growth in the business will be weighed against any downside risks. While these criteria will be used in evaluating business combination opportunities, we may decide to enter into a business combination with a target business or businesses that does not meet all of these proposed criteria and guidelines. In order to minimize potential conflicts of interest which may arise from multiple corporate affiliations, each of our officers has agreed, until the earliest of consummation of our initial business combination, our liquidation or such time as he or she ceases to be an officer, to present to our company for our consideration, prior to presentation to any other entity, any business opportunity in excess of approximately $190 million which may reasonably be required to be presented to us under Delaware law, subject to any pre-existing fiduciary or contractual obligations he or she might have. Decisions by us to release each of our officers to pursue any specific business opportunity will be made solely by a majority of our disinterested directors. Our initial business combination must be with one or more target businesses whose fair market value, individually or collectively, is equal to at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions of approximately $8.1 million, or approximately $9.3 million if the underwriters over-allotment option is exercised in full) at the time of such initial business combination. This may be accomplished by identifying and acquiring a single business or multiple operating businesses, which may or may not be related, contemporaneously. In order to consummate such a business combination, we may issue a significant amount of our debt or equity securities to the sellers of such business and/or seek to raise additional funds through a private offering of debt or equity securities. There are no limitations on our ability to incur debt or issue securities in order to consummate a business combination. If we issue securities in order to consummate a business combination, our shareholders could end up owning a minority of the combined company as there is no requirement that our shareholders own a certain percentage of our company after our business combination. Since we have no specific business combination under consideration, we have not entered into any such arrangement to issue our debt or equity securities and have no current intention of doing so. The future role of members of our management team, if any, in the target business cannot presently be stated with any certainty. Amendment No. 3 To FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents While it is possible that one or more of our officers or directors will remain associated in some capacity with us following an initial business combination, it is unlikely that any of them will devote their full efforts to our affairs subsequent to an initial business combination. Moreover, we cannot assure you that members of our management team will have significant experience or knowledge relating to the operations of the particular target business. If we are unable to consummate an initial business combination within 24 months from the date of this prospectus, we will liquidate and distribute the proceeds held in the trust account to our public stockholders in an amount we expect to be approximately $9.85 per share of common stock held by them (or approximately $9.82 per share if the underwriters exercise their over-allotment option in full), without taking into account any interest earned on such funds. However, we cannot assure you that we will in fact be able to distribute approximately $9.85 per share as a result of claims of creditors which may take priority over the claims of our public stockholders. Private Placements We issued 7,187,500 shares of common stock to our founders for an aggregate of $25,000 in cash, representing a purchase price of approximately $0.003 per share. This includes an aggregate of 937,500 shares of common stock that are subject to forfeiture by our founders if the over-allotment option is not exercised by the underwriters. The founders will be required to forfeit a number of shares, if any, so that their collective ownership interest in our common stock is 20% after giving effect to the offering and exercise, if any, of the underwriters over-allotment option. We refer to Capitol Acquisition Management LLC, Raul J. Fernandez, Piyush Sodha, Richard C. Donaldson, Lawrence Calcano, Brooke B. Coburn, Arno Penzias, Hugh Panero, ZG Ventures LLC, Thomas E. Wheeler, Ted Leonsis and Dr. Jeong H. Kim, all of the holders of our outstanding shares of common stock, as the founders, and we refer to the outstanding shares of common stock held by them as the founders common stock throughout this prospectus. Capitol Acquisition Management LLC was formed for the purpose of investing in our securities. There are seven investors in Capitol Acquisition Management LLC. Each of the investors is an accredited investor. The founders common stock is identical to the common stock included in the units being sold in this offering, except that: the founders common stock is subject to the transfer restrictions and registration rights described below; the founders have agreed to vote the founders common stock in the same manner as a majority of the public stockholders in connection with the vote required to approve our initial business combination; the founders will not be able to exercise conversion rights (as described below) with respect to the founders common stock; and the founders have agreed to waive their rights to participate in any liquidation distribution with respect to the founders common stock if we fail to consummate an initial business combination. In addition, our officers, directors and special advisors have agreed to purchase an aggregate of 7,000,000 warrants at a price of $1.00 per warrant ($7.0 million in the aggregate) in a private placement that will occur simultaneously with the consummation of this offering. The $7.0 million of proceeds from this investment will be held in the trust account pending our completion of an initial business combination on the terms described in this prospectus. If we do not complete such an initial business combination, then the $7.0 million will be part of the liquidating distribution to our public stockholders, and the warrants will expire worthless. CAPITOL ACQUISITION CORP. (Exact name of registrant as specified in its charter) Delaware 6770 26-0435458 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 509 7th Street, N.W. Washington, D.C. 20004 (202) 654-7060 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Table of Contents The sponsors warrants will not be transferable or salable by the purchasers (subject to limited exceptions) until we complete an initial business combination, and will be exercisable on a cashless basis and will be non-redeemable by us, in each case, so long as they are held by the purchasers or their permitted transferees. In addition, commencing 90 days after the date the sponsors warrants become exercisable, the sponsors warrants and the underlying shares of common stock are entitled to registration rights under an agreement to be signed on or before the date of this prospectus. With the exception of the terms noted above, the sponsors warrants have terms and provisions that are identical to those of the warrants being sold as part of the units in this offering. The holders of the warrants purchased in this offering will not be able to exercise those warrants unless we have an effective registration statement covering the shares issuable upon their exercise and a related current prospectus available. The warrant agreement provides that the sponsors warrants may not be exercised unless a registration statement relating to the common stock issuable upon exercise of the warrants purchased in this offering is effective and a related current prospectus is available. Our executive offices are located at 509 7th Street, N.W., Washington, D.C. 20004, and our telephone number is (202) 654-7060. Mark D. Ein, Chief Executive Officer Capitol Acquisition Corp. 509 7th Street, N.W. Washington, D.C. 20004 (202) 654-7060 (Name, address, including zip code, and telephone number, including area code, of agent for service) 1 This number includes an aggregate of 937,500 shares of common stock that are subject to forfeiture by our founders if the over-allotment option is not exercised by the underwriters. Copies to: David Alan Miller, Esq. Jeffrey M. Gallant, Esq. Graubard Miller The Chrysler Building 405 Lexington Avenue New York, New York 10174 (212) 818-8800 (212) 818-8881 - Facsimile Deanna L. Kirkpatrick, Esq. Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 (212) 450-4000 (212) 450-3800 - Facsimile 2 Assumes the over-allotment option has not been exercised and an aggregate of 937,500 shares of common stock have been forfeited by our founders. Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Table of Contents at a price of $.01 per warrant; upon a minimum of 30 days prior written notice of redemption (the redemption period ); and if, and only if, the last sale price of our common stock equals or exceeds $14.25 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. We may not redeem the warrants unless an effective and current registration statement covering the shares of common stock issuable upon exercise of the warrants is available throughout the redemption period. If we call the warrants for redemption, we will have the option to require all holders that wish to exercise warrants to do so on a cashless basis. However the public stockholders may not make such an election at their own option. In such event, each holder would pay the exercise price by surrendering the warrants for that number of shares of common stock equal to the quotient obtained by dividing (x) the product of the number of shares of common stock underlying the warrants, multiplied by the difference between the exercise price of the warrants and the fair market value (defined below) by (y) the fair market value. The fair market value shall mean the average reported last sale price of the ordinary shares for the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of warrants. This would have the effect of reducing the number of shares received by holders of the warrants. Reasons for redemption limitations: We have established the above conditions to our exercise of redemption rights to provide: warrant holders with adequate notice of exercise after the then-prevailing common stock price is substantially above the warrant exercise price; and a sufficient differential between the then-prevailing common stock price and the warrant exercise price so there is a buffer to absorb the market reaction, if any, to our redemption of the warrants. If the foregoing conditions are satisfied and we issue a notice of redemption, each warrant holder can exercise his, her or its warrant prior to the scheduled redemption date. However, the price of the common stock may fall below the $14.25 trigger price as well as the $7.50 warrant exercise price after the redemption notice is issued. Proposed American Stock Exchange symbols for our: Units: CLA.U CALCULATION OF REGISTRATION FEE Table of Contents Common stock: CLA Warrants: CLA.WS Founders common stock: We issued 7,187,500 shares of common stock to our founders for an aggregate purchase price of $25,000. This includes an aggregate of 937,500 shares of common stock that are subject to forfeiture by our founders if the over-allotment option is not exercised by the underwriters. The founders common stock is identical to the common stock included in the units being sold in this offering, except that: the founders common stock is subject to the transfer restrictions and registration rights described below; the founders have agreed to vote the founders common stock in the same manner as a majority of the public stockholders in connection with the vote required to approve our initial business combination; the founders will not be able to exercise conversion rights (as described below) with respect to the founders common stock; and the founders have agreed to waive their rights to participate in any liquidation distribution with respect to the founders common stock if we fail to consummate an initial business combination. The founders have agreed, subject to certain exceptions, not to sell or otherwise transfer any of the founders common stock until one year after the date of the completion of the initial business combination or earlier if, subsequent to our business combination, (i) the last sales price of our common stock equals or exceeds $14.25 per share for any 20 trading days within any 30-trading day period commencing 90 days after our initial business combination or (ii) we consummate a subsequent liquidation, merger, stock exchange or other similar transaction which results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property. We refer to such restrictions as the transfer restrictions throughout this prospectus. Furthermore, the interest holders of Capitol Acquisition Management LLC have agreed not to transfer their ownership interests in such entity to anyone other than another founder or an entity of which the founders are the beneficial owners, or beneficiaries of, until termination of the transfer restrictions. In addition, the founders are entitled to registration rights with respect to the founders common stock under an agreement to be signed on or before the date of this prospectus. The holders of the majority of these shares may elect to exercise these registration rights at any time commencing nine months after the consummation of our initial business combination. Title of each Class of Security being registered Amount being Registered Proposed Maximum Offering Price Per Security(1) Proposed Maximum Aggregate Offering Price(1) Amount of Registration Fee Units, each consisting of one share of Common Stock, $.0001 par value, and one Warrant(2) 28,750,000 Units $10.00 $287,500,000 $8,826.25 Shares of Common Stock included as part of the Units(2) 28,750,000 Shares (3) Warrants included as part of the Units(2) 28,750,000 Warrants (3) Shares of Common Stock underlying the Warrants included in the Units(4) 28,750,000 Shares $7.50 $215,625,000 $6,619.69 Total $503,125,000 $15,445.94(5) Table of Contents If the underwriters determine that the size of the offering should be increased or decreased, a stock dividend or a contribution back to capital, as applicable, would be effectuated in order to maintain our founders ownership at 20% of the number of shares to be outstanding after this offering (including any exercise of the over-allotment option). Sponsor s warrants purchased through private placement: Our officers, directors and special advisors have entered into agreements with us to purchase an aggregate of 7,000,000 sponsors warrants at a price of $1.00 per warrant ($7.0 million in the aggregate). The purchasers are obligated to purchase the sponsors warrants from us simultaneously with the consummation of this offering. The sponsors warrants will be purchased separately and not in combination with common stock or in the form of units. The purchase price of the sponsors warrants will be held in the trust account pending the completion of our initial business combination. If we do not complete an initial business combination that meets the criteria described in this prospectus and are forced to liquidate, then the $7.0 million purchase price of the sponsors warrants will become part of the distribution to our public stockholders and the sponsors warrants will expire worthless. The sponsors warrants will not be transferable or salable by the purchasers (subject to limited exceptions) until we complete an initial business combination, and will be exercisable on a cashless basis and will be non-redeemable by us, in each case, so long as they are held by the purchasers or their permitted transferees. In addition, commencing 90 days after the consummation of our initial business combination, the sponsors warrants and the underlying common stock are entitled to registration rights under an agreement to be signed on or before the date of this prospectus. With the exception of the terms noted above, the sponsors warrants have terms and provisions that are identical to those of the warrants being sold as part of the units in this offering, including the fact that they cannot be exercised unless an effective and current registration statement covering the shares of common stock issuable upon exercise of the warrants is available. Offering and sponsors warrants private placement proceeds to be held in trust account and amounts payable prior to trust account distribution or liquidation: $246,325,000, or approximately $9.85 per unit ($282,418,750, or approximately $9.82 per unit, if the underwriters over-allotment option is exercised in full) of the proceeds of this offering and the private placement of the sponsors warrants will be placed in the trust account at Merrill Lynch, with Continental Stock Transfer & Trust Company as trustee, pursuant to an agreement to be signed on the date of this prospectus. These proceeds include approximately (1) Estimated solely for the purpose of calculating the registration fee. (2) Includes 3,750,000 Units and 3,750,000 shares of Common Stock and 3,750,000 Warrants underlying such Units which may be issued on exercise of a 30-day option granted to the Underwriters to cover over-allotments, if any. (3) No fee pursuant to Rule 457(g). (4) Pursuant to Rule 416, there are also being registered such additional securities as may be issued to prevent dilution resulting from stock splits, stock dividends or similar transactions as a result of the anti-dilution provisions contained in the Warrants. (5) The filing fee has been previously paid. Table of Contents $8.1 million in deferred underwriting discounts and commissions (or approximately $9.3 million if the underwriters over-allotment option is exercised in full). We believe that the inclusion in the trust account of the purchase price of the sponsors warrants and the deferred underwriting discounts and commissions is a benefit to our public stockholders because additional proceeds will be available for distribution to them if a liquidation of our company occurs prior to the consummation of our initial business combination. Except as described below, proceeds in the trust account will not be released until the earlier of our consummation of our initial business combination or our liquidation. Unless and until our initial business combination is consummated, proceeds held in the trust account will not be available for our use for any purpose, including the payment of expenses related to (i) this offering, and (ii) the investigation, selection and negotiation of an agreement with one or more target businesses or other working requirements, except that there can be released to us from the trust account (a) interest income earned on the trust account balance to pay our income and franchise tax obligations and (b) interest income earned of up to $3.25 million on the trust account balance to fund such working capital requirements; provided, however, that we will not be allowed to withdraw interest income earned on the trust account for our working capital requirements unless we have sufficient funds available to us to pay our tax obligations then due at that time. With these exceptions, expenses incurred by us while seeking an initial business combination may be paid prior to an initial business combination only from the net proceeds of this offering not held in the trust account (initially, approximately $600,000). If the underwriters determine the size of the offering should be increased or decreased, such an increase or decrease in offering size could also result in a proportionate increase or decrease in the amount of interest we may withdraw from the trust account. As a result of an increase in the size of the offering, the per-share conversion or liquidation price could decrease by as much as $0.04. Limited payments to insiders: There will be no fees, reimbursements or other cash payments paid to our founders, officers, directors or their affiliates prior to, or for any services they render in order to effectuate, the consummation of an initial business combination (regardless of the type of transaction that it is) other than: Repayment of a non-interest bearing loan in an aggregate principal amount of $95,000 made to us by Leland Investments Inc., an affiliate of Mark D. Ein, to cover offering expenses; and Reimbursement for any expenses incident to identifying, investigating and consummating an initial business combination with one or more target businesses. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Table of Contents Our audit committee will review and approve all reimbursements and payments made to any founder or member of our management team or special advisor and our or their respective affiliates, and any reimbursements and payments made to members of our audit committee will be reviewed and approved by our board of directors, with any interested director abstaining from such review and approval. Right of First Review: In order to minimize potential conflicts of interest which may arise from multiple corporate affiliations, our officers have agreed, until the earliest of consummation of our initial business combination, our liquidation or such time as he ceases to be an officer, to present to our company for our consideration, prior to presentation to any other entity, any business opportunity in excess of approximately $190 million which may reasonably be required to be presented to us under Delaware law, subject to any pre-existing fiduciary or contractual obligations he might have. All amounts held in the trust account that are not paid to converting stockholders, released to us in the form of interest income or payable to the underwriters for deferred discounts and commissions will be released to us on closing of our initial business combination: All amounts held in the trust account that are not distributed to public stockholders who exercise their conversion rights (as described below) or previously released to us as interest income for our working capital requirements and tax obligations or paid to the underwriters as their deferred underwriting discounts and commissions that are equal to 3.25% of the gross proceeds of this offering, or approximately $8.1 million (or approximately $9.3 million if the underwriters over-allotment option is exercised in full) will be released on closing of our initial business combination with one or more target businesses, subject to compliance with the conditions to consummating an initial business combination that are described below. Funds released from the trust account to us can be used to pay all or a portion of the purchase price of the business or businesses with which our initial business combination occurs. If our initial business combination is paid for using stock or debt securities, we may apply the cash released to us from the trust account to general corporate purposes, including for maintenance or expansion of operations of the acquired businesses, the payment of principal or interest due on indebtedness incurred in consummating our initial business combination or to fund the purchase of other companies or for working capital. Certificate of Incorporation: There are specific provisions in our amended and restated certificate of incorporation that may not be amended prior to our consummation of an initial business combination, including the termination of our corporate existence if we do not complete our initial business combination within 24 months, our requirements to seek stockholder Table of Contents approval of such an initial business combination and to allow our stockholders to seek conversion of their shares if they do not approve of such an initial business combination. While we have been advised that such provisions limiting our ability to amend our certificate of incorporation may not be enforceable under Delaware law, we view these provisions, which are contained in Article Seven of our amended and restated certificate of incorporation, as obligations to our stockholders and will not take any action to amend or waive these provisions, except in connection with the consummation of an initial business combination. Our amended and restated certificate of incorporation also provides that we will continue in existence only until 24 months from the date of this prospectus. If we have not completed an initial business combination by such date, our corporate existence will cease except for the purposes of winding up our affairs and liquidating, pursuant to Section 278 of the Delaware General Corporation Law. This has the same effect as if our board of directors and stockholders had formally voted to approve our dissolution pursuant to Section 275 of the Delaware General Corporation Law. Accordingly, limiting our corporate existence to a specified date as permitted by Section 102(b)(5) of the Delaware General Corporation Law removes the necessity to comply with the formal procedures set forth in Section 275 (which would have required our board of directors and stockholders to formally vote to approve our dissolution and liquidation and to have filed a certificate of dissolution with the Delaware Secretary of State). In connection with any proposed initial business combination we submit to our stockholders for approval, we will also submit to stockholders a proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence, thereby removing this limitation on our corporate life. We will only consummate an initial business combination if stockholders vote both in favor of such initial business combination and our amendment to provide for our perpetual existence. The approval of the proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence would require the affirmative vote of a majority of our outstanding shares of common stock. Stockholders must approve initial business combination: We will seek stockholder approval before effecting our initial business combination, even if the initial business combination would not ordinarily require stockholder approval under applicable state law. In connection with the vote required to approve our initial business combination, all of our existing stockholders, including all of our officers and directors and special advisors, have agreed to vote the shares of common stock owned by them immediately before this offering in accordance with the majority of the shares of common stock voted by the public stockholders at the meeting called for the purpose of approving our initial business combination. They have also agreed to vote any shares Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED NOVEMBER 2, 2007 P R O S P E C T U S $250,000,000 25,000,000 units Capitol Acquisition Corp. is a newly organized blank check company formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination, one or more operating businesses or assets, which we refer to as our initial business combination. Our efforts in identifying a prospective target business will not be limited to a particular industry. If we are unable to consummate an initial business combination within 24 months from the date of this prospectus, we will liquidate and distribute the proceeds held in the trust account to our public stockholders. To date, our efforts have been limited to organizational activities as well as activities related to this offering. We do not have any specific initial business combination under consideration. We have not, nor has anyone on our behalf, contacted or researched any prospective target business or had any substantive discussions, formal or otherwise, with respect to such a transaction. This is an initial public offering of our securities. Each unit consists of one share of common stock and one warrant. We are offering 25,000,000 units. We expect that the public offering price will be $10.00 per unit. Each warrant entitles the holder to purchase one share of common stock at a price of $7.50. The warrants will become exercisable on the later of the completion of our initial business combination and one year from the date of this prospectus, provided in each case that we have an effective registration statement covering the shares of common stock issuable upon exercise of the warrants and a current prospectus relating to them is available. The warrants will expire five years from the date of this prospectus, unless earlier redeemed. We have also granted the underwriters a 30-day option to purchase up to an additional 3,750,000 units to cover over-allotments, if any. Mark D. Ein, our Chief Executive Officer, Amanda Eilian, our Vice President, Raul J. Fernandez, Piyush Sodha, Richard C. Donaldson and Lawrence Calcano, each members of our board of directors, and Brooke B. Coburn, Arno Penzias, Hugh Panero, Thomas E. Wheeler, Ted Leonsis and Dr. Jeong H. Kim, each a special advisor of ours, and ZG Ventures LLC, an entity controlled by Miles Gilburne, a special advisor of ours, have agreed to purchase an aggregate of 7,000,000 warrants at a price of $1.00 per warrant ($7.0 million in the aggregate) in a private placement that will occur simultaneously with the consummation of this offering. We refer to these warrants as the sponsors warrants. The proceeds from the sale of the sponsors warrants in the private placement will be deposited into a trust account and be subject to a trust agreement, described below, and will be part of the funds distributed to our public stockholders in the event we are unable to complete our initial business combination. The sponsors warrants will be substantially similar to the warrants included in the units sold in this offering except that the sponsors warrants will be exercisable on a cashless basis and will not be redeemable by us, in each case, so long as they are held by the purchasers or their permitted transferees. The purchasers of the sponsors warrants have agreed not to transfer, assign or sell any of these warrants until we consummate our initial business combination, subject to certain exceptions. Currently, there is no public market for our units, common stock or warrants. We intend to apply to have the units listed on the American Stock Exchange. Assuming that the units are listed on the American Stock Exchange, the units will be listed under the symbol CLA.U on or before the date of this prospectus. We intend to have the common stock and warrants begin separate trading on the 35th day after the date of this prospectus unless Citigroup Global Markets Inc. informs us of the underwriters decision to allow earlier separate trading. We intend to apply to have the common stock and warrants traded on the American Stock Exchange under the symbols CLA and CLA.WS, respectively. We cannot assure you, however, that our securities will continue to be listed on the American Stock Exchange. Investing in our securities involves a high degree of risk. See
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+F-1/A 1 file1.htm F-1/A Table of Contents As filed with the Securities and Exchange Commission on September 24, 2007 Registration No. 333-145994 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Amendment No. 1 to FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Babcock & Brown Air Limited (Exact Name of Registrant as Specified in Its Charter) Bermuda 7359 98-0536376 (State or Other Jurisdiction of Incorporation or Organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification No.) West Pier Dun Laoghaire County Dublin, Ireland Tel. +353 1 231-1900 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant s Principal Executive Offices) Puglisi & Associates 850 Library Avenue, Suite 204 Newark, Delaware 19711 Tel. (302) 738-6680 (Name, Address, Including Zip Code and Telephone Number, Including Area Code, of Agent for Service) Copies to: Boris Dolgonos, Esq. Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, New York 10153 Tel. (212) 310-8000 Jay Bernstein, Esq. Jacob Farquharson, Esq. Clifford Chance US LLP 31 West 52nd Street New York, New York 10019 Tel. (212) 878-8000 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. You should rely only on the information contained in this prospectus or any free writing prospectus prepared by us or on our behalf. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different information, you should not rely on it. We are not, and the underwriters are not, making an offer of these securities in any jurisdiction where an offer is not permitted. The information in this prospectus is only accurate on the date of this prospectus. TABLE OF CONTENTS Page Summary 1
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+PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the section entitled Risk Factors, our financial statements and the related notes to the financial statements, before making an investment decision. Unless otherwise indicated in this prospectus, references to "we," "us" "our" or "our company" refer to Asia Special Situation Acquisition Corp., and the term public shareholders mean only the holders of the 10,000,000 ordinary shares (11,500,000 shares if the over-allotment option is exercised in full) sold as part of the units in this offering or acquired in the secondary market; it excludes our Sponsor and our officers and directors with respect to the shares they acquired upon our formation, but includes any shares they purchase in this offering or in the open market following the offering. Unless we tell you otherwise, the information in this prospectus assumes that the underwriters have not exercised their over-allotment option and that no shareholder exercises its right of redemption as described elsewhere in this prospectus. As used in this prospectus, the following terms have the meanings defined below. Asia includes China as well as Japan, South Korea, Vietnam, Australia and New Zealand, but for purposes of this prospectus specifically excludes North Korea. "business combination" means the acquisition of all or at least a majority of the equity interest in one or more target businesses through a capital stock exchange, asset acquisition, stock purchase, or other similar transaction, including obtaining a majority interest through contractual arrangements. A business combination will only involve a transaction whereby any business or businesses which we acquire will, upon completion of our initial business combination, be at least majority-owned subsidiaries of our company, and are neither investment companies nor companies excluded from the definition of investment company by Sections 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940. China or the PRC refers to the People s Republic of China as well as the Hong Kong Special Administrative Region and the Macau Special Administrative Region, but does not include Taiwan. "existing shareholders" refers to all of our shareholders existing before completion of this offering, including our Sponsor and all of our officers and directors. "initial shares" refers to the 2,500,000 ordinary shares that were originally purchased from us for $25,000 in April 2007 by our Sponsor and our officers, directors and affiliated entities. target business means one or more businesses that are either located in Asia, provide products or services to consumers located in Asia, or invest in the Asian market. Sponsor refers to Ho Capital Management LLC, a Delaware limited liability company. trust account means the trust account established at J.P. Morgan Chase Bank N.A. for which Continental Stock Transfer & Trust Company will act as Trustee, to hold net proceeds of this offering, proceeds of the insider warrants to be purchased by our Sponsor immediately prior to the date of this prospectus, the deferred underwriting compensation, the net interest thereon (after taxes payable and up to $2,000,000 which we may draw for our working capital purposes), pending a business combination. The Company We are a recently organized blank check company known as a Business Combination Company TM , or BCC TM . We were incorporated under the laws of the Cayman Islands on March 22, 2007 for the purpose of acquiring all or a majority interest in one or more unidentified operating businesses, through a capital stock exchange, asset acquisition, stock purchase, or other similar transaction, including obtaining a majority interest through contractual arrangements. We will only acquire a business or businesses that, upon completion of our initial business combination, will be our majority-owned subsidiaries and will be neither investment companies nor companies excluded from the definition of investment company by Sections 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940. We intend to utilize cash derived from the proceeds of this offering, our capital stock, debt or a combination of cash, capital stock and debt, in effecting such acquisition. We will not acquire a minority interest in any operating business. We intend to identify prospective acquisitions that are either located in Asia, provide products or services to consumers located in Asia, or invest in Asia. Although not limited to any specific country in Asia, we intend to initially focus our initial efforts on acquiring an operating business or businesses in the leisure and hospitality or financial services industries that is located in China, provides products or services to consumers located in China, or invests in China. However, we will explore opportunities in other business sectors or regions in Asia if we feel that it is in the best interests of our company and shareholders. We will seek to acquire control of a business, which in the opinion of management, may provide our company and its shareholders with the most favorable growth potential, due to a variety of factors, including its financial condition and results of operations, experience and skill of incumbent management, value of the intellectual property owned by the business, its competitive position, the regulatory environment in which it operates, or other criteria determined by management. ASIA SPECIAL SITUATION ACQUISITION CORP. (Exact Name of Registrant as Specified in Its Charter) Cayman Islands 6770 Not Applicable (State or Other Jurisdiction of Incorporation or Organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) P.O. Box 309GT, Ugland House South Church Street George Town, Grand Cayman Cayman Islands 407-805-0879 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant s Principal Executive Offices) We intend to acquire all or a controlling interest in the equity of such operating business or businesses. If our initial business combination involves a transaction in which we acquire less than a 100% interest in the target company, the value of that interest that we acquire will be equal to at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions). In all instances, we would control the target company. The key factors that we will rely on in determining control would be our acquisition of at least 51% of the voting equity interests of the target company and/or control of the majority of any governing body of the target company through contractual arrangements or otherwise. To date, our efforts have been limited to organizational activities as well as activities related to this offering. We do not have any specific business combination under consideration, and we have not, nor has anyone on our behalf, either directly or indirectly, contacted any potential target businesses or their representatives or had any discussions, formal or otherwise, with respect to effecting a business combination with our company. We have not (nor have any of our agents, representatives or affiliates) been approached by any candidates (or representatives of any candidates) with respect to a possible transaction with our company. Moreover, we have not, nor has anyone on our behalf, taken any measure, directly or indirectly, to identify or locate any suitable acquisition candidate, nor have we engaged or retained any agent or other representative to identify or locate such an acquisition candidate for us. There is no specific timeframe or monetary amount established by management which will cause us to abandon our primary focus of acquiring an operating business in the leisure and hospitality or financial services industries that is located in, provides products or services to consumers located in China, or invests in China, in favor of other industries or countries in Asia even if it may be outside of management s expertise. During the early stages of searching for a suitable target business, we intend to pursue potential business combinations in the specific industries and area in Asia that are within our primary focus. If an acceptable transaction cannot be found in these industries in China during the first year of our search, management may expand its focus by seeking favorable business opportunities in other industries or areas in Asia, even if such may be outside of our expertise. However, management will not rule out pursuing an attractive business combination at any time during the search process, including industries or areas in Asia outside of our primary business focus, if management determines it is in the best interests of our company and shareholders. Our search for target businesses includes the following in the leisure and hospitality and financial services industries: Leisure and Hospitality industry - consists primarily of hotels, tourism, gaming and casinos, condo-hotels, fractional time-shares, destination clubs, cruise lines, golf resorts and spas; and Financial Services industry - consists primarily of asset management firms, banks, investment banks and broker-dealers, financial information companies, which provide financial information such as company financial data through either electronic or print media, technology companies and other vendors to the financial industry, residential and commercial mortgage banking and servicing firms, and specialty finance and leasing companies, which are companies that provide leasing services for, or financing for the purchase of, high-value assets such as aircraft, ships or industrial equipment. Our Sponsor is a Delaware limited liability company co-managed by Angela Ho, our chief executive officer and chairman of the board of directors. Angela Ho is the daughter of Dr. Stanley Ho and has been associated with a number of her father s business interests for many years. Dr. Ho is a well-known entrepreneur in Hong Kong and Macau and, until 2000, held a government-granted monopoly in the Macau gambling industry for over 35 years. According to Forbes Magazine, Dr. Ho was ranked 104th among the world s richest people in 2007 with an estimated net worth of $7.0 billion. Dr. Ho and members of his family own many properties and businesses in both Hong Kong and Macau, including businesses engaged in the casino, hotel, shipping, real estate, banking and transportation industries. Dr. Ho serves as Chairman of Shun Tak Holdings Limited, Director of The Shun Tak Shipping Company, Limited and Chairman of iAsia Technology Limited, and is President of the Real Estate Developers Association of Hong Kong. Shun Tak Holdings Limited is, through its subsidiary, Sociedade de Turismo e Diversoes de Macau, S.A., is one of the few licensed casino operators in Macau, operates what is believed to be the world s largest jetfoil fleet serving Hong Kong and Macau, holds investments in a number of hotels in Macau, including the Oriental and Westin Resort and is one of the largest property developers in Macau. c/o M & C Corporate Services Limited P.O. Box 309GT, Ugland House South Church Street George Town, Grand Cayman Cayman Islands 407-805-0879 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) Based on their existing relationships with Dr. Ho and his affiliates and their regular interactions and contacts with businesses located in Asia, and particularly in mainland China, Hong Kong and Macau, we believe that our Sponsor and members of our management are well positioned to access a number of potential acquisitions and business combinations in this area of the world. However, neither Angela Ho nor any other member of our management has or will discuss any potential business combination opportunities with Dr. Ho or his associates or affiliates until after completion of this offering. Although Dr. Ho is not an officer, director or advisor of our company and while we have no intention to negotiate with or acquire a company controlled by, or affiliated with, Dr. Ho, management and our Sponsor, including Angela Ho and Andrew Tse, the former Chief Financial Officer of Shun Tak Holdings Limited, intend to utilize Dr. Ho s extensive business contacts and experience in China and Asia as an additional resource in our search for potential acquisition targets in the leisure and hospitality and financial services industries. Management does not intend to rely exclusively on Dr. Ho s business contacts and experience and we cannot be certain that such contacts will be as helpful as we anticipate. Dr. Gary T. Hirst, our president and a director, has extensive experience in the financial services industry and, for the past 15 years, has been responsible for the development and investment management of both domestic and offshore hedge funds, and a number of structured investment products. Structured investment products are synthetic investment instruments, typically created by combining securities, such as notes or common stock, with derivatives such as options, that are specially created to meet specific needs that cannot be met from the standard financial instruments available in the markets. Andrew Tse, our vice president, is the former Chief Financial Officer for Shun Tak Holdings Limited, a diversified public company controlled by Dr. Stanley Ho and listed on the Hong Kong Stock Exchange since 1973. Michael Hlavsa, our chief financial officer and a director, is a certified public accountant and certified internal auditor with over 30 years of combined financial and operational experience, including gaming operations, finance and internal controls. Stuart A. Sundlun, a director of our company, is a managing director of BMB Advisors Ltd, a company providing financial advisory services to the BMB Group SPC, an alternative asset management firm investing in privately-owned hedge funds, real estate funds, private equity funds and direct investments. Arne van Roon, a director of our company, manages one of our principal shareholders, Noble Investment Fund Limited, an entity that invests in investment funds primarily in Europe. None of the hedge funds or investment funds affiliated with or managed by Messrs. Hirst, Sundlun or van Roon make any significant investments in Asia. Peter Kjaer, a member of our board of directors, has for the past 10 years been associated with a number of the business activities of companies controlled by Dr. Stanley Ho. Our initial business combination must be with one or more operating businesses whose fair market value, individually or collectively, is at least equal to 80% of the amount in the trust account at the time of the acquisition (less deferred underwriting compensation of $3,000,000, or $3,450,000 if the over-allotment option is exercised in full). In the event that we acquire less than 100% of a target business, such percentage ownership still must yield a fair market value at least equal to 80% of the amount in the trust account at the time of the acquisition or we will not proceed with such an acquisition. Accordingly, it is likely that we will have the ability to initially complete only a single business combination, although this may entail the simultaneous acquisition of several operating businesses at the same time. If we determine to simultaneously acquire several businesses and such businesses are owned by different sellers, we would need each of the sellers to agree that our purchase of its business is contingent on the simultaneous closings of the other acquisitions, which may be difficult for us to accomplish and could delay the completion of the business combination. With multiple acquisitions, we could also face additional risks, including additional burdens and costs with respect to possible multiple negotiations and due diligence investigations (if there are multiple sellers) and the additional risks associated with the subsequent assimilation of the operations and services or products of the acquired companies in a single operating business. However, despite what we believe is a favorable acquisition climate, there are a number of restrictions and limitations imposed by both central and local government agencies in the PRC that may impose significant barriers to our ability to consummate the acquisition of all or a controlling interest in the equity or assets of an operating business located in the PRC. These include: restrictions on foreign ownership of companies operating in what are considered important industries, including telecommunications, advertising, food production and heavy equipment; regulation on foreign exchange and currency conversion; regulation on distribution of dividends to foreign enterprises on profits earned by PRC operating companies; regulation of acquisitions of PRC companies by foreign invested enterprises, or FIEs, and the requirement of approvals by the PRC State Administration of Foreign Exchange, or SAFE, or the central Ministry of Commerce in Beijing; and restrictions on the acquisition by PRC residents of controlling interests in foreign special purpose companies formed for the purpose of investing in PRC operating companies. We may attempt to acquire a majority interest in a business, or businesses, located in China or Vietnam, through a combination of acquiring at least 51% of the equity interests of the target company and control of the board of directors or other governing body of the target company or through contractual arrangements. However, there are uncertainties regarding whether obtaining a majority interest through contractual arrangements will comply with regulations prohibiting or restricting foreign ownership in certain industries. The PRC or Vietnam can restrict the foreign ownership of businesses that are determined from time to time to be in "important industries" that may affect the national economic security or those in the PRC having "famous Chinese brand names" or "well established Chinese brand names." Additionally, the PRC may apply the above restrictions in other industries in the future. Moreover, uncertainties are present because contractual arrangements are subject to the review requirements of the Ministry of Commerce and other relevant agencies as discussed elsewhere for acquisitions of assets and companies in the PRC and Vietnam. Subject to the various percentage ownership limitations that exist from time to time, acquisitions involving foreign investors and parties in the various restricted categories of assets and industries may nonetheless sometimes be consummated where we obtain control using contractual arrangements with approved Chinese or Vietnamese parties. To the extent that such agreements are employed, they may be for control of specific assets such as intellectual property or control of blocks of the equity ownership interests of a company. The agreements would be designed to provide our company with the economic benefits of and control over the subject assets or equity interests similar to the rights of full ownership, while leaving the technical ownership in the hands of Chinese or Vietnamese parties who are approved by the Chinese or Vietnamese regulators, as applicable, and who would likely be designated by our company. For example, these contracts could result in a structure where, in exchange for our payment of the consideration (i) the operating company would continue to be totally or majority owned by Chinese or Vietnamese residents approved by the Chinese or Vietnamese regulators, as applicable, and not otherwise affiliated with us, and the target company would continue to hold the requisite licenses for its business, and (ii) we would establish a new wholly-owned or majority owned subsidiary in China or Vietnam, as applicable, which would provide technology, technical support, consulting and related services to the operating company in exchange for fees, which would transfer to us substantially all of the economic benefits of ownership of the operating company. These contractual arrangements would be designed to provide the following: our exercise of effective control over the operating company; a substantial portion of the economic benefits of the operating company would be transferred to us; and we, or our designee, would have an exclusive option to purchase all or part of the equity interests in the operating company owned by the Chinese or Vietnamese residents who are approved by the Chinese or Vietnamese regulators, as applicable, and whom we designate, or all or part of the assets of the operating company, in each case when and to the extent permitted by Chinese or Vietnamese regulations, as applicable. We have not selected any operating business and we are, therefore, unable to determine at this time what form an acquisition of a target business will take. Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. x In addition, if we or any of our potential future subsidiaries or affiliated entities are found to be in violation of any existing or future PRC laws or regulations (for example, if we are deemed to be holding equity interests in certain of our affiliated entities in which direct foreign ownership is prohibited) the relevant PRC regulatory authorities might have the discretion to: revoke the business and operating licenses of possible future PRC subsidiaries or affiliates; confiscate relevant income and impose fines and other penalties; discontinue or restrict possible future PRC subsidiaries or affiliates operations; require us or possible future PRC subsidiaries or affiliates to restructure the relevant ownership structure or operations; restrict or prohibit our use of the proceeds of this offering to finance our businesses and operations in China; or impose conditions or requirements with which we or possible future PRC subsidiaries or affiliates may not be able to comply. The imposition of any of these penalties could result in a material and adverse effect on our ability to conduct our business. If we are unable to consummate a business combination within the allotted time periods set forth in this prospectus, our company will automatically effect a dissolution and liquidation which will include the distribution of the proceeds of the trust account to our public shareholders. Our registered offices are located at c/o M & C Corporate Services Limited, P.O. Box 309GT, Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands and our telephone number in the United States is 407-805-0879. Purchase of Insider Warrants Immediately prior to the date of this prospectus, our Sponsor, Ho Capital Management LLC, an entity co-managed and jointly owned by Angela Ho, our chief executive officer and chairman, and Noble Investment Fund Limited, will purchase an aggregate of 5,725,000 warrants, or insider warrants, from us at a price of $1.00 per warrant in a private placement made in accordance with Regulation D under the Securities Act of 1933, as amended. All of the proceeds received from the insider warrants (an aggregate of $5,725,000) will be placed in the trust account described below. Ho Capital Management LLC and Noble Investment Fund Limited will each have a 50% beneficial ownership interest in the insider warrants. So long as the insider warrants are owned by Ho Capital Management LLC, Noble Investment Fund Limited or Angela Ho, the insider warrants may be exercised on a cashless basis and will not be subject to redemption. The insider warrants may not be sold, assigned or transferred by Ho Capital Management LLC (nor may the members interest in Ho Capital Management LLC be sold, assigned or transferred) until we have consummated a business combination or (if we fail to consummate such business combination) liquidate. The insider warrants transfer restrictions expire on the earlier of (i) a business combination or (ii) our liquidation. Immediately prior to the date of this prospectus, Noble Investment Fund Limited will provide Ho Capital Management LLC with a $5,725,000 loan payable at the end of five years (but subject to mandatory prepayment to the extent of any net proceeds received by Ho Capital Management LLC from the sale of any insider warrants or shares issuable upon exercise of such warrants). Ho Capital Management LLC will use the proceeds of such loan to purchase the insider warrants. The insider warrants will be pledged to Noble to secure repayment of such loan. In the event and upon our consummation of a business combination, the record and beneficial ownership of 2,862,500 warrants, or 50% of such insider warrants will be transferred by Ho Capital Management LLC to Noble Investment Fund Limited; and such transfer shall represent repayment of 50% of the $5,725,000 loan. The remaining $2,862,500 of such loan, plus accrued interest at the rate of 4.5% per annum, is payable by Ho Capital Management LLC and Angela Ho only out of the proceeds from the sale of such insider warrants or underlying shares. Accordingly, except for the pledged insider warrants and proceeds from periodic sales of such warrants or underlying shares, the loan from Noble Investment Fund Limited to our Sponsor is non-recourse to both our Sponsor and Angela Ho, and none of the other assets of our Sponsor or Ms. Ho (including their legal and beneficial interest in our shares) are subject to attachment or any liability for repayment of the loan. The $5,725,000 loan from Noble Investment Fund Limited to Ho Capital Management LLC will be made based upon a pre-existing business arrangement between Noble and Angela Ho whereby Ms. Ho agreed to organize the Sponsor and management of our company, Noble agreed to provide the financing for the purchase of the insider warrants, and the parties agreed to share equally in such insider warrants. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o The holders of the insider warrants will not have any right to any liquidation distributions with respect to the shares underlying the insider warrants in the event we fail to consummate a business combination and the insider warrants will expire worthless. Accordingly, all of the gross proceeds from the sale of the 5,725,000 warrants, or $5,725,000, will be deposited into the trust account. These warrants contain restrictions prohibiting their exercise or transfer until the earlier of the consummation of a business combination or our liquidation. Sponsor Loan Our Sponsor has agreed to loan us up to $500,000, which we will use to pay a portion of the expenses of this offering. We will repay this loan without interest from the proceeds of this offering not being placed in the trust account, and not from the $2,000,000 to be released to us from interest earned in the trust account to fund our working capital, on the earlier to occur of: (i) December 31, 2007, or (ii) the completion of this offering. The Offering Securities offered: 10,000,000 units, at $10.00 per unit, each unit consisting of: one ordinary share; and one warrant. The units will begin trading on or promptly after the date of this prospectus. Each of the ordinary shares and warrants shall trade separately on the 10th business day following the earlier to occur of: (i) the expiration of the underwriters over-allotment option, or (ii) its exercise in full. However, Maxim Group LLC may decide to allow continued trading of the units following such separation. Additionally, in no event will separate trading of the ordinary shares and warrants commence until we file an audited balance sheet reflecting our receipt of the gross proceeds of this offering and the sale of the insider warrants. We will file a Current Report on Form 8-K, including an audited balance sheet, upon the consummation of this offering, which is anticipated to take place three business days from the date of this prospectus. The audited balance sheet will include proceeds we receive from the exercise of the over-allotment option if the over-allotment option is exercised on the date of this prospectus. If the over-allotment option is exercised following the date of this prospectus, an additional Current Report on Form 8-K will be filed to disclose the exercise and closing of the over-allotment option. CALCULATION OF REGISTRATION FEE Ordinary shares: Number outstanding before this offering: 2,500,000 shares Number to be outstanding after completion of this offering: 12,500,000 shares Warrants: Number outstanding before this offering and the sale of the insider warrants: 0 Number to be outstanding after this offering and the sale of the insider warrants: 15,725,000 warrants (includes 5,725,000 insider warrants) Exercisability: Each warrant is exercisable for one ordinary share. Exercise Price: $7.50 per share Exercise Period: The warrants will become exercisable on the later of: the completion of a business combination with a target business; or _____________, 2008 [one year from the date of this prospectus]; provided that a current registration statement is in effect and a current prospectus with respect to the ordinary shares issuable upon exercise of the public warrant is available. The warrants will expire at 5:00 p.m., New York City time, on [______________] 2011 [four years from the date of this prospectus] or earlier upon redemption. Title of Each Class of Security Being Registered Amount Being Registered Proposed Maximum Offering Price Per Security(1) Proposed Maximum Aggregate Offering Price(1) Amount of Registration Fee Units, each consisting of one ordinary share, $.0001 par value, and one Warrant(2) 11,500,000 Units $ 10.00 $ 115,000,000 $ 3,530.50 Ordinary Shares included as part of the Units(2) 11,500,000 Shares (3) Warrants included as part of the Units(2) 11,500,000 Warrants (3) Ordinary Shares underlying the Warrants included in the Units(4) 11,500,000 Shares $ 7.50 $ 86,250,000 $ 2,647.88 Representative s Unit Purchase Option 1 $ 100 $ 100 (3) Units underlying the Representative's Unit Purchase Option ( Representative's Units )(4) 475,000 Units $ 12.50 $ 5,937,500 $ 182.28 Ordinary Shares included as part of the Representative's Units(4) 475,000 Shares (3) Warrants included as part of the Representative s Units(4) 475,000 Warrants (3) Ordinary Shares underlying the Warrants included in the Representative s Units(4) 475,000 Shares $ 7.50 $ 3,562,500 $ 109.37 Total $ 210,750,100 $ 6,470.03 Redemption: We may redeem the outstanding warrants (including any warrants issued upon exercise of the unit purchase options issued to the underwriters), without the prior consent of any third party: in whole and not in part; at a price of $.01 per warrant at any time after the warrants become exercisable; upon a minimum of 30 days' prior written notice of redemption; and if, and only if, the last sales price of our ordinary shares equals or exceeds $14.25 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. We have established this last criterion to provide warrant holders with a premium to the initial warrant exercise price as well as a degree of liquidity to cushion the market reaction, if any, to our redemption call. The warrants which are issuable to the representative of the underwriters upon the exercise of the representative s unit purchase option are subject to the same redemption conditions. If the foregoing conditions are satisfied and we call the warrants for redemption, each warrant holder shall then be entitled to exercise his or her warrant prior to the date scheduled for redemption, however, there can be no assurance that the price of our ordinary shares will exceed the call trigger price or the warrant exercise price after the redemption call is made and the price of our ordinary shares may, in fact, decline as a result of the limited liquidity following any such call for redemption. None of the insider warrants are redeemable while held by the initial purchasers or their permitted assigns. Payments to Insiders: Our officers and directors will not receive any compensation from the proceeds of this offering. Our officers and directors will be entitled to reimbursement for (i) out-of-pocket expenses incurred by them or their affiliates on our behalf, and (ii) expenses incurred by them incident to us finding a suitable business combination. Our Sponsor has agreed to loan us up to $500,000 which we will use to pay a portion of the expenses of this offering. This loan is without interest and will be repaid solely from the net proceeds of this offering and not from the $2,000,000 released to us to fund our working capital. Proposed American Stock Exchange Symbols: Units: Ordinary shares: Warrants: CIU.U CIU CIU.W Offering and insider warrant proceeds to be held in trust account: $100,000,000 of the proceeds from this offering and the sale of the insider warrants will be placed in a trust account at J.P. Morgan Chase Bank N.A. maintained by Continental Stock Transfer & Trust Company, pursuant to an agreement to be signed on the date of this prospectus. Of this amount, up to $97,000,000 may be used by us for the purpose of effecting a business combination, and up to $3,000,000 will be paid to the underwriters if a business combination is consummated, but will be forfeited by the underwriters if a business combination is not consummated. These funds will not be released until the earlier of the completion of a business combination or our automatic dissolution and liquidation; provided, however, that we plan to draw the following amounts from the interest accrued on the trust account prior to, or upon the consummation of, a business combination or our liquidation: (i) taxes payable on interest earned and (ii) up to $2,000,000 of interest income to fund our working capital requirements. Therefore, unless and until a business combination is consummated, other than as described above, the funds held in the trust account will not be available for our use for any expenses related to this offering or expenses which we may incur related to the investigation and selection of a target business and the negotiation of an agreement to acquire control of a target business. The $3,000,000 of funds attributable to the deferred underwriting discount in connection with this offering will be released to the underwriters, less $0.30 per share to any public shareholders exercising their redemption rights in accordance with the instructions set forth in the proxy materials to be mailed to our shareholders (as further discussed under the heading Effecting a business combination - Redemption Rights ) to obtain the requisite vote to approve of a business combination, upon completion of a business combination on the terms described in this prospectus, or to our public shareholders upon liquidation of the trust account as part of our dissolution and liquidation, but will in no event be available for use by us in a business combination. Expenses we may incur prior to consummation of a business combination may only be paid from the net proceeds of this offering and the sale of the insider warrants not held in the trust account, and any interest earned and released to us as provided above. (1) Estimated solely for the purpose of calculating the registration fee. (2) Includes 1,500,000 Units and 1,500,000 Ordinary Shares and 1,500,000 Warrants underlying such Units which may be issued on exercise of a 45-day option granted to the Underwriters to cover over-allotments, if any. (3) No fee pursuant to Rule 457(g). (4) Pursuant to Rule 416, there are also being registered such additional securities as may be issued to prevent dilution resulting from stock splits, stock dividends or similar transactions as a result of the anti-dilution provisions contained in the Warrants. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. There will be no fees, reimbursements or cash payments made to our Sponsor, existing shareholders and/or officers and directors other than (A) repayment of the $500,000 line of credit on the closing date, and (B) reimbursement for any expenses incident to finding a suitable business combination. In the event a business combination is consummated, all sums remaining in the trust account will be released to us and there will be no restriction on our use of such funds, which shall be available for working capital to pay officer and director salaries, make change of control payments, pay fees to affiliates or for any other corporate uses as we may determine. None of the warrants may be exercised until after the consummation of a business combination and, thus, after the proceeds of the trust account have been disbursed, the warrant exercise price will be paid directly to us. Amended and Restated Memorandum and Articles of Association: Our existing shareholders have voted by shareholder resolution, as permitted under the Companies Law (2007 Revision) of the Cayman Islands (the Companies Law ), to amend Section 169 of our amended and restated memorandum and articles of association to provide that certain provisions of our articles may not be amended prior to our consummation of a business combination without the prior consent of at least 95% of our outstanding ordinary shares, including our requirements (i) to seek shareholder approval of such a business combination (Section 170), (ii) to allow our shareholders to seek redemption of their shares if they do not approve of such a business combination (Section 171), (iii) that we will continue in existence only until eighteen months from the consummation of this offering or until twenty-four months if a letter of intent, an agreement in principle, or a definitive agreement to complete a business combination has been entered into (Section 172), (iv) to provide distributions from the trust account to investors in this offering only in the event of redemptions or our liquidation (Section 173), and (v) election, classification and removal of our directors (Section 174). Section 169 of our articles is permissible under the Companies Law. While these rights and protections have been established for the purchasers of units in this offering, it is nevertheless possible that the prohibition against amending or modifying these rights and protections at any time prior to the consummation of the business combination could be challenged as unenforceable under Cayman Islands law, although, pursuant to the underwriting agreement we are prohibited from amending or modifying these rights and protections at any time prior to the consummation of the business combination without the affirmative vote of at least 95% of our outstanding ordinary shares. We have not sought an unqualified opinion regarding the enforceability of the prohibition on amendment or modification of such provisions without the prior written consent of at least 95% of our outstanding ordinary shares because we view these provisions as fundamental and contractual terms of this offering. We believe these provisions to be obligations of our company to its shareholders and that investors will make an investment in our company relying, at least in part, on the enforceability of the rights and obligations set forth in these provisions including, without limitation, the prohibition on any amendment or modification of such provisions without the affirmative vote of at least 95% of our outstanding ordinary shares. Although Section 169 makes it difficult for us to amend such provisions in our amended and restated memorandum and articles of association, they are intended to protect our shareholders by requiring a supermajority of our shareholders to vote in favor of such a change in order for it to become effective. The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DECEMBER 17, 2007 $100,000,000 ASIA SPECIAL SITUATION ACQUISITION CORP. 10,000,000 units Asia Special Situation Acquisition Corp. is a newly organized Business Combination Company TM , or BCC TM , formed under the laws of the Cayman Islands. A BCC TM is a blank check company formed for the purpose of acquiring all or a majority interest in one or more unidentified operating businesses, through a capital stock exchange, asset acquisition, stock purchase, or other similar transaction, including obtaining a majority interest through contractual arrangements. We intend to identify prospective acquisitions that are either located in Asia, provide products or services to consumers located in Asia, or invest in Asia. Our efforts to identify a prospective target business will not be limited to a particular industry or area in Asia, although we initially intend to focus our efforts on acquiring an operating business in the leisure and hospitality or financial services industries, that either invests in, is located in or provides products or services to consumers located in China. We do not have any specific business combination under consideration and we have not (nor has anyone on our behalf) contacted any prospective target business or had any discussions, formal or otherwise, with respect to such a transaction. This is the initial public offering of our securities. We are selling 10,000,000 units. Each unit is being sold at a purchase price of $10.00 and consists of (i) one ordinary share; and (ii) one warrant, which entitles the holder to purchase one ordinary share at a price of $7.50. Each warrant will become exercisable on the later of our completion of a business combination or , 2008 [one year from the date of this prospectus], and will expire on , 2011 [four years from the date of this prospectus], or earlier upon redemption. There is presently no public market for our units, ordinary shares or warrants. We have applied to have the units listed on the American Stock Exchange under the symbol CIU.U on or promptly after the date of this prospectus. Each of the ordinary shares and warrants shall trade separately on the 10th business day following the earlier to occur of: (i) the expiration of the underwriters over-allotment option, or (ii) its exercise in full. Once the securities comprising the units begin separate trading, we expect that the ordinary shares and warrants will be listed on the American Stock Exchange under the symbols CIU and CIU.W , respectively. We cannot assure you, however that any such securities will continue to be listed on the American Stock Exchange. Investing in our securities involves a high degree of risk. See Risk Factors beginning on page 22 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Public offering price Underwriting discount and commissions(1)(2) Proceeds, before expenses, to us Per unit $ 10.00 $ 0.40 $ 9.60 Total $ 100,000,000 $ 4,000,000 $ 96,000,000 Shareholders must approve business combination: We will seek shareholder approval before we effect any business combination, even if the nature of the acquisition would not ordinarily require shareholder approval under applicable Cayman Islands law. In connection with the vote required for any business combination, all of our existing shareholders, including our Sponsor and all of our officers and directors, have agreed to vote the ordinary shares owned by them immediately before this offering in accordance with the majority of the ordinary shares voted by the public shareholders. Additionally, all of our existing shareholders have agreed to vote any ordinary shares that they acquire in connection with this offering or in the aftermarket in favor of any proposed business combination. We will proceed with a business combination only if: a majority of the ordinary shares voted by the public shareholders are voted in favor of the business combination, a majority of our outstanding ordinary shares are voted in favor of an amendment to our amended and restated memorandum and articles of association to permit our perpetual existence, and the number of shares owned by public shareholders who vote against the business combination and exercise their redemption rights as described below is less than 35% of the total number of shares sold in the offering. Accordingly, it is our understanding and intention in every case to structure and consummate a business combination in which public shareholders owning up to one share less than 35% of the total number of shares sold in this offering may exercise their redemption rights and the business combination will still go forward. This one share less than 35% of the publicly held shares redemption requirement which we have established is different from that of a traditional blank check offering which generally will proceed with an acquisition of a target business only if both shareholders owning a majority of the outstanding shares voting on a business combination vote in favor of the business combination and holders of no more than 20% of the publicly held shares exercise their redemption rights. We have increased the redemption percentage from 20% to one share less than 35% of the publicly held shares in order to reduce the likelihood that a small group of investors holding a block of our stock will be able to stop us from completing a business combination that may otherwise be approved by a large majority of our public shareholders. Accordingly, the one share less than 35% redemption requirement which we have established is a lower threshold and will make it easier for us to proceed with a proposed business combination than what is customary in a traditional blank check offering. Voting against the business combination alone will not result in redemption of a shareholder s shares. Such shareholder must also complete the procedure for exercising the redemption rights described below. (1) Does not include a corporate finance fee in the amount of 1% of the gross proceeds, or $.10 per unit, $1,000,000 ($1,150,000, if the over-allotment option is exercised in full), payable to Maxim Group LLC on the closing of the offering. (2) Does not include deferred underwriting compensation in the amount of 3% of the gross proceeds, or $0.30 per unit, or an aggregate of $3,000,000 ($3,450,000, if the over-allotment option is exercised in full), payable to the underwriters only upon consummation of a business combination and then only with respect to those units as to which the component shares have not been redeemed. Does not include the unit purchase options issuable to the underwriters. Of the proceeds we receive from this offering and the sale of the insider warrants to be made prior to the date of this prospectus by an affiliate of certain of our officers and directors, $100,000,000 ($10.00 per share) will be deposited into a trust account at J.P. Morgan Chase Bank N.A. maintained by Continental Stock Transfer & Trust Company acting as trustee. This amount includes up to $3,000,000 ($0.30 per unit), or $3,450,000 if the over-allotment is exercised in full, which will be paid to the underwriters if a business combination is consummated, but which will be forfeited by the underwriters if a business combination is not consummated. As a result, our public shareholders will receive, subject to any valid claims by our creditors which are not covered by amounts in the trust account or indemnities provided by our Sponsor, Noble Investment Fund Limited, and Allius Ltd., jointly and severally, $10.00 per share (plus a portion of the interest earned on the trust account, but net of (i) taxes payable on interest earned and (ii) up to $2,000,000, released to us to fund our working capital), in the event of our dissolution and liquidation if we fail to consummate a business combination. However, in the event the over-allotment is exercised in full, to the extent the funds held in trust are less than $10.00 per share, the first $750,000 in interest earned on the amount held in the trust account (net of taxes payable) will be used to cover such shortfall to bring the amount held in the trust account for the benefit of the public shareholders to an aggregate of $115,000,000 ($10.00 per share). Interest will be payable to public shareholders redeeming in connection with a business combination. We are offering the units for sale on a firm-commitment basis. Maxim Group LLC, acting as the representative of the underwriters, expects to deliver our securities to investors in the offering on or about [____], 2007. Maxim Group LLC CRT Capital Group LLC Sole Bookrunner The date of this prospectus is _______________, 2007 Redemption rights for shareholders voting to reject our initial business combination: Public shareholders voting against a business combination will have the right, under our amended and restated memorandum and articles of association, if we complete the transaction as our initial business combination, to redeem their ordinary shares in accordance with the instructions set forth in the proxy materials to be mailed to our shareholders (as further discussed under the heading Effecting a business combination - Redemption Rights ), for $10.00 per share payable out of the trust account, plus any interest earned on their portion of the trust account (including their allocable portion of interest earned on the deferred underwriting compensation but net of taxes payable), excluding trust account interest previously used to fund our working capital needs and expended up to a maximum of $2,000,000. However, the ability of public shareholders to receive $10.00 per share is subject to any valid claims by our creditors which are not covered by amounts held in the trust account or the indemnities provided by our Sponsor, Noble Investment Fund Limited, and Allius Ltd., jointly and severally. Public shareholders who redeem their ordinary shares for a share of the trust account will continue to have the right to exercise any warrants they may hold. Given the interest that our existing shareholders have in a business combination being consummated, it is possible that our existing shareholders will acquire securities from public shareholders (in the open market and/or in privately negotiated transactions) who have elected to redeem their ordinary shares in order to change their vote and insure that the business combination will be approved (which could result in a business combination being approved even if, after the announcement of the business combination, 35% or more of our public shareholders would have elected to exercise their redemption rights, or more than 50% of our public shareholders would have voted against the business combination, but for the purchases made by our existing shareholders). Any privately negotiated transaction with a shareholder would include a contractual acknowledgement that such shareholder, although still the record holder of our ordinary shares is no longer the beneficial owner thereof and therefore agrees to vote such ordinary shares as directed by our existing shareholder. In the event our existing shareholders purchase shares in privately negotiated transactions from public shareholders who have already cast votes against a proposed business acquisition and requested redemption of their shares, such selling shareholders would be required to revoke their prior votes against the proposed acquisition and to revoke their prior elections to redeem their shares and to cast new votes in favor of the proposed acquisition. The revocation of prior negative votes and substitution of votes in favor of the proposed acquisition would have the effect of reducing redemptions and increasing votes in favor of the proposed acquisition, thereby making it more likely that a proposed business combination would be approved. Automatic dissolution and liquidation if no business combination: Section 172 of our amended and restated memorandum and articles of association provides that we will continue in existence only until eighteen months from the consummation of this offering or until twenty-four months if a letter of intent, an agreement in principle, or a definitive agreement to complete a business combination has been entered into, except if holders of 95% or more of our outstanding ordinary shares approve an extension of such time period. If we have not completed a business combination by such date, our corporate existence will cease except for the purposes of winding up our affairs and liquidating. At that time, we will become subject to a voluntary liquidation procedure under the Companies Law. Our liquidator would give at least 21 days notice to creditors of his intention to make a distribution by notifying known creditors. Following such notice we anticipate the trust account would be liquidated shortly following expiration of the 21 day period. In any liquidation proceedings of the company under Cayman Islands' law, the funds held in our trust account may be included in our estate and subject to the claims of third parties with priority over the claims of our shareholders. To the extent any such claims deplete the trust account, we cannot assure you we will be able to return to our public shareholders the liquidation amounts payable to them. Furthermore, a liquidator of the company might seek to hold a shareholder liable to contribute to our estate to the extent of distributions received by them pursuant to the dissolution of the trust account beyond the date of dissolution of the trust account. If we are unable to consummate a transaction within the necessary time periods, our purpose and powers will be limited to winding up and ultimately dissolving. Upon notice from us, the trustee of the trust account will distribute the amount in our trust account to our public shareholders as part of automatic dissolution and liquidation. Concurrently, we propose that our liabilities and obligations will be paid from funds not held in trust, although we cannot assure you that there will be sufficient funds for such purpose. If there are insufficient funds held outside the trust account for such purpose, our Sponsor has agreed that it or its affiliates will be liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us. In order to protect the amounts held in the trust account, our Sponsor, Noble Investment Fund Limited and Allius Ltd. have agreed to indemnify us, jointly and severally, for claims of creditors that have not executed a valid and enforceable waiver of their right to seek payment of amounts due to them out of the trust account. We may elect to forego obtaining waivers only if we receive the approval of our Chief Executive Officer and the approving vote or written consent of at least a majority of our board of directors, including all of our independent directors. Although each of Angela Ho and Noble Investment Fund Limited, the members of Ho Capital Management LLC (our Sponsor), and Dr. Gary T. Hirst and Noble Investment Fund Limited (the members of Allius Ltd.), have agreed that, prior to the consummation of a business combination, they will not withdraw as members of Ho Capital Management LLC or Allius Ltd., as applicable, a withdrawal by any member of our Sponsor, Allius Ltd. or Noble Investment Fund Limited will not affect the indemnification obligations of our Sponsor, Allius Ltd., or Noble Investment Fund Limited to our company. We have not independently verified whether our Sponsor, Noble Investment Fund Limited, or Allius Ltd. have sufficient funds to satisfy their respective indemnity obligations and, therefore, we cannot assure you that they would be able to satisfy these obligations. Escrow of existing shareholders' shares: On the date of this prospectus, all of our existing shareholders, including all of our officers and directors, will place the shares they owned before this offering into an escrow account maintained by Continental Stock Transfer & Trust Company, acting as escrow agent. These shares will not be transferable during the escrow period and will not be released from escrow until _______________, 2010 [three years after the date of this prospectus], except that, following a business combination, such initial shares may be transferred to family members and trusts of permitted assignees for estate planning purposes, or upon the death of any such person, to an estate or beneficiaries of permitted assignees; in each case, such transferee will be subject to the same transfer restrictions as our existing shareholders until after the shares are released from escrow. Any shares held by these transferees would remain subject to the escrow agreement. Lockup of insider warrants and members interests of certain affiliates: The 5,725,000 insider warrants to be sold to our Sponsor immediately prior to the date of this prospectus, may not be sold, assigned or transferred until we consummate a business combination. Until such time, these warrants will be held in an account established by our Sponsor, its affiliates or their permitted assignees with Maxim Group LLC. If we are forced to dissolve and liquidate, these insider warrants will be cancelled. Our Sponsor, Ho Capital Management LLC, and Allius Ltd. are entities formed for the specific purpose of acquiring shares in our company. Each of Angela Ho and Noble Investment Fund Limited, the members of Ho Capital Management LLC and Dr. Gary T. Hirst and Noble Investment Fund Limited (the members of Allius Ltd.), have agreed that (i) prior to the consummation of a business combination, they will not withdraw as members of Ho Capital Management LLC or Allius Ltd., and (ii) they will not sell, assign or transfer their members interest in such entities to any third party until _______________ , 2010 [three years after the date of this prospectus], except that, following a business combination, such members interests may be transferred to family members and trusts of permitted assignees for estate planning purposes, or upon the death of any such person, to an estate or beneficiaries of permitted assignees; in each case, such transferee will be subject to the same transfer restrictions as our Sponsor and Allius Ltd. until three years after the date of this prospectus. Determination of offering amount: We based the size of this offering on our belief as to the capital required to facilitate our combination with one or more viable target businesses with sufficient scale to operate as a stand-alone public entity. We also considered the financial resources of competitors, including other BCC s with no limitation on the industries in which they may acquire businesses and the amounts such BCC s were seeking to raise or had raised in recent public offerings. We believe raising the amount described in this offering will offer us a broad range of potential target businesses possessing the scale of operations and developed infrastructure that will allow us to execute a business plan which will leverage our skills and resources. In addition, we also considered the past experiences of our officers and directors in operating businesses, and the size of those businesses, in the leisure, hospitality and other industries. We believe possessing an equity base equivalent to the net proceeds of this offering and the sale of the insider warrants will allow us to reduce the number of potential competitors for combination transactions while providing us the capital to combine with viable target businesses with established platforms and demonstrated business plans. The determination of the offering price of our units and the valuation accorded to our company is more arbitrary than the pricing of securities for, or valuation of, operating companies in general. Conflicts of Interest: Investors should be aware of the following potential conflicts of interest: None of our officers or directors is required to commit their full time to our affairs and, accordingly, they may have conflicts of interest in allocating management time among various business activities; None of our officers, directors or existing shareholders are currently affiliated with any entity whose primary business focus includes acquisitions in Asia. Each of our officers, directors and existing shareholders have agreed that, until we consummate a business combination or liquidate our trust account, they will not become associated or affiliated with any such competing entity. In addition, such persons have agreed that they will present to our board of directors any acquisition opportunity in Asia they obtain access to and which could reasonably be expected to be valued at 80% or more of the total amount placed in our trust account upon completion of this offering (excluding deferred underwriting fees), and provide us a right of first refusal to consummate such an acquisition. Each member of our management and board of directors has confirmed to us that they do not, and will not, have any pre-existing relationships or contractual obligations which would have priority over us with respect to the presentation of a business opportunity that meets our investment criteria of a fair market value of 80% or more of the total amount placed in our trust account upon completion of this offering (excluding deferred underwriting fees) and which is located in or primarily doing business in or investing in Asia. For a complete description of our management s other affiliations, see the section entitled Directors and Executive Officers; and our board of directors may have a conflict of interest in determining whether a particular target business is appropriate to effect a business combination. Their personal and financial interests may influence their motivation in identifying and selecting a target business and completing a business combination for the following reasons: our Sponsor and all of our officers and directors or their affiliates own ordinary shares which will be released from escrow after three years from the date of this prospectus only if we consummate a business combination and with respect to which they are waiving their redemption and liquidation distribution rights if we liquidate; and our Sponsor, which is co-managed and jointly owned by Angela Ho, our chief executive officer and chairman of our board of directors, and Noble Investment Fund Limited will purchase 5,725,000 insider warrants at a purchase price of $1.00 per warrant immediately prior to the date of this prospectus, and such insider warrants will expire worthless if we do not complete our initial business combination and we dissolve and liquidate. We have attempted to minimize potential conflicts of interest by establishing policies whereby: our company will not acquire or effect a business combination with any entity in which any of our officers, directors or shareholders are officers, directors, employees, or owners of more than 5% of the equity of such entity, or otherwise directly or indirectly an affiliate of such entity; none of our officers, directors or any of their affiliates will receive any finders fees or other compensation, either from us or from a prospective target company, in connection with any business combination; we are requiring each of our officers and directors to provide us with a right of first refusal to acquire any corporate or business opportunities that are located in or primarily doing business in or investing in Asia that they have access to, whether individually or through a company they are or may become affiliated with, and which could reasonably be valued at 80% or more of the total amount placed in our trust account upon completion of this offering (excluding deferred underwriting fees). In addition, each of the entities currently affiliated with our officers and directors has confirmed to us that such agreement will not violate any prior fiduciary duty or agreement with such entity. Such entities will execute a written confirmation to be delivered to us in which they acknowledge that they have received a copy of, and have reviewed, the applicable right of first refusal agreement and that compliance with such agreement by the applicable officer, director or existing shareholder will not violate any prior fiduciary duty or agreement with such entity; and prior to the consummation of a business combination, the liquidation of our company, or their ceasing to be a shareholder, officer or director of our company, none of our officers, directors or existing shareholders may become affiliated with any entity, including other blank check companies, with a primary focus on completing an acquisition in Asia. However, despite these policies and agreements, we cannot assure you that conflicts of interest will not exist or that these conflicts will be resolved in our favor. For a more complete discussion of our management's affiliations and the potential conflicts of interest that you should be aware of, see the sections below entitled Management Directors and Executive Officers and Management Conflicts of Interest. Risks In making your decision on whether to invest in our securities, you should take into account not only the backgrounds of our management team and the targeted leisure, hospitality and financial industries, but also the special risks we face as a blank check company, as well as the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, and, therefore, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. You should carefully consider these and the other risks set forth in the section entitled "Risk Factors" beginning on page 22 of this prospectus. (1) The as adjusted information gives effect to the sale of the units in this offering and the insider warrants, including the application of the related gross proceeds and the payment of the estimated remaining costs from such transactions. Does not give effect to the sale of the units which may be issued on exercise of a 45-day option granted to the underwriter to cover over-allotments, if any, or the units which may be issued on exercise of the underwriter s unit purchase option. (2) If the business combination is approved and completed, public shareholders who voted against the business combination will be entitled to redeem their ordinary shares for $10.00 per share, which includes $0.30 per share of which will be funded through a portion of the deferred underwriting discount, which the underwriters have agreed to forfeit in order to pay the redeeming shareholders, plus their respective pro rata portion of the interest earned on the trust account (net of taxes payable and interest released to us). However, the ability of shareholders to receive $10.00 per share is subject to any valid claims by our creditors which are not covered by amounts held in the trust account or the indemnities provided by our Sponsor, Noble Investment Fund Limited and Allius Ltd., jointly and severally. (3) Includes up to one share less than 35% of the total shares sold in this offering after giving effect to shareholder redemptions at $10.00 per share. At the time we seek shareholder approval of any business combination, we will offer each public shareholder (other than existing shareholders prior to this offering) the right to have such shareholder s ordinary shares redeemed for cash if the shareholder votes against the business combination and the business combination is approved and completed, each in accordance with the instructions set forth in the proxy materials to be mailed to our shareholders. However, we will not consummate a business combination if public shareholders owning 35% or more of the publicly owned shares vote against such business combination and exercise their redemption rights. The working capital and total assets amounts include the $100,000,000 ($10.00 per unit) to be held in the trust account, $97,000,000 of which will be available to us to consummate a business combination within the time period described in this prospectus, with the balance of $3,000,000 to be used to pay deferred compensation payable to the underwriters, upon consummation of a business combination. If a business combination is not so consummated, we will be dissolved and the proceeds held in the trust account (including $3,000,000 of deferred compensation to be held for the benefit of the underwriters) will be distributed solely to our public shareholders. RISK FACTORS An investment in our securities involves a high degree of risk. You should consider carefully all of the material risks described below, together with the other information contained in this prospectus before making a decision to invest in our units. Risks Associated With Our Business We are a newly formed company with no operating history and, accordingly, you will not have any basis on which to evaluate our ability to achieve our business objective. We are a newly formed company with no operating results to date. Therefore, our ability to begin operations is dependent upon obtaining financing through the public offering of our securities. Since we do not have any operations or an operating history, you will have no basis upon which to evaluate our ability to achieve our business objective, which is to complete a business combination with one or more unidentified operating businesses, through a capital stock exchange, asset acquisition, stock purchase, or other similar transaction, including obtaining a majority interest through contractual arrangements, that is either located in, selling its products or services in, or otherwise investing in Asia, with a specific focus on China. We will only acquire a business or businesses that, upon completion of our initial business combination, will be our majority-owned subsidiaries and will be neither investment companies nor companies excluded from the definition of investment company by Sections 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940. We do not have any specific business combination under consideration or contemplation and we have not, nor has anyone on our behalf, contacted any potential target business or had any discussions, formal or otherwise, with respect to such a transaction. Moreover, we have not engaged or retained any agent or other representative to identify or locate any suitable acquisition candidate for us. We will not generate any revenues or income (other than interest income, net of taxes, if any, on the proceeds of this offering) until, at the earliest, after the consummation of a business combination. We cannot assure you as to when or if a business combination will occur, or that even if we are successful in consummating a business combination, that our company will operate profitably in the future. If we are forced to dissolve and liquidate before a business combination our warrants will expire worthless. If we are unable to complete a business combination and are forced to dissolve, liquidate and wind up, there will be no amount payable upon such liquidation with respect to our outstanding warrants and, accordingly, the warrants will expire worthless. For a more complete discussion of the effects on our shareholders if we are unable to complete a business combination, see the section below entitled Effecting a business combination Dissolution and liquidation if no business combination. You will not be entitled to protections normally afforded to investors of blank check companies including the ability to receive all interest earned on the amount held in trust. Since the net proceeds of this offering are intended to be used to complete a business combination with a target business that has not been identified, we may be deemed to be a blank check company under the United States securities laws. However, since we will have net tangible assets in excess of $5,000,000 upon the consummation of this offering and will file a Current Report on Form 8-K with the SEC upon consummation of this offering, including an audited balance sheet demonstrating this fact, we are exempt from rules promulgated by the SEC to protect investors of blank check companies such as Rule 419. Accordingly, investors will not be afforded the benefits or protections of those rules, such as entitlement to all the interest earned on the funds deposited into the trust account. Because we are not subject to Rule 419, a significant amount of the interest earned on the funds deposited in the trust account will be released to us to fund our working capital and will not be available at all to those public shareholders redeeming in connection with a business combination and our units will be immediately tradable. For a more detailed comparison of our offering to offerings under Rule 419, see the section entitled Comparison to offerings of blank check companies below. Because there are numerous companies with a business plan similar to ours seeking to effectuate a business combination, including companies seeking to consummate a business combination with companies in China, it may be more difficult for us to do so. Since August 2003, based upon publicly available information, approximately 133 similarly structured blank check companies have completed initial public offerings in the United States. Of these companies, only 39 companies have consummated a business combination, while 26 other companies have announced they have entered into a definitive agreement for a business combination, but have not consummated such business combination, and 7 companies have failed to complete business combinations and have either dissolved or announced their intention to dissolve and return trust proceeds to their stockholders. Accordingly, there are approximately 61 blank check companies with more than $8.7 billion in trust that are seeking to carry out a business plan similar to our business plan. Of these companies, 9 with approximately $558.4 million in trust are seeking to consummate a business combination with a company in China. Furthermore, there are a number of additional offerings for blank check companies that are still in the registration process but have not completed initial public offerings and there are likely to be more blank check companies filing registration statements for initial public offerings after the date of this prospectus and prior to our completion of a business combination. While some of those companies must complete a business combination in specific industries, a number of them may consummate a business combination in any industry they choose. Therefore, we may be subject to competition from these and other companies seeking to consummate a business plan similar to ours. Because of this competition, we cannot assure you that we will be able to effectuate a business combination within the required time periods. If we are unable to consummate a business combination within the prescribed time period, we will be forced to liquidate. We will proceed with a business combination only if public shareholders owning one share less than 35% of the shares sold in this offering exercise their redemption rights, which is a lower threshold than that of a traditional blank check company and will make it easier for us to proceed with a proposed acquisition. We will proceed with a business combination only if: (i) a majority of the ordinary shares cast at the meeting are voted in favor of the business combination, (ii) if public shareholders owning less than 35% of the total number of shares sold in this offering exercise their redemption rights in accordance with the instructions set forth in the proxy materials to be mailed to our shareholders, and (iii) a majority of our outstanding ordinary shares are voted in favor of an amendment to our amended and restated memorandum and articles of association to permit our perpetual existence (as further discussed under the heading Effecting a business combination - Redemption Rights ). Accordingly, public shareholders owning up to one share less than 35% of the total number of shares sold in this offering may exercise their redemption rights and we could still consummate a proposed business combination. As a result, this may have the effect of making it more likely that we could consummate a proposed business combination even when a significant number of public shareholders have voted against such transaction. We have increased the redemption percentage from 20% to one share less than 35% of the total number of shares sold in this offering in order to reduce the likelihood that a small group of investors holding a block of our stock will be able to stop us from completing a business combination that may otherwise be approved by a large majority of our public shareholders. While there are a few other business combination companies similar to ours which contain redemption provisions greater than 20%, the 20% threshold is customary and standard for offerings similar to ours. Exercise of redemption rights must be effected pursuant to a specific process which may take time to complete and may result in the expenditure of funds by shareholders seeking redemption. A shareholder requesting redemption of his, her or its ordinary shares for cash may do so at any time after the mailing to our shareholders of the proxy statement and prior to the vote taken with respect to a proposed business combination. A shareholder would have from the time we send out our proxy statement through the vote on the business combination to tender (either electronically or through the delivery of physical stock certificates) such shareholder s ordinary shares if he, she or it wishes to seek to exercise his, her or its redemption rights. There is a nominal cost associated with the above-referenced tendering process and the act of certificating the shares or delivering them through the DWAC system. The transfer agent will typically charge the tendering broker $35 and it would be up to the broker whether or not to pass this cost on to the redeeming shareholder. There may be additional mailing and other nominal charges depending on the particular process used to tender the ordinary shares. Although we believe the time period, costs and other potential burdens associated with the tendering process are not onerous for an average investor, this process may result in additional burdens for shareholders, including mis-delivery or any other defect in the tendering process. Additionally, if a vote on our initial business combination is held and the business combination is not approved, we may continue to try to consummate a business combination with a different target until twenty four months from the date of this prospectus. If the initial business combination is not approved or completed for any reason, public shareholders voting against our initial business combination who exercised their redemption rights would not be entitled to redeem their ordinary shares into a pro rata share of the aggregate amount then on deposit in the trust account. In such case, if we have required public shareholders to tender their certificates prior to the meeting, we will promptly return such certificates to the tendering public shareholder. In such case, they would then have to comply with the tendering process again for any vote against a subsequent business combination. The terms on which we may effect a business combination can be expected to become less favorable as we approach our 18 and 24 month deadlines. Pursuant to our amended and restated memorandum and articles of association, we must effect and initiate procedures for our dissolution and liquidation and the distribution of our assets, including the funds held in the trust account, if we do not effect a business combination within 18 months after completion of this offering (or within 24 months after the completion of this offering if a letter of intent, agreement in principle or definitive agreement has been executed within 18 months after completion of this offering and the business combination related thereto has not been completed within such 18-month period). We have agreed with the trustee to promptly adopt a plan for the liquidation and distribution of our assets, including the funds held in the trust account, upon expiration of the time periods set forth above. Any entity with which we negotiate, or attempt to negotiate, a business combination, will, in all likelihood, be aware of these time limitations and can be expected to negotiate accordingly. In such event, we may not be able to reach an agreement with any proposed target prior to such period and any agreement that is reached may be on terms less favorable to us than if we did not have the time period restrictions set forth above. Additionally, as the 18 or 24 month time periods draw closer, we may not have the desired amount of leverage in the event any new information comes to light after entering into definitive agreements with any proposed target but prior to consummation of a business transaction. If third parties bring claims against us, the proceeds held in trust could be reduced and the per-share liquidation price received by shareholders from the trust account as part of our dissolution and liquidation may be less than $10.00 per share. Our placing of funds in trust may not protect those funds from third party claims against us. Although we will seek to have all vendors, prospective target businesses or other entities with which we execute agreements waive any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our public shareholders, there is no guarantee that they will execute such agreements, or even if they execute such agreements that they would be prevented from bringing claims against the trust account, including, but not limited to, fraudulent inducement, breach of fiduciary responsibility and other similar claims, as well as claims challenging the enforceability of the waiver, in each case in order to gain an advantage with a claim against our assets, including the funds held in the trust account. If any third party refused to execute an agreement waiving such claims to the monies held in the trust account, we would perform an analysis of the alternatives available to us if we chose not to engage such third party and evaluate if such engagement would be in the best interest of our shareholders if such third party refused to waive such claims. Examples of possible instances where we may engage a third party that refused to execute a waiver include the engagement of a third party consultant whose particular expertise or skills are believed by management to be significantly superior to those of other consultants that would agree to execute a waiver or in cases where management is unable to find a provider of required services willing to provide the waiver. In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with us and not seek recourse against the trust account for any reason. Accordingly, the proceeds held in trust could be subject to claims that could take priority over the claims of our public shareholders and the per-share liquidation price could be less than the $10.00 per share held in the trust account, plus interest (net of any taxes due on such interest, which taxes, if any, shall be paid from the trust account and net of any amounts released to us as working capital, or to fund costs associated with our automatic dissolution and liquidation if we do not consummate a business combination), due to claims of such creditors. Additionally, in the event we do not have sufficient funds available to us to consummate and complete our dissolution and liquidation, our Sponsor has agreed that either it or its affiliates will fund all costs associated with our dissolution and liquidation. Based on information we have obtained from such entities and individuals, we currently believe that such entities and individuals are capable of funding both a shortfall in our trust account and the costs associated with our dissolution and liquidation, even though we have not asked them to reserve for such an eventuality. However, we cannot assure you that our Sponsor or its affiliates will be able to satisfy those obligations. We believe the likelihood of our Sponsor, Noble Investment Fund Limited and Allius Ltd. having to indemnify the trust account is minimal because we will endeavor to have all vendors and prospective target businesses, as well as other entities, execute agreements with us waiving all right, title, interest or claim of any kind in or to monies held in the trust account. Additionally, if we are forced to declare insolvency or a case for involuntary liquidation is filed against us which is not dismissed, the funds held in our trust account will be subject to applicable Cayman Islands insolvency law, and may be included in our estate and subject to the claims of third parties with priority over claims of our public shareholders. To the extent any such claims deplete the trust account we cannot assure you we will be able to return to public shareholders the amounts payable to them upon a liquidation of the trust account. Although our disinterested directors will bring claims on our behalf to enforce the joint and several indemnification obligations of our Sponsor, Noble Investment Fund Limited and Allius Ltd., there is no assurance that such claims would be successful, resulting in a reduction in the amount of funds in the trust account available for distribution to our public shareholders. Our Sponsor, Noble Investment Fund Limited and Allius Ltd. have agreed that they will be jointly and severally liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us, but only to the extent we have not obtained a valid and enforceable waiver from such parties. In the event that the proceeds in the trust account are reduced and our Sponsor, Noble and Allius assert that they are unable to satisfy their obligations or that they have no indemnification obligations related to a particular claim, our disinterested directors will cause us to take legal action against them for specific performance to enforce their indemnification obligations. Our disinterested directors will cause us to take action against our Sponsor, Noble and Allius because our board of directors has a fiduciary obligation to bring such claims and our amended and restated memorandum and articles of association require our disinterested directors to bring such claims, if required. However, we can provide no assurance that such claims would be successful. If such claims are not successful, the amount of funds in the trust account available for distribution to our public shareholders may be reduced and the per share liquidation distribution could be less than the initial $10.00 per share held in the trust account. We will have only limited ability to evaluate the management of the target business. It is anticipated that, upon consummation of a business combination, all of our officers and directors will resign as officers and directors of the combined company, and that the executive officers and directors of the target company will become the executive officers and directors of our company after the business combination. Accordingly, the future success or failure of our company will depend largely upon the efforts of the senior management and board of directors of an, as yet, unidentified company. Although we intend to closely scrutinize the management of a prospective target business in connection with evaluating the desirability of effecting a business combination, we cannot assure you that our assessment of such management will prove to be correct. Although our current officers and directors intend to resign upon consummation of a business combination, under certain circumstances they may receive ongoing compensation following such business combination. Our board of directors and officers will not receive either from our company or the target company any finder s fee or related payment in connection with a business combination, or condition such business combination upon any or all of them receiving or retaining any position or obtaining any ongoing compensation following the business combination through any employment or consulting agreement or similar arrangement. However, if requested by the shareholders or directors of a prospective target company, one or more members of our board of directors may remain as a director of or consultant to our company and its subsidiaries following the business combination, and in connection therewith, will receive compensation to be negotiated with the board of directors or shareholders of the target company. If we acquire control of a target business in an all-cash transaction, it is more likely that one or more current members of management would remain with us as a director, or in senior management or advisory positions. If a business combination is structured as a merger or exchange of shares whereby the shareholders of the target company were to receive significant ordinary shares in our company in connection with such business combination, it would be less likely that any of our officers or directors will remain with the combined company. If any of our management or board members are retained post-business combination in any directorship or other consulting capacity, it may result in a conflict of interest. In addition, the financial interest of our officers and directors, including any compensation arrangements, could influence their motivation in selecting, negotiating and structuring a transaction with a target business, and thus, there may be a conflict of interest when determining whether a particular business combination is in the stockholders best interest. Our officers and directors are or may in the future become affiliated with entities engaged in business activities similar to those intended to be conducted by us and accordingly, may have conflicts of interest in determining which entity a particular business opportunity should be presented to. None of our officers, directors or existing shareholders are currently affiliated with any entity whose primary business focus includes acquisitions in Asia. Each of our officers, directors and existing shareholders have agreed that, until we consummate a business combination or liquidate our trust account, they will not become associated or affiliated with any such competing entity. In addition, such persons have agreed that they will present to our board of directors any acquisition opportunity in Asia they obtain access to and which could reasonably be expected to be valued at 80% or more of the total amount placed in our trust account upon completion of this offering (excluding deferred underwriting fees), and provide us a right of first refusal to consummate such an acquisition. However, there can be no assurance that these agreements will be fully complied with in all instances. One or more of our officers, directors or existing shareholders could breach these agreements by failing to present to our board of directors one or more acquisition opportunities in Asia they obtain access to and which meets the 80% threshold. If we become aware of any such breach, our disinterested directors will cause us to bring a claim against such officer, director or existing shareholder for specific performance or damages incurred by us in connection with any such breach. However, no assurance can be given that we would be successful with respect to any such claims. For a more complete discussion of our management's affiliations and the potential conflicts of interest that you should be aware of, see the sections below entitled Management Directors and Executive Officers and Management Conflicts of Interest. We cannot assure you that these conflicts will be resolved in our favor. Our officers and directors may have other conflicts of interest. The personal and financial interests of our directors and officers may influence their motivation in identifying and selecting a target business and completing a business combination. All of our executive officers and directors own ordinary shares which will be released from escrow only if we consummate a business combination and with respect to which they are waiving their redemption and liquidation distribution rights if we liquidate. In addition, immediately prior to the date of this prospectus, our Sponsor, which is co-managed and jointly owned by Angela Ho, our chief executive officer and chairman of our board of directors, and Noble Investment Fund Limited, will purchase for $1.00 each, warrants to purchase an aggregate of 5,725,000 of our ordinary shares, which insider warrants will be identical to the warrants in the units being offered by this prospectus, except that (i) subject to limited exception, none of the insider warrants will be transferable or salable until after we complete a business combination; (ii) the warrants are not subject to redemption if held by the initial holders and their permitted assigns; and (iii) the warrants are exercisable on a cashless basis if held by the initial holder or its permitted assigns. Our Sponsor and Noble Investment Fund Limited will each have a 50% beneficial ownership interest in the insider warrants. Although none of the insider warrants may be sold, assigned or transferred until we complete a business combination, permitted assigns include (i) the required transfer of 50% of the insider warrants to Noble Investment Fund Limited once we complete a business combination, as partial consideration for, and in reduction of, a $5,725,000 loan to be provided by Noble to enable Ho Capital Management LLC to purchase the insider warrants, or (ii) Angela Ho, a co-manager of Ho Capital Management LLC. If we are forced to liquidate, the insider warrants will become worthless. Accordingly, the financial motivation of our Sponsor and our officers and directors to consummate a business combination may affect their judgment in evaluating the merits of one or more prospective targets or result in our overpaying for a specific acquisition candidate. Although we initially intend to focus our efforts on acquiring an operating business in the leisure and hospitality or financial services industries that is located in, invests in, or provides products or services to consumers located in China, we will not be limited to a particular industry or area in Asia and may acquire control of a business operating in a particular industry and in a country in Asia that is beyond the expertise of our management. There is no specific timeframe or monetary amount established by management which will cause us to abandon our initial focus of acquiring an operating business in the leisure and hospitality or financial services industries that invests in, is located in, or provides products or services to consumers located in China, in favor of other industries or other specified countries in Asia. Early in the process of searching for a suitable target business, management intends to concentrate its focus on acquiring an operating business in the leisure and hospitality or financial services industries that invest in, is located in, or provides products or services to consumers located in China. However, we will not rule out exploring a favorable business opportunity in a different industry sector or area early during such process if an opportunity arises which management determines is in the best interests of our company and shareholders. Absent uncovering such opportunity, we intend to concentrate on our primary business and geographic focus during the first year of our business search, and only expand the scope of our search if we have been unable during such year to locate an attractive business combination in the leisure and hospitality or financial services industries that invests in, is located in, or provides products or services to consumers located in China. If a favorable business opportunity presents itself to management in an industry, other than the leisure and hospitality or financial services industries, or in any one or more of the designated countries in Asia, other than China, such industry or area may be outside of management s expertise. As a result, our ability to assess the growth potential, financial condition, experience and skill of incumbent management, competitive position, regulatory environment and other criteria in evaluating a business opportunity outside our primary business focus or outside of China may be adversely affected by virtue of our limited expertise. For a more detailed discussion of management s process for searching for and selecting a target business, see Effecting a business combination Selection of a target business and structuring of a business combination at page 77 of this prospectus. If we determine to seek to acquire control of a target business which is not operating in the leisure and hospitality or financial services industries that is located in, invests in, or provides products or services to consumers located in China and outside of the expertise of our management, no assurance can be given that we will be able to successfully complete such an acquisition and could result in the liquidation of the trust account and dissolution of our company. Our shareholders may be held liable for claims by third parties against us to the extent of distributions received by them. Section 172 of our amended and restated memorandum and articles of association provides that we will continue in existence only until eighteen months from the consummation of this offering or until twenty-four months if a letter of intent, an agreement in principle, or a definitive agreement to complete a business combination has been entered into, except if holders of 95% or more of our outstanding ordinary shares approve an extension of such time period. If we have not completed a business combination by such date, our corporate existence will cease except for the purposes of winding up our affairs and liquidating. At this time, we will become subject to a voluntary liquidation procedure under the Companies Law (2007 Revision) of the Cayman Islands (the Companies Law ). The company s liquidator would give at least 21 days notice to creditors of his intention to make a distribution by notifying known creditors (if any) who have not submitted claims and by placing a public advertisement in the Cayman Islands Official Gazette, although in practice this notice requirement need not necessarily delay the distribution of assets if the liquidator is satisfied that no creditors would be adversely affected as a consequence of a distribution before this time period has expired. We anticipate that the trust account should be liquidated shortly following expiration of the 21-day period. As soon as the affairs of our company are fully wound-up, the liquidator must lay his final report and accounts before a final general meeting which must be called by a public notice at least one month before it takes place. After the final meeting, the liquidator must make a return to the registrar confirming the date on which the meeting was held and three months after the date of such filing the company is dissolved. Additionally, in any liquidation proceedings of our company under Cayman Islands' law, the funds held in our trust account may be included in our estate and subject to the claims of third parties with priority over the claims of our shareholders. To the extent any such claims deplete the trust account we cannot assure you we will be able to return to our public shareholders the liquidation amounts payable to them. Furthermore, a liquidator of our company might seek to hold a shareholder liable to contribute to our estate to the extent of distributions received by them pursuant to the dissolution of the trust account beyond the date of dissolution of the trust account. Cayman Islands law does not limit the amount of time available to a liquidator to recover funds for the estate from shareholders that received distributions. Additionally, we cannot assure you that third parties will not seek to recover from our shareholders amounts owed to them by us. Furthermore, our board may be viewed as having breached their fiduciary duties to our creditors and/or may have acted in bad faith, and thereby exposing itself and our company to claims for having paid public shareholders from the trust account prior to addressing the claims of creditors. We cannot assure you that claims will not be brought against us for these reasons. If we are unable to consummate a transaction within the necessary time periods, our purpose and powers will be limited to winding up and ultimately dissolving. Upon notice from us, the trustee of the trust account will distribute the amount in our trust account to our public shareholders as part of our automatic dissolution and liquidation. Concurrently, we propose that our liabilities and obligations will be paid from funds not held in trust, although we cannot assure you that there will be sufficient funds for such purpose. If there are insufficient funds held outside the trust account for such purpose, our Sponsor, Noble Investment Fund Limited and Allius Ltd. have agreed that they will be jointly and severally liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us. We have not independently verified whether our Sponsor, Noble Investment Fund Limited or Allius Ltd. have sufficient funds to satisfy their respective indemnity obligations and, therefore, we cannot assure you that they would be able to satisfy these obligations. We will dissolve and liquidate if we do not consummate a business combination. Pursuant to, among other documents, our amended and restated memorandum and articles of association, if we do not either complete a business combination, enter into a letter of intent, agreement in principle or a definitive agreement to acquire a target company within 18 months after the consummation of this offering, or within 24 months after the consummation of this offering if the extension criteria described above have been satisfied, our corporate existence will cease except for the purposes of winding up our affairs and liquidating. Upon dissolution, we will distribute to all of our public shareholders, in proportion to their respective equity interest, an aggregate sum equal to the amount in the trust account (net of taxes payable and that portion of the interest earned previously released to us). Our initial shareholders, as well as our Sponsor who will purchase insider warrants immediately prior to the date of this prospectus, have waived their rights to participate in any liquidation distribution with respect to their initial shares and the insider warrants will expire worthless upon our liquidation and dissolution. There will be no distribution from the trust account with respect to our warrants which will expire worthless. We will pay the costs of our dissolution and liquidation. Our Sponsor, Noble Investment Fund Limited and Allius Ltd. have agreed to indemnify us, jointly and severally, for these expenses to the extent there are insufficient funds available from the proceeds not held in the trust account and interest released to us. Upon notice from us, the trustee of the trust account will liquidate the investments constituting the trust account and will turn over the proceeds to our transfer agent for distribution to our public shareholders as part of our dissolution and liquidation. Concurrently, we shall pay, or reserve for payment, from interest released to us from the trust account if available, our liabilities and obligations, although we cannot give you assurances that there will be sufficient funds for such purpose. The amounts held in the trust account may be subject to claims by third parties, such as vendors, prospective target business or other entities, if we do not obtain waivers in advance from such third parties prior to such parties providing us with services or entering into arrangements with them. These procedures may result in substantial delays in the liquidation of our trust account to our public shareholders as part of our automatic dissolution and liquidation. We may choose to redeem our outstanding warrants at a time that is disadvantageous to our warrant holders. Subject to there being a current prospectus under the Securities Act of 1933 with respect to the ordinary shares issuable upon exercise of the warrants, we may elect to redeem the warrants issued as a part of our units , without the prior consent of any third party, at any time after the warrants become exercisable in whole and not in part, at a price of $.01 per warrant, upon a minimum of 30 days prior written notice of redemption, if and only if, the last sales price of our ordinary shares equals or exceeds $14.25 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. Redemption of the warrants could force the warrant holders (i) to exercise the warrants and pay the exercise price thereafter at a time when it may be disadvantageous for the holders to do so, (ii) to sell the warrants at the then current market price when they might otherwise wish to hold the warrants, or (iii) to accept the nominal redemption price which, at the time the warrants are called for redemption, is likely to be substantially less than the market value of the warrants. The foregoing does not apply to the warrants included as part of the 5,725,000 insider warrants to be purchased immediately prior to the date of this prospectus, as such warrants are not subject to redemption while held by the initial holder or any permitted transferee of such initial holder. Although we are required to use our best efforts to have an effective registration statement covering the issuance of the shares underlying the warrants at the time that our warrant holders exercise their warrants, we cannot guarantee that a registration statement will be effective, in which case our warrant holders may not be able to exercise our warrants and sell the underlying shares. Holders of our warrants will be able to exercise the warrant only if (i) a current registration statement under the Securities Act of 1933 relating to our ordinary shares underlying the warrants is then effective and (ii) such shares are qualified for sale or exempt from qualification under the applicable securities law of the states in which the various holders of warrants reside. Although we have undertaken in the warrant agreement, and therefore have a contractual obligation, to use our best efforts to maintain a current registration statement covering the shares underlying the warrants following completion of this offering to the extent required by federal securities law, and we intend to comply with such undertaking, we cannot assure you that we will be able to do so. The warrants, including the warrants included in the representative s unit purchase option, may expire unexercised or unredeemed if there is no effective registration statement (as required by federal securities laws). In addition, there are no circumstances under which we will be required to net-cash settle the warrants, including the warrants included in the representative s unit purchase option, and a purchaser, including the representative upon exercise of the unit purchase option, may pay the full unit purchase price solely for the shares included in the units. Moreover, we have agreed to use our reasonable efforts to register the shares underlying the warrants under the blue sky laws of the states of residence of the exercising warrant holders, to the extent an exemption is not available. The value of the warrants may be greatly reduced if a registration statement covering the shares issuable upon the exercise of the warrants is not kept current or if the securities are not qualified, or exempt from qualification, in the states in which the holders of warrants reside. Holders of warrants who reside in jurisdictions in which the shares underlying the warrants are not qualified and in which there is no exemption will be unable to exercise their warrants and would either have to sell their warrants in the open market or allow them to expire unexercised. We may issue shares of our capital stock or debt securities to complete a business combination, which would reduce the equity interest of our shareholders and likely cause a change in control of our ownership. Our amended and restated memorandum and articles of association authorizes the issuance of up to 50,000,000 ordinary shares, par value $.0001 per share, and 1,000,000 shares of preferred stock, par value $.0001 per share. Immediately after this offering and the sale of the insider warrants (assuming no exercise of the underwriters over-allotment option), there will be 20,375,000 authorized but unissued ordinary shares available for issuance (after appropriate reservation for the issuance of shares upon full exercise of our outstanding warrants and the underwriters unit purchase option) and all of the 1,000,000 shares of preferred stock available for issuance. If more than 20% but not more than one share less than 35% of the shares owned by our public shareholders vote against a proposed business combination and exercise their redemption rights, we will still be required to utilize 80% of the amount in our trust account for the business combination (excluding deferred underwriting fees). In the event that such redemption leaves us with an insufficient amount of funds to consummate a proposed business combination then, we may issue a significant amount of our debt or equity securities to the sellers of such businesses and/or seek to raise additional funds through a private offering of debt or equity securities. Although we have no commitments as of the date of this offering to issue our securities, we may issue a substantial number of additional ordinary or preferred shares, or a combination of ordinary and preferred shares, to complete a business combination. The issuance of additional ordinary shares or any number of our preferred shares: may significantly reduce the equity interest of investors in this offering; will likely cause a change in control if a substantial number of our ordinary shares are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and most likely also result in the resignation or removal of our present officers and directors; and may adversely affect prevailing market prices for our ordinary shares. Additionally, the financial services industry is capital intensive, traditionally using substantial amounts of indebtedness to finance acquisitions and working capital needs. If we finance the purchase of assets or operations through the issuance of debt securities, it could result in: default and foreclosure on our assets if our operating revenues after a business combination were insufficient to pay our debt obligations; acceleration of our obligations to repay the indebtedness even if we have made all principal and interest payments when due if the debt security contained covenants that required the maintenance of certain financial ratios or reserves and any such covenant were breached without a waiver or renegotiation of that covenant; our immediate payment of all principal and accrued interest, if any, if the debt security was payable on demand; and our inability to obtain additional financing, if necessary, if the debt security contained covenants restricting our ability to obtain additional financing while such security was outstanding. For a more complete discussion of the possible structure of a business combination, see the section below entitled Effecting a business combination Selection of a target business and structuring of a business combination. We may have insufficient resources to cover our operating expenses and the expenses of consummating a business combination. We have reserved approximately $50,000 (not including up to $2,000,000 of interest we may earn on funds in the trust account, which we are entitled to receive in order to cover our operating expenses and our costs associated with our dissolution and liquidation if we do not consummate a business combination) from the proceeds of this offering and the sale of the insider warrants to cover our operating expenses for the next 24 months and to cover the expenses incurred in connection with a business combination. This amount is based on management s estimates of the costs needed to fund our operations for the next 24 months and consummate a business combination. Those estimates may prove inaccurate, especially if a portion of the available proceeds is used to make a down payment or pay exclusivity or similar fees in connection with a business combination or if we expend a significant portion of the available proceeds in pursuit of a business combination that is not consummated. If we do not have sufficient proceeds available to fund our expenses, we may be forced to obtain additional financing, either from our management or the existing shareholders or from third parties. We may not be able to obtain additional financing and our existing shareholders and management are not obligated to provide any additional financing. If we do not have sufficient proceeds and cannot find additional financing, we may be forced to dissolve and liquidate prior to consummating a business combination. None of our officers or directors has ever been associated with a blank check company which could adversely affect our ability to consummate a business combination. None of our officers or directors has ever been associated with a blank check company. Accordingly, you may not have sufficient information with which to evaluate the ability of our management team to identify and complete a business combination using the proceeds of this offering and the sale of the insider warrants. Our management s lack of experience in operating a blank check company could adversely affect our ability to consummate a business combination and force us to dissolve and liquidate the trust account to our public shareholders in an automatic dissolution and liquidation. Our officers and directors may allocate their time to other businesses thereby causing conflicts of interest in their determination as to how much time to devote to our affairs. This could have a negative impact on our ability to consummate a business combination. Our officers and directors are not required to commit their full time to our affairs, which may result in a conflict of interest in allocating their time between our operations and other businesses. We do not intend to have any full time employees prior to the consummation of a business combination. Each of our officers are engaged in several other business endeavors and are not obligated to contribute any specific number of hours per week to our affairs. If our officers other business affairs require them to devote more substantial amounts of time to such affairs, it could limit their ability to devote time to our affairs and could have a negative impact on our ability to consummate a business combination. For a discussion of potential conflicts of interest that you should be aware of, see the section below entitled Management Conflicts of Interest. We cannot assure you that these conflicts will be resolved in our favor. All of our officers and directors own ordinary shares, and our Sponsor, an affiliate of our chairman of the board of directors, will own insider warrants, which will not participate in the liquidation of the trust account in the event of our automatic dissolution and liquidation; therefore such persons may have a conflict of interest in determining whether a particular target business is appropriate for a business combination. All of our officers and directors own stock in our company, and our Sponsor, an entity that is co-managed and jointly owned by Angela Ho, our chief executive officer and chairman of the board of directors, and Noble Investment Fund Limited, will own our insider warrants purchased for $5,725,000 immediately prior to the date of this prospectus. Angela Ho and Noble Investment Fund Limited will each have a 50% beneficial ownership interest in the insider warrants held in the name of our Sponsor. Our officers and directors and our Sponsor have waived their right to the liquidation of the trust account in the event of our automatic dissolution and liquidation with respect to those shares upon the liquidation of the trust account to our public shareholders if we are unable to complete a business combination. The shares and warrants owned by these persons (including our officers and directors) will be worthless if we do not consummate a business combination. The personal and financial interests of these officers and directors and our Sponsor may influence their motivation in identifying and selecting a target business and completing a business combination in a timely manner. Consequently, these officers and directors discretion in identifying and selecting a suitable target business may result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination are appropriate and in our shareholders best interest. Our existing shareholders will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the amount available outside the trust account unless the business combination is consummated and therefore they may have a conflict of interest. Our existing shareholders will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the amount available outside the trust account, unless the business combination is consummated. The amount of available proceeds is based on management estimates of the capital needed to fund our operations for the next 24 months and to consummate a business combination. Those estimates may prove to be inaccurate, especially if a portion of the available proceeds is used to make a down payment or pay exclusivity or similar fees in connection with a business combination or if we expend a significant portion in pursuit of an acquisition that is not consummated. The financial interest of such persons could influence their motivation in selecting a target business and thus, there may be a conflict of interest when determining whether a particular business combination is in the shareholders best interest. If our ordinary shares become subject to the SEC s penny stock rules, broker-dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected. If at any time we have net tangible assets of less than $5,000,000 and our ordinary shares have a market price per share of less than $5.00, transactions in our ordinary shares may be subject to the penny stock rules promulgated under the Securities Exchange Act of 1934, as amended. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must: make a special written suitability determination for the purchaser; receive the purchaser s written agreement to a transaction prior to sale; provide the purchaser with risk disclosure documents which identify certain risks associated with investing in penny stocks and which describe the market for these penny stocks as well as a purchaser s legal remedies; and obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a penny stock can be completed. If our ordinary shares become subject to these rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected. As a result, the market price of our securities may be depressed, and you may find it more difficult to sell our securities. It is probable our initial business combination will be with a single target business, which may cause us to be solely dependent on a single business and a limited number of products or services. Additionally, we may face obstacles to completing simultaneous acquisitions. Our initial business combination must be with a business or businesses with a collective fair market value of at least 80% of the amount in our trust account (excluding $3,000,000 of deferred compensation to be held for the benefit of the underwriters) at the time of such acquisition, which amount is required as a condition to the consummation of our initial business combination. In addition, if more than 20% but not more than one share less than 35% of the shares owned by our public shareholders vote against a proposed business combination and exercise their redemption rights, we will still be required to utilize 80% of the amount in our trust account for the business combination. In the event that such redemption leaves us with an insufficient amount of funds to consummate a proposed business combination then, we may issue a significant amount of our debt or equity securities to the sellers of such businesses and/or seek to raise additional funds through a private offering of debt or equity securities. Since we have no specific business combination under consideration, we have not entered into any such fund raising arrangement and have no current intention of doing so (other than the 5,725,000 insider warrants for an aggregate of $5,725,000). We may not be able to acquire more than one target business because of this and various other factors, including the amount of funds available to consummate a business combination, possible complex accounting issues, which would include generating pro forma financial statements reflecting the operations of several target businesses as if they had been combined, and numerous logistical issues, which could include attempting to coordinate the timing of negotiations, proxy statement disclosure and closings with multiple target businesses. In addition, we may not have sufficient management, financial and other resources to effectively investigate the business and affairs of multiple acquisition candidates simultaneously or to negotiate the terms of multiple acquisition agreements at the same time which could result in a failure to properly evaluate multiple acquisitions. Further, we would also be exposed to the risk that conditions to closings with respect to the acquisition of one or more of the target businesses would not be satisfied bringing the fair market value of the initial business combination below the required fair market value of 80% of the amount in our trust account (excluding $3,000,000 of deferred compensation to be held for the benefit of the underwriters) threshold. Accordingly, while it is possible we may attempt to effect our initial business combination with more than one target business, we are more likely to choose a single target business if deciding between one target business meeting such 80% threshold and comparable multiple target business candidates collectively meeting the 80% threshold. Consequently, it is probable that, unless the purchase price consists substantially of our equity, we will have the ability to complete only the initial business combination with the proceeds of this offering and the sale of the insider warrants. Accordingly, the prospects for our success may be: solely dependent upon the performance of a single business; or dependent upon the development or market acceptance of a single or limited number of products or services. In this case, we will not be able to diversify our operations or benefit from the possible spreading of risks or offsetting of losses, unlike other entities which may have the resources to complete several business combinations in different industries or different areas of a single industry. The ability of our shareholders to exercise their redemption rights may not allow us to effectuate the most desirable business combination or optimize our capital structure. At the time we seek shareholder approval of any business combination, we will offer each public shareholder the right to have such shareholder's ordinary shares redeemed for cash if the shareholder votes against the business combination and the business combination is approved and completed. Accordingly, if our business combination requires us to use substantially all of our cash to pay the purchase price, because we will not know how many shareholders may exercise such redemption rights, we may either need to reserve part of the trust account for possible payment upon such redemption, or we may need to arrange third party financing to help fund our business combination in case a larger percentage of shareholders exercise their redemption rights than we expected. Therefore, we may not be able to consummate a business combination that requires us to use all of the funds held in the trust account as part of the purchase price, or we may end up having a leverage ratio that is not optimal for our business combination. This may limit our ability to effectuate the most attractive business combination available to us. We will not be required to obtain an opinion from an investment banking firm as to the fair market value of a proposed business combination if our board of directors independently determines that the target business has sufficient fair market value. The initial target business that we acquire must have a fair market value equal to at least 80% of the amount in our trust account (excluding $3,000,000 of deferred compensation to be held for the benefit of the underwriters) at the time of such acquisition. There is no limitation on our ability to raise funds privately or through loans that would allow us to acquire a target business or businesses with a fair market value in an amount considerably greater than 80% of the amount in our trust account (excluding $3,000,000 of deferred compensation to be held for the benefit of the underwriters) at the time of such acquisition. We have not had any preliminary discussions, or made any agreements or arrangements, with respect to financing arrangements with any third party. The fair market value of such business will be determined by our board of directors based upon standards generally accepted by the financial community, such as actual and potential sales, earnings and cash flow and book value, and the price for which comparable businesses have recently been sold. If our board is not able to independently determine that the target business has a sufficient fair market value, we will obtain an opinion from an unaffiliated, independent investment banking firm which is a member of the Financial Industry Regulatory Authority with respect to the satisfaction of such criteria. Since any opinion, if obtained, would merely state that fair market value meets the 80% threshold described above, it is not anticipated that copies of such opinion would be distributed to our shareholders, although copies will be provided to shareholders who request it. If we do obtain the opinion of an investment banking firm, a summary of the opinion will be contained in the proxy statement that will be mailed to shareholders in connection with obtaining approval of the business combination, and the investment banking firm will consent to the inclusion of their report in our proxy statement. In addition, information about how shareholders will be able to obtain a copy of the opinion from us will be contained in the proxy statement. However, we do not anticipate that shareholders will be entitled to rely on any such opinion. If the independent investment banking firm takes the view that shareholders may not rely on the opinion, we will not consider such a view as a factor in deciding which investment banking firm to hire. We will not be required to obtain an opinion from an investment banking firm as to the fair market value of a proposed business combination if our board of directors independently determines that the target business has sufficient fair market value. We may be unable to obtain additional financing, if required, to complete a business combination or to fund the operations and growth of the target business, which could compel us to restructure the transaction or abandon a particular business combination. Although we believe that the net proceeds of this offering and the sale of the insider warrants will be sufficient to allow us to consummate a business combination, inasmuch as we have not yet identified any prospective target business, we cannot ascertain the capital requirements for any particular transaction. If the net proceeds of this offering and the sale of the insider warrants prove to be insufficient, either because of the size of the business combination or the depletion of the available net proceeds in search of a target business, or because we become obligated to redeem for cash a significant number of shares from dissenting shareholders, we will be required to seek additional financing. We cannot assure you that such financing would be available on acceptable terms, if at all. To the extent that additional financing proves to be unavailable when needed to consummate a particular business combination, we would be compelled to restructure the transaction or abandon that particular business combination and seek an alternative target business candidate. In addition, if we consummate a business combination, we may require additional financing to fund the operations or growth of the target business. The failure to secure additional financing could have a material adverse effect on the continued development or growth of the target business. None of our officers, directors or shareholders is required to provide any financing to us in connection with or after a business combination. Our existing shareholders, including our officers and directors, control a substantial interest in us and thus may influence certain actions requiring shareholder vote. Upon consummation of this offering our existing shareholders (including all of our officers and directors) will collectively own 20% of our issued and outstanding ordinary shares. Our officers, directors and existing shareholders, have advised us that that they do not intend to purchase any units in this offering. However, our officers, directors and our existing shareholders, may make any purchases either in the open market, in private placements or other private transactions following the offering, although we are not aware that any of such persons or entities intend to do so. While we cannot be certain of all of the factors that would cause our existing officers, directors or shareholders to purchase our securities, we believe that some of the factors they would consider are: (i) the trading price of our securities, (ii) their aggregate investment in our securities, (iii) whether it appears that a substantial number of public shareholders are voting against a proposed business combination, and (iv) their interest in the target business once the target business has been identified. Any shares acquired by such individuals in this offering or in the aftermarket will be voted in favor of the business combination. Accordingly, any purchase of our shares by our officers and directors, including all of our existing shareholders, in this offering or in the aftermarket could influence the result of a vote submitted to our shareholders in connection with a business combination by making it more likely that a business combination would be approved. For a more complete discussion, please see the section of this prospectus entitled Principal Shareholders. Our board of directors is divided into two classes, each of which will generally serve for a term of two years with only one class of directors being elected in each year. It is unlikely that there will be an annual meeting of shareholders to elect new directors prior to the consummation of a business combination, in which case all of the current directors will continue in office at least until the consummation of the business combination. If there is an annual meeting, as a consequence of our staggered board of directors, initially only a minority of the board of directors will be considered for election and our existing shareholders, because of their ownership position, will have considerable influence regarding the outcome. Accordingly, our existing shareholders will continue to exert control at least until the consummation of a business combination. In addition, our existing shareholders and their affiliates and relatives are not prohibited from purchasing units in this offering or in the open market. If they do, we cannot assure you that our existing shareholders will not have considerable influence upon the vote in connection with a business combination. Since our existing shareholders will lose their entire investment in us if a business combination is not consummated and may be required to pay costs associated with our liquidation, our existing shareholders may purchase ordinary shares from shareholders who would otherwise choose to vote against a proposed business combination or exercise their redemption rights in connection with such business combination. Our existing shareholders own ordinary shares that will be worthless if we do not consummate a business combination. In addition, immediately prior to the date of this prospectus, our Sponsor will purchase warrants exercisable for our ordinary shares (for an aggregate of $5,725,000), which will also be worthless if we do not consummate a business combination. Given the interest that our existing shareholders have in a business combination being consummated, it is possible that our existing shareholders will acquire securities from public shareholders (in the open market and/or in privately negotiated transactions) who have elected to redeem their ordinary shares in order to change their vote and insure that the business combination will be approved (which could result in a business combination being approved even if, after the announcement of the business combination, 35% or more of our public shareholders would have elected to exercise their redemption rights, or more than 50% of our public shareholders would have voted against the business combination, but for the purchases made by our existing shareholders). Any privately negotiated transaction with a shareholder would include a contractual acknowledgement that such shareholder, although still the record holder of our ordinary shares is no longer the beneficial owner thereof and therefore agrees to vote such ordinary shares as directed by our existing shareholder. In the event our existing shareholders purchase shares in privately negotiated transactions from public shareholders who have already cast votes against a proposed business combination and requested redemption of their shares, such selling shareholders would be required to revoke their prior votes against the proposed business combination and to revoke their prior elections to redeem their shares and to cast new votes in favor of the proposed business combination. The revocation of prior negative votes and substitution therefor of votes in favor of the proposed business combination would have the effect of reducing redemptions and increasing votes in favor of the proposed business combination, thereby making it more likely that a proposed business combination would be approved.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001407539_liberty_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001407539_liberty_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a1f3e47c2af3f5be6bc3401dbc822f6821adba63
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001407539_liberty_prospectus_summary.txt
@@ -0,0 +1 @@
+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001407623_retail_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001407623_retail_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..259630ae3f759b473e9e4c9ea2806754d9085746
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001407623_retail_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering you should read the entire prospectus carefully including the risk factors and the financial statements and the related notes and schedules thereto. Unless we tell you otherwise, the information in this prospectus assumes that the underwriters have not exercised their over-allotment option. In making your decision whether to invest in our securities, you should take into account not only the backgrounds of the members of our management team, but also the special risks we face as a blank check company and the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, which we refer to as the Securities Act. You will not be entitled to protection normally afforded to investors in Rule 419 blank check offerings. You should carefully consider these and the other risks set
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001407672_cdm_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001407672_cdm_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e43f6b6b89f1ab6df34dc614c11370af587fc030
--- /dev/null
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@@ -0,0 +1 @@
+contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common units. You should read the entire prospectus carefully, including the historical and pro forma financial statements and the notes to those financial statements included in this prospectus. Unless indicated otherwise, the information presented in this prospectus assumes an initial public offering price of $20.00 per common unit and that the underwriters option to purchase additional common units is not exercised. You should read Risk Factors for more information about important risks that you should consider carefully before buying our common units. We include a glossary of some of the terms used in this prospectus as Appendix B. References in this prospectus to CDM Resource Partners, we, our, us, the Partnership or like terms refer to CDM Resource Partners, L.P. and its majority-owned subsidiaries, including CDM Resource Management, Ltd. ( CDM Operating ). References to CDMR Holdings refer to CDMR Holdings, LLC, the owner of our general partner. Following the closing of this offering, we will own a 52.999% limited partner interest and a 0.001% general partner interest in CDM Operating, and CDMR Holdings will own a 47.0% limited partner interest in CDM Operating. CDM Resource Partners, L.P. Overview We provide our customers with turn-key natural gas contract compression services to maximize their natural gas and crude oil production, throughput and cash flow. Our integrated natural gas compression solutions include a comprehensive assessment of a customer s compression needs and the design and installation of a customer-specific compression system that addresses those particular needs. We are responsible for the installation and ongoing operation, service, and repair of our compression units. We guarantee our customers 98% mechanical availability of our compression units for land installations and 96% mechanical availability for over-water installations. By outsourcing their natural gas compression requirements to us, our customers benefit from increased mechanical availability of our compression units, reduced operating expenses, reduced maintenance expenses, and reduced capital investment in equipment. We believe that these benefits enable our customers to increase their cash flow through increased natural gas and crude oil production and throughput and lower costs. Substantially all of CDM Operating s customers that have contracted for services since CDMR Operating s formation in 1997 remain active customers today. We were formed in May 2007 by CDMR Holdings to own a 53.0% interest in and to control CDM Operating. CDM Operating has been providing natural gas contract compression services since 1997 and currently operates in the states of Texas, Louisiana and Arkansas. As of September 30, 2007, CDM Operating owned 629 compression units with approximately 540,326 total available horsepower, of which 612 were revenue generating compression units with approximately 531,996 aggregate horsepower. CDMR Holdings will control us through its ownership of our general partner, and will indirectly control CDM Operating through our ownership of CDM Operating s general partner. We focus on meeting the complex requirements of field-wide compression applications, as opposed to targeting the compression needs of individual wells within a field. These field-wide applications include compression for natural gas gathering for sales, natural gas lift for crude oil production and natural gas processing. We believe that we improve the stability of our cash flow by focusing on field-wide compression applications because such applications generally involve long-term installations of multiple large horsepower compression units. At September 30, 2007, approximately 95% of our revenue generating horsepower was associated with field-wide applications compared to approximately 5% associated with individual wellhead and other applications. Our contracts typically have initial terms ranging from one to five years and provide for either a fixed monthly fee for our natural gas contract compression services or a fee based on the volume of natural gas compressed in a month. We do not have direct exposure to natural gas commodity price risk because we do Table of Contents Operating Highlights 73 Financial Results of Operations 75 Effects of Inflation 79 Liquidity and Capital Resources 80 Critical Accounting Policies and Estimates 84 Recent Accounting Pronouncements 86 Quantitative and Qualitative Disclosures About Market Risk 87 NATURAL GAS COMPRESSION INDUSTRY 88 BUSINESS 90 Overview 90 Business Strategies 91 Competitive Strengths 92 Our Relationship with CDMR Holdings 92 Our Operations 93 MANAGEMENT OF CDM RESOURCE PARTNERS, L.P. 101 Directors and Executive Officers 102 Reimbursement of Expenses of Our General Partner 103 Executive Compensation and Employment Matters 104 Compensation Discussion and Analysis 104 Compensation of Directors 105 Long-Term Incentive Plan 105 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 107 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 108 Distributions and Payments to Our General Partner and its Affiliates 108 Agreements Governing the Transactions 109 Omnibus Agreement 109 CDM Operating Partnership Agreement and CDM OLP GP, LLC Limited Liability Company Agreement 111 Natural Gas Contract Compression Services Contracts between CDM Operating and CDM MAX, LLC 111 Related Party Transactions Involving Carlyle/Riverstone 111 CONFLICTS OF INTEREST AND FIDUCIARY DUTIES 112 Conflicts of Interest 112 Fiduciary Duties 118 DESCRIPTION OF THE COMMON UNITS 121 The Units 121 Transfer Agent and Registrar 121 Transfer of Common Units 121 THE PARTNERSHIP AGREEMENT 122 Organization and Duration 122 Purpose 122 Power of Attorney 122 Cash Distributions 122 Capital Contributions 122 Voting Rights 123 Limited Liability 124 Issuance of Additional Securities 125 Amendment of the Partnership Agreement 125 Merger, Consolidation, Conversion, Sale or Other Disposition of Assets 127 Table of Contents not take title to the natural gas we compress and because the natural gas we use as fuel for our compressors is supplied by our customers without cost to us. Our indirect exposure to short-term volatility in natural gas and crude oil commodity prices is mitigated because natural gas and crude oil production, rather than exploration, is the primary demand driver for our natural gas contract compression services, and because our focus on field-wide applications reduces our dependence on individual well economics. Our compressor fleet consists of specially engineered compression units that utilize standardized components, which can be modified as needed for specific customer applications. Approximately 70% of our total available horsepower at September 30, 2007 was purchased new since December 31, 2003. We believe the young age and standardized composition of our compressor fleet results in fewer mechanical failures, lower fuel usage (a direct cost savings for our customers), and reduced environmental emissions. Business Strategies Our business objectives are to generate stable cash flows that will allow us to make the minimum quarterly distribution to our unitholders and to increase our quarterly cash distributions per unit over time by executing the following strategies: Continue to maximize our customers cash flow Continue to deliver strong organic growth Continue to manage our operating costs and expenses Take advantage of selective acquisition opportunities Competitive Strengths We believe that we are well positioned to successfully execute our business strategies because of the following competitive strengths: Experienced management team with proven ability to deliver strong organic growth Modern and efficient compressor fleet Large horsepower installations with long-term commitments Stable and growing fee-based cash flows Long-standing customer relationships Our Relationship with CDMR Holdings CDMR Holdings provides a comprehensive range of natural gas contract compression services and natural gas processing services to the natural gas and crude oil industries. Its natural gas contract compression services business has been conducted by CDM Operating since 1997, and its natural gas processing business has been conducted since 2005 through a separate subsidiary, CDM MAX, LLC, which owns and operates two 600 million cubic feet per day ( MMcf/d ) design capacity, natural gas processing plants in Louisiana. CDMR Holdings will continue to own and operate CDM MAX, LLC following this offering, and we will have no ownership interest in CDM MAX, LLC. CDM Operating provides natural gas contract compression services to CDM MAX, LLC and will continue to provide such services following this offering. Following the closing of this offering, our relationship with CDMR Holdings and its affiliates will be governed by an omnibus agreement between us, CDMR Holdings and its affiliates. Please read Certain Relationships and Related Party Transactions Omnibus Agreement. Following this offering, CDMR Holdings, through its ownership of our general partner, will be responsible for conducting our business and managing our operations and those of CDM Operating, and will provide us with all technical, operational and administrative support necessary to conduct our business. CDMR Holdings is owned by members of its senior management and by entities affiliated with Carlyle/Riverstone Global Energy and Power Fund II, L.P., a private equity fund the general partner of which is jointly controlled by Riverstone Holdings L.L.C. and The Carlyle Group. The senior management team of CDMR Holdings includes Randy Craft, Randy Dean and David Marrs, founders of CDM Operating, each of whom has more Table of Contents Table of Contents Termination and Dissolution 128 Liquidation and Distribution of Proceeds 128 Withdrawal or Removal of the General Partner 129 Transfer of General Partner Units 130 Transfer of Ownership Interests in the General Partner 130 Transfer of Incentive Distribution Rights 130 Change of Management Provisions 130 Limited Call Right 131 Meetings; Voting 131 Status as Limited Partner 132 Non-Citizen Assignees; Redemption 132 Indemnification 132 Reimbursement of Expenses 133 Books and Reports 133 Right to Inspect Our Books and Records 133 Registration Rights 134 UNITS ELIGIBLE FOR FUTURE SALE 135 MATERIAL TAX CONSEQUENCES 136 Partnership Status 136 Limited Partner Status 137 Tax Consequences of Unit Ownership 138 Tax Treatment of Operations 143 Disposition of Common Units 144 Uniformity of Units 146 Tax-Exempt Organizations and Other Investors 146 Administrative Matters 147 State, Local, Foreign and Other Tax Considerations 149 SELLING UNITHOLDER 150 INVESTMENT IN CDM RESOURCE PARTNERS, L.P. BY EMPLOYEE BENEFIT PLANS 151 UNDERWRITING 152 Commissions and Expenses 152 Option to Purchase Additional Common Units 153 Indemnification 153 Lock-Up Agreements 153 Listing on the New York Stock Exchange 153 Offering Price Determination 154 FINRA Regulations 154 Stabilization, Short Positions and Penalty Bids 154 Electronic Distribution 155 Stamp Taxes 155 Other Relationships 155 VALIDITY OF THE COMMON UNITS 156 EXPERTS 156 WHERE YOU CAN FIND MORE INFORMATION 156 FORWARD-LOOKING STATEMENTS 156 INDEX TO FINANCIAL STATEMENTS F-1 Appendix A Form of Amended and Restated Agreement of Limited Partnership of CDM Resource Partners, L.P. A-1 Appendix B Glossary of Terms B-1 Form of Underwriting Agreement List of Subsidiaries Consent of KPMG LLP Consent of Director Nominee Table of Contents than 25 years experience in the natural gas contract compression services or energy industries and will continue to serve as senior officers of our general partner. CDMR Holdings will have a significant economic interest in us through its ownership of 1,050,000 common units and 5,551,724 subordinated units, representing a 47.6% limited partner interest in us, and its ownership of our general partner which owns a 2.0% general partner interest in us and all of our incentive distribution rights. CDMR Holdings will also own a 47.0% limited partner interest in CDM Operating. CDMR Holdings intends to offer us the opportunity to purchase its 47.0% limited partner interest in CDM Operating, although it is not obligated to do so. In accordance with the omnibus agreement between us, CDMR Holdings, and other affiliates to be entered into in connection with the closing of this offering, CDMR Holdings will be required to offer us the right to purchase any part of its 47.0% limited partner interest in CDM Operating before it can sell that interest to anyone else. We refer to our purchase right as a right of first offer. The consummation and timing of any future purchases by us of this interest in CDM Operating will depend upon, among other things, our and CDMR Holdings compliance with debt agreements, our reaching an agreement with CDMR Holdings regarding the terms of such purchase, which will require the approval of the conflicts committee of our general partner s board of directors, and our ability to obtain financing on acceptable terms. Although we will have the right of first offer to purchase CDMR Holdings interest in CDM Operating, we are not obligated to purchase any additional interest in CDM Operating from CDMR Holdings. All future growth of our natural gas contract compression services business will occur in CDM Operating or future subsidiaries of ours. Under the omnibus agreement, CDMR Holdings will agree, and will cause its controlled affiliates to agree, not to compete with us and our subsidiaries by offering or providing natural gas contract compression related services except through CDM Operating. The non-competition restrictions will not apply to (and therefore will not prevent) competition by Riverstone Holdings LLC, The Carlyle Group or any of their affiliated funds or portfolio companies (except as specifically described above with respect to CDMR Holdings and its controlled affiliates). Risk Factors An investment in our common units involves risks associated with our business, our limited partnership structure and the tax characteristics of our common units. You should read carefully the risks under the caption Risk Factors that begins on page 16 of this prospectus. Formation Transactions and Partnership Structure General At or prior to the closing of this offering the following transactions will occur: CDMR Holdings will contribute a 53.0% partnership interest in CDM Operating to us; we will issue to CDMR Holdings or its subsidiaries 1,050,000 common units and 5,551,724 subordinated units, representing an aggregate 47.6% limited partner interest in us; we will issue to CDM RP GP, L.P., an indirect wholly-owned subsidiary of CDMR Holdings, a 2.0% general partner interest in us and all of our incentive distribution rights, which will entitle our general partner to increasing percentages of the cash we distribute in excess of $0.345 per unit per quarter (115% of the minimum quarterly distribution); we will issue 7,000,000 common units to the public in this offering, representing a 50.4% limited partner interest in us, and will contribute the net proceeds therefrom of approximately $126.7 million to CDM Operating, which will use those proceeds to repay indebtedness outstanding under its amended credit facility; CDMR Holdings will assume and repay $40.0 million of indebtedness outstanding under CDM Operating s amended credit facility; Table of Contents PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. Set forth below are the expenses expected to be incurred in connection with the issuance and distribution of the securities registered hereby. With the exception of the Securities and Exchange Commission registration fee, the NASD filing fee and the New York Stock Exchange listing fee, the amounts set forth below are estimates. SEC registration fee $ 5,190 NASD filing fee 17,405 New York Stock Exchange listing fee 150,000 Printing and engraving expenses 575,000 Accounting fees and expenses 1,100,000 Legal fees and expenses 1,800,000 Transfer agent and registrar fees 50,000 Subscription Agent fees * Information Agent fees * Standby Commitment fees * Structuring fee 400,000 Miscellaneous 102,405 Total $ 4,200,000 * None Item 14. Indemnification of Directors and Officers. The section of the prospectus entitled The Partnership Agreement Indemnification is incorporated herein by this reference. Reference is also made to the Underwriting Agreement filed as Exhibit 1.1 to this registration statement. Subject to any terms, conditions or restrictions set forth in the partnership agreement, Section 17-108 of the Delaware Revised Uniform Limited Partnership Act empowers a Delaware limited partnership to indemnify and hold harmless any partner or other person from and against all claims and demands whatsoever. Item 15. Recent Sales of Unregistered Securities. On June 20, 2007, in connection with the formation of CDM Resource Partners, L.P. (the Partnership ), the Partnership issued to (i) CDM RP GP, L.P. a 2% general partner interest in the Partnership for $20 and (ii) CDMR Holdings, LLC a 98% limited partner interest in the Partnership for $980. The issuance was exempt from registration under Section 4(2) of the Securities Act. There have been no other sales of unregistered securities within the past three years. Item 16. Exhibits and Financial Statement Schedules. (a) The following documents are filed as exhibits to this registration statement: Exhibit Number Description 1 .1 Form of Underwriting Agreement 3 .1**
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001407698_biolex_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001407698_biolex_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a1f3e47c2af3f5be6bc3401dbc822f6821adba63
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001407698_biolex_prospectus_summary.txt
@@ -0,0 +1 @@
+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001407926_cell_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001407926_cell_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f8153aad5bdaaa88ec772fe1886dceb7dc320b2a
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2007/CIK0001407926_cell_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights material information from this prospectus that you should consider before investing in our securities. This summary may not contain all of the information that is important to you. For a more complete understanding of this offering, you are encouraged to read this entire prospectus, including the risks of purchasing our securities discussed under Risk Factors, and our financial statements and the accompanying notes. The Company CKChip Live cell analysis is a growing field in life sciences and clinical medicine. This is due to rapid advances in imaging microscopy and corresponding software now enabling live cell imaging procedures that could not have been carried out a few years ago. New technologies are expected to open up new possibilities in such fields as cell biology, drug discovery, immunology, cancer, and stem cell research, among others. We therefore believe there exists an ever-growing need to study individual live cells as well as rare cells and rare cell events, and that our proprietary CKChip platform will address the need for cell-based assays that are simple to use, providing continuous recording of cellular activities with high sensitivity, reliability and medium to high throughput screening. The Cell Carrier, which we intend to market under the CKChip tradename, is a 4 sq mm, grid with between 2,500 and 10,000 conical micro-wells, each of which accommodates a single cell. The narrow ends of the wells open into a liquid chamber on which the grid is mounted. The chamber allows the addition of reagents into the chamber beneath the grid. Cells are loaded onto the Cell Carrier, distributed across the microwells, where each cell is trapped in a single microwell. Each cell is held at its address by adhesion/cohesion forces during its analysis, treatment or rinsing with multiple reagents. The location, or address , of each microwell is registered, so that cells identified for special attention during monitoring can be revisited and retrieved by computer-assisted micromanipulation for further studies. Monitoring of cells held on the CKChip is performed by means of fluorescence emission detected microscopically, using virtually any upright or inverted microscope, in conjunction with common imaging software. As fluorescence imaging microscopes are common in most life science and medical laboratories, anyone interested in using the CKChip can do so without having to invest in purchasing a monitoring device. We believe the CKChip has the following distinct advantages over other cytometric technologies: Ability to capture and register individual cells at specific addresses, Ability to repeatedly monitor identifiable individual living cells and rare events, Simultaneous and sequential monitoring of up to 10,000 cells by fluorescence imaging microscopy for long periods of time, Enables characterization of specific cells within a heterogeneous cell population, Adding and rinsing reagents to living cells under observation, Ability to analyze adherent and non-adherent living cells, Acquisition of kinetic and cell functions, and Savings in the cost of reagents. Our product line, which is in various states of development, is summarized below. At the present time, we have no commercially marketable products and have generated no revenues. Generation I (CCI) for fluorescence microscopy applications enabling repeated multi-live single cell monitoring for extended periods of time. In addition, it will allow multiple rinsing of reagents. We expect that this product will be ready for sale in the middle of 2008. Generation II (CCT) a transparent Cell Carrier that, in addition to the features described above for the CCI, is also suitable for light microscopy, reagent, chemical, and biological coating options. We expect that this product, which is in a preliminary development and design stage, will be introduced for sale in the first quarter of 2009. Generation III (CCM) We expect the CCM will be offered with special kits to enable clinical diagnostic applications based on research currently in progress. We intend to select our first clinical diagnostic application for the CCM by the second quarter of 2008, with development over a two year period thereafter; Software Support Package We intend to provide each of our CKChip customers with a dedicated software package so as to permit the user to easily register each investigated specimen, as well as simplify and enhance its imaging and attendant data analysis. We intend to enter into collaborative agreements with third party researchers, as well as academic and medical institutions, to develop specific applications for our CKChip technologies, with particular emphasis upon the development of single use consumable kits to enable life sciences and medical professionals and clinical diagnosticians to perform laboratory-based research and analysis upon living cells in such areas as cancer and research, hematology, immunology, and drug development, among others. We expect our CKChip will be usable in any laboratory in which these types of tests are presently conducted, as well as in laboratories that presently lack the capabilities for analysis of a multitude of individual cells. We will seek to develop strategic alliances, joint ventures and similar relationships with companies that manufacture and sell laboratory consumables. We anticipate that these companies, with their existing manufacturing capabilities and their established sales forces, will assist us in introducing our products to potential customers. Our initial marketing efforts will be directed to emphasize on the academic research and drug discovery markets. Medical Device Incubator We intend to source, vet and invest in early stage Israeli-based medical device companies. The State of Israel is particularly known as a generator of new and innovative ideas and technologies. It is the home for many high technology start-up companies, the numbers of which are disproportionately higher than would be expected, given the size of Israel s population and gross domestic product. The Israeli government actively supports entrepreneurship and private business innovation by providing grants, loans and tax benefits through its Office of Chief Scientist and the Investment Center in the Israeli Ministry of Industry Trade and Labor. Israel s Ministry of Health, which regulates medical device testing, has adopted protocols that correspond, generally, to those of the U. S. Food and Drug Administration, making it comparatively easy for studies conducted in Israel to satisfy FDA requirements, thereby enabling medical device techniques and products developed and subjected to clinical trials in Israel to reach U. S. and European Union commercial markets in an expedited fashion. Many members of Israel s medical community have earned international prestige in their chosen fields of expertise and routinely collaborate, teach and lecture at leading medical centers throughout the world. Israel also has free trade agreements with the U. S. and the European Union. We will seek to build value for our shareholders through building value in our partner companies, i.e., those companies in which we will invest, by assembling and making available to our partner companies at no cost to them an array of strategic, operational, financial and managerial resources to enable them to primarily focus their efforts UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 AMENDMENT NO. 3 TO FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 CELL KINETICS LTD. (Exact name of Registrant as specified in its charter) Israel (State or other jurisdiction of incorporation or organization) 3845 (Primary Standard Industrial Classification Code Number) Not Applicable (I.R.S. Employer Identification Number) 2 Yodfat Street Lod 71291 Israel 972-8-918-8667 (Address and telephone number of registrant s principal executive offices) United Corporate Services, Inc. 10 Bank Street White Plains, New York 10606 (914) 949-9188 (Name, address and telephone number of agent for service) Copies to: Ira I. Roxland, Esq. Sonnenschein Nath & Rosenthal LLP 1221 Avenue of the Americas New York, New York 10020 (212) 768-6700 Fax: (212) 768-6800 David S. Glatt, Esq. Liat Schaffer, Esq. Meitar Liquornik Geva & Leshem Brandwein 16 Abba Hillel Silver Rd. Ramat Gan 52506 Israel 972 (0)3 610-3100 Fax: 972 (0)3 610-3111 Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o upon technological innovation, product development and timely attainment of predetermined milestones for committed follow-on financing rather than having to devote limited personnel and resources to addressing managerial burdens and repeatedly pursuing diverse funding sources. Our preferred partner companies will be: very early stage concept companies, operating in growing markets of between $50.0 million to $150.0 million, that possess patented or other proprietary technology and intellectual property, with a compelling growth strategy, that is capable of developing a prototype medical device within 18 months of a capital infusion of up to $500,000, and which will require no more than a simple clinical testing authorization procedure. Our initial sourcing efforts will be limited to the State of Israel and will focus on entrepreneurs who need strategic guidance and capital support. We expect that in most instances our equity investment in a partner company will range from 20% to 50%, although there may be circumstances, particularly in prospective partner companies with no prior external financing, under which we may seek to acquire up to an 80% equity interest. As Medis has granted us a right of first refusal on all medical device company opportunities sourced by, or brought to Medis, we may establish our own partner companies, either alone or in conjunction with other persons that are not affiliated with either Medis or ourselves. We intend to seek significant involvement in and over the operating activities of our partner companies through a combination of equity ownership, board representation and contractual rights to participate in and, in some instances, approve material decisions. We believe that the reputation of Dr. Asaf Ben-Arye, our President and Chief Executive Office, within the Israeli medical device community, combined with the business experience and visibility of Jacob Weiss, our chairman, who served as a senior executive of Israeli Aerospace Industries, formerly known as Israel Aircraft Industries, will enable us to effectively source prospective partner companies in the intensively competitive Israeli high technology start up market. Our first partner company is Scorpion Surgical Technologies, Ltd., a start-up company in the field of orthopedic surgical instrumentation, with particular emphasis upon spinal stabilization systems. We have agreed to acquire a 20% equity interest in Scorpion for $150,000. Dr. Ben-Arye is a director and co-founder of Scorpion, which recently received a $250,000 loan, repayable from future revenues only, from the Israeli Office of Chief Scientist. General We were incorporated in Israel on May 23, 2002 and we commenced operations in May 2006. Our principal executive offices are located at 2 Yodfat Street, Lod 71291, Israel and our telephone number is 972-8-918-8667. Substantially all of our assets and most of our
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001408010_iggys_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001408010_iggys_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider in making your investment decision. You should read this summary together with the more detailed information, including our financial statements and the related notes, elsewhere in this prospectus. You should carefully review and consider, among other things, the matters discussed in "Risk Factors" before making an investment decision. Our Business We are an online real estate company that offers innovative services to home buyers and sellers. We share with each buyer 75% of the commission we receive from the seller or listing broker. This gives buyers a large financial incentive to use our services, while we earn significant net revenue per transaction. Our primary target is the 64% of all home buyers who find homes themselves. We also offer home buyers online tools to manage their purchase transactions from search to close. Currently, we generate revenue from our buy-side services and expect to expand into other fee-generating areas, including agent referral, mortgage brokerage, title and online advertising. Our customer acquisition strategy is unique. To capture consumers early in the transaction process, we provide sellers with free MLS listing services and the ability to post homes on our website for no charge. These services drive traffic to our fee-generating operations. Since the launch of our integrated services in March 2007, users have published more than 11,500 properties on our website with a total list price of over $4.1 billion, and used our free MLS listing service for more than 4,300 properties with a total list price of $1.5 billion. Buy-side real estate services We currently offer online buyer's agent services in six states, representing approximately 26% of the U.S. existing home market. Our model leverages the efficiencies of the Internet and our proprietary software to provide cost-effective services to self-directed buyers. Buyers can search our database of over 600,000 MLS listings, schedule home visits, make offers and monitor each step of the offer/counteroffer process, all online. When we represent buyers, we share with them 75% of our buyer broker commission, which we receive from the seller or listing broker. We believe that this is an industry-leading financial incentive. To date, our average closed buy-side transaction has exceeded $580,000, from which we have earned an average gross commission of over $15,000. From this, on average, we have paid buyers over $11,000 per transaction and earned approximately $3,800 in net revenue per transaction. During the period from our launch of our buy-side operations in April 2006 to October 22, 2007, we closed 222 buy-side transactions. Since our inception, we have derived all of our real estate brokerage revenues from our buy-side operations, and these revenues represented 71% of our total revenues through September 30, 2007. Sell-side real estate services We believe that we are the only company providing free MLS listings to home sellers, thereby giving them access to a critical market channel without having to pay a significant listing fee. MLS listings typically appear on major websites, including Realtor.com, exposing the home to the majority of buyers who search for homes on the Internet. We currently provide our free MLS listing service in 20 states, representing about 64% of the U.S. existing home market. We also enable sellers and their agents in all 50 states to list and self-publish exceptionally rich content about sellers' homes on our website without charge. We do not specifically derive any revenue from offering our customers these sell-side services. However, we recognize that home sellers are often home buyers, and we cross-market our revenue-generating services to them. Income (loss) from operations (1,174 %) (1,817 %) (663 %) Interest income 1 % 2 % Our Market Opportunity According to the National Association of Realtors, or NAR, 6.5 million existing homes were sold in the U.S. in 2006. According to REAL Trends, a company that provides news, research and consulting services to real estate industry participants, the total residential real estate brokerage commissions for the U.S. were approximately $59.7 billion in 2006. The Internet is reshaping the way real estate brokerage is conducted by empowering buyers to independently search for homes. Use of the Internet by home buyers has grown dramatically in recent years. According to NAR, the percentage of buyers using the Internet to search for homes increased from 41% in 2001 to 80% in 2006. Similarly, the Internet now enables home sellers to readily access information that previously was available only to traditional real estate agents, including home valuations, comparable home prices and other market research. According to the California Association of Realtors, the percentage of California sellers using the Internet in the home sale process has increased from 9% in 2002 to 62% in 2006. We believe that many consumers are dissatisfied with traditional real estate agents. Buyers are doing more of the work, yet traditional agents typically still earn a full commission and do not share any of it with the home buyer. According to NAR, 64% of all home buyers find their homes themselves, including on the Internet. Our Solution We believe that we are uniquely positioned with differentiated services for both home buyers and sellers. Offer a compelling consumer value proposition. Our use of the Internet and proprietary technologies allows us to offer a significant financial incentive to our buyers and reduced commissions to our sellers. Use the Internet to empower consumers. Through our websites, we empower buyers to search MLS listings, compare homes and gather information on neighborhoods. We also enable them to schedule home visits, make offers and obtain loan pre-approvals. We empower sellers with free MLS listings and self-publishing tools. Deliver high-quality service to self-directed consumers. We build our business around the self-directed consumer, not the agent. Our online service offerings give consumers the ability to direct transactions at the pace and in the manner they desire. We compensate our buy-side agents based upon how well they serve our customers, not the size of the transactions or whether the transactions close. Provide a full suite of real estate related services to our customers. We expect to provide "one-stop" shopping for the real estate consumer. We intend to expand our suite of services to include agent referral services, in which we refer consumers to real estate agents, mortgage brokerage services, flat-fee real estate brokerage services and title services. Our Growth Strategy Our objective is to become the leader in comprehensive online brokerage services for buyers and sellers of U.S. residential real estate. To achieve this objective, we are pursuing the following strategy: Expand our services nationwide through scalable model. Our scalable business model facilitates the expansion of our geographic footprint. Following this offering, we believe that we can rapidly expand the volume and geographic reach of our operations because much of our business is conducted through our websites. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Rollout additional services. We launched our mortgage brokerage services in California in May 2007, and in Florida in September 2007. We expect to provide mortgage brokerage services in at least 21 states by the end of 2008. We expect that, by the end of 2007, we will launch our real estate agent referral service in at least 35 states. Also, by the end of 2007, we plan to launch our flat-fee brokerage service in the same states as are then covered by our buy-side services. Invest in our technology platform. We believe our technology platform and the Internet will provide us with the opportunity to develop additional services for consumers looking to buy or sell a home. We plan to incorporate new technologies as they become available to help us provide enhanced functionality and increase overall ease-of-use of our websites. Pursue strategic relationships. We expect that our large geographic footprint, with our ability to rapidly expand throughout the U.S., will be attractive to potential strategic partners. We intend to aggressively pursue partnerships with home builders, home supply stores, real estate web portals and other related businesses. Focus on branding. Following this offering, we intend to build our brands with an advertising campaign that uses a mix of media, including the Internet, television, print, radio, direct-mail and outdoor signage. We will also conduct a publicity campaign with the objective of generating more news coverage about our services. In addition, we believe we can enhance our brand through word-of-mouth by continuing to provide a high level of service. Risks Related to Our Business Since our inception in 2005, we have a limited operating history and a history of losses from our start-up operations. As of September 30, 2007, we had an accumulated deficit of $11,258,837. We face a number of challenges and risks in our business, which are described in further detail in "Risk Factors" beginning on page 9 of this prospectus. Company Information We were incorporated in Delaware in 2005. Our principal executive offices are located at One South Wacker Drive, Suite 1900, Chicago, IL 60606. Our phone number is (312) 932-1111. Our web addresses are www.IggysHouse.com, www.BuySideRealty.com and www.BuySideMortgage.com. The information contained on our websites does not constitute part of this prospectus. References in this prospectus to "we," "us" "our" and "our company" refer to Iggys House, Inc. and our subsidiaries. Amendment No. 4 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 The Offering Securities offered 1,400,000 units. Each unit consists of one share of common stock, one Class A warrant and one Class B warrant, each warrant to purchase one share of common stock. The common stock and warrants will trade only as a unit for 30 days following the effective date of this offering, after which the common stock and Class A and Class B warrants each will trade separately. Class A warrants The Class A warrants included in the units will be exercisable commencing 31 days after the effective date of this offering. The exercise price of each Class A warrant will be $7.50 (125% of the public offering price of the units). The Class A warrants expire on the first anniversary of the effective date of this offering. Nevertheless, there is a possibility that the warrants will never be exercisable when in-the-money or otherwise, and that warrant holders will never receive shares or payment of cash in settlement of the warrants. See "Risk Factors" for more information. We will have the right to redeem the Class A warrants issued in this offering at a redemption price of $0.01 per warrant at any time after the date on which the closing price of our common stock, as reported on the principal exchange or trading facility on which it is then traded, has equaled or exceeded $9.00 (150% of the public offering price of the units) for 10 consecutive trading days. We are required to provide 30 days' prior written notice to the Class A warrant holders of our intention to redeem the warrants. Class B warrants The Class B warrants included in the units will be exercisable commencing 31 days after the effective date of this offering. The exercise price of a Class B warrant will be $9.00 (150% of the public offering price of the units). The Class B warrants expire on the third anniversary of the effective date of this offering. Nevertheless, there is a possibility that the warrants will never be exercisable when in-the-money or otherwise, and that warrant holders will never receive shares or payment of cash in settlement of the warrants. See "Risk Factors" for more information. IGGYS HOUSE, INC. (Exact name of registrant as specified in its charter) We will have the right to redeem the Class B warrants issued in this offering at a redemption price of $0.01 per warrant at any time after the date on which the closing price of our common stock, as reported on the principal exchange or trading facility on which it is then traded, has equaled or exceeded $12.00 (200% of the public offering price of the units) for 10 consecutive trading days. We are required to provide 30 days' prior written notice to the Class B warrant holders of our intention to redeem the warrants. Over-allotment option 210,000 units Proposed NASDAQ Capital Markets Symbols We have applied for listing of the units on the NASDAQ Capital Market under the symbol "IGGYU." Until the units are divided into their separate components of one share of common stock, one Class A warrant and one Class B warrant, only the units will be quoted on the NASDAQ Capital Market. Each unit will be divided into its separate components of one share of common stock, one Class A warrant and one Class B warrant on the date that is 30 days following the effective date of this offering. Following the separation of the units, the shares of common stock will be quoted on the NASDAQ Capital Market under the symbol "IGGY," the Class A warrants will be quoted on the NASDAQ Capital Market under the symbol "IGGYA," and the Class B warrants will be quoted on the NASDAQ Capital Market under the symbol "IGGYB." The units will cease to exist at that time. Use of proceeds We intend to use the net proceeds of this offering for general corporate purposes, including working capital, and to repay the full amount of our $1,000,000 bridge note and any outstanding indebtedness under our lines of credit. See "Use of Proceeds" for additional information. Unless otherwise indicated, the number of shares of common stock to be outstanding after this offering is based upon 5,334,503 shares outstanding as of November 14, 2007, and excludes: an aggregate of 2,800,000 shares issuable upon the exercise of the Class A warrants and Class B warrants included in the units being offered; an aggregate of 100,323 shares issuable upon the exercise of then outstanding warrants at a weighted average exercise price of $5.48 per share; an aggregate of 534,740 shares issuable upon the exercise of then outstanding options at a weighted average exercise price of $5.49 per share; an aggregate of 12,602 shares then available for future issuance under our equity incentive plans; and warrants to purchase 7% of the shares of common stock included in the units sold in this offering at an exercise price of $6.60 per share (110% of the offering price), and warrants to purchase 7% of the Class A warrants and 7% of the Class B warrants included as part of the units being offered, in each case at an exercise price of $0.15 per warrant. Except as otherwise noted, the information in this prospectus assumes: the underwriters do not exercise their over-allotment option; a 1-for-5 reverse stock split to be effected prior to the completion of this offering; the conversion of each share of our preferred stock into 5,000 shares of common stock immediately prior to the closing of this offering; the filing of our amended and restated certificate of incorporation; and an initial public offering price of $6.00 per unit. Joseph J. Fox Chief Executive Officer Iggys House, Inc. One South Wacker Drive, Suite 1900 Chicago, Illinois 60606 (312) 932-1111 (Name, address, including zip code, and telephone number including area code, of agent for service) (1)Consists of gross real estate commissions of $881,653 and $2,366,713, less commissions shared with buyers of $662,878 and $1,779,030, for the year ended December 31, 2006 and the nine months ended September 30, 2007, respectively. (2)For an explanation of the determination of the number of shares used in computing basic and diluted net loss per share, see Note 2 of the notes to our consolidated financial statements included elsewhere in this prospectus. Copies of all communications, including communications sent to agent for service, should be sent to: Mark D. Wood Michael J. Diver Katten Muchin Rosenman LLP 525 W. Monroe Street Chicago, Illinois 60661 (312) 902-5200 W. Morgan Burns Jonathan R. Zimmerman Faegre & Benson LLP 2200 Wells Fargo Center 90 South Seventh Street Minneapolis, Minnesota 55402 (612) 766-7000 (unaudited) Cash and cash equivalents $ 515,894 $ 15,625 $ 22,747 Working capital (deficit) 425,121 (2,967,870 ) (1,783,152 ) Total assets 806,439 521,602 1,337,343 Total long-term liabilities Total liabilities 153,520 3,194,573 2,479,490 Total stockholders' equity (deficit) 652,919 (2,672,971 ) (1,142,147 ) Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001408120_scope_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001408120_scope_prospectus_summary.txt
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+Prospectus summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001408193_tremisis_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001408193_tremisis_prospectus_summary.txt
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+This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. Unless otherwise stated in this prospectus: references to we, us or our company refer to Tremisis Energy Acquisition Corporation II; initial stockholders or existing stockholders refers to all of our stockholders prior to this offering, including all of our officers and directors; initial shares refers to the 2,731,250 shares of common stock that our initial stockholders originally purchased from us for $25,000 in July 2007; insider warrants refers to the 2,650,000 warrants we are selling privately to Lawrence S. Coben, Ronald D. Ormand, Jon Schotz, Charles A. Norris, Bill Goldstein, Dean Vanech, Jerry Doren, Owen Coleman, Bill Armstrong, Trevor Wilson, Brian McInerny, Richard Kassar, David Levine, Jim Land, David A. Preiser, Gary Evans and Dr. John Jacobs upon consummation of this offering; the term public stockholders means the holders of the shares of common stock which are being sold as part of the units in this public offering (whether they are purchased in the public offering or in the aftermarket), including any of our existing stockholders to the extent that they purchase such shares; and the information in this prospectus assumes that the representative of the underwriters will not exercise its over-allotment option. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer is not permitted. We are a blank check company organized under the laws of the State of Delaware on July 3, 2007. We were formed with the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. To date, our efforts have been limited to organizational activities. Our efforts in identifying a prospective target business will not be limited to a particular industry, although we intend to focus our efforts on seeking a business combination with an operating company in either the energy or the environmental industry and their related infrastructures. Energy Industry and Its Related Infrastructure The energy industry and its related infrastructure generally includes the production, generation, transmission and distribution of electricity, heat, fuel and other consumable forms of energy and the infrastructure needed to maintain and operate the facilities, services and installations used in the foregoing areas. Although we may consider a target business in any segment of the energy industry, we currently intend to concentrate our search for an acquisition candidate on companies in the following segments: Electricity generation, distribution and transmission; Oil and natural gas production, distribution and transmission; Energy related services including conservation, metering, well services, operations and maintenance; Steam generation and distribution; Alternative and renewable energy technologies; and The infrastructure necessary to operate in the energy industry including but not limited to areas such as the production, transportation or distribution of towers, power lines, scaffolding products and other equipment or supplies incidental to the energy industry. TABLE OF CONTENTS CALCULATION OF REGISTRATION FEE Title of Each Class of Security Being Registered Amount Being Registered Proposed Maximum Offering Price Per Security 1 Proposed Maximum Aggregate Offering Price 1 Amount of Registration Fee Units, each consisting of one share of Common Stock, $.0001 par value, and one Warrant 2 10,925,000 Units $ 8.00 $ 87,400,000 $ 2,683.18 Shares of Common Stock included as part of the Units 2 10,925,000 Shares 3 Warrants included as part of the Units 2 10,925,000 Warrants 3 Shares of Common Stock underlying the Warrants included in the Units 4 10,925,000 Shares $ 5.00 $ 54,625,000 $ 1,676.99 Total $ 142,025,000 $ 4,360.17 5 (1) Estimated solely for the purpose of calculating the registration fee. (2) Includes 1,425,000 Units, and 1,425,000 shares of Common Stock and 1,425,000 Warrants underlying such Units, which may be issued on exercise of a 45-day option granted to the Underwriters to cover over-allotments, if any. (3) No fee pursuant to Rule 457(g). (4) Pursuant to Rule 416, there are also being registered such additional securities as may be issued to prevent dilution resulting from stock splits, stock dividends or similar transactions as a result of the anti-dilution provisions contained in the Warrants. (5) The filing fee has been previously paid. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. TABLE OF CONTENTS Environmental Industry and Its Related Infrastructure The environmental industry and its related infrastructure generally includes the technologies and services that protect the natural and human environment from destruction and pollution, and the infrastructure needed to maintain and operate the facilities, services and installations used in the foregoing areas. The environmental industry also seeks to ameliorate the negative effects of industrial production and unhealthy practices and materials on our population as a whole. Although we may consider a target business in any segment of the environmental industry, we currently intend to concentrate our search for an acquisition candidate on companies in the following segments: Waste management and disposal, including wastewater treatment and management and sewage control; Air treatment and ionization, pollution and emission control; Medical waste disposal; Radon and site cleanup services; Other energy/environmental related technologies; and The infrastructure necessary to operate in the environmental industry including but not limited to areas such as the operation of water supply facilities, waste and wastewater treatment facilities, pollution control facilities and transportation facilities and the production, transportation or distribution of the equipment and products incidental to such operations.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001408348_china_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001408348_china_prospectus_summary.txt
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+summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. Unless otherwise stated in this prospectus, references to we, us or our company refer to China Holdings Acquisition Corp. Unless otherwise specified, references to China or PRC refer to the People s Republic of China as well as the Hong Kong Special Administrative Region, or Hong Kong SAR, and the Macau Special Administrative Region, or Macau SAR , but does not include Taiwan. All references to RMB or Renminbi are to the legal currency of China and all references to US dollars and are to the legal currency of the United States. Discrepancies in tables included in this prospectus between totals and sums of the amounts listed are due to rounding. Unless we tell you otherwise, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option. We are a blank check company formed under the laws of Delaware on June 22, 2007. We were formed to acquire or acquire control of one or more operating businesses having primary operations in Asia through a merger, stock exchange, asset acquisition, reorganization or similar business combination, or contractual arrangements (which we refer to throughout this prospectus as a business combination). We may acquire less than 100% of the interests or assets of the target business but will not acquire less than a controlling interest (which would be at least 51% of the voting securities of the target business). Our efforts to identify prospective target businesses will not be limited to a particular industry. To date, our efforts have been limited to organizational activities. We have not, nor has anyone on our behalf, contacted, or been contacted by, any potential target business or had any substantive discussions, formal or otherwise, with respect to such a transaction. While we have researched the opportunities, risks and issues related to consummating a business combination in various industries in China generally, we have not conducted any targeted research with respect to any specific potential target business candidates. We intend, after consummation of this offering, to initially focus for approximately nine months on target businesses in the PRC that we believe will have significant growth potential. Opportunities for market expansion have emerged for businesses with operations in China due to certain changes in the PRC s political, economic and social policies as well as certain fundamental changes affecting the PRC and its neighboring countries. We believe that China is an attractive market both for making acquisitions and operating a target business for several reasons, including, among other things, increased government focus within China on privatizing assets, improving foreign trade and emerging private enterprises. China s gross domestic product growths is among the highest of the world s major industrial countries, with strong growth across many sectors of the economy. While we intend to focus on potential acquisition targets in China for approximately nine months after the consummation of this offering, thereafter we may pursue opportunities in other countries within Asia as well as in China. We do not have any specific merger, stock exchange, asset acquisition, reorganization or similar business combination, or contractual arrangements under consideration or contemplation. Notwithstanding these trends, there are various risks of business acquisitions in China including, among others, the risk that we may be unable to enforce our rights in China, that governments may revert back to former policies less conducive to free trade and that relations between China and countries in other regions of the world, including the United States, may deteriorate leading to reduced trade. We will seek to capitalize on the significant investing and operating experience of our Chairman and Chief Executive Officer, Paul K. Kelly, and our President, James D. Dunning, Jr., each of whom has acquired and served as chief executive officer of multiple companies across a variety of industries. Additionally, our directors and advisors are senior professionals with extensive networks throughout the business community in China and other countries within Asia, and will help us to identify acquisition candidates. Our executive officers, directors and advisors have experience in a number of diverse areas including, but not limited to, consumer products, retail, healthcare and pharmaceuticals, technology, and media and publishing. Although our efforts in identifying a prospective target business will not be limited to a particular industry, we intend to leverage the experience of our executive officers, directors and advisors, including their relationships and contacts, to drive our efforts in identifying one or more target businesses with which we can consummate a business combination. Mr. Kelly is President and Chief Executive Officer of Knox & Co., an investment banking firm specializing in mergers and acquisitions, corporate restructuring and international financial advisory services for clients in Asia, the U.S., and throughout the world. In 2004, Mr. Kelly formed the Westgate Group, Inc., a strategic advisory firm focusing upon identifying and implementing cross-border business opportunities for clients, with an emphasis on Asia and the Pacific Basin, for which he acts as Chairman, CEO and is the majority shareholder. Mr. Kelly is also the President, Chief Executive Officer and sole shareholder of PH II, Inc., a privately held investment company which has investments in the United States and New Zealand. He has held these positions with PH II since 1988. Mr. Kelly also serves as Chairman and Chief Executive Officer of Knox Enterprises, Inc., successor to THT Inc., a privately held diversified manufacturing company. In 1996, Mr. Kelly founded the Carrington Club, a golf resort and karikari estate and winery in New Zealand for which he is the owner and Edgewater Developers, a real estate development company in New Zealand. From 1985 to 1990 Mr. Kelly served as President and Chief Executive Officer of Peers & Co., an international investment banking firm. From 1984 to 1985 Mr. Kelly was the President and a director of Quadrex Securities Corp. From 1982 to 1984 he was an Executive Vice President and Director of Dean Witter Reynolds, Inc., responsible for all investment banking activities for financial institutions. Mr. Kelly also served as Managing Director and a member of the Management Committee of Merrill Lynch White Weld Capital Markets Group from 1980 to 1982 where he was responsible for all investment banking activities for financial institutions on a worldwide basis, and was also senior banker to Merrill Lynch & Co., the holding company for all Merrill Lynch interests. Since April 2006, Mr. Dunning has been the Chairman of Doubledown Media, LLC, a multimedia platform and database company targeting high net worth individuals. Since January 1992, Mr. Dunning has served as Chairman of the Dunning Group, Inc., a private media company specializing in media leveraged buyouts. From April 2003 to March 2004, Mr. Dunning was a partner at Michaelson & Co., a hedge fund. From April 2000 to August 2001, Mr. Dunning was Chairman, President and CEO of Ziff Davis Media, Inc., a leading technology and Internet magazine publisher in the United States. Mr. Dunning led the management team that acquired Ziff-Davis Publishing Inc. from Ziff Davis Inc., and Softbank in December 1999. In August 1999 Mr. Dunning led the purchase of USA Pubs, Inc., a magazine subscription database and business acquisition company, and until August 2001 he served as the Chairman and CEO of USA Pubs, Inc. From January 1999 to August 1999 Mr. Dunning was the Chairman and CEO of EMAP Petersen. From 1996 until it was acquired in December 1999, Mr. Dunning served as Chairman, President and CEO of The Petersen Companies, Inc. He led the management team that purchased Petersen Publishing in September 1996 from its founder, Robert E. Petersen. During Mr. Dunning s tenure at Petersen, it developed from a publisher of special interest magazines into a complete marketing solutions company and one of the largest publishers of special-interest magazines in the U.S. In 1992, Mr. Dunning led the group that purchased Transwestern Publishing Company (a division of US West, Inc.) a yellow pages and database company. From 1992 to 1997 Mr. Dunning served as Chairman and CEO of Transwestern Publishing Company. While at Transwestern Publishing Company, Mr. Dunning led the buyout of SRDS, a media database and directory business and served as the Chairman of the Board from 1994 to 1995. In 1987 he led a buyout of Yellow Book, which went public as Multi-Local Media Information Group (Yellow Book), a public yellow pages and directory company and served as Chairman, President and CEO until 1992. From 1982 to 1985, Mr. Dunning was an investment banker at Thomson McKinnon Securities, Inc., where he served as Senior Vice President and Director of Corporate Finance. In addition to Mr. Kelly and Mr. Dunning, our Board of Directors is comprised of Alan G. Hassenfeld, Gregory E. Smith, Xiao Feng, and Cheng Yan Davis. Soopakij (Chris) Chearavanont and Ruey Bin Kao will be special advisors to our Board of Directors. Mr. Hassenfeld is Chairman of the Board and former Chief Executive Office of Hasbro, Inc., the second largest toy manufacturer in the world. The substantial majority of Hasbro s products are manufactured in China. Mr. Smith is the President and CEO of Cicada, which he founded in 1998. Cicada provides data management technology and compliance solutions to financial institutions, exchanges and data vendors. Cicada operates its principal software development operations in Hong Kong and Shenzhen, China. Mr. Feng is the founder of Bosera Asset Management Co., Ltd., one of the largest fund management companies in China. Prior to the establishment of Bosera, Mr. Feng was a senior government officer and deputy director of the China Securities Regulatory Commission. Ms. Davis has been the Vice Dean of International Programs and Development at the University of Pennsylvania Graduate School of Education since 1993. Since 1998, Ms. Davis has worked with Morgan Stanley on the International Conference on Higher Education Management in Shanghai, the establishment of the China Center, which focuses on management training for U.S.-China joint ventures. Mr. Chearavanont has been a Director and the Chairman of True Visions Public Company Limited (formerly United Broadcasting Corporation Public Company Limited), the largest cable and satellite television operator in Thailand, since 1993. Mr. Chearavanont has also been a Director and the Chairman of Chia Tai Enterprises International Ltd., a holding company for agricultural business, property and retail businesses, since 1995. Among other capacities, Mr. Chearavanont also is a Director and Chairman of Beijing Lotus Supermarket Chain Store Co., Ltd., a retail company, Chia Tai Lotus (Shanghai) Company Ltd., a retail company, and Shanghai Kinghill Ltd., a property company. However, the past experience of the members of our board of directors and their affiliated companies is no guarantee that our company will be successful in consummating an acquisition or in becoming a profitable venture following a business combination. Our initial business combination must be with a target business whose fair market value is at least equal to 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions of 3.0 million or 3.45 million if the underwriters overallotment option is exercised in full) at the time of such acquisition, although this may entail simultaneous acquisitions of several operating businesses. The fair market value of the target will be determined by our board of directors based upon one or more standards generally accepted by the financial community (which may include actual and potential sales, earnings, cash flow and/or book value). If our initial business combination involves a transaction in which we acquire less than a 100% interest in the target company, the value of that interest that we acquire will be equal to at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions). In all instances, we would control the target company. The key factors that we will rely on in determining control would be our acquisition of at least 51% of the voting equity interests of the target company and/or control of the majority of any governing body of the target company through contractual arrangements or otherwise. In order to consummate such an acquisition, we may use the proceeds held in the trust account, issue a significant amount of our debt or equity securities to the sellers of such business and/or seek to raise additional funds through a private offering of debt or equity securities. We do not have any specific business combination under consideration, and we have not (nor has anyone on our behalf) contacted any potential target business or had any discussions, formal or otherwise, with respect to such a transaction. We have not (nor have any of our agents or affiliates) been approached by any candidates (or representative of any candidates) with respect to a possible acquisition transaction. There has been no diligence, discussions, negotiations and/or other similar activity undertaken, directly or indirectly, by us, our affiliates or representatives, or by any third party, with respect to a business combination transaction with us. We intend to acquire an operating business through a stock exchange, asset acquisition or other similar business combination; however, there are a number of industries in China in which direct foreign investment is restricted (including telecommunications services, online commerce and advertising). Therefore, if our target business operates in an industry that is subject to these requirements we may seek to acquire control of our target business through contractual arrangements with licensed companies operating in China and their owners. We may enter into a business combination in which we, our subsidiaries and/or affiliates, and the target business and its stockholders enter into a series of contracts that are designed to secure for us economic benefits and to assume by us the risks of losses that are substantially similar to full ownership, although we would not be allowed to own the assets or obtain direct control of the operating company in a restricted industry in China. These contracts could, for example, result in a structure where, in exchange for our payment of the acquisition consideration, the target business would be owned 100% by Chinese residents whom we designate, and the target business would continue to hold the requisite licenses necessary to operate its business. We may also establish a new subsidiary in China which would provide technology, technical support, consulting and related services to the target business in exchange for fees, which are designed to transfer to us substantially all of the economic benefits of ownership of the target business. We will not consider any transaction that does not meet such criteria. If we choose to effect a business combination that employs these types of control arrangements, we may have difficulty in enforcing our rights. Therefore these contractual arrangements may not be as effective in providing us with the same economic benefits, accounting consolidation or control over a target business as would direct ownership. For example, if the target business or any other entity fails to perform its obligations under these contractual arrangements, we may have to incur substantial costs and expend substantial resources to enforce such arrangements, and rely on legal remedies including seeking specific performance or injunctive relief, and claiming damages. We cannot assure you these remedies will be sufficient to offset the cost of enforcement. In addition they may adversely affect the benefits we expect to receive from the business combination. Private Placement Our founders and special advisors have agreed to purchase an aggregate of 2,750,000 warrants at a price of 1.00 per warrant ( 2.75 million in the aggregate) in a private placement that will occur immediately prior to this offering. The 2.75 million of proceeds from this investment will be added to the proceeds of this offering and will be held in the trust account. The Company does not believe that the sale of the warrants will result in a compensation expense because they will be sold at approximately fair market value. Our executive offices are located at 33 Riverside Avenue, 5th Fl., Westport, CT 06880, and our telephone number at that office is (203) 226-6288.
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the following summary together with the more detailed information appearing in this prospectus, including our consolidated financial statements and the related notes, and our risk factors beginning on page 7, before deciding whether to purchase shares of our common stock. Unless the context otherwise requires, the terms 3PAR, the Company, we, us and our in this prospectus refer to 3PAR Inc. and its consolidated subsidiaries. 3PAR Overview We are the leading global provider of utility storage solutions for large to medium enterprises, business-oriented service providers, consumer-oriented Internet/Web 2.0 companies and government entities. Utility storage is a segment of the larger, global market for Fibre Channel and iSCSI open storage area networks, or SANs, a market in which we compete with larger, more established companies. Our utility storage products offer simple, efficient and massively scalable tiered storage arrays designed to dramatically enhance the economics and performance of storage. Our utility storage solution is designed to provision storage services rapidly and simply, reduce administrative costs, improve server and storage utilization, lower power requirements and scale efficiently to support the continuous growth of data. Our utility storage solution is designed as a key building block for utility computing. Utility computing is an emerging IT architecture that virtualizes key IT infrastructure elements, primarily application servers and storage arrays, to create shared infrastructures for workload consolidation that can enable services to be delivered more rapidly, flexibly, reliably and economically. Utility computing aims to capture key advantages of both mainframe computing and client/server, or distributed computing, which utility storage helps enable by reducing complexity and improving efficiency in the storage infrastructure. We deliver our utility storage solution through our InServ Storage Server arrays, all of which are powered by our InForm Suite of software. Our products provide the following key benefits to our customers: Simplicity. Autonomic and dynamically optimized management and administration of storage hardware and software; Efficiency. Virtualized storage capacity that reduces dedicated physical capacity and allows our customers to thinly provision physical storage to maximize utilization; Scalability. Clustered controller architecture designed to enable non-disruptive scalability within a single, tiered storage system as customer storage needs change over time; Availability. Architecture designed to maintain data availability, minimize the impact of component failures and allow faster recovery from application failures; and Faster Storage Provisioning. More rapid provisioning of storage services enables our customers to address new business opportunities more rapidly. We began commercial shipments of our products in March 2002 and have shipped over 400 systems to more than 200 end customers, including Credit Suisse Group, Department of Justice (FBI), Dow Jones & Company, Inc., MySpace.com, Omniture, Inc., Priceline.com, SAVVIS, Inc., TransUnion LLC, United States Census Bureau, USinternetworking, Inc. (an AT&T company), Verizon Business and the Virginia Information Technologies Agency. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents Industry Background IDC, a third-party market research firm, estimates in its November 2006 report Worldwide Disk Storage Systems 2006-2010 Forecast Update: Steady as She Goes that the global market for Fibre Channel and SANs will be approximately $11.7 billion in 2007. We compete in segments of this market that IDC estimates will be approximately $8.5 billion in 2007. The shift from mainframe to distributed computing has accelerated the adoption of modular storage and the development of networked storage in the form of both SANs and network attached storage, or NAS. However, traditional SAN and NAS approaches can lead to many individual storage silos, which in turn can require incremental networking infrastructure such as switches, appliances and management software. These incremental components add complexity to storage infrastructure and place a strain on IT personnel, which increases administrative costs. Traditional SAN and NAS approaches to data storage have numerous limitations, including complexity and inefficiency, slow provisioning of storage services, unintended storage performance bottlenecks and under-utilization of storage assets. In addition, there is increasing demand for IT storage agility and responsiveness to address changing business requirements at an economic cost that appropriately matches business needs, creating the need for a new storage solution. Utility storage is emerging as a next-generation storage architecture that leverages technologies that include virtualization, automation and clustering to create shared infrastructures for flexible workload consolidation. By employing these new technologies, we believe that organizations are able to significantly improve their storage environment with higher storage utilization, better data management and more predictable administrative costs. We believe that when compared to monolithic and modular storage solutions, our utility storage products enhance service delivery and storage economics by offering higher performance at a lower total lifetime cost of ownership. Our Strategy Our mission is to provide storage solutions that are simple and efficient. Key elements of our strategy include: Promoting the Benefits and Adoption of Utility Storage. We intend to increase market awareness of the benefits of utility storage by targeting organizations that can benefit from server virtualization and other aspects of utility computing; Building Substantial Repeat Business with Existing Customers. We intend to continue generating significant repeat business by selling easily expandable tiered storage arrays as our customers storage needs increase, and by delivering a broad and interoperable product line with a focus on achieving high levels of customer satisfaction; Expanding Our Customer Base Through Direct Customer Relationships in Core Markets. We intend to continue investing in the expansion of our sales force, both in the United States and internationally, in order to develop direct relationships with large potential customers; Expanding Our Strategic Relationships. We intend to continue establishing and expanding strategic relationships to serve markets in which we do not have a direct presence, and to integrate our utility storage solutions with the products offered by a broad range of hardware and software vendors; * To be filed by amendment. ** Previously filed. Confidential treatment has been requested for portions of this exhibit. These portions have been omitted from the Registration Statement and submitted separately to the Securities and Exchange Commission. AMENDMENT NO. 5 TO FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 Table of Contents Extending Our Technology Leadership Position in Utility Storage. We intend to continue enhancing our InForm Suite, other software applications and our underlying clustered controller hardware architecture with greater levels of functionality, performance and availability; and Offering the Highest Level of Customer Support. We intend to continue enhancing our remote support capabilities in order to further differentiate our utility storage products. Corporate Information We began operations in May 1999 and are headquartered in Fremont, California. Our principal executive offices are located at 4209 Technology Drive, Fremont, California 94538. Our telephone number is (510) 413-5999. Our website address is www.3par.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website to be part of this prospectus. The 3 design logo, 3PAR, InServ, InForm, InSpire, Serving Information, and other trademarks or service marks of 3PAR Inc. appearing in this prospectus are the property of 3PAR Inc. This prospectus contains additional trade names, trademarks and service marks of other companies. We do not intend our use or display of other companies trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies. 3PAR Inc. (Exact Name of Registrant as Specified in its Charter) Table of Contents
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001408792_reef-2007_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001408792_reef-2007_prospectus_summary.txt
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+Form of Compensation ADDITIONAL FINANCING You are not required to make any capital contributions to a partnership other than the payment of the offering price for your units. At times, however, the actual costs of a partnership's proposed drilling activities may exceed total partnership capital contributions due to unforeseen events. In such instances, additional funds may be required to uphold the partnership's obligations. Because the partnership agreement does not provide for assessments of the investor partners, we must obtain any necessary additional financing through either the use of partnership revenues, which will result in less overall distributions to the partners, the sale of partnership properties or production interests in partnership properties, or borrowings made by the partnership. In no event will a partnership's borrowings exceed 25% of the partnership's capital contributions without the consent of the partners. The proceeds of a partnership's borrowings will not be used to pay fees or expenses to us or our affiliates, other than to reimburse us or our affiliates for fees or expenses we have paid to third parties in the normal course of business on behalf of the partnership. In the event a partnership borrows funds for any reason, the lender must agree that it will have no recourse against the individual investor partners. A partnership may borrow money on a non-recourse basis from us or any of our affiliates, provided that on any loans made available by us or any of our affiliates to a partnership, we or such affiliate shall not receive interest in excess of the amount which would be charged to such partnership (without reference to our financial abilities or guaranties) by independent third parties for the same purpose. Any borrowings may, in our discretion, be secured by a partnership's assets or income and may, in our discretion, be made with or without recourse to us as managing general partner. We cannot guarantee that such additional financing will be available at the time needed, if at all, and if we are unable to procure a source of additional financing we may have to forego further drilling activities, development, completion or operations of oil and natural gas wells on partnership properties. Our inability to make required payments could also result in the loss of our interest in partnership properties, or in the sale of partnership assets or production interests in producing properties held by a partnership to third parties or our affiliates. In such instances, a partnership may not realize the full value of its holdings. In addition, to the extent a partnership incurs indebtedness, its repayment of such borrowings will decrease the partnership's cash available for distributions to the partners. We may from time to time elect to sell a production interest in a partnership's properties to another program sponsored by one of our affiliates or us. Should we elect to do so, the revenues generated by the sale of such production interest would be a source of additional financing for a partnership's initial or subsequent operations. The proceeds from such sale might also be utilized to purchase additional partnership properties, which would result in a more diverse portfolio of partnership properties and enable a partnership to participate in drilling activities requiring more capital than the amount initially raised by the partnership. The sale of a portion of the partnership's interest in producing properties would, however, result in the revenues from such properties being spilt between the partnership and the persons or entities purchasing an interest in the production from the partnership's wells and could result in decreased distributions to the partners. We will make all decisions as to how to raise any necessary additional financing and at times we may, in our discretion, loan funds to a partnership. In the event we or one of our affiliates makes a loan to a partnership, neither we nor our affiliate may receive interest in excess of our interest costs, nor may our affiliate or we receive interest in excess of the amounts which would be charged the partnership (without reference to our financial abilities or guaranties) by unrelated banks on comparable loans for the same purpose, and our affiliate or we shall not receive points or other financing charges or fees, regardless of the amount. Amount (1)All organization and offering costs, excluding sales commissions, will be paid by the managing general partner and not from subscription proceeds. The managing general partner will receive a credit in an amount not to exceed 2% of all subscription proceeds towards its acquisition of units of general partner interest for all organization and offering costs paid by it. Subsequent Sources of Funds As indicated above, it is anticipated that substantially all of a partnership's initial capital will be committed or expended following the offering of units in the partnership. Any future requirements for additional capital may have to be satisfied from partnership production or from borrowings to fund subsequent operations. See "ADDITIONAL FINANCING" and "
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001409134_osg_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001409134_osg_prospectus_summary.txt
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+This summary highlights information contained elsewhere in this prospectus. Unless we otherwise specify, all information and data in this prospectus about our business and fleet refer to the business and fleet that will be contributed to us upon the completion of this offering. You should read the entire prospectus carefully, including the historical and pro forma financial statements and the notes to those financial statements. The information presented in this prospectus assumes, unless otherwise noted, that the underwriters' over-allotment option is not exercised. You should read "Risk Factors" for information about important factors that you should consider before buying the common units.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001409302_value_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001409302_value_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before buying shares of our common stock. You should read the following summary together with the more detailed information concerning our company, the common stock being sold in this offering and our consolidated financial statements and related notes appearing in this prospectus. You should read the entire prospectus carefully, especially the risks described under Risk Factors and the consolidated financial statements and related notes, before deciding to invest in shares of our common stock. Value Financial Services, Inc. We are one of the largest providers of small, secured, non-recourse consumer loans, commonly known as pawn loans, and related services in the United States, based on the number of pawnshops operated. We were founded in 1994 by John Thedford, our president, chief executive officer and chairman of the board, and now have 62 stores in three states Florida (56 stores), Tennessee (four stores) and Georgia (two stores). We lend money on a short-term basis against pledged tangible personal property such as jewelry, electronic equipment, tools, sporting goods, musical instruments and other items of value, and also sell merchandise, including forfeited collateral from pawn loans. Our customers typically require pawn loans for their immediate cash needs, and often use our services for reasons of convenience and/or lack of credit alternatives. Pawn loans are typically small the average amount of our pawn loans was $149 in 2006 though the amount can vary considerably based on our customers particular needs. The terms of our pawn loans require that they be redeemed within 30 days, subject to an automatic extension period of 30 days unless paid or renewed earlier, and may be extended for additional 30-day periods upon the payment of accrued pawn service charges. In 2004, 2005 and 2006, approximately 78.0%, 78.8% and 77.8%, respectively, of the pawn loans made by us were redeemed in full or were renewed or extended through the payment of accrued pawn service charges. We refer to this as our redemption rate. We operate under long-established regulatory guidelines which permit pawn service charges ranging from 12.5% to 25.0% per month, or 187.5% to 300.0% annually, depending on state of origination, loan term and size. A majority of our pawn loans have pawn service charges of 25.0% per month as a result of our store concentration in Florida, where we operate 56 out of our 62 stores. Most of our larger competitors in the pawnshop industry are also geographically concentrated, and pawnshops have traditionally been most heavily concentrated in the Southeast and Southwest regions of the United States. We sell a wide range of merchandise in our stores, including merchandise that has been forfeited to us when a pawn loan is not redeemed, as well as used goods purchased from the general public and some new merchandise. For 2004, 2005 and 2006, we experienced profit margins on sales of merchandise of 36.9%, 38.2% and 36.9%, respectively. During 2006, approximately 69.3% of the merchandise we acquired was through loan forfeitures, 22.2% was through purchases from our customers, and the remaining 8.5% was through purchases from vendors. For 2006 and the nine months ended September 30, 2007, merchandise sales at stores that were in operation for all of that period and the corresponding prior period, which we refer to as same-store sales, increased by 25.3% and 19.9%, respectively. We opened our first store in Florida in 1994 and, as of September 30, 2007, operated 62 pawn and jewelry stores, under the trade names Value Pawn and Jewelry in Florida and Georgia and Check Jewelry & Loan in Tennessee. To date, we have opened all of our stores in three Southeastern states due in part to favorable demographics and regulatory environments. For the year ended December 31, 2006 and the nine months ended September 30, 2007, our average revenue per store was approximately $1.4 million and $1.2 million, respectively. At September 30, 2007, we had a total of 11,779 pawn loans outstanding, with a total balance of $17.5 million and an average balance of $282,691 per store. As of September 30, 2007, we had 574 team members (i.e. employees). UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents For 2006 and the nine months ended September 30, 2007, we generated total revenues of $87.8 million and $74.1 million, respectively, net income (loss) of $5.4 million and $(966,000), respectively, and EBITDA of $11.7 million and $922,000, respectively. Our revenues and EBITDA have grown substantially in recent years, at a compound annual growth rate of 18.6% and 26.3%, respectively, from 2003 to 2006. From 2003 to 2006, our EBITDA margin, which we define as EBITDA as a percentage of total revenues, improved from 11.1% to 13.3% and our store operating margins, which we define as store operating income as a percentage of total revenues, improved from 17.1% to 20.6%. Our Market Opportunity The pawnshop industry in the United States is an established industry, operating since at least the early 1800s, with estimated annual revenues of almost $5 billion in 2004, the most recent year for which data is available. The number of pawnshops has grown rapidly during the last two decades, from approximately 6,900 in 1988 to more than 11,000 in 2007. We believe that this growth is due to several factors, including the diminishing supply of competing banking services as well as underlying demographic trends. In addition, access to banks has become more difficult over time for many lower- to middle-income consumers. As a result of consolidation in the banking industry during recent decades, the number of banks has decreased substantially, from almost 15,000 in 1984 to less than 8,000 in 2003. While the overall number of bank branches has grown in recent years, data reported in 2004 by the Center for Community Capitalism estimated that the number of bank branches in low-income neighborhoods had decreased by over 20% during the preceding 15 years. We believe that our typical customer does not have a checking account or other traditional banking relationships. We refer to these customers as unbanked. A 2005 study by Marketdata Enterprises, Inc. estimated that 35% of the United States population, or 12 million households, are unbanked. Our customers also include underbanked individuals, who have bank accounts but do not have credit cards or other access to short-term loans. According to the Center for Financial Services Innovation, based on 2006 data, approximately 22 million U.S. families were underbanked. We provide high-quality customer service and have developed strong customer relationships founded on our focus on meeting customers needs. A significant portion of our business approximately 80% during 2006 is from repeat customers, which we believe is indicative of our high levels of customer satisfaction. The operation of pawnshops is governed primarily by state laws that are long-established, providing a stable set of guidelines for operations. States that maintain pawn laws most conducive to profitable operations have historically seen the greatest concentration of pawnshops. The three largest existing publicly traded pawnshop companies currently operate less than 1,000 of the pawnshops in the United States, and no one company owns more than 5% of the total number of stores. These companies stores tend to be geographically concentrated, with a particularly large number located in Texas. We have the second largest number of stores located in Florida, with 56 stores, compared to 67 by our largest competitor in the state as of December 31, 2006. We believe that individuals operating one to three stores own the majority of pawnshops in the United States. Our Strengths We believe that the growth in our revenues and profitability has been driven by the following key competitive strengths: Leading market presence in Florida. We operate 56 stores in Florida, making us the second largest pawn lender in the state, based on information provided by the National Pawnbrokers Association. We believe that Florida is a particularly attractive market for pawnshops as a result of its long-established regulatory environment and attractive demographics, including a large and growing Hispanic population. The current laws regulating the operation of pawnshops in Florida have been largely unchanged since 1996 and permit pawn service charges of up to 25.0% per month, or 300.0% annually. Amendment No. 4 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents Effective store management leads to strong financial performance. We believe that our strong financial performance is largely due to our effective store management founded upon our experienced and qualified team members. For 2006 and the nine months ended September 30, 2007, the average operating income of our stores that had managers with two or more years of tenure was higher by approximately 69.0% and 77.6%, respectively, than the average operating income of our stores that had managers with less than two years of tenure. For 2006 and the nine months ended September 30, 2007, our average store-level operating margins were 20.6% and 20.6%, respectively. Moreover, we have a consistent track record of store-level revenue growth and operating margin improvement. From 2003 to 2006, our same-store revenues grew at a compound annual growth rate of 18.6% and our store operating margins improved from 17.1% to 20.6%. Commitment to customer service. We have a long-established culture of customer service, and our team members strive to help and understand the needs of our customers. We believe that a high percentage of our customers are satisfied with us and their experience with us. A significant portion of our business approximately 80% during 2006 is from repeat customers, which we believe is indicative of our high levels of customer satisfaction. Management experience and expertise. Our executive management team has an average of 12 years experience within the pawn industry. We believe that our management s experience brings a professional, disciplined approach to our pawnshop operations, resulting in increased operational efficiencies. Our Strategy Our business strategy is designed to capitalize on our competitive strengths and enhance our leading market position in the pawnshop industry. Key elements of our strategy include: Open additional stores in our current markets. We intend to continue to open additional pawnshops in the states in which we currently operate. We opened two new stores in 2006, and expect to open at least seven additional stores within the states in which we currently operate by the end of 2008. By concentrating multiple stores in regional and local markets, we seek to expand market penetration, enhance name recognition and reinforce marketing programs. Continue to enhance employee metrics in order to improve existing store financial performance. Our same-store revenues have consistently increased in recent years, and we believe that our existing stores have continued growth potential. We have found that there is a strong correlation between the length of tenure of a store manager and the financial performance of that store. We believe that our existing store operating results should continue to improve if we are able to continue to retain our store managers and other key team members. Selectively pursue strategic acquisitions. The fragmented nature of our market provides opportunities for selective acquisitions of pawnshop businesses and individual stores. We are actively seeking to identify and acquire existing pawnshop operations and individual stores in markets that we believe to be desirable. Expand geographic footprint. We intend to expand into additional states and markets that we believe are conducive to pawn lending operations, including favorable regulatory environments and demographics. In addition to other states within the United States, we believe that both Puerto Rico and Mexico are attractive markets for our services, and we intend to continue to evaluate opportunities to open stores in each of these markets. VALUE FINANCIAL SERVICES, INC. (Exact name of registrant as specified in its charter) Table of Contents Evaluate opportunities to offer other specialty consumer finance services. We intend to evaluate opportunities to expand our service offerings to include other financial services designed to serve the needs of unbanked and underbanked consumers, including payday lending and check cashing services. We believe that there may be opportunities for us to leverage our experience and name recognition to provide other services such as these. Maintain focus on customer service. We believe that there will be a continuing demand for pawn lending services and other alternative credit solutions from a large segment of the population, both in the United States and in other jurisdictions. We believe that we can be successful in retaining existing customers and attracting additional customers for these services by continuing to emphasize customer service.
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus and does not contain all of the information you should consider in making your investment decision. You should read the following summary together with all of the more detailed information regarding us and our common stock being sold in the offering, including our financial statements and the related notes, appearing elsewhere in this prospectus. Unless we state otherwise, Aprimo, the Company, we, us, and our refer to Aprimo, Incorporated, a Delaware corporation. APRIMO, INCORPORATED Our Company We are a leading provider of marketing software and services that automate a broad spectrum of marketing processes and enhance the productivity and performance of marketing organizations. Our integrated suite of applications, Aprimo Enterprise, improves alignment across the Marketing Value Chain, which we define as the business processes that connect enterprise marketing departments with external marketing suppliers and enable the execution of marketing programs across multiple channels. Aprimo Enterprise is based on the Enterprise Marketing Backbone, our innovative service oriented architecture, which automates and unifies a broad range of marketing processes. We provide solutions primarily to large enterprises and medium-sized businesses worldwide, including AT T Inc., Bank of America, N.A., Capital One Services, Inc., The Home Depot U.S.A. Inc., Honda Motor Europe Ltd., Intel Corporation, Merck Co., Inc., Nestl S.A., Sprint Nextel Corporation, Target Corporation, Toyota Motor Corporation and Warner Bros. Entertainment, Inc. Aprimo Enterprise, our flagship solution, enables marketing professionals to better manage and optimize marketing expenditures and enhance their productivity by digitizing marketing processes from end to end. Our solutions meet the unique challenges inherent in the day-to-day activities of marketing professionals, which include managing assets and content, maintaining brand consistency, tracking expenditures, optimizing customer contacts, measuring advertising campaign returns and increasing the volume of high-value sales leads. By implementing our solutions, we believe our customers benefit from increased revenue through more leads and higher response rates, lower costs through the elimination of expensive rework, reduced time to market through streamlined production and approval workflows and improved efficiency of overall marketing operations through automated resource planning and management. A significant portion of our revenue is contracted prior to the period in which it is recorded. For example, by the end of the fourth quarter of 2006, we had contracted over 80% of our revenue for the first quarter of 2007. We expect this trend to continue. We increased our revenue from $30.5 million in 2005 to $51.6 million in 2006, representing a growth rate of 69%. Our revenue increased from $22.8 million for the six months ended June 30, 2006 to $29.8 million for the six months ended June 30, 2007, representing 31% year-over-year growth. We generated approximately 80% of our revenue in 2006 from customers in the United States and approximately 20% from international customers. Our Industry Marketing is one of the most critical enterprise functions, with worldwide expenditures on marketing activities exceeding $1 trillion annually. Marketing professionals are responsible for a wide range of activities, including the development of product strategy, brand and company promotion, and pricing and channel placement programs. In carrying out these responsibilities, marketing professionals must manage and analyze significant amounts of market data, optimize their business processes across the Marketing Value Chain and make critical strategic decisions in real time. Despite this complexity, few organizations have effectively automated their marketing functions, and in many cases, marketing professionals continue to rely on manual processes to manage marketing activities and communicate with marketing suppliers. Our large and growing total addressable market includes inter-related market segments such as Enterprise Marketing Management, Marketing Resource Management, Marketing Analytics, Campaign Management, Marketing Performance Management and Lead Management. Our total opportunity is further enhanced by the demand for integrated marketing platforms as opposed to point products, our ability to integrate the marketing organization and other enterprise functions, and our deployments that extend beyond the enterprise to connect third-party marketing suppliers directly with corporate marketing groups. According to a 2006 Gartner report, more than 50% of the marketing staff within global companies will use enterprise software by 2010, compared with fewer than 20% that do so today. We expect our growth to continue due to evolving challenges faced by marketing organizations, including: Increasing Challenges of the Marketplace. Marketing professionals operate in an increasingly challenging environment as consumers use technologies such as DVRs, commercial free radio and SPAM filters to limit the number of marketing messages that they receive. At the same time, the number of media channels continues to grow rapidly and includes both online and offline channels. In addition, the total number of products being marketed to consumers is increasing as enterprises develop more personalized products and reduce cycle times for new product introductions. Growing Complexity of the Marketing Value Chain. The Marketing Value Chain consists of an increasingly complicated network of entities including corporate marketing groups, external marketing suppliers, numerous channels, customers and prospective customers. Given the complexity of the Marketing Value Chain, marketing professionals face difficult challenges which include managing assets and content, maintaining brand consistency, tracking expenditures, optimizing customer contacts, measuring advertising campaign results and increasing the volume of high-value sales leads. Greater Accountability of the Marketing Organization. Organizations are placing greater attention on the transparency of marketing expenditures and risk management due to increasing legal and regulatory compliance requirements, including the Sarbanes-Oxley Act, no call lists and anti-spam laws. Additionally, marketing expenditures increasingly must demonstrate that they are producing an expected level of return on investment. Lack of Flexible, Comprehensive Marketing Platforms. Most disciplines within the enterprise, such as finance, sales and human resources, have implemented comprehensive software solutions to automate their workflows, business processes and data collection requirements. Marketing organizations have historically lacked a unified platform to manage and automate marketing activities, and most continue to rely on manual processes, internally developed software, office productivity tools and numerous other point products. Integration of Traditional Marketing Channels and the Internet. While online marketing expenditures remain relatively small compared to traditional marketing expenditures, online advertising is projected to approach 9% of total advertising expenditures by 2011, according to a 2007 IDC report, and is critical to the success of most marketing efforts. As a result, marketing professionals require technology solutions that can operate across traditional mass media and direct marketing channels, as well as online channels within an integrated platform. Our Solution We deliver a comprehensive software solution that enables our customers to automate their entire Marketing Value Chain, thereby increasing their marketing productivity and enhancing overall marketing performance. Aprimo Enterprise is a scalable platform that digitizes marketing processes from end to end through six main solution sets: Planning and Financial Management, Production Management and Workflow, Brand Content Management, Campaign Management and Planning, Lead Management and B2B Marketing. Our solutions are highly configurable, provide role-based functionality to all users, and are highly scalable with implementations generally ranging from 10 to 5,000 users. By implementing our solutions, we believe our customers benefit from: revenue gains through more sophisticated and effective marketing programs; cost savings through optimized investment and resource allocation; and real-time measurement and insight into marketing performance, which improves the productivity of the marketing organization. TABLE OF CONTENTS Page Prospectus Summary 1
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+Prospectus Summary 1 Risk Factors 16 Forward-Looking Statements 29 Use of Proceeds 30 Dividend Policy 30 Cash and Capitalization 31 Dilution 32 Unaudited Pro Forma Condensed Consolidated Financial Data 34 Selected Consolidated Financial and Other Data 42 Management s Discussion and Analysis of Financial Condition and Results of Operations 48 Business 94 Management 109 Executive Compensation 114 Certain Relationships and Related Transactions 129 Principal Stockholders and Selling Stockholders 131 Financing Arrangements 134 Description of Capital Stock 138 Shares Eligible for Future Sales 141 Material U.S. Federal Income Tax Considerations for Non-U.S. Holders of Common Stock 143 Underwriting 146 Legal Matters 151 Experts 151 Where You Can Find Additional Information 151 Index to Consolidated Financial Statements F-1 EX-10.1 SECOND AMENDED AND RESTATED 2005 STOCK INCENTIVE PLAN EX-10.2 FORM OF 2005 STOCK INCENTIVE PLAN NONQUALIFIED STOCK OPTION AGREEMENT EX-10.5 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EX-10.11 LEASE FINANCING AND PURCHASE OPTION AGREEMENT EX-10.12 PUT OPTION LETTER DATED OCTOBER 31, 2005 EX-10.13 CALL OPTION LETTER DATED OCTOBER 31, 2005 EX-10.14 SUPPLEMENTAL AGREEMENT DATED OCTOBER 31, 2005 EX-10.15 WORKING CAPITAL MURABAHA FACILITY AGREEMENT EX-10.16 REIMBURSEMENT LETTER DATED OCTOBER 31, 2005 EX-10.17 MURABAHA FACILITY AGREEMENT DATED OCTOBER 31, 2005 EX-10.18 MURABAHA FACILITY AGREEMENT DATED OCTOBER 31, 2006 EX-10.19 TENSAR INTERCREDITOR AGREEMENT DATED OCTOBER 31, 2005 EX-10.20 SUBORDINATION AND INTERCREDITOR AGREEMENT DATED OCTOBER 31, 2005 EX-10.21 MURABAHA FACILITY AGREEMENT DATED JUNE 22, 2006 EX-10.22 FIRST AMENDMENT TO LEASE/PURCHASE FACILITIES DOCUMENTS EX-10.23 FIRST AMENDMENT TO MURABAHA FACILITY AGREEMENT EX-10.24 FIRST AMENDMENT TO MURABAHA FACILITY AGREEMENT EX-10.25 FIRST AMENDMENT TO TCH INTERCREDITOR AGREEMENT EX-10.26 FIRST AMENDMENT TO SUBORDINATION AND INTERCREDITOR AGREEMENT EX-10.27 SECOND AMENDMENT TO LEASE/PURCHASE FACILITIES DOCUMENTS EX-10.28 FIRST AMENDMENT TO LUXCO COMMODITIES PURCHASE FACILITIES DOCUMENTS EX-10.29 SECOND AMENDMENT TO SECOND LIEN COMMODITIES PURCHASE FACILITY DOCUMENTS EX-10.30 SECOND AMENDMENT TO TENSAR HOLDINGS COMMODITIES PURCHASE FACILITY DOCUMENTS EX-23.2 CONSENT OF PRICEWATERHOUSECOOPERS LLP EX-23.3 CONSENT OF PRICEWATERHOUSECOOPERS LLP You should rely only on the information contained in this prospectus, any free writing prospectus prepared by us or information to which we have referred you. We have not, and the underwriters have not, authorized anyone to provide you with different information. This prospectus may only be used where it is legal to sell these securities. The information in this prospectus or any free writing prospectus may only be accurate as of their respective dates. This prospectus contains our registered and unregistered trademarks, service marks and trade names including: Everything from the Ground Downtm, Tensar , Mesa , North American Green , VMax3 , Geopier and Rammed Aggregate Pier . This prospectus also contains trademarks, service marks, copyrights and trade names of other companies. Unless otherwise cited, all market position data relating to our company and our industry is based on information from a July 2007 report issued by Freedonia Custom Research. We have supplemented such information where necessary with information from publicly available sources, discussions with our customers and our own internal estimates. We use these sources as estimates and believe them to be reliable. Through and including , 2007 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription. Table of Contents PROSPECTUS SUMMARY The following is a brief summary of selected contents of this prospectus. It does not contain all the information that may be important to you, and you should read this entire prospectus, including our consolidated financial statements and related notes herein. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those discussed in the Risk Factors and other sections of this prospectus. You should carefully consider, among other things, the matters discussed under the caption Risk Factors before making an investment decision. In this summary, we use the term EBITDA (earnings before interest, taxes, depreciation and amortization), which is a financial measure not calculated in accordance with generally accepted accounting principles, or GAAP. We include reconciliations of this measure to net income (loss) in Summary Historical and Pro Forma Consolidated Financial and Other Data and Selected Consolidated Financial and Other Data. In this summary, we also present pro forma financial data for the year ended December 31, 2006 that gives effect to the acquisition of The Tensar Group Limited (TGL) as if the acquisition and the related financings occurred on January 1, 2006. See Unaudited Pro Forma Condensed Consolidated Financial Data. Unless otherwise indicated, the terms Tensar Corporation, Tensar, Successor company, the company, we, us and our refer to Tensar Corporation and its subsidiaries on a consolidated basis. Our business operations are independently carried out by direct and indirect subsidiaries of Tensar Corporation. Our Company We are a leading global developer and manufacturer of proprietary, highly engineered, non-traditional site-development solutions for infrastructure end-markets, including transportation, commercial and industrial construction. We provide our customers with an integrated suite of innovative products, technologies and application expertise for a wide variety of end uses, including high performance roadways, earth retention structures, building foundations and erosion and sediment control. Relative to traditional construction materials and practices, our technology-based alternatives save time, extend asset life-cycles, reduce costs and minimize environmental impact. In 2006, the addressable U.S. infrastructure end-markets for our site development solutions were approximately $2.6 billion. We believe we have leading market positions in each of these end-markets. Many of these leading positions are supported by our worldwide portfolio of approximately 150 patents. We serve markets in North America, South America, Europe, the Middle East, Africa and Asia with 2006 sales in approximately 70 countries and have four manufacturing facilities on three continents. We serve these markets through a group of over 120 business development personnel located in 14 countries, who are supported by our network of more than 300 independent trained company representatives, distributors and licensees. For the six months ended June 30, 2007, our net sales into the Americas, the United Kingdom and Europe, the Middle East and Africa, and Asia Pacific were 70%, 28%, 1% and 1%, respectively. During the year ended December 31, 2006, we generated consolidated net sales of $175.8 million, incurred a net loss of $7.4 million and generated EBITDA of $44.6 million. Pro forma for our acquisition of The Tensar Group Limited (TGL), a U.K.-based business, in June 2006, we generated net sales of $206.1 million, incurred a net loss from continuing operations of $12.2 million and generated EBITDA of $48.5 million for the year ended December 31, 2006. During the six months ended June 30, 2007, we generated consolidated net sales of $108.3 million, incurred a net loss of $5.9 million and generated EBITDA of $24.1 million. See Summary Historical and Pro Forma Consolidated Financial and Other Data for additional detail. Table of Contents Our Reportable Segments Our operations are organized into the following three reportable segments based on the end-markets we serve: Earth Reinforcement Solutions (ERS). ERS develops and manufactures innovative products that are used for earth reinforcement in transportation, commercial and industrial construction. Our ERS products lower installation costs by reducing the need for traditional construction materials, allowing the use of lower cost construction materials and increasing the speed of construction relative to traditional alternatives. Our products also lower life-cycle costs by extending the life of roadways and other transportation infrastructure. ERS is a global market leader in the non-traditional earth reinforcement solution market, which is a sector of the overall roadway foundation and earth retention market. ERS has an approximate 5.8% share of the overall U.S. roadway foundation and earth retention market according to Freedonia Custom Research. For the year ended December 31, 2006, ERS generated net sales to external customers of $123.9 million, which represented 70.5% of our consolidated net sales during that period. Environmental Site Solutions (ESS). ESS develops and manufactures products used to provide erosion and sediment control and promote vegetation growth after construction. Our rolled erosion control products offer soil protection that is more effective and environmentally sensitive than traditional alternatives, and we believe our ESS solutions are safer, faster and more cost-effective than traditional materials. In addition, because we are a manufacturer of the reinforcement component used in almost every rolled erosion control product on the market today, we believe we are able to offer competitively priced erosion control products more profitably than our competitors. ESS products are principally used in transportation, commercial, residential and industrial applications. ESS is a leader in the rolled erosion control products market, which is a sector of the overall erosion control market. ESS has an approximate 6.0% share of the overall U.S. erosion control market according to Freedonia Custom Research. For the year ended December 31, 2006, ESS generated net sales to external customers of $35.9 million, which represented 20.4% of our consolidated net sales during that period. Foundation Improvement Solutions (FIS). FIS is a licensor of proprietary foundation support technologies used in the construction of new structures on sites with weak or soft soil conditions. FIS s technologies, which are based on proprietary methods of constructing intermediate-depth aggregate pier foundation systems, offer cost-effective and time saving alternatives to traditional steel and concrete pile foundations. FIS also provides design support services to its licensees. FIS s technologies are principally used for commercial, industrial and, more recently, alternative energy site-development applications. FIS is a North American market leader for intermediate-depth, aggregate-based foundation support technologies, which is a sector of the overall foundation improvement market. FIS has an approximate 7.2% share of the overall U.S. foundation improvement market according to Freedonia Custom Research. For the year ended December 31, 2006, FIS generated net sales to external customers of $16.0 million, which represented 9.1% of our consolidated net sales during that period. Market Opportunity According to Freedonia Custom Research, the addressable U.S. infrastructure end-markets for our site development solutions in 2006 were estimated to be approximately $2.6 billion and are expected to grow at an 8.6% compound annual growth rate to approximately $3.9 billion by 2011. According to the report, including our 58% market share in non-traditional solutions, 10.9% of the U.S. market in which we compete was comprised of non-traditional construction solutions in 2006, compared to 6.9% in 2001. The time savings, superior performance and lower cost of non-traditional solutions are expected to drive further substitution of traditional materials. As a result of the value proposition of non-traditional products, Freedonia Custom Research estimates that overall penetration of the addressable U.S. markets will increase to 17.9% by 2011. Table of Contents [Artwork to Come] Table of Contents We believe the following industry trends will positively impact demand for our products and services: Increased Demand and Funding for Infrastructure Projects. Our business will benefit from growth in domestic and international infrastructure markets. Global Insight projects an 8.0% annual growth rate in global infrastructure spending from 2005 to 2010 and a 6.7% annual growth rate in the United States over the same period. We expect the transportation sector of the infrastructure market will drive a significant portion of this growth as a result of recent federal-aid highway legislation, which provides for $286.4 billion in guaranteed funding for federal highway, transit and safety programs through 2009. In addition, a trend toward privatization of highways and increased use of toll roads, public-private partnerships, design-build-operate-and-maintain contracts and other alternative financing strategies may provide long-term funding for transportation projects to supplement federal aid and other public transportation spending. We expect that these new sources of funding will contribute to infrastructure market growth. We also believe that non-traditional, value-enhancing solutions such as ours should benefit from the increased cost-sensitivity associated with private transportation investments. In addition, international infrastructure spending is expected to rise in certain regions, including China, India, Russia and Eastern Europe. Increased Environmental Regulation and Enforcement. Recent storm water discharge regulations have significantly increased demand in the sector of the site-development market served by our ESS segment. Greater enforcement of these regulations, including significant financial penalties levied against violators, makes erosion control products an essential component of almost all construction projects in the United States. Further, environmental guidelines that limit the use of chemical stabilization of soft soils, regulate the disturbance of contaminated soils and control the opening of new aggregate quarries drive demand for non-traditional solutions, such as those provided by ERS. Rising Costs of Traditional Construction Materials and Practices. Prices for ready mix concrete, sand and gravel, and iron and steel have increased significantly since 2004, contributing to a 31% rise in overall highway construction costs from 2004 through 2006. Moreover, strong demand for and regulations limiting the opening of new aggregate quarries have led to a decrease in the supply of aggregate and a significant increase in crushed stone aggregate prices. We also believe that rising energy prices together with a trend toward relocating quarries farther away from populated areas due to land value pressures and environmental concerns have significantly increased the cost of transporting relatively heavy traditional materials over longer distances. These dynamics make non-traditional products, such as our ERS and ESS products, which reduce the need for traditional materials, increasingly attractive. Increasing Scarcity of Easily Developable Land. We believe the rate of land development is beginning to strain development capacity in and around higher population density regions, which we anticipate will continue to drive demand for construction methodologies that optimize and maximize land usage, including many of our ERS and FIS solutions. Competitive Strengths We have a number of important competitive strengths that we believe drive our success and differentiate us from our competitors, including: Market Leadership in Attractive End-Markets We believe we are a global leader in the markets in which we compete. We have an extensive international presence with a group of over 120 business development personnel located in 14 countries and more than 300 independent trained company representatives, distributors and licensees in approximately 70 countries. According to Freedonia Custom Research, our U.S. market shares range from 5.8% to 7.2% across our reportable segments. We have sales in all states in the United States, and our products hold favorable transportation agency specifications in 35 states. We also hold favorable specifications with a number of transportation authorities worldwide, including national specifications governing both highway and railway construction. Even with these Table of Contents advantageous specifications, our addressable end-markets are under penetrated by non-traditional products, which we view as an opportunity to grow our sales even during a future slowdown in the overall infrastructure market. Comprehensive Product Solutions Offer Compelling Value Proposition We offer an integrated suite of products, technologies and application expertise for a wide variety of infrastructure applications, such as high performance roadways, earth retention structures, building foundations and erosion and sediment control. We have created a platform that offers Everything from the Ground Downtm soil stabilization solutions that span across our three reportable segments, which we believe enhances the attractiveness of our individual product lines and provides meaningful cross-selling opportunities. Our technology-driven products and services are more attractive to our end-customers than traditional alternatives based on our value proposition of faster, better, cheaper. Our products, technologies and application expertise create these benefits by: reducing construction material costs; increasing structural performance and reliability; shortening project development time; expanding the amount of usable land for site development while reducing developmental costs; and extending the life-cycle of transportation roadway infrastructure. Technology-Driven Company with a History of New Product and Application Development and Commercialization We are a leading innovator of site development solutions in the markets we serve with a portfolio of approximately 150 patents worldwide and in-house engineering resources focused on continuing technological advancement. We believe our focus on innovation and continuous improvement of our products is inherent in our culture and is supported by approximately 120 engineers, of whom approximately 45 hold advanced degrees. In 2007, ERS introduced the next generation of our geogrid technology in the United Kingdom, ESS introduced a new line of high-performance, hydraulically-applied cotton fiber erosion control products and FIS began the introduction of a new foundation technology for use in softer soils. In addition, we invested approximately $0.7 million in our new research and development technical center at our Blackburn, United Kingdom production facility during 2006. Long-Standing Distributor Relationships with Diversified End-Customer Base Over the last 26 years, we have developed an extensive global distribution network across all of our product lines comprised of 189 U.S. distributors and licensees, and 115 international distributors and licensees. We also maintain direct sales locations in 14 countries and 120 direct sales personnel. As the developer of most of the technologies that we sell, we have been able to select leading distributors in nearly every region in which we compete. Many of our distributors and licensees are established local and regional businesses, with strong relationships with local contractors and engineers. These factors, coupled with our distributors and licensees product knowledge and experience, help us to maintain and continue to penetrate existing end-customers and attract new end-customers. Across our reportable segments, we service a diverse international end-customer base, including the U.S. Department of Transportation and most state and national transportation agencies, the U.S. Army Corps of Engineers, and private sector companies, such as energy companies, national retailers and home improvement centers. Efficient, Scalable, Global Manufacturing Our highly-advanced low labor content manufacturing process, which we have continually refined and improved over the last two decades, provides us with a significant competitive advantage. We manufacture our Table of Contents 2. In October 2005, in substitution of and exchange for management equity interests in our Predecessor company, we issued an aggregate of 790,985 shares of restricted stock to members of our management. 3. In October 2005, we issued and sold 11,359,016 shares to Tensar (Cayman) Holding Company Limited at a purchase price of $10.00 per share. The aggregate purchase price was $113,590,160.00, and the purchase price for these shares was paid in cash. 4. In June 2006, we issued and sold 1,000,000 shares to Kingsway Nominees, Ltd. at a purchase price of $10.00 per share. The aggregate purchase price was $10,000,000.00, and the purchase price for these shares was paid in cash. 5. In June 2006, we issued and sold 2,416,419 shares to Tensar (Cayman) Holding Company Limited at a purchase price of $10.00 per share. The aggregate purchase price was $24,164,190.00, and the purchase price for these shares was paid in cash. 6. In June 2006, we issued and sold 254,360 shares to certain members of our management at a purchase price of $10.00 per share in connection with their exercise of preemptive rights in order to avoid dilution in connection with the TGL acquisition. The aggregate purchase price was $2,543,600. The purchase price for these shares was paid in interest-free promissory notes made to Tensar (Cayman) Holdings Company Limited by the members of management that purchased these shares. Such interest-free promissory notes are secured by pledged shares of our common stock. 7. In June 2006, in substitution of and exchange for loan notes issued by us to David Johnstone, James McNally, Hendrik Jas, John Kiely and Anthony Walsh and totaling 706,593, we issued 130,721 shares of restricted stock to David Johnstone, James McNally, Hendrik Jas, John Kiely and Anthony Walsh. 8. In November 2006, we issued and sold 10,000 shares of restricted stock to Jeffrey Johnson under our Second Amended and Restated 2005 Stock Incentive Plan at a purchase price of $0.02 per share. The aggregate purchase price was $200.00, and the purchase price was paid in cash. 9. From September 15, 2005 through June 30, 2007, we granted non-qualified stock options to employees under our 2005 stock incentive plan covering an aggregate of 1,726,800 shares of our common stock, at an exercise price of $10.00. On July 16, 2007, we granted non-qualified stock options to employees, in recognition of our strong performance and in connection with the extension of their employment, covering an aggregate of 83,000 shares of our common stock, at an exercise price of $12.80. Stock options covering an aggregate of 189,800 shares of our common stock were forfeited by reason of death, resignation, or unmet performance goals. Through June 30, 2007, no options to purchase shares of our common stock had been exercised. No underwriters were involved in the foregoing sales of securities. Such sales were made in reliance upon the following exemptions from the registration provisions of the Securities Act: Section 4(2) of the Securities Act; Rule 506 under Regulation D of the Securities Act; and Rule 701 under the Securities Act. Appropriate legends were affixed to the stock certificates issued in such transactions. All of the foregoing securities are deemed restricted securities for the purposes of the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits Exhibit No. Description 1 .1 Form of Underwriting Agreement* 3 .1 Amended and Restated Certificate of Incorporation of the Company* 3 .2 Second Amended and Restated Bylaws of the Company* Table of Contents products in four facilities on three continents that are strategically located to allow quick delivery and minimize transportation costs. Our equipment, manufacturing expertise and highly automated processes provide us with the manufacturing flexibility to efficiently meet global demand for our products. As a result of strong demand for our products, we launched our production facility in China in 2005, and we expanded our primary U.S. production facility in 2007. We believe these new and expanded facilities will support our current growth expectations for the next several years, provide us with flexibility to redirect manufacturing capacity in periods of shifting demand for our products and meaningfully reduce our per unit costs as we continue to increase production. Experienced Management Team Our executive officers include nine individuals with significant industry experience. Our chief executive officer and three segment presidents have an average tenure of over 14 years at Tensar. Additionally, our chief executive officer, Philip D. Egan, has worked at Tensar for 18 years and in our industry for over 30 years. Our management team has successfully driven growth by developing and marketing new site-development solutions, as well as targeting and integrating strategic acquisitions. Our Growth Strategy Our strategy is focused on maintaining our market leadership while growing net sales, increasing market penetration and enhancing profitability. The following are key elements of our strategy: Continue to Increase Market Penetration and Drive Demand in Existing Markets The unpenetrated portion of our market, estimated at approximately $2.3 billion in the United States, presents a sizable opportunity for us. We intend to continue to strategically penetrate existing domestic and international markets by educating key constituents and decision-makers on the time and cost savings and superior performance that our full suite of site solutions delivers. The goal of these educational efforts is to obtain favorable specifications for and increased awareness of our products. We plan to leverage our global selling resources to promote this education effort and plan to continue our extensive training of our sales force and distributors in order to better communicate the advantages of our products while also maximizing cross-selling opportunities. Target Emerging International Markets We intend to continue to invest additional resources in new and emerging markets where we believe there are significant opportunities for us to grow our business. For example, since our acquisition of TGL in June 2006, we have added Saudi Arabia as a new market covered by our sales force and added sales representatives in Spain, Germany and Russia. Through our targeted education efforts and strategic deployment of selling resources, we plan to engage key constituents in new and emerging markets to convey our compelling value proposition of non-traditional solutions. Leverage Our Position as a One-Stop-Shop For Site Solutions Our goal is to have a Tensar solution on every earthwork site-development project and, as such, we have created our Everything from the Ground Down strategic platform, which we believe enhances the attractiveness of our individual product lines and provides meaningful cross-selling opportunities across our three reportable segments. Our integrated suite of innovative earthwork products, technologies and application expertise available on a contract basis provides our customers with a one-stop-shop for site solutions, which, when combined with our products value-proposition and proven long-term performance, we believe will continue to create loyal, repeat customers. We intend to supplement our platform with new solutions that are developed in-house, exclusively licensed or acquired. Table of Contents Focus on New and Proprietary Products We have consistently developed and commercialized new products and improved the performance of our product portfolio, and we believe we will be able to continue to improve our core technologies and pursue additional innovations in each of our reportable segments. For example: ERS. Over the last 16 years, we have introduced five improvements to one of our primary ERS geogrid products. We also introduced the next generation of our geogrid technology in the United Kingdom in May 2007, which we believe provides our customers with superior performance characteristics for high-performance roadway applications and additional cost savings. ESS. In June 2007, we launched a new line of high-performance, hydraulically-applied cotton fiber erosion control products developed by Mulch Seed Innovations Inc. in cooperation with Cotton Incorporated and the U.S. Department of Agriculture and licensed by Mulch Seed Innovations Inc. to ESS in North America on an exclusive basis. FIS. We plan to implement strategic market development programs that we believe will lead to continued acceptance of two new FIS technologies we introduced in 2006 and 2007. Continue to Drive Efficiency at Manufacturing Facilities We have consistently demonstrated our ability to improve our manufacturing efficiency, which increases our available capacity and reduces manufacturing costs. For example, for the five year period starting in 2002 and ending in 2006, we reduced our geogrid manufacturing conversion costs at our Morrow, Georgia manufacturing facility by 19%. Our four production facilities share best-practices to maximize manufacturing efficiency and utilization while maintaining or improving quality standards. For example, we leveraged our U.S. manufacturing expertise to increase throughputs by approximately 12% at our newly acquired U.K. facility, and we recently added a new production line at our Morrow, Georgia manufacturing facility, which incorporates state-of-the-art process and equipment improvements. Selectively Pursue Acquisition Opportunities We will seek to continue to identify highly profitable, high-growth acquisition targets that serve similar or complementary markets to enhance our leading market positions, broaden the suite of solutions that we offer our customers, expand our cross-selling opportunities and increase the portfolio of our distributors, thereby further enhancing our business relationships with existing distributors and licensees. In 2006, we acquired TGL, which expanded our international market presence to cover 54 new countries, grew our distribution network by adding 70 new distributors, and increased our manufacturing capacity through the addition of our U.K. and China production facilities. Our Majority Stockholder Our majority stockholder is an affiliate of Arcapita Bank B.S.C.(c), a global investment group founded in 1997 with offices in Atlanta, London, Singapore and Bahrain. We refer to Arcapita and its affiliates collectively as either Arcapita or our majority stockholder in this prospectus. Arcapita has total assets as of June 30, 2007 of over $3.8 billion and has executed 60 transactions valued at over $19.2 billion in four main lines of business corporate investment, real estate investment, asset-based investment and venture capital. Arcapita s corporate investment line of business has invested over $1.8 billion in equity across 26 transactions totaling over $4.5 billion in transaction value. Current and past corporate investments span a broad range of industries, including consumer, healthcare, specialized manufacturing and technology. Arcapita has 20 portfolio companies, including the following leading manufacturing companies: Paroc (a European provider of stone wool insulation), Cirrus Industries (a general aviation aircraft manufacturer) and Southland Log Homes (a log home kit manufacturer). Table of Contents Corporate Information Our U.S. business began operations in 1983. Our immediate predecessor was formed on April 23, 2004 in Delaware, and the prior predecessor was Atlantech Holding Corp., which was formed on December 5, 2000 in Delaware. We were incorporated on September 12, 2005 in Delaware. We were formed for the purpose of acquiring The Tensar Corporation, which we refer to as our Predecessor company. We entered into a stock purchase agreement on September 13, 2005, and in accordance with such agreement, we acquired our Predecessor company and its subsidiaries on October 31, 2005. In this prospectus, we refer to Tensar Corporation (the Successor company) and its consolidated subsidiaries for the period from and after November 1, 2005 and refer to our Predecessor company and its consolidated subsidiaries for periods prior to November 1, 2005. Our principal executive offices are located at 5871 Glenridge Drive, Suite 300, Atlanta, Georgia 30328, and our telephone number is (404) 214-1700. Our website is located at www.tensarcorporation.com. The information on, or that can be accessed through, our website is not part of this prospectus. Risks Associated with Our Business We are subject to a number of risks, which you should be aware of before you decide to purchase shares of our common stock. These risks are discussed more fully in the Risk Factors section of this prospectus and include the following: we are subject to fluctuations in the cost and availability of raw materials, and increases in these costs or decreases in availability could adversely affect our liquidity and profitability; we depend on large distributors and licensees for a significant portion of our net sales, and if we lose certain of these relationships or if the amount of business we obtain from them is reduced, our net sales could significantly decline; governmental entities fund a significant portion of the projects into which we sell our products, and as a result, decreases in transportation spending, budget deficits and changes in the allocation of available funds to various construction projects may materially decrease demand for our products; and we compete in several markets, some of which are cyclical in nature, and a downturn in these markets, specifically the commercial construction market, may adversely affect us. Table of Contents The Offering Common stock offered by us shares Common stock offered by the selling stockholders shares Common stock to be outstanding after this offering shares Use of proceeds We estimate that our net proceeds from this offering, after deducting the underwriting discounts and commissions and other estimated expenses, will be approximately $ million (or $ million if the underwriters exercise their over-allotment option to purchase additional shares in full). We will use the net proceeds to repay outstanding indebtedness. We will not receive any of the net proceeds from the sale of shares of common stock by the selling stockholders. See Use of Proceeds. Proposed New York Stock Exchange symbol TXC The common stock to be outstanding after this offering is based on shares outstanding as of June 30, 2007, and excludes the following: shares issuable upon the exercise of outstanding stock options at an exercise price of $ per share; shares available for future issuance under our equity compensation plans; and shares available for future issuance under our employee stock ownership plan. Except as otherwise indicated, the information in this prospectus: gives effect to a for split of shares of our common stock immediately prior to the closing of this offering; assumes the underwriters do not exercise their over-allotment option to purchase additional shares; and assumes that our shares of common stock will be sold at $ per share, which is the mid-point of the price range set forth on the cover page of this prospectus. Table of Contents Summary Historical and Pro Forma Consolidated Financial and Other Data We were formed on September 12, 2005 for the purpose of acquiring The Tensar Corporation, which we refer to as our Predecessor company. We entered into a stock purchase agreement on September 13, 2005, and in accordance with such agreement, we acquired our Predecessor company and its subsidiaries on October 31, 2005. In May 2006, we entered into an agreement to acquire TGL. In accordance with such agreement, we completed the acquisition on June 23, 2006. In this prospectus, we refer to Tensar Corporation and its consolidated subsidiaries for the period from and after November 1, 2005 as the Successor company and refer to The Tensar Corporation and its consolidated subsidiaries for periods prior to November 1, 2005 as the Predecessor company. The summary historical financial data for our Predecessor company for the year ended December 31, 2004 and the period from January 1, 2005 through October 31, 2005 has been derived from our Predecessor company s audited consolidated financial statements and related notes thereto included elsewhere in this prospectus. The summary historical financial data for Tensar Corporation for the period from November 1, 2005 through December 31, 2005 and for the year ended December 31, 2006 has been derived from our audited consolidated financial statements and related notes thereto included elsewhere in this prospectus. The summary historical financial data for Tensar Corporation as of June 30, 2007 and for the six months ended June 30, 2006 and 2007 have been derived from our unaudited consolidated financial statements and related notes thereto included elsewhere in this prospectus. Our unaudited consolidated financial statements include, in the opinion of management, all adjustments, consisting of normal recurring adjustments that are necessary for a fair presentation of our financial position as of such dates and our results of operations for such periods. The results for periods of less than a full year are not necessarily indicative of the results to be expected for any interim period or for a full year. The following tables also present summary unaudited pro forma financial data for Tensar Corporation for the year ended December 31, 2006 and summary unaudited pro forma as adjusted financial data for Tensar Corporation for the year ended December 31, 2006 and as of and for the six months ended June 30, 2007. The pro forma statement of operations data for the year ended December 31, 2006 gives effect to our acquisition of TGL and the related financing transactions as if they had occurred on January 1, 2006. The pro forma as adjusted financial data also gives effect to the following, as if they had occurred, in the case of the pro forma as adjusted financial data for the year ended December 31, 2006 and the six months ended June 30, 2007, on January 1, 2006 and, in the case of the pro forma as adjusted financial data as of June 30, 2007, on June 30, 2007: the completion of this offering, our receipt of the estimated net proceeds from the sale of the shares of our common stock offered hereby and the use of proceeds therefrom. See Use of Proceeds. The summary unaudited pro forma and pro forma as adjusted financial data for the year ended December 31, 2006 and the summary unaudited pro forma and pro forma as adjusted financial data as of and for the six months ended June 30, 2007, has been derived by the application of pro forma adjustments to our historical consolidated financial statements for the year ended December 31, 2006, and as of and for the six months ended June 30, 2007, and related notes thereto included elsewhere in this prospectus. The summary unaudited pro forma and pro forma as adjusted financial data is for informational purposes only and should not be considered indicative of actual results that would have been achieved had the transactions described above for which we are giving effect actually been completed on the dates or for the periods indicated. The summary unaudited pro forma and pro forma as adjusted financial data are also not necessarily indicative of the results to be expected for the full year or any future period. The summary unaudited pro forma and pro forma as adjusted financial data do not purport to predict balance sheet data, results of operations, cash flows or other data as of any future date or for any future period. A number of factors may affect our actual results. See Risk Factors and Forward-Looking Statements. The following information is qualified by reference to and should be read in conjunction with Cash and Capitalization, Unaudited Pro Forma Condensed Consolidated Financial Data, Selected Consolidated Financial and Other Data, Management s Discussion and Analysis of Financial Condition and Results of Operations and our and TGL s consolidated financial statements and related notes thereto included elsewhere in this prospectus. Table of Contents Summary Historical and Pro Forma Consolidated Financial and Other Data Predecessor Company Successor Company Pro Forma January 1, November 1, Pro Forma As Adjusted 2005 2005 Six Months Year Ended through through Year Ended Six Months Year Ended Year Ended Ended December 31, October 31, December 31, December 31, Ended June 30, December 31, December 31, June 30, 2004(1) 2005 2005 2006(2) 2006 2007 2006 2006 2007 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (In thousands, except per share data) Consolidated Statement of Operations Data: Net sales $ 87,638 $ 107,228 $ 17,118 $ 175,827 $ 67,021 $ 108,298 $ 206,165 Cost of sales 39,633 49,407 9,756 89,180 33,092 53,844 105,247 Gross profit 48,005 57,821 7,362 86,647 33,929 54,454 100,918 Operating expenses 24,707 26,006 8,060 54,524 21,399 40,767 67,809 Acquisition related expenses and other 8,094 2,163 1,991 2,163 Gain on sale of investment (1,362 ) (1,362 ) Operating income (loss) 23,298 23,721 (698 ) 31,322 10,539 13,687 32,308 Other income (expense), net Interest expense, net(3) (10,135 ) (17,981 ) (5,268 ) (38,513 ) (16,320 ) (22,475 ) (44,517 ) Loss on debt extinguishment (6,721 ) (3,639 ) Increase in fair value of liability for cross-currency swap(4) (7,521 ) (2,054 ) (1,679 ) (7,521 ) Increase in fair values of liabilities for warrant put options(5) (2,540 ) (12,254 ) Gain on foreign exchange, net(6) 2,561 (4,097 ) 1,649 2,561 Other (expense) income, net (294 ) 582 (142 ) (88 ) 1,205 (747 ) (88 ) Total other expenses (19,690 ) (33,292 ) (5,410 ) (43,561 ) (21,266 ) (23,252 ) (49,565 ) Income (loss) before income taxes 3,608 (9,571 ) (6,108 ) (12,239 ) (10,727 ) (9,565 ) (17,257 ) Income tax (expense) benefit (2,717 ) 1,340 2,291 4,804 3,843 3,636 5,541 Net income (loss) from continuing operations 891 (8,231 ) (3,817 ) (7,435 ) (6,884 ) (5,929 ) $ (11,716 ) Discontinued operations (1,177 ) 453 Net loss (286 ) (7,778 ) (3,817 ) (7,435 ) (6,884 ) (5,929 ) Preferred dividends (includes accretion of $1,373 and $3,202 in 2004 and for the ten months ended October 31, 2005, respectively) 5,503 3,928 Net loss available to common stockholders $ (5,789 ) $ (11,706 ) $ (3,817 ) $ (7,435 ) $ (6,884 ) $ (5,929 ) Per Common Share Data: Loss from continuing operations per share available to common stockholders basic and diluted(7) $ (1.16 ) $ (2.55 ) $ (0.31 ) $ (0.53 ) $ (0.56 ) $ (0.37 ) $ (0.73 ) Loss per share available to common stockholders basic and diluted(7) $ (1.46 ) $ (2.45 ) $ (0.31 ) $ (0.53 ) $ (0.56 ) $ (0.37 ) Weighted average shares basic and diluted 3,962 4,765 12,150 14,139 12,297 15,952 15,952 Other Financial and Operating Data: Depreciation $ 3,488 $ 3,372 $ 617 $ 5,699 $ 2,252 $ 4,029 $ 7,297 Amortization 1,795 1,302 1,834 12,611 5,621 7,169 13,696 Net cash provided by (used in) operating activities 18,302 11,743 8,519 15,881 (7,010 ) 566 15,881 Net cash used in investing activities (43,869 ) (5,127 ) (378,879 ) (148,924 ) (140,191 ) (5,930 ) (148,924 ) Net cash provided by (used in) financing activities 24,897 (3,994 ) 384,512 129,072 139,207 (926 ) 129,072 Purchases of property, plant and equipment 1,688 3,215 351 15,004 4,871 5,351 15,004 EBITDA(8)(9) 17,849 13,537 1,611 44,584 13,466 24,108 48,504 Adjusted EBITDA(8)(9) 17,849 17,176 2,801 46,441 14,237 24,108 49,866 Table of Contents Exhibit No. Description 5 .1 Form of Opinion of King Spalding LLP regarding the validity of the securities being registered* 10 .1 Second Amended and Restated Tensar Holdings, Inc. 2005 Stock Incentive Plan+ 10 .2 Form of 2005 Stock Incentive Plan Nonqualified Stock Option Grant and Agreement+ 10 .3 2007 Equity Incentive Plan*+ 10 .4 Form of 2007 Equity Incentive Plan Stock Option Grant and Agreement*+ 10 .5 Tensar Holdings, Inc. Supplemental Executive Retirement Plan+ 10 .6 Amended and Restated Employment Agreement with Philip D. Egan*+ 10 .7 Amended and Restated Employment Agreement with Jeffrey B. Johnson*+ 10 .8 Amended and Restated Employment Agreement with Robert F. Vevoda*+ 10 .9 Amended and Restated Employment Agreement with Robert F. Briggs*+ 10 .10 Amended and Restated Employment Agreement with Kord J. Wissmann*+ 10 .11 Lease Financing and Purchase Option Agreement, dated as of October 31, 2005, among TCO Funding Corp. (TCO), Tensar Corporation (f/k/a Tensar Holdings, Inc.) (Tensar Corporation), Tensar Corporation, LLC (Tensar) and Credit Suisse (Credit Suisse) 10 .12 Put Option Letter, dated as of October 31, 2005, among Tensar, TCO and Credit Suisse 10 .13 Call Option Letter, dated as of October 31, 2005, among Tensar, TCO and Credit Suisse 10 .14 Supplemental Agreement, dated as of October 31, 2005, among TCO, Tensar and Credit Suisse 10 .15 Working Capital Murabaha Facility Agreement, dated as of October 31, 2005, among Tensar Corporation, Tensar, TCO, Arcapita Investment Funding Limited (AIFL), AIA Limited (AIA), and Credit Suisse 10 .16 Reimbursement Letter, dated as of October 31, 2005, among Tensar, TCO and Credit Suisse 10 .17 Murabaha Facility Agreement, dated as of October 31, 2005, among Tensar, TCO, AIFL, AIA and American Capital Financial Services, Inc. (ACFS) 10 .18 Murabaha Facility Agreement, dated as of October 31, 2005, among Tensar Corporation, TCH Funding Corp. (TCH), AIFL and AIA 10 .19 Tensar Intercreditor Agreement, dated as of October 31, 2005, among Tensar Corporation, Tensar, TCO, Credit Suisse and ACFS 10 .20 Subordination and Intercreditor Agreement, dated as of October 31, 2005, between TCO, Tensar Corporation and TCH 10 .21 Murabaha Facility Agreement, dated as of June 22, 2006, among TCO, Tensar Corporation, TTC Holdings, S.a.r.l (Luxco), AIA, AIFL and Credit Suisse 10 .22 First Amendment to Lease/Purchase Facilities Documents, dated as of June 22, 2006, among Tensar, TCO and Credit Suisse 10 .23 First Amendment to Murabaha Facility Agreement, dated as of June 22, 2006, between TCO and Tensar 10 .24 First Amendment to Murabaha Facility Agreement, dated as of June 22, 2006, between Tensar Corporation and TCH 10 .25 First Amendment to TCH Subordination and Intercreditor Agreement, dated as of June 22, 2006, among TCH, American Capital Strategies, Ltd., AIG Annuity Insurance Company, American General Life Insurance Company, The Variable Annuity Life Insurance Company, American General Life and Accident Insurance Company and ACFS 10 .26 First Amendment to Subordination and Intercreditor Agreement, dated as of June 22, 2006, between TCO and TCH Table of Contents EXHIBIT INDEX Exhibit No. Description 1 .1 Form of Underwriting Agreement* 3 .1 Amended and Restated Certificate of Incorporation of the Company* 3 .2 Second Amended and Restated Bylaws of the Company* 4 .1 Form of Certificate of Common Stock of the Company* 5 .1 Form of Opinion of King Spalding LLP regarding the validity of the securities being registered* 10 .1 Second Amended and Restated Tensar Holdings, Inc. 2005 Stock Incentive Plan+ 10 .2 Form of 2005 Stock Incentive Plan Nonqualified Stock Option Agreement+ 10 .3 2007 Equity Incentive Plan*+ 10 .4 Form of 2007 Equity Incentive Plan Stock Option Grant and Agreement*+ 10 .5 Tensar Holdings, Inc. Supplemental Executive Retirement Plan+ 10 .6 Amended and Restated Employment Agreement with Philip D. Egan*+ 10 .7 Amended and Restated Employment Agreement with Jeffrey B. Johnson*+ 10 .8 Amended and Restated Employment Agreement with Robert F. Vevoda*+ 10 .9 Amended and Restated Employment Agreement with Robert F. Briggs*+ 10 .10 Amended and Restated Employment Agreement with Kord J. Wissmann*+ 10 .11 Lease Financing and Purchase Option Agreement, dated as of October 31, 2005, among TCO Funding Corp. (TCO), Tensar Corporation (f/k/a Tensar Holdings, Inc.) (Tensar Corporation), Tensar Corporation, LLC (Tensar) and Credit Suisse (Credit Suisse) 10 .12 Put Option Letter, dated as of October 31, 2005, among Tensar, TCO and Credit Suisse 10 .13 Call Option Letter, dated as of October 31, 2005, among Tensar, TCO and Credit Suisse 10 .14 Supplemental Agreement, dated as of October 31, 2005, among TCO, Tensar and Credit Suisse 10 .15 Working Capital Murabaha Facility Agreement, dated as of October 31, 2005, among Tensar Corporation, Tensar, TCO, Arcapita Investment Funding Limited (AIFL), AIA Limited (AIA), and Credit Suisse 10 .16 Reimbursement Letter, dated as of October 31, 2005, among Tensar, TCO and Credit Suisse 10 .17 Murabaha Facility Agreement, dated as of October 31, 2005, among Tensar, TCO, AIFL, AIA and American Capital Financial Services, Inc. (ACFS) 10 .18 Murabaha Facility Agreement, dated as of October 31, 2005, among Tensar Corporation, TCH Funding Corp. (TCH), AIFL and AIA 10 .19 Tensar Intercreditor Agreement, dated as of October 31, 2005, among Tensar Corporation, Tensar, TCO, Credit Suisse and ACFS 10 .20 Subordination and Intercreditor Agreement, dated as of October 31, 2005, between TCO, Tensar Corporation and TCH 10 .21 Murabaha Facility Agreement, dated as of June 22, 2006, among TCO, Tensar Corporation, TTC Holdings, S.a.r.l (Luxco), AIA, AIFL and Credit Suisse 10 .22 First Amendment to Lease/Purchase Facilities Documents, dated as of June 22, 2006, among Tensar, TCO and Credit Suisse 10 .23 First Amendment to Murabaha Facility Agreement, dated as of June 22, 2006, between TCO and Tensar 10 .24 First Amendment to Murabaha Facility Agreement, dated as of June 22, 2006, between Tensar Corporation and TCH 10 .25 First Amendment to TCH Subordination and Intercreditor Agreement, dated as of June 22, 2006, among TCH, American Capital Strategies, Ltd., AIG Annuity Insurance Company, American General Life Insurance Company, The Variable Annuity Life Insurance Company, American General Life and Accident Insurance Company and ACFS Table of Contents As of June 30, 2007 Pro Forma (In thousands) Actual As Adjusted(10) (Unaudited) (Unaudited) Consolidated Balance Sheet Data: Cash and cash equivalents $ 8,674 $ Property and equipment, net 69,776 Total assets 673,733 Total debt(11) 398,214 Total stockholders equity 141,413 (1) Includes results of North American Green from September 24, 2004, the date of our Predecessor company s acquisition of North American Green. (2) Includes results of TGL from June 23, 2006, the date of our acquisition of TGL. (3) Pursuant to the adoption of Statement of Financial Accounting Standards (SFAS) No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, on July 1, 2003, our senior redeemable preferred stock was reclassified into the liability section of the balance sheet, and the dividends and related issuance cost accretions were reclassified into interest expense, totaling $1.3 million and $1.4 million for the last six months of 2003 and the year ended December 31, 2004, respectively. All senior redeemable preferred stock was redeemed prior to December 31, 2004. (4) In connection with our acquisition of TGL, a portion of the U.S. dollar financing was placed with the international operations which have functional currencies other than the U.S. dollar. In seeking to minimize the risks and/or costs associated with foreign exchange risk on the borrowings, we entered into a cross-currency swap contract at the date of the acquisition that extends through October 31, 2012. The cross-currency swap is a fair value derivative under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The contract is marked-to-market through income (loss) at the same time that the debt is remeasured through income (loss). The loss on the cross-currency swap for the year ended December 31, 2006 was $7.5 million. Changes in the fair value of the cross-currency swap are offset by changes in the underlying borrowings. For the year ended December 31, 2006, a gain of $5.8 million is reflected in gain on foreign exchange, net. (5) In connection with our original issuance of senior subordinated notes in December 2000, our Predecessor company issued warrants for 510,000 pre-split shares of common stock to the lenders at a nominal exercise price. The warrants were to expire on December 6, 2010. The warrants were valued using the Black-Scholes pricing model and we recorded an original issue discount of $10 for the fair value of the warrants. The lenders also were granted a put option to sell to our Predecessor company all or a portion of the warrants or the common stock underlying the warrants. Our Predecessor company was obligated to purchase the put option at the fair market value of the shares of common stock subject to the put option. As a result of the put option, the warrants were marked-to-market and their fair value was classified as a liability. This resulted in the recording of an expense of $2.5 million for the year ended December 31, 2004 and $12.3 million in the period from January 1, 2005 to October 31, 2005. The liability established for these warrants was paid in connection with the October 31, 2005 acquisition. (6) Gain on foreign exchange, net for the year ended December 31, 2006 is comprised of three components. First, foreign currency transaction gains and losses are reported in results of operations, which resulted in a $0.2 million loss. Second, in seeking to minimize the risks and/or costs associated with foreign exchange risk on the British Pound (GBP) denominated purchase price for our acquisition of TGL, we entered into a forward currency swap contract in May 2006 to hedge a portion of the purchase price. This resulted in a loss on the forward currency swap of approximately $3.0 million. Third, an additional gain of $5.8 million was realized as more fully explained in Note 4 above. (7) For the year ended December 31, 2004, the ten months ended October 31, 2005, the two months ended December 31, 2005, the year ended December 31, 2006, the six months ended June 30, 2006, the six Table of Contents months ended June 30, 2007, the year ended December 31, 2006 pro forma as adjusted, the year ended December 31, 2006 pro forma and the six months ended June 30, 2007 pro forma as adjusted, stock options, warrants, and unvested restricted stock shares were excluded from the fully diluted computations of loss from continuing operations per share and net loss per share, because their inclusion in the loss from continuing operations per share and net loss per share calculations would have been anti-dilutive. For the year ended December 31, 2004 and the ten months ended October 31, 2005, Class B-1 redeemable convertible preferred stock was excluded from the fully diluted computations of loss from continuing operations per share and net loss per share, because the inclusion of such stock in the loss from continuing operations per share and net loss per share calculations would have been anti-dilutive. (8) EBITDA and adjusted EBITDA are supplemental non-GAAP financial measures. GAAP means generally accepted accounting principles in the United States. EBITDA is equal to net income (loss) plus (a) interest expense, net; (b) income tax (expense) benefit; and (c) depreciation and amortization. For a description of our use of EBITDA and a reconciliation of this non-GAAP financial measure to net loss, see the discussion and related table below. Our definition of adjusted EBITDA is different from EBITDA because we further adjust EBITDA for (a) the step-up in the value of our inventories in connection with our October 2005 acquisition of our Predecessor company and in the value of TGL s inventories in connection with our June 2006 acquisition of TGL, (b) the write off of a royalty related asset in connection with our acquisition of TGL, and (c) the loss on debt extinguishment recorded in connection with our October 2005 acquisition of our Predecessor company. We believe EBITDA and adjusted EBITDA are useful to an investor in evaluating our performance for the following reasons: We believe EBITDA and adjusted EBITDA are important indicators of the strength of our operations and the performance of our business because they provide a link between profitability and operating cash flow. We also believe that analysts and investors use EBITDA and adjusted EBITDA as supplemental measures to evaluate the overall operating performance of companies in our industry. In connection with both our October 2005 acquisition of our Predecessor company and our June 2006 acquisition of TGL, there was a step-up in the value of inventories acquired to estimated fair market value. In the case of the acquisition of our Predecessor company, the step-up adjustment was $1.2 million. In the case of our acquisition of TGL, the step-up adjustment was $1.2 million. We believe it is appropriate to adjust for the step-up in the values of our and TGL s inventories, because we believe it is useful to investors to present a financial measure that adjusts the value of our inventories to produce a normalized measure of cost of goods sold (and net income (loss)) that reflects our actual economic costs to produce cash flow for our stockholders without regard to our October 2005 acquisition of our Predecessor company or our June 2006 acquisition of TGL. In addition, management believes that adjustments for the step-up in the inventory values are appropriate in the case of our October 2005 acquisition of our Predecessor company because management views the October 2005 transaction as a change in ownership without any fundamental change to the underlying business enterprise. Similarly, management views the 2006 acquisition of TGL as a strategic transaction which added an international component to our existing operations and measures TGL s gross profit internally without regard to a step-up in the value of its inventories. Accordingly, in both cases management believes it is important to provide a measure of operating performance consistent with the measure used by management when evaluating the performance of the business. We recorded a write off of a royalty related asset in connection with our acquisition of TGL in June 2006 for an arrangement that previously existed between TGL and us. We believe it is appropriate to adjust for the write off of a royalty related asset, because the acquisition related charge is not an on-going part of our operations now that the two businesses are combined, and it is therefore meaningful to compare our operating performance period-to-period by adding the write off to net loss in deriving adjusted EBITDA. We recorded a loss on debt extinguishment in connection with our October 2005 acquisition of our Predecessor company and the repayment of our Predecessor company s outstanding debt in September Table of Contents 2005, and we expect to record an additional loss on debt extinguishment in connection with the repayment of indebtedness described under Use of Proceeds. We believe the losses will not be an ongoing part of our operations over the long-term and that it is, therefore, meaningful to compare our operating performance period-to-period by adding these losses to net loss in deriving adjusted EBITDA. Our management uses EBITDA and adjusted EBITDA: as measurements of operating performance because they assist us in comparing our operating performance on a consistent basis, as both remove the impact of items not directly resulting from our core operations; for planning purposes, including the preparation of our internal annual operating budget; to allocate resources to enhance the financial performance of our business; to evaluate the effectiveness of our operational strategies; to evaluate our capacity to fund capital expenditures and expand our business; and for non-equity incentive plan award purposes to calculate payouts to various officers and employees. The table below reconciles net loss to EBITDA and adjusted EBITDA for the periods presented. Predecessor Company Successor Company January 1, November 1, 2005 2005 Year Ended through through Year Ended December 31, October 31, December 31, December 31, Six Months Ended June 30, 2004 2005 2005 2006 2006 2007 (Unaudited) (Unaudited) (In thousands) Net loss $ (286 ) $ (7,778 ) $ (3,817 ) $ (7,435 ) $ (6,884 ) $ (5,929 ) Interest expense, net 10,135 17,981 5,268 38,513 16,320 22,475 Income tax expense (benefit) 2,717 (1,340 ) (2,291 ) (4,804 ) (3,843 ) (3,636 ) Depreciation 3,488 3,372 617 5,699 2,252 4,029 Amortization 1,795 1,302 1,834 12,611 5,621 7,169 EBITDA 17,849 13,537 1,611 44,584 13,466 24,108 Inventory step-up 1,190 1,168 82 Write off of a royalty related asset 689 689 Loss on debt extinguishment 3,639 Adjusted EBITDA $ 17,849 $ 17,176 $ 2,801 $ 46,441 $ 14,237 $ 24,108 Our definition of adjusted EBITDA differs from the definition of EBITDA included in the agreements related to our financing arrangements, which we refer to as our financing EBITDA. We use our financing EBITDA to measure our compliance with material financial covenants in the agreements governing our financing arrangements, including a minimum financing coverage ratio, a minimum fixed charge coverage ratio, a maximum leverage ratio and a maximum first lien leverage ratio. Our financing EBITDA includes additional adjustments to adjusted EBITDA, including management fees paid to our financial sponsors, earn-out payments to the former stockholders of our FIS business, financing-related charges, including the increase in value of the liability for the cross-currency swap and the increase in fair value of the warrant put options, net of any offsetting gains or losses and other miscellaneous adjustments allowed under our financing agreements, including acquisition related expenses, geogrid import variance, legal expenses related to a non-compete conflict with a consultant in our ESS business, consulting fees paid to the former owner of our FIS business and restructuring and other non-recurring expenses incurred by TGL. For additional information regarding our material financial covenants and our calculation of financing EBITDA, see Management s Discussion and Analysis of Financial Condition and Results of Table of Contents Operations Liquidity and Capital Resources Financing Arrangements Financial Covenants and Financing EBITDA. EBITDA, adjusted EBITDA and financing EBITDA as calculated by us are not necessarily comparable to similarly titled measures used by other companies. In addition, EBITDA, adjusted EBITDA and financing EBITDA: (a) do not represent net income (loss) or cash flows from operating activities as defined by GAAP; (b) are not necessarily indicative of cash available to fund our cash flow needs; and (c) should not be considered as alternatives to net income (loss), income (loss) from operations, cash provided by (used in) operating activities or our other financial information as determined under GAAP. (9) The following table reconciles our pro forma and pro forma as adjusted net loss from continuing operations to EBITDA and adjusted EBITDA for the year ended December 31, 2006. See Note 8 above for a further discussion of adjusted EBITDA and Unaudited Pro Forma Condensed Consolidated Financial Data for additional information regarding our pro forma and pro forma as adjusted results for the year ended December 31, 2006. Tensar TGL Corporation January 1, 2006 Year Ended through Adjustments December 31, June 22, Acquisition for this Pro Forma 2006 2006 Adjustments Pro Forma Offering As Adjusted (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (In thousands) Net income (loss) from continuing operations $ (7,435 ) $ (11,014 ) $ 6,733 $ (11,716 ) $ $ Income from discontinued operations 250 250 Net income (loss) (7,435 ) (10,764 ) 6,733 (11,466 ) Interest expense, net 38,513 3,962 2,042 44,517 Income tax expense (benefit) (4,804 ) (3,255 ) 2,518 (5,541 ) Depreciation 5,699 1,018 581 7,298 Amortization 12,611 1,085 13,696 EBITDA 44,584 (9,039 ) 12,959 48,504 Inventory step-up 1,168 (495 ) 673 Write off of a royalty related asset 689 689 Loss on debt extinguishment Adjusted EBITDA $ 46,441 $ (9,039 ) $ 12,464 $ 49,866 Table of Contents The following table reconciles our pro forma as adjusted net income (loss) to EBITDA for the six months ended June 30, 2007. We have not presented adjusted EBITDA, because the adjustments from EBITDA were not applicable for the six months ended June 30, 2007. See Note 8 above for a further discussion of adjusted EBITDA and Unaudited Pro Forma Condensed Consolidated Financial Data for additional information regarding our pro forma and pro forma as adjusted results for the six months ended June 30, 2007. Tensar Corporation Six Months Ended June 30, Adjustments Pro Forma 2007 for this Offering As Adjusted (In thousands) (Unaudited) (Unaudited) (Unaudited) Net income (loss) $ (5,929 ) $ $ Interest expense, net 22,475 Income tax benefit (3,636 ) Depreciation 4,029 Amortization 7,169 EBITDA $ 24,108 (10) A $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) each of the pro forma as adjusted cash and cash equivalents, total assets and total stockholders equity by $ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and following the completion of this offering will be adjusted, based on the actual public offering price and other terms of this offering determined at pricing. (11) Total debt includes both the current portion of long-term debt and long-term debt balances. Table of Contents RISK FACTORS This offering involves numerous risks. You should carefully consider the risks described below, together with all of the other information in this prospectus, including the consolidated financial statements and related notes thereto, before making a decision to invest in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations. We cannot assure you that any of the events discussed in the risk factors below will not occur. If any of the following risks actually occurs, our business, financial condition or operating results could suffer. As a result, the trading price of our common stock could decline, and you may lose all or part of your investment in our common stock. Risks related to our business We are subject to fluctuations in the cost and availability of raw materials, and increases in these costs or decreases in availability could adversely affect our liquidity and profitability. The principal raw materials used by us in our geogrid and lightweight oriented net manufacturing processes are select grades of polypropylene, high-density polyethylene and other resins, which we purchase from a variety of sources in the United States, the United Kingdom and Asia. We use mostly non-commodity grades of polymers that meet our required quality and performance specifications. The majority of these particular materials are more limited in production by large resin suppliers and, therefore, more difficult to obtain and somewhat more expensive than commodity grade polymers. During periods of limited supply and high demand, we are susceptible to abrupt raw material price increases or supply interruptions. The price and availability of the raw materials we use are subject to change depending on supply and demand in the United States and abroad. The price of our polymer resins has increased steadily over the past three years at a compound annual growth rate of 14% in the United States. As a result, we increased the selling price of our products and were able to pass most of the raw material price increase through to our customers. However, there can be no assurance that future raw material price increases will be successfully passed through to our customers. Additionally, increasing competition may erode our ability to pass through raw material price increases in the future. Our inability to pass through any such price increase could have a material adverse effect on our liquidity and profitability. Governmental entities fund a significant portion of the projects into which we sell our products, and as a result, decreases in transportation spending, budget deficits and changes in the allocation of available funds to various construction projects may materially decrease demand for our products. We depend substantially on federal, state and municipal funding for transportation construction, maintenance and other related infrastructure projects. Any decrease or delay in government funding for transportation construction, maintenance and other related infrastructure projects could cause our net sales and profits to decrease. Federal government funding for infrastructure projects is usually accomplished through highway authorization bills, which establish funding over a multi-year period. The most recent highway authorization bill was enacted in August 2005 and covers federal spending through 2009. Funding appropriations may be revised in future congressional sessions, and federal funding for infrastructure projects may be reduced in the future. In addition, Congress could pass legislation in future sessions that would divert highway funds for other national purposes or would restrict funding for infrastructure projects unless states comply with certain federal policies. The failure of us or our distributors or licensees to obtain new business from government contractors, the cancellation of or debarment from government contracts, increased budget allocations to supplementary transportation construction materials or reductions in federal budget appropriations regarding our products could result in materially reduced net sales. In addition, the funding of Department of Transportation projects also competes with other spending of the U.S. government. Our business is sensitive to changes in national priorities and future reductions in the Department of Transportation spending generally could materially reduce Table of Contents our net sales, cash flow from operations and profitability. If we or our distributors or licensees fail to win a particular bid, or are unable to replace lost business as a result of a cancellation, expiration or completion of a contract, our net sales or cash flow could be reduced. We compete in several markets, some of which are cyclical in nature. A downturn in these markets, specifically the commercial construction market, may adversely affect us. Construction and other diversified industrial industries to which we sell our products are, to varying degrees, cyclical and tend to decline in response to overall declines in industrial production. Margins in these industries are highly sensitive to demand cycles, and our end-customers in these industries historically have tended to delay large capital projects during economic downturns. As a result, our business may be cyclical, and the demand for our products by these customers depends, in part, on overall levels of industrial production and construction, general economic conditions and business confidence levels. Downward economic cycles could affect our distributors and end-customers and reduce sales of our products, resulting in reductions in our net sales and net income. Any future material weakness in demand in any of these industries could materially reduce our net sales and profitability. Because we depend on large distributors and licensees, which are independent businesses, for a significant portion of our net sales, a decrease or interruption in their businesses, or a decision by them to terminate our relationship, could adversely affect our sales and profitability. During the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 2007, we derived approximately 38%, 32%, 27% and 24%, respectively, of our consolidated net sales from Contech Construction Products, Inc. (Contech), the principal ERS distributor in the United States of our biaxial geogrids used primarily in roadway applications. During the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 2007, we derived approximately 4%, 6%, 5% and 7%, respectively, of our consolidated net sales from Peterson Contractors, Inc. and its affiliates (Peterson), our primary FIS licensee in the United States. In addition, together with Contech and Peterson, our largest 10 customers and licensees worldwide accounted for approximately 58%, 58%, 49% and 44% of our consolidated net sales for December 31, 2004, 2005 and 2006 and the six months ended June 30, 2007, respectively. Because our business is concentrated among Contech and its dealer network, Peterson and other key distributors and licensees, our net sales could significantly decline if we lose certain of these relationships or if the amount of business we obtain from them is reduced. We do not have any long term contracts with Contech, Peterson or any of our other key distributors and licensees. Our net sales, profitability and liquidity could decline if Contech or these other customers reduce the amounts they pay for our products and technologies, if they are unable to pay for our products and technologies, or if they terminate our agreement with them. In addition, we have significant sales with end-use customers, such as state and federal Departments of Transportation, and a loss of repeat business from these customers could have a significant negative impact on our net sales. If our distributors, licensees or end-use customers file for bankruptcy protection or experience financial difficulty, our net sales, profitability and liquidity could be negatively impacted. The market for our products is highly competitive. If we do not compete successfully in these markets, we may lose customers and our sales may decline. Our markets are highly competitive. We compete domestically and internationally with other providers of products used in site-development construction, which range from privately held companies to large vertically integrated public companies. Some of these competitors have resources greater than ours, and therefore may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or devote greater resources to the promotion and sale of their products than we can. Additionally, there can be no assurance that our products and technologies will not face competition from future solutions utilizing superior product concepts, materials or process technology. The emergence of a superior or cheaper substitute product by a competitor could displace the demand for our products and materially adversely affect our sales and results of operations. Table of Contents We believe our ability to compete depends primarily on superior product performance, continuous introduction of new products, consistent high quality, short lead and delivery time, our ability to offer, at the customer s request, project design consultation and customized engineering services, continued certification under customer quality assurance programs, and favorable product specifications from various government agencies. We also compete with a wide range of traditional construction materials (such as aggregate, rock riprap, and steel and concrete alternatives) and practices in all of our reportable segments that have the advantage of familiarity, ready availability and known acceptability under most applicable building codes. We may be unable to effectively manage our growth, which could adversely affect our liquidity and profitability. We have grown rapidly, with our net sales increasing from approximately $58.2 million for the year ended December 31, 2002 to approximately $175.8 million for the year ended December 31, 2006. On June 23, 2006, we acquired TGL, including manufacturing facilities in Wuhan, China and Blackburn, United Kingdom. We have formed a global Tensar business with our acquisition and integration of TGL. In the first quarter of 2007, we completed expansion at our Morrow, Georgia manufacturing facility, which included an additional manufacturing line with multi-process capabilities. Our growth has placed, and will continue to place, a strain on our management, production, product distribution network, information systems and other resources. Our growth may strain these resources to the point where they are no longer adequate to support our operations, which would require us to make significant expenditures in these areas. In order to manage growth effectively, we must: significantly increase the volume of products manufactured at our manufacturing facilities; continue to enhance our operational, financial and management systems, including our database management, tracking of inquiries, inventory control and product distribution network; expand, train and manage our employee base; and increase the number of sales personnel worldwide, together with the associated engineering and service personnel required for customized design and customer service. We may not be able to effectively manage this expansion in any one or more of these areas, and any failure to do so could significantly harm our business, financial condition and operating results. Because we are a supplier of products and technologies used in the earthwork construction industry, we are subject to claims for personal injury or property damage, remediation costs, project delays and other damages, which can result in unexpected legal contingencies, liabilities and possible losses, some of which may not be adequately covered by insurance. We are a supplier of products and technologies to international infrastructure end-markets, including transportation, commercial and industrial construction. In many transportation and construction applications, our products are used in structures that could cause significant property damage, loss of use of property, construction delays, personal injury or death or require significant remediation expenses in the event of a construction or product failure. As a supplier of construction materials employed in such structures, and also as the engineer of record in those instances where we are contractually engaged to provide the final engineering design drawings for a structure, we are susceptible to construction related claims and liabilities. These claims and liabilities could result from alleged defects in our products, alleged errors in our in-house construction designs or software, other alleged errors or breaches of contract, depending on the terms of our engagement on a project, construction schedule delays alleged to be caused by us, late or incorrect delivery of our materials or other components to job sites, and other causes. We currently maintain claims made commercial, product liability and professional liability insurance, and other insurance, for our operations. These policies have certain coverage limits and exclusions, and do not cover every conceivable loss. Thus, there is no guarantee that such coverage or limits are adequate for every potential construction risk. Furthermore, we cannot be certain that we will always be able to maintain or increase our insurance coverage at an affordable price. An under-insured or uninsured claim against us, if Table of Contents successful and of sufficient magnitude, could have a material and adverse effect on our financial condition and results of operations. For additional information regarding pending legal claims, see Business Legal Proceedings. Our product development and enhancements may not be successful, which could adversely affect our ability to compete and negatively impact our net sales and profitability. Our future success depends to a significant extent on our ability to continue to develop and manufacture innovative products and technologies. We commit significant resources to the development of highly engineered, novel product concepts and product usages. There can be no assurance that the commitment of our intellectual and financial resources to these development efforts will continue to yield economically viable products and applications, or that markets can be developed for our new products and applications on economically viable terms. If we do not complete the projected ramp-up of production in our newly expanded Morrow, Georgia manufacturing facility, our operating results could suffer. We have experienced and may continue to experience difficulties realizing maximum desired outputs for new manufacturing equipment installed in our Morrow, Georgia manufacturing facility, which we have adapted for use across multiple product lines using methods that are new to the industry. As a result of these difficulties, we may experience manufacturing delays, inefficiencies and additional equipment costs as we pursue increased capacity and yields, refine new manufacturing methods and processes, and implement new technologies. We may operate at less than expected capacity during the ramp-up period of our new manufacturing lines and produce less output than projected. This could result in higher marginal production costs and/or lower sales which could have an adverse effect on our profitability. Severe price increases in more traditional construction materials could make certain projects that would utilize our products and technologies cost prohibitive and thereby reduce the need for our products and technologies and result in decreased sales and results of operations. Our products are used in conjunction with traditional construction materials such as aggregate, rock riprap, concrete and steel. Substantially all of the infrastructure projects in which we participate utilize a combination of our products and technologies and traditional materials. Accordingly, if the costs of these traditional materials rise to a level that makes major infrastructure projects cost prohibitive, these projects may be delayed or their number reduced. Such delays or reductions in the number of infrastructure projects would reduce the demand for our products. This reduction in demand could adversely affect our sales and results of operations. We incurred net losses in prior years and may incur losses in the future. We incurred net losses in each of the last three years and for the six months ended June 30, 2007. Our net losses were $0.3 million for the year ended December 31, 2004, $11.6 million for the unaudited combined year ended December 31, 2005, $7.4 million for the year ended December 31, 2006, and $5.9 million for the six months ended June 30, 2007, and as of June 30, 2007, we had an accumulated deficit of $17.9 million. We may continue to incur net losses, and we cannot assure you that we will be profitable in future periods. If we are not able to protect, enforce or maintain our patents, trade secrets, trademarks and other intellectual property, we may not be able to prevent competitors from developing similar products or from marketing in a manner that capitalizes on our trademarks, and this loss of a competitive advantage could decrease our profitability and liquidity. Our ability to compete successfully is dependent upon our protection and preservation of the intellectual property and other proprietary rights and materials owned, licensed or otherwise used by us. We have approximately 150 U.S. and foreign patents with several key patent applications pending. We also have a substantial portfolio of U.S. and foreign trademark registrations. Our issued patents are expected to expire by Table of Contents their own terms at various dates, and our most significant patents will not expire for at least five years. We also enter into confidentiality and technology capture and transfer agreements with certain employees, distributors, customers, equipment suppliers, licensors, licensees, plant visitors and others to protect our intellectual property. We rely on contractual restrictions and patent, trademark, trade secret and other intellectual property laws to protect our proprietary rights, know-how, information and technology. Despite these protections, a third party may breach its undertaking or may copy or otherwise obtain and use our intellectual property without authorization or may independently develop similar intellectual property. We cannot assure you that our intellectual property rights will not be infringed upon or that our trade secrets will not be misappropriated or otherwise become known to or independently developed by competitors. We may not have adequate remedies available for any such infringement or other unauthorized use. In addition, the laws of certain foreign countries may not protect our intellectual property rights and confidential information to the same extent as the laws of the United States or the European Union. We cannot assure you that any infringement claims asserted by us will not result in our intellectual property being challenged or invalidated, that our intellectual property will be held to be of adequate scope to protect our business, or that we will be able to deter current and former employees, contractors or other parties from breaching confidentiality obligations and misappropriating trade secrets. We also have U.S. patent and trademark applications pending. We cannot assure you that our pending patent and trademark applications will result in issued patents and registered trademarks, and our failure to secure rights under these applications may limit our ability to protect the intellectual property rights that these applications were intended to cover and thus may diminish our competitive advantage. Assertions that we infringe on intellectual property rights of others could result in significant costs and harm our business and operating results. We primarily use internally developed technology and systems and licensed technology in our operations. However, it is possible for others to assert claims against us for infringement of their patents or proprietary rights or claims that our intellectual property rights are invalid. Although no material claims are pending against us, there can be no assurance that claims will not be made in the future. If we are forced to defend against any infringement claims, regardless of merit or whether they are determined in our favor, we may face costly litigation, diversion of technical and management personnel and/or delays in completion of sales. Furthermore, the outcome of a dispute may be such that we would need to change technology, develop non-infringing alternatives or enter into royalty or licensing agreements. A switch to different technology could cause an interruption in our business, and internal development of non-infringing technology may be expensive and time consuming, if we are able to successfully develop such technology at all. Additionally, royalty or licensing agreements, if required, may be unavailable to us on terms acceptable to us, or at all. Incurrence of any of these costs could negatively impact our operating results. The loss of the services of any members of our senior management team could adversely affect our ability to execute our business strategy and, as a result, adversely affect our sales and profitability. The success of our business to date has been, and our continuing success will be, dependent to a large degree on the continued services of our executive officers, especially our president and chief executive officer, Philip D. Egan, our vice president and chief financial officer, Jeffrey B. Johnson, our vice president of administration, general counsel and secretary, Robert F. Briggs, our president of ERS, Robert F. Vevoda, our president of ESS, Timothy L. Lancaster, and our president of FIS, Kord J. Wissmann. We do not have key-person insurance on any of our officers or employees. The loss of any member of our existing senior management team could damage key customer relationships, result in the loss of key knowledge, experience and expertise, lead to unanticipated recruitment and training costs and make it more difficult to successfully operate our business and execute our business strategy. Table of Contents Unexpected equipment failures or significant damage to one or more of our operating facilities would increase our costs and reduce our sales due to production curtailments or shutdowns. We manufacture all of our products at our four facilities in Morrow, Georgia; Poseyville, Indiana; Blackburn, United Kingdom; and Wuhan, China. An interruption in production capabilities at these plants as a result of equipment failure or significant damage to one or more of our facilities due to fires, explosions, long-term mechanical breakdowns, violent weather conditions or other natural disasters, work stoppages, power outages or any other cause, could result in our inability to produce our products, which would reduce our sales and earnings for the affected period, affect our relationships with our most significant distributors and end-customers and cause us to lose future sales. We are aware of potential past violations of the Foreign Corrupt Practices Act and other anti-corruption legislation. We are subject to the U.S. Foreign Corrupt Practices Act (FCPA), which prohibits people or companies subject to United States jurisdiction from engaging in bribery or other prohibited payments to foreign officials for the purposes of obtaining or retaining business or gaining an unfair business advantage. In addition, we are subject to anti-corruption legislation in other jurisdictions in which we and our subsidiaries do business, such as the United Kingdom. We are aware of approximately $45,000 in payments made by foreign TGL subsidiaries to foreign officials in China and the United Arab Emirates subsequent to our June 2006 acquisition of TGL. These payments may have violated the FCPA or other anti-corruption legislation in foreign jurisdictions. Further liabilities may emerge under anti-corruption legislation of foreign jurisdictions for the activities of the foreign TGL subsidiaries prior to the June 2006 acquisition. In August 2006, while reviewing our internal controls and our legal compliance procedures with TGL s finance and accounting departments as part of our integration of the TGL business, TGL identified past payments made by its foreign subsidiaries to foreign officials. In response, in January 2007 we engaged independent counsel to conduct an internal investigation of potential FCPA violations. Following the internal investigation, in July 2007, we voluntarily disclosed to the United States Department of Justice (DOJ) the factual information obtained during the investigation, and we met with the DOJ to discuss this matter further on August 28, 2007. DOJ is currently reviewing our findings and conducting its own assessment of the situation. We cannot predict the ultimate outcome of DOJ s assessment regarding the payments, nor can we predict whether DOJ or other U.S. or foreign governmental authorities will initiate investigations or the potential scope, duration or consequences of any such investigations. The outcome of DOJ s assessment and any related investigations or other actions taken by DOJ or other U.S. or foreign governmental authorities could include the institution of administrative, civil injunctive or criminal proceedings, the imposition of fines and other penalties and sanctions, restitution, debarment from participating in government contracts, modifications to business practices and compliance programs, and the imposition of a compliance monitor. One or more protracted investigations could impose substantial costs and distractions, regardless of its outcome. It is not possible to accurately predict at this time when matters relating to DOJ s assessment will be completed, the final outcome of the assessment or what if any actions may be taken by the DOJ or by other U.S. or foreign governmental authorities. Any such actions could have a material adverse effect on our business, financial condition and results of operations. While we have implemented significant safeguards following our discovery of the payments described above in order to prevent and discourage these practices by our employees, distributors and others, it is possible that, despite our best efforts, additional FCPA issues, or issues under anti-corruption legislation of other jurisdictions, could arise in the future. If our employees, distributors or others engage in conduct that subjects us to exposure under the FCPA or other anti-corruption legislation, we could suffer financial penalties, debarment from government contracts and other consequences that may have a material adverse effect on our business, financial condition and results of operations. Additionally, foreign companies, including some that may compete with us, generally are not subject to the FCPA. Moreover, even if they are subject to foreign laws similar to the FCPA, these laws are often not enforced in many foreign jurisdictions. Accordingly, companies based in many foreign countries may be more Table of Contents likely to engage in corruption, bribery, pay-offs, and other similar practices than are companies based in the United States, which could have a significant adverse impact on our ability to compete for and obtain sales in such countries. We are subject to risks arising from our international operations, such as increased costs, government regulation or interference, and the potential absence of intellectual property protection, which could impair our ability to compete and our profitability. We currently conduct international operations in 14 countries directly and in 2006 sold our products, either directly or through distributors, licensees or others in approximately 70 countries. We intend to pursue additional international opportunities. We generated approximately 30.3% and 20.1% of our consolidated net sales from operations outside of the Americas in the six months ended June 30, 2007 and the year ended December 31, 2006, and international suppliers provided a significant portion of our manufacturing material during this period. International operations subject us to additional risks and challenges, including: changes in and differences between domestic and foreign regulatory requirements; price controls and foreign currency exchange rate fluctuations; difficulties in complying with export restrictions and import permits; difficulties and costs of staffing and managing foreign operations; freight costs and availability; reduced protection for intellectual property rights in some countries; potentially adverse tax consequences; political and economic instability; and tariffs, trade sanctions and other barriers. Some of these factors may cause our international costs to exceed our domestic costs of doing business. Failure to adequately address these risks could decrease our profitability and operating results. We may be adversely affected by fluctuations in exchange rates, which could affect the costs of our products and our ability to sell our products in foreign markets. Approximately 30.3% and 20.1% of our consolidated net sales were received or denominated in foreign currency for the six months ended June 30, 2007 and the year ended December 31, 2006, respectively. As a result, we are exposed to foreign currency exchange rate risk, primarily with respect to changes in value of certain foreign currency denominated assets and liabilities of our China and U.K. manufacturing operations. In addition, for the purposes of financial reporting, any change in the value of foreign currency against the U.S. dollar during a given financial reporting period would result in a foreign exchange gain or loss on the translation of any U.S. dollar-denominated debt into such foreign currency. In the ordinary course of business, we do not enter into hedging transactions to hedge this risk. Consequently, our reported net income and total debt could fluctuate materially as a result of foreign exchange gains or losses. We have material weaknesses in our internal control over financial reporting, and our business and financial reporting may be negatively affected if we do not remediate these material weaknesses or if we have other material weaknesses. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. Table of Contents A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. In connection with their audit of our consolidated financial statements for the year ended December 31, 2006, our independent registered public accounting firm identified two material weaknesses in the design and operation of certain internal controls over financial reporting. The detail and nature of these material weaknesses are as follows: Accounting and finance resources. We did not have a sufficient complement of personnel in TGL with an appropriate level of accounting knowledge, experience and training in financial controls, the application of generally accepted accounting principles, and a general understanding of reporting requirements for SEC registrants commensurate with our financial reporting requirements. This control deficiency resulted in audit adjustments to several significant accounts in our 2006 annual consolidated financial statements. Period-end close and financial reporting. We did not maintain effective controls over certain period-end financial close and reporting processes. Specifically, effective controls were not in place to promote the preparation and review of the year end consolidated financial statements. These deficiencies include the failure to follow an effective financial close and consolidation schedule incorporating comprehensive corporate review processes. These deficiencies were exacerbated by the implementation of a new consolidated system, as well as the integration of our acquisition of TGL during 2006. In addition, we did not maintain effective controls over the year-end close process with respect to non-recurring and/or complex matters such as accounting for costs incurred in debt modification and the amortization of those costs, purchase accounting for acquisitions and the calculation of income taxes. Additionally, the maintenance of a proper cut-off of purchasing activities was noted as an area where deficiencies existed. This control deficiency resulted in audit adjustments to several significant accounts in our 2006 annual consolidated financial statements and the interim consolidated financial statements for each of the 2006 and 2007 quarters. Each of these control deficiencies could result in a misstatement of the aforementioned financial statement accounts and disclosures that would result in a material misstatement in our annual or interim consolidated financial statements that would not be prevented or detected on a timely basis. We cannot be certain that any remedial measures we take will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement new or improved controls or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations or comply with applicable laws. Accordingly, material weaknesses may still exist, or additional material weaknesses may be identified when we assess the effectiveness of our internal control over financial reporting for purposes of our reporting requirements under the Securities Exchange Act of 1934, or the Exchange Act, or Section 404 of the Sarbanes-Oxley Act of 2002 after this offering. The existence of one or more material weaknesses precludes a conclusion that we maintain effective internal control over financial reporting. Such conclusions would be required to be disclosed in our future Annual Reports on Form 10-K, which could adversely affect market perception of our financial condition, the trading price of our stock and customer perception of our business. In addition, any such material weaknesses may impact the accuracy and timing of our financial reporting and the reliability of our internal control over financial reporting. A discussion of our remediation efforts as well as our efforts to ensure compliance with the requirements of the Exchange Act and Section 404 of the Sarbanes-Oxley Act of 2002 is included in Management s Discussion and Analysis of Financial Condition and Results of Operations. Our leverage and covenants in the agreements governing our current financing limit our flexibility and increase our risk of default. We have a significant amount of indebtedness. As of June 30, 2007, our total outstanding debt on a consolidated basis was approximately $398.2 million. We expect to repay a portion of our outstanding Table of Contents indebtedness in connection with this offering. Our substantial financing obligations could adversely affect our financial health and business and future operations by, among other things: increasing our vulnerability to adverse economic and industry conditions by making it more difficult for us to react quickly to changing conditions; limiting our ability to obtain any additional financing we may need to operate, develop and expand our business; requiring us to dedicate a substantial portion of any cash flows from operations to service our financing obligations, which reduces the funds available for operations and future business opportunities; and potentially limiting our ability to compete in our industry. In addition, the instruments governing our financing obligations contain financial and other restrictive covenants such as, limitations on incurring debt, granting liens, investing and making loans or advances, mergers and asset dispositions, paying dividends, entering into transactions with our affiliates, making changes to our accounting policies and entering into operating leases, which limit our operating flexibility and could prevent us from taking advantage of business opportunities. These covenants are described in more detail under Management s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Financing Arrangements Financial Covenants and Financing EBITDA. Any failure on our part to comply with these covenants may result in an event of default. Such event of default may trigger an acceleration right for the holders of our outstanding debt. If such event of default results in acceleration or is not cured or waived, our liquidity and our operations may be adversely affected. The ability to make payments on our financing obligations will depend on our future operating performance, which is subject to general economic and competitive conditions and to financial, business and other factors, many of which we cannot control. If the cash flows from our subsidiaries operating activities are insufficient to service our financing obligations, we may take actions, such as delaying or reducing capital expenditures, attempting to restructure or refinance our financing obligations, selling assets or operations or seeking additional equity capital. Any or all of these actions may not be sufficient to allow us to service our financing obligations. Further, we may be unable to take any of these actions on satisfactory terms, in a timely manner or at all. Our failure to generate sufficient funds to pay our financing obligations or to successfully undertake any of these actions could, among other things, materially adversely affect the market value of the securities offered hereby and our ability to repay our obligations under our financing. We are vulnerable to interest rate fluctuation risk with respect to our financing obligations, which could lead to an increase in interest expense. Payments on a majority of our financing obligations are calculated based on a fluctuating interest rate index. Interest rate changes could increase the amount of our financing payments and thus, negatively impact our future net income and cash flows. As of June 30, 2007, our annual interest expense on the portion of our financing obligations not subject to interest rate caps as well as the portion of our financing obligations with interest rates below the interest rate caps would increase by $1.9 million for each 1% increase in interest rates. After giving effect to this offering and the use of proceeds therefrom, our annual interest expense on the unhedged portion of our financing obligations would increase by $ for each 1% increase in interest rates. Our business is seasonal, causing quarterly variations in net sales and net income (loss), which in turn could negatively affect our stock price. The majority of our business is conducted in seasonal markets, and our operating results are significantly impacted by seasonal net sales patterns. Our net sales in the first quarter of the calendar year have traditionally been lower than net sales in other quarters of the year. This is primarily due to lower activity levels in infrastructure service and construction markets during the winter months in the northern hemisphere, as colder temperatures and frozen on-site soils generally preclude earthwork construction activities until later in the year. We have a number of relatively fixed expenses associated with current operations and business Table of Contents development, and therefore, operating income varies significantly from quarter to quarter. This variance in our quarterly operating results could negatively affect our stock price. Compliance with health, environmental, safety and other government regulations applicable to us could increase costs and affect profitability. Our operations and properties are subject to the stringent laws and regulations of a number of governmental authorities. These governmental authorities include state and national health, environmental, labor relations, safety and other departments. Failure to comply with these laws and regulations could result in the imposition of substantial fines and sanctions, could require operational changes or the installation of costly equipment, or could lead to trade embargoes or government trade sanctions. We must conform our operations and properties to these laws and adapt to regulatory requirements in the countries in which we operate as any requirements change. We have not experienced significant operating or other costs to comply with environmental laws and regulations, but there is no guarantee that this will not change in the future. In connection with any future acquisition, we may assume significant environmental risks or liabilities, some of which we may not be aware of at the time of acquisition. In addition, new laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new clean-up or work environment protection requirements could require us to incur costs or become the basis for new or increased liabilities that could have a material adverse effect on our business, financial condition and results of operations. We may evaluate and pursue strategic acquisitions that are ultimately unsuccessful, or we may not be successful in integrating acquired businesses. Such evaluations and pursuits could be time-consuming, costly and adversely affect our business. Our historical growth has depended to a significant degree on our ability to make acquisitions and to successfully integrate acquired businesses. We intend to continue to seek additional acquisition opportunities, both to expand into new markets and to enhance our position in existing markets globally. There can be no assurances, however, that we will be able to successfully identify suitable candidates, negotiate appropriate acquisition terms, obtain necessary financing on acceptable terms, complete proposed acquisitions, successfully integrate acquired businesses into our existing operations or expand into new markets. Once integrated, acquired operations may not achieve levels of net sales, profitability or productivity comparable with those achieved by our existing operations, or otherwise perform as expected. Acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies, services and products of the acquired companies, the diversion of management s attention from other business concerns and the imposition of new legal requirements. Although our management will endeavor to evaluate the risks inherent in any particular transaction, there can be no assurance that we will properly ascertain all such risks. In addition, prior acquisitions have resulted, and future acquisitions could result, in the incurrence of substantial additional indebtedness and other expenses. Future acquisitions may also result in amortization expenses related to acquired intangible assets and potentially dilutive issuances of equity securities, any of which could harm our profitability. There can be no assurance that our acquisition strategy will not have a material adverse affect on our business, financial condition and results of operations. A deterioration in labor relations could disrupt our business operations and increase our costs, which could decrease our liquidity and profitability. As of June 30, 2007, we had approximately 660 full-time employees, with approximately 350 in North America, 100 in China, 170 in the United Kingdom and 40 in the rest of the world. Most of the employees in the United Kingdom are under government labor union contracts, which may increase the potential for a labor dispute. There is no guarantee that labor disputes or unionization efforts will not arise at other facilities as well. Any significant increase in our labor costs could decrease our liquidity and profitability, and any deterioration of employee relations, slowdowns or work stoppages at any of our locations, whether due to union activities, employee turnover or otherwise, could result in a decrease in our net sales or an increase in our costs. Table of Contents Risks related to this offering Our stock price may be volatile, your investment could decline in value, and we may incur significant costs from class action litigation. The trading price of our common stock may be volatile and may be subject to wide price fluctuations in response to various factors, including: actual or anticipated variations in our quarterly operating results; introductions or announcements of technological innovations or new products by us or our competitors; disputes or other developments relating to proprietary rights, including patents, litigation matters, and our ability to patent our products and technologies; changes in our financial estimates by securities analysts; additions or departures of key personnel; announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; regulatory developments in the United States and abroad; significant construction incidents or litigation; economic and political factors; and sales of our common stock, including sales of our common stock by our officers, directors or affiliates. In addition, the stock market in general has experienced significant price and volume fluctuations that have often been unrelated or disproportionate to operating performance. These broad market factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in potential liabilities, substantial costs and the diversion of our management s attention and resources, regardless of the outcome. Stockholders acquiring an interest through this transaction will experience immediate and substantial dilution in the book value of their common shares. The initial public offering price of shares of our common stock is substantially higher than the net tangible book value per outstanding share of our common stock. You will incur immediate and substantial dilution of $ per share in the net tangible book value of shares of our common stock from the initial public offering price of $ , the midpoint of the range set forth on the cover of this prospectus. If we were to be liquidated immediately after this offering, there may be no assets available for distribution to you after satisfaction of all of our obligations to creditors. Additional dilution will occur upon the exercise of outstanding options. Arcapita will continue to have substantial control over us after this offering and could limit your ability to influence the outcome of matters requiring stockholder approval and may support corporate actions that conflict with other stockholders interests. After this offering, Arcapita will beneficially own shares, or approximately %, of the outstanding shares of our common stock. Arcapita s ownership of shares of our common stock could have the effect of delaying or preventing a change of control of us, could discourage a potential acquirer from obtaining control of us, even if the acquisition or merger would be in the best interest of our stockholders. This could have an adverse effect on the market price for shares of our common stock. Arcapita will also be able to control the election of directors to our board. Upon consummation of this offering, of the members of our board of directors will be representatives of Arcapita. Table of Contents Future sales, or the perception of future sales, of a substantial amount of our common shares could depress the trading price of our common stock. If we or our stockholders sell shares of common stock in the public market following this offering or if the market perceives that these sales could occur, the market price of shares of our common stock could decline. These sales may make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate, or to use equity as consideration for future acquisitions. Upon completion of this offering, we will have shares of common stock authorized and shares of common stock outstanding. Of these shares, the shares to be sold in this offering will be freely tradable. We, our officers and directors, the selling stockholders, Arcapita and certain of our other existing stockholders have entered into agreements with the underwriters not to sell or otherwise dispose of shares of our common stock for a period of at least 180 days following completion of this offering, with certain exceptions. Immediately upon the expiration of this lock-up period, shares will be freely tradable pursuant to Rule 144(k) under the Securities Act of 1933 and another shares will be eligible for resale pursuant to Rule 701 and Rule 144 under the Securities Act of 1933, subject to the volume, manner of sale, holding period and other limitations of Rule 144. Upon completion of this offering, we intend to file a registration statement covering shares of our common stock issuable under our 2005 Stock Incentive Plan and 2007 Equity Incentive Plan. Upon completion of this offering, shares will be issuable upon the exercise of outstanding stock options, there will be shares of unvested restricted stock outstanding and an additional shares will be available for issuance under our equity compensation plans. Once we register those shares, shares issued under these plans will be freely tradable, subject to any vesting or other restrictions imposed by the terms of those awards, the volume, manner of sale, holding period and other limitations of Rule 144 that will apply to our officers, directors and other affiliates and, in the case of approximately % of the shares issuable upon exercise of stock options outstanding as of , 2007, the lock-ups described above. Our costs will increase significantly as a result of operating as a public company, and our management will be required to devote substantial time to comply with public company regulations. We have never operated as a public company. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. These expenses are associated with our public company reporting requirements and recently adopted corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, as well as new rules implemented by the SEC, the Public Company Accounting Oversight Board and the New York Stock Exchange. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We also expect these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We cannot predict or estimate the amount of additional costs we may incur as a public company or the timing of such costs. Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud. Upon completion of this offering, we will become subject to the periodic reporting requirements of the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management, recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the Table of Contents individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected. Some provisions of our certificate of incorporation, our bylaws and Delaware law inhibit potential acquisition bids that you may consider favorable. Our corporate documents, to be effective immediately prior to this offering, and Delaware law contain provisions that may enable our board of directors to resist a change in control of our company even if a change in control were to be considered favorable by you and other stockholders. These provisions: provide for a staggered board of directors; authorize our board of directors to issue preferred stock and to determine the rights and preferences of those shares, which will be senior to our common stock, without prior stockholder approval; establish advance notice requirements for nominating directors and proposing matters to be voted on by stockholders at stockholder meetings; limit the right of our stockholders to call a special meeting of stockholders; and impose procedural and other requirements that could make it difficult for stockholders to effect some corporate actions. In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or consolidating with us except under certain circumstances. These provisions could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions you desire. We do not expect to pay any dividends on our common stock for the foreseeable future. We do not anticipate that we will pay any dividends to holders of our common stock in the foreseeable future. Accordingly, investors must rely on sales of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments. Investors seeking cash dividends should not purchase our common stock. Table of Contents FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that involve many risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology including would, could, may, will, should, expect, intend, plan, anticipate, believe, estimate, predict, potential or continue, the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks described under Risk Factors above and in other parts of this prospectus. These factors may cause our actual results to differ materially from any forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We cannot guarantee future results, levels of activity, performance or achievements. Table of Contents USE OF PROCEEDS At an assumed initial public offering price of $ per share, which is the mid-point of the estimated price range set forth on the cover of this prospectus, we expect to receive approximately $ million from our sale of shares of common stock in this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses of approximately $ million. A $1.00 increase (decrease) in the assumed public offering price would increase (decrease) the net proceeds to Tensar Corporation from this offering by approximately $ million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and the estimated offering expenses payable. If the underwriters exercise their over-allotment option in full, we will receive an additional $ million in net proceeds. We intend to use the net proceeds from this offering to repay outstanding indebtedness. Our existing financing arrangements (including the financing arrangements being repaid with the proceeds of this offering) are described under Financing Arrangements. We will not receive any proceeds from the sale of shares by selling stockholders. DIVIDEND POLICY In the last five fiscal years, we have not declared or paid any cash or other dividends on our common stock. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and covenants in our existing financing arrangements and any future financing instruments. Table of Contents CASH AND CAPITALIZATION The following table sets forth our cash, cash equivalents and our capitalization as of June 30, 2007: on an actual basis; and on a pro forma as adjusted basis to give effect to our sale of shares of common stock in this offering at an assumed initial public price of $ per share, which is the mid-point of the estimated price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us and the use of proceeds therefrom. See Use of Proceeds. You should read this table together with the information under the headings Selected Consolidated Financial and Other Data and Management s Discussion and Analysis of Financial Condition and Results of Operations, as well as our consolidated financial statements and related notes contained elsewhere in this prospectus. As of June 30, 2007 Pro Forma Actual As Adjusted(3) (In thousands) (Unaudited) (Unaudited) Cash and cash equivalents $ 8,674 $ Indebtedness: Short-term debt(1) 3,585 Long-term debt(2) 394,629 Total debt 398,214 Redeemable common stock, 921,706 shares issued and outstanding actual; shares issued and outstanding pro forma as adjusted 9,238 Stockholders equity: Common stock, $0.01 par value per share, 30,000,000 shares authorized; 15,039,795 shares issued and outstanding actual, shares authorized; shares issued and outstanding pro forma as adjusted 151 Notes receivable from officers (221 ) Additional paid-in capital 151,994 Accumulated deficit(4) (17,864 ) Accumulated other comprehensive income 7,353 Total stockholders equity 141,413 Total capitalization $ 548,865 $ (1) Includes $2.3 million of outstanding amounts under our financing arrangements and $1.3 million under a revolving credit agreement of one of our subsidiaries. (2) As of June 30, 2007, $394.6 million was outstanding under our financing arrangements. The weighted average interest rate on our existing financing arrangements as of June 30, 2007 was 10.7%. As of June 30, 2007, we had $36.4 million of availability under our revolving credit facility that is part of our first lien financing. (3) A $1.00 increase (decrease) in the assumed public offering price would increase (decrease) the amount of cash and cash equivalents, additional paid-in capital, total stockholders equity and total capitalization by approximately $ , assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and the estimated offering expenses payable. (4) In connection with the repayment of debt with the net proceeds from this offering, we will write off $ million of unamortized deferred financing costs. Table of Contents DILUTION If you invest in shares of our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the net tangible book value per share of our common stock upon the completion of this offering. The net tangible book value attributable to shares of our common stock as of June 30, 2007 was $ million, or $ per share. Net tangible book value per share of common stock is determined by dividing the number of outstanding shares of common stock into the net tangible book value attributable to our common stock, which are our total tangible assets less our total liabilities. After giving effect to (1) the sale of shares of our common stock by us in this offering at the initial public offering price of $ per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and (2) the repayment of $ million of our indebtedness with the proceeds of this offering, the adjusted net tangible book value attributable to shares of our common stock as of June 30, 2007 would have been approximately $ million, or $ per share. This represents an immediate increase in net tangible book value of $ per share to the holders of our existing common stock and an immediate dilution of $ per share to new investors purchasing shares of common stock at the initial public offering price. The following table illustrates this per share dilution: Assumed initial public offering price per share $ Net tangible book value per share as of June 30, 2007 $ Increase per share attributable to new investors Adjusted pro forma net tangible book value per share after this offering Dilution in net tangible book value per share to new investors $ A $1.00 increase (decrease) in the assumed public offering price would increase (decrease): (1) our net tangible book value after giving effect to this offering by $ million; (2) the net tangible book value per common share after giving effect to the offering by $ ; and (3) the dilution per common share to investors in this offering by $ , in each case, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The following table sets forth, as of June 30, 2007, the differences between the number of shares of common stock purchased from us, the total price paid and average price per share paid by existing stockholders and by the new investors in this offering at an assumed initial public offering price of $ per share, before deducting (1) the estimated underwriting discounts and commissions and estimated offering expenses payable by us and (2) the repayment of $ million of our indebtedness with the proceeds of this offering. Shares Purchased Total Consideration Average Price Number Percent Amount Percent per Share Existing stockholders % $ % $ New investors Total 100 % $ 100 % $ A $1.00 increase (decrease) in the assumed public offering price would increase (decrease) total consideration paid by new investors and the total average price per share by approximately $ and $ , respectively, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and the estimated offering expenses payable. Table of Contents If the underwriters over-allotment option is exercised in full, the following will occur: the number of shares of common stock held by existing stockholders will represent approximately % of the total number of shares of our common stock outstanding after this offering; and the number of shares held by new investors will represent approximately % of the total number of shares of our common stock outstanding after this offering. The foregoing discussion and tables assume no exercise of stock options to purchase shares of our common stock issuable upon the exercise of stock options outstanding under our 2005 Stock Incentive Plan as of June 30, 2007 at an average exercise price of $ per share. To the extent that any options having an exercise price that is less than the offering price of this offering are exercised, new investors will experience further dilution. Table of Contents UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA The following unaudited pro forma condensed consolidated financial data has been derived by the application of pro forma adjustments to our historical consolidated financial statements for the year ended December 31, 2006 and as of and for the six months ended June 30, 2007 and related notes thereto included elsewhere in this prospectus. We are providing the following unaudited pro forma condensed consolidated financial data because our acquisition of TGL in June 2006 has a material effect on our financial information. The unaudited pro forma condensed consolidated statement of operations for Tensar Corporation for the year ended December 31, 2006 has been prepared to give effect to our acquisition of TGL and the related financing transactions as if they had occurred on January 1, 2006. The unaudited pro forma as adjusted condensed consolidated statement of operations for Tensar Corporation for the year ended December 31, 2006 and the six months ended June 30, 2007 have been further adjusted to give effect to the completion of this offering, our receipt of the estimated net proceeds from the sale of the shares of common stock offered hereby and the use of proceeds therefrom, as if this offering and the use of proceeds therefrom were completed on January 1, 2006. In addition, the unaudited pro forma as adjusted consolidated balance sheet data for Tensar Corporation as of June 30, 2007 has been adjusted to give effect to the completion of this offering, our receipt of the estimated net proceeds from the sale of the shares of common stock offered hereby and the use of proceeds therefrom, as if this offering and the use of proceeds therefrom were completed on June 30, 2007. The historical consolidated financial statements of TGL have been prepared in accordance with U.K. GAAP. For the purpose of presenting the unaudited pro forma condensed consolidated financial data, the statement of operations for the period January 1, 2006 through June 22, 2006 relating to TGL has been adjusted to conform with U.S. GAAP. The historical financial statements of TGL were presented in British Pounds (GBP) and for the purpose of presenting the unaudited pro forma condensed consolidated statement of operations, the adjusted statement of operations for TGL for the period January 1, 2006 through June 22, 2006 has been translated into U.S. dollars at the average daily closing rate for the period from January 1, 2006 through June 22, 2006. Our acquisition of TGL is accounted for under U.S. GAAP using the purchase method of accounting. Under this method, the purchase price is allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. Any excess of the purchase price over the estimated fair value of the net assets acquired is allocated to goodwill. The unaudited pro forma and pro forma as adjusted financial data is for informational purposes only and should not be considered indicative of actual results that would have been achieved had the transactions described above for which we are giving pro forma effect actually occurred on the dates or for the periods indicated, nor is such unaudited pro forma and pro forma as adjusted financial data necessarily indicative of the results to be expected for the full year or any future period. The unaudited pro forma and pro forma as adjusted condensed consolidated financial data does not purport to predict balance sheet data, results of operations, cash flows or other data as of any future date or for any future period. A number of factors may affect our actual results. See Risk Factors and Forward-Looking Statements. The notes to the unaudited pro forma condensed consolidated statement of operations and balance sheet provide a detailed discussion of how such adjustments were derived and are presented in the unaudited pro forma consolidated financial data. This unaudited pro forma and pro forma as adjusted financial data should be read in conjunction with Use of Proceeds, Cash and Capitalization, Prospectus Summary The Offering, Selected Consolidated Financial and Other Data, Management s Discussion and Analysis of Financial Condition and Results of Operations and our and TGL s consolidated financial statements and related notes included elsewhere in this prospectus. Table of Contents Tensar Corporation Unaudited Pro Forma Consolidated Balance Sheet As of June 30, 2007 Adjustments Tensar for this Pro Forma Corporation(1) Offering As Adjusted(2) (In thousands) Assets: Current Assets: Cash and cash equivalents $ 8,674 Accounts receivable 45,479 Inventories, net 21,596 Prepaid expenses and other current assets 4,950 Income taxes receivable 1,566 Deferred income taxes 2,057 Total Current Assets 84,322 Property, plant and equipment, net 69,776 Goodwill 270,188 Other intangible assets, net 233,518 Deferred financing and other non-current assets, net 14,563 Deferred income taxes 1,366 Total Assets $ 673,733 Liabilities and Stockholders Equity: Current Liabilities: Accounts payable $ 10,930 Interest payable 3,122 Taxes payable 2,009 Accrued compensation and benefits 6,513 Accrued expenses 8,298 Current portion of Long-term debt 3,585 Total Current Liabilities 34,457 Long-term debt 394,629 (3 ) Deferred income taxes 79,338 Cross-currency swap liability 9,200 Liability for pension benefits 3,022 Other non-current liabilities 2,436 Total Liabilities 523,082 Redeemable restricted stock 9,238 Stockholders Equity: Common stock 151 (4 ) Notes receivable from officers (221 ) Additional paid-in capital 151,994 (4 ) Accumulated deficit (17,864 ) Accumulated other comprehensive income 7,353 (3 ) Total Stockholders Equity 141,413 (4 ) Total Liabilities and Stockholders Equity $ 673,733 Table of Contents Tensar Corporation Notes to Unaudited Pro Forma Consolidated Balance Sheet (In thousands) (1) Our acquisition of TGL was completed on June 23, 2006. Accordingly, the allocation of the purchase price to the assets acquired and liabilities assumed is reflected in our consolidated balance sheet as of June 30, 2007. The following table summarizes the allocation of the purchase price to the assets acquired and liabilities assumed as of June 23, 2006: Accounts receivable $ 13,437 Inventories 7,849 Other current assets 2,283 Property, plant and equipment 24,571 Identifiable intangible assets 45,847 Other non-current assets 456 Accounts payable and accrued expenses (10,696 ) Deferred income taxes (11,939 ) Long term debt (1,452 ) Other non-current liabilities and other (4,651 ) 65,705 Goodwill 65,592 Aggregate purchase price $ 131,297 (2) A $1.00 increase (decrease) in the assumed public offering price would increase (decrease) the amount of cash and cash equivalents, total current assets, total assets, total stockholders equity, additional paid-in capital and total capitalization by approximately $ , assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and the estimated offering expenses payable. (3) Represents an adjustment for the repayment of outstanding indebtedness in the amount of $ , plus the payment of prepayment penalties in the amount of $ , and the write off of $ of unamortized deferred financing costs. Of this amount, $ will be applied as a reduction in accumulated deficit. (4) Represents an adjustment for the sale of shares of common stock, assuming no exercise by the underwriters of their over-allotment option, in this offering at an assumed initial public price of $ per share, which is the mid-point of the estimated price range as set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us in the amount of $ . Table of Contents Tensar Corporation Unaudited Pro Forma Condensed Consolidated Statement of Operations For the year ended December 31, 2006 The Tensar Group Limited Tensar January 1, Corporation 2006 Year Ended through Adjustments December 31, June 22, Acquisition for this Pro forma 2006 2006(1) Adjustments(2) Pro Forma Offering(3) As Adjusted (In thousands, except per share data) Statement of Operations Data: Net sales $ 175,827 $ 31,247 $ (909 )(a) $ 206,165 Cost of sales 89,180 18,027 (1,960 )(a)(b)(c)(d) 105,247 Gross profit 86,647 13,220 (1,051 ) 100,918 Operating expenses 54,524 23,527 (10,242 )(d)(e) 67,809 Acquisition related expenses and other 2,163 2,163 Gain on sale of investment (1,362 ) (1,362 ) Operating income (loss) 31,322 (10,307 ) 11,293 32,308 Other income (expense), net Interest expense, net (38,513 ) (3,962 ) (2,042 )(f) (44,517 ) (aa ) Increase in fair value of liability for cross-currency swap (7,521 ) (7,521 ) Gain on foreign exchange, net 2,561 2,561 Other income (expense), net (88 ) (88 ) (bb ) Total other expenses (43,561 ) (3,962 ) (2,042 ) (49,565 ) Income (loss) before income taxes (12,239 ) (14,269 ) 9,251 (17,257 ) Income tax benefit 4,804 3,255 (2,518 )(g) 5,541 (cc ) Net income (loss) from continuing operations $ (7,435 ) $ (11,014 ) $ 6,733 $ (11,716 ) Loss from continuing operations per share basic and diluted(4)(5) $ (0.53 ) $ (0.73 ) Weighted average shares basic and diluted 14,139 15,952 Table of Contents Tensar Corporation Unaudited Pro Forma Condensed Consolidated Statement of Operations For the six months ended June 30, 2007 Tensar Adjustments for Pro Forma Corporation this Offering(3) As Adjusted (In thousands, except per share data) Statement of Operations Data: Net sales $ 108,298 $ $ Cost of sales 53,844 Gross profit 54,454 Operating expenses 40,767 Operating income, net 13,687 (aa ) Interest expense, net (22,475 ) Increase in fair value of liability for cross-currency swap (1,679 ) Gain on foreign exchange, net 1,649 Other income (expense), net (747 ) (bb ) Total other expenses (23,252 ) Loss before income taxes (9,565 ) Income tax benefit 3,636 (cc ) Net loss $ (5,929 ) $ $ Loss per share basic and diluted(4)(5) $ (0.37 ) Weighted average shares basic and diluted 15,952 Table of Contents Tensar Corporation Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations (In thousands, except per share data) (1) The historical consolidated financial statements of TGL have been prepared in accordance with U.K. GAAP. For the purpose of presenting the unaudited pro forma condensed consolidated financial data, the statement of operations for the period January 1, 2006 through June 22, 2006 relating to TGL has been adjusted to conform with U.S. GAAP. The historical financial statements of TGL were presented in British Pounds (GBP) and for the purpose of presenting the unaudited pro forma condensed consolidated statement of operations, the adjusted statement of operations for TGL for the period January 1, 2006 through June 22, 2006 has been translated into U.S. dollars (USD) at the average daily closing rate for the period January 1, 2006 through June 22, 2006, which was 1.7885. The following table presents a reconciliation of the unaudited condensed consolidated statement of operations for TGL for the period from January 1, 2006 through June 22, 2006, prepared in accordance with U.K. GAAP and in GBP, to the statements of operations under U.S. GAAP and in USD included in the Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 2006. The unaudited U.K. to U.S. GAAP adjustments represent the significant adjustments that are required to convert the statement of operations data of TGL to U.S. GAAP on a continuing operations basis and descriptions of the nature of each of the adjustments are as follows: U.K. to U.S. GAAP U.K. GAAP Adjustments U.S. GAAP U.S. GAAP (In thousands) in GBP(i) in GBP(ii) in GBP(iii) in USD(iv) Net sales 17,471 17,471 $ 31,247 Cost of sales 9,184 895 (v)(vi)(vii) 10,079 18,027 Gross profit 8,287 (895 ) 7,392 13,220 Operating expenses 13,073 82 (v)(vi)(vii)(viii) 13,155 23,527 Operating loss (4,786 ) (977 ) (5,763 ) (10,307 ) Interest expense, net (2,215 ) (2,215 ) (3,962 ) Loss before income taxes (7,001 ) (977 ) (7,978 ) (14,269 ) Income tax benefit 1,587 233 (ix) 1,820 3,255 Net loss from continuing operations (5,414 ) (744 ) (6,158 ) $ (11,014 ) (i) Represents the unaudited results of The Tensar Group Limited from January 1, 2006 through June 22, 2006 prepared in accordance with U.K. GAAP and presented in a U.S. GAAP format. (ii) Represents adjustments to reconcile the U.K. GAAP amounts to U.S. GAAP. (iii) Represents the unaudited results of The Tensar Group Limited from January 1, 2006 through June 22, 2006 prepared in accordance with U.S. GAAP in GBP. (iv) Represents the unaudited results of The Tensar Group Limited from January 1, 2006 through June 22, 2006 prepared in accordance with U.S. GAAP in USD. For convenience purposes, we used an exchange rate of 1.7885. (v) Under U.K. GAAP, shipping and handling costs are recorded as operating expenses. Under U.S. GAAP, shipping and handling costs are included in cost of sales. This adjustment reclassifies 707 of shipping and handling costs under U.K. GAAP to cost of sales under U.S. GAAP. (vi) As a consequence of a modification to existing awards arising due to TGL s acquisition by us, options exercised were accounted for under the fair value methods adopted by both Financial Reporting Standard (FRS) 20 and SFAS No. 123(R), Share-Based Payment. Differences in the measurement of Table of Contents calculating the incremental fair value in the award, most notably of the inclusion in SFAS No. 123(R) of Type III events, required a charge under U.S. GAAP which did not exist under U.K. GAAP. An additional compensation expense of 158 and 833 would have been recorded in cost of sales and operating expenses under U.S. GAAP, respectively. (vii) Under U.K. GAAP, a provision for employee vacation pay is not required to be accrued. Under U.S. GAAP, employee benefits, such as vacation pay, are accounted for using the accrual method. The estimated expense is recognized in the period in which the employees earn the benefit. This adjustment represents the estimated expense for vacation pay in accordance with U.S. GAAP of which 30 and 57 was recorded as cost of sales and operating expenses, respectively. (viii) Under U.K. GAAP, goodwill is amortized over a period not to exceed 20 years. Under U.S. GAAP, goodwill is not amortized but rather tested at least annually for impairment. Under U.K. GAAP, TGL recorded amortization expense as operating expenses in the amount of 40, which was reversed for U.S. GAAP purposes. In addition, under U.K. GAAP, TGL recorded certain intangible assets as goodwill, which for U.S. GAAP purposes would have been recorded as an identifiable assets, subject to amortization. As a result of the different classification for these assets, under U.S. GAAP, TGL would have recorded a reduction of 61 in operating expenses. (ix) This adjustment includes the income tax effect on the U.S. GAAP adjustments offset by other taxation specific adjustments, primarily for recording unremitted foreign earnings. (2) The amounts in this column represent the following acquisition adjustments to reflect the pro forma impact of our acquisition of TGL and the related financing transactions as if these transactions occurred on January 1, 2006: (a) Includes the elimination of $909 of royalty income and royalty expenses, which is reflected as cost of sales, relating to a pre-existing royalty arrangement between TGL and us. (b) Includes a reduction of $495 of step-up in inventory basis to fair market value of inventories acquired in our TGL acquisition. The step-up in inventory recorded by Tensar Corporation in June 2006 was $1,168 as compared to $673 after giving effect to the acquisition of TGL as if the transaction was consummated on January 1, 2006. (c) Includes additional depreciation expense of $581 related to the fair market value adjustment to property, plant and equipment acquired in our acquisition of TGL. The depreciation expense is calculated using the remaining useful lives ranging from 2 to 21 years. (d) As a result of our acquisition of TGL in June 2006, TGL recorded (i) a charge in the amount of $7,261 related to equity compensation awards granted in anticipation of our acquisition of TGL, (ii) a charge in the amount of $2,407 relating to bonuses paid upon our acquisition of TGL, (iii) a charge in the amount of $1,023 relating to company funded national insurance costs, and (iv) a charge in the amount of $1,773 relating to stock compensation expenses recorded for previously outstanding equity compensation awards under SFAS No. 123(R). Of these amounts, $11,327 and $1,137 were adjusted to operating expenses and cost of sales, respectively. We believe it is appropriate to adjust for these charges as they are directly attributable to the acquisition. (e) Represents additional amortization of $1,085 of the trademark, technology and customer relationship intangible assets recorded in our acquisition of TGL. The amortization expense is calculated using the estimated useful lives ranging from 9 to 12 years. As of the date of acquisition, the trademarks were valued at $17,297, technology was valued at $19,999 and customer relationships were valued at $8,551. (f) Represents additional interest expense of $1,776 and amortization of deferred financing costs of $266 due to additional borrowings associated with our TGL acquisition, net of the elimination of TGL pre-acquisition interest and amortization expense. Interest expense was calculated based on (i) $80,000 of first lien financing arrangements at an assumed variable interest rate of the three month LIBOR plus 2.75% and (ii) $16,500 of PIK financing at a fixed rate of 17.5% entered into in conjunction with our TGL acquisition. A change in the rate of 0.125% would impact interest expense by approximately $100. Table of Contents (g) Reflects the tax effects of our pro forma adjustments based upon a statutory tax rate of 38.0% for U.S. adjustments and 30.0% for U.K. adjustments. (3) The amounts in this column represent the following adjustments to reflect the completion of this offering, our receipt of the estimated net proceeds from the sale of the shares of common stock offered hereby and the application of such net proceeds to repay indebtedness: (aa) In connection with this offering, we intend to use approximately $ of the net proceeds to repay our outstanding indebtedness, including the payment of applicable accrued interest and pre-payment penalties. Represents the reduction of interest expense resulting from the redemption, net of additional amortization of deferred financing costs. (bb) Represents pre-payment penalties of $ and the write off of $ of unamortized debt issuance costs. (cc) Reflects the tax effects of our pro forma adjustments based upon a statutory tax rate of 38.0% for U.S. adjustments and 30.0% for U.K. adjustments. (4) Unaudited pro forma basic and diluted loss from continuing operations per share have been calculated in accordance with SEC rules for initial public offerings. These rules require that the weighted average share calculation give retroactive effect to any change in our capital structure. Therefore pro forma weighted average shares have been adjusted to reflect a for split of shares of our common stock immediately prior to the offering. (5) The unaudited pro forma diluted weighted average shares outstanding for the year ended December 31, 2006 and the six months ended June 30, 2007 exclude the impact of all stock options and shares of unvested restricted stock, because such impact would be anti-dilutive. Table of Contents SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The selected consolidated statement of operations and other data for our Predecessor company for the years ended December 31, 2002 and 2003, and the selected consolidated balance sheet data as of December 31, 2002, 2003 and 2004 have been derived from our Predecessor company s audited consolidated financial statements and related notes thereto not included in this prospectus. The selected consolidated statement of operations and other data for our Predecessor company for the year ended December 31, 2004 and for the period from January 1, 2005 to October 31, 2005, have been derived from our Predecessor company s audited consolidated financial statements and related notes thereto included elsewhere in this prospectus. The selected consolidated statement of operations and other financial data for the Successor company for the period from November 1, 2005 to December 31, 2005, and for the year ended December 31, 2006, as well as the selected consolidated balance sheet data as of December 31, 2005 and 2006, have been derived from our audited consolidated financial statements and related notes thereto included elsewhere in this prospectus. The selected consolidated financial data for Tensar Corporation as of and for the six months ended June 30, 2006 and 2007 have been derived from the unaudited consolidated financial statements of Tensar Corporation included elsewhere in this prospectus. The following information is qualified by reference to and should be read in conjunction with Cash and Capitalization, Unaudited Pro Forma Condensed Consolidated Financial Data, Management s Discussion and Analysis of Financial Condition and Results of Operations and our, our Predecessor company s and TGL s consolidated financial statements and related notes thereto included elsewhere in this prospectus. Predecessor Company Successor Company January 1, November 1, 2005 2005 Year Ended through through Year Ended December 31, October 31, December 31, December 31, Six Months Ended June 30, (In thousands, except per share data) 2002(1) 2003 2004(2) 2005 2005 2006(3) 2006 2007 (Unaudited) (Unaudited) Consolidated Statement of Operations Data: Net sales $ 58,247 $ 68,493 $ 87,638 $ 107,228 $ 17,118 $ 175,827 $ 67,021 $ 108,298 Cost of sales 27,502 31,032 39,633 49,407 9,756 89,180 33,092 53,844 Gross profit 30,745 37,461 48,005 57,821 7,362 86,647 33,929 54,454 Operating expenses 17,655 19,985 24,707 26,006 8,060 54,524 21,399 40,767 Acquisition related expenses and other 8,094 2,163 1,991 Gain on sale of investment (1,362 ) Operating income (loss) 13,090 17,476 23,298 23,721 (698 ) 31,322 10,539 13,687 Other income (expense), net Interest expense, net(4) (9,553 ) (10,357 ) (10,135 ) (17,981 ) (5,268 ) (38,513 ) (16,320 ) (22,475 ) Loss on debt extinguishment (6,721 ) (3,639 ) Increase in fair value of liability for cross-currency swap(5) (7,521 ) (2,054 ) (1,679 ) Increase in fair value of liabilities for warrant put options(6) (2,540 ) (12,254 ) Gain on foreign exchange, net(7) 2,561 (4,097 ) 1,649 Other (expense) income, net (294 ) 582 (142 ) (88 ) 1,205 (747 ) Total other expenses (9,553 ) (10,357 ) (19,690 ) (33,292 ) (5,410 ) (43,561 ) (21,266 ) (23,252 ) Income (loss) before income taxes 3,537 7,119 3,608 (9,571 ) (6,108 ) (12,239 ) (10,727 ) (9,565 ) Income tax (expense) benefit (945 ) (3,266 ) (2,717 ) 1,340 2,291 4,804 3,843 3,636 Net income (loss) from continuing operations 2,592 3,853 891 (8,231 ) (3,817 ) (7,435 ) (6,884 ) (5,929 ) Discontinued operations 304 (1,604 ) (1,177 ) 453 Net income (loss) 2,896 2,249 (286 ) (7,778 ) (3,817 ) (7,435 ) (6,884 ) (5,929 ) Preferred dividends (includes accretion of $470, $317, $1,373, and $3,202 in 2002, 2003, 2004, and the ten months ended October 31, 2005, respectively) 6,262 5,415 5,503 3,928 Net loss available to common stockholders $ (3,366 ) $ (3,166 ) $ (5,789 ) $ (11,706 ) $ (3,817 ) $ (7,435 ) $ (6,884 ) $ (5,929 ) Table of Contents Predecessor Company Successor Company January 1, November 1, 2005 2005 Year Ended through through Year Ended December 31, October 31, December 31, December 31, Six Months Ended June 30, (In thousands, except per share data) 2002(1) 2003 2004(2) 2005 2005 2006(3) 2006 2007 (Unaudited) (Unaudited) Per Common Share Data: Loss available to common stockholders from continuing operations per share basic and diluted(8) $ (1.02 ) $ (0.42 ) $ (1.16 ) $ (2.55 ) $ (0.31 ) $ (0.53 ) $ (0.56 ) $ (0.37 ) Loss available to common stockholders per share basic and diluted(8) $ (0.93 ) $ (0.85 ) $ (1.46 ) $ (2.45 ) $ (0.31 ) $ (0.53 ) $ (0.56 ) $ (0.37 ) Weighted average shares basic and diluted 3,566 3,744 3,962 4,765 12,150 14,139 12,297 15,952 Other Financial and Operating Data: Depreciation $ 3,482 $ 3,537 $ 3,488 $ 3,372 $ 617 $ 5,699 $ 2,252 $ 4,029 Amortization 1,611 1,670 1,795 1,302 1,834 12,611 5,621 7,169 Net cash provided by (used in) operating activities 7,710 17,855 18,302 11,743 8,519 15,881 (7,010 ) 566 Net cash provided by (used in) investing activities (7,514 ) 1,036 (43,869 ) (5,127 ) (378,879 ) (148,924 ) (140,191 ) (5,930 ) Net cash provided by (used in) financing activities (1,912 ) (13,543 ) 24,897 (3,994 ) 384,512 129,072 139,207 (926 ) Purchase of property, plant and equipment 1,470 1,657 1,688 3,215 351 15,004 4,871 5,351 EBITDA(9) $ 18,487 $ 21,079 $ 17,849 $ 13,537 $ 1,611 $ 44,584 $ 13,466 $ 24,108 Adjusted EBITDA(9) 18,487 21,079 17,849 17,176 2,801 46,441 14,237 24,108 Predecessor Company Successor Company As of As of As of As of December 31, December 31, December 31, June 30, (In thousands) 2002 2003 2004 2005 2006 2007 (Unaudited) Balance Sheet Data: Cash and cash equivalents $ 163 $ 5,511 $ 4,841 $ 14,152 $ 14,902 $ 8,674 Property, plant and equipment, net 29,568 26,830 26,577 32,778 68,031 69,776 Total assets 161,967 156,450 200,657 498,354 671,198 673,733 Total debt(10) 90,574 79,776 187,304 285,057 391,890 398,214 Redeemable common stock(11) 14 14 2,417 7,910 9,220 9,238 Redeemable preferred stock(12) 72,435 79,819 12,043 Total stockholders (deficit) equity (13,072 ) (16,605 ) (20,285 ) 109,630 146,830 141,413 (1) Includes results of Geopier Foundation Company and its affiliate, Geotechnical Reinforcement Company (Geopier) from August 1, 2002, the date of our Predecessor company s acquisition of Geopier. (2) Includes results of North American Green from September 24, 2004 following our Predecessor company s acquisition of North American Green. (3) Includes results of TGL from June 23, 2006, the date of our acquisition of TGL. (4) Pursuant to the adoption of SFAS No. 150, on July 1, 2003, our senior redeemable preferred stock was reclassified into the liability section of the balance sheet, and the dividends and related issuance cost accretions were reclassified into interest expense, totaling $1.3 million and $1.4 million for the last six months of 2003 and the year ended December 31, 2004, respectively. All senior redeemable preferred stock was redeemed prior to December 31, 2004. (5) In connection with our acquisition of TGL, a portion of the U.S. dollar financing was placed with the international operations which have functional currencies other than the U.S. dollar. In seeking to minimize the risks and/or costs associated with foreign exchange risk on the borrowings, we entered into a cross-currency swap contract at the date of the acquisition that extends through October 31, 2012. The cross-currency swap is a fair value derivative under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The contract is marked-to-market through income (loss) at the same time that the debt is remeasured through income (loss). The loss on the cross-currency swap for the year ended December 31, 2006 was $7.5 million. Changes in the fair value of the cross-currency swap are offset by Table of Contents changes in the underlying borrowings. For the year ended December 31, 2006, a gain of $5.8 million is reflected in gain on foreign exchange, net. (6) In connection with our original issuance of senior subordinated notes in December 2000, our Predecessor company issued warrants for 510,000 pre-split shares of common stock to the lenders at a nominal exercise price. The warrants were to expire on December 6, 2010. The warrants were valued using the Black-Scholes pricing model and we recorded an original issue discount of $10 for the fair value of the warrants. The lenders also were granted a put option to sell to our Predecessor company all or a portion of the warrants or the common stock underlying the warrants. Our Predecessor company was obligated to purchase the put option at the fair market value of the shares of common stock subject to the put option. As a result of the put option, the warrants were marked-to-market and their fair value was classified as a liability. This resulted in the recording of an expense of $2.5 million for the year ended December 31, 2004 and $12.3 million in the period from January 1, 2005 to October 31, 2005. The liability established for these warrants was paid in connection with the October 31, 2005 acquisition. (7) Gain on foreign exchange, net for the year ended December 31, 2006 is comprised of three components. First, foreign currency transaction gains and loss are reported in results of operations, which resulted in a $0.2 million loss. Second, in seeking to minimize the risks and/or costs associated with foreign exchange risk on the British Pound (GBP) denominated purchase price for our acquisition of TGL, we entered into a forward currency swap contract in May 2006 to hedge a portion of the purchase price. This resulted in a loss on the forward currency swap of approximately $3.0 million. Third, an additional gain of $5.8 million was realized as more fully explained in Note 5 above. (8) For the year ended December 31, 2002, the year ended December 31, 2003, the year ended December 31, 2004, the ten months ended October 31, 2005, the two months ended December 31, 2005, the year ended December 31, 2006, and the six months ended June 30, 2006, and the six months ended June 30, 2007 stock options, warrants, and unvested restricted stock shares, were excluded from the fully diluted computations of income (loss) from continuing operations per share and net income (loss) per share, because their inclusion in the income (loss) from continuing operations per share and net income (loss) per share calculations would have been anti-dilutive. For the year ended December 31, 2002, the year ended December 31, 2003, the year ended December 31, 2004, and the ten months ended October 31, 2005, Class B-1 redeemable convertible preferred stock was excluded from the fully diluted computations of income (loss) from continuing operations per share and net income (loss) per share, because the inclusion of such stock in the income (loss) from continuing operations per share and net income (loss) per share calculations would have been anti-dilutive. (9) EBITDA and adjusted EBITDA are supplemental non-GAAP financial measures. GAAP means generally accepted accounting principles in the United States. EBITDA is equal to net income (loss) plus (a) interest expense, net; (b) income tax (expense) benefit; and (c) depreciation and amortization. For a description of our use of EBITDA and a reconciliation of this non-GAAP financial measure to net income (loss), see the discussion and related table below. Our definition of adjusted EBITDA is different from EBITDA because we further adjust EBITDA for (a) the step-up in the value of our inventories in connection with our October 2005 acquisition of our Predecessor company and in the value of TGL s inventories in connection with our June 2006 acquisition of TGL, (b) the write off of a royalty related asset in connection with our acquisition of TGL and (c) the loss on debt extinguishment recorded in connection with our October 2005 acquisition of our Predecessor company. We believe EBITDA and adjusted EBITDA are useful to an investor in evaluating our performance for the following reasons: We believe EBITDA and adjusted EBITDA are important indicators of the strength of our operation and the performance of our business because they provide a link between profitability and operating cash flow. We also believe that analysts and investors use EBITDA and adjusted EBITDA as supplemental measures to evaluate the overall operating performance of companies in our industry. Table of Contents In connection with both our October 2005 acquisition of our Predecessor company and our June 2006 acquisition of TGL, there was a step-up in the value of inventories acquired to estimated fair market value. In the case of the acquisition of our Predecessor company, the step-up adjustment was $1.2 million. In the case of our acquisition of TGL, the step-up adjustment was $1.2 million. We believe it is appropriate to adjust for the step-up in the values of our and TGL s inventories, because we believe it is useful to investors to present a financial measure that adjusts the value of our inventories to produce a normalized measure of cost of goods sold (and net income (loss)) that reflects our actual economic costs to produce cash earnings for our stockholders without regard to our October 2005 acquisition of our Predecessor company or our June 2006 acquisition of TGL. In addition, management believes that adjustments for the step-up in the inventory values are appropriate in the case of our October 2005 acquisition of our Predecessor company because management views the October 2005 transaction as a change in ownership without any fundamental change to the underlying business enterprise. Similarly, management views the 2006 acquisition of TGL as a strategic transaction which added an international component to our existing operations and measures TGL s gross profit internally without regard to a step-up in the value of its inventories. Accordingly, in both cases management believes it is important to provide a measure of operating performance consistent with the measure used by management when evaluating the performance of the business. We recorded a write off of a royalty related asset in connection with our acquisition of TGL in June 2006 for an arrangement that previously existed between TGL and us. We believe it is appropriate to adjust for the write off of a royalty related asset, because such acquisition related charge is not an ongoing part of our operations over the long-term, and it is therefore meaningful to compare our operating performance period-to-period by adding the write off to net income (loss) in deriving adjusted EBITDA. We recorded a loss on debt extinguishment in connection with our October 2005 acquisition of our Predecessor company and the repayment of our Predecessor company s outstanding debt in September 2005, and we will record an additional loss on debt extinguishment in connection with the refinancing transactions described under Use of Proceeds. However, we believe the losses will not be an ongoing part of our operations over the long-term and that it is therefore meaningful to compare our operating performance period-to-period by adding the non-cash portion of these losses to net income (loss) in deriving adjusted EBITDA. Our management uses EBITDA and adjusted EBITDA: as measurements of operating performance because they assist us in comparing our operating performance on a consistent basis as both remove the impact of items not directly resulting from our core operations; for planning purposes, including the preparation of our internal annual operating budget; to allocate resources to enhance the financial performance of our business; to evaluate the effectiveness of our operational strategies; to evaluate our capacity to fund capital expenditures and expand our business; and for non-equity incentive plan award purposes to calculate payouts to various officers and employees. The table reconciles net loss to EBITDA and adjusted EBITDA for the periods presented. Table of Contents Predecessor Company Successor Company January 1, November 1, 2005 2005 Year Ended through through Year Ended December 31, October 31, December 31, December 31, Six Months Ended June 30, 2002 2003 2004 2005 2005 2006 2006 2007 (Unaudited) (Unaudited) (In thousands) Net income (loss) $ 2,896 $ 2,249 $ (286 ) $ (7,778 ) $ (3,817 ) $ (7,435 ) $ (6,884 ) $ (5,929 ) Interest expense, net 9,553 10,357 10,135 17,981 5,268 38,513 16,320 22,475 Provision for income taxes 945 3,266 2,717 (1,340 ) (2,291 ) (4,804 ) (3,843 ) (3,636 ) Depreciation 3,482 3,537 3,488 3,372 617 5,699 2,252 4,029 Amortization 1,611 1,670 1,795 1,302 1,834 12,611 5,621 7,169 EBITDA 18,487 21,079 17,849 13,537 1,611 44,584 13,466 24,108 Inventory step-up 1,190 1,168 82 Write off of a royalty related asset 689 689 Non-cash portion of loss on debt extinguishment 3,639 Adjusted EBITDA $ 18,487 $ 21,079 $ 17,849 $ 17,176 $ 2,801 $ 46,441 $ 14,237 $ 24,108 Our definition of adjusted EBITDA differs from the definition of EBITDA included in the agreements related to our financing arrangements, which we refer to as our financing EBITDA. We use our financing EBITDA to measure our compliance with material financial covenants in the agreements governing our financing arrangements, including minimum financing coverage ratio, minimum fixed charge coverage ratio, maximum leverage ratio and maximum first lien leverage ratio. Our financing EBITDA includes additional adjustments to adjusted EBITDA including management fees paid to our financial sponsors, earn-out payments to the former stockholders of our Geopier business, financing-related charges including the increase in value of the liability for the cross-currency swap and the increase in fair value of the warrant put options, net of any offsetting gains or losses and other miscellaneous adjustments allowed under our financing agreements, including acquisition related expenses, geogrid import variance, legal expenses related to a non-compete conflict with a consultant in our ESS business, consulting fees paid to the former owner of our Geopier business and restructuring and other non-recurring expenses incurred by TGL. For additional information regarding our material financial covenants and our calculation of financing EBITDA, see Management s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Financing Arrangements Financial Covenants and Financing EBITDA. EBITDA, adjusted EBITDA and financing EBITDA as calculated by us are not necessarily comparable to similarly titled measures used by other companies. In addition, EBITDA, adjusted EBITDA and financing EBITDA: (a) do not represent net income or cash flows from operating activities as defined by GAAP; (b) are not necessarily indicative of cash available to fund our cash flow needs; and (c) should not be considered as alternatives to net income (loss), income from operations, cash provided by operating activities or our other financial information as determined under GAAP. (10) Total debt includes both the current portion of long-term debt and long-term debt balances. (11) At December 31, 2005, we included 790,985 shares of common stock held by members of management in redeemable common stock in the mezzanine section of the consolidated balance sheets. At each of December 31, 2006 and June 30, 2007, we included 921,706 of such shares in redeemable common stock in the mezzanine section of the consolidated balance sheets. The amounts reflected in redeemable common stock with respect to these shares as of December 31, 2005, December 31, 2006 and June 30, 2007 were $7.9 million, $9.2 million and $9.2 million, respectively. Agreements related to these shares of common stock contain redemption provisions that require us to repurchase the stock at fair market value in the event the holder s employment is terminated due to death or disability. In addition, as of December 31, 2006 and June 30, 2007, there were 10,000 shares of restricted stock containing a redemption provision similar to the provisions described above. We reclassified 3% and 20% (totaling $3 thousand and $18 thousand) of the $91 thousand grant date fair value of the restricted stock award to the mezzanine section of the consolidated balance sheets for the year ended December 31, 2006 and the Table of Contents six months ended June 30, 2007, respectively. Additionally, there was a corresponding reduction to additional paid-in capital for these periods. At each of December 31, 2002, 2003 and 2004, there were 635,868 shares of redeemable common stock in the mezzanine section of the consolidated balance sheets. (12) Redeemable preferred stock balance includes $18.0 million, $54.4 million, and $9 thousand of senior redeemable preferred stock, Class A-1 redeemable preferred stock, and Class B-1 redeemable convertible preferred stock, respectively in 2002. In 2003, redeemable preferred stock includes $20.7 million, $59.1 million, and $8 thousand of senior redeemable preferred stock, Class A-1 redeemable preferred stock, and Class B-1 redeemable convertible preferred stock, respectively. In 2004, redeemable preferred stock includes $12.0 million and $0.0 million of Class A-2 redeemable preferred stock and Class B-1 redeemable convertible preferred stock, respectively. Table of Contents MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our audited and unaudited consolidated financial statements and related notes thereto as well as the separate audited financial statements and related notes thereto for The Tensar Group Limited (TGL), which we acquired on June 23, 2006, each of which are included elsewhere in this prospectus. Unless otherwise noted, all of the financial information in this discussion is consolidated financial information for us or our Predecessor company. The forward-looking statements in this discussion, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are subject to numerous risks and uncertainties including, but
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001410660_plains-gp_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001410660_plains-gp_prospectus_summary.txt
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+This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the historical consolidated financial statements and pro forma condensed consolidated financial statements and the notes to those financial statements, and the other documents to which we refer for a more complete understanding of this offering. Furthermore, you should carefully read "Risk Factors" for more information about important risks that you should consider before making a decision to purchase common units in this offering. Except as otherwise indicated, the information presented in this prospectus assumes (1) an initial public offering price of $ per common unit and (2) that the underwriters do not exercise their option to purchase additional common units from us. All references in this prospectus to (1) "our," "we," "us," and the "Company" refer to Plains GP Holdings, L.P. and its wholly owned subsidiaries, (2) "PAA" refer to Plains All American Pipeline, L.P. and its operating subsidiaries collectively, or to Plains All American Pipeline, L.P., individually, as the context may require, (3) "PAA GP" refer to Plains AAP, L.P., the general partner of PAA, (4) "GP LLC" refer to Plains All American GP LLC, the general partner of PAA GP, and (5) our "partnership agreement" refer to the Amended and Restated Agreement of Limited Partnership of Plains GP Holdings, L.P. to be adopted contemporaneously with the closing of this offering. We refer to liquefied petroleum gas and other natural gas-related petroleum products as "LPG." We include a glossary of some of the terms used in this prospectus as Appendix B.
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+S-1/A SUMMARY 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001411419_chinaedu_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001411419_chinaedu_prospectus_summary.txt
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+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001411974_meridian_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001411974_meridian_prospectus_summary.txt
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+S-1/A Summary This summary highlights material information from this document and may not contain all the information that is important to you. To understand the stock offering fully, you should read this entire document carefully including the Consolidated Financial Statements and the notes to the Consolidated Financial Statements. For assistance, please call our stock information center at (___) ___-____. The Companies Meridian Financial Services, Incorporated Meridian Interstate Bancorp, Inc. East Boston Savings Bank 10 Meridian Street East Boston, Massachusetts 02128 (617) 567-1500 Meridian Financial Services, Incorporated is our Massachusetts chartered mutual holding company parent. As a mutual holding company, Meridian Financial Services is a non-stock company. Upon completion of the offering, Meridian Financial Services will own a majority of Meridian Interstate Bancorp s common stock. So long as Meridian Financial Services exists, it will own a majority of the voting stock of Meridian Interstate Bancorp and, through its board of trustees, will be able to exercise voting control over most matters put to a vote of stockholders. All 11 directors of Meridian Interstate Bancorp are also members of the board of trustees of Meridian Financial Services, which is composed of 28 members. Following the offering, Meridian Financial Services does not intend to engage in any business activity other than those relating to owning a majority of the common stock of Meridian Interstate Bancorp. Meridian Interstate Bancorp, Inc. is a Massachusetts chartered mid-tier stock holding company that was formed in 2006 by East Boston Savings Bank to be its holding company. This offering is made by Meridian Interstate Bancorp. Meridian Interstate Bancorp owns all of East Boston Savings Bank s capital stock and directs, plans and coordinates East Boston Savings Bank s business activities. In addition, Meridian Interstate Bancorp owns 40% of the capital stock of Hampshire First Bank, a New Hampshire chartered bank, organized in 2006 and headquartered in Manchester, New Hampshire. At June 30, 2007, Hampshire First Bank had assets of $42.4 million. In the future, Meridian Interstate Bancorp might also acquire or organize other operating subsidiaries, including other financial services companies or their assets, although it currently has no specific plans or agreements to do so. At June 30, 2007, Meridian Interstate Bancorp had total assets of $909.8 million, deposits of $745.6 million and total retained earnings of $112.7 million on a consolidated basis. East Boston Savings Bank is a Massachusetts chartered stock savings bank that operates from 11 full-service locations and one loan center in the greater Boston metropolitan area. We offer a variety of deposit and loan products to individuals and businesses located in our primary market, which consists of Essex, Middlesex and Suffolk Counties, Massachusetts. We have been successful in growing both deposits and loans. Since December 31, 2005, deposits have increased $73.1 million, or 10.9%, and loans have increased $62.9 million, or 13.1%. At June 30, 2007, we had total assets of $895.8 million, deposits of $745.6 million and total retained earnings of $98.7 million. STATEMENTS OF CASH FLOWS Cash flows from operating activities: Net income $ 2,591 $ 3,294 Adjustments to reconcile net income to net cash provided (used) by operating activities: Equity in undistributed earnings of subsidiary (2,793 ) (3,637 ) Equity loss on investment in affliate bank 211 578 Net amortization of securities available for sale (125 ) Decrease (increase) in other assets UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 PRE-EFFECTIVE AMENDMENT NO. 2 TO THE FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Meridian Interstate Bancorp, Inc. (Exact name of registrant as specified in its charter) Massachusetts 6036 204652200 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (IRS Employer Identification No.) 10 Meridian Street East Boston, Massachusetts 02128 (617) 567-1500 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Richard J. Gavegnano Chairman of the Board and Chief Executive Officer Meridian Interstate Bancorp, Inc. 10 Meridian Street East Boston, Massachusetts 02128 (617) 567-1500 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Lawrence M. F. Spaccasi, Esquire Dave Muchnikoff, Esquire Sean P. Kehoe, Esquire Silver Freedman & Taff, LLP Muldoon Murphy & Aguggia LLP 3299 K Street 5101 Wisconsin Avenue, NW Suite 100 Washington, DC 20016 Washington, DC 20007-444 (202) 362-0840 (202) 295-4500 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. x If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o Calculation of Registration Fee Our Corporate Structure The following diagram depicts our corporate structure after the offering at the midpoint of the offering range: Our Operating Strategy (page _____) Our mission is to operate and grow a profitable community-oriented financial institution. We plan to achieve this by executing our strategy of: Continuing to emphasize our commercial real estate, commercial business and construction loans, as well as increase our commercial business relationships in our expanding market area; Managing credit risk to maintain a low level of nonperforming assets, and interest rate risk to optimize our net interest margin; Expanding our franchise through the opening of additional branch offices and the possible acquisition of existing financial service companies or their assets; Increasing core deposits through aggressive marketing and the offering of new deposit products; and Continuing to grow and diversify our sources of non-interest income. Regulation and Supervision (page _____) Meridian Financial Services and Meridian Interstate Bancorp are subject to regulation, supervision and examination by the Federal Reserve Board and the Massachusetts Commissioner of Banks. East Boston Savings Bank is subject to regulation, supervision and examination by the Massachusetts Commissioner of Banks and the Federal Deposit Insurance Corporation. Title of each class of securities to be registered Amount to be registered Proposed maximum offering price per unit Proposed maximum aggregate offering price (2) Amount of registration fee The Offering Persons Who Can Order Stock in the Offering (page ____) We have granted rights to subscribe for shares of Meridian Interstate Bancorp common stock in a subscription offering to the following persons in the following order of priority: 1. Persons with $50 or more on deposit at East Boston Savings Bank as of the close of business on June 30, 2006. 2. Persons with $50 or more on deposit at East Boston Savings Bank as of the close of business on June 30, 2007. 3. Our employee stock ownership plan, which provides retirement benefits to our employees. 4. Officers, directors, trustees, corporators and employees of Meridian Financial Service, Meridian Interstate Bancorp and East Boston Savings Bank who do not have a higher priority right. If we receive subscriptions for more shares than are to be sold in this offering, we may be unable to fill or may only partially fill your order. Shares will be allocated in order of the priorities described above under a formula outlined in the plan of stock issuance. See The Stock Offering Subscription Offering and Subscription Rights for a description of the allocation procedure. The employee stock ownership plan may choose to fill, or be required to fill if the offering is unsubscribed by priorities 1 or 2, some or all of its intended subscription after the offering by purchasing shares in the open market or may purchase shares directly from us. We may offer shares not sold in the subscription offering to the general public in a direct community offering that can begin concurrently with, during or immediately following the subscription offering. Orders received in the direct community offering will be subordinate to subscription offering orders. Natural persons residing in the communities of East Boston, Everett, Lynn, Lynnfield, Melrose, Peabody, Revere, Saugus and Winthrop, Massachusetts will have first preference to purchase shares in the direct community offering. Shares of common stock not purchased in the subscription offering or the direct community offering may be offered for sale through a syndicated community offering managed by Keefe, Bruyette & Woods, Inc. We have the right to accept or reject, in our sole discretion, orders we receive in the direct community offering and syndicated community offering. Reasons for the Offering (page _____) Our primary reasons for this offering are to: increase the capital of East Boston Savings Bank to support future lending and operational growth; enhance profitability and earnings through investing and leveraging the proceeds; enable us to increase lending limits and support our emphasis on commercial real estate, construction and commercial business loans; support future branching activities and/or the acquisition of financial services companies or their assets; and implement equity compensation plans to retain and attract qualified directors, officers and staff and to enhance our current incentive based compensation programs. As part of our business planning process, our board of directors concluded that additional capital was needed in order to increase our profitability and support asset growth and that the best way to accomplish this would be through a stock offering. The board of directors considered two options: either (1) a full mutual-to-stock One- to four-family real estate $ 970 $ 824 $ 167 $ 169 $ 277 $ 289 Multi-family real estate 1,560 Commercial real estate 3,493 123 6 Home equity 141 29 27 14 47 Construction 2,098 1,814 1,323 Commercial business loans 311 12 Consumer loans 8 conversion, in which a new stock holding company is formed that issues all of its stock to the public, or (2) an offering by Meridian Interstate Bancorp, which by regulation may not issue more than 49.9% of its stock to the public. The board of directors determined that a minority offering by Meridian Interstate Bancorp was preferable, because engaging in a full mutual-to-stock conversion would raise more capital than we had current plans to deploy. Further, the minority stock issuance permits us to control the amount of capital being raised by selecting the percentage of shares to be sold in the offering. Additionally, the board of directors preferred to remain in the mutual holding company structure because it provides for the continued control of Meridian Interstate Bancorp by Meridian Financial Services through its majority ownership position. We chose to sell 43.7% of our shares to the public, rather than a smaller portion, because we believe that we are raising the amount of capital we can effectively deploy and because the sale of a smaller number of shares would make it less likely that an active trading market for the shares would develop. We chose not to sell more than 43.7% of our shares to the public so that we would have shares to contribute to the charitable foundation and have the flexibility to issue authorized but unissued shares to fund future stock benefit plans, in each case without exceeding the regulatory limit on the percentage of shares that can be owned by persons other than Meridian Financial Services. We will also be able to increase our philanthropic endeavors to the communities we serve through the contribution to Meridian Charitable Foundation. Purchase Price The purchase price is $10.00 per share. You will not pay a commission to buy any shares in the offering. Number of Shares to be Sold We are offering for sale between 8,542,500 and 11,557,500 shares of Meridian Interstate Bancorp common stock in this offering. The amount of capital being raised is based on an appraisal of Meridian Interstate Bancorp. Most of the terms of this offering are required by regulations of the Massachusetts Commissioner of Banks and are further subject to the approval of the Federal Reserve Board. With regulatory approval, we may increase the number of shares to be sold to 13,291,125 shares without giving you further notice or the opportunity to change or cancel your order. In considering whether to increase the offering size, the Massachusetts Commissioner of Banks and the Federal Reserve Board will consider the level of subscriptions, the views of our independent appraiser, our financial condition and results of operations and changes in market conditions. We also intend to contribute 300,000 shares of our common stock to Meridian Charitable Foundation. How We Determined the Offering Range (page _____) We decided to offer between 8,542,500 and 11,557,500 shares, which is our offering range, based on an independent appraisal of our pro forma market value prepared by Keller & Company, Inc., an appraisal firm experienced in appraisals of financial institutions. Keller & Company will receive fees totaling $55,000 for the preparation and delivery of the original appraisal report and the final updated appraisal report, plus reimbursement of out-of-pocket expenses not to exceed $2,500, and $2,500 for the preparation and delivery of each additional required updated appraisal report. Keller & Company estimates that as of August 30, 2007, our pro forma market value on a fully converted basis was between $195.5 million and $264.5 million, with a midpoint of $230.0 million. The term fully converted means that Keller & Company assumed that 100% of our common stock had been sold to the public, rather than the 43.7% that will be sold in connection with this offering. In preparing its appraisal, Keller & Company considered the information in this prospectus, including our financial statements. Keller & Company also considered the following factors, among others: our historical, present and projected operating results and financial condition and the economic and demographic characteristics of our market area; a comparative evaluation of the operating and financial statistics of East Boston Savings Bank with those of other similarly-situated, publicly-traded savings banks and bank holding companies; the effect of the capital raised in this offering on our net worth and earnings potential; (Unaudited) Within 1 year $ 78 $ 76 Over 1 year to 2 years 61 62 Over 2 years to 3 years 61 54 Over 3 years to 4 years 61 54 Over 4 years to 5 years 38 54 Thereafter Meridian Interstate Bancorp (pro forma): Minimum 31.87x 69.52% Midpoint 33.59x 74.04% Maximum 34.98x 77.64% Maximum, as adjusted 36.29x 81.05% Peer group companies as of August 30, 2007: Average 29.33x 88.56% Median 25.54x 90.18% Compared to the average pricing ratios of the peer group at the maximum of the offering range, our stock would be priced at discount of 12.33% to the peer group on a price-to-book basis and a premium of 19.25 % on a price-to-core earnings basis. This means that, at the maximum of the offering range, a share of our common stock would be less expensive than the peer group based on a book value per share basis and more expensive on a core earnings per share basis. The disparity between the pricing ratios results from Meridian Interstate Bancorp, on a pro forma basis, generally having higher levels of equity but lower earnings than the companies in the peer group. The appraisal concluded that these ranges represented the appropriate balance of the two approaches to valuing Meridian Interstate Bancorp, and the number of shares to be sold, in comparison to the peer group institutions. The independent appraisal does not indicate market value. You should not assume or expect that the valuation described above means that our common stock will trade at or above the $10.00 purchase price after the offering. (1) The information for publicly traded mutual holding companies may not be meaningful for investors because it presents average and median information for mutual holding companies that may have issued a different percentage of their stock in their offerings than the 43.7% that we are offering to the public. In addition, stock repurchase activity may affect these ratios. Possible Change in Offering Range Keller & Company will update its appraisal before we complete the stock offering. If, as a result of regulatory considerations, demand for the shares or changes in market conditions, Keller & Company determines that our pro forma market value has increased, we may sell up to 13,291,125 shares without further notice to you. If our pro forma market value at that time is either below $195.5 million or above $304.2 million, then, after consulting with the Massachusetts Commissioner of Banks and the Federal Reserve Board, we may: (i) terminate the stock offering and promptly return all funds with interest; (ii) promptly return all funds with interest, set a new offering range and give all subscribers the opportunity to place a new order; or (iii) take such other actions as may be permitted by the Massachusetts Commissioner of Banks, the Federal Reserve Board and the Securities and Exchange Commission. Possible Termination of the Offering We must sell a minimum of 8,542,500 shares to complete the offering. If we terminate the offering because we fail to sell the minimum number of shares or for any other reason, we will promptly return your funds with interest at 0.75% and without deduction of any fees, and holds on funds authorized for withdrawal from deposit accounts will be released. Loss before income taxes and equity in undistributed earnings of subsidiary (196 ) (456 ) Applicable income tax provision (benefit) FSB Community Bancshares, Inc. (Nasdaq: FSBC) 08/15/2007 % % N/A % % Beneficial Mutual Bancorp, Inc. (Nasdaq: BNCL) 07/16/2007 (7.9 ) (6.8 ) (11.5 ) (5.5 ) Hometown Bancorp, Inc. (OTCBB:HTWC) 06/29/2007 (5.0 ) (15.0 ) TFS Financial Corporation (Nasdaq: TFSL) 04/23/2007 17.9 18.0 23.4 15.7 Sugar Creek Financial Corp. (OTCBB:SUGR) 04/04/2007 6.0 (9.0 ) Delanco Bancorp, Inc. (OTCBB:DLNO) 04/02/2007 (5.0 ) (6.3 ) Oritani Financial Corp. (Nasdaq: ORIT) 01/24/2007 59.7 54.3 55.0 54.3 Polonia Bancorp (OTCBB: PBCP) 01/16/2007 0.5 1.5 1.0 (4.0 ) MSB Financial Corp. (Nasdaq: MSBF) 01/05/2007 23.0 21.5 19.3 5.0 MainStreet Financial Corp. (OTCBB: MSFN) 12/27/2006 10.0 10.0 (2.5 ) (7.5 ) Ben Franklin Financial, Inc. (OTCBB: BFFI) 10/19/2006 7.0 6.5 6.5 4.0 ViewPoint Financial Group (Nasdaq: VPFG) 10/03/2006 49.9 52.5 53.9 72.2 Fox Chase Bancorp, Inc. (Nasdaq: FXCB) 10/02/2006 29.5 27.9 30.1 22.0 Roma Financial Corp. (Nasdaq: ROMA) 07/12/2006 41.0 45.0 46.6 70.4 Seneca-Cayuga Bancorp, Inc. (OTCBB: SCAY) 07/11/2006 (1.5 ) (7.0 ) (10.0 ) Northeast Community Bancorp, Inc. (Nasdaq: NECB) 07/06/2006 10.0 12.0 12.0 4.0 Mutual Federal Bancorp, Inc. (OTCBB: MFDB) 04/06/2006 11.3 10.0 14.0 19.9 Lake Shore Bancorp, Inc. (Nasdaq: LSBK) 04/04/2006 7.0 5.5 2.9 5.7 United Community Bancorp (Nasdaq: UCBA) 03/31/2006 8.0 8.4 5.5 24.1 Average all transactions 14.0 13.9 13.6 12.2 Average Nasdaq listed companies 21.6 21.7 21.6 24.4 Average OTCBB quoted companies 3.6 3.3 1.0 (3.5 ) This table is not intended to be indicative of how our stock may perform. Furthermore, this table presents only short-term price performance with respect to several companies that only recently completed their initial public offerings and may not be indicative of the longer-term stock price performance of these companies. Stock price appreciation is affected by many factors, including, but not limited to: general market and economic conditions; the interest rate environment; the amount of proceeds a company raises in its offering; and numerous factors relating to the specific company, including the experience and ability of management, historical and anticipated operating results, the nature and quality of the company s assets, the company s market area, the quality of management and management s ability to deploy proceeds (such as through loans and investments, the acquisition of other financial institutions or other businesses, the payment of dividends and common stock repurchases), the presence of professional and other investors who purchase stock on speculation, as well as other unforeseeable events not in the control of management. In addition, the companies listed in the table above may not be similar to Meridian Interstate Bancorp, with regard to market capitalization, offering size, earnings quality and growth potential, among other factors. Further, the pricing ratios for their stock offerings were in some cases different from the pricing ratios for Meridian Interstate Bancorp s common stock and the market conditions in which these offerings were completed were, in some cases, different from current market conditions. Any or all of these differences may cause our stock to perform differently from these other offerings. Before you make an investment decision, we urge you to carefully read this prospectus, including, but not limited to, the Risk Factors section of this prospectus. You should be aware that, in certain market conditions, stock prices of thrift initial public offerings have decreased. For example, as the above table illustrates, the stock of seven companies traded at or below the initial offering price at various times through August 30, 2007. We can give you no assurance that our stock will not trade below the $10.00 purchase price or that our stock will perform similarly to other recent mutual to stock conversions. Common Stock no par value 13,591,125 (1) $10.00 $135,911,250 (3) Conditions to Completing the Offering We are conducting the offering under the terms of our plan of stock issuance. We cannot complete the offering unless the plan of stock issuance is approved by the corporators of Meridian Financial Services, we sell at least the minimum number of shares offered and we receive the final approval of the Massachusetts Commissioner of Banks and the Federal Reserve Board to complete the offering. We Will Contribute Stock to the Meridian Charitable Foundation (page ___) To continue our long-standing commitment to our local communities, we intend to contribute 300,000 shares of our common stock to Meridian Charitable Foundation, a charitable foundation that we formed in 1997. The common stock contributed to the charitable foundation is in addition to the shares being offered for sale and will not be included in determining whether the minimum number of shares of common stock has been sold to complete the offering. Our contribution to the charitable foundation would reduce net earnings by $2.0 million, after tax, in the year in which the contribution is made, which is expected to be the fourth quarter of 2007 or first quarter of 2008. Meridian Charitable Foundation will make charitable grants and donations and support projects located within our market area. The amount of common stock that we would offer for sale would be greater if the offering were to be completed without the contribution to Meridian Charitable Foundation. For a further discussion of the financial impact of the charitable foundation, including its effect on those who purchase shares in the offering, see Comparison of Independent Valuation and Pro Forma Financial Information With and Without the Foundation. For a discussion of the dilutive impact of the contribution to the charitable foundation, see Risks Related to the Contribution of Stock to the Charitable Foundation-The contribution to Meridian Charitable Foundation will decrease the ownership interest and voting interest in the shares issued to persons other than Meridian Financial Services by 1.1% after the contribution. Benefits of the Offering to Management (page _____) We intend to adopt the benefit plans and employment agreements described below. Meridian Interstate Bancorp will recognize compensation expense related to the employee stock ownership plan and the equity incentive plan. The actual expense will depend on the market value of Meridian Interstate Bancorp s common stock and, with respect to the employee stock ownership plan, will increase as the value of Meridian Interstate Bancorp s common stock increases. As reflected under Pro Forma Data, based upon assumptions set forth therein, the annual tax effected expense related to the employee stock ownership plan and the equity incentive plan would have been $313,000 and $1.6 million, respectively, for the year ended December 31, 2006, assuming shares are sold at the maximum of the offering range. See Pro Forma Data for a detailed analysis of the effects of each of these plans. Employee Stock Ownership Plan. We intend to establish an employee stock ownership plan that will purchase an amount of shares equal to 8.0% of the shares sold in the offering and contributed to Meridian Charitable Foundation. The plan will use the proceeds from a 20-year loan from Meridian Interstate Bancorp or a subsidiary capitalized by Meridian Interstate Bancorp to purchase these shares. As the loan is repaid and shares are released from collateral, the shares will be allocated to the accounts of employee participants. Allocations will be based on a participant s individual compensation as a percentage of total plan compensation. Non-employee directors are not eligible to participate in the employee stock ownership plan. We will incur additional compensation expense as a result of this plan. See Pro Forma Data for an illustration of the effects of this plan. Equity Incentive Plan. Following completion of the offering, we intend to consider adopting an equity incentive plan. Pursuant to approval conditions imposed by the Massachusetts Commissioner of Banks in connection with the formation of Meridian Interstate Bancorp, the adoption of the equity incentive plan requires the prior approval of the Massachusetts Commissioner of Banks. In addition, under current Massachusetts banking regulations, if the plan is implemented within one year after the offering, this plan must be approved by the holders of two-thirds of the total votes eligible to be cast by our stockholders and by the holders (other than Meridian Financial Services) of a majority of the total votes eligible to be cast by our stockholders at a meeting to be held no earlier than six months after completion of the offering. Under this plan, we may grant stock options in an amount up to 10.0% of the number of shares sold in the offering and contributed to Meridian Charitable Foundation, and restricted stock awards in an amount equal to 4.0% of the shares sold in the offering and contributed to Meridian Charitable Foundation. These limitations will not apply if the plan is implemented more than one year after the offering. Shares of restricted stock will be awarded at no cost to the recipient. Stock options will be granted at an exercise price equal to 100% of the fair market value of our common stock on the option grant date. We will incur additional compensation expense as a result of this plan. See Pro Forma Data for an illustration of the effects of this plan. One- to four-family real estate $ 718 $ 399 $ 970 $ 313 $ 284 $ 540 $ 1,441 $ 167 $ $ 1,298 $ 168 $ Multi-family real estate Commercial real estate 459 161 1,675 992 386 123 127 Home equity 141 43 141 153 29 27 29 14 Construction 480 335 335 760 1,054 708 Commercial business 311 116 50 Consumer 1 3 5 2 1 (1) Includes shares of common stock to be issued to Meridian Charitable Foundation, Inc., a private foundation. (2) Estimated solely for the purpose of calculating the registration fee. (3) A registration fee of $4,173 was previously paid upon the initial filing of the Form S-1 on September 28, 2007. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine. (1) Assumes the value of Meridian Interstate Bancorp common stock is $10.00 per share for purposes of determining the total estimated value of the grants. (2) Assumes the value of a stock option is $4.46, which was determined using the Black-Scholes option-pricing formula. See Pro Forma Data. Employment Agreements. East Boston Savings Bank intends to enter into amended and restated two-year employment agreements with each of Robert F. Verdonck, its President and Chief Executive Office, Philip F. Freehan, its Executive Vice President and Senior Loan Officer and Leonard V. Siuda, its Treasurer and Chief Financial Officer. In addition, Meridian Interstate Bancorp intends to enter into a two-year employment agreement with Richard J. Gavegnano, its Chairman of the Board and Chief Executive Officer. These employment agreements will provide for severance benefits if the executives are terminated following a change in control of Meridian Interstate Bancorp or East Boston Savings Bank. Based solely on cash compensation for the year ended December 31, 2006 and excluding any benefits that would be payable under any employee benefit plan, if a change in control of Meridian Interstate Bancorp occurred and we terminated all officers with employment agreements, the total cash payments due under the employment agreements would be approximately $3.6 million. The Offering Will Not Be Taxable to Persons Receiving Subscription Rights (page _____) As a general matter, the offering will not be a taxable transaction for purposes of federal income taxes to persons who receive or exercise subscription rights. We have received an opinion from our counsel, Muldoon Murphy & Aguggia LLP that, for federal income tax purposes, it is more likely than not that the depositors of East Boston Savings Bank will not realize any income upon the issuance or exercise of the subscription rights. Subscription Rights are Not Transferable You are not allowed to transfer your subscription rights and we will act to ensure that you do not do so. You will be required to certify that you are purchasing shares solely for your own account and that you have no agreement or understanding with another person to sell or transfer subscription rights or the shares that you purchase. We will not accept any stock orders that we believe involve the transfer of subscription rights. Eligible depositors who enter into agreements to allow ineligible investors to participate in the subscription offering may be violating federal and state law and may be subject to civil enforcement actions or criminal prosecution. How to Purchase Common Stock (page ____) In the subscription offering and the direct community offering, you may pay for your shares by: Performance Ratios (1): Return on average assets 0.58 % 0.74 % 0.38 % 0.68 % 0.88 % 1.05 % 1.04 % Return on average equity 4.63 6.09 3.12 5.31 6.85 8.55 8.47 Interest rate spread (2) 2.18 2.80 2.60 3.23 3.48 3.76 3.74 Net interest margin (3) 2.54 3.10 2.92 3.47 3.67 3.97 4.04 Non-interest expense to average assets 2.40 2.49 2.55 2.58 2.60 2.71 2.71 Efficiency ratio (4) 84.56 75.93 81.72 70.97 66.75 61.78 61.61 Average interest-earning assets to average interest-bearing liabilities 110.15 111.28 111.47 111.97 111.68 110.69 111.69 Capital Ratios: Average equity to average assets 12.44 % 12.19 % 12.26 % 12.72 % 12.80 % 12.31 % 12.28 % Total capital to risk weighted assets (5) 13.81 15.44 13.44 15.49 15.05 14.71 14.64 Tier I capital to risk weighted assets (5) 12.79 14.71 12.39 14.77 14.35 14.10 14.10 Tier I capital to average assets (5) 10.73 12.51 10.46 12.77 12.53 12.03 11.97 Asset Quality Ratios: Allowance for loan losses as a percent of total loans 0.64 % 0.62 % 0.63 % 0.61 % 0.58 % 0.65 % 0.58 % Allowance for loan losses as a percent of non-performing loans 49.95 1,344.40 126.06 926.50 1,301.05 81.28 762.71 Net charge-offs (recoveries) to average outstanding loans, net, during the period 0.01 (0.01 ) Non-performing loans as a percent of total loans 1.28 0.05 0.50 0.07 0.04 0.80 0.08 Non-performing assets as a percent of total assets 0.77 0.03 0.30 0.04 0.02 0.42 0.04 Other data: Number of offices 11 10 11 10 10 9 PROSPECTUS Meridian Interstate Bancorp, Inc. (Holding Company for East Boston Savings Bank) Up to 11,557,500 Shares of Common Stock 1. personal check, bank check or money order made payable directly to Meridian Interstate Bancorp, Inc. (third-party checks of any type will not be accepted); or 2. authorizing us to withdraw money from your East Boston Savings Bank deposit account(s) other than accounts with check writing privileges and individual retirement accounts ( IRAs ). To use funds from accounts with check writing privileges, please submit a check. To use IRA funds, please see the next section. East Boston Savings Bank is not permitted to lend funds (including funds drawn on an East Boston Savings Bank line of credit) to anyone for the purpose of purchasing shares of common stock in the offering. Also, payment may not be made by wire transfer. Checks and money orders will be immediately cashed, so the funds must be available within the account when your stock order form is received by us. The funds (up to, and in excess of, the minimum of the offering range) will be deposited by us into an East Boston Savings Bank segregated escrow account or, at our discretion, in an escrow account at an independent insured depository institution. We will pay interest at 0.75% from the date those funds are received until completion or termination of the offering. Withdrawals from certificate of deposit accounts at East Boston Savings Bank for the purpose of purchasing common stock in the offering may be made without incurring an early withdrawal penalty. All funds authorized for withdrawal from deposit accounts with East Boston Savings Bank must be available within the deposit accounts at the time the stock order form is received. A hold will be placed on the amount of funds designated on your stock order form. Those funds will be unavailable to you during the offering; however, the funds will not be withdrawn from the accounts until the offering is completed and will continue to earn interest at the applicable contractual deposit account rate until the completion of the offering. To ensure that we properly identify your subscription rights, you must list all of your deposit accounts as of the eligibility dates on the stock order and certification form. If you fail to do so, your subscription may be reduced or rejected if the offering is oversubscribed. To preserve your purchase priority, you must register the shares only in the name or names of persons on the deposit account at the applicable date of eligibility. You may not add the names of others who were not named on the deposit account as of the applicable date of eligibility. You may submit your order form in one of three ways: by mail, using the reply envelope provided; by overnight courier to the address indicated on the order form; or by hand delivery to our stock information center at our Peabody office. Stock order forms will not be accepted at other branch offices or our main office, nor will these locations have stock offering materials on hand. Once submitted, your order is irrevocable. We are not required to accept copies or facsimiles of order forms. Using IRA Funds to Purchase Shares in the Offering (page ___) You may be able to subscribe for shares of common stock using funds in your individual retirement account(s), or IRA. If you wish to use some or all of the funds in your East Boston Savings Bank IRA, the applicable funds must first be transferred to a self-directed IRA account maintained by an unaffiliated institutional trustee or custodian, such as a brokerage firm. If you do not have such an account, you will need to establish one and transfer your funds before placing your stock order. An annual fee may be payable to the new trustee. Our Stock Information Center can give you guidance in this regard. Because processing this type of order takes additional time, we recommend that you contact our Stock Information Center promptly, preferably at least two weeks before the [Date 1], 2007 offering deadline. Whether you may use retirement funds for the purchase of shares in the stock offering will depend on timing constraints and, possibly, limitations imposed by the institution where the funds are held. Purchase Limitations (page ___) Our plan of stock issuance establishes limitations on the purchase of stock in the offering. These limitations include the following: The minimum purchase is 25 shares. Performance Ratios (1): Return (loss) on average assets (0.13 )% 0.20 % 0.34 % 0.56 % Return (loss) on average equity (1.08 ) 1.65 2.72 4.62 Interest rate spread (2) 2.18 2.57 2.23 2.74 Net interest margin (3) 2.48 2.89 2.53 3.03 Non-interest expense to average assets 2.50 2.43 2.43 2.49 Efficiency ratio (4) 94.21 78.41 87.67 76.73 Average interest-earning assets to average interest-bearing liabilities 108.89 111.19 109.12 111.15 Capital Ratios: Average equity to average assets 12.34 % 12.39 % 12.40 % 12.23 % Total capital to risk weighted assets (5) 13.66 13.79 13.66 13.79 Tier I capital to risk weighted assets (5) 12.56 12.90 12.56 12.90 Tier I capital to average assets (5) 10.61 11.27 10.61 11.27 Asset Quality Ratios: Allowance for loan losses as a percent of total loans 0.66 % 0.63 % 0.66 % 0.63 % Allowance for loan losses as a percent of non-performing loans 72.49 146.80 72.49 146.80 Net charge-offs (recoveries) to average outstanding loans, net, during the period 0.00 0.00 0.00 0.00 Non-performing loans as a percent of total loans 0.91 0.43 0.91 0.43 Non-performing assets as a percent of total assets 0.56 0.25 0.56 0.25 Other data: Number of offices 11 10 11 Net cash provided (used) by operating activities This is the initial public offering of shares of common stock of Meridian Interstate Bancorp, Inc. The shares we are offering will represent 43.7% of our outstanding common stock. Additionally, we will contribute 300,000 shares of our common stock to Meridian Charitable Foundation, Inc., which represents between 1.53% and 1.13% of our outstanding common stock at the minimum and maximum of the offering, respectively. Meridian Financial Services, Incorporated, our Massachusetts chartered mutual holding company parent, will own the remainder of our outstanding common stock and will be our majority stockholder. We intend to have our common stock quoted on the Nasdaq Global Select Market under the symbol EBSB. If you were a depositor of East Boston Savings Bank on June 30, 2006 or June 30, 2007, you may have priority rights to purchase shares of common stock. If you are not a depositor of East Boston Savings Bank, but are interested in purchasing shares of our common stock, you may have an opportunity to purchase shares of common stock after priority orders are filled. We are offering up to 11,557,500 shares of common stock for sale on a best efforts basis, subject to certain conditions. We must sell a minimum of 8,542,500 shares to complete the offering. The amount of capital being raised is based on an appraisal of Meridian Interstate Bancorp. Most of the terms of this offering are required by regulations of the Massachusetts Commissioner of Banks. If, as a result of regulatory considerations, demand for the shares or changes in market conditions, the independent appraiser determines our market value has increased, we may sell up to 13,291,125 shares without giving you further notice or the opportunity to change or cancel your order. The offering is scheduled to terminate at Noon, Eastern time, on [Date 1], 2007. We may extend this termination date without notice to you until [Date 2], 2007, unless the Massachusetts Commissioner of Banks approves a later date , which may not be beyond July 2, 2009. Funds received before completion of the offering (up to, and in excess of, the minimum of the offering range) will be maintained at East Boston Savings Bank in a segregated escrow account. All subscriptions received will earn interest at 0.75%. The minimum purchase is 25 shares. Once submitted, orders are irrevocable unless the offering is terminated or extended beyond [Date 2], 2007. If we extend the offering beyond [Date 2], 2007, we will promptly return the funds of all subscribers who do not reconfirm their subscriptions. If we terminate the offering because we fail to sell the minimum number of shares or for any other reason, we will promptly return your funds with interest at 0.75%. Keefe, Bruyette & Woods, Inc. will use its best efforts to assist us in our selling efforts, but is not required to purchase any of the common stock that is offered for sale. Purchasers will not pay a commission to purchase shares of common stock in the offering. All shares offered for sale are offered at a price of $10.00 per share. We expect our directors and executive officers, together with their associates, to subscribe for 129,900 shares, which equals 1. 1 % of the shares offered for sale at the maximum of the offering range. This investment involves a degree of risk, including the possible loss of principal. Please read Risk Factors beginning on page _____. Offering proceeds $ 85,425 $ 115,575 Less: offering expenses 1,539 1,747 Net offering proceeds 83,886 113,828 Less: Proceeds contributed to East Boston Savings Bank 41,943 56,914 Proceeds used for loan to employee stock ownership plan 7,074 9,486 Proceeds remaining for Meridian Interstate Bancorp $ 34,869 $ 47,428 Initially, Meridian Interstate Bancorp intends to invest the proceeds that it retains in short-term liquid investments. In the future, Meridian Interstate Bancorp may use those funds to, among other things, invest in OFFERING SUMMARY Price Per Share: $10.00 Minimum Maximum Maximum As Adjusted securities or repurchase shares of common stock, subject to regulatory restrictions. East Boston Savings Bank will initially invest the proceeds it receives in short-term liquid investments. Over time, East Boston Savings Bank may use the portion of the proceeds that it receives to fund new loans, invest in securities, open new branches and expand its business activities. Meridian Interstate Bancorp and East Boston Savings Bank may also use the proceeds of the offering to diversify their businesses and acquire other financial service companies or their assets, although we have no specific plans to do so at this time. Purchases by Directors and Executive Officers (page ____) We expect that our directors and executive officers, together with their associates, will subscribe for 129,900 shares, which equals 1. 1 % of the shares that would be sold at the maximum of the offering range. Our directors and executive officers will pay the same $10.00 per share price as everyone else who purchases shares in the offering. Like all of our depositors, our directors and executive officers have subscription rights based on their deposits and, in the event of an oversubscription, their orders will be subject to the allocation provisions set forth in our plan of stock issuance. Purchases by our directors and executive officers will count towards the minimum number of shares we must sell to close the offering. Market for Meridian Interstate Bancorp s Common Stock (page ____) We anticipate that the common stock of Meridian Interstate Bancorp will be listed on the Nasdaq Global Select Market under the symbol EBSB. Keefe, Bruyette & Woods, Inc. currently intends to become a market maker in the common stock, but it is under no obligation to do so. We cannot assure you that other market makers will be obtained or that an active and liquid trading market for our common stock will develop or, if developed, will be maintained. After shares of the common stock begin trading, you may contact a stock broker to buy or sell shares. There can be no assurance that persons purchasing the common stock in the offering will be able to sell their shares at or above the $10.00 offering price, and brokerage firms typically charge commissions related to the purchase or sale of securities. Meridian Interstate Bancorp s Dividend Policy (page ____) We have not determined whether we will pay dividends on the common stock. After the offering, we will consider a policy of paying regular cash dividends. Our ability to pay dividends will depend on a number of factors, including capital requirements, regulatory limitations and our operating results and financial condition. Initially, our ability to pay dividends will be limited to the net proceeds of the offering retained by Meridian Interstate Bancorp and earnings from the investment of such proceeds. At the maximum of the offering range, Meridian Interstate Bancorp will retain approximately $47.4 million of the net proceeds. Additionally, funds could be contributed from East Boston Savings Bank through dividends; however, the ability of East Boston Savings Bank to dividend funds to Meridian Interstate Bancorp is subject to regulatory limitations described in more detail in Our Dividend Policy. Some holding companies that are chartered by other regulatory agencies waive dividends. Massachusetts banking regulations prohibit Meridian Financial Services from waiving dividends declared and paid by Meridian Interstate Bancorp unless the Massachusetts Commissioner of Banks does not object to the waiver and provided the waiver is not detrimental to the safe and sound operation of East Boston Savings Bank. In addition, as a mutual holding company regulated by the Federal Reserve Board under current Federal Reserve policies, Meridian Financial Services would be prohibited from waiving dividends declared and paid by Meridian Interstate Bancorp. If Meridian Interstate Bancorp pays dividends to its stockholders, it therefore will be required to pay dividends to Meridian Financial Services. The fact that dividends must be paid to Meridian Financial Services may act to reduce the level of dividends paid. Possible Conversion of Meridian Financial Services to Stock Form In the future, we may undertake a transaction commonly known as a second-step conversion in which we would sell to the public Meridian Financial Services interest in Meridian Interstate Bancorp. In a second-step conversion, depositors of East Boston Savings Bank would have subscription rights to purchase common stock of Meridian Interstate Bancorp or its successor, and the public stockholders of Meridian Interstate Bancorp would be entitled to exchange their shares of common stock for an equal percentage of shares of the new holding company. Total charge-offs 77 1 12 11 30 24 33 Recoveries: Real estate loans 16 1 47 Commercial business Consumer loans 59 3 3 7 9 17 June 30, 2007 (unaudited) Debt securities: Government-sponsored enterprises $ $ $ 145 $ 6,859 Corporate bonds 934 94,249 1,466 112,557 Mortgage-backed securities 3 December 31, 2006 Debt securities: Government-sponsored enterprises $ 1 $ 1,999 $ 173 $ 6,832 Corporate bonds 381 88,661 2,321 115,561 Mortgage-backed securities 3 This percentage may be adjusted to reflect any assets owned by Meridian Financial Services. Meridian Interstate Bancorp s public stockholders, therefore, would own approximately the same percentage of the resulting entity as they owned before the second-step conversion. We have no current plan to undertake a second-step conversion transaction and current Massachusetts banking regulations prohibit a second-step transaction for a period of three years from the completion of the offering unless waived by the Massachusetts Commissioner of Banks. Delivery of Prospectus To ensure that each person receives a prospectus at least 48 hours before the offering deadline, we may not mail prospectuses any later than five days prior to such date or hand-deliver prospectuses later than two days prior to that date. Stock order forms may only be delivered if accompanied or preceded by a prospectus. We are not obligated to deliver a prospectus or order form by means other than U.S. mail. We will make reasonable attempts to provide a prospectus and offering materials to holders of subscription rights. The subscription offering and all subscription rights will expire at Noon, Eastern time, on [Date 1], 2007 whether or not we have been able to locate each person entitled to subscription rights. Delivery of Stock Certificates (page ____) Certificates representing shares of common stock issued in the offering will be mailed to purchasers at the address provided by them on the order form as soon as practicable following completion of the offering and receipt of all necessary regulatory approvals. Stock Information Center If you have any questions regarding the offering, please call our stock information center. The telephone number is (____) ____-_____. The stock information center is open Monday through Friday from ___:00 a.m. to ___:00 p.m. and on Saturdays from 9:00 a.m. to Noon, Eastern time, except for bank holidays. Our stock information center is located at our Peabody office at 67 Prospect Street, Peabody, Massachusetts. December 31, 2005 Debt securities: Government-sponsored enterprises $ 2 $ 4,969 $ 204 $ 6,804 Corporate bonds 688 71,388 2,767 80,437 Mortgage-backed securities 3
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001412204_milestone_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001412204_milestone_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus and does not contain all of the information you need to consider in making your decision to invest in our common stock. This summary is qualified in its entirety by the more detailed information and consolidated financial statements and notes thereto included in this prospectus. You should read carefully this entire prospectus and should consider, among other things, the matters set forth in the section entitled Risk Factors before deciding to invest in our common stock. Unless otherwise indicated, Milestone refers solely to Milestone AV Technologies, Inc. (f/k/a CSAV Holding Corp. ) and we, us and our refer to Milestone AV Technologies, Inc. and its subsidiaries. Our Company We are a leading designer, marketer and distributor of branded audio visual, or AV, mounting equipment and display solutions. We believe we have the largest market share in North America for flat panel display mounting solutions, projector mounting solutions and speaker stands, based on sales, and are one of the top providers of AV furniture and other AV products and accessories. Milestone was formed in 2003 to acquire Chief Manufacturing, Inc., which was founded in 1978 and grew to become the leading supplier of commercial AV mounting systems sold to professional audio visual, or Pro-AV, dealers, and high-end custom home theater dealers. In 2004, Chief Manufacturing, Inc. acquired Decade Industries, Inc. (d/b/a Sanus Systems), or Sanus Systems, which was founded in 1986 and grew to become one of the largest manufacturers of high-quality speaker stands, AV furniture and television wall mounts for the consumer market. As a result of the acquisition of Sanus Systems, we believe we offer the most extensive selection of AV mounting and display solutions for commercial and consumer end-users. Our innovative products are used in connection with various high-growth AV products, such as flat panel displays and projectors, which are quickly becoming the preferred display technologies of many commercial and consumer end-users. We sell our products through numerous channels, including Pro-AV dealers, regional home theater dealers, consumer electronics retailers, mass merchants and original equipment manufacturers, or OEMs. In order to maximize our channel penetration, we market our products under the Chief and Sanus brand names and have recently introduced the channel specific iC, Vuepoint and simplicity brand names. Through these brands, we currently serve a broad base of over 4,500 customers, and over the past 18 years we have built a strong presence in leading national and regional retailers in the United States and Canada, such as Best Buy. We operate within the large and rapidly growing AV mounting equipment and display solutions industry. This industry includes AV mounting equipment and other display accessories and furniture that are sold to commercial and consumer end-users. This industry has grown dramatically in recent years as the demand for advanced digital display systems, including flat panel displays and projector systems, has increased. Flat panel displays and digital projectors have become the preferred display technologies across a wide range of commercial and consumer applications. According to iSuppli Corporation, or iSuppli, global sales of flat panel displays are expected to increase from 25.5 million units in 2005 to 76.1 million units in 2007, representing a compound annual growth rate of 72.9%. iSuppli estimates that global flat panel display unit sales will continue to grow from 2007 to 2010, projecting a compound annual growth rate of approximately 23.4%. According to Pacific Media Associates, or Pacific Media, global unit sales of projector systems are expected to increase from 4.1 million units in 2005 to 5.8 million units in 2007, representing a compound annual growth rate of 18.6%. Pacific Media estimates that global sales of projector systems will continue to grow from 2007 to 2010, projecting a compound annual growth rate of approximately 26.1%. Under the direction of our experienced management team, we have increased our net sales and income from operations over the past several years. From 2005 to 2006, our net sales increased 56.8% from $130.1 million to $204.0 million and our income from operations increased 20.5% from $29.2 million to $35.2 million. While our net income decreased 24.4% from $15.8 million in 2005 to $12.0 million in 2006, the decrease was primarily the result of recapitalization expenses and a recapitalization-related increase in interest payments. More recently, our net sales increased 34.0% from $133.5 million for the nine months Table of Contents The information in this prospectus is not compete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. PROSPECTUS SUBJECT TO COMPLETION, DATED DECEMBER 12, 2007. 12,000,000 Shares Milestone AV Technologies, Inc. Common Stock This is Milestone AV Technologies, Inc. s initial public offering. We are offering 5,333,333 shares of common stock and the selling stockholders identified in this prospectus are offering an additional 6,666,667 shares of common stock. We will not receive any of the proceeds from the sale of the shares being sold in this offering by the selling stockholders. We expect the initial public offering price of our common stock to be between $12.00 and $14.00 per share. Prior to this offering, there has been no public market for our common stock. We intend to apply to list our common stock on the New York Stock Exchange under the symbol MLS . Investing in our common stock involves risks. See Risk Factors on page 8. Per Share Total Public Offering Price $ $ Underwriting Discounts and Commissions $ $ Proceeds to Milestone AV Technologies, Inc. $ $ Proceeds to Selling Stockholders $ $ Delivery of the shares of common stock will be made on or about , 2007. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The selling stockholders have granted the underwriters an option to purchase a maximum of 1,800,000 additional shares of our common stock to cover over-allotments of shares, if any, exercisable at any time until 30 days after the date of this prospectus. Wachovia Securities Piper Jaffray William Blair Company Jefferies Company Robert W. Baird Co. The date of this prospectus is , 2007. Table of Contents ended September 30, 2006 to $178.8 million for the nine months ended September 30, 2007. During that same period, our income from operations increased 42.2% from $21.8 million to $31.0 million and net income increased 40.2% from $7.0 million to $9.8 million. As of September 30, 2007, our total debt was $213.1 million. Competitive Strengths We believe the following strengths have contributed significantly to our success and differentiate us from our competition: Leading market positions. We believe we are the largest North American supplier, based on sales, of flat panel display mounting solutions, projector mounting solutions and speaker stands, and are a leading supplier of AV furniture and other AV products and accessories. Strong relationships with a diversified customer base. We serve over 4,500 customers, including a diverse group of leading Pro-AV and home theater dealers such as AVI and Abt Electronics, OEMs such as Dell, consumer electronics retailers such as Best Buy, and mass merchants and club stores. Industry-leading product development. Since the beginning of 2005, we have successfully introduced over 100 new products, which represented more than 40% of our net sales in the first nine months of 2007. Highly effective customer service. We have a highly trained internal customer service team of approximately 30 professionals in the United States, the Netherlands and China that typically handles over 16,000 calls per month. In addition, our proprietary web-based tool Mountfinder allows customers to cross-reference available mounting solutions and is embedded in several of our customers websites. Multi-branded strategy. We have developed strong recognition within the commercial market with our Chief brand and within the consumer market with our Sanus, iC, Vuepoint and simplicity brands. Flexible supply chain capabilities. Our supply chain includes internal assembly and distribution operations and an extensive network of domestic and international outsourced component suppliers. In the first nine months of 2007, we sourced over 50% of our purchases from our Asian supplier base. Experienced management team. During the last three years, our management team has successfully integrated the operations of Chief Manufacturing, Inc. and Sanus Systems, expanded our international operations by increasing global sourcing and establishing European and Asian sales offices and significantly increased our net sales. Key Growth Initiatives We believe the following are key components of our growth strategy: Capitalize on our leading market positions. As sales of new display technologies, including flat panel displays and projectors, continue to grow, we plan to capitalize on our leading market positions in innovative AV mounting solutions and accessories. Further penetrate our existing retail customer base. Our leading presence with many of our retail customers enables us to participate in key merchandising decisions and to grow our business by introducing new products and product categories. Expand our presence in commercial channels. Within the commercial segment of our business, we are pursuing opportunities in the growing digital signage, workstation, hospitality and healthcare markets where we can attract new customers and further grow our business. Table of Contents Table of Contents Introduce new products and product categories. Our frequent introduction of new, innovative products and the redesign of existing products have been instrumental to our success and we intend to continue to develop and introduce new products and product categories. Expand our international presence. We are pursuing sales opportunities in international markets, particularly in the European and Asia-Pacific regions where we have established operations. Pursue strategic acquisitions. We plan to pursue strategic acquisitions that will expand our product offerings, enlarge our distribution channels and allow us to penetrate new markets. Risks Affecting our Business Our ability to operate our business successfully and execute our business strategy is subject to certain risks, including those that are generally associated with operating in the AV mounting equipment and display solutions industry, such as: we may be unable to develop new products or redesign existing products to compete effectively in the AV mounting and display solutions industry, resulting in a decrease in our net sales and loss of market share; our operations are dependent upon the strength of our relationships with our customers and if these relationships are not maintained, our net sales and profitability may decline; a decline in discretionary consumer spending or commercial technology spending could adversely affect our net sales and cause our operating results to decline; our international operations may be disrupted by events beyond our control; and our level of indebtedness may restrict our ability to expand our business. Any of these or other factors described more fully in the section entitled Risk Factors could adversely affect our business. You should consider carefully the information set forth in the section entitled Risk Factors beginning on page 8 and all other information contained in this prospectus before investing in our common stock. We are a Delaware corporation and the address of our principal executive offices is 8401 Eagle Creek Parkway, Suite 700, Savage, Minnesota 55378. Our telephone number is 866-977-3901 and our website is www.milestoneav.com. Any references to www.milestoneav.com, www.chiefmfg.com or www.sanus.com in this prospectus are inactive textual references only and the information contained on our websites is neither incorporated by reference into this prospectus nor intended to be used in connection with this offering. TABLE OF CONTENTS Page Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001412501_critical_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001412501_critical_prospectus_summary.txt
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+Prospectus summary This summary highlights selected information about us and this offering, but does not contain all of the information that you should consider before investing in our common stock. You should read this entire prospectus carefully, including the Risk factors and the historical and pro forma financial statements and related notes contained in this prospectus, before investing. This prospectus includes forward-looking statements that involve risks and uncertainties. See Forward-looking statements. Except as the context otherwise requires, references in this prospectus to the Company, we, our or us are to Critical Homecare Solutions Holdings, Inc. and its subsidiaries. References to information labeled as pro forma or on a pro forma basis means such information is presented after giving effect to (i) the combination of our two predecessors, Specialty Pharma, Inc. and New England Home Therapies, Inc., and the acquisitions of Deaconess Enterprises, Inc., Infusion Solutions, Inc. and Applied Health Care, Ltd. (in the case of the fiscal year ended December 31, 2006 only); (ii) the acquisitions of Infusion Solutions, Inc. and Applied Health Care, Ltd. (in the case of the nine months ended September 30, 2007 only); and (iii) this offering and the application of our estimated net proceeds from this offering. OVERVIEW We are a leading provider of comprehensive home infusion therapy services to patients suffering from acute or chronic conditions. We operate in two business segments, home infusion therapy and home nursing. Through our home infusion therapy segment, we deliver over 400,000 infusion pharmaceuticals, biopharmaceuticals, nutrients and related services and equipment each year to patients in the home through our 33 infusion locations in 14 states, primarily in the eastern United States. Through our home nursing segment, we provide over 350,000 nursing and therapy visits and 575,000 private duty nursing hours each year to patients in the home through our 32 home nursing locations in three states. We currently provide customized local clinical care to approximately 16,000 patients through our branch network and have relationships with approximately 450 payors, including insurers, managed care organizations and government payors. In the year ended 2006 and the nine months ended September 30, 2007, we generated pro forma net revenue of $176.1 million and $143.6 million, respectively. We believe our differentiated business model allows our branches, supported by regional and corporate resources, to respond to local needs and provide customized and cost-efficient services to our patients. Our local branches are staffed by integrated teams of highly trained clinicians that ensure the delivery of high quality care to our patients. Our national home health care platform and centralized infrastructure provide the complementary structure and support necessary to operate in a complex regulatory environment and gives us the purchasing power needed to obtain better rates for pharmaceuticals and ancillary supplies. All of our home infusion centers are accredited. We offer substantial benefits to patients, payors and physicians. We improve our patients quality of life by allowing them to remain at home while receiving the necessary medications, supplies and services, including caregiver counseling and education, for their treatment. We also offer payors a comprehensive approach to meeting their home health care service needs and help them reduce their costs, as providing infusion pharmacy services in the patient s home can be more cost-effective than providing these therapies in an acute or sub-acute setting. In addition, we assist physicians with the administration of time-intensive and costly care management support through patient monitoring and educational programs that can help improve patient compliance with therapy protocols. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents We are led by an experienced five-person senior management team that has an average of 23 years of experience in the health care industry. Our Chief Executive Officer and President, Robert A. Cucuel, our Chief Financial Officer, Mary Jane Graves, our Senior Vice President of Professional Services, Colleen Lederer, our Senior Vice President of Operations, Nitin Patel and our Senior Vice President of Reimbursement and Compliance, Joey Ryan, have worked closely together during the last 12 years. Our management team has extensive experience in acquiring and integrating home health care businesses, including eight acquisitions for us since our inception in 2006 whose core business segment was home infusion. In addition, we believe the strength of our management team has helped us to establish a reputation for clinical and operational excellence. OUR OPPORTUNITY The home health care sector is estimated by Frost & Sullivan to have accounted for between approximately $47 billion and $58 billion of overall health care spending in the United States in 2005 and is projected to grow at a compound annual growth rate of approximately 8% from 2005 to 2010. Home health care services can provide a less expensive alternative to the provision of similar treatments in hospitals, nursing facilities or on an outpatient basis. As a result, home health care has become an increasingly significant factor in the overall health care market. Expenditures for home health care services are outpacing expenditures for the health care market as a whole. According to a December 2006 report by Frost & Sullivan, home infusion expenditures in the United States totaled between $4 billion and $6 billion in 2005 and are expected to grow at a compound annual growth rate of approximately 7% from 2005 to 2010. This growth is expected to be driven by: patient preference for home care; payor cost containment pressures; an aging population; the introduction of new pharmaceuticals and therapies; and the potential for expanding coverage of home infusion therapy for the Medicare beneficiary population. The home infusion industry is highly fragmented, with the majority of service providers operating primarily in local and regional markets. We believe that few competitors possess the scale and resources to consolidate the home infusion industry and that our senior management s strong track record of successfully acquiring and efficiently integrating businesses in the home health industry positions us well to take advantage of the numerous acquisition opportunities that may be available to us. Furthermore, we believe that there are many factors that benefit larger providers in the home infusion industry, including: an enhanced appeal to referral sources by offering regional geographic coverage; revenue synergies through consolidating acquired businesses into existing managed care contracts; the ability to offer a complete product line to patients, which appeals to the patient, the provider of care and the payor; and improvements in the quality of billing and collection of receivables. According to a December 2006 report by Frost & Sullivan, the home nursing market was estimated to be between $35 billion and $40 billion in 2005, representing an estimated 70% of total home health care AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents expenditures. Moreover, the home nursing market is expected to grow at a compound annual growth rate of approximately 8% per year between 2005 and 2010. The growth in the home nursing sector continues to be driven by factors similar to those influencing the home infusion sector and the overall home health care market. OUR STRENGTHS We believe that we have a number of competitive strengths, including: A leading presence in the market for home infusion therapy products and services. We believe we are one of the leading providers by revenue of home infusion therapy products and services. We expect that our increasing scale will enhance our ability to achieve operating efficiency, increase our purchasing power and improve our competitive positioning. A focus and reputation for high quality clinical care. We believe we have a reputation for high quality care and responsiveness to patient needs. All of our home infusion centers are accredited, and each of our branches has an integrated team of nurses, pharmacists and therapists that have extensive clinical expertise and a commitment to serving the needs of our patients. An attractive therapeutic focus within the home infusion market. We focus on providing high value infusion therapies and specialty drugs that require complex clinical management. Many of our product offerings and services are designed to treat chronic conditions that require frequent drug administration, ongoing caregiver counseling and education regarding patient treatment and ongoing monitoring to encourage patients to comply with the prescribed therapy. Our business model combines the advantages of a national platform with the benefits of a local clinical services model. Our business model balances the benefits of promoting local responsibility and accountability for quality of care and operating results with the efficiencies gained from centralizing key administrative functions. Our talented and experienced management team. Our five-person senior management team has an average of 23 years of experience in the health care industry and has worked closely together during the last 12 years. Demonstrated ability to identify and integrate acquired businesses. Our senior management team has a demonstrated track record of identifying, evaluating, acquiring and integrating companies in the home health care market. We attribute part of our success in integrating these companies to our management s ability to identify leading home infusion companies, operational knowledge and a disciplined approach to due diligence. OUR STRATEGY Our goal is to be the leading provider of home infusion services in the United States. Our business strategy to achieve this goal and capitalize on our many opportunities includes: Continuing to focus on our core high value therapies; Continuing to operate a local clinical model that emphasizes customized patient care; Continuing to pursue a sales and marketing approach that targets both local and regional referral sources and payor contracts; Expanding our relationships with national managed care organizations; Critical Homecare Solutions Holdings, Inc. (Exact name of Registrant as specified in its charter) Table of Contents Continuing to realize additional synergies and operational efficiencies from our recent acquisitions; and Pursuing acquisitions of leading independent home infusion therapy providers in contiguous and other strategic markets. RISKS ASSOCIATED WITH OUR BUSINESS Our business is subject to numerous risks, which are highlighted in the section entitled Risk factors. These risks represent challenges to the successful implementation of our strategy and the growth of our business. Some of these risks are: We are highly dependent on payments from third-party health care payors, including private payors and Medicare, Medicaid and other government sponsored programs. Our inability to obtain third-party reimbursement for our products and services, or reductions in reimbursement rates, would reduce our revenue and profitability and negatively impact our liquidity. If we lose relationships with managed care organizations and other third party payors, we could lose access to a significant number of patients and our revenue and profitability could decline. Changes in reimbursement rates from federal and state programs, such as Medicare and Medicaid, for the services we provide may cause our revenue and profitability to decline or our working capital requirements to increase. An expansion of recently enacted rules establishing competitive bidding requirements for reimbursement from Medicare to include reimbursement rates for our RT/HME products in the areas we operate may negatively affect our revenue, profitability or liquidity. The laws and regulations governing our industry are extensive and extremely complex, and our interpretation of a given law or regulation may differ from those of the government agencies that regulate us. Furthermore, changes in state and federal laws and regulation could restrict our ability to conduct our business. Our limited independent operating history and subsequent acquisition activity make our future business prospects difficult to evaluate based on our past results. If we are unable to identify additional suitable acquisition candidates and acquire them on terms favorable to us, our growth may be slowed and our revenue and profitability may decline. If we are unable to successfully integrate acquisitions, our management s attention could be diverted and our efforts to integrate acquisitions may consume significant resources, which could have a material adverse effect on our business operations and liquidity. In connection with acquisitions, we may acquire unknown or contingent liabilities in amounts that exceed our potential recovery with regard to these liabilities. For further discussion of these and other risks you should consider before making an investment in our common stock, see the section entitled Risk factors beginning on page 12. CORPORATE HISTORY AND INFORMATION We were incorporated in Delaware on August 8, 2006 under the name KCHS Holdings, Inc. and changed our name to Critical Homecare Solutions Holdings, Inc. in connection with this offering. Our predecessors, Specialty Pharma, Inc., or Specialty Pharma, and New England Home Therapies, Inc., or Table of Contents New England Home Therapies, both of which we acquired in September 2006 for a total consideration of approximately $55.3 million, consisting of $49.4 million in cash and $5.9 million in assumed liabilities, have operated in the home health care business since 2002 and 2000, respectively. Specialty Pharma is a comprehensive home infusion and specialty pharmacy provider based in Connecticut and New England Home Therapies is a Massachusetts-based provider of home infusion products and services. See Our history for additional information regarding these predecessors. We are a holding company that conducts substantially all of our operations through our direct and indirect subsidiaries. Effective January 1, 2007, we acquired Deaconess Enterprises, Inc., or Deaconess, one of the largest providers of comprehensive infusion and nursing services in the United States, for a total consideration of approximately $170.6 million, consisting of $156.0 million in cash and $14.6 million in assumed liabilities, including related fees and expenses. Effective March 1, 2007, we acquired Infusion Solutions, Inc., or Infusion Solutions, a New Hampshire-based infusion services provider, for a total consideration of approximately $8.7 million, consisting of $8.0 million in cash and $0.7 million in assumed liabilities. Effective June 1, 2007, we acquired Applied Health Care, Ltd., or Applied, a Texas provider of infusion, specialty pharmacy, nursing and other services, for a total consideration of approximately $8.1 million, consisting of $7.5 million in cash and $0.6 million in assumed liabilities. In July and August 2007, we acquired Infusion Partners of Brunswick, Inc., or Infusion Partners of Brunswick, a provider of home infusion and specialty pharmacy services in Georgia, for a total consideration of approximately $7.1 million, consisting of $7.0 million in cash and $0.1 million in assumed liabilities, Infusion Partners of Melbourne, Inc., or Infusion Partners of Melbourne, a provider of home infusion, respiratory and nutritional services in Florida, for a total consideration of approximately $3.9 million, consisting of $3.8 million in cash and $0.1 million in assumed liabilities, and East Goshen Pharmacy, Inc., or East Goshen Pharmacy, a provider of home infusion services in Delaware and Pennsylvania, for a total consideration of approximately $6.3 million, consisting of $5.9 million in cash and $0.4 million in assumed liabilities. For more information on these acquisitions, see Our history. Our corporate headquarters are located at Two Tower Bridge, One Fayette Street, Suite 150, Conshohocken, Pennsylvania 19428, and our telephone number is (610) 825-2061. Our website is www.criticalhs.com. Information contained on our website does not constitute a part of this prospectus. OUR PRINCIPAL STOCKHOLDERS Our principal stockholders are investment funds managed by Kohlberg & Co., L.L.C., or Kohlberg. Kohlberg is a leading U.S. private equity firm specializing in middle market investing. Since its inception in 1987, Kohlberg has organized six investment funds, through which it has raised $3.7 billion of committed capital. Including us, the firm has completed more than 90 platform and add-on acquisitions with an aggregate value of more than $6 billion. Kohlberg has offices in Mt. Kisco, New York and Palo Alto, California. We refer to our Kohlberg investment fund stockholders collectively as the Kohlberg Stockholders. Our principal stockholders will continue to control more than 50% of the voting power of our common stock upon completion of this offering. As a result, we will be considered a controlled company for the purposes of the Nasdaq Stock Market, or Nasdaq, listing requirements. As a controlled company, we will be permitted to, and we intend to, opt out of the Nasdaq listing requirements that would otherwise require a majority of the members of our board of directors to be independent and require that we either establish a compensation committee and a nominating and governance committee, each comprised entirely of independent directors, or otherwise ensure that the compensation of our executive officers and nominees for directors are determined or recommended to our board by the independent members of our board. See Management Corporate Governance Controlled company. Critical Homecare Solutions Holdings, Inc. Two Tower Bridge One Fayette Street, Suite 150 Conshohocken, Pennsylvania 19428 (610) 825-2061 (Address, including zip code, and telephone number, including area code, of Registrant s principal executive offices) Robert A. Cucuel President and Chief Executive Officer Critical Homecare Solutions Holdings, Inc. Two Tower Bridge One Fayette Street, Suite 150 Conshohocken, Pennsylvania 19428 (610) 825-2061 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: John C. Kennedy, Esq. Paul, Weiss, Rifkind, Wharton & Garrison LLP 1285 Avenue of the Americas New York, New York 10019-6064 (212) 373-3000 Glenn R. Pollner, Esq. Gibson, Dunn & Crutcher LLP 200 Park Avenue New York, New York 10166 (212) 351-4000 Table of Contents REVERSE STOCK SPLIT Prior to the consummation of this offering, we intend to increase our total authorized number of shares of capital stock, make certain changes to our charter documents and effect a to one reverse stock split. In this prospectus, we refer to the increase in our total authorized capital stock, the reverse stock split and the changes to our charter documents discussed above collectively as the Reverse Stock Split. Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. CALCULATION OF REGISTRATION FEE Table of Contents The offering Common stock outstanding before this offering shares Common stock offered by us shares Common stock offered by the selling stockholders shares Common stock to be outstanding immediately after this offering shares Use of proceeds We expect to use the net proceeds from this offering to repay a portion of the outstanding indebtedness under our credit facilities. We will not receive any proceeds from the sale of our common stock by the selling stockholders. See Use of proceeds. Proposed Nasdaq Global Market symbol CHCS
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+Richard J. Navarro is the Chief Financial Officer of Albertsons LLC, a retail food and drug company, and has over 29 years of experience in the industry. Mr. Navarro is a Certified Public Accountant and from 2004 until 2006, was a consultant providing financial management services to various business. Prior to that, Mr. Navarro was employed by Albertsons, Inc. and held several management positions including Senior Vice President and Controller from 1999 to 2003. He currently serves on the Board of Directors of TitleOne Corporation and the Boise State University Foundation. He is also the past Chairman of the Associated Taxpayers of Idaho. Mr. Navarro is a graduate of Boise State University and the Executive Financial Management Program at Stanford University, Graduate School of Business. Len E. Williams joined Home Federal Bank as President in September 2006 and was appointed as a director of Home Federal Bank and Home Federal Bancorp in April, 2007. Mr. Williams has 30 years of commercial banking experience serving in many regional and national leadership roles. Prior to joining Home Federal Bank, Mr. Williams was Senior Vice President and Head of Business Banking with Fifth Third Bank. He was charged with creating and growing the business line and providing leadership over the company s business banking personnel, processes and products. Form 1987 to 2005, he held several management positions with Key Bank, including President of Business Banking from 2003 to 2005 and President of the Colorado District from 1999 to 2003. His prior experience includes regional corporate and commercial banking leadership responsibility. Mr. Williams is a member of the Board of Directors of the Boise Metro Chamber of Commerce and has served as chairman of Junior Achievement and Boys and Girsl Clubs. Mr. Williams holds an M.B.A. from the University of Washington and is a graduate of the Pacific Coast Banking School. Executive Officers Who Are Not Directors Each of the executive officers of Home Federal Bancorp will retain his or her office with new Home Federal Bancorp following the reorganization. Officers are elected annually by the board of directors of Home Federal Bancorp. The business experience for at least the past five years for each of the five executive officers of Home Federal Bancorp who do not serve as directors is set forth below. Robert A. Schoelkoph is Senior Vice President, Treasurer, Secretary and Chief Financial Officer of Home Federal Bancorp and Home Federal Bank and is 54 years of age. Mr. Schoelkoph joined Home Federal Bank in 1980. Mr. Schoelkoph was controller of Home Federal Bank from 1980 until 1983, Vice President and Treasurer from 1983 to 1994, and has served as Senior Vice President, Chief Financial Officer and Treasurer since 1983. The title of Secretary was added in 2007. He is a past member and Chairman of the Idaho Employers Council and a member of the Board of Directors of the Nampa Shelter Foundation. Mr. Schoelkoph is a certified public accountant. Lynn A. Sander is Executive Vice President/Consumer Banking of Home Federal Bank and is 54 years of age. Ms. Sander joined Home Federal Bank in May 2000 as Vice President/Sales Management. She was appointed to the position of Senior Vice President/Retail Banking in July 2001 and served in that position until she was appointed to her current position in April 2007. Immediately prior to joining Home Federal Bank, she was Senior Vice President, Account Manager for Fairmont/Aspen Performance Group, a sales and service consulting company, from June 1999 to May 2000. From 1987 until December 1998, Ms. Sander was employed by KeyBank of Idaho and its affiliate KeyCorp Management Company, where her last position was Vice President/Core Banking Territory Manager covering the states of Alaska, Idaho, Utah, and Colorado. She began her banking career in 1973 with Bank of Idaho. She currently serves on the Board of Directors of the Women and Children s Alliance, and is the Chair of the Board of the United Way of Treasure Valley. Ms. Sander served as Fundraising Chairman for the Idaho Anne Frank Human Rights Memorial and was chairman of the 2005 Treasure Valley United Way Campaign. Denis J. Trom is Senior Vice President/Human Resources of Home Federal Bank and is 60 years of age. Mr. Trom joined Home Federal Bank in April 2002. Mr. Trom was previously employed by U.S. Bancorp, Minneapolis, Minnesota from 1978 until 2002. He held various human resource, training and organizational development positions with U.S. Bancorp during his 23 years of employment, most recently serving as Vice President/Senior Regional Human Resources Consulting Manager from 1999 until 2002. Mr. Trom is active in the (Dollars in Thousands) Service fees and charges $ 9,218 $ 9,292 $ (74 ) (0.8 )% Gain on sale of loans 1,419 1,056 363 34.4 Increase in cash surrender value of bank owned life insurance 405 383 22 5.7 Loan servicing fees 549 620 (71 ) (11.5 ) Mortgage servicing rights, net (445 ) (179 ) (266 ) (148.6 ) Other 44 (63 ) Society for Human Resource Management, American Society for Training Development, the Professional Association for Compensation, Benefits and Total Rewards, and church activities. Steven D. Emerson is Executive Vice President and Chief Lending Officer of Home Federal Bank. Mr. Emerson joined Home Federal Bank as Senior Vice President and Chief Lending Officer on December 1, 2006. Mr. Emerson has over 15 years of experience in commercial banking and previously served as Vice President and Senior Commercial Lender for Farmers and Merchants Bank, a local community bank, during 2006. Prior to his employment with Farmers and Merchants Bank, Mr. Emerson served in several positions with Key Bank from 2000 to 2006, including President of the Cincinnati, Ohio market. Mr. Emerson holds an M.B.A. from Northwest Nazarene University. Cindy L. Bateman is Senior Vice President and Commercial Banking Team Lead of Home Federal Bank. Ms. Bateman joined Home Federal Bank in March 2007. Ms Bateman was previously employed by Key Bank from 2002 until 2007 having served as Senior Vice President and District Business Leader. Having started her career with First Security Bank of Idaho in 1983 in the Management Training program, she has held various positions in Credit Administration and Commercial and Business Banking. Ms. Bateman holds a B.B.A. in Finance from Idaho State University and an M.B.A. from the University of Washington. She currently serves on the Boards of Directors of Financial Women International and as Treasurer for the Idaho Shakespeare Festival. Sean P. Watt is Senior Vice President and Retail Branch Administration Manager of Home Federal Bank. Mr. Watt joined Home Federal Bank in May 2000. Mr. Watt served as the Consumer Loan Manager from May 2000 until he was appointed to his current position in Branch Administration in August 2001. Mr. Watt was previously employed by Key Bank as a Senior Consumer Loan Officer. Mr. Watt serves on the Board of Directors for the Boys and Girls Club of Nampa and Junior Achievement of Idaho. Mr. Watt graduated with honors from Pacific Coast Banking School in 2005. Meetings and Committees of the Board of Directors In connection with the completion of the conversion, new Home Federal Bancorp will establish a nominating and corporate governance committee, a compensation committee and an audit committee that will be substantially the same as the committees of Home Federal Bancorp. All of the members of these committees will be independent directors as defined in the listing standards of The Nasdaq Stock Market. We plan to have written charters for each committee available on our website at www.myhomefed.com . The following is a summary of the current committees of the boards of directors of Home Federal Bancorp and Home Federal Bank. Board of Directors The boards of directors of Home Federal Bancorp and Home Federal Bank conduct their business through meetings of the boards and through board and committee meetings. For the year ended September 30, 2007, both boards generally met in person on a bi-monthly basis, holding additional special meetings as needed. During the 2007 fiscal year, the board of directors of Home Federal Bancorp held six regular meetings and one special meeting and the board of directors of Home Federal Bank held six regular meetings and no special meetings. No director of Home Federal Bancorp or Home Federal Bank attended fewer than 75% of the total meetings of the boards and committees on which he served during this period. Committees and Committee Charters The board of directors of Home Federal Bancorp has standing Audit, Loan, Compensation, and Nominating Committees. The board has adopted written charters for its Audit, Compensation and Nominating Committees copies of which are available on our website at www.myhomefed.com. Audit Committee The Audit Committee consists of Directors Tinstman (Chairman), Hedemark, Navarro and Stamey. The Committee meets quarterly and on an as needed basis to evaluate the effectiveness of Home Federal Bancorp s internal controls for safeguarding its assets and ensuring the integrity of the financial reporting. The Audit Committee also meets quarterly to review and approve the earnings releases and the quarterly reports on Form 10-Q and annual report on Form 10-K. The Committee also appoints the independent auditor and reviews the audit report prepared by the independent auditor. The Audit Committee met 12 times during the year ended September 30, 2007. Each member of the Audit Committee is independent in accordance with the requirements for companies quoted on The Nasdaq Stock Market. Director Navarro has been designated by the board of directors as the audit committee financial expert, as defined by the SEC. Director Navarro is a certified public accountant and is the Chief Financial Officer of Albertsons LLC. Nominating Committee The Nominating Committee consists of Directors Helpenstell (Chairman), Malson, and Hedemark. The Nominating Committee and its Chair are appointed annually by the board of directors. Members of this Committee are selected from the pool of directors who are not up for election during the appointment year. The Nominating Committee meets annually and on an as needed basis, and is responsible for selecting qualified individuals to fill expiring director s terms and openings on the board of directors. Final approval of director nominees is determined by the full board, based on the recommendations of the Nominating Committee. This Committee met twice during the year ended September 30, 2007. Nominating Committee members receive no additional fees for serving on the Committee. Compensation Committee The Compensation Committee is comprised of Directors Hedemark (Chairman), Helpenstell, Malson and Navarro. The Compensation Committee meets annually and on an as needed basis regarding the personnel, compensation and benefits related matters of Home Federal Bancorp. The Committee also meets, outside of the presence of Mr. Stevens and Mr. Williams, to discuss their compensation and make its recommendations to the full board. Mr. Stevens and Mr. Williams make recommendations to the Compensation Committee regarding the compensation of the executive officers who report to them. The Committee considers these recommendations and makes its recommendation to the full board, which then votes on executive compensation. Mr. Stevens and Mr. Williams do not vote on their own compensation and only vote on the compensation of other executive officers in case of a tie. The Compensation Committee met four times during the year ended September 30, 2007. Corporate Governance Director Independence. The common stock of Home Federal Bancorp is listed on the Nasdaq Global Market. In accordance with Nasdaq requirements, at least a majority of Home Federal Bancorp s directors must be independent directors. The Board has determined that six of its eight directors are independent, as defined by Nasdaq. Directors Helpenstell, Hedemark, Malson, Stamey, Tinstman and Navarro are all independent. Only Daniel L. Stevens and Len E. Williams are not independent. Stockholder Communication with the Board of Directors. The board of directors maintains a process for stockholders to communicate with the board of directors. Stockholders wishing to communicate with the board of directors should send any communication to Daniel L. Stevens, Chairman of the board, Home Federal Bancorp, Inc., 500 12th Avenue South, Nampa, Idaho 83651. Any such communication should state the number of shares beneficially owned by the stockholder making the communication. Net unrealized gain (loss) (5,501 ) (208 ) (19 ) (271 ) 24 Tax effect 2,200 83 8 (unaudited) (in thousands) Equity $ 89,306 $ 87,459 $ 80,532 Other comprehensive income unrealized loss on securities 3,155 112 (Dollars in Thousands) Compensation and benefits $ 15,081 $ 12,636 $ 2,445 19.3 % Occupancy and equipment 2,759 2,765 (6 ) (0.2 ) Data processing 1,802 1,616 186 11.5 Advertising 1,025 1,147 (122 ) (10.6 ) Contribution to Home Federal Foundation 1,825 (1,825 ) (100.0 ) Other 3,278 3,169 (1) The directors did not receive any equity awards in the year ended September 30, 2007. Represents the dollar amount of expense recognized for financial statement reporting purposes in fiscal 2007 for awards made in prior years and being earned by the director ratably over the five-year period from the date of the award. Amounts are calculated pursuant to the provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment ( FAS 123R ). For a discussion of valuation assumptions, see Note 9 of the Notes to Consolidated Financial Statements in Home Federal Bancorp s Annual Report on Form 10-K for the year ended December 31, 2006. (2) For Directors Helpenstell, Malson, Hedemark, Stamey and Tinstman, represents an award of 11,924 shares of restricted stock with a grant date fair value of $151,435. For Director Navarro, represents an award of 2,000 shares of restricted stock with a grant date fair value of $25,700. As of September 30, 2007, Directors Helpenstell, Malson, Hedemark, Stamey and Tinstman each had 7,154 shares of restricted stock outstanding and Director Navarro had 1,600 shares of restricted stock outstanding. (3) For Directors Helpenstell, Malson, Hedemark, Stamey and Tinstman, represents a grant of options to purchase 22,357 shares of common stock with a grant date fair value of $46,503. For Director Navarro, represents a grant of options to purchase 20,000 shares of common stock with a grant date fair value of $57,200. As of September 30, 2007, Directors Helpenstell, Malson, Hedemark, Stamey and Tinstman each had 8,943 vested and 13,414 unvested options outstanding and Director Navarro had 4,000 vested and 16,000 unvested options outstanding. (4) Represents the expense to accrue the estimated present value of future benefits for the director deferred incentive plan. (5) Represents the aggregate change in actuarial present value of each director s accumulated benefit under the director retirement plan. (6) Represents dividends received on unvested restricted stock. Fees. Directors of Home Federal Bancorp are currently not compensated, but serve and are compensated by Home Federal Bank. For the year ended September 30, 2007, board members received an annual retainer of $15,000 and $750 for each board meeting attended and $250 for each committee meeting attended ($300 for the chair of each committee). It is not anticipated that separate directors fees will be paid to directors of Home Federal Bancorp or new Home Federal Bancorp until such time as these persons devote significant time to the separate management of the affairs of Home Federal Bancorp or new Home Federal Bancorp, which is not expected to occur until we become actively engaged in additional businesses other than holding the stock of Home Federal Bank. We may determine that such compensation is appropriate in the future. Director Deferred Incentive Plan. Home Federal Bank maintains a nonqualified deferred incentive plan for directors, which was last amended effective September 14, 2007. All members of the board of directors participate in the plan. Until October 1, 2006, the plan provided an incentive award percentage determined by reference to Home Federal Bancorp s return on assets and return on equity for the year. Each year, the percentage was determined and multiplied by the participant s directors fees for the year. The resulting amount was set aside in an unfunded deferral account for that participant. Although the incentive award has been discontinued, Participants may also elect to defer all or a part of their directors fees into the deferral account under the plan. The deferral accounts are credited annually with an interest credit that is based on the growth rate of Home Federal Bank s net worth in Home Federal Bancorp, subject to a maximum of 12% per year. Upon the participant s termination of service, the value of the participant s combined deferral accounts will begin to be paid. Hardship distributions are permitted, as well as certain limited in-service distributions as permitted by law. The plan also provides a death benefit equal to the director deferrals and interest credit on such amounts plus the greater of the value of the participant s deferral accounts, or a fixed death benefit of $202,000. All benefits are paid over 120 months, and during that period, the deferral account is adjusted for interest. The director may elect to change the form of benefit, subject to the approval of Home Federal Bank and compliance with legal restrictions. Director Retirement Plan. Home Federal Bancorp adopted a director retirement plan, effective January 1, 2005, that replaced prior plans. The plan is an unfunded nonqualified retirement plan for directors. All members of the board of directors participate in the plan. Upon the later of attaining age 72 or termination of service, the director will receive an annual benefit equal to 50 percent of the fees paid to the director for the preceding year, payable in monthly installments over 15 years. If the director retires before attaining age 72, his vested accrual benefit will be paid in monthly installments, with interest at a rate of 7.5 percent per year, over 180 months. The accrued benefit vests at a rate of 10 percent per year, except in the event of disability, in which case the vested percentage is 100 percent. If the director terminates service within 24 months following a change in control, he will receive 100 percent of his accrued benefit, plus a change in control benefit equal to 2.99 times his prior years directors fees. Change in control payments are subject to reduction to avoid excise taxes under Section 280G of the Internal Revenue Code. In the event a director dies before termination of service, his beneficiary would receive his projected benefit, which is the final benefit the director would have received had he attained age 72, assuming a 4% annual increase in the directors fees. In the event the director dies after separation from service, but before receiving the full 15 years of annual benefits, the remaining payments shall be paid to his or her beneficiaries. In-service distributions are permitted in limited circumstances. Executive Compensation Compensation Discussion and Analysis. This Compensation Discussion and Analysis describes the compensation philosophy and policies for the year ended September 30, 2007 that applied to the executives named in the summary compensation table below (known as the named executive officers ). It explains the structure and rationale associated with each material element of each named executive officer s total compensation, and it provides important context for the more detailed disclosure tables and specific compensation amounts provided following the discussion and analysis. Role of the Compensation Committee. The Compensation Committee is composed entirely of independent directors. The Committee sets and administers the policies that govern our executive compensation programs, and various incentive and stock option programs. All decisions relating to the compensation of the named executive officers are shared with and approved by the full board of directors. discounts took into consideration the potential financial impact of the conversion and offering and RP Financial s analysis of the results of operations and financial condition of Home Federal Bancorp compared to the peer group. Price-to-earnings Price-to-book Price-to-tangible multiple(1) value ratio book value ratio Compensation Philosophy and Objectives. The Compensation Committee believes that a compensation program for executive officers should take into account management skills, long-term performance results, and stockholder returns. The principles underlying our compensation policies are: to attract and retain key executives who are highly qualified and are vital to our long-term success; to provide levels of compensation commensurate with those offered in the Treasure Valley as measured by local regional, and national financial industry compensation surveys; to align the interests of executives with stockholders by having a significant portion of total compensation based on meeting or exceeding defined performance measures; to motivate executives to enhance long-term stockholder value and thereby helping them build their own personal ownership in Home Federal Bancorp; and to integrate the compensation program with our long-term strategic planning and management process. We seek to target executive compensation at levels that we believe to be consistent with others in the banking industry. The named executive officers compensation is weighted toward programs contingent upon our level of annual and long-term performance. In general, for senior management positions, including the named executive officers, we will pay base salaries that target the market median and above of other banks of similar asset size, growth strategy and complexity, and with similar products and markets. Goals for specific components include: Base salaries for executives generally are targeted between the 50th and 75th percentiles. The Annual Incentive Plan will provide cash compensation at the 50th percentile when target performance- based goals are achieved and between the 50th and 75th percentiles if annual goals are exceeded. Performance-based Long-Term Incentive Plan was not offered last year; however, it is being researched for future consideration. No equity awards would be made if long-term performance goals are not met. Elements of Compensation. We use the pay components listed below to balance various objectives. The compensation framework helps encourage achievement of strategic objectives and creation of stockholder value, recognize and reward individual initiative and achievements, maintain an appropriate balance between base salary and annual and long-term incentive opportunity, and allows us to compete for, retain and motivate talented executives critical to our success. Salary. We pay our executives cash salaries intended to be competitive and to take into account the individual s experience, performance, responsibilities, and past and potential contribution to Home Federal Bancorp and Home Federal Bank. There is no specific weighting applied to the factors considered, and the Committee uses its own judgment and expertise in determining appropriate salaries within the parameters of the compensation philosophy. We target salaries between the 50th and 75th percentiles of competitive practice. This is described in greater detail below, under Pay Level and Benchmarking Salary decisions also take into account the positioning of projected total compensation with target-level performance incentives. Because incentive opportunities are defined as a percentage of salary, changes in salary have an effect on total compensation. Prior to recommending salary increases to the board of directors, the Compensation Committee reviews the projected total compensation based on the proposed salaries. No executive cash salary increases were approved in 2007, with the exception of a five percent increase for Ms. Sander in Daniel L. Stevens 25 % 50 % 100 % Robert A. Schoelkoph 20 % 40 % 80 % Len E. Williams 25 % 50 % 100 % Lynn A. Sander 20 % 40 % 80 % Roger D. Eisenbarth 20 % 40 % 80 % The annual cash incentive objectives for the fiscal year ended September 30, 2007 were not achieved; therefore, no year-end cash incentives were paid to executives. On October 19, 2007, the Compensation Committee amended the 2008 annual incentive targets for certain of the named executive officers. The new award opportunities are threshold (90%), target (100%), target plus (120%) and stretch (140%). The following table shows potential awards at threshold, target, target plus and stretch, expressed as a percentage of the executive s salary. (1) It is expected the Mr. Schoelkoph will move into a new position as Treasurer of Home Federal Bank in the coming year and we will be hiring a new Chief Financial Officer. Long-Term Incentives. Equity-based compensation is intended to attract and retain qualified executives, to provide these persons with a proprietary interest in Home Federal Bancorp as an incentive to contribute to our success, and to reward executives for outstanding performance. Equity-based compensation functions as a long-term incentive because awards are generally made with a five-year gradual vesting schedule or a three year cliff vesting schedule. Awards are made either in the form of stock options, stock appreciation rights or restricted stock. Currently, we have in place the 2005 Recognition and Retention Plan and the 2005 Stock Option and Incentive plan, each of which was approved by our Board of Directors and stockholders. Awards remain available for grant under these two plans. The equity-based plans are administered and interpreted by the Compensation Committee of the board of directors. Under the plans, the Committee receives recommendations from the President and approves which officers and key employees will receive awards, the number of shares subject to each option or shares of restricted stock awarded, and the vesting of the awards. The per share exercise price of an option will equal at least 100% of the fair market value of a share of common stock on the date the option is granted. In addition, newly hired executives may receive awards at the time of their employment. In determining whether to make option or restricted stock awards, the Compensation Committee may take into account historical awards and then-current competitive conditions. 401(k) and Employee Stock Ownership Plan. Home Federal Bank sponsors both a 401(k) plan and an employee stock ownership plan. The purpose of these plans is to provide participating employees with an opportunity to obtain beneficial interests in the stock of Home Federal Bancorp and to accumulate capital for their future economic security. The trustees of the plans include the President, Chief Financial Officer and the Director of Human Resources. Executive Retirement Benefits. We have entered into salary continuation agreements with each of the named executive officers. These agreements help support the objective of maintaining a stable, committed and qualified team of key executives through the inclusion of retention and non-competition provisions. Under the agreement, an executive will be entitled to a stated annual benefit for a period of 15 years upon retirement from Home Federal Bancorp after attaining age 65, or upon attaining age 65, if his or her employment had been previously terminated due to disability. There are also benefits for early retirement and involuntary termination after a change in control. Other Compensation. The named executive officers participate in our broad-based employee benefit plans, such as medical, vision, dental, long-term and short-term disability, and term life insurance programs. For each of the named executive officers, we also provide the following perquisites: auto allowance for business and personal use for transportation for the executive, customers and employees; social and civic club dues for networking and entertaining; and business and personal use of a cell phone for accessibility to the executive. Pay Level and Benchmarking. As noted earlier, our compensation structure is designed to position an executive s compensation between the 50th and 75th percentiles of a competitive practice. In 2006, the Compensation Committee worked with Clark Consulting to review total compensation levels for the named executive officers. This New Home Federal Bancorp Minimum of offering range 24.34x 88.26 % 88.26 % Midpoint of offering range 27.66 96.34 96.34 Maximum of offering range 33.77 103.20 103.20 Maximum of offering range, as adjusted 34.10 110.13 110.13 Valuation of peer group companies as of September 14, 2007(2) Average 18.90x 129.19 % 145.75 % Median 14.80 128.49 133.67 Horizon Financial Corp. (HRZB) Team Financial Inc. (TFIN) Columbia Bancorp (CBBO) Bank Holdings (TBHS) Pacific Continental Group (PCBK) Pacific Financial Group (PFLC) Riverview Bancorp, Inc. (RVSB) PremierWest Bancorp (PRWT) Blue Valley Ban Corp. (BVBC) Rainier Pacific Financial Group (RPFG) Landmark Bancorp, Inc. (LARK) Washington Banking Group (WBCO) First Mutual Bancshares, Inc. (FMSB) BNCCORP Inc. (BNCC) HF Financial Corp. (HFFC) Idaho Independent Bank (IIBK) Heritage Financial Group (HFWA) After consideration of the data collected on external competitive levels of compensation and internal relationships within the executive group, the Compensation Committee makes decisions regarding individual executives target total compensation opportunities based on the need to attract, motivate and retain an experienced and effective management team. Review of Prior Amounts Granted and Realized. We desire to motivate and reward executives relative to driving superior future performance, so we do not currently consider prior stock compensation gains as a factor in determining future compensation levels. Adjustment or Recovery of Awards. We have not adopted a formal policy or any employment agreement provisions that enable recovery, or clawback , of incentive awards in the event of misstated or restated financial results. However, Section 304 of the Sarbanes-Oxley Act does provide some ability to recover incentive awards in certain circumstances. If we are required to restate our financials due to noncompliance with any financial reporting requirements as a result of misconduct, the Chief Executive Officer and Chief Financial Officer must reimburse us for (1) any bonus or other incentive- or equity-based compensation received during the 12 months following the first public issuance of the non-complying document, and (2) any profits realized from the sale of securities of Home Federal Bancorp during those 12 months. Timing of Equity Grants. The Compensation Committee does not have a formal written policy guiding the timing of equity grants. All equity grants were made after formal Compensation Committee approval and subject to full board approval. We have reviewed our equity grant practices and have confirmed that all past equity grants have been consistent with SEC guidelines. Tax and Accounting Considerations. We take into account tax and accounting implications in the design of our compensation programs. For example, in the selection of long-term incentive instruments, the Compensation Committee reviews the projected expense amounts and expense timing associated with alternative types of awards. Under current accounting rules, Home Federal Bancorp must expense the grant-date fair value of share-based grants such as restricted stock and stock options. The grant-date value is amortized and expensed over the service period or vesting period of the grant. In selecting appropriate incentive devices, the Compensation Committee reviews extensive modeling analyses and considers the related tax and accounting issues. Compensation Consultants. Over the past five years, the Compensation Committee has engaged the Compensation Group of Clark Consulting to assist it in several executive compensation initiatives, including salary data, equity plan designs and deferred compensation plans. Because Clark Consulting is knowledgeable in our executive compensation plans, it is an ongoing working relationship. Periodically, the Committee will engage Clark Consulting on an as needed basis. Role of Executives in Compensation Committee Deliberations. The Compensation Committee frequently requests the Chief Executive Officer and President to be present at Committee meetings to discuss executive compensation and evaluate company and individual performance. Occasionally other executives may attend a Committee meeting to provide pertinent human resources, financial and/or legal information. Executives in attendance may provide their insights and suggestions, but only Compensation Committee members may vote on decisions regarding changes in executive compensation to recommend to the full board. The Chief Executive Officer and President do not provide the recommendations for changes in their own compensation. The Compensation Committee discusses the compensation of the Chief Executive Officer and the President with each of them, but final deliberations and all votes regarding his compensation for recommendation to the full board are made in executive session, without the Chief Executive Officer or President present, as appropriate. The Committee initiates any changes in these officers compensation based on periodic market reviews and recommendations from outside consultants. Relative to executives other than the Chief Executive Officer and the President, the Committee uses their proposals and input from Clark Consulting in making its recommendations to the full board. Although the Chief Executive Officer and President are members of the board of directors, they only vote on executive compensation in the event of a tie. Compensation of the Chief Executive Officer. Mr. Stevens is the Chairman and Chief Executive Officer of Home Federal Bank and Chairman, President and Chief Executive Officer of Home Federal Bancorp. As the Chief Executive Officer of the Bank and the Company, he is responsible for the overall supervision of these entities. He oversees management and has responsibility for all policy development and implementation, he is responsible for the completion of the transition of authority and responsibility of executive leadership from himself to the new President of Home Federal Bank, he coordinates investor relations with stockholders, he is responsible for coordinating the activities and focus of the board of directors, he has ultimate responsibility for the overall consolidated performance of the related corporate entities, and has final responsibility for the change and the growth of Home Federal Bank and expansion of the business model of Home Federal Bank. Finally, it is his ultimate responsibility to see that this reorganization and conversion results in a positive outcome on behalf of the stockholders, the employees and the communities served by Home Federal and Home Federal Bank. While Mr. Stevens compensation exceeds that of all of the other named executive officers, the Compensation Committee believes it is commensurate with his experience and level of responsibility. Conclusion. We believe its compensation program is reasonable and competitive with compensation paid by other financial institutions of similar size. The program is designed to reward managers for strong personal, company and share-value performance. The Compensation Committee monitors the various guidelines that constitute the program and reserves the right to adjust them as necessary to continue to meet company and stockholder objectives. After Market Trading Activity Second Step Offerings Completed Closing Dates between January 1, 2006 and September 14, 2007 Appreciation from Initial Trading Date(1) (1) The named executive officers did not receive any equity awards in the year ended September 30, 2007. Represents the dollar amount of expense recognized for financial statement reporting purposes in fiscal 2007 for awards made in prior years and being earned by the officer ratably over the five-year period from the date of the award. Amounts are calculated pursuant to the provisions of FAS 123R. For a discussion of valuation assumptions, see Note 9 of the Notes to Consolidated Financial Statements in Home Federal Bancorp s Annual Report on Form 10-K for the year ended December 31, 2006. (2) Represents the expense to accrue the estimated present value of future benefits for the executive deferred incentive agreements. (3) Represents the aggregate change in actuarial present value of each named executive officer s accumulated benefit under his or her salary continuation agreement. (4) Please see the table below for more information on the other compensation paid to our executive officers in the year ended September 30, 2007. Transaction Conversion Date 1 Day 1 Week 1 Month Through September 14, 2007 (1) Primarily represents a one-time initiation fee. Employment Agreements. Home Federal Bancorp and Home Federal Bank have entered into separate three-year employment agreements with Daniel L. Stevens. On each anniversary of the initial date of the employment agreement, the term will be extended for an additional year unless notice is given by the board to Mr. Stevens, or vice versa, at least 90 days prior to the anniversary date. Home Federal Bank has entered into an employment agreement with Len E. Williams. The agreement provided for an initial one-year term, a two-year term that commenced on September 11, 2007 and a three year term commencing on September 11, 2009, provided the agreement has not been terminated earlier by either party. On each anniversary beginning on September 11, 2012, the term of the agreement will be extended for an additional year unless notice is given by the Board to Mr. Williams, or vice versa, at least 90 days prior to the anniversary date. Under the employment agreements, the aggregate base salary level for Mr. Stevens is $244,400 and the base salary level for Mr. Williams is $210,000, which may be increased at the discretion of the board of directors or an authorized committee of the board. The agreements provide that compensation may be paid in the event of disability, death, involuntary termination or a change in control, as described below under Potential Payments Upon Termination. Transition Agreement. On August 21, 2006, Home Federal Bancorp, Home Federal Bank and Home Federal MHC entered into a Transition Agreement with Daniel L. Stevens in connection with his proposed retirement on September 30, 2008. The purpose of the agreement is to facilitate the executive succession at Home Federal Bancorp and Home Federal Bank with the transition of M r. Stevens to retirement and the employment of a successor executive. The agreement defines Mr. Stevens responsibilities and compensation during the transition period. The agreement also identifies Mr. Stevens transition schedule beginning in September 2006 with the employment of a successor executive, Len E. Williams, and concluding with a retirement date of September 30, 2008. At the time of his retirement, Mr. Stevens will resign as President and Chief Executive Officer of Home Federal Bancorp and Home Federal M HC and will resign as Chief Executive Officer of Home Federal Bank. Following his retirement, Mr. Stevens will continue to serve as a director of, and Chairman of the boards of, Home Federal Bancorp, Home Federal Bank and Home Federal MHC. Under the terms of the agreement, Mr. Stevens resigned as President of Home Federal Bank upon Mr. Williams appointment by the board of directors as his successor. The agreement provides that Mr. Stevens will mentor and train Mr. Williams on all aspects of the chief executive officer and president functions until Mr. Stevens retires. Under the agreement, on January 1, 2008, Mr. Stevens will begin a less demanding work schedule that will be coordinated with management and the boards of directors of Home Federal Bancorp and Home Federal Bank. During the transition period, Mr. Stevens will be compensated in the same manner as he is currently compensated, however, he will not accrue any vacation in calendar year 2008. Under the terms of the agreement, Mr. Stevens forfeited 65,580 incentive stock options that were exercisable on July 19, 2009 and 2010, which were replaced by a grant of 65,580 non-qualified stock options. In connection with the forfeiture of his incentive stock options, Mr. Stevens will also receive incentive payments on July 19, 2009 and 2010 for the options that become (1) Represents the incentives that could have been earned under the annual incentive plan. No incentives were paid to the named executive officers because the relevant performance criteria were not met, as described earlier under Compensation Discussion and Analysis. Daniel L. Stevens 32,790 157,113 14,905 231,177 Robert A. Schoelkoph 14,905 77,705 5,962 92,471 Len E. Williams 3,000 41,250 Lynn A. Sander 4,769 73,967 Roger D. Eisenbarth 11,924 59,349 4,769 73,967 Daniel L. Stevens 25 % 50 % 100 % 150 % Robert A. Schoelkoph (1) 7.5 % 15 % 30 % 45 % Len E. Williams 25 % 50 % 100 % 150 % Lynn A. Sander 20 % 40 % 80 % Daniel L. Stevens 83,656 732,619 Robert A. Schoelkoph 24,996 233,304 Len E. Williams Lynn A. Sander 132,932 Roger D. Eisenbarth 27,228 305,633 We have entered into executive deferred incentive agreements with each of the named executive officers, except Mr. Williams. Until October 1, 2006, the agreements provided an incentive award percentage determined by reference to Home Federal Bank s return on assets for the year. Each year, the percentage was determined and multiplied by the participant s base salary for the year. The resulting amount was set aside in an unfunded deferral account for that participant. Although the incentive award has been discontinued, the deferral account is credited annually with an interest credit equal to the percentage that is based on the growth rate in Home Federal Bancorp s retained earnings, subject to a maximum of 12% per year. Upon the participant s termination of employment after his or her normal retirement date (age 65), Home Federal Bank will pay the value of the participant s deferral account in 180 equal monthly installments. During the payment period, the deferral account is adjusted for interest. The agreements also provide for benefits upon early retirement, early termination, disability, death or change in control, as described below under Potential Payments Upon Termination. Potential Payments Upon Termination. We have entered into agreements with the named executive officers that provide for potential payments upon disability, termination and death. In addition, our equity plans also provide for potential payments upon termination. The following discussion addresses the potential payments that the named executive officers could receive under a variety of scenarios. Daniel L. Stevens 881,823 12,729 Len E. Williams 615,315 16,750 Section 280G of the Internal Revenue Code provides that severance payments (either separately or in conjunction with other payments made on account of a change in control) that equal or exceed three times an individual s base amount will result in the individual receiving excess parachute payments if the payments are conditioned upon a change in control. Individuals receiving parachute payments in excess of 2.99 times of their base amount are subject to a 20% excise tax on the amount by which the value of the individual s change in control benefits exceed one times the individual s base amount (the excess parachute payment). If excess parachute payments are made, we would not be entitled to deduct the amount of these excess payments. The employment agreements provide that severance and other payments that are subject to a change in control will be reduced as much as necessary to ensure that no amounts payable to the executives will be considered excess parachute payments. Robert A. Schoelkoph 440,125 12,729 Lynn A. Sander 407,806 12,729 Roger D. Eisenbarth 421,295 12,729 Plan benefits are reduced to the extent necessary to avoid the payment of an excise tax under Section 280G of the Internal Revenue Code. Salary Continuation Agreements. As described above, we have entered into salary continuation agreements with each of the named executive officers. Under these agreements, if the participant makes the required contributions, then upon the participant s normal retirement date (age 65), Home Federal Bank will pay a monthly benefit equal to 50% of the average of the participant s final 36 months of base salary (the final salary benefit), plus the participant s deferral account balance. The participant s deferral account balance is the sum of the participant s elective deferrals plus interest credited. The plan provides a reduced monthly benefit if the participant terminates employment as a result of early retirement (before age 65). The early retirement benefit is the participant s vested accrual balance plus the deferral account balance. Vesting occurs at a rate of ten percent per plan year. The plan Abington Bancorp, Inc. (NASDAQ: ABBC) 6/28/07 (4.0 )% (1.6 )% (7.5 )% (4.2 )% Peoples United Financial, Inc. (NASDAQ: PBCT) 4/16/07 3.8 2.0 (0.3 ) (14.9 ) Osage Bancshares, Inc. (NASDAQ: OSBK) 1/18/07 (0.5 ) (0.5 ) (6.8 ) (9.1 ) Westfield Financial, Inc. (AMEX: WFD) 1/4/07 7.0 7.5 9.0 (0.1 ) Citizens Community Bancorp, Inc. (NASDAQ: CZ WI) 11/1/06 (2.5 ) (1.0 ) (3.3 ) (7.7 ) Liberty Bancorp, Inc. (NASDAQ: LBCP) 7/24/06 2.5 1.0 1.5 7.2 First Clover Leaf Fin. Corp. (NASDAQ: FCLF) 7/11/06 3.9 6.0 11.2 15.0 Monadnock Bancorp, Inc. (OTCBB : MN KB ) 6/29/06 (5.0 ) (13.8 ) (17.5 ) Average 1.3 1.1 (1.2 ) (3.9 ) Median 1.3 0.3 (1.8 ) (6.0 ) Daniel L. Stevens 101,657 122,263 109,548 101,657 Robert A. Schoelkoph 24,359 89,011 51,129 24,359 Len E. Williams 5,576 187,394 1,867 18,674 Lynn A. Sander 20,370 84,906 25,653 20,370 Roger D. Eisenbarth 35,718 66,463 49,078 35,718 Executive Deferred Incentive Agreements. As described above, we have entered into executive deferred incentive agreements with each of the named executive officers, except Mr. Williams. Until October 1, 2006, the agreements provided an incentive award percentage determined by reference to our return on assets for the year. Although the incentive award has been discontinued, the deferral account is credited annually with an interest credit equal to the percentage that is based on the growth rate in our retained earnings, subject to a maximum of 12% per year. Upon the participant s termination of employment after disability, death or an involuntary termination within 24 months following a change in control of Home Federal Bancorp, the value of the participant s deferred account will begin to be paid. Upon the participant s early retirement on or after age 62, but before age 65, the value of the participant s deferral account, plus the value of his incentive award (reduced to reflect either the early commencement of benefits, or a ten percent reduction for each year of service less than ten), will begin to be paid. Upon the participant s termination of employment prior to the participant s early retirement date, the value of the participant s deferral account, plus the value of his incentive award (reduced by ten percent for each year of service less than ten), will be paid beginning on the participant s normal retirement date. Hardship distributions are permitted, as are certain limited in-service distributions, as permitted by law. All benefits are paid over 180 months, and during that period, the deferral account is adjusted for interest. Benefits are reduced to the extent necessary to avoid the payment of an excise tax under Section 280G of the Internal Revenue Code. If the named executive officers had their employment terminated as of September 30, 2007 as a result of death, disability, early retirement, termination prior to early retirement or change in control, they would have been entitled to the following annual payments under the executive deferred incentive agreements: (1) Reflects the excess of the fair market value of the underlying shares as of September 30, 2007 over the exercise price of all unvested options. (2) Reflects the fair market value as of September 30, 2007 of all unvested restricted stock. The plans also provide for accelerated vesting of awards in the event of a participant s death or disability. If the employment of any of our named executive officers had been terminated as of September 30, 2007 by reason of How We Will Use the Proceeds Raised From the Sale of Common Stock We intend to use the net proceeds received from the stock offering as follows: Maximum, Minimum Maximum as adjusted either death or disability, the value of accelerated vesting of restricted stock awards would be as shown in the table above. Compensation Committee Interlocks and Insider Participation The members of the Compensation Committee are Directors Hedemark, Helpenstell, Malson and Navarro. No members of this Committee were officers or employees of Home Federal Bancorp or any of its subsidiaries during the year ended September 30, 2007, nor were they formerly officers or had any relationships otherwise requiring disclosure. Compensation Committee Report The Compensation Committee of the Board of Directors of Home Federal Bancorp has submitted the following report for inclusion in this proxy statement: We have reviewed and discussed the Compensation Discussion and Analysis contained in this prospectus with management. Based on the Committee s review of and the discussion with management with respect to the Compensation Discussion and Analysis, we recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this prospectus. The foregoing report is provided by the following directors, who constitute the Compensation Committee: Compensation Committee: N. Charles Hedemark, Chairman Fred H. Helpenstell, M.D. Thomas W. Malson Richard J. Navarro This report shall not be deemed to be incorporated by reference by any general statement incorporating by reference this prospectus into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, and shall not otherwise be deemed filed under such acts. Employee Severance Compensation Plan Home Federal Bancorp s board of directors has established the Home Federal Employee Severance Compensation Plan which will provide eligible employees with severance pay benefits in the event of a change in control of new Home Federal Bancorp or Home Federal Bank following the stock offering. The severance plan will define the term change in control in the same manner as Mr. Stevens employment agreement. Management personnel with employment agreements or severance agreements will not be eligible to participate in the severance plan. Generally, eligible employees will be eligible to participate in the severance plan if they have completed at least one year of service with Home Federal Bank. Employees will be credited with service prior to adoption of the plan. The severance plan will vest in each participant a contractual right to the benefits the participant is entitled to thereunder. Under the plan, in the event of a change in control of new Home Federal Bancorp or Home Federal, eligible employees who are terminated or who terminate their employment within one year for reasons specified under the severance plan will be entitled to receive a severance payment. If a participant whose employment has terminated has completed at least one year of service, the participant will be entitled to a cash severance payment equal to three months for service of one to two years, six months for service of two to three years, and six months plus one month for each year of continuous employment over three years up to a maximum of one and one-half times the participant s annual compensation. A participant who is a middle manager of Home Federal Bank prior to the change in control will receive a minimum payment equal to one-half of the participant s annual compensation. Individuals who are vice presidents and above of Home Federal Bank prior to the change in control will receive a minimum payment equal to one times the participant s annual compensation. These payments may tend to discourage takeover attempts by increasing costs to be incurred by Home Federal Bank in the event of a takeover. If the provisions of the severance plan are triggered as of September 30, 2006, the total amount of payments that would be due thereunder, based solely upon current salary levels, would be approximately $5.4 million. It is management s belief, however, that substantially all of Home Federal Bank s employees would be retained in their current positions in the event of a change in control, and that any amount payable under the severance plan would be considerably less than the total amount that could possibly be paid under the severance plan. Benefits to Be Considered Following Completion of the Conversion We intend to adopt and request stockholder approval of one or more stock-based incentive plans, including a new stock option plan and a new stock recognition and retention plan, no earlier than six months after the completion of the conversion. The stock option plan and stock recognition and retention plan may be established as separate plans or as part of a single plan. Employee Stock Ownership Plan. It is intended that the employee stock ownership plan will purchase 8% of the shares sold in the offering. This would range between 816,000 shares, assuming 10,200,000 shares are sold in the offering and 1,104,000 shares, assuming 13,800,000 shares are sold in the offering. We anticipate that the employee stock ownership plan will borrow funds from new Home Federal Bancorp to purchase the shares. This loan will equal 100% of the aggregate purchase price of the common stock purchased by the employee stock ownership plan. The employee stock ownership plan will repay the loan principally from the cash contributions from Home Federal Bank and from dividends payable on the common stock held by the plan over the anticipated 15-year term of the loan. The interest rate for the plan loan is expected to be the prime rate as published in The Wall Street Journal on the closing date of the conversion or some other reasonable rate. See Pro Forma Data. To the extent that the employee stock ownership plan is unable to acquire 8% of the common stock sold in the offering, it is anticipated that it may acquire the shares following the conversion through open market purchases. In any plan year, Home Federal Bank may make additional discretionary contributions to the employee stock ownership plan for the benefit of participants. These contributions may be used to acquire shares of common stock through the purchase of outstanding shares in the market, from individual stockholders, or from shares which constitute authorized but unissued shares or shares held in trust by Home Federal Bancorp. Several factors will affect the timing, amount and manner of any such discretionary contributions, including applicable regulatory policies, the requirements of applicable laws and regulations, and market conditions. The shares purchased by the employee stock ownership plan with the proceeds of the loan will be held in a suspense account, and released for allocation among eligible participants as the loan is repaid. Discretionary contributions to the employee stock ownership plan and shares released from the suspense account will be allocated among participants on the basis of each eligible participant s proportional share of total compensation. Forfeitures will be reallocated among the remaining plan participants. Participants will vest in their employee stock ownership plan account at the rate of 20% per year, beginning upon the completion of one year of service, with full vesting occurring after five years of service. Employees will be credited for service prior to adoption of the employee stock ownership plan. A participant is fully vested at normal retirement (which is the attainment of age 65), in the event of death or disability while actively employed, or upon termination of the employee stock ownership plan. Benefits are distributable upon a participants normal retirement, death, disability or termination of employment. Contributions to the employee stock ownership plan are not fixed, so benefits payable under the employee stock ownership plan cannot be estimated. The trustees of the employee stock ownership plan are Messrs. Williams, Schoelkoph and Trom. The trustee must vote all allocated shares held in the employee stock ownership plan in accordance with the instructions of plan participants and unallocated shares must be voted in the same ratio on any matter as those shares for which instructions are given. The trustee will vote the allocated shares for which no instructions are received as directed by the plan administrator. Under applicable accounting requirements, compensation expense for a leveraged employee stock ownership plan is recorded at the fair market value of the employee stock ownership plan shares when committed to be released to participants accounts. See Pro Forma Data. Stock Option Plan. We intend to adopt an additional stock option plan for our directors, officers and employees after the conversion and offering, subject to stockholder approval. Federal regulations prohibit us from implementing this plan until six months after the conversion and offering. Our proposed stock option plan will authorize a committee of non-employee directors or the full board of directors, to grant options to purchase up to 10% of the shares sold in the offering. The stock option plan will have a term of ten years. The committee or the board will decide which directors, officers and employees will receive options and the terms of those options. Generally, no stock option will permit its recipient to purchase shares at a price that is less than the fair market value of a share on the date the option is granted, and no option will have a term that is longer than ten years. In addition, executive officers and directors would be required to exercise or forfeit their options if Home Federal Bank becomes critically undercapitalized, is subject to enforcement action or receives a capital directive. If we implement a stock option plan before the first anniversary of the conversion, current regulations will require that: the total number of options available for grant to non-employee directors be limited to 30% of the options authorized under the plan; the number of options that may be granted to any one non-employee director be limited to 5% of the options authorized under the plan; the number of options that may be granted to any officer or employee be limited to 25% of the options authorized for the plan; the options may not vest more rapidly than 20% per year, beginning on the first anniversary of stockholder approval of the plan; and accelerated vesting not be permitted except for death, disability or upon a change in control of new Home Federal Bancorp or Home Federal Bank. We may obtain the shares needed for this plan by issuing additional shares or through stock repurchases. Stock Recognition and Retention Plan. We also expect to implement a new stock recognition and retention plan for our directors, officers and employees after the conversion. Federal regulations prohibit us from implementing this plan until six months after the conversion. We expect the recognition plan will be implemented within the first 12 months after the conversion. Federal regulations require that the plan be approved by a majority of the outstanding shares of common stock of new Home Federal Bancorp. Our proposed stock recognition and retention plan will authorize a committee of non-employee directors or the full board of directors to make restricted stock awards equal to 3.5% of the shares sold in the offering. The committee of the board will decide which directors, officers and employees will receive restricted stock and the terms of those awards. New Home Federal Bancorp may obtain the shares needed for this plan by issuing additional shares or through stock repurchases. If we implement a restricted stock plan before the first anniversary of the conversion and offering, current regulations will require that: the total number of shares that are awarded to non-employee directors be limited to 30% of the shares authorized under the plan; the number of shares that are awarded to any one non-employee director be limited to 5% of the shares authorized under the plan; the number of shares that are awarded to any officer or employee be limited to 25% of the shares authorized under the plan; the awards may not vest more rapidly than 20% per year, beginning on the first anniversary of stockholder approval of the plan; and accelerated vesting not be permitted except for death, disability or upon a change in control of Home Federal Bank or new Home Federal Bancorp. Restricted stock awards under this plan may feature employment restrictions that require continued employment for a period of time for the award to be vested. Awards would not be vested unless the specified employment restrictions are met. However, pending vesting, the award recipient may have voting and dividend rights. Executive officers and directors would be required to forfeit the unvested portion of their restricted stock if Home Federal Bank becomes critically undercapitalized, is subject to enforcement action or receives a capital directive. Transactions with Management We have followed a policy of granting loans to our officers and directors, which fully complies with all applicable federal regulations, including those governing loans and other transaction with affiliated persons of Home Federal Bank. Loans to our directors and executive officers are made in the ordinary course of business and on the substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with all customers, and do not involve more than the normal risk of collectibility or present other unfavorable features. All loans and aggregate loans to individual directors and executive officers, without regard to loan amount, are completely documented and underwritten using the same underwriting policies, procedures, guidelines and documentation requirements as are used for non-director and non-executive customers of Home Federal Bank. Following the normal underwriting approvals by underwriting personnel, all such loans are then presented for review and approval by the board of directors of Home Federal Bank, pursuant to Regulation O of the Federal Reserve Board and the requirements of the Office of Thrift Supervision. There are no exceptions to these procedures and all approvals are documented in the board meeting minutes. All loans to directors and executive officers were performing in accordance with their terms at September 30, 2007. * Less than one percent of outstanding shares. (1) Excludes shares which may be received upon the exercise of outstanding and exercisable stock options. Based upon the exchange ratio of 1.3364 of new Home Federal Bancorp shares for each share of Home Federal Bancorp common stock at the midpoint of the estimated valuation range, the persons named in the table would have options to purchase our common stock as follows: 5,976 shares for each of Messrs. Hedemark, Helpenstell, Malson, Stamey and Tinstman, 5,346 shares for Mr. Navarro, 15,935 shares for Ms. Sander, and for all directors and executive officers as a group, 65,790 shares. (2) Excludes unvested shares awarded under the recognition and retention plan, based upon the exchange ratio, in the following amounts: 79,674 shares for Mr. Stevens, 12,748 shares for Messrs. Hedemark, Helpenstell, Malson, Stamey and Tinstman, 2,138 shares for Mr. Navarro, 20,046 shares for Mr. Williams, 31,869 (unaudited) (in thousands) Deferred tax asset: Deferred compensation $ 1,813 $1,612 $ 1,268 Unrealized loss on securities available for sale 2,318 118 110 Allowance for loan losses 1,240 1,237 1,199 Charitable contributions 366 Equity compensation 351 281 Accrued expenses 211 205 223 Other 46 67 shares for Mr. Schoelkoph, 25,495 shares for Ms. Sander, and for all directors and executive officers as a group, 271,076 shares. (3) Excludes stock options and awards that may be granted under the proposed new stock option plan and recognition and retention plan if such plans are approved by stockholders at an annual or special meeting of stockholders at least six months following the conversion and reorganization. See Management Benefits to Be Considered Following Completion of the Conversion. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of June 30, 2007, information regarding share ownership of: 1. those persons or entities (or groups of affiliated person or entities) known by management to beneficially own more than five percent of Home Federal Bancorp s common stock other than directors and executive officers; 2. each director of Home Federal Bancorp; 3. each executive officer of Home Federal or Home Federal Bank named in the Summary Compensation Table appearing under Executive Compensation below (known as named executive officers ); and 4. all current directors and executive officers of Home Federal Bancorp and Home Federal Bank as a group. Persons and groups who beneficially own in excess of five percent of Home Federal Bancorp s common stock are required to file with the Securities and Exchange Commission, and provide a copy to Home Federal Bancorp, reports disclosing their ownership pursuant to the Securities Exchange Act of 1934. To our knowledge, no other person or entity, other than the one set forth below, beneficially owned more than five percent of the outstanding shares of Home Federal Bancorp s common stock as of the close of business on the voting record date. Beneficial ownership is determined in accordance with the rules and regulations of the Securities and Exchange Commission. In accordance with Rule 13d-3 of the Securities Exchange Act, a person is deemed to be the beneficial owner of any shares of common stock if he or she has voting and/or investment power with respect to those shares. Therefore, the table below includes shares owned by spouses, other immediate family members in trust, shares held in retirement accounts or funds for the benefit of the named individuals, and other forms of ownership, over which shares the persons named in the table may possess voting and/or investment power. In addition, in computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to outstanding options that are currently exercisable or exercisable within 60 days after the June 30, 2007 are included in the number of shares beneficially owned by the person and are deemed outstanding for the purpose of calculating the person s percentage ownership. These shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person. As of June 30, 2007, there were 15,232,243 shares of Home Federal common stock outstanding. * Less than one percent of shares outstanding. (1) Mr. Stevens and Mr. Williams are also executive officers. (unaudited) Income: Investment interest $ 56 $ 17 $ 36 $ 24 Mortgage-backed security interest 581 591 773 712 Other income 82 91 119 Home Federal Bancorp s common stock sold in the offering. Under the stock recognition and retention plan, we may award restricted stock in an amount equal to 3.5% of new Home Federal Bancorp s common stock sold in the offering. Shares of restricted stock will be awarded at no cost to the recipient. All the stock benefit plans will comply with all applicable Office of Thrift Supervision regulations. The new stock option and stock recognition and retention plans will supplement our existing 2005 Stock Option and Incentive Plan and 2005 Recognition and Retention Plan, which will continue as plans of new Home Federal Bancorp. Both the employee stock ownership plan and the recognition and retention plan will increase the voting control of management without a cash outlay by the recipient. The number of options granted or shares awarded under the proposed and existing stock option plans and stock recognition and retention plans may not in the aggregate, pursuant to Federal regulations, exceed 10% and 4%, respectively, of our total outstanding shares (including shares sold to our employee stock ownership plan). The additional shares purchased by the employee stock ownership plan and our new stock-based incentive plans will increase our future compensation costs, thereby reducing our earnings. We cannot determine the actual amount of these new stock-related compensation and benefit expenses at this time because applicable accounting practices generally require that they be based on the fair market value of the options or shares of common stock at the date of the grant; however, we expect them to be significant. We will recognize expenses for our employee stock ownership plan when shares are committed to be released to participants accounts and will recognize expenses for restricted stock awards and stock options generally over the vesting period of awards made to recipients. We estimate, once these plans are adopted, the increase in compensation expense will be approximately $1.6 million on an after-tax basis, based on the maximum of the valuation range. Additionally, stockholders will experience a reduction in their ownership interest if newly issued shares of common stock are used to fund stock options and restricted stock awards. In the event newly issued shares of our common stock are used to fund stock options and restricted stock option awards in an amount equal to 8.7% and 3.5% , respectively, of the shares sold in the offering, stockholders would experience dilution in their ownership interest of 4.9% and 2.0%, respectively, or 6.7% in the aggregate. See
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@@ -0,0 +1,8689 @@
+SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 
+ (a) Principles of consolidation 
+ The consolidated financial statements include the financial statements of the
+Company and its subsidiaries, including the VIE subsidiary for which the Company is the primary beneficiary. All significant inter-company transactions and balances between the Company, its subsidiaries and the VIE subsidiary have been eliminated
+upon consolidation. 
+ If an initial public offering is completed, all of the convertible redeemable preferred shares (Note 12) outstanding
+will automatically convert into 289,204,322 shares of ordinary shares, based on the shares of convertible redeemable preferred shares outstanding at December 31, 2006. Unaudited pro forma shareholders equity, as adjusted for the assumed
+conversion of the convertible redeemable preferred shares, is set forth on the consolidated balance sheet. 
+ (b) Use of estimates 
+
+ The preparation of the financial statements in conformity with US GAAP requires management to make estimates and assumptions that
+affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and
+assumptions reflected in the Group s financial statements include, but are not limited to, revenue recognition, allowance for doubtful accounts, useful lives of property and equipment and intangible asset, share-based compensation expenses, and
+valuation allowance for deferred tax assets. Actual results could materially differ from those estimates. 
+ (c) Fair value of financial
+instruments 
+ Financial instruments include cash and cash equivalents, accounts receivable, other current assets, accounts payable, other
+liabilities, short-term borrowings, amounts due to related parties, and the Series A, Series B and Series C convertible redeemable preferred shares. The carrying values of these financial instruments, other than the convertible redeemable preferred
+shares, approximate their fair values due to their short-term maturities. The Series A, Series B and Series C convertible redeemable preferred shares were initially recognized at fair value upon issuance and subsequently carried at amortized cost
+using the effective interest rate method. The convertible note was recognized based on residual proceeds after bifurcation of the warrants, which provided for a cashless exercise feature, at fair value. Subsequently, 
+
+ 
+
+ F-13 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ 
+the convertible note was carried at amortized cost using the effective interest rate method and the warrants were recognized at fair value.
+The Group utilized an independent third party valuation firm to determine the fair values of the convertible redeemable preferred shares, convertible note and warrants. 
+ The long-term borrowings approximate their fair value as their interest rates approximate market interest rates. 
+ (d) Foreign currency 
+ The Company and CGEN Hong Kong determined their functional currency to be the United
+States dollars ( US$ ) while CGEN Shanghai and CGEN Network determined their functional currency to be the Chinese Renminbi ( RMB ) based on the criteria of Statement of Financial Accounting Standard ( SFAS )
+No. 52, Foreign Currency Translation. The Company uses the RMB as its reporting currency. The Company uses the average exchange rate for the year and the exchange rate at the balance sheet date to translate its operating results and
+financial position, respectively. Any translation gains (losses) are recorded in accumulated other comprehensive income (loss) as a component of shareholders equity. Transactions denominated in foreign currencies are measured at the exchange
+rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are remeasured into the functional currency at the exchange rates prevailing at the balance sheet date. Exchange gains and losses are included in the
+consolidated statements of operations. 
+ (e) Convenience translation 
+ Amounts in United States dollars ( US$ ) are presented for the convenience of the reader and are translated at the noon buying rate of US$1.00 to RMB7.6120 on June 30, 2007 in the City of New
+York for cable transfers of Chinese Renminbi ( RMB ) as certified for customs purposes by the Federal Reserve Bank of New York. No representation is made that the RMB amounts could have been, or could be, converted into US$ at such rate.
+
+ (f) Cash and cash equivalents 
+ Cash and cash equivalents include cash on hand and short-term deposits with original maturities of three months or less at the date of purchase. Except for the restricted cash, none of the Group s cash and cash equivalents are
+restricted as to withdrawal and use. 
+ (g) Restricted cash 
+ Restricted cash represents the amounts of cash pledged as security for outstanding borrowings to a financial institution, which are not available for the Group s use. In February 2006, the Company
+placed a deposit of RMB5,193 (US$682) with AFG Asset Management Limited to secure the credit facility of RMB5,000 (US$657) to CGEN Shanghai. The restriction on cash has been released in January 2007. 
+ (h) Accounts receivable 
+ Billed and
+unbilled accounts receivable are carried at net realizable value. An estimate for doubtful debts is made when collection of the full amount is no longer probable. 
+ In evaluating the collectibility of receivable balances, the Group considers many factors, including the aging of the balance, the customer s historical payment history, its current credit-worthiness and current
+economic trends. Accounts receivable are written off after all collection efforts have ceased. 
+ 
+
+ F-14 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ The Company s billing practice upon completion of its services is influenced by its internal cash management decisions that take into account
+industry-wide payment practices and PRC business tax rules. Following normal business practices for service providers of the out-of-home advertising industry in the PRC, the Company pays business taxes when the payment is confirmed by its customers
+and we have issued tax receipts (which also serves as sales invoices) to our customers. The Company manages the timing of its tax payments, and its overall cash flows, by managing the timing of billing to its customers and issuance of tax receipts
+to its customers. Accordingly, the increase in unbilled receivables in 2006 is primarily driven by (i) the overall increase in advertising revenues and (ii) the Company s practice of cash flow and working capital management. The Company accrues
+for business taxes payable on unbilled receivables when the underlying revenues are recognized. 
+ (i) Property and equipment
+
+ Property and equipment are recorded at cost less accumulated depreciation. Depreciation is recorded on a straight-line basis over the
+estimated useful lives of the assets as follows: 
+ 
+
+ Flat-panel television screens
+
+ 
+5 years
+
+ Computers and office equipment
+
+ 
+5 years
+
+ Vehicles
+
+ 
+5 years
+
+ Leasehold improvements
+
+ 
+Over the lesser of the lease term or the useful life
+
+ Repair and maintenance costs are charged to expense when incurred, whereas the cost of renewals
+and betterment that extend the useful life of fixed assets are capitalized as additions to the related assets. Retirement, sale and disposals of assets are recorded by removing the cost and accumulated depreciation, with any resulting gain or loss
+reflected in the consolidated statements of operations. 
+ All direct and indirect costs that are related to the construction of property and
+equipment and incurred before the assets are ready for their intended use are capitalized as construction in progress. Construction in progress is transferred to specific property and equipment accounts and commences depreciation when these assets
+are ready for their intended use. 
+ Interest costs are capitalized if they are incurred during the acquisition, construction or production
+of a qualifying asset and such costs could have been avoided if expenditures for the assets have not been made. Capitalization of interest costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs
+are being incurred. Interest costs are capitalized until the assets are ready for their intended use. Interest costs qualifying for capitalization in 2005 and 2006 were insignificant. 
+ (j) Intangible asset 
+ Intangible asset consists of proprietary MediaOne scheduling
+and distribution software, which allows the Group to centrally and remotely schedule, distribute, monitor and, in most cases, trouble-shoot any technical problems in, the operation of the flat-panel television screens supported by servers installed
+in hypermarkets and supermarkets in cities across the PRC. This software was developed by CGEN Info, an entity under common control, for its internal use and was purchased by the Group from CGEN Info on June 1, 2004 for RMB6,730. The software
+was recognized at its historical cost of RMB4,498 and the excess of the purchase consideration paid by the Group over the historical cost of RMB2,232 was recognized as a compensation expense in 2004 to Yising Chan, the then chief executive officer
+of CGEN Network and the controlling shareholder. 
+ 
+
+ F-15 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ The Group recognizes costs to develop software for internal use in accordance with Statement of Position ( SOP ) No. 98-1, Accounting
+for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1 identifies three distinct stages of a typical computer software development project. The three stages are the preliminary project stage, the application
+development stage, and the post-implementation stage. Certain qualifying costs incurred during the application development stage are capitalized. All other internal use development costs are expensed as incurred. 
+ Intangible asset is carried at cost less accumulated amortization. Intangible asset with a finite useful life is amortized using the straight-line method
+over the estimated economic life of the intangible asset without any residual value. The estimated useful life for the software is 10 years. 
+ (k) Asset retirement obligations 
+ SFAS No. 143, Accounting for Asset Retirement Obligations, requires
+companies to record the present value of obligations associated with the retirement of tangible long-lived assets in the period in which it is incurred. The value of the liability is capitalized as part of the carrying amount of the related
+long-lived asset. Over time, accretion of the liability is recognized as an operating expense and the capitalized cost is depreciated over the expected useful life of the related asset. The Group s asset retirement obligations relate primarily
+to the restoration of the rental locations at hypermarkets and supermarkets to their original condition. 
+ (l) Impairment of long-lived
+assets 
+ The Group evaluates its long-lived assets, including property and equipment and intangible asset with a finite live, for
+impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying amount of an asset may not be recoverable in accordance with
+SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. When these events occur, the Group assesses the recoverability of long-lived assets by comparing the carrying amount of the assets to the expected future
+undiscounted cash flows resulting from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Group would recognize an impairment loss based on the
+excess of the carrying amount of the assets over their fair value. Fair value is generally determined by discounting the cash flows expected to be generated by the assets, when the market prices are not readily available. No impairment of long-lived
+assets and intangible assets was recognized for any of the periods presented. 
+ (m) Revenue recognition 
+ Revenues are recognized only when the following four criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the service has
+been rendered, (iii) the fees are fixed or determinable, and (iv) collectibility is reasonably assured. The Group considers the terms of each arrangement to determine the appropriate accounting treatment. 
+ Advertising 
+ The majority of the
+Group s revenue is derived from the sale of advertising airtime on its in-store advertising network using the flat-panel television screens placed in hypermarkets and supermarkets. Advertisement terms, including the airtime pattern, are
+specified in the advertising contracts with the customers or advertising agents, which are generally short-term in nature ranging from two weeks to 
+
+ 
+
+ F-16 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ 
+three months. When the above four criteria for revenue recognition criteria are met, revenues are recognized ratably over the airtime pattern
+of individual advertising contracts, which is a function of the length of the advertising content, frequency of play, and the number of stores or channels in which the advertisement is aired. 
+ The Group also provides free airtime to certain hypermarkets and supermarkets in which the Group leases space for the deployment of its network. The
+percentage of free airtime is fixed for each lease agreement ranging from 5% to 25% of the available advertising airtime over the entire lease term for all existing and new store locations covered under each lease agreement with the respective
+hypermarket or supermarket. The Group has determined that the fair value of the barter transactions is not reasonably determinable since the Group has (i) a sub-optimal historical average utilization rate of its advertising network (defined as the
+time slots sold divided by the time slots available for sale), (ii) no history of sales contracts with its customers of a similar duration, and (iii) no comparable lease agreements with comparable retailers for which no free airtime is provided.
+Accordingly, such barter transactions are recorded based on the carrying amount of the advertising surrendered, which is nil. 
+ Other
+services 
+ Other services revenues primarily include revenues from organizing promotional events. These services and activities are
+tailored to individual customer s needs and arrangements are specified in the sales contract. 
+ Promotional events typically involve
+staging indoor and outdoor promotional events. Revenues for promotional event contracts are recognized upon the completion of the promotional event. 
+ Payments received in advance for advertising and other services are deferred and recognized as revenue when the advertising or other services are rendered based on the respective policies above and all four criteria for revenue
+recognition are met. 
+ The Group offers discounts and rebates to its customers, which vary in amount depending on the strategic value and
+volume of business of the particular customer. These discounts and rebates are estimated and accounted for as a reduction of revenues as the related revenues are recognized. 
+ The Group does not provide provisions for refunds in its sales contracts with customers. The Group has not provided refunds during the periods presented herein. 
+ The Group s VIE subsidiary is subject to business tax and other surcharges on the revenues earned for services provided in the PRC. The applicable
+rate of business tax is 5%. The VIE subsidiary is also subject to culture and education construction fees on the revenues earned for services provided in the PRC. The applicable rate of the culture and education construction fee is 4%. Business tax
+and other surcharges as well as culture and education construction fees on revenues earned from the provision of advertising services by the VIE subsidiary to its customers for the years ended December 31, 2005 and 2006 were RMB1,817 and
+RMB15,785 (US$2,074) respectively. The Group has recognized revenues net of these business taxes and other surcharges and fees. In the event that revenue recognition is deferred to a later period, the related business tax and other surcharges and
+fees is also deferred and will be recognized only upon recognition of the deferred revenue. 
+ 
+
+ F-17 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ (n) Cost of revenues 
+ Cost of revenues
+consists primarily of depreciation expenses, rental expense for advertising space, revenue sharing with retailers, related overhead expenses directly attributable to the provision of advertising services, and the 5% business tax for technical and
+consulting service fees charged by CGEN Shanghai to CGEN Network. 
+ (o) Advertising expenses 
+ Advertising costs are expensed when incurred. Advertising expenses of nil and RMB414 (US$54) were recorded during the years ended December 31, 2005
+and 2006, respectively, as a component of selling expenses. 
+ (p) Income taxes 
+ The Group follows the liability method of accounting for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under this
+method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are
+expected to reverse. The Group records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The
+effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. 
+ (q) Leases
+
+ In accordance with SFAS No. 13, Accounting for Leases, leases are classified at the inception date as either a capital
+lease or an operating lease. For the lessee, a lease is a capital lease if any of the following conditions exist: a) ownership is transferred to the lessee by the end of the lease term, b) there is a bargain purchase option, c) the lease term is at
+least 75% of the property s estimated remaining economic life or d) the present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date.
+A capital lease is accounted for as if there was an acquisition of an asset and an incurrence of an obligation at the inception of the lease. All other leases are accounted for as operating leases wherein rental payments are expensed as incurred.
+
+ Certain lease agreements with hypermarkets and supermarkets provide for revenue sharing arrangements whereby the Group is required to
+share a percentage, generally ranging from 15% to 20%, of the revenues derived from advertisement broadcast in the respective hypermarkets or supermarkets. As the revenue sharing amounts are based on future services provided over the lease term,
+they are considered contingent lease payments. Accordingly, they are excluded from minimum lease payments in their entirety and accruable to income as incurred. The total rental expense for the years ended December 31, 2005 was RMB21,585, which
+comprised of minimum rentals of RMB21,585 and nil contingent rentals. The total rental expense for the year ended December 31, 2006 was RMB78,607 (US$10,327), which comprised of minimum rentals of RMB73,348 (US$9,636) and contingent rentals of
+RMB5,259 (US$691). 
+ 
+
+ F-18 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ (r) Net (loss) income per share 
+ In
+accordance with SFAS No. 128, Computation of Earnings Per Share and Emerging Issues Task Force ( EITF ) Issue No. 03-06, Participating Securities and the Two-Class Method under FASB Statement No. 128,
+basic (loss) income per share is computed by dividing net income attributable to ordinary shareholders by the weighted average number of unrestricted ordinary shares outstanding during the year using the two-class method. Under the two-class method,
+net income is allocated between ordinary shares and other participating securities based on their participating rights. The Company s Series A, Series B and Series C convertible redeemable preferred shares (Note 12) are participating securities
+herein. For the periods presented herein, the computation of basic loss per share using the two-class method is not applicable as the participating securities do not have contractual rights and obligations to share in the losses of the Company.
+Diluted (loss) income per share is calculated by dividing net income attributable to ordinary shareholders as adjusted for the effect of dilutive ordinary equivalent shares, if any, by the weighted average number of ordinary and dilutive ordinary
+equivalent shares outstanding during the period. Ordinary equivalent shares consist of the ordinary shares issuable upon the conversion of the Company s convertible redeemable preferred shares and convertible debt (Note 13), using the
+if-converted method, and ordinary shares issuable upon the conversion of the warrants (Note 13) and share options (Note 14), using the treasury stock method. For rights offering made to all shareholders, a bonus element exists when the subscription
+price is less than the fair value of the shares. These bonus shares are accounted for similar to stock dividend in the calculation of loss per share for all years presented, using a method that would adjust for the fair value of the theoretical
+ex-rights in accordance with SFAS No. 128. Pro forma basic and diluted loss per share are computed assuming the conversion of all convertible redeemable preferred shares outstanding. 
+ (s) Share-based compensation 
+ The
+Group s employees participate in the Company s share options scheme, which is more fully described in Note 14. The Company did not issue any share options prior to January 1, 2006. Effective January 1, 2006, the Group adopted
+SFAS No. 123 (Revised 2004), Share-Based Payment ( SFAS 123(R) ). According to SFAS 123(R), all grants of share options to employees are recognized in the consolidated financial statements based on their grant date fair values.
+The Company s share options are subject to graded vesting provisions. The Group recognizes share-based compensation expense using the accelerated recognition method specified in FASB Interpretation No. 28, Accounting for Stock
+Appreciation Rights and Other Variable Stock Option or Award Plan, over the requisite service period of the award. Fair value is determined by management with the assistance of an independent third party valuation firm. 
+ SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in the subsequent period if actual forfeitures differ
+from initial estimates. Share-based compensation expense was recorded net of estimated forfeitures such that expense was recorded only for those share-based awards that are expected to vest. Forfeiture rate is estimated based on historical and
+future expectation of employee turnover rate and are adjusted to reflect future change in circumstances and facts, if any. 
+ The Group used
+a binomial option pricing valuations model in determining the fair value of the options granted. 
+ 
+
+ F-19 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ (t) Segment reporting 
+ The Group
+follows SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The Group operates and manages its business as two operating and reportable segments: the advertising services segment and other services segment.
+The Group s chief operating decision maker, who has been identified as the president, chief executive officer and chief operating officer, relies upon revenues and cost of revenues by segment when making decisions about allocating resources and
+assessing the performance of the Group. Except for revenues and cost of revenues information for advertising and other services, no other segmental financial information for the Group s business activities is available. 
+ As the Group s long-lived assets and revenues are substantially all located in and derived from the PRC, no geographical segments are presented.
+
+ (u) Recent accounting pronouncements 
+ In June 2006, EITF reached consensus on Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement, that for taxes within the scope, a company
+may adopt a policy of presenting taxes either on a gross basis (included in revenues and cost) or a net basis (excluded from revenues). If taxes are significant, a company is required to disclose its accounting policy for presenting taxes and the
+amounts of such taxes that are recognized on a gross basis. EITF 06-3 is effective for the first interim reporting period beginning after December 15, 2006. The Group has included the business tax and surcharges incurred on its advertising
+services on a net basis in revenues. 
+ In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
+Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes ( FIN 48 ), to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by
+prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in
+interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Group will adopt FIN 48 as of January 1, 2007. The cumulative effect of adopting FIN 48, if any, will be recorded in
+retained earnings (or other appropriate components of equity or net assets in the statement of financial position as applicable) in the year of adoption. 
+ In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS 157 establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value
+within that framework, and expands disclosures about the use of fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The provisions are to be applied prospectively as of the beginning of the fiscal
+year in which SFAS 157 is initially applied. The Group is currently assessing the impact, if any, that SFAS 157 will have on its financial statements. 
+ In February 2007, the FASB issued SFAS No.159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No.115. SFAS 159 permits entities to choose to measure many financial
+instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within
+those fiscal years. The Group is currently assessing the impact of this new standard on its financial statements. 
+ 
+
+ F-20 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ In March 2007, the FASB EITF released Topic No. D-109, Determining the Nature of a Host Contract Related to a Hybrid Financial Instrument Issued in the
+Form of a Share under FASB Statement No. 133. EITF Topic D-109 provides guidance on the determination of the nature of the host contract for a hybrid financial instrument (that is, whether the nature of the host contract is more akin to
+debt or to equity) issued in the form of a share should be based on a consideration of economic characteristics and risks. The SEC believes that the consideration of the economic characteristics and risks of the host contract should be based on all
+the stated and implied substantive terms and features of the hybrid financial instrument. EITF Topic D-109 is effective at the beginning of the first fiscal quarter beginning after June 15, 2007. The Group is currently assessing the impact, if
+any, of this new standard on its financial statements. 
+ 
+
+3.
+ACCOUNTS RECEIVABLE 
+ 
+
+ 
+ 
+December 31
+ 
+
+ 
+ 
+ 2005 
+ 
+ 2006 
+ 
+
+ 
+ 
+RMB
+ 
+RMB
+ 
+ 
+US$
+ 
+
+ Accounts receivable:
+
+ 
+
+ 
+
+ 
+
+ Billed
+
+ 
+13,935
+ 
+11,424
+ 
+ 
+1,500
+ 
+
+ Unbilled
+
+ 
+ 
+ 
+90,972
+ 
+ 
+11,951
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total accounts receivable
+
+ 
+13,935
+ 
+102,396
+ 
+ 
+13,451
+ 
+
+ Allowance for doubtful accounts
+
+ 
+ 
+ 
+(10,126
+)
+ 
+(1,330
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Accounts receivable, net
+
+ 
+13,935
+ 
+92,270
+ 
+ 
+12,121
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Movement in allowance for doubtful accounts
+
+ 
+
+ 
+
+ 
+
+ Balance at the beginning of year
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Additions
+
+ 
+ 
+ 
+10,126
+ 
+ 
+1,330
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Balance at the end of year
+
+ 
+ 
+ 
+10,126
+ 
+ 
+1,330
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ For the year ended December 31, 2006, the Company made a bad debt provision amounting to
+RMB10,126 (US$1,330), of which, RMB9,700 (US$1,274) represents accounts receivable balances from three customers. 
+ 
+
+4.
+PREPAYMENTS AND OTHER CURRENT ASSETS 
+ Prepayments and other current assets consist of the following: 
+ 
+
+ 
+ 
+December 31
+
+ 
+ 
+ 2005 
+ 
+ 2006 
+
+ 
+ 
+RMB
+ 
+RMB
+ 
+US$
+
+ Prepayments
+
+ 
+6,225
+ 
+20,254
+ 
+2,661
+
+ Rental deposits
+
+ 
+1,180
+ 
+4,320
+ 
+567
+
+ Other receivables
+
+ 
+404
+ 
+591
+ 
+77
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+7,809
+ 
+25,165
+ 
+3,305
+
+ Less: Prepayments, non-current portion
+
+ 
+ 
+ 
+1,999
+ 
+262
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+7,809
+ 
+23,166
+ 
+3,043
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ F-21 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ Prepayments represent advances paid to third parties for managing projects related to the other services segment, prepaid rental payments
+deposits with retailers, and prepaid installation fees to contractors. All the advances are non-interest bearing. Prepayments of RMB1,999 (US$262) were classified as non-current since the related project management services will be performed in 2008
+through 2011. 
+ 
+
+5.
+PROPERTY AND EQUIPMENT, NET 
+ Property and equipment and its related accumulated depreciation as of December 31, 2005 and 2006 are as follows: 
+ 
+
+ 
+ 
+December 31
+ 
+
+ 
+ 
+2005
+ 
+ 
+2006
+ 
+
+ 
+ 
+RMB
+ 
+ 
+RMB
+ 
+ 
+US$
+ 
+
+ Flat-panel television screens
+
+ 
+47,493
+ 
+ 
+64,581
+ 
+ 
+8,484
+ 
+
+ Computers and office equipment
+
+ 
+1,005
+ 
+ 
+1,372
+ 
+ 
+180
+ 
+
+ Vehicles
+
+ 
+473
+ 
+ 
+473
+ 
+ 
+62
+ 
+
+ Leasehold improvements
+
+ 
+158
+ 
+ 
+158
+ 
+ 
+21
+ 
+
+ Construction in progress
+
+ 
+3,581
+ 
+ 
+3,728
+ 
+ 
+490
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+52,710
+ 
+ 
+70,312
+ 
+ 
+9,237
+ 
+
+ Less: Accumulated depreciation
+
+ 
+(11,654
+)
+ 
+(19,373
+)
+ 
+(2,545
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+41,056
+ 
+ 
+50,939
+ 
+ 
+6,692
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Depreciation expenses for the years ended December 31, 2005 and 2006 were RMB7,394 and
+RMB10,705 (US$1,406), respectively. Depreciation expenses include amounts of RMB609 and nil for the years ended December 31, 2005 and 2006, respectively, for the depreciation of property and equipment under capital leases. The capital leases
+expired in 2005. 
+ Depreciation expenses have been reported in the following accounts: 
+ 
+
+ 
+ 
+December 31
+
+ 
+ 
+2005
+ 
+ 2006 
+
+ 
+ 
+RMB
+ 
+RMB
+ 
+US$
+
+ Cost of revenues
+
+ 
+7,136
+ 
+10,388
+ 
+1,365
+
+ General and administrative expenses
+
+ 
+258
+ 
+317
+ 
+41
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+7,394
+ 
+10,705
+ 
+1,406
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ F-22 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+
+6.
+INTANGIBLE ASSET, NET 
+ Intangible
+asset, which consists of internally developed proprietary MediaOne software, and its related accumulated amortization as of December 31, 2005 and 2006 are as follows: 
+ 
+
+ 
+ 
+December 31
+ 
+
+ 
+ 
+2005
+ 
+ 
+2006
+ 
+
+ 
+ 
+RMB
+ 
+ 
+RMB
+ 
+ 
+US$
+ 
+
+ Cost
+
+ 
+4,498
+ 
+ 
+4,498
+ 
+ 
+591
+ 
+
+ Less: Accumulated amortization
+
+ 
+(712
+)
+ 
+(1,162
+)
+ 
+(153
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+3,786
+ 
+ 
+3,336
+ 
+ 
+438
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Amortization expenses included in cost of revenues for both years ended December 31, 2005 and
+2006 were RMB450 (US$59). The estimated annual amortization expense for each of the five succeeding fiscal years is as follows: 
+ 
+
+ 
+ 
+RMB
+ 
+US$
+
+ For the year ending December 31,
+
+ 
+
+ 
+
+ 2007
+
+ 
+450
+ 
+59
+
+ 2008
+
+ 
+450
+ 
+59
+
+ 2009
+
+ 
+450
+ 
+59
+
+ 2010
+
+ 
+450
+ 
+59
+
+ 2011
+
+ 
+450
+ 
+59
+
+ 
+ 
+ 
+ 
+
+ 
+2,250
+ 
+295
+
+ 
+ 
+ 
+ 
+
+ 
+
+7.
+BORROWINGS 
+ 
+
+ 
+ 
+December 31
+
+ 
+ 
+ 2005 
+ 
+ 2006 
+
+ 
+ 
+RMB
+ 
+RMB
+ 
+US$
+
+ Total borrowings
+
+ 
+21,600
+ 
+5,000
+ 
+657
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Comprised of:
+
+ 
+
+ 
+
+ 
+
+ Short-term
+
+ 
+8,250
+ 
+5,000
+ 
+657
+
+ Long-term, current portion
+
+ 
+13,350
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+21,600
+ 
+5,000
+ 
+657
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ The short-term borrowings outstanding as of December 31, 2005 and 2006 were obtained from
+financial institutions with an interest rate of 5.58% and 6.72% per annum, respectively. These borrowings were denominated in RMB and had terms of one year. The short-tem borrowings outstanding as of December 31, 2005 expired on
+January 20, 2006 while the short-term borrowings outstanding as of December 31, 2006 expired on February 12, 2007. 
+ The
+long-term borrowing outstanding as of December 31, 2005 was obtained from a bank with an interest rate of 5.76% per annum. This borrowing was denominated in RMB and had an original term of two years, which expired on November 19,
+2005. The long-term borrowing was not paid on the 
+
+ 
+
+ F-23 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ 
+maturity date and an additional interest penalty of RMB231 was incurred from November 19, 2005 to January 26, 2006 at which date
+the borrowing and related penalty was settled in full. 
+ The long-term borrowing was guaranteed by a third party financial institution, Ying
+Bang Security Rental Co., Ltd. The Group paid fees of RMB325 (US$43) to Ying Bang Security Rental Co., Ltd. for the provision of the above guarantee. 
+ 
+
+8.
+ACCRUED EXPENSES AND OTHER LIABILITIES 
+ Accrued expenses and other liabilities consist of the following: 
+ 
+
+ 
+ 
+December 31
+
+ 
+ 
+ 2005 
+ 
+ 2006 
+
+ 
+ 
+RMB
+ 
+RMB
+ 
+US$
+
+ Accrued rental fee
+
+ 
+3,472
+ 
+7,532
+ 
+989
+
+ Payroll payables
+
+ 
+1,102
+ 
+6,878
+ 
+904
+
+ Contingent rental payable (Note 2(q))
+
+ 
+ 
+ 
+5,184
+ 
+681
+
+ Other payables
+
+ 
+976
+ 
+1,089
+ 
+143
+
+ Legal and consulting fee payable
+
+ 
+1,623
+ 
+ 
+ 
+ 
+
+ Accrued audit fee
+
+ 
+449
+ 
+ 
+ 
+ 
+
+ Interests payable
+
+ 
+246
+ 
+ 
+ 
+ 
+
+ Other accrued expenses
+
+ 
+978
+ 
+713
+ 
+94
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+8,846
+ 
+21,396
+ 
+2,811
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+9.
+ADVANCES FROM CUSTOMERS 
+ Advances
+from customers consist of the following: 
+ 
+
+ 
+ 
+December 31
+
+ 
+ 
+2005
+ 
+2006
+
+ 
+ 
+RMB
+ 
+RMB
+ 
+US$
+
+ Advance from an advertising agent
+
+ 
+16,220
+ 
+16,220
+ 
+2,131
+
+ Others
+
+ 
+1,677
+ 
+3,058
+ 
+402
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+17,897
+ 
+19,278
+ 
+2,533
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Advance from an advertising agent represents deposits received from an advertising agent in
+connection with a sales agency agreement signed between CGEN Network and the advertising agent on December 14, 2004. The agreement requires CGEN Network to provide services exclusively to the customers and other advertising agents referred by
+the advertising agent between December 15, 2005 and December 14, 2009. The sales agency agreement was terminated on July 26, 2005 due to the failure of the advertising agent to fulfill its obligation under the sales agency agreement.
+As a result, the advertising agent and CGEN Network entered into a revised agreement on September 16, 2005 that obligates the advertising agent to continue referring customers for CGEN Network. CGEN Network will earn the RMB16,220 (US$2,131)
+advances by providing advertising services to customers referred by the advertising agent for a period of two years. On December 27, 2005, CGEN Network and the advertising agent entered into a supplemental letter agreement stipulating that the terms
+of the letter agreement will automatically extend for two years to September 2009 if CGEN Network generates a total sales of less than RMB6,000 by October 2006. As of October 2006, CGEN Network has not generated any sales under this letter
+agreement. The letter agreement expires on September 16, 2007, two years from the date of signing, and will automatically extend to September 2009. Any remaining advances balance upon expiration of the supplemental letter agreement will be
+forfeited by the advertising agent. 
+ 
+
+ F-24 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+
+10.
+BUSINESS AND OTHER TAXES PAYABLE 
+ Business and other taxes payable consist of the following: 
+ 
+
+ 
+ 
+December 31
+
+ 
+ 
+2005
+ 
+2006
+
+ 
+ 
+RMB
+ 
+RMB
+ 
+US$
+
+ Business tax
+
+ 
+1,100
+ 
+8,358
+ 
+1,098
+
+ Culture and education construction fee
+
+ 
+468
+ 
+5,526
+ 
+726
+
+ Individual income tax withholding
+
+ 
+175
+ 
+1,036
+ 
+136
+
+ Stamp duty
+
+ 
+105
+ 
+305
+ 
+40
+
+ Other surcharges
+
+ 
+35
+ 
+746
+ 
+98
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+1,883
+ 
+15,971
+ 
+2,098
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+11.
+ASSET RETIREMENT OBLIGATION 
+ The
+Group s asset retirement obligation includes the costs associated with the restoration of the rental locations at hypermarkets and supermarkets to their original condition. The following table reflects information related to the asset
+retirement obligations: 
+ 
+
+ 
+ 
+2005
+ 
+2006
+
+ 
+ 
+RMB
+ 
+RMB
+ 
+US$
+
+ Balance at the beginning of year
+
+ 
+28
+ 
+244
+ 
+32
+
+ Additions to asset retirement obligations
+
+ 
+207
+ 
+398
+ 
+52
+
+ Accretion expense
+
+ 
+9
+ 
+24
+ 
+3
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Balance at the end of year
+
+ 
+244
+ 
+666
+ 
+87
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+12.
+CONVERTIBLE REDEEMABLE PREFERRED SHARES 
+ During 2005 and 2006, the Company and several third party investors entered into sale and purchase agreements whereby the Company issued 8% accumulating preferred shares ( Accumulating Preferred Shares ), Series A
+convertible redeemable preferred shares ( Series A Preferred Shares ), Series B convertible redeemable preferred shares ( Series B Preferred Shares ), and Series C convertible redeemable preferred shares ( Series C Preferred
+Shares ). The significant terms of the preferred shares are summarized below. 
+ (i) Accumulating Preferred Shares 
+ On September 16, 2005, the Company issued 16,493,544 Accumulating Preferred Shares to an advertising agent in settlement of certain sales deposits of
+RMB13,780 (US$1,699), or US$0.10301 per share. The holders of the Accumulating Preferred Shares do not possess any voting rights. All of the Accumulating Preferred Shares were fully repurchased by the Company on January 16, 2006.
+
+ Dividends 
+ The holders
+of the Accumulating Preferred Shares are entitled to receive dividends on each Accumulating Preferred Share at the rate of 8% per annum. Such dividends are cumulative and are due and payable quarterly in arrears whether or not declared by the
+Company s board of directors. 
+ 
+
+ F-25 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ Ranking 
+ The Accumulating Preferred
+Shares rank junior to the Series A Preferred Shares and senior to all other junior securities such as ordinary shares. 
+ Liquidation
+preference 
+ In the event of any liquidation, dissolution or winding up of the Company, after payment to the holders of the Series A
+Preferred Shares as a liquidation preference, the holders of Accumulating Preferred Shares shall be entitled to receive an amount per share equal to the Accumulating Preferred Shares issuance price plus all accrued and unpaid dividends through the
+date of payment of such amount to the holder. 
+ Conversion rights 
+ The holders of the Accumulating Preferred Shares should have conversion rights as follows: 
+ 1. Each Accumulating Preferred Share plus any declared but unpaid dividends should be convertible at the option of the holder, at any time after the date of issuance of such share, into ordinary shares as determined by dividing the
+issuance price of US$0.10301 per share by the applicable conversion price. The conversion price of the Accumulating Preferred Shares is US$0.10301, subject to standard anti-dilution provisions. 
+ 2. All of the Accumulating Preferred Shares shall automatically converted into ordinary shares at the then-effective conversion price or
+upon the earlier of: 
+ (i) The closing of an qualified public offering, as defined in the Accumulating Preferred Shares sale
+and purchase agreement; and 
+ (ii) The consent or approval of the holders of a majority of the outstanding Series A Preferred
+Shares. 
+ Redemption 
+ At
+any time after September 8, 2010, upon written election by a holder of outstanding Accumulating Preferred Shares, the Company is obligated to redeem such holder s Accumulating Preferred Shares by paying the redemption price equal to four
+times the Accumulating Preferred Shares issuance price plus any declared but unpaid dividends. 
+ (ii) Series A Preferred Shares
+
+ On September 16, 2005, the Company and a group of third party investors entered into a sale and purchase agreement whereby the
+Company issued an aggregate of 43,685,079 Series A Preferred Shares for RMB36,416 (US$4,500), or US$0.10301 per share. 
+ Dividends 
+
+ The holders of the Series A Preferred Shares are not entitled to receive dividends, unless dividends are declared or paid to the holders of
+the Accumulating Preferred Shares or ordinary shares, in each case the holders of the Series A Preferred Shares have preference over the Accumulating Preferred Shares or ordinary shares to receive dividends in an amount equal to that of dividends
+declared or paid on the Accumulating Preferred Shares or an amount equal to or greater than the aggregate amount of dividends for all ordinary shares such Series A Preferred Shares could be converted into. 
+ 
+
+ F-26 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ Ranking 
+ The Series A Preferred Shares
+rank senior to the Accumulating Preferred Shares and ordinary shares. 
+ Voting rights 
+ Each holder of Series A Preferred Shares is entitled to the number of votes equal to the number of shares of ordinary shares into which such holder s
+Series A Preferred Shares could be converted and have voting rights and powers equal to the voting rights and powers of the ordinary shares. 
+ Liquidation preference 
+ Series A Preferred Shares are entitled to liquidation preference over ordinary shares and
+Accumulating Preferred Shares. Upon any liquidation, dissolution or winding up of the Company: 
+ 1. Occuring before
+September 8, 2007 and at the time of such liquidation event the proceeds from liquidation is equal to or less than RMB398,244 (US$51,000), the Series A Preferred shareholders are entitled to receive 1.5 times of the Series A Preferred Shares
+issuance price; 
+ 2. Occuring after September 8, 2007 and at the time of such liquidation event the proceeds from
+liquidation is equal to or less than RMB398,244 (US$51,000), the Series A Preferred Shares holders are entitled to receive two times of the Series A Preferred Shares issuance price. 
+ If at the time of any liquidation event, the liquidation proceeds are greater than RMB398,244 (US$51,000), the entire assets and funds of the Company legally available for distribution should be
+distributed amongst the holders of ordinary shares together with the holders of the Series A Preferred Shares and Accumulating Preferred Shares on an if converted basis in proportion to the ordinary shares then held or deemed to be held by them.
+
+ Upon issuance of Series B Preferred Shares, the liquidation terms were modified such that the liquidation preference amount per Series A
+Preferred Share shall be the Series A issuance price with respect to each Series A Preferred Share plus all declared but unpaid dividends on such Series A Preferred Share. 
+ Conversion rights 
+ The holders of the Series A Preferred Shares shall have conversion
+rights as follows: 
+ 1. Each Series A Preferred Share plus any declared but unpaid dividends shall be convertible at the
+option of the holder, at any time after the date of issuance of such share, into ordinary shares as determined by dividing the issuance price of US$0.10301 per share by the applicable conversion price. The conversion price of the Series A Preferred
+Shares is US$0.10301, subject to standard anti-dilution provisions. 
+ 2. All of the Series A Preferred Shares shall
+automatically be converted into ordinary shares at the then-effective conversion price or upon the earlier of: 
+ (i) The
+closing of a qualified public offering, as defined in the Series A Preferred Shares sale and purchase agreement; and 
+ (ii)
+The consent or approval of the holders of over half of the outstanding Series A Preferred Shares. 
+ Upon issuance of Series B Preferred
+Shares, a performance ratchet was added to adjust the conversion ratio. Under the performance ratchet, if the net income for 2006 is less than RMB31,235 (US$4,000), 
+
+ 
+
+ F-27 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ 
+then the aggregate percentage of ordinary share equivalents held by the holders of Series A Preferred Shares shall be proportionately
+increased in accordance with a predetermined formula, subject to a cap on the number of additional shares convertible. Any additional ordinary shares resulting from the application of this formula upon the conversion of the Series A Preferred Shares
+shall be effected ratably by a transfer of outstanding ordinary shares held by the existing ordinary shareholders. 
+ Upon issuance of Series
+C Preferred Shares, the performance ratchet of Series A Preferred Shares was cancelled. 
+ Redemption 
+ At any time after September 8, 2010, upon written election by a holder of the outstanding Series A Preferred Shares, the Company is obligated to
+redeem such holder s Series A Preferred Shares by paying the redemption price equal to four times the Series A Preferred Shares issuance price plus any declared but unpaid. 
+ Upon issuance of Series B Preferred Shares, the redemption date for Series A Preferred Shares was modified to January 16, 2011. 
+ Upon issuance of Series C Preferred Shares, the redemption date for Series A Preferred Shares was modified to December 31, 2009 and the redemption price was modified to 1.5 times the Series A
+Preferred Share issuance price plus any declared but unpaid dividends. 
+ (iii) Series B Preferred Shares 
+ On January 16, 2006, the Company and a group of third party investors entered into a purchase agreement whereby the Company issued an aggregate of
+88,181,951 Series B Preferred Shares for RMB80,676 (US$10,000), or US$0.113402 per share. 
+ On January 16, 2006, the Company issued
+2,513,186 Series B Preferred Shares to Investlink Consulting (China) Limited for advisory services with respect to the Series B Preferred Shares fund raising activities at fair value of RMB2,299 (US$285), or US$0.113402 per share. These costs were
+treated as part of the Series B Preferred Shares issuance costs and netted with Series B Preferred Shares issuance proceeds. 
+ On
+February 10, 2006, the Company issued an additional 33,529,746 Series B Preferred shares to third party investors for RMB30,672 (US$3,802), or US$0.113402 per share. 
+ Dividends 
+ The holders of the Series B Preferred Shares are not entitled to receive
+dividends, unless dividends are declared or paid to the holders of Series A Preferred Shares or ordinary shares, in each case the Series B Preferred Shares have preference over the Series A Preferred Shares or ordinary shares to receive dividends in
+an amount equal to that of dividends declared or paid on the Series A Preferred Shares or an amount equal to or greater than the aggregate amount of dividends for all ordinary shares such Series B Preferred Shares could be converted into.
+
+ Ranking 
+ The Series B
+Preferred Shares rank senior to the Series A Preferred Shares and the ordinary shares. 
+ 
+
+ F-28 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ Voting Rights 
+ Each holder of the
+Series B Preferred Shares are entitled to the number of votes equal to the number of shares of ordinary shares into which such holder s Series B Preferred Shares could be converted and shall have voting rights and powers equal to the voting
+rights and powers of the ordinary shares, except in the election by holders of Series B Preferred Shares of any directors to the Company s board of directors. 
+ Liquidation preference 
+ Series B Preferred Shares are entitled to liquidation preference over Series A
+Preferred Shares and ordinary shares. 
+ The liquidation preference amount per Series B Preferred Share shall be the Series B issuance price
+with respect to each Series B Preferred Share plus all declared but unpaid dividends on such Series B Preferred Share. 
+ Conversion
+rights 
+ The holders of the Series B Preferred Shares have conversion rights as follows: 
+ 1. Each Series B Preferred Share plus any declared but unpaid dividends are convertible at the option of the holder, at any time after the
+date of issuance of such share, into such number ordinary shares as determined by dividing the issuance price of US$0.113402 per share by the applicable conversion price. The conversion price of the Series B Preferred Shares is US$0.113402, subject
+to standard anti-dilution provisions. 
+ 2. Each Series B Preferred Share shall automatically be converted into ordinary
+shares at the then-effective conversion price or upon the earlier of: 
+ (i) The closing of a qualified public offering, as
+defined in the Series B Preferred Shares sale and purchase agreement; and 
+ (ii) The consent or approval of the holders of
+over half of the outstanding Series B Preferred Shares. 
+ A performance ratchet was included to adjust the conversion ratio. Under the
+performance ratchet, if the net income for 2006 is less than US$4,000, then the aggregate percentage of ordinary share equivalents held by the holders of Series B Preferred Shares shall be proportionately increased in accordance with a predetermined
+formula, subject to a cap on the number of additional shares convertible. Any additional shares resulting from the application of this formula upon the conversion of the Series B Preferred Shares shall be effected ratably by a transfer of ordinary
+shares held by the existing ordinary shareholders. 
+ Upon issuance of Series C Preferred Shares, the performance ratchet of Series B
+Preferred Shares was cancelled. 
+ 
+
+ F-29 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ Redemption 
+ At any time after
+January 16, 2011, upon written election by a holder of the outstanding Series B Preferred Shares, the Company is obligated to redeem such holder s Series B Preferred Shares by paying the redemption price equal to four times the Series B
+Preferred Shares issuance price plus any declared but unpaid dividends on such Series B Preferred Share. The Group shall pay the redemption price in the following order: 
+ 1. The holders of the Series B Preferred Shares are entitled to receive a portion of the redemption price equal to the Series B Preferred Shares issuance price plus any declared but unpaid dividends
+prior and in preference to any payment of redemption price to any holder of Series A Preferred Shares. 
+ 2. After payment of
+Series B issuance price (plus any declared but unpaid dividends) has been made in full to the holders of the Series B Preferred Shares as mentioned above, the holders of the Series A Preferred Shares are entitled to receive a portion of the
+redemption price equal to the Series A issuance price plus any declared but unpaid dividends prior and in preference to any further payment of any portion of the redemption price to any holder of the Series A and Series B Preferred Shares.
+
+ 3. After payment is made in full as mentioned above, the holders of the Series A and Series B Preferred Shares have the
+right to receive the remaining portion of the redemption price (i.e. 300% of the issuance price) legally available for distribution by the Group ratably among the holders of the Series A and Series B Preferred Shares in proportion to the remaining
+preferential amount each such holder is entitled to receive. 
+ Upon issuance of Series C Preferred Shares, the redemption date for Series B
+Preferred Shares was modified to December 31, 2009 and the redemption price was modified to 1.5 times the Series B Preferred Shares issuance price plus any declared but unpaid dividends. 
+ (iv) Series C Preferred Shares 
+ On
+December 5, 2006, the Company and a group of third party investors entered into a sale and purchase agreement whereby the Company issued 98,118,164 Series C Preferred Shares for RMB156,357 (US$19,974), or US$0.203574 per share. 
+ Dividends 
+ The holders of the Series
+C Preferred Shares are not entitled to receive dividends, unless dividends are declared or paid in the Series A and Series B Preferred Shares or ordinary shares, in each case the Series C Preferred Shares have preference over the Series A and Series
+B Preferred Shares or ordinary shares to receive dividends in an amount equal to that of dividends declared or paid on the Series A and Series B Preferred Shares or an amount equal to or greater than the aggregate amount of dividends for all
+ordinary shares such Series C Preferred Shares could be converted into. 
+ Ranking 
+ The Series C Preferred Shares rank senior to the Series B Preferred Shares, the Series A Preferred Shares and the ordinary shares. 
+ Voting Rights 
+ Each holder of the
+Series C Preferred Shares are entitled to the number of votes equal to the number of shares of ordinary shares into which such holder s Series C Preferred Shares could be converted and shall 
+
+ 
+
+ F-30 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ 
+have voting rights and powers equal to the voting rights and powers of the ordinary shares, except in the election by holders of Series C
+Preferred Shares of any directors to the Company s board of directors. 
+ Liquidation preference 
+ Series C Preferred Shares are entitled to liquidation preference over Series B Preferred Shares, Series A Preferred Shares and ordinary shares.
+
+ The liquidation preference amount per Series C Preferred Share is the Series C issuance price with respect to each Series C Preferred
+Share plus all declared but unpaid dividends on such Series C Preferred Share. 
+ After any payment to the holders of Series C Preferred
+Shares, Series B Preferred Shares and Series A Preferred Shares of the liquidation preference amounts, the entire remaining assets and funds of the Group legally available for distribution, if any, shall be distributed among any other holders of
+ordinary shares together with the holders of the Series C Preferred Shares, Series B Preferred Shares and Series A Preferred Shares on an if converted basis in proportion to the ordinary share equivalents then held by them. 
+ Conversion rights 
+ The holders of the
+Series C Preferred Shares have conversion rights as follows: 
+ 1. Each Series C Preferred Share plus any declared but unpaid
+dividends are convertible at the option of the holder, at any time after the date of issuance of such share, into such number of ordinary shares as determined by dividing the issuance price of US$0.203574 per share by the applicable conversion
+price. The conversion price of the Series C Preferred Shares is US$0.203574, subject to standard anti-dilution provisions. 
+ 2. Each Series C Preferred Share shall automatically be converted into ordinary shares at the then-effective conversion price or upon the earlier of: 
+ (i) The closing of a qualified public offering, as defined in the Series C Preferred Shares sale and purchase agreement; and 
+ (ii) The consent or approval of the holders of over two-third of the outstanding Series C Preferred Shares. 
+ A performance ratchet was included to adjust the conversion ratio. Under the performance ratchet, if the sum of the Company s consolidated audited
+2007 net income, subject to certain adjustments, multiplied by eight plus RMB175,493 (US$22,474), was found to be less than RMB644,015 (US$82,474), then the aggregate percentage of ordinary share equivalents held by the holders of Series C Preferred
+Shares shall be proportionately increased in accordance with a predetermined formula, subject to a cap on the number of additional shares convertible. Any additional shares resulting from the application of this formula upon the conversion of the
+Series C Preferred Shares shall be effected ratably by a transfer of ordinary shares held by the existing ordinary shareholders. 
+ Redemption 
+ At any time after December 31, 2009, upon written election by a holder of the outstanding Series C
+Preferred Shares, the Group is obligated to redeem such holder s Series C Preferred Shares by paying the redemption price equal to 1.5 times the Series C Preferred Shares issuance price plus any declared but unpaid dividends. 
+ 
+
+ F-31 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ The holders of the Series C Preferred Shares are entitled to receive the redemption price prior and in preference to any payment of redemption price to
+any holders of the Series B Preferred Shares and Series A Preferred Shares. 
+ Accounting for the Preferred Shares 
+ The Accumulating Preferred Shares, Series A Preferred Shares, Series B Preferred Shares and Series C Preferred Shares have been classified as mezzanine
+equity as these preferred shares can be redeemed at the option of the holders on or after an agreed upon date. 
+ The initial carrying value
+of the preferred shares is the issuance price of the preferred shares at their respective dates of issuance. The holders of the Accumulating Preferred Shares, Series A Preferred Shares, Series B Preferred Shares and Series C Preferred Shares have
+the ability to convert the instrument into the Company s ordinary shares. The Company evaluated the embedded conversion option in its preferred shares to determine if there were any embedded derivatives requiring bifurcation and to determine if
+there were any beneficial conversion features. The conversion option of the preferred shares does not qualify for derivative accounting because the conversion option is clearly and closely related to the host instrument and the underlying ordinary
+shares are not publicly traded nor readily convertible into cash. 
+ Beneficial conversion features exist when the conversion price of the
+convertible preferred shares is lower than the fair value of the ordinary shares at the commitment date. When a beneficial conversion feature exists as of the commitment date, its intrinsic value is bifurcated from the carrying value of the
+preferred shares as a contribution to additional paid in capital. The resulting discount to the preferred shares are then accreted to the redemption value using the effective interest method as a deemed dividend through accumulated deficits. The
+Company determined the fair value of the preferred shares and ordinary shares based on valuations performed by an independent valuation firm. 
+ On September 16, 2005, the most favorable conversion price used to measure the beneficial conversion feature of the Accumulating Preferred Shares was the issuance price of US$0.1030. No beneficial conversion feature was recognized
+for the Accumulating Preferred Shares as the fair value per ordinary share at the commitment date was US$0.0403, which was less than the most favorable conversion price. All of the Accumulating Preferred Shares were repurchased by the Company on
+January 16, 2006. An amount of RMB705 (US$90) was recorded as a credit to accumulated deficit for the difference between the carrying value of the Accumulating Preferred Shares of RMB15,795 (US$2,024) and the cash consideration paid by the Company
+of RMB15,090 (US$1,934) on the date of repurchase. 
+ On September 16, 2005, the most favorable conversion price used to measure the
+beneficial conversion feature for the Series A Preferred Shares was the issuance price of US$0.1030. No beneficial conversion feature was recognized for Series A Preferred Shares as the fair value per ordinary share at the commitment date was
+US$0.0403, which was less than the most favorable conversion price. 
+ On January 16, 2006 and on February 10, 2006, the Series B Preferred
+Shares provided a performance ratchet in which an adjustment to the conversion price of Series B Preferred Shares would occur if the Company s 2006 consolidated net income did not exceed a certain threshold based on a pre-determined formula,
+subject to a cap on the number of additional shares convertible. Despite the fact that the additional ordinary shares, if and when the performance ratchet on the Series B Preferred Shares is triggered, are to be transferred from the outstanding
+ordinary shares held by the ordinary shareholders, they represent value which the ordinary shareholders have foregone on behalf of the Company. 
+
+ 
+
+ F-32 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ 
+Accordingly, the impact of the Series B performance ratchet is considered in the effective conversion price when measuring the beneficial
+conversion feature of the Series B Preferred Shares at the commitment date. The most favorable conversion price used to calculate the amount of the beneficial conversion feature of the Series B Preferred Shares on the two issuance dates was the
+performance ratchet adjusted conversion price of US$0.0936. No beneficial conversion feature was recognized because the fair value per ordinary share at the two commitment dates was approximately US$0.0552, which was less than the most favorable
+conversion price. 
+ On December 5, 2006, the Series C Preferred Shares provided a performance ratchet in which an adjustment to the
+conversion price of Series C Preferred Shares would occur if the Company s 2007 consolidated net income did not exceed a certain threshold based on a pre-determined formula, subject to a cap on the number of additional shares convertible.
+Despite the fact that the additional ordinary shares, if and when the performance ratchet on the Series C Preferred Shares is triggered, are to be transferred from the outstanding ordinary shares held by the ordinary shareholders, they represent
+value which the ordinary shareholders have foregone on behalf of the Company. Accordingly, the impact of the Series C performance ratchet is considered in the effective conversion price when measuring the beneficial conversion feature of the Series
+C Preferred Shares at the commitment date. The most favorable conversion price used to calculate the amount of the beneficial conversion amount for the Series C Preferred Shares was the performance ratchet adjusted price of US$0.1481. A beneficial
+conversion feature of RMB50,795 (US$6,509) was recognized through a credit to additional paid-in capital because the fair value per ordinary share at the commitment date was US$0.2032, which was more than the most favorable conversion price.
+
+ After the beneficial conversion feature, if any, is bifurcated from the initial carrying value of the preferred shares upon issuance, the
+remaining amount forms the carrying value of the respective series of preferred shares, which is accreted using the effective interest rate method to the respective redemption amount. Upon the issuance of the Series B Preferred Shares on January 16,
+2006, certain terms of the Series A Preferred Shares, including the redemption value, the redemption date, liquidation rights and the conversion price (the performance ratchet), were modified. In addition, upon the issuance of the Series C Preferred
+Shares on December 5, 2006, certain terms of the Series A Preferred Shares and Series B Preferred Shares, including the redemption value, the redemption date and the conversion price (the performance ratchet), were modified. Subsequent to each
+modification, the Company adjusted its accretion prospectively of the Series A and Series B Preferred Shares from its then carrying value to the modified redemption value over the modified earliest redemption date using the effective interest rate
+method. 
+ A net accretion charge of RMB5,110 and RMB44,403 (US$5,690) was recorded as a reduction of income available to ordinary
+shareholders for the years ended December 31, 2005 and 2006, respectively. 
+ 
+
+ F-33 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ The carrying values of the preferred shares are as follows: 
+ 
+
+ 
+ 
+Accumulating
+ 
+ 
+Series A
+ 
+ 
+Series B
+ 
+ 
+Series C
+ 
+
+ 
+ 
+RMB
+ 
+ 
+RMB
+ 
+ 
+RMB
+ 
+ 
+RMB
+ 
+
+ Issuance of preferred shares
+
+ 
+13,780
+ 
+ 
+36,416
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Issuance costs
+
+ 
+ 
+ 
+ 
+(3,521
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Accretion
+
+ 
+1,402
+ 
+ 
+3,708
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Cumulative dividend
+
+ 
+343
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Balance December 31, 2005
+
+ 
+15,525
+ 
+ 
+36,603
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Issuance of preferred shares
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+113,647
+ 
+ 
+156,357
+ 
+
+ Issuance costs
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(3,976
+)
+ 
+(2,196
+)
+
+ Exercise of warrants (Note 13)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+5,654
+ 
+ 
+ 
+ 
+
+ Conversion of convertible note (Note 13)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+28,604
+ 
+
+ Accretion
+
+ 
+216
+ 
+ 
+10,695
+ 
+ 
+31,555
+ 
+ 
+1,960
+ 
+
+ Amortization of premium
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(23
+)
+ 
+ 
+ 
+
+ Beneficial conversion feature
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(50,795
+)
+
+ Amortization of beneficial conversion feature
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+3,606
+ 
+
+ Cumulative dividend
+
+ 
+54
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Consideration paid for redemption by the Company
+
+ 
+(15,090
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Deemed contribution on redemption
+
+ 
+(705
+)
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Balance December 31, 2006
+
+ 
+ 
+ 
+ 
+47,298
+ 
+ 
+146,857
+ 
+ 
+137,536
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Balance December 31, 2006 (US$)
+
+ 
+ 
+ 
+ 
+6,213
+ 
+ 
+19,293
+ 
+ 
+18,068
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+13.
+CONVERTIBLE NOTE AND WARRANTS 
+ On
+November 1, 2006, the Company issued (i) a RMB31,312 (US$4,000) zero interest convertible promissory note ( Convertible Note ) that is convertible into either Series B Preferred Shares or Series C Preferred Shares and
+(ii) warrants to purchase 3,527,278 Series B Preferred Shares, at US$0.113402 per share ( Warrants ), to all of the Series B Preferred Shares holders, at an aggregate amount of RMB31,312 (US$4,000). The Warrants provide for a cashless
+exercise option. On December 7, 2006, 3,527,278 shares of Series B Preferred Shares and 19,648,918 shares of Series C Preferred Shares were issued pursuant to the exercise and conversion of the Warrants and the Convertible Note, respectively.
+
+ Pursuant to the Convertible Note agreement, the entire outstanding principal of the Convertible Note shall be automatically converted into
+Series C Preferred Shares if the issuance of Series C Preferred Shares closed within three months of the issuance date of the Convertible Note. If the issuance of Series C Preferred Shares had not occurred on or before January 31, 2007, the
+holders of the Convertible Note have the option to (i) convert the outstanding principal into Series B Preferred Shares at the Series B Preferred Shares issuance price or (ii) redeem for principal. The holders of the Convertible Note can
+also make a one time extension for an additional three months if they chose not to convert the Convertible Note into Series B Preferred Shares, after which if the Series C Preferred Shares are not issued, they can (i) convert into Series B
+Preferred Shares at the Series B Preferred Shares issuance price or (ii) redeem for principal. 
+ The RMB31,312 (US$4,000) cash proceeds
+received by the Company was first allocated to the Warrants at fair value of RMB3,035 (US$386) with the remaining proceeds allocated to the Convertible Note. The 
+
+ 
+
+ F-34 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ 
+embedded conversion option of Convertible Note contained a benefical conversion feature at the commitment date, measured using the effective
+conversion price into Series B Preferred Shares, which was the only available conversion option available upon issuance. The conversion into Series C Preferred Shares represents a contingent conversion option, from which the beneficial conversion
+feature, if any, would be re-computed if and when the Series C Preferred Shares are issued. The intrinsic value of the beneficial conversion feature of RMB8,014 (US$1,018) was recognized based on the difference between the effective conversion price
+into Series B Preferred Shares of US$0.1024 and the fair value of ordinary shares of US$0.1313 at the commitment date. The term extension option was bifurcated at fair value of RMB932 (US$117) from the Convertible Note. The difference of RMB19,333
+(US$2,479) between the proceeds received and the values allocated to the Warrants, beneficial conversion feature and the term extension option was recorded as the carrying value of the Convertible Note upon issuance. Fair values were determined by
+an independent valuation firm. 
+ The Warrants were classified as liabilities from the issuance date to the exercise date since the holders
+were entitled to a cashless exercise into Series B Preferred Shares, which are contingently redeemable for cash. A gain of RMB512 (US$64) from the change in fair market value of the Warrants was recognized in earnings during the period the Warrants
+were outstanding. Upon exercise of the Warrants on December 5, 2006 into Series B Preferred Shares, no beneficial conversion feature was recognized since the fair value of ordinary shares of RMB5,613 (US$717) was less than the sum of the
+carrying value of the Warrants of RMB2,523 (US$322) and the exercise price of RMB3,131 (US$400). The full amount of deemed proceeds of RMB5,480 (US$700) was recorded as Series B Preferred Shares on the exercise date of the Warrants. Since the
+carrying amount of RMB5,654 (US$722) was in excess of the redemption value of the Series B Preferred Shares of RMB4,697 (US$600), the difference of RMB957 (US$122) is accreted down using the effective interest method to the earliest put date through
+accumulated deficit. 
+ On December 5, 2006, the Series C Preferred Shares were issued. Accordingly, the Convertible Note was converted
+into Series C Preferred Shares. During the period the Convertible Note was outstanding, interest expense of RMB3,790 (US$476) was recognized for the accretion of the debt discount from the bifurcation of (i) the beneficial conversion feature
+and (ii) the Warrants and term extension option. As the contingent conversion option into Series C Preferred Shares was triggered, the beneficial conversion feature of the Convertible Note is recomputed as the difference between the effective
+conversion price into Series C Preferred Shares and the fair value of ordinary shares as of the commitment date of the Convertible Note. As a result of the re-computation, no beneficial conversion feature should have been recognized on the
+Convertible Note since the fair value of ordinary shares as of the commitment date was US$0.1313, which was less than the effective conversion price into Series C Preferred Shares of US$0.1860. As such, upon conversion, the remaining unamortized
+discount from the beneficial conversion feature of RMB5,478 (US$700) was reversed through a debit to additional paid-in capital. The carrying value of the Convertible Note of RMB28,604 (US$3,654) then forms the new carrying value of the Series C
+Preferred Shares into which it converted. 
+ The term extension option was classified as a derivative liability from the issuance date to the
+conversion date of the Convertible Note. An expense of RMB8 (US$1) resulted from the change in fair market value of the term extension option was recognized in earnings during the period the Convertible Note was outstanding. The carrying value of
+the term extension option of RMB940 (US$118) was fully written off to earnings upon conversion of the Convertible Note into Series C Preferred Shares. 
+ 
+
+ F-35 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+
+14.
+SHARE-BASED COMPENSATION EXPENSE 
+ On April 26, 2006, the Company authorized a share option scheme (the 2006 Scheme ) that provides for the issuance of options to purchase up to 23,296,518 ordinary shares. Under the 2006 Scheme, the directors may, at
+their discretion, grant any officers (including directors), employees of the Group, and consultants (collectively, the grantees ) options to subscribe for ordinary shares. These awards vest over a three year period, with 35%, 35% and 30%
+of the options to vest on each of the first, second and third anniversaries of the award date as stipulated in the share option agreement. In accordance with the 2006 Scheme, a performance condition of an initial public offering is attached with the
+ability of exercise of 40%, 50% and 10% of the options vested for the three years following the initial public offering date. 
+ Under the
+terms of the Scheme, options are generally granted at prices equal to the fair market value and expire eight years from the date of grant. On May 8, June 30, and September 1, 2006, the Company granted 12,810,000, 3,120,000 and
+570,000 share options, respectively, to the directors and employees of the Group at an exercise price of US$0.1134 per share. The Company did not grant any share options to non-employees during the year ended December 2006. 
+ Share-based compensation expense will not be recorded before the performance condition of an initial public offering is met. Accordingly, no compensation
+expense was recognized for the year ended December 31, 2006. No option was exercised during the year ended December 31, 2006. 
+ 
+
+ F-36 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ The fair value of share options granted for the year ended December 31, 2006 was estimated using a binomial option pricing model. The binomial model
+requires the input of highly subjective assumptions including the expected stock price volatility, the expected price multiple at which employees are likely to exercise share options and the expected employee forfeiture rate. The Company uses
+historical data and future expectation to estimate forfeiture rate. For expected volatilities, the Company has made reference to historical volatilities of several comparable companies. The risk-free rate for periods within the contractual life of
+the option is based on the U.S. Treasury Bills yield in effect at the time of grant. The fair value of the ordinary shares, at the measurement dates, was determined based on a generally accepted valuation methodology, which incorporates certain
+assumptions including the financial results and growth trends of the Group, to derive the total equity value of the Group. The valuation model allocated the equity value between the ordinary shares and the preferred shares and determined the fair
+value of ordinary shares based on two assumptions: where conversion into ordinary shares would result in a higher economic value, preferred shares were treated as if they had converted into ordinary shares; and preferred shares that have a value
+higher than their conversion price were assigned a value that took into consideration their liquidation preference. The fair values of share options granted to directors and employees, respectively, during the year ended December 31, 2006 were
+estimated using the following assumptions: 
+ 
+
+ 
+ 
+May 8, 2006
+ 
+ 
+June 30, 2006
+ 
+ 
+September 1, 2006
+ 
+
+ Average risk-free rate of return
+
+ 
+5.07
+%
+ 
+5.14
+%
+ 
+4.66
+%
+
+ Suboptimal exercise factor
+
+ 
+1.2 - 2
+ 
+ 
+1.2 - 2
+ 
+ 
+1.2 - 1.5
+ 
+
+ Volatility rate
+
+ 
+37.32
+%
+ 
+37.32
+%
+ 
+37.32
+%
+
+ Expected dividend yield
+
+ 
+0
+%
+ 
+0
+%
+ 
+0
+%
+
+ Fair value of ordinary share
+
+ 
+US$0.0941
+ 
+ 
+US$0.1017
+ 
+ 
+US$0.1199
+ 
+
+ Estimated forfeiture rate
+
+ 
+
+ 
+
+ 
+
+ Senior management
+
+ 
+0% per annum
+ 
+ 
+0% per annum
+ 
+ 
+0% per annum
+ 
+
+ Management
+
+ 
+35% per annum
+ 
+ 
+32% per annum
+ 
+ 
+30% per annum
+ 
+
+ Employees
+
+ 
+45% per annum
+ 
+ 
+42% per annum
+ 
+ 
+40% per annum
+ 
+
+ Weighted average expected share option life
+
+ 
+6.3 years
+ 
+ 
+6.4 years
+ 
+ 
+4.6 years
+ 
+
+ Weighted average fair value of share option
+
+ 
+US$0.0296
+ 
+ 
+US$0.0406
+ 
+ 
+US$0.0227
+ 
+
+ 
+
+ F-37 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ The following table summarizes the Company s share option activity as of and for the year ended December 31, 2006. 
+ 
+
+ 
+ 
+Number of
+options
+ 
+Weighted
+average
+exercise price
+(US$)
+ 
+Weighted average
+remaining
+contractual life
+(Years)
+ 
+Aggregate
+intrinsic
+value
+(US$)
+
+ Outstanding, January 1, 2006
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Granted
+
+ 
+
+ 
+
+ 
+
+ 
+
+ May 8, 2006
+
+ 
+12,810,000
+ 
+0.1134
+ 
+7.4
+ 
+1,150
+
+ June 30, 2006
+
+ 
+3,120,000
+ 
+0.1134
+ 
+7.5
+ 
+280
+
+ September 1, 2006
+
+ 
+570,000
+ 
+0.1134
+ 
+7.7
+ 
+51
+
+ 
+ 
+ 
+
+ 
+
+ 
+
+ Exercised
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ Forfeited/cancelled
+
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+
+ Outstanding, December 31, 2006
+
+ 
+16,500,000
+ 
+0.1134
+ 
+7.4
+ 
+1,481
+
+ 
+ 
+ 
+
+ 
+
+ 
+
+ Vested and expected to vest at December 31, 2006
+
+ 
+14,370,044
+ 
+0.1134
+ 
+7.4
+ 
+1,271
+
+ 
+ 
+ 
+
+ 
+
+ 
+
+ Exercisable at December 31, 2006
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+
+ 
+
+ 
+
+ The aggregate intrinsic value is calculated as the difference between the exercise price of the
+underlying awards and the fair value of the Company s shares as at December 31, 2006, for those awards that have an exercise price currently below the fair value of the Company s shares. As of December 31, 2006, the Company has
+options outstanding to purchase an aggregate of 16,500,000 shares with an exercise price below the fair value of the Company s shares, resulting in an aggregate intrinsic value of RMB9,925 (US$1,481). 
+ As of December 31, 2006, there was RMB3,684 (US$484) of unrecognized share-based compensation cost related to share options, which will be
+recognized over a three year period following the initial public offering date. To the extent the actual forfeiture rate is different from the original estimate, actual share-based compensation related to these awards may be different from the
+expectation. 
+ 
+
+15.
+INCOME TAX EXPENSES 
+ Cayman
+Islands 
+ Under the laws of Cayman, no withholding tax on dividends or other distributions, nor any tax computed on profits or income or
+on any capital assets, gain or appreciation will be payable by an exempted company or its operations. Accordingly, the Company is not subject to tax. 
+ Hong Kong 
+ Hong Kong profits tax is subject to corporate income tax of 17.5% on the estimated assessable profits
+arising in Hong Kong. No provision for income tax has been made as CGEN Hong Kong had no taxable income during the years 2005 and 2006. 
+ 
+
+ F-38 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ China 
+ The Group s subsidiary and
+VIE subsidiary that are each incorporated in the PRC are subject to Enterprise Income Tax ( EIT ) on the taxable income as reported in their respective statutory financial statements adjusted in accordance with the Enterprise Income Tax
+Law and the Income Tax Law of the People s Republic of China concerning Foreign Investment Enterprise and Foreign Enterprises (collectively the PRC Income Tax Laws ), respectively. Pursuant to the PRC Income Tax Laws, the
+Group s PRC subsidiary and VIE subsidiary are subject to EIT at a statutory rate of 33%. 
+ CGEN Shanghai, being a Foreign Invested
+Enterprise and located in the Zhangjiang High-Tech Zone, Pudong New District of Shanghai, is subject to a preferential income tax rate of 18% on its taxable income. No current provision for income tax has been made as CGEN Shanghai had no current
+taxable income during the years 2005 and 2006. 
+ CGEN Network is subject to corporate income tax of 33% on its taxable income applicable to
+PRC domestic invested enterprises. No current provision for income tax has been made as CGEN Network had no current taxable income during the years 2005 and 2006. 
+ Loss before income taxes consists of: 
+ 
+
+ 
+ 
+Year ended December 31
+ 
+
+ 
+ 
+ 2005 
+ 
+ 
+ 2006 
+ 
+
+ 
+ 
+RMB
+ 
+ 
+RMB
+ 
+ 
+ US$
+
+ 
+
+ Cayman Islands
+
+ 
+(889
+)
+ 
+(1,832
+)
+ 
+(241
+)
+
+ Hong Kong
+
+ 
+(501
+)
+ 
+(1,381
+)
+ 
+(181
+)
+
+ PRC
+
+ 
+(35,766
+)
+ 
+(1,459
+)
+ 
+(192
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+(37,156
+)
+ 
+(4,672
+)
+ 
+(614
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ The reconciliation of income tax computed at the statutory income tax rate of 33% to effective
+income tax provision recorded is as follows: 
+ 
+
+ 
+ 
+Year ended December 31
+ 
+
+ 
+ 
+ 2005 
+ 
+ 
+ 2006 
+ 
+
+ 
+ 
+RMB
+ 
+ 
+RMB
+ 
+ 
+ US$
+
+ 
+
+ Income tax benefit computed at the statutory tax rate at 33%
+
+ 
+(12,261
+)
+ 
+(1,542
+)
+ 
+(203
+)
+
+ Impact of tax rate differences
+
+ 
+465
+ 
+ 
+1,290
+ 
+ 
+169
+ 
+
+ Non-deductible expenses
+
+ 
+1,726
+ 
+ 
+3,956
+ 
+ 
+520
+ 
+
+ Effect of tax rate change in PRC
+
+ 
+ 
+ 
+ 
+451
+ 
+ 
+60
+ 
+
+ Changes in valuation allowance
+
+ 
+10,070
+ 
+ 
+(4,155
+)
+ 
+(546
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Income tax provision
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ F-39 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ Deferred tax assets and deferred tax liabilities reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities
+for financial reporting purposes and the amounts used for income tax purpose. The components of deferred tax assets and deferred tax liabilities are as follows: 
+ 
+
+ 
+ 
+December 31
+ 
+
+ 
+ 
+2005
+ 
+ 
+2006
+ 
+
+ 
+ 
+RMB
+ 
+ 
+RMB
+ 
+ 
+US$
+ 
+
+ Deferred tax assets:
+
+ 
+
+ 
+
+ 
+
+ Net operating loss carry forwards
+
+ 
+18,393
+ 
+ 
+31,973
+ 
+ 
+4,200
+ 
+
+ Accrued expenses
+
+ 
+1,689
+ 
+ 
+10,542
+ 
+ 
+1,385
+ 
+
+ Inter-company technical support fee
+
+ 
+1,317
+ 
+ 
+8,511
+ 
+ 
+1,118
+ 
+
+ Unbilled cost of revenues
+
+ 
+2,598
+ 
+ 
+7,680
+ 
+ 
+1,009
+ 
+
+ Bad debt provision
+
+ 
+ 
+ 
+ 
+3,341
+ 
+ 
+439
+ 
+
+ Depreciation expenses
+
+ 
+ 
+ 
+ 
+451
+ 
+ 
+59
+ 
+
+ Others
+
+ 
+102
+ 
+ 
+94
+ 
+ 
+12
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total deferred tax assets
+
+ 
+24,099
+ 
+ 
+62,592
+ 
+ 
+8,222
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Deferred tax liabilities:
+
+ 
+
+ 
+
+ 
+
+ Unbilled revenues
+
+ 
+(4,504
+)
+ 
+(43,365
+)
+ 
+(5,697
+)
+
+ Inter-company technical support income
+
+ 
+(699
+)
+ 
+(4,519
+)
+ 
+(594
+)
+
+ Depreciation expenses
+
+ 
+(26
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Others
+
+ 
+(7
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total deferred tax liabilities
+
+ 
+(5,236
+)
+ 
+(47,884
+)
+ 
+(6,291
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net deferred tax assets
+
+ 
+18,863
+ 
+ 
+14,708
+ 
+ 
+1,931
+ 
+
+ Valuation allowance
+
+ 
+(18,863
+)
+ 
+(14,708
+)
+ 
+(1,931
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net deferred tax assets
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Due to its tax loss history, the Group has made a full valuation allowance against its deferred
+tax assets, as it does not believe there exists sufficient objective positive evidence that the recoverability of its deferred tax assets is more likely than not. Future reversal of the valuation allowance will be recognized either when the benefit
+is realized or when it has been determined that it is more likely than not that the benefit in future earnings will be realized. 
+ As of
+December 31, 2006, the Group had net operating loss carry forward of approximately RMB108,078 (US$14,198) for income tax purposes that expire in years 2008 to 2011. 
+ 
+
+16.
+SHARE CAPITAL 
+ Prior to the
+September 8, 2005 reorganization, the Group operated its advertising business through CGEN Network, which is a PRC share capital company where equity interests of individual equity interest holders are based on the respective proportionate
+share of capital invested. The reorganization was amongst entities under common control and accounted for in a manner similar to a pooling-of-interest. Accordingly these consolidated financial statements have been prepared as if the current
+corporate structure had been in existence since the inception of CGEN Network. 
+ 
+
+ F-40 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ On February 24, 2005, the Company issued 800,000,000 and 200,000,000 shares of ordinary share with par value of US$0.000001 to New Media Technology
+Limited and Yising Chan, respectively, in connection with the incorporation of the Company. 
+ On August 30 2005, CGEN Network effected
+a RMB10,000 rights offering for 50,000,000 ordinary shares to existing equity interest holders at that time. The rights offering contained a bonus element, measured as the difference between the subscription price and the fair value of the shares
+subscribed. This bonus element of 12,049,336 ordinary shares is accounted for similar to a stock dividend, using a method to adjust for the fair value of the theoretical ex-rights in accordance with SFAS 128. 
+ On September 7, 2005, the board of directors of the Company declared a 1,000,000-for-1 stock split to be effective on September 9, 2005.
+Accordingly, all outstanding shares and per share data in all periods presented have been restated to reflect the stock split. 
+ On
+September 8, 2005, Yising Chan and New Media Technology Limited, a wholly owned entity of Yising Chan, transferred 291,234 and 2,621,105 ordinary shares of the Company, respectively, at par value of US$0.000001 per share to Totnes International
+Limited as consideration for business advisory and consultation services provided to CGEN Network. The fair value of the equity interest transferred was RMB0.3270 (US$0.0430) per share based on an independent valuation. The difference between the
+subscription price at par and fair value of RMB951 has been accounted for as a consulting fee recorded in general and administrative expense in 2005, with a corresponding offset to additional paid-in capital. 
+ On December 7, 2006, 7,368,344 ordinary shares of the Company issued at par value to Yising Chan were repurchased at fair value for a consideration
+of RMB11,733 (US$1,541). The repurchased shares were considered cancelled under Cayman Islands law and the difference between the original issuance price and the repurchase price was charged to accumulated deficit. 
+ 
+
+17.
+STATUTORY RESERVES 
+ The
+Company s ability to pay dividends is primarily dependent on the Company receiving distributions from its subsidiaries and VIE subsidiary. Relevant PRC statutory laws and regulations permit payments of dividends by the Group s PRC
+subsidiary and VIE subsidiary only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the financial statements prepared in accordance with
+US GAAP differ from those reflected in the statutory financial statements of the Company s subsidiary and VIE subsidiary. 
+ In
+accordance with the Regulations on Enterprises with Foreign Investment of China and their articles of association, a foreign invested enterprise established in the PRC is required to provide certain statutory reserves, namely general reserve fund,
+the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as reported in the enterprise s PRC statutory accounts. A wholly-owned foreign invested enterprise is required to allocate at least 10% of its
+annual after-tax profit to the general reserve until such reserve has reached 50% of its respective registered capital based on the enterprise s PRC statutory accounts. A non wholly-owned foreign invested enterprise is permitted to provide all
+the above allocation of annual after-tax profit at the discretion of its board of directors. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors for all foreign invested
+enterprises. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. CGEN Shanghai was established as a wholly-owned foreign invested enterprise and therefore is subject to the above mandated
+restrictions on distributable profits. 
+ 
+
+ F-41 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ Additionally, in accordance with the Company Law of the People s Republic of China, a domestic enterprise is required to provide statutory common
+reserve at least 10% of its annual after-tax profit until such reserve has reached 50% of its respective registered capital based on the enterprise s PRC statutory accounts. A domestic enterprise is also required to provide for discretionary
+surplus reserve, at the discretion of the board of directors, from the profits determined in accordance with the enterprise s PRC statutory accounts. The aforementioned reserves can only be used for specific purposes and are not distributable
+as cash dividends. CGEN Network was established as a domestic invested enterprise and therefore is subject to the above mandated restrictions on distributable profits. 
+ As a result of these PRC laws and regulations that require annual appropriations of 10% of after-tax income to be set aside prior to payment of dividends as general reserve fund, the Company s PRC
+subsidiary and VIE subsidiary are restricted in their ability to transfer a portion of their net assets. No profit appropriation was made for the years ended December 31, 2005 and 2006 as both CGEN Shanghai and CGEN Network had accumulated
+deficits. 
+ 
+
+ F-42 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+
+18.
+BASIC AND DILUTED LOSS PER SHARE 
+ Basic and diluted loss per share for the year ended December 31, 2005 and 2006 have been calculated as follows: 
+ 
+
+ 
+ 
+December 31
+ 
+
+ 
+ 
+2005
+ 
+ 
+2006
+ 
+
+ 
+ 
+RMB
+ 
+ 
+RMB
+ 
+ 
+US$
+ 
+
+ Numerator for basic loss per share:
+
+ 
+
+ 
+
+ 
+
+ Loss attributable to ordinary shareholders
+
+ 
+(42,609
+)
+ 
+(52,030
+)
+ 
+(6,835
+)
+
+ Cumulative dividend on 8% accumulating convertible redeemable preferred shares
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Accretion of 8% accumulating convertible redeemable preferred shares
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Redemption of 8% accumulating convertible redeemable preferred shares
+
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Accretion of Series A convertible redeemable preferred shares
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Accretion of Series B convertible redeemable preferred shares
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Amortization of premium on Series B convertible redeemable preferred shares
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Accretion of Series C convertible redeemable preferred shares
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Accretion of beneficial conversion feature on Series C convertible redeemable preferred shares
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Numerator for diluted loss per share
+
+ 
+(42,609
+)
+ 
+(52,030
+)
+ 
+(6,835
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Denominator:
+
+ 
+
+ 
+
+ 
+
+ Number of shares outstanding, opening
+
+ 
+50,000,000
+ 
+ 
+100,000,000
+ 
+ 
+100,000,000
+ 
+
+ Retroactive adjustment for bonus element in rights offering August 25, 2005
+
+ 
+12,049,336
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Weighted average number of shares issued in rights offering (37,950,664 shares)
+
+ 
+13,412,700
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Weighed average number of shares cancelled (7,368,344 shares)
+
+ 
+ 
+ 
+ 
+(758,466
+)
+ 
+(758,466
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Weighted average number of shares outstanding basic
+
+ 
+75,462,036
+ 
+ 
+99,241,534
+ 
+ 
+99,241,534
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Dilutive effect of convertible securities:
+
+ 
+
+ 
+
+ 
+
+ Share options
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Warrants
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Convertible redeemable preferred shares
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Convertible note
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Weighted average number of shares outstanding diluted
+
+ 
+75,462,036
+ 
+ 
+99,241,534
+ 
+ 
+99,241,534
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ F-43 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ For the years ended December 31, 2005 and 2006, the potential dilutive effect in relation to the above convertible securities was excluded as they
+have an anti-dilutive effect. 
+ 
+
+ 
+ 
+December 31
+ 
+
+ 
+ 
+2005
+ 
+ 
+2006
+ 
+
+ 
+ 
+RMB
+ 
+ 
+RMB
+ 
+ 
+US$
+ 
+
+ Loss per share basic and diluted
+
+ 
+(0.56
+)
+ 
+(0.52
+)
+ 
+(0.07
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+19.
+RELATED PARTY TRANSACTIONS 
+ As of
+and for the years ended December 31, 2005 and 2006 the principal related parties with which the Group had transactions during the years are as follows: 
+ 
+
+ Name of related party
+
+ 
+ Relationship with the Group
+
+ Shanghai CGEN Information Systems Co., Ltd. ( CGEN Info )
+
+ 
+ Company controlled by a significant shareholder of the Company
+
+ CGEN Technology Co., Ltd. ( CGEN Technology )
+
+ 
+ Company controlled by a significant shareholder of the Company
+
+ Totnes International Limited
+
+ 
+Shareholder of the Company
+
+ S.I. Technology Venture Capital Limited
+
+ 
+Shareholder of the Company
+
+ Sumitomo Corporation Equity Asia Limited
+
+ 
+Shareholder of the Company
+
+ JAFCO Asia Technology Fund III
+
+ 
+Shareholder of the Company
+
+ TDF Capital China II, LP
+
+ 
+Shareholder of the Company
+
+ TDF Capital Advisor, LP
+
+ 
+Shareholder of the Company
+
+ Huitung Investments (BVI) Limited
+
+ 
+Shareholder of the Company
+
+ Redpoint Ventures II, LP
+
+ 
+Shareholder of the Company
+
+ Redpoint Associates II, LLC
+
+ 
+Shareholder of the Company
+
+ Investlink Consulting (China) Limited
+
+ 
+Shareholder of the Company
+
+ CPI Ballpark Investments Ltd.
+
+ 
+Shareholder of the Company
+
+ 
+
+ F-44 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ As of and for the years ended December 31, 2005 and 2006, significant related party balances and transactions were as follows: 
+ 
+
+ 
+ 
+December 31
+ 
+
+ 
+ 
+2005
+ 
+ 
+2006
+ 
+
+ 
+ 
+RMB
+ 
+ 
+RMB
+ 
+ 
+US$
+ 
+
+ Amounts due to related parties:
+
+ 
+
+ 
+
+ 
+
+ Balance at the beginning of year
+
+ 
+31,307
+ 
+ 
+977
+ 
+ 
+128
+ 
+
+ Advances from CGEN Technology
+
+ 
+12,874
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Technical support fee to CGEN Info
+
+ 
+1,342
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Payment of technical support fee to CGEN Info
+
+ 
+(1,342
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Repayment of advances from CGEN Technology
+
+ 
+(2,557
+)
+ 
+(943
+)
+ 
+(124
+)
+
+ Repayment of advances from CGEN Info
+
+ 
+(19,517
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Waivers of amount due to CGEN Technology
+
+ 
+(21,130
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Balance at the end of year
+
+ 
+977
+ 
+ 
+34
+ 
+ 
+4
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ The beginning balance of amounts due to related parties as of January 1, 2005 consisted of
+advances from CGEN Technology and CGEN Info of RMB11,751 and RMB19,556, respectively. 
+ During 2005, CGEN Network incurred RMB1,342 expenses
+related to technical support services provided by CGEN Info. The amount was settled by CGEN Network during the same year. 
+ On March 8,
+2005, CGEN Network acted as a guarantor for CGEN Technology for the RMB12,410 borrowings between CGEN Technology and Top Result Promotion Limited that was due on August 25, 2005. CGEN Technology then advanced the full amount to CGEN Network for
+working capital purposes. The amount was fully settled with interest of RMB462 by CGEN Technology on August 25, 2005. 
+ In addition, during
+2004, CGEN Technology advanced an amount of RMB8,250 to CGEN Hong Kong which was used as a deposit placed with a bank for granting letter of credit facilities to CGEN Network. The total of RMB21,130 due to CGEN Technology, comprising of the 2004
+advance of RMB8,250 and the 2005 advance of RMB12,874 including interest, was waived by CGEN Technology in 2005. Since CGEN Technology and CGEN Hong Kong are controlled by the same controlling shareholder of the Company, the waivers of liability of
+RMB21,130 were treated as a shareholder contribution and recorded in additional paid-in capital. 
+ All balances with the related parties as
+of December 31, 2005 and 2006 were unsecured, interest-free and have no fixed terms of repayment. 
+ 
+
+20.
+EMPLOYEE DEFINED CONTRIBUTION PLAN 
+ Full time employees of the Company s subsidiary and VIE subsidiary in the PRC participate in a government mandated defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance,
+employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require that the PRC subsidiaries of the Group make contributions to the government for these benefits based on 38% to 43% of the employees 
+salaries. The Company s subsidiary and VIE subsidiary have no legal obligation for the benefits beyond the contributions made. 
+
+ 
+
+ F-45 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ 
+The total amounts for such employee benefits, which were expensed as incurred, were RMB1,492 and RMB3,851 (US$506) for the years ended
+December 31, 2005 and 2006, respectively. 
+ 
+
+21.
+SEGMENT REPORTING 
+ The Company is
+engaged in providing advertising services, mainly operation of out-of-home advertising network using flat-panel television screens placed in public areas such as hypermarkets and supermarkets and to a lesser extent, provision of project management
+services in relation to indoor and outdoor promotion activities. In accordance with SFAS 131, the Group s chief operating decision maker evaluates segment performance based on revenues and cost of revenues by segment. The Group has determined
+that it has two operating and reportable segments which are advertising revenues and other services revenues. 
+ The revenues, cost of
+revenues and gross (loss) profit by segment are as follows: 
+ 
+
+ 
+ 
+Advertising revenues
+ 
+ 
+Other services
+revenues
+ 
+ 
+Consolidated
+ 
+
+ 
+ 
+RMB
+ 
+ 
+US$
+ 
+ 
+RMB
+ 
+ 
+US$
+ 
+ 
+RMB
+ 
+ 
+US$
+ 
+
+ Year ended December 31, 2005:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Revenues
+
+ 
+10,553
+ 
+ 
+
+ 
+11,106
+ 
+ 
+
+ 
+21,659
+ 
+ 
+
+ Cost of revenues
+
+ 
+(33,259
+)
+ 
+
+ 
+(9,651
+)
+ 
+
+ 
+(42,910
+)
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+
+ Gross (loss) profit
+
+ 
+(22,706
+)
+ 
+
+ 
+1,455
+ 
+ 
+
+ 
+(21,251
+)
+ 
+
+ Unallocated operating expenses
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+(13,767
+)
+ 
+
+ Unallocated non-operating expenses
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+(2,138
+)
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Loss before income tax
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+(37,156
+)
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+
+ Year ended December 31, 2006:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Revenues
+
+ 
+130,626
+ 
+ 
+17,161
+ 
+ 
+27,663
+ 
+ 
+3,634
+ 
+ 
+158,289
+ 
+ 
+20,795
+ 
+
+ Cost of revenues
+
+ 
+(95,045
+)
+ 
+(12,486
+)
+ 
+(18,676
+)
+ 
+(2,454
+)
+ 
+(113,721
+)
+ 
+(14,940
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Gross profit
+
+ 
+35,581
+ 
+ 
+4,675
+ 
+ 
+8,987
+ 
+ 
+1,180
+ 
+ 
+44,568
+ 
+ 
+5,855
+ 
+
+ Unallocated operating expenses
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+(47,947
+)
+ 
+(6,299
+)
+
+ Unallocated non-operating expenses
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+(1,293
+)
+ 
+(170
+)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Loss before income tax
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+(4,672
+)
+ 
+(614
+)
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ All of the Group s sales made to customers located in the PRC and all of the Group s
+long-lived assets are located in the PRC. The Group does not allocate such assets to individual segments. 
+ 
+
+22.
+COMMITMENT AND CONTINGENCIES 
+ Operating lease agreements 
+ The Group has entered into operating lease arrangements mainly relating to advertising
+space in hypermarkets and supermarkets and office buildings. Payments under operating leases are expensed on a straight-line basis over the periods of their respective leases. Total rental expense under all operating leases was RMB22,088 and
+RMB79,795 (US$10,483) for the year ended December 31, 2005 and 2006, respectively. 
+ 
+
+ F-46 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ Future minimum lease payments for non-cancelable operating leases as of December 31, 2006 are as follows: 
+ 
+
+ 
+ 
+RMB
+ 
+US$
+
+ 2007
+
+ 
+88,728
+ 
+11,656
+
+ 2008
+
+ 
+54,505
+ 
+7,160
+
+ 2009
+
+ 
+28,581
+ 
+3,755
+
+ 2010
+
+ 
+25,547
+ 
+3,356
+
+ 2011
+
+ 
+16,952
+ 
+2,227
+
+ 
+ 
+ 
+ 
+
+ Total
+
+ 
+214,313
+ 
+28,154
+
+ 
+ 
+ 
+ 
+
+ Contingences 
+ PRC regulations currently limit foreign ownership of companies that provide advertising services, including out-of-home television advertising services. In addition, foreigners or foreign invested
+enterprises are currently required to have at least two years of direct operations in the advertising industry outside of China to apply for the required licenses. The Company is incorporated in the Cayman Islands and accordingly CGEN Shanghai is
+considered as a foreign invested enterprise under PRC law. In order to comply with foreign ownership restrictions, the Group operates its out-of-home television advertising business in the PRC through CGEN Network. CGEN Network holds the licenses
+and approvals that are required to operate the out-of-home television advertising business while CGEN Shanghai owns the substantial majority of the physical assets required to operate the out-of-home television advertising business. 
+ CGEN Shanghai has entered into a series of contractual arrangements with CGEN Network, pursuant to which CGEN Shanghai provides CGEN Network with
+services and software licenses in exchange for fees, and CGEN Shanghai undertakes to provide financial support to CGEN Network to the extent necessary for its operations. In addition, CGEN Shanghai has entered into agreements with CGEN Network and
+its equity owners that provide it with the ability to control CGEN Network. In the opinion of management and the Company s counsel, (i) the ownership structure of the Company, CGEN Shanghai and CGEN Network are in compliance with existing
+PRC laws and regulations; (ii) the contractual arrangements with CGEN Network and its shareholders are valid and binding, and will not result in any violation of PRC laws or regulations currently in effect; and (iii) the Group s
+business operations are in compliance with existing PRC laws and regulations in all material respects. 
+ However, there are substantial
+uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, the Company cannot be assured that PRC regulatory authorities will not ultimately take a contrary view to its opinion. If the
+current ownership structure of the Group and its contractual arrangements with CGEN Network are found to be in violation of any existing or future PRC laws and regulations, the Group may be required to restructure its ownership structure and
+operations in the PRC to comply with the changing and new PRC laws and regulations. In the opinion of management, the likelihood of loss in respect of the Group s current ownership structure or the contractual arrangements with CGEN Network is
+remote. 
+ Litigation 
+ In
+December 2005, CGEN Network filed a legal action against Hymall Superstores for breach of their lease agreements. CGEN Network demanded Hymall Superstores to continue their obligations as 
+
+ 
+
+ F-47 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ 
+stipulated in the agreement and is seeking for a total compensation of RMB300. At December 31, 2005, the litigation is still in progress
+and the Court has not adjudicated on the compensation. In February and March 2006, the Court passed a verdict in favour of CGEN Network for the claims amounted to RMB300 and CGEN Network has received the claims on August 16, 2006 at which time
+the Group recognized the amount as non-operating income. 
+ On March 16, 2006, CGEN Network also commenced a legal action against Focus
+Media Holding Limited ( Focus Media ) for their improper soliciting of contracts with Hymall Superstores and sought total compensation of RMB13,570. 
+ As of December 31, 2006, the litigation is still in progress and the Court has not adjudicated on the compensation. CGEN Network has not recognized any income pertaining to this legal suit. 
+ On July 31, 2007, the Shanghai No. 1 Intermediate People s Court denied CGEN Network s legal action against Focus Media for compensation. CGEN
+Network intends to appeal the decision. 
+ 
+
+23.
+CONCENTRATION OF RISKS 
+ Concentration of credit risk 
+ Financial instruments that potentially subject the Group to significant concentration
+of credit risk consist primarily of cash and cash equivalents and accounts receivable. As of December 31, 2005 and 2006, substantially all of the Group s cash and cash equivalents were deposited in several financial institutions located in
+the PRC and Hong Kong, which management believes are of high credit quality. Historically, deposits in Chinese banks are secured due to the state policy on protecting depositors interests. However, China promulgated a new Bankruptcy Law in
+August 2006, which came into effect on June 1, 2007, which contains a separate article expressly stating that the State Council may promulgate implementation measures for the bankruptcy of Chinese banks based on the Bankruptcy Law. Under the
+new Bankruptcy Law, a Chinese bank may go into bankruptcy. In addition, since China s concession to the WTO, foreign banks have been gradually permitted to operate in China and have been significant competitors against Chinese banks in many
+aspects, especially since the opening of the Renminbi business to foreign banks in late 2006. Therefore, the risk of bankruptcy of those Chinese banks in which the Group has deposits has increased. In the event of bankruptcy of one of the banks
+which holds the Group s deposits, it is unlikely to claim its deposits back in full since it is unlikely to be classified as a secured creditor based on PRC laws. 
+ Accounts receivable are typically unsecured and derived from revenue earned from customers in the PRC. As a percentage of total accounts receivable, the top five customers accounted for 87.0% and 34.3%
+as of December 31, 2005 and 2006, respectively. 
+ Due to the Group s dependence on a limited number of customers, any negative
+events or deterioration in financial strength with respect to the Group s customers may cause material loss to the Group and have a material adverse effect on the Group s financial condition and results of operations. During 2005, the
+advertising revenues from Shanghai Ruiguang Advertising Co., Ltd. was RMB5,731 and the other services revenues from Visa International was RMB10,770, which individually accounted for 10% or more of consolidated net revenues. During 2006, the other
+services revenues from Visa International was RMB18,812 (US$2,471), which accounted for 10% or more of consolidated net revenues. 
+ 
+
+ F-48 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ The retail industry in the PRC is highly competitive and may experience substantial consolidation. As the Group s ability to generate revenues from
+advertising sales and services depends upon ongoing relationships with a limited number of retailers, any substantial weakening or failure of the business of one or more of the existing retailers, or the consolidation of one or more of the retailers
+with a third party, may adversely affect the Group s business, financial condition and results of operations. 
+ Current
+vulnerability due to business and economic risk 
+ The Group participates in a young and dynamic industry and believes that changes in any
+of the following areas could have a material adverse effect on the Group s future financial position, results of operations or cash flows: the Group s limited operating history, changes in the overall demand for services; increased
+competitive pressures; advances and trends in new technologies and industry standards; changes in certain strategic relationships or retailer relationships; regulatory or other PRC related factors; risks associated with the Group s ability to
+attract and retain employees necessary to support its growth; and general risks associated with the advertising industry. 
+ The Group s
+operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than 20 years, no assurance can be given that the PRC
+government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC s
+political, economic and social conditions. There is also no guarantee that the PRC government s pursuit of economic reforms will be consistent or effective. 
+ The Group transacts its business in RMB, which is not freely convertible into foreign currencies. On January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted
+daily by the People s Bank of China. However, the unification of the exchange rates does not imply the RMB may be readily convertible into US$ or other foreign currencies. All foreign exchange transactions continue to take place either through
+the People s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People s Bank of China. Approval of foreign currency payments by the People s Bank of China or other
+institutions requires submitting a payment application form together with suppliers invoices and signed contracts. 
+ On July 21,
+2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the US$. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against basket of certain foreign currencies. This change in
+policy has resulted in an approximately 3% appreciation of the RMB against the US$ in 2006. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government
+to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the US$. 
+ Concentration of retailers 
+ The Group enters into lease agreements to install its network of flat panel screens in
+leading retailer chains of hypermarkets and supermarkets, whose relationship the Group views as critical to the success of its business. A significant portion of the Group s lease payments are made to the Group s five largest lessors who
+collectively accounted for 68.4% and 81.7% of total rental expenses for the years ended December 31, 2005 and 2006, respectively. 
+ 
+
+ F-49 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+
+24.
+SUBSEQUENT EVENTS 
+ Change in tax
+law 
+ During the Fifth Session of the Tenth National People s Congress, which was conducted on March 16, 2007, the PRC
+Corporate Income Tax Law ( the New Corporate Income Tax Law ) was approved and will become effective on January 1, 2008. The New Corporate Income Tax Law introduces a wide range of changes which include, but are not limited to, the
+unification of the income tax rate for domestic-invested and foreign-invested enterprises at 25%. Since the detailed implementation and administrative rules and regulations have not yet been announced, the future financial impact of the New
+Corporate Income Tax Law to the Group cannot be reasonably estimated at this stage. 
+ Strategic partnership with Thomson S.A.
+( Thomson ) 
+ On January 23, 2007, the Group entered into an agreement to form a strategic alliance with Thomson, a leading
+integrated solutions provider to entertainment and media industries, to develop relationships with international retail chains operating in China that otherwise would not cooperate purely with a domestic PRC network operator. 
+ Grant of share options 
+ In accordance
+with the 2006 Scheme, the Company granted 2,990,000, 2,776,518 and 500,000 share options at an exercise price of US$0.1134 per share to its officers (including directors) and employees of the Group on January 31, 2007, March 15, 2007
+and May 15, 2007, respectively. On January 31, 2007, March 15, 2007 and March 31, 2007, the Company granted 10,000, 400,000 and 10,000 share options at an exercise price of US$0.1134 per share to non-employee consultants for
+provision of legal advisory services, respectively. 
+ On March 15, 2007, the Company authorized a new share option scheme ( 2007
+Scheme ) that provides for the issuance of options to purchase up to 9,723,180 ordinary shares. Under the 2007 Scheme, the directors may, at their discretion, grant any officers (including directors) and employees of the Group options to
+subscribe for ordinary shares. The terms of the 2007 Scheme is substantially the same as the 2006 share option scheme, except for the exercise price. In accordance with 2007 share option scheme, the Company granted 2,773,180 and 2,500,000 options on
+March 31, 2007 and May 15, 2007, respectively, at an exercise price of US$0.3000 per share to its officers (including directors and employees of the Group). 
+ 
+
+ F-50 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+
+25.
+CONDENSED FINANCIAL INFORMATION OF THE COMPANY 
+ Under PRC laws and regulations, the Company s PRC subsidiary and VIE subsidiary, CGEN Shanghai and CGEN Network, are restricted in their ability to transfer certain of their net assets to the Company. The amount restricted
+include share capital and statutory reserve, as determined pursuant to PRC generally accepted accounting principles, totaling RMB148,946 (US$19,567) as of December 31, 2006. 
+ The following is condensed financial information of the Company on a stand-alone basis: 
+ 
+
+ 
+ 
+December 31
+
+ 
+ 
+2005
+ 
+2006
+
+ 
+ 
+RMB
+ 
+RMB
+ 
+US$
+
+ Balance sheets
+
+ 
+
+ 
+
+ 
+
+ ASSETS
+
+ 
+
+ 
+
+ 
+
+ Current assets:
+
+ 
+
+ 
+
+ 
+
+ Cash and cash equivalents
+
+ 
+42
+ 
+119,088
+ 
+15,645
+
+ Restricted cash
+
+ 
+ 
+ 
+5,193
+ 
+682
+
+ Prepayments and other current assets
+
+ 
+ 
+ 
+967
+ 
+127
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total current assets
+
+ 
+42
+ 
+125,248
+ 
+16,454
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Non-current assets:
+
+ 
+
+ 
+
+ 
+
+ Investment in subsidiaries
+
+ 
+18,468
+ 
+153,610
+ 
+20,179
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total non-current assets
+
+ 
+18,468
+ 
+153,610
+ 
+20,179
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total assets
+
+ 
+18,510
+ 
+278,858
+ 
+36,633
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ LIABILITIES AND SHAREHOLDERS DEFICIT
+
+ 
+
+ 
+
+ 
+
+ Current liabilities:
+
+ 
+
+ 
+
+ 
+
+ Other liabilities
+
+ 
+1,527
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total current liabilities
+
+ 
+1,527
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total liabilities
+
+ 
+1,527
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ F-51 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+
+ 
+ 
+December 31
+ 
+
+ 
+ 
+2005
+ 
+ 
+2006
+ 
+
+ 
+ 
+RMB
+ 
+ 
+RMB
+ 
+ 
+US$
+ 
+
+ Convertible redeemable preferred shares:
+
+ 
+
+ 
+
+ 
+
+ Series C, par value
+
+ 
+
+ 
+
+ 
+
+ US$0.000001 per share
+
+ 
+
+ 
+
+ 
+
+ Authorized nil and 150,000,000 shares as of December 31, 2005 and 2006
+
+ 
+
+ 
+
+ 
+
+ Issued and outstanding nil and 117,767,082 shares as of December 31, 2005 and 2006
+
+ 
+
+ 
+
+ 
+
+ Redemption value nil and US$0.3054 per share as of December 31, 2005 and 2006
+
+ 
+ 
+ 
+ 
+137,536
+ 
+ 
+18,068
+
+ 
+
+ Series B, par value
+
+ 
+
+ 
+
+ 
+
+ US$0.000001 per share
+
+ 
+
+ 
+
+ 
+
+ Authorized nil and 130,000,000 shares as of December 31, 2005 and 2006
+
+ 
+
+ 
+
+ 
+
+ Issued and outstanding nil and 127,752,161 shares as of December 31, 2005 and 2006
+
+ 
+
+ 
+
+ 
+
+ Redemption value nil and US$0.1701 per share as of December 31, 2005 and 2006
+
+ 
+ 
+ 
+ 
+146,857
+ 
+ 
+19,293
+ 
+
+ Series A, par value
+
+ 
+
+ 
+
+ 
+
+ US$0.000001 per share
+
+ 
+
+ 
+
+ 
+
+ Authorized 130,000,000 and 100,000,000 shares as of December 31, 2005 and 2006
+
+ 
+
+ 
+
+ 
+
+ Issued and outstanding 43,685,079 and 43,685,079 shares as of December 31, 2005 and 2006
+
+ 
+
+ 
+
+ 
+
+ Redemption value US$0.41204 and US$0.1545 per share as of December 31, 2005 and 2006
+
+ 
+36,603
+ 
+ 
+47,298
+ 
+ 
+6,213
+
+ 
+
+ 8% accumulating, par value
+
+ 
+
+ 
+
+ 
+
+ US$0.000001 per share
+
+ 
+
+ 
+
+ 
+
+ Authorized 70,000,000 and nil shares as of December 31, 2005 and 2006
+
+ 
+
+ 
+
+ 
+
+ Issued and outstanding 16,493,544 and nil shares as of December 31, 2005 and 2006
+
+ 
+
+ 
+
+ 
+
+ Redemption value US$0.41204 and nil per share as of December 31, 2005 and 2006
+
+ 
+15,525
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Commitment and contingencies
+
+ 
+
+ 
+
+ 
+
+ Shareholders deficit:
+
+ 
+
+ 
+
+ 
+
+ Ordinary shares, par value US$0.000001 per share
+
+ 
+
+ 
+
+ 
+
+ Authorized 800,000,000 and 580,000,000 shares as of December 31, 2005 and 2006
+
+ 
+
+ 
+
+ 
+
+ Issued and outstanding 100,000,000 and 92,631,656 shares as of December 31, 2005 and 2006
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Additional paid-in capital
+
+ 
+42,081
+ 
+ 
+96,505
+ 
+ 
+12,678
+
+ 
+
+ Accumulated other comprehensive loss
+
+ 
+(135
+)
+ 
+(8,484
+)
+ 
+(1,115
+)
+
+ Accumulated deficit
+
+ 
+(77,091
+)
+ 
+(140,854
+)
+ 
+(18,504
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total shareholders deficit
+
+ 
+(35,145
+)
+ 
+(52,833
+)
+ 
+(6,941
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total liabilities and shareholders deficit
+
+ 
+18,510
+ 
+ 
+278,858
+ 
+ 
+36,633
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ F-52 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+
+ 
+ 
+Year ended December 31
+ 
+
+ 
+ 
+ 2005 
+ 
+ 
+ 2006 
+ 
+
+ 
+ 
+RMB
+ 
+ 
+RMB
+ 
+ 
+US$
+ 
+
+ Statements of operations
+
+ 
+
+ 
+
+ 
+
+ Revenue
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Cost of revenue
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Gross profit
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Selling expenses
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ General and administrative expenses
+
+ 
+(989
+)
+ 
+(230
+)
+ 
+(31
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Operating loss
+
+ 
+(989
+)
+ 
+(230
+)
+ 
+(31
+)
+
+ Interest income
+
+ 
+30
+ 
+ 
+295
+ 
+ 
+39
+ 
+
+ Interest expense
+
+ 
+ 
+ 
+ 
+(2,348
+)
+ 
+(308
+)
+
+ Exchange gain
+
+ 
+70
+ 
+ 
+212
+ 
+ 
+28
+ 
+
+ Other income
+
+ 
+ 
+ 
+ 
+239
+ 
+ 
+31
+ 
+
+ Equity in losses of subsidiaries
+
+ 
+(36,267
+)
+ 
+(2,840
+)
+ 
+(373
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Loss before income tax expense
+
+ 
+(37,156
+)
+ 
+(4,672
+)
+ 
+(614
+)
+
+ Income tax expense
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net loss
+
+ 
+(37,156
+)
+ 
+(4,672
+)
+ 
+(614
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+Year ended December 31
+ 
+
+ 
+ 
+ 2005 
+ 
+ 
+ 2006 
+ 
+
+ 
+ 
+RMB
+ 
+ 
+RMB
+ 
+ 
+US$
+ 
+
+ Statements of cash flows
+
+ 
+
+ 
+
+ 
+
+ Net cash provided by (used in) operating activities
+
+ 
+1,518
+ 
+ 
+(2,398
+)
+ 
+(315
+)
+
+ Net cash used in investing activities
+
+ 
+(34,297
+)
+ 
+(139,847
+)
+ 
+(18,372
+)
+
+ Net cash provided by financing activities
+
+ 
+32,904
+ 
+ 
+271,479
+ 
+ 
+35,665
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net increase in cash and cash equivalents
+
+ 
+125
+ 
+ 
+129,234
+ 
+ 
+16,978
+ 
+
+ Effect of exchange rate changes on cash and cash equivalents
+
+ 
+(83
+)
+ 
+(10,188
+)
+ 
+(1,338
+)
+
+ Cash and cash equivalents at the beginning of year
+
+ 
+ 
+ 
+ 
+42
+ 
+ 
+5
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Cash and cash equivalents at the end of year
+
+ 
+42
+ 
+ 
+119,088
+ 
+ 
+15,645
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ (a) Basis of presentation 
+ In the Company-only financial statements, the Company s investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since inception. The Company-only
+financial statements should be read in conjunction with the Company s consolidated financial statements. 
+ The Company records its
+investment in and advances to its direct and indirect subsidiaries under the equity method of accounting as prescribed in APB Opinion No. 18 ( APB 18 ), The Equity Method of Accounting for Investments in Common Stock. Such
+investment and advances are presented as Investment in subsidiaries on the balance sheet and share of the direct and indirect subsidiaries profits or losses is presented as Equity in (losses) profits of subsidiaries on
+the statements of operations. Advances to direct and indirect subsidiaries amounted to RMB48,067 and RMB134,654 (US$17,690) in 2005 and 2006, respectively. 
+ 
+
+ F-53 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+ The subsidiaries did not pay any dividend to the Company for the year presented. 
+ Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted by reference to the disclosures in the
+consolidated financial statements. 
+ (b) Excess losses over investment 
+ In accordance with APB 18, losses in excess of the Company s investment in subsidiaries and VIE subsidiary are not recognized. Such excess losses amounted to RMB34,482 as of January 1, 2005.
+
+ (c) Commitments 
+ The
+Company does not have any significant commitments or long-term obligations as of the year presented. 
+ 
+
+26.
+PRO FORMA LOSS PER SHARE (Unaudited) 
+ In 2006, the Company issued convertible redeemable preferred shares (Note 12) that will convert automatically into ordinary shares upon the completion of an IPO. Assuming the conversion had occurred on a hypothetical
+basis on January 1, 2006, based on existing terms of the various series of preferred shares as of December 31, 2006, the pro forma basic and diluted loss per share for the year ended December 31, 2006 is calculated as follows:
+
+ 
+
+ 
+ 
+December 31, 2006
+ 
+
+ 
+ 
+RMB
+ 
+ 
+US$
+ 
+
+ Numerator:
+
+ 
+
+ 
+
+ Loss attributable to ordinary shareholders
+
+ 
+(52,030
+)
+ 
+(6,835
+)
+
+ Accretion of Series A convertible redeemable preferred shares
+
+ 
+10,695
+ 
+ 
+1,405
+ 
+
+ Accretion of Series B convertible redeemable preferred shares
+
+ 
+31,555
+ 
+ 
+4,145
+ 
+
+ Amortization of premium on Series B convertible redeemable preferred shares upon exercise of warrants
+
+ 
+(23
+)
+ 
+
+ (3
+
+ )
+
+ Accretion of Series C convertible redeemable preferred shares upon exercise of warrants
+
+ 
+1,960
+ 
+ 
+257
+ 
+
+ Accretion of beneficial conversion feature on Series C convertible redeemable preferred shares
+
+ 
+3,606
+ 
+ 
+474
+ 
+
+ Beneficial conversion feature on Series C convertible redeemable preferred shares
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Numerator for pro forma basic and diluted loss per share
+
+ 
+(4,237
+)
+ 
+(557
+
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Denominator:
+
+ 
+
+ 
+
+ Number of shares outstanding, opening
+
+ 
+100,000,000
+ 
+ 
+100,000,000
+ 
+
+ Conversion of convertible redeemable preferred shares to ordinary shares
+
+ 
+289,204,322
+ 
+ 
+289,204,322
+ 
+
+ Weighted average number of shares cancelled (7,368,364 shares)
+
+ 
+(1,550,807
+)
+ 
+(1,550,807
+)
+
+ Denominator for pro forma basic and diluted loss per share
+
+ 
+387,653,515
+ 
+ 
+387,653,515
+ 
+
+ Pro forma basic and diluted loss per share
+
+ 
+(0.01
+)
+ 
+(0.001
+)
+
+ The nonrecurring charge related to the beneficial conversion feature on Series C convertible
+redeemable preferred shares was excluded from the pro forma loss per share calculation. 
+ 
+
+ F-54 
+
+Table of Contents
+
+ 
+CGEN DIGITAL MEDIA COMPANY LIMITED 
+ UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
+
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+
+ 
+ 
+Note
+ 
+December 31,
+2006
+ 
+ June 30,
+ 2007
+
+ 
+ Pro
+forma
+shareholders 
+equity at
+ June 30,
+ 2007
+
+ 
+ 
+ 
+ 
+RMB
+ 
+RMB
+ 
+US$
+ 
+ RMB 
+ 
+ US$ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Note 2(a)
+
+ ASSETS
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Current assets:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Cash and cash equivalents
+
+ 
+
+ 
+171,137
+ 
+193,133
+ 
+25,372
+ 
+
+ 
+
+ Restricted cash
+
+ 
+
+ 
+5,193
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ Accounts receivable (net of allowance of RMB10,126 at December 31, 2006 and RMB1,986 (US$261) at June 30, 2007)
+
+ 
+3
+ 
+92,270
+ 
+156,866
+ 
+20,608
+ 
+
+ 
+
+ Prepayments and other current assets
+
+ 
+4
+ 
+23,166
+ 
+22,622
+ 
+2,972
+ 
+
+ 
+
+ Deferred tax asset
+
+ 
+15
+ 
+ 
+ 
+74,804
+ 
+9,827
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ Total current assets
+
+ 
+
+ 
+291,766
+ 
+447,425
+ 
+58,779
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ Non-current assets:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Property and equipment, net
+
+ 
+5
+ 
+50,939
+ 
+55,194
+ 
+7,251
+ 
+
+ 
+
+ Intangible asset, net
+
+ 
+6
+ 
+3,336
+ 
+3,111
+ 
+409
+ 
+
+ 
+
+ Prepayments
+
+ 
+4
+ 
+1,999
+ 
+1,150
+ 
+151
+ 
+
+ 
+
+ Deferred initial public offerings costs
+
+ 
+7
+ 
+ 
+ 
+16,617
+ 
+2,183
+ 
+
+ 
+
+ Other assets
+
+ 
+
+ 
+614
+ 
+487
+ 
+64
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ Total non-current assets
+
+ 
+
+ 
+56,888
+ 
+76,559
+ 
+10,058
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ Total assets
+
+ 
+
+ 
+348,654
+ 
+523,984
+ 
+68,837
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ LIABILITIES AND SHAREHOLDERS (DEFICIT) EQUITY
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Current liabilities:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Short-term borrowing
+
+ 
+8
+ 
+5,000
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ Accounts payable
+
+ 
+
+ 
+7,451
+ 
+18,675
+ 
+2,454
+ 
+
+ 
+
+ Accrued expenses and other liabilities
+
+ 
+9
+ 
+21,396
+ 
+43,498
+ 
+5,714
+ 
+
+ 
+
+ Advances from customers
+
+ 
+10
+ 
+19,278
+ 
+19,400
+ 
+2,549
+ 
+
+ 
+
+ Business and other taxes payable
+
+ 
+11
+ 
+15,971
+ 
+30,215
+ 
+3,969
+ 
+
+ 
+
+ Unrecognized tax benefit
+
+ 
+15
+ 
+ 
+ 
+82,013
+ 
+10,774
+ 
+
+ 
+
+ Amount due to related parties
+
+ 
+18
+ 
+34
+ 
+26
+ 
+3
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ Total current liabilities
+
+ 
+
+ 
+69,130
+ 
+193,827
+ 
+25,463
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ Non-current liabilities:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Asset retirement obligation
+
+ 
+12
+ 
+666
+ 
+951
+ 
+125
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ Total non-current liabilities
+
+ 
+
+ 
+666
+ 
+951
+ 
+125
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ Total liabilities
+
+ 
+
+ 
+69,796
+ 
+194,778
+ 
+25,588
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ The accompanying notes are an integral part of the unaudited condensed consolidated
+financial statements. 
+ 
+
+ F-55 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+
+ 
+ 
+Note
+ 
+December 31,
+2006
+ 
+ 
+ June 30,
+ 2007
+
+ 
+ 
+ Pro
+forma
+shareholders 
+equity at
+June 30,
+ 2007
+
+ 
+
+ 
+ 
+ 
+ 
+RMB
+ 
+ 
+RMB
+ 
+ 
+US$
+ 
+ 
+ RMB 
+ 
+ 
+ US$ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+Note 2(a)
+ 
+
+ Convertible redeemable preferred shares:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Series C, par value
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ US$0.000001 per share
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Authorized 150,000,000 shares as of December 31, 2006 and June 30, 2007
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Issued and outstanding 117,767,082 shares as of December 31, 2006 and June 30, 2007
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Redemption value US$0.3054 per share as of December 31, 2006 and June 30, 2007
+
+ 
+13
+ 
+137,536
+ 
+ 
+173,520
+ 
+ 
+22,796
+ 
+ 
+
+ 
+
+ Series B, par value
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ US$0.000001 per share
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Authorized 130,000,000 shares as of December 31, 2006 and June 30, 2007
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Issued and outstanding 127,752,161 shares as of December 31, 2006 and June 30, 2007
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Redemption value US$0.1701 per share as of December 31, 2006 and June 30, 2007
+
+ 
+13
+ 
+146,857
+ 
+ 
+150,521
+ 
+ 
+19,774
+ 
+ 
+
+ 
+
+ Series A, par value
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ US$0.000001 per share
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Authorized 100,000,000 shares as of December 31, 2006 and June 30, 2007
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Issued and outstanding 43,685,079 shares as of December 31, 2006 and June 30, 2007
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Redemption value US$0.1545 per share as of December 31, 2006 and June 30, 2007
+
+ 
+13
+ 
+47,298
+ 
+ 
+48,328
+ 
+ 
+6,349
+ 
+ 
+
+ 
+
+ Commitment and contingencies
+
+ 
+21
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Shareholders (deficit) equity:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Ordinary shares, par value US$0.000001 per share
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Authorized 580,000,000 shares as of December 31, 2006 and June 30, 2007
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Issued and outstanding 92,631,656 shares as of December 31, 2006 and June 30, 2007
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Additional paid-in capital
+
+ 
+
+ 
+96,505
+ 
+ 
+96,505
+ 
+ 
+12,678
+ 
+ 
+493,364
+ 
+ 
+64,814
+ 
+
+ Accumulated other comprehensive loss
+
+ 
+
+ 
+(8,484
+)
+ 
+(12,640
+)
+ 
+(1,660
+)
+ 
+(12,640
+)
+ 
+(1,660
+)
+
+ Accumulated deficit
+
+ 
+
+ 
+(140,854
+)
+ 
+(127,028
+)
+ 
+(16,688
+)
+ 
+(151,518
+)
+ 
+(19,905
+)
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total shareholders (deficit) equity
+
+ 
+
+ 
+(52,833
+)
+ 
+(43,163
+)
+ 
+(5,670
+)
+ 
+329,206
+ 
+ 
+43,249
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Total liabilities and shareholders (deficit) equity
+
+ 
+
+ 
+348,654
+ 
+ 
+523,984
+ 
+ 
+68,837
+ 
+ 
+
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ The accompanying notes are an integral part of the unaudited condensed consolidated
+financial statements. 
+ 
+
+ F-56 
+
+Table of Contents
+
+ 
+CGEN DIGITAL MEDIA COMPANY LIMITED 
+ UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF
+OPERATIONS 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+
+ 
+ 
+ Note
+
+ 
+For the six months ended June 30,
+ 
+
+ 
+ 
+ 
+ 2006 
+ 
+ 
+ 2007 
+ 
+ 
+ 2007 
+ 
+
+ 
+ 
+ 
+ 
+RMB
+ 
+ 
+RMB
+ 
+ 
+US$
+ 
+
+ Net revenues:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Advertising revenues
+
+ 
+
+ 
+42,163
+ 
+ 
+133,448
+ 
+ 
+17,531
+ 
+
+ Other services revenues
+
+ 
+
+ 
+6,273
+ 
+ 
+8,515
+ 
+ 
+1,119
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+48,436
+ 
+ 
+141,963
+ 
+ 
+18,650
+ 
+
+ Cost of revenues:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Advertising revenues
+
+ 
+
+ 
+(39,563
+)
+ 
+(61,893
+)
+ 
+(8,131
+)
+
+ Other services revenues
+
+ 
+
+ 
+(4,549
+)
+ 
+(7,853
+)
+ 
+(1,032
+)
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Gross profit
+
+ 
+
+ 
+4,324
+ 
+ 
+72,217
+ 
+ 
+9,487
+ 
+
+ Operating expenses:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Selling expenses
+
+ 
+
+ 
+(6,264
+)
+ 
+(12,396
+)
+ 
+(1,628
+)
+
+ General and administrative expenses
+
+ 
+
+ 
+(7,518
+)
+ 
+(9,319
+)
+ 
+(1,224
+)
+
+ Depreciation expenses
+
+ 
+
+ 
+(126
+)
+ 
+(141
+)
+ 
+(19
+)
+
+ Reversal of bad debt provision
+
+ 
+
+ 
+ 
+ 
+ 
+8,140
+ 
+ 
+1,069
+ 
+
+ Loss on disposal of property and equipment
+
+ 
+
+ 
+(2,335
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Operating (loss) income
+
+ 
+
+ 
+(11,919
+)
+ 
+58,501
+ 
+ 
+7,685
+ 
+
+ Interest income
+
+ 
+
+ 
+103
+ 
+ 
+1,344
+ 
+ 
+177
+ 
+
+ Interest expense
+
+ 
+
+ 
+(299
+)
+ 
+(61
+)
+ 
+(8
+)
+
+ Exchange gain
+
+ 
+
+ 
+179
+ 
+ 
+1,579
+ 
+ 
+207
+ 
+
+ Other (expenses) income, net
+
+ 
+
+ 
+(81
+)
+ 
+350
+ 
+ 
+46
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ (Loss) income before income tax expenses
+
+ 
+
+ 
+(12,017
+)
+ 
+61,713
+ 
+ 
+8,107
+ 
+
+ Income tax expenses
+
+ 
+15
+ 
+ 
+ 
+ 
+(7,209
+)
+ 
+(947
+)
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net (loss) income
+
+ 
+
+ 
+(12,017
+)
+ 
+54,504
+ 
+ 
+7,160
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ The accompanying notes are an integral part of the unaudited condensed consolidated
+financial statements. 
+ 
+
+ F-57 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ UNAUDITED INTERIM CONDENSED CONSOLIDATED 
+ STATEMENTS OF OPERATIONS (Continued) 
+ (Amounts in thousands,
+except for number of shares and per share data) 
+ 
+
+ 
+ 
+Note
+ 
+For the six months ended June 30,
+ 
+
+ 
+ 
+ 
+2006
+ 
+ 
+2007
+ 
+ 
+2007
+ 
+
+ 
+ 
+ 
+ 
+RMB
+ 
+ 
+RMB
+ 
+ 
+US$
+ 
+
+ (Loss) income:
+
+ 
+
+ 
+
+ 
+
+ 
+
+ Cumulative dividend on 8% accumulating convertible redeemable preferred shares
+
+ 
+
+ 
+(54
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Accretion of 8% accumulating convertible redeemable preferred shares
+
+ 
+
+ 
+(216
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Redemption of 8% accumulating convertible redeemable preferred shares
+
+ 
+
+ 
+705
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Accretion of Series A convertible redeemable preferred shares
+
+ 
+
+ 
+(5,706
+)
+ 
+(1,030
+)
+ 
+(135
+)
+
+ Accretion of Series B convertible redeemable preferred shares
+
+ 
+
+ 
+(15,940
+)
+ 
+(3,824
+)
+ 
+(502
+)
+
+ Amortization of premium on Series B convertible redeemable preferred shares converted from the exercise of
+warrants
+
+ 
+
+ 
+ 
+ 
+ 
+160
+ 
+ 
+21
+ 
+
+ Accretion of Series C convertible redeemable preferred shares
+
+ 
+
+ 
+ 
+ 
+ 
+(13,285
+)
+ 
+(1,745
+)
+
+ Accretion of beneficial conversion feature on Series C convertible redeemable preferred shares
+
+ 
+
+ 
+ 
+ 
+ 
+(22,699
+)
+ 
+(2,982
+)
+
+ Allocation of net income to participating preferred shareholders
+
+ 
+
+ 
+ 
+ 
+ 
+(10,472
+)
+ 
+(1,376
+)
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ (Loss) income attributable to ordinary shareholders
+
+ 
+
+ 
+(33,228
+)
+ 
+3,354
+ 
+ 
+441
+ 
+
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Basic (loss) income per share
+
+ 
+17
+ 
+(0.33
+)
+ 
+0.04
+ 
+ 
+0.005
+ 
+
+ Diluted (loss) income per share
+
+ 
+17
+ 
+(0.33
+)
+ 
+0.03
+ 
+ 
+0.005
+ 
+
+ Weighted average ordinary shares used in basic (loss) income per share computation
+
+ 
+17
+ 
+100,000,000
+ 
+ 
+92,631,656
+ 
+ 
+92,631,656
+ 
+
+ Weighted average ordinary shares used in diluted (loss) income per share computation
+
+ 
+17
+ 
+100,000,000
+ 
+ 
+96,588,836
+ 
+ 
+96,588,836
+ 
+
+ Pro forma basic income per share on an as converted basis
+
+ 
+24
+ 
+
+ 
+0.14
+ 
+ 
+0.02
+ 
+
+ Pro forma diluted income per share on an as converted basis
+
+ 
+24
+ 
+
+ 
+0.14
+ 
+ 
+0.02
+ 
+
+ Shares used in pro forma basic income per share computation
+
+ 
+24
+ 
+
+ 
+381,835,978
+ 
+ 
+381,835,978
+ 
+
+ Shares used in pro forma diluted income per share computation
+
+ 
+24
+ 
+
+ 
+385,793,158
+ 
+ 
+385,793,158
+ 
+
+ The accompanying notes are an integral part of the unaudited condensed consolidated
+financial statements. 
+ 
+
+ F-58 
+
+Table of Contents
+
+ 
+CGEN DIGITAL MEDIA COMPANY LIMITED 
+ UNAUDITED INTERIM CONDENSED CONSOLIDATED 
+
+STATEMENTS OF CASH FLOWS 
+ (Amounts in thousand, except for number of shares and per share data) 
+ 
+
+ 
+ 
+For the six months ended June 30,
+ 
+
+ 
+ 
+ 2006 
+ 
+ 
+ 2007 
+ 
+ 
+ 2007 
+ 
+
+ 
+ 
+RMB
+ 
+ 
+RMB
+ 
+ 
+US$
+ 
+
+ Cash flows from operating activities:
+
+ 
+
+ 
+
+ 
+
+ Net (loss) income
+
+ 
+(12,017
+)
+ 
+54,504
+ 
+ 
+7,160
+ 
+
+ Adjustments to reconcile net (loss) income to net cash used in operating activities:
+
+ 
+
+ 
+
+ 
+
+ Loss on disposal of property and equipment
+
+ 
+2,335
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Amortization of intangible assets
+
+ 
+225
+ 
+ 
+225
+ 
+ 
+30
+ 
+
+ Depreciation of property and equipment
+
+ 
+4,586
+ 
+ 
+7,055
+ 
+ 
+927
+ 
+
+ Reversal of bad debt provision
+
+ 
+ 
+ 
+ 
+(8,140
+)
+ 
+(1,069
+)
+
+ Asset retirement obligation accretion expense
+
+ 
+16
+ 
+ 
+15
+ 
+ 
+2
+ 
+
+ Deferred tax asset
+
+ 
+ 
+ 
+ 
+(74,804
+)
+ 
+(9,827
+)
+
+ Changes in operating assets and liabilities:
+
+ 
+
+ 
+
+ 
+
+ Accounts receivable
+
+ 
+(38,633
+)
+ 
+(56,456
+)
+ 
+(7,417
+)
+
+ Prepayments and other current assets
+
+ 
+(12,693
+)
+ 
+1,393
+ 
+ 
+183
+ 
+
+ Other assets
+
+ 
+127
+ 
+ 
+127
+ 
+ 
+17
+ 
+
+ Accounts payable
+
+ 
+2,463
+ 
+ 
+1,979
+ 
+ 
+260
+ 
+
+ Accrued expenses and other liabilities
+
+ 
+(2,750
+)
+ 
+5,485
+ 
+ 
+720
+ 
+
+ Advances from customers
+
+ 
+1,349
+ 
+ 
+122
+ 
+ 
+16
+ 
+
+ Business and other taxes payable
+
+ 
+4,607
+ 
+ 
+14,244
+ 
+ 
+1,871
+ 
+
+ Unrecognized tax benefit
+
+ 
+ 
+ 
+ 
+82,013
+ 
+ 
+10,774
+ 
+
+ Amount due to related parties
+
+ 
+(943
+)
+ 
+(8
+)
+ 
+(1
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net cash (used in) provided by operating activities
+
+ 
+(51,328
+)
+ 
+27,754
+ 
+ 
+3,646
+ 
+
+ Cash flows from investing activities:
+
+ 
+
+ 
+
+ 
+
+ Restricted cash
+
+ 
+(5,193
+)
+ 
+5,193
+ 
+ 
+682
+ 
+
+ Acquisition of property and equipment
+
+ 
+(4,410
+)
+ 
+(1,795
+)
+ 
+(236
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net cash (used in) provided by investing activities
+
+ 
+(9,603
+)
+ 
+3,398
+ 
+ 
+446
+ 
+
+ The accompanying notes are an integral part of the unaudited condensed consolidated
+financial statements. 
+ 
+
+ F-59 
+
+Table of Contents
+
+ CGEN DIGITAL MEDIA COMPANY LIMITED 
+ UNAUDITED INTERIM CONDENSED CONSOLIDATED 
+ STATEMENTS OF CASH FLOWS (Continued) 
+ (Amounts in thousand,
+except for number of shares and per share data) 
+ 
+
+ 
+ 
+For the six months ended June 30,
+ 
+
+ 
+ 
+ 2006 
+ 
+ 
+ 2007 
+ 
+ 
+ 2007 
+ 
+
+ 
+ 
+RMB
+ 
+ 
+RMB
+ 
+ 
+US$
+ 
+
+ Cash flows from financing activities:
+
+ 
+
+ 
+
+ 
+
+ Proceeds from short-term borrowings
+
+ 
+5,000
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Repayment of short-term borrowings
+
+ 
+(8,250
+)
+ 
+(5,000
+)
+ 
+(657
+)
+
+ Repayment of long-term borrowings
+
+ 
+(13,350
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Proceeds from issuance of convertible redeemable preferred shares
+
+ 
+111,348
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Repurchase of 8% accumulating convertible redeemable preferred shares
+
+ 
+(15,090
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Proceeds from capital injection
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Payment of issuance cost of convertible redeemable preferred shares
+
+ 
+(1,677
+)
+ 
+ 
+ 
+ 
+ 
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Net cash provided by (used in) financing activities
+
+ 
+77,981
+ 
+ 
+(5,000
+)
+ 
+(657
+)
+
+ Net increase in cash and cash equivalents
+
+ 
+17,050
+ 
+ 
+26,152
+ 
+ 
+3,435
+ 
+
+ Effect of exchange rate changes on cash and cash equivalents
+
+ 
+(881
+)
+ 
+(4,156
+)
+ 
+(546
+)
+
+ Cash and cash equivalents at the beginning of period
+
+ 
+9,836
+ 
+ 
+171,137
+ 
+ 
+22,483
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Cash and cash equivalents at the end of period
+
+ 
+26,005
+ 
+ 
+193,133
+ 
+ 
+25,372
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Supplemental disclosures of cash flow information:
+
+ 
+
+ 
+
+ 
+
+ Interest paid
+
+ 
+220
+ 
+ 
+61
+ 
+ 
+8
+ 
+
+ Supplemental schedule of non-cash activities:
+
+ 
+
+ 
+
+ 
+
+ Non-cash acquisition of property and equipment
+
+ 
+2,585
+ 
+ 
+9,245
+ 
+ 
+1,215
+ 
+
+ Series B convertible redeemable preferred shares issued in exchange for advisory services
+
+ 
+2,299
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Non-cash investments from asset retirement obligation
+
+ 
+189
+ 
+ 
+270
+ 
+ 
+35
+ 
+
+ The accompanying notes are an integral part of the unaudited condensed consolidated
+financial statements. 
+ 
+
+ F-60 
+
+Table of Contents
+
+ 
+CGEN DIGITAL MEDIA COMPANY LIMITED 
+ UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF
+
+ CHANGES IN SHAREHOLDERS DEFICIT 
+ (Amounts in thousands, except for number of shares and per share data) 
+ 
+
+ 
+ 
+Number of
+ordinary
+shares
+ 
+Ordinary
+shares
+ 
+Additional
+paid-in
+capital
+ 
+Accumulated
+other
+comprehensive
+loss
+ 
+ 
+Accumulated
+deficit
+ 
+ 
+Shareholders 
+deficit
+ 
+ 
+Comprehensive
+(loss) income
+ 
+
+ 
+ 
+ 
+ 
+RMB
+ 
+RMB
+ 
+RMB
+ 
+ 
+RMB
+ 
+ 
+RMB
+ 
+ 
+RMB
+ 
+
+ Balance at January 1, 2006
+
+ 
+100,000,000
+ 
+ 
+ 
+42,081
+ 
+(135
+)
+ 
+(77,091
+)
+ 
+(35,145
+)
+ 
+
+ Cumulative dividend on 8% accumulating convertible redeemable preferred shares
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(54
+)
+ 
+(54
+)
+ 
+ 
+ 
+
+ Accretion of 8% accumulating convertible redeemable preferred shares
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(216
+)
+ 
+(216
+)
+ 
+ 
+ 
+
+ Redemption of 8% accumulating convertible redeemable preferred shares
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+705
+ 
+ 
+705
+ 
+ 
+ 
+ 
+
+ Accretion of Series A convertible redeemable preferred shares
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(5,706
+)
+ 
+(5,706
+)
+ 
+ 
+ 
+
+ Accretion of Series B convertible redeemable preferred shares
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(15,940
+)
+ 
+(15,940
+)
+ 
+ 
+ 
+
+ Foreign currency translation adjustment
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(757
+)
+ 
+ 
+ 
+ 
+(757
+)
+ 
+(757
+)
+
+ Net loss 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(12,017
+)
+ 
+(12,017
+)
+ 
+(12,017
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Balance at June 30, 2006
+
+ 
+100,000,000
+ 
+ 
+ 
+42,081
+ 
+(892
+)
+ 
+(110,319
+)
+ 
+(69,130
+)
+ 
+(12,774
+)
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Balance at January 1, 2007
+
+ 
+92,631,656
+ 
+ 
+ 
+96,505
+ 
+(8,484
+)
+ 
+(140,854
+)
+ 
+(52,833
+)
+ 
+
+ Accretion of Series A convertible redeemable preferred shares
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(1,030
+)
+ 
+(1,030
+)
+ 
+ 
+ 
+
+ Accretion of Series B convertible redeemable preferred shares
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(3,824
+)
+ 
+(3,824
+)
+ 
+ 
+ 
+
+ Amortization of premium on Series B convertible redeemable preferred shares converted from the exercise of
+warrants
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+160
+ 
+ 
+160
+ 
+ 
+ 
+ 
+
+ Accretion of Series C convertible redeemable preferred shares
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(13,285
+)
+ 
+(13,285
+)
+ 
+ 
+ 
+
+ Accretion of beneficial conversion feature on Series C convertible redeemable preferred shares
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(22,699
+)
+ 
+(22,699
+)
+ 
+ 
+ 
+
+ Foreign currency translation adjustment
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+(4,156
+)
+ 
+ 
+ 
+ 
+(4,156
+)
+ 
+(4,156
+)
+
+ Net income 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+54,504
+ 
+ 
+54,504
+ 
+ 
+54,504
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Balance at June 30, 2007
+
+ 
+92,631,656
+ 
+ 
+ 
+96,505
+ 
+(12,640
+)
+ 
+(127,028
+)
+ 
+(43,163
+)
+ 
+50,348
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ Balance at June 30, 2007 (US$)
+
+ 
+92,631,656
+ 
+ 
+ 
+12,678
+ 
+(1,660
+)
+ 
+(16,688
+)
+ 
+(5,670
+)
+ 
+6,614
+ 
+
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+ 
+
+ The accompanying notes are an integral part of the unaudited condensed consolidated
+financial statements. 
+ 
+
+ F-61 
+
+Table of Contents
+
+ 
+CGEN DIGITAL MEDIA COMPANY LIMITED 
+ NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED
+FINANCIAL STATEMENTS 
+ (Amounts in thousand, except for number of shares and per share data) 
+ 
+
+1.
+THE COMPANY AND BASIS OF PRESENTATION 
+ The accompanying unaudited interim condensed consolidated financial statements of CGEN Digital Media Company Limited (the Company ), its subsidiaries, CGEN Media Technology Co., Ltd. ( CGEN Hong Kong ) and CGEN
+Digital Technology (Shanghai) Co., Ltd. ( CGEN Shanghai ) and a variable interest entity ( VIE ) subsidiary, CGEN Digital Media Network Co., Ltd. ( CGEN Network ), collectively referred to as the Group , were
+prepared on a basis substantially consistent with the Group s audited financial statements for the year ended December 31, 2006. These unaudited interim condensed consolidated financial statements have been prepared in accordance with
+United States generally accepted accounting principles ( US GAAP ) for interim financial information. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for annual
+financial statements. 
+ In the opinion of the Company s management, the accompanying unaudited interim condensed consolidated financial
+statements contain all normal recurring adjustments necessary for a fair presentation of the Group s consolidated financial statements for the six months ended June 30, 2006 and 2007. The results of operations for the six months ended
+June 30, 2007 are not necessarily indicative of results to be expected for the full year. These interim consolidated financial statements should be read in conjunction with the Group s consolidated financial statements and related notes as
+of and for years ended December 31, 2005 and 2006. 
+ The Group is principally engaged in advertising services operations of out-of-home
+advertising network using flat-panel displays placed in public areas such as hypermarkets and supermarkets and to a lesser extent, provision of project management services in relation to indoor and outdoor promotion activities. The Group s
+principal geographic market is in the PRC. The Company does not conduct any substantive operation of its own and conducts its primary business operations through its VIE subsidiary in the People s Republic of China ( PRC ).
+
+ 
+
+2.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001414592_akela_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001414592_akela_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before buying our common shares. You should read the entire prospectus carefully, especially the sections entitled "Special Note Regarding Forward-Looking Statements" and "Risk Factors" and our financial statements and the related notes appearing at the end of this prospectus. Unless the context requires otherwise, references in this prospectus to "Akela," "we," "us" and "our" refer to Akela Pharma Inc. and its subsidiaries, as the context herein requires. Overview We are an integrated product development company primarily focused on therapeutics for pain utilizing our proprietary drug delivery technologies. Our lead product candidate is Fentanyl TAIFUN , a fentanyl formulation specifically designed to be delivered with our TAIFUN Multi-Dose Inhaler. We are developing Fentanyl TAIFUN as a rapid-acting inhaled opioid analgesic for treatment of break-through cancer pain. In June 2007, we entered into an exclusive license and development agreement with Janssen Pharmaceutica N.V. with respect to the continuing development and commercialization of Fentanyl TAIFUN . We believe, based upon the results of our clinical trials to date, that our Fentanyl TAIFUN product candidate, if approved by regulatory agencies, will deliver much faster onset of pain relief from break-through cancer pain at lower dosages than other non-injectable products currently indicated for break-through cancer pain. Our Phase IIb clinical trial, completed in August 2007, showed the median time to significant pain relief for patients using our Fentanyl TAIFUN was 5.2 minutes. This result was statistically significant versus placebo (p=0.007). We believe this offers significant clinical benefits for patients and physicians due to its rapid onset compared to other non-injectable therapies for break-through cancer pain. We have an open Investigational New Drug (IND) submission for Fentanyl TAIFUN , which was submitted to the U.S. Food and Drug Administration (FDA) in March 2006. We had an end-of-Phase II meeting with the FDA in August 2007 to present the data obtained and are now finalizing the design of the Phase III program required for submission of a New Drug Application, or NDA. We expect to commence our Phase III clinical trial during the first quarter of 2008. Break-through cancer-related pain has a severe impact on a patient's quality of life and can occur even if the individual is taking chronic pain medication on a regular basis. Break-through pain is a common component of chronic pain and is characterized by its rapid onset, intensity and relatively short duration. These intermittent flare-ups of intense pain "break-through" the effect of chronic pain medication. We believe currently available therapeutics targeted at break-through cancer pain are inadequate because of their higher dosage of fentanyl and comparatively longer time to onset. The current leading products in this market segment are Cephalon's Actiq lozenge and Fentora buccal tablet, both containing fentanyl as the active compound. According to data reported by the American Cancer Society, approximately 800,000 cancer patients in the United States will experience break-through pain in 2007. Data from EvaluatePharma shows that worldwide fentanyl sales in 2006 were $2.4 billion. We have developed a proprietary abuse-resistant delivery platform, which we call EDACS , or Extruded Deterrence of Abusable Controlled Substances, to address opioid abuse. We intend to initiate a Phase I clinical trial for our first product using EDACS technology in late 2007 and expect to rely on a Section 505(b)(2) NDA approval process with the FDA, although no submissions have been made to date. EDACS is manufactured by hot-melt extrusion of a homogeneously blended powder that can be formulated to provide a variety of dosing options including once-a-day extended pain release. We believe that our technology is superior to other approaches for abuse deterrence because products manufactured with EDACS are crush resistant and slow to dose-release in alcohol. In addition, our product candidates do not contain opioid antagonists, such as naltrexone, which we believe may be (unaudited) Pharma and Corporate Deferred corporate transaction costs $ $ 828 $ 2,231 Deferred financing fees 54 Other LRI Deferred financing fees, at cost, net of accumulated amortization of $269 (2005 $30) 35 Long-term investments, at cost, which approximates fair value 124 Long-term note receivable from lessor 692 Term deposit pledged as security for non-revolving loan 555 Other vulnerable to unwanted leaking of the antagonist, thereby reducing the effect of the opioid. Our product candidates are intended to compete with the current market-leading oral controlled-release opioid products, including Oxycontin , Avinza and Opana . Abuse of opioid pain medications is a significant medical and social problem. According to the National Survey on Drug Use and Health published in 2007 by the Substance Abuse and Mental Health Services Administration, during 2006 approximately 5.2 million people in the United States used prescription pain relievers for nonmedical purposes, an increase from the estimated 4.7 million in 2005. Current dosage forms of prescription pain relievers are often abused by dissolving them in alcohol or crushing and inhaling the tablets. The cost of U.S. opioid analgesic abuse (which includes costs relating to healthcare, criminal justice and the workplace) has been estimated by industry analysts in 2001 to be over $8.6 billion, which is the equivalent of $9.5 billion in 2005. In addition to our pain product candidates, our non-pain product candidates and our platform technologies include: GHRH (growth hormone releasing hormone) Our growth hormone releasing hormone is a synthetic analog of the natural human growth hormone releasing hormone, and is considered a new chemical entity. Our GHRH recently completed a pilot Phase II clinical trial outside the United States for the treatment of malnutrition associated with pre-dialysis stage chronic renal failure. The compound has been shown to have very high affinity for the pituitary GHRH receptor, and has a long circulating half life. CGRP (calcitonin gene related peptide) Our CGRP is a novel therapeutic currently in Phase IIb development outside the United States for the treatment of asthma. CGRP is a natural peptide (37 amino acids) produced in the lung in response to allergic stimuli. Unlike current asthma drugs, CGRP has been shown to possess a combination of bronchodilatory, bronchoprotective and anti-inflammatory properties in several preclinical animal models of allergic asthma. From a therapeutic point of view, if validated in human clinical trials, CGRP has the potential to become the first drug with these properties. PHARMAFILM Our transmucosal drug delivery film, which delivers drugs by being placed on the gum tissue, is suitable for drugs with poor oral bioavailability, that is, drugs that are not well-absorbed or are quickly degraded or deactivated when ingested orally. Advantages of our PHARMAFILM technology include suitability for a wide variety of drugs, a simple manufacturing process (in which neither water nor solvent is necessary for production) and excellent content uniformity. An IND has been submitted to the FDA with respect to this technology. To date, no submissions have been made to the FDA with respect to GHRH or CGRP. Our clinical operations group supports our product development activities by facilitating timely access, in a cost-effective manner, to highly competitive clinical patient populations. Strategy Our goal is to become a significant integrated product development company with a diversified product portfolio based on multiple drug delivery platforms. We intend to: Focus on pain We believe the pain market represents a substantial near-term opportunity as many existing therapeutics, such as fentanyl, have the potential to be delivered by inhalation technology and lead to improved clinical benefit. In addition, given the prevalence of opioid abuse, deterrent products are likely to be in demand. We believe our drug delivery technologies and formulation expertise will allow us to develop products that will meet these unmet medical needs. Pursue 505(b)(2) approvals We have selected the drugs incorporated in our proprietary delivery technologies, in part, due to their previously demonstrated safety and efficacy record in treating pain. We believe this will allow us to utilize the Section 505(b)(2) approval process with the FDA that may enable us to bring our product candidates to market more rapidly by relying for approval on studies conducted by others for which we have not obtained a right of reference. Leverage our drug delivery expertise We believe our proprietary technologies and drug delivery expertise will allow us to develop differentiated products that are faster acting, safer or less abusable than currently approved products. We intend to continue to identify therapies where our technology platform and expertise can be applied to improve the standard of care for patients. Maximize partnership opportunities We intend to enter into partnering arrangements with international pharmaceutical companies to market our product candidates worldwide. For our non-core product candidates, such as CGRP and GHRH, we intend to enter into partnership arrangements to advance clinical development prior to initiation of pivotal clinical trials. Actively develop, in-license or acquire complementary products We will continue to pursue the in-house development of additional product candidates complementary to our existing portfolio. We evaluate in-licensing and acquisition opportunities to broaden our pipeline in the core therapeutic areas and drug delivery platforms, as demonstrated by our recent acquisition of PharmaForm. Risk Factors We are subject to a number of risks of which you should be aware before you decide to buy our common shares. These risks are more fully described under the heading "Risk Factors," and include, among others, the following: All of our products are in the development stages; Our competitors may be able to use their own proprietary technologies to launch products that are similar to our products but do not infringe our patents, which may negatively impact our ability to achieve our business objectives; We have not received regulatory approval for, or generated commercial revenues from, any of our product candidates; If we do not successfully obtain regulatory approval for, or commercialize any of, our product candidates, we will be unable to achieve our business objectives; We have incurred net losses and, as of June 30, 2007, we had an accumulated deficit of $43.5 million; We expect to continue to incur losses over the next several years, and we may never become profitable; We do not expect to pay dividends in the near future, if at all; and An active and liquid trading market in our common shares may not develop. Non-competition agreement $ 1,400 $ 194 $ 1,206 FDA/DEA certifications 1,000 83 917 Customer contracts and relationships 2,000 278 1,722 Patents 984 202 782 Trademarks 17 11 The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. Subject to Completion, dated November 9, 2007 AKELA PHARMA INC. Maximum of 3,846,000 Common Shares Minimum of 2,000,000 Common Shares Recent Events In June 2007, we entered into an exclusive license and development agreement with Janssen Pharmaceutica N.V. with respect to the continuing development and commercialization of Fentanyl TAIFUN . In January 2007, we acquired Texas-based Formulation Technologies, L.L.C., a specialty pharmaceutical company known as PharmaForm, for approximately $13.0 million, including $7.5 million of cash, common shares valued at $4.4 million and transaction costs. Additional consideration is payable by us upon completion of certain milestones relating to PharmaForm's drug development programs as discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources." We spun off our preclinical contract research services business through an initial public offering in Canada in August 2006. In September and November 2006, we sold the balance of our holdings in that entity, now known as LAB Research Inc. (LRI). We have included in this prospectus an unaudited pro forma statement of operations for the 12 months ended December 31, 2006, and the six months ended June 30, 2007, which reflect the impact of the PharmaForm and LRI transactions on our consolidated financial statements as if both had occurred as of January 1, 2006. Corporate Information Our registered office is at 3333 C te-Vertu, Suite 710, Saint-Laurent, Qu bec, Canada H4R 2N1. Our telephone number is (514) 315-3330 and our facsimile number is (514) 315-3325. Our principal place of business and agent for service of process in the United States is Akela Pharma Inc., 11400 Burnet Road, Suite 4010, Austin, TX 78758, telephone number (512) 834-0449. We also maintain a website at www.akelapharma.com. The information contained in, or that can be accessed through, our website is not a part of this prospectus. Customer list $ 218 $ 218 $ Patents 829 173 656 Trademarks 17 10 We are offering for sale our common shares, no par value, on a minimum/maximum "best efforts" basis as to a minimum number of common shares that equate to gross proceeds of $13,000,000 and a maximum number of common shares that equate to gross proceeds of $24,999,000. We anticipate the initial public offering price will be $6.50. At the assumed price of $6.50 per share, we will offer for sale a minimum of 2,000,000 shares and a maximum of 3,846,000 shares. Our common shares are currently listed on the Toronto Stock Exchange under the symbol "AKL." This is the initial public offering of our common shares in the United States and no public market currently exists in the United States for our common shares. On November 6, 2007, the closing price of our shares on the Toronto Stock Exchange was C$6.00, or $6.49 in U.S. dollars based upon the noon buying rate in New York City on that date for cable transfers in foreign currencies as published by the Federal Reserve Bank of New York on such date of $1.00 = C$0.9243. We have applied to have our common shares listed on The NASDAQ Global Market under the symbol "AKLA." We expect that the public offering price for our shares will be determined by negotiations between us and the underwriters and will take into account, among other things, the price of our common shares on the Toronto Stock Exchange on the date this offering is priced. Our common shares are being offered by the underwriters on a "best efforts" basis as to a minimum of 2,000,000 common shares and a maximum of 3,846,000 common shares. Following effectiveness of the registration statement of which this prospectus is a part and the determination of the price per common share sold in the offering, subscriptions for our common shares will be deposited into a non-interest bearing escrow account maintained by the escrow agent, American Stock Transfer and Trust Company. Unless $13,000,000 of proceeds (representing the sale of 2,000,000 common shares at the assumed initial offering price of $6.50) are on deposit in the escrow account by December 9, 2007, the offering will terminate and all proceeds will be promptly refunded to investors by the escrow agent, without deduction or interest. We may agree with the underwriters to extend the offering to December 23, 2007. Investors will have no right to a return of their funds during this escrow period. All payments for the common shares must be made payable to American Stock Transfer and Trust Company, Escrow Agent for Akela Pharma Inc., and mailed or delivered to JP Morgan Chase, 55 Water Street, New York, New York 10041, with such additional information as instructed by the underwriters. Investing in our common shares involves risks that are described in the "Risk Factors" section beginning on page 12 of this prospectus. You should read this prospectus carefully before you make an investment decision.
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001414850_china_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001414850_china_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in the ADSs discussed under Risk Factors, before deciding whether to buy our ADSs. Our Business We are the largest retail drugstore chain in China based on the number of directly operated stores. As of September 30, 2007, our store network was comprised of 1,791 directly operated drugstores located in 62 cities in China, and we believe that we have the leading market position in a number of the most developed cities in China, including Shenzhen, Guangzhou, Dalian, Hangzhou, Ningbo, Suzhou and Kunming, in terms of store count. According to the China Drugstore Magazine, we had the highest revenue among all directly operated retail drugstore chains in China in 2004, 2005 and 2006. As the drugstore industry in China is highly fragmented, we estimate that our share of the retail market of pharmaceutical products in China was less than 0.5% of the total transaction value in each of these three years. We provide our customers with high-quality, professional and convenient pharmacy services and a wide variety of other merchandise, including over-the-counter, or OTC, drugs, nutritional supplements, herbal products, personal care products, family care products, as well as convenience products including consumable, seasonal and promotional items. Unlike most other drugstores and retail drugstore chains in China, we also offer products under our own brand names, which we refer to as private label products. We believe our private label product offering distinguishes our company from our key competitors. We launched our first private label product in September 2005 and currently offer 1,108 private label products. Sales of our private label products accounted for 17.5% and 17.6% of our revenue and 34.6% and 31.2% of our gross profit in 2006 and the six months ended June 30, 2007, respectively. Since our inception in 1995, we have rapidly expanded our operations, primarily through organic growth. The numbers of our directly operated drugstores increased from 668 as of December 31, 2004 to 1,115 as of December 31, 2005 and to 1,446 as of December 31, 2006. Our stores are generally located in well established residential communities and prime retail locations in major cities in China s coastal and adjoining provinces. As of September 30, 2007, we had 1,791 directly operated drugstores. Our revenue increased from RMB842.9 million in 2004 to RMB1,313.2 million in 2005 and to RMB1,732.4 million (US$227.6 million) in 2006, representing a compound annual growth rate, or CAGR, of 43.4% from 2004 to 2006. In the six months ended June 30, 2007, our revenue amounted to RMB946.3 million (US$124.3 million), representing an increase of 18.4% over the same period in 2006. Our Industry We operate in the large and growing drugstore industry in China, which we believe offers compelling industry fundamentals and benefits from favorable demographics. With approximately one-fifth of the world s population and one of the world s fastest-growing economies, China presents significant potential for the drugstore industry. According to the PRC State Information Center, a research institute under the PRC National Development and Reform Commission, or the NDRC, and Frost Sullivan, an independent market research and consulting firm, total expenditure on pharmaceutical products in China increased from RMB175.6 billion in 2002 to RMB360.3 billion (US$47.3 billion) in 2006, representing a CAGR of 19.7% in that period. Frost Sullivan expects expenditure on pharmaceutical products in China to grow at 23.5% annually between 2007 and 2011, and to reach Table of Contents The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. Subject to Completion. Dated , 2007 China Nepstar Chain Drugstore Ltd. 20,625,000 American Depositary Shares Representing 41,250,000 Ordinary Shares This is an initial public offering of American depositary shares, or ADSs, of China Nepstar Chain Drugstore Ltd., or China Nepstar. China Nepstar is offering 20,625,000 ADSs. Each ADS represents two ordinary shares, par value US$0.0001 per share, of China Nepstar. The ADSs are evidenced by American depositary receipts, or ADRs. Prior to this offering, there has been no public market for our ADSs or our ordinary shares. It is currently estimated that the initial public offering price per ADS will be between US$11.50 and US$13.50. We have received approval to list the ADSs on the New York Stock Exchange under the symbol NPD. See Risk Factors beginning on page 9 to read about risks you should consider before buying the ADSs. Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. Per ADS Total Initial public offering price US$ US$ Underwriting discount US$ US$ Proceeds, before expenses, to China Nepstar US$ US$ To the extent the underwriters sell more than 20,625,000 ADSs, the underwriters have an option to purchase up to 3,093,750 additional ADSs from China Nepstar at the initial public offering price less the underwriting discount. The underwriters expect to deliver the ADSs evidenced by the ADRs against payment in U.S. dollars in New York, New York on , 2007. Goldman Sachs (Asia) L.L.C. Goldman Sachs (Asia) L.L.C. Merrill Lynch Co. CLSA Asia-Pacific Markets Prospectus dated , 2007. Table of Contents RMB965.2 billion (US$126.8 billion) in 2011. We believe the significant growth potential of the drugstore industry in China is mainly due to the following factors: PRC Economic Growth, Increasing Disposable Income and Urbanization. China s fast growing economy has led to increases in disposable income, improvements in standard of living and accelerated urbanization, which have made pharmaceutical products more affordable and spending on pharmaceutical products more common. Aging Population. China s aging population is a key contributor to the increased expenditures on pharmaceutical products. The portion of the Chinese population aged 60 and above has increased in both absolute numbers and as a percentage of the total population, and this trend is likely to continue in the next decade. Government Support of the Drugstore Industry. The PRC government has supported the growth of the drugstore industry with a series of initiatives. Anti-Corruption. In China, sales by hospital pharmacies accounted for a large percentage of retail sales of pharmaceutical products in China. The PRC government has strengthened its anti-corruption measures targeting corruption practices in procurement and prescription in government-owned hospitals, and such anti-corruption measures are expected to result in more growth opportunities for drugstores that are not affiliated with hospitals. Pharmaceutical Product Labeling and Prescription Management. The pharmaceutical product labeling regulations adopted in March 2006 require that pharmaceutical product labels state the generic ingredients of the pharmaceutical products and bar the registration of any brand name for any pharmaceutical product which does not contain active ingredients. In addition, effective May 1, 2007, doctors are not permitted to include brand names in their prescriptions and required to specify the chemical ingredients of the medicines they prescribe. These requirements are expected to help curb corrupt practices by pharmaceutical product manufacturers and doctors, ensure that patients are given better information on medicines they purchase, and weaken the hospitals monopoly on prescriptions and prescription pharmaceutical products. Advertising of Pharmaceutical Products. The PRC government has adopted a series of measures regulating the advertising of pharmaceutical products. Consumers typically become familiar with a medicine through advertising and word-of-mouth recommendations by pharmacy salespeople. With increased restrictions on advertising of pharmaceutical products, pharmaceutical product manufacturers are expected to increasingly rely on retail pharmacies to build brand familiarity among the general public. Equal Opportunity for Non-Hospital Drugstores. The PRC Ministry of Health has promulgated prescription regulations requiring hospitals to allow prescriptions to be filled at non-hospital drugstores. The implementation of this regulation is expected to increase drug sales, especially prescription drug sales, in drugstores chains and independent drugstores that are not affiliated with hospitals. Increased Availability of Funding Under the National Medical Insurance Program. The PRC government has increased the availability of funding under the national medical insurance program and included more pharmaceutical products in the China s national medical insurance scheme. Enhanced Quality Requirements for the Operations of Pharmacies. China has strengthened its enforcement of good supply practice, or GSP, standards since adopting it at the end of December 2004. As a result, many smaller drugstore chains or independently operated drugstores may find it difficult to meet these enhanced quality requirements for the operations of pharmacies. Table of Contents Table of Contents Fragmentation of the Drugstore Industry and the Trend for Consolidation. The drugstore industry in China is highly fragmented. The NDRC reported that as of December 31, 2004, 7,445 pharmaceutical product wholesalers, 1,410 pharmacy chain stores and 58,065 individual pharmaceutical product retailers have obtained GSP certification. Given the level of fragmentation and increased regulatory requirements, retailers with an effective nationwide presence and a strong reputation are most likely to thrive. Our Competitive Strengths We believe the following competitive strengths will enable us to take advantage of the rapid growth of the drugstore industry in China: leading market position with strong brand name recognition; directly operated business to provide a consistent customer experience; optimized, diverse and high quality product offerings including private label products; proven ability to expand rapidly while increasing profitability; and experienced management team with proven track record. Our Strategies We intend to further strengthen our position as the leading pharmaceutical and healthcare retailer in China by implementing the following strategies: expand in large and fast-growing metropolitan markets; strengthen customer trust and loyalty with effective marketing and promotional programs; increase private label product offerings; upgrade our information management systems and distribution centers; and selectively pursue complementary acquisitions. Our Challenges We expect to face risks and uncertainties relating to our ability to: identify and respond to changing customer preferences, as well as optimize product offering and inventory position; achieve and maintain broad market acceptance for our private label products; effectively manage the expansion of our operations; attract and retain experienced management personnel and qualified pharmacists; establish effective marketing, advertising and promotional programs; obtain governmental approvals to open new drugstores; and adapt to adverse changes in the political and economic policies of the PRC government. See Risk Factors and other information included in this prospectus for a discussion of these and other risks and uncertainties. Table of Contents Corporate Information Our principal executive offices are located at 6th Floor, Tower B, Xinnengyuan Building, Nanhai Road, Nanshan District, Shenzhen, Guangdong Province 518054, People s Republic of China. Our telephone number at this address is (86) 755-2643-3366 and our fax number is (86) 755-2640-1549. Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website is www.nepstar.cn. The information contained on our website is not a part of this prospectus. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011. Conventions That Apply to This Prospectus Unless otherwise indicated, references in this prospectus to: ADRs are to the American depositary receipts, which, if issued, evidence our ADSs; ADSs are to our American depositary shares, each of which represents two ordinary shares; China and the PRC are to the People s Republic of China, excluding, for the purposes of this prospectus only, Taiwan and the special administrative regions of Hong Kong and Macau; China Nepstar is to China Nepstar Chain Drugstore Ltd.; Nepstar group companies, we, us, our company and our are to China Nepstar, its predecessor entities and its consolidated entities; ordinary shares are to our ordinary shares, par value US$0.0001 per share; regional Nepstar companies are to 11 PRC incorporated companies that operate Nepstar drugstores in their respective regions under the trade name Nepstar; RMB and Renminbi are to the legal currency of China; Series A redeemable convertible preferred shares are to our Series A redeemable convertible preferred shares, par value US$0.0001 per share; US$ and U.S. dollars are to the legal currency of the United States; and Yunnan Nepstar are to Yunnan Jianzhijia Chain Drugstore Ltd., our 40.0% owned consolidated subsidiary that operates our directly operated stores in Yunnan province. Yunnan Nepstar operates under the trade name Jianzhijia. Unless otherwise indicated, information in this prospectus assumes that the underwriters do not exercise their option to purchase additional ADSs. This prospectus contains translations of certain Renminbi amounts into U.S. dollars at specified rates. All translations from Renminbi to U.S. dollars were made at the noon buying rate in The City of New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York, or the noon buying rate. Unless otherwise stated, the translation of Renminbi into U.S. dollars has been made at the noon buying rate in effect on June 29, 2007, which was RMB7.6120 to US$1.00. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. See Risk Factors Risk Related to Doing Business in China Fluctuation in the exchange rates of the Renminbi may have a material adverse effect on your investment. On October 25, 2007, the noon buying rate was RMB7.4800 to US$1.00. Table of Contents THE OFFERING Price per ADS We currently estimate that the initial public offering price will be between US$11.50 and US$13.50 per ADS ADSs offered by us 20,625,000 ADSs Total ADSs offered 20,625,000 ADSs Ordinary shares outstanding immediately after the offering 206,250,000 ordinary shares The number of ordinary shares outstanding immediately after the offering: assumes the conversion of all outstanding Series A redeemable convertible preferred shares into 50,000,000 ordinary shares upon completion of the offering; excludes 8,674,000 ordinary shares issuable upon the exercise of options outstanding granted under our pre-IPO share option scheme; and excludes 8,680,000 ordinary shares reserved for issuance under our 2007 share incentive plan. The ADSs Each ADS represents two ordinary shares, par value US$0.0001 per share. The ADSs will be evidenced by a global ADR. The depositary will be the holder of the ordinary shares underlying your ADSs and you will have the rights of an ADS holder as provided in the deposit agreement among us, the depositary and owners and beneficial owners of ADSs from time to time. You may surrender your ADSs to the depositary to withdraw the ordinary shares underlying your ADSs. The depositary will charge you a fee for such an exchange. We may amend or terminate the deposit agreement for any reason without your consent. If an amendment becomes effective and you continue to hold your ADSs, you will be bound by the deposit agreement as amended. To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled Description of American Depositary Shares. We also encourage you to read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus. Depositary JPMorgan Chase Bank, N.A. Option to purchase additional ADSs We have granted the underwriters an option, exercisable within 30 days from the date of this prospectus, to purchase up to an aggregate of 3,093,750 additional ADSs. Form and settlement of ADSs The ADSs will be represented by one or more ADRs in definitive, fully registered form. The ADRs evidencing the ADSs will be deposited with a custodian for, and registered in the name Table of Contents of a nominee of, The Depository Trust Company, or DTC, in New York, New York. In general, beneficial interests in the ADSs will be shown on, and transfers of these beneficial interests will be effected only through, records maintained by DTC and its direct and indirect participants. Use of proceeds We estimate that we will receive net proceeds from this offering of approximately US$231.7 million assuming an initial public offering price of US$12.50, which is the midpoint of the estimated public offering price range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds we receive from this offering for the following purposes: approximately US$52.0 million to open new stores; approximately US$27.0 million to set up two new distribution centers; and approximately US$11.0 million to upgrade our information management and inventory control system. We may also use the remaining portion of the net proceeds we receive from this offering for other general corporate purposes and for potential acquisitions of retail drugstore chains or independently operated drugstores. See Use of Proceeds for additional information.
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+THE BOOKS AND RECORDS OF EACH FUND AND EACH MASTER FUND WILL BE MAINTAINED AS FOLLOWS: All marketing materials will be maintained at the offices of SEI INVESTMENTS DISTRIBUTION CO. One Freedom Valley Drive Oaks, PA. 19456; Telephone: (610) 676-1000;
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+This summary only highlights the more detailed information appearing elsewhere in this prospectus. As this is a summary, it does not contain all of the information that you should consider in making an investment decision. You should read this entire prospectus carefully, including the information under , ' ': , ' ': Risk Factors and our financial statements and the related notes included elsewhere in this prospectus, before investing. References in this prospectus to , ' ': , ' ': we, , ' ': , ' ': us or , ' ': , ' ': our company refer to Kanders Acquisition Company, Inc. References in this prospectus to , ' ': , ' ': public stockholders refers to those persons that own the securities offered by this prospectus and our founder or any of our officers or directors who purchase these securities either in this offering or afterwards, including pursuant to the limit order agreement described below, provided that such individuals status as , ' ': , ' ': public stockholders shall only exist with respect to those securities so purchased. References in this prospectus to our , ' ': , ' ': management team refer to our officers and directors. References in this prospectus to our , ' ': , ' ': initial stockholders refer to our stockholders immediately prior to this offering. Unless we state otherwise, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option. We are a blank check company formed under the laws of the State of Delaware on August 10, 2007. We were formed to acquire, or acquire control of, a currently unidentified operating business or several operating businesses through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination, which we refer to throughout this prospectus as our initial business combination. To date, our efforts have been limited to organizational activities as well as activities related to this offering. No evaluations of, or discussions with, any potential acquisition candidates occurred prior to our formation, nor did any of our principals have any direct or indirect contact with any potential acquisition candidate prior to our formation. We do not have any specific initial business combination under consideration. Furthermore, we have not, nor has anyone on our behalf, contacted any prospective target business or had any substantive discussions, formal or otherwise, with respect to such a transaction. Our efforts in identifying a prospective target business will not be limited to a particular industry or geography. Rather, we intend to concentrate on industries and target businesses that could potentially have a global presence and that may provide significant opportunities for growth, both organically and through a targeted acquisition program. Our management team possesses a substantial level of public market, private equity and capital raising experience as investors, operators and managers. We will seek to capitalize on the significant investing experience and contacts of the Chairman of our Board of Directors and Chief Executive Officer, Warren B. Kanders, and our other directors and executive officers. Mr. Kanders has over 20 years of experience investing globally, primarily in public companies, serving on boards of directors and pursuing an investment strategy of utilizing a private equity approach to building public companies. Philip A. Baratelli, our Chief Financial Officer, has senior level financial and operational experience at several publicly traded companies. Gary M. Julien, our Vice President, Corporate Development, has approximately 10 years of experience in sourcing, evaluating, structuring, managing and integrating acquisition-related transactions for several public companies. Kanders & Company, our founder, which is controlled by Warren B. Kanders, the Chairman of our Board of Directors and our Chief Executive Officer, is a private investment firm based in Stamford, Connecticut, that utilizes a private equity approach to building public companies. The firm provides public and private companies, either entire entities or divisions thereof, with strategic insights and capital for enhancing operating discipline and catalyzing long-term growth, both organically and via carefully selected acquisition opportunities. The firm s principals believe that the public markets provide an optimal forum to support growth initiatives for operating businesses given the disciplined corporate governance requirements, the permanent capital base resulting from being public and the access to the capital markets that is often necessary to fund growth. Kanders & Company has significant experience building public companies within a variety of industries including aerospace and defense, industrial manufacturing, healthcare, consumer and retail markets through its mergers and Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED DECEMBER 7, 2007 PROSPECTUS $400,000,000 Kanders Acquisition Company, Inc. 40,000,000 Units Kanders Acquisition Company, Inc. is a newly organized blank check company formed for the purpose of acquiring, or acquiring control of, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination, one or more operating businesses, which we refer to as our initial business combination. Our efforts in identifying a prospective target business will not be limited to a particular industry. We will have no more than 24 months to consummate a business combination. If we fail to do so, we will liquidate and distribute the proceeds held in the trust account to our public stockholders. To date, our efforts have been limited to organizational activities as well as activities related to this offering. No evaluations of, or discussions with, any potential acquisition candidates occurred prior to our formation, nor did any of our principals have any direct or indirect contact with any potential acquisition candidate prior to our formation. We do not have any specific initial business combination under consideration. We have not, nor has anyone on our behalf, contacted any prospective target business or had any substantive discussions, formal or otherwise, with respect to such a transaction. This is an initial public offering of our securities. Each unit consists of one share of our common stock and one warrant. We are offering 40,000,000 units at a public offering price of $10.00 per unit. Each warrant entitles the holder to purchase one share of our common stock at a price of $7.50. The warrants will become exercisable on the later of the completion of our initial business combination or 12 months after the date of this prospectus, provided in each case that we have an effective registration statement covering the shares of common stock issuable upon exercise of the warrants and a current prospectus relating to them is available. The warrants will expire five years after the date of this prospectus, unless earlier redeemed. We have also granted the underwriters a 30-day option to purchase up to an additional 6,000,000 units to cover over-allotments, if any. Kanders & Company, Inc., which we refer to as Kanders & Company or our founder throughout this prospectus and which is a Delaware corporation controlled by Warren B. Kanders, the Chairman of our board of directors and our Chief Executive Officer, has agreed to purchase 6,000,000 warrants, which we refer to as the private placement warrants, at a price of $1.00 per warrant ($6.0 million in the aggregate) in a private placement that will occur simultaneously with the consummation of this offering, as more fully described in this prospectus. The proceeds from the sale of the private placement warrants will be deposited into the trust account and be subject to a trust agreement, described below, and will be part of the funds distributed to our public stockholders upon conversion or in the event we are unable to complete a business combination. Our founder will enter into an agreement with Citigroup Global Markets Inc. in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, pursuant to which it will place a limit order for up to $25 million of our common stock commencing on the later of ten business days after we file a Current Report on Form 8-K announcing our execution of a definitive agreement for our initial business combination and 60 days after termination of the , ' ': , ' ': restricted period in connection with this offering under Regulation M of the Securities Exchange Act of 1934, as amended, and ending on the business day immediately preceding the record date for the meeting of our stockholders at which such initial business combination is to be approved, which we refer to as the buyback period. The limit order is more fully described in this prospectus. Our founder has agreed to vote any shares acquired in this offering or in the secondary market, including those purchased pursuant to this limit order, in favor of our initial business combination and an amendment to our amended and restated certificate of incorporation to allow for our perpetual existence. Our founder will agree that in the event that the buyback period expires and our founder has purchased less than $25 million of our common stock pursuant to the limit order, it will purchase from us, in a private placement to occur after the approval of our initial business combination by our stockholders and immediately prior to the consummation of our initial business combination, such number of units, at $10.00 per unit, as shall be necessary to reach an aggregate purchase price equal to the difference between $25 million and the aggregate purchase price of shares of our common stock purchased by our founder pursuant to the limit order. We refer to these units throughout this prospectus as the co-investment units. Currently, there is no public market for our units, common stock or warrants. We have applied to have the units listed on the American Stock Exchange. Assuming that the units are listed on the American Stock Exchange, the units will be listed under the symbol , ' ': , ' ': KAA.U on or promptly after the date of this prospectus. Each of the common stock and warrants will trade separately on the 35th day following the date of this prospectus unless Citigroup Global Markets Inc. informs us of its decision to allow earlier separate trading, subject to our filing a Current Report on Form 8-K with the Securities and Exchange Commission containing an audited balance sheet reflecting our receipt of the gross proceeds of this offering and issuing a press release announcing when such separate trading will begin. Once the securities comprising the units begin separate trading, we expect the common stock and warrants will be traded on the American Stock Exchange under the symbols , ' ': , ' ': KAA and , ' ': , ' ': KAA.WS, respectively. We cannot assure you, however, that our securities will be listed or will continue to be listed on the American Stock Exchange. Investing in our securities involves a high degree of risk. See , ' ': , ' ': Risk Factors beginning on page 25 for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Per Unit Total Public offering price $ 10.00 $ 400,000,000 Underwriting discount(1) $ 0.70 $ 28,000,000 Proceeds, before expenses, to us $ 9.30 $ 372,000,000 (1) Includes $0.325 per unit or $13.0 million in the aggregate ($14.95 million if the underwriters over-allotment option is exercised in full), payable to the underwriters for deferred underwriting discounts and commissions to be placed in the trust account described below. Such funds will be released to the underwriters only on completion of our initial business combination, as described in this prospectus. The underwriters are offering the units on a firm commitment basis. The underwriters expect to deliver the units to purchasers on or about , 2007. Of the proceeds we receive from this offering and the sale of the private placement warrants described in this prospectus, approximately $9.75 per share, or $390,050,000 in the aggregate (approximately $9.73 per share, or $447,800,000 in the aggregate if the underwriters over-allotment option is exercised in full), will be deposited into the trust account, at Morgan Stanley, with Continental Stock Transfer & Trust Company as trustee. These funds will not be released until the earlier of the completion of our initial business combination and our liquidation (which may not occur until the 24 month anniversary of the date of this prospectus). Citi Wachovia Securities Wm Smith & Co. The date of this prospectus is , 2007 Table of Contents acquisitions, corporate development and capital markets experience. Kanders & Company believes its success has been built upon: (i) a strict level of financial and operating discipline; (ii) a history of executing on a plan of building businesses through both an organic and acquisition-focused growth strategy; (iii) a focus on successful integration of target acquisitions; (iv) opportunistic use of public capital markets to finance growth; (v) good corporate governance principles; and (vi) a long-term investment horizon working in tandem with operating management. Similar to the strategies employed by Kanders & Company, our investment premise is to identify business targets that may provide significant opportunities for long-term value creation on a post-acquisition basis with our support. The past success of our management team and our founder is not necessarily indicative of the future success of our company. Our management team has built and maintained broad networks of relationships that we plan to utilize to identify and generate acquisition opportunities. These relationships include, among others, investment bankers, industry entrepreneurs, executives and board members at various public and private companies, business brokers, private equity and venture capital firms, consultants, commercial bankers, attorneys, and accountants. We believe this network will be of significant assistance in helping us identify potential business combination targets. Additionally, target businesses may be brought to our attention through unsolicited calls or mailings. Our officers and directors may also bring to our attention target business candidates that they become aware of through their business contacts as a result of formal or informal inquiries or discussions they may have, as well as by attending trade shows or conventions. In addition, we expect to receive a number of proprietary deal flow opportunities that would not otherwise necessarily be available to us as a result of the track record and business relationships of Mr. Kanders, our Chairman of the Board and Chief Executive Officer. However, in each of these cases, our ability to benefit from these extensive relationships may be limited because our board of directors, in order to clarify our expectations with respect to business opportunities, has adopted resolutions renouncing, in accordance with Delaware law, any interest or expectancy of our company to be presented certain business opportunities that come to the attention of an officer or director of our company and our officers and directors have pre-existing fiduciary duties to other entities. For more information regarding the affiliations of our officers and directors and potential conflicts of interest, see the sections titled , ' ': , ' ': The Offering – Potential conflicts of interest , , ' ': , ' ': The Offering – Right of First Review and , ' ': , ' ': Management – Conflicts of Interest in this prospectus. We will seek to acquire a business whose operations can be improved and enhanced with our capital and intellectual resources and where there are significant opportunities for growth both organically and through a targeted acquisition program. While it is the intention of our management team to remain with the company after the consummation of a business combination, such retention may require the negotiation and execution of employment or consulting agreements in connection with the business combination. There is no assurance that this will occur. Furthermore, while it is possible that one or more of our officers or directors will remain associated in some capacity with us following a business combination, we cannot assure you that any of them will devote their full efforts to our affairs subsequent to a business combination. We have identified the following criteria and guidelines that we believe are important in evaluating prospective target businesses. However, we may decide to enter into a business combination with a target business that does not meet these criteria and guidelines: Strong Management Team: We will seek to acquire a business target with an experienced management team with a proven track record of executing on its business plan, driving revenue growth and enhancing profitability. Our investment premise is to work in partnership with target management to provide the strategic resources and access to capital to allow them to execute on their business objectives; Table of Contents Favorable Long-Term Industry Macroeconomic Trends: We will seek to acquire a business target where the end user markets of such business target s products or services have a favorable long-term growth outlook. We believe that strong organic growth characteristics of a target business are fundamental to our investment strategy; Leading Industry Market Position: We intend to pursue companies whose products or services have leading positions within their respective market niche with sustainable competitive advantages and natural barriers to market entry. Such product or service characteristics may include leading market share, strong customer loyalty, unique and leading product or service characteristics, limited likelihood of product or service obsolescence, strong customer and after-market support, high product or service switching costs, strong brand recognition and solid intellectual property protection; Solid Free Cash Flow Generation: We will seek to acquire an established company with a history of good profit margins, strong free cash flow generation and solid recurring revenue streams with low capital expenditure and working capital investment requirements; Diversified Customer and Supplier Base: We intend to pursue businesses that have a diversified customer and supplier base with a series of products or services that serve a variety of end-user markets. Further, we will seek business targets whose products or services currently serve or have the potential to serve a large geographic footprint. We believe such a strategy significantly increases the likelihood of a target s management s ability to execute its business plan while minimizing the downside risks that may result from uncontrollable outside environmental forces and pressures which can include softness in the economy, increases in raw material costs, supply chain or distribution channel bottlenecks, weaknesses in end user markets, currency fluctuations and industry consolidation in the customer or supplier base; Potential Transaction Platform: We intend to seek business combinations that have significant opportunities for a selective acquisition program that can be executed on a geographically diverse basis; and Considerable Expectations for Returns on Invested Capital: Based on our financial discipline and significant due diligence requirements when evaluating a particular business target, we intend to focus on investment opportunities where we believe there is significant potential for free cash flow generation in excess of our cost of capital on our acquisition investment. These criteria are not intended to be exhaustive. Any evaluation relating to the merits of a particular initial business combination may be based, to the extent relevant, on the above factors as well as other considerations, factors and criteria our management deems relevant to our business objective. In evaluating a prospective target business, we expect to conduct an extensive due diligence review that will encompass, among other things, meetings with incumbent management and employees, document reviews, inspection of facilities, interviews with customers and suppliers, as well as review of financial and other information which will be made available to us. Our initial business combination must be with one or more target businesses whose fair market value, individually or collectively, is equal to at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions of approximately $13.0 million, or $14.95 million if the underwriters over-allotment option is exercised in full) at the time of such business combination. This may be accomplished by identifying and acquiring a single business or multiple operating businesses, which may or may not be related, contemporaneously. In no event however, will we acquire less than a controlling interest of a target business (meaning 50.1% or more of the voting securities of the target business). If we are unable to consummate a business combination prior to the 24 month anniversary of the date of this prospectus, we will liquidate and distribute the proceeds held in the trust account to our public stockholders in an amount we expect to be approximately $9.75 per share of common stock held by them (or approximately $9.73 per share if the underwriters exercise their over-allotment option in full), without taking into account any interest earned on such funds. The report of our independent registered public accountants includes an explanatory paragraph stating that, because we have a net loss, working capital deficiency and no operations, substantial doubt is raised about our ability to continue as a going concern. Our executive offices are located at One Landmark Square, 22nd Floor, Stamford, CT 06901, and our telephone number is (203) 428-9600. Table of Contents The Offering In making your decision on whether to invest in our securities, you should take into account not only the backgrounds of the members of our management team, but also the special risks we face as a blank check company and the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended (the , ' ': , ' ': Securities Act ). You will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. You should carefully consider these and the other risks set forth in the section below entitled , ' ': , ' ': Risk Factors beginning on page 25 of this prospectus. Securities offered: 40,000,000 units, each unit consisting of: one share of common stock; and one warrant. Trading commencement and separation of common stock and warrants: The units will begin trading on or promptly after the date of this prospectus. The common stock and warrants comprising the units will begin trading separately on the 35th day following the date of this prospectus unless Citigroup Global Markets Inc. informs us of its decision to allow earlier separate trading, subject to our filing a Current Report on Form 8-K with the Securities and Exchange Commission containing an audited balance sheet reflecting our receipt of the gross proceeds of this offering and issuing a press release announcing when such separate trading will begin. In no event will the common stock and warrants be traded separately until we have filed the Current Report on Form 8-K described above. We will file the Current Report on Form 8-K upon the consummation of this offering, which is anticipated to occur three business days after the date of this prospectus. If the over-allotment option is exercised following the initial filing of such Current Report on Form 8-K, we will file a second or amended Current Report on Form 8-K to provide updated financial information to reflect the exercise of the over-allotment option. Units: Number outstanding before this offering: 11,500,000 units(1) Number to be outstanding after this offering: 50,000,000 units(2) Common stock: Number outstanding before this offering: 11,500,000 shares(1) Number to be outstanding after this offering: 50,000,000 shares(2) Table of Contents Warrants: Number outstanding before this offering: 11,500,000 warrants(1) Number to be sold privately simultaneously with consummation of this offering: 6,000,000 warrants Number to be outstanding after this offering and private placement: 56,000,000 warrants(2) Exercisability: Each warrant is exercisable to purchase one share of our common stock. Exercise price: $7.50 per share Exercise period: The warrants (except the founder s warrants) will become exercisable on the later of: the completion of our initial business combination, or 12 months after the date of this prospectus; provided in each case that we have an effective registration statement under the Securities Act covering the shares of common stock issuable upon exercise of the warrants. The founder s warrants and the private placement warrants are subject to the same waiting period as the public stockholders warrants and neither the founder s warrants nor the private placement warrants may be exercised unless there is an effective registration statement covering the shares of common stock issuable upon their exercise, consequently they cannot be exercised prior to the time that the public stockholders may exercise their warrants. We have agreed to use our best efforts to have an effective registration statement covering the shares of common stock issuable upon exercise of the warrants as of the date the warrants become exercisable and to maintain a current prospectus relating to those shares of common stock until the warrants expire or are redeemed. The warrants will expire at 5:00 p.m., New York time, five years after the date of this prospectus or earlier upon redemption. On the exercise of any warrant, the warrant exercise price will be paid directly to us and not placed in the trust account. (1) This number includes 1,500,000 founder s units representing 1,500,000 shares of founder s common stock and 1,500,000 founder s warrants that are subject to forfeiture by our initial stockholders to the extent that the over-allotment option is not exercised by the underwriters. Only a number of founder s units necessary for the shares of founder s common stock to represent 20% of our outstanding common stock after the consummation of this offering and the expiration of the over-allotment option or its partial exercise will be forfeited. (2) Assumes the over-allotment option has not been exercised and 1,500,000 founder s units representing 1,500,000 shares of founder s common stock and 1,500,000 founder s warrants have been forfeited by our initial stockholders. Table of Contents Redemption: At any time while the warrants are exercisable and there is an effective registration statement covering the shares of common stock issuable upon exercise of the warrants available and current, we may redeem the outstanding warrants (except as described below with respect to the founder s warrants and private placement warrants): in whole and not in part; at a price of $.01 per warrant; upon a minimum of 30 days prior written notice of redemption (the , ' ': , ' ': 30-day redemption period ); and if, and only if, the last sale price of our common stock equals or exceeds $14.25 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. We will not redeem the warrants unless an effective registration statement covering the shares of common stock issuable upon exercise of the warrants is current and available throughout the 30-day redemption period. If we call the warrants for redemption as described above, our management will have the option to require all holders that wish to exercise warrants to do so on a , ' ': , ' ': cashless basis. In such event, each holder would pay the exercise price by surrendering the warrants for that number of shares of common stock equal to the quotient obtained by dividing (i) the product of the number of shares of common stock underlying the warrants, multiplied by the difference between the exercise price of the warrants and the , ' ': , ' ': fair market value (defined below) by (ii) the fair market value. The , ' ': , ' ': fair market value shall mean the average reported last sale price of our common stock for the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of warrants. Reasons for redemption limitations: We have established the above conditions to our exercise of redemption rights to provide: warrant holders with adequate notice of exercise only after the then-prevailing common stock price is substantially above the warrant exercise price; and a sufficient differential between the then-prevailing common stock price and the warrant exercise price so there is a buffer to absorb the market reaction, if any, to our redemption of the warrants. If the foregoing conditions are satisfied and we issue a notice of redemption, each warrant holder can exercise his, her or its warrant prior to the scheduled redemption date. However, the price of the common stock may fall below the $14.25 trigger price as well as the $7.50 warrant exercise price after the redemption notice is issued. Table of Contents Proposed American Stock Exchange symbols for our: Units: , ' ': , ' ': KAA.U Common stock: , ' ': , ' ': KAA Warrants: , ' ': , ' ': KAA.WS Founder s units: Effective August 10, 2007, our founder purchased 11,500,000 of our units for an aggregate purchase price of $25,000. Our founder subsequently transferred 28,750 units to each of our four independent directors for an aggregate purchase price of $250.00, or approximately $0.002 per unit. Our independent directors whom, together with our founder, we refer to as our initial stockholders throughout this prospectus, have agreed to be bound by all of the same provisions to which our founder is bound with regard to the transferred units. We refer to these outstanding units, shares of common stock and warrants as the founder s units, founder s common stock and founder s warrants, respectively, throughout this prospectus. The founder s units are identical to the units being sold in this offering, except that: up to 1,500,000 founder s units are subject to forfeiture by our initial stockholders to the extent that the over-allotment option is not exercised in full or in part by the underwriters (only a number of founder s units necessary for the shares of founder s common stock to represent 20% of our outstanding common stock after the consummation of this offering and the expiration of the underwriters over-allotment option or its partial exercise will be forfeited); the founder s units, founder s common stock and founder s warrants, including the common stock issuable upon exercise of the founder s warrants, are subject to the transfer restrictions described below; the founder s warrants will become exercisable upon the later of the consummation of our initial business combination and 12 months after the date of this prospectus if and when (i) the last sales price of our common stock equals or exceeds $14.25 per share for any 20 trading days within any 30 trading-day period beginning 90 days after such business combination and (ii) there is an effective registration statement covering the shares of common stock issuable upon exercise of the founder s warrants; the founder s warrants will not be redeemable by us as long as they are held by our initial stockholders or their permitted transferees; Table of Contents the founder s warrants may be exercised by our initial stockholders or their permitted transferees on a cashless basis; our initial stockholders have agreed to vote the founder s common stock in the same manner as the majority of votes cast by public stockholders in connection with the vote required to approve our initial business combination and to vote in favor of a proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence in connection with such business combination; our initial stockholders will not be able to exercise conversion rights (as described below) with respect to the founder s common stock; and our initial stockholders have agreed to waive their rights to participate in any liquidation distribution with respect to the founder s common stock if we fail to consummate a business combination. Our initial stockholders have agreed, subject to limited exceptions including the transferee agreeing to be bound by such transfer restrictions and any applicable voting, waiver and forfeiture provisions, not to sell or otherwise transfer any of the founder s units, founder s common stock or founder s warrants until 180 days after the consummation of our initial business combination. We refer to these restrictions as the transfer restrictions throughout this prospectus. All of the founder s units, founder s common stock and founder s warrants will cease to be subject to the transfer restrictions if, subsequent to our initial business combination, (i) the last sales price of our common stock equals or exceeds $20.00 per share for any 20 trading days within any 30 trading-day period beginning 90 days after our initial business combination or (ii) we consummate a subsequent liquidation, merger, stock exchange or other similar transaction which results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property. If the number of units we offer to the public is increased or decreased, a unit dividend or a contribution back to capital, as applicable, would be effectuated in order to maintain our initial stockholders aggregate ownership at 20% of our common stock after giving effect to this offering and the increase or decrease, if any, in the number of units offered hereby. Table of Contents Private placement warrants: Our founder has entered into an agreement with us to purchase 6,000,000 private placement warrants at a price of $1.00 per warrant ($6.0 million in the aggregate). Our founder is obligated to purchase the private placement warrants from us simultaneously with the consummation of this offering. The private placement warrants will be purchased separately and not in combination with common stock or in the form of units. The purchase price of the private placement warrants will be added to the proceeds from this offering to be held in the trust account pending the completion of our initial business combination. If we do not complete a business combination that meets the criteria described in this prospectus and are forced to liquidate, then the $6.0 million purchase price of the private placement warrants will become part of the distribution to our public stockholders and the private placement warrants will expire worthless. The private placement warrants (including the common stock issuable upon exercise of these warrants) (i) will not be transferable or saleable by our founder (subject to limited exceptions including the transferee agreeing to be bound to such transfer restrictions) until after we complete a business combination, (ii) will be non-redeemable so long as they are held by our founder or its permitted transferees and (iii) may be exercised by our founder or its permitted transferees on a cashless basis. With the exception of the terms noted above, the private placement warrants have terms and provisions that are identical to those of the warrants being sold as part of the units in this offering. Limit order purchases and co-investment units: Our founder has entered into an agreement with Citigroup Global Markets Inc. in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, pursuant to which it will place a limit order for up to $25 million of our common stock commencing on the later of ten business days after we file a Current Report on Form 8-K announcing our execution of a definitive agreement for our initial business combination and 60 days after termination of the , ' ': , ' ': restricted period in connection with this offering under Regulation M under the Exchange Act and ending on the business day immediately preceding the record date for the meeting of our stockholders at which such initial business combination is to be voted upon, or earlier in certain circumstances which we refer to as the buyback period. It is intended that these purchases will comply with Rule 10b-18(b) under the Exchange Act and the broker s obligation will otherwise be subject to applicable law, rule or regulation, including Regulation M under the Exchange Act, which may prohibit purchases under certain circumstances. The Table of Contents limit order will require our founder to purchase, until the earlier of the expiration of the buyback period or until such purchases reach $25 million in the aggregate, any of our shares of common stock offered for sale (and not purchased by another investor) at a price per share as determined in accordance with Rule 10b-18, provided that such price per share does not exceed the per share amount held in our trust account as reported in such Form 8-K and such purchase is otherwise made in compliance with Rule 10b-18 and any other applicable law, rule or regulation. The business purpose for the limit order is to demonstrate our founder s further commitment to our success, to increase our founder s economic stake in our success and, as described in this prospectus, to vote such shares in favor of our initial business combination and in favor of an amendment to our amended and restated certificate of incorporation to provide for our perpetual existence, and thus to increase the likelihood of approval of our initial business combination. The limit order would have the added effect of providing a willing buyer for our common stock, up to the limit price, and, therefore, accelerated liquidity for stockholders who would otherwise vote against our initial business combination and exercise their conversion rights. Our founder will participate in any liquidation distributions with respect to any shares of common stock, purchased by it following consummation of this offering, including shares of common stock purchased pursuant to such limit order, in the event that we fail to complete our initial business combination. In addition, our founder has agreed that it will not sell or otherwise transfer any shares of common stock purchased by it pursuant to the limit order until 180 days after the consummation of our initial business combination. In the event that the buyback period expires and our founder has purchased less than $25 million of our common stock pursuant to the limit order, our founder has agreed to purchase from us, in a private placement to occur after the approval of our initial business combination by our stockholders and immediately prior to the consummation of our initial business combination, such number of units, at $10.00 per unit, as shall be necessary to reach an aggregate purchase price equal to the difference between $25 million and the aggregate purchase price of shares of our common stock purchased by our founder pursuant to the limit order. We refer to these units throughout this prospectus as the co-investment units. The co-investment units will be identical to the units sold in this offering, except that they will not be transferable or saleable (subject to limited exceptions, including the transferee agreeing to be bound by the same transfer Table of Contents Item 16. Exhibits and Financial Statement Schedules. (a) The following exhibits are filed as part of this Registration Statement: Exhibit No. Description 1 .1 Form of Underwriting Agreement.** 3 .1 Amended and Restated Certificate of Incorporation.** 3 .2 By-laws.** 4 .1 Specimen Unit Certificate.** 4 .2 Specimen Common Stock Certificate.** 4 .3 Specimen Warrant Certificate.** 4 .4 Form of Warrant Agreement between Continental Stock Transfer & Trust Company and the Registrant. 5 .1 Opinion of Kane Kessler, P.C.** 10 .1 Form of Letter Agreement among the Registrant, Citigroup Global Markets Inc. and Philip A. Baratelli. 10 .2 Form of Letter Agreement among the Registrant, Citigroup Global Markets Inc. and Gary M. Julien. 10 .3 Form of Letter Agreement among the Registrant, Citigroup Global Markets Inc. and Warren B. Kanders. 10 .4 Form of Investment Management Trust Agreement between Continental Stock Transfer & Trust Company and the Registrant.** 10 .5 Form of Letter Agreement between Kanders & Company, Inc. and Registrant regarding administrative support. 10 .6 Form of Promissory Note issued to Kanders & Company, Inc.* 10 .7 Form of Registration Rights Agreement among the Registrant and the Initial Stockholders. 10 .8 Private Placement Warrant Subscription Agreements among the Registrant, Kane Kessler, P.C. Citigroup Global Markets Inc. and Kanders & Company, Inc. 10 .9 Second Amended and Restated Unit Subscription Agreement between Kanders & Company, Inc. and the Registrant. 10 .10 Form of Rule 10b5-1 Stock Purchase Plan by and among the Registrant, Citigroup Global Markets Inc. and Kanders & Company, Inc. 10 .11 Form of Co-Investment Subscription Agreement by and among the Registrant, Citigroup Global Markets Inc. and Kanders & Company, Inc. 10 .12 Form of Letter Agreement among the Registrant. Citigroup Global Markets Inc. and Kanders & Company, Inc. 10 .13 Form of Letter Agreement among the Registrant. Citigroup Global Markets Inc. and Michael A. Henning. Table of Contents restrictions) until 180 days after the consummation of our initial business combination. As the proceeds from the sale of the co-investment units will not be received by us until immediately prior to our consummation of our initial business combination, the proceeds, if any, will not be deposited into the trust account and will not be available for distribution to our public stockholders in the event of a liquidation of the trust account or upon conversion of shares by our public stockholders. The business purpose of the requirement to purchase the co-investment units is to provide additional capital to us, which may be used to fund a business combination or for general corporate purposes, and to demonstrate our founder s further commitment to the completion of our initial business combination. In the event that our founder does not fulfill all or any portion of its obligations to purchase shares of common stock pursuant to the limit order agreement or co-investment units when required to do so, our founder has agreed, and any permitted transferees thereof will agree, to sell and we have agreed to purchase all of the founders units held by our founder as of the effective date of the registration statement of which this prospectus is a part for the same purchase price originally paid for them by our founder. Initial stockholder registration rights: Concurrently with the issuance and sale of the units in this offering, we will enter into a registration rights agreement with our initial stockholders with respect to our securities held by them from time to time, including the founder s units, private placement warrants, shares of common stock purchased pursuant to the limit order agreement described above and the co-investment units. The registration rights agreement will provide that commencing 30 days after the consummation of our initial business combination, the holders of a majority of the founder s units, private placement warrants, shares of common stock purchased pursuant to the limit order agreement described above and the co-investment units may require us to register such securities (including any underlying securities) on a registration statement filed under the Securities Act. However, the founder s units, founder s common stock, founder s warrants, including the common stock issuable upon exercise of these warrants, the shares of common stock purchased pursuant to the limit order agreement described above and the co-investment units will continue to be subject to transfer restrictions until 180 days after consummation of our initial business combination subject to the exceptions described in this prospectus. Table of Contents Potential conflicts of interest: In order to clarify our expectations with respect to business opportunities, our board of directors has adopted resolutions renouncing, in accordance with Delaware law, any interest or expectancy of our company to be presented any business opportunity that comes to the attention of an officer or director of our company other than a business combination opportunity to acquire a privately held operating entity, if, and only if, (i) such entity has a fair market value equal to at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions) and the opportunity is to acquire substantially all of the assets or 50.1% or more of the voting securities of such entity or (ii) the opportunity to acquire such entity is presented by a third party to such officer or director expressly for consideration by us. With respect to all business opportunities, including those described in clause (i) above, but excluding those described in clause (ii) above, the obligation of an officer or director of our company to present a business opportunity to us which may be reasonably required to be presented to us under Delaware law is subject to any pre-existing fiduciary or other obligations the officer or director may owe to another entity. These resolutions adopted by our board of directors may not be amended or rescinded in any way except upon prior approval by the holders of a majority of our outstanding shares of common stock. Messrs. Kanders, our Chief Executive Officer and Chairman, Baratelli, our Chief Financial Officer, and Julien, our Vice President, Corporate Development, have pre-existing fiduciary duties to (i) Clarus Corporation, a publicly-held company with no current operating business, net operating loss carryforwards of approximately $223 million and approximately $85 million of cash and cash equivalents that is currently seeking to acquire a target business in any industry and (ii) Highlands Acquisition Corp., a blank check company with a trust account valued at approximately $134,830,000 as of October 15, 2007 (including deferred underwriting discounts and commissions of approximately $3,990,000) and a focus on acquiring a target business in the healthcare industry. As a result, except for opportunities presented to Messrs. Kanders, Baratelli or Julien expressly for presentation to us, (i) with regard to Clarus Corporation, each of Messrs. Baratelli, Julien or Kanders will not present opportunities to us unless he has first presented the opportunity to Clarus Corporation and Clarus Corporation has rejected it and (ii) with regard to Highlands Acquisition Corp., each of Messrs. Baratelli, Julien or Kanders will not present to us, without first presenting it to Highlands Acquisition Corp., any business opportunity to acquire a privately held operating business if, and only if, Table of Contents (i) the target entity has a fair market value between 80% of the balance in the Highlands Acquisition Corp. trust account (excluding deferred underwriting discounts and commissions) and $500 million, the target entity s principal business operations are in the healthcare industry and the opportunity is to acquire substantially all of the assets or 50.1% or greater of the voting securities of the target entity or (ii) the target entity s principal business operations are outside of the healthcare industry and the opportunity to acquire such target entity is presented by a third party to one of them expressly for consideration by Highlands Acquisition Corp. Additionally, Messrs. Owens and Henning, two of our independent directors, are also directors of, and have pre-existing fiduciary duties to, Highlands Acquisition Corp. Mr. Kanders has pre-existing fiduciary duties to Stamford Industrial Group, Inc., a publicly-held company, which through its subsidiary Concord Steel, is a manufacturer of steel counterweights, which is seeking to build a diversified global industrial manufacturing group through organic growth and acquisition growth initiatives that will complement and diversify its existing business lines. In addition, Kanders & Company, our founder, is a party to a consulting agreement with Stamford Industrial Group, Inc. pursuant to which Kanders & Company has agreed to provide investment banking and financial advisory services to Stamford Industrial Group, Inc. on a non-exclusive basis, including, among other things, guidance and advice as to potential targets for mergers and acquisitions, joint ventures and strategic alliances. Messrs. Baratelli and Julien are employed by Kanders & Company and, although neither Mr. Baratelli nor Mr. Julien are employed by or have a fiduciary duty to Stamford Industrial Group, Inc., both may from time to time render consulting services to Stamford Industrial Group, Inc. as a result of the consulting arrangement between Kanders & Company and Stamford Industrial Group, Inc. In order to minimize any potential conflicts of interest, we have agreed that we will not seek a target business in the healthcare industry unless and until Highlands Acquisition Corp. has either completed its initial business combination or liquidated. The healthcare industry encompasses all healthcare service companies, including, among others, managed care companies, hospitals, healthcare system companies, physician groups, diagnostic service companies, medical device companies and other healthcare-related entities. In addition, Mr. Kanders will enter into an agreement with us relating to his involvement with other blank check companies. Mr. Kanders will agree with us that until we Table of Contents file a Current Report on Form 8-K with the SEC announcing our execution of a definitive agreement with respect to our initial business combination or our liquidation, he will not, directly or indirectly, become an initial stockholder, sponsor or promoter of any blank check company formed after the date of the agreement, except that he may, directly or indirectly, become an initial stockholder, sponsor or promoter of one such other blank check company after such time as Highlands Acquisition Corp. files a Current Report on Form 8-K with the SEC announcing its execution of a definitive agreement with respect to its initial business combination or its liquidation. Notwithstanding the foregoing, our agreement with Mr. Kanders will not restrict him from acquiring up to 10% of the stock of any blank check company, or from rendering services, either directly or indirectly through Kanders & Company or another entity with which he is affiliated, to any blank check company. Although we do not generally expect our independent directors to present investment and business opportunities to us, they may become aware of business opportunities that may be appropriate for presentation to us. In such instances they may be required, due to pre-existing fiduciary or other obligations, to present these business opportunities to other entities with which they are affiliated, instead of presenting them to us. For more information regarding the affiliations of our officers and directors and potential conflicts of interest, see the sections titled , ' ': , ' ': Management – Conflicts of Interest and , ' ': , ' ': Certain Relationships and Related Transactions in this prospectus. Right of first review: Messrs. Kanders, Baratelli and Julien have entered into a business opportunity right of first review agreement with us which provides that, from the effective date of the registration statement of which this prospectus forms a part until the earlier of the consummation of our initial business combination, our liquidation in the event we do not consummate an initial business combination or, with respect to Messrs. Baratelli and Julien, until such time as such person ceases to be an officer or director of our company, we will have a right of first review with respect to any business combination opportunity of any of Messrs. Kanders, Baratelli or Julien (subject to any pre-existing fiduciary obligations they may have), if the business combination opportunity (i) is to acquire substantially all of the assets or 50.1% or more of the voting securities of one or more privately held operating entities that are not in the healthcare industry and (ii) has a fair market value equal to at least 80% of the balance in the trust account (excluding deferred underwriting discounts and Table of Contents commissions). Pursuant to the right of first review, each of Messrs. Kanders, Baratelli and Julien will first offer any such business opportunity to us (subject to any pre-existing fiduciary obligations he may have) and will not pursue, separate from our company, such business opportunity unless and until our board of directors, acting by a majority of our disinterested, independent directors, has determined for any reason that we will not pursue such opportunity. There is no time restriction on how long our board of directors may review such opportunity prior to determining whether or not to pursue such opportunity. During the term of his right of first review, none of Messrs. Kanders, Baratelli or Julien may enter into a similar agreement with another entity that may conflict with his obligations under his right of first review agreement with us. Offering and private placement warrants proceeds to be held in trust account and amounts payable prior to trust account distribution or liquidation: $390,050,000, or approximately $9.75 per unit ($447,800,000, or approximately $9.73 per unit, if the underwriters over-allotment option is exercised in full) of the proceeds of this offering and the sale of the private placement warrants will be placed in the trust account at Morgan Stanley with Continental Stock Transfer & Trust Company as trustee, pursuant to an agreement to be signed on the date of this prospectus. These proceeds include approximately $13.0 million in deferred underwriting discounts and commissions (or $14.95 million if the underwriters over-allotment option is exercised in full). We believe that the inclusion in the trust account of the purchase price of the private placement warrants and the deferred underwriting discounts and commissions is a benefit to our public stockholders because additional proceeds will be available for distribution to them if a liquidation of our company occurs prior to the consummation of our initial business combination. Except as described below, proceeds in the trust account will not be released until the earlier of the consummation of our initial business combination or our liquidation. Unless and until our initial business combination is consummated, proceeds held in the trust account will not be available for our use for any purpose, including the payment of expenses related to this offering and the investigation, selection and negotiation of an agreement with one or more target businesses, except that there can be released to us from the trust account (i) interest income earned on the trust account balance to pay our tax obligations and (ii) interest income earned of up to $5.5 million on the trust account balance, subject to adjustment as described below, to fund our working capital requirements, provided Table of Contents that after such release there remains in the trust account a sufficient amount of interest income previously earned on the trust account balance to pay any due and unpaid income taxes on such interest income. With these exceptions, expenses incurred by us while seeking an initial business combination may be paid prior to a business combination only from the net proceeds of this offering not held in the trust account (initially, approximately $100,000). If the number of units we offer to the public is increased, or the underwriters elect to exercise their over-allotment option, the amount of interest income earned on the trust account that can be released to us to fund our working capital will be increased proportionately. Limited payments to insiders: There will be no fees, reimbursements or other cash payments paid to our founder, officers, directors or their affiliates prior to, or for any services they render in order to effectuate, the consummation of a business combination other than: Repayment of a non-interest bearing loan totaling $100,000 made to us by Kanders & Company, our founder, which is controlled by Warren B. Kanders, our Chief Executive Officer and Chairman of our Board of Directors, and employs each of Philip A. Baratelli, our Chief Financial Officer, and Gary M. Julien, our Vice President, Corporate Development, to cover offering expenses; Payments of $10,000 per month to Kanders & Company for office space, secretarial and administrative services; and Reimbursement for any expenses incident to this offering and identifying, investigating and consummating a business combination with one or more target businesses, none of which have been incurred to date. All amounts held in the trust account that are not paid to converting stockholders, released to us in the form of interest income or payable to the underwriters for deferred discounts and commissions will be released to us on closing of our initial business combination: All amounts held in the trust account that are not distributed to public stockholders who exercise their conversion rights (as described below) or previously released to us from the interest income for our working capital requirements and tax obligations will be released upon the closing of our initial business combination with Table of Contents one or more target businesses, subject to compliance with the conditions to consummating a business combination that are described below. We will use these funds to pay amounts due to any public stockholders who exercise their conversion rights and to pay the underwriters their deferred underwriting discounts and commissions that are equal to 3.25% of the gross proceeds of this offering, or approximately $13.0 million (or $14.95 million if the underwriters over-allotment option is exercised in full). Funds released from the trust account to us can be used to pay all or a portion of the purchase price of the business or businesses with which our initial business combination occurs. If our initial business combination is paid for using stock or debt securities, we may apply the cash released to us from the trust account to general corporate purposes, including for maintenance or expansion of operations of the acquired business or businesses, the payment of principal or interest due on indebtedness incurred in consummating our initial business combination, to fund the purchase of other companies or for working capital. Amended and Restated Certificate of Incorporation: As discussed below, there are specific provisions in our amended and restated certificate of incorporation that may not be amended prior to the consummation of our initial business combination, including the requirements to seek stockholder approval of a business combination and to allow our stockholders to seek conversion of their shares if they do not approve of a business combination. While we have been advised that such provisions limiting our ability to amend our amended and restated certificate of incorporation may not be enforceable under Delaware law, we view these provisions, which are contained in Article Sixth of our amended and restated certificate of incorporation, as obligations to our stockholders and will not take any action to amend or waive these provisions. For more information, see the section titled , ' ': , ' ': Proposed Business – Effecting a Business Combination – Amended and Restated Certificate of Incorporation in this prospectus. Stockholders must approve initial business combination: We will seek stockholder approval before effecting our initial business combination, even if such business combination would not ordinarily require stockholder approval under applicable state law. We will proceed with our initial business combination only if (i) a majority of the votes cast by our public stockholders at a duly held stockholders meeting are voted in favor of the business combination, (ii) the amendment to our amended and restated certificate of incorporation to provide for our perpetual existence is approved by the holders of a majority of our outstanding shares of common stock and Table of Contents (iii) public stockholders owning no more than 30% minus one share of the shares sold in this offering both vote against the business combination and exercise their conversion rights. If a proposed business combination is not consummated and we still have sufficient time remaining before our corporate life expires, we may seek another target business with which to effect our initial business combination. In connection with the stockholder vote required to approve our initial business combination, our initial stockholders have agreed to vote the founder s common stock in the same manner as the majority of shares voted by the public stockholders at the special or annual meeting called for the purpose of approving our initial business combination and to vote in favor of the amendment to our amended and restated certificate of incorporation to provide for our perpetual existence in connection with such business combination. Each of our founder, officers and directors have also agreed to vote any shares acquired by them in or after this offering, including any shares of common stock purchased pursuant to the limit order agreement, in favor of our initial business combination and the amendment to our amended and restated certificate of incorporation to provide for our perpetual existence in connection with such business combination. As a result, our founder, officers and directors may be able to influence the outcome of the vote to approve our initial business combination. Conditions to consummating our initial business combination: Our initial business combination must occur with one or more target businesses that collectively have a fair market value of at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions of approximately $13.0 million, or $14.95 million if the underwriters over-allotment option is exercised in full) at the time of the business combination. If we acquire less than 100% of a target business or businesses in our initial business combination, the aggregate fair market value of the portion or portions we acquire must equal at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions as described above) at the time of the initial business combination. In no event, however, will we acquire less than a controlling interest of a target business (meaning 50.1% or more of the voting securities of the target business). We will consummate our initial business combination only if (i) a majority of the votes cast by our public stockholders at a duly held stockholders meeting are voted in favor of our initial business combination, (ii) the Table of Contents proposal to amend our amended and restated certificate of incorporation to provide for our perpetual existence is approved by the holders of a majority of our outstanding shares of common stock and (iii) public stockholders owning no more than 30% minus one share of the shares sold in this offering vote against the business combination and exercise their conversion rights described below. It is important to note that voting against our initial business combination alone will not result in conversion of a stockholder s shares into a pro rata share of the trust account, which only occurs when the stockholder also exercises the conversion rights described below. Conversion rights for stockholders voting to reject our initial business combination: If our initial business combination is approved and completed, public stockholders voting against our initial business combination will be entitled to convert their shares of common stock into a pro rata share of the aggregate amount then on deposit in the trust account, before payment of deferred underwriting discounts and commissions and including interest earned on their pro rata portion of the trust account, net of interest income on the trust account balance previously released to us to pay our tax obligations and net of interest income of up to $5.5 million, subject to adjustment as described in this prospectus, on the trust account balance previously released to us to fund our working capital requirements. If our initial business combination is not approved or completed for any reason, then public stockholders voting against our initial business combination will not be entitled to convert their shares of common stock into a pro rata share of the aggregate amount then on deposit in the trust account. Our initial stockholders will not be able to exercise conversion rights with respect to the founder s common stock and our founder, officers and directors will not be able to exercise conversion rights with respect to any of our shares that they may acquire in or after this offering, including any shares of common stock purchased pursuant to the limit order agreement, under any circumstances. If our initial business combination is approved and completed, public stockholders who convert their common stock into a pro rata share of the trust account will be paid their conversion price promptly following the consummation of our initial business combination and will continue to have the right to exercise any warrants they own. The initial per share conversion price is approximately $9.75 per share (or approximately $9.73 per share if the underwriters over-allotment option is exercised in full), without taking into account any Table of Contents interest earned on such funds. Since this amount is less than the $10.00 per unit price in this offering and may be lower than the market price of the common stock on the date of conversion, there may be a disincentive on the part of public stockholders to exercise their conversion rights. Because converting stockholders will receive their proportionate share of deferred underwriting discounts and commissions and the underwriters will be paid the full amount of the deferred underwriting discounts and commissions at the time of closing of our initial business combination, the non-converting stockholders will bear the financial effect of the payments to both the converting stockholders and the underwriters. Voting against our initial business combination alone will not result in conversion of a public stockholder s shares into a pro rata portion of the trust account. To convert shares, a public stockholder must also exercise the conversion rights described above and follow the specific procedures for conversion that will be set forth in the proxy statement relating to the stockholder vote for a proposed initial business combination. Liquidation if no business combination: If we are unable to complete a business combination prior to the 24 month anniversary of the date of this prospectus, our corporate existence will cease except for the purposes of winding up our affairs and liquidating pursuant to Section 278 of the Delaware General Corporation Law, in which case we will as promptly as practicable thereafter adopt a plan of distribution in accordance with Section 281(b) of the Delaware General Corporation Law. Section 278 provides that our existence will continue for at least three years after the expiration of our 24 month period of existence for the purpose of prosecuting and defending suits, whether civil, criminal or administrative, by or against us, and of enabling us gradually to settle and close our business, to dispose of and convey our property, to discharge our liabilities and to distribute to our stockholders any remaining assets, but not for the purpose of continuing the business for which we were organized. Our existence will continue automatically even beyond the three-year period for the purpose of completing the prosecution or defense of suits begun prior to the expiration of the three-year period, until such time as any judgments, orders or decrees resulting from such suits are fully executed. Section 281(b) will require us to pay or make reasonable provision for all then-existing claims and obligations, including all contingent, conditional, or unmatured contractual claims known to us, and to make such provision as will be reasonably likely to be sufficient to provide compensation for any then-pending claims and Table of Contents for claims that have not been made known to us or that have not arisen but that, based on facts known to us at the time, are likely to arise or to become known to us within 10 years after the date of expiration of our existence. Under Section 281(b), the plan of distribution must provide for all of such claims to be paid in full or make provision for payments to be made in full, as applicable, if there are sufficient assets. If there are insufficient assets to provide for all such claims, the plan must provide that such claims and obligations be paid or provided for according to their priority and, among claims of equal priority, ratably to the extent of legally available assets. These claims must be paid or provided for before we make any distribution of our remaining assets to our stockholders. We cannot assure you those funds will be sufficient to pay or provide for all creditors claims. Although we will seek to have all third parties (including any vendors or other entities we engage after this offering) and any prospective target businesses enter into valid and enforceable agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the trust account, there is no guarantee that they will execute such agreements. We have not engaged any third parties or asked for or obtained any waiver agreements at this time. There is no guarantee that the third parties would not challenge the enforceability of these waivers and bring claims against the trust account for monies owed them. In addition, there is no guarantee that a third party or prospective target business will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with us and will not seek recourse against the trust account for any reason. Kanders & Company has agreed that it will be liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us, but only if such a vendor or prospective target business does not execute a valid and enforceable waiver. However, we cannot assure you that Kanders & Company will be able to satisfy those obligations, if it is required to do so. Our initial stockholders have waived their rights to participate in any liquidation distribution with respect to the founder s common stock. We will pay the costs of liquidation from our remaining assets outside of the trust account. If such funds are insufficient, Kanders & Company has agreed to advance us the funds necessary to complete such liquidation (currently anticipated to be no more than approximately $15,000) and has agreed not to seek repayment for such expenses. Table of Contents If a business combination is not consummated, any net assets outside of the trust account and the aggregate amount then on deposit in the trust account, including all interest income thereon net of income taxes payable on such interest and the deferred underwriting discounts and commissions, will be distributed solely to our public stockholders as part of our liquidation. If we are unable to conclude an initial business combination and we expend all of the net proceeds of this offering and the founder s units and private placement warrants other than the proceeds deposited in the trust account, without taking into account any interest earned on the trust account, we expect that the initial per-share liquidation price will be approximately $9.75 (or approximately $9.73 per share if the underwriters over-allotment option is exercised in full), or $0.25 less than the per-unit offering price of $10.00 ($0.27 less if the underwriters over-allotment is exercised in full). The proceeds deposited in the trust account could, however, become subject to claims of our creditors that are in preference to the claims of our stockholders. In addition, if we file a bankruptcy case or an involuntary bankruptcy case is filed against us that is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. Therefore, we cannot assure you that the actual per-share liquidation price will not be less than approximately $9.75 (or approximately $9.73 per share if the underwriters over-allotment option is exercised in full). Audit committee to monitor compliance: Effective upon consummation of this offering, we will establish, and will maintain, an audit committee to, among other things, monitor compliance on a quarterly basis with the terms described above and the other terms relating to this offering. If any noncompliance is identified, then the audit committee will be charged with the responsibility to immediately take all action necessary to rectify such noncompliance or otherwise cause compliance with the terms of this offering. Our audit committee will also review and approve all reimbursements made to our founder, officers, directors or their affiliates, and any reimbursements made to members of our audit committee will be reviewed and approved by our board of directors, with any interested director abstaining from such review and approval. Determination of offering amount: We determined the size of this offering, and the trust account value, based on the prior transactional experience of our management, as well as our estimate of the capital required to facilitate our initial business combination with Table of Contents one or more viable target businesses with sufficient resources to operate as a stand-alone public entity. We intend to utilize the cash proceeds of this offering and the sale of the private placement warrants, our capital stock, debt or a combination of these as the consideration to be paid in our initial business combination. Based on the experience of our management team, we believe that there should be an ample number of potential target businesses to acquire. This belief is not based on any research, analysis, evaluations, discussions or compilations of information with respect to any particular investment or any such action undertaken in connection with our organization. We cannot assure you that our belief that we will be able to successfully identify potential acquisition candidates, obtain any necessary financing and consummate a business combination with one or more target businesses will be correct. Risks We are a newly formed company that has conducted no operations and has generated no revenues. Until we complete a business combination, we will have no operations and will generate no operating revenues. In making your decision on whether to invest in our securities, you should take into account not only the background of our management team, but also the special risks we face as a blank check company. This offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act. Accordingly, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. You should carefully consider these and the other risks set forth in the section entitled , ' ': , ' ': Risk Factors beginning on page 25 of this prospectus. Table of Contents SUMMARY FINANCIAL DATA The following table summarizes the relevant financial data for our business and should be read with our financial statements, which are included in this prospectus. We have not had any significant operations to date, so only balance sheet data is presented. September 30, 2007 Actual As Adjusted Balance Sheet Data: Working capital (deficiency) $ (126,000 ) $ 377,174,000 Total assets $ 265,000 $ 390,174,000 Total liabilities $ 241,000 $ 13,000,000 Value of common stock which may be converted to cash $ — $ 117,014,990 Stockholders equity $ 24,000 $ 260,159,010 The , ' ': , ' ': as adjusted information gives effect to the sale of the units we are offering including the application of the related gross proceeds, the receipt of $6.0 million from the sale of the private placement warrants and the payment of the estimated remaining expenses of this offering. The , ' ': , ' ': as adjusted total assets include approximately $13.0 million being held in the trust account ($14.95 million if the underwriters over-allotment option is exercised in full) representing deferred underwriting discounts and commissions. The , ' ': , ' ': as adjusted total assets amount includes approximately $390,050,000 (which includes deferred underwriting discounts and commissions of approximately $13.0 million) to be held in the trust account, which will be distributed to us upon the consummation of our initial business combination. We will use such funds to pay amounts owed to (i) any public stockholders who vote against our proposed initial business combination and exercise their conversion rights and (ii) the underwriters in the amount of approximately $13.0 million (or $14.95 million if the underwriters over-allotment option is exercised in full) in payment of their deferred underwriting discounts and commissions. All such proceeds will be distributed to us from the trust account only upon the consummation of a business combination within 24 months after the date of this prospectus. If a business combination is not so consummated, any net assets outside of the trust account and the aggregate amount then on deposit in the trust account, including all interest thereon net of income taxes payable on such interest and the deferred underwriting discounts and commissions, will be distributed solely to our public stockholders as part of our liquidation. The aggregate amount then on deposit in the trust account will be net of interest income on the trust account balance previously released to us to pay our tax obligations and interest income of up to $5.5 million, subject to adjustment as described in this prospectus, previously released to us to fund our working capital requirements. We will not consummate a business combination if public stockholders owning more than 30% minus one share of the shares of common stock sold in this offering vote against the business combination and exercise their conversion rights. Accordingly, we may effect a business combination if public stockholders owning up to 11,999,999 of the 40,000,000 shares of common stock sold in this offering exercise their conversion rights. If this occurred, we would be required to convert to cash up to 11,999,999 of the shares of common stock sold in this offering (or 13,799,999 shares of common stock if the underwriters exercise their over-allotment option in full) at an initial per-share conversion price of approximately $9.75 or up to approximately $117,014,990 in the aggregate (or approximately $9.73 per share or up to approximately $134,339,990 in the aggregate if the underwriters exercise their over-allotment option in full). The actual per-share conversion price will be equal to: the aggregate amount then on deposit in the trust account, before payment of deferred underwriting discounts and commissions and including accrued interest thereon, net of any amounts previously released to us as described above, as of two business days prior to the proposed consummation of the business combination, divided by the number of shares of common stock sold in this offering. Table of Contents
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+PROSPECTUS SUMMARY 1
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+Prospectus summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/CIK0001418463_aldabra-4_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/CIK0001418463_aldabra-4_prospectus_summary.txt
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+appearing elsewhere in this prospectus. As this is a summary, it does not contain all of the information that you should consider in making an investment decision. You should read this entire prospectus carefully, including the information under Risk Factors and our financial statements and the related notes included elsewhere in this prospectus, before investing. References in this prospectus to we , us or our company refer to Aldabra 4 Acquisition Corp. References in this prospectus to public stockholders refers to those persons that purchase the securities offered by this prospectus or afterwards and any of our initial stockholders (as defined below) who purchase these securities either in this offering or afterwards, provided that our initial stockholders status as public stockholders shall only exist with respect to those securities so purchased. References in this prospectus to our management team refer to our executive officers and directors. The information in this prospectus has been adjusted to reflect a 3/4-for-1 warrant dividend for each outstanding share of common stock which was effected as of December 19, 2007. Such transaction has effectively recapitalized the initial stockholders investment and has created the founders units that are discussed throughout this prospectus. Unless we tell you otherwise, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option. We are a blank check company organized under the laws of the State of Delaware on August 24, 2007. We were formed with the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or other similar business combination with one or more operating businesses, which we refer to as our initial business combination. To date, our efforts have been limited to organizational activities. Our efforts in identifying a prospective target business will not be limited to a particular industry, although we intend to focus our efforts on seeking an initial business combination with a portfolio company currently held by a private equity firm specializing in either leveraged buyouts or venture capital. We do not have any specific business combination under consideration. Our executive officers and directors have neither individually identified or considered a target business nor have they had any discussions regarding possible target businesses amongst themselves or with our underwriters or other advisors. We have not (nor has anyone on our behalf) contacted any prospective target business or had any discussions, formal or otherwise, with respect to an initial business combination transaction. We have not (nor have any of our agents or affiliates) been approached by any candidates (or representative of any candidates) with respect to a possible acquisition transaction with our company. Additionally, we have not, nor has anyone on our behalf, taken any steps, directly or indirectly, to identify or locate any acquisition candidate, nor have we engaged or retained any agent or other representative to identify or locate any such acquisition candidate. We will seek to capitalize on the significant investing experience and contacts of Nathan D. Leight, our Chairman, and Jason G. Weiss, our Chief Executive Officer, Secretary and a Director, each of whom has substantial experience in identifying, investing in, and acquiring businesses in a wide variety of industries. In 1998, Messrs. Leight and Weiss founded Terrapin Partners LLC, which through its network of affiliated companies manages, as of September 30, 2007, more than $600 million of capital for institutional investors, high net worth individuals, and Terrapin s principals. Additionally, Messrs. Leight and Weiss serve as the Chairman and Chief Executive Officer, respectively, of Aldabra 2 Acquisition Corp. ( Aldabra 2 ), a blank check company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. Aldabra 2 consummated its initial public offering in June 2007 and raised gross proceeds of $414 million at an offering price of $10.00 per unit. In September 2007, Aldabra 2 entered into a definitive agreement for an initial business combination with the paper and packaging divisions of Boise Cascade, L.L.C., a portfolio company of Madison Dearborn Capital Partners, LLC ( Madison Dearborn ), and expects shareholders to vote on the proposed transaction in the first quarter of 2008. Messrs. Leight and Weiss also served as Chairman and Chief Executive Officer, respectively, of Aldabra Acquisition Corporation ( Aldabra 1 ), a blank check company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with an unidentified operating business. Aldabra 1 consummated its initial public offering in February 2004 and raised gross Table of Contents proceeds of $55.2 million at an offering price of $6.00 per unit. In December 2006, Aldabra 1 completed a merger with Great Lakes Dredge Dock Corporation, a portfolio company of Madison Dearborn. Our initial business combination must be with a target business or businesses whose collective fair market value is at least equal to 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions of $3.0 million, or $3.45 million if the underwriters over-allotment option is exercised in full) at the time of such business combination but in no event more than $725 million. The fair market value of the target will be determined by our board of directors based upon one or more standards generally accepted by the financial community (which may include actual and potential sales, earnings, cash flow and/or book value). If our board is not able to independently determine that the target business has a sufficient fair market value, we will obtain an opinion from an unaffiliated, independent investment banking firm which is a member of the Financial Industry Regulatory Authority, or FINRA, with respect to the satisfaction of such criteria. We anticipate structuring an initial business combination to acquire 100% of the equity interests or assets of the target business. We may, however, structure an initial business combination to acquire less than 100% of such interests or assets of the target business or businesses but such acquisition will not be for less than a controlling interest (which would be at least 50.1% of the voting securities of the target business). If we acquire only a controlling interest in a target business or businesses, the portion of such business that we acquire must have a fair market value equal to at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions) at the time of such business combination. If we determine to simultaneously acquire several businesses and such businesses are owned by different sellers, we will need for each of such sellers to agree that our purchase of its business is contingent on the simultaneous closings of the other acquisitions, which may make it more difficult for us, and delay our ability, to complete the business combination. With multiple acquisitions, we could also face additional risks, including additional burdens and costs with respect to possible multiple negotiations and due diligence investigations (if there are multiple sellers) and the additional risks associated with the subsequent assimilation of the operations and services or products of the acquired companies in a single operating business. The target business or businesses that we acquire may have a collective fair market value substantially in excess of 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions) but not to exceed $725 million. In order to consummate such an initial business combination, we may issue a significant amount of our debt or equity securities to the sellers of such business and/or seek to raise additional funds through a private offering of debt or equity securities. There are no limitations on our ability to incur debt or issue securities in order to consummate an initial business combination except that we may not acquire a target business or businesses with a fair market value exceeding $725 million. If we issue securities in order to consummate an initial business combination, our stockholders could end up owning a minority of the combined company as there is no requirement that our stockholders own a certain percentage of our company after our business combination. Since we have no specific business combination under consideration, we have not entered into any such arrangement to issue our debt or equity securities and have no current intention of doing so. If we are unable to consummate a business combination within 24 months from the date of this prospectus (or within 30 months from the date of this prospectus if a definitive agreement has been executed within 24 months from the date of this prospectus and the business combination has not yet been consummated within such 24-month period), we will seek stockholder approval to liquidate and distribute the proceeds held in the trust account to our public stockholders in an amount we expect to be approximately $9.77 per share of common stock held by them (or approximately $9.74 per share if the underwriters exercise their over-allotment option in full), without taking into account any interest earned on such funds. Simultaneously with our formation, our executive officers organized Aldabra 3 Acquisition Corp. ( Aldabra 3 ), formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or other similar business combination with one or more operating businesses with a fair market value of at least $750 million. Aldabra 3 is anticipating to raise approximately $500 million in its initial public offering. It is anticipated that our initial public offering will coincide with that of Aldabra 3, Table of Contents although this is not a requirement of either offering. Nathan D. Leight, our chairman, and Jason G. Weiss, our chief executive officer, secretary and director, have entered into a business opportunity right of first review agreement with us and Aldabra 3 that provides that from the date of this prospectus until the earlier of the consummation of our initial business combination or our liquidation, we will have a right of first review with respect to the business combination opportunities of Messrs. Leight and Weiss with a fair market value of $725 million or less. Messrs. Leight and Weiss will first offer such business opportunities to us (subject to any pre-existing contractual or fiduciary obligations they might have other than to Aldabra 3) and they will not and Aldabra 3 will not pursue such a business opportunity unless and until a majority of our disinterested directors have determined for any reason that we will not pursue such an opportunity. This right of first review does not apply to a target business that (i) is being considered by Aldabra 3 in connection with other target businesses that will be acquired simultaneously by Aldabra 3 and is majority owned by the same sellers or (ii) is an affiliate of another business Aldabra 3 is simultaneously acquiring. Our executive officers and certain of our directors are also principals of Aldabra 2. Aldabra 2 consummated its initial public offering in June 2007 and in September 2007 entered into a definitive agreement for a business combination with Boise Cascade, L.L.C., a Madison Dearborn portfolio company, to acquire the assets and liabilities related to the operation of the paper, packaging and newsprint, and transportation businesses of, and most of the headquarters operations of, Boise Cascade, L.L.C., including Boise White Paper, L.L.C., Boise Packaging Newsprint, L.L.C. and Boise Cascade Transportation Holdings Corp. (collectively, Boise ). If the business combination between Aldabra 2 and Boise fails for any reason, our executive officers and certain of our directors will have a pre-existing fiduciary and contractual obligation to Aldabra 2 and will offer it all suitable business opportunities prior to offering such opportunities to us or Aldabra 3. Private Placements and Future Purchases of Common Stock Effective November 5, 2007, we issued an aggregate 2,875,000 units (after giving retroactive effect to our warrant dividend of three quarters (3/4) of a warrant issued per share of founders common stock that was effected as of December 19, 2007) to Terrapin Partners Small Cap Partnership, Stephen H. Bittel, Howard S. Singer, Richard S. Linhart, Murray L. Sprung, Salomon Sredni and Terrapin Partners Employee Partnership for $25,000 in cash, at a purchase price of approximately $0.009 per unit. This includes up to 375,000 founders units which are subject to forfeiture to the extent the underwriters do not exercise their over-allotment option in full. Each unit consists of one share of common stock and three quarters (3/4) of one warrant. We refer to the current holders of these outstanding units as our initial stockholders, and we refer to these outstanding units, shares of common stock and warrants as the founders units, founders common stock and founders warrants throughout this prospectus. The founders units are identical to the units being sold in this offering, except that: up to an aggregate of 375,000 founders units are subject to forfeiture by our initial stockholders to the extent that the over-allotment option is not exercised in full by the underwriters; the founders units will be placed in escrow and the founders common stock and founders warrants are subject to the transfer restrictions and registration rights described in this prospectus; the founders warrants will become exercisable after the consummation of our initial business combination if and when the last sales price of our common stock exceeds $14.50 per share for any 20 trading days within any 30-trading day period beginning 90 days after the initial business combination; the founders warrants will be exercisable on a cashless basis and will not be redeemable by us, in each case, as long as they are held by the initial stockholders or their permitted transferees; the initial stockholders have agreed to: (i) vote the founders common stock in the same manner as the majority of shares voted by the public stockholders at the special or annual meeting called for the purpose of approving our initial business combination; and (ii) vote in favor of our dissolution and Table of Contents liquidation in the event that we do not consummate an initial business combination within 24 months or 30 months from the date of this prospectus, as applicable; the initial stockholders will not be able to exercise conversion rights (as described below) with respect to the founders common stock; and the initial stockholders have agreed to waive their rights to participate in any liquidation distribution with respect to the founders common stock if we fail to consummate an initial business combination. The initial stockholders have agreed not to transfer, assign or sell any of the founders units until one year after the date of the completion of an initial business combination or earlier if, subsequent to our initial business combination, (i) the closing price of our common stock equals or exceeds $18.00 per share for any 20 trading days within any 30-trading day period or (ii) we consummate a subsequent liquidation, merger, stock exchange or other similar transaction which results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property; provided however that transfers can be made to permitted transferees who agree in writing to be bound to the transfer restrictions, agree to vote in the same manner as a majority of the public stockholders in connection with the vote required to approve our initial business combination and waive any rights to participate in any liquidation distribution if we fail to consummate an initial business combination. For so long as the founders units are subject to such transfer restrictions they will be held in an escrow account maintained by Continental Stock Transfer Trust Company. All of our executive officers and directors and William P. Stiritz and David R. Jaffe, each a director of Aldabra 3, and Peter R. Deutsch, a former director of Aldabra 1 and special advisor to Aldabra 2, and/or their family trusts, have agreed to purchase an aggregate of 2,000,000 warrants at a price of $1.25 per warrant ($2.5 million in the aggregate) in a private placement that will occur simultaneously with the consummation of this offering. The $2.5 million of proceeds from this investment will be added to the proceeds of this offering and will be held in the trust account pending our completion of an initial business combination on the terms described in this prospectus. If we do not complete such an initial business combination, then the $2.5 million will be part of the liquidating distribution to our public stockholders, and the sponsors warrants will expire worthless. The sponsors warrants are identical to the warrants included in the units being sold in this offering, except that the sponsors warrants (i) are non-redeemable so long as they are held by any of the sponsors or their permitted transferees, (ii) are subject to certain transfer restrictions as described in more detail in this prospectus and will not be exercisable while they are subject to these transfer restrictions and (iii) may be exercised on a cashless basis, as described in this prospectus. The sponsors have agreed not to sell or otherwise transfer any of the sponsors warrants until the later of one year from the date of this prospectus or 60 days after the date we complete our initial business combination; provided however that transfers can be made to permitted transferees who agree in writing to be bound by such transfer restrictions. For so long as the sponsors warrants are subject to such transfer restrictions they will be held in an escrow account maintained by Continental Stock Transfer Trust Company. Our executive offices are located at c/o Terrapin Partners LLC, 540 Madison Avenue, 17th Floor, New York, New York 10022 and our telephone number is (212) 710-4100. Table of Contents THE OFFERING In making your decision on whether to invest in our securities, you should take into account not only the backgrounds of the members of our management team, but also the special risks we face as a blank check company and the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended (the Securities Act ). You will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. You should carefully consider these and the other risks set forth in the section below entitled Risk Factors beginning on page 21 of this prospectus. Securities offered 10,000,000 units, at $10.00 per unit, each unit consisting of: one share of common stock; and three quarters (3/4) of one warrant. Trading commencement and separation of common stock and warrants The units will begin trading on or promptly after the date of this prospectus. Each of the common stock and warrants may trade separately on the 35th day after the date of this prospectus unless Citigroup Global Markets Inc. determines that an earlier date is acceptable. No fractional warrants will be issued and only whole warrants will trade. In no event will Citigroup Global Markets Inc. allow separate trading of the common stock and warrants until we file an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file a Current Report on Form 8-K with the Securities and Exchange Commission, including an audited balance sheet, promptly upon the consummation of this offering, which is anticipated to take place four business days from the date the units commence trading. The Form 8-K will include financial information regarding our receipt of the proceeds from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Form 8-K. If the over-allotment option is exercised after our initial filing of a Form 8-K, we will file an amendment to the Form 8-K to provide updated financial information to reflect the exercise and consummation of the over-allotment option. We will also include in this Form 8-K, or amendment thereto, or in a subsequent Form 8-K, information indicating if Citigroup Global Markets Inc. has allowed separate trading of the common stock and warrants prior to the 35th day after the date of this prospectus. The units will continue to trade along with the common stock and warrants after the units are separated. Holders will need to have their brokers contact our transfer agent in order to separate the units into common stock and warrants. Units: Number outstanding before this offering 2,875,000 units1 1 This number includes an aggregate of up to 375,000 founders units, comprised of 375,000 shares of founders common stock and 281,250 founders warrants, that are subject to forfeiture by our initial stockholders if the over-allotment option is not exercised in full by the underwriters and gives effect to our warrant dividend. Table of Contents Number outstanding after this offering 12,500,000 units2 Common stock: Number outstanding before this offering 2,875,000 shares3 Number to be outstanding after this offering 12,500,000 shares4 Warrants: Number outstanding before this offering 2,156,250 warrants5 Number to be sold privately simultaneously with consummation of this offering 2,000,000 warrants Number to be outstanding after this offering and sale to insiders 11,375,000 warrants6 Exercisability Each whole warrant is exercisable for one share of common stock. Warrants may be exercised only in increments of one whole warrant. Exercise price $6.50 Exercise period The warrants will become exercisable on the later of: the completion of an initial business combination with a target business, and one year from the date of this prospectus. However, the warrants will only be exercisable if a registration statement relating to the common stock issuable upon exercise of the warrants is effective and current. The warrants will expire at 5:00 p.m., New York City time, six years from the date of this prospectus or earlier upon redemption. 2 Assumes the over-allotment option has not been exercised and an aggregate of 375,000 founders units, comprised of 375,000 shares of founders common stock and 281,250 founders warrants, have been forfeited by our initial stockholders. 3 This number includes an aggregate of up to 375,000 shares of founders common stock that are subject to forfeiture by our initial stockholders if the over-allotment option is not exercised in full by the underwriters. 4 Assumes the over-allotment option has not been exercised and an aggregate of 375,000 shares of founders common stock have been forfeited by our initial stockholders. 5 This number includes an aggregate of up to 281,250 founders warrants, that are subject to forfeiture by our initial stockholders if the over-allotment option is not exercised in full by the underwriters and gives effect to our warrant dividend. 6 Assumes the over-allotment option has not been exercised and an aggregate of 281,250 founders warrants have been forfeited by our initial stockholders. Table of Contents Redemption We may redeem the outstanding warrants (excluding any founders warrants and sponsors warrants held by the initial stockholders, sponsors or their permitted transferees) without the prior consent of the underwriters: in whole and not in part, at a price of $.01 per warrant at any time while the warrants are exercisable, upon a minimum of 30 days prior written notice of redemption, and if, and only if, the last sales price of our common stock equals or exceeds $14.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. We will not redeem the warrants unless an effective registration statement covering the shares of common stock issuable upon exercise of the warrants is current and available throughout the 30-day redemption period. If we call the warrants for redemption as described above, our management will have the option to require all holders that wish to exercise warrants to do so on a cashless basis. In such event, each holder would pay the exercise price by surrendering the warrants for that number of shares of common stock equal to the quotient obtained by dividing (x) the product of the number of shares of common stock underlying the warrants, multiplied by the difference between the exercise price of the warrants and the fair market value (defined below) by (y) the fair market value. The fair market value shall mean the average reported last sale price of the common stock for the ten trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of warrants. We may not redeem the sponsors warrants so long as they are held by the sponsors or their permitted transferees. Reasons for redemption limitations: We have established the above conditions to our exercise of redemption rights to: provide warrant holders with adequate notice of redemption; permit redemption only after the then-prevailing common stock price is substantially above the warrant exercise price; and ensure a sufficient differential between the then-prevailing common stock price and the warrant exercise price exists so there is a buffer to absorb the market reaction, if any, to our redemption of the warrants. If the foregoing conditions are satisfied and we issue a notice of redemption, each warrant holder can exercise his, her or its warrant prior to the scheduled redemption date. However, there can be no assurance that the price of the common stock will not fall below the $14.50 trigger price or the $6.50 warrant exercise price after the redemption notice is issued. Table of Contents Founders units Effective November 5, 2007, we issued an aggregate 2,875,000 units (which includes 375,000 founders units which are subject to forfeiture to the extent the underwriters do not exercise their over-allotment option in full after giving effect to our warrant dividend) to Terrapin Partners Small Cap Partnership, Stephen H. Bittel, Howard S. Singer, Richard S, Linhart, Murray L. Sprung, Salomon Sredni and Terrapin Partners Employee Partnership for $25,000 in cash, at a purchase price of approximately $0.009 per unit. Each unit consists of one share of common stock and three quarters (3/4) of one warrant. The founders units are identical to the units being sold in this offering, except that: an aggregate of up to 375,000 founders units are subject to forfeiture by our initial stockholders to the extent that the over-allotment option is not exercised in full by the underwriters; the founders units will be placed in escrow and the founders common stock and founders warrants are subject to the transfer restrictions and registration rights described in this prospectus; the founders warrants will become exercisable after the consummation of our initial business combination if and when the last sales price of our common stock exceeds $14.50 per share for any 20 trading days within any 30-trading day period beginning 90 days after the initial business combination; the founders warrants will be exercisable on a cashless basis and will not be redeemable by us, in each case, as long as they are held by the initial stockholders or their permitted transferees; the initial stockholders have agreed to (i) vote the founders common stock in the same manner as the majority of shares voted by the public stockholders at the special or annual meeting called for the purpose of approving our initial business combination; and (ii) vote in favor of our dissolution and liquidation in the event that we do not consummate an initial business combination within 24 months or 30 months from the date of this prospectus, as applicable; the initial stockholders will not be able to exercise conversion rights (as described below) with respect to the founders common stock; and the initial stockholders have agreed to waive their rights to participate in any liquidation distribution with respect to the founders common stock if we fail to consummate an initial business combination. The initial stockholders have agreed not to transfer, assign or sell any of the founders units, founders common stock or founders warrants (including the common stock to be issued upon the exercise of the founders warrants) until one year after the date of the completion of an initial business combination or earlier if, subsequent to our initial business combination, (i) the closing price of our common stock equals or exceeds $18.00 per share for any 20 trading days within any 30-trading day period or (ii) we consummate a subsequent liquidation, merger, stock exchange or other Table of Contents similar transaction which results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property; provided however that transfers can be made to permitted transferees who agree in writing to be bound to the transfer restrictions, agree to vote in the same manner as a majority of the public stockholders in connection with the vote required to approve our initial business combination and waive any rights to participate in any liquidation distribution if we fail to consummate an initial business combination. For so long as the founders units are subject to such transfer restrictions they will be held in an escrow account maintained by Continental Stock Transfer Trust Company. Sponsors warrants purchased through private placement 2,000,000 sponsors warrants at $1.25 per warrant (for a total purchase price of $2.5 million) will be sold to the sponsors pursuant to letter agreements among us and the sponsors. These purchases will take place on a private placement basis simultaneously with the consummation of this offering. The sponsors warrants will be identical to the warrants underlying the units being offered by this prospectus except that the sponsors warrants (i) will be exercisable on a cashless basis and (ii) will not be redeemable by us so long as they are still held by the sponsors or their permitted transferees. The sponsors have agreed, pursuant to the agreements, that the sponsors warrants will not be sold or transferred by them (except to employees of Terrapin Partners LLC or to our directors at the same cost per warrant originally paid by them) until the later of one year from the date of this prospectus and 60 days after the consummation of our business combination. In the event of a liquidation prior to our initial business combination, the sponsors warrants will expire worthless. Right of first review: In order to minimize potential conflicts of interest which may arise from multiple corporate affiliations, each of our executive officers has agreed, until the earliest of an initial business combination, our liquidation or such time as he ceases to be an executive officer, to present to our company for our consideration, prior to presentation to any other entity, any suitable business opportunity which may reasonably be required to be presented to us, subject to any pre-existing fiduciary or contractual obligations he might have. Additionally, our executive officers have agreed that from the date of this prospectus until the earlier of the consummation of our initial business combination or our liquidation, we will have a right of first review with respect to the business combination opportunities of Messrs. Leight and Weiss with a fair market value of $725 million or less. Messrs. Leight and Weiss will first offer such business opportunities to us (subject to any pre-existing contractual or fiduciary obligations they might have) and they will not and we will not pursue such a business opportunity unless and until a majority of our disinterested directors have determined for any reason that we will not pursue such an opportunity. This right of first review does not apply to a target business that (i) is being considered by Aldabra 3 in connection with other target businesses that Table of Contents will be acquired simultaneously by Aldabra 3 and is majority owned by the same sellers or (ii) is an affiliate of another business Aldabra 3 is simultaneously acquiring. For a complete description of our executive officers pre-existing fiduciary and contractual obligations, see Management Conflicts of Interest. Proposed American Stock Exchange symbols for our: Units .U Common stock Warrants .WS Proceeds of offering to be held in trust account and amounts payable prior to trust account distribution in liquidation Approximately, $97.7 million or approximately $9.77 per unit (approximately $112.1 million, or approximately $9.74 per unit if the underwriters over-allotment option is exercised in full) of the proceeds of the offering and the private placement of the sponsors warrants will be placed in a trust account at Wilmington Trust, maintained by Continental Stock Transfer Trust Company, acting as trustee pursuant to an agreement to be signed on the date of this prospectus. These proceeds include $3.0 million in deferred underwriting discounts and commissions (or $3.45 million if the over-allotment option is exercised in full). The underwriters have agreed that such amount will not be paid to them unless and until we consummate an initial business combination. Upon the consummation of our initial business combination, the deferred underwriting discounts and commissions shall be released to the underwriters out of the gross proceeds of this offering held in the trust account. Except as described below, proceeds in the trust account will not be released until the earlier of the completion of our initial business combination and our liquidation. Unless and until an initial business combination is consummated, the proceeds held in the trust account will not be available for our use for any purpose, including the payment of expenses related to this offering and the investigation, selection and negotiation of an agreement with one or more target businesses. Notwithstanding the foregoing, there can be released to us from the trust account (i) interest income earned on the trust account balance to pay our income or other tax obligations and (ii) up to an aggregate of $2.0 million, or $2.3 million if the underwriters over-allotment option is exercised in full, of interest earned on the trust account balance to fund our working capital expenses related to investigating and selecting a target business and our other working capital requirements. With these exceptions, expenses incurred by us while seeking an initial business combination may be paid prior to an initial business combination only from the net proceeds of this offering not held in the trust account (initially $200,000). None of the warrants may be exercised until after the consummation of an initial business combination and, thus, after the proceeds of the trust account have been disbursed. Accordingly, the warrant Table of Contents exercise price will be paid directly to us and not placed in the trust account. Limited payments to insiders There will be no fees or other cash payments paid to, awarded to or earned by our initial stockholders, executive officers, directors or their affiliates prior to, or for any services they render in order to effectuate, the consummation of an initial business combination (regardless of the type of transaction that it is) other than: repayment of an aggregate of $100,000 in non-interest bearing loans made by Nathan D. Leight, our chairman of the board, and Jason G. Weiss, our chief executive officer; a payment of an aggregate of $12,500 per month to Terrapin Partners LLC, an affiliate of Nathan D. Leight and Jason G. Weiss, for certain administrative, technology and secretarial services, as well as the use of certain limited office space, including a conference room, in New York City; and reimbursement of out-of-pocket expenses incurred by them in connection with certain activities on our behalf, such as identifying and investigating possible business targets and our initial business combination. All amounts held in the trust account that are not converted to cash, released to us in the form of interest income or payable to the underwriters for deferred discounts and commissions will be released to us on closing of our initial business combination All amounts held in the trust account that are not converted to cash (as described below) or previously released to us as interest income to pay our tax obligations or to fund working capital will be released to us upon closing of our initial business combination with one or more target businesses, subject to compliance with the conditions to consummating an initial business combination described below. We will use these funds to pay amounts due to any public stockholders who exercise their conversion rights and to pay the underwriters their deferred underwriting discounts and commissions that are equal to 3.0% of the gross proceeds of this offering, or $3.0 million (or $3.45 million if the underwriters over-allotment option is exercised in full). Funds released from the trust account to us can be used to pay a portion of the purchase price of the target or target businesses. If the initial business combination is paid for using stock or debt securities, we may use the cash released to us from the trust account for general corporate purposes, including but not limited to maintenance or expansion of operations or acquired businesses, the payment of principal or interest due on indebtedness incurred in consummating our initial business combination, to fund the purchase of other companies or for working capital. Stockholders must approve business combination Pursuant to our amended and restated certificate of incorporation, we will seek stockholder approval before we effect any initial business combination, even if the nature of the acquisition would not Table of Contents ordinarily require stockholder approval under applicable state law. We view this requirement as an obligation to our stockholders and will not take any action to amend or waive this provision in our amended and restated certificate of incorporation. In connection with the vote required for any initial business combination, all of our initial stockholders, including all of our executive officers and directors, have agreed to vote the shares of common stock owned by them immediately before this offering in accordance with the majority of the shares of common stock voted by the public stockholders. They have also agreed that they will vote any shares they purchase in this offering or in the aftermarket in favor of a business combination. Thus, additional purchases of shares of common stock by our initial stockholders, including our executive officers or directors, would likely allow them to exert additional influence over the approval of our initial business combination. None of our executive officers, directors, initial stockholders or their affiliates has indicated any intention to purchase additional units or shares of common stock from persons in the aftermarket or in private transactions. The factors that would be considered in making such additional purchases would include consideration of the current trading price of our common stock. Another factor that would be taken into consideration would be that any such additional purchases would likely increase the chances that our initial business combination would be approved. We will proceed with an initial business combination only if (i) a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and (ii) public stockholders owning less than 40% of the shares sold in this offering exercise their conversion rights described below. Accordingly, it is our understanding and intention in every case to structure and consummate an initial business combination in which approximately 39.99% of the public stockholders may exercise their conversion rights and the business combination can still go forward. In addition, if within 90 days before the expiration of the 24- or 30-month period from the date of this prospectus, as the case may be, we seek approval from our stockholders to consummate a business combination, the proxy statement related to such business combination will also seek stockholder approval for our dissolution and our board s recommended plan of distribution in the event our stockholders do not approve such business combination or if such business combination is not consummated for other reasons. Conditions to consummating our initial business combination We will not enter into our initial business combination (i) with an entity with which our executive officers or directors, through their other business activities, had acquisition or investment discussions in the past, (ii) with an entity that is either a portfolio company of, or has otherwise received a material financial investment from, any private equity fund or investment company (or an affiliate thereof) that is affiliated with any of our executive officers or directors or (iii) where we acquire less than 100% of a target business and any of our executive officers, directors, initial stockholders, sponsors or Table of Contents their affiliates acquire the remaining portion of such target business, unless, in such cases, the transaction is approved by a majority of our disinterested directors and our audit committee and we obtain an opinion from an independent investment banking firm that is a member of FINRA that the business combination is fair to our unaffiliated stockholders from a financial point of view. Our initial business combination must occur with one or more target businesses that collectively have a fair market value of at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions of $3.0 million, or $3.45 million if the underwriters over-allotment option is exercised in full) at the time of such initial business combination but in no event more than $725 million. We may seek to consummate our initial business combination with a target business or businesses with a collective fair market value in excess of 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions) at the time of such initial business combination but in no event in excess of $725 million. We will only consummate an initial business combination in which we become the controlling stockholder of the target. The key factor that we will rely on in determining controlling stockholder status would be our acquisition of at least 50.1% of the voting equity interests of the target company. If we acquire only a controlling interest in a target business or businesses, the portion of such business that we acquire must have a fair market value equal to at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions). For the purposes of determining such fair market value, any debt assumed, refinanced or otherwise incurred by us in conjunction with our initial business combination shall be included at the accrued value in the financial statements of the target business in the calculation of such fair market value. We will not consider any transaction that does not meet such criteria. Conversion rights for stockholders voting to reject a business combination Pursuant to our amended and restated certificate of incorporation, public stockholders voting against an initial business combination will be entitled to convert their stock into a pro rata share of the trust account (initially approximately $9.77 per share, or approximately $9.74 per share if the over-allotment option is exercised), plus any interest income earned on their portion of the trust account but less any interest that has been released to us as described above to fund our working capital requirements or pay any of our tax obligations, if the business combination is approved and completed. Notwithstanding the foregoing, a public stockholder, together with any affiliate of his or any other person with whom he is acting in concert or as a group, will be restricted from seeking conversion rights with respect to more than 10% of the shares sold in this offering. Such a public stockholder would still be entitled to vote against a proposed business combination with respect to all shares owned by him or his affiliates. We believe this restriction will prevent stockholders from accumulating large blocks of stock before the vote held to approve a proposed business Table of Contents combination and attempt to use the conversion right as a means to force us or our management to purchase their stock at a significant premium to the then current market price. Absent this provision, a public stockholder who owns greater than 10% of the shares sold in this offering could threaten to vote against a proposed business combination and seek conversion, regardless of the merits of the transaction, if, for example, its shares are not purchased by us or our management at a premium to the then current market price. By eliminating any stockholder s ability to convert more than 10% of the shares sold in this offering, we believe we will deter a small group of stockholders from unreasonably attempting to block a transaction which is favored by our other public stockholders. However, we are not restricting the stockholders ability to vote all of their shares against the transaction. We view this requirement as an obligation to our stockholders and will not take any action to amend or waive this provision in our amended and restated certificate of incorporation. Our initial stockholders will not have such conversion rights with respect to any shares of common stock owned by them, directly or indirectly, whether their shares of founders common stock or shares purchased by them in this offering or in the aftermarket. Public stockholders who convert their stock into their share of the trust account will continue to have the right to exercise any warrants they may hold. An eligible stockholder may request conversion at any time after the mailing to our stockholders of the proxy statement and prior to the vote taken with respect to a proposed business combination at a meeting held for that purpose, but the request will not be granted unless the stockholder votes against the business combination and the business combination is approved and completed. Additionally, we may require public stockholders, whether they are a record holder or hold their shares in street name, to either tender their certificates to our transfer agent at any time through the vote on the business combination or to deliver their shares to the transfer agent electronically using Depository Trust Company s DWAC (Deposit/Withdrawal At Custodian) System, at the holder s option. There is a nominal cost associated with this tendering process and the act of certificating the shares or delivering them through the DWAC system. The transfer agent will typically charge the tendering broker $35 and it would be up to the broker whether or not to pass this cost on to the converting holder. The proxy solicitation materials that we will furnish to stockholders in connection with the vote for any proposed business combination will indicate whether we are requiring stockholders to satisfy such certification and delivery requirements. Accordingly, a stockholder would have from the time we send out our proxy statement through the vote on the business combination to deliver his shares if he wishes to seek to exercise his conversion rights. This time period varies depending on the specific facts of each transaction. However, as the delivery process can be accomplished by the stockholder, whether or not he is a record holder or his shares are held in street Table of Contents name, in a matter of hours by simply contacting the transfer agent or his broker and requesting delivery of his shares through the DWAC System, we believe this time period is sufficient for an average investor. However, because we do not have any control over this process, it may take significantly longer than we anticipated. Accordingly, we will only require stockholders to deliver their certificates prior to the vote if we give stockholders at least two weeks between the mailing of the proxy solicitation materials and the meeting date. Any request for conversion, once made, may be withdrawn at any time up to the vote taken with respect to a proposed business combination at a meeting held for that purpose. Furthermore, if a stockholder delivered his certificate for conversion and subsequently decided prior to the meeting not to elect conversion, he may simply request that the transfer agent return the certificate (physically or electronically). If a vote on our initial business combination is held and the business combination is not approved, we may continue to try to execute a definitive agreement with a different target business until twenty four months from the date of this prospectus and to consummate an initial business combination with a different target business until thirty months from the date of this prospectus. If the initial business combination is not approved or completed for any reason, then public stockholders voting against our initial business combination who exercised their conversion rights would not be entitled to convert their shares of common stock into a pro rata share of the aggregate amount then on deposit in the trust account. In such case, if we have required public stockholders to deliver their certificates prior to the meeting, we will promptly return such certificates to the public stockholder. Investors in this offering who do not sell or who receive less than an aggregate of approximately $0.23 (or $0.26 if the underwriters over-allotment option is exercised in full) of net sales proceeds for the warrants included in the units, and persons who purchase common stock in the aftermarket at a price in excess of approximately $9.77 per share (or $9.74 per share if the underwriters over-allotment option is exercised in full), may have a disincentive to exercise their conversion rights because the amount they would receive upon conversion could be less than their original or adjusted purchase price. Because converting stockholders will receive their proportionate share of the deferred underwriting discounts and commissions and the underwriters will be paid the full amount of their deferred underwriting compensation at the time of the consummation of our initial business combination, we (and, therefore, the non-converting stockholders) will bear the financial effect of such payments to both the converting stockholders and the underwriters. Liquidation if no business combination If we do not effect our initial business combination within 24 months from the date of this prospectus (or within 30 months from the date of this prospectus if a definitive agreement has been executed within 24 months from the date of this prospectus and the Table of Contents business combination has not yet been consummated within such 24-month period), pursuant to the terms of the trust agreement by and between us and Wilmington Trust, our amended and restated certificate of incorporation and applicable provisions of the Delaware General Corporation Law, we will seek stockholder approval to dissolve as promptly as practicable and to liquidate and release only to our public stockholders, as part of our plan of distribution, the amount in our trust account, including (i) all accrued interest, net of income taxes payable on such interest and net of interest earned on the trust account balance previously released to us to fund our working capital requirements and (ii) all deferred underwriting discounts and commissions plus any remaining assets. Stockholder approval of liquidation requirement We cannot provide investors with assurances of a specific timeframe for our dissolution and liquidation. Pursuant to our amended and restated certificate of incorporation, upon the expiration of such 24- or 30-month time period, as applicable, it is intended that our purposes and powers will be limited to dissolving, liquidating and winding up. Also contained in our amended and restated certificate of incorporation is the requirement that our board of directors, to the fullest extent permitted by law, consider a resolution to dissolve our company at that time. Consistent with such obligations, our board of directors will seek stockholder approval for any such plan of distribution, and our initial stockholders have agreed to vote in favor of such dissolution and liquidation. As promptly as practicable upon the later to occur of (i) the approval by our stockholders of our plan of distribution or (ii) the effective date of such approved plan of distribution, we will liquidate our trust account to our public stockholders. Our initial stockholders have waived their rights to participate in any liquidation distribution with respect to the founders common stock. There will be no distribution from the trust account with respect to our warrants, and all rights of our warrants will terminate on our liquidation. We estimate that our total costs and expenses for implementing and completing our stockholder-approved dissolution and plan of distribution, if not done in connection with a stockholder vote with respect to a potential business combination, will be between $75,000 and $125,000. This amount includes all costs and expenses relating to filing a certificate of dissolution with the State of Delaware, the winding up of our company, printing and mailing a proxy statement, holding a stockholders meeting relating to the approval by our stockholders of our dissolution and plan of distribution, legal fees and other filing fees. We believe that there should be sufficient funds available to us out of the net interest earned on the trust account and released to us as working capital, to fund the $75,000 to $125,000 in costs and expenses. In the event we seek stockholder approval for our dissolution and plan of distribution and do not obtain such approval, we will nonetheless continue to pursue stockholder approval for our dissolution. Pursuant to the terms of our amended and restated certificate of incorporation, it is intended that our powers following the Table of Contents expiration of the permitted time periods for consummating a business combination will automatically thereafter be limited to acts and activities relating to dissolving and winding up our affairs, including liquidation. If no proxy statement seeking the approval of our stockholders for a business combination has been filed 60 days prior to the date which is 24 months from the date of this prospectus (or 60 days prior to the date which is 30 months from the date of this prospectus if a definitive agreement has been executed within 24 months from the date of this prospectus and the business combination has not yet been consummated within such 24-month period), our board will, prior to such date, convene, adopt and recommend to our stockholders our dissolution and plan of distribution, and on such date file a proxy statement with the SEC seeking stockholder approval for such plan. Pursuant to the trust agreement governing such funds, the funds held in our trust account may not be distributed except upon our dissolution and, unless and until such approval is obtained from our stockholders, the funds held in our trust account will not be released (other than in connection with the funding of working capital, a conversion or a business combination as described elsewhere in this prospectus). Consequently, holders of a majority of our outstanding stock must approve our dissolution and plan of distribution in order to receive the funds held in our trust account and, other than in connection with a conversion or a business combination, the funds will not be available for any other corporate purpose. If we are unable to conclude an initial business combination and we expend all of the net proceeds of this offering and the purchase price paid in consideration for the founders units other than the proceeds deposited in the trust account, without taking into account any interest earned on the trust account, we expect that the initial per-share liquidation price will be approximately $9.77 (or approximately $9.74 per share if the underwriters over-allotment option is exercised in full), or $0.23 less than the per-unit offering price of $10.00 ($0.26 less if the underwriters over-allotment is exercised in full). The proceeds deposited in the trust account could, however, become subject to claims of our creditors that are in preference to the claims of our stockholders. In addition, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us that is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. Therefore, we cannot assure you that the actual per-share liquidation price will not be less than approximately $9.77 (or approximately $9.74 per share if the underwriters over-allotment option is exercised in full). While we will seek to have all vendors and service providers (which would include any third parties we engaged to assist us in any way in connection with our search for a target business) and prospective target businesses execute agreements with us waiving any right, title, interest or claim of any kind they may have in or to any monies held in the trust account, there is no guarantee that they Table of Contents will execute such agreements. Nor is there any guarantee that, even if such entities execute such agreements with us, they will not seek recourse against the trust account or that a court would not conclude that such agreements are not legally enforceable. Nathan D. Leight and Jason G. Weiss have agreed that they will be personally liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us. However, we cannot assure you that they will be able to satisfy those obligations, if they are required to do so. Furthermore, Messrs. Leight and Weiss will not have any personal liability as to any claimed amounts owed to a third party who executed a waiver (including a prospective target business). Additionally, in the case of a prospective target business that did not execute a waiver, such liability will be only in an amount necessary to ensure that public stockholders receive no less than $10.00 per share upon liquidation. Escrow of founders units On the date of this prospectus, all of our initial stockholders, including all of our executive officers and directors, will place their founders units into an escrow account maintained by Continental Stock Transfer Trust Company, acting as escrow agent. Subject to certain limited exceptions (such as transfers (i) to an entity s members upon its liquidation, (ii) to relatives and trusts for estate planning purposes or (iii) by private sales with respect to up to 33% of the founders units made at or prior to the consummation of an initial business combination at prices no greater than the price at which the units were originally purchased, in each case where the transferee agrees to the terms of the escrow agreement), these units will not be transferable during the escrow period and will not be released from escrow until one year after the consummation of our initial business combination or earlier if the over-allotment option is not exercised in full or in part, but only to the extent necessary to have up to 375,000 units cancelled as described above or if, following an initial business combination, (i) the last sales price of our common stock equals or exceeds $18.00 per share for any 20 trading days within any 30-trading day period or (ii) we consummate a subsequent liquidation, merger, stock exchange or other similar transaction which results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property. Audit committee to monitor compliance Effective upon consummation of this offering, we will establish and will maintain an audit committee to, among other things, monitor compliance on a quarterly basis with the terms described above and the other terms relating to this offering. If any noncompliance is identified, then the audit committee will be charged with the responsibility to immediately take all action necessary to rectify such non compliance or otherwise cause compliance with the terms of this offering. Determination of offering amount We determined the size of this offering in connection with the size of the offering for Aldabra 3 s initial public offering. We believe Table of Contents structuring our two initial public offerings simultaneously with different valuation requirements helps remove any potential conflicts of interest in engaging in the two offerings at the same time and provides our management with the greatest flexibility in finding suitable target businesses for both us and Aldabra 3 to complete an initial business combination. This belief is not based on any research, analysis, evaluations, discussions or compilations of information with respect to any particular investment or any such action undertaken in connection with our organization. We cannot assure you that our belief is correct, that we will be able to successfully identify acquisition candidates, that we will be able to obtain any necessary financing or that we will be able to consummate a transaction with one or more target businesses. Risks We are a newly formed company that has conducted no operations and has generated no revenues. Until we complete an initial business combination, we will have no operations and will generate no operating revenues. Our only revenues following this offering, and until we complete an initial business combination, will be from interest generated from our trust investments. In making your decision on whether to invest in our securities, you should take into account not only the backgrounds of our management, but also the special risks we face as a blank check company, as well as the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, and, therefore, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. You should carefully consider these and the other risks set forth in the section entitled Risk Factors beginning on page 21 of this prospectus. Table of Contents SUMMARY FINANCIAL DATA The following table summarizes the relevant financial data for our business and should be read with our financial statements, which are included in this prospectus. We have not had any significant operations to date, so only balance sheet data are presented. November 15, 2007 Actual As Adjusted(1) Balance Sheet Data: Working capital $ 11,500 $ 94,874,000 Total assets 125,000 94,874,000 Total liabilities 101,000 Value of common stock which may be converted to cash 39,059,990 Stockholders equity 24,000 55,814,010 (1) Includes the $2.5 million we will receive from the sale of the sponsors warrants. Assumes the payment of the $3.0 million deferred underwriters discounts and commissions to the underwriters. The as adjusted information gives effect to the sale of the units we are offering, including the application of the related gross proceeds and the payment of the estimated remaining costs from such sale and the repayment of the accrued and other liabilities required to be repaid. The working capital excludes $12,500 of costs related to this offering which were paid or accrued prior to November 15, 2007. These deferred offering costs have been recorded as a long-term asset and are reclassified against stockholders equity in the as adjusted information. The as adjusted working capital and total assets amounts include the approximately $94.7 million to be held in the trust account, which will be available to us only upon the consummation of an initial business combination within the time period described in this prospectus. The total amount to be placed in trust also includes $3.0 million (or $0.30 per unit) of deferred underwriting discounts and commissions payable to the underwriters in the offering only if we consummate an initial business combination. If an initial business combination is not so consummated, the trust account totaling approximately $97.7 million of net proceeds from the offering, including $2.5 million of proceeds from the private placement of the sponsors warrants, and all accrued interest earned thereon less (i) up to $2.0 million, or $2.3 million if the underwriters over-allotment option is exercised in full, that may be released to us to fund our expenses and other working capital requirements and (ii) any amounts released to us to pay our income or other tax obligations, will be distributed solely to our public stockholders (subject to our obligations under Delaware law to provide for claims of creditors). We will not proceed with an initial business combination if public stockholders owning 40% or more of the shares sold in this offering vote against the business combination and exercise their conversion rights. Accordingly, we may effect an initial business combination if public stockholders owning up to approximately 39.99% of the shares sold in this offering exercise their conversion rights. If this occurred, we would be required to convert to cash up to approximately 39.99% of the 10,000,000 shares sold in this offering, or 3,999,999 shares of common stock, at an initial per-share conversion price of approximately $9.77, without taking into account interest earned on the trust account. The actual per-share conversion price will be equal to: the amount in the trust account, including all accrued interest after distribution of interest income on the trust account balance to us as described above, as of two business days prior to the proposed consummation of the business combination, divided by the number of shares of common stock sold in the offering. Because converting stockholders will receive their proportionate share of the deferred underwriting discounts and commissions and the underwriters will be paid the full amount of their deferred underwriting compensation at the time of the consummation of the initial business combination, the company (and, therefore, the non-converting stockholders) will bear the financial effect of such payments to both the converting stockholders and the underwriters. Table of Contents RISK FACTORS An investment in our securities involves a high degree of risk. You should consider carefully all of the material risks described below, together with the other information contained in this prospectus before making a decision to invest in our units. If any of the following events occur, our business, financial condition and operating results may be materially adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks described below. Risks Associated With Our Business We are a development stage company with no operating history and, accordingly, you will not have any basis on which to evaluate our ability to achieve our business objective. We are a recently incorporated development stage company with no operating results to date. Therefore, our ability to commence operations is dependent upon obtaining financing through the public offering of our securities. Since we do not have an operating history, you will have no basis upon which to evaluate our ability to achieve our business objective, which is to acquire an operating business. We have not conducted any discussions and we have no plans, arrangements or understandings with any prospective acquisition candidates. We will not generate any revenues until, at the earliest, after the consummation of an initial business combination. We may not be able to consummate an initial business combination within the required time frame, in which case, we would be forced to liquidate our assets. Pursuant to our amended and restated certificate of incorporation, we have 24 months from the date of this prospectus (or 30 months from the date of this prospectus if a definitive agreement has been executed within 24 months from the date of this prospectus and the business combination relating thereto has not yet been consummated within such 24-month period) in which to complete an initial business combination. If we fail to consummate an initial business combination within the required time frame, we will, in accordance with our amended and restated certificate of incorporation seek stockholder approval to dissolve, liquidate and wind up. The foregoing requirements are set forth in Article Sixth of our amended and restated certificate of incorporation and may not be eliminated except in connection with, and upon consummation of, our initial business combination. We may not be able to find suitable target businesses within the required time frame. In addition, our negotiating position and our ability to conduct adequate due diligence on any potential target may be reduced as we approach the deadline for the consummation of an initial business combination. We do not have any specific business combination under consideration, and neither we, nor any representative acting on our behalf, has had any contacts with any target businesses regarding an initial business combination, nor taken any steps, directly or indirectly, to identify or locate any acquisition candidate, nor have we engaged or retained any agent or other representative to identify or locate any such acquisition candidate. If our stockholders approve our liquidation before an initial business combination is consummated and distribute the trust account, our public stockholders may receive less than $10.00 per share and our warrants will expire worthless. If we are unable to complete an initial business combination within 24 months from the date of this prospectus (or 30 months from the date of this prospectus if a definitive agreement has been executed within 24 months from the date of this prospectus and the business combination relating thereto has not yet been consummated within such 24-month period) and our stockholders approve our liquidation, the per-share liquidation distribution may be less than $10.00 because of the expenses of this offering, our general and administrative expenses and the anticipated costs of seeking a business combination. Furthermore, there will be no distribution with respect to our outstanding warrants which will expire worthless if we liquidate before the completion of an initial business combination. Table of Contents If we are unable to consummate a business combination, our public stockholders will be forced to wait up to 30 months before receiving liquidation distributions. We have 24 months from the date of this prospectus (or 30 months from the date of this prospectus if a definitive agreement has been executed within 24 months from the date of this prospectus and the business combination relating thereto has not yet been consummated within such 24-month period) in which to complete an initial business combination. We have no obligation to return funds to investors prior to the expiration of 24 or 30 months, as applicable, unless we consummate a business combination prior thereto and only then in cases where investors have sought conversion of their shares. Only after the expiration of this full time period will public stockholders be entitled to liquidation distributions if we are unable to complete an initial business combination. Accordingly, investors funds may be unavailable to them until such date. We may proceed with an initial business combination even if public stockholders owning approximately 39.99% of the shares sold in this offering exercise their conversion rights. We may proceed with an initial business combination as long as public stockholders owning less than 40% of the shares sold in this offering exercise their conversion rights. Accordingly, holders of approximately 39.99% of the shares of common stock sold in this offering may exercise their conversion rights and we could still consummate a proposed business combination. We have set the conversion percentage at 40% in order to reduce the likelihood that a small group of investors holding a block of our stock will be able to stop us from completing an initial business combination that is otherwise approved by a large majority of our public stockholders. While there are many other companies similar to ours which include conversion provisions of between 20% and 30%, the 40% threshold is above what had been customary and standard for offerings similar to ours. Our business combination may require us to use substantially all of our cash to pay the purchase price. In such a case, because we will not know how many stockholders may exercise such conversion rights, we may need to arrange third party financing to help fund our business combination in case a larger percentage of stockholders exercise their conversion rights than we expect. Additionally, even if our business combination does not require us to use substantially all of our cash to pay the purchase price, if a significant number of stockholders exercise their conversion rights, we will have less cash available to use in furthering our business plans following an initial business combination and may need to arrange third party financing. We have not taken any steps to secure third party financing for either situation. We cannot assure you that we will be able to obtain such third party financing on terms favorable to us or at all. You will not be entitled to protections normally afforded to investors of blank check companies. Since the net proceeds of this offering are intended to be used to complete an initial business combination with a target business that has not been identified, we may be deemed to be a blank check company under the United States securities laws. However, since our securities will be listed on the American Stock Exchange, a national securities exchange, and we will have net tangible assets in excess of $5.0 million upon the successful consummation of this offering and will file a Current Report on Form 8-K, including an audited balance sheet demonstrating this fact, we are exempt from rules promulgated by the SEC to protect investors of blank check companies such as Rule 419. Accordingly, investors will not be afforded the benefits or protections of those rules such as completely restricting the transferability of our securities, requiring us to complete an initial business combination within 18 months of the effective date of the initial registration statement and restricting the use of interest earned on the funds held in the trust account. Because we are not subject to Rule 419, our units will be immediately tradable, we will be entitled to withdraw a certain amount of interest earned on the funds held in the trust account prior to the completion of an initial business combination and we have a longer period of time to complete such an initial business combination than we would if we were subject to such rule. Table of Contents Because each unit includes only three quarters (3/4) of a warrant, the units may be worth less than units of other blank check companies. Each unit includes one share of common stock and three quarters (3/4) of a warrant. This is different from other offerings similar to ours whose units include one share of common stock and one warrant. We have established the components of the units in this way in order to alleviate the dilutive effect of the warrants and make us a more attractive merger partner for target businesses. Although the exercise price of our warrants is lower than that of warrants in other similar offerings, this unit structure may cause our units to be worth less than if it included one warrant. If the net proceeds of this offering not being held in trust are insufficient to allow us to operate for at least the next 30 months, we may be unable to complete an initial business combination. We believe that, upon consummation of this offering, the funds available to us outside of the trust account, plus the interest earned on the funds held in the trust account that may be available to us, will be sufficient to allow us to operate for at least the next 30 months, if an initial business combination is not consummated during that time. However, we cannot assure you that our estimates will be accurate. We could use a portion of the funds available to us to pay commitment fees for financing or fees to consultants to assist us with our search for a target business. We could also use a portion of the funds as a down payment or to fund a no-shop provision (a provision in letters of intent designed to keep target businesses from shopping around for transactions with other companies on terms more favorable to such target businesses) with respect to a particular proposed business combination, although we do not have any current intention to do so. If we entered into a letter of intent where we paid for the right to receive exclusivity from a target business and were subsequently required to forfeit such funds (whether as a result of our breach or otherwise), we might not have sufficient funds to continue searching for, or conduct due diligence with respect to, a target business. A decline in interest rates could limit the amount available to fund our search for a target business or businesses and complete an initial business combination since we will depend on interest earned on the trust account to fund our search, to pay our tax obligations and to complete our initial business combination. Of the net proceeds of this offering, only $200,000 will be available to us initially outside the trust account to fund our working capital requirements. We will depend on sufficient interest being earned on the proceeds held in the trust account to provide us with the additional working capital we will need to identify one or more target businesses and to complete our initial business combination, as well as to pay any tax obligations that we may owe. While we are entitled to have released to us for such purposes certain interest earned on the funds in the trust account, a substantial decline in interest rates may result in our having insufficient funds available with which to structure, negotiate or close an initial business combination. In such event, we would need to borrow funds from our initial stockholders to operate or may be forced to seek stockholder approval to liquidate. Our initial stockholders are under no obligation to advance funds to us in such circumstances. We may have six months longer than most other blank check companies to effect a business combination and therefore, the proceeds of this offering may remain in trust for a longer period of time before they are released to you. The period of time we have to complete an initial business combination is longer than blank check companies subject to Rule 419, which have 18 months to complete an initial business combination, or other special purpose acquisition companies, which typically have 18 or 24 months to complete an initial business combination. As a result, if we do not complete an initial business combination, the proceeds of this offering may remain in trust for a longer period of time before they are released to you. Table of Contents If third parties bring claims against us, the proceeds held in trust could be reduced and the per-share liquidation price received by stockholders could be less than approximately $9.77 per share. Our placing of funds in trust may not protect those funds from third party claims against us. Although we will seek to have all vendors and service providers we engage and prospective target businesses we negotiate with, execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our public stockholders, there is no guarantee that they will execute such agreements. Furthermore, there is no guarantee that, even if such entities execute such agreements with us, they will not seek recourse against the trust account. Nor is there any guarantee that a court would uphold the validity of such agreements. Accordingly, the proceeds held in trust could be subject to claims which could take priority over those of our public stockholders. If we liquidate before the completion of an initial business combination and distribute the proceeds held in trust to our public stockholders, Nathan D. Leight and Jason G. Weiss have agreed that they will be personally liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us. Based on representations made to us by Messrs. Leight and Weiss, we currently believe that they are capable of funding a shortfall in our trust account to satisfy their foreseeable indemnification obligations. However, we have not asked them to reserve for such an eventuality. Furthermore, our belief is based on our expectation that their indemnification obligations will be minimal. Accordingly, if that expectation turns out to be incorrect, we cannot assure you that such individuals will be able to satisfy those obligations or that the proceeds in the trust account will not be reduced by such claims. Furthermore, Messrs. Leight and Weiss will not have any personal liability as to any claimed amounts owed to a third party who executed a waiver (including a prospective target business). Additionally, in the case of a prospective target business that did not execute a waiver, such liability will be only in an amount necessary to ensure that public stockholders receive no less than $10.00 per share upon liquidation. Additionally, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our public stockholders. To the extent any bankruptcy claims deplete the trust account, we cannot assure you we will be able to return to our public stockholders at least approximately $9.77 per share. Our stockholders may be held liable for claims by third parties against us to the extent of distributions received by them. We will seek stockholder approval to dissolve and liquidate if we do not complete an initial business combination within 24 months from the date of this prospectus (or within 30 months from the date of this prospectus if a definitive agreement has been executed within 24 months from the date of this prospectus and the business combination relating thereto has not yet been consummated within such 24-month period). Under the Delaware General Corporation Law, stockholders may be held liable for claims by third parties against a corporation to the extent of certain unlawful distributions received by them in a dissolution conducted in accordance with the Delaware General Corporation Law. We do not intend to comply with the procedures set forth in Section 280 of the Delaware General Corporation Law, which prescribes various procedures by which stockholder liability may be limited. Because we will not be complying with Section 280, we will seek stockholder approval to comply with Section 281(b) of the Delaware General Corporation Law, requiring us to adopt a plan of dissolution that will reasonably provide for our payment, based on facts known to us at such time, of (i) all existing claims, including those that are contingent, (ii) all pending proceedings to which we are a party and (iii) all claims that may be potentially brought against us within the subsequent 10 years. However, because we are a blank check company, rather than an operating company, and our operations will be limited to searching for prospective target businesses to acquire, the only likely claims to arise would be from our vendors that we engage after the consummation of this offering and potential target businesses. We intend to have all vendors that we engage after the consummation of this offering and prospective target businesses execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the trust account, although we have not received any such agreements to date. If our plan of distribution complies with Section 281(b) of the Delaware General Corporation Law, any liability of Table of Contents stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder s pro rata share of the claim or the amount distributed to the stockholder. A plan of distribution in compliance with Section 281(b) of the Delaware General Corporation Law does not bar stockholder liability for claims not brought in a proceeding before the third anniversary of the dissolution (or such longer period directed by the Delaware Court of Chancery). Accordingly, we cannot assure you that third parties will not seek to recover from our public stockholders amounts owed to them by us even after that date. If we do not consummate a business combination and dissolve, payments from the trust account to our public stockholders may be delayed. We currently believe that any dissolution and plan of distribution in connection with to the expiration of the 24 and 30 month deadlines would proceed in approximately the following manner: prior to such deadline, our board of directors will, consistent with its obligations described in our amended and restated certificate of incorporation and Delaware law, consider a resolution for us to dissolve and consider a plan of distribution which it may then vote to recommend to our stockholders; at such time it will also cause to be prepared a preliminary proxy statement setting out such plan of distribution as well as the board s recommendation of such plan; upon such deadline, we would file our preliminary proxy statement with the SEC; if the SEC does not review the preliminary proxy statement, then, 10 days following the passing of such deadline, we will mail a definitive proxy statement to our stockholders, and 30 days following the passing of such deadline we will convene a meeting of our stockholders, at which they will either approve or reject our dissolution and plan of distribution; and if the SEC does review the preliminary proxy statement, we currently estimate that we will receive their comments 30 days following the passing of such deadline. We will mail the definitive proxy statement to our stockholders following the conclusion of the comment and review process (the length of which we cannot predict with any certainty, and which may be substantial) and we will convene a meeting of our stockholders at which they will either approve or reject our dissolution and plan of distribution. In the event we seek stockholder approval for our dissolution and plan of distribution and do not obtain such approval, we will nonetheless continue to pursue stockholder approval for our dissolution. Pursuant to the terms of our amended and restated certificate of incorporation, it is intended that our powers following the expiration of the permitted time periods for consummating a business combination will automatically thereafter be limited to acts and activities relating to dissolving and winding up our affairs, including liquidation. Pursuant to the trust agreement governing such funds, the funds held in our trust account may not be distributed except upon our dissolution and, unless and until such approval is obtained from our stockholders, the funds held in our trust account will not be released (other than in connection with the funding of working capital, a conversion or a business combination as described elsewhere in this prospectus). Consequently, holders of a majority of our outstanding stock must approve our dissolution in order to receive the funds held in our trust account and the funds will not be available for any other corporate purpose. These procedures, or a vote to reject any dissolution and plan of distribution by our stockholders, may result in substantial delays in the liquidation of our trust account to our public stockholders as part of our plan of distribution. An effective registration statement may not be in place when an investor desires to exercise warrants, thus precluding such investor from being able to exercise his, her or its warrants and causing such warrants to be practically worthless. No warrant held by public stockholders will be exercisable and we will not be obligated to issue shares of common stock unless at the time such holder seeks to exercise such warrant, a registration statement relating to the common stock issuable upon exercise of the warrant is effective and current. Under the terms of the warrant agreement, we have agreed to use our best efforts to meet these conditions and to maintain a current prospectus relating to the common stock issuable upon exercise of the warrants until the expiration of the Table of Contents warrants. However, we cannot assure you that we will be able to do so, and if we do not maintain a current prospectus related to the common stock issuable upon exercise of the warrants, holders will be unable to exercise their warrants and we will not be required to settle any such warrant exercise. If the prospectus relating to the common stock issuable upon the exercise of the warrants is not current, the warrants held by public stockholders may have no value, the market for such warrants may be limited and such warrants may expire worthless. An investor will only be able to exercise a warrant if the issuance of common stock upon such exercise has been registered or qualified or is deemed exempt under the securities laws of the state of residence of the holder of the warrants. No warrants will be exercisable and we will not be obligated to issue shares of common stock unless the common stock issuable upon such exercise has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. At the time that the warrants become exercisable (following our completion of an initial business combination), we expect to continue to be listed on a national securities exchange, which would provide an exemption from registration in every state. Accordingly, we believe holders in every state will be able to exercise their warrants as long as our prospectus relating to the common stock issuable upon exercise of the warrants is current. However, we cannot assure you of this fact. As a result, the warrants may be deprived of any value, the market for the warrants may be limited and the holders of warrants may not be able to exercise their warrants if the common stock issuable upon such exercise is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside. Since we have not yet selected a particular industry or target business with which to complete an initial business combination, we are unable to currently ascertain the merits or risks of the industry or business in which we may ultimately operate. We may consummate an initial business combination with a company in any industry we choose and are not limited to any particular industry or type of business. Accordingly, there is no current basis for you to evaluate the possible merits or risks of the particular industry in which we may ultimately operate or the target business which we may ultimately acquire. To the extent we complete an initial business combination with a financially unstable company or an entity in its development stage, we may be affected by numerous risks inherent in the business operations of those entities. If we complete an initial business combination with an entity in an industry characterized by a high level of risk, we may be affected by the currently unascertainable risks of that industry. Although our management will endeavor to evaluate the risks inherent in a particular industry or target business, we cannot assure you that we will properly ascertain or assess all of the significant risk factors. We also cannot assure you that an investment in our units will not ultimately prove to be less favorable to investors in this offering than a direct investment, if an opportunity were available, in a target business. Your only opportunity to evaluate and affect the investment decision regarding a potential business combination will be limited to voting for or against the initial business combination submitted to our stockholders for approval. At the time of your investment in us, you will not be provided with an opportunity to evaluate the specific merits or risks of one or more target businesses. Accordingly, your only opportunity to evaluate and affect the investment decision regarding a potential business combination will be limited to voting for or against the business combination submitted to our stockholders for approval. In addition, a proposal that you vote against could still be approved if a sufficient number of public stockholders vote for the proposed business combination. Alternatively, a proposal that you vote for could still be rejected if a sufficient number of public stockholders vote against the proposed business combination. Table of Contents We will not be required to obtain a fairness opinion from an independent investment banking firm as to the fair market value of the target business unless our board of directors is unable to independently determine the fair market value. The fair market value of the target business or businesses will be determined by our board of directors based upon one or more standards generally accepted by the financial community (such as actual and potential revenues, earnings and cash flow and/or book value). If our board is not able to independently determine that the target business has a sufficient fair market value to meet the threshold criterion and does not exceed $725 million, we will obtain an opinion from an unaffiliated, independent investment banking firm which is a member of FINRA with respect to the satisfaction of such criteria. We will not be required to obtain an opinion from an investment banking firm as to the fair market value if our board of directors independently determines that the target business complies with the threshold criterion. We may issue shares of our capital stock or debt securities to complete an initial business combination, which would reduce the equity interest of our initial stockholders and likely cause a change in control of our ownership. Our amended and restated certificate of incorporation authorizes the issuance of up to 35,000,000 shares of common stock, par value $.0001 per share, and 1,000,000 shares of preferred stock, par value $.0001 per share. Immediately after this offering and the purchase of the sponsors warrants (assuming no exercise of the underwriters over-allotment option), there will be 11,125,000 authorized but unissued shares of our common stock available for issuance (after appropriate reservation for the issuance of the shares upon full exercise of our outstanding warrants) and all of the 1,000,000 shares of preferred stock available for issuance. Although we have no commitment as of the date of this offering, we may issue a substantial number of additional shares of our common or preferred stock, or a combination of common and preferred stock, to complete an initial business combination. The issuance of additional shares of our common stock or any number of shares of our preferred stock: may significantly reduce the equity interest of investors in this offering; may subordinate the rights of holders of common stock if we issue preferred stock with rights senior to those afforded to our common stock; may cause a change in control if a substantial number of our shares of common stock are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and could result in the resignation or removal of our present executive officers and directors; and may adversely affect prevailing market prices for our common stock. Similarly, if we issue debt securities, it could result in: default and foreclosure on our assets if our operating revenues after an initial business combination are insufficient to repay our debt obligations; acceleration of our obligations to repay the indebtedness even if we make all principal and interest payments when due if we breach certain covenants that require the maintenance of certain financial ratios or reserves without a waiver or renegotiation of those covenants; our immediate payment of all principal and accrued interest, if any, if the debt security is payable on demand; and our inability to obtain necessary additional financing if the debt security contains covenants restricting our ability to obtain such financing while the debt security is outstanding. Resources could be wasted in researching acquisitions that are not consummated, which could materially adversely affect subsequent attempts to locate and acquire or merge with another business. It is anticipated that the investigation of each specific target business and the negotiation, drafting, and execution of relevant agreements, disclosure documents, and other instruments will require substantial Table of Contents management time and attention and substantial costs for accountants, attorneys and others. If a decision is made not to complete a specific business combination, the costs incurred up to that point for the proposed transaction likely would not be recoverable. Furthermore, even if an agreement is reached relating to a specific target business, we may fail to consummate the business combination for any number of reasons including those beyond our control, such as that 40% or more of our public stockholders vote against the business combination and opt to have us convert their stock for a pro rata share of the trust account even if a majority of our stockholders approve the business combination. Any such event will result in a loss to us of the related costs incurred which could materially adversely affect subsequent attempts to locate and acquire or merge with another business. Our ability to successfully effect an initial business combination and to be successful thereafter will be totally dependent upon the efforts of our key personnel, some of whom may join us following an initial business combination. Our ability to successfully effect an initial business combination is dependent upon the efforts of our key personnel. The role of our key personnel in the target business, however, cannot presently be ascertained. Although some of our key personnel may remain with the target business in senior management or advisory positions following an initial business combination, it is likely that some or all of the management of the target business will remain in place. While we intend to closely scrutinize any individuals we engage after an initial business combination, we cannot assure you that our assessment of these individuals will prove to be correct. These individuals may be unfamiliar with the requirements of operating a public company which could cause us to have to expend time and resources helping them become familiar with such requirements or replace them. This could be expensive and time-consuming and could lead to various regulatory issues which may adversely affect our operations. Our key personnel may negotiate employment or consulting agreements with a target business in connection with a particular business combination. These agreements may provide for them to receive compensation following an initial business combination and as a result, may cause them to have conflicts of interest in determining whether a particular business combination is the most advantageous. Our key personnel will be able to remain with the company after the consummation of an initial business combination only if they are able to negotiate employment or consulting agreements in connection with the business combination. Such negotiations would take place simultaneously with the negotiation of the business combination and could provide for such individuals to receive compensation in the form of cash payments and/or our securities for services they would render to the company after the consummation of the initial business combination. The personal and financial interests of such individuals may influence their motivation in identifying and selecting a target business. However, we believe the ability of such individuals to remain with the company after the consummation of an initial business combination will not be the determining factor in our decision as to whether or not we will proceed with any potential business combination. Our executive officers and directors will allocate their time to other businesses thereby causing conflicts of interest in their determination as to how much time to devote to our affairs. This conflict of interest could have a negative impact on our ability to consummate an initial business combination. Our executive officers and directors are not required to commit their full time to our affairs, which could create a conflict of interest when allocating their time between our operations and their other commitments. We do not intend to have any full time employees prior to the consummation of an initial business combination. Both of our executive officers are engaged in several other business endeavors, including, but not limited to, Aldabra 2 and Aldabra 3, and are not obligated to devote any specific number of hours to our affairs. If our executive officers and directors other business affairs require them to devote more substantial amounts of time to such affairs, it could limit their ability to devote time to our affairs and could have a negative impact on our ability to consummate an initial business combination. We cannot assure you that these conflicts will be resolved in our favor. As a result, a potential target business may be presented to another entity prior to its presentation to us and we may miss out on a potential transaction. Table of Contents Certain of our executive officers, directors and their affiliates are now, and all of them may in the future become, affiliated with entities engaged in business activities similar to those intended to be conducted by us and accordingly, may have conflicts of interest in determining to which entity a particular business opportunity should be presented. Certain of our executive officers and directors are now, and all of them may in the future become, affiliated with entities, including other blank check companies, engaged in business activities similar to those intended to be conducted by us. Each of our executive officers is an officer and director of Aldabra 2 and Aldabra 3 and certain of our directors are directors of Aldabra 2. Aldabra 2 has executed a definitive agreement for a business combination. Aldabra 3 cannot acquire a target business that has a fair market value less than $750 million. Furthermore, Nathan D. Leight and Jason G. Weiss have agreed, subject to any pre-existing fiduciary or contractual obligations, to show any potential target business that has a fair market value of $725 million or less to us prior to presentation to Aldabra 3 unless such target business (i) is being considered by Aldabra 3 in connection with other target businesses that will be acquired simultaneously by Aldabra 3 and is majority owned by the same sellers or (ii) is an affiliate of another business Aldabra 3 is simultaneously acquiring. Accordingly, we believe the potential for conflicts of interest with Aldabra 2 and Aldabra 3 is minimal. Nevertheless, they may have conflicts of interest with respect to other companies they are involved with in determining to which entity a particular business opportunity should be presented. We cannot assure you that these conflicts will be resolved in our favor. As a result, a potential target business may be presented to another affiliated entity prior to its presentation to us and we may miss out on a potential business combination. Our executive officers and directors interests in obtaining reimbursement for any out-of-pocket expenses incurred by them may lead to a conflict of interest in determining whether a particular target business is appropriate for an initial business combination and in the public stockholders best interest. Unless we consummate the initial business combination, our executive officers and directors will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the amount of available proceeds not deposited in the trust account and the amount of interest income from the trust account up to a maximum of $2.0 million, or $2.3 million if the underwriters over-allotment option is exercised in full, that may be released to us as working capital. We do not have a policy that prohibits our executive officers and directors from negotiating for the reimbursement of such expenses by a target business. If the owners of the target business do not agree to such repayment, this could cause our management to view such potential business combination unfavorably, thereby resulting in a conflict of interest. The financial interest of our executive officers or directors could influence our executive officers and directors motivation in selecting a target business or businesses and therefore there may be a conflict of interest when determining whether a particular business combination is in our stockholders best interest. All of our executive officers and directors own shares of our common stock and warrants issued prior, and in connection with, this offering. These shares and warrants will not participate in liquidation distributions and, therefore, our executive officers and directors may have a conflict of interest in determining whether a particular target business is appropriate for an initial business combination. All of our executive officers and directors own shares of founders common stock and founders warrants that were issued prior to this offering. Additionally, our executive officers and directors are purchasing sponsors warrants upon consummation of this offering. Such individuals have waived their right to receive distributions with respect to their shares of founders common stock upon our liquidation if we are unable to consummate an initial business combination. Accordingly, the founders common stock and founders warrants acquired prior to this offering, as well as the sponsors warrants, and any warrants purchased by our executive officers or directors in this offering or in the aftermarket will be worthless if we do not consummate an initial business combination. The personal and financial interests of our executive officers and directors may influence their motivation in identifying and selecting a target business on a timely basis and completing an initial business combination. Consequently, our directors and executive officers discretion in identifying and selecting a suitable target business may result in a conflict of interest when determining whether the terms, Table of Contents conditions and timing of a particular business combination are appropriate and in our stockholders best interest. The American Stock Exchange may delist our securities from quotation on its exchange which could limit investors ability to make transactions in our securities and subject us to additional trading restrictions. We anticipate that our securities will be listed on the American Stock Exchange, a national securities exchange, upon consummation of this offering. We cannot assure you that our securities will continue to be listed on the American Stock Exchange in the future prior to an initial business combination. Additionally, in connection with our initial business combination, it is likely that the American Stock Exchange will require us to file a new initial listing application and meet its initial listing requirements as opposed to its more lenient continued listing requirements. We cannot assure you that we will be able to meet those initial listing requirements at that time. If the American Stock Exchange delists our securities from trading on its exchange, we could face significant material adverse consequences, including: a limited availability of market quotations for our securities; reduced liquidity with respect to our securities; a determination that our common stock is a penny stock which will require brokers trading in our common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock; a significant decrease in coverage for our company; and a decreased ability to issue additional securities or obtain additional financing in the future. We may only be able to complete one business combination with the proceeds of this offering, which will cause us to be solely dependent on a single business which may have a limited number of products or services. Our business combination must be with one or more target businesses having an aggregate fair market value of at least 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions) at the time of such acquisition. By consummating an initial business combination with only a single entity, our lack of diversification may subject us to numerous economic, competitive and regulatory developments. Further, we would not be able to diversify our operations or benefit from the possible spreading of risks or offsetting of losses, unlike other entities which may have the resources to complete several business combinations in different industries or different areas of a single industry. Accordingly, the prospects for our success may be: solely dependent upon the performance of a single business, or dependent upon the development or market acceptance of a single or limited number of products, processes or services. This lack of diversification may subject us to numerous economic, competitive and regulatory developments, any or all of which may have a substantial adverse impact upon the particular industry in which we may operate subsequent to an initial business combination. Alternatively, if we determine to simultaneously acquire several businesses and such businesses are owned by different sellers, we will need for each of such sellers to agree that our purchase of its business is contingent on the simultaneous closings of the other business combinations, which may make it more difficult for us, and delay our ability, to complete the business combination. With multiple business combinations, we could also face additional risks, including additional burdens and costs with respect to possible multiple negotiations and due diligence investigations (if there are multiple sellers) and the additional risks associated with the subsequent assimilation of the operations and services or products of the acquired companies in a Table of Contents single operating business. If we are unable to adequately address these risks, it could negatively impact our profitability and results of operations. The ability of our stockholders to exercise their conversion rights may not allow us to effectuate the most desirable business combination or optimize our capital structure. When we seek stockholder approval of any business combination, we will offer each public stockholder (but not our initial stockholders) the right to have his, her or its shares of common stock converted to cash if the stockholder votes against the business combination and the business combination is approved and completed. Such holder must both vote against such business combination and then exercise his, her or its conversion rights to receive a pro rata portion of the trust account. If our business combination requires us to use substantially all of our cash to pay the purchase price, and since we will not know how many stockholders may exercise such conversion rights, we may either need to reserve part of the trust account for possible payment upon such conversion, or we may need to arrange third party financing to help fund our business combination in case a larger percentage of stockholders exercise their conversion rights than we expect. Since we have no specific business combination under consideration, we have not taken any steps to secure third party financing. Therefore, we may not be able to consummate an initial business combination that requires us to use all of the funds held in the trust account as part of the purchase price, or we may end up having a leverage ratio that is not optimal for our business combination. This may limit our ability to effectuate the most attractive business combination available to us. We may require stockholders who wish to convert their shares in connection with a proposed business combination to comply with specific requirements for conversion that may make it more difficult for them to exercise their conversion rights prior to the deadline for exercising their rights. We may require public stockholders who wish to convert their shares in connection with a proposed business combination to either tender their certificates to our transfer agent at any time prior to the vote taken at the stockholder meeting relating to such business combination or to deliver their shares to the transfer agent electronically using the Depository Trust Company s DWAC (Deposit/Withdrawal At Custodian) System. In order to obtain a physical stock certificate, a stockholder s broker and/or clearing broker, DTC and our transfer agent will need to act to facilitate this request. It is our understanding that stockholders should generally allot at least two weeks to obtain physical certificates from the transfer agent. However, because we do not have any control over this process or over the brokers or DTC, it may take significantly longer than two weeks to obtain a physical stock certificate. While we have been advised that it takes a short time to deliver shares through the DWAC System, we cannot assure you of this fact. Accordingly, if it takes longer than we anticipate for stockholders to deliver their shares, stockholders who wish to convert may be unable to meet the deadline for exercising their conversion rights and thus may be unable to convert their shares. Public stockholders, together with any affiliates of theirs or any other person with whom they are acting in concert or as a group with, will be restricted from seeking conversion rights with respect to more than 10% of the shares sold in this offering. When we seek stockholder approval of any business combination, we will offer each public stockholder (but not our existing stockholders) the right to have his, her, or its shares of common stock converted to cash if the stockholder votes against the business combination and the business combination is approved and completed. Notwithstanding the foregoing, a public stockholder, together with any affiliate of his or any other person with whom he is acting in concert or as a group will be restricted from seeking conversion rights with respect to more than 10% of the shares sold in this offering. Accordingly, if you purchase more than 10% of the shares sold in this offering and a proposed business combination is approved, you will not be able to seek conversion rights with respect to the full amount of your shares and may be forced to hold such additional shares or sell them in the open market. We cannot assure you that the value of such additional shares will appreciate over time following a business combination or that the market price of the common stock will exceed the per-share conversion price. Table of Contents Because of our limited resources and structure, we may not be able to consummate an attractive business combination. We expect to encounter intense competition from entities in addition to other blank check companies having a business objective similar to ours, including venture capital funds, leveraged buyout funds and operating businesses competing for acquisitions. Many of these entities are well established and have extensive experience in identifying and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human and other resources than we do and our financial resources will be relatively limited when contrasted with those of many of these competitors. While we believe that there are numerous potential target businesses that we could acquire with the net proceeds of this offering, our ability to compete in acquiring certain sizable target businesses will be limited by our available financial resources. This inherent competitive limitation gives others an advantage in pursuing the acquisition of certain target businesses. Furthermore, the obligation we have to seek stockholder approval of an initial business combination may delay the consummation of a transaction or make it less likely that a seller will agree to negotiate with us. Additionally, our outstanding warrants, and the future dilution they potentially represent, may not be viewed favorably by certain target businesses. Any of these obligations may place us at a competitive disadvantage in successfully negotiating an initial business combination. If we are unable to consummate an initial business combination with a target business within the prescribed time periods, we will be forced to seek stockholder approval to liquidate. We may be unable to obtain additional financing, if required, to complete an initial business combination or to fund the operations and growth of the target business, which could compel us to restructure or abandon a particular business combination. Although we believe that the net proceeds of this offering will be sufficient to allow us to consummate an initial business combination, because we have not yet identified any prospective target business, we cannot ascertain the capital requirements for any particular transaction. Since the minimum size of our initial business combination is greater than the amount to be held in our trust account, it is possible that we will be required to seek additional financing. We cannot assure you that such financing will be available on acceptable terms, if at all. During the third quarter of 2007, the global financial markets experienced declining equity valuations and disruptions in the credit markets due to reduced liquidity and a repricing of risk. These factors have and may continue to cause disruptions in the credit markets, which may impact our ability to obtain additional financing on reasonable terms if at all. To the extent that additional financing proves to be unavailable when needed to consummate a particular business combination, we would be compelled to either restructure the transaction or abandon that particular business combination and seek an alternative target business candidate. In addition, if we consummate an initial business combination, we may require additional financing to fund the operations or growth of the target business. The failure to secure additional financing could have a material adverse effect on the continued development or growth of the target business. None of our executive officers, directors or stockholders is required to provide any financing to us in connection with or after an initial business combination. Our requirement to complete our initial business combination with a target business or businesses whose collective fair market value does not exceed $725 million may limit the pool of available candidates. Our initial business combination must be with a target business or businesses whose collective fair market value is at least equal to 80% of the balance in the trust account (excluding deferred underwriting discounts and commissions) at the time of such acquisition and not more than $725 million. Typically, similarly structured blank check companies are able to complete an initial business combination with a target business or businesses whose collective fair market value is at least equal to 80% of the funds held in their trust account (excluding deferred underwriting discounts and commissions) without any maximum limitation. The limit on the fair market value of the business or businesses we can acquire may limit the potential pool of potential target businesses we may acquire and may make it more difficult for us to consummate an initial business combination. Table of Contents Our initial stockholders, including our executive officers and directors, control a substantial interest in us and thus may influence certain actions requiring a stockholder vote. Upon consummation of our offering, our initial stockholders (including all of our executive officers and directors) will collectively own 20% of our issued and outstanding shares of common stock (assuming they do not purchase any units in this offering). None of our initial stockholders, executive officers, directors or their affiliates has indicated an intention to purchase units in this offering or additional units or shares of common stock in the aftermarket or in private placements. However, they are not restricted from doing so. Additional purchases of shares of common stock by our initial stockholders, including our executive officers or directors, would likely allow them to exert additional influence over the approval of our initial business combination. The factors that would be considered in making such additional purchases would include consideration of the current trading price of our common stock. Another factor that would be taken into consideration would be that any such additional purchases would likely increase the chances that our initial business combination would be approved. Our board of directors is and will be divided into three classes, each of which will generally serve for a term of three years with only one class of directors being elected in each year. It is unlikely that there will be an annual meeting of stockholders to elect new directors prior to the consummation of an initial business combination, in which case all of the current directors will continue in office until at least the consummation of the initial business combination. If there is an annual meeting, as a consequence of our staggered board of directors, only a minority of the board of directors will be considered for election and our initial stockholders, because of their ownership position, will have considerable influence regarding the outcome. Accordingly, our initial stockholders will continue to exert control at least until the consummation of an initial business combination. Limited information is available for privately held companies that could be our potential targets. In accordance with our acquisition strategy, we may seek an initial business combination with one or more privately held companies. Generally, very little public information exists about these companies compared to public companies, and we will be required to rely on the ability of our executive officers and directors, with the assistance of advisors, to obtain adequate information to evaluate the potential returns from investing in these companies. If we are unable to identify all material information about these companies, then we may not make a fully informed investment decision, and we may lose money on our investments. Our initial stockholders paid an aggregate of $25,000, or approximately $0.009 per share, for their shares and, accordingly, you will experience immediate and substantial dilution from the purchase of our common stock. The difference between the public offering price per share of our common stock (allocating all of the unit purchase price to the common stock and none to the portion of the warrant included in the unit) and the pro forma net tangible book value per share of our common stock after this offering constitutes the dilution to the investors in this offering. Our initial stockholders acquired their initial shares of founders common stock at a nominal price, significantly contributing to this dilution. Upon consummation of this offering, you and the other new investors will incur an immediate and substantial dilution of approximately 34.3% or $3.43 per share (the difference between the pro forma net tangible book value per share of $6.57, and the initial offering price of $10.00 per unit). If our management exercises their option to require holders of our warrants to exercise such warrants on a cashless basis, it will cause holders to receive fewer shares of common stock upon their exercise of the warrants than they would have received had they been able to exercise their warrants for cash. If we call our warrants for redemption after the redemption criteria described elsewhere in this prospectus have been satisfied, our management will have the option to require any holder that wishes to exercise his warrant to do so on a cashless basis. In such event, each holder would be required to pay the exercise price by surrendering the warrants for that number of shares of common stock equal to the quotient obtained by Table of Contents dividing (x) the product of the number of shares of common stock underlying the warrants, multiplied by the difference between the exercise price of the warrants and the fair market value and (y) the fair market value. The fair market value shall mean the average reported last sales price of our common stock for the 10 trading days ending on the third trading day prior to the date on which notice of redemption is sent to the holders of the warrants. If our management chooses to require holders to exercise their warrants on a cashless basis, the number of shares of common stock received by a holder upon exercise will be fewer than it would have been had such holder exercised his warrant for cash. This will have the effect of reducing the potential upside of the holder s investment in our company. Our outstanding warrants may have an adverse effect on the market price of our common stock and make it more difficult to effect an initial business combination. We issued the founders warrants to purchase 1,875,000 shares of common stock (or 2,156,250 shares of common stock if the underwriters over-allotment option is exercised in full) as part of the sale of the founders units. We will be issuing warrants to purchase 7,500,000 shares of common stock as part of the units offered by this prospectus and the sponsors warrants to purchase 2,000,000 shares of common stock. To the extent we issue shares of common stock to effect an initial business combination, the potential for the issuance of a substantial number of additional shares upon exercise of these warrants (and at a price below the prevailing market price) could make us a less attractive acquisition vehicle in the eyes of a target business. Such securities, when exercised, will increase the number of issued and outstanding shares of our common stock and reduce the value of the shares issued to complete an initial business combination. Accordingly, our warrants may make it more difficult to effectuate an initial business combination or increase the cost of acquiring the target business. Additionally, the sale, or even the possibility of sale, of the shares underlying the warrants could have an adverse effect on the market price for our securities or on our ability to obtain future financing. If and to the extent these warrants are exercised, you may experience dilution to your holdings. If our initial stockholders or the purchasers of the sponsors warrants exercise their registration rights with respect to their founders units or sponsors warrants and underlying securities, it may have an adverse effect on the market price of our common stock and the existence of these rights may make it more difficult to effect an initial business combination. Our initial stockholders are entitled to demand that we register the resale of their founders units (including shares, warrants and shares underlying warrants) at any time commencing three months prior to the date on which their units are released from escrow. Additionally, the purchasers of the sponsors warrants are entitled to demand that we register the resale of their sponsors warrants and underlying shares of common stock at any time after we consummate an initial business combination. If such individuals exercise their registration rights with respect to all of their securities, then there will be an additional 2,500,000 shares (or 2,875,000 shares if the over-allotment option is exercised in full) of common stock and 3,875,000 warrants, or 4,156,250 warrants if the over-allotment option is exercised in full, as well as 3,875,000 shares, or 4,156,250 shares if the over-allotment option is exercised in full, underlying the warrants, eligible for trading in the public market. The presence of these additional shares of common stock trading in the public market may have an adverse effect on the market price of our common stock. In addition, the existence of these rights may make it more difficult to effectuate an initial business combination or increase the cost of acquiring the target business, as the stockholders of the target business may be discouraged from entering into an initial business combination with us or may request a higher price for their business because of the potential effect the exercise of such rights may have on the trading market for our common stock. If we are deemed to be an investment company, we may be required to institute burdensome compliance requirements and our activities may be restricted, which may make it difficult for us to complete an initial business combination. A company that, among other things, is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, owning, trading or holding certain types of securities would be deemed an investment company under the Investment Company Act of 1940. Since we will invest the Table of Contents proceeds held in the trust account, it is possible that we could be deemed an investment company. Notwithstanding the foregoing, we do not believe that our anticipated principal activities will subject us to the Investment Company Act of 1940. To this end, the proceeds held in trust may be invested by the trustee only in United States government securities within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 having a maturity of 180 days or less, or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940 that invest solely in government securities. By restricting the investment of the proceeds to these instruments, we intend to meet the requirements for the exemption provided in Rule 3a-1 promulgated under the Investment Company Act of 1940. If we are nevertheless deemed to be an investment company under the Investment Company Act of 1940, we may be subject to certain restrictions that may make it more difficult for us to complete an initial business combination, including: restrictions on the nature of our investments; and restrictions on the issuance of securities. In addition, we may have imposed upon us certain burdensome requirements, including: registration as an investment company; adoption of a specific form of corporate structure; and reporting, record keeping, voting, proxy, compliance policies and procedures and disclosure requirements and other rules and regulations. Compliance with these additional regulatory burdens would require additional expense for which we have not allotted funds. There is currently no market for our securities and a market for our securities may not develop, which would adversely affect the liquidity and price of our securities. There is currently no market for our securities. Stockholders therefore have no access to information about prior market history on which to base their investment decision. Furthermore, an active trading market for our securities may never develop or, if developed, it may not be sustained. You may be unable to sell your securities unless a market can be established and sustained. The determination for the offering price of our units and sponsors warrants is more arbitrary compared with the pricing of securities for an operating company in a particular industry. Prior to this offering there has been no public market for any of our securities. The public offering price of the units and the terms of the warrants, as well as the price of the sponsors warrants, were negotiated between us and the underwriters. Factors considered in determining the prices and terms of the units, including the common stock and warrants underlying the units, and the sponsors warrants include: the history and prospects of companies whose principal business is the acquisition of other companies such as other blank check companies; prior offerings of those companies; amount of cash per share held in trust; our prospects for acquiring an operating business at attractive values; our capital structure; an assessment of our management and their experience in identifying operating companies; general conditions of the securities markets at the time of the offering; and other factors as were deemed relevant. Table of Contents However, although these factors were considered, the determination of our offering price is more arbitrary than the pricing of securities for an operating company in a particular industry since we have no historical operations or financial results to compare them to. If we effect an initial business combination with a company located outside of the United States, we would be subject to a variety of additional risks that may negatively impact our operations. We may effect an initial business combination with a company located outside of the United States. If we did, we would be subject to any special considerations or risks associated with companies operating in the target business home jurisdiction, including any of the following: rules and regulations or currency conversion or corporate withholding taxes on individuals; tariffs and trade barriers; regulations related to customs and import/export matters; longer payment cycles; tax issues, such as tax law changes, United States federal anti-deferral requirements and variations in tax laws as compared to the United States; currency fluctuations; challenges in collecting accounts receivable; cultural and language differences; employment regulations; differing political environments; and deterioration of political relations with the United States. We cannot assure you that we would be able to adequately address these additional risks. If we were unable to do so, our operations might suffer. If we effect an initial business combination with a company located outside of the United States, the laws applicable to such company will likely govern all of our material agreements and we may not be able to enforce our legal rights. If we effect an initial business combination with a company located outside of the United States, the laws of the country in which such company operates will govern almost all of the material agreements relating to its operations. We cannot assure you that the target business will be able to enforce any of its material agreements or that remedies will be available in this new jurisdiction. The system of laws and the enforcement of existing laws in such jurisdiction may not be as certain in implementation and interpretation as in the United States. The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss of business, business opportunities or capital. Additionally, if we acquire a company located outside of the United States, it is likely that substantially all of our assets would be located outside of the United States and some of our officers and directors might reside outside of the United States. As a result, it may not be possible for investors in the United States to enforce their legal rights, to effect service of process upon our directors or executive officers or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties against our directors and officers under Federal securities laws. Because we must furnish our stockholders with target business financial statements, we may not be able to complete an initial business combination with some prospective target businesses. We will provide stockholders with audited financial statements of the prospective target business as part of the proxy solicitation materials sent to stockholders to assist them in assessing the target business. In all likelihood, these financial statements will need to be prepared in conformity with United States generally Table of Contents accepted accounting principles. A target business identified by us as a potential acquisition candidate may not have financial statements prepared in conformity with United States generally accepted accounting principles and may not be able to prepare its financial statements in conformity with United States generally accepted accounting principles. To the extent that this requirement cannot be met, we may not be able to acquire the proposed target business. These financial statement requirements may limit the pool of potential target businesses with which we may combine. Our obligations under laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related regulations, may increase our cost of completing an initial business combination. Section 404 of the Sarbanes-Oxley Act of 2002 requires that management assess and report on the effectiveness of our internal control beginning with our Annual Report on Form 10-K for the year ending December 31, 2009. If we fail to develop and maintain effective internal control, we may be subject to regulatory scrutiny, civil or criminal penalties and/or stockholder litigation. Any inability to provide reliable financial reports could harm our business. Section 404 of the Sarbanes-Oxley Act also requires that our independent registered public accounting firm provide an independent opinion on the effectiveness of our internal control over financial reporting. In addition, a target company may not be in compliance with the provisions of the Sarbanes-Oxley Act. The development and maintenance of the internal control of any such entity to ensure compliance with the Sarbanes-Oxley Act may increase the time and costs necessary to complete any such acquisition. Furthermore, any failure to develop and maintain effective internal control may harm our operating results and/or result in difficulties in meeting our reporting obligations. Inadequate internal control could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock. Table of Contents CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS The statements contained in this prospectus that are not purely historical are forward-looking statements. Our forward-looking statements include, but are not limited to, statements regarding our or our management s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words anticipates, believe, continue, could, estimate, expect, intends, may, might, plan, possible, potential, predicts, project, should, would and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this prospectus may include, for example, statements about our: ability to complete our initial business combination; success in retaining or recruiting, or changes required in, our officers, key employees or directors following our initial business combination; executive officers and directors allocating their time to other businesses and potentially having conflicts of interest with our business or in approving our initial business combination, as a result of which they would then receive expense reimbursements; potential ability to obtain additional financing to complete an initial business combination; pool of prospective target businesses; the ability of our executive officers and directors to generate a number of potential investment opportunities; potential change in control if we acquire one or more target businesses for stock; public securities potential liquidity and trading; listing or delisting of our securities from the American Stock Exchange or the ability to have our securities listed on the American Stock Exchange following our initial business combination; use of proceeds not held in the trust account or available to us from interest income on the trust account balance; or financial performance following this offering. The forward-looking statements contained in this prospectus are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those
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+appearing elsewhere in this prospectus. As this is a summary, it does not contain all of the information that you should consider in making an investment decision. You should read this entire prospectus carefully, including the information under Risk Factors and our financial statements and the related notes included elsewhere in this prospectus, before investing. References in this prospectus to we , us or our company refer to Aldabra 3 Acquisition Corp. References in this prospectus to public stockholders refers to those persons that purchase the securities offered by this prospectus or afterwards and any of our initial stockholders (as defined below) who purchase these securities either in this offering or afterwards, provided that our initial stockholders status as public stockholders shall only exist with respect to those securities so purchased. References in this prospectus to our management team refer to our executive officers and directors. The information in this prospectus has been adjusted to reflect a 3/4-for-1 warrant dividend for each outstanding share of common stock which was effected as of December 19, 2007. Such transaction has effectively recapitalized the initial stockholders investment and has created the founders units that are discussed throughout this prospectus. Unless we tell you otherwise, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option. We are a blank check company organized under the laws of the State of Delaware on August 24, 2007. We were formed with the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or other similar business combination with one or more operating businesses, which we refer to as our initial business combination. To date, our efforts have been limited to organizational activities. Our efforts in identifying a prospective target business will not be limited to a particular industry, although we intend to focus our efforts on seeking an initial business combination with a portfolio company currently held by a private equity firm specializing in either leveraged buyouts or venture capital. We do not have any specific business combination under consideration. Our executive officers and directors have neither individually identified or considered a target business nor have they had any discussions regarding possible target businesses amongst themselves or with our underwriters or other advisors. We have not (nor has anyone on our behalf) contacted any prospective target business or had any discussions, formal or otherwise, with respect to an initial business combination transaction. We have not (nor have any of our agents or affiliates) been approached by any candidates (or representative of any candidates) with respect to a possible acquisition transaction with our company. Additionally, we have not, nor has anyone on our behalf, taken any steps, directly or indirectly, to identify or locate any acquisition candidate, nor have we engaged or retained any agent or other representative to identify or locate any such acquisition candidate. We will seek to capitalize on the significant investing experience and contacts of Nathan D. Leight, our Chairman, and Jason G. Weiss, our Chief Executive Officer, Secretary and a Director, each of whom has substantial experience in identifying, investing in, and acquiring businesses in a wide variety of industries. In 1998, Messrs. Leight and Weiss founded Terrapin Partners LLC, which through its network of affiliated companies manages, as of September 30, 2007, more than $600 million of capital for institutional investors, high net worth individuals, and Terrapin s principals. Additionally, Messrs. Leight and Weiss serve as the Chairman and Chief Executive Officer, respectively, of Aldabra 2 Acquisition Corp. ( Aldabra 2 ), a blank check company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. Aldabra 2 consummated its initial public offering in June 2007 and raised gross proceeds of $414 million at an offering price of $10.00 per unit. In September 2007, Aldabra 2 entered into a definitive agreement for an initial business combination with the paper and packaging divisions of Boise Cascade, L.L.C., a portfolio company of Madison Dearborn Capital Partners, LLC ( Madison Dearborn ), and expects shareholders to vote on the proposed transaction in the first quarter of 2008. Messrs. Leight and Weiss also served as Chairman and Chief Executive Officer, respectively, of Aldabra Acquisition Corporation ( Aldabra 1 ), a blank check company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with an unidentified operating business. Aldabra 1 consummated its initial public offering in February 2004 and raised gross Table of Contents proceeds of $55.2 million at an offering price of $6.00 per unit. In December 2006, Aldabra 1 completed a merger with Great Lakes Dredge Dock Corporation, a portfolio company of Madison Dearborn. Our initial business combination must be with a target business or businesses whose collective fair market value is at least equal to $750 million. The fair market value of the target will be determined by our board of directors based upon one or more standards generally accepted by the financial community (which may include actual and potential sales, earnings, cash flow and/or book value). If our board is not able to independently determine that the target business has a sufficient fair market value, we will obtain an opinion from an unaffiliated, independent investment banking firm which is a member of the Financial Industry Regulatory Authority, or FINRA, with respect to the satisfaction of such criteria. We anticipate structuring an initial business combination to acquire 100% of the equity interests or assets of the target business. We may, however, structure an initial business combination to acquire less than 100% of such interests or assets of the target business or businesses but such acquisition will not be for less than a controlling interest (which would be at least 50.1% of the voting securities of the target business). If we acquire only a controlling interest in a target business or businesses, the portion of such business that we acquire must have a fair market value equal to at least $750 million. If we determine to simultaneously acquire several businesses and such businesses are owned by different sellers, we will need for each of such sellers to agree that our purchase of its business is contingent on the simultaneous closings of the other acquisitions, which may make it more difficult for us, and delay our ability, to complete the business combination. With multiple acquisitions, we could also face additional risks, including additional burdens and costs with respect to possible multiple negotiations and due diligence investigations (if there are multiple sellers) and the additional risks associated with the subsequent assimilation of the operations and services or products of the acquired companies in a single operating business. The target business or businesses that we acquire may have a collective fair market value substantially in excess of $750 million. In order to consummate such an initial business combination, we may issue a significant amount of our debt or equity securities to the sellers of such business and/or seek to raise additional funds through a private offering of debt or equity securities. There are no limitations on our ability to incur debt or issue securities in order to consummate an initial business combination. If we issue securities in order to consummate an initial business combination, our stockholders could end up owning a minority of the combined company as there is no requirement that our stockholders own a certain percentage of our company after our business combination. Since we have no specific business combination under consideration, we have not entered into any such arrangement to issue our debt or equity securities and have no current intention of doing so. If we are unable to consummate a business combination within 24 months from the date of this prospectus (or within 30 months from the date of this prospectus if a definitive agreement has been executed within 24 months from the date of this prospectus and the business combination has not yet been consummated within such 24-month period), we will seek stockholder approval to liquidate and distribute the proceeds held in the trust account to our public stockholders in an amount we expect to be approximately $9.77 per share of common stock held by them (or approximately $9.75 per share if the underwriters exercise their over-allotment option in full), without taking into account any interest earned on such funds. Simultaneously with our formation, our executive officers organized Aldabra 4 Acquisition Corp. ( Aldabra 4 ), formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or other similar business combination with one or more operating businesses with a fair market value of $725 million or less. Aldabra 4 is anticipating to raise approximately $100 million in its initial public offering. It is anticipated that our initial public offering will coincide with that of Aldabra 4, although this is not a requirement of either offering. Nathan D. Leight, our chairman, and Jason G. Weiss, our chief executive officer, secretary and director, have entered into a business opportunity right of first review agreement with us and Aldabra 4 that provides that from the date of Aldabra 4 s prospectus for its initial public offering until the earlier of the consummation of its initial business combination or its liquidation, Aldabra 4 will have a right of first review with respect to the business combination opportunities of Messrs. Leight and Weiss with a fair market value of $725 million or less. Messrs. Leight and Weiss will first Table of Contents offer such business opportunities to Aldabra 4 (subject to any pre-existing contractual or fiduciary obligations they might have) and they will not and we will not pursue such a business opportunity unless and until a majority of Aldabra 4 s disinterested directors have determined for any reason that Aldabra 4 will not pursue such an opportunity. This right of first review does not apply to a target business that (i) is being considered by us in connection with other target businesses that will be acquired simultaneously by Aldabra 3 and is majority owned by the same sellers or (ii) is an affiliate of another business we are simultaneously acquiring. Our executive officers and certain of our directors are also principals of Aldabra 2. Aldabra 2 consummated its initial public offering in June 2007 and in September 2007 entered into a definitive agreement for a business combination with Boise Cascade, L.L.C., a Madison Dearborn portfolio company, to acquire the assets and liabilities related to the operation of the paper, packaging and newsprint, and transportation businesses of, and most of the headquarters operations of, Boise Cascade, L.L.C., including Boise White Paper, L.L.C., Boise Packaging Newsprint, L.L.C. and Boise Cascade Transportation Holdings Corp. (collectively, Boise ). If the business combination between Aldabra 2 and Boise fails for any reason, our executive officers and certain of our directors will have a pre-existing fiduciary and contractual obligation to Aldabra 2 and will offer it all suitable business opportunities prior to offering such opportunities to us or Aldabra 4. Private Placements and Future Purchases of Common Stock Effective November 5, 2007, we issued an aggregate of 14,375,000 founders units (after giving retroactive effect to our warrant dividend of three quarters (3/4) of a warrant issued per share of founders common stock that was effected as of December 19, 2007) to Terrapin Partners Equity Partnership, Jonathan Berger, Richard Rogel, David Jaffe, Bruce Pollack, William Stiritz and Terrapin Partners Employee Partnership for $25,000 in cash, at a purchase price of approximately $0.002 per unit. This number includes up to 1,875,000 founders units which are subject to forfeiture to the extent the underwriters do not exercise their over-allotment option in full. Each unit consists of one share of common stock and three quarters (3/4) of one warrant. We refer to the current holders of these outstanding units as our initial stockholders, and we refer to these outstanding units, shares of common stock and warrants as the founders units, founders common stock and founders warrants throughout this prospectus. The founders units are identical to the units being sold in this offering, except that: up to an aggregate of 1,875,000 founders units are subject to forfeiture by our initial stockholders to the extent that the over-allotment option is not exercised in full by the underwriters; the founders units will be placed in escrow and the founders common stock and founders warrants are subject to the transfer restrictions and registration rights described in this prospectus; the founders warrants will become exercisable after the consummation of our initial business combination if and when the last sales price of our common stock exceeds $14.50 per share for any 20 trading days within any 30-trading day period beginning 90 days after the initial business combination; the founders warrants will be exercisable on a cashless basis and will not be redeemable by us, in each case, as long as they are held by the initial stockholders or their permitted transferees; the initial stockholders have agreed to: (i) vote the founders common stock in the same manner as the majority of shares voted by the public stockholders at the special or annual meeting called for the purpose of approving our initial business combination; and (ii) vote in favor of our dissolution and liquidation in the event that we do not consummate an initial business combination within 24 months or 30 months from the date of this prospectus, as applicable; the initial stockholders will not be able to exercise conversion rights (as described below) with respect to the founders common stock; and the initial stockholders have agreed to waive their rights to participate in any liquidation distribution with respect to the founders common stock if we fail to consummate an initial business combination. Table of Contents The initial stockholders have agreed not to transfer, assign or sell any of the founders units until one year after the date of the completion of an initial business combination or earlier if, subsequent to our initial business combination, (i) the closing price of our common stock equals or exceeds $18.00 per share for any 20 trading days within any 30-trading day period or (ii) we consummate a subsequent liquidation, merger, stock exchange or other similar transaction which results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property; provided however that transfers can be made to permitted transferees who agree in writing to be bound to the transfer restrictions, agree to vote in the same manner as a majority of the public stockholders in connection with the vote required to approve our initial business combination and waive any rights to participate in any liquidation distribution if we fail to consummate an initial business combination. For so long as the founders units are subject to such transfer restrictions they will be held in an escrow account maintained by Continental Stock Transfer Trust Company. All of our executive officers and directors and Stephen H. Bittel, a director of Aldabra 4, and Peter R. Deutsch, a former director of Aldabra 1 and special advisor to Aldabra 2, and/or their family trusts, have agreed to purchase an aggregate of 7,600,000 warrants at a price of $1.25 per warrant ($9.5 million in the aggregate) in a private placement that will occur simultaneously with the consummation of this offering. The $9.5 million of proceeds from this investment will be added to the proceeds of this offering and will be held in the trust account pending our completion of an initial business combination on the terms described in this prospectus. If we do not complete such an initial business combination, then the $9.5 million will be part of the liquidating distribution to our public stockholders, and the sponsors warrants will expire worthless. The sponsors warrants are identical to the warrants included in the units being sold in this offering, except that the sponsors warrants (i) are non-redeemable so long as they are held by any of the sponsors or their permitted transferees, (ii) are subject to certain transfer restrictions as described in more detail in this prospectus and will not be exercisable while they are subject to these transfer restrictions and (iii) may be exercised on a cashless basis, as described in this prospectus. The sponsors have agreed not to sell or otherwise transfer any of the sponsors warrants until the later of one year from the date of this prospectus or 60 days after the date we complete our initial business combination; provided however that transfers can be made to permitted transferees who agree in writing to be bound by such transfer restrictions. For so long as the sponsors warrants are subject to such transfer restrictions they will be held in an escrow account maintained by Continental Stock Transfer Trust Company. Our executive offices are located at c/o Terrapin Partners LLC, 540 Madison Avenue, 17th Floor, New York, New York 10022 and our telephone number is (212) 710-4100. Table of Contents THE OFFERING In making your decision on whether to invest in our securities, you should take into account not only the backgrounds of the members of our management team, but also the special risks we face as a blank check company and the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended (the Securities Act ). You will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. You should carefully consider these and the other risks set forth in the section below entitled Risk Factors beginning on page 21 of this prospectus. Securities offered 50,000,000 units, at $10.00 per unit, each unit consisting of: one share of common stock; and three quarters (3/4) of one warrant. Trading commencement and separation of common stock and warrants The units will begin trading on or promptly after the date of this prospectus. Each of the common stock and warrants may trade separately on the 35th day after the date of this prospectus unless Citigroup Global Markets Inc. determines that an earlier date is acceptable. No fractional warrants will be issued and only whole warrants will trade. In no event will Citigroup Global Markets Inc. allow separate trading of the common stock and warrants until we file an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file a Current Report on Form 8-K with the Securities and Exchange Commission, including an audited balance sheet, promptly upon the consummation of this offering, which is anticipated to take place four business days from the date the units commence trading. The Form 8-K will include financial information regarding our receipt of the proceeds from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Form 8-K. If the over-allotment option is exercised after our initial filing of a Form 8-K, we will file an amendment to the Form 8-K to provide updated financial information to reflect the exercise and consummation of the over-allotment option. We will also include in this Form 8-K, or amendment thereto, or in a subsequent Form 8-K, information indicating if Citigroup Global Markets Inc. has allowed separate trading of the common stock and warrants prior to the 35th day after the date of this prospectus. The units will continue to trade along with the common stock and warrants after the units are separated. Holders will need to have their brokers contact our transfer agent in order to separate the units into common stock and warrants. Units: Number outstanding before this offering 14,375,000 units1 1 This number includes an aggregate of up to 1,875,000 founders units, comprised of 1,875,000 shares of founders common stock and 1,406,250 founders warrants, that are subject to forfeiture by our initial stockholders if the over-allotment option is not exercised in full by the underwriters and gives effect to our warrant dividend. Table of Contents Number outstanding after this offering 62,500,000 units2 Common stock: Number outstanding before this offering 14,375,000 shares3 Number to be outstanding after this offering 62,500,000 shares4 Warrants: Number outstanding before this offering 10,781,250 warrants5 Number to be sold privately simultaneously with consummation of this offering 7,600,000 warrants Number to be outstanding after this offering and sale to insiders 54,475,000 warrants6 Exercisability Each whole warrant is exercisable for one share of common stock. Warrants may be exercised only in increments of one whole warrant. Exercise price $6.50 Exercise period The warrants will become exercisable on the later of: the completion of an initial business combination with a target business, and one year from the date of this prospectus. However, the warrants will only be exercisable if a registration statement relating to the common stock issuable upon exercise of the warrants is effective and current. The warrants will expire at 5:00 p.m., New York City time, six years from the date of this prospectus or earlier upon redemption. 2 Assumes the over-allotment option has not been exercised and an aggregate of 1,875,000 founders units, comprised of 1,875,000 shares of founders common stock and 1,406,250 founders warrants, have been forfeited by our initial stockholders. 3 This number includes an aggregate of up to 1,875,000 shares of founders common stock that are subject to forfeiture by our initial stockholders if the over-allotment option is not exercised in full by the underwriters. 4 Assumes the over-allotment option has not been exercised and an aggregate of 1,875,000 shares of founders common stock have been forfeited by our initial stockholders. 5 This number includes an aggregate of up to 1,406,250 founders warrants that are subject to forfeiture by our initial stockholders if the over-allotment option is not exercised in full by the underwriters and gives effect to our warrant dividend. 6 Assumes the over-allotment option has not been exercised and an aggregate of 1,406,250 founders warrants have been forfeited by our initial stockholders. Table of Contents Redemption We may redeem the outstanding warrants (excluding any founders warrants and sponsors warrants held by the initial stockholders, sponsors or their permitted transferees) without the prior consent of the underwriters: in whole and not in part, at a price of $.01 per warrant at any time while the warrants are exercisable, upon a minimum of 30 days prior written notice of redemption, and if, and only if, the last sales price of our common stock equals or exceeds $14.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. We will not redeem the warrants unless an effective registration statement covering the shares of common stock issuable upon exercise of the warrants is current and available throughout the 30-day redemption period. If we call the warrants for redemption as described above, our management will have the option to require all holders that wish to exercise warrants to do so on a cashless basis. In such event, each holder would pay the exercise price by surrendering the warrants for that number of shares of common stock equal to the quotient obtained by dividing (x) the product of the number of shares of common stock underlying the warrants, multiplied by the difference between the exercise price of the warrants and the fair market value (defined below) by (y) the fair market value. The fair market value shall mean the average reported last sale price of the common stock for the ten trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of warrants. We may not redeem the sponsors warrants so long as they are held by the sponsors or their permitted transferees. Reasons for redemption limitations: We have established the above conditions to our exercise of redemption rights to: provide warrant holders with adequate notice of redemption; permit redemption only after the then-prevailing common stock price is substantially above the warrant exercise price; and ensure a sufficient differential between the then-prevailing common stock price and the warrant exercise price exists so there is a buffer to absorb the market reaction, if any, to our redemption of the warrants. If the foregoing conditions are satisfied and we issue a notice of redemption, each warrant holder can exercise his, her or its warrant prior to the scheduled redemption date. However, there can be no assurance that the price of the common stock will not fall below the $14.50 trigger price or the $6.50 warrant exercise price after the redemption notice is issued. Table of Contents Founders units Effective November 5, 2007, we issued an aggregate 14,375,000 founders units (which includes 1,875,000 founders units which are subject to forfeiture to the extent the underwriters do not exercise their over-allotment option in full after giving effect to our warrant dividend) to Terrapin Partners Equity Partnership, Jonathan Berger, Richard Rogel, David Jaffe, Bruce Pollack, William Stiritz and Terrapin Partners Employee Partnership for $25,000 in cash, at a purchase price of approximately $0.002 per unit. Each unit consists of one share of common stock and three quarters (3/4) of one warrant. The founders units are identical to the units being sold in this offering, except that: an aggregate of up to 1,875,000 founders units are subject to forfeiture by our initial stockholders to the extent that the over-allotment option is not exercised in full by the underwriters; the founders units will be placed in escrow and the founders common stock and founders warrants are subject to the transfer restrictions and registration rights described in this prospectus; the founders warrants will become exercisable after the consummation of our initial business combination if and when the last sales price of our common stock exceeds $14.50 per share for any 20 trading days within any 30-trading day period beginning 90 days after the initial business combination; the founders warrants will be exercisable on a cashless basis and will not be redeemable by us, in each case, as long as they are held by the initial stockholders or their permitted transferees; the initial stockholders have agreed to (i) vote the founders common stock in the same manner as the majority of shares voted by the public stockholders at the special or annual meeting called for the purpose of approving our initial business combination, and (ii) vote in favor of our dissolution and liquidation in the event that we do not consummate an initial business combination within 24 months or 30 months from the date of this prospectus, as applicable; the initial stockholders will not be able to exercise conversion rights (as described below) with respect to the founders common stock; and the initial stockholders have agreed to waive their rights to participate in any liquidation distribution with respect to the founders common stock if we fail to consummate an initial business combination. The initial stockholders have agreed not to transfer, assign or sell any of the founders units, founders common stock or founders warrants (including the common stock to be issued upon the exercise of the founders warrants) until one year after the date of the completion of an initial business combination or earlier if, subsequent to our initial business combination, (i) the closing price of our common stock equals or exceeds $18.00 per share for any 20 trading days within any 30-trading day period or (ii) we consummate a subsequent liquidation, merger, stock exchange or other Table of Contents similar transaction which results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property; provided however that transfers can be made to permitted transferees who agree in writing to be bound to the transfer restrictions, agree to vote in the same manner as a majority of the public stockholders in connection with the vote required to approve our initial business combination and waive any rights to participate in any liquidation distribution if we fail to consummate an initial business combination. For so long as the founders units are subject to such transfer restrictions they will be held in an escrow account maintained by Continental Stock Transfer Trust Company. Sponsors warrants purchased through private placement 7,600,000 sponsors warrants at $1.25 per warrant (for a total purchase price of $9.5 million) will be sold to the sponsors pursuant to letter agreements among us and the sponsors. These purchases will take place on a private placement basis simultaneously with the consummation of this offering. The sponsors warrants will be identical to the warrants underlying the units being offered by this prospectus except that the sponsors warrants (i) will be exercisable on a cashless basis and (ii) will not be redeemable by us so long as they are still held by the sponsors or their permitted transferees. The sponsors have agreed, pursuant to the agreements, that the sponsors warrants will not be sold or transferred by them (except to employees of Terrapin Partners LLC or to our directors at the same cost per warrant originally paid by them) until the later of one year from the date of this prospectus and 60 days after the consummation of our business combination. In the event of a liquidation prior to our initial business combination, the sponsors warrants will expire worthless. Right of first review: In order to minimize potential conflicts of interest which may arise from multiple corporate affiliations, each of our executive officers has agreed, until the earliest of an initial business combination, our liquidation or such time as he ceases to be an executive officer, to present to our company for our consideration, prior to presentation to any other entity, any suitable business opportunity which may reasonably be required to be presented to us, subject to any pre-existing fiduciary or contractual obligations he might have. Additionally, our executive officers have agreed that from the date of Aldabra 4 s prospectus for its initial public offering until the earlier of the consummation of its initial business combination or its liquidation, Aldabra 4 will have a right of first review with respect to the business combination opportunities of Messrs. Leight and Weiss with a fair market value of $725 million or less. Messrs. Leight and Weiss will first offer such business opportunities to Aldabra 4 (subject to any pre-existing contractual or fiduciary obligations they might have) and they will not and we will not pursue such a business opportunity unless and until a majority of Aldabra 4 s disinterested directors have determined for any reason that Aldabra 4 will not pursue such an opportunity. This right of first review does not apply to a target business that (i) is being Table of Contents considered by us in connection with other target businesses that will be acquired simultaneously by Aldabra 3 and is majority owned by the same sellers or (ii) is an affiliate of another business we are simultaneously acquiring. For a complete description of our executive officers pre-existing fiduciary and contractual obligations, see Management Conflicts of Interest. Proposed American Stock Exchange symbols for our: Units .U Common stock Warrants .WS Proceeds of offering to be held in trust account and amounts payable prior to trust account distribution in liquidation Approximately, $488.6 million or approximately $9.77 per unit (approximately $560.6 million, or approximately $9.75 per unit if the underwriters over-allotment option is exercised in full) of the proceeds of the offering and the private placement of the sponsors warrants will be placed in a trust account at Wilmington Trust, maintained by Continental Stock Transfer Trust Company, acting as trustee pursuant to an agreement to be signed on the date of this prospectus. These proceeds include $15.0 million in deferred underwriting discounts and commissions (or $17.25 million if the over-allotment option is exercised in full). The underwriters have agreed that such amount will not be paid to them unless and until we consummate an initial business combination. Upon the consummation of our initial business combination, the deferred underwriting discounts and commissions shall be released to the underwriters out of the gross proceeds of this offering held in the trust account. Except as described below, proceeds in the trust account will not be released until the earlier of the completion of our initial business combination and our liquidation. Unless and until an initial business combination is consummated, the proceeds held in the trust account will not be available for our use for any purpose, including the payment of expenses related to this offering and the investigation, selection and negotiation of an agreement with one or more target businesses. Notwithstanding the foregoing, there can be released to us from the trust account (i) interest income earned on the trust account balance to pay our income or other tax obligations and (ii) up to an aggregate of $5.0 million, or approximately $5.7 million if the underwriters over-allotment option is exercised in full, of interest earned on the trust account balance to fund our working capital expenses related to investigating and selecting a target business and our other working capital requirements. With these exceptions, expenses incurred by us while seeking an initial business combination may be paid prior to an initial business combination only from the net proceeds of this offering not held in the trust account (initially $200,000). Table of Contents None of the warrants may be exercised until after the consummation of an initial business combination and, thus, after the proceeds of the trust account have been disbursed. Accordingly, the warrant exercise price will be paid directly to us and not placed in the trust account. Limited payments to insiders There will be no fees or other cash payments paid to, awarded to or earned by our initial stockholders, executive officers, directors or their affiliates prior to, or for any services they render in order to effectuate, the consummation of an initial business combination (regardless of the type of transaction that it is) other than: repayment of an aggregate of $125,000 in non-interest bearing loans made by Nathan D. Leight, our chairman of the board, and Jason G. Weiss, our chief executive officer; a payment of an aggregate of $12,500 per month to Terrapin Partners LLC, an affiliate of Nathan D. Leight and Jason G. Weiss, for certain administrative, technology and secretarial services, as well as the use of certain limited office space, including a conference room, in New York City; and reimbursement of out-of-pocket expenses incurred by them in connection with certain activities on our behalf, such as identifying and investigating possible business targets and our initial business combination. All amounts held in the trust account that are not converted to cash, released to us in the form of interest income or payable to the underwriters for deferred discounts and commissions will be released to us on closing of our initial business combination All amounts held in the trust account that are not converted to cash (as described below) or previously released to us as interest income to pay our tax obligations or to fund working capital will be released to us upon closing of our initial business combination with one or more target businesses, subject to compliance with the conditions to consummating an initial business combination described below. We will use these funds to pay amounts due to any public stockholders who exercise their conversion rights and to pay the underwriters their deferred underwriting discounts and commissions that are equal to 3.0% of the gross proceeds of this offering, or $15.0 million (or $17.25 million if the underwriters over-allotment option is exercised in full). Funds released from the trust account to us can be used to pay a portion of the purchase price of the target or target businesses. If the initial business combination is paid for using stock or debt securities, we may use the cash released to us from the trust account for general corporate purposes, including but not limited to maintenance or expansion of operations or acquired businesses, the payment of principal or interest due on indebtedness incurred in consummating our initial business combination, to fund the purchase of other companies or for working capital. Table of Contents Stockholders must approve business combination Pursuant to our amended and restated certificate of incorporation, we will seek stockholder approval before we effect any initial business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable state law. We view this requirement as an obligation to our stockholders and will not take any action to amend or waive this provision in our amended and restated certificate of incorporation. In connection with the vote required for any initial business combination, all of our initial stockholders, including all of our executive officers and directors, have agreed to vote the shares of common stock owned by them immediately before this offering in accordance with the majority of the shares of common stock voted by the public stockholders. They have also agreed that they will vote any shares they purchase in this offering or in the aftermarket in favor of a business combination. Thus, additional purchases of shares of common stock by our initial stockholders, including our executive officers or directors, would likely allow them to exert additional influence over the approval of our initial business combination. None of our executive officers, directors, initial stockholders or their affiliates has indicated any intention to purchase additional units or shares of common stock from persons in the aftermarket or in private transactions. The factors that would be considered in making such additional purchases would include consideration of the current trading price of our common stock. Another factor that would be taken into consideration would be that any such additional purchases would likely increase the chances that our initial business combination would be approved. We will proceed with an initial business combination only if (i) a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and (ii) public stockholders owning less than 40% of the shares sold in this offering exercise their conversion rights described below. Accordingly, it is our understanding and intention in every case to structure and consummate an initial business combination in which approximately 39.99% of the public stockholders may exercise their conversion rights and the business combination can still go forward. In addition, if within 90 days before the expiration of the 24- or 30-month period from the date of this prospectus, as the case may be, we seek approval from our stockholders to consummate a business combination, the proxy statement related to such business combination will also seek stockholder approval for our dissolution and our board s recommended plan of distribution in the event our stockholders do not approve such business combination or if such business combination is not consummated for other reasons. Conditions to consummating our initial business combination We will not enter into our initial business combination (i) with an entity with which our executive officers or directors, through their other business activities, had acquisition or investment discussions in the past, (ii) with an entity that is either a portfolio company of, or has otherwise received a material financial investment from, any Table of Contents private equity fund or investment company (or an affiliate thereof) that is affiliated with any of our executive officers or directors or (iii) where we acquire less than 100% of a target business and any of our executive officers, directors, initial stockholders, sponsors or their affiliates acquire the remaining portion of such target business, unless, in such cases, the transaction is approved by a majority of our disinterested directors and our audit committee and we obtain an opinion from an independent investment banking firm that is a member of FINRA that the business combination is fair to our unaffiliated stockholders from a financial point of view. Our initial business combination must occur with one or more target businesses that collectively have a fair market value of at least $750 million at the time of such initial business combination. We may seek to consummate our initial business combination with a target business or businesses with a collective fair market value in excess of $750 million at the time of such initial business combination. We will only consummate an initial business combination in which we become the controlling stockholder of the target. The key factor that we will rely on in determining controlling stockholder status would be our acquisition of at least 50.1% of the voting equity interests of the target company. If we acquire only a controlling interest in a target business or businesses, the portion of such business that we acquire must have a fair market value equal to at least $750 million. For the purposes of determining such fair market value, any debt assumed, refinanced or otherwise incurred by us in conjunction with our initial business combination shall be included at the accrued value in the financial statements of the target business in the calculation of such fair market value. We will not consider any transaction that does not meet such criteria. Conversion rights for stockholders voting to reject a business combination Pursuant to our amended and restated certificate of incorporation, public stockholders voting against an initial business combination will be entitled to convert their stock into a pro rata share of the trust account (initially approximately $9.77 per share, or approximately $9.75 per share if the over-allotment option is exercised), plus any interest income earned on their portion of the trust account but less any interest that has been released to us as described above to fund our working capital requirements or pay any of our tax obligations, if the business combination is approved and completed. Notwithstanding the foregoing, a public stockholder, together with any affiliate of his or any other person with whom he is acting in concert or as a group, will be restricted from seeking conversion rights with respect to more than 10% of the shares sold in this offering. Such a public stockholder would still be entitled to vote against a proposed business combination with respect to all shares owned by him or his affiliates. We believe this restriction will prevent stockholders from accumulating large blocks of stock before the vote held to approve a proposed business combination and attempt to use the conversion right as a means to force us or our management to purchase their stock at a significant premium to the then current market price. Absent this provision, a Table of Contents public stockholder who owns greater than 10% of the shares sold in this offering could threaten to vote against a proposed business combination and seek conversion, regardless of the merits of the transaction, if, for example, its shares are not purchased by us or our management at a premium to the then current market price. By eliminating any stockholder s ability to convert more than 10% of the shares sold in this offering, we believe we will deter a small group of stockholders from unreasonably attempting to block a transaction which is favored by our other public stockholders. However, we are not restricting the stockholders ability to vote all of their shares against the transaction. We view this requirement as an obligation to our stockholders and will not take any action to amend or waive this provision in our amended and restated certificate of incorporation. Our initial stockholders will not have such conversion rights with respect to any shares of common stock owned by them, directly or indirectly, whether their shares of founders common stock or shares purchased by them in this offering or in the aftermarket. Public stockholders who convert their stock into their share of the trust account will continue to have the right to exercise any warrants they may hold. An eligible stockholder may request conversion at any time after the mailing to our stockholders of the proxy statement and prior to the vote taken with respect to a proposed business combination at a meeting held for that purpose, but the request will not be granted unless the stockholder votes against the business combination and the business combination is approved and completed. Additionally, we may require public stockholders, whether they are a record holder or hold their shares in street name, to either tender their certificates to our transfer agent at any time through the vote on the business combination or to deliver their shares to the transfer agent electronically using Depository Trust Company s DWAC (Deposit/Withdrawal At Custodian) System, at the holder s option. There is a nominal cost associated with this tendering process and the act of certificating the shares or delivering them through the DWAC system. The transfer agent will typically charge the tendering broker $35 and it would be up to the broker whether or not to pass this cost on to the converting holder. The proxy solicitation materials that we will furnish to stockholders in connection with the vote for any proposed business combination will indicate whether we are requiring stockholders to satisfy such certification and delivery requirements. Accordingly, a stockholder would have from the time we send out our proxy statement through the vote on the business combination to deliver his shares if he wishes to seek to exercise his conversion rights. This time period varies depending on the specific facts of each transaction. However, as the delivery process can be accomplished by the stockholder, whether or not he is a record holder or his shares are held in street name, in a matter of hours by simply contacting the transfer agent or his broker and requesting delivery of his shares through the DWAC System, we believe this time period is sufficient for an average investor. However, because we do not have any control Table of Contents over this process, it may take significantly longer than we anticipated. Accordingly, we will only require stockholders to deliver their certificates prior to the vote if we give stockholders at least two weeks between the mailing of the proxy solicitation materials and the meeting date. Any request for conversion, once made, may be withdrawn at any time up to the vote taken with respect to a proposed business combination at a meeting held for that purpose. Furthermore, if a stockholder delivered his certificate for conversion and subsequently decided prior to the meeting not to elect conversion, he may simply request that the transfer agent return the certificate (physically or electronically). If a vote on our initial business combination is held and the business combination is not approved, we may continue to try to execute a definitive agreement with a different target business until twenty four months from the date of this prospectus and to consummate an initial business combination with a different target business until thirty months from the date of this prospectus. If the initial business combination is not approved or completed for any reason, then public stockholders voting against our initial business combination who exercised their conversion rights would not be entitled to convert their shares of common stock into a pro rata share of the aggregate amount then on deposit in the trust account. In such case, if we have required public stockholders to deliver their certificates prior to the meeting, we will promptly return such certificates to the public stockholder. Investors in this offering who do not sell or who receive less than an aggregate of approximately $0.23 (or $0.25 if the underwriters over-allotment option is exercised in full) of net sales proceeds for the warrants included in the units, and persons who purchase common stock in the aftermarket at a price in excess of approximately $9.77 per share (or $9.75 per share if the underwriters over-allotment option is exercised in full), may have a disincentive to exercise their conversion rights because the amount they would receive upon conversion could be less than their original or adjusted purchase price. Because converting stockholders will receive their proportionate share of the deferred underwriting discounts and commissions and the underwriters will be paid the full amount of their deferred underwriting compensation at the time of the consummation of our initial business combination, we (and, therefore, the non-converting stockholders) will bear the financial effect of such payments to both the converting stockholders and the underwriters. Liquidation if no business combination If we do not effect our initial business combination within 24 months from the date of this prospectus (or within 30 months from the date of this prospectus if a definitive agreement has been executed within 24 months from the date of this prospectus and the business combination has not yet been consummated within such 24-month period), pursuant to the terms of the trust agreement by and between us and Wilmington Trust, our amended and restated Table of Contents certificate of incorporation and applicable provisions of the Delaware General Corporation Law, we will seek stockholder approval to dissolve as promptly as practicable and to liquidate and release only to our public stockholders, as part of our plan of distribution, the amount in our trust account, including (i) all accrued interest, net of income taxes payable on such interest and net of interest earned on the trust account balance previously released to us to fund our working capital requirements and (ii) all deferred underwriting discounts and commissions plus any remaining assets. Stockholder approval of liquidation requirement We cannot provide investors with assurances of a specific timeframe for our dissolution and liquidation. Pursuant to our amended and restated certificate of incorporation, upon the expiration of such 24- or 30-month time period, as applicable, it is intended that our purposes and powers will be limited to dissolving, liquidating and winding up. Also contained in our amended and restated certificate of incorporation is the requirement that our board of directors, to the fullest extent permitted by law, consider a resolution to dissolve our company at that time. Consistent with such obligations, our board of directors will seek stockholder approval for any such plan of distribution, and our initial stockholders have agreed to vote in favor of such dissolution and liquidation. As promptly as practicable upon the later to occur of (i) the approval by our stockholders of our plan of distribution or (ii) the effective date of such approved plan of distribution, we will liquidate our trust account to our public stockholders. Our initial stockholders have waived their rights to participate in any liquidation distribution with respect to the founders common stock. There will be no distribution from the trust account with respect to our warrants, and all rights of our warrants will terminate on our liquidation. We estimate that our total costs and expenses for implementing and completing our stockholder-approved dissolution and plan of distribution, if not done in connection with a stockholder vote with respect to a potential business combination, will be between $75,000 and $125,000. This amount includes all costs and expenses relating to filing a certificate of dissolution with the State of Delaware, the winding up of our company, printing and mailing a proxy statement, holding a stockholders meeting relating to the approval by our stockholders of our dissolution and plan of distribution, legal fees and other filing fees. We believe that there should be sufficient funds available to us out of the net interest earned on the trust account and released to us as working capital, to fund the $75,000 to $125,000 in costs and expenses. In the event we seek stockholder approval for our dissolution and plan of distribution and do not obtain such approval, we will nonetheless continue to pursue stockholder approval for our dissolution. Pursuant to the terms of our amended and restated certificate of incorporation, it is intended that our powers following the expiration of the permitted time periods for consummating a business combination will automatically thereafter be limited to acts and activities relating to dissolving and winding up our affairs, Table of Contents including liquidation. If no proxy statement seeking the approval of our stockholders for a business combination has been filed 60 days prior to the date which is 24 months from the date of this prospectus (or 60 days prior to the date which is 30 months from the date of this prospectus if a definitive agreement has been executed within 24 months from the date of this prospectus and the business combination has not yet been consummated within such 24-month period), our board will, prior to such date, convene, adopt and recommend to our stockholders our dissolution and plan of distribution, and on such date file a proxy statement with the SEC seeking stockholder approval for such plan. Pursuant to the trust agreement governing such funds, the funds held in our trust account may not be distributed except upon our dissolution and, unless and until such approval is obtained from our stockholders, the funds held in our trust account will not be released (other than in connection with the funding of working capital, a conversion or a business combination as described elsewhere in this prospectus). Consequently, holders of a majority of our outstanding stock must approve our dissolution and plan of distribution in order to receive the funds held in our trust account and, other than in connection with a conversion or a business combination, the funds will not be available for any other corporate purpose. If we are unable to conclude an initial business combination and we expend all of the net proceeds of this offering and the purchase price paid in consideration for the founders units other than the proceeds deposited in the trust account, without taking into account any interest earned on the trust account, we expect that the initial per-share liquidation price will be approximately $9.77 (or approximately $9.75 per share if the underwriters over-allotment option is exercised in full), or $0.23 less than the per-unit offering price of $10.00 ($0.25 less if the underwriters over-allotment is exercised in full). The proceeds deposited in the trust account could, however, become subject to claims of our creditors that are in preference to the claims of our stockholders. In addition, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us that is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. Therefore, we cannot assure you that the actual per-share liquidation price will not be less than approximately $9.77 (or approximately $9.75 per share if the underwriters over-allotment option is exercised in full). While we will seek to have all vendors and service providers (which would include any third parties we engaged to assist us in any way in connection with our search for a target business) and prospective target businesses execute agreements with us waiving any right, title, interest or claim of any kind they may have in or to any monies held in the trust account, there is no guarantee that they will execute such agreements. Nor is there any guarantee that, even if such entities execute such agreements with us, they will not seek recourse against the trust account or that a court would not Table of Contents conclude that such agreements are not legally enforceable. Nathan D. Leight and Jason G. Weiss have agreed that they will be personally liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us. However, we cannot assure you that they will be able to satisfy those obligations, if they are required to do so. Furthermore, Messrs. Leight and Weiss will not have any personal liability as to any claimed amounts owed to a third party who executed a waiver (including a prospective target business). Additionally, in the case of a prospective target business that did not execute a waiver, such liability will be only in an amount necessary to ensure that public stockholders receive no less than $10.00 per share upon liquidation. Escrow of founders units On the date of this prospectus, all of our initial stockholders, including all of our executive officers and directors, will place their founders units into an escrow account maintained by Continental Stock Transfer Trust Company, acting as escrow agent. Subject to certain limited exceptions (such as transfers (i) to an entity s members upon its liquidation, (ii) to relatives and trusts for estate planning purposes or (iii) by private sales with respect to up to 33% of the founders units made at or prior to the consummation of an initial business combination at prices no greater than the price at which the units were originally purchased, in each case where the transferee agrees to the terms of the escrow agreement), these units will not be transferable during the escrow period and will not be released from escrow until one year after the consummation of our initial business combination or earlier if the over-allotment option is not exercised in full or in part, but only to the extent necessary to have up to 1,875,000 units cancelled as described above or if, following an initial business combination, (i) the last sales price of our common stock equals or exceeds $18.00 per share for any 20 trading days within any 30-trading day period or (ii) we consummate a subsequent liquidation, merger, stock exchange or other similar transaction which results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property. Audit committee to monitor compliance Effective upon consummation of this offering, we will establish and will maintain an audit committee to, among other things, monitor compliance on a quarterly basis with the terms described above and the other terms relating to this offering. If any noncompliance is identified, then the audit committee will be charged with the responsibility to immediately take all action necessary to rectify such non compliance or otherwise cause compliance with the terms of this offering. Table of Contents Determination of offering amount We determined the size of this offering in connection with the size of the offering for Aldabra 4 s initial public offering. We believe structuring our two initial public offerings simultaneously with different valuation requirements helps remove any potential conflicts of interest in engaging in the two offerings at the same time and provides our management with the greatest flexibility in finding suitable target businesses for both us and Aldabra 4 to complete an initial business combination. This belief is not based on any research, analysis, evaluations, discussions or compilations of information with respect to any particular investment or any such action undertaken in connection with our organization. We cannot assure you that our belief is correct, that we will be able to successfully identify acquisition candidates, that we will be able to obtain any necessary financing or that we will be able to consummate a transaction with one or more target businesses. Risks We are a newly formed company that has conducted no operations and has generated no revenues. Until we complete an initial business combination, we will have no operations and will generate no operating revenues. Our only revenues following this offering, and until we complete an initial business combination, will be from interest generated from our trust investments. In making your decision on whether to invest in our securities, you should take into account not only the backgrounds of our management, but also the special risks we face as a blank check company, as well as the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, and, therefore, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. You should carefully consider these and the other risks set forth in the section entitled Risk Factors beginning on page 21 of this prospectus. Table of Contents SUMMARY FINANCIAL DATA The following table summarizes the relevant financial data for our business and should be read with our financial statements, which are included in this prospectus. We have not had any significant operations to date, so only balance sheet data are presented. November 15, 2007 Actual As Adjusted(1) Balance Sheet Data: Working capital $ 11,500 $ 473,824,000 Total assets 150,007 473,824,000 Total liabilities 126,007 Value of common stock which may be converted to cash 195,439,990 Stockholders equity 24,000 278,384,010 (1) Includes the $9.5 million we will receive from the sale of the sponsors warrants. Assumes the payment of the $15.0 million deferred underwriters discounts and commissions to the underwriters. The as adjusted information gives effect to the sale of the units we are offering, including the application of the related gross proceeds and the payment of the estimated remaining costs from such sale and the repayment of the accrued and other liabilities required to be repaid. The working capital excludes $12,500 of costs related to this offering which were paid or accrued prior to November 15, 2007. These deferred offering costs have been recorded as a long-term asset and are reclassified against stockholders equity in the as adjusted information. The as adjusted working capital and total assets amounts include the $473.6 million to be held in the trust account, which will be available to us only upon the consummation of an initial business combination within the time period described in this prospectus. The total amount to be placed in trust also includes $15.0 million (or $0.30 per unit) of deferred underwriting discounts and commissions payable to the underwriters in the offering only if we consummate an initial business combination. If an initial business combination is not so consummated, the trust account totaling $488.6 million of net proceeds from the offering, including $9.5 million of proceeds from the private placement of the sponsors warrants, and all accrued interest earned thereon less (i) up to $5.0 million, or approximately $5.7 million if the underwriters over-allotment option is exercised in full, that may be released to us to fund our expenses and other working capital requirements and (ii) any amounts released to us to pay our income or other tax obligations, will be distributed solely to our public stockholders (subject to our obligations under Delaware law to provide for claims of creditors). We will not proceed with an initial business combination if public stockholders owning 40% or more of the shares sold in this offering vote against the business combination and exercise their conversion rights. Accordingly, we may effect an initial business combination if public stockholders owning up to approximately 39.99% of the shares sold in this offering exercise their conversion rights. If this occurred, we would be required to convert to cash up to approximately 39.99% of the 50,000,000 shares sold in this offering, or 19,999,999 shares of common stock, at an initial per-share conversion price of approximately $9.77, without taking into account interest earned on the trust account. The actual per-share conversion price will be equal to: the amount in the trust account, including all accrued interest after distribution of interest income on the trust account balance to us as described above, as of two business days prior to the proposed consummation of the business combination, divided by the number of shares of common stock sold in the offering. Because converting stockholders will receive their proportionate share of the deferred underwriting discounts and commissions and the underwriters will be paid the full amount of their deferred underwriting compensation at the time of the consummation of the initial business combination, the company (and, therefore, the non-converting stockholders) will bear the financial effect of such payments to both the converting stockholders and the underwriters. Table of Contents RISK FACTORS An investment in our securities involves a high degree of risk. You should consider carefully all of the material risks described below, together with the other information contained in this prospectus before making a decision to invest in our units. If any of the following events occur, our business, financial condition and operating results may be materially adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks described below. Risks Associated With Our Business We are a development stage company with no operating history and, accordingly, you will not have any basis on which to evaluate our ability to achieve our business objective. We are a recently incorporated development stage company with no operating results to date. Therefore, our ability to commence operations is dependent upon obtaining financing through the public offering of our securities. Since we do not have an operating history, you will have no basis upon which to evaluate our ability to achieve our business objective, which is to acquire an operating business. We have not conducted any discussions and we have no plans, arrangements or understandings with any prospective acquisition candidates. We will not generate any revenues until, at the earliest, after the consummation of an initial business combination. We may not be able to consummate an initial business combination within the required time frame, in which case, we would be forced to liquidate our assets. Pursuant to our amended and restated certificate of incorporation, we have 24 months from the date of this prospectus (or 30 months from the date of this prospectus if a definitive agreement has been executed within 24 months from the date of this prospectus and the business combination relating thereto has not yet been consummated within such 24-month period) in which to complete an initial business combination. If we fail to consummate an initial business combination within the required time frame, we will, in accordance with our amended and restated certificate of incorporation seek stockholder approval to dissolve, liquidate and wind up. The foregoing requirements are set forth in Article Sixth of our amended and restated certificate of incorporation and may not be eliminated except in connection with, and upon consummation of, our initial business combination. We may not be able to find suitable target businesses within the required time frame. In addition, our negotiating position and our ability to conduct adequate due diligence on any potential target may be reduced as we approach the deadline for the consummation of an initial business combination. We do not have any specific business combination under consideration, and neither we, nor any representative acting on our behalf, has had any contacts with any target businesses regarding an initial business combination, nor taken any steps, directly or indirectly, to identify or locate any acquisition candidate, nor have we engaged or retained any agent or other representative to identify or locate any such acquisition candidate. If our stockholders approve our liquidation before an initial business combination is consummated and distribute the trust account, our public stockholders may receive less than $10.00 per share and our warrants will expire worthless. If we are unable to complete an initial business combination within 24 months from the date of this prospectus (or 30 months from the date of this prospectus if a definitive agreement has been executed within 24 months from the date of this prospectus and the business combination relating thereto has not yet been consummated within such 24-month period) and our stockholders approve our liquidation, the per-share liquidation distribution may be less than $10.00 because of the expenses of this offering, our general and administrative expenses and the anticipated costs of seeking a business combination. Furthermore, there will be no distribution with respect to our outstanding warrants which will expire worthless if we liquidate before the completion of an initial business combination. Table of Contents If we are unable to consummate a business combination, our public stockholders will be forced to wait up to 30 months before receiving liquidation distributions. We have 24 months from the date of this prospectus (or 30 months from the date of this prospectus if a definitive agreement has been executed within 24 months from the date of this prospectus and the business combination relating thereto has not yet been consummated within such 24-month period) in which to complete an initial business combination. We have no obligation to return funds to investors prior to the expiration of 24 or 30 months, as applicable, unless we consummate a business combination prior thereto and only then in cases where investors have sought conversion of their shares. Only after the expiration of this full time period will public stockholders be entitled to liquidation distributions if we are unable to complete an initial business combination. Accordingly, investors funds may be unavailable to them until such date. We may proceed with an initial business combination even if public stockholders owning approximately 39.99% of the shares sold in this offering exercise their conversion rights. We may proceed with an initial business combination as long as public stockholders owning less than 40% of the shares sold in this offering exercise their conversion rights. Accordingly, holders of approximately 39.99% of the shares of common stock sold in this offering may exercise their conversion rights and we could still consummate a proposed business combination. We have set the conversion percentage at 40% in order to reduce the likelihood that a small group of investors holding a block of our stock will be able to stop us from completing an initial business combination that is otherwise approved by a large majority of our public stockholders. While there are many other companies similar to ours which include conversion provisions of between 20% and 30%, the 40% threshold is above what had been customary and standard for offerings similar to ours. Our business combination may require us to use substantially all of our cash to pay the purchase price. In such a case, because we will not know how many stockholders may exercise such conversion rights, we may need to arrange third party financing to help fund our business combination in case a larger percentage of stockholders exercise their conversion rights than we expect. Additionally, even if our business combination does not require us to use substantially all of our cash to pay the purchase price, if a significant number of stockholders exercise their conversion rights, we will have less cash available to use in furthering our business plans following an initial business combination and may need to arrange third party financing. We have not taken any steps to secure third party financing for either situation. We cannot assure you that we will be able to obtain such third party financing on terms favorable to us or at all. You will not be entitled to protections normally afforded to investors of blank check companies. Since the net proceeds of this offering are intended to be used to complete an initial business combination with a target business that has not been identified, we may be deemed to be a blank check company under the United States securities laws. However, since our securities will be listed on the American Stock Exchange, a national securities exchange, and we will have net tangible assets in excess of $5.0 million upon the successful consummation of this offering and will file a Current Report on Form 8-K, including an audited balance sheet demonstrating this fact, we are exempt from rules promulgated by the SEC to protect investors of blank check companies such as Rule 419. Accordingly, investors will not be afforded the benefits or protections of those rules such as completely restricting the transferability of our securities, requiring us to complete an initial business combination within 18 months of the effective date of the initial registration statement and restricting the use of interest earned on the funds held in the trust account. Because we are not subject to Rule 419, our units will be immediately tradable, we will be entitled to withdraw a certain amount of interest earned on the funds held in the trust account prior to the completion of an initial business combination and we have a longer period of time to complete such an initial business combination than we would if we were subject to such rule. Table of Contents Because each unit includes only three quarters (3/4) of a warrant, the units may be worth less than units of other blank check companies. Each unit includes one share of common stock and three quarters (3/4) of a warrant. This is different from other offerings similar to ours whose units include one share of common stock and one warrant. We have established the components of the units in this way in order to alleviate the dilutive effect of the warrants and make us a more attractive merger partner for target businesses. Although the exercise price of our warrants is lower than that of warrants in other similar offerings, this unit structure may cause our units to be worth less than if it included one warrant. If the net proceeds of this offering not being held in trust are insufficient to allow us to operate for at least the next 30 months, we may be unable to complete an initial business combination. We believe that, upon consummation of this offering, the funds available to us outside of the trust account, plus the interest earned on the funds held in the trust account that may be available to us, will be sufficient to allow us to operate for at least the next 30 months, if an initial business combination is not consummated during that time. However, we cannot assure you that our estimates will be accurate. We could use a portion of the funds available to us to pay commitment fees for financing or fees to consultants to assist us with our search for a target business. We could also use a portion of the funds as a down payment or to fund a no-shop provision (a provision in letters of intent designed to keep target businesses from shopping around for transactions with other companies on terms more favorable to such target businesses) with respect to a particular proposed business combination, although we do not have any current intention to do so. If we entered into a letter of intent where we paid for the right to receive exclusivity from a target business and were subsequently required to forfeit such funds (whether as a result of our breach or otherwise), we might not have sufficient funds to continue searching for, or conduct due diligence with respect to, a target business. A decline in interest rates could limit the amount available to fund our search for a target business or businesses and complete an initial business combination since we will depend on interest earned on the trust account to fund our search, to pay our tax obligations and to complete our initial business combination. Of the net proceeds of this offering, only $200,000 will be available to us initially outside the trust account to fund our working capital requirements. We will depend on sufficient interest being earned on the proceeds held in the trust account to provide us with the additional working capital we will need to identify one or more target businesses and to complete our initial business combination, as well as to pay any tax obligations that we may owe. While we are entitled to have released to us for such purposes certain interest earned on the funds in the trust account, a substantial decline in interest rates may result in our having insufficient funds available with which to structure, negotiate or close an initial business combination. In such event, we would need to borrow funds from our initial stockholders to operate or may be forced to seek stockholder approval to liquidate. Our initial stockholders are under no obligation to advance funds to us in such circumstances. We may have six months longer than most other blank check companies to effect a business combination and therefore, the proceeds of this offering may remain in trust for a longer period of time before they are released to you. The period of time we have to complete an initial business combination is longer than blank check companies subject to Rule 419, which have 18 months to complete an initial business combination, or other special purpose acquisition companies, which typically have 18 or 24 months to complete an initial business combination. As a result, if we do not complete an initial business combination, the proceeds of this offering may remain in trust for a longer period of time before they are released to you. Table of Contents If third parties bring claims against us, the proceeds held in trust could be reduced and the per-share liquidation price received by stockholders could be less than approximately $9.77 per share. Our placing of funds in trust may not protect those funds from third party claims against us. Although we will seek to have all vendors and service providers we engage and prospective target businesses we negotiate with, execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our public stockholders, there is no guarantee that they will execute such agreements. Furthermore, there is no guarantee that, even if such entities execute such agreements with us, they will not seek recourse against the trust account. Nor is there any guarantee that a court would uphold the validity of such agreements. Accordingly, the proceeds held in trust could be subject to claims which could take priority over those of our public stockholders. If we liquidate before the completion of an initial business combination and distribute the proceeds held in trust to our public stockholders, Nathan D. Leight and Jason G. Weiss have agreed that they will be personally liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us. Based on representations made to us by Messrs. Leight and Weiss, we currently believe that they are capable of funding a shortfall in our trust account to satisfy their foreseeable indemnification obligations. However, we have not asked them to reserve for such an eventuality. Furthermore, our belief is based on our expectation that their indemnification obligations will be minimal. Accordingly, if that expectation turns out to be incorrect, we cannot assure you that such individuals will be able to satisfy those obligations or that the proceeds in the trust account will not be reduced by such claims. Furthermore, Messrs. Leight and Weiss will not have any personal liability as to any claimed amounts owed to a third party who executed a waiver (including a prospective target business). Additionally, in the case of a prospective target business that did not execute a waiver, such liability will be only in an amount necessary to ensure that public stockholders receive no less than $10.00 per share upon liquidation. Additionally, if we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our public stockholders. To the extent any bankruptcy claims deplete the trust account, we cannot assure you we will be able to return to our public stockholders at least approximately $9.77 per share. Our stockholders may be held liable for claims by third parties against us to the extent of distributions received by them. We will seek stockholder approval to dissolve and liquidate if we do not complete an initial business combination within 24 months from the date of this prospectus (or within 30 months from the date of this prospectus if a definitive agreement has been executed within 24 months from the date of this prospectus and the business combination relating thereto has not yet been consummated within such 24-month period). Under the Delaware General Corporation Law, stockholders may be held liable for claims by third parties against a corporation to the extent of certain unlawful distributions received by them in a dissolution conducted in accordance with the Delaware General Corporation Law. We do not intend to comply with the procedures set forth in Section 280 of the Delaware General Corporation Law, which prescribes various procedures by which stockholder liability may be limited. Because we will not be complying with Section 280, we will seek stockholder approval to comply with Section 281(b) of the Delaware General Corporation Law, requiring us to adopt a plan of dissolution that will reasonably provide for our payment, based on facts known to us at such time, of (i) all existing claims, including those that are contingent, (ii) all pending proceedings to which we are a party and (iii) all claims that may be potentially brought against us within the subsequent 10 years. However, because we are a blank check company, rather than an operating company, and our operations will be limited to searching for prospective target businesses to acquire, the only likely claims to arise would be from our vendors that we engage after the consummation of this offering and potential target businesses. We intend to have all vendors that we engage after the consummation of this offering and prospective target businesses execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the trust account, although we have not received any such agreements to date. If our plan of distribution complies with Section 281(b) of the Delaware General Corporation Law, any liability of Table of Contents stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder s pro rata share of the claim or the amount distributed to the stockholder. A plan of distribution in compliance with Section 281(b) of the Delaware General Corporation Law does not bar stockholder liability for claims not brought in a proceeding before the third anniversary of the dissolution (or such longer period directed by the Delaware Court of Chancery). Accordingly, we cannot assure you that third parties will not seek to recover from our public stockholders amounts owed to them by us even after that date. If we do not consummate a business combination and dissolve, payments from the trust account to our public stockholders may be delayed. We currently believe that any dissolution and plan of distribution in connection with to the expiration of the 24 and 30 month deadlines would proceed in approximately the following manner: prior to such deadline, our board of directors will, consistent with its obligations described in our amended and restated certificate of incorporation and Delaware law, consider a resolution for us to dissolve and consider a plan of distribution which it may then vote to recommend to our stockholders; at such time it will also cause to be prepared a preliminary proxy statement setting out such plan of distribution as well as the board s recommendation of such plan; upon such deadline, we would file our preliminary proxy statement with the SEC; if the SEC does not review the preliminary proxy statement, then, 10 days following the passing of such deadline, we will mail a definitive proxy statement to our stockholders, and 30 days following the passing of such deadline we will convene a meeting of our stockholders, at which they will either approve or reject our dissolution and plan of distribution; and if the SEC does review the preliminary proxy statement, we currently estimate that we will receive their comments 30 days following the passing of such deadline. We will mail the definitive proxy statement to our stockholders following the conclusion of the comment and review process (the length of which we cannot predict with any certainty, and which may be substantial) and we will convene a meeting of our stockholders at which they will either approve or reject our dissolution and plan of distribution. In the event we seek stockholder approval for our dissolution and plan of distribution and do not obtain such approval, we will nonetheless continue to pursue stockholder approval for our dissolution. Pursuant to the terms of our amended and restated certificate of incorporation, it is intended that our powers following the expiration of the permitted time periods for consummating a business combination will automatically thereafter be limited to acts and activities relating to dissolving and winding up our affairs, including liquidation. Pursuant to the trust agreement governing such funds, the funds held in our trust account may not be distributed except upon our dissolution and, unless and until such approval is obtained from our stockholders, the funds held in our trust account will not be released (other than in connection with the funding of working capital, a conversion or a business combination as described elsewhere in this prospectus). Consequently, holders of a majority of our outstanding stock must approve our dissolution in order to receive the funds held in our trust account and the funds will not be available for any other corporate purpose. These procedures, or a vote to reject any dissolution and plan of distribution by our stockholders, may result in substantial delays in the liquidation of our trust account to our public stockholders as part of our plan of distribution. An effective registration statement may not be in place when an investor desires to exercise warrants, thus precluding such investor from being able to exercise his, her or its warrants and causing such warrants to be practically worthless. No warrant held by public stockholders will be exercisable and we will not be obligated to issue shares of common stock unless at the time such holder seeks to exercise such warrant, a registration statement relating to the common stock issuable upon exercise of the warrant is effective and current. Under the terms of the warrant agreement, we have agreed to use our best efforts to meet these conditions and to maintain a current prospectus relating to the common stock issuable upon exercise of the warrants until the expiration of the Table of Contents warrants. However, we cannot assure you that we will be able to do so, and if we do not maintain a current prospectus related to the common stock issuable upon exercise of the warrants, holders will be unable to exercise their warrants and we will not be required to settle any such warrant exercise. If the prospectus relating to the common stock issuable upon the exercise of the warrants is not current, the warrants held by public stockholders may have no value, the market for such warrants may be limited and such warrants may expire worthless. An investor will only be able to exercise a warrant if the issuance of common stock upon such exercise has been registered or qualified or is deemed exempt under the securities laws of the state of residence of the holder of the warrants. No warrants will be exercisable and we will not be obligated to issue shares of common stock unless the common stock issuable upon such exercise has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. At the time that the warrants become exercisable (following our completion of an initial business combination), we expect to continue to be listed on a national securities exchange, which would provide an exemption from registration in every state. Accordingly, we believe holders in every state will be able to exercise their warrants as long as our prospectus relating to the common stock issuable upon exercise of the warrants is current. However, we cannot assure you of this fact. As a result, the warrants may be deprived of any value, the market for the warrants may be limited and the holders of warrants may not be able to exercise their warrants if the common stock issuable upon such exercise is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside. Since we have not yet selected a particular industry or target business with which to complete an initial business combination, we are unable to currently ascertain the merits or risks of the industry or business in which we may ultimately operate. We may consummate an initial business combination with a company in any industry we choose and are not limited to any particular industry or type of business. Accordingly, there is no current basis for you to evaluate the possible merits or risks of the particular industry in which we may ultimately operate or the target business which we may ultimately acquire. To the extent we complete an initial business combination with a financially unstable company or an entity in its development stage, we may be affected by numerous risks inherent in the business operations of those entities. If we complete an initial business combination with an entity in an industry characterized by a high level of risk, we may be affected by the currently unascertainable risks of that industry. Although our management will endeavor to evaluate the risks inherent in a particular industry or target business, we cannot assure you that we will properly ascertain or assess all of the significant risk factors. We also cannot assure you that an investment in our units will not ultimately prove to be less favorable to investors in this offering than a direct investment, if an opportunity were available, in a target business. Your only opportunity to evaluate and affect the investment decision regarding a potential business combination will be limited to voting for or against the initial business combination submitted to our stockholders for approval. At the time of your investment in us, you will not be provided with an opportunity to evaluate the specific merits or risks of one or more target businesses. Accordingly, your only opportunity to evaluate and affect the investment decision regarding a potential business combination will be limited to voting for or against the business combination submitted to our stockholders for approval. In addition, a proposal that you vote against could still be approved if a sufficient number of public stockholders vote for the proposed business combination. Alternatively, a proposal that you vote for could still be rejected if a sufficient number of public stockholders vote against the proposed business combination. Table of Contents We will not be required to obtain a fairness opinion from an independent investment banking firm as to the fair market value of the target business unless our board of directors is unable to independently determine the fair market value. The fair market value of the target business or businesses will be determined by our board of directors based upon one or more standards generally accepted by the financial community (such as actual and potential revenues, earnings and cash flow and/or book value). If our board is not able to independently determine that the target business has a fair market value of at least $750 million, we will obtain an opinion from an unaffiliated, independent investment banking firm which is a member of FINRA with respect to the satisfaction of such criteria. We will not be required to obtain an opinion from an investment banking firm as to the fair market value if our board of directors independently determines that the target business complies with the $750 million threshold. We may issue shares of our capital stock or debt securities to complete an initial business combination, which would reduce the equity interest of our initial stockholders and likely cause a change in control of our ownership. Our amended and restated certificate of incorporation authorizes the issuance of up to 175,000,000 shares of common stock, par value $.0001 per share, and 1,000,000 shares of preferred stock, par value $.0001 per share. Immediately after this offering and the purchase of the sponsors warrants (assuming no exercise of the underwriters over-allotment option), there will be 58,025,000 authorized but unissued shares of our common stock available for issuance (after appropriate reservation for the issuance of the shares upon full exercise of our outstanding warrants) and all of the 1,000,000 shares of preferred stock available for issuance. Although we have no commitment as of the date of this offering, we may issue a substantial number of additional shares of our common or preferred stock, or a combination of common and preferred stock, to complete an initial business combination. The issuance of additional shares of our common stock or any number of shares of our preferred stock: may significantly reduce the equity interest of investors in this offering; may subordinate the rights of holders of common stock if we issue preferred stock with rights senior to those afforded to our common stock; may cause a change in control if a substantial number of our shares of common stock are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and could result in the resignation or removal of our present executive officers and directors; and may adversely affect prevailing market prices for our common stock. Similarly, if we issue debt securities, it could result in: default and foreclosure on our assets if our operating revenues after an initial business combination are insufficient to repay our debt obligations; acceleration of our obligations to repay the indebtedness even if we make all principal and interest payments when due if we breach certain covenants that require the maintenance of certain financial ratios or reserves without a waiver or renegotiation of those covenants; our immediate payment of all principal and accrued interest, if any, if the debt security is payable on demand; and our inability to obtain necessary additional financing if the debt security contains covenants restricting our ability to obtain such financing while the debt security is outstanding. Resources could be wasted in researching acquisitions that are not consummated, which could materially adversely affect subsequent attempts to locate and acquire or merge with another business. It is anticipated that the investigation of each specific target business and the negotiation, drafting, and execution of relevant agreements, disclosure documents, and other instruments will require substantial Table of Contents management time and attention and substantial costs for accountants, attorneys and others. If a decision is made not to complete a specific business combination, the costs incurred up to that point for the proposed transaction likely would not be recoverable. Furthermore, even if an agreement is reached relating to a specific target business, we may fail to consummate the business combination for any number of reasons including those beyond our control, such as that 40% or more of our public stockholders vote against the business combination and opt to have us convert their stock for a pro rata share of the trust account even if a majority of our stockholders approve the business combination. Any such event will result in a loss to us of the related costs incurred which could materially adversely affect subsequent attempts to locate and acquire or merge with another business. Our ability to successfully effect an initial business combination and to be successful thereafter will be totally dependent upon the efforts of our key personnel, some of whom may join us following an initial business combination. Our ability to successfully effect an initial business combination is dependent upon the efforts of our key personnel. The role of our key personnel in the target business, however, cannot presently be ascertained. Although some of our key personnel may remain with the target business in senior management or advisory positions following an initial business combination, it is likely that some or all of the management of the target business will remain in place. While we intend to closely scrutinize any individuals we engage after an initial business combination, we cannot assure you that our assessment of these individuals will prove to be correct. These individuals may be unfamiliar with the requirements of operating a public company which could cause us to have to expend time and resources helping them become familiar with such requirements or replace them. This could be expensive and time-consuming and could lead to various regulatory issues which may adversely affect our operations. Our key personnel may negotiate employment or consulting agreements with a target business in connection with a particular business combination. These agreements may provide for them to receive compensation following an initial business combination and as a result, may cause them to have conflicts of interest in determining whether a particular business combination is the most advantageous. Our key personnel will be able to remain with the company after the consummation of an initial business combination only if they are able to negotiate employment or consulting agreements in connection with the business combination. Such negotiations would take place simultaneously with the negotiation of the business combination and could provide for such individuals to receive compensation in the form of cash payments and/or our securities for services they would render to the company after the consummation of the initial business combination. The personal and financial interests of such individuals may influence their motivation in identifying and selecting a target business. However, we believe the ability of such individuals to remain with the company after the consummation of an initial business combination will not be the determining factor in our decision as to whether or not we will proceed with any potential business combination. Our executive officers and directors will allocate their time to other businesses thereby causing conflicts of interest in their determination as to how much time to devote to our affairs. This conflict of interest could have a negative impact on our ability to consummate an initial business combination. Our executive officers and directors are not required to commit their full time to our affairs, which could create a conflict of interest when allocating their time between our operations and their other commitments. We do not intend to have any full time employees prior to the consummation of an initial business combination. Both of our executive officers are engaged in several other business endeavors, including, but not limited to, Aldabra 2 and Aldabra 4, and are not obligated to devote any specific number of hours to our affairs. If our executive officers and directors other business affairs require them to devote more substantial amounts of time to such affairs, it could limit their ability to devote time to our affairs and could have a negative impact on our ability to consummate an initial business combination. We cannot assure you that these conflicts will be resolved in our favor. As a result, a potential target business may be presented to another entity prior to its presentation to us and we may miss out on a potential transaction. Table of Contents Certain of our executive officers, directors and their affiliates are now, and all of them may in the future become, affiliated with entities engaged in business activities similar to those intended to be conducted by us and accordingly, may have conflicts of interest in determining to which entity a particular business opportunity should be presented. Certain of our executive officers and directors are now, and all of them may in the future become, affiliated with entities, including other blank check companies, engaged in business activities similar to those intended to be conducted by us. Each of our executive officers is an officer and director of Aldabra 2 and Aldabra 4 and certain of our directors are directors of Aldabra 2. Aldabra 2 has executed a definitive agreement for a business combination. Aldabra 4 cannot acquire a target business that has a fair market value greater than $725 million. Furthermore, Nathan D. Leight and Jason G. Weiss have agreed, subject to any pre-existing fiduciary or contractual obligations, to show any potential target business that has a fair market value of $725 million or less to Aldabra 4 prior to presentation to us unless such target business (i) is being considered by us in connection with other target businesses that will be acquired simultaneously by Aldabra 3 and is majority owned by the same sellers or (ii) is an affiliate of another business we are simultaneously acquiring. Accordingly, we believe the potential for conflicts of interest with Aldabra 2 and Aldabra 4 is minimal. Nevertheless, they may have conflicts of interest with respect to other companies they are involved with in determining to which entity a particular business opportunity should be presented. We cannot assure you that these conflicts will be resolved in our favor. As a result, a potential target business may be presented to another affiliated entity prior to its presentation to us and we may miss out on a potential business combination. Our executive officers and directors interests in obtaining reimbursement for any out-of-pocket expenses incurred by them may lead to a conflict of interest in determining whether a particular target business is appropriate for an initial business combination and in the public stockholders best interest. Unless we consummate the initial business combination, our executive officers and directors will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the amount of available proceeds not deposited in the trust account and the amount of interest income from the trust account up to a maximum of $5.0 million, or approximately $5.7 million if the underwriters over-allotment option is exercised in full, that may be released to us as working capital. We do not have a policy that prohibits our executive officers and directors from negotiating for the reimbursement of such expenses by a target business. If the owners of the target business do not agree to such repayment, this could cause our management to view such potential business combination unfavorably, thereby resulting in a conflict of interest. The financial interest of our executive officers or directors could influence our executive officers and directors motivation in selecting a target business or businesses and therefore there may be a conflict of interest when determining whether a particular business combination is in our stockholders best interest. All of our executive officers and directors own shares of our common stock and warrants issued prior, and in connection with, this offering. These shares and warrants will not participate in liquidation distributions and, therefore, our executive officers and directors may have a conflict of interest in determining whether a particular target business is appropriate for an initial business combination. All of our executive officers and directors own shares of founders common stock and founders warrants that were issued prior to this offering. Additionally, our executive officers and directors are purchasing sponsors warrants upon consummation of this offering. Such individuals have waived their right to receive distributions with respect to their shares of founders common stock upon our liquidation if we are unable to consummate an initial business combination. Accordingly, the founders common stock and founders warrants acquired prior to this offering, as well as the sponsors warrants, and any warrants purchased by our executive officers or directors in this offering or in the aftermarket will be worthless if we do not consummate an initial business combination. The personal and financial interests of our executive officers and directors may influence their motivation in identifying and selecting a target business on a timely basis and completing an initial business combination. Consequently, our directors and executive officers discretion in identifying and selecting a suitable target business may result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination are appropriate and in our stockholders best interest. Table of Contents The American Stock Exchange may delist our securities from quotation on its exchange which could limit investors ability to make transactions in our securities and subject us to additional trading restrictions. We anticipate that our securities will be listed on the American Stock Exchange, a national securities exchange, upon consummation of this offering. We cannot assure you that our securities will continue to be listed on the American Stock Exchange in the future prior to an initial business combination. Additionally, in connection with our initial business combination, it is likely that the American Stock Exchange will require us to file a new initial listing application and meet its initial listing requirements as opposed to its more lenient continued listing requirements. We cannot assure you that we will be able to meet those initial listing requirements at that time. If the American Stock Exchange delists our securities from trading on its exchange, we could face significant material adverse consequences, including: a limited availability of market quotations for our securities; reduced liquidity with respect to our securities; a determination that our common stock is a penny stock which will require brokers trading in our common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock; a significant decrease in coverage for our company; and a decreased ability to issue additional securities or obtain additional financing in the future. We may only be able to complete one business combination with the proceeds of this offering, which will cause us to be solely dependent on a single business which may have a limited number of products or services. Our business combination must be with a business with a fair market value of at least $750 million at the time of such acquisition, although this may entail the simultaneous acquisitions of several operating businesses at the same time. By consummating an initial business combination with only a single entity, our lack of diversification may subject us to numerous economic, competitive and regulatory developments. Further, we would not be able to diversify our operations or benefit from the possible spreading of risks or offsetting of losses, unlike other entities which may have the resources to complete several business combinations in different industries or different areas of a single industry. Accordingly, the prospects for our success may be: solely dependent upon the performance of a single business, or dependent upon the development or market acceptance of a single or limited number of products, processes or services. This lack of diversification may subject us to numerous economic, competitive and regulatory developments, any or all of which may have a substantial adverse impact upon the particular industry in which we may operate subsequent to an initial business combination. Alternatively, if we determine to simultaneously acquire several businesses and such businesses are owned by different sellers, we will need for each of such sellers to agree that our purchase of its business is contingent on the simultaneous closings of the other business combinations, which may make it more difficult for us, and delay our ability, to complete the business combination. With multiple business combinations, we could also face additional risks, including additional burdens and costs with respect to possible multiple negotiations and due diligence investigations (if there are multiple sellers) and the additional risks associated with the subsequent assimilation of the operations and services or products of the acquired companies in a single operating business. If we are unable to adequately address these risks, it could negatively impact our profitability and results of operations. Table of Contents The ability of our stockholders to exercise their conversion rights may not allow us to effectuate the most desirable business combination or optimize our capital structure. When we seek stockholder approval of any business combination, we will offer each public stockholder (but not our initial stockholders) the right to have his, her or its shares of common stock converted to cash if the stockholder votes against the business combination and the business combination is approved and completed. Such holder must both vote against such business combination and then exercise his, her or its conversion rights to receive a pro rata portion of the trust account. If our business combination requires us to use substantially all of our cash to pay the purchase price, and since we will not know how many stockholders may exercise such conversion rights, we may either need to reserve part of the trust account for possible payment upon such conversion, or we may need to arrange third party financing to help fund our business combination in case a larger percentage of stockholders exercise their conversion rights than we expect. Since we have no specific business combination under consideration, we have not taken any steps to secure third party financing. Therefore, we may not be able to consummate an initial business combination that requires us to use all of the funds held in the trust account as part of the purchase price, or we may end up having a leverage ratio that is not optimal for our business combination. This may limit our ability to effectuate the most attractive business combination available to us. We may require stockholders who wish to convert their shares in connection with a proposed business combination to comply with specific requirements for conversion that may make it more difficult for them to exercise their conversion rights prior to the deadline for exercising their rights. We may require public stockholders who wish to convert their shares in connection with a proposed business combination to either tender their certificates to our transfer agent at any time prior to the vote taken at the stockholder meeting relating to such business combination or to deliver their shares to the transfer agent electronically using the Depository Trust Company s DWAC (Deposit/Withdrawal At Custodian) System. In order to obtain a physical stock certificate, a stockholder s broker and/or clearing broker, DTC and our transfer agent will need to act to facilitate this request. It is our understanding that stockholders should generally allot at least two weeks to obtain physical certificates from the transfer agent. However, because we do not have any control over this process or over the brokers or DTC, it may take significantly longer than two weeks to obtain a physical stock certificate. While we have been advised that it takes a short time to deliver shares through the DWAC System, we cannot assure you of this fact. Accordingly, if it takes longer than we anticipate for stockholders to deliver their shares, stockholders who wish to convert may be unable to meet the deadline for exercising their conversion rights and thus may be unable to convert their shares. Public stockholders, together with any affiliates of theirs or any other person with whom they are acting in concert or as a group with, will be restricted from seeking conversion rights with respect to more than 10% of the shares sold in this offering. When we seek stockholder approval of any business combination, we will offer each public stockholder (but not our existing stockholders) the right to have his, her, or its shares of common stock converted to cash if the stockholder votes against the business combination and the business combination is approved and completed. Notwithstanding the foregoing, a public stockholder, together with any affiliate of his or any other person with whom he is acting in concert or as a group will be restricted from seeking conversion rights with respect to more than 10% of the shares sold in this offering. Accordingly, if you purchase more than 10% of the shares sold in this offering and a proposed business combination is approved, you will not be able to seek conversion rights with respect to the full amount of your shares and may be forced to hold such additional shares or sell them in the open market. We cannot assure you that the value of such additional shares will appreciate over time following a business combination or that the market price of the common stock will exceed the per-share conversion price. Table of Contents Because of our limited resources and structure, we may not be able to consummate an attractive business combination. We expect to encounter intense competition from entities in addition to other blank check companies having a business objective similar to ours, including venture capital funds, leveraged buyout funds and operating businesses competing for acquisitions. Many of these entities are well established and have extensive experience in identifying and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human and other resources than we do and our financial resources will be relatively limited when contrasted with those of many of these competitors. While we believe that there are numerous potential target businesses that we could acquire with the net proceeds of this offering, our ability to compete in acquiring certain sizable target businesses will be limited by our available financial resources. This inherent competitive limitation gives others an advantage in pursuing the acquisition of certain target businesses. Furthermore, the obligation we have to seek stockholder approval of an initial business combination may delay the consummation of a transaction or make it less likely that a seller will agree to negotiate with us. Additionally, our outstanding warrants, and the future dilution they potentially represent, may not be viewed favorably by certain target businesses. Any of these obligations may place us at a competitive disadvantage in successfully negotiating an initial business combination. If we are unable to consummate an initial business combination with a target business within the prescribed time periods, we will be forced to seek stockholder approval to liquidate. We may be unable to obtain additional financing, if required, to complete an initial business combination or to fund the operations and growth of the target business, which could compel us to restructure or abandon a particular business combination. Although we believe that the net proceeds of this offering will be sufficient to allow us to consummate an initial business combination, because we have not yet identified any prospective target business, we cannot ascertain the capital requirements for any particular transaction. Since the minimum size of our initial business combination is greater than the amount to be held in our trust account, it is possible that we will be required to seek additional financing. We cannot assure you that such financing will be available on acceptable terms, if at all. During the third quarter of 2007, the global financial markets experienced declining equity valuations and disruptions in the credit markets due to reduced liquidity and a repricing of risk. These factors have and may continue to cause disruptions in the credit markets, which may impact our ability to obtain additional financing on reasonable terms if at all. To the extent that additional financing proves to be unavailable when needed to consummate a particular business combination, we would be compelled to either restructure the transaction or abandon that particular business combination and seek an alternative target business candidate. In addition, if we consummate an initial business combination, we may require additional financing to fund the operations or growth of the target business. The failure to secure additional financing could have a material adverse effect on the continued development or growth of the target business. None of our executive officers, directors or stockholders is required to provide any financing to us in connection with or after an initial business combination. Our requirement to complete our initial business combination with a target business or businesses whose collective fair market value is at least equal to $750 million may limit the pool of available candidates. Our initial business combination must be with a target business or businesses whose collective fair market value is at least equal to $750 million. Typically, similarly structured blank check companies are able to complete an initial business combination with a target business or businesses whose collective fair market value is at least equal to 80% of the funds held in their trust account (excluding deferred underwriting discounts and commissions). If we were using this threshold, we could consummate an initial business combination with a target business or businesses whose collective fair market value is at least equal to approximately $380 million. As a result, this may limit the potential pool of potential target businesses we may acquire and may make it more difficult for us to consummate an initial business combination. Table of Contents Our initial stockholders, including our executive officers and directors, control a substantial interest in us and thus may influence certain actions requiring a stockholder vote. Upon consummation of our offering, our initial stockholders (including all of our executive officers and directors) will collectively own 20% of our issued and outstanding shares of common stock (assuming they do not purchase any units in this offering). None of our initial stockholders, executive officers, directors or their affiliates has indicated an intention to purchase units in this offering or additional units or shares of common stock in the aftermarket or in private placements. However, they are not restricted from doing so. Additional purchases of shares of common stock by our initial stockholders, including our executive officers or directors, would likely allow them to exert additional influence over the approval of our initial business combination. The factors that would be considered in making such additional purchases would include consideration of the current trading price of our common stock. Another factor that would be taken into consideration would be that any such additional purchases would likely increase the chances that our initial business combination would be approved. Our board of directors is and will be divided into three classes, each of which will generally serve for a term of three years with only one class of directors being elected in each year. It is unlikely that there will be an annual meeting of stockholders to elect new directors prior to the consummation of an initial business combination, in which case all of the current directors will continue in office until at least the consummation of the initial business combination. If there is an annual meeting, as a consequence of our staggered board of directors, only a minority of the board of directors will be considered for election and our initial stockholders, because of their ownership position, will have considerable influence regarding the outcome. Accordingly, our initial stockholders will continue to exert control at least until the consummation of an initial business combination. Limited information is available for privately held companies that could be our potential targets. In accordance with our acquisition strategy, we may seek an initial business combination with one or more privately held companies. Generally, very little public information exists about these companies compared to public companies, and we will be required to rely on the ability of our executive officers and directors, with the assistance of advisors, to obtain adequate information to evaluate the potential returns from investing in these companies. If we are unable to identify all material information about these companies, then we may not make a fully informed investment decision, and we may lose money on our investments. Our initial stockholders paid an aggregate of $25,000, or approximately $0.002 per share, for their shares and, accordingly, you will experience immediate and substantial dilution from the purchase of our common stock. The difference between the public offering price per share of our common stock (allocating all of the unit purchase price to the common stock and none to the portion of the warrant included in the unit) and the pro forma net tangible book value per share of our common stock after this offering constitutes the dilution to the investors in this offering. Our initial stockholders acquired their initial shares of founders common stock at a nominal price, significantly contributing to this dilution. Upon consummation of this offering, you and the other new investors will incur an immediate and substantial dilution of approximately 34.5% or $3.45 per share (the difference between the pro forma net tangible book value per share of $6.55, and the initial offering price of $10.00 per unit). If our management exercises their option to require holders of our warrants to exercise such warrants on a cashless basis, it will cause holders to receive fewer shares of common stock upon their exercise of the warrants than they would have received had they been able to exercise their warrants for cash. If we call our warrants for redemption after the redemption criteria described elsewhere in this prospectus have been satisfied, our management will have the option to require any holder that wishes to exercise his warrant to do so on a cashless basis. In such event, each holder would be required to pay the exercise price by surrendering the warrants for that number of shares of common stock equal to the quotient obtained by Table of Contents dividing (x) the product of the number of shares of common stock underlying the warrants, multiplied by the difference between the exercise price of the warrants and the fair market value and (y) the fair market value. The fair market value shall mean the average reported last sales price of our common stock for the 10 trading days ending on the third trading day prior to the date on which notice of redemption is sent to the holders of the warrants. If our management chooses to require holders to exercise their warrants on a cashless basis, the number of shares of common stock received by a holder upon exercise will be fewer than it would have been had such holder exercised his warrant for cash. This will have the effect of reducing the potential upside of the holder s investment in our company. Our outstanding warrants may have an adverse effect on the market price of our common stock and make it more difficult to effect an initial business combination. We issued the founders warrants to purchase 9,375,000 shares of common stock (or 10,781,250 shares of common stock if the underwriters over-allotment option is exercised in full) as part of the sale of the founders units. We will be issuing warrants to purchase 37,500,000 shares of common stock as part of the units offered by this prospectus and the sponsors warrants to purchase 7,600,000 shares of common stock. To the extent we issue shares of common stock to effect an initial business combination, the potential for the issuance of a substantial number of additional shares upon exercise of these warrants (and at a price below the prevailing market price) could make us a less attractive acquisition vehicle in the eyes of a target business. Such securities, when exercised, will increase the number of issued and outstanding shares of our common stock and reduce the value of the shares issued to complete an initial business combination. Accordingly, our warrants may make it more difficult to effectuate an initial business combination or increase the cost of acquiring the target business. Additionally, the sale, or even the possibility of sale, of the shares underlying the warrants could have an adverse effect on the market price for our securities or on our ability to obtain future financing. If and to the extent these warrants are exercised, you may experience dilution to your holdings. If our initial stockholders or the purchasers of the sponsors warrants exercise their registration rights with respect to their founders units or sponsors warrants and underlying securities, it may have an adverse effect on the market price of our common stock and the existence of these rights may make it more difficult to effect an initial business combination. Our initial stockholders are entitled to demand that we register the resale of their founders units (including shares, warrants and shares underlying the warrants) at any time commencing three months prior to the date on which their units are released from escrow. Additionally, the purchasers of the sponsors warrants are entitled to demand that we register the resale of their sponsors warrants and underlying shares of common stock at any time after we consummate an initial business combination. If such individuals exercise their registration rights with respect to all of their securities, then there will be an additional 12,500,000 shares (or 14,375,000 shares if the over-allotment option is exercised in full) of common stock and 16,975,000 warrants, or 18,381,250 warrants if the over-allotment option is exercised in full, as well as 16,975,000 shares, or 18,381,250 shares if the over-allotment option is exercised in full, underlying the warrants, eligible for trading in the public market. The presence of these additional shares of common stock trading in the public market may have an adverse effect on the market price of our common stock. In addition, the existence of these rights may make it more difficult to effectuate an initial business combination or increase the cost of acquiring the target business, as the stockholders of the target business may be discouraged from entering into an initial business combination with us or may request a higher price for their business because of the potential effect the exercise of such rights may have on the trading market for our common stock. If we are deemed to be an investment company, we may be required to institute burdensome compliance requirements and our activities may be restricted, which may make it difficult for us to complete an initial business combination. A company that, among other things, is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, owning, trading or holding certain types of securities would be deemed an investment company under the Investment Company Act of 1940. Since we Table of Contents will invest the proceeds held in the trust account, it is possible that we could be deemed an investment company. Notwithstanding the foregoing, we do not believe that our anticipated principal activities will subject us to the Investment Company Act of 1940. To this end, the proceeds held in trust may be invested by the trustee only in United States government securities within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 having a maturity of 180 days or less, or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act of 1940 that invest solely in government securities. By restricting the investment of the proceeds to these instruments, we intend to meet the requirements for the exemption provided in Rule 3a-1 promulgated under the Investment Company Act of 1940. If we are nevertheless deemed to be an investment company under the Investment Company Act of 1940, we may be subject to certain restrictions that may make it more difficult for us to complete an initial business combination, including: restrictions on the nature of our investments; and restrictions on the issuance of securities. In addition, we may have imposed upon us certain burdensome requirements, including: registration as an investment company; adoption of a specific form of corporate structure; and reporting, record keeping, voting, proxy, compliance policies and procedures and disclosure requirements and other rules and regulations. Compliance with these additional regulatory burdens would require additional expense for which we have not allotted funds. There is currently no market for our securities and a market for our securities may not develop, which would adversely affect the liquidity and price of our securities. There is currently no market for our securities. Stockholders therefore have no access to information about prior market history on which to base their investment decision. Furthermore, an active trading market for our securities may never develop or, if developed, it may not be sustained. You may be unable to sell your securities unless a market can be established and sustained. The determination for the offering price of our units and sponsors warrants is more arbitrary compared with the pricing of securities for an operating company in a particular industry. Prior to this offering there has been no public market for any of our securities. The public offering price of the units and the terms of the warrants, as well as the price of the sponsors warrants, were negotiated between us and the underwriters. Factors considered in determining the prices and terms of the units, including the common stock and warrants underlying the units, and the sponsors warrants include: the history and prospects of companies whose principal business is the acquisition of other companies such as other blank check companies; prior offerings of those companies; amount of cash per share held in trust; our prospects for acquiring an operating business at attractive values; our capital structure; an assessment of our management and their experience in identifying operating companies; general conditions of the securities markets at the time of the offering; and other factors as were deemed relevant. Table of Contents However, although these factors were considered, the determination of our offering price is more arbitrary than the pricing of securities for an operating company in a particular industry since we have no historical operations or financial results to compare them to. If we effect an initial business combination with a company located outside of the United States, we would be subject to a variety of additional risks that may negatively impact our operations. We may effect an initial business combination with a company located outside of the United States. If we did, we would be subject to any special considerations or risks associated with companies operating in the target business home jurisdiction, including any of the following: rules and regulations or currency conversion or corporate withholding taxes on individuals; tariffs and trade barriers; regulations related to customs and import/export matters; longer payment cycles; tax issues, such as tax law changes, United States federal anti-deferral requirements and variations in tax laws as compared to the United States; currency fluctuations; challenges in collecting accounts receivable; cultural and language differences; employment regulations; differing political environments; and deterioration of political relations with the United States. We cannot assure you that we would be able to adequately address these additional risks. If we were unable to do so, our operations might suffer. If we effect an initial business combination with a company located outside of the United States, the laws applicable to such company will likely govern all of our material agreements and we may not be able to enforce our legal rights. If we effect an initial business combination with a company located outside of the United States, the laws of the country in which such company operates will govern almost all of the material agreements relating to its operations. We cannot assure you that the target business will be able to enforce any of its material agreements or that remedies will be available in this new jurisdiction. The system of laws and the enforcement of existing laws in such jurisdiction may not be as certain in implementation and interpretation as in the United States. The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss of business, business opportunities or capital. Additionally, if we acquire a company located outside of the United States, it is likely that substantially all of our assets would be located outside of the United States and some of our officers and directors might reside outside of the United States. As a result, it may not be possible for investors in the United States to enforce their legal rights, to effect service of process upon our directors or executive officers or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties against our directors and officers under Federal securities laws. Because we must furnish our stockholders with target business financial statements, we may not be able to complete an initial business combination with some prospective target businesses. We will provide stockholders with audited financial statements of the prospective target business as part of the proxy solicitation materials sent to stockholders to assist them in assessing the target business. In all likelihood, these financial statements will need to be prepared in conformity with United States generally Table of Contents accepted accounting principles. A target business identified by us as a potential acquisition candidate may not have financial statements prepared in conformity with United States generally accepted accounting principles and may not be able to prepare its financial statements in conformity with United States generally accepted accounting principles. To the extent that this requirement cannot be met, we may not be able to acquire the proposed target business. These financial statement requirements may limit the pool of potential target businesses with which we may combine. Our obligations under laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related regulations, may increase our cost of completing an initial business combination. Section 404 of the Sarbanes-Oxley Act of 2002 requires that management assess and report on the effectiveness of our internal control beginning with our Annual Report on Form 10-K for the year ending December 31, 2009. If we fail to develop and maintain effective internal control, we may be subject to regulatory scrutiny, civil or criminal penalties and/or stockholder litigation. Any inability to provide reliable financial reports could harm our business. Section 404 of the Sarbanes-Oxley Act also requires that our independent registered public accounting firm provide an independent opinion on the effectiveness of our internal control over financial reporting. In addition, a target company may not be in compliance with the provisions of the Sarbanes-Oxley Act. The development and maintenance of the internal control of any such entity to ensure compliance with the Sarbanes-Oxley Act may increase the time and costs necessary to complete any such acquisition. Furthermore, any failure to develop and maintain effective internal control may harm our operating results and/or result in difficulties in meeting our reporting obligations. Inadequate internal control could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock. Table of Contents CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS The statements contained in this prospectus that are not purely historical are forward-looking statements. Our forward-looking statements include, but are not limited to, statements regarding our or our management s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words anticipates, believe, continue, could, estimate, expect, intends, may, might, plan, possible, potential, predicts, project, should, would and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this prospectus may include, for example, statements about our: ability to complete our initial business combination; success in retaining or recruiting, or changes required in, our officers, key employees or directors following our initial business combination; executive officers and directors allocating their time to other businesses and potentially having conflicts of interest with our business or in approving our initial business combination, as a result of which they would then receive expense reimbursements; potential ability to obtain additional financing to complete an initial business combination; pool of prospective target businesses; the ability of our executive officers and directors to generate a number of potential investment opportunities; potential change in control if we acquire one or more target businesses for stock; public securities potential liquidity and trading; listing or delisting of our securities from the American Stock Exchange or the ability to have our securities listed on the American Stock Exchange following our initial business combination; use of proceeds not held in the trust account or available to us from interest income on the trust account balance; or financial performance following this offering. The forward-looking statements contained in this prospectus are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those
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+PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. Unless otherwise stated in this prospectus, references to we, us or our company refer to China Pacific Acquisition Corp., a Delaware corporation. References to our existing stockholders means the holders of our common stock immediately prior to the date of this prospectus, and the term public stockholders means the holders of common stock sold as part of the units in this offering or the aftermarket, including any existing stockholders to the extent that they purchase or acquire such shares. Unless otherwise specified, references to China or PRC refer to the People s Republic of China as well as the Hong Kong Special Administrative Region, or Hong Kong SAR , and the Macau Special Administrative Region, or Macau SAR , but does not include Taiwan. All references to RMB or Renminbi are to the legal currency of China and all references to U.S. dollars and $ are to the legal currency of the United States (the U.S. ). Discrepancies in tables included in this prospectus between totals and sums of the amounts listed are due to rounding. Unless otherwise specified, all references to private placement refer to our private placement of an aggregate of 1,200,000 warrants at a price of $1.00 per warrant to our directors, which will occur immediately prior to the completion of this offering. Unless we tell you otherwise, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option. Our Company Introduction We are a recently organized Delaware blank check company formed to serve as a vehicle for the acquisition of an operating business that has its primary operating facilities in the PRC. Our efforts in identifying a prospective target business will not be limited to a particular industry. We are not presently engaged in, and we will not engage in, any substantive commercial business for an indefinite period of time following this offering, and other than attempting to locate a target business we have no plan of operation for the remainder of 2007. We intend to utilize cash derived from the proceeds of this offering, our capital stock, debt or a combination of these in effecting a business combination. Our management has broad discretion with respect to the specific application of the net proceeds of this offering and, as a result, this offering can be characterized as a blank check offering. Pursuant to our amended and restated certificate of incorporation, the initial business combination must be a transaction with one or more operating businesses having primary business operations located in the PRC and in which the collective fair market value of the target business, at the time of the business combination, is at least 80% of the balance of the trust account (excluding deferred underwriting discounts and commissions of $1,800,000 or approximately $2,070,000 if the underwriters over-allotment option is exercised in full and taxes payable). Our initial business combination may involve the simultaneous acquisition or merger of more than one target business. Opportunities for market expansion have emerged for businesses with operations in the PRC due to certain changes in the PRC s political, economic and social policies, as well as certain fundamental changes affecting the PRC and its neighboring countries and regions. We believe that the PRC represents both a favorable environment for making acquisitions and an attractive operating environment for a target business for several reasons, including: the existence of a prolonged economic expansion within the PRC, with gross domestic product growth of approximately 9% on average over the last 25 years, growth of 10.1% for 2004, 10.4% for 2005, and 10.7% for 2006, according to the National Bureau of Statistics in China. - 4 - (State or jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification No.) 43rd Floor, Jardine House 1 Connaught Place Hong Kong, China Tel: 011 (852) 2537-9898 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Dato Sin Just Wong China Pacific Acquisition Corp. 43rd Floor, Jardine House 1 Connaught Place Hong Kong, China (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Robert Steven Brown, Esq. Louis Smookler, Esq. Reitler Brown & Rosenblatt LLC 800 Third Avenue, 21st Floor New York, New York 10022 Telephone:(212) 209-3050 Facsimile: (212) 371-5500 rbrown@reitlerbrown.com lsmookler@reitlerbrown.com Mitchell Nussbaum, Esq. Loeb & Loeb LLP 345 Park Avenue New York, New York 10154 Telephone:(212) 407-4159 Facsimile:(212) 504-3013 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. x If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o CALCULATION OF REGISTRATION FEE Title of Each Class Of Security Being Registered Amount Being Registered Proposed Maximum Offering Price Per Security(1) Proposed Maximum Aggregate Offering Price(1) Amount Of Registration Fee Units, each consisting of one share of common stock, $0.0005 par value, and one warrant (2) 8,625,000 $ 8.00 $ 69,000,000 $ 2,116.30 Common stocks included as part of the units(2) 8,625,000 0 (3) Warrants included as part of the units(2) 8,625,000 0 (3) Shares of common stock underlying the warrants included in the units(4) 8,625,000 6.00 51,750,000 1,588.73 Representative s Unit Purchase Option 1 100.00 100 0 (3) Units underlying Representative s Unit Purchase Option 750,000 10.00 7,500,000 230.25 Shares of common stock included as part of the units underlying the Representative s Unit Purchase Option(4) 750,000 0 (3) Warrants included as part of the units underlying the Representative s Unit Purchase Option 750,000 0 (3) Shares of common stock underlying warrants included as part of the units underlying the Representative s Unit Purchase Option(4) 750,000 7.50 $ 5,625,000 122.69 Total $ 133,875,100 $ 4,109.97 (1) Estimated solely for the purpose of calculating the registration fee. (2) Includes 1,125,000 units, and 1,125,000 shares of common stock and 1,125,000 warrants underlying such units, which may be issued on exercise of a 45-day option granted to the Underwriter to cover over-allotments, if any. (3) No fee pursuant to Rule 457(g). (4) Pursuant to Rule 416, there are also being registered such additional shares as may be issued as a result of stock splits, stock dividends or similar transactions. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Preliminary Prospectus Subject To Completion, December 28, 2007 PROSPECTUS CHINA PACIFIC ACQUISITION CORP. $60,000,000 7,500,000 Units China Pacific Acquisition Corp. is a Delaware blank check company recently formed for the purpose of acquiring, through a stock exchange, asset acquisition or other similar business combination, or control, through contractual arrangements, an operating business having its primary operations in the People s Republic of China. As used in this prospectus the term business combination shall mean the acquisition by us of a target business. Our efforts in identifying a prospective target business will not be limited to a particular industry. If we do not consummate a business combination within 18 months of the closing date of our initial public offering, but have entered into a letter of intent, an agreement in principle or definitive agreement with respect to a business combination within such 18 month period, we will have an additional six months in which to consummate a business combination. However, if we anticipate that we will not be able to consummate a business combination within 24 months, we may seek stockholder approval to extend the period of time to consummate a business combination by an additional 12 months. In order to extend the period of time to 36 months (i) public stockholders must approve the extension and (ii) public stockholders owning no more than one share less than 30% of the shares sold in this offering may have exercised their redemption rights as described in this prospectus. The 36 month period will be referred to throughout this prospectus as the extended period. If we fail to sign a letter of intent or definitive agreement within such 18 month period or if we fail to consummate a business combination within such 24 month period, or the extended period, as the case may be, we will liquidate and distribute to our public stockholders the net proceeds of this offering, plus interest, less certain costs, each as described in this prospectus. We do not have any specific merger, capital stock exchange, asset or stock acquisition or other business combination or contractual arrangements under consideration, and we have not, nor has anyone on our behalf, engaged in discussions with representatives of other companies, with respect to such a transaction. This is an initial public offering of our securities. Each unit will be offered at a price of $8.00 per unit and will consist of: one share of common stock; and one redeemable warrant. Each redeemable warrant entitles the holder to purchase one share of common stock at a price of $6.00 and is also exercisable on a net issuance or cashless basis in lieu of paying the cash exercise price if the warrants are redeemed, as described elsewhere in this prospectus. Each redeemable warrant will become exercisable on the later of our completion of a business combination or [__________], 2009 [one year from the date of this prospectus], and will expire on [__________], 2013 [five years from the date of this prospectus], or earlier upon redemption. Our directors have agreed to purchase from us an aggregate of 1,200,000 warrants at a price of $1.00 per warrant for an aggregate of $1,200,000 in a private placement prior to the completion of this offering. The warrants purchased in the private placement will be identical to those included in the units sold in this offering, except that these warrants will not be transferable or salable by our directors or their permitted transferees, subject to the exceptions described in this prospectus, until we complete a business combination, and will not be redeemable while held by our directors or their permitted transferees. In addition, commencing on the date when these warrants become exercisable, these warrants and the underlying common stock are entitled to registration rights. We have granted the underwriters a 45-day option to purchase up to 1,125,000 additional units solely to cover over-allotments, if any (over and above the 7,500,000 units referred to above). The over-allotment option will be used only to cover the net syndicate short position resulting from the initial distribution. We have also agreed to sell to WR Hambrecht + Co, LLC, the representative of the underwriters, for $100, as additional compensation, an option to purchase up to a total of 750,000 units at a per unit offering price of $10.00. The units issuable upon exercise of this option are identical to those offered by this prospectus, except that the warrants included in the option have an exercise price of $7.50 (125% of the exercise price of the redeemable warrants included in the units sold in this offering), are not redeemable and will be exercisable on a net issuance or cashless basis in lieu of paying the cash exercise price commencing on the date on which such warrants become exercisable, as described elsewhere in this prospectus. The purchase option and its underlying securities have been registered under the registration statement of which this prospectus forms a part. There is presently no public market for our units, common stock or redeemable warrants. We have applied to have the units listed on the American Stock Exchange, under the symbol [__________] upon official notice of issuance. Assuming that the units are listed on the American Stock Exchange, once the securities comprising the units begin separate trading, the common stock and redeemable warrants will be listed on the American Stock Exchange under the symbols [__________] and [__________], respectively. We cannot assure you, however, that any of such securities will be or continue to be listed on the American Stock Exchange. In the event that the securities are not listed on the American Stock Exchange, we anticipate that the units will be quoted on the OTC Bulletin Board, but we cannot assure you that our securities will be so quoted or, if quoted, will continue to be quoted. Investing in our securities involves a high degree of risk. See Risk Factors beginning on page 18 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Public offering price Underwriting discount and commissions(1) Proceeds, before expenses, to us Per unit $ 8.00 $ 0.56 $ 7.44 Total $ 60,000,000 $ 4,200,000 $ 55,800,000 (1) This amount includes $1,800,000 of the underwriting discount ($0.24 per unit), equal to 3% of the gross proceeds of this offering (excluding the over-allotment option), which the underwriters have agreed will be deferred and will be paid to the underwriters only upon the consummation of a business combination, less $0.24 for each share redeemed for cash in connection with our business combination. Such deferred discount will be held in the trust account at JPMorgan Chase NY Bank maintained by Continental Stock Transfer & Trust Company, acting as trustee, upon the consummation of a business combination and released to the underwriters. If a business combination is not consummated, such deferred discount will be forfeited by the underwriters. The underwriters will not be entitled to any interest accrued on the deferred discount. No discounts or commissions are payable with respect to the units issued in the private placement. Of the net proceeds we receive from this offering and the private placement, $57,000,000 ($7.60 per unit) will be deposited into a trust account at JPMorgan Chase NY Bank maintained by Continental Stock Transfer & Trust Company acting as trustee. This amount includes (i) $1,800,000 ($0.24 per unit) which will be paid to the underwriters if a business combination is consummated (less $0.24 for each share redeemed for cash in connection with our business combination), but will be forfeited by the underwriters if a business combination is not consummated and (ii) the proceeds of the private placement. As a result, our public stockholders will receive, based upon the amounts originally placed in the trust, and subject to any valid claims by our creditors which are not covered by amounts in the trust account or - 2 - indemnities provided by our directors, approximately $7.60 per unit, or $0.40 less than the per unit offering price of $8.00, plus interest, net of taxes paid or payable, and interest released to us to fund our working capital, in the event of our dissolution and liquidation if we fail to consummate a business combination. We are offering the units for sale on a firm-commitment basis. WR Hambrecht + Co, LLC, acting as representative of the underwriters, expects to deliver our securities to investors in the offering on or about [_________], 2008. WR Hambrecht + Co, LLC [__________], 2008 - 3 - Dato Sin Just Wong 937,500 (1) 937,500 (2) 50% 10% Jardine House 1 Connaught Place 43rd Floor Hong Kong SAR China Matthew McGovern c/o SBI-USA LLC 610 Newport Center Drive Suite 1205 Newport Beach, California 92660 937,500 (1) 937,500 (2) 50% 10% Michael R. Friedl c/o SBI-USA LLC 610 Newport Beach Center Drive Suite 1205 Newport Beach, California 92660 All directors and executive officers as a group (three individuals) 1,875,000 (1) 1,875,000 (2) 100 % PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. Unless otherwise stated in this prospectus, references to we, us or our company refer to China Pacific Acquisition Corp., a Delaware corporation. References to our existing stockholders means the holders of our common stock immediately prior to the date of this prospectus, and the term public stockholders means the holders of common stock sold as part of the units in this offering or the aftermarket, including any existing stockholders to the extent that they purchase or acquire such shares. Unless otherwise specified, references to China or PRC refer to the People s Republic of China as well as the Hong Kong Special Administrative Region, or Hong Kong SAR , and the Macau Special Administrative Region, or Macau SAR , but does not include Taiwan. All references to RMB or Renminbi are to the legal currency of China and all references to U.S. dollars and $ are to the legal currency of the United States (the U.S. ). Discrepancies in tables included in this prospectus between totals and sums of the amounts listed are due to rounding. Unless otherwise specified, all references to private placement refer to our private placement of an aggregate of 1,200,000 warrants at a price of $1.00 per warrant to our directors, which will occur immediately prior to the completion of this offering. Unless we tell you otherwise, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option. Our Company Introduction We are a recently organized Delaware blank check company formed to serve as a vehicle for the acquisition of an operating business that has its primary operating facilities in the PRC. Our efforts in identifying a prospective target business will not be limited to a particular industry. We are not presently engaged in, and we will not engage in, any substantive commercial business for an indefinite period of time following this offering, and other than attempting to locate a target business we have no plan of operation for the remainder of 2007. We intend to utilize cash derived from the proceeds of this offering, our capital stock, debt or a combination of these in effecting a business combination. Our management has broad discretion with respect to the specific application of the net proceeds of this offering and, as a result, this offering can be characterized as a blank check offering. Pursuant to our amended and restated certificate of incorporation, the initial business combination must be a transaction with one or more operating businesses having primary business operations located in the PRC and in which the collective fair market value of the target business, at the time of the business combination, is at least 80% of the balance of the trust account (excluding deferred underwriting discounts and commissions of $1,800,000 or approximately $2,070,000 if the underwriters over-allotment option is exercised in full and taxes payable). Our initial business combination may involve the simultaneous acquisition or merger of more than one target business. Opportunities for market expansion have emerged for businesses with operations in the PRC due to certain changes in the PRC s political, economic and social policies, as well as certain fundamental changes affecting the PRC and its neighboring countries and regions. We believe that the PRC represents both a favorable environment for making acquisitions and an attractive operating environment for a target business for several reasons, including: the existence of a prolonged economic expansion within the PRC, with gross domestic product growth of approximately 9% on average over the last 25 years, growth of 10.1% for 2004, 10.4% for 2005, and 10.7% for 2006, according to the National Bureau of Statistics in China. - 4 - increased government focus within the PRC on privatizing assets, improving foreign trade and encouraging business and economic activity; access to a highly trained and educated workforce as well as favorable labor rates and efficient, low-cost manufacturing capabilities; and attractive valuations for target businesses within the PRC. Without regard to the particular industry sector, we initially intend to seek as potential acquisition target companies displaying a number of the following characteristics: recurring revenue; stable cash flow; opportunities for organic and acquisition growth; annual revenues between $50 million and $500 million; at or near profitability; and a superior management team. We will focus on sectors that are impacted by the trends discussed in this prospectus and on companies where our international experience can be useful. Our directors and officers have extensive experience in China and the United States and provide us with the operational knowledge, technical expertise and relationships to acquire a business in China. Depending on the specific characteristics of the target business, we may issue debt or equity securities or incur indebtedness in connection with the business combination, which may permit us to invest cash directly into a business that was undercapitalized or otherwise in need of liquid funds. We will utilize the collective experience and expertise of our directors and officers to identify potential target acquisitions. Assuming we complete our initial business combination, we may pursue additional business combinations to, among other objectives, drive sales growth, penetrate complementary markets, introduce new products or broaden our sources of revenue. These criteria are not intended to be exhaustive. Any evaluation relating to the merits of a particular business combination will be based, to the extent relevant, on the above characteristics as well as other considerations deemed relevant by our management in effecting a business combination consistent with our business objective. In evaluating a prospective target business, we will conduct an extensive due diligence review which will encompass, among other things, meetings with management, where applicable, and inspection of facilities, as well as review of financial and other information which will be made available to us. Nevertheless, upon the completion of such due diligence, we may consummate a business combination with a business target which does not possess any of the foregoing characteristics. To date, our efforts have been limited to organizational activities. Accordingly, we cannot assure you that we will be able to locate a target business or that we will be able to engage in a business combination with a target business on favorable terms. - 5 - Competitive Strengths We believe that we possess several competitive strengths to source, evaluate and execute business combinations opportunities in the PRC. Our management team has extensive operational, transactional and financial expertise and experience derived through years of entrepreneurial and investment experience, as well as managing operating companies and divisions of operating companies. Our management team also has experience in international transactions and operations, particularly with respect to transactions and operations in the United States and Asia, along with substantial relationships and connections. We intend to bring to bear all of these skills and knowledge to the search for a target business, the acquisition process and the oversight of our acquisition s operations. Notwithstanding these strengths, our directors and officers may not be able to achieve similar results for us. Industry Sectors and Trends Although our efforts in identifying a prospective target business will not be limited to a particular industry, based upon the industry knowledge of our officers and directors, we believe that we will have particularly good business combination opportunities in the consumer product industry. Background We were incorporated under the laws of the State of Delaware on June 20, 2007. Our offices are located at 43rd Floor, Jardine House, One Connaught Place, Hong Kong, China and our telephone number at this office is 011 (852) 2533-9898. - 6 - The Offering Securities offered: 7,500,000 units, at $8.00 per unit, each unit consisting of: one share of common stock; and one redeemable warrant. The units are expected to begin trading on or promptly after the date of this prospectus. Each of the shares of common stock and redeemable warrants may trade separately on the 90th day after the date of this prospectus unless the representative of the underwriters determines that an earlier date is acceptable. In no event will the representative of the underwriters allow separate trading of the shares of common stock and redeemable warrants until we file an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file a Current Report on Form 8-K, including an audited balance sheet, as soon as practicable after the consummation of this offering, which is anticipated to take place three business days from the date of this prospectus. The audited balance sheet will include proceeds we receive from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Current Report on Form 8-K. Representative s Unit Purchase Option: We will issue to W.R. Hambrecht + Co, LLC, as the representative of the underwriters, for $100, an option to purchase up to a total of 750,000 units. The units issuable upon exercise of this option are identical to the units sold in this offering, except that the warrants included in the option have an exercise price of $7.50 (125% of the exercise price of the redeemable warrants included in the units sold in the offering), are not redeemable and will be exercisable on a net issuance or cashless basis in lieu of paying the cash exercise price commencing on the date on which such warrants become exercisable, as described elsewhere in this prospectus. This option is exercisable at $10.00 per unit commencing on the later of the consummation of a business combination and one year from the date of this prospectus and expires five years from the date of this prospectus. In lieu of the payment of the exercise price, the option may be converted into units on a net-share settlement or cashless exercise basis to the extent that the market value of the units at the time of conversion exceeds the exercise price of the option. The sale of the purchase option and its underlying securities have been registered under the registration statement of which this prospectus forms a part. Common Stock: Number outstanding before this offering and the private placement: 1,875,000 shares.(1) Number to be outstanding after this offering and the private placement: 9,375,000 shares(1)(2)(3) (without giving effect to the exercise of redeemable warrants and the representative s unit purchase option). Private placement: On June 20, 2007, our directors, Dato Sin Just Wong and Matthew McGovern, agreed to purchase from us an aggregate of 1,200,000 warrants at a price of $1.00 per warrant, for an aggregate of $1,200,000, in a private placement prior to the completion of this offering. The warrants purchased in the private placement will be identical to those included in the units sold in this offering, except that these warrants will not be transferable or salable by our directors or their permitted transferees, subject to the exceptions described in this prospectus, until we complete a business combination, and will not be redeemable while held by our directors or their permitted transferees. In addition, commencing on the date when these warrants become exercisable, these warrants and the underlying common stock are entitled to registration rights. (1) Does not include 281,250 shares of common stock held by our existing stockholders that are subject to redemption by us to the extent that the underwriters over-allotment option is not exercised in full. (2) Assumes no exercise of the underwriters over-allotment option and, therefore, the redemption of 281,250 shares of common stock previously held by our existing stockholders. To the extent that the underwriters over-allotment option is exercised in full and, therefore, we are not obligated to redeem 281,250 shares of common stock held by our existing stockholders, there will be 10,781,250 shares of our common stock outstanding after this offering and the private placement. (3) Does not give effect to the exercise of the redeemable warrants and the representative s unit purchase option. - 7 - The proceeds of the private placement will be held in the trust account pending our completion of a business combination on the terms described in this prospectus. If we do not complete such a business combination, then these funds will be part of the liquidating distribution to our public stockholders, and the warrants that are part of the units issued in the private placement will expire worthless. Redeemable warrants: Number outstanding before this offering and the private placement: 0 Number to be outstanding after this offering and the private placement: 8,700,000 redeemable warrants (without giving effect to the exercise of the representative s unit purchase option).(1) Exercisability: Each redeemable warrant is exercisable for one share of common stock. Exercise price: $6.00, except for those warrants exercised under the representative s unit purchase option which have an exercise price of $7.50 (125% of the exercise price of the redeemable warrants included in the units sold in this offering) or on a net issuance or cashless basis in lieu of paying the cash exercise price commencing on the date on which such warrants become exercisable, as described elsewhere in this prospectus. Each redeemable warrant is also exercisable on a net issuance or cashless basis in lieu of paying the cash exercise price if the warrants are redeemed, as described elsewhere in this prospectus. Exercise period: The redeemable warrants will become exercisable on the later of: the completion of a business combination with a target business, or [_______], 2009[one year from the date of this prospectus]. The redeemable warrants will expire at 5:00 p.m., New York City time, on [_______], 2013[five years from the date of this prospectus] or (1) Includes warrants exercisable for an aggregate of 1,200,000 shares of common stock sold to our founders in the private placement which are not redeemable. - 8 - earlier upon redemption. The redeemable warrants issued under the representative s unit purchase option will expire at 5:00 p.m., New York City time, on [_______], 2013[five years from the date of this prospectus]. Redemption: We may redeem the outstanding redeemable warrants: in whole and not in part, at a price of $0.01 per redeemable warrant at any time after the redeemable warrants become exercisable, upon a minimum of 30 days prior written notice of redemption, and if, and only if, the last sales price of our common stock equals or exceeds $11.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. We have established the above criteria to provide warrant holders with (i) adequate notice of exercise only after the then prevailing common stock price is substantially above the warrant exercise price and (ii) a sufficient differential between the then prevailing common stock price and the warrant exercise price so there is a reasonable cushion to absorb a negative market reaction, if any, to our redemption call. If the foregoing conditions are satisfied and we call the warrants for redemption, each warrant holder shall then be entitled to exercise his or her warrant prior to the date scheduled for redemption by payment of the exercise price or on a net issuance or cashless basis in lieu of paying the cash exercise price if the warrants are redeemed. However, there can be no assurance that the price of the common stock will exceed the call trigger price or the warrant exercise price after the redemption call is made. American Stock Exchange symbols for our: Units: [ ] Common stock: [ ] Redeemable warrants: [ ] Offering and private placement proceeds to be held in trust: $57,000,000 of the proceeds of this offering and private placement ($7.60 per unit) will be placed in a trust account - 9 - at JPMorgan Chase NY Bank maintained by Continental Stock Transfer & Trust Company, acting as trustee, pursuant to an agreement to be signed on the date of this prospectus. Of this amount, up to $55,200,000 ($7.36 per unit) may be used by us for the purpose of effecting a business combination, and $1,800,000 ($0.24 per unit) will be paid to the underwriters if a business combination is consummated, less $0.24 for each share redeemed for cash in connection with our business combination, but will be forfeited by the underwriters if a business combination is not consummated. We believe that the inclusion in the trust account of the $1,200,000 of the proceeds from the private placement and the deferred underwriting discount is a benefit to our stockholders because additional proceeds will be available for distribution to investors if a liquidation of our company occurs prior to our completing an initial business combination. These proceeds will not be released until the earlier of the completion of a business combination or a liquidating distribution; provided, however, that half of the interest earned on the trust account, net of taxes payable, will be released to us each calendar month to fund our working capital requirements and general corporate purposes as set forth in the Investment Management Trust Agreement. Therefore, unless and until a business combination is consummated, the proceeds held in the trust account (other than a portion of the interest earned) will not be available for our use for any expenses related to this offering or expenses which we may incur related to the investigation and selection of a target business and the negotiation of an agreement to acquire a target business. There will be no fees, reimbursements or cash payments made to our existing stockholders and/or officers and directors other than: Repayment of amounts advanced under a credit facility of up to 500,000 evidenced by a non-interest bearing promissory note, dated June 20, 2007, that our existing stockholders and directors have entered into with us that is due at the earlier of June 20, 2008 or the closing of this offering. Advances under the credit facility will be used to pay a portion of the expenses related to this offering. We intend to repay this loan from the proceeds of this offering. As of September 30, 2007, we have borrowed $1,159. Payment of $7,500 per month to SBI-e2 Capital Limited, a company established under the laws of the Hong Kong SAR, owned and managed by Dato Sin Just Wong, our chief executive officer, for office space and general and administrative services, including secretarial - 10 - support. Reimbursement for out-of-pocket expenses incurred by our officers and directors, some of whom are also existing stockholders, in connection with activities on our behalf such as identifying potential target businesses, performing due diligence on suitable business combinations, and for out-of-pocket expenses incurred in connection with this offering. The $1,800,000 of the proceeds attributable to the underwriters discount will be paid to the underwriters upon completion of a business combination (less $0.24 for each share redeemed for cash in connection with our business combination) on the terms described in this prospectus or to our public stockholders upon our liquidation of the trust account as part of our plan of dissolution and liquidation, but will in no event be available for use by us in a business combination. The underwriters will not be entitled to any interest accrued on the deferred amount. Prior to the consummation of a business combination, we may only pay expenses we have incurred from the net proceeds of this offering not held in the trust account and any interest earned and released to us as provided above. None of the redeemable warrants may be exercised until after the consummation of a business combination and, thus, after the proceeds of the trust account have been disbursed, the redeemable warrant exercise price will be paid directly to us. Amended and Restated Certificate of Incorporation: As discussed in more detail in this prospectus, there are specific provisions in our amended and restated certificate of incorporation that may not be amended without the prior consent of holders of 95% of our outstanding common stock prior to our consummation of a business combination, including our requirements to seek stockholder approval of such a business combination and to allow our stockholders to seek redemption of their shares if they do not approve of such a business combination. We view these provisions, which are contained in Article Sixth of our amended and restated certificate of incorporation, as obligations to our stockholders and will not take any action to amend or waive these provisions. - 11 - Stockholders must approve business combination: We will seek stockholder approval before we effect any business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable law. In connection with the vote required for any business combination, all of our existing stockholders, including all of our directors, have agreed to vote the shares of common stock owned by them immediately before this offering in favor of a business combination. We will consummate our initial business combination only if a majority of the shares of common stock voted by the public stockholders are voted in favor of our initial business combination and public stockholders owning no more than one share less than 30% of the shares sold in this offering, on a cumulative basis, including any stockholders who previously exercised their redemption rights in connection with the special meeting of stockholders called for the purpose of approving the extended period, if any, exercise their redemption rights, as described elsewhere in this prospectus. - 12 - If, at the end of the 18 month period, we have not entered into a letter of intent, an agreement in principle or definitive agreement with respect to a business combination, or if at the end of the 24 month period or the extended period, as applicable, we have not obtained stockholder approval for an initial business combination, or at the end of the 24 month period we have not obtained stockholder approval of the extended period, we will dissolve as promptly as practicable and liquidate and release only to our public stockholders, as part of our plan of distribution, the proceeds of the trust account, net of taxes payable and net of interest income earned on the trust account previously released to us to fund our working capital and general corporate requirements, subject to any valid claims by our creditors that are not covered by amounts held in the trust account or the indemnities provided by our officers and directors. The requirement that we seek stockholder approval before effecting our initial business combination is set forth in Article Sixth of our articles of association, which requires the affirmative vote of at least 95% of the voting power of our outstanding voting securities to amend. The requirement that we seek stockholder approval before effecting our initial business combination therefore may be eliminated only by a vote of our board and the vote of at least 95% of the voting power of our outstanding voting securities. Management will not request that the board consider such a proposal to eliminate or amend this provision. In connection with the stockholder vote required to approve the extended period and/or our initial business combination, our existing stockholders, including all of our directors, have agreed to vote their shares of common stock owned by them immediately prior to this offering in favor of a business combination or our extended period. If within 90 days before the expiration of the 24-month period, we seek approval from our stockholders of the extended period, or, within 90 days before the expiration of the 36-month period, we seek approval from our stockholders to consummate a business combination, the proxy statement related to such business combination will also seek stockholder approval for our board s recommended plan of distribution in the event our stockholders do not approve the extended period or the business combination or if such business combination is not consummated for other reasons. Possible extension of time to consummate a business combination to 36 months: Unlike other blank check companies, if we have entered into a letter of intent, agreement in principle or definitive agreement with respect to a business combination within 18 months following the consummation of this offering, we may seek to extend the time period within which we must complete our business combination, to avoid being required to liquidate, to 36 months, by calling a special meeting of our stockholders for the purpose of soliciting their approval for such extension. We believe that extending the date before which we must complete our business combination to 36 months (which we refer to in the prospectus as the extended period ) may be advisable due to the circumstances involved in the evaluation and closing of a business combination in China, including obtaining financial statements of potential targets audited in accordance with generally accepted accounting principles in the United States ( US GAAP ) that have previously kept their accounts in accordance with generally accepted accounting principles in China ( PRC GAAP ), the possible need for restructuring and reorganizing corporate entities and assets (particularly with respect to PRC state-owned enterprises) and the requirements of complex Chinese regulatory filings and approvals. For example, without the possibility of extending the time to complete a business combination by an additional 12 months, if we were to enter into an agreement near the end of this 18 month period, we would have only six months in which to accomplish the necessary accounting reconciliations, complete the restructuring of the company, satisfy U.S. and PRC regulatory requirements, secure the approval of our stockholders and provide for customary closing conditions. If holders of 30% or more of the shares sold in this offering vote against the proposed extension to 36 months and elect to redeem their shares for a pro rata share of the trust account, we will not extend the date before which we must complete our business combination beyond 24 months. In such event, if we cannot complete the initial business combination within such 24 month period, we will be required to liquidate, with the amount remaining in the trust account returned to all public stockholders. Subject to the foregoing, approval of the extension to 36 months will require the affirmative vote of the majority of public stockholders who vote at the special meeting called for the purpose of approving such extension. If we receive stockholder approval for the extended period and holders of 30% or more of the shares sold in this offering do not vote against the extended period and choose to redeem in connection with the vote for the extended period, we will then have an additional 12 months in which to complete the initial business combination. We will still be required to seek stockholder approval before completing our initial business combination, even if the business combination would not ordinarily require stockholder approval under applicable law. As a result of the potential for the extension, we may be able to hold your funds in the trust account for up to three years. A stockholder s election to redeem his shares will only be honored if the extended period is approved. Stockholders who vote against the extended period and exercise their redemption rights will not be able to vote on the initial business combination. All other stockholders will be able to vote on the initial business combination. If at the end of such 36 month period we have not effected a business combination, we will dissolve as promptly as practicable and liquidate the proceeds of the trust account as set forth in this prospectus. Redemption rights for stockholders voting to reject a business combination: Public stockholders voting against the extended period or our initial business combination will be entitled to redeem their shares into a pro rata share of the trust account if the matter to be voted upon is approved and completed, which includes $0.24 per share being held in the trust account attributable to the deferred underwriters discount and any interest earned on their portion of the trust account, net of taxes paid or payable, and excluding interest previously released to us to fund our working capital. Voting against the proposal for the extended period, if any, or our initial business combination alone will not result in the redemption of a stockholder s shares for a pro-rata portion of the trust account. The right of redemption is only valid when a stockholder votes against the proposal and exercises such redemption rights. Stockholders voting against (i) the extended period will only have the right to cause us to redeem their shares if the extended period is approved and (ii) the business combination will only have the right to cause us to redeem their shares if our initial business combination is approved and completed. However, the ability of stockholders to redeem their shares into a pro rata share of the trust account, net of taxes paid or payable, is subject to valid claims by our creditors which are not covered by amounts held in the trust account or the indemnities provided by our directors and officers. Public stockholders who redeem their shares of common stock for a pro rata share of the trust account will be paid promptly following their exercise of redemption rights and will continue to have the right to exercise any warrants they own. Because the initial per share redemption price is approximately $7.60 per share, which is less than the $8.00 per unit price in this offering and may be lower than the market price of the common stock on the date of conversion, there may be a disincentive on the part of public stockholders to exercise their redemption rights. Our existing stockholders are not entitled to redeem any shares of common stock held by them whether acquired by them prior to, as part of or after this offering, into a pro rata share of the trust account in connection with a business combination. Dissolution and liquidation if no business combination: We will promptly initiate procedures for our dissolution and the distribution to our public stockholders of our assets, including the funds held in the trust account after paying or reserving for payment of our liabilities (from assets outside the trust account and, if necessary within the trust account), if we do not effect a business combination within 18 months after the consummation of this offering (or within 24 months (or 36 months if the extension of an additional 12 months is approved by stockholders) from the consummation of this offering if a letter of intent, agreement in principle or definitive agreement has been executed within 18 months after the consummation of this offering and the business combination has not yet been consummated within such 18 month period or by the expiration of the extended period). Pursuant to our amended and restated certificate of incorporation, upon the expiration of such time periods, our purpose and powers will be limited to acts and activities relating to dissolving, liquidating and winding up. We will seek stockholder approval for our dissolution and plan of liquidation, but unless and until such approval is received, the funds held in the trust account will not be released. We cannot provide assurances that the distribution of our assets will occur within a specific timeframe. Our amended and restated certificate of incorporation also provides that we must comply with Section 281(b) of the Delaware General Corporation Law ( DGCL ). Section 281(b) requires us to adopt a plan for the distribution of our assets that will provide for the payment to our creditors and potential creditors, based on facts known to us at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may subsequently be brought against us in the subsequent 10 years. The plan will also provide that after reserving amounts sufficient to cover our liabilities and obligations and the costs of dissolution and liquidation, we will distribute our remaining assets pursuant to our plan of dissolution and liquidation, including the amounts held in the trust account, solely to our public stockholders. We will seek stockholder approval for our dissolution and plan for the liquidation of our assets. Upon the approval by our stockholders of our dissolution and plan for the liquidation of our assets, we will liquidate our assets, including the trust account, and after reserving amounts sufficient to cover our liabilities and obligations and the costs of dissolution and liquidation, distribute those assets solely to our public stockholders. However, we cannot assure you that third parties will not seek to recover from the assets distributed to our public stockholders any amounts owed to them by us. Under the DGCL, our stockholders could be liable for any claims against the corporation to the extent of distributions received by them in dissolution. Further, because our amended and restated certificate of incorporation provides that we distribute our assets in accordance with Section 281(b) rather than Sections 280 and 281(a), any such liability of our stockholders would extend to claims for which an action, suit or proceeding is begun after the third anniversary of our dissolution. Our existing stockholders, including all of our officers and directors, have waived their rights to participate in any distributions occurring upon our failure to complete a business combination with respect to shares of common stock acquired by them prior to this - 13 - offering, and have agreed to vote all of their shares of common stock owned prior to this offering in favor of our dissolution. We estimate that, in the event we liquidate the trust account, a public stockholder will receive approximately 7.60 per share, without taking into account net interest earned on the trust account, out of the funds in the trust account. We expect that all costs associated with implementing and completing our plan of dissolution and liquidation, including payments to any creditors will be funded by the proceeds of this offering not held in the trust account, but if we do not have sufficient funds outside of the trust account for those purposes or to cover our liabilities and obligations, the amount distributed to our public stockholders would be less than 7.60 per share. We estimate that our total costs and expenses for implementing and completing our stockholder-approved plan of dissolution and liquidation will be in the range of 75,000 to 125,000. This amount includes all costs and expenses relating to filing our certificate of dissolution in the State of Delaware, the winding up of our company and the costs of a proxy statement and meeting relating to the approval by our stockholders of our plan of dissolution and liquidation. While we believe that there should be sufficient funds available from the proceeds not held in the trust account to fund the 75,000 to 125,000 of expenses, SBI-e2 Capital Limited, an entity owed and controlled by Dato Sin Just Wong, our chairman of the board of directors and chief executive officer, has agreed to pay the costs of dissolution and liquidation in the event our remaining assets outside the trust account are insufficient to pay those costs. In the event that SBI-e2 Capital Limited is unable to pay such costs, then Messrs. Wong and McGovern have agreed to pay such costs. In the event that these individuals fail to satisfy these obligations or assert that the obligations in question are not covered by such indemnification, we would commence appropriate litigation if doing so would be in the best interests of our stockholders, which is a decision that would be made by our board of directors based on its fiduciary duties as set forth under Delaware law. In addition, if we seek approval from our stockholders to consummate a business combination more than 18 months after the consummation of this offering, the proxy statement related to such business combination will also seek stockholder approval for our plan of dissolution and liquidation, in the event our stockholders do not approve such business combination. If no proxy statement seeking the approval of our stockholders for a business combination has been filed 30 days prior to the date that is 24 or 36 months after the consummation of this offering (assuming that the period in which we need to consummate a business combination has been extended, as provided in our amended and restated certificate of incorporation), our board will, prior to such date, convene, adopt and recommend to our stockholders our plan of dissolution and liquidation, and on such date file a proxy statement with the SEC seeking stockholder approval for our plan of dissolution and liquidation. - 14 - Escrow of existing stockholders shares: On the date of this prospectus, all of our existing stockholders, including all of our directors, will place the common stock they owned before this offering into an escrow account at JPMorgan Chase NY Bank maintained by Continental Stock Transfer & Trust Company, acting as escrow agent. Subject to certain limited exceptions for transfers to spouses, children and controlled trusts and companies, these shares will not be transferable during the escrow period and will not be released from escrow until six months after the consummation of a business combination. The shares of common stock held in the escrow account will only be released prior to these dates if we are forced to liquidate, or if following a business combination we engage in a subsequent transaction resulting in our stockholders having a right to exchange their shares for cash or other securities. Risks In making your decision as to whether to invest in our securities, you should take into account not only the backgrounds of our management team, but also the special risks we face as a blank check company, as well as the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, and, therefore, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. You should carefully consider these and the other risks set forth in the section entitled Risk Factors beginning on page 18 of this prospectus. - 15 -
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+S-1/A 1 w32512a1sv1za.htm AMENDMENT NO. 1 TO FORM S-1 S-1/A Table of Contents As filed with the Securities and Exchange Commission on April 20, 2007 Securities Act File No. 333-141856 AMENDMENT NO. 1 TO UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 COMPASS DIVERSIFIED TRUST (Exact name of Registrant as specified in charter) Delaware 7363 57-6218917 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) COMPASS GROUP DIVERSIFIED HOLDINGS LLC (Exact name of Registrant as specified in its charter) Delaware 7363 20-3812051 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) Sixty One Wilton Road Second Floor Westport, CT 06880 (203) 221-1703 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) I. Joseph Massoud Chief Executive Officer Compass Group Diversified Holdings LLC Sixty One Wilton Road Second Floor Westport, CT 06880 (203) 221-1703 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Stephen C. Mahon Fred A. Summer Squire, Sanders Dempsey L.L.P. 312 Walnut Street Cincinnati, OH 45202 (513) 361-1200 (513) 361-1201 Facsimile Michael P. Reed Alston Bird LLP The Atlantic Building 950 F Street N.W. Washington, D.C. 20004 (202) 756-3300 (202) 756-3333 Facsimile Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: o If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. TABLE OF CONTENTS Page Summary 1 Risk Factors 11 Forward-Looking Statements 32 Use of Proceeds 34 Price Range of Shares 34 Dividend and Distribution Policy 35 Pro Forma Capitalization 37 Pro Forma Condensed Combined Financial Statements 38 Selected Financial Data 49 Management s Discussion and Analysis of Financial Condition and Results of Operations 50 Quantitative and Qualitative Disclosures About Market Risk 72 Business 73 Our Manager 115 Management 129 Executive Compensation 130 Principal Shareholders/Security Ownership of Directors and Executive Officers 136 Certain Relationships and Related Party Transactions 137 Description of Shares 142 Material U.S. Federal Income Tax Considerations 149 Underwriting 164 Legal Matters 168 Experts 168 Where You Can Find Additional Information 168 Index to Financial Statements F-1 EX-1.1: FORM OF UNDERWRITING AGREEMENT EX-10.3: REGISTRATION RIGHTS AGREEMENT EX-10.16: FORM OF SHARE PURCHASE AGREEMENT EX-23.1: CONSENT OF GRANT THORNTON LLP EX-23.2: CONSENT OF GRANT THORNTON LLP EX-23.3: CONSENT OF CLIFTON GUNDERSON LLP You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with different information. We, and the underwriters, are not making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information in this prospectus is accurate as of any date other than the date on the front cover of this prospectus. In this prospectus, we rely on and refer to information and statistics regarding market data and the industries of the businesses we own that are obtained from internal surveys, market research, independent industry publications and other publicly available information, including publicly available information regarding public companies. The information and statistics are based on industry surveys and our manager s and its affiliates experience in the industry. This prospectus contains forward-looking statements that involve substantial risks and uncertainties as they are not based on historical facts, but rather are based on current expectations, estimates, projections, beliefs and assumptions about our businesses and the industries in which they operate. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. You should not place undue reliance on any forward-looking statements, which apply only as of the date of this prospectus. Table of Contents SUMMARY This summary highlights selected information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read this entire prospectus carefully, including the sections entitled Risk Factors and Management s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and the notes relating thereto. Unless we tell you otherwise, the information set forth in this prospectus assumes that the underwriters have not exercised their overallotment option. Further, unless the context otherwise indicates, numbers in this prospectus have been rounded and are, therefore, approximate. Compass Diversified Trust, which we refer to as the trust, acquires and owns its businesses through a Delaware limited liability company, Compass Group Diversified Holdings LLC, which we refer to as the company. Except as otherwise specified, references to Compass Diversified, we, us and our refer to the trust and the company and its businesses together. See the section entitled Description of Shares for more information about certain terms of the shares, trust interests and allocation interests. Overview Compass Diversified Trust offers investors an opportunity to participate in the ownership and growth of middle market businesses that traditionally have been owned and managed by private equity firms or other financial investors, large conglomerates or private individuals or families. Through the ownership of a diversified group of middle market businesses, we also offer investors an opportunity to diversify their portfolio risk while participating in the cash flows of our businesses through the receipt of quarterly distributions. We acquire and manage middle market businesses based in North America with annual cash flows between $5 million and $40 million. We seek to acquire controlling ownership interests in the businesses in order to maximize our ability to work actively with the management teams of those businesses. Our model for creating shareholder value is to be disciplined in identifying and valuing businesses, to work closely with management of the businesses we acquire to grow the cash flows of those businesses, and to exit opportunistically businesses when we believe that doing so will maximize returns. We currently own six businesses in six distinct industries and we believe that these businesses will continue to produce stable and growing cash flows over the long term, enabling us to meet our objectives of growing distributions to our shareholders, independent of any incremental acquisitions we may make, and investing in the long-term growth of the company. In identifying acquisition candidates, we target businesses that: produce stable cash flows; have strong management teams largely in place; maintain defensible positions in industries with forecasted long-term macroeconomic growth; and face minimal threat of technological or competitive obsolescence. We maintain a long-term ownership outlook which we believe provides us the opportunity to develop more comprehensive strategies for the growth of our businesses through various market cycles, and will decrease the possibility, often faced by private equity firms or other financial investors, that our businesses will be sold at unfavorable points in a market cycle. Furthermore, we provide the financing for both the debt and equity in our acquisitions, which allows us to pursue growth investments, such as add-on acquisitions, that might otherwise be restricted by the requirements of a third-party lender. We have also found sellers to be attracted to our ability to provide both debt and equity financing for the consummation of acquisitions, enhancing the prospect of confidentiality and certainty of consummating these transactions. In addition, we believe that our ability to be long-term owners alleviates the concern that many private company owners have with regard to their businesses going through multiple sale processes in a short period of time and the disruption that this may create for their employees or customers. Table of Contents We have a strong management team that has worked together since 1998 and, collectively, has approximately 75 years of experience in acquiring and managing middle market businesses. During that time, our management team has developed a reputation for acquiring middle market businesses in various industries through a variety of processes. These include corporate spin-offs, transitions of family-owned businesses, management buy-outs, management based roll-ups, reorganizations, bankruptcy sales and auction-based acquisitions from financial owners. The flexibility, creativity, experience and expertise of our management team in structuring complex transactions provides us with strategic advantages by allowing us to consider non-traditional and complex transactions tailored to fit specific acquisition targets. Our manager, who we describe below, has demonstrated a history of growing cash flows at the businesses in which it has been involved. As an example, for the four businesses we acquired concurrent with our initial public offering, which we refer to as the IPO, 2006 full-year operating income increased, in total, over 2005 by approximately 20.5%. Our quarterly distribution rate has increased by 14.3% from the IPO, on May 16, 2006 until January 2007, from $0.2625 per share to $0.30 per share. From the date of the IPO until December 31, 2006 (including the distribution paid in January 2007 for the quarter ended December 31, 2006), our distribution coverage ratio (estimated cash flow available for distribution divided by total distributions) was approximately 1.7x. See Management s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources. Our Businesses To date, we have acquired controlling interests in the following seven businesses: Advanced Circuits On May 16, 2006, concurrent with the IPO, we acquired a controlling interest in Compass AC Holdings, Inc., which we refer to as Advanced Circuits. Advanced Circuits, headquartered in Aurora, Colorado, is a provider of prototype and quick-turn printed circuit boards, or PCBs, throughout the United States. PCBs are a vital component of virtually all electronic products. The prototype and quick-turn portions of the PCB industry are characterized by customers requiring high levels of responsiveness, technical support and timely delivery. Due to the critical roles that PCBs play in the research and development process of electronics, customers often place more emphasis on the turnaround time and quality of a customized PCB rather than on other factors, such as price. Advanced Circuits meets this market need by manufacturing and delivering custom PCBs in as little as 24 hours, providing its approximately 8,000 customers with approximately 98% error-free production and real-time customer service and product tracking 24 hours per day. Advanced Circuits had full-year operating income of approximately $11.6 million for the year ended December 31, 2006. Aeroglide On February 28, 2007, we acquired a controlling interest in Aeroglide Corporation, which we refer to as Aeroglide. Aeroglide, headquartered in Cary, North Carolina, is a leading global designer and manufacturer of industrial drying and cooling equipment. Aeroglide provides specialized thermal processing equipment designed to remove moisture and heat as well as roast, toast and bake a variety of processed products. Its machinery includes conveyer driers and coolers, impingement driers, drum driers, rotary driers, toasters, spin cookers and coolers, truck and tray driers and related auxiliary equipment and is used in the production of a variety of human foods, animal and pet feeds and industrial products. Aeroglide utilizes an extensive engineering department to custom engineer each machine for a particular application. Aeroglide had full-year operating income of approximately $3.1 million for the year ended December 31, 2006. Anodyne On August 1, 2006, we acquired a controlling interest in Anodyne Medical Device, Inc., which we refer to as Anodyne. Anodyne, headquartered in Los Angeles, California, is a leading manufacturer of medical support services and patient positioning devices used primarily for the prevention and treatment of pressure Table of Contents wounds experienced by patients with limited or no mobility. On October 5, 2006, Anodyne acquired the patient positioning business of Anatomic Global, Inc. Anodyne is one of the nation s leading designers and manufacturers of specialty support surfaces and is able to manufacture products in multiple locations to better serve a national customer base. Anodyne had operating income of approximately $0.3 million for the ten and one-half month period ended December 31, 2006. CBS Personnel On May 16, 2006, concurrent with the IPO, we acquired a controlling interest in CBS Personnel Holdings, Inc., which we refer to as CBS Personnel. CBS Personnel, headquartered in Cincinnati, Ohio, is a provider of temporary staffing services in the United States. In order to provide its 4,000 clients with tailored staffing services to fulfill their human resources needs, CBS Personnel also offers employee leasing services, permanent staffing and temporary-to-permanent placement services. CBS Personnel operates 144 branch locations in various cities in 18 states. CBS Personnel had full-year operating income of approximately $21.1 million for the year ended December 31, 2006. Crosman On May 16, 2006, concurrent with the IPO, we acquired a controlling interest in Crosman Acquisition Corporation, which we refer to as Crosman. Crosman, headquartered in East Bloomfield, New York, was one of the first manufacturers of airguns and is a manufacturer and distributor of recreational airgun products and related products and accessories. The Crosman brand is one of the pre-eminent names in the recreational airgun market and is widely recognized in the broader outdoor sporting goods industry. Crosman s products are sold in over 6,000 retail locations worldwide through approximately 500 retailers, which include mass market and sporting goods retailers. On January 5, 2007, we sold Crosman on the basis of a total enterprise value of approximately $143 million. We have reflected Crosman as a discontinued operation for all periods presented in this prospectus. For further information, see Note D Discontinued Operations, to our consolidated financial statements included elsewhere in this prospectus. Crosman had full-year operating income of approximately $17.6 million for the year ended December 31, 2006. Halo On February 28, 2007, we acquired a controlling interest in Halo Branded Solutions, Inc., which we refer to as Halo, and which operates under the brand names of Halo and Lee Wayne. Halo, headquartered in Sterling, Illinois, serves as a one-stop shop for over 30,000 customers, providing design, sourcing, management and fulfillment services across all categories of its customers promotional product needs. Halo has established itself as a leader in the promotional products and marketing industry through its focus on service through its approximately 700 account executives. Halo had full-year operating income of approximately $6.1 million for the year ended December 31, 2006. Silvue On May 16, 2006, concurrent with the IPO, we acquired a controlling interest in Silvue Technologies Group, Inc., which we refer to as Silvue. Silvue, headquartered in Anaheim, California, is a developer and producer of proprietary, high performance liquid coating systems used in the high-end eyewear, aerospace, automotive and industrial markets. Silvue s patented coating systems can be applied to a wide variety of materials, including plastics, such as polycarbonate and acrylic, glass, metals and other surfaces. These coating systems impart properties, such as abrasion resistance, improved durability, chemical resistance, ultraviolet or UV protection, anti-fog and impact resistance, to the materials to which they are applied. Silvue has sales and distribution operations in the United States, Europe and Asia, as well as manufacturing operations in the United States and Asia. Silvue had full-year operating income of approximately $6.7 million for the year ended December 31, 2006. Table of Contents Our Manager We have entered into a management services agreement with Compass Group Management LLC, who we refer to as our manager or CGM, pursuant to which our manager manages the day-to-day operations and affairs of the company and oversees the management and operations of our businesses. While working for a subsidiary of Compass Group Investments, Inc., which we refer to as CGI, our management team originally oversaw the acquisition and operations of each of our initial businesses and Anodyne prior to our acquiring them from CGI. We pay our manager a quarterly management fee equal to 0.5% (2.0% annualized) of our adjusted net assets as of the last day of each fiscal quarter for the services it performs on our behalf and reimburse our manager for certain expenses. In addition, our manager is entitled to receive a profit allocation upon the occurrence of certain trigger events and has the right to cause the company to purchase the allocation interests upon termination of the management services agreement. See Our Manager Our Relationship with Our Manager and Supplemental Put Agreement and Certain Relationships and Related Party Transactions for further descriptions of the management fees and profit allocation and our manager s supplemental put right. The company s chief executive officer and chief financial officer are employees of our manager and have been seconded to us. Neither the trust nor the company has any other employees. Although our chief executive officer and chief financial officer are employees of our manager, they report directly to the company s board of directors. The management fee paid to our manager covers all expenses related to the services performed by our manager, including the compensation of our chief executive officer and other personnel providing services to us. The company reimburses our manager for the salary and related costs and expenses of our chief financial officer and his staff, who dedicate a substantial majority of their time to the affairs of the company. See Our Manager Our Relationship with Our Manager and Certain Relationships and Related Party Transactions for further descriptions of costs and expenses for which we typically reimburse our manager. Market Opportunity We believe that the merger and acquisition market for middle market businesses is highly fragmented and provides opportunities to purchase businesses at attractive prices. For example, according to Mergerstat, during the twelve month period ended December 31, 2006, businesses that sold for less than $100 million were sold for a median of approximately 7.9x the trailing twelve months of earnings before interest, taxes, depreciation and amortization as compared to a median of approximately 9.3x for businesses that were sold for between $100 million and $300 million and 11.7x for businesses that were sold for over $300 million. We expect to acquire companies in the first two categories described above, and our manager has, to date, typically been successful in consummating attractive acquisitions at multiples at or below 7x the trailing twelve months of earnings before interest, taxes, depreciation and amortization, both on behalf of the company and prior to our formation while working for a subsidiary of CGI. We believe that among the factors contributing to lower acquisition multiples for businesses of the size we target are the fact that sellers of these businesses frequently consider non-economic factors, such as continuing board membership or the effect of the sale on their employees and customers, and that these businesses are less frequently sold pursuant to an auction process. Our Strategy In seeking to maximize shareholder value, we focus on the acquisition of new platforms and the management of our existing businesses (including acquisition of add-on businesses by those existing businesses). While we continue to identify, perform due diligence on, negotiate and consummate additional platform acquisitions of attractive middle market businesses that meet our acquisition criteria, we believe that our current businesses alone will allow us to pay and grow distributions to our shareholders. Table of Contents we must advance expenses, as incurred, to our directors and executive officers in connection with a legal proceeding to the extent permitted by Delaware law and may advance expenses as incurred to our other employees and agents, unless otherwise determined by the company s board of directors. The indemnification provisions contained in our LLC agreement are not exclusive of any other rights to which a person may be entitled by law, agreement, vote of members or disinterested directors or otherwise. In addition, we will maintain insurance on behalf of our directors and executive officers and certain other persons insuring them against any liability asserted against them in their respective capacities or arising out of such status. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment of expenses incurred or paid by a director, officer or controlling person in a successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to the court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this registration statement, we have agreed to indemnify the underwriters and the underwriters have agreed to indemnify us against certain civil liabilities that may be incurred in connection with this offering, including certain liabilities under the Securities Act. Item 15. Recent Sales of Unregistered Securities. On May 16, 2006, concurrently with the IPO, we issued 5,733,333 shares to CGI in a private placement under Section 4(2) of the Securities Act of 1933 at a purchase price of $15.00 per share, for an aggregate offering price of $86 million and completed the private placement of 266,667 shares to Pharos I LLC an entity controlled by Mr. Massoud, the chief executive officer of the company, and owned by our management team, at a purchase price of $15.00 per share for an aggregate offering price approximately $4.0 million. In connection with the purchase of Anodyne from CGI on August 1, 2006, we issued 950,000 shares of our newly issued shares to CGI in a private placement under Section 4(2) of the Securities Act of 1933 as part of the purchase price. The shares were valued at $13.1 million or $13.77 per share, the average closing price of the shares on the NASDAQ Global Market for the ten trading days ending on July 27, 2006. Item 16. Exhibits and Financial Statement Schedules. (a) The following exhibits are filed as part of this Registration Statement: Exhibit Number Description 1 .1 Form of Underwriting Agreement* 3 .1 Certificate of Trust of Compass Diversified Trust(1) 3 .2 Certificate of Formation of Compass Group Diversified Holdings LLC(1) 3 .3 Amended and Restated Trust Agreement of Compass Diversified Trust(3) 3 .4 Second Amended and Restated Operating Agreement of Compass Group Diversified Holdings, LLC dated January 9, 2007(7) Table of Contents Acquisition Strategy Our strategy for new platforms involves the acquisition of businesses that we expect to be accretive to our cash flow available for distribution. An ideal acquisition candidate for us is a North American company which demonstrates a reason to exist, that is, it is a leading player in its market niches, has predictable and growing cash flows, operates in an industry with long-term macroeconomic growth and has a strong and incentivizable management team. We believe that attractive opportunities to make such acquisitions will continue to present themselves, as private sector owners seek to monetize their interests and large corporate parents seek to dispose of their non-core operations. We benefit from our manager s ability to identify diverse acquisition opportunities in a variety of industries. In addition, we rely upon our management team s experience and expertise in researching and valuing prospective target businesses, as well as negotiating the ultimate acquisition of such target businesses. Management Strategy Our management strategy involves the active financial and operational management of our businesses in order to improve financial and operational efficiencies and achieve appropriate growth rates. After acquiring a controlling interest in a new business, we rely on our management team s experience and expertise to work efficiently and effectively with the management of the new business to jointly develop and execute a business plan and to manage the business consistent with our management strategy. In addition, we expect to sell businesses that we own from time to time, when attractive opportunities arise. Our decision to sell a business is based on our belief that doing so will increase shareholder value to a greater extent than would continued ownership of that business. Our sale of Crosman is an example of our ability to successfully execute this strategy. With respect to the sale of Crosman, we recognized a gain of approximately $35.9 million having owned Crosman for under eight months and having earned operating income of $13.3 million through December 31, 2006. Corporate Structure The trust is a Delaware statutory trust. Our principal executive offices are located at Sixty One Wilton Road, Second Floor, Westport, Connecticut 06880, and our telephone number is 203-221-1703. Our website is at www.CompassDiversifiedTrust.com. The information on our website is not incorporated by reference and is not part of this prospectus. We are selling 8,000,000 shares of the trust in connection with this offering and an additional 1,764,706 shares in the separate private placement transaction. Each share of the trust represents one undivided beneficial interest in the trust property. The purpose of the trust is to hold the trust interests of the company, which is one of two classes of equity interests in the company the trust interests, of which 100% are held by the trust, and allocation interests, of which 100% are held by our manager. The trust has the authority to issue shares in one or more series. See the section entitled Description of Shares for more information about the shares, trust interests and allocation interests. Your rights as a holder of trust shares, and the fiduciary duties of the company s board of directors and executive officers, and any limitations relating thereto are set forth in the documents governing the trust and the company. The documents governing the company specify that the duties of its directors and officers are generally consistent with the duties of a director of a Delaware corporation. Investors in the trust shares will be treated as beneficial owners of trust interests in the company. The company s board of directors oversees the management of the company and our businesses and the performance by our manager. The company s board of directors is comprised of seven directors, all of whom were initially appointed by our manager, as holder of the allocation interests, and four of whom are the company s independent directors. Six of the directors are elected by our shareholders in three staggered classes. As holder of the allocation interests, our manager has the right to appoint one director to the company s board of directors, subject to adjustment. An appointed director will not be required to stand for election by our shareholders. See the section entitled Description of Shares Voting and Consent Rights Board of Directors Appointee for more information about our manager s right to appoint a director. Table of Contents An illustration of our organizational structure is set forth below. Table of Contents The Offering Shares offered by us in this offering. 8,000,000 shares Shares outstanding after this offering and the separate private placement transaction 30,214,706 shares Use of proceeds We estimate that our net proceeds from the sale of the shares in this offering will be approximately $129.2 million (or approximately $148.6 million if the underwriters overallotment option is exercised in full), but without giving effect to the payment of public offering costs of approximately $2.2 million. We intend to use the net proceeds from this offering and the $30 million of proceeds from the separate private placement transaction to repay borrowings under our revolving credit facility and any remaining amounts for general corporate purposes. See the section entitled Use of Proceeds for more information about the use of the proceeds of this offering. NASDAQ Global Select Market symbol CODI Dividend and distribution policy We intend to declare and pay regular quarterly cash distributions on all outstanding shares, based on distributions received by the trust on the trust interests in the company. The declaration and amount of any distributions will be subject to the approval of the company s board of directors, which will include a majority of independent directors, and will be based on the results of operations of our businesses and the desire to provide sustainable levels of distributions to our shareholders. Any cash distribution paid by the company to the trust will, in turn, be paid by the trust to its shareholders. See the sections entitled Dividend and Distribution Policy for a discussion of our intended distribution rate and Material U.S. Federal Income Tax Considerations for more information about the tax treatment of distributions by the trust and the company. Shares of the trust Each share of the trust represents an undivided beneficial interest in the trust property, and each share of the trust corresponds to one underlying trust interest of the company owned by the trust. Unless the trust is dissolved, it must remain the sole holder of 100% of the trust interests, and at all times the company will have outstanding the identical number of trust interests as the number of outstanding shares of the trust. If the trust is dissolved, each share of the trust will be exchanged for one trust interest in the company. Each outstanding share of the trust is entitled to one vote on any matter with respect to which the trust, as a holder of trust interests in the company, is entitled to vote. The company, as the sponsor of the trust, will provide to our shareholders proxy materials to enable our shareholders to exercise, in proportion to their percentage ownership of outstanding shares, the voting rights of the trust, and the trust will vote its trust interests in the same proportion as the vote of holders of shares. The allocation Table of Contents interests do not grant to our manager voting rights with respect to the company except in certain limited circumstances. See the section entitled Description of Shares for information about the material terms of the shares, the trust interests and allocation interests. U.S. federal income tax considerations Subject to the discussion in Material U.S. Federal Income Tax Considerations, neither the trust nor the company will incur U.S. federal income tax liability; rather, each holder of trust shares will be required to take into account his or her allocable share of company income, gain, loss, deduction, and other items. The trust is currently seeking approval from the shareholders of record as of April 10, 2007, to authorize the board to amend the trust agreement to provide that the trust be taxed as a partnership. Assuming that approval is granted, the trust will report tax information to the shareholders for the 2007 taxable year and all future taxable years thereafter on Schedule K-1. If that approval is not granted, the trustees intend to dissolve the trust and each shareholder would receive a direct interest in the company in exchange for their shares in the trust. If that occurs, the company will continue to treat the trust as a grantor trust for the initial portion of the 2007 tax year and the trust will report the same tax information as found on the Schedule K-1 to the shareholders on Form 1041. See the section entitled Material U.S. Federal Income Tax Considerations for information about the potential U.S. federal income tax consequences of the purchase, ownership and disposition of shares and for a discussion of recent developments concerning treatment of the trust as a grantor trust for federal income tax purposes.
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+Prospectus Summary 1 Risk Factors 8 Forward-Looking Statements 23 Use of Proceeds 24 Price Range of Common Stock 24 Dividend Policy 24 Capitalization 25 Selected Financial Data 26 Management s Discussion and Analysis of Financial Condition and Results of Operations 28 Business 46 Management 59 Principal and Selling Stockholders 79 Certain Relationships and Related Party Transactions 82 Description of Capital Stock 84 Shares Eligible for Future Sale 89 Certain United States Federal Tax Considerations to Non-U.S. Holders 92 Underwriting 95 Legal Matters 101 Experts 101 Where You Can Find More Information 102 Index to Consolidated Financial Statements and Schedule F-1 EX-1.1: FORM OF UNDERWRITING AGREEMENT EX-5.1: OPINION OF MAYER, BROWN, ROWE & MAW LLP EX-23.1: CONSENT OF ERNST & YOUNG LLP You should rely only on the information contained in this document or in any free writing prospectus filed with the Securities and Exchange Commission or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. Table of Contents PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, especially the risks of investing in our common stock discussed under Risk Factors and our financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Unless otherwise indicated, the terms CommVault Systems, CommVault, the Company, we, us and our refer to CommVault Systems, Inc. and its subsidiaries. Our Company CommVault is a leading provider of data management software applications and related services in terms of product breadth and functionality and market penetration. We develop, market and sell a unified suite of data management software applications under the QiNetix (pronounced kinetics ) brand. QiNetix is specifically designed to protect and manage data throughout its lifecycle in less time, at lower cost and with fewer resources than alternative solutions. QiNetix provides our customers with: high-performance data protection, including backup and recovery; disaster recovery of data; data migration and archiving; global availability of data; replication of data; creation and management of copies of stored data; storage resource discovery (the automated recognition of available storage resources allowing more efficient storage and management of data) and usage tracking (tracking the use of available storage resources); data classification (the creation and tracking of key data attributes to enable intelligent, automated policy-based data movement and management); and management and operational reports and troubleshooting tools. We also provide our customers with a broad range of highly-effective professional services that are delivered by our worldwide support and field operations. QiNetix addresses the markets for backup and recovery, replication, archival and storage management, offering our customers high-performance and comprehensive solutions for data protection, business continuance, corporate compliance and centralized management and reporting. QiNetix enables our customers to simply and cost-effectively protect and manage their enterprise data throughout its lifecycle, from data center to remote office, covering the leading operating systems, relational databases and applications. In addition to addressing today s data management challenges, our customers can realize lower capital costs through more efficient use of their enterprise-wide storage infrastructure assets, including the automated movement of data from higher cost to lower cost storage devices throughout its lifecycle and through sharing and better utilization of storage resources across the enterprise. QiNetix can also provide our customers with reduced operating costs through a variety of features, including fast application deployment, reduced training time, lower cost of storage media consumables, proactive monitoring and analysis, simplified troubleshooting and lower administrative costs. QiNetix is built upon an innovative architecture and a single underlying code base, which we refer to as our Common Technology Engine. This unified architectural design is unique and differentiates us from our competitors, some of which offer similar applications built upon disparate software architectures, which we refer to as point products. We believe our architectural design provides us with significant competitive advantages, including offering the industry s most granular and automated management of data, tiered classification of all data based on its user-defined value and greater product reliability and ease of installation. In addition, we believe we have lower support and development costs and faster time to market for our new data management software applications. Table of Contents The information in this prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED JUNE 5, 2007 7,500,000 Shares CommVault Systems, Inc. Common Stock We are selling 300,000 shares of common stock and the selling stockholders named in this prospectus are selling 7,200,000 shares of common stock. We will not receive any of the proceeds from the shares of common stock sold by the selling stockholders. Our common stock is listed on The NASDAQ Global Market under the symbol CVLT. The last reported sale price of our common stock on June 4, 2007 was $16.72. The underwriters have an option to purchase a maximum of 1,125,000 additional shares from the selling stockholders to cover over-allotments of shares. Investing in our common stock involves risks. See Risk Factors on page 8. Underwriting Proceeds to Price to Discounts and Proceeds to Selling Public Commissions CommVault Stockholders Per Share $ $ $ $ Total $ $ $ $ Delivery of the shares of common stock will be made on or about , 2007. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Credit Suisse Goldman, Sachs Co. Merrill Lynch Co. Thomas Weisel Partners LLC RBC Capital Markets C.E. Unterberg, Towbin The date of this prospectus is , 2007. Table of Contents QiNetix fully interoperates with a wide variety of operating systems, applications, network devices and protocols, storage arrays (methods for storing information on multiple devices), storage formats and tiered storage infrastructures (storage environments in which data is organized and stored on a variety of storage media based on size, age, frequency of access or other factors), providing our customers with the flexibility to purchase and deploy a combination of hardware and software from different vendors. As a result, our customers can purchase and use the optimal hardware and software for their needs, rather than being restricted to the offerings of a single vendor. We have established a worldwide, multi-channel distribution network to sell our software and services to large global enterprises, small and medium sized businesses and government agencies, both directly through our sales force and indirectly through our global network of value-added resellers, system integrators, corporate resellers and original equipment manufacturers. As of March 31, 2007, we had licensed our data management software to approximately 5,900 registered customers across a variety of industries. A representative sample of well-known customers with a significant deployment of CommVault software includes Ace Hardware Corporation, Centex Homes, Clifford Chance LLP, Cozen O Connor, Halcrow Group Ltd., Newell Rubbermaid Inc., North Fork Bank, Ricoh Company, Ltd., the United Kingdom s Department of International Development and Welch Foods Inc. Each of these customers has at least 125 servers protected by our software. We derive the majority of our software revenue from our Galaxy Backup and Recovery software application. Sales of Galaxy Backup and Recovery represented approximately 83% of our total software revenue for the fiscal year ended March 31, 2007 and 90% for fiscal 2006. In addition, we derive the majority of our services revenue from customer and technical support associated with our Galaxy Backup and Recovery software application. We anticipate that we will continue to derive a majority of our software and services revenue from our Galaxy Backup and Recovery software application for the foreseeable future. CommVault s executive management team has led the growth of our business, including the development and release of all our QiNetix software, since its introduction in February 2000. Under the guidance of our management team, we have sustained technical leadership with the introduction of eight new data management applications and have garnered numerous industry awards and recognition for our innovative solutions. Our Industry The driving forces for the growth of the data management software industry are the rapid growth of data and the need to protect and manage that data. Data is widely considered to be one of an organization s most valued assets. The increasing reliance on critical enterprise software applications such as e-mail, relational databases, enterprise resource planning, customer relationship management and workgroup collaboration tools is resulting in the rapid growth of data across all enterprises. New government regulations, such as those issued under the Sarbanes-Oxley Act, the Health Insurance Portability and Accountability Act (HIPAA) and the Basel Committee on Banking Supervision (Basel II), as well as company policies requiring data preservation, are expanding the proportion of data that must be archived and easily accessible for future use. In addition, ensuring the security and integrity of data has become a critical task as regulatory compliance and corporate governance objectives affecting many organizations mandate the creation of multiple copies of data with longer and more complex retention requirements. The recent innovations in storage and networking technologies, coupled with the rapid growth of data, have caused information technology managers to redesign their data and storage infrastructures to deliver greater efficiency, broaden access to data and reduce costs. The result has been the wide adoption of larger and more complex networked data and storage solutions, such as storage area networks (SANs) (high-speed special-purpose networks (or subnetworks) that interconnect different kinds of data storage devices with associated data servers) and network-attached storage (NAS) (an environment in which one or more servers are dedicated exclusively to file sharing). In addition to those trends, regulatory compliance and corporate governance objectives are creating larger data archives having much longer retention periods that require Table of Contents information technology managers of organizations affected by these objectives to ensure the integrity, security and availability of data. We believe that these trends are increasing the demand for software applications that can simplify data management, provide secure and reliable access to all data across a broad spectrum of tiered storage and computing systems and seamlessly scale to accommodate growth, while reducing the total cost of ownership to the customer. Many of our competitors products were initially designed to manage smaller quantities of data in server-attached storage environments. As a result, we believe they are not as effective managing data in today s larger and more complex networked (SAN and NAS) environments. Given these limitations, we believe our competitors products cannot be scaled as easily as ours and are more costly to implement and manage than our solutions. Most data management software solutions are comprised of many individual point products built upon separate underlying architectures. This often requires the user to administer each individual point product using a separate, different user interface and unique set of dedicated storage resources, such as disk and tape drives. The result can be a costly, difficult to manage environment that requires extensive administrative cross-training, offers little insight into storage resource use across the global enterprise, provides modest operational reporting and commands greater storage use. Given these challenges, we believe that there is and will continue to be significant demand for a unified, comprehensive and scalable suite of data management software applications specifically designed to centrally and cost-effectively manage increasingly complex enterprise data environments. Our Strategy Our objective is to enhance our position as a leading supplier of data management software and services. Our key strategic initiatives are to continue: Extending our Technology Leadership, Product Breadth and Addressable Markets. We plan to continuously enhance existing software applications and introduce new information and data management software applications that address emerging data and storage management trends, incorporate advances in hardware and software technologies as they become available and take advantage of market opportunities. Enhancing and Expanding our Customer Support and Other Professional Services Offerings. We plan to continue creating and delivering innovative services offerings and product enhancements that result in faster deployment of our software, simpler system administration and rapid resolution of problems. Expanding Distribution Channels and Geographic Markets Served. We plan to continue investing in the expansion of our distribution channels, both geographically and across all enterprises. Broadening and Developing Strategic Relationships. We plan to broaden our existing relationships and develop new relationships with leading technology partners, including software application and infrastructure hardware vendors. We believe that these types of strategic relationships will allow us to package and distribute our data management software to our partners customers, increase sales of our software through joint-selling and marketing arrangements and increase our insight into future industry trends. Company Information We were incorporated in the State of Delaware in 1996. Our principal executive offices are located at 2 Crescent Place, Oceanport, New Jersey 07757, and our telephone number is (732) 870-4000. Our website address is www.commvault.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website as part of this prospectus. CommVault Systems, CommVault, CommVault Galaxy, QiNetix and other trademarks or service marks of CommVault appearing in this prospectus are the property of CommVault. This prospectus also Table of Contents contains additional trade names, trademarks and service marks of ours and of other companies. We do not intend our use or display of other companies trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies. Certain Principal and Selling Stockholders Affiliates of Credit Suisse Securities (USA) LLC, an underwriter in this offering, own approximately 35.5% of our common stock as of April 30, 2007 (calculated without giving effect to this offering). Certain affiliates of Credit Suisse Securities (USA) LLC are selling stockholders in this offering. Those affiliates of Credit Suisse Securities (USA) LLC will sell an aggregate of 7,200,000 shares (or 8,325,000 shares if the underwriters exercise their over-allotment option in full) in this offering and will receive aggregate sale proceeds of $113.8 million, or $131.5 million if the underwriters exercise their over-allotment option in full (in each case, based on an offering price of $16.72 per share, the last sale price of our common stock on The NASDAQ Global Market on June 4, 2007, less underwriting discounts and commissions). Upon completion of the offering and related transactions, affiliates of Credit Suisse Securities (USA) LLC will own approximately 18.3% of our common stock (or approximately 15.6% of our common stock if the underwriters exercise their over-allotment option in full). See Principal and Selling Stockholders. These affiliations present a conflict of interest because Credit Suisse Securities (USA) LLC has an interest in the successful completion of this offering beyond its interest as an underwriter in this offering. The conflict of interest arises due to the interests of its affiliates in this offering as selling stockholders. This offering therefore is being made using a qualified independent underwriter in compliance with the applicable provisions of Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc., which are intended to address potential conflicts of interest involving underwriters. See Underwriting for a more detailed description of Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc. and a description of the independent underwriting procedures that are being used in connection with this offering. Table of Contents The Offering Common stock offered to the public 300,000 shares by us 7,200,000 shares by the selling stockholders Total offering 7,500,000 shares (or 8,625,000 shares if the underwriters exercise their over-allotment option in full) Common stock to be outstanding after the offering 42,493,268 shares NASDAQ Global Market symbol CVLT Use of proceeds We intend to use the estimated net proceeds from the sale of shares by us in this offering of $4.3 million, together with approximately $2.0 million of our existing cash and cash equivalents, to pay the outstanding principal and accrued interest under our term loan (an amount equal to $6.3 million as of June 15, 2007, assuming interest accrued at a rate equal to 7.0% per annum for the applicable period). See Use of Proceeds. We will not receive any proceeds from the sale of common stock by the selling stockholders.
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+Prospectus Summary 1
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+PROSPECTUS SUMMARY The following is only a summary of some of the information contained or incorporated by reference in this prospectus which we believe to be important. We selected highlights of material aspects of our business to be included in this summary. We urge you to read this entire prospectus, including the information incorporated by reference in this prospectus. Investing in our common stock involves risks. Therefore, you should carefully consider the information below provided under the heading
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. Before investing in our common stock you should read this entire prospectus carefully, including the section entitled "Risk Factors" and our financial statements and related notes for a more complete understanding of our business and this offering. Unless we specify otherwise, all references and data in this prospectus to our "business," our "vessels" and our "fleet" refer to our fleet of seven vessels that we acquired simultaneously with the closing of our initial public offering, or "IPO," on October 18, 2005. Unless we specify otherwise, all references in this prospectus to "we," "our," "us" and "our company" refer to Double Hull Tankers, Inc. and its subsidiaries. The shipping industry's functional currency is the U.S. dollar. All of our revenues and most of our operating costs are in U.S. dollars. All references in this prospectus to "$" and "dollars" refer to U.S. dollars. See the "Glossary of Shipping Terms" included in this prospectus for definitions of certain terms used in this prospectus that are commonly used in the tanker shipping industry. Our Company We operate a fleet of double hull tankers. Our fleet currently consists of three very large crude carriers, or VLCCs, which are tankers ranging in size from 200,000 to 320,000 deadweight tons, or dwt, and four Aframax tankers, which are tankers ranging in size from 80,000 to 120,000 dwt. Our fleet principally operates on international routes and had a combined carrying capacity of 1,342,372 dwt and a weighted average age of 6.6 years as of September 30, 2006, compared with a weighted average age of 9.5 years for the world tanker fleet. We acquired the seven vessels in our fleet from subsidiaries of Overseas Shipholding Group, Inc., a Delaware corporation, or "OSG," on October 18, 2005 in exchange for cash and shares of our common stock, and we have chartered these vessels back to subsidiaries of OSG. OSG, one of the world's largest bulk-shipping companies, owns and operates a modern fleet of 91 vessels (including the seven vessels that comprise our fleet) that have a combined carrying capacity of 11.6 million dwt as of September 30, 2006. OSG's fleet consists of both internationally flagged and U.S. flagged vessels that transport crude oil, petroleum products and dry bulk commodities. OSG beneficially owned approximately 44.5% of our outstanding common stock as of January 16, 2007. Our strategy is to charter our vessels primarily pursuant to multi-year time charters to take advantage of the stable cash flow associated with long-term time charters. In addition, our time charter arrangements include a profit sharing component that gives us the opportunity to earn additional hire when vessel earnings exceed the basic hire amounts set forth in the charters. Our vessels are operated in the Tankers International Pool and the Aframax International Pool, and we expect our potential to earn additional hire will benefit from the higher utilization rates realized by these pools. In a pooling arrangement, the net revenues generated by all of the vessels in a pool are aggregated and distributed to pool members pursuant to a pre-arranged weighting system that recognizes each vessel's earnings capacity based on its cargo capacity, speed and consumption, and actual on-hire performance. Effective October 18, 2005, we time chartered our tankers to subsidiaries of OSG for terms of five to six and one-half years. Each time charter may be renewed by the charterer on one or more successive occasions for periods of one, two or three years, up to an aggregate of five, six or eight years, depending on the vessel. If a time charter is renewed, the charter terms providing for profit sharing will remain in effect and the charterer, at the time of exercise, will have the option to select a basic charter rate that is equal to (i) 5% above the published one-, two- or three-year time charter rate (corresponding to the extension length) for the vessel's class, as decided by a shipbrokers panel, or (ii) the basic hire rate set forth in the applicable charter. The shipbrokers panel, which we call the Broker Panel, will be The Association of Shipbrokers and Agents Tanker Broker Panel or another panel of brokers mutually acceptable to us and the charterer. (1)Amounts represent basic hire charter rates, which increase annually by amounts that vary by vessel class and year. See "Business Charter Arrangements" for a table detailing the basic hire rates by vessel class for the initial charter periods. Our Competitive Strengths We believe that we have a number of strengths that provide us with a competitive advantage in the tanker industry, including: A modern, high quality fleet. As of September 30, 2006, our three VLCC and four Aframax vessels had a weighted average age of 6.6 years, compared with a weighted average age for the world tanker fleet of 9.5 years. All of our tankers are of double hull construction and were designed and built to OSG's specifications and, prior to the IPO, were only operated by OSG. We believe they are among the most efficient and safest tankers in the world. We believe that owning and maintaining a modern, high quality fleet reduces off hire time and operating costs, improves safety and environmental performance and provides us with a competitive advantage in securing employment for our ships. Participation in OSG's pooling arrangements. We believe that we benefit from OSG's membership in the Tankers International Pool for VLCCs and the Aframax International Pool for Aframaxes, and we expect OSG's subsidiaries to continue to operate our vessels in these pools. We believe that, over a longer period of time, our potential to earn additional hire will be enhanced by the higher utilization rates and lower overhead costs that a vessel operating inside a pool can achieve compared with a vessel operating independently outside of a pool. An experienced management team. Our management team is led by Ole Jacob Diesen, our chief executive officer, who has over 30 years of experience in the shipping industry. Mr. Diesen has been an independent corporate and financial management consultant since 1997 and has extensive experience in the shipping industry, including advising on a broad range of shipping SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 transactions such as vessel sales and financings, vessel charters, pooling and technical management agreements. Our Strategy Our strategy is designed to generate stable cash flow through long-term fixed rate charters that provide us with the potential to earn additional revenue. The key elements of our strategy are: Charter our fleet primarily under multi-year, fixed-rate time charters that provide for profit sharing. We have time chartered all of our vessels to subsidiaries of OSG, one of the world's largest bulk-shipping companies, for periods of five to six and one-half years under charters that provide for fixed monthly payments, plus the potential to earn additional profit sharing payments. We believe that our long-term charters will generate stable and predictable cash flow and provide us with the opportunity to earn significant additional hire as market rates exceed our basic hire rates. Substantially fix our operating costs under our ship management agreements. Our tankers are managed by Tanker Management Ltd., a wholly owned indirect subsidiary of OSG that we refer to as Tanker Management, or our technical manager, pursuant to ship management agreements that became effective at the completion of our IPO. Under these agreements, which are coterminous with the charter for the applicable vessel, Tanker Management has assumed all responsibilities for the technical management of our vessels and for most of the operating costs (excluding insurance premiums and vessel taxes) in exchange for a fee that is fixed through October 2007. We believe these arrangements provide us with added certainty regarding the operating costs of our vessels. Strategically expand our fleet. We intend to grow our fleet through timely and selective acquisitions of additional vessels in a manner that is accretive to earnings and dividends per share over time. Although our fleet initially consists of our three VLCCs and four Aframax tankers, we intend to consider potential acquisitions of tankers in smaller size classes as well. To facilitate our future acquisitions, we have entered into a credit facility that, subject to the satisfaction of conditions to drawdown, permits us to borrow on a committed basis up to $150 million to finance the purchase price of additional vessels that we may acquire in the future. Our Time Charters We have time chartered our three VLCCs and our four Aframaxes to subsidiaries of OSG for periods of five to six and one-half years. The daily base time charter rate for each of our vessels, which we refer to as basic hire, is payable to us monthly in advance and increases annually by amounts set forth in each charter. For a table detailing the basic hire rates for each vessel class during the initial period of each charter, see "Business Charter Arrangements." In addition to the basic hire, the charterers and OSG International, Inc., or OIN, the charterers' parent, have agreed to pay us an additional payment, quarterly in arrears, which we refer to as additional hire. The additional hire payable, if any, in respect of a given quarter will be equal to 40% of the average revenue that our vessels earn or are deemed to earn for the charterers during that quarter (averaged on a rolling four quarter basis) in excess of the basic hire paid by the charterers to us during that quarter. Revenue is calculated on an aggregate fleetwide basis and depends on whether our vessels are operated in a pool: if a vessel is operated in a pool, revenue earned by that vessel equals the share of actual pool net earnings allocated to the charterer, as determined by a formula administered by the pool manager; AMENDMENT NO. 2 TO FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 if a vessel is operated outside of a pool: for periods that the charterer subcontracts the vessel under a time charter, revenue earned by that vessel equals the time charter hire earned by the charterer, net of specified fees incurred by the charterer; and for periods that the charterer does not subcontract the vessel in the time charter market, revenue deemed earned by that vessel is based on average spot market rates, which are rates for the immediate chartering of a vessel (usually for a single voyage), determined by a shipbrokers' panel for a series of routes commonly served by vessels of the same class. A pool constitutes a collection of similar vessels under various ownerships that are placed under one administrator, which we refer to as the pool manager. The pool manager markets the vessels as a single, cohesive fleet and collects, or pools, their net earnings prior to distributing them to the individual owners under a pre-arranged weighting system that recognizes each vessel's earnings capacity based on its cargo capacity, speed and consumption, and actual on-hire performance. Pools offer their participants more opportunities to enter into multi-legged charters and contracts of affreightment, which can reduce non-earning days through scheduling efficiencies. The three VLCCs in our fleet currently participate in the Tankers International Pool, in which OSG and seven other tanker companies participate. The Tankers International Pool consists of 46 VLCCs and V Pluses as of September 30, 2006, making it one of the world's largest VLCC fleets. The four Aframax tankers in our fleet currently participate in the Aframax International Pool, the world's second largest Aframax fleet, which, as of September 30, 2006, operates 36 Aframaxes and has six members, including OSG (which is one of the pool managers). Technical Management of Our Fleet To provide us with added certainty with respect to the costs of operating our vessels, we have entered into ship management agreements with Tanker Management. Under the agreements, Tanker Management is responsible for the technical management and for most of the operating costs of the vessels, including crewing, maintenance, ordinary repairs, scheduled drydockings, insurance deductibles (subject to the limits set forth in the ship management agreements) and other vessel operating expenses, excluding insurance premiums. In exchange for these services, we pay Tanker Management a fixed daily fee, which we refer to as the technical management fee, for each vessel under management. The technical management fee for each vessel is payable monthly in advance based on the actual number of days in the month. The fee is fixed for the first two years of the agreement and will increase by 2.5% per year thereafter. The ship management agreements are cancelable by us for any reason at any time upon 90 days advance notice, but each charterer has the right to approve the replacement manager that we select. Tanker Management is not be able to cancel the agreement prior to the second anniversary except for cause. Following the second anniversary, termination by Tanker Management requires at least 90 days advance notice. Dividend Policy We intend to pay quarterly dividends to the holders of our common stock in March, June, September and December of each year, in amounts substantially equal to the available cash from our operations during the previous quarter less cash expenses and any reserves established by our board of directors. Our board of directors may review and amend our dividend policy from time to time in accordance with any future growth of our fleet or for other reasons. Although we do not currently have any commitment in place to purchase any specific vessels, we intend to grow our fleet by acquiring additional vessels in the future in a manner that is expected to be accretive to earnings and dividends (years) ($/day) (years) Overseas Ann VLCC 309,327 2001 61/2 $ 37,400 8 Overseas Chris VLCC 309,285 2001 6 $ 37,400 8 Regal Unity VLCC 309,966 1997 51/2 $ 37,400 6 Overseas Cathy Aframax 112,028 2004 61/4 $ 24,700 8 Overseas Sophie Aframax 112,045 2003 53/4 $ 24,700 8 Rebecca Aframax 94,873 1994 5 $ 18,700 5 Ania Aframax 94,848 1994 5 $ 18,700 per share over time. We expect to fund all or a portion of future vessel acquisitions with borrowings under the $150 million vessel acquisition tranche of our credit facility. Upon acquiring an additional vessel or vessels, our board of directors may limit our dividends per share to the amount that we would have been able to pay if all or a portion of our acquisition related debt had been financed with equity as described in the section of this prospectus entitled "Dividend Policy." Based on the assumptions and the other matters set forth below and subject to the matters set forth under "Risk Factors," we estimate that the total amount of cash available for distribution with respect to the fourth quarter of 2006 and for full year 2007 will be $0.30 per share and $1.23 per share, respectively. The foregoing dividend estimates do not give effect to the payment of any additional hire that we may receive under the profit sharing arrangements that are included in our charter arrangements and are based on the following assumptions: the basic hire is paid on our vessels and our vessels are on hire for 360 days per twelve month period; we have no cash expenses or liabilities other than the technical management fee payable under our ship management agreements, insurance premiums, vessel taxes, our current directors' fees, the current salary and benefits of our executive officers, our other anticipated general and administrative expenses, interest payable on the $236 million of indebtedness that is outstanding under our credit facility, which we fixed for five years at a rate of 5.6% effective as of October 18, 2005, and payments of commitment fees and other financing costs under our credit facility; we do not purchase any additional vessels; we do not pay any income taxes or have to fund any required capital expenditures with respect to our vessels; no cash reserves are established by our board of directors; we are in compliance with the terms of our credit facility, which prohibits us from paying dividends if the charter-free market value of our vessels that secure the credit facility is less than 135% of our borrowings under the facility plus the actual or notional cost of terminating any interest rate swaps that we enter, if there is a continuing default under the credit facility or if the payment of the dividend would result in a default or breach of a loan covenant; and 30,009,250 shares of our common stock are outstanding at the time we make a dividend payment and no additional stock offerings or other capital raising transactions are made by us. The timing and amount of dividend payments will be determined by our board of directors and will depend on, among other things, our cash earnings, financial condition, cash requirements and the provisions of Marshall Islands law affecting the payment of dividends and other factors. Other than (i) the technical management fees payable under our ship management agreements, which after two years are cancelable by Tanker Management upon 90 days notice, (ii) interest that is payable on the $236 million of indebtedness that is outstanding under our credit facility, which we fixed for five years at a rate of 5.6% effective as of October 18, 2005, (iii) commitment fees under our credit facility (for so long as we do not make any further borrowings under the vessel acquisition facility or the working capital facility), (iv) salary paid to our executive officers, which is fixed during the terms of their employment agreements, and (v) our directors' fees, none of our fees or expenses are fixed. We cannot assure you that our future dividends will in fact be equal to the amounts set forth above or elsewhere in this prospectus. The amount of future dividends set forth above represents only an estimate of future dividends based on our charters, ship management agreements, employment Issuance of common stock 30,006,250 300 345,879 346,179 Deemed distribution to predecessor stockholders (237,612 ) (237,612 ) Deferred compensation related to options granted 5 26 New Street St. Helier, Jersey JE23RA Channel Islands +44 (0) 1534 639759 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) CT Corporation 111 Eighth Avenue New York, New York 10011 (212) 590-9100 (Name, address, including zip code, and telephone number, including area code, of agent for service) agreements, current directors' fees and an estimate of our other expenses and assumes that we do not make any vessel acquisitions. The amount of future dividends, if any, could be affected by various factors, including our cash earnings, financial condition and cash requirements, the loss of a vessel, the acquisition of one or more vessels, required capital expenditures, reserves established by our board of directors, increased or unanticipated expenses, our ability to comply with the terms of our credit facility, a change in our dividend policy, additional borrowings or future issuances of securities, many of which will be beyond our control. As a result, the amount of dividends actually paid, if any, may vary from the amounts currently estimated and such variations may be material. See the section of this prospectus captioned "Risk Factors" for a discussion of the risks associated with our ability to pay dividends. We believe that under current law, our dividend payments from earnings and profits constitute "qualified dividend income" and are generally subject to a 15% United States federal income tax rate with respect to United States non-corporate stockholders. Distributions in excess of our earnings and profits will be treated first as a non-taxable return of capital to the extent of a United States stockholder's tax basis in its common stock on a dollar-for-dollar basis and thereafter as capital gain. Please see the sections of this prospectus entitled "Risk Factors Risk Relating to our Company Certain adverse U.S. federal income tax consequences could arise for U.S. holders" and "Tax Considerations" for additional information regarding possible adverse tax treatment of dividend payments and the section entitled "Dividend Policy" for additional information regarding dividend payments generally. Our Credit Facility On October 18, 2005, we entered into a $401 million secured credit facility with The Royal Bank of Scotland that has a term of ten years, with no principal amortization for the first five years. The credit facility consists of a $236 million term loan, a $150 million vessel acquisition facility and a $15 million working capital facility. The credit facility is secured by mortgages on all of our vessels, assignments of earnings and insurances and pledges over our bank accounts. We are the borrower under the credit facility, and each of our vessel owning subsidiaries have guaranteed our obligations under the credit facility. We borrowed the entire amount available under the term loan upon the completion of our IPO to fund a portion of the purchase price for the seven vessels that we acquired from OSG. Subject to the satisfaction of a number of conditions, we are permitted to borrow up to the full amount of the vessel acquisition facility and up to the full amount of the working capital facility for a period of five years from the closing of the credit facility. Commencing on the fifth anniversary of the closing of the credit facility, the term loan will become repayable in quarterly installments over a five year period and the committed amounts of the vessel acquisition facility and the working capital facility will be reduced quarterly over a five year period (with any excess borrowings becoming repayable at the time of reduction). Borrowings under the term loan and the working capital facility will bear interest at an annual rate of LIBOR plus a margin of 0.70%. Borrowings under the vessel acquisition facility will bear interest at an annual rate of LIBOR plus a margin of 0.85%. To reduce our exposure to fluctuations in interest rates, we entered an interest rate swap on October 18, 2005 pursuant to which we fixed the interest rate for five years on the full amount of our term loan at 5.60%. We were required to pay a $1.5 million fee in connection with the arrangement of our credit facility (which we funded with a portion of the net proceeds from the IPO) and a commitment fee of 0.3% per annum, which will be payable quarterly in arrears, on the undrawn portion of the facility. Please see the section of this prospectus entitled "Our Credit Facility" for additional information regarding our credit facility. 1 October 17, 2006 $ 37,200/day $ 24,500/day $ 18,500/day 2 October 17, 2007 37,400/day 24,700/day 18,700/day 3 October 17, 2008 37,500/day 24,800/day 18,800/day 4 October 17, 2009 37,600/day 24,900/day 18,900/day 5 October 17, 2010 37,800/day 25,100/day 19,100/day With copies to: John T. Gaffney, Esq. Cravath, Swaine & Moore LLP Worldwide Plaza 825 Eighth Avenue New York, New York 10019 (212) 474-1000 Gary L. Sellers, Esq. Simpson Thacher & Bartlett LLP 425 Lexington Avenue New York, New York 10017-3954 (212) 455-2000 THE OFFERING Issuer Double Hull Tankers, Inc., a Marshall Islands company. Common stock offered by the selling stockholder in this offering 4,600,000 shares Common stock outstanding 30,009,250 shares Use of Proceeds The selling stockholder will receive all of the net proceeds from the sale of shares of our common stock in this offering. We are registering the shares of our common stock offered hereby pursuant to a registration rights agreement with the selling stockholder. NYSE Symbol "DHT"
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+PROSPECTUS SUMMARY This summary highlights all material information about us and this offering, but does not contain all of the information that you should consider before investing in our common stock. You should read this entire prospectus carefully, including the Risk Factors and the consolidated financial statements and related notes before investing. This prospectus includes forward-looking statements that involve risks and uncertainties. See Forward-Looking Statements. Except as the context otherwise requires, references in this prospectus to the Company, we, our or us are to Dice Holdings, Inc. and its subsidiaries. Except as the context otherwise requires, references to information being pro forma or on a pro forma basis means such information is presented after giving effect to (i) the acquisition of eFinancialGroup Limited and the disposition of eFinancialNews, in the 2006 period, (ii) the 2007 Dividend (as defined below), (iii) borrowings under our amended and restated credit facility on March 21, 2007, in connection with the payment of the 2007 Dividend, (iv) the Stock Split (as defined below), (v) the Conversion (as defined below) and (vi) this offering and the estimated use of proceeds from this offering. See Unaudited Pro Forma Financial Information. Our Company We are a leading provider of specialized career websites for select professional communities. We target employment categories in which there is a scarcity of highly skilled, highly qualified professionals relative to market demand. Our career websites serve as online marketplaces where employers and recruiters find and recruit prospective employees, and where professionals find relevant job opportunities and information to further their careers. Each of our career websites offers job listings, content, career development and recruiting services tailored to the specific needs of the professional community that it serves. Our largest websites by revenue are Dice.com, the leading career website in the United States for technology professionals, and eFinancialCareers.com, the leading global career website for capital markets and financial services professionals. We believe that as recruiting activities migrate online and the global workforce becomes increasingly specialized, both professionals and employers are demanding access to industry and occupation-specific online recruiting services and career content. Professionals use our websites at no cost to manage their careers by posting their resumes and searching our large and growing collections of job postings. Our customers pay us to post job listings and to access our databases of resumes of highly experienced and qualified professionals. The majority of our revenues are derived from customers who purchase our recruitment packages, which are available through monthly or longer-term contractual arrangements and allow customers to both post job listings and search our databases of resumes. The Dice service has operated for 16 years and eFinancialCareers.com has operated for almost seven years. We believe that our long operating history has enabled us to build brand recognition and a critical mass of both customers and professionals, which has given us a distinct competitive advantage in our employment categories. As the breadth and number of job listings and skilled professionals using our websites has grown, the increase of each has fostered the growth of the other, further enhancing the value and scale of our marketplaces. We operate the following websites, each of which focuses on different career sectors or geographic regions: Dice.com, the leading recruiting and career development website for technology and engineering professionals in the United States. eFinancialCareers.com, the leading global recruiting and career development network of websites for capital markets and financial services professionals, headquartered in the United Kingdom and serving the financial services industry in various markets around the world. JobsintheMoney.com, a leading recruiting and career development website for accounting and finance professionals in the United States. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents We report the number of unique visitors for Dice.com by tracking permanent cookies or unique browser and IP address configurations of visitors who visit our site. A visitor to Dice.com is unique once during the measurement period, which is typically one month. We report the number of unique visitors for eFinancialCareers.com on an aggregate basis across the complete site network. Visitors who visit more than one site in the network during the measurement period are counted as unique visitors for each site they visit. The reported traffic levels are based upon analysis of our weblogs using industry standard software tools and best practices. Table of Contents ClearanceJobs.com, the leading recruiting and career development website for professionals with active U.S. government security clearances. CybermediaDice.com, the largest targeted vertical career website for technology professionals in India. We also operate Targeted Job Fairs, a leading producer and host of career fairs and open houses focused primarily on technology and security-cleared candidates in the United States. On February 14, 2003, our predecessor, Dice Inc., filed a voluntary petition for bankruptcy under Chapter 11 of the United States Bankruptcy Code. Since emerging from bankruptcy on June 30, 2003, we have experienced significant revenue growth. We generated revenues from continuing operations of $83.7 million in 2006, up from $32.2 million in 2004, representing a compound annual growth rate, or CAGR, of 61%, and we grew our operating income and cash flow from operations from $3.6 million and $14.0 million to $16.6 million and $39.2 million, representing a CAGR of 115% and 67%, respectively, over the same period. For the period from January 1, 2005 to August 31, 2005, we had net income of $5.9 million and for the period from September 1, 2005 to December 31, 2005, we suffered a net loss of $1.7 million. For the fiscal year ended December 31, 2006 our historical net income was $6.8 million and, on a pro forma basis, we incurred a net loss from continuing operations of $3.6 million. As of March 31, 2007, we had $254.3 million of total intangible assets, of which $159.2 million was goodwill. Our Industry We operate in the online employment advertising segment of the broader market for staffing and employment services. The worldwide market for staffing and employment advertising is large and shifting online at a rapid pace. Corzen, Inc. ( Corzen ) estimates that recruitment advertising, comprising spending on print recruitment advertising placed in newspapers and online recruitment advertising and resume database access, in the U.S. market was $6.9 billion in 2006, with $2.2 billion spent online. Corzen forecasts that online recruitment spending will increase to $4.5 billion by 2010, and continue to rapidly gain market share from print recruitment advertising. We believe that the overall demand for employment advertising and recruiting and career development products and services has significant growth potential. Over the next several years, the aging labor force of the United States is expected to lead to a labor supply-demand imbalance as baby-boomers retire. According to the U.S. Bureau of Labor Statistics, a shortfall of over two million workers in the labor force is forecast by 2014. We also believe that certain industries that employ highly skilled and highly paid professionals will experience particularly strong demand for effective recruiting solutions due to the scarcity of such professionals. According to the U.S. Bureau of Labor Statistics, for instance, five of the 12 fastest-growing occupations in the United States during the period from 2004 to 2014 are expected to be in technology fields. We believe that international economies show similar trends, with an aging labor force in Europe, and shortages of skilled professionals to meet the demand of growing economies in Asia. We believe that the market for employment advertising is shifting online due to: the expansion in the size of the Internet population and increased broadband access; the shift in media consumption and spending from offline to online media; and the increased efficiency and cost advantages provided by online job boards compared to offline employment advertising methods. While generalist job boards have improved the recruiting process compared to traditional offline alternatives, specialized career websites offer job listings, content and services tailored to the specific needs of the communities they serve. Moreover, because specialized career websites attract communities of professionals from specific industries, employers can reach a more targeted and more qualified pool of candidates. We believe this leads to a better recruitment experience for both customers and professionals. AMENDMENT NO. 6 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents The market for recruiting services and employment advertising is highly competitive with multiple online and offline competitors. Additionally, the further development of the Internet has made it easier for new competitors to emerge with minimal barriers to entry. Our competitors primarily include generalist job boards, newspaper and magazine publishers, national and regional advertising agencies, executive search firms and search and selection firms that carry classified advertising. We also compete with specialized job boards specifically focusing on the industries we serve and new and emerging competitors, such as aggregators of classified information and social networking sites. Our Value Proposition We have become a leading provider of specialized career websites for select professional communities by providing unique benefits to professionals and our customers. Our specialized career websites provide professionals with quick and easy access to job listings that are relevant and meet their industry-specific criteria, and provide our customers with pools of hard-to-find, highly qualified professional talent. By providing deep databases of professionals to our customers and a large number of employment opportunities for professionals, we encourage the use of our websites and continue to attract customers to our services. We believe these factors have helped us to achieve a critical mass of both customers and professionals, contributing to the attractiveness and efficiency of our online marketplaces. Benefits to Professionals Access to a large number of relevant job postings. Our career websites provide a large number of job postings for technology and engineering, accounting and finance, capital markets and financial services, and U.S. government security-clearance positions. In addition, the specialized focus of our career websites benefits professionals by helping to ensure that the job opportunities posted by our customers are relevant and attractive to them. Compelling user experience. We have designed each of our career websites with the specific needs of our target audiences of professionals in mind. We believe that our customized search engines and audience-tailored websites are efficient and relevant, easy to use and valuable to our users, helping us build a loyal and engaged audience. Targeted career development services and tools. We provide professionals with targeted career development services and tools including content, decision support tools and relevant industry news. We believe our career development services and tools benefit the professionals who use our career websites by providing them with relevant information to manage and enhance their careers, and also increase the engagement of professionals with our sites. Benefits to our Customers Unique pools of qualified professionals. We seek to improve the efficiency of the recruiting process for our customers by providing quick and easy access to large and up-to-date pools of highly qualified and hard to reach professionals. Moreover, because the communities of professionals who visit our websites are highly skilled and specialized within specific industries, we believe our customers reach a more targeted and qualified pool of candidates than through generalist sites. Efficient and targeted candidate searches. Our career websites are easy to use and our search engines are designed so that our customers can search our resume databases quickly to find professionals who meet specified criteria. We believe that this approach results in a faster and more efficient search for candidates, helps our customers improve the efficiency of their recruiting efforts and increases customer preference for our career solutions relative to our competitors. Table of Contents High-quality customer support. We are able to differentiate ourselves from our competitors by providing extensive ongoing support to our customers. We personalize our customer support efforts by providing our customers with representatives that are knowledgeable about the professional communities we serve and the skill sets of professionals in those communities. Our Strategy Our goal is to be the leading global network of specialized career websites for select professional communities. Our primary objective is to maximize the potential of our career websites. To achieve these goals, we are pursuing the following strategies: continue to grow the size, quality and uniqueness of our professional communities; continue to execute on customer acquisition; further build brand awareness; enhance content and community features across our websites; further expand our services globally; and selectively expand into new verticals. Risks Associated With Our Business Our business is subject to numerous risks, which are highlighted in the section entitled
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+Prospectus Summary 1 Risk Factors 15 Forward-Looking Statements and Associated Risks 36 The Conversion 37 Use of Proceeds 48 Capitalization 49 Dividend Policy 50 Selected Historical Consolidated Financial and Other Data 52 Pro Forma Consolidated Financial Data 56 Management s Discussion and Analysis of Financial Condition and Results of Operations 62 Business 107 Regulation 138 Management 147 Compensation Discussion and Analysis 154 Certain Relationships and Related Transactions 175 Ownership of Common Stock 176 Description of Capital Stock 177 Shares Eligible for Future Sale 180 Underwriters 181 Legal Matters 185 Experts 185 Where You Can Find More Information 185 Glossary G-1 Opinion of Consulting Actuary A-1 Index to Consolidated Financial Statements F-1 You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with information that is different from that contained in this prospectus. We are offering to sell and are seeking offers to buy these securities only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of common stock. Until , 2007, which is the 25th day after the date of this prospectus, all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. Table of Contents PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before purchasing the common stock offered by this prospectus. You should read the entire prospectus carefully, including the , ' ': , ' ': Risk Factors and , ' ': , ' ': Forward-Looking Statements and Associated Risks sections and our historical consolidated financial statements, and the notes to those financial statements, before making an investment decision. Unless otherwise stated or the context otherwise requires, references in this prospectus to , ' ': , ' ': we, , ' ': , ' ': our or , ' ': , ' ': us refer to EIG Mutual Holding Company and its subsidiaries prior to the effective date of the conversion and to Employers Holdings, Inc. (the successor to EIG Mutual Holding Company in the conversion) and its subsidiaries after the effective date of the conversion and references to , ' ': , ' ': EIG refer solely to EIG Mutual Holding Company prior to the effective date of the conversion and to Employers Holdings, Inc. (the successor to EIG Mutual Holding Company in the conversion) after the effective date of the conversion. All financial information contained in this prospectus, unless otherwise indicated, has been derived from our consolidated financial statements and is presented in conformity with generally accepted accounting principles. The Glossary beginning on page G-1 of this prospectus includes definitions of certain insurance and other terms, such as assumed premiums written, direct premiums written, base direct premiums written, gross premiums written, net premiums written and net premiums earned. Our Company Overview We are a specialty provider of workers compensation insurance focused on select small businesses engaged in low to medium hazard industries. Our business has historically targeted employers located in several western states, primarily California and Nevada. We believe that the market we serve has, to date, been characterized by fewer competitors, more attractive pricing and strong persistency, or repeat business, when compared to the U.S. workers compensation insurance industry in general. We distribute our products almost exclusively through independent agents and brokers and our strategic distribution relationships. We had net premiums written (which excludes premiums ceded, or paid, to our reinsurers for transferring all or a portion of risk) of $439.7 million and $299.5 million, total revenues of $496.5 million and $359.2 million, and net income of $137.6 million and $116.5 million for the year ended December 31, 2005 and the nine months ended September 30, 2006, respectively. During 2005, based on net premiums written, we were the largest, seventh largest and seventeenth largest non-governmental writer of workers compensation insurance in Nevada, California and the United States, respectively, as reported by A.M. Best Company, or A.M. Best. We had total assets of $3.2 billion at September 30, 2006. The workers compensation insurance industry historically classified risks into four hazard groups based on severity, with employers in the first, or lowest, group having the lowest cost claims. In 2005, 67% and 31% of our base direct premiums written (which we define as direct premiums written prior to any policy audit or rating adjustments) were generated by employers in the second and third lowest hazard groups, respectively. Direct premiums written is the sum of premiums on all policies issued by our insurance subsidiaries. Within each hazard group, our underwriters use their local market expertise and disciplined underwriting to assess employers and risks on an individual basis and to select those types of employers and risks that allow us to generate attractive returns. We believe that, as a result of our disciplined underwriting standards, we are able to price our policies competitively and profitably. In 2005, we generated 77.7% and 18.3% of our direct premiums written in California and Nevada, respectively. We also write business in seven other states (Arizona, Colorado, Idaho, Illinois, Montana, Texas and Utah) and are licensed to write business in six additional states (Florida, Maryland, New Mexico, New York, Oregon and Pennsylvania). We market and sell our insurance products through independent local and regional agents and brokers, and through our strategic distribution partners, including our principal partners, ADP, Inc., or ADP, and Blue Cross of California, an operating subsidiary of Wellpoint, Inc., or Wellpoint. In 2005, policies underwritten directly or through our independent agents Table of Contents and brokers generated $323.6 million, or 70.6%, of our gross premiums written, while those underwritten through our strategic relationships generated $126.9 million, or 27.7%, of our gross premiums written (which we define as the sum of direct written premiums and assumed premiums written before the effect of ceded reinsurance and the intercompany pooling agreement). Under the leadership of our senior management team, our net premiums written increased from $187.0 million in 2002 to $439.7 million in 2005, and the total consolidated statutory surplus of our insurance subsidiaries has grown from $224.2 million at year end 2002 to $530.6 million at year end 2005 and $625.9 million at September 30, 2006. Total consolidated statutory surplus is the amount remaining after all liabilities are subtracted from all admitted assets, as determined in accordance with statutory accounting practices. Our average combined ratio on a statutory basis for the same four years was 96.8%. This ratio was lower than the industry composite combined ratio calculated by A.M. Best for U.S. insurance companies having more than 50% of their premiums generated by workers compensation insurance products. The industry combined ratio on a statutory basis for those companies was 106.8% during the same four years. The combined ratio is a measure used in the property and casualty insurance business to show the profitability of an insurer s underwriting, and it represents the percentage of each premium dollar spent on claims and expenses. The combined ratio is the sum of the losses and loss adjustment expenses, or LAE, ratio, the commission expense ratio and the underwriting and other operating expense ratio. The losses and LAE ratio, commission expense ratio and underwriting and other operating expense ratio express the relationship between losses and LAE (which we define as the expenses of investigating, administering and settling claims (including legal expenses)), commission expense, and underwriting and other operating expenses (including policyholder dividends), respectively, to net premiums earned. When the combined ratio is below 100%, an insurance company experiences underwriting gain, meaning that claims payments, the cost of settling claims, commissions and underwriting expenses are less than premiums collected. If the combined ratio is at or above 100%, an insurance company cannot be profitable without investment income, and may not be profitable if investment income is insufficient. Companies with lower combined ratios than their peers generally experience greater profitability. As of December 31, 2006, our insurance subsidiaries were assigned a group letter rating of A (Excellent), with a , ' ': , ' ': positive financial outlook, by A.M. Best, the fourth highest of 16 ratings. This A.M. Best rating is a financial strength rating designed to reflect our ability to meet our obligations to policyholders. This rating does not refer to our ability to meet non-insurance obligations and is not a recommendation to purchase or discontinue any policy or contract issued by us or to buy, hold or sell our securities. We commenced operations as a private mutual insurance company on January 1, 2000 when our Nevada insurance subsidiary assumed the assets, liabilities and operations of the Nevada State Industrial Insurance System, or the Fund, pursuant to legislation passed in the 1999 Nevada legislature. The Fund had over 80 years of workers compensation experience in Nevada. In July 2002, we acquired the renewal rights to a book of workers compensation insurance business from Fremont Compensation Insurance Group and its affiliates, or collectively, Fremont. Because of the Fremont transaction, we were able to establish our important relationships and distribution agreements with ADP and Wellpoint. This offering is being made in connection with our conversion to a stock corporation from a mutual insurance holding company owned by our policyholder members. See , ' ': , ' ': The Conversion. Our Competitive Strengths We believe we benefit from the following competitive strengths: Focused Operations. We focus on providing workers compensation insurance to select small businesses in low to medium hazard groups in specific geographic markets. We believe that this focus provides us with a unique competitive advantage because we are able to gain in-depth customer and market knowledge and expertise. In addition, we believe that we benefit by focusing on small businesses, as they are not generally the principal focus of large insurance companies. As a result, we believe we enjoy Table of Contents strong persistency and attractive pricing. We have also benefited from the attractive pricing resulting from the bundling of our workers compensation insurance product with the small group health insurance product marketed to our targeted customers by one of our strategic distribution partners, Wellpoint. Disciplined Underwriting. We employ a disciplined, conservative and highly automated underwriting approach designed to individually select specific types of employers that we believe will have fewer and less costly claims relative to other employers in the same hazard group. Our underwriting guidelines are designed to minimize underwriting of classes and subclasses of business which have historically demonstrated claims severity that do not meet our target risk profiles. We price our policies based on the specific risks associated with each potential insured rather than solely on the industry class in which such potential insured is classified. In 2005, policyholders in the second lowest industry defined hazard group generated approximately 67% of our base direct premiums written. Our statutory losses and LAE ratio, a measure which relates inversely to our underwriting profitability, was 58.3% in 2005, 18.2 percentage points below the 2005 statutory industry composite losses and LAE ratio calculated by A.M. Best for U.S. insurance companies having more than 50% of their premiums generated by workers compensation insurance products. Our statutory losses and LAE ratio was at least ten percentage points below the A.M. Best composite losses and LAE ratio for the industry for each of the five years ended December 31, 2005. Our disciplined underwriting approach is a critical element of our culture and has allowed us to realize competitive prices, diversify our risks and achieve profitable growth. Long-Standing and Strategic Distribution Relationships. We have established long-standing, strong relationships with independent agents and brokers by emphasizing personal interaction, offering responsive service and competitive commissions and maintaining a focus on workers compensation insurance. We are able to use these long-standing relationships to identify new business opportunities. Our field underwriters continue to work closely with independent agents and brokers to market and underwrite our business, regularly visit their offices and participate in presentations to customers, which results in enhanced understanding of the businesses and risks we underwrite and the needs of prospective customers. To expand our distribution reach, we have also developed important and long-standing strategic distribution relationships with ADP and Wellpoint and have recently entered into a strategic distribution relationship with E-chx, Inc., or E-chx, a payroll outsourcing company. Through our strategic distribution partnership with ADP, we jointly market our workers compensation insurance products with ADP s payroll services primarily to small businesses in California, as well as in Colorado, Idaho, Texas and Utah, generating $48.5 million in gross premiums written in 2005. Through our strategic distribution partnership with Wellpoint, we jointly market our workers compensation insurance products with Wellpoint s group health insurance plans to small businesses in California, generating $78.4 million in gross premiums written in 2005. Scalable and Cost-Effective Infrastructure. We have three strategic business units overseeing 12 territorial offices serving the various states in which we are currently doing business. We believe we have created an efficient, cost-effective, scalable infrastructure that complements our geographic reach, our focus on workers compensation insurance and our targeting of small businesses. As part of our cost-effective infrastructure, we have developed a highly automated underwriting software program that allows for electronic submission and review of insurance applications, employing our underwriting standards and guidelines. This automated process leads to efficient and timely processing of applications for small, straight-forward policies that meet our standards and saves our independent agents and brokers considerable time in processing customer applications. Financial Strength. As of September 30, 2006, our insurance subsidiaries had total consolidated statutory surplus of $625.9 million and, as of December 31, 2006, were assigned a group letter rating of A (Excellent), with a , ' ': , ' ': positive financial outlook, by A.M. Best, the fourth highest of 16 ratings. The amount of statutory surplus is regarded as financial protection to policyholders in the event an insurance company suffers unexpected or catastrophic losses. We have a proven history of conservative reserving. There have been no prior year adverse developments, or increases in the estimated ultimate losses and LAE from one valuation date to a subsequent valuation date, in our reserves since we commenced operations in 2000. Our insurance subsidiaries ratio of net premiums written to total consolidated Table of Contents SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Reno, State of Nevada on January 29, 2007. EMPLOYERS HOLDINGS, INC. By: /s/ Douglas D. Dirks Name: Douglas D. Dirks Title: Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated: Signature Title Date * Chairman of the Board January 29, 2007 Robert J. Kolesar /s/ Douglas D. Dirks President and Chief Executive Officer, Director (Principal Executive Officer) January 29, 2007 Douglas D. Dirks * Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) January 29, 2007 William E. Yocke * Director January 29, 2007 Richard W. Blakey * Director January 29, 2007 Valerie R. Glenn * Director January 29, 2007 Rose E. McKinney-James * Director January 29, 2007 Ronald F. Mosher * Director January 29, 2007 Katherine W. Ong * Director January 29, 2007 Michael D. Rumbolz * Director January 29, 2007 John P. Sande Table of Contents statutory surplus, a measure of underwriting leverage, of 0.83:1 at December 31, 2005, compared to an industry average of 1.1:1 at such date, further demonstrates the strength of our balance sheet. In connection with our assumption in 2000 of the assets, liabilities and operations of the Fund, including in force policies and historical liabilities associated with the Fund for losses prior to January 1, 2000, our Nevada insurance subsidiary assumed the Fund s rights and obligations under a retroactive 100% quota share reinsurance agreement (referred to in this prospectus as the LPT Agreement) which the Fund had entered into with third party reinsurers. The LPT Agreement substantially reduced the exposure to losses for pre-July 1995 Nevada insured risks. Strong Senior Management with Extensive Industry Experience. We have a strong senior management team with significant insurance industry experience across a variety of markets and market conditions. Our executive officers and senior management team also have significant experience with the state-by-state workers compensation legislative and regulatory environment, particularly in the states in which we operate or are licensed, and they have been proactive in encouraging legislation that allows us to operate profitably within a balanced framework. Douglas D. Dirks, our President and Chief Executive Officer, and four of our other executive officers have an average of over 18 years of insurance industry experience and over 16 years of workers compensation insurance experience. Additionally, our senior underwriting and claims managers on average have over 20 years of experience in the insurance industry. Our Strategies We plan to pursue profitable growth by focusing on the following strategies: Maintain Focus on Underwriting Profitability. We are committed to disciplined underwriting, and we will continue this approach in pursuing profitable growth opportunities. We will carefully monitor market trends to assess new business opportunities, only pursuing opportunities that we expect to meet our pricing and risk standards. We will seek to underwrite our portfolio of low to medium hazard risks with a view toward maintaining long-term underwriting profitability across market cycles. Continue to Grow in Our Existing Markets. Since commencing operations in Nevada in 2000, we have expanded our operations to California, were able to establish important strategic distribution relationships with ADP and Wellpoint because of the Fremont transaction, entered seven other states and obtained licenses in six new states. We plan to continue to seek profitable growth in our existing markets by addressing the workers compensation insurance needs of small businesses, which we believe represent a large and profitable market segment, and by entering into new strategic distribution agreements such as our recent agreement with E-chx. Small businesses generally grow faster than large businesses and, according to the United States Small Business Administration, 60% to 80% of new jobs over the past decade ending in 2005 were created by small businesses. In the states in which we operate, the workers compensation market for small businesses is not highly concentrated, with a significant portion of premiums being written by numerous insurance companies with small individual market shares. We believe that our focus on workers compensation insurance, our disciplined underwriting and risk selection, and our loss control and claims management expertise for small businesses position us to profitably increase our market share in our existing markets. Enter New Markets Through Our Existing Distribution Relationships. Since commencing operations in Nevada in 2000, we have expanded our operations to California, established important strategic distribution relationships with ADP and Wellpoint, entered seven new states and obtained licenses in six other states. We intend to continue to selectively enter new markets, taking into account the adequacy of premium rates, market dynamics, the labor market, political and economic conditions and the regulatory environment. Our strategic distribution partnerships with ADP and Wellpoint have allowed us to access new customers and to write attractive business in an efficient manner. For example, we entered Illinois in the fourth quarter of 2006 and we intend to enter Florida in the first quarter of 2007 through ADP. Additionally, we will seek to leverage our existing independent agent and broker relationships to enter new states. Table of Contents Capitalize on the Flexibility of Our New Corporate Structure. This initial public offering is part of our conversion from a mutual insurance holding company owned by our Nevada policyholder members to a stock corporation owned by our public stockholders. We believe that our conversion to a public company will give us enhanced financial and strategic flexibility. This will allow us to consider acquisitions, joint ventures and other strategic transactions, as well as new product offerings, which make strategic sense for our business while achieving our goal of profitable growth. Manage Capital Prudently. We intend to manage our capital prudently relative to our overall risk exposure, establishing adequate loss reserves to protect against future adverse developments while seeking to grow profits and long-term stockholder value, maintain our financial strength, fund growth, invest in our infrastructure or return capital to stockholders, which may include share repurchases. We will target an optimal level of overall leverage to support our underwriting activities and are committed to maintaining our financial strength and ratings over the long term. Leverage Infrastructure, Technology and Systems. We will continue to invest in our scalable, cost-effective infrastructure and our underwriting and claims processing technology and systems. We recently introduced a new highly automated underwriting system, which over time will replace three legacy underwriting systems. We anticipate that this new system will reduce transaction costs and support future profitable growth. In 2007, we expect to implement a new claims system designed to enhance our ability to support best-in-class claims processing. The Conversion On August 17, 2006, the board of directors of EIG, which we refer to in this prospectus as our board of directors, unanimously proposed, approved and adopted a plan of conversion under which EIG will convert from a mutual insurance holding company to a stock corporation. On October 3, 2006, our board of directors unanimously approved an amended and restated plan of conversion, which we refer to in this prospectus as the plan of conversion. This offering is being made in connection with the completion of the conversion, and each of the effectiveness of the conversion and the completion of this offering are conditioned upon the occurrence of the other. Upon completion of the conversion, EIG will become a Nevada stock corporation and will change its name to , ' ': , ' ': Employers Holdings, Inc. and all of the membership interests of our policyholder members will be extinguished. In exchange, eligible members will receive shares of our common stock, cash or a combination of both. When the conversion and this offering are complete, EIG will be a public company and will continue to indirectly own 100% of the common stock of Employers Insurance Company of Nevada, or EICN, and our other operating subsidiaries. Pursuant to Nevada law and the plan of reorganization that EICN adopted and amended in 2004 to reorganize into a mutual insurance holding company structure, the plan of conversion, including the amendments to EIG s articles of incorporation contemplated thereby, must be approved by both the affirmative vote of a majority of EIG s members, as of a record date fixed by EIG s board of directors in accordance with EIG s by-laws, and by the affirmative vote of not less than two-thirds of the eligible members voting in person or by proxy at the meeting of EIG s members called to vote on the plan of conversion. Nevada law also requires that the plan of conversion be approved by the Nevada Commissioner of Insurance, by issuance of both an initial order following a public hearing, and a final order approving the application for conversion. Under the terms of the plan of conversion, the conversion will not become effective until we have obtained these approvals and the Nevada Commissioner of Insurance has issued a new certificate of authority to EICN. The articles of incorporation and by-laws of EIG will be amended and restated effective upon completion of the conversion in the form filed as exhibits to the registration statement of which this prospectus forms a part. On August 22, 2006, we filed an application for conversion with the Nevada Commissioner of Insurance. The Nevada Commissioner of Insurance held a public hearing on the application for conversion on October 26, 2006 and issued an initial order approving the application for conversion on November 29, 2006, based upon, among other things, a determination that the plan of conversion is fair Table of Contents and equitable to EIG s eligible members. At a special meeting of its members on January 13, 2007, the plan of conversion, including the amended and restated articles of incorporation of EIG, was approved by the required votes of EIG s members. On January 13, 2007, the Nevada Commissioner of Insurance issued a final order approving the application for conversion. Risks Relating to Our Business and this Offering Investing in our shares of common stock involves substantial risk. In addition, the maintenance of our competitive strengths, the implementation of our strategy and our future results of operations and financial condition are subject to a number of risks and uncertainties. The factors that could adversely affect our actual results and performance, as well as the successful implementation of our strategy, are discussed under the headings , ' ': , ' ': Risk Factors and , ' ': , ' ': Forward-Looking Statements and Associated Risks and include, but are not limited to: Uncertainty of Establishing Loss Reserves. We establish reserves for our losses and LAE based on estimates involving actuarial and statistical projections of the ultimate settlement and administration costs of claims on the policies we write. These reserves may be inadequate to cover our ultimate liability for losses and actual claims and claim expenses paid might exceed our reserves. Downward Pressure on Premiums as a Result of Regulation. In 2005, 77.7% of our direct premiums written were generated in California, a state that has recently been through a cycle of substantial rate increases followed by equally substantial rate decreases. As a result of these pressures and various regulatory reforms, from September 2003 through January 1, 2007, we have reduced our rates in California by 60% and expect that we will further reduce our rates in the foreseeable future. Future rate regulations in California or any state in which we operate could impair our ability to operate profitably and ultimately have a material adverse effect on our financial condition and results of operations. Geographic Concentration. Our written premiums are heavily concentrated in the western United States, particularly California and Nevada. Our revenues and profitability for the foreseeable future will be substantially impacted by prevailing regulatory, economic, demographic, competitive, weather and other conditions in these states. Exposure to Natural and Man-Made Disasters. Our insurance operations expose us to claims arising out of unpredictable natural and other catastrophic events, as well as man-made disasters such as acts of terrorism. Claims arising from such events could reduce our earnings and cause substantial volatility in our results of operations for any fiscal quarter or year and adversely affect our financial condition. Additionally, under our excess of loss reinsurance treaty, or contract of reinsurance, our reinsurers obligation to cover terrorism-related events is limited. We Write Only a Single Line of Insurance. Because we offer only a single line of insurance, workers compensation, we are at a competitive disadvantage to our competitors who offer a wide array of insurance products. Additionally, we are fully exposed to the cyclicality of the workers compensation insurance market, which has been characterized in the past by periods of intense price competition due to excessive underwriting capacity. Termination or Underperformance of Our Principal Strategic Distribution Relationships. Our relationships with ADP and Wellpoint are responsible for a substantial portion of our premiums written and our reliance on these relationships will increase as we enter new states. Our agreement with ADP is not exclusive, and ADP can terminate the agreement with us without cause upon 120 days notice. Although our agreements with Wellpoint are exclusive, Wellpoint may terminate its agreements with us if we are not able to provide coverage through a carrier with an A.M. Best financial strength rating of B++ or better. Wellpoint may also terminate its agreements with us without cause upon 60 days notice. The termination of either of these relationships would have a substantial impact on our business and results of operations, and we cannot assure you that we would be able to develop similar relationships with other distribution partners on terms favorable to us. Table of Contents Changes in the Availability, Cost or Quality of Reinsurance Coverage. We may be unable to purchase reinsurance for our own account on commercially acceptable terms or to collect under any reinsurance we have purchased. Constraints Related to Our Holding Company Structure. As a holding company, EIG has no direct operations. Dividends and other permitted distributions from insurance subsidiaries are expected to be EIG s sole source of funds to meet ongoing cash requirements. These payments are limited by regulations in the jurisdictions in which EIG s subsidiaries operate. If EIG s insurance subsidiaries are unable to pay dividends, EIG may have difficulty paying dividends on common stock and meeting holding company expenses. Our Corporate Information Our principal executive offices are located at 9790 Gateway Drive, Reno, Nevada 89521. Our telephone number is (888) 682-6671. Our internet address is www.eig.com. Information on our website does not constitute part of this prospectus. Our Nevada insurance subsidiary was organized in Nevada in 1999 and commenced operations in 2000. EIG was created in Nevada in April 2005 as a result of our reorganization into a mutual insurance holding company structure. Table of Contents The Offering Common stock offered by us 26,750,000 shares. Common stock estimated to be outstanding immediately after the offering 52,912,292 shares. Use of proceeds We estimate that our net proceeds from the sale of shares of common stock in the offering, at an assumed initial public offering price of $15.00 per share, the midpoint of the range set forth on the cover of this prospectus, will be approximately $374.2 million, or $430.3 million if the underwriters exercise their over-allotment option in full as described under , ' ': , ' ': Underwriters, after deducting the estimated underwriting discounts and commissions payable by us, and we estimate that the proceeds available to eligible members as cash consideration in the conversion, which equals those net proceeds less estimated conversion and offering expenses, will be $357.6 million, or $413.7 million if the underwriters exercise their over-allotment option in full. Each $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the net proceeds to us of this offering by $24.9 million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the underwriting discounts and commissions payable by us. The plan of conversion requires us to use all or a portion of the net proceeds (after deducting underwriting discounts and commissions) (1) first, to pay all fees and expenses incurred by us in connection with the conversion and this offering and all cash consideration payable to eligible members of EIG who are not eligible to receive our common stock in the conversion (which we refer to in this prospectus collectively as the , ' ': , ' ': mandatory cash requirements ); and (2) next, to pay the cash consideration payable to eligible members of EIG who elect to receive cash instead of our common stock (which we refer to in this prospectus as the , ' ': , ' ': elective cash requirements ). Based on the number of cash elections received from our members, and assuming that the underwriters do not exercise their over-allotment option, no net proceeds will remain after all of the foregoing amounts have been paid in full. The net proceeds of any exercise of the underwriters over-allotment option will be used first to fund any portion of the elective cash requirements that are not funded in full by the net proceeds of the offering before such exercise, and EIG may retain and use any remaining amounts from such exercise for working capital, payment of future dividends on the common stock, repurchases of shares of common stock and other general corporate purposes. Table of Contents Dividend policy Our board of directors has authorized the payment of a dividend of $0.06 per share of our common stock per quarter to our stockholders of record beginning in the second quarter of 2007. See , ' ': , ' ': Dividend Policy. Any determination to pay dividends will be at the discretion of our board of directors and will be dependent upon EICN s payment of dividends and/or other statutorily permissible payments to us, our results of operations and cash flows, our financial position and capital requirements, general business conditions, any legal, tax, regulatory and contractual restrictions on the payment of dividends (including those described under , ' ': , ' ': Regulation—Financial, Dividend and Investment Restrictions ), and any other factors our board of directors deems relevant. At September 30, 2006, EICN had positive unassigned surplus of $23.4 million and had the capability to pay a dividend to us in such amount without prior approval of the Nevada Commissioner of Insurance. On October 17, 2006 the Nevada Commissioner of Insurance granted EICN permission to pay us up to an additional $55 million in one or more extraordinary dividends subsequent to the successful completion of this offering and before December 31, 2008, which dividends may be used by us to pay quarterly dividends to our stockholders. See , ' ': , ' ': Dividend Policy and , ' ': , ' ': Regulation—Financial, Dividend and Investment Restrictions. There can be no assurance that we will declare and pay any dividends. New York Stock Exchange symbol , ' ': , ' ': EIG. Except as otherwise indicated, this prospectus: assumes no exercise of the underwriters over-allotment option; assumes the completion of our conversion to a stock corporation from a mutual insurance holding company owned by our policyholder members, as described under , ' ': , ' ': The Conversion ; reflects the filing, prior to the closing of this offering, of EIG s amended and restated articles of incorporation and the adoption of EIG s amended and restated by-laws, implementing the provisions described under , ' ': , ' ': Description of Capital Stock ; reflects that, based on the number of cash elections received from our members, we do not have an option to pay in cash a portion of the consideration to be paid to those eligible members who do not elect cash (as described under , ' ': , ' ': The Conversion—Amount and Form of Consideration—Cash Consideration to Non-Electing Members ) and therefore we will not issue additional shares of common stock to such members in the conversion in connection with any , ' ': , ' ': top up amount to which they could have become entitled under certain circumstances if we had such option and were to exercise it; and assumes that we do not retain any portion of the net proceeds from this offering, and therefore do not issue additional shares of common stock in the conversion as would be necessary in connection with such retention. Table of Contents Trademarks and Copyrights We own or have rights to trademarks, service marks and trade names that we use in conjunction with the operation of our business including, without limitation, the following: Employers Insurance Group , Employers Insurance Company of Nevada , Employers Compensation Insurance Company and EMPLOYERSSM. Each trademark, service mark or trade name of any other company appearing in this prospectus belongs to its holder. Workers Compensation Insurance Hazard Groups The workers compensation insurance industry classifies risks into hazard groups defined by the National Council on Compensation Insurance, or NCCI, and based on severity, with employers in lower groups having lower cost claims. Until December 31, 2006, the NCCI defined four hazard groups. Effective January 1, 2007, the NCCI changed the number of hazard groups from four to seven. Since the financial information presented in this prospectus relates to periods prior to the adoption of the new hazard group structure by the NCCI, all references in this prospectus to hazard groups are to the four hazard groups as defined by the NCCI prior to January 1, 2007. Table of Contents Summary Historical Consolidated Financial and Other Data The following summary historical consolidated financial data should be read in conjunction with , ' ': , ' ': Management s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes included elsewhere in this prospectus. The summary historical financial data as of September 30, 2006 and for the nine months ended September 30, 2005 and 2006, have been derived from our unaudited consolidated financial statements and related notes thereto included elsewhere in this prospectus, which include all adjustments, consisting of normal recurring adjustments, that management considers necessary for a fair presentation of our financial position and results of operations for the periods presented. The results for periods of less than a full year are not necessarily indicative of the results to be expected for any interim period or for a full year. The summary historical financial data as of December 31, 2004 and 2005 and for the years ended December 31, 2003, 2004 and 2005 have been derived from our audited consolidated financial statements and related notes thereto included elsewhere in this prospectus. The summary historical financial data as of December 31, 2003 have been derived from our audited consolidated financial statements and related notes thereto not included in this prospectus. The summary historical financial data as of and for the years ended December 31, 2001 and 2002 have been derived from our unaudited consolidated financial statements and related notes thereto not included in this prospectus. These historical results are not necessarily indicative of results to be expected in any future period. The summary historical financial data reflects the ongoing impact of the LPT Agreement, a retroactive 100% quota share reinsurance agreement that our Nevada insurance subsidiary assumed on January 1, 2000 in connection with our assumption of the assets, liabilities and operations of the Fund, pursuant to legislation passed in the 1999 Nevada legislature. A quota share reinsurance agreement is a proportional or pro rata reinsurance treaty under which the same proportion is ceded on all cessions and the reinsurer assumes a set percentage of risk for the same percentage of the premium, minus an allowance for the ceding company s expenses. Upon entry into the LPT Agreement, we recorded as a liability a deferred reinsurance gain which we amortize over the period during which underlying reinsured claims are paid. We record adjustments to the direct reserves subject to the LPT Agreement based on our periodic reevaluations of these reserves. Direct reserves are our estimates of future losses and LAE payments on policies written by our insurance subsidiaries before the effect of ceded reinsurance. Table of Contents Year Ended December 31, Nine Months Ended September 30, 2001 2002 2003 2004 2005 2005 2006 (in thousands, except ratios) Income Statement Data: Revenues: Net premiums earned $ 126,368 $ 180,116 $ 298,208 $ 410,302 $ 438,250 $ 331,066 $ 300,137 Net investment income 47,421 36,889 26,297 42,201 54,416 39,520 49,715 Realized (losses) gains on investments (222 ) (2,028 ) 5,006 1,202 (95 ) (2,496 ) 5,660 Other income 2,372 (6,442 ) 1,602 2,950 3,915 2,929 3,694 Total revenues 175,939 208,535 331,113 456,655 496,486 371,019 359,206 Expenses: Losses and loss adjustment expenses 69,670 113,776 118,123 229,219 211,688 208,246 95,745 Commission expense 15,964 16,919 56,310 55,369 46,872 36,859 36,762 Underwriting and other operating expense 37,462 44,345 56,738 65,492 69,934 47,726 59,151 Total expenses 123,096 175,040 231,171 350,080 328,494 292,831 191,658 Net income before income taxes 52,843 33,495 99,942 106,575 167,992 78,188 167,548 Income taxes 2,706 834 3,720 11,008 30,394 15,083 51,060 Net income $ 50,137 $ 32,661 $ 96,222 $ 95,567 $ 137,598 $ 63,105 $ 116,488 Selected Operating Data: Gross premiums written(1) $ 120,732 $ 197,202 $ 337,089 $ 437,694 $ 458,671 $ 351,668 $ 310,323 Net premiums written(2) 114,763 186,950 297,649 417,914 439,721 336,347 299,471 Losses and LAE ratio(3) 55.1 % 63.2 % 39.6 % 55.9 % 48.3 % 62.9 % 31.9 % Commission expense ratio(4) 12.6 9.4 18.9 13.5 10.7 11.1 12.2 Underwriting and other operating expense ratio(5) 29.6 24.6 19.0 16.0 16.0 14.4 19.7 Combined ratio(6) 97.3 97.2 77.5 85.4 75.0 88.4 63.8 Net income before impact of LPT Agreement(7)(8)(9) $ 26,464 $ 11,015 $ 46,098 $ 72,824 $ 93,842 $ 47,575 $ 101,874 As of December 31, As of September 30, 2006 2001 2002 2003 2004 2005 (in thousands, except ratios) Balance Sheet Data: Cash and cash equivalents $ 182,955 $ 283,351 $ 166,213 $ 60,414 $ 61,083 $ 65,965 Total investments 975,850 858,637 1,015,762 1,358,228 1,595,771 1,730,788 Reinsurance recoverable on paid and unpaid losses 1,352,225 1,315,240 1,243,085 1,206,612 1,151,166 1,116,334 Total assets 2,714,020 2,683,916 2,738,295 2,935,686 3,094,229 3,189,703 Unpaid losses and loss adjustment expenses 2,226,000 2,212,368 2,193,439 2,284,542 2,349,981 2,315,559 Deferred reinsurance gain – LPT Agreement(7)(8) 600,679 579,033 528,909 506,166 462,409 447,795 Total liabilities 2,971,502 2,911,865 2,842,754 2,925,936 2,949,622 2,916,648 Total (deficit) equity (257,482 ) (227,949 ) (104,459 ) 9,750 144,607 273,055 Other Financial and Ratio Data: Total equity including deferred reinsurance gain – LPT Agreement(7)(8)(10) $ 343,197 $ 351,084 $ 424,450 $ 515,916 $ 607,016 $ 720,850 Total statutory surplus(11) $ 209,797 $ 224,234 $ 338,656 $ 430,676 $ 530,612 $ 625,852 Net premiums written to total statutory surplus ratio(12) 0.55 x 0.83 x 0.88 x 0.97 x 0.83 x (1) Gross premiums written is the sum of both direct premiums written and assumed premiums written before the effect of ceded reinsurance and the intercompany pooling agreement. Direct premiums written are the premiums on all policies our insurance subsidiaries have issued during the year. Assumed premiums written are premiums that our insurance subsidiaries have received from any authorized state-mandated pools and previous fronting facilities. Our previous fronting facilities involved the assumption by our insurance subsidiaries of insurance policies issued by other unaffiliated insurance companies. See Note 7 in the Notes to our Consolidated Financial Statements which are included elsewhere in this prospectus. Table of Contents (2) Net premiums written is the sum of direct premiums written and assumed premiums written less ceded premiums written. Ceded premiums written is the portion of direct premiums written that we cede to our reinsurers under our reinsurance contracts. See Note 7 in the Notes to our Consolidated Financial Statements which are included elsewhere in this prospectus. (3) Losses and loss adjustment expenses, or LAE, ratio is the ratio (expressed as a percentage) of losses and LAE to net premiums earned. Net premiums earned is that portion of net premiums written equal to the expired portion of the time for which insurance protection was provided during the financial year and is recognized as revenue. (4) Commission expense ratio is the ratio (expressed as a percentage) of commission expense to net premiums earned. (5) Underwriting and other operating expense ratio is the ratio (expressed as a percentage) of underwriting and other operating expense to net premiums earned. (6) Combined ratio is the sum of the losses and LAE ratio, the commission expense ratio and the underwriting and other operating expense ratio. (7) In connection with our January 1, 2000 assumption of the assets, liabilities and operations of the Fund, our Nevada insurance subsidiary assumed the Fund s rights and obligations associated with the LPT Agreement, a retroactive 100% quota share reinsurance agreement with third party reinsurers, which substantially reduced exposure to losses for pre-July 1, 1995 Nevada insured risks. Pursuant to the LPT Agreement, the Fund initially ceded $1.525 billion in liabilities for incurred but unpaid losses and LAE, which represented substantially all of the Fund s outstanding losses as of June 30, 1999 for claims with original dates of injury prior to July 1, 1995. (8) Deferred reinsurance gain—LPT Agreement reflects the unamortized gain from our LPT Agreement. Under U.S. generally accepted accounting principles, or GAAP, this gain is deferred and is being amortized using the recovery method, whereby the amortization is determined by the proportion of actual reinsurance recoveries to total estimated recoveries, and the amortization is reflected in losses and LAE. We periodically reevaluate the remaining direct reserves subject to the LPT Agreement. Our reevaluation results in corresponding adjustments, if needed, to reserves, ceded reserves, reinsurance recoverables and the deferred reinsurance gain, with the net effect being an increase or decrease, as the case may be, to net income. (9) We define net income before impact of LPT Agreement as net income less (i) amortization of deferred reinsurance gain—LPT Agreement and (ii) adjustment to LPT Agreement ceded reserves. Net income before impact of LPT Agreement is not a measurement of financial performance under GAAP and should not be considered in isolation or as an alternative to net income before income taxes and net income or any other measure of performance derived in accordance with GAAP. We present net income before impact of LPT Agreement because we believe that it is an important supplemental measure of operating performance to be used by analysts, investors and other interested parties in evaluating us. The LPT Agreement was a non-recurring transaction which does not result in ongoing cash benefits and, consequently, we believe this presentation is useful in providing a meaningful understanding of our operating performance. In addition, we believe this non-GAAP measure, as we have defined it, is helpful to our management in identifying trends in our performance because the excluded item has limited significance in our current and ongoing operations. The table below shows the reconciliation of net income to net income before impact of LPT Agreement for the periods presented: Year Ended December 31, Nine Months Ended September 30, 2001 2002 2003 2004 2005 2005 2006 (in thousands) Net income $ 50,137 $ 32,661 $ 96,222 $ 95,567 $ 137,598 $ 63,105 $ 116,488 Less: Impact of LPT Agreement: Amortization of deferred reinsurance gain – LPT Agreement 24,262 21,690 19,015 20,296 16,891 15,530 14,614 Adjustments to LPT Agreement ceded reserves(a) (589 ) (44 ) 31,109 2,447 26,865 — — Net income before impact of LPT Agreement $ 26,464 $ 11,015 $ 46,098 $ 72,824 $ 93,842 $ 47,575 $ 101,874 (a) Any adjustment to the estimated direct reserves ceded under the LPT Agreement is reflected in losses and LAE for the period during which the adjustment is determined, with a corresponding increase or decrease in net income in the period. There is a corresponding change to the reinsurance recoverables on unpaid losses as well as the deferred reinsurance gain. A cumulative adjustment to the amortization of the deferred gain is also then recognized in earnings so that the deferred reinsurance gain reflects the balance that would have existed had the revised reserves been recognized at the inception of the LPT Agreement. See Note 2 in the Notes to our Consolidated Financial Statements which are included elsewhere in this prospectus. Losses and LAE for the nine months ended September 30, 2005 and 2006 did not include any adjustment to LPT Agreement ceded reserves, as our reevaluation of the direct reserves subject to the LPT Agreement did not result in an adjustment for the nine months ended September 30, 2005 and 2006. (10) We define total equity including deferred reinsurance gain—LPT Agreement as total equity plus deferred reinsurance gain— LPT Agreement. Total equity including deferred reinsurance gain—LPT Agreement is not a measurement of financial position under GAAP and should not be considered in isolation or as an alternative to total equity or any other measure of financial health derived in accordance with GAAP. We present total equity including deferred reinsurance gain—LPT Agreement because we believe that it is an important supplemental measure of financial position to be used by analysts, investors and other interested parties in evaluating us. The Table of Contents LPT Agreement was a non-recurring transaction and the treatment of the deferred gain does not result in ongoing cash benefits and consequently we believe this presentation is useful in providing a meaningful understanding of our financial position. The table below shows the reconciliation of total equity to total equity including deferred reinsurance gain—LPT Agreement for the periods presented: As of December 31, As of September 30, 2006 2001 2002 2003 2004 2005 (in thousands) Total (deficit) equity $ (257,482 ) $ (227,949 ) $ (104,459 ) $ 9,750 $ 144,607 $ 273,055 Deferred reinsurance gain – LPT Agreement 600,679 579,033 528,909 506,166 462,409 447,795 Total equity including deferred reinsurance gain – LPT Agreement $ 343,197 $ 351,084 $ 424,450 $ 515,916 $ 607,016 $ 720,850 (11) Total statutory surplus represents the total consolidated surplus of EICN, which includes its wholly-owned subsidiary, Employers Compensation Insurance Company, or ECIC, our insurance subsidiaries, prepared in accordance with the accounting practices of the National Association of Insurance Commissioners, or NAIC, as adopted by Nevada or California, as the case may be. See Note 9 in the Notes to our Consolidated Financial Statements which are included elsewhere in this prospectus. (12) Net premiums written to total statutory surplus ratio is the ratio of our insurance subsidiaries annual net premiums written to total statutory surplus. Table of Contents RISK FACTORS Investing in our common stock involves risks. You should carefully consider the following risk factors and other information in this prospectus before purchasing our common stock. The trading price of our common stock may decline due to any of these risks, and you could lose all or part of your investment. Risks Related to Our Business Our liability for losses and loss adjustment expenses is based on estimates and may be inadequate to cover our actual losses and expenses. We must establish and maintain reserves for our estimated losses and loss adjustment expenses. We establish loss reserves in our financial statements that represent an estimate of amounts needed to pay and administer claims with respect to insured claims that have occurred, including claims that have occurred but have not yet been reported to us. Loss reserves are estimates of the ultimate cost of individual claims based on actuarial estimation techniques and are inherently uncertain. Judgment is required in applying actuarial techniques to determine the relevance of historical payment and claim settlement patterns under current facts and circumstances. In states other than Nevada, we have a short operating history and must rely on a combination of industry experience and our specific experience to establish our best estimate of losses and LAE reserves. The interpretation of historical data can be impacted by external forces, principally legislative changes, medical cost inflation, economic fluctuations and legal trends. In California, there have been significant legislative changes affecting workers compensation benefits to injured workers and claims administration, and we are observing changes in claim costs and claim payment patterns. We review our loss reserves each quarter. We may adjust our reserves based on the results of these reviews and these adjustments could be significant. If we change our estimates, these changes are reflected in our results of operations during the period in which they are made. Loss reserves are estimates at a given point in time of our ultimate liability for cost of claims and of the cost of managing those claims, and are inherently uncertain. It is likely that the ultimate liability will differ from our estimates, perhaps significantly. Such estimates are not precise in that, among other things, they are based on predictions of future claim emergence and payment patterns and estimates of future trends in claim frequency and claim cost. These estimates assume that the claim emergence and payment patterns, claim inflation and claim frequency trend assumptions implicitly built into estimates will continue into the future. Unexpected changes in claim cost inflation can occur through changes in general inflationary trends, changes in medical technology and procedures, changes in wage levels and general economic conditions and changes in legal theories of compensability of injured workers and their dependents. Furthermore, future costs can be influenced by changes in the workers compensation statutory benefit structure and in benefit administration and delivery. It often becomes necessary to refine and adjust the estimates of liability on a claim either upward or downward. Even after such adjustments, ultimate liability may exceed or be less than the revised estimates. Workers compensation benefits are often paid over a long period of time. For example, in addition to medical expenses, an injured worker may receive payments for lost income associated with total or partial disability, whether temporary or permanent (i.e., the disability is expected to continue until normal retirement age or death, whichever comes first). We may also be required to make payments, often over a period of many years, to surviving spouses and children of workers who are killed on the job or may be required to make relatively small payments on claims that have already been closed (which we refer to as reopenings). In addition, there are no policy limits on our liability for workers compensation claims as there are for other forms of insurance. Therefore, estimating reserves for workers compensation claims may be more uncertain than estimating reserves for other lines of insurance with shorter or more definite periods between occurrence of the claim and final determination of the ultimate loss and with policy limits on liability for claim amounts. Accordingly, our reserves may prove to be inadequate to cover our actual losses. Our estimates of incurred losses and LAE attributable to insured events of prior years have decreased for past accident years because actual losses and LAE paid and current projections of unpaid losses and LAE were less than we originally anticipated. We refer to such decreases as favorable Table of Contents developments. The reductions in reserves were $81.7 million, $78.1 million, $37.6 million, $69.2 million, $11.5 million and $38.7 million for the nine months ended September 30, 2006 and the years ended December 31, 2005, 2004, 2003, 2002 and 2001, respectively. Estimates of net incurred losses and LAE are established by management utilizing actuarial indications based upon our historical and industry experience regarding claim emergence and claim payment patterns, and regarding medical cost inflation and claim cost trends, adjusted for future anticipated changes in claims-related and economic trends, as well as regulatory and legislative changes, to establish our best estimate of the losses and LAE reserves. The decrease in the prior year reserves was primarily the result of actual paid losses being less than expected, and revised assumptions used in projection of future losses and LAE payments based on more current information about the impact of certain changes, such as legislative changes, which was not available at the time the reserves were originally established. While we have had favorable developments over the past five years, the magnitude of these developments illustrates the inherent uncertainty in our liability for losses and loss adjustment expenses, and we believe that favorable or unfavorable developments of similar magnitude, or greater, could occur in the future. State workers compensation insurance regulations in California and other states where we operate have caused and may continue to cause downward pressure on the premiums we charge. Our pricing decisions need to take into account the workers compensation insurance regulatory regime of each state in which we conduct operations, such as regimes that address the rates that industry participants in that state may or should charge for policies. In 2005, 77.7% of our direct premiums written were generated in California. Accordingly, we are particularly affected by regulation in California. California has recently been through a cycle of substantial rate increases, followed by equally substantial rate decreases. Until 1995, insurance companies were subject to minimum rate regulation in California. The state had established a minimum rate floor, and workers compensation insurers could not charge rates lower than that floor. In 1995, California eliminated its minimum rate regulation and allowed open price competition among workers compensation insurers. One of the results of this was intense pricing competition among insurance companies, with many lowering rates to levels that ultimately resulted in more than 20 insolvencies. By 2002, rates in California had increased significantly, driven by an expensive benefit delivery system, claims which resulted in higher than normal litigation and a lack of insurance capital within the state. Since 2002, three key pieces of workers compensation regulation reform have been enacted which reformed medical determinations of injuries or illness, established medical fee schedules, allowed for the use of medical provider panels, modified benefit levels, changed the proof needed to file claims, and reformed many additional areas of the workers compensation benefits and delivery system. Workers compensation insurers in California responded to these reforms by reducing their rates. For example, we have reduced our rates in California by 60% since September 2003 through January 1, 2007 and expect that we will further reduce our rates in the foreseeable future. These reductions in rates in California are in response to the legislative reforms which have reduced claim costs in California. Several attempts have been made to institute additional forms of rate regulation in California; however, none of those attempts have been enacted by the legislature as of October 31, 2006. The passage of any form of rate regulation in California could impair our ability to operate profitably in California, and any such impairment could have a material adverse effect on our financial condition and results of operations. Additionally, although the California Insurance Commissioner does not set premium rates, he does adopt and publish advisory , ' ': , ' ': pure premium rates which are rates that would cover expected losses but do not contain an element to cover operating expenses or profit. He recommended a 16.4% reduction in workers compensation , ' ': , ' ': pure premium rates starting in July 2006. In early November 2006, the California Insurance Commissioner recommended that , ' ': , ' ': pure premium rates be reduced by an additional 9.5% for policies written on or after January 1, 2007. Our California rates continue to be based upon our actuarial analysis of current and anticipated cost trends, and we have determined that our California rates effective on January 1, 2007 will include the 9.5% reduction recommended by the California Insurance Commissioner. In early January 2007, the governor of California stated his intent to make significant changes to the health care system in California. Under the proposed plan, companies with 10 or more employees would be required to pay at least 4% of payroll for health insurance or to pay that amount into a general pool. Companies with fewer than 10 employees would be exempt but would still be required to pay an annual fee to help the state of California provide employee health coverage. Insurers would also be required to Table of Contents offer incentives to insured employees or premium reductions to employers as rewards to workers who stop smoking or take similar steps to improve their health. In light of the preliminary and uncertain status of the proposal, we are unable to predict the outcome of these changes on our financial condition or results of operations. Certain states have adopted an , ' ': , ' ': administered pricing regime, under which rate competition is generally not permitted. Of the states in which we currently operate, only Idaho has implemented such regulation. However, we are exposed to the risk that other states in which we operate will adopt, or that new states which we intend to enter have implemented, administered pricing regimes. Such a regime could prevent us from appropriately pricing our insurance policies in those states, exposing us to the possibility of losses over and above the premiums we are able to collect. Florida, which we intend to enter through ADP in the first quarter of 2007, currently has administered pricing. Due to the existence of rate regulation, and the possibility of adverse changes in such regulations, in the states in which we operate and new states that we enter, we cannot assure you that our premium rates will ultimately be adequate for the purposes of covering the claim payments, losses and LAE and company overhead or, in the case of states without administered pricing, that our competitors in such states will not set their premium rates at lower rates. In such event, we may be unable to compete effectively and our business, financial condition and results of operations could be materially adversely affected. If we fail to price our insurance policies appropriately, our business competitiveness, financial condition or results of operations could be materially adversely affected. The premiums we charge are established when coverage is bound. Premiums are based on the particular class of business and our estimates of expected losses and LAE and other expenses related to the policies we underwrite. We analyze many factors when pricing a policy, including the policyholder s prior loss history and industry classification. Inaccurate information regarding a policyholder s past claims experience puts us at risk for mispricing our policies. For example, when initiating coverage on a policyholder, we must rely on the information provided by the policyholder or the policyholder s previous insurer(s) to properly estimate future claims expense. If the claims information is not accurately stated, we may underprice our policies by using claims estimates that are too low. As a result, our business, financial condition and results of operations could be materially adversely affected. In order to set premium rates accurately, we must utilize an appropriate pricing model which correctly assesses risks based on their individual characteristics and takes into account actual and projected industry characteristics. We are in the process of implementing our E ACCESS automated underwriting system. E ACCESS and its ability to set premium rates accurately are subject to a number of risks and uncertainties, including technical problems, insufficient or unreliable data, uncertainties generally inherent in estimates and assumptions and industry factors such as the costs of ongoing medical treatment and unanticipated court decisions, legislation or regulatory action. Consequently, we could set our premium rates too low, which would negatively affect our results of operations and our profitability, or we could set our premium rates too high, which could reduce our competitiveness and lead to lower revenues. Our geographic concentration in California and Nevada ties our performance to the business, economic, demographic and regulatory conditions in those states. Any deterioration in the conditions in those states could materially adversely affect our financial condition and results of operations. Our business is concentrated in California, in which we generated 72.7% of our direct premiums written for the nine months ended September 30, 2006, and Nevada, in which we generated 20.6% of our direct premiums written for the nine months ended September 30, 2006. Accordingly, unfavorable business, economic, demographic, competitive or regulatory conditions in those states could negatively impact our business. We focus on select small businesses engaged in low to medium hazard industries. If the business or economic conditions in either California or Nevada deteriorate, the departure or insolvency of a significant number of small businesses from one or both of those states could have a material adverse effect on our financial condition or results of operations. Similarly, if the pool of workers declines in those states due to demographic trends, our financial condition and results of operations would be adversely affected. In addition, many California and Nevada businesses are dependent on tourism revenues, which are, in turn, dependent on a robust economy. Any downturn in general economic Table of Contents conditions, either nationally or in one or both of those states, or any other event that causes a deterioration in tourism in either state, could adversely impact small businesses such as restaurants that we have targeted as customers. We may be exposed to greater risks than those faced by insurance companies that conduct business over a greater geographic area. For example, our geographic concentration could subject us to pricing pressure as a result of market or regulatory forces. We have experienced such pressure in California in the past. For example, our premiums in force per policy in California as of September 30, 2006 have declined by approximately 26% since the same time in 2005, principally as a result of rate changes. See , ' ': , ' ': —State workers compensation insurance regulations in California and other states where we operate have caused and may continue to cause downward pressure on the premiums we charge. We cannot assure you that we will not be subject to such pressure in California, or in any of our markets, in the future. Acts of terrorism and catastrophes could expose us to potentially substantial losses and, accordingly, could materially adversely impact our financial condition and results of operations. Under our workers compensation policies and applicable laws in the states in which we operate, we are required to provide workers compensation benefits for losses arising from acts of terrorism. The impact of any terrorist act is unpredictable, and the ultimate impact on us would depend upon the nature, extent, location and timing of such an act. We would be particularly adversely affected by a terrorist act in California or Nevada, most notably a terrorist act affecting any metropolitan area where our policyholders have a large concentration of workers. Notwithstanding the protection provided by the reinsurance we have purchased and any protection provided by the Terrorism Risk Insurance Extension Act of 2005, or the Terrorism Risk Act, the risk of severe losses to us from acts of terrorism has not been eliminated because our excess of loss reinsurance treaty program contains various sub-limits and exclusions limiting our reinsurers obligation to cover losses caused by acts of terrorism. Excess of loss reinsurance is a form of reinsurance where the reinsurer pays all or a specified percentage of loss caused by a particular occurrence or event in excess of a fixed amount, up to a stipulated limit. Our excess of loss reinsurance treaties do not protect against nuclear, biological, chemical or radiological events. If such an event were to impact one or more of the employers we insure, we would be entirely responsible for any workers compensation claims arising out of such event, subject to the terms of the Terrorism Risk Act, and could suffer substantial losses as a result. Under the Terrorism Risk Act, federal protection is provided to the insurance industry for events that result in an industry loss of at least $100 million in 2007. In the event of a qualifying industry loss (which must occur out of an act of terrorism certified as such by the Secretary of the Treasury), each insurance company is responsible for a deductible of 20% of direct earned premiums in the previous year, with the federal government responsible for reimbursing each company for 85% of the insurer s loss. Payouts to individual companies are limited, with the industry responsible for paying the lesser of $27.5 billion in 2007 or the aggregate amount of all insured losses, subject to a maximum aggregate federal payment of $100 billion. The Terrorism Risk Act is scheduled to expire on December 31, 2007 and may not be renewed, or if it is renewed, it may provide reduced protection against the financial impact of acts of terrorism. Accordingly, events may not be covered by, or may result in losses exceeding the capacity of, our reinsurance protection and any protection offered by the Terrorism Risk Act or any successor legislation. Thus, any acts of terrorism could expose us to potentially substantial losses and, accordingly, could materially adversely affect our financial condition and results of operations. Our operations also expose us to claims arising out of catastrophes because we may be required to pay benefits to workers who are injured in the workplace as a result of a catastrophe. Catastrophes can be caused by various unpredictable events, including earthquakes, volcanic eruptions, hurricanes, windstorms, hailstorms, severe winter weather, floods, fires, tornadoes, explosions and other natural or man-made disasters. To date, we have not experienced catastrophic losses arising from any of these types of events. Any catastrophe occurring in the states in which we operate could expose us to potentially substantial losses and, accordingly, could have a material adverse effect on our financial condition and results of operations. The geographic concentration of our business in Nevada and California, known to be particularly prone to earthquakes, subjects us to increased exposure to claims arising out of such a catastrophic event. Table of Contents The fact that we write only a single line of insurance may leave us at a competitive disadvantage, and subjects our financial condition and results of operations to the cyclical nature of the workers compensation insurance market. We face a competitive disadvantage due to the fact that we only offer a single line of insurance. Some of our competitors have additional competitive leverage because of the wide array of insurance products that they offer. For example, a business may find it more efficient or less expensive to purchase multiple lines of commercial insurance coverage from a single carrier. Because we do not offer a range of insurance products and sell only workers compensation insurance, we may lose potential customers to larger competitors who do offer a selection of insurance products. The property and casualty insurance industry is cyclical in nature, and is characterized by periods of so-called , ' ': , ' ': soft market conditions in which premium rates are stable or falling, insurance is readily available and insurers profits decline, and by periods of so-called , ' ': , ' ': hard market conditions, in which rates rise, coverage may be more difficult to find and insurers profits increase. According to the Insurance Information Institute, since 1970, the property and casualty insurance industry experienced hard market conditions from 1975 to 1978, 1984 to 1987 and 2001 to 2004. Although the financial performance of an individual insurance company is dependent on its own specific business characteristics, the profitability of most workers compensation insurance companies generally tends to follow this cyclical market pattern. Because we only offer workers compensation insurance, our financial condition and operations are subject to this cyclical pattern, and we have no ability to change emphasis to another line of insurance. For example, during a period when there is excess underwriting capacity in the workers compensation market and, therefore, lower profitability, we are unable to shift our focus to another line of insurance which is at a different stage of the insurance cycle and, thus, our financial condition and results of operations may be materially adversely affected. The California market in particular is transitioning from a period of capacity shortage to a period of capacity adequacy. This results in lower rate levels and smaller profit margins. During the period from 1994 to 2001, we believe that rising loss costs, despite declines in the frequency of losses, severely eroded underwriting profitability in the workers compensation insurance industry. According to the Insurance Information Institute, the workers compensation industry s accident year combined ratios rose from 97% in 1994 to a high of 138% in 1999. We believe that rising loss costs and low investment returns in recent years have led to poor operating results and have caused some workers compensation insurers to suffer severe capital impairment. Only recently during 2005 and in 2006 have we seen insurers begin to increase their capacity in order to allow the underwriting of additional premium in California, our largest market. Because this cyclicality is due in large part to the actions of our competitors and general economic factors, we cannot predict the timing or duration of changes in the market cycle. We have experienced significant increased price competition in our target markets since 2003. This cyclical pattern has in the past and could in the future adversely affect our financial condition and results of operations. If our agreements with our principal strategic distribution partners are terminated or we fail to maintain good relationships with them, our revenues may decline materially and our results of operations may be materially adversely affected. We are also subject to credit risk with respect to our strategic distribution partners. We have agreements with two principal strategic distribution partners, ADP and Wellpoint, to market and service our insurance products through their sales forces and insurance agencies. For the nine months ended September 30, 2006, we generated $32.9 million of gross premiums written through ADP and $49.1 million of gross premiums written through Wellpoint. The gross premiums written for ADP and Wellpoint were 10.6% and 15.8% of total gross premiums written during the nine months ended September 30, 2006, respectively. Our agreement with ADP is not exclusive, and ADP may terminate the agreement without cause upon 120 days notice. Although our distribution agreements with Wellpoint are exclusive, Wellpoint may terminate its agreements with us if the rating of our insurance subsidiary ECIC were to be downgraded and we are not able to provide coverage through a carrier with an A.M. Best financial strength rating of B++ or better. Wellpoint may also terminate its agreements with us without cause upon 60 days notice. The termination of any of these agreements, our failure to maintain good Table of Contents relationships with our principal strategic distribution partners or their failure to successfully market our products may materially reduce our revenues and have a material adverse effect on our results of operations if we are unable to replace the principal strategic distribution partners with other distributors that produce comparable premiums. In addition, we are subject to the risk that our principal strategic distribution partners may face financial difficulties, reputational issues or problems with respect to their own products and services, which may lead to decreased sales of our products and services. Moreover, if either of our principal strategic distribution partners consolidates or aligns itself with another company or changes its products that are currently offered with our workers compensation insurance product, we may lose business or suffer decreased revenues. We are also subject to credit risk with respect to ADP and Wellpoint, as they collect premiums that are due to us for the workers compensation products that are marketed together with their own products. ADP and Wellpoint are obligated on a monthly basis to pass on premiums that they collect on our behalf. Any failure to remit such premiums to us or to remit such amounts on a timely basis could have an adverse effect on our results of operations. If we do not maintain good relationships with independent insurance agents and brokers, they may sell our competitors products rather than ours and our revenues or profitability may decline. We market and sell our insurance products primarily through independent, non-exclusive insurance agents and brokers. These agents and brokers are not obligated to promote our products and can and do sell our competitors products. We must offer workers compensation insurance products and services that meet the requirements of these agents and their customers. We must also provide competitive commissions to these agents and brokers. Our business model depends upon an extensive network of local and regional agents and brokers distributed throughout the states in which we do business. We need to maintain good relationships with the agents and brokers with which we contract to sell our products. If we do not, these agents and brokers may sell our competitors products instead of ours or may direct less desirable risks to us, and our revenues or profitability may decline. In addition, these agents and brokers may find it easier to promote the broader range of programs of some of our competitors than to promote our single-line workers compensation insurance products. The loss of a number of our independent agents and brokers or the failure of these agents to successfully market our products may reduce our revenues and our profitability if we are unable to replace them with agents and brokers that produce comparable premiums. If we are unable to execute our strategic plan and successfully enter new states, we may not be able to grow, and our financial condition and results of operations could be adversely affected. One of our strategies is to enter new states. For example, we entered Illinois in the fourth quarter of 2006 and we intend to enter Florida in the first quarter of 2007 through ADP. Additionally, our lack of experience in these new states and the relative speed with which we will be entering them means that this strategy is subject to various risks, including risks associated with our ability to: comply with applicable laws and regulations in those new states; obtain accurate data relating to the workers compensation industry and competitive environment in those new states; attract and retain qualified personnel for expanded operations; identify, recruit and integrate new independent agents, brokers and other distribution partners; and augment our internal monitoring and control systems as we expand our business. Any of these risks, as well as risks that are currently unknown to us or adverse developments in the regulatory or market conditions in any of the new states that we enter, could cause us to fail to grow and could adversely affect our financial condition and results of operations. Table of Contents A downgrade in our financial strength rating could reduce the amount of business we are able to write or result in the termination of our agreements with ADP or Wellpoint. Rating agencies rate insurance companies based on financial strength as an indication of an ability to pay claims. Our insurance subsidiaries are currently assigned a group letter rating of , ' ': , ' ': A (Excellent), with a , ' ': , ' ': positive financial outlook, from A.M. Best, which is the rating agency that we believe has the most influence on our business. The , ' ': , ' ': A (Excellent) rating is the fourth highest of 16 ratings and is the lowest rating within the category based on modifiers (i.e., , ' ': , ' ': A and , ' ': , ' ': A are , ' ': , ' ': Excellent ). This rating is assigned to companies that, in the opinion of A.M. Best, have demonstrated an excellent overall performance when compared to industry standards. A.M. Best considers , ' ': , ' ': A rated companies to have an excellent ability to meet their ongoing obligations to policyholders. In addition to A.M. Best ratings (which range from A++ to D for companies not under supervision or liquidation), companies are assigned a rating outlook that indicates the potential direction of a company s rating for an intermediate period, generally defined as the next twelve to 36 months. A rating outlook of , ' ': , ' ': positive indicates that a company s financial/market trends are favorable, relative to its current rating level and, if continued, the company has a good possibility of having its rating upgraded. This rating does not refer to our ability to meet non-insurance obligations and is not a recommendation to purchase or discontinue any policy or contract issued by us or to buy, hold or sell our securities. The financial strength ratings of A.M. Best and other rating agencies are subject to periodic review using, among other things, proprietary capital adequacy models, and are subject to revision or withdrawal at any time. Insurance financial strength ratings are directed toward the concerns of policyholders and insurance agents and are not intended for the protection of investors or as a recommendation to buy, hold or sell securities. Although the policies that we have issued generally do not provide that policyholders may terminate such policies if the ratings of our insurance subsidiaries fall below a certain level, as a practical matter some of our policyholders may conduct businesses that require them to purchase workers compensation insurance from insurers that are rated A or better by A.M. Best. Additionally, our insurance agents and brokers may move their business to our competitors if our rating is downgraded. Therefore, any downgrade in the financial strength rating of our insurance subsidiaries would materially impair our ability to continue to write policies for these policyholders. We do not know how many of our policyholders have businesses that impose such ratings requirements on the purchase of workers compensation insurance. Our competitive position relative to other companies is determined in part by our financial strength rating. Our strategic distribution partner, Wellpoint, requires that we provide workers compensation coverage through a carrier rated B++ or better by A.M. Best. We currently provide this coverage through our subsidiary ECIC. Our inability to provide such coverage could cause a reduction in the number of policies we write, would adversely impact our relationships with our strategic distribution partners and could have a material adverse effect on our results of operations and our financial position. If ECIC s rating were to be downgraded and we were not able to enter an agreement to provide coverage through a carrier rated B++ or better by A.M. Best, Wellpoint may terminate its distribution agreements with us. We cannot assure you that we would be able to enter such an agreement if our rating were downgraded. The termination of our relationship with either ADP or Wellpoint would have a material adverse effect on our results of operations if we are unable to replace them with other distributors that produce comparable premiums. If we are unable to obtain reinsurance, our ability to write new policies and to renew existing policies would be adversely affected and our financial condition and results of operations could be materially adversely affected. Like other insurers, we manage our risk by buying reinsurance. Reinsurance is an arrangement in which an insurance company, called the ceding company, transfers a portion of insurance risk under policies it has written to another insurance company, called the reinsurer, and pays the reinsurer a portion of the premiums relating to those policies. Conversely, the reinsurer receives or assumes reinsurance from the ceding company. We currently purchase excess of loss reinsurance. We purchase reinsurance to cover larger individual losses and aggregate catastrophic losses from natural perils and terrorism. For the treaty, or contract, year beginning July 1, 2006, we have purchased reinsurance up to $175 million in excess of Table of Contents our $4 million net retention to protect against natural perils and acts of terrorism, excluding nuclear, biological, chemical and radiological events. Our retention is the amount of loss from a single occurrence or event which we must pay prior to the attachment of our excess of loss reinsurance. This means we have reinsurance for covered losses we suffer between $4 million and $175 million. This $175 million in reinsurance protection, in excess of our $4 million net retention, is subject to certain limitations, including (i) the aggregate reinsurance for covered losses between $4 million and $10 million is limited to $18 million, and (ii) the maximum reinsurance recoverable for any single person for losses between $10 million and $175 million is $7.5 million. Our current reinsurance treaty applies to all loss occurrences during and on policies which are in force between 12:01 a.m. July 1, 2006 through 12:01 a.m. July 1, 2007. We have the ability to extend the term of the treaty to continue to apply to policies which are in force at the expiration of the treaty generally for a period of 12 months, but we cannot assure you that our reinsurers will permit such an extension or that we can obtain such an extension on favorable terms. Covered losses which occur prior to expiration or cancellation of the treaty continue to be obligations of the reinsurer and subject to the other conditions in the agreement. We are responsible for these losses if the reinsurer cannot or refuses to pay. The treaty includes certain exclusions for which our reinsurers are not liable for losses, including but not limited to, losses arising from the following: war, strikes or civil commotion; nuclear incidents other than incidental or ordinary industrial or educational or medical pursuits; underground mining except where incidental; oil and gas drilling, refining and manufacturing; manufacturing, storage and transportation of fireworks or other explosive substances or devices; asbestos abatement, manufacturing or distribution; excess policies attaching excess of a self-insured retention or a deductible greater than $25,000; and commercial airlines personnel. The reinsurance coverage includes coverage for acts of terrorism other than losses directly or indirectly caused by, contributed to, resulting from, or arising out of or in connection with nuclear, radiological, biological or chemical pollution, contamination or explosion. Any loss we suffer that is not covered by reinsurance could expose us to substantial losses. We review and negotiate our reinsurance coverage annually. Our current treaty has a total of 24 subscribing reinsurers and, at September 30, 2006, Lloyds Syndicate #2020 WEL, Aspen Insurance UK Limited, American Reinsurance Company and Hannover Reuckversicherung-AG individually reinsured 32.0%, 17.5%, 15.0% and 15.0%, respectively, of the first layer of reinsurance ($6 million in excess of the first $4 million in losses). In addition, Endurance Specialty Insurance Ltd. and Aspen Insurance UK Limited reinsured 14.0% and 11.2%, respectively, of our total reinsurance limit ($175 million in excess of the first $4 million in losses) for a total of 25.2% of our total limit. The availability, amount and cost of reinsurance are subject to market conditions and to our loss experience. We cannot be certain that our reinsurance agreements will be renewed or replaced prior to their expiration upon terms satisfactory to us. If we are unable to renew or replace our reinsurance agreements upon terms satisfactory to us, our net liability on individual risks would increase and we would have greater exposure to catastrophic losses. If this were to occur, our underwriting results would be subject to greater variability and our underwriting capacity would be reduced. These consequences could materially adversely affect our financial condition and results of operations. We are subject to credit risk with respect to our reinsurers, and they may also refuse to pay or may delay payment of losses we cede to them. Although we purchase reinsurance to manage our risk and exposure to losses, we continue to have direct obligations under the policies we write. We remain liable to our policyholders, even if we are unable to recover from our reinsurers what we believe we are entitled to receive under our reinsurance contracts. Reinsurers might refuse or fail to pay losses that we cede to them, or they might delay payment. For example, we had to replace one of the original reinsurers under the LPT Agreement when its A.M. Best rating dropped below the mandatory level. See , ' ': , ' ': —Our assumption of the assets, liabilities and operations of the Fund covered all losses incurred by the Fund prior to January 1, 2000, pursuant to legislation passed in the 1999 Nevada legislature. We only obtained reinsurance covering the losses incurred prior to July 1, 1995, and we could be liable for all of those losses if the coverage provided by the LPT Agreement proves inadequate or we fail to collect from the reinsurers party to such transaction. Since we exclusively write workers compensation insurance, with claims that may be paid out over a long period of time, the creditworthiness of our reinsurers may change before we can recover amounts to which we are entitled. Table of Contents Recent natural disasters, such as Hurricanes Katrina, Rita and Wilma, have caused unprecedented insured property losses, a significant portion of which will be borne by reinsurers. If a reinsurer is active in both the property and in the workers compensation insurance markets, its ability to perform its obligations in the latter market may be adversely affected by events unrelated to workers compensation insurance losses. At September 30, 2006, we carried a total of $1.1 billion of reinsurance recoverables for paid and unpaid losses and LAE. Of the $1.1 billion in reinsurance recoverable, $11.5 million was the current recoverable at September 30, 2006 on paid losses and $1.1 billion was recoverable on unpaid losses and therefore was not currently due at September 30, 2006. With the exception of certain losses assumed from the Fund discussed below, these recoverables are unsecured. The reinsurance recoverables on unpaid losses will become current as we pay the related claims. If we are unable to collect on our reinsurance recoverables, our financial condition and results of operations could be materially adversely affected. Our assumption of the assets, liabilities and operations of the Fund covered all losses incurred by the Fund prior to January 1, 2000, pursuant to legislation passed in the 1999 Nevada legislature. We only obtained reinsurance covering the losses incurred prior to July 1, 1995, and we could be liable for all of those losses if the coverage provided by the LPT Agreement proves inadequate or we fail to collect from the reinsurers party to such transaction. On January 1, 2000, our Nevada insurance subsidiary assumed all of the assets, liabilities and operations of the Fund, including losses incurred by the Fund prior to such date. Our Nevada insurance subsidiary also assumed the Fund s rights and obligations associated with the LPT Agreement that the Fund entered into with third party reinsurers with respect to its losses incurred prior to July 1, 1995. The LPT Agreement was a retroactive 100% quota share reinsurance agreement under which the Fund initially ceded $1.525 billion in liabilities for the incurred but unpaid losses and LAE related to claims incurred prior to July 1, 1995, for consideration of $775 million in cash. The LPT Agreement provides coverage for losses up to $2 billion, excluding losses for burial and transportation expenses, and paid losses under the LPT Agreement totaled $353.6 million through September 30, 2006. Accordingly, to the extent that the Fund s outstanding losses for claims with original dates of injury prior to July 1, 1995 exceed $2 billion, they will not be covered by the LPT Agreement and we will be liable for those losses to that extent. As of September 30, 2006, the estimated remaining liabilities subject to the LPT Agreement were approximately $1 billion. The reinsurers under the LPT Agreement agreed to assume responsibilities for the claims at the benefit levels which existed in June 1999. Accordingly, if the Nevada legislature were to increase the benefits payable for the pre-July 1, 1995 claims, we would be responsible for the increased benefit costs to the extent of the legislative increase. Similarly, if the credit rating of any of the third party reinsurers that are party to the LPT Agreement were to fall below , ' ': , ' ': A as determined by A.M. Best or to become insolvent, we would be responsible for replacing any such reinsurer or would be liable for the claims that otherwise would have been transferred to such reinsurer. For example, in 2002, the rating of one of the original reinsurers under the LPT Agreement, Gerling Global International Reinsurance Company Ltd., or Gerling, dropped below the mandatory , ' ': , ' ': A A.M. Best rating to , ' ': , ' ': B+. Accordingly, we entered into an agreement to replace Gerling with National Indemnity Company, or NICO, at a cost to us of $32.8 million. We can give no assurance that circumstances requiring us to replace one or more of the current reinsurers under the LPT Agreement will not occur in the future, that we will be successful in replacing such reinsurer or reinsurers in such circumstances, or that the cost of such replacement or replacements will not have a material adverse effect on our results of operations or financial condition. The LPT Agreement also required the reinsurers to each place assets supporting the payment of claims by them in individual trusts that require that collateral be held at a specified level. The collateralization level must not be less than the outstanding reserve for losses and a loss expense allowance equal to 7% of estimated paid losses discounted at a rate of 6%. If the assets held in trust fall below this threshold, we can require the reinsurers to contribute additional assets to maintain the required minimum level. The value of these assets at September 30, 2006 was approximately $1.1 billion. If the value of the collateral in the trusts drops below the required minimum level and the reinsurers are unable to contribute additional assets, we could be responsible for substituting a new reinsurer or paying those Table of Contents claims without the benefit of reinsurance. One of the reinsurers has collateralized its obligations under the LPT Agreement by placing the stock of a publicly held corporation, with a value of $667.0 million at September 30, 2006, in a trust to secure the reinsurer s obligation of $569.4 million. The value of this collateral is subject to fluctuations in the market price of such stock. The other reinsurers have placed treasury and fixed income securities in trusts to collateralize their obligations. For losses incurred by the Fund subsequent to June 30, 1995, we are liable for the entire loss, net of reinsurance purchased by the Fund. If the premiums collected by the Fund for policies written between July 1, 1995 and December 31, 1999 and the investment income earned on those premiums are inadequate to cover these losses, our reserves may prove inadequate and our results of operations and financial condition could be materially adversely affected. Intense competition could adversely affect our ability to sell policies at rates we deem adequate. The market for workers compensation insurance products is highly competitive. Competition in our business is based on many factors, including premiums charged, services provided, financial ratings assigned by independent rating agencies, speed of claims payments, reputation, policyholder dividends, perceived financial strength and general experience. In some cases, our competitors offer lower priced products than we do. If our competitors offer more competitive premiums, dividends or payment plans, services or commissions to independent agents, brokers and other distributors, we could lose market share or have to reduce our premium rates, which could adversely affect our profitability. Our competitors include other insurance companies, professional employer organizations, third-party administrators, self-insurance funds and state insurance funds. Our main competitors in each of the nine states in which we currently operate vary from state to state but are usually those companies that offer a full range of services in underwriting, loss control and claims. We compete on the basis of the services that we offer to our policyholders and on ease of doing business rather than solely on price. In Nevada, our three largest competitors are American International Group, Inc., Builders Insurance Company and Liberty Mutual Insurance Company. In California, our three largest competitors are the California State Compensation Insurance Fund, American International Group and Zenith National Insurance Company. Many of our existing and potential competitors are significantly larger and possess greater financial, marketing and management resources than we do. Some of our competitors, including the California State Compensation Insurance Fund, benefit financially by not being subject to federal income tax. Intense competitive pressure on prices can result from the actions of even a single large competitor. Competitors with more surplus than us have the potential to expand in our markets more quickly than we can. Additionally, greater financial resources permit an insurer to gain market share through more competitive pricing, even if that pricing results in reduced underwriting margins or an underwriting loss. Many of our competitors are multi-line carriers that can price the workers compensation insurance that they offer at a loss in order to obtain other lines of business at a profit. If we are unable to compete effectively, our business and financial condition could be materially adversely affected. Our financial condition and results of operations may be materially adversely affected if we are unable to realize our investment objectives. Investment income is an important component of our revenues and net income. Investment income primarily consists of interest and dividends on the securities we own. The ability to achieve our investment objectives is affected by factors that are beyond our control. For example, domestic or international economic or political turbulence and large-scale acts of terrorism may adversely affect the general economy and, accordingly, reduce our investment income. Interest rates are highly sensitive to many factors, including governmental monetary policies which affect the capital markets and, consequently, the value of the securities we own. Interest rates, though recently at historically low levels, have risen over the past two years. The outlook for our investment income is dependent on the future direction of interest rates, maturity schedules and the amount of cash flows from operations available for investment. The fair values of fixed maturity investments that are , ' ': , ' ': available-for-sale will shift as changes in interest rates occur and cause security value fluctuations reflected on our balance sheet. Our stockholders equity will vary with future interest rate changes. Any significant decline in our investment income would have a material adverse effect on our financial condition and results of operations. Table of Contents We rely on our information technology and telecommunication systems, and the failure of these systems could materially and adversely affect our business. Our business is highly dependent upon the successful and uninterrupted functioning of our information technology and telecommunications systems. We rely on these systems to process new and renewal business, provide customer service, administer claims and make payments on those claims, facilitate collections, and, upon completion of the implementation of our E ACCESS automated underwriting system, to automatically underwrite and administer the policies we write. These systems also enable us to perform actuarial and other modeling functions necessary for underwriting and rate development. The failure of these systems, including due to a natural catastrophe, or the termination of any third-party software licenses upon which any of these systems is based, could interrupt our operations or materially impact our ability to evaluate and write new business. As our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to write and process new and renewal business and provide customer service or compromise our ability to pay claims in a timely manner. Any interruption in our ability to write and process new and renewal business, service our customers or pay claims promptly could result in a material adverse effect on our business. The insurance business is subject to extensive regulation that limits the way we can operate our business. We are subject to extensive regulation by the insurance regulatory agencies in each state in which our insurance subsidiaries are licensed, most significantly by the insurance regulators in the States of Nevada and California, in which our insurance subsidiaries are domiciled. These state agencies have broad regulatory powers designed primarily to protect policyholders and their employees, not stockholders or other investors. Regulations vary from state to state, but typically address or include: standards of solvency, including risk-based capital measurements; restrictions on the nature, quality and concentration of investments; restrictions on the types of terms that we can include in the insurance policies we offer; mandates that may affect wage replacement and medical care benefits paid under the workers compensation system; requirements for the handling and reporting of claims; procedures for adjusting claims, which can affect the cost of a claim; restrictions on the way rates are developed and premiums are determined; the manner in which agents may be appointed; establishment of liabilities for unearned premiums, unpaid losses and loss adjustment expenses and other purposes; limitations on our ability to transact business with affiliates; mergers, acquisitions and divestitures involving our insurance subsidiaries; licensing requirements and approvals that affect our ability to do business; compliance with all applicable medical privacy laws; potential assessments for the settlement of covered claims under insurance policies issued by impaired, insolvent or failed insurance companies; and the amount of dividends that ECIC may pay to EICN and that EICN may pay to EIG. Workers compensation insurance is statutorily provided for in all of the states in which we do business. State laws and regulations provide for the form and content of policy coverage and the rights and benefits that are available to injured workers, their representatives and medical providers. Legislation and Table of Contents regulation also impact our ability to investigate fraud and other abuses of the workers compensation systems where we operate. Our relationships with medical providers are also impacted by legislation and regulation, including penalties for the failure to make timely payments. In late 2006, the California Department of Insurance initiated the rulemaking process on a set of proposed regulations governing the establishment of reserves and collateral requirements for deductible workers compensation insurance. These regulations, if adopted, would alter the way in which reserves are established under deductible workers compensation insurance and change the manner in which Special California Schedule P deposits are calculated. Under current California law, workers compensation insurers are not required to count the deductible retained by their insureds when calculating their Schedule P deposit. The proposed regulations would require the inclusion of any deductible in the Schedule P deposit. As a result, insurance companies, including ECIC, would have to increase the amount of their Schedule P deposit to cover the deductible portion of any policy. At this time, we do not write any deductible policies. Were we to commence writing deductible policies in the future, and if the proposed regulations were adopted, our Schedule P deposit would need to increase and, correspondingly, these funds would no longer be available to ECIC. Regulatory authorities have broad discretion to deny or revoke licenses for various reasons, including the violation of regulations. We may be unable to maintain all required approvals or comply fully with the wide variety of applicable laws and regulations, which are continually undergoing revision and which may be interpreted differently among the jurisdictions in which we conduct business, or to comply with the then current interpretation of such laws and regulations. In some instances, where there is uncertainty as to applicability, we follow practices based on our interpretations of regulations or practices that we believe generally to be followed by the industry. These practices may turn out to be different from the interpretations of regulatory authorities. We are also subject to regulatory oversight of the timely payment of workers compensation insurance benefits in all the states where we operate. Regulatory authorities may impose monetary fines and penalties if we fail to pay benefits to injured workers and fees to our medical providers in accordance with applicable laws and regulations. The NAIC has developed a system to test the adequacy of statutory capital, known as , ' ': , ' ': risk-based capital, which has been adopted by all of the states in which we operate. This system establishes the minimum amount of capital and surplus calculated in accordance with statutory accounting principles necessary for an insurance company to support its overall business operations. It identifies insurers that may be inadequately capitalized by looking at the inherent risks of each insurer s assets and liabilities and its mix of net premiums written. Insurers falling below a calculated threshold may be subject to varying degrees of regulatory action, including supervision, rehabilitation or liquidation. The need to maintain our risk-based capital levels may prevent us from expanding our business or meeting strategic goals in a timely manner. Failure to maintain our risk-based capital at the required levels could adversely affect the ability of our insurance subsidiaries to maintain regulatory authority to conduct our business. In addition, the NAIC has developed the Insurance Regulatory Information System, or IRIS. IRIS was designed to provide state regulators with an integrated approach to monitor the financial condition of insurers for the purposes of detecting financial distress and preventing insolvency. IRIS consists of a statistical phase and an analytical phase whereby financial examiners review insurers annual statements and financial ratios. The statistical phase consists of 13 key financial ratios based on year-end data that are generated from the NAIC database annually; each ratio has a , ' ': , ' ': usual range of results. These ratios assist state insurance departments in executing their statutory mandate to oversee the financial condition of insurance companies. Ratios of an insurance company that fall outside the usual range are generally regarded by insurance regulators as part of an early warning system. Insurance regulators will generally begin to investigate, monitor or make inquiries of an insurance company if four or more of the company s ratios fall outside the usual ranges. Although these inquiries can take many forms, regulators may require the insurance company to provide additional written explanation as to the causes of the particular ratios being outside of the usual range, the actions being taken by management to produce results that will be within the usual range in future years and what, if any, actions have been taken by the insurance regulator of the insurers state of domicile. Regulators are not required to take action if an IRIS ratio is outside of the usual range, but depending upon the nature and scope of the particular insurance company s exception (for example, if a particular ratio indicates an insurance company has insufficient capital) regulators may Table of Contents act to reduce the amount of insurance the company can write or revoke the insurers certificate of authority and may even place the company under supervision. As of December 31, 2005, EICN had two ratios outside the usual range and ECIC had one ratio outside the usual range; all other ratios for EICN and ECIC were within the usual range. See , ' ': , ' ': Regulation—IRIS Ratio. These ratios related to EICN s investment yield and the ratio of liabilities to liquid assets. EICN s investment yield ratio was one-tenth of one percent below the usual range in 2005. This was principally related to EICN s asset allocation to equities being above property and casualty insurance industry averages, in addition to its equity interest in ECIC. EICN and ECIC s liabilities to liquid assets ratios were also outside the usual range because total liabilities includes funds withheld pursuant to their inter-company pooling agreement. See , ' ': , ' ': Regulation—IRIS Ratio. If either EICN or ECIC has unusual results on four or more ratios in the future, they may be subject to the actions of state regulators discussed above. This extensive regulation of our business may affect the cost or demand for our products and may limit our ability to obtain rate increases or to take other actions that we might pursue to increase our profitability. Further, changes in the level of regulation of the insurance industry or changes in laws or regulations or interpretations by regulatory authorities could impact our operations and require us to bear additional costs of compliance. We are a holding company with no direct operations, we depend on the ability of our subsidiaries to transfer funds to us to meet our obligations, and our insurance subsidiaries ability to pay dividends to us is restricted by law. EIG is a holding company that transacts substantially all of its business through operating subsidiaries. Its primary assets are the shares of stock of our operating subsidiaries. The ability of EIG to meet obligations on outstanding debt, to pay stockholder dividends and to make other payments depends on the surplus and earnings of our subsidiaries and their ability to pay dividends or to advance or repay funds, and, in particular, upon the ability of our Nevada domiciled insurance company, EICN, to pay dividends to its immediate holding company and, in turn, the ability of that holding company to pay dividends to EIG. Nevada law limits the payment of cash dividends by EICN to its immediate holding company by providing that payments cannot be made except from available and accumulated surplus money otherwise unrestricted (unassigned) and derived from realized net operating profits and realized and unrealized capital gains. A stock dividend may be paid out of any available surplus. A cash or stock dividend otherwise prohibited by these restrictions may only be declared and distributed upon the prior approval of the Nevada Commissioner of Insurance. As of December 31, 2004 and 2005, EICN had negative unassigned surplus of $198.7 million and $71.9 million, respectively, and therefore was unable to pay a dividend to us at such dates without prior approval of the Nevada Commissioner of Insurance. At September 30, 2006, EICN had positive unassigned surplus of $23.4 million and therefore had the capability of paying a dividend to us of up to such an amount without the prior approval of the Nevada Commissioner of Insurance. EICN must give the Nevada Commissioner of Insurance prior notice of any extraordinary dividends or distributions that it proposes to pay to its immediate holding company, even when such a dividend or distribution is to be paid out of available and otherwise unrestricted (unassigned) surplus. EICN may pay such an extraordinary dividend or distribution if the Nevada Commissioner of Insurance either approves or does not disapprove the payment within 30 days after receiving notice of its declaration. An extraordinary dividend or distribution is defined by statute to include any dividend or distribution of cash or property whose fair market value, together with that of other dividends or distributions made within the preceding 12 months, exceeds the greater of: (a) 10% of EICN s statutory surplus as regards policyholders at the next preceding December 31; or (b) EICN s statutory net income, not including realized capital gains, for the 12-month period ending at the next preceding December 31. On October 17, 2006, the Nevada Commissioner of Insurance granted EICN permission to pay us an aggregate of up to an additional $55 million in one or more extraordinary dividends subsequent to the successful completion of this offering and before December 31, 2008. The payment of these dividends is Table of Contents conditioned upon the expiration of the underwriters over-allotment option period, prior repayment of any expenses of EIG and its subsidiaries arising from the conversion and this offering, the exhaustion of any proceeds retained by EIG from this offering, maintaining the risk-based capital, or RBC, total adjusted capital of EICN above a specified level on the date of declaration and payment of any particular extraordinary dividend after taking into account the effect of such dividend, and maintaining all required filings with the Nevada Division of Insurance. We may use these extraordinary dividends from EICN, as well as any ordinary dividends that we may receive over time from EICN, to pay quarterly dividends to our stockholders as described under , ' ': , ' ': Dividend Policy, to repurchase our stock and/or for general corporate purposes. However, the October 17, 2006 extraordinary dividend approval prohibits us from using any such extraordinary dividends to increase executive compensation. As the direct owner of ECIC, EICN will be the direct recipient of any dividends paid by ECIC. The ability of ECIC to pay dividends to EICN is, in turn, limited by California law. California law provides that, absent prior approval of the California Insurance Commissioner, dividends can only be declared from earned surplus, excluding any earned surplus (1) derived from the net appreciation in the value of assets not yet realized, or (2) derived from an exchange of assets, unless the assets received are currently realizable in cash. In addition, California law provides that the California Insurance Commissioner must approve (or, within a 30-day notice period, not disapprove) any dividend that, together with all other such dividends paid during the preceding 12 months, exceeds the greater of: (a) 10% of ECIC s statutory surplus as regards policyholders at the preceding December 31; or (b) 100% of the net income for the preceding year. The maximum pay-out that may be made by ECIC to EICN during 2006 without prior approval is $44.6 million. Under California regulations, an additional liability, known as an excess statutory reserve, which reduces statutory surplus, must be recorded if a company s workers compensation losses and LAE ratio is less than 65% in each of the three most recent accident years. Excess statutory reserves reduced ECIC s statutory-basis surplus by $7.5 million to $277.2 million at December 31, 2005, as filed and reported to the regulators. Our board of directors has authorized the payment of a dividend of $0.06 per share of our common stock per quarter to our stockholders of record beginning in the second quarter of 2007. Any determination to pay dividends will be at the discretion of our board of directors and will be dependent upon our subsidiaries payment of dividends and/or other statutorily permissible payments to us (including the payment of the extraordinary dividends referred to above), our results of operations and cash flows, our financial position and capital requirements, general business conditions, any legal, tax, regulatory and contractual restrictions on the payment of dividends (including those described above), and any other factors our board of directors deems relevant. There can be no assurance that we will declare and pay any dividends. We are party to certain litigation involving our assumption of the assets of the Fund and this litigation, if determined unfavorably to us, could have a material adverse effect on our business. On October 10, 2006, a qui tam action captioned State of Nevada, ex rel., David J. Otto v. Employers Insurance Company of Nevada, et al. (referred to herein as the , ' ': , ' ': complaint ) in the second judicial district court of the State of Nevada was commenced pursuant to Nevada Revised Statute 357.080 et seq. (the , ' ': , ' ': Nevada False Claims Act ). The Nevada False Claims Act authorizes a private plaintiff to commence an action on behalf of the State of Nevada under the circumstances prescribed by the statute (, ' ': , ' ': qui tam action ). Nevada law requires that a qui tam action be filed under seal and remain under seal pending a decision by the Attorney General of the State of Nevada regarding whether to intervene in the action within the requisite statutory period. On March 6, 2006, the complaint was filed under seal, but the Attorney General did not intervene within the period prescribed under the Nevada qui tam statute. The complaint alleges, among other things, that EICN has violated the provisions of the Nevada False Claims Act embodied in Nevada Revised Statutes 357.040(1)(d), (g) and (h) in connection with an allegedly unconstitutional transfer of assets from the Fund to EICN on January 1, 2000 pursuant to Amendment No. 190 to Senate Bill No. 37 (, ' ': , ' ': SB 37 ) passed in the 1999 Nevada Legislature and signed into law by gubernatorial proclamation allegedly in abrogation of Article 9, Section 2 of the Nevada Constitution. Article 9, Section 2 provides in pertinent part under subparagraph 2: , ' ': , ' ': Any money paid for the purpose of providing compensation for industrial accidents and occupational diseases, and for Table of Contents administrative expenses incidental thereto ... must be segregated in proper accounts in the state treasury, and such money must never be used for any other purposes, and they are hereby declared to be trust funds for the uses and purposes herein specified. The complaint contends that although Article 9, Section 2 requires that the assets that were transferred to EICN be held in trust for the benefit of the State of Nevada, EICN has falsely and knowingly claimed that (i) it had and has legal title to these assets, (ii) it was not and is not a trustee with respect to such assets, and (iii) it failed to report any of the assets to the State (otherwise known as a reverse false claim). The complaint also asserts a number of common law causes of action arising out of the same allegations. Although the complaint does not specify the amount of money damages that it seeks, the complaint does seek money damages for the State of Nevada in an amount equal to three times the amount of all funds transferred to EICN under SB 37 and the gubernatorial proclamation as well as three times the amount of all rents, profits and income from the funds to transferred. The complaint also seeks declaratory and injunctive relief as well as an accounting. The plaintiff requests that he be awarded between 14 and 50 percent of any recovery by the State of Nevada, together with attorneys fees and costs in accordance with the Nevada False Claims Act. While the case is in a very preliminary stage, EICN believes that it has meritorious defenses to all of the plaintiff s claims and intends to defend the action vigorously. Nonetheless, should the plaintiff obtain an adverse judgment for the maximum amount sought in the complaint, such an adverse judgment would have a material adverse impact on EICN s financial condition. On November 20, 2006, EICN moved to dismiss the complaint in its entirety and with prejudice. On December 20, 2006, the plaintiff opposed EICN s motion to dismiss. No hearing has been set on EICN s motion. We have a limited history as a taxpayer, and, as such, we cannot predict whether the Internal Revenue Service (or other taxing authorities) could assert any tax deficiencies against us that could have a material adverse effect on our financial condition and results of operations. We commenced operations as an insurance company owned by our policyholders, also known as a private mutual insurance company, on January 1, 2000 when EICN assumed the assets, liabilities and operations of the Fund. While the Fund had over 80 years of workers compensation experience in Nevada, it was not subject to U.S. federal income taxation prior to 2000 because it was a part of the State of Nevada. EICN became subject to U.S. federal income taxation from and after January 1, 2000. Although we believe that EICN has properly reported and paid its U.S. federal income taxes in all material respects, we have never been audited by the Internal Revenue Service and, if we were audited, we cannot predict whether the Internal Revenue Service would assert any tax deficiencies that could result in our paying additional taxes that could have a material adverse effect on our financial condition and results of operations. Our profitability may be adversely impacted by inflation, legislative actions and judicial decisions. The effects of inflation could cause claims costs to rise in the future. Our reserve for losses and LAE includes assumptions about future payments for settlement of claims and claims handling expenses, such as medical treatment and litigation costs. In addition, judicial decisions and legislative actions continue to broaden liability and policy definitions and to increase the severity of claims payments. To the extent inflation and these legislative actions and judicial decisions cause claims costs to increase above reserves established for these claims, we will be required to increase our loss reserves with a corresponding reduction in our net income in the period in which the deficiency is identified. Administrative proceedings or legal actions involving our insurance subsidiaries could have a material adverse effect on our business, results of operations or financial condition. Our insurance subsidiaries are involved in various administrative proceedings and legal actions in the normal course of their insurance operations. Our subsidiaries have responded to the actions and intend to defend against these claims. These claims concern issues including eligibility for workers compensation insurance coverage or benefits, the extent of injuries, wage determinations and disability ratings. Adverse decisions in multiple administrative proceedings or legal actions could require us to pay significant amounts in the aggregate or to change the manner in which we administer claims, which could have a material adverse effect on our financial results. Table of Contents If we cannot obtain adequate or additional capital on favorable terms, including from writing new business and establishing premium rates and reserve levels sufficient to cover losses, we may not have sufficient funds to implement our future growth or operating plans and our business, financial condition or results of operations could be materially adversely affected. Our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses will generally determine our future capital requirements. If we have to raise additional capital, equity or debt, financing may not be available on terms that are favorable to us. In the case of equity financings, dilution to our stockholders could result. In any case, such securities may have rights, preferences and privileges that are senior to those of our shares of common stock. In the case of debt financings, we may be subject to covenants that restrict our ability to freely operate our business. If we cannot obtain adequate capital on favorable terms or at all, we may not have sufficient funds to implement our future growth or operating plans and our business, financial condition or results of operations could be materially adversely affected. Our business is largely dependent on the efforts of our management because of its industry expertise, knowledge of our markets and relationships with the independent agents and brokers that sell our products, and the loss of any members of our management team could disrupt our operations and have a material adverse affect on our ability to execute on our strategies. Our success will depend in substantial part upon our ability to attract and retain qualified executive officers, experienced underwriting personnel and other skilled employees who are knowledgeable about our business. The current success of our business is dependent in significant part on the efforts of Douglas Dirks, our president and chief executive officer, Martin Welch, the president and chief operating officer of our insurance subsidiaries, and William Yocke, our executive vice president and chief financial officer. Many of our regional and local officers are also critical to our operations because of their industry expertise, knowledge of our markets and relationships with the independent agents and brokers who sell our products. We have entered into employment agreements with certain of our key executives. These employment agreements are for a set term of three years and we may terminate the agreements for cause, including but not limited to material breach by the executive, willful violation of any law, rule or regulation by the executive and conviction of the executive for any felony or crime, including moral turpitude. For a description of the key terms and provisions of those agreements, see , ' ': , ' ': Compensation Discussion and Analysis. We do not maintain key man life insurance for those executives. If we were to lose the services of members of our management team or key regional or local officers, we may be unable to find replacements satisfactory to us and our business. As a result, our operations may be disrupted and our financial performance may be adversely affected. Risks Related to the Conversion A challenge to the Nevada Commissioner of Insurance s approval of the application for conversion could result in uncertainty regarding the terms of our conversion and could reduce the market price of our common stock. Nevada law requires that the plan of conversion be approved by the Nevada Commissioner of Insurance through the issuance of both an initial order, following a public hearing, and a final order approving the application for conversion. On August 22, 2006, we filed an application for approval of the plan of conversion with the Nevada Commissioner of Insurance. The Nevada Commissioner of Insurance held a public hearing on the application for conversion on October 26, 2006 and issued an initial order approving the application for conversion on November 29, 2006, based upon, among other things, a determination that the plan of conversion is fair and equitable to our eligible members. The initial order of the Nevada Commissioner of Insurance approving the application for conversion did not address the fairness of the plan of conversion to purchasers of common stock in this offering. At a special meeting of our members on January 13, 2007, the plan of conversion, including the amended and restated articles of incorporation of EIG, was approved by the required votes of our members. On January 13, 2007, the Nevada Commissioner of Insurance issued a final order approving the application for conversion. Table of Contents Nevada law provides that any party aggrieved by a final order of the Nevada Commissioner of Insurance approving the plan of conversion may petition for judicial review in a state district court. Under Nevada Revised Statutes 233B.035, for the purposes of this section , ' ': , ' ': party means , ' ': , ' ': each person or agency named or admitted as a party, or properly seeking and entitled as of right to be admitted as a party, in any contested case. Under Nevada law, judicial review of a decision of the Nevada Commissioner of Insurance must be sought by initiating an action under the Nevada Administrative Procedure Act in the appropriate district court within thirty days of receipt of the final order. A successful challenge could result in injunctive relief, a modification of the plan of conversion or the Nevada Commissioner of Insurance s approval of the plan of conversion being set aside. In addition, a successful challenge could result in substantial uncertainty relating to the terms and effectiveness of the plan of conversion, and an extended period of time might be required to reach a final determination. Because Nevada law provides that only eligible members are entitled to receive consideration as part of the conversion, certain of our members will not receive consideration and thus may have a greater incentive to challenge the conversion. All eligible members were given the option to request cash consideration rather than common stock. Some policyholders who elect to receive cash instead of common stock as consideration in the conversion may nevertheless receive a portion of their overall consideration in common stock if there is insufficient cash available for cash payment to policyholders. If this occurs, those policyholders who elected to receive cash instead of common stock may be more likely to challenge the conversion. Based on the number of cash elections received from our members, we believe that each eligible member who elected to receive their consideration in the form of cash will receive some portion of their overall consideration in the form of common stock. In order to successfully challenge the Nevada Commissioner of Insurance s approval of the application for conversion, a challenging party would have to sustain the burden of showing that approval was arbitrary, capricious, an abuse of discretion, made in violation of lawful procedures, clearly erroneous in view of the substantial evidence on the whole record, in violation of constitutional or statutory provisions, in excess of the statutory authority of the Nevada Commissioner of Insurance or affected by an error of law. Such an outcome would likely reduce the market price of our common stock, would likely be materially adverse to purchasers of our common stock, and would likely have a material adverse effect on our results of operations and financial condition. We currently are not aware of any lawsuits or proceedings challenging the initial order issued by the Nevada Commissioner of Insurance approving the application for conversion. However, we cannot assure you that no such lawsuits or proceedings will be commenced. The market price of our common stock may decline if persons receiving common stock as consideration in the conversion sell their stock in the public market. Substantially all of the estimated 26,162,292 shares of our common stock to be distributed as consideration to eligible members in the conversion will be freely tradable, and eligible members receiving these shares in the conversion will not be required to pay any cash for them. The sale of substantial amounts of common stock in the public market, or the perception that such sales could occur, could reduce the prevailing market price for our common stock. In particular, some eligible members who elect to receive cash instead of common stock as consideration in the conversion may nevertheless receive common stock if there is insufficient cash available to satisfy the elective cash requirements. Those eligible members who elect to receive cash instead of common stock may be especially likely to sell the shares of common stock they receive in the conversion to realize cash proceeds. This may increase selling pressure on our common stock. Risks Related to Our Industry Assessments by guaranty funds and other assessments may reduce our profitability. Most states have guaranty fund laws under which insurers doing business in the state are required to fund policyholder liabilities of insolvent insurance companies. Generally, assessments are levied by guaranty associations within the state, up to prescribed limits, on all insurers doing business in that state on the basis of the proportionate share of the premiums written by insurers doing business in that state in the lines of business in which the impaired, insolvent or failed insurer is engaged. Maximum Table of Contents contributions required by law in any one state in which we currently offer insurance vary between 1% and 2% of premiums written. We recorded an estimate of $2.0 million and $2.2 million for our expected liability for guaranty fund assessments at September 30, 2006 and December 31, 2005, respectively. As of September 30, 2006, all states in which we operate, other than California, had not levied any assessments; therefore, there are no expected recoveries as of September 30, 2006. A guaranty fund payment on deposit balance of $10.1 million as of September 30, 2006 was recorded as an asset for assessments paid to the California Insurance Guaranty Association that includes policy surcharges still to be collected in the future. The assessments levied on us may increase as we increase our premiums written or if we write business in additional states. In some states, we receive a credit against our premium taxes for guaranty fund assessments. The effect of these assessments or changes in them could reduce our profitability in any given period or limit our ability to grow our business. Government authorities are continuing to investigate the insurance industry, which may materially adversely affect our financial condition and results of operations. The attorneys general for multiple states and other insurance regulatory authorities have been investigating a number of issues and practices within the insurance industry relating to allegations of improper special payments, price-fixing, bid-rigging, improper accounting practices and other alleged misconduct, including payments made by insurers to brokers and the practices surrounding the placement of insurance business. These investigations of the insurance industry in general, whether involving our company specifically or not, together with any legal or regulatory proceedings, related settlements and industry reform or other changes arising therefrom, may materially adversely affect our business and future prospects. Any such investigation or threatened investigation may materially adversely affect our financial condition and results of operations. Proposed legislation could impact our operations. From time to time, there have been various attempts to regulate insurance at the federal level. Currently, the federal government does not directly regulate the business of insurance. However, federal legislation and administrative policies in several areas can significantly and adversely affect insurance companies. These areas include securities regulation, privacy and taxation. In addition, various forms of direct federal regulation of insurance have been proposed. These proposals include bills pending before Congress that would create a federal insurance regulatory agency, but would allow insurers to choose to be regulated either by such agency or under the applicable existing state regime. We cannot predict whether this or other proposals will be adopted, or what impact, if any, such proposals or, if enacted, such laws, could have on our business, financial condition or results of operations. Risk Related to this Offering The requirements of being a public company may strain our resources, including personnel, and cause us to incur additional expenses. As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934 (the , ' ': , ' ': Exchange Act ) and the Sarbanes-Oxley Act of 2002 (the , ' ': , ' ': Sarbanes-Oxley Act ). These requirements may strain resources, including personnel, and cause us to incur additional expenses. The Exchange Act requires that after the offering we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. In order to maintain and improve the effectiveness of these controls, significant resources and management oversight will be required. This may divert management s attention from other business concerns. Upon consummation of this offering, our costs will increase as a result of having to comply with the Exchange Act, the Sarbanes-Oxley Act and the New York Stock Exchange listing requirements, which may require us, among other things, to enhance our existing internal audit function. Changes associated with fully implementing effective disclosure controls and procedures and internal controls over financial reporting may take longer than we anticipate and may result in potentially significant extra cost. We expect these new rules and regulations to increase our legal and financial compliance costs and to make some activities more time consuming and costly. We also expect these new rules and regulations to make it more difficult Table of Contents and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These new rules and regulations could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly those serving on our audit committee. We will be exposed to risks, including potentially significant expenses and business process changes, relating to evaluations of our internal controls over financial reporting required by Section 404 of the Sarbanes-Oxley Act and failure to implement the requirements of Section 404 in a timely manner or the discovery of material weaknesses in our controls could expose us to material expenses. As a public company, we will be required to comply with Section 404 of the Sarbanes-Oxley Act by no later than December 31, 2007. We are in the process of evaluating our internal control systems to allow management to report on, and our independent auditors to assess, our internal controls over financial reporting. We have hired a consultant to assist us with our Section 404 compliance process. We cannot be certain, however, as to the timing of the completion of our evaluation, testing and remediation actions or the impact of the same on our operations, nor can we assure you that our compliance with Section 404 will not result in significant additional expenditures. Compliance with Section 404 will require the devotion of substantial time and attention from our management and may require us to secure additional personnel. For example, we anticipate that we will hire additional non-management compliance and reporting staff over the next year in order to ensure we can meet our reporting obligations. Furthermore, upon completion of this process, we may identify control deficiencies of varying degrees of severity that remain unremediated. As a public company, we will be required to disclose, among other things, control deficiencies that constitute a , ' ': , ' ': material weakness. A , ' ': , ' ': material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. If we fail to implement the requirements of Section 404 in a timely manner, we might be subject to sanctions or investigation by regulatory agencies such as the SEC. In addition, failure to comply with Section 404 or the disclosure by us of a material weakness may cause investors to lose confidence in our financial statements and the trading price of our common stock may decline. If we fail to remedy any material weakness, our financial statements may be inaccurate, our access to the capital markets may be restricted and the trading price of our common stock may decline. There has been no prior market for our common stock, and you may lose all or a part of your investment. There has not been any public market for our common stock prior to this offering. An active trading market for our common stock may not develop after this offering. If an active trading market develops, it may not continue and trading in and the price of our common stock may fluctuate widely as a result of a number of factors, many of which are beyond our control, including: failure of security analysts to cover our stock; variations in our quarterly operating results; changes in operating and stock performance of similar companies; changes in earnings estimates and market price targets by securities analysts; investor perception of the workers compensation insurance industry and of our company; results of operations that vary from those expected by securities and other market analysts and investors; future sales of our securities; sales or the perception of such sales of our stock received by our members as consideration in the conversion; litigation developments; regulatory actions; departures of key personnel; and Table of Contents general market conditions, including market volatility. A significant decline in our stock price could result in substantial losses for individual stockholders and could lead to costly and disruptive securities litigation. The initial public offering price of our common stock will be determined based upon a number of factors and may not be indicative of prices that will prevail following the completion of this offering. In addition, the stock market in recent years has experienced substantial price and trading volume fluctuations that sometimes have been unrelated or disproportionate to the operating performance of companies whose shares are publicly traded. As a result, the trading price of shares of our common stock may be below the initial public offering price, you may be unable to sell your shares of common stock at or above the price that you pay to purchase them, and you may lose some or all of your investment. Insurance laws of Nevada and other applicable states and certain provisions of our charter documents and Nevada corporation law could prevent or delay a change of control of us and could also adversely affect the market price of our common stock. Under Nevada insurance law and our amended and restated articles of incorporation that will become effective upon completion of the conversion, for a period of five years following the effective date of the plan of conversion or, if earlier, until such date as we no longer directly or indirectly own a majority of the outstanding voting stock of EICN, no person may directly or indirectly acquire or offer to acquire in any manner beneficial ownership of 5% or more of any class of our voting securities without the prior approval by the Nevada Commissioner of Insurance of an application for acquisition under Section 693A.500 of the Nevada Revised Statutes. Under Nevada insurance law, the Nevada Commissioner of Insurance may not approve an application for such acquisition unless the Commissioner finds that (1) the acquisition will not frustrate the plan of conversion as approved by our members and the Commissioner, (2) the board of directors of EICN has approved the acquisition or extraordinary circumstances not contemplated in the plan of conversion have arisen which would warrant approval of the acquisition, and (3) the acquisition is consistent with the purpose of relevant Nevada insurance statutes to permit conversions on terms and conditions that are fair and equitable to the members eligible to receive consideration. Accordingly, as a practical matter, any person seeking to acquire us within five years after the effective date of the plan of conversion may only do so with the approval of the board of directors of EICN. In addition, the insurance laws of Nevada and California generally require that any person seeking to acquire control of a domestic insurance company must obtain the prior approval of the insurance commissioner. Furthermore, insurance laws in many other states contain provisions that require pre-notification to the insurance commissioners of those states of a change in control of a non-domestic insurance company licensed in those states. While these pre-notification statutes do not authorize the state insurance departments to disapprove the change of control, they authorize regulatory action (including a possible revocation of our authority to do business) in the affected state if particular conditions exist, such as undue market concentration. Any future transactions that would constitute a change of control of us may require prior notification in the states that have pre-acquisition notification laws. Because we have an insurance subsidiary domiciled in Nevada and another insurance subsidiary domiciled in California and licensed in numerous other states, any future transaction that would constitute a change in control of us would generally require the party seeking to acquire control to obtain the prior approval of the Nevada Commissioner of Insurance and the California Insurance Commissioner and may require pre-acquisition notification in those states in which we are licensed to conduct business that have adopted pre-acquisition notification provisions. , ' ': , ' ': Control is generally presumed to exist through the direct or indirect ownership of 10% or more of the voting securities of a domestic insurance company or of any entity that controls a domestic insurance company. Obtaining these approvals may result in a material delay of, or deter, any such transaction. Therefore, any person seeking to acquire a controlling interest in us would face regulatory obstacles which may delay, deter or prevent an acquisition that stockholders might consider in their best interests. Provisions of our amended and restated articles of incorporation and amended and restated by-laws that will become effective on completion of the conversion could discourage, delay or prevent a merger, acquisition or other change in control of us, even if our stockholders might consider such a change in Table of Contents control to be in their best interests. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. In particular, our amended and restated articles of incorporation and amended and restated by-laws will include provisions: dividing our board of directors into three classes; eliminating the ability of our stockholders to call special meetings of stockholders; permitting our board of directors to issue preferred stock in one or more series; imposing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at the stockholder meetings; prohibiting stockholder action by written consent, thereby limiting stockholder action to that taken at a meeting of our stockholders; and providing our board of directors with exclusive authority to adopt or amend our by-laws. These provisions could limit the price that investors are willing to pay in the future for shares of our common stock. These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then current market price for our common stock. Table of Contents FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS This prospectus contains forward-looking statements, including statements regarding our expected financial position, business, financing plans, litigation, future premiums, revenues, earnings, pricing, investments, business relationships, expected losses, loss reserves, competition and rate increases. These forward-looking statements reflect our views with respect to future events and financial performance. The words , ' ': , ' ': believe, , ' ': , ' ': expect, , ' ': , ' ': plans, , ' ': , ' ': intend, , ' ': , ' ': project, , ' ': , ' ': estimate, , ' ': , ' ': may, , ' ': , ' ': should, , ' ': , ' ': will, , ' ': , ' ': continue, , ' ': , ' ': potential, , ' ': , ' ': forecast and , ' ': , ' ': anticipate and similar expressions identify forward-looking statements. Although we believe that these expectations reflected in such forward-looking statements are reasonable, we can give no assurance that the expectations will prove to be correct. Actual results may differ from those expected due to risks and uncertainties, including those discussed in
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+PROSPECTUS SUMMARY This summary highlights selected information contained in greater detail elsewhere in this prospectus and does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, especially the risks of investing in our common stock, which we discuss under "Risk Factors" and our consolidated financial statements and related notes. In this prospectus, the terms "Ensign," "we," "us" and "our" refer to The Ensign Group, Inc. and its separate, wholly-owned independent subsidiaries, unless otherwise stated. The Ensign Group, Inc. We are a provider of skilled nursing and rehabilitative care services through the operation of facilities located in California, Arizona, Texas, Washington, Utah and Idaho. As of September 30, 2007, we owned or leased 61 facilities. All of our facilities are skilled nursing facilities, except for four facilities that offer both skilled nursing and assisted living arrangements in a campus setting, and three stand-alone assisted living facilities. At our facilities, each of which strives to be the facility of choice in the community it serves, we provide a broad spectrum of skilled nursing and assisted living services, physical, occupational and speech therapies, and other rehabilitative and healthcare services, for both long-term residents and short-stay rehabilitation patients. Our facilities have a collective capacity of over 7,400 skilled nursing, assisted living and independent living beds. As of September 30, 2007, we owned 23 of our facilities and operated an additional 38 facilities under long-term lease arrangements with options to purchase 12 of those 38 facilities. We also have entered into agreements to purchase four of the 38 facilities that we operate under long-term lease arrangements, which are pending subject to certain closing conditions. For the year ended December 31, 2006 and the six months ended June 30, 2007, our skilled nursing services, including our integrated rehabilitative therapy services, generated approximately 97% of our revenue. We have increased our revenue from $102.1 million in 2002 to $358.6 million in 2006. Over the same period, we have increased our net income from $3.6 million in 2002 to $22.5 million in 2006. We believe that much of our historical growth can be attributed to our expertise in acquiring underperforming facilities and transforming them into what we believe are market leaders in clinical quality, staff competency, employee loyalty and financial performance. We were formed with the goal of establishing a new standard of quality care within the skilled nursing industry. Our organizational structure is centered around local leadership, with key operational decisions made at the facility level. Facility leaders and staff are trained and incentivized to pursue superior clinical outcomes, operating efficiencies and financial performance at their individual facility. In addition, our facility leaders are incentivized and enabled to share real-time operating data and to assist other facility leaders on ways to improve clinical care, maximize patient satisfaction and augment operational efficiencies, resulting in a high level of interdependence and sharing of best practices. Competitive Strengths We believe our success in acquiring, integrating and improving our facilities is a direct result of the following key competitive strengths: experienced and dedicated employees; reputation for quality care; unique incentive programs; staff and leadership development; innovative "Service Center" approach, which provides centralized services for our facilities; community-focused approach; attractive asset base; and investment in information technology. Growth Strategy Much of our historical growth can be attributed to our expertise in acquiring underperforming facilities and transforming them into successful stand-alone facilities with strengths in clinical quality, staff competency, employee loyalty and financial performance. We believe our competitive strengths position us well for future revenue and earnings growth. Key elements of our growth strategy include the following: continue to grow our talent base and develop future leaders; increase our mix of high acuity patients; focus on organic growth and internal operating efficiencies; continue to acquire additional facilities, in existing and new markets; and expand and renovate our existing facilities, and potentially begin constructing new facilities. Our Industry The senior living and long-term care industries consist of three primary living arrangement alternatives, with varying degrees of healthcare offerings depending upon the type of living arrangement and the health status of the patient or resident. The three primary living arrangement alternatives include independent living facilities, assisted living facilities and skilled nursing facilities. These alternatives are sometimes combined on a single campus, creating continuing care retirement communities. We predominantly focus on skilled nursing facilities, which provide both short-term, post-acute rehabilitative care for patients and long-term custodial care for residents who require skilled nursing and therapy care on an inpatient basis. We estimate the skilled nursing market in the United States represented approximately $100 billion in revenue in 2006. Some of the major trends that have impacted the long-term care industry include the following: shift of patient care to lower cost alternatives by federal and state governments as a result of increasing healthcare costs; fragmentation in the senior living industry, and in particular in the skilled nursing market, providing significant acquisition and consolidation opportunities; and increased demand for skilled nursing services resulting from increasing life expectancies and the aging population, as well as the modest decrease in the number of skilled nursing facilities in the United States over the past five years. Acquisitions in 2006 and 2007 Since January 1, 2006, we have added an aggregate of 15 facilities located in Texas, Washington, Utah, Idaho, Arizona and California that we had not operated previously, 11 of which we purchased and four of which we acquired under long-term lease arrangements. Three of the long-term lease arrangements include purchase options. Thirteen of these acquisitions were skilled nursing facilities, one was an assisted living facility and one was a campus that offers both skilled nursing and assisted living services. These facilities contributed 1,668 beds to our operations, increasing our total capacity by 29%. With these acquisitions, we entered two new markets, Utah and Idaho. In Texas, we increased our UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 capacity by 684 beds, or approximately 146%, and more than doubled the number of our facilities in that state. In 2006, we purchased eight facilities for an aggregate purchase price of $31.1 million, of which $29.0 million was paid in cash, and $2.1 million was financed with the assumption of a loan on one of the facilities. In 2006, we also purchased the underlying assets of three facilities that we were operating under long-term lease arrangements for an aggregate purchase price of $11.1 million, which ultimately was financed under our loan agreement with General Electric Capital Corporation. In the first six months of 2007, we acquired three additional long-term care facilities for an aggregate purchase price of $9.4 million in cash, which included two skilled nursing facilities in Texas and one skilled nursing facility in Utah. In July 2007, we exercised an option to purchase one of our leased skilled nursing facilities for $3.3 million in cash. In addition, in July 2007, we entered into an operating lease agreement for a long-term care facility in Utah that is licensed for both skilled nursing and assisted living services. We did not make any material payments to the prior facility operator and we did not acquire any assets or assume any liabilities, other than our rights and obligations under a new operating lease and operations transfer agreement, as part of this transaction. We also simultaneously entered into a separate contract with the property owner to purchase the underlying property for $3.0 million, pending the property owner's resolution of certain boundary line issues with neighboring property owners. We expect that we will purchase the property under the contract if and when these title issues are resolved. Regardless of whether the title issues are resolved, we have the option to purchase the property for $3.0 million under the operating lease. In August 2007, we entered into an agreement that we expect will close on or before December 14, 2007, to purchase two skilled nursing facilities in California and one assisted living facility in Arizona, which also provides independent living services, for an aggregate purchase price of approximately $13.0 million. We currently operate these three facilities under master lease agreements. The lease agreements for the two skilled nursing facilities contain purchase options which are not currently exercisable. Upon the expected closing of these purchase agreements, we will own 27 of our facilities and operate 34 of our facilities under long-term lease arrangements with options to purchase nine of those 34 facilities. Risks Relating to our Company Investing in our common stock involves risks. As part of your evaluation of our company, you should consider the risks associated with our industry, our business, and this offering. See "Risk Factors" beginning on page 11 of this prospectus for a discussion of these risks, including, among others: the impact of federal and state changes to reimbursement and other aspects of Medicaid and Medicare, from which we derive a significant portion of our revenue; continuing cost containment pressures on Medicare and Medicaid spending; the costs of complying with extensive and complex federal and state government laws and regulations; potential preclusion from participating in federal or state healthcare programs, including Medicare and Medicaid; changes in the acuity mix of patients in our facilities as well as payor mix and payment methodologies; increased competition for, or a shortage of, nurses and other skilled personnel; litigation that could result in significant legal costs and large settlement amounts or damage awards; Non-cash investing and financing activities: Accretion on Series A preferred stock $ AMENDMENT NO. 5 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 difficulties in completing future facility acquisitions and efficiently integrating our acquisitions; our dependence upon receiving funds from multiple independent operating subsidiaries; and the high ownership concentration of our common stock among affiliates of ours, which may prevent other stockholders from influencing significant corporate decisions. Corporate Information The Ensign Group, Inc. is a holding company. All of our facilities are operated by separate, wholly-owned, independent subsidiaries that have their own management, employees and assets. The use of "we," "us" and "our" throughout this prospectus is not meant to imply that our facilities are operated by the same entity. In addition, one of our wholly-owned subsidiaries, which we call our Service Center, provides centralized accounting, payroll, human resources, information technology, legal, risk management and other centralized services to each operating subsidiary through contractual relationships between the Service Center and such subsidiaries. We were incorporated in 1999 in Delaware. Our corporate address is 27101 Puerta Real, Suite 450, Mission Viejo, CA 92691, and our telephone number is (949) 487-9500. Our corporate website is located at www.ensigngroup.net. The information contained in, or that can be accessed through, our website does not constitute a part of this prospectus. Ensign is our United States trademark. All other trademarks and trade names appearing in this prospectus are the property of their respective owners. Except as otherwise indicated, the market data and industry statistics in this prospectus are based upon independent industry publications and other publicly available information. While we believe these publications to be reliable and appropriate, we have not independently verified such data and statistics, and we do not make any representation as to the accuracy of such information. THE ENSIGN GROUP, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware (State or Other Jurisdiction of Incorporation or Organization) 8051 (Primary Standard Industrial Classification Code Number) 33-0861263 (I.R.S. Employer Identification No.) 27101 Puerta Real, Suite 450 Mission Viejo, CA 92691 (949) 487-9500 (Address, Including Zip Code and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) Gregory K. Stapley, Esq. Vice President and General Counsel The Ensign Group, Inc. 27101 Puerta Real, Suite 450 Mission Viejo, CA 92691 (949) 487-9500 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) The Offering Common stock offered by Ensign 4,000,000 shares Common stock to be outstanding after this offering 20,446,380 shares Common stock offered by the selling stockholders pursuant to the over-allotment option 600,000 shares Use of proceeds We expect to use the net proceeds from the sale of the shares of common stock we are offering to acquire additional facilities, to upgrade existing facilities, pay down debt and for working capital and other general corporate purposes. See "Use of Proceeds." We will not receive any proceeds from the sale of shares of common stock offered by the selling stockholders pursuant to the exercise by the underwriters of their over-allotment option. Dividend policy We have paid annual cash dividends since 2002 and quarterly cash dividends for each quarter since the first quarter of 2004. For each of the first and second quarters of 2007, we have paid cash dividends to our stockholders of $0.04 per share, for an aggregate dividend of approximately $1,316,000. We also declared cash dividends of $0.04 per share as of September 30, 2007, for an aggregate dividend of $658,000, which is payable on or before October 31, 2007. For 2006, we paid cash dividends to our stockholders of $0.03 per share for each of the first three quarters, and $0.04 per share for the fourth quarter, for an aggregate dividend of approximately $2,132,000. For 2005, we paid cash dividends to our stockholders of $0.02 per share for each of the first three quarters, and $0.03 per share for the fourth quarter, for an aggregate dividend of approximately $1,502,000. For 2004, we paid cash dividends to our stockholders of $0.01 per share for each of the first two quarters, and $0.015 per share for each of the third and fourth quarters, for an aggregate dividend of approximately $835,000. For 2002 and 2003, we paid annual cash dividends to our stockholders of an aggregate of approximately $240,000 and $408,000, respectively. We do not have a formal dividend policy, but we currently intend to continue to pay regular quarterly dividends to the holders of our common stock. However, the future payment of dividends is subject to the discretion of our board of directors and will depend on many factors, including our results of operations, financial condition and capital requirements, earnings, general business conditions, restrictions imposed by financing arrangements, legal restrictions on the payment of dividends and other factors the board of directors deems relevant. The loan and security agreement governing our revolving line of credit with General Electric Capital Corporation restricts our ability to pay dividends to stockholders if we receive notice that we are in default under this agreement. Copies to: Nolan S. Taylor, Esq. Ellen S. Bancroft, Esq. Parker A. Schweich, Esq. David F. Marx, Esq. Dorsey & Whitney LLP 38 Technology Drive Irvine, CA 92618 (949) 932-3600 Kirt W. Shuldberg, Esq. Shana C. Hood, Esq. Heller Ehrman LLP 4350 La Jolla Village Drive, 7th Floor San Diego, CA 92122-1246 (858) 450-8400 Recent Financial Information We are currently in the process of finalizing our unaudited consolidated financial statements for the three months ended September 30, 2007, and therefore, our final results are not yet available. Management's estimates of certain selected consolidated financial data, set forth below, are subject to finalization and completion of our quarterly review procedures and completion of the financial reporting process, which could result in adjustments. Our unaudited consolidated financial statements for the three months ended September 30, 2007, have not yet been reviewed by our independent registered public accounting firm. We expect revenues for the three months ended September 30, 2007 to be between $102.0 million and $105.0 million, compared to revenues of $92.3 million for the three months ended September 30, 2006. This increase was primarily attributable to revenue generated by facilities acquired during 2006 and 2007. This growth was hindered in part by generally lower occupancy rates, and lower skilled mix and quality mix at such facilities, as well as operational challenges at two of our existing facilities. Historically, we have generally experienced lower occupancy rates, and lower skilled mix and quality mix in recently-acquired facilities, and we expect this trend to continue. We expect income before income tax to be between $6.7 million and $7.3 million for the three months ended September 30, 2007, compared to income before income tax of $9.9 million for the three months ended September 30, 2006. The decline in income before income tax in the three months ended September 30, 2007 was due in part to factors described above, as well as the result of higher provision for insurance related to an increase in actuarially determined estimates, increasing professional fees and wages as we prepare to become a public company, increased depreciation expense related to the recently-acquired facilities, and higher stock-based compensation expense. Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. (See footnotes on following pages) (unaudited) Term Loan with the Lender, multiple-advance term loan, principal and interest payable monthly; interest is fixed at time of draw at 10-year Treasury Note rate plus 2.25% (rates in effect at December 31, 2006 range from 6.95% to 7.50%), balance due June 2016, collateralized by deeds of trust on real property, assignments of rents, security agreements and fixture financing statements. $ $ 55,653 $ 55,251 Term loan with financial institution, principal and interest payable monthly at 30-day LIBOR plus 4.5% (8.89% at December 31, 2005), balance due March 2007, collateralized by a deed of trust on real property and assignment of rents. 16,968 Mortgage note, principal, and interest of $54,378 payable monthly and continuing through February 2027, interest at fixed rate of 7.5%, collateralized by deed of trust on real property, assignment of rents, and security agreement 6,913 6,774 6,689 Mortgage note, principal, and interest of $18,449 payable monthly and continuing through September 2008, interest at fixed rate of 7.49%, collateralized by a deed of trust and security agreement and an assignment of rents 2,094 2,062 Mortgage note, principal, and interest of $22,049 payable monthly and continuing through February 2010, interest at fixed rate of 10%, collateralized by a deed of trust on real properties 1,871 Promissory note due to seller, principal, and interest of $3,125 payable monthly, interest at fixed rate of 7%, balance due March 2010, collateralized by deed of trust on real property 291 Notes payable, principal and interest payable monthly at fixed rate of 11.475%, balance due January 2008, collateralized by equipment 11 Notes payable, principal and interest payable monthly at fixed rate of 6.9%, balance due November 2008, collateralized by equipment If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. (footnotes to prior page) (1)See Note 2 of the Notes to the Consolidated Financial Statements. (2)Gives effect to the conversion of all of our outstanding preferred stock into 2,741,180 shares of our common stock upon the closing of this offering and the receipt of the estimated proceeds from the sale of the 4,000,000 shares offered by this prospectus at the assumed initial offering price of $19.00 per share (the midpoint of the price range set forth on the cover of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, as described in "Underwriting." (3)EBITDA and EBITDAR are supplemental non-GAAP financial measures. GAAP means generally accepted accounting principles in the United States. Regulation G, "Conditions for Use of Non-GAAP Financial Measures" and other provisions of the Securities Exchange Act of 1934, as amended, define and prescribe the conditions for use of certain non-GAAP financial information. We calculate EBITDA as net income before (a) interest expense, net, (b) provision for income taxes, and (c) depreciation and amortization. We calculate EBITDAR by adjusting EBITDA to exclude facility rent cost of services. These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP. These non-GAAP financial measures should not be relied upon to the exclusion of GAAP financial measures. These non-GAAP financial measures reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business. We believe EBITDA and EBITDAR are useful to investors and other external users of our financial statements in evaluating our operating performance because: they are widely used by investors and analysts in our industry as a supplemental measure to evaluate the overall operating performance of companies in our industry without regard to items such as interest expense, net and depreciation and amortization, which can vary substantially from company to company depending on the book value of assets, capital structure and the method by which assets were acquired; and (See footnotes continued on the following page) CALCULATION OF REGISTRATION FEE (footnotes to prior pages) they help investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure and asset base from our operating results. We use EBITDA and EBITDAR: as measurements of our operating performance to assist us in comparing our operating performance on a consistent basis; to design incentive compensation and goal setting; to allocate resources to enhance the financial performance of our business; to evaluate the effectiveness of our operational strategies; and to compare our operating performance to that of our competitors. We typically use EBITDA and EBITDAR to compare the operating performance of each skilled nursing and assisted living facility. EBITDA and EBITDAR are useful in this regard because they do not include such costs as net interest expense, income taxes, depreciation and amortization expense, and, with respect to EBITDAR, facility rent cost of services, which may vary from period to period depending upon various factors, including the method used to finance facilities, the amount of debt that we have incurred, whether a facility is owned or leased, the date of acquisition of a facility or business, or the tax law of the state in which a business unit operates. As a result, we believe that the use of EBITDA and EBITDAR provides a meaningful and consistent comparison of our business performance between periods and between facilities by eliminating certain items required by GAAP. We also establish compensation programs and bonuses for our facility level employees that are partially based upon the achievement of EBITDAR targets. Despite the importance of these measures in analyzing our underlying business, designing incentive compensation and for our goal setting, EBITDA and EBITDAR are non-GAAP financial measures that have no standardized meaning defined by GAAP. Therefore, our EBITDA and EBITDAR measures have limitations as analytical tools, and they should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are: they do not reflect our current or future cash requirements for capital expenditures or contractual commitments; they do not reflect changes in, or cash requirements for, our working capital needs; they do not reflect the net interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; they do not reflect any income tax payments we may be required to make; although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and EBITDAR do not reflect any cash requirements for such replacements; and other companies in our industry may calculate these measures differently than we do, which may limit their usefulness as comparative measures. (See footnotes continued on the following page) 2003 50,000 $0.67-0.81 $ 38,095 6 26,800 $0.67-0.81 2004 90,800 $1.96-2.46 209,074 7 38,000 $1.96-2.46 2005 350,000 $4.99-5.75 1,987,508 8 73,800 $4.99-5.75 2006 638,700 $7.05-7.50 6,063,353 Title of Each Class of Securities to be Registered Number of Shares Registered(1) Proposed Maximum Offering Price per Share(2) Proposed Maximum Aggregate Offering Price Amount of Registration Fee(3) Common Stock, $0.001 par value 4,600,000 $20.00 $92,000,000 $2,824
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+This summary highlights information contained elsewhere in this prospectus and does not contain all the information you should consider before investing in our Class A common stock. You should read this entire prospectus carefully, including the section entitled Risk Factors and the historical financial statements and related notes, before you decide to invest in our Class A common stock. Evercore Partners Overview Evercore is the leading investment banking boutique in the world based on the dollar volume of announced worldwide merger and acquisition ( M&A ) transactions on which we have advised since 2002. When we use the term investment banking boutique , we mean an investment banking firm that directly or through its affiliates does not underwrite public offerings of securities or engage in commercial banking activities. We provide advisory services to prominent multinational corporations on significant mergers, acquisitions, divestitures, restructurings and other strategic corporate transactions. Evercore also includes a successful investment management business through which we manage private equity funds and public securities for sophisticated institutional investors. We serve a diverse set of clients around the world from our offices in New York, Los Angeles, San Francisco, London, Mexico City and Monterrey. Our senior leadership is comprised of Roger Altman, the former U.S. Deputy Treasury Secretary and Vice Chairman of The Blackstone Group; Austin Beutner, a former General Partner of The Blackstone Group; Eduardo Mestre, the former head of Citigroup s Global Investment Bank; Pedro Aspe, the former Minister of Finance of Mexico; and Bernard Taylor, the former Vice Chairman of JPMorgan Investment Banking (Europe) and Chief Executive of Robert Fleming & Co. Limited. We were founded on the belief that there was an opportunity within the investment banking industry for a firm free of the potential conflicts of interest created within large, multi-product financial institutions. We also believed that an independent advisory business, with its broad set of relationships, would provide a differentiated investment platform from which to make private equity investments. We employ the Evercore relationship network throughout the investment process in our private equity business to originate investment opportunities, evaluate those opportunities and add value after an investment is made. From the time of our founding in 1996, we have grown by expanding the range of our advisory and investment management services. In our advisory business, at December 31, 2006 we had 21 Senior Managing Directors with expertise and client relationships in a number of industry sectors, including telecommunications, technology, media, energy and power, general industrial, consumer products and financial institutions: 13 in the United States, 6 in Mexico and 2 in Europe. Our advisory business has a particular focus on advising multinational corporations on large, complex transactions. In addition, we have professionals with extensive restructuring experience. In our investment management business, at December 31, 2006 we had 9 Senior Managing Directors with expertise and relationships in a variety of industries: 7 in the United States, 1 in Mexico and 1 in Europe. A majority of our investment management team s Senior Managing Directors have worked together since 1999. As of December 31, 2006 the four private equity funds we manage had capital commitments of over $1.3 billion. In addition to our private equity funds, we also manage public equities in the United States through our joint venture, Evercore Asset Management L.L.C. ( EAM ), and fixed income securities in Mexico through our subsidiary, Protego Casa de Bolsa ( PCB ). We have grown from three Senior Managing Directors at our inception to 33 at December 31, 2006. We expect to continue our growth by hiring additional highly qualified professionals with a broad range of product UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents and industry expertise, expanding into new geographic areas, raising additional private equity funds and diversifying our investment management products and services. We opened our New York office in 1996, our Los Angeles office in 2000 and our San Francisco office in 2005. On August 10, 2006 we combined with Protego Asesores S. de R.L. ( Protego ) in Mexico, with offices in Mexico City and Monterrey, and on December 19, 2006 we acquired Braveheart Financial Services Limited ( Braveheart ), with an office in London. We believe maintaining standards of excellence in our core businesses demands a spirit of cooperation and hands-on participation more commonly found in smaller organizations. Since our inception, we have set out to build in the employees we choose and in the projects we undertake an organization dedicated to the highest caliber of professionalism. Advisory Our advisory business provides confidential, strategic and tactical advice to both public and private companies, with a particular focus on large, multinational corporations. By virtue of their prominence, size and sophistication, many of our clients are more likely to require expertise relating to larger and more complex situations. We have advised on numerous noteworthy transactions, including: First Data on its pending leveraged buyout by Kohlberg Kravis & Roberts & Co. Novelis on its pending sale to Hindalco Smiths on its sale of its Aerospace division to General Electric Realogy on its leveraged buyout by Apollo Management CVS on its acquisition of Caremark Credit Suisse on its sale of Winterthur General Motors on its sale of a 51% interest in GMAC to an investor group AT&T on its acquisition of BellSouth CVS on its acquisitions of Osco Drug and Sav-on Drug as part of the asset sale of Albertsons VNU on its sale to a private equity consortium Tyco on its pending split-up Cendant on its split-up E*TRADE on its acquisitions of Harrisdirect and Brown & Co. Swiss Re on its acquisition of General Electric s reinsurance business SBC on its acquisition of AT&T and on Cingular s acquisition of AT&T Wireless IntercontinentalExchange on its acquisition of the New York Board of Trade Aquila on its pending sale to Great Plains Energy Our approach is to work as a trusted senior advisor to top corporate officers and boards of directors, helping them devise strategies for enhancing shareholder value. We believe this relationship-based approach to our advisory business gives us a competitive advantage in serving a distinct need in the market today. Furthermore, we believe our advisory business is differentiated from that of our competitors in the following respects: Objective Advice with a Long-Term Perspective. We seek to recommend shareholder value enhancement strategies or other financial strategies that we would pursue ourselves were we acting in management s capacity. This approach often includes advising our clients against pursuing transactions that we believe do not meet that standard. Transaction Excellence. Since the beginning of 2004, we have advised on more than $375 billion of announced transactions, including acquisitions, sale processes, mergers of equals, special committee advisory assignments, recapitalizations and restructurings. We have provided significant advisory AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents services on multiple transactions for AT&T (including its predecessor company, SBC), CVS, Dow Jones, EDS, E*TRADE, General Mills and Swiss Re, among others. Senior Level Attention and Experience. The Senior Managing Directors in our advisory business participate in all facets of client interaction, from the initial evaluation phase to the final stage of executing our recommendations. Our advisory Senior Managing Directors have on average more than 21 years of relevant experience. Independence and Confidentiality. We do not underwrite securities, publish securities research, or act as a lender. This enables us to avoid the potential conflicts that may arise from these activities at larger, more diversified competitors. In addition, we believe our commitment to discretion and the smaller size of our firm enhance our ability to provide our clients with strict confidentiality. Our advisory business generates revenue from fees for providing advice and investment banking services on mergers, acquisitions, restructurings and other strategic transactions. In 2006 our advisory business generated $183.8 million, or 87.6%, of our net revenue and earned advisory fees from 63 clients. Investment Management Our investment management business manages four private equity funds with aggregate capital commitments of over $1.3 billion as of December 31, 2006, as well as public securities in the U.S. and Mexico. Mr. Beutner is the Chief Investment Officer of Evercore and a majority of the investment team s Senior Managing Directors have worked together since 1999. Our team brings a diverse set of skills and experiences to the investment process and includes experienced investors, former senior executives from Fortune 100 companies, buy-side research analysts and strategic consultants. Our investment management business principally manages and invests capital on behalf of third parties. A broad range of institutional and high net worth investors, including corporate and public pension funds, endowments, foundations, insurance companies and family offices, have committed capital to the funds we manage. The investments made by our private equity funds are typically control or significant influence investments while the investments made by our Evercore Ventures fund are typically minority investments. Evercore Capital Partners L.P. and its affiliated entities (collectively, ECP I ), Evercore Capital Partners II L.P. and its affiliated entities (collectively, ECP II ) are value-oriented, middle-market private equity funds. We believe Evercore differentiates itself from other managers of middle-market private equity funds by the breadth, depth, quality and stability of its investment team, its ability to leverage the broader Evercore relationship network throughout the investment process, and its ability to bring world class operating expertise to its portfolio companies. We seek to generate attractive risk-adjusted returns in all of our funds by adhering to the following investment approach: Employing the Evercore Relationship Network. We employ the Evercore relationship network throughout the investment process to originate investments, evaluate potential opportunities thoroughly, and add value after an investment is made. We enhance the breadth and depth of our advisory relationship network with our investment management business advisory board, in-house operating executives and the collective experience of our investment team. Value Discipline: Focus on Risk Adjusted Returns. We focus on the fundamentals of the underlying business rather than relying on capital markets arbitrage, future acquisitions or valuation multiple expansion to achieve returns. World Class Operating Expertise and Post-Investment Value Creation. We devote considerable time and resources to working closely with the funds portfolio companies to determine business strategy, allocate capital and other resources, evaluate expansion and acquisition opportunities and participate in Table of Contents implementing these plans. Our investment management team benefits from Fortune 100 CEO-level operating experience and is able to apply world class operating expertise to our middle market portfolio companies. As of December 31, 2006, ECP I and ECP II have invested over $990 million in 21 companies. The funds typically hold investments for three to seven years and systematically evaluate exit opportunities throughout the holding period. Evercore Venture Partners L.P. and its affiliated entities (collectively, EVP ) has invested $37.4 million in emerging technology companies in specific growth sectors including data storage, wireline and wireless communications, enterprise software and technology enabled services. Our investment management business primarily generates revenue from (1) fees earned for our management of the funds, (2) portfolio company fees, (3) incentive fees, referred to as carried interest, earned when specified financial returns are achieved over the life of a fund and (4) gains (or losses) on investments of our own capital in the funds. See Management s Discussion and Analysis of Financial Condition and Results of Operations Key Financial Measures Revenue Investment Management . Our investment management business generated $23.3 million, or 11.1%, of our net revenue in 2006, which was comprised of $16.7 million of management and portfolio company fees and $6.5 million of carried interest and investment losses. The Evercore entities entitled to the management and portfolio company fees from the private equity funds we manage were contributed to us as part of our reorganization prior to the IPO. Accordingly, we continue to receive these fees from all of the funds we manage following the IPO. However, with the exception of a non-managing minority equity interest in the general partner of ECP II, the general partners of the private equity funds we currently manage and certain other entities through which Messrs. Altman and Beutner have invested capital in ECP I were not contributed to us and continue to be owned by our Senior Managing Directors and other third parties. Accordingly, we no longer receive any carried interest from ECP I or EVP or any gains or losses arising from investments in those funds. However, through our equity interest in the general partner of ECP II, we receive 8% to 9% (depending on the particular fund investment) of any carried interest realized from that fund, as well as gains (or losses) on investment based on the amount of capital in that fund which is contributed to, or is subsequently funded by, us. We also will receive a portion of the carried interest realized from any future private equity funds we manage and gains (or losses) on investment based on the amount of capital we contribute in respect of any such future fund. Our investment management business also manages public securities in the U.S. and Mexico. In October 2005, we formed Evercore Asset Management L.L.C. ( EAM ). EAM s approach to investing is classic value and the firm seeks to make value investments in small- and mid-capitalization publicly-traded companies. EAM s business development focuses on the institutional pension, endowment and foundation market. As of December 31, 2006 EAM had $157.0 million in assets under management. We do not consolidate the results of EAM, but rather recognize our pro rata share of income or losses based on our 41.7% ownership interest in the joint venture. In 2005, Protego formed PCB, an asset management business focused on investment management in peso-denominated money market and fixed income securities for institutional and high net worth investors in Mexico. As of December 31, 2006, PCB had $263.2 million in assets under management. We own a 70.0% interest in PCB. Our Growth Strategy We believe this offering will allow us to continue to grow and diversify our advisory and investment management businesses and further enhance our profile and position. We seek to achieve these objectives through three primary strategies: Add Highly Qualified Advisory Professionals with Industry and Product Expertise. We intend to continue to recruit high-caliber professionals into our advisory practice to add depth in industry sectors 55 East 52nd Street 43rd Floor New York, NY 10055 Telephone: (212) 857-3100 (Address, including zip code, and telephone number, including area code, of Registrant s principal executive offices) Evercore Partners Inc. was incorporated in Delaware on July 21, 2005. Our principal executive offices are located at 55 East 52nd Street, 43rd Floor, New York, New York 10055, and our telephone number is (212) 857-3100. Adam B. Frankel, Esq. General Counsel Evercore Partners Inc. 55 East 52nd Street 43rd Floor New York, NY 10055 Telephone: (212) 857-3100 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents Organizational Structure The diagram below depicts our organizational structure immediately following this offering and gives effect to the vesting of Evercore LP partnership units that will occur as a result of the completion of this offering as described below. Holding Company Structure Evercore Partners Inc. is a holding company, and its sole material asset is a controlling equity interest in Evercore LP. As the sole general partner of Evercore LP, Evercore Partners Inc. operates and controls all of the business and affairs of Evercore LP and, through Evercore LP and its operating subsidiaries, conducts our business. See Management s Discussion and Analysis of Financial Condition and Results of Operations Reorganization for a more detailed discussion of the Reorganization we effected in August 2006 to establish our current organizational structure. Evercore Partners Inc. consolidates the financial results of Evercore LP and its subsidiaries, and the ownership interest of our Senior Managing Directors in Evercore LP is reflected as a minority interest in Evercore Partners Inc. s consolidated financial statements. Copies to: Vincent Pagano, Jr., Esq. Joshua Ford Bonnie, Esq. Simpson Thacher & Bartlett LLP 425 Lexington Avenue New York, NY 10017-3954 Telephone: (212) 455-2000 Facsimile: (212) 455-2502 Mark G. Borden, Esq. Stuart R. Nayman, Esq. Wilmer Cutler Pickering Hale and Dorr LLP 399 Park Avenue New York, NY 10022 Telephone: (212) 230-8800 Facsimile: (212) 230-8888 Table of Contents Pursuant to the partnership agreement of Evercore LP, Evercore Partners Inc. has the right to determine when distributions will be made to the partners of Evercore LP and the amount of any such distributions. If Evercore Partners Inc. authorizes a distribution, such distribution will be made to the partners of Evercore LP (1) in the case of a tax distribution (as described below), to the holders of vested partnership units in proportion to the amount of taxable income of Evercore LP allocated to such holder and (2) in the case of other distributions, pro rata in accordance with the percentages of their respective vested partnership interests. Evercore Partners Inc. may, however, authorize a distribution to the partners of Evercore LP who hold vested and unvested units in accordance with the percentages of their respective vested and unvested partnership interests in the event of an extraordinary dividend, refinancing, restructuring or similar transaction. The holders of partnership units in Evercore LP, including Evercore Partners Inc., will incur U.S. federal, state and local income taxes on their proportionate share of any net taxable income of Evercore LP. Net profits and net losses of Evercore LP will generally be allocated to its partners (including Evercore Partners Inc.) pro rata in accordance with the percentages of their respective partnership interests. The partnership agreement provides for cash distributions to the holders of vested partnership units of Evercore LP if Evercore Partners Inc. determines that the taxable income of Evercore LP will give rise to taxable income for its partners. In accordance with the partnership agreement, we intend to cause Evercore LP to make cash distributions to the holders of vested partnership units of Evercore LP for purposes of funding their tax obligations in respect of the income of Evercore LP that is allocated to them. Generally, these tax distributions will be computed based on our estimate of the net taxable income of Evercore LP allocable to such holder of vested partnership units multiplied by an assumed tax rate equal to the highest effective marginal combined U.S. federal, state and local income tax rate prescribed for an individual or corporate resident in New York, New York (taking into account the nondeductibility of certain expenses and the character of our income). Evercore LP also intends to make distributions to Evercore Partners Inc. in order to fund any dividends Evercore Partners Inc. may declare on the Class A common stock. If Evercore Partners Inc. declares such dividends, our Senior Managing Directors will be entitled to receive equivalent distributions pro rata based on their partnership interests in Evercore LP, although these individuals will not be entitled to receive any such dividend-related distributions in respect of unvested partnership units. Vesting of Evercore LP Partnership Units and Restricted Stock Units as a Result of the Completion of this Offering In the Reorganization, our Senior Managing Directors received 13,430,500 vested and 9,706,329 unvested partnership units in Evercore LP. Under the terms of the Evercore LP partnership agreement (1) 4,853,164, or 50%, of these unvested partnership units will vest if and when Messrs. Altman, Beutner and Aspe, and trusts benefiting their families and permitted transferees, collectively, cease to beneficially own at least 90% of the aggregate Evercore LP partnership units owned by them on the date the Reorganization was effected and (2) 9,706,329, or 100%, of these unvested partnership units will vest upon the earliest to occur of the following events: when Messrs. Altman, Beutner and Aspe, and trusts benefiting their families and permitted transferees, collectively, cease to beneficially own at least 50% of the aggregate Evercore LP partnership units owned by them at the time of the Reorganization; a change of control of Evercore; or two of Messrs. Altman, Beutner and Aspe are not employed by, or do not serve as a director of, Evercore Partners Inc. or one of its affiliates within a 10-year period following the IPO. In addition, 100% of the unvested Evercore LP partnership units held by a Senior Managing Director will vest if such Senior Managing Director dies or becomes disabled while in our employ. Our Equity Committee, which is comprised of Messrs. Altman, Beutner and Aspe, may also accelerate vesting of unvested partnership units at any time. Approximate date of commencement of the proposed sale of the securities to the public: As soon as practicable after the Registration Statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Table of Contents In addition, we granted 2,286,055 RSUs to our employees at the time of the IPO. 207,116 of the RSUs are fully vested and, as a result, we recorded compensation expense at the time of the IPO equal to the value of these fully vested RSUs. The remaining 2,078,939 of these RSUs are unvested and will vest upon the same conditions as the unvested partnership units of Evercore LP issued in connection with the Reorganization (although on a different vesting schedule). Generally, 10% of the units were fully vested at the time of grant and, upon each subsequent vesting, an additional 45% of the units will vest. We account for the unvested Evercore LP partnership units and unvested RSUs as compensation paid to employees in accordance with Statement of Financial Accounting Standard ( SFAS ) No. 123R, Share Based Payments ( SFAS 123R ), which we adopted effective January 1, 2006. The unvested Evercore LP partnership units and unvested RSUs vest based on the achievement of one of the performance and service vesting conditions as described above. In accordance with SFAS 123R, accruals of compensation costs for awards with a performance or service condition are based on the probable outcome of that service or performance condition. Compensation cost is accrued if it is probable that the performance condition will be achieved and is not accrued if it is not probable that the performance condition will be achieved. We have heretofore concluded that it is not probable that the conditions relating to a decline in the collective beneficial ownership of Messrs. Altman, Beutner and Aspe (and trusts benefiting their families and permitted transferees), a change of control of Evercore or a lack of continued association of Messrs. Altman, Beutner and Aspe with Evercore will be achieved, or that the death or disability condition during the employment period will be satisfied. Accordingly, we have not been accruing compensation expense relating to these unvested partnership units and unvested RSUs. However, the completion of this offering will probably result in Messrs. Altman, Beutner and Aspe, and trusts benefiting their families and permitted transferees, collectively, ceasing to beneficially own at least 90% of the aggregate Evercore LP partnership units owned by them on the date of the Reorganization, which will in turn result in the vesting of 4,853,164, or 50%, of the unvested partnership units and 1,039,505, or 50%, of the unvested RSUs issued in conjunction with the IPO. In the event that we successfully complete this offering but Messrs. Altman, Beutner and Aspe, and trusts benefiting their families and permitted transferees, collectively, continue to beneficially own at least 90% of the aggregate Evercore LP partnership units owned by them on the date of the Reorganization, our Equity Committee nonetheless intends to accelerate the vesting of these unvested partnership units and RSUs. The vesting of these partnership units and RSUs will be charged to expense at the completion of this offering based on the grant date fair value of the Evercore LP partnership units and RSUs, which is the IPO price of the Class A common stock of $21.00 per share. In the first quarter of 2007, and in connection with new hiring activity, we granted (1) 90,479 RSUs with a grant date fair value of $33.27 per unit, 30,160 of which were fully vested and 60,319 of which are unvested and will vest upon the same conditions as the unvested partnership units of Evercore LP issued in connection with the Reorganization, and (2) 90,606 shares of restricted stock with a grant date fair value of $33.64 per share, all of which are unvested and will vest upon the earlier of one year following the date of grant or Messrs. Altman, Beutner and Aspe, and trusts benefiting their families and permitted transferees, collectively, ceasing to beneficially own at least 90% of the aggregate Evercore LP partnership units owned by them on the date the Reorganization was effected. Therefore, the completion of this offering will result in the vesting of 30,160 of these RSUs and all of these 90,606 shares of restricted stock. Accordingly, we will record a non-cash equity-based compensation charge at the completion of this offering of approximately $127.0 million. As a result, we will record a significant loss in the quarter in which this offering is completed and expect to record a loss for the full fiscal year ending December 31, 2007. CALCULATION OF REGISTRATION FEE Table of Contents Tax Receivable Agreement Prior to this offering, certain of our Senior Managing Directors will exchange 2,369,397 Evercore LP partnership units that they hold on a one-for-one basis for shares of our Class A common stock. In addition, partnership units held by our Senior Managing Directors in Evercore LP may be exchanged in the future for shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. This exchange and any such future exchanges are expected to result in an increase in the tax basis of the tangible and intangible assets of Evercore LP. These increases in tax basis would increase (for tax purposes) amortization and, therefore, reduce the amount of tax that we would otherwise be required to pay in the future. We have entered into a tax receivable agreement with our Senior Managing Directors that provides for the payment by us to an exchanging Evercore partner of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize as a result of these increases in tax basis. We expect to benefit from the remaining 15% of cash savings, if any, in income tax that we realize. While the actual amount and timing of any payments under this agreement will vary depending upon a number of factors, including the timing of exchanges, the extent to which such exchanges are taxable and the amount and timing of our income, we expect that, as a result of the size of the increases of the tangible and intangible assets of Evercore LP attributable to our interest in Evercore LP, during the expected term of the tax receivable agreement, the payments that we may make to our Senior Managing Directors could be substantial. Assuming no material changes in the relevant tax law, and that we earn sufficient taxable income to realize the full tax benefit of the increased amortization, we expect that future payments to our Senior Managing Directors in respect of the exchange of Evercore LP partnership units which will occur prior to this offering to aggregate approximately $21.1 million, resulting in payments of approximately $1.4 million per year over the next 15 years, based on an assumed value of the Class A common stock of $29.30 per share (the last reported price of the Class A common stock on the New York Stock Exchange on May 11, 2007). (A $1.00 increase (decrease) in the assumed value of the Class A common stock of $29.30 per share would increase (decrease) the amount of future payments to our Senior Managing Directors in respect of the exchange of the Evercore LP partnership units that will occur prior to this offering by $0.05 million per year over the next 15 years.) Future payments to our Senior Managing Directors in respect of subsequent exchanges pursuant to the tax receivable agreement would be in addition to these amounts and are expected to be substantial. The effects of the tax receivable agreement on our consolidated statement of financial condition as a result of the exchange of 2,369,397 Evercore LP partnership units by our Senior Managing Directors prior to this offering are as follows: we will record an increase of $24.8 million in deferred tax assets for the estimated income tax effects of the increase in the tax basis of the assets owned by Evercore LP, based on enacted federal and state tax rates at the date of the transaction. To the extent we estimate that we will not realize the full benefit represented by the deferred tax asset, based on an analysis of expected future earnings, we will reduce the deferred tax asset with a valuation allowance; and we will record 85% of the estimated realizable tax benefit (which is the recorded deferred tax asset less any recorded valuation allowance) as an increase of $21.1 million to payable to related parties and the remaining 15% of the estimated realizable tax benefit, or $3.7 million, as an increase to paid-in-capital. Therefore, as of the date of the exchange of the Evercore LP partnership units, on a cumulative basis the net effect of accounting for income taxes and the tax receivable agreement on our financial statements will be a net increase in stockholders equity of 15% of the estimated realizable tax benefit. The amounts to be recorded for both the deferred tax asset and the liability for our obligations under the tax receivable agreement have been estimated. Any additional payments under the tax receivable agreement that will further increase the tax benefits Title Of Each Class Of Securities To Be Registered Amount To Be Registered(1) Proposed Maximum Aggregate Offering Price Per Share(2) Proposed Maximum Aggregate Offering Price(2) Amount of Registration Fee(3) Class A Common Stock, par value $.01 per share 4,830,000 shares $ 30.42 $ 146,928,600 $ 4,511 Table of Contents and the estimated payments under the tax receivable agreement have not been included in this estimate. All of the effects of changes in any of our estimates after the date of the purchase will be included in net income. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income. Future exchanges of Evercore LP partnership units for our shares of Class A common stock will be accounted for in a similar manner. If the underwriters exercise their option to purchase additional shares from the selling stockholders, we expect that our Senior Managing Directors will exchange additional Evercore LP partnership units. The values of the deferred tax assets and payable to related parties, and the amount of expected future payments to our Senior Managing Directors under the tax receivable agreement in respect of any such exchange, will be based on the value of the Class A common stock at the time of such exchange. (1) Includes 630,000 shares subject to the underwriters option to purchase additional shares. (2) Estimated solely for the purpose of calculating the registration fee, in accordance with Rule 457(c) under the Securities Act of 1933. The proposed maximum offering price per share, the proposed maximum aggregate offering price and the amount of the registration fee have been computed on the basis of the average of the high and low prices per share of the Class A common stock on the New York Stock Exchange on April 13, 2007. (3) Previously paid. Table of Contents The Offering Class A common stock offered by Evercore Partners Inc. 1,581,778 shares. Class A common stock offered by the selling stockholders 2,618,222 shares. Class A common stock outstanding immediately after this offering assuming no exercise of the underwriters option to purchase additional shares from the selling stockholders 10,560,339 shares (or 31,327,771 shares if all vested and unvested Evercore LP partnership units, other than those held by Evercore Partners Inc., are exchanged for newly-issued shares of Class A common stock on a one-for-one basis). Class A common outstanding immediately after this offering assuming full exercise of the underwriters option to purchase additional shares from the selling stockholders 11,129,645 shares (or 31,327,771 shares if all vested and unvested Evercore LP partnership units, other than those held by Evercore Partners Inc., are exchanged for newly-issued shares of Class A common stock on a one-for-one basis). Use of proceeds We estimate that our net proceeds from this offering, after deducting estimated underwriting discounts and commissions and offering expenses, will be approximately $43.0 million, based on an assumed public offering price of $29.30 per share (the last reported price of the Class A common stock on the New York Stock Exchange on May 11, 2007). We intend to use these proceeds to expand and diversify our advisory and investment management businesses and for general corporate purposes in our operating subsidiary, Evercore LP. We will not receive any proceeds from the sale of shares by the selling stockholders. Voting rights Each share of our Class A common stock entitles its holder to one vote on all matters to be voted on by stockholders generally. Each limited partner of Evercore LP holds one or more shares of our Class B common stock. The shares of Class B common stock have no economic rights but entitle the holder, without regard to the number of shares of Class B common stock held, to a number of votes that is determined pursuant to a formula that relates to the number of Evercore LP partnership units held by such holder. As a result of this formula, the limited partners of Evercore LP collectively have a number of votes in Evercore Partners Inc. that is equal to the aggregate number of The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Table of Contents vested and unvested partnership units that they hold. Under the formula, until such time as Messrs. Altman, Beutner and Aspe and certain trusts benefiting their families collectively cease to beneficially own, in the aggregate, at least 90% of the Evercore LP partnership units they held on August 10, 2006 (the date of the IPO), these three individuals will have all of the voting power of the Class B common stock and the other limited partners of Evercore LP will have no voting power. See Description of Capital Stock Class B Common Stock . As a result of the successful completion of the offering of the shares offered by this prospectus, Messrs. Altman, Beutner and Aspe and certain trusts benefiting their families collectively will own less than 90% of the Evercore LP partnership units they held on August 10, 2006. Accordingly, following the completion of this offering, each of the limited partners of Evercore LP will have a number of votes in Evercore Partners Inc. that is equal to the number of vested and unvested Evercore LP partnership units held by such holder. Holders of our Class A common stock and Class B common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law. Dividend policy As part of the IPO, we announced our intention to pay quarterly cash dividends to the holders of our Class A common stock and, on March 26, 2007, we paid our first quarterly cash dividend of $0.07 per share to holders of record of our Class A common stock as of March 12, 2007. Our board of directors has declared a quarterly cash dividend of $0.10 per share to holders of record of our Class A common stock as of June 1, 2007, payable on June 15, 2007. However, there is no assurance that sufficient cash will be available to pay future dividends. The declaration, amount and payment of any future dividends will be at the sole discretion of our board of directors. Our board of directors will take into account general economic and business conditions, our financial condition and operating results, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries (including Evercore LP) to us, and such other factors as our board of directors may deem relevant. Evercore Partners Inc. is a holding company and has no material assets other than its ownership of partnership units in Evercore LP. We intend to cause Evercore LP to make distributions to Evercore Partners Inc. in an amount sufficient to cover dividends, if any, declared by us. If Evercore LP makes such distributions, our Senior Managing Directors will be entitled to receive equivalent distributions from Evercore LP on their vested partnership units. Shares of Class A common stock outstanding and other information based thereon in this prospectus do not reflect: 2,795,295 shares of Class A common stock underlying 237,276 vested and 2,558,019 unvested restricted stock units (1,069,665 of which are expected to vest as a result of the completion of this offering) that have been awarded under our 2006 Stock Incentive Plan; 17,114,099 additional shares of Class A common stock reserved for issuance under our 2006 Stock Incentive Plan; and 431,607 additional shares of Class A common stock that may be issuable as deferred consideration as part of our acquisition of Braveheart Financial Services Limited. See Related Party Transactions Acquisition of Braveheart Financial Services Limited . Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. Subject to Completion, dated May 15, 2007 Prospectus 4,200,000 Shares Class A Common Stock (a) Prior to our August 2006 IPO, payments for services rendered by our Senior Managing Directors generally were accounted for as distributions of members capital rather than as compensation expense. See Management s Discussion and Analysis of Financial Condition and Results of Operations Key Financial Measures Operating Expenses Employee Compensation and Benefits Expense . (b) Prior to our August 2006 IPO, our income was not subject to U.S. federal and state income taxes. See Management s Discussion and Analysis of Financial Condition and Results of Operations Key Financial Measures Provision for Income Taxes . Evercore Partners Inc. is selling 1,581,778 of the shares in this offering and the selling stockholders named in this prospectus, including members of our senior management, are selling 2,618,222 of the shares in this offering. We will not receive any proceeds from the sale of shares of Class A common stock by the selling stockholders. Our Class A common stock is listed on the New York Stock Exchange under the symbol EVR . On May 11, 2007, the last reported sale price of the Class A common stock on the New York Stock Exchange was $29.30 per share. Investing in our Class A common stock involves risks. See
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+PROSPECTUS SUMMARY This summary highlights the material information contained elsewhere in this prospectus. This summary may not contain all of the information that you consider before investing in our common stock. You should carefully read this entire prospectus, including "Risk Factors" and our consolidated financial statements, before making an investment decision. Overview We are the largest provider of dredging services in the United States, with revenues of $426.0 million in 2006 and $126.7 million in the first quarter of 2007. Dredging generally involves the enhancement or preservation of navigability of waterways or the protection of shorelines through the removal or replenishment of soil, sand or rock. The U.S. dredging market consists of three primary types of work: capital, beach nourishment and maintenance. Our "bid market" is defined as the population of domestic projects on which we bid or could have bid if not for capacity constraints. Across the three sectors of the dredging industry, we achieved the leading U.S. market share of projects awarded within our bid market, averaging 37% over the last three years. In addition, we are the only U.S. dredging service provider with significant international operations. Foreign contracts accounted for an average of 18% of our dredging contract revenues over the last three years. Our fleet of 25 dredges, 25 material transportation barges, two drillboats, and numerous other specialized support vessels is the largest and most diverse fleet of any U.S. dredging company. We estimate the replacement cost of our fleet to be in excess of $1.0 billion in the current market. We benefit from the Foreign Dredge Act of 1906, or "Dredging Act", and Section 27 of the Merchant Marine Act of 1920, or "Jones Act", which prohibit foreign-built dredges and foreign-owned dredging companies from competing in the United States. The majority of the work within our domestic dredging bid market has historically been performed by us and four other key U.S. competitors, which collectively comprised an average of 81% of the market over the last three years. Our dredging activities are comprised primarily of the following types of projects: Domestic Capital. Capital dredging projects consist primarily of port expansion projects, which involve the deepening of channels to allow access by larger, deeper draft ships and the provision of land fill used to expand port facilities. Today U.S. ports are shallower than many foreign ports, creating a need for port deepening capital projects to maintain competitiveness in international trade. In addition to port work, capital projects also include land reclamations, trench digging for pipelines, tunnels and cables, and other dredging related to the construction of breakwaters, jetties, canals and other marine structures. The emerging market for liquefied natural gas, or "LNG," terminals also presents opportunities in the capital dredging sector. Further, we anticipate that over the next eight to ten years there will be significant dredging opportunities related to capital projects to protect and restore wetlands and coastal marshes, particularly those in Louisiana. For example, Congress is currently considering legislation that contemplates $3.7 billion of Louisiana wetland and coastal restoration work, a significant portion of which we believe will be allocated to capital dredging projects. Capital projects accounted for approximately 34% of our 2006 dredging revenues. Foreign Capital. Foreign capital projects typically relate to land reclamations, channel deepening and port infrastructure development. We target international opportunities that are well suited to our equipment and where we face reduced competition from our European competitors. Maintaining a presence in foreign markets has enabled us to diversify, particularly during periods of decreased domestic demand. Over the last ten years, we have performed dredging work in Europe, the Middle East, Africa, India, Mexico and South America. Most recently, we have focused our efforts on the opportunities in the Middle East, where we have cultivated a niche market by developing close customer relationships with major developers and seeking contracts compatible with the size of our vessels. Our dredging contracts in the Middle East have a longer duration than those in the U.S., and as a result, we have increased visibility with regard to future revenue and fleet utilization. Foreign projects accounted for approximately 23% of our 2006 dredging revenues. Beach Nourishment. Beach nourishment projects generally involve moving sand from the ocean floor to shoreline locations when erosion threatens shoreline assets. Beach erosion is a continuous problem that has intensified with the rise in coastal development and recent storm activity, particularly in Florida, and has become an important issue for state and local governments concerned with protecting beachfront tourism and real estate. Beach nourishment projects accounted for approximately 25% of our 2006 dredging revenues. Maintenance. Maintenance dredging consists of the re-dredging of previously deepened waterways and harbors to remove silt, sand and other accumulated sediments. Due to natural sedimentation, active channels generally require maintenance dredging every one to three years, thus creating a recurring source of dredging work that is typically non-deferrable if optimal navigability is to be maintained. Maintenance projects accounted for approximately 18% of our 2006 dredging revenues. We also own 85% of the capital stock of North American Site Developers, Inc. ("NASDI"), a demolition services provider located in the Boston, Massachusetts area. NASDI's principal services consist of interior and exterior demolition of commercial and industrial buildings, salvage and recycling of related materials, and removal of hazardous substances and materials. Since the acquisition of NASDI in 2001, we have operated in two reportable segments: dredging and demolition. Competitive Strengths We possess a number of competitive strengths that have allowed us to develop and maintain our leading position within the dredging industry. Favorable competitive dynamic. We benefit from significant advantages relative to both existing and potential competitors, including (i) our reputation for quality and customer service built up over our 117-year operating history, during which time we have never failed to complete a project; (ii) the long lead time and high capital cost associated with the construction of a new dredge, which we estimate to be between two to three years and $25 to $75 million, depending on the type of dredge; and (iii) the requirements of the Dredging Act and the Jones Act, which prohibit foreign-built dredges and foreign-owned dredging companies from competing in the U.S. Largest and most diverse dredging fleet. We operate the largest and most diverse dredging fleet in the U.S., with over 180 pieces of equipment, including the largest hydraulic dredges in the U.S. The size, versatility and technical capabilities of the fleet improve our competitiveness by affording us the flexibility to select the most efficient equipment for a particular job and enabling us to perform multiple projects at the same time. To maintain the value and effectiveness of our fleet, we emphasize preventative maintenance to minimize downtime, increase profitability, extend vessel life and reduce replacement capital expenditure requirements. Diversified revenue base. We benefit from a dredging revenue base that is broadly diversified across the three dredging sectors, which have different demand drivers. Capital projects primarily consist of port expansion and deepening work, which is driven by competitiveness among ports and growth in U.S. trade and commerce. Beach nourishment and maintenance projects are more heavily influenced by weather and recurring natural sedimentation and erosion. Revenue within each of our dredging sectors comes from a portfolio of separate UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 contracts, which helps to mitigate project-specific risk. For the year ended December 31, 2006, our U.S. dredging revenues were derived from over 70 separate dredging contracts, and no one contract represented more than 8% of our revenues. Our foreign dredging operations and demolition operations further diversify our revenue and customer base. Specialized capability in capital projects. We are a leader in U.S. capital dredging, which generally requires specialized engineering expertise, specific combinations of equipment and experience in executing complex projects. We believe our extensive experience performing complex projects significantly enhances our ability to win and complete these contracts profitably. Proprietary and proven project costing methodologies. Over the course of our 117-year operating history, we have developed an extensive proprietary database of publicly-available dredging production records from our own and our competitors' activities and past bidding results. We believe that this database, combined with our accumulated estimating and bidding expertise, is a significant competitive advantage in bidding for new dredging contracts. Proven, experienced management team. Our top executive management has an average of 25 years of experience in the dredging industry. We believe that management's experience provides us with a significant advantage over our competitors. Our executive management team currently holds approximately 3% of our outstanding common stock. Our board of directors intends to adopt an equity incentive plan to further align the interests of our management team with those of our stockholders, subject to stockholder approval of such equity incentive plan at our 2007 annual meeting. Business Strategy Build upon our industry leading market position in domestic capital projects. We intend to maintain and expand the largest, most flexible dredge fleet in the U.S. Our expertise and technical leadership have traditionally been an area of strength for us in executing complex and large-scale capital dredging projects, such as port deepening projects, due to the complicated nature of the work to be performed. In order to accommodate the trend of larger, deeper draft vessels, port expansion and/or significant channel depth increases will be necessary for the nation's largest ports. Additionally, we will pursue the significant opportunities for capital project work to protect and restore the wetlands and coastal marshes in Louisiana. While the actual timing for funding of projects identified under the current Water Resources Development Act, or "WRDA," remains uncertain, we believe there is significant demand for and political interest in such projects in the wake of recent hurricane activity in that region. Outside of WRDA, we anticipate that four Louisiana wetland and coastal restoration projects totaling approximately $100 million are scheduled to be put out for bid in 2007. Selectively bid on other profitable projects to maximize fleet utilization. Our fleet, coupled with our sophisticated engineering capabilities, provides us with the ability to deploy the appropriate equipment to efficiently meet the specifications of contracted work. Beach nourishment and maintenance projects are heavily influenced by weather and recurring natural sedimentation and erosion, which typically require such dredging work to be performed at regular intervals. We believe this will provide us with a recurring revenue stream that does not generally have the funding uncertainties of larger-scale capital projects. In addition, we will continue to pursue new growth opportunities in the dredging industry, such as private contracts with utility companies in the emerging LNG terminal market. Four LNG terminal dredging projects have been bid to date, two of which were awarded to us. We have successfully completed one LNG terminal dredging project with revenue totaling $22 million and are currently performing under a second contract with projected total revenues in excess of $60 million. AMENDMENT NO. 1 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Capture expanding international dredging opportunities. We continue to pursue new business opportunities abroad, with a focus on the Middle East region, which we believe to be one of the world's most robust markets for dredging services, including in excess of $2.5 billion in work suitable to our fleet that could be put out to bid over the next two to five years. We have developed important customer relationships with key governmental agencies and local leadership in the region. Since 2003, we have been awarded eight contracts with projected total revenue in excess of $385 million. These relationships have allowed us to individually negotiate certain projects without the work being put out for competitive bid. We intend to leverage our successful international project experience, coupled with our customer relationships and growing reputation, to secure additional business in the region. Consequently, we have and may continue to redeploy a portion of our fleet to the Middle East or other international markets as appropriate to support new business opportunities. We believe that our expansion into international markets will help to further diversify our revenue base and reduce our exposure to possible downturns in our domestic markets. Continue to focus on new technologies and operational efficiencies. We will continue to pursue and implement technological advancements and improvements to our fleet and processes. These improvements strengthen our ability to adapt to changing market conditions. For example, we have invested in technologies and developed techniques that allow us to perform dredging services in the most environmentally sensitive regions and challenging weather conditions. We expect to continue to make both mechanical and process improvements that will allow us to achieve operational efficiencies and higher margins. Opportunistically pursue acquisitions. We have a long history of purchasing dredging assets from our competitors, making appropriate modifications and successfully integrating vessels into our existing fleet. For example, one of our domestic competitors recently decided to exit the U.S. market, and we were able to capitalize on this opportunity by acquiring two of its vessels. We intend to continue to pursue selected acquisition opportunities to complement and expand our dredging fleet and solidify our competitive position both domestically and internationally. Merger with Aldabra Acquisition Corporation On December 26, 2006, GLDD Acquisitions Corp. merged with a subsidiary of Aldabra Acquisition Corporation. Aldabra was formed for the purpose of raising capital through an initial public offering with the intent to use the proceeds to merge with a business to build long term value. Following the Aldabra merger, and prior to this offering, we are owned approximately 46% by Madison Dearborn Capital Partners IV, L.P. and approximately 3% by our management. Recent Developments Purchase of New Equipment In April of 2007, we entered into agreements to purchase two dredges from C.F. Bean LLC: a 6,400 cubic yard hopper dredge to be named the "Terrapin Island," and a hydraulic dredge, the "Meridian." We then assigned our right to purchase the Meridian to Weeks Marine, Inc. in exchange for the right to purchase from Weeks a larger hydraulic dredge subsequently named the "Ohio." The acquisition of the Ohio and attendant plant was completed on April 25, 2007 for a total purchase price of $13.6 million, and we plan to spend approximately $18 million to modify this dredge, with all amounts to be funded under our revolving credit facility or cash on hand. The Terrapin Island purchase was completed on June 15, 2007. We funded the $25.5 million purchase price through revolver borrowings, which we subsequently refinanced through a long-term operating lease arrangement. The Terrapin Island has historically had a high utilization rate and will augment our fleet of versatile hopper dredges, while the Ohio's larger size will allow us to modify this vessel to create a BALANCE December 31, 2006 39,985,678 $ GREAT LAKES DREDGE & DOCK CORPORATION (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 1600 (Primary Standard Industrial Classification Code Number) 20-5336063 (I.R.S. Employer Identification No.) 2122 York Road Oak Brook, Illinois 60523 (630) 574-3000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) world class hydraulic cutterhead dredge well suited for high margin capital and offshore beach nourishment work. We intend to employ both vessels as soon as practicable, most likely during the last four months of 2007 and at some point over the next two years, we anticipate the Ohio will be taken out of service for a period of time to complete the modifications to the dredge. Based on our prior equipment acquisition experience, we believe we will be able to efficiently integrate both the Terrapin Island and the Ohio to generate incremental revenues and earnings consistent with our historical margin levels for dredges of this type and size. Through the acquisition from Bean, who has since effectively exited the U.S. market, we have strengthened our market position by assuming capacity previously controlled by a significant domestic competitor. In addition to these new equipment purchases, we intend to spend approximately $10 million to construct an auxiliary vessel to support our electric cutterhead dredge the "Florida." We expect this vessel will yield significant efficiency improvements and increase the versatility of the Florida, expanding deployment opportunities and utilization rates for that vessel. We expect that the acquisitions and the auxiliary vessel coupled with consolidated domestic capacity will contribute to our revenue growth and overall profitability. Depending on general market conditions and other variables, once the modifications to the Ohio are complete and the newly acquired dredges and the auxiliary vessel are fully deployed, we anticipate that these vessels will generate approximately $9 million to $13 million of incremental EBITDA (as defined on page 10) on an annualized basis, based upon estimated incremental operating income of $6.5 million to $10.5 million and estimated depreciation of $2.5 million. Warrant Redemption On June 19, 2007, we issued a notice of redemption to the holders of our outstanding warrants to purchase shares of our common stock. The agreement governing the warrants provides that we are entitled to redeem the warrants if the last trading price of our common stock is at least $8.50 per share for any 20 trading days within a 30 trading day period ending three business days before the notice of redemption is sent. The redemption date for the warrants was July 19, 2007. All of the warrants were exercised or redeemed as of the redemption date. We are using a portion of the proceeds to repay the balance of the outstanding indebtedness under our revolving senior credit facility and will use the remaining proceeds for identified efficiency enhancements to existing equipment, potential new equipment acquisitions and general corporate purposes. New Senior Revolving Credit Facility On June 12, 2007, we entered into a $155 million new senior revolving credit facility, refinancing the borrowings outstanding under our senior credit facility and our equipment term debt. On June 11, 2007, we bought out an operating lease for three vessels, including the Dredge Texas, for approximately $11 million, refinancing such purchase under our new senior revolving credit facility. Estimated Results of Operations On July 20, 2007, we announced estimated financial results for the six months ended June 30, 2007. For the six months ended June 30, 2007, we estimate contract revenues of between $234.0 million and $249.0 million, as compared to $222.5 million for the six months ended June 30, 2006. We estimate operating income of between $13.9 million and $15.0 million, as compared to $14.1 million for the six months ended June 30, 2006. Year to date operating income was negatively impacted by bad debt expense associated with a project completed in 2006 and additional costs related to our efforts in Texas to reduce personal injury claims, which totaled $1.2 million. We estimate EBITDA (as defined on page 10) of between $27.2 million and $29.2 million for the six months ended June 30, 2007, as compared to $27.1 million for the six months ended June 30, 2006. NET CHANGE IN CASH AND EQUIVALENTS 500 (1,861 ) (1,361 ) CASH AND CASH EQUIVALENTS Beginning of year 1,957 CASH AND CASH EQUIVALENTS End of year $ 1,957 $ Deborah A. Wensel, Chief Financial Officer 2122 York Road Oak Brook, Illinois 60523 (630) 574-3000 (Name, address, including zip code, and telephone number, including area code, of agent for service) We estimate EBITDA for the six months ended June 30, 2007 based upon estimated net income of $2.5 million to $2.8 million, and adding back estimated net interest expense of $10.4 million to $11.2 million, estimated income tax expense of $1.8 million to $1.9 million and estimated depreciation and amortization of $12.5 million to $13.3 million. EBITDA for the six months ended June 30, 2006 is calculated based upon net income of $1.4 million, adding back interest expense, net of $12.2 million, income tax expense of $1.0 million and depreciation and amortization of $12.5 million. At June 30, 2007, we had outstanding debt of $224 million, which included $49 million outstanding on our senior revolving credit facility. Subsequent to June 30, 2007, we received cash proceeds related to the warrants totaling $60.2 million and such proceeds will be used to pay down revolver borrowings. Had such warrants been exercised and the proceeds applied on June 30, 2007, net debt at June 30, 2007 would have been $163.8 million. We are currently in the process of preparing our unaudited consolidated financial statements for the quarter and year to date ended June 30, 2007. These financial statements are not currently available and are not expected to be available and reviewed by our auditors prior to the completion of this offering. Estimates of financial results are inherently uncertain and subject to change, and we undertake no obligation to update this information. Actual results may differ due to the completion of management's and the audit committee's final review. You are cautioned not to place undue reliance on the estimates. The estimates set forth above were prepared by our management and are based upon a number of assumptions. These estimates were prepared on the basis of GAAP. This information is a summary of estimated financial data and should be read in conjunction with the "Risk Factors," "Unaudited Pro Forma Condensed Consolidated Financial Statements," "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations", our unaudited condensed consolidated financial statements and the accompanying notes, and our consolidated financial statements and the accompanying notes appearing elsewhere in this prospectus. General We are a Delaware corporation. Our principal executive offices are located at 2122 York Road, Oak Brook, Illinois 60523. The telephone number for our principal executive office is (630) 574-3000. Our internet address is www.gldd.com. The information at this internet address is not part of this prospectus.
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+S-1/A 1 file1.htm FORM S-1/A Table of Contents As filed with the Securities and Exchange Commission on May 23, 2007 Registration No. 333-139993 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 6 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Greenlight Capital Re, Ltd. (Exact name of registrant as specified in its charter) Cayman Islands 6331 Not Applicable (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Number) (IRS Employer Identification No.) 802 West Bay Road, The Grand Pavilion Grand Cayman, KY1-1205 Cayman Islands Telephone: (345) 745-4573 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Corporation Service Company 1133 Avenue of the Americas Suite 3100 New York, New York 10036-6710 Telephone: (212) 299-5600 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Kerry E. Berchem, Esq. Bruce Mendelsohn, Esq. Akin Gump Strauss Hauer & Feld LLP 590 Madison Avenue New York, New York 10022 (212) 872-1000 Fax: (212) 872-1002 Leonard Goldberg Chief Executive Officer Greenlight Capital Re, Ltd. 802 West Bay Road, The Grand Pavilion P.O. Box 31110 Grand Cayman, KY1-1205 Cayman Islands Telephone: (345) 745-4573 Facsimile: (345) 745-4576 Gary Horowitz, Esq. Simpson Thacher & Bartlett LLP 425 Lexington Avenue New York, NY 10017 (212) 455-2000 Fax: (212) 455-2502 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. CALCULATION OF REGISTRATION FEE Title of Each Class of Securities to be Registered Proposed Maximum Aggregate Offering Price(1)(2) Amount of Registration Fee Class A Ordinary Shares, par value $.10 $ 212,175,000 $ 19,866(3 ) (1) Includes offering price of Class A Ordinary Shares that the underwriters have the option to purchase to cover over-allotments, if any. (2) In accordance with Rule 457(o) under the Securities Act, the number of shares being registered and the proposed maximum offering price per share are not included in this table. (2) $18,725 Previously paid. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. TABLE OF CONTENTS Prospectus Page Summary 1
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+PROSPECTUS SUMMARY You should read the following summary together with the more detailed information and financial statements appearing elsewhere in this prospectus. Except as otherwise indicated, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option. References to "we", "us" and "our" refer to GSI Technology, Inc. GSI Technology, Inc. We develop and market "Very Fast" static random access memory, or SRAM, products that are incorporated primarily in high-performance networking and telecommunications equipment, such as routers, switches, wide area network infrastructure equipment, wireless base stations and network access equipment. In addition, we serve the ongoing needs of the military, industrial, test equipment and medical markets for high-performance SRAMs. Gartner Dataquest divides the SRAM market into segments based on speed. The highest performance segment is comprised of SRAMs that operate at speeds of less than 10 nanoseconds, which we refer to as "Very Fast SRAMs." Gartner Dataquest estimates that this segment of the SRAM market will be greater than $1 billion in 2007. Based on the performance characteristics of our products and the breadth of our product portfolio, we consider ourselves to be a leading provider of Very Fast SRAMs. Growth in data, voice and video traffic has driven the need for greater networking bandwidth, resulting in the continued expansion of the networking and telecommunications infrastructure. This continued growth in the level of Internet usage has also led to the proliferation of a wide variety of equipment throughout the networking and telecommunications infrastructure and a demand for new equipment with faster and higher performance. High-performance networking and telecommunications equipment requires Very Fast SRAMs, and we expect that the emerging variety of applications within this market will continue to drive a need for an increasing number of specialized Very Fast SRAMs. We believe the key success factors for a Very Fast SRAM vendor are the ability to offer a broad catalog of high-performance, high-quality and high-reliability Very Fast SRAM products, to continuously introduce new products with higher speeds, lower power consumption and greater memory capacity, or density, to maintain timely availability of prior generations of products for several years after their introductions, and to provide effective logistic and technical support throughout our customers' product development and manufacturing life cycles. Accordingly, the key elements of our solution include: Innovative Product Performance Leadership. We believe that through the use of advanced architectures, design methodologies and silicon process technologies, we have established a position as a technology leader in the design and development of Very Fast SRAMs. The vast majority of our products have random access times of 9 nanoseconds or less, while our newest products have random access times of less than 5 nanoseconds and clock access times as fast as 0.45 nanoseconds. Many of our Very Fast SRAMs require significantly less power than comparable products offered by our principal competitors. Broad and Readily Available Product Portfolio. To meet our customers' diverse needs, we have what we believe is the broadest catalog of Very Fast SRAM products currently available, with features that address a wide range of our networking and telecommunications customers' system requirements. Additionally, we commit to manufacture our products for seven years or more following their initial introduction, which is generally longer than our competitors. Master Die Methodology. Our use of master die designs enables multiple product families to be manufactured from a single mask set. This allows us to respond to unforecasted customer orders more quickly than our competitors and reduce our costs through the purchase of fewer mask sets by enabling more cost-efficient use of engineering resources and by reducing the incidence of obsolete inventory. GSI Technology, BurstRAM, FLXDrive, NBT, SigmaRAM, SigmaQuad, SigmaQuad-II, SigmaCIO DDR-II and SigmaSIO DDR-II are trademarks of GSI Technology, Inc. in the United States and other countries. All trademarks, trade names or service marks appearing in this prospectus are the property of their respective owners. Customer Responsiveness. We work closely with leading networking and telecommunications original equipment manufacturers, or OEMs, as well as their chip-set suppliers, to better anticipate their requirements and to rapidly develop and implement solutions that allow them to meet their specific product performance objectives. Our customer driven approach provides our OEM customers with high-quality and high-reliability products and helps them accelerate their time-to-market. Our objective is to profitably increase our market share in the Very Fast SRAM market by: continuing to focus on the networking and telecommunications markets; strengthening and expanding our customer relationships; continuing to invest in research and development to extend our technology leadership; and collaborating with wafer foundries to leverage leading-edge process technologies. We sell our products to leading networking and telecommunications OEMs, including Alcatel-Lucent, Cisco Systems, Huawei Technologies and Nortel Networks. We utilize a fabless business model, which allows us both to focus our resources on research and development, product design and marketing, and to gain access to advanced process technologies with only modest capital investment and fixed costs. Cisco Systems is our largest OEM customer and accounted for between 28% and 34% of our net revenues in each of our last three fiscal years and the nine months ended December 31, 2006. We expect Cisco Systems to account for a lesser percentage of our net revenues for the quarter ending March 31, 2007. Cisco Systems has announced the implementation of a "lean manufacturing" program under which it plans to reduce the levels of inventory carried by it and by its contract manufacturers. We believe that the transition to this new program will result in reductions in purchases of our products by Cisco Systems' contract manufacturers during the quarter ending March 31, 2007, as they draw down their existing inventories, and that such reductions will likely result in our net revenues for the quarter being less than in the previous quarter. This transition could also impact our revenues in the quarter ending June 30, 2007. We were incorporated in California in 1995 under the name Giga Semiconductor, Inc. We changed our name to GSI Technology in December 2003 and reincorporated in Delaware in June 2004 under the name GSI Technology, Inc. Our principal executive offices are located at 2360 Owen Street, Santa Clara, California, 95054, and our telephone number is (408) 980-8388. Our website is www.gsitechnology.com. The information contained on our website does not constitute a part of this prospectus. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 The Offering Common stock offered 6,131,111 shares Common stock to be outstanding after this offering 27,533,940 shares Use of proceeds Our net proceeds from this offering will be approximately $30.2 million. We intend to use these net proceeds for general corporate purposes including working capital. See "Use of Proceeds." Risk factors See "Risk Factors" and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock. Nasdaq Global Market symbol GSIT The number of shares of common stock to be outstanding after this offering is based on the pro forma number of shares outstanding as of December 31, 2006 and reflects the conversion of all shares of our outstanding redeemable convertible preferred stock into 15,120,168 shares of our common stock. This information excludes: 4,348,869 shares issuable upon the exercise of outstanding options issued under our stock option plans, with a weighted average exercise price of $3.52 per share; 559,897 shares authorized for future issuance under our 2000 stock option plan; 3,000,000 shares authorized for future issuance under our 2007 equity incentive plan; and 500,000 shares authorized for future issuance under our 2007 employee stock purchase plan. The number of shares authorized for future issuance under our 2007 equity incentive plan and our 2007 employee stock purchase plan reflected above does not include shares that may be available for future issuance pursuant to the automatic share reserve increase provisions of these plans. The underwriters have a 30-day option to purchase up to an aggregate of 919,667 additional shares from several of our stockholders. Some of the disclosures in this prospectus would be different if the underwriters exercise their over-allotment option. Unless we tell you otherwise, the information in this prospectus: reflects the conversion of all outstanding shares of redeemable convertible preferred stock into 15,120,168 shares of common stock upon the completion of this offering; and assumes that the underwriters will not exercise their over-allotment option. AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 (in thousands) Consolidated Balance Sheet Data: Cash, cash equivalents and short-term investments $ 14,905 $ 45,086 Working capital 33,168 63,349 Total assets 50,754 80,935 Redeemable convertible preferred stock 9,007 Total stockholders' equity 27,825 67,013 The pro forma as adjusted information above reflects the sale of 6,131,111 shares of common stock by us in this offering at the initial public offering price of $5.50 per share, after deducting the underwriting discount and estimated offering expenses, and giving effect to the conversion of all outstanding shares of our redeemable convertible preferred stock into 15,120,168 shares of our common stock and the application of the net proceeds of the offering. GSI TECHNOLOGY, INC. (Exact name of Registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 3674 (Primary Standard Industrial Classification Code number) 77-0398779 (I.R.S. Employer Identification No.) 2360 Owen Street Santa Clara, California 95054 (408) 980-8388 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) RISK FACTORS An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and all of the other information contained in this prospectus before deciding whether to purchase our common stock. If any of the following risks actually occur, our business, financial condition and results of operations would suffer. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment in our common stock. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business operations. Risks Related to Our Business and Our Industry Unpredictable fluctuations in our operating results could cause our stock price to decline. Our quarterly revenues, expenses and operating results have varied significantly from quarter to quarter and are likely to vary in the future. For example, in the seven most recent fiscal quarters ended December 31, 2006, we have recorded net revenues of as much as $15.3 million and as little as $10.4 million and quarterly operating income of as much as $3.4 million and as little as $508,000. We therefore believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance, and you should not rely on them to predict our future performance or the future performance of our stock price. You should not consider recent quarterly revenue growth as an indication of our future performance. In fact, as described below, we expect our net revenues for the quarter ending March 31, 2007 to be less than for the previous quarter due to the implementation of a new inventory system by Cisco Systems, our largest OEM customer. In other future quarters, we may not have any revenue growth, or our revenues could decline. Furthermore, if our operating expenses exceed our expectations, our financial performance will be adversely affected. Factors that may affect quarterly operating results in the future include: our ability to attract new customers, retain existing customers and increase sales to such customers; unpredictability of the timing and size of customer orders, since most of our customers purchase our products on a purchase order basis rather than pursuant to a long term contract; changes in our customers' inventory management practices; fluctuations in availability and costs associated with materials needed to satisfy customer requirements; manufacturing defects, which could cause us to incur significant warranty, support and repair costs, lose potential sales, harm our relationships with customers and result in write-downs; changes in our product pricing policies, including those made in response to new product announcements and pricing changes of our competitors; and our ability to address technology issues as they arise, improve our products' functionality and expand our product offerings. Our expenses are, to a large extent, fixed, and we expect that these expenses will increase in the future. We will not be able to adjust our spending quickly if our revenues fall short of our expectations. If this were to occur, our operating results would be harmed. If our operating results in future quarters fall below the expectations of market analysts and investors, the price of our common stock could fall. LEE-LEAN SHU President and Chief Executive Officer GSI TECHNOLOGY, INC. 2360 Owen Street Santa Clara, California 95054 (408) 980-8388 (Name, address, including zip code, and telephone number, including area code, of agent for service) Cisco Systems, our largest OEM customer, accounts for a significant percentage of our net revenues. If Cisco Systems, or any of our other major customers reduce the amount they purchase or stop purchasing our products, our operating results will suffer. Cisco Systems, our largest OEM customer, purchases our products through SMART Modular Technologies, its consignment warehouse, through its contract manufacturers and directly from us. Based on information provided to us by consignment warehouses and contract manufacturers, purchases by Cisco Systems represented approximately 31%, 34%, 28% and 32% of our net revenues in fiscal 2004, 2005 and 2006 and the nine months ended December 31, 2006, respectively. We expect Cisco Systems to account for a lesser percentage of our net revenues for the quarter ending March 31, 2007. Cisco Systems has announced the implementation of a "lean manufacturing" program under which it plans to reduce the levels of inventory carried by it and by its contract manufacturers. We believe that the transition to this new program will result in reductions in purchases of our products by Cisco Systems' contract manufacturers during the quarter ending March 31, 2007, as they draw down their existing inventories, and that such reductions will likely result in our net revenues for the quarter being less than in the previous quarter. This transition could also impact our revenues in the quarter ending June 30, 2007. We expect that our operating results in any given period will continue to depend significantly on orders from our key OEM customers, particularly Cisco Systems, and our future success is dependent to a large degree on the business success of these OEMs over which we have no control. We do not have long-term contracts with Cisco Systems or any of our other major OEM customers, distributors or contract manufacturers that obligate them to purchase our products. If we fail to continue to sell to our key OEM customers, distributors or contract manufacturers in sufficient quantities, the growth of our business could be harmed. We have incurred significant losses in prior periods and may incur losses in the future. We have incurred significant losses in prior periods. For example, in fiscal 2003 and 2004, we incurred losses of $7.4 million and $670,000, respectively. Although we have operated profitably during the last two fiscal years, there can be no assurance that our Very Fast SRAMs will continue to receive broad market acceptance or that we will be able to sustain revenue growth or profitability. Our failure to do so may result in additional losses in the future. In addition, we expect our operating expenses to increase as we expand our business. If our revenues do not grow to offset these expected increased expenses, our business will suffer. We depend upon the sale of our Very Fast SRAMs for most of our revenues, and a downturn in demand for these products could significantly reduce our revenues and harm our business. We derive most of our revenues from the sale of Very Fast SRAMs, and we expect that sales of these products will represent the substantial majority of our revenues for the foreseeable future. Our business depends in large part upon continued demand for our products in the markets we currently serve, and adoption of our products in new markets. Market adoption will be dependent upon our ability to increase customer awareness of the benefits of our products and to prove their high-performance and cost-effectiveness. We may not be able to sustain or increase our revenues from sales of our products, particularly if the networking and telecommunications markets were to experience another significant downturn in the future. Any decrease in revenues from sales of our products could harm our business more than it would if we offered a more diversified line of products. We are subject to the highly cyclical nature of the networking and telecommunications markets. Our products are incorporated into routers, switches, wireless local area network infrastructure equipment, wireless base stations and network access equipment used in the highly cyclical networking Balance, December 31, 2006 (unaudited) 6,282,661 $ Copies to: DENNIS C. SULLIVAN, ESQ. DLA Piper US LLP 2000 University Avenue East Palo Alto, California 94303-2248 (650) 833-2000 DONNA M. PETKANICS, ESQ. Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, California 94304-9300 (650) 493-9300 and telecommunications markets. Our operating results declined sharply in fiscal 2002 and 2003 as a result of the severe contraction in demand for networking and telecommunications equipment in which our products are incorporated. Prior to this period of contraction, the networking and telecommunications markets experienced a period of rapid growth, which resulted in a significant increase in demand for our products. We expect that the networking and telecommunications markets will continue to be highly cyclical, characterized by periods of rapid growth and contraction. Our business and our operating results are likely to fluctuate, perhaps quite severely, as a result of this cyclicality. The average selling prices of our products are expected to decline, and if we are unable to offset these declines, our operating results will suffer. Historically, the average unit selling prices of our products have declined substantially over the lives of the products, and we expect this trend to continue. A reduction in overall average selling prices of our products could result in reduced revenues and lower gross margins. Our ability to increase our net revenues and maintain our gross margins despite a decline in the average selling prices of our products will depend on a variety of factors, including our ability to introduce lower cost versions of our existing products, increase unit sales volumes of these products, and introduce new products with higher prices and greater margins. If we fail to accomplish any of these objectives, our business will suffer. To reduce our costs, we may be required to implement design changes that lower our manufacturing costs, negotiate reduced purchase prices from our independent foundry, Taiwan Semiconductor Manufacturing Company Limited, or TSMC, and our independent assembly and test vendors, and successfully manage our manufacturing and subcontractor relationships. Because we do not operate our own wafer foundry or assembly facilities, we may not be able to reduce our costs as rapidly as companies that operate their own foundries or facilities. We rely heavily on distributors and our success depends on our ability to develop and manage our indirect distribution channels. A significant percentage of our sales are made to distributors and to contract manufacturers who incorporate our products into end products for OEMs. For example, in fiscal 2004, 2005 and 2006, and in the nine months ended December 31, 2006, our distributor Avnet Logistics accounted for 32.0%, 32.5%, 30.4% and 24.2%, respectively, of our net revenues and our distributor Nu Horizons accounted for 3.0%, 6.1%, 10.3% and 8.4%, respectively, of our net revenues. Avnet Logistics, Nu Horizons and our other existing distributors may choose to devote greater resources to marketing and supporting the products of other companies. Since we sell through multiple channels and distribution networks, we may have to resolve potential conflicts between these channels. For example, these conflicts may result from the different discount levels offered by multiple channel distributors to their customers or, potentially, from our direct sales force targeting the same equipment manufacturer accounts as our indirect channel distributors. These conflicts may harm our business or reputation. We may be unable to accurately predict future sales through our distributors, which could harm our ability to efficiently manage our resources to match market demand. Our financial results, quarterly product sales, trends and comparisons are affected by fluctuations in the buying patterns of the OEMs that purchase our products from our distributors. While we attempt to assist our distributors in maintaining targeted stocking levels of our products, we may not consistently be accurate or successful. This process involves the exercise of judgment and use of assumptions as to future uncertainties, including end user demand. Inventory levels of our products held by our distributors may exceed or fall below the levels we consider desirable on a going-forward basis. This could result in distributors returning unsold inventory to us, or in us not having sufficient inventory to meet the demand for our products. If we are not able to accurately predict sales through Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. our distributors or effectively manage our relationships with our distributors, our business and financial results will suffer. A small number of customers generally account for a significant portion of our accounts receivable in any period, and if any one of them fails to pay us, our operating results will suffer. At December 31, 2006, SMART Modular Technologies, Avnet Logistics and Nu Horizons accounted for 39.2%, 18.2% and 5.5%, respectively, of our accounts receivable. If any of these customers do not pay us, our operating results will be harmed. Generally, we do not require collateral from our customers. We could become subject to claims and litigation regarding intellectual property rights, which could seriously harm our business and require us to incur significant costs. In recent years, there has been significant litigation in the semiconductor industry involving patents and other intellectual property rights. In the past, we have been subject to claims and litigation regarding alleged infringement of other parties' intellectual property rights. In 2002, we settled patent litigation filed against us by one of our competitors. In connection with the settlement, we obtained a license from that competitor and agreed to pay a license fee and ongoing royalties. We could become subject to additional litigation in the future as a result of allegations that we infringe others' intellectual property rights or that our use of intellectual property otherwise violates the law. Claims that our products infringe the proprietary rights of others would force us to defend ourselves and possibly our customers or manufacturers against the alleged infringement. Any such litigation regarding intellectual property could result in substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition and results of operations. Similarly, changing our products or processes to avoid infringing the rights of others may be costly or impractical. If any claims received in the future were to be upheld, the consequences to us would be severe and could require us to: stop selling our products that incorporate the challenged intellectual property; obtain a license to sell or use the relevant technology, which license may not be available on reasonable terms or at all; pay damages; or redesign those products that use the disputed technology. Although patent disputes in the semiconductor industry have often been settled through cross-licensing arrangements, we may not be able in any or every instance to settle an alleged patent infringement claim through a cross-licensing arrangement. We have a more limited patent portfolio than many of our competitors. If a successful claim is made against us or any of our customers and a license is not made available to us on commercially reasonable terms or we are required to pay substantial damages or awards, our business, financial condition and results of operations would be materially adversely affected. Our business will suffer if we are unable to protect our intellectual property. Our success and ability to compete depends in large part upon protecting our proprietary technology. We rely on a combination of patent, trade secret, copyright and trademark laws and non-disclosure and other contractual agreements to protect our proprietary rights. These agreements and measures may not be sufficient to protect our technology from third-party infringement, or to protect us from the claims of others. Monitoring unauthorized use of our products is difficult and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. Our attempts to enforce our intellectual property rights could be time consuming and Cash paid for interest $ 8 $ 8 $ 8 $ 8 $ If any of the securities being registered on this form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. costly. Litigation may be necessary in order to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. If competitors are able to use our technology without our approval or compensation, our ability to compete effectively could be harmed. The market for Very Fast SRAMs is highly competitive. The market for Very Fast SRAMs, which are used primarily in networking and telecommunications equipment, is characterized by price erosion, rapid technological change, cyclical market patterns and heightened foreign and domestic competition. Several of our competitors offer a broad array of memory products and have greater financial, technical, marketing, distribution and other resources than we have. Some of our competitors maintain their own semiconductor fabrication facilities, which may provide them with capacity, cost and technical advantages over us. We cannot assure you that we will be able to compete successfully against any of these competitors. Our ability to compete successfully in this market depends on factors both within and outside of our control, including: real or perceived imbalances in supply and demand of Very Fast SRAMs; the rate at which OEMs incorporate our products into their systems; the success of our customers' products; our ability to develop and market new products; access to advanced process technologies at competitive prices; and the supply and cost of wafers. In addition, we are vulnerable to advances in technology by competitors, including new SRAM architectures and new forms of dynamic random access memory, or DRAM, or the emergence of new memory technologies that could enable the development of products that feature higher performance, lower cost or lower power capabilities. Additionally, the trend toward incorporating SRAM into other chips in the networking and telecommunications markets has the potential to reduce future demand for Very Fast SRAM products. There can be no assurance that we will be able to compete successfully in the future. Our failure to compete successfully in these or other areas could harm our business. We may experience difficulties in transitioning to smaller geometry process technologies and other more advanced manufacturing process technologies, which may result in reduced manufacturing yields, delays in product deliveries and increased expenses. In order to remain competitive, we expect to continue to transition the manufacture of our products to smaller geometry process technologies. This transition will require us to migrate to new manufacturing processes for our products and redesign certain products. The manufacture and design of our products is complex, and we may experience difficulty in transitioning to smaller geometry process technologies or new manufacturing processes. These difficulties could result in reduced manufacturing yields, delays in product deliveries and increased expenses. We are dependent on our relationships with TSMC to transition successfully to smaller geometry process technologies and to more advanced manufacturing processes. We cannot assure you that TSMC will be able to effectively manage the transition or that we will be able to maintain our relationship with TSMC. If we or TSMC experience significant delays in this transition or fail to implement these transitions, our business, financial condition and results of operations could be materially and adversely affected. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Manufacturing process technologies are subject to rapid change and require significant expenditures for research and development. We continuously evaluate the benefits of migrating to smaller geometry process technologies in order to improve performance and reduce costs. Historically, these migrations to new manufacturing processes have resulted in significant initial design and development costs associated with pre-production mask sets for the manufacture of new products with smaller geometry process technologies. For example, in the nine months ended December 31, 2005, we incurred $678,000 in research and development associated with pre-production mask sets, which were not later used in production as part of the transition to our new 90 nanometer process technology. We will incur similar expenses in the future as we continue to transition our products to smaller geometry processes. The transition costs inherent in the transition to new manufacturing process technologies will adversely affect our operating results and our gross margin. Our products are complex to design and manufacture and could contain defects, which could reduce revenues or result in claims against us. We develop complex products. Despite testing by us and our OEM customers, design or manufacturing errors may be found in existing or new products. These defects could result in a delay in recognition or loss of revenues, loss of market share or failure to achieve market acceptance. These defects may also cause us to incur significant warranty, support and repair costs, divert the attention of our engineering personnel from our product development efforts, result in a loss of market acceptance of our products and harm our relationships with our OEM customers. Our OEM customers could also seek and obtain damages from us for their losses. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend. Defects in wafers and other components used in our products and arising from the manufacturing of these products may not be fully recoverable from TSMC or other suppliers. For example, in the quarter ended December 31, 2005, we incurred a charge of approximately $900,000 related to the write-off of inventory resulting from an error in the assembly process at one of our suppliers. This write-off adversely affected our operating results for fiscal 2006. We are dependent on a number of single source suppliers, and if we fail to obtain adequate supplies, our business will be harmed and our prospects for growth will be curtailed. We currently purchase several key components used in the manufacture of our products from single sources and are dependent upon supply from these sources to meet our needs. If any of these suppliers cannot provide components on a timely basis, at the same price or at all, our ability to manufacture our products will be constrained and our business will suffer. For example, we obtain wafers from a single foundry, TSMC. If we are unable to obtain an adequate supply of wafers from TSMC or find alternative sources in a timely manner, we will be unable to fulfill our customer orders and our operating results will be harmed. We do not have supply agreements with TSMC or any of our independent assembly and test suppliers, and instead obtain manufacturing services and products on a purchase-order basis. Our suppliers, including TSMC, have no obligation to supply products or services to us for any specific product, in any specific quantity, at any specific price or for any specific time period. As a result, the loss or failure to perform by any of these suppliers could adversely affect our business and operating results. Should any of our single source suppliers experience manufacturing failures or yield shortfalls, be disrupted by natural disaster or political instability, choose to prioritize capacity or inventory for other uses or reduce or eliminate deliveries to us, we likely will not be able to enforce fulfillment of any delivery commitments and we would have to identify and qualify acceptable replacements from alternative sources of supply. In particular, if TSMC is unable to supply us with sufficient quantities of wafers to meet all of our requirements, we would have to allocate our products among our customers, which would constrain our growth and might cause some of them to seek alternative sources of supply. Since the manufacturing of wafers and other components is extremely complex, the process of qualifying new foundries and suppliers is a lengthy process and there is no assurance that we will be able to find and qualify another supplier without materially adversely affecting our business, financial condition and results of operations. Because we outsource our wafer manufacturing and independent wafer foundry capacity is limited, we may be required to enter into costly long-term supply arrangements to secure foundry capacity. We do not have long-term supply agreements with TSMC, but instead obtain our wafers on a purchase order basis. In order to secure future wafer supply from TSMC or from other independent foundries, we may be required to enter into various arrangements with them, which could include: contracts that commit us to purchase specified quantities of wafers over extended periods; investments in and joint ventures with the foundries; or non-refundable deposits with or prepayments or loans to foundries in exchange for capacity commitments. We may not be able to make any of these arrangements in a timely fashion or at all, and these arrangements, if any, may not be on terms favorable to us. Moreover, even if we are able to secure independent foundry capacity, we may be obligated to use all of that capacity or incur penalties. These penalties may be expensive and could harm our financial results. If we are unable to offset increased wafer fabrication costs by increasing the average selling prices of our products, our gross margins will suffer. If there is a significant upturn in the networking and telecommunications markets that results in increased demand for our products and competing products, the available supply of wafers may be limited. As a result, we could be required to obtain additional manufacturing capacity in order to meet increased demand. Securing additional manufacturing capacity may cause our wafer fabrication costs to increase. If we are unable to offset these increased costs by increasing the average selling prices of our products, our gross margins will decline. Demand for our products may decrease if our OEM customers experience difficulty manufacturing, marketing or selling their products. Our products are used as components in our OEM customers' products. For example, Cisco Systems, our largest OEM customer, incorporates our products in a number of its networking routers and switches. Accordingly, demand for our products is subject to factors affecting the ability of our OEM customers to successfully introduce and market their products, including: capital spending by telecommunication and network service providers and other end users who purchase our OEM customers' products; the competition our OEM customers face, particularly in the networking and telecommunications industries; the technical, manufacturing, sales and marketing and management capabilities of our OEM customers; the financial and other resources of our OEM customers; and the inability of our OEM customers to sell their products if they infringe third-party intellectual property rights. As a result, if OEM customers reduce their purchases of our products, our business will suffer. Downturns in the semiconductor industry may harm our revenues and margins. The semiconductor industry is highly cyclical. The industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles of both semiconductor companies' and their customers' products and declines in general economic conditions. These downturns have been characterized by production overcapacity, high inventory levels and accelerated erosion of average selling prices. From time to time, the semiconductor industry also has experienced periods of increased demand and production capacity constraints. Our operating results may suffer during the down portion of these cycles. For example, the SRAM industry experienced significant declines in the average selling prices of SRAM products during the recent downturn in the semiconductor industry. We expect similar declines to occur in the future. Downturns in the semiconductor industry could cause our stock price to be volatile, and a prolonged decline in the industry could adversely affect our revenues. If we are unable to control our expenses adequately in response to reduced net sales, our results of operations would be negatively impacted. For example, the industry downturn in 2001 resulted in a $3.9 million inventory write-off in fiscal 2002. If we do not successfully develop new products to respond to rapid market changes due to changing technology and evolving industry standards, particularly in the networking and telecommunications markets, our business will be harmed. If we fail to offer technologically advanced products and respond to technological advances and emerging standards, we may not generate sufficient revenues to offset our development costs and other expenses, which will hurt our business. The development of new or enhanced products is a complex and uncertain process that requires the accurate anticipation of technological and market trends. In particular, the networking and telecommunications markets are rapidly evolving and new standards are emerging. We are vulnerable to advances in technology by competitors, including new SRAM architectures, new forms of DRAM and the emergence of new memory technologies that could enable the development of products that feature higher performance or lower cost. We may experience development, marketing and other technological difficulties that may delay or limit our ability to respond to technological changes, evolving industry standards, competitive developments or end-user requirements. For example, because we have limited experience developing integrated circuits, or IC, products other than Very Fast SRAMs, our efforts to introduce new products may not be successful and our business may suffer. Other challenges that we face include: our products may become obsolete upon the introduction of alternative technologies; we may incur substantial costs if we need to modify our products to respond to these alternative technologies; we may not have sufficient resources to develop or acquire new technologies or to introduce new products capable of competing with future technologies; new products that we develop may not successfully integrate with our end-users' products into which they are incorporated; we may be unable to develop new products that incorporate emerging industry standards; we may be unable to develop or acquire the rights to use the intellectual property necessary to implement new technologies; and when introducing new or enhanced products, we may be unable to manage effectively the transition from older products. SUBJECT TO COMPLETION, DATED MARCH 29, 2007 The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. PROSPECTUS 6,131,111 Shares Common Stock This is our initial public offering, and no public market currently exists for our common stock. Our common stock has been approved for listing on the Nasdaq Global Market under the symbol "GSIT." Investing in our common stock involves risks. See "Risk Factors" beginning on page 5. Our products have lengthy sales cycles that make it difficult to plan our expenses and forecast results. Our products are generally incorporated in our OEM customers' products at the design stage. However, their decisions to use our products often require significant expenditures by us without any assurance of success, and often precede volume sales, if any, by a year or more. If an OEM customer decides at the design stage not to incorporate our products into their products, we will not have another opportunity for a design win with respect to that customer's product for many months or years, if at all. Our sales cycle can take up to 24 months to complete, and because of this lengthy sales cycle, we may experience a delay between increasing expenses for research and development and our sales and marketing efforts and the generation of volume production revenues, if any, from these expenditures. Moreover, the value of any design win will largely depend on the commercial success of our OEM customers' products. There can be no assurance that we will continue to achieve design wins or that any design win will result in future revenues. Any significant order cancellations or order deferrals could adversely affect our operating results. We typically sell products pursuant to purchase orders that customers can generally cancel or defer on short notice without incurring a significant penalty. Any significant cancellations or deferrals in the future could materially and adversely affect our business, financial condition and results of operations. Cancellations or deferrals could cause us to hold excess inventory, which could reduce our profit margins, increase product obsolescence and restrict our ability to fund our operations. We generally recognize revenue upon shipment of products to a customer. If a customer refuses to accept shipped products or does not pay for these products, we could miss future revenue projections or incur significant charges against our income, which could materially and adversely affect our operating results. We are subject to pending legal proceedings. We have been named as a defendant in a number of civil antitrust complaints filed against semiconductor companies on behalf of purported classes of direct and indirect purchasers of SRAM products throughout the United States. The complaints allege that the defendants conspired to raise the price of SRAM in violation of Section 1 of the Sherman Act, the California Cartwright Act, and several other state antitrust, unfair competition and consumer protection statutes. We believe that we have meritorious defenses to the allegations in the complaints, and we intend to defend these lawsuits vigorously. However, the litigation is in the preliminary stage and we cannot predict its outcome. Multidistrict antitrust litigation is particularly complex and can extend for a protracted time, which can substantially increase the cost of such litigation. The defense of these lawsuits is also expected to divert the efforts and attention of some of our key management and technical personnel. As a result, our defense of this litigation, regardless of its eventual outcome, will likely be costly and time consuming. Should the outcome of the litigation be adverse to us, we could be required to pay significant monetary damages, which could adversely affect our business, financial condition, operating results and cash flows. As our business grows, such growth may place a significant strain on our management and operations and, as a result, our business may suffer. We plan to continue expanding our business, and our expected growth could place a significant strain on our management systems, infrastructure and other resources. To manage the expected growth of our operations and increases in the number of our personnel, we will need to invest the necessary capital to improve our operational, financial and management controls and our reporting systems and procedures. Accordingly, we are currently transitioning the preparation of all of our internal reporting to a new enterprise resource planning system, which is expected to be implemented in the first quarter of fiscal 2008. If we encounter problems with the implementation of this system, we may have Per Share Total difficulties tracking internal information, which would adversely affect our ability to timely report our financial results. Our controls, systems and procedures might not be adequate to support a growing public company. In addition, we likely do not have sufficient administrative staff to support our operations. For example, we currently have only three employees in our finance department in the United States, including our Chief Financial Officer. Furthermore, our officers have limited experience in managing large or rapidly growing businesses and the majority of our management has no experience in managing a public company or communicating with securities analysts and public company investors. If our management fails to respond effectively to changes in our business, our business may suffer. Our international business exposes us to additional risks. Products shipped to destinations outside of the United States accounted for 51.9%, 48.3% and 49.4% of our net revenues in fiscal 2005 and 2006 and the nine months ended December 31, 2006, respectively. Moreover, a substantial portion of our products is manufactured and tested in Taiwan. We intend to expand our international business in the future. Conducting business outside of the United States subjects us to additional risks and challenges, including: heightened price sensitivity from customers in emerging markets; compliance with a wide variety of foreign laws and regulations; legal uncertainties regarding taxes, tariffs, quotas, export controls, competition, export licenses and other trade barriers; political and economic instability in, or foreign conflicts that involve or affect, the countries of our customers; difficulties in collecting accounts receivable and longer accounts receivable payment cycles; difficulties in staffing and managing personnel, distributors and representatives; limited protection for intellectual property rights in some countries; and fluctuations in freight rates and transportation disruptions. Moreover, our reporting currency is the U.S. dollar. However, a portion of our cost of revenues and our operating expenses is denominated in currencies other than the U.S. dollar, primarily the New Taiwanese dollar. As a result, appreciation or depreciation of other currencies in relation to the U.S. dollar could result in transaction gains or losses that could impact our operating results. We do not currently engage in currency hedging activities. TSMC, our other independent suppliers and many of our OEM customers have operations in the Pacific Rim, an area subject to significant earthquake risk and adverse consequences related to the potential outbreak of contagious diseases such as the Avian Flu. The foundry that manufactures our products, TSMC, and all of the principal independent suppliers that assemble and test our products are located in Taiwan. Many of our customers are also located in the Pacific Rim. The risk of an earthquake in these Pacific Rim locations is significant. The occurrence of an earthquake or other natural disaster near the fabrication facilities of TSMC or our other independent suppliers could result in damage, power outages and other disruptions that impair their production and assembly capacity. Any disruption resulting from such events could cause significant delays in the production or shipment of our products until we are able to shift our manufacturing, assembling, packaging or production testing from the affected contractor to another third-party vendor. In such an event, we may not be able to obtain alternate foundry capacity on favorable terms, or at all. The outbreak of SARS in 2003 curtailed travel to and from certain countries, primarily in the Asia-Pacific region, and limited travel within those countries. If there were to be another outbreak of a Public Offering Price $ 5.50 $ 33,721,111 Underwriting Discount $ 0.385 $ 2,360,478 Proceeds before expenses, to GSI Technology, Inc. $ 5.115 $ 31,360,633 contagious disease, such as SARS or the Avian Flu, that significantly affected the Asia-Pacific region, the operations of our key suppliers could be disrupted. In addition, our business could be harmed if such an outbreak resulted in travel being restricted, as it was during parts of 2003, or if it adversely affected the operations of our OEM customers or the demand for our products or our OEM customers' products. Changes in Taiwan's political, social and economic environment may affect our business performance. Because much of the manufacturing and testing of our products is conducted in Taiwan, our business performance may be affected by changes in Taiwan's political, social and economic environment. For example, any political instability resulting from the relationship among the United States, Taiwan and the People's Republic of China could damage our business. Moreover, the role of the Taiwanese government in the Taiwanese economy is significant. Taiwanese policies toward economic liberalization, and laws and policies affecting technology companies, foreign investment, currency exchange rates, taxes and other matters could change, resulting in greater restrictions on our ability and our suppliers' ability to do business and operate facilities in Taiwan. If any of these changes were to occur, our business could be harmed and our stock price could decline. Market demand for our products may decrease as a result of changes in general economic conditions, as well as incidents of terrorism, war and other social and political instability. Our revenues and gross profit depend largely on general economic conditions and, in particular, the strength of demand for our products in the markets in which we are doing business. From time to time, customers and potential customers have elected not to make purchases of our products due to reduced budgets and uncertainty about the future, and, in the case of distributors, declining demand from their customers for their solutions in which they integrate our products. Similarly, from time to time, acts of terrorism, in particular in the United States, have had a negative impact on information technology spending. High fuel prices and turmoil in the Middle East and elsewhere have increased uncertainty in the United States and our other markets. Should the current conflicts in the Middle East and in other parts of the world suppress economic activity in the United States or globally, our customers may delay or reduce their purchases on information technology, which would result in lower demand for our products and adversely affect our results of operations. We are substantially dependent on the continued services and performance of our senior management and other key personnel. Our future success is substantially dependent on the continued services and continuing contributions of our senior management who must work together effectively in order to design our products, expand our business, increase our revenues and improve our operating results. The loss of services of Lee-Lean Shu, our President and Chief Executive Officer, Robert Yau, our Vice President of Engineering, any other executive officer or other key employee could significantly delay or prevent the achievement of our development and strategic objectives. We do not have employment contracts with, nor maintain key person insurance on, any of our executive officers. If we are unable to recruit or retain qualified personnel, our business and product development efforts could be harmed. We must continue to identify, recruit, hire, train, retain and motivate highly skilled technical, managerial, sales and marketing and administrative personnel. Competition for these individuals is intense, and we may not be able to successfully recruit, assimilate or retain sufficiently qualified personnel. We may encounter difficulties in recruiting and retaining a sufficient number of qualified engineers, which could harm our ability to develop new products and adversely impact our relationships with existing and future end-users at a critical stage of development. The failure to recruit and retain Several of our stockholders have granted the underwriters the right to purchase up to an aggregate of 919,667 additional shares of our common stock to cover over-allotments. We will not receive any proceeds from the sale of any shares that may be sold by the selling stockholders. The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. It is illegal for any person to tell you otherwise. necessary technical, managerial, sales, marketing and administrative personnel could harm our business and our ability to obtain new OEM customers and develop new products. We may need to raise additional capital in the future, which may not be available on favorable terms or at all, and which may cause dilution to existing stockholders. We may need to seek additional funding in the future. We do not know if we will be able to obtain additional financing on favorable terms, if at all. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, and we may be required to reduce operating costs, which could seriously harm our business. In addition, if we issue equity securities, our stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of our common stock. Our products are increasingly being incorporated into advanced military electronics, and changes in international geopolitical circumstances and domestic budget considerations may hurt our business. Our products are increasingly being incorporated into advanced military electronics such as radar and guidance systems. Military expenditures and appropriations for such purchases have risen significantly in recent years. However, should the current conflicts in Iraq and Afghanistan and the general war on terror subside, our operating results would likely suffer. Domestic budget considerations may also adversely affect our operating results. For example, if governmental appropriations for military purchases of electronic devices that include our products are reduced, our revenues will likely decline. If we acquire any companies or technologies in the future, they could prove difficult to integrate, disrupt our business, dilute stockholder value and adversely affect our operating results. In the future, we may acquire or make investments in companies, assets or technologies that we believe are complementary or strategic. We have not made any acquisitions or investments to date, and therefore our ability as an organization to make acquisitions or investments is unproven. If we decide to make an acquisition or investment, we face numerous risks, including: difficulties in integrating operations, technologies, products and personnel; diversion of financial and managerial resources from existing operations; risk of overpaying for or misjudging the strategic fit of an acquired company, asset or technology; problems or liabilities stemming from defects of an acquired product or intellectual property litigation that may result from offering the acquired product in our markets; challenges in retaining employees key to maximize the value of the acquisition or investment; inability to generate sufficient return on investment; incurrence of significant one-time write-offs; and delays in customer purchases due to uncertainty. If we proceed with an acquisition or investment, we may be required to use a considerable amount of our cash, including proceeds from this offering, or to finance the transaction through debt or equity securities offerings, which may decrease our financial liquidity or dilute our stockholders and affect the market price of our stock. As a result, if we fail to properly evaluate and execute acquisitions or investments, our business and prospects may be harmed. Needham & Company, LLC WR Hambrecht + Co Maintaining and improving our financial controls and complying with rules and regulations applicable to public companies will be a significant burden on our management team and require considerable expenditures of our resources. As a public company, we will incur additional legal, accounting and other expenses that we do not incur as a private company. The Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and The Nasdaq Marketplace Rules, or Nasdaq rules, will apply to us as a public company. Compliance with these rules and regulations will necessitate significant increases in our legal and financial budgets and may also strain our personnel, systems and resources. The Exchange Act requires, among other things, filing of annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. Satisfying these requirements involves a commitment of significant resources and management oversight. As a result of management's efforts to comply with such requirements, other important business concerns may receive insufficient attention, which could have a material adverse effect on our business, financial condition and results of operations. Failure to meet certain of these regulatory requirements may also cause us to be delisted from the Nasdaq Global Market. In addition, in order to comply with these additional requirements, we are hiring and will continue to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge, which will increase our operating expenses in future periods. We also expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to maintain coverage. If we are unable to maintain adequate directors' and officers' insurance, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors, particularly to serve on our audit committee, and qualified executive officers. Our operations involve the use of hazardous and toxic materials, and we must comply with environmental laws and regulations, which can be expensive, and may affect our business and operating results. We are subject to federal, state and local regulations relating to the use, handling, storage, disposal and human exposure to hazardous and toxic materials. If we were to violate or become liable under environmental laws in the future as a result of our inability to obtain permits, human error, accident, equipment failure or other causes, we could be subject to fines, costs, or civil or criminal sanctions, face property damage or personal injury claims or be required to incur substantial investigation or remediation costs, which could be material, or experience disruptions in our operations, any of which could have a material adverse effect on our business. In addition, environmental laws could become more stringent over time imposing greater compliance costs and increasing risks and penalties associated with violations, which could harm our business. We also face increasing complexity in our product design as we adjust to new and future requirements relating to the materials composition of our products, including the restrictions on lead and other hazardous substances applicable to specified electronic products placed on the market in the European Union (Restriction on the Use of Hazardous Substances Directive 2002/95/EC, also known as the RoHS Directive). We also expect that our operations will be affected by other new environmental laws and regulations on an ongoing basis. Although we cannot predict the ultimate impact of any such new laws and regulations, they will likely result in additional costs, and could require that we change the design and/or manufacturing of our products, any of which could have a material adverse effect on our business. Current: U.S. federal $ $ 1,123 $ 875 Foreign 13 State 13 Robert W. Baird & Co. Stanford Group Company The date of this prospectus is , 2007 Risks Related to this Offering and Our Common Stock There has been no prior market for our common stock and the price of our common stock may decline after this offering. Before this offering, there has not been a public market for our common stock and the trading price of our common stock may decline below the initial public offering price. The initial public offering price has been determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. An active trading market may not develop and you may not be able to resell the shares you purchase at or above the initial public offering price, or at all. The trading price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control, including: actual or anticipated declines in operating results; changes in financial estimates or recommendations by securities analysts; announcements by us or our competitors of financial results, new products, significant technological innovations, contracts, acquisitions, strategic relationships, joint ventures, capital commitments or other events; rapid changes in industry estimates in demand for Very Fast SRAM products; the gain or loss of significant orders or customers; recruitment or departure of key personnel; and market conditions in our industry, the industries of our customers and the economy as a whole. If securities analysts do not publish research or reports about our business, our stock price could decline. The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. Other companies in our industry and market are larger, established, publicly traded companies. As a result, it may be difficult for us to attract analyst coverage. If we should be unable to attract analyst coverage or if one or more of these analysts should cease coverage of our company, our visibility in the financial market would suffer, which in turn could cause our stock price to decline. Furthermore, if one or more of the analysts who cover us downgrade our stock, our stock price would likely decline rapidly. The price of our stock may be volatile, which could harm our business or stockholders and result in litigation. In recent years the stock market in general, and the market for technology stocks in particular, have experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. The market price of our common stock might experience significant fluctuations in the future, including fluctuations unrelated to our performance. These fluctuations could materially adversely affect our business relationships, our ability to obtain future financing on favorable terms or otherwise harm our business. In addition, in the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. This risk is especially acute for us because the extreme volatility of market prices of technology companies has resulted in a larger number of securities class action claims against them. Due to the potential volatility of our stock price, we may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources. This could harm our business and cause the value of our stock to decline. We have no specific plan for the use of the net proceeds, and our investment of the net proceeds may not yield a favorable return. We plan to use most of the net proceeds from this offering for general corporate purposes, including working capital. We may use the net proceeds in ways with which our stockholders may not agree or that prove to be disadvantageous to our stockholders. We may not be able to invest the net proceeds of this offering in a manner that yields a favorable return, which could harm our financial position and cause the value of our stock to decline. After this offering we will continue to be controlled by our executive officers, directors and major stockholders, whose interests may conflict with yours. Upon completion of this offering, our executive officers, directors and major stockholders will beneficially own approximately 65.6% of our outstanding common stock. As a result, these stockholders will be able to exercise control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could have the effect of delaying or preventing a third party from acquiring control over or merging with us. The provisions of our charter documents might inhibit potential acquisition bids that a stockholder might believe are desirable, and the market price of our common stock could be lower as a result. Upon completion of this offering, our Board of Directors will have the authority to issue up to 5,000,000 shares of preferred stock. Our Board of Directors can fix the price, rights, preferences, privileges and restrictions of the preferred stock without any further vote or action by our stockholders. The issuance of shares of preferred stock might delay or prevent a change in control transaction. As a result, the market price of our common stock and the voting and other rights of our stockholders might be adversely affected. The issuance of preferred stock might result in the loss of voting control to other stockholders. We have no current plans to issue any shares of preferred stock. Our charter documents also contain other provisions, which might discourage, delay or prevent a merger or acquisition, including: our stockholders have no right to remove directors without cause; our stockholders have no right to act by written consent; our stockholders have no right to call a special meeting of stockholders; and stockholders must comply with advance notice requirements to nominate directors or submit proposals for consideration at stockholder meetings. These provisions could also have the effect of discouraging others from making tender offers for our common stock. As a result, these provisions might prevent the market price of our common stock from increasing substantially in response to actual or rumored takeover attempts. These provisions might also prevent changes in our management. You will experience immediate and substantial dilution in the book value of your shares. The initial public offering price of our common stock is substantially higher than the book value per share of our outstanding common stock immediately after the offering. Accordingly, if you purchase common stock in the offering, you will incur immediate dilution of approximately $3.07 in the book value of our common stock at the initial public offering price of $5.50 per share, based on pro forma net tangible book value as of December 31, 2006. You will experience additional dilution upon the exercise of outstanding options. As of December 31, 2006, there were 4,348,869 shares issuable upon the exercise of outstanding options with a weighted average exercise price of $3.52. In addition, you may experience dilution upon the exercise TABLE OF CONTENTS Page 221,561 immediately as of the date of this prospectus 21,181,268 180 days after the date of this prospectus, upon expiration of the lock-up agreements We intend to register on a Form S-8 registration statement under the Securities Act of 1933 a total of approximately 3,500,000 shares of common stock reserved for issuance under our stock option and employee stock purchase plans. As of December 31, 2006, there were outstanding options to purchase 4,348,869 shares of common stock, of which options to purchase 2,920,999 shares were vested and exercisable. We do not expect to pay any cash dividends for the foreseeable future. We do not anticipate that we will pay any cash dividends to holders of our common stock in the foreseeable future. Our credit line with Mega International Commercial Bank Co., Ltd., prohibits us from paying any cash dividend without the consent of that bank. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends in the foreseeable future should not purchase our common stock. U.S. Federal taxes at statutory rate $ (228 ) $ 1,572 $ 1,503 State taxes, net of federal benefit 61 130 (109 ) Stock-based compensation 179 40 32 Tax credits (220 ) (219 ) (228 ) Valuation allowance (782 ) (1,698 ) Release of tax reserve (895 ) Other 990 FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA This prospectus includes forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. These forward-looking statements are subject to a number of risks, uncertainties and assumptions about us, including among other things: general economic and business conditions, both nationally and internationally; our expectations and estimates concerning future financial performance, financing plans and the impact of competition; anticipated trends in our business; existing and future regulations affecting our business; and other risk factors set forth under Risk Factors in this prospectus. In this prospectus, the words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," "could," "plan" and similar expressions, as they relate to us, our business or our management, are intended to identify forward-looking statements. In evaluating these statements, you should specifically consider various factors, including the risk factors described above and in other parts of this prospectus. These factors may cause our actual results to differ materially from those anticipated or implied in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus. Information contained in this prospectus concerning our industry and the projected growth rate of the markets in which we participate is based on industry publications, surveys and forecasts generated by Gartner Dataquest and other sources. We have not independently verified their data. USE OF PROCEEDS At the initial public offering price of $5.50 per share, we will receive approximately $30.2 million from our sale of 6,131,111 shares of common stock in this offering, after deducting the underwriting discount and estimated offering expenses of approximately $1.2 million, that includes $30,000 of estimated offering expenses payable by us on behalf of the selling stockholders. If the underwriters exercise their over-allotment option in full, the selling stockholders will receive approximately $4.7 million from their sale of 919,667 shares of our common stock, after deducting the underwriting discount. We will not receive any portion of the net proceeds from the sale of any shares that may be sold by the selling stockholders upon exercise of the underwriters' over-allotment option. The principal purposes of this offering are to obtain additional capital, establish a public market for our common stock and facilitate our future access to public capital markets. We intend to use the net proceeds of this offering for working capital and other general corporate purposes, including capital expenditures and research and development. We may use a portion of the net proceeds to acquire businesses, products or technologies that are complementary to our current or future business and product lines; however, we have never made an acquisition and currently have no specific acquisitions planned. Our management will have significant flexibility in applying the net proceeds of this offering. Pending such uses, we will invest the net proceeds of this offering in investment grade, interest-bearing securities. DIVIDEND POLICY We have never declared or paid cash dividends on our common stock. We currently intend to retain future earnings to finance the growth and development of our business, and we do not anticipate declaring or paying any cash dividends in the foreseeable future. Our line of credit with Mega International Commercial Bank Co., Ltd. prohibits us from paying cash dividends without the consent of that bank. themselves about, and observe any restrictions relating to the offering and the distribution of this prospectus outside of the United States. (1)In connection with the offering, our estimated offering expenses are $1,150,000, which will be recorded as an issuance cost and, therefore, will be recorded as a reduction in additional paid in capital. We will also pay approximately $30,000 representing incremental expenses attributable to the selling stockholders, which will be expensed, thereby reducing retained earnings. The information above excludes: 4,348,869 shares issuable upon the exercise of options outstanding as of December 31, 2006 under our 1997 and 2000 stock option plans, with a weighted average exercise price of $3.52 per share; 559,897 shares authorized for future issuance under our 2000 stock option plan; 3,000,000 shares authorized for future issuance under our 2007 equity incentive plan; and Market data and industry statistics used throughout this prospectus are based on independent industry publications and other publicly available information. We have not independently verified this information. 500,000 shares authorized for future issuance under our 2007 employee stock purchase plan. The number of shares authorized for future issuance under our 2007 equity incentive plan and 2007 employee stock purchase plan reflected above does not include shares that may be available for future issuance pursuant to the automatic share reserve increase provisions of these plans. The share reserve for our 2007 equity incentive plan will automatically increase on April 1 of each year, from 2008 to 2017, by an amount equal to the lesser of (a) five percent of the number of shares issued and outstanding as of the immediately preceding March 31, or (b) a lesser amount determined by the Board. The share reserve for our 2007 employee stock purchase plan will automatically increase on April 1 of each year, from 2008 to 2017, by an amount equal to the lesser of (x) one percent of the number of shares issued and outstanding as of the immediately preceding March 31, or (y) 250,000 shares. (1)In the event that the underwriters exercise their over-allotment option in full, sales by the selling stockholders in this offering will reduce the number of shares held by existing stockholders to 20,483,162, or 74.4% of the total number of shares of common stock outstanding after this offering, and will increase the number of shares to be purchased by the new public investors to 7,050,778, or 25.6% of the total number of shares of common stock outstanding after the offering. See "Principal and Selling Stockholders." The information in the above table excludes 4,348,869 shares issuable upon exercise of options outstanding at December 31, 2006 under our 1997 and our 2000 stock option plans, with a weighted average exercise price of $3.52 per share. To the extent these options are exercised, there will be further dilution to the new investors. Assuming the exercise of all outstanding options as of December 31, 2006: the pro forma as adjusted net tangible book value of our common stock would have been $2.58 per share, representing an immediate dilution of $2.92 per share to new investors; the number of shares purchased by existing stockholders would have been 25,751,698; the total consideration paid by existing stockholders would have been $24.9 million; and the average price per share paid by existing stockholders would have been $0.97. (1)In fiscal 2002, we received $3.5 million of refunds from the United States Customs Service, or USCS, in connection with the revocation by the United States Department of Commerce of an order that had imposed a duty on us for selling our Taiwan-manufactured products in the U.S. at less than their fair market value. The revocation followed a ruling in our favor by the Court of International Trade. Of this amount, $2.2 million was credited to cost of revenues, $396,000 was credited to interest income, and the remaining $985,000 was credited to a receivable from the USCS that had been recorded on the date of the refund order. (2)In fiscal 2003, we received $876,000 of refunds from the USCS, of which $792,000 was credited to the receivable from the USCS and $84,000 was credited to interest income. (3)On April 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment ("SFAS 123(R)"), using the modified prospective transition method. The impact of adoption of SFAS 123(R) was to reduce income before income tax by $809,000, net income by $787,000 and basic and diluted net income per share by $0.13 and $0.03, respectively, for the nine months ended December 31, 2006. (in thousands) Consolidated Balance Sheet Data: Cash, cash equivalents and short-term investments $ 9,334 $ 6,150 $ 3,488 $ 11,522 $ 15,505 $ 14,905 Working capital 24,896 17,694 18,152 23,504 26,453 33,168 Total assets 32,504 23,803 30,899 33,524 39,544 50,754 Redeemable convertible preferred stock 9,007 9,007 9,007 9,007 9,007 9,007 Total stockholders' equity 18,033 11,696 11,619 16,568 20,958 27,825
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus, but it may not contain all of the information that is important to you. We urge you to read this entire prospectus including the section entitled Risk Factors and the financial statements and related notes, before investing in our common stock. Unless the context otherwise requires, as used in this prospectus, (i) the terms we, our, us, the Company, Chart Industries and similar terms refer to Chart Industries, Inc. and its consolidated subsidiaries, (ii) the term issuer refers to Chart Industries, Inc. and not any of its subsidiaries and (iii) the term initial public offering refers to our initial public offering of common stock which was completed on July 31, 2006. Chart Industries, Inc. Our Company We are a leading independent global manufacturer of highly engineered equipment used in the production, storage and end-use of hydrocarbon and industrial gases, based on our sales and the estimated sales of our competitors. We supply engineered equipment used throughout the global liquid gas supply chain. The largest portion of end-use applications for our products is energy-related, accounting for 56% of sales and 58% of orders in 2006, and 79% of backlog at December 31, 2006. We are a leading manufacturer of standard and engineered equipment primarily used for low-temperature and cryogenic, or very low temperature, applications. We have developed an expertise in cryogenic systems and equipment, which operate at low temperatures sometimes approaching absolute zero (0 kelvin; 273o Centigrade; 459o Fahrenheit). The majority of our products, including vacuum-insulated containment vessels, heat exchangers, cold boxes and other cryogenic components, are used throughout the liquid gas supply chain for the purification, liquefaction, distribution, storage and end-use of hydrocarbon and industrial gases. We have attained this position by capitalizing on our low-cost global manufacturing footprint, technical expertise and know-how, broad product offering, reputation for quality, and by focusing on attractive, growing markets. We have an established sales and customer support presence across the globe and low-cost manufacturing operations in the United States, Central Europe and China. We believe we are the number one or two equipment supplier in all of our primary end-use markets. For the three months ended March 31, 2007 and 2006, we generated sales of $152.5 million and $120.8 million, respectively. For the year ended December 31, 2006, the combined year ended December 31, 2005 and the year ended December 31, 2004, we generated sales of $537.5 million, $403.1 million and $305.6 million, respectively. We believe that we are well-positioned to benefit from a variety of long-term trends driving demand in our industry, including: increasing demand for natural gas and the geographic dislocation of supply and consumption, which is resulting in the need for a global network for liquefied natural gas, or LNG; increasing demand for natural gas processing, particularly in the Middle East, as crude oil producers look to utilize the gas portions of their reserves; and increased demand for natural and industrial gases resulting from rapid economic growth in developing areas, particularly Central and Eastern Europe and China. We operate in three segments: (i) Energy and Chemicals, or E C, (ii) Distribution and Storage, or D S, and (iii) BioMedical. While each segment manufactures and markets different cryogenic equipment and systems to distinct end-users, they all share a reliance on our heat transfer and low temperature storage know-how and expertise. The E C and D S segments manufacture products used in energy-related and other applications, such as the separation, liquefaction, distribution and storage of hydrocarbon and industrial gases. Through our BioMedical segment, we supply cryogenic equipment used in the storage and distribution of biological materials and oxygen, used primarily in the medical, biological research and animal breeding industries. Table of Contents Competitive Strengths We believe that the following competitive strengths position us to enhance our growth and profitability: Focus on Attractive Growing End Markets. We anticipate growing demand in the end markets we serve, with particularly strong growth in LNG, natural gas processing, specific international markets across all segments, and biomedical equipment. Rapid economic development in developing areas, particularly Central and Eastern Europe and China, has caused a significant increase in the demand for natural and industrial gases. Substantial Revenue Visibility. We have a large and growing backlog, which provides us with a high degree of visibility in our forecasted revenue. Our backlog as of March 31, 2007, December 31, 2006, December 31, 2005 and December 31, 2004 was $342.2 million, $319.2 million, $233.6 million and $129.3 million, respectively. Projects for energy-related applications totaled approximately $251.0 million in backlog as of December 31, 2006. Leading Market Positions. We believe we are the #1 or #2 equipment supplier in each of our primary end markets both domestically and internationally. We believe that our strong industry positioning makes us typically one of only two or three suppliers qualified to provide certain products to key customers. Diverse, Long-Standing Customer Base. We currently serve over 2,000 customers worldwide. Our primary customers are large, multinational producers and distributors of hydrocarbon and industrial gases that provide us with revenue stability. Customers and end-users also include high growth LNG processors, petrochemical processors and biomedical companies. We have developed strong, long-standing relationships with these customers. Highly Flexible and Low-Cost Manufacturing Base. Given our long-term investment in global manufacturing facilities and specialized equipment, we have developed a substantial comparative scale and geographic advantage within the markets for the cryogenic products that we manufacture with more than 1.9 million square feet of manufacturing space across 12 primary facilities and three continents. This scale and the related substantial operational flexibility enable us to be a low-cost producer for our products. Product Expertise, Quality, Reliability and Know-How. Within our end markets, we have established a reputation for quality, reliability and technical innovation. We believe that the main drivers of our target customers purchasing decisions are a supplier s product expertise, quality, reliability and know-how rather than pricing and terms, giving us an advantage based on our reputation and consequent brand recognition. We believe it would be difficult for a new entrant to duplicate our capabilities. Experienced Management Team. We have assembled a strong senior management team with over 250 combined years of related experience and complementary skills. This team is largely responsible for our strong performance since 2003. Business Strategy We believe that we are well-positioned to maintain our leadership in providing highly engineered equipment for use in low-temperature and cryogenic applications and to meet the world s growing demand for hydrocarbon and industrial gases with more economical, reliable and environmentally friendly systems. The principal elements of our strategy are as follows: Continue to develop innovative, high-growth, energy-specific products. We plan to continue to focus on extending our cryogenic technological leadership, both to capitalize on increasing demand for energy and to create new applications. Leverage our global platform to capitalize on growing international demand. We expect growth in hydrocarbon and industrial gas demand and investment over the next five years in the Middle East, Central and Eastern Europe, Russia and China. We believe that our investment in manufacturing, sales and marketing capabilities positions us to increase our market share in these growing international markets. Capitalize on our position as a market leader. We plan to continue to grow our long-standing relationships with the leading users of cryogenic equipment and expand our customer base. Table of Contents Darwin LNG liquefaction facility in Northern Territory, Australia, including Chart vacuum-insulated pipe and vacuum-insulated pipe riser modules for large storage tanks Chart brazed aluminum heat exchanger core for use in an air separation cold box Atlantic LNG Company plant, Point Fortin, Trinidad Tobago, including Chart liquefaction cold boxes and vacuum-insulated pipe for jetty cool-down lines (Photo courtesy Atlantic LNG Company, Point Fortin, Trinidad Tobago) Table of Contents Maintain our position as a low-cost producer while continuing to improve operating performance. We believe we are the lowest cost manufacturer for most of our products and we intend to continue to leverage our scale, scope, technical expertise and know-how to deliver to our customers higher quality and more reliable products and services at lower cost. Our disciplined approach to capital expenditures is intended to enhance capacity where we expect to realize significant and timely returns. Recent Developments On March 19, 2007, Mr. Ben A. Guill announced his resignation from our board of directors effective March 19, 2007. Mr. Guill s resignation from the board of directors, where he served as our Chairman, did not involve any disagreement with us on any matter relating to our operations, policies or practices. Mr. Guill resigned from the board of directors in connection with his resignation from First Reserve Corporation, or First Reserve, to explore new challenges which may include deal sourcing and/or another affiliation with First Reserve while allowing him more time with his family and to pursue other personal interests. On March 27, 2007, the board of directors designated Mr. Samuel F. Thomas, our Chief Executive Officer and President, to serve as Chairman. In the first quarter of 2007, Mr. John T. Romain resigned as President of our E C segment and left our company in the second quarter of 2007. On May 14, 2007, Michael T. Bright joined our company as President of our E C segment. Primarily as a result of the vesting of the performance-based options based on First Reserve achieving a specified investment return upon completion of this offering, we estimate that we will incur a pre-tax, non-cash stock-based compensation expense of approximately $7.0 million in the period in which this offering is consummated (assuming a sale price equal to the last reported sale price of our common stock on May 25, 2007). Mr. Thomas established a Rule 10b5-1 stock sale plan in late 2006. Under the plan, Mr. Thomas sold 60,000 shares of our common stock between March 22, 2007 and March 28, 2007 at prices ranging from $17.11 to $18.61 per share in accordance with the plan. Risk Factors Investing in our common stock involves substantial risk. You should carefully consider all the information in this prospectus prior to investing in our common stock. Our ability to execute our strategy is subject to the risks that are generally associated with the production, storage and end-use of hydrocarbon and industrial gases. We are also subject to a number of risks related to our competitive position, operations and business strategies. For example, our strategy relating to potential acquisitions exposes us to the risks involved in consummating and integrating acquisitions, including the risk that in a future acquisition we could incur additional debt and contingent liabilities which could adversely affect our operating results. For additional risks relating to our business and the offering, see Risk Factors beginning on page 11 of this prospectus. Company Information Chart Industries, Inc. is a Delaware corporation incorporated in 1992. Our principal executive offices are located at One Infinity Corporate Centre Drive, Suite 300, Garfield Heights, Ohio, 44125 and our telephone number is (440) 753-1490. On July 8, 2003, we and all of our then majority-owned U.S. subsidiaries filed voluntary petitions for reorganization relief under Chapter 11 of the U.S. Bankruptcy Code. On September 15, 2003, we and those subsidiaries emerged from Chapter 11 proceedings. On August 2, 2005, we entered into an agreement and plan of merger with certain of our stockholders, First Reserve, and CI Acquisition, Inc., which provided for the sale of shares of common stock of Chart Industries, Inc. by certain of its stockholders to CI Acquisition and the merger of CI Acquisition with and into Chart Industries, with Chart Industries surviving the merger as an indirect, wholly-owned subsidiary of First Reserve. We refer to the stock purchase, the merger and the related financing thereof collectively as the Acquisition. Before the closing of the Acquisition by First Reserve on October 17, 2005, we filed periodic and other reports with the Securities and Exchange Commission. We ceased filing those reports upon the closing of the Acquisition TABLE OF CONTENTS Page Prospectus Summary 1 Risk Factors 11 Special Note Regarding Forward-Looking Statements 25 Market and Industry Data 27 Use of Proceeds 28 Dividend Policy 29 Price Range of Our Common Stock 29 Capitalization 30 Selected Historical Consolidated Financial Data 31 Management s Discussion and Analysis of Financial Condition and Results of Operations 35 Industry Overview 63 Business 66 Management 77 Principal and Selling Stockholders 103 Certain Related Party Transactions 106 Description of Indebtedness 108 Description of Capital Stock 113 Shares Eligible for Future Sale 117 Material United States Federal Income and Estate Tax Consequences to Non-U.S. Holders 119 Underwriting 122 Validity of the Shares 126 Independent Registered Public Accounting Firm 126 Where You Can Find More Information 126 Index to Financial Statements F-1 EX-5.1 EX-23.1 You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell shares of common stock and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the shares of common stock. Table of Contents when our pre-Acquisition securities were cancelled and ceased to be outstanding. Since the completion of our initial public offering on July 31, 2006, we have filed periodic and other reports with the Securities and Exchange Commission. The financial statements and other financial data presented in this prospectus are of Chart Industries, Inc. and its direct and indirect subsidiaries. Equity Sponsor First Reserve is the oldest and largest private equity firm specializing in the energy industry. Founded in 1983, First Reserve was the first private equity investment firm to actively pursue building a broadly diversified global investment portfolio of companies involved in the various sectors of the energy industry. Since 1992, First Reserve has raised over $12.7 billion for its buyout-focused funds and made more than 65 principal transactions. In addition, First Reserve portfolio companies have completed 230 add-on transactions. Past and present public First Reserve portfolio companies include Chicago Bridge and Iron N.V., Weatherford International, Dresser-Rand Group Inc., Pride International, Inc., Alpha Natural Resources, Foundation Coal, China Coal Energy Company Limited, T-3 Energy Services Inc. and Quintana Maritime Limited. Table of Contents The Offering Selling Stockholders FR X Chart Holdings LLC, certain of our executive officers, including Messrs. Thomas and Biehl, and other employees. Our executive officers and other employees are selling 236,434 shares in the aggregate. Shares of common stock offered by the selling stockholders 12,612,648 shares. Shares of common stock outstanding after this offering 25,647,791 shares (including shares currently subject to options that are expected to be exercised in connection with this offering). Over-allotment option 1,891,897 shares. Use of proceeds We will not receive any of the proceeds from the sale of shares by the selling stockholders. The selling stockholders will receive all the net proceeds from the sale of shares of common stock offered by this prospectus. In the event the underwriters exercise any part of their over-allotment option, we intend to use the proceeds for general corporate purposes, including reduction of our indebtedness. See Use of Proceeds. Nasdaq Global Market GTLS Unless we specifically state otherwise, all information in this prospectus: assumes no exercise by the underwriters of their option to purchase additional shares; and excludes 2,391,860 shares of common stock reserved for issuance under stock options granted before the date of this prospectus that we expect to continue to be outstanding under our plans after this offering, which options would be exercisable at a weighted average exercise price of $7.43. Table of Contents Summary Historical Financial Information The financial statements referred to as the Predecessor Company financial statements include the consolidated audited financial statements of Chart Industries, Inc. and its subsidiaries prior to the Acquisition. The financial statements referred to as the Company financial statements include the consolidated audited financial statements of Chart Industries, Inc. and its subsidiaries after the Acquisition. The following table sets forth our summary historical consolidated financial and other data as of the dates and for the periods indicated. The Predecessor Company summary historical financial statements and other data for the year ended December 31, 2004 and the period from January 1, 2005 to October 16, 2005 are derived from our audited financial statements for such periods included elsewhere in this prospectus, which have been audited by Ernst Young LLP. The Company summary historical financial statements and other data as of and for the period from October 17, 2005 to December 31, 2005 and the year ended December 31, 2006 are derived from our audited financial statements for such periods included elsewhere in this prospectus, which have been audited by Ernst Young LLP. The Company unaudited summary historical financial information and other data for the three months ended March 31, 2006 and as of and for the three months ended March 31, 2007, respectively, have been derived from the unaudited condensed consolidated financial statements and related notes which are included elsewhere in this prospectus, and reflect all adjustments, consisting of normal, recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the Company s financial position, results of operation and cash flows for the three months ended March 31, 2006 and as of and for the three months ended March 31, 2007 and are not necessarily indicative of our results of operations for the full year. The data should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein. The historical consolidated financial data presented below is not necessarily indicative of our future performance. This information is only a summary and should be read in conjunction with Selected Historical Consolidated Financial Data, Management s Discussion and Analysis of Financial Condition and Results of Operations and our audited consolidated financial statements and related notes included elsewhere in this prospectus. Table of Contents Predecessor Company Company January 1, October 17, Three Months Three Months Year Ended 2005 to 2005 to Year Ended Ended Ended December 31, October 16, December 31, December 31, March 31, March 31, 2004 2005 2005 2006 2006 2007 (Dollars and shares in thousands, except per share data) (Unaudited) Statement of Operations Data: Sales $ 305,576 $ 305,497 $ 97,652 $ 537,454 $ 120,840 $ 152,463 Cost of sales(1) 211,770 217,284 75,733 382,535 83,853 112,604 Gross Profit 93,806 88,213 21,919 154,919 36,987 39,859 Selling, general and administrative expenses(2) 53,374 59,826 16,632 87,652 21,039 22,473 Restructuring and other operating expenses, net(3) 3,353 7,528 217 396 162 99 56,727 67,354 16,849 88,048 21,201 22,572 Operating income 37,079 20,859 5,070 66,871 15,786 17,287 Interest expense, net(4) 4,712 4,164 5,556 25,461 6,545 6,346 Other expense (income) (465 ) 659 409 1,003 222 50 4,247 4,823 5,965 26,464 6,767 6,396 Income (loss) from operations before income taxes and minority interest 32,832 16,036 (895 ) 40,407 9,019 10,891 Income tax expense (benefit) 10,134 7,159 (441 ) 13,044 2,980 3,713 Income (loss) from operations before minority interest 22,698 8,877 (454 ) 27,363 6,039 7,178 Minority interest, net of taxes and other (98 ) (19 ) (52 ) (468 ) (6 ) Net income (loss) $ 22,600 $ 8,858 $ (506 ) $ 26,895 $ 6,045 $ 7,178 Earnings (loss) per share data: Basic earnings (loss) per share $ 4.22 $ 1.65 $ (0.06 ) $ 1.70 $ 0.76 $ 0.28 Diluted earnings (loss) per share(5)(6) $ 4.10 $ 1.57 $ (0.06 ) $ 1.65 $ 0.73 $ 0.28 Weighted average shares basic 5,351 5,366 7,952 15,835 7,952 25,604 Weighted average shares diluted 5,516 5,649 7,952 16,269 8,285 25,810 Cash flow data: Net cash provided by operating activities $ 35,059 $ 15,641 $ 14,635 $ 36,398 $ 11,895 $ 1,037 Net cash (used in) investing activities $ (3,317 ) $ (20,799 ) $ (362,250 ) $ (38,664 ) $ (2,566 ) $ (6,646 ) Net cash (used in) provided by financing activities $ (35,744 ) $ 1,708 $ 348,489 $ 9,235 $ (5,839 ) $ (928 ) Other financial data: Depreciation and amortization(7) $ 8,490 $ 6,808 $ 4,396 $ 22,449 $ 5,194 $ 4,991 EBITDA(8) $ 45,936 $ 26,989 $ 9,005 $ 87,849 $ 20,764 $ 22,228 Capital expenditures $ 9,379 $ 11,038 $ 5,601 $ 22,253 $ 2,566 $ 5,024 Backlog $ 129,278 $ 206,215 $ 233,639 $ 319,153 $ 237,033 $ 342,182 Table of Contents As of December 31, As of March 31, 2006 2007 (In thousands) (Unaudited) Balance Sheet Data: Cash and cash equivalents $ 18,854 $ 12,359 Working capital(9) $ 73,290 $ 84,286 Total assets(10) $ 724,875 $ 736,316 Debt: Short-term debt $ 750 $ Long-term debt $ 290,000 Total debt $ 290,750 $ 290,000 Shareholder s equity $ 219,734 $ 226,963 (1) The period from October 17, 2005 to December 31, 2005 includes non-cash inventory valuation charges of $8.9 million related to purchase accounting. (2) Includes amortization expense related to intangible assets for the year ended December 31, 2004, the period from January 1, 2005 to October 16, 2005, the period from October 17, 2005 to December 31, 2005, the year ended December 31, 2006, the three months ended March 31, 2006 and the three months ended March 31, 2007 of $2.8 million, $2.7 million, $3.0 million, $15.4 million, $3.6 million and $3.0 million, respectively. Includes charges (income), net of insurance recoveries, related to Hurricane Rita of $1.1 million, $0.4 million and ($2.3 million) for the period from January 1, 2005 to October 16, 2005, the period from October 17, 2005 to December 31, 2005 and the year ended December 31, 2006, respectively. (3) Includes gain or loss on sale of assets. (4) Includes derivative contract valuation income or expense for interest rate collars to manage interest exposure relative to term debt. (5) The basic and diluted loss or earnings per share for the period from October 17, 2005 to December 31, 2005 are the same because incremental shares issuable upon conversion are anti-dilutive. (6) Diluted earnings (loss) per share for the three months ended March 31, 2007 are not comparable to diluted earnings (loss) per share for the three months ended March 31, 2006 due to the change in our capital structure upon completion of our initial public offering in July 2006. (7) The period from October 17, 2005 to December 31, 2005, the year ended December 31, 2006, the three months ended March 31, 2006 and the three months ended March 31, 2007 include financing costs amortization of $0.3 million, $1.5 million, $0.4 million and $0.4 million, respectively (8) EBITDA is calculated as net income (loss) before income tax expense and interest expense plus depreciation and amortization. Adjusted EBITDA is defined as EBITDA adjusted as indicated below. EBITDA and Adjusted EBITDA are not intended to represent cash flow from operations as defined by U.S. GAAP and should not be used as an alternative to net income as an indicator of operating performance or to cash flow as a measure of liquidity. EBITDA and Adjusted EBITDA are included in this prospectus because they are a basis upon which our management assesses financial performance. The senior secured credit facility also includes the definition of pro forma EBITDA which is used in the calculation of certain covenants. Pro forma EBITDA is calculated based on EBITDA and is adjusted in a manner similar to that described herein. While EBITDA and Adjusted EBITDA are frequently used as a measure of operations and the ability to meet debt service requirements, they are not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation. The following table reconciles EBITDA to net income (loss): Table of Contents Predecessor Company Company January 1, October 17, Three Months Three Months Year Ended 2005 to 2005 to Year Ended Ended Ended December 31, October 16, December 31, December 31, March 31, March 31, 2004 2005 2005 2006 2006 2007 Statement of Operations Data: Net income (loss) $ 22,600 $ 8,858 $ (506 ) $ 26,895 $ 6,045 $ 7,178 Income tax expense (benefit) 10,134 7,159 (441 ) 13,044 2,980 3,713 Interest expense net(a) 4,712 4,164 5,556 25,461 6,545 6,346 Depreciation and amortization(b) 8,490 6,808 4,396 22,449 5,194 4,991 EBITDA $ 45,936 $ 26,989 $ 9,005 $ 87,849 $ 20,764 $ 22,228 (a) Includes derivative contract valuation income or expense for interest rate collars to manage interest exposure relative to term debt. (b) The period from October 17, 2005 to December 31, 2005, the year ended December 31, 2006, the three months ended March 31, 2006 and the three months ended March 31, 2007 include financing costs amortization of $0.3 million, $1.5 million, $0.4 million and $0.4 million, respectively. The following table reconciles EBITDA to Adjusted EBITDA as such terms are defined in our senior secured credit facility and the indenture governing the notes. Certain covenants under the senior secured credit facility are also tied to ratios based on Adjusted EBITDA and our ability to engage in activities such as incurring additional debt, making investments and paying dividends under both our indenture and senior secured credit facility are also tied to ratios based on Adjusted EBITDA: Predecessor Company Company January 1, October 17, Three Months Three Months Year Ended 2005 to 2005 to Year Ended Ended Ended December 31, October 16, December 31, December 31, March 31, March 31, 2004 2005 2005 2006 2006 2007 (In thousands) EBITDA $ 45,936 $ 26,989 $ 9,005 $ 87,849 $ 20,764 $ 22,228 Stock-based compensation expense(a) 2,433 9,508 437 1,907 321 361 Inventory valuation charge(b) 8,903 Acquisition expenses(c) 6,602 In-process research and development charge(d) 2,768 Hurricane storm costs (recoveries)(e) 1,057 406 (1,593 ) 182 Offering expenses(f) 260 Employee separation and plant closure costs(g) 3,346 1,700 255 396 162 99 Reorganization expenses(h) 706 1,470 88 162 45 Appraisal rights settlement(i) 500 Management fees(j) 380 306 Loss (gain) on sale of assets(k) 133 (131 ) 78 Adjusted EBITDA $ 52,934 $ 50,269 $ 19,672 $ 88,721 $ 21,474 $ 22,948 (a) Represents stock-based compensation charges for stock and stock options issued to key employees and directors, and an additional charge for the cash-out of stock options in the period from January 1, 2005 to October 16, 2005 as a result of the Acquisition. Although it may be of limited relevance to holders of our debt instruments, it may be of more relevance to our equity holders, since such equity holders ultimately bear such expenses Table of Contents (b) Represents a non-cash inventory valuation charge recorded in cost of sales for the adjustment of inventory to fair value as a result of purchase accounting as of October 17, 2005, the closing date of the Acquisition. Under purchase accounting, inventory was adjusted to the fair value as of the date indicated above, and a corresponding charge was taken in the subsequent period from October 17, 2005 to December 31, 2005 cost of sales as the inventory was sold. (c) Represents acquisition expenses, primarily professional fees, incurred by us as a result of the Acquisition. (d) Represents a non-cash charge for purchased in-process research and development in conjunction with the acquisition of Changzhou CEM Cryo Equipment Co., Ltd., or CEM, in 2005. (e) Represents losses and costs incurred related to Hurricane Rita at our New Iberia, Louisiana facilities, net of insurance recoveries. (f) Represents offering expenses, primarily professional fees, incurred by us as a result of this offering. (g) Includes inventory valuation charges recorded in cost of sales, and severance expenses, facility exit costs and non-operating expenses related to the execution of our operational restructuring plan, which primarily included moving the Burnsville, Minnesota manufacturing operations to Canton, Georgia and closing the Plaistow, New Hampshire manufacturing facility. See Management s Discussion and Analysis of Financial Condition and Results of Operations for additional information. (h) Represents pre-bankruptcy debt restructuring-related fees, professional fees and expenses, and a claim settlement related to our 2003 bankruptcy reorganization. See Management s Discussion and Analysis of Financial Condition and Results of Operations for additional information. (i) Represents a charge for the settlement of former Predecessor Company stockholders appraisal rights claims as a result of the Acquisition. (j) Represents non-recurring management fees charged by our Predecessor Company majority stockholders, which are not charged by First Reserve. (k) Includes non-recurring gains and losses and charges on the sale, disposal or impairment of assets. See Management s Discussion and Analysis of Financial Condition and Results of Operations for additional information. (9) Working capital is defined as current assets, excluding cash, less current liabilities, excluding short-term debt. (10) Includes $247.1 million of goodwill and $146.6 million of finite-lived and indefinite-lived intangible assets as of December 31, 2006. Includes $246.8 million of goodwill and $143.6 million of finite-lived and indefinite-lived intangible assets as of March 31, 2007. Table of Contents EXHIBIT INDEX Exhibit No. Description 1 .1 Form of Underwriting Agreement.* 2 .1 Agreement and Plan of Merger, dated as of August 2, 2005 by and among Chart Industries, Inc., certain of its stockholders, First Reserve Fund X, L.P. and CI Acquisition, Inc. (incorporated by reference to Exhibit 2.1 to the Registrant s Registration Statement on Form S-1 (File No. 333-133254)). 2 .2 Asset Purchase Agreement among GT Acquisition Company and Greenville Tube, LLC, dated July 1, 2003 (incorporated by reference to Exhibit 2.2 to the Registrant s Registration Statement on Form S-1 (File No. 333-133254)). 3 .1 Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 5 to the Registrant s Registration Statement on Form S-1 (File No. 333-133254)). 3 .2 Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2 to Amendment No. 5 to the Registrant s Registration Statement on Form S-1 (File No. 333-133254)). 4 .1 Form of Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 4 to the Registrant s Registration Statement on Form S-1 (File No. 333-133254)). 4 .2 Indenture, dated as of October 17, 2005, between Chart Industries, Inc. and The Bank of New York as trustee (incorporated by reference to Exhibit 4.2 to the Registrant s Registration Statement on Form S-1 (File No. 333-133254)). 4 .3 Registration Rights Agreement, dated October 17, 2005 among Chart Industries, Inc., the subsidiary guarantors party thereto and Morgan Stanley Co., as representative of the initial purchasers (incorporated by reference to Exhibit 4.3 to the Registrant s Registration Statement on Form S-1 (File No. 333-133254)). 5 .1 Form of Opinion of Simpson Thacher Bartlett LLP. 10 .1 Underwriting Agreement, dated July 25, 2006, among Chart Industries Inc. and the several underwriters named therein (incorporated by reference to Exhibit 10.1 to Registrant s quarterly report on Form 10-Q for the period ended September 30, 2006 (File No. 001-11442)). 10 .2 Form of Amended and Restated Management Stockholders Agreement (incorporated by reference to Exhibit 10.10 to Amendment No. 3 to the Registrant s Registration Statement on Form S-1 (File No. 333-133254)). 10 .3 Stockholder Agreement, dated July 25, 2006, by and between Chart Industries, Inc. and FR X Chart Holdings LLC (incorporated by reference to Exhibit 10.3 to Registrant s quarterly report on Form 10-Q for the period ended September 30, 2006 (File No. 001-11442)). 10 .4 Amended and Restated Chart Industries, Inc. 2005 Stock Incentive Plan (incorporated by reference to Exhibit 10.16 to Amendment No. 4 to the Registrant s Registration Statement on Form S-1 (File No. 333-133254)).** 10 .4.1 Form of Nonqualified Stock Option Agreement under the 2005 Stock Incentive Plan (incorporated by reference to Exhibit 10.17 to the Registrant s Registration Statement on Form S-1 (File No. 333-133254)).** 10 .4.2 Form of Restricted Stock Unit Agreement (for non-employee directors) under the Amended and Restated Chart Industries, Inc. 2005 Stock Incentive Plan (incorporated by reference to Exhibit 10.22 to Amendment No. 4 to the Registrant s Registration Statement on Form S-1 (File No. 333-133254)).** 10 .5 Chart Industries, Inc. 2004 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.11 to the Registrant s Registration Statement on Form S-1 (File No. 333-133254)).** 10 .5.1 Amendment No. 1 to the 2004 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.13 to Amendment No. 1 to the Registrant s Registration Statement on Form S-1 (File No. 333-133254)).** 10 .5.2 Form of Stock Option Agreement under the 2004 Stock Option and Incentive Plan (for Samuel F. Thomas) (incorporated by reference to Exhibit 10.13 to the Registrant s Registration Statement on Form S-1 (File No. 333-133254)).** Table of Contents RISK FACTORS Investing in our common stock involves substantial risk. You should carefully consider the risks described below as well as the other information contained in this prospectus, prior to investing in our common stock. Any of the following risks could materially adversely affect our business, financial condition and results of operations. In such case, you may lose all or part of your original investment. Risks Related to our Business The markets we serve are subject to cyclical demand, which could harm our business and make it difficult to project long-term performance. Demand for our products depends in large part upon the level of capital and maintenance expenditures by many of our customers and end users, in particular those customers in the global hydrocarbon and industrial gas markets. These customers expenditures historically have been cyclical in nature and vulnerable to economic downturns. Decreased capital and maintenance spending by these customers could have a material adverse effect on the demand for our products and our business, financial condition and results of operations. In addition, this historically cyclical demand limits our ability to make accurate long-term predictions about the performance of our company. For example, certain of our core businesses underperformed in the years prior to 2004 due to a general downturn in capital spending in the global and domestic industrial gas markets. While we have experienced demand growth since late 2003 in the global hydrocarbon and industrial gas markets, this growth may not continue and our businesses performance may not be markedly better or may be worse in the future. For example, while we have recently experienced increased order activity for smaller LNG projects and industrial gas plants, we have experienced delay in the receipt of some large LNG liquefier and GTL projects resulting from industry cost growth, constrained resources and local political uncertainty. In addition, changing world economic and political conditions may reduce the willingness of our customers and prospective customers to commit funds to purchase our products and services. Further, in 2005, the U.S. government announced the reduction of the amount of dollars it offered as reimbursement to our customers for purchasing our medical oxygen therapy products, which has adversely affected demand for these products. The loss of, or significant reduction or delay in, purchases by our largest customers could reduce our revenues and profitability. Although no single customer accounted for more than 10% of our total sales for the year ended December 31, 2006, a small number of customers has accounted for a substantial portion of our historical net sales, and we expect that a limited number of customers will continue to represent a substantial portion of our sales for the foreseeable future. Approximately 35%, 33% and 39% of our sales for the years ended December 31, 2006, 2005 and 2004, respectively, were made to Praxair, Air Liquide, Air Products, Bechtel, Airgas, Linde and JGC, which management believes are the largest producers and distributors of hydrocarbon and industrial gases, and their suppliers. The loss of any of our major customers or a decrease or delay in orders or anticipated spending by such customers could materially reduce our revenues and profitability. Our largest customers, could also engage in business combinations which could increase their size, reduce their demand for our products as they recognize synergies or rationalize assets and increase or decrease the portion of our total sales concentration to any single customer. For example, Linde and BOC, or combined known as The Linde Group, engaged in a business combination in 2006. Additionally, we currently sell all of our magnetic resonance imaging, or MRI, components to GE, a leading worldwide manufacturer of MRI equipment, which accounted for $8.8 million in sales for the year ended December 31, 2006. The loss of, or significant reduction in, purchases of our MRI components by GE could reduce revenues and profitability in our BioMedical segment. We may be unable to compete successfully in the highly competitive markets in which we operate. Although many of our products serve niche markets, a number of our direct and indirect competitors in these markets are major corporations, some of which have substantially greater technical, financial and marketing resources than we, and other competitors may enter these markets. Any increase in competition may cause us to lose market share or compel us to reduce prices to remain competitive, which could result in reduced sales and earnings. Table of Contents Companies that operate in our industry are Air Products, Kobe, The Linde Group, Nordon, Puritan-Bennett, a division of Tyco International, Ltd., Sumitomo and Taylor-Wharton, a Harsco Company. Additionally, we compete with several suppliers owned by global industrial gas producers and many smaller fabrication-only facilities around the world. Increased competition with these companies could prevent the institution of price increases or could require price reductions or increased spending on research and development and marketing and sales, any of which could materially reduce our revenues, profitability or both. In the event of an industry downturn, customers who typically outsource their need for cryogenic systems to us may use their excess capacity to produce such systems themselves. We also compete in the sale of a limited number of products with certain of our major customers. We will soon be required to evaluate our internal controls under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price. The initial public offering resulted in our becoming subject to reporting and other obligations under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Beginning with the year ending December 31, 2007, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we will be required to furnish a report by our management on our internal control over financial reporting, and our auditors will be required to deliver an attestation report on management s assessment of and operating effectiveness of internal controls. The report by our management must contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting and audited consolidated financial statements as of the end of our fiscal year. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. Unlike many companies whose shares are publicly traded, we are not presently required to be in compliance with Section 404 s internal control requirements. We have substantial effort ahead of us to complete documentation of our internal control system and financial processes, information systems, assessment of their design, remediation of control deficiencies identified in these efforts and management testing of the designs and operation of internal controls. We may not be able to complete the required management assessment by our reporting deadline or may not meet applicable standards in following years. An inability to complete and document this assessment or to comply in following years could result in our receiving less than an unqualified report from our auditors with respect to our internal controls. This could cause investors to lose confidence in the accuracy and completeness of our financial reports, which could decrease the price of our stock. As a global business, we are exposed to economic, political and other risks in different countries which could materially reduce our revenues, profitability or cash flows, or materially increase our liabilities. Since we manufacture and sell our products worldwide, our business is subject to risks associated with doing business internationally. In 2006, 52% of our sales were made in international markets. Our future results could be harmed by a variety of factors, including: changes in foreign currency exchange rates; exchange controls and currency restrictions; changes in a specific country s or region s political, social or economic conditions, particularly in emerging markets; civil unrest, turmoil or outbreak of disease in any of the countries in which we operate; tariffs, other trade protection measures and import or export licensing requirements; potentially negative consequences from changes in U.S. and international tax laws; difficulty in staffing and managing geographically widespread operations; differing labor regulations; requirements relating to withholding taxes on remittances and other payments by subsidiaries; Table of Contents different regulatory regimes controlling the protection of our intellectual property; restrictions on our ability to own or operate subsidiaries, make investments or acquire new businesses in these jurisdictions; restrictions on our ability to repatriate dividends from our foreign subsidiaries; difficulty in collecting international accounts receivable; difficulty in enforcement of contractual obligations under non-U.S. law; transportation delays or interruptions; changes in regulatory requirements; and the burden of complying with multiple and potentially conflicting laws. Our international operations also expose us to different local political and business risks and challenges. For example, we are faced with potential difficulties in staffing and managing local operations and we have to design local solutions to manage credit and legal risks of local customers and distributors. In addition, because some of our international sales are to suppliers that perform work for foreign governments, we are subject to the political risks associated with foreign government projects. For example, certain foreign governments may require suppliers for a project to obtain products solely from local manufacturers or may prohibit the use of products manufactured in certain countries. International growth and expansion into emerging markets, such as China, Central and Eastern Europe, and the Middle East, may cause us difficulty due to greater regulatory barriers than in the United States, the necessity of adapting to new regulatory systems, problems related to entering new markets with different economic, social and political systems, and significant competition from the primary participants in these markets, some of which may have substantially greater resources than us. Our overall success as a global business depends, in part, upon our ability to succeed in differing economic, social and political conditions. We may not succeed in developing and implementing policies and strategies to counter the foregoing factors effectively in each location where we do business and the foregoing factors may cause a reduction in our revenues, profitability or cash flows, or cause an increase in our liabilities. If we are unable to successfully manage our growth, it may place a significant strain on our management and administrative resources and lead to increased costs and reduced profitability. We expect to continue to expand our operations in the United States and abroad, particularly in China and the Czech Republic. Our ability to operate our business successfully and implement our strategies depends, in part, on our ability to allocate our resources optimally in each of our facilities in order to maintain efficient operations as we expand. Ineffective management of our growth could cause manufacturing inefficiencies, increase our operating costs, place significant strain on our management and administrative resources and prevent us from implementing our business plan. For example, we have invested or plan to invest up to $30 million in new capital expenditures in the United States and China in 2006 and 2007 related to the expected growth of our E C and D S segments. If we fail to implement these capital projects in a timely and effective manner, we may lose the opportunity to obtain some customer orders. Even if we effectively implement these projects, the orders needed to support the capital expenditure may not be obtained, may be delayed or may be less than expected, which may result in sales or profitability at lower levels than anticipated. We have experienced some delay in orders related to our E C segment expansion from the timing initially anticipated in connection with that expansion, which has resulted in the underutilization of some of our capacity, and we cannot provide assurance when those orders will be obtained, if ever. In addition, potential cost overruns, delays or unanticipated problems in any capital expansion could make the expansion more costly than originally predicted. Table of Contents If we lose our senior management or other key employees, our business may be adversely affected. Our ability to successfully operate and grow our business and implement our strategies is largely dependent on the efforts, abilities and services of our senior management and other key employees. Our future success will also depend on, among other factors, our ability to attract and retain qualified personnel, such as engineers and other skilled labor, either through direct hiring or the acquisition of other businesses employing such professionals. Our products, many of which are highly engineered, represent specialized applications of cryogenic or low temperature technologies and know-how, and many of the markets we serve represent niche markets for these specialized applications. Accordingly, we rely heavily on engineers, salespersons, business unit leaders, senior management and other key employees who have experience in these specialized applications and are knowledgeable about these niche markets, our products, and our company. Additionally, we may modify our management structure from time to time. We recently named a new president to lead our E C segment, and the change of leadership in that segment may create marketing, operational and other business risks. The loss of the services of these senior managers or other key employees, any modification of our management structure or the failure to attract or retain other qualified personnel could reduce the competitiveness of our business or otherwise impair our business prospects. Fluctuations in the prices and availability of raw materials and our exposure to fixed-price contracts, including exposure to fixed pricing on long-term customer contracts, could negatively impact our financial results. The pricing and availability of raw materials for use in our businesses can be volatile due to numerous factors beyond our control, including general, domestic and international economic conditions, labor costs, production levels, competition, consumer demand, import duties and tariffs and currency exchange rates. This volatility can significantly affect the availability and cost of raw materials for us, and may, therefore, increase the short-term or long-term costs of raw materials. The commodity metals we use, including aluminum and stainless steel, have experienced significant upward fluctuations in price. On average, over half of our cost of sales is represented by the cost of commodities metals. We have generally been able to recover the cost increases through price increases to our customers; however, during periods of rising prices of raw materials, such as in 2004, 2005, 2006 and 2007, we may be unable to pass a portion of such increases on to our customers. Conversely, when raw material prices decline, customer demands for lower prices could result in lower sale prices and, to the extent we have existing inventory, lower margins. As a result, fluctuations in raw material prices could result in lower revenues and profitability. In addition, a substantial portion of our sales is derived from fixed-price contracts for large system projects, which may involve long-term fixed price commitments to customers. Among our long-term fixed-price contracts, we presently are executing two large projects each involving over $20 million of revenue on which our margins have deteriorated significantly, as previously disclosed. On one of these projects, we have experienced significant cost overruns, and the other was disrupted by a storm and related damage. The customer for one of these projects made the decision in the first quarter of 2007 to repair the damage through costly purchases of new replacement materials and has asserted we are responsible for other repairs. We may be required to pay for some of these or other repair costs in the future to the extent the customer successfully asserts that we are responsible for the damage occurring, which we would contest vigorously. To the extent that any of our fixed-price contracts are delayed, contract counterparties successfully assert claims against us, the original cost estimates in these or other contracts prove to be inaccurate or the contracts do not permit us to pass increased costs on to our customers, profitability from a particular contract may decrease, which, in turn, could decrease our revenues and overall profitability. The uncertainties associated with our fixed-price contracts make it more difficult to predict our future results and exacerbate the risk that our results will not match expectations, which has happened in the past. We may fail to successfully acquire or integrate companies that provide complementary products or technologies. A component of our business strategy is the acquisition of businesses that complement our existing products and services. Such a strategy involves the potential risks inherent in assessing the value, strengths, weaknesses, contingent or other liabilities and potential profitability of acquisition candidates and in integrating the operations Table of Contents of acquired companies. In addition, any acquisition of a foreign business may increase our exposure to certain risks inherent in doing business outside the United States. From time to time, we may have acquisition discussions with potential target companies. If a large acquisition opportunity arises and we proceed, a substantial portion of our surplus borrowing capacity could be used for the acquisition or we may seek additional debt or equity financing. We are not presently engaged in any negotiations concerning any acquisition which may be material in size and scope to our business. We anticipate, however, that one or more potential acquisition opportunities could become available in the future. If and when appropriate acquisition opportunities become available, we may pursue them actively. Any acquisition may or may not occur and, if an acquisition does occur, it may not be successful in enhancing our business for one or more of the following reasons: Any business acquired may not be integrated successfully and may not prove profitable; The price we pay for any business acquired may overstate the value of that business or otherwise be too high; We may fail to achieve acquisition synergies; or The focus on the integration of operations of acquired entities may divert management s attention from the day-to-day operation of our businesses. Inherent in any future acquisition is the risk of transitioning company cultures and facilities. The failure to efficiently and effectively achieve such transitions could increase our costs and decrease our profitability. If we are unable to continue our technological innovation in our business and successful introduction of new commercial products, our profitability could be adversely affected. The industries we serve, particularly the energy and biomedical industries, experience periodic technological change and product improvement. Manufacturers periodically introduce new generations of products or require new technological capacity to develop customized products or respond to industry developments or needs. Our future growth will depend on our ability to gauge the direction of the commercial and technological progress in our markets, as well as our ability to acquire new product technology or fund and successfully develop, manufacture and market products in this constantly changing environment. We must continue to identify, develop, manufacture and market innovative products on a timely basis to replace existing products in order to maintain our profit margins and competitive position. We may not be successful in acquiring and developing new products or technology and any of our new products may not be accepted by our customers. If we fail to keep pace with evolving technological innovations in the markets we serve, our profitability may decrease. We carry significant goodwill and indefinite-lived intangible assets on our balance sheet, which are subject to impairment testing and could subject us to significant charges to earnings in the future if impairment occurs. As of March 31, 2007, we had goodwill and indefinite-lived intangible assets of $281.3 million, which represented approximately 38% of our total assets. Goodwill and indefinite-lived intangible assets are not amortized but are tested for impairment annually or more often if events or changes in circumstances indicate a potential impairment may exist. Factors that could indicate that our goodwill or indefinite-lived intangible assets are impaired include a decline in stock price and market capitalization, lower than projected operating results and cash flows, and slower growth rates in our industry. To test for impairment, a model to estimate the fair market value of our reporting segments has been developed. This fair market value model incorporates our estimates of future operating results and cash flows, estimates of allocations of certain assets and cash flows among reporting segments, estimates of future growth rates and our judgment regarding the applicable discount rates to use to discount those estimated operating results and cash flows. If an impairment is determined to exist, we are required to record a charge to earnings in our financial statements, which may be significant, as in 2002 when we recorded a non-cash impairment charge of $92.4 million to write off non-deductible goodwill of the D S segment. While we do not presently anticipate that any of our goodwill or indefinite-lived intangible assets will be impaired in the Table of Contents foreseeable future, if an impairment is determined to exist and we are required to record a charge to earnings, it may result in significantly decreased profitability and shareholders equity. We may be required to make material expenditures in order to comply with environmental, health and safety laws, or incur additional liabilities under these laws. We are subject to numerous environmental, health and safety laws and regulations that impose various environmental controls on us or otherwise relate to environmental protection and various health and safety matters, including the discharge of pollutants in the air and water, the handling, use, treatment, storage and clean-up of solid and hazardous materials and wastes, the investigation and remediation of soil and groundwater affected by hazardous substances, and the requirement to obtain and maintain permits and licenses. These laws and regulations often impose strict, retroactive and joint and several liability for the costs of, and damages resulting from, cleaning up our, or our predecessors , past or present facilities and third party disposal sites. Compliance with these laws generally increases the costs of transportation and storage of raw materials and finished products, as well as the costs of storing and disposing waste, and could decrease our liquidity and profitability and increase our liabilities. Health and safety and other laws in the jurisdictions in which we operate, impose various requirements on us including state licensing requirements that may benefit our customers. If we are found to have violated any of these laws, we may become subject to corrective action orders and fines or penalties, and incur substantial costs, including substantial remediation costs and commercial liability to our customers. For example, in a project involving over $20 million in total revenue, we were subject to an investigation that commenced in the fourth quarter of 2006 by state regulators concerning whether one of our subsidiaries is required to have a license to install our manufactured equipment. Although we do not believe we are required to be licensed, if we were formally found to be in violation of the licensing requirement, we could owe substantial penalties to the state or be required to return job revenues to the customer. Further, we also could be subject to future liability resulting from conditions that are currently unknown to us that could be discovered in the future. We are currently remediating or developing work plans for remediation of environmental conditions involving certain current or former facilities. For example, the discovery of contamination arising from historical industrial operations at our Clarksville, Arkansas property has exposed us, and in the future may continue to expose us, to remediation obligations. To date, our environmental remediation expenditures and costs for otherwise complying with environmental laws and regulations have not been material, but the uncertainties associated with the investigation and remediation of contamination and the fact that such laws or regulations change frequently makes predicting the cost or impact of such laws and regulations on our future operations uncertain. Stricter environmental, safety and health laws, regulations or enforcement policies could result in substantial costs and liabilities to us and could subject us to more rigorous scrutiny. Consequently, compliance with these laws could result in significant expenditures as well as other costs and liabilities that could decrease our liquidity and profitability and increase our liabilities. The insolvency of our formerly consolidated subsidiary, Chart Heat Exchangers Limited, could have a material adverse impact on our liquidity and financial position. On March 28, 2003, our U.K. subsidiary, Chart Heat Exchangers Limited, or CHEL, which previously operated the closed Wolverhampton, United Kingdom manufacturing facility, filed for a voluntary administration under the U.K. Insolvency Act of 1986. CHEL s application for voluntary administration was approved on April 1, 2003 and an administrator was appointed. Additionally, we received information that indicated that CHEL s net pension plan obligations had increased significantly, primarily due to a decline in plan asset values and interest rates, as well as increased plan liabilities, resulting in an estimated plan deficit of approximately $12 million as of March 2003. Based on our financial condition in March 2003, we determined not to advance funds to CHEL in amounts necessary to fund CHEL s obligations. Since CHEL was unable to fund its net pension deficit, the trustees of the CHEL pension plan requested a decision to wind-up the plan from a U.K. pension regulatory board. That board approved the wind-up as of March 28, 2003. While no claims related to the CHEL insolvency presently are pending against us, persons impacted by the insolvency or others could bring pension and/or benefit related claims against us. Claims may be asserted against us for pension or other obligations of CHEL related to these matters. To Table of Contents the extent we are found to have significant liability with respect to CHEL s obligations, such liability could have a material adverse impact on our liquidity, profitability and financial condition as a result of CHEL s insolvency. Due to the nature of our business and products, we may be liable for damages based on product liability and warranty claims. Due to the high pressures and low temperatures at which many of our products are used and the fact that some of our products are relied upon by our customers or end users in their facilities or operations, or are manufactured for relatively broad consumer use, we face an inherent risk of exposure to claims in the event that the failure, use or misuse of our products results, or is alleged to result, in bodily injury, property damage or economic loss. We believe that we meet or exceed existing professional specification standards recognized or required in the industries in which we operate. We have been subject to claims in the past, none of which have had a material adverse effect on our financial condition or results of operations, and we may be subject to claims in the future. Although we currently maintain product liability coverage, which we believe is adequate for the continued operation of our business, such insurance may become difficult to obtain or unobtainable in the future on terms acceptable to us and may not cover warranty claims. A successful product liability claim or series of claims against us, including one or more consumer claims purporting to constitute class actions, in excess of our insurance coverage or a significant warranty claim or series of claims against us could materially decrease our liquidity and impair our financial condition. Increases in labor costs, potential labor disputes and work stoppages at our facilities could materially decrease our revenues and profitability. Our financial performance is affected by the availability of qualified personnel and the cost of labor. As of March 31, 2007, we had 2,686 employees, including 906 salaried, 324 bargaining unit hourly and 1,456 non-bargaining unit hourly employees. Employees represented by a union were subject to one collective bargaining agreement in the United States that expired in February 2007. A new three-year agreement was entered into in February 2007, and expires in February 2010. In connection with negotiating this new collective bargaining agreement, we experienced a work stoppage from the time that the previous agreement expired on February 3, 2007 until the terms of the new agreement were reached on February 7, 2007. If we are unable to enter into new, satisfactory labor agreements with our unionized employees when necessary in the future or other labor controversies or union organizing efforts arise, we could experience a significant disruption to our operations, lose business or experience an increase in our operating expenses, which could reduce our profit margins. We may have to make significant cash payments to our defined benefit pension plans, reducing the cash available for our business. We have four defined benefit pension plans covering certain U.S. hourly and salaried employees. All of these plans have been frozen. Our current funding policy is to contribute at least the minimum funding amounts required by law. Based on current actuarial estimates, we contributed $1.3 million to our U.S. defined benefit pension plans during 2006 and expect to contribute $0.7 million during 2007. If the performance of our assets in our pension plans does not meet our expectations or if other actuarial assumptions are modified, our contributions could be higher than we expect, thus reducing the available cash for our business. Fluctuations in exchange and interest rates may affect our operating results. Fluctuations in the value of the U.S. dollar may decrease our sales or earnings. Because our consolidated financial results are reported in U.S. dollars, if we generate sales or earnings in other currencies, the translation of those results into U.S. dollars can result in a significant increase or decrease in the amount of those sales or earnings. We also bid for certain foreign projects in U.S. dollars. If the U.S. dollar strengthens relative to the value of the local currency, we may be less competitive on those projects. In addition, our debt service requirements are primarily in U.S. dollars and a portion of our cash flow is generated in euros or other foreign currencies. Significant changes in the value of the foreign currencies relative to the U.S. dollar could limit our ability to meet interest and principal payments on our debt and impair our financial condition. Table of Contents In addition, fluctuations in currencies relative to the U.S. dollar may make it more difficult to perform period-to-period comparisons of our reported results of operations. For purposes of accounting, the assets and liabilities of our foreign operations, where the local currency is the functional currency, are translated using period-end exchange rates, and the revenues and expenses of our foreign operations are translated using average exchange rates during each period. In addition to currency translation risks, we incur currency transaction risk whenever we or one of our subsidiaries enters into either a purchase or a sales transaction using a currency other than the local currency of the transacting entity. Given the volatility of exchange rates, we may not be able to effectively manage our currency and/or translation risks. Volatility in currency exchange rates may decrease our revenues and profitability and impair our financial condition. We have purchased and may continue to purchase foreign currency forward purchase and sales contracts to manage the risk of adverse currency fluctuations. Our operations could be impacted by the effects of hurricanes, which could be more severe than the damage and impact that our New Iberia, Louisiana operations encountered from hurricanes in 2005. Some of our operations, including our operations in New Iberia, Louisiana and Houston, Texas, are located in geographic regions and physical locations that are susceptible to physical damage and longer-term economic disruption from hurricanes. We also could make significant capital expenditures in hurricane-susceptible locations from time to time. These weather events can disrupt our operations, result in damage to our properties and negatively affect the local economy in which these facilities operate. In 2005, for example, our New Iberia, Louisiana operations encountered some damage from the storm surge and flooding caused by Hurricane Rita. Future hurricanes may cause production or delivery delays as a result of the physical damage to the facilities, the unavailability of employees and temporary workers, the shortage of or delay in receiving certain raw materials or manufacturing supplies and the diminished availability or delay of transportation for customer shipments, any of which may have an adverse affect on our revenues and profitability. Although we maintain insurance subject to certain deductibles, which may cover some of our losses, that insurance may become unavailable or prove to be inadequate. Failure to protect our intellectual property and know-how could reduce or eliminate any competitive advantage and reduce our sales and profitability. We rely on a combination of internal procedures, nondisclosure agreements, intellectual property rights assignment agreements, licenses, patents, trademarks and copyright law to protect our intellectual property and know-how. Our intellectual property rights may not be successfully asserted in the future or may be invalidated, circumvented or challenged. For example, we frequently explore and evaluate potential relationships and projects with other parties, which often requires that we provide the potential partner with confidential technical information. While confidentiality agreements are typically put in place, there is a risk the potential partner could violate the confidentiality agreement and use our technical information for its own benefit or the benefit of others or compromise the confidentiality. In addition, the laws of certain foreign countries in which our products may be sold or manufactured do not protect our intellectual property rights to the same extent as the laws of the United States. For example, we are increasing our manufacturing capabilities and sales in China, where laws may not protect our intellectual property rights to the same extent as in the United States. Failure or inability to protect our proprietary information could result in a decrease in our sales or profitability. We have obtained and applied for some U.S. and foreign trademark and patent registrations and will continue to evaluate the registration of additional trademarks and patents, as appropriate. We cannot guarantee that any of our pending applications will be approved. Moreover, even if the applications are approved, third parties may seek to oppose or otherwise challenge them. A failure to obtain registrations in the United States or elsewhere could limit our ability to protect our trademarks and technologies and could impede our business. The patents in our patent portfolio are scheduled to expire between 2007 and 2024. In addition, we may be unable to prevent third parties from using our intellectual property rights and know-how without our authorization or from independently developing intellectual property that is the same as or similar to ours, particularly in those countries where the laws do not protect our intellectual property rights as fully as in the United States. We compete in a number of industries (for example, heat exchangers and cryogenic storage) that are Table of Contents small or specialized, which makes it easier for a competitor to monitor our activities and increases the risk that ideas will be stolen. The unauthorized use of our know-how by third parties could reduce or eliminate any competitive advantage we have developed, cause us to lose sales or otherwise harm our business or increase our expenses as we attempt to enforce our rights. We may be subject to claims that our products or processes infringe the intellectual property rights of others, which may cause us to pay unexpected litigation costs or damages, modify our products or processes or prevent us from selling our products. Although it is our intention to avoid infringing or otherwise violating the intellectual property rights of others, third parties may nevertheless claim (and have in the past claimed) that our processes and products infringe their intellectual property and other rights. For example, a third party has claimed that we may infringe certain patents related to cryogenic pipe technology and may have breached an undertaking relating to same, although we believe that these claims are without merit. In addition, our BioMedical business manufactures products for relatively broad consumer use, is actively marketing these products in multiple jurisdictions internationally and risks infringing technologies that may be protected in one or more of these international jurisdictions as the scope of our international marketing efforts expands. Our strategies of capitalizing on growing international demand as well as developing new innovative products across multiple business lines present similar infringement claim risks both internationally and in the United States as we expand the scope of our product offerings and markets. We compete with other companies for contracts in some small or specialized industries, which increases the risk that the other companies will develop overlapping technologies leading to an increased possibility that infringement claims will arise. Whether or not these claims have merit, we may be subject to costly and time-consuming legal proceedings, and this could divert our management s attention from operating our businesses. In order to resolve such proceedings, we may need to obtain licenses from these third parties or substantially re-engineer or rename our products in order to avoid infringement. In addition, we might not be able to obtain the necessary licenses on acceptable terms, or at all, or be able to reengineer or rename our products successfully. We are subject to regulations governing the export of our products. Due to our significant foreign sales, our export activities are subject to regulation, including the U.S. Treasury Department s Office of Foreign Assets Control s regulations. While we believe we are in compliance with these regulations, we may currently or may in the future be in violation of these regulations. Any violations may subject us to government scrutiny, investigation and civil and criminal penalties and may limit our ability to export our products. Additional liabilities related to taxes could adversely impact our financial results, financial condition and cash flow. We are subject to tax and related obligations in the jurisdictions in which we operate or do business, including state, local, federal and foreign taxes. The taxing rules of the various jurisdictions in which we operate or do business often are complex and subject to varying interpretations, and tax authorities may challenge tax positions that we take or historically have taken, and may assess taxes where we have not made tax filings or may audit the tax filings we have made and assess additional taxes. Some of these assessments may be substantial, and also may involve the imposition of substantial penalties and interest. For example, a state in which we operate has asserted that we may be liable for substantial state income taxes, penalties and interest related to our operations in the state from 1993 to 2000. The taxes asserted by the state pre-date the Acquisition, and we believe that if the state issued a formal assessment and was successful in pursuing that assessment against us, the amounts owed, except for penalties and interest for periods after the Acquisition, would increase our goodwill instead of being charged against our earnings, but the negative cash flow impact could be significant and there could be a negative impact on our earnings related to post-Acquisition penalties and interest. We would vigorously contest any such assessment, if issued, including through administrative and court proceedings, but we may be unsuccessful and ultimately required to pay additional taxes, penalties and interest. Also, our federal income tax returns for 2004 and 2005 are currently under routine audit by the Internal Revenue Service. These audits could possibly result in additional taxes, penalties and interest. The payment of substantial additional taxes, penalties or interest resulting from these assessments could materially and adversely impact our financial results, financial condition and cash flow. Table of Contents As a provider of products to the U.S. government, we are subject to federal rules, regulations, audits and investigations, the violation or failure of which could adversely affect our business. We sell certain of our products to the U.S. government and, therefore, we must comply with and are affected by laws and regulations governing purchases by the U.S. government. Government contract laws and regulations affect how we do business with our government customers and, in some instances, impose added costs on our business. For example, a violation of specific laws and regulations could result in the imposition of fines and penalties or the termination of our contracts or debarment from bidding on contracts. In some instances, these laws and regulations impose terms or rights that are more favorable to the government than those typically available to commercial parties in negotiated transactions. Depending upon the number of shares sold by First Reserve in this offering, we may be influenced by First Reserve whose interests may not be aligned with yours or ours. FR X Chart Holdings, LLC, an affiliate of First Reserve, owns a significant portion of our common stock. If FR X Chart Holdings, LLC continues to own a significant portion of our stock after this offering, First Reserve may have the ability to influence our policies and operations, including the election of directors, the appointment of management, the entering into of mergers, sales of substantially all of our assets and other extraordinary transactions, future issuances of our common stock or other securities, the implementation of stock repurchase programs, the payments of dividends, if any, on our common stock, the incurrence of debt by us and amendments to our certificate of incorporation and bylaws. In addition, if FR X Chart Holdings, LLC continues to hold 10% of our common stock, FR X Chart Holdings, LLC has the right to designate members of our board of directors as described below under the caption Certain Related Party Transactions Stockholders Agreement. Additionally, First Reserve is in the business of advising investment partnerships on making investments in companies and may from time to time cause them to acquire and hold interests in businesses that compete directly or indirectly with us or which may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. So long as FR X Chart Holdings, LLC continues to own a significant amount of our equity, even if it is less than 50%, First Reserve will continue to be able to strongly influence or effectively control our decisions. Risks Related to our Leverage Our substantial leverage and significant debt service obligations could adversely affect our financial condition, limit our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, impact the way we operate our business, expose us to interest rate risk to the extent of our variable rate debt and prevent us from fulfilling our debt service obligations. We are highly leveraged and have significant debt service obligations. Our financial performance could be affected by our substantial leverage. As of March 31, 2007, our total indebtedness was $290.0 million. In addition, at that date, we had approximately $22.6 million of letters of credit and bank guarantees outstanding and borrowing capacity of approximately $92.4 million under the revolving portion of our senior secured credit facility, after giving effect to the letters of credit and bank guarantees outstanding. We may also incur additional indebtedness in the future. This high level of indebtedness could have important negative consequences to us and you, including: we may have difficulty generating sufficient cash flow to pay interest and satisfy our debt obligations; we may have difficulty obtaining financing in the future for working capital, capital expenditures, acquisitions or other purposes; we will need to use a substantial portion of our available cash flow to pay interest and principal on our debt, which will reduce the amount of money available to finance our operations and other business activities; some of our debt, including our borrowings under our senior secured credit facility, has variable rates of interest, which exposes us to the risk of increased interest rates; our debt level increases our vulnerability to general economic downturns and adverse industry conditions; our debt level could limit our flexibility in planning for, or reacting to, changes in our business and in our industry in general; Table of Contents our substantial amount of debt and the amount we must pay to service our debt obligations could place us at a competitive disadvantage compared to our competitors that have less debt; our customers may react adversely to our significant debt level and seek or develop alternative suppliers; and our failure to comply with the financial and other restrictive covenants in our debt instruments which, among other things, require us to maintain specified financial ratios and limit our ability to incur debt and sell assets, could result in an event of default that, if not cured or waived, could have a material adverse effect on our business or prospects. Our net cash flow generated from operating activities was $1.0 million, $36.4 million, $30.3 million (on a combined basis) and $35.1 million for the three months ended March 31, 2007 and the years 2006, 2005 and 2004, respectively. Our high level of indebtedness requires that we use a substantial portion of our cash flow from operations to pay principal of, and interest on, our indebtedness, which will reduce the availability of cash to fund working capital requirements, capital expenditures, research and development or other general corporate or business activities, including future acquisitions. In addition, a substantial portion of our indebtedness bears interest at variable rates. If market interest rates increase, debt service on our variable-rate debt will rise, which would adversely affect our cash flow. Although our senior secured credit facility requires us to employ hedging strategies such that not less than 50% of our total debt carries a fixed rate of interest for a period of three years following consummation of the Acquisition, any hedging arrangement put in place may not offer complete protection from this risk. Additionally, the remaining portion of the senior secured credit facility may not be hedged and, accordingly, the portion that is not hedged will be subject to changes in interest rates. Our business may not generate sufficient cash flow from operations and future borrowings may not be available to us under our senior secured credit facility or otherwise in an amount sufficient to permit us to pay the principal and interest on our indebtedness or fund our other liquidity needs. We may be unable to refinance any of our debt, including our senior secured credit facility or the notes, on commercially reasonable terms. See Management s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to sell assets, seek additional capital or seek to restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Our senior secured credit facility and the indenture under which the notes were issued restrict our ability to use the proceeds from asset sales. We may be unable to consummate those asset sales to raise capital or sell assets at prices that we believe are fair and proceeds that we do receive may be inadequate to meet any debt service obligations then due. See Description of Indebtedness. Despite our current leverage, we may still be able to incur substantially more debt. This could further exacerbate the risks that we face. We may be able to incur substantial additional indebtedness in the future. The terms of our debt instruments do not fully prohibit us from doing so. The revolving credit portion of our senior secured credit facility provides commitments of up to $115.0 million, approximately $92.4 million of which would have been available for future borrowings (after giving effect to letters of credit and bank guarantees outstanding) as of March 31, 2007. We may also further increase the size of our senior secured credit facility. See Description of Indebtedness Senior Secured Credit Facility. If new debt is added to our current debt levels, the related risks that we now face could intensify. The senior secured credit facility and the indenture governing the notes contain a number of restrictive covenants which limit our ability to finance future operations or capital needs or engage in other business activities that may be in our interest. The senior secured credit facility and the indenture governing the notes impose, and the terms of any future indebtedness may impose, operating and other restrictions on us and our subsidiaries. Such restrictions affect or will Table of Contents affect, and in many respects limit or prohibit, among other things, our ability and the ability of our restricted subsidiaries to: incur additional indebtedness; create liens; pay dividends and make other distributions in respect of our capital stock; redeem our capital stock; make certain investments or certain other restricted payments; sell certain kinds of assets; enter into certain types of transactions with affiliates; and effect mergers or consolidations. The senior secured credit facility also requires us to achieve certain financial and operating results and maintain compliance with specified financial ratios. Our ability to comply with these ratios may be affected by events beyond our control. The restrictions contained in the senior secured credit facility and the indenture governing the notes could: limit our ability to plan for or react to market or economic conditions or meet capital needs or otherwise restrict our activities or business plans; and adversely affect our ability to finance our operations, acquisitions, investments or strategic alliances or other capital needs or to engage in other business activities that would be in our interest. A breach of any of these covenants or our inability to comply with the required financial ratios could result in a default under our senior secured credit facility and/or the indenture governing the notes. If an event of default occurs under our senior secured credit facility, which includes an event of default under the indenture governing the notes the lenders could elect to: declare all borrowings outstanding, together with accrued and unpaid interest, to be immediately due and payable; require us to apply all of our available cash to repay the borrowings; or prevent us from making debt service payments on the notes; any of which would result in an event of default under the notes. The lenders will also have the right in these circumstances to terminate any commitments they have to provide further financing. If we were unable to repay or otherwise refinance these borrowings when due, our lenders could sell the collateral securing the senior secured credit facility, which constitutes substantially all of our and our domestic wholly-owned subsidiaries assets. We are a holding company and we depend upon cash from our subsidiaries to service our debt. If we do not receive cash distributions, dividends or other payments from our subsidiaries, we may be unable to meet our obligations. We are a holding company and all of our operations are conducted through our subsidiaries. Accordingly, we are dependent upon the earnings and cash flows of, and cash distributions, dividends and other payments from, our subsidiaries to provide the funds necessary to meet our debt service obligations. If we do not receive such cash distributions, dividends or other payments from our subsidiaries, we may be unable to pay the principal or interest on our debt. In addition, certain of our subsidiaries are holding companies that rely on subsidiaries of their own as a source of funds to meet any obligations that might arise. Generally, the ability of a subsidiary to make cash available to its parent is affected by its own operating results and is subject to applicable laws and contractual restrictions contained in its debt instruments and other agreements. Table of Contents Moreover, there may be restrictions on payments by our subsidiaries to us under applicable laws, including laws that require companies to maintain minimum amounts of capital and to make payments to shareholders only from profits. As a result, although our subsidiaries may have cash, we may be unable to obtain that cash to satisfy our obligations and make payments to our stockholders, if any. Risks Related to this Offering Future sales of our shares could depress the market price of our common stock. The market price of our common stock could decline as a result of sales of a large number of shares of common stock in the market after the offering or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. We, the selling stockholders (except FR X Chart Holdings LLC, assuming it sells all of its shares in this offering) and each of our executive officers and directors have agreed with the underwriters not to sell, dispose of or hedge any shares of our common stock or securities convertible into or exchangeable for shares of our common stock, subject to specified exceptions, during the period from the date of this prospectus continuing through the date that is 90 days after the date of this prospectus, except with the prior written consent of the representatives of the underwriters. See Underwriting. After this offering, we will have 25,647,791 shares of common stock outstanding (including shares currently subject to options that are expected to be exercised in connection with this offering). Of those shares, the 12,500,000 shares of common stock sold in our initial public offering, the 12,612,648 shares being offered hereby and the approximately 120,000 shares previously sold under applicable securities law resale exemptions will be freely tradable. The approximately 410,000 shares that were not sold in our initial public offering, under the resale exemption provided by Rule 701 under the Securities Act or this offering will be eligible for resale from time to time after the expiration of the 90-day lock-up period, subject to contractual and Securities Act restrictions, including those relating to volume, manner of sale and other conditions of Rule 144. None of those shares may currently be resold under Rule 144(k). If First Reserve s affiliates do not sell all their shares, upon the expiration of 60 days after the date of this prospectus, they will have the ability to cause us to register the resale of their remaining shares and certain other holders of our unregistered common stock will be able to participate in such registration, subject to the expiration of their 90-day lock-up period. The market price of our common stock may be volatile, which could cause the value of your investment to decline. Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of our common stock in spite of our operating performance. In addition, our operating results could be below the expectations of securities analysts and investors, and in response, the market price of our common stock could decrease significantly. Further, the trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. You may be unable to resell your shares of our common stock at or above the offering price. Factors affecting the trading price of our common stock may include: actual or anticipated variations in our operating results; changes in financial estimates by research analysts, or any failure by us to meet or exceed any such estimates, or changes in the recommendations of any research analysts that elect to follow our common stock or the common stock of our competitors; actual or anticipated changes in economic, political or market conditions, such as recessions or international currency fluctuations; actual or anticipated changes in the regulatory environment affecting our industry; changes in the market valuations of our industry peers; and Table of Contents announcements by us or our competitors of significant acquisitions, strategic partnerships, divestitures, joint ventures or other strategic initiatives. In the past, following periods of volatility in the market price of a company s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and a diversion of management attention and resources, which could significantly harm our profitability and reputation. Provisions in our amended and restated certificate of incorporation and amended and restated bylaws and Delaware law may discourage a takeover attempt. Provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws and Delaware law could make it more difficult for a third party to acquire us. Provisions of our amended and restated certificate of incorporation and amended and restated bylaws and Delaware law impose various procedural and other requirements, which could make it more difficult for stockholders to effect certain corporate actions. For example, our amended and restated certificate of incorporation authorizes our board of directors to determine the rights, preferences, privileges and restrictions of unissued series of preferred stock, without any vote or action by our stockholders. Therefore, our board of directors can authorize and issue shares of preferred stock with voting or conversion rights that could adversely affect the voting or other rights of holders of our common stock. These rights may have the effect of delaying or deterring a change of control of our company. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock. See Description of Capital Stock. Table of Contents SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. These forward-looking statements include statements relating to our business. In some cases, forward-looking statements may be identified by terminology such as may, should, expects, anticipates, believes, projects, forecasts, continue or the negative of such terms or comparable terminology. Forward-looking statements contained herein (including future cash contractual obligations) or in other statements made by us are made based on management s expectations and beliefs concerning future events impacting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed or implied by forward-looking statements. We believe that the following factors, among others (including those described in Risk Factors ), could affect our future performance and the liquidity and value of our securities and cause our actual results to differ materially from those expressed or implied by forward-looking statements made by us or on our behalf: the cyclicality of the markets which we serve; the loss of, or a significant reduction or delay in purchases by, our largest customers; competition in our markets; our compliance obligations with the Sarbanes-Oxley Act of 2002; general economic, political, business and market risks associated with our non-U.S. operations; our ability to successfully manage our growth; the loss of key employees; the pricing and availability of raw materials and our ability to manage our fixed-price contract exposure, including exposure to fixed pricing on long-term customer contracts; our ability to successfully acquire or integrate companies that provide complementary products or technologies; our ability to continue our technical innovation in our product lines; the impairment of our goodwill and other indefinite-lived intangible assets; the costs of compliance with environmental, health and safety laws and responding to potential liabilities under these laws; the insolvency of our formerly consolidated subsidiary, Chart Heat Exchangers Limited, or CHEL, and CHEL s administration proceedings in the United Kingdom, including claims that may be asserted against us with respect to CHEL s obligations; litigation and disputes involving us, including the extent of product liability, warranty, pension and severance claims asserted against us; labor costs and disputes; our relations with our employees; our funding requirements in connection with our defined benefit pension plans; fluctuations in foreign currency exchange and interest rates; disruptions in our operations due to hurricanes; our ability to protect our intellectual property and know-how; regulations governing the export of our products; additional liabilities related to taxes; the possibility that our controlling stockholders interests will conflict with ours or yours; Table of Contents risks associated with our substantial indebtedness, leverage, debt service and liquidity; risks related to this offering; and other factors described in this prospectus. There may be other factors that may cause our actual results to differ materially from the forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this prospectus and are expressly qualified in their entirety by the cautionary statements included in this prospectus. We undertake no obligation to update or revise forward-looking statements which may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. Table of Contents MARKET AND INDUSTRY DATA This prospectus includes industry data and forecasts that we have prepared based, in part, upon industry data and forecasts obtained from industry publications and surveys. These sources include publications by Energy Ventures Analysis, the Energy Information Administration, the International Energy Agency and Spiritus Consulting. Third-party industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of included information or whether this information reflects current market data. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Forecasts are particularly likely to be inaccurate, especially over long periods of time. As an example of the unpredictable nature of these forecasts, in 1983, the U.S. Department of Energy forecast that oil would cost $74 per barrel in 1995; however, the price of oil was actually $17 per barrel. In addition, we do not know what assumptions regarding general economic growth were used in preparing the forecasts we cite. Statements made herein as to our leading positions in our industry and segments are based on our sales volumes measured against management s estimates of our competitors sales volumes, coupled with management s knowledge and experience in the markets that we serve. Table of Contents USE OF PROCEEDS The selling stockholders, including FR X Chart Holdings LLC, will receive all the net proceeds from the sale of our common stock in this offering. The net proceeds received by FR X Chart Holdings LLC will be distributed to affiliates of First Reserve. In addition, certain of our executive officers, including our Chief Executive Officer, are selling an aggregate of 140,000 shares in this offering as follows: Mr. Thomas (120,000 shares); and Mr. Biehl (20,000 shares). Assuming a sale price equal to the last reported sale price of our common stock on May 25, 2007, the proceeds to be received by certain of our executive officers (before payment of underwriting discounts) would be: Mr. Thomas ($2,623,200); and Mr. Biehl ($437,200). Other employees are selling an aggregate of 96,434 shares in this offering. We will not receive any of the proceeds from the sale of common stock in this offering. In connection with this offering, selling stockholders who are employees will pay us approximately $0.3 million to purchase shares of our common stock underlying stock options for sale in this offering. In the event the underwriters fully exercise their over-allotment option, we will issue new shares to cover the over-allotment and we will use the approximately $ million of net proceeds for general corporate purposes, including reduction of our indebtedness with interest rates ranging from an average of 6.93% to 9.125% at March 31, 2007 and maturities of October 2012 and October 2015, respectively. Table of Contents DIVIDEND POLICY In connection with our initial public offering, we distributed approximately $150.3 million of the net proceeds to pay a dividend to our stockholders existing immediately prior to the initial public offering, consisting of affiliates of First Reserve and certain members of management. FR X Chart Holdings LLC, an affiliate of First Reserve, received approximately $142.1 million, approximately $8.2 million in the aggregate was received by certain of our executive officers and other members of our management, consisting of Mr. Thomas ($5,866,697) and Mr. Biehl ($328,493), and $1,979,953 was received by seven other employees in the aggregate. In addition, upon the expiration of the underwriters over-allotment option, we issued 1,733,022 shares to FR X Chart Holdings LLC, 101,978 shares to certain of our executive officers and other members of our management, consisting of Mr. Thomas (73,181 shares) and Mr. Biehl (4,097 shares), and 24,700 shares to seven other employees in the aggregate as a stock dividend. We do not currently intend to pay any cash dividends on our common stock, and instead intend to retain earnings, if any, for future operations and debt reduction. The amounts available to us to pay cash dividends will be restricted by our senior secured credit facility. The indenture governing the notes also limits our ability to pay dividends. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. PRICE RANGE OF OUR COMMON STOCK Trading in our common stock commenced on the Nasdaq Global Market on July 26, 2006 under the symbol GTLS. Prior to that time, there was no public market for our common stock. The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock as reported on the Nasdaq Global Market. High Low 2006 Quarter ended September 30, 2006 $ 16.60 $ 11.43 Quarter ended December 31, 2006 $ 16.33 $ 11.16 2007 Quarter ended March 31, 2007 $ 18.89 $ 14.94 Quarter ended June 30, 2007 (through May 25, 2007) $ 23.10 $ 17.00 Table of Contents CAPITALIZATION The information in this table should be read in conjunction with Selected Historical Consolidated Financial Data, Management s Discussion and Analysis of Financial Condition and Results of Operations, Description of Indebtedness and our consolidated financial statements and related notes included elsewhere in this prospectus. The table excludes cash and cash equivalents as of March 31, 2007 of $12.4 million. As of March 31, 2007 (In millions) Debt: Senior secured credit facility: Revolving credit facility(1) $ Term loan facility 120.0 91/8% senior subordinated notes due 2015 170.0 Total debt $ 290.0 Shareholders equity: Common stock, par value $0.01 per share, 150,000,000 shares authorized, 25,588,835 shares issued and outstanding 0.3 Additional paid-in capital 185.9 Retained earnings 33.6 Accumulated other comprehensive income 7.2 Total shareholders equity $ 227.0 Total capitalization $ 517.0 (1) As of March 31, 2007, we had approximately $92.4 million available for borrowing under the revolving portion of the senior secured credit facility, subject to certain conditions, after giving effect to approximately $22.6 million of letters of credit and bank guarantees outstanding thereunder. See Description of Indebtedness. Table of Contents SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The financial statements referred to as the Pre-Predecessor Company financial statements include the consolidated audited financial statements of Chart Industries, Inc. and its subsidiaries prior to our Chapter 11 bankruptcy proceedings. Our emergence from Chapter 11 bankruptcy proceedings resulted in a new reporting entity and the adoption of Fresh-Start accounting in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. The financial statements referred to as the Predecessor Company financial statements include the consolidated audited financial statements of Chart Industries, Inc. and its subsidiaries after our emergence from Chapter 11 bankruptcy proceedings and prior to the Acquisition and related financing thereof. The financial statements referred to as the Company financial statements include the consolidated audited financial statements of Chart Industries, Inc. and its subsidiaries after the Acquisition and the related financing thereof. The following table sets forth the selected historical consolidated financial information as of the dates and for each of the periods indicated. The Pre-Predecessor Company selected historical consolidated financial data as of and for the year ended December 31, 2002 and as of and for the nine months ended September 30, 2003 is derived from our audited financial statements for such period, which have been audited by Ernst Young LLP and which are not included in this prospectus. The Predecessor Company selected historical consolidated financial data as of and for the three months ended December 31, 2003, as of December 31, 2004 and October 16, 2005 are derived from our audited financial statements for such periods which have been audited by Ernst Young LLP, and which are not included in this prospectus. The Predecessor Company selected historical consolidated financial data for the year ended December 31, 2004 and for the period from January 1, 2005 to October 16, 2005 is derived from our audited financial statements for such periods included elsewhere in this prospectus, which have been audited by Ernst Young LLP. The Company selected historical consolidated financial statements and other data as of December 31, 2005 and December 31, 2006 and for the period from October 17, 2005 to December 31, 2005 and for the year ended December 31, 2006 is derived from our audited financial statements for such periods included elsewhere in this prospectus, which have been audited by Ernst Young LLP. The Company selected historical consolidated financial data for the three months ended March 31, 2006, and as of and for the three months ended March 31, 2007, respectively, have been derived from the unaudited condensed consolidated financial statements and related notes which are included elsewhere in this prospectus, and reflect all adjustments, consisting of normal, recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the Company s financial position, results of operations and cash flows for the three months ended March 31, 2006 and as of and for the three months ended March 31, 2007 and are not necessarily indicative of our results of operations for the full year. You should read the following table together with Management s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes, included elsewhere in this prospectus. Table of Contents Three Months Ended March 31, Pre-Predecessor Company Predecessor Company Company Three Nine Months Months January 1, October 17, Year Ended Ended Ended Year Ended 2005 to 2005 to Year Ended December 31, September 30, December 31, December 31, October 16, December 31, December 31, 2002 2003 2003 2004 2005 2005 2006 2006 2007 (In thousands, except per share data) (Unaudited) Statement of Operations Data: Sales $ 276,353 $ 197,017 $ 68,570 $ 305,576 $ 305,497 $ 97,652 $ 537,454 $ 120,840 $ 152,463 Cost of sales(1) 205,595 141,240 52,509 211,770 217,284 75,733 382,535 83,853 112,604 Gross profit 70,758 55,777 16,061 93,806 88,213 21,919 154,919 36,987 39,859 Selling, general and administrative expenses(2)(3) 65,679 44,211 14,147 53,374 59,826 16,632 87,652 21,039 22,473 Restructuring and other operating expenses, net(4)(5)(6) 104,477 13,503 994 3,353 7,528 217 396 162 99 170,156 57,714 15,141 56,727 67,354 16,849 88,048 21,201 22,572 Operating (loss) income (99,398 ) (1,937 ) 920 37,079 20,859 5,070 66,871 15,786 17,287 Interest expense, net(7) 19,176 10,300 1,344 4,712 4,164 5,556 25,461 6,545 6,346 Other expense (income) 4,240 (3,737 ) (350 ) (465 ) 659 409 1,003 222 50 23,416 6,563 994 4,247 4,823 5,965 26,464 6,767 6,396 (Loss) income from continuing operations before income taxes and minority interest (122,814 ) (8,500 ) (74 ) 32,832 16,036 (895 ) 40,407 9,019 10,891 Income tax expense (benefit) 11,136 1,755 (125 ) 10,134 7,159 (441 ) 13,044 2,980 3,713 (Loss) income from continuing operations before minority interest (133,950 ) (10,255 ) 51 22,698 8,877 (454 ) 27,363 6,039 7,178 Minority interest, net of taxes and other (52 ) (63 ) (20 ) (98 ) (19 ) (52 ) (468 ) (6 ) (Loss) income from continuing operations (134,002 ) (10,318 ) 31 22,600 8,858 (506 ) 26,895 6,045 7,178 Income from discontinued operation, including gain on sale, net of tax(8) 3,217 3,233 Net (loss) income $ (130,785 ) $ (7,085 ) $ 31 $ 22,600 $ 8,858 $ (506 ) $ 26,895 $ 6,045 $ 7,178 (Loss) Earnings per share data(9): Basic (loss) earnings per share $ (5.22 ) $ (0.27 ) $ 0.01 $ 4.22 $ 1.65 $ (0.06 ) $ 1.70 $ 0.76 $ 0.28 Diluted (loss) earnings per share $ (5.22 ) $ (0.27 ) $ 0.01 $ 4.10 $ 1.57 $ (0.06 ) $ 1.65 $ 0.73 $ 0.28 Weighted average shares basic 25,073 26,336 5,325 5,351 5,366 7,952 15,835 7,952 25,604 Weighted average shares diluted 25,073 26,336 5,325 5,516 5,649 7,952 16,269 8,285 25,810 Cash Flow Data: Net cash provided by operating activities $ 5,249 $ 19,466 $ 4,988 $ 35,059 $ 15,641 $ 14,635 $ 36,398 $ 11,895 $ 1,037 Net cash provided by (used in) investing activities 1,288 15,101 154 (3,317 ) (20,799 ) (362,250 ) (38,664 ) (2,566 ) (6,646 ) Net cash (used in) provided by financing activities (17,614 ) (15,907 ) (13,976 ) (35,744 ) 1,708 348,489 9,235 (5,839 ) (928 ) Other Financial Data: Depreciation and amortization(10) $ 14,531 $ 9,260 $ 2,225 $ 8,490 $ 6,808 $ 4,396 $ 22,449 $ 5,194 $ 4,991 Table of Contents Pre-Predecessor Company Predecessor Company Company As of As of As of As of As of As of As of As of December 31, September 30, December 31, December 31, October 16, December 31, December 31, March 31, 2002 2003 2003 2004 2005 2005 2006 2007 Balance Sheet Data: Cash and cash equivalents $ 7,225 $ 27,815 $ 18,600 $ 14,814 $ 11,470 $ 11,326 18,854 12,359 Working capital(11) 48,563 35,826 47,161 51,292 43,486 59,561 73,290 84,286 Total assets 279,294 299,745 299,637 307,080 343,107 635,641 (13) 724,875 (13) 736,316 (13) Long-term debt 1,161 (12) 122,537 109,081 76,406 74,480 345,000 290,000 290,000 Total debt 263,900 (12) 126,012 112,561 79,411 80,943 347,304 290,750 290,000 Shareholders equity (deficit) (81,617 ) 89,865 90,807 115,640 121,321 116,330 219,734 226,963 (1) The three months ended December 31, 2003 and the period from October 17, 2005 to December 31, 2005 include non-cash inventory valuation charges of $5.4 million and $8.9 million, respectively, related to Fresh-Start and purchase accounting. (2) Includes amortization expense related to intangible assets for the year ended December 31, 2002, the nine months ended September 30, 2003, the three months ended December 31, 2003, the year ended December 31, 2004, the period from January 1, 2005 to October 16, 2005, the period from October 17, 2005 to December 31, 2005, the year ended December 31, 2006, the three months ended March 31, 2006 and the three months ended March 31, 2007 of $1.7 million, $1.2 million, $0.7 million, $2.8 million, $2.7 million $3.0 million, $15.4 million, $3.6 million and $3.0 million, respectively. (3) Includes charges (income), net of insurance recoveries, related to Hurricane Rita of $1.1 million, $0.4 million and ($2.3 million) for the period from January 1, 2005 to October 16, 2005, the period from October 17, 2005 to December 31, 2005 and the year ended December 31, 2006, respectively. (4) In March 2003, we completed the closure of our Wolverhampton, United Kingdom manufacturing facility, operated by CHEL. On March 28, 2003, CHEL filed for voluntary administration under the U.K. Insolvency Act of 1986. CHEL s application for voluntary administration was approved on April 1, 2003 and an administrator was appointed. In accordance with SFAS No. 94, Consolidation of All Majority-Owned Subsidiaries, we are not consolidating the accounts or financial results of CHEL subsequent to March 28, 2003 due to the assumption of control of CHEL by the insolvency administrator. Effective March 28, 2003, we recorded a non-cash impairment charge of $13.7 million to write off our net investment in CHEL. (5) In 2002, we recorded a non-cash impairment charge of $92.4 million to write off non-deductible goodwill of the D S segment. (6) In September 2003, in accordance with Fresh-Start accounting, all assets and liabilities were adjusted to their fair values. The adjustment to record the assets and liabilities at fair value resulted in net other income of $5.7 million for the nine months ended September 30, 2003. (7) Includes derivative contracts valuation income or expense for interest rate collars to manage interest exposure relative to term debt. (8) This discontinued operation relates to the sale of our former Greenville Tube, LLC business in July 2003. (9) The basic and diluted loss and earnings per share for the year ended December 31, 2002, the nine months ended September 30, 2003, the three months ended December 31, 2003 and the period from October 17, 2005 to December 31, 2005 are the same because incremental shares issuable upon conversion are anti-dilutive. Diluted earnings (loss) per share for the three months ended March 31, 2007 are not comparable to diluted earnings (loss) per share for the three months ended March 31, 2006 due to the change in our capital structure upon completion of our initial public offering in July 2006. (10) Includes financing costs amortization for the year ended December 31, 2002, the nine months ended September 30, 2003, the period from October 17, 2005 to December 31, 2005, the year ended December 31, 2006, the three months ended March 31, 2006 and the three months ended March 31, 2007 of $3.2 million, $1.7 million, $0.3 million, $1.5 million, $0.4 million and $0.4 million, respectively. (11) Working capital is defined as current assets, excluding cash minus current liabilities, excluding short-term debt. Table of Contents (12) As of December 31, 2002, we were in default on our senior debt due to violation of financial covenants. In April 2003, the lenders under our then-existing credit facility waived all defaults existing at December 31, 2002 and through April 30, 2003. Since the waiver of defaults did not extend until January 1, 2004, this debt was classified as a current liability on our consolidated balance sheet as of December 31, 2002. (13) Includes $236.7 million of goodwill and $154.1 million of finite-lived and indefinite-lived intangible assets as of December 31, 2005. Includes $247.1 million of goodwill and $146.6 million of finite-lived and indefinite-lived intangible assets as of December 31, 2006. Includes $246.8 million of goodwill and $143.6 million of finite-lived and indefinite-lived intangible assets as of March 31, 2007. Table of Contents MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our results of operations includes periods prior to the consummation of the Acquisition and periods after the consummation of the Acquisition. Accordingly, the discussion and analysis of historical periods does not reflect fully the significant impact that the Acquisition will have on us, including significantly increased leverage and liquidity requirements. You should read the following discussion of our results of operations and financial condition in conjunction with the Selected Historical Consolidated Financial Data section and our consolidated financial statements and related notes appearing elsewhere in this prospectus. Actual results may differ materially from those discussed below. This discussion contains forward-looking statements. See Special Note Regarding Forward-Looking Statements and
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+PROSPECTUS SUMMARY The following is a summary of some of the information contained in this prospectus and it may not contain all the information that you should consider before investing in our common shares. You should read the entire prospectus carefully, especially the "Risk Factors" section and the financial statements and accompanying notes included in this prospectus before making an investment decision. Unless otherwise indicated, all information relating to the Company contained in this prospectus gives effect to the transactions described under " The Company 2007 Reorganization" and " The Company 2004 Reorganization"as if the same had been in effect for all periods discussed. We use the terms "Genpact," "our company," "we" and "us" to refer to our business as described under " The Company." GENPACT LIMITED We manage business processes for companies around the world. We combine our process expertise, information technology expertise and analytical capabilities, together with operational insight derived from our experience in diverse industries, to provide a wide range of services using our global delivery platform. Our goal is to help our clients improve the ways in which they do business by continuously improving their business processes, including through the application of Six Sigma and Lean principles and by leveraging technology. We strive to be a seamless extension of our clients' operations. We have a unique heritage. We built our business by meeting the demands of the leaders of the General Electric Company, or GE, to increase the productivity of their businesses. We began in 1997 as the India-based captive business process services operation for General Electric Capital Corporation, or GE Capital, GE's financial services business. As the value of offshore outsourcing was demonstrated to the management of GE, it became a widespread practice at GE and our business grew in size and scope. We took on a wide range of complex and critical processes and we became a significant provider to many of GE's businesses, including Consumer Finance (now GE Money), Commercial Finance, Insurance, Healthcare, Industrial, NBC Universal and GE's corporate offices. Our leadership team, our methods and our culture have been deeply influenced by our eight years as a captive operation of GE. Many elements of GE's success the rigorous use of metrics and analytics, the relentless focus on improvement, a strong emphasis on the client and innovative human resources practices are the foundations of our business. We became an independent company at the beginning of 2005 and since that time we have grown rapidly, continued to expand our range of services and diversified our client base. Since January 1, 2005, we have entered into contracts with more than 35 new clients in a variety of industries, including banking and finance, insurance, manufacturing, transportation and healthcare. We have the benefit of a multi-year contract with GE that provides us with committed revenues through 2013. In addition, we have opportunities for expansion with many new clients. As of March 31, 2007, we have more than 26,500 employees, with operations in nine countries. In 2006, we had net revenues of $613.0 million, of which 25.8% was from clients other than GE, which we refer to as Global Clients. Our Opportunity Globalization of the world's economy remains the most powerful economic trend of our lifetime. It is driven by expanding technology capabilities, more efficient global telecommunications, the relaxation of local laws and regulations that previously impeded cross-border trade and the recognition by business leaders that a highly skilled global workforce can be a competitive business advantage. These dynamics are creating an entirely new set of competitive challenges for companies around the world. Companies have been forced to focus on ways to improve productivity and manage costs more aggressively in order to maintain or enhance their competitive positions and increase shareholder value. As part of their response to these pressures, in recent years, business leaders began offshoring business processes to captive operations and outsourcing business processes to third parties, including sending such You should rely only on the information contained in this prospectus. We and the selling shareholders have not authorized anyone to provide you with information that is different. We, the selling shareholders and the underwriters are not making an offer of our common shares in any jurisdiction or state where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus. We have not taken any action to permit a public offering of the common shares outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the common shares and the distribution of this prospectus outside of the United States. We have been designated by the Bermuda Monetary Authority as a non-resident for Bermuda exchange control purposes. This designation allows us to engage in transactions in currencies other than the Bermuda dollar and there are no restrictions on our ability to transfer funds other than funds denominated in Bermuda dollars, in and out of Bermuda or to pay dividends to United States residents who are holders of our common shares. The Bermuda Monetary Authority has given its consent for the issue and free transferability of all of the common shares that are the subject of this offering to and between non-residents of Bermuda for exchange control purposes. Approvals or permissions given by the Bermuda Monetary Authority do not constitute a guarantee by the Bermuda Monetary Authority as to our performance or our creditworthiness. Accordingly, in giving such consent or permissions, the Bermuda Monetary Authority shall not be liable for the financial soundness, performance or default of our business or for the correctness of any opinions or statements expressed in this prospectus. In some cases, issuances and transfers of common shares involving persons deemed resident in Bermuda for exchange control purposes require the specific consent of the Bermuda Monetary Authority. This prospectus will be filed with the Registrar of Companies in Bermuda pursuant to Part III of the Companies Act 1981 (Bermuda) as amended. In accepting this prospectus for filing, the Registrar of Companies in Bermuda shall not be liable for the financial soundness, performance or default of our business or for the correctness of any opinions or statements expressed in this prospectus. processes offshore to workers in countries where wage levels were lower than those in North America and Europe. Initially, India became the primary destination for offshore business process outsourcing. However, as demand and the range of services have grown, other destinations have become increasingly important. Outsourcing initially focused on realizing immediate cost savings and involved labor-intensive processes such as call center services and data entry. The frequency with which these processes were outsourced increased as companies recognized that offshore service providers could run these processes more efficiently by recruiting and training skilled labor in larger numbers and at lower cost than was available in a company's home market. The use of information technology has also been an important catalyst for the growth of outsourcing. Before outsourcing business processes, companies more frequently outsourced IT operations. As companies realized benefits from outsourcing IT services, they became more willing to outsource other types of processes. At the same time, growth in the use of IT contributed to greater efficiencies in business processes and other productivity enhancements. As a result, knowledge of IT platforms and technology became increasingly important to effective business process management. According to International Data Corporation, or IDC, aggregate worldwide spending on IT and business process outsourcing, or BPO, services is estimated to be $934 billion for 2006. The NASSCOM-McKinsey report estimates the total addressable market for offshore IT and BPO services to be approximately $300 billion, of which only about 10% has been penetrated. The NASSCOM-McKinsey report projects that spending on offshore IT and BPO services will grow from $30 billion in 2005 to $110 billion in 2010, representing a compound annual growth rate, or CAGR, of 30%. This growth is a function of the increasing acceptance of outsourcing and the constantly expanding notions of what can be outsourced and the benefits that can be achieved. The services that are being outsourced today are much broader, and involve much higher valued functionality than originally outsourced, and include engineering, design, software programming, accounting, healthcare services, legal services, financial analysis, consulting activities and other services, and cut across all industries. Companies also look to achieve a wider range of objectives from outsourcing, and to generate business impact such as increased revenue, expanded margins, improved working capital management, increased customer satisfaction and enhancement of their competitive positions. Today, the willingness to outsource a broader array of business processes, from the relatively simple to the more critical and complex, and the fact that many business processes can be enhanced through the application of IT, has created an opportunity for service providers that have broad and deep capabilities, as well as expertise in both process operation and IT platforms. Companies that are ready to embrace the outsourcing of complex business processes are seeking service providers with a broad range of capabilities with which they can establish a strategic relationship that will grow over time. Many senior, or C-level, executives today consider the following factors when looking to collaborate with a service provider: process excellence; global delivery; analytical capabilities; IT expertise; domain expertise; a stable workforce; and scale. Our Solution We manage a wide range of business processes that address the transactional, managerial, reporting and planning needs of our clients. We seek to build long-term client relationships with companies that wish SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 to improve the ways in which they do business and to which we can offer a wide range of services. With our broad and deep capabilities and our global delivery platform, our goal is to deliver comprehensive solutions and continuous process improvement to clients around the world and across multiple industries. Our Broad Expertise Our services include finance and accounting, collections and customer services, insurance, supply chain and procurement, analytics, enterprise application and IT infrastructure. Significant business impact can often best be achieved by redesigning and operating a combination of processes, as well as providing multiple services that combine elements of several of our service offerings. In offering our services, we draw on three core capabilities process expertise, analytical ability and technology expertise as well as the operational insight we have acquired from our experience managing thousands of processes in diverse industries. Process Expertise. We have extensive experience in operating a wide range of processes. We have developed a repository of knowledge of best practices in many industries, including banking and financial services, insurance, manufacturing, transportation and healthcare. We have extensive experience in transitioning myriad processes from our clients. We apply the principles of Six Sigma and Lean to eliminate defects and variation and reduce inefficiency. We also develop and track operational metrics to measure process performance as a means of monitoring service levels and enhancing productivity. Analytical Capabilities. Our analytical capabilities are central to our improving business processes. They enable us to work with our clients and identify weaknesses in business processes and redesign and re-engineer them to create additional business value. We also rigorously apply analytical methodologies, which we use to measure and enhance performance of our client services. We also apply these methodologies to measure and improve our own internal functions, including recruiting and retention of personnel. Technology Expertise. Our information technology expertise includes extensive knowledge of third-party hardware, network and computing infrastructure, and enterprise resource planning and other software applications. We also use technology to better manage the transition of processes, to operate processes more efficiently and to replace or redesign processes so as to enhance productivity. Our ability to combine our business process and IT expertise along with our Six Sigma and Lean skills allows us to perform, for example, enterprise resource planning, or ERP, implementations on budget and on time, as well as to ensure our clients achieve the full potential of business intelligence platforms and webstack software platforms. In addition, we believe that one of the factors that differentiates us from our competitors is the operational insight we have developed from our experience managing thousands of processes. Operational Insight. Our operational insight enables us to make the best use of our core capabilities. Operational insight starts with the ability to understand the business context of a process. We place great value on understanding not only the industry in which a client operates, but also the business culture and institutional parameters within which a process is operated. Operational insight is also the judgement to determine the best way to improve a process in light of the knowledge of best practices across different industries as well as an appreciation of what solutions can be implemented in the context of the particular business environment. Our Strategic Client Model We seek to create long-term relationships with our clients where they view us as an integral part of their organization and not just as a service provider. To achieve this goal, we developed the Genpact Virtual CaptiveSM model for service delivery, and we may implement all or some of its features in any given client relationship, depending on the client's needs. Under this approach, we strive to be a seamless extension of our client's operations which involves providing the client with dedicated leadership, AMENDMENT No. 4 TO Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 infrastructure and employees who are trained in that client's culture. This helps us to provide more services to those clients, to integrate us further into their business and to establish us as a reliable and important strategic service provider. Our Global Delivery Platform Clients with global operations have global needs. We deliver services from a global network of more than 25 locations in nine countries. Our service delivery locations, which we refer to as Delivery Centers, are in India, China, Hungary, Mexico, the Philippines, the Netherlands, Romania, Spain and the United States. Our presence in locations other than India provides us with multi-lingual capabilities, access to a larger employee pool and "near-shoring" capabilities to take advantage of time zones. With this network, we can manage complex processes in multiple geographic regions. Our People and Culture We have an experienced and cohesive leadership team and a culture that emphasizes teamwork, constant improvement of our processes and, most importantly, dedication to the client. Many members of our leadership team developed their management skills working within GE and many of them were involved in the founding of our business. As of March 31, 2007, we have more than 26,500 employees including over 5,500 Six Sigma trained green-belts, 300 Six Sigma trained black-belts and 60 Six Sigma trained master black-belts, as well as more than 4,500 Lean trained employees. A key determinant of our success, especially as we continue to increase the scale of our business, is our ability to attract, train and retain employees in highly competitive labor markets. We manage this challenge through innovative human resources practices. These include broadening the employee pool by opening Delivery Centers in diverse locations, using creative recruiting techniques to attract the best talent, emphasizing ongoing training, instilling a vibrant and distinctive culture and providing well-defined long term career paths. We monitor and manage our attrition rate very closely, and believe our attrition rate is one of the lowest in the industry. Our Strategy For Growth The specific elements of our strategy to grow our business include the following: Expand Relationships with Existing Clients. We intend to deepen and expand relationships with our existing clients, including GE. Since our separation from GE, we have succeeded in forming more than 35 new Global Client relationships with major companies. Many of those relationships are at an early stage and we believe they offer significant opportunities for growth. As we demonstrate the value that we can provide, often with a discrete process, we are frequently able to expand the scope of our work in a variety of ways. Develop New Client Relationships. In addition to expanding our existing client relationships, we plan to continue to develop new long-term client relationships, especially with those clients where we have an opportunity to deliver a wide range of our capabilities and have a meaningful impact on our clients' business. Continue To Promote Process Excellence. Our ability to deliver continuous process improvement is an important part of the value that we deliver to our clients. We have built a significant repository of process expertise across a wide range of processes such as finance and accounting, supply chain, analytics and client service. Our process expertise is complemented by our ability to work across multiple technology platforms in diverse industries. Continue To Deepen Expertise and Global Capabilities. We will continue to expand our capabilities globally as well as across industries and service offerings. While we expect this will occur primarily through organic growth, we also plan to evaluate strategic partnerships, alliances and acquisitions to expand into new services offerings as well as into new industries. GENPACT LIMITED (Exact name of registrant as specified in its charter) Bermuda (State or other jurisdiction of incorporation or organization) 541990 (Primary Standard Industrial Classification Code Number) 98-0533350 (I.R.S. Employer Identification Number) Canon's Court 22 Victoria Street Hamilton HM Bermuda (441) 295-2244 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Maintain Our Culture and Enhance Our Human Capital. Our ability to grow our business will depend on our ability to continue to attract, train and retain large numbers of talented individuals. We will continue to develop innovative recruiting techniques and to emphasize learning throughout the tenure of an employee's career. We also believe that maintaining our vibrant and distinctive culture, in which we emphasize teamwork, continuous process improvement and dedication to the client, is critical to growing our business. The Company The 2004 Reorganization Prior to December 30, 2004, our business was conducted through various entities and divisions of GE. On December 30, 2004, in a series of transactions we refer to as the "2004 Reorganization," GE reorganized these operations by placing them all under Genpact Global Holdings SICAR S. .r.l., or GGH, a newly formed Luxembourg entity. GE also sold an indirect 60% interest in GGH to Genpact Investment Co. (Lux) SICAR S. .r.l., or GICo, an entity owned in equal portions by General Atlantic LLC, or General Atlantic, and Oak Hill Capital Partners, or Oak Hill. On December 16, 2005, GE sold a portion of its equity in us to a subsidiary of Wachovia Corporation. As of December 31, 2006, GE owned approximately 29% of our equity, after giving effect to the conversion of preferred stock but excluding shares issuable pursuant to outstanding options. Following the 2004 Reorganization, we began operating as an independent company. We separated ourselves operationally from GE and began building the capabilities necessary to be successful as an independent company. Among other things, we expanded our management infrastructure and business development capabilities so that we could secure business from clients other than GE. We substantially expanded administrative functions for which we had previously relied primarily on GE, such as finance, legal, accounting and human resources. We created separate employee benefit and retirement plans, developed our own leadership training capability and enhanced our management information systems. The 2007 Reorganization On March 29, 2007, we formed Genpact Limited in Bermuda to be the new holding company for our business. It was initially a wholly-owned subsidiary of GGH. On July 13, 2007, we effectuated a transaction that resulted in Genpact Limited owning 100% of the capital stock of GGH. This transaction is referred to as the "2007 Reorganization." This transaction occurred by the shareholders of GGH exchanging their preferred and common shares in GGH for common shares in Genpact Limited. As a result, the only shares of Genpact Limited outstanding at effectiveness, and upon closing of the IPO, will be common shares. In addition, as part of the 2007 Reorganization, Genpact Global (Lux) S. .r.l., or GGL, which owned approximately 63% of the outstanding equity of GGH, became a wholly owned subsidiary of Genpact Limited pursuant to a share exchange. GGL had no operations or assets other than its ownership interest in GGH, and had no liabilities other than obligations for accumulated dividends on preferred shares that were eliminated in the 2007 Reorganization and certain tax liabilities, estimated at less than $3.0 million, for which GE and GICo have agreed to indemnify us. As part of the 2007 Reorganization, our existing equity based compensation plans were assigned to Genpact Limited. As a result, all outstanding options issued under our existing equity based compensation plans became options to acquire common shares of Genpact Limited. Victor Guaglianone, Esq. 1251 Avenue of the Americas New York, NY 10020 (646) 624-5929 (Name and address, including zip code, and telephone number, including area code, of agent for service) Our registered office is located at Canon's Court, 22 Victoria Street, Hamilton HM, Bermuda. Copies to: Timothy G. Massad, Esq. Cravath, Swaine & Moore LLP Worldwide Plaza 825 Eighth Avenue New York, New York 10019 (212) 474-1000 Fax: (212) 474-3700 Richard A. Drucker, Esq. Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 (212) 450-4000 Fax: (212) 450-3800 THE OFFERING Common shares offered by us 17,647,059 shares Common shares offered by the selling shareholders 17,647,059 shares Common shares to be outstanding after this offering (assuming no exercise of the underwriters over-allotment option) 206,405,587 shares Selling shareholders Entities owned by GE, General Atlantic and Oak Hill. Over-allotment option We have granted to the underwriters an option to purchase up to an additional 5,294,118 common shares to cover over-allotments at the initial public offering price less underwriting discounts and commissions. Use of proceeds To repay indebtedness outstanding under our credit facilities and for working capital and general corporate purposes, including potential acquisitions. We will not receive any proceeds from the sale of our common shares by the selling shareholders. Proposed New York Stock Exchange symbol G Dividend policy We do not anticipate paying cash dividends for the foreseeable future. Lock-up We, the selling shareholders, our directors and our executive officers have agreed with the underwriters, subject to certain exceptions, not to sell, transfer or dispose of any of our common shares for a period of 180 days after the date of this prospectus. Risk factors See "Risk Factors" for a discussion of factors you should consider before investing in our common shares. The number of common shares to be outstanding after this offering is based on 188,758,528 common shares outstanding as of July 13, 2007, and, unless we indicate otherwise: assumes no exercise of the underwriters' option to purchase up to 5,294,118 additional common shares to cover over-allotments. If the underwriters exercise this option in full, 211,699,704 common shares would thereafter be outstanding; and excludes approximately 24.0 million common shares issuable upon the exercise of share options outstanding as of July 13, 2007, of which options to purchase 4,930,972 common shares were vested as of that date. Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
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+This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements and the related notes and schedules thereto. Unless otherwise stated in this prospectus: references to "we," "us" or "our company" refer to Information Services Group, Inc.; references to our "principal stockholder" refer to Oenoke Partners, LLC, an affiliate of our officers; unless we tell you otherwise, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option; references to a "business combination" mean our initial acquisition of one or more domestic or international operating businesses through a merger, capital stock exchange, asset or stock acquisition or other similar business combination; references to the "private placement" refer to our private placement of 6,500,000 warrants, at a price of $1.00 per warrant, to our principal stockholder, Oenoke Partners, LLC, which will occur prior to the completion of this offering; and references to "public stockholders" refers to the holders of common stock sold as part of the units in this offering or in the open market, including our existing stockholders to the extent that they purchase or acquire such shares. Except as otherwise specified, all information in this prospectus and all per share information has been adjusted to reflect a 1 for 2 stock dividend that was effected on January 29, 2007. Our Business We are a blank check company organized under the laws of the State of Delaware on July 20, 2006. We were formed to acquire, through a merger, capital stock exchange, asset acquisition or other similar business combination, one or more domestic or international operating businesses. We intend to focus our efforts on the information services industry, including business, media, marketing and consumer information opportunities (the "target industry"). These opportunities may be in major industry segments such as consumer products, retail, financial services, media, marketing, healthcare, government and technology. We intend to identify acquisition opportunities where we can apply management's experience within these segments to enhance the value of the acquired company's product and service offerings. Although we intend to focus on identifying acquisition candidates in the information services industry and we will not initially actively seek to identify acquisition candidates in other industries, in the event that an opportunity is presented to us in another industry, we may consider pursuing that opportunity if we conclude that it represents an attractive investment opportunity for us. In addition, if we are unable to identify an acquisition candidate which we deem to be attractive in the information services industry after having expended a reasonable amount of time and effort to identify such a candidate, we may then decide to more actively seek opportunities in other industries. At present, we are not able to ascertain (i) what opportunities, if any, in industries outside of the target industry may be presented to us, (ii) how much time and effort we may expend prior to determining that we may not be able to identify favorable investment opportunities in the target industry or (iii) which other industries we may choose to examine with the objective of identifying a favorable investment opportunity. In the event we elect to pursue an investment outside of the target industry, we expect that our management, in conjunction with our board of directors and senior advisors, will engage in discussions to identify, based upon their respective familiarity with the business climate in general and specific industries in particular, one or more other industries which are likely to include a significant number of companies which would be suitable acquisition candidates. Once having identified such industry or industries, we would make known our interest in those industries to investment bankers and others who we believe may be able to identify companies in such industry or industries that may be candidates for a transaction. We do not currently have any specific operating businesses under consideration. We have not identified or been provided with the identity of, or had any direct or indirect contact with potential targets. Additionally, we have not engaged or retained any agent or other representative to identify or locate any suitable target, although we may do so following the offering. To date, our efforts have been limited to organizational activities and activities related to this offering. Our management has extensive experience with global operations, mergers and acquisitions and acquisition integration, as well as financial and legal expertise with leading firms in the information services industry. Our Chairman and CEO, Michael Connors, most recently served as Chairman and CEO of VNU's Media Measurement and Information (MMI) Group. VNU is a leading global information and media company. In 2001, Mr. Connors was instrumental in creating the MMI Group, which comprises VNU's media information, entertainment, software and internet businesses, including Nielsen Media Research, Nielsen Entertainment and NetRatings. In addition to leading the MMI Group, Mr. Connors served as chairman of VNU World Directories, which included VNU's Yellow Pages and directory businesses operating in seven countries. Mr. Connors also served as a member of the VNU Executive Board. Prior to joining VNU, Mr. Connors was Vice Chairman of ACNielsen Corporation, one of the world's largest marketing information services companies, where he helped lead the turnaround of ACNielsen into a profitable company. During his leadership, ACNielsen's equity value grew from $893 million, its market capitalization immediately following its spinoff in November, 1996 from The Dun & Bradstreet Corporation (D&B), to $2.3 billion, its sale price to VNU in February, 2001. After the acquisition of ACNielsen by VNU in 2001, Mr. Connors led the successful integration of ACNielsen into VNU. Prior to that, as Senior Vice President of D&B, Mr. Connors played a key role in the breakup of D&B into three separate publicly traded companies. Prior to its breakup, D&B owned, among others, the following companies in the information services industry: Moody's Investors Service, Inc., R.H. Donnelley, IMS Health, ACNielsen Corporation, Nielsen Media Research, D&B Credit Services and a majority stake in Gartner Group. At the time of its breakup, D&B was one of the largest data and information companies in the world. Frank Martell, our Executive Vice President, Chief Financial Officer and Treasurer, also has extensive experience in the information services industry. Until December 2006, Mr. Martell was the Chief Operating Officer of ACNielsen Corporation and Chief Executive Officer of ACNielsen Europe and Emerging Markets. He spent the previous 11 years with VNU, ACNielsen and D&B serving in a series of global financial and senior operating positions. Earl Doppelt, our Executive Vice President, General Counsel and Corporate Secretary, served as Executive Vice President and Chief Legal Officer of VNU, a leading global information and media company, until November 2006. He spent the previous 12 years with VNU, ACNielsen and D&B. Along with Mr. Connors, Mr. Doppelt was part of the executive team that led the turnaround of ACNielsen into a profitable company. Richard Gould, our Executive Vice President, was with Morgan Stanley until October 2006, where, during a 20-year career, he UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amendment No. 5 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 INFORMATION SERVICES GROUP, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 6770 (Primary Standard Industrial Classification Code Number) 20-5261587 (I.R.S. Employer Identification No.) Four Stamford Plaza 107 Elm St. Stamford, CT 06902 (203) 517-3100 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Michael P. Connors, Chairman and Chief Executive Officer Four Stamford Plaza 107 Elm St. Stamford, CT 06902 (203) 517-3100 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Emanuel Cherney Kaye Scholer LLP 425 Park Avenue New York, NY 10022 Telephone: (212) 836-8000 Facsimile: (212) 836-8689 Christopher S. Auguste Kramer Levin Naftalis & Frankel LLP 1177 Avenue of the Americas New York, NY 10036 Telephone: (212) 715-9100 Facsimile: (212) 715-8000 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. CALCULATION OF REGISTRATION FEE held several executive positions in capital markets, global sales management, marketing and new product innovation. Most recently, Mr. Gould served as co-head of Morgan Stanley's North America Equity Distribution as well as head of Global Derivatives Sales, Quantitative Research and the Global Pensions Group. We have a strong and distinguished board of directors. In addition to Mr. Connors, our board of directors includes Robert J. Chrenc, R. Glenn Hubbard and Robert E. Weissman, individuals with established records in industry and the financial community. Formerly Executive Vice President, Chief Financial Officer and Chief Administrative Officer of ACNielsen Corporation, Mr. Chrenc served as a director of Symbol Technologies Inc. until January 2007. Dr. Hubbard has served as the Dean of Columbia University, Graduate School of Business since 2004 and was Chairman of the President's Council of Economic Advisers from 2001 to 2003. Mr. Weissman retired in January 2001 after nearly 30 years of experience as Chief Executive Officer for several public corporations, including most recently IMS Health Incorporated, and prior to that Cognizant Corporation and The Dun & Bradstreet Corporation. We expect to rely heavily on their collective talent and experience in analyzing investment opportunities. We believe the projected demand for products and services in the information services industry presents attractive opportunities for consolidation and growth. The information services industry encompasses companies which create, produce, deliver, distribute and/or market products and services including: Market research, including research analytics, media measurement and related products and services; Marketing services, including targeted, measurable campaign execution and related analytics; Advisory services, including execution consulting, data management, technology implementation and analytics; Data services, including data collection, data mining, data harmonization, data organization, data distribution, interpretation and reporting; Products and services related to the creation or placement of any type of advertising or media; Software to utilize, analyze, interpret and enhance market, business or consumer data; Internet-based services, products and technology relating to the collection, aggregation, measurement, analysis and distribution of information; and Content, including text, audio, video, images and any combinations thereof, in print, broadcast, online or other distribution vehicles or any combinations thereof. Although we may effect business combinations with companies operating in any industry we choose (including companies operating outside of the information services industry under circumstances described above), we believe that there are numerous business opportunities in the industries on which we will be focused. However, we have not conducted any research with respect to identifying the number and characteristics of the potential business combination candidates within our targeted industry, or any industry, or the location of the target industry domestically or internationally, or the likelihood or probability of success of any proposed business combination. Accordingly, we cannot assure you that we will be able to locate a target business or that we will be able to engage in a business combination with a target business on favorable terms, or at all. Title of Each Class of Security to be Registered Amount to be Registered Proposed Maximum Offering Price Per Security(1) Proposed Maximum Aggregate Offering Price(1) Amount of Registration Fee While we may seek to effect business combinations with more than one target business, our initial business combination must have a fair market value at least equal to 80% of our net assets at the time of such acquisition (all of our assets, including the funds held in the trust account other than the deferred underwriting discount, less our liabilities). Consequently, it is likely that we will have the ability to effect a business combination with only a single domestic or international operating business. The target business that we acquire may have a fair market value significantly in excess of 80% of our net assets. We can also satisfy the requirement that the business combination have a fair market value at least equal to 80% of our net assets in an acquisition transaction where we acquire less than a 100% interest in the target business, provided that the fair market value of the interest in such business or businesses is at least equal to 80% of our net assets at the time such acquisition transaction is consummated. Although as of the date of this prospectus we have not engaged or retained, had any discussions with, or entered into any agreements with, any third party regarding any such potential financing transactions, we could seek to fund such a business combination by raising additional funds through the sale of our securities or through loan arrangements. However, if we were to seek such additional funds, any such arrangement would only be consummated simultaneously with our consummation of a business combination. Since we have no specific business combination under consideration, we have not entered into any such fundraising agreement and have no current intention of doing so. There is no assurance that such fundraising arrangement, if desired, would be available on acceptable terms, if at all. If we are unable to consummate a business combination within the allotted time periods set forth in this prospectus, we will implement a plan of dissolution and distribution which will include the liquidation of our trust account to our public stockholders. Our executive offices are located at Four Stamford Plaza, 107 Elm St., Stamford, CT 06902, and our telephone number is (203) 517-3100. Units, each consisting of one share of Common Stock, $0.001 par value, and one Warrant(2) 32,343,750 $ 8.00 $ 258,750,000 $ 27,686.25 (1)After giving effect to our stock dividend. Does not include 1,054,687 shares (after giving effect to our stock dividend) issued to Oenoke Partners, LLC, for an aggregate purchase price equal to $703.13 and which are subject to repurchase to the extent the underwriters over-allotment option is not exercised. (2)Assumes no exercise of the underwriter's over-allotment option and, therefore, that we repurchase 1,054,687 shares (after giving effect to our stock dividend) previously placed with Oenoke Partners, LLC. Shares of Common Stock included as part of the Units(2) 32,343,750 Warrants: Number outstanding before this offering and the private placement: 0 warrants Number to be outstanding after this offering and the private placement: 34,625,000 warrants Exercisability: Each warrant is exercisable for one share of common stock. Each warrant sold in the private placement is exercisable on a cashless basis. Exercise price: $6.00 Exercise period: The warrants will become exercisable on the later of: the completion of a business combination on the terms described in this prospectus and [ ], 2008 [one year from the date of this prospectus]. The warrants will expire at 5:00 p.m., New York City time, on [ ], 2011 [four years from the date of this prospectus] or earlier upon redemption. Redemption: We may redeem the outstanding warrants (including any warrants held by any of the underwriters as a result of the underwriters exercise of the unit purchase option) at any time after the warrants become exercisable: in whole and not in part; at a price of $0.01 per warrant; upon a minimum of 30 days' prior written notice of redemption; and if, and only if, the last sales price of our common stock equals or exceeds $11.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. In the event that the common stock issuable upon exercise of the warrants has not been registered, qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants, we will not have the right to redeem the warrants. The redemption criteria for our warrants have been established at a price which is intended to provide warrant holders a reasonable premium to the initial exercise price and to provide a sufficient degree of liquidity to cushion the market to our redemption call. However, there is no assurance that the price of the common stock will exceed $11.50 or the warrant exercise price after the redemption call is made. Warrants included as part of the Units(2) 32,343,750 (3) We may exercise this redemption right at our option, with no requirement for the consent of the underwriter or any other person. The warrants issued in the private placement are not subject to redemption. Private placement: Our principal stockholder, Oenoke Partners, LLC, which is an affiliate of our officers, has agreed to purchase from us an aggregate of 6,500,000 warrants at a price of $1.00 per warrant, for an aggregate purchase price of $6,500,000, in a private placement immediately prior to the completion of this offering. Oenoke Partners, LLC currently engages in no business activities other than to hold our securities. It does not have employees or advisors and its members consist solely of our management. The warrants to be sold in the private placement can be exercised on a cashless basis and will have terms and provisions that are otherwise identical to those of the warrants being sold as part of the units in the public offering, except that the private placement warrants will not be subject to redemption and the private placement warrants will not be transferable until one year following the date we complete a business combination. The $6,500,000 of proceeds from the private placement will be added to the proceeds of this offering and will be held in the trust account pending our completion of a business combination on the terms described in this prospectus. If we do not complete such a business combination, then the $6,500,000 of proceeds will be part of the liquidating distribution to our public stockholders and the warrants issued in the private placement will expire worthless. Proposed American Stock Exchange symbols for our: Units: "III.U" Common stock: "III" Warrants: "III.WS" Proceeds of this offering and the private placement to be held in the trust account: $221,650,000, or approximately $7.88 per unit, of the proceeds of this offering will be placed in a trust account at Deutsche Bank Trust Company Americas maintained by Continental Stock Transfer & Trust Company, pursuant to an agreement to be signed on the date of this prospectus. The amount to be placed in the trust account includes $6,500,000 of proceeds from the private placement and $7,250,000 of deferred underwriting discount (assuming the over-allotment option is not exercised). We believe that the inclusion in the trust account of the proceeds from the private placement and the deferred underwriting discount is a benefit to our stockholders because these amounts will ensure that additional proceeds will be available for distribution to investors if a liquidation of the trust account occurs as part of our dissolution and distribution prior to our completing an initial business combination. These proceeds will not be released until the earlier of the completion of a business combination and our liquidation as part of our plan of dissolution and distribution. However, up to $3,000,000 of the interest earned on the trust account (net of taxes) may be released to us to cover a portion of our operating expenses. Therefore, except with respect to such interest, unless and until a business combination is consummated, the proceeds held in the trust account will not be available for our use for any expenses related to this offering or expenses which we may incur related to the investigation and selection of a target business and the negotiation of an agreement to acquire a target business. These expenses may be paid prior to a business combination only from the proceeds of this offering and the private placement not held in the trust account (initially, $500,000) after payment of expenses related to this offering and from any interest earned on the trust account and released to us as described above. It is possible that we could use a portion of the funds not in the trust account to make a deposit, down payment or fund a "no-shop" provision with respect to a particular proposed business combination. In the event we were ultimately required to forfeit such funds (whether as a result of our breach of the agreement relating to such payment or otherwise), we may not have a sufficient amount of working capital available outside of the trust account to pay expenses related to finding a suitable business combination without securing additional financing. If we were unable to secure additional financing, we would most likely fail to consummate a business combination in the allotted time and would be forced to liquidate our trust account as part of our plan of dissolution and distribution. Shares of Common Stock underlying the Warrants included in the Units(2)(4) 32,343,750 $ 6.00 $ 194,062,500 $ 20,764.69 The underwriters have agreed to defer $7,250,000 of their underwriting discount ($8,262,500 if the over-allotment option is exercised in full) until the consummation of our initial business combination. Upon the consummation of an initial business combination, this deferred underwriting discount of $0.26 per unit, which equals approximately 3.2% of the gross proceeds of this offering, will be released to the underwriters and any public stockholders exercising their conversion rights out of the proceeds of this offering held in the trust account at Deutsche Bank Trust Company Americas maintained by Continental Stock Transfer & Trust Company acting as trustee. The underwriters will not be entitled to any interest accrued on the deferred discount. Warrant proceeds paid to us: None of the warrants may be exercised until after the consummation of a business combination and, thus, after the proceeds of the trust account have been disbursed. Accordingly, the warrant exercise price will be paid directly to us and not placed in the trust account. Limited payments to insiders: Prior to the completion of a business combination, we will not pay any fees, reimbursements or other cash payments to our officers, directors or senior advisors or their respective affiliates other than: repayment on the earlier of August 1, 2007 and the completion of this offering of a $100,000 loan, plus interest at the rate of 5% per annum, compounded semiannually, made by Oenoke Partners LLC; repayment on the earlier of October 3, 2007 and the completion of this offering of a $150,000 loan, plus interest at the rate of 5% per annum, compounded semiannually, made by Oenoke Partners, LLC; and reimbursement for any expenses related to this offering and to identifying, investigating and implementing a suitable business combination. Stockholders must approve our initial business combination: We will seek stockholder approval before we effect our initial business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable state law. In connection with the vote required for our initial business combination, all of our existing stockholders, including our principal stockholder and all of our officers, directors and senior advisors, have agreed to vote the shares of common stock then owned by them in accordance with the majority of the shares of common stock voted by the public stockholders. We will proceed with a business combination only if a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and only if public stockholders owning less than 20% of the shares sold in this offering exercise their conversion rights described below. Voting against the business combination alone will not result in conversion of a stockholder's shares for the conversion price described below. Such stockholder must have also exercised its conversion rights described below. In addition, if we seek approval from our stockholders to consummate a business combination within 90 days prior to the expiration of 24 months (assuming that the period in which we need to consummate a business combination has been extended to 24 months, as provided in our amended and restated certificate of incorporation) from the date of this offering, the proxy statement related to such business combination will also seek stockholder approval for our board's recommended plan of dissolution and distribution, in the event our stockholders do not approve such business combination. Units underlying the Underwriters' Unit Purchase Option ("Underwriters' Units")(4) 1,406,250 $ 9.60 $ 13,500,000 $ 1,444.50 Conversion rights for public stockholders voting to reject our initial business combination: If our initial business combination is approved and completed, public stockholders voting against our initial business combination will be entitled to convert their shares of common stock into a pro rata share of the aggregate amount then on deposit in the trust account, including their pro rata portion of the deferred underwriting discount and any interest income earned on the trust account, net of (1) income taxes payable on the interest income on the trust account and (2) up to $3,000,000 of interest earned on the trust account balance, net of income taxes payable on this amount, released to us to fund working capital requirements. We refer to this amount as the conversion price. Public stockholders who convert their common stock will be paid as soon as reasonably practicable their conversion price following their exercise of conversion rights and will continue to have the right to exercise any warrants they own. We estimate that the initial per share conversion price will be approximately $7.88 per share, without taking into account interest earned on the trust account or taxes payable on such interest. This amount is less than the $8.00 per unit price in this offering and may be lower than the market price of the common stock on the date of conversion. Accordingly, there may be a disincentive on the part of public stockholders to exercise their conversion rights. Dissolution and distribution if no business combination: We will dissolve and distribute only to our public stockholders the amount in our trust account (including any accrued interest, net of income taxes payable thereon) plus any remaining net assets outside the trust account if we do not effect a business combination within 18 months after consummation of this offering (or within 24 months from the consummation of this offering if a letter of intent, agreement in principle or definitive agreement has been executed within 18 months after consummation of this offering and the business combination has not yet been consummated within such 18 month period). Pursuant to our amended and restated certificate of incorporation, upon the expiration of the applicable time periods, our purpose and powers will be limited to dissolving, liquidating and winding up. Also contained in our amended and restated certificate of incorporation is the agreement of our board to dissolve our company upon the expiration of the applicable time period. We will seek stockholder approval for the plan of dissolution and distribution, and our principal stockholder, officers, directors and senior advisors have agreed to vote all shares owned by them in favor of the dissolution and distribution. As soon as reasonably practicable upon the approval by our stockholders of our plan of dissolution and distribution, we will liquidate our trust account to our public stockholders and pay, or reserve for payment, from funds not held in trust, our liabilities and obligations. All claims (whether existing, pending or that may be potentially brought against us in the next ten years) of our creditors must be paid or reasonably provided for prior to any distribution of funds held in the trust account to our stockholders. All of our officers, directors, senior advisors and principal stockholder directly or indirectly own common stock in our company, but have waived their right to receive distributions (other than with respect to common stock, or any shares of common stock underlying units, they purchase in connection with this offering or in the after market) upon the liquidation of the trust account, or as part of any plan of dissolution and distribution in the event we do not consummate a business combination within the required time periods. In addition, if we seek approval from our stockholders to consummate a business combination within 90 days of the expiration of 24 months (assuming that the period in which we need to consummate a business combination has been extended, as provided in our amended and restated certificate of incorporation) from the date of this offering, the proxy statement related to the business combination will also seek stockholder approval for our board's recommended plan of dissolution and distribution, in the event our stockholders do not approve the business combination. If no proxy statement seeking the approval of our stockholders for a business combination has been filed 30 days prior to the date which is 24 months (assuming that the period in which we need to consummate a business combination has been extended, as provided in our amended and restated certificate of incorporation) from the date of this offering, our board will, prior to such date, convene, adopt and recommend to our stockholders a plan of dissolution and distribution, and on such date file a proxy statement with the SEC seeking stockholder approval for this plan. Shares of Common Stock included as part of the Underwriters' Units(4) 1,406,250 (3) We expect that all costs associated with the implementation and completion of our plan of dissolution and distribution will be funded by funds not held in our trust account, although we cannot assure you that there will be sufficient funds for such purpose. To the extent such funds are not available, Oenoke Partners, LLC has agreed to advance us the necessary funds and has agreed not to seek repayment for such expenses, though it has not taken a reserve for this possibility and there can be no assurance that it will be able to meet its obligations under this agreement. Warrants included as part of the Underwriters' Units(4) 1,406,250 (3) In the event we seek stockholder approval for a plan of dissolution and distribution and do not obtain such approval, we will nonetheless continue to pursue stockholder approval for our dissolution. Pursuant to the terms of our amended and restated certificate of incorporation, our powers following the expiration of the permitted time periods for consummating a business combination will automatically thereafter be limited to acts and activities relating to dissolving and winding up our affairs, including liquidation. If we do not consummate a business combination, the funds held in our trust account may not be distributed except to our stockholders upon our dissolution and, unless and until such approval is obtained from our stockholders, the funds held in our trust account will not be released. Consequently, holders of a majority of our outstanding stock must approve our dissolution in order to receive the funds held in our trust account net of any payments which may be required to be made in respect of income tax obligations, and the funds will not be available for any other corporate purpose. Lock-up of securities: Our existing stockholders have agreed that, subject to certain limited exceptions, the shares they owned prior to the completion of this offering and the warrants purchased in the private placement will not be transferable until one year from the date of the closing of the initial business combination. All securities which are subject to lockup restrictions will be held in an escrow account maintained by a third party escrow agent pursuant to the terms of a lock-up agreement to be entered into by and among us, the security holders and such escrow agent. Any transferee of securities will be subject to the same restrictions imposed on the existing stockholders. Shares of Common Stock underlying the Warrants included in the Underwriters' Units(4) 1,406,250 $ 7.50 $ 10,546,875 $ 1,128.51 Risks We are a newly formed company that has no operations and has generated no revenues. Until we complete a business combination, we will have no operations and will generate no operating revenues. In making your decision on whether to invest in our securities, you should take into account not only the backgrounds of our management team but also the special risks we face as a blank check company. If we make down payments or pay exclusivity or similar fees in connection with structuring and negotiating our initial business combination and we do not complete the specific business combination, the costs incurred for the proposed transaction will not be recoverable. Such an event will result in a loss to us of the costs incurred and could materially and adversely affect subsequent attempts to locate and acquire or merge with another business. You should carefully consider these and the other risks set forth in the section entitled "Risk Factors" beginning on page 15 of this prospectus. Total $ 476,859,475 $ 51,023.95 (5) (1)Excludes the $100 purchase price for the purchase option issued to the underwriters. Includes the deferred underwriting discount equal to approximately 3.2% of the gross proceeds from the sale of the units to the public stockholders, or $7,250,000 ($8,262,500 if the underwriters' over-allotment option is exercised in full), which the underwriters have agreed to defer until the consummation of our initial business combination. (2)Working capital excludes fixed assets ($41,972 as of November 30, 2006). The "as adjusted" information gives effect to the sale of the units we are offering pursuant to this prospectus, including the application of the related gross proceeds and the payment of the estimated remaining costs from such sale and the sale of 6,500,000 warrants at a price of $1.00 per warrant in the private placement. The working capital and total assets amounts include the $221,650,000 (or $254,050,000 if the underwriters' over-allotment option is exercised in full) to be held in the trust account, which will be available to us only upon the consummation of a business combination within the time period described in this prospectus. If a business combination is not consummated, we will be dissolved and the proceeds held in the trust account will be distributed as part of our plan of dissolution and distribution solely to our public stockholders, who, for this purpose, include our existing stockholders with respect to any shares purchased by them in this offering or in the aftermarket. We will not proceed with a business combination if public stockholders owning 20% or more of the shares sold in this offering vote against the business combination and exercise their conversion rights. Accordingly, if we have the requisite vote, we may effect a business combination even if public stockholders owning up to 5,624,999 shares of the 28,125,000 shares sold in this offering exercise their conversion rights and vote against the business combination. If this occurred, we would be required to convert to cash up to 5,624,999 shares of the 28,125,000 shares sold in this offering, at an initial per-share conversion price of approximately $7.88, without taking into account interest earned on the trust account or taxes payable on such interest. The actual per share conversion price will be equal to: the amount in the trust account, including a pro rata portion of the deferred underwriting discount and all accrued interest (net of (1) income taxes payable on the interest income on the trust account and (2) up to $3,000,000 of interest income on the trust account balance, net of income taxes payable on this amount, released to us to fund working capital requirements, each calculated as of two business days prior to the actual consummation of the proposed business combination), divided by the number of units sold in this offering. (1)Estimated solely for the purpose of calculating the registration fee. (2)Includes 4,218,750 Units, and 4,218,750 shares of Common Stock and 4,218,750 Warrants underlying such Units, which may be issued on exercise of a 30-day option granted to the Underwriters to cover over-allotments, if any. (3)No fee pursuant to Rule 457(g). (4)Pursuant to Rule 416, there are also being registered such indeterminable additional securities as may be issued to prevent dilution as a result of stock splits, stock dividends or similar transactions. (5)The Registrant previously paid $34,015.97, with the balance of $17,007.98 being paid herewith. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
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+This summary highlights information contained elsewhere in this prospectus or in the documents incorporated by reference. You should read the entire prospectus, including the risk factors, our historical and pro forma consolidated financial statements and the notes to those financial statements. In this prospectus, we use the term "Historical Tyco" to mean Tyco's historical businesses, including healthcare and electronics. The terms "we," "our," "us" and "Tyco International" refer to Tyco International Ltd. and its consolidated subsidiaries giving effect, as appropriate, to the spin-offs, and the term "TIFSA" refers to Tyco International Finance S.A. Unless otherwise indicated, references in this prospectus to fiscal 2007, fiscal 2006, fiscal 2005 and fiscal 2004 are to Tyco International's fiscal years ended September 28, 2007, September 29, 2006, September 30, 2005 and September 30, 2004, respectively. Our Company On January 13, 2006, we announced that our board of directors had approved a plan to separate Historical Tyco's portfolio of diverse businesses into three independent, publicly-traded companies: one for our healthcare businesses (Covidien), one for our electronics businesses (Tyco Electronics) and one for our fire and security and engineered products and services businesses (Tyco International). Following the completion of the spin-offs of our healthcare and electronics businesses, we will continue to be a leading provider of electronic security, fire and safety services and products, valves and controls and other industrial products. We also will continue manufacturing steel pipe and tubular products and providing services to infrastructure markets around the world. In connection with the spin-offs of Covidien and Tyco Electronics, we are realigning our operations and will conduct our business through five segments: ADT Worldwide designs, sells, installs, services and monitors electronic security systems to residential, commercial, industrial and governmental customers. Fire Protection Services designs, sells, installs and services fire detection and fire suppression systems to commercial, industrial and governmental customers. Flow Control designs, manufactures, sells and services valves, pipes, fittings, valve automation and heat tracing products for the water and wastewater markets, the oil and energy markets and other process industries. Safety Products designs, manufactures and sells fire protection, security and life safety products, including fire suppression products, breathing apparatus, intrusion security, access control and video management systems. In addition, Safety Products manufactures products installed and serviced by ADT Worldwide and Fire Protection Services. Electrical and Metal Products designs, manufactures and sells galvanized steel tubing and pipe products, as well as cable products, including pre-wired armored cable and flexible conduit products for commercial construction. We also provide general corporate services to our segments and, through our Infrastructure Services business, provide consulting, engineering, construction management and operating services for the water, wastewater, environmental, transportation and facilities markets. These operations are reported as Corporate and Other. Revenue from product sales $ 920 $ 901 Service revenue 2 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE Tyco International Finance S.A. and Tyco International Ltd. "incorporate by reference" information into this prospectus, which means that we disclose important information to you by referring you to other documents filed separately by Tyco International Ltd. (SEC File No. 001-13836) with the SEC. The information incorporated by reference is deemed to be part of this prospectus, except for any information superseded by information contained in this prospectus. This prospectus incorporates by reference the documents set forth below, which Tyco International Ltd. has filed with the SEC: Annual Report on Form 10-K for the fiscal year ended September 29, 2006, filed on December 11, 2006; Current Report on Form 8-K filed on November 15, 2006 (with respect to Item 8.01 only); Current Reports on Form 8-K filed on December 5, 2006; Current Report on Form 8-K filed on December 15, 2006; Competitive Strengths We believe that we have the following competitive strengths: Leading market positions and brands. We have leading market positions in each of our segments, and a number of well recognized brands. Global reach and significant scale of operations. We are a global company, in terms of sales, manufacturing and services. We conduct business in more than 60 countries, and 50% of our fiscal 2006 net revenue was generated outside the United States. Diverse portfolio of services and products. We offer a broad portfolio of services and products, which allows our customers to fulfill many of their needs by purchasing solely from us. Diverse customer base. Our customers operate in many different industries and countries, which allows us to leverage our skills and experience across many end markets. Favorable long-term growth opportunities. We operate businesses in a number of different markets that have attractive characteristics and solid growth prospects. Stable, recurring revenue base. Many of our ADT Worldwide customers have long-term agreements with us to provide ongoing monitoring, inspection and maintenance services, which generate predictable annual revenue in excess of $3.5 billion. In addition, we have a substantial amount of repeatable revenue from ongoing service and maintenance activities in our Fire Protection Services business. Strong cash flow. We historically have generated significant cash flow from our operations. Our cash flow provides us with the financial flexibility to invest in new products and acquisitions to enhance our market leading businesses. Experienced management team. Our executive officers have the proven track record and experience necessary to execute our business strategies. Strategy Our goal is to build upon our position as a leading provider of electronic security, fire and safety services and products, valves and controls and other industrial products. We operate in a number of highly fragmented markets where we believe we have a number one or two market position that translates into a relatively small market share. We believe we have opportunities to increase our market Operating income 2,336 (1,087 ) (897 ) 130 482 Interest income 80 (19 ) (29 ) 32 Interest expense (327 ) 78 118 (131 ) (c) Other income, net 9 (7 ) Net revenue 39,283 (9,543 ) (11,804 ) 17,936 Cost of product sales 20,804 (5,040 ) (8,465 ) 7,299 Cost of services 4,761 (32 ) (180 ) 4,549 Selling, general and administrative expenses 8,226 (2,108 ) (1,292 ) 4,826 (Gains) losses on divestitures (274 ) (5 ) 301 22 Restructuring and other charges, net 5 (3 ) 14 16 Impairment of long-lived assets 6 (3 ) (1 ) Operating income $ 482 $ 612 Interest income 32 28 Interest expense (131 ) (149 ) Other income, net Revenue from product sales $ 1,946 $ 1,795 $ 1,577 Service revenue 3 3 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Current Report on Form 8-K filed on January 8, 2007; Current Report on Form 8-K filed on January 10, 2007; Proxy Statement on Schedule 14A filed on January 19, 2007; Current Report on Form 8-K filed on January 17, 2007; Proxy Statement on Schedule 14A filed on January 30, 2007; Quarterly Report on Form 10-Q for the quarter ended December 29, 2006 filed on February 6, 2007; Current Report on Form 8-K filed on February 20, 2007; Current Reports on Form 8-K filed on March 21, 2007; Current Report on Form 8-K filed on April 12, 2007; Amended Annual Report on Form 10-K/A for the fiscal year ended September 29, 2006, filed on April 20, 2007; Amended Quarterly Report on Form 10-Q/A for the quarter ended December 29, 2006 filed on April 20, 2007; Current Reports on Form 8-K filed on April 27, 2007; Quarterly Report on Form 10-Q for the quarter ended March 30, 2007 filed on May 8, 2007; Current Report on Form 8-K filed on May 11, 2007; Current Reports on Form 8-K filed on May 15, 2007; Current Report on Form 8-K filed on May 17, 2007; and Current Report on Form 8-K filed on May 18, 2007. You may request a copy of these filings at no cost, by writing or calling us at the following address or telephone number: Tyco International Ltd. 90 Pitts Bay Road, Second Floor Pembroke HM 08, Bermuda (441) 292-8674 Exhibits to the filings will not be sent, however, unless those exhibits have specifically been incorporated by reference in this document. share and accelerate revenue growth by expanding our customer base and by generating new business from our existing customers. In addition, we believe we have opportunities to improve our margins. Our business strategy includes the following strategic priorities: Expand our customer base. We believe that we have significant opportunities to attract customers and increase our market share by focusing our sales and marketing efforts and our product development efforts on key vertical markets, such as retailer, banking, oil and gas and water. Generate new business from existing customers. We believe that our customer relationships, enhanced by targeted sales and marketing efforts that emphasize the breadth of our portfolio and that focus on product and service opportunities within each customer's industry, will enable us to increase our market penetration and generate increased sales and service revenue from existing customers. Improve productivity and efficiency. We intend to increase the profitability of our global portfolio of services and products by focusing on further improvements to our cost structure. We will continue to reduce our manufacturing costs by leveraging our purchasing power to reduce procurement costs and enhancing our manufacturing productivity through an emphasis on key metrics and processes such as Six Sigma. Pursue disciplined acquisition process. Our strong cash flows will enable us to fund acquisitions that strengthen our product offerings and market positions, as well as increase our revenues and profitability, with a particular focus on our security, flow control and safety products businesses. Class Action Settlement On May 14, 2007, we entered into a memorandum of understanding with plaintiffs' counsel in connection with the settlement of 32 purported class action lawsuits. Under the terms of the memorandum of understanding, the plaintiffs have agreed to release all claims against us, the other settling defendants and ten other individuals in consideration for the payment of $2.975 billion to the certified class and assignment to the class of any net recovery of any claims possessed by us and the other settling defendants against our former auditor, PricewaterhouseCoopers. Defendant PricewaterhouseCoopers is not a settling defendant and is not a party to the memorandum. We and the other settling defendants have denied and continue to deny any wrongdoing and legal liability arising from any of the facts or conduct alleged in the actions. Pursuant to the terms of the memorandum of understanding, L. Dennis Kozlowski, Mark H. Swartz and Frank E. Walsh, Jr., also are excluded from the settling defendants, and the class will assign to us all of their claims against defendants Kozlowski, Swartz and Walsh. In exchange, we will agree to pay to the certified class 50% of any net recovery against these defendants. The memorandum of understanding does not address the following securities class actions, which remain outstanding: Stumpf v. Tyco International Ltd., New Jersey v. Tyco, Ballard v. Tyco International Ltd., Sciallo v. Tyco International Ltd., et al., Jasin v. Tyco International Ltd., et al., and Hall v. Kozlowski. The memorandum of understanding also does not address any consolidated ERISA litigation in which we and certain of our current and former employees, officers and directors have been named as defendants. Tyco International Finance S.A. Tyco International Finance S.A., or TIFSA, a Luxembourg company, is a wholly-owned subsidiary of Tyco International Ltd. TIFSA's registered and principal offices are located at 17, Boulevard de la Grande Duchesse Charlotte, L-1331 Luxembourg. Its telephone number at that address is (352) 464-340-1. TIFSA is a newly-formed holding company established in connection with the spin-offs Income from continuing operations before income taxes and minority interest 2,098 (1,035 ) (808 ) 130 385 Income taxes (513 ) 230 254 (17 )(b) (46 ) (d) Minority interest (5 ) 1 Operating income 2,632 (1,152 ) (888 ) 20 612 Interest income 70 (17 ) (25 ) 28 Interest expense (376 ) 91 136 (149 ) Other expense, net (3 ) Income from continuing operations before income taxes and minority interest 2,323 (1,075 ) (777 ) 20 491 Income taxes (533 ) 238 174 (1 )(b) (126 ) (4 )(k) Minority interest (4 ) 1 AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 TYCO INTERNATIONAL FINANCE S.A.* (Exact name of registrant as specified in its charter) TYCO INTERNATIONAL LTD. (Exact name of registrant as specified in its charter) Luxembourg (State or other jurisdiction of incorporation or organization) Bermuda (State or other jurisdiction of incorporation or organization) 7382 (Primary Standard Industrial Classification Code Number) 7382 (Primary Standard Industrial Classification Code Number) 98-0518565 (I.R.S. Employer Identification Number) 98-0390500 (I.R.S. Employer Identification Number) 17, Boulevard de la Grande Duchesse Charlotte L-1331 Luxembourg Telephone: (352) 464-340-1 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) 90 Pitts Bay Road, Second Floor Pembroke HM 08, Bermuda Telephone: (441) 292-8674 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) of our healthcare and electronics businesses to directly and indirectly own substantially all of the operating subsidiaries of Tyco International Ltd., to issue the notes and to perform treasury operations for us. Otherwise, it conducts no independent business. We have not included separate financial statements for TIFSA, which was formed in December 2006, in this prospectus because its initial capitalization was not material and it will not have any significant operations or assets until shortly before the spin-offs. Tyco International Ltd. Tyco International Ltd. is a Bermuda corporation. Its registered and principal office is located at Second Floor, 90 Pitts Bay Road, Pembroke HM 08, Bermuda, and its telephone number at that address is (441) 292-8674. Our management office in the United States is located at 9 Roszel Road, Princeton, New Jersey 08540. The Spin-Offs On January 13, 2006, we announced that our board of directors had approved a plan to separate Historical Tyco's portfolio of diverse businesses into three independent, publicly-traded companies Covidien Ltd., a global leader in developing, manufacturing and distributing medical devices and supplies, diagnostic imaging agents and pharmaceuticals for use in clinical and home settings; Tyco Electronics Ltd., a leading global provider of engineered electronic components, network solutions and wireless systems; and Tyco International, which will be the combination of Tyco Fire & Security and Tyco Engineered Products & Services, a leading provider of electronic security, fire and safety services and products, valves and controls and other industrial products. The separation will occur through tax-free spin-offs of our healthcare and electronics businesses to our shareholders. We refer to these transactions as the "spin-offs." On , 2007, the distribution date, each Tyco International shareholder will receive Covidien common shares and Tyco Electronics common shares for each common share of Tyco International held at the close of business on the record date. Immediately following the distributions, Tyco International's shareholders will own 100% of the common shares of Covidien and Tyco Electronics. Tyco International shareholders will not be required to make any payment, surrender or exchange their Tyco International common shares or take any other action to receive their common shares of Covidien and Tyco Electronics. We anticipate that on the distribution date we will, if approved by our Board of Directors, execute a reverse share split, and as a result, each Tyco International share will be converted into one-fourth of a share. The notes offered hereby will be offered following the completion of the separation distributions. We do not anticipate offering these notes in the event that the separation distributions are not completed.
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+Prospectus summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/LULU_lululemon_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/LULU_lululemon_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights some of the information contained elsewhere in this prospectus. This summary is not complete and does not contain all the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, especially the risks of investing in our common stock discussed in the Risk Factors section of this prospectus and our consolidated financial statements and the related notes appearing at the end of this prospectus. Our fiscal year ends on January 31. All references in this prospectus to our fiscal years refer to the fiscal year ended on January 31 in the year following the year mentioned. For example, our fiscal 2006 ended on January 31, 2007. Numerical and percentage figures included in this prospectus are presented subject to rounding adjustments. Accordingly, figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them. Our Company We believe lululemon is one of the fastest growing designers and retailers of technical athletic apparel in North America. Our yoga-inspired apparel is marketed under the lululemon athletica brand name. We believe consumers associate our brand with highly innovative, technically advanced premium apparel products. Our products are designed to offer superior performance, fit and comfort while incorporating both function and style. Our heritage of combining performance and style distinctly positions us to address the needs of female athletes as well as a growing core of consumers who desire everyday casual wear that is consistent with their active lifestyles. We also continue to broaden our product range to increasingly appeal to male athletes. We offer a comprehensive line of apparel and accessories including fitness pants, shorts, tops and jackets designed for athletic pursuits such as yoga, dance, running and general fitness. As of July 1, 2007, our branded apparel was principally sold through our 59 stores that are primarily located in Canada and the United States. We believe our vertical retail strategy allows us to interact more directly with and gain insights from our customers while providing us with greater control of our brand. We have developed a distinctive community-based strategy that we believe enhances our brand and reinforces our customer loyalty. The key elements of our strategy are to: design and develop innovative athletic apparel that combines performance with style and incorporates real-time customer feedback; locate our stores in street locations, lifestyle centers and malls that position each lululemon athletica store as an integral part of its community; create an inviting and educational store environment that encourages product trial and repeat visits; and market on a grassroots level in each community, including through influential fitness practitioners who embrace and create excitement around our brand. We were founded in 1998 by Dennis Chip Wilson in Vancouver, Canada. Noting the increasing number of women participating in sports, and specifically yoga, Mr. Wilson developed lululemon athletica to address a void in the women s athletic apparel market. The founding principles established by Mr. Wilson drive our distinctive corporate culture and promote a set of core values that attracts passionate and motivated employees. We believe the passion and dedication of our employees allow us to successfully execute on our business strategy, enhance brand loyalty and create a distinctive connection with our customers. We believe our culture and community-based business approach provide us with competitive advantages that are responsible for our strong financial performance. Our net revenue has increased from $40.7 million in fiscal 2004 to $148.9 million in fiscal 2006, representing a 91.1% compound annual growth rate. Our net revenue also increased from $28.2 million for the first quarter of fiscal 2006 to $44.8 million for the first quarter of fiscal 2007, representing a 58.9% increase. During fiscal 2006, Table of Contents EXPLANATORY NOTE This registration statement contains two forms of prospectus: one to be used in connection with the offerings of the securities described herein in the United States (the U.S. Prospectus), and one to be used in connection with the offering of such securities in Canada (the Canadian Prospectus). The U.S. Prospectus and the Canadian Prospectus are identical except for the cover page, the table of contents and the back page, and except that the Canadian Prospectus includes page 154, page 155, a Certificate of Lululemon, a Certificate of the Canadian Underwriters and Auditors Consent. The form of the U.S. Prospectus is included herein and is followed by the alternate and additional pages to be used in the Canadian Prospectus, except for the Auditor s Consent, which is not included herein. Each of the alternate pages for the Canadian Prospectus included herein is labeled Alternate Page for Canadian Prospectus. Each of the additional pages for the Canadian Prospectus included herein is labeled Additional Page for Canadian Prospectus. Table of Contents our comparable store sales increased 25% and we reported income from operations of $16.2 million, which included a one-time $7.2 million litigation settlement charge. Over that same period, our stores opened at least one year averaged sales of approximately $1,400 per square foot, which we believe is among the best in the apparel retail sector. Our Competitive Strengths We believe that the following strengths differentiate us from our competitors and are important to our success: Premium Active Brand. lululemon athletica stands for leading a healthy, balanced and fun life. We believe customers associate the lululemon athletica brand with high-quality, premium athletic apparel that incorporates technically advanced materials, innovative functional features and style. We believe our focus on women differentiates us and positions lululemon athletica to address a void in the growing market for women s athletic apparel. The premium nature of our brand is reinforced by our vertical retail strategy and our selective distribution through leading yoga studios and fitness clubs. We believe this approach allows us to further control our brand image and merchandising. Distinctive Retail Experience. We locate our stores in street locations, lifestyle centers and malls that position lululemon athletica stores to be an integral part of their communities. Our distinctive retail concept is based on a community-centric philosophy designed to offer customers an inviting and educational experience. To enhance our store s appeal as a community hub, we train our sales associates to be knowledgeable about the technical design aspects of our products and to remain current regarding local fitness classes, instructors and athletic activities. We believe that our engaging store environment differentiates us from other specialty retailers and encourages product trial, purchases and repeat visits. Innovative Design Process. We attribute our ability to develop superior products to a number of factors, including: our customer-driven design process; our collaborative relationships with third-party suppliers and local fitness practitioners to develop technically advanced and functional products; and our vertical retail strategy that allows us to integrate customer feedback into our products. Community-Based Marketing Approach. We differentiate lululemon athletica through an innovative, community-based approach to building brand awareness and customer loyalty. We use a multi-faceted grassroots marketing strategy that includes partnering with local fitness practitioners, creating in-store community boards, and facilitating fitness activities in our communities. To create excitement and establish a premium image for our brand, we often initiate our grassroots marketing efforts in advance of opening our first store in a new market. Deep Rooted Culture Centered on Training and Personal Growth. We believe our core values and distinctive corporate culture allow us to attract passionate and motivated employees who share our vision. We provide our employees with a supportive, goal-oriented environment and encourage them to reach their full professional, health and personal potential. We believe our strong relationship with our employees is a key contributor to our success. Experienced Management Team. Our founder, Mr. Wilson, leads our design team and plays a central role in corporate strategy and in promoting our distinctive corporate culture. Our Chief Executive Officer, Robert Meers, whose experience includes 15 years at Reebok International Ltd., most recently serving as the chief executive officer of the Reebok brand from 1996 to 1999, joined us in December 2005. Messrs. Wilson and Meers have assembled a management team with a complementary mix of retail, design, operations, product sourcing and marketing experience from leading apparel and retail companies such as Abercrombie Fitch Co., Limited Brands, Inc., Nike, Inc. and Reebok. We believe our management team is well positioned to execute the long-term growth strategy for our business. Table of Contents Growth Strategy Key elements of our growth strategy are to: Grow our Store Base in North America. We believe that there is a significant opportunity for us to expand our store base in North America, primarily in the United States. We plan to add new stores to strengthen existing markets while selectively entering new markets in the United States and Canada. We believe that our strong sales in the United States to date demonstrate the portability of our brand and retail concept. We expect to open 20 to 25 stores in fiscal 2007 and 30 to 35 additional stores in fiscal 2008 in the United States and Canada. Increase our Brand Awareness. We will continue to increase brand awareness and customer loyalty through our grassroots marketing efforts and planned store expansion. Our grassroots marketing programs are designed to reinforce the premium image of our brand and our connection with the community. These efforts, which we often initiate before we open a store in a new market, include organizing events and partnering with local fitness practitioners. We believe our grassroots marketing efforts enhance our profile in the community and create excitement for lululemon athletica. Introduce New Product Technologies. We will continue to focus on developing and offering products that incorporate technology-enhanced fabrics and performance features that differentiate us in the market and broaden our customer base. We believe that incorporating new technologies, providing advanced features and using differentiated manufacturing techniques will reinforce the authenticity and appeal of our products and drive sales growth. Broaden the Appeal of our Products. We will selectively seek opportunities to expand the appeal of lululemon athletica to improve store productivity and increase our overall addressable market. This includes our current plans to: grow our men s business as a proportion of our total sales; expand our product offerings in categories such as bags, undergarments, outerwear and sandals; and increase the range of the athletic activities our products target. Expand Beyond North America. We plan to open additional stores in Japan and Australia through our existing and planned joint venture relationships. Over time, we intend to pursue additional joint venture opportunities in other Asian and European markets that we believe offer similar, attractive demographics. We believe our joint venture model allows us to leverage our partners knowledge of local markets to reduce risks and improve our probability of success in these markets. Risk Factors There are a number of risks and uncertainties that may affect our financial and operating performance and our growth prospects. You should carefully consider all of the risks discussed in Risk Factors, which begins on page 10, before investing in our common stock. These risks include the following: the possibility that we may not be able to manage operations at our current size or manage growth effectively; the possibility that we may not be able to locate suitable locations to open new stores or attract customers to our stores; the possibility that we may not be able to successfully expand in the United States and other new markets; the possibility that we may not be able to finance our growth and maintain sufficient levels of cash flow; increased competition causing us to reduce the prices of our products or to increase significantly our marketing efforts in order to avoid losing market share; Table of Contents [ALTERNATE PAGE FOR CANADIAN PROSPECTUS] A copy of this preliminary prospectus has been filed with the securities regulatory authorities in each of the provinces and territories of Canada but has not yet become final for the purpose of the sale of securities. Information contained in this preliminary prospectus may not be complete and may have to be amended. The securities may not be sold until a receipt for the prospectus is obtained from the securities regulatory authorities. This prospectus has been filed under procedures in each of the provinces and territories of Canada that permit certain information about these securities to be determined after the prospectus has become final and that permit the omission of that information from this prospectus. The procedures require the delivery to purchasers of a supplemented PREP prospectus containing the omitted information within a specified period of time after agreeing to purchase any of the securities. All disclosure contained in a supplemented PREP prospectus that is not contained in this prospectus will be incorporated by reference into this prospectus as of the date of the supplemented PREP prospectus. No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise. This prospectus constitutes a public offering of these securities only in those jurisdictions where they may be lawfully offered for sale and therein only by persons permitted to sell such securities. The Company has filed a Registration Statement on Form S-1 with the U.S. Securities and Exchange Commission, under the United States Securities Act of 1933, as amended, with respect to these securities. Initial Public Offering and Secondary Offering , 2007 AMENDED AND RESTATED PRELIMINARY BASE PREP PROSPECTUS lululemon athletica inc. U.S. $ 18,200,000 SHARES OF COMMON STOCK This prospectus qualifies the distribution of shares of common stock of lululemon athletica inc. Of the 18,200,000 shares of common stock being offered, 2,290,909 shares are being offered by us and 15,909,091 shares are being offered by certain of our stockholders (the Selling Stockholders ). See Principal and Selling Stockholders. We are offering our common stock for sale concurrently in Canada under the terms of this prospectus and in the United States under the terms of a registration statement on Form S-1 filed with the U.S. Securities and Exchange Commission. Our common stock is being offered in Canada by Goldman Sachs Canada Inc., Merrill Lynch Canada Inc., Credit Suisse Securities (Canada) Inc., UBS Securities Canada Inc. and CIBC World Markets Inc. (the Canadian Underwriters ) and in the United States by Goldman, Sachs Co., Merrill Lynch, Pierce, Fenner Smith Incorporated, Credit Suisse Securities (USA) LLC, UBS Securities LLC, William Blair Company, L.L.C., CIBC World Markets Corp., Wachovia Capital Markets, LLC and Thomas Weisel Partners LLC (together with the Canadian Underwriters, the Underwriters ). Price: U.S.$ per Share of Common Stock Underwriters Net Proceeds to Price to the Discounts and Net Proceeds to the Selling Public(1) Commissions Lululemon(2) Stockholders(3) Per share(4) U.S.$ U.S.$ U.S.$ U.S.$ Total offering(5) U.S.$ U.S.$ U.S.$ U.S.$ (1) The offering price for shares of our common stock has been determined by negotiation between us, the Selling Stockholders and the Underwriters. See Underwriting. (2) Before deducting expenses of this offering, which are estimated to be approximately U.S.$6,000,000, which will be paid by us out of our general corporate funds. (3) The Selling Stockholders will pay the Underwriters discounts and commissions in respect of the shares of common stock sold by the Selling Stockholders. None of the expenses of the offering will be borne by the Selling Stockholders. Pursuant to the Agreement and Plan of Reorganization dated April 26, 2007, between us, our stockholders and certain other parties, we agreed to pay all expenses of the offering. See Principal and Selling Stockholders. (4) Assumes an initial public offering price of U.S.$16.00 per share (the midpoint of the currently estimated price range of U.S.$15.00 to U.S.$17.00). (5) Certain of the Selling Stockholders have granted an option to the Underwriters, exercisable in whole or in part for a period of 30 days from the closing of this offering, to purchase up to 2,730,000 additional shares of common stock on the terms as set forth above. If this option is exercised in full, the total Price to the Public, Underwriters Discounts and Commissions and Net Proceeds to the Selling Stockholders will be U.S.$ , U.S.$ and U.S.$ , respectively. This prospectus qualifies the distribution of the option and the distribution of the additional shares of common stock sold upon the exercise of the option. See Underwriting. An investment in our common stock is subject to certain risk factors that prospective investors should carefully consider. It is important for prospective purchasers of our common stock to consider the particular risk factors that may affect the athletic apparel industry. See Risk Factors for a more complete assessment of those risks. There is currently no market through which our common stock may be sold, and purchasers may not be able to resell common stock purchased under this prospectus. The Toronto Stock Exchange has conditionally approved the listing of our common stock under the symbol LLL. Listing is subject to fulfilling all the listing requirements of the Toronto Stock Exchange, including distribution of our common stock to a minimum number of public security holders. Our common stock has been approved for listing on the Nasdaq Global Select Market under the symbol LULU. The Canadian Underwriters, as principals, conditionally offer our common stock in Canada, subject to prior sale, if, as and when issued, sold and delivered by us and sold by the Selling Stockholders to, and accepted by, the Canadian Underwriters in accordance with the conditions contained in the underwriting agreement referred to under Underwriting , and subject to the approval of certain legal matters for us by McCarthy T trault LLP as to matters of Canadian law and Pepper Hamilton LLP as to matters of U.S. law and for the Underwriters by Osler, Hoskin Harcourt LLP as to matters of Canadian law and Simpson Thacher Bartlett LLP as to matters of U.S. law. In connection with this offering, the Underwriters may sell more shares of our common stock than they are required to purchase in this offering or effect transactions that stabilize or maintain the market price of our common stock at levels other than those which might otherwise prevail on the open market. See Underwriting. Subscriptions for our common stock will be received subject to rejection or allotment in whole or in part and the right is reserved to close the subscription books at any time without notice. A book entry only certificate representing our common stock will be issued in registered form to Depository Trust Company or its nominee ( DTC ) and will be deposited with DTC on the date of the closing of this offering. The closing of the offering is expected to occur on or about , 2007 or such later date as we and the Underwriters may agree, but in any event not later than , 2007. A purchaser of our common stock in Canada will receive only a customer confirmation from a registered dealer that is a participant in CDS Clearing and Depository Services Inc. from or through which our common stock is purchased. We and certain of the Selling Stockholders are incorporated under the laws of a foreign jurisdiction or reside outside of Canada. It may not be possible for investors to collect from us or the Selling Stockholders judgments obtained in courts in Canada predicated on the civil liability provisions of securities legislation. Table of Contents the possibility that we may not be able to effectively market and maintain a positive brand image; the possibility that we may not be able to maintain recent levels of comparable store sales or average sales per square foot; the possibility that we may not be able to continually innovate and provide our consumers with improved products; the possibility that our suppliers or manufacturers may not produce or deliver our products in a timely or cost-effective manner; and the dilution of $15.06 per share that new investors will experience upon purchase of our common stock, based on an assumed initial public offering price of $16.00 per share. Company Information We commenced operations in Canada in fiscal 1998 as a retailer of technical athletic apparel. We initially conducted our operations through our Canadian operating company, lululemon canada inc. (formerly known as Lululemon Athletica Inc.). In 2002, in connection with our expansion into the United States, we formed a sibling operating company to conduct our U.S. operations, lululemon usa inc. (formerly known as Lululemon Athletica USA Inc.). Both operating companies were wholly-owned by affiliates of Mr. Wilson. In December 2005, Mr. Wilson sold 48% of his interest in our capital stock to a group of private equity investors led by Advent International Corporation, which purchased approximately 38.1% of our capital stock, and Highland Capital Partners, which purchased approximately 9.6% of our capital stock. In connection with this transaction, we formed lululemon athletica inc. to serve as a holding company for all of our related entities, including our two primary operating subsidiaries, lululemon canada inc. and lululemon usa inc. lululemon athletica inc. is a Delaware corporation. Formerly known as Lulu Holding, Inc., we changed our name to Lululemon Corp. in March 2007 and to lululemon athletica inc. in June 2007. Our principal executive offices are located at 2285 Clark Drive, Vancouver, British Columbia, Canada, V5N 3G9. Our telephone number is (604) 732-6124. The address of our website is www.lululemon.com (which is not intended to be an active hyperlink in this prospectus). The information contained on or connected to our website is not part of this prospectus. Unless otherwise specifically stated herein, in this prospectus, the terms lululemon , our Company and we , us or our refer to lululemon athletica inc. and its direct and indirect subsidiaries. This prospectus contains references to a number of trademarks which are our registered trademarks or trademarks for which we have pending applications or common law rights. These include lululemon s original trademarks, Lululemon Athletica design mark, the logo design (WAVE design) mark, lululemon as a word mark, and lululemon s more recent brand, oqoqo . In addition to the registrations in Canada and the United States, lululemon s design and word mark are registered in over 50 other jurisdictions which cover over 90 countries. We own trademark registrations or have made trademark applications for the names of several of our fabrics, including Luon , Silverescent , Vitaseatm, Soyla , Booluxtm and WET.DRY.WARM. Other trademarks, service marks or trade names referred to in this prospectus are the property of their respective owners. Table of Contents Creativity is maximized when you re living in the moment. Table of Contents THE OFFERING Common stock offered by us 2,290,909 shares Common stock offered by the selling stockholders 15,909,091 shares Common stock outstanding after this offering 69,049,205 shares The number of shares of our common stock outstanding after this offering is based on the assumptions outlined in the bullets below. As described below, the number of shares outstanding after this offering depends in part on the initial public offering price and the effective date of our corporate reorganization. Use of proceeds We expect to receive net proceeds from this offering of approximately $28.1 million, based upon an assumed initial public offering price of $16.00 per share, the midpoint of the range set forth on the cover of this prospectus, and after deducting underwriting discounts and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares in this offering by the selling stockholders, including upon the sale of shares if the underwriters exercise their option to purchase additional shares from certain of the selling stockholders in this offering. We intend to use the net proceeds of this offering, together with cash flow from operations, to fund new store openings and working capital, and for other general corporate purposes, which may include general and administrative expenses and potential acquisitions of franchises. For fiscal 2007 and fiscal 2008, we have budgeted an aggregate of $28.0 million to $34.0 million for new store openings, although the actual amounts that we spend on such items may vary. See Use of Proceeds.
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+S-1/A We have not authorized anyone to provide you with information different from that contained in this prospectus and any free writing prospectus authorized by us. We and the selling stockholders are offering the securities for sale in those jurisdictions in the United States, Europe and elsewhere where it is lawful to make such offers. The distribution or possession of this prospectus or any free writing prospectus in or from certain jurisdictions may be restricted by law. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted or where the person making the offer or sale is not qualified to do so or to any person to whom it is not permitted to make such offer or sale. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 8 TO FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 40 Parker Irvine, California 92618 (949) 297-7000 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Joe E. Kiani Chief Executive Officer 40 Parker Irvine, California 92618 (949) 297-7000 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: John F. Della Grotta Michael G. McKinnon Paul, Hastings, Janofsky & Walker LLP 695 Town Center Drive, Suite 1700 Costa Mesa, CA 92626 Patrick T. Seaver Charles K. Ruck Latham & Watkins LLP 650 Town Centre Drive, 20th Floor Costa Mesa, CA 92626 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effectiveness of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box: If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective Registration Statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Calculation of Registration Fee Title of each Class of Securities to be Registered Amount to be Registered(1)(2) Proposed Maximum Aggregate Offering Price Per Share(3) Proposed Maximum Aggregate Offering Price(3) Amount of Registration Fee(4) Common Stock, $0.001 par value 13,704,120 $18.00 $246,674,158.20 $7,573.00 (1) Includes 1,787,494 shares that the underwriters have the option to purchase solely to cover over-allotments, if any. (2) This registration statement also covers rights to purchase shares of the Registrant s Series A junior participating preferred stock, referred to as the rights. Until the occurrence of certain prescribed events, the rights are not exercisable, are evidenced by certificates for common stock, and will be transferable along with and only with the common stock. The value attributable to the rights, if any, is reflected in the value of the common stock. (3) Estimated solely for purposes of calculating the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended. (4) Previously paid. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Table of Contents
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diff --git a/parsed_sections/prospectus_summary/2007/MDGL_madrigal_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/MDGL_madrigal_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before buying shares of our common stock. You should read the entire prospectus carefully, especially the risks of investing in shares of our common stock that we describe under
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diff --git a/parsed_sections/prospectus_summary/2007/NCMI_national_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/NCMI_national_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary highlights information contained elsewhere in this prospectus. It is not complete and does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, especially the risks of investing in our common stock discussed under
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diff --git a/parsed_sections/prospectus_summary/2007/NMM_navios_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/NMM_navios_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..69d5a4e6b16d128fa341c67f3adb5ac7ae94559c
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+This summary highlights information contained elsewhere in this prospectus. Unless we otherwise specify, all references to information and data in this prospectus about our business refer to the business and fleet that will be transferred to us in connection with this offering. You should read the entire prospectus carefully, including the historical financial statements and the notes to those financial statements. The information presented in this prospectus assumes, unless otherwise noted, (a) an initial public offering price of $20.00 per common unit and (b) that the underwriters overallotment option is not exercised. You should read , ' ': , ' ': Risk Factors for more information about important risks that you should consider carefully before buying our common units. We include a glossary of some of the terms used in this prospectus in Appendix B. Unless otherwise indicated, all references to , ' ': , ' ': dollars and , ' ': , ' ': $ in this prospectus are to, and amounts are presented in, U.S. Dollars. Yen amounts translated to U.S. Dollars, unless otherwise indicated, have been translated at a rate of 120 Yen per $1.00. Such translation is solely for convenience and should not be construed as a representation that the Yen amounts actually represent such U.S. Dollar amounts or could be converted into U.S. Dollars at the rate indicated or any other rate. Unless otherwise indicated, all data regarding our fleet and the terms of our charters is as of June 30, 2007 and all industry data is as of September 30, 2007. References in this prospectus to , ' ': , ' ': Navios Maritime Partners L.P., , ' ': , ' ': we, , ' ': , ' ': our, , ' ': , ' ': us or similar terms when used in a historical context refer to the assets of Navios Maritime Holdings Inc. and its vessels and vessel-owning subsidiaries that are being sold, transferred or contributed to Navios Maritime Partners L.P. in connection with this offering. When used in the present tense or prospectively, those terms refer, depending on the context, to Navios Maritime Partners L.P. or any one or more of its subsidiaries, or to all of such entities. References in this prospectus to , ' ': , ' ': Navios Maritime refer, depending on the context, to Navios Maritime Holdings Inc. or any one or more of its subsidiaries, including Navios ShipManagement Inc., or Navios ShipManagement. Navios ShipManagement (an affiliate of our general partner) will manage the commercial and technical operation of our fleet pursuant to a management agreement that it will enter into with us in connection with the closing of this offering and will provide administrative services to us pursuant to an administrative services agreement that it will enter into with us in connection with the closing of this offering.
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diff --git a/parsed_sections/prospectus_summary/2007/OESX_orion_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/OESX_orion_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..a1f3e47c2af3f5be6bc3401dbc822f6821adba63
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+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2007/ORN_orion_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/ORN_orion_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus, but it does not contain all of the information that you may consider important in making your investment decision. Therefore, you should read the entire prospectus carefully, including, in particular, the Risk Factors section beginning on page 10 of this prospectus and the financial statements and related notes included elsewhere in this prospectus. As used in this prospectus, unless the context otherwise requires or indicates, references to Orion, the company, we, our, and us refer to Orion Marine Group, Inc. and its subsidiaries taken as a whole. About Orion We are a leading marine specialty contractor serving the heavy civil marine infrastructure market. We provide a broad range of marine construction services on, over and under the water along the Gulf Coast, the Atlantic Seaboard and the Caribbean Basin. Our customers are federal, state and municipal governments as well as private commercial and industrial enterprises. We are headquartered in Houston, Texas. We act as a single-source, turnkey solution for our customers marine contracting needs. Our heavy civil marine construction services include marine transportation facility construction, dredging, repair and maintenance, bridge building and marine pipeline construction, as well as specialty services. Our specialty services include salvage, demolition, diving and underwater inspection, excavation and repair. While we bid on projects up to $50.0 million, during 2006 our average revenue per project was between $1.0 million and $3.0 million. Projects we bid on can take up to 36 months to complete, but the typical duration of our projects is from three to nine months. In 2006, we provided 99% of our services under fixed-price contracts, measured by revenue, and we self-performed over 85% of our work, measured by cost. We focus on selecting the right projects on which to work, controlling the critical path items of a contract by self-performing most of the work, managing the profitability of a contract by recognizing change order opportunities and rewarding project managers for outperforming the estimated costs to complete projects. We use state-of-the-art, scalable enterprise-wide project management software to integrate functions such as estimating project costs, managing financial reporting and forecasting profitability. Our revenue grew from $101.4 million in 2003 to $183.3 million in 2006, a compounded annual growth rate ( CAGR ) of 21.8%, substantially all of which was organic. During that same period, our EBITDA grew from $15.3 million in 2003 to $33.0 million in 2006, a CAGR of 29.2%, and our income available to common shareholders increased from $4.9 million in 2003 to $10.3 million in 2006, a CAGR of 28.1%. For an explanation of EBITDA and a reconciliation of EBITDA to net income calculated and presented in accordance with generally accepted accounting principles, or GAAP, please see Summary Consolidated Financial Data Non-GAAP Financial Measures. Our growth has been driven by our ability to capitalize on increased infrastructure spending in our markets across our scope of operations. This increased spending has caused shortages of specialized equipment and labor, creating a favorable bidding environment for heavy civil marine projects. We believe that the demand for our infrastructure services has been, and will continue to be, driven and funded primarily by a wide variety of factors and sources including the following: increasing North American freight capacity / port and channel expansion and maintenance; deteriorating conditions of U.S. intracoastal waterways and bridges; historic federal transportation funding bill; robust cruise industry activity; continuing U.S. base realignment and closure program; strong oil and gas capital expenditures; ongoing U.S. coastal and wetland restoration and reclamation; and recurring hurricane restoration and repair. Table of Contents The information in this prospectus is not complete and may be changed. These securities many not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED DECEMBER 19, 2007 PROSPECTUS 20,949,196 Shares Common Stock Orion Marine Group, Inc. is a leading marine specialty contractor serving the heavy civil marine infrastructure market. We provide a broad range of marine construction and specialty services on, over and under the water along the Gulf Coast, the Atlantic Seaboard and the Caribbean Basin. We serve as general contractor on substantially all of our projects, self-perform in excess of 85% of our work and provide our services almost exclusively on a fixed-cost basis to both government and private industry clients. This prospectus relates to up to 20,949,196 shares of our common stock which may be offered for sale by the selling shareholders named in this prospectus. The selling shareholders acquired the shares of common stock offered by this prospectus in private equity placements. We are registering the offer and sale of the shares of common stock to satisfy registration rights we have granted. We are not selling any shares of common stock under this prospectus and will not receive any proceeds from the sale of common stock by the selling shareholders. The shares of common stock to which this prospectus relates may be offered and sold from time to time directly by the selling shareholders or alternatively through underwriters or broker dealers or agents. Please read Plan of Distribution. There is no current market for our common stock. We have applied to list our common stock on the Nasdaq Global Market under the symbol OMGI. Based on the range of prices at which our shares have traded on the PORTAL Market, prior to the time our common stock is quoted on the Nasdaq Global Market, purchases and sales of our common stock will occur at prices between $14.05 and $15.00 per share, if any shares are sold. Following the date of this prospectus, we anticipate that our shares will be listed on Nasdaq and that the selling shareholders may sell all or a portion of their shares from time to time in market transactions, in negotiated transactions or otherwise, and at prices and on terms that will be determined by the prevailing market price or at negotiated prices. Investing in our common stock involves risks. You should read the section entitled Risk Factors beginning on page 10 for a discussion of certain risk factors that you should consider before investing in our common stock. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this prospectus is , 2007. Table of Contents We believe the diversity of industry drivers and funding sources that affect our market as well as our ability to provide a broad range of services result in a less volatile revenue stream year-to-year. At September 30, 2007, our backlog under contract was approximately $115.9 million, compared with $80.3 million at September 30, 2006. Given the typical duration of our contracts, which ranges from three to nine months, our backlog at any point in time usually represents only a portion of the revenue that we expect to realize during a twelve month period. In addition to our backlog, we also have a substantial number of projects in negotiation or pending award at any given time. At September 30, 2007, we were in negotiation or pending award for approximately $30.4 million in new contracts we expect to be awarded; however, there can be no assurances that the negotiations will be successful or that these contracts will be executed and added to backlog. We expect to continue to grow our business organically, as well as selectively consider strategic acquisitions that improve our market position within our existing markets, expand our geographic footprint and increase our portfolio of services. As of September 30, 2007, we employed a workforce of 893 people, many of whom occupy highly skilled positions. None of our employees are members of a union. Our workforce is supported by a large fleet of specialty equipment, substantially all of which we own. We have built much of our most highly specialized equipment, including many of our dayboats, tenders and dredges, and we provide maintenance and repair service to our entire fleet. Our fleet is highly mobile, which enables us to easily relocate our specialized equipment to and across all of the regions that we serve. On May 31, 2007, we completed a private placement of 20,949,196 shares of our common stock at a sale price of $13.50 per share to qualified institutional buyers, non-U.S. persons and accredited investors (the 2007 Private Placement ). The registration statement of which this prospectus is a part is being filed pursuant to the requirements of the registration rights agreement that we executed in connection with the 2007 Private Placement. We received net proceeds of approximately $261.5 million (after purchaser s discount and placement fees) from the 2007 Private Placement. We used approximately $242.0 million of the net proceeds to purchase and retire all of our outstanding preferred stock and 16,053,816 shares of our common stock from our former principal stockholders. The remaining net proceeds of $19.5 million from the 2007 Private Placement were and are being used for working capital and general corporate purposes. In connection with the 2007 Private Placement, we entered into employment agreements and transaction bonus agreements with our executive officers and certain key employees. Under the agreements, we granted an aggregate of 26,426 shares of common stock, granted options to acquire an aggregate of 327,357 shares of common stock, and made an aggregate of $2.2 million in cash payments. History We were founded in 1994 as a marine construction project management business. Initially, we performed work along the continental U.S. coastline, as well as in Alaska, Hawaii and the Caribbean Basin, and our revenue grew to $14.4 million in 1996. To improve our financial and competitive position, we decided in 1997 to expand beyond the project management business by establishing fixed geographic operating bases. Between 1997 and 2003 we invested approximately $30.0 million in four acquisitions to broaden our operating capabilities and geographic footprint, and our revenue grew to $101.4 million in 2003. In October 2004, we were acquired by Orion Marine Group, Inc., formerly known as Hunter Acquisition Corp., a corporation formed and controlled by our former principal stockholders. Our former principal stockholders provided incremental financial and strategic resources necessary for our continued success, including implementing stock based compensation, transitioning senior leadership and establishing standardization of systems and more scalable internal systems, such as project control systems. In September 2006, we acquired the assets of F. Miller Construction, based in Lake Charles, Louisiana, to serve as a platform for expansion within Louisiana and other Gulf Coast markets. F. Miller Construction was originally founded in 1932 and performs specialty marine construction projects, bridge construction projects, and complex sheet pile installations for both government and private industry customers. Table of Contents Table of Contents Competitive Strengths We believe we have the following competitive strengths: Breadth of Capabilities. Unlike many of our competitors, we provide a broad range of marine construction services for our customers. These services include marine transportation facility construction, dredging, repair and maintenance, bridge building and marine pipeline construction, as well as specialty services. Our specialty services include salvage, demolition, diving and underwater inspection, excavation and repair. By offering a breadth of services, we act as a single-source provider with a turnkey solution for our customers marine contracting needs. We believe this distinguishes us from smaller, local competitors, giving us an advantage in competitive bidding for certain projects. Furthermore, we believe our broad service offering and ability to complete smaller projects strengthens our relationships with our customers. Experienced Management Team. Our executive officers and senior project managers have an average of 28 years of experience in the heavy civil construction industry, an average of 26 years of experience in the heavy civil marine infrastructure industry and an average of 18 years of experience with us and our predecessor companies. Our strong management team has driven operational excellence for us, as demonstrated by our high organic growth, disciplined bidding process and what we believe to be leading industry margins. We believe our management has fostered a culture of loyalty, resulting in high employee retention rates. High Quality Fleet and Marine Maintenance Facilities. Our fleet, substantially all of which we own, consists of over 260 vessels of specialized equipment, including 55 spud barges and material barges, five major cutter suction dredges, three portable dredges, and 49 tug boats and push boats. In addition, we have over 215 cranes and other large pieces of equipment, including 48 crawler cranes and hydraulic cranes, as well as numerous pieces of smaller equipment. We are capable of building, and have built, much of our highly specialized equipment and we provide maintenance and repair service to our entire fleet. For example, we recently manufactured our newest dredge, which can operate on either diesel fuel or electric power, allowing us to complete projects with specified limits on nitrogen oxide (NOX) emissions, an increasingly common specification on our projects. Because some of our equipment operates 24 hours a day, seven days a week, it is essential that we are able to minimize equipment downtime. We strive to minimize downtime by operating our own electrical, mechanical and machine shops, stocking long-lead spares and staffing maintenance teams on-call 24 hours a day, seven days a week to handle repair emergencies. We also own and maintain dry dock facilities, which reduce our equipment downtime and dependence on third party facilities. Our primary field offices in Channelview, Texas, Port Lavaca, Texas, and Tampa, Florida, are all located on waterfront properties and allow us to perform repair and maintenance activities on our equipment and to mobilize and demobilize equipment to and from our projects in a cost efficient manner. Financial Strength /Conservative Balance Sheet. Financial strength is often an important consideration for many customers in selecting infrastructure contractors and directly affects our bonding capacity. In 2006, approximately 69% of our projects, measured by revenue, required some form of bonding. As of December 31, 2006, we had cash on hand of $18.6 million and senior debt of $25.0 million, resulting in a net debt position of $6.4 million. Most of our competitors are smaller, local companies with limited bonding capacity. We believe our financial strength and bonding capacity allow us to bid multiple projects and larger projects that most of our competitors may not be able to bond. Self-Performance of Contracts. In 2006, we self-performed over 85% of our marine construction and dredging projects, measured by cost. By self-performing our contracts, we believe we can more effectively manage the costs and quality of each of our projects, thereby better serving our customers and increasing our profitability. Our breadth of capabilities and our high quality fleet give us the ability to self-perform our contracts, which we believe distinguishes us from many of our competitors, who will often subcontract significant portions of their projects. Project Selection and Bidding Expertise. Our roots as a project management business have served us well, creating a project management culture that is pervasive throughout our organization. We focus on selecting the right projects on which to bid, controlling the critical path items of a contract by self-performing the work and managing the contract profitably by appropriately structuring rewards for project managers and recognizing change order Table of Contents opportunities, which generally allow us to increase revenue and realize higher margins on a project. Our intense focus on profitably executing contracts has resulted in only a small number of unprofitable contracts since our founding. We use state-of-the-art, scalable enterprise-wide project management software to integrate functions such as estimating project costs, managing financial reporting and forecasting profitability. Strong Regional Presence. We are a market leader in most of our primary markets. We believe our operations are strategically located to benefit from favorable industry trends, including increasing port expansion and maintenance, highway funding, oil and gas expenditures, coastal restoration and hurricane restoration and repair activity. For example, the Port of Houston, one of the largest ports in the U.S., and the Port of Tampa and their adjacent private industry customers generate both new marine construction and annual maintenance of existing dock facilities. In addition, the Texas Gulf Coast does not have any natural deep water ports, requiring all of its channels and ports to depend significantly on maintenance dredging, which is a significant source of recurring revenue. Our strong regional presence allows us to more efficiently deploy and mobilize our equipment throughout the areas in which we operate. Growth Strategy We intend to use the following strategies to increase revenue: Expand and Fill in Our Service Territory. We intend to continue to grow our business by seeking opportunities in other geographic markets by establishing a physical presence in new areas through selective acquisitions or greenfield expansions. Over the last several years, we have successfully expanded our services into Florida, the Caribbean Basin and Louisiana through strategic acquisitions. We have also pursued greenfield growth opportunities on the Atlantic Seaboard by opening a Jacksonville, Florida office and on the Gulf Coast by opening a Corpus Christi, Texas office. We believe that the establishment of a geographic base improves our returns within a given market, reducing mobilization and demobilization costs, improving and increasing capacity utilization and improving work force economics and morale. We focus on establishing bases in markets with solid, long-term fundamentals. In particular, in the near-term we intend to establish additional operating bases in two geographic regions: along the Gulf Coast between Texas and Florida and along the Atlantic Seaboard, working north from Florida to the Chesapeake Bay. In the longer term, we intend to establish a presence in the Mississippi River System, on the West Coast of the U.S. and on the New England Coast of the U.S. Pursue Strategic Acquisitions. We intend to evaluate acquisition opportunities in parallel with our greenfield expansion. Our strategy will include timely and efficient integration of such acquisitions into our culture, bidding process and internal controls. We believe that attractive acquisition candidates are available due to the highly fragmented and regional nature of the industry, high cost of capital for equipment and the desire for liquidity among an aging group of existing business owners. We believe our financial strength, industry expertise and experienced management team will be attractive to acquisition candidates. Continue to Capitalize on Favorable Long-Term Industry Trends. Our growth has been driven by our ability to capitalize on increased infrastructure spending across the multiple end-markets we serve including port infrastructure, government funded projects, transportation, oil and gas, and environmental restoration markets. We believe these long-term industry trends, described in more detail in Business Industry Overview, have significantly contributed to the funding and demand for our infrastructure services. This increased spending has caused shortages of specialized equipment and labor, creating a favorable bidding environment for heavy civil marine projects. We believe we are well-positioned to continue to benefit from these long-term industry trends. Continue to Enhance Our Operating Capabilities. Since our inception, we have focused on pursuing technically complex projects where our specialized services and equipment differentiate us from our competitors. Our breadth of services and ability to self-perform a high percentage of our projects has enabled us to better and more cost-effectively serve our customers needs. We intend to continue to enhance our operating capabilities across all of our present and future markets in order to better serve our customers and further differentiate ourselves from our competitors. Table of Contents Risk Factors You should carefully consider all of the information contained in this prospectus prior to investing in the common stock. In particular, we urge you to carefully consider the information set forth under Risk Factors beginning on page 10 for a discussion of risks and uncertainties relating to our business and an investment in our common stock. Third quarter Our revenue for the third quarter ended September 30, 2007 was $60.0 million, and we generated net income of $5.8 million, or $0.26 per diluted share, and EBITDA of $12.2 million. This compares with revenues of $47.8 million, net income of $3.5 million, or $0.22 per diluted share, and EBITDA of $9.7 million in the comparable period of 2006. Quarterly results are subject to fluctuation and are not indicative of results that may be expected for the full year. Corporate Information We were founded in 1994. We are a Delaware corporation. On October 14, 2004, we were acquired by Orion Marine Group, Inc., formerly known as Hunter Acquisition Corp., a corporation formed and controlled by our former principal stockholders. In May 2007, substantially all of our current stockholders purchased our stock in the 2007 Private Placement. Our principal executive offices are located at 12550 Fuqua, Houston, Texas 77034. Our website is www.orionmarinegroup.com, and our main telephone number is (713) 852-6500. Recent Developments Mike Pearson, Orion Marine Group s President and Chief Executive Officer, said, The Company s successful financial performance reflects our continuing commitment to achieve strong revenue growth while we monitor our projects for opportunities to enhance productivity and improve performance. With regard to the Company s goals, Mr. Pearson said, Our goal is to become the leading heavy civil marine contractor in the United States. We intend to meet this goal by growing our business through a combination of organic growth, greenfield expansion, and acquisitions. Our goal is to grow an average of 15% per year while maintaining an average EBITDA margin of 18%. We believe that our full year 2007 growth and EBITDA margins will be consistent with our long-term targets. Mark Stauffer, the Company s Chief Financial Officer, said, Our goal for 2008 anticipates continued growth of 14% to 16%, while achieving EBITDA margins of 17% to 19%. We expect to invest approximately $12 to $14 million in capital assets in 2008 to support our growth strategy. Table of Contents THE OFFERING The following summary is provided solely for your convenience. This summary is not intended to be complete. You should read the full text and more specific details contained elsewhere in this prospectus. For a more detailed description of the common stock, see Description of Capital Stock. Common stock offered by selling shareholders(1) 20,949,196 shares
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diff --git a/parsed_sections/prospectus_summary/2007/PODD_insulet_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/PODD_insulet_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. Because this section is only a summary, it does not contain all of the information that may be important to you or that you should consider before making an investment decision. For a more complete understanding of this offering, we encourage you to read this entire prospectus, including the information contained in the section entitled Risk Factors. You should read the following summary together with the more detailed information and consolidated financial information and the notes thereto included in this prospectus. In this prospectus, unless the context otherwise requires, the terms Insulet, we, us, our and our company refer to Insulet Corporation, a Delaware corporation, and its wholly-owned subsidiary. Our Business We are a medical device company that develops, manufactures and markets an innovative, discreet and easy-to-use insulin infusion system for people with insulin-dependent diabetes. Our proprietary OmniPod Insulin Management System, which consists of our OmniPod disposable insulin infusion device and our handheld, wireless Personal Diabetes Manager, is the only commercially-available insulin infusion system of its kind. Conventional insulin pumps require people with insulin-dependent diabetes to learn to use, manage and wear a number of cumbersome components, including up to 42 inches of tubing. In contrast, the OmniPod System features only two discreet, easy-to-use devices that eliminate the need for a bulky pump, tubing and separate blood glucose meter, provide for virtually pain-free automated cannula insertion, communicate wirelessly and integrate a blood glucose meter. We believe that the OmniPod System s unique proprietary design offers significant lifestyle benefits to people with insulin-dependent diabetes. The U.S. Food and Drug Administration, or FDA, approved the OmniPod System in January 2005 and we began commercial sale of the OmniPod System in the United States in October 2005. Our revenue for the years ended December 31, 2005 and 2006 and the six months ended June 30, 2007 was $50,000, $3.7 million and $5.2 million, respectively. We have incurred a significant net loss since our inception, including a net loss of $36.0 million for the year ended December 31, 2006 and $24.2 million for the six months ended June 30, 2007. As of June 30, 2007, we had an accumulated deficit of $126.3 million. As we have grown our business, our net loss has increased each quarter and we expect our rate of loss to continue to increase on a quarterly basis into 2008. To date, we have focused our sales and marketing efforts in the Eastern and Midwestern United States. As of September 30, 2007, we had approximately 3,200 patients using the OmniPod System in the United States, which represents an increase of approximately 750 patients since June 30, 2007. Historically, the growth in our quarterly revenue has not been consistent with our quarterly patient growth due to a number of factors, including the deferral of revenue received from new patients within 45 days prior to the end of a quarter and the timing and average size of reorders from existing patients. Accordingly, although our revenue for the third quarter of 2007 increased compared to our revenue for the prior quarter, this increase is not as large on a percentage basis as the increase in the number of customers during the third quarter of 2007. Our Market Diabetes is a chronic, life-threatening disease for which there is no known cure. Diabetes is caused by the body s inability to produce or effectively utilize the hormone insulin. This inability prevents the body from adequately regulating blood glucose levels. Glucose, the primary source of energy for cells, must be maintained at certain concentrations in the blood in order to permit optimal cell function and health. In people with diabetes, blood glucose levels fluctuate between very high levels, a condition known as hyperglycemia, and very low levels, a condition called hypoglycemia. Hyperglycemia can lead to serious short-term complications, such as confusion, vomiting, dehydration and loss of consciousness; long-term complications, such as blindness, kidney disease, nervous system disease, amputations, stroke and cardiovascular disease; or death. Hypoglycemia can lead to confusion, loss of consciousness or death. The International Diabetes Federation, or IDF, estimated that diabetes currently affects 246 million people worldwide. The IDF expects that by 2025, 380 million people worldwide will be affected by diabetes due to increasing overall life expectancy, worsening diet trends, increasingly sedentary lifestyles and the growing incidence of obesity. Frost Sullivan estimated that in 2006, 20.7 million people in the United States, or approximately 7% of the population, had diabetes, and reported that it expected this number to increase to 23.9 million people by 2011. Diabetes is typically classified as either Type 1, which is characterized by the body s nearly complete inability to produce insulin, or Type 2, which is the more common form and is characterized by the body s inability to either properly utilize or produce enough insulin. Some Type 2 diabetes patients can control their blood glucose levels using exercise, diet and/or oral medications. However, all Type 1 diabetes patients and a subset of Type 2 diabetes patients require daily insulin therapy, typically administered via Table of Contents The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED OCTOBER 29, 2007 Prospectus 4,898,398 Shares Common Stock The selling stockholders identified in this prospectus are selling 4,898,398 shares of our common stock. We will not receive any of the proceeds from the sale of shares of our common stock by the selling stockholders. Our common stock is listed on The NASDAQ Global Market under the symbol PODD. The last reported trading price of our common stock on October 26, 2007 was $26.62 per share. Investing in our common stock
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+Table of Contents Halliday, Norman Currs Farm Crowborough Hill Crowborough East Sussex TN5 2SD United Kingdom 25,000 .42 % 25,000 0 % Hill, Steven 17 Shannon Green SW Calgary AB T2Y 2K4 10,000 .17 % 10,000 0 % Himbeault, Gene 1017 McLean Vancouver BC V3L 3N2 5,000 .08 % 5,000 0 % Hipkin, Raymond Scotlands Farm Warfield Berkshire RG42 6AJ United Kingdom 25,000 .42 % 25,000 0 % Huber, Dennis 9 Revine Dr RR1 Dewinton AB T0L 0X0 5,000 .08 % 5,000 0 % Imagin Diagnostic Centres, Inc. 610 Granville Street Suite 3014 Vancouver, BC V6C 3T3 4,367,503.5 73.7 % 500,000 65.3 % Principal Shareholder Juohki, Timo Obere Reaharde 46, Ch 6340 Baar Switzerland 10,000 .17 % 10,000 0 % Knutson, Brian Box 72060, 90th Avenue Edmonton AB T6B 3A7 10,000 .17 % 10,000 0 % Leder, John 10457 184 Street NW Edmonton AB T5S 1G1 50,000 .84 % 50,000 0 % Leder, John 10457 184 Street NW Edmonton AB T5S 1G1 50,000 .84 % 50,000 0 % Lee, Colin 2749 McColl Pl. Victoria BC V8N 5Y8 7,500 .13 % 7,500 0 % Mammitzsch, Hans-Juergen Im Steingarten 29 Siegen 57074 Germany 20,000 .33 % 20,000 0 % McLennan, Neil 11450 149 Street NW Edmonton AB T5M 1W7 5,000 .08 % 5,000 0 % Mones, James 1077 Falconer Road NW Edmonton AB T6R 2C9 10,000 .17 % 10,000 0 % Montgomery, Celestine 9678 - 95th Ave. Edmonton AB T6C 2A4 12,500 .21 % 12,500 0 % Napier, John Alan The Mill Church Road Fingringhoe Essex CO5 7BN United Kingdom 75,000 1.26 % 75,000 0 % Table of Contents POSITRON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT For the year ended December 31, 2006 (In thousands, except share data) Series A Series B Series C Series G Preferred Stock Preferred Stock Preferred Stock Preferred Stock Common Stock Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Balance December 31, 2005 464,319 $ 464 -- $ -- 770,000 $ 770 -- $ -- 77,835,202 $ 778 Net loss -- -- -- -- -- -- -- -- -- -- Exercise of options -- -- -- -- -- -- -- -- 500,000 5 Compensation related to Issuance options -- -- -- -- -- -- -- -- -- -- Conversion of debt Series C Preferred to new series of Preferred stock -- -- 1,679,861 1,680 (770,000 ) (770 ) -- -- -- -- Conversion of preferred stock Into common stock -- -- (40,000 ) (40 ) -- -- -- -- 4,000,000 40 Issuance of preferred stock through Private placement net of total Offering costs of 28,975 -- -- -- -- -- -- 204,482 204 -- -- Issuance of common stock For services -- -- -- -- -- -- -- -- 3,870,000 39 Issuance of preferred stock for Acquisition of subsidiary -- -- 4,100,000 4,100 -- -- -- -- -- -- Loan discount -- -- -- -- -- -- -- -- -- -- Change in foreign currency Translation gain -- -- -- -- -- -- -- -- -- -- Cancelled subscriptions -- -- -- -- -- -- -- -- -- -- Balance December 31, 2006 464,319 $ 464 5,732,861 $ 5,740 -- -- 204,482 $ 204 86,205,202 $ 862 F- Table of Contents O'Neil, Cindy 8990 Samson Road Prince George BC V2N 5B1 5,000 .08 % 5,000 0 % O'Neill, Kenneth PO Box 906 Hamilton HM DX Bermuda 6,250 .11 % 6,250 0 % Oy, Thominvest Italahdenkatu 15 - 17 Helsinki 00210 Finland 50,000 .84 % 50,000 0 % Paludet, Paul 10025 106 Street NW Edmonton AB T5J 1G4 5,000 .08 % 5,000 0 % Pearson, Gerald 4800 Leslie Street, Suite 306 North York ON M2J 2K9 5,000 .08 % 5,000 0 % Peck, Jeffrey 5900 Cromwell Drive Bethesda, MD 20816 10,000 .17 % 10,000 0 % Perlmutter, David 20103 Saratoga Pierce Rd Saratoga, California 10,000 .17 % 10,000 0 % Peters, David 13945 - 56th Avenue Surrey BC V3X 2Z9 10,000 .17 % 10,000 0 % Poeter, Gord PO Box 59013 RPO River Bend Edmonton AB T6H 5Y3 5,000 .08 % 5,000 0 % Positron Acquisition Corp. 104 W. Chestnut Street, Suite 315 Hinsdale, IL 60521 722,358 12.2 % 722,358 12.2 % Principal Shareholder Russo, Paul 13050 La Paloma Rd. Los Altos, CA 94022 25,000 .42 % 25,000 0 % Silver, Anthony Le Manoir de la Maison Couffouleux 81800 France 5,000 .08 % 5,000 0 % Slette, Michael 39 River Oaks Point Moorhead, MN 56560 10,000 .17 % 10,000 0 % Somers, John 301 Maple Avenue Georgetown ON L7G 1W9 10,000 .17 % 10,000 0 % Suvan, Norman 10585 108 St. NW Edmonton AB T5H 2Z8 10,000 .17 % 10,000 0 % Van Aard, Joop Zanarbergiaan 17 4818GH Brega Netherlands 10,000 .17 % 10,000 0 % Table of Contents POSITRON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT For the year ended December 31, 2006 (In thousands, except share data) (Continued) Additional Paid-in Capital Subscription Receivable Other Comprehensive Income Accumulated Deficit Treasury Stock Total Balance December 31, 2005 $ 57,364 $ (30 ) $ -- $ (62,239 ) $ (15 ) $ (2,908 ) Net loss -- -- -- (6,586 ) -- (6,586 ) Exercise of options 20 -- -- -- -- 25 Compensation related to Issuance options 430 -- -- -- -- 430 Conversion of debt Series C Preferred to new series of Preferred stock 2,074 -- -- -- -- 2,984 Conversion of preferred stock Into common stock -- -- -- -- -- -- Issuance of preferred stock Through private placement Net of total offering Costs of 28,975 891 -- -- -- -- 1,095 Issuance of common stock For services 432 -- -- -- -- 471 Issuance of preferred stock for Acquisition of subsidiary (1,700 ) -- -- -- -- 2,400 Loan discount 919 -- -- -- -- 919 Change in foreign currency Translation gain -- -- 38 -- -- 38 Cancelled subscriptions (30 ) 30 -- -- -- -- Balance December 31, 2006 $ 60,400 -- $ 38 $ (68,825 ) $ (15 ) $ (1,132 ) F- Table of Contents Vergouwen, Gwen 287 Wolverine Drive Fort McMurray AB T9H 4M3 10,000 .17 % 10,000 0 % Vergouwen, Gwen 287 Wolverine Drive Fort McMurray AB T9H 4M3 10,000 .17 % 10,000 0 % Wesselius, Ken 1037 - 5th Street Brandon MB R7A 3M1 5,000 .08 % 5,000 0 % West, Barry 209 South Saint Asaph St. Alexandria, VA 22314 10,000 .17 % 10,000 0 % Weyer, Christian 36, Blvd. Helvetique Geneva Switzerland 5,000 .08 % 5,000 0 % White, David 6 Little Dragons Loughton Essex IG10 4DG United Kingdom 75,000 .42 % 75,000 0 % Wilson, William Box 221 Houston BC V0S 1Z0 10,000 .17 % 10,000 0 % Winton, Bruce 14315 118th Ave. NW Ste. 138 Edmonton AB T5L 4S6 5,000 .08 % 5,000 0 % Wollin, Harry 1611 - 9th Street NW Calgary AB T2M 3L5 10,000 .17 % 10,000 0 % Youssou, Cyril 33 Rue Fondary Paris 75015 France 5,000 .08 % 5,000 0 % Shareholders: 71 Total: 5,926,111.5 Table of Contents POSITRON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2006 and 2005 (In thousands) 2006 2005 Cash flows from operating activities: Net loss $ (6,586 ) $ (3,806 ) Adjustments to reconcile net loss to net cash used in operating activities Derivative losses 1,784 -- Compensation related to re-pricing of warrants and options -- (95 ) Compensation related to issuance of options 430 20 Depreciation expense 49 71 Amortization of intangible assets 8 -- Gain on disposal of assets (53 ) -- Write-off of inventory and field service parts -- 656 Issuance of common stock for services 471 16 Equity in losses of joint venture 373 20 Amortization of loan costs, debt discount and beneficial conversion feature 644 691 Majority interest in income of consolidated subsidiary (3 ) -- Extraordinary
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diff --git a/parsed_sections/prospectus_summary/2007/PRTS_carparts_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/PRTS_carparts_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus and may not contain all the information you should consider before investing in our common stock. You should read the entire prospectus carefully, including the Risk Factors and the consolidated financial statements and related notes, before making an investment decision. Our Business Overview We are a leading online provider of aftermarket auto parts, including body parts, engine parts, performance parts and accessories. Our network of websites provides individual consumers with a comprehensive selection of approximately 550,000 products, identified as stock keeping units or SKUs. We have developed a proprietary product database that maps our 550,000 SKUs to over 4.3 million product applications based on vehicle makes, models and years. Our flagship websites are located at www.partstrain.com and www.autopartswarehouse.com, and our corporate website is located at www.usautoparts.net. Our online sales channel and relationships with suppliers enable us to eliminate several intermediaries in the traditional auto parts supply chain, allowing us to acquire many of our products directly from manufacturers and sell them to our customers. Additionally, as an online retailer, we do not incur many of the costs associated with operating brick and mortar stores. We believe that our ability to disintermediate the auto parts supply chain, combined with our efficient e-commerce platform, enables us to sell products at competitive prices while achieving higher operating margins and return on invested capital than many traditional automotive parts retailers. Our business has grown consistently since we launched our first website in 2000. Net sales increased to $59.7 million and $83.5 million for the year ended December 31, 2005 and the nine months ended September 30, 2006, respectively, from $40.7 million and $44.0 million for the year ended December 31, 2004 and the nine months ended September 30, 2005, respectively. Net income decreased slightly to $6.8 million and $3.6 million for the year ended December 31, 2005 and the nine months ended September 30, 2006, respectively, from $7.1 million and $4.8 million for the year ended December 31, 2004 and the nine months ended September 30, 2005, respectively. Our Adjusted EBITDA increased to $8.8 million and $10.3 million for the year ended December 31, 2005 and the nine months ended September 30, 2006, respectively, from $8.0 million and $6.1 million for the year ended December 31, 2004 and the nine months ended September 30, 2005, respectively. In addition, we have experienced continued growth in the number of monthly unique visitors to our websites. In September 2006, approximately 6.9 million unique visitors viewed our websites. The number of orders placed through our e-commerce websites has also increased to approximately 288,000 and 505,000 for the year ended December 31, 2005 and the nine months ended September 30, 2006, respectively, from approximately 201,000 and 207,000 for the year ended December 31, 2004 and the nine months ended September 30, 2005, respectively. The average order value of purchases on our websites for the nine months ended September 30, 2006 was approximately $120. Industry Overview The United States automotive aftermarket industry is forecasted to be $204 billion in 2006 according to the Automotive Aftermarket Industry Association, or AAIA, an independent trade association. Our U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents addressable market is forecasted by AAIA to be approximately $91.3 billion, which consists of approximately $37.8 billion in sales to Do-It-Yourself, or DIY, customers, and approximately $53.5 billion in sales to Do-It-For-Me, or DIFM, customers. While the U.S. auto parts aftermarket is a large market characterized by modest growth, we believe there is an opportunity for e-commerce aftermarket auto parts retailers to grow faster than the overall market. According to Forrester Research, an independent market research firm, online purchases by U.S. consumers are expected to grow from approximately $172 billion in 2005 to approximately $329 billion by 2010, representing a 13.9% compound annual growth rate. In 2006, the online and mail order portion of aftermarket auto part sales is forecasted to be $2.7 billion according to the AAIA. While the portion of online and mail order sales represents only 3% of our addressable market, we believe online penetration rates of aftermarket auto parts consumers will continue to increase and, as a result, sales for online aftermarket auto parts are expected to continue to grow at a faster rate than the overall auto parts market. The auto parts market has traditionally been fragmented and inefficient, with multiple intermediaries, including importers, wholesalers, distributors and retailers, between manufacturers and consumers. Furthermore, auto parts retailers who operate brick and mortar stores generally stock only a small percentage of the products that are available for sale. The fragmented nature of the auto parts market has also meant an absence of a centralized database or a comprehensive, master catalog of products, which maps all aftermarket auto parts to all relevant applications for such parts. We believe this inadequacy of information leads to inefficiencies in the sale and purchase process for both the retailer and the consumer. Our Solution We believe our solution addresses the problems faced in the traditional auto parts market and provides additional benefits for our customers. The key components of our solution include: disintermediation of the traditional auto parts supply chain, which enables us to eliminate several intermediaries, allowing us to offer auto parts at competitive prices while maintaining higher profit margins; a leading network of aftermarket auto parts websites; a proprietary product catalog that maps our 550,000 SKUs to over 4.3 million product applications based on vehicle makes, models and years; flexible fulfillment methods that allow us to offer a broad selection of products, while effectively managing our inventory and enhancing our overall profitability; low-cost offshore and outsourced operations in the Philippines and India, which are responsible for a majority of the development and maintenance of our websites and product catalog and customer service and sales functions; and long-standing, strong supplier relationships with manufacturers and distributors located in Asia and the United States. Benefits to Customers We believe our solution provides multiple benefits to our customers, including: broad product selection and availability; competitive pricing; Table of Contents Exhibit No. Description 10.13* Teletransmission Agreement dated February 24, 2006 by and between U.S. Auto Parts Network, Inc. and East West Bank 10.14* Business Loan Agreement dated February 24, 2006 by and between U.S. Auto Parts Network, Inc. and East West Bank 10.15* Changes in Terms Agreement dated February 24, 2006 by and between U.S. Auto Parts Network, Inc. and East West Bank 10.16* Loan Agreement dated May 18, 2006 by and between U.S. Auto Parts Network, Inc. and East West Bank 10.17* Secured Promissory Note dated May 18, 2006 by U.S. Auto Parts Network, Inc. in favor of East West Bank 10.18* Collateral Assignment Agreement dated May 18, 2006 by and between U.S. Auto Parts Network, Inc. and East West Bank 10.19* Collateral Assignment Agreement dated May 18, 2006 by and between PartsBin, Inc. and East West Bank 10.20* Security Agreement dated May 18, 2006 by and between U.S. Auto Parts Network, Inc. and East West Bank 10.21* Security Agreement dated May 18, 2006 by and between PartsBin, Inc. and East West Bank 10.22* Amendment to Existing Agreements dated May 18, 2006 by and between U.S. Auto Parts Network, Inc. and East West Bank 10.23* Commercial Lease Agreement dated January 1, 2004 by and between U.S. Auto Parts Network, Inc. and Nia Chloe Enterprises, LLC 10.24* Standard Industrial/Commercial Multi-Tenant Lease Gross dated October 1, 2006 by and between U.S. Auto Parts Network, Inc. and Margay 2003, LLC 10.25* Standard Industrial/Commercial Multi-Tenant Lease Gross dated July 12, 2004 by and between U.S. Auto Parts Network, Inc. and Isadore Socransky 10.26* Lease dated November 30, 2004 by and between U.S. Auto Parts Network, Inc. and William Coats 10.27 * Catalog License and Parts Purchase Agreement dated November 20, 2006 by and between U.S. Auto Parts Network, Inc. and WORLDPAC, Inc. 10.28 Employment Agreement dated January 2007 by and between U.S. Auto Parts Network, Inc. and Michael J. McClane 10.29 * Services Agreement dated October 3, 2006 by and between U.S. Auto Parts Network, Inc. and Efficient Frontier, Inc. 10.30 Offer Letter of Employment dated November 2006 by and between U.S. Auto Parts Network, Inc. and Howard Tong 10.31 * Master Services Agreement dated August 5, 2005 by and between PartsBin, Inc. (as successor in interest to All OEM Parts, Inc.) and Access Worldwide Communications, Inc. 10.32 * Offer Letter of Employment dated January 1, 2006 by and between U.S. Auto Parts Network, Inc. and Houman Akhavan 10.33 * Form of Indemnification Agreement for Officers and Directors AMENDMENT NO. 3 TO Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents prompt order fulfillment; detailed product information; and an overall satisfying shopping experience and knowledgeable customer service. Our Growth Strategy Our primary objective is to continue our growth and to strengthen our position as a leading online provider of aftermarket auto parts. The key elements of our strategy are as follows: expand our product offering; cost-effectively increase the number of visitors to our websites; increase our visitor conversion rate; increase repeat customers; expand e-commerce distribution channels; and pursue strategic acquisitions that augment our business. Corporate Information We were formed as a California corporation in 1995 and reincorporated in Delaware in March 2006. Our executive offices are located at 17150 South Margay Avenue, Carson, California 90746, and our telephone number is (310) 719-8666. Our corporate website is located at www.usautoparts.net. Our flagship retail websites are located at www.partstrain.com and www.autopartswarehouse.com. The information contained in, or that can be accessed through, our websites does not constitute a part of this prospectus. Unless the context requires otherwise, as used in this prospectus, the terms U.S. Auto Parts, we, us and our refer to U.S. Auto Parts Network, Inc. and its subsidiaries, and the term Partsbin refers to All OEM Parts, Inc., ThePartsBin.com, Inc. and their affiliated companies, which we acquired in May 2006. U.S. Auto Parts , U.S. Auto Parts Network , PartsTrain , Partsbin , Kool-Vue and Auto-Vend are our United States common law trademarks. All other trademarks and trade names appearing in this prospectus are the property of their respective owners. U.S. Auto Parts Network, Inc. (Exact name of registrant as specified in its charter) Table of Contents The Offering Common stock offered by us 8,000,000 shares Common stock offered by the selling stockholders 2,000,000 shares Common stock to be outstanding after this offering 29,832,927 shares Use of proceeds For repayment of approximately $33.0 million of indebtedness and for working capital and other general corporate purposes, including expanding our infrastructure and sales and marketing activities. In addition, we may use a portion of the net proceeds for acquisitions and investments in complementary businesses, technologies and strategic relationships. See Use of Proceeds.
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+You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with different information. If anyone provides you with different information, you should not rely on it. We are not making an offer of these securities in any state where the offer is not permitted. The information in this prospectus is accurate only as of the date of this prospectus. ___________ TABLE OF CONTENTS Exchange Rates iv Summary 1 Risk Factors 16 Forward Looking Statements 28 Use of Proceeds 29 Capitalization 30 Market Information 31 Dividends and Dividend Policy 38 Unaudited Pro Forma Condensed Combined Financial Information 39 Selected Consolidated Financial Information 42 Management s Discussion and Analysis of Financial Condition and Results of Operations 46 Business 65 Management 94 Related Party Transactions 100 Major Shareholders 101 Description of Capital Stock 102 Description of American Depositary Receipts 113 Taxation 120 Underwriting 124 Notice to Canadian Residents 129 Where Can You Find More Information 130 Enforceability of Civil Liabilities 130 Validity of Securities 130 Experts 131 Index to Financial Statements F-1 Exhibit I --Unaudited Financial Information as of and for the Nine Month Periods Ended September 30, 2006 and 2005 I-1 SUMMARY This section summarizes selected information contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and financial statements included elsewhere in this prospectus. This prospectus includes specific terms of the ADSs and the series B shares that we are offering, as well as information regarding our business and detailed financial information. You
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider before investing in our common stock. You should read this entire prospectus carefully, including Risk Factors, our consolidated financial statements and the related notes and the other financial information appearing elsewhere in this prospectus before you decide to invest in our common stock. Unless otherwise indicated, references to Supermicro, the Company, we, us and our refer to Super Micro Computer, Inc. and its subsidiaries. We design, develop, manufacture and sell application optimized, high performance server solutions based on an innovative, modular and open-standard x86 architecture. Application optimized servers are configured to meet specific customer needs in contrast to typical servers which are offered in limited standardized configurations. To meet the needs of our customers, we configure our server solutions by adjusting the amount of memory, which enables computer servers to store data for a period of time, processing power, which enables computer servers to interpret instructions and process data rapidly, and/or input/output capabilities, which enable different components of a computer server to communicate with one another. We develop our systems based on the x86 architecture which is a set of open standard design specifications used by Intel Corporation and Advanced Micro Devices in their microprocessors. Our solutions include a wide range of complete server systems, as well as components which can be used by distributors, OEMs and end customers to assemble server systems. We have developed a set of design principles and performance specifications that meet industry wide standards and also incorporate advanced functionality and capabilities. Our modular architectural approach has allowed us to offer our customers interoperable designs across all of our components, which can be configured to create complete server systems. This modular approach, in turn, enables us to offer our clients flexibility and customization by providing what we believe is the industry s largest array of server systems and components. Our server systems and components are architected to provide high levels of reliability, quality, and scalability, thereby enabling benefits in performance, thermal optimization, power efficiency and total cost of ownership. As of December 31, 2006, we offered over 3,850 SKUs, including SKUs for server systems, serverboards, chassis and power supplies and other system accessories. We sell our server systems and components primarily through distributors, which include value added resellers and system integrators, and to a lesser extent to OEMs as well as through our direct sales force. During fiscal year 2006, our products were purchased by over 400 customers, most of which are distributors in more than 70 countries. We generally recognize revenue upon shipment to distributors. We commenced operations in 1993 and have been profitable every year since inception. Initially the focus of our business was in sales of high-performance server components. Since 2000, we have gradually shifted our focus and resources to designing, developing, manufacturing and selling application optimized server systems. In recent years our growth in net sales has been driven by the growth in the market for application optimized server systems. For fiscal year 2004, 2005 and 2006, our net sales were $167.1 million, $211.8 million and $302.5 million, respectively and our net income was $4.9 million, $7.1 million and $16.9 million, respectively. For the six months ended December 31, 2005 and 2006, our net sales were $136.6 million and $203.8 million, respectively, and our net income was $7.0 million and $9.8 million, respectively. As businesses of all sizes process larger quantities of data to communicate, transact and collaborate, their business processes are becoming more complex and their requirements for computing capacity are growing rapidly. Computing architectures are continuing to evolve to meet this rapidly growing demand for computing capacity. Businesses increasingly require solutions that provide flexibility and scalability in a cost effective manner, and are moving towards a modular and open system approach to create what are commonly referred to SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Table of Contents as scale-out computing architectures. Scale-out architectures enable businesses to add computing capacity incrementally without significantly disrupting existing systems, thus reducing total cost of ownership. Scale-out architectures provide significant benefits for many businesses. However, there are a wide range of circumstances in which businesses need more than just the incremental computing capacity that can be obtained by adding more general purpose servers as part of a scale-out deployment. In these circumstances, businesses seek application optimized solutions. For example: Large Scalable Server Farms: Data centers seek to optimize industry standard components by architecting server systems that enable higher performance through enhanced processing or I/O, more efficient memory bandwidth utilization and greater capacity. Businesses That Have Complex Computing Requirements: A broad range of industry segments with intensive information and image capture and processing requirements, including financial services, oil and gas exploration, and media and entertainment companies, require server solutions that are built with specific processing power and I/O capabilities that can maximize such processing in the most efficient manner. Original Equipment Manufacturers (OEMs): To differentiate their products, OEMs require a broad selection of high performance, rapidly deployable server solutions that can be optimized for the specific applications of their end customers. We believe the competitive advantages of our solutions include: Flexible and Customizable Server Solutions: Our building block approach allows us to provide a broad range of SKUs, enabling us to build and deliver customized solutions based upon customers application requirements. Rapid Time-to-Market: Our in-house design competencies and control of the design of many of the components used within our server systems enable us to rapidly develop, build and test server systems and components. Improved Power Efficiency and Thermal Management: We offer many design innovations to optimize power consumption and manage heat dissipation, allowing our products to achieve a superior price-to-performance ratio while minimizing energy costs. High Density Servers: We offer server systems with twice the density of conventional solutions. Density refers to the amount of space required for a server. By offering servers with higher density, our servers require less space, thereby allowing our customers to more efficiently deploy our server systems in scale-out configurations. Our objective is to be the leading provider of application optimized, high performance server solutions worldwide. Key elements of our strategy include: Maintain our Time-To-Market Advantage: We intend to maintain our time-to-market advantage by continuing our investment in our research and development efforts to rapidly develop new proprietary server solutions based on industry standard components. By being one of the first companies to offer servers incorporating latest generation microprocessors and other key standard components as they are introduced to the market, we are able to generate sales from customers eager to rapidly adopt latest generation technology as well as allow customers an early opportunity to evaluate our technology as they make new purchase decisions for next generation systems. Expand our Product Offerings: We plan to increase the number of products we offer by delivering new products with improved power and thermal management capabilities, greater density and additional management software capabilities. Amendment No. 5 to FORM S-1 Registration Statement Under The Securities Act of 1933 Table of Contents Further Develop Existing Markets and Expand into New Markets: We intend to strengthen our relationships with existing distribution and OEM partners and add new distributors and customers in order to expand our reach geographically, particularly in the Asia Pacific region and Europe. Strengthen our Relationships with Suppliers and Manufacturers: We plan to continue leveraging our relationships with suppliers and contract manufacturers in order to maintain and improve our cost structure. Deliver Advanced Blade Server Technology: To meet the emerging demand for blade servers, we are currently developing, and plan to introduce in the first half of calendar 2007, a high performance blade server solution, called Superblade. Blade servers are specifically designed for high density by sharing power, cooling, networking and other resources within a single server-rack enclosure, compared to standard servers which each require their own independent resources. By eliminating these repetitive components and locating them in one place, a greater number of blade servers can be used in a smaller physical area as compared to standard servers. In pursuing our strategy, we face a number of challenges and are subject to risks and uncertainties which are discussed in more detail in the section of this prospectus entitled Risk Factors. The primary risks we face include: fluctuating operating results; dependence on the growth of the market for application optimized server solutions, which is new and evolving; dependence on timely new technology introductions by suppliers of server related technology, such as Intel Corporation and Advanced Micro Devices; our ability to develop and market new products; and our ability to compete against some of the largest global technology vendors. If we are unable to adequately address these and other challenges we face, our ability to grow our business will be negatively impacted. We were incorporated in California in September 1993. We reincorporated in Delaware in March 2007. Our principal executive offices are located at 980 Rock Avenue, San Jose, CA 95131 and our telephone number is (408) 503-8000. Our website address is www.supermicro.com. The information on, or that can be accessed through, our website is not part of this prospectus. Super Micro Computer, Inc. (Exact name of Registrant as specified in its charter) Table of Contents THE OFFERING Common stock offered by us 6,400,000 shares Common stock offered by the selling stockholders 1,600,000 shares Common stock to be outstanding after this offering 28,623,220 shares Use of proceeds We intend to use a portion of the net proceeds that we receive from this offering to repay approximately $18.9 million of existing building loans. We intend to use the remaining net proceeds for working capital and general corporate purposes. We will not receive any of the proceeds from the sale of shares of our common stock by the selling stockholders. See Use of Proceeds. Proposed Nasdaq Global Market symbol SMCI The number of shares of common stock to be outstanding immediately after this offering is based on 22,223,220 shares of common stock outstanding as of December 31, 2006 and excludes the following: 15,062,530 shares of common stock issuable upon the exercise of stock options outstanding at a weighted average exercise price of $2.12 per share at December 31, 2006, including options outstanding under our 1998 stock option plan; and 4,000,000 shares of common stock which will be authorized for future issuance following the offering under our 2006 stock option plan. Unless specifically stated otherwise, all information contained in this prospectus: gives effect to our reincorporation in Delaware which was completed in March 2007; assumes that the underwriters do not exercise their option to purchase up to 1,200,000 additional shares from the selling stockholders in this offering to cover over allotments; and gives effect to a two-for-one stock split of our outstanding common stock which was completed in March 2007. Delaware 3571 77-0353939 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code number) (I.R.S. Employer Identification No.) 980 Rock Avenue San Jose, CA 95131 (408) 503-8000 (Address, including zip code, and telephone number, including area code, of Registrant s principal executive offices) (2) Long-term obligations, net of $0.6 million current portion, includes $18.3 million of building loans, which we expect to repay with the net proceeds from this offering. Charles Liang President and Chief Executive Officer Super Micro Computer, Inc. 980 Rock Avenue San Jose, CA 95131 (408) 503-8000 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents
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diff --git a/parsed_sections/prospectus_summary/2007/SPR_spirit_prospectus_summary.txt b/parsed_sections/prospectus_summary/2007/SPR_spirit_prospectus_summary.txt
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+incorporated by reference) in this prospectus. This summary does not contain all of the information you should consider before investing in our class A common stock. You should read the entire prospectus carefully, including the section describing the risks of investing in our class A common stock under the caption Risk Factors, the documents incorporated by reference in the section entitled Incorporation of Certain Documents by Reference and our financial statements and related notes included elsewhere in this prospectus before making an investment decision. Some of the statements in this summary constitute forward-looking statements. For more information, please see Cautionary Statements Regarding Forward-Looking Statements. Our Company Overview We are the largest independent non-OEM designer and manufacturer of commercial aerostructures in the world. Aerostructures are structural components such as fuselages, propulsion systems and wing systems for commercial and military aircraft. Spirit s operations commenced on June 17, 2005 following the acquisition of Boeing s commercial aerostructures manufacturing operations located in Wichita, Kansas, Tulsa, Oklahoma and McAlester, Oklahoma, which we collectively refer to as Boeing Wichita. We refer to this acquisition as the Boeing Acquisition. On April 1, 2006, we became a supplier to Airbus through our acquisition of the aerostructures division of BAE Systems, or BAE Aerostructures, headquartered in Prestwick, Scotland, which we refer to as the BAE Acquisition. Although Spirit Holdings is a recently-formed company, its predecessor, Boeing Wichita, had 75 years of operating history and expertise in the commercial and military aerostructures industry. For the twelve months ended December 31, 2006, we generated net revenues of approximately $3,207.7 million and had net income of approximately $16.8 million. For the three months ended March 29, 2007, we generated net revenues of approximately $954.1 million and had net income of approximately $69.8 million. We are the largest independent supplier of aerostructures to both Boeing and Airbus. We manufacture aerostructures for every Boeing commercial aircraft currently in production, including the majority of the airframe content for the Boeing B737. We were also awarded a contract that makes us the largest aerostructures content supplier on the Boeing B787, Boeing s next generation twin aisle aircraft. Furthermore, we believe we are the largest content supplier for the wing for the Airbus A320 family and we are a significant supplier for Airbus new A380. Sales related to the large commercial aircraft market, some of which may be used in military applications, represented approximately 99% of our net revenues for the twelve months ended December 31, 2006 and for the three months ended March 29, 2007. We derive our revenues primarily through long-term supply agreements with both Boeing and Airbus. For the four quarters ended March 29, 2007 (the first four quarters following the BAE Acquisition), approximately 88% and approximately 10% of our net revenues were generated from sales to Boeing and Airbus, respectively. We are currently the sole-source supplier of 95% of the products we sell to Boeing and Airbus, as measured by dollar value of the products sold. We are a critical partner to our customers due to the broad range of products we currently supply to them and our leading design and manufacturing capabilities using both metallic and composite materials. Under our supply agreements with Boeing and Airbus, we supply essentially all of our products for the life of the aircraft program (other than the A380), including commercial derivative models. For the A380 we have a long-term supply contract with Airbus that covers a fixed number of product units. We are organized into three principal reporting segments: (1) Fuselage Systems, which include the forward, mid- and rear fuselage sections, (2) Propulsion Systems, which include nacelles (aerodynamic engine enclosures which enhance propulsion installation efficiency, dampen engine noise and provide thrust reversing capabilities), struts/pylons (structures that attach engines to airplane wings) and engine structural components and (3) Wing Systems, which include wings, wing components and flight control surfaces. All other activities fall within the All Other segment. Fuselage Systems, Propulsion Systems, Wing Systems and All Other Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED MAY 12, 2007 PROSPECTUS 31,516,802 Shares Spirit AeroSystems Holdings, Inc. Class A Common Stock The selling stockholders named in this prospectus are selling 31,516,802 shares of class A common stock. We will not receive any proceeds from the sale of the shares by the selling stockholders. The underwriters have an option to purchase a maximum of 3,151,682 additional shares of class A common stock from the selling stockholders to cover over-allotments of shares. The underwriters can exercise this right at any time within 30 days from the date of this prospectus. Our class A common stock is listed on the New York Stock Exchange under the symbol SPR. On May 9, 2007, the closing price of our common stock, as reported by the NYSE Consolidated Tape, was $33.30 per share. Investing in our class A common stock involves risks. See
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+This summary highlights information contained in this prospectus relating to Tyco Electronics and the notes we are offering. The term TEGSA refers to Tyco Electronics Group S.A., the issuer of the notes. You should read the entire prospectus, including the risk factors, our historical combined financial statements, our unaudited pro forma combined financial statements and the respective notes to those historical and pro forma financial statements. Except as otherwise indicated or unless the context otherwise requires, the information included in this prospectus assumes the completion of the separation. Except as otherwise indicated or unless the context otherwise requires, "Tyco Electronics," "we," "us" and "our" refer to Tyco Electronics Ltd. and its combined subsidiaries, including TEGSA, "Covidien" refers to Covidien Ltd. and its combined subsidiaries and "Tyco International" refers to Tyco International Ltd. and its consolidated subsidiaries. When we intend to refer only to Tyco Electronics Ltd, a Bermuda corporation, without including its combined subsidiaries, we use the term "Tyco Electronics Ltd." Unless otherwise indicated, references in this prospectus to fiscal 2007, fiscal 2006, fiscal 2005 and fiscal 2004 are to Tyco Electronics' fiscal years ended September 28, 2007, September 29, 2006, September 30, 2005 and September 30, 2004. Our historical combined financial information has been prepared on a "carve-out" basis to reflect the operations, financial condition and cash flows specifically allocable to the Tyco Electronics component of Tyco International during all periods shown. Our pro forma combined financial information adjusts our historical combined financial information to give effect to our separation from Tyco International and any related financing. Our Company We are a leading global provider of engineered electronic components, network solutions and wireless systems. We design, manufacture and market products for customers in industries from automotive, appliances and aerospace and defense to telecommunications, computers and consumer electronics. With over 8,000 engineers and worldwide manufacturing, sales and customer service capabilities, Tyco Electronics' commitment is our customers' advantage. We conduct our business through four reporting segments: Our Electronic Components segment is one of the world's largest suppliers of passive electronic components, which includes connectors and interconnect systems, relays, switches, circuit protection devices, touchscreens, sensors, and wire and cable. The products sold by the Electronic Components segment are sold primarily to original equipment manufacturers, or OEMs, and their contract manufacturers in the automotive, computer, consumer electronics, communication equipment, appliance, aerospace and defense, industrial machinery, and instrumentation markets. Our Network Solutions segment is one of the world's largest suppliers of infrastructure components and systems for telecommunications and energy markets. These components include connectors, above-and below-ground enclosures, heat shrink tubing, cable accessories, surge arrestors, fiber optic cabling, copper cabling, and racks for copper and fiber networks. This segment also provides electronic systems for test access and intelligent cross-connect applications as well as integrated cabling solutions for cabling and building management. Our Wireless Systems segment is an innovator of wireless technology for critical communications, radar, and defense applications. The segment's products include radio frequency components and subassembly solutions such as silicon and gallium arsenide semiconductors, radar sensors, radio frequency identification components, microwave subsystems, and diodes and land mobile radios systems and related products. These products are sold primarily to the aerospace and defense, public safety, communication equipment, and automotive markets. Our Other segment designs, manufactures, distributes, and installs power systems and undersea telecommunication systems. ($ in millions) Power Utility $ 27 8.0 % $ 22 $ 49 14.2 % Communication Service Provider (30 ) (11.3 ) 12 (18 ) (6.7 ) Building Networks 31 18.4 7 38 22.6 Other (0.3 ) 1 (in millions) Restructuring and other charges, net: Cash charges $ 23 $ 9 Non-cash charges 2 (in millions) Fiscal 2007 Actions: Employee severance $ $ 22 $ $ $ $ 22 Facilities exit costs (1 ) Fiscal 2006 Actions: Employee severance 3 (2 ) 1 Facilities exit costs 2 (1 ) Net periodic benefit cost $ (1 ) $ (2 ) $ 43 $ 48 $ 2 $ Cash Flows From Investing Activities: Capital expenditures (610 ) (610 ) Proceeds from sale of property, plant, and equipment 35 35 Divestiture of businesses, net of cash retained by businesses sold 227 227 Increase in investments (3 ) (3 ) Other 1 Cash Flows From Investing Activities: Capital expenditures (610 ) (610 ) Proceeds from sale of property, plant, and equipment 35 35 Divestiture of businesses, net of cash retained by businesses sold 227 227 Increase in investments (3 ) (3 ) Decrease in intercompany loans 2,067 (2,067 ) Other 1 (in millions) Electronic Components $ 9 $ (1 ) $ 4 Network Solutions 9 2 2 Wireless Systems 5 (in millions) Restructuring and other charges (credits), net: Cash charges $ 13 $ 6 $ Fiscal 2004 Actions Employee severance 8 (3 ) (4 ) 1 Facilities exit costs 1 Fiscal 2004 Activity: Fiscal 2004 Actions Employee severance 11 (3 ) 8 Facilities exit costs 1 1 Other (in millions) Service cost $ 1 $ 1 $ 1 Interest cost 2 3 3 Amortization of prior service credit (1 ) (1 ) Amortization of net actuarial loss Funded status $ (45 ) $ (53 ) Unrecognized net actuarial loss 5 9 Unrecognized prior service cost 2 1 Contributions after the measurement date Income from operations 1,619 1,619 Interest income 33 33 Interest expense (344 ) (344 ) Other expense, net WHERE YOU CAN FIND MORE INFORMATION After our separation from Tyco International, we will become subject to the information and reporting requirements of the Exchange Act and, in accordance with the Exchange Act, we will file periodic reports, proxy statements and other information with the SEC. We maintain a website on the Internet at http://www.tycoelectronics.com. We will make available free of charge on or through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as soon as reasonably practicable after such material is filed with the SEC. This reference to our Internet address is for informational purposes only and shall not, under any circumstances, be deemed to incorporate the information available at such Internet address into this prospectus. Competitive Strengths We believe that we have the following competitive strengths: Global leader in passive components. With net sales of approximately $12.8 billion in fiscal 2006, we are significantly larger than many of our competitors. Strong customer relationships. As an industry leader, we have established close working relationships with our customers. These relationships allow us to anticipate and be responsive to customer needs when designing new products and new technical solutions. Process and product technology leadership. We employ over 8,000 engineers dedicated to product research, development and engineering. We invest over $600 million per year in product and process engineering and development so that we consistently provide innovative, high quality products with efficient manufacturing methods. Diverse product mix and customer base. We manufacture and sell a broad portfolio of products to customers in various industries. Balanced geographic sales mix. We have an established manufacturing presence in over 25 countries and our sales are global. Our global coverage positions us near our customers' locations and allows us to assist them in consolidating their supply base and lowering their production costs. Strong and experienced management team. We believe we have a management team that has the experience necessary to effectively execute our strategy and advance our product and technology leadership. Strategy Our goal is to be the world leader in providing custom-engineered electronic components and solutions for an increasingly connected world. Our business strategy is based upon the following priorities: Continue to focus our existing portfolio. We regularly review and will consider the divestiture of underperforming or non-strategic businesses to improve our operating results and better utilize our capital. Leverage our market leadership position to increase our market share. We are the global leader in many of the markets that we serve. We believe that we must continue to strengthen our leadership position in these markets. Achieve market leadership in attractive and under-penetrated industries. We plan to accelerate growth in end-user markets in which we do not have the number one market share but which we believe have attractive growth and profitability characteristics. Extend our leadership in key emerging markets. We seek to improve our market leadership position in emerging geographic regions, including China, Eastern Europe and India. We have been increasing our sales and marketing, engineering and manufacturing resources in these emerging regions in order to more fully capitalize on our skills and technologies. Supplement organic growth with strategic acquisitions. We will evaluate and selectively pursue strategic acquisitions that strengthen our market position, enhance our existing product offering, enable us to enter attractive markets, expand our technological capabilities and provide synergy opportunities. Improve operating margins. We intend to continue to increase our productivity and reduce our manufacturing costs in order to more than fully offset the impact of price erosion on our operating performance. Accelerate new product development through research and development excellence. We intend to focus our research, development, and engineering investment on next generation technologies and highly engineered products and platforms. Total restructuring and other charges, net 25 10 Cost of sales Total 5 (3 ) Accounts payable $ 37 Accrued and other current liabilities 17 Other liabilities Total amortizable $ 1,515 $ (506 ) $ 1,009 22 years $ 1,490 $ (464 ) $ 1,026 22 years Non-amortizable 1 1 2 (in millions) Fiscal 2006 Activity: Fiscal 2006 Actions Employee severance $ $ 12 $ (10 ) $ $ $ 1 $ 3 Facilities exit costs 2 Total Pre-Fiscal 2004 Actions Employee severance 2 (2 ) Facilities exit costs 70 (10 ) 1 5 66 Other Total 9 (3 ) (4 ) Pre-Fiscal 2004 Actions Employee severance 7 (5 ) 2 Facilities exit costs 42 (15 ) 4 39 70 Other 4 (2 ) (in millions) Balance at September 30, 2004 $ 5,980 $ 846 $ 635 $ 7,461 Purchase accounting adjustments(1) (30 ) (4 ) (34 ) Acquisitions 2 Total amortizable $ 1,490 $ (464 ) $ 1,026 22 years $ 1,460 $ (388 ) $ 1,072 22 years Non-amortizable 2 2 2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Class Action Settlement On May 14, 2007, Tyco International entered into a memorandum of understanding with plaintiffs' counsel in connection with the settlement of 32 purported class action lawsuits. Under the terms of the memorandum of understanding, the plaintiffs have agreed to release all claims against Tyco International, the other settling defendants and ten other individuals in consideration for the payment of $2.975 billion to the certified class and assignment to the class of any net recovery of any claims possessed by Tyco International and the other settling defendants against Tyco International's former auditor, PricewaterhouseCoopers. Defendant PricewaterhouseCoopers is not a settling defendant and is not a party to the memorandum. Tyco International and the other settling defendants have denied and continue to deny any wrongdoing and legal liability arising from any of the facts or conduct alleged in the actions. Pursuant to the terms of the memorandum of understanding, L. Dennis Kozlowski, Mark H. Swartz and Frank E. Walsh, Jr., also are excluded from the settling defendants, and the class will assign to Tyco International all of their claims against defendants Kozlowski, Swartz and Walsh. In exchange, Tyco International will agree to pay to the certified class 50% of any net recovery against these defendants. In connection with the class action settlement, we will incur a charge of $0.922 billion in the third quarter of fiscal 2007 for which we do not expect to recognize any tax benefit. When the Separation and Distribution Agreement is entered into, we will record a $2.975 billion liability and a $2.053 billion receivable from Tyco International and Covidien for their portion of the liability. The memorandum of understanding does not address the following securities class actions, which remain outstanding: Stumpf v. Tyco International Ltd., New Jersey v. Tyco, Ballard v. Tyco International Ltd., Sciallo v. Tyco International Ltd., et al., Jasin v. Tyco International Ltd., et al., and Hall v. Kozlowski. The memorandum of understanding also does not address any consolidated ERISA litigation in which Tyco International and certain of its current and former employees, officers and directors have been named as defendants. Tyco Electronics Group S.A. Tyco Electronics Group S.A., or TEGSA, a Luxembourg company, is a wholly-owned subsidiary of Tyco Electronics Ltd. TEGSA's registered and principal offices are located at 17, Boulevard de la Grande Duchesse Charlotte, L-1331 Luxembourg. Its telephone number at that address is (352) 464-340-1. TEGSA is a newly-formed holding company established in connection with the separation of the electronics business of Tyco International to directly and indirectly own all of the operating subsidiaries of Tyco Electronics to issue the notes and to perform treasury operations for Tyco Electronics. Otherwise, it conducts no independent business. We have not included separate financial statements for TEGSA, which was formed in December 2006, in this prospectus because its initial capitalization was not material and it will not have any significant operations or assets until shortly before the separation. Tyco Electronics Ltd. Tyco Electronics Ltd. is a Bermuda corporation. Its registered and principal office is located at Second Floor, 90 Pitts Bay Road, Pembroke HM 08, Bermuda, and its telephone number at that address is (441) 292-8674. Its executive office in the United States is located at 1050 Westlakes Drive, Berwyn, Pennsylvania 19312, and its telephone number at that address is (610) 893-9560. The Separation On January 13, 2006, Tyco International announced that its board of directors had approved a plan to separate Tyco International into three independent, publicly-traded companies: one for Tyco International's electronics businesses (Tyco Electronics), one for its healthcare businesses (Covidien) and one for its fire and security and engineered products and services businesses (Tyco International). Tyco International intends to accomplish this separation through distributions of common shares to Tyco International shareholders. Immediately following the separation of Tyco Electronics and Covidien, Tyco International's shareholders will own 100% of the equity in each of the three companies. We anticipate that the distribution will be tax-free for U.S. federal income tax purposes. Power Utility 45 % 43 % Communication Service Provider 28 33 Building Networks 24 21 Other 3 Net cash used in investing activities (548 ) (277 ) (375 ) Net cash (used in) provided by discontinued investing activities (91 ) (9 ) Net cash used in investing activities (375 ) (375 ) Net cash provided by discontinued investing activities 3 AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 On , 2007, the distribution date, each Tyco International shareholder will receive Covidien common shares and Tyco Electronics common shares for each common share of Tyco International held at the close of business on the record date. Immediately following the distributions, Tyco International's shareholders will own 100% of the common shares of Covidien and Tyco Electronics. Tyco International shareholders will not be required to make any payment, surrender or exchange their Tyco International common shares or take any other action to receive their common shares of Covidien and Tyco Electronics. Tyco International anticipates that on the distribution date it will effect a reverse share split, and as a result each Tyco International share will be converted into one-fourth of a share.
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+S-1/A Table of Contents [MAP OF THIRD FEDERAL SAVINGS AND LOAN BRANCH NETWORK APPEARS HERE] Table of Contents SUMMARY The following summarizes material information regarding the offering of shares of common stock by TFS Financial Corporation and the business of TFS Financial Corporation and Third Federal Savings and Loan Association of Cleveland. However, this summary may not contain all the information that may be important to you. For additional information, you should read this entire prospectus carefully, including the consolidated financial statements and the notes to the consolidated financial statements of TFS Financial Corporation. Our Organization In May 1997, Third Federal Savings and Loan Association of Cleveland (which we will refer to as Third Federal Savings and Loan ) reorganized into the two-tier mutual holding company structure. As part of the reorganization, Third Federal Savings and Loan formed TFS Financial Corporation and Third Federal Savings and Loan Association of Cleveland, MHC, a federally chartered mid-tier stock holding company and mutual holding company, respectively. As a result of the reorganization, Third Federal Savings and Loan became a federally chartered capital stock savings and loan association, and a wholly-owned subsidiary of TFS Financial Corporation, and TFS Financial Corporation became the wholly-owned subsidiary of Third Federal Savings and Loan Association of Cleveland, MHC. The same directors and certain officers who manage Third Federal Savings and Loan manage TFS Financial Corporation and Third Federal Savings and Loan Association of Cleveland, MHC. In addition, in 1998 TFS Financial Corporation organized Third Capital, Inc. as a wholly-owned Delaware subsidiary corporation. Our current ownership structure is as follows: The Companies Third Federal Savings and Loan Association of Cleveland, MHC Third Federal Savings and Loan Association of Cleveland, MHC is a federally chartered mutual holding company and currently owns 100% of the outstanding common stock of TFS Financial Corporation. Third Federal Savings and Loan Association of Cleveland, MHC has not engaged in any significant business activity other than owning the common stock of TFS Financial Corporation, and does not intend to expand its business activities after the stock offering. Upon completion of the stock offering, Third Federal Savings and Loan Association of Cleveland, MHC is expected to own up to 68.34% of the outstanding shares of common stock of TFS Financial Corporation. So long as Third Federal Savings and Loan Association of Cleveland, MHC exists, it is required to own a majority of the voting stock of TFS Financial Corporation. The executive office of Third UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 PRE-EFFECTIVE AMENDMENT NO. 2 TO THE FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 TFS FINANCIAL CORPORATION and THIRD FEDERAL 401(k) SAVINGS PLAN (Exact Name of Registrant as Specified in Its Charter) United States 6712 52-2054948 (State or Other Jurisdiction of Incorporation or Organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 7007 Broadway Avenue Cleveland, Ohio 44105 (216) 441-6000 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant s Principal Executive Offices) Marc A. Stefanski 7007 Broadway Avenue Cleveland, Ohio 44105 (216) 441-6000 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) Copies to: Ned Quint, Esq. Eric Luse Esq. Luse Gorman Pomerenk & Schick, P.C. 5335 Wisconsin Avenue, N.W., Suite 400 Washington, D.C. 20015 (202) 274-2000 Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: CALCULATION OF REGISTRATION FEE Title of each class of securities to be registered Amount to be registered Proposed maximum offering price per share Proposed maximum aggregate offering price Amount of registration fee Common Stock, $0.01 par value per share 105,199,618 shares (1) $10.00 $1,051,996,180(2) $112,564(3) Participation Interests 4,919,955 interests (4) (1) Includes shares to be issued to Third Federal Foundation, a private foundation. (2) Estimated solely for the purpose of calculating the registration fee. (3) A fee of $104,550 has been previously paid. (4) The securities of TFS Financial Corporation to be purchased by the Third Federal 401(k) Savings Plan are included in the amount shown for common stock. However, pursuant to Rule 457(h) of the Securities Act of 1933, as amended, no separate fee is required for the participation interests. Pursuant to such rule, the amount being registered has been calculated on the basis of the number of shares of common stock that may be purchased with the current assets of such plan. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. Table of Contents TABLE OF CONTENTS SUMMARY 1
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+PROSPECTUS SUMMARY This summary highlights the material information contained elsewhere in this prospectus. You should read this entire prospectus carefully, including "Risk Factors" and our financial statements and the notes to those financial statements included elsewhere in this prospectus. Unless the context otherwise requires, the terms "we," "our," "us" and "the Company" refer to TriMas Corporation and its subsidiaries. Our Company We are a manufacturer of highly engineered products serving niche markets in a diverse range of commercial, industrial and consumer applications. Most of our businesses share important characteristics, including leading market shares, strong brand names, broad product offerings, established distribution networks, relatively high operating margins, relatively low capital investment requirements, product growth opportunities and strategic acquisition opportunities. We believe that a majority of our 2006 net sales were in markets in which our products have the number one or number two market position within their respective product categories. In addition, we believe that in many of our businesses, we are one of only a few manufacturers in the geographic markets where we currently compete. Our broad product portfolio and customer base, as well as diverse end-markets reduce our dependence on any one product, customer, distribution channel, geographic region or industry segment. We are led by an experienced management team that pursues the highest level of customer satisfaction. Our operating system allows us to build on the strengths of each of our operating segments and across our businesses as a whole. Our businesses are organized into five operating segments, each of which represents a distinct business platform: Packaging Systems, Energy Products, Industrial Specialties, RV& Trailer Products and Recreational Accessories. Packaging Systems. We believe Packaging Systems is a leading designer, manufacturer and distributor of specialty, highly engineered closure and dispensing systems for a range of niche end markets, including steel and plastic industrial and consumer packaging applications. We also manufacture specialty laminates, jacketings and insulation tapes used with fiberglass insulation as vapor barriers in commercial and industrial construction applications. Our brands include Rieke and Compac . Energy Products. We believe Energy Products is a leading designer, manufacturer and distributor of a variety of engines and engine replacement parts and accessory products for the oil and gas industry as well as metallic and non-metallic industrial sealant products and fasteners for the petroleum refining, petrochemical and other industrial markets. We are the largest gasket supplier to the domestic petroleum industry. Our brands include Lamons and Arrow . Industrial Specialties. We believe Industrial Specialties is a leading designer, manufacturer and distributor of a diverse range of industrial products for use in niche markets within the aerospace, industrial, defense and medical equipment markets. This segment's products include highly engineered composite aerospace fasteners, high-pressure and low-pressure cylinders for the transportation, storage and dispensing of compressed gases, precision tools, and military ordnance components and steel cartridge cases. Our brands include Monogram Aerospace Fasteners, Norris Cylinder, Keo Cutters and Richards Micro-Tool. RV & Trailer Products. We believe RV & Trailer Products is a leading designer, manufacturer and distributor of a wide variety of high-quality, custom-engineered trailer products, lighting accessories and roof racks for the trailer original equipment manufacturers, recreational vehicle, agricultural/utility, marine and commercial trailer markets. We believe it is also the market leader in brake control solutions. Our brands include Bargman , Bulldog , Fulton , Wesbar and Tekonsha . MARKET AND INDUSTRY DATA Due to the variety of our products and the niche markets that we serve, there are few published independent sources for data related to the markets for many of our products. To the extent we are able to express our belief on the basis of data derived in part from independent sources, we have done so. To the extent we have been unable to do so, we have expressed our belief solely on the basis of our own internal analyses and estimates of our and our competitors' products and capabilities. Industry publications and surveys and forecasts that we have utilized generally state that the information contained therein has been obtained from sources believed to be reliable. Although we believe that the third-party sources are reliable, we have not independently verified any of the data from third-party sources nor have we ascertained the underlying assumptions or basis for any such information. In general, when we say we are a "leader" or a "leading" manufacturer or make similar statements about ourselves, we are expressing our belief that we formulated principally from our estimates and experiences in, and knowledge of, the markets in which we compete. In some cases, we possess independent data to support our position, but that data may not be sufficient in isolation for us to reach the conclusions that we have reached without our knowledge of our markets and businesses. Use of Trademarks Arrow , Bargman , Bulldog , Compac , Composi-Lok , Composi-Lok II, Draw-Tite , Englass , FlexSpout , Fulton , Hidden Hitch , Highland "The Pro's Brand" , Keo , Lamons , LEP , OSI-Bolt , Poly-ViseGrip , Radial-Lok , Reese , Reese Outfitter , Reese Towpower , Rieke , ROLA , Stolz , Tekonsha , Tow Ready , ViseGrip , Visu- Lok , Visu-Lok II and Wesbar are among our registered trademarks. This prospectus also includes other registered and unregistered trademarks of ours. All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners. Recreational Accessories. We believe Recreational Accessories is a leading designer, manufacturer and distributor of a wide range of aftermarket cargo management products, towing and hitch systems and accessories and vehicle protection products used to outfit and accessorize light trucks, sport utility vehicles and passenger cars. Our brands include Draw-Tite , Reese , Hidden Hitch , Tow Ready , ROLA and Highland "The Pro's Brand" . Our Strategy Guided by our experienced senior management team and a disciplined operating approach, we have pursued and intend to continue to pursue the following strategies: Continued Product Innovation. Product development and expanded market and product line offerings have historically driven and will continue to drive organic growth initiatives. We currently have a significant number of pending product initiatives across all of our business segments. Pursue International Growth Opportunities. We have launched initiatives to expand sales and product lines outside of our traditional NAFTA-based markets across all businesses in our portfolio. We are currently focusing on growth in Asia, Western Europe and South America. Pursue Lower-Cost Manufacturing and Sourcing Initiatives. We continue to focus on lean manufacturing, global sourcing and selectively shifting manufacturing capabilities to countries with lower production costs. For example, we recently launched two lower-cost manufacturing facilities in China and one in Thailand, and have also expanded our Mexican operations. Pursue Strategic Niche Acquisitions on a Disciplined Basis. We have completed and integrated over 30 acquisitions since 1986, including seven since June 2002. We have acquired and our current acquisition strategy targets, companies with engineered products and strong market positions and, in our opinion, sustainable organic growth prospects. Risks Related to Our Strategies You should also consider the many risks we face that could mitigate our competitive strengths and limit our ability to implement our business strategies, including: we may be unable to maintain or enhance our competitive positions if we are unable to address technological advances, implement new and more cost effective manufacturing techniques or introduce new or improved products; we face the risk of lower cost foreign manufacturers competing in the markets for our products and we may be adversely impacted; our ability to improve or sustain operating margins as a result of cost-savings may be limited and may be further impacted by increases in steel, resins and other material commodities or energy costs to the extent we are unable to offset any such cost increases with price increases on a timely basis; in the past, we have grown through acquisitions and we may be unable to identify attractive acquisition candidates, successfully integrate acquired operations or realize the intended benefits of our acquisitions; as of March 31, 2007 we had approximately $723.5 million of outstanding debt and would have had $623.5 million of outstanding debt after giving effect to this offering and the use of proceeds therefrom as described under "Use of Proceeds"; after this offering, we will continue to have substantial principal and interest payment obligations; and Equity securities 59 % 60 % N/A N/A Debt securities 39 % 38 % N/A N/A Real estate 0 % 0 % N/A N/A Cash 2 % UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 as we expand our international operations we may be subjected to risks not present in the U.S. markets such as foreign and U.S. government regulations and restrictions, tariffs and other trade barriers, foreign exchange risks and other risks related to political, economic and social instability. Our Executive Offices and Structure TriMas Corporation is a Delaware corporation. Our principal executive offices are located at 39400 Woodward Avenue, Suite 130, Bloomfield Hills, Michigan 48304. Our telephone number is (248) 631-5450. Our web site address is www.trimascorp.com. Information contained on our web site is not a part of this prospectus. TriMas Corporation is a holding company with no material assets of its own other than 100.0% of the capital stock of an intermediate holding company, TriMas Company LLC. TriMas Company LLC directly or indirectly owns our domestic and foreign operating subsidiaries, which represent the primary source of all of our revenues and are the primary owners of all of our operating assets. All of our senior credit facility and public debt are issued or guaranteed by TriMas Corporation, TriMas Company LLC and our domestic subsidiaries (other than our receivables financing subsidiary). As of December 31, 2006, we employed approximately 5,100 people, 19% of which were located outside the United States. We operate 15 domestic manufacturing facilities and 12 manufacturing facilities located outside the United States. Our foreign manufacturing facilities are located in Australia, Canada, China, the United Kingdom, Italy, Thailand, Germany and Mexico. Company Background and Our Principal Stockholder We operated as an independent public company from 1989 through 1997. In 1998, we were acquired by Metaldyne Corporation (formerly MascoTech, Inc.) ("Metaldyne") and in November 2000 Metaldyne was acquired by an investor group led by Heartland Industrial Partners, L.P. ("Heartland") and Credit Suisse. On June 6, 2002, an investor group led by Heartland acquired 66.0% of our fully diluted common equity from Metaldyne for cash with the objective of permitting us to independently pursue growth opportunities. On January 11, 2007, Metaldyne merged into a subsidiary of Asahi Tec Corporation ("Asahi") whereby Metaldyne became a wholly-owned subsidiary of Asahi. In connection with the consummation of the merger, Metaldyne dividended the 4,825,587 shares of our common stock that it owned on a pro rata basis to the holders of Metaldyne's common stock at the time of such dividend. This dividend of our common stock is referred to herein as the "Metaldyne Dividend." As part of the Metaldyne Dividend, Heartland, Credit Suisse and Masco Corporation were distributed 2,413,193, 1,186,276 and 280,701 shares of our voting common equity, respectively and upon consummation of this offering will beneficially own 47.5%, 3.7% and 7.7%, respectively of our fully diluted common equity (valued in aggregate at $181.1 million, $14.2 million and $29.5 million, respectively, in each case based upon the midpoint of the price range on the cover of this prospectus) assuming no exercise of the over-allotment option. As a result of the merger, Metaldyne and we are no longer related parties. See "Related Party Transactions." See "Principal Stockholders." Our Principal Stockholder and Other Significant Stockholders & Relationships Heartland. Heartland currently owns approximately 72.7% of our outstanding voting common equity. After giving effect to this offering (assuming no exercise of the over-allotment option) Heartland will own 47.5% of our outstanding voting common equity. One of our directors is the Managing Member of Heartland's General Partner. Entities affiliated with our Chairman also own Amendment No. 6 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 limited liability company interests in Heartland Additional Commitment Fund, LLC which is a limited partner in Heartland. Masco Corporation. Masco Corporation, both directly and through its wholly-owned subsidiary, Masco Capital Corporation, currently owns approximately 11.8% of our outstanding voting common equity. After giving effect to this offering (assuming no exercise of the over-allotment option) Masco Corporation together with Masco Capital Corporation would beneficially own 7.7% of our outstanding voting common equity. Our Chairman is also the President and Chairman of Masco Capital Corporation. Credit Suisse. Credit Suisse currently owns 1,186,276 shares of our outstanding voting common equity as a result of the Metaldyne Dividend. After giving effect to this offering (assuming no exercise of the over-allotment option) Credit Suisse will own approximately 3.7% of our outstanding voting common equity. We, Heartland, Masco Capital Corporation, Masco Corporation and Credit Suisse are party to a shareholders agreement relating to the ownership of our common equity. See "Related Party Transactions Shareholders Agreements." We are not aware of any additional agreements or understandings between or among Heartland, Masco Capital Corporation, Masco Corporation, Credit Suisse and any of our directors or officers concerning our common equity. Heartland and those of our directors associated with Heartland will realize certain direct and indirect costs and benefits from this offering, including the following: (1) all pre-offering owners of our common stock will benefit from the creation of a public market for our common stock although Heartland, Masco Capital Corporation, Masco Corporation and Credit Suisse will be subject to lock-up agreements described elsewhere in this prospectus; (2) Heartland will continue to own, and as a result one of our directors will continue to control, shares representing 47.5% of our voting stock (valued in aggregate at $181.1 million based upon the midpoint of the price range); Heartland originally acquired 66% of our fully diluted common equity from Metaldyne at an aggregate cost of $265.0 million; (3) Heartland is agreeing to a contractual settlement of its right to receive an annual monitoring fee of $4.0 million in exchange for a $10.0 million payment, but subject to approval on a case by case basis by the disinterested members of our Board of Directors, may continue to earn fees not to exceed 1.0% of the transaction value for services provided in connection with certain future financings, acquisitions and divestitures by us; and (4) Heartland will suffer a reduction in its percentage of share ownership and will have reduced representation on our Board of Directors and its committees, although Heartland will continue to control 47.5% of our shares immediately following this offering, as indicated above, and as a result of our Shareholders Agreement, Heartland will continue to have the ability to elect a majority of our Board of Directors. At the time of the June 2002 transactions, we, Metaldyne and Heartland entered into a number of agreements pertaining to, among other things, Heartland's investment, the dividend to Heartland, our respective ongoing relationships and the allocation of certain liabilities that might arise. We subsequently repurchased some of our common stock from Metaldyne in April 2003 at the same price as originally paid by Heartland. See "Related Party Transactions." Consequently, there are continuing ongoing relationships that will exist between us, on the one hand, and Heartland, Metaldyne and certain of our officers and directors, on the other hand. See "Management," "Principal Stockholders," "Related Party Transactions Benefits of This Offering to Certain Related Parties" and the relevant portions of the section captioned "Risk Factors." None of these matters are specific to this offering. TRIMAS CORPORATION (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 3452 (Primary Standard Industrial Classification Code Number) 38-2687639 (I.R.S. Employer Identification Number) 39400 Woodward Avenue, Suite 130 Bloomfield Hills, Michigan 48304 (248) 631-5450 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Joshua A. Sherbin, Esq. General Counsel TriMas Corporation 39400 Woodward Avenue, Suite 130 Bloomfield Hills, Michigan 48304 (248) 631-5497 (Name, address, including zip code, and telephone number, including area code, of agent for service) with a copy to: Jonathan A. Schaffzin, Esq. Cahill Gordon & Reindel LLP 80 Pine Street New York, New York 10005 (212) 701-3000 Valerie Ford Jacob, Esq. Fried, Frank, Harris, Shriver & Jacobson LLP One New York Plaza New York, New York 10004 (212) 859-8000 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. The Offering Common stock offered by us 11,000,000 shares Shares to be outstanding after the offering 31,759,500 shares Use of proceeds We estimate that our net proceeds from this offering after estimated underwriting discounts and offering expenses, will be approximately $119.3 million. We intend to use these net proceeds to redeem approximately $100.3 million in aggregate principal amount of our senior subordinated notes (plus a $5.0 million call premium), to make a $10.0 million payment to terminate the annual fee paid to Heartland under the Advisory Agreement, and to terminate certain of our operating leases by acquiring the underlying assets at a cost (measured as of the date of this prospectus) of up to approximately $4.0 million. To the extent there are any remaining net proceeds, we intend to use such funds to first terminate additional operating leases by acquiring the underlying assets, second to redeem additional amounts of our senior subordinated notes and lastly for general corporate purposes. Dividend policy We do not anticipate paying any cash dividends in the foreseeable future.
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+S-1 1 v062809s1.htm As filed with the Securities and Exchange Commission on As filed with the Securities and Exchange Commission on January 19, 2007 Registration No. 333-_________ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 UNITED STATES OIL FUND, LP (Exact Name of Registrant as Specified in Its Charter) Delaware 6799 20-2830691 (State or Other Jurisdiction of Incorporation or Organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 1320 Harbor Bay Parkway, Suite 145 Alameda, California 94502 510.522.3336 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant s Principal Executive Offices) Nicholas D. Gerber 1320 Harbor Bay Parkway, Suite 145 Alameda, California 94502 510.522.3336 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) Copies to: W. Thomas Conner, Esq. James M. Cain, Esq. Sutherland Asbill & Brennan LLP 1275 Pennsylvania Avenue, N.W. Washington, DC 20004-2405 202.383.0590 Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. CALCULATION OF REGISTRATION FEE Title of Each Class of Securities to Be Registered Amount to Be Registered Proposed Maximum Offering Price Per Unit(1) Proposed Maximum Aggregate Offering Price(1) Amount of Registration Fee United States Oil Fund, LP 50,000,000 Units $ 44.22 $ 2,211,000,000 $ 236,577 (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(d) under the Securities Act of 1933. The price per unit is based on United States Oil Fund s NAV on January 17, 2007 which was $44.22. This registration statement contains a combined prospectus under Rule 429 promulgated under the Securities Act of 1933, which relates to File No. 333-124950 and File No. 137784. Accordingly, upon effectiveness, this registration statement shall act as a post-effective amendment to File No. 333-124950 and File No. 137784. The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said section 8(a), may determine. PROSPECTUS United States Oil Fund, LP 55,200,000 Units United States Oil Fund, LP, a Delaware limited partnership, is a commodity pool that issues units that may be purchased and sold on the American Stock Exchange. United States Oil Fund, LP is referred to as USOF throughout this document. The investment objective of USOF is for changes in percentage terms of the units net asset value to reflect the changes in percentage terms of the spot price of West Texas Intermediate light, sweet crude oil delivered to Cushing, Oklahoma, as measured by changes in the price of the futures contract on West Texas Intermediate light, sweet crude oil as traded on the New York Mercantile Exchange that is the near month contract to expire, except when the near month contract is within two weeks of expiration, in which case the futures contract will be the next month to expire less USOF s expenses. This is a best efforts offering. USOF will continuously offer creation baskets consisting of 100,000 units to authorized purchasers through ALPS Distributors, Inc., which is the marketing agent. A list of USOF s current authorized purchasers is available from the marketing agent. Authorized purchasers will pay a transaction fee of $1,000 for the creation of each creation basket. There are no arrangements to place funds in an escrow, trust, or similar account. This will be a continuous offering and will not terminate until all of the registered units have been sold. Authorized purchasers may purchase creation baskets of 100,000 units. The per unit price of units on a particular day will be the total net asset value of USOF calculated shortly after the close of the American Stock Exchange on that day divided by the number of issued and outstanding units. Authorized purchasers will be the only persons that may place orders to create and redeem baskets. An authorized purchaser is under no obligation to create or redeem baskets, and an authorized purchaser is under no obligation to offer to the public units of any baskets it does create. Authorized purchasers that do offer to the public units from the baskets they create will do so at per-unit offering prices that are expected to reflect, among other factors, the trading price of the units on the American Stock Exchange, the net asset value of USOF at the time the authorized purchaser purchased the creation basket and the net asset value of the units at the time of the offer of the units to the public, the supply of and demand for units at the time of sale, and the liquidity of the oil futures contract market and the market for other oil interests, and are expected to fall between USOF s net asset value and the trading price of the units on the American Stock Exchange at the time of sale. The difference between the price paid by authorized purchasers as underwriters and the price paid to such authorized purchasers by investors will be deemed underwriting compensation. Units initially comprising the same basket but offered by authorized purchasers to the public at different times may have different offering prices. Units are expected to trade in the secondary market on the American Stock Exchange. Units may trade in the secondary market at prices that are lower or higher relative to their net asset value per unit. The amount of the discount or premium in the trading price relative to the net asset value per unit may be influenced by various factors, including the number of investors who seek to purchase or sell units in the secondary market and the liquidity of the oil futures contract market and the market for other oil interests. Authorized purchasers will not be required to sell any specific number or dollar amount of units. USOF is not a mutual fund registered under the Investment Company Act of 1940 and is not subject to regulation under such Act. Some of the risks of investing in USOF include: Investing in oil interests subjects USOF to the risks of the oil industry and this could result in large fluctuations in the price of USOF s units. If certain correlations do not exist, then investors may not be able to use USOF as a cost-effective way to invest indirectly in oil or as a hedge against the risk of loss in oil-related transactions. USOF does not expect to make cash distributions. USOF and its general partner may have conflicts of interest, which may permit them to favor their own interests to your detriment. USOF has a limited operating history so there is no extensive performance history to serve as a basis for you to evaluate an investment in USOF. Investing in USOF involves other significant risks. See What Are the Risk Factors Involved with an Investment in USOF? starting on page 11. NEITHER THE SECURITIES AND EXCHANGE COMMISSION ( SEC ) NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OFFERED IN THIS PROSPECTUS, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE COMMODITY FUTURES TRADING COMMISSION ( CFTC ) HAS NOT PASSED UPON THE MERITS OF PARTICIPATING IN THIS POOL NOR HAS IT PASSED ON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT. This prospectus is in two parts: a disclosure document and a statement of additional information. These parts are bound together, and both contain important information. Per Unit Per Basket Price of the units* $ 44.22 $ 4,422,000 * Based on the price that would have been in effect on January 17, 2007. Price may vary based on NAV in effect on a particular day. The date of this prospectus is January [ ], 2007. The Benchmark Futures Contract will be changed, or rolled from the near month contract to expire to the next month to expire over a four (4) day period. The General Partner believes that market arbitrage opportunities will cause USOF s unit price on the American Stock Exchange to closely track USOF s NAV per unit. The General Partner further believes that the prices of the Benchmark Oil Futures Contract have historically closely tracked the spot prices of WTI light, sweet crude oil. The General Partner believes that the net effect of these two expected relationships and the expected relationship described above between USOF s NAV and the Benchmark Oil Futures Contract, will be that changes in the price of USOF s units on the American Stock Exchange will closely track changes in the prices of the spot price of a barrel of WTI light, sweet crude oil, less USOF s expenses. USOF will also invest in obligations of the United States government with remaining maturities of two years or less ( Treasuries ) and hold cash and cash equivalents to be used to meet its current or potential margin or collateral requirements with respect to its investments in Oil Futures Contracts and Other Oil Interests. USOF does not expect there to be any meaningful correlation between the performance of USOF s investments in Treasuries/cash/cash equivalents and the changes in the price of WTI light, sweet crude oil. While the level of interest earned on or market price of these investments may in some respect correlate to changes in the price of oil, this correlation is not anticipated as part of USOF s efforts to meet its objectives. This and certain risk factors discussed in this Prospectus may cause a lack of correlation between changes in USOF s NAV and changes in the price of WTI light, sweet crude oil. The General Partner will employ a neutral investment strategy intended to track changes in the spot price of WTI light, sweet crude oil regardless of whether the price of oil goes up or goes down. USOF s neutral investment strategy is designed to permit investors generally to purchase and sell USOF s units for the purpose of investing indirectly in oil in a cost-effective manner, and/or to permit participants in the oil or other industries to hedge the risk of losses in their oil-related transactions. Accordingly, depending on the investment objective of an individual investor, the risks generally associated with investing in oil and/or the risks involved in hedging may exist. In addition, an investment in USOF involves the risk that the changes in the price of USOF s units will not accurately track the spot price of WTI light, sweet crude oil. USOF will create and redeem units only in blocks called Creation Baskets and Redemption Baskets, respectively. Only Authorized Purchasers may purchase or redeem Creation Baskets or Redemption Baskets. An Authorized Purchaser is under no obligation to create or redeem baskets, and an Authorized Purchaser is under no obligation to offer to the public units of any baskets it does create. It is expected that baskets will be created when there is sufficient demand for units that the market price per unit is at a premium to the NAV per unit. Authorized Purchasers will then sell such units, which will be listed on the American Stock Exchange, to the public at prices that are expected to reflect, among other factors, the trading price of the units on the American Stock Exchange, the NAV of USOF at the time the Authorized Purchaser purchased the Creation Baskets and the NAV at the time of the offer of the units to the public, the supply of and demand for units at the time of sale, and the liquidity of the Oil Futures Contracts market and the market for Other Oil Interests, and are expected to fall between USOF s NAV and the trading price of the units on the American Stock Exchange at the time of sale. Similarly, it is expected that baskets will be redeemed when the market price per unit is at a discount to the NAV per unit. Retail investors seeking to purchase or sell units on any day are expected to effect such transactions in the secondary market, on the American Stock Exchange, at the market price per unit, rather than in connection with the creation or redemption of baskets. The minimum number of Creation Baskets that must be sold is one. All proceeds from the sale of Creation Baskets will be invested as quickly as possible in the investments described in this Prospectus. There will be no escrow or similar holding of funds that has a time period or other conditions. Investments will be held through USOF s custodian Brown Brothers Harriman & Co., (the Custodian ) or, through accounts with USOF s commodities futures brokers. There is no stated maximum time period for USOF s operations and the fund will continue until all units are redeemed or the fund is liquidated pursuant to the terms of the LP Agreement. There is no specified limit on the maximum amount of Creation Baskets that can be sold. At some point, position limits on certain of the futures contracts in which USOF intends to invest may practically limit the maximum amount of Creation Baskets that will be sold if the General Partner determines that the other investment alternatives available to USOF at that time will not enable it to meet its stated investment objective. COMMODITY FUTURES TRADING COMMISSION RISK DISCLOSURE STATEMENT YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL BEGINNING ON PAGE 67 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, ON PAGE 7. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE DOCUMENT, INCLUDING THE DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT, BEGINNING ON PAGE 11. YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES MARKET, MAY BE SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR DIMINISHED PROTECTION TO THE POOL AND ITS PARTICIPANTS. FURTHER, UNITED STATES REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY AUTHORITIES OR MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE TRANSACTIONS FOR THE POOL MAY BE EFFECTED. Units may also be purchased and sold in smaller increments on the American Stock Exchange. However, these transactions will be effected at bid and ask prices established by specialist firm(s). Like any listed security, units of USOF can be purchased and sold at any time a secondary market is open. In managing USOF s assets the General Partner does not intend to use a technical trading system that issues buy and sell orders. The General Partner does intend to employ quantitative methodologies whereby each time one or more baskets are purchased or redeemed, the General Partner will purchase or sell Oil Futures Contracts and Other Oil Interests with an aggregate face amount that approximates the amount of Treasuries and/or cash received or paid upon the purchase or redemption of the basket(s). Note to Secondary Market Investors: The units can be directly purchased from or redeemed by USOF only in Creation Baskets or Redemption Baskets, respectively, and only by Authorized Purchasers. Each Creation Basket and Redemption Basket will consist of 100,000 units and is expected to be worth several million dollars. Individual investors, therefore, will not be able to directly purchase units from or redeem units with USOF. Some of the information contained in this Prospectus, including information about buying and redeeming units directly from and to USOF is only relevant to Authorized Purchasers. Units will also be listed and traded on the American Stock Exchange and may be purchased and sold as individual units. Individuals interested in purchasing units in the secondary market should contact their broker. Units purchased or sold through a broker may be subject to commissions. Except when aggregated in Redemption Baskets, units will not be redeemable securities. There is no guarantee that units will trade at or near NAV. The Units The units are registered as securities under the Securities Act of 1933 ( 1933 Act ) and will not provide dividend rights or conversion rights and there will not be sinking funds. The units may only be redeemed when aggregated in Redemption Baskets as discussed under Creations and Redemptions and limited partners will have limited voting rights as discussed under Who is the General Partner? Cumulative voting will neither be permitted nor required and there will be no preemptive rights. As discussed in the LP Agreement, upon liquidation of USOF, its assets will be distributed pro rata to limited partners based upon the number of units held. Each limited partner will receive its share of the assets in cash or in kind, and the proportion of such share that is received in cash may vary from partner to partner, as the General Partner in its sole discretion may decide. This will be a continuous offering under Rule 415 of the 1933 Act and it will terminate when all of the registered units have been sold. It is anticipated that when all registered units have been sold, additional units will be registered in subsequent continuous offerings. As discussed above, the minimum purchase requirement for Authorized Purchasers is a Creation Basket, which will consist of 100,000 units. Under the plan of distribution, USOF does not require a minimum purchase amount for investors who purchase units from Authorized Purchasers. There are no arrangements to place funds in an escrow, trust, or similar account. USOF s Investments in Oil Interests A brief description of the principal types of oil interests in which USOF may invest is set forth below. An oil futures contract is a standardized contract traded on a futures exchange that calls for the future delivery of a specified quantity of oil at a specified time and place. An oil forward contract is a supply contract between principals, not traded on an exchange, to buy or sell a specified quantity of oil at or before a specified date at a specified price. A spot contract for oil is a cash market transaction in which the buyer and seller agree to the immediate purchase and sale of oil, usually with a two-day settlement. Spot contracts are not uniform and are not exchange-traded. An option on an oil futures contract, forward contract or oil on the spot market gives the buyer of the option the right, but not the obligation, to buy or sell a futures contract, forward contract or oil, as applicable, at a specified price on or before a specified date. Options on futures contracts are standardized contracts traded on an exchange, while options on forward contracts and oil on the spot market, referred to collectively in this Prospectus as over-the-counter options, generally are individually negotiated, principal-to-principal contracts not traded on an exchange. Over-the-counter contracts (such as swap contracts) generally involve an exchange of a stream of payments between the contracting parties. Over-the-counter contracts generally are not uniform and not exchange-traded. A more detailed description of oil interests and other aspects of the oil and oil interest markets can be found later in this Prospectus. As noted, USOF expects to invest primarily in Oil Futures Contracts, including those traded on the New York Mercantile Exchange. USOF expressly disclaims any association with such Exchange or endorsement of USOF by such Exchange and acknowledges that NYMEX and New York Mercantile Exchange are registered trademarks of such Exchange. Principal Investment Risks of an Investment in USOF An investment in USOF involves a degree of risk. Some of the risks you may face are summarized below. A more extensive discussion of these risks appears beginning on page 11. Unlike mutual funds, commodity pools or other investment pools that actively manage their investments in an attempt to realize income and gains from their investing activities and distribute such income and gains to their investors, USOF generally does not expect to distribute cash to limited partners or other unitholders. You should not invest in USOF if you will need cash distributions from USOF to pay taxes on your share of income and gains of USOF, if any, or for any other reason. There is the risk that the changes in the price of USOF s units on the American Stock Exchange will not closely track the changes in spot price of WTI light, sweet crude oil. This could happen if the price of units traded on the American Stock Exchange does not correlate closely with USOF s NAV; the changes in USOF s NAV do not closely correlate with changes in the price of the Benchmark Oil Futures Contract; or the changes in price of the Benchmark Oil Futures Contract do not closely correlate with changes in the cash or spot price of WTI light, sweet crude oil. This is a risk because if these correlations do not exist, then investors may not be able to use USOF as a cost-effective way to invest indirectly in oil or as a hedge against the risk of loss in oil-related transactions. USOF seeks to have changes in its units NAV in percentage terms track changes in the spot price of WTI light, sweet crude oil rather than profit from speculative trading of oil interests. The General Partner will therefore endeavor to manage USOF s positions in oil interests so that USOF s assets are, unlike other commodities pools, not leveraged (i.e., so that the aggregate value of USOF s unrealized losses from its investments in such oil interests at any time will not exceed the value of USOF s assets). There is no assurance that the General Partner will successfully implement this investment strategy. If the General Partner permits USOF to become leveraged, you could lose all or substantially all of your investment if USOF s trading positions suddenly turn unprofitable. These movements in price may be the result of factors outside of the General Partner s control and may not be anticipated by the General Partner. Investors may choose to use USOF as a means of investing indirectly in oil and there are risks involved in such investments. Among other things, the crude oil industry experiences numerous operating risks. These operating risks include the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental hazards. Environmental hazards include oil spills, natural gas leaks, ruptures and discharges of toxic gases. Crude oil operations also are subject to various U.S. federal, state and local regulations that materially affect operations. Investors, including those who participate in the oil industry, may choose to use USOF as a vehicle to hedge against the risk of loss and there are risks involved in hedging activities. While hedging can provide protection against an adverse movement in market prices, it can also preclude a hedgor s opportunity to benefit from a favorable market movement. USOF will invest primarily in Oil Futures Contracts, and particularly in Oil Futures Contracts traded on the New York Mercantile Exchange. Representatives of the New York Mercantile Exchange have asserted certain claims regarding USOF s operations and the Exchange s service marks and settlement prices of oil futures contracts traded on the Exchange. Page Privacy Policy 73 U.S. Federal Income Tax Considerations 74 Other Tax Considerations 81 Investment by ERISA Accounts 82 Information You Should Know 84 Statement Regarding Forward-Looking Statements 84 Where You Can Find More Information 85 Summary of Promotional and Sales Material 85 Patent Application Pending 85 Index to Financial Statements F-1 Report of Independent Registered Public Accounting Firm Appendix A: Glossary of Defined Terms Appendix B: United States Oil Fund, LP Form of Third Amended and Restated Agreement of Limited Partnership Appendix C: Market Watch Interview with John Hyland Portfolio Manager, April 10, 2006 STATEMENT OF ADDITIONAL INFORMATION Overview of the Petroleum Industry Overview of Crude Oil Crude Oil Regulation Until January [ ], 2007 (10 days after the date of this prospectus), all dealers effecting transactions in the offered units, whether or not participating in this distribution, may be required to deliver a prospectus. This requirement is in addition to the obligations of dealers to deliver a prospectus when acting as underwriters and with respect to unsold allotments or subscriptions. The New York Mercantile Exchange initially claimed that USOF s use of the Exchange s service marks would cause confusion as to USOF s source, origin, sponsorship or approval, and constitute infringement of the Exchange s trademark rights and unfair competition and dilution of the Exchange s marks. In response to these claims, the General Partner changed USOF s name. In addition, USOF expressly disclaims any association with the Exchange or endorsement of USOF by the Exchange and acknowledges that NYMEX and New York Mercantile Exchange are registered trademarks of such Exchange. The General Partner has also engaged in discussions with the New York Mercantile Exchange regarding a possible license agreement. In this regard, USOF received a letter from the Exchange dated March 29, 2006 in which the Exchange stated that it would cause the cessation of any market data vendor s provision of New York Mercantile Exchange settlement prices to USOF and/or take other action to prevent USOF from using any New York Mercantile Exchange settlement prices unless USOF enters into a license agreement with the Exchange, or has indicated in writing that it will cease from using any Exchange settlement prices. USOF will continue to seek an amicable resolution to this situation. It is evaluating the current draft of the license agreement in view of this letter but is also taking into account a recent New York federal district court decision against the NYMEX that found under similar circumstances that NYMEX s intellectual property rights, including those related to its settlement prices, were significantly limited. USOF and the General Partner have retained separate counsel to represent them in this matter. At this time, USOF is unable to determine what the outcome from this matter will be. There could be a number of consequences. Under the license agreement currently being negotiated, USOF would be required to pay a license fee to the New York Mercantile Exchange for the use of its settlement prices. Also, if the resolution or lack of resolution of this matter results in a material restriction on, or significant additional expense associated with, the use of the New York Mercantile Exchange s oil futures contract settlement prices, USOF may be required to invest to a greater degree than currently anticipated in Oil Futures Contracts traded on commodity exchanges other than the New York Mercantile Exchange and Other Oil Interests. These or other consequences may adversely affect USOF s ability to achieve its investment objective. Separately, Goldman, Sachs & Co. ( Goldman Sachs ) sent USOF a letter on March 17, 2006, providing USOF notice under 35 U.S.C. Section 154(d) of two pending United States patent applications, Publication Nos. 2004/0225593A1 and 2006/0036533A1. Both patent applications are generally directed to a method and system for creating and administering a publicly traded interest in a commodity pool. In particular, the Abstract of each patent application defines a means for creating and administering a publicly traded interest in a commodity pool that includes the steps of forming a commodity pool having a first position in a futures contract and a corresponding second position in a margin investment, and issuing equity interest of the commodity pool to third party investors. USOF Units are equity interests in a publicly traded commodity pool. In addition, USOF will directly invest in futures contracts and hold other investments to be used as margin for its future contract positions. If patents were to be issued to Goldman Sachs based upon these patent applications as currently drafted, and USOF continued to operate as currently contemplated after the patents were issued, claims against USOF and the General Partner for infringement of the patents may be made by Goldman Sachs. However, as these patent applications are pending and have not been substantively examined by the U.S. Patent and Trademark Office, it is uncertain at this time what subject matter will be covered by the claims of any patent issuing on one of these applications, should a patent issue at all. Under the provisions of 35 U.S.C. 154(d), Goldman Sachs may seek damages in the form of a reasonable royalty from the date the Units are publicly offered for sale to the date one of their cited patent applications issues as a U.S. Patent if, and only if, the invention as claimed in the issued patent is substantially identical to the invention as claimed in the published patent application. To obtain a reasonable royalty under 35 U.S.C. 154(d), one of Goldman Sachs s patents must issue and then it must be proved that post-issuance acts or systems of USOF infringe a valid claim of the issued patent, and that the infringed claim is substantially identical to one of the claims in the corresponding published application. If at the time a Goldman Sachs patent issues, USOF does not infringe the claims of the issued patent based on its current design or through modifications made prior to issuance, or if any infringed issued claim is not substantially identical to a published claim, then Goldman Sachs will not be able to obtain a reasonable royalty under 35 U.S.C. 154(d). At this time neither of Goldman Sachs s patent applications have been substantively examined by an examiner at the U.S. Patent and Trademark Office nor are they currently being considered for examination on an expedited basis under a Petition to Make Special, and considering that both have been placed in Class 705 for examination, which has an average pendency of approximately 44-45 months to issuance (or abandonment) and an issuance rate of approximately 11% in 2004, it is likely that neither application PROSPECTUS SUMMARY This is only a summary of the Prospectus and, while it contains material information about USOF and its units, it does not contain or summarize all of the information about USOF and the units contained in this Prospectus that is material and/or which may be important to you. You should read this entire Prospectus, including What Are the Risk Factors Involved with an Investment in USOF? beginning on page 11, before making an investment decision about the units.
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+Prospectus summary This summary highlights the most important features of this offering and the information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before investing in our common stock. You should also read the entire prospectus carefully, especially the risks of investing in our common stock discussed under Risk factors and our consolidated financial statements and related notes included in this prospectus. Vanda Pharmaceuticals Inc. We are a biopharmaceutical company focused on the development and commercialization of our portfolio of clinical-stage product candidates for central nervous system disorders. We believe that each of our product candidates will address a large market with significant unmet medical needs by offering advantages over currently available therapies. Our product portfolio includes: iloperidone, a compound for the treatment of schizophrenia and bipolar disorder, which has demonstrated positive top-line results from a recently completed Phase III trial in schizophrenia. We expect to file a New Drug Application (NDA) for iloperidone in schizophrenia with the United States Food and Drug Administration (FDA) by the end of 2007 VEC-162, a compound for the treatment of sleep and mood disorders, which has demonstrated positive top-line results from a recently completed Phase III trial in transient insomnia. We expect to initiate at least one additional Phase III trial in chronic sleep disorders in the second half of 2007 VSF-173, a compound for the treatment of excessive sleepiness, for which we expect to begin a Phase II trial in mid-2007 We hold exclusive, worldwide rights to these compounds and plan to develop a focused U.S. sales force for the commercialization of iloperidone and VSF-173. We plan to seek partners for commercialization of these compounds outside of the United States. Given the large size of the prescribing physician base for sleep and mood disorders, we plan to partner with a global pharmaceutical company for the development and commercialization of VEC-162 worldwide, although we have not yet identified such a partner. Our founder and Chief Executive Officer, Mihael H. Polymeropoulos, M.D., started our operations early in 2003 after establishing and leading the Pharmacogenetics Department at Novartis AG. In acquiring and developing our compounds we have relied upon our deep expertise in the scientific disciplines of pharmacogenetics and pharmacogenomics. These scientific disciplines examine both genetic variations among people that influence response to a particular drug, and the multiple pathways through which drugs affect people. We believe that the combination of our expertise in these disciplines and our drug development expertise may provide us with preferential access to compounds discovered by other pharmaceutical companies, and will allow us to identify new uses for these compounds. These capabilities should also enable us to shorten the time it takes to commercialize a drug when compared to traditional approaches. Iloperidone for Schizophrenia and Bipolar Disorder. We are developing iloperidone for the treatment of schizophrenia and bipolar disorder. Today, schizophrenia patients are treated primarily with drugs known as atypical antipsychotics. These drugs have been called atypical because they are regarded as being safer and more effective than drugs known as typical antipsychotics, which have been prescribed since the 1950s. Atypical antipsychotics achieved worldwide sales in excess of $12 billion in 2005. However, despite their commercial success, atypical antipsychotics offer only modest and unpredictable efficacy and induce serious side effects, resulting in poor patient compliance. Consequently, there remains a high degree of dissatisfaction with atypical antipsychotics among patients and physicians. A recent study conducted by the National Institute of Mental Health and published in The New England Journal of Medicine found that 74% of patients taking antipsychotics discontinued treatment within 18 months. Given the safety and efficacy shortcomings of current drugs, we believe that iloperidone may be an attractive alternative therapy. Iloperidone may offer several advantages over existing therapies. In multiple Phase III trials of more than 2,000 patients, iloperidone showed a reduced risk of the side effects most associated with atypical antipsychotics, including weight gain, diabetes induction, involuntary body movements, elevated levels of the hormone prolactin, and sleepiness. The application of our pharmacogenetics and pharmacogenomics expertise may provide additional differentiation for iloperidone by identifying genetic markers of iloperidone s efficacy and safety. Our market research indicates that physicians treating schizophrenia patients would welcome a test that leads to improved patient outcomes by using genetic information to customize drug therapy. We also plan to distinguish iloperidone through the development of an extended-release injectable formulation of the compound that is administered only once every four weeks. We believe this formulation will help address the patient compliance and discontinuation problems commonly associated with atypical antipsychotics. Our extended-release injectable formulation has successfully completed a Phase I/IIa trial. We believe we will need to complete one Phase III trial with this formulation to be able to file for FDA approval. In December 2006 we announced positive top-line results from our Phase III trial of iloperidone in schizophrenia. This Phase III trial was a randomized, double-blind, placebo-controlled, multi-center, four-week inpatient study that enrolled 604 patients, and examined the effects of a 12-mg oral formulation of iloperidone dosed twice-daily (or 24 mg each day). The primary endpoint of the trial was efficacy versus placebo on the Positive and Negative Symptoms Scale (PANSS), for which iloperidone demonstrated statistically significant improvement. Iloperidone also demonstrated statistically significant improvement versus placebo in several other measures of efficacy. The drug also appeared to be safe and well-tolerated in the trial. Based on discussions with the FDA, we believe that our data and documentation on oral iloperidone will be sufficient to support the filing of an NDA with the FDA by the end of 2007. We expect to meet with the FDA in the first quarter of 2007 regarding this filing. The trial results also validated the pharmacogenetics work undertaken by the Company. Patients in the trial with a common genetic mutation, estimated to occur in approximately 70% of the population, experienced significantly better treatment results with iloperidone than the general treatment population. We also demonstrated in the trial that patients with an uncommon genetic attribute may experience longer QTc intervals (a measurement of specific electrical activity in the heart as captured on an electrocardiogram, corrected for heart rate) while taking iloperidone. The Company has developed a single blood test with these markers and may seek to commercialize this test alongside iloperidone. In addition to schizophrenia, we believe iloperidone may be effective in treating bipolar disorder. All of the approved atypical antipsychotics have received approval for bipolar disorder subsequent to commercialization for the treatment of schizophrenia. Iloperidone is ready for an initial Phase III trial in bipolar disorder. We expect to build our own sales force to market iloperidone directly to psychiatrists and other target physicians in the U.S. This medical community is relatively small and we believe that we can cost-effectively develop such a sales force. Outside of the U.S., we expect to find commercial partners for iloperidone. Table of contents Page Prospectus summary 1 The offering 5 Summary consolidated financial data 6 Risk factors 8 Forward-looking statements 24 Use of proceeds 25 Price range of our common stock 26 Dividend policy 27 Capitalization 28 Dilution 29 Selected consolidated financial data 30 Management s discussion and analysis of financial condition and results of operations 32 Business 55 Management 76 Certain relationships and related party transactions 100 Principal stockholders 101 Description of capital stock 104 Material United States federal tax consequences 108 Underwriters 110 Legal matters 115 Experts 115 Where you can find more information 115 Index to consolidated financial statements F-1 You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and are seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus. Vanda is a trademark of Vanda Pharmaceuticals Inc. This prospectus may also include other registered and unregistered trademarks of Vanda Pharmaceuticals Inc. and other persons. Unless the context otherwise requires, we use the terms Vanda, the Company, we, us and our in this prospectus to refer to Vanda Pharmaceuticals Inc. VEC-162 for Sleep and Mood Disorders. We are developing VEC-162 for the treatment of sleep and mood disorders. The markets for both sleep disorder drugs and for mood disorder drugs are large and growing. Insomnia drugs enjoyed worldwide sales of approximately $4.5 billion in 2005, even though industry sources indicate that the majority of people suffering from insomnia do not receive any treatment at all for their condition. In addition, antidepressant drugs achieved worldwide sales in excess of $19 billion in 2005. We believe VEC-162 may offer several benefits when compared to currently approved insomnia therapies. Unlike many approved therapies, VEC-162 works by directly targeting the melatonin receptors in the brain which govern the body s natural sleep/wake cycle. Because it appears to modulate the sleep/wake cycle, we believe that VEC-162 may be the first drug to address the underlying cause of sleeplessness in circadian rhythm sleep disorders, which, according to research conducted by LEK Consulting, LLC, a leading consulting firm, represent a significant portion of the insomnia market. Circadian rhythm sleep disorders are those, such as jet lag, where the circadian rhythm, or the rhythmic output of the human biological clock governed by melatonin and other hormones, is out of alignment with a person s daily activities or lifestyle. VEC-162 also appears to be safe, with no significant side effects or effects on next-day performance. As demonstrated in our recently completed Phase III trial, VEC-162 provides a benefit in both sleep onset, or time to fall asleep, and sleep maintenance, or ability to stay asleep. Based on these trial results, we believe that VEC-162 will compare favorably to efficacy achieved by currently approved insomnia drugs, not only for circadian rhythm sleep disorders but also for other types of insomnia. We also believe that VEC-162 is unlikely to be classified as a Schedule IV controlled substance by the United States Drug Enforcement Agency (DEA) because a recently approved compound with a similar mechanism of action has been shown not to have potential for abuse. In November 2006 we announced positive top-line results from our Phase III clinical trial evaluating VEC-162 in transient insomnia. VEC-162 demonstrated statistically significant improvements at all three tested doses compared to placebo in the primary endpoint of the trial, latency to persistent sleep, a measure of sleep onset. VEC-162 also produced statistically significant improvements relative to placebo in latency to non-awake, another measure of sleep onset, wake after sleep onset, a measure of sleep maintenance, and total sleep time. VEC-162 was also demonstrated to be safe and well-tolerated. We believe that we will need to conduct additional Phase III trials in chronic sleep disorders to receive FDA approval of VEC-162 for the treatment of insomnia. In addition to insomnia, we believe that VEC-162 may be effective in treating depression. VEC-162 has properties similar to Novartis agomelatine, an older compound with a similar mechanism of action, which in a Phase III trial demonstrated more rapid efficacy and reduced side effects when compared to a market-leading antidepressant. VEC-162 is ready for Phase II trials in depression, having demonstrated an antidepressant effect in animal models and having completed several Phase I trials. VSF-173 for Excessive Sleepiness. VSF-173 is an oral compound that has demonstrated effects on animal sleep/wake patterns and gene expression suggestive of a stimulant effect. As a result of these observations and safety data from previous human trials, we are planning to initiate a Phase II trial of VSF-173 in excessive sleepiness in mid-2007. Excessive sleepiness is a rapidly growing market which generated worldwide sales of approximately $500 million in 2005 and is currently treated primarily by stimulants. Strategy Our goal is to create a leading biopharmaceutical company focused on developing and commercializing products that address critical unmet medical needs through the application of our drug development and pharmacogenomics and pharmacogenetics expertise. The key elements of our strategy to accomplish this goal are to: pursue the clinical development and regulatory approval of our current product candidates enter into partnerships to extend our commercial reach develop a focused commercialization capability in the United States apply our pharmacogenomics and pharmacogenetics expertise to differentiate our product candidates from other available therapies expand our product portfolio through the identification and acquisition of additional compounds Recent developments We intend to engage an investment bank to provide financial and strategic advisory services to the Company, which may lead to one or more possible transactions, including the acquisition, sale or licensing by the Company of businesses or product candidates, the sale or licensing to a third party of one or more of our own product candidates, or the acquisition of the Company. We cannot assure you that we will complete any acquisitions, sales or licenses, or that, if completed, any acquisition, sale or license will be successful or on attractive terms. Risks associated with our business Our business is subject to numerous risks, as more fully described in the section entitled Risk factors. We may be unable, for many reasons, including those that are beyond our control, to implement our current business strategy. Those reasons could include delays in obtaining, or a failure to obtain, regulatory approval for our product candidates, a failure to maintain and to protect our intellectual property, our failure to meet certain development and commercialization milestones in our sublicense agreement with Novartis AG, which could cause our rights to iloperidone to be terminated, the exercise by Bristol-Myers Squibb Company of its option to reacquire our rights to VEC-162 at the end of our Phase III program (if we have not entered into a commercialization agreement with a third party covering significant markets by that time) and the exercise by Novartis of its option to reacquire rights to VSF-173 at the end of our Phase II trials or at the end of our Phase III trials. We have a limited operating history and have incurred net losses from our inception. We expect to continue to generate operating losses for the next several years. We will need to obtain additional capital to fund our continuing research and development activities. All of our product candidates are in development and none have been approved by the FDA for commercial sale. Even if we succeed in developing and commercializing one or more of our product candidates, we may never generate sufficient revenue to achieve and then sustain profitability. Corporate information We were incorporated in Delaware in November 2002. Our principal executive offices are located at 9605 Medical Center Drive, Suite 300, Rockville, Maryland, 20850 and our telephone number is (240) 599-4500. Our website address is www.vandapharma.com. The information on, or that can be accessed through, our website is not part of this prospectus. The offering Common stock we are offering: 3,500,000 shares Common stock to be outstanding after this offering: 25,628,534 shares Use of proceeds We expect to use the net proceeds of this offering for working capital and for other general corporate purposes, including the funding of our NDA filing for iloperidone and our clinical development efforts. See Use of Proceeds. Nasdaq Global Market symbol: VNDA The number of shares of common stock to be outstanding after the offering is based on 22,128,534 shares of common stock outstanding as of December 31, 2006. Except where we state otherwise, the number of shares of common stock to be outstanding after this offering does not take into account: 1,347,205 shares of common stock issuable upon the exercise of stock options outstanding as of December 31, 2006 under our Second Amended and Restated Management Equity Plan and agreements entered into under such plan, with a weighted-average exercise price of $1.69 per share 359,527 shares of common stock issuable upon the exercise of stock options outstanding as of December 31, 2006 under our 2006 Equity Incentive Plan and agreements entered into pursuant to such plan, with a weighted-average exercise price of $20.21 per share an additional 1,140,470 shares reserved for issuance under the 2006 Equity Incentive Plan as of December 31, 2006 for future stock option grants and purchases (see note 4 of Notes to condensed consolidated financial statements ) Finally, except where we state otherwise, the information we present in this prospectus reflects no exercise of the underwriter s over-allotment option. Summary consolidated financial data The following tables summarize our consolidated financial data. The summary consolidated financial data are derived from our audited financial statements for the period from March 13, 2003 (inception of our operations) through December 31, 2003, and for the years ended December 31, 2004 and 2005. Data are also included from our unaudited financial statements for the nine months ended September 30, 2005 and 2006. This data should be read together with our financial statements and related notes, Selected Consolidated Financial Data, and Management s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this prospectus. The as-adjusted balance sheet data contained in the following tables reflects our unaudited consolidated balance sheet data at September 30, 2006, adjusted for the sale of shares of common stock in this offering at an assumed public offering price of $25.98 (the last reported sale price of our common stock on January 12, 2007), after deducting the estimated underwriting discounts, commissions and offering expenses payable by us. Period from March 13, 2003 (inception) to Nine months ended December 31, Year ended December 31, September 30, 2003 2004 2005 2005 2006 Statements of operations data Revenue $ 47,565 $ 33,980 $ $ $ Operating expenses: Research and development 2,010,532 7,442,983 16,890,615 11,641,565 44,130,788 General and administrative 1,052,659 2,119,394 7,396,038 5,587,147 9,170,439 Total operating expenses 3,063,191 9,562,377 24,286,653 17,228,712 53,301,227 Loss from operations (3,015,626 ) (9,528,397 ) (24,286,653 ) (17,228,712 ) (53,301,227 ) Interest and other income, net 44,805 59,060 410,001 188,288 1,681,534 Net loss before tax provision (2,970,821 ) (9,469,337 ) (23,876,652 ) (17,040,424 ) (51,619,693 ) Tax provision 4,949 7,649 Net loss (2,970,821 ) (9,474,286 ) (23,884,301 ) (17,040,424 ) (51,619,693 ) Beneficial conversion feature deemed dividend to preferred stockholders(1) (33,486,623 ) (18,500,005 ) Net loss attributable to common stockholders $ (2,970,821 ) $ (9,474,286 ) $ (57,370,924 ) $ (35,540,429 ) $ (51,619,693 ) Net loss per share applicable to common stockholders, basic and diluted $ (983.72 ) $ (3,137.18 ) $ (3,374.33 ) $ (3,094.51 ) $ (3.72 ) Weighted-average number of shares used in computing net loss per share, basic and diluted 3,020 3,020 17,002 11,485 13,862,613 (1) In September and December of 2005, we completed the sale of an additional 27,235,783 shares of Series B Preferred Stock for net proceeds of approximately $33.5 million. After evaluating the fair value of the common stock obtainable upon conversion by the stockholders, we determined that the issuance of the Series B Preferred Stock sold in 2005 resulted in a beneficial conversion feature which was fully accreted in 2005 and is recorded as a deemed dividend to preferred stockholders of approximately $33.5 million and approximately $18.5 million for the year ended December 31, 2005 and the nine months ended September 30, 2005, respectively. As of September 30, 2006 Actual As adjusted Balance sheet data Cash and cash equivalents and restricted cash $ 32,330,209 $ 116,568,655 Short-term investments 11,096,506 11,096,506 Working capital 34,735,547 118,973,993 Total assets 47,282,498 131,520,944 Total liabilities 10,330,866 10,330,866 Deficit accumulated during the development stage (87,949,101 ) (87,949,101 ) Total stockholders equity 36,951,632 121,190,078 Risk factors Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including the consolidated financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in shares of our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations and future prospects would likely be materially and adversely affected. In that event, the market price of our common stock could decline and you could lose all or part of your investment. Risks related to our business and industry Our success is dependent on the success of our three product candidates in clinical development: iloperidone, VEC-162 and VSF-173. If any of these product candidates are determined to be unsafe or ineffective in humans, whether in clinical trials or commercially, our business will be materially harmed. Despite the positive results of our recently completed Phase III trials, we are uncertain whether any of our current product candidates in clinical development will ultimately prove to be effective and safe in humans. Frequently, product candidates that have shown promising results in clinical trials have suffered significant setbacks in later clinical trials or even after they are approved for commercial sale. Future uses of any of our product candidates, whether in clinical trials or commercially, may reveal that the product candidate is ineffective, unacceptably toxic, has other undesirable side effects or is otherwise not fit for further use. If we are unable to discover and develop products that are safe and effective, our business will be materially harmed. Any failure or delay in completing clinical trials for our product candidates could severely harm our business. Pre-clinical studies and clinical trials required to demonstrate the safety and efficacy of our product candidates are time-consuming and expensive and together take several years to complete. The completion of clinical trials for our product candidates may be delayed by many factors, including: our inability to manufacture or obtain from third parties materials sufficient for use in pre-clinical studies and clinical trials delays in patient enrollment and variability in the number and types of patients available for clinical trials difficulty in maintaining contact with patients after treatment, resulting in incomplete data poor effectiveness of product candidates during clinical trials unforeseen safety issues or side effects governmental or regulatory delays and changes in regulatory requirements and guidelines If we fail to complete successfully one or more clinical trials for any of our product candidates, we may not receive the regulatory approvals needed to market that product candidate. Therefore, any failure or delay in commencing or completing these clinical trials would harm our business materially. We face heavy government regulation, and FDA regulatory approval of our products is uncertain. The research, testing, manufacturing and marketing of drug products such as those that we are developing are subject to extensive regulation by federal, state and local government authorities, including the FDA. To obtain regulatory approval of a product, we must demonstrate to the satisfaction of the applicable regulatory agency that, among other things, the product is safe and effective for its intended use. In addition, we must show that the manufacturing facilities used to produce the products are in compliance with current Good Manufacturing Practices regulations, or cGMP. The process of obtaining FDA and other required regulatory approvals and clearances will require us to expend substantial time and capital. Despite the time and expense expended, regulatory approval is never guaranteed. The number of pre-clinical and clinical tests that will be required for FDA approval varies depending on the drug candidate, the disease or condition that the drug candidate is in development for, and the regulations applicable to that particular drug candidate. The FDA can delay, limit or deny approval of a drug candidate for many reasons, including that: a drug candidate may not be safe or effective they may interpret data from pre-clinical and clinical testing in different ways than we do they may not approve our manufacturing process they may change their approval policies or adopt new regulations For example, if certain of our methods for analyzing our trial data are not approved by the FDA, we may fail to obtain regulatory approval for our product candidates. Moreover, if and when our products do obtain such approval or clearances, the marketing, distribution and manufacture of such products would remain subject to extensive ongoing regulatory requirements. Failure to comply with applicable regulatory requirements could result in: warning letters fines civil penalties injunctions recall or seizure of products total or partial suspension of production refusal of the government to grant approvals withdrawal of approvals criminal prosecution Any delay or failure by us to obtain regulatory approvals for our product candidates could diminish competitive advantages that we may attain and would adversely affect the marketing of our products. We have not received regulatory approval to market any of our product candidates in any jurisdiction. Even if we do receive regulatory approval for our drug candidates, the FDA may impose limitations on the indicated uses for which our products may be marketed, subsequently withdraw approval or take other actions against us or our products that are adverse to our business. The FDA generally approves products for particular indications. An approval for a more limited indication reduces the size of the potential market for the product. Product approvals, once granted, may be withdrawn if problems occur after initial marketing. We also are subject to numerous federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices, the environment and the use and disposal of hazardous substances used in connection with our discovery, research and development work. In addition, we cannot predict the extent of government regulations or the impact of new governmental regulations that might significantly harm the discovery, development, production and marketing of our products. We may be required to incur significant costs to comply with current or future laws or regulations, and we may be adversely affected by the cost of such compliance. We intend to seek regulatory approvals for our products in foreign jurisdictions, but we may not obtain any such approvals. We intend to market our products outside the United States, either alone or with a commercial partner. In order to market our products in foreign jurisdictions, we may be required to obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and jurisdictions and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. We have no experience with obtaining any such foreign approvals. Additionally, the foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. For all of these reasons, we may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or jurisdictions or by the FDA. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market. The failure to obtain these approvals could harm our business materially. Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval or limit their marketability. Undesirable side effects caused by our product candidates could interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities for any or all targeted indications, and in turn prevent us from commercializing our product candidates and generating revenues from their sale. For example, like many other drugs in its class, iloperidone is associated with a prolongation of the heart s QTc interval, which is a measurement of specific electrical activity in the heart as captured on an electrocardiogram, corrected for heart rate. A QTc interval that is significantly prolonged may result in an abnormal heart rhythm with adverse consequences including fainting, dizziness, loss of consciousness and death. No patient in the controlled portion of any of iloperidone s clinical trials was observed to have an interval that exceeded a 500-millisecond threshold of particular concern to the FDA. Two patients experienced a prolongation of 500 milliseconds or more during the open-label extension of one trial. We will continue to assess the side effect profile of iloperidone and our other product candidates in our ongoing clinical development program. In addition, if any of our product candidates receive marketing approval and we or others later identify undesirable side effects caused by the product, we could face one or more of the following: regulatory authorities may require the addition of labeling statements, such as a black box warning or a contraindication regulatory authorities may withdraw their approval of the product Exhibit no. Exhibit index 10 .7 Lease Agreement between the registrant and Red Gate III LLC dated June 25, 2003 (lease of Rockville, MD office space) (filed as Exhibit 10.7 to the registrant s Registration Statement on Form S-1 (File No. 333-130759), as originally filed on December 29, 2005, and incorporated herein by reference) 10 .8 Amendment to Lease Agreement between the registrant and Red Gate III LLC dated September 27, 2003 (filed as Exhibit 10.8 to the registrant s Registration Statement on Form S-1 (File No. 333-130759), as originally filed on December 29, 2005, and incorporated herein by reference) 10 .9 Lease Agreement between the registrant and MCC3 LLC (by Spaulding and Slye LLC) dated August 4, 2005 (filed as Exhibit 10.9 to the registrant s Registration Statement on Form S-1 (File No. 333-130759), as originally filed on December 29, 2005, and incorporated herein by reference) 10 .10 Summary Plan Description provided for the registrant s 401(k) Profit Sharing Plan Trust (filed as Exhibit 10.10 to the registrant s Registration Statement on Form S-1 (File No. 333-130759), as originally filed on December 29, 2005, and incorporated herein by reference) 10 .11 Form of Indemnification Agreement entered into by directors (filed as Exhibit 10.11 to the registrant s Registration Statement on Form S-1 (File No. 333-130759), as originally filed on December 29, 2005, and incorporated herein by reference) 10 .12 Employment Agreement for Mihael H. Polymeropoulos dated February 10, 2005 (filed as Exhibit 10.12 to the registrant s Registration Statement on Form S-1 (File No. 333-130759), as originally filed on December 29, 2005, and incorporated herein by reference) 10 .13 Employment Agreement for William D. Clark dated February 10, 2005 (filed as Exhibit 10.13 to the registrant s Registration Statement on Form S-1 (File No. 333-130759), as originally filed on December 29, 2005, and incorporated herein by reference) 10 .14 Employment Agreement for Steven A. Shallcross dated October 18, 2005 (filed as Exhibit 10.14 to the registrant s Registration Statement on Form S-1 (File No. 333-130759), as originally filed on December 29, 2005, and incorporated herein by reference) 10 .15 Employment Agreement for Deepak Phadke dated August 15, 2005 (filed as Exhibit 10.15 to the Registrant s registration Statement on Form S-1 (File No. 333-130759), as originally filed on December 29, 2005, and incorporated herein by reference) 10 .16 Employment Agreement for Thomas Copmann dated May 27, 2005 (filed as Exhibit 10.16 to the registrant s Registration Statement on Form S-1 (File No. 333-130759), as originally filed on December 29, 2005, and incorporated herein by reference) 10 .17 2006 Equity Incentive Plan (filed as Exhibit 10.17 to Amendment No. 2 to the registrant s Registration Statement on Form S-1 (File No. 333-130759), as filed on March 17, 2006, and incorporated herein by reference) Exhibit Index Exhibit no. Exhibit index 1 .1 Form of Underwriting Agreement 3 .6 Amended and Restated Bylaws of the registrant (filed as Exhibit 3.6 to Amendment No. 2 to the registrant s Registration Statement on Form S-1 (File No. 333-130759), as filed on March 17, 2006, and incorporated herein by reference) 3 .8 Form of Amended and Restated Certificate of Incorporation of the registrant (filed as Exhibit 3.8 to Amendment No. 2 to the registrant s Registration Statement on Form S-1 (File No. 333-130759), as filed on March 17, 2006, and incorporated herein by reference) 4 .1 2004 Securityholder Agreement (as amended) (filed as Exhibit 4.1 to the registrant s Registration Statement on Form S-1 (File No. 333-130759), as originally filed on December 29, 2005, and incorporated herein by reference) 4 .4 Specimen certificate representing the common stock of the registrant (filed as Exhibit 4.4 to Amendment No. 2 to the registrant s Registration Statement on Form S-1 (File No. 333-130759), as filed on March 17, 2006, and incorporated herein by reference) 5 .1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin Hachigian, LLP 10 .1 Registrant s Second Amended and Restated Management Equity Plan (filed as Exhibit 10.1 to the registrant s Registration Statement on Form S-1 (File No. 333-130759), as originally filed on December 29, 2005, and incorporated herein by reference) 10 .2# Sublicense Agreement between the registrant and Novartis Pharma AG dated June 4, 2004 (as amended) (relating to iloperidone) (filed as Exhibit 10.2 to Amendment No. 1 to the registrant s Registration Statement on Form S-1 (File No. 333-130759), as filed on February 16, 2006, and incorporated herein by reference) 10 .3# Amended and Restated License, Development and Commercialization Agreement by and between Bristol-Myers Squibb Company and the registrant dated July 24, 2005 (relating to VEC-162) (filed as Exhibit 10.3 to Amendment No. 1 to the registrant s Registration Statement on Form S-1 (File No. 333-130759), as filed on February 16, 2006, and incorporated herein by reference) 10 .4# NDD-094 License Agreement between Novartis Pharma AG, Novartis AG and the registrant dated June 4, 2004 (relating to VSF-173) (filed as Exhibit 10.4 to Amendment No. 1 to the registrant s Registration Statement on Form S-1 (File No. 333-130759), as filed on February 16, 2006, and incorporated herein by reference) 10 .7 Lease Agreement between the registrant and Red Gate III LLC dated June 25, 2003 (lease of Rockville, MD office space) (filed as Exhibit 10.7 to the registrant s Registration Statement on Form S-1 (File No. 333-130759), as originally filed on December 29, 2005, and incorporated herein by reference) 10 .8 Amendment to Lease Agreement between the registrant and Red Gate III LLC dated September 27, 2003 (filed as Exhibit 10.8 to the registrant s Registration Statement on Form S-1 (File No. 333-130759), as originally filed on December 29, 2005, and incorporated herein by reference) 10 .9 Lease Agreement between the registrant and MCC3 LLC (by Spaulding and Slye LLC) dated August 4, 2005 (filed as Exhibit 10.9 to the registrant s Registration Statement on Form S-1 (File No. 333-130759), as originally filed on December 29, 2005, and incorporated herein by reference) we may be required to change the way the product is administered, conduct additional clinical trials or change the labeling of the product our reputation may suffer Any of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing the product candidate, which in turn could delay or prevent us from generating significant revenues from its sale. Our product candidates may never achieve market acceptance even if we obtain regulatory approvals. Even if we receive regulatory approvals for the sale of our product candidates, the commercial success of these products will depend, among other things, on their acceptance by physicians, patients, third-party payors and other members of the medical community as a therapeutic and cost-effective alternative to competing products and treatments. The degree of market acceptance of any of our product candidates will depend on a number of factors, including the demonstration of its safety and efficacy, its cost-effectiveness, its potential advantages over other therapies, the reimbursement policies of government and third-party payors with respect to the product candidate, and the effectiveness of our marketing and distribution capabilities. If our product candidates fail to gain market acceptance, we may be unable to earn sufficient revenue to continue our business. If our product candidates do not become widely accepted by physicians, patients, third-party payors and other members of the medical community, it is unlikely that we will ever become profitable. If we fail to obtain the capital necessary to fund our research and development activities, we may be unable to continue operations or we may be forced to share our rights to commercialize our product candidates with third parties on terms that may not be attractive to us. Based on our current operating plans, and assuming the sale of 3,500,000 shares of our common stock in this offering at $25.98 per share (the last reported sale price of our common stock on The Nasdaq Global Market on January 12, 2007), we believe that the proceeds from this offering, together with our existing cash, restricted cash, cash equivalents and short-term investments, will be sufficient to meet our anticipated operating needs through early 2008, and after that time we will require additional capital. In budgeting for our activities following this offering, we have relied on a number of assumptions, including assumptions that we will file an NDA for iloperidone in schizophrenia with the FDA by the end of 2007, that we will continue to expend funds in preparation of commercial launch of iloperidone, that we will expend funds on the extended-release injectable formulation of iloperidone, that we will initiate at least one additional VEC-162 Phase III trial for chronic sleep disorders in the second half of 2007 and that this trial will be conducted in accordance with our expectations, that we will initiate our VSF-173 Phase II trial for excessive sleepiness in mid-2007 and that this trial will be conducted in accordance with our expectations, that we will not engage in further in-licensing activities, that we will not receive any proceeds from potential partnerships, that we will not expend funds on the bipolar indication for iloperidone or on a Phase II trial of VEC-162 for depression, that we will continue to evaluate pre-clinical compounds for potential development, that we will be able to continue the manufacturing of our product candidates at commercially reasonable prices, that we will be able to retain our key personnel, and that we will not incur any significant contingent liabilities. We may need to raise additional funds more quickly if one or more of our assumptions proves to be incorrect or if we choose to expand our product development efforts more rapidly than presently anticipated or seek to acquire additional product candidates, and we may also decide to raise additional funds even before they are needed if the conditions for raising capital are favorable. We may seek to sell additional equity or debt securities or obtain a bank credit facility. The sale of additional equity or debt securities, if convertible, could result in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations and could also result in covenants that would restrict our operations. We cannot assure you that additional funds will be available when we need them on terms that are acceptable to us, or at all. The unavailability of financing may require us to delay, scale back or eliminate expenditures for our research, development and marketing activities necessary to commercialize our potential biopharmaceutical products. If we are unable to secure sufficient capital to fund our research and development activities, we may not be able to continue operations or we may have to enter into collaboration agreements that could require us to share commercial rights to our products to a greater extent or at earlier stages in the drug development process than we currently intend. Collaborations that are consummated by us prior to proof-of-efficacy and safety of a product candidate could impair our ability to realize value from that product candidate. We have incurred operating losses in each year since our inception and expect to continue to incur substantial and increasing losses for the foreseeable future. We have a limited operating history. We have not generated any revenue from product sales to date and we cannot estimate with precision the extent of our future losses. We do not currently have any products that have been approved for commercial sale and we may never generate revenue from selling products or achieve profitability. We expect to continue to incur substantial and increasing losses for the foreseeable future, particularly as we increase our research, clinical development and administrative activities. As a result, we are uncertain when or if we will achieve profitability and, if so, whether we will be able to sustain it. We have been engaged in identifying and developing compounds and product candidates since March 2003. As of September 30, 2006, we have accumulated net losses of approximately $87.9 million. Our ability to achieve revenue and profitability is dependent on our ability to complete the development of our product candidates, obtain necessary regulatory approvals, and have our products manufactured and marketed. We cannot assure you that we will be profitable even if we successfully commercialize our products. Failure to become and remain profitable may adversely affect the market price of our common stock and our ability to raise capital and continue operations. If our contract research organizations do not successfully carry out their duties or if we lose our relationships with contract research organizations, our drug development efforts could be delayed. We are dependent on contract research organizations, third-party vendors and investigators for pre-clinical testing and clinical trials related to our drug discovery and development efforts and we will likely continue to depend on them to assist in our future discovery and development efforts. These parties are not our employees and we cannot control the amount or timing of resources that they devote to our programs. If they fail to devote sufficient time and resources to our drug development programs or if their performance is substandard, it will delay the development and commercialization of our product candidates. The parties with which we contract for execution of our clinical trials play a significant role in the conduct of the trials and the subsequent collection and analysis of data. Their failure to meet their obligations could adversely affect clinical development of our product candidates. Moreover, these parties may also have relationships with other commercial entities, some of which may compete with us. If they assist our competitors, it could harm our competitive position. If we lose our relationship with any one or more of these parties, we could experience a significant delay in both identifying another comparable provider and then contracting for its services. We may be unable to retain an alternative provider on reasonable terms, if at all. Even if we locate an alternative provider, it is likely that this provider may need additional time to respond to our needs and may not provide the same type or level of service as the original provider. In addition, any provider that we retain will be subject to current Good Laboratory Practices, or cGLP, and similar foreign standards and we do not have control over compliance with these regulations by these providers. Consequently, if these practices and standards are not adhered to by these providers, the development and commercialization of our product candidates could be delayed. If our CTD contractors do not successfully carry out their duties or if we lose our relations with our CTD contractors, our NDA for iloperidone could be delayed. We are dependent on third-party vendors for the preparation of the Common Technical Dossier (CTD) related to the NDA we expect to file for iloperidone by the end of 2007. These parties are not our employees and we cannot control the amount or timing of resources that they devote to our program. If they fail to devote sufficient time and resources to our NDA preparation or if their performance is substandard, it will delay the approval of iloperidone. If we lose our relationship with any one or more of these third parties, we could experience a significant delay in both identifying another comparable provider and then contracting for its services. We may be unable to retain an alternative provider on reasonable terms, if at all. Even if we locate an alternative provider, it is likely that this provider may need additional time to respond to our needs and may not provide the same type or level of service as the original provider. Consequently, the NDA and commercialization of iloperidone could be delayed. We rely on a limited number of manufacturers for our product candidates and our business will be seriously harmed if these manufacturers are not able to satisfy our demand and alternative sources are not available. We do not have an in-house manufacturing capability and depend completely on a small number of third-party manufacturers and active pharmaceutical ingredient formulators for the manufacture of our product candidates. We do not have long-term agreements with any of these third parties, and if they are unable or unwilling to perform for any reason, we may not be able to locate alternative acceptable manufacturers or formulators or enter into favorable agreements with them. Any inability to acquire sufficient quantities of our product candidates in a timely manner from these third parties could delay clinical trials and prevent us from developing our product candidates in a cost-effective manner or on a timely basis. In addition, manufacturers of our product candidates are subject to cGMP and similar foreign standards and we do not have control over compliance with these regulations by our manufacturers. If one of our contract manufacturers fails to maintain compliance, the production of our product candidates could be interrupted, resulting in delays and additional costs. In addition, if the facilities of such manufacturers do not pass a pre-approval plant inspection, the FDA will not grant pre-market approval of our products. Our manufacturing strategy presents the following additional risks: the manufacturing process for VSF-173 has not been tested in quantities needed for continued clinical trials or commercial sales, and delays in scale-up to commercial quantities of VEC-162 and VSF-173 could delay clinical trials, regulatory submissions and commercialization of these product candidates because most of our third-party manufacturers and formulators are located outside of the United States, there may be difficulties in importing our compounds or their components into the United States as a result of, among other things, FDA import inspections, incomplete or inaccurate import documentation or defective packaging because of the complex nature of our compounds, our manufacturers may not be able to successfully manufacture our compounds in a cost-effective and/or timely manner Materials necessary to manufacture our product candidates may not be available on commercially reasonable terms, or at all, which may delay the development, regulatory approval and commercialization of our product candidates. We rely on our manufacturers to purchase from third-party suppliers the materials necessary to produce our product candidates for our clinical trials. Suppliers may not sell these materials to our manufacturers at the times we need them or on commercially reasonable terms. We do not have any control over the process or timing of the acquisition of these materials by our manufacturers. Moreover, we currently do not have any agreements for the commercial production of these materials. If our manufacturers are unable to obtain these materials for our clinical trials, product testing and potential regulatory approval of our product candidates could be delayed, significantly affecting our ability to develop our product candidates. If our manufacturers or we are unable to purchase these materials after regulatory approval has been obtained for our product candidates, the commercial launch of our product candidates would be delayed or there would be a shortage in supply, which would materially affect our ability to generate revenues from the sale of our product candidates. We face substantial competition which may result in others developing or commercializing products before or more successfully than we do. Our future success will depend on our ability to demonstrate and maintain a competitive advantage with respect to our product candidates and our ability to identify and develop additional product candidates through the application of our pharmacogenetics and pharmacogenomics expertise. Large, fully integrated pharmaceutical companies, either alone or together with collaborative partners, have substantially greater financial resources and have significantly greater experience than we do in: developing products undertaking pre-clinical testing and clinical trials obtaining FDA and other regulatory approvals of products manufacturing and marketing products These companies may invest heavily and quickly to discover and develop novel products that could make our product candidates obsolete. Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA approval or commercializing superior products or other competing products before we do. We believe the primary competitors for each of our product candidates are as follows: For iloperidone in the treatment of schizophrenia, the atypical antipsychotics Risperdal (risperidone) by Johnson Johnson (including the depot formulation Risperdal Consta ), Zyprexa (olanzapine) by Eli Lilly and Company, Seroquel (quetiapine) by AstraZeneca PLC, Abilify (aripiprazole) by Bristol-Myers Squibb Company/Otsuka Pharmaceutical Co., Ltd., Geodon (ziprasidone) by Pfizer Inc., Invega (paliperidone) by Johnson Johnson, and generic clozapine, as well as the typical antipsychotics haloperidol, chlorpromazine, thioridazine, and sulpiride (all of which are generic). In addition to the approved products, compounds in Phase III trials (or for which an NDA has been recently filed) for the treatment of schizophrenia include bifeprunox (Wyeth/Solvay S.A./Lundbeck A/S), and asenapine (Organon International). For VEC-162 in the treatment of insomnia, Rozeremtm (ramelteon) by Takeda Pharmaceuticals Company Limited, hypnotics such as Ambien (zolpidem) by Sanofi-Aventis (including Ambien CR ), Lunesta (eszopiclone) by Sepracor Inc. and Sonata (zaleplon) by King Pharmaceuticals, Inc., generic compounds such as trazodone and doxepin, and over-the-counter remedies such as Benadryl and Tylenol PM . In addition to the approved products, compounds in Phase III trials for insomnia include indiplon (Neurocrine Biosciences, Inc.) gaboxadol (Merck Co., Inc./Lundbeck A/S), and low-dose doxepin (Silenortm, Somaxon Pharmaceuticals, Inc.). For VEC-162 in the treatment of depression, antidepressants such as Paxil (paroxetine) by GlaxoSmithKline (GSK), Zoloft (sertraline) by Pfizer, Prozac (fluoxetine) by Eli Lilly, and Lexapro (escitalopram) by Lundbeck A/S /Forest Pharmaceuticals Inc., Effexor (venlafaxine) by Wyeth as well as other compounds such as Wellbutrin (buproprion) by GSK and Cymbalta (duloxetine) by Eli Lilly. In addition to the approved products, compounds in Phase III trials for depression include agomelatine (Novartis and Les Laboratoires Servier). For VSF-173 in the treatment of excessive sleepiness, Provigil (modafinil) and NuVigil (armodafinil) by Cephalon Inc., and Xyrem (sodium oxybate) by Jazz Pharmaceuticals, Inc. We have no experience selling, marketing or distributing products and no internal capability to do so. At present, we have limited marketing and no sales personnel. In order to commercialize any of our product candidates, we must either acquire or internally develop sales, marketing and distribution capabilities, or enter into collaborations with partners to perform these services for us. We may not be able to establish sales and distribution partnerships on acceptable terms or at all, and if we do enter into a distribution arrangement, our success will be dependent upon the performance of our partner. In the event that we attempt to acquire or develop our own in-house sales, marketing and distribution capabilities, factors that may inhibit our efforts to commercialize our products without partners or licensees include: our inability to recruit and retain adequate numbers of effective sales and marketing personnel the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe our product the lack of complementary products to be offered by our sales personnel, which may put us at a competitive disadvantage against companies with broader product lines unforeseen costs associated with creating our own sales and marketing team or with entering into a partnering agreement with an independent sales and marketing organization We will need to increase the size of our organization, and we may experience difficulties in managing our growth. As of December 31, 2006, we had 44 full-time employees. We will need to continue to expand our managerial, operational, financial and other resources in order to manage and fund our operations, continue our development activities and commercialize our product candidates. Our current personnel, systems and facilities are not adequate to support this future growth. To manage our growth, we must: manage our clinical trials effectively manage our internal development efforts effectively improve our operational, financial, accounting and management controls, reporting systems and procedures attract and retain sufficient numbers of talented employees We may be unable to successfully implement these tasks on a larger scale and, accordingly, may not achieve our development and commercialization goals. If we cannot identify, or enter into licensing arrangements for, new product candidates, our ability to develop a diverse product portfolio may be limited. A component of our business strategy is acquiring rights to develop and commercialize compounds discovered or developed by other pharmaceutical and biotechnology companies for which we may find effective uses and markets by using our unique pharmacogenetics and pharmacogenomics expertise. Competition for the acquisition of these compounds is intense. If we are not able to identify opportunities to acquire rights to commercialize additional products, we may not be able to develop a diverse portfolio of products and our business may be harmed. Additionally, it may take substantial human and financial resources to secure commercial rights to promising product candidates. Moreover, if other firms develop pharmacogenetics and pharmacogenomics capabilities, we may face increased competition in identifying and acquiring additional product candidates. If we lose key scientists or management personnel, or if we fail to recruit additional highly skilled personnel, it will impair our ability to identify, develop and commercialize product candidates. We are highly dependent on principal members of our management team and scientific staff, including our Chief Executive Officer, Mihael H. Polymeropoulos, M.D. These executives each have significant pharmaceutical industry experience. The loss of any such executives, including Dr. Polymeropoulos, or any other principal member of our management team or scientific staff, would impair our ability to identify, develop and market new products. Product liability lawsuits could divert our resources, result in substantial liabilities and reduce the commercial potential of our products. The risk that we may be sued on product liability claims is inherent in the development of pharmaceutical products. For example, we face a risk of product liability exposure related to the testing of our product candidates in clinical trials and will face even greater risks upon any commercialization by us of our product candidates. We believe that we may be at a greater risk of product liability claims relative to other pharmaceutical companies because our compounds are intended to treat behavioral disorders, and it is possible that we may be held liable for the behavior and actions of patients who use our compounds. These lawsuits may divert our management from pursuing our business strategy and may be costly to defend. In addition, if we are held liable in any of these lawsuits, we may incur substantial liabilities and may be forced to limit or forego further commercialization of one or more of our products. Although we maintain general liability and product liability insurance, our aggregate coverage limit under this insurance is $10,000,000, and while we believe this amount of insurance is sufficient to cover our product liability exposure, these limits may not be high enough to fully cover potential liabilities. In addition, product liability insurance is becoming increasingly expensive, and we may not be able to obtain or maintain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims, which could prevent or inhibit the commercial production and sale of our products. Legislative or regulatory reform of the healthcare system in the U.S. and foreign jurisdictions may affect our ability to sell our products profitably. The continuing efforts of the U.S. and foreign governments, insurance companies, managed care organizations and other payors of health care services to contain or reduce health care costs may adversely affect our ability to set prices for our products which we believe are fair, and our ability to generate revenues and achieve and maintain profitability. Specifically, in both the United States and some foreign jurisdictions there have been a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products profitably. In the United States, the Medicare Prescription Drug Improvement and Modernization Act of 2003 reforms the way Medicare will cover and reimburse for pharmaceutical products. This legislation could decrease the coverage and price that we may receive for our products. Other third-party payors are increasingly challenging the prices charged for medical products and services. It will be time-consuming and expensive for us to go through the process of seeking reimbursement from Medicare and private payors. Our products may not be considered cost effective, and coverage and reimbursement may not be available or sufficient to allow us to sell our products on a competitive and profitable basis. Further federal and state proposals and healthcare reforms are likely which could limit the prices that can be charged for the drugs we develop and may further limit our commercial opportunity. Our results of operations could be materially adversely affected by the Medicare prescription drug coverage legislation, by the possible effect of this legislation on amounts that private insurers will pay and by other healthcare reforms that may be enacted or adopted in the future. In some foreign countries, including major markets in the European Union and Japan, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take six to twelve months or longer after the receipt of regulatory marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. Our business could be materially harmed if reimbursement of our products is unavailable or limited in scope or amount or if pricing is set at unsatisfactory levels. Our quarterly operating results may fluctuate significantly. We expect our operating results to be subject to quarterly fluctuations. The revenues we generate, if any, and our operating results will be affected by numerous factors, including: our addition or termination of development programs variations in the level of expenses related to our existing three product candidates or future development programs our execution of collaborative, licensing or other arrangements, and the timing of payments we may make or receive under these arrangements any intellectual property infringement lawsuit in which we may become involved regulatory developments affecting our product candidates or those of our competitors If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially. We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance. Risks related to intellectual property and other legal matters Our rights to develop and commercialize our product candidates are subject in part to the terms and conditions of licenses or sublicenses granted to us by other pharmaceutical companies. With respect to VEC-162 and VSF-173, these terms and conditions include options in favor of these pharmaceutical companies to reacquire rights to commercialize and develop these product candidates in certain circumstances. Iloperidone is based in part on patents and other intellectual property owned by Sanofi-Aventis and Novartis. Titan Pharmaceuticals, Inc. (Titan) holds an exclusive license from Sanofi-Aventis to the intellectual property owned by Sanofi-Aventis, and Titan has sublicensed its rights under such license on an exclusive basis to Novartis. We have acquired exclusive rights to this and other intellectual property through a further sublicense from Novartis. Our rights with respect to the intellectual property to develop and commercialize iloperidone may terminate, in whole or in part, if we fail to meet certain milestones contained in our sublicense agreement with Novartis relating to the time it takes for us to launch iloperidone commercially following regulatory approval, and the time it takes for us to receive regulatory approval following our submission of an NDA or equivalent foreign filing. We may also lose our rights to develop and commercialize iloperidone if we fail to pay royalties to Novartis, if we fail to comply with certain requirements in the sublicense regarding our financial condition, or if we fail to comply with certain restrictions regarding our other development activities. Finally, our rights to develop and commercialize iloperidone may be impaired if we do not cure breaches by Novartis and Titan of similar obligations contained in these sublicense and license agreements, although we are not aware of any such breach by Titan or Novartis. In the event of an early termination of our sublicense agreement, all rights licensed and developed by us under this agreement may be extinguished, which would have a material adverse effect on our business. VEC-162 is based in part on patents that we have licensed on an exclusive basis and other intellectual property licensed from Bristol-Myers Squibb Company (BMS). Following the completion of the entire Phase III program for VEC-162, which may consist of several Phase III trials, and in the event that we have not entered into one or more development and commercialization agreements with one or more third parties covering certain significant markets, BMS has retained an option to reacquire the rights it has licensed to us to exclusively develop and commercialize VEC-162 on pre-determined financial terms, including the payment of royalties and milestone payments to us. BMS may terminate our license if we fail to meet certain milestones or if we otherwise breach our royalty or other obligations in the agreement. In the event that we terminate our license, or if BMS terminates our license due to our breach, all of our rights to VEC-162 (including any intellectual property we develop with respect to VEC-162) will revert back to BMS or otherwise be licensed back to BMS on an exclusive basis. Any termination or reversion of our rights to develop or commercialize VEC-162, including any reacquisition by BMS of our rights, may have a material adverse effect on our business. VSF-173 is based in part on patents and other intellectual property that we have licensed on an exclusive basis from Novartis. Novartis has the option to reacquire rights to co-develop and exclusively commercialize VSF-173 following the completion of the Phase II trials, and an additional option to reacquire co-development rights and exclusive commercialization rights following the completion of the Phase III clinical trials, subject in each case to Novartis payment of pre-determined royalties and other payments to us. In the event that Novartis chooses not to exercise either of these options and we decide to enter into a partnering arrangement to help us commercialize VSF-173, Novartis has a right of first refusal to negotiate such an agreement with us, as well as a right to submit a last matching counteroffer regarding such an agreement. In addition, our rights with respect to VSF-173 may terminate, in whole or in part, if we fail to meet certain development and commercialization milestones described in our license agreement relating to the time it takes us to complete our development work on VSF-173. These rights may also terminate in whole or in part if we fail to make royalty or milestone payments or if we do not comply with requirements in our license agreement regarding our financial condition. In the event of an early termination of our license agreement, all rights licensed and developed by us under this agreement may revert back to Novartis. Any termination or reversion of our rights to develop or commercialize VSF-173, including any reacquisition by Novartis of our rights, may have a material adverse effect on our business. If our efforts to protect the proprietary nature of the intellectual property related to our products are not adequate, we may not be able to compete effectively in our markets. In addition to the rights we have licensed from Novartis and BMS relating to our product candidates, we rely upon intellectual property we own relating to our products, including patents, patent applications and trade secrets. As of December 31, 2006, we owned 15 pending provisional patent applications in the United States and three pending Patent Cooperation Treaty applications, which permit the pursuit of patents outside of the United States, relating to our product candidates in clinical development. Our patent applications may be challenged or fail to result in issued patents and our existing or future patents may be too narrow to prevent third parties from developing or designing around these patents. In addition, we rely on trade secret protection and confidentiality agreements to protect certain proprietary know-how that is not patentable, for processes for which patents are difficult to enforce and for any other elements of our drug development processes that involve proprietary know-how, information and technology that is not covered by patent applications. While we require all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information and technology to enter into confidentiality agreements, we cannot be certain that this know-how, information and technology will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Further, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. If we are unable to protect or defend the intellectual property related to our technologies, we will not be able to establish or maintain a competitive advantage in our market. If we do not obtain protection under the Hatch-Waxman Act and similar foreign legislation to extend our patents and to obtain market exclusivity for our product candidates, our business will be materially harmed. The United States Drug Price Competition and Patent Term Restoration Act of 1984, more commonly known as the Hatch-Waxman Act, provides for an extension of patent protection for drug compounds for a period of up to five years to compensate for time spent in development. Assuming we gain a five-year extension for each of our current product candidates in clinical development, and that we continue to have rights under our sublicense and license agreements with respect to these product candidates, we would have exclusive rights to iloperidone s United States new chemical entity patent (the primary patent covering the compound as a new composition of matter) until 2016, to VEC-162 s United States new chemical entity patent until 2022 and to VSF-173 s United States new chemical entity patent until 2019. In Europe, similar legislative enactments allow patent protection in the European Union to be extended for up to five years through the grant of a Supplementary Protection Certificate. Assuming we gain such a five-year extension for each of our current product candidates in clinical development, and that we continue to have rights under our sublicense and license agreements with respect to these product candidates, we would have exclusive rights to iloperidone s European new chemical entity patents until 2015, to VEC-162 s European new chemical entity patents until 2022 and to VSF-173 s European new chemical entity patents until 2017. Additionally, a recent directive in the European Union provides that companies who receive regulatory approval for a new compound will have a 10-year period of market exclusivity for that compound (with the possibility of a further one-year extension) in most EU countries, beginning on the date of such European regulatory approval, regardless of when the European new chemical entity patent covering such compound expires. A generic version of the approved drug may not be marketed or sold during such market exclusivity period. This directive may be of particular importance with respect to iloperidone, since the European new chemical entity patent for iloperidone will likely expire prior to the end of this 10-year period of market exclusivity. However, there is no assurance that we will receive the extensions of our patents or other exclusive rights available under the Hatch-Waxman Act or similar foreign legislation. If we fail to receive such extensions and exclusive rights, our ability to prevent competitors from manufacturing, marketing and selling generic versions of our products will be materially harmed. Litigation or third-party claims of intellectual property infringement could require us to divert resources and may prevent or delay our drug discovery and development efforts. Our commercial success depends in part on our not infringing the patents and proprietary rights of third parties. Third parties may assert that we are employing their proprietary technology without authorization. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. Furthermore, parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to develop and commercialize one or more of our product candidates. Defense of these claims, regardless of their merit, would divert substantial financial and employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, obtain one or more licenses from third parties or pay royalties. In addition, even in the absence of litigation, we may need to obtain additional licenses from third parties to advance our research or allow commercialization of our product candidates. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to develop and commercialize further one or more of our product candidates. In addition, in the future we could be required to initiate litigation to enforce our proprietary rights against infringement by third parties. Prosecution of these claims to enforce our rights against others could divert substantial financial and employee resources from our business. If we fail to enforce our proprietary rights against others, our business will be harmed. If we use hazardous and biological materials in a manner that causes injury or violates applicable law, we may be liable for damages. Our research and development activities involve the controlled use of potentially hazardous substances, including toxic chemical and biological materials. We could be held liable for any contamination, injury or other damages resulting from these hazardous substances. In addition, our operations produce hazardous waste products. While third parties are responsible for disposal of our hazardous waste, we could be liable under environmental laws for any required cleanup of sites at which our waste is disposed. Federal, state, foreign and local laws and regulations govern the use, manufacture, storage, handling and disposal of these hazardous materials. If we fail to comply with these laws and regulations at any time, or if they change, we may be subject to criminal sanctions and substantial civil liabilities, which may adversely affect our business. Even if we continue to comply with all applicable laws and regulations regarding hazardous materials, we cannot eliminate the risk of accidental contamination or discharge and our resultant liability for any injuries or other damages caused by these accidents. Although we maintain pollution liability insurance, our coverage limit under this insurance is $2,000,000, and while we believe this amount and type of insurance is sufficient to cover risks typically associated with our handling of materials, the insurance may not cover all environmental liabilities, and these limits may not be high enough to cover potential liabilities for these damages fully. The amount of uninsured liabilities may exceed our financial resources and materially harm our business. Risks related to this offering Our stock price has been volatile and may be volatile in the future, and purchasers of our common stock could incur substantial losses. The stock market has from time to time experienced significant price and volume fluctuations, and the market prices of the securities of life sciences companies without product revenues, such as ours, have historically been highly volatile. Since our initial public offering on April 12, 2006 and through January 12, 2007, our stock price has traded from a low of $7.21 to a high of $28.67. The following factors, in addition to the other risk factors described in this section, may also have a significant impact on the market price of our common stock: publicity regarding actual or potential testing or trial results or the outcome of regulatory review relating to products under development by us or our competitors regulatory developments in the United States and foreign countries developments concerning any collaboration or other strategic transaction we may undertake announcements of patent issuances or denials, technological innovations or new commercial products by us or our competitors actual or anticipated variations in our quarterly operating results changes in estimates of our financial results or recommendations by securities analysts additions or departures of key personnel or members of our board of directors economic and other external factors beyond our control As a result of these factors, holders of our common stock might be unable to sell their shares at or above the price they paid for such shares. You will incur immediate and substantial dilution in the as-adjusted net tangible book value of the stock you purchase. We estimate that the public offering price of our stock will be $25.98 per share (the last reported sale price of our common stock on January 12, 2007). This amount is substantially higher than the as-adjusted net tangible book value that our outstanding common stock will have immediately after this offering. Accordingly, if you purchase shares of our common stock at the assumed public offering price, you will incur immediate and substantial dilution of $21.21 per share (based on the number of shares of our common stock outstanding as of September 30, 2006). You may incur further dilution to the extent that holders of outstanding options exercise those options. Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment. Our management will have broad discretion to use the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Management might not apply the net proceeds of this offering in ways that increase the value of your investment. We expect to use the net proceeds from this offering for further clinical development of our current product candidates, possible investments in, or acquisitions of, new product candidates, working capital and other general corporate purposes. We have not allocated these net proceeds for any specific purposes. Our management might not be able to yield any return on the investment and use of these net proceeds. You will not have the opportunity to influence our decisions on how to use the proceeds. If there are substantial sales of our common stock, our stock price could decline. If our existing stockholders sell a large number of our common stock or the public market perceives that existing stockholders might sell shares of common stock, the market price of our common stock could decline significantly. As of December 31, 2006, we had 22,128,534 shares of our common stock outstanding. Of these shares, 6,185,534 shares are securities issued pursuant to registered transactions under the Securities Act and are freely tradable, unless purchased by an affiliate as that term is used in Rule 144 under the Securities Act of 1933, as amended (in which case any resale by such an affiliate will be subject to the restrictions imposed by Rule 144). An additional 15,914,391 of these shares were, as of December 31, 2006, tradable under Rule 144 or the Securities Act without registration, subject in some cases to volume limitations and holding periods under Rule 144 (including restrictions imposed on our affiliates). Our directors and officers, as well as certain venture capital funds affiliated with certain of our directors (which funds held an aggregate of approximately 5,543,183 shares of our common stock as of December 31, 2006), have signed lock-up agreements pertaining to this offering, the restrictions of which will expire 30 days after this offering becomes effective. Holders of approximately 6,477,177 shares of our outstanding and unregistered common stock as of December 31, 2006 have rights with respect to the registration of the sale of their shares of common stock with the SEC. These rights have been waived with respect to this offering. In addition to our outstanding common stock, as of December 31, 2006 there are 1,347,205 shares of common stock that we have registered and that we are obligated to issue upon the exercise of currently outstanding options granted under our Second Amended and Restated Management Equity Plan. Upon the exercise of these options in accordance with their respective terms, these shares may be resold freely, subject to restrictions imposed on our affiliates under Rule 144. We have also registered 1,500,000 shares of common stock that are authorized for issuance under our 2006 Equity Incentive Plan. The shares authorized for issuance under our 2006 Equity Incentive Plan can be freely sold in the public market upon issuance, subject to the restrictions imposed on our affiliates under Rule 144. We have granted options to purchase 359,527 shares under our 2006 Equity Incentive Plan as of December 31, 2006, none of which are vested. If securities or industry analysts do not publish research or reports or publish unfavorable research about our business, our stock price and trading volume could decline. The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who covers the Company downgrades our stock, our stock price would likely decline. If one or more of these analysts ceases to cover us or fails to publish regular reports on us, interest in the purchase of our stock could decrease, which could cause our stock price or trading volume to decline. Anti-takeover provisions in our charter and bylaws, and in Delaware law, could prevent or delay a change in control of our company. We are a Delaware corporation and the anti-takeover provisions of Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our amended and restated certificate of incorporation and bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our amended and restated certificate of incorporation and bylaws: authorize the issuance of blank check preferred stock that could be issued by our board of directors to thwart a takeover attempt do not provide for cumulative voting in the election of directors, which would allow holders of less than a majority of the stock to elect some directors establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election require that directors only be removed from office for cause provide that vacancies on the board of directors, including newly-created directorships, may be filled only by a majority vote of directors then in office limit who may call special meetings of stockholders prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders establish advance notice requirements for nominating candidates for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings For information regarding these and other provisions, please see Description of capital stock. Forward-looking statements This prospectus includes forward-looking statements, as defined by federal securities laws, with respect to our financial condition, results of operations and business, and our expectations or beliefs concerning future events, including increases in operating margins. Words such as, but not limited to, believe, expect, anticipate, estimate, intend, plan, targets, likely, will, would, could, and similar expressions or phrases identify forward-looking statements. All forward-looking statements involve risks and uncertainties. The occurrence of the events described, and the achievement of the expected results, depend on many events, some or all of which are not predictable or within our control. Actual results may differ materially from expected results. Factors that may cause actual results to differ from expected results include, among others: a failure of our product candidates to be demonstrably safe and effective a failure to obtain regulatory approval for our products or to comply with ongoing regulatory requirements a lack of acceptance of our product candidates in the marketplace, or a failure to become or remain profitable our inability to obtain the capital necessary to fund our research and development activities our failure to identify or obtain rights to new product candidates a failure to develop or obtain sales, marketing and distribution resources and expertise or to otherwise manage our growth a loss of any of our key scientists or management personnel losses incurred from product liability claims made against us a loss of rights to develop and commercialize our products under our license and sublicense agreements All future written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We undertake no obligation, and specifically decline any obligation, to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this prospectus might not occur. See the section entitled Risk factors for a more complete discussion of these and other risks and uncertainties. The risk factors described in this prospectus are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could affect our results. Consequently, there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. Use of proceeds We estimate the net proceeds to us from the sale of the 3,500,000 shares of common stock in this offering to be approximately $84.2 million, based on the last reported sale price of our common stock on January 12, 2007 and after deducting underwriting discounts and commissions and estimated offering expenses. If the underwriters overallotment option is exercised in full, we estimate the net proceeds will be approximately $97.1 million. We currently intend to use the net proceeds of this offering for the continued clinical trials of our product candidates, the pursuit of regulatory approval and the development of a commercialization strategy for iloperidone, other research and development activities, and for working capital purposes. More specifically, we currently intend to use the net proceeds of this offering as follows: Approximately $46.0 million to prepare an NDA for iloperidone in schizophrenia, which we currently anticipate will be submitted by the end of 2007, to continue to develop the oral and extended-release injectable formulation of iloperidone in schizophrenia, to begin to fund the cost of carcinogenicity studies of inactive metabolites that we expect will be required after iloperidone is approved by the FDA, and to initiate the commercialization of iloperidone in schizophrenia, the commercial launch of which we currently anticipate in early 2009 Approximately $22.0 million to initiate an additional Phase III trial for VEC-162 in chronic sleep disorders and related clinical manufacturing costs Approximately $5.0 million to initiate a Phase II trial for VSF-173 in excessive sleepiness We anticipate that the balance of such net proceeds will be used for general research and development, business development and other corporate purposes as determined by our management, including for working capital, milestone payments under our existing license agreements, to the extent they become due. We may also use proceeds from this offering for the acquisition or licensing of businesses or product candidates that are complementary to our own. However, due to the uncertainties inherent in the clinical trial process and given that our product candidates have not completed their clinical development, we are unable to estimate precisely the total costs that will be associated with completing the above-mentioned clinical trials, and accordingly we cannot estimate precisely what proceeds will be available for general corporate purposes. The actual amounts could vary materially from our estimates. Currently, we have no specific plans or commitments with respect to any acquisition or license; however, we intend to engage an investment bank to provide financial and strategic advisory services to the Company, which may lead to one or more possible transactions, including the acquisition, sale or licensing by the Company of businesses or product candidates, the sale or licensing to a third party of one or more of our own product candidates, or the acquisition of the Company. We cannot assure you that we will complete any acquisitions, sales or licenses or that, if completed, any acquisition, sale or license will be successful or on attractive terms. The amount and timing of our actual expenditures will depend on numerous factors, including the progress of our research and development activities and clinical trials, the number and breadth of our product development programs, our ability to establish and maintain corporate collaborations and other arrangements and the amount of cash, if any, generated by our operations. We will retain broad discretion in the allocation and use of the remaining net proceeds of this offering. Pending application of the net proceeds, as described above, we intend to invest any remaining proceeds in short-term, investment-grade, interest-bearing securities. Price range of our common stock Our common stock is quoted on The Nasdaq Global Market under the symbol VNDA. The following table sets forth, for the periods indicated, the range of high and low closing sale prices of our common stock as reported on The Nasdaq Global Market. High Low Second quarter 2006 $ 11.26 $ 7.99 Third quarter 2006 $ 10.08 $ 8.22 Fourth quarter 2006 $ 26.17 $ 9.06 First quarter 2007 (through January 12, 2007) $ 26.27 $ 24.83 The last reported sale price of our common stock on January 12, 2007 was $25.98 per share. As of December 31, 2006, there were 42 holders of record of our common stock. Dividend policy We have never declared or paid any dividends on our capital stock. We currently intend to retain any future earnings to finance our research and development efforts, the further development of our pharmacogenetics and pharmacogenomics expertise and the expansion of our business and do not intend to declare or pay cash dividends on our common stock in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deem relevant. Capitalization The following table sets forth our actual capitalization as of September 30, 2006: On an actual basis On an as-adjusted basis to give effect to the sale of 3,500,000 shares of common stock that we are offering at $25.98 per share, based upon the last reported sale price of our common stock on The Nasdaq Global Market on January 12, 2007, after deducting underwriting discounts and commissions and estimated offering expenses payable by us You should read this table together with our financial statements and the related notes appearing at the end of this prospectus and the Management s discussion and analysis of financial condition and results of operations section of this prospectus. The table excludes the following shares: 1,569,669 shares of common stock issuable upon the exercise of stock options outstanding as of September 30, 2006 under our Second Amended and Restated Management Equity Plan and agreements entered into pursuant to such plan 103,692 shares of common stock issuable upon the exercise of stock options outstanding as of September 30, 2006 under the 2006 Equity Incentive Plan and agreements entered into pursuant to such plan an additional 1,396,308 shares reserved for issuance under the 2006 Equity Incentive Plan as of September 30, 2006 for future stock option grants and purchases under our equity compensation plans (see note 4 of Notes to condensed consolidated financial statements ) See Equity benefit plans, and note 10 of Notes to consolidated financial statements for a description of our equity plans. Actual As adjusted Stockholders equity: Common stock, $0.001 par value; 150,000,000 shares authorized, 21,907,188 shares issued and outstanding (actual); 25,407,188 shares issued and outstanding (as adjusted) $ 21,907 $ 25,407 Additional paid-in capital 124,893,956 209,128,902 Accumulated other comprehensive loss (15,130 ) (15,130 ) Deficit accumulated during the development stage (87,949,101 ) (87,949,101 ) Total stockholders equity 36,951,632 121,190,078 Total capitalization $ 36,951,632 $ 121,190,078 Dilution If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the as-adjusted net tangible book value per share of our common stock after this offering. As of September 30, 2006, our net tangible book value was approximately $36,951,632, or $1.69 per share, based on 21,907,188 shares of our common stock outstanding as of September 30, 2006. Our net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities, divided by the number of shares of our common stock outstanding as of September 30, 2006. After giving effect to our sale in this offering of 3,500,000 shares of our common stock at an assumed public offering price of $25.98 per share, based on the last reported sale price of our common stock on The Nasdaq Global Market on January 12, 2007, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our as-adjusted net tangible book value as of September 30, 2006 would have been approximately $121,190,078, or $4.77 per share of our common stock. This represents an immediate increase of net tangible book value of $3.08 per share to our existing stockholders and an immediate dilution of $21.21 per share to investors purchasing shares in this offering. The following table illustrates this per share dilution: Assumed public offering price per share $ 25.98 Net tangible book value per share as of September 30, 2006 $ 1.69 Increase in net tangible book value per share attributable to this offering $ 3.08 As-adjusted net tangible book value per share after giving effect to this offering $ 4.77 Dilution per share to new investors $ 21.21 If the underwriters exercise their option to purchase additional shares of our common stock in full in this offering, the
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+PROSPECTUS SUMMARY This summary highlights selected information about us and the ADSs that we are offering. It may not contain all of the information that may be important to you. Before investing in the ADSs, you should read this entire prospectus carefully for a more complete understanding of our business and this offering, including our audited consolidated financial statements and the related notes, and the sections entitled Risk Factors and Management s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this prospectus. Our Business We are a fast-growing residential real estate developer that focuses on Tier II cities in China, which are a selected group of larger, more developed cities with above average GDP and urban population growth rates. We utilize a standardized and scalable model that emphasizes rapid asset turnover, efficient capital management and strict cost control. We commenced operations in 1997 in Zhengzhou, the provincial capital of Henan Province, and were ranked No. 1 among all property developers in Zhengzhou in terms of contracted sales of residential units for the years 2004, 2005 and 2006, according to statistics prepared by the Bureau of Real Estate Management in Zhengzhou. Since 2006, we have expanded into strategically selected Tier II cities around the country and expect to benefit from the rising residential housing demand in these markets resulting from increasing income levels of consumers and growing populations in these cities. We currently have operations in five Tier II cities, including Chengdu in Sichuan Province, Hefei in Anhui Province, Jinan in Shandong Province, Suzhou in Jiangsu Province and Zhengzhou in Henan Province. We focus on developing large scale quality residential projects, which typically consist of multiple residential buildings that include multi-layer apartment buildings, sub-high-rise apartment buildings or high-rise apartment buildings. Several of our projects include auxiliary services and amenities such as retail outlets, leisure and health facilities, kindergartens and schools. We also develop small scale residential properties. Our developments aim at providing middle-income consumers with a comfortable and convenient community life. In addition, we provide property management services for our developments and other real estate-related services to our customers. We acquire our development sites primarily through public auctions of government land involving a transparent bidding process. This acquisition method allows us to obtain unencumbered land use rights to unoccupied land which can be immediately developed without the need for additional demolition, re-settlement or protracted legal processes to obtain title. As a result, we are able to commence construction relatively quickly after we acquire a site for development. We have expanded our business and operations significantly during the past three years. The number of projects we had under construction increased from three projects with a total gross floor area, or GFA, of 278,868 square meters as of December 31, 2004, to seven projects with a total GFA of 770,781 square meters as of September 30, 2007. We have seven additional projects with total GFA of 1,282,498 square meters under planning as of September 30, 2007. As of September 30, 2007, we have completed 13 projects with total GFA of approximately 939,829 square meters and comprising a total of 8,645 units, 99.6% of which have been sold. For each of the three years ended December 31, 2004, 2005 and 2006, our revenues were US$35.6 million, US$61.9 million and US$142.4 million, respectively, representing a compounded annual growth rate, or CAGR, of 99.9%. Our net income for each of those three years was US$3.9 million, US$9.6 million and US$16.1 million, respectively, representing a CAGR of 102.2%. For the nine months ended September 30, 2006 and 2007, our revenue was US$99.7 million and US$218.3 million, respectively. Our net income for the nine months ended September 30, 2006 and 2007 was US$12.5 million and US$36.0 million, respectively. We intend to continue our expansion into additional strategically selected Tier II cities as suitable opportunities arise. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents Our Competitive Strengths We believe the following strengths allow us to compete effectively in the real estate development industry: Well Positioned to Capture Attractive Growth Opportunities in Tier II Cities. Increases in consumer disposable income and urbanization rates have resulted in the emergence of a growing middle-income consumer market, driving demand for quality housing in many cities across China. Since 1997, we have been building large communities of modern, mid-sized residential properties for this market segment and have accumulated substantial knowledge and experience about the residential preferences and demands of these customers. Standardized and Scalable Business Model. Our business model focuses on a standardized property development process designed for rapid asset turnover. We segment the process into well-defined stages and closely monitor our costs and development schedules through each stage. We commence our pre-planning and budgeting prior to land acquisition, which enables us to acquire land at costs that meet our pre-set investment target and to quickly begin the development process upon acquisition. We believe that our standardized practices and methodologies, together with our systematic approach to the development process, can be replicated in strategically selected Tier II cities. Since 2006, we have expanded from one to a total of five Tier II cities in China, and from December 31, 2004 to September 30, 2007, our total GFA for projects under construction has grown 176.4%. Proven Ability to Provide Large Scale Quality Housing for Middle-Income Consumers. We have a clear focus on China s emerging middle-income consumers and provide standardized mid-sized units at affordable prices for this market. Our residential units feature modern designs and offer comfortable and convenient community lifestyles. We have a proven track record of building large-scale quality residential communities that appeal to middle-income customers, as demonstrated by the sale of more than 99% of units in our completed projects and the growth in our revenue at a CAGR of 99.9% from 2004 to 2006. Ability to Generate Attractive Investment Returns. Our standardized processes that emphasize rapid asset turnover allow us to efficiently use capital and generate attractive returns on our investments. We typically acquire land that is ready for development through the government auction system. We do not tie up our capital in idle land banks but instead begin development relatively quickly after land acquisition. We use our working capital efficiently by actively managing and coordinating receivables and expenditures across various projects. We believe that the velocity of our development cycle and our ability to efficiently manage our capital and maintain strict cost control at each stage of development enable us to generate attractive returns on our projects. Experienced Management Team Supported by Trained and Motivated Workforce. Our senior managers, most of whom have been working with our company for over five years, have on average over 10 years of experience in the PRC real estate industry and considerable strategic planning and business management expertise. Our Chairman and founder, Mr. Yong Zhang, has more than 20 years of experience in developing residential housing in China. Mr. Zhang was elected in 2004 as one of the Top Ten Rising Entrepreneurs in China s Real Estate Industry by the China International Real Estate & Archi-tech Fair, or CIHAF. Our management and work force are well trained and motivated. To promote effective recruitment, retention and advancement, we provide our management with training and incentive programs that include subsidizing our management s pursuit of post-secondary degrees and programs. Relationships with Our Institutional Shareholders. In 2006, Blue Ridge China Partners, L.P., or Blue Ridge China, and EI Fund II China, LLC, or Equity International, invested in our company. Blue Ridge China is a China-focused private equity fund and Equity International is a privately-held investment company specializing in real estate investments outside the United States founded and led by Samuel Zell and Gary Garrabrant. Equity AMENDMENT NO. 3 TO FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents International s portfolio companies include Homex in Mexico and Gafisa in Brazil, both of which are publicly traded in the United States. Both of these shareholders (through their designees on the board of directors) are active in major board-level decisions and contribute their expertise in corporate governance best practices, financial management and accessing global capital. Our Strategies Our goal is to become the leading residential property developer focused on China s Tier II cities by implementing the following strategies: Continue Expanding in Selected Tier II Cities. We believe that Tier II cities present development opportunities that are well suited for our scalable business model of rapid asset turnover. Many Tier II cities offer a large supply of potential development sites that meet the criteria of our internal pre-set investment target. Furthermore, Tier II cities currently tend to be in an early stage of market maturity and have fewer large national developers. We believe that the fragmented market and relative abundance of land supply in Tier II cities, as compared to Tier I cities, offer opportunities for us to generate attractive margins and believe that our experience in and strategic focus on Tier II cities afford us the opportunity to emerge as a leading developer in these markets. We plan to enter into additional Tier II cities that have increasing population, growing consumer disposable income and sustainable land supply for future developments. Capitalize on Growth of Middle-Income Population. The growing middle-income consumer market in China presents an attractive opportunity to continue our business expansion at a rapid pace. We will target this market by continuing to provide quality mid-sized modern residential units in large community developments for middle-income consumers. Our strategy is also consistent with the housing policy of relevant PRC governmental authorities in the context of rising incomes and rapid urbanization to promote the development of more low- and mid-priced housing in China. Focus on Efficient Land Acquisition. We constantly seek and assess land acquisition opportunities in selected Tier II cities through the governmental land auction system. To achieve our land acquisition targets, we have established a centralized and efficient system to research land acquisition opportunities. We monitor, plan and budget development costs for potential development sites. We bid for the site through the auction process, if the development opportunity meets our pre-set investment target. We believe that beginning with efficient land acquisition and following through with well-executed development will allow us to expand into Tier II cities successfully and provide sustainable growth for our business. Maintain Strict Cost Control. We plan to continue to closely monitor our capital and cash positions and carefully manage our land use rights costs, construction costs and operating expenses. We believe that by adhering to prudent cost management we will be able to more efficiently use our working capital, which will help to maintain our profit margins. Strengthen our Xinyuan Brand. We intend to promote our Xinyuan brand in our selected Tier II cities by delivering high quality products and attentive real estate-related services to our customers. At the same time, we will continue to actively promote the Xinyuan brand through marketing initiatives in our targeted markets. Xinyuan Real Estate Co., Ltd. (Exact name of registrant as specified in its charter) Not Applicable (Translation of Registrant s name into English) Table of Contents Risks Related to Our Business Our Challenges We believe that the following are some of the major risks and uncertainties that may materially affect us: ability to successfully manage our expansion into other Tier II cities; availability of capital resources to fund our land use rights acquisition and property developments; difficulties in acquiring desired development sites at commercially reasonable costs; financial and operating covenants contained in our current debt indentures that restrict our ability to pay dividends, raise further debt and take other corporate actions; risks associated with the guarantees we provide for the mortgage loans of our customers; further measures which the PRC government may adopt to curtail the overheating of the property sector; and dependence on the performance of the residential property market in China. Please see Risk Factors and other information included in this prospectus for a detailed discussion of these risks and uncertainties. Recent Development On December 4, 2007, we won a governmental auction for a parcel of land located in Kunshan Town of Suzhou City with a site area of 200,000 square meters. We will pay RMB1,103 million for the land use right over this parcel of land, and we intend to execute the related land use rights grant contract by December 11, 2007. Cayman Islands 1520 Not Applicable (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) No. 18 Xinyuan Road Zhengzhou, Henan 450011 People s Republic of China (86) 371 6565 1600 (Address, including zip code, and telephone number, including area code, of Registrant s principal executive offices) (1) The other shareholders of Zhengzhou Jiantou Xinyuan Real Estate Co., Ltd. are Zhengzhou General Construction Investment Company (50%) and Zhengzhou Jiantou Project Consulting Co., Ltd. (5%). We commenced our operations in May 1997 through Henan Xinyuan Real Estate Co., Ltd., one of our wholly-owned subsidiaries in the PRC. We completed a restructuring in April 2007 under which we established our current corporate structure by completing a share exchange in which the existing shareholders of Xinyuan Ltd., our then holding company, exchanged their respective shares for an equivalent number of our shares of the same class. In April 2007, we issued the following equity and debt securities: In connection with the restructuring referred to above and in exchange for Series A preference shares of Xinyuan Ltd. that were issued in August 2006 for cash proceeds of US$25 million, or US$0.81155 per share, we issued an aggregate of 30,805,400 Series A convertible redeemable preference shares, or Series A preference shares, to Blue Ridge China and Equity International, together with certain warrants. If our cumulative net income for the two years ending December 31, 2008 is less than US$80 million, the holders of the warrants are entitled to purchase up to a maximum of 3,987,009 additional Series A preference shares at an exercise price of US$0.01 per share. If our cumulative net income for such period equals or exceeds US$80 million, or if we consummate a qualified initial public offering prior to March 31, 2008, then these warrants will expire without being exercised. The CT Corporation System 111 Eighth Avenue New York, New York 10011 (212) 664-1666 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents fair value assigned to the warrants as at the date of issuance was US$496,000. We expect these warrants to expire without being exercised upon the completion of this offering. In addition, the terms of our Series A preference shares contain a contingent conversion option which Blue Ridge China and Equity International waived in November 2007. As a result of the waiver, we will recognize a deemed dividend of US$182.2 million to the holders of our Series A preference shares, representing the difference between the fair value of the Series A preference shares immediately after the waiver and the carrying value of the Series A preference shares immediately prior to the waiver. This deemed dividend will not affect our net income or cash flows. It will reduce our net income attributable to ordinary shareholders and retained earnings for the year ending December 31, 2007. We will review the final offering price of our ADSs (taking into account the ADS to common share ratio) and account for the fair value of the Series A preference shares accordingly in our financial statements for the year ending December 31, 2007. See Management s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Recent Development. Using an assumed initial offering price of US$14.00 per ADS, the mid-point of the estimated range of the initial public offering price, we estimate a fair value of US$6.72 for each Series A preference share. At this estimated fair value, we will record the modified Series A preference shares at an amount of US$207.0 million and the deemed dividend to the Series A preference shareholders at US$182.2 million, which will reduce the net income attributable to ordinary shareholders and retained earnings by the same amount of US$182.2 million for the year ending December 31, 2007. Moreover, this deemed dividend will eliminate the accumulated profits of US$57.5 million as at September 30, 2007. Our statutory reserves are not distributable as cash dividends. In connection with the restructuring referred to above and in exchange for warrants of Xinyuan Ltd. that were issued in August 2006 in consideration of financial advisory and investment banking services rendered, we issued warrants to Burnham Securities Inc. and Joel B. Gardner, or Burnham warrants, for the issuance of 1,853,172 fully paid common shares at an exercise price of US$0.81155 per share, which may be settled by cash or common shares. We assigned a fair value of US$55,595 to these warrants, which was recorded as paid-in capital. The holders of Burnham warrants will exercise all of their warrants on a net exercise basis upon completion of this offering, which will result in the issuance of 1,638,323 common shares. In connection with the restructuring referred to above and in exchange for common shares of Xinyuan Ltd. that were issued in November 2006 for an aggregate consideration of US$15 million, or US$0.9551 per share, we issued 15,704,379 common shares to Blue Ridge China and Equity International. We issued US$75 million principal amount of units, each unit comprising US$100,000 principal amount of secured senior floating rate notes due 2010, or the floating rate notes, and one warrant to subscribe for our common shares. Each warrant entitles the holder to subscribe at the warrant exercise price for the number of common shares equal to the quotient obtained by dividing (i) US$40,000 by (ii) the warrant exercise price, which will be equal to 80% of the price per common share derived from the offering of the ADSs. The fair value assigned to the warrants as at the date of issuance was US$7.36 million. We issued US$25 million principal amount of convertible subordinated notes due 2012, or convertible notes. The convertible notes are convertible into common shares at the rate of 38,388 common shares per US$100,000 principal amount of convertible notes, or a total of 9,597,120 common shares. See Description of Share Capital History of Share Issuances with respect to the original issuances of such securities by Xinyuan Ltd. Copies to: Scott Clemens, Esq. Baker & McKenzie LLP Suite 3401, China World Tower 2, China World Trade Center, 1 Jianguomenwai Dajie, Beijing 100004, PRC Roslyn Tom, Esq. Baker & McKenzie LLP 1114 Avenue of the Americas New York, NY 10036 Matthew Bersani, Esq. Shearman & Sterling LLP 12/F, Gloucester Tower The Landmark 15 Queen s Road Central Central Hong Kong, PRC Table of Contents Mr. Yong Zhang and Ms. Yuyan Yang collectively own 56.33% of our outstanding share capital as of the date of this prospectus and will own approximately 42.11% of our outstanding share capital upon completion of this offering. Blue Ridge China owns 26.20% of our outstanding share capital as of the date of this prospectus and will own approximately 19.39% of our outstanding share capital upon completion of this offering. Equity International owns 17.47% of our outstanding share capital as of the date of this prospectus and will own approximately 12.92% of our outstanding share capital upon completion of this offering. Corporate Information Our registered address is Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands. Our principal executive offices are located at No. 18 Xinyuan Road, Zhengzhou, Henan 450011, People s Republic of China. Our telephone number at this address is (86) 371 6565 1600 and our fax number is (86) 371 6565 1686. Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website is www.xyre.com. The information contained on our website does not form part of this prospectus. Our agent for service of process in the United States is CT Corporation System located at 111 Eighth Avenue, New York, New York 10011. Conventions Used in this Prospectus Unless the context otherwise requires, in this prospectus: we, us, our company, our and Xinyuan refer to Xinyuan Real Estate Co., Ltd., its predecessor entities and its subsidiaries; shares or common shares refers to our common shares, par value US$0.0001 per share; ADSs refers to our American depositary shares, each of which represents two common shares, and ADRs refers to the American depositary receipts that evidence our ADSs; China or PRC refers to the People s Republic of China, excluding, for the purposes of this prospectus only, Taiwan, Hong Kong and Macau; and RMB or Renminbi refers to the legal currency of China and US$ or U.S. dollars refers to the legal currency of the United States. At present, there is no uniform standard to categorize the different types and sizes of cities in China. In this prospectus, we refer to certain larger and more developed cities as Tier I and Tier II cities based on the categorization used by the CIHAF Valuation Report on Real Estate Investment in PRC Cities published by China Real Estate Business, or CREB, an authoritative real estate publication in China, YUBO Media and Institute of Finance and Trade Economics of Chinese Academy of Social Sciences. Based on this approach, there are currently four Tier I cities and 35 Tier II cities in China. Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering. Table of Contents THE OFFERING Unless otherwise indicated, information in this prospectus assumes that the underwriters over-allotment option is not exercised. Offering price per ADS We currently estimate that the initial public offering price will be between US$13.00 and US$15.00 per ADS. ADSs offered by us 17,500,000 ADSs Common shares outstanding after the offering 143,950,074 common shares. The ADSs Each ADS represents two common shares, par value $0.0001 per share. The depositary will be the holder of the common shares underlying the ADSs and you will have the rights of an ADS holder as provided in the deposit agreement among us, the depositary and owners and beneficial owners of ADSs from time to time. You may surrender your ADSs to the depositary to withdraw the common shares underlying your ADSs. The depositary will charge you a fee for such an exchange. We may amend or terminate the deposit agreement for any reason without your consent. If an amendment becomes effective, you will be bound by the deposit agreement as amended if you continue to hold your ADSs. To understand the terms of the ADSs, you should carefully read the section in this prospectus entitled Description of American Depositary Shares. We also encourage you to read the deposit agreement, which is an exhibit to the registration statement that includes this prospectus. Use of proceeds We estimate that we will receive net proceeds of approximately US$224.9 million from this offering, assuming an initial public offering price of US$14.00 per ADS, the mid-point of the estimated range of the initial public offering price, after deducting estimated underwriter discounts, commissions and estimated offering expenses payable by us. We intend to use approximately 95% of the net proceeds, or US$213.7 million of the approximated net proceeds, to acquire land use rights for future property development projects and to use the remaining net proceeds, or US$11.2 million of the approximated net proceeds, for working capital and other general corporate purposes. See Use of Proceeds for additional information. Depositary JPMorgan Chase Bank, N.A. CALCULATION OF REGISTRATION FEE Table of Contents Option to purchase additional ADSs We have granted the underwriters an option, exercisable within 30 days from the date of this prospectus, to purchase up to an aggregate of 2,625,000 additional ADSs to cover over-allotments. Risk factors See Risk Factors and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in the ADSs. Lock-up We, and our officers, directors and other shareholders have agreed with the underwriters not to sell, transfer or dispose of any ADSs, common shares or similar securities for a period of 180 days after the date of this prospectus. See Underwriting. Listing Our ADSs have been approved for listing on the New York Stock Exchange under the symbol XIN. Our common shares will not be listed or quoted for trading on any stock exchange or any automated quotation system. Throughout this prospectus, the number of our common shares outstanding after this offering includes: the 30,805,400 common shares issuable upon the conversion of all of our outstanding Series A preference shares, which will occur at the completion of this offering; the 1,638,323 common shares issuable upon the exercise of the Burnham warrants, which we expect to be exercised prior to the completion of this offering; and the 801,972 restricted shares granted on August 11, 2007, which will vest upon the completion of this offering. Unless otherwise indicated, the information in this prospectus does not reflect: 6,000,523 common shares underlying options and restricted share awards granted on August 11, 2007; 2,441,844 common shares underlying the options granted on November 5, 2007; 9,597,120 common shares issuable upon the conversion of the convertible notes; and the estimated 5,357,143 common shares underlying the warrants issued to the holders of our floating rate notes, assuming an initial public offering price of US$14.00 per ADS, the mid-point of the estimated range of the initial public offering price, and taking into account the ADS to common share ratio. The number of common shares underlying these warrants depends on the per common share equivalent of the final offering price of our ADSs, which will be determined at pricing. See Description of Debt and Equity-Linked Securities Floating Rate Notes and Warrants. Title of each class of securities to be registered Proposed Maximum Aggregate Offering Price(3) Amount of Registration Fee Common shares, par value $0.0001 per common share(1)(2) $ 302,000,000 $ 9,272 Table of Contents
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and notes thereto appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in the ADSs discussed under Risk Factors, before deciding whether to purchase the ADSs. Overview We operate the largest digital media network in China dedicated to air travel advertising. We operate over 95% of the digital TV screens that display advertisements in the 15 largest airports in China, according to an August 2007 report of Sinomonitor, or the Sinomonitor report. The advertising portion of our programs accounts for over 80% of the total length of the advertisements played on the digital TV screens for each of the three largest airlines in China. We operate over 2,000 digital TV screens in airports and place our programs on over 16,000 digital TV screens on airplanes. Due to PRC regulatory restrictions on foreign ownership of advertising businesses in China, we operate our advertising business through our consolidated variable interest entities and their subsidiaries in China. We have a series of contractual arrangements with these variable interest entities and their record owners that enable us to effectively control and derive substantially all of the economic benefits from these variable interest entities. We currently have contractual concession rights to operate digital TV screens in 52 airports, including 28 out of the 30 largest airports in China. Our digital TV screens are currently located in 37 airports in China, including the five largest airports, Beijing Capital International Airport, Shanghai Pudong International Airport, Guangzhou Baiyun International Airport, Shanghai Hongqiao International Airport and Shenzhen International Airport. We plan to gradually roll out our operations in the additional 15 airports where we have contractual concession rights to operate digital TV screens. In addition, we have contractual concession rights to place our programs on the routes operated by nine airlines, including the three largest airlines in China, China Southern Airlines, China Eastern Airlines and Air China. We also offer advertisers other media platforms in airports, such as digital frames, light box displays, 360-degree LED displays and 3D displays. We are in the process of upgrading our light box displays into digital frames and intend to significantly expand the number of digital frames in our network. For example, we recently obtained contractual concession rights to operate over 320 digital TV screens and over 440 digital frames at the newly constructed Terminal 3 of Beijing Capital International Airport and intend to install these digital TV screens and digital frames by the end of 2007. We also plan to introduce other new media platforms to expand our ability to target air travelers. Air travel advertising in China has grown significantly in recent years as a result of growth in China s advertising market and air travel sector. By focusing on air travel advertising, we enable our advertising clients to target air travelers in China, who we believe are an attractive demographic for advertisers due to their higher-than-average disposable income. We strategically place our digital TV screens and other displays in high-traffic locations of airports, particularly in areas where there tend to be significant waiting time, such as departure halls, security check areas, boarding gates, baggage claim areas and arrival halls. In addition, the digital TV screens on our network airplanes are located in highly visible locations in passenger compartments and on the back of passenger seats. Our combined coverage in airports and on airplanes enables our programs to attract air travelers at multiple points during their travel experience, from check-in, boarding, flight time, to arrival. We combine advertising content with non-advertising content, such as news, weather, sports and comedy clips, in our digital TV screen programs. We have agreements to show documentary clips provided by China Central Television, or CCTV, in airports and on airplanes. We also obtain program clips such as Just For Laughs and Globe Trekker from other third-party content providers. We believe this makes air travelers more receptive to the advertisements included in our programs and ultimately makes our programs more effective for SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents our advertising clients. Our standard programs in airports currently include 25 minutes of advertising content during each hour of programming and are shown for approximately 16 hours per day. The length of our in-flight programs typically ranges from approximately 45 minutes to an hour per flight, approximately five to 13 minutes of which consist of advertising content. We derive revenues principally by selling advertising time slots on our network to our advertising clients, including both direct advertisers and advertising agencies. From the commencement of our operations in August 2005 to June 30, 2007, a total of 240 advertising clients have purchased advertising time slots on our network. Our advertisers consist of international and domestic brands. Our top advertisers for 2006 and June 30, 2007 combined included Audi, China Mobile, China Unicom, Dongfeng-Citroen, Great Wall Wine, Haier, Hitachi, Lenovo, Lexus, LG, Mengniu Dairy, Nokia, Samsung and Shanghai Volkswagen, which collectively accounted for over 50.0% and 45.0% of our revenues for 2006 and the six months ended June 30, 2007, respectively. We have grown rapidly since we commenced operations. The number of airports and airlines in which we operated and the number of digital TV screens operating in our network increased from 16, six and 12,385 as of December 31, 2005 to 32, nine and 17,837 as of June 30, 2007, respectively. For the period from August 7, 2005, the date we commenced operations, to December 31, 2005, we incurred a net loss of US$2.4 million. For 2006, we generated net revenues of US$17.9 million and achieved a net income of US$4.1 million. For the six months ended June 30, 2007, our net revenues increased to US$15.9 million from US$6.7 million for the same period in 2006 and our net income increased to US$4.0 million from US$0.9 million for the same period in 2006. Industry Background The advertising market in China is one of the largest and fastest growing advertising markets in the world. According to ZenithOptimedia, advertising spending in China grew at a compound annual growth rate, or CAGR, of 16.4% between 2000 and 2005, making it one of the fastest growing advertising markets in the world. According to ZenithOptimedia, the advertising market in China is expected to experience continued strong growth with a CAGR of 18.1% from 2005 to 2009 and reach RMB164.0 billion (US$20.6 billion) by 2009. The growth of China s advertising industry is being driven by a number of factors including the rapid and sustained economic growth in China, the growth in consumer spending and the relatively low historical levels of advertising spending in China per capita and as a percentage of GDP. Air travel advertising in China is a relatively new advertising medium that has seen rapid growth in recent years. The development of the air travel advertising industry has resulted from a convergence of two rapidly growing sectors in China, out-of-home advertising, of which air travel advertising is an increasingly important subset, and air travel. Out-of-home advertising is a term we use to refer to media other than Internet, traditional television and radio broadcast and print media (which tend to be viewed primarily indoors). According to the China Statistical Abstract 2007, the number of air travelers in China grew at a CAGR of 15.5% from 67.2 million per year in 2000 to 159.7 million per year in 2006. We believe the air travel advertising industry in China has the following key characteristics: ability to target demographics that are attractive to advertisers; effective audience reach; and increasing acceptance by airports and airlines, air travelers and advertisers. Our Strengths We believe we have the following competitive strengths: We operate the largest digital media network in China dedicated to air travel advertising with broad geographic network coverage, and provide our advertising clients with the ability to reach a national audience through a single advertising network; We have contractual concession rights to operate digital TV screens in major airports and on leading airlines in China and, through our highly recognized brand name and experience in providing air travel advertising services, have also built strong relationships with these major airports and leading airlines; AMENDMENT NO. 4 TO FORM F-1 REGISTRATION STATEMENT Under The Securities Act of 1933 Table of Contents Our air travel digital media network provides a significant value proposition to airports and airlines by offering programs that may enhance the passenger experience, and by providing airports and airlines with incremental revenue opportunities, an effective means of managing passenger traffic and a cost-effective media service; Our air travel digital media network provides a significant value proposition to advertisers by offering them extensive viewer reach to an attractive demographic, cost-effective advertising, scheduling flexibility and quality client service; We have extensive experience in combining advertising content with non-advertising content to make our airport and airplane programs more attractive to air travelers and ultimately more effective for advertisers; We have a highly recognized brand name in the air travel sector and strong relationships with advertisers; and We have a strong management team with extensive industry experience. Our Strategies Our goal is to extend our competitive position as the largest air travel digital media network provider in China and to successfully expand into other areas of the air travel advertising sector. Accomplishing this goal requires the successful implementation of the following strategies: We plan to broaden our service offerings through new advertising media platforms within the air travel advertising sector, in particular by upgrading our light box displays to digital frames and significantly expanding this platform, to broaden our consumer reach, enhance the effectiveness of our advertisements and provide our advertising clients with more choices in selecting and combining different air travel advertising platforms according to their advertising needs and preferences; We plan to enhance our leading market position and revenues by building local sales teams in additional cities to increase our sales of advertising time slots and utilization rate in these cities and increase the number of digital TV screens and other displays in our existing network; We will continue to secure high quality non-advertising content to make audiences more receptive to advertisements played on our network and ultimately bring greater value to our business in a cost-effective manner; We will continue to promote our brand name and the value of air travel advertising through proactive sales and marketing efforts to solidify and broaden our customer base and our relationships with airports, airlines and content providers; and We plan to pursue strategic relationships and acquisitions that expand our business within the air travel advertising industry, although we are not currently negotiating any material acquisitions. Our Challenges Our ability to realize our business objectives and execute our strategies is subject to risks and uncertainties, including the following: If advertisers or the viewing public do not accept, or lose interest in, our air travel digital media network, we may be unable to generate sufficient cash flow from our operating activities and our prospects and results of operations could be negatively affected; We derive substantially all of our revenues from the provision of air travel advertising services, and if there is a downturn in the air travel advertising industry, we may not be able to diversify our revenue sources; AirMedia Group Inc. (Exact name of registrant as specified in its charter) Not Applicable (Translation of Registrant s name into English) Table of Contents If we are unable to retain existing concession rights contracts or obtain new concession rights contracts on commercially advantageous terms that allow us to place or operate the digital TV screens in airports or on airplanes, we may be unable to maintain or expand our network coverage and our business and prospects may be harmed; A substantial majority of our revenues are currently concentrated in the five largest airports and three largest airlines in China. If any of these airports or airlines experiences a material business disruption, our ability to generate revenues and our results of operations would be materially and adversely affected; and Our limited operating history may not provide an adequate basis to evaluate our business, financial performance or prospects or the viability of our digital media network and we do not expect to sustain our recent rates of growth in revenues or the number of airlines, airports or digital TV screens in our network in future periods. Please see Risk Factors and other information included in this prospectus for a discussion of these and other risks. Corporate History and Structure We commenced operations through Beijing Shengshi Lianhe Advertising Co., Ltd., or Shengshi Lianhe, a consolidated variable interest entity of our principal subsidiary, AirMedia Technology (Beijing) Co., Ltd., or AM Technology, in August 2005 in China. We established another wholly-owned subsidiary, Shenzhen AirMedia Information Technology Co., Ltd., or Shenzhen AM, in June 2006 in China. To prepare for this offering, we incorporated AirMedia Group Inc. in the Cayman Islands on April 12, 2007 as our listing vehicle and our holding company. Through a series of transactions, AirMedia Group Inc. became a holding company of AM Technology and Shenzhen AM. Due to certain restrictions and qualification requirements under PRC law that apply to foreign investment in China s advertising industry, our advertising business is currently conducted through contractual arrangements among us, our subsidiaries and our variable interest entities in China, principally Beijing AirMedia Advertising Co., Ltd., or AM Advertising, Shengshi Lianhe and Beijing AirMedia UC Advertising Co., Ltd., or AirMedia UC, which are the major companies through which we provide advertising services in China. These contractual arrangements enable us to: exercise effective control over all of our variable interest entities; receive substantially all of the economic benefits from all of our variable interest entities; and have an exclusive option to purchase all of the equity interests in all of our variable interest entities, in each case when and to the extent permitted by PRC law. Cayman Islands 7311 Not Applicable (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 17/F, Sky Plaza No. 46 Dongzhimenwai Street Dongcheng District, Beijing 100027 People s Republic of China (8610) 8438-6868 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Notes: (1) Shengshi Lianhe is 49.83% owned by Herman Man Guo, our founder, chairman, chief executive officer and an ultimate owner of our ordinary shares, 37.60% by Zhenyu Wang, our director who holds the equity on behalf of CDH, 7.45% owned by Qing Xu, our director and an ultimate owner of our ordinary shares and 5.12% owned by Xiaoya Zhang, our president, director and an ultimate owner of our ordinary shares. (2) AM Advertising is 83.80% owned by Shengshi Lianhe, 8.07% owned by Herman Man Guo, our founder, chairman, chief executive officer and an ultimate owner of our ordinary shares, 6.09% owned by Zhenyu Wang, our director who holds the equity on behalf of CDH, 1.21% owned by Qing Xu, our director and an ultimate owner of our ordinary shares and 0.83% owned by Xiaoya Zhang, our president, director and an ultimate owner of our ordinary shares. (3) AirMedia UC is 51.13% owned by Herman Man Guo, our founder, chairman, chief executive officer and an ultimate owner of our ordinary shares, 38.22% owned by Zhenyu Wang, our director who holds the equity on behalf of CDH and 10.65% owned by Qing Xu, our director and an ultimate owner of our ordinary shares. AirMedia UC became a consolidated variable interest entity in 2007. See Corporate Structure and Related Party Transactions for further information on our contractual arrangements with these parties. Corporate Information We are in the process of moving our principal executive offices and expect to substantially complete the move prior to the completion of this offering. Our new principal executive offices are located at 17/F, Sky Plaza, No. 46 Dongzhimenwai Street, Dongcheng District, Beijing 100027. Our telephone number at this address is 86-10-8438-6868 and our fax number is 86-10-8460-8658. Our former principal executive offices are located at Room 707, No. 8 Yong An Dong Li, Jianguomen Wai, Chaoyang District, Beijing 100022. Our telephone number at this address is 86-10- 5126-5816 and our fax number is 86-10-8528-8912. Our registered office in the Cayman Islands is P.O. Box 309GT, Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands. Our telephone number at this address is 1-345-949-8066. Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website address is http://www.AirMedia.net.cn. The information contained on our website is not part of this prospectus. CT Corporation System 111 Eighth Avenue New York, New York 10011 (212) 664-1666 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents THE OFFERING Total ADSs offered by us 11,750,000 ADSs by a selling shareholder 3,250,000 ADSs Over-allotment option We and a selling shareholder have granted the underwriters a 30-day option (commencing on the date of this prospectus) to purchase up to an aggregate of 2,250,000 additional ADSs to cover over-allotments. Price per ADS We currently estimate that the initial public offering price will be between US$12.00 and US$14.00 per ADS. The ADSs Each ADS represents two ordinary shares. The depositary will hold the shares underlying your ADSs and you will have rights as provided in the deposit agreement. We do not expect to pay dividends in the foreseeable future. If, however, we declare dividends on our ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our ordinary shares, after deducting its fees and expenses. You may turn in your ADSs to the depositary in exchange for ordinary shares. The depositary will charge you fees for any exchange. We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs, you agree to be bound by the deposit agreement as amended. To better understand the terms of the ADSs, you should carefully read the Description of American Depositary Shares section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus. ADSs outstanding immediately after this offering 15,000,000 ADSs (or 17,250,000 ADSs if the underwriters exercise the over-allotment option in full). Ordinary shares outstanding immediately after this offering 130,337,606 ordinary shares (or 134,337,606 ordinary shares if the underwriters exercise the over-allotment option in full), calculated based on the assumptions described below. Use of proceeds We intend to use the net proceeds from this offering to fund capital expenditures and for other general corporate purposes, which may include strategic acquisitions of businesses that could complement our existing capabilities and businesses. See Use of Proceeds for more information. We will not receive any of the proceeds from the sale of ADSs by the selling shareholders. Reserved ADSs At our request, the underwriters have reserved for sale, at the initial public offering price, up to 1,121,250 ADSs offered hereby for our directors, officers, employees, business associates and other related persons through our directed share program. Copies to: Z. Julie Gao, Esq. Latham & Watkins LLP 41st Floor, One Exchange Square 8 Connaught Place, Central Hong Kong (852) 2522-7886 Show-Mao Chen, Esq. Davis Polk & Wardwell 18th Floor, The Hong Kong Club Building 3A Chater Road, Central Hong Kong (852) 2533-3300 Note: (1) Midpoint of the estimated range of the initial public offering price. Unless otherwise indicated, all information in this prospectus: assumes the issuance and sale of 23,500,000 ordinary shares (in the form of ADSs) by us and the sale of 6,500,000 ordinary shares (in the form of ADSs) by a selling shareholder at an initial public offering price of US$13.00 per ADS (the midpoint of the price range set forth on the front cover of this prospectus); reflects the conversion of all outstanding Series A preferred shares into 32,600,000 ordinary shares upon the completion of this offering; reflects the conversion of all outstanding Series B preferred shares into 6,837,606 ordinary shares upon the completion of this offering, calculated based on the midpoint of the price range set forth on the front cover of this prospectus; excludes 8,065,000 ordinary shares issuable upon the exercise of stock options issued under our 2007 share incentive plan that are outstanding as of the date of this prospectus, each at an exercise price of US$2.00 per ordinary share; excludes 3,935,000 additional ordinary shares reserved for future grants under our 2007 share incentive plan as of the date of this prospectus; and assumes that the underwriters do not exercise their over-allotment option to purchase additional ADSs. Approximate date of commencement of proposed sale to the public: If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. Note: (1) Each ADS represents two ordinary shares. CALCULATION OF REGISTRATION FEE Note: (1) A US$1.00 increase (decrease) in the assumed initial public offering price of US$13.00 per ADS would increase (decrease) the amounts representing cash, total assets, and total shareholders equity by US$10.9 million. The following table presents a summary of our condensed consolidated statements of cash flow for the period from August 7, 2005 to December 31, 2005, the year ended December 31, 2006 and the six months ended June 30, 2006 and 2007. Period from August 7, 2005 to December 31, 2005 Year ended December 31, 2006 For the Six Months ended June 30, 2006 2007 (in thousands) Consolidated Statements of Cash Flow: Net cash (used in) provided by operating activities US$ (3,277 ) US$ 2,020 US$ 806 US$ 1,523 Net cash used in investing activities (762 ) (5,346 ) (3,478 ) (3,953 ) Net cash provided by financing activities 6,984 2,285 1,385 41,982 Title of each class of securities to be registered Amount to be registered(3) Proposed maximum offering price per share Proposed maximum aggregate offering price(1) Amount of registration fee(2) Ordinary Shares, par value US$0.001 per share(4) 34,500,000 US$7.00 US$241,500,000 US$7,414 Notes: (1) We define a time slot as a 30-second equivalent advertising time unit, which is shown during each advertising cycle on a weekly basis in a given airport or on a monthly basis on the routes of a given airline, respectively. Our airport advertising programs are shown repeatedly on a daily basis during a given week in one-hour cycles and each hour of programming includes 25 minutes of advertising content, which allows us to sell a maximum of 50 time slots per week. The number of time slots available for our digital TV screens in airports during the period presented is calculated by multiplying the time slots per week per airport by the number of weeks during the period presented when we had operations in each airport and then calculating the sum of all the time slots available for each of our network airports. The length of our in-flight programs typically ranges from approximately 45 minutes to an hour per flight, approximately five to 13 minutes of which consist of advertising content. The number of time slots available for our digital TV screens on airplanes during the period presented is calculated by multiplying the time slots per airline per month by the number of months during the period presented when we had operations on each airline and then calculating the sum of all the time slots for each of our network airlines. (2) Number of time slots sold refers to the number of 30-second equivalent advertising time units sold during the period presented. (3) Utilization rate refers to total time slots sold as a percentage of total time slots available for sale during the relevant period. (4) Average advertising revenue per time slot sold for digital TV screens in airports is calculated by dividing our revenues derived from digital TV screens in airports by the number of time slots sold for digital TV screens in airports. (5) Average advertising revenue per time slot sold for digital TV screens on airplanes is calculated by dividing our revenues derived from digital TV screens on airplanes by the number of time slots sold for digital TV screens on airplanes. (1) Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended. (2) Previously paid in full. (3) Includes ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public, and also includes ordinary shares that may be purchased by the underwriters pursuant to an over-allotment option. These ordinary shares are not being registered for the purpose of sales outside the United States. (4) American depositary shares issuable upon deposit of the ordinary shares registered hereby will be registered under a separate registration statement on Form F-6 (Registration No.333-146908). Each American depositary share represents two ordinary shares. Table of Contents
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